Sergienko v AXL Financial Pty Ltd

Mr Sergienko's application for security for costs

1. Mr Sergienko seeks an order for security for his costs of the second cross-claim against the cross-claimants, quantified in the sum of $60,000 (or in such other amount as deemed appropriate, by way of payment of that sum into court, or in such other manner as permitted (pursuant to s 1355 of the Corporations Act 2001 (Cth) (Corporations Act) or, alternatively, pursuant to r 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR)).
2. Mr Sergienko reads the affidavit of his solicitor (Mr Andrew Wei) affirmed 25 October 2019 in support of his motion. He also relies on two notices to produce dated 25 October 2019 and served, respectively, on IWC and DK Excavation, as well as the response thereto from the cross-claimants' solicitors dated 4 November 2019. The notices to produce served on DK Excavation and IWC sought financial statements, general ledger or management accounts, statements for any accounts held at financial institutions, tax returns, depreciation schedules, loan agreements, and certificates of title or extracts of title for any share or real property owned by DK Excavation and IWC. It is submitted for Mr Sergienko that it can be inferred from the failure of the cross-claimants to produce any documents (aside from a title search for the Killarney Heights Property the subject of this proceeding) that both companies have no trading activity and no assets.
3. Thus, Mr Sergienko contends that the evidence establishes that there is a real chance that the cross-claimants, being corporations, will be unable to pay Mr Sergienko's costs if ordered to do so, and that there is therefore jurisdiction to order security for costs under s 1335 of the Corporations Act or r 42.21(1)(d) of the UCPR. (The cross-claimants do not dispute that there is power to grant security if the threshold question - reason to believe the cross-claimants may be unable to meet an adverse costs order - is satisfied.)
4. Insofar as DK Excavation and IWC argue that they do not have to provide security for costs as they are in substance defendants, it is submitted for Mr Sergienko that this argument is misconceived. It is said that DK Excavation and IWC are not "defendants in substance", in the sense that they have been compelled to commence proceedings in order to defend their legal rights (cf, Commissioner of Taxation v Vasiliades [2016] FCAFC 170; (2016) 344 ALR 558 (Vasiliades) at [86] (Kenny and Edelman JJ)); rather, that they have made an informed decision to assert a claim in relation to the Killarney Heights Property. It is said that their claim turns on establishing both that AXLF acted in breach of trust and that DK Excavation has a superior equity to that of Mr Sergienko; and that it cannot be said that that such a claim is defensive in nature.
5. In any event, it is submitted that, even if DK Excavation and IWC are defendants in substance, while this would be a factor weighing against the grant of security for costs, it is not necessarily determinative. It is noted that the court retains a broad discretion regarding the order of security for costs (citing Vasiliades at [88], [107]-[109]).
6. In that regard, and irrespective of whether DK Excavation and IWC can be characterised as defendants in substance, Mr Sergienko submits that security for costs should be awarded for the following reasons: that the application for security was made promptly; that both cross-claimants are corporations with minimal share capital, no assets, and no trading activities, and therefore are "extremely unlikely" to be in a position to meet any costs order in Mr Sergienko's favour; and that there is no evidence that an order for security would stifle the proceedings.
7. As to quantum, Mr Sergienko seeks $60,000 in security for his costs of defending the second cross-claim. Mr Wei estimates that Mr Sergienko's reasonable costs of the defence will be $73,600 (see his affidavit at [15]). It is submitted that Mr Wei is qualified to give that evidence and it is noted that the cross-claimants have not sought to adduce any evidence to contradict it.
8. In those circumstances, it is submitted that it would be appropriate for DK Excavation and IWC to be ordered to provide security in the sum of $60,000 in respect of Mr Sergienko's costs of the second cross-claim.

Cross-claimants' submissions

1. The participation of the fourth and fifth defendants in these proceedings was, they submit, compelled by the nature of the relief sought by Mr Sergienko, which if granted will affect their alleged equitable interest in the Killarney Heights Property.
2. The fourth and fifth defendants filed their defence to the amended statement of claim on 31 July 2019, and the second cross-claim on the same date. As adverted to above, the second cross-claim was amended following an order (said to have been made at the request of Mr Sergienko on 20 August 2019) that Mr Sergienko be joined as a defendant to it because of Mr Sergienko's claimed interest in the land. As already noted, Mr Sergienko's defence to the amended second cross-claim filed on 4 November 2019 is in substantially similar terms to the proposed further amended statement of claim also circulated on 4 November 2019.
