All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited

BETWEEN: ALL CLASS INSURANCE BROKERS PTY LTD (IN LIQUIDATION) ACN 095 825 513 Applicant

AND: CHUBB INSURANCE AUSTRALIA LIMITED Respondent

JUDGE: ALLSOP CJ DATE OF ORDER: 19 June 2020

1. Within 28 days of the date of these orders, the applicant provide the respondent with security for its costs in the proceedings in the sum of $50,000.
2. The security referred to in Order 1 be provided by payment into Court or the provision of an irrevocable bank guarantee from an Australian trading bank.
3. The proceedings be stayed until the amount referred to in Order 1 above is paid into Court.
4. In the event that the amount in Order 1 is not paid into Court within the time stipulated in Order 1, the proceedings be dismissed with costs.
5. The costs of the respondent's interlocutory application filed on 8 October 2019 be reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ALLSOP CJ: 1 By interlocutory application lodged with the Court on 8 October 2019, the respondent Chubb Insurance Australia Ltd seeks an order pursuant to s 1335(1) of the Corporations Act 2001 (Cth) or, alternatively, s 56(1) of the Federal Court of Australia Act 1976 (Cth) and r 19.01 of the Federal Court Rules 2011 (Cth), that the applicant, All Class Insurance Brokers, provide security for Chubb's costs of these proceedings in the amount of $380,826.91 or such other amount as may be determined by the Court. The amount sought by Chubb was later revised in its supplementary written submissions to $117,800, calculated on the basis of a 1-2 day hearing going only to questions of liability. 2 This Application is in the context of proceedings in which All Class seeks an order that Chubb indemnify it under an insurance policy issued by Chubb in relation to theft by employees (the Policy). 3 All Class was in the business of insurance broking until it was the subject of a winding up order and a liquidator was appointed on 17 April 2013. Mr Bowmaker was the sole director and secretary of All Class at all relevant times. On 27 March 2013, Chubb was notified of a claim on the Policy, made by Mr Bowmaker's wife, arising from unauthorised withdrawals made by Mr Bowmaker from All Class' trust account. The money in that account was taken to be held on trust by All Class for the benefit of its clients: see ss 981A, 981B and 981H of the Corporations Act. All Class alleges that these unauthorised withdrawals commenced in the late 2000s and, by 2013, amounted to some $2,031,000. All Class contends that Mr Bowmaker was an employee for the purpose of the Policy and that it is therefore entitled to be indemnified under the Policy by Chubb for Mr Bowmaker's theft, fraud and dishonesty. Chubb denies liability on three bases. First, it says that the improper transfers out of the trust account were not theft, fraud or dishonesty by an employee, but instead were acts of All Class itself (through its director). That is, Mr Bowmaker as sole director and company secretary does not constitute an employee for the purpose of the Policy. Secondly, it says that there was no direct loss to All Class as the funds were applied to All Class' benefit. Thirdly, it says the claim is statute-barred. 4 Chubb relies on an affidavit sworn by its solicitor, Mr O'Brien, on 8 October 2019 in support of the Application. Mr O'Brien gives evidence about the correspondence between the parties leading up to the making of the Application; provides an estimate of Chubb's likely recoverable costs, should a cost order be made in its favour; and gives evidence about the financial position of All Class. 5 All Class relies on an affidavit affirmed by its solicitor, Mr Prowse, on 6 March 2020 and two affidavits affirmed by its liquidator, Mr Vardy, on 12 September 2019 and 23 March 2020. Mr Vardy's supplementary affidavit was filed in response to questions I raised with All Class' Counsel, Ms King, during the hearing of the Application on 12 March 2020, and a subsequent order I made allowing for the filing of further evidence.

