Australian Worldwide Pty Ltd v AW Exports Pty Ltd

Supreme Court of NSW|2018-10-05|Before: Parker J

Solicitors: Dormer Stanhope (Applicant/Third Defendant) JHK Legal (First and Second Respondents/First and Second Plaintiffs) File Number(s): 2017/40926 Publication restriction: Nil

Judgment

This is an application by the third defendant, Mozammil Bhojani, that the plaintiffs provide security for his costs of the proceedings.
The plaintiffs in the proceedings are Australian Worldwide Pty Ltd ("AWW") and Australian Worldwide Exports Pty Ltd ("AWE"). AWE is a wholly owned subsidiary of AWW. Both companies are in liquidation. They were placed in voluntary administration in January 2014 with Christopher John Palmer being appointed voluntary administrator. They proceeded to liquidation, with Mr Palmer being appointed as liquidator, in June 2014.
At all material times the sole director of AWW and AWE was Hugh Jones. Mr Jones is the second defendant. The first defendant in the proceedings is AW Exports Pty Ltd, a company incorporated in December 2013. Initially its directors were Warwick Broxom, the fourth defendant, and Jonathan Kaufman, the fifth defendant. One-third of its shares were initially held by Mr Broxom and the other two-thirds were held by persons said to have been associates of Mr Broxom and Mr Kaufman. The directors of the company are now Mr Bhojani and Mr Kaufman. The shareholders are a company incorporated in Nauru said to be associated with Mr Bhojani and a company incorporated in Australia said to be associated with Mr Kaufman.

Issues for determination

The security application is made under the Corporations Act 2001 (Cth), s 1335(1). The Court has a parallel power to award security in such circumstances under the Uniform Civil Procedure Rules, r 42.21(1)(d). It is not necessary to refer to that rule for the purpose of this application.
It is common ground that the first question for the Court is whether it appears by credible testimony that the plaintiff will be unable to pay the defendant's costs. If, but only if, this is established the Court moves to the second, discretionary stage of considering whether in the circumstances of the case security should be ordered. For this purpose, the fact that the plaintiff is unable to meet the costs is itself a factor in favour of making an order.
The first contention of AWW and AWE was that the threshold test had not been satisfied. Alternatively, they contended that if it had been, the Court should still, in the exercise of discretion, decline to award security.
After I heard argument on the application in these proceedings (which was followed by further written submissions from the parties), I handed down a decision on another security for costs application in Kupang Resources Ltd v Elias [2018] NSWSC 1553. One of the issues in that case was how the quantum of security was to be fixed, given the uncertainties about what costs would actually be incurred in the future, and I made orders in a form designed to accommodate this. A similar point arises in this case if, contrary to the principal submission of AWW and AWE, security were ordered.
Prior to delivering judgment on this application, I drew the attention of the parties to my decision in Kupang and invited them to present any further submissions they might wish to make on whether, should I conclude that security should be granted in this case, I ought to make orders in the same form as in Kupang. Counsel for Mr Bhojani raised no objection to such a course, but counsel for AWW and AWE lodged further written submissions. The submissions advanced further arguments about the grant of security generally. I have dealt with these arguments, even though I do not consider that they fell within the scope of the further submissions which were invited.

