China v James Smith (Also Known as James with) [No 4] - [2014] WASC 140

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: CHINA -v- JAMES SMITH (ALSO KNOWN AS JAMES WITH) [No 4] [2014] WASC 140

CORAM: KENNETH MARTIN J

HEARD: 21 MARCH 2014

DELIVERED : 21 MARCH 2014

PUBLISHED : 17 APRIL 2014

FILE NO/S: CIV 2583 of 2009
Consolidated by orders dated 17 September 2009

BETWEEN: PAUL CHINA
First Plaintiff
BENJAMIN CHINA
Second Plaintiff
CHINA BROTHERS PRODUCTION CO PTY LTD
Third Plaintiff
AND
JAMES SMITH (ALSO KNOWN AS JAMES WITH)
First Defendant
TIRED HORSES FILMS HOLDINGS PTY LTD
Second Defendant
TRI-US ENTERTAINMENT HOLDINGS PTY LTD
Third Defendant
TRI-US ENTERTAINMENT PTY LTD
Fourth Defendant

FILE NO/S :CIV 2376 of 2009

MATTER :Application pursuant to Order 26A of the Rules of the Supreme Court
Application for an interlocutory injunctio

BETWEEN :CHINA BROTHERS PRODUCTION CO PTY LTD
Plaintiff
AND
JAMES SMITH (ALSO KNOWN AS JAMES WITH)
First Defendant
TIRED HORSES FILMS HOLDINGS PTY LTD
Second Defendant
TRI-US ENTERTAINMENT HOLDINGS PTY LTD
Third Defendant

Catchwords:

Corporations law - Winding up - Just and equitable - Sole purpose corporation - Purpose failed - Winding up ordered

Corporations law - Costs - Winding up application granted with consent of respondent - Indemnity costs - Costs against director of respondent - Costs against companies owned by director of respondent - Application granted in part

Legislation:

Corporations Act 2001 (Cth), s 461(1)(k), s 466(2

Result:

Corporation wound up

Category: B

Representation:

CIV 2583 of 2009

Consolidated by orders dated 17 September 2009

Counsel:

First Plaintiff                :     Mr P Durack SC & Mr K Philp
Second Plaintiff            :     Mr P Durack SC & Mr K Philp
Third Plaintiff               :     Mr P Durack SC & Mr K Philp
First Defendant             :     No appearance
Second Defendant         :     Ms C H Thompson & Mr M Levitan
Third Defendant           :     No appearance
Fourth Defendant          :     No appearance

Solicitors:

First Plaintiff                :     Bennett & Philp Lawyers
Second Plaintiff            :     Bennett & Philp Lawyers
Third Plaintiff               :     Bennett & Philp Lawyers
First Defendant             :     No appearance
Second Defendant         :     Melvyn Levitan
Third Defendant           :     No appearance
Fourth Defendant          :     No appearance

CIV 2376 of 2009

Counsel:

Plaintiff:     Mr P Durack SC & Mr K Philp
First Defendant             :     No appearance
Second Defendant         :     Ms C H Thompson & Mr M Levitan
Third Defendant           :     No appearance

Solicitors:

Plaintiff:     Bennett & Philp Lawyers
First Defendant             :     No appearance
Second Defendant         :     Melvyn Levitan
Third Defendant           :     No appearance

Case(s) referred to in judgment(s):

Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567
Capelli v Shepard [2010] VSCA 2; (2010) 29 VR 242
China Brothers v Smith (also known as James With) [No 3] [2014] WASC 29
Re Tivoli Freeholds Ltd [1972] VR 445
Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 5 ACSR 296
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S)
KENNETH MARTIN J:
(This judgment was delivered extemporaneously on 21 March 2014 and has been edited from the transcript.)

