Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd - [2016] SASC 60

SUPREME COURT OF SOUTH AUSTRALIA
(Appeal from a Master: Civil)
ADELAIDE (SA POOLS & SPA) MANUFACTURING AND INSTALLATION PTY LTD & ORS v WESTCOURT GENERAL INSURANCE BROKERS PTY LTD
[2016] SASC 60
Judgment of The Honourable Justice Doyle
5 May 2016
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS
The appellants commenced proceedings against the respondent claiming that a company, which was the respondent's authorised representative, failed to provide them with appropriate insurance advice. As a result, the appellants complain that they were underinsured. The respondent made an application that the appellants provide security for costs. A Master of this Court allowed the application.
The appellants appeal against the Master’s order, challenging the Master’s approach and conclusions in relation to the merits of the proceedings, the risk of stultification of the litigation, and the cause of the appellants’ impecuniosity.
Held (per Doyle J), dismissing the appeal:
1. No error in the exercise of the Master’s discretion has been established.
Supreme Court Rules 2006 (SA) r 194(1); Corporations Act 2001 (Cth) s 1335 s 439A, referred to.
IceTV Pty Ltd v Ross [2007] NSWSC 1232; Duke Holdings Ltd v Duke Group Ltd [2009] SASC 245, discussed.
Dictating Machine Centre Pty Ltd v Combe (1981) 26 SASR 316; Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523; Unified Pty Ltd v The Cancer Council of Western Australia Inc (No 3) [2011] WASC 161; Goldedge Holdings Pty Ltd v Liquor and Gambling Commissioner (No 2) [2015] SASC 81; House v The King (1936) 55 CLR 499; Gartner v Ernst & Young (No 3) [2003] FCA 1437; Success 618 Pty Ltd v New Zealand Natural Pty Ltd [2015] SASC 182; Cody v Live Board Holdings Ltd [2015] NSWSC 1790; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276 ; Madgwick v Kelly (2013) 212 FCR 1; Ariss v Express Interiors Pty Ltd [1996] 2 VR 507; Kavcor Pty Ltd v Kavanagh [2005] NSWSC 1163; Haskins Contractors Pty Ltd v Sydney Airport Corporation Ltd [2002] NSWSC 267; Del Bosco v Outtrim [2008] NSWSC 105; Octocane Pty Ltd v SRJ Property Development Pty Ltd (1999) 74 SASR 471, considered.

ADELAIDE (SA POOLS & SPA) MANUFACTURING AND INSTALLATION PTY LTD & ORS v WESTCOURT GENERAL INSURANCE BROKERS PTY LTD
[2016] SASC 60
Master’s Appeal: Civil
DOYLE J:

This is an appeal from a Master’s order that the first to fifth appellants (the first to fifth plaintiffs) provide security for the second defendant’s costs by paying $150,000 into the Suitors’ Fund.
Background
There are six plaintiffs in this matter. The first five are corporate entities, and the sixth plaintiff (Mr Elliott) was a director of each at the relevant time.
The first plaintiff was the manufacturer of fibreglass pools and spas at a factory premises in Burton. The second plaintiff conducted a business selling the pools and spas made by the first plaintiff. The third plaintiff was the owner of the factory and show room premises from which the first and second plaintiffs conducted their business. The fourth plaintiff conducted a business constructing temporary pool fencing. The fifth plaintiff was the supplier of solar heating products, and supplied those products in relation to pools and spas manufactured by the first plaintiff and sold by the second plaintiff. The corporate plaintiffs are collectively described in the pleadings as the ASA Group.
The first defendant was a company which provided financial advice and was an authorised representative of the second defendant. It was deregistered by ASIC on 17 November 2012, and hence ceased to exist. The second defendant relevantly conducted business as a general insurance broker and was the holder of an Australian Financial Services Licence.
The essence of the claim brought by the plaintiffs is that Mr Olbrich, who was the plaintiffs’ relevant contact at the first defendant, failed to provide the plaintiffs with appropriate advice as to their insurance requirements for the businesses that the plaintiffs were conducting. As a result, the plaintiffs allege that they were underinsured.
Importantly, given that the first defendant is deregistered, the second defendant is said to be liable for the conduct of the first defendant (through Mr Olbrich). This is not in dispute.
In January 2010 there was a fire at the factory which caused considerable damage. The factory was put out of commission and did not recommence manufacturing. The insurers paid the sum of $2,474,710 to the first plaintiff in respect of damage caused by the fire. The money was apparently used in the ongoing running of the business, rather than in any attempt to restore the manufacturing capacity of the first plaintiff.
