Livingspring Pty Ltd v Kliger Partners
[2008] VSCA 93
•4 June 2008
SUPREME COURT OF VICTORIA
COURT OF APPEAL
No 4924 of 2006
| LIVINGSPRING PTY LTD |
| v |
| KLIGER PARTNERS |
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JUDGES: | MAXWELL P and BUCHANAN JA | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 1 February 2008 | |
DATE OF JUDGMENT: | 4 June 2008 | |
MEDIUM NEUTRAL CITATION: | [2008] VSCA 93 | |
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PRACTICE AND PROCEDURE – Security for costs – Threshold jurisdictional question – Whether reason to believe company will be unable to pay costs – Whether onus shifts upon defendant satisfying threshold question – Whether satisfaction of threshold question calls for exercise of the discretion to require security for costs – Matters relevant to exercise of discretion – Plaintiff company trustee of a unit trust – Whether nature of proceedings a relevant factor – Whether existence of professional indemnity insurance a relevant factor – Whether failure to supply up to date financial information a relevant factor – Whether expenditure on legal costs properly considered an asset – Corporations Act 2001 (Cth) s 1335; Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 62.02(1)(b).
PRACTICE AND PROCEDURE – Interlocutory appeal – Leave to appeal – Legislative policy against such appeals – Application for leave heard with substantive appeal – Whether decision below attended with sufficient doubt.
CORPORATIONS – Company accounts – Statutory presumption of admissibility – Whether prima facie presumption of accuracy of accounts – Corporations Act 2001 (Cth) s 1305.
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| APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr S Wilson QC with Mr Rubenstein | Hambros & Cahill |
For the Respondent | Mr J Gleeson SC | Minter Ellison |
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MAXWELL P,
BUCHANAN JA:
The applicant (‘LS’) is a property developer. Ten years ago, LS engaged the respondent (‘Kliger’) to act as solicitors in connection with two apartment projects. LS is now suing Kliger for breach of fiduciary duty and negligence, alleged to have resulted in the misappropriation of approximately $2.5 million by the former architect and project manager for the developments, Mr Chris Ng. LS is at the same time litigating on a number of other fronts, seeking to recover funds totalling approximately $15 million.
These proceedings commenced in March 2006. Pleadings have been exchanged. Since May 2007, however, the parties have been locked in collateral litigation over security for costs. Kliger’s initial application to a Master was refused. Kliger appealed. On 15 November 2007, a judge of the Trial Division upheld the appeal and ordered that LS give security for Kliger’s costs of the proceedings, up to the commencement of the trial, in the sum of $118 471.50.
LS seeks leave to appeal from that order. For reasons which follow, we would grant leave to appeal but dismiss the appeal.
Interlocutory appeals
With the consent of the parties, the hearing of the application for leave to appeal was treated also as the hearing of the putative appeal. To enable this to occur, the President made a determination under s 11(1A) of the Supreme Court Act 1986, that the appeal court be constituted by two judges of appeal.
This approach should be adopted in interlocutory appeals whenever practicable. Its advantages are obvious. As Sir Oliver Gillard pointed out 30 years ago in Niemann v Electronic Industries Ltd,[1] the alternative is to have two separate hearings, leave being granted by a bench of two and then the appeal being determined by a subsequent bench of three, likely to comprise different members. Gillard J said:
[I]n many cases, merits will be investigated and a good deal of time will be spent by an initial court in determining whether leave should be granted, and then subsequently, the same merits would have to be re-investigated by a court if leave to appeal should be granted.[2]
[1][1978] VR 431 (‘Niemann’).
[2]Ibid 445.
As applicant for leave, LS has several hurdles to clear. First, there is a clear legislative policy against interlocutory appeals. In Niemann, the Full Court adopted and applied – as an earlier Full Court had done in Darrell Lea (Vic) Pty Ltd v Union Assurance Society of Australia Ltd[3] - the following statement of principle from the 1901 judgment of the Full Court in Perry v Smith:
Parliament evidently desired to cut down these appeals from interlocutory orders as much as possible, and with that object, have made this provision [that there be no appeal from such an order except by leave] … We think that the object which Parliament had should be recognised by this Court in a liberal manner, and not begrudgingly.[4]
In Niemann, Murphy J added:
It is plain, as [the Full Court] said, from the terms of the section that the legislature was expressing an intention in the words used that appeals from interlocutory orders should not be permitted except in special circumstances.[5]
[3][1969] VR 401, 408.
[4](1901) 27 VLR 66, 68.
[5][1978] VR 431, 438.
Secondly, the power to order security for costs is discretionary. An appeal from such a decision is subject to the well-known limitations identified by the High Court in House v R.[6] Thirdly, the exercise of this particular discretion does not determine substantive rights, but concerns a matter of practice and procedure.[7] That being so, we are guided (as was the Full Court in Niemann) by what Sir Frederick Jordan said in Re Will of Gilbert:[8]
[I]f a tight rein were not kept upon interference with the orders of Judges of first instance, the result would be disastrous to the proper administration of justice. The disposal of cases could be delayed interminably, and costs heaped up indefinitely, if a litigant with a long purse or a litigious disposition could, at will, in effect transfer all exercises of discretion in interlocutory applications from a Judge in chambers to a Court of Appeal.[9]
[6](1936) 55 CLR 499, 505.
