Plaintiffs v Defendant

2 The relief claimed by the summons is that the plaintiffs by counterclaim give security in the sum of $154,475.10 in a form satisfactory to the Prothonotary within 14 days of the order pursuant to Rule 62.02(1)(b) and/or s 1335(1) of the Corporations Act 2001. I was told that the amount being claimed by way of security has been varied down to $101,375.

3 The Notice of Appeal included an application for special leave to rely on further affidavits on the hearing of the appeal but the application was not pressed and I have not read the affidavits of Charles Wantrup and Caralapati Premraj, each sworn 7 October 2010.

4 Counsel told me there were four issues arising on this application. Is the threshold test satisfied? Is there likely to be stultification if security is ordered? Have the plaintiffs' by counterclaim delayed in their application; and, quantum?

5 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:

(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.

6 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.

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

8 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 if unsuccessful at trial. Once that is established, the Court may then exercise its discretion as to whether to order security and, if so, in what amount. The discretion to order security for costs is unfettered and must be exercised judicially having regard to the particular circumstances of the case.

9 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.

10 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 ...

11 When I inquired, counsel was unable to identify the likely quantum of a costs order at the end of the trial. When, and in what sum, the unsuccessful plaintiffs by counterclaim might be called upon to pay a costs order is a central part of the threshold inquiry and it is usual that an estimate of the defendants' likely party party costs in the proceeding is provided. In this case that may not matter.

12 The first plaintiff by counterclaim was incorporated on 28 October 2008. It has a paid up capital of $10 and its sole director and shareholder is Mrs Homai Irani. Mrs Irani is also the sole director and shareholder of the second plaintiff by counterclaim. This company was incorporated on 16 May 1988 and has a paid up capital of $2. A fixed and floating charge over the whole of its undertaking and assets to a maximum of $7M to St George Bank Ltd was registered on 21 June 2000 and assigned by St George Bank Ltd to Westpac Banking Corporation in 2010. Neither company has any registered interest in any land.

13 The first plaintiff by counterclaim sues not for its own benefit but for the benefit of the F&D Family Trust. The original trustee of the F&D Family Trust was Thirteenth Corp Pty Ltd, the named defendant in the proceeding. It went into liquidation in October 2008. Its director, Boman Irani, has stated that Thirteenth Corp Pty Ltd only ever traded in its capacity as trustee of the F&D Family Trust. The trust deed was in evidence showing that the primary beneficiaries are Farokh Boman Irani, Danesh Boman Irani and Roxanne Boman Irani. The definition of beneficiaries in the trust is in a standard form which extends the defined beneficiaries to family members and related entities of the primary beneficiaries.

14 There was also in evidence a balance sheet of the F&D Family Trust as of 30 June 2008 and a Report as to Affairs (RATA) provided to the liquidator of Thirteenth Corp Pty Ltd. These documents disclose that the F&D Family Trust had a substantial net asset deficiency on its balance sheet. The overwhelming value of assets were shown to be non-current receivables from apparently related companies. Its unsecured financial liabilities were current liabilities, described as unpaid present entitlements of Combulk Pty Ltd and Unilaw Pty Ltd and non-current financial liabilities, consisting of unsecured loans, possibly owed to related entities. However, this is just surmise on my part from the names of the lenders appearing in the balance sheet. There was no evidence as to who stood behind the F&D Family Trust or stood to benefit from any cash flow through its accounts.

15 Clause 8.4 of the trust deed gives a right of indemnity to the trustee.

16 On this information alone there is no reason to believe, either from the lack of capital and assets of the plaintiffs by counterclaim revealed from searches or from the apparent lack of value in the trustee's right of indemnity, that the plaintiffs by counterclaim will be able to pay an order for costs in favour of the defendants by counterclaim, in any amount.

