Indigo Financial Money Pty Limited v Bolivar Road Pty Limited - [2012] SASC 148

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
INDIGO FINANCIAL MONEY PTY LIMITED & ANOR v BOLIVAR ROAD PTY LIMITED & ORS
[2012] SASC 148
Reasons of Judge Withers a Master of the Supreme Court
28 August 2012
PROCEDURE - COSTS - SECURITY FOR COSTS
Real Property Act 1886 (SA) s 191(j); Corporations Act 2001 (Cth) s 1335; Supreme Court Civil Rules 2006 (SA) r 194, referred to.
Dagenham Nominees Pty Ltd T/A Banwell Marine Service v Shanks [2011] SASC 163; KP Cable Investments Pty Ltd v Meltglow Pty Ltd & Ors (1995) 56 FCR 189, applied.
Indigo Financial Money Pty Ltd & Anor v Bolivar Road Pty Ltd & Ors [2009] SASC 373; Indigo Financial Money Pty Ltd & Anor v Bolivar Road Pty Ltd & Ors [2010] SASCFC 29; Indigo Financial Money Pty Ltd & Anor v Bolivar Road Pty Ltd & Ors (No 2) [2011] SASCFC 39; FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241; John Irving as Liquidator of Mawson KLM Holdings Pty Ltd (In liq) & Anor v Starmaker (No 51) Pty Ltd (No 2) [2005] SASC 310, considered.

INDIGO FINANCIAL MONEY PTY LIMITED & ANOR v BOLIVAR ROAD PTY LIMITED & ORS
[2012] SASC 148

JUDGE WITHERS. This action was instituted by summons on 25 November 2008 seeking an extension of time for removal of a caveat and further relief to be particularised in the statement of claim. An interlocutory application to extend the time for removal of the caveat together with a lengthy affidavit of the second plaintiff, John Tsoulos (hereinafter referred to as “Tsoulos”) was filed on the same day.
The interlocutory application first came before the Court when the plaintiffs gave an undertaking as to damages and an interim extension of time for removal of the caveat was granted. The application was listed for argument on 3 December 2008. That argument duly occurred. In the meantime the parties continued to develop their pleadings. The matter was fixed for an early trial commencing on 2 February 2009.
On 3 December 2008 the time for removal of the caveat was extended until further order. By a decision delivered on 30 January 2009 the Court ordered that the order of 3 December 2008 extending the time for removal be continued until further order. The costs of the application were reserved to the trial Judge – see reasons delivered by me on 30 January 2009 – FDN 32.
By way of background the first plaintiff Indigo Financial Money Pty Limited (hereinafter referred to as “Indigo”) asserted that it entered into an agreement with the defendants to take over various liabilities of the defendants on certain conditions including, according to Indigo, that the defendant Najjar personally guarantee repayment of some of the debt and that Bolivar Road Pty Limited (hereinafter referred to as “Bolivar”) grant securities over land to secure that repayment.
The plaintiffs’ claim failed. It was dismissed in a decision of Vanstone J delivered on 4 December 2009 – Indigo Financial Money Pty Ltd & Anor v Bolivar Road Pty Ltd & Ors [2009] SASC 373. This followed a trial that had commenced on 2 February 2009 and concluded on 10 July 2009.
On 15 December 2009 by a notice for specific directions – FDN 39 – the first and third defendants, namely Bolivar and Najjar, applied for an order that the order extending the time for removal of the caveat be discharged. Additionally they sought an assessment of compensation pursuant to s 191(j) of the Real Property Act 1886 (SA), which provides as follows:
191—Caveats
Any settlor of land or beneficiary claiming under a will or settlement, or any person claiming to be interested at law or in equity, whether under an agreement, or under an unregistered instrument, or otherwise howsoever in any land, may lodge a caveat with the Registrar-General forbidding the registration of any dealing with such land, either absolutely or unless such dealing shall be expressed to be subject to the claim of the caveator, or to any conditions conformable to law expressed therein:
…
(j)Caveator, except Registrar-General, liable to make compensation
any caveator other than the Registrar-General who shall have lodged or refused or neglected to withdraw any caveat wrongfully and without reasonable cause, shall be liable to make compensation to any person who may have sustained damage thereby, and such compensation may be recovered by action: Provided that, if proceedings shall have been taken in the Court by the caveatee or other person interested, the amount of such compensation may be assessed by the Court acting in the same proceedings; or the Court may direct an action to be brought to ascertain and recover such amount;
…
That application was supported by an affidavit of Mr Najjar filed on 15 December 2009 – FDN 40 – in which he asserted that the applicant defendants were continuing to suffer considerable losses as a result of the caveat. At that time he assessed those losses at $670,001.48.
