ACN 105 921 962 Pty Ltd v Wiggett

Judgment 1By Interlocutory Process filed on 15 August 2014, the Third Defendant, Mr Harry Fung, seeks orders for security for costs in the amount of $95,000 under r 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") and s 1335 of the Corporations Act 2001 (Cth). He also seeks an order that, until such security is provided, the proceedings should be stayed. 2The background to the proceedings was summarised by Brereton J in dealing with an earlier application by the Plaintiff, Elsmore Resources Ltd ("Company"), for summary judgment, which his Honour dismissed by his judgment delivered on 18 July 2014 ([2014] NSWSC 953). I should briefly refer to several aspects of that background. The Company is listed on Australian Securities Exchange Ltd ("ASX") although trading in its shares is presently suspended. Mr Tong Hong Chung is a major shareholder in the Company. The Company brought proceedings against four parties in respect of matters surrounding its listing and claims that an amount of $2,209,000 paid by way of subscription for its shares was required to be held on trust for it, under the terms of an agreement between the Company and Periwinkle Investments Pty Ld, the Second Defendant (which is a company associated with Mr Fung) ("Periwinkle"), and remitted to it on its listing on ASX on 23 December 2013. Summary judgment was given in favour of the Company against the First Defendant, Mr Ashley Howard, Periwinkle and the Fourth Defendant, HF Global Financial Solutions Pty Ltd. 3The claim brought by the Company against Mr Fung initially relied on the terms of a settlement alleged to have been reached on 11 March 2014, including on a guarantee given by Mr Fung on that date. Immediately prior to the hearing of this application, the Company served, but has not yet filed, a draft Statement of Claim which sought to expand its case against Mr Fung to include a claim for breach of trust and further or alternatively knowing assistance for breach of trust. That claim is pleaded on the basis that, on 7 November 2013, the Company transferred $150,000 of share subscriptions that it had received to Mr Fung on a particular basis, as to which it appears the Company brings a claim for breach of trust. The Company also pleads that, on 2 December 2013, it transferred $100,000 to Periwinkle on trust; and, on 13 December 2013, it transferred $779,000 to Periwinkle on trust and it appears that the claims in respect of those matters are in the nature of a claim for knowing involvement for breach of trust. The allegations of knowing involvement are pleaded on the basis that Mr Fung was involved in effecting transfers of the trust funds and that he "knew or ought to have known" that those transfers were a breach of trust and in breach of Periwinkle's "fiduciary duties as trustee". 4Mr Fung relies on his affidavit dated 27 August 2014, which outlines Periwinkle's role in the Company's listing, refers to alleged approval obtained from Mr Howard, then a director and later chairman of the Company, to the transfer of funds for Periwinkle's expenses and also refers to a claim by Periwinkle against the Company in respect of unpaid fees. Mr Fung's evidence is that other payments from the relevant accounts were made on Mr Howard's instructions. Mr Fung also relies on the affidavit of his solicitor, Mr John Gdanski, dated 15 August 2014 which sets out correspondence with the Company's solicitors in respect of the security for costs application, information as to the Company's financial position and Mr Gdanski's estimate of the costs likely to be incurred in the defence of the proceedings, to which I will refer below. That estimate was given prior to the introduction of the additional claim in respect of breach of trust in the draft Statement of Claim, but after the Company's solicitors had foreshadowed such a claim in correspondence. 5The Company relied on voluminous evidence in respect of the security for costs application, much of which is, at best, of tangential relevance. In particular, it read Mr Chung's affidavit dated 24 February 2014, a second affidavit dated 24 February 2014 but apparently sworn on 10 March 2014, a third affidavit dated 12 April 2014, a fourth affidavit dated 12 May 2014 and a fifth affidavit dated 29 May 2014, all of which relate to the substance of the dealings in respect of the share subscription monies. It read an affidavit of Mr Timothy Rout dated 25 August 2014 which referred to payments out of the relevant accounts, which do not appear to be substantially in dispute although the question whether they involve a breach of trust by Mr Fung or whether he was involved in a breach of trust by Periwinkle are likely to be in dispute. The Company also relied on an affidavit of Mr Nathan Cecil dated 11 July 2014 relating to the circumstances of the earlier mediation, which appears to be primarily relevant to its claim on a guarantee against Mr Fung. 6The Company also relied on paragraphs 3-8 of Mr Fung's affidavit dated 11 July 2014 which were tendered as an admission, by which Mr Fung admitted his knowledge of certain payments into a bank account which he had set up on account of the Company and the transfer of monies to a second account which he had also set up on account of the Company at Mr Howard's instructions. The Company also relied on extracts from the cross-examination of Mr Fung before Brereton J on 2 June 2014 which were also tendered by way of admission. Mr Fung there referred to his involvement in opening the relevant accounts and to the transfer of monies out of those accounts, which he claimed was undertaken