Forest Carbon Methodology Pty Ltd v Schultz

Federal Court of Australia|2023-08-11|Before: Mr J, O'Sullivan J

Counsel for the Plaintiff: Mr B Roberts KC with Mr T Kentish as junior

Solicitor for the Plaintiff: LK Law

Counsel for the First and Second Defendants: Mr H Lancaster SC with Mr B Hancock as junior

Counsel for the Third Defendant: Mr D McLure SC with Mr J Conde as junior

Solicitor for the Third Defendant: Herbert Smith Freehills

BETWEEN: FOREST CARBON METHODOLOGY PTY LTD ACN 061 048 246 Plaintiff

AND: JAMES PHILIP SCHULTZ First Defendant

LEWIS REGINALD DEVERE TYNDALL Second Defendant

TERRA CARBON PTY LTD ACN 154 094 470 Third Defendant

order made by: O'SULLIVAN J DATE OF ORDER: 11 August 2023

By on or before 1 September 2023, the plaintiff: (a) Is to provide security for costs of the first and second defendants in the sum of TWO HUNDRED AND FIFTY THOUSAND DOLLARS ($250,000); and (b) Is to provide security for costs of the third defendant in the sum of ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000).
The security is to be in the form of an irrevocable bank guarantee or alternatively be paid into Court as a lump sum.
Liberty to apply. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

O'SULLIVAN J: 1 On 3 May 2022, in Action Number SAD 11 of 2022, Orders were made pursuant to s 237 of the Corporations Act 2001 (Cth) granting leave to CleanFin Pty Ltd, a shareholder in Forest Carbon Methodology Pty Ltd (FCM), to bring Derivative Proceedings in the name of the plaintiff against the defendants, James Philip Schultz, Lewis Reginald Devere Tyndall and Terra Carbon Pty Ltd, respectively. 2 Both Mr Schultz and Mr Tyndall were previously directors of FCM. 3 Upon the incorporation of Terra Carbon on 4 November 2011, Mr Schultz and Mr Tyndall were its initial sole shareholders and directors. 4 Order 2 of the Orders required CleanFin: a. to indemnify FCM in respect of the costs it incurs in the Derivative Proceedings and have no recourse to FCM; and b. to indemnify FCM in respect of any order for security for costs or adverse costs in the Derivative Proceedings and have no recourse to FCM. 5 The CleanFin indemnity in Order 2 was jointly and severally guaranteed by Noble Investments Pty Ltd in its capacity as trustee of the Noble Investments and Consulting Services Trust (Noble Trust) and Timothy Owen Lebbon, a director of CleanFin. Mr Lebbon is the sole director of Noble and a beneficiary of the Noble Trust. 6 The extent of the joint and several guarantee was set out in the Schedule to the Orders. Order 4 of the Orders provided that the Schedule was to be confidential to the parties, Noble and Mr Lebbon. 7 Following the Orders, the defendants made applications for security for costs. 8 The first application, brought by Mr Schultz and Mr Tyndall, seeks security for costs from FCM in the amount of $1,153,413. 9 The second application, brought by Terra Carbon, seeks security for costs from FCM in the amount of $2,513,302, or an amount to be determined by the Court. 10 In both cases, application is made pursuant to s 1335 of the Act and/or s 56 of the Federal Court of Australia Act 1976 (Cth) (FCA). 11 FCM opposes both applications. 12 The issues on the applications are: (1) Whether the defendants have met the threshold in s 1335 of the Act in establishing by credible testimony that there is reason to believe that FCM will be unable to pay the defendants' costs if successful in their defence; (2) Alternatively, in all the circumstances, has the discretion under s 56 of the FCA been enlivened; (3) If yes to either or both of (1) or (2) above, whether, in the exercise of its discretion, the Court should order FCM to provide security for costs that may be awarded against it; (4) If yes to (3) above, the form of any security; whether it is appropriate to stage security; and the quantum of any security. 13 It is for the reasons which follow that at this stage FCM: (a) Is to provide security for costs in the sum of $400,000; (b) Such security is to be in the form of an irrevocable bank guarantee or alternatively be paid into Court; and (c) There will be liberty to apply to increase the amount of security as these proceedings progress.

background 14 In these proceedings FCM seeks various declarations against the first and second defendants as to breach of fiduciary duty, a constructive trust, and an account of profits from all defendants together with interest and costs.

