Idoport Pty Ltd v National Australia Bank Ltd

[2001] NSWSC 744

CITATION:	Idoport Pty Limited & Anor v National Australia Bank Limited & 8 Ors; Idoport Pty Limited & Market Holdings Pty Limited v Donald Robert Argus; Idoport Pty Limited "JMG" v National Australia Bank Limited [35] [2001] NSWSC 744 revised - 20/09/2001
FILE NUMBER(S):	SC 50113/98; 50026/99; 3991/00
HEARING DATE(S):	29/08/01, 30/08/01, 31/08/01, 3/09/01, 4/09/01
JUDGMENT DATE:	13 September 2001
PARTIES :	Idoport Pty Limited (Plaintiff) Market Holdings Pty Limited (Plaintiff) National Australia Bank Limited (Defendant) Donald Robert Argus (Defendant)
JUDGMENT OF:	Einstein J

COUNSEL :	Mr Garnsey QC, Mr M Dicker, Mr R Titterton (Plaintiffs) Mr J Gleeson SC, Dr AS Bell (Defendants)
SOLICITORS:	Withnell Hetherington (Plaintiffs) Freehills (Defendants)
CATCHWORDS:	Practice and procedure - Costs - Security for costs - General principles - Impecunious plaintiff - Bodies corporate - Litigation for benefit of third parties - Delay in pursuing claim for security for costs - Significance of prejudice - Final hearing to take extended period of years - Application for security as to - (1) defendants' future costs in respect of amendments to statement of claim allowed well after commencement of final hearing - (2) defendants' future costs in respect of claims made by Market Holdings (in liquidation) - (3) defendants' costs, past and future, in respect of MLC proceedings initiated following the commencement of the final hearing of the existing proceedings and ordered to be heard together with the existing proceedings - Primary purpose of an award of costs is to indemnify the successful party - A secondary purpose concerns the public interest objective in the sense of instilling in parties commencing litigation a realisation of the potential financial expenses involved - Large-scale disregard of the principle of the usual order as to costs would inevitably lead to an increase in litigation with an increased and often unnecessary burden on the scarce resources of the publicly funded system of justice - Purpose of a security for costs order is a protective jurisdiction to ensure that the primary purposes for having costs orders themselves can be achieved - A defendant is protected against the risk that a cost order obtained at the end of the proceedings may turn out to be of no value by reason of the impecuniosity of the plaintiff - The jurisdiction assists both the compensation purpose as well as the public interest objective
LEGISLATION CITED:	Corporations Act 2001 (Cth) Legal Profession Act 1987 (NSW) Supreme Court Rules 1970 (NSW) Maintenance, Champerty and Barratry Abolition Act 1993 (NSW)
CASES CITED:	Andrews v Caltex (1982) 40 ALR 305 Anstee v. Jennings (1935) VLR 144 Bankinvest AG v Seabrook (1988) 14 NSWLR 711 Beach Petroleum NL & Anor v Johnson & Ors Bell Wholesale Co Pty Limited v Gates Export Corporation (1994) 2 FCR 1 Bryan E. Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 Cameron's Unit Services Pty Ltd v Kevin R Whelpton and Associates (Aust) Pty Ltd (1986) 13 FCR 46 Carr v Baker (1936) 36 SR (NSW) 301 Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 8 ACLR 818 Caswell v Powell Duffryn Associated Collieries Limited [1940] AC 152 Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585 Chellaram and Mr Courtney v Chine Ocean Shipping Co (1991) 65 ALJR 642 Cilli v. Abbott (1981) 53 FLR 108 Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 Commonwealth of Australia and Another v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760 Cunningham v Olliver Federal Court of Australia, unreported 21 November 1994, NG 14/93 Cowell v Taylor (1885) 31 Ch D 34 Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68 Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972 Fitzpatrick v Waterstreet (1995) 18 ACSR 694 Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1 Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405 Grant v The Banque Franco-Egyptienne Egyptienne (1876) 1 CPD 143 Harpur v Ariadne Australia Ltd [1984] 2 Qd.R 523 Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) ACLC 32,446 Hession v Century Twenty-one South Pacific Limited (In Liq) (1992) 28 NSWLR 120 Idoport Pty Ltd & Anor v National Australia Bank Limited & 8 Ors.[1999] NSWSC 828 Idoport Pty Ltd & Anor v National Australia Bank Limited & 8 Ors [2001] NSWSC 142 Idoport Pty Ltd & Anor v National Australia Bank Limited & 8 Ors [2001] NSWSC 509 Idoport Pty Ltd & Market Holdings Pty Ltd (in liq) v National Australia Bank Limited CA40825 of 2000 Interwest Ltd v Tricontinental Corp Ltd (1991) 5 ACSR 621 Jingellic Minerals NL & Anor v King & Ors (1992) 10 ACLC 525 J & M O'Brien Enterprises Pty Limited v The Shell Co of Australia Limited (1983) 7 ACLR 790 Johnson v Lake Macquarie City Council (1995) 87 LGERA 22 Jones v Great Western Railway Co (1930) 144 LT 194 Kelly v. Noumenon Pty Ltd (1988) 47 SASR 182 KP Cable Investments Latoudis v Casey (1990) 170 CLR 534 Lindsay Petroleum v Hurd (1874) LR 5 PC 221 Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 MA Productions Pty Limited v Austaram Television Pty Limited (1982) 7 ACLR 97 Memutu Pty Limited v Lissenden (1983) 8 ACLR 364 Mummery v Irvings (1956) 96 CLR 99 National Bank of New Zealand Limited v Donald Export Trading Limited [1980] 1 NZLR 9 Orr v Ford (1989) 167 CLR 316 Oshlack v Richmond River Council (1998) 193 CLR 72 Pacific Acceptance Corporation Ltd v Forsyth (No 2) [1967] 2 NSWR 402 Pearson v Naydler [1977] 1 WLR 899 Rajski and Another v Computer Manufacture & Design Pty Ltd and Others [1982] 2 NSWLR 443 Ramsey v Hartley [1977] 2 All ER 673 Re Insurance Associates Pty Ltd (in liq) (1975) 1 ACLR 74 Riot Nominees Pty Limited v Suzuki Australia Pty Limited (1981) 34 ALR 653 Rosenfield Nominees Pty Limited v Bain & Co (1988) 14 ACLR 467 Rugby Union Players Association [30/7/1997, SCNSW, 50225/96, unreported] Scott Fell v Lloyd (Official Assignee) (1911) 13 CLR 230 Seltsam Pty Limited v McGuiness (2000) 49 NSWLR 262 Semler v Murphy [1968] Ch 183 Sent v Jet Corporation (1984) 2 FCR 201 Smail v Burton (1975) VR 776 Southern Cross Exploration v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114 Spiel v Commodity Brokers Australia Pty Ltd at 415 Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480 Tricorp Pty Ltd (in liq) v Deputy Commissioner of Taxation (WA) 10 ACLC 474 Tulloch v Walker (Yeldham J. 8 December 1987, unreported) Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 Weily's Quarries v Devine Shipping (1994) 14 ACSR 186 Woodhouse v McPhee (1997) 80 FCR 529 Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542
DECISION:	Orders to be made for the provision by Idoport Pty Ltd and by Market Holdings Pty Ltd (in liquidation) of security for costs in respect of each of the defendants' claims in notices of motion 19 and 22. Parties to bring in short minutes of order to reflect the reasons for judgment. The liquidator of Market Holdings to be given an opportunity to address submissions in relation to Market Holding's position.

INDEX
Heading	Paragraph number
Judgment – On security for costs application	1
Order of restricted access	1
Explanation of confidentiality regime	2
The proceedings	5
The notices of motion	9
Notice of motion 19	10
Notice of motion 22	13
Sources of the Court’s power to order security for costs	16
Inherent power	17
Section 1335 of the Corporations Act 2001	18
Part 53 of the Supreme Court Rules	21
Structure of the judgment	25
Background facts relevant	26
The claim for security for costs from Idoport in the main proceedings	28
Reason to believe that Idoport would be unable to pay	28
Plaintiff suing in substantial part for the benefit of other persons	31
The defendants submissions	33
The plaintiffs submissions	34
Stultification of litigation	35
Strength of the plaintiffs	36
Amount of security	38
Proceedings for the benefit of other persons – The facts	40
Dealing with the central principles	44
Costs generally	44
Security for costs	47
Plaintiffs: natural persons vs corporations	53
Burden of proof	60
The bases relied upon by the defendants	63
The plaintiffs evidentiary onus	65
Stultification	66
Delay	68
The principles	69
Delay – the facts	82
Time estimates for the final hearing	83
The circumstances in which leave to amend was granted	89
The concession as to arguable case	99
The proper construction of Part 53 Rule 2(1) (b) of the Supreme Court Rules	100
Dealing with the three claims to security	107
Outside funding agreements/arrangements	107
The claim for security in respect of the MLC proceedings	108
The claim for security pursued against Idoport in relation to the amendments	113
The claim for security pursued against Market Holdings	123
Extrapolating back to Southern Cross	126
Dealing with the plaintiffs’ ‘scale/imbalance’ submission	127
Maintenance and champerty	135
Amount of security	138
Security for costs against Market Holdings	155
Stepped payments	156
Idoport	156
Market Holdings	157
Short Minutes of Order	158

Appendices (not in internet version)

Appendix “A” – Funding arrangements (CONFIDENTIAL)

Appendix “B” – Table: Filing of statements

Appendix “C” – Experience of Mr Lovell (Affidavit of 29 August 2001]

Appendix “D” – Ms Vine-Hall’s CV (Affidavit of 5 August 2001

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION - COMMERCIAL LIST

EINSTEIN J

13 September 2001

50113/98 IDOPORT PTY LIMITED & ANOR v NATIONAL AUSTRALIA BANK LIMITED & 8 ORS

50026/99 IDOPORT PTY LIMITED & ANOR v DONALD ROBERT ARGUS

3991/00 IDOPORT PTY LIMITED (“JMG”) v NATIONAL AUSTRALIA BANK

JUDGMENT – On security for costs application

Order restricting access

1    The Court orders that, subject to any order which may later be made varying this order, the sections of the judgment whited out from this form of edited text at each place marked "blanked out" may be made available only to the plaintiffs and their legal representatives and to such persons on the defendants’ side of the record as have subjected themselves to the confidentiality regime by appropriate undertakings, and are not to be published or revealed to any other person. [Note: On 17 September 2001, the Court varied the above order to release generally for public inspection, the whole of the text of the judgment with the exception of Appendix “A”. Hence the judgment, which is made generally available, no longer includes any “blanked out” portions but does not include Appendix “A”]

Explanation of confidentiality regime

2    The Court’s judgment of 27 August 2001 delivered ex tempore and revised on 28 August 2001 set out the reasons for a particular confidentiality regime being imposed until further or other order in terms of the relevant persons who may have access to materials identified as confidential and the subject of the Courts orders made on 28 August 2001 as varied on 29 August 2001. In consequence of those orders, certain sections of the security for costs applications were heard in camera.

3    The judgment which is to be published by way of the reasons for the decision on the security for costs applications will be published in two forms. The first form is a judgment to be made available only to the plaintiffs’ side of the record and to such persons on the defendants’ side of the record as have subjected themselves by undertaking to the court to the confidentiality regime. The second form is a judgment to be made available generally without any restriction.

