Costs - Security for costs - Plaintiff trustee company - Discretion of the court - Where defendant has foreshadowed a counterclaim - Whether order for security would stultify the plaintiff's ability to pursue the proceedings - Whether defendant's conduct is materially responsible for plaintiff's impecuniosity - Turns on own facts

Corporations Act 2001 (Cth), s 1335

Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507

BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81

Blackbird Entertainment Pty Ltd v I O Research Pty Ltd (Unreported, WASC, Library No 980297, 2 June 1998)

BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339

Citi Nominees Pty Ltd v Fenny [2006] WASC 97

Crestland Investments Pty Ltd v Parisi Holdings Pty Ltd [2003] WASC 181

Dalma Formwork Pty Ltd (administrator appointed) v Concrete Constructions Group Ltd [1998] NSWSC 472

Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 11 ACLC 511; (1993) 10 ACSR 441

Ewing International Ltd Partnership v Ausbulk Ltd [2009] SASC 202

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241

Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564

Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438

Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] VicRp 9; [1995] 1 VR 150

Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584

Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377; (2008) 66 ACSR 455

Marand Holdings Pty Ltd v Cateus International Pty Ltd [2003] WASC 238

Nambour Valley Estates Pty Ltd v Henebery Holdings Investment Trust [2007] QSC 393

SAS Global Forrestdale Pty Ltd v Forestdale Developments Pty Ltd [2010] WASC 104

Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289

1 LE MIERE J: The defendant applies for an order that the plaintiff give security for the defendant's costs of the action in the sum of $80,000 by payment of that amount into court and that in the meantime the action be stayed.

2 The plaintiff is the trustee of the SAS Global Property Group Unit Trust (Unit Trust) pursuant to a deed of trust dated 2005 (Trust Deed). There are two units in the Unit Trust. Okton Pty Ltd as trustee for the Beamish Family Trust No 2 is the holder of one unit. Anthony Beamish is the sole company officer of Okton and the sole shareholder of Okton. The other unit is held by Sumita Pty Ltd as trustee for the Philip Meagher Trust. Philip Meagher is the sole company officer of Sumita and the sole shareholder of Sumita. Effectively, Mr Beamish and Mr Meagher are the sole controllers and shareholders of the plaintiff and are the sole controllers and beneficiaries of the Unit Trust. The plaintiff's sole purpose and sole business is conducted as trustee of the Unit Trust. All of the assets of the plaintiff are held as trustee of the Unit Trust. The plaintiff has a right of indemnity out of the assets of the Trust Fund, pursuant to cl 12.7 of the Trust Deed. Mr Beamish has sworn that the present action is for the benefit of the Unit Trust and the plaintiff has at all times acted as if it were one and the same as the Unit Trust itself, so that any cost orders in favour of the defendant are payable from the realisation of the assets of the Unit Trust.

3 The plaintiff was appointed trustee of the Unit Trust for the sole purpose of acquiring a large parcel of vacant land for the purpose of subdivision into smaller lots and resale of the smaller lots at an increased price with added value. Mr Beamish says that the process of subdivision is complete. The plaintiff has entered into a number of agreements to sell the subdivided lots. Some of those sale agreements have been completed. A number of buyers have declined to complete settlement of those agreements for various stated reasons.

4 On 7 September 2007 the plaintiff and the defendant entered into three written agreements whereby the plaintiff agreed to sell and the defendant agreed to purchase three subdivided lots. The defendant paid deposits totalling $95,160, but did not complete settlement or pay the whole of the deposits. The plaintiff commenced this action on 23 November 2009. The plaintiff alleges that the defendant refused to complete settlement of the sales in breach of the agreements. The plaintiff sues for specific performance of the agreements and damages for breach of contract in addition to or in lieu of specific performance.

5 The defendant alleges that on 9 November 2009 it validly terminated the contracts because servicing of the land by the plaintiff had not been completed by the date specified in the contracts and under the terms of the contracts the defendant was entitled to, and did, give the requisite notices to terminate the contracts.

6 On 21 December 2009 the plaintiff applied for summary judgment. The defendant opposed the plaintiff's application for summary judgment on the basis that:

1. the defendant has a complete defence to the plaintiff's claim, being that, on account of the breach of the contracts by the plaintiff, the defendant validly terminated the contracts;
2. the defendant has a valid counterclaim against the plaintiff, being for the return of the deposits pursuant to the contracts; and
3. in any event the plaintiff's claim is for specific performance of actions which the defendant is incapable of performing, namely, settling the contracts.

7 On 18 May 2010 I dismissed the plaintiff's claim for summary judgment against another buyer of subdivided lots which had refused to or failed to complete settlement: SAS Global Forrestdale Pty Ltd v Forestdale Developments Pty Ltd [2010] WASC 104. The issues in that case are similar to those in the present case. On 21 May 2010 I ordered by consent that the plaintiff's application for summary judgment be dismissed with costs in the cause.

8 Where a corporation is a plaintiff in a legal proceeding, the court, 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 if successful in its defence, may require sufficient security to be given for those costs and stay all proceedings until the security is given: Corporations Act 2001 (Cth) s 1335(1).

