Re-exercise of discretion
59 I have held that the primary judge acted on a wrong principle and/or failed to take into account relevant considerations in not taking account of the desirability of having and following guidelines concerning the ordering of security for costs against a liquidator suing personally, and in proceeding on the basis that, once it was shown that the liquidator would or might be unable to meet an adverse costs order, the onus was on the liquidator to satisfy the court that the proceedings would be stultified and, if that onus was not discharged, security for costs should be granted.
60 However, in my opinion, the very heavy costs of this case, together with the involvement of the litigation funder, combined with the primary judge's finding that the liquidator himself would or may be unable to meet an adverse costs order (a finding not challenged on this appeal) are together sufficient to justify the order for security that the primary judge made, limited as it was to future costs.
61 I think it is right that the court should be concerned to ensure that a litigation funder, involved in the litigation purely for commercial profit, should not be able to avoid responsibility for costs if the litigation fails, or be in a position where there may be obstacles in the way of a successful defendant obtaining costs from such a funder. I think this is enough to take this case outside the normal position in which a liquidator suing personally is assimilated to the position of an ordinary natural plaintiff and thus generally liable to an order for security for costs only in the circumstances set out in the UCPR.
62 As regards costs, both the appeal and the cross-appeal failed and should be dismissed with costs. However, the cross-appeal was not purely defensive, and both the appeal and cross-appeal required full consideration of the same questions. Accordingly, I propose that each side bear its own costs.
63 For those reasons, in my opinion, the following orders should be made:
(1) Leave to appeal and to cross-appeal granted.
(2) Notice of Appeal and Notice of Cross-Appeal to be filed within fourteen days.
(3) Appeal and cross-appeal dismissed.
(4) Each party to bear its own costs of the appeal and cross-appeal.
64 BASTEN JA: This application raises an important question as to whether the means by which an individual plaintiff funds proceedings can engage an obligation to provide security for the costs of another party.
65 I agree with Hodgson JA as to the general principles applicable in ordering security for costs in a case involving a liquidator acting in person. However, I would not, in application of those principles have made the order for security which his Honour approves. I also agree, subject to a similar qualification, with the further reasons of Campbell JA. The qualification relates to the matters which he identifies as "departures from the usual background" at [84]. The involvement of a litigation funder is undoubtedly an additional factor to those previously listed by his Honour. My concern relates to whether that additional factor warrants an order for security in circumstances where it would not otherwise be made.
66 The reason why it may be said that the involvement of a "litigation funder" militates in favour of an order for security for costs in the case where the plaintiff is an individual and, as in this case, the liquidator of a corporation requires some further consideration. Unless the rationale for the approach to be adopted is properly understood, there is a danger that a practice will develop whereby the presence of a litigation funder will be relied upon to justify the making of such order simply because the existence of the funder is understood to be a "relevant consideration". That in turn may tend to limit the availability of litigation funding, if the funder must have the resources not merely to meet the plaintiff's costs, but also an order for security for the costs of other parties, at the beginning of the litigation.
67 To avoid an overly broad principle being derived from particular precedents and, indeed, to justify a differential approach, it is also necessary to identify the relevant features of a "litigation funder". Thus, there are a variety of situations in which a plaintiff or applicant obtains financial assistance from a third party in order to pursue litigation. For example, such assistance may be obtained through insurance, legal aid, co-operative ventures such as trade unions or from creditors and shareholders of a corporate litigant. Indeed, a plaintiff may obtain indirect funding through retaining lawyers pursuant to a conditional costs agreement by which the lawyers will not recover fees unless there is a successful outcome of the claim: see, eg, Legal Profession Act 2004 (NSW), ss 323 and 324. Furthermore, a source of funds for litigation may result from the factoring of debts sought to be recovered, using property of the plaintiff by way of security or by the funder obtaining an interest in a corporate plaintiff, through an issue of shares: see, eg, Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd [2004] FCA 1248 at [36] (Tamberlin J).