4    Wherever the unrestricted form of judgment omits a section being confidential, the words "blanked out" appear. [see Note to paragraph 1]

The proceedings

5    Three sets of proceedings are presently being heard together.

6    Proceedings No 50113 of 1998 referred to generally as "the main proceedings” were commenced by Idoport and Market Holdings as plaintiffs by way of statement of claim filed on 24 September 1998. The final hearing of the main proceedings being heard together with proceedings No 50026 of 1999 ("the Argus proceedings") commenced on 24 July 2000. The Argus proceedings had commenced in early 1999. The convention has been as a matter of convenience to refer both to proceedings No 50113 of 1998 as well as No 50026 of 1999 as “the main proceedings”.

7    The MLC proceedings were commenced by Idoport as sole plaintiff on 19 September 2000, an order being made on 5 October 2000 that the main proceedings and the MLC proceedings be heard together.

8    It is not proposed to here set out the record. In excess of 50 interlocutory judgments have been delivered on sundry aspects of the issues raised in the ongoing proceedings and the essential issues have been the subject of extensive openings by both parties, supplemented by extensive materials in turn referring to the extensive pleadings. As and where appropriate aspects of the pleadings and of the lead up to the commencement of the final hearing and of the hearing itself will be referred to. The 277 statements currently filed or served will also be referred to.

The notices of motion

9    There are before the Court two notices of motion in which the defendants seek security for their costs.

Notice of motion 19

10    Notice of motion 19 was filed on 24 January 2001 in proceedings 50113 of 1998 [having at all material times been regarded as also seeking security for costs in relation to the Argus proceedings] and having been foreshadowed by facsimile from the defendants’ solicitors on 3 October 2000. This motion seeks an order:

"that Idoport and Market Holdings provide security for the costs of the defendants from 18 September 2000 pursuant to Part 53 rule 2 of the Supreme Court Rules (NSW) and section 1335 of the Corporations Law".

11    It is common ground that in the main proceedings the defendants seek security from Idoport in the sum of $1,699,500 by way of the suggested defendants costs from July 2001 [Affidavit of Mr Lovell 24 July 2001 paragraph 30], the claimed rationale being that these costs are said to concern amendments which have been allowed to the statement of claim as between the Third Further Amended Statement of Claim and the Fourth Further Amended Statement of Claim.

12    It is also common ground that the defendants seek security from Market Holdings in the sum of $6,406,500 by way of the suggested defendants’ costs from July 2001 [Affidavit of Mr Lovell 19 July 2001 paragraph 66 et seq], said to be the costs of litigating issues described as ‘the representations case’ and ‘the damages case’ concerning Market Holdings. (cf Mr Lovell’s affidavit of 19 July 2001, paragraphs 30 et seq and 49 et seq)

Notice of motion 22

13    Notice of Motion 22 was filed on 24 January 2001 in the MLC proceedings having been foreshadowed by facsimile from the defendants’ solicitors on 3 October 2000. The motion seeks an order:

"that Idoport provide security for the costs of the defendants pursuant to Part 53 rule 2 of the Supreme Court Rules (NSW) and section 1335 of the Corporations Law".

14    It is common ground that the defendants seek security from Idoport in the amount of $1,497,957 by way of an estimate of past and future costs and disbursements of the defendants in the MLC proceedings as from 19 September 2000.

15    MFI D176 contains the following convenient summary:

‘Proceedings No. 50113 of 1998 (the Main Proceedings)
A Idoport Pty Limited

· Amount claimed: $1,699,500 (paragraph 30 of the affidavit of Damian Gordon Lovell sworn 24 July 2001 (“the 24 July 2001 affidavit”)).

· From when: July 2001 (paragraphs 13, 16, 20 and 24 of the 24 July 2001 affidavit).

· In respect of:

Future costs in relation to the amendments to the statement of claim contained in the Fourth Further Amended Statement of Claim (“4FASOC”):

(i) Description of tasks in relation to the addition of paragraph 12A of the 4FASOC (paragraph 15 (amount); paragraph 13 (description of tasks));
(ii) Description of tasks in relation to the addition of paragraphs 18.6 and 52.17 of the 4FASOC (paragraph 19 (amount); paragraph 16 (description of tasks));
(iii) Description of tasks in relation to the addition of paragraphs 18.7 and 52.18 of the 4FASOC (paragraph 23 (amount); paragraph 20 (description of tasks));
(iv) Description of tasks in relation to the addition of paragraphs 18.8, 30(2), 35(2), 40(2), 46(2), 49B(2), 49I(2) and 52.19 of the 4FASOC (paragraph 27 (amount); paragraph 24 (description of tasks)).

· Assumptions: Paragraphs 10, 18 and 28 of the 24 July 2001 affidavit. In particular, paragraph 10(d) states that the costs estimate assumes there is no duplication of work between solicitors, or between solicitors and counsel.

B Market Holdings Pty Limited (in liquidation)

· Amount claimed: $6,406,500 (paragraph 101 of the affidavit of Damian Gordon Lovell sworn 19 July 2001 affidavit (“the 19 July 2001 affidavit”)).

· From when: July 2001 (paragraphs 66 and 68 of the 19 July 2001 affidavit).

· In respect of:

Future costs:
(i) Preparing the cross-examination of the plaintiffs’ lay and expert witnesses (paragraph 79 (amount); paragraphs 66(f)(8), 68(1) and 75 (description of task));
(ii) Conducting the cross-examination of the plaintiffs’ lay and expert witnesses (paragraph 84 (amount); paragraphs 66(f)(9), 68(2) and 80 (description of task));
(iii) Observing the cross-examination of the defendants’ lay and expert witnesses and conducting the re-examination of the defendants’ witnesses where appropriate (paragraph 89 (amount); paragraphs 66(f)(10), 68(3) and 85 (description of task));
(iv) Preparing and finalising the defendants’ lay witness statements relating to the Representations Case (including the amendments to the Representations Case) (paragraph 91 (amount); paragraphs 66(d) and 68(4) (description of task));
(v) Preparing the defendants’ witnesses for cross-examination (paragraph 93 (amount); paragraphs 66(e), 68(5) and 92 (description of task));
(vi) Preparing and presenting oral and written submissions (paragraph 95 (amount); paragraphs 66(f)(13), 68(6) and 94 (description of task));
(vii) Advising the defendants as to the progress of the proceedings (paragraph 97 (amount); paragraphs 66(f)(11), 68(7) and 96 (description of task)).

· Assumptions: paragraphs 72, 76, 77, 81, 82, 86 and 87 of the 19 July 2001 affidavit. In particular, paragraph 72(g) states that the costs estimate assumes there is no duplication of work between solicitors, or between solicitors and counsel.

Proceedings No. 3991 of 2000 (the MLC Proceedings)

· Amount claimed: $1,497,957 (paragraph 47 of the affidavit of Damian Gordon Lovell sworn 12 June 2001 (“the 12 June 2001 affidavit”)).

· From when: Commencement of the proceedings on 19 September 2000 (paragraph 8 of the 12 June 2001 affidavit).

· In respect of:

(a) Past costs (paragraph 8 (amount); paragraphs 12-34 (description of tasks)).

(b) Future costs:
(i) Reviewing proposed Further Amended Statement of Claim and filing defence (paragraph 43(a) (amount); paragraph 39(a) (description of task));
(ii) Discovery on damages issues (paragraph 43(b) (amount); paragraph 39(b) (description of task));
(iii) Reviewing plaintiff’s evidence (paragraph 43(c) (amount); paragraph 39(c) (description of task));
(iv) Reviewing documents (paragraph 43(d) (amount); paragraph 39(d) (description of task));
(v) Preparing and finalising defendants’ lay witness statements (paragraph 43(e) (amount); paragraph 39(e) (description of task));
(vi) Preparing assumptions and briefing defendants’ experts (paragraph 43(f) (amount); paragraph 39(f) (description of task));

(vii) Advising defendants (paragraph 43(g) (amount); paragraph 39(g) (description of task));
(viii) Preparing defendants’ witnesses for cross-examination (paragraph 43(h) (amount); paragraph 39(h) (description of task));
(ix) Preparing for hearing (paragraph 43(i) (amount); paragraph 39(i) (description of task));
(x) Appearing at the hearing (paragraph 43(j) (amount); paragraph 39(j) (description of task));
(xi) Preparing written submissions (paragraph 43(k) (amount); paragraph 39(j) (description of task)).

· Assumptions: Paragraph 42 of the 12 June 2001 affidavit. In particular, paragraph 42(i) states that the costs estimate assumes there is no duplication of work between solicitors, or between solicitors and counsel.’

Sources of the Court’s power to order security for costs

16    The Supreme Court derives power to order a plaintiff to provide security for the defendant’s costs of the proceedings from the following 3 sources:

a) The Court has an inherent power to require security for costs;

b) The Court may order security for costs under s1335 of the Corporations Act 2001.

c) The Court may order security for costs under Part 53 of the Supreme Court Rules 1970 (NSW);

Inherent power

17    The Supreme Court has inherent jurisdiction to make an order for security for costs in addition to its specific statutory jurisdiction. Its power is therefore broad enough to authorise the making of orders in cases other than those listed in the rules: Rajski and Another v Computer Manufacture & Design Pty Ltd and Others [1982] 2 NSWLR 443; Lehane J, “Security for Costs” Law Society Journal 37(4) May 1999 54-56.

Section 1335 of the Corporations Act 2001

18 Division 1 of Part 53 of the Rules does not affect the provisions of any Act under which the Court may require security of costs to be given: Part 53 Rule 5. The tests enunciated within Rule 2(1)(e) and s1335(1) of the Corporations Act are similar: Fitzpatrick v Waterstreet (1995) 18 ACSR 694.

19 Section 1335 of the Corporations Act states:

“(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

(2) The costs of any proceeding before a court under this Act is to be borne by such party to the proceeding as the court, in its discretion, directs.”

20    The Court must first consider the threshold question of whether credible testimony can establish that there is reason to believe that the corporation will be unable to pay the costs of the defendant if the latter is successful in its defence: Weily’s Quarries v Devine Shipping (1994) 14 ACSR 186. If this question is answered in the affirmative, the second question arises as to whether, in the exercise of the Court’s discretion, the relief sought should be granted: Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114.

Part 53 of the Supreme Court Rules

21 Part 53 of the Supreme Court Rules provides:

“(1) Where, in any proceedings, it appears to the Court on the application of a defendant:
(a) that a plaintiff is ordinarily resident outside the State;
(b) that a plaintiff is suing, not for his own benefit, but for the benefit of some other person and there is reason to believe that that plaintiff will be unable to pay the costs of the defendant if ordered to do so;

(c) subject to subrule (2), that the address of a plaintiff is not stated or is mis-stated in his originating process;

(d) that a plaintiff has changed his address after the commencement of the proceedings with a view to avoiding the consequences of the proceedings; or

(e) that there is reason to believe that a plaintiff being a body corporate will be unable to pay the costs of the defendant if ordered to do so,
the Court may order that plaintiff to give such security as the Court thinks fit for the costs of the defendant of and incidental to the proceedings and that the proceedings be stayed until the security is given.
(2) The Court shall not order a plaintiff to give security by reason only of subrule (1) (c) if it appears to the Court that the failure to state his address or the mis-statement of his address was made without intention to deceive.”

22    References to “plaintiff” extend to “any person who makes a claim for relief in any proceedings”. References to “defendant” extend to “any person against whom a claim for relief is made in any proceedings”: Rule 53 Part 1. Reference to “plaintiff” is not to be given a restricted or technical meaning: Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 306.

23 Where a plaintiff fails to comply with an order for security for costs, the Court may order that proceedings on any claims by the plaintiff for relief in the proceedings be dismissed: Part 53 Rule 4.

