Supreme Court New South Wales Medium Neutral Citation: Blackcitrus Pty Ltd (in liquidation) v Parramatta Rugby League Club Limited [2022] NSWSC 1329 Hearing dates: 17 March 2022 Date of orders: 30 September 2022 Decision date: 30 September 2022 Jurisdiction: Common Law Before: Campbell J Decision: See [77] and [78] Catchwords: CIVIL PROCEDURE – pleadings – striking out – no reasonable defence – tendency to cause embarrassment – where defence pleads contract void for illegality or a sham COSTS – security for costs – relevant factors – impecuniosity – whether the plaintiff's impecuniosity is attributable to the defendant's conduct – other relevant considerations Legislation Cited: Civil Procedure Act 2005 (NSW), ss 60, 100 Corporations Act 2001 (Cth), s 1335 Evidence Act 1995 (NSW), s 140 Registered Clubs Act 1976 (NSW), ss 10, 57E, 57F Uniform Civil Procedure Rules 2005 (NSW), rr 14.8, 14.14, 42.21 Cases Cited: Agar v Hyde (2000) 201 CLR 552; [2000] HCA 41 Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34 Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; (2022) 96 ALJR 89 Equuscorp Pty Ltd v Glengallen Investments Pty Ltd (2004) 218 CLR 471; [2004] HCA 55 General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125; [1964] HCA 69 Harry Goudias Pty Ltd v Akakios (2007) 97 SASR 93; [2007] SASC 81 Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2002] NSWSC 609 Jazabas Pty Ltd v Haddad [2007] NSWCA 291 Lewis v Condon (2013) 85 NSWLR 99; [2013] NSWCA 204 Nelson v Nelson (1995) 184 CLR 538; [1995] HCA 25 North v Marra Developments Limited (1981) 148 CLR 42; [1981] HCA 68 O'Brien v Bank of Western Australia Limited [2013] NSWCA 71 Official Assignee v Wilson [2008] 3 NZLR 45; [2007] NZCA 122 Spencer v The Commonwealth of Australia (2010) 241 CLR 118; [2010] HCA 28 Yango Pastoral Co Pty Ltd v First Chicago Australia Limited (1978) 139 CLR 410; [1978] HCA 42 Texts Cited: NC Seddon and RA Bigwood, Cheshire and Fifoot Law of Contract (11th ed, 2017, LexisNexis Butterworths) Category: Principal judgment Parties: Blackcitrus Pty Ltd (in liquidation) (Plaintiff) Parramatta National Rugby League Club Limited (Defendant) Representation: Counsel: Mr AW Smith the Plaintiff Mr SJ Stanton with Mr DK Ratnam for the Defendant Solicitors: File Number(s): 2021/00200240 Judgment 1. This decision involves the determination of two interlocutory applications. The first in time is the defendant's application, by Notice of Motion filed on 28 September 2021, seeking an order for security for costs. By Notice of Motion filed on 5 October 2021, the plaintiff applies to strike out passages of the defendant's defence filed on 11 August 2021. 2. The proceedings were commenced by Statement of Claim ("SOC") filed on 13 July 2021. The plaintiff is Blackcitrus Pty Ltd ACN 160 467 621 (In Liquidation) ("Blackcitrus"), and the defendant is Parramatta National Rugby League Club Limited ACN 092 536 519 ("the Club"). 3. The relief sought by Blackcitrus is for the Club to pay it the amount of $1,177,601.59, or in the alternative, an order that the Club pay Blackcitrus the amount of $514,994.71; or, in the further alternative, damages in the amount of $662,606.88. Pre-judgment interest under s 100 Civil Procedure Act 2005 (NSW) is also claimed. Blackcitrus avers that it and the Club entered into a contract styled "Heads of Agreement" ("HOA"), under which the Club agreed to pay Blackcitrus an annual fee of $221,996.00 plus GST per annum in quarterly instalments of $55,490.00 (plus GST) over a four-year period for the supply of specified, digital or technological licences and services. 4. By its Defence filed on 11 August 2021, the Club admits that Scott Seward, in his capacity as sometime CEO of the Club, signed the HOA. However, the Club pleads that the HOA is a sham to Blackcitrus's knowledge, and the true purpose of the arrangement was to provide payments to professional rugby league players of the Club in breach of the National Rugby League ("NRL") Salary Cap Rules (Defence [2(b)]). In the alternative, the Club says that the HOA was at all times void and of no legal effect by reason of illegality and/or as against public policy (Defence [2(c)]). The issues 1. Blackcitrus's application concerns the paragraphs of the Defence containing these two main averments. It seeks relief as follows: "Pursuant to Rule 14.28 of the Civil Procedure Rules 2005 (NSW) ('UCPR') and/or all other enabling powers, paragraphs [2c], [3c], [4b], [4c], [5b], [6c], [7c], [7d], [8e], [9b], [10c], [10d], [10e], [11d], [18], [19b], [21] and [23] of the Defence filed on 11 August 2021 ('the Defence') be struck out. Further or in the alternative to prayer 1 of this Notice of Motion, pursuant to Rule 14.28 of the UCPR, paragraphs [2c], [3c], [4b], [4c], [5b], [6c], [7c], [7d], [8e], [9b], [10c], [10d], [10e], [10f], [11d], [18], [19b], [21] and [23] of the Defence be struck out and the Defendant be at liberty to replead and make, file and serve an Amended Defence, which complies with the UCPR, within 14 days. Further or in the alternative to prayers 1 and 2 of this Notice of Motion, pursuant to Rule 14.28 of the UCPR, the Defence be struck out to the extent it fails to comply with any of Part 14.14, 15.1, 15.3 and/or 15.4 of the UCPR. Further or other orders the Court deems fit. The Defendant pay the Plaintiff's costs of and incidental to this Notice of Motion." 1. The Club's application for security for costs seeks relief as follows: "Pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 42.21 and/or s 1335(1) of the Corporations Act 2001 (Cth) order the plaintiff to provide security for costs of the defendant's costs up to and including the final hearing, in the amount of $265,622.09 by way of unconditional bank guarantee to the satisfaction of the defendant or in any other form deemed appropriate by the Court. Order that the plaintiff provide security for costs in accordance with order 1 above within 14 days of the making of such order, or by stages as deemed appropriate by the Court. The proceedings be stayed until the plaintiff provides security in accordance with order 1 and 2 above. The defendant has leave to make a further application for security for costs if it becomes apparent that any order for security for costs is inadequate. Grant liberty to the defendant to apply to the Court to dismiss the proceedings upon any failure by the plaintiff to comply with any security for costs order. The plaintiff to pay the defendant's cost of this application. Any other order the Court deems fit." 1. Given my determination in relation to the strike out motion is likely to have some bearing on the security for costs application, I will deal with that matter first. Blackcitrus's strike out application Blackcitrus's argument 1. In support of its motion, Blackcitrus read the affidavit of Mr Robert Webb, sworn 5 October 2021. Blackcitrus submits that its application for the striking out of certain paragraphs of the Defence consists of two primary themes, with two additional grounds for the strike out of discrete paragraphs. 