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Judgment (EX TEMPORE - REVISED 14 June 2018)

1. HIS HONOUR: I am dealing with an application for security for costs brought by the respondent to a cross-claim, Equity Trustees Wealth Services Limited (ETWS). The cross-claimant is Australian Special Opportunity Fund LP (ASOF). Security is sought on one or other of the bases set out in UCPR Rule 42.21(1)(a), (d), (e). As to the second of those bases, ETWS relies also on s 1335 of the Corporations Act 2001 (Cth).
2. There is no dispute as to the first ground. ASOF has corporate status under the laws of Delaware and in the relevant sense is "ordinarily resident outside Australia". On that basis alone, the power to order security for costs has been enlivened. However, the debate has proceeded, very sensibly, on the basis that if it were the case that ASOF had sufficient assets within Australia to satisfy any adverse order for costs, the court would be unlikely to make the order. Thus, in relation to both that ground and the second ground (inability to pay if ordered to do so), the common issue is the extent and value of ASOF's assets in Australia, and the likelihood that, if necessary, they will be available to meet any adverse costs order.
3. The third ground (suing for the benefit of someone else) was not really touched upon in the course of submissions. Once again, however, the real issue (if it arises) is as to the extent and availability of assets in Australia to meet any costs order.
4. ASOF is a limited partnership organised according to the laws of Delaware. The evidence is that the limited partners are not liable for its debts except in circumstances which appear to have no application. In principle, the general partner is. However, a claim may not be enforced against the general partner unless, in effect, all reasonable steps have been taken to enforce it against the assets of the partnership and the claim has not been satisfied.
5. The issues in the cross-claim relate to the quantification of the loss, if any, that ASOF has suffered by reason of the failure of ETWS to appoint a receiver during the "relevant period" in the insolvency of Metal Storm Limited. The dispute is confined to loss, because the question of liability has been resolved in favour of ASOF after a hearing before Black J and a trip to the Court of Appeal.
6. There is considerable dispute as to the extent and value of assets within Australia. ASOF asserts, in substance, that it has of the order of $6 million in unencumbered assets, including of the order of $1.7 million in listed securities in which it holds a 100% beneficial interest. However, the evidence on which those propositions are based does not make it possible to evaluate the net extent of the assets. True it is that the evidence satisfies me that the listed securities are unencumbered in the sense that they have not been charged as security for the payment of any debt. True it is, again, that the evidence satisfies me that the general partner did not need to borrow money to buy those listed securities. However, those two facts, accepted as they may be, do not show that there are no other liabilities. Mr Willis of Counsel, who appeared for ASOF, urged upon me the proposition that I should read his client's evidence as suggesting that there were no such liabilities. I really do not see why the court should read the evidence in a way that is not natural, particularly when that evidence is given by the lawyer for the party.
7. That leads to another point, which is that the evidence of ASOF's assets is not given by anyone who has much in the way of personal knowledge. It is given on information and belief by the lawyer, and is supported by documents that, to put it mildly, are somewhat opaque.
8. The probative value of that evidence has to be assessed against the fact that there have been numerous requests for financial information made of ASOF. The first was made on 1 April 2016. Further requests were made on 30 September and 4 October 2017, and on 30 May 2018. Those requests were not answered in a way which enables the court to evaluate the evidence given, such as it is, of the extent of ASOF's assets within Australia or of the net value of those assets.
9. I add that none of those who stand behind ASOF and who stand to benefit from its success in this litigation - the limited partners - have provided any information as to their financial positions. Nor have they offered any undertaking or indemnity in respect of any adverse costs order that may be made.
10. In my view, having regard to the correspondence and the failure to provide meaningful information of the net financial position of ASOF in this country, it is appropriate to infer that the evidence that could have been given is unlikely to have been of any assistance in rebutting the application for security for costs. To my mind, the approach taken by Black J in Narradine Pty Ltd v Mascot Steel and Tools Pty Ltd [1] at [8] is appropriate. I need do no more than set out that paragraph, and observe that what his Honour said is directly applicable to this case: Narradine has also not provided financial information to establish its financial position when requested by the Defendants to do so nor have financial statements in respect of Narradine or the Nelson Family Trust been led in evidence in these proceedings. In these circumstances, the Court can more readily infer that such information would not establish that Narradine would be able to meet an order for costs against it: Prynew Pty Ltd v Nemeth [2010] NSWCA 94 at [49]. Although it appears that Narradine has a right of indemnity against the Nelson Family Trust, the Court must also have regard to the practical difficulties which the Defendants would face in enforcing an order for costs, particularly where the directors of Narradine have not given any undertaking to exercise that right of indemnity in respect of an adverse costs order: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584 at 46,279-46,731; Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] VicRp 9; [1995] 1 VR 150; Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 at [18]; Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806; (2006) 202 FLR 270 at [34] ff.
