Pegasus Gold Inc v Bateman Project Engineering

Is BKK entitled to security for costs from PGA? 9 PGA is indisputably insolvent. On 12 December 1997 its directors resolved that the company was insolvent and elected to appoint Peter Ivan Felix Geroff and Gregory Michael Moloney as administrators pursuant to Part 5.3A of the Corporations Law. On 1 May 1998 PGA and the administrators executed a Deed of Company Arrangement under the administration of Mr Geroff and Mr Moloney. The Deed of Arrangement contains provisions concerning the funding of PGA's action against BKK. Clause 7.1 of the deed provides: 7.1 Preconditions to Distributions The Administrator need not make any distribution to Admitted Creditors pursuant to this clause unless, immediately before the distribution is made, the Administrator is satisfied that following the distribution the Company shall have sufficient funds: (a) …… (b) …… (c) to fund the prosecution of the BKK Action.

10 Clause 8.4(e) of the Deed provides: "(BKK Action) An Administrator may prosecute, settle, assign or take any step in relation to the BKK Action as the Administrator in his absolute discretion sees fit. All costs and expenses relating to the BKK Action including any cost orders made against the Company or an Administrator shall be paid from the Available Property prior to any payment to Admitted Creditors under clause 7." 11 In an affidavit dated 8 April 1999, Mr Geroff referred to the above clauses which, he said, permitted him to "earmark funds to pay any cost order made against Pegasus in this action". To this end, he had determined to earmark a total of $1 million to satisfy any order for costs that might be made against PGA. These funds, he said, would only be used only to pay any costs order made against PGA in this action, and would be preserved from distribution to creditors or from any other use, until this action is concluded. If the proceedings are concluded in PGA's favour the funds will no longer be treated in this manner. Mr Geroff indicated his preparedness to earmark further funds if he considers that costs orders for amounts exceeding $1 million may be made against PGA.

Power to order Security for Costs 12 The power to order security for costs is set out in s 56(1) of the Federal Court of Australia Act 1976 (Cth) ("the FCA Act"). That section provides as follows: "56 (1) The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him or her." 13 Subsection 56(5) provides: "(5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security". 14 Order 28 rule 3 of the Federal Court Rules enables the Court to order an applicant to give security for costs in situations where the applicant is ordinarily resident outside Australia or where the applicant is suing, not for his own benefit, but for the benefit of some other person and there is reason to believe that the applicant will be unable to pay the costs of the respondent if ordered to do so. It has been held that the discretion of the court to order security for costs under s 56 of the FCA Act is not limited to the circumstances set out in Order 28 rule 3: Bell Wholesale Co Pty Limited v Gates Export Corporation (1984) 2FCR 1. 15 It is relevant also to refer to s 1335(1) of the Corporations Law, which provides as follows: "Costs 1335 (1) [Court may require security] Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given." 16 Mr Gee QC, who appeared for PGA on the application, urged that an order for security for costs should not be made against his client as it has not been shown that PGA will be unable to pay BKK's costs if BKK is successful in the proceedings. This is a threshold test which must be satisfied in all cases, Mr Gee submits, and the onus is upon BKK to establish it. Mr Geroff's evidence makes it clear that funds are and will continue to be available to meet any order for costs made in favour of BKK against PGA. Therefore BKK has failed to show that PGA will be unable to meet a costs order against it. The failure of BKK to meet this threshold test means that no order for security should be made. 17 Mr Gee's overall submission is indisputably correct in relation to applications for security for costs made pursuant to s 1335 of the Corporations Law. But no such restriction is to be found in the terms of s 56(1) of the FCA Act which, on its face, confers an unfettered discretion to order security for costs. The cases referred to by Mr Gee as supporting the proposition that there is an overall threshold test, as suggested by him, are all based on legislative provisions which mirror the terms of s 1335. There is no case, so far as I am aware, which has sought to impose such a restriction upon the apparently open-ended discretion conferred by s 56. Indeed there is a great deal of authority to the contrary . The discretion is clearly intended to be used to accommodate to the individual circumstances of a wide range of cases coming before the Court. It is expected that relevant considerations will vary on a case by case basis, as will the weight to be accorded to individual considerations (See eg Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509 and K P Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196 - 197). 18 I accordingly reject the proposition that there is a 'threshold test' which needs to be met before an order for security for costs can be made under s 56(1). Nevertheless, Mr Geroff's evidence raises considerations which are relevant to be taken into account in the exercise of the Court's discretion. For if, as Mr Gee suggests is the substance of Mr Geroff's evidence, the necessary funds will be available in any event to meet BKK's potential costs claims against PGA, one might question whether there is any basis for ordering that security be given. 19 However, Mr McDougall QC, who appeared for BKK on this application, pointed out that Mr Geroff's evidence does not go thus far. The earmarking of PGA funds in order to meet potential costs liabilities might provide protection to BKK during the life of the current Deed of Company Arrangement, but the future of this Deed is by no means certain. The Deed may be varied or the administration may be terminated by PGA's creditors. Moreover, as Mr Geroff himself reported to creditors on 1 April 1999, it is proposed that the Deed be terminated on the occurrence of one of a number of events (which do not, so far as I can ascertain, relate to this litigation) and that PGA will then be placed into liquidation. In that event, any protection for BKK arising from the matters referred to by Mr Geroff would, at best, be tenuous. 20 In my view a strong prima facie case has thus been made out for ordering that PGA provide security to meet BKK's costs. 21 Other discretionary considerations have been referred to. I shall discuss them but briefly as they do not, in my opinion, detract from BKK's prima facie entitlement to obtain an order for security for costs. A relevant consideration is whether PGA's impecuniosity is attributable to the actions of BKK. It is the applicants' claim in these proceedings that the financial problems of all three applicants is the direct result of BKK's negligence and its other breaches. On the other hand, as Mr McDougall points out, this factor on its own would normally not be sufficient to defeat an application for security for costs. Some additional feature would normally be required, such as the fact that the defence was unmeritorious, that an order for security might stifle the plaintiff's claim, or that there has been inordinate delay in seeking security for costs. None of these factors appear to be present in this case, notwithstanding a suggestion from Mr Gee that there was excessive delay in the making of this application. In this regard I note that the application has been foreshadowed for a long time. It was mentioned in Mr Geroff's report to creditors dated 1 April 1999. Nor is there any suggestion that PGA's provision of security for costs would in any way affect its ability to continue with this litigation. To the contrary, PGA's principal argument on the security issue, as already mentioned, is that BKK's position as to costs is already adequately protected without the need for security to be given. 22 In my opinion ample reason has been shown to support the making of an order for security for costs in this case. No contrary considerations of any substance have been demonstrated. Accordingly, I propose to order that PGA provide security to meet BKK's cost of these proceedings in an amount and in a form to be determined by the Registrar.

