In the matter of HIH Insurance Limited (In Liquidation) (ACN 008 636 575) and others; In the matter of HIH Insurance Limited (In Liquidation) ACN 008 636 575 & others named in Schedule A; In the matter of HIH Insurance Limited (In Liquidation); Cuong Ly v HIH Insurance Limited
[2014] NSWSC 1587
Supreme Court of NSW|2014-11-10|Before: Brereton J
Solicitors:
Thomas Booler & Co (plaintiffs in Cuong Ly, Smith and DBW)
DC Legal (plaintiffs in Baldock)
Ashurst Australia (defendants)
File Number(s): 2013/320171; 2013/345623; 2013/358152; 2014/148595
[2]
Judgment (ex tempore)
HIS HONOUR: In each of these four matters the defendants, being the liquidators of the HIH Group of companies, apply for an order that the plaintiffs give security for their costs, and if security not be given that the proceedings be stayed.
While all four proceedings are claims brought by shareholders in HIH for damages said to have been caused by misleading and deceptive conduct engaged in by HIH before it went into liquidation, by reason of which they paid more than the true value of their shares, it is convenient for present purposes to deal with them in two groups.
The first is constituted by the Cuong Ly proceedings, the De Bortoli Wines proceedings and the Smith proceedings, in each of which Messrs Thomas Booler & Company Solicitors act for the plaintiffs. The plaintiffs in each of those three matters are funded by a common litigation funder, Bookarelli Pty Ltd. Across these three cases, there are a total of 127 plaintiffs, mainly natural persons.
The second category is constituted by the Baldock proceedings, in which DC Legal acts for the plaintiffs. Although that firm acts on a contingency basis, there is no litigation funder. In this class, there now remain 1,716 plaintiffs, again mainly natural persons.
The defendant applicants invoke the inherent power of the Court to make an order for security for costs. They accept that they cannot establish any of the grounds under (NSW) Uniform Civil Procedure Rules 2005, r 42.21(1) - including, although the addresses of the plaintiffs are not stated in the originating process, the ground referred to in subrule (1)(b), because no reason to believe that the omission of those addresses was with intent to deceive has been established. It seems that no request for those addresses has been made, and in some cases, in any event, the addresses of the plaintiffs are ascertainable from other documentation, including the authorities provided by the plaintiffs to their solicitors, although that is not so in every case.
The inherent jurisdiction of the Court to make an order for security for costs as part of its inherent power to regulate its own practice and procedure to procure the proper and effective administration of justice and prevent abuses of processes is well established [Rajski v Computer Manufacture and Design Pty Ltd [1982] 2 NSWLR 443, 447; Green v CGU Insurance Ltd (2008) 67 ACSR 105, [33]]. However, the jurisdiction is one reserved for exceptional cases, bearing in mind that the rules, and in particular r 42.21, indicate the cases which will ordinarily be appropriate for the exercise of the power to order security, and bearing in minding also that it is well established that a natural person within the jurisdiction is prima facie entitled to bring and prosecute proceedings regardless of impecuniosity. This often stated principle is, since the Law Reform Commission's report and the 2013 amendments to the rules, now expressly reflected in r 42.21(1)(b), which provides that if the plaintiff is a natural person, an order for security for costs cannot be made merely on account of his or her impecuniosity.
The purpose of an order for security for costs is to avoid the injustice to a successful defendant of being unable to enforce a costs order in its favour for a reason other the mere impecuniosity of the plaintiff. For that reason, and for the further reason that "stultification" is a "defence" to an application for security, I do not accept that proof of impecuniosity of the plaintiff is correctly described as a "starting point" in establishing a ground for security. The true touchstone must be the risk that a costs order will not be satisfied for some reason other than mere impecuniosity. In the context of the inherent jurisdiction, I think in so far as a general test can be stated, it was best captured by Young J in Morris v Hanley [2000] NSWSC 957 as being that the proceedings are "harassing or vexatious" in nature unless an order for security is made.
Given the constraints that apply to the power of summary dismissal of proceedings that are "doomed to fail", it is inappropriate to use the power to order security as a means of controlling litigation that appears unlikely to succeed, but is not so hopeless as to be liable to be summarily dismissed.
The cases in which impecuniosity is of some relevance are characterised by the circumstance that the proceedings are being prosecuted by a party behind whom other beneficial interests stand who are not exposed to liability for costs. This is reflected explicitly in r 42.21(d) in respect of corporations, as it is also in (Cth) Corporations Act 2001, s 1335; and also in r 42.21(e), which concerns the position where a plaintiff is suing not for his or her own benefit but for the benefit of some other person. In fact, these grounds are closely analogous. They both involve circumstances in which the person or persons who stand behind the nominal plaintiff - in the one case, the shareholders in the corporation, in the other the real plaintiff who hides behind a nominal plaintiff - is not exposed to an order for costs as they are not parties, yet sue through a form or structure that means the proceedings can be prosecuted on their behalf by a party against whom a costs order will be of no utility.