In the meantime the plaintiffs on 24 December 2009 – FDN 41 – filed a notice of appeal against the decision of Vanstone J. The defendants’ application to discharge the order extending the time for removal of the caveat was referred to White J who made an order in those terms on 1 April 2010.
On 27 August 2010 Mr Najjar filed a further affidavit – FDN 45 – in support of the application. An affidavit of an expert, Mr Veronese, was also filed on 27 August 2010 – FDN 46. This affidavit related to the damages said to be suffered by the defendants by reason of the order extending the time for removal of the caveat.
The assessment of damages made by Mr Veronese was $1,666,611.26. The affidavit of Mr Najjar, to which reference has been made, was to describe and verify the material upon which Mr Veronese had formed his opinion.
The Full Court dismissed the plaintiffs’ appeal on 27 August 2010 – see Indigo Financial Money Pty Ltd & Anor v Bolivar Road Pty Ltd & Ors [2010] SASCFC 29. However, the plaintiffs sought to have the appeal reopened on the basis that the Full Court had misapprehended three facts. The Full Court declined to reopen the appeal by order on 29 April 2011 – see Indigo Financial Money Pty Ltd & Anor v Bolivar Road Pty Ltd & Ors (No 2) [2011] SASCFC 39.
On 22 December 2011 the defendants lodged three short form claims for costs encompassing the original proceedings before Vanstone J, the Full Court costs pursuant to the order of 27 August 2010 and the Full Court costs pursuant to the order of 29 April 2011. The original trial claim (FDN 58) was for total costs and disbursements of $334,737.44. The first Full Court hearing claim was for a total of $86,308.25 – see FDN 60. The second Full Court hearing claim seems to be for a total of $40,559.50, although the amount shown as the total in the short form bill – FDN 59 – is a figure of $410,145.00. I consider this to be an error. Accordingly, the defendants have lodged unresolved claims for costs against the plaintiffs totalling $461,605.19.
In reference to the short form bill – FDN 58 – a notice of response – FDN 66 – set out an offer of $7,538.73 against the claimed $334,737.44 and a further response – FDN 65 – appears to offer an additional $68,050.91. In relation to the Full Court order of 27 August 2010 – FDN 60 – the two responses filed to that short form bill – FDN 61 and FDN 62 – appear to result in offers of $2,011.72 against $86,308.25 together with a further offer of $18,103.93. In relation to the second Full Court order of 29 April 2011, again two responses were filed – FDN 63 and FDN 64 – with offers of $11,109.16 together with a further $1,278.80. Accordingly, the respondent plaintiffs appeared to have offered the total amount of $108,093.25 towards the applicant defendants’ claimed costs of action of $461,605.19.
The plaintiffs applied on 24 February 2012 – FDN 68 – to strike out the defendants’ claim for compensation on the grounds of unacceptable delay. That application was unsuccessful. It was dismissed on 15 May 2012 – see my reasons in Indigo Financial Money Pty Limited & Anor v Bolivar Road Pty Limited & Ors delivered on 15 May 2012 – FDN 72.
Following the lack of success of the application to strike out, the plaintiffs on 6 June 2012 by interlocutory application FDN 73 sought an order for security for costs against Bolivar and a stay of proceedings until that security was provided. That application was supported by an affidavit of the solicitor for the plaintiffs – FDN 74.
By an interlocutory application – FDN 75 – filed on 21 June 2012, the defendants sought an adjudication of their costs by way of lump sum assessment, which application was supported by an affidavit of their solicitor Mr McNamara filed on that day – FDN 76. That application is not yet resolved.
