Plaintiff v Defendant

3 Quadrant's claims against CSB are now financed by a litigation funder.

4 The Associate Justice determined that an appropriate amount for security was in the sum of $21,000 provided by a bank guarantee. CSB now contends that an appropriate figure is $225,000 by way of bank guarantee; a far cry from its original "ask" of $939,000. Quadrant argues that the Associate Justice's allowance was appropriate.

5 I have determined that the appeal should be allowed and that a figure of $60,000 should be fixed as security by way of a bank guarantee.

Background to the application for security of costs

6 Between September 2000 and June 2003, Quadrant held an account with CSB out of which it traded in securities and options.

7 By July 2003, Quadrant had accumulated trading losses of $2.629 million and the value of the shares held by it had declined from $3,048,733 as at 16 May 2001 to $20,170 as at 26 May 2003.

8 On 13 April 2004, the Federal Court ordered that Quadrant be wound up in insolvency.

9 On 9 August 2007, Quadrant filed its writ, which was served a year later, with an appearance being filed on 26 August by CSB.

10 On 25 September 2008, Quadrant filed a statement of claim which was the subject of a request for further and better particulars.

11 On 1 December 2008, CSB's solicitors first requested information in relation to Quadrant's financial position.

12 On 14 January 2009, Quadrant and the liquidator entered into a funding agreement ("the funding agreement") with Litigation Lending Services ("LLS").

13 On four occasions in February and early March 2009, CSB's solicitor sought information from Quadrant's solicitor as to its financial position in the event of an adverse costs order.

14 On 24 March 2009, Quadrant's solicitors advised CSB's solicitors of the existence of the funding agreement. The following day, Quadrant provided a marked version of the agreement which withheld details of the indemnity provided under the agreement.

15 On 27 April 2009, CSB's solicitors wrote to Quadrant's solicitors seeking security for costs in the sum of $939,000, being the estimate of the likely costs to be incurred in the defence of the proceedings.

16 On 7 May 2009, Quadrant's solicitors advised that its client was not prepared to provide that amount of security.

17 At a directions hearing on 13 May 2009, CSB was ordered to file a defence and an application, if it so wished, in relation to security of costs by 10 June 2009. It filed the defence on 3 June and issued its application for security for costs on 11 June.

18 On 24 July 2009, Evans AsJ determined CSB's application and ordered Quadrant to pay $21,000 in the form of security by way of bank guarantee.

19 The following affidavits were relied upon by the parties:

(a) An affidavit of Catherine Mary Mills, CSB's solicitor, sworn 10 June 2009.

(b) Affidavits of James Higgins, Quadrant's solicitor, and David Andrews, a fellow solicitor at Slater & Gordon, both sworn 22 July 2009.

20 The relevant parts of Order 62.02 of the Supreme Court (General Civil Procedure) Rules 2005 provide that security for costs may be ordered in the following circumstances:

"62.02(1) Where:

(a) ... ;

(b) the 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;

...

(f) under any Act the Court may require security for costs -

the Court may, on the application of a defendant, order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against the defendant be stayed until the security is given."

21 Section 1335(1) of the Corporations Act 2001 (Cth) provides as follows:

"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."

22 In determining an application such as this, the relevant principles of law apply equally to the rule of Court and the statutory provision.[1]

23 Those principles were set out by the Court of Appeal in Livingspring Pty Ltd v Kliger Partners.[2] The jurisdiction to grant security is enlivened by the inability of the plaintiff to pay the defendant's costs. Once that is established, the Court may then exercise its discretion as to whether to order security and, if so, in what amount.

24 The discretion to order security for costs is unfettered and must be exercised judicially having regard to the particular circumstances of the case. In Ariss v Express Interiors Pty Ltd[3], Phillips JA said:

"Although of course, like any discretion conferred upon a court, it must be exercised judicially, the discretion conferred by s.1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion."

25 Subsequently, in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd[4] Winneke P and Phillips JA stated that:

"The authorities tend to suggest that the discretion given to the court by s.1335 to make an order for security against an impecunious company is 'open ended' and not to be fettered by rigid guidelines or principles ..."

26 I accept Quadrant's contention that, given the concessions made by Quadrant in the course of argument both before the Associate Justice and in the written outline of submissions provided prior to the hearing of this appeal, much of CSB's arguments on appeal are irrelevant.

