Plaintiff v Defendant

Citrus Queensland Pty Ltd v. Sun State Orchards Pty Ltd No. 5 [2006] FCR 1672.

Dalrymple Park Pty Ltd v. Tabe & Lees [1996] TASSC 101; (1996) 6 TasR 111.

Equity Access Ltd v. Westpac Corporation (1989) ATPR 40-972.

FFE Minerals Australia Pty Ltd v. Mining Australia Pty Ltd [2000] WASCA 69.

Frankston & Bassetter Pty Ltd v. Sigma Insurance Australia Ltd (1991) 9 ACLC 790.

Interwest Ltd v. Tricon Metal Corp Ltd (1991) 5 ACSR 621.

Irwin Alsop Services v. Mercantile Mutual Insurance [1986] VicRp 6; [1986] VR 61.

Lagarna Pty Ltd v. Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] VicRp 9; (1995) 1 VR 150.

Laundry Coin-Wash Nominees Pty Ltd v. Dunlop Olympic Ltd (1985) ATPR 40-584.

Prime Forme Cutting Pty Ltd v. Baltica General Insurance Co (1990) 8 ACLC 29.

Quichorn Pty Ltd v. Broad VSC, No.4001, 24 January 1994, unreported decision.

Re Insurance Australia Group Ltd v. HIH Casualty and General Insurance Ltd (in liquidation) [2003] FCA 803.

Street and Seven v. Luna Park Sydney [2006] NSWSC 1317.

Tenth Anemot Pty Ltd v. Colonial Mutual General Insurance Co Ltd [1993] VicRp 56; [1993] 2 VR 48.

William Buck (Vic) Pty Ltd v. Perception Pty Ltd [2006] VSC 385.

World Class Alpacas v. Ostrich Farms (Cooke Islands) Unreported Federal Court.

1 I have before me an appeal by Kliger Partners against orders of Master Daly made 30 May 2007 refusing security for costs and against an order made on 31 May 2007 refusing a request for further particulars.

2 Mr S.K. Wilson, one of Her Majesty's Counsel, with Mr S. Rubenstein of Counsel appears for the plaintiff Livingspring Pty Ltd ("Livingspring"). Mr J. Gleeson of Counsel appears for the defendant Kliger Partners.

4 The proceedings were commenced by writ on 2 March 2006. Kliger Partners entered an appearance on 10 March 2006. The statement of claim is dated 26 April 2006.

5 Livingspring alleges that it is the trustee of the Livingspring Unit Trust and from about 1 June 2000 the trustee of the Joyspring Unit Trust. The defendant Kliger Partners are solicitors carrying on practice in Victoria.

6 Livingspring alleges that in or about 1998, Livingspring engaged Kliger Partners to act as solicitors in relation to various aspects of Livingspring's development projects known as the Arrow Apartments, 488 Swanston Street, Melbourne, and the Harbour View Apartments, 585 Latrobe Street, Melbourne. Livingspring alleges that the retainer of Kliger Partners included the incorporation of the trustees and setting up of the trust structure pursuant to which the developments would proceed and acting for them generally in the acquisition and development of the projects. The retainer is said to also include doing the conveyancing on sales of apartments at the development. Kliger Partners admit the conveyancing but do not admit the other allegations. This is peculiar in view of the fact that the unit trust deeds of the Livingspring Unit Trust and the Joyspring Unit Trust exhibited in evidence indicate they were prepared by Kliger Partners.

7 In a nutshell, Livingspring is suing Kliger Partners as its solicitors for allegedly disbursing moneys that either were in trust or were due to come into trust on the sale of apartments from these developments at the direction of Mr Chris Ng. Livingspring is undertaking other proceedings against Mr Ng and a number of other companies related to him alleging that under the guise of acting as architect and project manager for the development of the residential student complexes, Mr Ng misappropriated about $15 million from the projects over several years[1]. This case is part of a wider attempt by Livingspring to recover the moneys which it alleged were wrongly taken. In particular, it is alleged that Kliger Partners in a general sense facilitated the removal of about $2½ million of that money by allowing Ng to take moneys that should have been accounted for to Livingspring in its own right.

8 In defence, Kliger Partners allege that the distribution of moneys was authorised by Livingspring in that Livingspring had given a power of attorney dated 30 June 1998 in favour of Chris Ng and that Livingspring had authorised Ng to give instructions to Kliger Partners on the distribution of moneys.

9 Livingspring says that the power of attorney was prepared by Kliger Partners without Kliger Partners at any time consulting with Livingspring or its board of directors about the purpose or scope for which the power was being conferred. Livingspring further alleges that on 30 June 1998, at a meeting of directors, the board made it clear that the power of attorney was for a specific purpose, that being, to facilitate the sale and settlement of properties. Livingspring alleges that the minutes of this meeting were prepared by the then secretary, Chris Ng, two weeks after the meeting. Further, Livingspring alleges that the power of attorney was drawn up in conflict with a resolution of Livingspring's board of directors and Kliger Partners were negligent in failing to satisfy themselves as to the proper authority and basis on which the company was purportedly granting the power of attorney to Chris Ng[2].

10 As mentioned above, Livingspring has also instituted several other actions in the Supreme Court of Victoria against Chris Ng and related companies, the National Australia Bank and their former accountants, Williams, all related to the alleged misappropriation of the approximately $15 million. Kliger Partners allege that these actions and other minor actions taken by Livingspring put a financial burden on Livingspring and are a further reason why Livingspring may not be able to meet an order for costs in favour of Kliger Partners in the event of Livingspring failing in this proceeding.

