In the matter of Felan's Fisheries Pty Limited

[2016] NSWSC 1351

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Felan’s Fisheries Pty Limited [2016] NSWSC 1351
Hearing dates:	2 September 2016
Decision date:	23 September 2016
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The Court orders that the parties bring in agreed orders to give effect to judgment within 14 days, including as to costs or, if there is no agreement between them, their respective draft short minutes of order and short submissions as to the differences between them.
Catchwords:	PROCEDURE — Costs — Security for costs — Application for security for costs – where plaintiff brought proceedings against a company and several of the company’s directors – where company and directors sought security for costs from the plaintiff for both past and future costs of the proceedings – where plaintiff relied on shares it owned in another entity to contend that it could meet orders for costs if unsuccessful in substantive proceedings – where plaintiff contended that separate legal representation by the company and the directors was unnecessary – whether there is reason to believe that the plaintiff will be unable to pay costs of the proceedings if unsuccessful – whether impecuniosity of the plaintiff results from conduct of defendants and whether that matter is relevant given plaintiff did not contend an order for security for costs would stultify proceedings – whether the plaintiff’s claim is essentially defensive in character – whether the Court should accept the quantum of costs sought by the applicants – whether it was necessary for the company and the directors to obtain separate legal representation in circumstances that the plaintiff alleged breach of director’s duties against the directors.
Legislation Cited:	- Corporations Act 2001 (Cth), ss 181, 236, 237, 1324, 1335 - Uniform Civil Procedure Rules 2005 (NSW), r 42.21
Cases Cited:	- ACN 105 921 962 Pty Ltd v Wiggett [2012] NSWSC 1526 - Ashington Capital Pty Ltd v Parissen Capital (Project X) Pty Ltd [2012] NSWSC 410 - Beach Petroleum NL v Johnson (1992) 7 ACSR 203 - Blue Oil Energy v Tan [2014] NSWCA 81 - BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 - Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; (2014) 98 ACSR 301 - Deangrove Pty Ltd v Buckby [2002] FCA 1544 - eInduct Systems Pty Ltd v 3D Safety System Services Pty Ltd [2015] NSWCA 284; (2015) 90 NSWLR 451 - Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 - Fimiston Investments Pty Ltd (in liq) v Pecker Maroo Pty Ltd [2011] QSC 356 - Ho v Fordyce t/as PMF Legal Trading (No 2) [2015] NSWSC 1748 - Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 - Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 - KDL Building v Mount [2006] NSWSC 474 - KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76 - Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 - Moroney v Reschke [2015] NSWSC 860 - Oswal v Cmr of Taxation [2015] FCA 1366 - Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344 - Polstead Pty Ltd (in liq) v Shah [2009] NSWSC 560 - Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222 - Putney Group Pty Ltd v Royal Rehabilitation Centre Sydney [2009] NSWSC 424 - Re Colorado Products Pty Ltd (in prov liq) [2013] NSWSC 611 - Re Elsmore Resources Ltd [2014] NSWSC 1247 - Re Felan’s Fisheries Pty Limited [2016] NSWSC 581 - Re Pioneer Energy Holdings Pty Ltd [2013] NSWSC 1366 - Re Travelodge Australia Ltd (1978) 21 ACTR 17 - Reinsurance Australia Corp Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803 - Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 - Szanto v Bainton [2011] NSWSC 985 - Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2009] NSWSC 563 - Weily’s Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 - Willey v Synan [1935] HCA 76; (1935) 54 CLR 175 - Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245
Category:	Procedural and other rulings
Parties:	Felan’s Fisheries Pty Limited (Plaintiff) Sydney Fish Market Pty Limited (First Defendant) SFM Tenants and Merchants Pty Limited (Second Defendant) Bruce James Standen (Third Defendant) Grahame Richard Turk (Fourth Defendant) John Samuel Symonds (Fifth Defendant) William John Gallagher (Sixth Defendant) Sandra Margaret Hook (Seventh Defendant) Terry Con Poulos (Eighth Defendant) Harry Kouros (Ninth Defendant) Gregory George Imisides (Tenth Defendant) Nicholas Peter Manettas (Eleventh Defendant)
Representation:	Counsel: R P V Carey (Plaintiff) J C Hewitt (First Defendant) N Kidd SC (Third – Ninth Defendants)   Solicitors: Fraser Clancy (Plaintiff) K & L Gates (First Defendant) HWL Ebsworth (Third to Ninth Defendants)
File Number(s):	2015/369226

Judgment

Background

1. By Originating Process dated 15 December 2015 the Plaintiff, Felan’s Fisheries Pty Limited (“Felan’s”) seeks declaratory and injunctive relief, or alternatively leave to bring a derivative proceeding, and damages, including bringing claims under ss 181, 236–237 and 1324 of the Corporations Act 2001 (Cth). The Defendants in the proceedings are Sydney Fish Market Pty Limited (“SFM”), SFM Tenants and Merchants Pty Limited (“Buyers”) and several directors of SFM (“Directors”). Buyers holds one of the two ordinary shares in SFM, the other of which is held by NSW Fishermen’s Holding Company Pty Limited (“Catchers”). Felan’s presently holds 1,875,000 ordinary shares of Buyers, representing 25% of the ordinary shares of Buyers, which it acquired on or about 26 August 2014 from a third party.

2. I have set out the background to these proceedings in an earlier judgment delivered in these proceedings ([2016] NSWSC 581). By way of background, the proceedings relate to the termination of Felan’s occupancy of premises at the Sydney Fish Market and an attempt to require it to divest its interest in Buyers. Felan’s held a lease of part of the Sydney Fish Market site for a term of 20 years commencing on 17 July 1986 and ending on 16 July 2006. The terms of its lease provided that it was entitled to remain in possession of the premises as a monthly tenant upon the expiry of the 20 year term, and it did so for a considerable period after that term expired in 2006. Felan’s was also granted a licence to use another part of that site for a term of one month commencing on 1 September 1995 and ending on 30 September 1995 for the purpose of unloading goods and articles, and the terms of that licence permitted Felan’s to continue to use that space after 30 September 1995 on the same terms, subject to SFM or Felan’s terminating that licence on one month’s notice. At a special general meeting held on 21 April 2015, the board of SFM resolved to issue notices to quit to Felan’s and, on 22 April 2015, SFM served notices to quit in respect of Felan’s lease and the licensed space upon Felan’s. Felan’s right to occupy the premises and the licensed space was subsequently extended to 16 July 2015 and, on 17 July 2015, SFM entered and took possession of the premises and the licensed space.

