Federal Court of Australia Credit Suisse AG v Gu [2022] FCA 1220 File number: NSD 211 of 2022 Judgment of: CHEESEMAN J Date of judgment: 21 October 2022 Catchwords: PRACTICE AND PROCEDURE – where referee appointed pursuant to s 54A(1) of the Federal Court of Australia Act 1976 (Cth) to prepare a report on applications for security for costs – where no party moves the Court to reject the referee's report – whether the report should be adopted, varied or rejected – Held: referee's report adopted in the whole. Legislation: Corporations Act 2001 (Cth), s 1335(1) Federal Court of Australia Act 1976 (Cth), ss 54A(1), 54A(3), 56 Federal Court Rules 2011 (Cth), rr 19.01, 28.67 Cases cited: Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 Commissioner of Taxation v Vasiliades [2016] FCAFC 170; 344 ALR 558 Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103 Nine Films and Television Pty Ltd v Ninox Television Ltd [2005] FCA 735; 146 FCR 144 Pegasus Gold Inc v Bateman Project Engineering Pty Ltd [1999] FCA 1734 Quach v MLC Limited [2022] FCA 586 Winnote Pty Ltd (in liq) v Page [2005] NSWCA 362; 64 NSWLR 244 Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Number of paragraphs: 40 Date of hearing: Determined on the papers. Solicitors for the Third to Sixth Respondents: MJF Law Pty Ltd Solicitors for the Ninth Respondent and Eighth Cross-Respondent to the First Cross-Claim: Hall & Wilcox ORDERS NSD 211 of 2022 BETWEEN: CREDIT SUISSE AG ABN 17 061 700 712 Applicant AND: MENGHONG (MICHAEL) GU First Respondent GREAT LANDS INVESTMENT PTY LTD Second Respondent ZHI HUANG (and others named in the Schedule) Third Respondent order made by: CHEESEMAN j DATE OF ORDER: 21 October 2022 THE COURT ORDERS THAT: 1. Pursuant to s 54A(3) of the Federal Court of Australia Act 1976 (Cth), the Report of the Referee, Senior National Judicial Registrar Farrell, dated 16 September 2022, be adopted in the whole. 2. Pursuant to s 56 of the Act, the cross-claimants to the first cross-claim (the Hu Parties) provide security for costs of the fifth and eighth cross-respondents' (Jing Spring Hill Pty Ltd (JSH) and Chunshan Jing) costs of the first cross-claim. 3. The amount of security to be paid pursuant to order 2 above is $180,000, either by way of: (a) money paid into court; or (b) an unconditional bank guarantee issued by an Australian bank. 4. Pursuant to s 56 of the Act, s 1335(1) of the Corporations Act 2001 (Cth) and r 19.01 of the Federal Court Rules 2011 (Cth), the cross-claimant to the fourth cross-claim (JSH) provide security for costs of the Hu Parties' costs of the fourth cross-claim. 5. The amount of security to be paid pursuant to order 4 above is $97,000 (excluding GST) either by way of: (a) money paid into court; or (b) an unconditional bank guarantee issued by an Australian bank. 6. In the security for costs application of JSH and Chunshan Jing filed on 4 August 2022, the Hu Parties pay the costs of JSH and Chunshan Jing as agreed or assessed. 7. In the security for costs application of the Hu Parties dated 4 August 2022, JSH pays the costs of the Hu Parties as agreed or assessed. 8. The parties are to confer within 14 days for the purpose of agreeing a lump sum in respect of the costs payable under orders 6 and 7, and if agreement is reached to submit agreed short minutes of order to the Associate to Justice Cheeseman for consideration in chambers. 9. In the absence of agreement being reached in respect of the costs payable under orders 6 and 7 within 14 days, the costs payable under orders 6 and 7 are to be determined by a Registrar on a lump sum basis. 10. The parties have leave to approach the Registrar for a listing in respect of the determination of costs in accordance with order 9. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT CHEESEMAN J: introduction 1 These brief reasons concern the adoption of a Referee's report under s 54A(3) of the Federal Court of Australia Act 1976 (Cth) (FCA Act) in circumstances where the parties have been informed that the Court proposed to adopt the report subject to any of the affected parties filing an application under r 28.67 of the Federal Court Rules 2011 (Cth). No such applications have been filed within the time stipulated by the Court. 