Karl Suleman Enterprizes Pty Limited (in liquidation) v Pham and Ors

Supreme Court of NSW|2010-07-29|Before: Schmidt J

CITATION : Karl Suleman Enterprizes Pty Limited (in liquidation) v Pham and Ors [2010] NSWSC 886

CATCHWORDS : PROCEDURE - costs - security for costs - additional security for costs in accordance with s 1335 of the Corporations Act 2001 (Cth) and/or Rule 42.21 of the Uniform Civil Procedure Rules 2005 - company in liquidation - liquidator not party to proceedings - whether Court's jurisdiction is enlivened - whether defendants contributed to the plaintiff's financial position - whether there is strength in plaintiff's case - stultification - delay - further security in relation to past costs refused - further security in relation to future costs ordered - costs

Civil Procedure Act 2005 LEGISLATION CITED : Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005

Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 Ibrahim v Pham [2005] NSWSC 246 CASES CITED : Ibrahim v Pham [2007] NSWCA 215 Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 Kavcor Pty Ltd v Kavanagh [2005] NSWSC 1163 Seven Network Limited v News Ltd [2007] FCA 1062; (2007) ATPR (Digest) 42-274 Suleman v R [2009] NSWCCA 70 Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2009] NSWSC 563

Karl Suleman Enterprizes Pty Limited (in liquidation) ACN 090 895 364 - Plaintiff Philip Viet Dzung Pham - First Defendant PARTIES : Nedelkja Borak - Second Defendant Alexander Atic - Third Defendant Pham & Associates - Fourth Defendant Pham Atic Pty Limited - Fifth Defendant

Mr M Aldridge SC with Mr S Duggan - Plaintiff COUNSEL : Mr D Pritchard SC with Mr JS Emmett - First, Third, Fourth and Fifth Defendants Mr MA Jones - Second Defendant

Swaab Attorneys - Plaintiff SOLICITORS : HWL Ebsworth - First, Third, Fourth and Fifth Defendants Gilchrist Connell - Second Defendant

27 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION PROFESSIONAL NEGLIGENCE LIST SCHMIDT J

2002/69495 KARL SULEMAN ENTERPRIZES PTY LIMITED (IN LIQUIDATION) v PHAM AND ORS

JUDGMENT 1 HER HONOUR: By motions filed by the defendants in 2009, orders were sought requiring the plaintiff to provide additional security for costs in accordance with s 1335 of the Corporations Act 2001 (Cth) and/or Rule 42.21 of the Uniform Civil Procedure Rules 2005. The proceedings were commenced in December 2002. They have an unfortunately protracted history. The defendants have still not put on all of their evidence, but the parties expect to be in a position to take a hearing date later in the year. It is now estimated that the hearing will take 4 weeks. 2 Security for costs was sought by motions filed in October 2004. In September 2005, the plaintiff consented to orders for security in two amounts of $325,000. That security was provided by bank guarantee, staggered in three tranches connected with certain stages of the litigation. The order was made without prejudice to the defendants' right to make further application for security, if 'the amount of the current best estimate of the defendants' subsequently proved to be insufficient'. 3 The first and second tranches have been put in place. The second tranche was required 14 days prior to the date on which the Court ordered that the defendants' evidence be put on. That occurred on 27 February 2009. The third tranche of $125,000 is due 14 days after the call over at which the matter is set down for final hearing. 4 By their July and August 2009 motions the defendants respectively sought orders for further security in amounts of $1,200,000 and $600,000, in relation to both past and future costs. The orders were opposed. At the hearing, the Pham defendants reduced their application to a further $600,000 and Ms Borak continued to press for an order for a similar amount. The orders were opposed by the plaintiff, but all parties accepted that as a matter of discretion under the Uniform Civil Procedure Rules 2005, the Court could order further security on terms other than those sought by the defendants.

