JUDGMENT
HIS HONOUR:
Introduction
1 There are four applications before the court for determination. The plaintiffs are Mr Graham Rich and two companies, Fiduciary Ltd ("Fiduciary") and Fiduciary Consultants Ltd ("Fiduciary Consultants"). Mr Rich is the controller and sole shareholder of the corporate plaintiffs. I shall refer to the plaintiffs, from time to time, as "the Rich interests". The second defendant is a Chicago-based company, Morningstar Inc. The third to seventh defendants are officers or former officers of Morningstar Inc, who are or were nominees of the Chicago company on the board of directors of the first defendant ("the Company", sometimes referred to in the evidence as "MDU"). I shall refer to the second to seventh defendants as the "the Morningstar interests".
2 The Company is an entity in which the Rich interests and the Morningstar interests hold shares. The Rich interests allege that the Company was a joint venture vehicle, and they seek relief based on various grounds including claims for misleading and deceptive conduct under the Trade Practices Act 1974 (Cth), breach of contract, and oppression under the Corporations Act 2001 (Cth). They also seek to assert various rights of the Company, including rights arising out of the alleged breaches of directors' duties, and for that purpose they seek leave under s 237 of the Corporations Act. Broadly speaking, this is an "oppression case", but the causes of action range more widely.
3 The claims made by the Rich interests are set out in their Amended Statement of Claim ("the ASC"), a 115 page document. I shall return to consider the plaintiffs' claims later, but it should be noted at the outset that, if all the matters raised in the ASC are carried into the final hearing, this will be very lengthy and expensive litigation.
4 In their first application, made by an Amended Interlocutory Process dated 21 August 2002, the Morningstar interests seek an order that the two corporate plaintiffs give security for costs. Their solicitors made a demand for security on 8 April 2002, which was refused by the solicitors for the Rich interests on 15 May 2002. It appears that the application has taken so long to reach the point of interlocutory hearing because directions for the filing of evidence have been made, extended or not complied with, and perhaps also because the parties have been distracted by other aspects of the litigation to which I shall refer, in the Industrial Relations Commission of New South Wales and the Federal Court of Australia.
5 Secondly, by the same interlocutory process, the Morningstar interests seek an order that paragraphs 240-243 of the Amended Statement of Claim ("the ASC") be struck out. Those paragraphs plead breaches of a shareholders' agreement, and the application to strike them out is based on the contention that proper notice of the alleged breaches was not given under the agreement.
6 Thirdly, the Morningstar interests seek, by notice of motion filed in the Industrial Relations Commission on 17 April 2003 and now "cross-vested" to this court, an order that the claim brought by the Rich interests in the Commission be struck out on the ground that Mr Rich's remuneration as managing director of the Company exceeded the limit of $200,000 set by s 108A of the Industrial Relations Commission Act 1996 (NSW).
7 Fourthly, the Morningstar interests seek an order that their costs of a motion in a proceeding in the Federal Court of Australia, which has been cross-vested to this court, so that it has effectively merged with their cross-claim against the Rich interests, should be assessed and paid by the Rich interests forthwith.
Outline of facts
8 The second plaintiff, Mr Rich, founded the FPG group of companies in New Zealand in about 1983. In 1993 the Company, formed in Victoria and previously known as FPG Research, acquired business assets in Australia and commenced business here. In 1997/98 Mr Rich commenced to search for a global partner for the Company, and late in 1998 he commenced discussions with a Chicago company, Morningstar Inc (the second defendant).
9 In February 1999 Fiduciary and Morningstar Inc entered into heads of agreement under which Morningstar Inc would acquire a substantial shareholding in the Company, in return for a capital injection and the licensing of some of their US ratings and research products. On 16 April 1999 the following agreements were made:
(a) a shareholders' agreement between Morningstar Inc, the Company, Fiduciary and Mr Rich;
(b) a subscription agreement between Morningstar Inc, the Company, Fiduciary and Mr Rich;
(c) a licensing agreement between Morningstar Inc and the Company.
10 There was also a management agreement, expressed to be between the Company, Mr Rich and Fiduciary Consultants. Although that agreement was never executed, it is common ground that the parties operated on the basis that some of its terms, including those relating to the amount of remuneration payable to Fiduciary Consultants and the obligations of Fiduciary Consultants and Mr Rich to provide management services to the Company, were agreed terms.
11 Under these agreements:
(a) Morningstar Inc became a shareholder in the Company. It subscribed initially for 176 shares, which gave it 15% of the issued share capital. The consideration for the issue those shares was USD125,000 and entry by Morningstar Inc into the licensing agreement;
(b) Morningstar Inc agreed to subscribe for further shares in the Company as follows:
(i) 253 shares for USD125,000 on 30 June 1999, so as to give it 30% of the issued capital;
(ii) 238 shares for USD250,000 on 30 June 2000, so as to give it 40% of the issued capital;
(iii) 329 shares for USD250,000 on 30 June 2001, so as to give its 49.9% of the issued capital;
(c) the relationship between the shareholders in the Company was to be that:
(i) the composition of the board of directors would change in accordance with the anticipated increase in Morningstar Inc's shareholding;
(ii) the board of directors was to be chaired initially by Ms Ruth Richardson; and
(iii) Mr Rich was to be the initial managing director, holding office on terms provided in the management agreement and letters from Ms Richardson to him setting out the basis upon which Fiduciary Consultants was to be remunerated for providing the services of Mr Rich;
(d) Morningstar Inc licensed certain of its products, services and technology to the Company, to permit the Company to develop derivative licensed products, and Morningstar Inc agreed to provide the Company with reasonable assistance for the purposes of the agreement, and the Company agreed to develop and promote the derivative licensed products.
12 Later, Morningstar Inc subscribed for shares in the Company pursuant to these arrangements, for a total investment of USD750,000 made in three tranches, giving it a 49.9% shareholding in the Company. In fact the investments were made on 30 June 1999, 28 October 1999 and 1 March 2000, completing the investment programme much earlier than the agreements provided.
13 Subsequently, Morningstar Inc made further advances to the Company. There were six payments from 17 May 2000 to 16 October 2001, in amounts varying from $100,000 to $550,000, totalling $2.45 million. On 29 November 2001 an additional $1,070,000 was paid. Five of these payments were made under convertible loan agreements which entitled Morningstar Inc to convert the loan amounts into equity in the Company. Upon the exercise of the rights of conversion, Fiduciary's shareholding interest in the Company was reduced, in stages, from 50.1% to 9.35%, according to the claims made by the Rich interests.
14 On 5 October 2001 Morningstar Inc gave notice to Mr Rich that it would seek to remove him as managing director and chief executive officer of the Company. On 1 November 2001 Mr Rich and Fiduciary commenced the present proceeding and sought interlocutory relief, to prevent Mr Rich's removal as a director and executive officer and to prevent the issue of shares in satisfaction of one of the advances made by Morningstar Inc.
15 On 23 November 2001 Barrett J dismissed the interlocutory application, with costs, and he eventually ordered that those costs be assessed and paid forthwith: Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1. Subsequently a costs assessor determined those costs at just over $118,000, and then there was a review by a Costs Review Panel which reduced the figure to just over $111,000 (plus assessment costs). The Rich interests successfully appealed to Gzell J on the ground that the Review Panel had mistakenly held that the costs were subject to GST, with the consequence that the recoverable amount was reduced by orders made by Gzell J on 13 May 2004 to just over $101,000 (plus assessment costs). The amount due has not yet been paid.
16 On 24 November 2001 Mr Rich was removed as managing director and chief executive officer of the Company.
17 The proceeding continued by pleadings. The Rich interests filed a statement of claim on 19 March 2002, and on 24 July 2002 they filed the present ASC. It makes a wide range of complaints in respect of events from late 1998 to November 2001. The application by the Morningstar interests for security for costs and to strike out paragraphs 240-243 of the ASC was filed on 25 July 2002, and subsequently amended.
18 The Morningstar interests filed a cross-claim against the Rich interests on 18 December 2002, making various complaints in relation to the agreements and conduct of the Rich interests.
19 On 22 November 2002 the Rich interests commenced proceeding No IRC 6661 of 2002 in the Industrial Relations Commission, seeking relief under s 106 of the Industrial Relations Act 1996 (NSW) on broadly the same facts as in the proceeding in this court. The summons for relief was not served on the Morningstar interests until 25 February 2003. On 17 April 2003 the Morningstar interests filed their notice a motion in the Commission seeking to strike out the summons for lack of jurisdiction.
20 On 24 April 2003 the Morningstar interests commenced a proceeding in the Federal Court against the Rich interests. Their statement of claim propounded substantially the same claims as the cross-claim in the present proceeding. It appears that their purpose in doing so was to establish a "jurisdictional transit point" required under the Commonwealth and State cross-vesting legislation, with the ultimate objective of transferring each of the IRC proceeding and the Federal Court proceeding to the Supreme Court.
21 I should briefly explain the jurisdictional peculiarities underlying these steps. The Jurisdiction of Courts (Cross-Vesting) Act 1997 (NSW) does not give this court the power to order that an IRC proceeding be directly cross-vested into this court and amalgamated with a proceeding in this court, even if the two proceedings raise common issues of law and fact between the same parties: RSL Com Personal Communications Pty Ltd v Mobile Tron Pty Ltd [2001] NSWSC 819 (Barrett J); Rexam Australia Pty Ltd v Optimum Metallising Pty Ltd [2002] NSWSC 916 (Einstein J). However, under s 8(1) of that Act, where a proceeding is pending in the IRC, and it appears to this court that the IRC proceeding is related to a proceeding in the Federal Court, this court is empowered to make an order removing the IRC proceeding to this court, if there are grounds on which the Federal Court proceeding could be transferred to this court. But removal of the Federal Court proceeding to this court must be made by an order of the Federal Court under s 5(4) of the Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth). A practical way of achieving the ultimate outcome is for this court to make an order under s 8 for the removal of the IRC proceeding into this court, but to stay the operation of that order pending a decision by the Federal Court as to whether to transfer the Federal Court proceeding into this court; and then for the Federal Court, if it sees fit, to transfer the proceeding before it to this court.
22 Pursuing this procedure, on 30 April 2003 the Morningstar interests filed of notice a motion in this court, seeking the removal of the IRC proceeding to this court. The court was informed that the Morningstar interests intended to file a notice of motion in the Federal Court proceeding seeking an order that the Federal Court proceeding be transferred to the Supreme Court and that thereafter the Federal Court proceeding be consolidated with the Supreme Court proceeding. On 2 May 2003, the Morningstar interests filed the foreshadowed notice of motion in the Federal Court, seeking an order under s 5(4) of the Commonwealth cross vesting legislation transferring the Federal Court proceeding to this court.
23 On 17 June 2003, the Rich interests filed a notice of motion in the Federal Court seeking dismissal of the Federal Court proceeding as an abuse of process. After a contested interlocutory hearing, that motion was dismissed by Hely J, with costs, on 22 August 2003: Morningstar Research Pty Ltd v Fiduciary Ltd [2003] FCA 870.
24 In July 2003 the Morningstar interests changed tack. They filed an amended notice of motion in this court seeking orders that the IRC proceeding be removed into this court and consolidated with this proceeding, and that the consolidated proceeding thereafter be transferred to the Federal Court and consolidated with the Federal Court proceeding. However, at a directions hearing before Hely J, concern was expressed by counsel for the Rich interests that there might be a constitutional difficulty in the Federal Court determining the IRC proceeding. Once that potential problem emerged, counsel for the Morningstar interests reverted to the course originally charted by his clients, namely that both the IRC proceeding and the Federal Court proceeding should be removed into this court and consolidated with the present proceeding.
25 On 20 October 2003, Burchett AJ, sitting in this court, heard the application for removal of the IRC proceeding, and made an order that the IRC proceeding be removed to this court and consolidated with this proceeding; but that the order be stayed pending an order by the Federal Court transferring the proceeding before it to this court. On 11 November 2003 Hely J ordered that the Federal Court proceeding be cross-vested to this court, and on 5 December 2003 this court ordered that the Federal Court proceeding be consolidated with this proceeding.
26 The result of these manoeuvres is that all of the claims inter partes, as far as I am aware, are now before this court in a single proceeding.
27 The Rich interests entered into a litigation funding agreement with Litigation Lending Services No 3 Partnership ("LLS") on 10 December 2003.
28 If the security for costs issue is resolved, it will then be necessary for the court to make further directions to give effect to the consolidation orders, to deal with the application by the Rich interests under s 237 of the Corporations Act to assert the Company's rights in the proceeding, and to establish a pre-trial directions programme so that the case can be brought forward to trial.
The claims by the Rich interests in the ASC
29 The ASC comprises 247 paragraphs, many of them lengthy, as well as prayers for relief. A detailed account of it is not appropriate here. However, it will be useful to provide a brief schematic outline of the claims. I shall first identify the eight causes of action that are pleaded, and then apply those causes of action to headings which briefly identify areas of factual allegation.
