Australian Energy and Electrical Holdings Pty Ltd v Isbell & Ors

[1] The applicants/defendants bring an application for an order that the respondent/plaintiff, Australian Energy and Electrical Holdings Pty Ltd (In Liquation) ("AEEH") give security for the defendants' costs of and incidental to defending the within proceeding.

[2] The present proceeding was commenced in the name of AEEH, as a derivative action under the Corporations Act 2001, pursuant to leave being granted on 2 November 2005, on an application by Rosewood Farms and Management Pty Ltd ("Rosewood"), which was a shareholder of AEEH. Mr Steven Clements is a director and shareholder of Rosewood, who claims to be a creditor of AEEH. AEEH's claim and statement of claim was filed on 23 November 2005. A defence was filed on 19 December 2005.

[3] AEEH carried on the business of sales, service and rental of electrical generators. Essentially, the claim made by AEEH is that the first and fourth defendants, in breach of fiduciary and statutory duties owed by them as directors of AEEH, appropriated AEEH's assets to companies which they control and caused AEEH's assets to be sold at an undervalue.

[4] The application for security for costs is brought on the basis that there is reason to believe that AEEH will not be able to pay the defendants' costs if ordered to do so (r 671(a) UCPR), AEEH being in liquidation, having been wound up on 6 June 2003. The Liquidators have indicated that they do not have the financial resources to conduct the litigation and have declined to fund it. If successful the defendants will have no recourse against the liquidators in respect of any costs order in their favour.

[5] AEEH's liquidation is sufficient to satisfy one of the prerequisites in r 671 UCPR and is a weighty consideration favouring the grant of the order sought, but is not determinative of the matter. Regard is also to be had to the discretionary factors listed in r 672 UCPR.

The prospects/merits/genuiness of the proceedings (r 672(b),(c) UCPR)

[6] The plaintiff contends that it has a strong prima facie case. Its claim concerns a valuable contract for the supply of electrical power to a mine site at Eloise, near Cloncurry in Queensland, operated by Amalg Resources NL (now called Breakaway Resources Limited ("Breakaway")). It is claimed that until 12 May 2003, pursuant to a contract for the supply of electricity between Amalg and AEEH, AEEH supplied electricity to the Eloise Mine ("the Eloise contract"). AEEH claims that the first and fourth defendants, while directors of AEEH and in breach of their duties as directors, terminated the Eloise contract, after procuring Amalg to substitute the third defendant, Texas-Australia Power Inc ("TAP"), as the supplier of electricity to the Eloise Mine. It is also alleged that, in breach of their duties as directors of AEEH, they sold the assets of AEEH to the second defendant, Australian Texas Energy Pty Ltd ("ATE"). TAP and ATE are companies with which the first and fourth defendants are associated as shareholders or directors. In addition, it is claimed that the assets and undertaking of AEEH were sold at a gross undervalue for the sum of $770,576, whereas it is said that the true value of the assets is said to be between $7.7 and $8.8 million, with the business sold being worth between $2.2 and $3.3 million. It is also alleged that the directors appropriated AEEH's assets in this manner to companies they control against a background of the Commissioner of Taxation having in late April 2003 issued director penalty notices to the directors of AEEH, in respect of AEEH's unpaid tax and in circumstances where administrators were appointed at the same time as the alleged appropriation.

[7] There is some history to this litigation. In early 2003, other proceedings (1606/03) were commenced by AEEH and TAP against Mr Clements, Rosewood and other companies associated with Mr Clements, for damages in contravention of the Trade Practices Act 1974 (Cth) (inter alia, for mispresentation as to the assets of AEEH). On 13 March 2003, McMurdo J granted interlocutory injunctive relief in those proceedings, in favour of AEEH and TAP, restraining Mr Clements and his companies from making representations that AEEH had no entitlement to payments for the supply of electricity to the Eloise Mine and that it had no interest in the generators and associated infrastructure used to supply the electricity to the Eloise Mine.

[8] The defendants do not defend the present proceedings on the basis that there was no contract between AEEH and Amalg for the supply of electricity to the Eloise Mine. Nor is it disputed that, in about May 2003, ATE entered into a contract with Breakaway to supply electricity to the Eloise Mine. It is also not in issue that the assets of AEEH were sold to ATE for $770,576. What is in issue is whether the first and fourth defendants acted in breach of their fiduciary or statutory duties as directors of AEEH, with ATE and TAP knowing beneficiaries of those breaches and whether the assets of AEEH were sold at an undervalue.