Inability to pay costs

There is a dispute about what Mr Bhojani's costs of the proceedings will be, which I address in more detail below. But it is plain that they will run into the hundreds of thousands of dollars.
An Originating Process in separate proceedings brought by Mr Palmer and AWW for the recovery of alleged preferential payments is in evidence. It is alleged in those proceedings that AWW was insolvent from August 2013 onwards. In any event, I think I can infer that AWW and AWE would not have proceeded to liquidation unless they had been insolvent.
In their letter of 8 June seeking security, Dormer Stanhope stated: The companies are obviously in liquidation and there has been no indication that there is any funds available which, in the event of our client's success and an adverse costs order, would enable our client to recover its costs. If that fact is seriously disputed please let us know the basis for such dispute and the facts relied upon for that contention.
JHK stated in response that the proceedings were being conducted pursuant to a litigation funding agreement under which AWW and AWE had an indemnity against any adverse costs order. JHK undertook to provide a copy of the funding agreement if an undertaking was given to keep it confidential. The undertaking was not provided (or at least not immediately) but the funding agreement is in evidence on the application.
The funder under the agreement is "TCA Global Credit Master Fund LP". I assume that, despite the slight variation in name, this is the same entity as AWW's financier, TCA. TCA's address is stated to be in Hollywood, Florida. There is no evidence before the Court of the financial position of TCA, or even what type of legal entity it is.
The funding agreement relevantly provides: 4 Funding 4.1 TCA agrees to provide the following Funding to the Liquidator and/or the Companies: (a) all Legal Costs up to the Funding Limit; (b) all Liquidator Costs; (c) any Adverse Costs Order; and (d) any other costs incurred with the prior written consent of TCA. … 6. Indemnity 6.1 For the avoidance of any doubt, TCA hereby indemnifies the Liquidator and the Companies from and against any Adverse Costs Order against any one or more of them including any Adverse Costs Order made after the expiration or termination of this deed, subject to clause 6.2 below. 6.2 The Indemnity in clause 6.1 (the Indemnity) survives the termination of this deed and extends to any Adverse Costs Order made after the termination of this deed in circumstances where the relevant costs to which the Adverse Costs Order relates comprise (in whole or in part) Pre-Termination Costs, save that:- (a) Where only part of the costs to which the Adverse Costs Order relates comprise Pre-Termination Costs then the Indemnity will extend to that part of the Adverse Costs Order which is attributable to those Pre-Termination Costs; and (b) The Indemnity will not extend to the balance of the costs to which the Adverse Costs Order relates. … 7. Termination of this agreement 7.1 Notwithstanding anything contained in this agreement TCA may at any time terminate this agreement by providing one month's notice in writing to the Liquidator, the Companies and the Lawyers. 7.2 In the event that this agreement is terminated pursuant to clause 7.1, TCA must pay the following amounts or such proportion of the amounts as relates to the period from the date of this agreement to the date of termination of this agreement: (a) all Legal Costs; (b) all Liquidator Costs; (c) any Adverse Costs Order; and (d) any other costs incurred with the prior written consent of TCA.
There is no direct evidence before the Court of the plaintiffs' current financial position. In particular, Mr Palmer's reports to creditors are not in evidence. In opposition to the security application, the plaintiffs relied on an affidavit of Liam Bailey. Mr Bailey is a partner of Mr Palmer's firm and has responsibility for the administration of the liquidations, reporting to Mr Palmer. His affidavit contained no direct evidence as to the financial state of the administrations. Mr Palmer said that AWW and AWE traded until June 2014 under Mr Palmer's control. He said that there had been "some recoveries in the liquidation from third parties" but did not say how much had been recovered. He also said that TCA was not only funding these proceedings but had previously funded public examinations undertaken by Mr Palmer as liquidator. This was done under a funding agreement similar to the funding agreement which covers these proceedings.
Counsel for AWW and AWE pointed out that they have the benefit of an indemnity from TCA against any costs which may be awarded in favour of Mr Bhojani. Counsel submitted that in an application of this sort it is conventional for the defendant seeking security to issue notices to produce or subpoenas concerning the financial position of the plaintiff company and its ability to meet the defendant's costs. Counsel observed that no such step had been taken in this case. Counsel's submission was that in the circumstances of this case the onus lay on Mr Bhojani as applicant to demonstrate there was reason to believe that AWW and AWE will be unable, even with the benefit of the indemnity from TCA, to meet his costs. Counsel submitted that the onus had not been discharged.
The Corporations Act, s 1335(1), provides: (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, 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 his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241; [2000] WASCA 69 the Full Court of the Supreme Court of Western Australia considered the impecuniosity requirement under s 1335(1). Pidgeon and Owen JJ set out the legislative history of the section and reviewed the relevant decisions. Their Honours pointed out that when initially enacted, the provision required that it be "proved to [the Judge's] satisfaction" that there was reason to believe the plaintiff would be unable to pay the defendant's costs. But this requirement was replaced in 1862 by a requirement that it "[appear] by any credible testimony" that there was reason to believe the plaintiff would be unable to pay. Their Honours said (at [24]): It becomes necessary now to determine whether there was before the Master the necessary credible testimony to give him jurisdiction. In view of the history of the section we would, for our part, see no requirement to attempt to define further the expression. The words speak for themselves and in that sense the expression is similar to expressions such as "beyond reasonable doubt". For the reasons we have set out we are not in accord with one proposition referred to by Lee J in Warren Mitchell Pty Ltd v Australian Maritime Officers' Union [(1993) 11 ACLC 1238] when his Honour said (at 1241) "qualification of the word 'testimony' by the word 'credible' suggest that evidentiary burden is undertaken by the parties seeking the order". We would not see any burden as nothing is sought to be proved. The legislature that first enacted the words, used them to replace words referring to proof and in our view, were dispensing with a requirement to prove a matter. What is required is an evaluation of the evidence led by the applicant to see whether that leads to a reason to believe that the corporation will be unable to pay the costs of the defendant.
