Star v NAB

Star v NAB - [1999] NSWSC 353 - NSWSC 1999 case summary — Zoe

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1 By a Notice of Motion filed on 1 March 1999 the defendant, National Australia Bank Limited, ("NAB"), for which Mr S.M.P. Reeves of Counsel appeared, sought an order that the plaintiffs, for whom and which Mr V.R.W. Gray of Counsel appeared, or, in the alternative, the second to fifth plaintiffs, provide security for NAB's costs of the proceedings in the sum of $346,230 or such other sum as the Court deems appropriate, and an order that the proceedings be stayed until such security is provided. The nature of the plaintiffs' proceedings are set forth sufficiently in a judgment I delivered on 8 April 1999 by which I granted them leave to amend their Summons. I shall not repeat what I said there, save in so far as is absolutely necessary, and I shall assume that the reader has access to that judgment. 2 NAB's application is based upon s.1335 of the Corporations Law, ("the Law"), and Part 53 rule 2(1)(e) of the Supreme Court Rules. In his written submissions Mr Gray stated that the plaintiffs do not dispute the jurisdiction of the Court to order security as the corporate plaintiffs are insolvent, the essential issue being whether it should be ordered in the exercise of the very wide, and often stated as "unfettered", discretion of the Court to make such an order in circumstances where its effect would be to stultify the litigation. That will happen in all probability, because it is clear that the corporate plaintiffs do not have the financial wherewithal to provide the security sought, and the first plaintiff, who is their liquidator, is not prepared to provide security personally. The first plaintiff was appointed voluntarily as liquidator by the corporate plaintiffs. 3 The sum of $346,230 was supported by the affidavit of the solicitor for NAB, Ms Linda Ellen Johnson, sworn 28 February 1999. She set forth, in some detail, how the figure was calculated and, in paragraph 13, stated:- "Having regard to the foregoing, I estimate that the properly recoverable party party costs for the Bank would be $346,230 (being 65% of the costs of the Bank). In calculating this sum, I have excluded the costs of solicitors and counsel incurred by the Bank to date in relation to these proceedings." 4 These proceedings, together with three other proceedings raising related issues, have been specially fixed for hearing to commence on 5 October 1999 with a time estimate of eight to ten weeks. Mr Reeves tendered the Second Amended Summons in proceedings 50260 of 1995 in which Bernard Laverty Pty Limited is the plaintiff and NAB is the fifth defendant, and the Amended Summons in proceedings 50140 of 1997 in which Mr Gordon McNichol Finlay is the plaintiff and NAB is the first defendant. These are two of the related proceedings. 5 In the first mentioned of those proceedings the plaintiff asserts that NAB is liable to it because of NAB's role in inducing, procuring and being knowingly concerned in Nambucca Investments Pty Limited engaging in misleading and deceptive conduct in relation to the solicitation of debenture funds during the currency of NAB's facilities and, by reason thereof, NAB is allegedly liable to the plaintiff, Bernard Laverty Pty Limited, in damages. It is pleaded that NAB required Nambucca Investments Pty Limited and its subsidiaries, which include the corporate plaintiffs in the present case, to provide security for its loans and other facilities, which purportedly took priority over the Mortgage Debenture, except as to a second ranking charge in favour of NAB, in breach of the terms of the Mortgage Debenture, and:- "By reason of the Bank's security arrangements and priority agreement, and the fact that subsidiaries held the significant assets acquired by the use of the debenture holder's moneys including the plaintiff's and the represented parties the Bank knew that debenture holders including the plaintiff and the represented parties had little or no security for the repayment of moneys lent to the Company." This is essentially the same issue as is raised in these proceedings, although the relief sought is different. However, from a practical point of view, if the plaintiff is entitled to succeed it may end up with a similar financial result as if the present proceedings go forward. 6 In the second mentioned proceedings Mr Finlay seeks an order that NAB account to him for all benefits by way of payment of principal, interest, charges and fees received by NAB out of the assets of Nambucca Investments Pty Limited and its subsidiaries during the currency of the facilities referred to in the Amended Summons by reason of the realisation of its securities over the assets of Nambucca Investments Pty Limited or any of its subsidiaries. Certain other relief was sought against NAB including an order that its securities over the assets of Nambucca Investments Pty Limited, or any of its securities, be set aside:- ".. so far as they impede, directly or indirectly, the recovery of the debt of the debenture holders referred to herein or create any priority equal to or greater than that of the said debenture holders." Thus essentially the same result is sought, so far as Mr Finlay is concerned, as the plaintiffs seek in these proceedings. 