Proposed security arrangements 15 After the two security for costs applications were filed, CleanFin's solicitors wrote, (albeit in the name of the plaintiff) to the solicitors for Mr Schultz, Mr Tyndall and Terra Carbon respectively on 28 June 2022 offering that for a period up to and including the first day of trial, Noble and Mr Lebbon would guarantee the CleanFin indemnity in an amount of $3million, supported by registered mortgages in favour of FCM and by an irrevocable Deed of Charge over two properties owned by Noble (Noble property) and Mr Lebbon (Lebbon property) respectively. The properties had been valued in excess of $3million: affidavit of Andrew Nathan Tarnowskyj sworn 11 July 2022 (first Tarnowskyj affidavit), at [5], annexure ANT-1, pp 11-48. 16 After an exchange of correspondence with the solicitors for the first and second defendants, on 7 July 2022, Cleanfin's solicitors wrote to the defendants detailing the proposed security arrangements and enclosed a number of documents together with independent valuation reports for the Noble property - CT 6219/124 and the Lebbon property - CT 6234/260: first Tarnowskyj affidavit, annexure ANT-3, pp 52-160. 17 The proposed security arrangements comprise: (a) A Deed of Charge, Guarantee and Indemnity which has now been executed as a Deed Poll; (b) A first mortgage in favour of FCM over the Noble property which is owned by Noble in its capacity as trustee of the Noble Trust; (c) A first mortgage in favour of FCM over the Lebbon property; and (d) Signed authorities from the beneficiaries of the Noble Trust that they unconditionally consent to Noble increasing the existing guarantee to FCM to $3million and to charging and mortgaging the Noble property for the purposes of that guarantee. 18 At the hearing of this application, the defendants objected to me receiving the independent valuation reports on a number of bases. I overruled that objection noting that ultimately it was a question of the weight I would place on those independent valuations.

The Deed of Charge, Guarantee and Indemnity 19 The guarantors are defined in the preamble as, together, Noble and Mr Lebbon. 20 Clause 1.1 contains a number of defined terms: Guaranteed Money means all money up to the Guaranteed Money Limit that Cleanfin is or may at any time be liable (actually, prospectively or contingently) to pay to the Secured Party under or in connection with the Undertaking. Guaranteed Money Limit means the amount of $3,000,000.00. Secured Party means Forest Carbon Methodology Pty Ltd ACN 145 048 246 of … (Address omitted) Undertaking means the undertaking of Cleanfin to indemnify the Secured Party in relation to costs incurred by the Secured Party in the "Derivative Proceedings" referred to in the Court Orders in SAD11/2022 made on 3 May 2022 … 21 Clause 3 provides the guarantee in the following terms: The Guarantor irrevocably and unconditionally guarantees to [FCM] that Cleanfin will comply on time with its obligations under the Undertaking. (Square brackets provided) 22 Clause 4 deals with payment under the guarantee: If Cleanfin does not comply with its obligations under the Undertaking on time, the Guarantor must on demand: (a) comply with those obligations; and (b) pay the Guaranteed Moneys to [FCM] as and when the payment of such Guaranteed Moneys falls due and payable. 23 Clause 5 provides: As an additional obligation of the Guarantor which [FCM] may enforce separately from the guarantee in clause 3, the Guarantor irrevocably and unconditionally indemnifies [FCM] against, and undertakes as principal debtor to pay [FCM] on demand a sum equal to all liability, loss, penalties, costs, charges and expenses directly or indirectly arising from or incurred in connection with: (a) Cleanfin not complying on time with its obligations under the Undertaking; and (b) [FCM] being able to recover all of the Guaranteed Money from Cleanfin or enforce all of Cleanfin's obligations under the Undertaking for any reason, up to, in all respects, the Guaranteed Money Limit. 24 Clause 6 sets out the extent of the guarantee and indemnity as: This guarantee and this indemnity are independent of and in addition to any other guarantee or security [FCM] holds and are continuing and are not discharged by any one payment and may not be terminated by the Guarantor. They continue until: (a) [FCM] unconditionally releases the Guarantor in writing; or (b) all of the Guarantor's obligations under the guarantee and the indemnity are complied with. 25 Clause 7 provides that in addition to the guarantee and indemnity, Noble will grant a mortgage in favour of FCM over the Noble property and Mr Lebbon will grant a mortgage in favour of FCM over the Lebbon property. The clause provides: (a) In addition to the guarantee and indemnity contained herein: (i) Noble will grant a mortgage in favour of [FCM] over the Noble Property; and (ii) Lebbon will grant a mortgage in favour of [FCM] over the Lebbon Property, (together, the Mortgages). (b) The Mortgages will secure only the Guaranteed Money. (c) The terms and conditions of the Mortgages shall be subject to The Law Society of South Australia's Standard Terms and Conditions No 12843331 with the following additional terms and conditions: (i) in relation to the Lebbon Property - where Lebbon wishes to register an Application for the Deposit of a Plan of Division with the Registrar-General pursuant to the Real Property Act 1886 (SA) to enlarge the Lebbon Property (Application), [FCM] must not unreasonably withhold its consent to such Application and must, upon Lebbon's request, use best endeavours to provide its consent to the Application as soon as reasonably practicable; (ii) in relation to both the Noble Property and the Lebbon Property - where Noble or Lebbon wishes to sell the mortgaged properties, [FCM] must, upon Noble or Lebbon's request (as the case may be), promptly discharge the relevant mortgage and must accept alternative real property security in substitution for the mortgaged property provided that such security shall be sufficient to enable the Guarantor to secure any unpaid monies owing by the Guarantor under this document. (iii) [FCM] must not enforce the Mortgages unless and until the Guarantor has not complied with a demand referred to in clause 3 or clause 4 within 90 days, with standard interest accruing from the date of the demand at the Reserve Bank cash rate as at the date of the demand. (d) The Mortgages shall, unless otherwise agreed in writing by [FCM], be a first charge and take priority over all other Security Interests. (e) Upon the discharge of this guarantee and indemnity, the Mortgages shall be released as a matter of priority. 26 The parties did not agree terms.

