Petersen Superannuation Fund Pty Ltd v Bank of Queensland Limited

Counsel for the First Respondent: Mr I Jackman SC with Mr D Klineberg

Counsel for the Second Respondent: Mr A Leopold SC with Mr W A D Edwards

Solicitor for the Second Respondent: Johnson Winter & Slattery

BETWEEN: PETERSEN SUPERANNUATION FUND PTY LTD ACN 136 059 562 Applicant

AND: BANK OF QUEENSLAND LIMITED ABN 32 009 656 740 First Respondent

JUDGE: YATES J DATE OF ORDER: 21 JUNE 2017

1. The parties bring in agreed orders or, if agreement cannot be reached, proposed orders giving effect to these reasons, by no later than 4.00 pm on 28 June 2017. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 The first respondent, Bank of Queensland Limited (BOQ), and the second respondent, DDH Graham Limited (DDH), each seek orders requiring the applicant, Petersen Superannuation Fund Pty Ltd (Petersen), to provide security for costs. 2 In this connection, BOQ filed an interlocutory application on 28 November 2016 seeking security in the sum of $733,035.80 for the period up to and including the completion of discovery. On 20 February 2017, I granted leave to BOQ to file an amended interlocutory application in which it increased the amount of the security sought to $1,008,116.90. BOQ seeks security in the form of payment into Court or in the form of an unconditional guarantee from an Australian-owned bank, as recognised by the Australian Prudential Regulation Authority, to pay on demand, the amount of the security it now seeks. 3 The reason BOQ sought the increased amount of security is the fact that, relatively recently, it was informed by Petersen's solicitors, Quinn Emanuel Urquhart & Sullivan (Quinn Emanuel), that, in response to a subpoena issued at Petersen's request to the liquidators of Sherwin Financial Planners Pty Limited (in liquidation) (SFP), a database containing over 1 million electronic documents, and 550 boxes of documents, have been produced. At the time of hearing BOQ's application for security, BOQ did not have access to these documents, although there were ongoing discussions as to how the documents in the database would be made available. BOQ's solicitors, Jones Day, were unable to say whether all the documents in the database would need to be reviewed. However, the partner having carriage of the matter on behalf of BOQ, Mr Emmerig, assumed that at least 100,000 documents might need to be reviewed. This led him to increase his estimate of BOQ's likely costs, up to the stage of completion of discovery, by approximately $300,000. 4 At the time of the hearing, Petersen submitted that it was not then in a position to deal adequately with the basis on which BOQ sought the increased amount for security. I proceeded to deal with BOQ's application for security on the basis that Petersen could file further affidavit evidence responding on this issue and that, thereafter, both Petersen and BOQ could file short supplementary written submissions. These steps were taken by 3 April 2017. 5 DDH also filed an interlocutory application on 28 November 2016 seeking security for its costs up to 3 March 2017. In opening, senior counsel for DDH, Mr Leopold S.C., explained that, when DDH's interlocutory application was filed, it was anticipated that certain work streams would have been completed by 3 March 2017. By the time of the hearing of DDH's application for security, that assumption was no longer correct, principally in light of the fact that, in order to complete one of the work streams, DDH would need to review, at least, a large number of the documents produced by SFP's liquidators. Thus, DDH no longer sought security for costs up to 3 March 2017 but, rather, for the completion of the work in the four work streams to which I have alluded. At the time of the hearing, DDH was not able to estimate, confidently, the costs that would be involved in reviewing the documents produced by the liquidators, although it seemed reasonably clear that the estimate of costs it had provided in evidence in respect of the completion of the four streams of work, as originally contemplated, would significantly understate what its actual costs were now likely to be. Therefore, DDH sought to reserve its position in that regard by seeking liberty to apply to the Court, at a later stage in the proceeding, for an increase in security to cover its actual costs involved in reviewing the documents produced by the liquidators. Petersen did not object to this course. 6 There are two further matters I should mention at this stage. They relate to changes in circumstances that occurred after the hearing of BOQ's and DDH's applications, when judgment was reserved. 7 The first matter concerns new material that the respondents say is relevant to the financial standing of AmTrust Europe Limited (AmTrust Europe), an insurer whose role is important in relation to the security that Petersen proposes. In correspondence with Quinn Emanuel on 12 May 2017, the respondents said that Petersen should draw this material to the attention of the Court. Petersen agreed to do so, even though it does not consider that the material makes any difference to the determination of the present applications. At the request of the parties, I made orders on 22 May 2017 providing for the filing of further evidence and the making of short written submissions dealing with that material, which I will discuss below. 8 The second matter concerns a change in the legal landscape in New South Wales brought about by the enactment of the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW) (the CL(TPCAI) Act). Broadly stated, the effect of the CL(TPCAI) Act is that, from 1 June 2017, a third party, with leave, may bring proceedings in a court or tribunal in New South Wales directly against an insurer in respect of a claim for damages, compensation or costs which the third party has against a person who is insured by the insurer for that person's liability to pay damages, compensation or costs to the third party. I will discuss the relevant provisions of the CL(TPCAI) Act in greater detail below.

Background 9 This proceeding is a representative proceeding brought pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act) by Petersen on its own behalf and on behalf of defined Group Members. It is an open class action. At this stage, no orders have been made in relation to the issue of opt-out notices. 10 Petersen is a private company incorporated under the Corporations Act 2001 (Cth) (the Corporations Act). It is the trustee of a self-managed superannuation fund known as the "Petersen Superannuation Fund". 11 BOQ is a public company incorporated under the Corporations Act. Perhaps to state the obvious, it is an Australian retail bank with its headquarters in Brisbane, Queensland. 12 DDH is a public company incorporated under the Corporations Act. It operates and administers a financial product known as a Money Market Deposit Account (MMDA) as agent for BOQ. 13 Petersen alleges that DDH and BOQ are responsible for losses caused to it and the Group Members from certain alleged failures in the operation of the MMDAs held by SFP's clients. The alleged failures relate to transactions said to have been carried out fraudulently on the MMDAs by SFP over a period of approximately 9 years from 10 March 2004 to 24 January 2013. As I have said, DDH administered these MMDAs as agent of BOQ. 14 DDH has estimated that there are approximately 500 MMDA holders who potentially meet the definition of Group Member as pleaded in the statement of claim. Particulars have not been provided of the likely quantum of the claims of Group Members, although, in evidence, BOQ referred to a news report that some $60 million was lost in MMDAs held by SFP's clients. There was no challenge to this figure. Petersen says that it lost approximately $809,790 from the allegedly fraudulent operations carried out on its MMDA. 15 The proceeding is funded by a litigation funder, Vannin Capital Operations Limited (Vannin) - a company registered and based in Malta. As early as 1 May 2016, Quinn Emanuel confirmed in correspondence with Jones Day that Vannin was prepared to provide reasonable security for BOQ's and DDH's costs. This position was confirmed at the first case management hearing on 2 May 2016. In subsequent correspondence, on 8 September 2016, Quinn Emanuel stated that Vannin had not resiled from its acceptance that the provision of security was appropriate in this case. However, the security that Vannin then proposed, and which Petersen now proposes, is commercial litigation insurance (also known as "adverse costs" or "after the event" insurance (ATE insurance) underwritten by AmTrust Europe. 16 AmTrust Europe is an underwriter of general insurance in the United Kingdom and other European countries. It is an insurer of some standing. It is a wholly-owned subsidiary of AmTrust Financial Services, Inc. (AmTrust Financial Services). AmTrust Financial Services is a multinational insurance holding company based in New York in the United States of America. Its stock is publicly traded on the NASDAQ Global Market. AmTrust Europe is regulated in the United Kingdom by the Financial Conduct Authority and the Prudential Regulation Authority. It is subject to a minimum capital requirement. There is evidence before the Court of AmTrust Europe's financial standing and of its compliance with its minimum capital requirement. I will refer to the policy of insurance proposed as security for BOQ's and DDH's costs as the AmTrust policy. 17 The AmTrust policy indemnifies Petersen for defence costs up to $5.5 million. The evidence does not reveal in any detail how, in what circumstances or on what basis the AmTrust policy was obtained. The only direct evidence touching these matters was given in an affidavit by Petersen's solicitor, Mr Scattini, and in an affidavit by Mr Pinner, a director and the Chief Financial Officer of AmTrust Europe. 18 Mr Scattini simply said: On or around 20 June 2016 [Vannin] obtained an insurance policy underwritten by [AmTrust Europe] in which [Petersen] is named as the insured policyholder … 19 Mr Pinner's affidavit was no more revealing than Mr Scattini's affidavit on this subject. Relevantly, he said: On or around 20 July 2016 [Vannin] purchased an After The Event … legal expenses insurance policy … from AmTrust Europe, in which … [Petersen] … is named as the insured … 20 Two things emerge from this evidence. The first is that the AmTrust policy was obtained fairly early in the piece, either on 20 June 2016 (according to Mr Scattini) or 20 July 2016 (according to Mr Pinner). I think it is more likely that the correct date is 20 June 2016 and that Mr Pinner's evidence is incorrect in this regard because the policy commencement date is stated to be 20 June 2016. For reasons neither explored nor explained, the AmTrust policy was only offered as security for BOQ's and DDH's costs on 8 September 2016 despite the fact that, for some time, correspondence had passed between the solicitors for the parties on the question of security for costs, with Vannin being pressed to provide security. 21 The second matter to emerge is that, according to Mr Scattini, it was Vannin who "obtained" the AmTrust policy. Consistently with this evidence, Petersen's written submissions speak of Vannin having "secured" the policy for Petersen. These matters tend to suggest that Vannin was the person dealing with AmTrust Europe in obtaining the AmTrust policy and that neither Petersen nor its solicitors, Quinn Emanuel, had any dealings with AmTrust Europe in that regard. However, Petersen and its two directors, Niels Petersen and Joyce Mabel Petersen, have given certain undertakings to the Court concerning, amongst other things, how they will deal with events that might arise in connection with operation of the AmTrust policy, including making claims under it. These undertakings represent that Petersen submitted the proposal for the policy. This tends to suggest that Petersen played some role in obtaining the AmTrust policy; however, the extent of that role is unclear. It may have involved no more than Petersen submitting the proposal to AmTrust Europe, in some formal sense. Importantly, the nature and extent of Vannin's involvement is unstated. Its involvement certainly appears to have been significantly greater than simply paying the insurance premium. 22 The evidence to which I have referred strongly suggests, and I infer, that it was Vannin who engaged with AmTrust Europe to obtain the AmTrust policy and that the involvement of Petersen in that exercise was, at best, of a very limited nature only. 23 I can draw this inference more confidently because the Litigation Funding Agreement between Petersen and Vannin (the Funding Agreement) imposes an obligation on Vannin to provide Petersen with Security for Costs (as defined in the Funding Agreement), when required, by means which include an ATE policy. Plainly, the Funding Agreement contemplates that it is Vannin who is entrusted with obtaining such a policy: see clauses 3.1(d) and 21 of the Funding Agreement. 24 But additionally, under the Funding Agreement, Vannin is required to provide Petersen with Adverse Costs Security (as defined), which can be in the form of an ATE policy on terms approved by Vannin in its absolute discretion as security for the performance of its further obligation, under clause 19, to indemnify Petersen against Adverse Costs (as defined): see clauses 3.1(c) and 20 of the Funding Agreement. 25 This evidence leads to me to conclude that, in June 2016, Vannin obtained the AmTrust policy on terms satisfactory to it in fulfilment of its obligation to provide Petersen with Adverse Costs Security and that, in September 2016, the same policy was put forward - and is now put forward - as security for BOQ's and DDH's costs, in fulfilment of Vannin's separate obligation under the Funding Agreement to provide Petersen with Security for Costs. There is no evidence before me, and it has not been suggested, that Petersen has the benefit of two ATE policies or that its potential liability for BOQ's and DDH's costs can be met by any financial resource other than the AmTrust policy. 26 On the evidence, Vannin's financial position is largely unknown. There is no evidence that it has any assets in Australia. Vannin is prepared to pay the equivalent of £6,000 in Australian currency into Quinn Emanuel's trust account to cover the reasonable costs of registering a judgment in the United Kingdom, presumably in connection with Petersen's enforcement of the AmTrust policy against AmTrust Europe (should that become necessary).