11 Livingspring has a paid up capital of $10. It is the trustee of the Livingspring Unit Trust, which was established on 24 June 1997. The statement of claim alleges that K.L. & J.H. Goh held 50 per cent of the units in the unit trust, Dr Chan held 20 per cent and Chris Ng 30 per cent through companies nominated by them being Wellspring Pty Ltd, Qerem Pty Ltd and Ecomace Pty Ltd respectively. The trust deed indicates they were the initial ordinary class unit holders. The Joyspring Unit Trust was established by deed dated 18 June 1997 wherein Joyspring Pty Ltd was the trustee. Livingspring alleges that in about June 2000, Livingspring was appointed the trustee of the Joyspring Unit Trust.

12 Livingspring is said to be a part of the "Livingspring Group of Companies", which are said to include Joyspring Pty Ltd, Arrow on Swanston (Aust) Pty Ltd as the trustee of the Arrow Heights Unit Trust and Harbour Light (Aust) Pty Ltd as the trustee of the Nova Harbour Views Unit Trust[3]. Mr Lee, the chief executive officer of Livingspring, in his first affidavit sworn 5 July 2007 ("Lee's first affidavit"), says that these companies are involved in and associated with the ownership, operation and management of two apartment complexes at Latrobe Street and Swanston Street, Melbourne. The apartment complexes include, among other things, a combination of facilities for overseas students. The apartments are available for sale.

13 It was not explained to me what role each of these companies plays in the two apartment complexes. As will become clear later, this is of some concern due to the confusing nature of the inter-company loans within the so called "Livingspring Group of Companies". I say "so called", because normally a group applies where there is a parent/subsidiary relationship. I am not sure whether or not that applies to this so called group of companies as on consolidation of the accounts inter company loans were not eliminated. Further, as they are trustee companies, it is not clear how their assets and liabilities can be consolidated.

14 As indicated above, Livingspring has no material assets of its own (save its rights of indemnity), but merely acts as the trustee of the Livingspring Unit Trust and the Joyspring Unit Trust. The Livingspring Unit Trust operates the Arrow apartments and the Joyspring Unit Trust operates the Harbour View apartments[4]. Currently, there are 76 Arrow Apartments and 132 Arrow car-parks available for sale. As for Harbour View, there are seven Harbour View apartments and 21 Harbour car-parks available for sale.

15 In addition to selling apartments, Livingspring as trustee receives income from the leasing of the apartments to students. The financial accounts of Livingspring are to be found primarily in an exhibit entitled "Copy of Livingspring Pty Ltd Consolidated Accounts as at 30 April 2007, together with accounting worksheets underlying the consolidated accounts"[5]. A balance sheet is produced entitled "Livingspring Pty Ltd and its Related Entities Financial Report as at 30 April 2007." It is unaudited. In addition, a statement of income and expenditure for Livingspring and its related entities is produced broken down into the Livingspring Unit Trust, Joyspring Unit Trust, Arrow on Swanston Street (Aust) Pty Ltd, Harbour Light (Aust) Pty Ltd "InterCo" transactions and a consolidated column. In addition, a balance sheet is produced as at 30 April 2007 broken down into a consolidated balance sheet and balance sheets for the Livingspring Unit Trust, the Joyspring Unit Trust, Arrow on Swanston Street (Aust) Pty Ltd (includes B & E and Archers), Harbour Light (Aust) Pty Ltd and a column for inter-company transactions.

16 Mr Lee, in his first affidavit, swore that he was the chief executive officer and company secretary of several other companies that are part of the "Livingspring Group of Companies", including Joyspring Pty Ltd, Arrow on Swanston (Aust) Pty Ltd as trustee for Arrow Heights Unit Trust ("arrow on Swanston") and Harbourlight (Aust) Pty Ltd as trustee for Harbour View Unit Trust ("Harbourlight"). Mr Lee holds accounting qualifications and is a Fellow of CPA Australia. He deposes that the accounts in KP-5 referred to above are management accounts prepared by Michael Cheong, an accountant employed by Livingspring. Subject to one caveat, he believed the accounts to be true and correct. The one caveat was that the accounts identify a series of related party loans between various companies in the "Livingspring Group of Companies". Mr Lee says that due to certain ambiguities and bookkeeping irregularities in the books of account arising essentially from the administration of the companies by Mr Ng, he is unable to reconcile the loan account balances for inter-company transactions between the companies in the "Livingspring Group of Companies" for the period up to when Chris Ng was removed from the management of those companies in about April 2003. Mr Lee says the effect of this is that the balances for the inter company loans may not be accurate and will not be able to be reconciled until certain liability issues are determined by the court in proceedings 2001 of 2004. He says that as a result of this, he cannot categorically confirm the loan account balances are true and correct, and he suspects that they are not. He says that he has resolved this issue (to the best that he is able) by having prepared a consolidated set of accounts, that in the main, ensures that the impact of the inter company loans are eliminated (because for the most part the loans are off set against each other).

