Fitzpatrick v Isaacs

Case [2024] FCA 1187

FEDERAL COURT OF AUSTRALIA

Fitzpatrick v Isaacs [2024] FCA 1187

File number: QUD 365 of 2023
Judgment of: DERRINGTON J
Date of judgment: 17 October 2024
Catchwords: PRACTICE AND PROCEDURE – security for costs – application to review decision of Registrar to order security for costs – where there is an individual and corporate plaintiff – where claims of individual and company are not co-ordinate – where other persons who stand behind company and who may benefit from the litigation did not expose their assets to the risk of a cost order – security ordered against company
Legislation:

Corporations Act 2001 (Cth)

Federal Court of Australia Act 1976 (Cth)

Federal Court Rules 2011 (Cth)
Cases cited:

3Bears Childcare Centre Pty Ltd v Deputy Commissioner of Taxation, in the matter of 3Bears Childcare Centre Pty Ltd [2018] FCA 1690

All Class Insurance Brokers Pty Ltd (in liquidation) v Chubb Insurance Australia Limited [2020] FCA 840

Auslink Golf Course Pty Limited v Zhongsheng Group Pty Ltd [2023] FCA 397

Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371

Australian Battery Distributors Pty Ltd v Robert Bosch (Australia) Pty Ltd [2015] FCA 1164

Barton v Minister for Foreign Affairs (1984) 2 FCR 463

Beach Petroleum NL v Johnson, M.K. (1992) 7 ACSR 203

Bechara v Bates (2021) 286 FCR 166

Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564

General Trade Industries Pty Ltd (in liquidation) v AGL Energy Limited (No 2) [2023] FCA 556

Global Access Limited v Educationdynamics, LLC [2010] 1 Qd R 525

Gumm v Commissioner of Taxation [2024] FCA 71

Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523

In the matter of IPM Developments Pty Ltd [2023] NSWSC 1443

Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306

Jalpalm Pty Ltd v Hamilton Island Enterprises Pty Ltd (1995) 16 ACSR 532

Knight v Beyond Properties Pty Ltd [2005] FCA 764

Madgwick v Kelly (2013) 212 FCR 1

St Mary’s Hog’s Pty Ltd v HBCA Pty Ltd [2022] FCA 52

Strategic Financial and Project Services Pty Ltd v Bank of China Limited [2009] FCA 604

Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317

TS Lucas Pty Ltd v Anatinus Pty Ltd [2024] FCA 943

West International Pty Ltd v Ultradrilling Pty Ltd (2008) 68 ACSR 108

Willey v Synan (1935) 54 CLR 175
Division: General Division
Registry: Queensland
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Number of paragraphs: 84
Date of hearing: 29 January 2024
Counsel for the Plaintiffs and the Second Cross-Defendant: Mr A Kirby
Solicitor for the Plaintiffs and the Second Cross-Defendant: Nicholas O’Donohue and Co
Counsel for the Defendants and the Cross-Claimant: Mr E Olivier
Solicitor for the Defendants and the Cross-Claimant: S&A Law
Counsel for the First Cross-Defendant: The First Cross-Defendant did not appear

ORDERS

QUD 365 of 2023
BETWEEN:

HEATH FITZPATRICK

First Plaintiff

TOR CAPITAL PTY LTD (ACN 632 062 885)

Second Plaintiff

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AGLC
Fitzpatrick v Isaacs [2024] FCA 1187
Case
[2024] FCA 1187
Decision Date

CaseChat Overview and Summary

The matter of Fitzpatrick v Isaacs involves a dispute between Tor Capital, its director Mr Heath Fitzpatrick, and several defendants, including Mr Simon Isaacs, Oscarsun Pty Ltd, and Ebroker.com.au Pty Ltd. The plaintiffs allege oppressive conduct by the defendants concerning the management of Ebroker, including wrongful termination, breaches of shareholder agreements, and unfair dilution of shares. The defendants applied for security for costs, arguing that the plaintiffs, particularly Tor Capital, lack sufficient funds to cover potential costs. The court was tasked with determining whether security for costs should be ordered against Mr Fitzpatrick individually and against Tor Capital.

