Plaintiff v Defendants

2 On the applications before Efthim AsJ a number of matters were dealt with, but on the appeals before me there is only a single issue, which might be encapsulated in the following question: Do the defendants already have sufficient security for their costs?

3 Each of the plaintiffs resides in the United Arab Emirates. It was accepted both before Efthim AsJ and before me that enforcement there would be difficult if not impossible. Neither of the plaintiffs has unencumbered assets of any significance in Australia. Each of the plaintiffs is the subject of very large claims by the Australian Taxation Office. There is no evidence that either of the plaintiffs is impoverished or that their actions will be stultified if security is ordered.

4 The case for security for costs against each plaintiff is strong, indeed compelling, absent consideration of the sole ground upon which security was resisted before me, being the contention that the defendants already have sufficient security for their costs.

5 Prior to the events which are the subject of the two proceedings, Radhika Oswal was the owner of 35 percent of the share capital of a company then named Burrup Holdings Limited (BHL). BHL in turn owned 100 percent of the shares in a company then named Burrup Fertilisers Pty Ltd (BFPL). That company is the owner of an ammonia plant in Western Australia.

6 Prior to the events which are the subject of the two proceedings, the other shareholders in BHL were Mrs Oswal's husband, Mr Pankaj Oswal, holding 30 percent of the share capital, and Yara Australia Pty Ltd ("Yara") owning 35 percent of the share capital.

7 Australia and New Zealand Banking Group Limited (ANZ) advanced substantial sums of money to BFPL, to Mr Pankaj Oswal as trustee of the Burrup trust, and to an associated company named Maruti Investments Limited.

8 By a writ issued on 2 September 2011 Mrs Radhika Oswal made allegations to the effect that in December 2009 she and her husband entered into negotiations with officers of ANZ as a consequence of which she signed a guarantee, a share mortgage in relation to 7.5 percent of the share capital of BHL which she owned, an escrow agreement and an escrow process deed in relation to the balance of her shareholding in BHL (27.5 percent of the share capital), and two powers of attorney. She alleged that she signed these documents as a result of conduct by bank officers which renders them void or unenforceable as being contrary to public policy, as a result of duress and/or undue influence by the bank officers, and as a result of unconscionable conduct by ANZ both at general law and under statute.

9 ANZ had appointed Ian Carson, David McEvoy and Simon Theobald (the receivers) as receivers under its securities, and Mrs Oswal's shares which were the subject of the escrow arrangements were held by an escrow agent with ANZ holding her power of attorney. In her writ Mrs Oswal alleged that it was the intention of ANZ and the receivers to sell her shares and she sought to prevent that.

10 On 14 and 16 December 2011 Davies J heard an application for an interim injunction by Mrs Oswal to prevent the sale of her shares. Yara as a prospective purchaser was heard on that application. Davies J refused the application for an interim injunction. She found that there was no serious question to be tried. Her concern in that respect was that the only material before her as to the substance of Mrs Oswal's allegations was hearsay material deposed to by Mrs Oswal's solicitor. She found that the balance of convenience weighed against the granting of an interim injunction. She was concerned as to the adequacy of the undertaking as to damages, and she considered that damages would be an adequate remedy in any event.

11 Both Mrs Oswal's shares and Mr Oswal's shares were then sold to Yara and to a company named Apache Fertilisers Pty Ltd ("Apache"). By those sales Apache acquired 49 percent of the share capital of BHL and Yara acquired an additional 16 percent so as to bring its holding to 51 percent.[1]

12 In April of this year Mrs Oswal amended her proceeding so as to add the two purchasers of her shares as defendants.

13 In her amended statement of claim Mrs Oswal has expanded her allegations of misconduct by bank officers in the negotiations in December 2009 and has added claims relating to the agreements under which her shares were sold to Apache and to Yara. Those agreements are referred to as the "Apache Share Sale Deed" and the "Yara Share Sale Deed". She alleges that there was a lack of authority to enter into those deeds and that they are not binding. She alleges conversion by ANZ. She alleges misleading and deceptive conduct. She also alleges that, if the impugned documents are held to be binding, ANZ and the receivers breached duties which they owed her, both in entering into the deeds on the terms they contained and in selling her shares at less than market value. She alleges that Apache and Yara had notice of relevant breaches by ANZ and the receivers. In substance, Mrs Oswal seeks to unwind all of the transactions and she claims damages.

