In the matter of Sundara Pty Ltd (recs & mgrs apptd) (in liq); In the matter of Wine National Pty Ltd (recs & mgrs apptd) (in liq); In the matter of Killara 10 Pty Ltd (recs & mgrs apptd) (in liq); James Estate Wines Pty Ltd (recs & mgrs apptd) v Rabobank Australia Ltd & Anor

In the matter of Sundara Pty Ltd (recs & mgrs apptd) (in liq); In the matter of Wine National Pty Ltd (recs & mgrs apptd) (in liq); In the matter of Killara 10 Pty Ltd (recs & mgrs apptd) (in liq); James Estate Wines Pty Ltd (recs & mgrs apptd) v Rabobank Australia Ltd & Anor - [2015] NSWSC 1443 - NSWSC 2015 case summary — Zoe

Judgment

The Applicant Mr David James has filed applications for leave to bring derivative proceedings in respect of four companies, Sundara Pty Limited (recs & mgrs. apptd) (in liq) ("Sundara"), James Estate Wines Pty Ltd (recs & mgrs apptd) ("James Estate"), Wine National Pty Ltd (recs & mgrs apptd) (in liq) ("Wine National") and Killara 10 Pty Ltd (recs & mgrs apptd) (in liq) ("Killara 10").
The applications in respect of the three companies in liquidation will be brought in the Court's inherent jurisdiction and the application in respect of James Estate, which is not in liquidation, under ss 236-237 of the Corporations Act 2001(Cth). The leave applications are listed for hearing for up to three days commencing 6 October 2015 before me, although there is a difference between the parties as to whether they will take anywhere between one and three days.
The submissions by the parties refer to the significant factual history, both in dealings between the parties, and dealings in this litigation, which I need not recite for the purposes of this judgment.
The First Defendant in each proceeding, Rabobank Australia Ltd ("Rabobank"), which would be the defendant in the proposed substantive proceedings, seeks security for costs in respect of each of the applications, by Interlocutory Processes filed on 7 and 20 August 2015, although both the foreshadowed leave application brought by Mr James and the foreshadowed security for costs application have a much longer history which is not necessary to relate. Rabobank, broadly, seeks security for approximately $174,000 in respect of past costs of the application, and approximately $74,775 in respect of future costs, on the basis set out in the affidavit of Mr Peter Hanson sworn 10 September 2015. The Third Respondent in each of the leave applications and proposed Third Defendant in the substantive proceedings, ROI Lands and Hedging Pty Ltd ("ROI") also filed an application for security for costs on 4 September 2015, in which it seeks security for costs of $68,000, on the basis set out in the affidavit of Mr Hadchiti sworn 11 September 2015. The applications have a degree of urgency, given the imminent hearing dates for the leave application, and for that reason I have delivered an oral judgment promptly, although it will be in less detail than might have been the case had such urgency not existed.
Several issues of principle arise in the application. The first issue is whether security for costs is available, in respect of an application for leave brought by Mr James in the inherent jurisdiction or under ss 236-237 of the Corporations Act, under rule 42.21 of the Uniform Civil Procedure Rules 2005 (NSW). Both Rabobank and ROI place primary reliance on that rule which provides, relevantly, that if a plaintiff is suing, not for his or her own behalf, but for the benefit of some other person and there is reason to believe that he or she will be unable to pay the defendant's costs, if ordered to do so, the Court may order the plaintiff to give such security as it thinks fit, in such manner as it directs, for the defendant's costs of the proceedings, and order the proceedings to be stayed until such security is given.
Mr Cashion, who appears for Mr James, contends that rule is not applicable in the present circumstances, and, on balance, I accept that submission. First, these proceedings are separate proceedings from the derivative proceedings, which would be brought if leave bring them is granted. The application for leave to bring the derivative action, whether in the Court's inherent jurisdiction or under ss 236-237 of the Corporations Act is anterior to the derivative action and, it seems to me, Mr James is presently acting on his own behalf, as a contributory, in seeking to achieve, if he obtains leave, the ability to act on the corporation's behalf. It is therefore not necessary to address the further question, considered in Perry v Jackson [1998] 4 VR 463, to which Mr Assaf (who appears for ROI) fairly drew attention, whether a subsequent derivative action could itself be characterised as brought only for the corporation's benefit, and not for Mr James' benefit, in the relevant circumstances. That question is best left until it arises, if it does later arise. If r 42.21 was applicable, then there would be no doubt that the first requirement for an order for security for costs under that rule would be satisfied, in that Mr James would be unable to pay the defendants' costs of the proceedings if ordered to do so. Mr Katekar points to a statement of assets and liabilities which Mr James had previously filed in other proceedings, indicating an excess of liabilities over assets in the order of $45 million, and Mr Cashion accepted that Mr James was properly described as impecunious.
