Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd - [2008] NSWCA 148

NEW SOUTH WALES COURT OF APPEAL

CITATION:
Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148

FILE NUMBER(S):
40132/08

HEARING DATE(S):
27 May 2008

JUDGMENT DATE:
20 June 2008

PARTIES:
Martin John GREEN in his capacity as liquidator of ARIMCO MINING PTY LTD (In liquidation) ACN 003 254 519 (Appellant)
CGU Insurance Limited ACN 004 478 371 (Respondent)

JUDGMENT OF:
Hodgson JA Basten JA Campbell JA

LOWER COURT JURISDICTION:
Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):
50177/04

LOWER COURT JUDICIAL OFFICER:
Einstein J

LOWER COURT DATE OF DECISION:
9 May 2008

LOWER COURT MEDIUM NEUTRAL CITATION:
Martin John Green in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) v CGU Insurance Limited & Ors [2008] NSWSC 449

COUNSEL:
D L DAVIES SC/ M S WHITE (Appellant, Cross-Respondent)
R B S MACFARLAN QC/ S A GOODMAN (Respondent, Cross-Appellant)

SOLICITORS:
Henry Davis York (Appellant)
Kennedys (Respondent)

CATCHWORDS:
PRACTICE AND PROCEDURE – Security for costs – Liquidator suing personally – General principles as to ordering security for costs against plaintiff liquidators – Litigation funding – Whether involvement of funder for commercial profit relevant to ordering security for costs.

LEGISLATION CITED:
Civil Procedure Act 2005 (NSW) ss 61 and 62
Corporations Law s 1335
Federal Court of Australia Act s 56(1)
Land and Environment Court Act 1979 s 69(3)
Law Reform (Miscellaneous Provisions) Act 1946 (NSW) s 6(4)
Supreme Court Act 1970 (NSW) s 23
Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 2.1, r 42.3, r 42.21, r 51.50

CATEGORY:
Principal judgment

CASES CITED:
Bell Wholesale P/L v Gates Export Corporation (No 2) (1984) 8 ACLR 588
Bhattacharya v Freedman [2001] NSWSC 498
Brocklebank & Co v The King’s Lynn Steamship Co (1878) 3 CPD 365
Bryan E Fincott P/L v Eretta P/L (1987) 16 FCR 497
Buckley v Bennell Design & Constructions Pty Limited (1974) 1 ACLR 301
Byrnes v John Fairfax Publications Pty Limited [2006] NSWSC 251
Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41; 229 CLR 386
Chartspike Pty Limited v Chahoud [2001] NSWSC 585
Cory-Wright and Salmon Limited v KPMG Peat Marwick [1993] 2 NZLR 701
Cowell v Taylor (1885) 31 Ch D 34
Eddy v Mac Audio and Acoustical Consultants Pty Limited [2000] SASC 145
Ferrier and Knight v Civil Aviation Authority [1994] FCA 982 (Lockhart J)
Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWSC 449
Greener v E Kahn and Co Limited [1906] 2 KB 374
Hellen and Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019
Hession v Century 21 South Pacific Limited (1992) 28 NSWLR 120
House v The King (1936) 55 CLR 499
Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744
Jonas v Rocklea Spinning Mills Pty Limited [2000] VSC 93
Lucas v Yorke (1983) 50 ALR 228
Maples v Hughes [2002] NSWSC 617
McHenry v Lewis (1882) 22 Ch D 397
Mead v Watson [2005] NSWCA 133; 23 ACLC 718
Melville v Craig Nowlan and Associates Pty Limited [2002] NSWCA 32, 54 NSWLR 82
Merribee Pastoral Industries Pty Limited v Australia & New Zealand Banking Group Limited [1998] HCA 41; 193 CLR 502
Morris v Hanley [2000] NSWSC 957
Norbis v Norbis (1986) 161 CLR 513
Owners – Strata Plan 50530 v Walter Construction Group Limited [2001] NSWSC 820
Pearson v Naydler [1977] 1 WLR 899 at 902; [1977] 3 All ER 531
Re Pavelic Investments Pty Limited (1983) 1 ACLC 1207
Rajski v Computer Manufacture & Design Pty Limited [1982] 2 NSWLR 443
Re Strand Wood Co Limited [1904] 2 Ch 1
Southern Cross Exploration NL v All Risks Insurance Co Limited (1985) 1 NSWLR 114
Timbertown Community Enterprises Limited v Holiday Coast Credit Union Limited (1997) 15 ACLC 1679
Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2004] NSWCA 136
Wentworth v Lloyd (1864) 10 HL Cas 589; 11 ER 1154

TEXTS CITED:

DECISION:
(1) Leave to appeal and to cross-appeal granted.
(2) Notice of Appeal and Notice of Cross-Appeal to be filed within fourteen days.
(3) Appeal and cross-appeal dismissed.
(4) Each party to bear its own costs of the appeal and cross-appeal.

JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA 40132/08
SC 50177/04
HODGSON JA
BASTEN JA
CAMPBELL JA
20 JUNE 2008

Martin John GREEN in his capacity as liquidator of ARIMCO MINING PTY LIMITED (in liquidation) v CGU INSURANCE LIMITED