The plaintiff's claims and the course of the proceedings 5 The plaintiff was incorporated in 1999 and wound up in 2001. It had operated a trolley collection business under contracts with various supermarkets. It also conducted an investment scheme, described by the plaintiff in its submissions as a 'ponzi' scheme, under which distributions from its trolley collection business and other investments were offered. Investors were in fact paid distributions from monies coming in from subsequent investors, on the basis of promised returns of 50-60% per annum over a set period. The plaintiff's income essentially came from these investments. 6 Over $123 million was raised in this way under some 2,600 contracts, many of them made with small investors, members of Sydney's Assyrian community. Liabilities in excess of $1 billion resulted. ASIC intervened in 2001 and the company went into liquidation, with resulting losses for the investors. 7 These proceedings are pursued against the company's former solicitors and associated entities, who acted for the controlling mind of the plaintiff, Mr Karl Suleman, before its incorporation; on the incorporation; and subsequently for the plaintiff in relation to various matters, including a managed investment scheme. The further amended statement of claim alleges various breaches of retainer and duty of care, as well as breaches of fiduciary obligations. Damages of up to $90 million are pursued. 8 It is alleged that Mr Pham, the first defendant, advised the plaintiff in relation to various matters, including the investment scheme and its contracts with investors; and that he was also a director of an associated service company, which facilitated payments to investors. Mr Pham was initially employed by Borak & Co, of which the second defendant Ms Borak was principal. Various allegations are made against her. Mr Pham later practiced on his own account as a solicitor and then as a principal of the firm Pham Atic Pty Limited. The third defendant, Alexander Atic, was the other principal. A settlement is still being pursued with Mr Atic. 9 After the 2005 consent orders as to security, the further amended statement of claim was filed in 2006. The defendants then put on their pleadings; there has been discovery and inspection; 17 volumes of a tender bundle have been served and evidence, including expert evidence as to liability and damages, have been put on by the plaintiff. The defendants have also served certain evidence, including expert evidence, but further evidence is yet to be put on. 10 From the evidence it appears that discovery has contributed very significantly to a very substantial costs blow out, given the earlier estimates. The explanation for this was that defendants' solicitors did not envisage various developments, including that the plaintiff would amend its statement of claim; that there would be over 40 directions hearings; that the plaintiff would finally electronically discover more than 63,000 documents and Mr Pham some 8,000; and that the plaintiff would file a tender bundle of some 17 volumes. Affidavit evidence showed that for Mr Pham's part, it was initially anticipated that discovery would only involve some 5 boxes of material. 11 The defendants' solicitors were not required for cross examination. The plaintiff's solicitors put on no evidence. The evidence did not shed any real light on how or why the course that this litigation was expected to take has altered so significantly and why the difficulties discovery might raise were not foreseen, or better managed when they emerged. 12 Notwithstanding the potential size of the claim here pursued, this situation appears to compare unfavourably with the cost and difficulties caused by discovery in mega litigation such as that in Seven Network Limited v News Ltd [2007] FCA 1062; (2007) ATPR (Digest) 42-274, where Sackville J observed at [15] that there some 85,653 documents had been discovered. Situations such as this have led to the Attorney Generals' 2010 reference to the Australian Law Reform Commission - a Review of Discovery Laws to Improve Access to Justice (see terms of reference at http://www.alrc.gov.au/inquiries/current/discovery/terms.html) and to the observations and recommendation made by the Victorian Law Reform Commission in its Civil Justice Review Report 14 at Chapter 6, Getting to the Truth Earlier and Easier. 13 In this case, questions of the parties' compliance with their own obligations under the Civil Procedure Act 2005, which concerns itself with ensuring that the cost of litigation to the parties is proportionate to the importance and complexity of the subject-matter in dispute, may well arise for consideration (see s 56(3), s 58(2) and s 60.) This application is not the time for dealing with such possibilities, but they may not be overlooked, given the defendants' pursuit of further orders for security, not only in respect of future costs, but also significant costs already incurred, when it must have been long apparent that their original estimates of costs, would be far exceeded. 14 It was in 2006 that the statement of claim was amended and discovery was seemingly first pursued. It was in 2007 that further security for costs was sought by the defendants from the plaintiff, at a time when it was proposed that this matter be heard together with other proceedings then being pursued by the plaintiff against other solicitors. Additional security was then refused by the plaintiff. The other proceedings were later settled. There was then an unsuccessful mediation and further settlement discussions in relation to these proceedings. In February 2009, the proceedings were stayed for a month, under the existing orders, when the plaintiff was unable for a period to provide the second tranche of security. It was not until July and August 2009 that the defendants filed the motions which are now pursued. 15 The Pham defendants originally estimated that their costs would be $426,410. Their current estimate of costs incurred up to June 2009 was some $549,808 and a further $264,501 for steps taken to June 2010. Future costs were estimated at $537,500 - a total in excess of $1,351,000. 16 The evidence for Ms Borak was that in 2005 the initial estimate of costs was some $428,925. The current estimates were that $370,000 have been incurred to date and that future costs will be $715,000, a total in excess of $1million. 17 Notes made by the liquidator, Mr Weston, tendered by the defendants, showed that in January 2010, the plaintiff had paid over $800,000 in costs; there were some $172,000 in unpaid costs; and that he had been advised that its further costs, for a 4 week trial, was expected to be in the order of $800,000 - a total in excess of $1,772,000. 18 The plaintiff earlier had a funding agreement in place, but it was terminated in 2009, after the defendants pursued their application for further security, which the funder was not prepared to provide on terms which the liquidator could accept. The plaintiff has sought, but not yet obtained a further funding agreement for the future conduct of the proceedings. It does not have the support of any creditors in funding the litigation.

