HIS HONOUR: By interlocutory process filed on 13 May 2014, the first defendant Pioneer Energy Holdings Pty Limited and the seventh defendant Pioneer Energy Pty Limited - to whom I shall refer as the applicants, or the "Pioneer defendants", as the case may be - apply pursuant to (NSW) Uniform Civil Procedure Rules, r 42.21, and/or (Cth) Corporations Act 2001, s 1335, for an order that the third plaintiff Blue Oil Energy Pty Limited and the fourth plaintiff Blue Diamond Australia Pty Limited give security for the Pioneer defendants' costs in the sum of $230,000 (or such other amount as the Court deems fit) by payment into court or bank guarantee, and that the proceedings as against the first and seventh defendant be stayed if security is not so provided.
This is not the first application for security for costs in these proceedings. On 16 September 2013, Black J heard an application by the then second through sixth defendants for an order that Blue Oil and Blue Diamond provide security for their costs of the proceedings, and on 19 September his Honour ordered that security be given [In the matter of Pioneer Energy Holdings Pty Limited [2013] NSWSC 1366]. His Honour's judgment included a finding that there was reason to believe that Blue Oil would be unable to pay the second to sixth defendants' costs if ordered to do so (at [9]), and proceeded on the footing of a concession that the Court would be entitled to proceed on the basis that there was reason to believe that Blue Diamond would be unable to do so. On 26 March 2014, the Court of Appeal dismissed an application for leave to appeal from his Honour's judgment [Blue Oil Energy Pty Limited v Tan [2014] NSWCA 8].
On an application for security for costs, there are generally three issues: the first is whether the ground referred to in the relevant section or rule relied upon is established; the second is whether, if the ground has been established, as a matter of discretion an order should be made; and the third is the quantum of any order to be made and the terms on which it might be made [Polstead Pty Ltd (in liq) v Sandip Shah [2009] NSWSC 560, at [6]].
The historical background to this litigation has already been set out in a number of judgments [In the matter of Pioneer Energy Holdings Pty Ltd [2013] NSWSC 1366 (Black J) and In the matter of Pioneer Energy Holdings Pty Ltd [2014] NSWSC 480 (Brereton J)], and it is unnecessary to repeat it here. It should be added, however, that the plaintiffs have now discontinued the proceedings as against the (former) second, third, fourth and fifth defendants.
At the time of the first security application, the first and seventh defendants did not participate in the proceedings. They filed a notice of appearance about eight days after the hearing of that application. However, the solicitors who now act for them are the same solicitors who act for the sixth defendant and who formerly acted for the second through fifth defendants. The inference is inescapable that their source of instructions must be the majority or controlling interest in the first defendant, of which the seventh defendant is a wholly owned subsidiary, and that majority interest is the sixth defendant Morgan Stanley. The third plaintiff Blue Oil is the minority interest, and the second plaintiff Mr Seth is, on the evidence before me, the sole beneficial shareholder in Blue Oil and Blue Diamond.
The ground relied on in this application, as it was on the first application before Black J, is that which I have somewhat imperfectly called "corporate impecuniosity", referred to in Corporations Act, s 1335(1), and UCPR, r 42.21(1)(d). The former provides that the Court may order a plaintiff provide security if "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." The latter provides that a Court having jurisdiction may require a corporate plaintiff to give security "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." It has never been suggested that there is any material difference between the two provisions, nor was that suggested in this case. As was said in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 (at 205), the criterion is established where:
…credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant if judgment goes against it even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs...
However, it does need to be recognised that both provisions speak of reason to believe that the plaintiff corporation will be unable to pay the costs. In each case, the word "will" rather than the word "may" is used, so that there needs to be something more than evidence of a mere risk, amounting to a probability that there will be an inability to pay the defendant's costs if required to do so, rather than a mere possibility that that will be so.
