AE Siberia Pty Ltd v Sloan
[2014] WADC 118
•25 SEPTEMBER 2014
AE SIBERIA PTY LTD -v- SLOAN [2014] WADC 118
| DISTRICT COURT OF WESTERN AUSTRALIA | Citation No: | [2014] WADC 118 | |
| Case No: | CIV:175/2014 | 24 JUNE 2014 | |
| Coram: | REGISTRAR KINGSLEY | 25/09/14 | |
| PERTH | |||
| 8 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| PDF Version |
| Parties: | AE SIBERIA PTY LTD MARK SLOAN VICTORIA RATUSHNYAK |
Catchwords: | Application for security for costs No new principles |
Legislation: | Nil |
Case References: | Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 |
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
MARK SLOAN
First Defendant
VICTORIA RATUSHNYAK
Second Defendant
Catchwords:
Application for security for costs - No new principles
Legislation:
Nil
Result:
Application dismissed
Representation:
Counsel:
Plaintiff : Mr D Thompson
First Defendant : Mr H Robinson
Second Defendant : Mr H Robinson
Solicitors:
Plaintiff : Thompson Downey Cooper
First Defendant : Haydn Robinson
Second Defendant : Haydn Robinson
Case(s) referred to in judgment(s):
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57
1 REGISTRAR KINGSLEY: The defendants in these proceedings have brought an application for security for costs against the plaintiff's company. The plaintiff's counsel does not dispute that, on the evidence, the court's discretion to order security pursuant to s 1335 Corporations Act (2001) is enlivened.
Factors relevant to the exercise of the discretion
2 The discretion having been enlivened, the question now is whether I should exercise my discretion in awarding security for costs. Both counsel broadly agree on the principles that apply – though the defendants' counsel adopts the more expansive criteria of Edelman J in Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57. In that case Edelman J states at [5] – [6] (omitting the footnotes):
5 … The discretion has been described as 'unfettered',11 but it must be exercised 'judicially', by reference to established principles. The factors which have developed to guide the discretion broadly strike a balance between the interests of the plaintiff corporation in conducting litigation to protect or enforce its rights and the interests of a defendant in not being exposed to the prejudice of being unable to recover costs if it is successful.12
6 Depending on the circumstances, various factors may have different strength and effect on the exercise of the discretion to award security for costs. The most commonly cited, non-exclusive, factors include the following, most of which I extrapolate from the cases footnoted:13
(i) the strength and bona fides of the plaintiff's case;
(ii) the likelihood of the plaintiff being unable to pay the defendant's costs;
(iii) whether the plaintiff's impecuniosity was caused by the defendant's conduct which is the subject of the claim;
(iv) whether the application for security is oppressive;
(v) whether the award of security would deny an impecunious applicant a right to litigate;
(vi) whether there are persons standing behind the plaintiff who were likely to benefit from the litigation;
(vii) whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
(viii) whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant's self-help procedures;
(ix) whether the application for security had been brought promptly;
(x) whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and
(xi) any factors relating to the public interest.
3 The defendants application is supported by an affidavit sworn by Mark Sloan on 10 April 2014, on behalf of himself and for the second defendant (Sloan Affidavit). Mark Rowbottam has sworn an affidavit on 12 June 2014 opposing the application (Rowbottam affidavit).
Context
4 Mark Rowbottam (Rowbottam) is a director of the plaintiff (AE Siberia) and Rowbottam together with 11 others are the shareholders of AE Siberia. AE Siberia was incorporated on 7 February 2012. The first defendant (Sloan) is an exploration geologist and geophysicist and the second defendant (Ratushnyak) is an exploration geophysicist.
5 In early 2012 the defendants became aware of a license (the PL 60 License) being put up for auction by Russian authorities to permit exploration and exploitation of oil and gas resources in Siberia. Both the plaintiff and defendants agree that the PL 60 License was to be acquired by a Russian company which would be owned as to 87.5% of issued shares by Albatross Energy (Russia) Ltd (AER). Sloan and Ratushnyak were the directors and majority shareholders of AER. The balance of 12.5% in AER was to be owned by a Dr Gert.