68 In common parlance, a "litigation funder" may be understood to refer to an entity which runs a commercial business involving the funding of litigation for profit. Because there are a number of ways in which a similar outcome can be achieved, it may be necessary to identify in what respect the commercial litigation funder is to be distinguished from other means of funding litigation, if some different principle is to be applied in relation to orders for security for costs. In discussing the history of the law with respect to maintenance and champerty, the joint judgment in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; 229 CLR 386 (Gummow, Hayne and Crennan JJ) noted at [75] (omitting references):
"Yet practices no different in substance, from some of those condemned so roundly, became commonplace in the law of insolvency. Bankruptcy legislation was held to permit a trustee in bankruptcy who had commenced an action to sell and assign the subject matter of the action to a purchaser for value. And, of course, the development of the doctrine of subrogation as applied to contracts of insurance qualified the apparent generality of rules against maintenance and champerty."
69 The operation of rules relating to security for costs is dependent upon that aspect of civil litigation in this country which, generally but not universally, provides that costs orders will follow the event, in the sense that the successful party may expect to recoup at least part of its costs from the unsuccessful party. That rule applies mutually with respect to plaintiffs and defendants. Defendants, having been brought into proceedings involuntarily, are not subject to orders for security for costs, despite the fact that, in relation to a justifiable claim, it may ultimately be held that their conduct gave rise to the need for the litigation: see, eg, Levick v Commissioner of Taxation [2000] FCA 674; 102 FCR 155 at [24] (Wilcox, Burchett and Tamberlin JJ).
70 Nor is an individual plaintiff generally subject to an order for security for costs; although the inherent jurisdiction of the court may extend beyond the circumstances now found in the Uniform Civil Procedure Rules 2005 (NSW), r 42.21(1), the circumstances in which orders might be made against individuals are usually to be found within the exceptions to the general principle there stated. Both the general principle and the exceptions demonstrate an underlying policy that one may sue to vindicate one's own rights as an individual, so long as one does not take positive steps to avoid the potential consequence of failure, being liability for the other party's costs of the proceedings. That principle is expressly stated in paragraph (c) of the sub-rule (relating to change of address) and may be seen to underlie paragraph (b) (misstating an address with intent to deceive). Although it involves no element of deliberate avoidance, paragraph (a) (referring to ordinary residence outside the jurisdiction) may be seen to reflect a variation on the same principle, namely that the plaintiff should be available to answer for any liability in costs without undue difficulties being imposed on the defendant in seeking to recover costs.
71 The other two exceptions relate to a person who is suing, not for his or her own benefit but for the benefit of another (paragraph (e)) and where the plaintiff is a corporation (paragraph (d)). In each of the latter cases, the power to order security is further conditioned upon the apparent inability of the plaintiff to meet the costs of the defendant, if so ordered (sometimes referred to as impecuniosity, although in major commercial litigation even a relatively wealthy plaintiff may fulfil the condition).
72 The rule with respect to corporations may be seen as reflecting the same underlying policy as that with respect to nominal plaintiffs suing for the benefit of others (see also Corporations Act 2001 (Cth), s 1335). Thus, although being a legal entity in its own right the corporation is pursuing its own interests, the ultimate benefit will flow to its creditors (if it is insolvent) or its shareholders. The defendant in proceedings brought by a company "could find himself involuntarily prejudiced by the limited liability character of the plaintiff who had commenced proceedings against him": see Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 at 303-304 (Street CJ, Moffitt P and Hutley JA agreeing). Of course, the defendant which finds itself involuntarily brought into proceedings by an impecunious individual may not see itself as being in a materially different position from that facing an impecunious corporate plaintiff: cf Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; 208 ALR 564 at [53] (Austin J).
