Practice and procedure - Security for costs - Application under Rules of the Supreme Court 1971(WA) O 25 r 1 - Factors relevant to discretion - Turns on own facts

1 BEECH J: For the reasons that follow, I would dismiss the defendant's application for security for costs.

2 These proceedings were commenced by originating summons on 14 November 2012. The plaintiff seeks a declaration that two mortgages made on 5 July 2010 and an undated deed of charge, all between the plaintiff and the defendant, are void by virtue of s 89 of the Property Law Act 1969 (WA), in that they were entered into with intent to defraud creditors. These instruments were entered into at the same time as, and collateral to, a Loan Agreement dated 5 July 2010 between the same parties.

3 The originating summons is supported by an affidavit of Mr Trevor Betts sworn in November 2012.

4 On 3 April 2013, after some delays, the defendant filed an affidavit of Mr Rick Hopkins sworn 2 April 2013 in opposition to the plaintiff's claims in the proceedings.

5 On 24 June 2013 the Registrar made directions, among others, that:

(1) by 8 July 2013 the plaintiff file and serve a statement of claim; and

(2) by 29 July 2013 the defendant file and serve a defence;

6 The plaintiff has not filed a statement of claim.

7 By chamber summons dated 13 September 2013, the defendant applied for security of costs by way of a deposit of the sum of $100,000 into an interest bearing account.

8 The defendant relies on O 25 of the Rules of the Supreme Court 1971 (WA). It is unclear why the defendant has not relied on s 1335 of the Corporations Act 2001 (Cth), but at all times it has advanced its application under O 25 r 1, and I determine the application on that basis.

9 The parties each filed affidavits on the application. The defendant relies on the affidavit of its solicitor Mr Steven Blyth sworn 13 September 2013 and the affidavits of its director Mr Rick Hopkins sworn 2 April 2013 and 29 November 2013. The plaintiff relies on the affidavit of its director Mr Trevor Betts sworn 6 November 2013. In submissions the parties also referred to Mr Betts' affidavit of November 2012 filed in the substantive proceedings.

10 Order 25 r 1, O 25 r 2 and O 25 r 3 provide as follows:

1. Factors that are not grounds for ordering security for costs

The Court may order security for costs to be given by a plaintiff, but no order shall be made merely on account of the poverty of the plaintiff or the likely inability of the plaintiff to pay any costs which may be awarded against him.

Without limiting the generality of rule 1 the Court may order security for costs to be furnished where the plaintiff -

(a) is ordinarily resident out of the jurisdiction, notwithstanding that he may be temporarily within the jurisdiction;

(b) is about to depart from the jurisdiction;

(c) enjoys within the jurisdiction some privilege which renders him immune, wholly or partially, from the normal processes of execution;

(d) is an undischarged bankrupt or a person who has suspended, or given notice of suspension of, his debts;

(e) is a company in liquidation or under official management, or a company in respect of which a receiver of its property has been appointed;

(f) is a relator suing for the enforcement or declaration of some public right or to have some public trust carried out or some charitable scheme settled;

(g) is in default in respect of any costs ordered to be paid by him in any proceedings previously brought by him against the same defendant or another defendant for substantially the same cause of action or in relation to substantially the same subject matter;

(h) is a person who has in the past vexatiously brought litigation against the same defendant or against any other defendant;

(i) is suing the sheriff in respect of anything done or omitted to be done by the sheriff or his officers in the execution of any judgment of the Court.

The granting of security shall be in the discretion of the Court, and in determining whether an order should be made the Court shall take into consideration

(a) the prima facie merits of the claim;

(b) what property within the jurisdiction may be available to satisfy any order for costs against the plaintiff;

(c) whether the normal processes of the Court would be available within the jurisdiction for enforcement of any order for costs made against the plaintiff.

11 None of the specific grounds set out in O 25 r 2 are engaged in this case.

12 It is well established that the court's discretion to order security for costs is broad, and depends upon all the circumstances of the case.

13 Under O 25 r 1 (unlike under s 1335 of the Corporations Act) the likely inability of the plaintiff to pay any costs which may be awarded against him is not, in itself and standing alone, sufficient ground to make an order for security. That does not make such an inability irrelevant to the exercise of discretion under O 25 r 1. To the contrary, any such likely inability is among the factors relevant to the exercise of discretion.