In respect of both companies, evidence was tendered of corporate searches and real property searches, to establish that the companies had no real property in New South Wales or Queensland, and had a limited or nominal paid up share capital. In my view, such evidence does not begin to raise a case of reason to believe that a company will be unable to pay costs. A company having a small nominal paid up share capital is entirely consistent with it in fact having extensive assets. The absence of real property does not mean that a company does not have extensive other property. The fact that there is a solitary shareholder does not mean that the company is not wealthy.
The inadequacy of such evidence is accentuated where some evidence is tendered showing the company's actual financial position. In this case, if somewhat belatedly, evidence was produced in the form of balance sheets of both the companies in question.
I will deal first with Blue Oil. There was produced a Special Purpose Financial Report for year ended 30 June 2013, which appears to have been prepared by accountants acting for the company. It is exhibited to Mr Seth's affidavit of 6 August 2014 as "the accounts for Blue Oil Energy Pty Limited". In that way, they are verified by him, a director, as true financial statements. He was not cross-examined. In any event, it is really the only evidence of the company's financial position before the Court. The balance sheet is, essentially, a fairly simple one. It shows total assets of $13,015,459 (of which $17,080 is cash, $12,944,487 investments, $27,387 property plant and equipment, and $26,505 intangibles). The investment is explained (in a note to the accounts) as "non-current assets - investment in shares". It is not in doubt that it is the 25 percent shareholding held by Blue Oil in the first defendant. Although various attempts were made on the one hand to suggest by reference to other documents that the investment might be worth more than that amount, and on the other to suggest that one should be cautious about accepting it, the auditors' report for Pioneer Energy Holdings Pty Limited indicates that the auditors of that company do not regard its assets as impaired, and its balance sheet supports a valuation in the order of the $12.9 million that appears in Blue Oil's balance sheet.
The company is reported to have total liabilities of $14,425,544, resulting in a deficiency of assets of $1,410,085. The applicants point to that deficiency as providing reasonable grounds for believing that an adverse costs order might not be satisfied. However, the debt of $14,425,397 is explained in the notes as one owing to Pure Energy Investment Limited on a loan. Pure Energy Investment Limited is a company incorporated in the British Virgin Isles and owned by Mr Prakash Seth's brother, Mr Jagdesh Seth, who has sworn an affidavit deposing to being authorised by Pure Energy to act on its behalf in relation to all dealings with Blue Oil, and exhibiting resolutions of Pure Energy to that effect. He has produced a resolution of directors authorising him to sign a deed of subordination, and a deed of subordination signed by him as a director of Pure Energy, by which Pure Energy has agreed to subordinate its debt to any costs order that might be made against Blue Oil. The deed of subordination is expressed to be governed by the law of New South Wales, and the parties to it submit to the non-exclusive jurisdiction of the courts of this state (and any Court which hear appeals from them) in respect of any proceedings connected with the deed. By clause 4.1, Pure Energy as lender and Blue Oil as debtor agree that the repayment of the debt shall be subordinated at all times to any costs order made in favour of the Pioneer defendants in these proceedings, and Pure Energy agrees not to prove or claim in the event of Blue Oil's insolvency for the repayment of the subordinated debt in competition with any unsubordinated debt. It also agrees not to demand repayment or commence proceedings for repayment or recovery, of the whole or any part of the subordinated debt, without the prior consent in writing of the Pioneer defendants, and that it will not accept repayment of the subordinated debt until the proceedings are finalised by a judgment, discontinuance, settlement or otherwise and until all costs orders made in favour of the Pioneer defendants in the proceedings are paid in full. Similarly, Blue Oil agrees not to repay the whole or any part of the subordinated debt at any time until the proceedings are finalised and until all costs orders made in favour of the Pioneer defendants in the proceedings are paid in full.
In those circumstances, the Pure Energy debt being subordinated, Blue Oil has assets of nigh on $13 million with which to satisfy an adverse costs order. The amount for security sought at present is but a fraction of that amount, and even if the investment were grossly overvalued and even if it was sold at a very greatly reduced price in distressed circumstances, there would still be ample to satisfy any potential liability to the Pioneer defendants for costs.
