LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited

The primary judge's reasons 12The appellant commenced proceedings on 11 June 2008 in the District Court. The proceedings were transferred to the Common Law Division of the Supreme Court on 10 December 2010. The respondent's application for security for costs was filed on 30 November 2012 and, as I have said, heard on 14 March 2013 and 9 April 2013. 13The appellant resisted the application on the bases that it had been made too late, that to order security would stultify the litigation, that the respondent's conduct had caused the appellant's impecuniosity and that the appellant, although a corporation, was effectively the alter ego of its principal, Mr Naboulsi. The appellant submitted that it should be in no worse position than if Mr Naboulsi were the appellant just because he had chosen to arrange his affairs through a corporate vehicle. 14The appellant did not dispute that it would be unable to meet an order for costs if it were unsuccessful in the proceedings or, according to the s 1335 formulation, that there was reason to believe that it would be unable to pay the defendant's costs. Accordingly, her Honour said, there was jurisdiction to make an order either under s 1335 of the Corporations Act 2001 (Cth) or rule 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW) (as then in force). There is, of course, also an inherent power to order security as an incident of the court's control over its own practice and procedure to procure proper and effective administration of justice and prevent abuse of process: Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd (above); Rajski v Computer Manufacture & Design Pty Ltd [1982] 2 NSWLR 443. 15The respondent argued that, in the particular circumstances, the onus shifted to the appellant to establish a reason why security should not be ordered, adding that the inability of a corporate appellant to meet an adverse costs order both triggered the jurisdiction and was a factor in the exercise of the court's discretion. 16The primary judge referred to facts which she considered to be admitted, not in dispute, incontrovertible or established by objective or contemporaneous evidence. These were, in summary, as follows:

The appellant was registered on 29 March 2005. Mr Naboulsi was its sole director. Its paid up capital was $10.
In 2005, Mr and Mrs Urusoglu, the owners of premises at Granville, granted to the appellant a five-year lease of the entrance of the ground floor and the first and second floors of unit 35, with two five-year options to renew. The first and second floors were accessible from the ground floor by a lift and two sets of fire stairs. The entry to the gymnasium was on the ground floor but the reception area for it was on the first floor, as were the related office and a "server" room of which more will be said presently. The appellant was in possession of the leased area from 30 August 2005 until 30 August 2007, when the fire occurred. 3 For the year ended 30 June 2006, the appellant disclosed in its income tax return gross income of $208,542 which consisted of $53,366 from "other sales of goods and services" and $155,176 of "other gross income". The total expenses came to $646,351 and included lease expenses of $115,098, repairs and maintenance of $141,475 and undifferentiated "all other expenses" of $368,706. The result, therefore, was a loss or deficiency of $437,809.
The business insurance policy issued by the respondent covered the period 28 September 2006 to 28 September 2007. It insured the appellant against loss or damage by reason of fire and business interruption. There were particular sums insured for specified classes of loss or damage.
On 16 May 2007, Mr Naboulsi, through an agent, A & K Engineering Group Pty Ltd, applied for a development and construction certificate in respect of a proposed new location for the gymnasium in the same building complex. In connection with that application, Mr Naboulsi's made a statement as follows: "As Council would be aware the subject site currently contains a health and fitness centre, and as part of this submission, the tenant of the existing health and fitness centre wishes to relocate to the north-east building."
By letter dated 21 August 2007, the appellant was offered a tenancy of lot 20 of the proposed new location. The appellant was, before the fire, also negotiating with the owners of lots 21, 23 and 24 of the new location.
There were 14 CCTV cameras located at various positions throughout the gymnasium. Images captured by the cameras could be viewed on a computer screen located in a room known as the "server room" which was located on the first floor and could be accessed via the office. The CCTV installation included a monitor (the "server monitor"), a keyboard, a mouse and a digital video recorder (or "DVR") on a wooden stand about 40 cms from the wall. The cabling to the DVR was unsupported and hung loose from where it was plugged into the DVR.
The DVR was set to "motion" which meant that images captured were only sent to the hard disc if motion was detected.
The only input controls for the DVR were the keyboard and mouse located in the server room. There was also a monitor located at the reception desk (the "repeat monitor") but there was no accompanying keyboard or mouse for the repeat monitor. The repeat monitor displayed what was shown on the server monitor.
There were two DB15HD connectors referable to the CCTV system (the "connectors") which were held securely in place by thumbscrews. There was one thumbscrew on each side of each connector. The connectors which were plugged in to the back of the monitor connected the DVR to the power sources on the wall. It was impossible to unplug either of the connectors when the thumbscrews were tight. Each connector had a capacity of 8 cameras. Cameras 1-8 were connected to the top connector and cameras 9-16 (except for 13 and 14 which were not in use) were connected to the lower connector.
