First plaintiff v First defendant

2 The defendants rely on the affidavits of Shane Nicholas Anderton affirmed 26 November 2020 ('First Anderton Affidavit') and 29 January 2021 ('Second Anderton Affidavit'), together with affidavits of a costs consultant retained by the defendants, Christopher John Grisenti, sworn 25 November 2020 ('First Grisenti Affidavit') and 29 January 2021 ('Second Grisenti Affidavit').

3 In opposing the application, Capital relies on the affidavits of the first plaintiff, Trent McKendrick, sworn 15 July 2020 ('First McKendrick Affidavit'), 21 December 2020 ('Second McKendrick Affidavit') and 16 February 2021 ('Third McKendrick Affidavit') together with an affidavit of Penelope Jane van den Berg, a costs lawyer, sworn 21 December 2020.

4 The first defendant, Credit Clear Limited (formerly Credit Clear Pty Ltd) ('Credit Clear'), is involved in the development of financial technology. It was originally incorporated as a proprietary limited company but became a public company and was listed on the Australian Securities Exchange ('ASX') in October 2020. The proceeding is a claim for alleged oppressive conduct under ss 232 and 233 of the Act against Credit Clear, together with what Capital describes as 'ancillary remedies' sought as a result of the alleged oppressive conduct.

5 In his evidence, Mr McKendrick states that he is the founder of Credit Clear and conceived of the 'Credit Clear System', the central enterprise conducted by Credit Clear. He states that in early 2015, he sought investors to assist in commercialising the Credit Clear System and was introduced to Mark Casey (the director of the second defendant, Casey Consulting Services Pty Ltd ('Casey Consulting')) by Lewis Romano (who controls the third defendant, Romano Family Holdings Pty Ltd ('Romano Family Holdings')). Mr Casey agreed to invest in Credit Clear in return for a 50 per cent shareholding. Mr McKendrick was to be chief executive officer and was to manage the business, with Mr Casey overseeing the financial and accounting aspects of the business.

6 Mr McKendrick was a director of Credit Clear from its incorporation in March 2015 until his resignation in October 2015. I will elaborate on the position in regard to Mr McKendrick's interest in Capital below. Capital was a shareholder in Credit Clear from its incorporation until November 2016, when Mr McKendrick signed an agreement (called the Separation Agreement) which provided for the purchase of 5,000,000 of Capital's shares in Credit Clear by the second defendant, Casey Consulting. Casey Consulting and Romano Family Holdings are now the shareholders of Credit Clear and are respectively controlled by the directors of Credit Clear, Mr Casey and Mr Romano.

7 In the amended statement of claim, the only relief sought by Mr McKendrick is to be reinstated as a director of Credit Clear. Capital seeks, amongst other things, to be reinstated as a shareholder of Credit Clear. By the amended originating process, both plaintiffs seek declarations that the Separation Agreement (and the Intellectual Property Assignment Agreement of the same date) are void on the grounds that they were procured under duress, undue influence, unconscionable conduct and, additionally or alternatively, misleading and deceptive conduct.

8 A declaration is also sought that Capital is entitled to hold 20 per cent of the issued shares in Credit Clear, approximately 36,000,000 shares, which at the time of the hearing of the application were valued at around $25 million. The plaintiffs seek rectification of the share register to reinstate Capital as a member of Credit Clear and to record that it holds 20 per cent of the issued shares, or alternatively 6,805,555 shares, in Credit Clear. A declaration is also sought that the affairs of Credit Clear are being conducted in an oppressive manner. The plaintiffs also seek the typical ancillary relief one expects to see in an oppression proceeding, including an order requiring Capital to be bought out for its shares, or alternatively the winding up of Credit Clear.

9 The parties to the Separation Agreement are Mr McKendrick, Capital and Casey Consulting. The recitals record that the parties have agreed that Mr McKendrick "separate from the company" on the terms set out in the agreement. The terms are as follows:

(a) Capital agrees to transfer "all of its 5,000,000 ordinary shares in Credit Clear to Casey Consulting" for a consideration of $1,000;

(b) Casey Consulting agrees to forgive loans to Mr McKendrick of up to $120,000 contemporaneous with payment of the consideration for the shares in (a) above;

(c) Casey Consulting agrees to transfer to Mr McKendrick 1,666,666 shares in Intergroup Mining Limited, held on bare trust by Casey Consulting for Mr McKendrick contemporaneously with payment of the consideration for the shares in (a) above;

(d) Mr McKendrick agrees to transfer all Credit Clear's intellectual property in his possession to Credit Clear and execute a separate agreement entitled Intellectual Property Assignment Agreement;[2]

(e) Mr McKendrick agrees to a restraint of trade and non-compete clause for a period of 12 months in Australia.

10 As contemplated by the Separation Agreement, Mr McKendrick, as assignor, entered into an agreement styled "Intellectual Property Assignment Agreement". Mr McKendrick executed the assignment on 27 October 2016 and Mr Casey appears to have executed the agreement on 11 November 2016, on which date Mr Romano also signed the agreement in his capacity as director of Credit Clear. That agreement identifies the intellectual property being assigned and is accompanied by a deed dated 27 October 2016 between Mr McKendrick and another company, Credit Clear International Pty Ltd. This document speaks in the recitals of Mr McKendrick being the inventor in respect of a patent application. Under its terms, Mr McKendrick assigns the intellectual property in an invention related to a method and system for receiving a debt payment to Credit Clear International Pty Ltd for consideration of $10.

11 By a share transfer dated 27 October 2016, Mr Casey transferred the shares in Intergroup Mining Pty Ltd to the trustee of Mr McKendrick's family trust, McKendrick Pty Ltd. The consideration for that transfer is expressed to be $200,000, being 12 cents per share for 1,666,666 shares. The transferor is identified as Outlook Holdings Pty Ltd, presumably a company associated with Mr Casey.

12 It is appropriate to detail the corporate structures and dealings of Capital and Credit Clear as they are of central significance to the respective parties' submissions made in this application, in particular those regarding the involvement of Mr McKendrick with those entities.

13 Credit Clear was incorporated on 5 March 2015. It is uncontroversial that Capital, at one juncture, held shares in Credit Clear. Mr McKendrick states that Capital "was set up solely as the vehicle through which [he] was to hold [his] interest in [Credit Clear]".[3] Capital, of which Mr McKendrick is the sole director and shareholder, is the trustee of the Credit Clear Unit Trust which was established on 16 March 2015 ('the Unit Trust').

14 Upon its establishment, the unit holders in the Unit Trust were Herculean Enterprises (Australia) Pty Ltd ('Herculean Enterprises') holding 100,000 units (which held those units for Julian Gallin)[4], Rita Carron holding 220,000 units (who held those units for Chris Carron), and McKendrick Pty Ltd, which held 680,000 units as trustee of the TM Trust, a discretionary trust of which Mr McKendrick is the primary beneficiary. Mr McKendrick's mother, Kerry Joy McKendrick, was the sole director and shareholder of McKendrick Pty Ltd.

15 Mr McKendrick deposes that following a meeting which took place on 8 October 2015 and entry into the Shareholders Agreement dated 11 November 2015, the units of Herculean Enterprises and Ms Carron were redeemed and arrangements were made for each of them to hold their shares directly in Credit Clear.[5] Mr McKendrick states that in early July 2018, after the Separation Agreement was signed, he undertook steps to transfer the units in the Unit Trust from McKendrick Pty Ltd to himself, with Ms McKendrick signing an authority to this effect. Mr McKendrick says that the unit register of the Unit Trust was updated around 18 July 2018 by Mr McKendrick's accountant, Mr Luburic. An electronic copy of the unit register identifies Mr McKendrick as the only unit holder with 680,000 units.[6] In an email of 16 February 2021, Mr Luburic states that in July 2018 he was instructed by the director of Capital (presumably a reference to Mr McKendrick) to transfer the units of McKendrick Pty Ltd in the Unit Trust to Mr McKendrick for $0.0001 and that Mr Luburic update the unit register to reflect the transfer on '18th July'.[7] In July 2020, McKendrick Pty Ltd was deregistered.

16 To summarise the position as it now stands, Mr McKendrick, the first plaintiff, is sole director and shareholder of Capital, the second plaintiff, which is the trustee of the Unit Trust. Mr McKendrick is the sole unit holder in the Unit Trust.