[7]Churchills Ltd v Pilcher (1940) 57 WN (NSW) 109 (Jordan CJ).
[8](1946) 46 SR (NSW) 318.
[9]Ibid 323. See also Adam P Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170, 177; Classic Ceramic Importers Pty Ltd v Ceramica Antigua SA (1994) 12 ACLC 549, 550 (NSWCA); Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191, 200 [30] (Winneke P, Phillips JA).
The Full Court drew on these earlier authorities to articulate the two-part test for leave to appeal which has been applied ever since:
We ought to address ourselves to the question whether the order … is attended with sufficient doubt to warrant its being reconsidered on appeal and secondly whether substantial injustice will be caused to the applicant if the order … is allowed to stand.[10]
These are, as Murphy J said in Niemann, stringent requirements.[11] Given that modern litigation takes longer and costs more than those earlier Full Courts could ever have imagined, there is a case for even greater stringency today. Particularly must this be so when – as here – the decision of the trial judge is itself a decision on appeal from a Master.
[10]Niemann [1978] VR 431, 433 (McInerney J). See further Secretary to the Department of Premier and Cabinet v Hulls [1999] 3 VR 331, 335-337 (Phillips JA).
[11]Niemann [1978] VR 431, 438 (Murphy J).
If appellate intervention in interlocutory decision-making is to become truly exceptional, as Parliament intended, the tests to be applied at first instance must be as clear and straightforward as possible, to minimise both the scope for error and the scope for argument about whether error has occurred. With that in mind, we turn to examine the test to be applied when an application for security for costs is made.
The test
The plaintiff being a corporation, the application for an order for security for costs is brought pursuant to r 62.02(1)(b) of the Supreme Court (General Civil Procedure) Rules and s 1335(1) of the Corporations Act 2001. Rule 62.02(1)(b) relevantly provides that, where there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so, the court may order that the plaintiff give security for costs. Section 1335(1) provides:
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.
Although the wording is not identical, the applicable principles have been developed – and applied - on the assumption that they apply equally to the rule of court and to the statutory provision.[12] Considerations of certainty underline the wisdom of that approach.
[12]See, for example, Interwest Limited v Tricontinental Corporation Limited (1991) 5 ACSR 621, 623 (Ormiston J); Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360 [25], [42].
The first question to be addressed is whether the threshold condition for the exercise of the power is satisfied, that is, whether
there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful.
That jurisdictional condition must be satisfied before the discretionary power to order security for costs is enlivened.[13]
[13]See FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 156 FLR 116 (‘FFE’), 122 [21] (Pidgeon and Owen JJ).
In the present case, the judge applied what he described as ‘the generally accepted test on the threshold question’, being that formulated by Von Doussa J in Beach Petroleum NL v Johnson, as follows:
In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there was a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on the service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs, along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security. [14]
[14](1992) 7 ACSR 203, 205.
This formulation has been applied many times. In our respectful view, however, it is wrong to substitute a judicial exposition for the words of the statute itself. As the High Court has stated repeatedly in recent years, it is the words of the statute which govern.[15] Kirby J made the point very clearly in Central Bayside General Practice Association Limited v Commissioner of State Revenue:
Where the law in issue is expressed in the form of an Act of an Australian legislature, it is in the words of that statute that the content of the legal obligation is to be found, not in judicial synonyms, restatements or approximations.[16]
[15]Weiss v R (2005) 80 ALJR 444 [9]; Stingel v Clark (2006) 226 CLR 442, 458 [26]-[27].
[16](2006) 228 CLR 168, 197 [84].
The language of the statutory test is clear. The court must address the question which the section poses:
Is there reason to believe that the corporation will be unable to pay the defendant’s costs?[17]
There is no warrant for – and no apparent advantage in – adopting the much lengthier Beach Petroleum formulation, which requires the court to decide whether there is
reason to believe that there is a real chance that in events which can fairly be described as reasonably possible the corporation will be unable to pay, … even if in other events which can be fairly described as reasonably possible the corporation would be able to pay…
[17]See, for example, Lesvos Pty Ltd v Penrith Whitewater Stadium Ltd (2006) 58 ACSR 481, 485 [23] (Bell J).
The phrase ‘reason to believe’ is the touchstone of jurisdiction. It requires a rational basis for the belief – and no more.[18] The wording adopted may be contrasted with other familiar formulations such as ‘If the court is satisfied that … ‘ or ‘If in the view of the court it is likely that …’. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a “real risk”.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation’s financial affairs.
[18]See Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union (1993) 12 ACSR 1, 5 (Lee J); FFE (2000) 156 FLR 116, 122 [22].
