North Shore Property Developments Pty Ltd (in liq) v Haddad

The deed of indemnity 9 The deed of indemnity was the focus of submissions because the applicants argued that its existence obviated any need for security for costs. A redacted copy of the deed is annexed to an affidavit sworn by Ms Erskine. 10 Relevantly, cl 3.5 of the deed provides that its purpose is to "provide an indemnity for the Liquidator against any Adverse Costs arising from the Proceedings". The quantum of such costs: must either be agreed to in writing by the DCT or be an amount ordered by a Court and must not exceed the maximum amount of the Adverse Costs provision provided for in Schedule 1 of the Deed. 11 The definitions and other provisions of the deed that are relevant to understanding this provision are as follows. (a) The "Liquidator" is Ms Erskine. The parties to the deed are Ms Erskine and the DCT. North Shore has no rights under the deed. (b) "Adverse Costs" is defined to mean: any costs, damages, expenses, compensation and/or remuneration that the Liquidator and/or the Company are, or may become, liable to pay to any person or the court, including as security for the costs of any defendant, but does not include fees for services rendered to the Liquidator, their solicitors or agents. (c) "Proceedings" means "any proceedings in a court as contemplated in the Indemnity Purpose". The "Indemnity Purpose" means the purposes described in Schedule 1. Part of the relevant section of Schedule 1 is redacted. The part that is not redacted refers to commencing proceedings in the nature of the present proceeding. (d) The "Adverse Costs provision" in Schedule 1 is part of the "Indemnity Amount" provided for in that Schedule. The provisions relating to the "Indemnity Amount" (which go on for around five pages and include a description of "Indemnified Work") are completely redacted except for one line which reads "Adverse Cost provision $990,000". 12 The applicants submit that the provisions of the deed of indemnity are sufficient to ensure that any costs order in favour of the respondents can be met. The respondents resist this submission for, broadly, three reasons. 13 First, cl 9.1 of the deed gives the DCT power to terminate or suspend it at any time if they consider it to be in the interests of the Commonwealth to do so. No reasons need be given (cl 9.2) and such a decision is "final and binding on the parties" (such that the Liquidator promises not to seek review of the decision: cl 9.3). Termination is not to affect the DCT's liability under the deed in respect of expenses already incurred in compliance with it (cl 9.10). However, because liability to pay costs does not accrue until an order for costs is made (Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; 234 CLR 52 at [35]-[36] (Gleeson CJ, Gummow, Hayne and Crennan JJ)), Ms Erskine would not be able to call on any indemnity in relation to costs ordered against her if the deed were terminated before the costs order was made. 14 The applicants sought to limit the force of this point by referring to cl 9.5 of the deed of indemnity. Clause 9.5 is found under the heading "Termination by Parties for breach or on other grounds" and provides as follows. 9.5 A Party may terminate this Deed by written notice specifying: 9.5.1 if this Deed is terminated for a breach of its terms, a date not less than fourteen (14) days from expiry of the period specified in clause 9.6 (if the Party considers that the breach has not been waived, reasonably rectified, or being reasonably progressed to satisfactory resolution following the giving of the notice required by clause 9.6); and 9.5.2. in any other case, a date of not less than fourteen (14) days from the date that the notice is given. 15 The suggestion is that termination of the deed would require notice to be given by the DCT and Ms Erskine would undertake to inform the Court and the respondents immediately if such notice was received. An application for security for costs could be made at that time. Unless and until such notice was given, there would be no reason to doubt the availability of the indemnity. 16 The applicants' argument is unattractive. Rather than dealing with the question of security for costs now (at a time which the applicants themselves say is already late in the proceeding) it would leave that question, potentially, to be re-agitated closer to the hearing and at a time when adequate security may not be able to be provided. Further (and perhaps more fundamentally), it is far from clear that the notice requirement in cl 9.5 applies to a termination by the DCT under cl 9.1. Arguably, cl 9.5 is to be read with the heading that precedes it and is therefore concerned with termination in the circumstances contemplated by cl 9.4 (which involve expenses arising out of fraud, dishonesty, conflicts of interest, negligence and so on). Termination under cl 9.1 does not involve any "grounds". It is undesirable for questions of construction of this kind to be decided in the abstract and without hearing detailed argument from the parties to the deed. Unless the import of the deed is very clear, I do not think it appropriate to proceed on the basis that it assures the respondents that costs ordered in their favour would be met. 17 Secondly, the entirety of the deed of indemnity is not before the Court. A significant portion of the document is redacted. It is impossible to know whether the redacted portions contain an exception or qualification or some other provision that affects the scope of the indemnity. 