9 Section 1335 carries both a threshold test and a discretionary test. The first question is whether the threshold condition for the exercise of the power is satisfied, that is, whether there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful.

10 The jurisdictional condition must be satisfied before the discretionary power to order security for costs is enlivened: FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 (Pidgeon & Owen JJ), [21].

11 The threshold test was discussed by Maxwell P and Buchanan JA in Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377; (2008) 66 ACSR 455, where they said:

The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'if the court is satisfied that' or 'if in the view of the court it is likely that'. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a 'real risk'.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs.

It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk [15] - [16].

12 Mr Beamish has produced a statement of the financial position of the plaintiff as at 31 August 2010 prepared by J G C Accounting & Financial Services Pty Ltd, the accountant engaged by the plaintiff since it acquired the land for subdivision. The statement of financial position is as follows:

SAS Global Forrestdale Pty Ltd

As Trustee for SAS Global Property Group Unit Trust

Detailed Statement of Financial Position As At 31 August 2010

13 The non-current assets consist of 'Preliminary & Prospectus Costs' and 'Borrowing Expenses'. The plaintiff has not explained how preliminary and prospectus costs or borrowing expenses are or might be assets available to satisfy a costs order in favour of the defendant. I disregard these non-current assets for the purpose of determining what assets the plaintiff has to meet an award of costs in favour of the defendant.

14 The major asset is the unsold subdivided land. The statement of financial position states the value of those lots to be $54,112,000. In his affidavit of 8 September 2010 Mr Beamish states that that is the value of the 64 lots owned by the plaintiff as of 7 September 2010. The stated value is based on a valuation by Gavin Chapman, a licensed valuer (Valuation). The Valuation was made on instructions from Bank of Western Australia Ltd (BankWest). The Valuation was signed by Mr Chapman on 6 August 2010 and states the date of valuation to be 26 July 2010. At that time the plaintiff owned 67 lots. The Valuation values each of those lots on the basis of current market value 'as is'. The Valuation does not state the current market value 'as is' of the unsold subdivided land as a whole but the sum of the current market value 'as is' of the lots equals $56,293,000. Between 26 July 2010 and 8 September 2010 the plaintiff had sold three lots. Mr Chapman's current market 'as is' valuation of the remaining 64 lots is $54,112,000. That is the value of the unsold subdivided land included in the plaintiff's statement of financial position as at 31 August 2010.

15 The Valuation also includes a current market value 'in one line' of $39,500,000. I understand the current market value 'in one line' to be an assessment of the value of all of the lots owned by the plaintiff if they were sold together rather than separately. The Valuation includes an estimate of value in one line - forced sale of $31,500,000 to $35,500,000.

16 The Valuation is based on a number of assumptions. One assumption is that the site is free from soil contamination which would adversely affect the development potential, marketability or value of the land. The Valuation notes that correspondence from the Department of Environment and Conservation dated 23 February 2010 indicates that the land has been classified 'possibly contaminated - investigation required' and suggests that memorials will be lodged on the title of each of the lots. Mr Chapman refers to a report prepared by VDM Consulting to the effect that contamination is minor and does not impact the current approved land uses. Mr Chapman says that it appears reasonable to assume in the absence of any further advice that the land can be reclassified as 'not contaminated' or 'decontaminated' and accordingly he has assumed that the land is unaffected by contamination. Nevertheless Mr Chapman observes:

Clearly however, the land is currently blighted by the open ended nature of the current contamination classification and the fact that Memorials will be issued over the titles. Without further knowledge, it is reasonable to assume that purchasers will be sceptical of the subject land and that the resulting blight may adversely impact the saleability and value of the lots until reclassified.

Should subsequent advice indicate that the affectation or contamination of the subject property is substantially in excess of that outlined in the initial VDM report, and that the land is affected to a greater level than anticipated, then we reserve the right to revise our assessment.

17 In relation to Mr Chapman's estimate of value in one line he makes the following qualification:

An important consideration in both one line sale and an in one line sale under duress is the target market and buyer profile. The level of value contemplated is considerable, and in the current market credit is not freely available for the purchase of such assets, and therefore the potential for purchasers is significantly diminished. To that extent, a protracted selling period may be encountered, and a higher level of discount may be encountered.

18 As I have said, the valuation date is 26 July 2010. At that time the plaintiff owned 67 lots. Between then and 31 August 2010 the plaintiff had sold three lots. There is no evidence of the price for which those lots were sold. However, if the value of each of those lots assessed by Mr Chapman in his 'as is' valuation is deducted from his 'as is' valuation of the land then the current market value 'as is' of the remaining 64 lots is $54,112,000. That is a reduction of $2,181,000 from the aggregate current market 'as is' value of the 67 lots as at 26 July 2010. The three lots sold since 26 July 2010 are lots 269, 279 and 350. In the Valuation Mr Chapman valued those lots 'as is' at $780,000, $783,000 and $618,000 respectively. I note that in Mr Chapman's Valuation he recorded that in July 2010 offers had been received for those lots, exclusive of GST, of $600,200, $764,625 and $536,130 respectively. I infer that those three offers gave rise to the sale of those three lots between 26 July and 31 August 2010. I observe that the amount of the offer for each of those lots is less than the 'as is' value of them assessed by Mr Chapman in his Valuation.

