Duke Holdings Ltd (in liq) v Duke Group Ltd (in liq)
[2009] SASC 245
•20 August 2009
SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
DUKE HOLDINGS LTD (IN LIQ) v DUKE GROUP LTD (IN LIQ)
[2009] SASC 245
Judgment of The Honourable Justice White
20 August 2009
CORPORATIONS - LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS - EXTERNAL LITIGATION PROCEDURE - COSTS - SECURITY FOR COSTS - DISCRETION OF COURT - GENERAL PRINCIPLES
CORPORATIONS - LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS - EXTERNAL LITIGATION PROCEDURE - COSTS - SECURITY FOR COSTS - DISCRETION OF COURT - IMPECUNIOSITY
PROCEDURE - COSTS - SECURITY FOR COSTS - PLAINTIFF
Application for security for costs in defending appeal against liquidator's rejection of two proofs of debt - Court's discretion to make an order for security for costs enlivened because of reasonable belief that the plaintiff will be unable to pay the costs of the defendant if they succeed in defending the appeal.
Whether appropriate to make an order for security for costs in light of considerations including the plaintiff's impecuniosity; the commercial nature of the litigation; the likely detriment to the defendant should they be unable to enforce a costs order against the plaintiff and the prospect that the plaintiff's prosecution of the appeal may be stifled.
Whether plaintiff required to establish that litigation funding is not available.
Held: plaintiff has not demonstrated that an order for security for costs will stultify prosecution of the appeal - an order for security for the defendant's costs is appropriate.
Corporations Act 2001 (Cth) s 1335, s 1408; Companies (South Australia) Code s 533; Corporations Law s 601; Trade Practices Act 1974 (Cth) s 52, referred to.
Kavcor Pty Ltd (In Liq) v Kavanagh [2005] NSWSC 1163; Jeffcott Holdings Ltd v Paior (1997) 15 ACLC 28; Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542, applied.
Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Limited (1998) 193 CLR 502, distinguished.
Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564; The Duke Group Limited (In Liq) v Pilmer (1998) 144 FLR 1; The Duke Group Limited (In Liq) v Pilmer (1999) 73 SASR 64; Pilmer v The Duke Group Limited (In Liq) (2001) 207 CLR 165; Sons of Gwalia v Margaretic & Ors (2007) 231 CLR 160; The Duke Group Limited (In Liq) v Arthur Young (Reg) & Peat Marwick Hungerfords (1991) 4 ACSR 335, discussed.
PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321; Hession v Century 21 South Pacific Ltd (In Liq) (1992) 28 NSWLR 120; Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd (2006) 229 CLR 386; Australian Quarry Holdings Pty Ltd (In Liq) v Dougherty (1992) 8 ACSR 569; Eddy v Mac Audio and Acoustical Consultants Pty Ltd [2000] SASC 145; Interwest Ltd v Tricontinental Corp. Ltd (1991) 5 ACSR 621; Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507, considered.
DUKE HOLDINGS LTD (IN LIQ) v DUKE GROUP LTD (IN LIQ)
[2009] SASC 245Civil
WHITE J: The defendant (Duke Group) is a company in liquidation. The plaintiff (DHL) submitted two proofs of debt to the liquidator (Mr Sheahan), each of which was rejected. Acting under s 538 of the Companies (South Australia) Code,[1] DHL has appealed against those decisions. Duke Group seeks security for its costs in defending the appeal.
[1] Continued in operation by s 601 of the Corporations Law and s 1408 of the Corporations Act 2001 (Cth).
Background
Duke Group has previously pursued in this Court substantial litigation arising out of one of the transactions giving rise to DHL’s proofs of debt.[2] The transaction was a “reverse take-over” which was put into effect between April and June 1988. Under that transaction (the RTA), Duke Group acquired the assets of DHL and its subsidiaries for a consideration totalling $67m. The consideration comprised the payment in cash of $12.25m, the issue to DHL of 59,444,444 shares at a price of 45 cents each ($26.75m), and the assumption by Duke Group of specified liabilities of DHL and its subsidiaries totalling $28m.
