Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited & Ors

Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited & Ors - [2008] NSWSC 449 - NSWSC 2008 case summary — Zoe

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Addstead Pty Ltd v Simionato Holdings Pty Ltd (unreported, Supreme Court of South Australia, Duggan J, S5691, 5 July 1996) Barton v Minister for Foreign Affairs (1984) 54 ALR 586 Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 52 ALR 176 Benzlaw & Assoc Pty Ltd v Medi-Aid Centre Foundation Ltd [2007] QSC 009 Bhattcharya v Freedman [2001] NSWSC 498 Buckley v Bennell Design and Construction Pty Ltd (1974) 1 ACLR 301 Byrnes v John Fairfax Publication Pty Ltd [2006] NSWSC 251 Chartspike Pty Ltd v Chahoud [2001] NSWSC 585 Commonwealth v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 Cory-Wright and Salmon Ltd v KPMG Peat Marwick [1993] 2 NZLR 701 Cowell v Taylor (1885) 31 Ch D 34 Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 Eddy v Mac Audio & Acoustical Consultants Pty Ltd [2000] SASC 149 Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 Frankston Ambassador Pty Ltd v Cigna Insurance Australia Ltd (1991) 9 ACLC 790 Greener v E Kahn & Co Ltd [1906] 2 KB 374 Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61 Jodast Pty Lrd v A & J Blattner Pty Ltd (1991) 104 ALR 248 Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 Liberty Grove (Concord) Pty Ltd v Mirvac Projects Pty Ltd [2008] NSWSC 48 Lucas v Yorke (1983) 50 ALR 228 CASES CITED : Maronis Holdings Ltd v Nippon Credit Australia Ltd [2000] NSWSC 994 Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd (1998) 193 CLR 502 Morris v Hanley [2000] NSWSC 957 Northern Southern Western Supermarkets Pty Ltd v HIH Casualty and General Insurance Ltd (in liq) [2002] NSWSC 541 Pasdale v Concrete Constructions (1995) 131 ALR 268 Pavelic Investments Pty Ltd, In re (1983) 8 ACLR 417 Pearson v Naydler [1977] 1 WLR 899 Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344 Plaza Print Pty Ltd v South British Insurance Co Limited (1984) 54 ACTR 3 Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1989) 8 ACLC 29 P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 ( Oshlack v Richmond River Council (1998) 193 CLR 72 Rajski v Computer Manufacture & Design Pty Ltd (1982) 2 NSWLR 443 Re W Powell and Sons [1896] 1 Ch 681 Re Strand Wood Co Ltd [1904] 2 Ch 1 Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326 Rickard Constructions Pty Ltd v Allianz Australia Insurance Ltd [2002] NSWSC 1162 Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 Silverstone Holdings Pty Ltd v American Home Assurance Co [2003] WASC 139 Tenth Anemot Pty Ltd v Colonial Mutual General Insurance Co Ltd [1993] 2 VR 48 Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679 Tulloch Ltd v Walker (unreported, Yeldham J, Supreme Court of New South Wales, 8 December 1976) Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542

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JUDGMENT The application 1 The first defendant, ("CGU") seeks an order that the plaintiff, Mr Green, provide security for costs in an amount of $2,592,330.72. The application throws up the question of whether or not a liquidator may or should be required to provide security for costs in a situation where the liquidator is funded by an external funder. 2 The application is pursued pursuant to the inherent power of the Court to order security for costs [cf: Rajski v Computer Manufacture & Design Pty Ltd (1982) 2 NSWLR 443 at 448-449 per Holland J, who made the point that the discretion to order for security costs is unfettered]. Background 3 These proceedings are brought by the liquidator of Arimco Mining Pty Ltd (in liquidation). 4 When the proceedings commenced, the defendants were the former directors and officers of Arimco, and CGU in its capacity as the insurer of those directors and officers. 5 It is alleged that the directors and officers, during the period 1 February 1999 to 14 March 1999, allowed Arimco to incur debts at a time when that company was insolvent or there were reasonable grounds for suspecting that it was insolvent, or would become insolvent by incurring those debts. 6 The liquidator seeks to recover approximately $22 million. Interest, if calculated from 1999, represents a further amount of $18 million. 7 On the occasion when Mr Green sought leave to join CGU to the proceedings in its capacity as the insurer of each of the third, fourth, fifth and sixth defendants, under section 6 (4) of the capital Reform (Miscellaneous Provisions) Act 1946 (NSW), an affidavit was made by Mr Green on 14 December 2004 and was served upon CGU. That affidavit put CGU on notice that, prior to commencing the proceedings, Mr Green had sought funding from a litigation funder and that a funding agreement was only entered into by him after extensive negotiations on 7 December 2004. 8 The plaintiff has settled with the directors and officers. CGU is the sole remaining defendant. CGU's defence includes that it is entitled to reduce its liability to nil on the basis of non-disclosure and misrepresentation by the directors and officers as to the financial position of Arimco at the time the proposal was submitted and the policy written. 9 On 27 November 2007, the proceedings were set down for a 4 week hearing commencing on 15 July 2008.

