Forest Carbon Methodology Pty Ltd v Schultz

Case [2023] FCA 943

FEDERAL COURT OF AUSTRALIA

Forest Carbon Methodology Pty Ltd v Schultz [2023] FCA 943  

File number(s): SAD 87 of 2022
Judgment of: O'SULLIVAN J
Date of judgment: 11 August 2023
Catchwords: SECURITY FOR COSTS – application by the defendants for security for costs pursuant to s 1335 of the Corporations Act 2001 (Cth) and/or s 56 of the Federal Court of Australia Act 1976 (Cth) (FCA) – whether defendants met the threshold in s 1335 of the Act by establishing that there is reason to believe that the plaintiff will be unable to pay the defendants’ costs if successful in their defence – whether the discretion under s 56 of the FCA enlivened – threshold met and discretion enlivened – where necessary to determine form of security – exercise of the discretion – whether appropriate to stage security – where security for costs ordered up to and including preparation of affidavit evidence with liberty to apply
Legislation:

Corporations Act 2001 (Cth), ss 237, 1335

Federal Court of Australia Act 1976 (Cth), s 56

Federal Court Rules 2011 (Cth), r 19
Cases cited:

Adeva Home Solutions Pty Ltd v Queensland Motorways Management Pty Ltd [2021] QCA 198; (2021) QR 141

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

Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCAFC 29; (1984) 2 FCR 1

Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497

Chief Disruption Officer Pty Ltd atf McDonald Family Trust v Michel, in the matter of Laava ID Pty Ltd [2022] FCA 148

Commissioner of Taxation v Vasiliades [2016] FCAFC 170; (2016) 344 ALR 558

Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360

DIF III Global Co-Investment Fund, LP v BBLP LLC [2016] VSC 401

Firexpress Australia Pty Ltd v Imago Exchange Pty Ltd [2022] FCA 129

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

Norcast S.ár.L v Bradken Ltd [2012] FCA 765

Save the Ridge Inc v Commonwealth of Australia [2004] FCA 1289

Stapleton v Fairfax Media Publications Pty Ltd [2019] FCA 1418

Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317
Division: General Division
Registry: South Australia
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Number of paragraphs: 87
Date of hearing: 1 August 2022
Counsel for the Plaintiff: Mr B Roberts KC with Mr T Kentish as junior
Solicitor for the Plaintiff: LK Law
Counsel for the First and Second Defendants: Mr H Lancaster SC with Mr B Hancock as junior
Solicitor for the First and Second Defendants: Henry William Lawyers
Counsel for the Third Defendant: Mr D McLure SC with Mr J Conde as junior
Solicitor for the Third Defendant: Herbert Smith Freehills

ORDERS

SAD 87 of 2022
BETWEEN:

FOREST CARBON METHODOLOGY PTY LTD ACN 061 048 246

Plaintiff
AND:

JAMES PHILIP SCHULTZ

First Defendant

LEWIS REGINALD…

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AGLC
Forest Carbon Methodology Pty Ltd v Schultz [2023] FCA 943
Case
[2023] FCA 943
Decision Date

CaseChat Overview and Summary

Forest Carbon Methodology Pty Ltd (FCM) filed proceedings against Schultz and others, seeking various declarations and remedies including breach of fiduciary duty, a constructive trust, and an account of profits from the defendants. Schultz and the other defendants applied for security for costs pursuant to s 1335 of the Corporations Act 2001 (Cth) and s 56 of the Federal Court of Australia Act 1976 (Cth). The court was required to determine whether the defendants met the threshold for security for costs under s 1335 of the Corporations Act and whether the discretion under s 56 of the Federal Court of Australia Act was enlivened. The court found that the defendants had met the threshold and that the discretion was enlivened.

