Financial Pty Ltd v Nicols

[2023] NSWSC 306

Supreme Court

New South Wales

Medium Neutral Citation:

Financial Pty Ltd v Nicols [2023] NSWSC 306

Hearing dates:

17 March 2023

Decision date:

31 March 2023

Jurisdiction:

Equity

Before:

Robb J

Decision:

See [59] – [64]

Catchwords:

COSTS — application for security for costs — where plaintiff has minimal paid-up share capital — where sole director of plaintiff offered personal undertaking — where detailed financial circumstances of plaintiff and sole director not in evidence — plaintiff to provide security for costs

Legislation Cited:

Corporations Act 2001 (Cth), s 1335(1)

Legal Profession Uniform Law (NSW), ss 86, 88

Uniform Civil Procedure Rules 2005 (NSW), r 42.21(1)

Cases Cited:

Base 1 Projects Pty Ltd v Islamic College of Brisbane Ltd [2012] QCA 114

Gekko Developments Pty Ltd v Centa Co Pty Ltd (No 2) [2013] QSC 353

KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189; [1995] FCA 76

Maggbury Pty Ltd v Hafele Australia Pty Ltd [2000] QSC 220

Specialised Explosives Blasting & Training Pty Ltd v Huddy's Plant Hire Pty Ltd [2010] 2 Qd R 85; [2009] QCA 254

Suncare Constructions Australia Pty Ltd v Gainspace (MacKay) Pty Ltd [2016] QSC 67

Category:

Costs

Parties:

Financial Pty Ltd (Plaintiff)
Steven Nicols (In his capacity as Trustee in Bankruptcy for Rinaldo (Rick) Frank Albert Manietta (Defendant)

Representation:

Counsel:
A Fernon SC/A J Macauley (Plaintiff)
R J Pietriche (Defendant)

Solicitors:
Yeldham Price O'Brien Lusk (Plaintiff)
Colin Biggers & Paisley (Defendant)

File Number(s):

2022/00236204

JUDGMENT

1. By notice of motion filed on 13 September 2022 the defendant, Mr Steven Nicols, seeks an order that the plaintiff provide security for his costs of these proceedings in the amount of $430,000 by way of bank guarantee, funds paid into court, or other form of liquid security proffered in favour of Mr Nicols on or before seven days after the determination of the notice of motion. The plaintiff is Financial Pty Ltd (Financial).

2. Mr Nicols has sought security under rule 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW), s 1335(1) of the Corporations Act 2001 (Cth), and the inherent jurisdiction of this Court. The principles that should be applied to the application are in this case the same whichever juridical basis for the application is applied.

3. Mr Nicols also seeks the conventional order that the proceedings be stayed until such time as the security ordered by the Court is provided.

4. The proceedings were commenced by Financial by statement of claim filed on 10 August 2022. Mr Nicols acted promptly in making his application for the provision of security for his costs.

5. Financial has sued Mr Nicols in his personal capacity, and as the trustee in bankruptcy for Mr Rinaldo (Rick) Frank Albert Manietta, by appointment made on 8 May 2017.

6. Financial's claim arises out of a funding agreement made on 7 February 2018, under which Financial agreed to advance monies to Mr Nicols to fund legal proceedings against Mr Manietta and persons and companies associated with him. In brief, Financial alleges that the funding agreement contained terms that required Mr Nicols to consult with it before he settled any claims made against the proposed respondents. The statement of claim alleges that, by a variation deed made on 22 September 2020, Financial agreed to fund Mr Nicols' remuneration and disbursements to a limit of $150,000 and his legal costs and disbursements to a limit of $500,000, as well as other payments with its consent. One effect of the funding agreement was that Financial became entitled to reimbursement of all monies advanced to Mr Nicols as well as 30% of the proceeds of the litigation.

7. Financial alleges that Mr Nicols pursued proceedings in the Federal Circuit Court of Australia to examine persons in relation to the affairs of Mr Manietta and that on 2 June 2020, Mr Nicols commenced proceedings in the Federal Court of Australia against Mr Manietta and associated parties to recover monies and property. These proceedings were funded by money advanced by Financial under the funding agreement.