27 Particularly, the following matters were not in issue:

(a) That Quadrant was impecunious, enlivening the Court's jurisdiction permitting the granting of security.[5]

(b) That, given the involvement of LLS and its funding of the claim, Quadrant's claim would not be stultified by an order for security of costs.[6]

28 Once these concessions had been made by Quadrant, the remaining question was, taking into account the other discretionary considerations, what amount should be allowed as security and in what form? Quadrant did not contend that no allowance should be made. Rather, it defended the allowance made by the Associate Justice.

29 As I have said, CSB spent considerable time in both written and oral arguments focusing on the funding agreement between Quadrant and LLS.[7] Evans AsJ noted that:

Citi has expended much time and energy seeking to find out how the funder stands to benefit from the litigation and what is the financial position of the litigation funder. Both are irrelevant.[8]

30 I agree. The thrust of the decisions in Bufalo Corporation Pty Ltd (receiver and manager appointed) (in liq) v Primelife Corporation Limited & Ors[9] and in Duke Holdings Ltd (in liq) v Duke Group Ltd (in liq)[10] (both relied upon by CSB) is that the existence of the litigation funder is a relevant discretionary consideration in determining whether to make an order for security, but is not necessarily relevant to the quantum of such an order. For instance, in Bufalo[11] the plaintiff company argued that the existence of the agreement rendered it unnecessary to make an order in favour of the defendant. No such argument was advanced here.

31 In my view, the intense focus on the role of the litigation funder and the funding agreement was misplaced once it was conceded that Quadrant's claim would not be stultified and the Court's jurisdiction had been enlivened. It was inevitable that an order for security would be made. The amount was the issue.

32 Further, CSB's belated submission before the Associate Justice that an appropriate amount to be allowed as security is in the sum of $225,000 appears to be based solely upon the level of the indemnity given under cl 5 of the funding agreement by LLS to the liquidator and Quadrant as against any order for costs. Such an approach is, I think, misguided. As discussed subsequently, the appropriate manner in which to support an application for security is to provide a realistic estimate as to the party/party costs[12] likely to be incurred prior to trial or, alternatively, to the conclusion of the trial. Simply asserting, as CSB did, that an appropriate amount is that provided in terms of the indemnity available under the litigation funding agreement takes CSB's case nowhere.

The nature of the dispute as reflected by the pleadings

33 There was considerable debate between the parties as to the likely complexity of the claim and its preparation for trial.

34 Although this is a claim which has a superficial simplicity to it - namely, was CSB authorised to trade on behalf of Quadrant? - I accept CSB's contention that in a case such as this the pleadings may not reflect the subtleties of the claim. Whilst it is somewhat far-fetched to draw an analogy between this and the claim in Ali v Hartley Poynton Limited,[13] a trial that ran for more than 27 weeks, the fact is that cases of this type can expand rapidly both before and when they reach trial.

35 Quadrant says this case will simply be a contest based on facts and some supporting evidence between the CSB broker, Mr David Sedgwick and Mr Walker, the controller of Quadrant. But such cases, where the entire ambit of the evidence is simply oath against oath, are rare. It is inevitable that each side will seek to lead evidence, be it oral or written, corroborative of the account they wish to support. Invariably, as experience demonstrates, the scope for cross-examination on matters of credit and recollection increases exponentially. Moreover, the claim involves nearly three years of trading and, presumably, will involve scrutiny of the past association of the two primary witnesses.[14]

36 Quadrant says it will not call expert witnesses. But how am I to gauge that proposition when the consolidated statement of claim filed on its behalf refers in numerous places to the provision of expert evidence which will ultimately be adduced at trial?[15]

37 Quadrant relies on assertions made by Mr Higgins, in his affidavit.[16] He has set out a number of orders that, he opines, may be made by the Court which will limit the costs involved in the prosecution of the claim. I do not for one moment accept that CSB's case will necessarily be limited to two witnesses, as he suggests. I think that one can, at this time, shut out the prospect that CSB will not be permitted to file and serve expert reports, nor that it will be prevented from issuing subpoenas. Indeed, I find the latter suggestion particularly surprising.

38 I hope I am proved wrong, but I think that Mr Higgins' estimate of five days, for a case involving three years of trading in shares and options with a lengthy past history of association, is inaccurate; rather it will occupy weeks of Court time.

39 Therefore, I propose to assume that the claim will occupy at least two weeks, and that the preparation for it will be commensurate with that type of trial.

