Gillespie v Gillespies Cranes Nominees Pty Ltd [2022] NSWSC 1792 | Case summary

Power to award security

The Director Defendants' application was primarily based on the Court's inherent jurisdiction to order security for costs in cases where a plaintiff sues as a representative of other parties: see Mitchell v Roads and Maritime Services [2022] NSWSC 500; Mitchell v Transport for NSW [2022] NSWSCA 141. But they also called in aid the Court's power to order security for costs under the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"), specifically r 42.21(1)(e). The rule relevantly provides: 42.21 Security for costs (1) If, in any proceedings, it appears to the court on the application of a defendant - … (e) that a plaintiff is suing, not for his or her own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so, … the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given.
In response, counsel for Robert contended that the present case did not fall within UCPR 42.21(1)(e), and there was no occasion for awarding security in the exercise of the Court's inherent power.
At the hearing on 18 November, I decided the application on the basis that the Director Defendants had not demonstrated that there was a reason to believe, for the purposes of r 42.21(1)(e), that Robert would be unable to pay their costs if ordered to do so. I also said that I did not consider that if the inherent jurisdiction applied, it would call for a different outcome.
This conclusion made it unnecessary to decide at the hearing whether the requirement in r 42.21(1)(e) that the plaintiff be "suing, not for his or her own benefit, but for the benefit of some other person" was satisfied. For completeness, I have further considered that question in the course of preparing this judgment and now set out my reasoning and conclusions.
In Perry v Jackson [1998] 4 VR 463 Kaye J was faced with an application for security under r 62.02(1)(b) of the Victorian Supreme Court Rules, the Victorian version of UCPR r 42.21(1)(e). The Victorian rule applied where "the plaintiff… (not being a plaintiff who sues in a representative capacity) sues, not for his own benefit, but for the benefit of some other person".
The proceedings concerned the affairs of two companies. The plaintiffs were directors and shareholders of those companies. Some of their claims were derivative ones which the plaintiffs contended they were entitled to bring in their own names pursuant to exceptions to the rule in Foss v Harbottle (see J1 at [33]-[40]). Counsel for the defendants argued that these claims were not being brought by the plaintiffs for their "own benefit" within the meaning of the rule. Counsel also contended that the plaintiffs were not suing "in a representative capacity" so as to engage the exception in the rule.
Kaye J referred to the rules of practice for the grant of security for costs which had developed prior to the introduction of express rules of court which now apply. The general rule, in the case of a natural person, was that poverty was no bar to a litigant. But there was an exception for "nominal" plaintiffs. In Cowell v Taylor (1885) 31 Ch D 34 at 38 Bowen LJ described the exception as one: introduced in order to prevent abuse, that if an insolvent sues as nominal plaintiff for the benefit of somebody else, he must give security. In that case the nominal plaintiff is a mere shadow. The two most familiar classes of cases of this kind are cases where a person has divested himself of his interest and handed it over to some one else that the transferee may sue for him, and cases where a person who has commenced a suit divests himself of his interest during the course of the suit in order that another person may carry it on for his benefit. Those are the common cases, I do not say that there may not be others.
In Cowell, the plaintiff was a trustee in bankruptcy who was himself insolvent. No question of the type of abuse described by Bowen LJ arose. Security was refused.
Kaye J summarised the state of the authorities under the rule of practice, including Cowell, in the following way (at 465, citations omitted): The key to the exception was the prevention of abuse. Executors, administrators, trustees having no interest in the subject matter of the trust, trustees in bankruptcy and at least some liquidators were not required to give security even if impecunious. Such persons, though suing for the benefit of others, were not mere nominal plaintiffs. They sued in what might be called a representative capacity. No abuse was involved.
Kaye J did not find it necessary to decide whether the Victorian rule was limited to circumstances which engaged the common law rule of practice. However, the rationale his Honour had identified for the exception to the rule of practice, namely abuse of the general rule that an individual was not required to give security by having proceedings brought by a nominal plaintiff, "should be considered to remain pertinent" to the operation of the Victorian rule. The plaintiffs were not, in the sense used in the common law rule of procedure, "nominal plaintiffs" and the application failed for that reason. It was therefore unnecessary to determine whether a plaintiff suing for the benefit of a company or its shareholders under an exception to the rule in Foss v Harbottle was suing in a "representative capacity" so as to bring the claim within the express exception in the Victorian rule (at 466-467).