2 Pursuant to orders dated 18 July 2022, as varied by orders dated 19 August 2022, the parties to the proceedings were required to file and serve any interlocutory applications with respect to security for costs by 28 July 2022. A timetable was entered for the filing of submissions, submissions in reply, and any affidavit evidence in support. 3 Pursuant to s 54A(1) of the FCA Act, a Registrar of the Court was appointed as a Referee to conduct an inquiry into the following questions, and provide to the Court a written report setting out his opinions on those questions supported by reasons: (1) whether security for costs should be granted; and (2) if so, in what amount and in what form. 4 By interlocutory application filed on 4 August 2022 (JSH Application), Jing Spring Hill Pty Ltd (JSH) and Chunshan Jing (JSH Parties), the fifth and eighth cross-respondents to the first cross-claim, sought (inter alia): (1) Pursuant to s 56 of the FCA Act, an order that Zhi Huang, Ying Qin, Zhenhua Zhang and Po Hu, the cross-claimants to the first cross-claim (the Hu Parties), provide initial security for costs of the JSH Parties in the amount of $340,522.00 or such other amount as the Court may order within 7 days from the date of the order. The security is to be provided by way of either payment into Court or unconditional bank guarantee. (2) An order that, in the event that the security is not given as directed by the Court within the time specified, the proceedings be stayed until further order. (3) Liberty to apply on 3 days' notice for further security if the amount of security ordered in order 1 proves insufficient, or if there is disagreement about the acceptability of the unconditional bank loan. (4) Costs. (5) Further or other orders as the Court deems appropriate. 5 By interlocutory application dated 4 August 2022 (the Hu Application), the Hu Parties sought (inter alia): (1) Pursuant to s 56 of the FCA Act and/or s 1335(1) of the Corporations Act 2001 (Cth) and r 19.01 of the Rules, orders that: (a) The eighth respondent/cross-claimant to the second cross-claim, i-Prosperity Pty Ltd (in liquidation) (IPPL), provides security for costs in the amount of $132,310.48, or such amount as the Court determines, to the Hu Parties; (b) The second respondent/cross-claimant to the third cross-claim, Great Lands Investment Pty Ltd, provides security for costs in the amount of $176,799.98, or such amount as the Court determines, to the Hu Parties; and (c) The ninth respondent/cross-claimant to the fourth cross-claim (JSH), provides security for costs in the amount of $125,468.48 or such amount as the Court determines, to the Hu Parties. 6 The security sought by the Hu Parties as against IPPL and Great Lands Investment was resolved by consent between the relevant parties, and as a result was not considered by the Referee. 7 On 16 September 2022, the Referee provided his Report (R) in which he set out his reasons for forming the following opinions in respect of the questions referred to him: (1) the Hu Parties should provide security for costs of the JSH Parties' costs of the first cross-claim; (2) the amount of security to be paid pursuant to (1) above should be $180,000 either by way of money paid into court or an unconditional bank guarantee issued by an Australian bank; (3) JSH should provide security for costs of the Hu Parties' costs of the fourth cross-claim; and (4) the amount of security to be paid pursuant to (3) above should be $97,000 (excluding GST) either by way of money paid into court or an unconditional bank guarantee issued by an Australian bank. 8 Whilst not within the scope of the referral, the Referee also usefully included in his Report his views on the costs orders that should follow given his opinion on the questions referred to him in respect of the JSH Application and Hu Application. On the basis that both applications were to some extent successful, the Referee recommended that: (1) In the JSH Application, the Hu Parties pay the costs of the JSH Parties as agreed or assessed. (2) In the Hu Application, that JSH pays the costs of the Hu Parties as agreed or assessed. 