Allison v Harmsworth
[2018] SASC 27
•14 March 2018
SUPREME COURT OF SOUTH AUSTRALIA
(Appeal from a Master: Civil)
ALLISON v HARMSWORTH
[2018] SASC 27
Judgment of The Honourable Justice Doyle
14 March 2018
APPEAL AND NEW TRIAL - APPEAL - PRACTICE AND PROCEDURE - SOUTH AUSTRALIA - SECURITY FOR COSTS
The appellant (first defendant) sought an order that the respondent (plaintiff) provide security for the costs to be incurred by him in defending proceedings relating to a dispute between the parties involving a company (GTS, the second defendant) in which they were both shareholders and directors (or, in the case of the plaintiff, a purported director).
The primary ground on which the application for security was brought was that the plaintiff was ordinarily resident outside Australia under rule 194(1)(b) of the Supreme Court Rules.
While accepting that this circumstance would usually warrant an order for security, the Master held that the usual rule was displaced by reason of (i) the fact that the first defendant had taken security over GTS’s intellectual property for the monies owed to him by GTS, and (ii) a policy concern about, or a need to move very slowly in, ordering security for costs against an applicant for a winding up order.
The Master accordingly refused the first defendant’s application for security. The first defendant appeals from that decision.
Held, per Doyle J (allowing the appeal):
1. The Master erred in relying upon the two matters he identified in holding that the usual rule in favour of an order for security was displaced.
2. Relevant considerations included (i) the plaintiff’s residence outside of Australia, (ii) the absence of any assets of the plaintiff within Australia, (iii) the likely complexity and uncertainty associated with enforcement of a costs order of this Court in the United Arab Emirates and (iv) the uncertainty about the plaintiff’s financial position and absence of any basis for holding that an order for security would stultify the proceedings.
3. In light of the combination of the above, the decision not to order security was an unreasonable exercise of that discretion and involved error in the House v The King sense.
4. The appeal is allowed, and in exercising the discretion afresh, it is appropriate to order that the respondent provide security for the appellant’s costs through to the commencement of trial in the amount of $70,000.
Corporations Act 2001 (Cth) s 462; Supreme Court Rules 2006 (SA) r 194; Foreign Judgments Act 1991 (Cth); Foreign Judgments Regulations 1992 (Cth), referred to.
Macks v Valamios Produce Pty Ltd (No 2) [2003] NSWSC 1044 [2003] NSWSC 1044, applied.
Shin v Commodore Hotel Management [1999] FCA 771; House v The King (1936) 55 CLR 499; Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60; Barton v Minister for Foreign Affairs (1984) 2 FCR 463; Energy Drilling Inc v Petroz NL [1989] ATPR 40-954; Logue v Hansen Technologies Ltd (2003) 125 FCR 590; PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321; Limberis v N Limberis & Sons Pty Ltd [2004] SASC 186; Ninan v St George Bank Ltd [2012] FCA 905; Maxims Caterers Ltd v Magnona Pty Ltd (No 1) [2010] FCA 450; Abigroup Contractors Pty Ltd v Hardesty Hanover International LLC [2008] SASC 337; Re Hollen Australia Pty Ltd [2009] VSC 95, considered.
ALLISON v HARMSWORTH
[2018] SASC 27Master’s Appeal: Civil
DOYLE J: The appellant (first defendant) brought an application seeking an order that the respondent (plaintiff) provide security for his costs in defending the proceedings brought by the plaintiff. The primary ground on which that application was brought was that the plaintiff was ordinarily resident outside Australia. The Master refused the application and declined to order security for costs. This is an appeal from the Master’s decision.
Background
The plaintiff (Mr Harmsworth) and the first defendant (Dr Allison) are shareholders in a company that is the second defendant (Green Technology Systems Pty Ltd (GTS)).
The plaintiff resides in the United Arab Emirates and the first defendant in Australia. When GTS was established in 2012, they were both directors. The plaintiff contributed capital of $50,000, and the first defendant contributed some intellectual property relating to the design and manufacture of a roof mounted ventilation system designed to ventilate buildings, particularly for use in dry climates. Both the United Arab Emirates and Australia are potentially significant markets for this type of system.
