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[2008] QCA 409
Court of Appeal (Qld)
2008-12-16
Fraser JA, Reasons for judgment and orders
Original judgment source is linked above.
Source: Queensland Judgments (Supreme Court Library Queensland) (www.queenslandjudgments.com.au). Converted to plain text by ZoeLaw. Not the official version.
SUPREME COURT OF QUEENSLAND
CITATION: Mt Nathan Landowners P/L (in liq) v Morris & Ors [2008] QCA 409
PARTIES: MT NATHAN LANDOWNERS PTY LTD (IN LIQUIDATION) ACN 073 540 619 (plaintiff/appellant/respondent**)** v TREVOR DOUGLAS MORRIS (defendant/first respondent) JOHN MCTAGGART (second defendant/second respondent**)** KEVIN FRANCIS GILL **(**third defendant/third respondent) JAMES GRAHAM (fourth defendant/fourth respondent) ROBERT EUGENE MURPHY (fifth defendant/fifth respondent/applicant) DEACONS GRAHAM & JAMES (A FIRM) **(**sixth defendant/sixth respondent/applicant)
FILE NO/S: Appeal No 10977 of 2008 / SC No 8265 of 2004
DIVISION: Court of Appeal
PROCEEDING: Application for Security for Costs
ORIGINATING COURT: Supreme Court at Brisbane
DELIVERED ON: 16 December 2008
DELIVERED AT: Brisbane
HEARING DATE: 12 December 2008
JUDGE: Fraser JA / Reasons for judgment and orders
ORDERS: 1. By 4.00 pm on 31 January 2009 the appellant provide security for the fifth respondent’s costs of the appeal in the amount of $50,000 in a form satisfactory to the Registrar****2. By 4.00 pm on 31 January 2009 the appellant provide security for the sixth respondent’s costs of the appeal in the amount of $52,800 in a form satisfactory to the Registrar****3. Extend the time within which the appellant is obliged to take any further steps in the appeal until 1 February 2009****4. The appellant’s and the fifth respondent’s costs of the fifth respondent’s application for security for costs are reserved****5. The appellant’s and the sixth respondent’s costs of the sixth respondent’s application for security for costs are reservedEx Tempore Orders Delivered 12 December1. By consent of the appellant and the first and third respondents, the notice of appeal is struck out against the first, second, third and fourth respondents****2. **Appellant to pay the third respondent’s costs of and incidental to the appeal to be assessed on the standard basis.**3. Third respondent’s application for security for costs of the appeal is refused with no order as to costs.
CATCHWORDS: APPEAL AND NEW TRIAL – APPEAL – PRACTICE AND PROCEDURE – QUEENSLAND – SECURITY FOR COSTS – application for security for costs for an appeal – plaintiff unsuccessful following 13 day trial and filed appeal against decision of trial judge – plaintiff insolvent and impecunious – predicted duration of appeal in dispute – whether plaintiff should provide security for costs of the appeal – quantum of the security to be provided / Althaus & Anor v Australia Meat Holdings P/L & Anor [2006] QCA 499, cited / Emanuel Management Pty Ltd & Ors v Foster's Brewing Group Ltd & Ors [2003] QSC 205, referred to / Harrington Services Pty Ltd (in liq) v Harrington [2003] NSWCA 89, cited / Natcraft P/L & Anor v Det Norske Veritas & Anor [2002] QCA 241, applied / Peterson v Rockhampton Permanent Building Society [1988] 2 Qd R 49, cited
COUNSEL: S D Anderson for the plaintiff/appellant/respondent / The first defendant/first respondent appeared on his own behalf / No appearance for the second defendant/second respondent / J J G Hitchcock (sol) for the third defendant/third respondent / No appearance for the fourth defendant/fourth respondent / T D Sullivan for the fifth defendant/fifth respondent/applicant / J H Dalton SC for the sixth defendant/sixth respondent/applicant
SOLICITORS: Schweikert Lawyers for the plaintiff/appellant/respondent / No appearance for the first defendant/first respondent / No appearance for the second defendant/second respondent / Rudkin Hitchcock for the third defendant/third respondent / Minter Ellison for the fifth defendant/fifth respondent/applicant / Brian Bartley & Associates for the sixth defendant/sixth respondent/applicant
FRASER JA: The third, fifth and sixth respondents (who were defendants below) applied under UCPR r 772 for security for their costs of the appeal brought by the unsuccessful plaintiff against all six respondents. At the hearing of these applications the appellant by its counsel consented to the appeal being struck out as against all respondents other than the fifth and sixth respondents.
