MCDS Group Nominees Pty Ltd v Angas Securities Limited & Ors

Impecuniosity

Impecuniosity caused by the actions of a defendant is certainly a ground to resist the making of an order for security for costs but where a plaintiff corporation admits its impecuniosity and alleges it was materially caused by the defendant seeking security it must establish to the satisfaction of the Court that is so and "with relatively straightforward and unambiguous evidence of a fairly compelling nature": see Dal Pont's Law of Costs (3rd edition, 2013, LexisNexis) 29.101 and see 29.102-103.
Mr Roberts points out that it is agreed that MCDS is impecunious. He submits that since MCDS was formed recently there can be no suggestion that its impecuniosity has anything to do with Angas Securities. He submits that MCDS's attempt to refer to the Trust being impecunious is misconceived since a trust is not a legal entity. Mr Anderson he says, by appointing a trustee with no funds, has endeavoured to install a plaintiff who cannot meet any costs order which might be imposed and has done so when he anticipates that MCDS as a new trustee will advance a claim for $170 million at no risk to it or any of those who might benefit from the case. A further point of relevance is that Owston was placed in liquidation in 2010 and the liquidator of Owston could have brought proceedings to recover monies which are now claimed by MCDS as the assignee, by operation of law, of Owston's rights as trustee of the Trust, and the liquidator did not do so. Any monies recovered by MCDS would be subject to a right of Owston to be reimbursed out of those proceeds: Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360, at p.367.
Mr Roberts' contention that a trust is not a legal entity is clearly correct: Kelly v Mina [2014] NSWCA 9 at [103] per Leeming JA (with whom Ward JA agreed at [100]) and it is not correct to speak of a trust as "impecunious" at all. The debts of the trust are the trustee's debts Vacuum Oil Co Pty Ltd v Wiltshire (1945) 72 CLR 319 at p.423 per Latham CJ see also Octavo at p.367 and see the recent outline of these matters in "The Commercial trust: risk of liability for investors, and potential for limitation" at pp.1-3 of a paper delivered by Dr R.P Austin at the 2016 Annual Commercial and Corporate Law Conference.
It is clear that MCDS cannot establish that its own impecuniosity has arisen by virtue of anything done by the defendants.
There is some discussion in Dal Pont (supra) at 29.49 of cases involving the question of whether an insolvent trustee should be required to provide security. The question of security for costs orders in cases brought by a corporate trustee is considered in more recent cases summarised by Barrett J in Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806 and see Narradine Pty Ltd & Anor v Mascot Steel and Tools Pty Ltd & Ors [2012] NSWSC 385 per Black J.
I think there is force in Mr Roberts' contention that an appointer ought not be permitted to engineer a situation whereby a trustee with no funds and no ability meet a costs order should be permitted to conduct litigation but in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 it was pointed out that when the corporate trustee is insolvent the position of the trust funds which the trustee administers would be relevant (assuming that the trustee has a right of indemnity). Since MCDS says not only that it has no assets but that there are no assets held by the Trust (other than the rights claimed in this litigation) it could be said that the absence of trust assets held is relevant. I therefore shall proceed on the assumption that for MCDS to overcome the impecuniosity obstacle it would be sufficient for MCDS to establish that Owston (and not MCDS) was rendered impecunious because of the actions of Angas Securities and Korda Mentha, and consider whether that contention has been made good.
The allegation that Owston as a trustee of the Trust was rendered impecunious by reason of the actions of Angas Securities is connected with the central allegations made by MCDS in these proceedings. There is no straightforward and unambiguous evidence of a "fairly compelling nature" that Owston was made impecunious because of the action of Angas Securities. The first reason is that Owston had numerous secured creditors when it was placed in liquidation of which Angas Securities was only one- the others were Balanced Securities Ltd ("Balanced"), Barber Mortgages Pty Ltd ("Barber") and Mortgage Funds Management Pty Ltd ("MFM"), to whom collectively very substantial monies were owing. In Family Court proceedings to which I later refer Watts J noted that he had been informed that as at May 2009 Owston owed secured lenders $70 million: see p.73 of DC4 to Mr Colovic's affidavit. Not only that but it was unsecured creditors (and not the secured creditors) who successfully sought to wind up Owston. No attempt has been made by MCDS to identify the debts which were owed by Owston to those unsecured creditors, their quantum or to establish any connection with the acts or omissions of Angas Securities.
This links to another problem with the argument of MCDS which is that it is the acts said to found the MCDS claim themselves by which Owston is said to have been made impecunious. This problem was identified by Katzmann J in Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222 [22] -[25] and see also Reinsurance Australia Corp Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803 at [17]. At the very least, the claim that impecuniosity has been caused by the party seeking security from an impecunious plaintiff requires more than the usual basis of an arguable case.
