Bakers Investment Group (Australia) Pty Ltd v Caason Investments Pty Ltd
[2014] VSC 154
•4 APRIL 2014
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
CIVIL DIVISION
No. 5680 of 2011
| BAKERS INVESTMENT GROUP (AUSTRALIA) PTY LTD | Plaintiff |
| v | |
| CAASON INVESTMENTS PTY LTD & ORS | Defendants |
---
JUDGE: | ELLIOTT J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 4 APRIL 2014 | |
DATE OF JUDGMENT: | 4 APRIL 2014 | |
CASE MAY BE CITED AS: | BAKERS INVESTMENT GROUP (AUSTRALIA) PTY LTD v CAASON INVESTMENTS PTY LTD | |
MEDIUM NEUTRAL CITATION: | [2014] VSC 154 | |
---
PRACTICE AND PROCEDURE – security for costs – costs of trial – previous orders for security for costs – court’s discretion – whether material change in circumstances – relevance of litigation funder – counterclaim – undertaking by defendants to treat counterclaim as stayed if security not paid and proceeding stayed – Supreme Court (General Civil Procedure) Rules 2005 (Vic), rr 62.02(1), 62.05, Corporations Act 2001 (Cth), s 1335(1).
---
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr SW Stuckey | De Wet Partnership |
| For the Defendant | Mr M Moshinsky SC with Mr ST Pitt | Rogers & Gaylard |
HIS HONOUR:
A. Introduction
This is an application for security for costs made by the defendants against the plaintiff. It is the third such application. Security for costs has previously been ordered on 29 March 2012 (“the First Application”) and 21 December 2012 (“the Second Application”) by Efthim AsJ and Randall AsJ respectively.
The order in relation to the Second Application for security is in relation to the defendants' costs up to and including the end of the first day of trial. The security the subject of the previous orders has been paid.
The defendants now seek security for the remainder of the trial. The timing of this application is at the suggestion of the court, to avoid any disruption that might be caused if the application was made at the time of the trial. The trial has been set down to commence on 19 May 2014 on a present estimate of 10 days. The parties acknowledge that it is possible that the trial may run for approximately 8 days, depending on the final opinions of the respective experts of the parties, which are still in the process of being formulated. There has been no conferral between the experts to date, and this will be able to occur after the defendants' expert report has been filed and served.
For the reasons that follow, a further order will be made for security for costs.
B. Background
This proceeding concerns a joint venture agreement entered into between the plaintiff and the 1st defendant in March 2011. The purpose of the joint venture was to create a new corporate vehicle to establish and operate a coal mine in the Fingal Valley in the state of Tasmania by the acquisition and development of rights held by the 2nd defendant. These rights exist by reason of exploration licences held by the 2nd defendant.
It is unnecessary to go into any detail as to the various claims made by the plaintiff as to why it alleges that the 1st defendant repudiated the joint venture agreement. In summary, the plaintiff seeks to establish it has ownership rights in the corporate vehicle subsequently established. It also seeks substantial damages.
By a further amended defence and counterclaim filed February 2014, the defendants make a substantial counterclaim against the plaintiff. The relief sought in the counterclaim seeks not only declaratory relief, but also substantial damages.
It is convenient to now refer to the previous orders for security for costs.
In relation to the First Application, Efthim AsJ recorded various matters in "Other matters", which appear on the face of the orders of the court, which included:
2.The defendants state that there is a real risk that costs will not be paid if an order is made against the plaintiff because:
(a) the plaintiff has no real estate
(b)the plaintiff’s accounts for the year to date up to the end of February show loss. There is a significant drop in revenue from 2011 to 2012.
(c)The plaintiff obtains income from capital raising and research functions. A company, IQA Pty Ltd was formed to act in Raising, leaving the plaintiff to continue with research functions. It was formed after a former director, Mr Baker, was dismissed from employment. It is as a consequence of Mr Baker’s actions that the plaintiff decided to create a separate company. The plaintiff was unable to state when all of the capital rates and functions would be conducted by IQA Pty Ltd. There is a possibility that those functions could be given to IQA Pty Ltd prior to the mediation being completed. While there is anticipated research income from the 2012 year, the research income in the financial year up to 30 June 2011 was $90,000.00 and in the financial year up to 30 June 2010 was zero.