Counsel for Robert, although he did not expressly refer to Kaye J's reasoning, presented a submission along the same lines. Counsel submitted that r 42.21(1)(e) was intended to prevent abuse of process in the form of soliciting a nominal plaintiff. Counsel pointed out that this could not be said of Robert. Indeed, the claim was being made pursuant to a grant of leave by the Court. No question of abuse of process could arise. Furthermore, Robert's position was analogous to that of a trustee, and authority established that a trustee was not a "nominal plaintiff" according to the rule.
Counsel also relied on two other recent Australian cases. The first was that of Beech-Jones J (as his Honour then was) in this Court in Binetter v Binetter [2020] NSWSC 552. The second was the decision of Holt AsJ of the Supreme Court of Tasmania in Rowe v Andrews [2021] TASSC 34.
In Binetter, the plaintiff was bringing a claim as an executor on behalf of a deceased's estate. The plaintiff was resident overseas and his Honour found security should be granted on that basis, pursuant to r 42.21(1)(a). But he went on, for completeness, to consider r 42.21(1)(e).
His Honour noted the defendant's argument that the plaintiff was suing "for the benefit of some other persons", namely the beneficiaries of the estate. But he pointed out that the will established discretionary family trusts for relatives of the plaintiff, and their families. He concluded (at [13]): It follows that [the plaintiff] is one of the discretionary beneficiaries of these testamentary trusts. It further follows that it cannot be said that he is suing "not for his own benefit"; ie only suing for the benefit of others and not himself (Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 at [45]). Accordingly, UCPR 42.21(1)(e) is not satisfied.
In Rowe, the plaintiff had been the original trustee of a discretionary family trust for the benefit of herself and others. As trustee she acquired two properties. Later she was replaced as trustee of the trust by a company. But she remained the registered proprietor of the properties.
The proceedings arose because the defendants successfully transferred the registration of the properties to themselves. The plaintiff's case was that the transfers had been forged. The plaintiff claimed orders restoring her as the owner of the property, or alternatively, an account for the monies received by the defendants.
By the time the proceedings were commenced, the trustee company had been struck off, so that there was no extant trustee for the trust. It was common ground that if the plaintiff recovered anything she would do so as a constructive trustee. Security was sought pursuant to the relevant Tasmanian rule, which was substantially the same as the Victorian rule considered by Kaye J in Perry. It was argued for the defendants that the plaintiff was bringing the proceedings only for the benefit of others.
Holt AsJ refused the application for security. His Honour quoted from the reasoning in Kaye J's judgment in Perry to which I have referred above, and concluded (at [27]): The argument that the plaintiff is a nominal plaintiff cannot be sustained. She is a primary beneficiary under the terms of the trust and so it cannot be said that she is suing only for the benefit of some other person.
Thus, the reasoning in both Binetter and Rowe relied, to take the case outside the rule, upon the plaintiff having a beneficial interest in the property of the trust. Counsel for Robert, as I understood their argument, submitted that the present case had the same feature. Counsel submitted that Robert had "a very real, personal, direct, financial and beneficial interest in the litigation and its success".
Returning to the first limb of counsel's argument, I accept that a person who has been made the plaintiff in proceedings in order to pursue them on behalf of the real plaintiff is "not suing for his or her own benefit" and is instead "suing for the benefit of someone else" for the purposes of r 42.21(1)(e). To that extent the rule reflects the rule of practice which preceded it, as expounded in Cowell.
But it does not follow that r 42.21(1)(e) is limited to such cases, or to cases amounting to an "abuse of process". In my view, to read such a limitation in the rule is not warranted by its language and runs the risk of judicially rewriting the rule.