The Court's jurisdiction is enlivened 19 The plaintiff accepts that it is unlikely to be able to meet the defendants' costs of the proceedings, in the event that its claims fail and that it is ordered to meet those costs and that this enlivens the Court's jurisdiction in relation to further security.

The parties' cases 20 The defendants' case is that the proceedings expanded significantly after 2004, when the further amended statement of claim was served in 2006 and later, when there were lengthy discussions and disputes in relation to discovery, which gave rise to extensive delays. The result was that their earlier estimate of costs were proven to have been too low. For Ms Boral it was submitted that the discovery had been sought by the other parties, with the result that she, too, had to inspect the documents produced. In the circumstances, justice demanded that further security be ordered. 21 The plaintiff resisted the orders sought on the basis of the defendants' delay in making their applications and the resulting stultification of the proceedings, if the orders sought were to be made. It accepted that the onus falls on it to establish that the orders sought would stultify the litigation (see Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [25]).

The evidence 22 Evidence was called from the plaintiff's liquidator, Mr Weston, who explained the steps taken by the plaintiff to obtain litigation funding; that even though the funding agreement had been terminated, that the plaintiff would be able to meet the third tranche of the existing order and fund the further proceedings; the unsuccessful steps taken to obtain further funding; and the plaintiff's financial position. Mr Weston's view was that if the orders sought were made, the plaintiff would not be able to continue pursuing the proceedings. 23 Mr Weston was cross examined as to steps taken to obtain further litigation funding and support of creditors. He explained that there were four to six litigation funders generally operating in the Australian market. Creditors rarely funded litigation for liquidators. The funding market was small by world standards and in large litigation, Mr Weston has had recourse to the world market. Funders viewed advices given in relation to the litigation, made a risk analysis and determined whether they wished to fund the litigation and what percentage of the prospective recovery they would accept, having regard to matters such as their assessment of risk and costs. 24 Over $13 million had been recovered, in this liquidation some $10 million of which had been spent on administration and other fees and over $900,000 returned to creditors. The plaintiff had obtained an order for $3.26 million in its favour in other litigation. The judgment was under appeal and Mr Weston was of the view that the plaintiff's case was a good one. He was not aware of those defendants' financial position and whether the $3.26 million could be recovered, if the appeal was dismissed. 25 The previous funder, Litigation Lending Services, had funded the litigation until 2009, having provided funds both for security and the plaintiff's costs of the litigation. Discussions about the possibility of further funding were on foot, but a decision would not be made until judgment was given on these applications. If the security required was not too high, funding might be forthcoming. The funder would then have to lodge cash to obtain further bank guarantees. 26 Creditors had been kept informed of the course of this litigation, but not of these applications for further security. Only two creditors were now participating in the committee of inspection, which operated as a sounding board for the liquidator. The litigation was being pursued for the benefit of the general body of unsecured creditors, of whom there were some 1,270. Some had lodged proofs of debt for more than $40,000 and some for millions of dollars. In re-examination, Mr Weston described the creditors as 'predominantly mums and dads' and explained that he had not previously approached them, because it had become obvious to him that the majority were investors who had invested and lost their life savings; and that many had borrowed to make their investments. A number were impecunious and facing financial hardship, which was why a large dividend had earlier been paid to creditors. It was his view that creditors would not be able to afford to fund litigation of this magnitude, or even the further security being sought. 27 Mr Weston agreed that mathematically, contribution to $600,000 security amounted to $472 per creditor. He also agreed that he could approach creditors to fund the litigation and that it would not cost a significant sum to convene a meeting of creditors for that purpose. If ordered to pay further security, Mr Weston proposed to continue his negotiations with Litigation Lending Services and if necessary, to approach other funders. He had not yet considered approaching creditors but would do so, if he could not obtain funding. In his experience it was rare for creditors to fund litigation and when that occurred, it involved commercial creditors. 28 In re-examination, Mr Weston agreed that there was currently an issue being considered by ASIC as to whether a liquidator seeking to raise funds from creditors for the purpose of conducting litigation would constitute a managed investment scheme.

The principles 29 In Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276, McClelland CJ at CL discussed the nature of the discretion and the facts to be considered in an application such as this :

"73 The principles by which orders for security for costs are made in relation to financially stressed corporations are well known. They are frequently considered in relation to matters in the Commercial List. They must often be applied where it is alleged that the stressed financial position of a plaintiff corporation has been caused or contributed to by the conduct of the defendant.