The respondents' objections to the AmTrust policy 27 BOQ and DDH contended that the AmTrust policy does not provide sufficient or adequate security for their costs. They submitted that the appropriate form of security should be payment into court or the provision of a bank guarantee. DDH indicated that an appropriately worded unconditional indemnity in its favour from AmTrust Europe might provide sufficient security. BOQ reserved its position in that regard. I hasten to add that no such unconditional indemnity has been offered as security for the respondents' costs. Only the AmTrust policy has been offered. 28 Although the grounds of BOQ's and DDH's objections to the AmTrust policy were similarly based, it is convenient to note their respective submissions. 29 BOQ submitted, firstly, that the AmTrust policy does not, in terms, provide an indemnity for BOQ's costs. It is a policy between AmTrust Europe and Petersen. BOQ is not a party to the policy and AmTrust Europe has assumed no obligation to BOQ under the policy. BOQ submitted that the way in which it might benefit from the policy is, at best, indirect. This submission must now be seen in light of the enactment of the CL(TPCAI) Act, although it remains the case that neither BOQ nor DDH has contractual rights against AmTrust Europe. 30 Secondly, BOQ submitted that it has no way of assessing whether there are grounds for AmTrust Europe to reduce or avoid liability under the AmTrust policy or, indeed, to cancel it. In this connection, BOQ pointed to a number of exclusions contained in clause 2 of the policy which, it said, concerned matters outside its control. 31 Clause 2 provides: 2 What is not covered 2.1 We will not, unless stated otherwise in the Policy, pay any claim under the Policy caused by or attributable to: 2.1.1 Your failure to co-operate with or to follow the advice of Your Solicitor; 2.1.2 any material delay or default caused by You, Your Solicitor or any other legal representative appointed to act on Your behalf; 2.1.3 any failure by You, Your Solicitor or any other legal representative appointed to act on Your behalf to comply with a pre-action protocol or with an Order of the Court or the CPR during the Litigation; 2.1.4 any liability arising from Your or Your Solicitor's liability for misconduct or breach of any requirement of the CPR, or Your liability for fines or penalties. 2.1.5 any negligent act or omission by Your Solicitor or any other legal representative appointed to act on Your behalf; 2.1.6 any pre-action application made or opposed by You without Case Manager's Approval; 2.1.7 a decision by You or Your Solicitor to make or oppose any application which may involve any party incurring Costs without Case Manager's Approval; 2.1.8 Your decision to make an offer to settle or compromise Opponent's Costs without Case Manager's Approval; 2.1.9 Your decision to reject an offer of settlement without Case Manager's Approval; 2.1.10 Your decision to conclude a settlement with Your Opponent or any other party to the Litigation without Case Manager's Approval; 2.1.11 Your decision to abandon or discontinue the Litigation without Case Manager's Approval; 2.1.12 Your decision to continue the Litigation without Case Manager's Approval, after the Case Manager has informed Your Solicitor that in their view You are more likely than not to lose the Litigation; 2.1.13 an Appeal brought by You without Case Manager's Approval; 2.1.14 any Enforcement Action brought by You without Case Manager's Approval; 2.1.15 any Detailed Assessment process commenced by or against You without Case Manager's Approval; or 2.1.16 any element of GST where otherwise recoverable. (Bold expressions in original.) 32 The reference to Case Manager in this clause is to another AmTrust entity appointed by AmTrust Europe. 33 In oral submissions, BOQ drew particular attention to clause 2.1.5, which excludes from the AmTrust policy any liability to pay costs caused by or attributable to any negligent act or omission by any legal representative acting for Petersen. BOQ submitted that this clause exposed the respondents to real risk having regard to the fact that, at trial, it is quite likely that BOQ will make strong criticisms of some of the ways in which Petersen's case has been conceptualised and pleaded. 34 In oral submissions, BOQ also drew attention to clause 3.2.1 of the AmTrust policy which allows AmTrust to either reduce its liability for a claim or cancel the insurance contract if there is non-disclosure (meaning either fraudulent or non-fraudulent disclosure). BOQ made two points. The first point is that clause 3.2.1 of the AmTrust policy distinguishes it from the ATE policies considered in certain United Kingdom cases, which I discuss below, where it would seem that the policies under consideration could only be avoided for fraudulent non-disclosure. The second point is that, if the AmTrust policy were to stand as security for the respondents' costs, and as they do not know the basis on which the proposal for the AmTrust policy was put forward, the respondents would be at risk for any non-fraudulent breach by Petersen of its duty of disclosure to AmTrust Europe. 35 Thirdly, BOQ drew attention to clause 13.1, which provides that if Petersen has under-insured its liability for adverse costs, then it will only be entitled to a proportion of the insured sum. Clause 13.1 gives the following example: 13.1 … if Your Insured Liability for Opponent's Costs is AUD$100,000 based upon the estimate of costs referred to in clause 3.1.2 and the actual liability is AUD$200,000, then You will only be indemnified for 50% of Your Insured Liability for Opponent's Costs, namely AUD$50,000 (AUD$100,000/AUD$200,000 x 100). This is because We have been prevented from charging the full premium for the risk by virtue of Your under-insurance. (Bold expressions in original.) 36 BOQ noted that the AmTrust policy is intended to cover both its and DDH's costs. It submitted that it was conceivable that, in a representative proceeding such as the present, BOQ's and DDH's combined costs could exceed the limit of $5.5 million stated in the policy. 37 In written submissions, BOQ referred to some additional matters which can be dealt with now. 38 First, assuming that a final costs order were to be made against Petersen in this proceeding, BOQ submitted that it (BOQ) would need to enforce its claim under the AmTrust policy in the United Kingdom. It submitted that it was unsatisfactory to require a party, in respect of whom it was agreed security should be given, to enforce its security in a foreign jurisdiction. Further, it said that the amount required to cover the enforcement costs in the present case was not stated. 39 I think, with respect, that this submission is somewhat misdirected. At the time that the submission was made, BOQ itself had no right to claim against AmTrust Europe in respect of the liability insured under the AmTrust policy. The position was that if BOQ were to obtain a judgment for costs against Petersen, then Petersen would have to make a claim under the AmTrust policy to satisfy that judgment and, if need be, commence a proceeding in a court of competent jurisdiction in New South Wales to litigate its claim under the policy. I observe, in this connection, that clause 15.1 of the AmTrust policy provides that it will be construed in accordance with the law of the State or Territory where the litigation is being conducted (here, New South Wales). The clause also acknowledges AmTrust Europe's agreement to submit to the jurisdiction of courts "of that place". If it be assumed that Petersen were to obtain a judgment against AmTrust Europe by suing on the AmTrust policy, then that judgment would need to be registered in the United Kingdom, if it were to be enforced there. This is the reason why Vannin expressed its willingness to pay the costs of registering a judgment in the United Kingdom. However, that judgment would not be the costs judgment obtained by BOQ against Petersen in this proceeding. 40 BOQ now has a direct right, conferred by the CL(TPCAI) Act, to sue AmTrust Europe for the amount of the insured liability under the AmTrust policy. As I will come to explain, that right is qualified. But more importantly for present purposes, the CL(TPCAI) Act does not operate so as to confer on BOQ, and BOQ cannot and does not assume, Petersen's contractual rights under the AmTrust policy. 41 Although I have addressed BOQ's submission in this regard, it will be appreciated that DDH is in the same position. 42 Secondly, BOQ submitted that there is no indication that AmTrust Europe has confirmed that an indemnity is available to Petersen under the AmTrust policy or that the policy will cover BOQ's costs. I do not accept this submission: the AmTrust policy is plainly a contract of insurance between AmTrust Europe and Petersen directed to meeting Petersen's legal liability (if any) to pay BOQ's and DDH's costs in the proceeding, subject to the policy terms and conditions. If by its submission BOQ is referring to some other "confirmation" by AmTrust Europe, it is not clear to me what that confirmation could possibly be at the present time; there is no present liability to which the AmTrust policy can respond. 43 Thirdly, and relatedly, BOQ also submitted that there is no evidence of AmTrust Europe's financial capacity to fulfil its obligations under the AmTrust policy in light of its other commercial commitments. There is, however, evidence given through Mr Pinner's affidavit which, taken on its own, would demonstrate, to my satisfaction, that AmTrust Europe does have the financial capacity to fulfil its obligations under the AmTrust policy. 44 However, at this juncture, it is necessary to refer to the new material, to which I have briefly alluded, concerning AmTrust Europe's financial standing. 45 On 27 February 2017, A. M. Best Rating Services, Inc. (A. M. Best), an international ratings agency, downgraded the "outlook" for AmTrust Financial Services from "stable" to "negative". The change in rating is explained in the following press release issued by A. M. Best: OLDWICK - FEBRUARY 27, 2017 A.M. Best has revised the outlook to negative from stable and affirmed the Long-Term Issuer Credit Rating (Long-Term ICR) of "bbb" and the Long-Term Issue Credit Ratings of AmTrust Financial Services, Inc. (AmTrust) (New York, NY) [NASDAQ:AFSI]. Concurrently, A.M. Best has revised the outlooks to negative from stable and affirmed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICRs of "a" for the members of the AmTrust Group. A.M. Best also has revised the outlook to negative from stable and affirmed the FSR of A- (Excellent) and the Long-Term ICR of "a-" of AmTrust Title Insurance Company (New York, NY). The rating actions follow the disclosure of a delay in the filing of AmTrust's annual report (10-K) due to a delay in completing its consolidated financial audit and assessment of internal controls, although still considered timely by the Securities and Exchange Commission. In addition, AmTrust has identified material weaknesses related to its internal controls over: the assessment of risks associated with financial reporting; and corporate accounting and corporate financial reporting resources within the company. While the specific items identified may not give rise to any material issues with respect to the financial reports themselves, they highlight the strain the organization's substantial growth in recent years has placed on resources. A.M. Best anticipates that AmTrust's financials to be disclosed in its 10-K will be in line with those in its Feb. 27, 2017, news release. In addition, A.M. Best expects that the actions to address the concerns raised by its auditor will be sufficient to resolve the material weakness in the near term. However, the negative outlook reflects the potential for downward movement in the Credit Ratings (ratings) should there be material changes in AmTrust's fourth-quarter financial results compared with the financial data released Feb. 27, 2017, or upon the disclosure of further material weaknesses prior to the resolution of those disclosed in the 2016 Form 10-K. The rating outlooks for AmTrust and its subsidiaries may be revised to stable from negative upon resolution of the material weakness in AmTrust's internal controls identified in its year-end 2016 audit, so long as there are no other material changes in the financial condition of any of the companies that would otherwise drive negative rating actions. The ratings of AmTrust and its subsidiaries may be negatively impacted by material changes in AmTrust's financial leverage or interest coverage levels that cause them to fall outside A.M. Best's expectations for the current rating, or by any material change in the financial condition of any operating subsidiaries. 46 In its Quarterly Report for the period ended 31 March 2017, lodged pursuant to the Securities Exchange Act of 1934 (US), AmTrust Financial Services disclosed that certain previously filed Consolidated Financial Statements needed to be restated because of two primary errors, although other adjustments were also needed. The Quarterly Report described the impact as follows: The impact of the Restatement on the Consolidated Statements of Income primarily resulted in decreased service and fee income, increased acquisition costs and other underwriting expenses, increased other expense, decreased interest expense and increased foreign currency loss (three months ended March 31, 2016), increased interest expense and decreased foreign currency gain (three months ended March 31, 2015), which ultimately resulted in decreases to net income in both the three months ended March 31, 2016 and 2015. The impact of the Reinstatement on the Consolidated Balance Sheets primarily resulted in an increase of premiums receivable (three months ended March 31, 2016 only) and other assets, a reduction of deferred policy acquisition costs and property plant and equipment, an increase in accrued expenses and other liabilities, and a decrease in shareholders' equity. The impact of the Reinstatement adjustments on the Consolidated Statements of Cash Flows resulted in an increase of net cash provided by operating activities in the three months ended March 31, 2016 and 2015, an increase of net cash used in investing activities in the three months ended March 31, 2016, a decrease of net cash used in investing activities in the three months ended March 31, 2015, and a decrease in net cash provided by financing activities in the three months ended March 31, 2016 and 2015. 47 BOQ drew on this material to submit that Mr Pinner's evidence should be treated with caution. It submitted that, even though AmTrust Europe is subject to a minimum capital requirement and AmTrust Financial Services "has total assets in the billions", these considerations do not in themselves allow any assessment to be made of the financial position of either company because such an assessment would need to take into account various matters including current and future insurance exposures. BOQ submitted that the new material suggests that the financial positions of AmTrust Europe and AmTrust Financial Services are "weakening". 48 DDH also submitted that the new material is relevant to the adequacy of the AmTrust policy as security for any adverse costs order. It referred to the fact that any enforcement of the AmTrust policy was likely to be years away and that AmTrust Europe's financial position cannot be known. 49 Whilst I acknowledge the relevance of the new material, it does not lead me to any different conclusion to the one I provisionally expressed at [43] above. Notwithstanding BOQ's cautionary submission concerning the reliance that can be placed on AmTrust Europe's minimum capital requirement, there is nothing in the evidence that would lead me to think that AmTrust Europe does not maintain, as the evidence shows, capital well in excess of its minimum requirement or that, in light of the need for AmTrust Financial Services to restate its financial statements, the institutions responsible for AmTrust Europe's prudential regulation have any concerns about its ability to meet future liabilities under the insurance contracts it has written. 50 I now turn to consider DDH's remaining submissions in relation to the sufficiency or adequacy of the AmTrust policy as security for an adverse costs order. 51 Like BOQ, DDH referred to the exclusions contained in clause 2 of the AmTrust policy, in particular, sub-clauses 2.1.1 to 2.1.3, 2.1.5 and 2.1.6 to 2.1.12 which, DDH also said, concerned acts completely outside its control. 52 DDH referred to clause 3.2.1 of the AmTrust policy (discussed above at [34]) which provides that the policy can be cancelled (or the amount payable under it reduced) should Petersen be found to have breached its duty of disclosure to AmTrust Europe, quite apart from AmTrust Europe's entitlement to avoid the AmTrust policy "from its beginning" for fraudulent non-disclosure (clause 3.2.2). 53 DDH referred to other provisions entitling AmTrust Europe to cancel the AmTrust policy, in particular clause 4.10, which provides: 4.10 You and Your Solicitor will control the Litigation and make decisions in relation to it. The Case Manager will monitor the case for Us and will deal with applications by You for Case Manager's Approval. If You fail to obtain Case Manager's Approval when required, You may be in breach of the Policy which could give rise to Our right to cancel. (Bold expressions in original.) 54 DDH submitted that whether, in terms of clause 4.10, "approval" had been given by the Case Manager for a particular step might be debatable in the circumstances. DDH submitted that, if AmTrust Europe were minded "to extract itself from potential liability", it could use an occasion presented by clause 4.10 to cancel the policy, in which event AmTrust Europe would be able to avoid liability to Petersen from the date of cancellation. 55 In this connection, clause 6.3 provides: 6.3 If We cancel the Policy We will not pay the Insured Liability incurred after the date of cancellation. For the avoidance of doubt the Contingent Premium remains payable in the event of a Successful Outcome in accordance with clause 7. In such circumstances the Contingent Premium will be calculated in accordance with clause 7.3 as if a Successful Outcome had been achieved as at the date of cancellation. (Bold expressions in original.) 56 The AmTrust policy defines Insured Liability as: "Insured Liability" means Your legal obligation to pay Opponents' Costs, and Own Disbursements which We have agreed to indemnify up to the Maximum Limit. (Bold expressions in original.) 57 This definition focuses on Petersen's legal obligation to pay costs. That obligation will only be incurred when an order is made against Petersen for costs. The definition is not concerned with when the opponent's costs are incurred, only with when Petersen's legal obligation to pay costs is incurred. Thus, it is possible that the AmTrust policy could be cancelled before a costs order is made against Petersen and, hence, before a legal liability arises to which the policy can respond. 58 DDH also referred to the fact that clause 4.10 specifies that Petersen and its solicitors "will control the Litigation". DDH argued that this was problematic because clause 4.10 "makes no allowance for the role of the [f]under" which, it said, was likely to be a source of potential difficulty in the application and interpretation of the clause. The short point appears to be that, insofar as clause 4.10 imposes an obligation on Petersen and its solicitors to control the litigation, that obligation could be breached should Vannin exercise control in the way contemplated by the Funding Agreement. In this connection, there may be a real debate about the meaning of "control", as referred to in the AmTrust policy, and as referred to in the Funding Agreement, and whether they mean the same thing. 59 DDH also suggested that clause 4.10 was "almost certainly antithetical to the expeditious conduct of the litigation" in light of what it called "the cumbersome process" for obtaining the Case Manager's approval. Here, DDH also referred to clause 9 of the AmTrust policy, which sets out the procedures for making a claim, including, in clause 9.3, an "audit" by the Case Manager: see clause 4.3.11. DDH submitted that clause 9 gives no assurance that a claim will be accepted. However, clause 14.1 of the AmTrust policy provides that, in the event of a dispute, AmTrust Europe will agree to the dispute being referred to a single arbitrator whose decision will be final and binding: see clause 14.1.4. It is possible, therefore, that a particular matter in dispute between Petersen and AmTrust Europe, upon which AmTrust Europe's liability depends, could be submitted to arbitration and decided adversely to Petersen, with the consequence that the AmTrust policy will not respond to a claim made for BOQ's and DDH's costs. 60 Like BOQ, DDH drew attention to the under-insurance provision of clause 13.1, which Mr Leopold S.C. described in oral submissions as delivering a "double whammy" because, if the clause were to be triggered, not only would Petersen be exposed (and, hence, BOQ and DDH be exposed) to the shortfall between Petersen's actual costs liability to BOQ and DDH and the maximum amount insured under the AmTrust policy, but AmTrust Europe's liability to Petersen under the policy would also be proportionally reduced. In other words, under the AmTrust policy, Petersen's exposure (and, hence, BOQ's and DDH's exposure) is significantly more than the inadequacy of the insured sum to meet BOQ's and DDH's costs. DDH illustrated, by reference to the evidence led by BOQ and DDH, that the jeopardy provided by clause 13.1 is real and not fanciful. Further, DDH referred to the added complication that the level of each respondent's costs is not within the control of the other. 61 In light of these various provisions, DDH submitted: The AmTrust Policy is inadequate security because it renders DDH hostage to the conduct of the Applicant (and Funder), whose interests are opposed to those of DDH in this litigation. There can be no presumption that they have acted, and will continue to act, in such a way as to ensure the limits of the AmTrust Policy remain or will remain available and, even if they do, payment under the Policy is subject to AmTrust's claims assessment procedure over which no one but AmTrust (and potentially an arbitrator) has any control. Moreover, given that the Applicant is relevantly impecunious, a serious question arises as to how it would practically be able to vindicate any rights it had to dispute an unfavourable claims assessment by AmTrust. 62 Additionally, DDH submitted that the Court should not give its imprimatur to the AmTrust policy. This is because the AmTrust policy seeks to impose duties on Petersen's legal representatives that could constitute an interference with the proper administration of justice. In this connection, DDH referred to clauses 4.8.1 and 4.8.2, which provide: 4.8 You will: 4.8.1 instruct Your Solicitor to resist any application by the Opponent for the summary assessment of Opponent's Costs. If Opponent's Costs are summarily assessed, You must tell the Case Manager as soon as reasonably practicable and provide Your Solicitor with appropriate instructions so as to allow Us to take over all rights to appeal the summary assessment; 4.8.2 instruct Your Solicitor to resist any application by the Opponent for Opponent's Costs unless You have Case Manager's Approval not to do so; … (Bold expressions in original.) 63 DDH submitted that the unqualified obligations imposed by these clauses are contrary to the paramount duty owed by Petersen's legal representatives to the Court because those clauses might require them, for example, to resist an application where there were no reasonably arguable grounds for doing so. DDH submitted that if the Court were to regard the AmTrust policy as an acceptable form of security, that approval would carry with it the approval of provisions such as clauses 4.8.1 and 4.8.2. 64 It is also convenient to note at this point that both BOQ and DDH relied on evidence given by Mr Scattini to the effect that the cost of obtaining a deed of indemnity from AmTrust Europe in favour of one or both of BOQ and DDH to cover a liability for costs of $5.5 million would be approximately $550,000. BOQ and DDH relied on this evidence to submit that (what was taken to be) the substantial difference between, on the one hand, the premium for the AmTrust policy and, on the other, the cost of an indemnity from the same insurer, reflected a recognition by the insurer of a greater risk assumed under the deed of indemnity compared with the risk assumed under the terms and conditions of the AmTrust policy. BOQ and DDH used this to illustrate the relative prejudice or disadvantage they would suffer if security for their costs were to be provided only by the AmTrust policy.