14 Mr Oswal's claim in his proceeding is more confined than Mrs Oswal's claim. His proceeding is against only the receivers. He alleges a failure to obtain a proper price for his shares. He also makes a claim that there was wrongful disclosure of the terms of a particular agreement.

15 It is not possible at this stage to assess the merits of the claims made in the two proceedings. It is clear that each proceeding will involve the expenditure of substantial costs by the defendants for so long as they remain on foot. I proceed on the basis that the agreements Mrs Oswal seeks to impugn are valid, as the relevant issue is recovery of the defendants' costs in the event that the plaintiffs fail.

16 Rule 62.02(1)(a) provides that where a plaintiff is ordinarily resident out of Victoria the court may, on the application of the defendant, order that the plaintiff give security for the costs of the defendant.

17 The general principles which apply in such applications are well summarised in two judicial statements, one by McHugh J and the other by Gummow J.

18 In PS Chellaram & Co Ltd v China Ocean Shipping Co & Another McHugh J said:[2]

To make or refuse an order for security for costs involves the exercise of a discretionary judgment. That means that the court exercising the discretion must weigh all the circumstances of the case. The weight to be given to any circumstance depends not only upon its own intrinsic persuasiveness but upon the impact of the other circumstances which have to be weighed. A circumstance which may have very great weight when only two or three circumstances have to be weighed may be of minor significance when many circumstances have to be weighed. However, for over 200 years, the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide security for costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction.

19 In Energy Drilling Inc v Petroz NL & Ors Gummow J said:[3]

The purpose of ordering security for costs against an applicant ordinarily resident outside the jurisdiction is to ensure that a successful respondent will have a fund available within the jurisdiction of this Court against which it can enforce the judgment for costs, so that the respondent does not bear the risk as to the certainty of enforcement in the foreign country and as to the time and complexity of the action there which might be necessary to effect enforcement: Kent Heating Ltd v Cook on Gas Products Pty Ltd & Anor (1984) 59 ALR 277 at p 279. On the other hand, the mere circumstance that an applicant is resident outside the jurisdiction does not necessarily invite an exercise of discretion in favour of ordering security, the question being how justice will be best served in the particular case: Barton v Minister for Foreign Affairs [1984] FCA 89; (1984) 2 FCR 463, CBS Records Australia Ltd & Ors v Telmak Teleproducts (Aust) Pty Ltd (1987) ATPR 40-783 at pp 48,554-48,555; (1978) 72 ALR 270 at pp 284-285.

20 Each plaintiff has signed a guarantee. Mrs Oswal's guarantee is limited but, for present purposes, the limitations do not bear on any relevant issue. Under each guarantee, the guarantor agrees to reimburse ANZ for its expenses in relation to contemplated, actual, or attempted enforcement, or exercise, preservation or consideration of ANZ's rights, powers or remedies under the guarantee, which expenses are said to include both administrative costs and legal fees on a full indemnity basis.

21 Each of the share mortgages signed by the plaintiffs secure all monetary liability on any account and in any capacity and make provision for the application of money received by ANZ, or any receiver, in terms whereby the mortgagor is entitled to payment of a surplus only after payment of all costs, charges and expenses incurred by either the ANZ or the receiver. Under each of the share mortgages, ANZ is entitled to retain the proceeds of realisation of the secured property for so long as any sum is contingently owing.

23 Under the share sale deeds the receivers sell and the respective buyers purchase shares mortgaged by Mr Oswal and Mrs Oswal (Clause 3.1(a)(1)). In addition, ANZ, as Mrs Oswal's attorney, sells and the respective buyers purchase the escrow shares owned by Mrs Oswal (Clause 3.1(a)(2)).

24 Under each share sale deed the price calculation begins with an amount called the "Base Sale Shares Purchase Price" (Clause 3.2(a)(1)), which is then adjusted by a working capital adjustment, a provision as to interest, a provision as to the receivers' costs, provisions as to dividends and payments to "Oswal Entities", and other adjustments under the deed so as to reach what is then called the "Sale Shares Purchase Price" (Clause 3.2(a)(1)-(6)).