17 As the only assets of Livingspring are its rights of indemnity against the assets of the Livingspring Unit Trust and the Joyspring Unit Trust, the treatment of the inter company loan accounts by consolidating the accounts of the so-called "Livingspring Group of Companies" creates difficulties. So far as Livingspring is concerned, it may only be entitled under its indemnity to the assets of the particular trust for which it has incurred a liability. Livingspring may not be able to avail itself of the assets of the so called related companies. Nor would Livingspring be able to seek an indemnity from the assets of the Livingspring Unit Trust in respect of a liability incurred on behalf of the Joyspring Unit Trust. Accordingly, I find the consolidations of limited use in these proceedings.

18 Mr Lee says that the accounts identify stock on hand of apartments and car-parks of the Livingspring Unit Trust which cost $15,053,794 and of the Joyspring Unit Trust of which cost $3,212,827 (collectively $18,266,621), but he says the market value of these assets, according to the valuation of Charter Keck Cramer, are now $19,083,000 and $3,770,575 respectively (collectively $22,853,575). Therefore he says the market value of the units exceed their cost by $4,586,954, and he says further there is an unrealised potential gain of $4,586,954 which is not as yet reflected in the consolidated accounts.

Kliger Partners' application for security for costs

19 By summons filed 16 May 2007, Kliger Partners made application for, amongst other things, an order that Livingspring provide security for costs of $188,471.50 to secure Kliger Partners' costs incurred up to the commencement of the trial.

20 Kliger Partners' application for security for costs was heard by Master Daley on 30 May 2007. On the hearing before the Master, Kliger Partners relied on the affidavits of Cameron John Oxley sworn 16 May 2007, Margaret Carns Gourlay sworn 14 May 2007 and Geoffrey Klinger sworn 18 May 2007.

21 Livingspring relied on an affidavit by Katie Pound sworn 29 May 2007 ("Pound's first affidavit") where she exhibited a balance sheet for the Livingspring Unit Trust[6]. That balance sheet disclosed that, as at 31 March 2007, the assets of the unit trust exceeded liabilities by over $3 million, and that the unit trust had cash at bank and on hand in excess of $780,000, including a term deposit of $561,000.

22 Prior to the hearing of Kliger Partners' application, Drs K.L. and T.H. Goh, being the current directors of Livingspring, offered Kliger Partners undertakings including that in the event that a costs order was made against Livingspring in the proceeding, they would do all things necessary for Livingspring to enforce against trust property the right of indemnification conferred on Livingspring under clause 50 of the Trust Deed dated 24 June 2004[7].

23 Master Daley dismissed the application for security for costs[8].

24 By notice of appeal dated 4 June 2007, Kliger Partners appealed Master Daley's, order dismissing the application for security for costs.

25 On 4 June 2007, Kliger Partners, by its solicitors, wrote to the solicitors for Livingspring seeking further financial information with respect to the Livingspring Unit Trust and the Joyspring Unit Trust[9].

26 By affidavit of Katie Pound sworn 19 June 2007 ("Pound's second affidavit"), Livingspring provided further information relating to the financial position of the Livingspring Unit Trust and the Joyspring Unit Trust (and other related trusts) for the period 1 July 2006 to 30 April 2007.

27 Kliger Partners' appeal was first listed before Hargrave J in the Practice Court on 20 June 2007. Kliger Partners objected to the filing of the further affidavit material on behalf of Livingspring. Nevertheless, Hargrave J granted leave to Livingspring to rely upon Pound's second affidavit, conditional upon Mr William Lee, the Chief Executive Officer of Livingspring, making and filing an affidavit verifying the financial information material contained in Pound's second affidavit and providing any explanation deemed necessary, and also conditional upon Mr Lee making himself available for cross-examination on his affidavit.

28 As referred to above, on 5 July 2007, Livingspring filed and served Lee's first affidavit verifying the financial information material contained in Pound's first affidavit and providing an explanation for some of the material entries contained in the management accounts exhibited as KP-5 to the June affidavit of Pound.

29 On 12 October 2007, Livingspring provided to the solicitors for Kliger Partners a further affidavit of Mr Lee sworn earlier that day ("Lee's second affidavit"). Lee's second affidavit clarifies and corrects some errors appearing in Lee's first affidavit.

30 Both Livingspring and Kliger Partners have provided further affidavits updating the court on matters arising since the commencement of the appeal. Kliger Partners seek to rely upon an affidavit of Cameron Oxley sworn 10 October 2007 ("Oxley's second affidavit") and Livingspring seeks to rely on an affidavit of Katie Pound sworn 12 October 2007 ("Pound's third affidavit").

31 Before me, Mr Lee made himself available for cross-examination but was not called on to be cross-examined. The affidavit material filed on behalf of Livingspring with respect to its financial position (both in respect to the initial application and the appeal before me), has not been contested or challenged by Kliger Partners in any answering affidavit material.

32 Kliger Partners rely upon several matters in their argument that the "consolidated accounts" contained in the management accounts (i.e. Exhibit KP-5) do not establish that there is reason to believe that Livingspring has sufficient assets to pay Kliger Partners' costs.

33 First of all they point out that the "consolidated accounts" are not audited. They point out that Mr Lee said that the accounts cannot be properly audited until the issues in proceeding 2001 of 2004 are resolved by the court. This may be so, but the failure to provide the court with audited accounts does raise an issue as to the comfort the court can draw from the accounts.

34 The second point raised by Kliger Partners is that the "consolidated accounts" are now more than five months out of date. It is said that Mr Lee swore his second affidavit on 12 October, but has made no attempt to update the relevant parts of the accounts or give any evidence as to whether the nett asset position set out in the consolidated accounts remain generally valid. Kliger Partners say that this is significant in light of the fact that the statement of accounts initially exhibited in Pound's first affidavit indicated that the current year earnings amounted to a loss of almost $2 million.

