BETWEEN : TRAFALGAR WEST INVESTMENTS PTY LTD AS TRUSTEE FOR THE TRAFALGAR WEST INVESTMENTS TRUST

Corporations Act - Oppression action - Security for costs - Discretion to order - Turns on own facts

Corporations Act 2001 (Cth), s 1335

Plaintiff : Mr S Penglis (pro bono counsel for plaintiff)

1 KENNETH MARTIN J: The defendants apply for security for costs against the corporate plaintiff (Trafalgar) under both s 1335(1) of the Corporations Act 2001 (Cth) and O 25 of the Rules of the Supreme Court 1971 (WA) (RSC).

2 After hearing submissions from counsel for both sides on 27 February 2013, I reserved. Having now given the matter consideration, I am satisfied security for costs should be ordered under s 1335(1) and to resolve the application on that basis. It is therefore unnecessary to consider, in addition, RSC O 25.

3 As a threshold issue, it was not disputed (and I conclude accordingly), I hold the jurisdiction to order security for costs under s 1335(1): see par 30 of the plaintiff's submissions for hearing listed on 9 September 2011.

4 In this action Trafalgar alleges statutory oppression against the defendants in contravention of the Corporations Act. The action is one of three the others being COR 138 of 2010 and COR 76 of 2011 pursued by Trafalgar, a corporation under the Act all of which I case manage in the CMC list. Trafalgar brought the action 'as trustee for the Trafalgar West Investments Trust', although in October 2011 Mr Patrick Jebb, as the Trust's appointor, made himself trustee: see Deed of Change of Trustee, annexure PGJ1 to Mr Jebb's affidavit of 27 October 2011. There followed an unsuccessful application to substitute Mr Jebb in Trafalgar's place as plaintiff, or to have Mr Jebb made a second plaintiff.

5 The relationship of Mr Jebb to the plaintiff is pertinent to this application and is explored further in these reasons. However, for present purposes, I need only note the corporate entity Trafalgar remains sole plaintiff: see Trafalgar West Investments Pty Ltd v Superior Lawns Australia Pty Ltd [No 2] [2012] WASC 169 (Trafalgar [No 2]).

6 I am also satisfied, to paraphrase s 1335(1), that it appears by credible testimony there is reason to believe Trafalgar (ie, the plaintiff) will be unable to pay the costs of the defendants, if they are successful in their defence of this action at trial. The fiscal basis for that finding was not disputed in any material way.

7 There is ample evidence from affidavits affirmed by Ms Nicola Emma Randall (nee Batalin) of 27 July 2011, 8 September 2011 and 8 February 2013, that the legal costs incurred by the defendants to date have been substantial. On the plaintiff's part, Mr Jebb has sworn a number of affidavits, of which the most recent states that Trafalgar as plaintiff has been solely reliant on loans from him. He in turn has been financed by family, friends and colleagues: see par 6 of Mr Jebb's affidavit of 15 February 2013. Indeed, the inability of Trafalgar to fund the level of legal representation required of a corporate litigant by RSC O 4 r 3(2) was a reason why Mr Jebb sought to replace it as plaintiff: Trafalgar [No 2] [6]; see also the affidavit of Alan Hilton Karp sworn 27 September 2011 in support of orders pursuant to RSC O 8 r 7.

8 The remaining central issue, therefore, is whether the court should exercise a discretion under s 1335(1) to order security. The case raises no novel issues in terms of an application of s 1335(1). Hence it is sufficient for me to repeat a helpfully comprehensive recent summary of relevant principles by Allanson J in Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161 (Unified [No 3]):

1. The relevant principles are not in dispute. Once the court has jurisdiction under s 1335, there is an unlimited discretion which is to be exercised considering all of the circumstances of the case. Essentially, the section requires a balance to be struck between protecting the defendant from the possible consequences of being sued by an impecunious corporation with limited liability and avoiding injustice to the corporation by unnecessarily prejudicing it in the conduct of litigation.
2. I approach this matter on the basis that there is not an entitlement to security as of right once the defendant has established that the plaintiff will be unable to pay its costs if the defendant is successful; nor is there a predisposition towards an order for security. In the circumstances of a particular case, however, the fact that the plaintiff is impecunious may be an important factor in determining the application.
3. Further, the court may give weight to the amount of the defendant's loss if the risk materialises.
4. Where those who stand behind the company and would gain from the litigation are financially able to provide adequate security, it is at least a weighty consideration in favour of an order for security. A court is not justified in declining to make an order on the basis that the proceedings will be stultified unless the impecunious plaintiff establishes that those who stand behind it are also unable to provide the requisite security for costs.
5. Where, however, those who will benefit are without means, an order for security may stultify the litigation. Where the plaintiff does establish the possibility of stultification, that is a powerful factor to be taken into account in exercising the court's discretion, although it does not automatically lead to refusal of the order.
6. The effect of the authorities is that a company seeking to resist an order for security on the ground that it will frustrate the litigation must 'raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts'. It is incumbent upon a plaintiff who wishes to resist an application for security to put before the court a full and frank statement of the assets and liabilities of the plaintiff, and also of its shareholders and creditors (if relevant), and, if there are trust assets, of the beneficiaries of the trust. Without that evidence, no conclusion can properly be reached that the effect of an order for security will be to frustrate the plaintiff's claim. In this sense there is an onus on a plaintiff resisting an order for security.
7. Finally, the ability of the defendant to absorb the costs if successful may be a relevant consideration. The court may have regard to the position of the defendant, and may be 'more sympathetic to an application from a respondent with limited funds than a respondent which is a major corporation'. (citations omitted)