(d)Mr Baker has brought an action against the plaintiff claiming oppression and seeking that the company be wound up on just and equitable grounds pursuant to s 461(k) of the Corporations Act2001.
(e) The plaintiff is a company that is funded by its members.
3.According to the management accounts up to 29 February 2012, the plaintiff has net assets of $345,133.00. Of that the major assets are cash at bank at $66,411.00, trade receivables of $204,992.00 and shares in the All Mine Group Limited which are currently valued at 19 cents. The shares relate to consideration earned in providing a brokering service for the acquisition of Arccon (WA) Pty Ltd by All Mine Group Limited. The plaintiff is entitled to a share in performance and loyalty payment subject to Arccon achieving certain performance targets by 30 June. The plaintiff has agreed that it will not sell any of those shares without first consulting Mr Baker.
4.The only real assets of the company is the cash which will be expended in relation to the plaintiff’s own costs, and the shares which may not be able to be sold depending on the attitude of Mr Baker. In those circumstances, there is a real risk that security will not be paid.
In relation to the Second Application, Randall AsJ also noted in "Other matters":
2.I am satisfied that although the potential to receive the issue of extra shares in the All Mine Group seems to have crystallised, the financial position of the plaintiff has not substantially improved from the time of the order by the Hon Associate Justice Efthim. This is so because, even assuming the shares will be issued, the value used by the Hon Associate Justice Efthim was 19 cents per share. The shares are currently trading at about 12 cents each. Therefore any potential issue is counterbalanced by the decrease in the value.
…
4.If the proceeding is stayed by reason of this Order, the defendants, by their counsel, have undertaken not to prosecute the counterclaim.
The interlocutory process is now generally complete. The proceeding has been set down for trial on 19 May 2014, on an estimate of 8 to 10 days.
C. The present applications – approaches suggested
The defendants submit that nothing has changed materially since December 2013 and the court should not revisit the findings already made from which there was no appeal.
The plaintiff submits the court is required to look at the matters afresh. Indeed, it seeks that, in the circumstances in which the plaintiff now finds itself, the security for costs previously ordered and paid ought to be released back to the plaintiff.
Accordingly, there is a threshold issue as to the extent of the court's discretion on this application.
D. The applicable principles
In GB Radio (Australia) Pty Ltd v Marchant (No.3),[1] Hargrave J addressed the issue of what approach the court should take regarding subsequent applications for security for costs when security has previously been ordered. His Honour said:[2]
Rule 62.05 provides that the court may vary or set aside an order for security for costs. On its face, an unfettered discretion is granted, depending on the circumstances of the case.
[1][2005] VSC 222.
[2]At [21].
His Honour then referred to the circumstance of a plaintiff adducing fresh evidence. In so doing, Hargrave J quoted, with approval, from the decision of Gordano Building Contractors Ltd v Burgess:[3]
[3][1988] 1 WLR 890, 894.1 (Mann LJ).
The question is essentially this. Can a plaintiff return if he can show a material change of circumstances and can a plaintiff return if he produces fresh evidence as to the state of affairs extant at the date of the original order?
I take the second first. In my judgment, a plaintiff cannot return and seek to get an order varied or set aside by producing fresh evidence as to the state of affairs extant at the date of the order. There would be no end to the matter if such a situation was tolerable. He who wishes to have an opportunity to produce new evidence should, no doubt at some penalty as to costs, apply for an adjournment.
That leaves, however, the question of whether a plaintiff can apply if he can show a material change of circumstances. There is, surprisingly, no direct authority upon this point in regard to situations of impercuniosity. The matter is discussed in… The Supreme Court Practice 1988 ... where reference is made to a decision in this Court, Parkinson v Myer Wolff & Manley (unreported), 23 April 1985; Court of Appeal (Civil Division) Transcript No. UB 1888 of 1985. The facts are quite unimportant for present purposes, but there is a passage in the judgment of Kerr LJ, who gave the leading judgment, which is material:
“While it is not necessary to express a concluded view on the jurisdiction of the court in such cases, it seems to me at present that the conclusion expressed in that note is correct and that, just as a defendant may from time to time make further applications for security in the light of changed circumstances, so a plaintiff may be entitled to apply for variation or discharge of an order previously made if his circumstances have changed. Whether the court would accede to such an application must then depend on the circumstances, the nature of the order previously made and any other material considerations.”