The application for security for costs was argued on 4 July 2012. There appears to be no contest between the parties as to the applicable law.
The Law
It is clear and accepted that the defendants in this matter are no longer exercising a defensive position but rather are in the position of claimants or plaintiffs. The plaintiffs’ application for security for costs is expressed to be pursuant to r 194 of the Supreme Court Civil Rules 2006 (SA) and s 1335(1) of the Corporations Act 2001 (Cth). Section 1335 of the Corporations Act 2001 is in the following terms:-
1335 Costs
(1) [Where corporation unable to pay costs] 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.
(1A)…
(2) [By whom costs borne] The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.
6R 194(1) of the Supreme Court Civil Rules 2006 is in the following terms:
[6R 194]     Security for costs
194 (1) The Court may order a plaintiff to provide security for costs if—
(a)     the action is brought in a representative capacity and the plaintiff is insolvent or would have insufficient resources to meet an order for costs if the action were to prove to be unsuccessful; or
(b)     the plaintiff is ordinarily resident outside Australia; or
(c)     there are reasonable grounds to suspect that the action may have been brought for an ulterior purpose; or
(d)     the order is authorised by statute; or
(e)     the order is necessary in the interests of justice.
In the case of FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241, Pidgeon and Owen JJ said (at [20]):
[20] Recent cases in Australia indicate that courts are approaching the matter on the basis of there being a threshold question as to whether the court has jurisdiction followed by an examination whether the court would exercise its discretion and we are satisfied that this is the proper approach. …
At [21], their Honours said:
[21] We consider that the wording of the section [s 1335 of the CA] and the weight of the authorities supports the proposition that there is initially the jurisdictional question as to whether it appears by credible testimony that there is reason to believe that the corporation had been able to pay the costs. Once the Court has jurisdiction there is an unlimited discretion.
In considering what must be produced to meet the requirement of credible testimony, their Honours’ said in [22], referring to the decision of the learned Master, which was the subject of the appeal:
… The learned Master was correct in saying that there was the threshold hurdle which was required to be cleared to give the Court jurisdiction. We consider however, with respect, that the learned Master placed the hurdle too high. He said that there must be credible testimony “that the respondent would not be able to meet any costs order made against it”. The applicant is required to establish no more than that there is “reason to believe”.
In the matter of John Irving as Liquidator of Mawson KLM Holdings Pty Ltd (In liq) & Anor v Starmaker (No 51) Pty Ltd (No 2) [2005] SASC 310 at [45], Layton J said:
[45] Many authorities support the proposition that it is incumbent upon a plaintiff who wishes to resist an application for security to put before a court a full and frank statement of assets and liabilities, not only of the plaintiff but also of shareholders.[1] The absence of such material does not mean that a court should necessarily conclude that a particular litigant may not have sufficient resources to meet an order for security for costs. It is a relevant circumstance for a court to take into account, particularly if there is some doubt about the ability of a party being able to fulfil any obligations for costs if unsuccessful.[2]
[1] Tradestock Pty Ltd v TNT (Management) Pty Ltd & Ors (1977) 14 ALR 52 at 56-57 which refers to the opportunities of parties to put facts and circumstances relevant to the problem before the court; Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1, Idoport Pty Limited & Another v National Australia Bank Limited and Others [2001] NSWSC 744 at [66].
[2] Jownal v Commonwealth Bank of Australia [1999] SASC 72 at [47] to [52].
