First Plaintiff v Third Plaintiff

Supreme Court of Victoria|2013-10-31|Before: Derham AsJ

PRACTICE AND PROCEDURE - SECURITY FOR COSTS - plaintiffs are impecunious foreign corporations in provisional liquidation - whether security would stultify prosecution of plaintiffs' claim - practical and commercial difficulties in providing any security by plaintiffs - whether reasonable to expect shareholders or creditors to make funds available - burden of proof - appropriate amount of security to be ordered - Security for costs ordered - Supreme Court (General Civil Procedure) Rules 2005 rr 62.02(1) - Corporations Act 2001 (Cth) s 1335(1).

In support of the application, the defendant filed the affidavit of her solicitor, Brett Saunders, sworn 22 August 2013 (the Saunders affidavit) and affidavits by her and her husband, Philip Edwin Need (Mr Need), each sworn 2 October 2013. In response, the plaintiffs have filed the affidavits of Damian John Templeton sworn 17 September 2013 (the Templeton affidavit) and Darren Michael Lewis affirmed 27 September 2013 (the Lewis affidavit),[1] and Margarita Larraga Bielsa sworn 8 October 2013.
Mr Brett Saunders is a solicitor practicing in New South Wales. He entered an appearance on behalf of the defendant giving an address for service in Victoria at the defendant's address at 3 Mulhalls Road, Macclesfield, Victoria 3782. That is also the address of Mr Need.
The application was before the Court on 18 September 2013 when it was part heard. It was adjourned on the application of the plaintiffs to enable further affidavits to be filed on their behalf as to their inability to raise funds from their creditors, or from litigation funders, to fund any order for security for costs. This, as will be made clear, is critical to the ability of the plaintiffs to resist an order for security.
Before that adjournment, the substance of the defendant's defence was given on information and belief in the Saunders Affidavit. When the matter was adjourned on 18 September 2013, the defendant was given the opportunity to file further affidavit material, which she did, so as to deflect criticism made by the plaintiffs that the defence to the claim was shadowy and not strong. That defence is to a claim under a guarantee and mortgage and is based upon unconscionability in accordance with the principles expounded in such cases as Yerkey v Jones[2] and Garcia v National Australia Bank Ltd (Garcia).[3]

The plaintiffs are companies incorporated in Arizona in the United States of America,[4] and are currently the subject of an investigation by the Australian Securities & Investments Commission (ASIC).[5] The Federal Court of Australia made orders on 14 November 2012, on the application of ASIC, appointing Damian John Templeton and Darren Michael Lewis of KPMG as joint and several provisional liquidators of the plaintiffs pursuant to s 472(2) of the Corporations Act 2001.[6]
The plaintiffs were part of a group of companies incorporated both in and outside Australia, which were involved in a scheme whereby funds were raised from self-managed superannuation funds (SMSF) in Australia on the basis that they would be invested in the distressed property market in Arizona, United States of America. The plaintiffs raised $3,165,000 from SMSFs and small investors in Australia on this basis. It is these investors who are the creditors of the plaintiffs.
About $460,000 of the funds raised were invested in property in Arizona. Of the balance, about $1,411,779 was advanced as a loan to MOGS Pty Ltd (MOGS) pursuant to a Loan Agreement dated 19 October 2011, as varied by a deed of variation made in November 2011.[7] It is in respect of that Loan that the defendant has given a guarantee and, as security, a mortgage over her home situate at 3 Mulhalls Road, Macclesfield, Victoria (the Property).[8] MOGS is also currently the subject of investigation by ASIC.[9] In return for the provision of the guarantee and mortgage security, Mr Need and the defendant were to receive a 10% shareholding in MOGS,[10] although Mr Need swears that he subsequently never received any such shares.[11]
This proceeding was commenced by writ and statement of claim filed on 11 June 2013. The plaintiffs seek to enforce the guarantee and mortgage. The plaintiffs seek judgment against the defendant for the sum of $1,745,575.00, plus interest, and an order for possession of the Property.
On 17 July 2013, the defendant filed a notice of defence containing bare denials and non-admissions. Paragraph 19 of the defence, however, states:

Further, she reserves her right to amend her defence to allege that the Guarantee and Mortgage are void and unenforceable by reason of unconscionable conduct and undue influence. Such amendments will be made pursuant to Order 36 following resolution of any dispute as to security for the costs of the defendant.