The first, second and third plaintiffs were ultimately placed into administration in September 2012, and each entered into a deed of company arrangement (DOCA) with their creditors in November 2012. The companies have not been wound-up. It is clear, and conceded, that each of the plaintiffs, including Mr Elliott, is impecunious.
The application for security
The application for security for costs invoked rule 194(1) of the Supreme Court Rules 2006 (SA) and s 1335 of the Corporations Act 2001 (Cth).
Rule 194(1)(e) provides that the Court may order a plaintiff to provide security for costs if the order is authorised by statute. In relation to a corporation, an order may be authorised under s 1335 of the Corporations Act. Section 1335(1) provides:
Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdictions 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, requires sufficient security to be given for those costs and stay all proceedings until the security is given.
In this case there is no dispute that there is reason to believe that the corporate plaintiffs will be unable to pay the costs of the second defendant if it is successful in its defence, such that the threshold requirement under s 1335(1) was made out, and the jurisdiction to order security for costs enlivened.
Nor is there any dispute that the Court’s discretion to order security is wide and unfettered, but must be exercised judicially, having regard to the considerations which are appropriate to the subject matter of the discretion. There is no predisposition in favour of, or against, requiring security. The Court must balance the potential hardship or injustice a defendant may suffer if there is no security for its costs against the hardship or injustice the plaintiff may suffer if required to give security.[1]
[1] Dictating Machine Centre Pty Ltd v Combe (1981) 26 SASR 316 at 320.
The Master’s reasons
The Master commenced by correctly noting that there are a number of established principles relevant to the exercise of the discretion to order security for costs, that the weight to be given to those factors will vary from case to case, and that the existence of one or other factor is not usually decisive.
The Master also observed that satisfaction of the jurisdictional question (ie impecuniosity) was itself a significant reason to exercise the power to order security.[2] The reason for this is that the power to order security exists for the purpose of protecting the defendant against the very risk which must be shown to exist before the power can be exercised. His Honour also explained that applications for security for costs against corporations raised different considerations to those that arose in the case of plaintiffs who are natural persons.[3] The reason for this is that an individual who conducts their business affairs through a corporation without assets would, in the absence of a power to order security, be in a position to expose their opponent in litigation to significant cost without placing their own assets at risk. The purpose of the power to order security is to require that those who stand to benefit from the litigation bring their own assets into play.
[2] Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [19].
[3] Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 at 532.
The Master noted that the plaintiffs opposed the making of an order for security for costs in this case on three bases, namely:
1.   the plaintiffs have a meritorious claim and ought to be entitled to pursue it;
2.   if security for costs is ordered, the action will be stultified; and
3.   the plaintiffs’ impecuniosity was caused by the conduct of the defendants.
In relation to the merits of the plaintiffs’ claim, the Master reasoned:
The plaintiffs’ case appears to be relatively straightforward. The plaintiffs were reorganising their finances with BankSA in late 2009. At that time there were discussions about their insurance requirements. If it is the case the advice that was provided was defective, the plaintiffs may well succeed in this action. It is clearly an arguable case.
However, the same could be said of the defence. In short, the defence is that the sixth defendant was always concerned about the amount of premiums that were being paid and, accordingly, the insurance coverage was provided to fall within the premium range that the plaintiffs were prepared to pay. It is also pleaded in the defence that Mr Olbrich sought instructions in late 2009, from the sixth plaintiff, to increase the level of insurance coverage, but the sixth plaintiff failed to provide instructions to do so. The defendants say it is for that reason, and not for any reason of inadequate advice, that the first plaintiff was underinsured.
In the result, it seems that the strength of the case and the strength of the defence neutralise each other. The strength of the case is a neutral factor on the question of security for costs.
The Master then addressed the plaintiffs’ contention that if security were ordered the action would be stultified. The Master noted the paradox that arises in applications of this nature that the same circumstance which gives rise to the Court’s jurisdiction to make an order for security for costs, namely a plaintiff company’s lack of funds, also gives rise to reason not to make such an order because to do so will mean that the litigation will be stultified. His Honour referred to authorities[4] to the effect that in considering the issue of stultification it is necessary to consider the ability of those who stand behind, or stand to benefit from, the litigation to provide the contemplated security. In the case of a corporate plaintiff this may require consideration of the position of the shareholders and creditors, and if the corporation is a trustee, of the assets and beneficiaries of the relevant trust. There is an onus on the party resisting an order for security to establish stultification, and this will usually require full and frank disclosure of the assets and liabilities of the plaintiff and those who stand behind it or stand to benefit from the litigation.