13 In the first security application, Black J was asked to take into account a letter from Pure Oil which indicated that it would agree to the subordination of its debt. His Honour dealt with that in the course of considering a submission as to the form of the security, it having been suggested that it should be by a lien over Blue Oil's shares in Pioneer Holdings, relying on the consent and offer of subordination by Pure Energy.
His Honour observed that the letter from Pure Energy was signed by a person other than Mr Seth's brother, whereas the evidence was that Mr Seth's brother controlled Pure Energy; that there was no evidence that the signatory was a director of Pure Energy as he claimed; that Pure Energy was incorporated in the British Virgin Isles and the Court should be cautious in accepting an undertaking from it which it may have no capacity to enforce; and that the court could not assess the efficacy of such a subordination arrangement without access to the relevant loan documents, which Pure Energy had declined to produce.
Most of those considerations are no longer applicable. The authority of the signatory of the deed of subordination is now established by documentary evidence. The relevant loan documents and subordination documents are before the court, so the efficacy of the agreement could be ascertained; as it transpired, no submission was made about its efficacy save to invoke the remaining matter referred to by Black J, namely that the court should be cautious in accepting an undertaking from a company incorporated in the Virgin Islands which it may have no capacity to enforce. However, the repeated attempts of the court to ascertain some basis upon which it would be possible for Pure Energy to breach the undertaking and enforce its rights to the detriment of the Pioneer defendants - given that Blue Oil is located in Australia and, more fundamentally, that the shares which are its only asset are in a company which is not only located in Australia but which is itself one of the Pioneer defendants - elicited no satisfactory explanation as to how the deed of subordination could be undermined or circumvented in any way.
I am therefore not satisfied that there is reason to believe that Blue Oil will be unable to pay the applicant's costs.
Turning to Blue Diamond, as I have said, Black J proceeded on the basis of a concession that, on the then state of the evidence - which amounted only to evidence that it had no substantial assets in New South Wales and Queensland, with no evidence being led by the plaintiffs as to its financial position - there was reason to believe that it would be unable to pay the defendants' costs if ordered to do so. That position also has now changed. There is some evidence before the court as to Blue Diamond's financial position. Mr Prakash Seth refers in his affidavit of 6 August 2014 to a balance sheet for Blue Diamond. It shows assets of $7.1 million, of which $6.9 million are said to be current assets. The notes to the balance sheet elaborate that those current assets comprise cash or cash equivalents in bank accounts or on deposit amounting to $6.920 million. Of that, there is documentary evidence corroborating the existence of $3.626 million approximately in a Westpac USD account, $802,000 in a Westpac business cash reserve account; $338,000 in a Westpac term deposit account, and $2.118 million on deposit with Morgan Stanley (including accumulated interest). There is a very reasonable question as to whether that $2.118 million is available for present purposes, given that it stands as security for obligations of Blue Diamond to the Pioneer defendants under the contract in issue in these proceedings, although there seems at least a reasonable case that Blue Diamond may be presently entitled to the interest component of $118,000. But even subtracting the whole of that $2.118 million leaves cash and cash equivalents - that is to say, highly liquid assets - of in the order of $4.8 million. Non-current assets of $186,000 bring the total assets to $7.1 million.
The company is said to have non-current liabilities of $9.198 million, resulting in a net deficiency of funds of $2.090 million. Again, the applicants point to that deficiency as indicative of reason to believe that an adverse costs order will not be paid. However, as the notes to the accounts explain, that liability of $9.198 million is a director's loan and, as Mr Seth says in his affidavit of 6 August 2014:
Blue Diamond has no current liabilities and the only non-current liability is a director's loan, that is, a loan from me to the company which I am the beneficial owner of all shares. There is no written loan agreement between myself and BDA. As stated in my previous affidavit I am prepared to undertake not to call on that loan until such time as any costs orders made in these proceedings have been paid.