74 A convenient summary of the relevant principles was made by Beazley J, as her Honour then was, in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189. Her Honour's judgment has been applied in many subsequent cases. Beazley J said at 196-198: "Principles governing application for security for costs

The law is now settled that the discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: see the review of the authorities by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 AT 509. See also Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624 and Zeeman J's decision in Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 at 188. In Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 415, Cooper J stated that: '[i]t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642 at 643.' Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are: 1. That such applications should be brought promptly. This is a principle of longstanding: see Grant v The Banque Franco-Egyptienne (1876) 1 CPD 143; see also Smail v Burton; Re Insurance Associates Pty Ltd [1975] VR 776 per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311 at 313; Bryan E Fencott at 514. I should state immediately that there is no issue of delay in this case. 2. That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations: see M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; Bryan E Fencott at 514. As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success. ( Bryan E Fencott at 514). 3. Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim: see M A Productions v Austarama Television at 100. 4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate: see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E Fencott at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms: '[t]he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour.'

Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memetu Pty Ltd v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123; Bryan E Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows: ' ... a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors) ... Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.'

An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking: see Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325.

Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate: see Interwest at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (1979) ACLC 32,446; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping where Zeeman J stated (at 189): '[ t]he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order ... [see] Sydmar Pty Ltd v Statewise Developments Pty Ltd and Interwest Ltd v Tricontinental Corporation Ltd." [emphasis added.]

See also the discussion in "Law of Costs" (LexisNexis Butterworths, 2003) by G E Dal Pont at [29.10] - [29.29], [29.78] - [29.98]." 75 The nature of the defendant is some times relevant to the exercise of the discretion to make an order. The courts are reluctant to make an order which would have the effect of shutting out a small company from making a genuine claim against a large well-resourced and amply funded body such as the State, a council or a major corporation (see KP Cable Investments at 197; Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 at 50,635 and 50,637 per Hill J). A plaintiff should not be denied access to the courts unless the justice of the case makes it imperative ("Law of Costs", G E Dal Pont, [29.87]). 76 In Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180, which involved litigation between an insured person and insurer, King CJ said that the ability of the insurer-defendant "to absorb the costs, if he is unable to recover them from the plaintiff, is a relevant consideration" (at 186). Likewise, in Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61, Ormiston J described insurers as "pre-eminently loss-bearing and loss-sharing entities, whose raison d'être is their ability to shoulder the losses of others albeit on a commercial basis…" However, in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1990) 8 ACLC 29, referring to financial institutions, engineering and construction companies, newspaper proprietors, public authorities and other powerful companies in litigation-prone sectors, Brooking J expressed a word of caution. His Honour said at 32-33: "These large corporations stand in no special need of care and protection. Suing and being sued is for them a normal part of this imperfect world. They can afford to pay the piper, just as they will expect to call the tune. But if one of these wealthy, powerful institutions is sued by an insolvent company, why should it be viewed as outside the policy of the security for costs provisions? 77 Beazley JA referred to Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1. In a joint judgment in that case, Sheppard, Morling and Neaves JJ expressed the view that a court should not decline to order security on the ground that do to so would frustrate the litigation, unless the company "establishes that those who stand behind it and who will benefit from the litigation if it is successful are also without means."

30 In Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105, Hodgson JA discussed the principles in the context of proceedings brought by a liquidator, rather than by a company in liquidation, observing:

"27 Importantly for the present case, the case of Re Strand Wood was considered by the New South Wales Court of Appeal in Hession v Century 21 South Pacific Limited (supra). In that case, the respondent company (which was in liquidation) had sued the appellants, and the appellants had sought security for costs. The District Court judge had refused the application, relying on Re Strand Wood . In allowing the appeal, Meagher JA (with whom Kirby P and Cripps JA agreed) referred to s 1335 of the Corporations Law , which provided that security for costs may be required of a plaintiff corporation if it appeared there was reason to believe it would be unable to pay the defendant's costs; and he continued: A distinction must be made between cases in which the liquidator personally is the plaintiff, and those when the company (albeit by its agent, the liquidator) is the plaintiff, a distinction which his Honour regarded as pedantic. In the former case - a prototype of which is the misfeasance summons - if the proceeding fails costs will be awarded against the liquidator personally ( Re W Powell and Sons [1896] 1 Ch 681), but no order for security for costs will be made against him ( Re Strand Wood ), apparently on the ground that he is exercising a statutory power vested in him personally. Where the company in liquidation is the plaintiff, things are otherwise. In this case, obviously the Court has jurisdiction to order security for costs: that is what s 1335 says. The fact that the company has a deficiency of assets compared to liabilities (a not uncommon feature of companies in liquidation) is evidence of entitlement under the section to an order ( Northampton Coal, Iron, and Waggon Co v Midland Waggon Co (1878) 7 Ch D 500 at 503), not (as his Honour seemed to imagine) evidence of immunity from an order. In this regard, it should also be noted that where a company in liquidation sues and fails, there is no jurisdiction in the Court to order the liquidators personally to pay the defendant's costs. Further, a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors): Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; 52 ALR 176. Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.

The statement that there is no jurisdiction to order the liquidators personally to pay costs when a company in liquidation sues and fails, is not universally correct; see Mead v Watson [2005] NSWCA 133; 23 ACLC 718. But that jurisdiction is only exercised where the liquidator's conduct is improper, so in my opinion the general approach disclosed in this passage is not thereby affected.

