Addenbrooke Pty Ltd v Duncan

Solicitor for the First Respondent: Yeldham Price O'Brien Lusk

Counsel for the Second Respondent: Mr S Kanagaratnam

Solicitor for the Second Respondent: Watson Mangioni Lawyers

Counsel for the Third Respondent: Mr JAC Potts

Solicitor for the Third Respondent: Speed and Stracey Lawyers

Solicitor for the Fourth, Fifth, Seventh, Eleventh and Twelfth Respondents: Mr T Murray of Torq Murray Law

Counsel for the Sixth and Ninth Respondents: Dr AS Bell SC with Mr J Williams

Solicitor for the Sixth and Ninth Respondents: TressCox Lawyers

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2243 of 2012

JUDGE: JACOBSON J DATE OF ORDER: 2 April 2014 WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. The parties are directed to bring in orders to give effect to these reasons for judgment. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2243 of 2012

JUDGE: JACOBSON J DATE: 2 April 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The 6th and 9th respondents (the Cascade respondents) seek orders that the applicant (Addenbrooke) provide security for costs in an amount of slightly in excess of $1 million. The 1st respondent (Mr Duncan) has filed a separate interlocutory applicant seeking security in an amount of approximately $800,000. 2 Mr Duncan brought an earlier application for security for costs which I dismissed on 31 May 2013: Addenbrooke Pty Ltd v Duncan [2013] FCA 573 (Addenbrooke v Duncan (No 1)). I refused to order security at that time because I was satisfied that the person ultimately standing behind Addenbrooke, Mr Denis O'Neil, was a man of substance: Addenbrooke v Duncan (No 1) at [10]. 3 I therefore accepted undertakings given to the Court by Mr O'Neil and Neforu Pty Ltd (Neforu), which owns all of the issued capital of Addenbrooke, to be jointly and severally liable for the payment of any adverse costs orders made against Addenbrooke. 4 In giving judgment in Addenbrooke v Duncan (No 1) I said at [11] that it was incumbent upon Mr O'Neil to be frank with the Court as to his financial position, but I said there was nothing to suggest that those who supplied the evidence in the earlier application on Mr O'Neil's behalf were lacking in candour. 5 Regrettably, my reliance upon the frankness of those who provided that evidence, or on those who gave the necessary instructions was misplaced. I do not suggest that they were deliberately dishonest. But, as Mr Douglas QC, who appears for Addenbrooke, fairly acknowledged, there was at least a very serious error of judgment on the part of those who provided instructions or gave evidence at the earlier hearing. 6 Accordingly, Mr Douglas does not take issue with the proposition that there were material non-disclosures in the evidence sufficient to warrant the Court revisiting the exercise of the discretion to order security. 7 The error of judgment, and consequent lack of candour in the previous application, stem from a decision of certain persons involved in the application to present a highly selective picture of the financial position of Neforu and Mr O'Neil. That decision was made with a view to putting the best possible picture of Mr O'Neil's financial position before the Court. 8 In particular, Ms Deborah Cartwright, who has been Mr O'Neil's personal accountant and the accountant for his private group of companies for more than 30 years, provided the Court with a purported asset and liability statement which had been altered from the form in which she had originally signed that document. 9 The alteration was not to the figures, but rather, to a line in the original document which drew attention to an attached summary of external assets and liabilities of Neforu and its subsidiaries. The line which drew attention to the summary, and the summary itself, were removed from the form of the document which was put before the Court. 10 It was plain from the summary which was removed that the asset and liability statement which Ms Cartwright put before the Court on the previous occasion was misleading in a number of material respects. 11 The position presented to the Court on the last occasion in Ms Cartwright's letter, and in the evidence given on Mr O'Neil's behalf by his solicitor, Mr Gye, was that Mr O'Neil had a very valuable piece of real estate worth some $27 million, that Neforu had net assets of at least $40 million as at 30 June 2012 and that the only substantial security given by Mr O'Neil was a mortgage of approximately $26 million to the ANZ Bank. 12 In truth, the net equity of Neforu on a consolidated basis, disclosed in its unaudited accounts for the year ended 30 June 2012, disclosed negative equity of $33 million and the ANZ Bank was not the only substantial lender to whom Mr O'Neil had provided security. 