Zaps Transport (Aust) Pty Ltd (in liquidation) (controller appointed) v Catlin Syndicate No 2003

ALLSOP CJ: 1 This is an application for security for costs by the respondent insurers. The security sought is for the costs of the defence to date and for any preparation and hearing of the two separate issues, which have been relevantly identified in case management hearings and work to date. There has also been prepared a statement of agreed facts to found the hearing of those separate issues. The applicant in these proceedings is in liquidation; there is apparently a controller appointed. The sole director of the applicant and the controller appointed are both named Mr John Zappia. In these reasons a reference to Mr Zappia is a reference to the director of the applicant, not the appointed controller. 2 The respondent has submitted that the legitimacy of the appointment of the controller is in some doubt. There has been a body of correspondence about that since the matter was filed earlier this year. For present purposes, I do not place any emphasis on whether there is any doubt about the legitimacy of the appointed controller and I will accept for present purposes that the appointment is legitimate. If it is demonstrated in due course that the appointment is not legitimate and that the purported controller had no instructions and, in effect, no authority to commence these proceedings, there are obvious consequences that will ultimately follow from that. 3 The primary claim flows out of the theft of tobacco products from a bonded warehouse operated by the applicant in two incidents in 2014. In March 2014, the relevant bonded warehouse was broken into and tobacco products were stolen. Later in the year, in August 2014, the bonded warehouse was broken into again and more tobacco products were stolen. The tobacco products were imported by Richland Express Pty Ltd. Following the importation of the dutiable goods into Australia, Richland had placed the goods for storage at the bonded warehouse, where they were held under bond, pursuant to a license issued to the applicant under Part V of the Customs Act 1901 (Cth). The respondents are a collection of syndicates that were the underwriters of two policies of insurance issued to Richland. 4 The financial loss that is sought to be recovered by the applicant under the policies flows from the consequences of section 35A of the Customs Act, which obliges a license holder (and any person entrusted with the possession, custody or control of dutiable goods which are subject to customs control) who fails to account for goods to the satisfaction of the Comptroller General of Customs to pay an amount that equates to the amount of the duty that would have been payable on those goods had they been entered for public consumption. In August and December 2014, the Australian Taxation Office (ATO) made two demands for amounts equivalent to the duty and excise payable on the stolen tobacco products against the applicant, its sole director and the warehouse manager. 5 The first policy, being the policy that covered the first loss during the insurance period 6 May 2013 to 6 May 2014, was described as "Stock Throughput Insurance" for conveyances "per land, water (including barges) or air". The first policy named the assured as: Richland Express Pty Ltd and/or Associated and/or Affiliated and/or Subsidiary Companies and/or Corporations world-wide or as may hereafter be created or constituted and/or for whom the Assured may receive instructions to insure and/or have assumed responsibility to insure. 6 The first policy described the voyage as: At and from any port or ports, place or places in Germany and/or Luxemburg [sic] to any port or ports, place or places in Australia, thence to Westin Tri Star Bonded Warehouse(s) for a period not exceeding 60 days thence in transit to customers in Australia via any route direct or including transhipments. Including risks in customs as required. Including all domestic and/or internal transits as required. 7 Under the interest provision there was as stated: All goods and/or merchandise of every description pertaining to the Assured's business, consisting principally of, but not limited to, Tobacco for which they are responsible, contractually or otherwise. 8 The level of cover in the first policy was significant, being AUD 7 million whilst in the bond store and AUD 2,622,240 in any one conveyance. 9 The first policy contained a duty clause as follows: This Contract also covers subject to the same terms and conditions, the increased value consequent upon payment of duty at destination, it being understood and agreed that where the insurance hereunder continues beyond the time of landing from the vessel or aircraft the said increased value shall then attach in like manner as an additional insurance upon the interest insured from the time of payment of such duty and to the extent of the amount thereof actually paid. 10 The choice of law and jurisdiction clause was as follows: This contract is subject to Australian law, including the Marine Insurance Act 1909. It is also subject to the exclusive jurisdiction of the courts of Australia. In some cases the Insurance Contracts Act may apply. 