Longjing Pty Ltd v Perpetual Nominees Ltd

[2017] NSWSC 1690

Supreme Court

New South Wales

Medium Neutral Citation:	Longjing Pty Ltd v Perpetual Nominees Ltd [2017] NSWSC 1690
Hearing dates:	3 November 2017; final written submissions received 23 November 2017
Date of orders:	08 December 2017
Decision date:	08 December 2017
Jurisdiction:	Equity
Before:	Parker J
Decision:	Registrar’s order for security for costs confirmed on review
Catchwords:	Civil Procedure – security for costs – corporate plaintiff – stifling of proceedings – solicitor acting on deferred payment basis – whether exception for solicitor creditor – whether solicitor standing behind proceedings – willingness to provide further funding – ability to provide further funding – onus – applicable discretionary principles Civil Procedure – review of decision of Registrar – further evidence filed – evidence not “fresh” – discretion
Legislation Cited:	Corporations Act 2001 (Cth), s 1335 Legal Profession Uniform Law (NSW), ss 180(2), 185(1) Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”), r 42.21(1)(d)
Cases Cited:	Australian Equity Investors v Colliers International (NSW) Pty Ltd [2012] FCAFC 57 Ballard v Brookfield Australia Investments Ltd [2012] NSWCA 434 Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; [1984] FCA 34 Firth v Centrelink (2002) 55 NSWLR 451; [2002] NSWSC 564 Green v CGU Insurance Ltd (2008) 67 ACSR 105; [2008] NSWCA 148 House v R (1936) 55 CLR 499; [1936] HCA 40 LRSM Enterprise Pty Ltd v Zurich Australian Insurance Ltd [2014] NSWCA 88 Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61 Short v Crawley (No 45) [2013] NSWSC 1541 Tomko v Palasty (No 2) (2007) 71 NSWLR 61; [2007] NSWCA 369 Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd [2013] NSWCA 404 Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd (2014) 103 ACSR 201; [2014] NSWCA 417
Category:	Procedural and other rulings
Parties:	Longjing Pty Ltd (Plaintiff) Perpetual Nominees Ltd (Defendant)
Representation:	Counsel: M Condon SC (Plaintiff) CN Bova (Defendant)   Solicitors: Somerset Ryckmans (Plaintiff) Dentons (Defendant)
File Number(s):	2016/269217
Publication restriction:	Nil

Judgment

1. This is an application for review of a decision of the Registrar to order security for costs.

2. The Registrar’s decision was made in February 2017. She ordered that the plaintiff provide security for the defendant’s costs of the proceedings in the sum of $90,000, such security to be paid in four tranches of $22,500 over the ensuing 12 months.

3. The defendant (“Perpetual”) owns a retail shopping centre at Springfield Lakes in Queensland. The plaintiff (“Longjing”) leased a shop in the centre for the purpose of operating an Asian food restaurant. The lease contained provisions requiring Longjing to open the shop for specified trading hours and to pay rent and other occupancy charges. Perpetual terminated the lease on the grounds that Longjing had breached these obligations.

4. Longjing alleges that the lease had not yet commenced and thus there was no obligation to pay rent or to trade, that Perpetual contributed to the inability to open the shop and that Perpetual represented that it would not terminate the lease. Longjing claims a declaration that it lawfully terminated the lease in April 2016. Longjing also claims damages for breach of contract and relief under the Australian Consumer Law including damages and compensation.

Issues for determination

5. Perpetual’s application for security was based on both the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”), r 42.21(1)(d) and the Corporations Act 2001 (Cth), s 1335(1), each of which gives the Court power to order security for costs if there is reason to believe that the plaintiff, being a corporation, will if unsuccessful in the proceedings be unable to pay the defendant’s costs. It was common ground before the Registrar that Longjing would be unable to pay Perpetual’s costs of these proceedings if ordered to do so. The question for the Registrar was whether, having regard to relevant discretionary factors, security ought to be ordered and, if so, in what amount.