It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation’s impecuniosity.[19] The provision equips the court with the means to require that the defendant be secured against that risk.
[19]Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507, 513-4.
The power being enlivened, the court must consider whether it should be exercised. Foremost amongst discretionary considerations will be any contention on behalf of the plaintiff that an order for security would work an injustice. We turn to consider the question of onus.
The onus does not shift
It was for a long time debated whether satisfaction of the threshold test – reason to believe that the corporation will be unable to pay – should ‘predispose’ the court to exercise the discretion in favour of ordering security. In Victoria, that debate ended with the decision of this Court in Ariss v Express Interiors Pty Ltd (In Liq).[20] In that case, Phillips JA (with whom Ormiston and Charles JJA agreed) said:
… [T]he debate about the word “predisposition” … is a sterile one and should no longer be pursued … The discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.[21]
[20][1996] 2 VR 507, 514.
[21]At 514.
The same point may be expressed slightly differently, as follows. The threshold condition for the exercise of the power to order security defines the circumstances in which Parliament contemplated that the power would be exercised. That is, the power was conferred for the purpose of protecting the defendant against the very risk which must be shown to exist before the power can be exercised. In this sense, satisfaction of the threshold condition – demonstrating the existence of the risk - ‘calls for’ the fulfilment of the purpose for which the power was conferred.[22] Whether the power should be exercised in the particular case will, of course, depend upon all the circumstances.
[22]Cf Commissioner of State Revenue v Royal Insurance (1984) 182 CLR 51, 88 (Brennan J); Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201, 217 (Smithers J).
On ordinary principles, it is for the defendant-applicant to persuade the court that the discretion should be exercised in its favour. In the present case, however, the judge applied the following statement of Jacobson J in Re Insurance Australia Group Limited v HIH Casualty and General Insurance Ltd (In Liq):[23]
The effect of the authorities is that if an applicant for security discharges the evidentiary burden of showing a prima facie case, there is then an evidentiary onus upon the opponent to satisfy that court that, taking into account all relevant factors, the discretion ought to be exercised against the making of an order.
The judge’s conclusion was expressed in these terms:
After considering all the matters going to my discretion, I am not satisfied my discretion ought to be exercised against the making of an order and I have therefore decided that [LS] should give security for [Kliger’s] costs.
[23][2003] FCA 803, [25].
Senior counsel for LS argued that his Honour had, in effect, imposed a persuasive burden on the plaintiff corporation. His Honour had approached the application, it was said, on the basis that once the threshold condition was satisfied the power would be exercised in the defendant’s favour, unless the plaintiff corporation persuaded the court (by reference to discretionary factors) that it should not be so exercised. In our view, this objection is made out. While the satisfaction of the threshold condition in the relevant sense ‘calls for’ the exercise of the power, this does not alter the fact that the burden rests on the defendant, from first to last, to persuade the court that the order for security should be made.
There are, of course, particular discretionary matters of which the plaintiff must necessarily have carriage. If, for example, the plaintiff corporation asserts that an order for security would impose on it such a financial burden as would stultify the litigation, the plaintiff must establish the facts which make good that assertion. We respectfully adopt what the Full Federal Court said in this regard in Bell Wholesale Co Limited v Gates Export Corp:
In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for a party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts.[24]
The same would be true of a contention that the plaintiff’s impecuniosity was caused by the defendant.[25]
[24](1984) 2 FCR 1, 4. See also Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744, [66] (Einstein J); Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564, 582-3 (Austin J); Pioneer Park Pty Ltd (In Liq) v ANZ Banking Group Ltd (2007) 65 ACSR 383, 396 [51] (Basten JA).
[25]See S Colbran, “Security for Costs Against Corporations – Section 1335 of the Corporations Law” (1993) 11 Company and Securities Law Journal 273, 283-4.
Because the question of onus is of general importance, we would grant leave to appeal. For reasons which follow, however, we are not persuaded that this error had any effect on the decision arrived at. In our view, the learned judge correctly considered all relevant discretionary matters and the decision arrived at was well within the scope of a sound exercise of the discretion.
We deal first with the grounds on which LS attacks the judge’s conclusion that the threshold condition was satisfied.
Assessing the plaintiff’s financial position
LS is the trustee of two unit trusts, respectively the Livingspring Unit Trust (‘the LUT’) and the Joyspring Unit Trust (‘the JUT’). The trust assets in each case comprise apartments and associated car parks. In addition to selling apartments, LS as trustee receives income from the leasing of apartments to students. It is common ground that LS as trustee has a right of indemnity against the assets of the relevant trust.
When the application came before the Master, LS relied on unaudited accounts of the LUT as at March 2007. These accounts purported to show total assets of $34.5 million and net assets of $3.36 million. The accounts were exhibited to a solicitor’s affidavit, in which it was stated that an ‘expert forensic accountant’ retained by LS had confirmed the accuracy of the accounts. As noted earlier, the Master dismissed the application for security.