2. The first of Blackcitrus's arguments, as submitted by Mr Smith of Counsel, is that the allegations in the Defence that the HOA is of no legal effect and void for illegality (contained in paragraphs 2c, 3c, 4b, 4c, 5b, 6c, 7d, 8e, 9b, 9d, 10c, 10d and 23) ("the illegality point") jointly, severally or in combination disclose no reasonable defence. Blackcitrus says that the Club has failed to plead or particularise any statute, common law and/or public policy that rests upon an established communal consent to a definite principle which entry into or performance of the HOA is said to have contravened. 3. In response to a request for further and better particulars requesting identification of the statute which the Club says was contravened by reason of entry into and/or performance of the HOA, the Club asserted that its involvement in the NRL competition with the financial support from the Parramatta Leagues Club Ltd, a registered club under the Registered Clubs Act 1976 (NSW) ("the registered club"), rendered the Club subject to the registered club's obligations under that Act and the related public policy to which the Act gave effect. The Club asserted that its conduct had: "…[a] direct impact and effect upon the Board of the [registered club]. In that respect, it clearly constituted public policy that the affairs of [the Club] were not to bring into disrepute and/or cause concern as to the manner in which the Board of [the Club] conducted itself at the same time as being a Board that was equally responsible for the affairs of [the registered club]". This is a little obtuse, but the evidence read at the hearing demonstrated sufficiently for present purposes that the Board of each of the Club and the registered club was constituted by the same membership. 1. Further, the Club also asserted that it was a matter of public policy that the registered club conducted substantial liquor, gaming and hospitality operations, and that the conduct with respect to the HOA led to the appointment of a temporary administrator of the registered club pursuant to s 41A of the Registered Clubs Act, on the basis that the registered club's board had ceased to be effective as a governing body. It was said that the registered club's board was one and the same body as the Club's board, and the HOA was the basis for the allegations that gave rise to adverse findings by the Independent Liquor and Gaming Authority ("the Authority") against the then former members of the Board of the registered club. 2. Blackcitrus submits that the Club can only point to alleged consequences for the registered club as a basis to assert illegality, and the registered club is neither a party to the HOA nor the proceeding. Further, the Club has failed to plead what public policy the HOA breached. In answer to the Club's argument that there has been a breach of the NRL rules, Blackcitrus argues that even assuming the agreement was entered into for the purpose of avoiding the NRL rules, that does not result in the agreement being void for illegality. 3. The second of Blackcitrus's arguments is in relation to the allegations in the Defence that the Club has not performed its obligations under the HOA (contained in paragraphs 11d, 18, 19b and 21) because the HOA is a sham ("the sham point"). Blackcitrus submits that essential to an allegation of sham is that the parties enter into an agreement which takes the appearance of a legally effective transaction, but which the parties intend should not have the apparent or any legal consequence. Blackcitrus submits that these allegations cannot sit with the illegality argument, as either the HOA was intended to have legal consequence, or it was not. 4. The first additional ground for strike out of discrete paragraphs is in relation to paragraph 7c of the Defence, which pleads that "Stephen Moss signed the HOA in breach of his duties as a director owed to [Blackcitrus]…". Blackcitrus submits this pleading should be struck out as the Club lacks standing to plead a claim that a director of Blackcitrus breached his duties as a director, and that the pleading is otherwise incomplete. 5. Finally, Blackcitrus applies for paragraphs 10e and 10f to be struck out as embarrassing. The pleading is as follows: "[the Club] … (e) says that in the circumstances all monies paid by [the Club] pursuant to the HOA were wrongfully or improperly authorised; and (f) says that in the circumstances the payments made by [the Club] pursuant to the HOA are recoverable as against [Blackcitrus]." Blackcitrus submits these pleadings contain broad assertions and fail to include the underlying material facts to support the assertions, and as such purport to plead a claim for restitution in favour of [the Club] on grounds which are not articulated in accordance with the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"). The Club's argument 1. Mr Stanton of Counsel for the Club directed the Court to the decision of the Independent Liquor & Gaming Authority, dated 6 June 2018, under Part 6A of the Registered Clubs Act in relation to the former members of the Board of the registered club (Court Book ("CB") 118 ff). He argued, evidence would be led at the final hearing that it was the registered club that was requested to pay the Blackcitrus invoices. Further, where a registered club running a NRL football club (the Club) exposes their registration under the Registered Clubs Act to the risk of being deregistered or losing assets, on the basis that the Club is unfit and/or improper as a football club, the fact that the Club cannot point to the contravention of an express statutory provision is not relevant (28.10T). The issue is derived from the performance by the registered club as a public entity of its statutory obligations. 2. In answer to the public policy argument, Mr Stanton submitted that as a matter of public policy, where those people running the registered club, being a club participating in the NRL through ownership of the Club, are doing so in a manner that breaches the Registered Clubs Act, due to running it on an improper and unfit basis and in such a way as to lead to the Club being at risk of being deregistered, that football club is doing a disservice to its members and the community generally (28.15 - .25T). The breach of public policy was, the Club submits, the HOA read together with the Third Party Agreements ("TPAs"), which enabled the breach of the NRL Rules in relation to the salary cap, these being matters of fact the Club would attempt prove at the final hearing. 