Nova Supply Chain Finance Pty Limited v Active Capital Reinsurance Limited

Delivered ex tempore, revised from transcript

1. This is an interlocutory application dated 21 February 2025 seeking orders that the applicant (Nova) provide security for costs to the second and third respondents and that Nova's amended statement of claim be struck out.
2. Nova's evidence suggests that the essence of its case is as follows:

(a) Nova conducts a business of facilitating or undertaking trade or supply chain financing to other businesses;

(b) in February 2020, the second respondent (Mr McNally) told Mr Andrews of Nova about surety bonds by a third party, which could be made available to Nova for a premium or fee to protect Nova from loss;

(c) in December 2020, Mr Andrews introduced Mr McNally to the Barbera family, which controlled M&R Farms Pty Limited;

(d) on 3 March 2021, Mr McNally provided to Nova a Deed of Corporate Indemnity said to be on the instructions of M&R Farms Pty Limited with a limit of $1 million, apparently executed by Active Capital Reinsurance Limited (ARC). ARC was originally the first respondent to these proceedings, but the matter was discontinued against ARC after it emerged that ARC stated that it had never issued a surety bond or similar document in favour of Nova;

(e) on 1 September 2021, Nova entered into a supply chain finance agreement with Bundaberg Farming Co Pty Limited (Bundaberg) which had, by then, acquired M&R Farms Pty Limited;

(f) on 31 January 2022, Mr McNally provided a second surety bond, apparently executed by ARC, but now said to be issued on the instructions of Bundaberg with a limit of $1.5 million;

(g) from 13 December 2021 to 2 August 2023, Nova paid various debts incurred by Bundaberg totalling $2,126,733.30, in respect of which Nova was repaid various amounts leading to a net amount due by Bundaberg to Nova of $1,329,479.20. That amount is a loss to Nova, together with amounts totalling $74,775 which the third respondent (Insured Creativity) charged Nova for the provision of the two surety bonds;

(h) when Nova sought to call on the second surety bond, Mr McNally falsely represented, on 30 October 2023, to Nova that ARC had accepted liability under the surety bond and similar representations were allegedly made in June 2023 and March 2024, although I do not see how those alleged misrepresentations caused Nova any significant loss.

1. Nova's evidence suggests that its real complaint is that Mr McNally and Insured Creativity falsely represented that the two surety bonds were valid and effective, and that they would not have entered into and continued to perform the transactions with Bundaberg if that representation had not been made. That alleged representation seems to be one said to arise by implication from Mr McNally and Insured Creativity procuring the two surety bonds purportedly from ARC and providing them to Nova.
2. The amended statement of claim pleads misleading and deceptive conduct under the Australian Consumer Law and also the tort of deceit. Oddly, the representation as to effectiveness of the surety bonds is limited to the tort of deceit (not the claims under the Australian Consumer Law), and even then, it relates only to the bond dated 31 January 2022, when the March 2021 bond would seem to be the relevant one to have been relied on in entry into the supply chain finance agreement on 1 September 2021 and in making some of the earlier payments to Bundaberg's creditors. Further, although Nova's written submissions on this interlocutory application contend that Mr McNally was the author of the two surety bonds (together with earlier drafts), no such allegation is made in the amended statement of claim.
3. The Australian Consumer Law claims are odd in not alleging any representation concerning the effectiveness or otherwise of the security bonds and in focusing on alleged representations made by Mr McNally and Insured Creativity from 30 October 2023 onwards, by which time the alleged loss had been incurred. The claimed losses do refer to the payments of $74,775 by Nova to Insured Creativity, but oddly do not refer to the net amount of $1,329,479.20 paid by Nova to Bundaberg's creditors which it has been unable to recover.
4. After some discussion with Mr Hyde of counsel, who appeared for Nova (and who does not appear to have drafted or settled the pleading), Nova agreed that the amended statement of claim should be redrafted. In my view, it is appropriate to strike out that pleading with leave to re-plead.
5. As to the application for security for costs, Mr McNally and Insured Creativity seek security for costs in the amount of $404,000 pursuant to s 1335 of the Corporations Act 2001 (Cth) on the basis that it appears that there is reason to believe that Nova will be unable to pay their costs if successful in their defence. Nova accepts that it is impecunious in that sense, but relies on the court's discretion not to award costs, on the basis that its impecuniosity was caused by the alleged wrongful conduct: see All Class Insurance Brokers Pty Limited (in liq) v Chubb Insurance Australia Limited [2020] FCA 840 at [43] (Allsop CJ).
6. The financial statements of Nova for the last four years show the following:

(a) in the year ended 30 June 2021, net assets of $386,844 and net profit after tax of $390,519;

(b) in the year ended 30 June 2022, net assets of $531,369 and net profit after tax of $144,525;

(c) in the year ended 30 June 2023, net assets of $435,416, a loss after tax of $95,833; and

(d) in the year ended 30 June 2024, net assets of negative $812,541.50 and a loss of $1,251,104.10.

1. It should be noted that the accounts for the year ended 30 June 2024 are management accounts which have not yet been signed by the directors or by the company's accountants, which is not an unusual phenomenon given the delays often experienced by proprietary limited companies in the final preparation of their annual accounts. Bad debts are recorded as $1,329,479.20 in the year ended 30 July 2024, being the same figure as shown in Nova's ledger for its account with Bundaberg as being owed by Bundaberg but not recovered. If it were not for those bad debts, Nova would have made a profit of $90,824.45.
2. The respondents submit that the proceedings are for the benefit of investors in Nova, being a special purpose vehicle, primarily for conducting business with Bundaberg, rather than Nova itself, and there is no evidence that those investors are unable to provide security. However, in my view, the proceedings have been brought for Nova's benefit, that being the entity which will be entitled to any judgment. I do not regard it as material that its shareholders may ultimately benefit from the litigation, which is true of any proceedings brought by a company limited by shares rather than by guarantee. The respondents' submission seems to be directed to a submission that Nova does not make, namely that an order for security would stultify the proceedings.
3. In my view, the financial statements for Nova demonstrate that if it were not for the alleged wrongful conduct of Mr McNally and Insured Creativity, there would not be sufficient reason to believe that Nova would be unable to pay their costs if they are successful in their defence. Further, Nova has provided prima facie evidence of that wrongful conduct and of its loss. The fact that the amended statement of claim is too muddled to express those claims with sufficient clarity is not material to the exercise of discretion in relation to security for costs.
4. Accordingly, in my view, Nova has demonstrated that its impecuniosity in the sense required under s 1335 was caused by the alleged wrongful conduct by the respondents, as to which there is prima facie evidence before me. In those circumstances, it would not be appropriate to order that Nova provide security for the respondents' costs.
5. As to costs, each party has achieved success on the interlocutory application in approximately equal measure. In those circumstances, it is appropriate that each party pay its own costs of the interlocutory application.

I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.