Kilmac Investments P/L v NHLS & Co Ltd & Ors

(a) Such an order will frustrate the litigation;

(b) NHLS was the cause of Kilmac's impecuniosity; and

(c) There are public interest reasons why the litigation should continue.

[5] Although Kilmac argues that NHLS's actions caused Kilmac's impecuniosity, it relies on that only to support its argument that it should not be required to provide security in an amount greater than that which it has offered.

[6] Ordinarily, impecuniosity is advanced as a ground for refusing an order completely. Rule 672 of the UCPR provides that when a court is deciding whether to make an order, the court may have regard to a number of identified matters. Two of those matters are: the impecuniosity of a corporate plaintiff and, whether the plaintiff's impecuniosity is attributable to the defendant's conduct. There seems to me to be no reasons why impecuniosity cannot be advanced as a reason for only providing a certain level of security. If, due to the conduct of a defendant, a plaintiff corporation is only able to raise a limited amount of money or provide security over property to a limited extent, then r 672 allows regard to be had to those matters and to take them into account when moulding an order suitable in the circumstances.

[7] There is no doubt that that Kilmac would be unable to pay the costs of NHLS if that party was successful. Kilmac has no assets of any description. It acquired the money it paid to NHLS through a fee it earned ($101,965.70) by procuring funds for a property project, the provision of $50,000 from Litehaus Pty Ltd ("Litehaus") and a further $50,000 from Kilcor Pty Ltd ("Kilcor"). Litehaus has forgiven Kilmac the advance it made. As for the advance from Kilcor, McGuiness, in his affidavit filed by leave deposes that a dispute arose between Litehaus and Kilcor in the second half of 2005 over fees for work undertaken by Litehaus for Kilcor. That dispute was settled on the basis that Kilcor agreed to transfer to McGuiness its share in Kilmac, making him the sole shareholder and director of Kilmac. McGuiness says that, by that process, Kilmac became (and remains) solely entitled to the funds if it is to recover them from NHLS. He then deposes that Kilmac is the only entity to benefit from this litigation.

[8] Where an order for security is sought, one of the matters which must be given close attention is the chance of success of a claim made by the impecunious plaintiff.[1] Where the claim that is made by the plaintiff corporation is, on its face, regular and discloses a cause of action, then, in the absence of evidence to the contrary, a court should proceed on the basis that it is bona fide with a reasonable prospect of success.[2]

It is argued by NHLS that Kilmac's claims have no merit and have no prospect of being successful because NHLS's amended points of defence meet Kilmac's claims and allegations in its amended points of claim. By itself, that is not sufficient. Allegations in a document entitled points of claim are no more than that - allegations. It is argued that as the basis of Kilmac's claim against the respondents is that NHLS did not disclose the other shareholders' promissory notes or how NHLS's net tangible assets position was supported then that claim is met by a pleading that Kilmac was so aware. The mere pleading of a position does not advance the case. The affidavit material which has been supplied demonstrates that there will be questions of credit to be decided as to whether certain information was disclosed, by whom and in what manner. In those circumstances I regard it as appropriate to proceed on the basis that there is a bona fide regular claim which has a reasonable prospect of success.

I am satisfied that Kilmac has demonstrated that, if an order for security in a sum greater than that offered, is made, then that will stultify the proceedings. Mr McGuiness, in his affidavit and in cross-examination, demonstrated that he has exhausted the external sources of any funds or security he could call upon to support Kilmac.

Of course, whenever a corporation claims impecuniosity then the court is entitled to look to see whether those who stand behind the corporation have made their assets available to fund the costs of the litigation.[3] It is for the corporation who has commenced the action to discharge the burden of showing that those who might benefit from the claim are unable to pay the costs or that it is commercially impracticable for the plaintiff to get them to do so.[4] In this case McGuiness has offered a personal guarantee. It cannot be said, then, that he is improperly sheltering behind the corporate shield, but his personal guarantee is of no practical use. Although he has been discharged from bankruptcy, he has no assets in his own name. If those who stand behind a company accept personal responsibility, the statutory purpose of ensuring that an impecunious company does not unfairly apply pressure to a party it sues may be largely satisfied.[5] Of course, that will not, of itself, mean that a security for costs order will not be made.[6]

The true issues which arise out of the circumstances of the case and the offer made by Kilmac are those identified by NHLS as its objections to an order being made in the terms of that offer.

[13] NHLS relies upon a report by Stephen Hartwell in which he provides an estimate of the fees and costs likely to be incurred and allowed on a standard basis of assessment by the 11 respondents in defending the proceedings brought by the applicant. He, in relying upon information received from the solicitors for NHLS, calculates the costs incurred to date at $66,170. He then lists the steps which he says will need to be taken in respect of the matter and he sets out the costs estimates for those steps. Those steps include this application and an application to strike out the pleadings within the amended points of claim. He also provides an estimate of costs with respect to an application concerning expected deficiencies in disclosure by Kilmac.

[14] With respect to future costs, the estimate provides for the costs of drawing and engrossing the brief to counsel to appear upon this application and a fee on brief for appearing on this application. Mr Tucker appeared. He was the solicitor for NHLS. Curiously, there is provision for a strike out application of the amended points of claim. First, there has been no suggestion of any strikeout application. Secondly, and more importantly, if such an application takes place then the costs of that application will be decided at that time and security should not be provided for it now.

