Fitzpatrick v Isaacs

Federal Court of Australia|2024-10-17|Before: Derrington J

ltradrilling Pty Ltd (2008) 68 ACSR 108 Willey v Synan (1935) 54 CLR 175

Division: General Division

Registry: Queensland

Sub-area: Corporations and Corporate Insolvency

Number of paragraphs: 84

Date of hearing: 29 January 2024

Counsel for the Plaintiffs and the Second Cross-Defendant: Mr A Kirby

Solicitor for the Plaintiffs and the Second Cross-Defendant: Nicholas O'Donohue and Co

Counsel for the Defendants and the Cross-Claimant: Mr E Olivier

Solicitor for the Defendants and the Cross-Claimant: S&A Law

Counsel for the First Cross-Defendant: The First Cross-Defendant did not appear

BETWEEN: HEATH FITZPATRICK First Plaintiff

TOR CAPITAL PTY LTD (ACN 632 062 885) Second Plaintiff

AND: SIMON ISAACS First Defendant

OSCARSUN PTY LTD (ACN 164 998 556) AS TRUSTEE FOR THE ISAACS FAMILY TRUST Second Defendant

EBROKER.COM.AU PTY LTD (ACN 606 329 800) Third Defendant

AND BETWEEN: EBROKER.COM.AU PTY LTD (ACN 606 329 800) Cross-Claimant

AND: VINE CAPITAL PTY LTD ACN 633 897 408 (and another named in the Schedule) First Cross-Defendant

order made by: DERRINGTON J DATE OF ORDER: 17 OCTOBER 2024

THE COURT ORDERS THAT:

Pursuant to s 1335 of the Corporations Act 2001 (Cth), or alternatively s 56 of the Federal Court of Australia Act 1976 (Cth) and r 19.01 of the Federal Court Rules 2011 (Cth), the second plaintiff provide security in the sum of $160,000.00 for the defendants' costs in these proceedings.
The security referred to in Order 1 is to be provided: (a) by the payment of the sum of $160,000.00 into Court or otherwise secured in a manner acceptable to a Registrar of the Court; (b) within 14 days from the date of these Orders.
If the sum of $160,000.00 is not paid or secured as provided for in Order 2 hereof, the second plaintiff's claim as against the defendants be stayed.
The parties are to be heard on the question of costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 By an interlocutory application dated 21 September 2023, the defendants sought security in the sum of $241,890 in respect of their costs of defending the plaintiffs' claims. On 4 December 2023, following a hearing at which evidence was adduced, written submissions considered and oral submissions made, a Registrar of this Court ordered that the plaintiffs provide security in a sum of $160,000, payable in two tranches. By an interlocutory application dated 14 December 2023, the plaintiffs now seek to review the Registrar's decision pursuant to s 35A(5) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act), contending that the Registrar erred in ordering security against them. 2 For the reasons that follow, it is appropriate to order that the corporate plaintiff, Tor Capital Pty Ltd (Tor Capital) provide security for the defendants' costs of the proceeding in the amount of $160,000, but there should be no order made against the first plaintiff, who is an individual.

Nature of the review and relevant legal principles 3 Before turning to the facts of the matter, it is useful to briefly restate the principles relevant to the present application. 4 On an application to review a Registrar's decision under s 35A(5) of the Federal Court Act, the Court is required to conduct a hearing de novo. The parties may adduce further evidence, and the Court must rehear the case and decide the facts for itself: West International Pty Ltd v Ultradrilling Pty Ltd (2008) 68 ACSR 108, 109 [6]; 3Bears Childcare Centre Pty Ltd v Deputy Commissioner of Taxation, in the matter of 3Bears Childcare Centre Pty Ltd [2018] FCA 1690 [13]. The rehearing of the underlying application is not prosecuted by the applicant for review, but by the person who sought the order made by the Registrar; in effect, an application for review is a demand that the claim for the underlying relief be heard by a Judge: see Bechara v Bates (2021) 286 FCR 166, 176 [27]. 5 The defendants' application for security for costs was made pursuant to s 56 of the Federal Court Act, r 19.01 of the Federal Court Rules 2011 (Cth) (the Rules), and, in the case of Tor Capital, s 1335 of the Corporations Act 2001 (Cth) (Corporations Act). 6 The principles to be applied by the Court in determining an application for security for costs are well-settled and were not in dispute. They were summarised by Allsop CJ in All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited [2020] FCA 840 [40] - [44], and it is not necessary to recite them at length. For present purposes, it suffices to note the following matters. 7 The power in s 1335 of the Corporations Act is engaged where it appears by credible testimony that there is reason to believe that a corporate plaintiff will be unable to pay the costs of the defendant if it is successful in its defence. Although s 56 of the Federal Court Act does not have this same "threshold" requirement, it is relevant to the discretionary power under that section if the defendant can demonstrate that there is reason to believe that the plaintiff will be unable to pay their costs if ordered. The defendants bear the ultimate onus of persuading the Court to order security. However, under s 1335 of the Corporations Act, once it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the defendants' costs, the evidentiary burden shifts to the plaintiff to establish a reason why security should not be ordered: Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 [25] - [27]. 8 The discretion to order security is broad. The matter which lies at the heart of the discretion is fairness: see Madgwick v Kelly (2013) 212 FCR 1, 21 [92] (Madgwick v Kelly). There are a number of well-established factors relevant to the Court's exercise, and they include whether the application for security has been brought promptly; the strength and bona fides of the plaintiff's case; whether the plaintiff's impecuniosity was caused by the defendant's conduct subject of the claim; whether the defendant's application for security is oppressive, in the sense that it is being used merely to deny an impecunious plaintiff a right to litigate; and, where the plaintiff is a corporation, whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security.