35 It is usual in accounts, for reference to be made to any material post balance date transactions. I believe there is some force in this submission.

36 The third issue raised by Kliger Partners is that the "consolidated accounts" are not the Livingspring Pty Ltd accounts. They purport to be a balance sheet for "Livingspring and its Related Entities". As indicated above, they incorporate also the results of "related companies" Arrow on Swanston Pty Ltd and Harbour Lights Pty Ltd. The reason given for this in paragraph 7 of Pound's second affidavit is that the latter entities are "companies commonly controlled by Livingspring's controlling shareholder, Wellspring Pty Ltd and that they are companies associated with businesses operated by Livingspring". No satisfactory explanation was provided of the respective activities carried on by those entities or why their financial position should be consolidated with Livingspring, save to eliminate inter company loans.

37 In my opinion, it is appropriate to have regard to the balance sheet of the Livingspring Unit Trust and the Joyspring Unit Trust as separately indicated in the management accounts. On that basis, the Livingspring Unit Trust had a surplus of assets over liabilities of $3,321,525.95 and the Joyspring Unit Trust had a deficiency of assets over liabilities of $513,042.55 as at 30 April 2007.

38 Kliger Partners submit that the "consolidated accounts" contain numerous "asset" entries which should be disregarded as assets for the purposes of this application.

39 They first of all point to the entry of "Trust Accounts: Legal Fees - $1,283,623.35". This is an asset of the Livingspring Unit Trust. This amount was originally described by Mr Lee as "an amount set aside in a separated account and designated for the payment of legal fees associated with proceeding 2001 of 2004 and other associated proceedings including these proceedings"[10]. The entry would suggest that these moneys were being held on trust for payment of Livingspring's own legal fees.

40 In Lee's second affidavit he stated that this evidence was incorrect[11]. He said that "The amount of money that as at 30 April 2007 had been set aside and placed in trust but had not at that date been expended was approximately $80,000. This means that in respect of that particular entry in the balance sheet, approximately $1,203,000 had actually been expended and approximately $80,000 was being held in trust for payment of legal expenses."

41 Livingspring was unable to satisfactorily explain how moneys expended on legal fees could be treated as an asset, let alone as money held in a trust account. It might have some asset value if Livingspring was to succeed against Mr Ng and the other defendants, including Kliger Partners, however, for the purposes of this application, we assume Livingspring is unsuccessful against Kliger Partners and is ordered to pay Kliger Partners' costs. Such an assumption does not have to be made in regard to the other proceedings, including the proceedings brought against Mr Ng. However, I would imagine that the possibility of loss in those other actions should be taken into account.

42 Kliger Partners' second criticism of the consolidated accounts relates to "contingent assets - recoverable - litigation costs - $2,391,587.38." This was originally described by Mr Lee as "an accounting entry representing that Livingspring and its associated companies have so far spent approximately $2.39 million on legal costs in respect of overall litigation ... and upon it being successful in the proceedings, will be likely to recover some or all of this amount of legal costs"[12]. Mr Lee later changed this description, stating that it was not limited to legal costs only, but also included other litigation expenses including disbursements[13].

43 Kliger Partners submits that this asset should be disregarded by the court. They submit that the question of whether the plaintiff will recover even a portion of this amount by way of a party/party costs order and other litigation is a matter of speculation. They submit further, that if Kliger Partners succeeds in this litigation (being the circumstances under contemplation for the purposes of a security for costs application), some of the "contingent assets" will not be available to satisfy a costs order. There is some force in this submission and particularly the "asset" represented by the costs incurred on these proceedings.

44 The third criticism of Kliger Partners relates to "total related party loans - $715,503.72." Mr Lee said that he cannot say that the loan account balance is true and correct due to ambiguities in bookkeeping irregularities in the books of account. Mr Lee has acknowledged that he suspects that they are not true and correct[14]. I accept that little if any reliance can be placed on the inter-company loan account figures.

45 Fourthly, Kliger Partners take issue with "trade debtors - $1,726,763.65", which they say is an amount for which no information has been provided as to the nature, age or likely recoverability of the debts or the identity of the debtors. They point to the fact that the solicitors for Kliger Partners have requested this information but none has been provided[15]. In view of the fact that the accounts are unaudited and there is an evidentiary onus on Livingspring in view of Livingspring being a trustee to put forward evidence as to the value of the indemnity, I accept that this submission has some weight.

46 Kliger Partners submit that if these "assets" are disregarded, Livingspring does not have a nett surplus of $2,244,288, but a nett deficiency of $3,873,188.

47 In my opinion, the adjustments in respect of doubtful assets should be made to the Livingspring Unit Trust assets and the Joyspring Unit Trust assets, rather than the consolidated figures. As at 30 April 2007, as indicated above, Joyspring had a deficiency of $513,042.55. Clearly, therefore, it could not, on that basis, satisfy an order for costs.