Judgment

HODGSON JA: On 9 May 2008, Einstein J made an order that the claimant (the liquidator) pay $450,000 by way of security for costs by Bank Guarantee, failing which proceedings, commenced by him and set down for a four week trial commencing 15 July 2008, would be stayed: Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWSC 449.
The liquidator seeks leave to appeal and the opponent (CGU) seeks leave to cross-appeal. The applications for leave were heard on the basis that, if leave is granted, the appeal and cross-appeal would be decided without further argument.
Circumstances
The proceedings in which the order for security was made were brought by the liquidator, who is liquidator of Arimco Mining Pty Limited (in liquidation) against former directors and officers of Arimco and also CGU in its capacity as insurer of these directors and officers.
It is alleged in the proceedings that the directors and officers, during the period 1 February 1999 to 14 March 1999, allowed Arimco to incur debts at a time that the company was insolvent or would become insolvent by incurring these debts, or there were reasonable grounds for suspecting that this was so. The liquidator seeks to recover about $22 million plus interest.
On or shortly after 14 December 2004, at a time when the liquidator was seeking to have CGU joined in the proceedings pursuant to s 6(4) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW), CGU was served with an affidavit dated 14 December 2004 disclosing that the proceedings were financed by a litigation funder pursuant to an agreement entered into on 7 December 2004. However, no application was made for security for costs until 6 March 2008.
The liquidator has settled the proceedings with the directors and officers, and CGU is the sole remaining defendant. On 27 November 2007, the proceedings were set down for a four-week hearing commencing 15 July 2008. The liquidator had expended more than $1 million on the proceedings by the time the application for security for costs was made. CGU did not offer any explanation as to why security was not sought earlier.
Decision of primary judge
The primary judge accepted as correct the following principles:
1.The Court has power to order the provision of security for costs against plaintiffs who are natural persons: s 23 Supreme Court Act, Rajski v Computer Manufacture and Design Pty Ltd [1982] 2 NSWLR 443 (Holland J) and [1983] 2 NSWLR 122 (Court of Appeal); Morris v Hanley [2000] NSWSC 957 at [10]ff (Young J); Bhattcharya v Freedman [2001] NSWSC 498 at [27] (Badgery-Parker AJ); Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [17] (Einstein J); Byrnes v John Fairfax Publication Pty Ltd [2006] NSWSC 251 at [17] (Simpson J). This is an inherent power necessary for the due administration of justice and to prevent abuse of the Court’s processes: Rajski at [447]–[448]; Bhattcharya v Freedman at [27].
2.The Court’s discretion to require the provision of security for costs is broad and the factors informing the exercise of that discretion cannot be stated exhaustively: Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [48]; Dal Pont, Law of Costs, Butterworths 2003 at 29.2. The only limitation is that the discretion be exercised judicially: Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 52 ALR 176 at 178. Any attempt to limit the discretion by reference to rules or practices is wrong, as the exercise of a discretion judicially requires the court to consider the circumstances of the particular case with a view to determining the justice of the matter: Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd (1998) 193 CLR 502 at 513 ([26]) (Kirby J), Dal Pont, Law of Costs at [29.2]; Lucas v Yorke (1983) 50 ALR 228 at 229 (Brennan J); Barton v Minister for Foreign Affairs (1984) 54 ALR 586 at 593–594 (Morling J); Jodast Pty Ltd v A & J Blattner Pty Ltd (1991) 104 ALR 248 at 251 (Hill J).
3.The purpose of a security for costs order is protective, so as to ensure that the primary purpose of an award of costs (that is, indemnification of the successful party: Oshlack v Richmond River Council (1998) 193 CLR 72 at 97 [67], per McHugh J and the cases therein cited) is achieved. As stated in Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [33]:
The jurisdiction to award security for costs should thus be seen as protecting the efficacy of the exercise of the jurisdiction to award costs. The discretion should be exercised with the same rationale in mind, namely that, to the extent it can be provided, the court should not permit a situation where a party’s success is pyrrhic.
4.In exercising the discretion to make an order for the provision of security for costs, the court seeks to achieve a balance between ensuring that adequate and fair protection is provided to the defendant, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting him out or prejudicing him in the proceedings: Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 470 (Giles J); Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [47].
5.The inability of a plaintiff to meet the costs of a successful defendant weighs heavily in the exercise of the discretion: Rosenfield at 470; Idoport Pty Ltd v National Australia Bank Limited at [47].
6.There is now no rule that the impecuniosity of a natural person plaintiff prevents the court ordering the provision of security for costs. The impecuniosity of the plaintiff is a factor to be weighed in the exercise of the discretion and is neither a sufficient condition for the ordering of security nor a sufficient condition for the Court to decline the order for security: Lucas v Yorke (1983) 50 ALR 228 at 228–9 (Brennan J); Morris v Hanley [2000] NSWSC 957 at [15]–[18] (reversed on appeal but not on this point [2001] NSWCA 374). This stands in contrast to the more rigid approach taken in Cowell v Taylor (1885) 31 Ch D 34 at 38 per Bowen LJ: “The general rule is that poverty is no bar to a litigant, that, from time immemorial, has been the rule at common law, and also, I believe, in equity” and Greener v E Kahn & Co Ltd [1906] 2 KB 374 at 378.
7.The plaintiff’s position as a liquidator does not of itself prevent the making of an order for the provision of security for costs. Whilst there were statements in some cases, starting with Re Strand Wood Co Ltd [1904] 2 Ch 1, to the effect that liquidators are not required to provide security, these were an application of the general approach then taken, and exemplified in Cowell v Taylor (1885) 31 Ch D 34, that proceedings brought by a trustee in bankruptcy ought not be stultified by reason of his impecuniosity. See also Greener v E Kahn & Co Ltd [1906] 2 KB 374 at 376; Cory-Wright and Salmon Ltd v KPMG Peat Marwick [1993] 2 NZLR 701 at 705 and Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679.
8.To the extent that a party asserts that an order that security be provided would stultify the proceedings, it must satisfy the Court that those who stand behind it or stand to benefit from its success in the proceedings are unable to provide security for costs: Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 at [66]; Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 52 ALR 176 at 179. A proceeding cannot be regarded as stultified unless those who stand behind the impecunious plaintiff are unable (not unwilling) to provide the requisite security for costs.
9.An important factor informing the exercise of the discretion is the existence of persons who stand behind an impecunious plaintiff who seek to take the benefit of our system of justice (ie share of the proceeds of victory) without the corresponding burden (ie a potential adverse costs order): Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 472–3 (Giles J); Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 at 70 (Lehane J); Maronis Holdings Ltd v Nippon Credit Australia Ltd [2000] NSWSC 994 (Bryson J); Chartspike Pty Ltd v Chahoud [2001] NSWSC 585 at [5] (Young CJ in Eq); Northern Southern Western Supermarkets Pty Ltd v HIH Casualty and General Insurance Ltd (in liq) [2002] NSWSC 541 (Einstein J); Rickard Constructions Pty Ltd v Allianz Australia Insurance Ltd [2002] NSWSC 1162 (McClellan J); Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 584 ([83]) (Austin J); Benzlaw & Assoc Pty Ltd v Medi-Aid Centre Foundation Ltd [2007] QSC 009 at [15]–[16] (Douglas J). As Austin J stated in Fiduciary v Morningstar Research Pty Ltd at [83]:
It would be unrealistic for the court to decline to order security on the ground that to do so would stultify the litigation, if it took into account only the financial ability of the plaintiff, and disregarded the financial ability of those who would benefit from the plaintiff’s success and who would therefore have an economic incentive to bear the burden of a security order. More broadly, it is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails. That notion appealed to Young CJ in Eq in Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585 at [5], where his Honour observed that where a plaintiff contracts to have the litigation funded by a third party, in return for the third party receiving a share of the verdict, “it is appropriate that the third party bear part of the risk”.
The primary judge noted (and apparently accepted) the submission of CGU that the liquidator will or may be unable to meet an adverse costs order, and that CGU had incurred costs and disbursements in the proceedings to the end of February 2008 in the amount of $1,650,987.02. He also noted rival contentions as to the quantum of CGU’s future costs and disbursements, which he resolved at $574,331 (ex GST).
The primary judge noted (and apparently accepted) the submission of CGU that the litigation funder had provided financial statements which were before the court suggesting net assets of about $2.5 million, of which about $2 million represented funding expenditure on cases, including the present proceedings. (The financial statements had been “redacted” by blanking out parts of them, so this view was if anything favourable to the litigation funder and the liquidator.)
The primary judge noted authorities to the effect that liquidators who are plaintiffs should not be required to provide security for costs, notably Re Strand Wood Co Limited [1904] 2 Ch 1, following Cowell v Taylor (1885) 31 Ch D 34; and he expressed the views ([2008] NSWSC 449 at [16]) that this proposition derived from a concern over stultification of proceedings, and that where stultification was relied on by a liquidator, the liquidator must satisfy the court that an order for security would stultify the proceedings. Consistently with his acceptance that the discretion to order security for costs was not limited by reference to rules or practices, he stated that the assertion of Meagher JA in Hession v Century 21 South Pacific Limited (1992) 28 NSWLR 120 at 123, that no order for security for costs will be made against the liquidator, was obiter.
The primary judge noted that a very important factor was that there was a litigation funder who stood to benefit from the liquidator’s success in the proceedings, to an extent that was not disclosed to the court because the relevant provision was withheld. (This Court was informed that this was the result of a claim for client legal privilege, which was upheld.) The primary judge noted that the funder was contractually bound to indemnify the liquidator in relation to any order for security for costs, and to provide a bank guarantee. He found that an order requiring the security would not stultify the proceedings, in circumstances where the liquidator had not led evidence proving that the funder was unable to provide the security.
The primary judge then considered delay, noting authorities to the effect that an application for security for costs should be made promptly: at [34]. He accepted that delay may be a factor tending against an order for security where such an order after delay would cause prejudice to the plaintiff; and he noted that the liquidator had led no evidence to prove that, had the application been made promptly, the liquidator would not have, or even may not have, pursued these proceedings: at [38].
The primary judge concluded that the principled exercise of discretion was to reject any claim for security for costs incurred up to and including the present; but to grant security for reasonable anticipated costs up to and including the conclusion of the first instance trial: at [41]-[42].
Issues
The liquidator seeks to rely on the following grounds of appeal:
1.His Honour erred in ordering that the plaintiff give security for costs in circumstances where the plaintiff is the liquidator personally rather than being a company in liquidation.
2.His Honour erred in not following this Court's decision in Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120.
3.His Honour erred in regarding the issue of stultification as a relevant factor where the proceedings are brought by a liquidator personally.
4.His Honour erred in considering that the existence of the plaintiff’s litigation funding arrangement was an important factor in determining whether to order that the plaintiff give security for costs.
5.His Honour erred in disregarding the lack of explanation for the gross delay on the part of the defendant in making the application for security for costs.
6.His Honour erred in holding that the plaintiff needed to show some actual prejudice arising from the defendant's delay to resist an order for security for costs.
CGU seeks to rely on the following grounds in its cross-appeal:
1.His Honour erred in failing to give adequate reasons for declining to order the provision of security for costs incurred to 29 February 2008.
2His Honour:
(a)      having correctly adopted the following principles of law:
(i)the time taken to bring an application for the provision of security for costs is a factor which informs the exercise of the Court's discretion.
(ii)there is no set time by which an application must be made;
(iii)the presence of delay is not per se fatal to the application; and
(iv)delay may be a factor tending against an order for the provision of security where an order requiring the plaintiff to provide security for costs after a delay would cause prejudice to the plaintiff;
(b)      and not having made any finding that the cross respondent was prejudiced by the delay in the making of the application for security for costs;
(c)      erred In declining to order the provision of security for costs incurred before the making of the application for security for costs.
A decision to order security of the costs is a discretionary decision, so it would be necessary for the liquidator and/or CGU to show an error of the kind discussed in House v The King (1936) 55 CLR 499.
I would understand the first three grounds in the liquidator’s appeal as raising an alleged House v The King error, to the effect that the primary judge treated the discretion whether or not to grant security as not being limited by reference to rules or practices, and in particular not being affected by any rule or practice against granting security when the plaintiff is a liquidator suing personally; and as requiring the liquidator to prove the proceedings would be stultified by an order for security, once it had been proved that the liquidator would or may be unable to meet an adverse costs order. In any event, that is the way these grounds were developed in argument.