24 The defendants rely upon each of the essentially two grounds for security so provided for in Part 53 and in section 1335.

Structure of the judgment

25    The convenient course may be to commence by outlining certain sections of the written submissions of both parties which should serve to set the general framework of submissions. The submissions were substantially supplemented during oral address and have been fully transcribed. Following the general outline of some sections of the extensive written submissions it seems appropriate to move directly to the evidence as to the funding arrangements and then to deal with the applications by way of the Court’s identification of the relevant principles and of the reasons for the ultimate decision as to the appropriate exercise of the discretion.

Background facts relevant

26    The plaintiffs’ submissions were to the effect that although all of the facts, matters and circumstances required to be carefully examined, a number of suggested particular background facts should be seen as of central relevance to the application. I set out hereunder the particular facts to which the plaintiffs draw the Court's attention:

“(a) the main proceedings were commenced by Idoport and Market Holdings by way of Statement of Claim on 24 September 1998. The trial of the main proceedings and matter no. 50026 of 1999 commenced before Justice Einstein on 24 July 2000 and are currently continuing to be heard (Mr Hetherington’s affidavit sworn 3 August 2001 paragraph 2);
(b) at all relevant times from the commencement of the main proceedings on 24 September 1998 to date, Freehills have acted as the solicitors for the Defendants in both the main proceedings and the MLC proceedings. At all relevant times Mr G E Healy, a partner of Freehills, has been the solicitor on the record for the Defendants (Mr Hetherington’s affidavit sworn 3 August 2001 paragraph 3). Accordingly, no delay can be explained by a change in solicitors for the Defendants;
(c) between the commencement of the main proceedings on 24 September 1998 to the commencement of the final hearing of the proceedings on 24 July 2000, there were numerous directions hearings and interlocutory applications heard by judges including Justices Hunter, Rolfe and Einstein (Mr Hetherington’s affidavit sworn 3 August 2001 paragraph 4);
(d) the financial standing of the Plaintiffs was discussed before Einstein J in the context of an undertaking as to damages being given by the Plaintiffs in the interlocutory hearing which took place in July and August 1999 and is referred to at paragraphs 332-342 of Einstein J’s judgment dated 19 August 1999 ([1999] NSWSC 828). As can be seen from paragraph 333 of the reasons for decision of Einstein J, tax returns and balance sheets for 1998 for the Plaintiffs had been tendered by the Defendants at that time (affidavit of Mr Hetherington sworn 3 August 2001 paragraph 8);
(e) it was not until 3 October 2000, over two years after the commencement of the main proceedings and over two months after the commencement of the final trial, that the solicitors for the Plaintiffs first received notice of an application by Freehills seeking security for costs in relation to the main proceedings and foreshadowing a similar application for security for costs in the MLC proceedings (affidavit of Mr Hetherington sworn 3 August 2001 paragraph 5);
(f) it appears that the letter from Freehills dated 3 October 2000 was the first time that security for costs had been raised with the solicitors for the Plaintiffs in either the main proceedings or the MLC proceedings. Further, it appears that the question of a claim for security for costs had never been raised in the hearing before Justice Einstein which commenced on 24 July 2000 by the Defendants prior to the receipt by Mr Hetherington of the letter from Freehills dated 3 October 2000 (Mr Hetherington’s affidavit sworn 3 August 2001 paragraph 6);
(g) prior to the commencement of the trial on 24 July 2000 and thereafter the Plaintiffs have sought and been granted leave to amend their Statement of Claim on a number of occasions. At no stage have the Defendants sought as a condition of leave to amend that the Plaintiffs or either of them provide security for the costs of the Defendants occasioned by the work needed to deal with the amendments the subject of the leave. Further, it appears that at no stage have the Defendants indicated at the time that leave was sought or granted to the Plaintiffs that an application would be made by the Defendants for security for costs in relation to the costs occasioned by the Defendants in performing work to deal with such amendments (affidavit of Mr Hetherington sworn 3 August 2001 paragraph 7);
(h) issues relating to the financial capacity of the Plaintiffs have arisen between the parties on a number of occasions prior to 3 October 2000 without the Defendants raising the issue of or claiming security for costs. In the period May to July 2000 the Defendants, through various procedural means, sought access to documents disclosing any funding of the Plaintiffs by parties external to the Plaintiffs. See the documents at pages 1-81 of Exhibit “SWH1” to the affidavit of Mr Hetherington sworn 3 August 2001 and the documents referred to at paragraph 9(a) to (e) of that same affidavit. Further, Mr Maconochie, a director of the Plaintiffs, was cross-examined in relation to funding of this litigation on 28 July 1999 by Mr T E F Hughes QC, senior counsel then appearing for the Defendants. See pages 54-56 of Exhibit “SWH1” to the affidavit of Mr Hetherington sworn 3 August 2001. Despite this issue of funding of the proceedings and the Plaintiffs’ financial position being squarely before the Defendants, at no stage prior to 3 October 2000 did the Defendants raise the issue of security for costs”

27    It is apparent that each of the plaintiffs strongly submits that a most important discretionary consideration in relation to the claim for security concerns the defendants delay in pursuing security.

The claim for security for costs from Idoport in the main proceedings

Reason to believe that Idoport would be unable to pay

28    The defendants submit that there is reason to believe on the evidence that Idoport would be unable to pay the costs of the defendants if ordered to do so. The plaintiffs accept for the purposes of the application that this is indeed the case.

29    In those circumstances whilst it may be strictly unnecessary to examine the solvency of Idoport it is convenient to simply set out paragraph 14 from the defendants’ submissions of 10 August 2001 in the main proceedings:

“The balance sheet of Idoport as at 30 June 2000 shows net assets of only $456,119 as compared to net assets as at 30 June 1999 of $1,215,923 (see MFI D125); and the profit and loss statement of Idoport for the year ending 30 June 2000, which shows an accumulated loss of $2,943,982, a very substantial increase on the loss reported for the year ended 30 June 1999, of $334,117 (see MFI D125). Further, it may readily be assumed that whatever limited funds Idoport may currently have in its bank account will be dissipated by the continuation of the litigation for the period of time estimated by Mr Garnsey on 2 May 2001: Lovell, 19 July 2001, DGL2, pages 6-8.”

30    The more detailed evidence as to Idoport’s present financial position extends to an examination of the current balance in the main bank account which has been and continues to be used by Idoport as the account through which all fees and disbursements including payments to experts are made.

Plaintiffs suing in substantial part for the benefit of other persons

31    A substantial portion of the argument on the applications concerned the defendants’ submission that the plaintiffs are suing at least in substantial part for the benefit of other persons. The plaintiffs concede that there are persons connected with the plaintiffs with a real interest in the outcome of the litigation including directors and shareholders of both plaintiffs and including third parties. The plaintiffs strongly contend however that unless the Court is satisfied that third parties are the only substantial beneficiaries from the proceedings and that the proceedings are not for the benefit of the plaintiffs, the ground provided for in Part 53 Rule 2 (b) is simply not established.

32    The general question requires attention to be paid both to the facts established on the applications as well as to the appropriate principles.

The defendants’ submissions

33    The defendants written submissions included the following:

“Significance of the funders
29. Such persons, being legally removed from the plaintiffs, are thus, prima facie and subject to limited exceptions, immune from the burden of an adverse costs order in the event that the defendants succeed in the Main Proceedings. Such an order is, of course, the ordinary price to be paid for bringing civil litigation in our courts. As has been said in relation to the statutory power to order security for costs…( Harpur v Ariadne Australia Ltd [1984] 2 Qd.R 523 at 532 was then referred to)
30. The point being made by Connolly J. in the above passage is that, in circumstances where the plaintiff is a proprietary limited company and/or there is or are other persons behind the plaintiff who stand to benefit from the plaintiff’s proceedings, if successful, absent an order for security for costs, such persons may readily outflank the burden a plaintiff necessarily assumes when it commences litigation, viz. a potential adverse liability for the other side’s costs.
31. That this is something which should be avoided by the courts can be discerned when regard is had for the rationale underpinning the ordinary rule that costs follow the event which is a characteristic of our legal system that distinguishes it from that of the courts of the United States, for example. That rationale was stated by McHugh J. in Latoudis v Casey (1990) 170 CLR 534 at 566-567:
“An order for costs indemnifies the successful party in litigious proceedings in respect of liability for professional fees and out-of-pocket expenses reasonably incurred in connection with the litigation: Kelly v. Noumenon Pty Ltd (1988) 47 SASR 182, at p 184. The rationale of the order is that it is just and reasonable that the party who has caused the other party to incur the costs of litigation should reimburse that party for the liability incurred. The order is not made to punish the unsuccessful party. Its function is compensatory. Thus, in civil proceedings an order may, and usually will, be made even though the unsuccessful party has nearly succeeded or has acted reasonably in commencing the proceedings. It may, and usually will, be made even though the action has failed through no fault of the unsuccessful party. In Cilli v. Abbott (1981) 53 FLR 108, Keely, Toohey and Fisher JJ. pointed out (at p 111) that "the object of costs is not to penalize; it is to indemnify the successful party in regard to expense to which he has been put by reason of legal proceedings"; see also Anstee v. Jennings (1935) VLR 144, at p 148.”
32. …(Reference was then made to Oshlack v Richmond River Council (1998) 193 CLR 72 at 97).
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 rationales in mind, namely that, to the extent it can be avoided, the court should not permit a situation to arise where a party’s success is pyrrhic.
34. Where there are persons standing behind an impecunious plaintiff or plaintiffs, and who seek to take the benefit of our system of justice without the corresponding burden (in the form of a potential adverse costs order), the considerations in favour of an order for security for costs are even more powerful: see for example Chartspike Pty Ltd (in liq) v Chahoud [2001] NSWSC 585 (Young CJ in Eq). Indeed, it has been said that in this situation, it will be generally inappropriate to refuse to make an order for security: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545. As Giles J. said in Rosenfield Nominees Pty Limited v Bain & Co (1988) 14 ACLR 467 at 472-473:
“I consider that those behind plaintiffs should be, and can be, required to undertake some of the risks of the proceedings if they wish to have its benefits: Tulloch v Walker (Yeldham J. 8 December 1987, unreported); National Bank of New Zealand Limited v Donald Export Trading Limited [1980] 1 NZLR 97; MA Productions Pty Limited v Austaram Television Pty Limited (1982) 7 ACLR 97; Memutu Pty Limited v Lissenden (1983) 8 ACLR 364; Bell Wholesale Co Pty Limited v Gates Export Corporation (No. 2) …”
35. Where some of those persons are or may be overseas (with no presence or assets in the jurisdiction), those considerations become still more powerful yet because of the practical inability to fix those persons with a personal costs order.

The plaintiffs’ submissions

34    The plaintiffs written submissions included the following:

“80. It appears to be accepted principle that in order to establish jurisdiction under Part 53 rule 2(b) of the Rules, it must be shown that the third party is the substantial beneficiary of any judgment. The plaintiff must sue, not for his own benefit, but for the benefit of some other person: Part 53(2)(b) SCR.