30 The eight causes of action are:
(a) misleading and deceptive conduct
frequently in the pleading, it is alleged that Morningstar Inc made representations amounting to misleading and deceptive conduct, partly or wholly in respect of future matters, for the purposes of ss 52 and 51A of the Trade Practices Act 1974 (Cth), and that all or some of the three plaintiffs, and sometimes the Company, acted in reliance on the representations and would not otherwise have acted as they did, and have suffered loss and damage;
(b) breach of contract
allegations are made of breaches of
* the heads of agreement between Fiduciary and Morningstar Inc (especially the Best Interests Term),
* the shareholders' agreement between Morningstar Inc, the Company, Fiduciary and Mr Rich,
* the licensing agreement between Morningstar Inc and the Company (especially the Product Terms), and
* the subscription agreement between Morningstar Inc, the Company, Fiduciary and Mr Rich,
and it is pleaded that the innocent contractual parties suffered loss and damage by virtue of the breaches; it is also said that Fiduciary and Mr Rich have validly terminated the shareholders agreement under clause 5.5 and are therefore entitled to acquire the shares of Morningstar Inc in the Company at book value;
(c) encouraged assumptions and estoppel
it is contended that Morningstar Inc, by the agency of Mr Phillips and others, acted on various occasions in such a way as to encourage the Company and some or all of the plaintiffs to make specified assumptions about the attitude of Morningstar Inc and its future conduct, and the Company and Mr Rich acted in reliance on such assumptions, so that it was unconscionable for Morningstar Inc subsequently to act inconsistently with the assumptions and it was estopped from doing so;
(d) unconscionable conduct
it is said that in various specified ways, Morningstar Inc engaged in conduct that was unconscionable, both at general law and under s 51AA of the Trade Practices Act, and that the Company and some or all of the plaintiffs suffered loss and damage;
(e) economic duress
it is said that by its conduct, Morningstar Inc applied improper pressure to cause the Company, Mr Rich and Fiduciary to enter into four convertible loan agreements, and that the agreements should be set aside;
(f) oppression
it is said that in various specified ways, Morningstar Inc and some or all of the third to seventh defendants acted contrary to the interests of the members of the Company as a whole, and in a manner that was oppressive and unfairly prejudicial to, and unfairly discriminatory against, Fiduciary in its capacity as a shareholder in the Company, and that (by reason of the specific matters pleaded) the affairs of the Company are a being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against, Fiduciary in its capacity as a shareholder of the Company, and contrary to the interests of the members of the Company as a whole, for the purposes of Part 2F.1 of the Corporations Act, and that Fiduciary is entitled to relief, such as an order that Morningstar Inc buy its shares in the Company or an order that Fiduciary buy the shares of Morningstar Inc, at a price to be determined by the court;
(g) breach of directors' duties
it is said that in various specified ways Morningstar Inc (which, it is claimed (paragraph 35), was a director of the Company for the purposes of the statutory duties contained in the Corporations Act) and all or some of the third to seventh defendants failed to exercise reasonable care, or to act in good faith in the interests of the Company, or for proper corporate purposes, and that they improperly used their positions to cause detriment or gain advantage, contrary to s 180-182 of the Corporations Act and their general law duties (generally, see paragraphs 35-38);
(h) breach of fiduciary duties as joint venture partner
it is said that Morningstar Inc and its nominee directors on the board of the Company were each subject to fiduciary duties to act in the best interests of the Company and of the joint venture partners as a whole (apparently the joint venture partners were Morningstar Inc, Mr Rich, Fiduciary and Fiduciary Consultants) and not to improperly use their positions to gain advantage or cause detriment (generally, see paragraph 39).
31 The broad categories of facts alleged to give rise to these causes of action are:
(1) pre-contractual representations by Morningstar Inc to the three plaintiffs (paragraphs 18-28, 43-45, 244)
*misleading and deceptive conduct by Morningstar Inc, damage to the Company and the three plaintiffs;
(2) failure by Morningstar Inc to comply with the Product Terms and other matters (paragraphs 29-34, 40-42, 244)
*breach of contract (licensing agreement, subscription agreement, shareholders agreement) by Morningstar Inc, damage suffered by the Company and the three plaintiffs;
(3) representations by Morningstar Inc with respect to business strategy and capital requirements from December 1999 to February 2000 ("Enhanced Plan Representations") (paragraphs 46-57, 244)
*misleading and deceptive conduct by Morningstar Inc, damage to the Company and the three plaintiffs;
*encouraged assumptions and estoppel, arising out of the conduct of Morningstar Inc, asserted by the Company and Mr Rich;
(4) r epresentations, agreement and conduct by Morningstar Inc in respect of the February 2000 funding and the April 2000 funding (paragraphs 58-72, 73-88, 244)
*misleading and deceptive conduct by Morningstar Inc, damage to the Company and the three plaintiffs;
*breach of contract by Morningstar Inc causing damage to the Company and the three plaintiffs;
*encouraged assumptions and estoppel, arising out of the conduct of Morningstar Inc, asserted by the Company;
(5) the negotiation and making of the first, second, third and fourth convertible loan agreements by Morningstar Inc and its nominee directors (paragraphs 89-102, 103-116, 143-157, 183-193, 244)
*oppression by Morningstar Inc of Fiduciary as a shareholder of the Company;
*unconscionable conduct by Morningstar Inc, damage to the Company and the three plaintiffs;
*each of the loan agreements was secured by economic duress by Morningstar Inc, entitling the Company, Fiduciary and Mr Rich to set the agreements aside;
*breach of directors' duties owing to the Company by Morningstar Inc and Mr Phillips (first and second convertible loan agreements) and by Morningstar Inc and the third to sixth defendants (third and fourth convertible loan agreements), causing damage to the Company;
*breach of the duties of a joint venture partner, by Morningstar Inc and Mr Phillips (first and second convertible loan agreements) and by Morningstar Inc and the third to sixth defendants (third and fourth convertible loan agreements), causing damage to the Company and the three plaintiffs;
*breach of contract by Morningstar Inc, namely the Best Interests Term in the heads of agreement and the terms of the second convertible loan agreement, causing loss to the Company and the three plaintiffs;
(6) conduct on behalf of Morningstar Inc in respect of the 2001 Business Plan (paragraphs 117-129, 244)
*misleading and deceptive conduct by Morningstar Inc, damage to the Company and the three plaintiffs;
*encouraged assumptions and estoppel arising out of Morningstar Inc's conduct, asserted by the Company and Mr Rich;
(7) conduct by Morningstar Inc and its nominee directors in connection with the 2001 capital raising, negotiations with Investorinfo and DST, the Combined Proposal, the DST Proposal and the Free Use Condition (paragraphs 130-142, 161-169, 170-182, 244)
*misleading and deceptive conduct by Morningstar Inc, damage to the Company and the three plaintiffs;
*breaches of directors' duties by Morningstar Inc and the third to sixth defendants, damage to the Company;
*breaches of fiduciary duties of joint venture partner, by Morningstar Inc and the third to sixth defendants, damage to the Company and the three plaintiffs;
*breaches of contract, namely the Best Interests Term in the heads of agreement, by Morningstar Inc, damage to the Company, Fiduciary and Mr Rich;
(8) conduct of Morningstar Inc and its nominee directors in connection with the removal of Mr Rich as chief executive officer and managing director of the Company (paragraphs 195-217, 244)
*oppression by Morningstar Inc of Fiduciary in its capacity as a shareholder of the Company;
*breach of directors' duties owed to the Company by Morningstar Inc and the third to seventh defendants, damage to the Company;
*breach of fiduciary duties to joint venture partners by Morningstar Inc and the third to seventh defendants, damage to the Company and the three plaintiffs;
*breaches of contract by Morningstar Inc, namely clause 3.2 of the shareholders' agreement and the Best Interests Term in the heads of agreement, damage to the Company and the three plaintiffs;
(9) failure by Morningstar Inc and its nominee directors to provide Fiduciary and Mr Rich with information since 24 November 2001 (paragraphs 218-223, 244)
*breach of contract by Morningstar Inc, namely clauses 5.3 and 5.5(ii) of the shareholders agreement and the Best Interests Term in the heads of agreement, damage to the Company and the three plaintiffs;
*oppression by Morningstar Inc of Fiduciary in its capacity as a shareholder of the Company;
*breach of directors' duties owed to the Company by Morningstar Inc and the third to seventh defendants, damage to the Company;
*breach of fiduciary duties owed to the joint venture partners, by Morningstar Inc and the third to seventh defendants, damage to the Company and the three plaintiffs;
(10) failure by Morningstar Inc and its nominee directors to prevent conflict of interest arising out of Clayton Utz acting for the Company and also for the Morningstar interests (paragraphs 224-233, 244)
*oppression by Morningstar Inc of Fiduciary in its capacity as a shareholder of the Company;
*breach of directors' duties owed to the Company by Morningstar Inc and the third to seventh defendants, damage to the Company;
*breach of fiduciary duties owed to joint venture partners, by Morningstar Inc and the third to seventh defendants, damage to the Company and the three plaintiffs;
*breach of contract by Morningstar Inc, namely the Best Interests Term in the heads of agreement, damage to the three plaintiffs;
(11) conduct of the third to sixth defendants in making and acting upon irrevocable agreements as to how to vote at board meetings of the Company (paragraphs 234-238, 244)
*oppression by the third to sixth defendants of Fiduciary in its capacity as a shareholder of the Company;
*breach of directors' duties owed to the Company by Morningstar Inc and the third to sixth defendants, damage to the Company;
*breach of fiduciary duties owed to joint venture partners, by Morningstar Inc and the third to sixth defendants, damage to the Company and the three plaintiffs;
*breach of contract (apparently by Morningstar Inc through the agency of the third to sixth defendants), namely the Best Interests Term in the heads of agreement, damage to the three plaintiffs.
Security for costs
32 The application by the Morningstar interests is that Fiduciary and Fiduciary Consultants be ordered to give security for the costs of the defendants to be incurred up to and including the hearing. While the Amended Interlocutory Process also sought an order for security for the costs of the defendants incurred up to the date of the making the order, I was informed in submissions that this relief is no longer pressed. Orders are sought that the proceeding be stayed until security is given, and that the defendants have liberty to apply to increase the amount of security, should the amount prove inadequate.
33 The Rich interests' primary submission is that no order for security for costs should be made at all. If, however, the court decides to make an order, the plaintiffs say that the amount of security should be no more than approximately $800,000, whereas the Morningstar interests seek an order for security for approximately $6.5 million. I shall deal first with the general approach taken by courts to applications of this kind, and with the Rich interests' grounds for contending that no order should be made. Since I do not agree with the Rich interests' submissions, I shall then deal with the question of quantum of security.
Jurisdiction to order security for costs
34 There are three sources of power for the court to make an order for security for costs against the two corporate plaintiffs: first, the inherent power of the court to regulate its own procedure and practice, reinforced by s 23 of the Supreme Court Act 1970 (NSW): see Rajski v Computer Manufacture & Design Pty Ltd [1982] 2 NSWLR 443, 447-8 (Holland J); affirmed on appeal [1983] 2 NSWLR 122; secondly, Part 53 rule 2(1)(e) of the Supreme Court Rules; and thirdly, s 1335 of the Corporations Act 2001 (Cth). In my opinion, the issues raised by the parties go to the proper exercise of discretion, rather than the existence of jurisdiction or power, for reasons I shall explain.
General approach to the exercise of discretion
35 An order for costs is made to indemnify the successful party: Oshlack v Richmond River Council (1998) 193 CLR 72, 97 per McHugh J. The purpose of an order for security for costs against a corporate plaintiff is to protect the defendant against the risk of being deprived, through the plaintiff's inability to pay, of the benefit of a costs order made for that purpose, should the defendant be successful. The general approach of the courts to an application for security for costs against a corporate plaintiff was described by Einstein J in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744. As his Honour pointed out (at [20]), the defendant has the evidentiary onus of satisfying the court that the corporate plaintiff will be unable to meet the defendant's reasonable costs if the defendant succeeds in the litigation. Once that is established, the court's discretion is triggered, though it is not an unfettered discretion: Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542.
36 Not only does proof of the unsatisfactory financial position of the corporate plaintiff trigger the court's discretion, but that evidence is also substantial factor in the exercise of the discretion: Idoport, at [56]-[57]. And once the defendant has shown that the corporate plaintiff will be unable to meet its reasonable costs, the evidentiary burden shifts to the plaintiff to satisfy the court that, taking into account all relevant factors, the court should exercise its discretion by refusing to order security or by ordering security of a lesser amount than the defendant seeks: Idoport, at [60]-[62].
The court's approach to assessing the strength of the plaintiff's case
37 For the purposes of the security for costs application, the Rich interests say that their claims against the Morningstar interests are bona fide and have reasonable prospects of success. The Morningstar interests do not assert otherwise, but they say that the merits of the underlying claims should be regarded as a neutral factor, and that the court should simply assume that the claims are bona fide and arguable and should not embark on a more detailed consideration of the merits: Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 at 50-636 per Hill J; Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621, 624 per Ormiston J.
38 I agree with these submissions. Lynnebry Pty Ltd v Farquhar Enterprises Pty Ltd (1977) 3 ACLR 133 was an appeal from a Master who had declined security after forming the conclusions that the plaintiff had a very strong case and the defences were prima facie implausible. Meares J agreed (at 136) with the Master's conclusions, on the limited evidence that was available, but he held that these conclusions were not a ground for refusing to grant security. However, he cited (at 135) authorities in support of the view that it is relevant to consider whether the plaintiff's claim is bona fide and has a reasonable prospect of success.
39 Here, looking at the ASC as a whole and not focusing on particular cause of action, I have no reason to doubt that the claims by the Rich interests are bona fide claims with a reasonable prospect of success. The claims are extensive and complicated, and they are vigorously contested by the Morningstar interests. It would therefore be highly imprudent, at the stage, to attempt to form any view as to the proportionate strength of the cases of the parties, even if the authorities permitted me to do so. In the present case, the merits of the Rich interests' case against the Morningstar interests are a neutral factor.
The financial position of the corporate plaintiffs and their ability to meet an adverse costs order
40 It is clear from the evidence that the factual issues to be addressed for the plaintiff to prove the case asserted in the ASC will be numerous and complex. So much is effectively conceded by the evidence of the Rich interests on the application (for example, in the affidavit of their solicitor, Mr O'Neill, made on 15 April 2004, paragraph 32, and in the affidavit of Ms Rosati made on 12 May 2004, paragraph 9). By any measure, the defendants' costs up to and including the hearing will be substantial.
