Supreme Court of WA|2004-03-30|Before: Smith J

Global Finance Group Pty Ltd (In Liq) & Ors v Marsden Partners (A Firm) [2004] WASC 52 (30 March 2004)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : GLOBAL FINANCE GROUP PTY LTD (IN LIQ) & ORS -v- MARSDEN PARTNERS (A FIRM) [2004] WASC 52

BETWEEN : GLOBAL FINANCE GROUP PTY LTD (IN LIQ) (ACN 009 380 205)

GLOBAL FINANCE GROUP PTY LTD (IN LIQ) (ACN 009 380 205)

Practice and procedure - Costs - Security for costs - General principles - Plaintiff in liquidation and with no assets in Western Australia - Litigation funding agreement - Need to give security for costs conceded - Dispute about amount of security - Dispute about form of security - Whether undertaking or deed of guarantee by litigation funder sufficient - Whether bank guarantee required - Amount of security - Form of order

Rules of the Supreme Court (WA), O 25 r 2(e) and r 5

Plaintiff by Counterclaim : Mallesons Stephen Jaques

Arkin v Borchard Lines Ltd & Ors [2003] EWHC 2844

Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates Pty Ltd (1986) 13 FCR 46

Costa Vraca v Bell Regal Pty Ltd [2003] FCA 65

Elfic Ltd v Macks [2003] 2 Qd R 125

Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405

Hamilton v Al Fayed (No 2) [2002] EWCA Civ 665; [2002] 3 All ER 641

Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523

Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744

Jodast Pty Ltd v A & J Blattner Pty Ltd (1991) 104 ALR 248

KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189

Magic Menu Systems Pty Ltd & MMS Franchising Pty Ltd v AFA Facilitation Pty Ltd, Janus, Kobble Creek Pty Ltd & Simon (1997) 72 FCR 261

Re Movitor Pty Ltd (In liq) (1996) 64 FCR 380

Re Tosich Constructions Pty Ltd (1997) 73 FCR 219

Rosengrens Ltd v Safe Deposit Centres Ltd [1984] 3 All ER 198

Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 1 QB 609

Territory Broadcasting Pty Ltd v Darwin Broadcasters Pty Ltd [1992] NTSC 3; (1992) 106 FLR 66

Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241

UTSA Pty Ltd (In liq) v Ultra Tune Australia Pty Ltd [1997] 1 VR 667

Weily's Quarries v Devine Shipping Pty Ltd [1994] TASSC 76; (1994) 14 ACSR 186

1 ROBERTS-SMITH J: This is an application for an order for security of costs against the first plaintiff ("Global") pursuant to s 1335 of the Corporations Act 2001 (Cth) and O 25 r 2(e) and r 5 of the Rules of the Supreme Court ("RSC").

2 The application is made by chamber summons filed 30 January 2004.

3 The ground of the application is that there are reasonable grounds to believe that the first plaintiff will be unable to pay the defendant's costs of defending this action as it is in liquidation and does not hold any property in Western Australia.

4 Specifically, the orders sought by the defendant ("Marsdens") is that within 14 days of the date of order, Global give security pursuant to O 25 r 2(e) or O 25 r 3 of the Rules of the Supreme Court or s 1335(1) of the Corporations Act 2001 for the defendant's costs of the action in the sum of not less than $300,000 and that in the meantime, all further proceedings in the action be stayed.

5 The defendant relies upon three affidavits, being those of Roger Roy Nicholas sworn 30 January 2004, Michael John Waterson sworn 18 February 2004 and Edward John Guntrip sworn 19 February 2004.

6 The plaintiff relies upon two affidavits, one of Hugh McLernon sworn 10 February 2004 and one of Laura Ann Del Fuoco sworn 25 February 2004.

7 Before dealing with the substance of the application it is necessary to say something briefly about the nature of the action itself.

8 The writ of summons was filed on 29 November 2000. Global is a corporation which carried on business as a mortgage broker, under a finance broker's licence issued under s 29 of the Finance Brokers Control Act 1975 (WA) ("the FBC Act"), by the Finance Brokers' Supervisory Board ("the FBSB").

9 Global was wound up by special resolution of its creditors on 20 April 1999.

10 The second plaintiffs ("the Webbs") were clients of Global.

11 Marsdens is a firm of certified practising accountants. Marsdens conducted audits of Global's trust account pursuant to s 50 of the FCB Act.

12 Global alleges misleading conduct, negligence, negligent mis-statement and breach of contract, in respect of the audit and audit reports for the years ending 31 December 1995, 1996, 1997 and the six month period ending on 30 June 1996. Marsdens has denied the claim and has filed a counterclaim.