A winding up order is moved for against the second defendant corporation, Tired Horses Films Holdings Pty Ltd, (THFH) by the third plaintiff, China Brothers Production Co Pty Ltd (CBP).
The application is moved on the basis identified in my reasons for decision China Brothers v Smith (also known as James With) [No 3] [2014] WASC 29, namely that by s 461(1)(k) of the Corporations Act 2001 (Cth):
(k)the Court is of the opinion that it is just and equitable that the company be wound up.
In my reasons of 7 February 2014, in respect of a separate determination, I resolved the plaintiffs' contention that there had arisen a 'Quistclose' trust, in respect of moneys the subject of the Court's prior preservation orders beneficially favouring the plaintiffs in respect of the funds: see Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567.
In resolving that issue, I necessarily addressed three elements to establish such a 'Quistclose' trust.
The three elements assessed in that separate determination are identified at par 67 of those reasons, namely:
(a)Were the funds advanced to THFH by CBP for the primary purpose of the making of the film All The Tired Horses? (My answer was in the affirmative).
(b)Had that purpose, that is, the primary purpose of making the film, now failed? (I resolved that question in the affirmative).
(c) Was the mutual intention of the parties, objectively assessed, that the funds were advanced on a basis that they were not to become part of the general assets of the recipient, THFH? (I answered that question in the negative).
For element (c) above, it was significant that there had, in effect, been a capital raising by THFH in respect of $1.5 million, as funds fully and exclusively subscribed for in that corporation by CBP, in return for an allocation of 1,500,000 A class shares in THFH.
In reaching a conclusion that the $1.5 million amount received from CBP had become part of the general capital funds of THFH, I was taken to the provisions of the THFH Constitution. The Constitution was before me on that application as attachment KP‑11 to the affidavit of Kenneth Philp sworn 25 June 2013. It was also incorporated into a book of documents for this winding up application and was tendered by the third plaintiff.
The Constitution of THFH includes cl 93 which I again set out:
SHARE RIGHTS
93.The rights, privileges and conditions attaching to the said ORINARY, A CLASS, B CLASS, C CLASS and D CLASS shares shall be as set out in this Rule.
ORDINARY SHARE RIGHTS:
Voting Rights
(1)The said ORDINARY shares shall entitle the holder or holders thereof to receive notice of meetings and shall confer upon any holder thereof, when present in person or by proxy or by attorney at any general meeting of the Company the right to case one (1) vote upon a show of hands and upon a poll to cast one (1) vote for each share held.
Dividends/Winding up
(1)The said ORINDARY shares shall confer upon the holder or holders thereof the rights to payment of such dividends as the Directors may from time to time recommend and as the Company may pursuant to these Rules declare.
(2)Upon winding up of the Company the said ORDINARY shares shall confer upon the holder or holders thereof the right to payment of any distribution of surplus profits or assets of the company.
A, B, C and D CLASS SHARE RIGHTS:
Voting Rights
(1)The said A CLASS, B CLASS, C CLASS and D CLASS shares shall not confer on the holder or holders thereof the right to vote at any general meeting of the company nor shall the holder or holders thereof be entitled to receive notice of or to attend any general meeting of the Company.
Dividends/Winding up
(1)The said A CLASS, B CLASS, C CLASS and D CLASS shares shall confer upon the holder or holders thereof the rights to payment of such dividends as the Directors may from time to time recommend and as the Company may pursuant to these Rules declare.
(2)Upon winding up of the company the said A CLASS, B CLASS, C CLASS and D CLASS shares shall as regards return of Capital rank in priority to all other shares of the Company to the value of $1.00 each, but shall not carry the right to any further participation in the surplus profits or assets of the Company.
In the 'Quistclose' argument reasons I had noticed that the THFH Constitution did two key things. First, it did not afford any voting rights whatsoever to THFH A class shareholders. But, second, A class shareholders were afforded rights to priority over ordinary shareholders as regards a receipt of dividends, and in relation to any return of their capital upon a winding up.
I was, of course, then assessing THFH as a single purpose company, created for the purpose of making a particular film, with that purpose then being assessed as having failed. On these findings, a correlative question fell into focus. This was whether, with the filmmaking purpose then assessed as having failed and in accord with well‑established case law authorities, THFH should be wound up on the just and equitable ground. Significant case authorities to that end include, notably, Re Tivoli Freeholds Ltd [1972] VR 445; Strong v J Brough & Son (Strathfield) Pty Ltd (1991) 5 ACSR 296; and Capelli v Shepard [2010] VSCA 2; (2010) 29 VR 242. At [103] of Capelli, Dodds‑Streeton and Mandie JJA and Byrne AJA cited the following passage from Brough, which I assess as equally pertinent on the facts now presenting:
[I]f a company is formed for one purpose and one purpose alone, and if that purpose is accomplished, or, alternatively, if its accomplishment has become impossible, then the shareholders are entitled to a winding up and a return of their investment (300).
In other words, the failure of the 'Quistclose' trust argument carried with it a subsidiary focus towards whether it was nevertheless just and equitable to wind up THFH, given it had been formed the sole purpose of making a particular film, and bearing in mind the provisions of the THFH Constitution and the now ascertained failure of the filmmaking purpose.
This was the issue I indicated the prima facie position towards: see China [No 3], particularly [93] ‑ [98]. I said I would hear the parties. This was necessary as the issue of winding up by the just and equitable ground had not been squarely in focus previously, although it had fallen at the end, I thought, within the orbit of those issues.
Upon publication of those reasons, the parties were afforded an opportunity to file written submissions or further evidentiary materials. The indicated position of the plaintiffs was that CBP would amend its pleadings to move for orders that THFH be wound up pursuant to s 461(1)(k).
That foreshadowed winding up application was then programmed for progress towards hearing. At the time the indication from THFH via its legal representatives was that the application to wind up THFH would be strongly opposed.
Following a filing of the fourth further amended statement of claim and third amended writ of summons by the planitiff, there was a further directions hearing on 20 February 2014.

