Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Appeal from interlocutory orders concerning matter of practice and procedure - Security for costs - Whether error in ordering further security - Turns on own facts

Corporations Act 2001 (Cth), s 1335(1)

Dodds v Kennedy [2011] WASCA 32

House v The King [1936] HCA 40; (1936) 55 CLR 499

Kelbush Pty Ltd v Australia and New Zealand Banking Group Ltd [2016] WASCA 14; (2016) 49 WAR 374

LPH Developments Pty Ltd v Jameson Moore Pty Ltd (No 2) [2017] WASC 128

LPH Developments Pty Ltd v Jameson Moore Pty Ltd (No 3) [2017] WASC 284

LPH Developments Pty Ltd v Jameson Moore Pty Ltd [2015] WASC 416

The State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40

Traynor v Cunningham (No 2) [2017] WASCA 159

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

Wilson v Metaxas [1989] WAR 285

1. At the hearing of this appeal, we made orders refusing leave to appeal and dismissing the appeal. These are our reasons for making those orders.
2. The appellant seeks leave to appeal against the interlocutory orders of the master made in the primary proceedings on 22 February 2018. The orders require the appellant to give further security for costs in the amount of $50,000, and stay the original action and counterclaim pending compliance with that requirement. The orders were made under s 1335(1) of the Corporations Act 2001 (Cth).
3. In the primary proceedings, the appellant claims damages for breach of a contract for the sale a commercial property in O'Connor by the respondent to the appellant. The claimed damages include expenditure in respect of the property, termination costs, the difference between the value of the property and the purchase price under the contract with the respondent and the lost opportunity to profit from the commercial development of the property. The respondent counterclaims for damages for breach of the same contract, being the difference between the amount realised on the resale of the O'Connor property and the purchase price payable under the contract with the appellant, as well as resale costs.
4. An initial application for security for costs was dismissed by Beech J in 2015. A significant consideration for Beech J was that the appellant would advance the same arguments as to whether the respondent was entitled to terminate the contract in its claim and in its response to the respondent's counterclaim. Beech J did not think it appropriate to order security for costs of the appellant's action, under the threat of a stay, while the respondent remained at liberty to pursue its counterclaim. The respondent had not proffered an undertaking not to prosecute its counterclaim to alleviate that concern.[1]
5. In May 2017, a second application for security for costs was granted by Banks-Smith J. By that time the appellant had incurred further judgment debts of $297,000, which had not been paid, and $143,023, payment of which had been deferred by agreement. In the second application, the respondent undertook to stay its counterclaim pending the payment of any security by the appellant. The appellant asserted that it had incurred some $450,000 in legal costs since the previous application, but did not say whether those costs had been paid. The evidence did not establish that an order for security would prevent the trial from proceeding. The appellant had repeatedly failed to comply with orders of the court in a manner that increased costs for all parties. These factors led Banks-Smith J to decide that the respondent was entitled to an order for security for costs.[2]
6. Before Banks-Smith J, the parties agreed that the likely length of trial was 5 days. The respondent had provided a draft bill of costs in the amount of $125,554, and sought $50,000 in security. Mr Hirschberg, the appellant's sole director, had offered an unsecured personal undertaking in the amount of $50,000. In these circumstances, Banks-Smith J considered the sum of $50,000 to be an appropriate amount to be ordered to be paid into court by way of security.[3]
7. On 29 June 2017, Mr Hirschberg appointed administrators to the appellant under s 436A of the Corporations Act. At a second meeting of creditors on 3 August 2017, it was resolved to accept a Deed of Company Arrangement (DOCA) proposed by Mr Hirschberg. The appellant's most significant creditor was another company controlled by Mr Hirschberg (Octani Capital Pty Ltd) which claimed to be a secured creditor in an amount exceeding $2.9 million, of which about $2.2 million was claimed for advisory services said to have been provided to the appellant for managing the primary proceedings. Under the DOCA, control of the appellant reverted to Mr Hirschberg, and a special purpose entity (Octani Investments Pty Ltd) was constituted as a vehicle to pursue litigation funding for the primary proceedings.[4]
8. In general terms, the DOCA provides for secured and unsecured creditors to share up to $100,000 of any remaining proceeds from the primary proceedings, after the making of payments which include administration expenses and $525,000 to Octani Investments. Any remaining balance after that distribution to the creditors is to be paid to Octani Investments.[5] The parties to the DOCA acknowledge that:[6]

[Octani Investments] shall be solely liable for any adverse cost order or any claims made against [the appellant] in the [primary proceedings] and solely responsible for providing any security for costs required to continue with the [primary proceedings], and shall indemnify the [appellant] and the Administrators/Deed Administrators against any such cost orders, claims and security for costs.