In correspondence preceding the issue of the application for security,[12] the defendant's solicitor put the relevant background to, and basis for, the making of an order for security. In so doing, he stated:
- (a) The property the subject of the claim for possession is the defendant's home. The guarantee and mortgage secures the indebtedness of companies in which the defendant has no interest, and that the defendant did not gain from the transactions "in any way";
- (b) following resolution of the issue of security for costs, the defence would be amended to plead, amongst other things, that the guarantee and mortgage should be set aside in accordance with the principles identified in Garcia;
- (c) the plaintiffs in this proceeding are named together with MOGS and a Mr Graeme Stonehouse as defendants in Australian Securities and Investments Commission v Activesuper Pty Ltd,[13] and exhibited the statement of claim in that proceeding,[14] which reveals that it is alleged that the moneys loaned by the plaintiffs to MOGS, and secured by the guarantee and mortgage given by the defendant, was sourced predominantly from SMSFs and other small investors attracted by representations that they would be issued shares in the plaintiffs, and that those moneys were in fact used for making payments for the benefit of officers or agents of MOGS, including a company called "Need Properties".
In the Lewis affidavit it is disclosed that Need Properties Pty Ltd (Need Properties) was incorporated on 16 August 2011 and its directors and shareholders since incorporation are the defendant and her husband Mr Need,[15] and that based on information from ASIC, between October 2011 and June 2012 MOGS paid approximately $180,000 to Need Properties.[16]
Mr Need's affidavit discloses that in September 2011, Mr Need had a meeting with his business acquaintances, Mr Stonehouse and Mr Gore, about Mr Need working as a consultant to MOGS.[17] In consequence, on 20 September 2011, Need Properties entered into a consultancy agreement with MOGS.[18] That agreement is apparently executed by Need Properties by both its directors, the defendant and Mr Need. Under that agreement the services provided are vaguely defined and a base consultancy fee of $10,000 per month was payable by MOGS to Need Properties, and bonus fee of $100 per property found by Need Properties and sold to a third party.
The defendant's affidavit reveals that in approximately July 2012 the money that Mr Need had been receiving for 'finding properties' stopped.[19]
The Templeton and Lewis Affidavits further disclose that:
- (a) The provisional liquidators of the plaintiffs are not aware of any documents or other information supporting the claims made in the Saunders Affidavit in relation to the purported defence of the defendant;[20]
- (b) The plaintiffs have no funds to pay the costs and expenses of the provisional liquidators, and Mr Templeton and Mr Lewis are acting on a speculative basis;[21]
- (c) The only known creditors of the plaintiffs are small investors who are either individuals or SMSFs. None of the investors are corporate or institutional investors. There are 195 of them and the total of their investments is $3,165,000. The average investment is $16,231. The largest investor is owed $60,000 and the smallest $3000;[22]
- (d) Based on correspondence that Mr Lewis has had with certain of the investors, the amounts they stand to lose are significant amounts to them. It is unlikely that the investors will receive any funds in the winding up of the plaintiffs otherwise from this proceeding;[23]
- (e) On 17 June 2013 a letter was sent by the provisional liquidators to all investors advising them of a meeting to be held on 3 July and enclosing a Report. The Report included information about the loan by the plaintiffs to MOGS, that the loan was secured by a guarantee and mortgage, that the provisional liquidators were currently in the process of enforcing the guarantee and mortgage, that ASIC had provided limited funding to enable the commencement of recognition proceedings in Arizona and other creditors were invited to provide funding if they chose to do so and the ability to pay a dividend was dependant on the outcome of this proceeding;[24]
- (f) By email dated 30 August 2013 (that is after the filing of the summons for security), the provisional liquidators, after referring to the Report referred to above, requested each creditor (each investor) to express interest in providing funding of legal costs for this proceeding. The email said:[25]

If you would like to contribute to the funding please fill out the form attached and return to this office by Thursday 5 September 2013. At this stage it would appear that without external funding the Provisional Liquidators may not be able to continue with the recovery action in relation to this matter. Please note that in the event of a successful litigation those creditors who provide funding may have a priority claim against the Companies.

(g) Three investors expressed interest and the total of their offered funds was $7,150.00 only.[26] One of the offers was of the sum of $5000 or 25% of the investor's investment recovered, meaning 25% of the funds recouped by him personally.[27] The total of that investment was $30,000;[28]

(h) The provisional liquidators have approached two litigation funders and they are not willing to fund the proceeding.[29] Mr Lewis expressed the opinion, without objection, that, based on his experience with commercial litigation funders, there is a limited market for funding for smaller value claims, such as the claim in this proceeding, and litigation funders operate under similar guidelines in respect of the information required for them to assess whether they will agree to provide funding. After approaching two funders and being rejected (one on the basis of the amount in issue being too small and another on the basis of the claim not being within the funders' guidelines) he formed the view that it was unlikely that any others would provide funding;[30]

