Supreme Court New South Wales Medium Neutral Citation: In the matter of HCafe Chatswood Pty Ltd [2018] NSWSC 362 Hearing dates: 6 March 2018 Decision date: 06 March 2018 Jurisdiction: Equity - Corporations List Before: Black J Decision: No order as to the costs of the proceedings between the parties. Catchwords: COSTS – party/party costs – where there has been no hearing on the merits – whether Court will make an order for costs. Legislation Cited: - Uniform Civil Procedure Rules 2005 (NSW) r 42.19 - Supreme Court (Corporations) Rules 1999 (NSW) r 5.6 Cases Cited: - Bitannia Pty Limited v Parkline Constructions Pty Limited [2009] NSWCA 32 - Calderbank v Calderbank [1975] 3 All ER 333 - Khoury v JCS Technologies Pty Ltd [2016] NSWSC 1575 - One.Tel Limited v Deputy Commissioner of Taxation [2000] FCA 270; (2000) 101 FCR 548 - Re HCafe Chatswood [2017] NSWSC 1828 - Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin [1997] HCA 6; (1997) 186 CLR 622 Category: Procedural and other rulings Parties: Jianlin Weng (First Plaintiff) Youhua Li (Second Plaintiff) Fei Sun (First Defendant) Kee Mew Family Pty Ltd (Second Defendant) HCafe Chatswood Pty Ltd (Third Defendant) Representation: Counsel: B F Katekar (Plaintiffs) A Katsoulas (First and Second Defendants) Solicitors: Juris Cor Legal (Plaintiffs) Kekatos Lawyers (First and Second Defendants) File Number(s): 2016/385934 Judgment – EX TEMPORE Nature of the proceedings 1. By Originating Process filed on 23 December 2016, the Plaintiffs, Ms Weng and Ms Li, sought a range of relief in respect of the affairs of HCafe Chatswood Pty Ltd, now in provisional liquidation ("Company"). That relief was sought against the First Defendant Ms Fei Sun; the Second Defendant, Kee Mew Family Pty Ltd ("KMF"), which held shares in the Company, and was, as I will note below, plainly associated with Ms Sun; and the Third Defendant, the Company. 2. The first form of relief sought was an order under s 233(1)(j) of the Corporations Act 2001 (Cth), which deals with the relief which the Court can order in respect of oppression, requiring Ms Sun to contribute $245,000 to the Company. The second form of relief sought was an order requiring KMF to transfer a portion of its shares in the Company to each of Ms Weng and Ms Li. The first and second forms of relief sought appear to have been directed to allegations then made by the Plaintiffs that, in effect, Ms Sun, or possibly KMF, through Ms Sun, had breached an agreement to contribute certain funds to the Company in consideration of the issue of shares to KMF, implicitly on the same terms as the issue of shares to the Plaintiffs. 3. Alternatively, the Plaintiffs then sought an order, under s 233(1)(a) of the Corporations Act on the basis of oppression, or under s 461(1)(k) of the Corporations Act, that the company be wound up, which invoked, inter alia, the just and equitable ground of winding up. 4. This matter was listed for hearing for four days commencing today, 6 March 2018. On 28 February 2018, the parties advised the Associate to Brereton J, before whom the matter was to be heard, that the Plaintiffs did not intend to press their claims for relief except for the winding up of the Company and that the Defendants consented to the winding up of the Company and that the only issue remaining between the parties was the costs of the proceedings. That position was reconfirmed by email dated 2 March 2018. The argument today, which was referred to me, has been directed to the question of costs. Winding up 1. The parties have agreed that an order should be made that the Company be wound up, and that Mr Natkunarajah, who is presently the provisional liquidator of the Company, should be appointed as liquidator of the Company. Mr Natkunarajah has consented to that appointment. Mr Katekar, who appears for the Plaintiffs, has read and tendered evidence of notification and advertisement in support of the winding up application, although the Plaintiffs seek an order dispensing with the strict requirement of publication under r 5.6(3) of the Supreme Court (Corporation) Rules 1999 (NSW). It seems to me that that order should be made in the circumstances, where the Company has been in provisional liquidation for some time, and the requirements for a winding up are otherwise satisfied. 2. There remains the question of the costs of the proceedings. The Plaintiffs seek an order that the Defendants, or at least Ms Sun and KMF, pay their costs of and incidental to the proceedings, including reserved costs. Alternatively, they recognise the possibility that there should be no order as to the costs of the proceedings. The Defendants, represented by Mr Katsoulas, seek a somewhat more complex order, which has not been formulated by draft orders, which seems to have components that include that the Plaintiffs pay Ms Sun's and KMF's costs of particular claims against them, or possibly that they pay the Defendants' costs of the proceedings, possibly on an indemnity basis, or possibly that they pay the costs of the winding up or of part of the proceedings. 