17 The terms of the Credit Clear Unit Trust Unit Trust Deed ('Trust Deed')[8], which constitutes the terms of the Unit Trust, state that the trustee, Capital, will hold the trust fund (which includes transferred property) on trust (clause 2) and that no unitholder has any proprietary, beneficial or other interest in any asset forming part of the trust fund (clause 3). The transfer of units in the trust requires a written instrument signed by the transferor and transferee, along with a certificate and compliance with other procedural steps (clause 8). The Trust Deed stipulates that the trustee does not have the power to make unit holders personally liable for any payment other than for their unit subscriptions (clause 23) and also grants the trustee a broad indemnity (clause 27). The unit holders of the trust are able to remove a trustee by ordinary resolution (clause 28) and, if the trustee enters into an insolvency administration, the trustee is automatically removed from office (clause 28(a)(ii)).

Background leading up to the commencement of this proceeding

18 Mr McKendrick states that in May 2015, shortly after the incorporation of Credit Clear, Mr Casey informed him that an unofficial board of investors would be formed and that Mr McKendrick was required to report to it. According to Mr McKendrick, but unbeknown to him at the time, the investors in Credit Clear included two persons who were involved in serious criminal activity who were charged and convicted of drug trafficking offences shortly after.

19 Mr McKendrick states that in October 2015 he was deposed from his position as director by the unofficial board appointed by Mr Casey. He states that threats were made to his life which he took seriously. Mr McKendrick was also removed as chief executive officer and replaced by Mr Romano.

20 Mr McKendrick states that from that time he was excluded from management and other involvement in Credit Clear. He was presented with various iterations of agreements which he was told to sign otherwise his shareholding would be diluted to nothing. In November 2015, he was told by Mr Casey "that he would always own 20 per cent of Credit Clear because it was [Mr McKendrick's] idea".[9] He states, however, that his interest was subsequently reduced to 10.5 per cent without his agreement. Threats were made that if he argued about this he would lose all his shares.

21 Mr McKendrick deposes that as at 18 April 2016, he held[10] 6,805,555 of the shares in the capital of Credit Clear, which he says is 10.5 per cent of the issued capital.

22 On 27 October 2016, Mr McKendrick was provided with the Settlement Agreement, the terms of which are outlined above. He states he was told to take what was on offer otherwise he would be "paid a visit" from Mr Gallin. Mr McKendrick says he was afraid of Mr Gallin, who had previously threatened him. Mr Gallin had a prior conviction for recklessly causing injury as a security guard. Mr McKendrick alleges that he was told that if he accepted the offer, he would be provided with $30,000 cash. Because of the threat that he would be deprived of his shares for nothing and his fear of physical assault he signed the Separation Agreement. He states he did not receive any legal advice prior to doing so and was not given an opportunity to consider the terms of the Separation Agreement or his circumstances.

23 Mr McKendrick states that on 14 November 2016, and without his knowledge or consent, Mr Casey lodged a share transfer form with ASIC for the transfer of all of Capital's shares in Credit Clear, being 6,805,555 shares.

(a) he has been excluded from involvement in Credit Clear through a combination of threats, broken promises and untruths which amount to oppressive conduct and involve undue influence, unconscionable conduct, duress and misleading and deceptive conduct;

(b) from the time of Mr Casey's first involvement there was a campaign of intimidation and standover tactics which included:

(i) the appointment of the unofficial board of directors to Credit Clear at Mr Casey's instigation, contrary to Mr McKendrick's wishes and contrary to promises that he would have the discretion to develop Credit Clear's business;

(ii) threats were made to his physical safety by two associates of Mr Casey, Mr Carron and Mr Gallin, in the presence of Mr Casey and Mr Romano. These threats were repeated by Mr Casey and Mr Romano at key points in the timeline;

(iii) Mr McKendrick's removal from Credit Clear as director on 8 October 2015;

(iv) what Mr McKendrick describes as oppressive and improper share dealings, including repeated dilution of Capital's shareholding; and

(v) expropriation of the whole of Capital's shareholding in Credit Clear, without any, or any adequate, compensation, and without a transfer having been executed by Capital.

25 Credit Clear was listed on the ASX on 26 October 2020 and, at the time of the hearing of the application, trade in the range of 60 to 70 cents.

26 Other than the evidence which has been filed by them in support of this application for security for costs, the defendants have yet to file affidavit material in opposition to the allegations made by Mr McKendrick. They have, however, filed points of defence dated 20 October 2020 which contest the plaintiffs' claims. In short, the defendants say that the dealings with Mr McKendrick were commercial in nature and the current interest holdings were arrived at through discussions and agreement with Mr McKendrick.

27 The defendants say that following a meeting in around September or October 2015, attended by the various stakeholders to whom reference has been made, Mr McKendrick made certain admissions that Credit Clear's technology had not been tested. It was agreed that the shareholding in Credit Clear would be adjusted to reflect the capital contributions made by each party and that Mr McKendrick's shareholding would thereby be reduced to 20 per cent of the issued share capital. The defendants say that following that meeting Mr McKendrick resigned as a director of Credit Clear and that he was aware of and consented to the appointment of Mr Romano as a director. They say that Mr McKendrick electronically signed a resignation form dated 8 October 2015 together with a resolution appointing Mr Romano as a director on the same date. This predated the Separation Agreement.

28 The defendants say that in March 2016, shares in Credit Clear were issued to Romano Holdings and Casey Consulting which had the effect of diluting Capital's shareholding but that this occurred with the knowledge and consent of Mr McKendrick. They say that the reason for this dilution was because on or around 13 November 2015, Mr McKendrick agreed to transfer from his own shareholding 7.5 per cent of Credit Clear's shares to Mr Gallin and 2 per cent to Mr Carron in order to settle outstanding liabilities he owed to them and that these transfers are evidenced and documented. The defendants say that in October 2016, Mr Romano sent Mr McKendrick a draft of the Separation Agreement and the Intellectual Property Assignment Agreements. They say that Mr McKendrick requested that the settlement sum provided for be paid in cash and not be documented in the agreement.

29 The policy underlying the award of security of costs was described by the Full Court of the Supreme Court of Queensland in Harpur v Ariadne Australia Ltd:

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.[11]

30 The discretion whether or not to order security for costs has been described as unfettered, the only limitation being that the discretion must be exercised judicially and not constrained by rigid rules or categories. It has been said that it is nonetheless appropriate for the grant to "be read in the light of the way the discretion to order security for costs has been exercised over the years".[12] The general principles to be applied when the Court considers an application for security for costs were collected by Derham AsJ in Colmax Glass Pty Ltd v Polytrade Pty Ltd[13] where he stated:

The first question is whether the threshold condition for the exercise of the power is satisfied, that is, whether there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful. That jurisdictional condition must be satisfied before the discretionary power to order security for costs is enlivened ...

It is well established that the proper approach to the matter is that the Court has an unfettered discretion, but on the footing that the very fact that the jurisdiction has been enlivened in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.

If the Court has jurisdiction to order security, the burden rests on the defendant to persuade the Court that an order for security should be made.

In exercising the discretion whether to order a company to give security for costs the court must carry out a balancing exercise. It must weigh the injustice to the plaintiff if it is prevented from pursuing a proper claim by an order for security, against the injustice to the defendant if no security is ordered and at trial the plaintiff's claim fails and the defendant is unable to recover costs from the plaintiff: See the observations of Smithers J in Tradestock Pty Ltd v TNT (Management) Pty Ltd. The Court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, but also it will be concerned not to be so reluctant to order security that an impecunious company can use its inability to pay costs to put unfair pressure on the defendant...

The various factors that have been found to be potentially relevant in the exercise of the discretion were summarised many years ago, compendiously, by Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd. So far as relevant to the present application, those factors include:

(a) The plaintiff's prospects of success: Whether the plaintiff's claim is made bona fide and has reasonable prospects of success. In this regard, the authorities make the following points:

(i) As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with reasonable prospects of success;

(ii) Assessing the plaintiff's prospects of success is not really a practicable test in any case of reasonable complexity... Although it will ordinarily not be practicable to reach any clear view about the merits of the plaintiff's claim, that is not to say that the merits are always irrelevant (unless totally lacking) or that the bona fides of the claim may be disregarded ...