Kliger exercised its right of appeal to a judge, which entitled it to a full rehearing on the merits.[26] Kliger’s solicitors then requested further accounting information regarding the LUT and the JUT. In response, LS filed a further solicitor’s affidavit to which was exhibited what were described as
consolidated management accounts (unaudited) for Livingspring, its underlying trusts (being the Livingspring Unit Trust and Joyspring Unit Trust) and its affiliated entities (being Arrow on Swanston Pty Ltd and Harbourlight Pty Ltd) for the period 1 July 2006 to 30 April 2007.
[26]See r 77.05(7).
The solicitor’s affidavit pointed out that, according to the consolidated accounts –
·the net assets of ‘LS and its affiliated entities’ were $2.24 million;
·the net assets of the LUT were $3.32 million; and
·there was a net deficit of $513 000 in the assets of the JUT.
The consolidated accounts were accompanied by separate sets of accounts for the LUT, the JUT and each of the affiliated companies.
On an appeal from a Master, the parties are limited to the evidence which was before the Master, unless a party obtains ‘special leave of the judge’ to rely upon additional evidence.[27] Kliger having objected to the further affidavit material on behalf of LS, special leave was granted to LS to rely on the second solicitor’s affidavit. The grant of leave was conditional upon the Chief Executive Officer of LS, William Lee, verifying by affidavit the additional financial information and upon him making himself available for cross-examination. In the event, Mr Lee filed two verifying affidavits. He was not called for cross-examination.
[27]Rule 77.05(7)(b).
His Honour made the following general observations about the consolidated accounts, with which we respectfully agree. First, the fact that the accounts were unaudited raised an issue as to the degree of comfort which the court could derive from the accounts. Secondly, the consolidated accounts were of limited assistance, since the right of LS as trustee to be indemnified in respect of any liability incurred on behalf of one of the trusts would be limited to the assets of that trust.
Inter-company loans
The balance sheet of LUT lists ‘related party loans’ as both an asset and a liability. The asset value is shown as $5.94 million, the liability as $2.23 million. In his first affidavit, Mr Lee said that he believed the accounts were true and correct, subject to one caveat. He was unable to reconcile loan account balances for inter-company transactions up to April 2003, and as a result
I cannot categorically say that the loan account balances are true and correct (and I suspect that they are not).
Mr Lee said, however, that he had ‘resolved this issue’ by preparing consolidated accounts in which inter-company loans were ‘for the most part’ offset against each other. The consolidated balance sheet of ‘the group’ records related party loans as an asset of $715 503 and a liability of $116 653.
As we have already said, the consolidated position was of little assistance. We reject the proposition, maintained on this appeal, that consolidation and setting off of the loans removed ‘any issue about the accuracy of the accounts’ in this regard. What mattered was whether the balance sheet for LUT could be relied on as accurately depicting the financial position of LS as trustee of the LUT. Having referred to Mr Lee’s ‘caveat’, his Honour said:
I accept that little if any reliance can be placed on the inter-company loan account figures.
With respect, that conclusion was fully justified.
Legal expenditure as an asset
The balance sheet of LUT listed the following as an asset:
Trust accounts: legal fees - $1 283 623.35.
As the judge noted, this amount was originally described by Mr Lee as ‘an amount set aside in a separated account and designated for the payment of legal fees associated with proceeding 2001 of 2004 and other associated proceedings including these proceedings.’ The description of the item in the accounts suggested, as his Honour commented, that these moneys were being held on trust for payment of LS’s own legal fees. In his second affidavit, however, Mr Lee corrected his earlier evidence. He said:
The amount of money that as at 30 April 2007 had been set aside and placed in trust but had not at that date been expended was approximately $80 000. This means that in respect of that particular entry in the balance sheet, approximately $1 203 000 had actually been expended and approximately $80 000 was being held in trust for payment of legal expenses.
His Honour’s conclusion on this item was as follows:
Livingspring was unable to satisfactorily explain how moneys expended on legal fees could be treated as an asset, let alone as money held in a trust account. It might have some asset value if Livingspring was to succeed against Mr Ng and the other defendants, including Kliger Partners, however, for the purposes of this application, we assume Livingspring is unsuccessful against Kliger Partners and is ordered to pay Kliger Partners’ costs. Such an assumption does not have to be made in regard to the other proceedings, including the proceedings brought against Mr Ng. However, I would imagine that the possibility of loss in those other actions should be taken into account.
These conclusions were, with respect, unassailable. The written submission for LS on the appeal contended nevertheless that the judge had erred ‘both in fact and in law’ in finding that LS
was unable to satisfactorily explain how money expended on legal fees could be treated as an asset in circumstances where LS had in fact done so [in Lee’s second affidavit].
On the hearing of the application, senior counsel for LS abandoned this contention. He conceded – properly, in our view – that the so-called ‘asset’ represented by moneys already expended on legal fees had to be disregarded. Nothing said by Mr Lee could have been regarded as a satisfactory explanation of the item.