8. The essential complaint made by Financial in the statement of claim is that, on 27 May 2022, Mr Nicols accepted an offer made by most of the respondents to the proceedings on 18 May 2022 that had the effect that Mr Nicols discontinued the proceedings against all respondents, and withdrew any objections he had to the discharge of Mr Manietta’s bankruptcy, in consideration of the payment of the sum of $2 million in satisfaction of all of his claims, inclusive of interest and costs.

9. As a result of this settlement of his claims, Mr Nicols received the amount of $2 million on 17 June 2022. Under the funding agreement, Financial became entitled to reimbursement of the sum of $936,552.58 for legal costs, previous remuneration of Mr Nichols, and disbursements, together with payment of $600,000, as Financial's 30% share of the proceeds of the litigation. Mr Nicols paid Financial its total entitlement of $1,536,552.58 on 8 July 2022.

10. The statement of claim contains a series of allegations of communications between the solicitors for Financial and Mr Nicols concerning the appropriateness of Mr Nicols accepting the offer of settlement. The essence of Financial's claim against Mr Nicols, as formulated in par 36, is that Mr Nicols did not inform Financial that he had resolved to accept the offer of settlement, he did not invite and hear Financial's views, and he did not discuss with Financial any legal advice that he had obtained, so that he did not give real consideration to the opposition raised by Financial to the acceptance of the offer of settlement.

11. Financial alleges that Mr Nicols' conduct was in breach of the term of the funding agreement that required him to consult with Financial before he entered into any settlement of the proceedings.

12. The statement of claim also contains an allegation that Mr Nicols was bound by an estoppel arising out of an alleged representation made by him that he would not settle the Federal Court proceedings for a sum less than $3 million and that, if the proceedings did not settle prior to hearing for that sum, Mr Nicols would agree either to be replaced as trustee or to assign to Financial the choses in action being enforced in the proceedings.

13. The claim made by Financial in the statement of claim is for damages for the loss of its opportunity to secure a more favourable return to it under the terms of the funding agreement, either by reason that the respondents to the Federal Court proceedings would have made a higher offer to settle the proceedings than the payment of $2 million, or a better result would have been achieved by judicial determination.

14. Financial gave particulars of its claim to the effect that the value of the claims in the Federal Court proceedings were "conservatively, around $6.0m, and potentially in excess of $10.5m”.

15. Financial claims that it would have received an additional $0.30 for each dollar recovered from the further pursuit of the Federal Court proceedings above the $2 million recovered by Mr Nicols, and that it would also have been repaid all of the additional funds that it would have been required to advance for the further prosecution of the proceedings.

16. In this regard, Financial asserts in its particulars that the respondents to the Federal Court proceedings held sufficient assets to satisfy a liability that was potentially in excess of $10.5 million, as well as the cost of the proceedings.

17. There is no basis for the Court on the present application to form any judgment concerning Financial's prospects of success in these proceedings. In these circumstances, the following observation made by Beazley J (as her Honour then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (KP Cable) at 197 will be applicable:

Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are:

…

2.That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations: see M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; Bryan E Fencott at 514. As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success. (Bryan E Fencott at 514).

18. Mr Nicols did not contest the proposition that the Court should treat Financial's claim against him as being bona fides with a reasonable prospect of success. It may reasonably be observed, however, that the claim is inherently contentious, irrespective of whether Financial has a good claim that under the funding agreement Mr Nicols ought not to have settled the Federal Court proceedings without taking the steps that Financial has alleged the funding agreement obliged him to take. That is because success in the proceedings will require that Financial establish a number of speculative counterfactuals. One such counterfactual is that, if Mr Nicols had consulted with Financial to the degree required, he would not have accepted the settlement on offer anyway. Another counterfactual is that the respondents to the Federal Court proceedings would at some time have offered to settle by paying some amount more than $2 million, or that the Federal Court would have found in favour of Mr Nicols after a contested hearing and given judgment for a sum of more than $2 million. Financial will have to establish what the further costs of prosecuting the proceedings would have been. It would then have to establish that each of the respondents to the proceedings would have been able to satisfy the amount of the judgment against that respondent, as well as the amount of the costs that that respondent would have been ordered to pay.