In practical terms, the litigation is now being conducted principally for the benefit of Octani Investments which, as between the parties to the DOCA, has assumed responsibility for the payment of costs and security for costs.

1. Following the appointment of administrators, the respondent withdrew its undertaking not to deal with the proceeds of the sale of the O'Connor property, which were its only asset. The appellant then applied for a freezing order in respect of those proceeds. The application was made on 24 August 2017. The appellant paid the security for costs into court on 1 September 2017. The application for a freezing order was ultimately dismissed by Banks-Smith J on 3 October 2017.[7]
2. On 28 November 2017, the respondent applied for further security for costs. That application was granted on 22 February 2018 by the master, who delivered oral reasons for that decision. At that time, the matter had been listed for a 5 day trial commencing on 30 July 2018.
3. After referring to the above history, the master noted that Mr Hirschberg said that Octani Investments had loaned $101,000 from undisclosed entities for the purpose of funding the proceedings, of which $50,000 was applied to the security of costs ordered by Banks-Smith J. The appellant, Mr Hirschberg and Octani Capital had provided guarantees of those loans. The master noted that Octani Investments had not offered to be bound by any costs order or provided any undertaking to the respondent. The master referred to evidence of Mr Hirschberg that Octani Investments borrowed money from Octani Capital's clients, and from Octani Capital in its own right using funds derived from its business income. The master noted that Octani Capital clearly derives business income, but the extent has not been disclosed.
4. The master also referred to an order made by Banks-Smith J on 27 October 2017 that the appellant pay the respondent's costs of the freezing order application without regard to the scale limits and, as to one directions hearing, on an indemnity basis. The master noted that those costs had not been agreed. He referred to the respondent's submission that, if those costs were to be paid from the existing security, then, in real terms, the respondent's existing security of $50,000 had been substantially reduced.
5. The master then said that in all the circumstances ordering further security was warranted. He noted that the jurisdiction to do so was enlivened by the evidence that the appellant was unable to meet any costs order. The master then concluded:

It then becomes a question of whether I ought exercise my discretion. The main reason that the [appellant] says I ought not order for further security is that it might stultify a further litigation. In other words, the [appellant] won't be in a position to provide the funds and won't be able to pursue its claim. In my view, the evidence is such that, taken together with the failure to pay a costs order today, a further order for security is appropriate.

I've taken into account all matters raised by Mr Hirschberg and in particular his personal circumstances, which I would accept are unfortunate. Nonetheless, the [respondent] is entitled to have its position protected. That, after all, is the (indistinct) of section [1335] (ts 5 - 6). (emphasis added)

1. The appellant now seeks leave to appeal against the master's orders of 22 February 2018 on 3 grounds.
2. Ground 1 contends, in effect, that the master erred by having regard to appellant's failure to pay the costs of the freezing order application, which had been neither agreed nor taxed. It is alleged that the master did so in the italicised portion of his reasons quoted at [13] above. There is no merit in that ground. We accept the respondent's submission that the italicised portion of the master's reasons were not referring to the unquantified costs of the freezing order application. It rather appears that the master was referring to the failure by the appellant to pay the respondent's costs of a directions hearing before Banks-Smith J on 21 November 2017. At that time, Banks-Smith J had ordered the appellant to pay the respondent's costs fixed in the sum of $462[8]forthwith.8 The appellant's failure to pay even this modest award of fixed costs when due was a matter relevant to the exercise of the master's discretion.
3. Grounds 2 and 3 are expressed in the following terms:
   1. The [appellant's] evidence that further security would stifle the progress of the action (a position that had previously not been put at the hearing of the second application for security) should also have been found to be a significant militating factor against the exercise of the court's discretion to award security. This is a further error.
   2. The learned Master should have dismissed the application on grounds that:

(a) there had been no material additional costs to the [respondent] since the hearing of the last/previous security for costs application;

(b) security had already been provided;

(c) there were no new or changed circumstances that warranted the grant of additional security; and

(d) a further order for security would stifle the progress of the action.