Relevant legislation and legal principles 65 Section 56 of the Federal Court Act provides: (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (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. 66 This power is complemented by r 19.01(1) of the Federal Court Rules 2011 (Cth) (FCR), which provides: (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. 67 Section 1335(1) of the Corporations Act 2001 (Cth) (the Corporations Act) provides: (1) 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. 68 Section 56 of the Federal Court Act, unlike s 1335(1) of the Corporations Act, is not conditioned on the requirement that there be "credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant". I will refer to this requirement and similarly worded requirements as the threshold requirement. 69 In Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 (Khoo), I observed (at [5]) that where the only asserted basis for an order for security relates to the alleged inability of the applicant to meet a future costs order, it is difficult to see in practice a difference between the operation of s 1335(1) of the Corporations Act and s 56 of the Federal Court Act. In the present case, it is accepted that, putting to one side its apparent contractual entitlements under the AmTrust policy, Petersen is impecunious. 70 For its part, BOQ submitted that it is not necessary for the Court, in the present case, to be concerned with questions of "credible testimony" under s 1335(1) of the Corporations Act or, indeed, with the assessment of discretionary factors because Petersen has accepted that security should be provided. Whilst this submission is no doubt based on the acknowledgements which I have recorded at [15] above, Petersen did, in fact, advance submissions striking at the threshold requirement of s 1335(1) of the Corporations Act. 71 BOQ, in reliance on certain observations made by Black J in In the matter of Pioneer Energy Holdings [2013] NSWSC 1366 at [28], contended that the usual form of security is payment into court or the provision of a bank guarantee by an Australian trading bank. However, on appeal (Blue Oil Energy Pty Limited v Tan [2014] NSWCA 81 (Blue Oil Energy)), the Court of Appeal (Beazley P and Tobias AJA) stressed that the provisions there under consideration (s 1335(1) of the Corporations Act and r 42.21(2) of the Uniform Civil Procedure Rules 2005 (NSW) placed no limitation on the form of security that might be ordered. The same is, of course, true for s 56 of the Federal Court Act. 72 There is authority to the effect that a plaintiff is entitled to put forward security in a form that is least disadvantageous to it. In Rosengrens Limited v Safe Deposit Centres Limited [1984] 3 All ER 198 (Rosengrens) Parker LJ said (at [200j]-[201a]): So long as the opposite party can be adequately protected, it is right and proper the security should be given in a way which is the least disadvantageous to the party giving that security. 73 In that connection, his Lordship observed that a bank guarantee and payment into court are but two forms of giving security which "may take many forms", so long as it is "adequate to protect the opposite party". 74 In Blue Oil Energy the applicants for leave to appeal advanced a contention, purportedly based on Parker LJ's observations in Rosengrens, that security should be ordered in a form that was the least disruptive or disadvantageous to the party required to provide the security. The Court of Appeal rejected that contention, stating that no principle of construction required a court's discretion as to the form of security to be constricted in that way. The Court of Appeal said (at [22]) that, in Rosengrens, Parker LJ was not laying down the general proposition for which the applicants were contending. The true issue, the Court of Appeal said, is whether the form of security ordered is adequate to protect the party seeking it. 75 In a similar vein, Hargrave J in DIF III Global Co-Investment Fund, L.P. & Anor v BBLP LLC & Ors [2016] VSC 401 (DIF III Global) said that: 38 … a plaintiff is entitled to put forward security in a form least disadvantageous to it. Where a plaintiff puts forward security in a form other than payment into court or a bank guarantee from an Australian bank, the central inquiry is whether the proposed form of security is adequate to achieve its object as security; namely, to provide a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff. The fact that some delay may be involved in accessing that security is, while relevant, not decisive. 76 In the United Kingdom, in relatively recent times, a practice seems to have emerged of accepting an appropriately worded ATE policy as adequate security for the costs of an opposing party. Indeed, it appears to be the current position that, depending on its terms, an ATE policy might suffice to negate a conclusion, otherwise available, that there is reason to believe that the party, against whom an order for security is sought, will be unable to pay the opposing party's costs: Geophysical Service Centre Co v Dowell Schlumberger (ME) Inc [2013] EWHC 147 (TCC) (Geophysical); NGM Sustainable Developments Limited v Wallis [2015] EWHC 461 (Ch) (NGM); Premier Motorauctions Ltd v Pricewaterhousecoopers plc [2016] WLR (D) 547; [2016] EWHC 2610 (Ch) (Premier Motorauctions). Thus, the existence of an appropriate ATE policy can be deployed defensively in a security for costs application to strike at the threshold requirement of a provision such as s 1335(1) of the Corporations Act. 77 Earlier United Kingdom authority doubted that position. For example, in Michael Phillips Architects v Ricklin & Anor [2010] BLR 569, Akenhead J said (at [30]): 30 … It is argued that, in the light of the ATE insurance and given that the burden of establishing that the Claimant will be unable to pay the Defendants' costs is on the Defendants, the Defendants have not established the threshold necessary to give the court jurisdiction and discretion to order security for costs. That argument must fail in my view at least in the circumstances of the ATE Insurance in this case. I do not see how it can be said that an insurance policy which does not provide direct benefits to the Defendants and under which they are not amongst the insured parties and which does provide for cancellation of the policy either for a large number of reasons or for no reason provides any appreciable benefit or raises any presumption or inference that the Claimant will be able to pay the Defendants' costs if ordered to do so. 78 However, in Geophysical, Stuart-Smith J seems to have made a step change, concluding that: 20 Ultimately, on an application such as this, the question is not whether the assurance provided by an ATE policy is better security than cash or its equivalent, but whether there is reason to believe that the claimant will be unable to pay the defendant's costs despite the existence of the ATE policy. It must now be recognised, in my judgment, that depending upon the terms of the policy in question, an ATE policy may suffice so that the court is not satisfied that there is reason to believe that the claimant will be unable to pay the defendant's costs. In this case, the defendant's costs estimate of just over £900,000 has been approved by the court, and the claim for security for costs in the sum of £500,000 should be seen in that context. 79 Following this approach, Snowden J in Premier Motorauctions said: 41 … I think that in a case in which a claimant has obtained an ATE policy specifically to cover the bringing of a claim, and relies upon it to resist an application for security for costs, the approach taken by Stuart-Smith J in Geophysical Service Centre v Dowell Schlumberger (ME) Inc 147 Con LR 240, para 20 is correct. The question is not whether the ATE policy provides the same security as cash or a bank guarantee, or indeed whether the ATE policy provides the same security as might a deed of indemnity from the same or another insurer. It is whether, having regard to the terms of the ATE policy in question, the nature of the allegations in the case and all the other circumstances, there is reason to believe that the ATE policy will not respond so as to enable the defendant's costs to be paid. 80 A number of objections voiced by the respondents to the AmTrust policy have been considered and rejected by these cases. I refer, in particular, to the respondents' criticisms that (1) they have no contractual rights under the AmTrust policy; that (2) the AmTrust policy can be avoided on a number of contractual grounds; and that (3) the AmTrust policy was provided on the basis of information not seen by them. 81 In Geophysical, the first of these matters did not impress itself as a reason to go behind a conclusion that the threshold requirement had not been met, even though, without the policy, there would be cause to believe that the claimant company would not be able to meet an adverse costs order: see at [43]. 82 With regard to the second matter, the cases have cautioned against a concern over what might be seen, on the evidence, as no more than "theoretical" possibilities of breach: see Geophysical at [29]-[30]; NGM at [43]. The point here is that, even with an apparently solvent claimant company that is currently trading profitably, there is always a theoretical possibility that things can change unexpectedly and, perhaps, quite rapidly. The threshold requirement in provisions such as s 1335(1) of the Corporations Act is not met by pointing to mere theoretical possibilities; a theoretical possibility of insolvency, for example, is not a reason to believe that it might happen. 83 The same caution has been expressed in respect of concerns raised by the third matter: Geophysical at [27]. Further, in Premier Motorauctions, Snowden J placed significant reliance on the circumstances in which the ATE policy in that case had been obtained, saying: 50 In the instant case, the ATE policies taken out to cover the companies' exposure to adverse costs orders have been arranged and the proposals to insurers have been made by the joint liquidators who are independent professional insolvency officeholders. They have arranged the ATE policies after having conducted an investigation into the claims against the defendants with the assistance of experienced solicitors and counsel. This level of objective professional scrutiny is likely to exceed that undertaken in cases such as Monarch Energy or Geophysical Service Centre where, although the claimant companies were in financial difficulties, professional insolvency officeholders had not been appointed. 51 Moreover, as Mr Sims QC submitted, the joint liquidators have every incentive to ensure that the terms and conditions of the ATE policies will be adhered to and that they will respond. The companies have no assets, so that the joint liquidators must be well aware that if the companies were to lose and the ATE policies were not to respond as a consequence of any failure on their part, there would at least be a significant prospect of the defendants applying for a costs order against them personally under section 51 of the Senior Courts Act 1981. 84 DDH submitted that the United Kingdom cases to which I have referred should not be followed. 85 First, DDH said that those cases are founded, in part, on policy considerations that are irrelevant to the present case. In this connection, DDH pointed to an observation by Snowden J in Premier Motorauctions to the effect that there was a public interest in permitting ATE insurance on appropriate terms to provide access to justice for insolvent companies under the control of responsible insolvency office-holders. 86 It is true, as I have noted, that the claimant companies in Premier Motorauctions were in liquidation. It is also true, as I have also noted, that Snowden J appears to have placed reliance on the presence of the liquidators as an important circumstance in dealing with the objection, in that case, to security being provided in the form of an ATE policy. However, I do not understand Snowden J's analysis to be confined to such cases or to be dependent on the presence of office-holders such as liquidators. Certainly, no such policy considerations were at play in Geophysical and NGM . 87 DDH placed reliance, in this connection, on the fact that the present case is "funded by a professional litigation funder". That is true, but I do not see how that fact, alone, stands as a relevant point of distinction. I accept Petersen's submission that there is no reason why an appropriate ATE policy should not be regarded as an acceptable form of security or could not be used to negative, say, the threshold requirement of s 1335(1) of the Corporations Act (if the reasoning of the United Kingdom cases on that matter is to be accepted), simply because a litigation funder is involved in the case. As Petersen submitted: Precisely how litigation is funded, whether by insurance or other means, is ultimately irrelevant. The threshold question is whether there is a risk [that Petersen] will be unable to pay the Respondents' costs in the event that one or both of them are successful in the proceedings. That question is to be answered on the evidence. 88 Secondly, DDH submitted that the United Kingdom cases are founded, in part, on the "maturity" of the United Kingdom market for ATE policies. In Geophysical Stuart-Smith J remarked on the maturity of "the ATE market" when considering certain obiter observations made by Mance LJ in Nasser v United Bank of Kuwait [2001] EWCA 556 (Nasser). In Nasser, Mance LJ had said (at [60]): I would interpose at this point that, even where a claimant or appellant is resident abroad, there may of course be special factors indicating that any order for costs will be satisfied in some other fashion. The interesting possibility was raised before us that a claimant or appellant who has insured against liability for the defendants' costs in the event of the action or appeal failing might be able to rely on the existence of such insurance as sufficient security in itself. I comment on this possibility only to the extent of saying that I would think that defendants would, at the least, be entitled to some assurance as to the scope of the cover, that it was not liable to be avoided for misrepresentation or non-disclosure (it may be that such policies have anti-avoidance provisions) and that its proceeds could not be diverted elsewhere. The new arrangement for the funding of litigation certainly appear capable of throwing up possible imbalance, in so far as they permit contingency fee arrangements with uplifts potentially recoverable from losing defendants, but enable claimants to pursue litigation without insuring or securing the defendants' fees. The claimant's contingency fee arrangement in the present case is, however, without uplift. 89 In Geophysical, Stuart-Smith J responded: …Nasser dates from 2001 when the ATE market was considerably less mature than it is now. It must be recognised both that the market is now more mature and that Brit, who provided the insurance which is going to be considered in this case, is to be regarded as a reputable insurer within the market. It is also to be recognised in my judgment that the funding of litigation by ATE policies is, and has for some years now, been a central feature of the ability of parties to gain access to justice. In the absence of evidence to the contrary, the court's starting position should be that a properly drafted ATE policy provided by a substantial and reputable insurer is a reliable source of litigation funding. 90 With respect, I do not see how the "maturity" of the United Kingdom market for ATE policies assists DDH's opposition in the present case, given that, on the evidence, AmTrust Europe is an insurer of substance operating in that market. As Petersen submitted, the implicit assertion in DDH's submission - that there is a less mature or no market in New South Wales (regardless of the accuracy of that asserted fact) - is irrelevant. 91 Thirdly, DDH submitted that the United Kingdom cases can be distinguished on the basis that the AmTrust policy offers AmTrust Europe "a great many more potential loopholes for avoiding cover than the policies in issue in those cases …". A similar submission was advanced by BOQ. I will consider that submission later. 92 I am persuaded that, depending on the circumstances of the given case, an appropriately worded ATE policy might be capable of providing sufficient security for an opponent's costs. In coming to this conclusion, I bear in mind that, although courts are accustomed to ordering security in the form of payment into court or by provision of a bank guarantee, on present authority it would be wrong to see those forms as the only ones that could satisfy the requirement for sufficient security. Whether, of course, the AmTrust policy provides sufficient security for BOQ's and DDH's costs is a separate matter, which I address below. 93 The United Kingdom cases which accept that an appropriately worded ATE policy can strike at the threshold requirement of provisions such as s 1335(1) of the Corporations Act treat analytically separate questions - whether the threshold requirement has been met and whether the proposed security is sufficient security in the circumstances - as convergent questions that are to be determined by answering the second question. Thus, in Geophysical, Stuart-Smith J said (at [19]): In my judgment, this inevitably requires the court to form a view at this stage on the meaning of the policy and on how readily it may be avoided legitimately and contractually, and also to form a view of the likelihood of circumstances arising which will enable the policy to be readily, legitimately and contractually avoided. 94 There are three observations I wish to make in this regard. 95 First, Stuart-Smith J's observations reveal that the court in question must undertake a form of risk assessment in order to determine whether an ATE policy will stand as sufficient security in the circumstances of a given case. 96 Secondly, it seems to me that the notion of "sufficiency" in this context requires more than a consideration of the policy terms and conditions, their contractual effect and how readily they might be or are likely to be legitimately avoided. These are no doubt important considerations. They must, of course, comprehend that parties to a contract of insurance, although acting in good faith, will nonetheless act in their own interests and may well disagree, on legitimately contestable grounds, on whether events have occurred that would enable the insurer to avoid or limit its liability under the contract in question. But the consideration of "sufficiency" must go further and extend to a practical assessment of the risks involved in having the benefits of the insurance, when called upon, turned to the account of those for whom security is to be provided. 97 Thirdly, while an understanding of the insurance contract is undoubtedly necessary, the understanding arrived at for the purposes of considering a security for costs application might not be the insurer's understanding. Here, of course, AmTrust Europe is not a party to the proceeding and would not, therefore, be bound by anything said in the present context as to the interpretation or effect of particular terms and conditions of the AmTrust policy. 98 In the present case, I propose to deal with the respondents' applications on the basis that the threshold requirement of s 1335(1) of the Corporations Act has been made out. This is how the parties originally approached the matter. Both in correspondence and in the course of case management by the Court, Petersen, up to this point, has accepted that security for the respondents' costs must be provided. I see no reason why I should depart from that framework, particularly given that, even on Petersen's argument invoking the recent United Kingdom cases, the dispositive consideration will be the sufficiency of the AmTrust policy as a form of security for the respondents' costs. 99 I turn now to consider the relevant provisions of the CL(TPCAI) Act. 100 The object of the CL(TPCAI) Act is to give effect to the recommendations of the New South Wales Law Reform Commission in Report 143: Third party claims on insurance money. The recommendations result from a review of s 6 of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) (the LR(MP) Act). Section 6 of the LR(MP) Act provides a statutory charge over insurance money payable under a contract on insurance and enables a third party to enforce that charge in respect of the insured's liability to pay damages or compensation to the third party. The CL(TPCAI) Act repeals Part 4 of the LR(MP) Act (which contains s 6) but preserves the operation of s 6 in actions brought against insurers under that section before the commencement of the CL(TPCAI) Act: s 12. 101 The central provision of the CL(TPCAI) Act is s 4, which provides: Claimant may recover from insurer in certain circumstances (1) If an insured person has an insured liability to a person (the claimant), the claimant may, subject to this Act, recover the amount of the insured liability from the insurer in proceedings before a court. (2) The amount of the insured liability is the amount of indemnity (if any) payable pursuant to the terms of the contract of insurance in respect of the insured person's liability to the claimant. (3) In proceedings brought by a claimant against an insurer under this section, the insurer stands in the place of the insured person as if the proceedings were proceedings to recover damages, compensation or costs from the insured person. Accordingly (but subject to this Act), the parties have the same rights and liabilities, and the court has the same powers, as if the proceedings were proceedings brought against the insured person. (4) This section does not entitle a claimant to recover any amount from a re-insurer under a contract or arrangement for re-insurance. 102 It will be observed that s 4 employs the mechanism of the insurer standing in the place of the insured person in respect of the third party's claim for damages, compensation or costs, as if the proceedings were brought against the insured person. The CL(TPCAI) Act does not employ the mechanism of the third party standing in the place of the insured person in respect of the insured person's claims under the contract of insurance against the insurer. 103 However, the insurer is entitled to rely defensively on the contract of insurance in any proceedings under s 4. The insurer is also entitled to rely on any defence that the insured person might have to the third party's claims for damages, compensation or costs. In this connection, s 7 provides: Matters on which insurer may rely In proceedings brought under section 4, the insurer is entitled to rely on any defence or any other matter in answer to the claim or in reduction of its liability to the claimant: (a) that the insurer would have been entitled to rely on in a claim made by the insured person under the contract of insurance, or (b) that the insured person would have been entitled to rely on in proceedings brought by the claimant against the insured person in respect of the insured liability. 104 Proceedings under s 4 by the third party against the insurer cannot be brought or continued except by leave of the court in which the proceedings are to be, or have been, commenced: s 5(1). The CL(TPCAI) Act does not prescribe any particular matter to be weighed in exercising the discretion to grant or refuse leave, but it does require leave to be refused if the insurer can establish that it is entitled, amongst other things, to disclaim liability under the contract of insurance: s 5(4). Whilst in terms unconfined (other than for the consequence required by s 5(4)), the exercise of discretion must be directed to the purpose for which it is conferred. I proceed on the basis that the purpose of s 5(1) is materially the same as the purpose for which, under the proviso to s 6 of the LR(MP) Act, leave was also required, namely to ensure that insurers are not exposed to "unnecessary" or "inappropriate" claims (Oswald v Bailey (1987) 11 NSWLR 715 at 717F-G) or "unwarranted" claims (Tzaidas v Child (2014) 61 NSWLR 18; [2004] NSWCA 252 at [17] and [107]).