19 The plaintiff's principal liabilities consist of 'Commercial Advance A/C 106-003076-0' of $16,903,204 and 'TEYS Trust SAS Global Forrestdale' of $20,352,567. The commercial advance is the amount owing to BankWest under a commercial facility and is secured by a first registered mortgage over the land. In his affidavit of 8 September 2010 Mr Beamish says that the balance of the BankWest loan facility is not due and payable. However, the BankWest statement annexed to Mr Beamish's affidavit states that the facility was rolled on 31 August 2010 and now expires on 30 December 2010.

20 In his affidavits of 5 August 2010 and 8 September 2010 Mr Beamish addresses the nature of the TEYS facility agreement. TEYS Property Funds Ltd (in liquidation) (TPFL) is the responsible entity of the TEYS Strata Development Trust (TSDT). A sub-trust of TSDT is the SAS Forrestdale Scheme which is a registered managed investment scheme (Forrestdale Scheme) which has 391 investors. The assets of the Forrestdale Scheme include the TEYS Facility Agreement and the second registered mortgage. The TEYS Facility Agreement and the second registered mortgage gives security to TPFL for the principal sum of the advances made pursuant to the TEYS Facility Agreement in the amount of $20,352,567. That is the amount stated in the plaintiff's statement of financial position. Mr Beamish says that there is no interest payable by the plaintiff upon the principal sum of the advances made pursuant to the TEYS Facility Agreement. Any further amount that might become payable by the plaintiff pursuant to the TEYS Facility Agreement is an amount described as the project participation profit which is contingent upon the making of a profit upon the underlying property development. Any costs orders in favour of the defendant, if the defendant is successful, will be proper costs of the plaintiff incurred in the underlying property development. Accordingly, the plaintiff submits, any costs orders in favour of the defendant will have priority to any further amount that might become payable by the plaintiff pursuant to the TEYS Facility Agreement.

21 Counsel for the defendant does not accept that the defendant's costs would rank in priority to the project participation profit payable under the TEYS Facility and secured by the second mortgage. Counsel submits that costs payable to the defendant would not, or arguably would not, be expenses of the project to be taken into account before determining a 'development profit'.

22 I find it unnecessary to determine whether or not the project participation profit payable under the TEYS Facility Agreement and secured by the second mortgage would rank in priority to the defendant's costs. It is sufficient to observe that the matter is not clear beyond argument and may add to a rational belief on the part of the defendant that the plaintiff will be unable to pay the costs of the defendant if successful.

Assessment of plaintiff's financial position

23 According to the plaintiff's statement of financial position as at 31 August 2010 the total liabilities of the plaintiff, excluding any development profit payable under the TEYS Facility Agreement, amounts to $37,572,800. The statement of financial position discloses assets, excluding the land and 'non-current assets', of $382,000. Therefore, after offsetting assets other than the land against liabilities, the total liabilities are $37,190,800. The plaintiff submits that the 'as is' and 'one line' valuations of the land both exceed that amount and hence there is no reason to believe that the plaintiff will be unable to pay the costs of the defendant if it is successful.

24 Mr Chapman's current market 'as is' valuation assumes that each lot is sold individually in the normal course of realising the subdivided lots. Mr Chapman assumes that in order to realise the entire stock in that way a minimum of some three and a half to four years may be required. That is an inappropriate method of valuation of the land for present purposes. If the defendant is successful in the action then an order for costs in its favour is likely to be made some time next year. The proceeds from the sale of lots by the plaintiff in four years time would not be available to meet those costs. The proceeds of any sales will first be paid to BankWest in discharge of its loan.

25 Mr Chapman valued the land on the basis of current market value in one line as $39,500,000. That amount, together with the current assets as stated in the statement of financial position exceeds the total liabilities stated in the statement of financial position by $2,309,200. However, if the amount realised from the sale of the land was 5% less than Mr Chapman's current market value in one line valuation then the plaintiff's liabilities would exceed its assets.

26 Counsel for the plaintiff submitted that a valuation of the land at $39,500,000 is a conservative valuation and hence there is no reason to believe that the plaintiff will be unable to pay the costs of the defendant if successful. I do not agree. Mr Chapman's current market in one line and current market in one line forced sale valuations include the three lots that were sold between 26 July and 31 August 2010. Those lots accounted for $2,181,000, which is 3.9% of Mr Chapman's current market 'as is' valuation of the 67 lots. If Mr Chapman's current market in one line valuation is reduced by 3.9% to take account of the three lots sold between 26 July 2010 and 31 August 2010 then the notional current market in one line valuation of the remaining 64 lots is approximately $37,960,000. That is barely more than the total liabilities of the plaintiff as at 31 August 2010.