7 The purpose of tendering those pleadings in this application was to show that similar issues were raised in the related proceedings by Bernard Laverty Pty Limited and Mr Finlay, each of which and whom has an interest in establishing liability on the part of NAB in respect of its various transactions, including its transactions with the present corporate plaintiffs which were subsidiaries of Nambucca Investments Pty Limited. A Tension Exists 8 There is a clearly a tension between s.1335 of the Law and the various sections, such as ss.588FE and FF, which allow proceedings to be brought by the liquidator to set aside certain transactions in the event of companies being insolvent. On the one hand the Law contemplates a requirement for the giving of security and, on the other, the bringing of proceedings by or on behalf of insolvent companies. The fact that the latter sections do not excuse an insolvent company from the provisions of s.1335 show, in my opinion, that the legislature did not intend that there should be any dispensation given to those companies in relation to the application of s.1335. The rationale behind this would seem to be that the parties who would benefit by proceedings under s.588FF will, generally speaking, be creditors and others interested in the insolvent companies recovering moneys and, therefore, sufficiently interested in the outcome of such proceedings to provide funds to the liquidator to prosecute them. It seems to me that unless this is the reasoning the situation will exist whereby insolvent companies, notwithstanding the provisions of s.1335, can rely upon its stultifying effect to avoid the provision of security, and thereby defeat the purpose of s.1335. 9 That this is not the position was made clear by the Full Court of the Federal Court in Bell Wholesale Co Pty Limited v Gates Export Corporation & Ors (No 2) [1984] ACLR 588. At p.591 Sheppard, Morling and Neaves JJ said:- "In our opinion the Court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and prove the necessary facts. We pause to make it clear that the matters we have considered are by no means the only relevant ones. We have concentrated our attention on them because they were at the forefront of the appellant's argument. But the Court's discretion is unfettered; each case must depend on its own circumstances; see generally Patterson, Ednie & Ford, Australian Company Law Third Edition para 533/1 et seq." 10 In Yandil Holdings Pty Limited v Insurance Co of North America & Ors (1985) 3 ACLC 542 at p.545, Clarke J said:- "The principles which should guide me in resolving the present dispute are not in doubt. The Court is vested with an unfettered discretion as to whether an order is made and, if so, upon what 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. It must be observed however in this respect that the 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." 11 His Honour then quoted the passage from Bell Wholesale to which I have referred and continued:- "Read literally this statement suggests that a court is bound to order security unless the evidence referred to is forthcoming. But I do not understand their Honours to be suggesting that the Court's discretion was fettered in this way. They were dealing with a case in which the primary question was whether the onus lay on the applicant for security to bring forth evidence of the ability of the persons likely to benefit to provide the adequate security. Their Honours made the statement quoted in decisively rejecting the plaintiff's submission that that question should be answered affirmatively." 12 Mr Reeves, with typical frankness, referred me to the decision of Sanderson M in Williamson & Anor v Soil Land Garden Suppliers Pty Limited & Ors (Supreme Court of Western Australia - 2 June 1998 - unreported). In that case the insolvent companies had made applications pursuant, inter alia, to s.588FF, and there was an application for security for costs. 13 Whilst the Master agreed that the discretion to order security is unfettered, he came to the conclusion that in that case it was inappropriate to so order. He did not consider that the liquidator was under an obligation to give security, it being noted in that case, unlike the present, that the liquidator was appointed by the Court on the application of creditors. 14 The Master considered it was "most important to focus upon the position held by the liquidator" and the duties thereby imposed on him, and that to impose upon the liquidator an obligation to provide security "seems to me likely to frustrate the liquidator in the exercise of his duty". 15 The Master noted that not only was the liquidator suing, but so also was the company in liquidation, and he considered that if an order for security for costs was not to be made against the liquidator it also ought not to be made against the company because the two causes of action were intertwined, and that to effectively bring one to a halt and to allow the other to proceed would not only be inconsistent, but might frustrate the conduct of the litigation as a whole. In the result the Master did not consider that it was appropriate to grant security and, if I may say so with respect, he does not seem to have considered the prospect of those interested in the liquidator recovering assets for the insolvent companies indemnifying the liquidator.