[2] The Duke Group Limited (In Liq) v Arthur Young (Reg) & Peat Marwick Hungerfords (1991) 4 ACSR 355 (Full Court); The Duke Group Limited (In Liq) v Pilmer [1998] SASC 6529; (1998) 144 FLR 1.
A second transaction (the Abbott Agreement) occurred at the same time. It involved the sale to DHL of the shares held by interests associated with Harold Abbott (the Abbott interests) in Duke Group. The consideration for that sale was $11,940,300 in cash. The Abbott Agreement was made on the same day as the RTA, and was subject to the RTA being completed.
Duke Group contends that the assets which it acquired under the RTA were virtually worthless. It became insolvent shortly after the RTA was completed. As a result of the action which it took against the firm of accountants (Arthur Young) who provided a report to it in relation to the RTA, Duke Group recovered, by negotiation, substantial damages.[3] It also recovered by judgment substantial damages against another firm of accountants and its own former directors.[4] That judgment followed a very substantial trial. There were appeals from the judgment at first instance to the Full Court[5] and, in turn, to the High Court.[6]
[3] Those proceedings settled after 220 days of hearing at the conclusion of Duke Group’s case and before the defendants had presented any evidence.
[4] The Duke Group Limited (In Liq) v Pilmer [1998] SASC 6529; (1998) 144 FLR 1.
[5] The Duke Group Limited (In Liq) v Pilmer [1999] SASC 97; (1999) 73 SASR 64.
[6] Pilmer v The Duke Group Limited (In Liq) (2001) 207 CLR 165.
As a result of the recoveries made by Duke Group, its creditors have now received payment in full of their proven debts as at the date of the liquidation.
Following the decision of the High Court in Sons of Gwalia v Margaretic & Ors,[7] Mr Sheahan realised that the shareholders of Duke Group may have claims on its funds which would take priority over the post-liquidation interest claims of its creditors. After obtaining directions from this Court, Mr Sheahan placed advertisements in a number of newspapers giving notice that any shareholder who wished to make a claim should do so by a specified date. DHL then lodged one proof of debt on 16 January 2008 (the First Proof) and another on 27 June 2008 (the Second Proof). It is these proofs which were rejected by Mr Sheahan and which give rise to the appeal to this Court.
[7] [2007] HCA 1; (2007) 231 CLR 160.
The Contentions to be made on the Appeal
The basis of DHL’s claim is set out in the Points of Claim which it has filed in support of the appeal. DHL contends that in entering into the RTA and the Abbott Agreement, it relied upon the opinion about the value of the shares of Duke Group and its subsidiaries expressed by one Hartigan in a written report prepared in March 1988. It alleges that in preparing his report, Hartigan relied upon representations made to him by Duke Group about its financial position and performance, which representations were false. As a result, Hartigan’s opinion (on DHL’s contention) overstated the value of Duke Group shares. Duke Group did not alert DHL to the overstatement of the value nor to the fact (as DHL contends) that the Hartigan report was based on inaccurate information. DHL contends that the true value of Duke Group and its subsidiaries at relevant times was between $30,590,000 and $32,790,000, and not the $51,410,000 as represented by Duke Group to Hartigan.
Under the First Proof (relating to the RTA) DHL seeks to recover damages of $14,177,500. It pleads that the conduct by Duke Group in making the representations to Hartigan, and in not subsequently alerting DHL to the true position, was misleading or deceptive, in contravention of s 52 of the Trade Practices Act 1974 (Cth) (TPA). It pleads, in the alternative, a breach of a contractual warranty contained in the RTA, as to the correctness of the information provided by Duke Group to Hartigan.
Under the Second Proof (relating to the Abbott Agreement), DHL seeks to recover $4,510,700. It relies upon the alleged contravention by Duke Group of s 52 of the TPA.
