In the matter of Jimmy's Recipe Pty Limited (No 4)

[2020] NSWSC 1244

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Jimmy’s Recipe Pty Limited (No 4) [2020] NSWSC 1244

Hearing dates:

20 July 2020

Date of orders:

11 September 2020

Decision date:

11 September 2020

Jurisdiction:

Equity - Corporations List

Before:

Rees J

Decision:

Proceedings dismissed, fifth defendant’s costs to be his costs in any further proceedings commenced by a party concerning the same matter.

Catchwords:

COSTS – derivative action – liquidators appointed to company – plaintiff seeks dismissal with no order as to costs on basis of Lai Qin – defendant expects liquidators may pursue same cause of action, potentially funded by plaintiff – r 42.20 UCPR applies.

Legislation Cited:

Bankruptcy Act 1966 (Cth), 58(3)(b)

Civil Procedure Act 2005 (NSW), s 91(1)

Corporations Act 2001 (Cth), ss 237, 477, 506

Uniform Civil Procedure Rules 2005 (NSW), rr 42.19(2), 42.20(1)

Cases Cited:

Australiawide Airlines Ltd t/as Regional Express v Aspirion Pty Ltd [2006] NSWCA 365

Barnes v Addy (1874) LR 9 Ch App 244

Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52 at [124]; (2008) 227 FLR 43; (2008) 65 ACSR 661; (2008) 245 ALR 780

In the matter of Jimmy's Recipe Pty Limited [2018] NSWSC 1331

In the matter of Jimmy’s Recipe Pty Limited [2020] NSWSC 93

In the matter of Jimmy’s Recipe Pty Limited (No 2) [2020] NSWSC 632

Nichols v NFS Agribusiness Pty Ltd [2018] NSWCA 84

Re Minister for Immigration and Ethnic Affairs (Cth); Ex Parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6

Shellharbour City Council v Minister for Local Government [2017] NSWCA 256

Category:

Costs

Parties:

Gek Sim Tsia (Plaintiff)
Chee Wee Seow (Fifth Defendant)

Representation:

Counsel:
D Smallbone and W Chan (Plaintiff)
P L Dodson (Fifth Defendant)

Solicitors:
Brown Wright Stein Lawyers (Plaintiff)
Cohen & Krass (Fifth Defendant)

File Number(s):

2017/200809

Judgment

1. The plaintiff, Gek Tsia, seeks an order that these proceedings be dismissed with no order as to costs. The only remaining defendant for practical purposes, the fifth defendant, Chee Seow, opposes an order in these terms. If dismissal of these proceedings is the end of the matter, then Mr Seow is content to bear his costs, thought to be between $50,000 and $100,000. But Mr Seow is concerned that further proceedings may be brought by the liquidators of the first defendant, Jimmy’s Recipe Pty Limited (in liquidation), funded by the plaintiff.

2. During the course of the hearing, I proposed for the parties’ consideration an order in respect of Mr Seow’s costs in terms that, if the liquidators further prosecute the claims of Jimmy’s Recipe which have been made in these proceedings, then Mr Seow’s costs of these proceedings would be his costs in the further proceedings. As the liquidators did not appear at the hearing, the liquidators’ attitude was sought. No consent was forthcoming. Thus it is necessary to determine an appropriate costs order. The plaintiff also seeks her costs of Mr Seow’s application for an order in terms other than she has proposed.

History of proceedings

3. These proceedings have involved a series of unfortunate but unremarkable events. Drawing on the various judgments that have been given in this matter (In the matter of Jimmy's Recipe Pty Limited [2018] NSWSC 1331; In the matter of Jimmy’s Recipe Pty Limited [2020] NSWSC 93 and In the matter of Jimmy’s Recipe Pty Limited (No 2) [2020] NSWSC 632), Jimmy’s Recipe operated a Malaysian restaurant in Sydney near Town Hall. Alwin Chong, the third defendant, and his mother Norannie Chong, the fourth defendant, were directors and shareholders of the company. In 2010, the plaintiff became a 25% shareholder.

4. In 2016, the second defendant, Jimmy’s Recipe Gateway Pty Limited, was incorporated and began operating a Malaysian restaurant in the Gateway building near Circular Quay, using substantially the same recipes and livery as Jimmy’s Recipe. Alwin Chong was also a director and shareholder of Jimmy’s Recipe Gateway. Mr Seow was a director and shareholder of Jimmy’s Recipe Gateway.