13 The other lender of particular importance to Mr O'Neil and the Neforu group of companies (Neforu Group) was ING Bank (Australia) Pty Ltd to whom the Neforu Group was indebted in an amount of approximately $48 million. The debt was the subject of security from the Neforu Group and was personally guaranteed by Mr O'Neil. 14 The impression that was wrongly created by the deliberate decision to exclude the summary document from Ms Cartwright's report of 30 May 2013, was that there was a mortgage to ING for a comparatively small amount in the order of $1.5 million. 15 Dr Bell SC, who appears for the Cascade respondents, accepts that the misleading impression was inadvertently created by Mr Douglas and no criticism is directed to him. Rather, the evidence indicates that the decision to exclude the summary document was taken by Mr O'Neil's son and Mr Greg Smith who was then the CFO of Addenbrooke. 16 Ms Cartwright's summary report was misleading in another material way. It stated that Mr O'Neil's assets included "shares in Neforu Pty Ltd and subsidiaries" in an amount of slightly in excess of $50 million. In truth, that asset does not consist of his shareholding, but is said to consist of loans made by Mr O'Neil to various companies in the Neforu Group. The loans are undocumented other than in the various companies' ledgers but are said to be repayable on demand. 17 The failure of those who gave instructions on behalf of Addenbrooke to make proper disclosure of Mr O'Neil's financial position has the result that I was misled as to the worth of the undertakings given to the Court by Neforu and Mr O'Neil. 18 Nevertheless, the approach which Mr Douglas asks me to take in the present applications is that Mr O'Neil is still a man of substance. 19 This submission has to be considered in light of the fact that Addenbrooke is impecunious. There is no dispute that it will be unable to meet an adverse costs order. The evidentiary burden therefore shifts to it to establish a reason as to why security should not be granted: Prynew Pty Ltd v Nemeth [2010] NSWCA 94 at [16]. 20 It is therefore incumbent upon Addenbrooke to persuade me that the undertakings offered by Neforu and Mr O'Neil have real value. However, there are a number of reasons why I am not persuaded that the undertakings have any real worth. 21 First, I do not accept that the summary of external assets and liabilities, excluded on the last occasion, but now relied upon by Addenbrooke, contains an accurate statement of the net assets of Neforu and its subsidiaries. 22 There are a number of inaccuracies in the document. The inaccuracies include bringing to account as an asset the value of the shares in Cascade Coal Pty Ltd upon the basis that Addenbrooke will succeed in the action. 23 Moreover, some of the assets set out in the summary are not owned by Neforu or Mr O'Neil beneficially. Instead, they are held through discretionary trusts. Mr O'Neil is the appointor under the relevant trust deeds but it is quite wrong to assume that assets held through such a medium will be available to satisfy undertakings given to the Court by Neforu and Mr O'Neil. 24 In addition, the evidence does not satisfy me that the valuation of the Rose Bay Marina, which was based on a September 2011 valuation, could be relied upon. It was out of date and was valued upon an "as if complete" basis. The deficiencies which were exposed in the cross-examination of Ms Cartwright were not such as could be repaired by the belated attempt to call Mr O'Neil's son to try to explain the position. For that reason I did not permit him to give evidence on that topic. 25 Second, quite apart from the inaccuracies in the summary of external assets, the overriding flaw in the approach advanced on behalf of Addenbrooke is that all of the purported values are based upon an assumption that the assets are to be valued on a "going concern" basis. 26 The fundamental flaw in this approach is that the relevant assets are secured by the ING facility which expires in two weeks. No evidence was adduced of any proposed extension of that facility or of any attempt to refinance. 27 If ING demands repayment on the expiration of the facility, Neforu (or the relevant subsidiaries) will be forced to sell assets to meet the demand. As Ms Cartwright properly conceded in cross-examination, assets sold under a forced sale are often realised at less than what would otherwise be their realisable value. 28 Third, there are a number of deficiencies in the 2013 accounts of the Neforu Group. One of them relates to the value of the Rose Bay Marina which is the principal asset of the Group and the subject of security held by ING. 29 That asset was revalued in the accounts so as to comprise an increase of goodwill of $20 million. But the revaluation consisted of internally generated goodwill which is not recognised under applicable accounting standards. 