evidence from amtrust europe 105 At this point, it is convenient to note the following unchallenged evidence given in Mr Pinner's affidavit: 20. At the end of proceedings in respect of which AmTrust has issued an ATE policy to an unsuccessful claimant, it is AmTrust's normal practice to pay the successful defendant's costs (in the amount agreed or assessed, but subject always to the policy limits and policy terms and conditions) directly to the defendant or the defendant's solicitors. 21. To the best of my knowledge and belief, having made appropriate enquiries with the Underwriting Department, I am not aware of, and I have no reason to believe that there are any grounds on which or reasons why AmTrust Europe would wish to cancel the Petersen Insurance Policy. 22. Clause 15.1 of the Petersen Insurance Policy provides that the policy will be construed in accordance with the law of the state in which the Proceeding is being conducted and AmTrust Europe has agreed to submit to that jurisdiction. I am not aware of, and I have no reason to believe that there are any grounds on which or reasons why AmTrust Europe would fail to submit to the jurisdiction of the state in which the Proceeding is being conducted. 23. To the best of my knowledge and belief, having made appropriate enquiries with the Underwriting Department, I am not aware of, and I have no reason to believe that there are any grounds on which or reasons why AmTrust Europe would not honour the Petersen Insurance Policy should the Respondents succeed in the Proceeding. 106 Whilst Petersen placed considerable reliance on this evidence to both negate the threshold requirement of s 1335(1) of the Corporations Act as it arises in this case, and to support the sufficiency of the AmTrust policy to meet BOQ's and DDH's costs, DDH also relied on it to illustrate that, should the AmTrust policy be called on, AmTrust Europe has made clear that it fully intends to rely on the policy terms and conditions, including the exclusions of liability and other terms and conditions that are of concern to the respondents.