11. The other matter that is of significant importance is that, as I have said, ASOF is a limited partnership. The evidence is that the limited partners may withdraw all or a portion of their capital account by giving at least 90 days' written notice prior to the end of any calendar quarter. If withdrawal requests are made that aggregate more than 25% of the net asset value of the fund then the general partner may satisfy them all, or satisfy them pro rata, at its discretion. There is no apparent limitation on the right of a limited partner to withdraw (subject to the 25% limitation) and no apparent discretion in the general partner to refuse to pay out (again subject to the 25% limitation). For that reason alone, it is self-evident that whatever assets are presently held in this country may be withdrawn, in circumstances where the general partner, who presumably is supervising the conduct of the cross-claim, has no choice but to obey.
12. It is correct to say, as was put for ASOF, that there is no evidence of any likelihood of flight or dissipation. However, the question is whether the ability of the limited partners to withdraw their capital on 90 days' notice impairs the likelihood that the assets held within this country will be sufficient to meet any adverse costs order. I should mention that it appears to be common ground that the recoverable amount of costs, referable to this application for security for costs, ranges between $910,000 and $930,000. If it is correct to say that the listed securities in which ASOF has a 100% beneficial interest are worth of the order of $1.7 million (and the nature of securities, which I referred to in the course of the hearing as "penny dreadfuls", is such that their value is somewhat volatile), then there is not all that much margin in the readily available assets before the ability to recover in full against them becomes threatened.
13. In all the circumstances, I am not satisfied, for the purposes of r 42.21(a), that the qualification to which I have referred that is often applied - namely, that the corporation will hold sufficient assets in Australia to satisfy any likely adverse costs order - has been shown to be the case. In reaching that conclusion, I take into account not only the inadequacies in the evidence to which I have referred but also the legal threat posed by the ability of the limited partners to withdraw their capital on notice.
14. To the extent that it is necessary to consider separately r 42.21(d) and s 1335 of the Corporations Act, the same circumstances lead me to the view that there is indeed reason to believe that ASOF will be unable to pay the costs if ordered to do so.
15. Thus, I turn to the discretionary issues. If one were speaking strictly, the matter I have just referred to could be said to be "discretionary" in relation to r 42.21(a). It is unnecessary to take that pedantry any further. The only discretionary issue raised was that of delay.
16. There has undoubtedly been very significant delay in making the application. To an extent, the impact of that delay has been mitigated because the security is sought only for costs that are to be incurred in the future. ETWS does not seek security for costs that it has incurred in the past. In this context, the "future" and the "past" date, as I understand it, from about October 2017, which is, the parties agree, the end point of the significance of delay.
17. It is unnecessary to detail the chronology of delay because ETWS does not suggest that it has been other than substantial. There is an explanation given for the delay. That explanation is that Mr Meehan, the lawyer responsible for the conduct of the litigation on behalf of ETWS, formed the view that, having regard to the way in which the damages claim was cast, he could not make any accurate assessment of costs until the evidence on which ASOF relied had been served and considered. There is I think a great deal to be said for that proposition.
18. ASOF has been extraordinarily dilatory in serving its evidence on the question of damages. It has not complied with numerous deadlines imposed by the court to do so. The evidence was initially due in May 2016. It was not finally served until something like 15 months later. The reasons for that delay have not been explained.
19. Of course, delay on the part of one party does not excuse delay on the part of the other, except where the former is causative of the latter. The significance of the delay is, rather, that Mr Meehan has said that it was not until he had all the evidence that he was able to form a reasonably accurate view of the work that needed to be done and the likely costs that would be incurred in doing it. That evidence has not been challenged and it is in my view persuasive.
20. I have not overlooked the fact that on 21 October 2015, ASOF gave what purported to be particulars of damages. Those particulars did no more than set out the approach to quantification of damages that would be followed. That approach was said to be that the damages would be the value of the loss of opportunity that ASOF had to find itself in a better position than in fact it occupies, had ETWS appointed a receiver in the relevant period (27 July to 15 August 2012). That is supplemented by some six numbered paragraphs which assert what the various opportunities would have been. However, as the particulars concluded, the existence and value of that lost opportunity "are matters to be addressed in evidence to be served". Despite the court's orders, it took very considerable time thereafter for the evidence to be served.
21. I do not accept the submission that the particulars given in October 2015 would have enabled any rational assessment to be made of the scope and cost of the work to be done by ETWS in defending the claim for damages. In my view, those so-called particulars could have done no more than indicate to ETWS and its legal advisers the kinds of evidence (or the kinds of expert witnesses) that might be required.