18 In many instances, the location of the redacted portions suggests that it is unlikely that they contain anything of relevance to the present issues. However, that is not the case in relation to (at least) the several lines of text that have been redacted underneath the line in Schedule 1 identifying the "Adverse Cost provision"; and more broadly it is not appropriate to make assumptions about what is and is not contained in the redacted sections. Ordinarily, a party who relies on the effect of a document must tender the entire document. 19 On the morning of the hearing, the applicants tendered the deed of indemnity in unredacted form but sought to have it received on the basis that the unredacted version would not be made available to the respondents or their legal representatives. I rejected this tender. It was said from the bar table that the redacted sections of the deed are privileged and their disclosure to the respondents would give them a tactical advantage in the proceedings. I was not persuaded that it was appropriate to allow the applicants to maintain a claim of privilege over parts of the document while simultaneously relying on those parts to prove the effect of the document. I accept that the DCT (who was the party insisting on confidentiality) has sound reasons for insisting that the redacted parts of the deed of indemnity not be seen by the respondents. However, sticking to that position has consequences for the extent to which the deed can be relied on in the present application. 20 As senior counsel for the respondents pointed out, if the position is that the DCT will indemnify the applicants against an adverse costs order come what may, the complexities discussed above could be avoided by the DCT giving an undertaking to meet any costs order that is made against the applicants. No such undertaking has been proffered. 21 Thirdly, the deed of indemnity only protects Ms Erskine. It was submitted that, therefore, the deed would not answer a costs order made specifically against North Shore. 22 Generally, unsuccessful parties bear the costs liability jointly and severally: Royal v El Ali (No 3) [2016] FCA 1573 at [53] (Davies J). If the applicants fail, therefore, the ordinary expectation would be a costs order enforceable against either or both. Such an order would seem to be within the scope of the deed of indemnity, at least in so far as the terms of that deed are known. 23 The respondents submit that the applicants claim damages under distinct heads, representing losses separately incurred by North Shore and Ms Erskine. The losses alleged to have been suffered as a result of the former liquidator's reliance on what are said to be fraudulent representations (at FASOC [44]) are particularised as consisting of: (a) Loss of the opportunity to bring claims against Mr Haddad and his "associates". This is apparently a reference to the claims that the former liquidator was seeking to pursue, and which were compromised by the deed of settlement. These were claims under ss 588FB and 588FDA of the Corporations Act, which were maintainable by the liquidator but which, if successful, would result in an order for payment "to the company" under s 588FF. It is North Shore, not Ms Erskine, that suffered loss as a result of the claims no longer being maintainable. (b) Costs incurred by Ms Erskine in making an application to extend time under s 588FF(3)(b) of the Corporations Act, costs awarded against her in relation to that application, and costs incurred in investigating the circumstances in which the deed of release was executed. These were losses suffered by Ms Erskine. 24 Thus, it is submitted, there is a prospect that North Shore might fail and Ms Erskine succeed (or vice versa). It is further submitted that, because their claims are not closely connected, separate orders for costs might be made; and that, for this reason, an order for security is appropriate (relying on Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [27]-[28] (Brereton J) (Luna Park)). The effect of this submission is that the indemnity granted to Ms Erskine is not sufficient to protect the respondents' position because they might obtain an order for costs enforceable only against North Shore. 25 I reject this particular submission. First, the final relief sought includes damages (or equitable compensation) payable only to Ms Erskine (FASOC [50], and see prayer 2 of the Further Amended Originating Application). The other relief sought (a declaration that the deed of settlement has been rescinded) is sought by both applicants. The prospect of an outcome in which the Court considered making a costs order enforceable only against North Shore therefore seems slender. Secondly, Ms Erskine would face grave difficulty in contending for such an order in circumstances where (a) she, as liquidator, is responsible for North Shore having put the case that it puts and (b) she has resisted an order for security on the express basis that the indemnity granted to her under the deed of indemnity is available. 26 Despite rejecting this last submission, for reasons explained above I accept the respondents' broader argument that the deed of indemnity is not in itself a sufficient answer to the application for security for costs. On the current evidence, the deed of indemnity shows that there is some possibility of costs ordered against the applicants being covered by the DCT. Accepting Flick J's description of the issue as one of risk management, that is relevant to the exercise of discretion. However, in circumstances where the DCT has not chosen to make the position clear, it cannot be given significant weight.