A uniform blue screen image at the server monitor was generated when it no longer detected a valid signal at the camera input, such as the connectors. For example, signal interruption from a camera feed would result in blue screen being generated. Signals from any individual camera could potentially be interrupted at various locations between the camera and the DVR. However interruptions to groups of cameras (1-8 or 9-16) could only occur at the connectors.
The CCTV footage established a sequence of events between 11.15pm on 30 August 2007 and 1.28am on 31 August 2007 that the primary judge recorded in detail. In particular, her Honour noted that Mr Naboulsi was alone in the gymnasium after 11.59pm (when the last staff members left) until 12.50am (when he departed) and, during that period, spent time at various windows and adjusted the server monitor. At 12.54am, an unrecognisable person, apparently male, wearing a white hooded one-piece suit and booties entered the premises, went immediately to the server room and disconnected the CCTV cameras so that a blank blue screen was thereafter displated on the monitor.
The fire was deliberately lit at about 1am. Petrol from six 20-litre cans had been poured around the premises. The fire was reported at 1.28am.
The telephone in the office was out of its cradle when the fire brigade arrived. The presence and position of soot indicated that the receiver was out of its cradle before the fire. Photographs taken after the fire showed that the connectors and the composite connector for the repeat monitor were unplugged and were in a bundle of wires on the floor.
On 22 December 2008, Mr Naboulsi was interviewed by police. The interview was recorded. The respondent tendered the electronically recorded interview of a suspected person ("ERISP") on the application. The primary judge set out a long extract from the ERISP.
On 22 January 2009, Mr Naboulsi was arrested and charged with arson. He was subsequently acquitted by direction. 17The primary judge next referred to evidence of Mr Naboulsi to the following effect:
Neither the appellant nor Mr Naboulsi himself had the funds to provide security for costs or to meet an adverse costs order.
He was not aware of any litigation funder who would be prepared to fund the proceedings.
He had nothing to do with the fire and was innocent of any wrongdoing relating to it.
At the time of the fire, neither he nor the appellant had cash flow problems.
The only demands by creditors of the appellant at the time of the fire were for unpaid rent (which was disputed) and electricity bills (which were also disputed). The dispute with the lessor was the subject of litigation.
Before the fire, Mr Naboulsi had spent about $360,000 of his own money and money from others fitting out the gymnasium.
The annual rent payable under the lease for the gymnasium was $22,000, subject to a disputed arrangement for certain set-offs.
Mr Naboulsi had told the lessor before the fire that he intended to move to different premises within the same complex.
The new premises he had identified were smaller and more suitable since they were on the ground floor. The rent for the new premises would be less than half the rent for the original premises.
Mr Urusoglu had a key to the gymnasium.
On 25 August 2007, someone tried to set fire to a gas leak at the gymnasium. This made Mr Naboulsi "paranoid" and caused him to be very wary when leaving the premises at night. 18Against that factual background, the primary judge proceeded to consider the application by reference to several headings: The appellant's prospects of success and whether its claim was made in good faith Whether an order for security would prevent the appellant from maintaining the proceedings and whether the appellant had demonstrated impecuniosity on the part of those standing to reap the benefit of any judgment in the appellant's favour Delay Other matters put by the appellant in opposition to the application. 19The appellant's main challenge is to the primary judge's conclusions on the first and second of these matters. The finding concerning delay is also challenged. It is convenient to deal with these three matters separately; to note the judge's finding and reasoning on each; and then to deal with the arguments raised on appeal.