Background 6 Before I turn to the relevant principles, the nature of the parties' submissions in respect of the Application requires an understanding of the background to, and progression of, the proceedings to date. 7 All Class entered into the Policy for the year from 30 June 2012 to 30 June 2013. The insurer named on the Policy documents issued to All Class was Chubb Insurance Company of Australia Pty Ltd (in liquidation). I will refer to that company as Old Chubb. By November 2016, that company had been placed into liquidation following implementation of a scheme under the Insurance Act 1973 (Cth), which transferred all of the rights and liabilities of Old Chubb to Chubb. 8 On 27 March 2013, Mrs Bowmaker (the wife of Mr Bowmaker) notified All Class' insurance broker, Steadfast Group Ltd, of a claim under the "Employee Theft Coverage Section" of the Policy. Steadfast notified Old Chubb of the claim on that same day. 9 On 5 April 2013, Steadfast notified Mrs Bowmaker that a claims manager had been appointed by Old Chubb and asked her to provide information about the misappropriated funds, including a list of the insurers affected and the total amount misappropriated. A representative from All Class, Ms Snelling, provided Steadfast with two spreadsheets detailing the premiums and premium funding loans collected but not received into All Class' trust account. 10 A risk investigator was appointed by Old Chubb shortly thereafter. The risk investigator made contact with Ms Snelling on 15 April 2013, advising that he would review the information supplied and would make contact with All Class for any other assistance. 11 On 17 April 2013, Mr Vardy was appointed liquidator of All Class. 12 The Committee of Inspection met on 25 October 2013. Following the meeting, on 11 November 2013, Mr Vardy wrote to the members of the Committee providing them with options as how best to determine the amount misappropriated from the trust account, so that a final claim could be made on the Policy. 13 Mr Vardy issued his report to ASIC in accordance with section 533 of the Corporations Act on 6 June 2014. The report outlined a number of offences committed by Mr Bowmaker as director of All Class. 14 Mr Vardy lodged a claim under the Policy in September 2014 in respect of loss associated with misappropriations from the trust account operated by All Class at the hands of Mr Bowmaker. 15 On 2 October 2014, a Mr Donovan of Old Chubb wrote to Mr Vardy acknowledging that Mr Vardy was in the process of preparing a proof of loss and setting out further information which Old Chubb required before it was in a position to progress its review. Mr Vardy supplied the proof of loss on 31 October 2014. 16 Mr Vardy requested an update on the progress of the claim on 13 November 2014. On 18 November 2014, Mr Donovan indicated that, given the quantum of the claim lodged and the complexity of the loss, it may take several weeks before a final determination was made. 17 Mr Vardy requested a further update on 1 December 2014 and, on 17 December 2014, asked for written confirmation of the timeframe in which Old Chubb expected to finalise the determination of the claim. 18 On 4 February 2015, Mr Prowse of MCW Lawyers wrote to Old Chubb on behalf of All Class asking for a substantive response to the claim within 14 days. 19 On 16 February 2015, Mr Donovan wrote to Mr Vardy seeking further information including evidence of how the misappropriated funds were used and evidence of the premiums collected but not deposited into the trust account. The letter also requested the following: Confirmation as to whether Mr Bowmaker was acting in his capacity as an Executive or Employee (as defined by the Policy) of the Insured. Based on the information currently available, it is understood that Mr Bowmaker misappropriated the funds from the trust account in his capacity as a director of the Insured. We note that in order to trigger the relevant insuring clauses (Insuring Clause 1A - Employee Theft or 1C - Client Coverage under the Crime Coverage Section), it is a requirement that the funds be misappropriated by an Employee. It is unclear how the Insured has sustained a direct loss of Money. For example, we understand that the misappropriated funds were not the legal property of the Insured and the Insured has instead received a consequential benefit from misappropriating funds from the relevant insurers. Please advise should you hold an alternative view. 20 The parties met on 17 February 2015 to discuss the claim. 21 On 28 April 2015, Mr Donovan wrote to Mr Vardy stating that it was Old Chubb's understanding that Mr Vardy was in the process of preparing responses to the questions he raised in February 2015 on the policy threshold issues. Mr Donovan stated that Old Chubb would place its coverage investigations on hold whilst it awaited this information. 22 Mr Prowse responded to some of Mr Donovan's questions by letter on 21 July 2015. Mr Prowse did not provide the requested evidence of how the misappropriated funds were used. He stated that the trace of the company's accounts was still being completed and would be available within the next 6 weeks. 23 Mr Prowse wrote to Old Chubb again on 5 February 2016 attaching the outcome of the trace, being an analysis of the payments from the trust brokerage account to the general office working account from July 2008. The letter requested confirmation from Old Chubb by 4 March 2016 that the insurance contract would be honoured. The letter also attached copies of the brokerage agreements between All Class and the creditors. 