[4] Unified Pty Ltd v The Cancer Council of Western Australia Inc (No 3) [2011] WASC 161 at [15]; Goldedge Holdings Pty Ltd v Liquor and Gambling Commissioner (No 2) [2015] SASC 81 at [32].
Applying these principles to this case, the Master accepted that the plaintiffs have no money. The Master said that the proceedings were being run not for the benefit of the first two plaintiffs. Rather, those who stood to gain from any success in the litigation, after the payment of legal costs, were the administrators and the creditors. However, the Master concluded that there was no proper evidence as to the capacity of any of those parties to fund wholly or in part these proceedings, or to provide security for the second defendant’s costs. Accordingly, his Honour held that the plaintiffs had failed to discharge their onus of establishing likely stultification in the event of security being ordered.
Finally, in relation to the issue of whether the plaintiffs’ impecuniosity was caused by the conduct of the defendant, the Master acknowledged that this was the subject matter of the action. His Honour had earlier in his reasons said that “while it can cogently be argued that it was the conduct of [the first defendant], or at least the conduct for which [the second defendant] is liable, that caused the impecuniosity of the plaintiffs, the position is not clear.” His Honour added:
The cause of the financial failure of the two plaintiffs is likely to be complicated as the second plaintiff, in particular, traded for more than two years after the fire that caused the destruction of the first plaintiffs’ factory. Further, if the defendants’ position that the sixth [plaintiff] simply failed to follow advice to increase insurance cover is made out at trial, then the cause of the failure of the first two plaintiffs was simply the failure of their director to act prudently.
The Master concluded that in the circumstances of this case, the justice of the situation required an order for security for costs.
The appeal
The appellants challenge the Master’s approach and conclusions in relation to each of the issues of the merits of the proceedings, stultification of the litigation, and causation of the plaintiffs’ impecuniosity.
Before addressing the appellants’ submissions in relation to these issues, it is relevant to observe that the decision of the Master was a discretionary one, such that the appeal is subject to the principles in House v The King.[5]Accordingly, the appellant must establish that the Master acted on a wrong principle, allowed extraneous or irrelevant matters to guide or affect him, mistook the facts or did not take into account some material consideration. Alternatively, the appellant must establish that the result embodied in the orders made is, upon the facts, unreasonable or plainly unjust, such that it can be inferred that there has been a failure to properly exercise the relevant discretion despite the precise nature or source of the error not being identifiable.
[5] House v The King (1936) 55 CLR 499 at 504-505.
Two preliminary matters
Two preliminary matters arose on the hearing of this appeal.
The first related to some objections that were taken below to certain passages from the affidavit of the sixth plaintiff, Mr Elliott. Most of these objections were to Mr Elliott’s evidence in relation to the financial performance and position of the plaintiffs, one was in relation to Mr Elliott’s assertion of the causal consequences of the fire and underinsurance, and one was in relation to Mr Elliott’s evidence to the effect that other unsecured creditors were unable to fund the litigation.
I understand that the second defendant withdrew its objection to the evidence as to the causal consequences on the basis of a concession by the plaintiffs that the evidence was only led to establish the temporal sequence of the relevant evidence. The remaining objections were pressed on the basis that the impugned evidence was of a hearsay nature, with its source not disclosed.
The Master did not formally rule on the objections. I infer that he received the entirety of Mr Elliott’s affidavit, treating the objections as going to the weight of the evidence. While hearsay evidence is potentially admissible in interlocutory hearings, it is usually a precondition to its receipt that its source be disclosed. A strict analysis might have resulted in the evidence being excluded, but in my view the pragmatic approach taken by the Master was appropriate given the nature of the evidence objected to and the matters in issue. In any event, as there is no ground of appeal challenging his Honour’s rulings on the evidence, I do not need to consider the issue further. I will address his Honour’s approach to the evidence in the context of the various factual issues raised in the notice of appeal.
