CBX2 Pty Ltd v National Australia Bank (No 2)

[2015] NSWSC 1969

Supreme Court

New South Wales

Medium Neutral Citation:	CBX2 Pty Limited v National Australia Bank (No 2) [2015] NSWSC 1969
Hearing dates:	15 December 2015
Date of orders:	16 December 2015
Decision date:	15 December 2015
Jurisdiction:	Equity - Commercial List
Before:	McDougall J
Decision:	Appeal allowed. Set aside order of Associate Justice and order plaintiff to provide security for defendant’s costs.
Catchwords:	PRACTICE AND PROCEDURE – interlocutory application – security for costs – three discretionary factors – first, whether the making of an order for security for costs would stultify the proceedings – second, whether the defendant is the cause of the plaintiff’s impecuniosity – where absence of full and frank disclosure again precludes that finding – where decline in financial resources of plaintiff in any event not apparently related to any actions on the bank, on the available evidence – third, the financial position of plaintiff’s director and shareholder who stands to benefit from any success it enjoys in the litigation – failure by the plaintiff to make full and frank disclosure – where plaintiff has onus of proof – resulting impossibility of being satisfied of any of the three discretionary factors in the plaintiff’s favour – result that security for costs should be given – quantum – evidence of costs experts
Legislation Cited:	Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744 Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Nonox Australia v Certain Underwriters at Lloyds [2014] NSWSC 221 Unified Pty Ltd v Cancer Council of Western Australia Inc (No 3) [2011] WASC 161
Category:	Procedural and other rulings
Parties:	CBX2 Pty Limited (Plaintiff) National Australia Bank Limited (Defendant)
Representation:	Counsel: A J McQuillen (Respondent) P D Reynolds (Appellant)    Solicitors: Sullivan Fernan Laywers (Plaintiff) Corrs Chambers Westgarth (Defendant)
File Number(s):	2014/243692

Judgment   (ex tempore – revised 15 december 2015)

1. HIS HONOUR: On 27 October 2015, an Associate Justice of the Court gave judgment dismissing the defendant Bank’s application for security for costs. At that stage, the matter was listed in the Common Law Division. The matter has now been transferred to the Commercial List. The Bank has appealed from the decision of the Associate Justice.

2. For the reasons I gave yesterday (CBX2 Pty Ltd v National Australia Bank [2015] NSWSC 1945), I am satisfied that the decision of the Associate Justice was affected by factual error. In those circumstances, it is necessary that I should re-examine the substantive question before the Associate Justice. That substantive question is whether, given the undoubted satisfaction of the requirement that it be shown that the plaintiff CBX2 could not afford to pay the Bank's costs if ordered to do so, security should be ordered, and if so in what amount.

Approach to exercise of discretion

3. As I have said, there is no doubt that the jurisdictional fact is satisfied, both for the purposes of s 1335 of the Corporations Act 2001 (Cth) and for the purposes of UCPR r 42.21. It is convenient to proceed under the Rules, and to note that r 42.21(1A) sets out matters to which the Court may have regard in determining whether it is appropriate to make an order for security for costs. In what follows, I shall deal with so many of the factors listed in subr (1A) as seem to me to be relevant. The way the argument has panned out, those relevant factors also overlap with matters to which Beazley J referred in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196 –198.

4. In looking at the list of discretionary factors, it is necessary to balance a number of considerations. One is that in terms, once the jurisdiction to order security for costs is enlivened (as it is in the present case), the Court's discretion is relevantly unfettered. As I said in Nonox Australia v Certain Underwriters at Lloyds [2014] NSWSC 221, the discretion is one to be exercised judicially. That in turn requires that it be exercised on the basis of such material put before the Court as is relevant, and in a way which, objectively, gives due respect to the purpose underlying the rule. I added, and I remain of the view, that the Court must take into account as well as that statutory purpose, the competing consideration that arguable disputes should be litigated if at all possible. Put more bluntly, citizens should not be denied access to the Court except for good reason.