[15] With respect to disclosure there is an assumption that disclosure by Kilmac will be inadequate and there will need to be an application with respect to it. There is no basis advanced for such a supposition and, for the reasons given with respect to the previous item, the costs of any such application will be determined at that time and security should not be required now.

[16] There is also an item for counsel to settle witness statements and affidavits. There has not been any direction yet for this trial to be heard by way of witness statement or affidavit and so no provision should be made for it.

[17] Many of the guiding principles for the exercise of discretion in this area were set out in the reasons of French J (as he then was) in Bryan E Fencott:

"Beyond the limits imposed by the meaning of the word, there is nothing to limit the amount of security which can be ordered: Imperial Bank of China, India, and Japan v Bank of Hindustan, China, and Japan (1866) 1 Ch App 437 at 438 per Knight Bruce LJ.

It is clear that the security may extend not only to future costs but also to costs already incurred: Brocklebank & Co v King's Lynn Steam Ship Co (1878) 3 CPD 365; Procon (Great Britain) Ltd v Provincial Building Co Ltd [1984] 1 WLR 557; Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (supra).

In fixing the amount of the security the court must look first at the whole case and take into account, inter alia, the chance of it collapsing without coming to trial. It is not bound to give the amount of security which a defendant says will be the amount of his costs: Dominion Brewery Ltd v Foster (1897) 77 LT 507.

The court may in such a case, order somewhat less than if there seems to be every prospect that the action will be fought to a finish: T Sloyan & Sons (Builders) Ltd v Brothers of Christian Instruction (supra) at 720.

The court does not set out to give a complete and certain indemnity to a defendant: Menhaden v Citibank NA [1984] FCA 183; (1984) 1 FCR 542 at 547 per Toohey J.

The process of estimation embodies to a considerable extent, necessary reliance on the 'feel' of the case after considering relevant factors: Pearson v Naydler (supra) at 907." [7]

[18] The question of whether or not costs which have already been incurred should be allowed to be the subject of an order for security for costs usually arises when there has been some delay in the bringing of an application. NHLS says that there has been no delay as the 5th to 11th respondents were joined as parties to the action on 15 October 2007 and, in doing so, a new case was made against those added respondents. It was in April of this year that Kilmac filed its amended originating application and on 30 April Kilmac filed its amended points of claim. While there has been a substantial change in the case brought against NHLS, the financial position of Kilmac has always been as it is now and has always been in that position to the knowledge of NHLS. That is a matter which does inform the discretion to be exercised when formulating an order. The fees which have been incurred so far amount to some $66,000. The sums which are sought in Mr Hartwell's estimate for matters which are not properly included amount to some $21,000. Those two figures taken together reduce the total sought to about $130,000.

[19] In this type of application the court has an unfettered discretion as to the nature of any order for security for costs.[8] In exercising that discretion the court is entitled to take into account all the relevant circumstances including the extent to which a plaintiff's impecuniosity has been caused by a defendant, the timing of the application and the nature of the costs sought to be secured. In all the circumstances of this case, the sum of $100,000 offered by way of security is appropriate. That leaves, then, the question of whether or not the form of the security offered is appropriate.

[20] There are two aspects to the form of security offered. The first is a personal guarantee offered by McGuiness. I have already referred to that above. NHLS, in a letter from its solicitors of 31 October 2007 said that it would be prepared to accept a personal guarantee from McGuiness as security for their costs. That was, at that time, rejected.

[21] The real debate is about the nature of the security offered by Kilmac. It offered a registered second mortgage over some real property. It asserted that the value of the property was approximately $850,000 and that the debt otherwise secured against the property was $350,000. The evidence supporting the value of the property consisted of a one page letter from a firm of property consultants which said that they valued the particular property at $800,000, that they expected that due to market volatility the property might decrease in value by up to around 10 per cent in 2008, and that the valuation should not be used for mortgage lending purposes.

[22] Mr Morris QC, who appeared with Mr Jurth, for Kilmac, offered to draft a minute of order which would be consistent with his submission that the security could be provided in such a way that it would not be illusory in the sense that it could disappear depending upon the actions of the first mortgagee. I am prepared to make an order that Kilmac provide security in the sum of $100,000 together with a personal guarantee from McGuiness provided that Kilmac can structure the security over the property in such a way that it offers an appropriate level of protection for NHLS.

[23] I will hear the parties further on the form of that order.

1. [1] Spiel v Commodity Brokers Australia Pty Ltd (1983) 35 SASR 294.
2. [2] Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497 at 514; GAI Holdings (No 3) Pty Ltd (In liquidation) v GAI Holdings (No 4) Pty Ltd (1986) 4 ACLC 90 at 91.
3. [3] Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 at 532.
4. [4] Jeffcott Holdings Ltd v Paior 1996 15 ACLC 28 at 33; Ariss v Express Interiors Pty Ltd (In liquidation) [1996] 2 VR 507.
5. [5] Harpur v Ariadne Australia Ltd at 532.
6. [6] Cabinets Pty Ltd v Sampas Pty Ltd (1998) 18 WAR 306.
7. [7] At 515.
8. [8] Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545.