41 According to the evidence given on behalf of the Morningstar interests by their solicitor, Mr Wang, the anticipated costs of the defendants in this proceeding are in the order of $6.5 million. In Mr O'Neill's view, given on behalf of the Rich interests, a reasonable provision for costs up to and including the hearing would be in the order of $800,000. I shall return to this evidence when I consider the question of quantum of security. It is unnecessary to resolve the conflict of evidence at this point, for on either view of the quantum of costs, the evidence clearly shows that the corporate plaintiffs will be unable to meet those costs in the event that the defendants succeed.
42 It appears from the evidence that Fiduciary's only assets are 44 shares in the Company, which the Morningstar interests claim to be entitled to purchase for book value, and all of the shares in a company called FPG Research Holdings Ltd, which in turn owns 999 shares in the Company and 5/6 of the shares in FPG Research Ltd. According to the solicitor for the Rich interests, Mr O'Neill, Fiduciary has no other substantial assets (affidavit made on 15 April 2004, paragraph 16). The evidence includes financial statements of the Company for various years, including the year ended 31 December 2003, which show that the Company now has a negative net worth. Therefore Fiduciary's shares in the company appear to have no value. According to the financial statements for the year ended 31 December 2003, the Company's holding in its subsidiary, FPG Research Holdings Ltd, has no significant value. It seems to follow that Fiduciary has no substantial assets, and certainly insufficient assets to meet an order for costs in the order of $6 million or even $800,000.
43 It is unnecessary, for present purposes, to go further than that, although I should note that I agree with the contention made by the Morningstar interests that such a conclusion is supported by the failure of Fiduciary to comply with Barrett J's order that the costs of the interlocutory application in November 2001 be paid forthwith. I summarised the process of assessment of costs, reviewed by the Costs Review Panel, and determination by Gzell J that the Panel had erred with respect to GST, in my outline of the facts. In the result, an amount in excess of $101,000 has been payable since 13 May 2004, and no part of it has been paid.
44 According to Mr O'Neill (affidavit made on 15 April 2004, paragraph 17), Fiduciary Consultants asserts that it has claims against the Company. But there is no evidence of the value of the claims, and no proceeding has been commenced to assert them. Mr O'Neill's evidence concedes (affidavit made on 15 April 2004, paragraph 25) that Fiduciary Consultants is unable to provide any security for costs.
45 In considering the ability of a corporate plaintiff to meet an order for security for costs, it is relevant, in my opinion, to have regard to any funding arrangement that the corporate plaintiff has made. Here, the Rich interests have a litigation funding agreement with LLS, but there is no evidence at all with respect to the financial position of LLS.
The arguments against an order for security
46 The Rich interests contend that an order for security for costs should not be made, for three reasons. First, they point out that one of the plaintiffs is Mr Rich, a natural person, and they say that the court should not make an order against Mr Rich's co-plaintiffs when it would not (or perhaps could not) make an order against Mr Rich personally (I shall call this "the personal plaintiff argument"). Secondly, they say that to require the corporate plaintiffs to provide security would have the effect of stultifying the ability of the plaintiffs to pursue their claims in the proceeding ("the stultification argument"). Thirdly, they say that the two corporate plaintiffs are impecunious as a direct result of the wrongful conduct of the Morningstar interests (I shall call this "the causation argument").
The personal plaintiff argument
47 In Cowell v Taylor (1885) 31 Ch D 34, 38, Bowen LJ said:
"The general rule is that poverty is no bar to a litigant, that, from time immemorial, has been the rule at common law, and also, I believe, in equity."
48 That statement, and similar observations by Baggallay LJ (at 37), appear to identify a strict rule, subject to specific exceptions identified by their Lordships, rather than a guideline for the exercise of discretion. The rationale for rule appears to be a public policy requiring the defendant to accept the risk that the plaintiff might not be able to satisfy an order for costs, so as to ensure that the doors of the court are not barred to a resident plaintiff simply because he or she is impecunious: Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, 530 per Connolly J. As Megarry V-C observed in Pearson v Naydler [1977] 1 WLR 899, 902, "the power to require security for costs ought not to be used so as to bar even the poorest man from the courts". Nowadays, however, the "rule" may be less absolute than the formulations in Cowell v Taylor would suggest (Melville v Craig Nowlan & Associates Pty Ltd (2001) 54 NSWLR 82, 108, per Heydon JA), and there may be room for debate about its true nature (Morris v Hanley [2000] NSWSC 957, at [11] to [21] per Young J).
49 In some New South Wales cases, an order for security has been made against a plaintiff who is a natural person, outside the recognised exceptions now found in Part 53 rule 2(1), suggesting that the "rule" is discretionary: Rajski v Computer Manufacture & Design Pty Ltd (supra); Bhagat v Murphy [2000] NSWSC 892. But it is unnecessary, in the present case, to explore the scope of the court's discretion to depart from the "general rule" outside the established exceptions, for two reasons. First, the present case does not display the kind of extreme circumstances that influenced the courts to act in the Rajski and Bhagat cases; and secondly, the defendants do not seek to have an order for security for costs against the natural person plaintiff, but only against the two corporate plaintiffs.
50 Where an order for security is sought against a corporate plaintiff, the court's inherent power is supplemented by Part 53 rule 2(1)(e) of the Supreme Court Rules, which provides:
"(1) Where, in any proceedings, it appears to the Court on the application of a defendant - ...
(e) that there is reason to believe that a plaintiff being a body corporate will be unable to pay the costs of the defendant if ordered to do so,
the Court may order that the plaintiff give such security as the Court thinks fit for the costs of the defendant of and incidental to the proceedings and that the proceedings be stayed until the security is given."
51 Section 1335(1) of the Corporations Act is to similar effect. It says:
"(1) Where a corporation is plaintiff in any action or other legal proceedings, 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."
52 Thus jurisdiction to make an order that a corporate plaintiff provide security for costs is conferred by the Corporations Act and the Supreme Court Rules. That being so, the question is whether the court should in its discretion refuse to order security for costs against the corporate plaintiffs because they are co-plaintiffs with a natural person. For the purpose of answering this question, I shall assume that, in accordance with the "general rule", the court would not make an order for security for costs against Mr Rich personally.
53 There is a striking contrast between the approach taken to security for costs against a corporation and the approach taken where the plaintiff is an individual. The justification for such a sharp distinction is not immediately obvious. It appears to lie in an endeavour, where an impecunious corporation is the plaintiff, to prevent the corporation's controller from hiding behind it and avoiding liability for costs: Harpur v Ariadne Australia Ltd, at 527 per Connolly J; Pearson v Naydler (where Megarry V-C said, at 905, that the statutory provision "provides some protection for the community against litigious abuses by artificial persons manipulated by natural persons"). If, therefore, the individual who stands behind the impecunious corporation accepts responsibility for costs, the Court may decide not to make an order for security: Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46, 53 per Burchett J.
54 Understandably, difficulty arises where there are two or more plaintiffs, including one or more individuals and one or more corporations. There is an exception to the rule that security for costs will not be ordered against an individual plaintiff, if the plaintiff ordinarily resides abroad: see, in New South Wales, Part 53 rule 2(1)(a). In a series of cases courts have declined to make an order for a foreign plaintiff to provide security for costs when his or her co-plaintiff resides within the jurisdiction and is therefore protected by the general rule: Winthrop v Royal Exchange Assurance Co (1755) 1 Dick 282 [21 ER 277]; M'Connell & East v Johnston (1801) 1 East 431; Sykes v Sykes (1869) LR 4 CP 645 [102 ER 167]; D'Hormusgee & Co v Grey (1882) 10 QBD 13. An order for security for costs will be declined, according to these cases, even where the local plaintiff is insolvent or bankrupt. The issue in the present case is whether, by analogy with these cases, an order for security for costs against a corporate plaintiff should be refused where its co-plaintiff is an individual residing within the jurisdiction.
55 The issue was considered in John Bishop (Caterers) Ltd v National Union Bank Ltd [1973] 1 All ER 707, where Plowman J distinguished the "foreign co-plaintiff" cases and made an order for security for costs. There were two grounds of distinction. First, in the foreign co-plaintiff cases the claims of the plaintiffs were identical or overlapped, whereas in the case before Plowman J, in which there was a long and complicated statement of claim, there were very large areas of claims raised by the corporate plaintiff as to which the individual plaintiff, a secured creditor of the corporate plaintiff, had no locus standi, and consequently the overlap was comparatively small. This meant, according to Plowman J (at 710), that if the corporate plaintiff were to lose at the trial, it would be unlikely that the individual plaintiff would be ordered to pay the defendants all of the defendants' costs incurred vis-a-vis the corporate plaintiff. The second ground of distinction was that the foreign co-plaintiff cases did not arise under the security for costs provisions of companies legislation, an area which the legislature had "singled out for special treatment" (at 711).
56 The question was addressed rather more fully by Megarry V-C in Pearson v Naydler. He distinguished the foreign co-plaintiff cases (at 904) on the ground that the basic rule for an individual plaintiff was that security for costs would not be ordered, and the exception for a foreign plaintiff arises only where the sole plaintiff is, or all of the plaintiffs are, resident abroad; whereas in the case of a limited company, there is no basic rule conferring immunity from liability to give security for costs, and the basic rule is in fact the opposite. He said that the correct approach, under the statutory provision, was to regard the presence of an individual co-plaintiff as a matter going to the exercise of discretion rather jurisdiction. He made an order for the provision of security for costs. One of the matters to which he referred (at 906), in the exercise of his discretion, was that in the case before him, the plaintiff company was in truth the only real plaintiff, and the case was not one of a plaintiff company which had as a true co-plaintiff a natural person. But he did not base his decision on that factor.
57 In Harpur v Ariadne Australia Ltd, Connolly J (with whom Campbell CJ and Demack J agreed) allowed an appeal against an order for the corporate plaintiffs to provide security, in the action by an individual and three companies. The evidence indicated that the corporate plaintiffs were impecunious, but the individual plaintiff, Mr Harpur, was a man of substantial means who controlled the corporate plaintiffs. After analysing the cases and stressing the breadth of the court's discretion under the predecessor of s 1335, he observed (at 532):
"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."
58 He found that Mr Harpur was the real plaintiff, and the corporate plaintiffs had been joined "as a means to his establishing his own rights". There was no question of the companies having any claim independent of Mr Harpur's claim and there was a complete overlap in the interests put in suit. Since Mr Harpur was the prime plaintiff and was not seeking to shelter behind the companies, he should not be in any different position from any other individual plaintiff whose assets are within reach of the court process.
59 There are some similarities between that case and the present case. Here, as there, the individual plaintiff controls the corporate plaintiffs. But in this case, although there is substantial overlapping of claims and a largely common factual substratum, conceptually some of the claims of the individual plaintiff and the corporate plaintiffs are quite distinct - for example, the oppression claims, which can only be asserted by the corporate plaintiff which is the shareholder in the Company, and the Company's claims for breach of directors' duties and other matters, which the plaintiffs seek to assert derivatively. Therefore, to the extent that Connolly J's reasoning requires the court to refuse security if the individual plaintiff is the "true" or "prime" plaintiff, it cannot be said that Mr Rich is in that position in the present case, notwithstanding that he controls the corporate plaintiffs. Another difference is that in the present case, unlike the Harpur case, all plaintiffs are impecunious but there is a litigation funding agreement in place. That makes it more difficult to say that the outcome should be governed by the presence of the individual plaintiff.
60 In Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621, Ormiston J summarised the effect of the earlier cases (at 624-5) as follows:
"In [ John Bishop ], security was ordered because the overlap between the individual and the corporate plaintiffs' cases was comparatively small, so much so that Plowman J thought there might be separate orders for costs. In Harpur v Ariadne Australia Ltd , the Queensland Full Court considered that the facts that the corporation was joined for conformity and that the individual plaintiff was a person of substantial means were sufficient grounds to dismiss the application. Each was therefore a case at opposite ends of the spectrum. Megarry V-C, though purporting to follow the John Bishop case, took a middle course, asserting that the presence of an individual as plaintiff is merely a factor to be taken into account in the exercise of the discretion: at 905. It is not, perhaps, an intellectually satisfying solution, but it provides an answer to the plaintiffs' arguments. In other words one cannot merely rely on the fact, as was suggested on behalf of the plaintiffs, that there are also plaintiffs joined who happen to be individuals who might be able to pay any costs ordered in favour of the defendants."
61 The facts before his Honour indicated that it would be unlikely that the individual plaintiffs could meet an adverse costs order, and it was clear that the corporate plaintiffs could not do so. Noting, however, that the individual plaintiffs could not be the subject of any order, he said (at 625) that "due allowance" should be made for the consideration that the court "ought not to give any indirect benefit to the defendants in respect of their defence of the individual plaintiffs' claims". He concluded (at 625) that "the presence of the individual plaintiffs' claims and their relative significance should be seen as a factor diminishing the defendants' claim to security but not extinguishing it".
62 The effect of these cases is that the presence of an individual plaintiff, alongside the corporate plaintiffs against whom security is sought, is to be taken into account in the weighing up of discretionary considerations, but it is not an absolute bar to the ordering of security. The presence of the individual plaintiff may be significant in various ways.
63 First, it is relevant to consider whether the causes of action asserted by the various plaintiffs are sufficiently distinct that if the plaintiffs are unsuccessful, the Court is unlikely to make the individual plaintiff responsible for failure of the claims made by the corporate plaintiffs. If that is the position, it is likely that the defendants, if they are successful against the corporate plaintiffs, will be forced to look to the corporate plaintiffs alone for recovery of costs in respect of that success, and in such a case the normal rules for the provision of security by corporations should apply in respect of the defendants' costs of defending the corporations' claims.