3. Regarding the sham point, the Club submits that whatever Blackcitrus was purportedly bound to supply under the express terms of the HOA, ultimately what it did was enable the evading of the salary cap limits, by giving TPAs to footballers who were paid over and above what they were entitled under the salary cap limitations (31.6 - .10T). Applicable legal principles – Strike out 1. The Court's power to strike out pleadings is derived from r 14.28(1) of the UCPR, which provides that the whole or any part of a pleading be struck out if the pleading – (a) discloses no reasonable cause of action or defence or other case appropriate to the nature of the pleading, or (b) has a tendency to cause prejudice, embarrassment or delay in the proceedings, or (c) is otherwise an abuse of the process of the court. 1. Where the ground for striking out the defence is its failure to disclose a reasonable defence, which is Blackcitrus's primary submission, the applicable test is that as formulated in General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125; [1964] HCA 69: the power to strike out a pleading may only be exercised in "plain and obvious cases". The principle requires some slight modification for a strike out, as opposed to summary disposal, application. In the latter context Macfarlan JA pointed out that the real issue is whether there is an underlying defence that has a real, not fanciful, prospect of success, and this is distinct from the question of whether such a defence is actually pleaded: O'Brien v Bank of Western Australia Limited [2013] NSWCA 71 at [3]. Blackcitrus does not seek summary judgment. But the question of whether there is a "pleadable" defence remains relevant as Blackcitrus's prayers for relief recognise. 2. It is to be borne in mind that Blackcitrus relies principally upon the ground that the pleading discloses no reasonable defence. In this regard, as I have already indicated, there was a cross-over between the applicable principles and the principles relevant to summary judgment. Ordinarily a party "is not to be denied the opportunity to place his or her case before the Court in the ordinary way": Agar v Hyde (2000) 201 CLR 552; [2000] HCA 41, Gaudron, McHugh, Gummow and Hayne JJ at [57]. A party will be denied this opportunity only if the Court can conclude with "a high degree of certainty" that "the ultimate outcome" will be adverse to the party if the matter is allowed to proceed to trial "in the ordinary way". What is required is "certain demonstration of the outcome of the litigation, not an assessment of the prospect of its success": Spencer v The Commonwealth of Australia (2010) 241 CLR 118; [2010] HCA 28 at [54]. Consideration 1. I will deal first with the evidence submitted regarding the illegality point. I consider that for these contested paragraphs to disclose a reasonable defence, the Club must point to material from which it may be inferred that there will be evidence or argument available at the final hearing which if accepted will be capable of demonstrating the HOA is void or unenforceable as contrary to statute or public policy. Any material facts must be pleaded and any statutory basis for illegality identified. 2. Mr Stanton relied on the lengthy reasons of the Independent Liquor & Gaming Authority ("the Authority"), being the Final Decision on Complaint in relation to the registered club. He submitted their relevance was that the basis upon which the findings were made is incorporated into the Defence and the particulars supporting it (25.15T). Specifically, he relied on findings regarding the knowledge of former board members. He submitted invoices would be tendered in evidence to prove that it was the registered club which was asked to pay the Blackcitrus invoices (26.6 –.17T). Mr Bevan Paul, in his principal capacity as chief executive officer of the registered club, was responsible for seeing Blackcitrus' invoices were paid. 3. He further relied on the particularisation of TPA matters, which the Club says enabled the breach of the salary cap to occur: 29.12 - .17T. On the public policy point, the Club relied on the broad assertion that the relevant public policy pertains to the organisation and ability of registered clubs to participate within the community to run sporting clubs in an honest and above-board manner: 30.10T. Conclusion – illegality point 1. For reasons of economy and avoidance of prolixity I will not set out the Club's defence in full. The same verbal formulation to raise "illegality" is adopted in various places. That formulation is in these terms: "[the Club] says that the HOA was at all times void and of no legal effect by reasons of its illegal nature and/or as against public policy." This formulation appears at paragraphs: 2c; 3c; 4b and c; 5b; 6c; 7d; 8e; 9b; 10c and d; 19b; and 23. 1. By paragraph 23 the pleading is amplified to make clear that the matter underpinning the pleading of "illegality" or "contrary to public policy" is that the HOA was entered into to evade compliance with the NRL rules or NRL Code of Conduct for the deceptive purpose of disguising payments made in breach of the NRL salary cap by dressing up the payments as fees paid for the supply of other services. 2. Paragraph 23 also makes clear that to the extent that the Club pleads that the HOA is contrary to statute, the statute involved is the Registered Clubs Act. There is a general reference to Part 6A of that Act, and also to s 10, which latter provision is not said to have been breached. While no specific contravention of any individual section of the legislation is invoked, the pleading makes amply clear that the Club relies upon the findings of the Authority that the former directors responsible for the administration of both the registered club and the Club were, because their entry into the HOA was for the purpose of the evasion of the requirements of the NRL salary cap, not fit and proper persons to hold office as directors of a registered club. The route is somewhat tortuous, but the destination plain. 