Principles 27 The applications are brought pursuant to s 1335 of the Act or, alternatively, s 56 of the FCA. 28 Section 1335 of the Act provides: 1335 Costs (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. … 29 Section 56 of the FCA provides: 56 Security (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security. 30 The applicant referred in submissions to r 19 of the Federal Court Rules 2011 (Cth) (FCR) which provides: Part 19 - Security for costs 19.01 Application for an order for security for costs (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought. (3) The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. 31 The principles applying to an application for security for costs are well settled. In All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Ltd [2020] FCA 840, Allsop CJ summarised those principles at [40]-[44]: 40 Where the applicant is a corporation, the Court is empowered to order security for costs pursuant to s 1335 of the Corporations Act if "it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant". Once this threshold is met, the Court will turn to the matters relevant to the exercise of its discretion to order security for costs: Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; 98 ACSR 301. 41 Section 56 of the Federal Court of Australia Act does not expressly impose any threshold to be met before the Court considers the various discretionary matters. However, the applicant's inability to pay the costs of the respondent remains an important consideration in the exercise of the Court's discretion. 42 The Court's discretion to require the provision of security for costs is broad and the factors informing the exercise of that discretion cannot be stated exhaustively. The only limitation is that the discretion be exercised judicially: Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCAFC 29; 2 FCR 1 at 3 . The matter which lies at the heart of the discretion is one of fairness, both in terms of whether security should be granted, and if so, in what amount: Madgwick v Kelly [2013] FCAFC 61; 212 FCR 1 at 21 [92]. The Court aims to achieve a "balance between ensuring that adequate and fair protection is provided to the defendants, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings": Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 470 (Giles J). 43 The Court's discretion should be exercised having regard to all of the circumstances of the case (see Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd [1998] HCA 41; 193 CLR 502 at 513 [26] (Kirby J)). There are a number of well-established factors relevant to the Court's exercise. These include (see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189 at 197 -198 per Beazley J): whether the application for security for costs has been brought promptly; the strength and bona fides of the applicant's case; whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim; whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate; and 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. 44 An additional factor to add to this list is whether there are aspects of public interest which weigh in the balance against the making of an order (see Equity Access Ltd v Westpac Banking Corporation [1989] FCA 520 ; ATPR 40-972 at 50,635 per Hill J). 32 See also Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360 at [9]-[13] (Edelman J). 33 In Chief Disruption Officer Pty Ltd atf McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd [2022] FCA 148 at [43] Goodman J noted the approach of Brereton J in Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 (at [5]) where an order for security for costs was sought against a corporate party such as FCM: On an application for security for costs under s 1335 or under r 42.21(1)(d) [of the Uniform Civil Procedure Rules 2005 (NSW)], three issues generally arise: the first is whether the ground referred to in the section or the rule is established; the second is whether, if the ground has been established, as a matter of discretion an order for security should be made; and the third is the quantum of and terms upon which any order for security is to be made. 34 There is no material difference in the approach to security for costs under s 1335 and s 56.