17 The contention of the defendants by counterclaim on the threshold question was boldly met by counsel for the plaintiffs by counterclaim. He contended that the Court should not be satisfied that the threshold test had been met, arguing that it could not be established, as stated by Mr Wantrup in an affidavit, that the assets of the F&D Family Trust are zero. He contended that the financial statements of the trust disclosed a range of assets and a range of liabilities, including the assets represented by the amounts claimed in these proceedings.

18 The Court needs merely to be satisfied there is reason to believe there may be an inability to pay the costs. As the Court of Appeal stated in Livingspring:

The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a "real risk".) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk.

19 The evidence need not be conclusive as to the financial position of the plaintiffs by counterclaim. The burden rests on the applicant, from first to last, to persuade the court that the order for security should be made. A prima facie case of lack of ability to pay can be sufficient as it may raise an evidentiary burden upon the plaintiff by counterclaim to show that it will be able to pay the costs if that is what it contends. It is open for me to infer, and I do, on the basis of the evidence of the financial position of the plaintiffs by counterclaim before me that there is a real chance that they will be unable to pay the costs of the defendants by counterclaim in this proceeding should they win.

20 In my view, the threshold question has been established by the applicants.

21 It was faintly suggested that a relevant discretionary consideration was that ordering security might stultify the ability of the plaintiffs by counterclaim to pursue an arguable case legitimately instituted. The onus lies upon the plaintiffs by counterclaim to show that this is the case. It raises questions about whether there are persons standing behind the plaintiffs by counterclaim, such as in this case, creditors of, or unit holders in, the trust, who could provide the security and who possibly as the ultimate beneficiaries of the proceeding ought to do so.[5] I did not understand Mr Waldren to be seriously pursuing this consideration.

22 Next, Mr Waldren contended the plaintiffs by counterclaim were, in substance, defendants. Neither party attempted to explain the state of the pleadings to me. In fact when I asked Mr McCormack what the issues were in the proceeding he frankly and surprisingly stated that he had not read the pleadings. As a result the court has had to wade through a quagmire of amended and substituted pleadings without assistance from counsel, which was most unsatisfactory.

23 On superficial analysis, the counterclaim could be seen as a defensive response to the claim but, significantly, there has been a change in parties. The claim is no longer being pursued for the stated reason that the trustee is in liquidation although that trustee has been replaced.

24 The original claim was issued on 1 April, 2004. It sought a declaration that a deed made in September 1999, embodying a litigation funding arrangement, had been terminated, or alternatively, specific performance of it. The defendant was sued as the trustee of the F&D Family Trust. The counterclaim was first issued in December 2004. The current plaintiffs by counterclaim were substituted in May 2009. What is curious, is that the first plaintiff by counterclaim is the replacement trustee for the defendant, now in liquidation.

25 In the current counterclaim the first plaintiff, Jasmine, seeks restitution of the sum of $563,397.73 due on loan agreements and the second plaintiff, Shalridge, seeks the sum of $4.5M. They jointly seek a further sum of $414,928.50 from the defendants by counterclaim. They allege the litigation, the funding of which was the subject of the deed upon which the plaintiff sued, failed by reason of the conduct of the defendants by counterclaim. They also allege an overriding deed entered into in 1998 on which is founded claims from the defendants by counterclaim to a sum of $4.5M and the further sum of $414,928.50.

26 The leading decision explaining the principles which apply to determining whether a proceeding is essentially defensive remains that of Ormiston J in Interwest Ltd v Tricontinental Corporation Ltd.[6] At 627, he said:

Principally it would appear necessary to characterise the proceedings in respect of which security is sought. If they are "defensive" proceedings, either directly resisting proceedings already brought or seeking to "halt self-help procedures", it would seem that to require security would be oppressive, or at least would provide serious grounds for refusing to make an order. At the least, it is a factor to be considered in the exercise of the discretion. In particular, it is a basis for reducing the amount of security ordered to a sum related to the costs of those claims which cannot be characterised as defensive: cf Sloyan's case, supra.

The underlying rationale is that if a party is genuinely seeking to resist another party's claim, whatever form it takes, then to order security would be manifestly unfair.