27 Furthermore, Mr Chapman's valuation states that a relatively prolonged sale and settlement period may be required to realise the land if sold 'in one line'. Mr Chapman states that on the basis of a sale in one line a marketing period in the order of six to nine months would be required. A further settlement period would then be required. Furthermore, Mr Chapman states that his estimate of a marketing period in the order of six to nine months is 'subject to contamination issues being resolved'. Furthermore, Mr Chapman's valuation is based on assumptions which may not turn out to be correct. I have already referred to his assumption concerning soil contamination. Further, Mr Chapman has assumed that all essential services are available to the properties incorporating bitumen sealed roads with concrete curbing and other services notwithstanding that at the date of valuation full access was not available to the entire site due to roadways still being under construction. Further, as I have already observed, Mr Chapman qualifies his current market value in one line by stating that the level of value contemplated is considerable and in the current market credit is not freely available for the purchase of such assets and therefore the potential for purchasers is significantly diminished. To that extent, Mr Chapman says, a protracted selling period may be encountered and a higher level of discount may be encountered.

28 The threshold test is not whether the corporation will be unable to pay the defendant's legal costs, it is whether it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the defendant's legal costs. As Maxwell P and Buchanan JA said in Livingspring Pty Ltd v Kliger Partners the test requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? A risk assessment is, of necessity, imprecise. Section 1335 calls for a practical, commonsense approach to the examination of the corporation's financial affairs. After undertaking that examination I find that it appears by credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if it is successful in its defence.

29 In Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584, Smithers J said:

Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity as against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability (46,729).

That passage has been cited with approval on many occasions: Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] VicRp 9; [1995] 1 VR 150, 154; Blackbird Entertainment Pty Ltd v I O Research Pty Ltd (Unreported, WASC, Library No 980297, 2 June 1998), 9; Citi Nominees Pty Ltd v Fenny [2006] WASC 97, [92]; BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81, [14].

30 In this case the Trust Deed establishes that the plaintiff trustee has a right of indemnity from the trust assets. However, it was observed by Maxwell P and Buchanan JA in Livingspring Pty Ltd v Kliger Partners that the primary judge noted that undertakings given by the plaintiff in that case did not stop the trustee distributing the trust assets to the beneficiaries prior to the conclusion of the proceeding nor, for that matter, a new trustee being approved as trustee of each of the unit trusts.

31 In the end, however, those matters are immaterial. Considerations of this kind only become relevant, and necessary, when the trust assets appear to be sufficient to meet an adverse costs order. That conclusion having been reached, the court seeks assurance that the plaintiff will be able to, and will, exercise its right of indemnity against the trust assets in order to meet such an order and that the plaintiff will in the meantime do nothing to diminish the value of the trust assets. Without that dual assurance a conclusion about the present sufficiency of the trust assets might provide no guidance at all as to the ability of the plaintiff at some future time to pay the defendant's costs. However, those matters are not relevant where, as here, I have found that there is credible testimony that there is reason to believe that the trust assets will be insufficient to pay the costs of the defendant if successful.

32 In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd Pidgeon and Owen JJ said that once the threshold test has been satisfied and the court has jurisdiction there is an unlimited discretion to make a security for costs order. The characterisation of the court's discretion under s 1335 'as unfettered' has been criticised: Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 11 ACLC 511; (1993) 10 ACSR 441 (Powell J). In Livingspring v Kliger Partners Maxwell P and Buchanan JA referred to the statement by Phillips JA (with whom Ormiston and Charles JJA agreed) in Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507:

... the debate about the word 'predisposition' ... is a sterile one and should no longer be pursued ... the discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor in the exercise of the discretion (514).

In Livingspring v Kliger Partners Maxwell P and Buchanan JA at [19] - [20] said that the same point may be expressed slightly differently as follows:

The threshold condition for the exercise of the power to order security defines the circumstances in which Parliament contemplated that the power would be exercised. That is, the power was conferred for the purpose of protecting the defendant against the very risk which must be shown to exist before the power can be exercised. In this sense, satisfaction of the threshold condition - demonstrating the existence of risk - 'calls for' the fulfilment of the purpose for which the power was conferred. Whether the power should be exercised in the particular case will, of course, depend upon all the circumstances.

On ordinary principles, it is for the defendant-applicant to persuade the court that the discretion should be exercised in its favour. In the present case, however, the judge applied the following statement of Jacobson J in Re Insurance Australia Group Ltd v HIH Casualty & General Insurance Ltd (in liq) [2003] FCA 803, [25]:

'The effect of the authorities is that if an applicant for security discharges the evidentiary burden of showing a prima facie case, there is then an evidentiary onus upon the opponent to satisfy the court that, taking into account all relevant factors, the discretion ought to be exercised against the making of an order.'

33 There are a number of well-established guidelines or factors which the court typically takes into account in exercising its discretion whether or not to order security for costs. The factors include whether the plaintiff's claim is bona fide and has reasonable prospects of success: Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289.