48 In my opinion, the submissions that Kliger Partners made about the consolidated accounts should also be looked at in relation to the assets of the Livingspring Unit Trust and the Joyspring Unit Trust. The criticisms they make about the trust account; in respect of legal fees of $1,283,623.35 relate solely to the Livingspring Unit Trust. Secondly, the contingent assets - recoverable - litigation costs of $2,391,587.38 also relate entirely to the Livingspring Unit Trust. The total related party loans referable to and shown as an asset in the Livingspring Unit Trust is in fact $5,944,458.34, rather than the smaller sum on the consolidated basis of $715,503.72. The trade debtors relate to Arch on Swanston Pty Ltd and Harbour Lights Pty Ltd. Thus, on this analysis of the nett surplus of assets over liabilities of $3,321,525.95 of the Livingspring Unit Trust: the following are subject to question:

49 I do not suggest that is the actual deficiency, but the calculation does indicate the degree of uncertainty about the financial position of the Livingspring Unit Trust shown by those accounts.

50 Kliger Partners also submit that over $18 million of the claimed assets are described as "stock of apartments on hand" and a further $8.5 million is described as "auditorium". They say it is questionable whether these are current assets. I accept that there must be some doubt about them being current assets which are expected to be sold within twelve months.

51 Kliger Partners submit that a corporation is taken to be unable to pay any adverse costs order if it can only do so if allowed extended time to realise assets, even if upon realisation the assets may produce a surplus over liabilities sufficient to pay the costs. They rely upon Brereton J in Street and Seven v. Luna Park Sydney[16], citing with approval Beach Petroleum NL v. Johnson[17] and Dalrymple Park Pty Ltd v. Tabe & Lees[18].

52 Kliger Partners also refer to the fact that the consolidated accounts state that the Livingspring Unit Trust has incurred a nett loss of $1,973,567 to 30 April 2007. They submit that Mr Lee did not update the statement of income and expenditure in Lee's second affidavit. They submit that if the losses continue at a similar rate, even the claimed surplus assets will disappear before Kliger Partners is able to execute any costs order in these proceedings. There is some force in that submission.

53 Kliger Partners submit that Livingspring has failed to provide any tax returns for itself or the Livingspring or Joyspring Unit Trusts. I accept that this is a material omission on the part of Livingspring.

"Market value" of apartments: should they be taken into account?

54 Livingspring seeks to rely on an increase in the value of its main asset, being the stock of apartments, as set out in a valuation prepared by Charter Keck Cramer dated 25 July 2007[19]. The valuation is entitled a "retrospective assessment" and values 71 apartments and 137 car parking spaces at 488 Swanston Street, Carlton ("Arrow on Swanston") as at the retrospective date of 4 December 2006. These are apartments of the Livingspring Unit Trust.

55 Kliger Partners submitted that I should disregard the valuation for the following reasons.

56 Kliger Partners submit that no explanation has been provided as to why the consolidated accounts do not record the assets at the higher amount. I do not accept this as a valid criticism in the circumstances where property values are rising quickly and the accounts are merely management accounts.

57 Secondly, it is submitted that the valuation report did not exist at the time Mr Lee swore his first affidavit. It is said that the valuation report was not created until after it had been requested. I do not accept that the report should be ignored for those reasons.

58 Thirdly, it is said that the retrospective assessment states that: "Our advice has been prepared for internal considerations by Livingspring Pty Ltd and for no other party or purpose. In particular we stress our advice has not been prepared for, nor is it to be construed as, a formal valuation for mortgage purposes and no recommendation is made in that regard."[20]. Accepting as I do its limited purpose, it is still a valuation prepared by a certified practising valuer.

59 The valuation report states that a relatively prolonged sale and settlement period may be required to realise all 71 apartments, possibly extending up to 12 months.[21] This is a relevant matter that I do take into account.

60 Finally, Kliger Partners submit that the "market value" of $22,853,575 on which Livingspring seeks to rely is not supported by the retrospective assessment. Kliger Partners point out that Livingspring's "market value" is made up of 75 "Arrow" apartments and 132 "Arrow" car-parks and seven "Harbour View" apartments and 21 "Harbour View" car-parks. The "retrospective assessment", it is said, does not provide any valuation for the Harbour View apartments or car-parks which collectively comprise $3,770,575 of Livingspring's "market value".

61 Further, Kliger Partners point out that two of the "Harbour View" apartments are said in KP-6 to have a market value of $520,000 and $637,280 respectively. The majority of apartments in the "Arrow" development are valued in the "retrospective assessment" at $170,000 to $250,000. The highest valuation of any apartment in the "Arrow" development is $470,000 for two four bedroom apartments. I do not accept that these matters necessarily undermine the valuation of the Arrow apartments.

62 A criticism is made that the "retrospective assessment" assesses the apartments and car-parks on a GST inclusive basis[22]. Kliger Partners say that there is no basis for assuming that the GST component received upon a sale of the apartments would not be required to be remitted to the ATO. They say including GST in the "market value" inflates the valuation by $2,077,597. That may well be so. On the other hand, there may well be an entitlement to a GST allowance. The valuation and the evidence is unsatisfactory in view of this confusing position.

63 Finally, it is submitted by Kliger Partners that KP-6 shows that Livingspring's "market value" includes valuing the "Arrow" car-parks at $25,000 each ($3,300,000 divided by 132) and the "Harbour View" car-parks at $35,000 each ($735,000 divided by 21). It is said the "retrospective assessment" values the "Arrow" car-parks at $20,000 each (see paragraphs 8.42, 8.52) and provides no valuation for the "Harbour View" car-parks. It is said no explanation is provided for the discrepancy. I accept that these criticisms are warranted.

