Solarus Projects Pty Ltd v Vero Insurance Ltd

Evidence 3On the hearing of the motion, Vero Insurance placed before me a voluminous amount of evidence by way of affidavits and exhibits. However, because of two important concessions made by the solicitor for GAP, a great deal of the evidence does not require detailed analysis. 4The first concession was "the second plaintiff does not maintain that it would be able to meet an adverse order for costs" (T18.47). 5The second concession was "[t]here is no point taken about timeliness. This motion was filed four months ago [sic], four months after the proceedings commenced" (T26.7). 6It was not disputed in the proceedings that, looked at as a whole, the evidence establishes the following matters of fact. 7First, although GAP has paid-up capital of $900,000, there is no evidence that it is in a form able to meet a costs order made against it. 8Secondly, the building licence of GAP was cancelled in August 2011. 9Thirdly, both GAP and the former director of that company were found to be in contempt of the Supreme Court of New South Wales in 2011. 10Fourthly, GAP has been dilatory in providing financial information requested by Vero Insurance. 11Fifthly, it appears that in 2011 GAP was defending actions in the District Court of Queensland and the Supreme Court of Queensland. 12Sixthly, financial records of GAP for the year ended 30 June 2009 were to the effect that GAP was owed over $800,000 in unsecured loans. However, GAP has never provided material to Vero Insurance revealing the identity of those asserted creditors. 13Seventhly, MAP Nominees (Australia) Pty Limited ("MAP") is the only shareholder in GAP. There is no further information before me about that entity. 14Eighthly, Solarus was placed into liquidation on 13 December 2011. GAP attended a creditors meeting and claimed to be owed $6 million by Solarus. However, there is no detail as to that asserted debt. 15Ninthly, in August 2012, Mr Bega, the director of GAP at the time, presented his own bankruptcy petition. 16Tenthly, it does not appear that GAP has interests in real property or other assets. 17The motion first came before me on 3 September 2012. On that occasion a Mr Batiste attended court and stated that he was a newly appointed director of GAP. He was not in a position to defend the motion and the matter was adjourned by me over the opposition of Vero Insurance. The solicitor who appeared on the subsequent date, and to whom I have referred above, informed the Court that he had only received instructions the evening before. 18The solicitor for GAP tendered in the proceedings a number of documents that had been obtained by way of a call made upon Solarus pursuant to s 36 of the Evidence Act 1995. An objection to its production on the part of Solarus, supported by Vero Insurance, was overruled by me. In short, the documents show that Westpac, which is a very substantial creditor of Solarus, has agreed with Vero Insurance to pay its costs up to the sum of $400,000. That agreement does not involve a court order, or an undertaking to the court, but is merely an agreement between the parties. The fact that the bank entered into that agreement led to Vero Insurance not pressing a motion for security for costs against Solarus. 19The amount of security for costs sought by Vero Insurance is $411,000. In support of that application, Vero Insurance read an affidavit of a Mr Mead, a solicitor experienced in commercial litigation. That was done over an objection by GAP founded upon, amongst other things, the test in s 79 of the Evidence Act. GAP had not notified the solicitors for Vero Insurance that Mr Mead was required for cross-examination. Nor did GAP place any evidence before the Court contradicting or calling into question the evidence of Mr Mead. 20There is no need for me to quote extensively from that evidence. In short, it consisted of two tables that provided a rough breakdown of the costs that Mr Mead thought would be incurred by Vero Insurance in preparation for a full hearing. The tables do not go into great detail.

