Ceni Enterprises Pty Ltd (in liq) v Sykes, in the matter of Ceni Enterprises Pty Ltd (in liq)

This case sits in the middle of a larger commercial dispute about the Australian Autosmart business. Glassurn Pty Ltd operated a business manufacturing and selling Autosmart-branded car cleaning products to Australian franchisees as the Australian master franchisee of Autosmart International Limited in the United Kingdom. Its parent company, Ceni Enterprises Pty Ltd, was owned by interests associated with Adrian Sykes and Michael Fidler.

The judgment records that by 1 July 2017 the relevant franchise agreements had expired, but the parties continued trading on the same basis while a new master franchise agreement remained possible. At the same time, there was a long-running shareholder dispute about Ceni's historical affairs. According to the liquidator's evidence summarised by the Court, Autosmart International had made an offer to purchase Hermitage's shares in Ceni at a price that implicitly valued the plaintiffs at $6,764,060, while Mr Sykes also offered to sell his own 49% shareholding for $2.15 million.

The plaintiffs' core allegation was that, while those discussions were unfolding, Mr Sykes was actually negotiating with David Buckley to cause the sale of all of Glassurn's assets to Autosmart Australia Pty Ltd, a company under Mr Buckley's control. The plaintiffs alleged this was a covert transaction on very favourable terms to the buyer and that it was pursued while Mr Sykes was buying time by referring to a tax audit and avoiding the risk of being removed as director by the majority shareholder if the plan became known.

The Court was not deciding the final truth of those allegations in this judgment. Instead, Markovic J was dealing with interlocutory applications about security for costs and a separate application for injunctive relief under the Corporations Act.

There were two separate applications before the Court. First, the first and second defendants, Adrian Sykes and Sykes Phoenix Pty Ltd, sought security for their costs in the sum of $747,722.59. They also sought an injunction under section 1324 of the Corporations Act restraining the plaintiffs from paying, disbursing or otherwise removing assets, including cash at bank, for the purpose of paying the Sykes parties' legal costs and disbursements.

Secondly, the third and fourth defendants, Autosmart Australia Pty Ltd and David Buckley, sought security for their costs in the sum of $750,000.

The security applications were brought under section 56 of the Federal Court of Australia Act and or section 1335 of the Corporations Act. Because the plaintiffs were corporations, section 1335 was especially important. That provision allows the Court to require security if credible testimony gives reason to believe the corporation will be unable to pay the defendant's costs if the defendant succeeds.

So the Court's task was not to decide the whole case. It had to ask whether the plaintiffs could meet an adverse costs order, whether security should be ordered as a matter of discretion, and if so in what amount and on what terms. It also had to decide whether the injunction sought by the Sykes parties should be granted.

The Court said the principles were settled. For a corporate plaintiff, the first step under section 1335 is whether there is credible testimony giving reason to believe the company will be unable to pay the defendant's costs if the defendant succeeds. If that threshold is met, the Court then considers discretionary factors.

Markovic J adopted the usual approach described in earlier authority. The central concern is fairness. The Court must balance adequate and fair protection for defendants against the risk of injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing the conduct of the proceeding. The factors are not closed, but commonly include whether the application was brought promptly, the strength and bona fides of the plaintiff's case, whether the plaintiff's impecuniosity was caused by the defendant's conduct, whether the application is oppressive, whether someone standing behind the company is willing to provide security, and whether public interest considerations weigh against an order.

On the threshold question, there was no real dispute. The liquidator, Mr Billingsley, gave evidence that the plaintiffs could not provide the combined security sought by the defendants without obtaining litigation funding, and that they also needed funds to run their own case. As at 11 June 2024, he held $1,358,167.90 cash on hand across the two liquidations, made up of $11,207.68 in Ceni and $1,346,960.22 in Glassurn. He said the plaintiffs were not in a position to provide the security sought collectively because they did not have $1.5 million available for that purpose and also needed to fund their own legal costs. The plaintiffs' solicitor gave evidence to similar effect.

The Court accepted that the plaintiffs would be unable to pay the defendants' costs if the defendants were successful. That meant the threshold for considering security was clearly met. The real issue was discretion.

The plaintiffs advanced four main discretionary arguments. They said their case was strong, that the defendants' conduct had caused their financial position, that ordering security would prejudice them because they would need litigation funding, and that public interest considerations weighed against security.

