Polstead Pty Ltd (in liq) v Sandip Shah

LEGISLATION CITED : (CTH) Corporations Act 2001 s 588G, s 588M, s 1355(1)

Beach Petroleum NL v Johnson (1992) 7 ACSR 203 Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 Ferrier and Knight v Civil Aviation Authority [1994] FCA 982 Green (as liquidator of Arimco Mining Pty Limited) v CGU Insurance Ltd [2008] NSWCA 148, (2008) 67 ACSR 105 CASES CITED : Hellen and Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019 Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120. Jonas v Rocklea Spinning Mills Pty Limited [2000] VSC 93 Standard Chartered Bank of Australia Limited v Antico & Ors (No 2) (1995) 38 NSWLR 290 Westralian Gold Mines Ltd v Westralian Minerals & Drilling Pty Ltd (in liq) (1986) 4 ACLC 167

Polstead Pty Ltd (in liq) (plaintiff) PARTIES : Sandip Shah (first defendant) Shamshad Ahmed (second defendant) Zeena Ahmed (third defendant)

COUNSEL : Mr A Paterson (plaintiff) Mr J Kelly SC w Mr A Narayan (defendants)

SOLICITORS : Sarvaas Ciaparras Lawyers (plaintiff) Dominic Stamfords (defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3184/06 Polstead Pty Ltd (in liq) v Sandip Shah & Ors JUDGMENT (ex tempore) 1 HIS HONOUR: By originating process filed on 9 June 2008 and subsequently amended on 22 August 2008, the plaintiff Polstead Pty Limited (in liq) claims compensation, pursuant to Corporations Act s 588G and s 588M, from the first defendant Sandip Shah who were directors of Polstead. By interlocutory process filed on 14 November 2008, the defendants claim security for their costs in the sum of $150,000, or such other amount as the Court deems fit.

2 UCPR 42.21(1) relevantly provides as follows: (1) If, in any proceedings, it appears to the court on the application of a defendant ... (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, ... the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. 3 Corporations Act s 1355(1), provides that where a corporation is the plaintiff in any action or other legal proceedings, the Court having jurisdiction in the matter may, if it appears by creditable 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 if the security is not given.

4 As in most cases, in the context of this case nothing turns on such fine distinctions as there may be between the two provisions. In Beach Petroleum NL v Johnson (1992) 7 ACSR 203 Von Doussa J said (at 205): In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is 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 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. 5 His Honour's observations are equally applicable to r 42.21(d).

6 On an application for security for costs in this context, three issues generally arise: the first is whether the ground referred to in the section or rule is established; the second is whether, if the ground has been established, as a matter of discretion an order should be made; and the third is the quantum of any order to be made and the terms on which it might be made.

7 The proceedings are brought, at least now as a result of the amendment, by the company in liquidation and not by the company personally. In those circumstances, it is not in doubt that UCPR, r 42.21(1)(d), and Corporations Act, s 1355(1), are available to found an application for security for costs. The application of s 1335, and by analogy 42.21(1)(d), to a case where the plaintiff is a company in liquidation (as distinct from one in which the liquidator personally is the plaintiff), was adverted to by Meagher JA, with whom Kirby P and Cripps JA agreed, in Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120. Having observed that, at least ordinarily, an order for security for costs would not be made against a liquidator personally (although, if the proceedings failed, costs would be awarded personally against the liquidator), his Honour turned to the situation where the company in liquidation was the plaintiff, and said: Where the company in liquidation is the plaintiff, things are otherwise. In this case, obviously the Court has jurisdiction to order security for costs: that is what s 1335 says. The fact that the company has a deficiency of assets compared to liabilities (a not uncommon feature of companies in liquidation) is evidence of entitlement under the section to an order ( Northampton Coal, Iron, and Waggon Co v Midland Waggon Co (1878) 7 Ch D 500 at 503), not (as his Honour seemed to imagine) evidence of immunity from an order. In this regard, it should also be noted that where a company in liquidation sues and fails, there is no jurisdiction in the Court to order the liquidators personally to pay the defendant's costs. Further, a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors): Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; 52 ALR 176. Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs. 8 In Green (as liquidator of Arimco Mining Pty Limited) v CGU Insurance Ltd [2008] NSWCA 148, (2008) 67 ACSR 105, Hodgson JA, Basten JA and Campbell JA referred, with apparent approval, to what Meagher JA said in Hession, and added that the approach was supported by Ferrier and Knight v Civil Aviation Authority [1994] FCA 982 (Lockhart J) [13); Re Pavelic Investments Pty Limited (1983) 1 ACLC 1207; Jonas v Rocklea Spinning Mills Pty Limited [2000] VSC 93; and Hellen and Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019. Later, Hodgson JA concluded (at [45]) that a Court considering applications for security for costs against liquidators should have regard to certain guidelines, relevantly: (2) Where the plaintiff is a company in liquidation, and not the liquidator, then security for costs will more readily be ordered, although the court's discretion is unfettered ( Bell Wholesale Pty Ltd v Gates Export Corporation (No 2) (1984) 8 ACLR 588) and there is no presupposition in favour of granting security ( Bryan E Fincott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497. However, the court will not refuse to order security on the ground that this will frustrate the litigation unless the company proves that those who stand behind the company and would benefit from the liquidation are unable to provide security ( Bell Wholesale ).