25 Clause 3.2(b) of each deed then provides as follows:

The Sale Shares Purchase Price will be paid as follows:

(1) The aggregate amounts referred to in (a)(1) to (a)(6) less the Holdback Amount (the Completion Payment), is payable by the Buyer on Completion in accordance with clause 4.3(c)(1);

(2) The Holdback Amount is payable by the Buyer on Completion, in accordance with clause 4.3(c)2. ...

26 Clause 4.3(c)(1) provides (in effect) for payment to or at the direction of the receivers and the bank (acting as attorney for Mrs Oswal). Clause 4.3(c)(2) provides for payment of the "Holdback Amount" to Citibank, which is called the "Escrow Agent", for deposit into an account called the "Escrow Account". The holdback amount under the Yara deed is $US5,000,000. The holdback amount under the Apache deed is $US15,000,000.

27 Each share sale deed contains a large number of representations, warranties and indemnities for the benefit of Yara and Apache respectively (Clause 5). They concern what might be described as formal matters in relation to the existence of the parties, due authorisation, and so forth; but there are also warranties and indemnities in relation to the assets of BFPL including warranties and indemnities in relation to material contracts, personal property, real property, plant, sufficiency of assets for the conduct of the relevant business, environmental matters, industrial matters, the accuracy of the financial statements, insurance, and other matters. There is a taxation indemnity.

28 Under clause 5.7 ANZ (both in its own capacity and as attorney for Mrs Oswal) and the receivers indemnify the respective buyers in relation to all losses suffered or incurred by them arising out of or as a result of "any Sale Shares Claim" or "any Oswal Claim". Mrs Oswal's proceeding is both a "Sale Shares Claim" and an "Oswal Claim".

29 In summary, each of the buyers has the benefit of a significant number of warranties and indemnities covering a wide range of matters. One of the matters in relation to which they have an indemnity is the costs they incur in Mrs Oswal's proceeding.

30 The claims which the respective buyers might make are dealt with by reference to the terms "Claim" and "DoI Claim".[4] Clause 6.11 of each deed relevantly provides as follows:

(a) Any payment made by ANZ, RO [Mrs Oswal] or the Receivers to the Buyer in respect of any Claim or any DoI Claim:

(1) Will be in reduction of the Sale Shares Purchase Price; and

(2) For so long as sufficient funds are available in the Escrow Account to satisfy Claims and DoI Claims, will be paid out of the Escrow Account. For the avoidance of any doubt, to the extent that the funds available in the Escrow Account are insufficient to satisfy a Claim, the Buyer shall be entitled to seek payment of the Claim from ANZ or the Receivers.

31 Under clause 7 of each deed there is a procedure for prompt notification of any claims.

32 Clause 8 of each deed deals specifically with the holdback amount.

33 Clause 8.1 provides that the escrow account is to be held in the joint names of ANZ and the respective buyer.

34 Clause 8.2 deals with use of the holdback amount. It provides as follows:

The funds in the Escrow Account shall be held on the following terms:

(a) Any interest or profit generated on the Escrow Account (subject to any bank or other charges properly charged to or in connection with the establishment or maintenance of the Escrow Account) (the income) shall accrue for the account of the Sale Shares Purchase Price and shall not form part of the Holdback Amount and the Escrow Agent shall be instructed to remit the income out of the Escrow Account upon a request from ANZ without further deduction or withholding other than as required by law;

(b) Subject to the remainder of this deed, the Holdback Amount shall be retained in the Escrow Account for a period of 24 months from completion (the Escrow Period). At the end of the Escrow Period (subject to clause 8.4) Buyer and ANZ shall issue joint written instructions to the Escrow Agent to release to ANZ (or at their direction) any remaining funds in the Escrow Account (together with any income);

(c) The Holdback Amount shall be utilised only for the satisfaction of any Claims under this deed and DoI Claims.

35 Clause 8.3 provides that funds may be released from the escrow account to the buyer "when such amounts are agreed or determined". Clause 8.4 provides that the escrow period is subject to extension to the extent that any claim made within the 24 months remains unresolved.