I will consider in turn the issues raised by the first three grounds in the appeal, then the issue raised by the fourth ground (concerning the relevance of the litigation funder), and finally the issues raised in the fifth and sixth grounds and in the cross-appeal (concerning delay).
I reach the view that there was an error of principle in relation to the way the primary judge dealt with the approach to ordering security against a liquidator suing personally. The parties agree that, in those circumstances, this Court could and should re-exercise the discretion; so I will then proceed to consider that matter.
Legislation and Rules
There is no relevant provision of a statute dealing explicitly with security for costs in relation to individual plaintiffs: cf Corporations Act (2001) (Cth) s 1335 in relation to corporate plaintiffs. However, s 23 of the Supreme Court Act 1970 (NSW) and ss 61 and 62 of the Civil Procedure Act 2005 (NSW) have some relevance. These provisions are relevantly as follows:
Supreme Court Act 1970 No 52
23      Jurisdiction generally
The Court shall have all jurisdiction which may be necessary for the administration of justice in New South Wales.
Civil Procedure Act 2005 No 28
61      Directions as to practice and procedure generally
(cf SCR Part 23, rule 4; Act No 9 1973, section 68A)
(1)      The court may, by order, give such directions as it thinks fit (whether or not inconsistent with rules of court) for the speedy determination of the real issues between the parties to the proceedings.
(2)      In particular, the court may, by order, do any one or more of the following:
(a)it may direct any party to proceedings to take specified steps in relation to the proceedings,
(b)it may direct the parties to proceedings as to the time within which specified steps in the proceedings must be completed,
(c)it may give such other directions with respect to the conduct of proceedings as it considers appropriate.
…..
62      Directions as to conduct of hearing
(cf Act No 52 1970, section 87; Act No 9 1973, section 77 (4); SCR Part 34, rules 6 and 6AA)
(1)      The court may, by order, give directions as to the conduct of any hearing, including directions as to the order in which evidence is to be given and addresses made.
…..
(4)      A direction under this section must not detract from the principle that each party is entitled to a fair hearing, and must be given a reasonable opportunity:
(a)to lead evidence, and
(b)to make submissions, and
(c)to present a case, and
(d)at trial, other than a trial before a Local Court sitting in its Small Claims Division, to cross-examine witnesses.
…..
Relevant provisions in the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) are Rules 2.1, 42.21 and 51.50 (the last of which deals with security for the costs of an appeal to this Court). Those Rules are as follows:
2.1     Directions and orders
(cf SCR Part 26, rule 1)
The court may, at any time and from time to time, give such directions and make such orders for the conduct of any proceedings as appear convenient (whether or not inconsistent with these rules or any other rules of court) for the just, quick and cheap disposal of the proceedings.
42.21 Security for costs
(cf SCR Part 53, rules 2, 3, 4 and 5; DCR Part 40, rule 1; LCR Part 31, rule 11A, Part 31A, rule 11)
(1)      If, in any proceedings, it appears to the court on the application of a defendant:
(a)that a plaintiff is ordinarily resident outside New South Wales, or
(b)that the address of a plaintiff is not stated or is mis-stated in his or her originating process, and there is reason to believe that the failure to state an address or the mis-statement of the address was made with intention to deceive, or
(c)that, after the commencement of the proceedings, a plaintiff has changed his or her address, and there is reason to believe that the change was made by the plaintiff with a view to avoiding the consequences of the proceedings, or
(d)that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or
(e)that a plaintiff is suing, not for his or her own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so,
the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant’s costs of the proceedings and that the proceedings be stayed until the security is given.
(2)      Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct.
(3)      If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff’s claim for relief in the proceedings be dismissed.
(4)      This rule does not affect the provisions of any Act under which the court may require security for costs to be given.
51.50   Security for costs
(cf SCR Part 51, rule 16)
(1)      In special circumstances, the Court may order that such security as the Court thinks fit be given for costs of an appeal.
(2)      Subject to subrules (1) and (3), no security for costs of an appeal is to be required.
(3) Subrules (1) and (2) do not affect the powers of the Court under rule 42.21 (which relates to security for costs).
Liquidator as plaintiff
The judgment of the primary judge and the submissions before this Court have drawn attention to two strands of authority, one to the effect that security for costs will not be ordered against a liquidator suing personally, and the other to the effect that there are no rules or practices limiting the discretion to order for security for costs. The primary judge resolved this apparent conflict by treating the former strand as an expression of a more basic principle that security will generally not be ordered where it would stultify the proceedings, and as yielding in cases where it was shown that a liquidator would not or may not be able to meet an adverse costs order, but not shown that an order for security would stultify the proceedings.
In order to determine whether this approach of the primary judge involved a House v The King error, it is necessary to consider the two strands in question, and also some cases where the apparent conflict was discussed.
The first strand can be considered as starting with Cowell v Taylor (supra). The leading judgment of Bowen LJ in that case referred to the general rule that “poverty is no bar to a litigant” (so that security for costs would not be ordered except in certain excepted cases), to an exception in the case of appeals, and to another exception where an insolvent person was a nominal plaintiff for the benefit of someone else. Bowen LJ went on to hold that an insolvent trustee in bankruptcy did not come within that second exception, because he was not a mere nominal plaintiff but a person with the statutory right and duty to get in the assets.
That case was applied to a liquidator in Re Strand Wood Co Limited (supra), although in that case Vaughan-Williams LJ said he “would not be sorry if the court had power to order security in a case in which it thought that the circumstances were such that security ought to be ordered”.
However, in Greener v E Kahn and Co Limited [1906] 2 KB 374, the Court of Appeal held that that approach did not apply to an insolvent trustee to whom property had been assigned for the benefit of creditors, who owed his position not to legislative enactment but to the mandate of another person.
Importantly for the present case, the case of Re Strand Wood was considered by the New South Wales Court of Appeal in Hession v Century 21 South Pacific Limited (supra). In that case, the respondent company (which was in liquidation) had sued the appellants, and the appellants had sought security for costs. The District Court judge had refused the application, relying on Re Strand Wood. In allowing the appeal, Meagher JA (with whom Kirby P and Cripps JA agreed) referred to s 1335 of the Corporations Law, which provided that security for costs may be required of a plaintiff corporation if it appeared there was reason to believe it would be unable to pay the defendant’s costs; and he continued:
A distinction must be made between cases in which the liquidator personally is the plaintiff, and those when the company (albeit by its agent, the liquidator) is the plaintiff, a distinction which his Honour regarded as pedantic. In the former case — a prototype of which is the misfeasance summons— if the proceeding fails costs will be awarded against the liquidator personally (Re W Powell and Sons [1896] 1 Ch 681), but no order for security for costs will be made against him (Re Strand Wood), apparently on the ground that he is exercising a statutory power vested in him personally. Where the company in liquidation is the plaintiff, things are otherwise. In this case, obviously the Court has jurisdiction to order security for costs: that is what s 1335 says. The fact that the company has a deficiency of assets compared to liabilities (a not uncommon feature of companies in liquidation) is evidence of entitlement under the section to an order (Northampton Coal, Iron, and Waggon Co v Midland Waggon Co (1878) 7 Ch D 500 at 503), not (as his Honour seemed to imagine) evidence of immunity from an order. In this regard, it should also be noted that where a company in liquidation sues and fails, there is no jurisdiction in the Court to order the liquidators personally to pay the defendant's costs. Further, a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors): Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; 52 ALR 176. Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.
The statement that there is no jurisdiction to order the liquidators personally to pay costs when a company in liquidation sues and fails, is not universally correct; see Mead v Watson [2005] NSWCA 133; 23 ACLC 718. But that jurisdiction is only exercised where the liquidator’s conduct is improper, so in my opinion the general approach disclosed in this passage is not thereby affected.
This approach is also supported by Ferrier and Knight v Civil Aviation Authority ([1994] FCA 982 (Lockhart J) at [13]); Re Pavelic Investments Pty Limited (1983) 1 ACLC 1207; Jonas v Rocklea Spinning Mills Pty Limited [2000] VSC 93; and Hellen and Fordyce v Alex G Grivas Pty Limited [2002] NSWSC 1019.
This strand of authority is based on and supported by more general authority to the effect that “a natural person who sues will not be ordered to give security for costs, however poor he is”: Pearson v Naydler [1977] 1 WLR 899 at 902; [1977] 3 All ER 531 at 533 per Megarry VC.