It was necessary then to consider only the applications for security for costs brought by the fifth and sixth respondents. After hearing argument I decided that these were appropriate cases for ordering security and I indicated that I would deliver reasons for that decision in due course. What follows are those reasons.
UCPR r 772 (and s 1335 of the Corporations Act 2001 (Cth)) authorises the Court to order an appellant to give security for the payment of any costs that the Court may award to a respondent. The discretion is unfettered.1
The appellant conceded that it, a company in liquidation, is impecunious, that it was so at trial, and that the respondents promptly applied for security for costs once the notice of appeal was served on them. Those facts and the fact that the impecunious appellant has had its day in court favour the grant of security for the respondents’ costs of the appeal.2
In the written submissions filed on the appellant’s behalf its opposition to security being ordered was principally based upon the contention that it had good prospects of success on appeal. In oral submissions, the appellant’s counsel contended that the appellant had a substantial, seriously arguable appeal. In addition the appellant contended that security should be refused because of public interest considerations concerning the liquidator’s role and in the resolution of what were submitted to be important questions of law.
Before directly addressing those arguments it is necessary to say something about the issues, the facts found by the trial judge and her Honours' reasons for rejecting the appellant’s claim. My summary must necessarily be imprecise: the trial judge's reasons run to 183 paragraphs, reflecting the significant factual and legal disputation at the 13 day trial.
In 1996, a group of neighbours entered into legally binding arrangements together to develop and subdivide some of the land of which they were individual owners. They had more land than they needed and decided to form a company to develop and subdivide the balance of their land. The company they formed was the plaintiff/appellant.
The venture was not a success.
"[115] In this case, there were a number of factors which enabled a conclusion to be drawn that the company was then insolvent. They included:
(1)The company was entirely dependent for its cash flow on land sales and sales had slowed in the six months prior to the administration in spite of prices being reduced and double commissions offered. The company and its bank had consistently forecast that it had to make one to two sales a month to pay its debts but that was not achieved. The company’s only asset was its land but that was not readily realisable by selling the land or by raising money on the security of the land. Previous attempts to borrow further funds from the bank had been refused. The company did not have the funds to promote sales any more vigorously by improving the presentation of the estate or by increasing advertising.
(2)The company did not just have a temporary lack of liquidity, it had a long history of financial difficulties and endemic shortage of cash with consistently late payment of its debts. It was unable to meet even its statutory obligations such as rates and land tax without significant indulgence from its creditors and it was not known if that could continue. There was, to use the words of Jacobs J in Hymix Concrete Pty Ltd v Garrity (1977) 2 ACLR 559 at 566 'an endemic shortage of working capital.'
(3)The company’s current liabilities included interest payments due to the bank, the loan owed to Mr and Mrs Gill, repayment of which they had sought, [Contrary to the view expressed by Mr Geroff in para 22(g) of his affidavit sworn on 10 July 2007.] and other creditors such as the OSR which was owed over $16,000 in respect of land tax due in October. [No arrangement had been made for those moneys to be paid later than they were due and Mr Geroff’s assertion that historically they had been paid upon the sale of land was not completely correct.] The company did not have the funds to meet any of those obligations. There were no settlements of the sale of blocks of land due until November. Even if one has regard to the commercial reality that some or all of its creditors may not have insisted on payment of moneys the company did not have, the debts were due and payable and the only reason for an indulgence was the company’s incapacity to actually pay the debts that were undoubtedly due. [In this respect I share the view expressed by Chesterman J in Emmanuel Management v Foster Brewing at [82] – [86] of the effect of commercial realities in a case where there has been no legal and equitable change to the status of the debt owing.] There were no readily realisable assets to pay them.