6 Sloan deposes that it was agreed on 6 February 2012 between he and Ratushnyak and Rowbottam that a new company be established in Australia to take over AER upon it being successful for the PL 60 License. Rowbottam denies this agreement saying there was an agreement between the parties to work together to reach a commercial agreement, and to incorporate a company to use as a vehicle to bid for an oil exploration license in the Western Siberia region. In any event AE Siberia was incorporated on 7 February 2012.
7 On 9 March 2012 AE Siberia entered into a loan agreement with AER, as borrower, and Sloan and Ratushnyak, as guarantors. The loan was for the sum of $675,000 to be applied towards expenses associated with bidding on oil licenses located in Western Siberia. The loan was to be repaid on the earlier of:
(i) the dates AER receives the return of the funds associated with the bidding on the Siberian licenses;
(ii) 25 May 2012; and
(iii) five business days after the date on which AER received a notice from AE Siberia under cl 5.1.
8 Clause 5.1 of the loan agreement provides that if AER commits a breach of any of its obligations, AE Siberia may, by written notice, declare all the monies owing pursuant to the agreement be due and payable within five business days after receipt of the notice. The notice provision of the loan agreement provides that each notice authorised or required to be given to a party shall be in writing and may be delivered personally or sent by properly addressed and prepaid mail or facsimile (cl 9.1).
9 On the same day, 9 March 2012, an option agreement was entered into between AE Siberia as grantee and AER. The recitals provide that Sloan and Ratushnyak were the legal and beneficial owners of 100% of the issued shares in the capital of AER which controls 87.5% of the issued share capital in 000 Albatross Neftegaz (Albatross). (It appears common ground that Albatross was the Russian company Sloan and Ratushnyak originally intended to use as the acquirer of PL60. Due to Russian regulatory requirements, and with the consent of AE Siberia, another company, 000 Siberia Petroleum (Siberia Petroleum) was substituted for Albatross to bid for PL60).
10 It's the defendants' submission that the intention of the option agreement was that, upon its exercise, Sloan and Ratushnyak would become majority shareholders in AE Siberia. Pursuant to cl 2.3 and cl 1.1 of the option agreement, if the option were not exercised it would automatically lapse on 31 May 2012.
11 Siberia Petroleum was successful in the bid for the PL60 license. The evidence is that the monies provided by AE Siberia to AER were applied by Siberia Petroleum to acquire the PL 60 license (remembering that Sloan and Ratushnyak are majority shareholders in Siberia Petroleum) (Sloan affidavit, par 26).
12 Sloan and Ratushnyak say the common understanding of the parties was that if Siberia Petroleum was successful in the bid for the PL60 license, as it was, then the liability of Sloan and Ratushnyak as guarantors would come to an end (Sloan affidavit, par 29). This was because Sloan and Ratushnyak would become majority owners of shares in AE Siberia under the option agreement and would become the majority directors of AE Siberia. Sloan and Ratushnyak would then be in the position to release and discharge the guarantees under the loan agreements.
13 At par 8 of the defence, Sloan and Ratushnyak plead an email dated 4 February 2012 from Rowbottam to them that they say supports the proposition they would become the majority directors. Paragraph 8 also supports a later plea of misleading and deceptive conduct on the part of Rowbottam.
14 The email of 4 February 2012 states that Newco (presumably AER) would exercise a call option to acquire 87.5% to 100% of the shares in AER. AER would then be able to elect a director to Newco, taking the number of directors to two – Sloan affidavit, page 37.
15 On 31 May 2012 AE Siberia sent an email to Sloan purportedly exercising the option granted under the option deed. There would have to be some doubt as to whether that email message constituted a valid exercise of the option. Be that as it may, the option was never formally taken up.
16 As part of their defence to AE Siberia's claim Sloan and Ratushnyak refer to cl 8.2 of the loan agreement. Clause 8.2 under the heading 'Guarantee' provides that AE Siberia would not be entitled to enforce the guarantee in circumstances where the loan funds are withheld or lost during the period that the funds have been advanced within the jurisdiction and control of the Russian local or federal licensing authorities.
