Strategic Financial and Project Services Pty Ltd v Bank of China Limited

NEW SOUTH WALES DISTRICT REGISTRY NSD 1900 of 2008

BETWEEN: STRATEGIC FINANCIAL AND PROJECT SERVICES PTY LTD ACN 110 336 966

Introduction 1 This judgment concerns applications for security for costs made by both respondents in these proceedings. By notice of motion filed on 20 March 2009, the first respondent seeks security for the first respondent's costs of and incidental to the proceeding in the sum of $554,000.06. By notice of motion filed on 19 March 2009, the second respondent seekssecurity for its costs in the sum of $400,764.

The nature of the proceedings 2 The allegations made against the first respondent can be summarised as follows. The first respondent is said to have issued a promissory note on behalf of one of its clients in favour of Monibrook Pty Ltd (Monibrook), a client of the second respondent. The promissory note on its face purports to have been endorsed on behalf of the first respondent by two officers of the first respondent. By endorsing the promissory note, it is said that the first respondent promised that on presentation the promissory note would be accepted and paid, would become liable to compensate the holder of the promissory note if it were dishonoured and would be precluded from denying to the holder of the promissory note that it had been properly endorsed. The first respondent then delivered the promissory note to the second respondent, as agent for Monibrook. The promissory note was assigned by Monibrook to the first applicant. In August 2008, the first applicant attempted to "collect" the promissory note, and it was dishonoured by the first respondent. 3 The applicants allege that the first respondent made various representations, some of which are said to have arisen from the promissory note itself, while others are said to have been conveyed in certain correspondence allegedly sent by the first respondent to the second respondent. These representations are said to be false. In reliance on these representations, the first applicant became the bearer of a worthless promissory note, and the second applicant, also in reliance on these representations firstly, entered into a commercial agreement involving it, the first respondent and Monibrook and secondly, paid an amount of one million dollars to Monibrook. 4 The applicants also allege that the first respondent is liable in negligence. 5 The first applicant seeks an order against the first respondent for payment of the face value of the promissory note, or alternatively, damages. The second applicant is seeking damages against the first respondent. 6 The first respondent's defence is that it is not liable under or in respect of the promissory note. The first respondent denies that the promissory note was ever endorsed by it and alleges that the signatures appearing on the supposed endorsement were not made by the relevant officer of the first respondent. The first respondent denies that it ever sent the promissory note to the second respondent (as agent for Monibrook). It also denies that it ever sent any correspondence to the second respondent as alleged. 7 The first respondent also denies that it is liable in negligence. 8 The second applicant alleges that the second respondent (on each of 10 August 2006, 16 August 2006 and 23 August 2006) represented to the second applicant that the promissory note was validly issued, that the promissory note would be paid on presentation and that the second respondent had confirmed the promissory note on a bank-to-bank basis with the first respondent. The second applicant alleges that in reliance on the second respondent's representations, the second applicant entered into a commercial agreement involving it, the first respondent and Monibrook, and paid an amount of one million dollars to Monibrook. 9 The second applicant claims that the second respondent's representations were made negligently, and in breach of s 51A and s 52 of the Trade Practices Act 1974 (Cth) (TPA). The second applicant claims damages against the second respondent, as well as interest and costs. 10 The second respondent denies that it made the representations referred to earlier. The second respondent denies that it could be liable under s 51A and s 52 of the TPA or in negligence.