81. This requirement was commented on by Lockhart J in Andrews v Caltex (1982) 40 ALR 305 at 309 where he stated, in considering the equivalent rule of the Federal Court:
“It must not be forgotten that there are two aspects of “benefit”, namely, first that the proceeding is not for the benefit of the applicant and second, that it is brought for the benefit of some other person. Proof of the former does not necessarily establish the latter.”
82. It is submitted that the reverse is equally true, that proof of the latter (that is, the proceedings are brought for the benefit of some other person), does not necessarily establish the former (that is, that the proceedings are not for the benefit of the applicant). Thus it is submitted that regardless of whether or not the defendants prove the proceedings are brought or continued partly for the benefit of some other person, the evidence does not establish that the proceedings are not brought for the benefit of the plaintiffs.
83. Further, as is discussed in Ritchie, while a party who is merely a nominal plaintiff may be ordered to provide security under the rules (see Riot Nominees Pty Limited v Suzuki Australia Pty Limited (1981) 34 ALR 653), but the Court must first be satisfied, on the balance of probabilities, that the plaintiff is bringing the proceedings for the benefit of some other person: Johnson v Lake Macquarie City Council (1995) 87 LGERA 22.

84. Security may properly be ordered where the plaintiff has assigned the benefit of the cause of action: Semler v Murphy [1968] Ch 183, unless the assignment is only as to parts of the proceeds of the cause of action and the plaintiff retains a significant pecuniary interest in the outcome of the litigation: Ramsey v Hartley [1977] 2 All ER 673.
85. The evidence establishes:

(a) there were no so called “first, second or third tranche” shareholders or beneficiaries when proceedings were commenced;

(b) such persons are, on the evidence, shareholders or perhaps lenders only. Thus the proceedings are brought for the benefit of Idoport.
There is no evidence of any disposition or assignment of any benefit under the Consulting Agreement. Under the Statement of Claim Idoport, not an assignee, seeks to enforce or recover damages or compensation for, inter alia, breach of the Consulting Agreement.
86. Further, it is submitted that the two documents relied upon by the Defendants and referred to in paragraph 25(b) and (c) of their submissions are consistent with equity investors in Idoport. How those funds are then expended by Idoport is a matter for it although the Plaintiffs concede that amongst Idoport’s business is the prosecution of these proceedings. However, Idoport’s activities include the preparation of Business Plans, the provision of those plans to NMG and attendance at Management Committee meetings.
87. In relation to paragraph 27 of the Defendants’ written submissions, the Plaintiffs submit that the Court is unable on the basis of the matters referred to to make the very serious conclusion that the companies referred to “had been used as investment vehicles to hide the identity of the true investors and to make the pursuit of costs orders against such investors difficult”. Highly cogent evidence would be needed to establish this assertion.
88. In relation to the matters in paragraph 26 of the Defendants’ written submissions, the comments of Justice Young are no substitute, it is submitted with respect, for admissible evidence from the Defendants. Further, in relation to paragraph 26(e) of the written submissions, it appears unclear show substantial rights to control the litigation can be granted with two votes out of four “on the LOC”.
89. In relation to paragraphs 31-35 of the Defendants’ written submissions and the cases there cited, the Plaintiffs say that to award a security for costs order against the Plaintiffs in the present case would be to defeat the rationale of security for costs by amounting to an order constituting a punishment as opposed to an order with the aim of compensation. The Plaintiffs have brought these proceedings against extremely powerful and well-funded Defendants with “massive” legal resources at their disposal. The First Defendant is one of the largest corporations in this country with, in practical terms, unlimited financial resources to fund legal action. Even if the Court finds itself able to make the inference that certain third persons may possibly and indirectly benefit from the present proceedings, the Court should not make such an order unless it is satisfied that those who originally were behind Idoport, being Negubo Pty Limited and Mr Maconochie, do not receive any benefit from these proceedings. On that the onus should rest on the Defendants. Mr Maconochie was the primary person behind Idoport and Market Holdings from the date of the Consulting Agreement, 13 September 1996, right up to the present through the filing of numerous statements in support of the Plaintiffs in these proceedings. It is submitted that it would simply be unfair and contrary to the true rationale of security for costs, if the weapon of security for costs could be used to prevent the Plaintiffs obtaining just compensation for their various legal rights including breach of the Consulting Agreement in circumstances where the Defendants have conceded the Plaintiffs have a serious case to be tried for the purposes of these motions.”

Stultification of litigation

35    The defendant's written submissions included the following:

“38. ………………there is authority, both of the Full Court of the Federal Court of Australia ( Bell Wholesale Co Pty Limited v Gates Export Corporation (1994) 2 FCR 1) and of the New South Wales Court of Appeal ( Hession v Century Twenty-one South Pacific Limited (In Liq ) (1992) 28 NSWLR 120) to the effect that the onus of demonstrating that those who stand to benefit from the litigation are equally impecunious lies on the party asserting that an order for security for costs would stultify the litigation. In the former case, the Full Court stated that:
“In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts .” (emphasis supplied)
39. It is apparent from this passage that not only does the burden, in this context, lie on the plaintiffs but that any submission on this matter must be supported by evidence. Without any proper evidentiary foundation, inferences to support such a conclusion may not be drawn ( Seltsam Pty Limited v McGuiness (2000) 49 NSWLR 262 at 276; Carr v Baker (1936) 36 SR (NSW) 301 at 306; Caswell v Powell Duffryn Associated Collieries Limited [1940] AC 152 at 169-170; Jones v Great Western Railway Co (1930) 144 LT 194 at 202).
40. If Idoport is to contend that an order for security for costs would stultify the litigation, it is incumbent upon it to establish at least the following matters:
(a) who Idoport’s current funders are (including where interposed company or trust structures are used, the identity of the ultimate funders/likely beneficiaries of the action);
(b) the residence of each such funder;
(c) the terms of all current funding agreements;
(c) the overall net asset and financial position of the current funders;
(d) if the extent of funding is limited, evidence of unsuccessful requests for increased funding from the current funders;
(e) what other attempts have been made to obtain funding;
(f) what requests have been made to the funders to provide security for costs;
(g) the funders’ ability to meet such requests;
(h) the funders’ responses to those requests; and
(i) the general availability or otherwise of funding in the market for actions of this type.
41. A party seeking to make such an argument must show not only that it would be unable to meet an order for security for costs and could not fund the litigation from its own resources, if such an order were made, but also that it and all funders/potential beneficiaries of the action standing behind it could not meet such burden.
42. The conclusion to draw from the paragraphs immediately above is that the plaintiffs have not discharged the onus of proof referred to in paragraphs 38 to 40 above. In these circumstances the Court should not conclude that a security for costs order would stifle the Main Proceedings. Rather, the Court should conclude that this possible discretionary factor does not weigh in the equation when determining whether an order for security for costs should be made.”

Strength of the plaintiffs’ case

36    The defendants written submissions included the following:

“43. It is only where a plaintiff puts to the court, in answer to an application for security for costs, that the effect of such an order would be to shut it out of the litigation that an occasion may arise for a consideration of the plaintiff’s prospects of success in the particular claim: see Rosenfield Nominees Pty Limited v Bain & Co (1988) 14 ACLR 467 at 470; J & M O’Brien Enterprises Pty Limited v The Shell Co of Australia Limited (1983) 7 ACLR 790. In this context, the fact that Idoport has not led any evidence in support of a contention that an order for security would stultify the litigation, a contention upon which it, for the reasons stated in paragraph 37 to 40 above, necessarily bears the onus is fatal to it and, as a matter of principle, should preclude any inquiry into the strength of Idoport’s case in these proceedings.
44. In any event, there is no material before the Court by reference to which it could make such an assessment, bearing in mind the limited manner in which security has been sought. No evidence has been led in respect of the amendments to the Fourth Further Amended Statement of Claim. The discrete case brought by Market Holdings is in a similar position; the Court has not heard any of the evidence in relation to it yet.
45. In circumstances where there is no such material before the Court, if the question of the strength of the plaintiffs’ case arises for consideration (and the defendants contend that this could only be so where an argument that a security order would stultify the litigation is made and credible evidence is led in support), the Court should proceed on the basis that the plaintiffs’ claim is genuine and arguable. To go further would not only be inappropriate for obvious reasons (see Interwest Ltd v Tricontinental Corp Ltd (1991) 5 ACSR 621 at 624 and the statements of his Honour made in the context of considering the defendants’ arguments relating to certain of the amendments sought to be propounded in the Fourth Further Amended Statement of Claim: see [2001] NSWSC 142 at paragraph 15, Lovell 10 August 2001 paragraph 19) but would also invite the Court to engage in illegitimate speculation and conjecture (see the cases cited at paragraph 39 above). The defendants have already made a concession, for the purposes only of this motion, to this effect.
46. In MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100, Needham J concluded:
“Whether that claim is a strong claim will depend of course upon the evidence as it comes out and as it may be that I will have to try the matter, I do not think I should say more than that I am not convinced that the plaintiff has an overwhelmingly strong case.”
47. In J & M O’Brien Enterprises Pty Ltd v The Shell Company of Australia Ltd (1983) 7 ACLR 790 at 793, Bowen CJ concluded:
“I do not consider it is necessary for me to express any view about the prospects of success in the appeal. It is sufficient to state my opinion that O’Brien Enterprises has a bona fide and genuine interest in having the question determined and the question of law involved is substantial.”
48. In Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972 at 50-636, Hill J stated:
“It would I think be quite improper for me to embark upon a view of the evidence as it presently stands to determine whether the applicant does nor does not have a good case. It suffices to say that the case is one where it must clearly be said that the applicant has an arguable or triable case...”
49. Any attempts by the plaintiffs to rely on the judgment of Justice Einstein dated 19 August 1999 ([1999] NSWSC 828) as a factor highlighting the strength of the plaintiffs’ case should be rejected by the Court. The manner in which the Main Proceedings have changed since the date of that judgment are set out in the affidavit of Lovell sworn 10 August 2001.”

37    The plaintiffs’ submissions included the following:

“94. It is submitted that it is not impermissible for the Court to take into account the strength of the of the Plaintiffs’ case as one factor in its overall judicial discretion as to whether to make the order for security for costs. It is submitted that it would be an incorrect exercise of discretion for the Court not to take that matter into account if it considers it to be otherwise relevant.

95. In relation to paragraphs 43-48 of the Defendants’ written submissions, the Defendants’ concession that the Plaintiffs have a serious case to be tried is clearly a relevant factor in favour of the Defendants on the exercise of the judicial discretion.

96. In relation to paragraph 49 of the Defendants’ written submissions, the Plaintiffs say that whilst the Court should be very cautious in placing undue reliance on the judgment of Justice Einstein dated 19 August 1999 as a factor highlighting the strength of the Plaintiffs’ case, the views of the Court on that judgment on the proper construction of the Consulting Agreement at the least are highly relevant and are unlikely to be altered by subsequently evidence.”

Amount of security

38    The defendants written submissions included the following:

“51. The amount of security to be ordered must be “sufficient” (see section 1335 of the Corporations Act )………
…….
53. It is submitted in all these circumstances, and given the complexity of the current proceedings, no reduction in the amount of the security sought by the defendants is justified.
54. While this may be a matter for cross-examination the defendants ultimate submission will be that any discount of the estimates of Mr Lovell, even allowing for Ms Vine-Hall’s opinion, should be small.”