5. On 3 July 2017, an Originating Process was filed commencing these proceedings. The defendants were then Jimmy’s Recipe, Jimmy’s Recipe Gateway and Alwin Chong. In September 2017, Norannie Chong was joined as fourth defendant. The plaintiff sought relief from oppression in relation to Jimmy’s Recipe. In particular, complaint was made that another “Jimmy’s Recipe” restaurant had been established at Circular Quay through Jimmy’s Recipe Gateway and the business, name, goodwill and intellectual property of Jimmy’s Recipe had been appropriated to the advantage of the defendants. The plaintiff also sought, pursuant to a grant of leave under section 237 of the Corporations Act 2001 (Cth), relief for breach of director’s duties. Complaint was also made in respect of discriminatory repayments said to have been made to the third and fourth defendants’ loan accounts. The plaintiff sought a compulsory purchase order in respect of her shares, an account for money taken as ‘wages’, recovery against the company of the plaintiff’s shareholder loan debt or, alternatively, the appointment of a receiver or liquidator.

6. As a shareholder of Jimmy’s Recipe, the plaintiff had standing to bring an oppression suit without requiring leave under section 237 of the Corporations Act. The alleged breaches of duty by Alwin and Norannie Chong were also matters said to have amounted to oppressive conduct of the affairs of Jimmy’s Recipe such as to ground relief for oppression. Thus, the plaintiff needed leave to pursue some of the relief sought, but not all.

7. In February 2018, Brereton J granted leave under section 237 of the Corporations Act to the plaintiff to bring these proceedings on behalf of Jimmy’s Recipe against Jimmy’s Recipe Gateway, Alwin and Norannie Chong and Mr Seow. Mr Seow was joined to the proceedings. The claim against Mr Seow was a Barnes v Addy (1874) LR 9 Ch App 244 claim for knowing involvement and knowing assistance. In June 2018, Mr Seow filed a defence saying that he was told that Alwin Chong owned the intellectual property rights and was entitled to permit Jimmy’s Recipe Gateway to use the intellectual property. If Alwin Chong was in breach of his director’s duties to Jimmy’s Recipe, then Mr Seow was not aware of the breaches nor knowingly involved.

8. The proceedings were then waylaid for a period of time by a contempt motion. In October 2017, Alwin and Norannie Chong gave undertakings to the Court that the takings of the business would be put through the till and banked. The undertakings were breached and $137,555 was not banked over a five month period. In 2018, Brereton J made orders for Alwin and Norranie Chong to give weekly disclosure of documents to enable the plaintiff to ascertain whether they were adhering to their undertakings and, by November 2018, it had become apparent that they were not so adhering. In February 2019, the plaintiff filed a motion charging Alwin and Norannie Chong with contempt of court. This motion did not concern Mr Seow. Affidavits were served, notices to produce and subpoenas issued. Further motions were issued and heard in respect of privilege, substituted service, amendment of the contempt motion and setting aside subpoenas. The contempt motion was heard in June 2019 and, on 19 February 2020, Alwin and Norannie Chong were found guilty of contempt of court and ordered to pay the plaintiff’s costs of the motion on an indemnity basis payable forthwith: In the matter of Jimmy’s Recipe Pty Limited [2020] NSWSC 93.

9. On 24 February 2020 the parties entered into a Deed of Settlement, the details of which are set out in In the matter of Jimmy’s Recipe Pty Limited (No 2) [2020] NSWSC 632. In short, the parties agreed for these proceedings to be dismissed on the plaintiff receiving $565,000, being $515,000 from Alwin Chong and $50,000 from Mr Seow. Payment was due on 23 March 2020.

10. On 18 March 2020, Alwin and Norannie Chong put Jimmy’s Recipe into voluntary administration. On 23 March 2020, Mr Seow paid $50,000 in accordance with the deed. Alwin Chong paid nothing. On 3 April 2020, Alwin and Norannie Chong became bankrupt on their own petition and thus the plaintiff’s proceedings against them were stayed: section 58(3)(b) of the Bankruptcy Act 1966 (Cth). On 6 April 2020, Jimmy’s Recipe ceased to trade.

11. In April 2020, the plaintiff and Mr Seow each filed competing motions seeking to have the Deed of Settlement construed: the plaintiff contended that the effect of the deed was that Mr Seow was obliged to pay the amounts unpaid by Alwin Chong while Mr Seow contended otherwise.

12. On 1 May 2020, the creditors of Jimmy’s Recipe resolved to wind up the company and the administrators became the liquidators. On 26 May 2020, Leeming JA dismissed the motions of both the plaintiff and Mr Seow, concluding that the plaintiff was not entitled to demand $515,000 from Mr Seow under the deed. Orders were subsequently made for the plaintiff to repay the $50,000 to Mr Seow.

13. In the meantime, the Official Trustee in Bankruptcy of Alwin Chong’s estate is proceeding on the basis that Alwin Chong owns the trademark of Jimmy’s Recipe and is taking steps to sell it to the highest bidder. So too, the liquidators of Jimmy’s Recipe are interested to sell the company’s chose in action – which, until now, has been pursued by the plaintiff in these proceedings – to the highest bidder. In response to my query referred to at [2], the liquidators advised that no one had yet made a firm offer to acquire the chose in action from the liquidators but, if an offer was made, the offer would be put to the market so that Mr Seow would have the opportunity to purchase the chose of action himself.