Given that undertaking, there is in Blue Diamond nearly $5 million of ready cash with no other claims on it that would compete with, let alone have priority over, an adverse costs order.
In expressing those conclusions, I bear in mind that it is not on an application of this kind for the respondent to demonstrate its solvency or to rebut a presumption of insolvency, but for the applicant to demonstrate that there is reason to believe that an adverse costs order will not be paid. The evidence to which I have referred illustrates that that has not been demonstrated and, accordingly, the ground for a security order is not made out.
Had I not reached that conclusion it would have been necessary to consider the various discretionary arguments which have been advanced. I will do so, in the circumstances, only relatively briefly.
First, it seems to me that the combination of delay in making the application - which I will describe - and the overlap between this application and that made by the second to sixth defendants in the first security application is a significant discretionary consideration tending against making an order on this application. By delay in making the application, I refer principally to the circumstance that the first and seventh defendants, for reasons which remain entirely unexplained, eschewed participating in the first security application. They must have been aware of it, because their directing minds are the parties who were the applicants in the first security application. For some reason, they chose not to file an appearance at that stage. Lest it be said that the seventh defendant was not joined when the first security application was made, it had been joined by the time that application came on for hearing and, as I have said, given the role of its directing minds in the first application, must have been aware of it.
Because I do not need to do so I will not examine the question of quantum in any detail, but in circumstances where the original application for security involved the defence of the proceedings up to the first directions hearing following completion of the plaintiffs' evidence, and where many of the issues that would have to be addressed by the first and seventh defendants would also have to be addressed by the sixth defendant, it is unlikely that the additional costs of acting for the Pioneer defendants would materially impact on the estimated costs of the defence of the proceedings up to that point. Together with the unexplained failure of the Pioneer defendants to participate in the first security application, that would have counted against making an order for security at this stage.
More decisively, the albeit belated acknowledgement on the part of the second plaintiff that he would be liable for any costs order that might be made against the third or the fourth plaintiff would have resulted in the refusal of the application on discretionary grounds. The existence of a natural plaintiff in the jurisdiction, regardless of his or her financial capacity or even solvency, has always been a very important consideration against making an order for security against a joint foreign plaintiff or a joint corporate plaintiff. I accept that it is not decisive, and that where there is not an overlap of the cases brought by the natural plaintiff with the case brought by the plaintiff who would otherwise be amenable to a security order, the court may well still make an order. I considered these matters in Street v Luna Park Sydney Pty Limited [2006] NSWSC 1317, in particular as follows:
[27] It is undoubtedly relevant to the exercise of the discretion to order security that there is one or more individual co-plaintiffs against whom an order for security could not or would not be made [Pearson v Naydler [1977] 1 WLR 899; Interwest Ltd v Tricontinental Corporation Ltd & Anor (1991) 5 ACSR 621 at 635 (Ormiston J); Fiduciary Ltd & Ors v Morningstar Research Pty Ltd & Ors (2004) 208 ALR 564]. This appears to have originated with cases in which there was a plaintiff outside the jurisdiction (against whom security might be ordered) but also a plaintiff, albeit an impecunious one, within the jurisdiction. The view was taken that the defendant's position should not be improved by the mere circumstance that there was an additional plaintiff. In other words, as the defendant would not have been able to get an order for security against the impecunious plaintiff in the jurisdiction, it should be no better off by reason of the circumstance that a plaintiff outside the jurisdiction was also joined [Sykes v Sykes (1869) LR 4 CP 645; D'Hormusgee & Co v Grey (1882) 10 QBD 13]. The rationale of these cases was examined in this court by Studdert J in Maples v Hughes [2002] NSWSC 617, in the course of which his Honour referred to Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523 ; (1984) 8 ACLR 835, a decision of the Queensland Full Court in which a natural person was joined with three companies as plaintiffs. The leading judgment was given by Connolly J who (at 841) having posed the question "What is the rule when there is more than one plaintiff", proceeded:
The "two plaintiff" cases start with the situation in which one is out of the jurisdiction. Prima facie he ought to be ordered to provide security but his co-plaintiff is within the jurisdiction. In such a case it was considered that there was no ground for ordering security. See Sykes v Sykes (1869) 4 LR CP 645 at 648 per Byles J and Montague Smith J. This principle was held to apply even where the plaintiff within the jurisdiction was insolvent. I take the underlying reason to be that the defendant was really in no worse position than if he had been sued by a single plaintiff resident within the jurisdiction and insolvent. As Brett J remarked at 650, the cases show that, unless there is ground for making an order for security against all the plaintiffs, it cannot be made against any.