13 The parties anticipate the trial will take six weeks.

14 Although discovery is not yet complete, the first plaintiff's discovery already amounts to some 80 boxes of documents.

15 The first plaintiff's litigation is being funded by Insolvency Management Fund Pty Ltd ("IMF") by agreement between IMF and Global's liquidators.

16 This is one of a number of actions which arise out of the activities of finance brokers in Western Australia between 1994 and the late nineties, which resulted in loss to some 2,000 or so investors.

17 Some of those investors have brought an action against the FBSB based on misfeasance in public office and negligence. Their actions are being funded by IMF, with which they have all entered into funding agreements. As part of those arrangements they have all agreed to retain the firm of Solomon Brothers as their solicitors. IMF is apparently funding approximately 38 cases arising out of finance broking transactions.

18 The nature of the funding arrangements was the basis of an application for a stay of proceedings in Clairs Keeley (A Firm) v Treacy & Ors [2003] WASCA 299, a case in which other investors have brought actions against finance brokers, mortgagors, guarantors and solicitors. The stay was granted (per Templeman and Pullin JJ, with whom Parker and Wheeler JJ agreed, Murray J dissenting).

19 The Court held the funding agreement and the solicitors' retainer were an abuse of process. Following the Clairs Keeley decision, plaintiffs in that and related actions entered into variations of the funding agreement and retainer.

20 Some of those came before McLure J in Van Stokkum & Ors v Finance Brokers Supervisory Board [2004] WASC 42, on a stay application by the FBSB. Her Honour did not accept the plaintiffs' submission that the varied agreements overcame the problems with them identified in Clairs Keeley and nor that there was anything otherwise to sufficiently distinguish the two cases. Her Honour granted the stay.

21 All of that is to briefly give some wider context to the present application. The funding or retainer arrangements between Global's liquidators and IMF were not in issue before me.

22 In his affidavit, Nicholas gives the following account relevant to the present application.

23 He is a partner of the defendant. On his instructions, Mr Bruce Dodd, a partner of Marsdens' solicitors, originally sought security for costs from Global in the amount of $100,000 in January 2001.

24 Following negotiations, Global offered security for costs in the form of a guarantee issued by HSBC Bank Australia Ltd ("HSBC") for an amount of $60,000 with a further guarantee for $60,000 to be provided prior to trial.

25 That guarantee was executed on 31 May 2001. Nicholas deposes that it expired on 22 February 2002.

26 In the course of the hearing before me however, counsel for Global indicated that his understanding was that the guarantee was renewable and was in fact renewed. There apparently being some dispute about that, counsel agreed that the position should be clarified and the position confirmed with me by letter following the hearing.

27 By letter to my Associate dated 17 March 2004, Mallesons Stephen Jaques advised that the HSBC guarantee had now been renewed on 8 March 2004, the new expiry date being 5 March 2006. They state that consequently Global has now provided valid security in accordance with the terms of the guarantee to the extent of $60,000. I accept that to be the position.

29 Marsdens now seeks security for costs for the remainder of the action in the amount of $300,000 rather than on an incremental basis. In the event this security proves inadequate for the entire action, Marsdens reserve their right to bring a further application for security for costs.

30 A draft bill of costs has been prepared for Marsdens. That is annexure RN6 to Nicholas' affidavit. It has been prepared on the basis that the scale of costs will be lifted given the complex nature of the action.

31 The draft bill of costs shows a total of almost $773,000 for solicitors' and counsels' fees and a total of almost $833,000 with disbursements (the bulk being an allowance of $60,000 for expert witness fees). The fees are predicated on a trial lasting 60 days.

32 The exchange of correspondence annexed to Nicholas' affidavit reveals on-going negotiations as to the issue of security for costs.

33 On 26 November 2003, Williams & Hughes, Global's solicitors, wrote to Mallesons advising that the approach IMF has adopted and "... which is generally agreed to by parties seeking security" is to give a formal undertaking to the court that it will meet any adverse costs order made against the party being funded. They said that in their view such an undertaking would fully protect the defendant's position in relation to costs, as IMF is a company listed on the Australian Stock Exchange Ltd and has significant asset backing.

34 In their letter responding to that dated 3 December 2003, Mallesons advised they were currently seeking Marsdens' instructions but in the meantime enquired whether or not the Webbs' pursuit of the proceedings was also being funded by IMF.