in accordance with Mr Howard's instructions; denied knowledge of the nature of the money in the relevant accounts; and also claimed to have little knowledge of the matters involved in an initial public offering. Applicable principles 7Mr Fung relied primarily on r 42.21 of the UCPR to support the security for costs application, and it is convenient to proceed on that basis, although recognising that an order for security for costs may also be supported under s 1335 of the Corporations Act if it appears by credible testimony that there is reason to believe that a corporation will be unable to meet a defendant's costs if successful in his or her defence. The Court also has an inherent power to order security as an incident of its control over its own practice and procedure to procure proper and effective administration of justice and prevent abuse of process: Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 at [34]; LRSM Enterprise Pty Ltd v Zurich Australia Insurance Ltd [2014] NSWCA 88 at [14]. 8Rule 42.21(1)(d) of the Uniform Civil Procedure Rules relevantly provides that if in any proceedings it appears to the Court, on the application of a defendant, that there is reason to believe that a plaintiff, a corporation, will be unable to pay the defendants' costs if ordered to do so, the Court may order the plaintiff to give such security as the Court thinks fit, in such manner as the Court directs, and that the defendant's costs of the proceedings and the proceedings be stayed until the security is given. Rule 42.21(1A) in turn identifies matters to which the Court may have regard in determining whether it is appropriate to make an order for security for costs, in an inclusive manner, including the prospects of success or merit of the proceedings, the genuineness of the proceedings, the plaintiff's impecuniosity, whether the plaintiff's impecuniosity is attributable to the defendant's conduct, whether the plaintiff is effectively in the position of a defendant, whether an order for security for costs would stifle the proceedings, whether the proceedings involve a matter of public importance, whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant, the costs of the proceedings, whether the security sought is proportionate to the importance and complexity of the subject matter in dispute and the timing of the application for security for costs. 9Both parties accepted that the issues which arose in a security for costs application were those identified by Brereton J in Polstead Pty Ltd (in liq) v Shah [2009] NSWSC 560 at [6], namely, whether the grounds referred to in the rule are established; if those grounds are established, whether an order for security for costs should be made as a matter of discretion; and the quantum of any order to be made and the terms on which it should be made. Reason to believe that the Company may be unable to pay a claim for costs 10An initial question is whether there is reason to believe (as contemplated by UCPR r 42.21(1)(d)) that the Company would be unable to pay Mr Fung's costs of the proceedings if ordered to do so. This requirement will generally be satisfied if there is a real chance, in events that are reasonably possible, that the relevant corporation will be unable to pay those costs: Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205; Deangrove Pty Ltd v Buckby [2002] FCA 1544 at [4]; ACN 105 921 962 Pty Ltd v Wiggett [2012] NSWSC 1526 at [4]. In Wollongong City Council v Legal Business Centres Pty Ltd [2012] NSWCA 245, Beazley JA (with whom Meagher and Barrett JJA agreed) observed that the Court should adopt a "practical commonsense approach" to the examination of a corporation's financial affairs (at [28]) and noted that the defendant bears the onus of establishing that there is reason to believe that the plaintiff will be unable to pay those costs if unsuccessful and, if that is established, the onus shifts to the plaintiff to establish a reason why security should not be granted (at [29]-[30]). 11Mr Cox, who appeared for the Company, essentially conceded that there was reason to believe that the Company may be unable to pay a claim for costs, although he maintained that the Company was solvent and that aspects of its financial position were relevant to the exercise of the Court's discretion whether to order security for costs. To the extent that there is any qualification to that concession, I am satisfied that there is reason to believe that the Company may be unable to meet an order or costs against it. The Company incurred a substantial net loss after income tax for the half year ended 31 December 2013 and its quarterly report to the ASX for the period ending 30 June 2014 reported a net operating cash outflow of $124,000; cash at the end of the quarter of $15,000; and a loss in the second half of the financial year of approximately $4 million. The Company appears to be dependent on raising additional finance for other activities; and the amount attributable to plant and equipment is treated in its accounts as a non-current asset and may not be readily realised. Proceedings have also been commenced against the Company and Mr Chung in the Federal Court claiming damages in excess of $1.2 million in respect of a disputed transfer of shares in the Company, which it appears do not relate to the matters in issue in these proceedings. The Company also issued an announcement to the ASX on 31 July 2014 which indicates that in excess of 19.3 million fully paid shares in it have apparently been issued for which it has not received payment, and it has requested that the voluntary suspension of the trading of its shares on ASX be extended to the end of February 2015. 