27 I do not consider the counterclaim can properly be characterised as defensive and, in so concluding, I have had regard to the:

(a) fact that the original claim is no longer being pursued;

(b) substantial claims made in the counterclaim, which in quantum exceed those of the abandoned claim ten-fold;

(c) fact that the claims made in the counterclaim are substantially based in a different agreement to that upon which the claims in the proceeding are put; and

(d) appearance that the counterclaim would be pursued against the defendants by counterclaim in any event.

28 Mr Waldren's primary contention for security to be refused on discretionary grounds is delay. He identified two parts to the relevant delay being delay by the defendants by counterclaim in investigating the financial position of the plaintiffs by counterclaim, and delay by the defendants by counterclaim in applying for security.

29 Demand that security be provided had been made by letter dated 21 July 2010. The application for security was made by summons filed 27 July 2010. I have already noted that at this stage the proceeding had been on foot for six years and the proceeding has been set down for trial three times, on 29 September 2009 and on 21 April 2010 with its current trial date of 11 November 2010.

30 The counterclaim was first issued in December 2004 and the current plaintiffs by counterclaim were substituted in May 2009 following contested applications. From an affidavit, it appears Mr Premraj was aware of the status of Jasmine Management from at least as early as December 2009. A RATA in respect of Thirteenth Corp Pty Ltd became available after it went into liquidation but the defendants by counterclaim seem to have been dilatory in tracking it down.

31 In Smail v Burton,[7] in dismissing the application, Gillard J stated:

... an application for security of costs should be made promptly. If an appellant has expended sums of money preparing the appeal for hearing and all the matters necessary to be performed have already been performed and the appeal is ready for hearing, it would be patently unjust to permit a respondent who stood by and allowed that work to be done to come to court and to ask for security after such expenses have been incurred. Accordingly, it is well established by authority that applications for security of costs should be made promptly and before considerable expense is incurred by the appellant.

32 In Devenish v Jewell Food Stores Pty Ltd,[8] in dismissing an application, Mason CJ stated:

In these circumstances, it is obvious that the major steps preparatory to the hearing of the appeal have been taken, so that the appeal is ready for hearing and the bulk of the costs of the appeal would already have been incurred by the second appellant. In the result, the application for security comes at the heel of the hunt. What is more, the respondent has had reason to believe, at least since 8 March 1990, that the source of funds previously available to the second appellant was no longer available. In this situation, the respondent was in a position to seek security as early as 11 May 1990 when special leave was granted on the second occasion. As a general rule, applications for security for costs should be made promptly and before significant expense is incurred by the appellant.

33 Delay in bringing the application will often be persuasive against its success because it is unfair for a defendant to stand by and permit an impecunious plaintiff to incur costs in pursuing a claim without the burden of providing security, and then to impose the burden upon it. Thus the enlivening feature of delay, which can make it influential in the exercise of the discretion, is not so much the fact of delay but rather its impact on the position of a plaintiff. As the Court of Appeal observed in Livingspring,[9] "Foremost among discretionary considerations will be any contention on behalf of the plaintiff that an order for security would work an injustice".

34 On the one hand, the overriding injustice might be thought to be the exposure of the defendants by counterclaim to an unsatisfied costs order because those standing behind the plaintiffs by counterclaim, who may well be able to meet the costs order, decline to do so. They have not been induced to expend costs by the inaction of the defendants by counterclaim but may be sheltering behind an insolvent trading trust as they pursue a claim.[10] In other words, full force may be given to the impecuniosity of the plaintiffs by counterclaim as a matter which not only opens the jurisdiction but provides a substantial factor in the decision whether to exercise it.[11]

35 On the other hand, the inquiry into the prejudice caused by delay may reveal that the delay is simply not sufficiently prejudicial,[12] or there is no real unfairness because little has been going on in the proceeding,[13] or that circumstances have changed despite delay,[14] or that the prejudice to the plaintiff evident from the delay may be sufficiently addressed by limiting the security to future costs.[15] Clearly, the circumstances of each case ought be considered.