The plaintiff and first defendant subsequently fell into dispute about how, and on what terms, they would exploit GTS’s intellectual property. This included disputes in relation to the payment of royalties, and entry into a manufacturing and distribution agreement between GTS and a company incorporated in the United Arab Emirates in which the plaintiff has an interest (Green Energy Solutions Ventilation Equipment Manufacturing LLC (GES)).
The dispute came to a head in the second half of 2016. In particular, at a meeting held on 9 August 2016, GTS purportedly resolved to remove the plaintiff as a director. Controversial resolutions were also purportedly passed at a subsequent meeting of GTS on 1 November 2016.
On 4 January 2017, the plaintiff commenced these proceedings challenging the validity of the above-mentioned meetings and resolutions, and seeking declaratory relief as to their invalidity. The originating process also sought consequential relief and an order that GTS be wound up.
On 30 January 2017, the first defendant brought an application seeking orders for security for his costs. On 17 February 2017, the plaintiff filed a second originating process in which he made it clear that the relief he sought included an order winding up GTS on two grounds, namely the ‘just and equitable’ ground and insolvency.
The application for security for costs
Rule 194(1) of the Supreme Court Rules 2006 (SA) provides as follows:
194 – Security for costs
(1)The Court may order a plaintiff to provide security for costs if-
(a) the action is brought in a representative capacity and the plaintiff is insolvent or would have insufficient resources to meet an order for costs if the action were to prove to be unsuccessful; or
(b) the plaintiff ordinarily resident outside Australia; or
(c) there are reasonable grounds to suspect that the action may have been brought for an ulterior purpose; or
(d) the order is authorised by statute; or
(e) the order is necessary in the interests of justice.
It was common ground that the plaintiff is ordinarily resident outside Australia within the meaning of r 194(1)(b). However, the first defendant argued that orders for security for costs could be justified under not only r 194(1)(b), but also under r 194(1)(c), (d) and (e).
The Master’s reasons
Security for costs on grounds other than non-residence
The Master rejected the contention that there were reasonable grounds to suspect that the application may have been brought for an ulterior purpose within the meaning of r 194(1)(c). The essence of his Honour’s reasoning was that the mere fact that the plaintiff was motivated by self-interest did not establish an inappropriate or ulterior purpose, and that there was no evidence that would otherwise justify such a finding.
As to the r 194(1)(d) reference to an order for security being “authorised by statute”, the first defendant had relied upon s 462(4) of the Corporations Act 2001 (Cth). That section requires that the Court not hear an application by a contingent or prospective creditor for an order to wind up, unless and until such security has been given as the Court thinks reasonable, and a prima facie case for the winding up established. The Master applied authority to the effect that any jurisdiction to order security under this section was to be exercised according to the generally applicable principles concerning security for costs.[1] The Master held that in those circumstances neither s 462(4) nor r 194(1)(d) added to or informed the exercise of his discretion.
[1] Macks v Valamios Produce Pty Ltd(No 2) [2003] NSWSC 1044 at [7].
The Master also rejected the contention that an order for security would be in the interest of justice under r 194(1)(e). The first defendant had submitted that the plaintiff had come to the court with ‘unclean hands’, because he had not accounted to GTS for the profits that were alleged to have been improperly taken by a company associated with the plaintiff (that is, GES). The Master rejected this contention. His Honour reasoned that it confused the plaintiff with the company GES, and assumed that the action was an equitable one. Further and in any event, the Master held that the submission was not supported as a matter of fact by any evidence. His Honour held that there was no evidence on which he could find that there had been an inappropriate use of intellectual property, adding that this would in any event be a matter to be resolved at trial.
While reliance upon r 194(c), (d) and (e) was not formally abandoned upon appeal, no particular error in his Honour’s reasoning in relation to these sub-rules was identified in submissions. In any event, I agree with his Honour’s reasoning and conclusions in relation to these sub-rules. None of them provided a basis for ordering security for costs in the circumstances of this case.
Security for costs on ground of non-residence
Turning to r 194(1)(b), which provides that the discretion to order security for costs is enlivened by a finding that the plaintiff is ordinarily resident outside Australia, the Master acknowledged that it was common ground that the plaintiff was ordinarily resident outside of Australia. The Master added:[2]
In such circumstances, an order for security will usually be made. Such an order will usually be limited to the extent of the costs of enforcing a cost order in the foreign jurisdiction.
