Fodare Pty Ltd v Shearn [2009] NSWSC 1140 | Case summary

1 The defendants seek an order that the plaintiff provide security for costs. 2 The plaintiff is a company in liquidation. The proceedings were instituted after commencement of the winding up. The decision to sue was a decision of the liquidator, Mr Clout, but it is clear that he relied on advice and information given to him by a solicitor, Mr Dennis. 3 Mr Dennis was (and is) a significant creditor of the plaintiff. He obtained a judgment against the company. It is on his application that the winding up order was made. 4 The approach to be taken to an application for security for costs in proceedings commenced by a company at the instigation of its liquidator was outlined by Hodgson JA in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105. After referring to cases in which the liquidator (as distinct from the company) is plaintiff and observing that a liquidator is generally regarded in the same way as a natural person plaintiff, his Honour said (at [45]): "Where the plaintiff is a company in liquidation, and not the liquidator, then security for costs will more readily be ordered, although the court's discretion is unfettered ( Bell No 2 ) and there is no presupposition in favour of granting security ( Bryan E Fincott P/L v Eretta Pty Ltd (1987) 16 FCR 497 ( Bryan )). However, the court will not refuse to order security on the ground that this will frustrate the litigation unless the company proves that those who stand behind the company and would benefit from the litigation are unable to provide security ( Bell No 2 )." 5 In the present case, there is the added factor that the plaintiff is, it seems, the trustee of a family trust. That factor has a significance emphasised by the Full Federal Court in Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 52 ALR 176, a case to which Hodgson JA referred. The Full 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 security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts." 6 The persons beneficially entitled under the family trust include the defendants or persons associated with them. The only identified creditor of the plaintiff is Mr Dennis. It is said that the existence of the plaintiff has never been disclosed to the Australian Taxation Office and that the gain realised by the plaintiff on sale of its property at Menangle may have given rise to a debt to the Commissioner (the other possibility is that any taxation liability of that kind would rest with trust beneficiaries "presently entitled" thereto). 7 At all events, it is, I think, appropriate to regard Mr Dennis as a person who stands behind the plaintiff, in the sense that it will benefit from the litigation if it is successful. 8 I rejected a passage in Mr Dennis's affidavit stating that he is "unable to provide to the liquidator of the plaintiff security for costs if ordered against the plaintiff". I accepted that he is "unwilling" to do so. I also have before me evidence that a creditor's petition in bankruptcy has been presented against Mr Dennis by the second defendant and another person but that he has paid to their solicitor moneys sufficient to cover the debt owed to them. Nothing else is known about Mr Dennis's financial affairs. I am able to conclude that he is unwilling to contribute financially to the conduct of the proceedings by the plaintiff; but not that he is unable to do so. 9 I have said nothing to this point about the claims made by the plaintiff against the defendants. The main claim against the first defendant is that she, being a director of the plaintiff, received into her own bank account some $383,000 out of the proceeds of the sale of the plaintiff's Menangle property and thereafter paid about $260,000 of that $383,00 to the second defendant so that the second defendant could clear a debt owed by her husband and herself to a bank, as she in fact did. The claim is thus that the first defendant breached duties owed by her to the plaintiff as a director of the plaintiff; and that the second defendant was knowingly concerned in the first defendant's breach or knowingly received part of the proceeds of that breach. There are also claims based on alleged breach of obligations with respect to accounting records. 10 On the materials before me, the case the plaintiff seeks to make is an arguable case. 11 The two particular features of this present application, as I see them, are, first, that, according to the arguable case the plaintiff advances, the defendants may properly be seen as having brought about the situation where the plaintiff has no financial resources with which the liquidator is able to pursue litigation for it; and second, that it has been proved that the person with the greatest financial stake in the plaintiff is unwilling to finance the litigation; but it has not been proved that he is unable to do so. 12 Were it not for the second matter, this case might well be viewed in the way recently described by Rothman J in O'Keefe v Seafresh Holdings Pty Ltd [2009] NSWSC 1090 at [15]: "There is a wide range of considerations that are relevant to the exercise of the discretion to order security for costs. In this case, while liability is in issue, the plaintiff's claim has been made in good faith and appears to be reasonably arguable. There is no doubt that the plaintiff lacks funds to meet most of any costs order that may be made against him, if he should be unsuccessful. However, largely, that lack of funds has been caused or contributed to by the alleged conduct of the defendants. Moreover, the plaintiff's impecuniosity, brought about by the accident, would mean that, if security for costs were to be ordered (and the proceedings stayed pending the payment), the plaintiff would be unable to pursue these proceedings." 13 The matter pertaining to Mr Dennis cannot, however, be overlooked. It brings to the fore consideration upon which the Full Federal Court placed emphasis in Bell Wholesale. 