CSB's responsibility for Quadrant's insolvency

40 The Associate Justice concluded that Quadrant's insolvency was brought about by the share trading. There is no evidence of any other activity which may have brought it about and it is, I think, a fair inference. As I have related, during the relevant period its assets in the form of its share portfolio diminished by approximately $3 million.

41 The question then arises as to what relevance, if any, this consideration has in a case in which the plaintiff's claim is funded by a litigation funder. Quadrant asserted that it was a relevant discretionary consideration. However, this submission is inevitably intertwined with a stultification argument so as to resist an order for security for costs. Together, the two considerations may provide a powerful reason for a Court to refuse to grant security or to order security in a modest amount.[17]

42 I accept the submission made on behalf of CSB that the presence of the litigation funder changes the dynamics of this equation. I think that it does, as CSB said, neutralize this issue. Given that the case will be able to be seen through to judgment with LLS' involvement, there is no reason to attach any real weight to this consideration.

Delay on the part of CSB's solicitor in making the application

43 Applications for security of costs must be brought promptly.[18]

44 Quadrant contended that waiting, in effect, six months to make the application involved unwarranted delay. The statement of claim was filed in September 2008 and a holding defence served but not filed until December of that year.

45 I accept CSB's response to this criticism. In order to formulate a view on whether to make the application and to determine an appropriate amount to seek as security for costs, Ms Mills, solicitor for CSB, made a request in December 2008, after requesting further and better particulars, and sought further material during the first quarter of 2009.

46 I think it is of little moment that there might have been some one month's delay after Quadrant refused to provide security. It would, in my view, have been premature for CSB to commence an application without first exploring the financial position of Quadrant and the potential involvement of a litigation funder.

47 In my view, there was no relevant delay and CSB is entitled to seek security for its costs from December 2008.

48 The real complaint, I think, in relation to the actions of the solicitor for CSB was the quantum of the amount sought for security.

The estimate of costs provided by CSB's solicitors

49 Ms Mills provided an estimate of $939,000 based on likely solicitor/client costs in defending the claim. It was, I think, misconceived both in legal principle and in quantum.

50 The estimate of costs should have been on a party/party basis. I do not regard CSB's contention that "it is far from unusual for a party to provide the other side in the Court with an estimate of solicitor/client costs" as a sensible response to the complaints about this figure. As the letter[19] demonstrates, it was clearly intended to be a figure it sought as security, not just a ballpark figure which could be discussed by the parties at their leisure:

"Accordingly, we are instructed to seek a bank guarantee from the liquidator or the litigation funder, in favour of our client, in the amount of $939,000, which is our client's estimate of the likely costs it will incur in defence of the proceedings. We enclose for your reference, a copy of an estimate prepared in support of that amount. We look forward to promptly receiving a bank guarantee in the amount of $939,000.

If we have not received such a guarantee by 4 May 2009, our client may file an application seeking an order for security of costs in the proceedings, without further notice, and we rely on this letter (and earlier communications) in support of an order for costs on that motion."

51 The position espoused in the letter remained the position of CSB until the day before the hearing before the Associate Justice. At that time, it was jettisoned and replaced by a figure of $225,000, being, coincidentally, the amount guaranteed by LLS under the litigation agreement.

52 Providing a figure based on an estimate of solicitor/client costs was not only wrong in principle, but necessarily derailed the prospect of resolution of the application for a realistic figure. The estimates contained in the schedule to the letter are, to my mind, extraordinary. Take one example: solicitors' fees and disbursements in relation to the simple task of issuing subpoenas are costed at $20,000.

53 The solicitors for CSB have not provided any further estimate of its party/party costs. Accordingly, it is necessary to rely upon the estimates provided by Mr Andrews insofar as they paint a realistic picture of the likely costs likely to be incurred.

The costs of the proceeding: what amount of security should be ordered

54 In determining the amount for security of costs, I adopt what was said by Habersberger J in Saint-Gobain RF Pty Ltd v Maax Spa Corporation Pty Ltd:[20]

"I turn then to an assessment of what amount of security should be ordered at this stage. In calculating an amount to be ordered for security for costs the Court does not set out to give the applicant a complete and certain indemnity for costs.[21] The amount ordered to be provided is, after all, only an estimate of the probable costs which the applicant will incur as far as they can be ascertained.[22] Uncertainties, such as the possibility that the proceeding may settle, have also to be taken into account by way of a discount.[23]"

55 The only relevant evidence is that of Mr Andrews. He estimates the costs up until the conclusion of the preparation for trial as being between $62,500 to $73,500. He makes no allowance for the costs associated with pleadings and limits the costs of witness statements to two lay witnesses and no expert witnesses. His estimate of counsels' fees also seem to me to be somewhat conservative. .