(i) ASIC have informed the liquidators that it is unable to assist in these proceedings by way of litigation funding, save for agreeing to fund the legal costs incurred in bringing proceedings in Arizona, USA to have the provisional liquidators' appointment over the Companies recognised in the USA (the Recognition Proceedings);[31] and

(j) In the event that security is granted, the plaintiffs will not be in a position to take any further steps in the proceeding.[32] Further Mr Lewis swears, after giving a lengthy account of the efforts made to obtain funding from the investors, external litigation funders and ASIC, that he and Mr Templeton are of the view that they have exhausted the options available to them to source external funding.[33]

There is no dispute between the parties as to the principles applicable to an application for security for costs brought against a corporate plaintiff under r 62.02 of the Supreme Court (General Civil Procedures) Rules 2005 and s 1335 of Corporations Act 2001 (Cth).
There is also no dispute that the jurisdiction to make an order is enlivened, as it appears by credible testimony that there is reason to believe that the plaintiffs will be unable to pay the costs of the defendant if she is successful in her defence of the proceeding: s 1335 of Corporations Act.[34]
In light of the background to the proceeding and the matters raised by the affidavit material, the following principles are relevant to this application.

The discretion to order or not to order security is unfettered, although like any discretion it must be exercised judicially. There is no general predisposition in favour of making an order for security once the jurisdictional threshold is passed. But impecuniosity is itself a significant discretionary factor and often a most significant factor: Ariss v Express Interiors Pty Ltd (in Liq) (Ariss).[35]
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.[36]
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: Keary Developments Ltd v Tarmac Construction Ltd.[37]

The burden rests on the defendant, from first to last, to persuade the Court that the order for security for costs should be made: Livingspring Pty Ltd v Kliger Partners (Livingspring).[38] There are, however, particular discretionary matters in respect of which the plaintiff must necessarily have the carriage. Thus if the plaintiffs, as in this case, assert that an order for security would impose on it such a financial burden as to stultify or frustrate the litigation, the plaintiffs must establish the facts which make good that assertion.[39]
The plaintiffs accept that it is incumbent on them to establish the facts to make good the assertion that an order for security imposes such a financial burden so as to stultify the litigation.

As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, the Court should proceed on the basis that the claim is bona fide with reasonable prospects of success in the absence of evidence to the contrary;[40]
Assessing the plaintiffs' prospects of success is not really a practicable test in any case of reasonable complexity: Interwest Ltd v Tricontinental Corp Ltd.[41] 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: Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd.[42]
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: Impex Pty Ltd v Crowner Products Ltd; [43] Ariss v Express Interiors Pty Ltd (in liq).[44]

There is a well-recognised factor (sometimes called a principle), which may affect the exercise of the Court's discretion, that the Court will not make an order for the provision of security if the order would operate to frustrate or stultify the plaintiff's arguable case legitimately instituted: MA Productions Pty Ltd v Austarama Television Pty Ltd;[45] Drumdurno Pty Ltd v Braham;[46] Ariss v Express Interiors Pty Ltd (in liq);[47] Excelsior Run Pty Ltd (in liq) v Nelius Pty Ltd;[48] Fiduciary Ltd v Morningstar Research Pty Ltd.[49] The making of an order in these circumstances may work an injustice, 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)[50].
The "stultification principle", being a factor relevant to the exercise of the discretion, does not automatically lead to refusal of the application for security.[51] 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 Co of North America.[52]
In Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2)[53] the Full Federal Court said:

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.

In the Bell Wholesale case, the question was about the impecuniosity of those who would benefit.
In Ariss, a case of a company in liquidation suing former directors for insolvent trading and other breaches of the then Corporations Law, the plaintiff resisted an order for security on the stultification ground and advanced a 'commercial impracticability' argument based on the opinion of the Liquidator expressed in the following terms:

In the event that security for costs is ordered against the plaintiff herein, it is most unlikely that the plaintiff would be able to provide that security. Now produced and shown to me and marked MWM-7 is a list of the creditors of the plaintiff. Of the many creditors, there is none which is owed more than $75,000. Hence, there is no creditor with a sufficient amount to gain such that it would be prepared to fund this proceeding, including providing security for costs of the defendants. The prospects of securing agreement across such a large number and spread of creditors to enable contribution to be made by them on a rateable basis is, in my experience as a liquidator, remote.