9 In exercising this discretion, I will also keep in mind the principles of case management necessarily applicable to the CMC List. I refer in particular to par 6 of Practice Direction No 4.1.2 - the Commercial and Managed Cases (CMC) List:

The general objective of the CMC List is to bring cases to the point where they can be resolved by mediation or tried in the quickest, most cost effective way, consistently with the need to provide a just outcome. The principle of proportionality is applied (O 1 r 4B).

10 The unsatisfactory manner in which this oppression action has been diverted from progressing, up to this point, also presents as a live consideration to be weighed in considering an order for security. As case manager for about two years now, this provides further levels of insight I feel obliged to draw upon.

11 I am satisfied in all the circumstances it is appropriate to order security, but that in view of the clear impecuniosity of Trafalgar and Mr Jebb standing behind Trafalgar, such an order should be tailored to the progress of the action.

12 I am also very concerned by the prolixity of the pleaded action and the delays which have accompanied its progression (more correctly, nonprogression) to this point.

13 The plaintiff's statement of claim currently seeks to ventilate (over 100 pages) (seemingly) some about 41 distinct acts of alleged oppressive conduct. Many of these present as carping or trivial in nature designed to annoy, rather than ventilate a real grievance. It is obvious that these matters require a very heavy pruning by a competent counsel, before the matter approaches a trial. No more than three to five events should be pressed, at most.

14 Security for costs was first raised by application made by the defendants in July 2011. The defendants rely essentially on the written submissions which they made at that time, along with a further affidavit of Ms Randall, affirmed 8 February 2013.

15 I noted at the time I delivered my reasons for decision in Trafalgar [No 2] that this was a 'very complex' statutory oppression action particularly in light of the 'heavily constrained' financial resources of Trafalgar and Mr Jebb: see [12]. Unfortunately, subsequent developments have only reinforced that view.

16 This necessarily raises a prospect of legal costs being a significant burden upon both sides, which makes an exercise of the court's discretion more difficult. As Allanson J recognised in Unified [No 3] at [10], s 1335(1) involves a task of striking a balance between prejudice to the defendant if the plaintiff a limited liability corporate trustee is both unsuccessful and unable to pay the defendants' costs, and the legitimate interests of a plaintiff in pursuing the litigation.

17 Essentially, for similar reasons discussed in relation to jurisdiction, I am satisfied first, the defendants are vulnerable to real financial harm, in the event that the action is formally concluded in their favour, but they are unable to recover taxed costs in their favour. On the other hand, bare impecuniosity in a plaintiff is not of itself a ground to order security. I must give appropriate weight to the plaintiff's legitimate interests in pursuing what is not an untenable cause of action.

18 Again as Allanson J noted in Unified [No 3], to properly assess the risk of litigation being stultified, a court must have evidence of the financial state of those who stand behind the plaintiff corporation. As canvassed above, the plaintiff's sole source of funds is Mr Jebb and, by extension, those from whom he borrows. Mr Jebb is the plaintiff's sole director and holder of half its issued capital: see pars 2 and 6 of Mr Jebb's affidavit of 15 February 2013. In Trafalgar [No 2], I observed Mr Jebb effectively controls the plaintiff in its conduct of these proceedings: [59], [69]. In these circumstances, it is appropriate to take account as well of Mr Jebb's position as the key personality standing behind the plaintiff.

19 In argument, counsel for the defendants took me to a number of unanswered questions which were said to indicate that there had not been 'a full and frank statement' as to Mr Jebb's assets and liabilities, to paraphrase United [No 3]. For the purposes of this application, however, it is sufficient for me to note Mr Jebb restated his willingness to personally meet any costs orders which may be made against the plaintiff: see par 18 of Mr Jebb's affidavit of 15 February 2013.

20 In light of that statement and Mr Jebb's close relationship to the plaintiff, it is difficult to accept in literal terms a statement in the foregoing paragraph of the affidavit that neither he nor the plaintiff, is able to provide 'any' sum by way of security. It appears, rather, that they together would be able to provide some security from time to time as the action progresses and, indeed, counsel for the defendants accepted that this would be the appropriate form in which to make any order, if I was so persuaded.

21 I have, therefore, decided to order the plaintiff to provide, by way of an irrevocable bank guarantee, security for costs totalling $150,000. To militate against the risk of the litigation being stultified, I will order payment shall be rendered in successive tranches as the action advances (hopefully!), with a first tranche ($32,648) assessed by reference to items 1 to 8 of the bill of defendants' costs annexed to attachment NEB4 of the affidavit of Ms Nicola Emma Batalin, affirmed 27 July 2011.

22 The defendants shall have liberty to apply for further orders for payment of each tranche as the action proceeds, with the final payment if any to be made after completion of a mediation.

23 The defendants also have leave to apply to increase the amount of security above $150,000 in the event that figure presents as inadequate, as time passes.