(iii) The court is not obliged to consider at length the merits of the claim, and to do so would ordinarily be a waste of resources ...

(b) Plaintiff's impecuniosity caused by defendant: Whether the plaintiff's lack of funds has been caused or contributed to by the conduct of the defendant in relation to the transaction the subject of the claim ... In this regard, the authorities make the following points:

(i) The plaintiff carries the burden of persuasion on the question whether the conduct of the defendant was the cause of the plaintiff's financial difficulties ...

(ii) There must be a solid foundation for that conclusion ...

(iii) The plaintiff carries the onus of satisfying the court on the basis of admissible evidence...

(c) Plaintiff's proceeding merely defensive: Whether the plaintiff's proceeding is merely a defence against "self-help" measures taken by the defendant ... Each case must be looked at to see whether in substance the claim set up is by way of defence such that the plaintiff's claims are properly characterised as defensive;

(d) Security order would stultify pursuit of legitimate claim: Whether the making of the order would unduly stultify the ability of the plaintiff to pursue an arguable case legitimately instituted ...

(e) Contribution by shareholders or creditors to security ordered: The extent to which it is reasonable to expect shareholders or creditors (or beneficiaries, if the company is a trustee) to make funds available to satisfy any order for security which is made ...

(f) Delay in applying for security: Delay in applying for security may be ground for refusing to order security. The company, which can be assumed to be in financial difficulties, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it makes a substantial financial commitment toward litigating the claim. ...[14]

(citations omitted)

I will return to a more detailed consideration of the case law involving the individual categories which the parties respectively submitted were relevant in this application.

31 The defendants contend that it is not in dispute that Capital does not have the capacity to pay their costs if ordered to do so and as such the threshold condition is satisfied. Further, Mr McKendrick has not offered to pay or indemnify Capital for any adverse costs orders made against it and says that he does not have the resources to do so.

32 In response, Capital submits that the threshold condition for the exercise of the power is not made out. It contends it has a valuable asset consisting of the right to be reinstated to the share register of Credit Clear for at least 1,805,555 shares, which, at 70 cents per share, are said to be worth approximately $1.26 million. It is contended that will enable it to pay the costs of the defendants if they are successful.

33 The reference by Capital to the parcel of 1,805,555 shares has its source in a contention in the Second McKendrick Affidavit that even if the Separation Agreement is held to be binding insofar as it relates to the 5,000,000 shares of Capital in Credit Clear (which is disputed), the defendants have no defence to the claim for the 1,805,555 remaining shares in Credit Clear of which Capital has been allegedly wrongfully deprived by the defendants.

34 Mr Rubenstein, counsel for Capital, made reference to the decision of Mukhtar AsJ in Premier Capital (China) Ltd v Sandhurst Trustees Ltd[15] as authority for the proposition that where there are funds in the hands of the defendant who clearly has no right to detain them from the plaintiff, such funds may be regarded as being available to the plaintiff to meet any adverse order for costs which might be made.

35 I cannot accept the submission that that principle applies in these circumstances where the defendants deny all of the plaintiffs' claims including that in relation to the 1,805,000 shares in Credit Clear. The plaintiffs' claim in respect of those shares is controversial and will require determination by the Court. It is not at all clear that Capital will succeed in such claim. It was submitted by Mr Rubenstein that Capital's claim in this proceeding is one brought to, amongst other things, establish its right to the shares of which it contends it was wrongfully deprived and to be restored to the share register of Credit Clear, including the 1,805,555 shares the subject of this contention, as well as the 5,000,000 the subject of the Separation Agreement. Mr North, senior counsel for the defendants, observed however that the statement of claim and the amended originating process make no claim for restoration of the 1,805,555 shares, only making a claim for the 5,000,000 shares. In his oral submissions, Mr North made it clear that the claim for the restoration of the 1,805,555 shares will be the subject of strong opposition.

36 It is obvious that in order to have its entitlement to the 1,805,555 shares restored, Capital must successfully obtain that outcome in the proceeding. In order to accept Capital's submission that it has a valuable asset in the form of the shares and therefore that the jurisdiction for the Court's discretion as to awarding security is not enlivened, the Court is required to assume that it is clear that that part of its claim, at least, will be successful but the Court cannot speculate on the outcome of this proceeding.

37 Capital does not identify any other source from which the defendants' costs would be paid in the event that the plaintiffs were unsuccessful.

38 I regard it as clear that the threshold condition has been passed. The authorities indicate that I am now required to embark on a consideration of the relevant discretionary factors in deciding whether to award security or not.

General observations about discretionary categories

39 The various categories of discretion which are the subject of the case law in the area for security for costs are not, of course, statutory criteria but over time have been identified as relevant criteria to inform the exercise of the Court's discretion. The discretion to make an order for security against an impecunious company is "open-ended" and not fettered by agreed guidelines or principles.[16]

40 The various heads of discretion emerging from the authorities on occasion overlap and on others they appear to clash. The grounds of stultification and oppression, for example, give rise to very similar considerations, if the threshold has been shown to have been passed, it would be quite likely that any requirement to provide security would stultify the proceeding. Similarly, as has been identified by the Court of Appeal in Ariss v Express Interiors Pty Ltd[17] citing Ormiston J in Interwest Ltd v Tricontinental Corporation Ltd[18], the very fact that there is credible evidence that a party will be unable to pay any order for costs if unsuccessful will also be a factor, and a most significant one, in the exercise of the discretion.

41 In the parties' submissions, they relied on a number of the discretionary factors identified in the case law and mentioned above. I shall consider what effect each of those factors has in deciding whether security should be ordered.

42 Capital contends that the defendants have delayed in bringing their application for security for costs. It draws on the principle, which is summarised above, that a plaintiff is entitled to know its position in respect of security at the outset of a proceeding before it embarks on the substance of its litigation and delay on the part of an applicant for security in bringing its application weighs against the award of security.

43 In this instance, the originating process and initiating affidavit were filed on 15 July 2020. The parties attended an initial conference conducted in accordance with Practice Note SC CC 8 - Oppressive conduct of the affairs of a company on 13 August 2020 and points of claim were filed on 14 September 2020. A judicial mediation was conducted on 27 October 2020 without success. The defendants' present application for security for costs was commenced on 25 November 2020. Capital contends that the period of four months after commencement of the proceeding, after the substantial costs and preparation of points of claim and defence and attendance at the mediation, constitutes a delay in this context and as a discretionary factor which should be weighed against the order for security. Capital submits that the defendants have known of the plaintiffs and their financial circumstances for several years and this is not a case where the defendants suddenly became aware of the plaintiffs' impecuniosity.

44 I do not accept that submission. I would have regarded it as inappropriate for the defendants to have commenced an application for security for costs, which can itself be a costly exercise, prior to the conclusion of the mediation. The interval between the conclusion of the mediation and the commencement of the application was reasonable and is explicable by reason of the time being required for the preparation of the application. The proceeding is in an early stage and Capital has not pointed to any prejudice of a relevant kind. The costs likely to have been incurred by Capital to date are not likely to be substantial. In real terms, the period which passed before the application was formally commenced was several weeks and does not, to my mind, constitute delay in a context of the discretionary factor to be weighed against an order for security for costs.

45 In applications of this type, the strengths and weaknesses of both plaintiffs' and defendants' cases often cannot be satisfactorily determined and the Court should not conduct anything more than a superficial assessment of the plaintiffs' prospects of success.[19] As Derham AsJ observed in Andrews v Zuccubarr:

As a general rule, where a claim discloses a cause of action, in the absence of evidence to the contrary, the Court should proceed on the basis that the claim is bona fide with reasonable prospects of success.[20]

46 In Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd, Corboy J observed in regard to this discretionary factor:

There are obvious and practical limits on the extent to which an assessment can be made of the substantive merits of the plaintiff's claims and the defendant's defence. The court will generally not be required to investigate in considerable detail the likelihood or otherwise of success in the action...[21]

(citations omitted)

47 The merits of a case are unlikely to be clear-cut and are difficult to discern at an interlocutory stage. The prospects of success are generally regarded as a neutral matter in cases where, as here, the issues are somewhat complex however this might not be so where a plaintiff's case is hopeless or doomed to failure.[22]

48 Mr North delivered a detailed critique of the plaintiffs' claims, subjected them to close analysis and culminated with a submission that the plaintiffs' claims had low prospects of success from both a legal and factual standpoint. The authorities, however, indicate that I should not embark on such a detailed analysis of Capital's prospects but rather I should perform a somewhat summary appraisal of Capital's case.