Background to the proceeding 9 The plaintiffs in the proceeding are Tor Capital and its sole director, Mr Heath Fitzpatrick. They bring claims against Mr Simon Isaacs, Oscarsun Pty Ltd as trustee for the Isaacs Family Trust (Oscarsun), and Ebroker.com.au Pty Ltd (Ebroker). Oscarsun is the largest shareholder in Ebroker, owning 70% of its shares, and Mr Isaacs is Ebroker's sole director. 10 Tor Capital acquired 25% of the issued shares in Ebroker in 2019. It remains an owner of those shares, although it is disputed whether its shareholding has been diluted following certain capital fundraising that occurred in August 2023. 11 As to the shareholding in Tor Capital itself, Mr Fitzpatrick owns 25% of the shares through his company, Heathander Holdings Pty Ltd (Heathander). The remaining shareholders are Mr Fitzpatrick's sister, Ms Kristy Pearson, who owns 25% of the shares, and his parents, Mr John Fitzpatrick and the late Mrs Christine Fitzpatrick, who own 50% of the shares through their company Jontine Pty Ltd (Jontine). 12 The plaintiffs commenced this proceeding on 23 August 2023, claiming that the affairs of Ebroker have been conducted in a manner oppressive to Tor Capital within the meaning of s 232 of the Corporations Act. Paragraph 36 of the statement of claim relevantly sets out the oppressive conduct relied upon, which includes the acts of: (a) summarily, wrongly and unjustifiably terminating Mr Fitzpatrick's employment as Chief Operating Officer of Ebroker; (b) breaching the deed entered into between the shareholders of Ebroker (Shareholders' Deed), such that Tor Capital cannot sell its shares to other shareholders under the Shareholders' Deed or to third parties; (c) wrongfully alleging that Mr Fitzpatrick misused his position and information obtained through that position to benefit Vine Capital Pty Ltd (Vine Capital), a business lending company of which Tor Capital is a shareholder; (d) purporting to undertake a share issue as to unfairly dilute Tor Capital's percentage holding of shares in the Company from 25% to some 13%; (e) Oscarsun purporting to transfer a portion of its shares to Muddles Pty Ltd in breach of the terms of the Shareholders' Deed; (f) denying Tor Capital access to the books of Ebroker; and (g) bringing this application for security for costs for an excessive and oppressive sum of $251,460. 13 Amongst the final relief sought is a declaration concerning the oppressive conduct, an order requiring Mr Isaacs and Oscarsun to purchase Tor Capital's shares, and further and alternatively, orders for specific performance of the Shareholders' Deed to enable Tor Capital to sell its shares to another shareholder or to a third party. 14 The defendants deny the allegations made against them. They also take issue with the inclusion of Mr Fitzpatrick as a plaintiff. In this respect, it is relevant to note that he is a party to the Shareholders' Deed and brings claims for alleged breaches of that Deed which are said to have prevented Tor Capital from selling its shares in Ebroker. 15 On 6 October 2023, Ebroker filed a cross-claim against Mr Fitzpatrick and Vine Capital. By that cross-claim, it is alleged that: (a) Mr Fitzpatrick's company, Heathander, holds 25% of the issued shares in Tor Capital and, through Tor Capital, is an indirect shareholder in Vine Capital; (b) Tor Capital holds 50% of the shares in Vine Capital; (c) Mr Fitzpatrick has a business called "The Event Crew", to which he devoted time, which is why Ebroker paid him a salary of $70,000; (d) Being a party to the Shareholders' Deed, Mr Fitzpatrick breached its provisions by misusing confidential information for the benefit of Vine Capital; (e) Vine Capital was a panel lender with Ebroker under a "Panel Lender Agreement"; (f) Mr Fitzpatrick breached contractual, fiduciary and statutory duties and obligations by misdirecting Ebroker leads to Vine Capital in priority to other panel lenders; (g) Vine Capital was knowingly concerned in, and benefitted from, these breaches, in that it secured the underwriting of $11 million in loans to these leads but paid lower brokerage fees to Ebroker than other panel lenders would have; (h) Further to the above, Vine Capital received "benefits, gains and profits" from underwriting that $11 million in loans; and (i) Ebroker has suffered loss and damage, including lost commissions and brokerage of some $102,000, 34% of the wages paid to Mr Fitzpatrick (approximately $88,500), 34% of the fixed costs attributable to Mr Fitzpatrick's employment (approximately $42,500), other loss and damage totalling approximately $107,500 by reason of Mr Fitzpatrick's breaches of his employment agreement, and unpaid invoices issued to Vine Capital for brokerage fees totalling $12,600. 16 Mr Fitzpatrick and Vine Capital have each filed defences to the cross-claim.