39    It may be convenient at this point in the judgment to deal with the factual issues relating to funding.

Proceedings for the benefit of other persons - The facts

40    The defendants’ written submissions were substantially supplemented by the evidence adduced on the hearing of the motions. The written submissions included the following:

“24. Whilst it is plain in the present case that neither of Idoport and Market Holdings would be capable of meeting an adverse order for costs (cf.s.1335 of the Corporations Act and Part 53, rule 2 of the NSW Supreme Court Rules), it is equally plain that Idoport and Market Holdings have standing behind them persons with a vital interest in the outcome of the litigation. These persons include directors, shareholders and funders:
‘Original Beneficiaries
Idoport: Negubo Pty Ltd (“Negubo”) as parent company of Idoport; Mr Maconochie as director of Idoport.
Market Holdings: Negubo as shareholder; Mr Maconochie as director and shareholder.
[see company searches; letter from Withnell Hetherington to Freehills of 5 June 2001].
First Tranche Beneficiaries
Idoport: The original beneficiaries together with Australian International Insurances Limited (“AIIL”) (a subsidiary of an Australian public company, OAMPS Limited) which purchased a share in Idoport in September 1998 pursuant to a Shareholders Agreement for a total subscription price of $1.55 million.
[see Lovell, 23 January 2001, DGL1, pages 24-34]
Market Holdings: As for Original Beneficiaries.
2nd Tranche Beneficiaries
Idoport: The Original Beneficiaries and the First Tranche Beneficiaries together with North & South Group SA (“North & South”) which is a shareholder in Idoport through a trustee company, NW Nominees Ltd (“Nominees”) which purchased a share in Idoport in May 2000 pursuant to a Shareholders Agreement for a total subscription price of up to $5 million (see MFI D129).
Market Holdings: As for the Original Beneficiaries.
3rd Tranche Beneficiaries
Idoport: As for the 2nd Tranche Beneficiaries together with Efficiency Investments BV (“Efficiency”), a funder.
Market Holdings: The Original Beneficiaries together with Efficiency, a funder.
[see Judgment of Young J [para 243]].
25. That there are funders in place who stand to benefit from a successful outcome of the litigation and, it may be inferred, who are treating the litigation as a commercial investment is established from the following factors:

(a) the matters about funders recorded in the judgment of Young J. (set out more fully below);

(b) the Shareholders Agreement dated 16 September 1998 between Mr Maconochie, Negubo and AIIL, as amended by a letter of 12 May 1999 (Lovell, 23 January 2001, DGL1, pages 24-34);

(c) the Shareholders Agreement between Mr Maconochie, Negubo, North & South, and Idoport signed on 19 May 2000 (see MFI D129) and the letter from Idoport to the directors of North & South dated 5 June 2000 (see MFI D129).

26. What emerges about the funding agreements from the judgment of Young J. is as follows:

(a) There is at least one funder [par 17];

(b) It is a foreign corporation [par 17];

(c) It is funding the plaintiffs for reward [par 17]

(d) The funder funds both Idoport and Market Holdings [par 227, 228];

(e) The funder has substantial rights to control the litigation (2 votes out of 4 on the LOC) [par 227, 228];

(f) The funder receives a large share of the proceeds [par 227, 228]
27. What emerges from the two Shareholders Agreements is that:
(a) one of the shareholders AIIL, is a subsidiary of a public Australian company, OAMPS Limited and has “invested” $1.5 million to purchase a share in Idoport, after the commencement of the proceedings;
(b) another of the shareholders, Nominees, is a trustee company resident in Jersey, United Kingdom, holding a share in Idoport on trust for North & South, a company resident in the British Virgin Islands. This share was issued at a subscription price of up to $5 million, after the commencement of the proceedings. It may be inferred from:

(1) the fact that Idoport’s only asset is the proceedings;
(2) that Nominees and North & South are domiciled in overseas tax havens;
(3) that the share was subscribed for after the commencement of the proceedings; and
(4) from the lack of any explanation from the plaintiffs,

that these companies have been used as investment vehicles to hide the identity of the true investors and to make the pursuit of costs orders against such investors difficult.”

41    The written submissions of the plaintiffs which were also supplemented during the hearing of the notices of motion included the following:

“75. In relation to the analysis in paragraph 24 of the Defendants’ written submissions, the Plaintiffs make the following submissions. The evidence shows that the so-called “first tranche beneficiaries”, Australian International Insurances Limited, has invested a sum of $1.5 million in exchange for equity in Idoport. The Plaintiffs submit that from the evidence relied upon by the Defendants (pages 24-34 of Exhibit “DGL1” to the affidavit of Mr Lovell sworn 23 January 2001) the inference should be drawn that the amount of $1.5 million has been fully subscribed and, because Idoport has the financial position alleged by the Defendants, that sum has already been expended. In those circumstances, as additional shareholders have emerged, it cannot be inferred that the so-called “first tranche beneficiaries” are available to invest any further moneys in Idoport. Indeed the existence of so called “second” and “third tranche beneficiaries” enables and supports an inference to the contrary.
76. As to the so-called “second tranche beneficiaries” being North & South Group SA, that company subscribed for shares in Idoport in the sum of $5 million. From Idoport’s financial position it should be inferred that the total amount referred to of $5 million has been subscribed and expended. It should be inferred from this and the involvement of so called “third tranche beneficiaries” there are no further funds to be subscribed for by the so-called “second tranche beneficiaries”.

77. In relation to the so called “third tranche beneficiaries”, the Defendants refer to Efficiency Investments BV, a suggested funder as referred to in paragraph 243 of the judgment of Young J at (2001) 37 ACSR 629.”

42    By the end of the oral submissions, the question of outside funders had been clarified to a considerable extent and the Court during the in camera sessions had been taken to substantial detail in this regard aided by charts prepared by the defendants.

43    As a consequence of the confidentiality regime imposed in relation to particularly confidential documents, it is not possible as part of the version of this judgment which is for public release, to outline in detail the facts and figures in particular clauses of the funding arrangements or the Court’s reasons and findings in relation to these arrangements. Accordingly, the private unabridged version of this judgment will include an appendix "A" which is to be regarded as part of these reasons.

Dealing with the central principles

Costs generally

44    The ordinary rule is that costs follow the event in proceedings before the Court.

45    The rule has its rationale by way of a principle of compensation in respect of the successful party to the proceedings recovering the costs incurred in the proceedings. As Mr Gleeson SC for the defendants pointed out, the amendment to the Legal Profession Act1987 (NSW) which specified that the appropriate test is “a fair and reasonable amount of costs” has the result that the benefit of a costs order in the Supreme Court becomes closer to full compensation than had been the case under the pre-existing practice. This result is consistent with the purpose of a costs order which I accept, is to provide not ‘perfect’ compensation but ‘substantial’ compensation.

46    The rationale for the general rule which has a public as well as a private dimension, was identified by McHugh J in Oshlack (supra) at 97:

“The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation.
As a matter of policy, one beneficial by-product of this compensatory purpose may well be to instil in a party contemplating commencing, or defending, litigation a sober realisation of the potential financial expense involved. Large scale disregard of the principle of the usual order as to costs would inevitably lead to an increase in litigation with an increased, and often unnecessary, burden on the scarce resources of the publicly funded system of justice.”

Security for costs

47    It is clear that the discretion to award security for costs requires to take into account all of the relevant facts matters and circumstances and is a judicial discretion to be exercised following the adducing of all evidence by each party to an application seeking to have such an award made. As Giles J (as His Honour then was) made plain in Rosenfield Nominees Pty Ltd v Bain and Co (1988) 14 ACLR 467 at 470, in exercising the discretion as to whether or not to make an order for costs, the Court must have a concern 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 it out or prejudicing it in the conduct of the proceedings [cf Street CJ in Buckley v Bennell (1974) 1 ACLR 301 at 304]. Giles J referred to the debate over whether the discretion should be exercised with some predisposition in favour of the defendant and expressed the view with which I agree, that the debate is largely semantic. The principle which his Honour identified at 470 was that:

"the discretion must be exercised having regard to all the circumstances of the case, but the inability of the plaintiff to meet the costs of the successful defendant, being the occasion for invoking the exercise of the discretion, is likely to play an important if not decisive role".

48    Because the discretion to be exercised by the Court is a wide one which should remain unfettered, the circumstances in which the discretion should be exercised in favour of making the order cannot and should not be stated exhaustively: Spiel v Commodity Brokers Australia Pty Ltd at 415. In Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405, Cooper J stated:

“(i)t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: PS Chellaram and Mr Courtney v Chine Ocean Shipping Co (1991) 65 ALJR 642 at 643.” (at 415)

49    Notwithstanding the unfettered nature of the discretion, Beazley J in KP Cable Investments set out 7 guidelines which the Court is said to typically take into account when determining such an application:

“1. That such applications should be brought promptly. This is a principle of longstanding: see Grant v The Banque Franco-Egyptienne Egyptienne (1876) 1 CPD 143; see also Smail v Burton (1975) VR 776 per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 8 ACLR 818 at 820; Bryan E. Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514…

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

3. Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim: see M A Productions Pty Ltd v Austarama Television Pty Ltd at 100.

4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate: see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E. Fencott at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms:
‘(t)he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour.’
This factor is related to the next, namely:
5. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memetu v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120 at 123; Bryan E. Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows:
‘...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)...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.’

6. An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking: see Cameron's Unit Services Pty Ltd v Kevin R Whelpton and Associates (Aust) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325.

7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate: see Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) ACLC 32,446; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 where Zeeman J stated at 189:

‘(t)he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order...(see) Sydmar Pty Ltd v Statewise Developments (supra) and Interwest Ltd v Tricontinental (supra).” (at para 39)

50    Clearly as Beazley J recognised, the possibility of stultification is a “powerful” factor to be taken into account by the Court in exercising its discretion as to whether an order is appropriate: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542. However, Clarke J in Yandil observed that the fact that a plaintiff is financially unable to provide security does not lead to the inevitable conclusion that the making of the order will stultify the plaintiff’s claim nor does it lead to the automatic refusal of an order. He went on to cite a line of authorities (see Tulloch v Walker, Yeldham J, 8 December 1976, unreported; Bell Wholesale Co Pty Ltd v Gates Export Corp & Ors (No 2) (1984) 8 ACLR 588) in support of the view that it is generally inappropriate to refuse an order for security where:

“the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security.” (at 545)


In other words, without fettering the Court’s discretion, it was said to be unlikely that a plaintiff could successfully resist a security order on the grounds of their own impecuniosity in the absence of evidence of the financial status of those who stand behind it (see Yandil at 545).

51    McHugh J in Oshlack also made plain at 97 that:

"[T]he 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 rationales in mind, namely that, to the extent it can be avoided, the court should not permit a situation to arise where a party’s success is pyrrhic."

52    The purpose of a security for costs order is therefore a protective jurisdiction to ensure that the primary purposes for having costs orders themselves, can be achieved. A defendant is protected against the risk that a costs order obtained at the end of the day may turn out to be of no value by reason of the impecuniosity of the plaintiff. The jurisdiction therefore assists both the compensation purpose as well as the public interest objective.

Plaintiffs: natural persons vs corporations

53    In relation to natural person plaintiffs, the mere fact that the plaintiff is impecunious does not provide a gateway into security for costs. However with respect to a corporation it has long been established in terms of the Corporations Act and its predecessors, and the rules of court as well as the inherent jurisdiction, that if there is good reason to believe that the corporation may be unable to pay costs at the end of the day, this provides a gateway by which an application for security for costs may be made.