The significance of this concession can hardly be overstated. The treatment of amounts already expended on legal fees as an asset was never seriously defensible. Yet the validity of the entry had been purportedly verified, not once but twice, by the chief executive office and company secretary of LS. The inability of LS to provide any justification to the judge for the inclusion of this $1.2 million ‘asset’ inevitably cast doubt on the reliability of the accounts as a whole.
LS called in aid on the appeal s 1305(1) of the Corporations Act which, it was said, established ‘a presumption that company accounts are prima facie true and correct and accurate.’ The provision does no such thing. All that s 1305(1) provides is that a company’s books (relevantly, its financial reports and records)[28] are admissible and are ‘prima facie evidence of any matter stated or recorded’ in them. As the Full Federal Court said in Whitton v Regis Towers Real Estate Pty Ltd,[29] s 1305 does not elevate an entry in a book of account to the status of prima facie evidence of the transaction(s) which the entry purports to record. The same must be true of an entry purporting to record the existence, and value, of an asset. The entry in the accounts
can be no more than prima facie evidence that an unknown person formed an opinion on an undisclosed basis that … such a figure should appear in the accounts.[30]
Even if there had been such a statutory presumption, it would have been immediately rebutted by the discrediting of the legal fees ‘asset’.
[28]See definition of ‘books’ in s 9.
[29](2007) 161 FCR 20 (Buchanan J, Marshall and Tracey JJ agreeing).
[30]Ibid 36 [59].
Similar considerations apply to the following asset, also listed in the balance sheet of LUT:
Contingent assets – recoverable – litigation costs: $2 391 587.38.
As the judge noted in his reasons, this item was originally described by Mr Lee as
an accounting entry representing that Livingspring and its associated companies have so far spent approximately $2.39 million on legal costs in respect of the overall litigation … [U]pon it being successful in the proceedings, [LS] will be likely to recover some or all of this amount of legal costs.
Mr Lee later modified his description, explaining that the item was not limited to legal costs but also included other litigation expenses including disbursements. (We note in passing that this ‘asset’ appears to be of essentially the same character as the ‘legal fees’ asset just discussed).
Before the judge, and again on this application, Kliger argued that this ‘asset’ should be disregarded. First, so far as the ‘asset’ represented amounts expended in other litigation, it was a matter of speculation whether LS would recover any part of those costs. Secondly, so far as it represented moneys expended in the action against Kliger, it would necessarily be unavailable to satisfy an order for costs in favour of Kliger. His Honour concluded that there was ‘some force’ in these arguments. We respectfully agree. For the purposes of the enquiry at hand, this ‘asset’ was no asset at all.
Trade debtors
The consolidated balance sheet of ‘LS and its related entities’ included as an asset an amount of $1.73 million shown as ‘trade debtors’. Before the judge, Kliger objected that ‘no information has been provided as to the nature, age or likely recoverability of the debts or the identity of the debtors.’ This information had been sought by Kliger’s solicitors but not provided. His Honour concluded that the submission had ‘some weight’. On appeal, LS submitted that it was an error for his Honour to have taken into account the lack of detail about trade debtors since, as a matter of law, determination of sufficiency of assets was not a matter for the carrying out of ‘a comprehensive audit of accounts’.
While we agree with the general proposition, it is unnecessary to resolve this particular issue. As his Honour’s reasons make clear, the ‘trade debtors’ item in the consolidated balance sheet was irrelevant to the asset position of LS as trustee of the LUT. The trade debtors related only to Arrow on Swanston Pty Ltd and Harbourlight Pty Ltd. LS itself had no such asset. So much was properly conceded by senior counsel for LS in his reply.
Market value of the apartments
The balance sheet of the LUT recorded stock-on-hand of apartments and car parks as an asset valued at approximately $15 million. The corresponding item for the JUT is $3.2 million. In each case, the asset was valued at cost. In his affidavit, however, Mr Lee said that the market value of these assets was $19 million and $3.8 million respectively. On that basis, he said, the market value of the units exceeded their cost by $4.6 million, this being an unrealised potential gain not reflected in the balance sheet.
LS relies for this purpose on a valuation prepared by Charter Keck Cramer dated 25 July 2007, valuing the LUT apartments and car parks at $17.9 million as at 4 December 2006. (There was no independent valuation of the JUT apartments). The judge rejected a number of objections to the valuation advanced on behalf of Kliger, but then said:
The valuation report states that a relatively prolonged sale and settlement period may be required to realise all 71 apartments, possibly extending up to 12 months. This is a relevant matter that I do take into account.[31]
His Honour was clearly right to take that matter into account. As Brereton J said in Street v Luna Park Sydney Pty Ltd, ‘a corporation is to be taken to be unable to pay an adverse costs order if it can only do so if allowed extended time to realise assets, even if upon realisation the assets may produce a surplus over liabilities sufficient to pay the costs.’[32]
[31]Reasons [59].