19. The evidence before the Court on this security for costs application is not sufficient to enable the Court to make any realistic assessment of the likely future course of these proceedings or the costs that will be incurred by Mr Nicols in defending them. Although Mr Nicols' solicitor has quantified an estimate of the costs that will be incurred at $453,620 (on the basis of a six-day hearing), that estimation must largely be speculative because of the nature of the issues that have been outlined above and the difficulty of the forensic task that Financial will face in prosecuting its claim, particularly given the likely absence of cooperation by the respondents to the Federal Court proceedings.

20. The Court's present task is simplified because Financial has not lead evidence challenging the estimate of costs made by Mr Nicols’ solicitor. All that Financial has done is to refer to authority that suggests that it is usual for the Court to fix an amount of security which is below the applicant's estimation, and to submit that, if an order for security is made, it should be limited to a reduced figure of $315,000. The Court is, in these circumstances, to some degree spared the difficult task of addressing what the real costs of defending these proceedings are likely to be. That is a welcome development because the claim that Financial has chosen to pursue might commit Mr Nicols to incurring very substantial costs that are out of all proportion to the quantum of the damages that Financial might realistically hope to receive.

21. As Financial only has a paid-up capital of $200, it has elected not to contest the issue of whether there is reason to believe that it will be unable to satisfy any order for costs that may be made against it in these proceedings.

22. Instead, Financial has proffered the following undertakings by its sole director, Mr Farshad Amirbeaggi, to be given to the Court in lieu of the Court making an order against Financial that it provide security by paying money into court:

By consent:

1    The plaintiff's sole director, Mr Farshad Amirbeaggi, undertakes to the Court to be liable for, jointly and severally with the plaintiff, any amounts which the plaintiff is or may be liable to pay to the defendant, Steven Nicols, pursuant to any costs orders made in these proceedings.

2    For the duration of the proceedings, up to and including the payment of any amounts which the plaintiff is or may be liable to pay to the defendant pursuant to any costs orders made in these proceedings, Mr Farshad Amirbeaggi undertakes to the Court not to transfer, encumber or otherwise deal with his interest in the real property known as [a house in Woollahra] without giving at least 30 days' written notice of his intention to do so to the defendant's legal representatives.

23. Mr Nicols has not accepted this offer and resists the Court finding that adequate security for costs may be provided by Financial that does not involve the provision of liquid security that will be available to readily satisfy any costs order made by the Court against Financial in favour of Mr Nicols. Mr Nicols has not accepted Financial's offer because he considers that the information that Financial had provided concerning Mr Amirbeaggi's real financial circumstances does not provide Mr Nicols with the required degree of comfort that any costs orders made in his favour against Financial would be satisfied in a timely way or at all.

24. It is necessary to consider the relevant parts of the correspondence between the solicitors for the parties concerning the security for costs that should be provided by Financial, given that it did not proffer evidence that Financial itself would be able to promptly satisfy any costs orders made against it. I will refer to the correspondence as being exchanged between Mr Nicols and Financial although it was in fact exchanged between their solicitors.

25. On the basis that Financial had a paid-up capital of $200, on 19 August 2022 Mr Nicols asked Financial to agree to provide $430,000 as security for his costs, failing which he would make an application to the Court.

26. On 23 August 2022, Financial asked Mr Nicols to justify the amount of $430,000, and on 29 August 2022 Mr Nicols explained the composition of the amount in the same terms as his evidence to the Court on the application.

27. Financial first offered that Mr Amirbeaggi would provide an undertaking to the Court to meet any adverse costs order against Financial in these proceedings on 31 August 2022.

28. Mr Nicols then filed his notice of motion seeking an order for security for costs on 13 September 2022.

29. Financial advised Mr Nicols on 21 December 2022 that Mr Amirbeaggi remained willing to provide an undertaking to the Court and attached the draft consent order that is set out above at [22].

30. At the same time, Financial advised that Mr Amirbeaggi is the registered proprietor of the Woollahra property, which is a four bedroom, three bathroom, two-car terrace. Financial attached a title search for the Woollahra property that confirmed that Mr Amirbeaggi was the sole registered proprietor and that the property was subject to a mortgage to the National Australia Bank Ltd (NAB). Financial attached a valuation of the Woollahra property by a registered valuer dated 22 October 2022, which stated that the market value of the property was $4 million.