Relevant discretionary factors

5. The discretionary factors relied upon by Mr McQuillen of Counsel, who appeared for CBX2, as indicating that the Court should make no order for security for costs, overlapped. They were:

1. Would the making of an order for security for costs stultify the proceedings?

2. Were the actions of the Bank, of which CBX2 makes complaint, the cause of its present impecuniosity?

3. What is the financial position of Mr Blinkworth – the sole director and shareholder of CBX2, and the person who (it may be assumed) stands to benefit from any success that CBX2 enjoys in the litigation?

The authorities

6. Relevant to the first two matters, McClellan CJ at CL, with whom Mason P agreed, said in Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276 at [94] that the onus lay on a plaintiff resisting an order for security to show both that its financial position was adequate before it met with the misfortunes, at the hands of the defendant, of which it complains, and that it was the actions of the defendant that caused or materially contributed to the present impecuniosity of the plaintiff. At [95], his Honour cited with approval a statement in a leading text on the topic of costs, that a plaintiff making such a case should support it with straightforward, unambiguous and “fairly compelling” evidence. I set out those paragraphs of his Honour's reasons:

[94]   The claimants carried the onus of establishing both the adequacy of their financial position before their dealings with the opponents and that the opponents’ actions have caused or at least materially contributed to the claimants’ inability to meet an order for security for costs: see Fiduciary Ltd v Morningstar Research Pty Ltd at [100].

[95]    In Law of Costs, G E Dal Pont says (at [29.96]):

[T]he plaintiff must be able to support the allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial. For this reason, it is not enough that the defendant’s conduct is merely a contributing factor — it must be the material contributor to or cause of the plaintiff’s impecuniosity. [Emphasis added]

(See also MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100 per Needham J; Fiduciary Ltd v Morningstar Research Pty Ltd at [88] per Austin J; Pioneer Park (in liq) v ANZ [2005] NSWSC 832 at [14] per Einstein J; Sharjade v Darwinia Estate [2006] NSWSC 708 at [17]–[20] per McDougall J.)

7. It would appear that Basten JA, who although giving separate reasons concurred in the outcome, had a similar view. That appears from what his Honour said at [33]. It is not necessary to set out that paragraph.

8. It has been said that a plaintiff that seeks to prove stultification must be full and frank in its disclosure to the Court: see Allanson J in Unified Pty Limited v Cancer Council of Western Australia Inc (No 3) [2011] WASC 161 at [15]. Einstein J in this Court spoke to similar effect in his reasons in Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744 at [66]. His Honour pointed to the requirement that the plaintiff should "call the necessary evidence to establish what are the assets of shareholders or creditors of the plaintiffs or of persons or companies with whom the plaintiffs have funding arrangements or agreements".

Frank and full disclosure?

9. I start with the last category mentioned by Einstein J – those with whom the plaintiff in this case, CBX2, might have funding arrangements or agreements.

10. The evidence of Mr Sullivan, CBX2's solicitor, is that he has been retained by CBX2 on ordinary commercial terms. Certainly, the costs agreement which is in evidence supports that proposition. Mr Sullivan said that he had received two payments, each of $15,000, on account of his costs. The evidence might suggest that one of those payments came from Mr Blinkworth. The identity of the other payer is unknown.

11. However, Mr Sullivan said, he could not regard the credit balance standing in his trust account from time to time as money of CBX2. That was so, he said, because he did not know from whom the money had come. Mr Blinkworth had declined to give him instructions on that matter. Thus, one simply does not know whether such funding as has occurred was indeed funding coming from Mr Blinkworth, or funding coming from some external source.

12. The significance of that matter extends well beyond the sum of $30,000 to which I have referred. When this matter was in the Common Law Division, CBX2 filed a statement of claim. The statement of claim was verified by the affidavit of Mr Blinkworth. Under the heading "Losses", the statement of claim said (at para 146) that CBX2 "claims reimbursement of legal fees, accounting fees and consultant's fees, estimated to be $200,000 incurred since 2008".