9 The Report was sent to the legal representatives of the Hu Parties and JSH Parties on 21 September 2022 with a preliminary indication that the Court intended to adopt the findings in the Report subject to any affected party bringing an application under r 28.67 of the Rules, with any such application to be filed by 4:00pm on 28 September 2022. The parties were informed that their submissions in relation to costs would be considered with a view to determining the issue of costs in conjunction with finalising the reference, noting the observations the Referee had made in respect of costs. As mentioned above, none of the affected parties filed any application under r 28.67 by the date nominated. LEGAL PRINCIPLES Adoption of Referee's Report 10 Rule 28.67(1) relevantly provides that after a referee's report has been given to the Court, a party may, on application, ask the Court to adopt, vary or reject the report, in the whole or in part. No party has made such an application in these proceedings. Nonetheless, it is appropriate to provide judgment and give reasons in circumstances where the parties were informed that the Court proposed to adopt the Report subject to any of the affected parties filing an application under r 28.67. 11 The principles relevant to the exercise of the Court's discretion to adopt, vary or reject a referee's report are set out in Quach v MLC Limited [2022] FCA 586 (at [8]). For present purposes, in the absence of any application under r 28.67 of the Rules, the following brief summary will suffice: (1) The discretion to adopt, vary or reject a referee's report is to be exercised in a manner consistent with the context and purpose of the relevant rules. The purpose of the Rules is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, and it would frustrate that purpose to allow the reference to be treated as a rehearsal for the real contest. (2) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, "patent misapprehension of the evidence" means a lack of understanding of the evidence and not the weight attributed to it; and "perversity or manifest unreasonableness" means a conclusion that no reasonable tribunal of fact could have reached. (3) In general, the referee's findings of fact should not be re-agitated before the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee has expertise. That is patently so in circumstances where no party seek to oppose the adoption of the Report. Security for Costs 12 The principles applicable to the grant of security for costs with respect to s 56 of the FCA Act are set out in Quach at [9] – [10] and need not be reproduced here. Section 56 applies in respect of cross-claimants: Nine Films and Television Pty Ltd v Ninox Television Ltd [2005] FCA 735; 146 FCR 144 at [56], [68]; Pegasus Gold Inc v Bateman Project Engineering Pty Ltd [1999] FCA 1734 at [29]. 13 Section 1335(1) of the Corporations Act provides: (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. 14 In Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103, Murphy J observed (at [17]): Section 56 of the Federal Court Act, unlike s 1335(1) of the Corporations Act, does not expressly require credible testimony that there is reason to believe that the corporation will be unable to pay the respondent's costs. However, as is usually the case in security for costs applications, the primary basis of the application before me is that [the applicant] will be unable to pay the [respondents'] costs if it is unsuccessful in the proceeding. In these circumstances the approach to be taken under either provision is essentially the same: see Soul Pattinson Telecommunications Pty Ltd v Subex Americas Inc [2009] FCA 651 at [6] per Perram J; Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 at [5] per Yates J. 15 Section 1335(1) applies in respect of cross-claimants as well as plaintiffs: Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 306; Winnote Pty Ltd (in liq) v Page [2005] NSWCA 362; 64 NSWLR 244 at [18]; Pegasus Gold Inc v Bateman Project Engineering Pty Ltd [1999] FCA 1734 at [29]. 16 Rule 19.01(1) of the Rules provides: (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. 17 In r 19.01, an applicant is defined to include a cross-claimant: r 19.01(4). CONSIDERATION OF THE REFEREE'S REASONS 18 In preparing the Report, the Referee has carefully analysed the evidence filed and the submissions made by the parties. JSH Application 19 On the JSH Application, in summary the JSH Parties submitted that: (1) On the basis of the available evidence it appears that only one of the Hu Parties (being Po Hu) ordinarily reside in Australia. (2) Even in relation to Mr Hu, there is no evidence that would satisfy the Court that he is ordinarily resident in Australia. (3) The only evidence of any ownership of assets in the jurisdiction is that Mr Hu