By its Points of Defence, Duke Group either denies or does not admit that it provided any misleading information to Hartigan; that DHL received the Hartigan report; that even if DHL did receive the Hartigan report, that it relied upon it as alleged by DHL; and that it provided the contractual warranty relied upon by DHL. Duke Group contends, in addition, that DHL warranted to it that the assets which it was to acquire from DHL would be worth not less than the purchase price of $67m. That warranty was breached as, on Duke Group’s contention, DHL and its subsidiaries were, at relevant times, virtually worthless. Duke Group contends that in determining the benefits acquired by each party under the transaction, the RTA should be considered in its entirety, ie, looking not only at the value of the assets acquired by DHL but also at the value of the assets which it transferred to Duke Group. Accordingly it contends that even if DHL makes good its claim that there was some shortfall in the value of the assets conveyed to it, Duke Group received in return a consideration which was valueless, with the effect that DHL made a profit and not a loss on the transaction. It also contends that the RTA and the Abbott Agreement are inextricably linked so that even if the latter agreement is brought into account, DHL still made a profit, and not a loss, on the transactions.
The Power to Order Security
Duke Group relies upon s 1335(1) of the Corporations Act 2001 (Cth) which provides as follows:
(1)Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
There was a suggestion by DHL that it may be the counterpart provision in s 533(1) of the Companies (South Australia) Code which is applicable. I am inclined to think that s 1335(1) is the applicable provision, but it is not necessary to decide this as the two provisions are identical.
The Court’s discretion to order security under s 1335(1) is enlivened as there is credible testimony giving reason to believe that DHL will be unable to pay the costs of Duke Group in the event that Duke Group succeeds in its defence. DHL is in liquidation. Its liquidator, Mr Home, has disclosed that it has available funds of $1,297.47 and that the claims of its unsecured creditors amount to $13,119,625.79.
The Exercise of the Discretion
The Court’s discretion to order security is unfettered but it must be exercised judicially, having regard to the considerations which are appropriate to the subject matter of the discretion. There is no predisposition in favour of requiring security to be given.[8] The Court must take into account the possible injustice if Duke Group is unable, in the event that it is successful, to recover its costs from DHL and, on the other hand, the possible injustice to DHL if Duke Group is able to escape liability for its wrongdoing by relying upon DHL’s incapacity to meet the costs of the litigation in which it seeks to vindicate its position.
[8] Jeffcott Holdings Ltd v Paior (1997) 15 ACLC 28 at 31.
It is convenient to address separately the principal matters bearing upon the exercise of the discretion under s 1335(1) to which the parties referred.
The Impecuniosity of DHL and the Potential Hardship to Duke Group
DHL’s impecuniosity not only enlivens the Court’s discretion under s 1335(1) to order security but is also relevant to the exercise of that discretion. The impecuniosity of a plaintiff company is not only the occasion for the exercise of the discretion but “a factor, and often a most significant factor, in the exercise of the Court’s discretion”.[9]
[9] Interwest Ltd v Tricontinental Corp. Ltd (1991) 5 ACSR 621 at 624. See also Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507 at 513.
Some authorities have suggested that once the defendant seeking security has established that the plaintiff will be unable to meet the defendant’s reasonable costs in the event that it succeeds in defending the action, an evidentiary burden shifts to the plaintiff to satisfy the Court that, taking into account all relevant factors, the Court should exercise the discretion by refusing to order security or by ordering security of a lesser amount than the defendant seeks.[10] I prefer to not approach the present application on that basis. If a plaintiff does have a general evidentiary burden as the decisions in Idoport and Morningstar suggest, it would seem to have the effect that in most, if not all, cases, once the discretion to order security is enlivened, the evidentiary onus moves to the plaintiff. I do not understand that to be the position which has hitherto been adopted in this Court.
[10] Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [60]-[62]; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 at [36]; (2004) 208 ALR 564 at 574.