[116]Further and additionally, there were a number of factors suggesting the company was likely to become insolvent even if it was not already insolvent. While, as Palmer J said in Crimmins v Glenview Home Units Pty Ltd (in liq) [2001] NSW SC 699 at [48]-[49], actual insolvency, as defined in s 95A of the Corporations Law, is a question of fact determined in all the circumstances of the case, taking into account the commercial realities of the company’s position, a determination of likely insolvency is much more subjective.
'Likely insolvency is much more a matter of opinion upon which minds may differ. Some directors, more cautious and apprehensive than others, might conclude that insolvency is likely where other more robust colleagues may see no cause for alarm. It is for this reason that the only criterion for judging whether an opinion as to likely insolvency has properly been formed for the purposes of s 436A is whether that opinion has been formed genuinely and in good faith: see eg Kazar v Duus 29 ACSR 321, at 333.'
(1)Section 95A of the Corporations Law mandates a 'cash flow' rather than a 'balance sheet' approach to actual solvency. Nevertheless the company’s balance sheet showed a massive deficit between its assets and liabilities and even if the company could delay paying the loans to the shareholders shown in its accounts until after all the land was sold, the company would still be unable to repay those debts in full. Mr Geroff’s assessment of the solvency of the company on a balance sheet test set out in paras 14 to 17 of his affidavit sworn on 10 July 2007 was based on later acquired knowledge and assessment and is irrelevant to what the directors, the solicitors and the administrator knew or believed at the time.
(2)There was a very real prospect that the company would become involved in litigation which it could not afford whether as a result of an oppressed minority action, claims by shareholders against the directors which would have to be met by the company or claims by shareholders directly against the company. Even if litigation did not eventuate, the disputation apparent in the company would be likely to require extensive and on-going legal advice which the company simply could not afford. After seeking legal advice on only one occasion from Deacons the company had only $50 left in the bank with no immediate prospect of any income."
"[117]However the defendants do not have to show that the company was insolvent or likely to become insolvent at the time the administrator was appointed. Rather the plaintiff must show against the first to third defendant, that the directors did not have reasonable grounds to believe that the company was insolvent or likely to become insolvent as at 13 October 1999; against the sixth defendant, that the advice given was negligently given; and against the fifth defendant that a reasonably prudent insolvency practitioner would not have accepted appointment as administrator on the basis of the information before him on 13 October 1999. In view of the matters to which I have referred, notwithstanding Mr Geroff’s view to the contrary, these allegations have not been made out.
[118]There was in my view sufficient reliable material before Mr Murphy to satisfy him that the company was insolvent or likely to become insolvent. He was not in the circumstances required to make further enquiries before accepting appointment. It is not a case like Wilson v Manna Hill Mining Company Pty Ltd [2004] FCA 1663, relied upon by the plaintiff, where the minute of the resolution purportedly appointing administrators disclosed matters which should have put the proposed administrators on notice of the need to inquire into the regularity or validity of the resolution purportedly appointing them. Of course that is not the only circumstance where a proposed administrator will be put on notice that his appointment may be invalid, but there were no circumstances which should have put the administrator on notice in this case. The duty of an administrator to investigate the company’s affairs under s 438A arises only once he or she has been appointed and the administration has begun."
It thus appears that the appellant could not succeed in its appeal unless it establishes that the trial judge made not just one error but a series of errors. The appeal also appears necessarily to involve challenges to numerous findings of fact, including findings that turned on the trial judge’s assessment of witnesses.
Bearing those matters in mind, and the large volume of material and extent of the issues raised by the 14 grounds of appeal, it is impractical to form a reliable view of the appellant’s prospects in an application of this kind. I will assess the applications for security upon the basis that the appellant’s appeal has not been shown to lack reasonable prospects of success.
The appellant’s counsel relied upon what were said to be significant legal errors. She submitted that it was in the public interest that some of these questions be resolved in this appeal; that an order for security would stifle the appeal; and that security should therefore not be ordered.
The appellant’s counsel pointed, for example, to what was submitted to be a legal rather than factual challenge in ground 1 of the notice of appeal. It complains of the "finding that the defendants were entitled to rely upon the financial statements" and gives reasons why those statements should have been known to be unreliable. But even the brief conspectus of the trial judge's findings I have given suggests that the trial judge's findings in that respect involved resolution of numerous factual issues unfavourably to the plaintiff, including the rejection of the liquidator’s evidence on factual grounds. On her Honour’s findings there were numerous indicia of insolvency apart from the financial statements.