In Northampton Coal, Iron and Waggon Co v Midland Wagon Co (1878) 7 Ch D 500 Jessel MR said (at 503): I should say that the fact of the Plaintiff company being in liquidation would be sufficient "reason to believe" the assets to be insufficient unless evidence to the contrary was given.
Churchills Ltd v Pilcher (1940) 57 WN (NSW) 109, was an appeal from a decision of Bavin J refusing an application for security made under the then equivalent of s 1335(1) (Companies Act 1936 (NSW), s 360). Bavin J said (quoted at 109 of the appeal judgment): All the cases that I have had under this [section] have been cases where the company was either in liquidation - that seems to be in itself a ground - or cases where there were admissions by the company itself or unquestionable evidence from the books of the company, or facts relating to the company which show that it could not pay.
On appeal to the Full Court, Jordan CJ said that there was nothing in the language of the section to justify restricting it to cases of the types enumerated by Bavin J. On review of the evidence, he found that there was sufficient reason to believe that the company would be unable to pay the costs if unsuccessful and security was awarded.
In FFE Minerals, it was noted in Western Australia the rules of court expressly authorised the making of an order for security in a case where the plaintiff was a company in liquidation. There was no equivalent rule in England, and there has never been an equivalent rule in this State. Strictly speaking, therefore, Bavin J may have overstated the position in saying that the fact that a plaintiff was in liquidation was "itself a ground" for security. But it does seem that in practice, if the plaintiff was in liquidation, that fact alone, unless something else appeared, was treated as sufficient to enliven the Court's power to order security.
In Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR ¶40-584 the plaintiff company was the trustee of a trust. The trust assets consisted of a business with a substantial amount of equity in it. The trust deed contained an express right of indemnity and the applicant plaintiff undertook to exercise its right of indemnity in the event of any adverse costs order being made against it. It was argued for the plaintiff that in those circumstances the defendants had not shown by credible testimony that there was reason to believe that the plaintiff would be unable to pay the costs. Smithers J said (at 46729): Where the only tangible assets of [a plaintiff] company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the Court to have in mind the difficulties which a successful [defendant] 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 plaintiff] company as if it were without assets to meet such a liability.
The directors had made an offer to provide unconditional guarantees by deed to meet any costs which might be awarded against the plaintiff. The defendants refused to accept the offer in view of security. Smithers J said (at 46730): I think it was a matter for the [defendants] to decide whether they would accept the offer of the directors' guarantees. It may well be that the directors were financially well equipped to give the guarantee. But the [plaintiff] did not provide appropriate evidence of that, and in any event I think the [defendants] were entitled to take the view that they were entitled to look to the [plaintiff] itself to support its litigation and were not required to make a judgment as to the adequacy of a personal guarantee or the efficacy of the [plaintiff's] undertaking to enforce the indemnity.
The fact that a company is in liquidation does not always mean that it will be unable to pay the costs of litigation brought in its name. That is so even if it is a creditors' winding up or a court-ordered winding up in insolvency. It may be that, in a particular case, any costs awarded in favour of the defendant can be funded out of the monies in the administration. For this reason, a defendant seeking security would be well advised to lead evidence negativing this possibility, which would usually be done by tendering the liquidator's report to creditors. That was not done in this case. But I do not think it is fatal to the application. On Mr Bailey's evidence, trading activity ceased in mid-2014. No doubt significant liquidation and legal costs have been incurred since then. Funding was apparently required from external sources to conduct the examinations. I think I can infer that if there were significant funds still available in the administration, I would have been told about it. I am satisfied that there is reason to believe that AWW and AWE have insufficient funds of their own to meet an order for costs in favour of Mr Bhojani.
In an application under s 1335(1), the Court is required to make an assessment of whether the plaintiff company will have sufficient funds at the time judgment may be given against it to meet any costs awarded in favour of the defendant. Where the company's operations involve extending credit to its customers, the ability of those customers to meet their obligations may be relevant in assessing the company's own prospective ability to meet its obligations. But the focus in s 1335(1) is on the company. The question is whether the company will be able to meet the defendant's costs, not whether someone else will be able to meet the defendant's costs on the company's behalf.
AWW and AWE became insolvent and ceased trading long before these proceedings were commenced. The indemnity from TCA was obtained for the purposes of the proceedings and has nothing to do with the trading activities of AWW and AWE. In my opinion it is irrelevant to determining the question of impecuniosity posed by s 1335(1). Given my finding that AWW and AWE are unable to meet Mr Bhojani's costs from the amounts available to them in the administration, the requirement of impecuniosity is satisfied. The indemnity is only relevant at the discretionary stage where the question is whether, despite the impecuniosity of AWW and AWE, satisfactory arrangements can be put in place to protect Mr Bhojani from the risk of non-recovery.
