Timbercorp Finance Pty Ltd (in liq) v Tomes [2015] VSCA 322

1 I invite McLeish JA to deliver the first judgment in this matter.

2 The respondent to this application for leave to appeal, Mr John Charles Tomes, seeks an order for security of its costs of the application and any appeal.

3 The application for leave to appeal (and any appeal) is brought by Timbercorp Finance Pty Ltd (in liq) ('Timbercorp') and is listed to be heard on 30 November 2015. At the same time, another application for leave to appeal, brought by Timbercorp against different respondents, will also be heard.

4 Both applications for leave to appeal are brought in respect of orders made by a judge in the Trial Division by way of answer to a preliminary question in two proceedings brought by Timbercorp against the respective respondents. By those orders, it was declared that the respondents are not precluded from raising their pleaded defences to Timbercorp's claims in those proceedings. Timbercorp had contended that the respondents were so precluded, by reason of their participation as group members within the meaning of pt 4A of the Supreme Court Act 1986 in a group proceeding heard and determined under those provisions.[1]

5 The judge in the Trial Division held that the principles of Anshun estoppel[2] did not apply to group proceedings under pt 4A, or that, if they did, they were not attracted in the present cases. The judge further held that the raising of the defences pleaded by the respondents did not constitute an abuse of process.

6 The preliminary question which was heard and determined in the Trial Division was the subject of a hearing lasting three days concluding on 4 May 2015. Judgment was given on 2 September 2015. On 30 September 2015, Timbercorp

commenced an application for leave to appeal in respect of each proceeding. Copies of its written case, draft summary and draft application book index were served upon Mr Tomes on 1 October 2015, along with an application for expedition of the hearing of the application.

7 On 6 October 2015, the Court advised the parties that the two applications would be heard on 30 November 2015. Mr Tomes' materials in the present application were filed on 4 November 2015.

8 Also on 4 November 2015, Mr Tomes' solicitors wrote to the solicitors for Timbercorp expressing concern about his ability to recover his costs from Timbercorp. In reliance upon Timbercorp's most recent accounts, which were filed with the Australian Securities and Investments Commission ('ASIC') following delivery of judgment on the preliminary question, the letter suggested that Timbercorp had three secured creditors who were owed $89,226,951, and had 'only $6,858,603 in total money held'. Concern was also expressed about the number of borrowers who were insolvent or had claimed hardship. The letter asked the solicitors to confirm the value of Timbercorp's assets that were, and those that were not, subject to registered security interests, and how it proposed to meet the outstanding adverse costs order against it and any adverse costs order made by the Court on the application for leave to appeal.

9 Further correspondence ensued, until Timbercorp's lawyers replied in writing on 11 November 2015. The letter took issue with a number of aspects of the earlier correspondence. In answer to the queries that were raised, the letter stated that Timbercorp held, at the time of the letter, $5.6 million in unencumbered cash funds, had an unencumbered loan book value of approximately $172 million and had an 'anticipated current head room in respect of its encumbered loan' of approximately $140 million. The letter continued:

We are instructed that our client considers that it and its liquidators would be entitled to exercise a lien over funds realised in the course of the liquidation in respect of the amount of any costs that it might be ordered to pay your client in this proceeding.

10 Mr Tomes' solicitors responded on the same day. Among other things, they asked whether the statement just quoted meant that Timbercorp would exercise a lien to enable adverse costs to be paid from the sum the subject of the lien. By email later that evening, Timbercorp's solicitors said that it was neither reasonable nor necessary for it or its liquidators to commit to exercising the lien in question, as it may not turn out to be necessary for that to happen in order to make a payment out of funds realised by them in order to satisfy any costs order that might be made against Timbercorp.

11 The application for security for costs was filed on the following day. The application was supported by an affidavit sworn by Jonathan Bowers-Taylor, solicitor, deposing to an estimate of Mr Tomes' costs of the application and any appeal in the total amount of $167,250. Slightly different amounts were claimed in the application itself and in correspondence, but nothing turns on the difference. Mr Bowers-Taylor also exhibited the relevant correspondence and ASIC records in further support of the application.