31. It will be convenient at this point to note that at the hearing Mr Nicols attempted to cast doubt on the reliability of the valuation report because it was prepared at a date about five months before the hearing and contained a number of qualifications that are commonly included in formal valuation reports in order to protect the valuer. I accept that for the purposes of this application the Court should treat the Woollahra property as having a market value in the order of $4 million.

32. Financial also attached a NAB transaction listing for Mr Amirbeaggi that stated that the amount of the mortgage debt was approximately $2 million, and a further transaction listing that recorded that Mr Amirbeaggi had an account with a credit cash balance of $1 million as at 6 December 2022.

33. Financial pointed out that Mr Amirbeaggi is a principal solicitor of a law firm and that he receives regular and substantial income from his role as principal solicitor.

34. Financial made an open offer of compromise to the effect that Mr Amirbeaggi would proffer the proposed undertaking to the Court and Mr Nicols' notice of motion filed on 13 September 2022 would be dismissed with no order as to costs (with the intention that each party bear its or his own costs).

35. Mr Nicols responded to Financial's offer and the information provided by email dated 22 December 2022. Among other matters, Mr Nicols stated that he did not consider that the valuation report for the Woollahra property alone was sufficient to address his concerns as to Mr Amirbeaggi's financial position and he required additional evidence and assurances. That included evidence as to the specific NAB mortgage balance, evidence that established that there were no other encumbrances or interests over the property in favour of third parties, and:

3.    Evidence as to Mr Amirbeaggi's net financial position which establishes that the equity which is in his property is not outweighed by liabilities elsewhere. We would require, for example, details in relation to his cash balances, other assets and any loans associated with same and a list of any contingent liabilities which he may owe to third parties.

36. Mr Nicols stated that he remained willing to consider the offer of an undertaking, but only if the information requested was provided.

37. The email, written by Mr Nicols' solicitors continued:

… In addition, we consider the form of undertaking offered is deficient in two respects. Namely:

4.    The undertaking is not tied to the property; and

5.    The undertaking only provides for notice to be given to us in advance of any intended action which would transfer, encumber or otherwise diminish his equity in the property. Our client is not otherwise given the ability to prevent the prejudice which this would cause him, unless he is able to satisfy the Court that an injunction preventing disposal or encumbrance of the property would be appropriate.

Accordingly, were our client to consider accepting Mr Amirbeaggi's undertaking the following amendments to the undertaking would be required.

6.    First, inserting a new order [2] that:

"Mr Farshad Amirbeaggi undertakes that he will, if unable to otherwise pay any such costs order within the required timeframe, use his equity in the [Woollahra property], either through sale of the property or in order to obtain finance, to meet any costs order payable to the defendant".

7.    Secondly, amending the existing order [2] (which would become order [3]) to the below:

[2 (3)] For the duration of the proceedings, up to and including the payment of any amounts which the plaintiff is or may be liable to pay to the defendant pursuant to any costs order made in these proceedings, Mr Farshad Amirbeaggi undertakes to the Court.

(a) not to transfer, encumber or otherwise deal with his interest in the property without giving at least 30 days' written notice to the defendant's legal representatives of:

(i) his intention to do so; and

(ii) alternate assets in which he has an unencumbered interest of at least $430,000 (alternate security), and which are to be used to meet any adverse costs order payable to the defendant in these proceedings.

(b) that, if alternate security is identified, he will not transfer, encumber or otherwise deal with the alternate security without giving at least 30 days' written notice to the defendant's legal representatives of:

(i) of his intention to do so; and

(ii) further alternative assets in which he has an unencumbered interest of at least $430,000 (further alternate security), and which are to be used to meet any adverse costs order payable to the defendant in these proceedings.

(d) [sic] that, if further alternate security is provided, until further order, he will not transfer, encumber or otherwise deal with his interest in the further alternate security.