35 By facsimile letter dated 22 December 2003, Williams & Hughes advised that the prosecution by the Webbs of their claim is not being funded by IMF but rather is being maintained by Williams & Hughes on the basis set out in Clyne v New South Wales Bar Association [1960] HCA 40; (1960) 104 CLR 186. They added however, that whilst IMF is not funding the Webbs' claim, it has provided them with an indemnity in relation to any adverse costs orders. In consideration of the indemnity, IMF will receive a percentage of the judgment or settlement the Webbs may receive.

36 On 14 January 2004 Mallesons again wrote to Williams & Hughes. Much of the letter concerned the basis upon which Williams & Hughes was acting for the Webbs, but in relation to the issue of security for costs, Mallesons advised that Marsdens was not prepared to accept an undertaking from IMF. They required $100,000 to be paid into an account to be held in the joint names of Global and Marsdens, or an acceptable bank guarantee for $100,000 and foreshadowed they would seek further security for costs when that $100,000 had been exhausted.

37 On 16 January 2004 Williams & Hughes wrote to Mallesons asking on what basis Mallesons was contending that Marsdens' position in relation to costs would not be adequately protected by an undertaking from IMF to meet any adverse costs order.

38 Mallesons responded by letter dated 16 January 2004. They advised that IMF's undertaking was unacceptable to Marsdens because:

1. they had no knowledge of IMF's current financial status and did not intend to incur costs investigating the issue;

2. the financial status of IMF was likely to change (either for the better or worse) during the course of the proceedings, meaning that it would be impossible for their client to properly assess the value of any undertaking at the time when the security for costs is likely to have to be relied upon; and

3. IMF is not a known bank or financial institution.

They reiterated their requirement for payment of $100,000 into a joint account or an acceptable guarantee from a known bank or financial institution.

39 Guntrip's affidavit is quite short. The purpose of it is simply to annex a copy of the funding agreement between IMF and the liquidators of Global.

40 In his affidavit McLernon deposes that he is the managing director of IMF (Australia) Ltd and that Insolvency Litigation Fund Pty Ltd (formerly named Insolvency Management Fund Pty Ltd) ("ILF") is a wholly owned subsidiary of IMF. IMF is a litigation funding company listed on the Australian Stock Exchange Ltd. He is also a director of ILF.

41 A funding agreement has been made between the liquidators of Global and ILF in relation to the conduct of this action.

42 Pursuant to the funding agreement, ILF has indemnified the liquidators and Global in respect of any adverse costs order that may be made against them in the action.

43 For consistency, I shall continue to refer to the plaintiff's litigation funder as IMF, except where it is necessary to make the distinction between IMF and ILF.

44 IMF propose that the defendant's cost position be protected in one of two alternate ways. They are first that IMF will provide a formal undertaking to the court that they will meet any adverse costs order that may be made against Global. The second is that alternatively, IMF will enter into a Deed of Guarantee with Marsdens direct to guarantee Global's costs position.

45 McLernon deposes that IMF has adopted the above approach rather than agreeing to provide further bank guarantees for a number of reasons. The first is because that is the extent of its obligation under the funding agreement. The second is that the provision of a bank guarantee would require IMF to put aside funds equal to the amount of the guarantee for a number of years prior to any potential costs liability arising. The third is because the net asset position of IMF makes it highly probable that any adverse costs order will be met by IMF and the fourth is because IMF report its accounts to the ASX every six months and their cash position every three months, the defendant can easily monitor its financial position and make any appropriate application for security should that seriously deteriorate from its current position. Access is available to the account through a number of sites on the internet.

46 Attached to the McLernon affidavit are copies of audited accounts for IMF and ILF as at 30 June 2003 and half-yearly accounts as at 31 December 2003 (these have not yet been fully audited but are about to be lodged with the ASX and the Australian Securities and Investments Commission and will be audited prior to lodgement).

47 Finally, McLernon deposes that IMF has about $1 million in outstanding guarantees securing costs in judicial proceedings around Australia. Most of those guarantees were provided when the net asset position of IMF was half its present size.

48 In his affidavit Waterson states that neither of the offers made by IMF is acceptable to Marsdens. He annexes to his affidavit a true copy of a presentation prepared by IMF in August 2003 relating to the status of IMF's financial and business position. He obtained that from IMF's website. He points out the presentation contains the following statements by IMF:

When required to provide security for costs 'IMF obtains a bank guarantee'

'One or two serious losses or delay would put a big dent in our figures'

'Serious delay in a large number of cases can cause distortion to the budget and problems with cashflow'."