3. Felan’s filed an Originating Process on 16 December 2015, a Statement of Claim on 17 February 2016 and an Amended Statement of Claim on 10 March 2016, and SFM filed its Defence on 18 March 2016 and the Directors filed their Defence in substantially similar terms on 2 May 2016. Buyers and two individual defendants filed submitting appearances in the proceedings.

4. It is not necessary to set out the matters pleaded by Felan’s Amended Statement of Claim in detail, although they include a challenge to the validity of the board resolutions of SFM authorising the issue of the notices to quit; an allegation that the termination of Felan’s lease and licence and the failure to offer Felan’s a new lease and new licence was inconsistent with a term of the Shareholders Agreement between Catchers and Buyers, which contemplated that SFM’s business and objectives included providing:

“[T]o any tenant who is a shareholder of Buyers and whose lease expires, a first right of refusal in relation to the new lease offered in respect of that tenancy … prior to offering the new lease of the tenancy to any other person.”

5. Felan’s also alleges that the Directors who voted in favour of the relevant resolutions brought about contraventions of the Shareholders Agreement between Buyers and Catchers and SFM’s constitution and contravened s 181 of the Corporations Act. I have referred in greater detail to those allegations in the earlier judgment. Felan’s seeks orders including declarations that the notices to quit were invalid and of no effect; that the Directors’ decision to issue the notices to quit was made for an improper purpose in contravention of s 181 of the Corporations Act; and injunctive relief under s 1324 of the Corporations Act.

The applications for security for costs

6. By Interlocutory Process filed on 11 April 2016, SFM seeks an order under s 1335 of the Corporations Act, or alternatively under r 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) that Felan’s provide security for its costs, quantified in the amount of $435,000, on a staged basis and that the proceedings be stayed until the security is provided by Felan’s. By Interlocutory Process filed on 2 May 2016, the Directors also seek orders under the same provisions that Felan’s provide security for costs in the lesser amount of $215,714, also on a staged basis.

7. Section 1335 of the Corporations Act allows the court to make an order for security for costs if it appears by credible testimony that there is reason to believe that a corporation will be unable to meet a defendant’s costs if successful in his or her defence. Rule 42.21(1)(d) of the UCPR provides that if, in any proceedings, it appears to the court, on the application of a defendant, that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the defendant’s costs if ordered to do so, the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and the proceedings be stayed until the security is given. Rule 42.21(1A) of the UCPR in turn identifies matters to which the court may have regard in determining whether it is appropriate to make an order for security for costs, in an inclusive manner, including the prospects of success or merit of the proceedings, the genuineness of the proceedings, whether the plaintiff’s impecuniosity is attributable to the defendant’s conduct, whether the plaintiff is effectively in the position of a defendant, whether an order for security for costs would stifle the proceedings, whether the proceedings involve a matter of public importance, whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant, the costs of the proceedings, whether the security sought is proportionate to the importance and complexity of the subject matter in dispute and the timing of the application for security for costs.

8. Consistent with authority, SFM identified the three issues arising in an application of this kind as whether there is reason to believe that Felan’s will be unable to pay the costs of SFM if ordered to do so; whether as a matter of discretion an order should be made; and the quantum of that order: KDL Building v Mount [2006] NSWSC 474 at [6]; Polstead Pty Ltd (in liq) v Shah [2009] NSWSC 560 at [6].

9. The parties led extensive affidavit evidence. SFM relied on affidavits of its solicitor, Mr Webster, dated 8 April 2016, 19 May 2016 and 19 August 2016; expert valuation evidence of Mr Richard Stewart dated 18 April 2016 and 7 June 2016; and affidavits of a costs consultant, Ms Alyson Ashe, dated 6 June 2016 and 27 July 2016. The Directors relied on affidavits of their solicitor, Ms Kumar, dated 2 May 2016 and 16 June 2016. Felan’s relied on the affidavit of its solicitor, Mr Mark Fraser, dated 26 May 2016; expert valuation evidence of Mr Daniel Coote dated 24 May 2016 responding to Mr Stewart’s report dated 18 April 2016; and affidavits of a costs consultant, Ms Deborah Vine-Hall, dated 14 June 2016 and 7 July 2016.

Whether there is reason to believe that Felan’s may be unable to pay a claim for costs

10. An initial question is whether there is reason to believe that Felan’s would be unable to pay SFM’s and the Directors’ costs of the proceedings if ordered to do so. This question requires consideration whether there is a rational basis for the belief or a real risk of inability to pay the defendant’s costs, and that test has been described as setting a “low threshold” and as being an “undemanding test”: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 at [15]–[16]; Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; (2014) 98 ACSR 301 at [57]–[60]. This requirement will generally be satisfied if there is a real chance, in events that are reasonably possible, that the relevant corporation will be unable to pay those costs: Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205; Deangrove Pty Ltd v Buckby [2002] FCA 1544 at [4]; ACN 105 921 962 Pty Ltd v Wiggett [2012] NSWSC 1526 at [4]. A relevant inability may be established even if a defendant has a surplus of assets over liabilities, which would be sufficient to meet the relevant costs, if it could only pay those costs if allowed an extended time to realise its assets: Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [16]; Livingspring Pty Ltd v Kliger Partners above at [43]. Mr Kidd, who appears for the Directors, also refers to the summary of the relevant principles by Beazley JA in Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [28]–[33], where Beazley JA (with whom Meagher and Barrett JJA agreed) observed that the court should adopt a “practical commonsense approach” to the examination of a plaintiff’s financial affairs (at [28]) and noted that the defendant bears the onus of establishing that there is reason to believe that the plaintiff will be unable to pay those costs if unsuccessful and, if that is established, the onus shifts to the plaintiff to establish a reason why security should not be granted (at [29]–[30]).

11. SFM and the Directors submit that there is reason to believe that Felan’s will be unable to pay SFM’s and the Directors’ costs of the proceedings if it is ordered to do so. SFM points to several matters which it submits, and I accept, support a conclusion that there is reason to believe that Felan’s would be unable to pay SFM’s costs if ordered to do so, including that Felan’s is not presently trading; that it has minimal cash in bank; that an amount previously held on its balance sheet, being funds deposited on trust with the solicitors who are conducting the proceedings on its behalf, is no longer relied upon by Felan’s to support its ability to meet an order for costs against it, presumably because it has been or will be expended in the conduct of the proceedings by Felan’s; and that Felan’s solicitors have secured their costs of the proceedings by requiring that payment into trust on account of costs and disbursements. In response, Felan's relies on the value of its shares in Buyers to seek to establish that it could meet an order for costs against it.