28 This approach is also supported by Ferrier and Knight v Civil Aviation Authority ([1994] FCA 982 (Lockhart J) at [13]); Re Pavelic Investments Pty Limited (1983) 1 ACLC 1207; Jonas v Rocklea Spinning Mills Pty Limited [2000] VSC 93; and Hellen and Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019." 31 In this case, while the liquidator was initially a party, that is no longer the case. The liquidator is no longer personally liable as to costs. His Honour went on to deal with various authorities, observing relevantly:

"45 In my opinion, on the basis of this review of cases, and especially on the basis of the previous Court of Appeal decisions in Hession and Melville , a court considering applications for security for costs against liquidators should not treat the matter as being entirely at large, but should have regard to guidelines, which I would express as follows: (1) …

(2) Where the plaintiff is a company in liquidation, and not the liquidator, then security for costs will more readily be ordered, although the court's discretion is unfettered ( Bell Wholesale P/L v Gates Export Corporation (No 2) (1984) 8 ACLR 588) and there is no presupposition in favour of granting security ( Bryan E Fincott P/L v Eretta P/L (1987) 16 FCR 497). However, the court will not refuse to order security on the ground that this will frustrate the litigation unless the company proves that those who stand behind the company and would benefit from the litigation are unable to provide security ( Bell Wholesale ). (3) … 46 In my opinion, it would be an oversimplification to say that underlying these guidelines is a broader principle that defendants should be protected against being unable to collect costs ordered against plaintiffs unless this would stultify the litigation. Certainly, these are relevant considerations; but in my opinion also relevant are the considerations that there should not be undue inhibitions on less wealthy persons from seeking vindication of their rights against more wealthy persons, and that there could be such inhibitions if it was in every case open to defendants to apply for security for costs on the basis of some evidence (or even on the basis of fishing notices to produce) suggesting inability to pay costs, and to claim that security should be given unless the plaintiff can prove it would stultify the litigation. In my opinion these considerations make it desirable that guidelines be adhered to, even though the question is ultimately for the court's discretion." 32 There is also discussion in the authorities of circumstances where the shareholders of the company who might benefit from the fruits of the litigation are available to share its risks. This is not such a case. Here, the shareholders, principally the fraudster Mr Suleman, like Mr Pham, are said to have been the beneficiaries of the scheme operated by the plaintiff to the detriment of its many small investors, who are now the company's creditors.

Consideration 33 The competing claims must be assessed in light of the requirements of the Civil Procedure Act. Relevantly they include s 56, which provides that the Act has as its overriding purpose the 'just, quick and cheap resolution of the real issues in the proceedings' and requires that parties assist the Court to further that purpose; s 57, which requires that the Court manage proceedings by paying regard to how the parties have fulfilled their obligations in the proceedings, including in relation to any lack of expedition and the timely disposal of the proceedings, and all other proceedings in the court, at a cost affordable by the respective parties; and s 58, which requires that the Court act in accordance with the dictates of justice, and that consideration be given to the degree of expedition with which the respective parties have approached the proceedings; the degree to which they have been timely in their interlocutory activities; and the degree of injustice that would be suffered by the respective parties, as a consequence of any order or direction made. 34 There can be no question that the claims brought in the proceedings are made bona fide. It is settled that in the circumstances here arising, the plaintiff carries the evidentiary burden of satisfying the Court that, taking into account all relevant factors, further security should not be granted or, if granted, should be ordered in an amount less than the defendant seeks (Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [62]).

The absence of the liquidator as a party 35 Having in mind the history of the matter, it seems to me that not much turns on the fact that the liquidator is not a party to the proceedings. That was the situation at the time that the earlier agreement in relation to security was reached. That it is the plaintiff which now resists the further security sought, is a factor to be weighed in the balance, in the way discussed in the authorities.

The defendants' contribution to the plaintiff's financial position 36 The plaintiff argued that the defendants had contributed to its financial position. In Jazabas it was observed at [94] that the plaintiff carries the onus of showing the adequacy if its financial position before the dealings in question and that the defendants' actions had caused or materially contributed to its inability to meet a security order. 37 While much evidence has been filed, the parties did not go to any of the evidence from which some assessment might be made of this claim, or matters such as this. Given the approach adopted, it must be accepted, as the defendants argued, that the plaintiff did not meet its onus in relation to this argument.