I think this view is consistent with the approach by Smithers J in the Laundry Coin-Wash case. His Honour treated the adequacy of the indemnity and the undertakings offered by the directors as going to the reasonableness of the defendants pressing the security application. As such, the issue apparently went to discretion. Discretion would not have fallen for consideration if his Honour had not considered that the impecuniosity requirement was established. Presumably in that case it was established because the evidence showed the assets of the company were held on trust and thus, on the face of it, were not available to meet the company's debts. The position is much clearer in this case where AWW and AWE have no assets and the indemnity is being offered by an external financier.
If I am wrong in the view that the indemnity is irrelevant to impecuniosity, I think that, once it was established that AWW and AWE lacked the ability to meet Mr Bhojani's costs from their own resources, there was an evidentiary onus on AWW and AWE to demonstrate that the indemnity was sufficient to ensure that any costs order in favour of Mr Bhojani would be met. That is consistent with what Jessel MR said in the Northampton Coal case. And in the Laundry Coin-Wash case, Smithers J clearly saw the onus as lying on the plaintiff company to show that the arrangements for indemnity or guarantee offered by it would result in the defendants' costs being met.
The facts of the present case illustrate some of the practical problems with the submission by counsel for the plaintiffs that, merely by disclosing the existence of an indemnity, AWW and AWE were able to cast an onus on Mr Bhojani to demonstrate that that indemnity provided insufficient cover for any order for costs that might be made in his favour. How does the Court know that if the indemnity is called upon it will prove possible to enforce it? What if TCA resists enforcement on the grounds of some sort of non-disclosure or misrepresentation? And even if a judgment could be obtained against TCA on the indemnity, does TCA have sufficient assets to meet the judgment? Can its assets (wherever they may be) be reached by execution? In my view it would be quite unreasonable to say that these sorts of matters should have been addressed by Mr Bhojani issuing notices to produce or subpoenas. That would be so even if TCA were in the jurisdiction, but in fact it is outside the jurisdiction and there is nothing to show that it would even be amenable to a subpoena. I reject counsel's submission.
There is no evidence before the Court that TCA has any assets in the jurisdiction. Indeed, there is no evidence before the Court concerning TCA's financial position at all. The Court therefore cannot even be satisfied that, assuming the indemnity is enforceable against TCA, Mr Bhojani's costs could be recovered from TCA. In my view, the plaintiffs' reliance on the indemnity fails for this reason alone.
Furthermore, the funding agreement in this case contains no obligation on TCA to fund the litigation to its conclusion. TCA can withdraw at any point, although it will be liable for costs incurred up to that point. Counsel for the plaintiffs submitted that if TCA withdrew there would be no risk to Mr Bhojani. But that is not necessarily so. Neither the plaintiffs nor TCA have any obligation to notify Mr Bhojani of the termination of the funding agreement. The termination of the agreement would not necessarily bring the proceedings to an end. AWW and AWE might be able to keep the proceedings going for some time, depending on their fee arrangements with their solicitors. Or they might obtain further funding which would not necessarily include an indemnity against costs awarded. There might readily be costs not covered by TCA's indemnity, or where the coverage by TCA's indemnity was doubtful.
In her latest supplementary submissions, counsel for AWW and AWE took a new point. Counsel pointed out that there are a number of different defendants and AWW and AWE may succeed against some of them. Counsel suggested that multiple defendants had been joined because AWW and AWE were unable "to predict ultimately where fault may lie (either in a factual or legal sense)". Counsel submitted that the Court could not determine at this stage whether it had been unreasonable or improper to join Mr Bhojani as a defendant. The suggestion was that if it had not been, Mr Bhojani might be required to bear his own costs. Counsel also submitted that it was impossible to say at this point whether or not there might be something in the conduct of an ultimately unsuccessful defendant other than Mr Bhojani which would justify the making of a Sanderson or a Bullock order with respect to his costs.
In so far as this submission suggests that AWW and AWE may be uncertain about whether fault lies with Mr Bhojani, I find it somewhat disturbing. AWW and AWE have seen fit to commence the proceedings and to make serious allegations against Mr Bhojani. The submission is also wrong in suggesting that the Court would deprive Mr Bhojani of a costs order against AWW and AWE merely because it had not been unreasonable or improper to bring the claim against him. Much more than that would be required. I see nothing to suggest that AWW and AWE have any realistic prospect, should they fail against Mr Bhojani, of obtaining an order that he himself, or some other unsuccessful defendant, bear his costs of the proceedings. But it is not necessary to pursue this any further.
The hypothesis upon which an application for security for costs is made is that the defendant will succeed in the proceedings and obtain an order for costs in his favour in accordance with the usual rule that costs follow the event. If AWW and AWE fail against Mr Bhojani but persuade the Court to order him or some other unsuccessful defendant to bear his costs of the defence, there will be no costs order against AWW and AWE to which the security will attach. But that cannot be a reason for declining to order security in the first place.
Counsel for AWW and AWE also stated in her latest submissions that if the Court were concerned as to the availability of the indemnity under the funding agreement it could order TCA to provide a guarantee. But the Court has no power to order TCA, a non-party, to do anything. Where a plaintiff company wishes to avoid the consequence of its impecuniosity, it may prevail upon a funder or some other person who stands to gain from the litigation to offer a personal undertaking to pay the costs. The question then becomes, as it was in the Laundry Coin-Wash case, whether the undertaking means that, in the exercise of the Court's discretion, security should not be ordered. No such undertaking has been offered in this case, so questions of its value and enforceability, among other discretionary considerations, do not arise.
For these reasons, I am satisfied that there is reason to believe that Mr Bhojani's costs will not be met if he succeeds in his defence. The threshold requirement of s 1335(1) is satisfied.