Alternatively, Rabobank and ROI rely on the Court's inherent jurisdiction to order security for costs, the scope of which was considered, by reference to earlier authorities, by Young J in Morris v Hanley [2000] NSWSC 957. His Honour there noted that impecuniosity of a plaintiff is one of several factors relevant to whether it will be vexatious to allow proceedings to continue without security, and recognised that whether the lack of assets was caused by the defendant's conduct was a relevant factor, and identified other relevant matters including whether the claim was brought in good faith, whether the plaintiff had reasonably good prospects of obtaining an order in its favour, whether an order for security would bring the proceedings to an end, how the lack of assets came about, and whether anyone is standing behind the plaintiff who may benefit from the action, and the question of any delay in the application. Mr Assaf rightly pointed out that those factors were broadly similar to those which would arise if an application was brought under UCPR r 42.21.
In Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 at [45] Hodgson JA in turn noted that cases where security for costs might be ordered against a natural person, outside those provided under UCPR r 42.21, include situations where, in addition to proof that there is reason to believe the plaintiff will be unable to pay the defendant's costs, the plaintiff brings a weak case to harass the defendant. That proposition appears to combine two propositions, one of the weakness of the case, and another of its purpose, or at least its effect, of harassing a defendant. I should note that his Honour also referred to unpaid costs orders. I have had no regard to such a question in this case, because there is a pending dispute as to the status of cost orders made in associated proceedings.
In HIH Insurance Ltd (in Liq) [2014] NSWSC 1587, Brereton J in turn referred to the scope of the Court's inherent jurisdiction to order security for costs as part of its inherent power to regulate its own process and to promote the proper and effective administration of justice and prevent an abuse of process and noted that the jurisdiction was reserved for exceptional cases, bearing in mind that a natural person within the jurisdiction is prima facie entitled to bring and prosecute proceedings, regardless of his or her impecuniosity. His Honour noted that the jurisdiction was directed to whether a costs order would not be satisfied for a reason other than impecuniosity but also referred to Morris v Hanley above for the wider test that referred to whether proceedings were "harassing or vexatious". His Honour noted, and I accept, that the power should not be used to order security for costs as a means of controlling litigation that seems unlikely to succeed, but is not so hopeless as to be summarily dismissed. I proceed on that basis. To put it another way, neither impecuniosity, nor relative weakness of a case pleaded, falling short of hopelessness which would provide a basis for summary dismissal, would in themselves warrant an order for security for costs, unless something can be added that would lead to a conclusion that the proceedings are in some way harassing or vexatious.
I turn now to the application of these principles in the present case. Mr Katekar, for Rabobank, submits that this is an exceptional case given the extent of Mr James' liabilities; the costs incurred in previous stages of the proceedings; the proposition that any recovery by the companies would benefit the secured creditors and not, Rabobank contends, Mr James; Mr James' inability to provide security for costs in the derivative action, if leave to bring it were granted; and he also contends that Mr James' financial position was not caused by the conduct of Rabobank of which he complains. Mr Katekar sets out the history of the proceedings, which include the striking out of earlier versions of the claim and the relevant liquidators' having consented to the dismissal of proceedings brought by Sundara and Killara 10 and costs. Mr Katekar submits the proceedings are pointless, so far as a claim under the Farm Debt Mediation Act 1994 (NSW) against Rabobank, on which Mr James relies to invalidate the appointment of the receivers and their subsequent enforcement action would not, he contends, affect other debts owed to Rabobank which, he contends, are not farm debts, and any proceeds of a claim would still be subject to Rabobank's security.