For reasons that will appear later, I think that, in this case, the usual rule in respect of foreign residents is displaced.
[2] At [15]-[16].
After addressing the other limbs of r 194(1) in the manner I have already summarised, the Master commenced his reasoning leading to the conclusion that the ‘usual rule’ in relation to foreign residents was displaced with a finding that GTS was impecunious.
The Master then referred to the submissions of the first defendant to the effect that GTS was insolvent, could not pay its only worker (the first defendant), had not traded in Australia until very recently, had received no income, had no relevant current trade, had no assets of substance or anything else of value (putting to one side the intellectual property mentioned earlier) and had not paid its liabilities (to the first defendant) because it could not do so.
The Master was not prepared, at this stage in the proceedings, to find that GTS was insolvent. However, his Honour did find, on the first defendant’s own uncontested evidence, that GTS owed the first defendant a significant amount for outstanding salary (or consultancy fees), and nearly $12,000 in unpaid rent. His Honour also noted that the first defendant had made loans to the GTS that were secured against the only asset of any significance that the first defendant claimed was owned by GTS (namely its intellectual property). The Master added that GTS had no other assets of substance, and that its bank account was only in credit by reason of loans made by the first defendant.
While the Master was also not prepared, at this stage in the proceedings, to go as far as to find that GTS should be wound up on the ‘just an equitable’ ground, he did accept that there was uncontested evidence that justified findings:
· that there had been a breakdown of the relationship between the plaintiff and first defendant that appeared to be irretrievable, and that as a consequence GTS appeared to be dysfunctional;
· that there was a long standing unresolved dispute between the shareholders,[3] and between the first defendant and plaintiff over the plaintiff’s status as a director; and
· that there was no evidence as to any offer by the first defendant to purchase the plaintiff’s shares.
[3] The shareholding was initially split equally between the plaintiff and first defendant, but half of the plaintiff’s shareholding was later transferred to his partner, Alice Bangera. The first defendant challenges the validity of this transfer, and the involvement of Ms Bangera in the affairs of GTS, essentially on the ground of non-compliance with the pre-emptive rights provisions of the shareholders agreement. The share register of GTS presently records the first defendant holding slightly more than 50 per cent of the issued shares.
Against that background, the Master then identified two matters that he considered were sufficient to displace what he had earlier described as the usual rule applicable in cases of plaintiffs ordinarily resident outside of Australia.
As to the first, namely the taking of security in respect of monies owed by GTS to the first defendant, the Master said:[4]
It appears that, on the first defendant’s own evidence, he is in a position to demand payment of money to himself which payment the company could not make. Further, on his own evidence, he has secured in his own favour the only significant asset of the company. On that evidence, the first defendant is on his own case totally in control of the company. It is his to do what he likes with.
Taking everything into account, it seems to me that the first defendant’s ability to take the company’s only asset simply by making a demand outweighs the fact that if he is successful in this litigation he might have to enforce any order for costs in his favour in the UAE. The first defendant can – on his case – defeat this litigation at his own election. In those circumstances, I consider that he should not be entitled to require the plaintiff to provide security for costs.
[4] At [33]-[34].
As to the second, namely policy reasons against ordering security for costs in the present context, the Master reasoned:[5]
There is another factor. Mr Ross-Smith submitted that there are strong policy reasons for not ordering security for costs against an applicant for a winding-up order. In support he submitted that there is no case in any Australian jurisdiction in which such an order has been made. Mr Roach for the first defendant did not refer to any such case. Shin v Commodore Hotel Management Pty Ltd[6] is a case where such an order was made. It is the only such case that my researches have uncovered. The principle invoked by Mr Ross-Smith does not appear to have been advanced by counsel.
I accept that the Court should be concerned to ensure that the corporations do not trade if they are insolvent or hopelessly dysfunctional. Mr Roach did not argue to the contrary. Given that approach, I further accept that a Court should be very slow in ordering security for costs on a winding up application. That is not to say that there cannot be a case in which such an order should be made (Shin v Commodore Hotel Management is an example). Nor is it to say that an unusual costs order would not be made against an unsuccessful applicant for winding up who is found to have made the application for – for example – ulterior motives.