12 Timbercorp relies on an affidavit of Craig Peter Shepard, one of its liquidators. Mr Shepard deposes to the fact that the outcome of the application for leave, and any appeal, will directly affect the defences able to be raised by defendants in approximately 1094 proceedings initiated by Timbercorp in Victorian courts.

13 Mr Shepard further deposes that, as at 6 October 2015, the amount owed by Timbercorp to its two remaining secured creditors was approximately $85 million. The amount owing to it on loans which are secured by those two remaining secured creditors totalled approximately $172.5 million. The overall balance of its loan book was approximately $382.8 million.

14 In addition, as at 17 November 2015, Timbercorp had approximately $5.3 million in cash funds not secured by its remaining two secured creditors. The current balance of loans owing to Timbercorp and not secured by its secured creditors was approximately $181 million. Mr Shepard deposed that Timbercorp was presently collecting funds from borrowers in the course of its liquidation in the amount of approximately $2.1 million per month.

As one of the joint and several liquidators of [Timbercorp], I consider that I will be entitled, and I intend, if it is necessary to do so, to exercise my ATCO/Universal Distributors' lien over funds realised from borrowers in the course of [Timbercorp's] liquidation in priority to secured and unsecured creditors to meet any order for costs made in favour of Mr Tomes in this proceeding.

16 It has regularly been held that the power of the Court to order security for costs in relation to an appeal (including an application for leave to appeal) is unconfined, but that the following matters are relevant to the exercise of the Court's discretion:

(a) the prospects of success of the application, and any appeal;

(b) the extent of the risk that a costs order will not be satisfied;

(c) whether the making of an order for security would be oppressive by stifling a reasonably arguable claim;

(d) whether any impecuniosity of the applicant/appellant arises out of the conduct complained of;

(e) whether there are aspects of the public interest which militate against the making of an order for security; and

(f) whether there are particular discretionary matters peculiar to the circumstances of the case.[3]

17 It is convenient to take those considerations in order.

18 In his written submissions, Mr Tomes contends that it cannot properly be said that the application and appeal are bound to succeed, or even likely to succeed. This submission is misconceived. While it will generally weigh heavily against making an order for security that an appeal is likely to succeed,[4] the converse is not true. The converse position is where there is no genuinely arguable question of law, which counts in favour of an order for security being made.[5]

19 The applications for leave to appeal raise a novel question of law. The judgment of the primary judge extends to 741 paragraphs. The issues are far from straightforward. In the circumstances, although it cannot be said that an appeal would be likely to succeed, nor can it be said that it is likely to fail or that it is not genuinely arguable. The prospects of success are therefore a neutral factor in the present application.

20 Most of Mr Tomes' argument was directed to this factor. It was observed that Timbercorp is in liquidation, which was said to entail a higher risk that a costs order would not be satisfied than if it were solvent. It was submitted that this risk is magnified when one has regard to such material as is publicly available concerning the liquidation. It was noted that any costs order made in favour of Mr Tomes on the appeal would not be provable as a debt in the winding up of Timbercorp, since neither the order itself nor the circumstances giving rise to it would have occurred before the relevant date (referring to the Corporations Act 2001 (Cth), s 553(1)).

21 In respect of the liquidators' lien, Mr Tomes submitted that Mr Shepard's expressed intention to exercise that lien, if it should prove necessary, could not provide the same level of security as an order of the Court. Among the matters that it was suggested might arise before the time for payment of an adverse costs order were other events which would require the liquidators, in the proper exercise of their duties, to give priority to other persons, difficulty in recovering funds, or the removal of the liquidators.

22 At a more fundamental level, counsel for Mr Tomes submitted that the lien was available only in respect of those costs and expenses incurred by the liquidator personally, such that it would not avail Mr Tomes should Timbercorp, rather than its liquidators, be subject to a costs order.