12. Before turning to the expert evidence as to that question, it should be noted that there is other evidence that casts light on the value of Felan’s shares in Buyers. SFM points to the fact that, on 10 April 2015, all the issued shares in Felan’s were disposed of to an unrelated party for consideration of $500,000 in a transaction that the directors of the vendor certified was a bona fide sale for consideration that was fair and reasonable (Ex SFM-2, pp 97, 102). SFM also relies on the fact that Felan’s shares in Buyers were recorded in its balance sheet as at 30 June 2015 as a non-current asset at “director’s valuation” of $305,255 (Ex SFM-1, Tab 7J, pp 93–94) and that, on 26 February 2016, all of an unrelated party’s shares in Felan’s were sold to TRHS Pty Ltd for $295,685. I recognise that, after the commencement of the proceedings, Felan’s current directors revalued the shares in Buyers held by Felan’s in Felan’s financial statements from a value of $305,255 as at 30 June 2015 to $1,750,000 as at 31 January 2016. However, I am not satisfied that a reasonable basis for that revaluation has been established.

13. The parties led expert evidence as to the valuation, on several bases, of Felan’s shares in Buyers, although SFM submits that the Court is not required to make a finding as to that matter, where all that need be determined is whether there is a rational basis for the belief that Felan’s will be unable to pay its costs of the litigation if unsuccessful. Felan’s at one point relied on a valuation of its shares in Buyers in a valuation report dated 10 February 2016 prepared by Acumen Accounting & Advisory, but no longer relies on that valuation, and SFM relies on an affidavit of Mr Richard Stewart dated 18 April 2016 in response to that valuation. It is not necessary to address the criticisms made of the Acument report, since Felan’s no longer relies on that report.

14. Felan’s relies on a further report prepared by Mr Coote of William Buck Accountants dated 24 May 2016, which was subject to significant limitations as to the verification procedures undertaken. Mr Coote values Felan’s shares in Buyers, subject to those limitations, in the range between $1,085,000 and $2,170,000, partly by treating Felan’s 25% interest in Buyers, which in turn holds a 50% interest in SFM, as amounting to an indirect 12.5% interest in SFM, and in turn attributing a value of 12.5% of the net assets of SFM to the shares held by Felan’s in Buyers. The value derived from SFM and attributed to Felan’s interest in Buyers depends upon realising SFM’s non-current assets, since SFM’s balance sheets indicate that it only has a limited surplus of current assets over current liabilities. Mr Coote also refers to another transaction involving shares in Buyers, between third parties, in November 2015. That other transaction does not seem to me to be comparable to a dealing in Felan’s shares in Buyers, because that other transaction involved the sale of an ongoing business where the vendor held a lease of premises in the Sydney Fish Market, which Felan’s does not, and will not if it is unsuccessful in the proceedings. Mr Coote recognises the likelihood that a purchaser of shares in Buyers would apply a “large marketability discount” to those shares, and applies a discount of up to 50% to the shares, and then applies a further minority interest discount of 15%.

15. SFM relies on a second report of Mr Stewart, which responded to Mr Coote’s report and expressed the view that Mr Coote’s approach does not apply appropriate discounts to reflect the fact that Buyers owns one of two shares in SFM rather than an interest in SFM’s assets. That criticism seems to me to be well-founded, where Buyers, as one of two shareholders in SFM, would have considerable practical difficulty in forcing a sale of SFM’s assets over Catchers’ opposition, and Felan’s is in turn a minority shareholder in Buyers, which would practically be unable to force a sale of SFM’s assets without the cooperation of a large number of other shareholders in Buyers, as well as Catchers. Mr Stewart also expresses the view that the fair market value of Felan’s shares in Buyers is more likely to approximate the value implied by the price paid by TRHS Pty Ltd for its acquisition of the shares in Felan’s, of $295,685, to which I referred above. I would prefer Mr Stewart’s evidence to Mr Coote’s evidence in respect of this matter, if it were necessary to reach a finding about it. However, it is not necessary to reach a finding about that matter, because there is no reason to expect that Felan’s could realise its shares within Buyers within any reasonable period at anything approximating the valuation which Mr Coote attributes to them.

10. SFM points out, and I accept, that the question whether Felan’s can meet an order for costs against it has to be determined upon the hypothesis that Felan’s is unsuccessful in the proceedings, is then unable to establish a right to have a continued or further lease in the Sydney Fish Market, and has been validly required to sell its shares in Buyers under the relevant constitutional provisions. SFM points to several restrictions in Buyers’ constitution which plainly limit the range of potential purchasers of Felan’s shares in Buyers, including provisions which limit a person’s ability to become a member of Buyers to a person who is a tenant or licensee of an area in the Sydney Fish Market; provide that a person is not entitled to remain a member of Buyers if it ceases to be a tenant or licensee of an area at the Sydney Fish Market; and require a person who has ceased to be eligible to remain a member of Buyers to dispose of the relevant shares in accordance with a mechanism specified in reg 49 of Buyers’ constitution, by which shares are offered to other members at a price that is revised downward in successive steps until one or other member accepts the offer.

11. SFM submits, and I also accept, that there is no reason to think that other members of Buyers, who would be aware of those provisions, including the provision for the sale price to be reduced by the mechanism specified in Buyers’ constitution, would have any reason to pay a theoretical value for Felan’s shares in Buyers to acquire those shares. That position is reinforced because, as SFM also points out, no existing shareholder in Buyers could acquire Felan’s entire interest of 25% of the shares in Buyers, because Felan’s constitution limits the maximum interest held by a member to a 25% interest; one other existing shareholder in Buyers could not bid for those shares, because it already owns a 25% interest in Buyers; and any other shareholder would only acquire Felan’s shares in Buyers in order to increase its existing shareholding in Buyers, since the purchase of Felan’s shares in Buyers would not, on the hypothesis that it failed in the proceedings, be associated with a right to occupy any area at the Sydney Fish Market. SFM also submits, and I accept, that it is not easy to see why another shareholder would be anxious to increase its interest in Buyers, given the maximum percentage that it may hold, and the fact that SFM has not declared dividends in recent years.

12. Mr Kidd, for the Directors, relies on essentially the same matters as SFM for the proposition that there is reason to believe that Felan’s will be unable to pay the Directors’ costs of the proceedings. Mr Kidd summarises the position advanced by the Directors, and also advanced by SFM, in respect of the value of Felan’s shares in Buyers as follows:

“The marketability of those shares is severely restricted by the provisions contained in [Buyers’] constitution, which have the effect of limiting the potential buyers of Felan’s stake in [Buyers] to 14 existing shareholders of [Buyers] in circumstances where there is limited income potential from acquiring additional shares, the [Buyers] constitution prohibits shareholders from holding more than 25% of the issued shares (such that Felan’s 25% stake would have to be purchased by two or more existing shareholders), and the [Buyers] constitution prescribes a ‘Dutch Auction’ share sale process whereby the asking price is discounted on a periodic basis until there are willing buyers.”

