Supreme Court New South Wales Medium Neutral Citation: Aligned Investment Management v Aligned FM [2018] NSWSC 1852 Hearing dates: 30 November 2018 Date of orders: 30 November 2018 Decision date: 30 November 2018 Jurisdiction: Equity - Commercial List Before: McDougall J Decision: Dismiss the first defendant's application for security for costs. Catchwords: CIVIL PROCEDURE – application for security for costs – whether jurisdiction to order security enlivened – where plaintiff's sole asset is a right of indemnity out of the assets of a trust – whether enlivened discretion should be exercised to order security – where ordering security would have limited practical effect due to the existence of cross-claims – application dismissed. Legislation Cited: Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: ACN 105 921 962 Pty Ltd v Wiggett [2012] NSWSC 1526 LSKF Holdings Pty Ltd v Shield Lifestone Holdings Pty Ltd [2018] NSWCA 109 Category: Procedural and other rulings Parties: Aligned Investment Management Pty Ltd (Plaintiff/Respondent) Aligned FM Pty Ltd (First Defendant/Applicant) Boultwood Ho Investments (Second Defendant) Representation: Counsel: M Cleary (Plaintiff/Respondent) C Tam (First Defendant/Applicant) Solicitors: Baker McKenzie (Plaintiff/Respondent) Squire Patton Boggs (First Defendant/Applicant) File Number(s): 2018/179099 Judgment (EX TEMPORE – REVISED 30 NOVEMBER 2018) 1. HIS HONOUR: The plaintiff (AIM) and the second defendant (BHI) each holds 50% of the issued shares in the first defendant (AFM). The CEO and a director of AFM is Mr Glen Boultwood, who is the director and shareholder (directly or indirectly) of BHI. 2. AIM brings a number of claims against both AFM and BHI. Those claims arise out of the shareholders' agreement between AIM and BHI and out of a notice of default given by BHI to AFM. It is BHI's case that the notice of default was properly given, and that in the result, by the operation of cl 17 of the shareholders' agreement, it is entitled to buy out AIM's shares in AFM at 80% of the value established by an independent valuation performed in accordance with another clause of the shareholders' agreement. 3. BHI says that the independent valuation was performed. The document that is in evidence establishes a range of values, the midpoint of which is about $2 million. It is not necessary to go into greater particularity. Thus, if BHI succeeds, it would be entitled to buy out the shares for $1.6 million. 4. AIM is a trustee. It holds the shares in AFM on the terms of a trust deed made on some date, buried somewhere in the back of the document, which quite frankly I am not sufficiently troubled to ascertain. It would appear that the trust deed may have been amended from time to time, but nothing turns on that. 5. The accounting records of AIM show that it has little, if anything, in the way of assets held by it beneficially. Thus, for present purposes, its sole relevant asset is its right of indemnity out of the assets of the trust for liabilities incurred by it in the execution or attempted execution of its powers or discretions as trustee. That equitable right of indemnity is stated expressly in cl 16 of the trust deed. There are two exceptions to that right but, despite the earnest submissions of Mr Tam of Counsel (for AIM) to the contrary, those exceptions do not seem to me to cut down the right in any way that is relevant for present purposes. 6. AFM seeks an order that AIM provide security for costs. 7. The dispute as to the question of jurisdiction turned on the relevance of the fact that AIM's sole relevant asset is the right of indemnity. Mr Tam submitted, in my view correctly, that realisation of that right (or of the fruits of it) could be difficult, because it would involve appointing a receiver or other controller of the trustee and causing that controller to satisfy the right of indemnity. 8. The difficulties were referred to by Leeming JA in LSKF Holdings Pty Ltd v Shield Lifestone Holdings Pty Ltd [1] at [15] and [16]. In my view, his Honour's comments are directly applicable to the present case. 9. It may be noted that those who are entitled to the beneficial interest in the trust, and those who control AIM in its capacity as trustee, have not offered any undertakings of the kind to which Black J referred in ACN 105 921 962 Pty Ltd v Wiggett [2] at [11]. It is therefore not necessary to consider the sufficiency of those undertakings, as his Honour did at [12] and following. 10. In the circumstances, I am satisfied that the Court's jurisdiction to order security for costs is enlivened. 11. I should note, and it has been recorded in any event, that AIM by Counsel has given an undertaking to the Court to the effect that pending the completion of the proceedings or the further order of the Court, it will not encumber the shares held by it in AFM. It follows that if the defendants succeed in repelling all AIM's claims, BHI will be able and entitled to buy the shares (and indeed, I think, on the proper view of the shareholders' agreement it would be required to buy them), as I have said at a price of $1.6 million. It follows that in that event, the undertaking will effectively ensure that the benefit of the proceeds of sale will be available. The difficulty is not so much whether there are likely to be funds, but one of the realisation of the right of indemnity: the matter to which Leeming JA referred in LSKF Holdings. 12. The generally accepted discretionary factors were the subject of detailed submissions. Despite the earnest endeavours of Mr Cleary of Counsel for AIM to persuade me to the contrary, I do not think that this is an appropriate case to undertake any investigation of the relative strengths of the claims and the defences (and the cross-claims brought by both AIM and BHI). This does not seem to me to be a case where it can be said that the position of one party or the other is so obviously weak that the comparative merits are factors that have any influence on the exercise of the discretion. 13. I do accept that insofar as the notice of default was based on assertions of breach of confidentiality, the defendants have been remarkably imprecise in attempting to formulate the breach. That does not mean however that the claim is likely to fail. It goes, at most, to the question (which I think to be more relevant) of the party for whose real benefit the claims are being defended. 