Those observations, were, in the circumstances of that case, obiter. I would, however, adopt them. As Sir Denys Buckley pointed out in the course of argument, it must be open to a plaintiff to apply for payment out in the light of circumstances which have changed.
In short, if the circumstances of the plaintiff have materially changed since a previous order for security for costs, then the court may quite properly revisit previous orders made for security for costs.
E. Have the plaintiff’s circumstances materially changed?
It is plain that the circumstances have materially changed from those of December 2013. Since that time, the plaintiff has secured an agreement with a litigation funder. This funder has come to an arrangement with the plaintiff which has not been fully disclosed to the court. However, the evidence does disclose the funder has already met costs the plaintiff has incurred in conducting this litigation, which are in excess of $150,000. This fact alone demonstrates the plaintiff has managed to obtain substantial financial backing for the purpose of prosecuting its case against the defendants.
Such a circumstance means it is likely that the plaintiff has less exposure to its costs of the proceeding. This may also mean that there would be further funds available for any costs awarded in favour of the defendants.
Accordingly, I consider it appropriate to consider the financial position of the plaintiff afresh.
In so doing, the court must determine whether there is credible evidence that there is reason to believe that the plaintiff will be unable to pay the defendants' further costs of conducting the litigation.[4]
[4]Supreme Court (General Civil Procedure) Rules 2005 (Vic), r 62.02(1); Corporations Act 2001 (Cth), s 1335(1).
F. Evidence of the plaintiff’s financial circumstances
I now turn to the further evidence relevant to the plaintiff’s financial position. In an affidavit filed on behalf of the plaintiff by its company secretary and in-house legal counsel, certain financial information has now been provided which was not previously before the court. More particularly, the plaintiff tendered a document entitled "Management Report for the period ended 31 January 2014" (“the Management Report”).
The first thing to note about the accounts within the Management Report are that they are marked "Provisional - for internal information only". Absent corroborative evidence, this limited form of production gives the court little confidence as to the reliability of the Management Report.
Secondly, there is no evidence as to how the provisional accounts were prepared. In short, the court has been left in the dark as to the extent to which the accounts have been formulated based on the actual business records of the company. Further, the court has no idea whether the accounts have been prepared according to appropriate accounting standards.
Thirdly, there is no evidence to suggest the profit recorded in the accounts has been approved by the board of the plaintiff. The status of the Management Report is entirely unclear.
Fourthly, we are now in April 2014. There has been no meaningful attempt to inform the court as to what has occurred during the months of February and March 2014.
In summary, the Management Report is of virtually no probative value. Furthermore, the bare assertions from the company secretary and in-house counsel that the plaintiff is solvent and has “sufficient surplus” (the amount was not specified) to pay the defendants' costs adds little, if anything, to the unsatisfactory state of the evidence.
In any event, I have considered the contents of the accounts. In my view, they provide no substantive basis for concluding any costs order in favour of the defendants could be met by the plaintiff. Indeed, they suggest quite the opposite.
First, the accounts show that for the financial year to date, as at 31 January 2014, the plaintiff has incurred losses of $149,646. This is following losses incurred for the year ended 30 June 2013 of $84,245, this latter figure accords with the audited accounts for that period.
Secondly, the current assets have the item "Trade and other receivables" in the amount of $469,410. However, the accounts give no details as to what this figure comprises. In particular, there is no evidence to what extent the figure is attributable to "other receivables", rather than trade debtors.
Thirdly, the revenue includes a sum of $230,000, described as "litigation funding support". Based on this description, this source of revenue does not comprise funds to which the defendants would be likely to be able to rely upon in seeking to recover their costs if costs were awarded in their favour.
Fourthly, the other assets of the plaintiff include an amount for deposits in the sum of $89,000. This sum reflects the amount of money already paid into court by way of security for costs. It must follow that this sum is also not available to meet any further costs of the defendants.