Security for costs: principles and relevant statutory provisions 11 I now turn to consider the relevant statutory provisions and principles that govern the Court's power to order security for costs. Section 56 of the Federal Court of Australia Act 1976 (Cth) confers on the Court a broad discretionary power to order security. Power to order security is also conferred by s 1335 of the Corporations Act 2001 (Cth), which provides: (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. ... 12 It is apparent that s 56 of the Federal Court Act confers a broader power to award security for costs than s 1335 of the Corporations Act. InAcohs Pty Ltd v Ucorp Pty Ltd & Ors (2006) 155 FCR 181 at [8], Jessup J highlighted that s 1335(1)has three elements, each of which requires a particular approach by the Court. Those elements are: (a) the standard involved in the phrase "if it appears by credible testimony that there is reason to believe"; (b) the concept involved in the phrase "the corporation will be unable to pay"; and (c) the nature of the discretion given by the words "the court … may … require". The parties were content to approach the applications in this matter on the footing that they would be determined by reference to s 1335. It is convenient to address the various elements in order. 13 The first element, that of "credible testimony", was considered at some length by von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203, where his Honour explained that the power of the Court under s 1335 arises if credible testimony establishes that there is reason to believe there is "a real chance" that in events which can fairly be described as "reasonably possible" an applicant will be unable to pay the costs if judgment goes against it. The matter was also considered by the then Full Court of the Supreme Court of Western Australia in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 156 FLR 116 at [11], where, in explaining the what a party must do to satisfy the first element of s 1335, Pidgeon and Owen JJ said: ... The applicant is required to do no more than place on the record credible testimony and the exercise of the court at this stage is in judging the testimony and its quality rather than seeing if a matter has been proved by inference. The company, at this stage, is not being asked to explain or contradict something for the purposes of avoiding an inference being drawn. If there is credible testimony, then the court has jurisdiction to make the order and a company which called no evidence to show it could meet a costs order would run the risk of having an order made against it. 14 The second element concerns the ability to pay. The phrase "the corporation will be unable to pay" was also considered by von Doussa J in Beach Petroleum where his Honour said (at 205): A corporation "will be unable to pay" the costs within the meaning of the section if it can only do so if given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over other liabilities, sufficient to pay the costs .... The company will also be unable to pay the costs within the meaning of the section if the payment would be one that will amount to a preference of the defendant over other creditors such that the payment would be liable to be set aside either as a preference or as a fraudulent disposition (that is a payment made by the plaintiff corporation with the intention to defeat or delay one or more other creditors) in the event of the plaintiff corporation later going into liquidation ...

(References omitted) 15 Justice von Doussa's approach in Beach Petroleum was followed by Einstein J in Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744. In Idoport, Einstein J noted (at [58]) that where the Court is considering an application for security for costs under s 1335, the Court is required to form an opinion about what the financial position of the applicant will be at the time of judgment. Of necessity, therefore, is the requirement to make a judgment about future events. As von Doussa J said in Beach Petroleum (at 205): When the Court is required to make a judgment which anticipates future events the Court of necessity is required to judge the degree of probability that a particular event might occur. The Court can do no more than evaluate the chances ... 16 In Idoport, Einstein J (at [58]) emphasised that although the financial position of the applicant at the time of the application for security is important, other factors are also important. According to his Honour, such other factors include the outcome of the trial, the costs associated with the trial and the success or otherwise of the applicant's business and investments in the meantime. 17 Once the factual preconditions of s 1335 are met, the Court then has jurisdiction to make an order that security for costs be provided: Acohs Pty Ltd v Ucorp Pty Ltd & Ors at [11]. Once it is accepted that there is reason to believe that the applicant will be unable to pay the respondent's costs, the evidentiary burden shifts to the applicant to satisfy the Court that, taking into account all relevant factors, the Court should exercise its discretion by refusing to order security. In Idoport, Einstein J said (at [60]): Whilst from one point of view it may seem inappropriate to approach the matter in terms of the strictures of burden of proof whether of a legal or forensic character ... there is certainly substantial authority which is followed in these reasons, to the effect that the defendants, as applicants for security for costs, have an evidentiary burden of leading evidence to establish a prime facie entitlement to such an order and to such an order in relation to a particular amount. Normally, in any court, the party who asserts must prove in order to succeed ...

(References omitted) 18 Justice Einstein's approach in Idoport (at [60])was adopted by Austin J in Fiduciary v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [36] and by Jacobson J in Reinsurance Australia Corporation Limited v HIH Casualty and General Insurance Ltd (in liquidation) [2003] FCA 803 at [25].