13. As Mr Reynolds of Counsel, for the Bank, pointed out, the phrasing of that claim for relief suggests that CBX2 has paid out amounts totalling of the order of $200,000, for the specified purposes, since 2008. If its case in this Court, on the question of security for costs, is to be believed, it has been without assets since 2008. Hence, if it has paid out of the order of $200,000, the money must have come from somewhere other than its own resources. The evidence gives no clue as to who the benefactor or benefactors might have been.

14. Further, and returning to the requirement that there be full disclosure of the assets of shareholders, the evidence is in my view remarkably deficient in that respect. That is one of the reasons why, respectfully, I thought that the Associate Justice had erred.

15. I interpose to note that, as the Associate Justice remarked upon, the evidence of Mr Blinkworth's financial position came not from him but from his solicitor, Mr Sullivan. The Associate Justice referred to her hesitation in accepting that evidence, "particularly in relation to whether Mr Blinkworth has disclosed all of his assets" (see at [52] of her Honour's reasons).

16. In this case, Mr Blinkworth has produced tax returns for the years 2001 to 2011 but, significantly, excluding the 2005 and 2006 years. He has not produced any tax returns for the years 2012 onwards.

17. For the years in respect of which Mr Blinkworth did produce tax returns, he revealed very substantial earnings. The lowest figure was, in round figures, $228,000 in 2011. The highest figure was $950,000 in 2007. The following years were not quite so lucrative, but he nonetheless managed to earn $801,000 in 2008, $864,000 in 2009, and $780,000 in 2010.

18. Thus, at least until the 2011 financial year, Mr Blinkworth derived substantial or very substantial earnings. There is simply no explanation as to what has happened to those earnings. The solicitor's affidavits contain conclusory statements about payments out to support Mr Blinkworth's former wife and their daughter, and payments for rental for what appears to have been an expensive property at Walsh Bay.

19. Further, this aspect of the evidence stands in marked contrast to evidence given by a Mr Sanna. Mr Sanna appears to have been associated with Mr Blinkworth, or CBX2, in a business of training and breeding horses for show jumping. Mr Senna's evidence was that the horses had to be sold off in a "fire sale" because CBX2 had no sources of income. He said that in 2008, Mr Blinkworth effectively said he could not afford to support the business.

20. It will be recalled that he earnt $950,000 the year before, $801,000 in that year, and $864,000 the following year. The evidence offers no explanation whatsoever as to why the apparently prosperous situation appearing from the income tax returns nonetheless left Mr Blinkworth in the unfortunate position that, according to Mr Sanna, was reported.

21. This hardly counts as full and frank disclosure.

22. I referred to the absence of the 2005 and 2006 tax returns. That is significant. It appears from Mr Blinkworth's 2004 tax return that he owned, or had an ownership interest in, a number of rental properties. It appears from the 2007 tax return that those rental properties were no longer owned by him. Obviously enough, something happened to them in 2005 or 2006. One would have expected one or other, or both, of the tax returns for those years to disclose what the properties were sold for, and what if any capital gain was made. The affidavit evidence says merely that Mr Blinkworth "recovered his investment". If I may say so, that is a rather scanty description of the way in which the proceeds of sale were treated.

23. It is possible to draw the conclusion, which no doubt the suspicious person would draw, that the 2005 and 2006 tax returns were not produced because they might indicate that Mr Blinkworth had derived substantial capital gains from the sale of the investment properties. Since I am not by nature a suspicious person, I will not draw that inference. It is enough to say that this is another way in which the disclosure of Mr Blinkworth's financial affairs is less than full and frank.

24. In those circumstances, I am simply not satisfied that CBX2 has discharged the onus cast upon it of establishing that it is likely that the proceedings would be stultified if an order for security for costs were made. The fact that Mr Blinkworth has failed to put on any evidence of his financial position from 2012 on strongly supports that approach. I accept of course his solicitor's evidence, that his instructions are that Mr Blinkworth has been in receipt of a disability support pension from Centrelink since August 2013. That does not excuse the need to put on a full and frank statement of his current asset and income position. And in any event, the availability of that pension and the reasons why he draws it are of relevance to another question, to which I shall return in due course.