Submissions on behalf of Vero Insurance 21The motion seeks that security for costs be ordered pursuant to both s 1335(1) of the Corporations Act 2001 (Cth) and also r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005. It was submitted that the principles arising under each are identical. 22It was submitted that, to quote r 42.21(1)(d) "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". It was submitted that the combination of the concession by the solicitor for GAP and all the evidence would lead me to be comfortably satisfied that that state of affairs exists. 23It was submitted that, even if that proposition is established, it remains a question of discretion whether to order security for costs, and if so in what sum. However, the submission was that, once it has been established that there is reason to believe that the opponent to such a motion will be unable to pay costs if unsuccessful, then the onus shifts to the opponent in order to demonstrate why security for costs should not be ordered. 24It was submitted that some factors relevant to the exercise of discretion include: whether the application for security for costs was brought promptly; whether the case to the plaintiff is strong and bought bona fides; whether the conduct of the applicant has caused the financial difficulties of the opponent; whether the application for security for costs is oppressive; and whether there are persons "standing behind the company" who may benefit from the litigation and who are willing to provide the security. 25Dealing with each of those factors in turn, the following submissions were made. Due to the concession made by the solicitor for GAP, delay is not an issue. On the evidence before me, it is not possible to determine the strength of the case of GAP, and accordingly that factor is neutral. Although it may be inferred that GAP is indeed in financial difficulty, there is nothing to suggest that that has been caused by the behaviour of Vero Insurance. Finally, there is no evidence that persons associated with the company are willing to provide security. It is most unlikely that Mr Bega could do so, and one knows nothing about MAP. 26Separately, it was submitted that the rule discussed by Brereton J in Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [27] concerning applications for security for costs where there is more than one plaintiff would not stand in the way of an order being made on the evidence in this case. 27In short, it was submitted that, in light of the concession as to the inability of GAP to pay an adverse costs order, and in light of the failure of GAP to place any evidence before the Court that would lead to the discharge of its onus, the order should be made.

Submissions on behalf of GAP 28The solicitor for GAP made the following submissions. 29First, he emphasised that the making of such an order is discretionary, and not to be made automatically simply because the plaintiff corporation is impecunious. 30Secondly, he submitted that the evidence of Mr Mead with regard to projected legal costs in preparation of the hearing was amorphous and excessive. He drew attention to correspondence that was in evidence to demonstrate that the solicitors then acting for GAP had made that point to the solicitors for Vero Insurance months ago. He accepted that he had neither sought to cross-examine Mr Mead nor tendered evidence to the contrary of his evidence. Nevertheless, he submitted, Vero Insurance bore the onus of demonstrating not only that the order should be made but also satisfying me of the appropriate quantum. 31Thirdly, he submitted that the prediction of Mr Mead was founded on the assumption that the proceedings of both plaintiffs would continue against Vero Insurance. And yet what the proceedings really involve is construction of a contract in order to determine whether either, or both, of the plaintiffs fall within its terms. He submitted that, as a result of those areas of legal and evidential overlap, the quantum of any order for security for costs against his client should be reduced. 32Fourthly, he submitted that it is quite likely that any claim of Solarus and GAP would succeed or fail together. He conceded that the two plaintiffs could take different approaches to the litigation. He accepted, for example, that it is possible that Solarus will settle shortly and that GAP could proceed to full hearing and exercise all of its appeal rights. He also accepted that it is possible that Solarus could succeed against Vero Insurance and GAP could fail. Nevertheless, he submitted that the fact that Westpac had given an undertaking to pay the costs of Vero Insurance if necessary was a relevant factor in the exercise of my discretion, particularly as to quantum. He submitted that it is conceivable that others (for example, the liquidators and receivers of Solarus) could be liable for costs as well. 33Fifthly, he submitted that care should be taken on my part not to stultify what could well be a valid claim by GAP. He agreed that I am not in a position to determine the prospects of success of the claim, but he submitted that I certainly could not be satisfied that it is nothing more than a sham. To the extent that there is no evidence of a third party who could provide security, whether by way of an undertaking on his or her own part, or by way of assisting GAP to provide security for costs, he submitted that, in truth, that state of affairs argues against the making of the order. That is because any such order may have the practical effect of permanently staying a valid claim. 34In short, the solicitor for GAP submitted that, as a matter of discretion, the order sought should not be made. His ancillary position was that, if I were to determine that such an order should be made, it should be in a sum substantially smaller than $411,000.