14. On 24 June 2020, the plaintiff’s solicitors wrote to the parties advising that, as Jimmy’s Recipe was now in liquidation, the leave granted by Brereton J under section 237 of the Corporations Act had ceased to be operative and the plaintiff could no longer carry on the prosecution of the company’s claims, which remained a decision for the liquidators. The liquidators advised that they did not seek to continue the proceedings and, further:

… any continuance of legal action by the Liquidators … to recover claims associated with Jimmy’s Recipe … subject to the current proceedings would be subject to any funding that may be provided by creditor(s).

Mr Moss and I reserve our rights to commence new proceedings on behalf of the Company against any of the 2^nd, 3^rd, 4^th and 5^th defendants with respect to any potential legal recovery claim that may be available to the Company.

15. On 26 June 2020, the plaintiff’s solicitor wrote to the parties proposing an order that the proceedings be dismissed with no order as to costs, suggesting that this was the appropriate order in accordance with Re Minister for Immigration and Ethnic Affairs (Cth); Ex Parte Lai Qin (1997) 186 CLR 622; [1997] HCA 6 (Lai Qin). The liquidators consented to such an order

Submissions

16. Mr Seow submitted that Lai Qin does not apply because there has been no settlement and the proceedings have not been rendered “futile” in the relevant sense. Mr Seow has not settled with the plaintiff or the company, has not capitulated, remains prepared to defend the claims against him, and has been put to considerable expense in defending unsubstantiated claims which he has always denied. Rather, the situation was analogous to a discontinuance and the usual cost consequences of a discontinuance should follow.

17. Further, Mr Seow submitted that, as the underlying causes of action have not been determined, the proceedings may be revived by the liquidators, with the participation and assistance of the plaintiff. The liquidators have expressly reserved their rights to do so. If the plaintiff is dissatisfied with any perceived reluctance on the part of the liquidators to sue or continue proceedings, she can seek an order that the liquidators commence proceedings (sections 477 or 506, Corporations Act) or that a receiver be appointed by the court to pursue the statutory causes of action. The plaintiff may take steps to acquire the statutory choses in action from the liquidators and may bring the proceedings in her own right. If such proceedings are pursued by the liquidators, presumably adopting the plaintiff’s pleadings and evidence, but are unsuccessful, an eventual costs order in favour of Mr Seow would not compensate him for his true costs of resisting the claims against him.

18. The plaintiff submitted that the grant of leave to the plaintiff to bring derivative proceedings is no longer operative: Chahwan v Euphoric Pty Ltd t/as Clay & Michel [2008] NSWCA 52 at [124]; (2008) 227 FLR 43; (2008) 65 ACSR 661; (2008) 245 ALR 780). The claims made in the proceedings on behalf of Jimmy’s Recipe can now only be made by the company through its liquidators, which would require a cross-claim in its name or fresh proceedings. Mr Seow seeks costs against the plaintiff in circumstances where she no longer has any control of the company or the litigation. Mr Seow does not seek a costs order against the company on whose behalf he is sued. In so doing, it was said that he entered into the domain of the internal affairs of the company and asserted that the plaintiff was capitulating because she does not seek to pursue fresh routes towards the company continuing the action that she can no longer control or prosecute. If the plaintiff were to embark on any of the courses of action suggested by Mr Seow, that would not be a continuation of the present proceedings. The subject matter of the proceeding had evaporated due to the insolvency of Jimmy’s Recipe. The proceedings for the recovery of value for the shareholders had become futile. The fifth defendant's interpretation of the authorities was said to be too narrow.

Consideration

19. In Lai Qin at 625, McHugh J stated:

If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings.

20. It does appear that the plaintiff and the fifth defendant have acted reasonably in commencing and defending these proceedings. Further prosecution of the proceedings has become futile, or indeed impermissible, as the leave granted by Brereton J under section 237 of the Corporations Act to bring a derivative suit has been superseded by the appointment of liquidators to Jimmy’s Recipe, who do not wish to continue the proceedings.

21. Where proceedings are dismissed without a determination of the merits, section 91(1) of the Civil Procedure Act 2005 (NSW) provides:

Effect of dismissal of proceedings

(1)   Dismissal of—

(a)   any proceedings, either generally or in relation to any cause of action, or

(b)   the whole or any part of a claim for relief in any proceedings,

does not, subject to the terms on which any order for dismissal was made, prevent the plaintiff from bringing fresh proceedings or claiming the same relief in fresh proceedings.

