Mt Nathan Landowners Pty Ltd (In Liq) v Morris & Ors

PROCEDURE - COSTS - SECURITY FOR COSTS - OTHER MATTERS - where defendants seek security for costs - where plaintiff is a corporation - where plaintiff is in liquidation and unable to pay the defendants' costs if unsuccessful in the proceeding - where plaintiff had been incorporated to conduct property development to benefit the shareholders who transferred their land to the plaintiff - where majority of shareholders refused to authorise the liquidator to bring the proceeding - where one shareholder had provided the funds for the liquidator to pursue the proceeding, but refused to provide security for defendants' costs - where the plaintiff could show a strong prima facie case against the defendants and that its impecuniosity was caused by the defendants' conduct - where the proceeding involved the use made of Part 5.3A of the Corporations Law by the defendants which was a matter of public importance - where the proceeding would be stifled if security of costs were ordered which would be oppressive - where discretion exercised against granting security for costs

Corporations Act 2001 (Cth), s 1335

Australian Energy and Electrical Holdings Pty Ltd v Isbell [2006] QSC 34

Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1

Downey v Crawford [2004] FCA 1264; (2004) 51 ACSR 182

Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523

Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440

Kazar v Duus [1998] FCA 1378; (1998) 88 FCR 218

KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189

M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97

J Brasch for the first and second defendants/applicants

Russell and Company for the first and second defendants/applicants

Brian Bartley & Associates for the sixth defendant/applicant

[1] MULLINS J: The first and second defendants, the fifth defendant and the sixth defendant have brought applications against the plaintiff seeking security for each of their respective costs of the proceeding, relying either on s 1335 of the Corporations Act 2001(Cth) ("the Act") or r 670 of the UCPR. The plaintiff opposes the making of such orders.

[2] The plaintiff was incorporated on 4 April 1996. It was formed by a number of neighbouring landowners as a vehicle to jointly develop and sell their land. The landowners entered into a shareholders' agreement dated 29 March 1996 ("the shareholders' agreement"), became shareholders of the plaintiff and transferred their land to it. There were ten groups of shareholders, each of which held one of the ten issued shares. The original parcels of land were developed and subdivided into 53 lots. Under the shareholders' agreement it was intended that each shareholder group would retain the newly created allotment that contained that shareholder's existing dwelling or, where no dwelling existed, the shareholder would retain one residential allotment as that shareholder's allotment. Special Condition 2 of each of the contracts for sale by which the relevant shareholder group transferred its land to the plaintiff recorded that the parties agreed that the consideration was deemed to have been paid by the issue of the specified share in the capital of the plaintiff. Under the plaintiff's articles of association, each group of shareholders was entitled to participate in profits or return of capital in the proportions set out in article 70(c). The proportions reflected the relative consideration attributed to the land transferred by each group of shareholders to the plaintiff in accordance with the shareholders' agreement.

[3] The first to fourth defendants are the directors of the plaintiff. The fifth defendant is the former administrator and liquidator of the plaintiff who held those positions between 13 October 1999 and 16 October 2002. The sixth defendant is a firm of solicitors which was retained by the plaintiff.

[4] In mid 1999 a dispute arose between the plaintiff and the holders of the one "C" class ordinary share, Mr and Mrs Goodier, about the Goodiers' complaint of lack of access which their property would have to Mt Nathan Road as a result of the proposed development. On 10 June 1999 the directors, on behalf of the plaintiff, and the Goodiers entered into a deed of compromise ("the Goodier transaction").

[5] By letter dated 4 August 1999, Mrs Etridge, the holder of one "G" class share in the plaintiff, complained to the directors about the directors' breaching the shareholders' agreement by entering into the Goodier transaction and requested answers to specified questions. Mrs Etridge foreshadowed making an application to the court for a declaration that the directors were liable to reimburse the plaintiff for the money which they caused the plaintiff to pay to the Goodiers. Mrs Etridge sent further letters to the directors dated 6 and 12 September 1999.

[6] On 12 September 1999 the directors of the plaintiff held an extraordinary general meeting at which they made a presentation as to the financial position of the plaintiff and handed to each person a copy of a financial report in respect of the plaintiff, as at 12 September 1999. That report showed eighteen lots remained to be sold and that the plaintiff was expected to make a profit, if those lots could be sold over a period of twelve to eighteen months at average sale prices of somewhere between $92,000 and $94,000 per lot. The Goodier transaction was not ratified at that meeting. Solicitors on behalf of Mrs Etridge then engaged in correspondence with the directors of the plaintiff. After the meeting on 12 September 1999 Mr Etridge sent a letter to the groups of shareholders (other than those associated with the directors) in which he set out his view of the Goodier transaction and other criticisms of the manner in which the directors were selling the remaining lots. The letter was very critical of the second defendant. Mr Etridge wanted projections of income to be calculated on the basis of sale prices between $70,000 and $80,000 per lot as he considered that would be realistic.