24 On 12 February 2016, Mr Donovan responded by email stating (in part): We certainly understand the requirement for this matter to be reviewed as quickly as possible but note that the time frame provided in your letter is not realistic. We also note that we requested the information on 17 February 2015 and have only now received a response. … Whilst I am not presently in a position to commit to a date on coverage (as this may be dependable upon a full review of the information supplied and further information that may need to be requested) I will respond to you with a request for any further information (if required) by 7 March 2016. I confirm that whilst coverage is under consideration, Chubb's position under the Policy is fully reserved. 25 Mr Prowse followed up by email on 10 March 2016 and by letter on 16 March 2016. That letter stated: My client requires a formal policy response in respect to the claim that it has made. In anticipation that you intend to decline coverage under the policy, can you please let me know the details of your appointed solicitors in respect to this claim. 26 On 31 March 2016, Mr Donovan wrote to Mr Prowse identifying perceived deficiencies in the tracing information provided by Mr Prowse on 5 February 2016 and the proof of loss document submitted by Mr Vardy on 31 October 2014. The letter at [13]-[17] set out at length Old Chubb's "preliminary views". Old Chubb expressly stated that it was unclear whether All Class had sustained any loss of money and whether the theft, fraud or dishonesty had been committed by an "Employee". The letter concluded by stating: As stated previously, we are not currently in a position to reach a final view on Policy coverage until and unless the liquidator clarifies the precise way it is seeking to advance the claim under the Policy, and satisfies the condition under section IX of the Policy by providing a proper proof of loss which addresses with full particulars the issues set out in paragraph 9 above. In the meantime, however, should proceedings be commenced against us without the further provision of a proof of loss, we reserve our position to raise and agitate each of the issues set out above as part of its defence of the proceedings, as well as the Insured's failure to provide a proof of loss as required. 27 All Class did not respond to Old Chubb's letter until 1 May 2018, attaching a Liquidator's investigation report dated 13 April 2018. The letter was sent to the email address . Mr Prowse sent a follow-up letter to the same email address on 15 May 2018. A Claims Examiner from Chubb responded on 25 May 2018, asking for a Chubb reference for the matter or a copy of the 31 March 2016 letter. Mr Prowse provided the letter on 30 May 2018. 28 On 25 June 2018, a Mr Baxter of Chubb sent an email to Mr Prowse asking him for the annexures to the Liquidator's report. The annexures were provided by Mr Prowse on 2 July 2018. 29 Mr Prowse followed up with Mr Baxter on 25 July 2018. That same day Mr Baxter stated that he was still reviewing the annexures provided earlier that month. 30 On 9 August 2018, Mr Prowse wrote to Mr Baxter asking for a substantive response by 17 August 2018. 31 On 16 August 2018, Mr O'Brien of YPOL Lawyers wrote on behalf of Chubb to Mr Prowse. The letter identified a number of "fundamental issues" with the Liquidator's report. The letter again identified the issue of Mr Bowmaker being the sole director and secretary of All Class: Further, we note that Mr Bowmaker was the sole secretary, director and shareholder of the company and therefore the governing mind and will of the company. In those circumstances, All Class must have been aware of Mr Bowmaker's actions and alleged misappropriations, and must have approved them. … Chubb has considerable concerns as to whether the Insuring Clause (1)(A) of the Policy has been activated in any event. There is an issue as to when discovery of the alleged fraud or dishonesty occurred, and who, in fact, made it. This is because Mr Bowmaker was the sole director, shareholder and secretary of the company. 32 All Class did not respond to this letter until 8 April 2019, stating that it intended to file proceedings in the Federal Court on or before 16 April 2019. 33 The proceedings were commenced on 16 April 2019 against Old Chubb. All Class served Chubb on 9 May 2019. 34 On 30 May 2019, YPOL wrote to Mr Prowse stating that All Class appeared to have initiated proceedings against the incorrect respondent (being Old Chubb instead of Chubb). 35 On 1 July 2019, Mr Prowse wrote to YPOL, proposing to add Chubb as a second respondent to the proceeding. 36 On 8 July 2019, YPOL replied by letter, addressing the proposal to join Chubb to the proceeding and asking at [7] about All Class' current asset position "in order for [Chubb] to consider an application for security for costs". YPOL did not receive a response to this letter, so it followed up by letter on 25 July 2019. 37 On 9 August 2019, Senior Registrar Farrell ordered that, by 16 August 2019, Chubb provide All Class with a proposal for All Class to provide security for costs, and that All Class provide its response to that proposal by 30 August 2019. 38 On 16 August 2019, Chubb provided a proposal for security for costs to All Class. Chubb followed up on 26 September 2019. All Class did not respond to this proposal until 4 October 2019, at which time it indicated that it did not propose to provide any security for Chubb's costs. 39 Chubb filed its Application on 8 October 2019. The Application was stood over to March 2020 to allow the parties to participate in mediation, which was unsuccessful.