First and second issues - s 1335 of the Act and s 56 the FCA - the applicant's inability to meet an adverse costs order 35 Although there is no threshold for the purposes of s 56, as Allsop CJ made clear in All Class at [41], the applicant's inability to pay the costs of the respondent remains an important consideration in the exercise of the Court's discretion. 36 The defendants submit there is no dispute that neither FCM nor CleanFin have sufficient funds of their own to meet any adverse order for costs. 37 FCM submits that because of the proposed security arrangements to be put in place to fortify the CleanFin indemnity up to a limit of $3million, there is no reason to believe FCM will not be able to satisfy any adverse costs order. FMC submits it has an enforceable legal right to enforce the security and therefore no reason to believe it will be unable to pay an adverse costs order such that the defendants have not established, whether under s 1335 or s 56, that the exercise of the discretion has been enlivened. 38 I do not accept that submission. In the circumstances of this matter, I consider that the proposed security arrangement is a matter which is relevant to the exercise of the discretion as to whether security should be ordered. 39 There is no dispute that FCM does not have sufficient funds to meet an adverse costs order, hence the CleanFin indemnity. 40 The fact that both Noble and Mr Lebbon have proffered the joint and several guarantee to support the CleanFin indemnity is clear evidence that CleanFin does not have sufficient funds to honour its indemnity without that joint and several guarantee. 41 In the circumstances, I am satisfied that whether for the purposes of s 1335 of the Act and/or s 56 of FCA, that neither FCM nor CleanFin have an ability to meet an adverse costs order without financial support. Accordingly, the discretion as to whether to order security for costs is enlivened.