The question whether that rule is strict, albeit subject to specific exceptions as in the case of appeals and nominal plaintiffs, was raised but not determined by Heydon JA (Young CJ in Eq agreeing) in Melville v Craig Nowlan and Associates Pty Limited [2002] NSWCA 32, 54 NSWLR 82 at [101]. In that judgment, Heydon JA held that the rule did not qualify the general power in s 69(3) of the Land and Environment Court Act 1979 to grant security for costs. In doing so, he contrasted that provision with provisions operating in the Supreme Court ([78]-[80]), and noted that the general law rule had been applied in the Federal Court despite the general power to grant security given by the Federal Court of Australia Act s 56(1) ([81]-[98]). He also accepted (at [131]) that it could be a relevant factor against ordering security under a general power to grant security where “the circumstances would correspond closely to those in which the general law rule about impecunious natural persons operated justly”.
In his concurring judgment in that case, Young CJ in Eq at [135]-[138] asserted an underlying principle that security would be ordered where not to do so would allow proceedings which would be vexatious or oppressive or an abuse of the court’s process, referring to McHenry v Lewis (1882) 22 Ch D 397 at 408 and to his own previous decision in Morris v Hanley [2000] NSWSC 957.
I have set out above the statutory provisions and rules concerning security for costs operating in the Supreme Court of New South Wales; and in general terms, they tend to support the strand of authority that I am now considering. UCPR 42.21 provides for security for costs in circumstances similar to those which would have been exceptions to the general law rule, apart from the appeals exception; and UCPR 51.50 provides that on appeals, security for costs can in addition be ordered in “special circumstances”, but not otherwise. (I note that Cowell and Strand Wood decided in effect that a liquidator suing personally should not generally be treated as within UCPR 42.21(1)(e).) These rules strongly suggest that, in cases other than appeals (appeals being an exception to the general law rule under consideration), security would not be awarded without strong justification, perhaps of the kind referred to by Young CJ in Eq in Melville.
It is clearly established however that the Supreme Court does have a discretion to order for security for costs against a natural person in circumstances falling outside those set out in the previous Supreme Court Rules, which were in similar terms to those in the UCPR.
In Rajski v Computer Manufacture & Design Pty Limited [1982] 2 NSWLR 443, Holland J relied on the courts’ “inherent power to regulate their own practice and procedure to procure proper and effective administration of justice and prevent abuse of process” (at 447); and he noted that in the case before him, “the facts are exceptional but that is the very thing that an inherent jurisdiction to regulate procedure and prevent abuse of the process of the court is able to adjust to”. He noted that Dr Rajski’s lack of assets and income was self-inflicted, and that his corporation co-plaintiff had been managed by him to be denuded of assets before the litigation commenced; and he did not think “that in the peculiar circumstances of this case he should be permitted to shelter behind the so-called poverty rule generally applied to a personal litigant”. An appeal from that decision was dismissed ([1983] 2 NSWLR 122), but leave to appeal had been granted only on a question as to the effect of a grant of legal aid to Dr Rajski. However, in the course of the appeal judgment, Moffitt P (with whom Samuels JA agreed) said:
The general or overriding power of the court to order a stay of proceedings is a power, the boundaries of which have not been precisely defined, except that in the many different situations in which it has been exercised it can be seen as directed to preventing a person pursuing litigation or doing so in a way which is oppressive so as to be unjust to another party. The power is one which has been exercised where the unjust situation has been produced by a course of action which the plaintiff was entitled to take eg before another court, tribunal or body, or has been produced by improper means.
The view that the Supreme Court has power to order security in circumstances outside the Rules is supported by the decisions of Young CJ in Eq in Morris, and also Badgery-Parker AJ in Bhattacharya v Freedman [2001] NSWSC 498 at [27], Einstein J in Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744 at [17], and Simpson J in Byrnes v John Fairfax Publications Pty Limited [2006] NSWSC 251 at [17]. However, I note that Morris was a case where, on the findings of Young CJ in Eq, there were tremendous difficulties in the way of the case succeeding, and the action was brought partly to harass the defendants, was extremely expensive and might bankrupt the defendants even if they won (and his decision to grant security was overturned on appeal because of delay). In Bhattacharya, the Master had found that the plaintiff was a prolific litigator, had many unsatisfied costs orders against him including costs orders in favour of the defendant, was not in a position to satisfy adverse costs orders, and had divested his major asset (his house) to his daughters in consideration of love and affection; and in those circumstances, Badgery-Parker AJ held that the Master had not erred in granting security. Idoport was a case where the plaintiffs were corporations. In Byrnes, there were outstanding costs orders in excess of $200,000 in favour of the defendant against the plaintiff arising from related proceedings, and Simpson J did not in the event order security but stayed the proceedings until those costs had been paid.
The second strand of authority is to the effect that there are no rules or practices limiting the discretion to order for security for costs.
One authoritative statement to this effect is to be found in the judgment of Kirby J in Merribee Pastoral Industries Pty Limited v Australia & New Zealand Banking Group Limited [1998] HCA 41; 193 CLR 502 at [26] (footnotes omitted):
[26]Without any pretence to having conducted an exhaustive analysis of the decisions in this Court where orders for security for costs have been sought, in appeals, a number of propositions can be stated which it may be useful to collect:
1.        There is no absolute rule to control the exercise of the discretion to order security for costs where that jurisdiction derives from the inherent power of the Court. The jurisdiction, as one reposed in a court, is to be exercised judicially and for the purpose for which it exists. An analogous discretion has been described as "absolute". It would be wrong to attempt to hedge the jurisdiction about by rules or practices, even where derived from a number of instances. This is because what should be done in each case depends entirely on the circumstances of the case. The governing consideration is what is required by the justice of the matter.
2.        There is therefore no absolute rule (applicable statute apart) that the impecuniosity of a party will entitle its opponent to an order for security for its costs. Where the power to so provide exists in uncontrolled terms, it would be to fetter the jurisdiction impermissibly to adopt such a rule or even a prima facie entitlement. By the same token, the inability of a party to meet the costs of an unsuccessful proceeding is not irrelevant to the exercise of the jurisdiction. Litigation is inevitably expensive and burdensome. To add to the burdens of a party successful in the outcome, those of paying its costs with little or no prospect of recovery under an order for costs may, in particular circumstances, be a reason for offering a measure of protection to that party by way of security for costs.
3.        Another consideration that has sometimes been judged to be relevant is the strength of the case of the party resisting an order that it provide security for costs and an evaluation (necessarily tentative) of its prospects of success. Thus, the fact that a party has secured special leave to argue its case on appeal has been thought a relevant consideration in some circumstances. Similarly, if a proceeding appeared hopeless and such as was bound to fail, the lack of apparent merit in a party's case might be a reason for ordering it to provide security for the costs to which, it appears, it is needlessly putting its opponent. Such a consideration would need to be exercised with care, given that the real merits of a case might not emerge until the final hearing or might not sufficiently emerge in the necessarily brief proceedings typically involved in an application for security for costs. Furthermore, if a party asserts that its opponent's proceedings are manifestly lacking in legal merit, other remedies are available to it to protect it from needless vexation. In appeals there is the barrier of leave or special leave.
4.        Further considerations which, in the particular circumstances of the case, have been held relevant to the grant or refusal of an order for security for costs in relation to a proceeding in the Court have been:
(a)That the hearing of the proceeding is close at hand or that the moving party has delayed its application for such an order.
(b)That the parties or some of them are legally aided.
(c)That the proceeding raises matters of general public importance quite apart from the interests of the parties.
(d)That the nature of the proceeding is such that, even if unsuccessful, an order for costs in favour of the winning party might not be made or might be limited.
(e)That the costs orders made earlier in the proceedings have followed an unusual course or have involved countervailing orders which must be weighed against those liable to be made in the proceedings in question.
(f)That a party to the proceedings is, or will at judgment be, or be likely to be, absent from the jurisdiction and has no or few assets within the jurisdiction.
(g)That if an order were made it would effectively shut a party out of relief according to law in circumstances where that party's impecuniosity is itself a matter which the litigation may help to cure.
Doubtless there are as many further considerations as there are cases. The foregoing help to illustrate some of the matters which courts, including this Court, have felt to be relevant to the exercise of the discretion to order security for costs, where that discretion is invoked.