Evidence 19 In support of its application for security for costs, the first respondent filed two affidavits of Roger Forbes, who is the first respondent's solicitor in this matter. Mr Forbes swore his first affidavit on 19 March 2009, and his second on 28 April 2009. Exhibited to Mr Forbes' first affidavit are copies of company extracts obtained from the Australian Securities and Investment Commission (ASIC) in relation to each applicant. The company extract relating to the first applicant shows that the first applicant has three shareholders, each of which is a proprietary company, with a paid up capital of $100. 20 The company extract relating to the second applicant shows that the second applicant has one shareholder, which is a proprietary company, and a paid up capital of $4,580,000. In respect of the second applicant, no share capital has been issued since at least December 2004. The second applicant's company extract shows that the most recent financial report filed with ASIC by the second applicant was its annual financial report for the year ending 31 December 2003. Amongst other things, the second applicant's financial report shows that the second applicant did not generate any income for the year that ended on 31 December 2003, incurred a loss from ordinary activities before related income tax expenses of $1,685,057 and had accumulated losses of $2,289,395. 21 The evidence of Mr Forbes is that he is concerned that the second applicant may not have sufficient assets or income to meet any orders for costs made against it. 22 Mr Forbes deposes to the fact that the company extracts of the first and second applicant, as well as that of Monibrook, demonstrate a close relationship between the applicants and Monibrook as follows: (a) the first and second applicant have the same registered address and principal place of business; (b) Monibrook is one of the first applicant's shareholders, owning 40% of the issued capital of the first applicant; (c) Allyn Holdings Pty Limited owns 40% of the issued capital of the first applicant. A company extract in relation to Allyn Holdings Pty Limited shows that its only shareholders are Allyn Holdings Pty Limited (which holds one Class "J" share), Alan Frederick Keller and Lyndall Keller (each of whom holds one ordinary share); (d) Mr Keller is a director of both the first and second applicants; (e) Walter Burke-Brooks is a director of the first applicant and his address is the same as the common address of both of the directors of Monibrook. 23 The evidence also is that neither applicant is the registered proprietor of any real property in New South Wales. 24 Mr Forbes' evidence is that as of 18 March 2009, the first respondent has incurred $85,119.25 in costs and disbursements. Mr Forbes has had substantial experience in conducting commercial litigation in superior courts in Australia. In his affidavit, he estimates that the first respondent will incur approximately $770,970 in costs and disbursements up to, and including, a final hearing, broken down as follows: · $303,698.86 in solicitors' professional costs up to a final hearing; · $242,274.72 in disbursements (include counsel's fees) up to a final hearing; · $101,595.38 in solicitors' professional costs at a final hearing; and · $123,400.00 in disbursements (include counsel's fees) at a final hearing. 25 Mr Forbes' evidence is that the following tasks will need to be undertaken to further prepare this matter for hearing: (a) obtaining instructions from, meeting and corresponding with Bank of China (BOC) (b) considering and, if appropriate, responding to any reply filed by the applicants; (c) considering and, if appropriate, responding to the defence filed by the Commonwealth Bank of Australia (CBA); (d) preparing categories of documents required for discovery; (e) identifying, collating and reviewing BOC's documents for discovery, taking instructions in relation to privilege and confidentiality in relation to those documents, and preparing