Phillips JA delivered the decision of the Court of Appeal in that case, Ormiston and Charles JJA agreeing with him. For present purposes it is what his Honour said about commercial impracticability that is relevant:[54]

It is true that commercial impracticability is not the same as plain want of means; and it is true also that in Bell Wholesale a Full Court of the Federal Court held that, if in that case the plaintiff company sought to resist the order for security for costs on the ground that to make the order would frustrate the litigation, then it was up to the plaintiff, itself impecunious ex hypothesi, to establish "that those who stand behind the action and who will benefit from the litigation if it is successful ... are also without means". To my mind, there is much force in the contention, advanced before us, that what was said in Bell Wholesale has perhaps been extended beyond its context in later cases....

There can be no absolute rule that, in order to resist an order for security on the ground that the litigation will be altogether frustrated, there must be evidence that those who will benefit from the litigation are without means; it will depend upon how the case is being put.

Obviously, such evidence will be needed in some cases - and Bell Wholesale was an example of that, as also was Rhema Ventures. But they were only specific applications of a wider principle, which, as I apprehend it, is that if a plaintiff company seeks to resist an order for security on the ground of stultification, then it must establish the necessary factual basis before the argument can be weighed in the exercise of discretion....

The argument of stultification means no more than that if an order for security is made the order cannot be met, with the result that the litigation will be brought to a premature end. Bell Wholesale decided only that, if the plaintiff relies upon a want of means to establish that the order cannot be met, the plaintiff must demonstrate that fact by reference, not to its resources (which ex hypothesi must be inadequate if the discretion is called into play), but by reference to the resources of those who will benefit from the litigation and who might reasonably be expected to meet some of the costs: see also Impex at 446 per Macrossan CJ. In this case, however, the plaintiff does not rely upon want of means but upon "commercial impracticability", meaning thereby the practical difficulty facing the plaintiff in gaining any advantage from (by applying to the costs of the litigation) such means as may exist in others, and notably its creditors. I see no reason why, as a matter of principle, that should not be a relevant circumstance when the plaintiff seeks to demonstrate that any order for security cannot be met - even though it be different from the circumstance that those who must meet any order for security are themselves without means.

Thus, in Ariss it was held that want of means was not the only basis on which it might be contended that the litigation would be stultified; and the "commercial impracticability" of obtaining funding, could be weighed in the overall discretion. However, it is for the plaintiffs contending this to make it out. Notably, in Ariss, the plaintiff failed on the facts.
Jeffcott Holdings Ltd v Paior [55] is another case of a company in liquidation suing its former directors. The liquidator's affidavit was to the effect that the majority of the creditors had small claims and that there was no prospect of receiving any substantial funding for the action from them, or from any shareholder. The Master at first instance, and the judge on appeal from him (Debelle J) both proceeded on the basis that it had been shown that there were no shareholders or creditors who could reasonably be expected to satisfy an order for security for costs, and that accordingly it was a case in which the making of an order would frustrate the claim by the plaintiff company.
Doyle CJ (with whom Prior and Niland JJ agreed) pointed out that the reasoning in the Bell Wholesale case (that it was necessary to establish that those standing behind the company lack the means to meet an order) was no more than an instance of a wider proposition, that the making of an order will stultify the claim by the plaintiff. They pointed to the decision of the Court of Appeal in Ariss as authority for the proposition 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 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. Where the plaintiffs are in liquidation, as is the effective position here, and it is in the interests of its creditors for the plaintiffs to succeed, a relevant question is whether, it would not be reasonable, in "practical commonsense terms" to expect a financially capable creditor of the company to give security if the debt he is owed is small: BPM Pty Ltd v HPM Pty Ltd.[56]

The plaintiffs submitted that:
- (a) The Templeton and Lewis affidavits established that the provisional liquidators are without funding and if an order for security for costs is made the plaintiffs will be unable to continue the proceedings;
- (b) The provisional liquidators have sought funds from the creditors of the companies and only a small amount has been volunteered. The funding by commercial litigation funders has also been explored, with various correspondence and meetings having taken place, without success;[57]
- (c) The practical and commercial difficulties that the provisional liquidators have in providing any security ordered have been demonstrated by Messrs Templeton and Lewis; and
- (d) the Court should be satisfied that the impecuniosity of the plaintiffs means that they should not be required to provide security for the costs of the proceeding: cf Ariss;[58] Kavcor Pty Ltd (in liq) v Kavanagh.[59]
The plaintiffs submitted that it is important to recognise that the proceeding has been commenced by the provisional liquidators in the hope of securing a return for the creditors of the plaintiffs. As explained by Justice Dodds-Streeton when appointing the provisional liquidators, the creditors of the plaintiffs are those persons who had been induced by conduct in apparent contravention of the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) to invest their "relatively small amounts of superannuation".[60] If security is granted, it is unlikely that these investors will receive any return in the winding up of the plaintiffs.[61]
On the basis of the concerns as raised by ASIC, the Federal Court was prepared to make asset preservation orders and then appoint provisional liquidators to the plaintiffs. The appointment of a provisional liquidator must be based on strong and clear evidence that demonstrates a need for the appointment in the public interest.[62] A court appointed liquidator then has a public duty to investigate and wind-up the affairs of a company and the Court, too, has a duty to assist them: Re Noitaroproc Pty Ltd (in liq) [1999] VSC 507, Byrne J at [17]. Further, it cannot be said in the current circumstances that it is reasonable to expect the creditors of the plaintiff (being those investors who have lost their investment) to make funds available to satisfy an order for security.[63]