The second reason is that there is no evidence of what assets Owston had before it borrowed money from Angas Securities and the other lenders.
The third reason is that MCDS's claims against Angas Securities centre upon a challenge to Angas Securities' right to have appointed receivers to Fernhill and the Antiques Collection which in turn is founded on the claim that Angas Securities was not owed money by Owston when it appointed receivers. Angas Securities claims that there is no bona fide case to support that contention.
In the course of his judgment Darke J made a number of findings which are pertinent to the central claim of MCDS: "[10] In relation to the debt position as at 19 November 2010, evidence was adduced from Mr Luckhurst-Smith, a director of Angas, that the amount outstanding at about that time (under loan number 359) was in excess of $2.5 million. Mr Anderson, who swore two affidavits in support of the plaintiffs' application, did not accept the authenticity or accuracy of that evidence, but did not otherwise make any attempt to contradict it. Some other parts of Mr Anderson's affidavit (sworn on 29 September 2016) contained calculations or estimates which are said to indicate that Angas ought to have received certain amounts of net proceeds of sale of various properties and chattels in 2009 and 2010. However, that material does not in my view provide a firm basis to doubt the apparent accuracy of Mr Luckhurst-Smith's evidence concerning the debt outstanding on loan 359 at the time the receivers and managers were appointed in 2010. [12] There is evidence before the Court that, taking into account the assigned debt, Angas is presently owed about $45 million by Owston. The validity of the assignment is not challenged by the plaintiffs; neither is the extent of the assigned debt, which was about $36.6 million at the time of the assignment in 2012. There is no suggestion that such debt has since been reduced. [13] It is relevant to note, in considering the strength of the plaintiffs' claims, that despite the fact that aspects of the receivership have previously been the subject of litigation in which either or both of Owston and Mr Anderson were parties, there has not previously been any dispute that Owston was significantly in debt to Angas. It was not contended in such litigation that there was no debt owing at the time any of the receivers were appointed. It was not contended in such litigation that no power of sale had arisen. The earlier litigation includes Family Court proceedings in 2012 in which Mr Anderson unsuccessfully sought to restrain Angas from exercising its power of sale over the property. [14] It seems to me that in all the circumstances the plaintiffs' claim that Angas does not have a power of sale that is exercisable in respect of the property must be regarded as very weak, and falls short of raising a serious question to be tried as to the existence of a power of sale. [16] I note that the plaintiffs also suggest that the sale process being undertaken by Angas amounts to a "fire sale". I am unable to accept that suggestion, which in my view is not made out on the evidence of Mr Anderson to which I was referred in this regard. On the contrary, the weight of evidence suggests that Angas has made considerable efforts over many years to sub-divide and then proceed to sell the property."
Of course Darke J was not making final determinations of fact but his Honour's conclusion after consideration of the evidence before him that as at 19 November 2010 (when Owston went into liquidation) the debt to Angas Securities was in excess of $2.5 million is relevant to assessing the plaintiff's contentions that no debt was owed to Angas Securities by Owston as at that date. When the matter commenced Mr Ogborne told me that none of his Honour's conclusions were challenged: see T3.25-28 subsequently however he sought to resile from that position: see T37.10-25. It should be noted that Watts J of the Family Court found in reasons published 24 June 2009 that all of the Angas Securities loans had expired and "are in default" and Darke J found that there was no admissible evidence that the Antiques Collection was sold for less than it was worth.
Mr Ogborne sought to advance the proposition that $9 million of the proceeds of sale of assets in excess of the monies due to Angas Securities were not accounted for (see T31.44-45) and to contend that if it had been properly accounted for Owston would not have owed any money to Angas Securities and that Angas Securities would not have been entitled to exercise its rights to appoint receivers.
Mr Ogborne relied on an affidavit of October by Mr John McAuley an accountant presented as an expert by MCDS.
Mr McAuley identifies documents that he was given and says that he was asked to provide an opinion "based upon the documents and material detailed in 3 (semble 4) above….." "as to whether at 7 December 2010 [Owston] had directly or indirectly paid to [Angas Securities] sufficient monies to have repaid the indebtedness of [Owston] to Angas in terms of the [Owston] Mortgage Debentures and the five loan agreements."
Mr McAuley focuses on the date of 10 June 2010 and says that Owston was only indebted to Angas Securities in respect of four loans and he says that he has concluded that as at 7 December 2010 Owston had repaid the debt and that Angas Securities held $7 million of funds of Owston in excess of its entitlement.
Mr Roberts attacked Mr McAuley's affidavit saying: 1. That Mr McAuley was merely asserting the same thing that Mr Anderson had asserted before Darke J, which assertions had not been accepted by Darke J. 2. That it is not clear how Mr McAuley arrived at his figures. 3. That Mr McAuley simply says he looked at specific documents but did not say he has looked at all the relevant documents available to come to his conclusion. It is not a report as to the true level of Owston's indebtedness to Angas Securities at any relevant time.