The circumstances of the present case 27 The question becomes whether an order for security is appropriate in circumstances where: (a) the applicants, who it can be assumed would be jointly and severally liable for costs, are a company in liquidation (which is impecunious) and its liquidator, a natural person, as to whose personal financial resources there is no evidence; (b) the proceeding is being conducted by the applicants for the benefit of a third party (the DCT) and there is no doubt that that party has the resources to provide security in the amount sought; and (c) the application for security is brought somewhat late in the piece and after the incurring of significant costs (in that the originating application was filed on 21 September 2023, the pleadings have been amended twice, 72-74 Gordon has been reinstated, the parties have been ordered to file their evidence on the substantive issues, and (subject to any applications for leave to file further material) that evidence has been filed). 28 As to the first of these points, Brereton J in Luna Park at [27]-[28] referred to a line of cases in which it has been held that the presence of a plaintiff against whom security would normally be ordered should not be used to improve the defendant's position if there is also a plaintiff against whom security would not be ordered. This raises the question whether security would be appropriate if the only applicant were Ms Erskine suing in her capacity as liquidator. 29 Ms Erskine has gone into evidence but has said nothing as to her capacity to meet an order for costs. The respondents submit that an inference should therefore be drawn to the effect that her evidence on this point would not assist her. However, I do not regard this gap in the evidence as particularly meaningful in circumstances where the material filed in support of the application for security did not raise any issue as to Ms Erskine's own resources. 30 Some observations were made about the position of a liquidator, suing in their own name, by the New South Wales Court of Appeal in Green (as liquidator of Arimco Mining Lty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; 67 ACSR 105 (Hodgson, Basten and Campbell JJA) (Green). These observations are also relevant to the second of the circumstances mentioned above (litigation being conducted for the benefit of a third party). In Green, after reviewing the authorities, Hodgson JA said (at [45]-[46]): In my opinion, on the basis of this review of cases, and especially on the basis of the previous Court of Appeal decisions in [Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120] and [Melville v Craig Nowlan & Associates Pty Ltd [2002] NSWCA 32; 54 NSWLR 82], a court considering applications for security for costs against liquidators should not treat the matter as being entirely at large, but should have regard to guidelines, which I would express as follows: (1) Liquidators suing personally are generally to be treated in the same way as natural persons, so that, on the one hand, costs orders will be made against them if proceedings fail, and, on the other hand, security for costs may be ordered against them when the conditions set out in r 42.21 of the [Uniform Civil Procedure Rules 2005 (NSW) (UCPR)] are satisfied or (on appeal) there are "special circumstances" within r 51.50 of the UCPR. Although security for costs can be ordered (at first instance only) in other circumstances, this is not the usual or normal course; and it is relevant that, in order that security for costs be ordered in other circumstances on an appeal, where at general law security was more readily granted, "special circumstances" are required. It is to be noted also that mere inability to meet costs orders does not amount to special circumstances (Transglobal Capital Pty Ltd v Yolarno Pty Ltd (2004) 60 NSWLR 143; [2004] NSWCA 136) and thus does not of itself put an onus on an appellant to prove that an order for security would stultify the appeal. (2) Where the plaintiff is a company in liquidation, and not the liquidator, then security for costs will more readily be ordered, although the court's discretion is unfettered [Bell Wholesale Co Ltd v Gates Export Corp (No 2) (1984) 2 FCR 1 (Bell No 2)] and there is no presupposition in favour of granting security (Bryan E Fincott P/L v Eretta Pty Ltd (1987) 16 FCR 497 (Bryan)). However, the court will not refuse to order security on the ground that this will frustrate the litigation unless the company proves that those who stand behind the company and would benefit from the litigation are unable to provide security (Bell No 2). (3) Cases in which security for costs might be ordered against a natural person or a liquidator outside those provided for in r 42.21 of the UCPR include cases where (in addition to proof that there is reason to believe the plaintiff will be unable to pay the defendant's costs) the plaintiff has dissipated assets and/or has not paid previous costs orders (especially if those costs orders were in favour of the defendant) and/or brings a weak case to harass the defendant and/or brings a case for the benefit of others (albeit not solely for their benefit as apparently required by r 42.21(1)(e) of the UCPR). There is of course a sense in