Is Svedala Entitled to Security for Costs from BKK? 23 On 1 December 1999 BKK's solicitor wrote to Svedala's solicitor in the following terms: "We refer to our recent exchange of correspondence regarding security for costs. For the purposes of Svedala's Notice of Motion for security for costs only, BKK is willing to admit the following: Irrespective of the success or failure of the Applicants' actions against BKK and on the basis that BKK are unsuccessful in their Cross Claim against Svedala, BKK (whether jointly or severally) would be unable to satisfy any costs order which may be made against any one or more of them in favour of Svedala. The admission in paragraph 1 is not to be taken as an admission of any other fact or matter, and particularly neither an admission that the BKK parties are insolvent; nor an admission that Svedala is entitled to security for costs. 3. The hearing of Svedala's Notice of Motion for security for costs will proceed on the admission in paragraph 1." 24 The concession made in this letter forms the basis for Svedala's claim that BKK provide security for its costs. It demonstrates, in my view, a solid foundation for the making of such an order. Nor, in Svedala's case, are there any significant discretionary considerations to the contrary. It cannot for example be suggested that BKK's inability to pay Svedala's costs is in any way attributable to Svedala's actions or breaches. Accordingly, I propose to order that BKK provide security for Svedala's costs in an amount and in a form to be determined by the Registrar.