the list of documents for discovery. Much of the documentary material in relation to this matter is in Mandarin Chinese and will need to be translated into English. (f) inspecting and reviewing the documents discovered by the the applicants and CBA; (g) preparing lay evidence, including: (i) meeting with potential witnesses in the People's Republic of China (China); and (ii) preparing witness statements, affidavits and exhibits. A number of witnesses are based in China and do not speak or read English. Translators will therefore be required to assist in interviewing these clients and in the prepraration of affidavits; (h) briefing experts to prepare reports on, among other things, the authenticity of the promissory note and the signatures and other marks affixed thereto; (i) preparing agreed tender bundles; (j) preparing and updating briefs to counsel; (k) attendance at, and preparation for, directions hearings; (l) assisting with preparation of opening and closing submissions; (m) preparing cross-examination of applicants', and possibly, CBA's, witnesses; (n) preparing for, and attendance at, hearing. The hearing is estimated to take up to 10 days; (o) corresponding with the solicitors for the applicants and the CBA; and (p) instructing and meeting with counsel and meeting with BOC's witnesses prior to, and during, the hearing. Mr Forbes also states that he will incur disbursements costs in engaging translators (much of the relevant documentation is in the Chinese language), engaging expert witnesses, travel and accommodation for witnesses who may need to travel to Sydney. 26 As set out above at [24], Mr Forbes estimates that the first respondent will incur approximately $770,970 in costs and disbursements up to, and including, a final hearing. Mr Forbes estimates that if costs are awarded in favour of the first respondent, the first respondent would recover (on a party/party basis) not less than 60% of its professional fees and 85% of its disbursements (including counsel's fees). This amounts to $554,000.06, which is comprised of: (a) $388,152.83 in relation to costs up to a final hearing. This amount is itself comprised of $182,219.32 in professional costs and $205,933.51 in disbursements; and (b) $165,847.23 in relation to costs of a final hearing. This amount is itself comprised of $60,957.23 in professional costs and $104,890.00 in disbursements. 27 In support of its application, the second respondent filed an affidavit of Scott Atkins, who is the second respondent's solicitor in this matter. Mr Atkins swore his affidavit on 19 March 2009. Much of Mr Atkins' affidavit contains the same material in relation to the corporate structure, and the officers, directors and shareholders of the first and second applicants. It is unnecessary to repeat it. Similarly, I will not repeat the information in Mr Atkins' affidavit about the filing of annual returns or financial reports with ASIC. I also note that Mr Atkins has conducted property searches in relation to the applicants, with the evidence being that neither is the owner of property in New South Wales. 28 Mr Atkins estimates that the second respondent will incur approximately $552,521 in future costs and disbursements up to, and including, a final hearing (of which $367,721 will be incurred up to the hearing). Mr Atkins' estimate does not include any potential cross-claims that might be filed and not does it factor in any settlement discussions or mediations. 29 Mr Atkins estimates that the recoverable costs for the second respondent (on a party and party basis) would be in the range of : (a) $343,512-$400,764 in relation to costs expected to be incurred up to the end of the hearing; (b) $220,632-$257,404 in relation to costs expected to be incurred up to (but not including) the final hearing. 30 Neither Mr Forbes nor Mr Atkins was cross-examined on the contents of their affidavits and I was not invited to conclude that the veracity of what is deposed to in their affidavits is in doubt.