In the present case the impecuniosity of DHL is a significant matter. Duke Group has estimated that its solicitor-client costs for the preparation and conduct of a 40 day trial will be between $838,700 and $1,033,200. If the parties are able to agree upon certain issues, the trial may be shorter but Duke Group’s estimate of its solicitor-client costs for the preparation and hearing of a shorter trial is in the range of $396,450 to $421,200.
DHL does not dispute those estimates. In fact, Mr Home expects DHL’s costs to be similar. Duke Group presently has cash reserves of approximately $12m. Mr Sheahan has said that he has received post-liquidation interest claims totalling approximately $48m. If Duke Group is successful in its defence of DHL’s claim, but cannot recover the substantial costs which it expects to incur, the funds presently available to Duke Group to meet the claims of its creditors will be depleted significantly.
In short, I am satisfied that the continuance of the proceedings against Duke Group, without the provision of some security, has the potential to cause significant detriment to Duke Group.
Stultification of the Proceedings
DHL’s evidence establishes that it will be unable to meet an order for security itself. It submits that the effect of an order for security will be to stultify its prosecution of the action.
The prospect that an order for the provision of security may have the effect of stultifying a plaintiff’s prosecution of an action does not, on itself, warrant the refusal of the application for security.[11] Nevertheless the prospect of stultification “usually operates as a powerful factor in favour of exercising the Court’s discretion in the plaintiff’s favour”.[12] That is because of the unwillingness of courts to preclude plaintiffs from pursuing deserving claims by reason of their own indigence.
[11] Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 at [73]; (2004) 208 ALR 564 at 582.
[12] Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545.
However, a plaintiff who asserts that an order for security will have the effect of stultifying the proceedings is required to establish not only that it is unable to provide the security but that those who stand behind it and who will benefit from the litigation if it is successful are also unable to do so. In Bell Wholesale Co Ltd v Gates Export Corporation,[13] the full Federal Court said:
In our opinion, a court is not justified in declining to order security on the ground that to do so will frustrate any litigation unless a company in the position of the appellant here establishes that those who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for a party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of impecuniosity of those who the litigation will benefit and to prove the necessary facts.[14]
[13] (1984) 2 FCR 1.
[14] Ibid at 179-80. See also PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 at 323; Hession v Century 21 South Pacific Ltd (In Liq) (1992) 28 NSWLR 120 at 123; Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507 at 515.
Despite its own estimate of the substantial costs likely to be incurred in the proceedings and of its own impecuniosity, DHL has not provided any evidence of the way in which those costs are to be funded.
It is conducting these proceedings using two firms of solicitors: Kelly & Co in Adelaide as agent for Corrs Chambers Westgarth in Melbourne. Counsel for DHL submitted that the Court could infer that both firms are acting in the matter on a no-win/no-fee basis. I will draw that inference on the basis that counsel would not have invited the Court to do so unless he knew it had a sound basis in fact. However, I do so on the further basis, having regard to ordinary commercial considerations, that neither firm would have agreed to act on that basis without first satisfying itself that DHL’s appeal has some sensible prospect of success. That latter inference has an implication in relation to the issue of litigation funding to which reference will be made shortly.
DHL has been in liquidation since 1989. Mr Home deposes to having received and admitted proofs of debt from unsecured creditors of DHL as follows:
Duke Securities Limited (In Liquidation)
$ 12,432,822
Genoa Investments Pty Ltd
27 $ $ 387,500
Barker Gosling
28 $ 7,955
Total
29 $12,828,277
Mr Home deposes also to having received, but not yet adjudicated upon, proofs of debt from putative creditors as follows:
Equiticorp Financial Services Limited
$ 1,670,029
Natwest Wholesale Australia Pty Limited
$ 181,191
Deputy Commissioner of Taxation
$ 175,250
Peter Reid
$ 97,501
Total
$ 2,123,979
In addition, Mr Home has received information from Dalgety Farmers Limited (now LFD Limited) that it has a claim against DHL for the sum of $602,260 but he has not received a proof of debt in relation to that claim, nor has the claim been admitted. Certain other proofs of debt received by Mr Home have effectively been withdrawn and it is not necessary to mention them separately.