[7] In late September 1999 the directors of the plaintiff gave notice of an extraordinary general meeting to be held on 17 October 1999 in order to ratify the Goodier transaction. At a directors' meeting held on 1 October 1999 to discuss the letter from Mrs Etridge's solicitors, it was noted that "The Board must ensure they are covered by indemnity, must obtain legal advice".

[8] On 8 October 1999 the second defendant telephoned Ms Forbes of the sixth defendant. According to the minutes of the meeting of the directors held in the evening of 8 October 1999, the second defendant organised with Ms Forbes for the directors of the plaintiff to meet with the sixth defendant on 12 October 1999, subject to the approval of the directors being given at that meeting. The plaintiff alleges that on 8 October 1999 Ms Forbes advised the second defendant in relation to the potential proceedings against the directors of the plaintiff and in relation to voluntary administration. That allegation is denied by the first and second defendants who allege that the advice of Ms Forbes was to the effect that the potential existed for Mrs Etridge to commence legal action as a minority shareholder and for such action to lead to the plaintiff being placed in liquidation. The sixth defendant admits that in that telephone conversation between the second defendant and the plaintiff on 8 October 1999 that Ms Forbes may have given general advice in relation to directors' liability for insolvent trading and as to voluntary administration, but denies that any such advice was given in relation to the circumstances of the plaintiff or its directors. At the directors' meeting on 8 October 1999 it was resolved that the sixth defendant be appointed as the plaintiff's solicitors.

[9] On or about 12 October 1999 the directors of the plaintiff met with Ms Forbes and Mr Mann of the sixth defendant and retained the sixth defendant to advise the plaintiff in relation to the Goodier transaction and the letters from Mrs Etridge. Mr Bartley, the solicitor for the sixth defendant, has deposed to being informed by Ms Forbes that, at the meeting on 12 October 1999, she was provided by the plaintiff's directors with a copy of the plaintiff's accounts as at 30 June 1998 which had been prepared by the plaintiff's accountants Teefy Suchowiecki ("the plaintiff's first set of 1998 accounts"). These accounts showed that each group of shareholders had lent the plaintiff the amounts that was attributed to that shareholder group in the shareholder's agreement for the value of the land transferred to the plaintiff.

[10] On 13 October 1999 the directors resolved that the plaintiff was or was likely to become insolvent at some future time and appointed the fifth defendant as voluntary administrator of the plaintiff. The plaintiff alleges that these resolutions were in consequence of the advice of the sixth defendant. That allegation is admitted by the first and second defendants. The sixth defendant alleges that the resolutions of the directors were made upon the basis of their knowledge of the affairs of the plaintiff, as well as in consequence of the sixth defendant's advice.

[11] On 18 October 1999 the fifth defendant received completed questionnaires from each of the directors of the plaintiff. The first, second and third defendants in their questionnaires specified that the reason for the failure of the plaintiff was threatened litigation by one shareholder, whereas the second defendant specified the threatened litigation and that the plaintiff was technically insolvent from inception. The fourth defendant did not consider the plaintiff had failed, but noted the potential claim by a shareholder as an oppressed minority shareholder could make the plaintiff insolvent. Each of the directors noted that the first time they suspected the plaintiff might have to go into administration was upon receipt of advice from the sixth defendant. The only director who recorded on his questionnaire as a loan the amount which represented the value of the land which he and his wife transferred to the plaintiff pursuant to the shareholders' agreement was the second defendant.

[12] Mrs Etridge's husband, Mr Etridge, telephoned the fifth defendant on 19 October 1999 and told him that Mrs Etridge was not a creditor of the plaintiff and on 20 October 1999 Mr Etridge told the fifth defendant that none of the shareholders was a creditor of the plaintiff. The fifth defendant admits these conversations. The first creditors' meeting of the plaintiff was held on 20 October 1999. It is also alleged in the statement of claim that Mr Etridge on 20 October 1999 showed copies of the shareholders' agreement, Mrs Etridge's contract of sale and settlement of sale to the fifth defendant, but the fifth defendant cannot recall whether he was shown those documents.

[13] On 21 October 1999 Suncorp-Metway Ltd ("Suncorp-Metway"), the secured creditor of the plaintiff, which was owed $580,000 appointed receivers and managers to the plaintiff, as a result of the appointment of the administrator. (Although the first and second defendants do not admit the allegation that the directors caused the plaintiff to breach the terms of the plaintiff's loan agreement with Suncorp-Metway by appointing the administrator, the allegation is admitted by the third, fifth and sixth defendants.) Prior to the appointment of these receivers and managers, Suncorp-Metway had been receiving 85% of the gross proceeds from the sales of each of the plaintiff's lots in repayment of the secured loan.

[14] On 22 October 1999 Mrs Etridge's solicitors wrote to the fifth defendant explaining that the shareholders were not creditors of the plaintiff.