14 In Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd[1] Edelman J set out a nonexclusive list of factors relevant to security for cost discretion. That was a case concerned with s 1335, but, in my view, in addition to what is said in O 25 r 3, the same factors are also relevant under O 25 r 1 :

(i) the strength and bona fides of the plaintiff's case;

(ii) the likelihood of the plaintiff being unable to pay the defendant's costs;

(iii) whether the plaintiff's impecuniosity was caused by the defendant's conduct which is the subject of the claim;

(iv) whether the application for security is oppressive;

(v) whether the award of security would deny an impecunious applicant a right to litigate;

(vi) whether there are persons standing behind the plaintiff who are likely to benefit from the litigation;

(vii) whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking;

(viii) whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant's selfhelp procedures;

(ix) whether the application for security has been brought promptly;

(x) whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and

15 As to the first of these factors, there are obvious and practical limits on the extent of which an assessment can be made of the substantive merits of the plaintiff's claim. It will not generally be appropriate for the court to attempt to investigate in considerable detail the likelihood of success in the action.[2]

16 The giving of a personal undertaking to pay any costs by the person(s) standing behind a company does not preclude an order for security for costs against the company. The giving of a personal undertaking is one factor, albeit an important and sometimes decisive factor, to be taken into account in the exercise of discretion.[3]

17 The major points made in the defendant's written submissions are:

(1) the action is for the benefit of Mr Betts, notwithstanding that it is an action brought by the plaintiff Crosswest;

(2) the critical issue in the case is whether monies were paid by Allstrike to author the benefit of Crosswest. That is the subject of a report dated 31 January 2013 prepared by Barrington Accountants. The plaintiff has been given an opportunity to review that report and attached materials, and in the ten months since it has not taken issue with it;

(3) that failure to take issue with the report of 31 January 2013 demonstrates that the plaintiff's claim is weak;

(4) a relevant factor is what property within the jurisdiction may be available to satisfy any order for costs against the plaintiff. The defendant is the mortgagee in possession of all the substantive assets of the plaintiff and is seeking to sell its real property; and

(5) the personal undertaking offered by Mr Betts is inadequate because he does not have assets of substance against which execution could be levied with any reasonable prospects of satisfaction. In that regard he holds a 499/1000 share of his matrimonial home. There is evidence that that holding was created with a view to ensuring that any creditor of Mr Betts would have considerable difficulty in executing against his interest in the house.

18 I will outline the defendant's oral submissions in the next section of these reasons.

19 In my view, none of the matters emphasised by the defendant in this case, alone or in combination, sustain a favourable exercise of the discretion to make an order for security for costs.

20 I begin with the matters highlighted in the defendant's written submissions.

21 It is true that this action is evidently for the benefit, in substantial part at least, for Mr Betts. However, Mr Betts has offered a personal undertaking. The weight to be given to that undertaking depends upon all the circumstances, but the fact that the action benefits an individual shareholder of the plaintiff company is not in itself a factor of any significant weight in favour of an order for security of costs in circumstances where that shareholder offers a personal undertaking.

22 I do not accept the defendant's submission that the failure of the plaintiff to respond substantively to the letter of 31 January 2013 reveals or suggests that the plaintiff has a weak case. The letter of 31 January 2013 is assertive and conclusionary in character. Its enclosures are not in evidence. Further, the circumstances do not justify an inference that an absence of response to it reveals an inability to refute the assertions in the letter. I am not persuaded that failure to respond to it has significant evidentiary consequences.

23 It is also true, as the defendant submits in its written submissions, that the property of the plaintiff available to satisfy a costs order against it is extremely limited, because the plaintiff's property is the subject of a charge to the defendant, and the defendant is exercising its power of sale under the mortgage of the Geraldton land that is the plaintiff's main asset. However, the validity of those instruments is the central subject matter of these proceedings. That is relevant to the discretion to award security for costs in at least two ways.

24 First, there is room for the view that, in those circumstances, it would be oppressive to order security, in that it would stultify the action to set aside the instruments the operation of which creates, or increases the prospect that the plaintiff would be unable to meet a costs order.