34 In this case I am satisfied that the plaintiff's claim is bona fide. A material consideration is the probability of success of the plaintiff. Where the facts are in dispute, as they are here, it is difficult for the court to express a view on this aspect. There are substantial issues to be tried. I am satisfied that the plaintiff's claim is made bona fide and that it has reasonable prospects of success. That is relevant to the exercise of the discretion.

Discretionary matters raised by plaintiff - the foreshadowed cross-claim

35 The plaintiff raised three discretionary factors. The first concerns multiplicity and circuitry of action. There are three contracts for sale of land subject to this action. The nominated deposit holder holds a total of $95,160 upon the terms of the contracts. The ownership of the deposit monies is yet to be determined. Any determination of such ownership requires a determination of the issues raised by the statement of claim in the present action and the counterclaim foreshadowed by the defendant. The plaintiff submits that if the present action does not proceed then another equally expensive procedure would be needed to determine the ownership of the deposit monies.

36 There are many decisions that deal with the issue of whether or not it is appropriate for the court to make an order for security for costs against the plaintiff in circumstances where it is also a cross-defendant pursuant to a cross-claim brought by the defendant. In Sydmar Pty Ltd v Statewise Developments Pty Ltd Smart J affirmed the principle that the decision to order security was unfettered and then listed a number of factors which he considered to be relevant to the exercise of the discretion to grant security. Among those factors was the following:

Whether substantially the same facts are likely to be canvassed in determining the action and the cross action. The court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross action covering substantially the same factual areas proceeds (300).

37 That dictum was considered by Bleby J in Ewing International Ltd Partnership v Ausbulk Ltd [2009] SASC 202. Bleby J made three observations about that dictum. The first is that Smart J offered no authority for that proposition. However, the proposition has been affirmed in many subsequent cases, some of which I will refer to. Bleby J's second observation is that Smart J's dictum needs to be read in the context of the facts of that case. Of the cross-claim in that case Smart J later observed:

By reason of the complexity of the matters raised in the cross-claim, the time it will take to hear them and the amount claimed, the cross-claim is now the dominant part of the proceedings. The plaintiff's claim, while important to it, is, in the overall picture of the hearing time and the amount claimed, of minor importance (302).

... the proposition, on its face, represents a misunderstanding of what this court decided in John Arnold's Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd (1979) 22 SASR 20. That is that one of the relevant factors against ordering security for costs is where a plaintiff is, in reality, a defendant. Ausbulk in this case, is a defendant in the arbitration. Although it has a cross-claim, it was open to the judge below to conclude that it was effectively a cross-claim by way of defence only, being based on Ewing's alleged breach of contract, the very substance of Ausbulk's defence in Ewing's claim. Such a defensive counterclaim does not preclude a defendant from obtaining an order for security [25].

38 The principle referred to by Smart J was considered by Rolfe J in Dalma Formwork Pty Ltd (administrator appointed) v Concrete Constructions Group Ltd [1998] NSWSC 472. Rolfe J said:

In circumstances where the claim and the cross-claim arise out of the same, or essentially the same, factual matrix this, in my opinion, is a very important consideration. It has been frequently and consistently said by Judges sitting in this Division that an order for security will not generally be made in such circumstances, in the exercise of the Court's discretion. It would, in my view, be quite wrong to preclude a party from litigating matters by way of a defence to a cross-claim merely because that party has been the initial institutor of the proceedings. The conduct of the other party may have forced the allegedly impecunious party to take the litigious initiative, whilst not constituting misconduct. Put simply if CCG seeks to recover any part of the debt the issues raised by Dalma in its claim would be available to it as a defence, and there has never been any suggestion that a party could be precluded from defending proceedings, where the defence is bona fide, by reason of impecuniosity. It is, therefore, a somewhat arid exercise to be considering an application for security for costs if the plaintiff can be cast in the role of a defendant and can litigate the very matters the subject of its claim by way of defence. This situation can be overcome by a defendant if it unequivocally states that it will not pursue any claims against the plaintiff in the event of an order for security being made and not met. There is obvious logic in a defendant not wishing to pursue cross-claims against an insolvent plaintiff, not the least of which would be the necessity to pay its own costs and, even if ultimately successful, risk receiving little or nothing.

An appeal to the New South Wales Court of Appeal was dismissed. Sheppard AJA (with whom Mason P and Handley JA agreed) at [24] expressly approved of what Rolfe J said about the principle.

39 The principle was referred to by Master Newnes (as his Honour then was) in two cases in 2003. In Crestland Investments Pty Ltd v Parisi Holdings Pty Ltd [2003] WASC 181 Master Newnes said:

In the present case, I think it can reasonably be said that in substance Crestland and the Archbishop are each as much a plaintiff as the other. Moreover, as I have said, the primary issue in both Crestland's claim and in its defence to the Archbishop's claim is whether Crestland was, as it claims, entitled to rescind the contract by reason of misleading or deceptive conduct or breach of an implied term. It follows that, even if Crestland's claim were to be stayed, it would still be entitled to litigate that issue in defence to the Archbishop's claim. The only matter that would fall away would be Crestland's claim for consequential losses.