22. Thus, in my view, there has been an acceptable explanation for the delay. In saying that, I take into account that at the time the first requirement for security for costs to be provided was notified (1 April 2016), the evidence for ASOF was to be served by May 2016. Thus, it might be thought, the period of delay before an informed assessment could be made was relatively short.
23. It is, in hindsight, unfortunate that when the various extensions of time that ASOF sought were given, ETWS did not remind it of the pending demand for security (at least, until 13 September 2017, when the second of the letters to which I referred earlier was written). Nonetheless, it could hardly have been thought that, in the period from April 2016 to September 2017, ETWS had determined to drop its intimated desire to have security for its costs.
24. In circumstances where there has been an explanation, the real significance of delay must be the prejudice, if any, that delay has caused to the party against whom security is sought. The evidence of prejudice is somewhat scanty. ASOF says (again, through evidence given on information and belief by its lawyer) that it could not provide security without selling existing investments "potentially on unfavourable terms". It says that the assets in question are "distressed shares" bought "at discounted prices on the secondary market". A premature sale of those shares, it says, might result in its suffering a loss.
25. In those circumstances, ASOF says (through evidence given in the same way), that had it been given notice of the security for costs application in advance of preparing its evidence it would have carefully considered and made a business decision whether to continue with the litigation. If it did, it would have set aside funds, which then would not have been used to buy the distressed assets to which I have referred.
26. A number of things may be said about that. The first is that, as I have said, ETWS did give notice of its desire to have security for costs on 1 April 2016. Perhaps the date on which that was given caused some confusion. However, on notice of that desire, ASOF did not thereafter hold up its preparation (slow as it was) of its evidence. The evidence that has been given does not address this point.
27. The other point to be made is that, even with the benefit of hindsight, ASOF is not prepared to say that it would have made the business decision not to continue with the litigation. That in my view is significant, because the matters that would have needed to be "carefully considered" to make that decision must have been known to ASOF in June 2018, when the relevant affidavit was sworn.
28. There is, I suppose, a risk that an order for security would require ASOF to sell up some of its existing investments. There is, I suppose, the possibility that it may suffer a loss. There is no firm evidence on those matters. There is however firm evidence that in April 2018 (before the affidavit to which I have referred was sworn), ASOF managed to scrape together $2,500,000 to make some sort of loan, on the basis of "a convertible security funding agreement", to a company known as Aus Tin Mining Ltd. There is no evidence as to whether that money was raised by debt, from existing reserves, by contributions from limited partners, or in some other way. There is no evidence as to why some part of that money could not have been earmarked to provide security for costs. In short, that evidence seems to me to be quite inconsistent with the protestations made about the need to sell distressed assets potentially at a loss, and the consequent business decision that might have been considered, to which I have referred earlier.
29. In all the circumstances, I am not satisfied that the delay has caused any, let alone any real or significant, prejudice to ASOF.
30. I turn to the quantification and timing of the security. I have indicated the range. I see no value in poring through the many pages of evidence from which the end points of that range were derived. The simple, and in terms of s 56 just, quick and cheap approach, is to split the difference and say that security should be given in a total sum of $920,000.
31. There appears to be consensus that if I come to the opinion that I have expressed, I should order part of that security to be provided within 14 days of making the order and the remainder to be provided after the matter is set down for hearing. The latter stage has caused a subsidiary dispute as to whether the security should be ordered within 14 days of the date setting down, or within four or six weeks before the commencement of the hearing. The point I think is really that once the matter is set down for hearing, ETWS will have to take steps, retaining counsel, making sure that experts are available, and the like fairly shortly thereafter. I do accept, as was put for ASOF, that the bulk of the costs will be referable to the hearing and the period of four to six weeks preceding it. However, to hold matters off until then would be to leave ETWS exposed to the risk that, putting the matter in not particularly legal parlance, ASOF might pull the plug once a hearing date has been allocated.
32. Doing the best I can, I think that the second tranche should be provided within 28 days after an order is made setting the cross-claim down for hearing.
33. For those reasons I order the cross-claimant to provide to the cross-defendant, by payment into court or in such other manner as the parties may agree, $920,000 for security for the cross-defendant's costs. I order that that security be provided by two instalments: one, within 14 days after the date of these orders and another within 28 days after an order is made setting the cross-claim down for hearing. Those instalments are to be, respectively, $370,000 and $550,000. I order that the cross-claim be stayed unless security is paid in accordance with those orders.
34. I will hear the parties on costs but my present view is that, since the real justification for the application will depend on the fate of the cross-claim, the costs of the application for security should be costs in the cross-claim.