25. Mr Blinkworth himself did not give evidence. No accountant gave evidence. He gave evidence only through his solicitor. That evidence was conclusory in the extreme, at first. As the Bank put on its evidence, revealing the inadequacy of what had been put forward by Mr Blinkworth through his solicitor, the solicitor put on further affidavits, on the basis of his instructions from Mr Blinkworth. The impression that I get is, as Mr Reynolds submitted, that the evidence was tailored rather to meet evidence put forward by the Bank than to provide a full and frank statement of Mr Blinkworth's income and asset position.

26. I should make it perfectly plain that nothing in what I have said, or for that matter in what I am about to say, should be taken as reflecting in any way upon the solicitor. I accept that the solicitor acted upon the basis of his instructions. I accept that he has been honest in giving evidence of those instructions to the Court. My criticism is directed at Mr Blinkworth, and at the tardy, piecemeal and unsatisfactory way in which he has approached the task of putting before the Court, fully and frankly, evidence of his assets and income.

Bank the cause of CBX2’s impecuniosity?

27. I turn to the question of whether it was the wrongdoing attributed to the Bank that led to CBX2's undoubted present impecuniosity. As I have noted, by reference to the decision in Jazabas, that is a matter on which CBX2 carries the onus, and in respect of which it should adduce straightforward, unambiguous and fairly compelling evidence.

28. In my view, the evidence is anything but straightforward and compelling.

29. The starting point is that the wrong complained of is that the Bank paid away of the order of $1.8 million contrary to a mandate, or direction, given to it by Mr Blinkworth. However, the money in question was money of Mr Blinkworth's. He said that he was entitled to receive a cheque for $1.95 million. On the version of affairs that he alleges in his Commercial List Statement, that cheque was to be paid apparently into the account of CBX2 (I do not know why into that account rather than into his own account, since it was his money). It was to be used to pay out a housing loan which he and his then wife had, under which about $930,000 was said to be owing. Otherwise, it was to be used "for other business expenses of" CBX2.

30. This is somewhat different to the case that had been alleged in the statement of claim. That case was that the proceeds of the cheque "were to be used for the sole purpose of off-setting or repaying the home loan of [Mr Blinkworth]... with [the Bank]". There was no mention of the balance of the proceeds being available for the legitimate business expenses of CBX2. As I have said, the statement of claim was verified by the affidavit of Mr Blinkworth.

31. It is convenient to note at this point that Mr Blinkworth apparently told his former lawyers that the money was to be paid to another company, known as Reliance. That appears from a letter written by those lawyers, reciting Mr Blinkworth's instructions.

32. According to that letter, Mr Blinkworth had specifically directed a Mr Craig Ball (his former accountant and business partner, who is said to have been complicit in the wrongful payment out of the moneys) "that the entire amount of $1.950m be transferred to Reliance after having been deposited into CBX2... and like the other funds you had loaned to the Reliance organisation they should be recorded against your loan account".

33. Since $1 million of the money was in fact paid out to Reliance, it might be thought that on that version of what the money was to be used for, there could be no complaint. There is simply no explanation of the change in this aspect of CBX2's case.

34. However, the point for present purposes is that at the outset, the money was not CBX2's money. It was Mr Blinkworth's money. There is nothing in the material to which I have been taken to show why he (as he appears to have done) decided that the money should go to CBX2. Nor is there any explanation as to why, if the purpose of the money was in part to be applied to discharge his home loan, that had to be done from the account of CBX2.

35. Thus, except that Mr Blinkworth chose to give the money to CBX2, such losses as might have been incurred by any wrongful payment, contrary to mandate, would not have been losses of CBX2. They would have been losses by Mr Blinkworth in his own name.

36. Further, given that $930,000 was to be applied to purposes other than those of CBX2 on any view of the current version of the facts, the alleged losses that could have impacted on its financial position could be no more than the remaining $1,020,000.

37. However, the evidence does not support the proposition that it was the loss (of whatever sum, whether $1,020,000, or $1.95 million, or some other sum) that caused CBX2's financial position to deteriorate. On the contrary, the evidence is that its financial position had deteriorated, by 30 June 2007, for totally unrelated reasons.