54    Giles CJ in Rugby Union Players Association [30/7/1997, SCNSW, 50225/96, unreported] described the rationale behind the exceptions to the general rule that the impecuniosity of a plaintiff should not be a ground for making an order for security for costs (this principle having been well established by the authorities in relation to plaintiffs who are natural persons: Cowell v Taylor (1885) 31 Ch D 34), in the following terms:

“In both cases the rationale is that those who will benefit from success in the proceedings, as shareholders in or creditors of a corporation or as third parties for whose benefit the plaintiff (whether a natural person or a corporation) sues, should not be able to litigate and expose the defendant to the risk of irrecoverable costs while themselves shielded, by reason of the interposition of the impecunious plaintiff, from the burden of an adverse order for costs.” (at 11)

55    The Court in Harpur v Ariadne [1984] 2 Qd.R 523 at 532 described the rationale behind this principle in the following terms:

“The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play.”

56    The inability of a plaintiff company to pay the costs of the defendant not only opens the jurisdiction for the giving of security, but also provides a substantial factor in the decision whether to exercise it: Pearson v Naydler [1977] 1 WLR 899 at 906; cited with approval in Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201 at 215.

57    Where a winding-up order has been made in relation to the plaintiff company on account of its insolvency, the company will not prima facie be in a position to pay any costs ordered against it. The Court will generally treat this circumstance as a special factor justifying the making of an order for security for costs: Tricorp Pty Ltd (in liq) v Deputy Commissioner of Taxation (WA) 10 ACLC 474 at 475.

58 In considering an application under s1335, the Court is required to form an opinion about what the financial position of the plaintiff will be at the time of judgment and immediately after. An important consideration will be the financial position of the plaintiff at the time of the application, however this is not the sole consideration. Other factors may include the outcome of the trial, the costs associated with the trial and the success or otherwise of its business and investments in the meantime. When the Court is required to make a judgment involving the anticipation of future events, it must consider the degree of probability that a particular event might occur: Beach Petroleum NL & Anor v Johnson & Ors; Jingellic Minerals NL & Anor v King & Ors (1992) 10 ACLC 525 at 526-527.

59    With specific regard to security for costs against corporations, the Court in Pearson v Naydler recognised that the basic notion of security for costs empowers the Court to order the plaintiff to do something that it will likely find difficult to do, ie. to provide security for the costs which ex hypothesi it is likely to be unable to pay. Despite this, the Court noted that this discretionary power should not be used as an instrument of oppression “by shutting out a small company from making a genuine claim against a large company” (see also Equity Access Limited v Westpac Banking Corporation (1989) 11 ATPR 40-972 at 50,635). The Court must thereby strike a balance between this consideration and the notion that:

“…the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section.” Pearson v Naydler at 906-907.

Burden of proof

60    Whilst from one point of view it may seem inappropriate to approach the matter in terms of the strictures of burden of proof whether of a legal or forensic character [cf discussion in Mummery v Irvings (1956) 96 CLR 99 at 118ff], there is certainly substantial authority which is followed in these reasons, to the effect that the defendants, as applicants for security for costs, have an evidentiary burden of leading evidence to establish a prime facie entitlement to such an order and to such an order in relation to a particular amount. Normally, in any court, the party who asserts must prove in order to succeed: Scott Fell v Lloyd (Official Assignee) (1911) 13 CLR 230 at 241; Bankinvest AG v Seabrook (1988) 14 NSWLR 711 at 717 per Kirby P. In Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 the word “credible” in s1335 was said to suggest that an evidentiary burden is undertaken by the party seeking the order who must show:

“…that the material before the Court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings.”

61    The evidence to be relied on must have some characteristic of cogency. Furthermore, speculation as to the insolvency or financial difficulties experienced by the plaintiff company is insufficient to ground the exercise of the discretion: Warren Mitchell Pty Ltd v Australian Maritime Officers Union.

62    The approach followed in these reasons is that once the defendants have led evidence to establish the above described entitlement, an evidentiary onus falls upon the plaintiffs to satisfy the Court that taking into account all relevant factors, the Court's discretion ought be exercised by either refusing to order security or by ordering security in some lesser amount than was sought by the defendants.

The bases relied upon by the defendants

63    The defendants in this regard have put forward two alternative bases for seeking to discharge the above evidentiary burden. The first is to satisfy the Court that there is good reason to believe that the plaintiffs, being body corporates, will be unable to pay the costs of the defendants if ordered to do so. The second is to satisfy the Court that the plaintiffs are suing, not for their own benefit, but for the benefit of some other persons and that there is reason to believe that the plaintiffs will be unable to pay the costs of the defendants if ordered to do so.

64    It seems clear that the defendants have established the first of these bases both as at early October 2000 as well as early September 2001, in relation to any amount which might be ordered on the making of the instant applications for security for costs, greater than a nominal amount. At an analytical level it may have been unnecessary for them to have endeavoured to establish the second of these bases but they did attempt this. The matter is dealt with below.

6    The third tranche involved back-to-back loan agreements between Idoport and Negubo on one hand, and Negubo and Efficiency on the other. There is also a Shareholders Agreement between Negubo and Efficiency that gives Efficiency the option of converting its debt into equity. The net result of these agreements is a contribution of $7.5m from Efficiency in return for a proportion of the NTA of Negubo which is determined by Efficiency’s total contribution once it exercises its right to convert to equity.

1) OAMPS/AIIL

7    Australian International Insurance Ltd (AIIL) is an Australian insurance underwriting company and a subsidiary of the OAMPS Group. OAMPS is a company listed on the Australian Stock Exchange. [DX3, pp 1147, 1149]

8    On 16 September 1998, Mr Maconochie, Negubo and AIIL entered into the Investor Shareholders Agreement (DX3, pp 1015-1032). The Agreement was varied by a letter of amendment on 12 May 1999 (DX2, pp 585-595).

9    Clauses 4.1 and 4.5 (and clause 2.3 of Annexure A) provided for an investment of $1.55m by AIIL by way of share subscription in return for the issue of 16 shares in Idoport. The shares were to be issued in the following manner:

Number of shares issued to AIIL	Price per share	Total price
1	$50,000	$50,000
15	$100,000	$1,500,000
Total for 16 shares:	$1,550,000

10    Clause 13.1 of the Agreement provides Negubo with a put and call option in the following terms:

“If at anytime during the currency of this agreement, the circumstances are such that any of the assets of Idoport are realised…resulting in an entitlement to receive money or value from any other person for an amount…such that Idoport’s NTA exceeds $1.5 million, or if all of the assets of Idoport are realised in the same manner whether or not the realised asset value exceeds $1.5 million, then Negubo will be entitled to call on [AIIL] to transfer to Negubo all the shares that [AIIL] holds in Idoport (“the call option”) at the call option price.”

11    In the event that Idoport’s NTA exceeds $1.5m, AIIL is entitled to:

a) the subscription price ($1.5m) plus 10 times the subscription price (to a maximum of $15m); or
b) 15% of the NTA.
whichever is the lesser.

12    AIIL subscribed for the 16 shares and transferred the following amounts to Idoport on the following dates (see DX3, pp 1246-1249, 1040-1044):

Date transferred	Amount	Number of shares issued
17 September 1998	$50,000	1
9 November 1998	$100,000	1
23 December 1998	$100,000	1
24 February 1999	$100,000	1
14 April 1999	$100,000	1
12 May 1999	$100,000	1
26 May 1999	$1,000,000	10
Total	$1,550,000	16

13    Mr D'Emilio gave evidence that the $1.55m received from AIIL was used to pay the costs of these proceedings. [T12383]

Resources

14    OAMP’s balance sheet for the year ended 30 June 2000 shows the total shareholder’s equity at this time as being $23.3m. A half-yearly report for OAMPS dated 31 December 2000 shows that the net assets for the company were about $28m, demonstrating an increase of approximately $4m over the six-month period. A balance sheet for AIIL for the year ended 30 June 2000 shows a total shareholder’s equity of $9.6m. [DX 3, pp 1163, 1194, 1230]

15    The defendants submit that this clearly demonstrates AIIL’s ability to put up the security. They submit that there is nothing to say that they have refused to do so or have even been asked

2) NORTH & SOUTH GROUP SA (NSG)

16    NSG is incorporated in the British Virgin Islands (DX3, p 1054). On 19 May 2000, NSG entered into a Shareholders Agreement with Mr Maconochie, Negubo and Idoport (DX3, p 1054-1058). Clause 3 of the Agreement provided that Idoport would issue one ordinary share to NSG at a subscription price of up to $5m.

17    Clause 10 of the Agreement provides Negubo with a put and call option in the following terms:

“If the circumstances are such that any of the assets of JMG are capable of being realised…resulting in an entitlement to receive money or value from any other person…such that JMG’s NTA exceeds AUD 10 million, or if all of the assets of JMG are realised in the same manner whether or not JMG’s NTA exceeds AUD 10 million, then Negubo will be entitled to call on NSG to transfer to Negubo the Share at the Option Price (“the call option”)…”

18    Under clause 11, the option price for the full $5m subscription is stated in the following terms:

Value of Verdict	Option Price as a % of NTA
Up to $50m inclusive	40%
Between $50m and $200m inclusive	30%
Greater than $200m inclusive	10%

19    The option price percentages for subscription levels less than $5m are reduced proportionally according to the subscription. There is no maximum cap on the Option Price.

20    One share was issued to NSG on 15 May 2000, and held on trust by NW Nominees, a company resident in Jersey (DX3, p 1063). The following amounts were paid in exchange for this share:

Date transferred	Amount
1 June 2000	$700,000
10 July 2000	$600,000
21 July 2000	$500,000
3 September 2000	$50,000
Total	$1,850,000.00

21    Mr D'Emilio gave evidence that at all times from October 2000 onwards; this money has funded part of the plaintiffs’ proceedings. [30 August 2001, Confidential Transcript, p16]

22    Based on NSG’s total subscription payment of $1.85m, and assuming it does not contribute any more, NSG’s percentage of the verdict will be somewhere between approximately 3% and 15%:

Value of Verdict	Option Price as a % of NTA
Up to $50m inclusive	14.8%
Between $50m and $200m inclusive	11.1%
Greater than $200m inclusive	3.7%

3) EFFICIENCY INVESTMENT BV

The initial agreements

23    On 18 September 2000, Idoport, Market Holdings, Mr Sheahan (as liquidator of Market Holdings) and Mr Maconochie entered into a Partnership Agreement [DX5, pp 96-119]. On the same day, Market Holdings, Mr Sheahan (as liquidator of Market Holdings) and Efficiency entered into the Market Holdings Participation Agreement [DX5, pp 120-143]. (The “initial Agreements”).

24    A condition precedent of each Agreement (or part thereof) was that a court of competent jurisdiction approved of the entry into and performance of the other Agreement.

25    The current position is that the liquidator of Market Holdings has not yet brought forward either agreement for court approval and these conditions precedent have not been satisfied.

26    The initial Agreements are however relevant in understanding the current agreements in force between the parties. The defendants’ submission was that the combined effect of these initial agreements was to create a joint venture structure between Idoport and Market Holdings which sought to avoid problems associated with maintenance and champerty.

27    The defendants submit that when Mr Sheahan ceased as liquidator of Market Holdings, the joint venture idea was no longer pursued. They submit that the Idoport Loan Agreement and the Shareholders Agreement are structured around the possibility of the new liquidator, Mr Silvia, reviving this idea. The fulfilment of the conditions precedent to the initial Agreements therefore determines whether a number of provisions in the Idoport Loan Agreement come into force, and indeed, whether the Shareholders Agreement as a whole is operative (subject to Efficiency providing notice to Negubo of such fulfilment). Both Agreements are referred to below.