Mr James in turn submits, and Rabobank denies, that his impecuniosity is attributable to the conduct of Rabobank. Mr James' contention in that regard is founded on his attack on compliance with the requirements of the Farm Debt Mediation Act, and the validity of enforcement action taken without, it is alleged, compliance with it. That attack is not directed to the existence of the underlying debts, which it appears to be common ground existed whether or not Rabobank took enforcement action in respect of them, or the fact of debts owed to, or enforcement action by, other creditors; or what Rabobank would have done if it had not, on his case, invalidly appointed the receivers. There may be a question whether, even if Rabobank had not appointed receivers, other parties to whom Mr James owed very substantial debts, would have taken enforcement action. Having said that, these are not issues that were explored at any length in this application and not issues on which I now need to reach any findings. It seems to me that, given the state of the evidence of the likely contest between the parties, it is possible to do no more than to note that Mr James will seek to establish Rabobank's responsibility for his present financial position, that Rabobank denies that proposition, and that that question will plainly be hotly contested in any situation in which it is relevant.
Mr James submits that an order for security for costs will stultify the proceedings. It seems to me that that matter is not established by the evidence, at least so far as the evidence does not exclude the possibility that others might voluntarily assist Mr James, if security for costs were ordered. Again, however, I prefer not to reach a decision in respect of that matter, where I can decide the matter on other grounds. It is preferable that I not do so where this is a matter which may be of some significance in the application for leave, so far as the provision of a meaningful indemnity for the companies' costs of the proceedings may be necessary to establish that such proceedings are in the companies' best interest.
Mr Cashion initially submitted that the Court would not order security for costs in respect of an application for leave to bring derivative proceedings, and referred to the policy considerations applicable to whether such leave should be granted, under ss 236-237 of the Corporations Act and in the Court's inherent jurisdiction. Ultimately, he fairly accepted that these matters were not an absolute bar to such an order, and that these matters should simply be taken into account, leading the Court to exercise caution in the making of such an order. It seems to me that Mr Cashion is right to submit that the Court should exercise caution in such a case, not least because the application for leave to bring a derivative proceeding is itself intended to be a relatively compressed application, conducted within a short time frame, and that would not be promoted if, on each occasion that such application was brought, it was met by a security for costs application. Having said that, it seems to me that that result is unlikely, by reason of a matter to which I will now refer.
Mr Cashion also submitted that the researches of those acting for Mr James had identified no previous instance of a security for costs order made in respect of an application for leave to bring derivative proceedings. Mr Katekar submits that that matter is likely to be explicable by the fact that it would be by no means common for impecunious persons to seek leave to bring derivative proceedings. I accept that submission, since the case law at least in New South Wales, and in several other States, has emphasised the significance of an indemnity for the company's costs of the proceedings, in order to establish the basis for the proposition that proceedings are in the company's best interests, and there is authority (to which I drew Counsels' attention) that the inability to provide such an indemnity may lead to a refusal of leave: Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480 at [29]. In those circumstances, it is perhaps not surprising that issues of this kind are not commonplace. As I noted above, Rabobank also submits that the matter is also unusual because significant costs have previously been incurred by Rabobank, by reason of the history of the application, including the striking out of earlier versions of the statements of claim.
Mr Cashion in turn emphasised that the consequence of non-compliance with the Farm Debt Mediation Act was invalidity of the relevant enforcement action. There may be a question, which may arise in the leave application, or at a substantive hearing, as to the consequences of invalidity in a particular case. That question seems to me to be of lesser significance in the case against Rabobank than in the case against ROI to which I will return. In the case against Rabobank, Mr James seeks to bring, in the names of the companies, actions in conversion and trespass which would give rise to a claim in damages and do not depend upon setting aside transactions in which, for example, ROI has become the registered proprietor of land.
It seems to me that Mr James' claim for leave to bring proceedings against Rabobank may face significant challenges, including questions of causation, the quantum of recoverable damages, and whether he is able to provide a meaningful indemnity so as to support a finding that the grant of leave is in the companies' interests. That is not a matter as to which I can, or should, express any form of concluded view in this application because it is a matter that will be determined when the application for leave is heard. It does not seem to me that these matters rise to the level that it could be said that it was harassment or vexatious to allow a determination of Mr James' claim for leave to bring a derivative action on its merits, where, on the average estimate of the parties, two hearing days will be required to achieve that result, given the nature of Mr James' claims and the size of the damages claimed, notwithstanding the unfortunate history of the matter and the evidence of Mr James' impecuniosity. It does not seem to me that Mr James' claim for leave to bring a derivative action against Rabobank could presently be characterised, in the language adopted by Brereton J in HIH above, as so hopeless that he could not succeed. I am therefore not satisfied that security for costs should be ordered in favour of Rabobank, so far as that question falls to be decided in the Court's inherent jurisdiction rather than under UCPR 42.21 for the reasons I have noted.