49 Del Fuoco is a solicitor employed by Williams & Hughes. She has prepared a comparison of the position of the IMF Group as at 31 December 2001 with its position as at 31 December 2003. A copy of that analysis is annexed to her affidavit.

51 There is no dispute between the parties as to whether the plaintiff should provide security. That is common ground. It was in recognition of it that IMF (and ILF) provided security to the defendant in this action by way of a bank guarantee into 2001 and continues to do so.

52 What is in dispute is the amount of the security required and the form of it.

53 In Associated Euro Atlantic Shipping Corporation v Maritime Union of Australia & Ors, unreported; FCA; 22 August 1997, the respondents to an application in the Federal Court sought an order that the applicant provide security for its costs. The applicant was a corporation which had been incorporated pursuant to the Liberian Business Corporation Act and with a postal address in Monrovia, Liberia. It had no assets within the jurisdiction.

54 Branson J found that no circumstances had been identified which would suggest against the making of orders for security for costs "in accordance with usual practice". However she noted that the real contest before her was as to the amounts which the order sought should be made and the manner in which security for the payment of such amounts should be provided. The applicant proposed it should be in the form of a "P & I Club" letter of undertaking, on the basis that such letters of undertaking are regularly used in the Admiralty jurisdiction of the Federal Court when furnishing security on behalf of foreign ship owners. All her Honour said about this was that:

"I am not aware of a case in the general jurisdiction of this Court in which security for costs by way of 'P & I' letter of undertaking has been accepted. I see no reason for the usual practice in such cases of requiring security to be provided by way of cash, bank guarantee or bank bond to be departed from in this case."

55 In respect of the appropriate amount, her Honour noted that the respondents' affidavit material estimated the properly recoverable party and party costs for the respondents up to and including costs for a five day hearing.

56 Noting that pre-trial procedures had not been completed and in particular, the time for the filing of evidence by affidavit had not expired, her Honour considered it not appropriate to order that the applicant provide security for the costs of the hearing at that stage. The appropriate course, in her Honour's view, was to make an order in a sum designed to take the matter up to the time at which it would be set down for hearing and to reserve to the parties liberty to apply at that time, or earlier should circumstances materially change, to vary the amount for which security for costs had been given. She agreed with the observation of Lindgren J in Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd [1995] FCA 1778; (1995) 134 ALR 187 at 179 that:

"The amount is in the discretion of the Court and should be such sum as the Court thinks just, having regard to all the circumstances of the case. Obviously, a factor of prime importance would be the amount of the respondent's costs which an applicant, if unsuccessful, will be ordered to pay to the respondent if the proceeding continues to a determination by the Court. But the estimation of that amount involves many factors, some of these imponderable."

"The Court on an application of this kind does not set out to give a complete and certain indemnity to a respondent (Fullagar J in Brundza v Robbie & Co [No 2] [1952] HCA 49; (1952) 88 CLR 171 at 175). The best that the Court can do at this early stage in the life of the proceeding is to calculate the sum which it thinks just to order to be secured, having regard primarily to a reasonable estimate of the likely taxable costs of the first respondent. Such estimate should, in my view, be a conservative one; first, because the Court can be moved to vary the amount under s56(3) of the Federal Court Act and secondly, because at this early stage in the proceeding, the possibility of settlement before the matter is fully prepared for trial may be taken into account (French J in Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497 at 515)."

58 The same principles, in my view, are applicable an application under s 1335(1) of the Corporations Act 2001 (Cth) and O 25 r 5 of the Rules of The Supreme Court.

59 A not dissimilar approach was taken by Young CJ in Equity in Chartspike Pty Ltd (In liq) v Chahoud [2001] NSWSC 585. That involved an application for security for costs in an action in the professional negligence list. The plaintiff was a company in liquidation and was insolvent. The defendant was its former solicitor. The liquidator had entered into a funding agreement with Insolvency Management Fund Pty Ltd (which was later purchased by Max Multimedia Limited, which later became IMF) which had a connection with the Walker Law Group. The agreement gave the liquidator and the plaintiff company an indemnity in respect of any adverse costs order. It also provided that the funder would obtain a guarantee from the Hong Kong Bank of Australia up to $60,000 on signing of the funding agreement and a further $60,000 prior to the hearing of the proceedings commencing. (It was conceded that the defendant's costs of the hearing would be about $120,000).