Principles 40 Where the applicant is a corporation, the Court is empowered to order security for costs pursuant to s 1335 of the Corporations Act if "it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant". Once this threshold is met, the Court will turn to the matters relevant to the exercise of its discretion to order security for costs: Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; 98 ACSR 301. 41 Section 56 of the Federal Court of Australia Act does not expressly impose any threshold to be met before the Court considers the various discretionary matters. However, the applicant's inability to pay the costs of the respondent remains an important consideration in the exercise of the Court's discretion. 42 The Court's discretion to require the provision of security for costs is broad and the factors informing the exercise of that discretion cannot be stated exhaustively. The only limitation is that the discretion be exercised judicially: Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCAFC 29; 2 FCR 1 at 3. The matter which lies at the heart of the discretion is one of fairness, both in terms of whether security should be granted, and if so, in what amount: Madgwick v Kelly [2013] FCAFC 61; 212 FCR 1 at 21 [92]. The Court aims to achieve a "balance between ensuring that adequate and fair protection is provided to the defendants, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings": Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 470 (Giles J). 43 The Court's discretion should be exercised having regard to all of the circumstances of the case (see Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] HCA 41; 193 CLR 502 at 513 [26] (Kirby J)). There are a number of well-established factors relevant to the Court's exercise. These include (see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189 at 197-198 per Beazley J): whether the application for security for costs has been brought promptly; the strength and bona fides of the applicant's case; whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim; whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate; and whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security. 44 An additional factor to add to this list is whether there are aspects of public interest which weigh in the balance against the making of an order (see Equity Access Ltd v Westpac Banking Corporation [1989] FCA 520; ATPR 40-972 at 50,635 per Hill J).

Consideration 45 Having considered the submissions of the parties in this matter, I am satisfied that when all relevant considerations are taken into account the discretion should be exercised by making an order that All Class provide to Chubb security for costs, albeit in an amount lower than that set out in the Application. The amount should reflect the costs in resolving in a short hearing the essential constructional issues that divide the parties as to the application of the Policy. In so deciding, I have taken into account the following matters. 46 It is agreed between the parties that All Class is impecunious. All Class has been in liquidation since 2013. In his affidavit at [13], Mr Prowse states that there are no funds left in the liquidation and the liquidator currently has unpaid fees amounting to $352,383. The solicitors and counsel for All Class are acting in this matter on a speculative basis (see [12] of Mr Prowse's affidavit). I therefore conclude that there is reason to believe that All Class would be unable to pay Chubb's costs in these proceedings if it were ordered to do so. The "threshold" established, I turn to the discretionary factors addressed by the parties.

Strength of the claim 47 The parties agree that both All Class' claim and Chubb's response are brought in good faith and both can be seen to have reasonable prospects of success.