The strength of the case 38 The Pham defendants argued that the claims advanced against them in these proceedings were weak, and had no reasonable prospects of success. While there was a dispute between the experts, the evidence to be called from the defendants' expert Mr Goldie, supported the view that there had been no breach of duty as alleged by the plaintiff. 39 The parties did not go to any evidence which might shed light on the strength or weakness of their respective cases. The defendants submitted, nevertheless, that a relevant consideration was that Mr Pham had successfully defended proceedings involving similar issues in Ibrahim v Pham [2005] NSWSC 246; affirmed in Ibrahim v Pham [2007] NSWCA 215. 40 This submission has little force. The Ibrahim proceedings were brought in negligence, amongst other things, against Mr Pham by certain investors in the scheme, also presumably the plaintiff's creditors, who claimed that Mr Pham had advised them that the investment in the plaintiff's scheme was a good one. Much turned on questions of credit. The plaintiffs had gone to Mr Pham to seek his assistance in raising finance for their investment in the scheme. There was evidence which the trial judge accepted, that Mr Pham had not advised the investors, who had received independent advice, about the investment and had repeatedly said that he could not do so, given that he was acting for Mr Karl Suleman, the plaintiff's promoter and controlling mind. The claims advanced in that case appear to be entirely different to those here brought by the plaintiff against Mr Pham, in respect of the work he undertook for the plaintiff. 41 The defendants also submitted that nothing which they had done or omitted had made any difference to the plaintiff's conduct. The plaintiff pointed to no other assets that it had, independent of the scheme the subject of the proceedings, that were lost by reason of the defendants' conduct. The plaintiff had always acted through Mr Suleman, a convicted fraudster (see Suleman v R [2009] NSWCCA 70.) 42 Mr Suleman has been convicted of 26 counts to which he had pleaded guilty, being offences contrary to s 178BB of the Crimes Act 1900, of making a false statement for which the maximum penalty prescribed is imprisonment for 5 years, as well as offences contrary to s 300(2) of the Crimes Act 1900, of using a false instrument. The charges rested on false statements made to investors in respect of agreements with supermarkets which did not exist; other false instruments and false statements in relation to fortnightly returns on investments. 43 The difficulty with this aspect of the defendants' case was that the heart of the plaintiff's case is that it was the result of Mr Pham's acts and omissions that contributed to the position which led to the plaintiff's liquidation. Given that the defendants did not go to the evidence which might have supported the argument that the plaintiff's case is a weak one, the onus falling on the defendants to provide a foundation for this aspect of their case was not met.

Stultification 44 The defendants argued that the onus which fell upon the plaintiff to establish the stultification which it claimed would follow, were the orders sought to be made, had not been met. Even if the risk of stultification was accepted, refusal of the order sought would not automatically follow. 45 The plaintiff's case was that the litigation would be stultified, were the orders sought to be made. This was in circumstances where it is alleged that Mr Pham was the legal adviser responsible for setting up the plaintiff's illegal scheme; drafting many of the contracts which formed part of the scheme; and that he was involved in the service company which facilitated the scheme and enabled its exponential growth. This made it unjust to grant the orders sought. The defendants had contributed significantly to the plaintiff's impecuniosity, in circumstances where Mr Pham, particularly, profited from the operation of the scheme, including in the capacity of a broker, by which means he earned commissions from the operation of the scheme. 46 In Kavcor Pty Ltd v Kavanagh [2005] NSWSC 1163, Palmer J observed at [10] - [11]: "10 In order to demonstrate that a security for costs order would stifle prosecution of a deserving claim, a liquidator should show not only that the company in liquidation is without funds but that it has no other resources upon which it can call. As claims by companies in liquidation are usually prosecuted for the benefit of creditors, creditors are usually called upon to provide the funds for the litigation. If the liquidator shows that creditors, having been requested to provide litigation funding, cannot or do not do so, the liquidator will, at least, have advanced some distance towards demonstrating insurmountable impecuniosity. 11 However, liquidators now have more than one source of funding open to them: in certain types of cases and with proper safeguards against abuse of process - see e.g. Project 28 Pty Ltd v Barr [2005] NSWCA 240 - it may be appropriate to procure litigation funding from a commercial litigation funder."

47 In this case there has been no approach to creditors. Mr Weston's assessment that such an approach is unlikely to produce a source of funds for the litigation, appears to have a foundation, but it may not be overlooked that he also accepted in cross examination that such an approach was one which he would have to consider making, if no other source of funding was found, given that the litigation funder has been lost. He also acknowledged that if the appeal presently on foot was successfully resisted by the plaintiff, there might be some funds available to support the litigation; and that his discussions with the former litigation funder, or other funders, might yet bear fruit, in relation to further security and future costs, once the orders made in respect of these motions are known. 48 In the light of all of that evidence, while there are obvious and significant difficulties which the plaintiff faces in pursuing the litigation, it may not be concluded that the plaintiff has met the onus falling on it to establish that the proceedings will be stultified, if any further security for costs order is made.

