Consideration
19 As the consent of the then applicant to the order of 21 December 2009 in effect acknowledges, the criteria for making an order, under s 56 of the FCA Act and O 28 r 3 of the Federal Court Rules 1979 (Cth), then existed. There is no submission now to the contrary. The question for the Court is whether the discretion under s 56 should now be exercised - having regard to the matters I have mentioned and the other discretionary considerations raised by the parties - so as to vary that order.
20 As I have indicated, I am satisfied that there is now a significant change in the circumstances of the applicants. It is that, in my view, there is a real prospect that the applicants will be unable to continue to conduct the proceeding if the order for security for costs is not varied. Plainly, the proceeding is to take longer than the original estimate of the applicants, and has required considerably more work beyond that anticipated by the then applicant and the legal advisers in December 2009. That work has also significantly eaten into the time for the hearing. The circumstances in which that has come about are set out above. As I indicated, it is not a matter of blaming either the applicants or the respondents for that circumstance. There are reasons for it. If the Court had adjudicated on the security for costs application in December 2009, it would have considered the likely preparation and hearing time and the resources available to the applicant to decide whether any order for security for costs might have stultified the proceeding, as well as other matters. It was not called upon to do so. Its assessment of that issue is likely to have been different because the extent of the work required of the applicants and the time and cost involved is now apparently significantly greater than they then estimated. The available resources to meet those costs do not appear to have changed materially.
21 Presently, the parties have agreed upon the deferment of evidence upon a discreet question as to damages, and the submissions in relation to it. That has shortened the hearing to some degree. There remains, subject to that question, preparation for the closing submissions and the submissions themselves. Although the information about the applicants' available resources is limited, and is not ideal, I am satisfied that their resources are now so stretched that, without a variation of the security for costs order, they are likely to be unable to continue to be represented in the proceeding. Given its complexity and the stage of the proceeding, I am not confident that if they became self-represented, they could usefully contribute to the final stage of the proceeding. I noted that the evidence as to their present resources is not in ideal form. It is by affidavit of a solicitor acting for them. However, I am mindful of the financial position of the applicants (the then applicant and its directors - now the second and third applicants) in December 2009. There is nothing to suggest their financial position has changed, except adversely by the funding of this proceeding to date. The affidavit of a solicitor for the respondents tends to confirm that assessment.
22 On the other hand, the Court can vary the security for costs order without greatly impairing the resources available to the respondents to recover their costs if the action is unsuccessful. It may do so by varying the amount of the security from $200,000.00 to $100,000.00 and by discharging the requirement of the third applicant and her husband Karl Donnelly to provide a bank guarantee in the sum of $100,000.00. The evidence filed in December 2009 indicates that that bank guarantee was apparently able to be offered by reason of real property held jointly by him and mortgaged to the Commonwealth Bank of Australia (in an earlier affidavit called the Timbertop Property) and another property held by Karl Donnelly also mortgaged to that bank (called the Bonogin Property). Each of those properties then, and now, is mortgaged to support loans by the bank to support the borrowing of the first applicant from the bank. There was said to be a significant residual equity in them. The first applicant, through its directors, proffered a further mortgage over the Timbertop Property by way of security. I infer that the security for costs was provided in that context.
23 The variation of the security for costs order which I propose to make will not, in my assessment, significantly reduce the assets of the applicants available to meet any costs order. Both the Timbertop Property and the Bonogin Property presently are mortgaged to secure borrowing of the first applicant from the bank. In the relatively short period until the proceeding is resolved, that position is unlikely to change. The addition of the second and third applicants exposes them directly to an order for costs; even though each is only recently a party, as I indicated in the course of submissions, any costs incurred by the respondents since they have been parties are likely to be recoverable against all applicants (if the claims are unsuccessful) and I would be disposed in any event to ensure that costs awarded against the third applicant would extend sufficiently to cover the amount of the bank guarantee. Any costs order may well extend beyond that. I also require the second and third applicants to undertake not to dispose of any interest in real estate until judgment as a condition of varying the security for costs order. To the extent that the third applicant has an interest in the Bonogin Property, that undertaking would extend to that property. What will be lost to the respondents in the short term is the immediate access to the bank guarantee. In the circumstances, I think that is really a timing issue. That guarantee does not create any priority over other unsecured creditors of any of the respondents. Ultimately, their assets will be unchanged and recourse to them will be available to support any order for costs. If their claims are unsuccessful and costs are ordered against them, the Court could fix a preliminary quantum for costs at least to the extent of the bank guarantee so that steps to recover it would not be delayed by taxation. The immediate impact upon any costs recovery, if the claim is unsuccessful, is that the $100,000.00 guarantee will not be available once costs are taxed. If the claim is unsuccessful, the process for recovering costs will be more prolonged and complex. But, as I assume the bank guarantee was provided by some arrangement between their bank and the third applicant (and Karl Donnelly), I infer there is ultimately equity in those two properties to support it. There is no reason why that position will have altered in any material way. The properties are mortgaged, so the bank itself will be monitoring the borrowings. I also have not overlooked the evidence that, relatively recently, Karl Donnelly became the sole registered proprietor of what is apparently the home of himself and the third applicant. I infer that they arranged for him to do so to remove the family home from exposure to liability in the event that the first respondent became insolvent, so that its creditors could not pursue that property. I do not regard that arrangement as sinister; it is a not uncommon step taken in such circumstances. As I do not think that any exposure to costs of any of the respondents would - except in the sense I have referred to - be less likely to be met if the claim is unsuccessful, whilst I have had regard to it, it does not lead me to the view, either alone or in the light of all the matters I was asked to consider, that I should not vary the security for costs order. Apart from the immediate payment of the guarantee, the respondents would have no greater and no lesser access to that asset (or Karl Donnelly's assets generally) than they presently have.