From the above tables, it can be seen that the admitted proof of debt from Duke Securities accounts for nearly 97 per cent of all admitted proofs and for nearly 80 per cent of all claims against DHL for which the liquidator has received a proof of debt or information about a claim. Duke Securities has been in liquidation since 13 July 1989. The presentation of accounts and statements from its liquidator (Mr Silvia) lodged with the Australian Securities and Investments Commission on 11 June 2009 indicated that Duke Securities had 44 unsecured creditors with claims totalling in excess of $72m.
On 26 June 2009, DHL’s liquidator wrote to Mr Silvia informing him of the two proofs of debt lodged with Mr Sheahan by DHL; the rejection of those proofs; the appeal to this Court and of the application for security for costs. The letter continued:
Our client expects that DSL does not have assets sufficient to enable it to satisfy a security for costs order made against DHL in the amount of $408,120 (assuming it were otherwise willing to do so). Our client respectively requests that you advise us in writing by 5.00 pm on 1 July 2009 whether this is in fact the case.
For the avoidance of doubt, it is intended that your response will be relied upon by our client in opposing TDGL’s application for security for costs.
On 6 July 2009 a partner in Mr Silvia’s office responded, saying:
Your client’s understanding is correct.
DSL does not have sufficient assets to assist in providing security for costs.
DHL submitted that this evidence indicated that its major creditor is not able to provide the security, in the event that it is ordered.
Duke Group, however, submitted that this material did not demonstrate that those who stand behind DHL and who would benefit from its success on the appeal are unable to provide security. It emphasised that DHL has not provided any evidence concerning the capacity of the creditors of Duke Securities to provide security. The fact that Duke Securities has 44 unsecured creditors with claims totalling in excess of $72m indicates by itself that at least some of those creditors have substantial claims. Given that Duke Securities would be the substantial beneficiary of DHL’s success on the appeal, those creditors would also stand to benefit. In that circumstance, it is reasonable, Duke Group submitted, to expect that, at the least, evidence would be provided about their capacity to provide security in respect of the claim of stultification. Duke Group submitted, in addition, that the enquiry made of the liquidator of Mr Silvia was perfunctory, in effect inviting, without further enquiry or particularisation, the response which was ultimately given.
I accept the force of that submission. When a plea of stultification is made by a company in liquidation which has one major creditor who stands to benefit from the plaintiff’s success, but who is itself unable to provide funding assistance, the plaintiff should also demonstrate that those who stand behind the major creditor are also unable to provide that assistance. In that respect, DHL’s evidence in the present case is lacking.
Duke Group also submitted that it had not been demonstrated that the other creditors of DHL were unable to contribute to the provision of security or that it was otherwise impractical for them to do so. I do not accept that submission. Two of the creditors (Genoa Investments Pty Limited and Equiticorp Financial Services Limited) are themselves in liquidation. Given the size of their claimed debts relative to that of Duke Securities Limited and to the amount of security claimed by Duke Group, it is reasonable to infer that the liquidators of those companies would not regard it as commercially practical to provide security, even if otherwise willing to do so. The size of the debts claimed by the Deputy Commissioner for Taxation, Peter Reid and Barker Gosling also suggest that it may not be commercially practicable for them to contribute to the provision of security. Finally, both LFD Limited and the Deputy Commissioner for Taxation are creditors of both DHL and the Duke Group. Mr Sheahan did not dispute DHL’s liquidator’s assertion that LFD Limited is likely to receive a far greater dividend in respect of its admitted claim against Duke Group than it would receive in respect of its potential claim against DHL, making assistance by it to DHL’s appeal unlikely.
Duke Group submitted that in addition to looking to its creditors for funding, DHL could also look to a commercial litigation funder. It submitted that DHL had not adduced adequate evidence that litigation funding (which may involve the provision of funds for security) was not available.