3. Section 10 of the Registered Clubs Act stipulates the "requirements" which "apply in relation to a (registered) club". They are couched in general terms; and even by paragraph 23, as I have said, the Club does not particularise the breach of any specific requirement of this provision. Part 6A of the Registered Clubs Act is entitled "Disciplinary Action". Its provisions extend to disciplinary action against a member of the governing body of a Registered Club including a former member: s 57E(1). Non-compliance with s 10 is a ground on which disciplinary action may be taken by the authority. I apprehend from the content of paragraph 23 and in particular the reference to the complaint and findings of the Authority in the particulars appended to paragraph 23, (vi) and (vii), s 57F(3)(g) is the relevant provision invoked by the Club, always bearing in mind, as Blackcitrus argue, the registered club is not a party to the proceedings. I repeat, the board members of the Club and the registered club are the same. Section 57F(3)(g) is in the following terms: (3) Disciplinary action may be taken by the Authority against a registered club or a person who is the secretary or a member of the governing body of a registered club on any one or more of the following grounds— … (g) that the secretary of the club or any member of the governing body of the club is not a fit and proper person to act as such, … 1. In my judgment, if the formulation "by reason of its legal nature and/or as against public policy" is to be understood wherever it appears by reference to the amplification of those matters in paragraph 23, I would be of the view that the Club's defence adequately complies with the requirements of UCPR. If one incorporates paragraph 23 in the other provisions impugned, which I have listed above, it can be seen that the defence contains a summary of the material facts upon which the Club relies. It may be that by reference to the actions taken by the Authority, arguably the pleading strays into evidence, however, by that device, brevity is achieved: r 14.8 UCPR. While paragraph 23 may not be a textbook model of pleading, it is of a reasonable professional standard; although it perhaps should have made reference specifically to the provisions of s 57F of the Registered Clubs Act relied upon. But it does in substance make clear the grounds relied upon for the purpose of complying with the whole of r 14.14 UCPR. 2. It is clear that a plea of "illegality" is a substantive, not discretionary, defence to a claim in contract: Nelson v Nelson (1995) 184 CLR 538; [1995] HCA 25 at 551, per Deane and Gummow JJ. It is also clear that there is no single category of illegality. In Nelson v Nelson (at p. 552) Deane and Gummow JJ referred to the judgment of Jacobs J in Yango Pastoral Co Pty Ltd v First Chicago Australia Limited (1978) 139 CLR 410; [1978] HCA 42 at 429 – 430, 432 – 433 to point out that there are at least three categories of case where the contravention of a statute is involved: express statutory prohibition of an act essential to the formation of the contract in question; express prohibition of the doing of a particular act in performance of the contract which is therefore impliedly prohibited by the statute; and contracts not directly contrary to the provisions of a statute by "express or implied prohibition in the statute", but which are "'associated with or in furtherance of illegal purposes'". 3. Deane and Gummow JJ said (p. 552): "Examples in the third category include cases where the mode of performance adopted by the party carrying out the contract contravenes statute, although the contract was capable of performance without such contravention. In this last class of case, the courts act not in response to a direct legislative prohibition but, as it is said, from "the policy of the law". The finding of such policy involves consideration of the scope and purpose of the particular statute. The formulation of the appropriate public policy in this class of case may more readily accommodate equitable doctrines and remedies and restitutionary money claims than is possible where the making of the contract offends an express or implied statutory prohibition." (Footnotes omitted) 1. North v Marra Developments Limited (1981) 148 CLR 42; [1981] HCA 68 ("North") involved a case falling into Jacob J's second category where the contract did not contravene the statute, but its "performance … involved illegal conduct" (p. 60 per Mason J). Mason J went on to say (with the agreement of Murphy and Wilson JJ, Stephen and Aickin JJ contra): "Quite apart from contravention of s 70, the inferences drawn establish that the appellants' claim was affected by common law illegality. The appellants' claim for remuneration was based on the commission of fraudulent conduct, the making of statements which were and were known to be misleading with a view to deceiving the Scottish shareholders. A claim for remuneration for fraudulent conduct is defeated by the illegality principle (citation omitted). The general principle was expressed by Lindley LJ in Scott v Brown, Doering, McNab & Co ([1892] 2 QB 724 at 728–9, in these terms: 'In this case the correspondence put in evidence by the plaintiff in support of the claim he made at the trial shews conclusively that the sole object of the plaintiff in ordering shares to be bought for him at a premium was to impose upon and to deceive the public by leading the public to suppose that there were buyers of such shares at a premium on the Stock Exchange, when in fact there were none but himself. The plaintiff's purchase was an actual purchase, not a sham purchase; that is true, but it is also true that the sole object of the purchase was to cheat and mislead the public. Under these circumstances, the plaintiff must look elsewhere than to a court of justice for such assistance as he may require against the persons he employed to assist him in his fraud, if the claim to such assistance is based on his illegal contract.' As the fraud and illegality (common law and statutory) was a contemplated means of performing the contract and became an integral element in the appellants' performance of the contract there is no basis for treating the fraud and the illegality as collateral only or fraud as severable from the remainder of the work undertaken by the appellants." 