In a recent decision of Dagenham Nominees Pty Ltd T/A Banwell Marine Service v Shanks [2011] SASC 163, Blue J had cause to consider the law in relation to security for costs. After considering the requirements of s 1335 of the Corporations Act 2001, his Honour considered the principles to be applied in the exercise of the discretion. At [30] he said:
[30] Once the threshold test has been satisfied, I have a discretion to be exercised considering all of the circumstances of the case, without that discretion being fettered and with no single factor necessarily being decisive.[3]
[31] It is a corollary that the mere fact that Dagenham will be unable to pay Mr Shanks’ costs if Mr Shanks is successful on appeal does not dictate that security for costs should necessarily be ordered.[4]
[32] If it is established that the proceedings will be stultified if security for costs is ordered, this is a factor to be taken into account.[5] However:
1.     the ability of not only the company but also those who stand behind it is to be considered for this purpose;
2.     the onus of proof that neither the company nor those who stand behind it are able to provide the security and that an order would stultify the proceeding is upon the company;
3.     as part of discharging the onus of proof, the company is normally expected to put before the court a full and frank statement of the assets and liabilities of the company and of those who stand behind it.[6]
[33] If the inability to pay the other party’s costs if unsuccessful is due to the allegedly wrongful conduct of the other party the subject of the proceedings, that is a factor to be taken into account in the exercise of the discretion.[7]
Contentions
[3]    John Arnold’s Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd (1979) 22 SASR 20 at 34 per Mitchell J (Bray CJ and Legoe J agreeing); Spiel v Commodity Brokers Australia Pty Ltd (in liq) (1983) 35 SASR 294 at 300 per Bollen J (Zelling and Wells JJ agreeing).
[4]    John Arnold’s Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd (1979) 22 SASR 20 at 34 per Mitchell J (Bray CJ and Legoe J agreeing); Merribee Pastoral Industries Pty Ltd v Australia and New Zealand Banking Group Ltd (1998) 193 CLR 502; [1998] HCA 41 at [26] per Kirby J.
[5]    Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545 per Clarke J; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3 per Sheppard, Morling and Neaves JJ.
[6]    Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3 per Sheppard, Morling and Neaves JJ; Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120 at 123 per Meagher JA (Kirby P and Cripps JA agreeing); BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 345 per Anderson J.
[7]    North Groongal Pty Ltd v ANZ McGaughan Ltd (1993) 61 SASR 302 at 306 per Perry J; Octocane Pty Ltd v SRJ Property Development Pty Ltd [7] (1999) 74 SASR 471 at 477 per Olsson J.
The applicants contend that Bolivar is a company in liquidation and that it is this company which is the registered proprietor of the properties subject to caveat. Accordingly, it has the substantial, if not whole claim, for any compensation or damages for which the plaintiffs may be found liable either pursuant to s 191(j) of the Real Property Act or pursuant to the undertakings given to secure the order extending the time for removal of the caveat.
Counsel for the defendants conceded that any claim for compensation or damages by the third defendant Najjar would be at best incidental to the claim by Bolivar. The third defendant is the sole director and secretary of Bolivar and has been so since 1 April 2007.
Bolivar was wound up by order of the Federal Court on 16 December 2011. In an affidavit in the Federal Court filed by then administrator, Hugh Sutcliffe Martin, a copy of which is Exhibit “JRH-1” to the affidavit of Mr Henderson filed on 28 June 2012 – FDN 78A – Mr Martin attested that the only asset of Bolivar available to pay creditors was its judgment from the decision of Vanstone J in this matter. He noted that the value of that judgment had not yet been assessed but referred to the claim for legal costs and to a claim for damages or compensation assessed for Bolivar by two experts. He attested that Bolivar had no other assets and no other funds with which to pursue the collection of the judgment.
Mr Martin also noted in that affidavit that there was a floating charge over the assets of Bolivar in favour of Orio Mortgage Finance Company Pty Limited for a debt of approximately $374,000.00 and a solicitor’s lien from Commercial and General Law for its unpaid legal fees totalling approximately $438,000.00. The affidavit of Mr Martin then addressed a possible Deed of Company Arrangement which did not eventuate. As earlier indicated, the Federal Court ordered that the company be wound up.
No evidence was filed on the part of either Bolivar or Najjar as to their assets and liabilities save for the affidavit of Mr McNamara of 21 June 2012 – FDN 76 – in which he refers to the legal costs and their claim for compensation and damages to which Bolivar and Najjar are entitled pursuant to orders of the Court. Mr McNamara relies on the earlier affidavit exhibiting expert and other opinions as to the damages allegedly sustained by the defendants as a result of the caveats being in place. These losses were quantified initially by Mr Najjar at $670,000.00, subsequently by Mr Veronese at $1.667 million and subsequently by another expert, a Mr Fechner, at $1.4 million. It was therefore argued on the part of the defendants that the plaintiffs did not overcome the first hurdle of establishing that there was credible evidence giving reason to believe that Bolivar may not be able to meet an order for security for costs.