However, it is to be noted that the plaintiff in that case was a corporation, albeit that the application was made in reliance on a general discretion to order security and not any particular provision concerning corporations; and also that, in the event, Kirby J did not order security.
Another authoritative statement is in Lucas v Yorke (1983) 50 ALR 228, where Brennan J at 228-9 said this:
Mr Lucas seeks an order for security for the costs of the appeal on the grounds that the appellants will be unable to meet the costs of the appeal if their appeal should fail. The inability of an appellant to meet the costs of an unsuccessful appeal is a relevant factor in exercising the discretion conferred by O 70, r 10, of the Rules of this Court, but it is no more than a factor to be weighed in all the circumstances (DJE Constructions Pty Ltd v Maddocks (1981) 38 ALR 185). The discretion is not fettered by a rule, such as the rule adopted by the Court of Appeal in Hall v Snowdon, Hubbard & Co [1899] 1 QB 593, that security for costs is ordinarily ordered when a respondent shows that the appellant, if unsuccessful, will be unable through poverty to pay the costs of the appeal. The discretion under O 70, r 10, is absolute, like the discretion under the High Court Procedure Act 1903 (Cth) considered by Rich J in King v Commercial Bank of Australia Ltd (1920) 28 CLR 289. I would respectfully adopt what Rich J said (at 292), mutatis mutandis, to the discretion now to be exercised: “The Legislature, however, has left absolute discretion to the court, and has done so without prescribing any rules for its exercise. In these circumstances no rules can be formulated in advance by any judge as to how the discretion shall be exercised. It depends entirely on the circumstances of each particular case. The discretion must, of course, be exercised judicially, which means that in each case the judge has to inquire how, on the whole, justice will be best served, whether by altering the amount and, if so, to what extent, or by letting it stand unaltered.”
The primary judge (at [16] and [17]) relied on a number of cases to support a view that the first strand of authority, to which I have referred, really only reflected a reluctance to allow an order for security for costs to stultify an action brought by a liquidator because of the liquidator’s lack of means, and that this was no more than a matter of application of the general discretion referred to in Merribee and Lucas.
One of those cases was Timbertown Community Enterprises Limited v Holiday Coast Credit Union Limited (1997) 15 ACLC 1679, in which Young J applied what he called the rule in Cowell v Taylor to the case of an administrator, saying that an administrator could be foiled by a stay because of failure to meet an order for security for costs, since in most cases of administration, the administrator would be in no position to marshal resources to meet any security ordered. Accordingly, Young J declined to order security. However, in that case the plaintiff was in fact the company in administration, not the administrator, and the judgment was ex tempore; and (at least unless different principles apply to an administrator causing a company in administration to bring proceedings than to a liquidator causing a company in liquidation to bring proceedings) the judgment appears to involve the error identified in the decision in Hession referred to earlier.
Another of the cases was Eddy v Mac Audio and Acoustical Consultants Pty Limited [2000] SASC 145 where at [39] Lander J (with whom Doyle CJ and Duggan J agreed) said this:
The fact that the proceedings are brought by a liquidator, appointed by the Court, who is performing a public function to recover the corporation's losses for the benefit of the creditors and shareholders will usually be a relevant factor in the exercise of the discretion to make an order of this kind: In re Pavelic Investments Pty Ltd (1983) 8 ACLR 417. Moreover if a liquidator brings a claim bona fide against directors for breach of their duties ordinarily no order for security for costs would be made in favour of the directors where the liquidator alleges that the breaches of duty caused the plaintiff's impecuniosity; Addstead Pty Ltd v Simionato Holdings Pty Ltd (Supreme Court (SA) Duggan J, Judgment No S 5691 5 July 1996, Unreported). But that is not a rule. It is no more than the result of the proper exercise of a discretion. Clearly there will be cases where in such a claim it would be appropriate to exercise the discretion in favour of the defendant. One circumstance which may make such an exercise appropriate is where there are persons with means who are financing the plaintiff's action and who will be the beneficiaries of the plaintiff's success. If any order made will mean that the plaintiff cannot proceed with the litigation that will also be a relevant factor. The proper exercise of the discretion requires the weighing of all relevant facts and circumstances. It cannot be said that as a rule any one matter should be given greater weight than any other matter. The weight given to any matter will depend upon the facts of the case.
In that case also, security for costs was refused. However, that case too was one in which it was the company, not the liquidator, that brought the proceedings, so again the approach seems contrary to Hession.
The other two cases referred to at this point by the primary judge were Greener v E Kahn & Co (supra), where the plaintiff was a privately chosen insolvent person, and Cory-Wright and Salmon Limited v KPMG Peat Marwick [1993] 2 NZLR 701, where an Official Liquidator was a plaintiff (in addition to the company in liquidation) but the court referred to and relied on a practice in New Zealand not to make an order for costs against Official Liquidators (which, as indicated below, is contrary to the practice in England and Australia). So again, they do not seem to be to the point.
In my opinion, on the basis of this review of cases, and especially on the basis of the previous Court of Appeal decisions in Hession and Melville, a court considering applications for security for costs against liquidators should not treat the matter as being entirely at large, but should have regard to guidelines, which I would express as follows:
(1)Liquidators suing personally are generally to be treated in the same way as natural persons, so that, on the one hand, costs orders will be made against them if proceedings fail, and, on the other hand, security for costs may be ordered against them when the conditions set out in UCPR 42.21 are satisfied or (on appeal) there are “special circumstances” within UCPR 51.50. Although security for costs can be ordered (at first instance only) in other circumstances, this is not the usual or normal course; and it is relevant that, in order that security for costs be ordered in other circumstances on an appeal, where at general law security was more readily granted, “special circumstances” are required. It is to be noted also that mere inability to meet costs orders does not amount to special circumstances (Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2004] NSWCA 136) and thus does not of itself put an onus on an appellant to prove that an order for security would stultify the appeal.
(2)Where the plaintiff is a company in liquidation, and not the liquidator, then security for costs will more readily be ordered, although the court’s discretion is unfettered (Bell Wholesale P/L v Gates Export Corporation (No 2) (1984) 8 ACLR 588) and there is no presupposition in favour of granting security (Bryan E Fincott P/L v Eretta P/L (1987) 16 FCR 497). However, the court will not refuse to order security on the ground that this will frustrate the litigation unless the company proves that those who stand behind the company and would benefit from the litigation are unable to provide security (Bell Wholesale).
(3)Cases in which security for costs might be ordered against a natural person or a liquidator outside those provided for in UCPR 42.21 include cases where (in addition to proof that there is reason to believe the plaintiff will be unable to pay the defendant’s costs) the plaintiff has dissipated assets and/or has not paid previous costs orders (especially if those costs orders were in favour of the defendant) and/or brings a weak case to harass the defendant and/or brings a case for the benefit of others (albeit not solely for their benefit as apparently required by UCPR 42.21(1)(e)). There is of course a sense in which a liquidator is suing for the benefit of others; but what was decided in Cowell and Strand Wood was that this was not of itself sufficient to justify security for costs in relation to a person who has the statutory right and duty to do this.
In my opinion, it would be an oversimplification to say that underlying these guidelines is a broader principle that defendants should be protected against being unable to collect costs ordered against plaintiffs unless this would stultify the litigation. Certainly, these are relevant considerations; but in my opinion also relevant are the considerations that there should not be undue inhibitions on less wealthy persons from seeking vindication of their rights against more wealthy persons, and that there could be such inhibitions if it was in every case open to defendants to apply for security for costs on the basis of some evidence (or even on the basis of fishing notices to produce) suggesting inability to pay costs, and to claim that security should be given unless the plaintiff can prove it would stultify the litigation. In my opinion these considerations make it desirable that guidelines be adhered to, even though the question is ultimately for the court’s discretion.
In my opinion, the primary judge did not follow these guidelines. This may be insufficient to show a House v The King error. In Norbis v Norbis (1986) 161 CLR 513 at 520, Mason and Deane JJ said this:
The reference to “wrong principle” in the passage quoted from House v R no doubt refers to a binding rule rather than a guideline in the sense already explained. A failure to apply a guideline does not of itself amount to error, for it may appear that the case is one in which it is inappropriate to invoke the guideline or that, notwithstanding the failure to apply it, the decision is the product of a sound discretionary judgment. The failure to apply a legitimate guideline to a situation to which it is applicable may, however, throw a question mark over the trial judge's decision and ease the appellant's burden of showing that it is wrong. However, in the ultimate analysis and in the absence of any identifiable error of fact or positive law, the appellate court must be persuaded that the order stands outside the limits of a sound discretionary judgment before it intervenes.
However, in my opinion, to the extent that the primary judge did proceed on the basis that, once it was shown that the liquidator would or might be unable to meet an adverse costs order, the onus was on the liquidator to satisfy the court that the proceedings would be stultified and, if that onus was not discharged, security for costs should be granted, then this was an error going beyond mere failure to apply a guideline. Further, in my opinion, the primary judge did fail to take account of a relevant consideration, namely the desirability of having and generally following the guidelines I have set out. Accordingly, in my opinion, a House v The King error was made.
Litigation funder
Mr Davies SC for the liquidator submitted that the circumstance that someone other than a plaintiff who is a natural person stands to gain, along with the plaintiff, from success in the proceedings was not an important factor which could justify an order for security: cf Owners – Strata Plan 50530 v Walter Construction Group Limited [2001] NSWSC 820. He submitted this was particularly so where this other entity had indemnified the plaintiff against costs ordered to be paid to the defendant, and thus could be made liable to pay them at the instance of the defendant.
In this regard, I note also that, in cases where both a liquidator and the company in liquidation are plaintiffs, security for costs will generally not be ordered against the company, assuming the claims coincide or overlap to an extent such that failure would attract an order for costs against the natural plaintiff: Maples v Hughes [2002] NSWSC 617 at [14]-[15].
However, in my opinion a court should be readier to order security for costs where the non-party who stands to benefit from the proceedings is not a person interested in having rights vindicated, as would be a shareholder or creditor of a plaintiff corporation, but rather is a person whose interest is solely to make a commercial profit from funding the litigation. Although litigation funding is not against public policy (Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41; 229 CLR 386 at [87]-[95]), the court system is primarily there to enable rights to be vindicated rather than commercial profits to be made; and in my opinion, courts should be particularly concerned that persons whose involvement in litigation is purely for commercial profit should not avoid responsibility for costs if the litigation fails.
In this case, the funder could perhaps be liable for costs, at the instance of the defendant; although Young CJ in Eq in Chartspike Pty Limited v Chahoud [2001] NSWSC 585 said there would be difficulty in enforcing this kind of indemnity, because the funder is not an insurer who could be sued pursuant to the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) s6. If in such a case the funder did not willingly pay a costs order against the plaintiff, there is a question whether the defendant could bring proceedings in which the plaintiff and the funder were joined as defendants in order to enforce the indemnity against the funder; and even if this were possible, the proceedings would be cumbersome and could well be highly contentious. I note also that, in this case, the funder can avoid liability for future costs by terminating the funding agreement; and this could happen in such a way that CGU would need to expend further costs in order to obtain a decision in its favour, with no possibility of enforcement of those costs against the funder. (Problems such as these could possibly be overcome if the funder undertook to the court to be subject to any order for costs the court might make or consented to be joined as a party for that purpose: cf UCPR 42.3.)
In all these circumstances, in my opinion, the existence of the funder and the funding agreement is a matter that favours an order for security which, according to the funding agreement, the funder would be obliged to comply with. This view is supported by the consideration that in this case the court is left in the dark as to the proportion to which the funder is entitled of any verdict obtained by the liquidator; although, because this is the result of a claim of legal professional privilege, the court would not be justified in drawing any conclusion that the proportion to which the funder is entitled is unreasonably high: cf Wentworth v Lloyd (1864) 10 HL Cas 589; 11 ER 1154. (It may be that where the court knows the extent of the funder’s interest in the outcome of the case, this could be a factor which might lead the court to order security for less than the totality of the costs.)
Accordingly, I find no error by the primary judge in his regard to the involvement of a litigation funder.
Delay
Mr Davies submitted that, in circumstances where there had been gross unexplained delay, the primary judge erred in disregarding prejudice to the liquidator because the liquidator led no evidence that, had the application been made promptly, the liquidator would or may not have pursued proceedings. He submitted that there was a presumption of prejudice from gross delay: Southern Cross Exploration NL v All Risks Insurance Co Limited (1985) 1 NSWLR 114 at 125; Morris v Hanley [2001] NSWCA 374 at [29]-[30].
Mr Macfarlane QC for CGU submitted that prejudice had not been shown (cf Buckley v Bennell Design & Constructions Pty Limited (1974) 1 ACLR 301 at 308) and (in relation to proposed cross-appeal) that there was no reason why security should not have been ordered for costs already incurred; and he submitted that the primary judge erred in not doing so. He submitted that the appropriate order was for security for past and future costs: Brocklebank & Co v The King’s Lynn Steamship Co (1878) 3 CPD 365; Southern Cross Exploration at 122-123 and cases there cited; Bryan v Fencott.
In my opinion, it is not necessary, in order for a plaintiff to show prejudice from delay, that the plaintiff prove what the plaintiff would have done if the application had been made earlier; although if a plaintiff does prove that it would not have gone ahead with the proceedings if the application had been brought when it should have been, this would be a very powerful consideration against granting security in the case of a delayed application. In my opinion, where substantial costs have been incurred since the time when an application for security should have been brought, it would be unreasonable to deny the existence of prejudice unless the plaintiff can prove exactly what the plaintiff would have done if the application had been brought earlier.
However, in my opinion, the primary judge did not squarely say there was no prejudice because the liquidator did not prove what would have happened if the application had been made earlier; and in my opinion also, the primary judge did not deny the possibility of ordering security in respect of past costs. In the circumstances, if one assumes that an order for security for costs should be made in this case, I see no error in the primary judge’s approach concerning delay, or in the order that he made. In my opinion also, the reasons were adequate in this respect.
Re-exercise of discretion
I have held that the primary judge acted on a wrong principle and/or failed to take into account relevant considerations in not taking account of the desirability of having and following guidelines concerning the ordering of security for costs against a liquidator suing personally, and in proceeding on the basis that, once it was shown that the liquidator would or might be unable to meet an adverse costs order, the onus was on the liquidator to satisfy the court that the proceedings would be stultified and, if that onus was not discharged, security for costs should be granted.
However, in my opinion, the very heavy costs of this case, together with the involvement of the litigation funder, combined with the primary judge’s finding that the liquidator himself would or may be unable to meet an adverse costs order (a finding not challenged on this appeal) are together sufficient to justify the order for security that the primary judge made, limited as it was to future costs.
I think it is right that the court should be concerned to ensure that a litigation funder, involved in the litigation purely for commercial profit, should not be able to avoid responsibility for costs if the litigation fails, or be in a position where there may be obstacles in the way of a successful defendant obtaining costs from such a funder. I think this is enough to take this case outside the normal position in which a liquidator suing personally is assimilated to the position of an ordinary natural plaintiff and thus generally liable to an order for security for costs only in the circumstances set out in the UCPR.
As regards costs, both the appeal and the cross-appeal failed and should be dismissed with costs. However, the cross-appeal was not purely defensive, and both the appeal and cross-appeal required full consideration of the same questions. Accordingly, I propose that each side bear its own costs.