6. Longjing is controlled by Ms Merry Ng. In the proceedings before the Registrar, Ms Ng offered an undertaking to accept personal liability for Perpetual’s costs of the proceedings. But the evidence showed that Ms Ng also lacked the means to be able to meet Perpetual’s costs.

7. A number of discretionary factors were raised by counsel for Longjing before the Registrar in opposition to the making of an order for security. One contention was that Longjing was, in effect, the defendant in the proceedings. Another was that it was sufficient for Ms Ng to accept liability for the costs of the proceedings because, even though she was unable to meet those costs, she should not be in any worse position than if she had taken the lease, and brought the proceedings, in her own name. The Registrar rejected both contentions and neither has been pursued in the application before me. There was also no challenge in the review application to the quantum of security fixed by the Registrar.

8. The question which Longjing seeks to pursue in the review application is the potential for the security order to stifle the proceedings. This is a recognised discretionary factor under the Corporations Act (Cth), s 1335(1) and is specifically referred to in UCPR r 42.21(1A)(f).

9. Longjing has a number of creditors, including its solicitor, SR Legal Pty Ltd, which trades under the name Somerset Ryckmans (“SR”). The Registrar concluded that, because there was no evidence as to whether SR was prepared to underwrite the litigation by providing security, stultification was not established. This conclusion is challenged by Longjing, giving rise to the substantive issue for determination on the application before me.

10. Before I consider this question, I must address a procedural issue. Longjing contends that the Registrar made an error in dealing with the security application which would justify intervention under the principles in House v R (1936) 55 CLR 499. But Longjing also seeks review of the decision on a wider basis. Longjing has filed further evidence which deals, among other things, with SR’s retainer arrangements and its attitude to providing credit to Longjing. Perpetual contends that the Court should restrict the review to a consideration of House v R errors and should not entertain a wider enquiry based on additional evidence.

Nature of review hearing and admissibility of subsequent evidence

11. The principles governing the grounds for review of a Registrar’s decision were considered by the Court of Appeal in Tomko v Palasty (No 2) (2007) 71 NSWLR 61. The rules which apply to an appeal do not, strictly speaking, apply to such a review and the Court is not limited by a requirement to identify errors of the type identified in House v R. The Court has power, in its discretion, to conduct a rehearing and to receive further evidence for that purpose. But, in doing so, the Court must be careful not to allow rehearings at will. As a consequence, for practical purposes, the Court usually will not permit review except in cases of House v R error or where fresh evidence has come to light since the decision under review: see, in particular, Tomko v Palasty (No 2) at 64-65 [5]-[10] (Hodgson JA), 66 [17] (Ipp JA), 73-74 [52] (Basten JA).

12. Counsel for Perpetual argued that no question of fresh evidence, in the relevant sense, arose in the present case. It had been for Longjing to establish before the Registrar that an order for security would stifle the proceedings and that security should be refused for this reason. One of the further affidavits on which Longjing relied was from Mr Ryckmans, one of the principals of SR. Counsel contended that the affidavit did not meet the requirements for fresh evidence as the evidence it contained could have been put before the Registrar. In response to Longjing’s further evidence, Perpetual filed a further affidavit from its solicitor and also tendered documents obtained by way of notice to produce. But Perpetual’s principal submission was that none of the further evidence from either party should be received and the Court should deal with the review application strictly on the basis of the material before the Registrar.

13. I accept that the evidence from Mr Ryckmans is not fresh evidence in the relevant sense. However, I have decided to receive the evidence and to permit the parties to argue the review application on the basis of that further evidence. This is for two reasons. In the first place, one recognised exception to the general rule concerning the ambit of review applications is where the decision has the effect, either legal or practical, of determining the proceedings: Tomko v Palastry (No 2) at 65 [9] (Hodgson JA), 73 [52(4)(a)] (Basten JA). Longjing contends that it will be unable to provide the security ordered. On Longjing’s case, therefore, the order for security will result in the proceedings being dismissed.

14. The second reason is that the point raised by Longjing is one of general significance. It requires consideration of whether the principles which have been developed in the context of potential stifling of proceedings where there is a creditor who could fund the litigation apply if the creditor in question is the plaintiff’s solicitor.