Mr Kidd also points to the recent market transactions between arms-length parties, to which I referred above, as supporting the view that Felan’s stake in Buyers is worth about $290,000, and in any event no more than $460,000. Mr Kidd also submits that, irrespective of the debate between the experts as to the value of Felan’s stake in Buyers, there is sufficient evidence to establish that there is reason to believe that Felan’s will be unable to pay the Defendants’ costs, where the only material asset owned by Felan’s is shares in an unlisted company governed by a constitution containing significant restrictions on their sale, and there is credible expert evidence that those shares have a value in the vicinity of $290,000 to $460,000.

19. Ultimately, it seems to me unnecessary to address the complexities involved in the valuation of Felan’s shares in Buyers as addressed by the expert evidence. There is plainly a real risk, on the evidence presently before the Court, that Felan’s could not realise its shares in Buyers, in a forced sale process in accordance with Buyers’ constitution, within a relatively short time of a costs order being made, since other members of Buyers may have no interest in acquiring those shares, even at a discounted price, within that period; and, if Felan’s could realise its shares in Buyers, within a relatively short period, there is a real risk that it could only do so at a price deeply discounted to any theoretical value of those shares. There is, at the least, a real risk that Felan’s either could not realise its shares within that period, or could not do so at a sufficient price to pay an order for costs against it, even of a much lesser amount than the costs orders foreshadowed by SFM and the Directors. For these reasons, I find that there is reason to believe that Felan’s will be unable to meet a costs order made against it for the purposes of s 1335 of the Corporations Act and UCPR r 42.21 and that the jurisdiction to order security for costs is established.

Discretionary factors

20. SFM submits, and I accept, that once it and the Directors have discharged the onus of establishing that there is reason to believe that Felan’s will be unable to pay the costs of the proceedings if unsuccessful, the onus shifts to Felan’s to establish a reason why security should not be granted: Wollongong City Council v Legal Business Centre Pty Ltd above at [30]; Cornelius v Global Medical Solutions Australia Pty Ltd above at [18]–[20]. Several relevant factors are specified in UCPR r 42.21(1A) and were addressed by the parties, and those factors are broadly consistent with those identified by Beazley J (as her Honour then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 at 197–198.

21. A party’s prospects of success and the merits of the proceedings are a relevant matter to whether security for costs should be granted. Mr Hewitt submits that Felan’s prospects of success in the proceedings are low for reasons which he advances, including that Felan’s does not have the right to enforce provisions of the Shareholders Agreement or SFM’s constitution, since Buyers and not Felan’s is party to the Shareholders Agreement and a shareholder in SFM; that the objects clauses in the Shareholders Agreement or SFM constitution are not enforceable by Felan’s for the same reason; and that the allegation that the directors of SFM contravened s 181 of the Corporations Act by acting inconsistently with objects clauses in the Shareholders Agreement is “misconceived”. Mr Hewitt also submits that Felan’s is unlikely to succeed in obtaining an injunction under s 1324 of the Corporations Act, where SFM is not alleged to have contravened the Corporations Act, a matter to which I referred in the earlier judgment. SFM also relies upon the apparently consensual arrangements made between SFM and Felan’s to extend the time for Felan’s to vacate the premises and to the fact of SFM’s re-entry into the premises in July 2015. Each of these submissions have force.

22. Mr Carey accepts that the merits of a plaintiff’s claim are a factor to be taken into account in the exercise of the court’s discretion to order security. However, Mr Carey also submits that once a plaintiff’s claim appears reasonably arguable, it is not appropriate to attempt a more detailed assessment of its prospects of success: Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [37]–[39]. In Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276, McClellan CJ at CL (with whom Mason P agreed) observed at [83] that:

“The question which must be asked is whether the claimants’ case is bona fide and raises real issues to be tried. Unless obviously hopeless the prospect of success or failure is of little relevance. This must especially be the case where, as in the present matter, the issues to be litigated are complex and where it may be thought the law is developing.”

The same approach was taken in Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222, where Katzmann J observed (at [22]) that the existence of an arguable case should be treated as neutral, particularly in a complex case, and I adopted that approach in ACN 105 921 962 Pty Ltd v Wiggett above at [18] and in Re Elsmore Resources Ltd [2014] NSWSC 1247 at [16].

23. Once it is accepted that Felan’s claim raises real issues to be tried, and SFM does not suggest that it is capable of summary dismissal, and raises complex issues, then the case law to which I have referred above indicates that the merits of the claim are neutral. That appears to me to be the proper approach, since courts would otherwise be required to engage in mini-trials of the substantive proceedings in order to address applications for security for costs.

24. I do not understand it to be suggested that an order for security for costs would stifle or stultify the proceedings, and that has also not been established where there is no evidence that those standing behind the proceedings could not provide the funds to allow the litigation to proceed: Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344 at [43]. SFM submits, and I accept, that persons standing behind Felan’s, including Mr Deans and Fishbank Development Corporation Pty Ltd (“Fishbank”), are likely to benefit from any success in the proceedings, but have not offered to support the provision of security for costs: KP Cable Investments Pty Ltd v Meltglow Pty Ltd above at 197–198. That matter would be significant if Felan’s advanced any claim that an order for security for costs would stultify the proceedings. It has not done so.

25. Mr Carey submits that SFM’s and the Directors’ conduct is the cause of any impairment of Felan’s financial position, because the issue of the notices to quit in April 2015 resulted in the loss of Felan’s business and its right to sell its shares in Buyers to interested parties, and not just other shareholders of Buyers. It does not seem to me that the factual basis of any suggestion that Felan’s financial position was impaired, by comparison with its previous financial position, has been established, since the evidence indicates that Felan’s was not in a stronger financial position prior to the issue of the notices to quit in April 2015. In any event, that matter is of limited relevance in this application, for the reasons noted in BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 346, where Anderson J (with whom Kennedy and Ipp JJ agreed) observed that this factor should not be taken in isolation and:

“It must be considered together with the assertion that the effect on the plaintiff of an order for security will be to stultify the action. If that will not be or is not shown to be the effect of the order, that is, if other parties who will benefit from the plaintiff’s success are financially able to provide the security and it is reasonable that they do so, the fact that the defendant has caused the plaintiff’s own impecuniosity will hardly be good reason to decline security.”