60 Young CJ did not consider these provisions much comfort to the defendant, as it might well be argued that if the liquidator and the company had not got the assets to meet an adverse costs order, then there would be difficulty in enforcing the indemnity. As his Honour saw it, the situation was that the plaintiff was an insolvent company which had contracted to have the liquidation funded by a third party, in return for that third party receiving a share of the verdict. In such circumstances it was appropriate that the third party bear part of the risk. As the costs of the hearing were estimated at about $120,000, his Honour thought it appropriate to make an order for $60,000 in the first instance with liberty to apply to increase that amount as the case came closer to hearing. He ordered that the plaintiff provide security for costs to the defendant in the sum of $60,000 and that "... such security may be made by bank guarantee or in such other form as is acceptable to the defendant's solicitors or to a Registrar."

61 Northern Southern Western Supermarkets Pty Ltd (Subject to a Deed of Company Arrangement) v HIH Casualty & General Insurance Ltd (In liq) [2002] NSWSC 541 was another case in which the litigation was being funded by a company from the IMF Group.

62 The plaintiff was claiming an amount in the order of $4.75 million plus interest since 1996. The first defendant was said to have been the insurer of the plaintiff. The second defendant was the plaintiff's insurance broker. The proceedings concerned a claim for indemnity by the plaintiff in respect of a fire which destroyed supermarket premises in respect of which a claim for indemnity had been denied by the first defendant.

63 The plaintiff had entered into a funding agreement with Insolvency Litigation Fund Pty Ltd (previously called Insolvency Management Fund Pty Ltd).

64 On the issues of the amount of security to be provided and the form of it, Einstein J first highlighted the difficulties inherent in the situation in which counsel for one party were estimating costs on the basis that the final hearing might be concluded within a period of three weeks when counsel for the other parties were suggesting a period of five weeks would be required. He said that at that stage of the interlocutory proceedings where the evidence was some distance from being complete, it was very difficult for a court to assess the likely duration of the final hearing, although the case management procedures were likely to put the court in a better position to estimate that at a later stage.

65 His Honour accordingly decided to make an order for security for costs on the basis of an estimated three week final hearing but with liberty to the defendants to make a further application for an increased security order.

66 On the form of security to be provided, the plaintiff had submitted that the court ought to accept an undertaking given to it by the holding company of the litigation funder to pay any adverse costs order made against the plaintiff in favour of the defendants.

67 His Honour had before him the IMF half-yearly report to 31 December 2001. His Honour set out the following paragraphs from the "Review and Result of Operations" section of the Director's report:

"1. The net loss after tax, of the consolidated entity, for the 6 month period ending 31 December 2001 amounted to $1,237 million (2000: $2,904 million).

2. The prospectus to raise the initial capital of the company arrived with prospective shareholders on 11 September 2001. Despite this unfortunate timing the issue closed oversubscribed and the company commenced business as a litigation funder in October 2001.

3. The first aim of management was to retire the $3 million due to Expectation Pty Ltd by 30 June 2002. At the time of writing we are half way towards that goal and believe that, if the current list of cases go according to plan, we should have those monies repaid around 30 June 2002.

4. The company has two case streams:

(a) 80 or so smaller cases overseen by the Sydney Office;

(b) 10 or so large cases split between the Sydney and the Perth Office.

5. Large cases are considered to be those likely to bring in $1 million or more in net income to IMF.

6. It is the intention of the Board to announce the signing of agreements to fund these large cases as and when future funding agreements are completed. We will also announce to the ASX any settlement, judgment and abandonment of these cases.

7. The current large cases being funded by the company are as follows:

(a) an action pursuing $10 million by 200 applicants in the Federal Court in Queensland against Patrick Corp and others;

(b) an action by 1,200 plaintiffs in the Supreme Court of Western Australia pursuing about $80 million from the Finance Brokers Control Board and various legal firms in Western Australia;

(c) an action by some 200 plaintiffs in the Supreme Court of New South Wales pursuing about $30 million from Financial Wisdom and Twenty First Australia Inc;

(d) an action by defendants of the deceased passengers in the Whyalla Airlines crash in the USA pursuing approximately $50 million;

(e) an action by a liquidator in the Supreme Court of New South Wales pursuing the directors of Doran Construction for approximately $4 million;

(f) an action in the Supreme Court of New South Wales on behalf of a liquidator suing to enforce an insurance policy for approximately $5 million;

(g) an action in the Supreme Court of Queensland on behalf of a liquidator pursuing the Queensland Local Government Super Board for approximately $5 million as the result of an alleged uncommercial transaction;

(h) an action by a liquidator to be lodged in the Supreme Court of New South Wales claiming $18 million as damages for breach of fiduciary duty and other remedies;

(i) an action to be lodged in the Supreme Court of New South Wales against a firm of solicitors alleging negligence and claiming damages of $10 million;

(j) an action to be lodged in the Supreme Court of South Australia on behalf of the liquidator of Monaad Corp against an Aerospace company claiming breach of contract and negligence in manufacture with the claim set at $7 million;

(k) an action by the liquidator of Nomad Telecommunications claiming insolvent trading and preferential payments to be lodged in the Supreme Court of Victoria;

(l) a claim against an investor in relation to an investment contract claiming $30 million in the Federal Court in New South Wales.