22. Further, rule 42.20(1) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) provides:

Dismissal of proceedings etc

(1)   If the court makes an order for the dismissal of proceedings, either generally or in relation to a particular cause of action or in relation to the whole or part of any claim, then, unless the court orders otherwise, the plaintiff must pay the defendant’s costs of the proceedings to the extent to which they have been dismissed.

Similarly, where proceedings are discontinued, then rule 42.19(2) of the UCPR provides, “Unless the court orders otherwise”, the plaintiff must pay the defendant’s costs incurred until the date of discontinuance.

23. In Australiawide Airlines Ltd t/as Regional Express v Aspirion Pty Ltd [2006] NSWCA 365, Bryson JA (with whom McColl and Basten JJA agreed) held at [48]:

… Lai Qin is not readily applicable to decision under r 42.20(1). UCPR r 42.20 is not entirely consistent with McHugh J.'s observation that the proper exercise of the costs discretion will usually mean that the Court will make no order as to costs. Justice McHugh's observations were directed to the discretionary power in O71 r 39 of the High Court Rules (Cth) …which was discretionary overall, whereas in contrast r 42.20(1) creates a starting point by requiring “…the plaintiff must pay the defendant's costs of the proceedings …” unless that outcome is displaced by a discretionary decision. It should in my opinion no longer be said that if the moving party, or if both parties have acted reasonably in commencing and defending proceedings the proper exercise of the costs discretion will usually mean that the Court will make no order as to the costs of the proceedings; observance of the starting point under r 42.20 will make this outcome less usual than it earlier was.

24. Thus, where rule 42.20(1) applies, its express terms apply such that “unless the court orders otherwise, the plaintiff must pay the defendant’s costs”: Australiawide Airlines at [10]. Australiawide Airlines makes plain that the Court should observe the starting point in the relevant rule and only make a different order if that starting point is displaced by a discretionary decision. Lai Qin continues to assist in respect of costs orders which are not constrained by rules such as rr 42.19 or 42.20 of the UCPR. The Court of Appeal’s consideration of Lai Qin in such circumstances is helpfully collated by Payne JA in Nichols v NFS Agribusiness Pty Ltd [2018] NSWCA 84 at [26] to [29]. One recent example is Shellharbour City Council v Minister for Local Government [2017] NSWCA 256.

25. Thus, the starting point for the exercise of the Court’s discretion in respect of costs is that the plaintiff must pay Mr Seow’s costs of these proceedings. That a plaintiff bringing derivative proceedings may be exposed to a costs order should the proceedings fail was alluded to by Brereton J when leave was granted under section 234, in In the matter of Jimmy's Recipe Pty Limited [2018] NSWSC 1331 at [27]:

Although derivative proceedings brought with leave under s 237 are brought in form, in the name of, and on behalf of, the company, it is in substance the derivative claimant who brings those proceedings. Leave to bring proceedings on behalf of and in the name of the company does not amount to leave to resort to the company’s assets to fund those proceedings. Unless and until an order to that effect is made, the present plaintiff will have to fund the proceedings herself. As things stand, the company will not incur any costs from her prosecution on its behalf of the proceedings. If the proceedings fail, it is entirely open to the Court, under s 242(a), to make any adverse costs order against the present plaintiff, as the person who was granted leave to bring the proceedings. …

26. Against this, the plaintiff has pursued these proceedings bona fide and in good faith for the benefit of Jimmy’s Recipe and has not herself contributed to the current position. But neither has Mr Seow. There is nothing to stop the plaintiff or the liquidators commencing fresh proceedings pursuing the same causes of action against Mr Seow, whose concerns that the plaintiff may fund such litigation are, I think, well founded given the intensity with which these proceedings have been prosecuted by the plaintiff to date.

27. Mr Seow’s willingness to bear his own costs if dismissal of these proceedings is an end of the matter is perfectly reasonable. But if the claims made against him are re-agitated in fresh proceedings, brought either by Jimmy’s Recipe, the plaintiff – or any other defendant for that matter – then it seems to me that fairness dictates that either:

1. the plaintiff in fresh proceedings should first pay Mr Seow’s costs of these proceedings before prosecuting fresh proceedings; or

1. Mr Seow’s costs of defending these proceedings should be his costs in the cause in the fresh proceedings.

28. The latter course is acceptable to Mr Seow and a more advantageous arrangement for any prospective plaintiff in fresh proceedings. Mr Seow’s costs should include his costs in respect of this issue, in respect of which he has substantially succeeded in the face of substantial opposition.

29. For these reasons I make the following orders:

1. Dismiss the proceedings.

2. If any party to these proceedings commences further proceedings against the fifth defendant in respect of the subject matter of these proceedings, then the fifth defendant’s costs of these proceedings will be his costs in the further proceedings, such costs to include his costs in respect of the appropriate orders to be made on dismissal of these proceedings.

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Decision last updated: 11 September 2020