1. NC Seddon and RA Bigwood in Cheshire and Fifoot Law of Contract (11th Australian Edition, 2017, LexisNexis Butterworths) (at p. 1010, [18.21]) refer to North as an example of a case of a contract to engage in conduct prohibited by common law, specifically by reference to the passage I have quoted from the judgment of Mason J. The learned authors state that "even if the contract (in North) was not prohibited by the legislation, it was defeated by the 'common law illegality' of a conspiracy to deceive". One can see from paragraph 23 that the elements of a conspiracy to deceive the NRL are spelt out expressly even if bound up with other matters. The learned authors also made the comment "a contract made for an unlawful purpose may be void even if its formation or performance was not as such illegal": p. 1007, [18.18]. I remind myself it has been said that a party relying upon illegality must plead it "clearly, specifically, and with detailed particulars": Harry Goudias Pty Ltd v Akakios [2007] SASC 81 at 29 (Gray J, Doyle CJ and David J agreeing); Cheshire and Fifoot, p. 993 [18.3]. I am satisfied for the reasons I have explained, allowing some room for improvement, this standard has been substantial satisfied. 2. I turn then to paragraph 7c of the defence, which pleads that "Stephen Moss signed the HOA in breach of his duties as a director owed to [Blackcitrus]." I agree that this sub-paragraph is embarrassing. It ill lies in the mouth of the Club to plead breach of a duty owed to someone else, even in this case Blackcitrus. Such matter if proved would not advance the Club's case either on the sham point or the illegality/public policy point. I would strike out sub-paragraph 7c. I interpolate, while I accept the force of Blackcitrus's argument that there is, at law, a distinction between a sham and voidness for illegality, there can be no objection to pleading sham, on the one hand, and illegality on the other, in the alternative and I would allow sub-paragraph 7d to stand. 3. So far as sub-paragraphs 10d, e and f are concerned, I would allow 10d and e to stand. It is possible that they amount to mere surplusage and may not advance the Club's defence, but absent 10f they are not as such embarrassing or likely to give rise to confusion, at least in the absence of the claim for restitution. 4. I will, however, strike out 10f, I accept that it appears to raise a claim for restitution, the basis for which is neither pleaded nor particularised, even if it may be guessed at. To that extent it is embarrassing. Any claim for restitution which the Club wishes to bring and maintain should be properly pleaded in full by way of cross-claim in accordance with the rules. It is appropriate that this matter be dealt with separately, if and when it is brought forward. Given the possible ramifications of the issues raised by the Club there may be questions about whether a claim for restitution of payments made by the Club, or on its behalf, under the contract is maintainable. Consideration - sham point 1. In relation to the sham point, I consider that for these paragraphs to disclose a reasonable defence, the Club must point to evidence likely to be available at the final hearing that, if accepted, will demonstrate that the HOA was entered into solely for the purpose of breaching the NRL Salary Cap Rules and was not what it purported to be. 2. The Club took me to excerpts from the letter providing further and better particulars from its instructing solicitor, Mr Michael Holmes, to the plaintiff, detailing the thrust of the defence's argument on this point: 31.5T. Mr Holmes said: "BlackCitrus and Scorecube represent that particular class of "agreement" that is clearly seen to be an agreement to provide a service which in substance is not the service sought to be provided, but rather a subterfuge to enable the evading of a requirement, here the Salary Cap Rules, which in turn impact upon and affect the ability of the Club to remain registered and caused a show cause to be issued against each of the Board Members of not only the [registered club] but also those Board Members who also represented and were Board Members of the [Club]." Mr Stanton submitted that this is the sham nature of the agreement and that is the evidence that will be led: 31.10 - .15T. Scorecube is a wholly owned subsidiary of Blackcitrus which entered into the so-called TPAs with certain players. 1. In response to a question I asked, being what evidence shows that Blackcitrus distributed the money either to the player named in the pleadings or other players, Mr Stanton responded: "What Blackcitrus did, is it entered into third party agreements through its subsidiary Scorecube and then on the basis that these players were to perform services, which were in reality no service whatsoever, they were paid money." (at 31.26T). 1. The Club also relied upon the invoices contained at p. 286 of the Court Book, which were issued to the "Parramatta Eels", by "Blackcitrus Ops Pty Limited", but payable to "Blackcitrus Pty Limited": 32.9 - .25T. 2. Finally, the Club pointed to a letter to Mr Ralston from Piggot Stinson, Blackcitrus's then lawyers, which provides "A copy of the full work log for all work already provided to [the Club] is enclosed." (CB p. 307, 32.30T). It is the Club's submission that there is nothing that is contained in that work log that is referrable to the HOA entered into between the Blackcitrus and [the Club]: 32.30T. Conclusion – sham point 1. The law relating to sham contracts has been summarised by Leeming JA (McColl JA and Sackville AJA agreeing) in Lewis v Condon (2013) 85 NSWLR 99; [2013] NSWCA 204 ("Lewis") at [57] – [64]. I will not set out this passage from his Honour's judgment in full but I have had close regard to it. His Honour referred to Equuscorp Pty Ltd v Glengallen Investments (2004) 218 CLR 471; [2004] HCA 55 at [46] to define sham as follows: "[Sham] refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences." 1. Leeming JA said (at [59]), "it is essential that there be an intention that the true transaction is different from that which would ordinarily be attributed to the transaction on the face of the documents". Leeming JA pointed out that the conclusion that an apparent agreement is a sham "is a confined and exceptional aspect to the process of giving legal meaning to a document": Lewis at [60]. His Honour continued (at [62]): "The sham doctrine is thus one of those relatively rare doctrines in the law where legal meaning is given to a document by reference to a subjective intention. Other examples are a plea of non est factum at law and a claim for rectification in equity. All these doctrines "must necessarily be kept within narrow limits", for all subtract from the objective theory of contractual obligation, and if unchecked would cause "serious mischief"" (citation omitted). 