Litigation funding by commercial interests providing the funding in exchange for an agreed proportion of the judgment proceeds has been recognised as being neither against public policy nor as an abuse of court process: Campbells Cash and Carry Pty Limited v Fostif Pty Ltd.[15] The majority decision in Fostif indicates that it is not contrary to public policy in Australia for a funder to finance and control litigation in the expectation of profit. Arrangements of this kind are not uncommon and are often appropriate in facilitating access to justice by those who are indigent or whose claims, considered by themselves, do not warrant the expenditure of substantial sums on legal costs. The use of litigation funding by trustees in bankruptcy and by liquidators has been commonplace.
[15] [2006] HCA 41; (2006) 229 CLR 386.
However, the question of whether a plaintiff resisting an order for the provision of security on the grounds of stultification should be required to adduce evidence that litigation funding is unavailable or inappropriate has received relatively little judicial attention. It was addressed in Kavcor Pty Ltd (In Liq) v Kavanagh,[16] in which Palmer J considered, in the circumstances of that case, that the plaintiff should demonstrate that commercial litigation funding was either unavailable or inappropriate:
Before the Court could be satisfied that Kavcor has a claim deserving of prosecution and that insurmountable impecuniosity will stifle it if a security for costs order is made, the Court would need evidence as to the circumstances in which the Liquidator has endeavoured unsuccessfully to procure litigation funding from Kavcor's creditors; it would need evidence explaining why commercial litigation funding is unavailable or inappropriate. In short, the Court requires evidence to satisfy it that insurmountable impecuniosity justifies departure from the usual requirement that a company in liquidation provide security for the costs of its litigation.[17]
Although other authorities have not addressed directly the question of whether a plaintiff should demonstrate that litigation funding is either unavailable or inappropriate there are some which, in their statement of general principle, do provide some support for that proposition. For example, in Ariss v Express Interiors Pty Ltd (In Liq),[18] Phillips JA in the judgment of the Court of Appeal of the Supreme Court of Victoria held:
… the plaintiff was bound to establish, if it could, the commercial impracticability of meeting an order for costs.[19] [Emphasis added]
Similarly, in Fiduciary Ltd v Morningstar Research Pty Ltd,[20] Austin J said:
… the mere fact that the corporate plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order for security will stultify the plaintiff’s claim. It may be that there is someone else who will satisfy the order on the plaintiff’s behalf.[21]
[16] [2005] NSWSC 1163.
[17] Ibid at [14].
[18] [1996] 2 VR 507.
[19] Ibid at 516.
[20] [2004] NSWSC 664; (2004) 208 ALR 564.
[21] Ibid at [74], 582.
In my opinion, the availability of commercial litigation funding is a matter which should be addressed, at least in commercial litigation of the present kind, by a plaintiff who resists providing security on the grounds of stultification. There may of course be many reasons why a plaintiff may not wish to enter into a litigation funding agreement. However, like Palmer J, I consider that a plaintiff in circumstances like the present, should adduce cogent evidence explaining why commercial litigation funding is either unavailable or inappropriate.
DHL accepted that some evidence about litigation funding was appropriate as Mr Home addressed the question in his affidavit in the following terms:
33I have considered entering into a funding arrangement with a litigation funder in relation to the prosecution of this action.
34As I have not previously entered into a funding arrangement with a litigation funder, I have sought and obtained advice from Corrs in relation to the issue.
35After considering advice provided by Corrs, I consider that it would be very unlikely that a litigation funder would be willing to fund the prosecution of this action for reasons including that:
(a) DHL’s ability to successfully prosecute this action is uncertain. DHL’s case relies largely upon the Court accepting inferences which I will submit should be drawn from a number of documents. I understand the authors of many of those documents are now deceased. In those circumstances, I expect that a litigation funder will perceive the action as unattractive.