3. The fourth and fifth defendants say that, so far as they are concerned, the real issue in these proceedings will be the relative priorities of Mr Sergienko and DK Excavation when the property is vested in IWC. It is noted that, as a priority contest between two unregistered equitable interests in land, there are many factors which might determine which interest will prevail. Reliance is placed on Trojan Marketing & Consultants Pty Limited v Kirela Pty Limited [2018] NSWSC 1786 and LTDC Pty Ltd v Cashlow Finance Australia Pty Ltd [2019] NSWSC 150 for the (not controversial) proposition that in a priority dispute between competing equitable interests one must enquire into all of the relevant circumstances.
4. The fourth and fifth defendants argue that their cross-claim against Mr Sergienko is essentially defensive (akin to an action by way of interpleader). They submit that a close inspection of the second cross-claim, Mr Sergienko's defence to the second cross-claim, and the proposed amended statement of claim, shows that the second cross-claim and the proposed further amended statement of claim arise out of the same, or essentially the same, factual matrix. In those circumstances, it is submitted that an order for security will not generally be made in the exercise of the court's discretion.
5. As to the discretionary factors to be taken into account on such an application, in particular, the prospects of success in the proceedings, it is noted that Mr Sergienko has not put on any evidence nor made any submissions about the prospects of success in the proceedings. The fourth and fifth defendants rely in this regard on: the affidavits of their solicitor, Mr Atticus Busby, of 21 June 2019 and 16 August 2019; and two affidavits filed in the earlier (now settled) proceedings (an affidavit of Mr Ian Chalmers of 28 March 2018, who operates AXL Capital Pty Ltd, and the affidavit of Mr Sergienko of 28 March 2018).
6. As to the earlier proceedings, which are described by the cross-claimants as having arisen "out of what appears to have been an attempted back door listing through an on-market purchase of shares in PLC Financial Solutions Ltd", I am informed that Mr Sergienko sought and had obtained a freezing order in relation to certain funds, prior to the settlement of the proceedings.
7. The cross-claimants say that that there are "several remarkable features of that transaction" (as alleged in the pleadings and affidavits available to the fourth and fifth defendants), namely: that $1.58 million in cash was deposited by Mr Sergienko with the AXLF and/or Mr Roths; that the "back door listing" appears to have been planned without the consent or acquiescence of the vehicle and involved shares being acquired in the name of Roths Holdings (the fourth and fifth defendants here noting that there is nothing in the affidavit that suggests the market was informed that Mr Sergienko was funding the purchase of the share by Roths Holdings (referring to the Annexure to Mr Chalmers' affidavit at pp 29-30)); that prior to the earlier proceedings being commenced, Mr Sergienko knew that Mr Roths had been convicted of fraud and had a history of financial dishonesty; and that Mr Chalmers (who was a witness for Mr Sergienko in the prior proceedings) knew of the existence of DK Excavation, having been nominated as the contact person for that company when it was created.
8. It is submitted that in circumstances where AXLF has not filed a defence to the amended second cross-claim it may be presumed that it has acceded to the vesting order sought and that the vesting order will be made. The cross-claimants argue that, in the contest of priorities between Mr Sergienko and the fourth and fifth defendants, the fourth and fifth defendants face "very good prospects of success" because the circumstances surrounding the settlement of the earlier proceedings are sufficient to disentitle them to priority ahead of the fourth and fifth defendants.
9. In the course of the hearing of the present application, I permitted brief cross-examination of Mr Wei. The cross-claimants note that in the course of that cross-examination Mr Wei accepted that the issue raised in the second cross-claim is the relative priority as between the fourth and fifth defendants and the plaintiff in relation to the subject property (although I note that Mr Wei did not accept that the issues were "exactly" the same). Mr Wei accepted that a possible outcome of the proceedings is that the property will be vested in IWC ahead of Mr Sergienko's claimed interest; and he accepted that the pleaded allegations of trust in the defence to the second cross-claim and the proposed amended statement of claim are the same.

Determination

1. As noted, there was no dispute between the parties as to the power to order security or as to the principles to be applied on an application for security for costs, whether that be under s 1335 of the Corporations Act or under r 42.21(1)(d) of the UCPR.