23 In response, Timbercorp submitted that it had approximately $5.3 million in cash funds not secured by its secured creditors. In addition, senior counsel for Timbercorp said that Mr Shepard was to be taken as saying, as an officer of the Court, that if those or other available funds were not sufficient to satisfy any costs order in favour of Mr Tomes, he would exercise the lien so as to meet such an order. By virtue of the nature of the lien, this would cause Mr Tomes to be paid ahead of the claims of secured creditors.

24 Timbercorp also submits that s 556 of the Corporations Act 2001 gives priority over unsecured creditors to various expenses which would include any costs order in favour of Mr Tomes.[6] It was noted that Timbercorp was owed about $181 million over which the secured creditors had no claim.

25 As Timbercorp points out, the evidence is that, as at 17 November 2015, it had approximately $5.3 million in cash funds not secured by its creditors. These amounts are, it may be inferred, available to meet the costs of the liquidation. It is true that it has significant debts, and that questions may arise as to the extent of its ability to satisfy both its secured and unsecured creditors. On the other hand, as Timbercorp submitted, at least that sum has been available for the last three years. Prima facie, therefore, it would be able to meet a costs order in this proceeding.

26 Timbercorp seeks to meet Mr Tomes' concern that, none the less, there is a substantial risk that he would not be paid, by pointing both to s 556(1) of the Corporations Act 2001 and the liquidators' lien. As to the first, it is true, as Timbercorp submits, that s 556(1) gives priority over unsecured creditors to expenses including any costs order that might be made against it (or the liquidators) in Mr Tomes' favour.[7] At the same time, however, the amount owing to secured creditors remains substantial, some 40 times Timbercorp's monthly receipts at present. Section 556 therefore is not a complete answer to Mr Tomes' concerns.

27 It is necessary then to say more about the lien. The liquidators are engaged in the process of recovering monies alleged to be owed to Timbercorp by a large number of persons. The group proceeding was defended by Timbercorp as part of that process, and the preliminary question in the present proceedings was prosecuted as a test case, also as part of that wider recovery process. The proceeds recovered are subject to an equitable lien or charge in favour of the liquidators for the expenses reasonably incurred in the care, preservation and realisation of Timbercorp's property, including its loan book.[8] That lien takes priority over a secured creditor's charge, as well as over the claims of unsecured creditors.

28 In the context in which it is proffered, and in light of senior counsel's further elaboration, Mr Shepard's indication is plainly intended as an assurance that any costs order in favour of Mr Tomes will be met ahead of both secured and unsecured creditors. Timbercorp submits that the lien arises in respect of costs and expenses incurred by the liquidators, not only in their own right but on behalf of the company. Mr Tomes, to the contrary, contends that the assurance is unsatisfactory because it

28 could only apply to costs incurred by the liquidators personally.[9] In the absence of full argument, it would not be desirable to enter into this question. It suffices to say that the liquidators will be managing the affairs of the company, and one of them has given an assurance, based on his view as to his entitlements, upon which Mr Tomes is entitled to rely. If it transpires that Mr Shepard's view as to the liquidators' entitlements is incorrect, to the prejudice of Mr Tomes, a question may arise as to whether any costs order should be made against the liquidators personally, so as to ensure that the lien is attracted.[10] In any event, the assurance places Mr Tomes in a stronger position in respect of any costs order in his favour.

29 It is true, as Mr Tomes submits, that the availability of the liquidators' lien does not place him in the position he would be in if security were to be ordered. But that is not to the point. In light of the availability of $5.3 million in unsecured funds, coupled with the assurance of Mr Shepard, Mr Tomes has in my opinion failed to show that there is a significant risk that an adverse costs order against Timbercorp would not be paid.

30 Mr Tomes submits that there is no suggestion that the ability of Timbercorp to conduct its leave application would in any way be prejudiced by a grant of security for costs. Timbercorp takes no issue with this submission. It is plainly the case that making an order for security would not stifle the proposed appeal.