The application for security 17 As mentioned, on 4 December 2023, a Registrar of this Court issued a determination requiring the plaintiffs to provide security for the defendants' costs of the proceeding in a total sum of $160,000. Consequent upon the plaintiffs' application to review that decision, the defendants' application for security now falls for reconsideration. 18 At the hearing of the review, the parties relied upon all the material that was placed before the Registrar, including written submissions. The defendants adduced further affidavit evidence, and both sides adduced further written submissions in support of their respective positions. 19 The defendants contended that the Registrar's decision ought to be confirmed primarily on the basis that each plaintiff would be unable to satisfy a costs order if one were made against them. As the defendants are the parties seeking security for costs, they have the onus of persuading the Court that it is appropriate to make an order for security. 20 The plaintiffs contended that security should not be ordered in circumstances where: (a) Mr Fitzpatrick is an individual, and the defendants have not discharged their evidentiary onus of establishing that he is impecunious, not a necessary party to the proceeding, or that he is suing for the benefit of others; (b) Tor Capital has a valuable asset, being the owner of issued shares in Ebroker, and thus could satisfy an adverse costs order; (c) Ebroker has filed a cross-claim and is in practical terms the plaintiff in the proceeding. Ebroker "could and should have filed its claim first as a plaintiff", and its cross-claim relates to matters at the heart of the oppression claim; (d) the bringing of the application for security is itself an act of oppression; and (e) the quantum of costs sought is oppressively high and appears intended to stifle the plaintiffs' claims. 21 Each of these is addressed in turn below, amongst some other general discretionary factors relevant to the present application. It is, however, convenient to commence the analysis with the bases upon which security is sought against Mr Fitzpatrick.

Whether security should be ordered against Mr Fitzpatrick 22 That Mr Fitzpatrick is a natural person militates against the making of an order for security against him. It is an ancient and well-established rule that an individual's lack of means is not regarded as a reason to limit their access to the courts for the purposes of vindicating their rights: see Barton v Minister for Foreign Affairs (1984) 2 FCR 463, 469. However, where some factor in addition to impecuniosity is present, the making of an order may be appropriate. A number of factors were identified by Lindgren J in Knight v Beyond Properties Pty Ltd [2005] FCA 764 [33], including where the plaintiff is resident outside Australia, where the plaintiff brings a claim to a significant extent for the benefit of others, and where the plaintiff brings a claim which lacks prospects of success and there are large costs involved to the defendants. 23 Here, the defendants submitted that certain additional factors are present including that Mr Fitzpatrick has no relevant interest in the relief claimed in the proceeding, is an unnecessary party to the proceeding, and is suing for the benefit of others.

Mr Fitzpatrick's impecuniosity 24 The assertion that Mr Fitzpatrick is impecunious was made on the basis that he has been unemployed since March 2023 and that his only identified assets are insufficient to meet an adverse costs order. This was denied by the plaintiffs who claimed that the defendants failed to discharge their onus of establishing his relevant impecuniosity. 25 The fact that Mr Fitzpatrick is unemployed does not establish that he is impecunious. Additionally, it cannot be ignored that the cause of his unemployment is the termination of his role with Ebroker, the company the subject of the oppression claim. 26 Prior to filing their application, the defendants made multiple requests for evidence of Mr Fitzpatrick's financial position. No information was provided and Mr Fitzpatrick adduced no such evidence in response to the application. In his written submissions, however, he asserted that he holds valuable business interests in his company, Heathander, his business, The Event Crew, Tor Capital (via shareholding held by Heathander), and Vine Capital (also via shareholding held by Heathander). There was, however, no evidence of his interest in The Event Crew and, accordingly, no evidence of its value. To the extent that Mr Fitzpatrick's financial position is known, it is simply that he holds an interest in his company, Heathander, and indirect interests in Tor Capital and Vine Capital. 27 Aside from the fact that he is unemployed, nothing was advanced by the defendants which was sufficient to establish Mr Fitzpatrick is relevantly impecunious. Critically, there was no evidence of any searches, including publicly available ones, to ascertain whether he holds any real property or other assets. It is relevant that he failed to disclose whatever assets he held, but little can be made of this in the circumstances where no relevant searches were conducted. 28 In these circumstances, the defendants have not discharged their onus. He may be impecunious, and the evidence before the Court does not prove that he is not. However, that is not to the point. The defendants have the burden of showing that Mr Fitzpatrick would not be able to satisfy a costs order in their favour, and they have not achieved that. The most that can be said is that they have raised cause for question or suspicion.