1. A finding of sham requires a finding of intent to deceive, although an intent to deceive alone is insufficient to establish that the putative agreement is a sham. Moreover, given the opprobrium rightly attaching to deception, the "considerations associated with Briginshaw v Briginshaw (1938) 60 CLR 336; [1938] HCA 34 require a cautious approach": Lewis at [63]. A court will only look behind an ostensibly valid agreement "if there is good reason to do so, and 'good reason' is a high threshold, since a premium is placed on commercial certainty": Official Assignee v Wilson [2008] 3 NZLR 45; [2007] NZCA 122 at [52], per O'Regan and Robertson JJ. 2. Where a party seeks to challenge the efficacy of a "contract as the charter of the parties' rights and duties, on the basis that it is either a sham or otherwise ineffective under the general law or statute", parol evidence as to the entire history of the parties' dealing is admissible to assist in the determination of the true character of the parties' relationship: Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd [2022] HCA 1; (2022) 96 ALJR 89 at [59], Kiefel CJ, Keane and Edelman JJ. 3. Applying these principles to the case at hand, the defence adequately pleads the Club's case that the HOA was a sham. So much appears from (sub-) paragraphs 2, 7b, 8d, 10b, 11b, 12b and 21 of the defence. These pleas sufficiently comply with the requirements of the UCPR and nothing more elaborate or complex is required. To the extent to which there is an infelicitous juxtaposition of the pleading of sham and illegality this may be readily rectified by simple amendment making clear that they are pleaded in the alternative. I would not strike out the pleadings on this ground alone. Conclusions as to Blackcitrus's challenges to the Club's pleading 1. For the reasons I have already expressed, Blackcitrus's application to strike out the Club's pleadings largely fails. I will strike out paragraph 7c and paragraph 10f. In respect of the latter, I will leave to the Club, if so advised, to seek leave to propound the claim for restitution encapsulated in paragraph 10f of the Defence as a cross-claim in accordance with the rules. 2. I will also direct that the Club file an Amended Defence, making clear that: 1. sham and illegality, whether under statute or at common law are pleaded strictly in the alternative; and 2. that the plea of illegality where it is made throughout the defence is advanced by reference to the matters pleaded in paragraph 23 of the Defence. Defendant's security for costs application 1. As Blackcitrus has enjoyed some, albeit minor, success on its application and I have directed the Club to file an Amended Defence, arguably, the determination of the Club's motion for security of costs of 28 September 2021 could be deferred to await developments following the filing of the Amended Defence. However, given the security for costs argument was fully argued before me and to avoid any further or unnecessary delay in respect of it, I think it appropriate to determine it now. The Club's argument 1. By way of Notice of Motion, the defendant seeks an order for security for costs from the plaintiff, pursuant to either r 42.21(1)(d) UCPR, or s 1335(1) Corporations Act 2001 (Cth). The Club relies on a Statutory Report filed by the Liquidators of the defendant on 18 January 2019, which it says reveals a number of uncontroversial elements proving Blackcitrus's inability to meet an adverse costs order (Defendant's Written Submissions ("DWS") [14]). It submits that there exists a risk that Blackcitrus will be unable to pay when the time comes to meet such an order, and that risk cannot be characterised as remote or fanciful (DWS [30]). 2. In response to Blackcitrus's allegation that the Club caused Blackcitrus's impecuniosity, the Club submitted that this fails to recognise that Blackcitrus was never entitled to any legitimate payment of monies from the Club, as any monies paid, or said to be owing, arose out of a sham or illegal arrangement (DWS [49]). Further, the Report as to Affairs of Blackcitrus lodged by Michael Hogan on behalf of the liquidators, Hogan Sprowles, did not disclose any liabilities owed by the Club to Blackcitrus. The Club also points to Blackcitrus's continuing to trade following the issue of the alleged outstanding invoices from about 2016 (DWS [51]), lack of any disclosure that Blackcitrus's insolvency (reported to creditors as being as early as 30 May 2018) arose as a direct consequence of the Club's alleged default (DWS [53]), Blackcitrus's acceptance of investments in private companies in lieu of payment for services rendered by it (DWS [55]), and the liquidators assessment that the failure of Blackcitrus was caused by the director's conduct and the misappropriation of Blackcitrus's assets by related parties (DWS [56]). 3. The Club also relied on the fact that: Blackcitrus is liable to unsecured creditors in the sum of at least (see below) $468,141; the business has no value and could not be the subject of sale for any value; the liquidators do not anticipate paying a dividend to any class of creditor; the limited funds available to Blackcitrus to prosecute the proceedings; and the winding up of Blackcitrus in respect of a debt owing worth only $10,049.82 (DWS [17]-[22]). 4. In relation to the quantification of costs the Club relied on the evidence of the Affidavit of Mr Michael Holmes affirmed 28 September 2021, and the Affidavit of Mr Ross Nicholas affirmed 28 September 2021. It was submitted that, pursuant to the evidence of Mr Holmes, the issues in dispute were a lot wider than that submitted by Blackcitrus, requiring the calling of 15-20 witnesses, and as a result the quantification of the Club's recoverable costs is in the figure of $265,622.09 (DWS [73], Affidavit Mr Nicholas, Exhibit "RN-1" p. 8). Blackcitrus's argument 1. Mr Smith submitted for Blackcitrus that firstly, the estimate of the legal fees is "exorbitant and without substance", especially in relation to the amount of witnesses the Club submits would be called at the hearing. Secondly, Mr Smith pointed to r 42.21(1A)(d) UCPR, identifying "one of the core considerations of any security for costs application is whether the plaintiff's impecuniosity is attributable to the defendant". 2. Blackcitrus does not put in issue whether there is reason to believe it will be unable to pay the costs of the Club if successful in its defence (Plaintiff's Written Submissions ("PWS") [2.6]). However, it submits that the repudiation of the HOA by the Club was the material contributor to the impecuniosity of Blackcitrus (PWS [4.7]), and further, if that was not sufficient to avoid an order for security for costs, the amounts sought by the Club in the application are disproportionate to the facts in issue and subject matter of the proceeding (PWS [4.8]). Mr Smith relied on s 60 of the Civil Procedure Act 2005 (NSW), given the application seeks "about 20 or 25 per cent of the total amount claimed." (47.6T). 