Consideration 31 In relation to the first applicant, the respondents have adduced credible evidence that establishes that there is a real chance that the applicant will not be able to meet any costs order if it is unsuccessful. The first applicant has three shareholders, with a paid up capital of only $100. Given that there is reason to believe that the first applicant will be unable to pay the respondents' costs, the evidentiary burden shifts to the first applicant to satisfy the Court that, taking into account all relevant factors, the Court should exercise its discretion by refusing to order security. It has not discharged the burden. 32 The situation with the second applicant is not so straightforward. Although the second applicant has paid up capital of $4,580,000, no share capital has been issued since at least December 2004. In my view, the fact that the second applicant has this paid up capital says nothing of substance about its present financial position (on either a cash-flow or assets/liabilities basis). Of more relevance is the fact that the second applicant's financial report for the year ending 31 December 2003 shows that the second applicant incurred a loss that year from ordinary activities of $1,685,057 (before related income tax expenses) and had accumulated losses of $2,289,395. There is, however, evidence that the second applicant has at its disposal the sum of $200,000, which is currently held in a trading account with a major Australian retail bank. 33 At the hearing, the applicants sought to tender a document that was described in the affidavit of Mr Avendra Singh (who is the applicants' solicitor), sworn 29 April 2009, as a "a copy of the financial statement relating to the Second Applicant for the financial year ended 30 June 2008". I rejected the tender of this document relying, in substantial part, on s 135 of the Evidence Act 1995 (Cth). I did so for a number of reasons. Firstly, the applicants only provided the respondents with the affidavit of Mr Singh, to which the "financial statement" was annexed, the day before the hearing of the notices of motion. However, I note that the "financial statement" was given by the applicants to the respondents on 14 April 2009 pursuant to a notice to produce, although the applicants assert that no indication was given at the time that it was going to be relied upon as evidence. It was provided, as evidence, far too late. 34 My second reason concerns the nature of the document itself. The document is described on its face as a "special purpose financial report" for the year ended 30 June 2008. It was prepared for use by directors and members of the second applicant. The report was not audited, and the report itself states that the directors were solely responsible for the information contained in the report. Further, although the report was prepared in accordance with certain accounting standards, the chartered accountants who prepared the report included the following disclaimer: The special purpose financial report was prepared for the benefit of the directors and members of [the second applicant] and the purpose identified above. We do not accept responsibility to any other person for the contents of the special purpose financial report. Significantly, the report included, on its front page, a "directors declaration" that had not been signed by any of the directors of the second applicant. 35 The issue of the admissibility of un-audited financial statements, in the context of security for costs applications, has arisen in a number of cases. In Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 at 5, Lee J accepted the "unaudited accounts prepared by a practising accountant as a sufficiently accuratereflection of the affairs of the corporation". In Juelle Pty Ltd v Buildev Properties Pty Ltd and Ors [2006] NSWSC 302, Gzell J allowed the tender of a special purpose financial report (that was in essence a summary of the financial information provided by the directors) prepared by the plaintiff's accountant, notwithstanding that the report had not been reviewed, audited or verified by the accountant. As Gzell said (at [18]): In my view, the lack of verification, validation, audit and review by [the accountant] does not render the financial report inadmissible. They are the statements by the directors of the financial position of [the plaintiff]. The lack of verification, validation, audit and review may bear upon the weight to be given to the evidence but it does not, in my view, exclude the evidence. The fundamental difference between the special purpose report in Juelle and what purports to be a special purpose report in the present case is that the relevant report in Juelle had been signed by the directors. The present report appears to me to be of very limited probative value if it has not been adopted by the directors, having regard to the fact that the author of the document relied on information from the directors in compiling it. 36 I am satisfied that it appears by credible testimony that there is reason to believe that the second applicant will be unable to pay the costs of the respondents if successful in their defences. Again, the evidentiary burden shifts to the second applicant to satisfy the Court that, taking into account all relevant factors, the Court should exercise its discretion by refusing to order security. It has not discharged the burden. 37 Accordingly, my discretion under s 1335 of the Corporations Act to make an order for the provision of security by the respondents has been enlivened. I now turn to consider how that discretion should be exercised. 38 In essence, the applicants assert that an order for security for costs should not be made for three reasons. Firstly, the applicants say that to require them to provide security for costs would be oppressive and would have the effect of stultifying their ability to pursue their claims in the proceeding. Secondly, the applicants (and particularly the second applicant) assert that they are impecunious as a result of the wrongful conduct of the respondents. Thirdly, the applicants argue that there are public interest considerations that militate against the making of an order for security for costs. 