Mr Fitzpatrick's inclusion as a plaintiff 29 As mentioned, the defendants complained that Mr Fitzpatrick is not a necessary party to the proceeding because he lacks standing to seek the relief which follows from the oppression claims made by Tor Capital. In reliance on certain observations in St Mary's Hog's Pty Ltd v HBCA Pty Ltd [2022] FCA 52 [134] - [138], they suggested that this supports making an order for security against him. 30 It is undoubted that Mr Fitzpatrick has no entitlement to the relief sought under s 233 of the Corporations Act given that he is not a member of Ebroker: see s 234 Corporations Act. Though the acts forming the basis for the oppression claims include the termination of his employment with Ebroker and the levelling of allegations that he misused his position and information obtained through that position to benefit Vine Capital, none of the associated relief is sought on his behalf. 31 The relief which is sought on his behalf are declarations that the defendants breached the Shareholders' Deed in relation to the share transfer to Muddles Pty Ltd, as well as by failing to respond to certain correspondence from Mr John Fitzpatrick. An order for specific performance of the Shareholders' Deed to facilitate the sale of Tor Capital's shares is also sought. 32 The defendants submitted that Mr Fitzpatrick has no real or relevant interest in that relief either. They identified that the same relief is sought by Tor Capital such that, if Tor Capital was the sole plaintiff and successful in its claim, Mr Fitzpatrick would have the benefit of that success in any event through his shareholding in Tor Capital. Although that may be true, Mr Fitzpatrick is a party to the Shareholders' Deed and brings claims for the alleged breaches of that Deed which are said to have prevented Tor Capital from selling its shares in Ebroker. He is entitled to advance claims which are based on obligations which he is entitled to enforce together with any other party to the Deed who has the same grievance. In any event, by virtue of his inclusion as a plaintiff, he has exposed his assets to the possibility of an adverse costs order if the plaintiffs' claims do not succeed.

Is Mr Fitzpatrick suing for the benefit of others? 33 The defendants also submitted that Mr Fitzpatrick is suing for the benefit of others, namely, for the benefit of Tor Capital and its shareholders. It is well-recognised that, where an impecunious party is suing for the benefit of others, such a factor may weigh in favour of making an order for security: see Madgwick v Kelly at 5 [12]. However, that principle applies where those persons are immune from a costs order because they are not parties to the proceeding. In circumstances where Tor Capital is itself a plaintiff, this is not a particularly relevant factor in determining whether security should be ordered against Mr Fitzpatrick. The distinct question of whether the proceedings are brought for the benefit of Tor Capital's shareholders will be considered below in the context of whether security should be ordered against Tor Capital.

Conclusion in relation to Mr Fitzpatrick 34 In light of the foregoing, it is not appropriate to make an order for security against Mr Fitzpatrick. It was not sufficiently established that he is impecunious and, even if he is, none of the additional factors identified by the defendants are sufficient to persuade the Court that this is a case where security ought to be ordered against an individual.