Another example of what was submitted to constitute legal error concerned ground 3 of the appeal. It asserts error in the finding that the appellant was insolvent "on the basis that the Gill debt was due and payable as from November 1997", on the grounds that Mr Gill had made an agreement with the appellant, he had not made an unequivocal demand, and the fifth respondent found no insolvent trading transaction prior to his appointment. In support of that ground the appellant’s counsel argued that the trial judge erred in applying Chesterman J's judgment in Emanuel Management Pty Ltd & Ors v Foster's Brewing Group Ltd & Ors.5 I am not persuaded that this raises an important legal issue. The appellant’s counsel accepted that Emanuel Management Pty Ltd & Ors v Foster's Brewing Group Ltd & Ors accurately stated the relevant legal principles and that the trial judge accurately reported the relevant effect of that decision. At best for the appellant the error for which it contended concerned only the application of undisputed legal principle to the unique facts of this case.
Disposition
At the hearing I ordered, by consent of the appellant and the first and third respondents, that the notice of appeal be struck out as against the first, second, third and fourth respondents. I ordered the appellant to pay the third respondent’s costs of and incidental to the appeal to be assessed on the standard basis. I declined to hear the third respondent’s oral application for the same costs order against the liquidator: there was no formal application for such an order and the appellant’s counsel indicated that she had not obtained the liquidator’s instructions to meet such an application. I refused the third respondent’s application for security for costs of the appeal (it having become redundant once the appeal was struck out against him) and I made no order as to the costs of that application.
Once I decided to order security for costs the fifth and sixth respondents did not oppose the appellant’s submission that the date for provision of the security should be 31 January 2009. Those respondents consented to the appellant’s application to be relieved of its obligation to prosecute the appeal in the period between now and 31 January 2009, when, if the security is not provided, a stay will be imposed by UCPR r 774(a).
I order that:
By 4.00 pm on 31 January 2009 the appellant provide security for the fifth respondent’s costs of the appeal in the amount of $50,000 in a form satisfactory to the Registrar.
By 4.00 pm on 31 January 2009 the appellant provide security for the sixth respondent’s costs of the appeal in the amount of $52,800 in a form satisfactory to the Registrar.
Extend the time within which the appellant is obliged to take any further steps in the appeal until 1 February 2009.
The appellant’s and the fifth respondent’s costs of the fifth respondent’s application for security for costs are reserved.
The appellant’s and the sixth respondent’s costs of the sixth respondent’s application for security for costs are reserved.
Peterson v Rockhampton Permanent Building Society [1988] 2 Qd R 49; Murchie v The Big Cart Track Pty Ltd (No 2) [2003] 1 Qd R 528; [2002] QCA 339. ↩
Natcraft P/L & Anor v Det Norske Veritas & Anor [2002] QCA 241. ↩
Mt Nathan Land Owners Pty Ltd (in liquidation) v Morris and others [2008] QSC 239 at [44] – [55]. ↩
Mt Nathan Land Owners Pty Ltd (in liquidation) v Morris and others [2008] QSC 239 at [94]. ↩
Emanuel Management Pty Ltd & Ors v Foster's Brewing Group Ltd & Ors [2003] QSC 205. ↩
Cowell v Taylor (1885) 31 Ch D 34 at 38. ↩
Belar Pty Ltd (in liq) v Mahaffey [2000] 1 Qd R 477 at [36]; [1999] QCA 2; and Mahaffey & Ors v Belar Pty Ltd (in liquidation) [1999] QCA 2 at [10]. ↩
Harrington Services Pty Ltd (in liq) v Harrington [2003] NSWCA 89 at [34]. ↩
Emanuel Management Pty Ltd & Ors v Foster’s Brewing Group Ltd & Ors [2003] QCA 552 at [16]; Natcraft P/L & Anor v Det Norske Veritas & Anor [2002] QCA 241 at [9]. ↩
See, for example, Althaus & Anor v Australian Meat Holdings P/L [2006] QCA 499 at [5] – [6]. ↩
Mt Nathan Landowners P/L (in liq)
Morris & Ors
A critical question at the trial was whether or not it was reasonable for the directors of the plaintiff company to resolve that the company was insolvent or likely to become insolvent on 13 October 1999 and so appoint a voluntary administrator. The voluntary administrator appointed was the fifth defendant/fifth respondent. In appointing the administrator the directors acted, at least in part, on the advice of a firm of solicitors, the sixth defendant/sixth respondent. It was necessary for the trial judge to determine whether or not the sixth respondent was negligent in advising the directors that the company could be put into administration and whether the fifth respondent should in the circumstances have accepted appointment as, and remained in the position of, administrator.