(b) The costs of prosecuting this action are likely to be significant. Having regard to the matters deposed to in paragraphs 22 and 23 of Fisher’s Affidavit, it is apparent that TDGL’s costs are likely to be more than $1,000,000. I expect that DHL’s costs will be of a similar quantum (although I do not expect that DHL will obtain an expert valuation report). Given the possibility of the Court finding that the First Proof of Debt and/or the Second Proof of Debt should be admitted in part only, a litigation funder is likely to perceive its costs exposure as disproportionate to its likely return.
(c) TDGL has a distinct forensic advantage in this action. Sheahan has been involved in lengthy and complex litigation in relation to issues raised in this action and has the benefit of holding the overwhelming majority of documents relevant to those issues, which have not yet been disclosed. Unless and until TDGL makes disclosure and the documents disclosed are properly reviewed, I expect that the litigation funder will perceive its ability to be properly briefed in relation to the action as significantly impaired.
36After considering advice provided by Corrs, I consider that even if a litigation funder was willing to fund the prosecution of this action, it is very likely that it would only do so on terms that would entitle it to a significant portion of any proceeds of the action. Any such terms could result in the action being prosecuted for the benefit of the litigation funder alone, rather than the creditors of DHL.
37Having regard to the matters deposed to in paragraphs 35 and 36 of this Affidavit, I have decided not to approach a litigation funder in relation to this action and I consider it unnecessary for me to do so.
I understood the statement by Mr Home in para 34 that he had not previously entered into a funding arrangement with a litigation funder to indicate that he had not entered into such an arrangement at all. On that basis, it seemed to me that Mr Home’s views about the willingness of a litigation funder to provide assistance in relation to the appeal, or the terms upon which it may be prepared to do so, had little value. However, both parties invited me to proceed on the basis that Mr Home was saying only that he had not previously entered into a funding arrangement with a litigation funder in connection with the liquidation of DHL. Accordingly, I will proceed on that basis.
Mr Home’s conclusion that litigation funders would be unwilling to fund the prosecution of DHL’s appeal rests on three considerations which are expressed only in very general terms: the uncertain prospects of success; the substantial costs likely to be incurred in prosecuting the appeal; and the perceived forensic advantages of Duke Group in the appeal. Mr Home also considers that the terms which would be sought by a litigation funder could result in the appeal being prosecuted for the benefit of the litigation funder alone and not for the creditors of DHL.
A number of features of Mr Home’s affidavit concerning litigation funding may be noted. First, Mr Home does not particularise, let alone disclose, the advice from Corrs Chambers Westgarth upon which he has relied in coming to the views expressed in his affidavit. Nor is the basis for that advice disclosed. Secondly, DHL has not made an application to any commercial litigation funder. DHL is not able to adduce evidence that such an application has been refused. Nor has it adduced evidence from a litigation funder as to how an application for such funding may be perceived nor of the attitude which a litigation funder may take. Thirdly, given that Mr Home has already secured no-win/no-fee arrangements with DHL’s solicitors, it is not clear how the “costs exposure” of a litigation funder would be “disproportionate to its likely return”. Fourthly, and in any event, DHL is pursuing appeals with respect to proofs of debt amounting to $14,177,500 and $4,510,700 respectively. It is difficult to regard the likely costs exposure of a litigation funder as disproportionate to claims of that size. Even if DHL was only partially successful on the appeal, the amount of its recovery is likely to well exceed the costs incurred. Fifthly, although there may be uncertainty about DHL’s prospects of success, its solicitors, at least, seem to be proceeding on the basis that there are sensible prospects of success. There seems to be some inconsistency between the inferred view of the respective solicitors about the merits of the appeal, on the one hand, and the view which Mr Home imputes to litigation funders on the other.
In all these circumstances, I am not satisfied that DHL has demonstrated that litigation funding is either unavailable or inappropriate in the circumstances of this case. When coupled with the absence of evidence of the inability of the creditors of Duke Securities to provide, or assist in providing security, I consider that DHL has not demonstrated “insurmountable impecuniosity” so as to warrant the conclusion that an order for security will result in the stultification of its prosecution of the appeal.