2. Section 1335(1) of the Corporations Act provides that: 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.
3. The word "plaintiff" includes a cross-claimant (see Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 306; Winnote Pty Ltd (in liq) v Page (2005) 64 NSWLR 244; [2005] NSWCA 362 at [18]).
4. Rule 42.21(1)(d) of the UCPR relevantly provides: (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.
5. "Plaintiff" in r 42.21(1)(d) includes a person by whom a cross-claim is made (s 3(1) of the Civil Procedure Act 2005 (NSW)).
6. The threshold question to be determined is whether there is reason to believe that the cross-claimants will be unable to pay Mr Sergienko's costs of defending the second cross-claim if they were to be ordered to do so. That requires the formation of an opinion as to the financial position of those entities as it will be at the time of judgment and immediately thereafter.
7. The onus is on an applicant for security, to establish that there is reason to believe that the other party will be unable to pay the costs of the litigation if unsuccessful (see Cornelius v Global Medical Solutions Australia Pty Ltd; Farrag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [17], [56]-[59] (Cornelius v Global Medical)).
8. It has been said that the question whether there is a rational basis for such a belief, or a real risk of inability to pay the opposing party's costs, sets a "low threshold" and involves an "undemanding test" (Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [15]-[16]; Cornelius v Global Medical at [57]-[60]; In the Matter of Felan's Fisheries Pty Limited [2016] NSWSC 1351 at [10]); and that a "practical commonsense approach" should be adopted to the examination of the financial affairs of the corporation (Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 (Wollongong City Council) at [28]).
9. As to the threshold issue in the present case, I am persuaded that it has been satisfied. The response to the notices to produce discloses no property assets (other than the property the subject of the dispute) and the two companies have not produced relevant financial material. Given the undemanding nature of the test, there is sufficient evidence before me to conclude that there is reason to believe that the cross-claimants may be unable to meet an adverse order for costs.
10. Once the threshold question is satisfied (as I am persuaded it is here), the next issue to be considered is whether, in the exercise of discretion, security should be granted. In that regard there is an evidentiary onus on the part of the party from whom security is sought to establish a reason why security should not be granted (see Wollongong City Council (at [30]) and Cornelius v Global Medical (at [18]-[20])).
11. A number of discretionary considerations have been identified as relevant in this context by Beazley JA (as Her Excellency then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (at 196-198). Those matters are now largely reflected in amendments to r 42.21 of the UCPR, which came into effect on 9 August 2013, and may be summarised as: the prospects of success or merits and the genuineness of the proceedings (r 42.21(1A)(a)-(b)); impecuniosity (r 42.21(1A)(c)); whether the impecuniosity is attributable to the conduct of the party seeking security (r 42.21 (1A)(d)); whether the plaintiff (or here the cross-claimants) is in effect in the position of a defendant (r 42.21(1A)(e)); whether an order for security for costs would stifle the proceedings(r 42.21(1A)(f)); whether the proceedings involves a matter of public importance (r 42.21(1A)(g)); whether there has been an admission or payment in court (r 42.21(1A)(h)); whether delay in commencing the proceedings has prejudiced the defendant (r 42.21(1A)(i)); the costs of the proceedings (r 42.21(1A)(j)); whether the security sought is proportionate to the importance and complexity of the subject matter in dispute (r 42.21(1A)(k)); the timing of the application for security for costs (r 42.21(1A)(l)); whether an order for costs made against the plaintiff would be enforceable within Australia (r 42.21(1A)(m)); and the ease and convenience or otherwise of enforcing a New South Wales court judgment or order in the country of a non-resident plaintiff (r 42.21(1A)(n)).
12. Of those discretionary considerations, in the present case the main focus was on the first, as to the prospects of success or merits of the proceedings (r 42.21(1A)(a)), and fifth, as to whether the cross-claimants' cross-claim is essentially defensive in nature (r 42.21(1A)(e)), though I take into account such other of the factors as may here be relevant.
13. As to the first, as a general rule, where a claim is prima facie regular on its face and discloses a cause of action then, in the absence of evidence to the contrary, it has been said that the court should proceed on the basis that the claim is bona fide and has reasonable prospects of success (KP Cable at 197). I accept that it has been said that in some cases it may be appropriate to explore in some detail the question of prospects. I am not persuaded it is appropriate here to do so.