14 As the only established creditor of the plaintiff (the position of the Commissioner of Taxation is obscure, for the reason I have stated), Mr Dennis has a clear and direct interest in the success of the plaintiff's claim. He was himself pursuing the claim as the plaintiff's solicitor before he ceased practising. He has, it appears, committed an act of bankruptcy, but has, at the same time, paid over funds sufficient to cover the debt that precipitated the bankruptcy proceedings. He has not given evidence warranting a finding that he is unable (as distinct from unwilling) to provide financial assistance for the purposes of this litigation. 15 The circumstance just mentioned is, in my view, determined. It makes inappropriate to this case the approach taken by Rothman J. Security for costs should be ordered. 16 It is then necessary to address the question of quantum. The respective solicitors have sworn affidavits giving estimates of the sums that it will be necessary for the plaintiff to outlay to complete the proceedings. Mr Cohen of counsel, who appeared for the defendants, described aspects of the plaintiff's solicitor's affidavit as "oracular" - in the sense that it does not state a basis for certain opinions (Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705). The same point may be made about aspects of the defendants' solicitor's affidavit. Each solicitor expresses a view about the length of the final hearing. One estimates three days, the other one day or one and a half days. Neither makes any attempt to explain the basis on which the estimate is made. Neither refers to the expected length of counsel's opening, the time needed to deal with objections to affidavits, the time required for cross-examination or the time required for final addresses. Neither is in any position to do so. There are not yet in existence any formulated pleadings, much less affidavits. 17 In saying what I have just said, I intend no criticism of the solicitors. The point is that there is, in cases such as the present, room for what might best be termed educated guesswork. Indeed, there are areas in which no other approach is feasible. 18 The unsatisfactory atmosphere in which applications for security for costs arise for consideration were recently described by Heydon J in Jeffrey & Katuakas Pty Ltd [2009] HCA 43 at [93]: "Defendants are frequently in a dilemma. If they seek security speedily they are accused of applying too early. If they do not seek it speedily they may obtain security only for the future, not the past, and may not even obtain security for the future. Judges are reluctant to order security for costs in large amounts, perhaps fearing that this will simply prolong the litigation in an ill-disciplined way. "The amount awarded as security is no more than an estimate of the future costs and it is not reasonable to expect a defendant to make further applications to the court at every stage when it appears that costs are escalating so as to render the amount of security previously awarded insufficient": Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 at 190-191 per Mason CJ and Deane J. The lack of judicial generosity is one of several signs that applications seeking security for costs have little attraction for judges. In part that is because they are interlocutory, satellite and hypothetical. Their interlocutory character is repellent to courts eager to deal with trials but hard pressed to do so. They are satellite in character because they often involve spending significant time examining complex questions of solvency which are irrelevant to the main proceedings. They are hypothetical in character because their point depends on the hypothesis, which may or may not be realised, that the defendant will succeed, so that through them stalks the fear in many instances that they are a waste of time." 19 Returning to the solicitors' affidavits, it can be said at once that each solicitor is qualified, by experience, to express relevant opinions and to make relevant judgments. Each will, in accordance with his client's interests, be inclined to approach matters of doubt or difficulty in a particular way, being a way that enhances those interests while, at the same time, being supportable. Two particular matters of difference emerge from the evidence of the solicitors. The first already mentioned concerns the length of the final hearing: the defendant's solicitor estimates three days, the plaintiff's solicitor says one to one and a half days. Having regard in particular to extracts from liquidator's examinations, my impression is that an estimate of one and a half days is appropriate. 20 The second matter concerns expert evidence. The defendants' solicitor apparently foresees a need for evidence of experienced company directors as to standard practices of directors. Given that the allegations are by no means complex, I accept the plaintiff's solicitor's view that there is unlikely to be any place for expert evidence. 21 The defendant's solicitors overall estimate is $102,310. With the two items just mentioned eliminated, this is reduced by $51,200 to $51,110. 22 Various other aspects are raised by the plaintiff's solicitor. Together, they would reduce the total to $30,000. I do not propose to go into the several matters of detail. Rather, I am content to regard an appropriate sum as roughly mid-way between the defendants' figure as reduced above (that is $51,110) and the plaintiff's figure ($30,000) - say $40,000. 23 The orders are as follows: 1. Order that the plaintiff do give security in the sum of $40,000 for the costs of the defendants. 2. Order that the security be in such form as the Registrar determines. 3. Order that the proceedings be stayed until such security is provided. 24 The application for security for costs was heard together with the application for summary disposal (as to which the defendants were unsuccessful). Both applications were advanced by the defendants' interlocutory process filed on 13 July 2009. Unless the parties agree on the costs orders that should be made, each should forward to the other and to my Associate within fourteen days a statement of the costs orders sought and submissions in support. **********

Fodare Pty Ltd v Shearn

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Judgment (11 paragraphs)

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Cases Cited (9)

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