As it seems to me, the law regards the prosecution of proceedings in that manner as harassing or vexatious in the sense referred to by Young J in Morris v Hanley. In all of those cases, it is a precondition to making an order for security that the nominal plaintiff, either the corporation or the trustee or nominee suing for the benefit of some other person, be unable to pay the costs of the defendant if ordered to do so. In other words, it is not regarded as harassing or vexatious for a corporation or a trustee or nominee to sue without the shareholders or beneficiaries being exposed to a costs order, so long as the corporation, trustee or nominee is itself able to pay the costs of the defendant. It only becomes harassing or vexatious if the corporation, trustee or nominee is not able to do so.
In the present case, the defendants rely on five main considerations which can be summarised as follows. First, so it is said, the "anomalous and fragmented" claims by 1,843 plaintiffs, which are not brought by way of a class action; secondly, the risk that the value of the costs order will be exhausted or substantially eroded by the cost of enforcing it proportionately against those 1,843 plaintiffs; thirdly, in the Smith, Cuong Ly and De Bortoli Wines proceedings, that a funder stands behind the proceedings and is entitled to fifty per cent of any recovery made by the plaintiffs in the proceedings; fourthly, in the Baldock proceedings, that the solicitors are acting on a contingency basis, and that the number of plaintiffs and inconsistencies in what they have been told about their exposure to liability for costs may lead to difficulties in resistance in enforcing any costs order; and fifthly, that the defendants as liquidators are discharging an important public function.
Turning to the first of these, I do not accept that the proceedings are correctly described as "anomalous and fragmented". Theoretically, each of the 1,843 plaintiffs has a claim by way of appeal to the Court from rejection of that plaintiff's proof of debt in the liquidation. Theoretically, each of those claims could have been brought by each plaintiff in a separate proceeding. The defendant would then have been able to enforce the costs of each separate proceeding only against the plaintiff in that separate proceeding. Except where the plaintiff is a corporation, there would have been no basis for making an order for security for costs in any of those separate proceedings. If the proceedings had been brought as a class action, the plaintiffs' ability to recover costs would in any event have been constrained by the provisions of (NSW) Civil Procedure Act 2005, s 181. Ultimately, no party suggested that 1,800 separate actions was a desirable course from the perspective of any party or from the perspective of the Court.
This leads to the second consideration, which is founded on the incorrect proposition that a costs order would have to be enforced proportionately against each of the 1,843 plaintiffs. In fact, within each of the four proceedings, any costs order would almost certainly be made jointly and severally against all the plaintiffs in those proceedings, leaving the defendant in the position where it could choose against which of the plaintiffs and in what sequence and order it sought to execute any costs order. In that way, it can choose and execute against those with assets to meet the order. Presumably, once a costs order was made, the defendant would proceed to assessment and obtain a single assessment and a single certificate binding all the plaintiffs, and then decide against which of them it would wish first to execute. Those against whom the defendant executed would then be left to claim contribution from the others. The responsibility of achieving apportionment through a claim for contribution would fall on the plaintiffs against whom the defendant executed rather than on the defendants.
In this way, it seems to me that the structure of the proceedings in fact leaves the defendants significantly better positioned from a practical perspective than would be the case if there were 1,800 separate actions in each of which the defendant was limited to recovering against the individual plaintiff, which would then truly be an unattractive and cumbersome process, and in many cases, might be futile due to the inability of some of the plaintiffs to pay. As things are structured, it is difficult to imagine that the defendant would not be able to find some plaintiffs with sufficient assets to meet the whole of the prospective costs burden. While the absence of addresses may increase the difficulty, the defendants, as I have said, have access to some addresses, and where the requirements of r 42.21(1)(b) are not satisfied, the mere absence of an address is not a sufficient ground to make a security for costs order. However, to remove any doubt and problem in this area, I propose to require the plaintiffs to file a schedule of addresses so as to comply, albeit belatedly, with the rules in that respect.
As to the third factor, the presence of a funder who has no other interest (such as a creditor or contributory), than that of commercial profit, who is entitled to a share in the proceeds of litigation, is no doubt a relevant consideration, and in some circumstances can justify an order for security for costs in the inherent jurisdiction [Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd (2008) 67 ACSR 105; [2008] NSWCA 148, per Hodgson JA and Campbell JA]. In Green, evidence that the plaintiffs were impecunious and that the funder had a substantial interest in the proceedings as a result of the funding agreement, but no other as contributory or creditor, was held by majority to be sufficient to support a security for costs order in the inherent jurisdiction.