3. Additionally, Blackcitrus submitted that if security were to be ordered, it should be ordered to be paid over a period of time, to avoid any consequences of stultification (47.43T). Applicable legal principles 1. The application is made pursuant to either r 42.21 UCPR, or s 1335 of the Corporations Act. Rule 42.21 provides: (1) If, in any proceedings, it appears to the court on the application of a defendant – … (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or …. The court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. Section 1335 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. 1. The Club relied on the decision of Bergin J in Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd [2002] NSWSC 609, particularly at [96] where her Honour said that where it is submitted that the defendant has caused the plaintiff's impecuniosity, the onus is on the plaintiff to establish this. This principle was repeated in Jazabas Pty Ltd v Haddad [2007] NSWCA 291 (at [94] – [95]): "The claimants carried the onus of establishing both the adequacy of their financial position before their dealings with the opponents and that the opponents' actions have caused or at least materially contributed to the claimants' inability to meet an order for security for costs… In "Law of Costs", G E Dal Pont says: "[T]he plaintiff must be able to support the allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial. For this reason, it is not enough that the defendant's conduct is merely a contributing factor – it must be the material contributor to or cause of the plaintiff's impecuniosity." (Original emphasis)." Evidence 1. I have already pointed out that Blackcitrus concedes, quite properly in the circumstances, that it would be unable to pay the Club's costs of a successful defence and, therefore, the question of security for costs properly arises for consideration. 2. The Club's submissions accurately summarise the salient features of the content of the liquidators' RATA about Blackcitrus's affairs. I repeat, its notable that there is no reference to any liability of the Club to Blackcitrus. Having said that, the report refers to "a potential legal recovery against [the Club]" (CB p. 882). There was also a potential recovery from the shareholders of the company in respect of a research and development tax refund in the net sum of $122,968.76. 3. The liquidators were successful in recovering a judgment on 13 October 2021 against the former director and the related company in the sum of $122,968.76 "plus interest in accordance with s 100 of the Civil Procedure Act 2005 (NSW)" between 27 November 2020 and 13 September 2021. It is unknown whether recovery has been effected (CB p. 962). 4. It is also notable that as at 10 September 2021 the liquidators' remuneration from the period commencing on 18 October 2018 was assessed as $150,231. I should also record that Blackcitrus was wound up on the application of its former lawyers, Dibb Barker, for the amount I have referred to of $10,049.82, apparently being fees incurred in relation to the exploration by those lawyers of the claim against the Club. 5. In their report to creditors of 22 September 2021, the liquidators gave a full report on the commencement of these proceedings (CB pp. 917 – 8). The liquidators expressed the opinion that the total value of the claim including interest was $1,177,601. They stated that prior to the entry into the HOA Blackcitrus had completed "approximately $300,000 worth of work" for the Club. Blackcitrus's wholly owned subsidiary, Scorecube, entered into the TPA with a named player on 2 February 2015. It is asserted that the review carried out by the NRL did not find any "wrongdoing" by Blackcitrus or the player. 6. As at 22 September 2021, unsecured creditors claims had grown to $1,285,871. The liquidators recorded that the "majority of claims relates to funds contributed by the company's former and current shareholder totalling $1,035,228". Investigations would be conducted into the quantum and validity of the unsecured creditor claims (CB p. 921). It is not clear to me how this figure dovetails with the original total of $468,141. When the RATA was prepared the sums due to the director and shareholder as an unsecured creditor were said to total $164,000. The escalation may possibly be in retaliation for the R & D refund claim, but this is speculation. 7. From a consideration of the profit and loss statements between the financial year ending 30 June 2014 and the financial year ("FY") ending 30 June 2017, the liquidators made the following "observations" (CB p. 922): * During the period FY 15 and FY 16, while [Blackcitrus] was completing work for [the Club] the company was profitable (or in a slight loss-making position). Following determination of the [HOA] with [the Club], revenues dropped significantly. The FY 17 profit was only due a significant R & D refund ($519k) received during that year. * The company was being wound down from 18 August 2017 with the company realising investment assets and pursuing the claim against [the Club]. 1. I accept that the charge out rates disclosed by Mr Holmes are on their face reasonable, being an hourly rate of $500 for a senior partner/specialist, $300 for an employed solicitor of 3 to 5 years' experience and $180 for a graduate paralegal. The distribution of work at 55 percent, 39 percent and 6 percent respectively likewise does not appear unreasonable. The daily rate for Mr Stanton, a very senior junior and his hourly rate of $6,000 and $600 respectively likewise seem reasonable. These figures are supported by the expert opinion of Mr Nicholas, a legal costs expert and solicitor (Exhibit RN – 1 to affidavit of the 28 September 2021 (CB p. 365 ff)). The real issue is his assessment of $265,622.09 as the likely recovery on assessment if the defendant is successful after a trial of 5 days duration involving two counsel appearing for the Club. In Mr Nicholas's opinion, the figure I have mentioned represents 80 percent of his assessment of costs incurred, and likely to be incurred, by the Club on a solicitor and client basis. Determination 1. I repeat that there is no doubt that the discretion to make an order for security for costs against Blackcitrus has been engaged given its concession which satisfies the condition expressed in UCPR 42.1(1)(d) and s 1335(1) of the Corporations Act, which essentially amounts to the same thing. However, when one considers the discretionary factors expressed in r 42.21(1A) there is, it seems to me, much to be said for Blackcitrus's position. Taking the HOA at face value, Blackcitrus must be considered to have not unreasonable prospects of success, having regard to the principles I have referred to above as explained by Leeming JA in Lewis. 