Is BKK entitled to security for costs from the applicants in relation to any costs it may be ordered to pay to Svedala? 25 This was, in many respects, the most contentious issue in the proceedings relating to security for costs. The position was complicated by the fact that, during the same proceedings, I gave leave to BKK to file and serve five further cross-claims in the proceedings. In a general sense, these cross-claims raise issues not dissimilar to those raised by BKK in its cross-claim against Svedala. Given the concession made by BKK's solicitors as to its inability to satisfy a costs order in favour of Svedala, it is likely that further applications for security for costs will be received from one or more of these additional cross-respondents. Mr McDougall concedes that this is a relevant issue under this head. The passing on to the applicants of a potential cost liability from BKK to Svedala may be very different from passing on the potential liability of BKK to six separate cross-respondents. Accordingly, if I were otherwise inclined to order that the security to be provided by the applicants should include amounts BKK might be ordered to pay to Svedala, I would adjourn this part of BKK's application to a time when the extent of any additional costs liability can be ascertained. 26 Mr McDougall concedes that if the operative provision were s 1335 of the Corporations Law, there would be no power in the court to make the order presently sought, as BKK's potential costs liability to Svedala under the cross-claim could not be described as BKK's costs in "defence" of the proceedings commenced by the applicants. As Drummond J said in Southern Cross Airlines Holdings Ltd (in liquidation) v Arthur Anderson & Co & Ors (Drummond J, 6 August 1997, unreported). "It cannot be within the power of a respondent, by taking action against third parties in order to advance its own interests, to create a situation in which the Court's jurisdiction under section 1335 the Corporations Law to order security is enlivened, when that would not be the case if the respondent claiming security for its defence costs had not chosen to take such third-party action. This consideration is also relevant when a decision has to be made as to whether to order security under section 56 of the Federal Court of Australia Act." 27 Mr McDougall relies upon the fact that s 56 (1) of the FCA Act contains no restriction similar to that contained in s 1335 of the Corporations Law. If BKK were to successfully defend the proceedings commenced by the applicants, it would, by necessity, lose its case against Svedala. In that event, the court would have power to order the applicants to pay BKK's costs, including any costs it was liable to pay to Svedala. Alternatively the court might order the applicants to pay Svedala's costs directly. In either event, Svedala's costs are, within the terms of s 56(1) of the FCA Act, costs that may be awarded against the applicants. 28 The applicants do not dispute that the Court has power to make the order presently sought by BKK. However they urge that the consideration which creates a bar under s 1335 of the Corporations Law operates as a highly significant discretionary consideration against the making of such an order. As McPherson J said in Bruce Pie & Sons Pty Ltd v KH Mainwaring, English and Peldan [1985] 1 Qd R 401 at 403 - 409: "Mr Harrison QC makes the point that the assessment evidently includes the cost of the defendants' proceedings against the third parties, and that the defendants are not entitled to security in respect of those costs. Again there appears to be no reported authority in point. As a matter of principle, however, it is not easy to see why the plaintiff should be required to provide security for the costs of proceedings by the defendants against third parties. It is true that, apart from the plaintiff's act in instituting the action, there would be no third party proceedings. But, as a matter both of history and substance, such proceedings really represent a separate action brought by the defendant which, for reasons of convenience, are allowed to be combined with the principal action and its trial. As regards those proceedings the defendant is in the position of a plaintiff and as such is not entitled to security for costs." 29 I can only echo the views expressed by both Drummond and McPherson JJ. BKK's cross-claim against Svedala is a separate action which, as a matter of convenience, BKK has chosen to join with the proceedings commenced by the applicants. That is indisputably the most efficient way of conducting the litigation. But it does not affect the essential nature of the cross-claim, which is a separate claim pursued by BKK against a party independent of the applicants. 30 It is possible in exceptional circumstances that an order such as that which is sought here might be justified. But in my view special considerations would need to be shown. No such circumstances have been demonstrated here. In my view the security for costs which BKK is entitled to obtain from the applicants should not include security for any costs that BKK might be liable to pay to Svedala. 31 The parties have agreed that, should I make an order in relation to security for costs, the amount and form of security should be determined by the Registrar. No stay has been sought in the meantime. To the contrary, all parties are concerned to maintain their momentum in advancing this complex piece of litigation towards an eventual hearing. 32 No submissions were sought or made as to the costs of these applications. Svedala, PGI and PGC have succeeded in all the matters raised by them. Both BKK and PGA have had only partial success. In these circumstances I think it inappropriate to make an order for costs in the absence of submissions from the parties. Various other matters in the litigation have been adjourned until February 2000. In the event that the parties cannot agree on an appropriate costs order the matter can be the subject of submissions on that occasion. 33 The formal orders I proposed to make are as follows:

1. The applicants provide security for the respondents' costs of the proceedings, excluding any costs that the respondents may be ordered to pay to the cross-respondent.
2. The cross-claimants provide security for the cross-respondent's (Svedala) costs of the proceedings.
3. The matter be referred to a Registrar of the Court for determination and assessment of the nature and amount of security to be provided pursuant to Orders 1 and 2 hereof.
4. For the purposes of Order 2, the respondents and cross-respondent be granted leave to forthwith approach a Registrar to seek a hearing date for determination of their costs up to and including the conclusion of discovery.
5. Thereafter, the respondents and the cross-respondent be granted liberty to apply to a Registrar on 7 days' notice to seek any further amount or amounts for security for their costs.
6. I reserve the question of costs.

I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mathews.

Counsel for the First and Second Applicants: SJ Archer

Solicitor for the First and Second Applicants: Slater & Gordon

Counsel for the Third Applicant: C Gee QC with M Dempsey

Solicitor for the Third Applicant: Allen Allen & Hemsley

Counsel for the Respondents: R McDougall QC with TD Castle

Solicitor for the Respondents: Tress Cocks & Maddox

Counsel for the Cross-Respondent: BW Collins QC with CD Freeman

Solicitor for the Cross-Respondent: Clayton Utz

Date of Hearing: 6 and 7 December 1999

Date of Judgment: 15 December 1999