The trial judge made numerous findings of primary fact3 upon matters that her Honour considered pointed to the appellant having been insolvent by the time of the fifth respondent’s appointment.
The appellant had also found itself embroiled in a dispute with two shareholders, the Goodiers. The appellant compromised the Goodiers' claim but this led or contributed to disputes with a shareholder, Mrs Etridge, and her husband. The trial judge rejected the appellant’s claim that the compromise was effected by the directors in breach of their fiduciary duties or in breach of their duties to act honestly, with care and diligence, and in the interests of the company as a whole. The Etridges subsequently threatened various further claims against the directors. The trial judge found4 that, due in part to the ongoing and escalating dispute with the Etridges, the appellant was becoming more or less impossible for the directors to manage.
The trial judge rejected the appellant’s claim that the sixth respondent advised the directors of the appellant that voluntary administration was a course of action available to them at a time when the sixth respondent knew or ought to have known that the appellant was neither insolvent nor likely to become insolvent and/or at a time when it knew or ought to have known that the directors were acting for the improper purpose of protecting themselves personally against litigation. It was conceded that the financial accounts were in error (in incorrectly including shareholder loans as liabilities), but the trial judge found that the error was included in the financial statements prepared at all times prior to the administration.
Her Honour found that the solicitors relied, as they were entitled to do, on the financial accounts prepared by qualified accountants which showed that the appellant had more debts than assets and that even if the assets were realised, there would not be enough money to pay the debts; further, that the appellant was not able to pay debts it incurred, such as land tax, as and when they became due and payable. That entitled the solicitors to form the view that the appellant was insolvent as defined by s 95A of the Corporations Law. The trial judge referred to the relevant statutory provisions and the leading authorities for the test of insolvency and concluded that on the facts the appellant was insolvent when the sixth respondent advised the appellant to appoint an administrator and when the fifth respondent accepted appointment as administrator.
In addition, the trial judge found that the information given to the fifth and sixth respondents by the directors showed that even if the appellant was not then insolvent, it was likely to become insolvent: that was an alternative basis upon which the appointment was justified.
The trial judge's reasons for those conclusions included the following:
The appellant also argued that the trial judge's conclusion that the appellant was insolvent from November 1997 was irreconcilable with the fifth respondent’s finding that there was no instance of insolvent trading during the course of the appellant’s operations. But it is not necessary for the respondents to defend a view that the appellant was insolvent as early as November 1997. It is sufficient for their purposes if, as the trial judge found, the appellant was insolvent or likely to become insolvent in late 1999, when the fifth respondent accepted appointment and the sixth respondent gave the advice challenged by the appellant.
It is unnecessary to refer to other examples of the appellant’s challenges, all of which seem to me to require the appellant to persuade the Court to overturn findings of fact, at least some of which were based in part on the trial judge’s assessments of credibility. As I have mentioned, it is impractical now to assess the appellant’s prospects of succeeding in its appeal, but the appellant has not demonstrated that it has a strong case that the trial judge erred in law. Nor am I persuaded that the appellant has demonstrated that success on any of the legal grounds identified in argument would itself necessarily give the appellant victory in the appeal. That being so it is not necessary to discuss the appellant’s argument that a public interest in the resolution of important questions of law might militate against the grant of security.