The defendant submitted that:
- (a) The facts that enliven the jurisdiction also demonstrate that, absent an order for security, the defendant will be unable to recover the costs of a successful trial;
- (b) The defendant has a good defence. The facts deposed to in the defendant's affidavit would, if proved at trial, provide a defence to the plaintiffs' claim: Garcia v National Australia Bank Ltd [1998] HCA 48; (1998) 194 CLR 395 at [31]; Yerkey v Jones [1939] HCA 3; (1939) 63 CLR 649; and see Tyler, Young and Croft, Law of Mortgage 2nd Aust Ed at [13.23];
- (c) There is no satisfactory evidence before the Court contradicting the facts that make out the defendant's case. Mr Templeton's evidence[64] that he is "unaware" of material "supporting" the claims made by the defendant does not assist the plaintiffs. As things stand, the largely unchallenged evidence of the defendant demonstrates a good defence to the plaintiffs' claim;
- (d) The plaintiffs' evidence is inadequate to resist an order for security: there is little evidence about who is to benefit from this litigation. It is asserted that investors in the "scheme" are creditors of the plaintiffs,[65] but this is not explained. The decision in ASIC v ActiveSuper Pty Ltd (ACN 125 423 574) & Ors (No 1) (2012) 92 ACSR 614 sets out at paragraphs [5] to [23] a complicated corporate scheme. The relationship between that scheme and the claims of "investors" is not explained in the evidence;
- (e) There is no evidence about the ability of creditors to fund the litigation; and
- (f) The amount sought to be secured is $129,964. The basis for it is explained in the Saunders' affidavit at [6] to [13]. That amount is unchallenged in the evidence.