64 Livingspring submitted that the trusts were not highly geared. Livingspring pointed out that the total mortgages payable to the National Bank total $14,450,230 and that liabilities to related parties total $2,229,244. In addition, some $9,772,913.49 was owing to unit holders on unit holder loan accounts. If it is assumed that the unit holder loans are akin to equity, then there is a substantial excess of assets over liabilities.

65 The application for an order for security for costs is brought pursuant to Rule 62.02(1)(b) of the Supreme Court (General Civil Procedures) Rules 2005, and s 1335(1) of the Corporations Act 2001 ("the Corporations Act") and the inherent jurisdiction of the court.

66 Rule 62.02(1)(b) relevantly provides that where a plaintiff is a corporation and there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so, the court may order that the plaintiff give security for costs.

67 Section 1335(1) of the Corporations Act provides:

"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 As Brereton J said in Street v. Luna Park Sydney Pty Ltd[23], on an application for security for costs under s 1335 or r 62.02(10(b) of the Rules of Court, three issues generally arise: the first is whether the ground referred to in the section or the rule is established; second is whether, if the ground has been established, as a matter of discretion an order for security should be made, and the third is the quantum of and terms upon which any order for security is to be made.

69 The onus of establishing that a plaintiff corporation has insufficient assets or will be unable to pay the costs of the defendant if ordered to do so is on the defendant[24].

70 The generally accepted test on the threshold question was laid down by von Doussa J in Beach Petroleum NL v. Johnson[25] where his Honour said:

"In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there was a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on the service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs, along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security."

71 This passage was cited with approval by Cavanough J in William Buck (Vic) Pty Ltd v. Perception Pty Ltd[26] and is of persuasive authority to me.

72 In Re Insurance Australia Group Ltd v. HIH Casualty and General Insurance Ltd (in liquidation)[27] Jacobson J cited von Doussa in Beach Petroleum NL v. Johnson for the threshold question and in passing referred to the fact that a similar approach was adopted by a Full Court of the Supreme Court of Western Australia in FFE Minerals Australia Pty Ltd v. Mining Australia Pty Ltd[28] where Pidgeon and Owen JJ traced the history of s 1335 back to its inception in the Joint Stock Companies Amendment Act 1857 (20 & 21 Victc 14 (Imp)). On the issue of discretion, Jacobson J said that:

"The effect of the authorities is that if an applicant for security discharges the evidentiary burden of showing a prima facie case, there is then an evidentiary onus upon the opponent to satisfy that court that, taking into account all relevant factors, the discretion ought to be exercised against the making of an order."[29]

73 In this case, Livingspring has no material assets of its own and is the trustee of two unit trusts, the Livingspring Unit Trust and the Joyspring Unit Trust. In the case of a plaintiff which is a trustee company with no assets of its own, the Court of Appeal of the Supreme Court of Victoria, Tadgell and Cummins JJA, in Lagarna Pty Ltd v. Bridge Wholesale Acceptance Corporation (Australia) Ltd[30] approved and adopted the observation of Smithers J in Laundry Coin-Wash Nominees Pty Ltd v. Dunlop Olympic Ltd[31] where Smithers J observed that:

"Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties, it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability."

"I have concluded that an applicant being a trustee company which desires to resist an order for security costs should establish that recourse to property held by or for it will be available to the party against whom it has fought its action and be adequate, at the appropriate time, to meet the possible liability for costs."

75 Before looking at the financial position, I should refer to the undertakings that have been given in this matter. The directors of Livingspring, Dr D.H. Goh and Dr K.L. Goh, have given a similar undertaking in respect of the Livingspring Unit Trust and the Joyspring Unit Trust. For convenience I will quote the undertaking given with respect to the Livingspring Unit Trust, which provides as follows:

"The directors of the plaintiff, Dr T.H. Goh and Dr K.L. Goh, hereby undertake to the court as follows:

1. In the event that an order for costs is made against the plaintiff in the present proceeding, he or she, as the case may be, will, as a director of the plaintiff, do all such things as are necessary for the plaintiff to enforce against the trust property of the Livingspring Unit Trust the right of indemnity conferred upon the plaintiff by clause 50 of the Trust Deed dated 24 June 1997.

2. That in the event either that they or either one of them should resign or be replaced as a director of the plaintiff between the date of these undertakings and the final disposition of the proceeding herein or in the event that further directors are appointed, they will advise the defendant of any alteration in directorships within 48 hours of any such alteration being effected."[33]

76 Kliger Partners submitted that these undertakings were unsatisfactory as they do not include an undertaking not to dispose of the assets. Kliger Partners rely upon World Class Alpacas v. Ostrich Farms (Cooke Islands)[34] where his Honour said:

"There is nothing to stop the applicant distributing the trust assets prior to the conclusion of litigation. The applicant did not offer an undertaking not to dispose of its assets."

77 Livingspring has submitted that it is not appropriate for Dr T.H. and Dr K.C Goh to give an undertaking that Livingspring not dispose of any assets of the Trust as Livingspring and its underlying trusts operate a significant commercial business, being the ownership, operation and management of the two apartment complexes at Latrobe Street and Swanston Street, Melbourne. Livingspring says that such an undertaking will disrupt the business operations of Livingspring.

78 Nevertheless, there is nothing to stop Livingspring distributing the trust assets to the beneficiaries prior to the conclusion of the proceeding nor, for that matter, for a new trustee being approved as trustee of each of the unit trusts.