36 The total amount paid by Yara and Apache under the share sale deeds was $US582,527,535. The bank debt has largely been repaid. There is alleged to be an amount of $A1.77 million still outstanding for receivership costs and expenses.

37 $US20,000,000 has been paid into the escrow accounts. Of that $US20,000,000, approximately $US9.2 million is referable to the sale of Mr Pankaj Oswal's mortgaged shares, and approximately $US10.8 million is referable to the sale of Mrs Radhika Oswal's mortgaged shares and her escrow shares.

38 The only "Claims" or "DoI Claims" which have been identified to date are claims for legal costs in relation to Mrs Oswal's proceeding.

39 Efthim AsJ ordered security for costs in each proceeding. He addressed a number of relevant issues, one of which was the sole issue addressed on the appeals. He quoted and adopted the passages from the judgments of McHugh J and Gummow J, which I have also quoted and adopted. As to the significance of the holdback amount, he said that that amount is subject to further claims and that the factors raised in support of an order for security (to which I have only briefly referred but to which he referred in greater detail) " ... weigh against allowing a contingent fund to be used to defeat an order for security for costs".[5] As to Yara and Apache's ability to recover costs from the escrow accounts, Efthim AsJ held that their position was relevantly the same as that which applies in relation to an insured defendant. In this respect he relied upon the Court of Appeal decision in Living Springs Pty Ltd v Kliger Partners.[6] He quoted the following passage from Maxwell P and Buchanan JA's judgment:[7]

We can see no reason in principle why an insured defendant should be in any different position from an uninsured defendant for this purpose. Let it be assumed that the insurer has agreed to indemnify the defendant against the plaintiff's claims. The insurer should be regarded as having exactly the same entitlement as the insured defendant to protection against the risk that the plaintiff would be unable to meet an adverse costs order.

On this view, the fact that a defendant is insured is irrelevant to an application for security for costs. If, as LS argued, the judge had in fact been expressing that view, there would have been no error in doing so.

40 On Mr Oswal's appeal, it was submitted on his behalf that the three defendants in his proceeding (the receivers) have an indemnity from ANZ and that ANZ is holding $US9,000,000 of Mr Oswal's money. As to Efthim AsJ's statement that the fund is a "contingent asset", it was submitted that the present availability of the fund is not the issue; the issue being whether the fund satisfactorily addresses the risk that the receivers will not recover their costs if they succeed in the proceeding. It was submitted that the receivers have the onus on the application and that they are in a position, together with their appointor ANZ, to appraise the court of likely claims on the holdback amount, but they have not done so. In the circumstances, it was submitted that an order for security for costs should not be made until material is placed before the court giving some proper basis for concluding that the fund already held is not or may not be adequate.

41 Similar submissions were made on behalf of Mrs Oswal on her appeal. In addition, it was submitted that Apache and Yara have no need for an order for security for costs as they can have recourse to the escrow amounts as the proceeding progresses. It was submitted that their position is not at all analogous to the position of an insured defendant, as they have not insured their liability, instead they have a right of recourse to a fund created by the sale of the plaintiff's own shares.

42 On behalf of ANZ and the receivers, submissions were made compendiously in relation to both proceedings.

43 First, the circumstances concerning Mr and Mrs Oswal's foreign residence and their assets in Australia were outlined. It was submitted that Efthim AsJ's conclusion that the existence of a contingent asset did not sufficiently weigh in the balance to defeat the applications for security was impeccable.

44 Addressing the significance of the holdback amount, it was submitted that a defendant could not rely upon the existence of an asset within the jurisdiction to defeat an application for security unless the defendant had an immediate indefeasible right to that asset. In that respect reliance was placed upon two authorities: Jesse James v Nolmont Pty Ltd[8] and Tan Kah Hock v AWP SGT 26 Investment Ltd.[9]

45 It was submitted on behalf of ANZ and the receivers that ANZ could have no recourse to the escrow accounts to meet their costs, and that ANZ's entitlement to any balances would only arise after 24 months from completion, at the earliest, and was entirely subject to the claims of Yara and Apache. It was also submitted that, on a proper analysis of the share sale deeds, the "price" of the mortgaged shares and the escrow shares could not be truly ascertained until all claims of Yara and Apache had been dealt with.