3. I first turn to the applicable principles, before addressing the agreed facts on which the parties proceeded, and Counsels' submissions in respect of the parties' positions. First, both parties recognise authority that, although the Court can make an order for costs where there has been no hearing on the merits, it will generally not do so where that would require the trial of a hypothetical action between the parties and deprive them of the cost saving which would have been achieved by settlement, but may do so where it concludes that "one of the parties have acted so unreasonably that the other party should obtain the cost of the action" or where the Court can be confident that, although both parties are acted reasonably, one party was almost certain to have succeeded if the matter had been fully determined: Re The Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin [1997] HCA 6; (1997); 186 CLR 622 at 624–625. While McHugh J there referred to the saving to the parties of avoiding a contest as to costs which canvasses the issues that would have been addressed at a substantive hearing, it seems to me that that principle also reflects matters of public policy. In particular, the community, which funds the Court system, should not be required to bear the costs of extended arguments as to the merits of proceedings that have settled only on the question of costs between the parties. There is also a significant risk of unfairness to the parties, if costs orders are made based on a perception of which party would have succeeded on a trial on the merits, without the unsuccessful party having the opportunity to defend that trial on the merits. 4. The parties paid less attention to another important principle, also recognised in the case law in this area, including the observations of Burchett J in One.Tel Limited v Deputy Commissioner of Taxation [2000] FCA 270 at [6]; (2000) 101 FCR 548, the Court of Appeal in Bitannia Pty Limited v Parkline Constructions Pty Limited [2009] NSWCA 32 at [79] and of Barrett AJA in Khoury v JCS Technologies Pty Ltd [2016] NSWSC 1575, which distinguish the position where, on the one hand, proceedings are dismissed by reason of a surrender or abandonment by a plaintiff, and on the other, where some supervening event has removed the plaintiff's cause of action. In Khoury v JCS Technologies Pty Ltd above, Barrett AJA noted that the principle in Lai Qin above is applicable where a supervening event removes the cause of action, and there is not a surrender or abandonment of the plaintiff's claim, but no need for a determination on the merits of a particular claim arises by reason of that supervening event. Background facts 1. Turning now to the situation in these proceedings, I reviewed some of the background to the proceedings in my judgment appointing a provisional liquidator to the Company in Re HCafe Chatswood [2017] NSWSC 1828. The parties both formulated accounts of the relevant facts, to some extent reflecting their particular perspectives, which were treated as common ground with certain exclusions. It is not necessary, for the purpose of this judgment, to recite those facts, although they are set out, with exclusions, in paragraphs 4–7 of Mr Katekar's submissions and paragraph 4 of Mr Katsoulas' submissions. In broad summary, the Plaintiffs acquired an interest in the Company, and it is an agreed fact that "Ms Sun's company", KMF, was allocated "her" 56 per cent share in the Company. It is common ground that the parties intended they would all be involved in the day-to-day management of the Company's business, but the relationship between them quickly broke down in respect of disputes as to the treatment of funds. An issue then arose as to the fact that Ms Sun or KMF had paid less for the shares allocated to KMF than the Plaintiffs had paid for their shares in the Company, although the merits of that position were a matter that would have been determined at the trial that will not now occur. 2. The Court made certain orders dealing with the proceeds of a proposed sale of the Company's business on 23 December 2016. A sale subsequently took place and the proceeds of that sale were deployed in a manner that resulted in no net payment to the Company. Mr Katekar contends that that was in breach of the Court's orders made in December 2016 in respect of that sale. Given the serious character of that allegation, that is also a matter that could only have been determined at a hearing of the proceedings on the merits. The Defendants' outline of the facts in turn refers to Ms Sun's involvement with a brand of cafes, having the brand "HCafe", and to her involvement with the fit-out and establishment of the business; to the appointment of a provisional liquidator; and to subsequent communications between the parties in respect of possible settlements of the proceedings. 3. Although it was not an agreed fact, evidence has been led of communications between the parties in November 2016 (Ex P1) in respect of the proposed sale of the Company's business then initiated by Ms Sun, and to the position in respect of outstanding rent owed to the lessor of the Company's premises in March 2017 (Ex P2). Evidence was also led of a range of offers of settlement of the proceedings made by the parties at various times, often on a "without prejudice except as to costs" basis. The Defendants rely on two "without prejudice except as to costs" offers dated 9 December 2016 which raised the alternatives of the Plaintiffs either transferring their respective shares in the Company to Ms Sun for a specified consideration or purchasing Ms Sun's shares for a specified consideration. Those offers were expressed as offers in accordance with Calderbank v Calderbank [1975] 3 All ER 333, although it appears that they were made when litigation had been threatened but not yet commenced. In any event, the solicitor for the Plaintiffs then responded, correctly, that those offers were incapable of acceptance, because they did not identify the timing of payment for the transfer of the relevant shares. It seems to me that it can scarcely have been unreasonable for the Plaintiffs not to have accepted offers which did not tell them when they would be paid the amount they had been offered, even if a term that payment was due within an unspecified "reasonable" time would be implied. There is no evidence that Ms Sun or KMF later indicated when such payment would be made if the offers were accepted. 