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The Issues In The Present Case 16 It was not in issue that the liquidator was not prepared to provide security personally nor that the corporate plaintiffs are insolvent and will not be able to meet any costs' order that may be made against them. In these circumstances it was submitted that to make an order for security would be to stultify the litigation. However, it was submitted on behalf of NAB that there was no evidence that a significant proportion of the corporate plaintiffs' creditors could not fund the proceedings. The evidence disclosed that those representing the liquidator had approached, or attempted to approach, a number of the "external" creditors to ascertain whether they would provide voluntary contribution to a fund to meet any order which the Court might make for security. These creditors included National Commercial Finance, Gutteridge Haskins & Davey, AGC Limited and Caterpillar Financial Pty Limited. Each declined to provide any financial backing, as appears from the affidavit of Mr Nicholas Malanos, sworn 23 March 1999. Mr Malanos annexed to his affidavit the names of the creditors with which and whom he communicated. These included not only external creditors but also persons who are parties to the proceedings, by which I mean the ones with which I am directly involved and those to be heard with them. The creditors' attitude, generally speaking, was that they had written off the debts. 17 Mr Malanos also stated, in paragraph 10 of his affidavit, that he had examined the liquidator's files and that he became aware from them that in 1997 and 1998 attempts were made to obtain insurance litigation funding, but that three named insurers, which had been approached, had "to date" not agreed to provide any funding to the liquidator in relation to the proceedings. This evidence was objected to, but I admitted it. There was no evidence whether any of the insurers would come to a decision favourable to the plaintiffs. 18 There was also evidence that Coffs Harbour City Council is a creditor, but it has declined to provide any funds. 19 In these circumstances Mr Reeves submitted that those who had a real interest in the ultimate success of the litigation and, therefore, those who should bear the risk of prosecuting it, were not interested in doing so and, accordingly, it had not been established that those who would benefit from the litigation if it is successful, being entities which it could be inferred would be financially able to assist, were prepared to do so. He submitted that in these circumstances the decisions in Bell Wholesale and Yandil Holdings led to the conclusion, notwithstanding the decision in Williamson, that in the proper exercise of my discretion the application for security should be granted. 20 Mr Reeves submitted that Williamson should be distinguished on the bases that there was a Court appointed liquidator; that he had received legal advice that the proceedings were likely to succeed; and that that was not a case in which the liquidator had taken the approach that he was not liable for the costs. 21 I also think that in coming to a consideration as to whether one should apply Bell Wholesale, in relevantly appropriate circumstances, regard must be had to the decision of the High Court in Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at p.492. I have quoted this passage in my earlier decision and it seems to me that not only should it be applied, but the authority of a longstanding decision of the Full Court of the Federal Court, as Bell Wholesale is, demands that the special circumstances be disclosed before the discretionary factors relevantly referred to therein are not followed. 22 I should also note that Mr Gray, in addition to not disputing that the corporate plaintiffs are insolvent and do not have the means to provide security for NAB's costs, conceded that the plaintiffs "are not able to procure other parties to provide funds to meet an order for security for the Bank's costs". He continued that when one considered the amounts of the individual creditor's debts; the amount claimed by NAB as security for costs; and the personal positions of individual creditors this was "hardly surprising". Whilst one can have some sympathy for a submission such as this it leads, in my opinion, to the ultimate conclusion that those who have an interest in the pursuit of the proceedings are not prepared, for their own specific reasons, to support them. Other Discretionary Considerations 23 Mr Gray submitted that the liquidator should not be required to provide security personally. I am inclined to the view that this is correct in so far as it means that the liquidator should not be required to provide security from his own personal funds. However, in my opinion, a liquidator faced with such a position may be required to provide security provided that he can obtain an indemnity from creditors. This is a well known method by which security is provided and, in circumstances where the Law requires the liquidator to bring the proceedings, the situation seems to me to be that the liquidator cannot be excused from granting security in an appropriate case simply for that reason. On the other hand, in my opinion, the liquidator is not required to provide it from his own resources but to ensure that those for the benefit of whom and which he is conducting the litigation provide him with an appropriate indemnity. In these circumstances I do not have the same difficulties as Sanderson M had in relation to the provision by the liquidator of security although, as I have said, I would not expect the liquidator to meet the claim for security personally. 24 Mr Gray submitted nextly that the claim to avoid the securities should be seen as in substance a defensive rather than an aggressive proceeding and therefore not one appropriate for the making of an order for security for costs. I disagree with this submission. NAB is relying upon security documents. The plaintiffs are seeking to have them set aside for reasons provided by the Law. The plaintiffs challenge the validity of the securities. They are therefore, in my opinion, clearly the moving parties seeking substantive relief based on the allegations they put forward. The proceedings are not of a defensive nature in the sense to which Mr Gray referred. 