The importance of the balancing exercise, to which I have already referred (above at paragraph 22), is of prime significance in this case, as it was in the appeal considered by the Full Court of the Federal Court in Madgw[66]k v Kelly.66
It is clear that the plaintiffs will be unable to pay the defendant's costs if she is successful in her defence of the claim.
The apparent prospects of success are relevant to the discretion to the extent they are discernible. Often in security for costs applications the Court cannot make a rational prediction about merits and proceeds on an assumption that the case is brought in good faith and defences raised in good faith**.**
Even though the authorities speak of the strength of the plaintiffs' claim as being the focus of any analysis of the merit of the proceeding, it is obvious that in this case the success or failure of the plaintiffs' proceeding depends (so far as can presently be seen) on the success of the defence based on the principles in Garcia.
It is not possible to assess the strength of that claim on the materials available, and it is not appropriate to do so. Counsel for the plaintiffs acknowledged that position in argument, whilst at the same time pointed to the fact that the defendant may not be appropriately characterised as a volunteer, a matter relevant to the availability of relief on the Garcia basis.
In this regard, reference was made to the evidence to which I have referred at paragraphs 15 to 16 above and the likelihood that at least indirectly the defendant gained some benefit from the relationship between MOGS and the company Need Properties. But whether that is so or not turns on a much fuller account of the facts surrounding the relationship between MOGS and Need Properties and between the defendant and her husband. It is not appropriate at this stage to say anything about the prospects of the defence succeeding, other than that the facts may give rise to a defence.
In this instance it is relevant, when considering whether the action might be stultified by an order for security, to look at the practical and commercial difficulties in providing any security ordered.
The level of information provided in the Templeton affidavit (at the first return of the application) and the further information provided in the Lewis affidavit, shows, in my view, that reasonable efforts have been made to obtain external litigation funding and that it is fair to say that it is most unlikely to be available from any commercial litigation funder. I am satisfied by that material that it is impossible in a practical and commercial sense for the provisional liquidators to raise funds to prosecute the proceeding in this way.
The evidence as to the unavailability of any funding for this proceeding from ASIC is both unchallenged and convincing. The funding provided were limited to the Recognition Proceedings in Arizona, USA.
The question then is whether, it would be reasonable, in "practical commonsense terms" to expect the investors to "subscribe" funds for the purpose of enabling the plaintiffs to meet an order for security in the current circumstances, and particularly where the debts owed are small. It is clear, as I have said, that the task of satisfying the Court as to that matter rests on the plaintiffs resisting the application.
There is considerable evidence of the lack of the availability of funds from the investors, in the sense of common sense commercial practicability. The evidence of number of investors, the amount of their claims, and the response to the email requesting funds could be said to establish that it is not reasonable to expect those investors to contribute to the costs.
But the weakness here is that the provisional liquidators have not put the position of the plaintiffs forcefully and clearly enough to the investors to demonstrate commercial impracticability sufficiently strongly. The email referred to above at paragraph 17(f) is expressed as a polite request to contribute to the funding "if you would like". Of course, the provisional liquidators cannot demand that the investors contribute. But the matter can be put in a way that makes it clear that there will be no recovery in the proceeding unless they do contribute.
In this regard, the email does not say that the litigation cannot go ahead if the investors do not contribute, in contradistinction to the position advanced by the provisional liquidators in their affidavits filed in answer to this application. The matter is put to the investors in the email as "at this stage it would appear that without external funding the Provisional Liquidators may not be able to continue with the recovery action" (emphasis added). At that stage the enquiries of external litigation funders were incomplete, indeed they had only commenced on the day the email to the investors was sent.
In order to properly advance the commercial impracticability it would have been necessary for the investors to be told that without their contributions to the costs, the proceeding cannot go ahead and there will be no recovery for the investors in the liquidation, which is the position the provisional liquidators adopt in their affidavits in this application.
Given that the polite request and inconclusive position put to the investors in the email did generate three willing contributors, it seems likely that by putting the position more forcefully the likelihood is that more will be forthcoming. In short, this is a case (unlike, for example, Jeffcott Holdings referred to above at paragraphs 36 and 37) where it is fair to say that there is a practical means of drawing upon the resources of the investors and that practical means has not been adequately pursued.
There is another important element in the assessment of this evidence and whether it establishes "commercial impracticability", or a reasonable expectation that the investors are either unwilling (in the sense of throwing good money after bad having regard to the size of their investments) or unable (as not having sufficient funds). That is the realistic quantum of any security ordered.
Once it is appreciated that the appropriate amount of security to be ordered is $46,500 rather than $129,964.00, as I determine below, the evidence of the willingness and ability of the investors to contribute seems to me to be insufficient to demonstrate the "commercial impracticability" of continuing the proceeding if security in that sum were ordered to be paid. As I have said, the investors, who stand to benefit greatly from a successful claim, may well be willing to contribute if the matter is put to them with sufficient force and with the inevitability of the proceeding being halted in its tracks without that funding.
The plaintiffs also pointed to the context in which the provisional liquidators were appointed to advance the proposition that this is a case where the public interest is at stake and this element should weigh against the making of an order for security against the plaintiffs. Although it is true that there was a public interest in the appointment of the provisional liquidators, this proceeding is not a part of an investigation into any wrong doing by those involved in the plaintiffs or MOGS. It is a debt recovery action for the benefit of the creditors of the companies. There is no more public interest in this proceeding than any other claim by a liquidator to recover debts due to the company to which he is appointed.
In these circumstances, the last matter to be put in the balance is whether it is fair that the defendant, being sued by the companies without means, should be in the position of having to incur substantial costs, in this case tens of thousands of dollars of costs, and being at risk of liability for the plaintiffs' costs, and yet have no real chance of recovering costs even if the plaintiffs' proceeding is unsuccessful, when there are persons who would benefit from the proceedings, who face no risk of liability for costs themselves, and are either unwilling or unable to provide security.[67]
In light of the moneys offered by those investors who responded to the call, the way the request was couched, the way events have moved on since that request was made (so that there is no other source of funding save for the investors), and the amount of the security appropriate on my estimation, it seems to me that the balance of the factors applicable here favours the making of an order for security for the defendant's costs.