The second preliminary matter is that the Master mistakenly referred early in his reasons to the fourth and fifth plaintiffs as deregistered. In so doing, the Master overlooked an affidavit filed shortly before the hearing which deposed to those companies having been re-registered. While this error was unfortunate (albeit understandable given the late affidavit), I do not think it affected the approach the Master took to the exercise of his discretion to order security. On the assumption that the fourth and fifth plaintiffs were deregistered and hence did not exist or own the causes of action pleaded on their behalf, his Honour essentially put them to one side and focused upon the position of the balance of the ASA Group (ie the first to third plaintiffs).
In my view, adding the fourth and fifth plaintiffs to the analysis would not have altered the approach or outcome. The position of those plaintiffs was no stronger (and, indeed, was probably weaker) than that of the first three plaintiffs. The fourth and fifth plaintiffs are clearly impecunious. The causes of action pleaded in the statement of claim were pleaded globally on behalf of all plaintiffs, as members of the ASA Group. The second defendant contends that the claims of the fourth and fifth plaintiffs are weak relative to the other plaintiffs’ claim. While there is some ambiguity in the pleadings about the basis for the claimed duties, causes of action and losses pleaded on behalf of the fourth and fifth plaintiffs, it is sufficient for present purposes that I am satisfied that their claims are no stronger than those of the first to third plaintiffs.
In summary, given the plaintiffs’ approach of grouping the claims of the members of the ASA Group, it was appropriate for the Master to treat the application for security as one against all of the corporate plaintiffs as members of the ASA Group. Having approached the matter in this way, his Honour’s mistaken reference to the fourth and fifth plaintiffs as deregistered was of no consequence. In my view, it does not provide a basis for me intervening and exercising the discretion afresh.
Merits of the plaintiffs’ claim
The plaintiffs’ contentions under this heading on appeal are that the Master failed to give sufficient weight to their evidence when assessing the merits of the case, and in concluding that the second defendant’s pleaded defence was as strong as the claim made by the plaintiffs such that they neutralised each other. They contend that the Master should have concluded that the plaintiffs had a case which was strong, or at least stronger than the defence case, and hence that the merits of their claim was a factor weighing against the ordering of security rather than a neutral factor.
In support of their contention that they have a strong case, the plaintiffs point to various matters, most of which arise from the affidavit of the sixth plaintiff, Mr Elliott, and the exhibits to that affidavit.
First, Mr Elliott refers to his attempts to obtain refinancing on behalf of the plaintiffs’ businesses through BankSA in late 2009. He exhibits some November 2009 email communications in this context between an officer of BankSA and Mr Olbrich which identified some potential underinsurance, including in respect of the factory premises. Mr Elliott deposed to a meeting to discuss this issue, and although Mr Elliott does not directly say so in his affidavit, the plaintiffs’ pleading alleges that Mr Elliott made it plain to Mr Olbrich that he wanted to ensure the plaintiffs had adequate cover, and that Mr Olbrich said that he would review the cover and ensure that it was complete and adequate.

Secondly, Mr Elliott exhibits an expert report from Mr Parnell, an insurance broker. In that report Mr Parnell expressed a number of opinions to the effect that Mr Olbrich fell short of the standard expected of a reasonably competent general insurance broker, and that the insurance cover which he obtained was insufficient and inadequate.
The second defendant did not put on any evidence in relation to the merits. It relied on its pleaded defence to the effect that Mr Elliott was a skilled businessman who had sufficient knowledge to make his own insurance decisions, and that he had at various time during the relevant period rejected or ignored advice given by Mr Olbrich, based primarily on cost. It was pleaded that rather than Mr Olbrich saying he would ensure adequate cover, Mr Elliott gave his own instructions in relation to the insurance cover required which placed a limitation on premiums to be paid.
The plaintiffs’ contention was that the Master erred in not having regard to the evidence summarised above. They further contended that the Master should have also had regard to the implausibility of the second defendant’s pleaded case, and the absence of any affidavit evidence from Mr Olbrich to support the denial of Mr Elliott’s version. The plaintiffs also emphasised the second defendant’s failure to disclose the documents which it (through it lawyers) had suggested in correspondence that it had and which supported its case as to the proper characterisation of the dealings between Mr Elliott and Mr Olbrich. The plaintiffs contended that had the Master had proper regard to these matters he would have formed the view that the plaintiffs had a strong case, and that this was a factor weighing against security being ordered rather than a neutral factor.