25 Mr Gray submitted nextly that the plaintiffs' case was prima facie reasonably arguable. This may be so. If it were not then, no doubt, an application would have been made to dismiss the proceedings. However, even allowing for a reasonably arguable case, I do not consider that this is a reason to refuse security. Section 1335, in my view, proceeds on the basis that there is such a case the conduct of which will involve costs. It may be that an insolvent plaintiff can show a case which is so strong that it would not be a proper exercise of discretion to preclude its going forward by an order for security. But it is not suggested that this is such a case and, even though NAB has not filed any evidence to suggest that it has a good or even a reasonably arguable defence to the claim, in litigation of this type, where the onus rests essentially on the plaintiffs, I do not consider that that is necessary, nor do I consider that the facts as pleaded are such as to lead to the conclusion that in the exercise of my discretion it would be wrong not to allow the plaintiffs to pursue the remedy in the sense that their chance of success is so great that they should not be precluded from litigating the claim. 26 Nextly Mr Gray submitted that NAB's conduct underlying the present action is at least partially materially responsible for the plaintiffs' present impecuniosity, because it is the claim of the liquidator that the liabilities of the corporate plaintiffs under the third party securities to NAB is a material factor in their insolvencies. It is always necessary to have regard, in considering how to exercise the discretion, to whether the impecunious position of the plaintiffs has been contributed to by the conduct of the defendant. In the present case NAB took a series of securities to support third party obligations in relation to the business affairs of the corporate plaintiffs and Nambucca Investments Pty Limited. Other companies within that general group were also involved. On their face the securities were valid and enforceable. It is for the corporate plaintiffs to establish they are not. There is no evidence, as opposed to the allegations made, to support the view that NAB's conduct was improper in the manner necessary to weigh the discretionary scales in favour of refusing an order for security. 27 Finally, Mr Gray submitted that in the circumstances of this case NAB will not suffer "undue hardship" if no order for security be made; that if an order for security is made, the effect of making it will deprive the plaintiffs of the opportunity to bring a reasonably arguable case; and that, therefore, the application should be seen as oppressive and a means to stultify the action, not on the merits, but in the exploitation of NAB's superior economic resources. 28 I do not agree that NAB will not suffer "undue hardship". Of course in dealing with a large national bank one has to have regard to the fact that everything is relative. In my view it is not appropriate to refuse an application for security for costs merely because the entity seeking it is seen as one which, if the order was not made, could finance the litigation in any event. Section 1335 makes no distinction between financially powerful and financially weak defendants. It proceeds on the assumption that if a party is successful in litigation it will be entitled to recover its costs irrespective of its "need" to do so in the overall scheme of its financial affairs. Further, those directing the affairs of NAB have duties to it to discharge. 29 The second submission is merely a repetition, if I may say so with respect, of the general submission about stultifying litigation. As I have sought to point out s.1335 does stultify litigation, save in the circumstances to which I have referred. In the present case, as I have said, the plaintiffs have simply failed to establish that which, if it had been proved, would have provided a basis for considering whether, in the exercise of my discretion, it was appropriate to make an order. 30 The third submission, if I may say so once again with respect, is an appeal to the general merits of the situation. However, I consider it is an appeal which is wide of the mark because NAB is not exploiting its "superior economic resources". NAB is simply availing itself of well understood principles of law, which now find themselves enshrined in s.1335 of the Law. As I have said if it were the intention of the legislature that well-to-do defendants were not to be entitled to the benefit of that section the legislature would have said so. Conclusions 31 For all these reasons I have come to the view that NAB has established its entitlement to security, and that there are no discretionary reasons why the basic order it seeks should not be made. 32 No submission was made that the amount claimed is inappropriate. It is interesting to note that in few of these applications is there much dispute about that. However, the amount, as I understand the evidence, relates to the whole of the litigation into the future. As I have said a number of matters will be heard together and, in these circumstances, it seems to me that notwithstanding the absence of any submissions in relation to quantum I should not allow the full amount claimed. I have als o come to this view because the proceedings are still some little way from hearing and, if need be, NAB can bring a further application for security for costs. It may be that the amount of the discount from the figure claimed, which I propose to make, will make little practical difference to the situation, but, none-the-less, I consider it appropriate to reduce the amount sought. 33 In making the order against the liquidator I do so on the basis to which I have referred in these reasons. Orders 34 I order that:- (a) The plaintiffs provide security for the defendant's costs of these proceedings in the sum of $275,000 in a form to be approved by the Registrar of the Court within twenty eight (28) days from to-day's date. (b) These proceedings be stayed until such security is provided. (c) The plaintiffs pay the defendant's costs of the Notice of Motion.

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