For those reasons, in my opinion, the following orders should be made:
(1) Leave to appeal and to cross-appeal granted.
(2)Notice of Appeal and Notice of Cross-Appeal to be filed within fourteen days.
(3)Appeal and cross-appeal dismissed.
(4) Each party to bear its own costs of the appeal and cross-appeal.
BASTEN JA: This application raises an important question as to whether the means by which an individual plaintiff funds proceedings can engage an obligation to provide security for the costs of another party.
I agree with Hodgson JA as to the general principles applicable in ordering security for costs in a case involving a liquidator acting in person. However, I would not, in application of those principles have made the order for security which his Honour approves. I also agree, subject to a similar qualification, with the further reasons of Campbell JA. The qualification relates to the matters which he identifies as “departures from the usual background” at [84]. The involvement of a litigation funder is undoubtedly an additional factor to those previously listed by his Honour. My concern relates to whether that additional factor warrants an order for security in circumstances where it would not otherwise be made.
The reason why it may be said that the involvement of a “litigation funder” militates in favour of an order for security for costs in the case where the plaintiff is an individual and, as in this case, the liquidator of a corporation requires some further consideration. Unless the rationale for the approach to be adopted is properly understood, there is a danger that a practice will develop whereby the presence of a litigation funder will be relied upon to justify the making of such order simply because the existence of the funder is understood to be a “relevant consideration”. That in turn may tend to limit the availability of litigation funding, if the funder must have the resources not merely to meet the plaintiff’s costs, but also an order for security for the costs of other parties, at the beginning of the litigation.
To avoid an overly broad principle being derived from particular precedents and, indeed, to justify a differential approach, it is also necessary to identify the relevant features of a “litigation funder”. Thus, there are a variety of situations in which a plaintiff or applicant obtains financial assistance from a third party in order to pursue litigation. For example, such assistance may be obtained through insurance, legal aid, co-operative ventures such as trade unions or from creditors and shareholders of a corporate litigant. Indeed, a plaintiff may obtain indirect funding through retaining lawyers pursuant to a conditional costs agreement by which the lawyers will not recover fees unless there is a successful outcome of the claim: see, eg, Legal Profession Act 2004 (NSW), ss 323 and 324. Furthermore, a source of funds for litigation may result from the factoring of debts sought to be recovered, using property of the plaintiff by way of security or by the funder obtaining an interest in a corporate plaintiff, through an issue of shares: see, eg, Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd [2004] FCA 1248 at [36] (Tamberlin J).
In common parlance, a “litigation funder” may be understood to refer to an entity which runs a commercial business involving the funding of litigation for profit. Because there are a number of ways in which a similar outcome can be achieved, it may be necessary to identify in what respect the commercial litigation funder is to be distinguished from other means of funding litigation, if some different principle is to be applied in relation to orders for security for costs. In discussing the history of the law with respect to maintenance and champerty, the joint judgment in Campbells Cash and Carry Pty Ltd v Fostif Pty Ltd [2006] HCA 41; 229 CLR 386 (Gummow, Hayne and Crennan JJ) noted at [75] (omitting references):
“Yet practices no different in substance, from some of those condemned so roundly, became commonplace in the law of insolvency. Bankruptcy legislation was held to permit a trustee in bankruptcy who had commenced an action to sell and assign the subject matter of the action to a purchaser for value. And, of course, the development of the doctrine of subrogation as applied to contracts of insurance qualified the apparent generality of rules against maintenance and champerty.”
The operation of rules relating to security for costs is dependent upon that aspect of civil litigation in this country which, generally but not universally, provides that costs orders will follow the event, in the sense that the successful party may expect to recoup at least part of its costs from the unsuccessful party. That rule applies mutually with respect to plaintiffs and defendants. Defendants, having been brought into proceedings involuntarily, are not subject to orders for security for costs, despite the fact that, in relation to a justifiable claim, it may ultimately be held that their conduct gave rise to the need for the litigation: see, eg, Levick v Commissioner of Taxation [2000] FCA 674; 102 FCR 155 at [24] (Wilcox, Burchett and Tamberlin JJ).
Nor is an individual plaintiff generally subject to an order for security for costs; although the inherent jurisdiction of the court may extend beyond the circumstances now found in the Uniform Civil Procedure Rules 2005 (NSW), r 42.21(1), the circumstances in which orders might be made against individuals are usually to be found within the exceptions to the general principle there stated. Both the general principle and the exceptions demonstrate an underlying policy that one may sue to vindicate one’s own rights as an individual, so long as one does not take positive steps to avoid the potential consequence of failure, being liability for the other party’s costs of the proceedings. That principle is expressly stated in paragraph (c) of the sub-rule (relating to change of address) and may be seen to underlie paragraph (b) (misstating an address with intent to deceive). Although it involves no element of deliberate avoidance, paragraph (a) (referring to ordinary residence outside the jurisdiction) may be seen to reflect a variation on the same principle, namely that the plaintiff should be available to answer for any liability in costs without undue difficulties being imposed on the defendant in seeking to recover costs.
The other two exceptions relate to a person who is suing, not for his or her own benefit but for the benefit of another (paragraph (e)) and where the plaintiff is a corporation (paragraph (d)). In each of the latter cases, the power to order security is further conditioned upon the apparent inability of the plaintiff to meet the costs of the defendant, if so ordered (sometimes referred to as impecuniosity, although in major commercial litigation even a relatively wealthy plaintiff may fulfil the condition).
The rule with respect to corporations may be seen as reflecting the same underlying policy as that with respect to nominal plaintiffs suing for the benefit of others (see also Corporations Act 2001 (Cth), s 1335). Thus, although being a legal entity in its own right the corporation is pursuing its own interests, the ultimate benefit will flow to its creditors (if it is insolvent) or its shareholders. The defendant in proceedings brought by a company “could find himself involuntarily prejudiced by the limited liability character of the plaintiff who had commenced proceedings against him”: see Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 at 303-304 (Street CJ, Moffitt P and Hutley JA agreeing). Of course, the defendant which finds itself involuntarily brought into proceedings by an impecunious individual may not see itself as being in a materially different position from that facing an impecunious corporate plaintiff: cf Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; 208 ALR 564 at [53] (Austin J).
It might be open, in terms of public policy, for the law to draw a distinction between plaintiffs seeking to protect personal interests and those seeking to vindicate their commercial interests. (It may be that this is a consideration which will affect the exercise of the discretionary power.) On the other hand, it is plain that a distinction is drawn between the circumstances of an individual plaintiff and that of a corporate plaintiff: see, eg, the analysis of this Court in Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123 in a passage dismissed by the primary judge in the present case as obiter (following the headnote) but which, in my view, was neither obiter nor other than a reflection of both court rules and the general law.
Within this scheme of principle, when a liquidator is a plaintiff, as for example in a misfeasance suit, rather than bringing proceedings in the name of the company, he or she might properly be seen as suing for the benefit of others. However, as Hodgson JA explains, a liquidator has not been treated as a nominal plaintiff for the purposes of orders for security. The underlying concern in relation to a nominal plaintiff is that those substantially interested in the outcome of the proceedings have retreated behind an impecunious individual so as to avoid putting their own resources at risk of an adverse costs order. As explained by Campbell JA at [83], the position of the liquidator is materially different and there are sound policy reasons for not applying that principle to a liquidator.
Where a liquidator sues unsuccessfully in his or her own name, the successful defendant is likely to obtain an order for costs payable by the liquidator personally. It follows that where the nature of the proceedings allows, the liquidator will not sue personally where proceedings can properly be brought in the name of the company and is unlikely to sue personally unless indemnified in relation to a possible adverse costs order. With respect to individual plaintiffs generally (including liquidators), neither impecuniosity, the nature of the resources relied upon to bring the proceedings nor the possibility of indemnity in the case of failure, will usually be considerations warranting an order for security for costs. (Given that impecuniosity is not relevant in such cases, the existence of an indemnity may well provide a greater degree of comfort to a defendant than would otherwise be the case.) The question is why a different approach should be adopted in relation to a liquidator funded by commercial business interests which have no separate and pre-existing interest in the outcome of the proceedings.