As I noted above, there is here no suggestion that an order for security for costs would stultify the proceedings.

26. Felan’s also contends that an order for security for costs should not be made because SFM and the Directors are in substance the aggressors in the proceedings and Felan’s claim is essentially defensive. In Willey v Synan [1935] HCA 76; (1935) 54 CLR 175, Dixon J treated proceedings commenced by a plaintiff as defensive, where they were responsive to a step taken by the Collector of Customs to seek the condemnation of property, which shifted the onus of taking the proceedings to the owner of that property, and where, absent the relevant statutory provision, the Collector of Customs would itself have had to take proceedings to achieve that result. Mr Carey also draws attention to the decision in Re Travelodge Australia Ltd (1978) 21 ACTR 17, where the plaintiff was served with a notice which, unless it commenced proceedings, would bring about the compulsory acquisition of its shares in a company. The Court held that proceedings that were commenced by the plaintiff to seek to prevent the acquisition of those shares were defensive in character, and declined to make an order for security for costs. Blackburn CJ observed (at 19) that:

“The applicant is a person who invokes a special statutory procedure in order to preserve to himself a right which he considers a valuable one, which by the combined effect of a statute and the actions of the respondent may be taken away from him.”

27. Mr Carey submits, and I accept, that the analogy with the present case is a strong one, where, as I will note below, SFM issued notices to quit to Felan’s and sought to bring about the divesture of Felan’s shares in Buyers, by action taken by Buyers pursuant to the relevant provisions in Buyers’ constitution, and the relief sought by Felan’s in these proceedings is directed to preserving its interest in those shares. Mr Kidd seeks to distinguish the decisions in Willey v Synan above and Re Travelodge Australia Ltd above on the basis that the plaintiff owned property in those cases, and the relevant statutory regime amounted, in effect, to a compulsory acquisition of that property. While I accept that that is a broadly accurate characterisation of the factual issue in those cases, it does not seem to me that the reasoning in those cases is limited to that situation.

28. In Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621, Ormiston J (at 627) summarised the position in respect of defensive proceedings as follows:

“Principally it would appear necessary to characterise the proceedings in respect of which security is sought. If they are “defensive” proceedings, either directly resisting proceedings already brought or seeking to “halt self-help procedures”, it would seem that to require security would be oppressive, or at least would provide serious grounds for refusing to make an order. At the least, it is a factor to be considered in the exercise of the discretion. In particular, it is a basis for reducing the amount of security ordered to a sum related to the costs of those claims which cannot be characterised as defensive …”.

That summary was approved by Rein J in Ho v Fordyce t/as PMF Legal Trading (No 2) [2015] NSWSC 1748 at [36], where his Honour held that it would be oppressive to order security in respect of proceedings that were defensive in character, and that such security should not be provided either as a matter of principle or as a matter of discretion.

29. I recognise that the fact that proceedings are defensive in character does not necessarily prevent the court ordering security for costs from a plaintiff who is in substance a defendant. In Weily’s Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186, Zeeman J observed (at 189) that:

“The 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. In other such cases, to require security, if not oppressive, would be quite inappropriate by reference to the justice of the case.”

That view was approved in Reinsurance Australia Corp Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803 at [82] and in Oswal v Cmr of Taxation [2015] FCA 1366 at [42]–[43]. Those observations recognise the significance of the fact that proceedings are defensive in character in the exercise of the court’s discretion whether to order security for costs, and the risk that an order for security may be “oppressive” or “inappropriate” where proceedings are defensive in their nature.

30. Mr Carey submits that Felan’s claim is essentially defensive in character, so far as it is a response to the notices to quit issued by SFM in April 2015 and a notice issued by Buyers on 30 November 2015 requiring Felan’s to divest itself of its shares in Buyers. Mr Carey submits, and I accept, that the evidence indicates that the notices to quit were issued by SFM for the purpose of triggering the divesture provisions in Buyers’ constitution (Ex SFM-8, p 66) in respect of Felans’s shares in Buyers, and SFM went further, by letter dated 17 July 2015, by drawing the issue of the notices to quit to Buyers’ attention and inviting it to invoke those divesture provisions. On 30 November 2015, Buyers in turn purported to give notice to Felan’s requiring Felan’s to divest itself of its shares, with its right to do so having derived from SFM’s issue of the notices to quit (Ex SFM-8, p 77). Buyers and its directors have since given undertakings not to take any further action in respect of that divesture, on the condition that Felan’s commence and prosecute these proceedings.

31. Mr Hewitt acknowledged in written submissions for SFM that the “grievances” that have caused Felan’s to bring these proceedings are the termination of its lease and licence over the areas it occupied in the Sydney Fish Market, the failure of SFM since 26 August 2014 to offer Felan’s a new lease of the premises or a new licence of the licensed space, although he also contended that the proceedings are directed to a failure of SFM’s board to support or favourably consider Fishbank’s proposal in respect of a development of the Sydney Fish Markets area. Mr Hewitt also acknowledged that the relief that Felan’s seeks in the proceedings is primarily declaratory and injunctive relief (including relief under s 1324 of the Corporations Act) directed towards securing a new lease of Felan’s premises and a new licence of the licensed space. Mr Hewitt acknowledged, in oral submissions, that a response to a notice to quit issued to a longstanding monthly tenant may, without more, be defensive in character, but contended that was not the case if, rather than merely defending the termination of the monthly lease, that tenant sought a new lease (T76). The distinction between those positions seems to me to be a somewhat subtle one. Mr Hewitt also submits that Mr Deans acquired his interest in Felan’s after the termination of Felan’s lease, and after the matters that had occurred with SFM gave rise to the dispute between Felan’s and SFM, by TRHS acquiring the shares in Felan’s. I have had regard to that matter. However, on balance, it seems to me that whether the proceedings are defensive in character should be determined by reference to Felan’s position, rather than by reference to the interests of those who may be its shareholders.

32. Mr Kidd emphasises the commercial reasons for SFM issuing the notices to quit, and promoting the divesture of Felan’s shares, because of a concern of SFM and the Directors that alleged voting arrangements between Felan’s and other members of Buyers may have adversely impacted upon SFM’s right to occupy the Sydney Fish Market premises under the relevant Crown lease (T85–86). Mr Kidd accepted that the Court could proceed on the basis that the decision to issue the notices to quit, and by extension to seek the divesture of Felan’s shares in Buyers, was made for a purpose of SFM, although he contended that purpose had arisen because of prior conduct of Felan’s, and in that sense the conduct was defensive on SFM’s part rather than on Felan’s part (T87). Mr Hewitt also submits that Felan’s had taken anterior steps which may have placed SFM’s interests at risk and had in turn provoked SFM to issue the notices to quit to Felan’s.