Third issue - whether, in the exercise of its discretion, the Court should order FCM to provide security for costs 42 Save that the discretion must be exercised judicially, the exercise of the discretion under either provision is broad and unfettered with each case depending on its own circumstances: All Class at [42] citing Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCAFC 29; (1984) 2 FCR 1 at p 3. 43 It is well-established that there are a number of matters which are relevant to the exercise of discretion, recognising that the list is not exhaustive. Those matters include whether there are any persons standing behind, in this case FCM, who are likely to benefit from the litigation and were willing to provide the necessary security. KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 at 197-198 (Beazey JA). 44 The issue is whether there is sufficient security available to FCM. That involves a consideration of the arrangements put into place by Noble and Mr Lebbon to secure either the ability of FCM itself and/or by reason of the CleanFin indemnity, CleanFin to meet any adverse costs order in these proceedings. 45 The CleanFin indemnity is directed both to FCM's costs of the proceedings and also to any order for security for costs or adverse costs order with there being no recourse to FCM. It is supported by one or more unencumbered assets. The real property offered in support of the unencumbered assets does not include the Noble property but does include the Lebbon property. 46 During the course of submissions, Mr Roberts KC submitted that if the defendants' complaint is about indirect security, FCM will arrange a guarantee and mortgage directly in favour of the defendants. He submitted that option was offered originally but there was no agreement from the defendants about a guarantee and mortgage directly in their favour and that the suggestion that a first registered mortgage is unsatisfactory has only emerged over more recent times: affidavit of Maxwell Thomas Bennett Bonnell sworn and filed 20 June 2022 (Bonnell affidavit) at pp 25, 30; first Tarnowskyj affidavit pp 11, 12. 47 The first and second defendants submit that although the Deed makes reference to a guarantee and indemnity in favour of FCM, the value of that guarantee is limited to the mortgages given by Noble and Mr Lebbon over the Noble property and Lebbon property respectively, up to a limit of $3million. 48 They submit that under cl 7, apart from being the only security for FCM's cost obligations, to access that security FCM will be required to enforce the mortgages. In a practical sense, that will require the defendants, on the assumption they become entitled to an order for costs, to require FCM to enforce the mortgages and even then, FCM must wait for 90 days after making a demand of Cleanfin under the Cleanfin indemnity: cl 7(c)(iii). 49 Still further, cl 7(c): (a) Provides that FCM must not unreasonably withhold its consent and must, upon Mr Lebbon's request, use its best endeavours to consent to any application for the deposit of a Plan of Division with the Registrar General to enlarge the Lebbon property; and (b) In relation to both the Noble property and the Lebbon property, if either wishes to sell the mortgaged properties, FCM must, upon request, promptly discharge the relevant mortgage and must accept alternative real property security in substitution for the mortgaged property provided that it is sufficient to enable the Guarantor to secure any unpaid monies owing by the Guarantor under the Deed. 50 The first and second defendants submit that there is no stipulation that the alternative security must be a first ranking registered mortgage or indeed be a mortgage at all but only that the alternative security "shall be sufficient to enable the Guarantor to secure any unpaid monies owing by the Guarantor under this document". 51 The first and second defendants also refer to the definition of "Undertaking" in the Deed which refers to "the undertaking of CleanFin to indemnify [FCM] in relation to costs incurred by [FCM] in the 'Derivative Proceedings' referred to in the [Orders] made on 3 May 2022". They submit that on its face, the defined term "Undertaking" in the guarantee refers only to the undertaking in Order 2(a) which reads: a. to indemnify FCM in respect of the costs it incurs in the Derivative Proceedings and have no recourse to FCM 52 Whilst not accepting that submission unconditionally, I accept there is some ambiguity as to the extent of the undertaking as defined in the Deed and the matter is not free from doubt. 53 I also note that if an order for costs was made against CleanFin and CleanFin did not comply with those obligations under the Undertaking such that the defendants were required to have recourse to the Deed, any party claiming through CleanFin would need to have recourse to the Deed which may well involve having recourse to FCM, contrary to the terms of Order 2(b). 54 Finally, the first and second defendants' submit that the independent valuations for the two properties are unsatisfactory in a number of respects. 55 The third defendant submits that the Court would need to be satisfied that the property offered as security provides readily accessible funds to meet the third defendant's entitlement to costs in the event an order being made in its favour. It submits that the conventional forms of security such as a payment into Court or an irrevocable bank guarantee represent the conventional forms of security for costs because they impose little or no ongoing supervision costs on the parties or on the Court, which is not the case in relation to the arrangements proposed by FCM. 56 The third defendant submits further that there is no evidence being offered as to why the Noble property and the Lebbon property cannot be employed by CleanFin as security for obtaining a conventional form of security for costs, such that the risk associated with the security is as between the bank and those proferring the security, as opposed to the defendants bearing the entirety of the risk. 57 The third defendant also submits that the independent valuations for the two properties are unsatisfactory in a number of respects. 58 In Stapleton v Fairfax Media Publications Pty Ltd [2019] FCA 1418 at [6], Flick J observed that the issue to be resolved is essentially one of risk management. In the circumstances of this matter, I am satisfied there should be an order that FCM provide security for costs for the following reasons. 59 First, I accept the defendants' submissions that on the terms of the Deed, the capacity of FMC to meet an adverse costs order is entirely dependent on the two mortgages and comprise indirect security. Separately, the ability of CleanFin to honour the CleanFin indemnity is dependent on Noble and Mr Lebbon providing security for that indemnity. The inability of FMC and/or CleanFin to pay the costs of the defendants without the defendants having recourse to indirect security, the value of which may well vary, is such that the risk of the value of the security is imposed on the defendants. 60 I add that in my view there is a risk that if CleanFin defaults on the Cleanfin indemnity, given that Noble and Mr Lebbon are providing a joint and several guarantee for the Cleanfin indemnity, there is a risk that the security proferred under the Deed is meaningless. 61 Second, I accept the defendants' submissions that in the event they require FMC to enforce the mortgages, there is a 90 day delay running from Cleanfin's default. There is also the risk of a change in the value of the properties during the course of these proceedings and that the properties may be sold and the mortgages discharged albeit in circumstances where the security is replaced by security "sufficient to enable the Guarantor to secure any unpaid monies owing by the Guarantor under this document": Deed cl 7(c)(ii). In my view, that simply adds to uncertainty. 62 Third, cl 6 of the Deed provides that the guarantee and indemnity under the Deed continues until one of two events occurs, the first of which is FCM unconditionally releasing the Guarantor in writing. There is a risk, which although unable to be quantified and which I accept may be slight, nonetheless exists that the defendants may be left with no or reduced security in the event FCM unconditionally releases the Guarantor. 63 Fourth, the guarantee and indemnity given under the Deed applies only if CleanFin does not honour the CleanFin indemnity. That indemnity is limited by quantum and also by reason of it being advanced against both FCM's own costs of running the proceedings and any adverse costs order. To that extent, the level of security is diluted. 64 On the issue of the valuations, I note the valuations were valid for three months from the time of publication. In the event I was satisfied that the form of security offered by FCM was appropriate in all the circumstances, then I would have given FCM the opportunity of providing updated valuations. However, given that I do not consider that to be the case, it is not necessary. 65 The security offered by FCM is fraught for the reasons advanced by the defendants and for the reasons I have set out above, such that an order should be made that FCM is to provide security for costs.