[9] The defendants' case is that while AEEH had a contract to supply electricity to the Eloise Mine, Amalg terminated the Eloise contract as a result of conduct by Mr Clements. This conduct is said to include representations made by Mr Clements that AEEH did not have any interest in the generators being used to supply electricity to the Eloise Mine, representations that the generators used were owned by his companies, the appointment of administrators to those companies and assertions to Amalg that he was in dispute with AEEH and that Amalg should deal with him rather than AEEH. The defendants contend that because of Mr Clements' conduct, Amalg refused to deal further with AEEH in respect of the Eloise contract. The defendants also deny that the first and fourth defendants acted in breach of their duties or that AEEH's assets were sold at an undervalue.

[10] There is evidence of the conduct alleged against Mr Clements by the defendants, including documentary evidence of representations made by Mr Clements to Amalg. It is to be noted however that the defendants accept that, except for two generators owned by AEEH, Mr Clements' assertions and representations that AEEH had no interest in the generators used by AEEH to supply electricity to Amalg is correct. But even if it can be shown that Mr Clements acted as alleged by the defendants, it is by no means the case that the plaintiff's proceeding can be said to have poor prospects or that it can be dismissed as not genuine. In saying this, I note that, the claim proceeds on the basis of allegations by the plaintiff that the contract for the supply of electricity to the Eloise Mine was until 12 May 2003 with AEEH, which is contrary to the position taken by Mr Clements' and Rosewood's in the injunction proceedings, where it was maintained that the contract was with a company associated with Mr Clements. As to the allegations of sale at an undervalue, each party contends that the valuation reports available supports its case. No valuation evidence is presented to support the quantum of the plaintiff's claim as to the value of the Eloise contract.

[11] I do not consider that it is possible at this stage and on the material presently available to make any useful assessment of the prospects of success of the plaintiff's claim.

Whether AEEH's impecuniosity is attributable to the defendants' conduct

[12] A relevant consideration in ordering security for cash is whether, as maintained by AEEH, AEEH's impecuniosity is attributable to the defendants' conduct (r 672(e) UCPR). The defendants claim that AEEH's impecuniosity was caused by Mr Clements' and Rosewood's conduct and that AEEH was insolvent before the Eloise contract was terminated. Indeed, the defendants point out that in proceedings 1606/03, it was asserted by Mr Clements in his affidavit filed 11.3.03 that AEEH was insolvent. It is to be observed that by April 2003, AEEH had some financial difficulties as evidenced by its substantial unpaid tax liability which resulted in director notices being issued and by demands made by its creditor the Commonwealth Bank of Australia, although it cannot be said that any financial problems could not have been overcome with the continued income from the Eloise contract. A proper consideration of this discretionary factor is thus closely connected with the merits of the respective claims and cannot, on the present material, be determined. It is thus not a factor that weighs against the ordering of security.

[13] The interlocutory injunctions made by McMurdo J on 13 March 2003 were made on an undertaking as to damages by AEEH and TAP and on their undertaking to pay $75,000 into AEEH's then solicitor's trust account as security for that undertaking and security for costs. On 21 December 2005, Fryberg J ordered that AEEH be removed as a plaintiff in those proceedings and made a costs orders against AEEH in favour of Mr Clements and other defendants.

[14] The respondent contended that if security for costs was considered appropriate in this case, that there was ample security available in the form of the costs order made in its favour by Fryberg J. It is estimated by the respondents' solicitors that those costs are in the vicinity of between $40,000 to $80,000 and that the assessment of the costs will be concluded in two months time. Nevertheless, I do not consider that that is a sufficient basis for the refusal of an order for security. In any event, it may be some considerable time before the assessment is finalised, notwithstanding the expectation of the respondent's solicitors.