Stultification of the proceedings 28On this issue, her Honour began by noting Mr Naboulsi's unchallenged evidence that, if an order for security for costs were made, it would prevent the appellant from maintaining the proceedings. It was clear that the company itself had virtually no financial resources of its own and that Mr Naboulsi was in the same position. It was conceded by the respondent that Mr Naboulsi's father, who had guaranteed some of the company's financial obligations, was incapable of providing funds to meet an order for security for costs. 29The primary judge set out the following passage in the judgment of Sheppard, Morling and Neaves JJ in Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1 (at 4): "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts." 30Her Honour observed that the relevance of that matter had been reaffirmed in Pioneer Park Pty Ltd v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344; 65 ACSR 383. 31Attention was then directed to the plaintiff's creditors. Mr Naboulsi identified three creditors who had obtained judgments against the appellant and who had apparently agreed to defer enforcement pending the outcome of the proceedings. All were trade creditors. Capital Finance Australia Ltd had a judgment of 24 November 2008 in the sum of $33,953.76 plus interest from that date (with interest continuing to run); Australian Product Sourcing Pty Ltd had a judgment of 13 May 2009 for $675,660.39 including interest and costs as at 27 February 2013 (but with interest continuing to run); and Macquarie Equipment Rentals Pty Ltd had a judgment of 19 October 2009 for $37,500 plus interest and costs up to 27 February 2013 (with interest continuing to run). 32After permitting re-opening, the primary judge received an affidavit affirmed by Mr Naboulsi on 14 March 2013 about the approximate amounts of other debts said to be owed by him but which appear to be owed by the appellant, being: CBA Credit card $38,000 John Osman $250,000 Coca-Cola Amatil $10,000 Service Finance $30,000 Lease Choice Pty Ltd $21,064.43. 33The appellant put into evidence before the primary judge such replies as had been received to letters to these creditors asking whether they would give financial assistance for the costs of the proceedings. Capital Finance, Australian Product Sourcing and Macquarie Equipment Rentals all replied that they were "not prepared" or "not willing" to give financial assistance. Service Finance said that it could not "justify underwriting a court action where the evidence is unknown to us". Mr Oswan sad that he was "not in a position to extend any further funds to this entity as I am already owed a substantial amount". There was no evidence of replies from others. 34Her Honour's conclusion was stated as follows (at [54]-[55]): "54. The plaintiff's further evidence established that its creditors are willing to take the benefit of the litigation but not to assume any burden for costs. There is no evidence that they are unable to assume such a burden, merely that they are unwilling to do so. Accordingly, the plaintiff has not only failed to discharge the onus referred to in Bell Wholesale but it has effectively proved the contrary. 55. That those who stand to benefit from the litigation if the plaintiff is successful are able but not willing to provide security is a relevant matter, particularly in circumstances where the plaintiff submitted that I should refuse to order security on the grounds that such an order would stymie the litigation." 35The appellant contended in this Court that the primary judge should have viewed matters differently and concluded that the appellant, as plaintiff, had no realistic prospects of obtaining financial assistance from anyone who might, in a relevant sense, be regarded as "standing behind" it. The respondent contended that the judge's assessment was correct. The difference of opinion relates to the external creditors. There is no quarrel with the judge's assessment that Mr Naboulsi and his father (the only identified insiders) are without means and unable to provide financial assistance. 36It may be accepted that, in Bell Wholesale Co Pty Ltd v Gates Export Corp (above), the Full Federal Court said that, if a corporate plaintiff seeks to resist an application for security for costs on the ground that the making of the order would frustrate the litigation, that plaintiff must establish "that those who stand behind the action and who will benefit from the litigation if it is successful ... are also without means". According to this formulation, a plaintiff seeking to resist an application for security for costs has to demonstrate a state of impecuniosity on the part of not only itself but also those "standing behind it" who will "benefit from the litigation if it is successful". The focus is on the inability, as distinct from mere unwillingness, of relevant persons to give financial assistance - the lack of financial capability or means, as distinct from lack of willingness. 37As was noted in Ariss v Express Interiors Pty Ltd (1995) 13 ACLC 1585, however, the question of lack of means is, in such cases, merely an aspect of a more broadly based inquiry whether, if an order for security is made, the order cannot be met with the result that the litigation will be brought to a premature end. It is the ability of the plaintiff to meet an order for security that is in issue; and, just as the inability of persons standing behind it to give it financial support will be relevant to the inquiry, so too may be unwillingness of those persons (despite ability) and all other reasons for the unavailability of their support. A finding of stultifaction becomes available only to the extent that the reasons of relevant persons other than the plaintiff itself for not giving financial support truly reflect an inability, rather than unwillingness, of the plaintiff to marshall the relevant financial resources. It is for this reason that unwillingness of other persons is viewed differently from their inability. 38It was held in Arris by Phillips JA (with whom Ormiston JA and Charles JA agreed) that, when the question of stultification is under consideration, it is proper to take account of "commercial impracticability", in the sense of any practically insurmountable difficulty facing the plaintiff in gaining any advantage from such financial capacity as may exist in other persons, and notably its creditors. Phillips JA saw no reason why, as a matter of principle, such "commercial impracticability" should not be a relevant circumstance when the plaintiff seeks to demonstrate that any order for security cannot be met - even though it be different from the circumstance that those who must meet any order for security are themselves without means. 39The decision in Ariss was that, when considering whether the action might be stultified by an order for security, it is relevant to look at the practical and commercial difficulties in providing any security ordered; and that the task of demonstrating those difficulties rested on the company resisting the application. 