Whether security should be ordered against Tor Capital

Tor Capital's ability to meet an adverse costs order 35 In considering whether an order for security should be made against Tor Capital, the first question is whether it appears by credible testimony that there is reason to believe that it will be unable to pay the defendants' costs if they are successful in their defence of the proceeding. 36 In this respect, the defendants relied upon evidence including a company extract obtained from the Australian Securities and Investments Commission, revealing that Tor Capital has three shareholders, current issued capital of $100, and no net assets. Additionally, it was not disputed that Tor Capital does not carry on a business, and that it was incorporated for the sole purpose of holding shares in Ebroker. In light of these matters, Mr Robert Silberstein, the solicitor for the defendants, deposed that he is concerned that Tor Capital is highly leveraged or that it has only minimal cash or asset reserves at any given time. 37 In response to the application for security, Tor Capital produced a "special purpose" financial report for the financial year ending 2022 (being a period ending some 18 months prior to the hearing of the review). The report is stated to have been prepared for use by directors and members of the company. It is unaudited, and is based on information provided by the director, Mr Fitzpatrick. Significantly, it is stated that the director is solely responsible for the information provided, yet the "Director's Declaration" contained at the end of the report has not been signed. In these circumstances, the report has little, if any, probative value: Strategic Financial and Project Services Pty Ltd v Bank of China Limited [2009] FCA 604 [34] - [37]. 38 Despite that, and although it is undesirable, it is helpful to have some resort to the report which is the only evidence of Tor Capital's financial position. Relevantly, the financial statements contained in the report disclose that, in the 2022 financial year: (a) Tor Capital received income of $51,000, described as "Contractor Payments". The source of those payments is unclear and that is troubling, particularly considering that Tor Capital does not operate a business; (b) Against that income, the company incurred expenses of $51,699, attributable primarily to interest payments. As a result, it operated at a net loss, as it did in the 2021 financial year; (c) The company's only current asset was cash in the amount of $50,414, whilst its current liabilities were $50,000, being interest payments owing to the company, Jontine; (d) The only material non-current asset of the company was recorded as "Shares in other companies", with a value of $500,000. It was not in doubt that this was a reference to the book value of Tor Capital's shareholding in Ebroker, which was purchased for $500,000 in 2019; and (e) That asset value was exceeded by non-current liabilities totalling $503,377. It was not disputed that these recorded liabilities represented outstanding loans given by interests in the Fitzpatrick family for the purpose of purchasing the Ebroker shares. There was no evidence that these loans have been discharged. 39 In the result, the report suggests that, at least in the 2022 financial year, Tor Capital operated as a loss-making entity with little or no real revenue, no net assets and, potentially, increasing liabilities. If this at all reflects Tor Capital's current financial position, it can be safely concluded that the company will not be able to pay the defendants' costs if the present proceeding is unsuccessful. 40 Despite this, Tor Capital contended (both before the Registrar and on review) that its only reported asset, being its shareholding in Ebroker, could be realised to meet any adverse costs order. It was not said, however, how that might be achieved given the existence of its long term liabilities which exceed $500,000. 41 In Beach Petroleum NL v Johnson, M.K. (1992) 7 ACSR 203, 204 - 205 (Beach Petroleum), it was observed that a corporation "will be unable to pay" a defendant's costs, within the meaning of s 1335, if it can only do so if given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over other liabilities, sufficient to pay the costs: see also Auslink Golf Course Pty Limited v Zhongsheng Group Pty Ltd [2023] FCA 397 [23]. 42 Here, as the defendants submitted, there is no reason to believe that Tor Capital could realise its shareholding in Ebroker to satisfy a costs order within any reasonable time, or at all. Ebroker is a small private corporation, and it cannot be concluded that there is a ready market for its shares. Further, the sale of any shares would also have to satisfy the rights and obligations set out in the Shareholders' Deed. 43 In response to this, Tor Capital submitted that the defendants have prevented it from attempting to sell its shares to any third parties, such that the Court should be cautious to cease the analysis there. On that basis, it is appropriate to assess whether Tor Capital would be able to pay the defendants' costs within the meaning of s 1335, on the assumption that the shares could be realised within a reasonable time. The answer to that will turn on the assessable value of its shares in Ebroker. 44 In this context, it is important to note that the oppression claim is founded, in part, on an allegation that the defendants unfairly diluted Tor Capital's percentage holding of shares in Ebroker from 25% to some 13% by the latter company purporting to undertake an improper share issue. As a result, Tor Capital will hold only an approximate 13% shareholding in Ebroker if it is unsuccessful in its claims. 45 Whatever the case may be, there was limited evidence as to the value of Ebroker and, therefore, its shares. Although there appeared to be a significant difference between the parties in relation to their opinion on the potential value of Ebroker, they ultimately failed to adduce any admissible or probative evidence of what it might be. Here it is necessary to observe that some attempt was made to adduce some hearsay evidence of value, but it was found to be inadmissible. To the extent that there is any evidence of value before the Court, it is the $500,000 paid by Tor Capital in 2019 for a 25% shareholding in Ebroker. That says nothing about the value of those shares some four years later. 46 In the result, it cannot reasonably be concluded that Tor Capital's shareholding is valued at more than $500,000 or, indeed, at that figure. It, therefore, cannot be concluded that Tor Capital could realise the asset at a price sufficient to provide a surplus over other liabilities in order to meet an adverse costs order. It can be added that, consistently with what was said in Beach Petroleum, even if it were assumed that the Ebroker shares would provide a sale value of $500,000, after accounting for Tor Capital's long term liabilities, there would be no surplus which might be used to meet an order for costs. 47 Further, even if it was somehow possible that the shareholding could be sold at a price which would exceed the sum of Tor Capital's liabilities, an alternative and likely possibility is that it could not be. In this respect, the following observations in Beach Petroleum (at 204 - 205) are relevant: … the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the-defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security. (Emphasis added).

The undertakings not to enforce the loans 48 Upon the review of the Registrar's decision, the plaintiffs for the first time sought to proffer undertakings from Tor Capital's creditors, being Mr Fitzpatrick and Jontine (through its director, Mr John Fitzpatrick) that each of them would not enforce their respective loans to Tor Capital until any costs orders made in this proceeding against Tor Capital and in favour of the defendants have been satisfied in full. 49 That is a not insignificant factor. At first glance, the undertakings have the effect of placing Tor Capital with a surplus of assets. However, even if those undertakings were accepted, there is insufficient evidence available to the Court concerning Tor Capital's current financial position. Critically, it remains unknown whether it has incurred any further liabilities since 30 June 2022, so as to be in a position to fund the present proceeding. In such circumstances, the weight of those undertakings is greatly diminished. Even on the basis of a number of favourable assumptions, it is simply not possible to ascertain Tor Capital's actual financial position. 50 It also cannot be ignored that the undertakings were proffered at a very late stage. The following was relevantly observed in In the matter of IPM Developments Pty Ltd [2023] NSWSC 1443 [12] (IPM Developments): In some cases, undertakings offered by a plaintiff may be relevant to the exercise of the court's discretion particularly when they are freely offered at an early stage. However, in my opinion, if the defendants are otherwise entitled to security as the defendants in this case are, they should not be deprived of that security because the undertaking is proffered at the last moment in a context where it has become apparent that an order for security is likely to be made. 51 Here, the undertakings are offered after an order has already been made by the Registrar requiring the plaintiffs to pay security for costs. In such circumstances, they should be given little weight.