Winding up

There has ensued, essentially, an exchange of evidentiary materials by each party by affidavit and answering affidavit.
I mention first an affidavit from the first defendant, James Robert Wearing Smith, sworn 7 March 2014, in which he states in par 1 that he is the director of THFH and made that affidavit in opposition to the third plaintiff's application to wind up THFH.
At the hearing, Mr Smith's affidavit was read in by counsel for CBP, not for any purpose of proving the truth of its contents, but rather to indicate an opposing position to winding up by the first and second defendants and thereby to explain the stance of CBP, by filing an answering affidavit, sworn by CBP director Mr Shaun China, on 18 March 2014.
The position then loomed prior to 21 March, from the previous two hearings, that I would be dealing with a strongly resisted application to wind up THFH. As matters have transpired, however, this was not the case.
Yesterday my associate had received an indication through the solicitors for the defendants that in fact THFH would not be resisting the winding up application.
Today it was indicated at 10.15 am, when more time to confer was requested by both sides, that there would not in fact be any opposition to a winding up order proposed by CBP on the just and equitable ground and that the parties were discussing wider possible settlement terms. This afternoon, at a hearing commencing about 2.45 pm, counsel for THFH articulated for that corporation only a position of consent to a winding up order being made.
Nevertheless, winding up orders are not made lightly, even if consented to. A court must itself first be affirmatively satisfied that the winding up order is an appropriate disposition in the prevailing circumstances, particularly where the just and equitable ground is invoked.
However, I can truncate matters considerably by indicating that for the purposes of s 461(1)(k), the prima facie position as I foreshadowed in my prior reasons in China [No 3] at [98] has not been derogated from by any materials which have emerged subsequently. In fact, it has been solidified. Although not conclusive, the consent position for THFH to the application is one new and additional factor be weighed.
Most significant to my evaluation, however, as explained by the earlier reasons, are the somewhat unique provisions of the THFH Constitution as regards the elevated priority of class A shareholders to a return of their capital on a winding up. This is revealing in terms of what is now assessed to be just and equitable. The remaining capital of THFH, which for all intents and purposes has been moribund, is held by THFH in circumstances where the purpose of making the film for which the money was raised in prospectus like documentation, has plainly not materialised.
I am satisfied then, in accord with the case authorities, as referred to above, that it is just and equitable that a winding up of THFH be ordered. I do so on the basis that the court has received the consent to act as liquidator from Mr Giovanni Carello of BRI Ferrier Western Australia, advising he is prepared to be the liquidator for the purposes of a winding up of THFH.
Accordingly, it is appropriate to order in terms of the motion of CBP that THFH, the second defendant, be wound up pursuant to s 461(1)(k) of the Corporations Act. I also make the correlative order appointing Mr Carello as the liquidator for the purposes of the winding up.