9 In considering whether the ground referred to in rule 42.21(d) and s 1355 which for the sake of convenience may be shortly if somewhat imprecisely be described as corporate impecuniosity is established, it is relevant to note that the plaintiff concedes that, because of its impecuniosity, its lawyers are acting for it on a speculative basis and that, on evidence, the plaintiff puts before the court, its own lawyers will not be paid if the plaintiff is unsuccessful; a fortiori there is no prospect of the defendants' costs being paid if the plaintiffs are unsuccessful. The evidence plainly establishes, and it is uncontroversial, that the ground of corporate impecuniosity is established. 10 It is then appropriate to turn to the discretionary considerations. These were identified by Hill J in Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 at 50-635.

11 The first is the plaintiff's prospects of success. On the one hand, the plaintiff demonstrates at least an arguable case that relevant debts were incurred when the company was insolvent. However, as to its prospects of ultimate success, it is highly significant that, of the total claim of some $1.9 million approximately, allegedly outstanding unpaid debts incurred during the relevant period, some $933,000 is said to be due to two companies Moda Leathers Private Ltd and Antel Imports Private Ltd apparently incorporated in India, both of which have provided letters to the effect that their matters with Polstead have been closed and finalised, and that there are no outstanding payments or liabilities due to them from Polstead.

12 The largest claim that of the petitioning creditor Mistral is far in excess of a million dollars, but it represents an award of damages in proceedings brought by Mistral in the District Court for damages for defective goods, and it is well established that suffering an adverse judgment for unliquidated damages does not constitute the incurring of a debt for the purposes of Corporations Act s 588G [see Standard Chartered Bank of Australia Limited v Antico & Ors (No 2) (1995) 38 NSWLR 290, 314].

13 The only remaining claim is for a sum of about $4,500 for barristers' fees. 14 Accordingly, the prospects of ultimate substantial success appear quite poor.

15 The next relevant consideration is the magnitude of the risk the plaintiff would not be able to satisfy an adverse costs order in the event of failure. In this case, the question is not one of risk, but certainty.

16 The third relevant consideration is whether use of the power would prevent the plaintiff from prosecuting a genuine claim. An important subsidiary consideration is whether those individuals who stand behind the impecunious corporation and stand to benefit if its claim succeeds are prepared to make their own assets available, if they have any of significance, to satisfy an adverse costs order. In this case, the petitioning creditor Mistral has been asked by the plaintiff to contribute to the funding of the litigation, and has declined to do so. It is clear enough, from the material to which I have already referred, that the two Indian companies will not contribute. Far from showing that those who stand behind the corporation and stand to benefit from the successful prosecution of the litigation are prepared in any way to put their own assets at risk, it is quite clear that they are not. That tells strongly in favour of making an order for security. 17 A fourth consideration is whether the impecuniosity arises out of the conduct of the defendant in respect of which relief is sought in the proceedings. It was argued that a claim for compensation for insolvent trading is the paradigm of such a case. I disagree. A claim for insolvent trading has, as its fundamental hypothesis that the corporation was already insolvent before the relevant debts were incurred in other words, that the corporation was already impecunious before the cause of action arose. It cannot be said in those circumstances that the conduct of the defendants in respect of which relief is sought in the proceedings caused the impecuniosity of the plaintiff. 18 A fifth consideration is whether there are public interest aspects which militate in favour of or against making an order for security. I accept that there is a public interest in the pursuit of an insolvent trading case on behalf of a company in liquidation. However, that is but one factor to be weighed against the others, and in particular giving regard to the prima facie strength and prospects of success of the case. There is no public interest in allowing a case which has but very slight prospects of success, or for only a very small claim, to proceed.

19 A sixth consideration is whether there are discretionary matters peculiar to the particular case which weigh one way or the other. The only matter that has been urged under that category in this case is that there is a close relationship between the defendants, who are directors of the plaintiff, and the plaintiff. In some cases, I can see that the existence of such a relationship may tell in favour of declining make an order for security [Westralian Gold Mines Ltd v Westralian Minerals & Drilling Pty Ltd (in liq) (1986) 4 ACLC 167, 174]. But again, that must be but one factor which has to be seen in the light of the other relevant considerations in the case.

20 No point has been taken that the application here has not been brought sufficiently promptly. 21 In my view, the considerations to which I have referred overwhelmingly favour making an order for security, the chief amongst them are the plaintiff's apparently poor prospects of ultimate substantial success, the very great magnitude of the risk to the point of certainty that the plaintiff could not satisfy an adverse costs order, and the circumstance that those who stand to benefit from litigation if successful are not prepared to put their own assets at risk lest it be unsuccessful.

22 I turn then to the question of quantum. The plaintiffs' solicitor has assessed the costs of the proceedings to finality, on the basis of a five day trial, at $222,981. There has been no challenge to that assessment. The plaintiffs' motion seeks only $150,000. In the absence of challenge, I do not see any reason why I should order a different amount.

23 My orders are: (1) Order that the plaintiff give security for the defendants' costs in the amount of $150,000 in a form acceptable to the Registrar within 14 days, that is to say before 19 May 2009.

(2) Order that the proceedings be stayed until the security is provided.

(3) Reserve liberty to apply in the event of any difficulty arising in respect of the form of security.

(4) Order that the plaintiff pay the defendants' costs of the Motion.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.