[32][2006] NSWSC 1317 [16], citing Beach Petroleum NL v Johnson (1992) 7 ACSR 203, 205 and Dalrymple Park Pty Ltd v Tabe & Lees (1996) 6 Tas R 111.
One particular criticism of the valuation by Kliger was that the market value of the apartments had been assessed on a GST-inclusive basis. According to his Honour:
Kliger Partners say that there is no basis for assuming that the GST component received upon a sale of the apartments would not be required to be remitted to the ATO. They say including GST in the “market value” inflates the valuation by $2,077,597. That may well be so. On the other hand, there may well be an entitlement to a GST allowance. The valuation and the evidence is unsatisfactory in view of this confusing position.
Once again, what his Honour said was plainly correct. The fact that the apartments were valued on a GST-inclusive basis introduced a significant element of uncertainty into the valuation. The starting-point for valuation should, of course, be a GST-exclusive value. Prima facie, LS as vendor of the apartments would be obliged to remit the GST component of the sale price to the Australian Tax Office. Of course, as his Honour acknowledged, LS might well have had offsetting GST credits. But, having put the valuation into evidence, it was for LS to justify any departure from a GST-exclusive valuation basis. LS made no attempt to do so.
On this application, senior counsel for LS argued that, at worst, the deduction of GST would reduce the market valuation by only $417 000. Kliger, on the other hand, maintained that the GST component inflated the valuation by more than $2 million. That dispute could only have been resolved by a detailed examination of the GST position of LS. Not only was there an absence of material to enable that to be done but, in any case, such an investigation was beyond the scope of the enquiry required of a judge considering an application for security for costs.
The obligation to supply up-to-date financial information
His Honour noted a further objection by Kligers that, when Mr Lee’s second affidavit was sworn on 12 October, less than a week before the hearing of the appeal, he had made no attempt to update the accounts beyond 30 April 2007 nor to give evidence as to whether the asset position set out in those accounts remained valid. This was said by Kliger to be a significant omission, given that the profit and loss statement for the LUT to 30 April 2007 showed a trading loss (before extraordinary items) of almost $2 million. His Honour said:
It is usual in accounts, for reference to be made to any material post-balance date transactions. I believe there is some force in this submission.
On the leave application, it was submitted for LS that his Honour erred
by having regard to the fact that the accounts … of Livingspring were five months out of date as at the date of hearing.
This was an error, it was said, because the hearing before the judge was an appeal against the Master’s earlier order
and therefore was a hearing de novo in respect of an application for security for costs based on the financial status of Livingspring as at a period five months earlier.
The judge should have taken into account that
the evidence in respect of the accounts for purposes of the hearing was to be as at the initial hearing before the Master together with the further evidence as permitted by the order [granting LS special leave].
We reject this submission. In the circumstances of this case, there was force in the point taken by Kliger about the out-of-date accounts, as his Honour said. As we noted earlier, the starting position on an appeal from a Master is that the judge rehears the application on the evidence which was before the Master. In that case, a defendant could hardly argue that the plaintiff company was obliged to provide updated financial information as at the date of the appeal.
But the present case was quite different. LS itself had sought to provide the judge on the appeal with more, and more recent, financial information than that which had been before the Master. The accounts before the Master were accounts for LUT alone, as at March 2007, whereas the consolidated accounts which LS wished to rely on - and which Mr Lee therefore had to verify - were accounts for the ‘group’, as at 30 April 2007. Mr Lee’s second affidavit, filed shortly before the hearing of the appeal, was explicitly directed at ensuring that the judge had before him the most accurate explanation of those accounts which Mr Lee could provide. In our view, once LS took upon itself – for its own advantage – the task of enlarging on and verifying its own financial information, it assumed an implicit responsibility to ensure that the information on which the judge was asked to act on was up-to-date. The filing of the second affidavit, almost contemporaneously with the appeal hearing, carried with it at least prima facie an obligation to provide information about any material changes in the accounts between April and October.
In the end, however, this particular matter appears to have played no significant part in the decision. It was, in the circumstances, just one of many factors contributing to his Honour’s view that there was uncertainty about the financial position of LS.
Conclusion as to the financial position of LS
As noted earlier, his Honour concluded that the objections about ‘doubtful assets’ had to be considered by reference to the individual trusts of which LS was trustee. Since the JUT was shown to have a deficiency, it clearly could not satisfy an order for costs. That conclusion is not challenged. As far as the LUT was concerned, his Honour identified the following assets as ‘subject to question’:
·‘trust accounts: legal fees’ $1 283 623.35
·related party loans $5 944 458.34
·recoverable litigation costs $2 391 587.38.
Together, these doubtful assets totalled $9 619 668. If they were all deducted from the net asset figure of $3.32 million shown in the LUT balance sheet as at 30 April 2007, there would be a deficiency of approximately $6.3 million. His Honour said:
I do not suggest that is the actual deficiency, but the calculation does indicate the degree of uncertainty about the financial position of the Livingspring Unit Trust shown by those accounts.