[5] At [35]-[36].
[6] Shin v Commodore Hotel Management [1999] FCA 771.
The appeal
On appeal, the first defendant contends that the Master erred in holding that the usual or general rule that a plaintiff ordinarily resident outside of Australia was displaced in the circumstances of this case, and in particular that it was displaced by reason of:
· the fact that the first defendant had taken security for the monies owed to him by GTS; and
· a policy concern about ordering security for costs against an applicant for a winding up order.
In considering the appeal, I bear in mind the discretionary nature of the Master’s jurisdiction to order security for costs. The appeal is thus one subject to the principles of appellate restraint in House v The King.[7] As I observed in Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd,[8] also in the context of an appeal from the exercise of a Master’s discretion in relation to security for costs:[9]
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.
[7] House v The King (1936) 55 CLR 499 at 504-505.
[8] Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60.
[9] Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60 at [22].
Persons ordinarily resident outside of Australia
Historically there had been an inflexible rule requiring that a non-resident plaintiff provide security for the defendant’s costs.[10] The rationale for ordering security was a concern to ensure that a non-resident plaintiff who sought to take advantage of the jurisdiction of a court, but did not have assets within that jurisdiction, was not able to escape liability for an adverse costs order in the event his or her claim was unsuccessful. The purpose of an order for security was to create a fund within the jurisdiction against which the defendant might enforce any costs liability in his or her favour, thereby providing a level of protection from the risks, uncertainties and delay of attempts to enforce that costs liability in the plaintiff’s country of residence.[11]
[10] Dal Pont, Law of Costs, 2013, 3rd Edition at [29.65].
[11] Barton v Minister for Foreign Affairs (1984) 2 FCR 463 at 469; Energy Drilling Inc v Petroz NL [1989] ATPR 40-954 at 50, 422; Logue v Hansen Technologies Ltd (2003) 125 FCR 590 at [18].
However, the courts no longer adopt a rigid or inflexible approach. Consistent with the court’s approach to security for costs generally, and the terms of the court rules around Australia (to the effect that the Court may order security where a plaintiff is ordinarily resident outside of the jurisdiction), modern authority recognises that the decision whether to order security for costs in this circumstance remains a discretionary one.
It is true that the fact a plaintiff resides outside Australia and has no assets in Australia is a circumstance of significant weight in favour of an order for security. As McHugh J explained in PS Chellaram & Co Ltd v China Ocean Shipping Co:[12]
To make or refuse to make an order for security for costs involves the exercise of a discretionary judgment. That means that the court exercising the discretion must weigh all the circumstances of the case. The weight to be given to any circumstance depends not only upon its own intrinsic persuasiveness but upon the impact of the other circumstances which have to be weighed. A circumstance which may have very great weight when only two or three circumstances have to be weighed may be of minor significance when many circumstances have to be weighed. However, for over 200 years, the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide security for costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction.
[12] PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 at 323, applied in Limberis v N Limberis & Sons Pty Ltd [2004] SASC 186 at [21].
While it is thus also true to say that a non-resident plaintiff without assets in the jurisdiction will usually be ordered to provide security, and perhaps that there is a usual or general rule to this effect,[13] it is important to remember that the matter remains a discretionary one. Each case must be considered on its particular facts, with the weight and significance attached to a plaintiff’s non-residence within the jurisdiction being determined in light of all other considerations relevant in the particular case.
[13] In the same sense that there may be said to be a ‘general rule’ that costs follow the event without this being seen as a fetter upon what remains an exercise of the court’s discretion in relation to costs.
Bearing in mind the rationale for ordering security for costs against a non-resident plaintiff, the weight of this consideration will also turn to some extent upon the likely ease and convenience of enforcement procedures in the plaintiff’s country of residence.