8. Theses (sic) large cases are at various stages of completion ranging from the recent issue of legal proceedings to being on the verge of settlement.

9. At the present time in the absence of serious competition the company is able to pick and choose cases it will fund from the many opportunities which are presented to it. This will no doubt change with the advent of competition.

10. The company's operations are running generally according to its expense budget. ..."

68 Having considered that material, his Honour set out his conclusions in the following passages:

"[29] Mr Foster has submitted that the holding company offering the undertaking to the Court, is a public company with net assets of approximately twelve million dollars. Mr Pritchard of counsel for the second defendant, in drawing the Court's attention to the Review and Results of Operation section of the half yearly report, has made the point, which it seems to me is one of real substance, that the nature of the activities of Insolvency Litigation Fund Pty Ltd in terms of the cases being funded by it and the scale of the litigation currently being funded by the company, is such that defendants, entitled to certainty in terms of security for costs, should not be obliged to have any possible question marks over the value of their security for costs protection in the form of a mere undertaking to the Court, albeit by the public company. Clearly enough the list of proceedings in respect of which the funder is currently funding large cases may involve costs of very high order if plaintiffs were unsuccessful. Additionally, as it seems to me, the mere proffering to Court of an undertaking by the funder of the type Mr Foster suggests should be sufficient, exposes the defendants to the circumstance that other large cases may well become the subject of funding, so that over a period of time during the pendency of the remaining interlocutory steps in these proceedings, the defendants would simply necessarily have no control over precisely what it was that Insolvency Management Fund Ltd or its subsidiary were or were not disposed to fund.

[30] In all of those circumstances and bearing in mind what I understand from its name, Insolvency Litigation Fund Pty Ltd, to be the central undertaking of this company, it seems to me appropriate to require as part of the orders for security, that a bank guarantee in conventional form for the payment by the plaintiff or funder be provided to the defendants." (Emphasis in original).

69 In Global's outline of submissions it is said there is a growing recognition, both in Australia and abroad, that litigation funding serves a legitimate, and increasingly important, community purpose. It is said this recognition corresponds with public concerns about the cost of contemporary litigation, the inadequacy of Legal Aid funding and the denial of access to justice to an increasingly large proportion of the population.

70 It is submitted that this Court should not approach the question of security for costs to be provided by a litigation funder on any basis different to that on which it would approach the same issue where, for example, it were considering an order for security for costs to be provided by those who stand behind an impecunious corporate plaintiff, for example the shareholders or the secured creditor of an impecunious company. In those cases, and in the present, the question is whether the security proffered will provide the defendant with adequate security for its costs, should it be successful at trial (Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542). Whether the person standing behind the impecunious plaintiff is a litigation funder or "stands behind" in some other role is not to the point.

71 I accept the submission that the question is whether or not the security is adequate and appropriate. In my view however, the character, nature and circumstances of the person funding the impecunious plaintiff are matters which may bear upon the exercise of the court's discretion.

72 The fundamental submission made by Mr Stone on behalf of Global is that the court can accept there could be no question about the ability of IMF to pay $700,000 in accordance with its undertaking, should the plaintiff fail.

73 In support of this he urges upon me the argument that the security is being offered by a public company listed on the ASX, which accordingly is subject to financial audit every six months and is required to report to the ASX and provide its balance sheet and profit and loss account for the previous six months, on a six monthly basis. That information is then available on the IMF website. His next point is that IMF is not only a public company, it is a very successful one. He relies upon McLernon's affidavit which shows that in the financial year to 30 June 2003, IMF made a net profit of nearly $9 million with net assets in excess of $20 million and total current assets, that is liquid assets, of some $21 million. Current liabilities are only $4.2 million and non-current liabilities are $2.1 million.

74 Mr Stone points out that the position of IMF now is vastly different to what it was before Einstein J in the Northern Southern case in 2002. IMF had been floated on 11 September 2001, so Einstein J was dealing with a public company which had a track record on the material before his Honour of only three months. The Del Fuoco affidavit shows a vastly improved position since then. The net assets have risen from $12 million to $22 million and cash has improved by almost $3 million.

