In the matter of Credit Clear Limited [2022] VSC 206 (29 April 2022): security for costs,
May 3, 2022 |
Justice Riordan considered an appeal against an order for security for costs in In the matter of Credit Clear Limited [2022] VSC 206. The appellants were unsuccessful across the board.
FACTS
By originating process filed 15 July 2020, the plaintiffs made an application under:
(a) sections 175, 232, 233, 461(1)(k), 1041H(1), 1324(1) and 1325 of the Corporations Act 2001 (Cth) (‘the Act’);
(b) sections 12DA and 12GM of the Australian Securities and Investments Commission Act 2001(Cth) (‘the ASIC Act’);
(c) Sections 237 and 243 of the Australian Consumer Law, being Schedule 2 of the Competition and Consumer Act 2020 (Cth) (‘ACL’); and
(d) the inherent jurisdiction of the Court [2].
The plaintiffs sought the following substantive relief in their points of claim [4]:
(a) The first plaintiff (‘Mr McKendrick’) sought to be reinstated as a director of the first respondent (‘Credit Clear’).
(b) The appellant sought the following relief:
B. Declarations and or orders under s 1325 of the Act, alternatively s 233(1)(c) and or (j) of the Act, s 12GM of the ASIC Act and or ss 237 and 243 of the ACL, that the Separation Agreement dated 11 November 2016 and Intellectual Property Assignment Agreement dated 11 November 2016 (by which the plaintiffs were forced to give up their interests in the first defendant together with the intellectual property rights owned by the first plaintiff) are void on the grounds they were procured under duress, undue influence, unconscionable conduct and or misleading and deceptive conduct in contravention of 1041H(1) of the Act, s 12DA of the ASIC Act and or s 18 of the ACL;
C. A declaration that the second plaintiff is entitled to hold 20% of the issued ordinary shares in the first defendant;
D. Rectification of the share register of the first defendant pursuant to s 175 of the Act to reinstate the second plaintiff as a member and to record that it holds a number of fully paid ordinary shares representing 20% of issued shares in the first defendant alternatively that it holds 6,805,555 fully paid ordinary shares in the first defendant;
E. A declaration that the affairs of the first defendant are being conducted contrary to the interests of the members as a whole and or are oppressive to, or unfairly prejudicial to, or unfairly discriminatory against the second plaintiff, or in the interests of and to the benefit of the second to third defendants and not the first defendant or its members;
F. An order that the second and or third defendants purchase the second plaintiff’s shareholding in the first defendant at fair value;
G. Alternatively to paragraph F, an order that the first defendant purchase the second plaintiff’s shareholding at fair value with an appropriate reduction of the first defendant’s share capital;
H. Alternatively to paragraph F or G, an order that the first defendant be wound up under s 233 or alternatively under s 461(1)(k) of the Act;
I. An order that the first defendant compensate the plaintiffs for their loss and damage pursuant to s 175(2) of the Act;
J.Alternatively to paragraph I, compensation pursuant to ss 1041I and or 1325 of the Act, s 12GM of the ASIC Act or ss 237 and 243 of the ACL.
His Honour summarised the quite dramatic relevant allegations as. at [5]:
(a) Iin 2014, Mr McKendrick (“McKendrick”) created a digital debt management and collection system to be owned and operated by Credit Clear. McKendrick was the sole director and chief executive officer of Credit Clear between 17 March and 8 October 2015.
(b) On 17 March 2015, Credit Clear was registered with the appellant recorded as the sole shareholder, holding 5 million fully paid ordinary shares (100% interest).
(c) In March 2015, McKendrick and Mr Mark Casey (“Casey”), associated with the second respondent (‘Casey Consulting’) agreed that:
(i) Casey or his related entities would invest working capital of $1 million with half to be paid up capital and the other half to be unpaid and linked to the achievement of milestones that were to be agreed between them; and
(ii) McKendrick would be the chief executive officer of Credit Clear.
(d) In or about May 2015, Casey informed McKendrick that Mr Julian Gallin (“Gallin”) and Mr Chris Carron (“Carron”) would be investing and taking shares in Credit Clear and there would be a board of Credit Clear. Casey did not inform McKendrick that Gallin and Carron had criminal histories.
(e) On 8 October 2015, there was a meeting of the board of Credit Clear, where McKendrick was told that he would no longer be the CEO and would be replaced by Mr Lewis Romano (“Romano”) (who is associated with the third respondent (‘Romano Holdings’)). McKendrick says he complied because Casey and Gallin threatened him.