[15] By letter dated 25 October 1999 the fifth defendant sought advice from the sixth defendant in relation to whether the shareholders were creditors of the plaintiff, as the fifth defendant had been provided with a copy of one of the relevant contracts of sale by Mrs Etridge's solicitors, and whether he should recommend that the administration should end. A meeting was held by the administrator with Ms Forbes and Mr Litster of the sixth defendant on 26 October 1999. The fifth and sixth defendants differ as to the content of the advice given at that meeting by the sixth defendant. According to the fifth defendant, Mr Litster expressed the view that he was not sure that the construction of the shareholders' agreement for which Mr Etridge contended was correct and advised that the fifth defendant should recommend that the plaintiff execute a deed of company arrangement and that it was a legitimate use of the Part 5.3A procedure to forgive claims against the directors, restructure the management of the plaintiff, use the process to "decide what they want to happen", bind actions against the plaintiff, limit the opportunity of the Etridge/third parties to bring action, "clean the mess up" and avoid oppression action. The sixth defendant says that Mr Litster did say that, if the plaintiff were insolvent, these matters were achievable by a deed of company arrangement, and the matters could properly be taken into account when determining whether an administrator should be appointed, provided the directors had resolved bona fide that the plaintiff was insolvent or likely to become insolvent at some future time.

[16] On 29 October 1999 the fifth defendant issued a report to creditors. The report set out the financial information from the plaintiff's first set of 1998 accounts, but noted that the plaintiff's accountants had prepared a second set of financial accounts for the year ended 30 June 1998 ("the second set of accounts") at the instruction of an unauthorised party (who was in fact Mr Etridge) on the basis that the shareholders were deemed to have been paid for their land by the issue of a share in the capital of the plaintiff. The fifth defendant set out in his report the asset and liability position of the plaintiff on the basis of the reports as to affairs completed by the directors as at 13 October 1999 and these showed the shareholders of the plaintiff as unsecured creditors for the amount of $2,699,110, being the total value of the land transferred to the plaintiff by those shareholders. In commenting on the amount shown as a liability for unsecured creditors, the fifth defendant noted that the first set of 1998 accounts and the reports completed by the directors accounted for the consideration on sale of the properties on the basis that the funds were loaned to the plaintiff by the shareholders who sold their land to the plaintiff. The fifth defendant noted in his report that his appointment as administrator was validly made on the basis of the plaintiff's first set of 1998 accounts. The fifth defendant recommended that it was in the creditors' interests for them to resolve for the plaintiff to execute a deed of company agreement. The fifth defendant cited as a reason that he could not recommend that the administration should end that it appeared from the plaintiff's first set of 1998 accounts and the directors' reports as to affairs that the plaintiff "may be insolvent". The fifth defendant did not in the report deal in any detailed way with the position revealed by the second set of accounts.

[17] On 12 November 1999 the fifth defendant completed a report as to affairs for the receivers and managers of the plaintiff which stated that the plaintiff had an estimated surplus of assets over liabilities in the sum of $964,112.15 as at 21 October 1999 and did not include the loans from shareholders that had been incorporated in the plaintiff's first set of 1998 accounts. A deed of company arrangement was executed on 30 November 1999 and the fifth defendant became the administrator of that deed. On 21 January 2000 the fifth defendant paid out the Suncorp Metway debt from finance obtained through LM Investment Management Ltd and the receivers and managers retired. The operation of the deed was extended by a deed of variation executed on 28 November 2000. Under the deed of company arrangement, the fifth defendant proceeded to sell the remaining lots of the plaintiff's land. On 13 September 2002, by operation of the deed of company arrangement after the sale of the last lot of the plaintiff's land had been completed, the fifth defendant became the liquidator of the plaintiff.

[18] On the application to this Court of Mrs Etridge and two other groups of shareholders, Mr and Mrs Lane and Mr Carabetta, Mr Geroff was appointed liquidator of the plaintiff in place of the fifth defendant on 16 October 2002 and continues as the liquidator of the plaintiff.

[19] On 11 June 2003 Mr Geroff paid a dividend of 100 cents in the dollar to admitted unsecured creditors of the plaintiff. The total paid was $243,195 comprising the sum of $211,919.83 paid to Mr and Mrs Gill in settlement of their advance of $200,000 to the plaintiff plus interest and the sum of $27,215 in lieu of a bank guarantee given by Suncorp-Metway to the Gold Coast City Council relating to the development of the plaintiff's land which amount was to be held in trust pending the outcome of negotiations between Mr Geroff and the Council.

