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]).