49 Based on an assessment of the evidence filed by the plaintiffs, I consider that Capital's claims are regular, disclose a cause of action, and, so far as it is appropriate to provide an opinion in that regard, have reasonable prospects of success. I do not consider that the claims are hopeless, implausible or bound to fail. As to the bona fides of the claim, the defendants point to the delay on the part of the plaintiffs in commencing this proceeding, some five years after the relevant events, together with the fact that the plaintiffs did not make any complaint about the matters the subject of this proceeding until there was media coverage of Credit Clear's intention to list on the ASX. The delay warrants explanation, and there has been none, but in my view this is only to be given limited weight in this application. The defendants also contend that the position being put by the plaintiffs is contradicted by contemporaneous documentary records but again, a detailed assessment in this regard is beyond the scope of this application.

50 Taking all of these factors into consideration, I consider that the factor of prospects of success is a neutral one and does not weigh significantly in favour or against an order for security.

51 As has been noted, the authorities indicate that the financial circumstances of a party resisting an application for security for costs is a factor, and often a most significant factor, in the exercise of the Court's discretion.[23]

52 The evidence as to the financial position of Capital is that it has no assets.[24] Instead it contends that it has a chose in action, the basis of its claim in this proceeding seeking restoration of the shares it formerly held. Capital says its claim for 1,805,555 shares is uncontroversial and as such a valuable chose in action that can be relied upon to pay costs if so ordered at the conclusion of the proceeding, but such part of its claim is by no means clear cut and Mr North has observed that it is strongly contested. As I have observed above in respect of consideration of the threshold issue, this cannot constitute a basis that Capital presently has an asset worth approximately $1.26 million which would be available to meet any order for costs. Such claim might be successful and transformed into a valuable asset in the future but that is not to the point in the present context.

53 Orders for security for costs are designed to protect a defendant and provide for its costs in the event that the plaintiff is unsuccessful. In this proceeding, there are a number of possible outcomes. If Capital is completely unsuccessful, it follows that no shares will be restored to it and it will remain without assets to satisfy any judgment for costs. If it is completely successful, no question of its needing to meet any orders for costs would likely arise. If it is partially successful, for example by obtaining an order that the 1,805,555 shares be restored to it, it would likely be able to meet any adverse order for costs, but that requires the Court to impermissibly predict with considerable confidence that such an outcome will occur.

54 Mr Rubenstein also contended that if the defendants are successful they would have an entitlement to look to any assets of the trust to pay their legal costs by reason of the trustee's right of indemnity out of the trust assets under the terms of the Trust Deed, at common law and under statute.

55 In my view, there are several difficulties with that submission, the most prominent one being that the evidence indicates that the Unit Trust, aside from its potential chose in action the subject of this proceeding, has no assets to speak of and indeed, when pressed by me on this issue, Mr Rubenstein conceded as much.[25] Further, even if it did have assets, Capital could be removed as trustee at the whim of Mr McKendrick thereupon becoming bare trustee of any assets it did hold. Similarly, if the defendants sought to compel payment of any adverse orders for costs made against Capital by serving a statutory demand upon it and then commencing winding up proceedings, Capital, by operation of the ipso facto clause in the Trust Deed, would lose office as trustee and any assets it had would henceforth be held on bare trust. Although the trustee's right of indemnity would survive the winding up order, in order for to exercise the lien in respect of the indemnity, the liquidator appointed would be required to make application to the Court to gain access to such assets to satisfy any judgment for costs, including seeking the appointment of a receiver. That will involve a protracted and costly process.

56 I regard the financial position of Capital as the most significant factor to be weighed in favour of the award of security.

Whether the defendants' conduct brought about Capital's impecuniosity

57 As outlined above, Capital carries the burden of establishing, by reliance on a solid evidentiary foundation, that the defendants' conduct was a cause of its current financial position. In Coonwarra Pty Ltd v Cornonero Pty Ltd (No 2) the Court observed:

The fact that the plaintiff's impecuniosity was caused by the defendant must have a strong evidentiary foundation. This includes, in certain situations, the plaintiff proving through evidence that they were in a good financial state before interacting with the defendant.[26]

58 The defendant's conduct must be the material contributor to or cause of the plaintiff's impecuniosity, not merely a contributing factor.[27] In this instance, Capital's impecuniosity and what caused it go to the very issues which are required to be decided in the case, including a consideration of whether the defendants by their conduct brought about Capital's parlous financial position.

59 Capital, which bears the onus of establishing that this discretionary factor should be taken into consideration, presented no evidence as to its financial position prior to the events giving rise to this litigation, other than that it held shares in Credit Clear (and of which it contends it has been wrongfully deprived). In particular, Capital did not exhibit any records or accounts to evidence its position prior to the alleged conduct and current financial position, nor were any accounts or records of the Unit Trust put in evidence. Mr McKendrick deposes that Capital does not trade and has no unpaid debts[28] but the evidence before me in this application does not go beyond this.

60 There is also no evidence as to what the value of Capital's shares in Credit Clear was at the time of the alleged conduct the subject of Capital's claims (which preceded the entry of Credit Clear on the ASX). Mr McKendrick states that Mr Romano sold 142,593 shares for $25,000, i.e. approximately $0.175 per share however when or the circumstances by which this occurred are not specified.

61 I do not consider that Capital has discharged its onus that it bears to establish that the defendants' conduct was the cause of its impecuniosity in the context of this application and I would not attribute any weight to this factor against an award of security.

62 Both parties placed considerable emphasis, albeit in quite different contexts, on the fact that in addition to the corporate plaintiff, Mr McKendrick, an individual ordinarily resident in the jurisdiction, is co-plaintiff.

63 In Opes Prime Group Ltd (in liq) (scheme admins apptd) v Niako Investments Pty Ltd,[29] Derham AsJ dealt with the principles to be applied in circumstances where, in addition to the plaintiff corporation the subject of the application, a natural person was co-plaintiff. Drawing on the commentary of the authors of Civil Procedure Victoria Derham AsJ observed:

(a) If a natural person ordinarily resident within the jurisdiction is also a plaintiff, the Court will not as a rule require the plaintiff corporation to give security for the defendant's costs. The individual plaintiff will be liable for the defendant's costs if the proceeding fails, but the defendant would not have been entitled to security if that plaintiff had sued alone, even if the plaintiff was insolvent, and there is no reason why the joinder of a company which is insolvent as co-plaintiff should put the defendant in any better position with respect to security ...

(b) However, security may be ordered where there are differences between the claim of the corporation and that of the individual such that there is a possibility that if both fail, the Court will not order the individual plaintiff to pay all the costs of the defendant ...

(c) The Court must consider the degree of the overlap between the claim of the corporation and that of the individual. If there is very limited overlap, so that the defendant will incur substantial costs in meeting the corporation's claim which it will have no entitlement to recover from the natural person should the defendant succeed against the individual, then, in the absence of other relevant considerations, a proper exercise of discretion would generally require security to be provided by the corporation. Where, however, there is a very substantial degree of overlap between the two claims, then because the defendant has a natural person as plaintiff to whom he or she can look for payment of substantially the whole of the costs he or she is likely to incur if he or she successfully defends both sets of claims, a proper exercise of the discretion would generally result in no order for security being made against the corporation ...

(d) If the corporate plaintiff is ordered to give security, and its claim is stayed until the security is given, the individual plaintiff will not be prevented from pursuing the claim personal to himself or herself ...

Apart from these points, if there is a broad general rule it is simply that the presence of a natural person as a plaintiff with a corporation or corporations is a factor that may tend against the ordering of security against a corporate plaintiff. The simplest example is where an individual plaintiff is a person of substantial means, and that plaintiff's claims largely coincide with those of the corporate plaintiff. In this case the same issues would have to be tried even if the corporate plaintiff's claims were stayed.