31 Mr Tomes contends that no issue arises in respect of this factor. Timbercorp, however, submits that its financial position is the direct result of the conduct of Mr Tomes and other borrowers who have defaulted on their loan repayments, necessitating its claims in debt being brought against those borrowers in these and other proceedings.

32 It must be very doubtful whether the position taken by other borrowers has any relevance to the present application. It plainly cannot be said that the financial position of Timbercorp is attributable to conduct of Mr Tomes. But in the end, little if anything turns on this factor. Given my conclusion as to the level of risk to which Mr Tomes is exposed, it is not pertinent to inquire whether he has brought that risk upon himself.

33 Mr Tomes contends that there are no aspects of the public interest militating against the making of an order for security. In contrast, Timbercorp contends that its application raises matters of public importance, not only because of the number of pending proceedings before Victorian courts which may be affected, but because the proposed appeal would clarify the law on the operation of Anshun or and abuse of process principles in respect of group proceedings under pt 4A of the Supreme Court Act 1986 more generally. Timbercorp contends further that Mr Tomes sought to participate in the test case deciding these issues, in circumstances where there was no need for him to do so.

34 The fact that an appeal may raise matters of public importance is a possible basis for declining to order security for costs.[11] That is primarily because it may not be in the public interest to order security if that would prevent an issue of public importance from being heard and determined by the Court. It is not at all clear that ordering security would have that effect in the present case. Moreover, the present application for security is made by only one of the respondents in question. As noted earlier, there are two applications for leave to appeal in respect of the orders made by the primary judge. Despite differences between them, both of those applications raise the same broad questions of public importance. There is no material before the Court upon which it could be concluded that the grant of an order for security of costs in the present proceeding would make it less likely that the other proceeding would continue. In other words, the public interest in having the questions determined will be satisfied in any event. This factor therefore has no bearing on the exercise of the Court's discretion.

35 Timbercorp places particular reliance on what it says is the unexplained delay on the part of Mr Tomes in bringing the present application. It is submitted that he has stood by and allowed considerable sums of money to be expended by Timbercorp in preparation of the proposed appeal and that this delay has not been explained. Timbercorp points out that Mr Tomes never sought security for his costs or raised questions about its financial position until 4 November 2015, after the work necessary for the application for leave to appeal had been completed.

36 There is some force in Timbercorp's submissions in this regard. It is well established that applications for security of costs should be made promptly and before considerable expense is incurred by an appellant.[12] In Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd,[13] it was said that the fact that the impecuniosity of a prospective applicant for leave to appeal is known to the successful party at trial will often make it unjust to allow that party to stand by and take steps towards seeking security only after the unsuccessful party has performed the work necessary to prepare the appeal for hearing.

37 In the present case, it cannot be said, notwithstanding the expedition with which the application for leave has been able to be brought to hearing, that Mr Tomes was prompt in seeking security for costs. On the other hand, it may fairly be said that Timbercorp's financial position was not so plainly evident in the present case as it was in Façade Treatment. While Timbercorp was obviously known to be in liquidation, the evidence as to its current financial position, upon which Mr Tomes ultimately relies, was not publicly available until about 25 September 2015. Notwithstanding that earlier financial information was available, it cannot be said in the circumstances that such delay as Mr Tomes has allowed to occur would of itself stand as a significant obstacle to the grant for an order for security of costs.

38 In the end, the primary considerations upon which this application falls to be determined are Timbercorp's financial position and such responsibility as Mr Tomes should bear for the timing of the making of the application.

39 In my opinion, it has not been shown that there is a sufficient risk that Timbercorp would fail to meet a costs order in favour of Mr Tomes to warrant the making of an order for security for costs. In the result, I would refuse the application.

40 I agree with McLeish JA, for the reasons he gives, that the application for security for costs should be dismissed.

42 Timbercorp seeks an order for the costs of the application, on the standard basis until 16 November 2015 and thereafter on an indemnity basis. The ground for that application is an offer it made on 13 November 2015 to give security to Mr Tomes in the amount of $15,000 if his application for security was discontinued. It was submitted that, despite the fact that the offer was made at 5:00pm on a Friday and was only open until 2:00pm on the following Monday, Mr Tomes was in possession of the relevant financial information and should have realised that the application would fail and accepted the offer.