64 It will be seen, from my summary of the ASC set out above, that some of the causes of action are asserted by all the plaintiffs, some of them are asserted by fewer than all of the plaintiffs, and some of them are causes of action of the Company. As to the latter, the ASC contains an interlocutory application for an order under s 237 of the Corporations Act granting leave to the three defendants to bring and maintain the proceeding in the Company's name. That application has not yet been heard.
65 The causes of action for misleading and deceptive conduct under the Trade Practices Act, and for unconscionable conduct under the Trade Practices Act and the general law, have been asserted by all three plaintiffs and additionally, the plaintiffs wish to make those claims on behalf of the Company. The breach of contract claims have sometimes but not always been asserted on behalf of all three plaintiffs and the Company, although it is not apparent that they can be maintained except by parties to the relevant agreements. The causes of action for breach of fiduciary duties to joint venture partners are sometimes asserted against the individual defendant directors as well as Morningstar Inc, and are asserted on behalf of all three plaintiffs and the Company, although there must be some doubt as to whether all of these people are properly designated as joint venture partners. Notwithstanding these doubts, I shall proceed on the basis that, to the extent that the ASC asserts causes of action for breach of contract and breach of joint venture duties on behalf of the three plaintiffs and the Company, it is permissible to do so. What follows is that there is a very large overlap of, and sometimes a coincidence between, the claims asserted by each of the plaintiffs and by the Company with respect to misleading and deceptive conduct, unconscionable conduct, breach of contract and breach of joint venture duties. As far as I can tell from reviewing the pleading, it is likely that each of the plaintiffs will rely on the same facts to establish the claims in these categories.
66 The various claims for encouraged assumptions and estoppel are in a somewhat different category, because generally they are only asserted by the Company and Mr Rich and not the other plaintiffs. Nevertheless, the factual grounds for the assertions are also grounds for claims for relief made by all of the plaintiffs, particularly with respect to misleading conduct. Therefore there is a high degree of overlapping of the factual grounds for those claims with the factual grounds for claims made on behalf of all plaintiffs. Much the same can be said with respect to the economic duress claims. They are asserted for the purpose of setting aside the convertible loan agreements, and strictly, therefore, are to be asserted only by the parties to those agreements. But the factual basis for the claims is also the basis for claims for breach of directors' duties made by the Company, and for breach of joint venture duties made by the Company and all plaintiffs. The degree of overlapping is therefore very high.
67 The causes of action for oppression and breach of directors' duties are in a different category. Under s 234 of the Corporations Act, only Fiduciary can obtain statutory relief for oppression under Part 2F.1. There is a tension between Fiduciary's oppression claim and Mr Rich's claim for damages for misleading conduct, based on the same facts, because if the oppression claim succeeds Mr Rich will presumably be unable to prove loss. The claims based on breaches of directors' duties can only be made in the name of the Company, though if their interlocutory application succeeds, the claims will be prosecuted on the Company's behalf by all of the plaintiffs. Once again, however, the factual grounds for seeking relief against oppression, and remedies for breaches of directors' duties, are grounds for claiming other relief, such as relief for breach of contract (in particular, the Best Interests Term in the heads of agreement) and other relief such as remedies for breaches of the joint venture duties. Although, therefore, the claims in this category cannot be maintained by all plaintiffs, they are maintained in respect of a common factual substratum, and therefore the degree of overlapping is again high.
68 In my opinion, while it is strictly possible for Mr Rich to succeed while the corporate plaintiffs fail or vice versa, there is such a high degree of overlapping of the factual grounds of the claims that the probability, should the defendants be successful, of a separate order for costs against the corporate plaintiffs is very low. That conclusion is reinforced by the consideration that in the present case, the two corporate plaintiffs are controlled and owned by Mr Rich. It is also reinforced by the consideration that, to the extent that the ASC asserts the Company's causes of action, leave will be sought for all three plaintiffs to do so, and if that leave is granted, all three plaintiffs can be expected to bear the costs if they fail to make out the Company's case. Once all these things are taken into account, there is a high probability that all of the plaintiffs would be made jointly and severally liable to pay the defendants' costs, if the defendants succeed.
69 Once the likelihood of a joint and several costs order is established, one needs to consider the financial capacity of the individual plaintiff to meet an adverse costs order which the corporate plaintiffs cannot pay. If, as in Harpur's case, the individual plaintiff has adequate financial means, it is likely that an order for security will be denied.
70 If the individual plaintiff, like the corporate plaintiffs, has insufficient means, the imposition of an order for security for costs might in some cases shut the impecunious individual plaintiff out of court. But it need not do so. In the Interwest case, Ormiston J ordered (5 ACSR at 608-9) that the corporate plaintiffs provide security, but he did not stay the proceeding entirely until the security was provided. His orders stayed only that part of the proceeding representing the claims by the corporate plaintiffs, leaving the individual plaintiffs free to continue to prosecute their claims. In some cases it will not be sensible and coherent to limit the stay of proceedings in this way (for example, where the claims are all joint claims), but in the present case, it seems to me feasible to do so. Limiting the stay of proceedings to the claims of the corporate plaintiffs will prevent further prosecution of the oppression claim until the order is satisfied, but it will not necessarily prevent Mr Rich from continuing, in his own right, the misleading and deceptive conduct and for unconscionable conduct claims, the breach of contract claims (where he is a party to the contract), and the claims for breach of the fiduciary duties of a joint venture partner (if he can establish that he personally was a joint venturer). As to the Company's claims, it will be open to Mr Rich to pursue the s 237 application in his individual capacity. His impecuniosity will be a relevant discretionary consideration for the court in the assessment of that application, but not necessarily a fatal one.
71 It seems to me that if the stay of proceedings is limited to the claims of the corporate plaintiffs, orders for the provision of security by them will not infringe the principle that an impecunious individual plaintiff resident in the jurisdiction should not be shut out of court by a security for costs order.
The stultification argument
72 There is a well-recognised principle that the court will not make an order for the provision of security, even in the case of a corporate plaintiff, if the order would operate to frustrate or stultify the plaintiff's non-frivolous pursuit of its claims. It is thought to be oppressive to the plaintiff to do so, because the order would stifle a claim that may prove to be genuine (MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97, 100 per Needham J), and unjust, because the effect of the order would be that the defendants would achieve a "victory" without any contest (Spiel v Commodity Brokers Australia Pty Ltd (in liq) (1983) 8 ACLR 410, 416 per Bollen J).
73 The "stultification principle" goes to the exercise of the court's discretion, and does not automatically lead to refusal of the application for security. It nonetheless "usually operates as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour": Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542, 545 per Clarke J; see also Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744, at [50] per Einstein J. In Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120, 123, Meagher JA said that "the courts must be astute to make sure that a person pursuing a claim which is not frivolous is not precluded from doing so by the erection of obstacles which poverty is unable to surmount", but he added that proof of insolvency does not automatically confer an immunity from the statutory provisions which do with insolvent plaintiffs.
74 I take these cases to mean, in the case of a corporate plaintiff, that although the court has a discretion to order security and may be influenced to do so by proof of the plaintiff's insolvency, it may be persuaded not to do so if the impecunious plaintiff proves that there is no real prospect of obtaining funds to meet the order from someone else: Jeffcott Holdings Ltd v Paior (1996) 15 ACLC 28, 32. As Clarke J explained in Yandil Holdings Pty Ltd v Insurance Company of North America, 3 ACLC at 545, the mere fact that the corporate plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order for security will stultify the plaintiff's claim. It may be that there is someone else who will satisfy the order on the plaintiff's behalf.
75 The Morningstar interests submit that, to make good the stultification claim, the Rich interests must satisfy the court that those who stand behind them, or stand to benefit from their success in the proceeding, are unable to provide security for costs. They rely on cases including Bell Wholesale Co Ltd v Gates Export Corporation (1984) 52 ALR 176 and Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744.
76 In the Bell Wholesale case, the Full Federal Court said (at 179-180):
"In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate any litigation unless a company in the position of the appellant here establishes that those who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for a party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts."
77 The approach of the Full Federal Court in Bell Wholesale was approved by McHugh J in PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321, 323, and by the New South Wales Court of Appeal in Hession v Century 21 South Pacific Ltd (in liq), 28 NSWLR at 123.
78 In the Idoport case, Einstein J said (at [66]):
"As to [the claim that an order for security for costs would stultify the litigation], the plaintiffs bear the onus of proving the factual substratum to make good the relevant assertion. Notwithstanding the fact that neither Idoport nor Market Holdings have themselves the capacity by reference to their own assets to provide security and to continue funding the litigation, the plaintiffs appear to have recognised, and in any event the court holds, that in failing to call the necessary evidence to establish what are the assets of shareholders or creditors of the plaintiffs or persons or companies with whom the plaintiffs have funding arrangements or agreements, the relevant evidentiary onus was not discharged."
79 This passage has particular significance to the present case, because Einstein J makes it specifically clear that the "personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds" (to use Clarke J's words in Yandil) include a litigation funder who has agreed to finance the litigation in exchange for a portion of any recovery. But it is not enough to identify a financially capable person who stands to benefit from the plaintiff's success in the litigation. It is also relevant to consider whether it is reasonable to expect that person to put up security. If, for example, the plaintiff company is in liquidation and it would be in the interests of its creditors for the plaintiff to succeed, it would not be reasonable, in "practical commonsense terms" to expect a financially capable creditor of the company to give security if the debt is small: BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339, 344-5 per Anderson J.
80 I am not satisfied, on the evidence, that the making of an order for the provision of security in the amount that I have in mind, would stultify the litigation. True it is that the principal person standing behind the corporate plaintiffs, Mr Rich, has given oral evidence, supported by Mr O'Neill's affidavit made on 15 April 2004, paragraph 16, establishing that Mr Rich could not meet an order for security for costs of any substantial amount, let alone the very large amount sought by the defendants. But it is also necessary to consider the position of LLS, the litigation funder. While the litigation funding agreement does not expressly require that LLS to pay adverse cost orders or meet any orders for security for costs, and Mr O'Neill has given evidence that it has declined to do so (affidavit made on 15 April 2004, paragraph 30), there is no evidence to show that LLS is financially unable, rather than merely unwilling, to provide security.
81 For the Full Federal Court in the Bell Wholesale case, the question was about the impecuniosity of those who would benefit. In Idoport, the evidence held to be lacking was evidence of the assets of shareholders and creditors and persons with whom the plaintiffs had funding arrangements. These cases point to the conclusion that the question for consideration is not whether those who stand to benefit from the plaintiff's success in the litigation are obliged to willing to provide security, but whether they are able to do so. No basis is advanced in the cases for treating a person who will benefit through a litigation funding agreement any differently from a shareholder or creditor or beneficiary. This is not a case where it would be unreasonable to expect the litigation funder to put up security, as a step along the way to procuring the very substantial benefits that it hopes to derive should the plaintiffs succeed.
82 In the Jeffcott case, 15 ACLC at 32, Doyle CJ (with whom Prior and Niland JJ agreed) said that stultification may be shown not only in cases where those standing behind the company or standing to benefit from the litigation are unable to meet an order, but also when it would be "commercially impractical" to gain access to the resources of others. They gave as an example a case where an insolvent company sues for the benefit of its creditors, if there is no practical means of drawing upon the creditors' resources. It seems to me that this principle is inapplicable in the present case, because there is nothing to suggest "commercial impractability" in drawing upon LLS to meet an order for security. The difficulty is only the unwillingness of LLS to come forward.
83 It would be unrealistic for the court to decline to order security on the ground that to do so would stultify the litigation, if it took into account only the financial ability of the plaintiff, and disregarded the financial ability of those who would benefit from the plaintiff's success and who would therefore have an economic incentive to bear the burden of a security order. More broadly, it is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails. That notion appealed to Young CJ in Eq in Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585, at [5], where his Honour observed that where a plaintiff contracts to have the litigation funded by a third party, in return for the third party receiving a share of the verdict, "it is appropriate that the third party bear part of the risk".
84 My conclusion, therefore, is that the corporate plaintiffs have failed to establish that an order for security for costs against them would stultify the proceeding.
The causation argument
85 The Rich interests claim that their impecuniosity was caused by the conduct of the Morningstar interests complained of in the ASC. They say that in such a case, the court does not order security, citing Lynnebry Pty Ltd v Farquhar Enterprises Pty Ltd (1977) 3 ACLR 133. In that case Meares J formed the view that the conduct of the defendants which had been placed in issue in the proceeding was the cause of the plaintiff's impecuniosity, and (at 136-7) he described that as a "most relevant circumstance" which warranted security being refused. There was evidence that the plaintiff company was in a healthy situation before its dealings with the defendants, and his Honour apparently regarded the plaintiff as having a strong case (at 136). It is not surprising, in those circumstances, that he was able to find a causal link between the defendants' wrongdoing and the plaintiff's financial condition. It will not normally be as easy to do so. In the present case, assuming that the causation principle advocated by the Rich interests is correctly stated, it seems to me that the case for factual application of the principle has not been made out.