38. It seems from the accounts of CBX2 that it carried on some sort of consulting business. In 2004, it received about $427,000 from this source. In 2005, it received $109,000 from this source. In 2006, it received $1.36 million from this source. In 2007, it received $304,000 from this source.

39. In short, up until 2007, CBX2's income from whatever consulting work it did fluctuated very substantially. There is no explanation as to why. And specifically, the very significant drop in income that it experienced in 2007 (well over $1 million, compared to the previous year) could not have had anything whatsoever to do with the wrongs attributed to the Bank.

27. So far as the evidence goes, after 2008, various assets owned by CBX2, in the nature of bloodstock, were sold. The proceeds of sale from 2009 to 2010 (the slow-burning “fire sale” to which I referred yesterday) were of the order of $900,000. Although it is said that the total amount recovered was less than the real value of the animals, nonetheless the sums actually recovered cannot be regarded as insubstantial. If those sums were paid to CBX2 (as they should have been) they would have provided a very substantial cash injection. If they were not paid to CBX2, that is hardly something for which the Bank can be said to have been responsible.

28. Again, the disclosure in this respect is anything but full and frank.

Other aspects of the evidence

42. I referred a little while ago to Mr Blinkworth's being on a disability support pension. That is significant, because he is the beneficiary of a superannuation fund. The trustee of that fund is a company that he controls. The trust deed provides for the payment out of benefits for temporary incapacity and permanent incapacity. It is plain that Mr Blinkworth appears to suffer from temporary incapacity as defined. I accept, as Mr McQuillen submitted, that the only benefit that could be paid to him would be benefit in the form of a non-commutable pension: that is to say, a benefit that would not, of itself, realise a capital sum. I accept, further, that the payment of such a pension might threaten his Centrelink benefits.

43. However, Mr Blinkworth has given no evidence whatsoever of the medical condition – physical, mental or both – that has caused him to be relevantly disabled. There is no evidence of the medical reasons why he cannot work. Thus, there is no basis on which the Court can assess whether he meets the definition of either temporary or permanent incapacity. Of course, if he met the definition of permanent incapacity, the whole of the superannuation fund could be paid out to him: some $430,000.

44. I have referred in some detail to the income and asset position of Mr Blinkworth over the years. There is one matter emerging from the evidence that I have not mentioned. It is that, at a time which I do not think is made clear in the evidence, Mr Blinkworth sold for $1.5 million a business that he had bought for $150,000. There is no real evidence of where that money went. Again, in 2005, Mr Blinkworth received $1.3 million as what appears to have been the first tranche of payments for the sale or disposal of another business, in respect of which the $1.95 million paid in August 2008 was the second tranche. There is again no evidence of what happened to this $1.3 million. In other words, in the years leading up to 2008 and the events of which complaint was made, Mr Blinkworth appears to have received, over and above the salary returned in his income tax returns, something of the order of $2.8 million.

Summary as to discretionary factors

45. Thus, when one looks at the three interrelated matters on which Mr McQuillen relied to defeat the application for security, the short summary is that I am totally unsatisfied that it is likely that the making of an order for security for costs would stultify the litigation. I am totally unsatisfied of that because in my view Mr Blinkworth has been anything but full and frank in the disclosure that he has instructed his solicitor to make. I am totally unsatisfied that any real connection has been shown between the wrongs complained of and the present impecunious position of CBX2. And I am totally unsatisfied that either Mr Blinkworth or the mysterious funders from whom, apparently, he is drawing financial support for this litigation cannot continue to fund it, even if he has to make some payment by way of security for costs or if they decide to protect their apparent investment to date by doing so. In short, I am unsatisfied that any of the discretionary reasons for refusing to make the order for security, on which reliance has been placed, are made out.

46. It follows, in my view, that there is no reason shown why some order for security should not be made.

Amount of security

47. I turn to the question of quantification of the amount. That evidence comes from CBX2's solicitor, Mr Delaney, and from a costs consultant, Mr Matters, who gave expert evidence. There was no challenge to the evidence of either of those witnesses; neither was cross-examined.