owns a residential property at Zetland in Sydney which is claimed to be valued at approximately $630,000 and another residential property at Pyrmont. (4) The Hu Parties have failed to respond to requests for information from the solicitors for the JSH Parties in relation to their ability to meet any adverse costs order. (5) The relevant case law establishes that the residence of a party outside the jurisdiction is a powerful factor in favour of ordering security for costs. (6) The assets identified by the Hu Parties should not satisfy the Court as being sufficient to remove the need for security. The assets are unencumbered residential properties, one of which is claimed to have a value of $650,000, but there is no evidence of value of the Pyrmont property. The potential exposure of the Hu Parties to adverse costs orders in the proceedings may well exceed the amount of any equity which exists in the Zetland property. (7) The JSH Application was made promptly and it is not oppressive, in that it is not being used to deny an impecunious applicant a right to litigate. On the contrary, the JSH Parties say that the Hu Parties are attempting to resist the JSH Application on the basis that Mr Hu has sufficient assets and is not impecunious. 20 In summary, the Hu Parties submitted that: (1) The onus of establishing that the Hu Parties ordinarily reside outside the jurisdiction rests with the JSH Parties, and in relation to Mr Hu, Ms Qin and Mr Huang, they have failed to do so. (2) Security for costs is not ordinarily ordered where a case for security is made out against one or some of multiple plaintiffs. (3) The claims by each of the Hu Parties are identical and as such, there is no prospect that adverse costs orders will be made against only one or some of the Hu Parties. (4) Mr Hu has established that he has substantial assets in the jurisdiction which demonstrate that any potential liability in respect of adverse costs orders will be able to be satisfied. (5) If security for costs is ordered by the Court, an appropriate amount would be $150,000. 21 In support of the JSH Application, the JSH Parties relied on the affidavits of Jacob Uljans dated 3 August 2022 and 8 September 2022. In opposition, the Hu Parties relied on the affidavit of Mark Joel Fester dated 25 August 2022. 22 In determining the JSH Application, the Referee correctly summarised the general principles applicable to exercising the discretion to grant security for costs (R[20] – [21]). The Referee then moved to consider the application of the general principles to the particular circumstances of the proceedings. 23 First, the Referee addressed the issue of Mr Hu's residence. The Referee set out evidence that Mr Hu is a resident of Australia, and owns residential property in New South Wales that would sufficiently satisfy any costs orders against the Hu Parties (R[23] – [25]). The Referee proceeded to set out the evidence before him as to the residences of the other Hu Parties, being Mr Huang, Ms Qin and Mr Zhang. The Referee was of the view that only Mr Hu is ordinarily resident in Australia, whilst noting that the position was not entirely clear (R[26] – [33]). 24 Secondly, the Referee considered the extent of Mr Hu's assets in the jurisdiction. The Referee referred to evidence of Mr Hu's property ownership in New South Wales, including a Land Registry Title Search for the Zetland property. The Referee also noted the lack of evidence as to the other Hu Parties' assets or financial positions. Following a careful assessment of the submissions and evidence as to Mr Hu's assets (R[36] – [39]), the Referee concluded that the discretion should be exercised in favour of ordering security for costs against the Hu Parties in favour of the JSH Parties. The amount and form of security 25 The Referee considered an estimate of the costs of the JSH Parties up to and including the first day of hearing of the proceedings, provided in Mr Uljans' affidavit of 3 August 2022. The Referee had regard to the principles as to the assessment of quantum (R[46] – [47]) and proceeded to apply discounts from solicitor-client to party-party costs, the likely amount recoverable on taxation, and the costs directly incurred in relation to the Hu Parties' cross-claim (R[49] – [54]). The Referee concluded that $180,000 should be paid in security for JSH's costs. The amount claimed for security in the JSH Application was $340,522. 