86 The Morningstar interests submit that the Rich interests cannot show that the alleged wrongdoing caused their impecuniosity except by proving that the two corporate plaintiffs were in a sound financial position before the commencement of the conduct of which they complain. They refer to the BDM case, 131 FLR at 345-6, where Anderson J (with whom Kennedy and Ipp JJ agreed) rejected the idea that the onus was on the defendants to show that their conduct did not cause plaintiff's financial plight, and added:
"In all fairness it must be accepted that the plaintiff's financial condition before and after the transaction is peculiarly within the plaintiff's own knowledge. If the plaintiff wishes to resist an application for security because the defendant's wrongful actions have brought about its lack of means it must surely be for the plaintiff to establish this. ... I do not mean to say that this is anything but an evidentiary onus. It is enough to say for the purposes of this appeal that if there is no evidence to show that the defendant was to blame for the plaintiff's lack of means, the plaintiff cannot say that the application should be refused on that ground. There was no direct evidence before the master of the plaintiff's financial condition at the time the first defendant was engaged to advise it and there is not really any evidence on which to safely base any inferences."
87 In Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Management Ltd [2003] NSWSC 609, at [96], Bergin J cited the BDM case as authority for the proposition that, if they wish to invoke the causation argument, the plaintiffs bear the onus of establishing that the defendants caused their impecuniosity, and she added:
"There is no evidence of the financial position of any of the plaintiffs prior to the alleged legal wrongdoing by the defendants. I simply do not know what the position was and in those circumstances I reject the plaintiff's submissions on this aspect of the applications."
88 I do not regard these observations as authority for a proposition of law, to the effect that the court cannot conclude that the defendant's wrongdoing caused the plaintiff's impecuniosity unless there is evidence to establish the plaintiff's financial health before the wrongdoing occurred. I think the observations I have quoted go to the facts necessary to prove causation in the circumstances of those cases. One can imagine a case in which the plaintiff company has been carrying on business for a lengthy time, only to find itself financially ruined after the defendant's conduct has intervened. In such a case the court may be able to conclude that the defendant's wrongdoing caused the plaintiff's financial collapse, without the plaintiff having to prove its previous financial strength in detail. But in a case such as the present one, where the corporate plaintiffs had not been operating in Australia for a sufficiently lengthy period of time to establish a track record, it is correct, in my view, to require them to prove that they were in an adequate financial state, prior to the commencement of their association with the Morningstar interests, to have been able to meet an adverse costs order in the proceeding.
89 Some evidence of the financial position of Fiduciary prior to its connection with the Morningstar interests is found in the affidavit of Mr O'Neill made on 15 April 2004. Its principal asset was the ownership of the "FPG Research Business", to which it had made loans in excess of NZD212,000. As part of the arrangements it made with Morningstar Inc in April 1999, the FPG Research Business became the Company, in which Fiduciary became the 50.1% shareholder, and the loan was written off. Before it entered the arrangements with Morningstar Inc, Fiduciary was deriving revenues in excess of NZD250,000 per annum from providing the consulting services of Mr Rich to the financial services industry. Under the arrangements with Morningstar Inc, Mr Rich provided his services exclusively to the Company. Before it entered the arrangements with Morningstar Inc, Fiduciary also had some minor financial services businesses called Adviserlink and Financial Alert, which were divested by Fiduciary for consideration of NZD200,000, as part of its arrangements with Morningstar Inc.
90 Accordingly, the arrangements with Morningstar Inc meant that Fiduciary gave up all its other assets in return for a 50.1% shareholding in the Company, and its financial position was thus linked to the success of the Company. But none of that evidence shows that the remaining asset of Fiduciary, its shareholding in the Company, was of any particular value, let alone a value significant enough to meet an adverse costs order in this proceeding. It is not enough, in my view, to show that the value of the only asset of Fiduciary, its shareholding in the Company, has declined since April 1999. There needs to be some evidence either of the value of that asset when it was first acquired, or of the value of Fiduciary's assets before the transaction which produced the shareholding.
91 There is no direct and reliable evidence of the value of the FPG Research Business prior to the making of the arrangement with Morningstar Inc, or of the initial value of its 50.1% shareholding in the company in April 1999. The Rich interests have endeavoured to overcome these evidentiary deficiencies in various ways.
92 First, they sought leave at the hearing to file and serve an affidavit by Mr Rich giving evidence of the value of Fiduciary's shareholding in the Company prior to and in the months after the transaction with Morningstar Inc in April 1999. I decided to exclude that evidence, on the ground that it was served without prior notice shortly before commencement of the hearing, notwithstanding numerous directions for the filing of evidence and a directions hearing on the morning of the day on which the affidavit was served. Additionally, I accepted contentions by the Morningstar interests to the effect that it was the kind evidence that they should be allowed to answer, and that they would be prejudiced if the evidence were to be admitted without such an opportunity being granted. It seemed to me highly undesirable to prolong the hearing of interlocutory applications already scheduled for a three-day hearing, by allowing the evidence to be read and then granting an adjournment application by the Morningstar interests, especially since there was an obvious risk that the plaintiffs' impecuniosity would prevent the Morningstar interests recovering costs of the aborted hearing.
93 Secondly, the Rich interests placed some emphasis on evidence that Morningstar Inc valued the Company and the respective shareholdings at a high level after April 1999. Thus, in response to a notice to produce all documents referring to or recording any valuation of the business assets of the company or the shares in it, the Morningstar interests produced a document which propounded alternative valuations of the Company at $5.2 million and $10 million, as at 26 September 2001. Another document gave "Morningstar Australia" (presumably, the Company) a valuation range of $10 million to $20 million as at 1 May 2000.
94 The Rich interests also drew attention to documents which, they say, demonstrate that Morningstar Inc set a pre-offering valuation of the Company at $25 million as part of the process of obtaining a third party investor, on the basis that a $10 million investment would buy 28.57% of the company. The post capital-raising value of the company was to be $35 million. The Rich interests say that, as at 30 September 2001, according to documents produced by Morningstar Inc concerning the proposed capital raising from DST, Fiduciary's 24.4% shareholding in the Company would have been valued at $8.5 million had the proposed injection of $10 million capital occurred. As at 31 August 2001, had the capital injection occurred, Fiduciary's then 32.61% shareholding would have been valued at $11.412 million. Ultimately the capital raising did not proceed because, according to the Rich interests, Morningstar Inc imposed unreasonable and unacceptable terms. They contend that if one were to adopt the "pre-money valuation" of $25 million without any capital injection, Fiduciary's shareholding would be worth $8.1525 million as at 31 August 2001 and $6.1 million as at 30 September 2001, the decline being referable to the allotment of a further 354 shares to Morningstar Inc on 13 September 2001.
95 The Rich interests also say that the multiplier chosen by Morningstar Inc for the purpose of converting its loans to equity was reduced from four times revenues to 1 times revenues in the period from 1 December 2000 to 25 September 2001, and it declined again subsequently. They point out that the valuation used for the purpose of capitalising the Fiduciary Loan Account into 44 shares (the transaction discussed below) had the effect of valuing Fiduciary's shareholding (which then stood at 46.9%) at $4.2679 million as at 31 December 2000.
96 There are other documents but they are ambiguous. There are doubts about the authorship of the documents produced in answer to the notice to produce, and the basis of valuation is not clearly explained. The documents were admitted into evidence to show the fact that opinions as to value were held by certain relevant persons within Morningstar Inc at those amounts as at the specified times, but not to prove the value of the Company or the shareholding.
97 It seems to me, however, that none of this evidence cures the failure of the Rich interests to prove the value of the FPG Research Business prior to the April 1999 transaction. Valuations of the Company's business made after the arrival of Morningstar Inc and the associated injection of funds, even if they could be properly sourced and treated as evidence of value at the specified times, would not be relevant to establish the value of the FPG Research Business at the earlier time, because the arrangements for provision of products, technology and know-how, and injection of funds, may themselves have had an impact on the value of the business. It does not assist the Rich interests that the valuation evidence indicates that Morningstar Inc attributed lower values to the Company's business as time went on. The decline in estimates of value does not itself show that Morningstar Inc's conduct caused the value of Fiduciary's shareholding to decline.
98 Nor does it assist the Rich interests to point to the fact that in April 1999 Morningstar Inc was prepared to pay USD750,000 and grant and exclusive software licence in return for 49.9% of the business. That does not give a full picture of the financial position of the corporate plaintiffs at that time, and in any event the implied valuation would not be shown to be sufficient to cover the costs of the Morningstar interests up to the final hearing or even the amount I propose to set as security for costs.
99 As to the other corporate plaintiff, Fiduciary Consultants, the only evidence of its financial position is that, under the terms of the arrangements made with Morningstar Inc, Fiduciary Consultants became entitled to be paid at agreed rates for the provision of the services of Mr Rich to the Company. But it cannot be suggested that its entitlement to payment was of sufficient value that it would have been able to meet an adverse costs order in the proceeding.
100 My conclusion is that, for the purposes of the causation argument, the corporate plaintiffs have failed to discharge their evidentiary onus of establishing the adequacy of their financial position before they came into contact with the Morningstar interests, and in this case I am therefore unable to conclude that the wrongdoing of the Morningstar interests has caused them to be unable to meet an order for security for costs.
101 Even if there had been evidence to show that the corporate plaintiffs were in a sound financial position before their dealings with the Morningstar interests, I would not have refused to order security on this ground alone. I respectfully agree with the following observations by Anderson J in the BPM case (131 FLR at 346):
"...I doubt this factor can be taken in isolation. It must be considered together with the assertion that the effect on the plaintiff of an order for security will be to stultify the action. If that will not be nor is not shown to be the effect of the order, that is, if other parties who would benefit from the plaintiff's success are financially able to provide the security and it is reasonable that they do so, the fact that the defendant has caused the plaintiff's own impecuniosity will hardly be good reason to decline security."
Conclusion as to whether an order for security should be made
102 This is lengthy, complex and costly litigation. The unsuccessful side is likely to have a very large liability for costs. It is not possible, at this stage, for the court to take any view as the respective merits of the claims and contentions of the parties. Two of the plaintiffs are corporate plaintiffs, which assert substantial causes of action for themselves, although there is considerable overlapping with the claims made by the individual plaintiff. The corporate plaintiffs and the individual plaintiff will be unable to meet an order for costs against them, if the defendants are successful at the hearing, and they will be unable to meet from their own resources an order for security for costs of the amount I have in mind. It has not been shown, however, that an order against the corporate plaintiffs for security for costs will shut the individual plaintiff out of court, since I do not propose to order a stay of proceedings against Mr Rich personally. Nor has it been shown that order in the amount I have in mind will stultify or frustrate the claims by the corporate plaintiffs. In particular, the Rich interests have litigation funding arrangements with LLS, and it has not been shown that LLS is incapable of meeting a security order should it choose to do so. Nor has it been shown that the impecuniosity of the Rich interests was caused by the conduct of the Morningstar interests about which the Rich interests complain.
103 In the circumstances it seems to me appropriate to order, under s 1335 of the Corporations Act and Part 53 rule 2(1)(e) of the Supreme Court Rules, that the two corporate plaintiffs provide security for costs, and that the part of the proceeding relating to their claims be stayed until that security is provided.
The amount for which security should be provided
104 The principal evidence given on behalf of the Morningstar interests as to the costs to be incurred in this proceeding was given by Mr Wang, their solicitor. He has given estimates of the amount of time that would be needed for preparation and conduct of the proceeding on his clients' behalf, including estimates of counsel's time, his own time, the time of employed solicitors of his firm, and the time of the firm's legal technology support department. He has then applied to those estimates the hourly or daily charge-out rates thought to be appropriate to the various categories of professionals involved in the work, and added estimates of disbursements, to produce a total estimate. The estimate first made, in August 2002, has been revised several times.
105 Mr Wang's first estimate, made in his affidavit of 19 August 2002, was reviewed by the expert costs assessor for the Morningstar interests, Ms Vine-Hall, who gave evidence of the hourly rates likely to be allowed on assessment. Having reviewed Mr Wang's figures and using his assumptions, she expressed the opinion that the amount recoverable on assessment would be $3,337,302. In his affidavit made on 2 July 2003, Mr Wang reviewed his earlier estimate, principally upon the ground (discussed below) that he had grossly underestimated the number of documents in the possession of the defendants that would need to be reviewed for the purposes of discovery. His revised estimate was $5,649,790, using the hourly rates supported by the evidence of Ms Vine-Hall.
106 By his affidavit made on 1 June 2004, Mr Wang made a further revision, after re-distribution of tasks amongst employed solicitors. The revised estimate was $5,475,990. Then, by letter dated 15 June 2004, Mr Wang explained that 8,122 paralegal hours had not been incorporated into the calculations made in his affidavit of 2 July 2003, and therefore the correct figure in that affidavit should have been $6,461,990. Consequently, the correct figure in the affidavit of 1 June 2004 should have been $6,288,190.
107 Even that was not the correct final estimate at the hearing. In his oral evidence, Mr Wang gave the figure for professional costs as $6,271,390. On the third day of the hearing senior counsel for the Morningstar interests handed up a document entitled "Defendants' Estimates of Anticipated Tasks to the Conclusion of the Hearing", which confirmed Mr Wang's oral estimate of professional costs and added disbursements of $279,000, to show a total figure for professional costs and disbursements of $6,550,390.
108 I shall use this latter amount as the estimate by the Morningstar interests. As I understand the evidence, that is the current estimate made on behalf of the Morningstar interests of the future professional costs and disbursements to be incurred on their part in the proceeding for the entire period from the time of the security for costs hearing until conclusion of the final hearing and the making of final orders. My understanding is that the estimate does not extend to past costs, and that at the hearing of the application, the Morningstar interests did not seek security in respect of past costs (noting paragraph 41 of the Defendants' Outline of Submissions in Reply).
109 The Rich interests contend that the estimate of costs and disbursements made on behalf of the Morningstar interests is grossly inflated. They contend that if (contrary to their submissions) security is to be ordered at all, the figure should be in the vicinity of $800,000.