(f) After the meeting, and without the knowledge of McKendrick, Romano lodged a notice with ASIC removing McKendrick as director and appointing himself as director. From that time, McKendrick has been excluded from the management of Credit Clear.
(g) By a Shareholders Agreement signed 11 November 2015 (‘the Shareholder Agreement’), it was agreed that the shareholding in Credit Clear was as follows:
Shareholder
|
Number of shares
|
McKendrick
|
5,000,000 [20%]
|
Casey
|
7,250,000 [29%]
|
Romano
|
5,500,000 [22%]
|
Herculean [Gallin]
|
4,500,000 [18%]
|
Carron
|
2,750,000 [11%]
|
TOTAL
|
25,000,000
|
(h) McKendrick signed the Shareholder Agreement because, on the basis of the earlier threats, he formed the view he could lose all of his interest in Credit Clear.
(i) On 30 March 2016, without notice to McKendrick, Credit Clear purported to issue a further 57.5 million ordinary shares, with 13,750,000 issued to Romano Holdings and 43,750,000 issued to Casey Consulting, thereby diluting the interests of McKendrick and the appellant in Credit Clear to 8%.
(j) On 19 May 2016, Credit Clear purported to issue a further 509,259 ordinary shares to Romano Holdings and 1,805,555 to the appellant.
(k) By the Separation Agreement between Credit Clear, McKendrick, the appellant and Casey Consulting, McKendrick would ‘separate from [Credit Clear] and:
(i) the appellant agreed to transfer ‘all of its 5,000,000 ordinary shares in [Credit Clear] to [Casey Consulting]’ for a consideration of $1,000;
(ii) Casey Consulting agreed to forgive loans to McKendrick of up to $120,000 contemporaneous with payment of the consideration for the shares referred to in (i) above;
(iii) Casey Consulting agreed to transfer to McKendrick 1,666,666 shares in Intergroup Mining Limited, held on bare trust by Casey Consulting for McKendrick, contemporaneously with payment of the consideration for the shares referred to in (i) above;
(iv) McKendrick agreed to transfer all of Credit Clear’s intellectual property in his possession to Credit Clear and execute a separate agreement entitled Intellectual Property Assignment Agreement;
(v) McKendrick agreed to a restraint of trade and non-compete clause for a period of 12 months in Australia; and
(vi) the parties agreed to a mutual release and indemnity in the following terms:
Except for any matters that occur after the execution of this Agreement (including a breach of this Agreement), in consideration of the obligations of the parties under this Agreement, the parties agree to release and forever discharge the other parties, including the members, directors, officers and employees of the parties, from all actions, suits, obligations, sums of money, causes of action, proceedings, accounts, costs, charges, expenses, claims and demands both at law or in equity and/or arising under any statute which may arise out of, or in any way relate directly or indirectly to:
(a) [Credit Clear]; and
(b) Any other written agreement between the parties relating to [Credit Clear].
(l) On 27 October 2016, McKendrick signed the Separation Agreement and collected $30,000 in cash. The Separation Agreement was executed by Credit Clear and Casey Consulting on 11 November 2016.
(m) McKendrick alleges he signed the Separation Agreement as a result of:
(i) threats that he might be physically harmed by Mr Gallin; and
(ii) concerns that Mr Casey would further dilute his interests in Credit Clear or cause him to lose his interests entirely.
(n) On 14 November 2016, Casey purported to lodge with ASIC a form stating that the appellant’s 6,805,555 shares in Credit Clear had been transferred to Casey Consulting (‘the November share transfer’).
(o) The Separation Agreement and the November share transfer were procured by duress, undue influence, unconscionable conduct and/or misleading and deceptive conduct and should be set aside. The alleged conduct was oppressive within the meaning of s 233 of the Act.
In their points of defence the respondents admitted the Separation Agreement and the issuing and transfers of shares as alleged by the plaintiffs but said:
- that each was with the knowledge and consent of McKendrick.
- McKendrick’s shareholding was diluted from 20% to 10.5% because, on 13 November 2015, Mr McKendrick agreed to transfer from the appellant’s shareholding:
(a) 7.5% of issued shares in Credit Clear to Mr Gallin; and
(b) 2% of issued shares in Credit Clear to Mr Carron,
in order to settle outstanding liabilities he owed to each of Gallin and Carron [6].
By summons filed 25 November 2020, the respondents sought security for costs from the appellant pursuant to:
(a) r 62.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (‘the Rules’);
(b) s 1335(1) of the Act; or alternatively
(c) the inherent jurisdiction of the Court [7].