38. Financial relied upon an affidavit of its solicitor made on 3 February 2023 in which the solicitor, in addition to giving evidence of matters that have already been referred to above, stated that he had been informed by Mr Amirbeaggi and believed that there were no encumbrances on the Woollahra property other than the mortgage to the NAB and that, apart from the liability to that bank, the only other liability of Mr Amirbeaggi was a debt to the Commissioner of Taxation in the amount of $312,143.35. The solicitor annexed Mr Amirbeaggi's 2021 income tax return and a document stating an estimate of the income tax payable by Mr Amirbeaggi. I do not see the need to disclose details of Mr Amirbeaggi's taxable income in these reasons. In relation to Mr Amirbeaggi's cash position, the solicitor stated on information and belief that Mr Amirbeaggi then had approximately $700,000 cash at bank and was expecting to receive a further $900,000 by 8 February 2023. Based upon these stated assets and liabilities, the solicitor said that Mr Amirbeaggi's assets were at least $3,287,856.65 (being $4 million plus $1,600,000 less $2 million and $312,143.35).

39. At the hearing on 17 March 2023, Mr Nicols pressed for an order that Financial provide appropriate liquid security for his costs, rather than that he would accept an undertaking from Mr Amirbeaggi in the revised terms set out in the 22 December 2022 email. For its part, Financial only offered the undertaking by Mr Amirbeaggi that is set out above at [22].

40. As Financial did not contest the issue that there is reason to believe that it will not be able to satisfy any costs orders in favour of Mr Nicols that may be made against it in these proceedings, the only question for the Court to determine is the nature, and if necessary, the amount, of the security for costs that Financial should be required to provide. As Financial resists an order that it provide liquid security, I consider that Financial has the burden of satisfying the Court, at least in the first instance, that the undertaking offered by Mr Amirbeaggi is a satisfactory form of security for costs in this case. If it is necessary for the Court to determine the amount of security for costs that should be provided, Mr Nicols will have the burden of satisfying the Court that the security should be in the amount that he seeks.

41. Financial's position at the hearing was that the personal undertaking to the Court offered by Mr Amirbeaggi provided more than adequate security for Mr Nicols' costs, given the evidence of Mr Amirbeaggi's financial position and, in addition, that the undertaking would be given to the Court, so that Mr Nicols would have the added protection of the sanctions that Mr Amirbeaggi would face if he did not satisfy the undertaking. Furthermore, Financial supported its submission on the basis that Mr Amirbeaggi's practising certificate would be placed in jeopardy if he did not satisfy the undertaking, because of his need to notify a bankruptcy-related event under ss 86 and 88 of the Legal Profession Uniform Law (NSW) if a failure to satisfy the undertaking led to his bankruptcy.

42. Financial submitted that Mr Amirbeaggi's personal undertaking to the Court was sufficiently secured by his supplementary undertaking not to transfer, encumber or otherwise deal with his interest in the Woollahra property without giving at least 30 days' notice to Mr Nicols. Financial submitted that the supplementary undertaking in practical terms would provide Mr Nicols with a security worth about $2 million for the personal undertaking.

43. Financial justified the supplementary undertaking being subject to being terminated on 30 days' notice to Mr Nicols on the basis that the additional practical security of about $2 million was much greater than the amount of the security for his costs sought by Mr Nicols, and if Mr Amirbeaggi was not able to terminate the supplementary undertaking on notice, then that would prevent him from dealing with the Woollahra property in his own proper interests and would risk stultifying his ownership of that property.

44. Mr Nicols' response to Financial's submissions was inhibited by the fact that he had very little information concerning the financial circumstances of either Financial or Mr Amirbeaggi, in the sense of knowing what the true nature of the commercial arrangements in which they are involved are, and the contingent risks that may arise out of those unknown matters. Mr Nicols pointed to the fact that Financial pleaded in par 1(d) of its statement of claim that "at all times" it "has been in the business of funding, and being involved with, litigation". Mr Nicols pointed to the fact that, as the evidence shows that Financial itself has limited capital, it is probable that Mr Amirbeaggi will be required to undertake personal liability in relation to the provision of capital to Financial, by way of borrowings or otherwise, to permit it to engage in its business of funding litigation. Even though the paucity of information provided to Mr Nicols by Financial prevented him from making specific submissions, he submitted that a realistic consideration by the Court of the possible financial position over time of both Financial and Mr Amirbeaggi meant that there was real inherent uncertainty about the position of both parties over time. Financial had provided evidence, but only on information and belief by its solicitor, that the only liability of Mr Amirbeaggi other than his debt to the NAB was the debt of $312,143.35 referred to above. However, as Mr Nicols was therefore unable to explore with Mr Amirbeaggi in the witness box the full extent of the business activities in which he is involved, there was an unknowable risk that Mr Amirbeaggi would incur liabilities between the present and the time that he may be called upon to satisfy his undertaking to the Court that will have the effect of diluting the value of that undertaking to Mr Nicols, because he will have to compete with other creditors who are entitled as unsecured creditors to be treated pro rata with Mr Nicols. Mr Amirbeaggi's personal incentive to satisfy his undertaking to the Court will provide Mr Nicols no protection against the requirement that Mr Amirbeaggi's unsecured creditors be treated equally under the bankruptcy laws.