110 Extensive evidence was given, over several days, with respect to quantification of security for costs. I have done my best to consider it all, but I do not regard it as necessary to summarise the evidence in full. It seems to me, having considered in particular the evidence of the solicitor for the Rich interests, Mr O'Neill, and the evidence given by Ms Rosati, the expert costs assessor for the Rich interests, that there are three issues in contention: first, the correct estimate for the length of the final hearing; secondly, whether Mr Wang was right to include an estimate of the costs of the discovery process (and if so, whether his estimate was excessive); and thirdly, whether the hourly rates and time estimates used in Mr Wang's calculations are too high. I shall consider each of these issues.
111 Mr Wang's estimates appear to take into account costs referable to defending the Company's claims, including its claims against the third to seventh defendants. This assumes that the plaintiffs will be given leave under s 237 of the Corporations Act to assert the Company's claims. The Rich interests did not contend that this assumption was inappropriate, or that I should excise from the estimates the cost referable to answering the Company's claims on the basis that it would be premature to take them into account prior to the hearing of the s 237 application.
The length of the final hearing
112 Mr Wang's estimates were made on the basis that the proceeding will raise many disputed questions, and he has estimated a final hearing of approximately 60 days. The Morningstar interests have prepared an "Issues Document" which is 52 pages in length and sets out the issues they believe to be in dispute. The document includes references to allegations made by the Rich interests to the effect that Morningstar Inc failed to comply with its obligations under the licensing agreement to provide a readily adaptable source code, intellectual property, software, know-how and assistance. Mr Wang's evidence is that these allegations raise extensive technological issues, and it will be necessary for the Morningstar interests to deal with them by engaging the services of experts as well as witnesses resident in the United States of America.
113 I accept Mr Wang's evidence as to the general nature of the issues to be raised at the hearing. The Rich interests did not contend otherwise. I also accept that some of the issues, especially with respect to intellectual property and technology, are likely to be issues appropriate for expert opinion evidence. I do not agree with the submission on behalf of the Rich interests that these questions are simple factual questions about whether software was or was not delivered. Therefore, I see no basis for rejecting the evidence of Mr Wang that his clients will find it necessary to engage the services of expert witnesses, and I accept that the witnesses may well be located in the United States.
114 I have greater difficulty in accepting Mr Wang's estimate that the hearing will be a 60 day hearing. Mr O'Neill generally agrees with Mr Wang's analysis of the issues in the case, but he estimates the hearing as a 20 to 30 day hearing. They are both highly experienced legal practitioners. Mr Wang's assessment may turn out to be the correct one, and may even prove to be too conservative. But in my opinion it is too early to give a closely accurate estimate of the length of the final hearing, given that discovery has not taken place and the evidence of the experts and other witnesses has not yet been prepared and served. In circumstances where it seems likely that the plaintiffs will have to raise any security that the court may order from their litigation funder or by other borrowing, it could well be unfairly oppressive on them for the court to accept a high estimate of the hearing time at this early stage, and on that basis calculate an amount of security which may eventually be shown to have been excessive. Mr O'Neill's estimate goes up to 30 days, and I think the correct course (taking into account the above considerations, and noting that the hearing will include hearing of a cross-claim) is to make calculations on the basis of a 30 day hearing.
The discovery process
115 Mr Wang has given evidence that it will be necessary for the defendants to give discovery of all documents relevant to any issue in dispute, by a process involving the review of vast quantities of documents in the possession of the Company and the Morningstar interests, assessing them as to relevance and privilege, and preparing and filing a list of documents. He envisages that an electronic-based document management system for discovered documents will be established and maintained by his firm's Legal Technology Support Department.
116 In his first affidavit, Mr Wang assumed, on the basis of preliminary instructions from his clients, that there would be 65,000-75,000 documents to review, and he allowed six minutes per document for review time. Later, some information provided to him by Mr Ellis caused him to conduct further investigations, from which (he says) it became apparent that there would be a total of 337,295 documents to be reviewed. This led him, in his affidavit made on 2 July 2003, to revise the total estimate of professional costs of performing the work required up to and including the hearing. Additional provision for discovery was by far the largest factor in increasing the estimate from approximately $3.5 million to over $6.5 million.
117 In his affidavit made on 15 April 2004, Mr O'Neill says that the plaintiffs have not yet made application for an order for discovery, but at the appropriate time, they will seek an order that discovery be limited to nominated categories of documents. He says that Mr Rich already has detailed knowledge of the documents created by the Company up to 24 November 2001, and so the plaintiffs are likely to nominate only limited categories of documents for that period. He says that the plaintiffs will seek discovery by way of limited categories in respect of documents of the Company created after 24 November 2001, and also limited categories in respect of documents of Morningstar Inc and the other defendants. On this basis, Mr O'Neill says that Mr Wang's estimates are inappropriate, to the extent that they assume general discovery, and that an estimate of costs and expenses relating to discovery should be deferred until after the parties have nominated and considered the categories of documents they require each other to discover. He says that the balance of Mr Wang's estimates is infected by his erroneous assumptions about discovery.
118 The Morningstar interests have criticised Mr O'Neill because he has not provided categories of discovery, but has merely said they will be limited. It appears that, pending resolution of the present application, the discovery process has not commenced. The Rich interests submitted that the solicitors for the Morningstar interests have not asked Mr O'Neill to provide his discovery categories, and as far as I can see there is no evidence that they have done so. In the circumstances, I do not regard this as a proper ground for rejecting or discounting Mr O'Neill's evidence.
119 Given the prospect, to which Mr O'Neill has deposed, that the discovery required by the plaintiffs will be discovery by categories within a narrow compass, I would not be justified in accepting Mr Wang's estimate of the cost of discovery made on the assumption that general discovery will be required. I am of the opinion that if the plaintiffs' discovery categories are defined in narrow terms, the costs of the Morningstar interests in giving that discovery will be very substantially less than the cost of general discovery. The evidence supports the view that it would be possible, using the archive index, to exclude certain kinds of obviously irrelevant documents (the examples given in submissions included Cab charge vouchers, travel receipts and invoices for repairs) by categories without professional review of the excluded categories.
120 I note Mr Wang's evidence, in his affidavit made on 1 June 2004, that discovery by categories may nevertheless require a review of all the documents potentially relevant to the issues in dispute. It seems to me, however, that an application for an order for discovery by categories that had the effect of requiring review and possible discovery of all documents in the possession of the party giving discovery (where there is a great volume of such documents) would be rejected as oppressive: Lubrizol Corp Inc v Imperial Chemical Industries plc [2000] FCA 1464, at [9] per Branson J; see also Cassidy v Medical Benefits Fund of Aust Ltd [2001] FCA 700, at [24] per Hill J; South Sydney District Rugby League Football Club Ltd v News Ltd [2000] FCA 519, at [10] per Finn J. As those cases show, the modern approach to discovery is to resist making orders which would produce the kind of costly outcome identified in Mr Wang's evidence, and one can anticipate that the court will strive to avoid that outcome in this case, if it is called upon to make an adjudication.
121 There is an issue, explored in cross-examination by senior counsel for the Rich interests, as to the manner in which the documents were identified and the degree of judgment exercised by Mr Ellis or Mr Wang in the course of making a determination that "all" of the documents held by a particular business unit would need to be reviewed. At the end of the hearing I was unsure whether the Morningstar interests' estimate that the number of documents to be reviewed was 337,295 is even approximately accurate.
122 In summary, I have real doubts as to the appropriateness of making provision for security on a basis which includes Mr Wang's estimates with respect to the discovery process and associated tasks. But I have decided that it would be premature to make any determination to that effect at this stage. I think the preferable course is to take no account of the very large estimate of costs for the discovery process at this stage, and to allow the parties to negotiate their discovery categories and take instructions as to what will be necessary to comply. If it later becomes much clearer than it is now that the defendants' costs of the discovery process will be substantial, an application for supplementary security would be possible.
123 The Morningstar interests submit that discovery is not the only purpose for which documents need to be reviewed. They say that the potential use of documents in aid of their own case or as an answer to the case of the Rich interests needs also to be assessed. I cannot accept that this need would lead, in any practical context, to the review of all of the documents that have been identified, by an arduous and time-consuming process costing millions of dollars, nor that the cost of such a review would be regarded by a costs assessor as a cost reasonably incurred and recoverable on a party/party basis. Rather, one would expect the solicitor and client to confer to identify the issues on which helpful documents might be found, and the likely categories and location of such documents, as a preview to a more narrow and focus search and review process. In my opinion this submission does not support Mr Wang's very large estimate of the cost of conducting a document review.
124 My conclusion as to discovery implies that it would also be premature to make provision for the costs of using the Legal Technology Support Department of Mr Wang's firm. According to evidence given by Ms Rosati, which I accept, if the documents to be discovered are limited by categories in the manner stated by Mr O'Neill and the number of documents to be discovered is significantly lower than the number estimated by Mr Wang, then the use of the Legal Technology Support Department to manage the documents may be strictly limited or even unnecessary. Accordingly, I shall make no provision for the anticipated costs of Legal Technology Support. That being so, it is unnecessary for me to resolve the conflict of evidence between Ms Vine-Hall and Ms Rosati as to the appropriate hourly rates for the professional staff in that Department.
125 My decision that it is premature at this stage to make any provision for security in connection with the costs of the discovery process implies that, at a later stage, some such provision may be appropriate. But there will need to be much more clarity about the precise nature of the discovery process, the number of documents to be reviewed, and consequently the likely cost of the process, before any supplementary order is made for provision of security to cover those costs. Similarly, my decision to make provision for a hearing of only 30 days implies that there may be a case for a supplementary order if it becomes clear, at a later stage, that this is an under-estimate.
126 Since my reasoning implies the prospect of a future application for further security, I shall make express provision in my orders for such an application to be made. However, it would be an inefficient use of the court's time, and unnecessarily costly for the parties, if there were to be a series of applications for security made whenever there is any change in any one of the relevant parameters. In an effort to limit the costs of further interlocutory applications, and bearing in mind that there are many steps still to be taken before this case is ready for hearing, I have decided that the court should prevent any further application for security from being made within the next six months. That period is admittedly somewhat arbitrary, but I have selected it on the basis that, assuming that the litigation moves forward, some substantial progress should have been made, after six months, with respect to the s 237 application, the discovery process and preparation of affidavits by experts and lay witnesses. Progress in those areas should make it much easier for the parties and ultimately the court to decide whether there is a genuine case for an increase in the provision of security.
Hourly rates and time estimates
127 As to the appropriate hourly rates to be used for the purpose of calculating the amount of security, Ms Vine-Hall provided a table, in her affidavit of 21 August 2002, as to the hourly rates for solicitors of various categories and for counsel, that the defendants would be likely to be allowed on assessment of costs, if they were to obtain an order for costs in their favour. Ms Rosati gave evidence that the estimates of hourly rates by Ms Vine-Hall were reasonable and within the range of rates likely to be allowed for this type of matter. Ms Vine-Hall's evidence of hourly rates is therefore unchallenged and I accept it. It has been used by Mr Wang in his subsequent calculations.
128 As to the estimates of the amount of time to be taken for performing various tasks, Ms Vine-Hall has given evidence that Mr Wang's estimates in his first affidavit of the times to be taken on the various tasks are well within the range of time generally taken for such matters, although she reduced by 20% the hours actually spent up to August 2002 to take into account the fact that not all of the work would be allowed on a party/party basis. She has said that the amount Mr Wang estimated for disbursements in his first affidavit was within the range of expenses generally incurred in matters of that nature. The estimates for disbursements were not challenged.
129 Ms Vine-Hall has not applied any reduction to Mr Wang's time estimates, comparable to her 20% reduction of his actual time figures. She has said that it is unnecessary to apply any percentage reduction because she regards Mr Wang's estimates for future work as reasonable and likely to be recovered in full on a party/party assessment. She is at odds with Ms Rosati this point. Ms Rosati has said that a reduction of some percentage amount is necessary to reflect the probability that not all the work to be undertaken will be allowed on a party/party basis. She has said that, having regard to the decision of the Review Panel with respect to the defendants' costs of the interlocutory application (where the defendants' bill of costs was substantially reduced), it is likely that on a party/party assessment of costs, the costs claimed by the Morningstar interests would be reduced by between 25% and 40%. Ms Vine-Hall has responded by saying that the reduction made by the Review Panel should be disregarded, because reduced hours and rates have already been factored into the calculations for the likely recovery of costs of the proceeding; and moreover, the Review Panel's decision related to interlocutory costs, and some of the claims were not rejected but simply held not to be chargeable to the interlocutory application.
130 I can see that the hourly rates used by Mr Wang now reflect the rates likely to be recovered on assessment, as set out in Ms Vine-Hall's first affidavit, and no percentage reduction is warranted on that account. But the time estimates are a different matter. Given the conflicting evidence of the experts, and also having regard to my discretion in fixing the amount of security for costs, I think it appropriate to make my own assessment on this point. It may be that Mr Wang has made conservative estimates having regard to his experience in the assessment and review processes, but it seems to me implausible, even allowing for any such conservatism, that a costs assessor would make no reduction of the estimates made by Mr Wang, if they were translated into actual hours of work. As senior counsel for the Rich interests submitted, "no account is taken of vicissitudes". I shall therefore make a percentage reduction. Ms Rosati proposes 25% to 40% but I think the figure should be lower, because acceptable hourly rates have been used and the analogy with interlocutory costs is apt to mislead her. I have decided that the correct figure should be 15%.