79 Applying the test approved by Cavanough J in William Buck (Vic) Pty Ltd v. Perception Pty Ltd[35]; is there reason to believe that there is a real chance that in events which can fairly be described as reasonably possible that Livingspring will be unable to pay the costs of Kliger Partners in this proceeding if Kliger Partners should win? In my view, where the assets, on the best view, only marginally exceed the liabilities and where the accounting information is less than reliable as pointed out by Kliger Partners and in light of other matters that I have referred to above, there is a real chance in the sense referred to that Livingspring will be unable to pay the costs of Kliger Partners in this proceeding if they should win. In my view, the threshold question has been established by Kliger Partners.

80 I now turn to the second issue of whether as a matter of discretion an order for security should be made. As indicated above, there is an evidentiary onus upon the opponent to satisfy the court that, taking into account all relevant factors the discretion ought to be exercised against the making of an order.[36]

81 In Equity Access Ltd v. Westpac Corporation[37] Hill J identified six discretionary factors which might be taken into account. These were also taken into account by Brereton J in Street and Seven v. Luna Park Sydney Pty Ltd[38]. The factors are as follows:

2. The nature of the risk that the plaintiff will be unable to satisfy a costs order in the event that it fails.

3. Whether the use of the power to order security would be oppressive or would stultify prosecution of a genuine claim.

4. Whether the plaintiff's impecuniosity was caused by the conduct of the defendant in respect of which relief is sought in the proceeding.

5. Whether any public interest considerations bear on whether or not an order for security for costs should be made.

6. Whether the application for security has been brought sufficiently promptly.

82 As to Livingspring's prospect of success, it was held in Street v. Luna Park Sydney Pty Ltd[39] that this does not involve any detailed evaluation of the plaintiff's prospect but only the formation of a view as to whether the claim is bona fide or a sham. In this case I find that Livingspring's claim is bona fide.

83 As to the risk that the plaintiff will be unable to satisfy a costs order, I find that there is a material risk that it would be unable to do so. In doing so, I take into consideration that it has on foot other extensive litigation which will be a significant drain on its resources.

84 As to the third factor as to whether an order would be oppressive or would stultify prosecution of a genuine claim, I do not believe an order for security would. The proceedings have been brought by the trustee of two unit trusts. There is no evidence to suggest that the ultimate beneficiaries to this action, the Drs Goh and Mr Chan, are in any way unable to finance the proceedings. In circumstances where the true beneficiaries to the action are not responsible for liabilities of Livingspring, I find it difficult to say that there is oppression involved in an application for security for costs.

85 As to the fourth discretionary factor that the plaintiff's impecuniosity is caused by the conduct of the defendant, in this case it is alleged that Mr Ng misappropriated some $15 million and that the solicitors Kliger Partners are a party to $2.5 million of that. In those circumstances, I do not believe it is open to Livingspring to argue that the actions of the solicitors have caused its impecuniosity.

86 The fifth discretionary factor is whether there is any public interest considerations to bear. Livingspring submitted as follows:

"Fifth and finally, the defendants as a legal practitioner under the Legal Profession Act 2004 must hold professional indemnity insurance in respect of claims of the kind made by the plaintiff. It follows that it is likely that a professional indemnity insurer has carriage of this matter on behalf of the defendant. While the fact that the defendant might be protected by a policy of insurance is not determinative against the making of an order for security, it may be a relevant factor in the exercise of the discretion whether or not to order security for costs."

87 Livingspring relied on Quichorn Pty Ltd v. Broad[40]. In that case Hayne J of the Supreme Court of Victoria (as he then was) said:

"Now it has been said that in proceedings against an insurer for indemnity on a policy of insurance, when the existence of the policy is not disputed, it is not ordinarily appropriate to grant security in favour of the insurer. (See Irwin Alsop Services v. Mercantile Mutual Insurance[41]). However, that view was not followed in Prime Forme Cutting Pty Ltd v. Baltica General Insurance Co[42]; Frankston & Bassetter Pty Ltd v. Sigma Insurance Australia Ltd[43]; or Tenth Anemot Pty Ltd v. Colonial Mutual General Insurance Co Ltd[44]. I consider the better view to be the fact that an applicant for security is an insurer and that it is resisting a claim by a party on a contract in which it voluntarily entered are matters that may be taken into account in the exercise of the discretion whether to order security, but there is no general predisposition against the granting of security to insurers. The question will always be one for the exercise of an unfettered discretion. The nature of that unfettered discretion was explored in some detail in Interwest Ltd v. Tricon Metal Corp Ltd[45], especially at 624. There is, in my view, no general principle of the kind which the plaintiff's submissions suggest might apply to defendant insurers who seek security for costs. Rather, in each case the position of the applicant must be considered having regard to all of the circumstances that affect that applicant in those proceedings without any predisposition one way or the other in favour or against the granting of security."

88 In my opinion, that decision does not suggest that the existence of an insurer may be taken into account but should influence the exercise of my discretion in any particular way.

89 As to the issue of whether the application has been brought promptly, the fact that Kliger Partners started making inquiries about the financial position of Livingspring on 4 January 2007, satisfies me there has been no unreasonable delay.

90 At the conclusion of the hearing, Mr Wilson senior counsel for Joyspring said that he had instructions that the company would give an undertaking that, pending the hearing and determination of this trial, it would undertake not to sell, dispose of or otherwise, charge or encumber an individual unit which would be worth more than on the face of it the amount being sought in security at the moment. He said that would then, as it were, quarantine that unit as an asset. I assume therefore that Livingspring does have available unencumbered units that it could mortgage to provide a bank guarantee. This further supports my view that an order for security would no be oppressive or could not stultify the prosecution of a genuine claim.