Consideration 107 I am not persuaded that the AmTrust policy provides sufficient security for BOQ's and DDH's costs. There are a number of considerations which, in combination, lead me to that conclusion. 108 First, under the AmTrust policy, the insured is the party against whom a final costs order might be made (Petersen), not the parties who have the benefit of that costs order and who are seeking the benefit of the security (BOQ and DDH). Petersen and Mr and Mrs Petersen have given undertakings to the Court, which include undertakings to the effect that Petersen will make claims on the AmTrust policy to meet any adverse costs order; that the claims will be progressed by Petersen expeditiously; and that Petersen will pay to BOQ and DDH such amounts as are paid to it by AmTrust Europe in respect of Petersen's liability to BOQ and DDH. However, the undertakings do not include an undertaking to sue AmTrust Europe on the AmTrust policy to enforce any legitimate claim that AmTrust Europe is not prepared to meet. There is no mechanism by which the respondents can compel Petersen to sue on the policy. Further, Petersen's present impecuniosity shows that it is unlikely to have the financial wherewithal to do so. I have no reason to doubt, as Mr Pinner's affidavit makes tolerably clear, that AmTrust Europe will rely on the AmTrust policy terms and conditions. That is its legitimate right. 109 Secondly, the undertakings that Petersen and Mr and Mrs Petersen have given are undertakings given to the Court. They are not undertakings given to BOQ or DDH. BOQ and DDH have no contractual rights against Petersen or Mr and Mrs Petersen in that regard. Even if Petersen and Mr and Mrs Petersen were to give undertakings to BOQ and DDH in the terms of Exhibits 1 and 2, there is no evidence to suggest that those undertakings, of themselves, would provide BOQ and DDH with sufficient security. Petersen is known to be impecunious. Mr and Mrs Petersen's financial position is not known. And Vannin is not itself prepared to come forward and provide security (other than by payment of the premium for the AmTrust policy), even though it has an obvious commercial interest in the outcome of the litigation. 110 Thirdly, although the position faced by BOQ and DDH by reason of the first two matters is ameliorated to some extent by the possibility of proceedings under s 4 of the CL(TPCAI) Act, there remain a number of difficulties and potential obstacles to BOQ and DDH effectively or conveniently deploying that provision. 111 Section 4 of the CL(TPCAI) Act confers a local statutory right. An effective exercise of that right requires the presence of the insurer within the jurisdiction. AmTrust Europe is not present in Australia, let alone New South Wales. Moreover, as the CL(TPCAI) does not create surrogate contractual rights in favour of the third party against the insurer, BOQ and DDH, unlike Petersen, do not have the benefit of AmTrust Europe's agreement under clause 15.1 of the AmTrust policy to submit to the jurisdiction of courts in New South Wales. Thus, BOQ and DDH would be left to find some available and proper basis on which they could seek leave to serve AmTrust Europe outside Australia. To add to this complication, s 5 of the CL(TPCAI) Act would impose on BOQ and DDH the need to obtain leave to bring or continue the proceeding against AmTrust Europe in any event. Section 5(4) of the CL(TPCAI) Act shows that the insurer has an interest and right to be heard on that question. Thus, even at the point of seeking leave to proceed under s 4, BOQ and DDH would be faced with the task of suing a foreign defendant with no presence in Australia, with the attendant cost, expense and uncertainty that such a course would entail. 112 Further, even though the CL(TPCAI) Act does not operate so as to treat BOQ and DDH as if they were contracting parties with AmTrust Europe under the AmTrust policy, in any proceeding brought by BOQ or DDH under s 4, AmTrust Europe would be entitled to rely on any defence or other matter arising under the AmTrust policy that would answer or reduce its liability to Petersen: s 7(a) of the CL(TPCAI) Act. 113 In short, in proceedings based on s 4 of the CL(TPCAI) Act, BOQ and DDH would be in no better position, and in certain respects could well be in a materially worse position, than Petersen would be in if Petersen were to sue AmTrust Europe on the AmTrust policy. 114 Fourthly, clause 3.2 of the AmTrust policy provides for the consequences on non-disclosure, including in clause 3.2.1 AmTrust Europe's entitlement to reduce its liability under the AmTrust policy, or even cancel the policy, on the basis of non-fraudulent disclosure. BOQ and DDH do not know what information has or has not been provided to AmTrust Europe in relation to the proposal put forward to it. I have already referred to the paucity of the evidence concerning the circumstances in which the AmTrust policy was obtained for Petersen. Unlike the position in, for example, Premier Motorauctions, where Snowden J drew comfort from the fact that the policy was obtained by independent professional insolvency office-holders who had carried out their own investigation of the claimants' claims, no such comfort can be drawn here. Vannin, who is not a party to this proceeding but who, as I have found, engaged with AmTrust Europe to obtain the AmTrust policy, has not given evidence on the subject. The undisclosed basis on which Vannin obtained the AmTrust policy presents a not insignificant risk to which BOQ and DDH are exposed, which must be weighed in the balance. 115 Fifthly, the AmTrust policy does contain a significant number of exclusions from liability and other conditions affecting Petersen's legal entitlements under the contract of insurance. Whilst Petersen argues, in line with the United Kingdom cases, that the likelihood of these exclusions and other conditions becoming operative is "theoretical", I think that caution should be exercised in using that expression. In the present context, the expression "theoretical" reflects a value judgment that depends on whose risk is being assessed. For example, Petersen's appetite for risk might be such that it is prepared to treat the risk it bears under the AmTrust policy as "theoretical". After all, as a party to the insurance contract, it is in a position to manage the risks that it is prepared to assume or been required to assume. But BOQ and DDH are in no such position. They are not parties to the insurance contract and they have no control whatsoever as to how Petersen might choose to act under that contract. Thus, when considering the AmTrust policy as a resource from which Petersen's liability for costs can be met, BOQ's and DDH's exposure to risk is fundamentally different to Petersen's exposure to risk. 116 BOQ and DDH have sought to illustrate this proposition by reference to the cost of an unconditional indemnity in their favour from AmTrust Europe. The argument proceeded on the assumption that the indemnity was also irrevocable. I think that that is a reasonable assumption. Although I do not know the difference between the cost of the premium for the AmTrust policy and the cost of such an indemnity from AmTrust Europe in favour of BOQ and DDH, Mr Scattini's evidence suggests that there is a substantial difference which Petersen cannot meet and which, it seems, Vannin is not prepared to meet, save by passing on the additional cost to Petersen and the Group Members. 117 BOQ and DDH say that this difference reflects a difference in risk for AmTrust Europe and, correspondingly, a difference in risk for them. A similar argument was rejected by Snowden J in Premier Motorauctions who opined (at [63]) that the additional premium for an indemnity was simply a percentage of the amount secured by the deed of indemnity, "reflecting market practice for this type of product". So much can be accepted. But, in the absence of evidence to the contrary, I would accept that any material difference in the premium for the AmTrust policy and the premium for an unconditional indemnity in favour of the respondents from AmTrust Europe is also likely to be a reasonable indicator that materially different risks are to be assumed by AmTrust Europe for which it seeks, in the case of the unconditional indemnity, a commensurately greater reward. 118 For example, there are a number of terms and conditions of the AmTrust policy that are protective of AmTrust Europe's position. Leaving to one side the numerous exclusions from liability, AmTrust Europe is given rights and powers in respect of Petersen's conduct of the litigation that can be exercised through the instrumentality of AmTrust Europe's appointed Case Manager. No doubt these rights and powers would assist AmTrust Europe in managing the risk it assumes under the policy. 119 The AmTrust policy contains a number of provisions in this regard, including provisions that require Petersen to consult with and obtain the Case Manager's approval before taking certain steps. Further, under clause 2.1.12 of the AmTrust policy, AmTrust Europe will not pay any claim caused by or attributable to Petersen continuing in the litigation where the Case Manager has formed the view that it is more likely than not that Petersen will lose the litigation. The provision is subject to the Case Manager giving approval to Petersen to continue with the litigation, but it is difficult to see why, in those circumstances, the Case Manager, acting in AmTrust Europe's interests, would give such approval. Moreover, when AmTrust Europe determines that there has been a breach of the AmTrust policy, it has a right of cancellation. If AmTrust Europe cancels the policy then, under clause 6.3, it will not be liable to pay the insured liability incurred after the date of cancellation: see [54]-[57] above. 120 On the evidence before me, limited though it is, I accept that, in relation to Petersen's potential liability for costs, AmTrust Europe is likely to be subject to greater risk under an unconditional indemnity in favour of BOQ and DDH than it is under the AmTrust policy in favour of Petersen. Correspondingly, I would accept that security in relation to Petersen's potential liability for BOQ's and DDH's costs, in the form of Petersen's contractual entitlements under the AmTrust policy, presents greater risk for BOQ and DDH than would an unconditional indemnity from AmTrust Europe which is irrevocable and which BOQ and DDH could enforce in their own right. 121 Returning to Petersen's submission that the risks under the AmTrust policy are "theoretical", it may be the case that the risk that Petersen might fail to undertake one or more of the steps referred to in clause 2.1 is "theoretical" in the sense that, on the evidence, there is no reason to think that Petersen, acting rationally, would not take those steps. Indeed, it has undertaken to the Court that it will comply with its obligations under the AmTrust policy. However, other exclusions of liability in clause 2 are more problematic. I have already referred to clause 2.1.12. Clause 2.1.5 provides another example. In oral submissions, BOQ referred to the scope of operation this provision would have and to the fact that it places an obvious inhibition on the respondents as to how they should conduct their respective defences. As I have noted, BOQ submitted that it is quite likely that, at trial, the respondents will advance strong criticism of the way in which Petersen's case has been conceptualised and pleaded. The point, which seems to me to be of some cogency (despite Petersen's criticism of it), is that, from the respondents' perspective, it is simply not apposite to dismiss the risk assumed by Petersen under clause 2.1.5 as merely "theoretical" when the respondents intend to attack the very foundation on which Petersen's case is based. I accept, therefore, that clause 2.1.5 provides a significant exclusion from liability. I accept that the respondents should not be inhibited in the way they seek to present their respective defences by the jeopardy that, in doing so, they might also be undermining the only means by which they can recover their costs if they succeed in those defences. 122 In any event, the conduct of complex commercial litigation almost inevitably throws up difficult forensic and tactical challenges for the parties, which require decisions to be made along the way. These decisions may be made negligently, even if made in good faith. Obviously, the respondents have no control over the conduct of Petersen's legal advisers or the advice that they might give from time to time in the course of the litigation. They may well give advice or take steps that arguably trigger clause 2.1.5 to BOQ's and DDH's ultimate detriment. Why should parties in the position of the respondents bear the risk of how Petersen chooses to bring and conduct its own case? 123 I also accept the respondents' submission that the United Kingdom cases with respect to ATE policies should be treated with caution for the reason that the exclusions from liability in the AmTrust policy appear to be somewhat more extensive and onerous than the exclusions described or noted in the ATE policies there under consideration. I do not assume, for example, that the AmTrust policy would have been seen in the same light and treated with the same favour as, for example, the ATE policies discussed in Geophysical and Premier Motorauctions. 124 Sixthly, returning to the risk of cancellation, I have already pointed out (at [57] above) that it is possible that the AmTrust policy could be cancelled before a costs order is made against Petersen and, hence, before a legal liability arises to which the AmTrust policy can respond. Petersen argued that the only consequence would be that, because of a change in circumstances, the respondents could approach the Court to ask that the proceeding be stayed until replacement security is provided. This, however, would be of little comfort to the respondents. Upon cancellation - an event over which the respondents have no control - the security they had would have evaporated, with no guarantee that replacement security could be, or would be, provided in relation to costs they had already incurred. 125 Seventhly, in the course of oral submissions, I raised the question of what would happen to the proceeds of payment under the AmTrust policy if Petersen were to be placed in liquidation. I do not think that that possibility can be brushed to one side. Petersen accepts that, leaving aside the AmTrust policy, it is impecunious. It made no qualification in that regard. The respondents do not know Petersen's actual liabilities because Petersen has chosen not to disclose them. Petersen suggested that moneys payable as the proceeds of insurance under the AmTrust policy would be impressed with a Quistclose trust in favour of BOQ and DDH: Barclays Bank Limited v Quistclose Investments Limited [1970] AC 567. This argument was not developed and I was not referred to any authority on the point, although I note that, in the United Kingdom, the provisional view has been expressed, unassisted by argument on the question, that moneys payable under an ATE policy "may well be impressed with a Quistclose trust": GSM Export (UK) Ltd (In Administration) v Revenue and Customs Commissioners [2014] UKUT 457 (TCC) at [37]. BOQ disputed that position, at least so far as the present case is concerned. It submitted that there is nothing on the face of the AmTrust policy to suggest that there was any intention to create an express trust in favour of the respondents in respect of the insurance proceeds. BOQ suggested that the prospect that the insurance proceeds would be protected by a Quistclose trust is remote. 126 This is not the occasion to express any firm view on this question. It is enough for me to form the view, as I do, that there is a real question as to whether the insurance proceeds would be made available to BOQ and DDH in the event that Petersen were to be placed in external administration because of insolvency. It is quite possible that those proceeds would simply form part of the corpus of assets available to creditors generally. 127 Eighthly, as I have noted, clause 4.8.1 of the AmTrust policy provides that Petersen will instruct its solicitor to resist any application for the summary assessment of the respondents' costs. Clause 4.8.2 provides that Petersen will instruct its solicitor to resist any application by the respondents for their costs unless Petersen has the Case Manager's approval not to do so. These clauses refer to costs at any stage of the proceeding. They have the real, not merely "theoretical", potential to interfere with the obligation imposed on parties and their lawyers by s 37N of the Federal Court Act to conduct the proceeding in a way that is consistent with the overarching purpose of facilitating the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible. AmTrust Europe is not a party to the proceeding and is not, through lawyers or otherwise, subject to the control of the Court. Nevertheless, Petersen's contractual entitlements under the AmTrust policy are subject to the exercise of this level of control by AmTrust Europe in the proceeding itself. Whilst this consideration is not directly related to the sufficiency of the AmTrust policy as a form of security, it is relevant as to how the Court should exercise its discretion and, in particular, whether the AmTrust policy should be regarded as an appropriate form of security. I accept DDH's submission that the unqualified obligations imposed by these clauses are in apparent conflict with the duties owed by Petersen and its legal representatives to the Court. 128 For completeness, I should record that I am not persuaded that the limitation of the insured liability under the AmTrust policy to $5.5 million or the fact that AmTrust Europe has the benefit of the under-insurance provision in clause 13, stand as reasons for rejecting the AmTrust policy as providing sufficient security, at least at this stage of the proceeding. Obviously, the amount of the security to be provided is very important. But the amount of security presently sought by the respondents is well within the limits of the AmTrust policy. BOQ and DDH are able to superintend the level of their own costs and, if necessary, apply for additional security. I do note, however, that DDH has provided a high-level estimate of its overall costs for the proceeding, which puts those costs in the range of approximately $3.4 million to $4.6 million. Assuming that estimate to be accurate, it is tolerably clear that, when BOQ's overall costs are factored in (which I assume will be in a similar range), the AmTrust policy would not provide sufficient security, on the basis of quantum alone, for all the costs that the respondents might reasonably incur in the proceeding. 129 Having found (1) that the AmTrust policy does not provide sufficient security for BOQ's and DDH's costs or is an otherwise inappropriate form of security (for the reasons discussed at [127] above), and given (2) that Petersen accepts that it is impecunious (putting the AmTrust policy to one side), I accept that it is appropriate that some other form of security be provided for the respondents' costs. 130 Petersen advances a number of discretionary reasons why this should not be so. It argued that its claim is regular on its face and discloses a cause of action. It also argued that its claim is bona fide, with some prospect of success. For the purposes of the present applications, the respondents did not argue to the contrary. However, I am not persuaded that these considerations alone lead to a conclusion that security should not be provided. 131 Petersen also argued that security for costs should not be ordered because its impecuniosity can be attributed to the conduct of the respondents. Petersen submitted that this consideration was "most relevant" to the Court's exercise of discretion. 132 I reject this contention for a number of reasons. 133 First, up to the present time, Petersen has accepted, without qualification, that security for the respondents' costs should be provided. The only question has been the form and amount of the security to be provided. 134 Secondly, whilst acknowledging that it is impecunious, Petersen has not adduced evidence of its financial circumstances or sought to demonstrate, by evidence, any causal connection between its accepted impecuniosity and the conduct complained of in this proceeding. It has simply asserted that its impecuniosity can be attributed to the conduct of the respondents. That proposition is not self-evident. The absence of evidence is fatal to its contention. In Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291, McClellan CJ at CL said (at [94]-[96]): [94] The claimants carried the onus of establishing both the adequacy of their financial position before their dealings with the opponents and that the opponents' actions have caused or at least materially contributed to the claimants' inability to meet an order for security for costs: see Fiduciary Ltd v Morningstar Research Pty Ltd at [100]. [95] In Law of Costs, G E Dal Pont says (at [29.96]): [T]he plaintiff must be able to support the allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial. For this reason, it is not enough that the defendant's conduct is merely a contributing factor - it must be the material contributor to or cause of the plaintiff's impecuniosity. [Emphasis added] (See also MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100 per Needham J; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [88] per Austin J; Pioneer Park (in liq) v ANZ [2005] NSWSC 832 at [14] per Einstein J; Sharjade v Darwinia Estate [2006] NSWSC 708 at [17]-[20] per McDougall J) [96] The events of which complaint is made occurred in 1993-1999. It may be that those events, whether by result of actionable fault of the opponents or otherwise, deprived the claimants of anticipated profits. It is conceivable that since those events to date their working capital has diminished, making it more difficult to continue their development activities and take advantage of available business opportunities. However, the evidence before her Honour would not enable these conclusions to be drawn. The fact that the claimants were unable to realise profits from the proposed venture does not, without other evidence, establish that their present impecuniosity has been caused or even materially contributed to by the opponents. 135 Thirdly, Petersen has not said that an order that it provide sufficient security for the respondents' costs would stultify its claim. As I have previously noted, those standing behind Petersen, namely Mr and Mrs Petersen (and the beneficiaries of the Petersen Superannuation Fund, if they be different) and Vannin - all of whom are likely to benefit from Petersen's success in the litigation - have chosen not to put their own financial circumstances before the Court. More importantly, they have not sought to assist Petersen financially in this proceeding beyond, of course, Vannin paying the premium for the AmTrust policy. 136 Petersen also argued that there is no evidence that it has been deliberately selected as a "person of straw" in order to immunise Group Members of substantial means from a liability to pay costs. I accept this to be the case; but the respondents did not suggest otherwise. Once again, I am not persuaded that this consideration leads to a conclusion that security should not be provided. 137 I will address the appropriate form of security in later paragraphs of these reasons. I now turn to consider the amount that should be provided for security. There is no dispute that security should be provided in stages.