The current agreements

28    The funding arrangements in relation to Efficiency currently involve three separate agreements that operate as a back-to-back structure for the lending of money from Efficiency to Idoport. They are:

a) The Idoport Loan Agreement between Negubo and Idoport;
b) The Negubo Loan Agreement between Negubo and Efficiency; and
c) Shareholder Agreements between Negubo, Efficiency and Mr and Mrs Maconochie.

a) The Idoport Loan Agreement

29    The Idoport Loan Agreement was entered into by Idoport and Negubo (DX7, pp 25-40).

Negubo’s Obligations

30    Under the Agreement, Negubo agreed to provide loan monies to Idoport for the purpose of the legal proceedings. Negubo’s obligations in relation to the “Idoport Loan Amount” (which includes interest) consists of:

a) the Initial Loan Amount (clause 4): Negubo agreed to advance monies as requested by Idoport solely for the purpose of payment of:
i) Idoport’s proportion of the costs and expenses of the proceedings and administration costs (ie of the administration of Market Holdings) under the Partnership Agreement; and
ii) the costs and expenses of the proceedings and administration costs pending satisfaction of the conditions precedent of the initial Agreements or in the event that those conditions are not satisfied; and
b) the Additional Idoport Loan Amount (clause 8):
i) Idoport may request that Negubo advance the necessary monies or post the necessary bond or collateral for the purpose of posting security for costs in connection with the proceedings (up to $1m);

ii) Negubo will then request that Efficiency advance the necessary monies etc under the Negubo Loan Agreement (up to $1m);

iii) Negubo will advance the necessary monies etc to Idoport (up to $1m) if Efficiency fulfils its request.

31    In relation to the Initial Loan Amount, Negubo’s obligations to make advances is conditional upon Negubo having sufficient cash to meet the request at the time of the request: clause 4.7.

32    In relation to the Additional Idoport Loan Amount, the plaintiffs submit that in the absence of any evidence, the Court should draw the inference that Idoport would be able to ask Negubo, and Negubo would be able to ask Efficiency for this money and that the parties would comply with their contractual obligations. They further submit that any additional amounts of security ordered against Idoport over and above the $1m provided for under clause 8 would lead to great difficulties for the plaintiffs in continuing the case. However, the same contractual obligations do not apply in relation to Market Holdings, and the plaintiffs submit that the Court should infer that Market Holdings has no capacity to obtain any security.

33    Prior to the Agreement, Negubo had already advanced $1,225,752.00 to Idoport and this amount is also governed by the terms of the Agreement.

Termination by Negubo

34    Clauses 5 and 6 deal with two possibilities for termination of the Agreement:

a) Clause 5: If the conditions precedent to the initial Agreements are satisfied:
- Negubo’s obligation to advance the Initial Loan will terminate when it receives notice from Idoport.
b) Clause 6: Until such time as the conditions precedent to the initial Agreements are satisfied or if they are not satisfied, Idoport must provide notice to Negubo once each of the following amounts of expenditure have been reached:

Negubo’s options, rights and obligations	Total outlay for Negubo
i) Once Idoport has spent $6.5m:
- Negubo has an option to terminate its obligation to advance the initial loan amount; - If Negubo decides to terminate: it must provide a further $1m whereafter its obligation ends.	$7.5m
ii) Once Idoport has spent $9m:
- Negubo has an option to terminate its obligation to advance the initial loan amount; - If Negubo decides to terminate: it must provide a further $1m whereafter its obligation ends.	$10m
iii) After this point:
- Negubo has a quarterly option of terminating its obligation to advance the initial loan amount - If Negubo decides to terminate: it must provide a further $1m whereafter its obligation ends;	$11m

35    The defendants submit that clause 5 should be seen to have been included on the basis that Mr Silvia, as liquidator, might decide to revive the joint venture structure under the initial Agreements. If this were to occur, Negubo’s rights and obligations would become governed by the initial Agreements instead of this one.

Repayment and distribution of litigation proceeds

36    Under clause 9.1 of the Agreement, Negubo’s right to recover amounts under the Agreement is limited to the litigation proceeds available to Idoport.

37    “Litigation proceeds” includes all moneys and assets by way of any judgment, order, settlement sum, settlement or agreement in connection with the proceedings; or proceeds of insurance under the Partnership Agreement. “The proceedings” is defined very broadly and includes the proceedings brought by Market Holdings: clause 1.

38    Once again, the Agreement proceeds on two alternative possibilities depending on the possible revival of the joint venture structure:

a) If the conditions precedent to the initial Agreements are satisfied: Idoport is obliged to do everything within its power to procure that any litigation proceeds are paid in accordance with the Partnership Agreement;
b) If these conditions precedent are not satisfied: Idoport is obliged to do everything within its power to procure that any litigation proceeds are paid in the following way and order of priority:

i) payment of any judgment made in favour of the cross-claimants in the first cross-claim;
ii) repayment of the Additional Idoport Loan Amount (principal, then interest);

iii) repayment of the Initial Idoport Loan Amount (principal, then interest);
iv) any remaining proceeds are to be paid in the following manner:

If Negubo terminates:	Party	% of Litigation Proceeds
Once Negubo has contributed $7.5m ($6.5m + $1m)	Negubo	30%
Idoport	70%
Once Negubo has contributed $10m ($9m + $1m)	Negubo	40%
Idoport	60%
Once Negubo has contributed more than $10m	Negubo	40%
Idoport	60%
Otherwise (ie funding indefinite)	Negubo	50%
Idoport	50%

Undertakings

39    Clause 12 of the Agreement contains a series of undertakings by Idoport to Negubo. The defendants’ submission is that this clause operates to:

“sterilise Idoport as a separate legal entity…it is essentially a corporate shell being used to back litigation.” . [3 September 2001, Confidential Transcript, p 16]

b) The Negubo Loan Agreement

40    The Negubo Loan Agreement was entered into by Negubo and Efficiency (DX7, pp 3-18).

Efficiency’s Obligations

41    Under the Agreement, Efficiency agrees to provide loan monies to Negubo for the purpose of enabling Negubo to preserve and/or realise its shares in Market Holdings, Idoport and IBS (its “assets”).

42    Under clause 4.1, Efficiency is obliged to advance moneys to Negubo as requested from time to time (the “Negubo Loan Amount”). This amount is only to be advanced to pay the costs and expenses incurred by Negubo in preserving and/or realising its assets.

43    Unlike the Idoport Loan Agreement, this is an unconditional promise by Efficiency to advance whatever monies are requested by Negubo. The defendants submit that this distinction is significant, in that whilst Idoport has a power to request Negubo to make advances, Negubo has an absolute ability to compel Efficiency to make the advances. They say that Efficiency can therefore be compelled to advance money for security for costs. Furthermore, there is no ceiling to the amounts that can be requested by Negubo under this Agreement.

44    In line with this Agreement, Efficiency paid the following amounts to Idoport on direction from Negubo:

Date	Payment
26 September 2000	$500,000
3 October 2000	$7m

Repayment

45    Under clause 6, the Negubo Loan Amount (including interest) is repayable to Efficiency on demand in writing, however only where Negubo has realised monies from its assets sufficient to pay the amount at the time of the demand.

46    This Agreement does not contain any provisions as to the division of the proceeds.

Undertakings

47    Clause 8 of the Agreement contains a series of undertakings by Negubo to Efficiency. The defendants submit that this clause, like clause 12 of the Idoport Loan Agreement effectively sterilises Negubo as a corporate shell and constrains the duties of its directors.

c) The Shareholders Agreement

48    The Shareholders Agreement was entered into by Efficiency, Negubo and Mr and Mrs Maconochie (DX7, pp 95-110).

Possible swap from debt to equity

49    A condition precedent to this Agreement is that the conditions precedent to the initial Agreements are not satisfied. The Agreement becomes operative once Efficiency gives notice in writing to the other parties that the conditions precedent have not been satisfied: clause 3.

50    Once the Agreement becomes effective, Negubo is released from all liability to Efficiency under the Negubo Loan Agreement in exchange for Negubo issuing one partly paid share in Negubo to Efficiency: clause 4. In this way, Efficiency can choose to swap from debt to equity, and may do so by giving notice under clause 3 if and when the conditions precedent are not satisfied.

51    Upon issue of the partly paid share, it will have been partly paid to an amount equalling the Negubo Loan Amount. Efficiency is then to pay further calls on the share as made by Negubo from time to time.

52    The parties agree that the terms of a Notice to Produce issued by the defendants dated 29 May 2001 (DX2, pp 884-889) called for documents which covered any notice that might have been given by Efficiency under clause 3. In circumstances where no such document was produced, it might be thought that the Court would infer that no such notice was ever given.

53    Mr Gleeson’s primary submission was to the effect that the Court should infer that the notice had been given. Mr Dicker advanced a submission to the contrary. Mr Gleeson’s alternative and secondary submission was one to which, as I understood him, Mr Dicker acceded, namely that the Court should infer that the notice had not been given but that, regardless of this fact, the Court should infer that the Agreement is operative. [The “agreement operative/notice still to be given” submission].

54    Ultimately, it seems to me that the significant matter is simply that at the least, Efficiency may be inferred as holding the power to give the necessary notice in writing so that the Agreement would then become effective.

55    Another way of looking at the matter is that if one considers the Agreements on the basis that the Shareholders Agreement is ineffective, one has Efficiency as a funder who has agreed to provide an unlimited amount so that security could never be a burden. Alternatively, if Efficiency were to convert its debt to equity, having issued the notice, it would become a funder who has a series of exit points and would take a substantial share of any proceeds of the litigation.

Capping of liability

56    This Agreement is significant in that if Efficiency swaps from debt to equity, it has the ability to cap its liability (clause 5.4). In this way, Efficiency may elect to cease paying calls on the share if and when the following events occur and it gives 15 days written notice to Negubo:

Efficiency’s options, rights and obligations	Share fully paid at:
i) Upon the share being partly paid to $6.5m:
- Efficiency may elect to cease paying calls on the share - If Efficiency elects to cease payment: it must pay calls to a further $1m whereafter its liability terminates.	$7.5m
ii) Upon the share being partly paid to $9m:
- Efficiency may elect to cease paying calls on the share - If Efficiency elects to cease payment: it must pay calls to a further $1m whereafter its liability terminates.	$10m
iii) After this point:
- Efficiency has a quarterly option of ceasing to pay calls on the share; - If Efficiency elects to cease payment: it must pay calls to a further $1m whereafter its liability terminates.	$11m or more

57    It is significant to note that the “exit points” at which Efficiency can cap its liability are exactly the same as those given to Negubo under the Idoport Loan Agreement.

Dividends

58    Another significant feature of this Agreement is that if Efficiency choses to swap from debt to equity, it becomes entitled to a share of the proceeds through the declaration of a dividend: clause 6.1.

59    The partly paid share, when issued to Efficiency, has a right attached to it to call upon the directors of Negubo to declare a dividend on the share at any time when the NTA of Negubo are positive. Once the directors receive such a call, they are obliged to declare and pay the dividend within 10 business days of the call: clause 6.2.

60    The dividend, paid in cash, will be in the following amounts:

If Efficiency elects to cease paying calls when its full contribution is:	Dividend as a % of NTA of Negubo
$6.5m + $1m = $7.5m	30%
$9m + $1m = $10m	40%
More than $10m	40%
Otherwise (ie funding indefinite)	50%

61    The NTA is defined as “the net assets excluding intangible assets”. The defendants submission was that the NTA of Negubo would comprise of the following 3 elements:

a) the increase in value of Negubo’s shareholding in Market Holdings consequent upon a verdict for Market Holdings;
b) the increase in value of Negubo’s shareholding in Idoport consequent upon a verdict for Idoport;
c) all monies repaid by Idoport to Negubo under the Idoport Loan Agreement. [3 September 2001, p 24]

62    The swap from debt to equity thereby operates to give Efficiency access to a percentage to each of these three streams of assets.