25 Secondly, and in any event, these proceedings can be seen to be, in substance, defensive in character, in that the plaintiff is responding to the selfhelp remedies invoked by the defendant under the instruments now sought to be set aside in these proceedings. Proceedings brought to resist selfhelp measures available to the defendant have been said to be defensive in character, thus militating against an award of security for costs.[4]

26 I accept that there are very real doubts about whether Mr Betts has assets against which a costs order could be effectively enforced. Nevertheless, Mr Betts' undertaking is not without some value. A failure to pay any costs ordered would, if the defendant elects, result in the bankruptcy of Mr Betts. The likely costs are in the order of $100,000. Although there is no direct evidence, I infer that there may be some prospect that Mr Betts could (at the relevant time), if he chose, access or raise funds of that order.

27 The defendant's delay in bringing the application is not satisfactorily explained. The application was not made until 13 September 2013, almost 10 months after commencement of the proceedings. There is no evidence to explain the delay. The explanation offered in the defendant's written submission is that the nature and extent of the dispute had not emerged until the application was made. I do not accept that submission. The plaintiff's case was sufficiently spelled out in Mr Betts' affidavit of November 2012. The scope of the issues were or should have been sufficiently apparent once the defendant's instructions were obtained.

28 The delay is a factor militating against ordering security for costs.

29 In its oral submissions the defendant submits[5], in summary, that:

(1) it is clear that there is no merit in the plaintiff's case;

(2) the plaintiff is impecunious, because there is no issue that it owes a debt of more than $8.5 million and its sole asset, land in Geraldton, is on any view worth considerably less than that sum; and

(3) the personal undertaking of Mr Betts is inadequate for the reasons summarised in the written submissions.

30 The first two of these propositions were fundamentally based on the defendant's contentions that:

(a) the plaintiff's debt of (more than) $8.5 million was established, referred to, or acknowledged, in an instrument executed in 2008 known as the Deed of Consent to Distribution and Settlement (the 2008 Deed)[6];

(b) the plaintiff does not dispute that $8.5 million was advanced to it, and so it owes $8.5 million[7].

31 For the reasons that follow, I am not persuaded of contentions (a) and (b), and consequently, I am not persuaded of propositions (1) and (2).

32 The parties to the 2008 Deed are: Betts Nominees Pty Ltd, Mr Betts, Mr Phillippe Steinier in his own right and as trustee for the Pilou Trust, Mr Rick Hopkins, Laika Corp Pty Ltd, Springland Pty Ltd in its own right and as trustee for the Bertram Heights Unit Trust and the Bertram Heights Unit Trust No 2, Bertram Heights Pty Ltd in its own right and as trustee for the Bertram Heights Unit Trust No 3, Sunlea Enterprises Pty Ltd in its own right and as trustee for the Drummond Cove Unit Trust, Playstar Holdings Pty Ltd in its own right and as trustee for the Parkerville Unit Trust.

34 In oral submissions, the defendant submits that the plaintiff owes a debt to various entities arising from the 2008 Deed. However, the defendant did not make good that assertion by reference to anything in the 2008 Deed. The Deed does not create any debt owed by the plaintiff. The defendant does not point to any reference in the 2008 Deed to any loan to the plaintiff. In oral submissions[8] the defendant referred to the loans set out in schedule B of the 2008 Deed.[9] Schedule B sets out loans said to have been made by various trusts to other trusts. In each case, the trustee of the relevant trust was at the time of the deed, a party to the instrument; all are entities distinct from the plaintiff.

35 The defendant's contention that there is no dispute by the plaintiff that it owes $8.5 million is directly contradicted by Mr Betts evidence. In par 23 of his affidavit, Mr Betts states that at no time did the plaintiff borrow from the defendant, nor did the defendant advance a sum of $9.845 million or any sum to the plaintiff.

36 When that difficulty was put to counsel for the defendant, he submitted that, notwithstanding par 23 of the affidavit of Mr Betts, earlier paragraphs of Mr Betts affidavit, particularly par 17 to 22, and the fact that Mr Betts executed the instruments the subject of these proceedings, mean that in substance the plaintiff accepts that it owed the sum of $8.5 million[10].