Where there is an absence of evidence as to the individuals' capacity to pay costs, or where there is evidence suggesting a likelihood that they could not pay, it is appropriate to take those factors into account in exercising the Court's discretion in respect of the corporate plaintiff's claims, while making due allowance for the consideration that an indirect benefit should not be given to the defendant in respect of its defence of the individual plaintiff's claims, for those are not, ordinarily, the subject of any order for security.

On the other hand, reliance on the fact that there is also an individual plaintiff who might be able to pay any costs ordered in favour of the defendants would lead to artificial joinder of individuals and would not give effect to the purpose of the section.

Thus the presence of an individual plaintiff or plaintiff[s] is often likely to be seen as a factor diminishing the defendant's claims to security, but not extinguishing it.[30]

(citations omitted, emphasis added)

64 The Full Court of the Supreme Court of Queensland in Harpur v Ariadne Australia Ltd also considered the presence of a natural person co-plaintiff, observing:

Against this background, what is the rule where there is more than one plaintiff? In such a case, all plaintiffs suing in the same interest and by the same solicitors and counsel, there is but one set of costs. If the defendants have an opponent who is worth powder and shot they have as much as any litigant is fairly entitled to. The court cannot by its orders guarantee a successful outcome in a practical sense to any party.[31]

65 The Full Court in Harpur referred to the consideration of the issue of "overlapping" claims by plaintiffs in security for costs applications by Plowman J in the UK decision of John Bishop (Caterers) Ltd v National Union Bank Ltd.[32] In that case the plaintiff company and the second plaintiff, an individual within the jurisdiction, brought an action against the defendants. The natural person was a secured creditor of the plaintiff company and large aspects of the claim of the plaintiff company did not involve the natural person. The plaintiff company was in liquidation and said to be hopelessly insolvent and the defendants applied for an order for security for costs. The plaintiff company conceded that the Court had jurisdiction to make an order but contended that no order should be made because of the presence of the natural person second plaintiff. Plowman J surveyed various authorities involving a natural person co-plaintiff in a proceeding and distinguished them by reason that the authorities referred to involved a complete identity of interests between the two plaintiffs who were suing in respect of the same cause of action. After distinguishing those cases his Honour observed:

In the present case - and I say this without attempting to analyse the long and complicated statement of claim which has been served - it seems to me that there are very large areas of claim raised by the plaintiff company, in which Mr Sneddon, whose interest is that of a secured creditor, appears to have no locus standi. In other words, unlike the cases to which I have referred, in the present case the overlap seems to me to be comparatively small. And if that is so and this action goes to trial and the plaintiff company loses, I am not satisfied that Mr Sneddon will necessarily be ordered to pay to the defendants all the costs which they incurred vis-a-vis the plaintiff company.[33]

(emphasis added)

66 The defendants contend that whilst security is not generally ordered against a corporate plaintiff in such circumstances, the authorities indicate it may be ordered where the claims of the corporation and individual are discrete and will be the subject of separate consideration. In such circumstances, there may be a tendency for the Court to make orders for costs tailored to the outcome of such discrete claims and perhaps not make a joint and several order for costs. The defendants contend that here the Court must consider the degree of "overlap" between the claims of Capital, on the one hand, and Mr McKendrick on the other. The defendants say that if Capital is ordered to give security and the claim is stayed until security is given, Mr McKendrick will still be entitled to pursue his claim.

67 The defendants submit that there is very little overlap in the plaintiffs' claims, so that Mr McKendrick will not likely be the subject of a joint and several order for costs in the event of Capital suffering an adverse outcome, and that this is a factor weighing in favour of an award of security.[34]

68 In this regard, the defendants contend that the claims put forward by the plaintiffs by reference to their statement of claim are separate and arise from separate transactions and this is confirmed by reference to the relief sought by each plaintiff.[35] They contend that this is underscored by pointing out that the only relief sought by Mr McKendrick is his reinstatement as a director of Credit Clear, whereas that sought by Capital is much broader and includes, amongst other things, a declaration that it is entitled to 20 per cent of the share capital of Credit Clear, an order for the compulsory purchase of its shares and further or alternatively compensation in excess of $25 million under various statutory provisions. It is also said that Mr McKendrick's claim, as well as being discrete and narrower in scope, is inherently unlikely to succeed in circumstances where:

(a) Credit Clear is an ASX listed company with a fully functioning board of directors;

(b) Mr McKendrick signed resignation and appointment resolutions confirming his resignation as a director on 8 October 2015, and his resignation was confirmed in emails exchanged between Mr Romano, Mr Casey and Mr McKendrick on that day; and

(c) Mr McKendrick plainly knew and accepted that he was no longer a director of Credit Clear on and from October 2015, and he has not taken any steps as director, nor purported to act as a director, since that date.

69 Mr North noted that the constitution of Credit Clear provides that directors may be appointed[36] and removed[37] by resolution at a general meeting of the company. Mr North contended that there is no entitlement of a director in Mr McKendrick's circumstances to demand that they be reinstated as a director when one has regard to the terms of the constitution of Credit Clear. Mr North submitted that Mr McKendrick's case stands alone, is a weak one, could be dealt with separately and in short compass and its agitation would likely add little to the length or complexity of the proceeding. As such, Mr McKendrick would have a respectable basis for contending that if the case went adversely to him and Capital, he should still only be required to meet the costs related to his relatively insignificant part of the proceeding and, moreover, he should not be the subject of a joint and several order for costs.

70 Mr Rubenstein submitted that, to the contrary, there is a very high degree of overlap and "enmeshment" between the claims of Capital and Mr McKendrick, such that, if the plaintiffs were unsuccessful the defendants would have a strong basis for a submission that there should be a joint and several order for costs and, referencing the remarks of Derham AsJ in Opes Prime with appropriate adaptions, would have a natural person as plaintiff to whom they can look for payment for substantially the whole of the costs they are likely to incur if they successfully defend both sets of claims.

71 Mr Rubenstein maintains that Mr Kendrick's claims largely coincide with Capital so that the same issues would have to be tried even if Capital's claims were stayed.

72 In this regard, Mr Rubenstein referred to the Separation Agreement, which is a central focus of the plaintiffs' case. It was executed by both plaintiffs and provides that Capital transfer "all of its 5,000,000 ordinary shares" to Mr Casey or a nominee for $1,000, together with a forgiveness of a loan of $120,000 from Mr Casey to Mr McKendrick and a transfer of 1,666,666 shares in Intergroup Mining to Mr McKendrick. The plaintiffs contend that in fact the consideration passing to Mr McKendrick and his interests is illusory.[38]

73 Mr Rubenstein characterised the proceeding in terms of it being a relatively straight forward and conventional oppression proceeding whereby Mr McKendrick, as the originator and inventor of the product underpinning Credit Clear, has had his commercial opportunity effectively taken from him by the defendants. He stated the source for Mr McKendrick's remedy to restore him to the register relies on both s 175 and s 233 of the Act, the oppression provision. As such, he contended there was no distinction in this proceeding between the remedies of Mr McKendrick and Capital. Mr Rubenstein submitted that an order should not be made for security because the interests of Mr McKendrick and Capital are at one and, significantly in the present context, if the case is lost, that it was almost inevitable that the defendants would submit that, by reason of the common and overlapping interests, the plaintiffs should suffer a joint and several order for costs.

74 In his submissions, Mr Rubenstein contended that the first part of the plaintiffs' case is to obtain declarations of invalidity in respect to the Separation Agreement and Intellectual Property Assignment Agreement to which both Mr McKendrick and Capital are parties and in that sense, the plaintiffs' claims are what Mr Rubenstein described as "interlaced and interbound". He submitted that it was a mischaracterisation of Mr McKendrick's case as being one simply being limited to reinstatement as a director of Credit Clear.

75 Mr Rubenstein submitted that Capital is merely Mr McKendrick's "corporate instrument to hold his shares"[39] and Mr McKendrick is intimately bound up in the factual background of the claims. There is, he says, therefore a high degree of overlap and enmeshment between the plaintiffs' claims such that it can be said that the defendants can have confidence that they have a natural person to whom they can look for payment of any adverse order as to costs.

76 Referring to the amended originating process, Mr Rubenstein pointed to the remedies sought, including that both plaintiffs were required to claim declarations in relation to the Separation Agreement and Intellectual Property Assignment Agreement because they were both parties to these agreements. All other remedies flow from the declarations.[40] Mr Rubenstein submits that in order to obtain those remedies, all of the factual matters dealing with the oppression claim would need to be established.