17 It appears the argument by Sloan and Ratushnyak is that, as the bid by Siberia Petroleum was successful, the moneys paid are now withheld or lost in the sense that the monies are no longer recoverable. As Rowbottam deposes cl 8.2 of the loan agreement was intended to apply where the funds advanced to AER were lost to the Russian authorities, or were not repaid after the bid for the license had failed.
Application of the principles
18 Sloan and Ratushnyak were ordered on 14 March 2014 to bring any application for security for costs on or before 4 April 2014. The application was brought on 10 April 2014. No issue has been raised as to delay.
19 The action by AE Siberia, in essence, is straightforward – an action against guarantors for monies owing under a loan agreement. The defendant's counsel submits the plaintiff's claim is specious. As defendants' counsel submits, the plaintiff would have ownership and control of the PL60 license but also the right to sue for the money used to acquire the PL60 license. However the plaintiff does not have ownership and control of the PL60 license. Sloan and Ratushnyak, through Siberia Petroleum, have ownership of the PL60 license. The plaintiff would have had ownership and control of the PL60 license through exercise of the option agreement but there may well be some doubt whether that option agreement has been validly exercised. In any event it would appear the right to exercise the option has expired.
20 All that can be said is that the plaintiff's claim in this matter is prima facie strong and there is no evidence that would impute the plaintiff bona fides in bringing the action.
21 An application for security may be resisted on the grounds that the plaintiff's impecuniosity was caused by the defendants' conduct. To succeed the respondent to the application must show a real causal connection between the defendants' conduct and the impecuniosity. Further the applicant for security must be guilty of some form of misconduct or unacceptable business dealing as regards the respondent to the application (Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [45]).
22 AE Siberia was incorporated for the sole purpose of financing the acquisition of the PL60 license. The funds of AE Siberia are the funds contributed by its shareholders for that purpose. Those funds were advanced to AER on the basis that those monies would be advanced to another Russian company controlled by AER. While the defendants executed declarations of trust by which they held their interests in Siberia Petroleum on trust for AER it remains that AE Siberia advanced monies to acquire the PL60 license and that asset is held by AE Siberia. The defendants' counsel submits that, on the exercise of the option, the PL60 license would have become an asset of AE Siberia. There is some doubt whether the exercise of the option by AE Siberia was a valid exercise. I am not prepared to find that the impecuniosity of the plaintiff is caused by the defendants' conduct.
23 The plaintiff submits that the application for security is oppressive. Plaintiff's counsel submits the application is brought as a matter of strategy to compensate for the weakness of defence and in those circumstances the application is oppressive. There is some merit in that submission when one considers the defendants' counsel's submissions on cl 8.2, and the fact that the email of 4 February 2012 does not support the proposition that the intention was Sloan and Ratushnyak would become majority directors of AE Siberia. This factor I do take into account when exercising my discretion.
24 Other factors to consider are whether there are persons standing behind the plaintiff who are likely to benefit from the litigation and whether those persons have offered any security or personal undertaking to be liable for the cost. This issue was not strongly argued and I do not intend to exercise my discretion on those factors. In the context of this litigation, where the plaintiff was established as a vehicle to obtain the PL60 license and the defendants, through their corporate vehicle, has obtained the PL60 license using the plaintiff's money, this suggests that, whilst there are shareholders behind the plaintiff likely to benefit, they should not be required to give undertakings in relation to security for costs.
25 It has not been strongly argued that the applicant is in substance a plaintiff.
26 There are no factors relating to the public interest which would influence the exercise of my discretion.
27 Having considered the relevant factors in my opinion it would be inappropriate to order security for costs. Whilst there are complexities, in essence the plaintiff lent monies to a company to bid for a petroleum license. The defendants guaranteed that loan. The monies lent have not been repaid.
28 The application is dismissed. I will hear counsel on the question of costs.
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