I accept, as submitted by Crestland's counsel, that it would be a somewhat odd result if Crestland was ordered to provide security for costs for its claim, with the potential consequence that that claim could be stayed, when essentially the same factual issues would be litigated in its defence of the Archbishop's counterclaim.

In the circumstances, I do not consider that Crestland should be required to provide security for costs [20] - [22].

40 In Marand Holdings Pty Ltd v Cateus International Pty Ltd [2003] WASC 238 Master Newnes referred with approval to the statements of Smart J in Sydmar and Rolfe J in Dalma Formwork to which I have referred and continued:

It is true that, in this case, the issues raised in the counterclaim itself are limited and discrete. However, as the pleadings stand, the determination of the counterclaim will involve canvassing substantially the same factual issues as those raised in the plaintiff's claim. Accordingly, if the action were stayed because of the plaintiff's inability to provide security, the same factual issues would nevertheless have to be canvassed in order to determine the counterclaim. In my view, a Court should be slow to allow that situation to come about. I do not consider there is anything in the circumstances of this case that would justify the prospect of such a result.

In my view, this is not an appropriate case to order security for costs. Neither the plaintiff nor those who stand behind it are in a position to provide security. On the evidence, the effect of an order for security would be to stifle the plaintiff's claim. In addition, as the matter stands, substantially the same factual ground will have to be covered in the determination of both the claim and the counterclaim [41] - [42].

41 In Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 the principle was referred to by Yates J in circumstances where the respondents had stated that they were prepared to give an undertaking to the court not to prosecute their cross-claim against the applicant should the principal proceeding be stayed for failure to provide security, and to withdraw their cross-claim should the principal proceeding be dismissed for failure to provide security. Yates J said:

The importance of this lies in the fact that, where the claim and cross-claim arise out of the same or essentially the same factual matrix, an order for security will not generally be made as a matter of discretion. This is because it would be unjust to allow the situation to arise where a principal proceeding is stayed because of an inability to provide security but a cross-claim proceeds covering substantially the same factual area: Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289 at 300; Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (admin apptd) [1999] NSWCA 16 at [24]; Reinsurance Australia Corporation Ltd v HIH Casualty and General Insurance Ltd [2003] FCA 803 at [84]- [92]; Total Development Supplies Pty Ltd v GRD Building Pty Ltd [2008] FCA 844 at [30]- [35]. This situation is avoided by the giving of an undertaking of the kind foreshadowed by the respondents [72].

42 The defendant says that the foreshadowed counterclaim is not a reason for not ordering the plaintiff to give security for costs for three reasons. The first is that the defendant may not pursue the counterclaim. The second is that an order that the plaintiff give security for costs would not stultify the action. The third is that the fact that the plaintiff's claim and the foreshadowed counterclaim raise the same or similar issues is simply one factor that needs to be weighed against other factors in the exercise of the discretion.

43 Counsel for the defendant did not submit that the defendant would not pursue the foreshadowed counterclaim if the plaintiff's action is stayed. Counsel stated (ts 29) that the defendant had not made a decision either way. That is not a reason not to give weight to the fact that the plaintiff's claim and the defendant's foreshadowed counterclaim involve the same or overlapping issues. There are two reasons why that is so. First, the defendant has not proffered any undertaking that it will not seek to pursue its counterclaim. Secondly, the defendant has not abandoned its claim to the deposits paid under the contracts. Those deposits are presently held by the designated deposit holder. The entitlement to those deposits will have to be determined by this, or another, court if the defendant maintains its claim to the deposits.

44 The defendant submits that the plaintiff's action will not be stultified by the making of an order for security. In [35] of the plaintiff's written submissions it states:

The restricted point made by the Full Court in BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 was that if the respondent asserts stultification, then the respondent must prove the lack of means of those standing to gain from the litigation. That is not the present respondent's case.

45 In oral submissions counsel for the plaintiff submitted that the concession made in its written submissions was not a concession that the plaintiff could put up security if ordered to do so. The plaintiff's position is that the people standing to gain from the litigation are the 391 investors in the Forrestdale Scheme, that is, the managed investment scheme that advanced the money to the plaintiff which is the subject of the TEYS Facility Agreement and secured by the second mortgage. That is because after the loan to BankWest has been repaid and the advances secured under the TEYS Facility have been repaid, the proceeds from the sale of the land will be due to the investors in the scheme as a project participation profit pursuant to cl 5.1 of the TEYS Facility Agreement. The defendant accepts that is so in the presently foreseeable circumstances. The plaintiff submits that if it were to submit that an order for security would stultify the action it would have to prove that the 391 investors were not able to put up the amount of the security. In effect, the plaintiff says that it is not able to undertake that task.

46 In Sydmar Pty Ltd v Statewise Developments Pty Ltd one of the factors identified by Smart J as being relevant to the exercise of the discretion is whether the making of the order would unduly stultify the corporation's ability to pursue the proceedings. In BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339, Anderson J, with whom Kennedy and Ipp JJ agreed, said:

It is well settled that the onus lies on the plaintiff, who resists giving security on the grounds that to do so will effectively stultify the action, to establish that '... those who stand behind it and who will benefit from the litigation if it is successful ... are also without means' (345).