15. In my opinion, it is desirable in these circumstances that that review should be undertaken with as much evidence as possible of the relevant facts. Accordingly, the further evidence which post-dates the Registrar’s decision, which I admitted provisionally at the hearing, will be admitted for all purposes. I will consider the impact of this decision on costs, if that proves necessary, in due course.

Stifling of proceedings

16. In Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 a Full Court of the Federal Court said (at 4):

In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

17. Longjing has paid up capital of $2. Ms Ng is the sole director and secretary. She is also the sole shareholder.

18. For the purposes of the security application, Ms Ng swore an affidavit in November 2016 which was before the Registrar. In her affidavit, Ms Ng said that Longjing was a special purpose vehicle and had no assets apart from its claim against Perpetual in these proceedings. She said that Longjing owed approximately $450,000 to a company called Property IQ No. 3 Pty Ltd (“Property IQ”), pursuant to an earlier loan agreement. She also said that approximately $586,000 was owed to the builder who undertook the fit-out of the leased premises.

19. In her affidavit, Ms Ng also said that her personal taxable income for the year ended 30 June 2015 had been approximately $17,000 but that she had recently obtained employment at a salary of $60,000 per annum. She said that the only assets that she herself owned were a car, which was subject to a lease and had a residual value of approximately $25,000, and a half share of a residential property at Belrose in Sydney (jointly owned with her sister), which was subject to a bank mortgage of approximately $500,000. She said that she owed SR approximately $250,000 in fees for these proceedings and “other matters” (which were not identified); $20,000 to a company called Little Lease Company Pty Ltd (“LLC”) and $450,000 to Property IQ (having guaranteed Longjing’s liabilities to that company). She said that caveats had been lodged against her share of the Belrose property by SR, LLC, and Property IQ.

20. Ms Ng estimated the value of the Belrose property at $1.2 million, and, therefore, her equity in it at $350,000, but said that her net equity was nil as a result of debts owed to the caveators.

21. The caveats themselves were not in evidence before the Registrar. Nor were documents relating to the liabilities of Longjing or Ms Ng. The statements in Ms Ng’s affidavit do not appear to have been objected to or challenged on a factual level.

22. In her decision, the Registrar said:

In respect to the other creditors, apart from SR, I accept that they are arms length’s creditors and their position would not ordinarily be taken into account when assessing whether the proceedings would be stultified. However, in my view, the position of SR is different they are substantial creditors and clearly have an interest in the outcome of the proceedings. The plaintiff suggests that

without cross examination SR’s position should be a neutral factor, in my view, this ignores the obligation of the plaintiff to be full and frank in their disclosure to the Court on this issue. I am not satisfied on the evidence before

me that SR would not be prepared to advance further funds, if an order for security were made. Thus stultification has not been established.

Evidence on review application

23. Ms Ng swore an affidavit on 18 May updating her financial position. The affidavit disclosed that she had little, if any, money in her personal bank accounts and had credit card debt of approximately $67,000. Longjing also owed approximately $10,000 under a credit card issued to it. Ms Ng referred to fortnightly salary payments of approximately $1,900, from which I infer that she continued to be employed at a salary of approximately $60,000 before tax. The affidavit stated that neither Longjing nor Ms Ng had the financial resources to pay the security for costs in the amount ordered by the Court.

24. The evidence on the review application concerning the liabilities of Longjing and Ms Ng to SR is more extensive than it was before the Registrar. It shows that SR previously acted for another one of Ms Ng’s companies, China Grand Sydney Airport Pty Ltd (“China Grand”), in proceedings arising out of a lease taken by China Grand of a shop at Sydney Airport. The costs agreement for the proceedings is in evidence. It is dated 15 July 2014. The clients are Ms Ng and China Grand. Clause 19 provides:

Security for Legal Costs and Disbursements

In consideration of us agreeing to provide legal services to you, you (and where there is more than one client, each of you) hereby charge all freehold and leasehold interests in land that you (or where there is more than one client, each of you) beneficially own now or in the future. You further consent to us lodging a caveat or caveats noting our interest pursuant to such charge and you agree that we shall not be required to discharge or withdraw any such caveat until such time as all of our legal costs and disbursements are fully paid and satisfied.