Such a reading would I think also be inconsistent with the approach taken by the Court of Appeal in Green v CGU Insurance Ltd (2008) 67 ASCR 105. The Court accepted in that case that in the ordinary course liquidators acting as plaintiffs to vindicate statutory rights attached to the office of liquidator are not within the rule. That conclusion was apparently based on the wording of the rule. Questions going to "abuse of process" were expressly addressed by the Court in the context of the inherent power to order security: see at [45(3)].
Nor do I think that a trustee can usually be described as "suing for the benefit of someone else" within the meaning of r 42.21(1)(e), even if the trustee has no beneficial interest in the trust. As we have seen, such a trustee was not amenable to an order for security under the old rule of practice. The case which made that proposition completely clear was White v Butt [1909] 1 KB 50. The decision is I think instructive.
The plaintiffs in White were the trustees of a marriage settlement of which the wife was the beneficiary. The trustees had subsequently been appointed after the original trustees had retired. They sued the husband in order to enforce the promises made in that settlement. An order for security was refused and the defendants appealed to the Court of Appeal.
It was argued for the defendants that the decision in Cowell was confined to trustees in bankruptcy or other trustees or office bearers performing statutory duties. It did not apply to ordinary trustees having no beneficial interest in the subject-matter of the trust. Both Vaughan Williams LJ and Buckley LJ emphasised that the Cowell exception involved assignment of a claim for the purposes of litigation, which was not relevant on the facts.
But Buckley LJ went further. He pointed out that the trustees in the case, as the holders of the legal estate, were the only possible plaintiffs. He added: I am startled that any one should put forward the proposition that trustees, like the plaintiffs, come within the rule as to "nominal plaintiffs," because they have no beneficial interest in the subject-matter of the litigation. If this proposition were true, it would apply equally to any trustees, whether of a marriage settlement or a will, or for debenture-holders, and it would follow that trustees could be ordered, if impecunious, to give security for costs in any action brought by them as trustees, on the ground that they, personally, had no beneficial interest in the subject-matter of the action. Such a proposition appears to me altogether untenable.
In my view this reasoning applies equally to r 42.21(1)(e). Of course, to say that the trustee of a trust who is not a beneficiary has no interest in the assets of the trust is an oversimplification anyway. The trustee will usually have an interest in the property to the extent that it may be required for recoupment of expenses pursuant to the trustee's right of indemnity for expenses incurred as trustee: see Chief Commissioner of Stamp Duties for New South Wales v Buckle (1998) 192 CLR 226 at 246 [48]. But even leaving this aside, the trustee has been vested with the legal right to sue (I use this phrase to include an equitable right of action which is itself held on trust). That should be sufficient for the purposes of the rule to say that the trustee is suing in his or her own interests.
This conclusion is also supported by practical considerations. It would be an inconvenient distraction if a court, in applying the rule, had to look behind the plaintiff's legal title and answer potentially contestable questions about whether the plaintiff is a trustee, and, if so, what beneficial interest the plaintiff may have in the trust. Especially is this so because the rule does not only apply in this Court but also applies in the Local Court (which has no equitable jurisdiction) and the District Court (which has a limited equitable jurisdiction).
It follows that, with respect, I agree with the decision of Beech-Jones J in Binetter that the plaintiff in that case did not fall within the terms of the rule, but not because the plaintiff happened to be a beneficiary of the estate in question. The fact that the plaintiff was the legal personal representative of the estate would, for me, be sufficient to take the case out of the rule.
Similar observations apply to the decision in Rowe. The plaintiff in that case was exercising her right to sue as the former proprietor of a registered legal estate in the properties in question, a point made by Holt AsJ at [24]. The fact that the estate may have been held on constructive trust, and that there was no trustee then in existence to enforce that constructive trust, was irrelevant.
But in the present case Robert is not himself the trustee of the Trust. The trustee remains GCN. The order I have made merely authorises Robert, in these proceedings, to plead and pursue claims on behalf of the Trust.