The court considered several factors, including the strength of the plaintiffs' case, the impecuniosity of the plaintiffs, and whether the application for security was oppressive. The court found that Mr Fitzpatrick, as an individual, was not appropriately subject to an order for security due to insufficient evidence of his impecuniosity and lack of other factors supporting such an order. However, the court found that Tor Capital, as a plaintiff, had limited financial resources and was unable to provide credible evidence of its financial position, despite undertakings from its shareholders not to enforce their loans until the defendants' costs were paid. The court concluded that the power under s 1335 of the Corporations Act was enlivened, and security should be ordered against Tor Capital to protect the defendants from potential financial loss.

The court ordered that Tor Capital provide security of $160,000 within 14 days, failing which its claims against the defendants would be stayed. The court also directed that the parties be heard on the question of costs. The orders ensure that the defendants are protected from potential financial loss while the litigation proceeds.

Orders

Orders of the court

1. Pursuant to s 1335 of the Corporations Act 2001 (Cth), or alternatively s 56 of the Federal Court of Australia Act 1976 (Cth) and r 19.01 of the Federal Court Rules 2011 (Cth), the second plaintiff provide security in the sum of $160,000.00 for the defendants’ costs in these proceedings.

2. The security referred to in Order 1 is to be provided:

(a) by the payment of the sum of $160,000.00 into Court or otherwise secured in a manner acceptable to a Registrar of the Court;

(b) within 14 days from the date of these Orders.

3. If the sum of $160,000.00 is not paid or secured as provided for in Order 2 hereof, the second plaintiff’s claim as against the defendants be stayed.

4. The parties are to be heard on the question of costs.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

The discretion to order security is broad. The matter which lies at the heart of the discretion is fairness: see Madgwick v Kelly (2013) 212 FCR 1, 21 [92] (Madgwick v Kelly). There are a number of well-established factors relevant to the Court’s exercise, and they include whether the application for security has been brought promptly; the strength and bona fides of the plaintiff’s case; whether the plaintiff’s impecuniosity was caused by the defendant’s conduct subject of the claim; whether the defendant’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious plaintiff a right to litigate; and, where the plaintiff is a corporation, whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security.Background to the proceeding The plaintiffs in the proceeding are Tor Capital and its sole director, Mr Heath Fitzpatrick. They bring claims against Mr Simon Isaacs, Oscarsun Pty Ltd as trustee for the Isaacs Family Trust (Oscarsun), and Ebroker.com.au Pty Ltd (Ebroker). Oscarsun is the largest shareholder in Ebroker, owning 70% of its shares, and Mr Isaacs is Ebroker’s sole director. Tor Capital acquired 25% of the issued shares in Ebroker in 2019. It remains an owner of those shares, although it is disputed whether its shareholding has been diluted following certain capital fundraising that occurred in August 2023. As to the shareholding in Tor Capital itself, Mr Fitzpatrick owns 25% of the shares through his company, Heathander Holdings Pty Ltd (Heathander). The remaining shareholders are Mr Fitzpatrick’s sister, Ms Kristy Pearson, who owns 25% of the shares, and his parents, Mr John Fitzpatrick and the late Mrs Christine Fitzpatrick, who own 50% of the shares through their company Jontine Pty Ltd (Jontine). The plaintiffs commenced this proceeding on 23 August 2023, claiming that the affairs of Ebroker have been conducted in a manner oppressive to Tor Capital within the meaning of s 232 of the Corporations Act. Paragraph 36 of the statement of claim relevantly sets out the oppressive conduct relied upon, which includes the acts of:(a)summarily, wrongly and unjustifiably terminating Mr Fitzpatrick’s employment as Chief Operating Officer of Ebroker;(b)breaching the deed entered into between the shareholders of Ebroker (Shareholders’ Deed), such that Tor Capital cannot sell its shares to other shareholders under the Shareholders’ Deed or to third parties;(c)wrongfully alleging that Mr Fitzpatrick misused his position and information obtained through that position to benefit Vine Capital Pty Ltd (Vine Capital), a business lending company of which Tor Capital is a shareholder;(d)purporting to undertake a share issue as to unfairly dilute Tor Capital’s percentage holding of shares in the Company from 25% to some 13%;(e)Oscarsun purporting to transfer a portion of its shares to Muddles Pty Ltd in breach of the terms of the Shareholders’ Deed;(f)denying Tor Capital access to the books of Ebroker; and(g)bringing this application for security for costs for an excessive and oppressive sum of $251,460.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