46 It was submitted on behalf of ANZ and the receivers that if there is any fund remaining at the end of the escrow period then that fund will be a fund over which ANZ has security. It was submitted, however, that the respective plaintiffs' counsel had not conceded that that was the case and that they should be required to do so.

47 It was submitted that the interest ANZ would earn on the escrow account would not be sufficient to meet the outstanding liability of $A1.77 million.

48 Counsel on behalf of Yara and Apache adopted the submissions made on behalf of ANZ and the receivers. They emphasised that the escrow accounts were funds exclusively set aside for them during the escrow period. They characterised the funds as "our money". They submitted that Efthim AsJ had been correct in applying to them the principles articulated in Living Springs.

49 Prompted by the submissions made on behalf of ANZ and the receivers, in the course of the hearing I raised with counsel for the plaintiffs whether it was conceded that the plaintiffs were liable for ANZ and the receivers' costs under the various agreements (assuming their validity for these purposes) and whether that liability was secured over any balances of the holdback amounts. They each sought the opportunity to obtain instructions and to make further submissions on the issue.

50 In a note submitted after the initial hearing counsel on behalf of Mr Oswal advised (among other things): "Mr Oswal accepts that his beneficial interest in the holdback amount forms part of the Mortgaged Property under the Share Mortgage".

51 On behalf of Mrs Oswal her counsel's note indicated that she accepted that the debts and liabilities secured by the mortgage would include costs payable by her to the ANZ in respect of any costs order made by the Court in these proceedings and also acknowledged that to the extent that the holdback amounts represent the net proceeds of sale of her shares:

(a) the Bank is entitled to retain those proceeds and is not required to discharge the Mortgage whilst there remains a contingent liability of the Plaintiff to the Bank in respect of the costs of these proceedings ... and

(b) the Bank is required to apply those proceeds in accordance with clause 8.1 of the Mortgage, including in satisfaction of the "Secured Moneys" (which would include any amount payable by the Plaintiff pursuant to a costs order in favour of the Bank in these proceedings, as acknowledged above).

In view of the above analysis the Plaintiff accepts that her share of the Holdback Amounts ... stands charge with the payment of those costs should she be ordered to pay them.

53 In further submissions heard after delivery of the respective notes, counsel on behalf of ANZ and the receivers submitted that the concessions which had been made were limited in that Mrs Oswal's acknowledgment concerned only the costs of the bank and not the costs of the receivers and in that her acknowledgement was only in respect of costs orders. As to Mr Oswal it was submitted that he had not addressed the relevant issue at all. In response counsel for Mrs Oswal said that her acknowledgment was intended to extend to the receivers' costs and should be read as if it did so.

54 I do not accept the contention put on behalf of ANZ and the receivers that the holdback amount is irrelevant because the plaintiffs do not have an immediate indefeasible right to that asset. Neither Jesse James nor Tan Kah Hock establishes any such general principle. In those cases particular assets (the possibility of receiving dividends in one case and the possibility of receiving royalties in another) were held not to obviate the need for security. Obviously, the likelihood of a particular asset being available to meet a costs order is of importance. Each case will depend on its own facts.

55 I also reject the submissions made on behalf of Yara and Apache that their position is relevantly analogous to that of an insured defendant. Their position is quite different. An insured defendant has paid premiums to a third party, who otherwise has nothing to do with the dispute, to cover specified eventualities, one of which might be incurring costs in litigation. That is not Apache and Yara's position here. Here, a fund has been created in the course of a sale of property which is owned by the plaintiff, Mrs Oswal, but over which she has created security and other rights in favour of ANZ. To the extent that Yara and Apache call on the fund to meet their costs those costs will, for all practical purposes, be met by ANZ from the realisation of Mrs Oswal's own assets, over which ANZ holds security and other rights. Then, to the extent that any surplus remains after ANZ has met those obligations to Yara and Apache, and has met other amounts owing to it, that portion of the holdback amount which is referable to Mrs Oswal's shares will have to be accounted for to her. There is no insurer meeting Yara or Apache's costs. The costs will be met out of property owned by Mrs Oswal over which she has granted security and other rights. The analogy with an insurer is inapt.