In my view, this is a crucial distinction. Robert is pursuing the claim on behalf of another person, namely GCN. This is illustrated by the fact that, should Robert succeed, judgment will not be entered in his personal favour but in favour of GCN: see J1 at [53]. The fact that Robert has an indirect interest in one of the claims, in the sense that he stands to benefit from a judgment in favour of GCN, does not alter the position.
For these reasons, I consider that Robert's claim against the Director Defendants was a claim to which rule 42.21(1)(e) applied. I reject the submission by counsel for Robert that the application, so far as it relied upon that rule, should have failed at the threshold.

Plaintiff's inability to pay defendants' costs

As already noted, at the hearing on 18 November I concluded that, assuming the power under UCPR 42.21(1)(e) was available, the Director Defendants had failed to demonstrate that there were reasonable grounds for the belief that Robert would be unable to pay their costs on the evidence. The result was that the application had to fail even if, as I have now held, the rule applied. I now set out my reasons for that conclusion.
I have already referred to Mr Ardagna's estimate of the future recoverable costs of the Director Defendants in the proceedings as being at least $528,000. In his affidavit, Mr Ardagna noted that if the Director Defendants are successful in the proceedings they will recover their costs to date, although that is not part of the amount for which they seek security. Mr Ardagna also stated that Robert would be liable for his own costs, and for those of GCN. Mr Ardagna stated that it was "quite likely" that Robert would be exposed to a total costs liability exceeding $2 million if unsuccessful in the proceedings.
There was no affidavit evidence from Robert as to his financial position. The only evidence on this question came from property searches carried out on behalf of the Director Defendants and documents produced by Robert in response to a notice to produce issued by the solicitors for the Director Defendants.
Property searches show that Robert, in co-ownership with his wife, owns a property at Mosman on Sydney's North Shore, which is presumably the matrimonial home. The property is mortgaged to Westpac Banking Corporation ("Westpac"). Robert apparently owns no other property in New South Wales. There is no evidence as to the value of the Mosman property.
Bank statements from Westpac in response to the notice to produce show that Robert and his wife have two loan accounts with Westpac. Both are described as "investment loans" and are presumably secured on the Mosman property. The statement for the first account, which ends on 8 July this year, records a total amount drawn down of $590,000 with a further $237,000 available. The statement for the other account, which goes up to 2 September, shows a liability of $637,000 with an offset account which was $6,000 in credit. Thus the total indebtedness to Westpac is $1.2 million, with a possibility of another $0.2 million being drawn down in future.
Also in evidence was a statement from a share brokerage account in Robert's name. This showed numerous share-trading transactions, resulting in holdings which were valued at $166,000 as at 30 June.
Counsel for the Director Defendants, as I understood their argument, accepted that the onus lay on the Director Defendants to establish that the requirements of r 42.21(1)(e) was satisfied. Counsel accepted that "reason to believe" for the purposes of the rule required some belief based on a rational foundation. But counsel submitted that the existence of a real and substantial risk that Robert would be unable to meet the Director Defendants' costs if successful was sufficient to establish such a belief.
Counsel's proposition was based on the Victorian Court of Appeal decision Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377. But the interpretation of r 42.21(1)(e) must take account of the later decision in this State's Court of Appeal in Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ASCR 301. The decision shows that, at least in this State, the terms of counsel's proposition may be misleading.
Cornelius concerned the power to grant security for costs against a corporation as plaintiff, under either UCPR r 42.21(1)(d) or s 1335(1) of the Corporations Act 2001 (Cth). The impecuniosity requirement in r 42.21(1)(d) was the same as the one under r 42.21(1)(e), namely that there was "reason to believe that the corporation will be unable to pay the defendant's costs". The primary judge had asked whether there was a risk that was "real" or "sensible", a formulation which had been accepted by both parties (see [15]). The defendant, who had unsuccessfully applied for security, argued on appeal that the primary judge should have found that such a risk existed and awarded security.
The appeal failed. The leading judgment was given by Macfarlan JA. His Honour stated (at [15]) that the test used at first instance had been too favourable to the defendant and pointed out (at [16]) that the statute referred to there being reason to believe that the company "will" be unable to pay the costs, not merely that there is a risk of being unable to do so. His Honour emphasised (at [17]) that the Court must apply the statutory language without imposing any gloss on it.