91 After considering all the matters going to my discretion, I am not satisfied my discretion ought to be exercised against the making of an order and I have therefore decided that Livingspring should give security for Kliger Partners costs. There is no issue as to whether the amount of security should be $118,471.50. Accordingly, I propose to order that the appeal be allowed and that Livingspring should give security for the defendant's costs of the proceeding incurred up to the time of the commencement of the trial of the proceeding in the sum of $118,471.50 in the form of (a) a payment into court, (b) a bank guarantee or (c) other forms of security acceptable to the Prothonotory.

92 I will order that if the plaintiff fails to provide such security within 21 days of the order herein, the plaintiff's claim made in the proceedings against the defendant be thereafter stayed.

93 I will order liberty to be reserved to the defendant to apply for further security for costs for the proceeding.

94 I ruled on this matter and held that in the circumstances Kliger Partners had sufficient particulars to be able to fairly defend the matter. This matter took up virtually no time of the hearing of the appeal. The appeal against order 8 of the orders of Master Daly of 31 May 2007 was not pressed.

1. The appeal against the order of Master Daly made 30 May 2007 be allowed.

2. Orders 1 and 2 of the order of Master Daly made 30 May 2007 be set aside and in lieu thereof the court orders:

(a) That the plaintiff give security for the defendant's costs of the proceeding incurred up to the time of the commencement of the trial of the proceeding in the sum of $118,471.50 in the form of -

(iii) such other form of security acceptable to the Prothonotary.

(b) If the plaintiff fails to provide such security in accordance with paragraph (a) within 21 days of this day, the plaintiff's claim in the proceeding against the defendant be thereafter stayed.

(c) Liberty be reserved to the defendant to apply for further security for costs of the proceeding.

(d) The plaintiff pay the defendant's costs of the application to the Master for security for costs.

3. The appeal against order 7 of Master Daly made 31 May 2007 in so far as it relates to paragraphs 11 and 14 of the statement of claim dated 26 April 2006 and against order 8 of Master Daly made 31 May 2007 be dismissed.

4. That the plaintiff pay the defendant's costs of the appeal against the order of Master Daly made 30 May 2007 and there be no order as to the costs of the appeal against orders 7 and 8 of the order of Master Daly made 31 May 2007.

[1] The other proceedings include Livingspring Pty Ltd v. Chris Ng number 2001 of 2004; Livingspring Pty Ltd v. National Australia Bank, Supreme Court of Victoria number 9055 of 2004; and Livingspring Pty Ltd v. William Partners, Supreme Court of Victoria number 5886 of 2005.

[3] Affidavit of William Leonard Lee sworn 5 July 2007 para 2.

[4] See Exhibit B to the affidavit of Cameron John Oxley sworn 16 May 2007.

[5] Exhibit KP-5 to affidavit Katie Pound sworn 19 June 2007.

[6] Exhibit KP-2 to Pound's first affidavit.

[7] See para 13 in Exhibit KP-9 of the affidavit of Katie Pound sworn 19 June 2007 ("Pound's second affidavit").

[8] See Order of Master Daley made 30 May 2007 at Exhibit KP-3.

[9] See letter dated 4 June 2007 at Exhibit KP-4 to Pound's second affidavit.

[10] Paragraph 7(d) of Lee's first affidavit.

[12] Paragraph 7(e) of Lee's first affidavit.

[13] Paragraph 5 of Lee's second affidavit.

[14] Para 7(a) of the first Lee affidavit.

[15] Exhibit CJO-2 to the affidavit of Cameron John Oxley sworn 10 October 2007.

[16] [2006] NSWSC 1317 at [16].

[17] [1992] FCA 110; (1992) 7 ACSR 203 at 205.

[18] [1996] TASSC 101; (1996) 6 TasR 111.

[19] Paragraph 7(c) of Lee's first affidavit in Exhibit CJO-5 to Oxley's second affidavit.

[23] [2006] NSWSC 1317 at [5].

[24] Citrus Queensland Pty Ltd v. Sun State Orchards Pty Ltd No. 5 [2006] FCR 1672 at [33] per Collier J.

[25] [1992] FCA 110; (1992) 7 ACSR 203 at 205.

[26] [2006] VSC 385.

[27] [2003] FCA 803.

[28] [2000] WASCA 69.

[29] [2003] FCR 803 at [25].

[30] [1995] VicRp 9; (1995) 1 VR 150 at 154.

[31] (1985) ATPR 40-584 at 46, 729.

[33] Undertaking plaintiff's directors dated and filed 30 May herein.

[34] Unreported Federal Court, Sundberg J 30 October 1997 at 5.

[35] [2006] VSC 385.

[36] Re Insurance Australia Group Ltd v. HIH Casualty and General Insurance Ltd (in liquidation) [2003] FCA 803.

[37] (1989) ATPR 40-972.

[38] [2006] NSWSC 1317 at [19].

[40] VSC, No.4001, 24 January 1994, unreported decision of Hayne J at 49-50.

[41] [1986] VicRp 6; [1986] VR 61.

[42] (1990) 8 ACLC 29.

[43] (1991) 9 ACLC 790.

[44] [1993] VicRp 56; [1993] 2 VR 48.

[45] (1991) 5 ACSR 621.