The mere fact that there is a litigation funder which has a commercial interest in the outcome, given that there is no longer any public policy concern with respect to maintenance of proceedings in which one has no prior interest, does not self-evidently render the circumstances relevantly distinguishable from the maintenance of such proceedings by a creditor whose interest similarly will not be in the subject-matter of the proceedings, except in the sense that success in the litigation will expand the resources of the corporation from which the creditor may receive payment at least of an enhanced dividend. Nor is it clear how the position of the litigation funder differs from that of a creditor which acquired its interest by assignment. The point of distinction relied upon by other members of the Court, as I understand it, is that the litigation funder will, at least in the event of a successful outcome, profit from the litigation. Profit, in this context, means more than merely recovering a prior debt, but recovering also a profit margin.
I do not find the distinction immediately persuasive. The creditor which sold goods to the company and was not paid will have included a profit margin in its price. If it recovers in full, it too will profit from the litigation in a similar sense to that in which the litigation funder will profit. The real point of distinction is that the litigation funder acquires its interest in the proceedings purely for the purposes of advancing the litigation and not from any pre-existing relationship with the corporation in liquidation. However, that fact is at best of limited relevance where, on the present hypothesis, the corporation is not a party to the litigation. Furthermore, that would appear to be reintroducing reliance upon the abandoned principle that an assignment of an interest in the subject matter of litigation will be lawful only if the assignee “have some legal interest (independent of that acquired by the assignment itself) in the property in dispute” rather than an interest “generated only by the assignment itself”: see Fostif at [73]. That approach was subject to condemnation in earlier times as the “traffic of merchandising in quarrels, of huckstering in litigious discord”: Fostif at [74]. Of course, an abandonment of that approach, with the result that maintenance of litigation is no longer criminal, tortious or against public policy, does not mean that the maintainer, absent a pre-existing common interest with the party maintained, may not properly be subject to an order for security for costs. The question is whether the fact that an individual plaintiff is funded from a commercial source of that kind forms a proper basis for a variation in the traditional approach to orders for security with respect to liquidators.
I am not persuaded by the arguments presented in the present case that such an order is called for in the case of proceedings brought by a liquidator personally. Nor was the Court referred to any considered authority supporting the proposed order. If the reason to protect a defendant from the incapacity of the liquidator to pay its costs arises in circumstances where the funder has no prior interest in the dispute, the principle could apply in numerous situations, including, subject to possible statutory constraints, where some form of legal aid is available. If the reason is merely that the funder stands to gain a financial benefit in the event of success, that would apply to a creditor or shareholder of the corporation in the interests of which the liquidator sues. If it is a combination of those factors it is still necessary to ask why that should engage a basis for protecting the defendant which does not otherwise arise. Assuming a reasonably arguable case, properly commenced and maintained, but brought by a plaintiff who may not be able to meet an adverse costs order, no authority supports the view that the individual, pursuing his or her own interests (or deemed to be so as in the case of a liquidator), may be required to provide security depending on the method of financing the litigation. A possible distinction in the case of a liquidator is that he or she is bargaining part of the company’s potential recovery for access to funding. That arrangement may be reviewable by the Court, but not at the instance of the defendants: they have no interest in the fate of any judgment moneys in the hands of the liquidator. Accordingly, the distinction is not one which has a relevant connection to the particular interests of the defendant with respect to a possible costs order.
If a creditor funding such proceedings would not be ordered to step forth and provide security to allow the proceedings to continue, no case has been made out to impose on a different source of litigation funds such an obligation.
The presence of litigation funding may justify a new approach to the basis on which orders for security are made with respect to individual plaintiffs, or to the way in which liquidators suing personally are to be treated. Whilst the issue arises in respect of practice and procedure within the Court, the approach proposed by the respondent involves departure from, rather than extrapolation of, existing authority. It raises an issue which calls for a uniform approach across jurisdictions and would better be addressed in the broader context of the regulation of commercial litigation lending. Such consideration will need, amongst other things, to define with some precision what is a “litigation funder”.
I agree with orders (1) and (2) proposed by Hodgson JA. In relation to order (3), I agree the cross-appeal should be dismissed. Otherwise I would allow the appeal and order the respondent to pay the appellant’s costs in this Court and the costs of the application for security before the primary judge.
CAMPBELL JA: I agree with the reasons of Hodgson JA, and add the following remarks.
The background against which courts developed a policy of usually not requiring liquidators to provide security for costs when suing in their own name included:
(a)The liquidator is performing a public function under statutory authority. That public function provided a reason for not according as much weight as would be accorded in litigation purely between private individuals and of the type that fell within UCPR 42.21(1) to the private interest of the person sued to have assurance that an order for costs would be paid.
(b)There have always been provisions such as s 545 Corporations Act 2001, that enable a liquidator to not sue if not satisfied that he or she is properly funded. That fact, combined with the potential personal liability of the liquidator for costs, and a measure of public control over the qualifications of persons who are eligible to be liquidators (eg s 1282 Corporations Act), in itself has a tendency (which might not be realised in every case) for liquidators not to bring litigation unless they were satisfied that they could pay the costs if they were to lose.
(c)That the liquidator is exposing all his or her assets to the risk of an unfavourable costs order puts the litigant into a situation somewhat analogous to a natural person plaintiff who is suing for his or her own benefit.
(d)The liquidator's personal gain from running the litigation consists only of professional costs and disbursements, which are themselves subject to a measure of public control, either by the court or creditors (ss 473, 499 Corporations Act).
(e)Even when the liquidator is being funded by a creditor, in circumstances where the creditor is entitled to a preferential dividend under s 564 Corporations Act by reason of having funded the litigation, the most that the creditor can recover for its own benefit is a return of its outlay for costs, and a 100% dividend on its proved debt. A creditor who funds the litigation in those circumstances is thus doing nothing more than protecting its own legal right to be paid its debt by the company.
That background is departed from if the liquidator is being funded by a creditor who is in commercial substance a funder who has taken assignments of debts for a fraction of the face value, as happened in Jarbin Pty Ltd v Clutha Ltd (in liq) [2004] NSWSC 28; (2004) 180 FLR 393; (2004) 22 ACLC 550; (2004) 208 ALR 242. It is likewise departed from when the liquidator is being funded by a commercial funder who stands to receive a proportion of the proceeds of the litigation. In those situations, there is not the same reason that there is in the ordinary situation of a liquidator suing to regard the inherent power of the court to order security as not being enlivened.
There is no shortage of judicial statements to the effect the fact that the litigation is being brought in part for the benefit of a litigation funder is a relevant consideration in the exercise of a discretion as to costs under s 1335 Corporations Act (Spargos Mining NL v Fuller [2003] WASC 37; (2003) 21 ACLC 860 at [10], [23]; Healy Air-conditioning Pty Ltd v Oracle Corporation Pty Ltd [2003] WASC 78; (2003) 21 ACLC 866 at [3]; Global Finance Group Pty Ltd (in liq) v Marsden Partners (a firm) [2004] WASC 52 at [59]-[60], [71]) even if the plaintiff is a company that is insolvent even though not actually in liquidation (Maronis Holdings Ltd v Nippon Credit Australia Ltd [2000] NSWSC 994 at [11]-[12]; Baygol Pty Ltd v Huntsman Chemical Co Australia Pty Ltd t/a RMAX [2004] FCA 1248 at [37]-[39] ), and there is authority that the involvement of a funder is relevant to whether the court should order security for the costs of appeal (Winnote Pty Ltd (in liq) v Page [2005] NSWCA 362; (2005) 64 NSWLR 244 at [23]).