47 Earlier in his reasons for judgment Anderson J said that the mere fact that there are creditors of an insolvent company with the means to assist the company to give adequate security will not always be a decisive factor. His Honour said:

The question is not simply whether there is a person who will derive some benefit from the action should it be successful and who can put security. It is also relevant to consider whether it is reasonable that he should do so (344).

48 In Ariss v Express Interiors Pty Ltd the Supreme Court of Victoria Court of Appeal held that a company may resist an order for security on the ground of commercial impracticability. In that case a company in liquidation and a large number of creditors owed relatively small debts. The liquidators opposed an application for security for costs on the ground that it would be commercially impracticable for the company to obtain financial backing from the creditors, and to meet any order for security. The Court of Appeal accepted that commercial impracticability was a relevant circumstance when a company sought to demonstrate that an order for security could not be met, but found that it had not been established in that case. In Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 Austin J said that in the case of a corporate plaintiff the court has a discretion to order security and may be influenced to do so by proof of the plaintiff's insolvency but it may be persuaded not to do so if the impecunious plaintiff proves that there is no real prospect of obtaining funds to meet the order from someone else [74]. The mere fact that the corporate plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order for security will stultify the plaintiff's claim. It may be that there is someone else who will satisfy the order on the plaintiff's behalf. Austin J said:

But it is not enough to identify a financially capable person who stands to benefit from the plaintiff's success in litigation. It is also relevant to consider whether it is reasonable to expect that person to put up security. If, for example, the plaintiff company is in liquidation and it would be in the interests of its creditors for the plaintiff to succeed, it would not be reasonable, in 'practical commonsense terms' to expect a financially capable creditor of the company to give security if the debt is small: BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 344-5 per Anderson J [79].

49 In this case the plaintiff, in effect, relies upon the commercial impracticability of being able to meet an order that it give security for costs in the amount of $80,000. Counsel for the plaintiff stated that for that proposition the plaintiff relies upon the evidence with respect to the encumbrances upon the land and that it is evident from that alone that the first $17 million worth of receipts from the sale of land will necessarily go to BankWest. The plaintiff has not put on any evidence that it has approached the investors in the managed investment scheme or the unit holders in the Unit Trust to see if they are prepared to advance the funds to meet any order for security for costs. There is no evidence of the amount invested by each of the 391 investors in the Forrestdale Scheme. The evidence is not sufficient to establish that an order for security would stultify the action. However, the evidence does not establish that the plaintiff would be able to raise the funds necessary to meet an order for security for the defendant's costs of the action. The evidence establishes that there are significant practical difficulties confronting the plaintiff in an attempt to meet any order for security for costs.

50 The third point made by the defendant is that the fact that the plaintiff's claim and the foreshadowed counterclaim raised the same or overlapping issues is only one factor that must be weighed against other factors in the exercise of the discretion. Counsel for the plaintiff referred to Nambour Valley Estates Pty Ltd v Henebery Holdings Investment Trust [2007] QSC 393. In that case the plaintiff agreed to sell a property to the defendant. The defendant paid part of the deposit but subsequently purported to terminate the contract and demand the return of the deposit monies which had been paid. The plaintiff treated this as a repudiation of the contract, elected to terminate, and declared the deposit monies forfeited. In the action the plaintiff claimed a declaration that the contract was terminated and that it was entitled to forfeit the deposit monies paid and claimed the balance of the deposit due and owing and damages for wrongful repudiation of the contract. The defendant filed a defence and counterclaim which contended that the defendants execution of the contract was procured by misrepresentations made on behalf of the plaintiff, that the contract was lawfully rescinded and that the plaintiff's purported termination of the contract was itself a repudiation which entitled the defendant to elect to terminate. The alleged misrepresentations included misrepresentations by various persons on behalf of the plaintiff, including Franks. By its counterclaim, to which Franks and others were joined as defendants by counterclaim, the defendant sought various relief including recovery of the deposit monies paid and damages. The subject property was encumbered by a registered mortgage in favour of Franks. Franks appointed receivers and managers of the plaintiff. It was common ground that the plaintiff was impecunious. The defendant submitted that the discretion to order security for costs should be exercised in its favour for a number of reasons including that whilst it could be said that any order for security for costs had the potential to stifle the litigation, the court should look to the means of those behind the litigation. It was submitted that neither the receivers nor the secured creditor, Franks, said that they did not have the capacity to put up security. Daubney J held that for the purpose of deciding in which way to exercise his discretion the matter came down to weighing the principal arguments on each side, namely:

(a) for the defendant, that the person behind the plaintiff who stands to benefit from success for the plaintiff in the litigation, ie the secured creditor, had not offered to put the necessary security for costs of the impecunious plaintiff; and

(b) for the plaintiff, that the question of the efficacy of the contract, on which the plaintiff's claim depends, will necessarily have to be litigated in the defendant's counterclaim and to enable the defendant, if successful, to obtain payment out of court of the $250,000.