11 The second policy, described as "Marine Stock Throughput Insurance", was from 11 July 2014 to 11 July 2015 and thus covered the date of the second theft at the bonded warehouse. The second policy named the insured as: Richland Express Pty Ltd and/or their Subsidiary and/or Associated and/or Affiliated Companies and/or Joint Venture Companies and/or Partnerships as they are now or may thereafter be created and/or constituted and/or for whom they may have instructions to insure and/or for whom they have or assume a responsibility to arrange insurance, as their respective rights and interests may appear - hereinafter known as the Insured. 12 The relevant clauses in the second policy were similar in substance to the first policy, as described above. But it is to be noted that the limits of liability in respect of tobacco only whilst in the bond store had been increased to AUD 25 million. 13 The issues that have been identified for early determination are whether the Marine Insurance Act 1909 (Cth) applies and, if it does not, whether the applicant, by reason of section 48 of the Insurance Contracts Act 1984 (Cth), was entitled to make a claim for loss under the policy as an interested third party. 14 The respondents' reliance upon the Marine Insurance Act is based on the fact that there is no equivalent to section 48 in the Marine Insurance Act. The respondents say that the applicant is not a named insured under the policies. It may not be necessary, ultimately, to come to assess the strength of the case in this application, but perhaps at the outset I should say that there do appear to be some difficulties for the applicant in relation to the claim. But based on the materials that I have looked at so far, one cannot dismiss the claim as hopeless. That said, it faces some hurdles. 15 There is no doubt that the applicant is not in a position to satisfy an order for costs. That was made plain by Mr Hall, the solicitor for the applicant who has carriage of the matter and who argued this application. He made that plain to Mr Luxford, the former solicitor with carriage of the matter for the respondents, on 6 May 2020. The interlocutory application for security for costs was foreshadowed by the respondents at an early point in time and has relevantly been brought on with prompt despatch. There have been debates between the legal representatives, conducted if I may say so in a civilised fashion, about documents seen to be relevant that have taken up some time in bringing the matter to Court. Also, if I may say so, sensibly, the parties have, notwithstanding the anticipated security for costs application, brought the matter to an appropriate stage by reference to the agreed issues and a helpful agreed statement of facts. On that basis I would certainly permit the application to be seen as legitimately covering at least a good proportion of the costs that have been expended. It is anticipated by the parties that the case on the separate issues would take no more than a day; I think that is a sensible estimate. Counsel for the respondents, Mr McHugh, indicates that, even if the separate issues are answered favourably to the applicant, that may not be the end of the defence. That is understood and the parties have thought it appropriate to bring forward the separate issues in conformity with the spirit of the Insurance List. 16 Nevertheless, this application is one for security and is subject to the considerations to which I will come. Section 1335(1) of the Corporations Act 2001 (Cth) enlivens the discretion to grant security, that section stating: 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. 17 The solicitor for the respondents, Mr Hetherington, has sworn an affidavit setting out the history of the matter, which I do not need to deal with other than to say the following in relation to the usual factors for consideration which can be taken into account, which were set out by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; 56 FCR 189 at 197-198. The first of those considerations is whether the applicant's impecuniosity was caused by the respondents' conduct. Properly analysed here, I do not think it can be stated so. The particular claim by the applicant on the respondents was not made until this year. The applicant went into liquidation in November 2016. The thefts took place and the ATO made demands pursuant to the Customs Act against the applicant in 2014. Richland, being the named insured, was sought to be made responsible to the applicant in a claim which failed in the Supreme Court of New South Wales. The applicant and Mr Zappia have been involved in litigation concerned with the sequelae of these thefts for some time. 18 There is no evidence before me that sets out the historical financial position of the applicant. It is therefore difficult to conclude that the failure of the insurer to pay under the policy is a reason for the financial impecuniosity of the applicant. A further factor is that the claim of the applicant is made not as an insured but as a third party by force of the effect of section 48 of the Insurance Contracts Act. That claim was not made until some years after the liquidation of the applicant. 