56 In my view, in determining an application such as this, it is necessary to look at costs both in the broad, as well as scrutinizing the individual items - but not to the extent of minute examination. Descending into too much detail does not assist in the conduct of the exercise because by its nature it is necessarily imprecise and requires guesstimates as much as estimates. Rather, a figure has to be allowed, based on Mr Andrews' assessment, with adjustments, which reflects the cost of preparation for litigation in this Court for a trial that will take two weeks. That figure should be assessed on the basis a mediation will take place, but that there will, necessarily, be costs of trial preparation incurred prior to the mediation.

57 Given my views as to the scope of the issues, I propose to accept the figures at the higher end of Mr Andrews' estimates providing security up to the conclusion of a mediation.

To this I add allowances for the preparation of the pleadings and the possibility of obtaining advice about expert reports or, alternatively, obtaining expert opinions - which I assess in total at $10,000.

58 As I have endeavoured to indicate, I am not persuaded that this case will be as simple as Quadrant contends and, notwithstanding CSB's ambit approach to the question of security, the amount allowed by the Associate Justice was, I think, inadequate.

59 Standing back and looking at the figure and bearing in mind that the purpose of an order for security is not to provide indemnity but to guard against the risk of non-payment, I think that a figure of $60,000 represents an appropriate allowance of costs up until the conclusion of the mediation.

Synthesis of these considerations: The appropriate amount for security

60 CSB is entitled to an order for security of costs running from the time it first ventilated the issue with Quadrant. It was from that time that Quadrant was on notice that it was likely that an order would be sought.

61 I have already indicated that I do not think the question of delay is of any real relevance, nor is the fact of CSB's responsibility for Quadrant's insolvency. The salient issue is the fixing of an amount that will provide CSB with security up to the time of mediation, and including an allowance for preparation for trial. That allowance is $60,000.

62 The appeal should be allowed and the Associate Justice's order set aside to the extent that the amount for security of costs provided by bank guarantee is fixed at $60,000.

[1] Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; [2008] 20 VR 377 [10].

[2] [2008] VSCA 93; [2008] 20 VR 377, [10]-[17].

[3] [1996] 2 VR 507 at 514, see also Bryan E. Fencott & Assoc v Eretta Pty Ltd (1987) 167 FCR 497, 509.

[4] [1999] VSCA 43; [1999] 2 VR 191 [16].

[5] Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; [2008] 20 VR 377 [11]-[18].

[6] See Bell Wholesale Co Limited v Gares Export Corp [1984] FCA 34; [1984] 2 FCR 1, 4 Livingspring Pty Ltd v Kliger Partners [2008] 93 [22].

[7] Affidavit of Catherine Mary Mills dated 10 June 2009, Exhibit CMM15.

[8] Para [15], referred to at para 3.7 of Quadrant's submissions.

[9] [2009] VSC 171.

[10] [2009] SASC 245 [23], [33]-[34].

[11] [2009] VSC 171, [76].

[12] Newtronics Pty Ltd v Gjergja & Anor [2007] VSC 195; (2007) 63 ACSR 611 [45].

[13] [2002] VSC 113

[14] Affidavit of James Higgins dated 22 July 2009, [8]-[11].

[15] Consolidated statement of claim dated 25 September 2008, para 10(b), 10(c)(ii), (vi), (vii), 10(f).

[16] Affidavit of James Higgins dated 22 July 2009, [28].

[17] Australian Quarry Holdings Pty Ltd (in liq) v Dougherty & Ors (1992) 8 ACSR 569, 570.

[18] Re Insurance Associates Pty Ltd [1975] VicRp 76; [1975] VR 776, 777.

[19] Affidavit of Catherine Mary Mills dated 10 June 2009, Exhibit CMM16.

[20] [2004] VSC 335, [71].

[21] Brundza v Robbie & Co (No. 2) [1952] HCA 49; (1952) 88 CLR 171 at 175 per Fullagar J

[22] Pacific Acceptance Corporation Ltd v Forsyth trading as Flack & Flack (No. 2) [1967] 2 NSWR 402 at 408 per Moffitt J

[23] Procon (GB) Ltd v Provincial Building Co Ltd [1984] 2 All ER 368