39 The weight of authority is that a party cannot successfully resist an order for the provision of security by simply proving that it cannot fund the litigation itself; it must also prove that it cannot do so even it relies on other sources of funds: Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120 at 123 per Meagher JA. As the Full Federal Court explained in the Bell Wholesale Co Pty Limited v Gates Export Corporation (1984) 2 FCR 1 at 4: In our opinion a 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 to prove the necessary facts. 40 The applicants have not adduced any evidence that either the persons standing behind the respondents, or the persons who will benefit from the litigation, are unable to provide security. 41 The second applicant asserts that the Court should refrain from making an order for the provision of security against it on the basis that the second applicant's putative impecuniosity arose out of the conduct of the respondents. This issue was considered by the Full Court of the Supreme Court of Western Australia inBPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 345-346, where Anderson J (with whom Kennedy and Ipp JJ agreed) rejected the notion that the party applying for security should be required to show that their conduct did not contribute to the plainitff's impecuniosity. His Honour further stated that: In all fairness it must be accepted that the plaintiff's financial condition before and after the transaction is peculiarly within the plaintiff's own knowledge. If the plaintiff wishes to resist an application for security because the defendant's wrongful actions have brought about its lack of means it must surely be for the plaintiff to establish this ... 1 do not mean to say that this is anything but an evidentiary onus. It is enough to say for the purposes of this appeal that if there is no evidence to show that the defendant was to blame for the plaintiff's lack of means, the plaintiff cannot say the application should be refused on that ground. There was no direct evidence before the master of the plaintiff's financial condition at the time the first defendant was engaged to advise it and there is not really any evidence on which to safely base any inferences. A similar approach has been taken in a number of other cases: Reches v Tadiran (1998) 85 FCR 514 at 523; Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 472. 42 The second applicant has not provided any evidence to suggest that its impecuniositiy has arisen out of the conduct of the respondents. It is not sufficient for the second applicant to simply assert, by way of submission, that its impecuniositiy arose out of the conduct of the respondents. I reject the second applicant's submissions on this aspect of the applications for security for costs. 43 The applicants submit that there exist public interest considerations that tell against the making of an order for security for costs. The public interest component of these proceedings, as the applicants would have it, arises from the need to investigate certain banking procedures in China given the role China now occupies in the global economy. 44 In my view this submission should be rejected. I am prepared to accept that as China's economic influence continues to grow, the stability and reliability of the Chinese banking system may become an important issue in global commerce. However, as counsel for the first respondent correctly pointed out, this is not the appropriate forum for the conduct of a wide-ranging examination of Chinese banking practices and safeguards. Any factual findings I make in these proceedings will only be of relevance in deciding the issues that are before me. Such factual findings will say nothing about the Chinese banking system as a whole. 45 In my opinion, the applicants should be ordered to provide security for the respondents' costs of the proceedings. The question that now arises is the quantum of the security that the applicants are to provide. 46 There was a dispute at the hearing of the notices of motion as to whether each of the applicants seeking relief against each of the respondents. However, from my reading of the amended application, filed 16 March 2009, and the amended statement of claim, filed 26 February 2009, it would appear that both applicants are seeking relief against the first respondent, whereas only the second applicant is seeking relief against the second respondent. 47 There was, as I understand it, a suggestion at the hearing of the applications for security that the fact that only one of the respondents is being sued by both applicants may have some bearing on any order for the provision of security that I am inclined to make. The difficulty faced by the applicants is that neither of them cross-examined the respondents' witnesses (Mr Forbes, solicitor for the first respondent, and Mr Atkins, solicitor for the second respondent); nor did the applicants call any evidence that would refute the basis of either Mr Forbes', or Mr Atkins', evidence as to the costs that the first and second respondents would incur in defending the proceedings. Accordingly, there is no reason for me to substitute my own amount for the amounts proffered by the respondents. 48 It is appropriate in this case for the applicant to provide the security requested by the first and second respondents. In making an order for security the court does not set out to give a complete indemnity to a respondent(Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 at 175) nor is it to be assumed that the applicant will fail in the proceeding. I only propose to order, at this stage, security in relation to costs concerning the preparation of the matter for trial. I can review the question of security as the trial approaches or at an earlier stage if it is apparent that the security provided for the cost of preparation is not, having regard to the applicable principles, adequate. I propose to order that security in the sum of $250,000 be provided by the applicants in relation to the first respondent, and $200,000 in relation to the second respondent. In my view the quantum of costs I have ordered is reasonable in the circumstances given the factual complexity of the issues involved and the length of time that will need to be devoted to preparing the matter for the hearing. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.

Associate: Dated: 5 June 2009 Counsel for the Applicants: M McHugh

Solicitor for the Applicants: Colin Biggers & Paisley

Solicitor for the First Respondent: Mallesons Stephen Jaques

Counsel for the Second Respondent: A Bell SC with D Sulan

Solicitor for the Second Respondent: Henry Davis York