36 Sometimes the debate focuses on whether the plaintiff has actually proved such prejudice as it asserts or whether such prejudice can be reasonably inferred in the absence of explicit proof, as occurred in Felsink. This issue was also one of the issues before the NSWCA in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd,[16] where Hodgson JA observed:

In my opinion, it is not necessary, in order for a plaintiff to show prejudice from delay, that the plaintiff prove what the plaintiff would have done if the application had been made earlier; although if a plaintiff does prove that it would not have gone ahead with the proceedings if the application had been brought when it should have been, this would be a very powerful consideration against granting security in the case of a delayed application. In my opinion, where substantial costs have been incurred since the time when an application for security should have been brought, it would be unreasonable to deny the existence of prejudice unless the plaintiff can prove exactly what the plaintiff would have done if the application had been brought earlier.

37 Well before demand was made for security, the applicants were on notice that the plaintiffs by counterclaim may be impecunious. The applicants took no steps to investigate the matter. Such knowledge can, on the affidavits, plainly be put at at least March of this year. The RATA had been produced to the Court in response to a subpoena issued by the applicants on 22 February 2010. Why they did not then demand security is not satisfactorily explained. It appears from the court file that between March and July of this year there was intense activity in the proceeding. There was an application for a substantial amendment to the counterclaim and there were at least three appearances before Byrne J and Daly AsJ. The parties were clearly engaged in extensive preparation for the trial scheduled for 21 April 2010. The fact that orders were made for further discovery suggests that the documentary evidence was being closely examined. There is both the basis for an expectation that an application for security might have then been made and there was the opportunity to do so.

38 There is a more extensive unexplained period of delay. The only evidence of inquiries into the financial position of the plaintiffs by counterclaim are those that occurred in July of this year. But in an affidavit sworn 8 December 2008, Mr Premraj deposed that he first became aware that the original plaintiff by counterclaim was acting in its capacity as the trustee and not in its own capacity on 2 December 2008. Thirteenth Corp Pty Ltd went into liquidation in October 2008 and the RATA was submitted to ASIC on 11 November 2008. Why they did not demand security at the end of 2008 is also not satisfactorily explained.

39 The explanation for the failure of the defendants by counterclaim to adequately investigate the financial position of the plaintiffs by counterclaim was unsatisfactory. Mr Premraj said that it appeared to him that Mr Irani had substantial means, and he assumed that if he could fund so much litigation he must have substantial funds with which to fund his companies. He referred to comments about Mr Irani spending hundreds of thousands, if not millions, of dollars in costs in fighting St George Bank. This explanation is nonsensical. Thus, the defendants by counterclaim appear to have been well aware that it was likely that the plaintiff by counterclaim lacked resources and was dependent upon those standing behind it to fund this litigation.

40 Here prejudice through delay can be expected as the matter has been set down for trial twice before and I was told it is now substantially prepared for trial. The solicitor for the plaintiffs by counterclaim, Mr Leonidas, swore that the plaintiff by counterclaim had twice incurred the costs of preparing for trial and that the costs had practically all been incurred before the application was made. Counsel had been briefed. Mr McCormack did not dispute this and in fact reduced his claim by a third because of affidavits sworn by Mr Leonidas, which in part raised the point that items of costs were past, not future, costs.

41 I find there has been prejudice to the plaintiffs by counterclaim through delay which is therefore a factor of significance in discretionary considerations. I also consider that the plaintiffs by counterclaim are now pursing a major claim against the defendants by counterclaim and the litigation is most likely to be for the benefit of those interested in the F&D Family Trust. There is no satisfactory evidence that those interested creditors or beneficiaries cannot provide security or, if not, that the proceeding may be stifled because they cannot do so.

42 The trial of this proceeding is scheduled, for the third time, to commence on 11 November 2010.

43 The threshold condition for the exercise of the power to order security is here satisfied and, as the Court of Appeal noted in Livingspring,[17] that defines the circumstances in which Parliament contemplated that the power would be exercised. The purpose of security is to protect the defendant against the very risk which must be shown to exist before the power can be exercised. In this sense, demonstrating the existence of the risk can call for the fulfilment of the purpose for which the power was conferred.