14. When one goes to the further amended summons filed on 6 August 2018, the substantive relief that is sought against AFM comprises the following: 1. an order that it and BHI be restrained from giving effect to the notice of default; 2. an order that it and BHI be restrained from giving effect to the impugned valuation; 3. a declaration that the conduct of AFM's affairs, particularly in relation to the notice of default and its consequences, is oppressive; and 4. an order that AFM and BHI be restrained pursuant to s 233(1)(i) of the Corporations Act 2001 (Cth) from giving effect to the notice of default. 1. It will be noted that the first and last of those claims for relief overlap; the only difference is as to the basis on which the relief is claimed. 2. For my part, I simply do not understand what interest AFM has in contesting a number of those issues. It can be of no interest to AFM whether the relevant clause, cl 17, of the shareholders' agreement is (as AIM alleges) void as being a penalty. It can be no interest of AIM to uphold the propriety of the valuation. Both those matters are shareholders' disputes, the real parties to which are AIM on the one hand and BHI on the other. 3. I do accept that relief is sought against AFM in respect of those matters. That is because it is a necessary party, having regard to the terms of the shareholders' agreement and the events that have happened. But its real or proper interest in defending those matters seems to me to be as little as the interest that a company has in defending a dispute between shareholders as to who is entitled to control its board. 4. There are separate allegations to the effect that the board of AFM improperly excluded nominees of AIM from the board, and acted in other ways that are oppressive. Again, I accept, where it is said that the conduct of the affairs of AFM has been oppressive to AIM, AFM is a necessary party. However, as the further amended commercial list statement makes tolerably clear, the oppression that is alleged is oppression based on the way in which Mr Boultwood in particular, who as I have said is the alter ego of BHI, has caused the affairs of AFM to be conducted. 5. There are then the cross-claims. They relate to breaches of confidentiality and to diversion of business opportunities. Each of AFM and BHI has brought a cross-claim. To a large extent, those cross-claims, or to be more accurate, the facts, matters and circumstances that enliven them, will be litigated even if the claim brought by AIM is stayed for failure to provide security for costs. That is because there is no indication from either AFM or BHI that if AIM's proceedings are stayed, they will not continue with the cross-claims. Thus, many of the issues that underlie AIM's own claims will be litigated in any event, and the parties will be put to the cost of propounding and defending them. 6. There were other issues argued. It does not seem to me to be necessary to go to all the detail (for example, whether BHI's cross-claim was properly brought or as to whether the financial statements of the trust of which AIM is a trustee have been prepared in a manner that is sufficiently comprehensible to cast any light whatsoever on the particular dispute with which I am at present concerned). The real issues seem to me to be those with which I have dealt. They are the questions that to my mind are relevant to the balancing or discretionary exercise that is involved, having regard to my conclusion that the jurisdiction to order security for costs has been enlivened. 7. When one seeks to balance those factors, the following points emerge. The first is that in many respects, AFM is sticking its nose into a fight that is none of its concern. The second is that the factual disputes that underlie AIM's claims will be litigated in any event, for the reasons that I have indicated. The third is the overlap in the relief claimed by BHI and AFM in their cross-claims. 8. Taking all those matters into account, I conclude that it is inappropriate to exercise the enlivened jurisdiction in favour of the applicant. It seems to me that to do so would not have any practical effect, particularly bearing in mind the cross-claims to which I have now referred several times. 9. In those circumstances it is not necessary to go to the question of quantification. I will however say that I am satisfied that an effort has been made to exclude from the amount of costs sought any costs referable to the cross-claims. To some extent, of course, that is an artificial exercise because the very fact that the cross-claims are being run means that the costs of the hearing will be prolonged to some extent in any event. However, in general, I am satisfied that an appropriate attempt has been made to discount the costs estimated appropriately, and that what remains is a not unreasonable sum for the likely cost of preparing and conducting a three-day hearing. 10. Were I satisfied otherwise that it was appropriate to do so, I would have ordered that security be provided in the sum of $150,000, most likely in a way that was payable by more than one tranche. But as I have said, it is unnecessary to say anything more because, for the reasons I have given, I conclude that the jurisdiction ought not be exercised. 11. The result is that AFM's notice of motion filed on 9 November 2018 should be dismissed. In the particular circumstances of this case, that seems to me to be a relatively discrete event. I do not perceive that the costs relating to it is a matter that should await the final hearing before being assessed. Nor do I see this as a matter where one cannot determine the real justice of a costs order until there has been a final hearing on the merits. 12. Accordingly, and taking into account to the contrary the general position stated in UCPR r 42.7, I order the applicant to pay the respondent's costs of that notice of motion. 13. I direct that the exhibits be handed out. ********** Endnotes 1. [2018] NSWCA 109. 2. [2012] NSWSC 1526. 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: 03 December 2018