Fifthly, there is no item of revenue or current asset to which the plaintiff can point as being a likely source of funds in the event that costs are awarded in the defendants’ favour.
Accordingly, even if the Management Report were of some probative value, its contents do not suggest the plaintiff would have any capacity to meet the defendants' further costs.
The evidence that is before the court that is probative are the audited accounts of the plaintiff as at 30 June 2013. Those accounts disclose, as already noted, that a loss was suffered by the plaintiff for the year ended 30 June 2013 of some $84,245. This follows from a loss for the year ended 30 June 2012 of $368,018.
As to the balance sheet, the net assets as at 30 June 2013 were negative $93,351, following on from the position as at 30 June 2012 of negative $9,106. Accordingly, the audited accounts show not only a negative net equity position, but also a decline in the net asset position of the plaintiff.
Also, significantly, the audited accounts to 30 June 2013 contain the following statement in the notes to the accounts:
(j) Going Concern
The deficiency of net assets and the net loss position indicate the existence of a material uncertainty regarding the company's ability to continue as a going concern, and therefore, whether the company will be able to realise its assets and discharge its liabilities in the normal course of business.
However, the financial statements have been prepared on a going concern basis, which contemplates the continuity of normal business activities and realisation of assets and discharge of liabilities in the ordinary course of business. This basis has been adopted as the company has received commitment from its directors on their continuing financial support to allow the company to meet its liabilities as and when they fall due and payable. It is the directors' belief that such financial support will continue to be made available.
(Emphasis added.)
Accordingly, the only basis upon which the company has been able to remain solvent to date, according to its audited accounts, is because of the continued support of the directors.
There is no evidence before the court to fetter or qualify, in any way, the statement that was made and attached to the 30 June 2013 accounts. Further, there is nothing to satisfy the court that the directors are bound to continue their support of the plaintiff. Furthermore, there is no affidavit from a director now stating that the directors will continue to support the company to meet any obligations they might have to the defendants if costs are ordered in the defendants' favour. Finally, there is no evidence of the financial capacity of the directors to meet any ongoing commitment to the plaintiff.
In these circumstances, I have formed the view that there is credible evidence before the court to meet the threshold question as to whether or not the plaintiff can meet the costs of the defendants in the event the defendants are successful in the proceeding.
G. Further exercise of the court’s discretion
That threshold question having been answered, the court is to approach the exercise of its discretion on the basis that the court has an “altogether unfettered [discretion], but on the footing that the very fact [that the jurisdiction has been enlivened] in the first place may itself be a factor, even a most significant factor, in the exercise of its discretion.[5]
[5]Ariss v Express Interiors Pty Ltd (in liquidation) [1996] 2 VR 507, 514.8 (Phillips JA, with whom Ormiston and Charles JJA agreed). See also Livingspring Pty Ltd v Kliger Partners [2008] 20 VR 377, 382 [18] (Maxwell P and Buchanan JA).
Put another way, the “satisfaction of the threshold condition … ‘calls for’ the fulfilment of the purpose for which the power was conferred”, subject to a proper exercise of the discretion depending on all the circumstances.[6] Further, although the exercise of the power may be “called for”, that circumstance does not alter the fact that the burden rests on the defendants to persuade the court that security should be ordered.[7]
[6]Livingspring Pty Ltd v Kliger Partners [2008] 20 VR 377, 382-383 [19].
[7]Ibid, 383 [21].
I respectfully adopt the observations made by Efthim AsJ and Randall AsJ in relation to the First Application and Second Application respectively. Those matters, together with the further evidence referred to above, demonstrate that there is a strong prima facie position that an order ought to be made in favour of the defendants for security for costs not covered by previous orders.
In resisting the further security for costs being ordered, the plaintiff relies upon the existence of the substantive counterclaim by the defendants. I accept the submission made on behalf of the plaintiff that the counterclaim now before the court is fundamentally different to the counterclaim as it stood when the issue of security for costs was before Efthim AsJ.[8]
[8]See pars 1 and 9 above.