4. Evidence has also been led of subsequent correspondence, in the month before this hearing, where the Plaintiffs made an offer of settlement of the proceedings, on the basis that amounts were paid to them, in exchange for releases in favour of Ms Sun and KMF. The Plaintiffs did not rely on that offer, but Ms Sun and KMF did so to assert the reasonableness of their position in defending the proceedings. It seems to me that offer is neutral in that respect, where it offered releases that the Plaintiffs would not otherwise be obliged to give potentially extending to causes of action and claims that have not been raised in these proceedings against the Defendants. 5. At least by 28 February 2018, the Plaintiffs advised Ms Sun and KMF that they did not intend to proceed with their claims for relief other than for the winding up of the Company, due to the Company's present circumstances. The reference to the Company's present circumstances was significant, because its business had previously been sold, without realising any net benefit to it, in a sale implemented by Ms Sun as its director without reference to the Plaintiffs, and the Company had then been placed in provisional liquidation by the Court. The position, in respect of the Company which had no operating business and had received no moneys for the sale of the business, as at February 2018, was quite different from the position of the Company at the time the proceedings commenced, when it appears that at least Ms Sun considered that the Company had an asset in the business of considerable value. 6. Ms Sun and KMF in turn relied (Ex D2) on correspondence where they set out the perceived weaknesses of the claims against them, but made an offer for the winding up of the Company, on the basis that the proceedings would be dismissed with no order as to costs. That offer, however, in turn included a requirement for a deed of release, which went beyond what would be required on a winding up order made by the Court. Mr Katekar's submissions 1. Turning now to the parties' submissions, which I will summarise shortly, with no disrespect to the sophistication of the arguments put, Mr Katekar refers to the observations of McHugh J in Lai Qin above and seeks to establish the basis for an order for costs in favour of the Plaintiffs on the basis that the conduct of the Defendants from the commencement of the proceedings to their resolution was unreasonable. Mr Katekar's submissions, in that respect, turn upon the factual characterisation of what was done, which is the subject of the substantive dispute in the proceedings which will now not be determined. In particular, Mr Katekar points to the contribution by the Plaintiffs to the business; the collapse of the relationship between the Plaintiffs and Ms Sun; and the circumstances of the sale of the Company's business, for a substantially lesser amount than Ms Sun had understood to be its value as at December 2016. Mr Katekar submits that it was always appropriate that the business be sold by an independent third party, although that proposition must depend upon an assessment of the conduct of the parties. That proposition might well be correct if, as Mr Katekar assumes, the Plaintiffs were justified in their loss of confidence in Ms Sun, but would not be correct if, as Ms Sun and KMF would contend, the Plaintiffs were not justified in that loss of confidence, and the Plaintiffs rather than Ms Sun were at fault in respect of the collapse of the relationship. Which is correct will not be known, where this matter has not gone to a hearing on its merits. 2. Mr Katekar also submits that, in effect, a winding up order was always inevitable, because of the breakdown of the relationship between the parties. Again, it does not seem to me that that submission can be accepted. Where the relationship between the parties has broken down, discretionary considerations come into play, including any fault of the parties in respect of the circumstances of the breakdown. As I have noted above, absent a determination on the merits, it cannot now be known whether, on the one hand, the Plaintiffs were at fault, or Ms Sun were at fault, or all parties were at fault, in the breakdown of relationship between them. It became more likely that the Company would be would up, as its financial position deteriorated, and particularly after a provisional liquidator had been appointed, where that appointment recognised the matters that would lead to an ultimate winding up. However, that, of course, reflects a deterioration in the Company's position occurring as the proceedings continued, and it seems to me to fall within the class of supervening events to which I have referred above. Mr Katsoulas' submissions 1. Mr Katsoulas advanced somewhat more elaborate submissions than Mr Katekar, which were directed to a range of possible results. First, Mr Katsoulas sought to separate out the relief sought in the Originating Process, as separate claims against Ms Sun, KMF, and the Company in respect of the winding up. In respect of the first of those claims, Mr Katsoulas submitted that the Court would never have ordered that Ms Sun contribute $245,000 to the Company, where she was not the relevant shareholder and would not be allocated any shares in the Company. With respect, it seems to me that that submission was unduly technical. First, as I have noted above, it was an agreed fact that KMF was Ms Sun's company, even if it was also the trustee of a trust. Second, it was plain from the correspondence, including a letter of offer from Ms Sun's solicitors, that Ms Sun exercised practical control over these shares held by KMF as trustee for the family trust, so that she, for example, offered to transfer them to the Plaintiffs in exchange for a payment to her or KMF. Third, whether such an order would have been made against Ms Sun plainly depended upon the terms of the parties' agreement, which is a matter that will now not be determined in substantive proceedings. 