24 It is appropriate to note other matters which I have considered when deciding how to exercise the discretion to vary the order for security for costs. They are discussed in many cases: see generally, Stephen Colbran, Security for Costs (1993) Ch 14 at 233-272. They include the financial position of the applicants, and in the way discussed about that of those standing behind them. They include the fact that the claim, I am satisfied, has been brought in good faith. I have considered the respective prospects of success of the parties; as I indicated in submissions, I have not given that matter weight in favour or against exercising the discretion as its outcome will depend to some degree on my views of the reliability of several of the witnesses including the second and third applicant and I have not yet formed a firm view on those questions. Nor do I have a firm view about the likely outcome of the proceedings in any respect. Although a common consideration is whether the applicants' financial position is attributable to the respondents' conduct, as I do not have a firm view about the prospects of either the applicants or the respondents in the proceeding that matter has not weighed in the scales. The first applicant clearly has significant indebtedness to its bank, and one of the live issues in the case touches upon whether that is a consequence of the choices made by the first applicant about how it should conduct its business. In the circumstances, since about mid 2009, I consider that the applicants and the respondents have conscientiously conducted the proceeding in a timely way. I have taken into account the burden on the respondents of conducting the proceeding. It is very substantial - in terms of time, the commitment of their resources, and of course in terms of cost.
25 In all the circumstances, I have come to the view that I should vary the order for security for costs to the extent of varying the amount to $100,000.00 and releasing the third applicant and Karl Donnelly from the provision of the bank guarantee. The respondents will retain the benefit of the balance of the security for costs. As I see it, that will enable the applicants prospectively to continue to operate their business and to continue prospectively to conduct the proceeding to its completion, other than in respect of the issue which has been deferred. Those costs, having regard to the steps now required, will be of relatively small proportion compared to the costs incurred by the respondents to date. Nevertheless, in respect of those extensive costs, as I have noted above, the respondents will, by the order I propose, lose immediate access to the bank guarantee.
26 The agreed order of 21 December 2009 included a term that the respondents would not subsequently seek an order for security for costs. As that agreement was part of the "package" then agreed, the variation of the order should include them being released from that term. Moreover, the release from that term will enable the respondents to have a further application for security for costs if there is a material change in circumstances, either different from the course of the proceedings as I have understood them to be, or if the respondents learn that the financial position of the applicants is materially different from that which I understand it to be.
27 The second and third respondents have given appropriate written undertakings in terms which reflect the requirement referred to above.
28 In the circumstances, I order that:
Upon the undertaking of the applicants Lynda Campbell and Elizabeth Campbell given in their personal capacity and as directors of the applicant Pampered Paws Connection Pty Ltd that they will not sell, transfer or otherwise dispose of any interest in real property in their names or either of their names or in the name of Pampered Paws Connection Pty Ltd without giving 21 days' notice thereof to the respondents by notice in writing to be given to Donaldson Walsh Lawyers at Kings Chambers, 320 King William Street, Adelaide, other than by charging, or extending the charge on, any such property for the purpose of procuring funds to enable them to continue to conduct this proceeding or for the purpose of securing funds to enable the business of Pampered Paws Connection Pty Ltd to be conducted:
1. The order made on 21 December 2009 directing Pampered Paws Connection Pty Ltd to provide security for costs in the amount and in the manner expressed in that order be varied by substituting for the sum of $200,000.00 the sum of $100,000.00 and by discharging the requirement that Lynda Campbell and Karl Donnelly provide a bank guarantee in the sum of $100,000.00 and by renumbering paragraphs 1.2 and 1.3 as paragraphs 1.1 and 1.2 respectively.
2. In the event that the respondents are given any notice referred to in the undertaking hereby given, they have liberty to apply for any further order or orders they may seek in relation to security for costs.
3. The respondents be released from their undertaking recorded in the recital to the order made on 21 December 2009.
I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.