Making the order? 35In the recent decision of Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245, Beazley JA (as her Honour then was) discussed the applicable legal principles. Meagher JA agreed with her Honour and published a separate judgement; Barrett JA also agreed with her Honour. It is convenient to set out the whole of the discussion of legal principles at [26] - [35]: "[26] The Uniform Civil Procedure Rules 2005 (UCPR), r 42.21 provides: '42.21 Security for costs (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. (2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct. (3) If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff's claim for relief in the proceedings be dismissed. (4) This rule does not affect the provisions of any Act under which the court may require security for costs to be given.' [27] The Corporations Act 2001 (Cth), s 1335(1) is in relevantly the same terms: '1335 Costs (1) 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.' [28] Both sources of power involve the exercise of a discretionary judgment. In approaching its task in the case of a corporation, the court should adopt a practical commonsense approach to the examination of the financial affairs of the corporation: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377 at [15]. [29] The principles governing the exercise of the discretion are well established and are relevantly the same in respect of each source of power: see Livingspring v Kliger Partners at [10]. The party seeking an order for security for costs (who, for convenience I will refer to as the defendant) bears the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful: see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Pioneer Park Pty Ltd (in liq) v Australian and New Zealand Banking Corporation [2007] NSWCA 344; Prynew Pty Ltd v Nemeth [2010] NSWCA 94. [30] There is no predisposition to the making of an order: see Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509; Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624; KP Cable Investments v Meltglow. Once the defendant has discharged the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, the onus shifts to the party against whom the order is sought (who I will refer as the plaintiff) to establish a reason why security should not be granted: KP Cable Investments v Meltglow; Equity Access Ltd v Westpac Banking Corporation; Pioneer Park v Australia and New Zealand Banking Corporation; Prynew Pty Ltd v Nemeth. [31] In Staff Development & Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643, Spender J, at [9], summarised the factors that have been identified in the case law as governing the exercise of discretion, namely: '(a) The quantum of risk that a costs order will not be satisfied; (b) Whether the making of an order would be oppressive in that it would stifle a reasonably arguable claim; (c) Whether any impecuniosity of the applicant arises out of the conduct complained of; (d) The prospects of success; (e) Whether there are aspects of public interest which weigh in the balance against such an order; (f) Whether there are any particular discretionary matters peculiar to the circumstances of the case.' [32] Delay is also a relevant factor in determining whether an application for security for costs is to be made: Commonwealth v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 at 762; Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 71; KP Cable Investments v Meltglow. However, delay is not of itself a disentitling factor: see Bryan E Fencott v Eretta; Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114. [33] If the plaintiff's adverse financial circumstances are alleged to be due to the effect of the defendant's alleged conduct subject of the claim, the plaintiff bears the onus of establishing the adequacy of its financial position before the dealings with the defendant and that the defendant's conduct either caused, or at least materially contributed to, the plaintiff's inability to meet an order for costs: see Fiduciary v Morningstar Research [2004] NSWSC 664; 208 ALR 564 at [100]; Jazabas Pty Ltd and Ors v Haddad and Ors [2007] NSWCA 291. Further, where the plaintiff's claim is based upon a loss of profit, the court will take a more cautious approach in its consideration of the cause of impecuniosity than where the claim is based on the infliction of damage: Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) 3 ACLC 312; ATPR ¶40-544 at 46, 428; Jazabas v Haddad at [33]. [34] There is a further matter to which reference should be made. In some cases, persons who stand behind a plaintiff corporation, or who otherwise stand to benefit from the litigation, may offer to be responsible for the costs. Should that occur, it may provide a reason for the court to exercise its discretion in a plaintiff's favour and not order security: see KP Cable Investments v Meltglow; Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306; Prynew v Nemeth at [33]-[45]. [35] In the present case, it is apparent that Amir Harb and Habib Harb stand to benefit should the litigation be successful. However, neither have offered to be responsible in the event a costs order is made against LBC. In any event, on the evidence, they would not have the financial capacity to be responsible for the costs." 36Applying those principles to the evidence in this matter, I make the following findings. 