26 The Referee considered the submissions of the Hu Parties that security, if ordered, be given in a way least disadvantageous to them through providing a second registered mortgage over the Zetland property for the required amount of security. The Referee noted that the Court should prefer liquid security in order to minimise the risk that litigation may be required to enforce the security, and concluded that the security should be provided either by way of money paid into court or an unconditional bank guarantee issued by an Australian bank (R[55] – [56]). Hu Application 27 On the Hu Application, in summary the Hu Parties submitted that: (1) JSH is a corporate cross-claimant and as such, security can be ordered against it pursuant to both s 56 of the FCA Act and s 1335(1) of the Corporations Act. (2) There has been delay by the Hu Parties in making the application which is acknowledged and accepted and accordingly the Hu Parties are only seeking security for future, not past costs. (3) Jing is a resident of China and has put on affidavit evidence to the effect that he is a "very wealthy and successful" business person. (4) Jing owns no real estate property in Australia. (5) The claim made by JSH in its cross-claim alleges that: (a) In 2019 Jing loaned iProsperity Group Pty Ltd (IPG) an amount of just over $3 million. (b) IPG subsequently defaulted on the loan from Jing. In April 2020, Jing, IPG and the first respondent, Menghong Gu, entered into a Deed of Guarantee by which Mr Gu guaranteed IPG's debt. (c) As security for the guarantee in (b) Mr Gu gave an equitable mortgage over the Mosman Property. (d) In August 2020, Jing and JSH entered into a Deed of Assignment by which Jing assigned his rights under the Deed of Guarantee to JSH. (6) Under the Deed of Assignment, JSH is entitled to enforce the obligations of IPG and Mr Gu, including by means of legal proceedings. However, the Deed also provides that Jing pays the costs of JSH in doing so and indemnifies JSH for any liability or cost it incurs in enforcing those obligations. In return for doing so, JSH agrees to pay the net proceeds of any recovery to Jing. (7) As such, JSH is pursuing its cross-claim for Jing's benefit and at his expense. Therefore Jing stands behind JSH and is the party who will benefit if JSH succeeds on its cross-claim. (8) If an order for security is not made, Jing will be able to hide behind the arrangements which are in place with JSH, despite the fact that he is the person of substance funding the claim and benefitting from its success. (9) JSH should be ordered to pay security for the recoverable costs of the Hu Parties of defending JSH's cross-claim in an amount of $125,468.48. 28 The JSH Parties submitted that: (1) The Hu Application should be refused given the "very substantial" delay in making it. The Hu Parties did not raise the issue of security until 12 months after the cross-claim was filed and only brought the application some 7 months after the proceedings were effectively ready for hearing. (2) All evidence and discovery has been completed in respect of the cross-claim by the JSH Parties and the matter was effectively ready for hearing in December 2021 and remains so. Apart from the costs of preparing for and attending the eventual hearing of the proceedings, the Hu Parties have already incurred all the costs that will be incurred by them in relation to that cross-claim. (3) The delay is entirely unexplained. The Hu Parties only raised the issue of security after it was raised by the JSH Parties. (4) The estimate by the Hu Parties of the likely future costs to be incurred in respect of the cross-claim is excessive. If security is ordered against JSH, it should be in the amount of $84,140.21. 29 In support of the Hu Application, the Hu Parties relied on the affidavit of Mark Joel Fester dated 4 August 2022. In opposition, JSH relied on the affidavits of Jacob Uljans dated 3 August 2022 and 16 August 2022. 30 The Referee correctly referred to the relevant statutory provisions and framework (R[12] – [15]), and legal principles applicable to exercising the discretion to grant security for costs (R[20] – [21]). 