There is no doubt that some consideration of the merits of the plaintiffs’ claim was appropriate, and a relevant consideration. That said, the authorities counsel against undertaking too fine or detailed an analysis of the merits.[6] For example, in IceTV Pty Ltd v Ross,[7] Bereton J said:[8]
However, generally speaking, on an application for security for costs, a Court should not descend to too fine a balancing of the strength of the respective cases. There is obviously a very strong case for security if a plaintiff’s case appears practically untenable, and a weak case for security if it seems that a plaintiff’s case will almost certainly succeed; but short of cases at those extremes, courts are not much influenced by the relative strength of a case on an application for security. One powerful reason for that is that a preliminary assessment of the strength of a case may turn out to be incorrect. I think it is clear that, although I have found the plaintiff’s case to be in some respects strongly arguable, the defendants’ case is not untenable. I therefore do not think that questions of relative strength of the case weigh strongly on the issue of security.
[6]    Gartner v Ernst & Young (No 3) [2003] FCA 1437 at [10]; Success 618 Pty Ltd v New Zealand Natural Pty Ltd [2015] SASC 182 at [10].
[7]    IceTV Pty Ltd v Ross [2007] NSWSC 1232.
[8]    IceTV Pty Ltd v Ross [2007] NSWSC 1232 at [14].
Other cases have gone further and suggested that the Court should not generally proceed beyond satisfaction that the claim is bona fide and has reasonable prospects of success, such that the merits of the claim is generally a neutral consideration.[9]
[9] Cody v Live Board Holdings Ltd [2015] NSWSC 1790 at [109]; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 at [37]-[38]; Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276 at [83].
In my view, particularly bearing in mind the unfettered nature of the discretion, the appropriate approach to the merits of a case will depend upon the nature of the case and the evidence available to the Court. In some cases the issues may be so narrowly defined or clear that it is possible to form a view about the strength or weakness of a particular claim. In those cases, the merits may weigh quite heavily in favour or against an order for security. However, it will often be the case that it is neither practical nor desirable for the Court to go further than satisfying itself that the claim has reasonable prospects of success. That will generally be so where the claim is complicated or turns on disputed questions of fact (particularly where they are likely to involve issues of credit).
In my view, it was appropriate for the Master to treat this as an example of the latter kind of case. While the plaintiffs’ claim has at least reasonable prospects of success, I do not think it was necessary or appropriate for his Honour to go further than this, either in terms of the detail of his consideration of the issue or the conclusion he reached. I do not think it was necessary for his Honour to do more than undertake the general review of the evidence that his reasons indicate he did undertake. While his Honour did not refer in terms to the features of the evidence that I have summarised, there is no reason to doubt that the Master had at least a general regard to the entirety of Mr Elliott’s affidavit. In the passage from his reasons extracted earlier in these reasons, the Master accurately summarised the key issues arising in the dispute between the parties. In my view, this was sufficient. It was not necessary to descend to an analysis of the evidence.
In any event, in the circumstance of this case, I do not think the evidence permits a finding that the plaintiffs have a strong claim, as opposed to one that has at least reasonable prospects of success. While the essential thrust of the plaintiffs’ claim is clear, and appears conceptually sound, it will turn to some extent upon resolution of the competing versions of the relevant dealings and discussions that will likely be the subject of evidence from Mr Elliott and Mr Olbrich. It is relevant that Mr Olbrich has not at this stage deposed to the defendant’s version of those dealings and discussions, but I do not think that is a matter of great moment given the timing and nature of this application, and the fact that the effect of those dealings and discussions is set out in the defence. I do not accept that the defence version is so implausible as to warrant me concluding that it is doomed to fail, or even unlikely to succeed.
In the circumstances, I do not consider that the Master erred in his approach to the merits of the claim, or in his conclusion that this was a neutral factor.
Stultification of the litigation
It is well recognised that if a plaintiff can establish that an order for security would frustrate or stultify the litigation, then this is a factor which weighs against the Court exercising its discretion to order security. It is also well recognised that in considering the issue of stultification the Court must have regard not only to the capacity of the named plaintiff to provide the contemplated security, but also the likely capacity (or, in some cases, willingness) of those who stand behind the plaintiff, or otherwise stand to benefit from the litigation if it succeeds, to do so. Further, it is for a plaintiff seeking to resist an order for security to prove and establish likely stultification, and this usually requires full and frank disclosure of the assets and liabilities of the relevant people or entities.[10] Proof of stultification does not, of itself, warrant the refusal of an application for security, but it will usually operate as a powerful factor against security being ordered.[11]
[10] Goldedge Holdings Pty Ltd v Liquor and Gambling Commissioner (No 2) [2015] SASC 81 at [32].