There is force in the point made by LS on the appeal, that if the asset represented by related party loans was to be disregarded, so too should the corresponding liability of $2.23 million. That would have reduced the notional deficiency to approximately $4 million. But, as his Honour made clear, he was not purporting to specify an actual deficiency. It was neither possible nor necessary for him to do so. His conclusion was a conclusion about the unreliability of the accounts, and it was well justified, in our view.
His Honour’s conclusion on the jurisdictional question was expressed in these terms:
In my view, where the assets, on the best view, only marginally exceed the liabilities and where the accounting information is less than reliable as pointed out by Kliger Partners and in light of other matters that I have referred to above, there is a real chance in the sense referred to [in Beach Petroleum] that Livingspring will be unable to pay the costs of Kliger Partners in this proceeding if they should win. In my view, the threshold question has been established by Kliger Partners.[33]
Later, in discussing discretionary matters, his Honour restated his conclusion that there was ‘a material risk’ that LS would be unable to satisfy a costs order. He added:
I take into consideration that [LS] has on foot other extensive litigation which will be a significant drain on its resources.[34]
[33]Reasons [79].
[34]Reasons [83].
A question arises as to whether the challenge to the judge’s conclusion on the threshold condition is to be approached in the same way as the challenge to the exercise of the discretionary power thereby enlivened, or whether the appeal court must decide for itself whether there was, indeed, ‘reason to believe’ that LS would be unable to meet an order for costs.[35] It is unnecessary to resolve that question, however, since we would reach the same result by either approach. We are satisfied that the conclusion reached by his Honour was well open to him on the factual material before him. Alternatively, deciding the matter for ourselves, we conclude that on the financial material before the court, and for the reasons already considered, there is a risk that LS will be unable to meet an adverse costs order.
[35]Cf DPP v Le (2007) 15 VR 352, 358 [17]-[18] (Maxwell P, Chernov JA).
Undertakings
Before leaving this topic, it is necessary to deal with the question of undertakings. In response to Kliger’s application for security, the directors of LS gave an undertaking that, in the event of an order for costs against LS in the proceeding, they would in their capacity as directors ‘do all such things as are necessary’ for LS to enforce its right of indemnity against the relevant trust property. Before the judge, Kliger submitted that these undertakings were unsatisfactory as they did not include an undertaking not to dispose of the trust assets. LS responded that it was not appropriate for the directors to give such an undertaking because it would ‘disrupt the business operations of LS’, being the ownership, operation and management of the two apartment complexes. In the end, his Honour simply noted that the undertakings given did not
stop LS distributing the trust assets to the beneficiaries prior to the conclusion of the proceeding nor, for that matter … a new trustee being approved as trustee of each of the unit trusts.[36]
[36]Reasons [78].
On this appeal, senior counsel for LS argued that the undertaking given by the directors of LS was ‘substantially in the Envol form’. This was a reference to the 1993 decision of Ashley J in Envol Pty Ltd v Perceptive Systems Ltd.[37] As in the present case, the plaintiff was there suing in its capacity as trustee of a trust. In contrast to the present case, however, Ashley J concluded that the trust asset (there was only one) would be sufficient to meet an adverse costs order. When the defendants complained that the trustee company might not exercise its right of indemnity in order to meet such a costs order, his Honour required (as a condition of refusing the application for security) that the directors of the company undertake to ‘do all such things as are necessary’ to enable the company to enforce its right of indemnity. The directors of LS have given an undertaking of that kind. But in Envol the required undertaking went further. The directors were also required to undertake that they would “take no action whereby to cause the [trustee company] to dispose of“ its valuable asset. That is the very undertaking which the LS directors have refused to give. In a critical respect, therefore, the present undertaking did not adopt ‘the Envol form’.
[37]Unreported, Supreme Court of Victoria, 15 September 1993.
In the end, however, the lack of that undertaking in the present case was immaterial. Undertakings of this kind only become relevant, and necessary, when (as in Envol) the trust assets appear to be sufficient to meet an adverse costs order. That conclusion having been reached, such undertakings give assurance to the court and to the defendant that –
(a)the plaintiff will be able to, and will, exercise its right of indemnity against the trust assets in order to meet such an order; and
(b)the plaintiff will in the meantime do nothing to diminish the value of the trust’s assets.
Without that dual assurance, a conclusion about the present sufficiency of the trust assets might provide no guidance at all as to the ability of the plaintiff at some future time to pay the defendant’s costs.
As recorded in the judge’s reasons, senior counsel for LS informed his Honour at the conclusion of the hearing that
he had instructions that the company would give an undertaking that, pending the hearing and determination of this trial, it would undertake not to sell, dispose of or otherwise, charge or encumber an individual unit which would be worth more than on the face of it the amount being sought in security at the moment. He said that would then, as it were, quarantine that unit as an asset.
His Honour said in his reasons:
I assume therefore that [LS] does have available unencumbered units that it could mortgage to provide a bank guarantee. This further supports my view that an order for security would not be oppressive or could not stultify the prosecution of a genuine claim.[38]
[38]Reasons [90].