Fourth issue - The form of security, whether it should be staged and the quantum of security 66 Whilst it is common for the form of security to be either a payment into Court or an irrevocable bank guarantee, that does not mean any security must take that form. It will, in each case, be a matter to be determined in all the circumstances: Firexpress Australia Pty Ltd v Imago Exchange Pty Ltd [2022] FCA 129 at [59] (Markovic J); Chief Disruption Officer at [74]. 67 In determining the form of security, it is important to keep in mind the protective purpose of an order for security for costs and whether the form of security is such that it is adequate to achieve that purpose, and in particular to provide a fund and asset against which the defendants may enforce an order for costs: Commissioner of Taxation v Vasiliades [2016] FCAFC 170; (2016) 344 ALR 558 at [72]; (2016) 344 ALR 558 (Kenny and Edelman JJ); Adeva Home Solutions Pty Ltd v Queensland Motorways Management Pty Ltd; [2021] QCA 198; (2021) QR 141 at [18], (Bond JA, Fraser and Wilson JJA agreeing); DIF III Global Co-Investment Fund, LP v BBLP LLC [2016] VSC 401 at [38], [40(3)], [63] (Hargrave J); Firexpress at [37], [46]. 68 I am conscious that FCM is entitled to put forward security in a form least disadvantageous to it, however that must always be balanced against the protective purpose of the security and whether the security is adequate to achieve that purpose, namely to provide a fund or an asset against which the defendants may enforce an order for costs: DIF III at [38]. 69 It is for the reasons I have given above that FCM's proposed security arrangements are such that the proposed security will not be readily accessible by the defendants. Apart from potential changes in value and the uncertainty that creates, the real difficulty is that there is no direct access to the security available to the defendants. Although the form of the security being put forward, being real property, may well be appropriate in some circumstances, I do not consider it is appropriate on the proposed arrangements. 70 If FCM is prepared to offer mortgages as security (albeit indirectly), no reason has been advanced why FCM cannot use those assets to obtain the funds, if that be required, to either pay the amount I fix as security into Court or alternatively provide an irrevocable bank guarantee in favour of the defendants such that the risk the defendants face in accessing the security is lessened. 71 The form of security is to be either an irrevocable bank guarantee or a payment into Court.

Staging 72 Defences have been filed by the defendants but there have not been any further orders made. 73 The usual order for security for costs is up to and including the first day of trial although the practice is not an inflexible one and the Court has a broad discretion in an appropriate case to fix security by reference to some other point in the pre-trial process. 74 FCM submits that after the pleadings are closed, the live issues will be clearer, any interlocutory disputes are likely to be identified and the overlap of issues as between the defendants will be apparent. On that basis, it submits that if security for costs is going to be ordered, it should be staged. 75 I accept that submission. The proceedings are at a relatively early stage in terms of pre-trial steps and I do not consider it appropriate at this point to order security for the entirety of the proceedings since to do so involves a deal of speculation. 76 I am prepared to make staged orders for security for costs with the first stage for work required in the period up to and including the filing and serving of affidavit evidence.