44 I consider the power should be exercised in this particular case. The circumstances of delay, both in terms of when the defendants by counterclaim ought to have made inquiries about the financial position of the plaintiffs by counterclaim and when they ought to have demanded that security be provided, while powerful factors militating against a beneficial exercise of the discretion for the defendants by counterclaim, do not outweigh other factors. In particular, the counterclaim is now the main claim in this proceeding. It is not a defensive ploy. Absent evidence of stultification, those standing behind the plaintiffs by counterclaim ought not be permitted to continue to hide there, avoiding any risk of costs in the event of an adverse result.

45 The delay is significant and entirely avoidable. I consider that prejudice to the plaintiffs by counterclaim from delay is not shown to be such that requiring security to be provided now, but calculated by reference to future costs only, would be unjust. I would go further to protect against prejudice from delay. I am told that the proceeding is now prepared for trial and given that 11 November 2010 is its third fixing, that observation is hardly surprising.

46 I consider that it is likely the plaintiffs by counterclaim do not continue to be prejudiced by incurring substantial legal costs, not because the defendants by counterclaim have stood idly by, declining to seek security and inducing the plaintiffs by counterclaim into a false understanding, but because the plaintiffs by counterclaim are investing in a substantial claim against the defendants by counterclaim, which they intend to pursue for the benefit of those standing behind the F&D Family Trust. Nevertheless, I propose to give some weight to the factor of delay on the part of the defendants by counterclaim in bringing this application. I will not order security for the costs incurred in preparing the proceeding for trial.

47 As I have noted above, the quantum of the estimated future costs has been reduced since the summons was filed, and the plaintiffs by counterclaim contend that it ought to be substantially further reduced. As I take the view that there is now little point in requiring the plaintiffs by counterclaim to provide security for the costs of preparation for trial it is not necessary that I enter the item by item debate about the likely party party costs on taxation. I will order that the plaintiffs by counterclaim provide, by the trial date, an appropriate sum to stand as security only for the costs of the conduct of the trial.

48 It is not my task to work through bills of costs considering objections to items in the form of a taxation. Rather, I am obliged to fix an amount which fairly achieves the objectives of the exercise of the power, that is, to provide not payment but security. It is not the practice in this jurisdiction to provide security by way of an indemnity against estimated party party costs. The balancing of discretionary factors may be reflected in the quantum of the security to be provided.

49 Taking all the above matters into consideration I allow the appeal, set aside the order of the Associate Justice and order that the plaintiffs by counterclaim by 4.00 pm on 8 November 2010 provide security, to the satisfaction of the Prothonotary, for the costs of the defendants by counterclaim in the conduct of the trial of the proceeding only, in the sum of $50,000, failing which the proceeding be stayed.

50 I will hear from the parties as to the form of the order and in respect of costs.

[1] Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; [2008] 20 VR 377, 380 at [10].

[4] [1999] VSCA 43; [1999] 2 VR 191, 195 at [16].

[6] (1991) 5 ACSR 621.

[7] [1975] VicRp 76; [1975] VR 776, 777.

[8] [1990] HCA 35; (1990) 94 ALR 664, 666.

[10] cf Ellis v Uniting Church in Australia Property Trust [2008] QCA 238.

[11] Ariss v Express Interiors [1996] 2 VR 507, 513.

[12] As in Siyan P/L v Nillumbik Shire Council [2001] VSC 285.

[13] As in Perpetual Nominees Ltd v Chaucers Canterbury Pty Ltd [2005] VSC 135.

[14] As in ACN 064 516 543 Pty Ltd and Ors v Pivot Ltd [2002] VSC 19.

[15] As in Felsink v City of Maribyrnong [2007] VSC 49.

[16] [2008] NSWCA 148; (2008) 67 ACSR 105 at [57].