19 As to the strengths and weaknesses of the applicant's case, it is sufficient to say that it has real problems, although I am not prepared to conclude that it could not succeed. I do not think it is appropriate that I further comment on the doubtful strength of the case, given what I said in All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited at [75]-[77] to the effect that the Court should not predetermine the respondents' liability for the applicant's losses where that very liability is what is in issue in the proceeding and there is no evidence to suggest that an order for security for costs will stultify the proceeding. Thus I do not place any real weight on the proposition that the respondents are the cause of the applicant's impecuniosity. 20 The respondents' application for security for costs is in the sum of $50,000. There is evidence from Mr Hetherington in his affidavit as to the sums expended in the case to date and the likely costs in the future. Sums in the order of $40,000 to $50,000 have been spent to date and Mr Hetherington indicates in his affidavit that the preparation of the case in the form of the separate issues will in all likelihood cost another $40,000 to $50,000. Thus it is submitted by the respondents that the sum requested of $50,000 is not oppressive. I would accept that it is not an oppressive request. Whether or not in all the circumstances $50,000 should be the amount ordered is an issue to which I will come. 21 Importantly, there is no real evidence upon which I can be clear that those who stand behind the applicant do not have the ability to contribute to the security for costs: see Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCAFC 29; 2 FCR 1 at 4 (per Sheppard, Morling and Neaves JJ). There has been no evidence filed about the financial position of those who stand behind the applicant. It is a matter for the applicant company to persuade the Court of the financial position of those standing to benefit from the action. I am prepared to accept that the applicant itself is entirely impecunious. The evidence of Mr Hetherington and the documents annexed to his affidavit, which were obtained from the applicant, help one to understand that there has been a deed of assignment of debt and securities from a former financier, Hermes Capital Australia Pty Ltd, who gave financial accommodation to the applicant in 2015. The debt and securities were assigned to two companies and Mrs Rose Zappia, the wife of Mr Zappia. 22 The addresses of those companies in the deed of assignment do not, on their face, make it clear whether they are Mr and Mrs Zappia's corporate creatures, if I may use that expression without any intended disrespect. But in answer to an order made by the Court for the applicant to disclose who is standing behind it and who stands to benefit from this litigation, Mr and Mrs Zappia were identified. The position of Mr and Mrs Zappia, as best can be obtained from an email sent by Mr Hall to Mr Hetherington on 4 August 2020, is as follows: Each of John Zappia and Rose Zappia (married) are the persons that will in fact benefit from this litigation. John Zappia had been a guarantor of the facilities that were assigned when they were paid out. Rose Zappia was one of the assignees of the secured creditor at the time that the facilities were paid out. The other assignee parties are related commercial parties, but as a practical matter the parties benefiting will be John Zappia and Rose Zappia. Rose Zappia has no independent means of financial support beyond that of Mr John Zappia (not the person appointed as controller, but the other Mr John Zappia). Mr John Zappia's estate was placed into bankruptcy (although he is now discharged), and to a large degree his problems may be traced to the claims arising in these proceedings. He was found to have been in control of the goods for the purposes of Section 35A of the Customs Act and was held jointly liable for the same debt. 23 That said, I do not have any evidence from Mr and Mrs Zappia as to their financial position, nor any evidence as to the financial position of the other assignees from the previous creditor who may, on the evidence, stand to benefit from the action. 24 In all these circumstances, I am prepared to order, and I consider it just to order, that a reasonably modest sum be required to be given as security for the costs of the respondents for the separate issues. I am prepared to discount some reasonable proportion of the costs spent to date, not through any criticism of Mr Luxford's conduct of the matter prior to his retirement and Mr Hetherington taking over, but rather that some such body of costs, in a sense, are part of the ordinary course of business of underwriters in responding to claims. But taking some proportion of those costs and taking a realistic view as to an efficiently parsimonious, if I may use that expression, conduct of the proceeding, I think a sum of $40,000 would be reasonable and just. 25 In these circumstances, I will order that the applicant give security for the costs of the respondents up to and including the resolution, at first instance, of the separate issues in the sum of $40,000 in a manner and form that is acceptable to, in the first instance, the respondents, and if there is a dispute about the form, the Court. Should the security not be provided within a reasonable time, and in any event no later than 30 October 2020, I will hear the parties very briefly as to the consequences. But as presently minded, I would stay the proceeding and thereafter give leave to the respondents after a reasonable time of the stay to have the proceeding dismissed. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Chief Justice Allsop.