131 Having decided to apply this general reduction to Mr Wang's estimates, I think it would be unfair on the Morningstar interests to look specifically at identified areas and revise the time estimates for them, in addition to applying the overall percentage reduction. The number of hours estimated for some tasks (preparation of chronologies seems to be an example) seems very high, and may arguably be excessive, but I shall not in the circumstances enter into that debate, because I believe that fairness is best achieved by applying a percentage reduction along the lines proposed by Ms Rosati. However, the estimates for the tasks related to discovery and attendance at the hearing are different, for reasons I have explained, and it is not enough, in respect of those matters, to make a percentage adjustment. The estimates in respect of the discovery process should be excluded entirely because it would be premature to take them into account, and the estimates based on a 60 day hearing should be halved.
Calculation of the amount to be provided as security for the costs of the Morningstar interests
132 Fixing the amount to be provided by way of security is part of the exercise of the court's discretion in dealing with the application. The principles I have articulated provide a basis for re-calculation, and I think I should make the recalculation myself, in an effort to minimise further disputation and costs.
133 It is appropriate to begin with the figures in the "Defendants' Estimates ..." document handed up by senior counsel for the Morningstar interests at the hearing on 18 June, since in my view Mr Wang's estimates should be the starting point. Those estimates are to be adjusted, however, by deducting costs relating to the discovery process, halving the cost relating to the estimated final hearing, and applying a 15% discount to the remainder of the estimates (other than disbursements).
134 Therefore the following amounts are to be deducted from the items in the "Defendants' Estimates ..." document:
* Discovery (whole amount) $2,669,830
* Inspection (whole amount) $19,680
* Review of the plaintiffs' affidavits in chief (15%) $2,196
* Review of discovered documents and consequent interviews with expert witnesses (whole amount) $71,700
* Review of discovered documents and consequent interviews with defendants and lay witnesses (whole amount) $126,000
* Correspondence (15%) $15,600
* General preparation in two weeks prior to final hearing (50%) $85,200
* Preparation of chronologies (15%) $174,636
* Attendance at hearing (50%) $380,400
* Assistance in preparation of submissions (15%) $2,475
* Legal Technology Support Department (whole amount) $1,153,600
* Total deductions $4,701,317
* Remainder of Morningstar interests' estimates after deductions $1,849,073
135 Therefore $1,849,073 is an estimate, acceptable to the court, of the likely costs of the Morningstar interests. The next question is whether the amount of security for costs should be the whole of that estimate or only a portion of it. It seems to me inappropriate to order the corporate plaintiffs to provide security for those costs of the defendants that would be incurred in any event, even if the corporate plaintiffs did not proceed.
136 As I have said, there will be no stay of proceedings against Mr Rich, and he will be free to pursue his personal claims. The LLS litigation funding seems to have been agreed on the basis that all of the claims made by the three plaintiffs will be pursued, including the oppression claims, which cannot be prosecuted by Mr Rich personally. It is unclear whether LLS would support Mr Rich's prosecution of his personal claims about the claims of the corporate defendants. In the circumstances, I cannot be sure that the Morningstar interests will be forced to incur all or any of their estimated costs in order to defend Mr Rich's personal claims. But it would be inconsistent with the principle that the court should not shut out an impoverished individual plaintiff if I were to make a presumption, in the absence of evidence to the contrary, that Mr Rich will be unable due to financial reasons to proceed with his personal claims. It seems to be appropriate, on the state of the evidence before me, to proceed on the basis that Mr Rich will continue to prosecute his personal claims, and also the Company's claims by leave under s 237, either with the financial support of LLS or with some other financial support.
137 It nevertheless seems to me unlikely, on the evidence, that his doing so will force the Morningstar interests to incur anything like all of their estimated costs. Since Mr Rich is not a party to the licensing agreement or the heads of agreement, the technology and intellectual property issues which will generate a substantial part of the costs of the Morningstar interests would not appear to be in issue between them and Mr Rich personally. Moreover, a substantial portion of the facts raised in the ASC appear to go solely or principally to the oppression claims, and are likely to be judged relevant to support Mr Rich's personal claims. While the case would still be a substantial one, if prosecuted by Mr Rich alone, it would be significantly smaller in scope than if the corporate plaintiffs remained part of it.
138 It is very difficult to quantify how much of the estimated costs of the Morningstar interests would still have to be incurred if the corporate plaintiffs did not continue. I can only rely on pleadings because, quite properly, I was not taken into the substantive evidence in the case. Doing the best I can in the exercise of my discretion, it seems to me appropriate to allocate half of the acceptable estimate to matters that would need to be addressed in answering Mr Rich's personal claims if the corporate plaintiffs did not proceed. I shall order that the plaintiffs provide security for the costs of the Morningstar interests in the sum of $924,536.
139 By letter dated 21 May 2004, Fiduciary offered its remaining shareholding in Company as security. It received no reply that offer. The Rich interests contend that in all the circumstances, that offer is an offer of sufficient and appropriate security. I disagree. As I have mentioned, the evidence indicates that the shareholding has no present value. The fact that it may have had a very substantial value at an earlier time is not relevant to the provision of adequate security for costs.
Strike-out of paragraphs 240-243 inclusive of the ASC
140 The shareholders agreement was made on 16 April 1999. The parties are Morningstar Inc, the Company, Fiduciary and Mr Rich. By Clause 5.5, each "shareholder party" (Morningstar Inc and Fiduciary) agrees to take steps to ensure that, inter alia, no director commits any breach of duty under the constitution of the Company or the (then) Corporations Law.
141 Clause 8.1 provides a mechanism for termination upon material breach of the shareholders' agreement which, if properly invoked, allows the innocent party to acquire the shares of the defaulting party at book value as defined. It provides for two notices: first, the innocent party may give notice of the default; and secondly, if the defaulting party has not cured the breach after 30 days from the date on which written notice was given, the innocent party may give a notice of termination of the agreement.
142 Clause 10 deals with service of notices under the shareholders agreement. It provides that
"Any and all notices, requests, demands and other communications required or otherwise contemplated to be made under this Agreement shall be in writing and shall be deemed to have been duly given (i) if delivered personally, when delivered, (ii) if transmitted by facsimile, upon receipt of a confirmation of receipt, or (iii) if by international courier service, on the fourth (4th) business day following the date of deposit with such courier service, or such earlier delivery date as may be confirmed to the sender by such courier service. All such notices, requests, demands and other communications shall be addressed as follows ...
If to the Investor:
MORNINGSTAR, Inc.
[Here clause 10 sets out the Chicago address of Morningstar, and specifies that the communication be marked the attention of the Product Manager, whose name is given, together with telephone, facsimile and e-mail contact particulars]
With a copy (which copy shall not constitute notice) to:
[Here clause 10 names another person, and gives his telephone, facsimile and e-mail contact particulars]
Or in each case to such other address or facsimile number as the party may have furnished to the other party in writing."
143 In paragraphs 240-243 of the ASC, the Rich interests plead
(1) that on 11 and 19 October 2001 they gave notice of breaches of directors' duties, requesting Morningstar Inc to take steps to remedy the breaches and to prevent future breaches, and that in breach of clause 5.5, Morningstar Inc has failed to take steps within its power to remedy the breaches of directors' duties, and that accordingly, Fiduciary and Mr Rich are entitled to give notice of termination of the shareholders' agreement under clause 8.1, and by virtue of the ASC they purport to do so;
(2) that alternatively, by virtue of the terms of the ASC they purport to give notice under clause 8.1 and to require the breaches to be remedied within the period stipulated in that clause.
144 The Morningstar interests seek an order that paragraphs 240-243 inclusive of the ASC be struck out, on the ground that notice of the default alleged by the Rich interests was never properly given under the terms of the shareholders agreement.
145 The letters of 11 and 19 October 2001 are letters from Nash O'Neill Tomko, the solicitors for the Rich interests, rather than from Fiduciary or Mr Rich; and they are addressed to Ms Richardson, the chairman of the Company, rather than to Morningstar Inc at the Chicago address specified in the agreement.
146 It seems to me at least arguable, to the General Steel standard (General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125), that a notice may be given under clause 8.1 by the duly authorised agent of the party entitled to give it. It is conceded that the letters were received by Morningstar Inc without delay, and it is not contended that the irregular method of address has caused any prejudice to the Morningstar interests. The point is simply, according to the Morningstar interests, that the notices were ineffective under clause 8.1 because they did not comply with the requirements of clause 10, which, according to the submission, are mandatory.
147 A clause in a contract prescribing a method of giving notice of termination should be construed having regard to its practical effect, and should not be given a strict and technical construction that is not clearly required: Pan Foods Company Importers & Distributors Pty Ltd v ANZ Banking Group Ltd (2000) 74 ALJR 791; Midland Brick Co Pty Ltd v CMS Gas Transmission of Australia [2003] WASC 222; Hancock Prospecting Pty Ltd v BHP Minerals Pty Ltd [2003] WASCA 259; GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd (2003) 128 FCR 1.
148 In my opinion there is an arguable case, sufficient to satisfy the General Steel standard, that the name and address particulars for the Investor in clause 10 do not constitute an exclusive statement of the methods of giving a notice to the Investor under the shareholders agreement. As a matter of construction, the first sentence of clause 10 specifies two conditions, one being expressed as a necessary condition (that the notice must be in writing) and the other being expressed as a sufficient but not a necessary condition for service (personal delivery, transmission by facsimile, international courier). Then the second sentence refers to "all such notices ...", arguably identifying only those notices that satisfy the two conditions, namely notices that are in writing and are deemed to be served in the manner specified in the first sentence. The view that clause 10 does not exclusively state the requirements for service tends to be confirmed by the fact that the address particulars include an e-mail address, whereas the body of the first sentence does not contemplate communication by e-mail.
149 If clause 10 does not exclusively state the requirements for service, then the address particulars for the Investor are not the exclusive means of addressing notices under the shareholders agreement. It is arguable that if a notice is addressed in another way and it has come to the notice of the Investor in a timely fashion, the notice has been properly served, consistently with clause 10.
150 The Morningstar interests presented me with some supplementary written submissions in which they contended that as a matter of construction, notices given under clause 8 are required to comply strictly with clause 10, on the ground that this is the literal construction of the clauses and that this construction is consistent with admissible surrounding circumstances known to both parties. It seems to me that the appeal to evidence of surrounding circumstances is a good indication that the construction supported by the Morningstar interests is not so clear as to justify pre-emptive intervention by the court at this stage.
151 Consequently the application to strike out paragraphs 240-243 of the ASC is unsuccessful.
Strike-out of the Industrial Relations Commission proceeding
152 By a notice of motion filed in the Industrial Relations Commission on 17 April 2003, the Morningstar interests seek an order striking out or permanently staying the summons for relief in the Commission. As previously noted, the proceeding in the Commission, No IRC 6661 of 2002, seeks relief under the unfair contracts provision of the Industrial Relations Act 1996 (NSW), s 106. The proceeding has been removed to this court and consolidated with this proceeding.
153 The application relies on s 108A of the Act, which provides:
"(1) An application cannot be made for an order under this Division if the application relates to a contract of employment under which:
(a) a remuneration package that exceeds the remuneration cap is paid or received (or is payable or receivable) during the period of 12 months immediately before the application is made (or, if the application concerned relates to a contract that has been terminated, immediately before the termination), or
(b) a remuneration package is paid or received (or is payable or receivable) during a period of less than 12 months immediately before the application is made (or, if the application concerned relates to a contract that has been terminated, immediately before the termination) that would, if the remuneration package had been paid or received (or been payable or receivable) for a period of 12 months, have exceeded the remuneration cap.
....
(3) In this section:
'contract of employment' means any contract or arrangement under which work is done by a person in the capacity of an employee, and includes a related condition or collateral arrangement with respect to such a contract;
'employment benefit' means a benefit provided to an employee at the cost of his or her employer (being a benefit of a private nature) and, without limitation, includes:
(a) contributions payable to a superannuation scheme by an employer in respect of the employee, including any liability of that employer to make such contributions or to pay costs associated with that scheme, or
(b) the provision by an employer of a motor vehicle for private use by the employee, or
(c) any other benefit prescribed by the regulations for the purposes of this definition;
'monetary remuneration' includes any performance-related bonus or incentive payment;
'remuneration cap' means:
(a) $200,000, except as provided by paragraph (b), or
(b) any greater amount prescribed by the regulations (being a regulation that increases the amount by reference to increases in the amount referred to in section 83(1)(b));
'remuneration package' means the total value of monetary remuneration and employment benefits payable or receivable under a contract of employment."
154 In the present case, the question raised by s 108A is whether the remuneration package of Mr Rich, paid to or received by or payable to or receivable by him under his contract of employment in the 12 months immediately prior to 24 November 2001 (when his employment was terminated) exceeded the remuneration cap of $200,000.
155 The remuneration arrangements for Mr Rich and Fiduciary Consultants are to be found in the management agreement prepared but never executed, and in correspondence. It is also relevant to have regard to the shareholders agreement, the licensing agreement and the subscription agreement. In the management agreement, clause 4.1 provides for payment of monthly instalments of management fees to Fiduciary Consultants, referred to in the agreement as "FCL". "Fiduciary Consultants" is defined to mean FCL and its sole employee, Mr Rich, and the defined expression is then used in clauses dealing with the duties of "Fiduciary Consultants" and the right of access to information enjoyed by "Fiduciary Consultants. But the right to be paid for the provision of services is given by the agreement to FCL. However, as Mr Rich is director and beneficial owner of all of the issued shares of FCL, payments to FCL are for the benefit of Mr Rich.
156 The annual remuneration package of Fiduciary Consultants/Mr Rich was determined by the board of directors of the Company pursuant to the management agreement and the shareholders' agreement. According to a letter written to Mr Rich by Ms Richardson as chairman of the board of directors of the Company, dated 15 February 2000, the annual remuneration package was a base element of $180,000 and an "at risk element" calculated by reference to exceeding budget revenue. There was an alteration to this latter bonus element, communicated by Ms Richardson to Mr Rich by letter dated 6 March 2001. It is common ground that no bonus element was paid or payable during the relevant 12 months period.