The defendants also submitted that Mr Fitzpatrick is suing for the benefit of others, namely, for the benefit of Tor Capital and its shareholders. It is well-recognised that, where an impecunious party is suing for the benefit of others, such a factor may weigh in favour of making an order for security: see Madgwick v Kelly at 5 [12]. However, that principle applies where those persons are immune from a costs order because they are not parties to the proceeding. In circumstances where Tor Capital is itself a plaintiff, this is not a particularly relevant factor in determining whether security should be ordered against Mr Fitzpatrick. The distinct question of whether the proceedings are brought for the benefit of Tor Capital’s shareholders will be considered below in the context of whether security should be ordered against Tor Capital.Conclusion in relation to Mr Fitzpatrick In light of the foregoing, it is not appropriate to make an order for security against Mr Fitzpatrick. It was not sufficiently established that he is impecunious and, even if he is, none of the additional factors identified by the defendants are sufficient to persuade the Court that this is a case where security ought to be ordered against an individual. Whether security should be ordered against Tor CapitalTor Capital’s ability to meet an adverse costs order In considering whether an order for security should be made against Tor Capital, the first question is whether it appears by credible testimony that there is reason to believe that it will be unable to pay the defendants’ costs if they are successful in their defence of the proceeding. In this respect, the defendants relied upon evidence including a company extract obtained from the Australian Securities and Investments Commission, revealing that Tor Capital has three shareholders, current issued capital of $100, and no net assets. Additionally, it was not disputed that Tor Capital does not carry on a business, and that it was incorporated for the sole purpose of holding shares in Ebroker. In light of these matters, Mr Robert Silberstein, the solicitor for the defendants, deposed that he is concerned that Tor Capital is highly leveraged or that it has only minimal cash or asset reserves at any given time. In response to the application for security, Tor Capital produced a “special purpose” financial report for the financial year ending 2022 (being a period ending some 18 months prior to the hearing of the review). The report is stated to have been prepared for use by directors and members of the company. It is unaudited, and is based on information provided by the director, Mr Fitzpatrick. Significantly, it is stated that the director is solely responsible for the information provided, yet the “Director’s Declaration” contained at the end of the report has not been signed. In these circumstances, the report has little, if any, probative value: Strategic Financial and Project Services Pty Ltd v Bank of China Limited [2009] FCA 604 [34] – [37].

Ratio Decidendi

Legal Principle Established

Further, even if it was somehow possible that the shareholding could be sold at a price which would exceed the sum of Tor Capital’s liabilities, an alternative and likely possibility is that it could not be. In this respect, the following observations in Beach Petroleum (at 204 – 205) are relevant: … the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the-defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.(Emphasis added). The undertakings not to enforce the loans Upon the review of the Registrar’s decision, the plaintiffs for the first time sought to proffer undertakings from Tor Capital’s creditors, being Mr Fitzpatrick and Jontine (through its director, Mr John Fitzpatrick) that each of them would not enforce their respective loans to Tor Capital until any costs orders made in this proceeding against Tor Capital and in favour of the defendants have been satisfied in full. That is a not insignificant factor. At first glance, the undertakings have the effect of placing Tor Capital with a surplus of assets. However, even if those undertakings were accepted, there is insufficient evidence available to the Court concerning Tor Capital’s current financial position. Critically, it remains unknown whether it has incurred any further liabilities since 30 June 2022, so as to be in a position to fund the present proceeding. In such circumstances, the weight of those undertakings is greatly diminished. Even on the basis of a number of favourable assumptions, it is simply not possible to ascertain Tor Capital’s actual financial position. It also cannot be ignored that the undertakings were proffered at a very late stage. The following was relevantly observed in In the matter of IPM Developments Pty Ltd [2023] NSWSC 1443 [12] (IPM Developments): In some cases, undertakings offered by a plaintiff may be relevant to the exercise of the court’s discretion particularly when they are freely offered at an early stage. However, in my opinion, if the defendants are otherwise entitled to security as the defendants in this case are, they should not be deprived of that security because the undertaking is proffered at the last moment in a context where it has become apparent that an order for security is likely to be made. Here, the undertakings are offered after an order has already been made by the Registrar requiring the plaintiffs to pay security for costs. In such circumstances, they should be given little weight. The power in s 1335 is enlivened