The hearing was adjourned on 28 October 2016 until 11 November 2016. In that time Angas Securities filed a further affidavit from Mr Luckhurst- Smith of 3 November 2016, in which Mr Luckhurst-Smith gave a detailed explanation of what had happened to the money which had been obtained from the sale of the Antiques Collection.
Mr Ogborne embraced the new affidavit of Mr Luckhurst-Smith saying that it vindicated Mr McAuley's conclusion that much of the money that had been obtained from the sale of the Antiques Collection had not been paid to reduce the Owston debt. It is clear from Mr Luckhurst-Smith's affidavit that much of the money was directed to reducing the debts of Owston to other lenders such as Balanced, Barber and MFM.
Mr Ogborne also drew attention to the fact that Mr Luckhurst-Smith's affidavit makes it clear that: 1. some of the funds were used to pay off debts owed by Pelagon Pty Ltd ("Pelagon") and Sanishell Pty Ltd "Sanishell" and, 2. that $733,505.97 was paid to Barker (see para 6(ii))
MCDS, in its Statement of Claim claims that as at the time that Angas Securities purported to exercise its rights as a mortgagee (over real estate and chattels) it had paid all of the debt (including interest) which was due to Angas Securities. Its case is not framed as one based on the assertion that Angas Securities had wrongly diverted money from the sale of securities to pay off other debts owed by Owston to third parties. At 8 of his reasons Darke J made reference to the MCDS claim that the Owston debt had been paid off. On 8 November Mr Ogborne explained that the combination of Mr Luckhurst-Smith's and Mr McAuley's evidence showed that not all of the money obtained from the sale of the Antiques collection had gone to pay off the Angas Securities debt. That much can be accepted but there is clearly a reason why that was so- relevantly an indebtedness by Owston to creditors as well as to Angas Securities which led to an agreement between secured creditors as to which debts would be paid off first. There is in evidence the Deed of Priority Agreement into which Angas Securities, Balanced, Barker and MFM entered which recorded the existence of various charges or mortgages granted by Owston to all of these lenders and by which they sought to regulate between themselves how the proceeds realised were to be dealt: see ALS-27 to the affidavit of Mr Luckhurst-Smith of 3 November 2016.
Mr Luckhurst-Smith's affidavit does not establish that Owston's debt to Angas Securities was paid and nor does Mr McAuley's evidence. MCDS has not established that Darke J's conclusion that money was owed to Angas Securities at the time the receivers were appointed was incorrect. If in fact Angas Securities had paid out the debt of Balanced it would, in accordance with established principles, be entitled to stand in the shoes of Balanced as outlined in Ghana Commercial Bank v Chandiram [1960] AC 732 at 745 approved in Aged Care Services Pty Ltd v Kanning Services Pty Ltd (2013) 86 NSWLR 174; [2013] NSWCA 393 [51]-[52] per Gleeson JA with whom Meagher JA and Leeming JA agreed. Mr Ogborne did not challenge the applicability of that principle. As Mr Roberts pointed out there could be no real advantage to Owston as a debtor by virtue of payment of other secured creditors' debts. This is quite apart from the fact that subsequently Angas Securities took an assignment of the Balanced debt.
Turning to the two matters raised in [32]. Pelagon and Sanishell were companies related to Owston (see para 7 (d) and (e) of Mr Luckhurst-Smith's affidavit), and the debts of which, Owston guaranteed. The fact that $733,000 was paid to Barker does not assist MCDS. Mr Ogborne contended that the document at Tab 3 to Mr McAuley's affidavit (JM-3) shows that the debt to Cardiff Capital Pty Ltd ("Cardiff") and Barker was repaid by a loan from Balanced. Mr Ogborne could point to no evidence that showed that in fact the Cardiff and Barker debts were repaid (whatever the intention) and more importantly it does not establish that Owston had paid off the debt to Angas Securities. Mr Roberts also made the point, with which I agree, that focusing on one or two transactions is not of any assistance. It was open to MCDS to have Mr McAuley review all of the Owston debts and payments and arrive at a conclusion and express an opinion as to what was owed by Owston as at the date that receivers were appointed in respect of particular property, but that was not done. Mr Ogborne claimed at one point that Angas Securities had "manoeuvred around" money in order to produce the result that it could appoint receivers (T62.29-37). That allegation is not one made in the Statement of Claim.