Associate Justice Gardiner found that an order for security should be made and made the Security Order [8] in the following terms:
1. By no later than 4.00pm on 21 October 2021, the second plaintiff provide, by way of payment into Court, security for the defendants’ costs of and incidental to this proceeding up to and including the second mediation in the sum of $135,000.
2. If there is a default of payment or provision of security as provided for in paragraph 1, the proceeding shall be stayed forthwith.
3. The second plaintiff pay the standard costs of the defendants’ summons filed on 25 November 2020, such costs to be taxed in default of agreement.
4. There be liberty to apply, including in respect of whether further security ought be provided and the amount thereof for the period following the second mediation [1].
Grounds of Appeal were:
(a) The Associate Judge erred in finding that there is reason to believe that the appellant will be unable to satisfy an adverse costs order if ordered to do so.
(b) The Associate Judge erred in failing to appropriately consider the following grounds in the exercise of his discretion:
(i) The impecuniosity of the appellant was caused by the respondents.
(ii) The presence of a natural person standing behind the appellant.
(iii) The resources of persons standing behind the appellant.
(iv) The effect that the order for security would stultify the proceeding.
(v) The application was an instrument of oppression.
(c) The Associate Judge erred in not halving the quantum of security awarded in consideration of the presence of a natural person co-plaintiff [15].
DECISION
His Honour focused on r 62.02(1)(b) of the Rules which provides that plaintiff give security for a defendant’s costs of the proceeding where:
(a) the plaintiff is a corporation; and
(b) there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so (‘the threshold condition’).
His Honour reviewed the principles stating:
- if the defendant satisfies the threshold condition, the Court has an unfettered discretion to award security for costs, which must be exercised judicially, having regard to all of the circumstances [10].
- relevant factors include:
(a) the merits of the claim;
(b) whether the proposed orders would stultify the claim;
(c) whether the defendant was the cause of the company’s impecuniosity;
(d) whether there was delay in making the application;
(e) whether there are persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security;
(f) whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking; and
(g) whether the company is in substance a defendant. An order ought not be made against parties who are defending themselves and thus forced to litigate [11].
- the burden of satisfying the Court that an order security for costs should be made rests on the defendant [12]
- the plaintiff must establish matters that are peculiarly within the knowledge of the plaintiff, such as:
(a) whether an order for security would stultify its capacity to conduct the litigation or be oppressive; and
(b) whether the plaintiff’s impecuniosity was caused by the defendant [12],
- in exercising its discretion, the Court must balance the risk of a successful defendant being unable to enforce a costs order against the prospect of an impecunious corporation being prevented from pursuing a bona fide claim [13].
An appeal brought under r 77.06 of the Rules is by way of rehearing rather than rehearing de novo. In the absence of further evidence or a change in the law that ordinarily requires the appellant to show error (factual, legal or discretionary) on the part of the Associate Judge [14].
Regarding the grounds:
The Associate Judge erred in finding that there is reason to believe that the appellant will be unable to satisfy an adverse costs order if ordered to do so
The appellant’s submitted that the Associate Judge erred in failing to find that it had assets in the hands of the respondents that could be applied to an adverse costs order because:
- it has a strong claim to be reinstated to the register at least in respect of the 1,805,555 shares in Credit Clear because the Separation Agreement only provided for the transfer of 5 million shares and the respondents caused the transfer of the appellant’s entire shareholding of 6,805,555 shares.
- the Associate Judge relied upon the broad denial of this claim by the respondents and referred to the entitlement to the shares as being ‘controversial’ however the respondent did not raise any defence regarding the facts relevant to this claim.
- although not pleaded McKendrick and the appellant notified the respondents they would rely on:
- a claim that he did not execute a share transfer form for the transfer of 5,000,000 shares in Credit Clear.
- the Second Plaintiff claims the value for the 2.785% shareholding (1,805,555 shares) which it held in Credit Clear, $4,399,763.20 and for which the respondent hadno genuine defence.
- C Capital has a valuable asset that will allow it to pay the costs of the defendants if they are successful. The valuable asset is the right to be reinstated to at least 1,805,555 shares in Credit Clear which are worth approximately $1.2M dollars. [16]
The respondents submitted there was no error in finding that the appellant had insufficient assets to pay the costs of the respondents because:
- the appellant conceded that it held insufficient assets to pay such costs.
- the Associate Judge was correct to rejectthe appellant’s claim to the 1,805,555 shares in Credit Clear because:
- it had not been pleaded or advanced in the originating process or the points of claim; and
- there was a real issue as to whether the appellant, in fact, held 6,805,555 shares at the time of the Separation Agreement [17]
The Associate Judge found that the respondents had satisfied the threshold condition and regarding the claim for the 1,805,555 shares the Associate Judge noted that the Court is cannot assume that that that part of its claim will be successful [19].