77 Mr Rubenstein distinguished the circumstances here to those the subject of my earlier decision in Muranna Park Pty Ltd v Southern Mortgages Ltd.[41] In Muranna Park I observed that if the plaintiffs' claims were unsuccessful, it was not clear what order would be made for costs and that there was a possibility that arguments would be made that the corporate plaintiff's claims were the central focus of the proceeding and as such the natural person may only be ordered to cover a small portion of the costs, i.e. and not be the subject of a joint and several order.[42] In that instance I found that the natural person plaintiff's claims "rode on the coat-tails" of those of the corporate plaintiff. Mr Rubenstein says that the opposite is the case here and that the claims stem from Mr McKendrick as he is the individual against which the alleged oppressive acts took place.[43]

78 While both parties devoted considerable time in their submissions to the nature of Mr McKendrick's interest in Credit Clear as it changed over time, for the purposes of this application at least, I do not consider that the prior position in regard to the unit holding is of any moment in the consideration of the matters I am required to weigh in this application.

79 While the principal and substantive claims in the proceeding are brought by Capital seeking restoration of its shares in Credit Clear and the other relief which has been described, it will be seen from the foregoing survey of the factual background that he does "ride on the coat-tails" of Capital. While the only relief sought by Mr McKendrick in the statement of claim is for his reinstatement as director of Credit Clear, he also joins with Capital in seeking declarations in respect of the Intellectual Property Agreement and the Settlement Agreement, to which he was party.

80 Mr Rubenstein contended that the case was, in reality, Mr McKendrick's claim for oppression and Capital was merely the vehicle by which his interest was held. I agree with that submission. In my view, the circumstances here are not analogous to those considered by Plowman J in John Bishop. On my reading of that case, the secured creditor could have quite readily run a separate and discrete proceeding; his interests and the relief he claimed was quite distinct from that of the corporate plaintiff which, it seems, was the principal reason that Plowman J decided that the claims did not overlap in the context of deciding whether security should be ordered.

81 When I pressed Mr Rubenstein at the hearing of this application on the subject of whether Mr McKendrick would be likely to suffer a joint and several order for costs, he accepted this was likely if the proceeding was decided adversely to the plaintiffs.[44] While I cannot predict what form of order for costs the trial judge will make if the case was decided adversely for the plaintiffs, the involvement and interest of Mr McKendrick in the outcome of the proceeding and his role as the directing mind and driving force behind Capital in the proceeding are such that it seems to me more than likely that a joint and several order for costs would be made.

82 In my view the claims of the plaintiffs overlap in the sense considered by the authorities such that it is a factor to be weighed against the grant of security. The central and predominant grievance which is sought to be agitated by the plaintiffs in the proceeding is that Capital has been deprived of its interest in Credit Clear by reason of the circumstances surrounding the making of the Separation Agreement and the Intellectual Property Assignment Agreement. While at first blush it could be said that Mr McKendrick's involvement in the proceeding is ancillary or peripheral to that of Capital, he is the alter ego and directing mind of Capital and the driving force behind this litigation. While he personally holds no shares in Credit Clear (and never did), by reason of his intimate involvement in the affairs of Capital and being in reality the only person who stands to gain by the litigation, he is inextricably connected to the fortunes of Capital in this litigation. He would, it seems, be Capital's principal witness at the trial of this proceeding and the prominent person from whom Capital's lawyers have recourse to for instructions.

83 This is a feature which weighs against the grant of security, although, as observed by Ormiston J in Interwest, it is a factor which diminishes the defendants' claims to security but does not extinguish it.[45]

Resources of persons standing behind the plaintiff company

84 The discretion of the Court to grant security is further enlivened, Mr North contended, by the interconnection between Mr McKendrick and Capital. This interconnection is because Capital is suing on behalf of Mr McKendrick, the sole unit holder in the Unit Trust of which it is trustee, but Mr McKendrick is not prepared to provide security and indeed refuses to do so. Mr McKendrick has not offered to give an undertaking to be jointly and severally liable for or to guarantee a payment of any such adverse order.

85 Mr North referred to the terms of the Trust Deed which provide that unit holders have no personal liability for acts of the trustee[46] and that Capital can be removed by the unit holders as trustee by ordinary resolution[47]. In these circumstances, he contended, by reason that Mr McKendrick is the sole unit holder, the situation could arise that as soon as an adverse order for costs is made against Capital, it could be removed by him as trustee of the Unit Trust. Further, as has been mentioned, the Trust Deed contains an ipso facto clause and if Capital did not comply with a statutory demand seeking to recover such costs and a winding up application was successful, with the appointment of a liquidator Capital immediately loses office as trustee and becomes bare trustee of any trust assets. Any liquidator appointed in the winding up of Capital would then be required to approach the Court so to obtain the necessary orders to gain access to any assets of the Unit Trust.

86 Mr North referred to the decision of Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd in which Smithers J observed that:

Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties, it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability.

...

I have concluded that an applicant being a trustee company which desires to resist an order for security costs should establish that recourse to property held by or for it will be available to the party against whom it has fought its action and be adequate, at the appropriate time, to meet the possible liability for costs.[48]

87 Mr North submitted that a reasonable person in the position of Mr McKendrick would have stepped into the shoes of Capital and obviated the need to make the application for security by offering to provide it or undertake to be joint and severally liable to an adverse order. As he has not done so, Mr North states this is a factor to be taken into consideration in the exercise of the discretion.

88 In response, Mr Rubenstein submitted that the authorities such as Laundry Coin-Wash have no application here by reason that Mr McKendrick is a co-plaintiff. He contends that the Court in exercising its discretion as to costs will no doubt look to Mr McKendrick for such an order in this proceeding, should the plaintiffs be unsuccessful, by reason that he is the controller and the guiding mind of Capital and the person totally responsible for its actions. Mr Rubenstein stated that while Capital is the party with the standing to bring this proceeding, in doing so it brings the claim on behalf of Mr McKendrick. He submitted that any order for costs could be satisfied by Capital exercising its right to indemnity from the trust assets under clause 19 of the Trust Deed as well as s 36 of the Trustee Act 1958 (Vic). However he conceded no recourse could be had to Mr McKendrick as the beneficiary of the Unit Trust pursuant to clause 23 of the Trust Deed.

89 Mr Rubenstein submitted that the principles of trust law are irrelevant in considering whether Mr McKendrick should present a form of security because he is a plaintiff in the proceeding. The determination of this application ought ultimately turn on the fact that as there is a natural person plaintiff, the general principle in those circumstances is that it does not matter whether he has assets or not and that no order ought be made.

90 Mr Rubenstein contended that Mr McKendrick's level of income supports the notion that there is a natural person co-plaintiff who has some financial resources. As Mr Rubenstein has emphasised in his submissions in other contexts in this application, Mr McKendrick is the sole director and shareholder of Capital, its directing mind and the sole beneficiary of the Unit Trust of which Capital is trustee. He is the person who stands to benefit by this litigation. Mr McKendrick does not own any real estate. He describes his occupation as Head of Markets with a global financial institution earning an annual salary of $139,000 with an additional average annual bonus of $80,000, a total of approximately $240,000 per annum. He states that he is financially supporting his partner and his mother, who is ill. He does not elaborate further as to his outgoings or provide independent substantiation of his position. He states that he is relying on the claims in this proceeding to improve his financial circumstances.

