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.