The court found that it was open to the Associate Judge to find that there was reason to believe that the appellant would be unable to pay the costs of the respondents if successful in its defence because it was accepted that, except for any amount recovered in this proceeding, the appellant had no assets [21].
His Honour stated that the Court was entitled to proceed on the basis that the additional shares claim was bona fide and, when pleaded, had reasonable prospects of success however it would be necessary for the Court to be satisfied that any defence to the claim has no real prospect of success. The Court will not go into the merits of a claim [23]
His Honour found that In the circumstances of this case it was open to the Associate Judge not to speculate as to the ultimate outcome of the additional shares claim at trial [24].
The court made the pointed comment that the points of claim could have been amended and the matter adjourned to allow the respondents to file a responding defence and put on evidence. As neither party requested that be done it was open to the Associate Judge to proceed and deal with the matter as he did [25].
The Associate Judge erred in failing to appropriately consider that the impecuniosity of the appellant was caused by the respondents
The appellant submitted that it provided sufficient evidence to establish that the appellant’s financial impecuniosity was caused by the respondents, being that it:
(a) did not trade; and
(b) was established for the sole purpose of operating as an investment vehicle to hold McKendrick’s shares in Credit Clear [25].
Because of that the appellant submitted that it was not necessary to produce the financial accounts or audits referred to by the Associate Judge [27].
The respondents submitted that:
- the Associate Judge was correct in finding that the appellant failed to adduce any evidence regarding its financial position or the value of itss shares in Credit Clear at the time of the alleged conduct the subject of the claims (which preceded the entry of Credit Clear on the Australian Securities Exchange) [28] .
- the authorities recognise that caution is required before the Court embarks on a detailed analysis of the merits of a plaintiff’s claim [29].
- the central allegations advanced by the appellant are contradicted by contemporaneous documentary records [29].
- the appellant has delayed for some five years after the relevant events before making a complaint [29].
The Court found that the Associate Judge did not err in finding that the appellant failed to establish that the respondents’ conduct was the cause of its impecuniosity because:
- it was open to the Associate Judge to find there was no evidence as to the value of the appellant’s shares in Credit Clear at the time of the alleged conduct.
- The extent of McKendrick’s evidence suggests the appellant sold its shares for ‘fair value’.
- the evidence about Romano’s sale of shares was not in admissible form and was at best vague and unspecified as to time or circumstance
- it was not practicable for the Associate Judge to attempt to make any assessment as to whether the consideration received by the plaintiffs in the Separation Agreement for the transferred shares was fair or not [30].
The Associate Judge erred in failing to appropriately consider the presence of a natural person standing behind the appellant
The appellant submitted that McKendrick as a party was a basis to dismiss the application because:
- as the appellant was a corporate vehicle to hold McKendrick’s interests in Credit Clear it wasMcKendrick’s interests that were being pursued [31].
- it was more than likely that a joint and several costs order would be made [31].
Not surprisingly the respondents submitted that the issue of overlapping claims was not a weighty consideration because:
- the principal claim is brought by the appellant & McKendrick’s claim to be reappointed as a director of Credit Clear is hopeless.
- while the appellant’s position is that its claim is McKendrick’s claim for oppression McKendrick was not prepared to indemnify the appellant in respect of an adverse costs order.
- the Associate Judge recognised that it is impossible to predict whether a joint and several costs order would ultimately be made against the plaintiffs [32]
The Court found no error with the Associate Judge failing to consider the presence of a natural person standing behind the appellant as:
- the appellant was merely the vehicle by which McKendrick’s interest in Credit Clear was held; and
- even if it was more than likely that a joint and several costs order would be made McKendrick was not prepared to give an undertaking to accept the liability for any costs order [33].
- it is difficult to predict what costs orders would be made as::(a) Mr McKendrick’s claim arises from his removal as a director of Credit Clear in October 2015.
- the appellant’s principal claims relate to the execution of the Separation Agreement in November 2016.
- at trial the Court could be find that McKendrick was improperly removed as a director but the appellant’s transfer of shares claim faiedl [35].
- there was no satisfactory explanation offered as to why McKendrick would not give an undertaking to accept liability for any costs ordered against the appellant [36].
- while the Associate Judge considered the presence of a natural person standing behind the appellant it was open for him not to consider it to be determinative [38].