Delay and past costs 49 The plaintiff also resisted any further order on the basis of the defendants' delay. The authorities make it clear that an application for security must be made promptly. The same obligation must apply to an application or further security. 50 In my view the defendants' delays in making and pursuing their applications support the refusal of the orders sought, at the very least in relation to past costs. 51 The lapse of time since the proceedings were commenced in 2002 and the current order for security was consented to in 2005, given the very substantial blow out in costs, which began from the time of the amendment of the claim in 2006 and the problems which then began to emerge with the discovery sought, does not assist the defendants' case. 52 It was argued for the defendants that this was an unusual case, because the plaintiff has been aware since the making of the 2005 consent orders, that the defendants were entitled to seek further security, if their costs' estimates were exceeded. In my view, this does not assist the defendants. The express reservation of the right to seek additional security and the delay in pursuing a further application, if it became evident that the defendants' costs estimates would be exceeded, which was not acted on while the preparation of the case was permitted to proceed, with all parties incurring very substantial additional costs in the meantime, weakens the defendants' case. There has not been an adequate explanation for the delay. 53 I am unable to accept, as the defendants submitted, that it was appropriate to wait until discovery had concluded and a significant part of the evidence served, before their applications for further security were pursued, even if it could be accepted, as the defendants argued, that the real cost blow out did not become apparent until 2008. I do not accept that submission on all of the evidence, but if I did, there is still delay. In the circumstances that delay would not support a costs order in relation to past costs. 54 That the plaintiff has not been spending its own funds in the meantime, having had the benefit of a litigation funder and only being obliged to repay the funder in relation to costs incurred up to the time of the termination of the agreement, if funds are recovered from the defendants, as was argued by the defendants, is not to the point. That is not an argument consistent with the emphasis placed in the Civil Procedure Act on ensuring 'just, quick and cheap' litigation and proportionality of costs. 55 During the defendants' delay in pursuing further orders as to security, the plaintiff has incurred very extensive costs in pursuit of its case, as have they. The plaintiff has put its evidence on and a large part of the defendants' evidence is also on, including expert evidence. 56 The liquidator was forced to terminate the earlier funding arrangement, once further security was sought, given the magnitude of what was sought and the litigation funder's attitude to the provision of such an amount of further security. Had security been sought in a more timely way, it may be that the litigation would never have proceeded to the point that it now has. In the circumstances, considerations of oppression plainly arise, in a context where it is settled that long and unexplained delay may be fatal to any security application (see for example Morris v Hanley [2001] NSWCA 374 at [30]). 57 In Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2009] NSWSC 563, Barrett J explained:

"28 The reason why delay acts against an applicant is that it allows a plaintiff to proceed without interruption and without any warning that his or her preparations and expenditures on them may be rendered worthless by the intervention of a stay brought about by inability to furnish security. The point was made in these terms by Einstein J in Liberty Grove (Concord) Pty Ltd v Mirvac Projects Pty Ltd [2008] NSWSC 48 at [7]: "The comprehensive treatment of the appropriate principles which fall to be considered in relation to applications for security for costs to be found in Idoport v National Australia Bank [2001] NSWSC 744 (' Idoport ') (at [69] and following) is accepted as correct for present purposes. One of the first and most important such principles concerns the need for an application for security for costs to be made promptly: Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1; Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 at 308; Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 123. The authorities have recognised that it would often be patently unjust to permit a defendant who stood by and allow a plaintiff to work on their case to ask for security after expenses had been incurred: Smail v Burton; Re Insurance Associates Pty Ltd (in liq) (1975) 1 ACLR 74 at 75. Indeed the longer the delay, the proximity of the hearing and the more acts done during the interval, the greater the significance of the delay and the more difficult it will be to persuade the Court that an order for security will not, in the circumstances, be unfair or oppressive: see French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514." " 58 After the earlier consent orders were made in 2005, the question of further security was raised in 2007, but not pursued until 2009 and not heard until 2010. In the meantime very considerable additional costs were incurred. There is still a further tranche of security to be provided under the existing orders. The defendants' delay in pursuing a further order, expressly contemplated as it was by the earlier orders, is in this case a factor which weighs considerably against the grant of the orders sought. I am of the view, in all of the circumstances, that justice does not permit any further orders for security in respect of past costs. Like the conclusion reached in Tim Barr Pty Ltd (at [35] - [40]), in this case I am satisfied that the orders sought in respect of past costs would lead to an unacceptably oppressive result.