73 It might be open, in terms of public policy, for the law to draw a distinction between plaintiffs seeking to protect personal interests and those seeking to vindicate their commercial interests. (It may be that this is a consideration which will affect the exercise of the discretionary power.) On the other hand, it is plain that a distinction is drawn between the circumstances of an individual plaintiff and that of a corporate plaintiff: see, eg, the analysis of this Court in Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123 in a passage dismissed by the primary judge in the present case as obiter (following the headnote) but which, in my view, was neither obiter nor other than a reflection of both court rules and the general law.
74 Within this scheme of principle, when a liquidator is a plaintiff, as for example in a misfeasance suit, rather than bringing proceedings in the name of the company, he or she might properly be seen as suing for the benefit of others. However, as Hodgson JA explains, a liquidator has not been treated as a nominal plaintiff for the purposes of orders for security. The underlying concern in relation to a nominal plaintiff is that those substantially interested in the outcome of the proceedings have retreated behind an impecunious individual so as to avoid putting their own resources at risk of an adverse costs order. As explained by Campbell JA at [83], the position of the liquidator is materially different and there are sound policy reasons for not applying that principle to a liquidator.
75 Where a liquidator sues unsuccessfully in his or her own name, the successful defendant is likely to obtain an order for costs payable by the liquidator personally. It follows that where the nature of the proceedings allows, the liquidator will not sue personally where proceedings can properly be brought in the name of the company and is unlikely to sue personally unless indemnified in relation to a possible adverse costs order. With respect to individual plaintiffs generally (including liquidators), neither impecuniosity, the nature of the resources relied upon to bring the proceedings nor the possibility of indemnity in the case of failure, will usually be considerations warranting an order for security for costs. (Given that impecuniosity is not relevant in such cases, the existence of an indemnity may well provide a greater degree of comfort to a defendant than would otherwise be the case.) The question is why a different approach should be adopted in relation to a liquidator funded by commercial business interests which have no separate and pre-existing interest in the outcome of the proceedings.
76 The mere fact that there is a litigation funder which has a commercial interest in the outcome, given that there is no longer any public policy concern with respect to maintenance of proceedings in which one has no prior interest, does not self-evidently render the circumstances relevantly distinguishable from the maintenance of such proceedings by a creditor whose interest similarly will not be in the subject-matter of the proceedings, except in the sense that success in the litigation will expand the resources of the corporation from which the creditor may receive payment at least of an enhanced dividend. Nor is it clear how the position of the litigation funder differs from that of a creditor which acquired its interest by assignment. The point of distinction relied upon by other members of the Court, as I understand it, is that the litigation funder will, at least in the event of a successful outcome, profit from the litigation. Profit, in this context, means more than merely recovering a prior debt, but recovering also a profit margin.
77 I do not find the distinction immediately persuasive. The creditor which sold goods to the company and was not paid will have included a profit margin in its price. If it recovers in full, it too will profit from the litigation in a similar sense to that in which the litigation funder will profit. The real point of distinction is that the litigation funder acquires its interest in the proceedings purely for the purposes of advancing the litigation and not from any pre-existing relationship with the corporation in liquidation. However, that fact is at best of limited relevance where, on the present hypothesis, the corporation is not a party to the litigation. Furthermore, that would appear to be reintroducing reliance upon the abandoned principle that an assignment of an interest in the subject matter of litigation will be lawful only if the assignee "have some legal interest (independent of that acquired by the assignment itself) in the property in dispute" rather than an interest "generated only by the assignment itself": see Fostif at [73]. That approach was subject to condemnation in earlier times as the "traffic of merchandising in quarrels, of huckstering in litigious discord": Fostif at [74]. Of course, an abandonment of that approach, with the result that maintenance of litigation is no longer criminal, tortious or against public policy, does not mean that the maintainer, absent a pre-existing common interest with the party maintained, may not properly be subject to an order for security for costs. The question is whether the fact that an individual plaintiff is funded from a commercial source of that kind forms a proper basis for a variation in the traditional approach to orders for security with respect to liquidators.
