Sun Asia Group Pty Ltd ATF Sun Asia Group Trust v Invigor Group Ltd (No 2)

These reasons are concerned with notices of motion filed by two groups of defendants in which they seek orders that the corporate plaintiffs provide security for their costs pursuant to s 1335 of the Corporations Act 2001 (Cth) and Uniform Civil Procedure Rules 2005 (NSW) r 42.21 (UCPR).

The notices of motion were heard on 6 August 2021, and I published my principal reasons for judgment on 26 August 2021: Sun Asia Group Pty Ltd ATF Sun Asia Group Trust v Invigor Group Ltd [2021] NSWSC 1082 (J).

As I explained in the principal judgment, the plaintiffs make three separate and distinct claims in these proceedings. I considered the defendants' applications for security for costs separately in relation to the three claims.

In these reasons I will assume that the reader is aware of the terms of the principal judgment.

As I will explain below, I determined in relation to the plaintiffs' most substantial claim that a particular order for security for costs was appropriate in the circumstances of the case. However, I did not immediately make that order. The reason was that in respect of the two lesser claims made by certain of the plaintiffs, which were only made against one group of defendants, I considered that the issues relevant to the question whether the relevant plaintiffs should be ordered to provide security for costs did not arise with sufficient clarity out of the statement of claim or the evidence provided to the Court at the hearing of the notices of motion. I found that it was reasonable in the circumstances for the Court to defer its decision as to whether to order the provision of security for costs in relation to the two lesser claims until the relevant defendants had filed their defences. Essentially, that was because it was not sufficiently apparent that the two lesser claims would be contentious, so that it was difficult for the Court to decide whether additional security for costs was warranted as well as the security for costs that the Court proposed to order in respect of the principal claim made by the plaintiffs.

The Court did not make any orders at all on the notices of motion as it contemplated that defences would be filed by the relevant defendants in the timeframes required by the UCPR and that the Court would then be asked to complete its consideration of the matter and make appropriate orders.

As it has happened, the parties then embarked upon an exercise of seeking particulars of the plaintiffs' statement of claim, which led to the filing of a further amended statement of claim on 13 December 2021, defences and cross claims on 14 March 2022, and defences to the cross claims on 23 and 24 May 2022.

The parties caused the notices of motion to be relisted and the further hearing took place on 10 June 2022.

I will deal first with what I described in the principal judgment as the plaintiffs' first claim.

It will be appropriate that I repeat here the conclusion that I reached in the principal judgment concerning the provision of security for the defendants' costs in respect of the first claim:

In essence, I found that the defendants had established the requirements for an order against the plaintiffs that they provide security for the defendants' costs in respect of the first claim in the conventional manner by payment into court or by bank guarantee, save for one matter. That was that the subject matter of the first claim was the issue by the defendant Invigor to the first plaintiff, SAG, of a parcel of shares in Invigor for a price of $1,000,000 paid by SAG using a sum of $1,000,000 borrowed by SAG through a related company from Nehoc. That $1,000,000 parcel of shares remained the property of SAG at the date of the hearing. It had a market value of about $364,000 at the date trading in Invigor's shares on the ASX was halted at Invigor's request on 28 October 2019 and quotation was suspended on 30 October 2019. As at the date of the primary judgment, I was not prepared to treat SAG's Invigor shares as having no value. Invigor was the only party in a position to explain the circumstances of the trading halt and suspension and the likelihood that the suspension would be lifted. It did not do so.

Consequently, I determined that, while the defendants had established an entitlement to security for costs in relation to the plaintiffs' first claim, it would be fair to require the plaintiffs to provide that security by means of a charge granted by SAG over its shares in Invigor. To ensure that any such charge would be effective, I added the requirements at J [152]-[153].

As I noted at J [154], the Invigor defendants had not provided separate estimates of their costs of defending the consultancy agreement claim by SAG and the debt claim by the EAA, being the second and third claims considered in the judgment. For the reasons explained at J [155]-[162], I deferred making a separate decision as to whether security for costs should be ordered in respect of those claims until after the relevant defendants had served their defences.

The evidence before the Court on the 10 June 2022 hearing was that the suspension of Invigor's shares was lifted by the ASX on 21 April 2022, and that, as of 31 May 2022, SAG had 1,458,334 shares in Invigor that had a market value of $86,041.71. There was no evidence that this amount was not representative of the value of the shares since the trading suspension was lifted.