37First, due to the concession, it is established that there is reason to believe that GAP will be unable to pay the costs of Vero Insurance if ordered to do so. Quite apart from that, applying a commonsense approach to the question of the financial affairs of GAP, I would come to the same conclusion. 38That matter having been established to my satisfaction by Vero Insurance, I am not satisfied that GAP has discharged the onus of establishing a reason why security should not be granted against it. It follows that an order for security for costs should be made. 39Turning briefly to the matters that have informed my discretionary decision, for convenience I shall deal with them slightly out of the order in which they were discussed in the judgment of Beazley JA. 40I consider that the risk is not insubstantial that a costs order would not be satisfied. 41I do not consider that it has been established that the lack of funds of GAP is a result of the conduct of Vero Insurance in not complying with a request to pay out on the contract of insurance. As a matter of principle, it would be rather circular if the resistance on the part of the defendant to a claim by a plaintiff could of itself be called in aid by the plaintiff in defeating an application for security for costs. In any event, it has not been established by the evidence that the financial troubles of GAP arose from the position of Vero Insurance. 42Senior counsel for Vero Insurance referred to the decision of Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542. He submitted that that case supports the proposition that, in an application for security for costs, the failure to pay out under an insurance contract cannot be relied upon in itself to resist such an application. The solicitor for GAP invited my attention to differences in the facts between that case and this case. 43I agree that the facts in that case were rather more adverse to the plaintiff than the facts in this case. But, as I have said, it is not the case that it has been established by GAP that the financial troubles of GAP have been caused solely, or even substantially, by the refusal of Vero Insurance to pay out under the contract of insurance. 44As for the prospects of success of the claim of GAP, on the evidence before me those are impossible to determine. I am certainly not satisfied that the proceedings brought by GAP are a sham or doomed to failure. 45I do not consider that there are aspects of public interest that would argue for or against my discretion to make an order for security for costs. 46Nor do I consider that there are any peculiar discretionary matters that arise in this case. As I have noted, it is conceded that there was no delay in bringing the application. 47I turn to the question of whether or not an order could stifle a valid claim. 48The existence of a related third party (be it director or shareholder) who is willing to provide a guarantee or indemnity for an impecunious corporate plaintiff acts as a discretionary factor tending towards the granting of security for costs. In other words, the absence of such a third party may argue against the making of such an order. However, it is not a determinative factor, and its weight will need to be decided on a case by case basis. 49As was said in Yandil Holdings Pty Ltd v Insurance Co of North America at 545: "[T]he mere fact that the plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order will stultify the plaintiff's claim. There is a line of authority, commencing with the unreported decision of Yeldham J in Tullock v Walker (8 December 1976), standing for the proposition that if the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security then it is, generally speaking, inappropriate to refuse an order." 50I consider that the rationale for this principle is that, where there is a person who will benefit from the litigation, that person ought not be permitted to hide behind an impecunious company in order to avoid an adverse costs order. 51In the case of a director or shareholder being impecunious and therefore unable to meet any order for security, stultification becomes an important consideration. The effect of stultification has been described by Clarke J (as his Honour then was) in Yandil Holdings Pty Ltd v Insurance Co of North America in these terms: "The fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour." 52The courts are, unsurprisingly, slow to restrict a plaintiff's right to argue a reasonable cause of action on the sole ground of impecuniosity. Where an order for security for costs would have the effect of stultifying the plaintiff's case, a court would be slow to grant that order. 53However, it is important to bear in mind that it is not for the party seeking the order to show that an order for security for costs would not stultify the plaintiff. To the contrary, once the "threshold question" has been answered by the defendant, it is the plaintiff that must demonstrate that the order would in fact stultify its cause of action. As Einstein J said at [66] in Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744: "As to [stultification], the plaintiffs bear the onus of proving the factual substratum to make good the relevant assertion. Notwithstanding the fact that neither Idoport nor Market Holdings have themselves the capacity by reference to their own assets to provide security and to continue funding the litigation, the plaintiffs appear to have recognised, and in any event the Court holds, that in failing to call the necessary evidence to establish what are the assets of shareholders or creditors of the plaintiffs or of persons or companies with whom the plaintiffs have funding arrangements or agreements, the relevant evidentiary onus was not discharged." 