78 I am not persuaded by the arguments presented in the present case that such an order is called for in the case of proceedings brought by a liquidator personally. Nor was the Court referred to any considered authority supporting the proposed order. If the reason to protect a defendant from the incapacity of the liquidator to pay its costs arises in circumstances where the funder has no prior interest in the dispute, the principle could apply in numerous situations, including, subject to possible statutory constraints, where some form of legal aid is available. If the reason is merely that the funder stands to gain a financial benefit in the event of success, that would apply to a creditor or shareholder of the corporation in the interests of which the liquidator sues. If it is a combination of those factors it is still necessary to ask why that should engage a basis for protecting the defendant which does not otherwise arise. Assuming a reasonably arguable case, properly commenced and maintained, but brought by a plaintiff who may not be able to meet an adverse costs order, no authority supports the view that the individual, pursuing his or her own interests (or deemed to be so as in the case of a liquidator), may be required to provide security depending on the method of financing the litigation. A possible distinction in the case of a liquidator is that he or she is bargaining part of the company's potential recovery for access to funding. That arrangement may be reviewable by the Court, but not at the instance of the defendants: they have no interest in the fate of any judgment moneys in the hands of the liquidator. Accordingly, the distinction is not one which has a relevant connection to the particular interests of the defendant with respect to a possible costs order.
79 If a creditor funding such proceedings would not be ordered to step forth and provide security to allow the proceedings to continue, no case has been made out to impose on a different source of litigation funds such an obligation.
80 The presence of litigation funding may justify a new approach to the basis on which orders for security are made with respect to individual plaintiffs, or to the way in which liquidators suing personally are to be treated. Whilst the issue arises in respect of practice and procedure within the Court, the approach proposed by the respondent involves departure from, rather than extrapolation of, existing authority. It raises an issue which calls for a uniform approach across jurisdictions and would better be addressed in the broader context of the regulation of commercial litigation lending. Such consideration will need, amongst other things, to define with some precision what is a "litigation funder".
81 I agree with orders (1) and (2) proposed by Hodgson JA. In relation to order (3), I agree the cross-appeal should be dismissed. Otherwise I would allow the appeal and order the respondent to pay the appellant's costs in this Court and the costs of the application for security before the primary judge.
82 CAMPBELL JA: I agree with the reasons of Hodgson JA, and add the following remarks.
83 The background against which courts developed a policy of usually not requiring liquidators to provide security for costs when suing in their own name included:
(a) The liquidator is performing a public function under statutory authority. That public function provided a reason for not according as much weight as would be accorded in litigation purely between private individuals and of the type that fell within UCPR 42.21(1) to the private interest of the person sued to have assurance that an order for costs would be paid.
(b) There have always been provisions such as s 545 Corporations Act 2001, that enable a liquidator to not sue if not satisfied that he or she is properly funded. That fact, combined with the potential personal liability of the liquidator for costs, and a measure of public control over the qualifications of persons who are eligible to be liquidators (eg s 1282 Corporations Act), in itself has a tendency (which might not be realised in every case) for liquidators not to bring litigation unless they were satisfied that they could pay the costs if they were to lose.
(c) That the liquidator is exposing all his or her assets to the risk of an unfavourable costs order puts the litigant into a situation somewhat analogous to a natural person plaintiff who is suing for his or her own benefit.
(d) The liquidator's personal gain from running the litigation consists only of professional costs and disbursements, which are themselves subject to a measure of public control, either by the court or creditors (ss 473, 499 Corporations Act).
(e) Even when the liquidator is being funded by a creditor, in circumstances where the creditor is entitled to a preferential dividend under s 564 Corporations Act by reason of having funded the litigation, the most that the creditor can recover for its own benefit is a return of its outlay for costs, and a 100% dividend on its proved debt. A creditor who funds the litigation in those circumstances is thus doing nothing more than protecting its own legal right to be paid its debt by the company.