The court considered the financial circumstances of the parties and the potential costs that may be incurred by the defendants if FCM was successful in their claims. The court found that it was reasonable to conclude that there was a risk that FCM may be unable to pay the defendants' costs if they were successful in their defence. The court also considered the defendants' proposal for security in the form of a Deed of Charge, Guarantee and Indemnity, supported by mortgages over properties owned by Noble and Mr Lebbon. The court accepted the proposal as an appropriate form of security for costs at that stage of the proceedings. The court ordered that FCM provide security for costs of the first and second defendants in the sum of $250,000 and for the third defendant in the sum of $150,000. The security was to be in the form of an irrevocable bank guarantee or alternatively be paid into Court as a lump sum. The court also granted liberty to apply for an increase in the amount of security as the proceedings progressed.

Orders

Orders of the court

1. By on or before 1 September 2023, the plaintiff:

(a) Is to provide security for costs of the first and second defendants in the sum of TWO HUNDRED AND FIFTY THOUSAND DOLLARS ($250,000); and

(b) Is to provide security for costs of the third defendant in the sum of ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000).

2. The security is to be in the form of an irrevocable bank guarantee or alternatively be paid into Court as a lump sum.

3. Liberty to apply.

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

Background

Background to the litigation

It is for the reasons which follow that at this stage FCM:(a)Is to provide security for costs in the sum of $400,000;(b)Such security is to be in the form of an irrevocable bank guarantee or alternatively be paid into Court; and(c)There will be liberty to apply to increase the amount of security as these proceedings progress. BACKGROUND In these proceedings FCM seeks various declarations against the first and second defendants as to breach of fiduciary duty, a constructive trust, and an account of profits from all defendants together with interest and costs.Proposed security arrangements After the two security for costs applications were filed, CleanFin’s solicitors wrote, (albeit in the name of the plaintiff) to the solicitors for Mr Schultz, Mr Tyndall and Terra Carbon respectively on 28 June 2022 offering that for a period up to and including the first day of trial, Noble and Mr Lebbon would guarantee the CleanFin indemnity in an amount of $3million, supported by registered mortgages in favour of FCM and by an irrevocable Deed of Charge over two properties owned by Noble (Noble property) and Mr Lebbon (Lebbon property) respectively. The properties had been valued in excess of $3million: affidavit of Andrew Nathan Tarnowskyj sworn 11 July 2022 (first Tarnowskyj affidavit), at [5], annexure ANT-1, pp 11-48. After an exchange of correspondence with the solicitors for the first and second defendants, on 7 July 2022, Cleanfin’s solicitors wrote to the defendants detailing the proposed security arrangements and enclosed a number of documents together with independent valuation reports for the Noble property - CT 6219/124 and the Lebbon property - CT 6234/260: first Tarnowskyj affidavit, annexure ANT-3, pp 52-160. The proposed security arrangements comprise:(a)A Deed of Charge, Guarantee and Indemnity which has now been executed as a Deed Poll;(b)A first mortgage in favour of FCM over the Noble property which is owned by Noble in its capacity as trustee of the Noble Trust;(c)A first mortgage in favour of FCM over the Lebbon property; and(d)Signed authorities from the beneficiaries of the Noble Trust that they unconditionally consent to Noble increasing the existing guarantee to FCM to $3million and to charging and mortgaging the Noble property for the purposes of that guarantee. At the hearing of this application, the defendants objected to me receiving the independent valuation reports on a number of bases. I overruled that objection noting that ultimately it was a question of the weight I would place on those independent valuations.The Deed of Charge, Guarantee and Indemnity The guarantors are defined in the preamble as, together, Noble and Mr Lebbon. Clause 1.1 contains a number of defined terms:Guaranteed Money means all money up to the Guaranteed Money Limit that Cleanfin is or may at any time be liable (actually, prospectively or contingently) to pay to the Secured Party under or in connection with the Undertaking.Guaranteed Money Limit means the amount of $3,000,000.00.Secured Party means Forest Carbon Methodology Pty Ltd ACN 145 048 246 of … (Address omitted)Undertaking means the undertaking of Cleanfin to indemnify the Secured Party in relation to costs incurred by the Secured Party in the “Derivative Proceedings” referred to in the Court Orders in SAD11/2022 made on 3 May 2022 …

Evidence

Evidence Before The Court

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Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

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