[I]t seems unfair, where this insolvent company has not considerable assets, that, if the defendants are successful, they would be at risk for their costs when substantially all available assets may well have been expended on the plaintiff's unsuccessful case.[49]

92 It is not inconsistent with s 1335(1) of the Act for the Court to have regard to the financial circumstances of the individual who will, or will likely, benefit should the claim succeed. The allowance for a third party to finance a plaintiff's proceeding addresses any concern regarding injustice on the part of a defendant which may otherwise be unable to recover their costs.[50]

93 In Bruce Pie & Sons Pty Ltd v R H Mainwaring, English and Peldan, McPherson J observed that:

Among the considerations relevant to the exercise of that discretion are the apparent prospects of success, or absence of them, if discernible; and that the order for security should not be the means of effectively denying the plaintiff his right to pursue his claim. That consideration must necessarily carry less weight where the plaintiff is not an individual but an insolvent corporation, and where, as here, no offer has been made by those (whether they be secured creditors or the shareholders) who are evidently providing the plaintiff with sinews of war to meet any costs that may be awarded against the plaintiff. It follows that, without provision of adequate security, the defendants cannot hope to recover anything, not even so much as a dividend from the assets of that company, in satisfaction of any costs order that they may obtain.[51]

(emphasis added)

94 In regard to the principles expressed by McPherson J, Professor Dal Pont observes:

If an impecunious company is able, through the financial resources of its shareholders, its creditors or any other persons who have an interest in the proceeding, to provide security, for a court to decline to order security on the ground that the company itself cannot raise the security would be to perpetuate an abuse of process, the company being used as 'a stalking horse to enable someone to evade personal responsibility'.[52]

95 The evidence, to my mind, is that despite Mr McKendrick's contention that he is not able or prepared to support the provision of security, by community standards he has a substantial income. Such an income would enable him to procure funding to offer security but he has not offered to indemnify Capital, which is without any assets and otherwise unable to meet any adverse order for costs. In these circumstances, Capital has apparently been able to fund its costs of the proceeding to date, presumably (although this is not clear) from Mr McKendrick's financial resources. Like Ormiston J in Ariss, I regard this as unfair. I also respectfully agree with the sentiments expressed by McPherson J in Bruce Pie & Sons and Professor Dal Pont in this regard. I consider that this is a persuasive factor that should be weighed in favour of an order for security.

Whether an order for security would stultify Capital's claim

96 Mr Rubenstein contends that the granting of the application for security will have the effect of stultifying Capital's claim by reason of its lack of assets and what are described as the "modest means" of Mr McKendrick. The plaintiffs' case is that Mr McKendrick developed the underlying business, the business model software, and the technology. Mr McKendrick approached funders seeking their assistance to commercialise the produce and the basis of his claim is that was then taken from him by the defendants who have effectively deprived him of his invention and interest.

97 In Livingspring Pty Ltd v Kliger Partners the Court of Appeal observed that if a plaintiff wishes to contend that an order for security would impose on it such a financial burden that would stultify the litigation, the plaintiff must establish the facts that would make good that assertion.[53] Here, Capital bears such an onus.

98 As has been mentioned, Capital (save for a contention that it has a valuable chose in action which is the subject of this proceeding) has no assets of its own. Its co-plaintiff Mr McKendrick has described his financial position. He states that his financial circumstances do not enable him to support Capital by provision of funds for security for the defendants' costs.

99 As I have already observed , even having regard to his financial responsibilities (which are not detailed), Mr McKendrick's income is substantial by community standards. I do not consider that it is satisfactorily explained why he, as the effective owner and directing mind of Capital and a unit holder in the Unit Trust who would have the most to benefit by any restoration of Capital of its financial position, should not stand behind Capital financially and bear some risk in the outcome of the litigation.

100 In this regard, in Bell Wholesale Co Ltd v Gates Export Corporation (No 2), the Full Court of the Federal Court stated:

In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and 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 the 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.[54]

101 It could not be said that on the evidence Mr McKendrick has presented that he is impecunious or without means in the way spoken of in the authorities in this context. Rather it seems that he has deployed his income to discharge other obligations, including, it would seem, the plaintiffs' costs of this proceeding. If the plaintiffs are unsuccessful and suffer an adverse order for costs, Mr McKendrick's resources will presumably have been exhausted by payment of the plaintiffs' legal expenses and the defendants will be left wanting.

102 I do not accept that it has been established that the plaintiffs' claims would be stultified in the context that that expression is used in the authorities dealing with that question. In my view, Capital, which bears the onus, has not discharged it so as to bring this ground to bear as a discretionary ground in its favour against an order for security.

103 Mr Rubenstein contended that by reason of a number of features of this case, the ordering of security for costs would be an oppressive burden on Capital and would deprive it of the right to litigate. He contended that this was so by reason of:

(a) the prior relationship between the parties, noting that they were business partners for the purpose of commercialising Mr McKendrick's invention;

(b) the circumstances giving rise to the proceeding in terms of the defendants' conduct;

(c) Capital's impecuniosity and inability to provide security for costs because of the actions of the defendants; and

(d) if security for costs was ordered it would prevent Capital from progressing its claims against the defendants.

104 In response, the defendants emphasised that the plaintiffs bear the onus of establishing by reliable and testable evidence that an order for security would not only stultify an otherwise bona fide claim but that it would also be oppressive.[55] Further, they contend that in any event there is no basis for finding that the requirement to provide security would be oppressive where the defendants had meritorious defences and there is no suggestion that they have conducted the litigation in a way that has brought about unnecessary delay or cost. The defendants point to an open letter from their lawyers in which they offered to accept a reduced figure of $195,174.65 by way of security up to and including the first day of the trial and that the security be provided in tranches and not a singular lump sum.

105 The ground of oppression which has emerged from the case law in applications of this kind is very closely related, in my view, to the stultification ground. Indeed, in his text Law of Costs Professor Dal Pont appears to deal with these matters as a single ground.[56] In general terms it is said that Courts are reticent to order security for costs where its effect would be to shut out a plaintiff from proceeding with a claim that is bona fide and not obviously frivolous or vexatious.[57] Such an order will not be automatically refused merely because the ordering of security will frustrate the plaintiff's right to litigate its claim by reason of its financial condition but it is said that it will nonetheless usually operate as a powerful factor for exercising the Court's jurisdiction in the plaintiff's favour.[58]

106 Amongst the features which may be relevant to take into account according to Professor Dal Pont in the context of this proceeding include first, the relative position and power of the parties. An example would be where the application is being used to shut out a less powerful party from making a genuine claim against a large enterprise and making the orders will have a "disastrous effect" on the applicant.[59] It is said that if these questions are answered affirmatively there may be grounds to conclude that the application is oppressive as it is being used merely to deny an impecunious applicant a right to litigate.

107 I do not think that this proceeding has those features. The parties were formerly involved in a commercial relationship and were on something of an equal footing prior to Capital and Mr McKendrick departing the enterprise. Aside from the current value ascribed to Credit Clear by reference to its market value on the ASX, little is known of the resources of those connected with the defendants. While Mr McKendrick contends that he and his interests are without resources, as I have said, he appears to be currently apparently funding the plaintiffs' own legal costs. It is not the David and Goliath type of scenario the subject of consideration by Byrne J in Shackles v Broken Hill Proprietary Company Ltd[60] where his Honour declined to order security against indigenous plaintiffs in New Guinea who alleged that the defendants' mining activities injured their subsistence existence on the ground that it would impose great hardship on the plaintiffs who were already particularly vulnerable. Both sides in this proceeding are commercial people who have fallen in dispute. The plaintiffs would have it that they are the underdogs but I consider that they are on a somewhat similar plane in this context.

108 Another feature which Professor Dal Pont catalogues in assessing whether an order would be oppressive is whether or not the plaintiff will be prevented from proceeding if security for costs is ordered. This is very obviously similar, if not identical, ground to that the subject of consideration in assessing whether security would stultify a claim. Professor Dal Pont observes that in the case of a corporate plaintiff, evidence as to the financial resources of persons behind the company and who stand to benefit from the action if it is successful (such as directors or shareholders) is relevant. As my consideration of the other discretionary grounds reveal, I consider that Mr McKendrick is not entirely without resources[61] and is able to offer some security. I do not consider that this ground, of which Capital bears the onus of establishing, is made out.

109 I consider that the following emerges from the matters discussed above:

(a) First, I consider that the so-called threshold condition for the exercise of the power is satisfied and that there is reason to believe that Capital would be unable to pay the costs of the defendants if successful.

(b) Secondly, Capital's claim is bona fide, arguable and plausible and not fanciful or doomed to fail. I consider that this factor bears neutral weight in considering whether security should be awarded.

(c) Thirdly, as well as establishing that the threshold has been satisfied, I would accord considerable weight to Capital's financial circumstances in favour of an order for security.

(d) Fourthly, I do not accept Capital's contention that there has been delay in bringing the application for security that is not explicable nor has it been demonstrated by Capital that any delay has occasioned it prejudice. I would not accord any weight to this ground.