Mr Assaf, who appears for ROI, as I noted above, advances somewhat similar submissions to Mr Katekar, although his client stands in a different position from Rabobank, as the purchaser of the relevant property and assets and the case against it, to the extent that it is possible to identify it, is of a somewhat different character. ROI seeks a lesser amount of security, reflecting its more limited role in the proceedings, or at least its more recent appearance in them, in the amount of $70,000, relying on affidavits of its solicitor, Mr Hadchiti, dated 11 and 16 September 2015. Mr Assaf also relied on UCPR 42.21, which I do not consider is applicable for the reasons noted above, and on the Court's inherent jurisdiction. Mr Assaf also points to Mr James' liabilities, although his impecuniosity is conceded, as noted above, and emphasises that they extend not only to his debt to Rabobank of nearly $24 million, but also to a substantial debt to ANZ Bank, in excess of $11.45 million, and costs orders made against him in related proceedings, although I noted above that the status of at least some of those orders may be in dispute.
Mr Assaf submits that the prospects of the success of the application to bring proceedings against ROI are weak, having regard to his contention that the proceedings against Rabobank are pointless, as to which he adopts Mr Katekar's submissions; his contention that no relief is sought against ROI in the proposed Statement of Claim; and the proposition that ROI was not involved in the conduct alleged against Rabobank and is bona fide purchaser for value of real property with the protection of s 42 of the Real Property Act 1900 (NSW). Mr Assaf also submits that there is no evidence that Mr James' impecuniosity resulted from Rabobank's conduct or that an order for security for costs will stifle the litigation, and that the amount of the security that is sought by ROI is modest by contrast with the complexity of the issues.
It is necessary to say something further as to the position of ROI. It is not a party to which the Farm Debt Mediation Act applied; it is not alleged to have breached that Act; and its involvement in the matter is as a purchaser of properties, and possibly other assets sold by the receivers who, on Mr James' case, were invalidly appointed, as a result of transactions which Mr James contends were void. Mr James' submissions describe the claim against ROI as: "To set aside the transfer of the Baeremi and Pokolbin properties, they also having been void and notwithstanding their subsequent registration."
Mr Assaf submitted, and as I noted above, that no relief was sought against ROI in the proposed Statements of Claim. That proposition seems to me to require significant qualification, because the relief sought seeks orders that the sale of the properties are void and an order that, for example, the transfer of certain properties to ROI be set aside. I raised, with Mr Cashion in submissions, whether the proposed pleading of the case against ROI was sufficient to give notice of the case that ROI had to meet. Mr Cashion has satisfied me that the pleading does give notice of what is alleged, in the sense that matters that are not pleaded are, at least presently, not alleged. In particular, it is not alleged that there are any material facts, beyond the claimed invalidity of the transfer, that give rise to a claim for restitution against ROI, or that the companies propose to or have the capacity to place ROI in the position it would have been in had the transactions not occurred, by repaying the purchase price and interest to ROI. It is not alleged that, so far as ROI was a purchaser of assets, it did not pay substantial consideration for them or act in good faith. It is not alleged that, so far as ROI has indefeasible title to the land transferred to it, it acted fraudulently for the purposes of s 42 of the Real Property Act. Mr Cashion fairly accepted in submissions that the Statements of Claim, so far as ROI is concerned, identified the contentions that the transactions were void, by reason of the alleged breach of the Farm Debt Mediation Act by Rabobank, but stopped short of pleading why that affects ROI as a purchaser of the properties. There is also no pleading of any claim for damages against ROI, or identification of any cause of action which might give rise to such a claim.