45. Mr Nicols also submitted that it was not satisfactory in the circumstances that Mr Amirbeaggi be able to terminate his supplementary undertaking in relation to the Woollahra property on 30 days' notice, because that would have the practical effect of requiring Mr Nicols to prosecute his application for security for costs again, in unknown circumstances in which Mr Nicols may have incurred substantial legal costs, and the landscape of Mr Amirbeaggi's financial position has substantially changed for the worse.

46. The evidence relied upon by Financial to resist Mr Nicols' application that it provide liquid security for costs is somewhat two-edged. On the one hand, it creates a relatively sound appearance that, at the present time at least, Mr Amirbeaggi's financial position is such that he should have no real difficulty satisfying his personal undertaking to the Court, because he has substantial reserves of cash that would easily be sufficient to enable him to pay the amount of the security sought by Mr Nicols. However, Financial did not tender evidence that there is any good reason for Mr Amirbeaggi to maintain any particular amount of cash at bank. In the absence of such a reason, cash may be invested, and cash that is invested may be lost. That is a particular risk for parties engaged in litigation funding. Financial's statement of claim in this case shows that under the funding agreement its gross return has been about 64% of monies invested. Even in the absence of detailed evidence about the general business activities of Financial and Mr Amirbeaggi, it appears that those activities require substantial funding and involve significant risk.

47. Furthermore, Financial did not provide any evidence that a requirement that it call upon Mr Amirbeaggi to provide liquid security for costs on its behalf would cause it or Mr Amirbeaggi to suffer any financial detriment or lost opportunity. The Court might speculate on that subject, but there is no evidence that would enable the Court to truly balance the risk to Mr Nicols from being required to accept the proposed undertakings offered by Mr Amirbeaggi against the risk that Financial or Mr Amirbeaggi will suffer some opportunity cost as a result of being required to provide liquid security for costs.

48. The judicial controversy that previously existed concerning the significance to an application for security for costs against a company of doubtful solvency where the persons who stand behind the company and will gain from its success in the proceedings offer an undertaking to be responsible for paying any adverse costs order against the company has now been settled by the decision of Beazley J in KP Cable and the authorities that have followed that decision. Previously, some authorities supported the view that, where the persons who stand to gain from the successful prosecution of proceedings by a company of doubtful solvency offer an undertaking that makes their own assets liable to meet an adverse costs order, the Court should generally accept the undertaking as providing adequate security for costs. That was often thought to be so even where the assets of the persons offering the undertaking appeared inadequate to satisfy any possible adverse costs order. The rationale for this approach appears to have been that, as impecunious personal claimants are not prevented from prosecuting proceedings, persons in that position should not be worse off because they happen to have conducted their affairs through a corporate vehicle.

49. In KP Cable Beazley J discussed the authorities, and concluded at 204:

With respect to Powell J, I do not agree that Mantaray and Gentry stand for the proposition as stated by his Honour. In Mantaray before referring to the passage from Harpur, Byrne J stated, at 306, “[a]nother important consideration supports refusal of security”. He then set out the passage from Harpur and concluded “[the director] … has accepted personal responsibility for the defendant's costs. In this case that satisfies the object of [the section]” (emphasis added).

The full passage from Gentry is as follows:

“Once the shareholders have been exposed to personal liability for the applicant's costs, the weight to be given to the statutory purpose is gone …

The offer by the shareholders of the applicant to accept personal liability for the applicant's costs is a factor weighing heavily against the making of an order against the applicant for provision of a cash or other security for costs notwithstanding that the worth of the shareholders may ultimately prove insufficient to satisfy any judgment in whole or in part.”