Merits of the Appeal
It is sometimes necessary to consider whether a plaintiff’s claim is bona fide and has reasonable prospects of success. The weaker the plaintiff’s claim, the greater the likelihood of the defendant being successful, and hence the greater the likelihood of it suffering hardship through an unsatisfied costs order.
Duke Group submitted that DHL’s appeal was “inherently weak, or at best speculative”. Indeed, Duke Group submitted that the appeal with respect to the Second Proof could not, as a matter of law, succeed.
I consider it neither necessary nor appropriate to embark upon an evaluation of the strength of the appeal.[22] I have heard only limited argument and, in any event, it is open to Duke Group, if so minded, to seek the summary dismissal of the appeal with respect to the Second Proof. I also think it pertinent that Mr Home says that he instituted the appeal after having obtained legal advice from Corrs Chambers Westgarth.[23]
[22] Cf Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Limited [1998] HCA 41 at [26(3)]; (1998) 193 CLR 502 at 514; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 [37]; (2004) 208 ALR 564 at 574.
[23] Australian Quarry Holdings Pty Ltd (In Liq) v Dougherty (1992) 8 ACSR 569 at 570.
I proceed on the basis that the merit of DHL’s appeal is a neutral factor.
Public Policy
DHL emphasised that the appeal was brought by it at the instance of a liquidator discharging statutory functions. I agree that the fact that the proceedings are brought at the instance of a liquidator, appointed by a court, who is performing a public function to recover DHL’s losses for the benefit of the creditors and the shareholders is a relevant factor in the exercise of the discretion.[24] However, in the present case that consideration cuts both ways. Duke Group too is in liquidation and it is defending the appeal at the instance of its liquidator in order to preserve the funds available for the benefit of its creditors.
[24] Eddy v Mac Audio and Acoustical Consultants Pty Ltd [2000] SASC 145 at [39].
In my opinion, public policy considerations are neutral in this case.
Delay
DHL commenced its appeal on 15 August 2008. Duke Group first foreshadowed the application for security at a directions hearing on 10 June 2009 and filed its application on 17 June 2009. DHL submitted that Duke Group had unduly delayed making the application, allowing DHL to go on incurring costs in connection with the litigation, and therefore that delay was a relevant factor to be considered in exercising the discretion.
I do not regard the time which has elapsed since 15 August 2008 as amounting to a material delay nor as a significant factor in the exercise of the discretion. The period involved was relatively short and some of the time was, in any event, taken up in the investigation by Duke Group of DHL’s circumstances. There is some authority to the effect that an application for security should appropriately be made immediately after the filing of the defendant’s defence.[25] That would suggest that the application in the present case should appropriately have been made shortly after 4 March 2009 when Duke Group filed its first Points of Defence. The period which has elapsed since then is short.
[25] Ibid at [49].
As I have said, I do not regard delay as a significant consideration in the exercise of the discretion.
Conclusion on Exercise of Discretion
Although I have had regard to all the matters referred to above, the matters which I regard as particularly significant are the commercial nature of the litigation; DHL’s impecuniosity; the substantial costs likely to be incurred by Duke Group in defending the appeal and the corresponding detriment to it if it is unable to enforce a costs order in the event that it is successful; and DHL’s failure to establish that its prosecution of the appeal will inevitably be stultified if it is required to provide security. Having regard to those matters, I consider it appropriate to make an order for security.
Amount and Manner of Security
Duke Group submitted that the security should be provided by the payment into Court by DHL of the sum of $408,120. DHL did not take any issue with the amount of the security sought, nor with the manner by which it is to be provided.
Accordingly, I order that the further prosecution of the appeal by DHL be stayed until it has paid into Court the sum of $400,000 to secure Duke Group’s costs of the appeal.
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