The defendant seeks security in the (unchallenged) sum of $129,964.00. That calculation provides details of the costs incurred as well as the costs anticipated to be incurred down to the completion of the trial. The calculation also proceeds on the footing that all sums are reasonable in amount and were reasonably incurred so as to give rise to recovery on the Standard basis.
The Court's modern practice, however, is to make orders for security only for the costs up to and including mediation. In modern litigation, the parties are to be encouraged to undertake alternative dispute resolution at some time after the close of pleadings or completion of discovery. The prospects of settlement are better achieved if a plaintiff is not labouring under the financial burden, or tactical disadvantage, of a substantial security for costs order calculated as if the trial was going to run.[68]
Adopting the (unchallenged) estimates provided by Mr Saunders, the solicitor for the defendant, the sum for the costs up to and including mediation is approximately $91,000, calculated as follows:
- (a) $11,522.00 of solicitor's costs incurred up to the time of the swearing of the Saunders affidavit (32 hours). This seems excessive given that the proceeding commenced in June 2013 and this application was brought two months later, on 22 August 2013. Only one affidavit and a bare defence was filed by the defendant up to the time of the swearing. This ought to be reduced by 25% - $8,641.50;
- (b) $7,000 for solicitor's costs of issuing subpoenas and discovery (est. 20 hours). The estimate seems excessive for what appears to be a straight-forward matter that would not require 20 hours work on discovery. It is also not made clear as to what subpoenas will be required. This ought to be reduced by 25% - $5,250;
- (c) $14,000 for solicitor's costs of preparing witness statements/proofs of evidence (est. 40 hours). 40 hours is excessive given that this item more appositely relates to trial rather than mediation and much of the material facts have already been exhibited to the affidavits of "key witnesses". This ought to be reduced by 50% - $7,000;
- (d) $3,500 for solicitor reviewing the plaintiffs' statements/summaries. This seems reasonable, however, this item appears to be taking two bites of the cherry when compared to paragraph (a) above. This ought to be discounted completely;
- (e) $7,000 for solicitor's general preparation and attendances in relation to interlocutory matters including this application for security for costs (20 hours). This item appears to overlap with paragraph (a) above, and ought to be reduced by 25% - $5,250;
- (f) $5,000 for the solicitor's costs of mediation (est. 2 days). After all the necessary interlocutory steps have taken place (and it is arguable that close to all of the relevant material has been filed), mediation is unlikely to take longer than 1 day. This ought to be reduced by 50% - $2,500;
- (g) $2,840 for Counsel's costs incurred up to the time of the swearing of the Saunders affidavit. This appears to be reasonable;
- (h) $5,700 for Counsel's costs of drawing an amended defence (est. 1.5 days). There has already been considerable affidavit material that refers to matters that could appropriately be uplifted into the foreshadowed amended defence. This ought to be reduced to 1 day - $3,800;
- (i) $1,900 for Counsel's costs of attending a conference with the defendant (est. half day). This appears to be reasonable;
- (j) $1,900 for Counsel's costs of attending a conference with "other witnesses". This appears to be reasonable;
- (k) $3,800 for Counsel's costs of settling proofs and witness statements (est. 1 day). I refer to similar criticisms as in paragraph (c) above. This appears to be reasonable
- (l) $7,600 for Counsel's costs of appearing in this security for costs application (est. 2 days). This is reasonable;
- (m) $3,800 for Counsel's costs of attending 2 half-day directions hearings. This seems reasonable;
- (n) $7,600 for Counsel's costs of general preparation and attendances in relation to interlocutory matters. This appears to overlap with paragraph (m) above. Therefore this ought to be discounted by 50% - $3,800; and
- (o) $7,600 for Counsel's costs of mediation (est. 2 days). This ought to be for 1 day only - $3,800.
As a result of the above revision of the defendant's incurred and anticipated costs, the sum for the costs up to and including mediation is more likely to be approximately $61,881.50. That should be subject to an overall discount of 25%, giving a figure for security of $46,411.12, say $46,500.
The evidence to which I have referred establishes that there are approximately 195 investors who, in total, invested $3,165,000 in the plaintiff companies, with an average investment of $16,231 per investor.[69] I have inspected Confidential Exhibit DML-2 to the Lewis Affidavit, being a spreadsheet produced by the provisional liquidators which lists each of the investors and the amount invested. The amounts invested range, as I have said, from $3,000 to $60,000**.**
The estimated sum of security to be provided ($46,500) is approximately 1.5% of the total invested funds raised by the investors ($3,165,000). Given the average investment was $16,231, 1.5% of the average yields $243.47 per investor as the sum required to meet any order for security for costs. Of course it is unlikely that the plaintiffs will be able to raise a contribution from every investor. But even if only 50 are willing and able to make contribution, the amount per investor would be $930.
As discussed in paragraph 17 above, the plaintiffs have already shown that three investors are willing to contribute a sum of $7,150 to meet any such order.

For the above reasons, the security for costs will be ordered in the sum of $46,500. Having regard to the need of the liquidators to raise these funds, I will allow a suitable period for the security to be provided. This is a case where, subject to any contrary persuasive argument, the costs should follow the event. They will, however, not be payable until the conclusion of the matter in accordance with Rule 63.20.01.