For example, if the evidence establishes that the plaintiff has assets in his or her place of residence, and that a judgment could be enforced with ease in that country (that is, pursuant to well-known and clearly-defined procedures), then that would reduce the significance of the plaintiff being a non-resident.[14] This will often be so, for example, in the case of a plaintiff resident in one of the countries listed in the Schedule to the Foreign Judgments Regulations 1992 (Cth) as having reciprocal arrangements in relation to the enforcement of judgments, and hence in relation to which the provisions of the Foreign Judgments Act 1991 (Cth) are applicable. In such a case the general practice has nevertheless been to order that the plaintiff provide security for the costs of registering and enforcing a judgment in the plaintiff’s country of residence, as a defendant should not have to risk incurring that expense in enforcing any order for costs in his or her favour.[15]
[14] Barton v Minister for Foreign Affairs (1994) 2 FCR 463 at 469; Maxim’s Caterers Ltd v Magnona Pty Ltd (No 1) [2010] FCA 450 at [13].
[15] Barton v Minister for Foreign Affairs (1994) 2 FCR 463 at 470.
In Ninan v St George Bank Ltd,[16] the plaintiff was an impecunious natural person ordinarily resident in the United Arab Emirates. Having referred to the authorities mentioned above, Griffiths J summarised the relevant principles in the following terms:[17]
Given that the historical basis for requiring a foreign-based applicant to give security for costs is to recognise that the respondent who succeeds in proceedings and obtains a judgment has to enforce that judgment in the applicant’s foreign country of residence, it is also relevant to take into account whether or not that foreign country is covered by the Foreign Judgments Act 1991 (Cth). The list of countries to which the Foreign Judgments Act 1991 applies are set out in the Schedule to the Foreign Judgments Regulations 1992 (Cth). The United Arab Emirates is not included in that list, with the consequence that the Foreign Judgments Act 1991 is inapplicable. If, unlike the circumstances here, a particular country is covered by that legislation, security for costs might still be ordered, but, the quantum may simply reflect the costs of enforcement under such a statutory scheme (as was the case in Barton). But if the foreign country is not covered by such legislation, that is a factor weighing in favour of ordering an applicant (even a natural person) to pay security for costs commensurate with the reasonable costs of preparing and conducting the proceedings, at least up until an appropriate point which might, in some cases, be the commencement of the trial …
[16] Ninan v St George BankLtd [2012] FCA 905.
[17] Ninan v St George BankLtd [2012] FCA 905 at [36].
Returning to the Master’s reasons in this case, his Honour was right to describe this case as one in which an order for security would “usually” be made, or in which the “usual rule” applicable in relation to non-resident plaintiffs applied. His Honour’s description and approach were consistent with the modern discretionary approach to security for costs in this context.
On the other hand, I consider that the Master was in error in then stating that an order for security in such circumstances will usually be limited to the extent of the costs of enforcing a costs order in the foreign jurisdiction. While the authorities do not all speak with one voice on this issue, I consider that the better view is that this limitation upon the quantum of security is generally only applicable in the case of a plaintiff resident in a foreign jurisdiction which has an established and relatively convenient mechanism for the enforcement of costs orders from the jurisdiction of the court in question.[18] It is generally only applicable in circumstances where the plaintiff’s foreign residence does not give rise to a risk of an inability to enforce a costs order that would warrant protection through the usual quantum of security, but where it is nevertheless appropriate that the defendant have some limited protection in respect of the additional costs likely to be associated with enforcement in the foreign jurisdiction.
[18] Limberis v N Limberis & Sons Pty Ltd [2004] SASC 186 at [22]; Abigroup Contractors Pty Ltd v Hardesty Hanover International LLC [2008] SASC 337 at [21]; Donald-Oates v Donald [2011] NSWSC 1391 at [48]-[53].
Given that the Master did not order security, this error in describing the likely quantum of any award might be said to be of no consequence. However, it does highlight something of an ambiguity in the Master’s reasons as to the assumption or basis upon which his Honour proceeded insofar as the issue of ease of enforcement was concerned. While this is a potentially significant matter, the Master’s failure to give it any express attention is understandable given that it did not attract any attention in oral argument below.
The affidavit material below did, however, include an email exchange between the first defendant’s solicitor and a solicitor from the United Arab Emirates. The first defendant’s solicitor sought an estimate from the Emirati solicitor of his fees to enforce a costs order of the South Australian Supreme Court in the United Arab Emirates. The response from the Emirati solicitor addressed both the court fees and legal fees likely to be incurred. The estimated ranges varied depending upon whether enforcement was to be through the Dubai Courts or the Dubai International Financial Centre Courts (DIFC). The estimated ranges also depended upon the extent of any defence of, or opposition to, the enforcement. Converted to Australian dollars, the estimate was that total costs might be between about $20,000 and $40,000.