In my view, having regard to all of the considerations to which I have just referred, it would be appropriate for an order for security for costs to be made. In particular, I consider that the appointment of receivers and managers to the plaintiff, combined with the evidence to the effect that success by the plaintiff in the proceeding would largely benefit a secured creditor who has chosen not to offer security for costs, outweighs the consideration urged by the plaintiff of commonality of factual issues between the claim and the counterclaim. The following observation by Needham AJ in Seabird Corporation Ltd (Receiver and Manager Appointed) (in liq) v National Securities Exchanges Guarantee Corporation Ltd (1989) 7 ACLC 1263 at 1266 is apposite:

'It would be unjust to allow a secured creditor an opportunity to litigate free of any risk that, should it fail, it would not be under an obligation to pay the costs of the defendant. The receiver and manager's duty, should he succeed in obtaining judgment, would be to apply the proceeds of the litigation towards repayment of the secured debt. In that sense, the proceedings are taken for the benefit of the secured creditor, and there is every reason, in my opinion, why the defendant should have the benefit of an order giving it some security for costs.

See also Sent & Anor v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201; and Health & Life Care Ltd v Price Waterhouse [1993] SASC 4092; (1993) 11 ACLC 1110.

51 The circumstances of this case are quite different. This is not a case where success by the plaintiff in the proceeding would benefit one person and that person has chosen not to offer security for costs. Prior to the repayment of the loan to BankWest, the proceeds from any judgment obtained by the plaintiff would go to BankWest. However, it is not correct to say that success by the plaintiff in the proceeding would largely benefit BankWest. That is because the value of the land is greatly in excess of the loan owing to BankWest. Success by the plaintiff in the proceeding would largely benefit the investors in the Forrestdale Scheme. However, there are 391 of them. It may be inferred that it would be difficult to obtain the agreement of all 391 of the investors to equally fund any required security for costs or to obtain the agreement of some of the investors to fund the required security largely for the benefit of all of the investors. That is not merely a matter of the investors being unwilling to put up the security, it is a matter of commercial practicability.

The Applicant's conduct caused impecuniosity

52 It is common ground that a discretionary factor to be taken into account is whether the defendant's alleged conduct was in any material sense responsible for the plaintiff's impecuniosity. The plaintiff submits that if the defendant, and the other purchasers who have refused or declined to complete contracts of sale, had paid the purchase price for the subdivided lots, then the plaintiff would have discharged its financial obligations entirely and therefore there is a direct causal connection between the defendant's conduct and the plaintiff's impecuniosity. The plaintiff submits that the defendant and the other defaulting purchasers have individually and collectively caused the plaintiff to commence litigation to enforce its rights and at the same time seek to use the effect of their conduct upon the plaintiff's financial position as a basis for a stay.

53 If the defendant had settled the sale of the three subdivided lots then the plaintiff would have received the contract prices which total $1,890,525. The plaintiff's financial position would not be better by that amount because the plaintiff would no longer have those three subdivided lots for sale. Mr Chapman valued those three lots on an 'as is' basis at $1,629,000. Mr Chapman's current market in one line valuation is approximately 70% of his current market 'as is' valuation. So the three subdivided lots the subject of this action may notionally be said to represent $1,140,300 of Mr Chapman's current market in one line valuation. That figure is arrived at by aggregating 70% of Mr Chapman's 'as is' valuation of each of the three subdivided lots. Thus, the plaintiff's financial position as disclosed by its statement of financial position as at 31 August 2010 would show additional net assets of approximately $488,000 (that is $1,629,000 minus $1,140,300) if the sales to the defendant had been completed, if the land is valued on the current market in one line valuation basis. That amount is significant but even with that amount added to the plaintiff's asset position there would still be reason to believe that the plaintiff will be unable to pay the costs of the defendant if it is successful.

54 However, other purchasers have refused or failed to settle their contracts for the same or similar reasons as the defendant. If the alleged wrongful conduct of all of those parties is aggregated then their conduct is a material cause of the plaintiff's present financial position. That is, if all of those purchasers who allegedly wrongfully refused to settle had settled their sale contracts then the plaintiff's financial position would be such that there is no reason to believe that the plaintiff will be unable to pay the plaintiff's costs of the defendant if successful. It is proper to take that matter into account in the exercise of the discretion. It is not necessary to establish that each of the purchasers who have refused or failed to settle have acted in concert. It is sufficient that each of them has engaged in the same alleged wrongful conduct, or at least alleged wrongful conduct that is sufficiently similar for it to properly be taken into account in the exercise of the discretion.

55 Having regard to all of the considerations to which I have referred, it would be inappropriate for an order for security for costs to be made. In particular, I consider that the fact that the plaintiff's claim and the foreshadowed counterclaim raise the same or overlapping issues combined with the evidence to the effect that the alleged wrongful conduct of the defendant, and of the other purchasers who have failed or refused to settle the contracts of sale of subdivided lots, has materially contributed to the plaintiff's current financial position outweighs the considerations in favour of ordering security for costs. The defendant's application will be dismissed.