I have set out Darke J's comments at [13] of his Honour's reasons. The only new material on this application (other than material going to the amount of security and the position of the potential beneficiaries) is the affidavit of Mr McAuley and the latest affidavit of Mr Luckhurst-Smith. Of significance, as mentioned by Darke J, is the fact that in proceedings in the Family Court in 2009 and 2010 Mr Anderson in his own right, Owston (which Mr Anderson then controlled) and Ms Rowe, took positions quite contrary to that which MCDS now seeks to advance: see pp.74, 84,91,96,99 and 166 of the judgments of Watts J (Exhibits DC4 and DC9 to the affidavit of Mr Colovic of 29 August 2016). For example Owston and Mr Anderson opposed Mrs Anderson's attempt to restrain the receivers of the property owned by Owston from enforcing that security and at a different time the appointment of receivers to sell the Antiques Collection was made by consent. In none of the various proceedings brought by or involving Mr Anderson prior to the proceedings in this Court (including the caveat proceedings in the Family Court) did Mr Anderson or Owston assert that there was no debt owing to Angas Securities when it appointed receivers. The liquidator of Owston has not since appointed in 2010 made any claims against the defendants. There is no evidence to support the claim that the Antiques Collection was sold at an undervalue. My attention was not drawn to any evidence to support a claim that Fernhill lots were sold at an undervalue or monies not obtained that should have been obtained, and nothing was said about the issue in 6 above.
I am not persuaded that Owston's impecuniosity, or the absence of funds in the Trust as at any time in 2009 or 2010, arose because of the actions or defaults of Angas Securities. Further I am not satisfied that the claims that MCDS wishes to bring are bona fide claims with a reasonable prospect of success. This is a very different case to Westralian (supra), in which, most importantly, it was the defendant which had placed the plaintiff in voluntary liquidation and in which it was held that the plaintiff's impecuniosity was a result of the defendant's actions: see p.174 per Brinsden J and, semble p.170 per Wallace J.

Stultification

In view of the conclusion reached above it is not necessary to consider the issue of stultification further but I shall address some of the further points relevant to this.
There can be no doubt that Mr Anderson is unable to lawfully fund these proceedings.
Mr Ogborne points to the evidence of his instructing solicitor Mr Crawley of 24 October 2016 that he has been: "informed by Daniel Anderson, Shauna Anderson and Catherine Rowe potential beneficiaries of the Warren Anderson Family Trust and verily believes that none of them have any assets of substance to enable them to contribute to any orders for security for costs"
Mr Ogborne on Friday 11 November sought leave to file in Court (which leave was not opposed) the affidavit of Ms Catherine Louise Rowe of 27 October 2016. In which Ms Rowe deposes: "3. The Trust has no capacity to pay the sought for security for costs estimated by Mr Colovic or any lesser sum. 4. Cheryl Anderson, my mother, a potential general beneficiary of the Trust, will not be the recipient of any distribution from the Trust upon a successful outcome in favour of the Plaintiffs, as she has received substantial monies from the property settlement in the referred to Family Court proceedings."
The evidence is deficient in a number of respects: 1. Mr Crawley's affidavit sets out no detail of the assets and liabilities of the potential beneficiaries. 2. Ms Rowe, the only one of the beneficiaries to provide an affidavit says absolutely nothing about her assets and liabilities. She says only that "the Trust has no capacity" to provide security. The question of stultification is whether the persons who would or might benefit from the litigation have access to funds that would be required to stand as security for the costs order that the defendant may obtain if it succeeds in defending the proceedings. 3. There is no evidence put forward by Mr Crawley or Ms Rowe (and therefore MCDS) as to how this litigation has been funded to date and who it is who will pay the costs which MCDS has incurred to date to Mr Crawley and Mr Ogborne. No evidence has been given nor was it suggested that MCDS's legal representation are appearing pro bono. For MCDS to incur obligations without any prospect of being able to pay those debts could leave Ms Rowe personally exposed to a costs order and may constitute a breach of Ms Rowe's obligation as a director. Further in this regard Darke J has made an order against MCDS that it pay the defendant's costs in respect of the hearing before him. No explanation has been given as to how that is to be paid. If I assume that there has been no irregularity in the engagement of Mr Crawley and Mr Ogborne by MCDS then it would seem that someone, not identified, has funds which are available to support this litigation.
There is no evidence that Mrs Anderson, although divorced, could not be a beneficiary of the Trust. The mere fact that she received substantial monies from a property settlement does not necessarily lead to the conclusion that she could not be a beneficiary of the Trust, although I accept that it is unlikely that she would be. Mr Ogborne submitted (T64), and Mr Roberts did not dispute, that it was not necessary for MCDS to put on evidence from persons who might in remote circumstances, be potentially beneficiaries, and I proceed on the basis that no further potential beneficiaries needed to be identified and give evidence of their financial circumstances.
There is insufficient evidence from Mr Anderson's children who are potential beneficiaries to enable a conclusion to be reached as to stultification and I am not persuaded that the proceedings could not be funded by whoever has funded the proceedings to date.

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Cases Cited (11)