31 The Referee considered the threshold question of whether JSH has the ability to meet any adverse costs order which might be made against it. The Referee set out the evidence relevant to this question, being the affidavit of Mr Fester dated 4 August 2022 identifying the lack of property of JSH in Australia and paid up share capital of $1.00. The Referee noted that there was no evidence before him challenging that evidence (R[64] – [65]), and concluded that there was a legitimate concern that JSH may not be able to meet an adverse costs order. 32 The Referee then proceeded to determine the exercise of discretion, and considered the lack of promptness by the Hu Parties in bringing the Hu Application, the fact that they only seek security for future costs, and the lack of evidence that the JSH Parties have suffered prejudice as a result of the delay. The Referee determined that delay is not a decisive factor weighing against the Hu Parties in considering whether to grant security (R[67] – [70]). The Referee further concluded that JSH does not have such a high degree of probability of success that it would be a factor weighing against the grant of security (R[72]). 33 The Referee noted that no weight was given to whether JSH's apparent impecuniosity was caused by the conduct of the Hu Parties, as this was not raised by JSH as a relevant factor (R[73]). The strength and bona fides of the JSH Parties' case was also not a factor which was put in issue by either party (R[71]). 34 The Referee also considered whether there is any person standing behind JSH who was willing to provide security or undertakings, and determined based on the evidence before him that JSH is prosecuting its cross-claim for the benefit of Jing and at his expense. The Referee noted that Jing is a resident of China and does not appear to be the owner of property in Australia. The Referee was of the view that unless an order for security is made, if an adverse costs order is made against JSH, Jing will be able to receive protection behind the arrangements made with JSH (R[74] – [77]). 35 The Referee, after giving detailed consideration to the circumstances noted above, concluded that the discretion should be exercised in favour of ordering security for costs against JSH in favour of the Hu Parties. Form and quantum 36 The Referee considered the evidence and submissions of the parties on the question of quantum. Amongst other things, the Referee noted that in his affidavit Mr Fester set out the future work that will have to be done on behalf of the Hu Parties. The Referee determined to apply reductions for party-party assessment and discounts as to the estimate of counsel's fees, and concluded that the sum of security to be paid is $97,000 (excluding GST). The Hu Parties sought $125,468.48 inclusive of GST in security (R[80] – [86]). 37 The Referee determined that the security should be in the form of either a payment into Court or a bank guarantee for the same reasons noted at paragraph [26] above (R[79]). consideration 38 I have reviewed and assessed the Report by reference to the applicable principles. The Referee has provided his reasoning for each of his opinions in a detailed and reasoned manner. The Referee has referred to the correct principles relevant to making an order for security for costs under s 56 of the FCA Act and s 1335(1) of the Corporations Act, and the manner, time and terms for the giving of the security under r 19.01 of the Rules. 39 The Referee acted within the terms of the matters referred to him for determination, and extended procedural fairness to the parties. It is clear that the Referee arrived at his determinations by reference to a holistic assessment of the material on the applications. conclusion 40 I am satisfied that the Court should adopt the Report in its entirety and make orders consistent with the Referee's opinions. I am also satisfied that it is appropriate to make costs orders in the form recommended by the Referee for the reasons identified by the Referee, namely that both applications have been, to some extent, successful and on that basis, there is no reason to depart from the usual course of awarding party-party costs. I will make orders accordingly. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman. Associate: Dated: 21 October 2022 SCHEDULE OF PARTIES NSD 211 of 2022 Defendants Fourth Respondent: YING QIN Fifth Respondent: ZHENHUA ZHANG Sixth Respondent: PO HU Seventh Respondent: HONGYUN LIU Eighth Respondent: I-PROSPERITY PTY LTD ACN 142 091 585 (IN LIQUIDATION) Ninth Respondent: JING SPRING HILL PTY LTD Tenth Respondent: LIYUN LIU