54It is therefore necessary for the plaintiff to adduce evidence of its inability to meet any security for costs that may be ordered against it before it can rely on stultification as a "powerful factor" against making the order. 55It will be recalled that, in this case, no evidence has been presented as to the financial position of those who "stand behind" GAP. Nor is there evidence about their readiness or otherwise to directly or indirectly provide security for costs to Vero Insurance. The exception to that proposition is the evidence led by Vero Insurance that Mr Bega presented his own bankruptcy petition. In particular, there is no evidence as to the financial circumstances of the sole shareholder MAP, and whether or not it can provide any security. 56Applying the relevant principles with regard to this question, and focusing in particular on the onus falling upon GAP, I determine that, although there is some risk of stultification of a valid claim, that should not lead me to refuse to make the order. GAP has not discharged the onus of persuading me that I should not make the order on this basis. 57Finally, as I have said, senior counsel for Vero Insurance invited my attention to the principle in the "two plaintiff" cases referred to by Brereton J in Street v Luna Park Sydney Pty Ltd. There is no need for me to embark upon a detailed analysis of that rule, because I am satisfied, for two reasons, that it should have no application here. 58The first reason is that this is not a case where security for costs is being sought against a plaintiff corporation and the other plaintiff is an individual. Here, the two plaintiffs are both corporations. 59The second reason is that, although there is no court order for security for costs against Solarus, there can be no dispute that Vero Insurance has de facto security for costs against Solarus as a result of its agreement with Westpac. I have no doubt that, if such an agreement had not been forthcoming, Vero Insurance would have pursued such an order against Solarus, and may well have been successful. 60In the circumstances of this case, I am satisfied that the rule does not stand in the way of the relief sought by Vero Insurance. 61In short, taking into account all of the relevant considerations, I am satisfied that, as a discretionary matter, an order for security for costs in favour of Vero Insurance should be made against GAP in the circumstances of this case.

Quantum 62Turning to quantum, the judgment of Robertson J in Hi-Tech Telecom Pty Ltd v NEC Australia Pty Ltd [2012] FCA 466 supports the proposition that the evidence of Mr Mead is sufficiently specific. 63Whilst the sums described by Mr Mead in his affidavit are undoubtedly substantial, in light of the absence of evidence that contradicts it or calls it into question, I am unable to determine that those sums are excessive. 64On the other hand, it is the case that the costs estimate is founded on the assumption that Vero Insurance would be defending both claims. I accept that there may well be substantial overlap with regard to issues of fact and law between the claims of Solarus and GAP against Vero Insurance. The quantum of the order will be reduced to reflect that fact. 65I also consider that, separately, the fact that Vero Insurance has, as a practical matter, security for costs from Solarus in the sum of $400,000 should lead me, in my discretion, to reduce the quantum of any order. I have come to that view even though it is possible that Solarus will settle promptly and GAP will proceed to a full hearing. 66Obviously, it is impossible for me to predict with precision what costs may be incurred by Vero Insurance over the months ahead. Any number of variables may come into play. As Brereton J said in Street v Luna Park Sydney Pty Ltd at [41], determining quantum is "necessarily an imprecise exercise in impression and involves balancing the interests of both parties". 67In short, there will be an order for security for costs in a sum substantially less than that sought by Vero Insurance.

Conclusion 68I am satisfied that an order for security for costs in favour of Vero Insurance should be made against GAP. 69However, I consider that the quantum of such an order should be substantially less than that sought by Vero Insurance. 70As for the costs of this motion, I consider that GAP should pay the costs of Vero Insurance of the day on which the matter was adjourned contrary to the opposition of Vero Insurance. Furthermore, it is appropriate that GAP pay half the costs of the motion generally.

Orders (1)The second plaintiff give security within 14 days of the defendant's costs in the proceedings by way of bank guarantee in the amount of $250,000 (in a form acceptable to the defendant) or in such other form as may be acceptable to the defendant. (2)The proceedings comprising the second plaintiff's claim against the defendant be stayed in the event that security is not provided in accordance with order 1. (3)The defendant has liberty to make such further application to the Court for security for costs. (4)The second plaintiff pay 50 per cent of the defendant's costs as agreed or assessed in respect of its notice of motion filed 20 September 2011. (5)The second plaintiff pay the defendant's costs thrown away by reason of the adjournment of the notice of motion filed 20 September 2011 on 3 September 2012.

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: 10 April 2013