Costs

Legal costs was really the only issue of argued contention today - in light of the late positional change advised on the part of THFH.
In that context, Ms Thomson today only indicated an appearance on behalf of the second defendant, THFH, as the entity proposed to be wound up. The residual question then presents as to the appropriate orders as to costs.
In that respect, I was first referred to s 466 of the Corporations Act, particularly, s 466(2). This provision says that the liquidator must, unless the court orders otherwise, reimburse out of the property of the company the taxed costs incurred by the applicant for liquidation in any such proceedings.
A somewhat elevated position beyond s 466(2) as to costs was put by CBP, to seek not only taxed costs, but also orders that CBP receive indemnity costs. Furthermore CBP seeks the indemnity costs order against all defendants, not only THFH. Contrary to that costs position, the stance of THFH by counsel was that in regard to costs, no indemnity costs order was justifiable, and that the orthodox position under s 466(2), namely an entitlement to taxed costs against THFH alone, payable out of the proceeds of the winding up, was the proper costs order.
Essentially then, the first contest as between the parties is over indemnity costs and, second, as against whom.
So should any costs received by CBP be from the assets of THFH or not? Or should CBP's costs be ordered against all defendants and, particularly, as against Mr Smith?
Mr Smith is effectively the exclusive ordinary shareholder for THFH. He owns of all voting shares, and is sole director and undoubtedly the exclusive decision-maker as being, in effect, the THFH board.
A number of factors need to be weighed here. Costs lie ultimately at the discretion of the court, but are awarded in accord with well‑established case law principles.
There needs to be some evidence to satisfy me there should be an enhancement to or a departure from the costs position orthodoxy as delivered by s 466(2).
For the present case, a factor of key significance that does move me above the orthodox costs position is that there has, at least until yesterday, been by all indications very strong opposition to the making of the winding up order against THFH, at least from materials before the court. That opposition from THFH undoubtedly led the applicant CBP to file affidavit material and submissions in answer, and so to thereby incur legal costs at levels greater than would have been incurred, had an opposition stance not been identified and actively pursued at two hearings which followed my published reasons for decision. That position was only resiled from, it seems, late on the afternoon of Wednesday this week.
In practical terms, solicitors and counsel engaged on behalf of CBP only learnt about the change of stance yesterday, as they respectively arrived in Perth, in the course of travelling here to participate in today's application. That is a significant factor going to costs.
A second factor that influences me is that the funds held by way of subscription to THFH had all emanated originally and exclusively from CBP by its subscription of $1.5 million for 1,500,000 A class shares in THFH. Although I have found that those funds became the beneficial property of THFH, that is of little comfort to CBP as it sees these residual funds accessed and diminished in order to meet unnecessary costs. What has transpired effectively diminishes the limited THFH funds it seeks to recover ‑ with the underlying filmmaking purpose for which the funds were originally subscribed by CBP having failed.
Hence, my view is that the costs position orthodoxy of s 466(2), in terms of giving an applicant a prior entitlement to taxed costs out of the proceeds of the winding up, does not meet the justice of the present case without some extra enhancement.
The two factors I have identified do justify a departure here from the orthodoxy of s 466(2), that would otherwise apply. The question, however, remains as to whether any defendant beyond THFH, bearing in mind only THFH appeared by counsel today, should suffer any costs exposure as well?
In all the presenting circumstances, it is my view that a basis for a costs order against the first defendant, Mr Smith, is made out as well. He clearly has been the exclusive moving hand, and decision-maker, for THFH in respect of the opposition to winding up proposed by CBP on the part of the second defendant. That position has been latterly resiled from, as noted. Nevertheless, the first defendant, who is the sole member of THFH's board and who must be taken to have made a tactical decision to actively defend and resist winding up to at least last Wednesday afternoon, must also bear a separate and personal exposure to taxed costs orders favouring CBP on this application.
Beyond that, however, as regards a costs exposure position of the third and fourth defendants, they are also, effectively, controlled by Mr Smith. But I am not persuaded those entities should bear a responsibility for any level of costs upon this winding up application. They are, essentially, only funds recipients. Their accounts have been frozen to isolate funds which now, with interest, approach approximately $1 million.
I can ascertain no conceptual basis to expose the third and fourth defendants to personal orders as to CBP's costs, particularly as this present application narrowed merely to a contest as between CBP as the sole A class shareholder and s 461(1)(k) applicant, and THFH as respondent and the director Mr Smith - who made the key decisions initially resisting, but then more recently consenting to the winding up of THFH. There is no evidence the third and fourth defendants were concerned in these decisions.
That will be the extent of the exposure in terms of costs that should follow as regards these applications, namely in THFH and in Mr Smith personally.
That still leaves an unresolved question as regards those first and second defendants concerning whether they should bear costs at a level of taxed costs only, or whether the exposure should be to indemnity costs? Principles in respect of indemnity costs were canvassed in the Court of Appeal in Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 (S) at [10].