30. Mr Kidd also submits that the Court should not determine whether the Defendants are the “aggressors” in this application where that matter is contentious and may depend upon substantive issues in the case (T85). I do not accept that submission, where that matter is readily, and appropriately, determined by reference to the fact that the immediate cause of the proceedings was the issue of the notices to quit, SFM’s encouragement to Buyers to divest Felan’s shares in Buyers and Buyers taking that course. I do not consider that it is necessary to go beyond identification of that immediate cause to a wider inquiry as to the commercial disputes between the parties, before or after that occurred. However, even if that matter were left open, and there was a real prospect that SFM could properly be characterised as initiating the steps that brought about these proceedings, that seems to be a strong reason not to order security for costs against a party that could, conversely, properly be characterised as seeking to vindicate its legal rights in response to the action taken by SFM.

31. It may be that SFM had good reason to issue the notices to quit and to seek to have Buyers divest Felan’s shares in Buyers, in order to preserve its legitimate commercial interests, including its rights under the Crown lease. However, whether or not SFM had good reason to take that course, it seems to me that the step taken by SFM in issuing the notices to quit, and encouraging Buyers to divest Felan’s shares in Buyers, was the real step that brought about the commencement of these proceedings. If SFM had sought a declaration as to its entitlement to take those steps, prior to taking them, there is no doubt that Felan’s would not have been required to provide security for costs for its defence of the proceedings. It seems to me that Felan’s should not be in a worse position because SFM did not seek declaratory relief as to its entitlement to take those steps before taking them, but exercised self-help and left Felan’s to challenge the propriety of those steps after they had occurred. It seems to me that, having regard to all the circumstances and balancing the other matters which I have addressed above, this factor is sufficient to weigh the balance against making an order for security for costs in favour of SFM, in the sense that it would be oppressive or inappropriate to order that the proceedings by which Felan’s seeks to defend its position be stayed unless it put up the very substantial amount of security claimed.

32. However, it does not seem to me that that position extends to the case brought by Felan’s against the Directors. The proposition that proceedings would not be characterised as defensive, where they went further than necessary for that purpose, was recognised in Putney Group Pty Ltd v Royal Rehabilitation Centre Sydney [2009] NSWSC 424 at [59]. Mr Kidd distinguished the position of the Directors from that of SFM, and contended that, even if Felan’s was acting defensively in relation to the proceedings against SFM, that was not the case where it brought proceedings against the Directors alleging breach of director’s duties and claiming damages under, inter alia, s 1324 of the Corporations Act. I accept that the Directors, obviously enough, took the decision that authorised the issue of the notices to quit by SFM. However, it was not necessary for Felan’s to bring proceedings against the Directors individually in order to challenge the validity of the issue of the notices to quit by SFM. So far as it alleged that the Directors’ conduct was in breach of duty, and that matter invalidated the notices to quit, then that allegation was open to Felan’s in proceedings brought against SFM and did not require that the Directors be joined, although their conduct was a factual matter on which Felan’s relied to establish its rights against SFM. I recognise that Felan’s also seeks injunctive relief against the Directors in respect of any further notice to quit, but my attention was not drawn to any present threat that the Directors would authorise any such further notices to quit, and such relief could also have been sought against SFM. I am not satisfied that the claim against the Directors can properly be characterised as defensive, or at least as a proportionate defence, so as to decline an order for security for costs in favour of the Directors on that basis.

33. Felan’s also relies on the fact that, without admission as regards any entitlement of SFM or the Directors as to security or as to the quantum or form of that security, it made an open offer to the Defendants on 10 June 2016 to provide security in the amount of $400,000 in the form of a first ranking charge over its shares in Buyers, which it allocated between the Defendants as to $240,000 to SFM and $160,000 to the Directors. Mr Hewitt points out that a somewhat similar offer of a lien on shares was held to be insufficient to provide adequate security for costs in Re Pioneer Energy Holdings Pty Ltd [2013] NSWSC 1366 at [27]ff, aff’d Blue Oil Energy v Tan [2014] NSWCA 81. It does not seem to me that that offer assists Felan’s, because SFM and the Directors could not reasonably be required to accept security in the form of a first ranking charge over shares of uncertain value in Buyers, where the disposition of those shares would be subject to the constitutional limitations to which I have referred above. As Mr Hewitt points out, if that security was adequate to secure a potentially substantial liability for costs, then there is no reason that Felan’s could not obtain a bank guarantee in that amount, offering that security to the lender, and provide that bank guarantee to SFM and the Directors in the common form in which such security is provided in security for costs applications. Conversely, if that security is not adequate for a lender to be prepared to issue a bank guarantee on the basis of it, then it seems to me that there is no reason that SFM or the Directors should be required to accept the risk of it.

34. I note, for completeness, that there is no suggestion that there has been any significant delay in the application for security for costs, although it has taken some time for the application to reach a hearing by reason of aspects of the case and the way in which the application was framed and conducted.

Quantum of costs of SFM’s and the Directors’ defences

38. Both SFM and the Directors seek security for both past and future costs in the proceedings. An order for security for costs may extend beyond future costs to costs already incurred, where an application for security for costs was made promptly: Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2009] NSWSC 563 at [35]ff; Szanto v Bainton [2011] NSWSC 985 at [50]ff; Re Colorado Products Pty Ltd (in prov liq) [2013] NSWSC 611 at [69]. SFM and the Directors submit, and I accept, that their applications for security for costs were brought promptly. The question was raised in correspondence shortly after the proceedings were commenced; Felan’s then took the point that the costs of defending the proceedings could not reasonably be estimated until after the close of pleadings; and SFM brought this application shortly thereafter.

39. There is a contest between the parties as to the amount of costs which are likely to be payable on a party/party basis if Felan’s is ordered to pay SFM’s or the Directors’ costs if unsuccessful in the proceedings. Felan’s submits that the Defendants and “in particular SFM” have not established their recoverable costs of the proceedings. However, there was no real contest as to the estimate of costs made by the Directors’ solicitor, to which I will refer below.

40. Mr Hewitt submits, and I accept, that the court will take a “broad brush” approach to the quantum of an order for security for costs and will not attempt a detailed cost assessment in that regard: Ashington Capital Pty Ltd v Parissen Capital (Project X) Pty Ltd [2012] NSWSC 410 at [18]; Re Colorado Products Pty Ltd (in prov liq) above at [66]. SFM relies on affidavits of its solicitor, Mr Timothy Webster, dated 8 April and 19 May 2016, to establish the work done and quantum of costs incurred and to be incurred in respect of the defence of the proceedings. It is not necessary to address a range of detailed criticisms made by Felan’s of Mr Webster’s estimate of future costs, given the conclusion that I have reached on other grounds.