All Class' impecuniosity 48 A powerful factor weighing against the grant of an order for security for costs is whether such an order is likely to prevent a litigant from continuing with the proceeding. In his affidavit at [10], Mr Prowse states that he believes an order for security for costs would stifle the litigation. This concern was echoed in All Class' written submissions. 49 When considering whether the litigation would be stifled, one not only looks to the impecuniosity of the litigant, but those standing behind the litigant or those who stand to benefit from the litigation if it were to proceed. Informed by the notion that "those who stand to share the benefits of litigation cannot shirk its burdens" (see Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd [2012] FCAFC 57 at [30]), Sheppard, Morling and Neaves JJ in Bell Wholesale 2 FCR at 4 expressed the point as follows: [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. 50 The evidence before me suggests that All Class does not have the resources to fund an order for security for costs. 51 Annexed to Mr Vardy's first affidavit, at page 292, is a list of the eligible creditors of All Class who have submitted formal proofs of debt. Based on that list, it appears that there are 26 creditors with outstanding claims totalling $2,226,161.02. All but three of these creditors appear to be insurance underwriters or brokers. Six creditors have claims amounting to over $100,000 each, with one insurance company, Hollard Insurance Company Pty Ltd, being owed $841,272.19. 52 All Class' creditors are predominantly large insurance companies who are acting and carrying on business in circumstances of sufficient solvency to maintain their licenses. There is no evidence before me to the effect that these creditors cannot afford to fund the proceedings and, indeed, I infer the opposite. It has not been shown that the creditors do not lack funds or, if they have funds, they are only small creditors in a large sea of other people who do not have funds. 53 The evidence before me at the hearing was equivocal as to whether the creditors were willing (as opposed to able) to contribute to any order for security for costs. On 5 March 2020, Mr Vardy wrote to the Committee of Inspection, comprising of representatives from Global Transport & Automotive Insurance Solutions, Hollard and Wesfarmers General Insurance Limited (now IAG), asking whether the committee members were willing to contribute funds. Annexed to Mr Prowse's affidavit were responses from Global Transport and IAG. I do not find these responses particularly helpful because they simply contain requests for further information about the amount each creditor would be expected to contribute. Another email response from Global Transport, dated 9 March 2020, was handed up during the hearing. It stated that "[g]iven GT has lost in the vicinity of $500,000 already from the All Class fraud, we are not prepared to risk losing any further funds by making a contribution towards a security bond." 54 Mr Prowse himself states at [9] of his affidavit that he is of the belief that "there is a limited appetite on the part of the committee of creditors to contribute anything more than a nominal amount in respect to security of costs". Mr Prowse also states at [11] of his affidavit that he understands that each of the creditors has written off their respective debts. 55 At the time of the hearing I was concerned that, given the creditors' "limited appetite" to provide security for costs, such an order may stifle the proceedings. This is particularly concerning where the liquidator has accumulated some $350,000 in unpaid fees and appears to be the person who stands to lose if the proceedings do not go ahead. There was no evidence before me at the hearing as to how Mr Vardy had incurred these fees and whether the fees were incurred in undertaking the duties imposed upon Mr Vardy as liquidator by the Corporations Act. It seemed to me possibly unfair and contrary to the public interest that a liquidator stood to lose these fees if they were legitimately incurred as a result of the carrying out of his or her statutory duties. This is why it is uncommon for security for costs to be ordered against a liquidator when proceedings are brought in the liquidator's name: see Re Strand Wood Co Limited [1904] 2 Ch 1, concerned with a misfeasance summons; Green v CGU Insurance Ltd [2008] NSWCA 148; 67 ACSR 105 at 119 [45] per Hodgson JA and at 127 [83] per Campbell JA. 56 At the conclusion of the hearing I ordered that further evidence be filed by All Class and I indicated that this evidence should include a supplementary affidavit affirmed by Mr Vardy setting out how his fees were incurred, in particular the portion of the fees incurred by him in the process of undertaking his statutory duties as liquidator and the amount incurred by him in pursuing this claim for creditors on a speculative basis. Mr Vardy's supplementary affidavit sets out these matters, though only at a high level, stating that $208,186.83 of his fees relates to the "general investigation and Liquidation process" and $157,398.42 relates to "the Chubb claim and proceedings". It is not clear to me how much of the $208,186 was incurred in the process of carrying out Mr Vardy's statutory duties, although I note that, according to Mr Vardy, $174,391 was incurred "conducting investigations up until the lodgement of the ASIC report" and a further $9,272.17 was incurred conducting "additional investigations pending ASIC funding". 57 Mr Vardy's supplementary affidavit also set out further evidence as to the willingness of the creditors to contribute to any order for security for costs. On 17 March 2020, Mr Vardy submitted to each of the creditors a Security Contribution Notice and requested that each creditor return it to him no later than 23 March 2020. Mr Vardy received four positive responses to his Notice, which are annexed to his supplementary affidavit. It is unclear whether he received any refusals to contribute. Based on the responses, it is evident that those four creditors - Global Transport, Hollard, IAG and High Street Underwriting Agency - are willing to contribute a total of $49,123.30 as security for costs. In these circumstances I am satisfied that, if I were to grant some security for costs, All Class' own impecuniosity would not be a bar to the continuation of these proceedings.