40Counsel for the appellant referred to a number of cases in which creditors whose support had not been forthcoming were seen as occupying a position that made it unreasonable for them not to give financial assistance to the corporate plaintiff. In Pasdale Pty Ltd v Concrete Constructions (1995) 131 ALR 268, Finn J was influenced by the fact that the corporate plaintiff was subject to a deed of company arrangement which acknowledged a possible need for the creditors to provide financial support if the litigation was to proceed and that the creditors as a body had, by a process of voting, assented to that. In Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201, the company's decision to sue was viewed as that of its financier "acting through" a receiver and manager appointed by it. In Reches Pty Ltd v Tadiran Ltd (1998) 85 FCR 514, the creditors were the shareholders. In all of those cases, creditors whose position was relevant to the assessment of the company's ability to meet an order for costs had some attribute of relevance over and above creditor status. 41It was submitted that where, by contrast, the persons identified as potential providers of financial support are mere arm's length trade creditors having no other connection or interest, their proved unwillingness (as distinct from proved inability) to assist should not, as it were, be held against the corporate plaintiff. Rather, their position should be judged against criteria of reasonableness and commercial practicability. 42There is, to my mind, merit in that submission. In Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [26], Hodgson JA accepted that Bell Wholesale indicates that, if a company wishes to have the benefit of a finding that litigation will be stultified, it must prove that the persons who substantially stand to benefit are unable to provide the security. He continued: "If that is not proved, it does not necessarily make the impecuniosity of the company and difficulties with providing security irrelevant; and if it can be shown that those persons are reasonably unwilling, even though possibly able, to provide the security, that may be a factor that would be taken into account." 43On that approach, proof by a corporate plaintiff of what might be termed rationally and practically reasonable unwillingness of creditors to give financial support is something that may be taken into account in the exercise of the undoubtedly wide discretion with respect to security for costs. The correctness of that approach was expressly confirmed by Allsop CJ and Middleton J in Madgwick v Kelly [2013] FCAFC 61; 212 FCR 1 (at [81]). Their Honours were of the view (at [83]) that "unwillingness in itself is not determinative, and the question of the reasonableness of any unwillingness to contribute must be considered in determining what is fair in all the circumstances". They added (at [87]) "that questions of unwillingness, the difficulties of drawing conclusions about stultification, and the overall risk of stultification" are "considerations that may be proper to take into account". 44The creditors mentioned at [31] and [32] above are arm's length trade creditors. They have no connection with the company or Mr Naboulsi akin to the connections that existed in the cases mentioned at [40] above - or, for that matter, the connection of the solicitors in Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd [2013] NSWCA 404 who were willing to continue acting in the litigation on a deferred payment basis. There is therefore a question as to whether those arm's length trade creditors should be regarded as "standing behind" the corporate plaintiff in the sense relevant to this area of discourse. 45The focus is, of necessity, on resources that may reasonably be expected to be available to the company. An arm's length trade creditor could be expected to make resources available only if it suited its own selfish commercial purposes to do so; and even then, the matter would be entirely in the discretion of the creditor. A creditor for a relatively small amount might well be content to see the company's action stayed because of non-provision of security for costs and take its chances on having to write off its relatively small debt rather than increase its financial exposure. A creditor for a larger amount might take the view that there was no commercial justification for increased financial exposure to the particular debtor. Credit policies might be compromised. And any creditor might take the attitude reflected by the reply by Service Finance that it was commercially unacceptable to commit funds to litigation where there was no way of assessing the possible outcome. Another rational attitude would be that, if there were to be any financial assistance, the company should, in return, concede some measure of control or influence over the conduct of the litigation. 46Because of the range of rational and sensible attitudes of mere arm's length creditors, it is artificial to insist on evidence of their inability, as distinct from unwillingness, when a corporate plaintiff seeks to prove that a requirement for the provision of security will stultify its action. The real issue goes to the practical capacity of the company to marshall financial resources - a process in which persons involved in the company's internal decision-making and its ultimate economic success or failure are subject to expectations of financial commitment that do not fall upon independent parties with whom ordinary business transactions are undertaken. 47In Pioneer Park Pty Ltd v Australia and New Zealand Banking Group Ltd (above) at [51], Basten JA, referring to Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; 208 ALR 564 at [74] and Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545, said that the matter to be addressed is one of possibility: "It may be that there is someone else who will satisfy the order on the plaintiff's behalf". His Honour later said (at [60]) that it was for the corporate plaintiff seeking to resist the application to "establish on the balance of probabilities that the appeal would not proceed if security for costs were required". Whether someone else will satisfy the order and whether the action will proceed if security is required are matters about which the financial capabilities of the plaintiff's arm's length creditors have very little, if anything, to say. 48I am of the opinion that no objective reason has been shown in this case for an expectation that any of the identified creditors should provide financial support to the appellant for the purposes of its litigation. There is nothing to suggest that any of those creditors is distinguishable from a bank whose customer's account is overdrawn or a supplier who has cut off supplies because past payments have not been made. Creditors of that kind are independent actors whose own interests may legitimately be uppermost in their minds. There is no legal or commercial expectation that they should turn themselves into litigation funders. 49On this aspect, the primary judge did not, in my view, have proper regard to the relevance of unwillingness, as distinct from inability, to assist financially when the persons whose potential assistance is under consideration do not occupy an "insider" position and have no separate interest in supporting the plaintiff. In that way, a material consideration was not taken into account.

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