41. SFM also relies on the first affidavit of a costs consultant, Ms Ashe, who expressed the view that past costs of SFM were incurred at reasonable rates and the scope of the work was appropriate and proportionate to the commercial importance and complexity of the matter and was being carried out by a cost effective spread of the legal team. With respect to Ms Ashe, I find it difficult to see how Ms Ashe could reasonably have formed that view, in her first affidavit, when at that point SFM had made available to her (and the Court) only the first and last pages of invoices, omitting all of the material which would provide any adequate identification of the work done from the invoices, and Ms Ashe had been provided with only the broadest account of the work done. Felan’s in turn relied on a first report of Ms Vine-Hall in response to Ms Ashe’s first report. In that first report, Ms Vine-Hall accepted that the likely recoverable costs for future work, based on the estimate in Mr Webster’s first affidavit was $206,763, and it would follow that SFM should be allowed security of at least that amount, if, contrary to the view I have expressed above, security should be allowed in its favour. There is an area of disagreement between Ms Ashe and Ms Vine-Hall as to the amount of time allowed for trial preparation, including by Counsel. I would prefer Mr Webster’s evidence, where he allows six days for preparation by Counsel, to Ms Vine-Hall’s estimate of four days, since it seems to me that a solicitor with conduct of the proceedings will generally be in a better position than a costs assessor for the other party to form a view as to that matter, and the proceedings plainly have a degree of complexity. I would not accept Ms Vine-Hall’s adjustment of partner rates for SFM’s solicitors downwards, since it seems to me that that matter can be addressed by a discount to hourly rates of the kind ordinarily made by the court in estimating the amount that would be recoverable on assessment.

42. SFM also relied on the second affidavit of Ms Ashe dated 27 July 2016 exhibiting a second report, and Felan’s relied on a second affidavit of Ms Vine-Hall dated 7 July 2016 in response to Ms Ashe’s second affidavit. By the time of her second report, Ms Ashe had been provided with complete, but still heavily redacted, copies of tax invoices issued by SFM’s solicitors to SFM. Mr Hewitt submits that:

“When a party seeking security for costs partially redacts the invoices to preserve privilege over certain privileged advice or communications, it does not follow that the redacted entries should be completely excluded from consideration when it comes to assessing the quantum of security. Rather, it is for the Court to determine whether there is sufficient evidence before it to substantiate the claim in respect of the redacted entries.”

I accept that proposition, in the general terms in which it is put. However, it does not follow that Ms Ashe can, or I should, speculate as to the content of such entries, where SFM has not placed evidence of their content before the Court.

43. The amount of past costs identified in invoices issued by SFM’s solicitors (as to which attendances are masked, as I have noted above) is $382,489.02, comprising solicitors’ fees of $312,019.21 and disbursements in the order of $70,000. (I put aside an apparent difference between the costs assessors of the amount of disbursements, which is not material for present purposes.) In her second report, Ms Ashe maintained substantially the same view that she had previously given in her first report, concluding that SFM’s likely recoverable costs in the matter would be $489,939.20, which she rounded up to $500,000, excluding GST, comprising past costs (allowed at 65% of actual costs) of $248,526.86 and future costs of $241,412.34. Ms Ashe again expressed the view in her second report that SFM’s past costs were incurred at reasonable rates, the scope of the work was appropriate and proportionate to the commercial importance and complexity of the matter and was being carried out by a cost effective spread of the legal team, maintaining the view expressed in her first report. At this point, Ms Ashe had at least some basis to express that view, as to past costs, since she had been provided with redacted versions of invoices. However, those invoices were still heavily redacted, often obscuring the nature of attendances and the identity of persons with whom they took place. On the other hand, Ms Vine-Hall expressed the view in her second report that the extent of redactions to invoices upon which SFM relies is such that it is not possible to draw any conclusion as to whether or not the costs which are the subject of the redacted parts of those invoices would be recoverable (Ex F11, [27]). Ms Vine-Hall’s second report deducts the amount of entries that are partially redacted, which she calculates at $124,044.75.

44. In any event, whether the past attendances that were redacted relate to the proceedings is a question of fact for the Court, and not a matter for expert evidence. While I accept that the Court does not undertake a detailed assessment of costs in a security for costs application, it seems to me that it must at least be satisfied that the relevant attendances relate to the litigation, rather than, for example, to commercial or other aspects of the matter before they are allowed in a security for costs application which properly relates only to the litigation. I have undertaken a sampling of those attendances, without considering them one by one, and it seems to me that there is a real question whether the amount referable to those redacted attendances would have had to be deducted from any security ordered in respect of past costs of SFM, had I considered that security for costs should have been ordered in favour of SFM. It is not necessary for me to reach a final view as to that matter where I have held that the claim brought by Felan’s against SFM is defensive in substance and security for costs should not be ordered in favour of SFM in any event.

45. Ms Ashe’s evidence was also that, since her first report, the Cost Assessment Rules Committee had issued guidelines for assessment of costs in a manner that made it likely that the costs charged by SFM’s solicitors would be assessed at actual rates charged. Ms Ashe may or may not be correct in her anticipation of the way in which costs assessors will in future proceed in that respect. In any event, I consider that the Court ought to proceed, in security for costs applications, on the basis of the historical experience of assessments until a factual basis is available to establish whether Ms Ashe’s forecast of future changes in assessment practice is or is not correct.

46. Felan’s also submits, in reliance on Ms Vine-Hall’s report, that amounts in the order of $11,106 attributable to the preparation of “action items” and $16,290 referable to the preparation of a chronology should be excluded from any security for costs ordered in favour of SFM. I am conscious that these amounts are relatively large for the nature of the work claimed, but it seems to me that that matter could have been addressed by any discount that is allowed on the total amount of costs, had an order for security for costs in favour of SFM otherwise been appropriate. Felan’s also submits that the costs attributable to Felan’s Interlocutory Process filed on 27 April 2016, which were awarded in SFM’s favour, should be excluded from any security for costs ordered in favour of SFM. In Fimiston Investments Pty Ltd (in liq) v Pecker Maroo Pty Ltd [2011] QSC 356 at [53], McMeekin J noted a possibility that the court would not have power to order security for costs in respect of past costs, where orders have already been made in respect of those costs; did not accept that it was beyond the jurisdiction of the court to make such an order; and noted that it may be very rare for such an order to be made. Had I otherwise been satisfied that security for costs should be ordered in SFM’s favour, I would not have accepted the submission that security for costs should not extend to the costs of that application, where that application was brought by Felan’s after an application for security for costs had been made. It seems to me that SFM should not be in a worse position, in respect of its ability to secure those costs, because that interlocutory application needed to be and was determined quickly, than if the security for costs application been determined prior to the hearing and determination of that application.

