Kavcor Pty Ltd (in liq) & Anor v Kavanagh [2005] NSWSC 1163 | Case summary

1 The First Plaintiff is a company in liquidation ("Kavcor"). The Second Plaintiff is its liquidator ("Liquidator"). The Defendant was the sole director and shareholder of Kavcor. The Plaintiffs have commenced proceedings against the Defendant seeking repayment of an alleged debt owing by the Defendant to Kavcor. The Second Plaintiff has sought additional relief in his own right as liquidator. The Defendant disputes that any debt is owing by him to the company. 2 The Defendant seeks an order pursuant to s.1335(1) Corporations Act 2001 (Cth) that Kavcor provide security for his costs in the proceedings. Kavcor, as the Liquidator freely concedes, is completely without funds to pursue this litigation. The litigation is being undertaken, it seems, on a contingency basis by the Plaintiffs' solicitors. The Defendant says that this admitted circumstance is sufficient to warrant the making of an order for security for costs against Kavcor. Further, the Defendant says that the Liquidator is misadvised in commencing these proceedings in the first place. 3 On the other hand, the Liquidator says that if a security for costs order is made, it will stifle a proper claim which should be made on behalf of Kavcor's creditors. 4 The Plaintiffs' case as to the alleged debt seems to be founded entirely upon draft accounts prepared for Kavcor prior to its liquidation in which the Defendant is shown as a substantial debtor. The Defendant says that those accounts were draft accounts only and did not take it into consideration the fact that a transaction giving rise to a substantial debt on the part of the Defendant to Kavcor was rescinded, the result being that, rather than being a debtor of Kavcor, the Defendant is in fact a substantial creditor. 5 The Defendant says that, in view of the explanation which he has provided to the Liquidator and in view of the lack of any other evidence in support of the Plaintiffs' claim than the draft accounts, the Liquidator is acting irresponsibly in bringing these proceedings. 6 The law as to whether a company in liquidation will be ordered to provide security for costs is now well settled. It is as set out in Re Pavelic Investments Pty Ltd (1983) 8 ACLR 417; Hession v Century 21 South Pacific (in liq) (1992) 28 NSWLR 120; Ferrier & Knight v Civil Aviation Authority (unrep., FCA, 24 March 1994, Lockhart J); Hellen & Fordyce v Alex G. Grivas Pty Ltd [2002] NSWSC 1019, per Campbell J. 7 In Ferrier & Knight, Lockhart J said at para 13: "The authorities draw a distinction between cases in which the liquidator personally is the plaintiff and those where the company is the plaintiff, although controlled by the liquidator. In the former case the liquidator, like other litigants, is liable to pay costs personally, though he may have recourse to the assets of the company to satisfy that liability in appropriate circumstances, and the liquidator is not liable (at least generally) to an order to provide security for costs. On the other hand, where the company in liquidation is the plaintiff, the liquidator is not liable to pay costs and the company is liable to an order to provide security for costs: see Hession v Century 21 South Pacific Ltd (In Liq) (1992) 28 NSWLR 120; Re W Powell and Sons (1896) 1 Ch 681; Re Wilson Lovatt & Sons Ltd (1977) 1 All ER 274; Re Speedifix Building Products Pty Ltd (In Liq) and the Companies Act (1987) 5 ACLC 866; Re Buena Vista Motors Pty Ltd (In Liquidation) (1971) 1 NSWLR 72; Re Pavelic Investments Pty Ltd (1983) 1 ACLC 1207; Re Strand Wood Co Ltd (1904) 2 Ch 1; Re W Powell and Sons (1896) 1 Ch 681." 8 In Hession (supra) at p.123 the Court said of the case in which the company in liquidation is plaintiff, as distinct from its liquidator personally: "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." 9 In the present case, so far as the claim in debt against the Defendant is concerned, the proper plaintiff is Kavcor, not the Liquidator personally. Kavcor has no funds with which to prosecute its claim against the Defendant. As pointed out in Hession, that circumstance does not in itself confer immunity against a security for costs order - on the contrary, it founds a prima facie entitlement to such an order. 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. 12 In the present case, the Liquidator does not say that he has called upon Kavcor's creditors to provide funds to prosecute the debt claim against the Defendant. All that the Liquidator says is this: "I do not at this stage consider that it is in the interests of the creditors of the First Plaintiff to enter into a funding agreement with any of the litigation funders providing funds in respect of recovery action by companies in liquidation.

No creditor of the First Plaintiff has offered to fund the present litigation." 13 The Liquidator does not say whether he has, in fact, explored the possibility funding by a commercial litigation funder. He does not say why he does not consider it to be in the interests of creditors of Kavcor to enter into such a funding arrangement. Further, it is unclear from his evidence whether he has sought litigation funds from Kavcor's creditors and has been refused or whether he has not sought litigation funding and no creditor has volunteered it. 14 Before the Court could be satisfied that Kavcor has a claim deserving of prosecution and that insurmountable impecuniosity will stifle it if a security for costs order is made, the Court would need evidence as to the circumstances in which the Liquidator has endeavoured unsuccessfully to procure litigation funding from Kavcor's creditors; it would need evidence explaining why commercial litigation funding is unavailable or inappropriate. In short, the Court requires evidence to satisfy it that insurmountable impecuniosity justifies departure from the usual requirement that a company in liquidation provide security for the costs of its litigation. 15 The evidence which the Liquidator has filed to date is insufficient for that purpose. Accordingly, I am not satisfied that the Court should, at this stage, refuse the application for security against Kavcor. 16 The Defendant's solicitor has provided an estimate of the Defendant's costs up to and including trial, amounting to approximately $45,000. The Plaintiffs have not challenged that estimate. I consider it reasonable to order that Kavcor provide security for the Defendant's costs of Kavcor's claim against him in an amount of $30,000 at this stage. Each party will have liberty to seek an increase or diminution of that amount at any stage in the progress of the matter towards trial. Further, the Liquidator will not be precluded from making an application to discharge the order for security for costs if, at some time in the future, he is able to demonstrate insurmountable impecuniosity, as I have discussed above. 17 The orders of the Court are:

Kavcor Pty Ltd (in liq) & Anor v Kavanagh

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