84 That background is departed from if the liquidator is being funded by a creditor who is in commercial substance a funder who has taken assignments of debts for a fraction of the face value, as happened in Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 180 FLR 393; (2004) 22 ACLC 550; (2004) 208 ALR 242. It is likewise departed from when the liquidator is being funded by a commercial funder who stands to receive a proportion of the proceeds of the litigation. In those situations, there is not the same reason that there is in the ordinary situation of a liquidator suing to regard the inherent power of the court to order security as not being enlivened.
85 There is no shortage of judicial statements to the effect the fact that the litigation is being brought in part for the benefit of a litigation funder is a relevant consideration in the exercise of a discretion as to costs under s 1335 Corporations Act (Spargos Mining NL v Fuller [2003] WASC 37; (2003) 21 ACLC 860 at [10], [23]; Healy Air-conditioning Pty Ltd v Oracle Corporation Pty Ltd [2003] WASC 78; (2003) 21 ACLC 866 at [3]; Global Finance Group Pty Ltd (in liq) v Marsden Partners (a firm) [2004] WASC 52 at [59]-[60], [71]) even if the plaintiff is a company that is insolvent even though not actually in liquidation (Maronis Holdings Ltd v Nippon Credit Australia Ltd [2000] NSWSC 994 at [11]-[12]; Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd t/a RMAX [2004] FCA 1248 at [37]-[39] ), and there is authority that the involvement of a funder is relevant to whether the court should order security for the costs of appeal (Winnote Pty Ltd (in liq) v Page [2005] NSWCA 362; (2005) 64 NSWLR 244 at [23]).
86 A special problem is posed for the court when any proceeds of litigation brought in the name of the liquidator will go partly to a funder for its private profit, and partly remain with the liquidator for distribution among the creditors and others entitled in a winding up. Guidelines usually applied in connection with security of costs would suggest that, in so far as the litigation is for the private profit of the funder, it is appropriate for security to be supplied, but insofar as it is brought by a liquidator for distribution in the ordinary course of a winding up security for costs ought not be required. Clearly, those two approaches are mutually incompatible. In a situation where the rationale for a guideline concerning the exercise of discretion is not present, there may be good reason for departing from that guideline. Whether to depart from it, and if so, how, will depend very much of the facts of the case.
87 Melville v Craig Nowlan & Associates Pty Ltd [2002] NSWCA 32; (2002) 54 NSWLR 82 at [99] - [102] provides an illustration of how the particular forensic context, in which a general principle concerning security for costs comes to be applied, affects the operation of that principle. Heydon JA there accepted that the principle that poverty should not be a bar to the bringing of litigation operated differently in relation to litigation brought under the open standing provision of s 123 Environmental Planning and Assessment Act 1979. In particular, the reason why it operated differently was because the feature of most litigation, that the plaintiff is seeking to enforce rights that he personally has, is absent. In so far as a liquidator brings litigation in that capacity, but for the benefit of people other than the creditors of the company, the same can be said.
88 One extremely relevant factor is the extent to which the litigation, if successful, will ultimately be for the private profit of the funder. That information is simply not known in the present case. The court is aware that the reported cases show a significant range of returns being asked by commercial litigation funders (see, eg Jarbin at [108]). The effect of the terms of the funding agreement not being placed before the court in the present case because of a claim of legal professional privilege is that the court is not entitled to draw the inference that it would be entitled to draw if a privilege claim had been absent, that the funder was receiving a proportion of the proceeds at the top of the available range (cf Armory v Delamirie (1722) 1 Stra 505; (1722) 93 ER 664). But the court is still in a situation of knowing that there will be some special return to the funder. Sometimes in connection with the award of damages the court must do the best it can to make an assessment of damages on the basis of material that it knows is considerably less than compelling, because it would be doing a worse injustice to award no damages at all. Similarly in the present case, the very fact of private profit from the litigation, and lack of satisfaction that there are available assets from which an unfavourable costs order against the liquidator would be met, are enough to show that some order of security for costs should be made. Even though the materials on the basis of which the quantum can be assessed are certainly not as good as they might be, an order in the quantum proposed by the trial judge is appropriate.
89 I agree with the orders proposed by Hodgson JA.
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