To elaborate, in the draft defence and counterclaim dated 13 March 2012, whether by design or otherwise,[9] the counterclaim confined itself to declaratory relief, and orders pursuant to ss 237 and 243 of the Australian Consumer Law,[10] and s 12GM of the Australian Securities and Investments Commission Act 2001 (Cth). Although there might have been a basis for seeking damages in the counterclaim, no damages were in fact sought. Since that time the defendants have amended their counterclaim to claim damages in many millions of dollars.
[9]Senior counsel for the defendants suggested that the failure to claim damages in the draft pleading was an error rather than a conscious decision.
[10]That is, Australian Competition and Consumer Act 2010 (Cth), Schedule 2.
In reliance upon what Ormiston J said in Interwest Ltd v Tricontinental Corporation Ltd,[11] the plaintiff submits, given the existence of the counterclaim, it is inappropriate, in the exercise of the court's discretion, to award a further amount of security against the plaintiff. The relevant passage reads as follows:[12]
The defendants in argument themselves relied upon the defensive nature of the counterclaim and therefore sought to overcome the difficulties created by the elaborate defence to counterclaim and the almost identical issues raised by it. But I should first deal with their offer to submit to a stay of that counterclaim as a price for any stay of the corporate plaintiffs’ claims. It is hard to believe that a claim of over $250m could be so easily abandoned. Nevertheless, in my opinion it is not appropriate to allow the applicants the luxury of pursuing the counterclaim and then having it stayed when it suits them. As mentioned in an earlier hearing, they could well have discontinued those counterclaims, especially as they say they have such little value to them. As I have said above, there is no evidence as to either the fact that it has little value, or indeed as to their belief as to that issue. Such objective facts as exist do not support such a conclusion. So far as the counterclaims against three of the corporate plaintiffs are concerned, there appear to be claims exceeding $60m which are not only the subject of the counterclaim but are the basis of the three winding up applications. When asked what would happen to these applications if the counterclaim was stayed, the defendants did not likewise offer to have those winding up proceedings stayed, so that in a very real sense the claims would remain alive and have to be litigated. It was not suggested that those claims should be severed and those plaintiffs excluded from the application for security. If the defendants had been genuine they could have discontinued the counterclaims as such and merely sought to defend the plaintiffs’ claims by way of set-off, as is presently pleaded in para 155 of their defence. That would have required some reconstitution of the pleadings to particularise those claims of set-off, which presently are set out in detail in over 150 paragraphs of the counterclaim. But the whole exercise is artificial. The defendants cannot blow hot and cold. They must accept the consequences of the fact that up to the present they have been seeking to enforce by counterclaim claims exceeding $250m which cannot be resolved without entering upon most of the issues raised by the plaintiffs in their statement of claim.
(Emphasis added.)
[11][1991] 5 ACSR 621.
[12]At 627.3.
In response, the defendants referred to the decision of Judd J in Bufalo Corp Pty Ltd (receiver and manager appointed) (in liquidation) v Lendlease Primelife Ltd.[13] In that case, Judd J accepted an undertaking from the defendants that if security were ordered and the amount were not paid, resulting in a stay of the proceeding, then the defendants would also treat their counterclaim as stayed.
[13][2010] VSC 263.
Although the judgment of Judd J does not identify the amount of the claim, it was referred to by his Honour as “a significant counterclaim”.[14] From inquiries that I have made,[15] it appears that many millions of dollars were claimed in that counterclaim. Based on the undertaking given by the defendants in that proceeding, his Honour thought it was appropriate to award security for costs. In other words, the existence of the counterclaim was not a bar to an order for security for costs. I am of the view that a similar approach should be taken in the facts and circumstances of this case. The undertaking previously given to the court has been repeated by senior counsel on behalf of the defendants.
[14]At [70].
[15]I caused a search of the relevant court file to be conducted.
If the contents of the counterclaim are considered, and also the financial circumstances of the plaintiff, I accept that the position is highly likely, if not axiomatic, that had the plaintiff not sued the defendants, the defendants would not be pursing the counterclaim independently. Accordingly, based on the undertaking given to the court, the existence of the counterclaim is not a reason not to order security for costs.