[11] Duke Holdings Ltd v Duke Group Ltd [2009] SASC 245 at [22].
The plaintiffs contend that the Master made two errors in his consideration of this issue. First, that he erred in finding that the litigation was being pursued for the benefit of the lawyers, administrators and creditors, and not the first and second plaintiffs. Secondly, that he erred in finding that the plaintiffs did not discharge their onus of proof in respect of the incapacity of the administrators and creditors to fund the litigation or security.
As to this first issue, the appellants rely upon the following passage from the Master’s reason:
It can be seen that this litigation is being pursued not for the benefit of the first two plaintiffs but rather, as set out in clause 11 above, the lawyers, Administrators and, finally, if there are sufficient funds, the creditors of those plaintiffs.
This passage followed immediately after the Master’s summary of various matters arising out of the administrators’ report under s 439A of the Corporations Act, and the provisions in clause 11 of the DOCAs as to the distribution of any proceeds from this litigation. Read in this context, I do not understand the above sentence from his Honour’s reasons to be any more than a summary of the effect of the DOCAs as to the sequence of distribution of the proceeds of the litigation. I do not understand his Honour to have intended to suggest or imply that there was anything inappropriate or untoward in the motivation or reasons for pursing this litigation.
The plaintiffs challenge his Honour’s suggestion that the litigation is not being pursued for the benefit of the first two plaintiffs. They point out that those companies will benefit in the sense that if successful in the proceedings they will have their indebtedness extinguished and they will be compensated for the loss caused by the second defendant. But I do not interpret his Honour as suggesting anything contrary to this. In my view, his Honour was simply making the point that given the order in which any proceeds would be distributed, the litigation could not be said to be motivated by a potential financial benefit to the shareholders of the first and second plaintiffs.
The plaintiffs criticised his Honour’s reference to the creditors being benefited only “if there are sufficient funds”, adding that the evidence suggested that the quantum of the claim was sufficient that there would very likely be a return to creditors in the event the litigation succeeded. Again, I do not understand his Honour’s reference to “if there are sufficient funds” as involving any implicit criticism or otherwise suggesting that it was unlikely that the creditors would benefit. To the contrary, later passages in his Honour’s reasons suggest that his Honour did accept that the creditors were likely beneficiaries of the litigation. I interpret his Honour’s reference to “if there are sufficient funds” as merely making the obvious and accurate point that any proceeds from the litigation will need to exceed the quantum of the lawyers’ and administrators’ fees before there will be a benefit for the creditors.
Finally in relation to this passage from the Master’s reasons, I also do not understand his Honour to have made or intended any implicit criticism of the lawyers for conducting the litigation on a speculative basis. Nor do I think that the Master erred in referring to the litigation as being pursued for the benefit of the lawyers.
In challenging the Master’s reference to the lawyers benefiting from the litigation, the plaintiffs rely upon Madgwick v Kelly[12] as authority for the proposition that when considering who stands to benefit from litigation for the purposes of determining the issue of stultification, the recovery by lawyers of professional fees (even if recovered under a contingency agreement allowing for some uplift) is not a “benefit” in the relevant sense. Accordingly, it is not relevant on the issue of stultification to consider the capacity or preparedness of the lawyers to provide security. But in this case the Master’s reference to the lawyers benefiting was not made in the context of his Honour’s consideration of the issue of stultification. When his Honour later addressed the issue of stultification he confined his consideration of those able and prepared to fund the security to the administrators and creditors, without making any suggestion that he needed to be satisfied as to the lawyers’ capacity or preparedness to do so. Read in context, his Honour’s reference to the lawyers benefiting was a reference merely to the financial reality, confirmed by the terms of the DOCAs that they would receive payment of their professional fees if the claim succeeded. His Honour treated this as a background matter, and not something that weighed in the exercise of the discretion in any material way.
[12] Madgwick v Kelly (2013) 212 FCR 1.
As to the Master’s consideration of the issue of stultification, I do not think the plaintiffs have established error.
It being accepted that all plaintiffs were impecunious, the Master correctly focused on the evidence of the administrators and creditors as to their ability to fund, or arrange the funding of, the security in the event it was ordered. The Master was correct to state that there was no proper evidence as to the capacity of the creditors to fund the security.