However, because of the proven impecuniosity of the plaintiffs, that case was one that fell into the class that I have described where plaintiffs are suing, including for the benefit of other persons, but are not themselves able to satisfy a costs order. That is sufficient to make the proceedings harassing or vexatious in the sense to which I have referred, and to justify a security for costs order. Once again, the underlying rationale is that the real plaintiff was not exposed to a costs order, and the actual plaintiffs not able to meet one.
This concept was captured by Hodgson JA in Dae Boong International Company Pty Ltd v Gray [2009] NSWCA 11 at [27] which, although concerning an application under s 1335(1) of the Corporations Act, usefully states the general principle:
Ultimately it seems to me the question to be determined by the Court is whether it is fair that the person being sued by the company should be in the position of having to incur substantial costs, in this case perhaps tens of thousands of dollars of costs, and being at risk of liability for the company's costs, and yet have no real chance of recovering costs even if the action is unsuccessful when there are persons who would benefit from the proceedings who face no risk of liability for costs themselves, and are either unwilling or unable to provide security.
It will be observed that one element of the principle as so stated by his Honour is that the defendants, "Yet have no real chance of recovering costs even if the action is unsuccessful". As I have sought to explain, in a corporations case or a nominal plaintiff case, that will be so only where the corporation or the nominal plaintiff is itself shown to be unable to meet an adverse costs order.
In the present case, the evidence does not establish that the plaintiffs will not, or even may not, be able to meet an adverse costs order. Indeed, objectively, it seems highly unlikely that between 1,843 plaintiffs, the defendants will be unable to find some that can satisfy an order for $750,000 - assuming without deciding that that is a reasonable estimate. As I have said, it seems to me that the defendants are more likely to be able to do so in the proceedings as presently structured than if there were 1,843 individual actions. While the defendants' submissions have referred to difficulties in or doubts attending the extent to which the plaintiffs might be indemnified by the funder as to costs, that is irrelevant to the defendants' rights against the plaintiffs, where no reason to think that the plaintiffs themselves would be unable to meet a costs order from their own resources has been established.
Turning then to the fourth ground, which concerns the Baldock proceedings, solicitors acting on a contingency basis are, in any event, not analogous to litigation funders [Madgwick v Kelly [2013] FCAFC 61, [43]-[48]]. The argument that the number of plaintiffs exacerbates the difficulties in enforcements is, I think, incorrect; if anything, it provides the defendants with more options for enforcement.
I do not see how misunderstandings between the plaintiffs and their solicitors, if there be such misunderstandings, as to the individual plaintiffs' exposure to liability for costs, could found resistance by those plaintiffs to enforcement by the defendants pursuant to a costs order made by the Court.
Fifthly, while the status of a liquidator may be relevant in considering whether a security for costs order should be made against a liquidator where the liquidator is a plaintiff in the proceedings, there is no basis for considering the status of the defendants as liquidators, as more deserving of protection by a security for costs order than other defendants.
The defendants also referred to the subsistence of unpaid costs orders against the plaintiffs; however, as it seems to me, while there are or may be unpaid costs orders against plaintiffs whose proceedings have been dismissed or discontinued, or against the solicitor for the plaintiffs in the Baldock proceedings, as I apprehend it, there are no unpaid costs orders against continuing plaintiffs, and in those circumstances, it does not seem to me that the subsistence of unpaid costs orders against persons who are not the continuing plaintiffs could be relevant to making a security for costs order against the continuing plaintiffs.
Accordingly, I am not satisfied that there is a reasonable apprehension that a costs order in favour of the defendants, if they are successful, will not be recoverable against the plaintiffs, or that enforcement will be so difficult as to exhaust or erode the value of any such costs order. The defendants are not entitled to an order for security, and their motions must be dismissed with costs. However, I propose to order in each proceeding that within twenty-eight days, the plaintiffs file a schedule stating the residential address, or in the case of corporate plaintiffs, the registered office of each plaintiff.
The Court orders that:
1. The motion filed on 12 September 2014 be dismissed with costs.
2. Within twenty-eight days, the plaintiffs file and serve a schedule stating the name and residential address or registered office of each plaintiff.
[3]
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Decision last updated: 20 March 2015
Parties
Applicant/Plaintiff:
In the matter of HIH Insurance Limited (In Liquidation) (ACN 008 636 575) and others; In the matter of HIH Insurance Limited (In Liquidation) ACN 008 636 575 & others named in Schedule A; In the matter of HIH Insurance Limited (In Liquidation); Cuong Ly