2. Mr Katsoulas also submitted that the Court would not have made orders against KMF, apparently on the basis that it would have involved a readjustment of shareholdings in the Company. Whether that is so depends upon analysis that was not fully undertaken in Mr Katsoulas' submissions, but even if it was so, the Court would have power to reorder such a readjustment in an oppression claim, and it is by no means apparent to me, at least putting aside the deterioration of the Company's financial situation, that such an order could not have been made. 3. Mr Katsoulas also submitted that Ms Sun and KMF acted reasonably in opposing the winding up, because the Court would not have ordered the winding up, by reason of discretionary factors involving the conduct of the Plaintiffs. That, with respect, assumed in Ms Sun's and KMF's favour issues as to the merits which will now not be determined, because the matter has not gone to a hearing. 4. Mr Katsoulas also submitted that the Plaintiffs had abandoned their claims as against Ms Sun and KMF, and that Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") r 42.19(2) created a default position where relief was discontinued that the plaintiff should pay the defendants' costs. The short answer to that proposition is that relief has not here been discontinued or abandoned. The Plaintiffs press for relief in respect of one of the alternatives claimed, namely a winding up order. The longer answer to that proposition is that, in this case, what has occurred is, consistent with the authorities to which I have referred, that a supervening event, namely the deterioration of the Company's financial position and sale of its business, has rendered it pointless for the Plaintiffs to pursue transfers of shares in it to them. In those circumstances, the policy underlying UCPR r 42.19(2), namely an abandonment of relief which implies that the relief would not have been granted, when the proceedings commenced, is not satisfied. It does not seem to me that that rule applies but, if it did, I would depart from it, in the exercise of discretion, where the Plaintiffs' pursuit of the first and second orders, primarily sought against Ms Sun and KMF, is longer viable given the deterioration in the Company's financial position and the sale of its business under Ms Sun's control. 5. Mr Katsoulas alternatively submitted that the position as against Ms Sun and KMF amounted to a dismissal. At a technical level, there is some support for that proposition on the basis that the proposed orders provide for a winding up order and the proceedings otherwise to be dismissed. Mr Katsoulas identifies the default position, in respect of a dismissal, as that, unless the Court otherwise orders, the plaintiff must pay the defendant's costs of the proceedings. Again, it seems to me that the rule does not, in truth, apply, because this is not a dismissal of proceedings, but the making of a substantive order in them, with the consequence that other alternative orders are necessarily not made, and a dismissal of those alternate orders is made for completeness. Even if the rule did apply, I would be satisfied that I should depart from it, where the other orders are no longer practicable given the deterioration in the Company's position and the sale of its business. Determination 1. In these circumstances, it seems to me that neither the Plaintiffs have established the basis for an order for costs in their favour, nor have Ms Sun and KMF established an ordered for costs in their favour. It is not necessary, strictly, to determine whether either or both parties have acted reasonably, in all respects or in most respects, in determining that there should be no order as to costs, where such an order could only properly be based on findings as to the merits which cannot now be made without a hearing on the merits. It seems to me that a winding up order is plainly properly made and that the parties have acted sensibly in recognising that. There should otherwise be no order as to the costs of the proceedings between the parties. Where neither party has succeeded in sustaining the relief as to costs which was its primary position today, there should also be no order as to costs as of today. Where there is no order as to costs, then there can be no question of any particular basis upon which costs should be awarded, by way of indemnity costs or otherwise. 2. I appreciate that both parties would have incurred significant costs in respect of the conduct of the proceedings, and that will be a matter for regret, perhaps, for all parties. However, that is the unfortunate consequence of the conduct of proceedings, in respect of a company which was in a deteriorating financial position. That consequence cannot be fairly addressed, in the circumstances, by imposing costs on one or other party, without a trial on the merits which would have allowed a determination where those costs properly lie. 3. I therefore make orders in accordance with the form of orders provided by the Plaintiffs, but amending Order 4 to read: "There be no order as to the costs of the proceedings, other than any orders as to costs previously made which are preserved." ********** 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: 17 April 2018