[28] However, this is not an absolute rule, as appears from the judgment of Plowman J in John Bishop (Caterers) Ltd v The National Union Bank Ltd [1973] 1 All ER 707; see also Fiduciary Ltd v Morning Star Research. Where there is a complete identity between the corporate plaintiff and the individual plaintiff, so that all plaintiffs are suing in relation to one and the same defendant, and all plaintiffs must succeed or fail together, security will not ordinarily be ordered against only one of them [Bishop, 709-710]. But where the various plaintiffs' claims have different elements and aspects, so that they will not all necessarily succeed or fail together, although the existence of individual plaintiffs is a factor that diminishes the defendant's claim to be entitled to security against the corporate plaintiff, it does not extinguish it [Interwest Ltd v Tricontinental]. And where the degree of overlap between the claim of the individual and corporate plaintiffs is comparatively small, such that separate orders for costs might be made in respect of each of the plaintiffs, it is usually appropriate that an order for security be made [Bishop, 716; Fiduciary v Morning Star, 33-36].
In the judgment of Connolly J in Harpur v Ariadne Australia Limited (No 2) (1984) 8 ACLR 835, to which reference was made in the above passage in Luna Park, his Honour said that in two plaintiff cases, where one was out of the jurisdiction but a co-plaintiff was within the jurisdiction, there was no ground for ordering security, even where the plaintiff within the jurisdiction was insolvent. In another passage of his Honour's judgment (at 842) his Honour explained rationale as follows (with reference to the equivalent section in (QLD) Companies Code, s 533):
The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. If, however, he is already available for whatever he is worth the object of the legislation is seen to be satisfied.
It is true, as the applicants point out, that the natural plaintiffs appear to have no cause of action of their own in these proceedings, and that they have filed an interlocutory process seeking their removal as plaintiffs, although they have not proceeded on it. However, the fact is that as a party they are amenable to a costs order, although they might have argued that costs attributable to the proceedings by the third and fourth plaintiffs ought not be ordered against them. Had that been the case, then the distinction to which I referred in Luna Park would have been applicable and a security order might, had the grounds otherwise have been established, have been made. But where the sole beneficial owner of the corporate plaintiffs has now acknowledged that he will be amenable to any costs order made against the corporate plaintiffs, there is no absence of overlap of their respective liabilities, and the purpose of the provision has effectively been secured. For that reason I would also, as a matter of discretion, have dismissed the application.
I would finally observe that while this is not exclusively an oppression suit, in which it is often inappropriate for the majority to resort to the assets of the company to defend themselves against the minority claim, this case has some features of one. Because I have concluded that the ground is not established, and that an order would also be declined on discretionary grounds, I do not need to rely on, or even take into account, this feature, and I acknowledge that there is a claim for breach of contract against the seventh defendant, which it is strongly arguable it ought to be entitled to defend using its own resources. That said, it is not easy to see why the minority should be required to put up security for the corporation's costs (as distinct from the majority's) of defending the claim. But that is not an essential part of my reasons.
The court orders that the interlocutory process filed on 30 May 2014 be dismissed with costs, fixed in the sum of $22,500, and payable forthwith.
[3]
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: 19 February 2015