The case of Interwest Ltd v Tricontinental Corporation Ltd[16] referred to above is readily distinguishable. It is clear from the passage quoted that Ormiston J was not convinced that the defendants genuinely intended to forego the counterclaims the subject of that proceeding. In stark contrast, given the precarious financial position of the plaintiff in this case, coupled with the undertaking, I am satisfied that the counterclaim will be rendered effectively otiose in the event that the proceeding is stayed by reason that security for costs is ordered and not paid.
[16][1991] 5 ACSR 621; see par 46 above.
Another relevant factor in determining whether or not to order security for costs is the existence of the litigation funder. Although not determinative of the issue, the fact that financial support from the litigation funder is now available to the plaintiff is a further reason why security for costs ought to be ordered. Notwithstanding requests on behalf of the defendants, no details of the arrangement between the plaintiff and the litigation funder have been provided. Thus, the court is not aware of whether or not the funder has agreed to indemnify the plaintiff for any costs it is required to pay to the defendants.
Even with the paucity of evidence available, the only proper inference open is that the litigation funder stands to gain from the litigation if the plaintiff is successful. The funder is able to place itself in this position without being a party to the proceeding and, therefore, without the usual risk in relation to costs (subject, of course, to the possibility of an order under s 24 of the Supreme Court Act 1986 (Vic)).[17] In such circumstances, as the litigation funder seeks to benefit financially from the litigation, it is also appropriate that the funder be exposed to providing a level of security for costs. Given the absence of any evidence of a contractual obligation to do so, the court ought to order such arrangements are put in place.
[17]Cf Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd (2005) 63 NSWLR 203, 230 [120] (Mason P, with whom Sheller JA agreed and Hodgson JA relevantly agreed).
In this regard, I again refer to the decision of Judd J in Bufalo Corp Pty Ltd v Lendlease Primelife Ltd,[18] in which his Honour said[19]:
[18][2010] VSC 263.
[19]At [53]-[54].
There is much to be said for the proposition that where a litigation funder has elected not to provide an irrevocable indemnity to a plaintiff for all costs that may be ordered against the plaintiff and declined to provide information to satisfy the court of its ability to meet any order for costs, it should provide a full indemnity to the defendants for any order for costs in their favour made against the plaintiff.
As against such a proposition, the plaintiff argued that the litigation funder should not be penalised for providing the plaintiff with access to justice by funding its claim. Such an argument may have greater weight in a jurisdiction, such as the United States of America, where orders for costs against an unsuccessful party are [un]usual. In this jurisdiction, however, access to justice carries with it financial responsibilities. One such responsibility is to meet orders for costs. In a jurisdiction where, in the ordinary course, costs follow the event, the failure of the plaintiff’s case will usually result in an order that the plaintiff pay the successful defendants’ costs.
(Original emphasis.)
H. Security for costs – timing and amount
The defendants seek any security for costs awarded to be paid by 1 May 2014, otherwise the proceeding be stayed. During argument, senior counsel for the defendants accepted this was not the appropriate order given that security already has been provided up to and including the end of the first day of the trial. In circumstances where security has been awarded to this time, it would be unjust that any further security be ordered prior to this time.
As to the amount of the security, there was no evidence in opposition to the amounts provided by the solicitor for the defendants. When counsel for the plaintiff was asked whether it was considered that any of the figures put forward were unreasonable, he only identified 1 item, namely the amount to be paid to the instructing solicitor for the duration of the trial. The suggestion was that it was not necessary to have a solicitor with the seniority of the solicitor in question, present at the trial. Therefore, it was submitted a lesser hourly rate ought to be ordered.
The amounts involved in this case are very substantial. Thus, it is entirely appropriate to have a senior solicitor instructing. I note that both parties have senior counsel representing them.
Accordingly, I propose to accept the figures provided in the letter forwarded to the plaintiff on 19 March 2014 as the proper basis for awarding security for costs, save that the order will be for 7 days costs rather than 9 days (given that 8 days is the agreed estimate of the duration of the trial in the event that the dispute between the experts is resolved).
The order of the court will be for the plaintiff to pay to the defendants security for costs in the sum of $113,193, by 4 pm on 19 May 2014, otherwise the proceeding be stayed.
---
12
2
0