It seems to me that, if there is an issue with the case against ROI, it is therefore not one of pleading, but of the substantive matters which are raised, by reason of its factual and legal basis. I should add, again, that this is not the point where I need to determine or should determine the question of whether the case against ROI is seriously arguable, or whether it is in the best interests of the companies to bring it, which will be an issue for the leave application. The question at the point of the security for costs application is instead, as I have noted above, whether it can properly be said that the claim against ROI is harassing and vexatious, for the purposes of the exercise of the Court's inherent jurisdiction to order security for costs against an impecunious natural person.
Mr Cashion responded that ROI was properly joined as party to the proceedings because its interests were affected by the relief sought and, second, there were potentially complex issues as to any interaction between the relief available under the Farm Debt Mediation Act and the extent of statutory indefeasibility of title under s 42 of the Real Property Act. I accept each of those propositions, with a qualification. The qualification to the first proposition is that whether ROI is a necessary party will depend, ultimately, upon whether any claim can properly be asserted against it, because if no claim can be properly asserted against it, then its interests are not in fact affected by the proceedings. As to the second proposition, it seems to me that issue was not fully explored in submissions, but I do accept that there are issues, which have been considered in the case law, as to the circumstances where the invalidity of a transaction, by statute, does or does not impact the title of a registered proprietor of land. The cases which have considered that issue, to which the parties did not refer in submissions, consider the question whether a registered proprietor of property may rely on its title, arising by registration, notwithstanding that a statutory provision may avoid an anterior step to the acquisition of title: for example, Breskvar v Wall (1971) 126 CLR 376; Horvath v Commonwealth Bank of Australia [1999] 1 VR 643; City of Canada Bay Council v F & D Bonaccorso Pty Limited [2007] NSWCA 351; (2007) 71 NSWLR 424 at [83]; Koompahtoo Local Aboriginal Land Council v KLALC Property Investment Pty Limited [2008] NSWCA 6 at [28]ff. The issue that arises in those cases does, however, support Mr Cashion's submission that, to the extent that there is an issue raised by the Statement of Claim as to whether a statutory avoidance of the relevant transaction, by reason of the Farm Debt Mediation Act, may prevail over registered title, then ROI would be a proper party to the proceedings, and potentially a necessary party of the proceedings, under UCPR 6.24.
It seems to me that the position in respect of whether security for costs should be ordered in the claim against ROI is finely balanced, and the issues are more difficult than the issues in respect of the claim against Rabobank. Ultimately, the balance of authority as to statutory indefeasibility may favour ROI, and the proposed claim against ROI may face challenges, or substantial challenges, to which Mr Assaf refers, as to whether a serious question to be tried is established and as to whether it is in the best interests of the companies to bring that claim against ROI. Again, however, it does not seem to me that the case law in this area is entirely straightforward, and it does not seem to me that it can be put that the claim is either hopeless, although it may face its challenges, or that it could be said that to join ROI, as a party who would be affected by the claim if it were to succeed, is either vexatious or harassing of ROI. The issue, it seems to me, may ultimately be one whether there is a serious question to be tried, and whether the claim is in the companies' best interests, but the fact that there may be substantial argument as to those questions, or indeed that the companies may face challenges in establishing those questions, could not rise to the level necessary to support an order for security for costs in the Court's inherent jurisdiction at this point.
It is therefore not necessary to determine the questions, either in respect of Rabobank or in respect of ROI, as to whether security for costs should have extended to past costs or as to its quantum.
The applications for security for costs should be dismissed. Mr Assaf indicated, in written submissions, that he sought to be heard as to the question of costs. There will not be time to hear the parties as to that question today. I should indicate that my preliminary view is, in any event, that the question of costs should be reserved. It seems to me that the question of what costs order should properly be made, in respect of this application, may ultimately be significantly affected by the outcome of the proposed applications for leave to bring derivative action on behalf of the companies. To the extent that Mr James has been successful in defending the application for security, that is in a sense a step on the way to bringing that application. There may be a real question whether, if that application ultimately fails, this application could be described as a success in any substantive sense. If that situation arose, it may be that Mr James' success having avoided an order for security for costs, and continued the application continues in the absence of such an order, will have imposed additional costs on Mr James, his creditors, Rabobank and ROI.
Accordingly, I order that the Notices of Motion, so far as they seek security for costs, be dismissed in each proceeding. I requested Counsel to advise whether they sought to be heard within the limited time that is available as to my preliminary view that costs should be reserved, and all Counsel replied in the negative. I also make a further order that costs be reserved.

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