While the advice from the Emirati solicitor was only directly addressed to the costs of enforcement, it is implicit in the advice that the solicitor considered there was a mechanism for enforcement of a South Australian Supreme Court costs order in the United Arab Emirates. At the same time, it is also apparent from his advice that the process was not an entirely straightforward one, with its likely success, or at least level of complexity, depending to some extent upon the nature and extent of any opposition.
On appeal, both parties made submissions as to the relative ease or complexity of enforcement of a costs order made by this Court in the United Arab Emirates. The appellant made the point that the United Arab Emirates is not listed in the regulations to the Foreign Judgments Act, meaning that there is no recognised reciprocal arrangement for the enforcement of judgments from Australia in the United Arab Emirates. The respondent, on the other hand, drew my attention to a document entitled ‘Memorandum of Guidance between the Federal Court of Australia and the Dubai International Financial Centre Courts’. While acknowledging that the document did not apply to Supreme Court judgments, and was not legally binding even in respect of Federal Court judgments, it does nevertheless evidence (and describe) a relatively established and conventional arrangement for the enforcement of Australian judgments in the United Arab Emirates.
Bearing all of the above in mind, and despite accepting that there is a reasonable likelihood that a costs order of the South Australian Supreme Court would ultimately be enforceable in the United Arab Emirates, I consider that there is, at least on the state of the evidence before me, sufficient uncertainty and complexity involved in the process that the plaintiff’s non-residence should be a weighty consideration in favour of an order for security.
Put another way, I do not consider that the evidence establishes a sufficiently established and simple process for enforcement of a South Australian costs order in the United Arab Emirates that the plaintiff’s non-residence should be put to one side, or that any order for security should be confined to the additional costs of enforcement in that foreign jurisdiction.
In this respect, it is noteworthy that while the courts have on occasion taken this course in relation to a plaintiff resident in one of the countries listed in the regulations to the Foreign Judgments Act, the mere existence of some recognised process for enforcement does not mean that such an approach is appropriate. For example, in Limberis v N Limberis & Sons Pty Ltd,[19] the Court received evidence of the procedure for enforcement of a South Australian costs order in Greece, but concluded that the uncertainty and complexity in the process, and hence risk for the defendant in any attempt to enforce, meant that the plaintiff’s non-residence remained a matter that was significant in the exercise of the discretion to order security for costs.
[19] Limberis v N Limberis & Sons Pty Ltd [2004] SASC 186.
The security taken by the first defendant
The evidence before the Master included a loan agreement between the first defendant and GTS. The agreement is dated 28 July 2017 and documents a loan from the first defendant to GTS in the amount of $4,000, repayable upon demand. The first defendant apparently lent the $4,000 to GTS so that it could pay its external creditors, leaving the first defendant as its only creditor.
The third schedule to the loan agreement records that GTS granted to the first defendant a security interest in GTS’s intellectual property. The security was said to secure the payment “of all amounts owed” by GTS to the first defendant. While the first defendant has at times suggested that the security is confined to repayment of the $4,000 loan, in the course of oral submissions the first defendant left open the possibility that the security extended to all monies owed by GTS to the first defendant. The first defendant contended that it was nevertheless relevant that both the validity and extent of the security were challenged by the plaintiff.
While the circumstances and nature of the security taken by the first defendant are matters that may warrant consideration in due course, I have some difficulty in understanding its relevance to the Court’s discretion in relation to security for costs. I accept that by taking this security the first defendant may well have, in practical terms, improved his position financially and in terms of his control over the GTS’s assets. However, given that the validity and extent of the security are contentious, I do not think it is accurate in the present context to describe the security as placing the first defendant “totally in control” of GTS, or as providing the first defendant with an ability to “defeat this litigation at his own election”.
In any event, even if the security is valid I do not understand how this would provide the first defendant with any measure of protection against the risk that a costs order in his favour may not be enforceable against the plaintiff.