47. SFM also claims, and Ms Vine-Hall excludes, costs referable to this application for security for costs. I accept that the costs of this application are not properly included within the amount of security for costs that is sought, and that matter is properly to be addressed by an order for costs, made in the ordinary way, consequential on the determination of the application. That matter has no effect on SFM’s application, where I will not order security for costs in favour of SFM on other grounds. However, the Directors would need to recalculate the amount of security claimed in their application, if and to the extent that they have included such costs in their application.

48. SFM submits, and I broadly accept, that it would have been allowed the amount of its disbursements, in accordance with the general approach adopted in security for costs applications, had I held that security for costs should be ordered in its favour. It may then have been necessary to resolve the difference between the costs assessors as to the total of those amounts, and there would also need to have been an adjustment for the matters noted above in respect of disbursements.

49. Felan’s also submits that the quantum of security claimed by the Defendants, particularly SFM, is excessive and disproportionate to the issues in dispute. Mr Hewitt responds, by reference to case law dealing with the assessment of costs of litigation by costs assessors, that questions of proportionality depend upon the importance and complexity of the subject matter in dispute, rather than the quantum or value of the subject matter of the litigation: eInduct Systems Pty Ltd v 3D Safety System Services Pty Ltd [2015] NSWCA 284; (2015) 90 NSWLR 451 at [53]–[64] and [117]–[127]. I accept that the matters raised by these proceedings are significant for SFM and the Directors, where an attack is made on the propriety of SFM’s and the Directors’ decision-making, and those matters also have a degree of complexity. I also accept, as SFM contends, that it appears that Felan’s is at least to some extent raising issues as to the wider development of the Sydney Fish Market site, albeit as a step on the way to the relief that is sought in the proceedings, and that is a matter of considerable importance to SFM. However, the continuing significance of that issue is likely to be reduced by the fact that, some time ago, the Court declined to restrain dealings with the Sydney Fish Market site on Felan’s application.

50. Mr Hewitt also submits, and I accept, that the proceedings involve a number of complex legal and factual issues, and that the costs claimed at this stage are larger because SFM was required to undertake a very significant amount of work at an early stage in order to consider the issues raised in the Statement of Claim and prepare SFM’s Defence. It still seems to me that there may be an open question whether the costs incurred by SFM are significantly higher than would ordinarily be expected in a matter of this kind, at a relatively early stage of the proceedings. However, it is ultimately not necessary for me to form or express any final view as to that matter in order to determine the application, given the findings that I have reached on other grounds, and it seems to me preferable that I not do so.

43. Felan’s submits that there is no need for separate representation as between SFM and the Directors and that Felan’s, even if it is ultimately unsuccessful in the proceedings, should not be required to bear the costs associated with separate representation. I do not accept that submission. Felan’s has chosen to advance allegations of breach of director’s duties against the Directors, which include an allegation that the Directors acted in breach of their duties to SFM. It seems to me that each of SFM and the Directors needed, and will need on a continuing basis, independent advice as to the position to be adopted in their pleadings and evidence. Even if the content of that advice is that no breach of duty exists, and they adopt a common defence in that respect, that course can only properly be taken where each of them has independent advice and, in particular, SFM could not take that course without independent scrutiny of the position. I have had regard to the question whether that could have been addressed by, for example, SFM taking independent advice as to that issue alone, while otherwise sharing common representation with the Directors. It does not seem to me that that course would have been practical, where issues requiring independent consideration of the separate position of SFM and the Directors are likely to arise throughout the conduct of ongoing proceedings. For that reason, it seems to me that separate representation was reasonably required, and Felan’s must bear the costs of it, to the extent that security for costs is otherwise properly ordered, where its joinder of the Directors in the proceedings has created that situation.

44. The Directors seek an order for security for their costs in the amount of $215,714, being the mid-point of the range of the Directors’ costs estimated by their solicitor, Ms Kumar, as between $174,114 and $257,314. The Directors rely on Ms Kumar’s affidavit, sworn 2 May 2016 in support of that claim, together with evidence relied on by SFM in the application. So far as I could tell, Felan’s did not contest the Directors’ quantification of their claim for security for costs in that amount, which was substantially less than the amount claimed by SFM. Ms Kumar’s estimate includes past costs of $33,314, and I accept that an order for such costs may be made in an appropriate case, having regard to the case law to which I referred above. The claims against the Directors are plainly of significance to them, so far as it is alleged that their voting in favour of resolutions to issue the notices to quit involved a failure to discharge their duties in good faith and in the best interests of SFM in contravention of s 181(1)(a) of the Corporations Act.

45. Ms Kumar adopts a higher percentage, of 80%, of recoverable costs on an assessment, than did SFM in quantifying the amount of security claimed. No evidence was served by Felan’s responding to Ms Kumar’s evidence, and I accept her evidence as to past costs and likely future costs, on the basis that is uncontested. I do not, however, accept that I should order security for costs on the basis that 80% of solicitor/client costs will be recovered on an assessment. I would, so far as security is ordered in favour of the Directors, adopt the lower percentage figure of two-thirds of solicitor/client costs and all of Counsel’s fees which SFM seeks to sustain, and which has been adopted by the Court in some other applications of this kind: Re Pioneer Energy Holdings Pty Ltd above at [25], aff’d Blue Oil Energy v Tan above; Morony v Reschke [2015] NSWSC 860 at [36].

Orders and costs

54. For the reasons set out above, an order for security for costs should not be made in favour of SFM. Felan’s should be ordered to provide security for the Directors’ costs of defending the proceedings, calculated on the basis set out above, and must pay the Directors’ costs of this application as agreed or as assessed. My preliminary view is that any order for costs of this application in favour of Felan’s and against SFM should be substantially discounted to take account of the fact that Felan’s required SFM to prove that there was reason to believe that Felan’s would be unable to pay its costs if it was ordered to do so, where there seems to me not to have been a reasonable basis for a contention to the contrary. I will hear the parties as to the question of costs, if there is no agreement between them as to that matter.

55. The parties should bring in agreed orders to give effect to this judgment within 14 days, including as to costs or, if there is no agreement between them, their respective draft short minutes of order and short submissions as to the differences between them.

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Decision last updated: 26 September 2016