BOQ's estimate 138 At this stage, BOQ seeks security for its costs incurred and estimated up to the completion of discovery. BOQ seeks security in the amount of $1,008,116.90. This amount is exclusive of GST. It does not cover costs incurred by BOQ in relation to its separate cross-claims against Petersen and DDH. 139 Mr Emmerig's evidence (set out in two affidavits) was that, at the time of the hearing, BOQ's then billed costs were $672,000 comprising solicitors' fees, counsel's fees and other disbursements. Unbilled costs were $211,970 and unbilled disbursements were $22,225. Thus, the total amount of BOQ's billed and unbilled costs, from the commencement of Jones Day's retainer in March 2016 to the date of the hearing, was $906,195. 140 Mr Emmerig summarised the principal tasks undertaken by his firm in relation to this billed and unbilled work. I will not repeat that summary. I will, however, draw attention to the fact that the firm's work included reviewing over 18,000 documents produced by the Australian Securities and Investments Commission (ASIC) in response to a subpoena served on it by Petersen. The work also included undertaking a "first pass" review of approximately 20,000 documents that had been collated as part of the discovery to be given by BOQ. 141 Mr Emmerig said that the next steps to be taken by Jones Day include: continuing the collation and review of records held by BOQ for the purposes of discovery, as well as preparing a list of documents and taking instructions from BOQ thereon; reviewing the documents to be produced on discovery by Petersen and DDH; and reviewing records produced by the liquidators of SFP in answer to the subpoena served by Petersen. 142 I note the following matters. 143 First, as a result of an agreement between BOQ and Petersen, the period in respect of which BOQ has been ordered to provide discovery is 1 January 2009 to 1 February 2013 - a period of just over 4 years - in respect of categories of documents specified in relatively broad terms. I have no doubt that the involvement of Jones Day in relation to the discovery to be given by BOQ will be both substantial and time-consuming. 144 At the date of the hearing, Mr Emmerig was able to report that: in the order of 868 gigabytes of primary electronic records have been collated by BOQ for discovery (comprising an estimated 14 million primary electronic records) sourced from over 65 custodians (current and former employees of BOQ) and multiple departments and teams within BOQ; many of these records have been sourced from BOQ's back-up tapes maintained offsite by a third party provider, giving rise to associated cost and access issues; it has been necessary for BOQ's electronic discovery provider to undertake significant work to process the primary electronic records (including de-duplication, coding and key word searches) so that the records can be made available for review by Jones Day; and key word searches had, at that stage, generated in the order of 60,000 documents for review. As I have noted, Jones Day has already undertaken a "first pass" review of approximately 20,000 of these documents. 145 On 10 February 2017, BOQ produced a first tranche of discovery to Petersen and DDH. The processing and review by Jones Day of documents collated by BOQ is ongoing. 146 Secondly, at the date of the hearing, DDH had produced its first tranche of discovery comprising 4,830 documents. Mr Johnson, DDH's solicitor, has given evidence that DDH will produce approximately 60,000 documents on discovery. 147 Thirdly, Mr Emmerig estimated the cost of reviewing the documents to be produced by SFP's liquidators at $298,350. This estimate based on the assumption, noted at [3] above, that at least 100,000 documents from the database may need to be reviewed. 148 Mr Emmerig has estimated that the costs to be incurred by BOQ in relation to the work noted at [141] above are likely to be $533,972. This amount includes an agreed client discount of 20%. Mr Emmerig's estimate is explained in a table which identifies the categories of work to be undertaken; the categories of lawyers who will be undertaking that work (Junior Lawyer/Paralegal, Senior Lawyer, Partner and Junior Counsel); and the times allocated to, and the charge out rates for, the categories of lawyers concerned. Mr Emmerig did not provide a similar analysis in relation to the billed and unbilled costs noted at [139] above. The categories of work identified in the table are expressed in broad terms covering a range of activities. These activities have not been broken down and separately itemised according to Sch 3 of the FCR, as they would need to be on a taxation of costs. I make no criticism in this regard. Such itemisation is not necessary for the purposes of the present application. 149 From my short description, it can be seen that the total costs incurred or estimated by Mr Emmerig for this stage is $1,440,167. The security that BOQ seeks is 70% of this amount.