75 Mr Lundberg had drawn my attention to IMF material which stated it provided security by bank guarantee. Mr Stone concedes that was so, but says that IMF is starting to take the view, and had asked the liquidator to instruct him to advance the view, that the balance sheet and the performance of the company are now strong enough to make a bank guarantee completely unnecessary.

76 The IMF presentation annexed to Waterson's affidavit details the evolution of IMF from the floating of Max Multimedia Ltd on the ASX in January 2000, up to August 2003. It is a presentation by Alden Halse, Chairman and McLernon, Managing Director of IMF. It notes, inter alia, that litigation funding is a national business which takes place in the Supreme Court of each State and Territory and in the Federal Court of Australia. In general terms the company has moved well away from having a large number of small cases to a business model of a smaller number of larger cases. It does not fund cases in which the claim is less than $2 million. IMF pays the legal costs of the client and the court costs of the litigation. In addition, IMF indemnifies the client against an adverse costs order if the litigation is unsuccessful. It is often the case that the court will order a funded plaintiff to provide security for the defendant's costs. The presentation states that in those circumstances IMF obtains a bank guarantee "... which, of course, requires IMF to place on deposit an amount equal to the guarantee. This is not an extra cost but it is a cashflow factor." After a successful settlement or judgment IMF is paid out the amount it has actually expended and then receives between 30 per cent and 40 per cent of the judgment.

77 The first test applied by IMF is not whether the litigation will succeed, but rather whether the defendant will be able to pay once the litigation has been won. The second question applied by IMF to all litigation funding opportunities is "Is it virtually certain that this litigation will be successful?"

78 The presentation states that IMF oversees the activities of the solicitors and ensures that time-lines, budgets and court orders are met. IMF executives will often be involved in the major strategic moves during the course of the litigation. IMF reports to the client during the course of the litigation and takes instructions from the client on any major steps. The decision as to settlement of the litigation always remains with the client. The major clause of all funding agreements and the only non-negotiable term, is that IMF may withdraw from the litigation funding agreement at any time. IMF requires a return on funds invested in cases, of about 300 per cent.

79 There is a very careful balance to be drawn and maintained between the amount of funds invested in cases and the amount of funds held in a liquid form, so as to ensure there is never any question as to the ability of the company to meet its financial commitments.

80 The presentation notes that the company was planning to have liquid cash assets of $20 million by 30 December 2003. That would be a sufficient cash buffer during the development of the company over the next two years. It was expressly noted that that was a plan, not a forecast. The company then had cash at bank of about $10 million but had recently announced that it expected to have $13 million cash on hand as at the end of September and it believed that it required an amount of $20 million cash to enable it to operate smoothly within the litigation funding market.

81 During the first year of operation IMF did not commit funds to any case in which its funding for that case was in excess of 20 per cent of available funds. That criterion had been tightened to 10 per cent - thus it is said that IMF's largest case can only cause a loss of 10 per cent of its cash holdings.

82 IMF is confident there will be no lack of cases to fund. The presentation states:

"The history of the human race shows that the last two creatures left alive on this planet will be a cockroach and a litigator. It is highly improbable that the supply of funding opportunities will dry up.

In fact, a large number of cases which are funded by IMF would not have seen the light of day, so, in effect, IMF is, on many occasions creating litigation (by enabling litigants to have their day in court when they would otherwise be denied that opportunity.)"

83 It is noted that serious delay in a large number of cases can cause distortion to the budget and problems with cashflow and that the worst possible event for a litigation funder is not to be able to immediately meet a demand for payment by the solicitors retained by the funder or by the other side. Proper management of cashflow is therefore of paramount importance - which is the reason the company has decided to see "a very solid cash buffer" of $20 million prior to dividend distribution.