14. Certainly, the basic factual allegations appear likely to be established (the Killarney Heights Property on the face of the documents before me was acquired as a trust asset and on the allegations made by the cross-claimants it would appear that it has been used by the trustee for the trustee' benefit unrelated to the trust). However, it appears that the validity of the trust transaction itself will be in issue and I am not in a position here to test that. Nor am I in a position here to form any view as to the allegedly "remarkable" nature of the transaction that was in dispute in the earlier proceedings. (I note that Mr Sergienko maintains that the earlier affidavits in those proceedings are irrelevant on the present application.)
15. The principal factor relied upon by the fourth and fifth defendants in resisting the application for security is as to their status as cross-claimants (in effect that they are essentially defendants - see r 42.21(1A)(e)).
16. As to the position of being a cross-claimant, in Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 (Interwest), Ormiston J (at 627) observed that proceedings have been characterised as defensive where they are either directly resisting proceedings already brought or seeking to halt self-help procedures. His Honour said that in those circumstances: … [I]t 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 adducing the amount of security ordered to a sum relating to the cost of those claims which cannot be characterised as defensive.
17. Examples of what may be characterised as defensive proceedings have been given in KP Cable at 199-202; John Arnold's Surf Shop (in liq) v Heller Factors Pty Ltd [1979] 22 SASR 20 (John Arnold's Surf Shop); (1979) 4 ACLR 492 and Interwest.
18. Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289 (Sydmar) (at 300), said that the court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-claim covering substantially the same factual areas proceeds. In Sydmar, however, (at 302), Smart J considered that the defendant/cross-claimant was, in the words of Legoe J in John Arnold's Surf Shop, "one seeking to go out for the recovery from the opposition by attack".
19. In Green Camel Pty Ltd v Urban Ecological Systems Ltd [2017] NSWSC 362, I considered the above authorities and formed the view that the case there before me was one of that kind where the description by Legoe J was apposite. There, the cross-claim for damages in respect of alleged breaches of the obligations under the Licence Agreement was likely to involve an exercise in comparing the respective technologies and assessing the development of the technology in question (including any incorporation of confidential information therein), as well as the loss claimed to have been suffered as a result of the latter. I was not persuaded that those matters would necessarily be raised (or would need to be explored to the same extent) in determining the plaintiff's claim in isolation of the cross-claim.
20. Here, the question in essence is whether the cross-claimants need to fight their cross-claim directly to resist the principal proceeding already brought by Mr Sergienko.
21. Certainly, the respective claims relate to the same property (albeit not arising out of precisely the same factual matrix, since the cross-claim will raise issues as to the trust relationship that might not necessarily have been raised in the principal proceeding) and there is an element of defensiveness in that the cross-claimants seek to set up as against the claimed entitlement of Mr Sergienko their own equitable interest in the Killarney Heights Property. There is force in my opinion to the submission that this is in some ways akin to an interpleader application, in which opposing parties maintain their own entitlement to the fund in question.
22. Nevertheless, the cross-claimants do seem to me in substance to be going "on the attack" in their cross-claim; particularly insofar as it appears from their submissions that they are seeking to challenge not just the priority of Mr Sergienko's interest but also to put in issue the factual circumstances in which Mr Sergienko claims to have acquired that interest.
23. I have concluded that the cross-claim is not essentially defensive in nature but even if it is, the nature of the competing priority dispute is such that it is appropriate still to consider an award of security.
24. Of the other factors, impecuniosity (r 42.21(1A)(c)) has been recognised as a substantial factor favouring the exercise of the discretion to order security (see Idoport Pty Ltd v National Australia Bank Ltd [2002] NSWCA 271 (Idoport) at [40] (Mason P); Tyneside Property Management Pty Limited v Hammersmith Management Pty Limited [2013] NSWCA 404 at [18] (Sackville AJA)). While it is well established that security for costs will generally not be ordered where to do so will stifle non-frivolous proceedings; and that the discretion to order security for costs should not be used as an instrument of oppression, shutting out genuine claims by plaintiffs who are otherwise impecunious (see Idoport at [59], KP Cable at 197; and see Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 at [72]), it will not however create an automatic bar to such an order in all cases (Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302 at [92]-[93]) In the present case, there was no suggestion that a security for costs order would stifle the proceedings and the amount sought is relatively modest. This factor therefore supports a grant of security.