The other public interest point relied upon by the appellant arose, its counsel argued, from the importance of encouraging liquidators to commence appropriate litigation in the interests of insolvent companies. The appellant’s counsel pointed out that this liquidator replaced an administrator, that he acted on legal advice, and that the trial judge rejected attacks on his credit (although the respondents disclaimed any such attacks). I do not accept that the suggested public interest trumps the respondents’ interests in obtaining security on appeal. As Bowen LJ said in Cowell v Taylor,6 “the appellant has had the benefit of a decision by one of Her Majesty’s Courts, and so an insolvent party is not excluded from the Courts, but only prevented, if he cannot find security, from dragging his opponent from one Court to another”.
The appellant's counsel argued that security should not be ordered because to do so would stifle the appeal. In some cases that does point against ordering security. Here the liquidator deposed that those who funded the trial did not have the capacity to provide security for the respondents’ costs of the appeal and that if the appellant were ordered to provide security it would be unable to proceed with the appeal. But the liquidator’s fees of more than $500,000 constitute the largest single component of the appellant’s claim. The liquidator thus had a significant personal interest in the appeal, but his affidavit did not directly address the question whether he would be prepared or able to provide security. That the liquidator has a significant personal interest in the appeal, and that if the appeal fails the liquidator might be ordered to pay the respondents’ costs,7 are factors favouring an order for security for costs.8
In Natcraft, Davies JA observed (at paragraph [3]) that "an impecunious plaintiff who has lost at trial on the merits will have greater difficulty in relying on apparent merits as a factor against the making of an order for security the effect of which might stifle an appeal than would have been the case in respect of a similar reliance in opposition to an application for security of costs before trial. That is especially so where, as may have been the case here, the decision on the merits involved findings of fact based on credit." Those observations are applicable here. The same matters diminish the significance of any attempt to blame the respondents for the appellant’s insolvency, a factor which in any event has a diminished significance at appellate level: Natcraft at paragraph [9] per Jerrard JA.
For these reasons I concluded that the discretionary factors in this case in favour of ordering appropriate security were overwhelming.
As to quantum, in the fifth respondent’s evidence and in its written outline it sought security of $75,000. The sixth respondent sought $64,130. The appellant’s outline and affidavit contended for figures of $50,000 and $52,800 respectively. Each of these estimates was supported by an affidavit by an experienced solicitor.
The appellant’s figures were premised upon security for a one day hearing whereas the respondents’ figures assumed a two day hearing. With careful attention to the written outlines it should be practicable to confine the hearing to one day. I will assess the quantum of security on that basis.
In the oral submissions for the fifth respondent his counsel sought an increase in the amount of security by some $25,000 so that it covered the fifth respondent’s potential costs liability to a director, the third respondent, against whom the fifth respondent has cross-appealed. The fifth respondent’s counsel argued that this was appropriate because the appellant’s appeal in substance invited the fifth respondent to sue the directors; the fifth respondent could only be liable if the directors had breached their duties; and if the appeal fails the fifth respondent will likely be ordered to pay the third respondent’s costs upon dismissal of the cross-appeal. That argument directly concerns the question whether the appellant might be ordered to indemnify the fifth respondent against its costs liability to the third respondent. Different considerations apply in an application for security for costs, where a conservative approach is usually adopted in determining quantum.9 I am not persuaded that the risk that the appeal will be stifled should be aggravated by increasing the quantum of security in the way proposed for the fifth respondent, who is the party who decided to bring the cross-appeal.
The appellant’s counsel argued in oral submissions that the figures the appellant initially supported should be reduced on the basis that the fifth and sixth respondents had a community of interest; that whether or not they chose to be separately represented the appellant should not have to provide security for two sets of legal representatives. A similar approach has been taken in relation to costs orders,10 but I do not accept the argument. Whilst the fifth and sixth respondents share a common interest in defeating many of the arguments likely to be advanced for the appellant, their interests diverge at other points. Furthermore the claims against each of them include serious allegations potentially affecting their professional reputations. I consider that each of these respondents should be secured to a reasonable extent for the legal costs each will incur in fighting the appeal.
Accordingly, applying the conservative approach required by the authorities, I adopt the figures sworn to by the appellant’s solicitor as being reasonable estimates of the costs likely to be incurred by the fifth and sixth respondents in resisting the appeal.