2. I accept, however, that there must remain a question about this assessment of Blackcitrus's prospects of success given the material propounded by the Club from which it may be said, there is a real question as to whether the HOA is a sham or vitiated by illegality in the sense I have discussed above. Of course, in respect of each of these matters the Club carries the onus of proof and Briginshaw v Briginshaw principles (see s 140(2) Evidence Act 1995 (NSW)) are very much in play. These considerations extend to the determination of illegality in the alleged circumstances of this case because the essence of the Club's case involves a conspiracy to deceive the NRL. 3. What I have said about the onus of proof lying upon the Club and the considerations informing whether the ordinary civil standard of proof can be discharged in all the circumstances very much place Blackcitrus "effectively in the position of a defendant" for the purpose of UCPR r 42.21(1A)(e). 4. I have set out the relevant test in relation to whether the plaintiff's impecuniosity may be attributed to the defendant's conduct for the purpose of an application for security for costs. I bear firmly in mind that its necessary for Blackcitrus to show that the Club's conduct is the material contributor to or cause of its impecuniosity. I acknowledge that the evidence is not overwhelming, but the analysis of the liquidators has not been directly challenged. It is also apparent that Blackcitrus was seriously considering its position with regard to suing on the HOA well prior to the commencement of its winding up. It had engaged lawyers (at whose suit it was wound up in the end) who were actively pursuing the claim with the Club's lawyers. Strong denials of the sham point had been made. The matter had reached the point where the identity of mediators was being discussed before Blackcitrus's insolvency overtook it. Were this the only point that favoured Blackcitrus's position, it may not be decisive. But given the other matters I have referred to, and will refer to, which favour its position over the Club in relation to security, I am of the view that the evidence of the Club's contribution to Blackcitrus's impecuniosity is such that it weighs in Blackcitrus's favour in conjunction with other relevant factors in the exercise of my discretion. 5. I am also of the view that an order for security would likely stifle the proceedings. While there are unsecured creditors, and the evidence about this is a little difficult to reconcile, there is no evidence that any of the unsecured creditors, including the former director and shareholder, is prepared to stand behind the liquidators to fund the proceedings. There is certainly no evidence of the involvement of any professional litigation funder. Given the cost and complexity of contested proceedings, these considerations lead me to conclude that an order for security is likely to stifle the proceedings if made. 6. The total amount of security sought is perhaps surprisingly on the high side given the nature of the proceedings and the total amount involved. However, that factor alone would not be decisively against ordering security as I have ample power to tailor the amount involved to meet the justice of the particular circumstances of this case. There is no question that the Club moved promptly to make its application for security after the commencement of the proceedings. 7. Naturally a costs order if the Club is ultimately successful could readily be enforced within the Commonwealth of Australia, but this is of little moment given the fundamental impecuniosity of Blackcitrus. 8. There is also a further reason which might be referred to as a general discretionary ground favouring Blackcitrus. However one looks at the Club's defences, whether by way of sham or illegality, and the heads of agreement are not otherwise challenged or impugned, the Club's case proceeds upon the premise that each of it and Blackcitrus were party to the deception. One might say, at the very least, that each hoped to profit from it. Blackcitrus no doubt financially, and the Club by obtaining an unfair advantage over its competitors in the NRL competition by fielding a squad, the payroll for whom breached the salary cap which is designed to "level the playing field". Even accepting that those persons responsible for the Club's internal management when the HOA was entered into have long since been replaced, this consideration would make it decidedly unfair to place the roadblock of an order for security in favour of the Club in Blackcitrus's way. 9. Balancing all of these considerations together, which I regard as the relevant matters to take into account in the particular circumstances of this case, in the exercise of my discretion, I refuse the Club's application for security for costs. 10. As each party has enjoyed what I would regard as a roughly equivalent measure of success, in my view the appropriate order as to costs in respect of each motion is that each party bear its own. Orders 1. For the reasons given, my orders in respect of the plaintiff's Notice of Motion filed on 5 October 2021, are: 1. Strike out paragraph 7c of the defendant's defence filed on 11 August 2021; 2. Strike out paragraph 10f of the said defence; 3. The defendant is to file an amended defence making clear that sham and illegality whether under statute or at common law are pleaded strictly in the alternative and that the plea of illegality where it is made throughout the said defence is advanced by reference to the matters pleaded in paragraph 23 thereof and specifying the provision of the Registered Clubs Act 1976 (NSW) relied upon for the purpose of paragraph 23; 4. No order as to costs to the intent that each of the plaintiff and the defendant will bear its own costs. 1. My orders in respect of the defendant's notice of motion filed on 28 September 2021 are: 1. The notice of motion is dismissed; 2. No order as to costs to the intent that each of the plaintiff and the defendant will bear its own costs. ********** Amendments 30 September 2022 - Amendment to case title to include the words "(in liquidation)" DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 30 September 2022