12Mr Gdanski also refers to costs and disbursements incurred by Mr Fung in respect of the proceedings to date, as to which Mr Fung has an order for costs in his favour in respect of the application for summary dismissal, which is not payable at this point. That order is relevant to this application so far as it is another claim against the Company that should be taken into account in assessing whether there is reason to believe that it would be unable to meet an order for costs made against it, and also relevant to the quantum of costs that should be ordered as noted below. Discretionary factors 13I turn now to the discretionary factors relevant to an application for security for costs, as to which the onus shifts to the Company to establish a reason why security should not be ordered. I have referred to the factors specified in UCPR r 42.21(1A) above, which are broadly consistent with those identified by Beazley J (as her Honour then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 at [197-198]. 14Mr Fung submits, and I accept, that the application has been brought in good faith, given the public information as to the Company's financial position and the fact that the Company has not offered any security for Mr Fung's costs of the proceedings, in correspondence between the parties. There is no suggestion that there has been delay in the application for security for costs, which was brought promptly after Mr Fung was joined as party to the proceedings, although the parties properly deferred the hearing of the application to make at least some attempt to resolve the question of security between themselves. 15The second factor is the strength and bona fides of the Company's case. The commentary to r 42.21 in Ritchie's Uniform Civil Procedure NSW in turn notes, in respect of the relevance of the success or merits of the proceedings, that if the plaintiff's claim appears reasonably arguable, it is not appropriate to attempt a more detailed assessment of the prospects of success and refers to Fiduciary Ltd v Morning Star Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [37]-[39] in support of that proposition. In Jazabas Pty Ltd v Haddad [2007] NSWCA 291; 65 ACSR 276 at [83], McClellan CJ at CL (with whom Mason P agreed) observed at [83] that: "The question which must be asked is whether the claimants' case is bona fide and raises real issues to be tried. Unless obviously hopeless the prospect of success or failure is of little relevance. This must especially be the case where, as in the present matter, the issues to be litigated are complex and where it may be thought the law is developing." 16The observation in Jazabas v Haddad was cited, with apparent approval, by Barrett JA in LRSM Enterprises above at [23]. In Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222, Katzmann J observed (at [22]) that the existence of an arguable case should be treated as neutral, particularly in a complex case where the assumption should be made in a security for costs application that the defendant will ultimately succeed in the proceedings so that costs will be payable, and I followed that decision in ACN 105 921 962 Pty Ltd v Wiggett above at [18]. Counsel for both parties largely accepted that approach, notwithstanding that each then addressed the issues of the merits of the proceedings at length. 17Mr Cox placed substantial weight on the strength of its claim. The Company contends that there is no realistic likelihood that it will not succeed against Mr Fung for some amount, even if the Deed of Guarantee is set aside, and that the prospects of a costs order which would exceed the judgment in its favour is "practically impossible or at least highly improbable". 18First, the Company contends that it has a strong case on the Deed of Guarantee given by Mr Fung at the earlier mediation and refers to Brereton J's earlier judgment in that regard. So far as the claim against Mr Fung on the guarantee is concerned, it seems to me that the Court should proceed on the basis of the findings made by Brereton J that the claim brought by the Company against Mr Fung is plainly open to it and that Mr Fung also has an arguable defence to that claim under the Contracts Review Act 1980 (NSW), consistent with the fact that the Company was not successful in its claim for summary judgment in respect of that claim, and notwithstanding that he may face some obstacles to establishing that defence. 19Second, the Company contends that: "Even if the Deed [of Guarantee] is set aside, the [Company] has an extremely strong claim in the alternative that Mr Fung is liable for breach of trust in respect of the amounts Periwinkle held (approximately $1,029,000), albeit for a lesser amount than the guarantee claim. ... The terms of the express trust were that the share subscriber fees collected by the [Company] were to be held by Periwinkle until the [Company] listed on the ASX. On examination Mr Fung conceded he was aware of the basis on which Periwinkle held those share subscriber funds. Mr Fung was the sole director of Periwinkle and exclusively controlled the bank account styled Elsmore IPO Share Account No 2. Prior to the [Company] listing on the ASX, Mr Fung transferred that money to companies controlled by him and later to a different bank account controlled by Mr Howard. That conduct is a clear breach of trust for which no defence has ever been identified." 