On appeal, the appellants’ submission focused more on the unwillingness, or likely unwillingness, of the creditors to fund the litigation, rather than their capacity to do so. While usually the authorities speak in terms of, and require, proof that the beneficiaries of the litigation cannot, as opposed to will not, fund the litigation, there is some support for the relevance of the “commercial impracticability” of the creditors contributing to the cost of the litigation.[13]
[13] Ariss v Express Interiors Pty Ltd [1996] 2 VR 507 at 515-516.
However, while accepting the potential relevance of this consideration, it will generally need to be established through evidence as to the approaches made to creditors (particularly the larger ones) with request for support.[14] In support of their submission of commercial impracticability in this case, the appellants rely upon the evidence from Mr Elliott to the effect that the secured creditor (BankSA) has declined to fund the litigation. As to the remaining creditors they rely upon inferences that they contend can be drawn from the size or identity of the creditors as to their likely unwillingness to contribute to the cost of the litigation. While it can safely be inferred that many of the smaller unsecured creditors would be unwilling to contribute, I do not think it can be safely inferred that none of the larger creditors would contribute. In this context, it is relevant that the contribution required would likely be confined to the amount of the security ordered rather than the entire cost of the litigation, given that the second defendant’s lawyers have agreed to conduct the litigation on a speculative basis.
[14] Ariss v Express Interiors Pty Ltd [1996] 2 VR 507 at 516-517.
The evidence in relation to BankSA was merely that it had declined to provide “litigation funding for this claim”. Not only is this evidence very general, it does not squarely address the possibility of BankSA contributing merely to any security that might be required. Nor is there evidence of any approach to the other creditors in respect of this issue. In circumstances where the claim is one with at least reasonable prospects of success, and where the quantum if successful is likely to be significant, I do not think it can be assumed or inferred that none of the creditors would be prepared to contribute to the cost of the security ordered by the Master.
In the circumstances, I am not satisfied that the Master erred in concluding that the contention of stultification was not supported by proper evidence.
Further, and in any event, I agree with the Master’s additional observation that it was relevant in this case that the creditors had (upon the recommendation of the administrators) quite intentionally opted to pursue this litigation through the DOCAs (with the lawyers acting on a speculative basis) rather than placing the plaintiffs into liquidation and pursing the claim with the assistance of litigation funding.
There are several authorities which have recognised that in the context of essentially commercial claims such as the present, the possibility of litigation funding should be considered before a conclusion of stultification can be reached.[15] In particular, in Duke Holdings Ltd v Duke Group Ltd,[16] White J held that in order to establish stultification of commercial litigation, a plaintiff should adduce cogent evidence explaining why commercial litigation funding is either unavailable or inappropriate.
[15] Duke Holdings Ltd v Duke Group Ltd [2009] SASC 245 at [37]-[45]; Kavcor Pty Ltd v Kavanagh [2005] NSWSC 1163 at [14]; Madgwick v Kelly (2013) 212 FCR 1 at [76]-[78].
[16] Duke Holdings Ltd v Duke Group Ltd [2009] SASC 245 at [40], [45].
Here, far from there being evidence that litigation funding was likely to be unavailable, the administrators’ report to the creditors recommending the DOCAs assumed that such funding would likely be available. A conscious decision or choice was made, however, not to pursue litigation funding because the preparedness of the lawyers to act on a speculative basis meant that the cost of a funder (which would likely involve surrendering a significant percentage of the proceeds of any litigation) could be avoided. In my view, while this choice or decision was reasonable and appropriate from the creditors’ point of view, I do not think it follows that litigation funding was unavailable or inappropriate in the sense relevant to establishing stultification. If litigation funding had been obtained, then security would likely have been ordered unless (as often happens) the terms of the funding agreement obliged the funder to meet any adverse costs order. Either way, the second defendant would have had some costs protection. In my view, the fact that the creditors chose to pursue an alternative approach when litigation funding may well have been available undermines their reliance upon stultification and weighs in favour of an order for security.
For completeness, I add that as stultification focuses on an ability to fund the security rather than the entirety of the legal fees incurred in pursuing the litigation (in circumstances where the lawyers are prepared to act on a speculative basis), it may well be that the plaintiffs are able to obtain some form of litigation funding or loan to cover the costs of the security ordered by the Master. While the cost of this would reduce the proceeds to the creditors in the event of success in the litigation, it is still a relevant consideration.
Plaintiffs’ impecuniosity caused by second defendant’s conduct
The final issue raised by the plaintiffs is a challenge to the Master’s reasoning in relation to their contention to the effect that a factor weighing against an order for security was that the second defendant caused their impecuniosity. I have earlier summarised the Mater’s reasoning in relation to this issue, which was that while it could be cogently argued that the second defendant caused the plaintiffs’ impecuniosity, the position was not clear and likely to be complicated.