Once the statements in Mantaray and Gentry are considered in context, it is clear that no more was being said than that the offer of security by way of a guarantee from the directors or shareholders or other persons interested in the outcome of the litigation was a factor, which could be decisive in a given case, to be considered in determining whether any other form of order for security for costs should be made. In my opinion, this is the correct approach to take when such an offer has been made.

50. Her Honour was followed by White J in Maggbury Pty Ltd v Hafele Australia Pty Ltd [2000] QSC 220 at [22]. For the purposes of a trial judge sitting in this Court, the matter was settled by the decision of the Queensland Court of Appeal in Specialised Explosives Blasting & Training Pty Ltd v Huddy's Plant Hire Pty Ltd [2010] 2 Qd R 85; [2009] QCA 254, where Muir JA (Holmes JA and Philippides J agreeing) said at [39], after conducting a detailed review of the relevant authorities (footnote omitted):

[39] I respectfully agree with the observations of Beazley J in KP Cable Investments that the decisions in Mantaray and Gentry do not purport to propound a principle that where the shareholders or other persons interested in the outcome of the litigation offer to be personally liable for the plaintiff company's costs, an order for security should not be made and other circumstances need not be considered.

51. This judgment has been followed in Suncare Constructions Australia Pty Ltd v Gainspace (MacKay) Pty Ltd [2016] QSC 67 at [36]; Gekko Developments Pty Ltd v Centa Co Pty Ltd (No 2) [2013] QSC 353 at [25] and Base 1 Projects Pty Ltd v Islamic College of Brisbane Ltd [2012] QCA 114 at [44].

52. The position therefore is that the fact that a person who stands to benefit from the success in proceedings of a company of doubtful solvency offers a personal undertaking to the Court to satisfy any adverse costs order made against the company does not fetter the Court’s discretion concerning the order that should be made, although it remains a relevant factor the significance of which will depend upon all of the circumstances of the particular case.

53. It is notable that in KP Cable itself a personal undertaking had been offered by a person standing to gain from the success in the proceedings of a corporate plaintiff, but Beazley J concluded at 204:

The question which arises in this case is whether the respondents should be deprived of the provision of security such as cash security or a charge over assets merely because such an offer has been made. In my opinion, there is no reason why they should be so deprived. Mrs Kinsella has rugs and antiques which she values at $30,000. They are not necessary for her daily living needs, although she may use them for such, nor are they used by her for the purposes of her earning a living. There is no reason, therefore, why those assets should not be charged to the extent of the security which I propose to order.

54. I consider that the nature of the issues raised by Financial in its statement of claim are of particular relevance to the determination of the present application. As I have explained above, in order to succeed on its claim that it lost a valuable opportunity because of Mr Nicols’ alleged breach of the funding agreement, Financial will have to succeed on an array of counterfactuals. The quantum that may be able to be established as the value of its lost opportunity will depend upon the Court’s findings in respect of all of the counterfactuals, leading to a finding concerning the probability that, if Mr Nicols had not accepted the settlement offer that was made, the continuation of the proceedings in the Federal Court would have led to an outcome that was $X greater than $2 million. That enquiry will have to be undertaken in circumstances where Financial had already paid $936,552.58 to Mr Nicols under the funding agreement, which was $286,552.58 greater than those $650,000 in total that Financial had bound itself to advance to Mr Nicols. On the basis of the allegations made in the statement of claim, Mr Nicols was in the position, when he accepted the offer of settlement, of being able to incur further costs only with the consent of Financial. At a hearing of these proceedings, the issue of whether Mr Nicols would in fact have rejected the offer of settlement and continued to incur further costs at the behest of Financial, in circumstances where his risk of personal liability for costs depended on the reliability of the indemnity offered by Financial, is likely to weigh heavily in the determination of the proceedings. In my view, it is clear that these proceedings give rise to an exceptional risk that the forensic issues will multiply and the costs of the parties will get out of hand.