20It seems to me that the Company's claim for breach of trust or accessorial liability to a breach of trust is also not without complexity. First, so far as the claim for breach of trust is concerned, the Company relies on an email dated 8 November 2013 from Mr Chung to Mr Fung to establish the relevant trust, but that email seeks to confirm that the funds in the account in respect of the initial public offering: "belongs to investor and refundable no matter what's happening". A question may arise whether the reference to investor in that email is to the Company or to the subscriber(s) for the shares, and therefore as to who is the beneficiary of any trust and entitled to bring a claim for breach of trust. Mr Cox also described the Company's claim for accessorial liability in respect of a breach of trust, in oral submissions, as a claim for knowing involvement in a breach of trust. If the claim is in fact put on that basis, then the draft Statement of Claim does not presently plead the essential elements of such a claim, which include that the breach of trust was dishonest and that Mr Fung had the requisite knowledge. In particular, the alternate pleading that Mr Fung "ought to have known" that the monies were held on trust may well not found such claim: Barnes v Addy (1874) LR 9 Ch App 244; Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] HCA 8; (1975) 132 CLR 373; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 230 CLR 89; Hasler v Singtel Optus Pty Ltd [2014] NSWCA 266 at [56]ff. I should add that wider principles applicable to establishing the liability of a person who induces or procures a trustee to commit a breach of trust do not require that the breach be of a dishonest and fraudulent character: Hasler v Singtel Optus Pty Ltd above at [77]; W Gummow, "Knowing Assistance" (2013) 87 Australian Law Journal 3. However, it would not be necessary or appropriate to say anything further as to the application of those wider principles where they were not explored by the parties in submissions. 21It seems to me that the Company's submissions as to its substantial prospect of success do not have sufficient regard to the contingency against which a security for costs application is directed, namely that, notwithstanding its assessment of the merits of the proceedings, its claim will ultimately fail, on the basis that no claim in litigation can be treated as certain to succeed. I treat the fact that the Company's case is arguable as a neutral factor (by contrast with the position had it not been arguable, which would have supported an order for security for costs) and consider the other discretionary factors without undertaking a detailed review of the strengths and weaknesses of the claim. 22I turn now to the question whether an order for security for costs would stultify the proceedings. In Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1 at 4; 52 ALR 176, the Full Court of the Federal Court observed that: "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts." Mr Caillard, who appeared for Mr Fung, referred to several other authorities supporting the approach adopted in Bell Wholesale, including Green v CGU Insurance Ltd above at [45]; Golden Mile Property Investments Pty Ltd (in liq) v Cudgegong Australia Pty Ltd [2014] NSWCA 224 at [45]; Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 at [41]. In LRSM Enterprise above, Barrett JA noted (at [37]) that the question arose as part of a broader inquiry whether, if an order for security was made, the order could not be met with the result that the litigation would be brought to a premature end. It does not seem to me necessary to address these authorities or this question further, where the Company does not suggest that an order for security would in fact stultify the continuance of the proceedings. 23There is no suggestion in this case that an order for security for costs would stultify the proceedings. Mr Cox expressly did not put that proposition, on the basis that the Company has other funding available to it, and there is no evidence that those who stand behind the Company, including Mr Chung as a major shareholder, would not be able to fund security if it is ordered to be given. I should add that, although the Company is listed on ASX, it seems to me that the ability of a substantial shareholder to fund such security remains relevant in an application of this kind, particularly in circumstances where trading of the Company's shares is presently suspended and that shareholder holds, or at least held, a substantial proportion of the Company's shares. 24Mr Cox also submits that any impecuniosity of the Company results from Mr Fung's conduct. The Company contended that any financial difficulties which it may presently suffer were caused by the misappropriation of share subscriptions contributed for its listing on ASX which: "may have [been] partially contributed to by Mr Fung, although it is accepted that Mr Howard may bear greater responsibility". Mr Fung submits, and I accept, that there are plainly a number of factors contributing to the Company's present financial position, which include at least its trading performance and Mr Howard's conduct. At the same time, there is substantial force in the proposition that, but for the transfers of funds undertaken by Mr Fung, whether or not on Mr Howard's instructions, the Company would be in a significantly stronger position than its present position. However, it seems to me that that matter is of limited relevance in this application, for the reasons noted in BPM Pty Ltd v HPM Pty Ltd [1996] 136 FLR 339 at 346, which I followed in Ryberg Telecommunications Pty Ltd (in liq) above, where Anderson J (with whom Kennedy and Ipp JJ agreed) observed that this factor should not be taken in isolation and: "It must be considered together with the assertion that the effect on the plaintiff of an order for security will be to stultify the action. If that will not be or is not shown to be the effect of the order, that is, if other parties who benefit from the plaintiff's success are financially able to provide the security and it is reasonable that they do so, the fact that the defendant has caused the plaintiff's own impecuniosity will hardly be good reason to decline security." 