Significance of the funding arrangements to the issue of delay

63    The defendants submit that there are 2 ways in which evidence of third party funding arrangements is relevant to the issue of delay:

a) the question of whether there has been delay; and
b) the question of what weight is to be given to any delay.

64    The defendants say that in relation to (a), delay is only a factor where the plaintiffs can show that they have suffered prejudice as a result. They say that there has been no evidence of prejudice to OAMPS, NSG or Efficiency. Furthermore, they say that the fact that the funding arrangements provide for the further advance of funds to meet an order for security for costs, means that there is no prejudice suffered by the plaintiffs, at least up to the maximum amount allowed in these provisions.

65    The defendants also refer to a number of initial Agreements apparently negotiated between the parties in July 2000 and signed in September 2000. The defendants submit that these Agreements demonstrate recognition on the part of Efficiency that security for costs might be ordered and a commitment by them to meet such an order. They submit that this was relevant because one, it is evidence of Efficiency’s ability and willingness to pay, and two, because it is evidence on the part of Idoport, Market Holdings, the Maconochies and Efficiency, that when these agreements came to light, an application for security was likely.

66    The defendants further point to a letter of 26 October 2000 from Efficiency to Mr Maconochie recognising that the conditions precedent to the initial Agreements had not been met and asking for its money back. Sometime in November 2000, Efficiency apparently decided to allow the money to flow again. The defendants submit that this decision was made at a time after the application for security for costs had been flagged by the defendants on 3 October 2000 and that the Court should infer that Efficiency knew of this application by reason of clauses 6.5 of the versions of the Idoport Loan Agreement and Negubo Loan Agreement then in force. These clauses required Idoport to notify Negubo, and Negubo to notify Efficiency of any prospective order for costs respectively.

67    In relation to (b), the defendants say that if the Court were to find there was delay, this prejudice must be weighed against the changes in circumstances that have taken place during the case. The defendants submit that their discovery of NSG as a second funder was an event giving the defendants a fresh start in relation to their decision as to whether or not to seek security for costs. They submit that this constituted a relevant change in the dynamic of the case, as the plaintiffs were now suing for the benefit of a new party. They further submit that the entry of Efficiency into the equation (which apparently occurred in secret in June 2000, only to become public in September 2000) constituted a further change in the structure of the arrangements and a further fresh start for the defendants.

68    In reply to this, the plaintiffs submit that the defendants would have been aware of Idoport’s financial position as at June 1999 and June 2000 and would have seen a different position as at those two dates. The plaintiffs submit that the defendants would have realised that this change in circumstances must have been a result of new funding arrangements, and yet, despite this, the defendants only made the application in October 2000.

69    In all of the circumstances, where the plaintiffs elected not to call any evidence of substance in terms of disclosing the real world position in relation to the funding agreements (outside of the evidence given by Mr D'Emilio, who had virtually no knowledge of any detail of the funding agreements) it does not seem to me to lie in the mouths of the plaintiffs to advance the submission that the Court should strain to reach inferences which might favour the plaintiffs in this regard. The submission that the defendants would have realised that the above suggested change in circumstances must have been a result of new funding arrangements requires the Court to speculate in a fashion that is entirely inappropriate in the present circumstances.

70    To the contrary of the plaintiffs’ submissions, the appropriate inference from all of the evidence is that there are in place funding arrangements and agreements to give very substantial backing to Idoport in terms of the necessary resources to fund the ongoing proceedings.

Forecasted distribution of proceeds

The plaintiffs’ submissions

71    The following table is a revised form of MFI P224, a summary handed up by the plaintiffs in an attempt to summarise their understanding of the division of proceeds between the plaintiffs and the funders based on 5 alternate verdicts handed down in favour of the plaintiffs:

Gross party share @ claim value ($ millions)

Share Party20,00010,0005,0001,000500

OAMPS1717171717

NSG7753952055335

Efficiency5,7582,8721,429275131

Costs1111111111

Sub-total (share parties)6,5613,2951,662356194

Plaintiffs13,4396,7053,338644306

72    Taking the verdict value of $500m in the last column as an example, the plaintiffs explained the figures calculated within that column in the following way:

Verdict of $500m; based on total contribution of $7.5m from Efficiency

Total ShareCalculationDescription of calculation

1) OAMPS

$17m = $1.5m +Subscription price

$15m10 x subscription price

$16.5m Rounded up

= $17mTotal

2) NSG

$35m = $20m +40% x first $50

$45m +30% x next $150m

$27m10% x [next $300m - $17m (OAMPS) – $11m (costs)]

= $92m

$92m x 37%$1.85m/$5m = 37% (based on NSG’s current contribution of $1.85m)

= $35mTotal

3) Efficiency

$131m30% xBased on Efficiency’s current contribution of $7.5

$437mNTA: $500m - $17m (OAMPS) - $35 (NSG) - $11m (costs)

= $131mTotal

4) Plaintiffs

$306m $500m - Total verdict

61% of verdict$183m-$17m (OAMPS) + $35m (NSG) + $131 (Efficiency)

$11mCosts

= $306mTotal

73    Based on these figures, the plaintiffs would end up with $306m of a verdict of $500m, which is approximately 61% of the entire verdict. The plaintiffs add that even in the “worst case” scenario, if Efficiency decided to increase its contribution over $10m, with unlimited funding forevermore, the plaintiffs share of the proceeds would still be 43.7%. In this case, Efficiency and the plaintiffs’ sections of the above table would become:

3) Efficiency
$218.5m	50% x	Based on Efficiency’s contribution of $10m, with unlimited funding thereafter
$437m	NTA: $500m - $17m (OAMPS) - $35 (NSG) - $11m (costs)
= $218.5m	Total
4) Plaintiffs
$218.5m	$500m -	Total verdict
43.7% of verdict	$270.5m-	$17m (OAMPS) + $35m (NSG) + $218.5 (Efficiency)
$11m	Costs
= $218.5m	Total

74    Furthermore, this prediction is subject to Efficiency ceasing to advance funds at some stage in the future, at which point its percentage would drop back to either 30% or 40%, depending on its total contribution.

The defendants’ submissions

75    The defendants suggested a number of fallacies in relation to the plaintiffs’ predictions and calculations.

76    The defendants’ first point was in relation to the plaintiffs’ estimate of costs. They point out that the figure of $11m was an inappropriate assumption, as it reflects the plaintiffs’ costs to date rather than their costs to the end of the hearing. Assuming the hearing runs until 2003, the defendants say the costs are more like:

$500,000/month x 24 months = $12m
$12m (future costs) + $11m (past costs) = $23m (Total costs)

77    The defendants say this is significant because:

a) It changes the NTA as a whole; and
b) The additional costs will presumably come from one of the funders, which will change the total share for each party. There are two possibilities under this head:
i) The additional funding comes from Efficiency:
If the funding were to come from Efficiency, the amount advanced from it would increase from $7.5m to over $10m. If Efficiency chose to permanently maintain this funding, its percentage of the NTA would increase from 30% to 50%, bringing its total share up significantly.
Once Efficiency raises its contributions over the $10m mark, Negubo (and Efficiency) can reassess their situation each quarter and decide whether to continue funding. The defendants submit that at this point, Efficiency is in a position to renegotiate and has strong bargaining power on the basis that it can choose to cease funding. Under these circumstances, if Efficiency did decide to contribute further, it would be likely to attempt to increase its share and thereby reduce the amount left for the plaintiffs.
ii) The additional funding comes from NSG:
Part of the additional funding could also come from NSG, which has only partly paid its share and has an entitlement to subscribe up to $5m. If NSG contribute another $3.15m towards these costs, its staggered option price increases from 37% of the 40%, 30% and 10% of the NTA to a full 100% of each of these percentages. In this way, its share effectively triples, and thereby reduces the amount left for the plaintiffs.

78    The defendants’ second criticism is aimed at the unclear use of the word “plaintiffs” within MFI P224, which provides a misleading view as to what the true plaintiffs (being Mr and Mrs Maconochie) will get. They say that if either of the two plaintiffs win, Negubo will receive most of the proceeds for the following reasons:

a) If Market Holdings wins: Its 99% shareholder is Negubo (with one share to Mr Maconochie);
b) If Idoport wins: Its majority shareholder is Negubo (with 17 shares to AIIL and NSG);
c) Because 1 share (out of 3) of Negubo may be owned by Efficiency, one third of both plaintiffs’ share goes back to Efficiency in the event that they win.

79    The defendants say that both of these points lead to the conclusion that the plaintiffs’ interest (being Mr and Mrs Maconochie) are far less than that predicted by the plaintiffs, and well below 50%.

80    The defendants produced a number of pie charts in MFI D174 in an attempt to illustrate their arguments, which have been attached to the end of this appendix. The charts were explained by Dr Bell in the following way:

Charts 1 – 5 are based on a verdict of $50m for Idoport:
Chart 1: This explains the division of proceeds based on the assumption that NSG top up its subscription to the full $5m;
Chart 2: This explains how Negubo’s share (identified as the blue section in Chart 1) is to be divided up;
Chart 3: This explains how Idoport’s share (identified as the dark grey section in Chart 1) is to be divided up;
Chart 4: This explains what Negubo’s total share is, based on its own proceeds and that which it obtains from Idoport (identified as the blue section in Chart 1 and the blue section in Chart 2);
Chart 5: This explains the ultimate division of proceeds (taking into account Charts 2, 3 and 4);
Charts 6 and 7 are based on a verdict of $50m for Market Holdings:
Chart 6: This explains the division of proceeds
Chart 7: This explains the ultimate division of proceeds

81    The defendants submit that on either of these two scenarios (ie a verdict of $50m for Idoport or Market Holdings) the interests of Mr and Mrs Maconochie are only around 30%. Furthermore, they say that the charts are based on the assumption that Efficiency does not renegotiate its position. The defendants submit that regardless of the verdict assumed, a significant proportion of the proceeds go to third parties who stand to obtain the benefit without taking the risk.

The plaintiffs’ response

82    In response to the defendants’ submissions in relation to the estimate of costs, the plaintiffs say that it would be inappropriate for the Court to make assumptions as to the length of the case, or to speculate as to the possible renegotiation by Efficiency or increased subscription by NSG.

83    In relation to the defendants’ pie charts at MFI D174, the plaintiffs say they are unable to reconcile the results put forward for a judgment of $50m with the effect of the Agreements. The plaintiffs do not explain the basis for this assertion but do suggest the following alternate distributions based on a verdict of this amount:

“OAMPS $5.2 million 10.4%
NSG $2.9 million 5.8%
Efficiency $9.9 million 19.8% (+ tax credit of $9 million)
Negubo $23 million 46%
$41 million 82%
Tax $9 million 18%
$50 million 100%”

84    My own view based upon the above submissions and calculations is that the defendants’ submissions appear to have considerable substance. Ultimately, it is simply unnecessary for the Court to do more than to hold as it does, that on the evidence as to funding, the outside funders stand to benefit by receiving extremely large percentages of most substantive verdicts. Any comparison between the amounts which the outside funders stand to receive and the amounts which the plaintiffs stand to receive must always be relative to the postulated amount of a verdict. In proceedings in which the plaintiffs claim damages of a very high order, it seems an arid exercise to further this examination.

Last Modified: 06/13/2002