which a liquidator is suing for the benefit of others; but what was decided in [Cowell v Taylor (1885) 31 Ch D 34] and [Re Strand Wood Co Ltd [1904] 2 Ch 1] was that this was not of itself sufficient to justify security for costs in relation to a person who has the statutory right and duty to do this. In my opinion, it would be an oversimplification to say that underlying these guidelines is a broader principle that defendants should be protected against being unable to collect costs ordered against plaintiffs unless this would stultify the litigation. Certainly, these are relevant considerations; but in my opinion also relevant are the considerations that there should not be undue inhibitions on less wealthy persons from seeking vindication of their rights against more wealthy persons, and that there could be such inhibitions if it was in every case open to defendants to apply for security for costs on the basis of some evidence (or even on the basis of fishing notices to produce) suggesting inability to pay costs, and to claim that security should be given unless the plaintiff can prove it would stultify the litigation. In my opinion these considerations make it desirable that guidelines be adhered to, even though the question is ultimately for the court's discretion. 31 Turning to the relevance of the circumstance that someone other than the plaintiff stands to gain from the litigation, Hodgson JA said (at [50]-[51]): In this regard, I note also that, in cases where both a liquidator and the company in liquidation are plaintiffs, security for costs will generally not be ordered against the company, assuming the claims coincide or overlap to an extent such that failure would attract an order for costs against the natural plaintiff: Maples v Hughes [2002] NSWSC 617 at [14]-[15]. However, in my opinion a court should be readier to order security for costs where the non-party who stands to benefit from the proceedings is not a person interested in having rights vindicated, as would be a shareholder or creditor of a plaintiff corporation, but rather is a person whose interest is solely to make a commercial profit from funding the litigation. Although litigation funding is not against public policy (Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386; 229 ALR 58; [2006] HCA 41 at [87]-[95]), the court system is primarily there to enable rights to be vindicated rather than commercial profits to be made; and in my opinion, courts should be particularly concerned that persons whose involvement in litigation is purely for commercial profit should not avoid responsibility for costs if the litigation fails. 32 Basten JA, while differing in part as to the result, agreed with Hodgson JA as to the general principles (at [65]). 33 Campbell JA expressed agreement with Hodgson JA and added the following "remarks" (at [83]-[84]): The background against which courts developed a policy of usually not requiring liquidators to provide security for costs when suing in their own name included: (a) The liquidator is performing a public function under statutory authority. That public function provided a reason for not according as much weight as would be accorded in litigation purely between private individuals and of the type that fell within r 42.21(1) of [the UCPR] to the private interest of the person sued to have assurance that an order for costs would be paid. (b) There have always been provisions such as s 545 of [the Corporations Act], that enable a liquidator to not sue if not satisfied that he or she is properly funded. That fact, combined with the potential personal liability of the liquidator for costs, and a measure of public control over the qualifications of persons who are eligible to be liquidators (for example, s 1282 of the Corporations Act), in itself has a tendency (which might not be realised in every case) for liquidators not to bring litigation unless they were satisfied that they could pay the costs if they were to lose. (c) That the liquidator is exposing all his or her assets to the risk of an unfavourable costs order puts the litigant into a situation somewhat analogous to a natural person plaintiff who is suing for his or her own benefit. (d) The liquidator's personal gain from running the litigation consists only of professional costs and disbursements, which are themselves subject to a measure of public control, either by the court or creditors: ss 473, 499 of the Corporations Act. (e) Even when the liquidator is being funded by a creditor, in circumstances where the creditor is entitled to a preferential dividend under s 564 of the Corporations Act by reason of having funded the litigation, the most that the creditor can recover for its own benefit is a return of its outlay for costs, and a 100% dividend on its proved debt. A creditor who funds the litigation in those circumstances is thus doing nothing more than protecting its own legal right to be paid its debt by the company. That background is departed from if the liquidator is being funded by a creditor who is in commercial substance a funder who has taken assignments of debts for a fraction of the face value, as happened in Jarbin Pty Ltd v Clutha Ltd (in liq) (2004) 180 FLR 393; 208 ALR 242; 22 ACLC 550; [2004] NSWSC 28 (Jarbin). It is likewise departed from when the liquidator is being funded by a commercial funder who stands to receive a proportion of the proceeds of the litigation. In those situations, there is not the same reason that there is in the ordinary situation of a liquidator suing to regard the inherent power of the court to order security as not being enlivened. 