56 There were submissions made as to whether the holdback amounts can properly be described as part of the "price" of Mr and Mrs Oswal's shares. The resolution of that issue is not important. The matters which are important are these:

(a) A total sum of the $US582,527,535 has been paid by Yarra and Apache under deeds transferring to Yara and Apache Mr and Mrs Oswal's shares.

(b) $US20,000,000 of that sum has been placed into escrow accounts for the purpose of meeting claims under the deeds by Apache and Yara.

(c) Interest on the $US20,000,000 is to be paid to ANZ and, after the escrow period, the balances of the funds (if there are any) are to be paid to ANZ.

(d) If ANZ receives any balance it will do so as mortgagee and/or agent, and it must then account to Mr and Mrs Oswal.

57 Mr and Mrs Oswal's respective interests in the holdback amounts were described as "contingent", which they are. All the relevant parties' interests are contingent. Yara and Apache's respective interests are contingent on their having valid claims under the respective deeds. ANZ's interest is contingent on there being a balance remaining after meeting Yara and Apache's claims, and is then confined to relevant liabilities which remain outstanding. Describing the interests as being contingent does not greatly advance the position. It is necessary to analyse the contingencies.

58 As matters presently stand, on the materials before me, the position is as follows:

(a) There is a total of $US20,000,000 held by Citibank in the names of ANZ and Apache and Yara respectively.

(b) Yara and Apache can claim their costs of Mrs Oswal's proceeding from those respective funds now, and can continue to do so hereafter for so long as they are being incurred.

(c) There are no other known claims on the funds at this time.

(d) If no other claims are made, at the end of the escrow period the balances of the funds will be paid to ANZ. In the meantime ANZ will be paid interest on the funds.

(e) ANZ can apply those balances and that interest to meet the $A1.77 million said to be outstanding on its debt, and the costs it and the receivers incur in Mr Oswal's proceeding and Mrs Oswal's proceeding.

(f) Any amount remaining must be accounted for to Mr and/or Mrs Oswal.

59 Thus, it seems to me that, if matters remain as they are, Yara will be able to recover all its costs of Mrs Oswal's proceeding from the escrow account established under its share sale deed unless those costs exceed $US5,000,000, and Apache will likewise be able to recover all its costs unless they exceed $US15,000,000. If matters remain as they are, I would expect substantial balances to be paid to ANZ at the end of the escrow period. ANZ can then apply those balances and that interest to meet the $A1.77 million said to be outstanding on its debt, its own costs, and the costs of the receivers in both the Oswal proceedings.

60 It is possible that things will not remain as they are. New claims by Apache or Yara may emerge. It is also possible that the total of the defendants' costs will exceed $US20,000,000. But there is no evidence before me addressing those possibilities. Obviously, the defendants are the only parties who could usefully bring forward such evidence.

61 This analysis leads me to a conclusion which differs from Efthim AsJ.

62 The defendants have security for their costs already. The issue is whether that security is sufficient. It seems to me that it may well be sufficient. Only the defendants are in a position to bring forward material suggesting that it is, or may be, insufficient. They have not done so. My conclusion is that unless they do so security should not be ordered.

63 I do not consider that the defendants are subjected to any unwarranted risk in this respect. They can bring a further application if and when they consider that they can demonstrate that the security represented by the respective holdback amounts is or may be inadequate. The Court has power to order security for past costs.[10] It could not be contended that there has been delay. If interlocutory costs orders are not met in a proceeding, the Court has power to stay that proceeding.

64 Security for costs should not have been ordered. The appeals will be allowed. I will hear the parties on the appropriate orders and on any other issues which arise.

[1] BHL and BFPL have since changed their names to Yara Pilbara Holdings Ltd and Yara Pilbara Fertilisers Pty Ltd.

[2] [1991] HCA 36; (1991) 102 ALR 321, 323.

[4] There is a separate Deed of Indemnity for each buyer.

[6] (2000) 20 VR 377 ("Living Springs").

[7] (2000) 20 VR 377, 393.

[8] [2007] FCA 1604 ("Jesse James").

[9] [2008] FCA 540 ("Tan Kah Hock").

[10] Procon (Great Britain) Ltd v Provincial Building Co Ltd (1984) 1 WLR 557, [1984] 2 All ER 368; Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114, 122-3; Szanto v Baiton [2011] NSWSC 985.