Discretionary factors

I stated earlier that I considered that the indemnity was relevant only on the question of discretion. For the reasons just given, I do not think it is a discretionary answer to Mr Bhojani's claim for security.
Counsel for AWW and AWE identified three factors which, she contended, should lead to Mr Bhojani's security application being refused. But these did not include the stultification of the proceedings. It was not suggested that if security were ordered, it could not be provided.
The first discretionary contention was that if there is a risk that AWW and AWE will prove unable to meet Mr Bhojani's costs, this is a consequence of his own wrongful conduct. That has been recognised in the authorities as a ground for refusing an order for security. It may be that the discretion should only be exercised in a plaintiff's favour on this ground if, in addition, the proceedings would otherwise be stultified. But on any view much more is required than mere assertion that the defendant's conduct caused the plaintiff's impecuniosity.
In Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291 the plaintiff company, a property developer, claimed damages for losses suffered on the purchase of a property. In answer to an application for security the plaintiff contended, among other things, that the losses suffered on the property had driven it out of business and led to its impecunious state. McClellan CJ at CL (with whom Mason P agreed) said (at [94]-[96]): 94 The claimants carried the onus of establishing both the adequacy of their financial position before their dealings with the opponents and that the opponents' actions have caused or at least materially contributed to the claimants' inability to meet an order for security for costs (see Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [100]). 95 In Law of Costs, G E Dal Pont says (at [29.96]): [T]he plaintiff must be able to support the allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial. For this reason, it is not enough that the defendant's conduct is merely a contributing factor - it must be the material contributor to or cause of the plaintiff's impecuniosity." [Emphasis added] (see also M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100 per Needham J; Fiduciary Ltd v Morningstar Research Pty Ltd at [88] per Austin J; Pioneer Park (in liq) v ANZ [2005] NSWSC 832 at [14] per Einstein J; Sharjade v Darwinia Estate [2006] NSWSC 708 at [17]-[20] per McDougall J). 96 The events of which complaint is made occurred in 1993-1999. It may be that those events, whether by result of actionable fault of the opponents or otherwise, deprived the claimants of anticipated profits. It is conceivable that since those events to date their working capital has diminished, making it more difficult to continue their development activities and take advantage of available business opportunities. However, the evidence before her Honour would not enable these conclusions to be drawn. The fact that the claimants were unable to realise profits from the proposed venture does not, without other evidence, establish that their present impecuniosity has been caused or even materially contributed to by the opponents.
Counsel for AWW and AWE pointed to complaints made by JHK in correspondence that the delay in providing discovery was preventing AWW and AWE from completing their expert evidence for the purposes of the proceedings. Counsel submitted that without this evidence AWW and AWE could not be expected to "meet the standard as expressed by McClellan CJ at CL in Jazabas" and that what his Honour said should not be applied "inflexibly in circumstances of this case".
I do not think that Mr Bhojani's failure to provide discovery has anything to do with the matter. There is nothing in what McClellan CJ at CL said in Jazabas to suggest that his Honour's statement of principle was only a guide or that the Court could be "flexible" about whether to follow it. What his Honour said covers the facts of this case and I must apply it. That is how the doctrine of precedent works.
On AWW's and AWE's own allegations, AWW was in financial difficulty before December 2013. The Statement of Claim does not allege that this was in any way the responsibility of Mr Bhojani. There is no evidence from AWW and AWE on the question. I think it is clear from Jazabas that AWW and AWE cannot escape an order for security merely by asserting that Mr Bhojani's conduct, the wrongfulness of which is the very subject of the proceedings, deprived them of profits they would otherwise have made.
Next, counsel for AWW and AWE submitted that the evidence did not establish that AWE was unable to meet Mr Bhojani's costs. Counsel pointed out that while AWW had made a preference claim asserting that it was insolvent, AWE had made no such claim. Counsel's proposition was that if security could not be awarded against AWE, then it should not be awarded against AWW as co-plaintiff, even if an order for security against AWW was otherwise appropriate. Counsel relied on the well-known decision in Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523; (1984) 8 ACLR 835.
I do not think that the fact that AWE has not made a preference claim alleging its own insolvency has any significance. My decision against AWW on the impecuniosity issue depends upon AWW being unable to meet Mr Bhojani's costs from its own resources. This applies equally to AWE.
I considered counsel's proposition in Woolworths Ltd v About Life Pty Ltd (No 2) [2018] NSWSC 1340, where I discussed some of the limitations which may surround it. Given my conclusions on AWE's financial position it is unnecessary to go into those for present purposes. But I note in passing that AWW has its own claims against Mr Bhojani which are distinct from any claims by AWE (in fact, it is not easy to see from the Statement of Claim what losses AWE, which was not a party to the Master Supply Agreement, could claim against Mr Bhojani). A refusal to award security against AWE would not necessarily prevent the Court from awarding security against AWW.
The third discretionary factor raised by counsel for AWW and AWE was the delay in making the application for security. Counsel submitted that the delay deprived the Court of power to order security. That cannot be correct, but it is well recognised that delay is a relevant factor in the exercise of the Court's discretion.
The present is a clear case of a lengthy and unexplained delay. The question of security was raised fifteen months after the beginning of proceedings, following Mr Bhojani's failure to comply with his discovery obligations and when, only two days beforehand, Mr Bhojani's solicitors had put forward the fact that Mr Bhojani had no security for his costs as a reason for modifying those discovery obligations.
On the other hand, there are many statements in the authorities to the effect that delay in bringing an application is of little if any significance unless the question of the proceedings being stultified is raised: Rickard Constructions Pty Ltd v Allianz Australia Insurance Ltd [2002] NSWSC 1162 at [17]; Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326 at 332-333. This is because usually the only prejudice created by delay is the expenditure of further costs on the litigation. If it is not suggested that the making of an order for security will stultify the litigation, then the delay has caused no prejudice.
It has not been suggested in this case that an order for security would stultify the proceedings. Moreover, the proceedings are being funded under a litigation funding agreement with TCA. In my view, a financier who agrees to fund litigation by an insolvent company should ordinarily expect that the company will be required to give security. In such a case, the provision of security should be seen by the financier as part of the cost of doing business, indistinguishable from the cost of funding the fees of the company's own lawyers and the disbursements incurred in mounting the claim.
In the present case, TCA was an existing financier of the company. But I do not think this makes any difference. The fact that the case was an appropriate one for the award of security would have been obvious at the outset. If it did not form part of the assessment TCA undertook when deciding whether to fund the proceedings, it should have. The fact that no application was made at an earlier stage is TCA's good fortune, and nothing more.
For these reasons, I see no reason why security should not now be awarded at least to cover the costs to be incurred from now on in the proceedings. Whether the security should cover costs already incurred by Mr Bhojani is a more difficult question. There is no reason to think that if an application had been made at the beginning, security would not have been awarded for the whole of Mr Bhojani's costs. If the evidence showed that the failure to make an application for security resulted from misunderstanding or inadvertence on Mr Bhojani's side, it might be argued that he should not be disadvantaged by the mistakes of those advising him. But there was no such evidence in this case. For all I know, the question was considered and specific instructions were given not to make such an application because of forensic considerations which I cannot see. In the circumstances, I propose to exclude from the assessment of any security the costs incurred up to 8 June, and also the costs of complying with Mr Bhojani's discovery obligations, which should have been completed by that date.

Quantum and timing of security

Dormer Stanhope's letter of 8 June seeking security stated that Mr Bhojani had already incurred costs of approximately $73,000. The letter contained a high-level estimate of Mr Bhojani's costs totalling $450,000. It stated: We can if requested provide a more comprehensive breakdown but we assume that you are familiar with the legal costs likely to be incurred, and unless requested to do so we do not imagine that there could be serious dispute that costs in that order will, if the matter proceeds further, be incurred.
In JHK's response, there was no request for further information or any other comment on the figures in Dormer Stanhope's letter.
The affidavit in support of Mr Bhojani's application from Justeen Dormer, Mr Bhojani's solicitor, addressed the question of quantum in the following way. Ms Dormer deposed to lengthy experience as a solicitor. She set out, in general terms, some of the steps she thought would, or would probably be required in preparing the case for hearing. She identified the charge out rates of the solicitors and counsel acting for Mr Bhojani. Her evidence relevantly continued: 27. I have previously obtained expert evidence in relation to the financial affairs and solvency of companies and depending on the complexity and range of issues involved, I envisage costs to be between $50,000 and $100,000. … 29. Based on my experience and the issues central to this dispute, I estimate that the third defendant's costs in these proceedings up to and including trial will be approximately $489,200 (excluding GST). The following table provides a high-level breakdown of those estimated costs: Stage of proceeding Fees and Disbursements (Excl GST) Compliance with discovery orders $35,000 Pre-trial matters including but not limited to expert evidence, preparation of bundles for trial, preparation of bundles, conferences with client and Counsel, reviewing objections and submissions, lists of issues, lists of authorities $100,000 Mediation including preparation of position paper (if required) $30,000 Attendance at hearing (based on a 10 day hearing including preparation before and after court) $80,000 Post hearing matters (additional submissions and correspondence) $30,000 Counsels fees for preparation and the hearing (both junior and senior counsel) $79,200 based on 10 days hearing and 8 days preparation and if senior counsel is retained a further $135,000 plus GST based on 5 days preparation and 10 days hearing at $9,000 per day TOTAL $489,200

… 31. The third defendant has incurred costs in the amount of approximately $73,000 to date in defending this matter. This amount does not include costs incurred by the third defendant from his previous solicitors. Costs incurred to date have not been included in the above estimate of costs.

There was no evidence in response on the application by AWW and AWE. At the hearing, counsel for AWW and AWE objected to Ms Dormer's evidence essentially on the ground that it constituted opinion evidence which did not comply with the requirements of the Evidence Act 1995 (NSW), s 79.
Counsel for Mr Bhojani initially submitted, as I understood him, that no such objection was available on an application of this sort. It is well established that in determining how much security to award in an application of this sort, the Court takes a "broad brush" approach. Counsel observed that evidence of the type given by Ms Dormer is frequently given in security applications and is used by the Court as a guide in fixing the amount of the security. Certainly my experience reflects that observation. But the objections were made and it were necessary to rule on them.
Ms Dormer's evidence at paragraph 31 was a statement of the approximate level of costs incurred. As Mr Bhojani's solicitor, Ms Dormer had personal knowledge of the level of costs rendered and paid. Her recollection was, as might be expected, imprecise. In my view, that did not make it a matter of opinion. It is commonplace for a witness to give evidence in the form of recollections which are more or less approximate.
Where a witness gives evidence from recollection about the expenditure of money, that is not the best evidence. The best evidence would be financial records. But that does not make the witness' evidence inadmissible. For these reasons I rejected the objection to paragraph 31.
Where precision is important, the court may decline to act on evidence of expenditure given by a witness which is no more than the witness' recollection. Especially is this so if the best evidence, in the form of financial records, would have been available. I do not see that as applicable here, especially where AWW and AWE have had an opportunity to test Ms Dormer's figure and have chosen not to. I see no reason to doubt that Mr Bhojani's costs have been approximately what Ms Dormer said they were.
The figures given by Ms Dormer at paragraphs 27 and 29 for Mr Bhojani's likely costs give rise to different considerations. Counsel for Mr Bhojani submitted that it would be impossible, at this stage, to predict what his costs might be. Counsel appeared to suggest that the relevant question was not how much the costs were likely to be, but rather what Ms Dormer's estimate of them was.
I cannot accept this suggestion. If the Court's power under s 1335(1) is enlivened, it may require "sufficient security" to be given for the defendant's costs. The likely level of the defendant's costs is relevant to, if not necessarily determinative of, how much security is "sufficient". Ms Dormer's estimate was not of itself relevant; the relevant question was what the likely level of costs will in fact be, no matter how difficult that may be to determine at present. In my view a solicitor's estimate of future costs must, strictly speaking, satisfy the requirements of s 79.
Counsel for AWW and AWE criticised the form of Ms Dormer's estimates. Counsel submitted that they were merely conclusory without any supporting reasoning or explanation: cf Makita (Aust) Pty Ltd v Sprowles (2001) 52 NSWLR 705; [2001] NSWCA 305.
For an opinion to be admissible under s 79, sufficient evidence must appear to show that it is "based on" witness' expertise for the purpose of s 79. That expertise, and the basis for the opinion, does not always need to be spelt out in the witness' opinion; as the High Court said in Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; [2011] HCA 21 (at [37]) with reference to the example of a specialist medical practitioner, showing that the opinion of an expert is "based" on their "training, study or experience" can, in some circumstances, be satisfied "very quickly and easily" by inferring that connection from the opinion itself. This will of course depend on the nature of the expert witness and the opinion sought to be adduced in the particular case. Whether a sufficient basis is disclosed to satisfy the minimum conditions of admissibility is a matter of degree, involving practical judgment.
In my view, the estimate of time set out in the table in Ms Dormer's affidavit at paragraph 29 was sufficient. Ms Dormer's estimate that the hearing would take ten days, for instance, was obviously based on her litigation experience and in my view no further breakdown was necessary to demonstrate that the opinion was "based on" relevant expertise. But I thought the figures given in paragraphs 27 and 29 fell on the other side of the line. They must have been based on some form of calculation, however imprecise, but the integers of that calculation were not identified. For these reasons, I admitted paragraph 29 to the extent it contained time estimates but rejected the rest of paragraphs 27 and 29.
In Kupang, I made orders fixing the security in two tranches, one representing costs so far incurred and to be incurred up to the date on which the proceedings are fixed for trial, and the other representing the costs of the trial itself. I made further directions designed to allow either party to seek a review of the amount of security at the time the proceedings are fixed for trial, having regard to the costs actually incurred to that point, and estimated to be incurred from that point.
In her latest submissions, counsel opposed the making of orders of the type I made in Kupang. Counsel submitted that such orders would generate unnecessary additional hearings and a disproportionate level of associated cost, contrary to the Court's obligations under the Civil Procedure Act 2005 (NSW), s 60. Counsel was also bold enough to suggest that in making these orders the Court would be acting unfairly by "resuscitating" Mr Bhojani's application which, according to counsel, was not, at this point, supported by adequate evidence.
I find these submissions unattractive. For reasons I gave in Kupang at [17]-[21] I think the Court's objective in an application of this sort should be to fix an amount for security which reflects the quantum of recoverable costs, should a costs order ultimately be made in favour of the defendant. The Court should not aim for over-coverage or under-coverage. Of course, the desirability of achieving this objective must be balanced against the cost of doing so. But the process of fixing the quantum of security should not operate as a game of forensic chance.
In my view, orders of the type I made in Kupang strike the right balance. It is in both parties' interest that the amount of security should be reviewable in the light of further experience in the conduct of the proceedings. The directions I will make will require Mr Bhojani's solicitors to disclose his costs incurred up to the date the proceedings are fixed for hearing, and their estimate at that point for the costs of trial. In the light of this information, the parties will not necessarily have to return to Court at all. If the costs prove to be higher or lower than the figures I fix now, the parties may be able to negotiate the appropriate variation. If that proves impossible, then, as in any other interlocutory application, the Court will rule and the unsuccessful party can expect to be ordered to pay the costs of the application. I do not see this as imposing costs which are disproportionate to the amounts at stake, which may run into the hundreds of thousands of dollars.
Given the approach I will take, the rulings I have made on Ms Dormer's affidavit have little ultimate significance. The Court is entitled to make its own estimates of the steps involved in the proceedings and the likely time they will involve. Evidence was given, without objection, of charge out rates, and the Court can use those and apply them to its own estimates. And, as counsel for AWW and AWE accepted, ultimately the exercise is a "broad brush" one.
Dealing first with the period up to the proceedings being fixed for trial, I exclude costs so far incurred as well as the costs of completing the discovery (see [61] above). I also exclude the costs of the security application itself; there may be arguments about whether the costs of that application should follow the event.
On the information available at present, it is not clear that any expert evidence will be required and I allow nothing for this at present. On the other hand, it is likely that a mediation will be ordered before the matter is fixed for trial and provision will need to be made for one or two more directions hearings and the general administration of the proceedings. I think it reasonable to allow for two days of work for junior counsel, two days of work for a paralegal, two days of work for a senior associate solicitor and half a day of work for Ms Dormer. Assuming full recovery of counsel's fees and seventy per cent recovery of the solicitors' fees on assessment, and rounding the result to the nearest $10,000, yields $20,000.
As to the trial, I think Ms Dormer's estimate of ten days with five days of preparation is reasonable on the material before me. The proceedings involve a multi-party claim which is likely to involve numerous witnesses. I will allow fifteen days' work for junior counsel with fifteen days' assistance from a senior associate solicitor to instruct, together with five days for a paralegal and two days for Ms Dormer. At this stage, senior counsel has not been briefed and it is not clear whether senior counsel will be briefed. Accordingly I propose to make no allowance for senior counsel at this stage, but if senior counsel is ultimately briefed that can be a matter which can be taken up when the level of security is reviewed once the proceedings have been fixed for trial. Making the same adjustments for assessment and rounding as I have made above, the figure for the second tranche will be $120,000.
Mr Bhojani's application sought orders that the security be provided within 14 days, failing which the proceedings were to be stayed. But in my view account must be taken of the fact that Mr Bhojani should have complied with the discovery order and has not. AWW and AWE should have no obligation to put up any security until that order has first been complied with. Accordingly, the first tranche of security will be payable one month after Mr Bhojani files his list of documents.
I will hear from the parties on the costs of this application, if that cannot be agreed.

Orders

The orders of the Court are:
Order that the plaintiffs provide security for the third defendant's costs in the following tranches: 1.1. $50,000 to be paid within 28 days of the filing of the third defendant's list of documents; 1.2. A further $120,000 to be paid within 42 days of the court setting the proceedings down for trial.
Order that security be provided by payment into Court or in such other form as may be approved by the Registrar.
Order that the proceedings be stayed against the third defendant in the event of failure to make any of the payments for security provided for under these orders.
Direct that within 7 days of the Court setting the proceedings down for trial the third defendant file and serve an affidavit setting out the costs incurred to date (apart from costs incurred up to 8 June and the costs incurred in complying with the order for discovery by the third defendant) and an estimate of the further costs to be incurred to the completion of the proceedings.
Grant liberty to either party within 14 days after service of the affidavit in Order 4 to apply to the Court to vary the amount to be provided in the second tranche of security.
Direct that within 21 days of today's date the third defendant lodge proposed orders dealing with the costs of this application; if the proposed orders are not agreed, the question is to be the subject of a further hearing on a date, and in accordance with directions, to be fixed by arrangement with my Associate.

Amendments 21 November 2018 - Para [78] - Corrected typographical error. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 November 2018

Companies Act 1936(NSW)

(Companies Act 1936(NSW)

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