[20] Mr Geroff prepared a report to members and creditors of the plaintiff dated 13 June 2003. That report expressed his opinion reached after investigation of the circumstances relating to the appointment of the fifth defendant as voluntary administrator of the plaintiff that, at all material times, the plaintiff was solvent and that the fifth defendant failed in his duty to recommend that control of the plaintiff's affairs be returned to the directors. The report advised that Mr Geroff had received advice that there were good prospects of recovering the fifth defendant's fees received as liquidator from the time he became aware that the plaintiff was solvent and potentially from the time of his initial appointment. Mr Geroff had investigated possible claims against the fifth defendant in respect of the incurring of additional costs for valuers and marketing and losses that may have arisen as a result of his appointment as a voluntary administrator causing a reduced realisation from the sales of the land owned by the plaintiff and increased interest costs associated with the refinance obtained from LM Investment Management Ltd. Mr Geroff reported that he had received advice that there were less than reasonable prospects of recovering from the fifth defendant damages for loss on sale of land owned by the plaintiff. Mr Geroff's report also dealt with claims against the directors and the sixth defendant. Mr Geroff had received advice that the cost of proceedings against the directors and the fifth and sixth defendants was likely to be $80,000 to $100,000. At the meeting of the creditors and members of the plaintiff held on 27 June 2003 the proposed resolution that Mr Geroff conduct further investigations and commence proceedings against the directors and the fifth and sixth defendant was rejected. Mrs Etridge, Mr and Mrs Lane and Mr Carabetta voted in favour of the resolution.

[21] The claim and statement of claim in this proceeding were filed on 22 September 2004. The fourth defendant has not filed a defence. Defences of the other defendants were filed in November 2004. The plaintiff filed replies to each of the defences in December 2004. In July 2005 the plaintiff's solicitors advised the defendants' solicitors that the matter had been delayed for some months pending the liquidator arranging finance and as the issue had been resolved, the plaintiff had given instructions to apply to have the matter listed on the commercial list. Mr Geroff was unsuccessful in arranging funding from litigation funders. As a result of an objection to placing the matter on the commercial list taken by some of the defendants, the plaintiff's solicitors applied for the matter to be placed on the supervised case list. The proceeding was ordered to be placed on that list on 24 November 2005. The fifth defendant's application for security for costs was filed on 12 December 2005. The first and second defendants' application for security for costs was filed on 5 January 2006. The sixth defendant's application for security for costs was filed on 7 March 2006. The amended defence of the fifth defendant was filed on 12 January 2006 and an amended reply filed by the plaintiff on 21 March 2006.

[22] On 31 January 2006 the plaintiff's solicitors served a list of documents on all other parties to the proceeding. The plaintiff's solicitors anticipate that disclosure in this proceeding will be made almost entirely by the plaintiff. This is on the basis that the plaintiff's claims are in relation to the conduct of the directors and the voluntary administrator/former liquidator of the plaintiff and their advisers and Mr Geroff is in possession of the majority of the plaintiff's documents and those which were held by the fifth defendant. In addition, the sixth defendant's file cannot be located, so that the plaintiff's solicitors expect the sixth defendant's disclosure of documents that are able to be produced for inspection to be limited to those documents contained on the sixth defendant's computer system, such as emails, electronic copies of documents and time records.

[23] In Mr Geroff 's circular to members and creditors dated 24 November 2005, he stated the plaintiff had cash at the bank of $39,345 and the potential of recovering the amount of $27, 215 paid to the Council that was then held on trust. Mr Geroff noted that the plaintiff's cash at the bank was subject to a priority claim by him for his fees as liquidator.

[24] In summary, the plaintiff's claim against the first to fourth defendants is for damages for breach of fiduciary or statutory duties on the basis that the decision to appoint the fifth defendant was made by them in breach of their duties as directors. The plaintiff relies on the allegations that it was not insolvent nor likely to become so and the directors ought reasonably have been aware that was the fact or that a substantial purpose of the directors in appointing the fifth defendant was to stave off litigation threatened by Mrs Etridge. The total amount claimed by the plaintiff from the first to fourth defendants is $699,990.79 which comprises $50,000 for the Goodier transaction, $20,993.86 for the cost of refinancing the Suncorp-Metway debt, $380,611.21 for the remuneration and other expenses incurred during the voluntary administration, under the deed of company arrangement and the liquidation and $248,385.72 for fees paid by the fifth defendant to the real estate agent in excess of REIQ rates for selling the plaintiff's land and the losses claimed to have been incurred by the sale of the land at reduced prices. The plaintiff alleges that the allotments that were sold by the fifth defendant were sold at prices which were less than the fair market value of those lots. The first and second defendants deny that on 13 October 1999 they knew or ought to have known that the plaintiff was solvent and was not likely to become insolvent or that they were acting for an improper purpose. The first and second defendants deny breaching the duties owed by them to the plaintiff, but if they are found to have breached any duty, they rely on their claim that they acted on advice, particularly from the sixth defendant, and seek to be excused from such liability pursuant to s 1318 of the Act. The first and second defendants also allege that if they are found to have breached any duty, no loss or damage has been suffered by the plaintiff as a consequence of the breach.