A special problem is posed for the court when any proceeds of litigation brought in the name of the liquidator will go partly to a funder for its private profit, and partly remain with the liquidator for distribution among the creditors and others entitled in a winding up. Guidelines usually applied in connection with security of costs would suggest that, in so far as the litigation is for the private profit of the funder, it is appropriate for security to be supplied, but insofar as it is brought by a liquidator for distribution in the ordinary course of a winding up security for costs ought not be required. Clearly, those two approaches are mutually incompatible. In a situation where the rationale for a guideline concerning the exercise of discretion is not present, there may be good reason for departing from that guideline. Whether to depart from it, and if so, how, will depend very much of the facts of the case.
Melville v Craig Nowlan & Associates Pty Ltd [2002] NSWCA 32; (2002) 54 NSWLR 82 at [99] - [102] provides an illustration of how the particular forensic context, in which a general principle concerning security for costs comes to be applied, affects the operation of that principle. Heydon JA there accepted that the principle that poverty should not be a bar to the bringing of litigation operated differently in relation to litigation brought under the open standing provision of s 123 Environmental Planning and Assessment Act 1979. In particular, the reason why it operated differently was because the feature of most litigation, that the plaintiff is seeking to enforce rights that he personally has, is absent. In so far as a liquidator brings litigation in that capacity, but for the benefit of people other than the creditors of the company, the same can be said.
One extremely relevant factor is the extent to which the litigation, if successful, will ultimately be for the private profit of the funder. That information is simply not known in the present case. The court is aware that the reported cases show a significant range of returns being asked by commercial litigation funders (see, eg Jarbin at [108]). The effect of the terms of the funding agreement not being placed before the court in the present case because of a claim of legal professional privilege is that the court is not entitled to draw the inference that it would be entitled to draw if a privilege claim had been absent, that the funder was receiving a proportion of the proceeds at the top of the available range (cf Armory v Delamirie (1722) 1 Stra 505; (1722) 93 ER 664). But the court is still in a situation of knowing that there will be some special return to the funder. Sometimes in connection with the award of damages the court must do the best it can to make an assessment of damages on the basis of material that it knows is considerably less than compelling, because it would be doing a worse injustice to award no damages at all. Similarly in the present case, the very fact of private profit from the litigation, and lack of satisfaction that there are available assets from which an unfavourable costs order against the liquidator would be met, are enough to show that some order of security for costs should be made. Even though the materials on the basis of which the quantum can be assessed are certainly not as good as they might be, an order in the quantum proposed by the trial judge is appropriate.
I agree with the orders proposed by Hodgson JA.

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LAST UPDATED:
20 June 2008