34 The provisions of the UCPR cited by Hodgson JA at [45] (which his Honour set out at [21]) were somewhat more prescriptive than s 56 of the Federal Court Act as to the circumstances in which security for costs may be ordered. However, this does not undermine the force of his Honour's point that a liquidator suing personally is "generally" to be treated in the same way as a natural person. Usually, in the case of a natural person, poverty is not a bar to commencing and maintaining proceedings. The considerations listed by Campbell JA at [83] indicate the rationale for taking this position. 35 Green has been referred to without disapproval in this Court. It has most often been cited for what it says about the difference between a creditor and a litigation funder (which I mention further below). However, the statements at [45] and [83] were referred to in All Class Insurance at [55] as explaining why "it is uncommon for security for costs to be ordered against a liquidator when proceedings are brought in the liquidator's name". 36 It may sometimes be the case that a liquidator commences proceedings in the hope of generating funds from which their own fees can be paid. However, usually at least, a liquidator sues for the benefit of the creditors who will share in the proceeds of the winding up of the company. That is the case here. Here, there is one creditor (the DCT) who stands to receive the bulk of any pecuniary return that is derived from the proceeding, and that creditor is taking an interest to the extent of (potentially) indemnifying the liquidator. The most that the DCT can recover for their own benefit is the amount of their proved debt (together with a return of their outlay for costs). The DCT is thus seeking to protect the right of the Commonwealth to be paid amounts owed to it by way of tax, not to earn a commercial return. The ease with which (I infer) the DCT could provide security for costs might be significant if the relevant factors were otherwise finely balanced. However, the position of the DCT as a creditor interested in the outcome of the proceeding is neutral so far as security for costs is concerned. 37 The third of the points mentioned above (delay in bringing the application for security) weighs against the making of the order. All Class Insurance at [43] (set out above) is one of several decisions in this Court that affirm the relevance of any delay in seeking security to the exercise of the discretion. It is easy to see why this is so. 38 The delay in this case is not egregious. The respondents' solicitors first raised the question whether the applicants had the capacity to meet a costs order in a letter to Ms Erskine dated 11 December 2023. The response was to the effect that Ms Erskine had the benefit of an indemnity. Letters continued to be exchanged until January 2024 and there was then a hiatus until 18 March 2024. Consent orders made on 22 March 2024 provided for any application for security to be filed by 5 April 2024 and the interlocutory application was filed on that day. The time that elapsed before a formal application was made for security is thus explained to some extent by the applicants asserting the existence of an indemnity and the respondents seeking to inquire into the terms of that indemnity. However, in fairness to the applicants, if security for costs was to be sought, the issue should have been raised earlier and brought to a head more quickly. Significant effort had been expended on the case by the time the interlocutory application was filed. Aside from amendments to the pleadings, the parties' evidence was due for filing in March 2024 (and, as noted above, evidence was filed) and the matter had been listed for case management on 22 March "with a view to the allocation of a hearing date". 39 I note that it was also submitted for the respondents that the applicants' substantive case is "on its face" a difficult one. That submission was not developed in any detail. It does appear to be correct that the applicants' case is one of fraud and does not get anywhere unless they can prove outright dishonesty on the part of Mr Haddad. However, I was taken to an affidavit filed in the substantive case (deposed by the purported author of a sales appraisal that is alleged to be bogus) which indicates that at least one of the allegations of fraud has substance. I am not persuaded that the applicants' substantive case has obvious infirmities that would justify an order for security for costs. 40 For these reasons, the interlocutory application will be refused. 41 Both sides sought their costs of the interlocutory application. That suggests agreement that costs can be awarded now and should not be reserved or become costs in the cause. There is no reason why the applicants, having succeeded, should not have their costs of the interlocutory application. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Kennett.