The taking of security by the first defendant over GTS’s assets did not provide the first defendant with any security in respect of a costs order he might obtain against the plaintiff. At most it might be said that by purporting to improve his position vis-à-vis GTS, a company in respect of which he shared an interest with the plaintiff, he thereby gained some practical improvement of his position, or leverage, against not only that company but also the plaintiff. But even if that be so, I do not consider it is a matter relevant in any direct way to an exercise of the Court’s discretion in relation to security for costs.
Policy reason not to grant security
I accept that there may well be good reason for courts to be slow to order security for costs against, for example, an arm’s length plaintiff creditor seeking to wind up a defendant company on the grounds of insolvency. The rationale for this caution would be the reluctance to impose a potential obstacle to winding up proceedings in the face of a risk of harm to other unsuspecting creditors resulting from allowing an insolvent (or even potentially insolvent) company to continue to trade and incur further debts. While I was not directed to any authorities that have expressed this policy, or note of caution, there is some obvious logic underpinning it, at least in cases where to order security might stultify the litigation and hence expose third parties to the risk I have mentioned.
Perhaps reflecting this policy, or reason for caution, it appears to be the case that orders for security for costs are not common in the context of winding up proceedings. That said, as the Master pointed out, such an order was made in Shin v Commodore Hotel Management Pty Ltd.[20]
[20] Shin v Commodore Hotel Management Pty Ltd [1999] FCA 771 at [21].
In any event, while this need for caution may loom large in the context of some applications to wind up, I do not think it is a policy or consideration that will operate in all proceedings seeking orders that a company be wound up.
In particular, I do not consider that it is a matter of any significance in the present case. In the present case, the plaintiff is not an arm’s length creditor seeking a winding up order solely on the basis of insolvency. To the contrary, the plaintiff is a contributory and purported director, whose primary complaint is that the company is deadlocked by reason of the disputes between him and first defendant. While the plaintiff does allege that the company is insolvent, and while even ‘mere’ dysfunction resulting from a deadlock can present a risk to third parties dealing with a company, the risk of harm to third parties in this case is not obvious. It is possible that the company may have dealings with third parties in the future, but this is not a case involving a company that is said to be insolvent while actively trading or dealing with other parties. Further, as I explain later in these reasons, the evidence fell short of establishing that an order for security would stultify the litigation.
In my view, the nature of these proceedings is not such as to call for any particular caution, let alone for the Court to be “very slow” in ordering security for costs. In my view, in proceeding on this basis the Master failed to appreciate the distinction between, on the one hand, winding up proceedings brought by an arm’s length creditor relying upon insolvency and where the company sought to be wound up is actively trading with third parties, and, on the other hand, a case such as the present where the proceedings are brought by a contributory and purported director in respect of a deadlocked company that is not actively trading with third parties. Not only is the risk to third parties lower in the present case, but it is also significant that in cases involving disputes between contributories or directors, an order that the company be wound up is very much a remedy of last resort.[21]
[21] ReHollen Australia Pty Ltd [2009] VSC 95 at [89].
The plaintiff’s financial position: impecuniosity and stultification
It is well recognised that the financial position of the plaintiff may be relevant to an exercise of the discretion to order security for costs. While somewhat paradoxical, the general position is that if it is established that the plaintiff is impecunious then this will weigh in favour of an order for security; whereas if it is established that the effect of ordering security will be to stultify, or prevent the plaintiff from pursuing, the proceedings, then this will weigh against an order for security.[22]
[22] Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60 at [42]; Ninan v St George Bank Ltd [2012] FCA 905 at [38].
Here the Master did not refer to the plaintiff’s financial position. It might be inferred that his Honour did not consider that either impecuniosity or stultification had been made out.
The evidence as to the plaintiff’s financial position was sparse. An affidavit sworn by the plaintiff’s solicitor deposed to his instructions that:
· during his nearly 40 years working in the United Arab Emirates, the value of any assets he held had fluctuated as a result of a number of factors (namely wars in the region and oil prices);
· at present the assets he has in the United Arab Emirates are a bank account which he uses for day to day transactions, and his goodwill in GES;
· the balance of the bank account varies at any given time;
· the value of the goodwill in GES is not easy to quantify, as it depends upon the local economic climate and upon any policies of the new United States administration that may affect the middle east, in addition to the usual factors which affect the value of a business; and
· the plaintiff will not have the financial means to continue to pursue the proceedings if he were required to pay security between $200,000 and $220,000 upfront into court, in addition to the cost of his solicitors continuing to act on his behalf and the amount already spent, and that it was unlikely he would be able to arrange finance for this purpose.