On the merits, the plaintiffs argued this was not a case where the Court should remain neutral. They said the contemporaneous records and admissions showed a dishonest scheme in clear terms, especially against the Sykes parties. They criticised the Sykes parties' defence as largely non-responsive and said the Buckley parties had effectively admitted much of the relevant conduct.

The Court did not accept that submission. Markovic J said the proceeding was still at an early stage. The plaintiffs had filed a detailed statement of claim and the defendants had filed defences, but the defendants had not yet served their evidence. The allegations were serious and many aspects were denied. The only evidence before the Court in support of the claims was the evidence marshalled by the liquidator, who had understandably presented the case at its highest. In those circumstances, the Court considered it too early to make a realistic assessment of prospects. The Court did not question the bona fides of the claim, but treated the strength of the case as neutral.

That conclusion also affected the argument that the defendants had caused the plaintiffs' impecuniosity. The plaintiffs said the alleged covert sale of Glassurn's assets on fire sale terms had caused their financial position and that it would be unfair for defendants to rely on that very position to seek security. But because the Court was not prepared at this stage to accept the plaintiffs' allegations as established, it could not conclude that the defendants' conduct had caused the plaintiffs' impecuniosity.

On prejudice, the plaintiffs did not say security would stultify the proceeding. Instead, they said they would need commercial litigation funding, which would come at material cost and reduce any recovery. The Court accepted that funding would affect recoveries if the plaintiffs succeeded, but did not regard that as prejudice of a kind weighing against security. Markovic J said litigation funding is a commercial arrangement that allows parties such as companies in liquidation to pursue claims they otherwise could not fund. In that sense, it was a vehicle enabling the proceeding to continue, not a reason to refuse security.

The plaintiffs also argued that public interest weighed against security because the case involved alleged covert conduct and alleged contraventions of statutory and fiduciary duties. The Court recognised that public interest can be relevant in some cases, but held that this argument again depended on accepting the plaintiffs' allegations at an early stage. Because the Court was not prepared to do that, it did not find a public interest factor weighing against security.

The Court granted both security for costs applications. The plaintiffs were ordered to provide security of $747,000 for the costs of the first and second defendants up to the service of their evidence, within 21 days, either by payment into Court or by unconditional bank guarantee in a form acceptable to the New South Wales District Registrar.

The plaintiffs were also ordered to provide security for the costs of the third and fourth defendants in two stages: $400,000 within 21 days, and a further $350,000 within 14 days after any unsuccessful mediation or 12 weeks before the commencement of any final hearing, whichever occurred earlier. If the required security was not provided on time, the proceeding against the relevant defendants would be stayed until further order. The defendants were also given liberty to apply for further security on reasonable notice.

The Court dismissed paragraph 2 of the Sykes parties' interlocutory application, which was the application for injunctive relief under section 1324 of the Corporations Act. The costs orders were split. The plaintiffs were ordered to pay the first and second defendants' costs of the successful security application and the third and fourth defendants' costs of their interlocutory application. The first and second defendants were ordered to pay the plaintiffs' costs of the dismissed injunction application.

The orders are clear on those outcomes. However, the full reasoning for the dismissal of the section 1324 application is not fully visible in the text used for this page, so that part of the decision should be read with care if you need detailed analysis of the injunction issue.

There are two commercial themes in this case. The first is governance around asset sales. The allegations arose in a setting where franchise arrangements had expired, trading continued informally, a shareholder dispute was already underway, and a director was alleged to have negotiated a sale of company assets to a company controlled by another defendant. Even though the Court did not decide those allegations finally, that combination of facts is a warning sign for any business. If a company is negotiating a sale while there is internal conflict or uncertainty about contractual rights, the process needs to be transparent, documented and properly authorised.

The second theme is litigation risk management. A company in liquidation may have a potentially valuable claim, but that does not remove the need to deal with adverse costs exposure. If the company cannot pay the other side's costs if it loses, security for costs is a real possibility. Courts will often focus on fairness and practical funding arrangements rather than treating the seriousness of allegations as decisive at an early stage.

For directors, shareholders and liquidators, the case is a reminder to think about evidence and funding separately. You may believe the documents strongly support your position, but unless the Court can realistically assess the merits on the material before it, that may not help much on an interlocutory security application. Early planning about cash, insurance, funding and staged security can make the difference between a claim moving forward and a claim being stayed.