CTI Resort Holdings Group Pty Ltd v Jingquan Chen
[2015] NSWSC 2090
•07 August 2015
Supreme Court
New South Wales
Medium Neutral Citation: CTI Resort Holdings Group Pty Ltd v Jingquan Chen [2015] NSWSC 2090 Hearing dates: 7 August 2015 Date of orders: 07 August 2015 Decision date: 07 August 2015 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Proceedings stayed until undertaking to be bound by costs order against the plaintiff or security for costs in the sum of $50,000 given by persons named in [11].
Catchwords: PROCEDURE – costs – security for costs – corporate impecuniosity – discretionary factors weighing against security for costs order – where plaintiff has strongly arguable case – whether plaintiff’s case is in truth defensive – existence of special relationship between plaintiff and defendant – whether order for security would stultify proceedings – where persons standing behind company unwilling, rather than unable, to contribute security – injustice of prosecuting proceedings on behalf of company when company unable to meet adverse costs order and shareholders shielded from liability. Legislation Cited: (CTH) Corporations Act 2001, s 1335
(NSW) Uniform Civil Procedure Rules 2005, r 42.41(1)Cases Cited: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 13 ACLC 437 Category: Costs Parties: CTI Resort Holdings Group Pty Ltd ACN 603 076 026 (plaintiff)
Jingquan Chen (first defendant)
Full River Pty Ltd (second defendant)Representation: Counsel:
Solicitors:
J E Sexton SC w J L Lee (applicants/defendants)
H Stowe w M Kloucek (respondent/plaintiff)
Ren Zhou Lawyers (applicants/defendants)
Shohmelian Legal (respondent/plaintiff)
File Number(s): 2015/181299
Judgment (ex tempore)
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HIS HONOUR: By notice of motion filed on 16 July 2015, the defendants Jingquan Chen and Full River Pty Limited seek an order pursuant to (NSW) Uniform Civil Procedure Rules 2005, r 42.41(1)(d), and/or (CTH) Corporations Act 2001, s 1335, that the plaintiff CTI Resort Holdings Group Pty Limited give security for the defendants’ costs in the sum of $250,000, or such other sum as the Court deems fit.
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The ground for security – namely that which can be described as "corporate impecuniosity" – is plainly established. The plaintiff company has no assets, other than its cause of action in these proceedings. In short, it has, if it is unsuccessful in the proceedings, no capacity to pay an adverse costs order.
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A number of discretionary factors are relevant. First, it seems to me that the plaintiff, at least as the material presently stands, has a strongly arguable case for final relief. I am prepared to accept that this is a case in which the strength of the case is such not merely to be neutral on the question of security, as is usually the case if it is decided that the case is not unarguable but not clearly destined for success, but in this case weighs positively against a security order being made.
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The other discretionary consideration that was advanced, however – namely that the plaintiff's claim was defensive in character – I do not accept. The case does not have such characteristics as were listed by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 13 ACLC 437, which combined to make the plaintiff's case in truth a defensive one. Here, in substance, the plaintiff is alleging that the defendant has acted in breach of contract and/or in breach of its fiduciary duties, and is seeking to enforce against the defendant obligations that it alleges the defendant owed it. There is nothing defensive in character about that.
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Further, while there are some elements of a special relationship between the plaintiff and the defendant, I do not consider them of any moment in the circumstances of the case.
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There is no evidence to make good the proposition that an order for security would stultify the proceedings. When that submission is made in connection with a corporation, it is necessary for those who stand behind the corporation – essentially those beneficially interested – to demonstrate that they too are unable (as opposed to unwilling) to contribute security. In my view, the evidence here establishes overall only that they are unwilling, rather than unable, to do so.
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While the prima facie strength of the plaintiff's case is a relevant consideration, one cannot be certain that the plaintiff will succeed, and the prospect that the defendant will do so has to be acknowledged. It is the eventuality of that prospect that a security order is intended to serve. If it seemed that a security order would prevent the plaintiff from prosecuting what appears to be a strong case, then that would be a very good reason not to make it. But, as I have said, particularly given the limited form of security that would be appropriate in this case, I do not think that has remotely been established.
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The strength of the plaintiff's case has to be balanced against the injustice of allowing it to prosecute proceedings for the benefit of its shareholders in circumstances where it cannot meet an adverse costs order, and its shareholders are not exposed to any risk. All that would ordinarily be required in such a case is that the persons beneficially interested acknowledge that they are personally liable in respect of any adverse costs order. But, save for one of the shareholders – who has indicated that he would be prepared to guarantee 20 per cent of any adverse costs order conditional upon the other shareholders guaranteeing their proportions, which condition has not been satisfied – that has not been forthcoming.
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In those circumstances, the appropriate course is to make an order for security, but upon terms that enable it to be satisfied, if the shareholders so wish, by acknowledging that they would be personally liable for any adverse costs order.
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As to quantum, the defendants limited their claim at this stage of the proceedings to $50,000, and in the light of that no submission was made that the quantum was inappropriate.
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The Court orders that:
Unless by 4 September, 2015 each of Daniel Michael Isaac Wakim, Zhaojian (Owen) Zhang and Xio Hui (Susan) Zhao has filed an acknowledgment that he or she is jointly and severally with the others liable to the defendant as if bound by any costs order made against the plaintiff in these proceedings, the plaintiff give security for the defendants’ costs in the sum of $50,000 in a form acceptable to the Registrar.
The proceedings be stayed unless and until the security is given or the condition referred to in order 1 is satisfied.
The plaintiff pay the defendants’ costs of the motion.
Application to vary costs order
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If I thought that the costs of the proceedings had been significantly increased by the quantum of the security claimed or the manner in which they were pursued, then the position might be otherwise; but it seems to me that the motion has been pursued in an economical way, despite the ambitious quantum of the initial claim, and that it could easily have been averted by the shareholders taking the conventional course of acknowledging that they were personally liable.
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I decline to vary the costs order.
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Decision last updated: 19 August 2016
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