Should any further security be ordered for future costs? 59 As to security for further costs, it may not be overlooked that the plaintiff has been known to be impecunious from the outset. The creditors who stand behind it and were likely to benefit from the litigation, have never provided security. The liquidator has not offered to be liable for costs, since being removed as a party. In those circumstances, the defendants argued, it would be unjust to permit the proceedings to continue, without ordering further security, given what is now estimated will be required to fund the ongoing litigation. I accept that given the amount of costs here incurred by the parties to date, and what is estimated will be further incurred, these submissions may not be lightly dismissed. 60 The defendants already have a certain level of security, as earlier agreed. If the plaintiff is not in a position to provide the third tranche of the existing security, the matter will not proceed. In those circumstances, should further security be required in respect of future costs, which are still very considerable, indeed greater than the original estimates? 61 The effect of the order sought in relation to future costs is to increase the third tranche from $125,000 security for each defendant, payable within 14 days after the call over at which the matter is listed for hearing. In respect of costs estimated to be incurred on a party/party basis after June 2010, further costs of $537,000 are estimated for the Pham defendants and $714,875 for Ms Borak. Ms Borak's estimates were calculated on the basis of an 8 week trial, but it became common ground at the hearing that there was a 4 week estimate. 62 Given the time at which this application has been brought and pressed, and the stage that preparation has reached, still some time before all of the defendants' evidence is put on and the matter made ready for allocation of a hearing date for a trial, I am satisfied that justice demands that some further security be ordered in respect of future costs. 63 The defendants' solicitors were not required for cross examination. Accordingly, the submission advanced for the plaintiff, that their estimates could not be understood; appeared to involve excessive work; and ought to be rejected and reduced to $220,000 in both cases, on the basis of a quick calculation done during the course of submissions, may not be accepted as a matter of justice. It may be that the current estimates are an over estimate, but that has not been established. Given the evidence and the history of the matter to this point, that is a conclusion which cannot readily be reached, certainly not on the basis of the approach adopted for the plaintiff to that question. 64 The defendants accepted that payment of further security could again be ordered by way of tranches, but no party advanced submissions as to what such further tranches ought to be. What remains outstanding to be done, it appears, is that inspection of discovered documents and the plaintiff's tender bundle must be concluded; the defendants' further evidence must be put on; the hearing must be prepared for; further directions hearings are required; and finally, there must be a 4 week trial. 65 The Pham defendant's estimate their costs from June 2010 at some $537,500. Assessing party/party costs on the basis of a 70% recovery, as the defendants argued, that amounts to $376,250. Ms Borak's estimate was $714,875, but that was on the basis of an 8 week trial at a cost of $505,000. Reducing that figure by half, would reduce the estimate to $462,375. A 70% recovery amounts to $323,662. 66 The plaintiff must already provide further security of $125,000, once a hearing date is fixed. In the circumstances, I have concluded that it is just to require further security of $251,250 for the Pham defendants and $198,662 for Ms Borak, in addition to the existing $125,000 security in each case, to be paid in three tranches. 67 In the case of the Pham defendants, $100,000 should be provided within 28 days of the date of this judgment; $100,000, within 14 days after the defendants' evidence has all been served; and the security to be provided once a hearing date has been fixed should be increased from $125,000 to $176,250. 68 In the case of Ms Borak, $90,000 should be provided within 28 days of the date of this judgment; $90,000, within 14 days after the defendants' evidence has all been served and the security to be provided once a hearing date has been fixed should be increased from $125,000 to $143,662. 69 The usual order as to costs would be that the plaintiff must bear the defendants' costs of their motions. The parties have liberty to approach if there is any disagreement in respect of the appropriate costs order.

That within 28 days of the date of this judgment, the plaintiff provide the second defendant with a further bank guarantee as security for costs in the sum of $90,000, in a form agreed, or failing agreement, in a form satisfactory to the Registrar.

That within 28 days of the date of this judgment, the plaintiff provide the other defendants with a further bank guarantee as security for costs in the sum of $100,000, in a form agreed, or failing agreement, in a form satisfactory to the Registrar.

That within 14 days after the second defendant notifies the plaintiff in writing that all of her evidence has all been served, the plaintiff provide the second defendant with a further bank guarantee as security for costs in the sum of $90,000, in a form agreed, or failing agreement, in a form satisfactory to the Registrar.

That within 14 days after the other defendants notify the plaintiff in writing that all of their evidence has all been served, the plaintiff provide the other defendants with a further bank guarantee as security for costs in the sum of $100,000, in a form agreed, or failing agreement in a form satisfactory to the Registrar.

That the consent orders made in September 2005 requiring the plaintiff to provide the second defendant with a further bank guarantee as security for costs in the sum of $125,000 on the date which is 14 days after call over at which time the proceedings are set down for final hearing, be varied to require such security to be provided in the sum of $143,662.

That the consent orders made in September 2005 requiring the plaintiff to provide the other defendants with a further bank guarantee as security for costs in the sum of $125,000 on the date which is 14 days after call over at which time the proceedings are set down for final hearing, be varied to require such security to be provided in the sum of $176,250.

If security for costs is not provided in accordance with any of these orders, the proceedings are stayed.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

At a glance

Court

Decision date

Before

Source

Judgment (45 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (27)

Cited By (12)