The means of those standing behind the proceeding (r 672(a) UCPR))

[15] Relying on Mantaray P/L v Brookfield Breeding Co P/L (1990) 8 ACLC 304 and Gentry Bros P/L v Wilson Brown & Associates P/L (1992) 8 ACSR 405, it was contended by the respondent that Mr Clements ought to be regarded as a person standing behind the proceedings, who has assets available to meet an order for costs so that security ought not be ordered. It is of course pertinent to have regard to the means of those standing behind the proceeding (r 672(a) UCPR). But it is also to be noted that, although an undertaking by those standing behind a company to pay a successful defendant's costs may be a weighty consideration supporting refusal of an order for security, it is not to be elevated to such importance as to require a predisposition towards the refusal of security (Epping Plaza Freshfruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] VSCA 43; (1999) 2 VR 191 at 198; Iron Gates P/L (in Liq) v Richmond River Shire Council [2002] QSC 458).

[16] A personal guarantee was offered by Mr Clements in his affidavit sworn 10 February 2006 but was by its terms limited to the extent that a costs order made against AEEH exceeded the $75,000 held in the solicitor's trust account. During oral argument, counsel obtained clarification of Mr Clement' offer and indicated that Mr Clements was prepared "to accept personal responsibility for the costs". The respondent submitted that Mr Clements, having offered to guarantee personally the defendants' costs if successful, has made himself available for whatever he is worth.

[17] There is some question as to Mr Clements financial means. In Mr Clements' affidavit sworn 10 February 2006, he deposes to having entered into a contract on 20 January 2006 to purchase residential property for $1,250,000. The contract exhibited to his affidavit provides for settlement in 60 days, but for the seller to remain in possession rent free until 30 June 2006. The contract indicates that a deposit of only $10,000 was required and that the finance was specified as "sufficient to complete". Mr Clements deposes that an application for finance in the sum of $500,000 was approved on 9 February 2006. It is not stated what Mr Clements net equity in the property will be. Mr Clements also deposes to receiving a wage of $130,000 from a company, WASP Diesel P/L, but does not reveal details of his financial liabilities. However, a somewhat different picture of Mr Clements' finances was presented to the court in proceeding 1606/03. In that proceeding, it was asserted by Mr Clements's solicitor (see affidavit of Mr Hawthorn filed 11.3.03) that Mr Clement had "limited financial resources". A position that was reiterated in oral submissions before McMurdo J on 7 February 2006 by Mr Clements' solicitor, Mr Russell, who referred to evidence that Mr Clements was "impecunious" (see affidavit of Mr Kelly filed 13.2 06, ex SK26). The weight to be accorded to the offer by Mr Clements must be assessed against the limited nature of the disclosure by Mr Clements of his finances.

Whether an order would be oppressive/stifle the proceeding (r 672(g),(h) UCPR)

[18] An additional factor to be considered is whether an order for security would stifle the proceeding. As was observed in Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 at 4, in having regard to this factor, it is of significance that there is a creditor who stands to benefit from the outcome of the litigation who is not without means. The court said:

"... 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."

[19] While Mr Clements has indicated that, at present, he is not prepared to fund the litigation, given his preparedness to guarantee the defendants' costs and his affidavit evidence as to his recent purchase and his income, it is not apparent that the proceeding could not progress if security for costs were ordered.

[20] For the reasons, I do not consider that the discretionary factors relevant in the present case militate against the ordering of security for costs. In my view, the defendants are entitled to an order for security for costs.

[21] The question then arises as to the quantum and nature of the security that ought to be provided. The applicants are not entitled to a complete indemnity for their costs in defending the proceedings. An estimate of the anticipated costs of the defendants up to and including the first day of trial has been provided by the parties. The applicant's solicitors have quantified these costs as in the vicinity of $180,000. The estimated recoverable costs on a standard basis is in the order of $90,000 to $144,000. The respondent's solicitors on the other hand have quantified the costs in defending the proceeding up to and including the first day of trial as $52,588. That estimate is to be contrasted with those solicitors' estimate of the costs of the subject of the order by Fryberg J. The application for security for costs has been brought at an early stage in the proceeding and this is reflected in the estimate provided by the applicants' solicitors.

[22] Taking a broad brush approach, I consider that security in the amount of $80,000, which involves some discount on the estimate provided by the applicants, is sufficient security at this stage

1. That the plaintiff give security for the defendants' costs of and incidental to defending the proceedings here in the sum of $80,000;

2. That the security be given by payment into court or in any other way approved by the court or the registrar;

3. That the security be provided within 28 days of this order, failing which the plaintiff's claim against the defendants is stayed;