I do not accept that submission. In my view in the whole of the circumstances presently before the Court there is credible evidence giving reason to believe that Bolivar may not be able to meet an order for costs made against it. Any benefit it receives from this action may well be subject to priority claims by Orio, by its former solicitors, and by the liquidator. Bolivar is the prime, if not the only, claimant who can achieve an order for compensation under s 191(j) or pursuant to the undertaking as to damages. The defendants concede that Mr Najjar’s claim, if any, is no more than incidental. No evidence has been put before the Court as to Mr Najjar’s ability to meet an order for costs. I find in terms of the authorities that the Court’s discretion to order security for costs is enlivened in these circumstances.

It was argued on the part of the defendants that Bolivar must succeed to some degree in obtaining an order for compensation and/or damages. It was put without contradiction that no offer had been made by the plaintiffs to settle the claim such that Bolivar as an applicant claimant was put at risk of an adverse costs order. Therefore it was inevitable in those circumstances that some compensation would be ordered. If that were to be the case then Bolivar could reasonably expect to recover its costs of the application. It was further put that the plaintiffs were in any event indebted to the applicant defendants for a significant amount in terms of legal costs in addition to any amount that may be due for compensation or damages. In those circumstances it would be unfair to make an order for security against Bolivar and/or Najjar.
Exercise of Discretion
Conditions relevant to the exercise of the discretion or ordering security for costs once the jurisdiction is enlivened were described by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd & Ors (1995) 56 FCR 189 at 197-8. Her Honour said:-
Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are:
1.That such applications should be brought promptly. This is a principle of longstanding: …
2.That regard is to be had to the strength and bona fides of the applicant’s case are relevant considerations: … 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. …
3.Whether the applicant’s impecuniosity was caused by the respondent’s conduct subject of the claim: …
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: … Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123; … 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: …
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: … [Authorities not cited.]
In relation to those criteria in respect of the present matter I find as follows:-
1.While it could not be said that these applications for security have been brought promptly the matter has been significantly delayed in its progress by reason of the several appeals taken by the plaintiffs and by delays associated with the defendants’ experts. In my view no criticism of the plaintiffs can be made on that factor.
2.The application for compensation and/or damages made by the defendants is regular and discloses reasonable causes of action which I find to be bona fide and with a reasonable prospect of success.
3.It is arguable that the defendants’ apparent impecuniosity is likely at least to some degree to have been contributed to by the plaintiffs’ conduct in caveating the various properties and in unsuccessfully pursuing litigation against them.
4.The plaintiffs’ applications are not oppressive. They are properly made in circumstances where there is credible evidence giving reason to believe that the applicant corporate defendant will be unable to meet orders for costs made against it and where no evidence in respect of the ability of the third defendant to meet any order for costs has been offered.
5.There is no evidence before the Court of any persons standing behind the company Bolivar who is likely to benefit from the litigation and who is willing to provide the necessary security. The company and its director shareholder Najjar are at fault in failing to provide evidence to the Court as to their full financial circumstances.
6.No personal undertaking of liability for costs appears to have been given by Najjar.
7.It is clear that the defendants in these proceedings are acting as plaintiffs and are not in a defensive position.
The plaintiffs have a significant liability to the defendants for legal costs in this action. Apparently no offer has been made to resolve claims for compensation and damages. The amounts of these claims have varied between $670,000.00 and $1.6 million in assessment. It is reasonable for the Court to infer that the defendants will recover at least some award in respect of their claim. In my view these circumstances are sufficient for the Court to exercise its discretion not to order security for costs. In a sense the plaintiffs have brought the defendants’ claims upon their own heads not only by giving an undertaking for damages but also by subjecting themselves to the reach of s 191(j) of the Real Property Act in protecting the caveats as they did. In all the circumstances it would be unjust to require the defendants to provide security for the plaintiffs’ costs.
For the foregoing reasons, the application for security of costs is refused. The plaintiffs are to pay the defendants’ costs of and incidental to the application. I certify fit for counsel.