[1] The latter affidavit was undated and by affidavit sworn on 8 October 2013, Sarah Jade Kimpton deposed that it had been affirmed on 27 September 2013.

[4] Paragraph 2 of and exhibit DJT-1 to the Templeton Affidavit.

[5] Templeton affidavit at [5]; see generally Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No. 1) (2012) 92 ACSR 614..

[6] Paragraph 2 of the Templeton Affidavit.

[8] The land more particularly described in Certificate of Title Volume 9061 Folio 537. The guarantee in evidence as an exhibit to the affidavit of the defendant is dated 19 October 2011, whilst the mortgage is undated.

[9] See generally Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No. 2) [2013] FCA 234.

[10] Mr Need's affidavit at [25], [30], [37].

[12] Annexure A to the Saunders affidavit.

[13] (2012) 92 ACSR 614; ]2012] FCA 234, Gordon J.

[14] Annexure E to the Saunders affidavit.

[15] Exhibit DML-1 to the Lewis affidavit.

[17] Affidavit of Philip Edwin Need sworn 2 October 2013 [23].

[18] Exhibit PEN-1 to Mr Need's affidavit.

[19] Defendant's affidavit paragraph 54.

[22] Lewis affidavit at [11] - [12] and confidential exhibit DML-2.

[25] Templeton affidavit at [20] and Exhibit DJT-9.

[26] Templeton affidavit at [21] and exhibit DJT-10.

[27] Affidavit of Margarita Larraga Bielsa affirmed 8 October 2013, referring to paragraphs 18-22 of the Lewis Affidavit and confidential exhibits DML-5 and DML-6.

[28] Lewis affidavit at [18] and confidential exhibit DML-4.

[29] Templeton affidavit at [22]-[23]; Lewis affidavit at [23]-[37].

[32] Templeton affidavit at [16] and [28].

[34] Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 at 381 [11].

[37] [1995] 3 All ER 534 at 540; Op Cit Williams Civil Procedure Victoria [62.02.80].

[38] [2008] VSCA 93; (2008) 20 VR 377, Maxwell P and Buchanan JA at [21];, Colmax v Polytrade at [18].

[40] Bryan E Fencott and Assocs Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497; KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189; 13 ACLC 437 at 439;

[44] [1996] 2 VR 507 at 514 per Phillips JA.

[50] (1983) 35 SASR 294 at 301-2 ; 8 ACLR 410 at 416 per Bollen J; Fiduciary Ltd v Morningstar Research [2004] NSWSC 664; (2004) 208 ALR 564 at [72].

[51] Fiduciary Ltd v Morningstar Research [2004] NSWSC 664; (2004) 208 ALR 564 at [73].

[52] (1985) 3 ACLC 542 at 545 per Clarke J; see also Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744; at [50] per Einstein J; Fiduciary Ltd v Morningstar Research [2004] NSWSC 664; (2004) 208 ALR 564 at [73].

[56] (1996) 131 FLR 339 at 344-5; 14 ACLC 857 at 861 per Anderson J; Fiduciary Ltd v Morningstar Research [2004] NSWSC 664; (2004) 208 ALR 564 at [79].

[57] Paragraphs 28-31 (regarding IMF Australia), and 32-37 (regarding Pretium) of the Lewis Affidavit.

[58] [1996] 2 VR 507, Phillips JA at 515-518 (Ormiston JA at 508 and Charles JA at 519 agreeing).

[59] [2005] NSWSC 1163, Palmer J at [10]-[15].

[60] Australian Securities and Investments Commission v ActiveSuper Pty Ltd & Ors (No. 1) (2012) 92 ACSR 614 at [8].

[61] Paragraphs 16 and 28 of the Templeton Affidavit.

[62] Constantinidis v JGL Trading Pty Ltd (1995) 17 ACSR 625, Kirby P at 636; Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No. 2) [2013] FCA 234; (2013) 93 ACSR 189, Gordon J [11]-[18].

[63] Cf Fitzroy Football Club Limited v Brisbane Bears-Fitzroy Football Club Limited [2010] VSC 180, Mukhtar AsJ at [39].

[67] Per Hodgson J in Dae Boong International Company Pty Ltd v Gray [2009] NSWCA 11 at [27]; Madgwick v Kelly (2013) FCR 1 at [82].

[68] Premier Capital (China) Ltd v Sandhurst Trustees Ltd & Ors [2011] VSC 572, [7].

[69] Affidavit of Darren Michael Lewis affirmed on 27 September 2013 [11].

Court (General Civil Procedure) Rules 2005

Court (General Civil Procedures) Rules 2005

Securities and Investments Commission Act 2001

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