48. Mr Delaney sought to assess the actual costs that his client had paid, and would pay up to the stage when evidence on both sides had been completed. I should have mentioned earlier that what is sought is a first tranche of security, covering work to be done up until the time when the parties' evidence in chief and evidence in reply is complete. Rounding the figures out, Mr Delaney said that to the date he swore his affidavits, the Bank had incurred $92,000 in costs. From then up until the completion of evidence, he said, it would incur of the order of $224,000 in costs. That is a total of $316,000.

49. Mr Matters said that the likely recoverable costs on the ordinary basis would be respectively $75,000, $215,000 and a total of $290,000.

50. In giving that summary account of the evidence, I overlook both the detail in which it was given and the reasoning process thoroughly exposed in Mr Matters' evidence, to support his conclusion.

51. One immediate problem is that the estimate of costs includes amounts of about $34,000 for "discovery". That might have been relevant when the matter was in the Common Law Division. The usual position in the Equity Division is that disclosure of documents will not be ordered until the parties have put on their evidence. See Practice Note SC Eq 13. Thus, to that extent, the amount of relevant costs has been overstated. I hasten to say that this is not a criticism of either witness, since when the affidavits were put on, the matter was still in the Common Law Division.

52. As against this, as Mr Reynolds pointed out, if one looks at the detail of Mr Delaney's estimate of costs, it is likely somewhat to understate the actual amount of work likely to be done. For example, the time taken in respect of the application for security for costs has been very substantially more than he allowed: in part because of this appeal.

53. Making those allowances, it still seems to me that the figures claimed need to be reduced somewhat. I am not satisfied – there is no evidentiary basis on which I could be satisfied – that the now erroneous inclusion of costs for discovery is balanced, wholly or at least substantially, by additional costs likely to be incurred up until the parties' evidence is complete.

54. In addition, of course, even when it is decided to order security for costs, there is simply no principle that a successful party is entitled to be given security for the whole of the recoverable costs that it is likely to incur.

55. I have said more than once, in dealing with applications for security for costs, that the assessment of the amount for which security should be provided necessarily involves a somewhat broad-brush analysis. That is, I think, a polite way of saying that it really involves the Court fixing upon a figure that is incapable of detailed rational justification.

56. In the circumstances of this case, accepting as a starting point the evidence as to costs and recoverable costs, making allowance for the "discovery factor", and taking into account also that security need not be a complete protection against costs, I conclude that it is appropriate to order security, up until the time when the parties' evidence in chief and in reply is complete, in the sum of $250,000.

57. It is also of course appropriate to make the usual order for a stay until that security is provided.

58. In the circumstances of this case, I think that CBX2 should be given up until the beginning of the next term – 31 January 2016 (the new term commences on 1 February 2016) – to provide that security should it choose to do so. I think that subject to a matter I shall mention, the proceedings should be stayed up until security is given. I think that it is appropriate to make it clear that the Bank has liberty to apply for further tranches of security if so advised. And finally, I think, it is appropriate to list the matter for directions on 12 February 2016.

59. Mr Reynolds provided a form of draft orders. They really do not cover in detail the matters that I have just referred to. What I will do is make orders in chambers to reflect what I have just said, and ask Mr Reynolds to provide to my Associate a soft copy of the orders that he furnished so that this can be done.

60. That leaves the question of costs. The appeal has succeeded. It follows that the Bank should have its costs of the notice of motion filed on 24 November 2015. I have decided that the Bank should have security for its costs, and substantially as sought. It follows that the Bank should have the costs of its original notice of motion, filed on 8 May 2015. Those orders were covered in the draft and, subject to hearing from Mr McQuillen, they will be included among the orders that I make.

[FOR SUBMISSIONS SEE MAIN TRANSCRIPT]

61. HIS HONOUR: The only dispute is as to whether costs should be assessed forthwith. Certainly the Commercial List Practice Note (SC Eq 3) provides for that. In circumstances where the proceedings have been transferred into the Commercial List on the application of the Bank, I think that for the costs with which I am presently concerned, there should be a direction that the costs not be assessed forthwith. That should not be taken to express a view on when any further costs order made against CBX2 (should that happen) is to be assessed.

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