1. These grounds fail to take account of the discretionary nature of the power to award costs under s 1335 of the Corporations Act. It is not enough to contend that the application should have been dismissed, or that the master failed to give sufficient weight to certain considerations, such as the prospect that the proceedings would be stultified. That prospect, referred to in grounds 2 and 3(d), was expressly considered by the master who referred to Mr Hirschberg's evidence of financial difficulties. After referring to various financial difficulties,[9] Mr Hirschberg deposed that, if an order requiring payment of additional security of $50,000 was made, there was no possibility that the appellant, Mr Hirschberg or any entity he controlled would be able to pay the amount in the foreseeable future.[10] Error is not established by the failure to give adequate weight to this consideration unless it really amounts to a failure to exercise the discretion actually entrusted to the court.[11]
2. The matters referred to in grounds 3(a) - (c) did not demand dismissal of the application for further security for costs. The administration of the appellant and subsequent litigation funding arrangements, the additional costs incurred in the appellant's failed freezing order application and the failure to pay the modest fixed costs ordered on 21 November 2017 were capable of justifying the court revisiting the quantum of security to be provided. While the prospect that a further order for security for costs would stultify the litigation was a significant factor counting against ordering further security, particularly given the prospect that it would prevent the determination of the appellant's claim on its merits, it was only one of the factors to be considered.[12] In all the circumstances of this case, error cannot be inferred on the basis that the master's decision was unreasonable or plainly unjust.[13]
3. Although the issue is not referred to in the grounds of appeal, the appellant's submissions also contend that the application ought to have been dismissed in the absence of any undertaking by the respondent to stay its counterclaim pending payment of the additional security. However, the order sought by the respondent and made by the master provided for both the appellant's action and the respondent's counterclaim to be stayed pending the provision of security for costs. Further, an affidavit in support of the application for further security for costs conveyed an undertaking not to prosecute the respondent's counterclaim for the period in which there is a stay of the appellant's action.[14]
4. As the master's orders are clearly interlocutory in character, the appellant requires leave to appeal under s 60(1)(f) of the Supreme Court Act 1935 (WA). Generally, leave should not be granted unless the decision below is plainly wrong or is attended by sufficient doubt to justify the grant of leave and a substantial injustice would be done if it remains undisturbed.[15] The requirement for leave to appeal against an interlocutory decision is no mere technicality or procedural nicety. Rather it is a substantive restriction which advances the administration of justice by preventing procedural disputes distracting the court and the parties from the determination of contested substantive rights.[16] Moreover, special restraint must be exercised when the interlocutory order under appeal is one concerning practice and procedure.[17]
5. In the circumstances we have outlined, the master's decision is not plainly wrong or attended by sufficient doubt to warrant or justify the grant of leave to appeal. The grounds of appeal do not disclose any proper basis for interfering with the exercise of the master's discretion in a matter concerning practice and procedure.
6. For these reasons, we refused to grant leave to appeal against the interlocutory orders made by the master and dismissed the appeal.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

[1] LPH Developments Pty Ltd v Jameson Moore Pty Ltd [2015] WASC 416.

[2] LPH Developments Pty Ltd v Jameson Moore Pty Ltd (No 2) [2017] WASC 128 esp at [56].

[3] LPH (No 2) [38], [57] - [58].

[4] These findings were made by Banks-Smith J in dealing with the application for a freezing order referred to in the next paragraph: LPH Developments Pty Ltd v Jameson Moore Pty Ltd (No 3) [2017] WASC 284 [11] - [12].

[7] LPH (No 3) [10], [13] - [16], [43].

[8] Order 14 of the orders made on 21 November 2017. The order, and failure to pay the costs, was deposed to in par 8 of the affidavit of Gregory John Mettam sworn 11 December 2017.

[9] Paragraphs 2 - 34 of the affidavit of Philip Allen Hirschberg sworn 5 December 2017.

[10] Paragraph 36 of the affidavit of Philip Allen Hirschberg sworn 5 December 2017.

[11] See Dodds v Kennedy [2011] WASCA 32 [4].

[12] As to the exercise of the discretion under s 1335(1) of the Corporations Act, see Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [5] - [6].

[13] House v The King [1936] HCA 40; (1936) 55 CLR 499, 504 - 505.

[14] Paragraph 6 of the affidavit of Gregory John Mettam sworn 11 December 2017.

[15] The State of Western Australia v Bond Corporation Holdings Ltd (1991) 5 WAR 40, 54 - 57; Wilson v Metaxas [1989] WAR 285, 294.

[16] Kelbush Pty Ltd v Australia and New Zealand Banking Group Ltd [2016] WASCA 14; (2016) 49 WAR 374 [81].

[17] Dodds v Kennedy [5]; Traynor v Cunningham (No 2) [2017] WASCA 159 [41].