[25] The claim by the plaintiff against the fifth defendant is for damages for breach of statutory duties, contract, fiduciary duties and the duty of care. This is based on the allegations that the fifth defendant came into possession or became aware of the shareholders' agreement either before or shortly after his appointment and was therefore aware that the plaintiff was solvent or that he did not discharge his duty to investigate the affairs of the plaintiff and form an opinion pursuant to s 438A(b) of the Corporations Law ("the Law"). The quantum of damages claimed against the fifth defendant is the same as that claimed against the first to fourth defendants, excluding the claim of $50,000 for the Goodier transaction. The fifth defendant maintains that the plaintiff on and from 13 October 1999 was or appeared to be insolvent or likely to become insolvent. The fifth defendant denies that he acted in breach of his duties, because he had no basis for thinking otherwise than that the directors of the plaintiff had resolved bona fide to appoint him and that he carried out reasonable and proper investigations of the plaintiff's business, property, affairs and financial circumstances as soon as practicable after his appointment as administrator so as to enable him to form an opinion for the purposes of s 438A of the Law and to provide a report to creditors for the purposes of s 439A of the Law. The fifth defendant relies particularly on the advice he obtained from the sixth defendant on 26 October 1999 on the effect of the shareholders' agreement and the related contracts of sale and that he should recommend that the plaintiff execute a deed of company arrangement.

[26] The claim against the sixth defendant is for damages for breach of contract and the duty of care owed to the plaintiff and is also based on the allegations that the sixth defendant was in possession of a copy of the shareholders' agreement and therefore was aware or ought to have been aware that the plaintiff was solvent and that the sixth defendant was aware that a substantial purpose motivating the first to the fourth defendants in seeking legal advice and appointing the fifth defendant was an improper purpose. The quantum of damages claimed against the sixth defendant is the same as that claimed against the fifth defendant. The sixth defendant alleges that the resolution of the directors that resulted in the appointment of the fifth defendant as administrator was not only in consequence of the sixth defendant's advice, but on the basis of the directors' knowledge of the affairs of the plaintiff. The sixth defendant also relies on the facts that at no time prior to 25 October 1999 was the sixth defendant aware of any reason why the plaintiff's first set of 1998 accounts should be considered inaccurate or of any contention that those accounts were inaccurate or that the sixth defendant had any reason to form the view that the directors were acting in breach of their fiduciary and statutory duties in appointing the fifth defendant as administrator. The sixth defendant alleges that, following Suncorp-Metway's debt falling due for payment, the plaintiff was unable prior to 21 January 2000 to repay the Suncorp-Metway debt. The sixth defendant also relies on the fact that it advised the directors in circumstances in which internal dissension was adversely affecting their ability to manage the plaintiff.

[27] It was anticipated that this proceeding could require a trial lasting 10 days. By the conclusion of the hearing of these applications it was common ground between the plaintiff and the first and second defendants, between the plaintiff and the sixth defendant that the costs and expenses that would be assessed on a standard basis for the work done and incurred up until the first day of the trial would be $45,000 respectively for the first and second defendants and for the sixth defendant. The fifth defendant sought security in the amount of $115,000 up to and including the first day of the trial or the amount determined by the court as appropriate.

[28] It was common ground amongst the parties that the plaintiff would be unlikely to be able to pay any of the defendants' costs of the proceeding, if ordered to pay them, if the plaintiff did not succeed at trial against any of the defendants. The parties therefore addressed the discretionary considerations relevant to whether security for costs should be ordered: r 672 UCPR; KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189, 197-198. The matters which are relevant include:

(a) the means of those standing behind the proceeding;

(c) whether the plaintiff's impecuniosity is attributable to the defendants' conduct;

(d) whether an order for security for costs would be oppressive;

(e) whether an order for security for costs would stifle the proceeding;

(f) whether the proceeding involves a matter of public importance;

(g) delay in bringing the application for security for costs.

[29] That the plaintiff is in liquidation is one of the factors in favour of making an order for security for costs. It is therefore necessary to consider the means of those who stand to benefit from the proceeding. The shareholders who have supported Mr Geroff undertaking further investigations into the claim against the directors of the plaintiff and the fifth and sixth defendants were Mrs Etridge, Mr and Mrs Lane and Mr Carabetta. Mr Carabetta was not in a position to contribute to the funding of the proceeding, having no assets of any substance and his sole income being the disability pension and other social security payments.

[30] Mr and Mrs Lane informed Mr Geroff that they were unable to contribute to the funding of the proceeding. In September 2003 Mr and Mrs Lane sold the property they owned at Mt Nathan and with other members of their family purchased a 1,100 acre property west of Grafton and a holiday cottage at Woollai for which they paid in total $212,500, but which were encumbered by a mortgage in the amount of $95,000. Mr and Mrs Lane's only income is derived from social security which is sufficient only to cover their living expenses.