25. There was no issue raised as to any delay in the bringing of the cross-claim (the r 42.21(1A)(i) factor) (or in the bringing of the application for security for costs - the r 42.21 (1A)(l) factor) so it is not necessary to consider the rationale underlying the requirement that security for costs should be sought promptly (see KP Cable at 197; In the matter of Colorado Products Pty Limited (in prov liq) [2013] NSWSC 611 at [69]; Litmus Australia Pty Ltd (in liq) v Canty [2007] NSWSC 670 at [26]; Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 at 309 (per Moffitt P); and French J, then sitting in the Federal Court in Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514).
26. No issue was raised as to the factor the subject of r 42.21(1A)(d). I have already noted that there was no suggestion that an order for security for costs would stifle the proceedings (r 42.21 (1A)(f)); and the factors set out in rr 42.21(1A)(g), (h), (m) and (n) here do not arise.
27. As the costs of the cross-claim (r 42.21(1A)(j)), the fact that a party is likely to incur significant legal costs in defending the claim, and will be unprotected if no order for security is made, is a consideration relevant to the making of an order for security (see Porter v Gordian Runoff Limited [2004] NSWCA 171 at [13]-[32]). Here, there is little doubt that costs will be incurred. The estimate as to those costs is not unreasonable.
28. The cross-claimants argued that quantification of the security would effectively be a very difficult exercise because costs could not readily be apportioned as between the principal claim and the second cross-claim (see T 30.3) and that this was a factor weighing against security. Mr Wei was cross-examined as to his estimate of costs in that regard. However, as I read Mr Wei's affidavit, he clearly attempted to carry out just such an exercise of apportionment (so, for example, a two-day hearing for the cross-claimant's part out of an estimated four day hearing for the whole) and it does not seem to me that this was unreasonable.
29. In Jeffery & Katauskas Pty Ltd v SST Consulting Pty Ltd (2009) 239 CLR 75; [2009] HCA 43, where Heydon J (at [110]) articulated the rationale for the courts' inherent and statutory power to award costs as being "one of the mechanisms for alleviating (though only partially) the harm which the plaintiff has caused the defendant by bringing litigation based on unfounded allegations" and described that potential costs liability as "one of the legitimate pressures generating a measure of discrimination in conducting that litigation". With that in mind, I have concluded that, balancing all of the above, the discretionary matters point in favour of an order for security for costs being made in this case.
30. As to the quantum and manner of provision of security, there is no claim for past costs. While the court may fix the amount of security based on a general estimate (see Allstate Life Insurance Co v Australia & New Zealand Banking Group Limited [1995] FCA 1778; (1995) 134 ALR 187); here an estimate has been provided and I consider that Mr Wei's estimate in the present case is not unreasonable.
31. Ordinarily, I would consider it appropriate to order security in tranches (having regard to the possibility that the matter might resolve either at mediation or before trial) (see Pacific Acceptance Corporation Ltd v Forsyth (No 2) (1967) 85 WN Pt 1 (NSW) 715 (Moffitt J)). However, given the modest amount of the security and the fact that the case is at an early stage, I consider it appropriate simply to order the full amount of security be provided at this stage.
32. Security may take such form as the court considers will provide adequate protection to the defendant (see Estates Property Investment Corporate Ltd v Pooley (1975) 3 ACLR 256). I see no reason not to adopt the conventional basis of ordering security by payment into court or by provision of an unconditional bank guarantee in a form acceptable to the cross-defendant.
33. I see no reason why costs should not follow the event.

Order

1. Accordingly, for the above reasons, I order as follows: 1. Pursuant to r 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW), order the cross-claimants (the fourth and fifth defendants in the proceedings) to provide security for the cross defendants' costs of the second cross-claim in the sum of $60,000 within 28 days, such security to be provided by way of an unconditional bank guarantee, in a form acceptable to the cross-defendant, or payment into court. 2. In the event that the security ordered in Order 1 is not provided within the time specified, order that the second cross-claim be stayed until further order. 3. Order the cross-claimants to pay the cross-defendants costs of and incidental to this notice of 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. Decision last updated: 20 November 2019