The Associate Judge erred in failing to appropriately consider the resources of persons standing behind the appellant
The appellant submitted that the Associate Judge erred in failing to consider McKendrick’s resources because:
- McKendrick was the true plaintiff and the appellant is merely the corporate vehicle by which he pursues his interests,
- it was most likely that there would be a joint and several costs order.
- McKendrick’s income is relatively modest and did not support the assumption that he had the capacity to both fund the litigation and offer security to the respondents [38].
The respondents submitted that there was no error because:
- it was incongruous for the the appellant to argue that there will be a joint and several costs order but McKendrick not being prepared to indemnify the appellant [39]
- the allowance for a third party to finance the plaintiffs’ proceeding addresses the concern regarding injustice of a successful defendant not being able to recover its costs [39].
His Honour found that it was open for the Associate Judge to reject the appellants submissions because:
- while McKendrick had a substantial income he had not ‘elaborate his outgoings or provide independent substantiation of his position [40]
- McKendrick had not offered to indemnify the appellant
- McKendrick’s income would enable him to procure funding to offer security [41].
The Associate Judge erred in failing to appropriately consider the effect that the order for security would stultify the proceeding
The appellant argued that
- McKendrick had limited means and couldn’t afford to sustain the litigation if he is required to pay security for costs [44] as
a) his salary has reduced to $75,000;
b) he has combined monthly expenses of $16,507.67 (including tax);
c) he has combined assets of $80,000;
d) he has a credit card debt of $18,800;
e) as of 4 June 2021, [he has] legal costs of approximately $68,562.42; and
f) he is financially supporting his partner and gravely ill mother.
The respondents resp;onded that:
- the Associate Judge characterised McKendrick’s annual income of $240,000 as high by community standards and that he was in a position to procure funding to offer security.
- McKendrick did not provide independent substantiation of his financial position, nor did he provide evidence of attempts to obtain third party funding.
- McHendrick’s Quantum Affidavit failed to provide details of the redundancy package McKendrick received from his previous employer, did not provide supporting documentation of alleged expenses and did not detail any attempts to obtain third party funding [45].
His Honour found it was open for the Associate Judge not to accept that the appellant had established that its claims would be stultified [46]
The Associate Judge erred in failing to appropriately consider that the application was an instrument of oppression
The appellant submitted that the application for security for costs was oppressive because:
- McKendrick was deprived of his invention;
- the parties were not on an equal footing in a commercial relationship; and
- the Associate Judge erred in refusing to draw an inference that the respondents had substantial assets [48].
The respondents submitted that the appellant’s characterisation that hte applicatoin was oppressive depended entirely upon the acceptance of the allegations, which were denied. At the relevant time the parties were engaged in a commercial enterprise on somewhat of an equal footing and finally that the respondents had meritorious defences and there was no suggestion that the litigation was conducted in a manner which has brought about unnecessary delay or costs [49].
The court rejected the appellant’s submissions noting that the parties were formerly involved in a commercial relationship and were on something of an equal footing prior to the appellant and Mr McKendrick departing the enterprise’ [50] – [51].
The Associate Judge erred in not halving the quantum of security awarded in consideration of the presence of a natural person co-plaintiff
The appellant submitted that because any costs order against the appellant and/or McKendrick would be paid by McKendrick it should have been halved [53] and the Associate Judge erred by splitting the quantum on a 90/10 basis without an explanation [54].
The respondents returned to the argument that while the appellant accepted that McKendrick is the true plaintiff he refuses to accept that each plaintiff will be equally liable for the entirety of the respondents’ costs [55].
His Honour disposed of this ground by finding that the quantum of security ordered was well within the Associate Judge’s discretion. His Honour was not impressed with the argument that in ordering security for costs the amount should be divided by the number of plaintiffs and noted that the appellants presented no authority in support of that proposition [56].
ISSUE
This decision is useful in that the court carefully set out how the principles are applied. It is also useful in showing what is required when the plaintiffs are both a corporate entity and its human face. That is not an uncommon situation. The appeal foundered on every ground. What is surprising is the lack of preparedness of the person behind the appellant to provide some form of indemnity for costs. The lack of documentary substantiation in support of claimed expenses did not assist. It was also a flawed argument to allege that the appellants interest in the company provides sufficient assets to satisfy a costs order when that interest and right to assets was contested. Courts do not like to speculate on how litigation will transpire.
In short, resisting a security for costs application involves putting on sufficient material to satisfy the court that a costs order can be satisfied. As a result it is a complex exercise require careful preparation. Failing to set out as much information as possible can result in a poor outcome.