[31] Since the creditors' meeting of June 2003 Mrs Etridge had provided $82,700.33 by way of funding for the investigations and litigation. Mr Geroff has not applied funds of the plaintiff in investigating the claims against the defendants or pursuing this proceeding. Mrs Etridge informed Mr Geroff of a number of matters relevant to her position for the purpose of this application. These included that she was 63 years old and her assets consist of the house in which she and her husband reside at Parma Court, Mt Nathan, a motor vehicle and approximately $140,000 in shares owned by her. The house is valued at approximately $500,000 and is subject to a first mortgage to Citibank and a second mortgage in favour of Mr Geroff which secures his professional fees and expenditure for this proceeding, leaving approximately $60,000 in equity. Mrs Etridge owes about $25,000 in legal fees incurred in the proceeding to date. Mrs Etridge also expended approximately $21,000 in legal and other fees in the correspondence which she had her solicitors send after the meeting of 12 September 1999 and before the plaintiff went into administration, on an application she made to obtain access to the plaintiff's books and records during the operation of the deed of company arrangement which did not proceed after the fifth defendant provided access to the plaintiff's documents and on the application for the removal of the fifth defendant as liquidator of the plaintiff. Mrs Etridge's sole income is derived from the shares held by her and, if those were sold, she would have no income, other than a right to apply for an aged pension. Mrs Etridge's husband does not own any assets, receives a small pension from the Government of the United Kingdom and is unable to contribute to providing security for costs. Mr and Mrs Etridge's combined income is sufficient for their daily living expenses only.

[32] Although Mr Geroff put before the court the details of the financial position of each of the shareholders who support the proceeding on the basis of what that shareholder informed him, there is nothing in the material to suggest that this information was not accurate.

[33] It is understandable that the shareholders associated with the first, second, third and fourth defendants have not supported the prosecution of the proceeding. There are three other groups of shareholders, however, apart from Mrs Etridge, Mr and Mrs Lane and Mr Carabetta, who would be entitled to a return of capital, if this proceeding were successful and there were a surplus at the completion of the winding up. The plaintiff was a vehicle for what was effectively a joint venture in property development by the shareholders where the relationship amongst them subsequently broke down. The groups of shareholders therefore have differing views on this proceeding. This can be contrasted with the position of a company that pursues litigation for the benefit of all the persons on whose behalf the company was trading such as in Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 and the mischief to which s 1335 of the Act is directed: Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, 532.

[34] Submissions were made to the effect that Mr and Mrs Lane and Mrs Etridge did have uncommitted funds which could support the provision of guarantees in favour of the defendant by way of security for costs. Having regard to the overall financial position of Mr and Mrs Lane, it is not surprising that they do not wish to risk the little equity which they have in their real property on this proceeding, when their only income is social security. Mrs Etridge has risked her personal assets in having the fifth defendant removed as the liquidator of the plaintiff and in providing funding to date to the liquidator to enable this proceeding to reach the stage that it has. She is presently out of pocket for about $130,000 and has committed further funds secured over her real property to meet Mr Geroff's fees and expenses in relation to the proceeding. Her overall financial position is relatively modest. It is relevant to take into account the extent of funds that she has already paid in considering the weight to be placed on her decision not to put herself at further financial risk by offering to provide security for costs to the defendants.

[35] The sixth defendant argues that Mr Geroff stands to benefit from the proceeding by receiving fees for the work he does in relation to the proceeding and that he should offer to provide security for costs or subordinate the mortgage to secure his fees which he has obtained from Mrs Etridge, so as to enable Mrs Etridge to provide security for costs. Mr Geroff is carrying out his duties as liquidator of the plaintiff in causing the proceeding to be pursued by the plaintiff and will be entitled to seek payment for work which he does. It is not a proper characterisation of his role to describe him as a person who "benefits" from the proceeding in the sense that is used for identifying persons against whom security for costs can be sought.

[36] It is not always possible to make a useful assessment of the prospects of success of a plaintiff's claim: Australian Energy and Electrical Holdings Pty Ltd v Isbell [2006] QSC 34. Consideration of the merits of a plaintiff's claim is particularly relevant, however, when the plaintiff claims that its impecuniosity has been caused by the defendant's conduct which is the subject of the claim: Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440, 441, 445.

[37] It is apparent from the above analysis of the disputes that resulted in the proceeding and the analysis of the claims and defences in the proceeding that the plaintiff's respective claims against the directors and the fifth and sixth defendants arise out of different relationships, involve different duties and depend on different facts, even though the claims relate to the same events. There is the possibility that the plaintiff's success in this proceeding may not be against all defendants and, if the plaintiff is successful against a defendant, it may not be successful in all its claims against that defendant.