On the basis of the above, the plaintiff’s solicitor asserted that the effect of the order sought by the first defendant will be to stultify the plaintiff’s ability to pursue the proceedings.
The first defendant had sought $200,000 by way of security for his costs. His solicitor subsequently provided an estimate of his fees, based on the Supreme Court scale, of between $102,000 and $200,000 – although I note that this included $33,000 in costs already incurred, and between about $30,000 to $40,000 in costs associated with the trial. The plaintiff’s solicitor, on the other hand, estimated that the cost to be incurred through to the commencement of trial will be about $31,000.
In my view, the sparse and general, if not vague, nature of the plaintiff’s disclosure of his financial position is significant. The evidence he did give provided a basis for some concern about the sufficiency of his assets in the United Arab Emirates to meet an adverse costs order in these proceedings, even assuming it is able to be enforced in the United Arab Emirates.
On the hand, I consider that the evidence fell well short of establishing stultification. The plaintiff was not only vague about the value of his assets in the United Arab Emirates, but also did not ever say that he did not have any other assets outside of the United Arab Emirates. Nor did he provide any information about what steps he had taken or might take in order to obtain assistance in funding the proceedings. The bare assertion of stultification by his solicitor – particularly when it was predicated upon a figure of between $200,000 and $220,000 being payable by way of security for cost and did not address his capacity to pay a lesser amount without stultifying the litigation – was not sufficient to establish stultification.
In my view, these aspects of the evidence in relation to the plaintiff’s financial position were a relevant consideration in favour of an order for security.
Disposition of the appeal
In my view, the Master has fallen into error in the exercise of his discretion in relation to security for costs. While correctly identifying the starting point that the non-residence of the plaintiff meant that an order would usually be made, I consider that his Honour erred in relying upon the two matters he did in holding that the usual position have been displaced. In my view, both matters were irrelevant to the exercise of the discretion and hence reliance upon them involved error in the sense required by House v The King.
Alternatively, and in any event, in light of the combination of the following considerations:
· the non-residence of the plaintiff;
· the absence of any assets of the plaintiff within the jurisdiction;
· the fact that the United Arab Emirates is not listed as a country to which the provisions of the Foreign Judgments Act are applicable, and the complexity and uncertainty likely to be associated with the enforcement of a South Australian costs order in the United Arab Emirates; and
· the uncertainty about the plaintiff’s financial position and the absence of any basis for determining that an order for security would stultify the proceedings,
I consider that the decision not to award security for costs was an unreasonable exercise of that discretion and hence involved error in the House v The King sense.
I would thus allow the appeal, set aside the Master’s decision and exercise the discretion afresh.
In exercising that discretion, bearing in mind the matters listed above, I consider it appropriate that the first defendant have the protection of an order for security.
Given the uncertainty about enforcement in the United Arab Emirates, I do not consider that this is a case in which the quantum of the security should be confined to the likely costs of enforcement. I consider the quantum should reflect the likely party and party costs associated with preparing the matter through to the commencement of trial, with the expectation that the appropriateness of any additional security may be addressed in the lead up to the trial.
Given the promptness of the application, I do not ignore the costs incurred to date. However, as the authorities acknowledge, I do not consider it necessary or appropriate to order an amount reflecting a complete indemnity against the first defendant’s likely party and party costs through to the commencement of trial. Security is often ordered in a relatively modest or conservative amount, reflecting the fact that it is intended to mitigate the risk associated with enforcement of a costs order and is not necessarily intended to be a complete indemnity in respect of those costs.
It is always difficult to be precise about the quantum of the costs likely to be incurred, and the general and conflicting nature of the evidence in this case makes that task particularly difficult. In my view, an order for $70,000 by way of security for the first defendant’s costs through to the commencement of trial is reasonable.
I will allow the appeal, and order security for costs in the amount of $70,000. I will hear the parties as to the precise terms of the orders, and in relation to the issue of costs of the application and appeal.
4
13
1