Delay 58 Applications for security for costs ought to be brought promptly. Precisely how any delay in applying for security for costs will impact on the exercise of the Court's discretion will depend on the prejudice likely to be suffered by the respondent to the application and the reasons, if any, for the delay in applying for security: see Jianshe Southern Pty Ltd v Get Motor Cycles Pty Ltd (No 3) [2007] FCA 1078 at [30] (Besanko J). 59 All Class focused in its submissions on the fact that the application for security for costs was filed by Chubb on 8 October 2019, some six months after the proceedings were commenced on 16 April 2019. The reason for this delay can only be understood after an examination of the events that took place between 16 April 2019 and 8 October 2019, set out at [34]-[39] above. 60 While the proceedings were commenced on 16 April 2019, they were commenced against Old Chubb and were not served on either Old Chubb or Chubb until 9 May 2019. All Class' solicitors did not propose to add Chubb to the proceedings until 1 July 2019. Chubb flagged the possibility of an application for security for costs in its letter dated 8 July 2019. Chubb then provided its proposal for security for costs to All Class on 16 August 2019, in accordance with the timetabling orders made by Senior Registrar Farrell. Despite court orders requiring All Class to respond to that proposal by 30 August 2019, All Class did not respond until 4 October 2019. Chubb then filed its Application four days later. 61 In these circumstances I do not consider that Chubb unnecessarily delayed in filing its Application. 62 All Class did not put forward any evidence of prejudice which it might suffer by reason of the Application having been made when it was.

The nature of the parties 63 It was submitted by All Class that an order for security for costs should not be made in the light of the relationship between the parties as insurer and insured and the nature of the dispute, being one that concerns whether or not the claim made by the insured falls under the insurance policy. This approach is reflected in the decision of Ormiston J in Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61; 10 ACLR 176. In that case Ormiston J reached the view at 180 that because insurers are "pre-eminently loss-bearing and loss-sharing entities, whose raison d'etre is their ability to shoulder the losses of others albeit on a commercial basis … it is not ordinarily appropriate to grant security for costs in favour of an insurer defendant". 64 Other authorities are to the contrary, as reflected by the views of Einstein J in Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited [2008] NSWSC 449; 26 ACLC 323 at 331-332 [33] (cited with approval by McDougall J in Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CVO263CFGL [2014] NSWSC 221; 18 ANZ Insurance Cases 62-009 at 75,038 [46]; see also Tenth Anemot Pty Ltd v Colonial Mutual General Insurance Co Ltd [1993] 2 VR 48; 7 ANZ Insurance Cases 61-154 at 77,814-77,815 per McDonald J): As CGU has contended, Ormiston J's decision should not be followed, as it: i. was not followed by Brooking J in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1990) 8 ACLC 29 at 32; by Beach J in Frankston Ambassador Pty Ltd v Cigna Insurance Australia Ltd (1991) 9 ACLC 790 at 793-4; by McDonald J in Tenth Anemot Pty Ltd v Colonial Mutual General Insurance Co Ltd [1993] 2 VR 48 at 53-54 or by Newnes M in Silverstone Holdings Pty Ltd v American Home Assurance Co [2003] WASC 139 at [46]; ii. is inconsistent with decisions in which security for costs has been ordered to the benefit of a defendant insurer: see e.g. Yandil Holdings Pty Limited v Insurance Co of North America (1985) 3 ACLC 542; Plaza Print Pty Ltd v South British Insurance Co Limited (1984) 54 ACTR 3 (Blackburn CJ); Prime Forme Cutting Pty Ltd (supra) and Silverstone Holdings Pty Ltd v American Home Assurance Co (supra); iii. is inconsistent with the decision of the New South Wales Court of Appeal (Basten JA, Tobias and McColl JA agreeing) in Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344 at [55]-[56]. The Court of Appeal adopted the approach taken by Brooking J in Prime Forme Cutting Pty Ltd (supra) at 32 that large corporate defendants should not be seen as standing outside the policy of "the security for costs provisions"; and iv. was made in a case, unlike the present, where the making of an order for security would have stultified the plaintiff's claim. 65 While the fact that a defendant is an insurer does not debar it from obtaining an order for security for costs in an appropriate case, the nature of the relationship of insurer and insured is a matter that may be taken into consideration when exercising the Court's discretion. I refer to the comments of McDonald J in Tenth Anemot 2 VR at 54; 7 ANZ Insurance Cases 61-154 at 77,815: [T]he nature of the commercial enterprise in which an insurer is engaged should not be regarded as removing it from the protection that may be provided to it by the security for costs provisions … However I consider that the fact that the party seeking an order for security for costs is an insurer and that such a party is resisting a claim under a contract of insurance voluntarily entered into by it with a proprietary company are matters relevant for the court to have regard to in the exercise of its discretion on an application for security for costs - see further The Frankston Ambassador at p. 794. 