[38] Issues which are critical to the plaintiff's claims against the first and second defendants are whether the directors genuinely believed on reasonable grounds on 13 October 1999 that the plaintiff was insolvent or likely to be so in the future (Downey v Crawford [2004] FCA 1264; (2004) 51 ACSR 182, 216 [189]) and whether a substantive purpose in the appointment of the fifth defendant was an improper purpose (Kazar v Duus [1998] FCA 1378; (1998) 88 FCR 218, 233).

[39] On the first issue, although the plaintiff's first set of accounts for 1998 showed each group of shareholders as a creditor of the plaintiff for the relative value of the land transferred by that group to the plaintiff, it is significant that the directors themselves who were parties to the contracts for the sale of their land to the plaintiff and the shareholders' agreement either knew or had the means of knowing what the true position was in relation to the consideration for the transfer of that land. It is also significant that the directors had presented to the shareholders at the meeting on 12 September 1999 a financial report for the plaintiff as at that date which did not foreshadow insolvency.

[40] On the second issue, the knowledge and the means of knowledge that the directors had about the true state of the plaintiff's accounts and financial position and that the directors were concerned about the threat of litigation by Mrs Etridge are relevant. These matters must also be relevant in considering the extent to which the directors did rely on the advice they say they were given by the sixth defendant and, if they are found to have breached their duties, whether s 1318 of the Act can be applied to their conduct.

[41] For the purpose of this application it is neither appropriate nor possible to express a concluded opinion on the plaintiff's claims against the first and second defendants. I have made the above observations as they are the patent result of a perusal of the extensive documentary material that was relied on at the hearing of this application in support of the submission made on behalf of the plaintiff that it has a genuine, strong and meritorious case against the defendants. As against the first and second defendants, I am satisfied that the plaintiff has shown that it has strong prima facie case against them.

[42] The evaluation of the prima facie case of the plaintiff against each of the fifth and sixth defendants is complicated by disputed facts including the content of the advice given by the sixth defendant to the directors on 12 October 1999 and by the sixth defendant to the fifth defendant on 26 October 1999 and the need to determine what significance each of the fifth and sixth defendants should have attached to the plaintiff's first set of 1998 accounts in light of the sixth defendant having a copy of the shareholders' agreement, at least from 12 October 1999, and both the fifth and sixth defendants having both a copy of the shareholders' agreement and one of the contracts of sale relating to the transfer of land by a shareholder to the plaintiff, at least from 25 October 1999.

[43] It is relevant that the sixth defendant was consulted by the directors because of the concern about Mrs Etridge's claims arising from the Goodier transaction, and not because of trading difficulties of the plaintiff, and that the fifth defendant was approached in this same context. The relationships between the directors and the sixth defendant, between the directors and the fifth defendant, and between the fifth defendant and the sixth defendant and the content of the relevant duties owed by the defendants to the plaintiff were affected by the circumstances in which the involvement of the fifth and sixth defendants in the affairs of the plaintiff was procured by the directors.

[44] The fifth defendant accepts that the plaintiff has a genuinely arguable case, but submits that the fifth defendant has equally arguable defences. The sixth defendant does not dispute that the proceeding is genuine, but says the plaintiff's claim cannot be said to be "overwhelmingly strong".

[45] Even allowing for the defences respectively raised by the fifth and sixth defendants and the factual issues which will need to be resolved at a trial, the plaintiff has shown on the material that prima facie it has a strongly arguable case against each of the fifth and sixth defendants, at least for the claims that arise directly from the appointment of the fifth defendant as administrator and liquidator. The reservations that Mr Geroff has expressed about the plaintiff's prospects of success in relation to recovering damages for loss on sale of land owned by the plaintiff and sold when the fifth defendant was controlling the plaintiff should not be ignored in respect of that part of the claim. An arguable defence in respect of that part of the claim, however, does not dispose of the other parts of the claim.

Whether plaintiff's impecuniosity is attributable to the defendants' conduct

[46] It is argued that the plaintiff is impecunious, because Mr Geroff paid the sum of $243,195 to the unsecured creditors in full in June 2003. Mr Geroff relies on s 478 of the Act as requiring him to pay the unsecured creditors. The concept of impecuniosity on an application for security of costs relates to the inability of a company to pay a defendant's costs in litigation brought by the company. The unsecured creditors were paid out in this matter when the plaintiff had funds to do so and before Mr Geroff had commenced his investigations that resulted in the proceeding. It is a narrow view of relevant events concerning the plaintiff and an arbitrary approach to argue that the plaintiff's position at this point in time has arisen because of the payment of unsecured creditors during the course of the liquidation of the plaintiff.

[47] In view of the strength of the prima facie case that the plaintiff has shown against each of the first and second defendants, the fifth defendant and the sixth defendant, it follows that the plaintiff has shown on a prima facie basis that its impecuniosity is due to the conduct of these defendants. That justifies taking this factor into account against ordering security for costs.