Petersen's submissions 150 Petersen submitted that this amount is excessive. The basis for this submission is articulated in two affidavits made by Mr Scattini. The first affidavit deals with the matters summarised at [151]-[155] below. The second affidavit deals with the matter summarised at [156]-[157] below. 151 First, prior to the commencement of this proceeding, BOQ had been involved in an ASIC investigation relating to "the underlying factual circumstances" of the proceeding. Mr Scattini's understanding is that, in the course of that investigation, BOQ would have reviewed and compiled documents that are relevant to this proceeding. Mr Scattini expressed the belief that, because of BOQ's involvement in the ASIC investigation, Jones Day would be able to manage the present proceeding (particularly the process of discovery) more efficiently than would otherwise be the case. 152 Secondly, Mr Scattini suggested that, because DDH is required to discover more categories of documents than BOQ, and because DDH has sought a lesser amount for security than BOQ at this stage of the proceeding, it would follow that BOQ's estimate for costs is excessive. 153 Thirdly, Mr Scattini said that much of the work identified by Mr Emmerig would be relevant to BOQ's cross-claim against DDH. 154 Fourthly, Mr Scattini said that, based on his experience, much of the work identified in Mr Emmerig's first affidavit would not be recoverable on an hourly rate basis if costs were to be assessed having regard to the scale in Sch 3 FCR. 155 Fifthly, Mr Scattini said that some of the work identified by Emmerig would involve duplication between various solicitors and staff, which should not be borne by Petersen. 156 Sixthly, Mr Scattini directed particular attention to Mr Emmerig's estimate of the costs that will be incurred in reviewing the records to be produced by SFP's liquidators. Mr Scattini argued that it was premature to make an assessment of the costs that would be incurred in this regard because Mr Emmerig's assumption that at least 100,000 electronic documents would need to be reviewed was speculative and is likely to be an overstatement of the potential work involved, given that: the database is likely to contain, to a large extent, wholly irrelevant or unimportant documents that could be excluded from review (such as social/spam emails; employment records; tax records; CHESS statements and documents relating to clients other than Class Members); and the database covers documents for a period significantly greater than the period relevant to the events pleaded in the statement of claim. 157 Thus, Petersen submitted, the appropriate course is to exclude these costs from the first stage of security and to revisit the question of security for the costs of this work at a later stage in the proceeding when more reliable information is known.