66 And later at 77,817: Of relevance also, in my view, is the fact that the defendant voluntarily entered into a commercial relationship with the plaintiff. It did this knowing that the plaintiff was a proprietary company. This is not a situation where a plaintiff who seeks relief against the defendant is otherwise a stranger to the defendant and one who the defendant has not been prepared to or who has not entered into a commercial relationship with. Where such a voluntary commercial or contractual relationship exists it is open to a person such as the defendant to provide protection for itself against the risk of being sued as part of its enterprise. Such is particularly so when that party is an insurer. 67 It may be said that Chubb voluntarily assumed the risk of All Class' financial position when it decided to enter into an insurance policy of this character with All Class, a company operated by a man who was its sole director, shareholder and company secretary. 68 It is difficult, however, to take this point much further without resolving at least one of the substantive issues between the parties. All Class contends that the cause of its impecuniosity is the exact risk that Chubb chose to insure it against: the theft, fraud or dishonesty of an employee of All Class. Chubb denies that this was the risk insured against because under its construction of the policy terms, Mr Bowmaker did not constitute an employee for the purposes of the Policy. Given that this issue goes to the centre of the dispute between the parties, I give it little weight in my consideration of whether or not security for costs should be ordered. This point does, however, relate to the amount of security that I am willing to order. I discuss this further below.

Good faith 69 All Class submitted that the seeking of security for costs was inconsistent with the duty of utmost good faith imposed on Chubb by s 13 of the Insurance Contracts Act 1984 (Cth). 70 The duty of utmost good faith has been held to apply to the conduct of any litigation between an insurer and insured (though not all courts have taken this approach). In Ensham Resources Pty Limited v Aioi Insurance Company Limited [2012] FCAFC 191, Lander and Jagot JJ stated at [68] that the "obligation continues to operate upon the party in any litigation arising under the contract of insurance", citing Silbermann v CGU Insurance Ltd [2003] NSWCA 203; 57 NSWLR 469, Hodgson JA at 482 [51] (with Tobias JA agreeing at 487-488 [78]); cf Imaging Applications Pty Ltd v Vero Insurance Ltd [2008] VSC 178 at [55] and UDP Holdings Pty Ltd v Ironshore Corporate Capital Ltd (No 2) [2019] VSC 645 at [380]-[382]. 71 The duty of utmost good faith does not, however, automatically preclude an insurer from seeking security for costs against an insured. Rather, the duty requires that the insurer act in accordance with "commercial standards of decency and fairness" with "due regard to the legitimate interests of an insured, as well as to its own interests": CGU Insurance Limited v AMP Financial Planning Pty Ltd [2007] HCA 36; 235 CLR 1 at 12 [15] per Gleeson CJ and Crennan J. I do not accept that an application for an order for security for costs necessarily conflicts with that standard in all circumstances. This is particularly so where, as in this case, the order for security for costs will not stultify the proceedings. 72 While All Class contended at [17(e)] of its written submissions that the Application was merely being used to deny an impecunious applicant a right to litigate, this allegation was not pressed in oral submissions. 73 The existence of the duty of utmost good faith may be a consideration relevant to the exercise of the Court's discretion: see the comments of Lord Hobhouse, with whom Lords Steyn and Hoffman agreed, in Manifest Shipping [2001] 1 Lloyd's Rep 389 at 407 [77] (made in relation to the Court's discretion to order discovery of documents and referring to the duty of utmost good faith in s 17 of the Marine Insurance Act 1906 (UK)): I am therefore strongly of the view that once the parties are in litigation it is the procedural rules which govern the extent of the disclosure which should be given in the litigation, not s. 17 as such, though s. 17 may influence the Court in the exercise of its discretion. 74 All Class contends in its written submissions made in relation to this Application that Chubb has breached its duty of utmost good faith by failing to respond to the claim in a meaningful manner by (a) admitting indemnity; (b) appointing a loss assessor; and (c) confirming or denying the claim. All Class submits that this breach should weigh against the grant of security for costs. All Class does not claim that Chubb has breached s 13 in its amended originating application or amended concise statement of claim. In these circumstances, and in light of the chronology which I have earlier outlined and in the context of an interlocutory application such as this, I do not think that it is appropriate to undertake an analysis of this kind. I note, however, that, on the facts as set out above at [7]-[33] and, in particular, the large delays on the part of All Class in providing information to allow Chubb to progress the claim, I find it difficult to see how Chubb has breached its duty under s 13. Chubb (via its predecessor Old Chubb) has raised the policy construction issues with All Class since at least February 2015.