Quantum 77 Collectively, the defendants seek the sum of $3,666,715 as security for costs to the end of trial, which they estimate at this stage as requiring 10 days. 78 The sum of $3,666,715 comprises $1,153,413 on the part of the first and second defendant: Bonnell affidavit at [14]-[17] and $2,513,302 on the part of the third defendant: affidavit of Peter Mark Butler sworn 27 June 2022 at [56]-[65]. 79 The assessment of quantum on an application such as this was considered by Gordon J in Norcast S.ár.L v Bradken Ltd [2012] FCA 765 at [17]-[18]: 17 … broadly speaking, there are two available approaches to determining the quantum of the security to be provided in a security for costs application. The traditional approach is for the respondent to engage what is known as a "costs consultant" to prepare an affidavit setting out the steps likely to occur up to and including the first day of trial with an estimate of the party-party costs of each step which would be recoverable by the respondent were it to succeed and obtain an order for its costs. That approach avoids any dispute as to whether a party's actual or indemnity costs are an appropriate starting point and, if so, what discount must be applied to arrive at an estimate of party-party costs. 18 An alternative approach is for the respondent's own solicitor to give evidence as to the likely steps and the costs to be incurred in completing each step. Because the respondent's solicitor is unlikely to also be a specialist in the field of costs consulting, such evidence usually relies upon a calculation of "actual costs" (ie, costs which would be payable on an indemnity basis) discounted by some factor. 80 At [24], her Honour observed that the purpose of security is not to give a full indemnity to the defendants. Her Honour referred to the statement by French J (as his Honour then was and as a member of this Court) in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497, 515, that "the process of estimation embodies, to a considerable extent, necessary reliance on the 'feel' of the case after considering relevant factors" and to Emmett J's views in Save the Ridge Inc v Commonwealth of Australia [2004] FCA 1289 at [24] that in assessing the quantum of such an order, a broad-brush approach needs to be taken. 81 It was not suggested that Mr Bonnell and/or Mr Butler are cost consultants. However, they are both experienced practitioners. No evidence has been filed on the part of FCM on the question of quantum. 82 FCM submits the cost estimate is excessive and has not been prepared with any meaningful consideration of the likely actual course of the litigation and the overlap in work between the defendants. FCM refers to the pleading of Terra Carbon as the corporate alter-ego of Mr Schultz and Mr Tyndall such that at least in so far as a primary factual issue is in dispute, the defendants would adopt a substantially common defence. 83 The defences of the first and second defendants are virtually identical, even to the extent that in the second defendant's defence there is a typographical error where the first defendant is pleaded: at [15]. 84 At a high level, the third defendant's defence is directed to different commercial entities; no copyright because of publicly available information that was able to be commercially exploited; FCM never having the object of exploiting commercial opportunities; a time-bar and Terra Carbon not being the alter-ego of Mr Schultz or Mr Tyndall. Terra Carbon's defence is largely, although not entirely, documentary. There is a claim that Terra Carbon is a knowing recipient of profits made as a consequences of the breaches of fiduciary duty by Mr Schultz and Mr Tyndall for an account in equity for profits. 85 On any view, at this stage of the proceedings, the estimates of costs are necessarily speculative and, in my view, excessive. 86 After considering the costs estimates, I consider the appropriate quantum of security for costs up to and including the preparation of affidavit evidence is $400,000. That figure is to be divided as to $250,000 for the first and second defendants and $150,000 to the third defendant. I arrive at the sum of $400,000 taking into account that the defences are relatively straightforward and the degree of overlap as between the first and second defendants. Whether there will be extensive discovery is a matter yet to be determined and there is no guarantee that there will be numerous interlocutory applications or case management hearings. I take into account that Terra Carbon's lay evidence is likely to be minimal. If there is a need for expert evidence, then that is a matter that can be considered at the appropriate time. As to mediation, none is yet scheduled, however the prospect of ordering security for costs for an attempt to resolve this dispute seems somewhat counter-intuitive. Nonetheless, whether a mediation occurs and the prospects of any settlement will depend to an extent on the content of the affidavits of evidence. 87 If there is a need for further security for costs, that can be the subject of liberty to apply. I certify that the preceding eighty-seven (87) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Sullivan.

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