I understand that the plaintiffs accepted at the hearing that the fact that there had been a consolidation of Invigor's share capital was immaterial as the consolidation did not affect the value of the shareholding of each shareholder in the company.

Because of an obscure observation made by Mr Shannon in his affidavits that the company called SAF10, which borrowed the $1,000,000 from Nehoc to on-lend it to SAG, "may have an interest in some of the Invigor Shares which were issued to SAG as a result of monies raised under the Nehoc Agreements" the possibility arose that SAF10’s possible interest may take priority to any charge granted by SAG to the defendants to secure their costs of the proceedings. That led to a flurry at the hearing, but the defendants ultimately did not read the evidence that they initially proposed to lead to demonstrate the consequences of receivers and managers having been appointed over SAF10.

For the reasons that follow, it is not necessary to consider whether this obscure observation by Mr Shannon should be taken, by itself, to make the proposed charge over the Invigor shares inappropriate.

As a matter of procedure, in cases where the Court has determined that there is a risk that the plaintiff will not be able to meet a costs order in favour of the defendant such that it is appropriate to make an order for security for costs, the Court may make an order for the provision of additional security where it is satisfied that circumstances have changed in a way that warrants additional security being provided: Misthold Pty Ltd v NSW Historic Sites and Railway Heritage Company Pty Ltd [2022] NSWSC 42 at [17]-[18] (Payne JA). That may be appropriate where the defendant can demonstrate that, in some manner that was not reasonably anticipated at the time the initial order was made, the defendant's costs can be expected to have increased in a manner that will not adequately be protected by the original security that was ordered to be provided. In my view, a similar consideration applies to a case where the Court has ordered that security be provided in the form of a charge over an asset owned by the plaintiff, and the defendant can demonstrate that the value of the asset has declined in a manner that will make it improbable that the charge will serve the initially expected purpose of providing the level of security contemplated by the Court.

The simple fact is that now that it is demonstrated that the suspension of trading of the Invigor shares has been lifted and their market value as of 31 May 2022 was $86,041.71, the assumptions upon which I was initially prepared to consider that the provision of a charge over those shares would be adequate security for the defendants' costs has been undermined. As it has happened, the time taken by the parties to complete the pleadings has had the effect of demonstrating that the provision of security for costs by means of the proposed charge will be wholly inadequate, and that change of circumstance has occurred before the Court has actually made any order for the provision of security for costs.

The first cross claim filed by Nehoc on 14 March 2022 seeks orders to enforce the transaction documents under which Nehoc made the $1,000,000 loan to SAF10. It should follow that Nehoc is entitled to the relief that it seeks if the plaintiff's' case against Nehoc fails. The existence of the first cross claim does not affect my conclusion that the plaintiffs are the effective claimants in the proceedings.

It is arguable that the second cross claim filed by Invigor on 14 April 2022, under which it seeks damages against a number of the plaintiffs and other cross defendants in respect of the circumstances in which the parties entered into a heads of agreement, is a separate claim that may have the effect of enlivening in the cross defendants an entitlement to the provision for security for costs by the cross claimant, Invigor. Whether or not that is true is not a question that is now before this Court.

Now that I have had the opportunity to review the defences filed by the Invigor defendants in response to the second and third claims considered in the principal judgment, I am satisfied that those defendants raise genuine justiciable issues that warrant the Court accepting that it was reasonable for those defendants to include the costs of the forensic effort necessary to defend those claims in the calculation of the amount of the security for costs that they seek.

I noted at J [1] that the two groups of defendants had sought security for their costs in the amounts of $180,000 and $198,867.14 respectively. The Nehoc defendants have conceded that the latter amount should be reduced to $161,817.14 by reason of an error in the original calculation.

Particularly in view of the procedural history of the proceedings since the date of the principal judgment, I am satisfied that the amounts sought by each group of defendants as security for their costs is clearly reasonable, and in fact relatively modest.

At J [136]-[140], I considered the question of whether the defendants had established that the corporate plaintiffs should be ordered to provide almost identical amounts of security for costs for the separate legal representation of the two groups of defendants. I said at J [136] that I was not satisfied that that matter had been established. I reached that conclusion in part on the basis of an analysis of the solicitors' tax invoices for the two sets of defendants that showed that Gary Cohen and Gregory Cohen were personally involved in the preparation of the other group of defendants' cases in a way that was not consistent with the two sets of defendants conducting their defences in an arms’ length way that would be expected if they recognised a real risk that a conflict of interest would develop that would cause the defendants embarrassment in relation to their legal representation. It had seemed to me on the evidence that each of Gary and Gregory Cohen had become so involved in the preparation of the defence of the other's group of defendants that the defendants must have made a judgment that the likelihood of a real conflict arising in the future was sufficiently remote that it could be ignored.