The power in s 1335 is enlivened 52 The defendants have established that there is reason to believe that Tor Capital will be unable to pay their costs if they are successful in their defence of the proceeding. It cannot be concluded that Tor Capital's shareholding could be realised in a reasonable time or at a price sufficient to satisfy any adverse costs order in the proceeding. That being so, the power in s 1335 of the Corporations Act is enlivened. However, whether an order for security should ultimately be made against Tor Capital requires consideration of other factors.

Whether Ebroker is effectively a plaintiff 53 The plaintiffs submitted that an order for security should not be made in circumstances where Ebroker has filed a cross-claim which makes it "in practical terms" the plaintiff in the proceedings. They asserted that, in reality, Ebroker could and should have filed its claim first, and that its cross-claim relates to matters at the heart of the oppression claim. 54 The plaintiffs' submissions in this respect should be rejected. Tor Capital is the party who claims to be aggrieved by the defendants' conduct. It alleges that it was denied its rights of pre-emption in relation to the sale of shares to Muddles Pty Ltd, that the terms of the Shareholders' Deed in relation to the sale of shares have been ignored, that Mr Fitzpatrick was wrongly dismissed as Ebroker's Chief Operating Officer, that shares were improperly issued, and that these acts constituted oppression of Tor Capital. Such claims, as advanced in the statement of claim, are not defensive in nature in the sense that they respond to rights asserted against the plaintiffs through some adjustment mechanism: see TS Lucas Pty Ltd v Anatinus Pty Ltd [2024] FCA 943; Willey v Synan (1935) 54 CLR 175; Global Access Limited v Educationdynamics, LLC [2010] 1 Qd R 525. 55 It is true that the claims made in the cross-claim are responsive to some of the allegations made in Tor Capital's claim, in the sense that the cross-claimant seeks remedies for the conduct which caused it to act as it did towards Mr Fitzpatrick. That, however, does not make the plaintiffs' claim in any way defensive. Rather, the cross-claimant's claims are founded upon its justification of its actions towards Mr Fitzpatrick and Tor Capital. That said, such claims are substantive and are also pursued for the vindication of rights. 56 No conclusion could reasonably be reached that the plaintiffs' claims in this matter, or even Tor Capital's claims alone, are defensive in nature. 57 It can be accepted that there is some overlap in relation to the issues raised by the claim and the cross-claim. Such correspondence of issues falls to be considered, if at all, on the question of the quantum of any security ordered.

Whether the application is oppressive 58 Whether the application for security is oppressive, in the sense that it is being used merely to deny an impecunious plaintiff a right to litigate, is generally an important factor in the exercise of the Court's discretion. Here, the plaintiffs submitted that the present application for security was itself an act of oppression as that concept is used in s 232 of the Corporations Act. This submission was made somewhat opaquely in the plaintiffs' written submissions. At the hearing, Mr Kirby, counsel for the plaintiffs, explained the submission as being that the costs are "oppressively sought", "oppressively high", and that "part of that involves conduct intended to try stifle the plaintiffs' claims". Much of this was rhetorical and there is no substance to the submission that either the application or the amount sought was improper. The nature and content of the application was entirely orthodox. It is in the defendants' interests to seek to secure their ability to recover their costs in the event that the plaintiffs are unsuccessful on their claims, and any suggestion that the application was improper must be rejected.