The second defendant complains that this issue was not properly raised in the notice of appeal. In my view that complaint is well founded. The ground relied upon by the plaintiffs as raising the issue is, in my view, a ground which related to the Master’s approach to the merits of the plaintiffs’ claim and not the causal effect of the second defendant’s conduct.
In any event, I am also of the view that no error has been established in the Master’s reasoning on this issue.
Again, there is no doubt that if it can be established that the defendant’s conduct caused the plaintiff’s impecuniosity then this is a factor which weighs against an order for security. However, the Courts have emphasised two related matters in this context. The first is a reticence to permit too detailed an analysis of the facts where the asserted causal link is not clear. The second is the need for the plaintiff to establish more than that the defendant’s conduct was merely one contributing factor to the plaintiff’s impecuniosity. It has been said the defendant’s conduct must be the cause, or at least a material contributor to, the plaintiff’s impecuniosity.[17]
[17] Haskins Contractors Pty Ltd v Sydney Airport Corporation Ltd [2002] NSWSC 267 at [52]; Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276 at [94]-[96]; Del Bosco v Outtrim [2008] NSWSC 105 at [26].

Here, as the Master pointed out, the conduct of the second defendant relied upon was the subject matter of the action. While such conduct can be relied upon in this context,[18] there must be sufficient evidence to make clear the causal link without the Court having to, in effect, predetermine or provisionally determine the issues in the litigation.
[18] Octocane Pty Ltd v SRJ Property Development Pty Ltd (1999) 74 SASR 471 at [40].
In this case there was some evidence to support a causal link between the plaintiffs’ impecuniosity and the alleged conduct for which the second defendant is liable. There is evidence that for some years prior to the fire the plaintiffs (or at least the first three plaintiffs) had been profitable, and increasingly so. On the other hand, there are other factors which potentially complicate the issue. The first is that the plaintiffs did have very significant debt levels prior to the fire, suggesting that they may have been vulnerable to changes in trading or other financial conditions in any event. The second is that, as the Master pointed out, the plaintiffs did manage to continue to trade for more than two years after the fire.
The plaintiffs point to the assessment of the administrators in their s 439A report that the cause of the failure of the company can be attributed to:
·    Insufficient working capital available to sustain the Company’s operations following the closure of the ASA Group’s manufacturing facility;
·    Reduced operating margins caused by higher cost of goods sold; and
·    Inadequate business insurance cover to financially support the Company’s operations following the destruction of the ASA Group’s manufacturing facility.
The plaintiffs contend that the third bullet point explains or caused the first two bullet points. While the administrators do not say so in as many words, this may well be so. Presumably if there was more insurance this would have supplemented, or been a substitute for, working capital. And it appears that at least some of the increase in cost of goods sold came from the need to source supply from interstate, which I infer was a consequence of the fire and the inability of the plaintiffs (given their allegedly insufficient insurance cover) to rebuild their factory.
However, while there is some basis to think that the second defendant’s conduct did contribute to the plaintiffs’ impecuniosity, the issue is not clear cut. The issue will ultimately turn not only upon the plaintiffs making out one of their causes of action arising out of the underinsurance, but also the nature and extent of the underinsurance.
In my view, no error has been demonstrated in the Master’s approach to this issue. His Honour recognised that it could “cogently be argued” that the conduct for which the second defendant was liable caused the plaintiffs’ conduct. However, against this his Honour also observed that at the current point in time the issue was “not clear”, and “complicated” by the fact that the plaintiffs were able to trade on for over two years. While the Master did not state how much weight, if any, he attached to this issue, I do not think he was required to do so. It is clear that he took account of the issue, and the weight he afforded it was a matter within his Honour’s discretion. It may be that the lack of clarity or existence of complications meant that the Master gave it little or no weight, but in my view that would not establish error in the House v The King sense.
Conclusion
For the above reasons, I am not satisfied that the plaintiffs have established any error on the part of the Master in the sense required by House v The King. The Master addressed, and took account of, each of the matters relied upon by the plaintiffs. In so doing his Honour did not make any error of principle. To the extent the plaintiffs’ complaint is in relation to the weight that his Honour attached to the matters raised, this does not involve error in the sense required by House v The King.
I dismiss the appeal.