Consequently, I concluded at J [140] that I would not order the corporate plaintiffs to provide the double amounts of security for costs sought by the defendants, and that the quantum of the security for costs that the Court might order should be substantially reduced.

The defendants made submissions at the recent hearing directed at persuading the Court that it should now make orders that the plaintiffs provide security for the costs of each group of defendants in the amounts sought by them. The defendants relied upon the circumstance that the plaintiffs pleaded that the Invigor defendants made certain positive representations to the general effect that the Invigor share price would increase in certain circumstances. However, the relevant representative of the Nehoc group of defendants, Gregory Cohen, was not alleged to have been at the meetings at which positive representations were made, and the only allegation of misleading or deceptive conduct against the Nehoc group of defendants was that representations by silence were made that Invigor, in effect, was not in a bad financial position.

The Nehoc group of defendants relied upon the claim that those defendants have a causation defence. Counsel for the Nehoc defendants made the following submission [T 8.4-9.37]:

Counsel’s explanation assists me in understanding that the allegations in pars 34 and 35 of the Nehoc defendants’ defence to the effect that Invigor’s alleged conduct caused SAG to borrow the $1,000,000 from Nehoc through SAF10, because SAG’s agreements with Invigor had the effect that SAG had to acquire that amount of money, were intended to have the effect of excluding Nehoc’s conduct as being causative of SAG’s loss.

While I remain concerned about the level of apparent cooperation by Gary and Gregory Cohen with the other’s legal representatives, I am satisfied upon reflection that the two groups of defendants are justified in having separate legal representation, and that at the hearing these proceedings there is a real possibility that the Nehoc defendants may be able to avoid liability to the plaintiffs by establishing that only the conduct of Invigor was causative of any loss suffered by any of the plaintiffs. Whether or not that outcome will eventuate will depend upon the course of the proceedings.

In any event, now that I have had an opportunity to consider the pleadings, I am satisfied that the amount of the security for their costs sought by each group of defendants is moderate, and there is no justification for the Court to make an arbitrary reduction in the amount of the security to be provided by the plaintiffs to one or other group of defendants.

As there was no application by the corporate plaintiffs that the amounts of security be paid in tranches, I will order that they be provided in single amounts.

The Invigor defendants sought an order that the proceedings be dismissed pursuant to UCPR r 42.21(3) if the corporate plaintiffs fail to comply with the order for provision of security for their costs within the time stipulated. That rule permits the Court to order that the proceedings on the corporate plaintiffs’ claim for relief in the proceedings be dismissed if they fail to comply with the order for security for costs. I will not make that order now in advance as a guillotine order. The Nehoc defendants sought an order that the proceedings be relisted before the Court on the date that is 14 days after the date that the orders are made for consequential orders, or, in the event that the security has not been provided in accordance with the orders, for consideration as to whether it is appropriate for an order for the dismissal of the corporate plaintiffs’ proceedings to be made. I propose only to make an order relisting the proceedings before the Registrar about 14 days after the corporate plaintiffs will be required to provide the security, so that the parties may then seek such directions as may seem appropriate upon the basis of the circumstances as they then appear.

Both groups of defendants seek orders that the corporate plaintiffs pay their costs of the notices of motion. I accept that it is common practice for the Court to make an order that the plaintiff pay the defendant’s costs of a successful application for security for costs, even though it may happen that in fact the plaintiff succeeds in the proceedings. However, such an order is not always made. A recent case in which the Court has ordered that the costs of the application be the parties’ costs in the cause is Interslice Pty Ltd v CCA Investments – Bass Hill Pty Ltd [2021] NSWSC 1578 (Ward CJ in Eq, as the President then was) where both parties had enjoyed mixed success on the application (see [103]). In the present case the position is different, but the corporate plaintiffs substantially succeeded at the first hearing in only being required to provide security for the costs of the first claim by a charge over the Invigor shares to be granted by SAG. The defendants ultimately succeeded at the second hearing in obtaining an order for the provision of more conventional security, but that was only because of a change in circumstances since the first hearing. It would not be fair to the corporate plaintiffs for the Court to treat them as being wholly unsuccessful on the defendants’ applications. The appropriate order in this case is that the costs of the applications be the parties’ to the notices of motion costs in the cause.

The Court’s orders will be: