Chapel Road Pty Limited v Australian Securities Investments Commission

Supreme Court of NSW|2012-03-15|Before: Schmidt J, Mr J

Judgment 1By motion filed in February 2012 the defendant sought further security for its costs in the proceedings, by the plaintiff being required to pay two further tranches of $75,000 into Court, with consequential orders as to the stay of the proceedings, if the further security is not provided. 2Orders for security were earlier made by consent in November 2009 and May 2010. They required payment into Court of $50,000 by 30 April 2010; $50,000 by 31 August 2010; and $75,000 by 31 December 2010. The plaintiff failed to pay the second and third tranches, with the result that the proceedings were stayed. Further orders were made by consent in May 2011, extending the time for payment and the matter proceeded. 3There was then a dispute in relation to discovery, dealt with by an order made in May 2011 (see Chapel Road Pty Limited v Australian Securities Investments Commission [2011] NSWSC 419). This resulted in considerable work being undertaken by the defendant, in giving the discovery ordered. Inevitably the result was that significant further costs have been incurred. That they were not expected at the time of the earlier security order, must be accepted. The defendant thus foreshadowed seeking a further security order, which is now pursued. 4On the evidence the defendant has incurred costs of some $460,117.41 since August 2009. Further costs of up to $198,000 are assessed. Security of $175,000 has already been paid. In submissions, further security of a minimum of $150,000 and up to $250,000 was pressed, payable in further tranches. 5As earlier discussed in Chapel Road Pty Limited v Australian Securities Investments Commission, what the plaintiff seeks to establish in these proceedings is that its circumstances are the result of its treatment by the defendant, which involved inconsistent application of its own policies in relation to a breach of the plaintiff's license. It is alleged that this was a breach which under the relevant policy was at the bottom of a pyramid of such breaches, being of the least serious kind and for which publicised sanctions involved fining, reprimanding and in more serious cases, enforceable undertakings. Instead, the plaintiff's license was revoked for what the defendant had identified to be a trivial breach. At the same time the defendant treated others involved in similar breaches by encouraging them to take steps which the plaintiff also undertook and accepting from them enforceable undertakings. The plaintiff seeks to establish that this differential treatment was undertaken maliciously, with the result that it had to cease trading and was unable to recommence trading, even when the AAT restored its license, some 26 months later. 6To establish the jurisdictional fact that the plaintiff will be unable to pay the defendant's costs, if ordered to do so, the defendant relied on written advice given it by the plaintiff's solicitors in July 2009, that the plaintiff 'for all intents and purposes has no assets'. This position had not changed. It argued that in those circumstances the Court's jurisdiction was enlivened and that the discretion would be exercised in its favour, having in mind the need to achieve a balance between ensuring that there is adequate protection of the defendant and avoiding injustice to the plaintiff. 7While the plaintiff relied on the evidence of Mr Bennett, a shareholder and director, who had sworn a number of affidavits as to his position and that of the plaintiff, the most recent sworn on 8 March, the defendant argued that this evidence did not attempt to establish that the plaintiff would have been able to meet a costs order, but for the defendant's conduct. That would require an explanation of the plaintiff's financial position before and after the conduct in issue, which was not given. 8The plaintiff resisted the further security sought. Its case was that the proceedings resulted from actions taken by the defendant to cancel the plaintiff's securities dealer's license and that there was a direct causal connection between its impecuniosity and the defendant's conduct. The revocation of the plaintiff's license was later reversed by the AAT, which directed that its license be reinstated. This was submitted to reveal the strength of the plaintiff's case, a matter relevant to the application, as well as to the public interest inherent in the litigation. 9It was argued for the plaintiff that the application was an attempt to delay or stultify the proceedings. The plaintiff relied on the affidavit evidence of Mr Bennett. He was not required for cross-examination. He offered an undertaking, as clarified by counsel, that in the event that the plaintiff's case fails, and an order is made in favour of the defendant, he would meet those costs to the extent of his assets, which on his evidence as value of some $900,000, which it was submitted the Court would accept in the circumstances. 10It was submitted that Mr Bennett's evidence showed that to provide further security would require him to sell the business from which he makes his living. There was also evidence of earlier unsuccessful attempts to raise funds against his family home. That he had previously raised funds to provide security, did not establish that he had an ability to do so now. He controlled some 91.2% of the plaintiff, by virtue of direct personal or shareholder ownership. It was disputed that the authorities provided that if he had assets which were capable of supporting an order for security, there was no reason why the order sought would not be made. The substantial security already provided and the material contribution of the defendant to the plaintiff's position, were also factors which would be considered, in the exercise of the Court's discretion, together with Mr Bennett's undertaking. 11The defendant relied on evidence which shows that the plaintiff has a number of other shareholders, personal and corporate, apart from Mr Bennett, who will benefit from any successful outcome in the proceedings. The evidence did not establish that the proceedings would be stultified given their financial position had not been disclosed. That was necessary to be established, before the undertaking could be considered. It was submitted to be relevant that while Mr Bennett deposed to now having net assets in excess of $900,000, that earlier affidavits disclosed assets of over $8m. 12It was the plaintiff's case that what had been disclosed in Mr Bennett's previous affidavits, were theoretical assets. An explanation had been given by Mr Bennett as to why he is unable to raise further funds, in order to provide further lump sums by way of security. In those circumstances, and having in mind that Mr Bennett makes his living from operation of a financial services license, the Court would accept his undertaking. The alternative would be to require him to liquidate his interest in his financial planning business, from which he makes his living, if the proceedings were to continue. 13 In the event that further security was ordered, it was submitted that the Court would only consider future costs, thus security in excess of $100,000, representing 60% of the defendant's assessed further costs, would not be ordered.

The relevant tests 14The application is governed by Rule 42.21 of the Uniform Civil Procedure Rules 2005, which relevantly provides: "42.21 Security for costs (cf SCR Part 53, rules 2, 3, 4 and 5; DCR Part 40, rule 1; LCR Part 31, rule 11A, Part 31A, rule 11) (1) If, in any proceedings, it appears to the court on the application of a defendant: ... (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or ... the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. ..." 15There was finally no issue as to the plaintiff's financial situation or the terms of the undertaking Mr Bennett proffered. His willingness to provide an undertaking of personal liability is, however, but a factor to be considered, albeit an important one. It is not a decisive consideration, as discussed in Jazabas Pty Ltd v Haddad [2007] NSWCA 291 at [78] - [80]. 16 At [74] McClellan CJ in CL there referred to the relevant principles, as summarised by Beazley J as her Honour then was, in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196 - 198: "Principles governing application for security for costs The law is now settled that the discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: see the review of the authorities by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 AT 509. See also Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624 and Zeeman J's decision in Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 at 188. In Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 415, Cooper J stated that: '[i]t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642 at 643.' Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are:

That such applications should be brought promptly. This is a principle of longstanding: see Grant v The Banque Franco-Egyptienne (1876) 1 CPD 143; see also Smail v Burton; Re Insurance Associates Pty Ltd [1975] VR 776 per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311 at 313; Bryan E Fencott at 514. I should state immediately that there is no issue of delay in this case.
That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations: see M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; Bryan E Fencott at 514. As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success. (Bryan E Fencott at 514).
Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim: see M A Productions v Austarama Television at 100.
Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate: see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E Fencott at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms: '[t]he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour.' This factor is related to the next, namely:
Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memetu Pty Ltd v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123; Bryan E Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows: ' ... a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors) ... Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.'

The case is brought bona fide 19There was no issue between the parties that the plaintiff's claim discloses a cause of action. Accordingly, the application must be considered on the basis that the claim is bona fide, with a reasonable prospect of success. 20Given the nature of what is in issue, it follows that it must be accepted that the plaintiff has an arguable case that its financial position is the result of the defendant's actions. The plaintiff claims that it lost its securities licence, on which its business depended, as the result of actions wrongly taken by the defendant, in circumstances where it later succeeded in having its license restored to it, but was unable to re-establish its business, given what had transpired during the time that it was unable to operate.

No further order as to past costs 21The next matter to be considered is that since the earlier consent orders were made, very significant additional costs have been incurred by the parties. It seems to me in the circumstances which have arisen, further security may not be justly ordered in respect of any past costs which have been incurred. In the circumstances such an order would be unreasonably oppressive. 22As discussed by Barrett J, as he was in Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2009] NSWSC 563 at [35] - [40] it is well recognised that it may be unjust for a defendant to stand by and allow a plaintiff to work on the case and then to ask for costs, only after they have been incurred. The longer the delay and the more acts done in the interim, the more difficult it will be to persuade the Court that an order for security for past costs will not be unjust or oppressive. 23In this case it has been apparent to the parties for some time that significant additional costs have been incurred in the discovery process, costs not comprehended in the earlier consent orders. That development ought to have led to a prompt further application for security, if there was a concern as to the inadequacy of the security already provided. In the circumstances, as a matter of justice between these parties, any further security should be restricted to future costs.

24The defendant's future costs are assessed to fall in the range of up to $198,000. That is to be considered in the context that this litigation is brought against the defendant, the corporate regulator. As observed in Jazabas at [75]: "The courts are reluctant to make an order which would have the effect of shutting out a small company from making a genuine claim against a large well-resourced and amply funded body such as the State, a council or a major corporation (see KP Cable Investments at 197; Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 at 50,635 and 50,637 per Hill J). A plaintiff should not be denied access to the courts unless the justice of the case makes it imperative ("Law of Costs", G E Dal Pont, [29.87])." 25Mr Bennett is not the only individual or corporation who stands behind the plaintiff and stands to gain from the litigation, but he is by far the most substantial shareholder, with the most significant interest in the proceedings. The financial position of the other shareholders has not been established. They, however, have only a small interest in the outcome of the litigation. It is Mr Bennett who has the most substantial interest and it is he who has already provided $175,000 security thus far. His evidence that he is not in a position to provide more, for reasons which he explained, was not challenged. He is not insolvent and has proffered an undertaking that establishes that the plaintiff is not 'a stalking horse to enable someone else to evade personal responsibility' for the costs of these proceedings, as discussed in Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 at 53. 26Mr Bennett also explained that it is not only the plaintiff whose position is a consequence of the defendant's conduct, which had the result of immediately destroying the plaintiff's business and its good will and leaving as its only income trailing commissions from work previously undertaken. He said that his own reduced financial position is the result of the defendant's act. This evidence was also not challenged. 27Also to be considered is evidence that in the past Mr Bennett has deposed to having significant personal assets, in excess of $8m. Now his assets are said to be worth only some $907,000. The difference is explained on the basis that his previous assessment of his assets reflected a value of a company that was 'potentially theoretical' and that shares in that company cannot be traded. He also explained that significant funds have been expended on software development and that despite negative equity, this company had a value, but that it could not be realised at the moment. Other of his shareholdings could also not be traded, nor were they capable of providing security against funds which could be borrowed. None of the evidence was challenged. 28Mr Bennett also gave an explanation as to how he makes his living and what income that work generates. While it was submitted for the plaintiff that there were various matters left unexplained by his evidence, including for example the income which his exertions generated for other of his companies, he was not cross-examined. In the result, his evidence that he was not capable of providing further security or borrowing further funds, with the result that the proceedings could not continue, if the orders sought were made was not challenged in cross-examination. Rather, reliance was placed by the defendant on documentary evidence which it was submitted showed that the onus which fell on the plaintiff to establish that the proceedings would be stultified, if the order sought were not made, could not be met, with the result that his undertaking would not be accepted. 29It seems to me that these submissions may not be accepted. In my assessment the evidence does show that there is a very substantial risk that the proceedings will be stultified, if the order sought is made and that in the particular circumstances of this case, Mr Bennett's undertaking should be accepted. 30His evidence that his assets are not liquid was not challenged, nor was his evidence explaining why further security could not be provided. Given that asset position, however, when considered with the income generated by his work as a financial adviser, pursuant to agreements between corporations in which he holds shares and which he controls, the undertaking has real value, sufficient to satisfy the assessed further costs, should the plaintiff's case fail. That situation must be considered in circumstances where Mr Bennett has already provided substantial security. 31In all of these circumstances, it seems to me that the undertaking must be accepted and that the orders sought by the defendant refused. 32The usual order would be that the defendant should bear the plaintiff's costs of the motion. Unless the parties approach within 14 days to be heard on the question of costs, that will be the Court's order.

Order 33For the reasons given, I order that:

The defendant's motion is dismissed.
Mr Bennett's undertaking is accepted.
Unless the parties approach within 14 days to be heard on the question of costs, the court's order will be that the defendant bear the plaintiff's costs of the motion, as agreed or assessed.

Amendments 18 May 2012 - Amendment on coversheet - Additional hearing date added to 'Hearing date' field 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: 15 November 2013

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