The court's discretion to make indemnity costs orders is not closed off, in terms of potential circumstances that may warrant such an order being made. In the main, however, such orders are made where a court, effectively by sanction, indicates displeasure with the conduct of a party or parties, especially where there is improper or unreasonable conduct which is such a departure from the norm as to warrant the court's costs sanction.
One key question applicable to making an indemnity costs order is whether a more orthodox costs order would actually deliver an appropriate outcome in the circumstances of the case. In particular, would an increase in scale limits for the purposes of a taxation in fact compensate a party sufficiently, so it is, in effect, not left out of pocket as regards expenditures upon legal costs? There was no attempt by CBP to invoke this taxed costs augmentation principle.
Matters have moved quickly and unfolded ‑ perhaps taking an unexpected turn today. But as regards costs, all the materials I have before me is evidence as identified by senior counsel for the applicant CBP. That in context is contended to be enough to support an indemnity costs order. I respectfully must disagree. Although the applicant has been successful, indeed vindicated by today's winding up order, I am not satisfied at the end of the day the case rises to a level that I could reliably and comfortably assess the underlying materials as so lacking in substantive merit as to warrant an imposition of the sanction of an indemnity costs order.
Had the matter proceeded to be actively argued, I might then have been left in a position, whereby after evidence tendered had been tested, I could reach another view. But because a party makes a submission ultimately not accepted by a court, or which is withdrawn, does not necessarily dictate the court should sanction the party by indemnity costs orders. A reality of life in practice of the law is that parties should be encouraged to constantly review their position in litigation from time to time. The parties ought not then to be unduly discouraged by adverse costs considerations from ongoing review of the strengths or weaknesses of their case ‑ on a basis that if they do resile, or change a position, they face an indemnity costs order.
To adopt such a rigid policy would lock parties to rigid and unhelpful positions. It is very much in the interests of justice that parties constantly keep their positions under review and, where appropriately advised, not hesitate to make concessions to reach resolution outcomes by consent.
Although THFH effectively, has changed position late and just before the substantive arguments have been heard, nevertheless, the materials do not rise to the level of warranting an indemnity costs sanction applying Swansdale v Whitcrest principles.
The applicant CBP should receive the costs of this application on a taxed basis only. The orders for taxed costs apply not just as against THFH but also against the first defendant, Mr Smith, personally albeit he was not identified through counsel as participating today. I am not prepared to make indemnity costs orders.