25As I noted above, there is no suggestion that an order for security for costs would stultify the proceedings. In that situation, the fact that Mr Fung's conduct may have weakened the Company's financial position, albeit in combination with a number of other matters, does not seem to me to be a reason why the Company or those standing behind it should not give security for costs against the contingency that the Company is ultimately unsuccessful in its claims against Mr Fung. Quantum of security 26An order for security for costs may extend not only to future costs but also to costs already incurred, where an application for security for costs was made promptly, as is common ground in this application: Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2009] NSWSC 563 at [35]ff; Szanto v Bainton [2011] NSWSC 985 at [50]ff. Mr Gdanski refers to costs already incurred by Mr Fung in the proceedings, including the costs of the summary judgment application. Mr Gdanski's affidavit does not provide any detail of the relevant attendances to allow a determination of the extent to which they would be recoverable on assessment, but it is clear that a significant part of them would be recoverable where Mr Fung was successful in the security for costs application and an order for costs was made in his favour although it is not presently due for payment . Adopting a broad-brush approach, as the Court may do in an application of this kind, I will order security in an amount of $15,000 in respect of these costs. 27Mr Gdanski gives an estimate of Mr Fung's future costs of the proceedings, in somewhat short form, in the amount of $75,000 (excluding Counsel's fees) which is calculated on the basis of solicitor/client costs. Mr Fung is not entitled to security for costs on a solicitor/client basis. Some of the costs, being the amount referable to the security for costs hearing, will be the subject of an order for costs in respect of this application. The amount of costs of $10,000 attributed by Mr Gdanski to a mediation in that estimate may be excessive, since it is difficult to see that a mediation involving only two active parties, in respect of matters that are now well-defined, could cost Mr Fung that amount. However, it seems to me that Mr Gdanski's overall estimate of solicitor/client costs is likely to be reasonable, having regard to the additional complexity which will be introduced into the proceedings by the claim for knowing involvement in a breach of trust that has been included in the draft Statement of Claim and the serious character of that claim. 28I propose to discount Mr Gdanski's estimate of future solicitor/client costs by one-third, consistent with the discount that he has allowed for the recovery of costs on assessment in respect of Mr Fung's costs incurred to date (although he did not apply the same discount to future costs in his affidavit) and consistent with the Court's experience recognised in other cases. It will usually be desirable that estimates of costs recoverable on assessment be supported by evidence of a costs consultant. Nonetheless, the Court has accepted percentage discounts of that order in the context of lump sum costs orders and security for costs applications, on the basis of solicitors' evidence and its own experience: Dubow v Fitness First Australia Pty Ltd (No 2) [2012] NSWSC 961 at [14]-[20]; Liberty Industrial Pty Ltd v Donald McCarthy Trading Australia Pty Ltd [2013] NSWSC 279 at [17]; Re Colorado Products Pty Ltd (in prov liq) [2013] NSWSC 611 at [68]; Re Pioneer Energy Holdings Pty Ltd [2013] NSWSC 1366 at [25]. Accordingly, I will allow the amount of $50,000 by way of security for future solicitors' costs of the proceedings. The costs attributable to Counsel's fees should also be discounted, because they also involve attendance at a mediation, from the amount of $20,000 claimed to the amount of $15,000. 29The total costs which should be the subject of an order for security are therefore $15,000 referable to earlier steps in the proceedings, $50,000 referable to future solicitor/client costs and $15,000 referable to Counsel's fees. It is appropriate, as is common practice, that such security be provided on a staged basis. 30Accordingly, I make the following orders:

1. The Plaintiff provide security for the Third Defendant's costs of the proceedings in such form as may be agreed between the parties, or otherwise in a form to be determined by a Registrar, in two tranches: (a) the amount of $40,000 within 28 days; and (b) the amount of $40,000 no later than 21 days prior to the date allocated for the commencement of the final hearing of the proceedings.
2. The proceedings be stayed if security is not provided when due in accordance with Order 1 above. 31My preliminary view is that the Plaintiff should pay the costs of this application as agreed or as assessed, on the usual basis that costs follow the event. However, as I foreshadowed in the course of the hearing, I will allow the parties 14 days in which to make any further short written submissions as to that matter.

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