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9 . An important factor informing the exercise of the discretion is the existence of persons who stand behind an impecunious plaintiff who seek to take the benefit of our system of justice (i.e. share of the proceeds of victory) without the corresponding burden (i.e. a potential adverse costs order): Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 472-3 (Giles J); Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 70 (Lehane J); Maronis Holdings Ltd v Nippon Credit Australia Ltd [2000] NSWSC 994 (Bryson J); Chartspike Pty Ltd v Chahoud [2001] NSWSC 585 at [5] (Young CJ in Eq); Northern Southern Western Supermarkets Pty Ltd v HIH Casualty and General Insurance Ltd (in liq) [2002] NSWSC 541 (Einstein J); Rickard Constructions Pty Ltd v Allianz Australia Insurance Ltd [2002] NSWSC 1162 (McClellan J); Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 584 ([83]) (Austin J); Benzlaw & Assoc Pty Ltd v Medi-Aid Centre Foundation Ltd [2007] QSC 009 at [15]-[16] (Douglas J). As Austin J stated in Fiduciary v Morningstar Research Pty Ltd at [83]: "It would be unrealistic for the court to decline to order security on the ground that to do so would stultify the litigation, if it took into account only the financial ability of the plaintiff, and disregarded the financial ability of those who would benefit from the plaintiff's success and who would therefore have an economic incentive to bear the burden of a security order. More broadly, it is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails. That notion appealed to Young CJ in Eq in Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585 at [5], where his Honour observed that where a plaintiff contracts to have the litigation funded by a third party, in return for the third party receiving a share of the verdict, "it is appropriate that the third party bear part of the risk" ." The case put by CGU for an exercise of the discretion in its favour 13 CGU puts the following factors forward in its claim for the security for costs order:

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Liberty Grove (Concord) Pty Ltd v Mirvac Projects Pty Ltd [2008] NSWSC 48 (Einstein J); Idoport v National Australia Bank Limited [2001] NSWSC 744 at [70]; Commonwealth v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 at 762 per Bollen J (Mohr and Duggan JJ agreeing); Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326 at 331-32. 36 Nor is there any set time by which an application must be made: Buckley v Bennell Design and Construction Pty Ltd (1974) 1 ACLR 301 at 308 per Street CJ (Moffitt P and Hutley JA agreeing); Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326 at 332-333. The significance of an enquiry into prejudice to be suffered by the plaintiff 37 I accept as correct the proposition that delay may be a factor tending against an order for the provision of security where an order requiring the plaintiff to provide security for costs after a delay would cause prejudice to the plaintiff: Buckley v Bennell Design and Construction Pty Limited (supra) at 308 per Street CJ (Moffitt P and Hutley JA agreeing); Commonwealth v Cable Water Skiing (supra) (Bollen J; Mohr and Duggan JJ agreeing). For delay "to bar a security for costs application or to be a reason for refusing it then there must also be some prejudice to the plaintiff" (Dal Pont, Law of Costs at [29.129]). The prejudice position presently 38 No particular evidence whatever has been led by the liquidator in an attempt to prove that had the application for security been made in a timely fashion, the liquidator would not have pursued the proceedings in any event, nor even that the liquidator may not have pursued the proceedings. 39 Mr Davies SC appearing for the liquidator simply submitted that the court should find a 'presumptive prejudice', the suggested prejudice/hardship being the significant spending on the costs up to this point in time. Decision 40 It has to be remembered that the liquidator is able to call upon the funder to indemnify him in relation to any order that he provide security for costs and to require it to support the indemnity with a bank guarantee. 41 To my mind the principled exercise of the relevant discretion is to reject any claim for security for costs incurred by CGU up to and including the present time. CGU having elected not to pursue the application and to expend costs of in excess of $1,500,000 million dollars must presently live with that expenditure. Litigation at any, let alone this level requires a rigorous approach to pursing an early application for security for costs. 42 However the principled exercise of the relevant discretion is to make an order for security for costs which is to cover only so much of the anticipated costs of CGU [as seems reasonable to the court] up to and including the conclusion of the first instance trial. There is no reason why, even at this late stage, the liquidator [able to call upon the lender to indemnify it in fashion already referred to], should not be obliged to pay a portion of the future costs by way of an order for security. Turning to the quantum of costs area 43 The respective positions of the parties on the issue of quantum (ex GST) are summarised in the table below: Liquidator CGU Difference Future Costs $ 467,071 $852,017 $384,946

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Cases Cited (25)