157 There was a loan account in the books of the Company called the "Fiduciary Loan Account", maintained from at least April 1999 until the termination of Mr Rich's employment on 24 November 2001. The liability of the Company to Fiduciary Consultants in respect of payment for the services of Mr Rich was recorded in the Fiduciary Loan Account, on the basis that Mr Rich and Fiduciary Consultants would allow that amount to be available to the Company as working capital. The account was also used to record intercompany indebtedness between Fiduciary and the Company, for cash loans provided by Fiduciary to the Company as working capital. According to the evidence, the amount standing to the credit of the Fiduciary Loan Account was payable by the Company at call.
158 The monthly payment of the annual base management fee of $180,000 was recorded in the Fiduciary Loan Account. This is confirmed in a facsimile dated 14 December 2000 from Ian Bell (the Manager of Finance and Administration for Morningstar Research Ltd, a New Zealand subsidiary of the Company) to Gary Burge (the Chief Financial Office of Morningstar Inc), and copied to Mr Rich. According to the facsimile, the full base amount per month was "journalled" to the Fiduciary Loan Account and Mr Rich drew only part of the amount, the balance remaining as a loan from Fiduciary to the Company. In the period from 1 April 1999 to 31 October 2000 the total amount undrawn and treated as a loan was $120,859, according to the facsimile. The facsimile said that the Fiduciary Loan Account also reflected cash amounts paid by Fiduciary to the Company, evidently also by way of loan.
159 It appears that at the beginning of the period relevant for the purposes of s 108A of the Industrial Relations Act, namely 23 November 2000, the balance of the Fiduciary Loan Account was $180,000, owing by the Company to Fiduciary. Of that amount, $120,859 represented base management fees credited to the account and undrawn, as described above. The fact that the account balance was $180,000 at that time is confirmed in an e-mail from Craig Ellis (Chief Financial Officer of the Company) to Gary Burge dated 7 December 2000, which also states this that there was no accrued bonus/incentive payment in the Fiduciary Loan Account.
160 On 8 December 2000, Fiduciary requested that the balance of the Fiduciary Loan Account be paid by the Company by the issue of new shares, on the basis of the valuation then being considered for the purposes of a proposed loan by Morningstar Inc. Fiduciary's proposal was confirmed in an e-mail from Mr Ellis to Mr Burge dated 8 December 2000. Morningstar Inc agreed to that request, and on 31 December 2000, 44 shares in the Company were issued to Fiduciary.
161 The Morningstar interests say that when the 44 shares were issued on 31 December 2000, consideration to the value of $180,000 was received by Fiduciary, and of that amount $120,859 represented management fees that had been accrued and were payable, but had not been paid. Therefore, they contend, during the relevant year a total amount of $300,859 was payable (alternatively, $180,000 was payable and $120,859 was paid) and the statutory maximum was exceeded.
162 The Morningstar interests rely on the decision of the Full Bench of the Industrial Relations Commission in Court Session in Commander Australia Ltd v Kerr [2004] NSWIRComm 74. In that case Mr Kerr was employed on a base salary and a management incentive payment, the amount of which depended upon the company's financial results. During the relevant year (the year ending 5 July 2002) he received his base salary of $180,000, and also an incentive payment of $39,860. The incentive payment was in respect of the company's performance in the previous year (the year ending 30 June 2001) and was said to relate to work performed by Mr Kerr in that previous year. Nevertheless, the Full Bench held that the incentive payment should be taken into account in the 2002 year, because it was both "paid" and "payable" in that year rather than in the 2001 year. Therefore the incentive payment and base salary combined exceeded the $200,000 remuneration cap. The Full Bench rejected an argument that for the purposes of s 108A, remuneration was to be limited to payments referable to work done during the relevant 12 month period.
163 In my opinion the Commander Australia case is distinguishable from the present facts. Here, monthly instalments of the base management fee were credited by the Company to the Fiduciary Loan Account. It is clear that Mr Rich was aware of this practice because he participated by drawing part of the monthly amount in cash. I infer that there was either an express or implied direction by Mr Rich and Fiduciary Consultants for the monthly amounts to be paid by the Company by credit to the account, or at least that they acquiesced in that practice. The effect of what was done, month by month, was to transform part of the debt owing by the Company to Mr Rich and Fiduciary Consultants from base management fees (namely the part not drawn in cash) into a loan by Fiduciary to the Company. Since there does not appear to be any evidence of an assignment of these monthly amounts by Mr Rich and Fiduciary Consultants to Fiduciary, it may be that Fiduciary became the entity entitled to the loan amounts as the agent of Mr Rich and Fiduciary Consultants. But it is not necessary to make a decision on that point for present purposes.
164 The important point is that, by the time the share issue, the nature of the choses in action totalling $120,859 had been changed from their initial character as monies owing by the Company to Mr Rich and Fiduciary Consultants for monthly instalments of base management fees, to loans made by Fiduciary (perhaps as agent to Rich and Fiduciary Consultants) to the Company on the terms of the Fiduciary Loan Account. When, therefore, Fiduciary received "payment" from the Company by the issue of shares, for a value representing an amount which included those loans, it did not receive payment of the balance of base management fees, but rather it received payment of loan monies payable under the terms of the Fiduciary Loan Account.
165 In terms of the definition of "remuneration package" for the purposes of s 108A, the conversion of the Fiduciary loan into equity did not involve any "monetary remuneration" or "employment benefit", and nothing was "payable or receivable under a contract of employment". It would therefore be incorrect to treat the $120,859 as part of the remuneration package of Mr Rich, for the purposes of s 108A.
166 It follows, therefore, that Mr Rich's remuneration package paid to or received by or payable to or receivable by him under his contract of employment in the 12 months immediately prior to 24 November 2001 was $180,000, not $300,859, and it did not exceed the remuneration cap of $200,000 set by s 108A. The notice of motion filed by the Morningstar interests in the Industrial Relations Commission on 17 April 2003 should be dismissed.
Costs of the Federal Court proceeding
167 As I have said, the Federal Court proceeding was initiated for the ultimate purpose of transferring the Industrial Relations Commission proceeding into the court that would hear and determine the principal proceeding between parties (as it has turned out, this court will do so). The notice of motion by the Rich interests alleging abuse of process was heard by Hely J in the Federal Court, and on 22 August 2003 his Honour dismissed the motion with costs: Morningstar Research Pty Ltd v Fiduciary Ltd [2003] FCA 870.
168 Now that the Industrial Relations Commission proceeding has been removed to this court, and the Federal Court proceeding has been cross-vested to this court, the Federal Court proceeding is otiose. It is common ground that
* the Federal Court proceeding should be dismissed;
* the Rich interests are to pay the costs of the Morningstar interests for the abuse of process motion in the Federal Court, as ordered by Hely J;
* otherwise, the costs of the Federal Court proceeding should be costs in the cause in the Supreme Court proceeding.
The only issue is whether this court should order that the costs of the abuse of process motion in the Federal Court be assessed and paid forthwith, rather than at the conclusion of this proceeding.
169 The Rich interests urged me to reject the application on the simple ground that it had not been made to Hely J. But in view of the transfer of the Federal Court proceeding to this court, that fact has no significance and this court has jurisdiction to entertain the application.
170 The Morningstar interests submit that as the Federal Court proceeding is at an end, the time has come for the costs of that proceeding to be assessed and paid. Alternatively, if the court takes the view that the Federal Court proceeding has, in effect, merged into the Supreme Court proceeding in which the same issues are raised, and those issues cannot be said to have been determined, the Morningstar interests urged the court to exercise its discretion under Part 52A rule 9 to order that the relevant costs be assessed and paid forthwith.
171 The circumstances in which the court should make such an order under Part 52A rule 9 were considered by Barrett J in Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1, at [10]. His Honour cited the observation of the Court of Appeal of New South Wales in Horrobin v Australia & New Zealand Banking Group Ltd (unreported, 6 June 1997, per Priestley JA) that an order will be made if the costs relate to a discrete aspect of the litigation which is "sufficiently self-contained and detached or detachable from the proceedings yet to be heard, whether between the same or associated parties, as to make it seem just for an actual payment to be made in the meantime". These observations were subsequently applied by Sackville J in Australian Agricultural Co Ltd v AMP Life Ltd [2003] FCA 1134. For both Barrett J and Sackville J it was a relevant consideration that the final determination of the proceeding would be likely to take a considerable period of time.
172 I do not accept the first alternative submission of the Morningstar interests, that an order for immediate assessment and payment is appropriate simply because the Federal Court proceeding has come to an end. The issues between the parties in the Federal Court proceeding are continued in the cross-claim in the proceeding in this court, which is substantially identical with the Federal Court claim. If what had been resolved were simply a step along the way to the final resolution of the proceeding, I would not make the order that the Morningstar interests seek.
173 However, in my opinion, the costs of the abuse of process motion are sufficiently self-contained and detached from the remainder of the proceeding that it is appropriate for such an order to be made in this case. As the Morningstar interests submitted, that application has been disposed of and will play no further part in the proceeding. It arose as a procedural challenge to the mechanism that had been adopted to bring all aspects of the dispute before a single court, and it failed. The process which it challenged has now been completed, at all aspects of the dispute are in the one court.
174 It appears from Hely J's judgment that a factor in his decision was the proffering by the Morningstar interests of an undertaking not to prosecute the cross-claim in this court and the Federal Court proceeding concurrently, and that undertaking was offered no earlier than at the hearing before his Honour. Additionally, the Morningstar interests had two changes of heart, originally seeking to have all proceedings consolidated and heard in this court, then seeking consolidation and hearing in the Federal Court, and then reverting to their original position. Those matters could affect the decision to award costs, but Hely J ordered the Rich interests to pay the Morningstar interests' costs notwithstanding them. It seems to me that they have lesser significance on the question before me now.
175 Now that the various separate proceedings have been brought together and are to be consolidated, steps can be taken (subject, in the case of the corporate plaintiffs, to their satisfying the order for security for costs) to determine the application under s 237 of the Corporations Act and prepare the single proceeding for trial. But it is highly likely that a considerable period of time will be taken to bring the case to final hearing and judgment. I say this because of the scope and complexity of the issues raised in the ASC, the prospect that the s 237 application may be an application of significant scope, the fact that discovery categories have not yet been agreed and there is a possibility that extensive discovery may be necessary, and the fact that it has taken nearly two years for the security for costs and strike-out applications to come to court, notwithstanding efforts by various judicial officers to set effective timetables. The likelihood that there will be a substantial lapse of time before the final hearing is relevant to my exercise my discretion as to costs.
Conclusions
176 For the reasons I have given, I shall make orders for the provision of security in the sum of $924,536, with ancillary orders, including liberty to apply. I shall dismiss the application by the Morningstar interests to strike out part of the ASC, and their application to strike out the claim under the Industrial Relations Act. I shall order that the costs of the motion in the Federal Court be assessed and paid forthwith.
177 Both sides have had partial success at the hearing of these four applications. Although most of the time was directed to the security for costs application, on which the Morningstar interests were successful, the bulk of the hearing time on that application was directed to questions of quantum of security, as to which the Morningstar interests did not achieve anything like the outcome that they advocated. In these circumstances, I am inclined to order that the costs of the four applications now heard and determined be costs in the cause in this proceeding. However, I shall give the parties the opportunity to make submissions, if they wish.
178 I propose to make orders to the following effect:
(1) As to the application for security for costs:
(a) the First and Third Plaintiffs, within 21 days, give security for the costs of the Defendants in the proceeding by paying into Court the sum of $924,536 or by otherwise providing security for that amount in a manner satisfactory to the Court;
(b) until the security referred to in paragraph (1)(a) is given, there be a stay of that part of the proceeding being the First and Third Plaintiffs' claims made in the proceeding against the defendants, noting that this order does not prevent the Second Plaintiff from prosecuting that part of the proceeding being his claims against the defendants, or from making an application on his own behalf under s 237 of the Corporations Act 2001 (Cth) for leave to prosecute the First Defendant's claims in the proceeding;
(c) after the expiration of six months but not earlier, the Defendants have liberty to apply to increase the amount of security, on 10 days' notice;
(d) grant liberty to any party to apply to Austin J or the Equity Duty Judge on two days' notice in respect of any matter arising out of the above orders for provision security.
(2) Otherwise, the Amended Interlocutory Process filed on 21 August 2002 on behalf of the Defendants is dismissed.
(3) The Notice of Motion dated 17 April 2003 and filed in the Industrial Relations Commission on behalf of the Defendants is dismissed.
(4) In respect of Federal Court proceeding No 3017 of 2003, which was cross-vested to this Court on 11 November 2003 (the "Federal Court Proceeding"):
(a) consistently with the order made by Hely J on 22 August 2003, the Defendants to the Federal Court Proceeding pay the costs of the Plaintiffs to that proceeding of the Defendants' Notice of Motion dated 17 June 2003, such costs to be assessed and paid forthwith;
(b) otherwise, the costs incurred in relation to the Federal Court Proceeding are costs in the cause of this proceeding; and
(c) the Federal Court Proceeding is dismissed.
(5) The costs of the four applications heard on 16-18 June 2004 and determined by these orders are costs in the proceeding.
(6) Proceeding stood over to [a date in September 2004] at 9:30am before me, for further directions.
179 I shall stand the proceeding over for a brief time, in order to give the parties the opportunity to consider these reasons for judgment, and to make submissions on costs and the form of orders. I shall direct the Morningstar interests to bring in draft short minutes of orders.