As I have already pointed out, Mr Ardagna's estimate of recoverable costs for the balance of the proceedings of $528,000 involved a great deal of uncertainty. The rest of the case might not be as lengthy, and hence as expensive for the Director Defendants, as Mr Ardagna assumed.
On the other hand, Mr Ardagna's estimate covered only the future costs of the proceedings. If the Director Defendants were to succeed, they would receive an order in their favour for the whole of their costs of the proceedings (apart from the costs of their unsuccessful summary dismissal and strike out application, the costs of which had been awarded in Robert's favour: see J2 at [79]).
Mr Ardagna did not provide any figures for the costs of the Director Defendants up to November last year (net of the costs of the summary dismissal and strike-out application). There was thus no evidence from which their total recoverable costs of the proceedings could be estimated. On the information available to me, the most one could say was that the minimum figure might be $400,000 or so, but this really was guesswork.
Certainly, Robert's overall liability for costs was an integer in determining his likely future financial position, and thus in determining whether there was "reason to believe" that he would be unable to pay the Director Defendants' costs if successful. But there were difficulties in using Mr Ardagna's $2 million estimate of that overall liability.
Obviously, Mr Ardagna had no direct knowledge of what Robert was being charged by his lawyers to run the proceedings, or what GCN was being charged. Furthermore, it could not simply be assumed that Robert would be liable for all of GCN's costs. For the purposes of the application, the hypothesis was that the Director Defendants would succeed in their defence and obtain an order for costs. But the rule did not require the Court to make the further assumption that Robert would fail against GCN. The financial consequences of that separate claim, to the extent that they were a relevant factor in the application, were, like any other factor bearing on Robert's financial position, a matter to be proved by the Director Defendants.
On the evidence to which I have referred, Robert had a reasonable case that at least some of the income distributions made by GCN over the period from 2008/2009 to 2019/2020 were invalid. Nor could it be assumed that GCN would incur significant further costs. It was at least possible that GCN would leave the defence of the proceedings to the Director Defendants (in fact it now seems that this is what will happen).
GCN has no assets, but even if Robert fails to recover monies from GCN, there may be recoveries from defendants other than the Director Defendants. There was simply nothing before the Court that would allow me to make any judgment about how likely that was or what might be recoverable. And even if there were no recovery, Robert might still succeed against GCN which would mean that he would not have to pay GCN's costs at all.
In summary, if Robert were to fail against the Director Defendants, he would be liable for their costs of the proceedings (net of the costs of the summary dismissal and strike-out application) and would have to bear his costs of the claims against them. But it was impossible to say what the net cost of the proceedings, taken as a whole, would be to him.
The evidentiary problems with the application were however even more fundamental. The simple fact was that I had no complete evidence before me which would allow me to make any reliable assessment of Robert's current, and likely future, financial position.
It is true that the evidence established a liability to Westpac, secured on the Mosman property, of $1.2 million. But for all I knew this might have been only a fraction of the value of the Mosman property. And while it seemed that Robert was not currently earning any substantial income, there was no evidence whatever of what he was spending on living expenses (noting that his wife might have been contributing to some of those expenses).
All I did know was that Robert received a distribution from the Trust in 2019 in the sum of at least $1.6 million. That sum alone would have been more than sufficient to meet the costs of the Director Defendants of the proceedings on the material before me. There was nothing before the Court to suggest that Robert had dissipated these monies. Even if there was no apparent indication that he had invested them, he might have used them to reduce the debt on the Mosman property, in which case the equity would correspondingly have increased.
In these circumstances I did not consider that the evidence established there was "reason to believe" that Robert would be unable to meet the Director Defendants' costs if he failed against them in the proceedings. While it was possible that he might be unable to do so, that was really only a speculative possibility. If anything, it appeared to me that, so far as the evidence went, costs in the vicinity of the amount claimed in the application would be within Robert's financial means.

Gillespie v Gillespies Cranes Nominees Pty Ltd

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