43 Mr Tomes submits that it was not until Mr Shepard's affidavit was produced on 18 November 2015, and its meaning in respect of the lien was adumbrated at the hearing of this matter, that the relevant financial circumstances were fully revealed. On that basis, he submits that he was driven to make the application for security, and seeks an order that Timbercorp pay his costs, alternatively that there be no order as to costs.

44 In my opinion there should not be any order in favour of Timbercorp on an indemnity basis. Notwithstanding the delay to which reference has been made on the part of Mr Tomes, the questions which he raised as to Timbercorp's financial position were not finally addressed until Mr Shepard made clear his intentions in respect of the liquidators' lien in his affidavit of 18 November 2015, which was foreshadowed in correspondence on 17 November. By then, the offer had already expired.

45 At the same time, however, Mr Tomes was on notice from 11 November that $5.6 million (later revised to $5.3 million) was available to meet Timbercorp's costs and expenses free of the claims of secured creditors. As indicated, this meant that, prima facie, a costs order in his favour would be met. It therefore cannot be said that he was driven to make the application as a result of the failure of Mr Shepard to explain more clearly his intentions regarding the lien. It would be wrong in the circumstances to deprive Timbercorp of its costs in successfully defending the application.

46 Mr Tomes should therefore pay Timbercorp's costs of the application on the standard basis.

[1] Woodcroft-Brown v Timbercorp Securities Ltd [2011] VSC 427.

[2] Port of Melbourne Authority v Anshun Pty Ltd [1981] HCA 45; (1981) 147 CLR 589.

[3] Maher v Commonwealth Bank of Australia [2008] VSCA 122; Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2015] VSCA 169, [11]; Trkulja v Dobrijevic [2015] VSCA 281, [43].

[4] Kenyon v Akeroyd [2007] VSCA 50, [12].

[5] Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2015] VSCA 169, [16].

[6] Re Windy Dropdown Pty Ltd [2010] NSWSC 1099, [18].

[7] See, generally, Ansett Australia Ground Staff Superannuation Plan Pty Ltd v Ansett Australia Ltd [2002] VSC 576; (2002) 174 FLR 1, 75 [279]; McDonald v Commissioner of Taxation [2005] NSWSC 2; (2005) 187 FLR 461, 467 [19]; Re Mendarma Pty Ltd (in liq) (No 2) [2007] NSWSC 99; (2007) 61 ACSR 601, 610 [45]; Re Windy Dropdown Pty Ltd [2010] NSWSC 1099, [18].

[8] In re Universal Distributing Co Ltd (in liq) [1933] HCA 2; (1933) 48 CLR 171, 174-5; Stewart v Atco Controls Pty Ltd (in liq) ([2014] HCA 15; 2014) 252 CLR 307, 317-8 [11]-[13], [22]-[23].

[9] Both parties relied on passages in Stewart v Atco Controls Pty Ltd (in liq) ([2014] HCA 15; 2014) 252 CLR 307. Timbercorp relied further on an argument by analogy with s 556(1)(a) of the Corporations Act 2001.

[10] See Re Mendarma Pty Ltd (in liq) (No 2) [2007] NSWSC 99; (2007) 61 ACSR 601, 610 [44] for an order made against liquidators personally, limited to their entitlement to be indemnified from the assets of the company. Of course, it cannot be said from this distance, and without hearing argument from affected parties, whether such an order, if sought, would be made.

[11] Smail v Burton [1975] VicRp 76; [1975] VR 776, 778, 780; Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2015] VSCA 169, [14].

[12] Smail v Burton [1975] VicRp 76; [1975] VR 776; Façade Treatment Engineering Pty Ltd (in liq) v Brookfield Multiplex Constructions Pty Ltd [2015] VSCA 169, [17]-[18].

[13] [2015] VSCA 169, [18].