On the appeal, it was argued that his Honour had ‘misused’ the proffered undertaking, by using it to support a conclusion adverse to LS. The undertaking should have been seen, it was submitted, as providing sufficient assurance to the court to obviate the need for an order for security.
We reject these arguments. The proffered undertaking had no bearing on the critical question of whether the trust assets would be sufficient to enable LS to meet an order for costs against it. As we have already said, his Honour’s conclusion on that issue – adverse to LS – is unassailable on this appeal. The proffered undertaking was, in substance, an undertaking to provide security, that is, to ‘quarantine’ an unencumbered asset to which recourse could be had, if necessary to meet an order for costs.
His Honour was, in our view, right to deal with that proposal in the way he did. Far from altering the conclusion reached about the risk that LS would be unable to meet an order for costs, the offer to quarantine an asset served only to confirm that LS would be in a position to give security, if ordered to do so, without that inhibiting its ability to conduct the litigation.
The exercise of discretion
Apart from the question of onus dealt with earlier, LS addressed two matters which it was said constituted error in his Honour’s exercise of discretion. They may be disposed of briefly.
Nature of the proceeding
LS submitted that the judge erred by ‘failing to give any or any sufficient weight’ to the allegations which LS made against Kliger, namely that Kliger as solicitor for LS had distributed approximately $2.5 million to Mr Ng on his own instructions, without ever ascertaining from the directors of LS whether such payments were authorised. LS did not, however, seek to reargue the point, rejected by the judge, that Kliger should be seen as having caused the impecuniosity of LS. That apart, the nature of the allegations against Kliger was irrelevant to Kliger’s application for security.
Kliger’s professional indemnity insurance
Before the judge, and again on the appeal, LS argued that the court should take into account the fact – not disputed by Kliger – that Kliger held professional indemnity insurance in respect of claims of the kind brought by LS. LS submitted that there was ‘a public policy reason not to grant the solicitor double indemnity with respect to its costs’. Reliance was placed on Quichorn Pty Ltd v Broad,[39] a case which concerned an insurer defendant rather than an insured defendant. In that case, Hayne J said:
Now it has been said that in proceedings against an insurer for indemnity on a policy of insurance, when the existence of the policy is not disputed, it is not ordinarily appropriate to grant security in favour of the insurer. (See Irwin Alsop Services v Mercantile Mutual Insurance). However, that view was not followed in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co; Frankston Ambassador Pty Ltd v Sigma Insurance Australia Ltd; or Tenth Anemot Pty Ltd v Colonial Mutual General Insurance Co Ltd.
I consider the better view to be the fact that an applicant for security is an insurer and that it is resisting a claim by a party on a contract in which it voluntarily entered are matters that may be taken into account in the exercise of the discretion whether to order security, but there is no general predisposition against the granting of security to insurers. The question will always be one for the exercise of an unfettered discretion. The nature of that unfettered discretion was explored in some detail … There is, in my view, no general principle of the kind which the plaintiff’s submission suggests might apply to defendant insurers who seek security for costs. Rather, in each case the position of the applicant must be considered having regard to all of the circumstances that affect that applicant in those proceedings without any predisposition one way or the other in favour or against the granting of security.[40]
[39]Unreported, Supreme Court of Victoria, Hayne J, 24 January 1994.
[40]Ibid (citations omitted).
In the present case, the judge cited that passage, and continued:
In my opinion, that decision does not suggest that the existence of an insurer may be taken into account but should influence the exercise of my discretion in any particular way.
On the appeal, LS submitted that this passage should be read as expressing the view that the fact of insurance should be ignored altogether. We disagree. While the wording itself is unclear, the reading suggested by LS is improbable, given the context. We think his Honour was probably intending to do no more than summarise what Hayne J had said, namely, that insurance was a matter which could be taken into account in the exercise of the (unfettered) discretion but did not dictate any particular conclusion.
In any case, as already noted, Hayne J was concerned with an insurer defendant, not an insured defendant. The debate (in the cases referred to in Quichorn) about whether an insurer defendant could seek security turned on the nature of an insurer’s business.[41] That consideration has no relevance to an application for security by an insured defendant.
[41]See now Board of Examiners v XY [2006] VSCA 190, [42] (Nettle JA).
We can see no reason in principle why an insured defendant should be in any different position from an uninsured defendant for this purpose. Let it be assumed that the insurer has agreed to indemnify the defendant against the plaintiff’s claims. The insurer should be regarded as having exactly the same entitlement as the insured defendant to protection against the risk that the plaintiff will be unable to meet an adverse costs order.[42]
[42]Cf Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1990) ACLC 29, 32 (Brooking J).
On this view, the fact that a defendant is insured is irrelevant to an application for security for costs. If, as LS argued, the judge had in fact been expressing that view, there would have been no error in doing so.
Conclusion
The applicant has failed to demonstrate any error in the decision below. The appeal must therefore be dismissed.
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