38 The effect of par 17 to 22 of Mr Betts' affidavit can be summarised as follows. When Mr Hopkins showed Mr Betts the loan agreement and the mortgages and deed of charges the subject of these proceedings, Mr Betts asked Mr Hopkins what the purpose of those instruments was. Mr Hopkins said that in order to protect the assets of the Drummond Cove Unit Trust (namely the Geraldton land) from the liquidator of Sandpiper Assets Pty Ltd, it was necessary that the plaintiff execute the loan agreement and the mortgages, encumbering the trust assets, thereby safeguarding the land from any potential claims by the liquidator or creditors of Sandpiper. Sandpiper had previously been the registered proprietor of the Geraldton land now registered in the name of the plaintiff.

39 In my view, the implicit acceptance of a need or possible need to protect the assets of the trust from claims by the liquidator of Sandpiper falls well short of establishing that Crosswest owed a debt of $8.5 million to anyone. One could well contemplate the potential for claims by the liquidator of Sandpiper (as previous owner of the land) of an entirely different character to a claim of a preexisting debt.

40 The defendant further submits that Mr Betts' position in signing the instruments on the basis set out in his affidavit is 'contradictory'[11] and his evidence involves giving the court 'half an answer'.[12] In my view those are matters for resolution at trial. Those are not conclusions appropriately drawn in the context of an interlocutory application of this character.

41 For these reasons, I do not accept that, for the purposes of this application, I can proceed on the basis that Crosswest owes a debt of $8.5 million. Nor do I accept that there is, as the defendant submits, clearly no merit in the plaintiff's case. To the contrary, in my view, for the purposes of this application, little can be said about the merits of the plaintiff's claim.

42 At the very conclusion of the defendant's oral submissions, the defendant raised a different ground for concluding that the plaintiff is impecunious and is likely to be unable to meet a costs order. The defendant submitted that:

(1) the only asset of any substance owned by the plaintiff is the Geraldton land;

(2) there is evidence, in the form of a declaration of trust, that the land is held by the plaintiff on trust for Sunlea Enterprises Pty Ltd as trustee for the Drummond Cove Unit Trust;[13]

(3) Sunlea Enterprises Pty Ltd as trustee for the Drummond Cove Unit Trust has been issued an integrated accounts statement by the Australian Taxation Office requiring payment of an amount over $8.25 million;[14]

(4) if Sunlea Enterprises fails to pay that amount there is a prospect that the Australian Taxation Office may wind up Sunlea Enterprises and, invoking the declaration of trust, seek to have recourse to the Geraldton land owned by the plaintiff.

43 Counsel for the defendant conceded that, in light of the evidence in Mr Betts' affidavit, for the purposes of this application for security for costs, the court could not determine whether the declaration of trust was valid.[15]

44 Nevertheless, there is no evidence that the plaintiff has made any application challenging the validity of the declaration of trust. Further, the evidence appears to establish that the plaintiff became registered proprietor of the Geraldton land as part of the same transaction and contemporaneously with its execution of the declaration of trust. Thus on the face of it at least, any application to set aside the declaration of trust would involve setting aside the transfer of the land to the plaintiff.

45 In the circumstances, I am satisfied that there is a substantial risk that the plaintiff will be unable to satisfy a costs order against it. However, in all the circumstances, including:

(a) the nature and subject matter of these proceedings, as explained in [25] above;

(b) the fact that Mr Betts has offered an undertaking to pay any costs ordered against the plaintiff, albeit that the evidence suggests there are very real doubts about the ability of the defendant to satisfy any costs liability from any assets owned by Mr Betts. As I have said, the failure to pay any costs ordered would, if the defendant elects, result in the bankruptcy of Mr Betts;

(c) the likely effect of an order for security on the ability of the plaintiff to prosecute its action; and

(d) the defendant's delay in making the application;

I am not persuaded that I should exercise my discretion under O 25 r 1 in favour of an order for security for costs.

46 For these reasons I dismiss the defendant's application.

[1] Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [6].

[2] Swansdale Pty Ltd v Whitecrest Pty Ltd [2010] WASCA 129 [72] - [74].

[3] Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) WAR 306.

[4] Heller Factors Pty Ltd v John Arnolds Surf Shop Pty Ltd (1979) 22 SASR 20; Westonia Earthmoving [47].

[13] See annexure TSJB1 of the affidavit of Mr Betts sworn 6 November 2013.

[14] Affidavit of Mr Hopkins 29 November 2013.