[48] There is no suggestion that any of the defendants has brought the application for security for costs for an improper purpose, as it was an appropriate application to make in the light of the current financial state of the plaintiff and the refusal of Mrs Etridge and Mr and Mrs Lane to provide the security that was requested of the plaintiff. That does not, however, conclude the issue of whether ordering security for costs in this matter would be oppressive, in the sense of being used to deny an impecunious plaintiff the right to litigate: M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97, 100. What is oppressive must be judged in the broader context of the relationships between the parties to the proceeding.

[49] The inference which I have draw from the information provided in Mr Geroff's affidavit filed on 24 January 2006 which is articulated in paragraph [33] of the written submissions made by the plaintiff (exhibit 5) is that the only feasible source of funding the proceeding for the plaintiff is from Mrs Etridge who does not have the means (and has refused) to put up adequate security for the costs of the defendants and that, if such security were ordered against the plaintiff, it would prevent the plaintiff from pursuing the proceeding. That would be oppressive having regard to the history of the dealings that are the subject of this proceeding.

Whether security for costs would stifle the proceeding

[50] Notwithstanding that Mr Geroff did not expressly state that the proceeding would not continue, if security for costs were ordered against the plaintiff, I am satisfied, as set out above, that the inference should be drawn that the proceeding would be stifled by security for costs in favour of the defendants being ordered against the plaintiff.

[51] The plaintiff submits that the proceeding raises the issue of the "use and abuse" of Part 5.3A of the Act which is a matter that is said to be of public concern. The first and second defendants submit that there is no issue of public importance, as allegations of negligent professional advice and improper behaviour of directors are "relatively commonplace".

[52] On the pleadings, the starting point for this proceeding was the challenge by Mrs Etridge made against the directors of the plaintiff in relation to the Goodier transaction. The pleadings reveal that the directors sought advice from the sixth defendant in relation to this claim made by Mrs Etridge; that after receiving advice from the sixth defendant the directors appointed the fifth defendant as the voluntary administrator the plaintiff; that in the course of the fifth defendant undertaking independently the duties imposed on him under s 438A and s 439A(4) of the Law he was provided with information by or on behalf of Mrs Etridge which was relevant to the extent of the plaintiff's liabilities; that the fifth defendant sought advice from the sixth defendant on this matter in respect of which the directors evinced a position that was contrary to that put forward by Mrs Etridge; that the sixth defendant gave advice on this matter in response to the request of the fifth defendant; and that the fifth defendant seeks to rely on the advice given by the sixth defendant to justify the recommendation that he made in his report to the creditors of the plaintiff against bringing the administration to an end.

[53] This is not therefore merely a case of determining whether directors have breached their duties, whether the fifth defendant breached duties imposed on him in the various capacities which he assumed in relation to the plaintiff or whether the sixth defendant gave negligent advice. The reliance by and the advice given to the directors on the procedure under Part 5.3A underpins this proceeding. The allegations of breach of duty and negligent advice have to be considered in the context of the application of Part 5.3A and whether it was used in circumstances for which it was appropriate. I accept the submission of the plaintiff that there is a matter of public importance involved in this proceeding arising out of the use of Part 5.3A in circumstances that were precipitated by the claim foreshadowed by one shareholder against the directors of the plaintiff.

[54] Although the plaintiff commenced the proceeding on 22 September 2004 and the parties attended to further pleadings in a timely way, delay was caused in the proceeding during 2005, as a result of the plaintiff's investigation of its sources of funding. These applications for security for costs were flagged when the proceeding was placed on the supervised case list. Although the plaintiff has taken significant steps towards disclosure, it appears that this was done when the plaintiff was on notice that the applications for security for costs would be brought. There has been no delay by the defendants in bringing these applications that would count against granting them.

[55] The exercise of the discretion as to whether or not to order security for costs is dependent upon giving weight to and balancing the various factors that are for and against the granting of security for costs. Although there are factors in this matter which support making orders for security for costs such as the impecuniosity of the plaintiff and that Mrs Etridge has used her available funds to secure the liquidator's costs of the proceeding, there are many factors that favour refusing security for costs. These have been referred to above. The strength of the plaintiff's case, that prima facie its impecuniosity has been caused by the defendants' conduct, the public importance involved in considering the actions of the defendants in relation to using Part 5.3A of the Act and that the proceeding would be stifled if security for costs were ordered which would be oppressive in the circumstances are compelling factors in favour of the plaintiff. When all the relevant factors are considered and taken into account, I am satisfied that in this matter the balance of the factors favours refusal of the applications for security for costs.

[56] It follows that the orders which should be made are:

1. The application filed on 12 December 2005 is dismissed.

2. The application filed on 5 January 2006 is dismissed.

3. The application filed on 7 March 2006 is dismissed.

[57] Subject to hearing submissions from the parties on the issue of costs, I am disposed to make an order for costs in favour of the plaintiff in respect of each of the applications to reflect the plaintiff's success in resisting the applications.