(e) Fifthly, I do not consider that Capital, which bears the onus for establishing that it is the defendants' conduct which has caused its present impecuniosity is made out and therefore no weight should be accorded to this ground against exercising the discretion.

(f) Sixthly, while Mr McKendrick appears on the face of it to make a relatively minor or ancillary claim for reinstatement as a director, I accept Mr Rubenstein's submission that Mr McKendrick and Capital's claims are inextricably bound up and enmeshed such that in the context of the authorities which have been discussed, his claims overlap Capital's claims. This has been said to be a feature which weighs against an order for security, albeit a relatively minor one.

(g) Seventhly, both parties contended that the presence of Mr McKendrick as a co-plaintiff to Capital was a feature weighing respectively for and against an order for security, I consider that having regard to all the circumstances in particular that Mr McKendrick is not entirely without resources to support Capital by a provision of security in some form yet refuses to do so, is a somewhat significant factor to be weighed in favour of ordering security. It is he alone who stands to benefit if his interests are successful in the proceeding yet he is not prepared to risk his personal resources to support Capital's provision of security. He apparently considers it appropriate to provide Capital with the "sinews of war",[62] but if the defendants are ultimately successful and obtain an order for costs the situation may well be that all of the plaintiffs' resources have been expended on their own costs in their unsuccessful case.

(h) I do not accept that by reason of Mr McKendrick's financial circumstances that he has established that an award of security would stultify the proceeding in the relevant sense or be oppressive.

110 In exercising the discretion whether or not to order security, the Court is required to conduct what has been described as a balancing exercise weighing the relevant considerations. Professor Dal Pont describes one way of approaching the issue is to "balance the hardship a successful defendant may suffer if there is no security for its costs against the hardship the plaintiff may suffer if ordered to give security".[63] Smithers J in Tradestock Pty Ltd v TNT (Management) Pty Ltd (No 1) described it in this way:

No doubt the answer is to be found by ascertaining where, on considerations of what is just and reasonable, the balance rests between the risk of exposing an innocent defendant to the expense of defending his position and the risk of unnecessarily shutting out from relief a plaintiff whose case if litigated would result in his obtaining that relief.[64]

111 In my view, an application of the principles to which I have referred results in a determination that an order for security should be made. In this regard I consider that the dominant features are the financial position of Capital and that Mr McKendrick, who has not been prepared to support Capital by offering up some form of security but who is the sole person standing to gain by the success of the proceeding, is not entirely without resources. Balanced against that are factors which weigh only neutrally on the question or, if positively against the exercise of the discretion, of a markedly less degree than those features favouring the award of security.

112 I note that Mr Rubenstein indicated in closing his submissions that he wished to reserve his position to make further submissions as to quantum. I will hear the parties as to how the issue of quantum should be finally determined on the occasion of the delivery of these reasons.

113 It may well be that the best course is for the parties to each file a short written submission not exceeding four pages on the question of quantum. I note that there is already affidavit evidence directed to this issue.

ACN 604 594 621 (ACN 604 594 621) (FORMERLY KNOWN AS C CAPITAL PTY LTD)

CREDIT CLEAR LIMITED (FORMERLY CREDIT CLEAR PTY LTD) (ACN 604 797 033)

CASEY CONSULTING SERVICES PTY LTD (ACN 070 047 997) AS TRUSTEE FOR THE CASEY CONSULTING SERVICES TRUST

ROMANO FAMILY HOLDINGS PTY LTD (ACN 169 299 174) AS TRUSTEE FOR THE LEWIS ROMANO FAMILY TRUST

[1] On 3 February 2021, the solicitors for the defendants wrote to the plaintiffs making an open offer to accept security for their costs up to and including the first day of trial of $195,174.65. That offer expired at 4pm on 9 February 2021.

[2] It is to be noted that in the Intellectual Property Assignment Agreement and accompanying deed, which are described further below, Mr McKendrick himself is described as the assignor, not Credit Clear.

[3] Second McKendrick affidavit, [5] and Third McKendrick affidavit, [4].

[4] In the plaintiffs' evidence, Mr Gallin's name is also spelt as Galen. See First McKendrick Affidavit, [9] and Second McKendrick Affidavit, [15].

[5] Second McKendrick affidavit, [15] and Third McKendrick affidavit, [5].

[6] Exhibit TMM-7 to the Third McKendrick affidavit.

[7] Mr Luburic does not specify a year in his email. See Exhibit TMM-8 to the Third McKendrick affidavit.

[8] Exhibit SNA-1 to the First Anderton affidavit, 215-241.

[10] This would appear to be incorrect as Mr McKendrick has never held the shares in his own name.

[11] Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, 532 ('Harpur').

[12] G E Dal Pont, Law of Costs (LexisNexis Butterworths, 4th ed, 2018) [29.2] citing Orr v Lusute (1987) 72 ALR 617, 620.

[13] [2013] VSC 311 ('Colmax').

[15] [2011] VSC 572.

[16] Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd [1999] VSCA 43; [1999] 2 VR 191, 195.

[17] [1996] 2 VR 507, 513 ('Ariss').

[18] (1991) 5 ACSR 621, 624 ('Interwest').

[19] Interwest (n 18) 624.

[20] Andrews v Zuccubarr [2020] VSC 675, [70].

[21] Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19, [36(e)].

[22] Dal Pont (n 12) 29.82-29.85.

[23] Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621, 624 ('Interwest').

[24] See Second McKendrick Affidavit, [5] where Mr McKendrick deposes that Capital has no assets other than the legal claims in this proceeding. Further, Mr Rubenstein accepted at the hearing on 17 February 2021 that there are no assets in the trust; see Transcript of hearing, 17 February 2021, 47:8 ('Transcript').

[25] Transcript, 47. See also Defendants' outline of submissions filed 3 February 2021, [12]; First Anderton Affidavit, [25]-[32]; Second McKendrick Affidavit, [5] and [9].

[26] Coonwarra Pty Ltd v Cornonero Pty Ltd (No 2) [2019] VSC 702, [52(b)].

[27] Haskins Contractors Pty Ltd (in liq) v Sydney Airport Corporation Ltd [2002] NSWSC 267, [52].

[28] Second McKendrick Affidavit, [8].

[29] [2014] VSC 414 ('Opes Prime').

[31] Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, 531-532.

[32] [1973] 1 All ER 707 ('John Bishop').

[34] Opes Prime (n 29) [33] and [35].

[35] By reference to the statement of claim.

[36] First Anderton Affidavit, 87, clause 57.3.

[37] First Anderton Affidavit, 86, clause 57.1(a).

[38] It is also accepted by the plaintiffs that on exchange of the agreements, Mr McKendrick received an envelope with $30,000 in cash. See First McKendrick Affidavit, [23].

[41] [2016] VSC 84 ('Muranna Park').

[45] Interwest (n 18) 625. See also Raventhorpe Pty Ltd v Westpac Banking Corporation [2017] VSC 362, [50].

[48] Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584, [46,729] and [46,731] ('Laundry Coin-Wash').

[49] Ariss (n 17) 508.

[50] See Dal Pont (n 12) [29.20].

[51] Bruce Pie & Sons Pty Ltd v R H Mainwaring, English and Peldan [1985] 1 Qd R 401, 404-405 ('Bruce Pie & Sons').

[52] Dal Pont (n 12) [29.21].

[53] Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377, 383.

[54] Bell Wholesale Co Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 2 FCR 1, 4.

[55] Citing Western Export Services Inc v Jireh International [2008] NSWSC 601, [61].

[56] Dal Pont (n 12) [29.90]-[29.99].

[57] Dal Pont (n 12) [29.90] citing Porzelack v Porzelack (UK) Ltd [1987] 1 WLR 420, 426.

[59] Dal Pont (n 12) [29.92] citing Equity Access Limited v Westpac Banking Corporation [1989] FCA 361; (1989) ATPR 40-972, 50,637.

[60] [1996] VicRp 76; [1996] 2 VR 427, 437-3.

[62] See paragraph 93 above.

[63] Dal Pont (n 12) [29.9] and the authorities cited at footnote 45.

[64] Tradestock Pty Ltd v TNT (Management) Pty Ltd (No 1) [1977] FCA 1; (1977) 30 FLR 343, 348.