84 Finally the presentation sets out the list of current cases:

"4. Sentinel - $20 million (Supreme Court of New South Wales trial currently underway)

5. Geneva Finance - $20 million (Supreme Court of Western Australia trial 2004)

6. Pilbara Manganese - $6 million (Supreme Court of Western Australia trial early 2004)

7. Coplex Resources NL - $20 million (Supreme Court of Western Australia)

8. Finance Broking case - $90 million (Supreme Court of Western Australia)

9. Cobar Mines - $5 million (New South Wales)

10. Nomad Services - $5 million (New South Wales)

11. Mercury Rising - $20 million (Supreme Court of Victoria)

12. Barron Films - $2 million (Western Australia)

13. Simplex - $1.2 million (Queensland)

14. Marsden Partners - $12 million (Supreme Court of Western Australia)

15. Ord Minnett - $20 million (Supreme Court of Western Australia

16. Kingsheath - $5 million (Supreme Court of New South Wales)

17. Doran Constructions - $4 million (trial August 2003)

18. Henry & Edward - $4 million (Victoria - settlement negotiations under way)

19. Shifern - $3 million (Queensland)

20. Meadow Springs - $10 million (Western Australia)

21. Irlmond - $3 million (Victoria)

22. Pan Pharmaceuticals - $50 million (New South Wales)

23. Basuki - $4 million (Supreme Court of Western Australia - settlement negotiations under way)"

85 As Mr Lundberg points out, the Del Fuoco affidavit shows IMF had $11 million in cash as at 30 December 2003, which is a considerable way short of its planned position of $20 million cash by that time, the latter being that amount which IMF itself believed it required to enable it to operate smoothly within the litigation funding market.

86 He further argues that the financial broking cases being funded by IMF are, with a total $90 million claim, the largest claim currently on its books. It is also the case in which the Full Court ordered a stay in Clairs Keeley (since Mr Lundberg made that submission a similar order has been made by McLure J in Van Stokkum as I have already noted). These judicial developments go to the evaluation of the risks of litigation funding.

87 Notwithstanding the business policies and practices adopted by IMF to manage risk and its financial exposure, I think the general point made by Mr Lundberg is sound. It is that this is a developing and still evolving area of business and like any other commercial activity, is subject to commercial risk and uncertainty.

• Global is in liquidation, is impecunious and has no assets in Western Australia;

• litigation funding is being provided to Global (and on a more restricted basis, to the Webbs) by IMF as a commercial enterprise, as a result of which IMF has a direct and substantial financial interest in the litigation - and, it would seem, a potentially substantial degree of control over it;

• the conduct of IMF's business is subject to commercial risk which may change with market forces, legislative changes or judicial decisions - ie the degree of commercial risk is uncertain and subject to vicissitudes of the market and the legal environment;

• the action may not come to trial for possibly two years or more; and

• the defendant's costs are likely to be substantial

the defendants should have a greater degree of financial comfort as to their costs should the plaintiffs' action fail, than that of an undertaking or guarantee from IMF.

89 It is one thing for a defendant to monitor costs being incurred in the process of litigation so as to be in a position to apply to the court for an increase for security for costs; it is quite a different thing for a defendant to be expected to monitor the publicly published financial accounts and business performance of a litigation funder, with a view to applying to the court for security for costs to be provided in a different and more secure form. In my view it is unreasonable to expect the latter.

90 A requirement that the security should be by way of bank guarantee would not be outweighed by any unreasonable detriment to Global or to IMF. Whilst there is obviously a cost in providing a bank guarantee, I consider that is one which IMF should be required to bear as an incident of its commercial interest in the litigation.

91 That brings me to the question of the amount of the security which should be provided.

92 This action is still a long way from hearing. I would like to think it would not be two years before it comes to trial, but it well could be. That being so, I consider the correct approach in principle is to require security in an amount which would realistically and not unreasonably be sufficient to cover the defendant's possible costs to entry for trial and to give liberty to the defendant to apply to vary the amount of the security.

93 Mr Stone submits that on the basis of the first plaintiff's calculations handed to me on the hearing of this application, the defendant's costs to entry for trial could reasonably be expected to be approximately $150,000. He submits that (effectively by the application of a "one-third rule") I should allow two-thirds of that and so the appropriate sum should be one in the order of $95,000 to $100,000. He points out that as is apparent from the correspondence, the defendant's solicitors were consistently seeking only $100,000 but now ask for $300,000.

94 I think the appropriate sum to provide realistic and reasonable, but not excessive, security to the defendant for its costs up to entry for trial, is one of $150,000.

95 Global has already provided an HSBC guarantee in the amount of $60,000 and so would need to provide a further bank guarantee in the sum of $90,000.

96 I would order accordingly and give the defendant liberty to apply to vary the amount of the security.

Brokers Control Act 1975

Global Finance Group Pty Ltd (In Liq) & Ors v Marsden Partners

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (142 paragraphs)

Global Finance Group Pty Ltd (In Liq) & Ors v Marsden Partners (A Firm) [2004] WASC 52 (30 March 2004)

Parties

Legislation Cited (1)

Cases Cited (11)