Impecuniosity caused by Chubb 75 All Class alleges that its impecuniosity resulted from the failure of Chubb to meet the claim. That is circular. If Chubb proves to be correct in the view it takes as to the construction of the Policy, in particular whether Mr Bowmaker constitutes an employee, it is not (and never has been) obliged to meet the claim. 76 Where security for costs is resisted on the ground that it is the conduct of the respondent that has caused the applicant's impecuniosity, the apparent strength of the applicant's case should be assessed: Statewide Developments Realty Pty Ltd v Owners Corporation, SP 77457 [2013] NSWSC 1750 [20]. However, as observed by White J in Statewide at [23], the real reason for investigating the strength of the applicant's case arises only where it was said that, on the particular facts of the case, the grant of security would stultify the proceedings. This approach was taken by the Full Court of the Supreme Court of Western Australia in BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 346 (per Anderson J, Kennedy and Ipp JJ agreeing), with Anderson J observing that the question of whether the respondent contributed to the applicant's impecuniosity had to be considered in conjunction with the proposition that the effect of an order for security would be to stultify the action. This principle was also applied by Black J in Advance Innovative Solutions Pty Ltd (in liq) v X-Dem Group (Aust) Pty Ltd [2012] NSWSC 1112 at [19] (citing the passage in BPM 131 FLR at 346). 77 In circumstances where there is no basis for concluding that the effect of ordering the security would be to stultify the litigation, and in fact there are four creditors willing and plainly able to provide $49,000 in security, I do not find it appropriate to consider further whether Chubb is the cause of All Class' current impecuniosity. That exercise ought to be left for the final hearing.

Quantum 78 Weighing up all of the relevant discretionary factors, I am of the view that this is a matter where it is fair and in the interests of justice that an order for security for costs be made. However, I am not satisfied that the amount sought by Chubb in its interlocutory application, and later revised in its supplementary written submissions, is appropriate. 79 If All Class' interpretation of the Policy is accepted, Chubb has issued a contract of insurance for this exact kind of loss and may by its failure to pay be a significant cause of All Class' current impecuniosity. I think it is appropriate to award security only for the costs of a hearing to resolve the underlying policy construction issues. Until those issues are resolved, I do not think that it is suitable to order any further security against All Class. 80 The sum of $50,000 is appropriate for security for Chubb's costs for a one-day hearing. 81 I therefore make the following orders: (1) Within 28 days of the date of these orders, the applicant provide the respondent with security for its costs in the proceedings in the sum of $50,000. (2) The security referred to in Order 1 be provided by payment into Court or the provision of an irrevocable bank guarantee from an Australian trading bank. (3) The proceedings be stayed until the amount referred to in Order 1 above is paid into Court. (4) In the event that the amount in Order 1 is not paid into Court within the time stipulated in Order 1, the proceedings be dismissed with costs. (5) The costs of the respondent's interlocutory application filed on 8 October 2019 be reserved. I certify that the preceding eighty-one (81) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Chief Justice Allsop.