Whether the action would be stifled 59 A more relevant and logical submission, however, concerned the question of whether the making of an order for security would stifle the plaintiffs' claim. Such a risk, if it exists, is a factor which weighs heavily against making an order for security. 60 Unfortunately, no evidence or substantive submissions were advanced by the plaintiffs that the proceeding would be stultified by an order for security. Indeed, the plaintiffs have, at all times, asserted that both Tor Capital and Mr Fitzpatrick are possessed of sufficient assets to meet the defendants' costs if their claims are unsuccessful. In the circumstances, the fact that an order for security will not stifle the action removes any inhibition to making an order which might have otherwise existed. 61 In relation to the consideration of whether the granting of security will stifle the proceedings, it is necessary to have regard to those who stand behind the litigating company and who stand to benefit from its success. In General Trade Industries Pty Ltd (in liquidation) v AGL Energy Limited (No 2) [2023] FCA 556 [73], the following was held: 73 For the sake of clarity, the position that emerges from this survey of the authorities can be summarised in the following series of propositions: (a) Where a corporate applicant is impecunious and it is alleged that an order for security for costs against it will stultify the litigation, it is necessary to consider the position of those who stand behind that applicant and those who will benefit from the litigation if it is successful. (b) The overarching question is whether it is reasonable to expect those persons or entities who stand behind the applicant and those who will benefit from the litigation to provide security. (c) In answering that overarching question of reasonableness, it will be relevant first to consider the means of the persons or entities concerned. That factor demands foremost attention because, if the persons or entities are demonstrably without means, then there may be no need to go further in order to demonstrate unreasonableness. (d) Where that initial factor does not lead clearly to the conclusion that it would be unreasonable to expect those persons or entities to provide security, it will be relevant to consider the reasonableness of any expression of unwillingness on their part to do so. Approaching the matter from the perspective of the applicant, it might also be asked whether it is "commercially impracticable" for it to gain any advantage from such means as may exist in others. (e) The determination as to whether or not the relevant persons' or entities' unwillingness is reasonable may be informed by the extent of the benefit that they stand to receive in the litigation, and the extent to which they "stand behind" the applicant, or the litigation more broadly, by funding it or otherwise exercising a degree of influence or control over its course. The former matter may be of particular significance, as a fundamental principle guiding the overall inquiry is that "those who stand to share the benefits of litigation cannot shirk its burdens". For this reason, it is conceivable that, in certain circumstances, even arm's length unsecured trade creditors who ostensibly do not "stand behind" the applicant, but do stand to benefit from the litigation, will reasonably be expected to provide security. On the other hand, if the persons or entities in question stand to receive only a very slight benefit that is wholly disproportionate to the security that they would be asked to provide, then that may assist the applicant in demonstrating that it would be commercially impracticable to have those external parties put up security for costs and/or that their unwillingness to do so is reasonable. (f) Not relevant at any level of the inquiry is the "mere" unwillingness of the persons or entities to provide security for costs, in the sense of their straightforward disinclination, unsupported by any further reasons. (Emphasis in original). 62 The foundation of those principles is derived from the mischief at which s 1335 of the Corporations Act is aimed, being that individuals who conduct their affairs through impecunious corporations ought not be permitted to expose their opponents to significant costs without being at risk of facing an adverse costs order. The unfairness in such a situation is patent, and an order for security often requires the individual to bring their own assets into play to correct that imbalance. If, however, the individual is already available for what they are worth, the object of the legislation may be seen to be satisfied: see, for example, Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523, 532. Similarly, before a corporate litigant can be heard to assert that an order making provision for security for costs will stifle an action, it should be clear that those who stand behind the company are also without means to meet the company's costs of the litigation, including the risk of an adverse costs order. 63 In this context, an undertaking proffered by the shareholders of an impecunious plaintiff company to meet any adverse costs order is a significant factor in the exercise of the Court's discretion to order security. Indeed, it may be determinative in a particular case: see Jalpalm Pty Ltd v Hamilton Island Enterprises Pty Ltd (1995) 16 ACSR 532, 534; Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306, 316. However, the weight to be given to the undertaking is affected by its value, whether it is given by all of the shareholders or interested persons, and whether the undertaking is an adequate form of security. 64 It is unfortunate that in neither the material nor the submissions was any direct attention given to the above matters. Nevertheless, the facts as they appeared provide a sufficient foundation on which to consider them. 65 Those who stand behind Tor Capital and who stand to benefit from the litigation are Ms Kristy Pearson, Jontine, Heathander and Mr Fitzpatrick. 66 No submission was made to the effect that it was not reasonable to require the members of Tor Capital to come out from behind the skirt of Tor Capital and expose their assets to the risk of a costs order. Prima facie, all the shareholders stand to benefit from the litigation, and it is not apparent that the benefit of the action is limited to only one or some of them. It follows that it would be unfair if the defendants were required to expend significant costs meeting Tor Capital's claims with the risk that they would be unable to recover those costs if the claims are unsuccessful, whilst those behind Tor Capital, who are the ultimate beneficiaries of the litigation, are able to protect their own assets by effectively hiding behind the company. Addressing the question of fairness as between Tor Capital (and those standing behind it) and the defendants, it is reasonable to expect Tor Capital's shareholders to provide some financial support to secure the continuation of the proceedings. 67 Here, whilst Mr Fitzpatrick has offered an undertaking to meet any costs order made against Tor Capital, no similar sufficient undertaking was offered by the other shareholders. In these circumstances, the pre-condition for considering whether the ordering of security will stifle the proceeding has not been satisfied and it is therefore not a matter which goes to the Court's discretion.

The undertaking proffered by Mr Fitzpatrick 68 As mentioned, on the review, Mr Fitzpatrick proffered an undertaking to the Court that, in the event a costs order is made solely against Tor Capital, he will be responsible for that costs order to the extent that it is not also made against him personally. The plaintiffs submitted that, independently of the above considerations, this should weigh against making an order for security against Tor Capital. 69 However, Mr Fitzpatrick's undertaking is insufficient. First, the persons or entities who will substantially benefit from the litigation are members of the Fitzpatrick family or their companies who, not including Mr Fitzpatrick, hold 75% of the shareholding in Tor Capital. None of those persons or entities have offered any security or undertakings in relation to any costs orders that might be made against Tor Capital. The purpose of s 1335 cannot be said to have been achieved where only one of the potential beneficiaries of the litigation has offered to put his assets into play. Secondly, there was no evidence of Mr Fitzpatrick's financial position. In the circumstances, and considering that only one person standing behind the company has indicated their willingness to come forward, the undertaking is of little value. As has been found above, the evidence as to Mr Fitzpatrick's worth is opaque at best. It was not established to be of any value. Thirdly, the undertaking was given very late in the course of the application, being in the context where it was apparent that an order for security was likely to be made: IPM Developments [12]. In the result, the offered undertaking is of no relevant weight.