Consideration and conclusion on the amount of security to be provided 158 As to the first matter ([151] above), I note Mr Emmerig's evidence that, prior to March 2016, Jones Day had not been retained by BOQ in relation to the matters the subject of this proceeding or the ASIC investigation (and a related proceeding in the Supreme Court of Queensland); in particular, Jones Day was not involved in the collation or review of documents for the ASIC investigation or the related Queensland proceeding other than, it seems, a notice issued in June 2016 concerning risk assessments for MMDAs which were created or operated in the period 16 September 2010 to 9 January 2013. Further, the discovery required of BOQ in this proceeding is wider in scope and covers a longer period of time. Given these facts, it is difficult to see how the work that Jones Day will be required to undertake in relation to BOQ's discovery will have been facilitated by any work that BOQ was itself required to undertake for the purposes of the ASIC investigation or the related Queensland proceeding other than, possibly, the production of the risk assessments to which I have referred. 159 As to the second matter ([152] above), I do not accept that the amount of security that BOQ seeks bears some relation to the amount of security that DDH seeks. It does not follow from Mr Scattini's calculus that the amount of security sought by BOQ is excessive. 160 As to the third matter ([153] above), Mr Emmerig has made clear that his estimate does not concern work in relation to BOQ's cross-claims. 161 As to the fourth and fifth matters ([154]-[155]), Mr Scattini's criticisms of Mr Emmerig's estimate do not provide any assistance as to what work would not be recoverable on an hourly rate basis. Similarly, Mr Scattini does not identify where he thinks that duplication might have occurred in Mr Emmerig's estimate, or the extent of that duplication. I accept, however, that a measure of unnecessary duplication would inevitably be involved in the review tasks described in categories 1, 4 and 5 of the work categories identified by Mr Emmerig. This, however, can be accounted for, in a broad way, by an overall percentage reduction in the amount of the costs claimed. I note that, after allowing for an agreed client discount of 20%, Mr Emmerig then applied such a reduction, reflected in BOQ seeking security for only 70% of the discounted costs estimated by Mr Emmerig. 162 As to the sixth matter ([156]-[157] above), BOQ submitted that Mr Emmerig's estimate for this component is reasonable because it is based on a review of only 10% of the documents in the database. In this connection, BOQ also noted that the documents in the database have already undergone a de-duplication and system file filtering process. I note, however, that the estimate of DDH's costs (discussed below at [174]) is based on a review of 40,000 documents in the database. Thus, there is a significant difference in BOQ's and DDH's positions, although DDH's is, admittedly, a qualified position. For present purposes, I think that DDH's more conservative assumption should be adopted. It follows that, in my view, BOQ should only be allowed 40% of its present estimate for this component. This allowance will be without prejudice to BOQ seeking further security if the number of documents required to be reviewed is significantly greater than 40,000 documents or if there is some other materially significant change in circumstances. 163 Given the kind of evaluation that is required in an application for security for costs, I am satisfied that it is appropriate to adopt an hourly rate approach in order to come to a broad view as to the amount of the costs that might be allowed to BOQ on a party and party basis, if taxed. Apart from generalised assertions, Mr Scattini did not comment on Mr Emmerig's time estimates, which I propose to adopt. They appear to be reasonable and provide for an appropriate degree of delegation for the tasks involved. 164 Proceeding on this basis, I am satisfied that the rate adopted by Mr Emmerig for Junior Counsel is appropriate for the present exercise. I am not persuaded, however, that the other rates adopted by Mr Emmerig are appropriate. It seems to me that they are too high. The capped rates in Item 1 of Sch 3 FCR provide guidance. That said, when these rates are applied to Mr Emmerig's weighted time analysis, the result is much the same as Mr Emmerig's overall estimate based on the rates he adopted. In fact, on my calculation, Mr Emmerig's estimate is lower. This is because, in his calculation, Mr Emmerig applies a client discount of 20% to the overall total which, as it happens, brings the result into line with the amount calculated by reference to the Sch 3 rates, which apply no such discount. 165 For these reasons, I am satisfied that, at this stage of the proceeding, Petersen should provide security for BOQ's costs in the amount of $908,000. This figure, which has been rounded up slightly, provides for the downward adjustment referred to at [162] above. As I have stated, the amount of security provided for will also be without prejudice to BOQ seeking further security if the number of documents required to be reviewed as a consequence of the production of documents by SFP's liquidators is significantly greater than 40,000 documents or if there is some other materially significant change in circumstances in that regard.

DDH's estimate 166 DDH adopted a different approach to that taken by BOQ in providing its estimate of the amount of security that should be provided. Like BOQ, DDH seeks security for costs incurred and estimated. DDH supported the amount it seeks by two affidavits from Mr Johnson, who is a consultant at DDH's solicitors, Johnson Winter and Slattery (JWS). Mr Johnson has the day-to-day carriage of the proceeding on DDH's behalf. Unlike BOQ, DDH also engaged an independent cost consultant, Ms Vine-Hall, to provide an expert opinion on the likely recoverability of DDH's incurred and estimated costs, on a party and party basis. Ms Vine-Hall prepared two affidavits, the second of which was directed to the question of the recoverability by a successful respondent of its defence costs in circumstances where the issues raised are also issues raised in a cross-claim brought by that respondent. 167 The incurred costs component is $209,700.50 exclusive of GST. It relates to costs incurred up to 31 October 2016. It is convenient to refer to this as the past costs component. Mr Johnson said that this amount excludes work done in respect of BOQ's cross-claim against DDH. 168 Mr Johnson summarised the work undertaken in this regard. Once again, I will not repeat that summary. I note, however, that the work included reviewing part of the 18,000 documents produced by ASIC under subpoena, and collating and reviewing large volumes of documents held by DDH in order to prepare DDH's defence to the claim. 169 The estimated costs component concerns four streams of work, identified as: giving discovery; completing a review and analysis of the documents produced by ASIC; reviewing the documents to be produced by SFP's liquidators; and "matter management and other miscellaneous tasks". 170 It is convenient to refer to these estimated costs as the future costs component, although by the time of the hearing some of this work had already been undertaken. 171 As to giving discovery, Mr Johnson estimated that DDH would produce about 60,000 documents of which about 20,000 would need to be reviewed by lawyers at JWS. Mr Johnson said that, to the extent possible, the review function would be undertaken by Law Graduates. However, more senior lawyers would be involved in managing the review process and undertaking discovery-related tasks such as managing the database, reviewing significant documents, and preparing the discovery list and verifying affidavit. 172 Mr Johnson made clear that, in providing his estimate for this work stream, he has taken into account DDH's prior involvement in the ASIC investigation, and its compliance with ASIC's requests for documentation which, he said, has achieved efficiencies in the discovery process. He also said, however, that substantial work was and is still required in order for DDH to comply with its discovery obligations. This is because a number of categories of documents required to be discovered are broader in scope than ASIC's requests for documents in the course of the investigation. Mr Johnson said that searches have revealed approximately 18,000 newly-identified documents that are relevant to discovery. He also made clear that the team within JWS responsible for reviewing discovery documents, the documents produced under subpoena by ASIC, and the documents to be produced by SFP's liquidators, does not have a pre-existing background in this matter. Mr Johnson said that, apart from some limited involvement by him, DDH was principally advised during the ASIC investigation by a Brisbane-based partner at JWS who has now left the firm. 173 As to reviewing the documents produced by ASIC, Mr Johnson said that Law Graduates have conducted a targeted review for the purpose of assembling the documents into bundles according to issues. He said that a more general review will need to be done, most likely by the Law Graduates because of their familiarity with this material. The documents include transcripts of interviews and examinations conducted by ASIC, which will need to be summarised for the purpose of making their contents more readily available to counsel. 174 As to reviewing the documents to be produced by SFP's liquidators, Mr Johnson estimated that it would be necessary to review 40,000 electronic documents. He envisaged that this task would be undertaken principally by Law Graduates. He also said that it would be necessary for a more senior lawyer to attend a storage facility in Brisbane to review the 550 boxes of hard copy documents in the liquidators' possession. Although Mr Johnson provided an estimate of the costs for this work stream, he cautioned that, because JWS had yet to have access to this material, it may well be necessary for him to revise the estimate he has provided in this regard. As I have noted, this position was accepted by Petersen. 175 Mr Johnson originally estimated the future costs component at $582,221. He said that no work had been included that related solely to BOQ's cross-claim against DDH. He subsequently revised this estimate in light of more current information that indicated that DDH's costs of providing discovery would be considerably less than Mr Johnson had originally anticipated. The revised estimate was $458,268. 176 Ms Vine-Hall's first affidavit was directed to the likely recoverability of the past costs component, and the future costs component based on Mr Johnson's original estimate of $582,221 for the future costs component. In undertaking her review, she was asked to make certain assumptions, including those underpinning Mr Johnson's original estimate for the future costs component. Obviously, by the time of the hearing, those assumptions were no longer valid, for the reason I have noted immediately above. 177 I will not detail the various matters canvassed in Ms Vine-Hall's affidavit other than to note that she gave thorough and careful consideration to the task she was assigned. 178 For the reasons expressed in her affidavit, Ms Vine-Hall was of the opinion that, in relation to the past costs component, DDH was likely to recover $177,216.32. In relation to the future costs component, Ms Vine-Hall was of the opinion that DDH was likely to recover $509,841. Thus, in relation to the two components, Ms Vine-Hall's opinion was that DDH was likely to recover $687,057.32, or approximately 86.8% of the total amount of Mr Johnson's original calculation. DDH took the sensible course of applying the same percentage figure to Mr Johnson's revised estimate for the future costs component. Thus, DDH sought security in the total amount of $578,460.72, subject to its reservation concerning the possible need for a greater amount of security in relation to the review of documents to be produced by SFP's liquidators. DDH submitted that this amount could be conveniently rounded down to $578,000.

Petersen's submissions 179 Petersen submitted that the amount sought as security by DDH is excessive. Once again, this position was advanced through evidence given by Mr Scattini. 180 First, Mr Scattini referred to DDH's involvement in the ASIC investigation and, as he did in relation to BOQ, expressed the belief, based on his experience, that JWS would be able to manage the proceeding (particularly the discovery process) more efficiently than would otherwise be the case, given DDH's review of documents that had been produced as part of the ASIC investigation. 181 Secondly, Mr Scattini said that much of the work identified by Mr Johnson would be relevant to BOQ's cross-claim against DDH. 182 Thirdly, Mr Scattini challenged Ms Vine-Hall's opinion by stating that "it is inherently difficult for a third party … to accurately estimate the recoverable future costs of a party in a matter as complicated as [this proceeding]".

Consideration and conclusion on the amount of security to be provided 183 As to the first matter ([180] above), I note Mr Johnson's evidence that his estimate takes into account the efficiencies that have been achieved by DDH's involvement in the ASIC investigation. 184 As to the second matter ([181] above), Mr Johnson has made clear that his calculations do not concern work in relation to BOQ's cross-claim against DDH or at least work solely referable to BOQ's cross-claim. This is in accordance with authority. The costs of a cross-claim are only those by which the costs of the proceeding have been increased by the cross-claim. No costs not incurred by reason of the cross-claim can be costs of the cross-claim: Medway Oil and Storage Co Ltd v Continental Contractors Ltd [1929] AC 88; Mahlo v Westpac Banking Corporation Ltd [1999] NSWCA 358 at [88] per Sheller JA with whom Spigelman CJ at [1] and Mason P at [25] agreed. 185 As to the third matter ([182] above, I can see no reason why I should not be guided by Ms Vine-Hall's carefully considered and expressed expert opinion. 186 I am satisfied that, at this stage of the proceeding, Petersen should provide security for DDH's costs in the amount of $578,000. This is a slightly rounded down figure. The amount of security provided for will be without prejudice to DDH seeking further security if the number of documents required to be reviewed as a consequence of the production of documents by SFP's liquidators is significantly greater than 40,000 documents or if there is some other materially significant change in circumstances in that regard.

The appropriate form of security 187 As I have noted, BOQ contended that Petersen should provide security by payment into court or by providing, in acceptable form, a bank guarantee in its favour by an Australian trading bank. DDH adopted a similar position, except that it said that it is prepared to accept, in appropriate form, an unconditional (and, I would infer, an irrevocable) deed of indemnity in its favour from AmTrust Europe. In this latter regard, my attention was drawn to Hargrave J's acceptance of this form of security in DIF III Global. I note, however, that Petersen has not offered to provide an unconditional and irrevocable deed of indemnity as a form of security. 188 Therefore, Petersen should provide security by payment into court or by providing an appropriately worded bank guarantee from an Australian trading bank. It may be that the parties can agree on some other form of security, in which event their agreement should prevail.

Disposition 189 The parties are to bring in agreed orders or, if agreement cannot be reached, proposed orders giving effect to these reasons, by no later than 4.00 pm on 28 June 2017. Security is to be provided by no later than one calendar month after the orders are made. If security is not provided as ordered then the proceeding is to be stayed, subject to further order of the Court. Petersen is to pay BOQ's and DDH's costs of and incidental to their respective applications. I certify that the preceding one hundred and eighty-nine (189) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.