55. In those circumstances, I am satisfied that, while Mr Nicols’ solicitor has made a genuine attempt to estimate the likely future costs that Mr Nicols will incur in these proceedings, at $453,620, there is an exceptional risk that that amount will prove to be an underestimate. This is a case where there is a particular risk that Mr Nicols will become committed in his defence to incurring costs substantially in excess of the amount now estimated, so that it will be necessary for Mr Nicols to make an application for the provision of further security for costs.

56. To the extent that that consideration is valid, it heightens the significance of the inherent risk to Mr Nicols that arises out of the fact that I have discussed above that Financial has not provided any evidence concerning the general commercial activities of itself or Mr Amirbeaggi. The detrimental risk to Mr Nicols that is now apparent will be magnified if the costs that Mr Nicols is required to incur increase unexpectedly as a result of the forensic consequences of the pursuit by Financial of the proof of the counterfactuals that have been referred to above.

57. Mr Nicols is entitled to expect the court to make a realistic practical judgment about the risk that, if Financial is not required to provide liquid security for his costs, he will be required to incur ever increasing costs in his defence in circumstances where the current apparent adequacy of the undertakings offered by Mr Amirbeaggi dissipate over time, with the result that Mr Nicols will effectively be marooned on an island of his own costs liability if he is forced to seek further security for his costs in the future.

58. Mr Nicols faces these risks in circumstances where Financial has not established that an order that it provide liquid security for his costs, or alternatively a security that gives him reliable priority to recover his costs, would cause any detriment or loss of opportunity to either Financial or Mr Amirbeaggi.

59. In the circumstances of a relatively finely balanced application such as the present one, I consider that there is no good reason for denying Mr Nichols an order for security for costs that either provides him with liquid security or alternatively security over an asset that obviates the possibility that his security will in fact be diluted by the rights of other creditors who are entitled to payment of their debts pro rata with Mr Nicols. It is reasonable that the Court gives Financial a choice whether to pay the amount of the security into Court (or provide a conventional alternative such as a bank guarantee) or that it provide a mortgage over suitable real property, such as Mr Amirbeaggi’s interest in the Woollahra property. If Financial elected to provide a mortgage over the Woollahra property, the Court would be open to submissions as to whether that mortgage should be in registrable form or whether there are impediments to that course that might justify the Court accepting an equitable mortgage supported by a caveat or undertaking by Mr Amirbeaggi not to increase the amount secured by the mortgage to the NAB, or to permit the registration of any dealing that would undermine the equitable mortgage granted to protect Mr Nicols. Mr Amirbeaggi should be permitted to transfer the Woollahra property on 30 days’ notice to Mr Nicols’ legal representatives, provided that on settlement of any transfer he becomes the registered proprietor of alternative real property over which he grants to Mr Nicols a substitute mortgage on equivalent terms that provides security to Mr Nicols for the amount of the security for costs that Financial is required to provide, plus 20% to provide Mr Nicols with a reasonable margin of protection.

60. I am satisfied that the appropriate amount of security for costs that Financial should provide is the $430,000 sought by Mr Nicols. This is not a case where the Court should, in the absence of any evidentiary challenge to the reasonableness of Mr Nicols’ estimate of his likely costs, make an arbitrary reduction to the amount of the security to be provided. As I have explained above, I consider that there is a very real risk that Mr Nicols will incur costs significantly in excess of the amount estimated.

54. If Financial elects to provide liquid security for costs in conventional form, I would receive submissions as to the appropriate timing for tranches of that security to be provided.

55. It is warranted in this case that the Court’s orders provide for express leave for Mr Nicols to make a further application for security for costs if the costs that he incurs exceed the estimated amount of $453,620.

56. The costs of Mr Nicols’ notice of motion should be reserved to the hearing of these proceedings or further order. Although Mr Nicols will succeed in obtaining an order for security for costs, the issue was relatively well-balanced as I have stated above, and this may prove to be a case where the costs of the notice of motion should be the parties’ costs in the cause.

57. The parties should confer for the purpose of agreeing short minutes of order if that is possible. If it is not possible, the parties should provide the short minutes of order that they propose the Court should make to my Associate, together with written submissions, if necessary, limited to two pages. If I am not able to resolve any dispute concerning the orders to be made in chambers, I will arrange for my Associate to list the matter for a further hearing.

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Decision last updated: 31 March 2023