30 Fourth, those who gave instructions on behalf of Addenbrooke deliberately failed to answer subpoenas addressed to relevant entities. The documents which were called for under those subpoenas were relevant to an assessment of the true net worth of Neforu and Mr O'Neil. 31 It follows that I can have no confidence in the opinion given by Ms Cartwright in her most recent report as to the financial position of Mr O'Neil and his associated entities. 32 Accordingly, I can give limited weight to the worth of the undertakings that have been provided to the Court by Mr O'Neil and Neforu in deciding whether or not to order security. 33 I cannot find on the evidence in this application that Mr O'Neil is entirely impecunious. The proposition stated by the Victorian Court of Appeal in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at [24] that the Court should not readily accept an undertaking from an impecunious person who steps out from behind the "skirts" of an impecunious company, is therefore of limited application. 34 It is true that Mr O'Neil's financial position is largely dependent upon that of the Neforu Group and the Group is in some financial difficulty. But I do not consider this justifies a finding that Mr O'Neil is impecunious. 35 The position in the present case is that Mr O'Neil's financial position is in a state of uncertainty and he has failed to put before the Court all relevant matters which would enable me to make a proper determination. 36 This must be weighed against the fact that the respondents do not take issue with the bona fides of Addenbrooke's case and do not suggest that it is without merit. 37 Addenbrooke does not suggest that Mr O'Neil is impecunious or that Addenbrooke's impecuniosity (or derivatively, that of Mr O'Neil and Neforu) was caused by the respondents' conduct. 38 It seems to me that in all the circumstances the proper exercise of the discretion is informed by the uncertain state of Mr O'Neil's financial position and his failure to permit it to be fully exposed. Accordingly, the proper exercise of my discretion is to order security. 39 Nevertheless, since I do not find Mr O'Neil to be impecunious, I can take into account the fact of his personal undertaking as a matter which informs the assessment of the amount to be ordered. 40 I do not see why the respondents should be given a full indemnity for their party and party costs as a condition of Addenbrooke's ability to conduct its case. 41 The amount which is sought by the Cascade respondents is slightly in excess of $1 million and Mr Duncan seeks $800,000. Also, it is clear that the other three groups of respondents will seek security. On the approach which I have taken, they should also be entitled to a favourable exercise of the discretion. 42 If I were to order security for costs in favour of all respondents in the amounts sought, or likely to be sought, the total to be ordered would be in excess of $4 million. Yet, the total claim is for approximately $8 million. Whilst the quantum of costs results from the likely length of the proceeding and the number of respondents, I am, in my opinion, entitled to have regard to considerations of proportionality in determining the amount of security. 43 This is particularly so in the present case where an established businessman, presently suffering from financial stresses, is prepared to stand behind his company in a bona fide proceeding. 44 In my opinion, the amount of security which should be ordered must be a sufficiently substantial sum to take into account the risks to the respondents that they will be unable to enforce a costs order but weighing in the balance the other considerations to which I have referred. 45 I do not consider it is necessary to distinguish between the respective respondents in determining the amount of security. In my opinion an appropriate amount for the Cascade respondents and Mr Duncan (and for each of the remaining respondents) is $300,000. Thus, Mr O'Neil or one or more of his corporate entities will be required to provide a total amount of security of $1.5 million. 46 Security is to be provided in the form of bank guarantees. A separate bank guarantee is to be provided to each respondent. The bank guarantees are to be provided, by a recognised Australian bank in a form and substance satisfactory to the Court no later than 30 April 2014. 47 If the securities are not provided the proceedings are to be stayed as against each group of respondents for whom Addenbrooke has failed to provide security. 48 I will direct the parties to bring in short minutes to reflect these reasons for judgment. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.