The merits of the plaintiffs' claims 70 Though there may be some applications for security for costs in which the Court can make a reasonable preliminary assessment of the respective merits of the parties' cases, such instances are likely to be few in number: Gumm v Commissioner of Taxation [2024] FCA 71 [99]. 71 Whilst the affidavit evidence of Dr Silberstein suggested that there may be some weakness to the plaintiffs' claims, ultimately, the parties did not delve into their merits to any great degree. To this end, accord should be given to the observations of Edelman J in Australian Battery Distributors Pty Ltd v Robert Bosch (Australia) Pty Ltd [2015] FCA 1164 [29] that, where a claim is prima facie regular on its face and discloses a cause of action, as the present case does, the Court should proceed on the basis that it is bona fide with reasonable prospects of success in the absence of evidence to the contrary. 72 This factor therefore weighs neutrally in the exercise of the Court's discretion.

The presence of an individual co-plaintiff 73 On balance, the factors considered so far strongly weigh in favour of the making an order for security. The final matter relevant to the exercise of the discretion is whether security should be ordered against Tor Capital in circumstances where there is a natural co-plaintiff against whom an order for security will not be made. 74 It is often the case that where an individual and their company have generally overlapping claims and both bring proceedings, it is unlikely that an order for security for costs will be made: see Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 [27] - [28]; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564, 579 [62]. This is usually because the individual is the sole party who stands behind the company and who will benefit from success in the action, and their assets are exposed to a costs order in the action. That is not the case here. Mr Fitzpatrick is not the sole shareholder of Tor Capital who would stand to benefit from its successful claim. Therefore, whilst his presence in the action is relevant, it is far from determinative. 75 Further, the major claim in the proceeding is for relief under s 233 of the Corporations Act in relation to oppressive conduct. This is solely a claim advanced by Tor Capital and one in respect of which Mr Fitzpatrick has no relevant interest. His claims for declarations in relation to the Shareholders' Deed have only a partial relevance to the company's causes of action. That being so, there is very little in the way of overlap as between the company's claims and Mr Fitzpatrick's. Further, as the factual foundation for each claim is sufficiently different, success or failure in one does not equate to the same result in the other. 76 It follows that the fact that Mr Fitzpatrick is a party to the proceeding is not a good reason for not making an order for security against Tor Capital.

Other matters 77 The plaintiffs also asserted that, if an order for security was made against Tor Capital and accompanied by a stay of proceedings, that would create difficulties for Mr Fitzpatrick, in that he would be faced with the option of not proceeding to trial until security had been provided, or proceeding to trial with an action that was not properly constituted (as one of the parties would effectively be missing). 78 This submission must be rejected. The plaintiffs did not submit, and have not established, that an order for security against Tor Capital would stultify its or Mr Fitzpatrick's claim. In the circumstances of this matter, there is no reason to believe that any stultification of the action will occur. In any event, the causes of action belonging to Mr Fitzpatrick can be pursued despite the absence of Tor Capital's claim. There is no merit in this submission.

Conclusion in relation to Tor Capital 79 Having regard to all the circumstances, an order should be made requiring Tor Capital to provide security for the defendants' costs of the proceeding. Tor Capital advances its own separate and distinct claim in the proceeding, and it does so for its benefit and the benefit of its members. It sufficiently appears that it is without means to meet an adverse costs order if it is unsuccessful, and it is also apparent that Mr Fitzpatrick may not have sufficient funds either. The fact that Mr Fitzpatrick is a party to the proceedings generally is an insufficient reason not to make the order for security. Whilst his claims and those of Tor Capital overlap to a small degree, they do not do so completely. No conclusion can be reached that the making of an order for security will stultify the proceedings by Tor Capital. At this stage, not all of those who stand behind it and stand to benefit from a successful outcome are prepared to expose their assets to the risk of the litigation. Whilst Mr Fitzpatrick has offered an undertaking to meet any order for costs made against Tor Capital, it has not been shown to be of sufficient value to provide any serious protection for the defendants. 80 In the absence of any relevant countervailing matters, it is appropriate that an order for security be made.

The quantum of security 81 In terms of quantum, the defendants submitted that they were content for the Court to confirm the Registrar's orders in respect of security; that is, to order security in the amount of $160,000. In the alternative, however, they submitted that security should be ordered in the amount originally sought on their application, being $241,890. 82 For the reasons given by the Registrar, the sum of $241,890 is far in excess of what is reasonable in the circumstances to give the defendants adequate protection. Weighing up all of those factors mentioned by the Registrar in his reasons, the sum of $160,000 is appropriate in the circumstances of this case.

Disposition 83 For the reasons which have been given, an order for security for costs should be made against Tor Capital in the amount of $160,000. 84 No order should be made against Mr Fitzpatrick who, as an individual, is entitled to litigate his claims despite his possible inability to meet an order for costs should he lose. I certify that the preceding eighty-four (84) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Derrington.

SCHEDULE OF PARTIES QUD 365 of 2023 Cross-Defendants Second Cross-Defendant HEATH FITZPATRICK

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