Without limiting the foregoing, Merry Ng agrees to charge her beneficial interest in the real property known as [address], BELROSE NSW 2085 and contained in Folio Identifier 1011/1047864.

25. SR’s caveat over the Belrose property is also in evidence. The interest claimed is specified as an equitable charge under the China Grand costs agreement. The caveat was registered in April 2016.

26. There is also evidence concerning SR’s retainer in these proceedings. According to Mr Ryckmans’ affidavit, he agreed orally with Ms Ng in “around March 2016” to act for Longjing in its dispute with Perpetual. It was expressly agreed that SR would act “on the same basis” as in the China Grand proceedings, including that SR’s costs would be secured on Ms Ng’s share of the Belrose property. There is also in evidence a written costs disclosure and costs agreement relating to these proceedings, but it is dated June 2017, more than 14 months after SR was first retained. The clients are Ms Ng and Longjing. The agreement does not make provision for security. Nor does it provide for deferral of SR’s costs; in fact, it entitles SR to terminate the retainer if, among other things, any tax invoice of SR is unpaid or if any request by SR for payment of disbursements or amounts for future costs is not complied with within seven days.

27. Mr Ryckmans’ affidavit disclosed that in about July 2016 the China Grand proceedings were settled for $75,000. Out of this settlement, an amount of approximately $32,000 was credited to Longjing in SR’s trust account, to meet disbursement costs in these proceedings.

28. Counsel for Perpetual criticised Longjing for not having disclosed the receipt from the China Grand settlement in its application before the Registrar. It is certainly unfortunate that Longjing failed to do so. The release of these monies from the settlement was, in effect, a loan to Longjing to assist it in pursuing its claim in these proceedings. Its omission from Ms Ng’s affidavit made that affidavit inaccurate.

29. The amount provided from the China Grand settlement to Longjing is not very large in the scheme of things. It does not alter the overall conclusion that neither Longjing nor Ms Ng is in a position to meet the costs of Perpetual if Perpetual succeeds in its defence in these proceedings. But it says something about the attitude of SR to these proceedings. SR would have had a solicitor’s lien over the $75,000 settlement: see Firth v Centrelink, referred to at [35] below. SR would thus have been entitled to insist on the funds being applied to meet its costs under the China Grand retainer. By permitting the sum of $32,000 to be credited to Longjing, SR was going beyond just affording credit by deferring payment of its own fees in these proceedings. It was, in effect, providing an additional sum by way of credit to Longjing to allow it to pursue the claims in the proceedings.

30. SR’s trust ledger for these proceedings for the period up to 2 November 2017 is in evidence. It shows the credit from the China Grand settlement on 15 August 2016. It also shows a credit of approximately $17,000 in March 2017 from Energy Australia, described as “settlement proceeds”. There is no evidence to explain what this receipt was for.

31. The debits to the account largely represent payment of counsel’s fees and other disbursements, but there are a number of other payments to Ms Ng or to an entity called “Pier 9” on her instructions; these payments total $12,000. The withdrawals are not explained in the evidence. The account remains approximately $11,000 in credit.

32. After the Registrar made her order that security be provided and the first instalment was not provided, Darke J made an order staying these proceedings. A dispute arose between the parties as to whether this order had the effect of staying Longjing’s application for review of the Registrar’s decision or, if it did, whether it should be varied to allow the review application to proceed. I resolved this dispute by staying the Registrar’s security order, and allowing the review to proceed, but on terms that Longjing provided security for Perpetual’s costs of the review application in the sum of $22,500. That security was provided. The payment does not appear in SR’s trust account ledger, although it does appear in SR’s office ledger. On the face of it, SR would appear to have advanced the security to Longjing, but the issue was not explored in evidence and I cannot reach any final conclusion as to where the security which has been provided came from.

33. Before me, counsel for Longjing stated that SR’s position is that it is entitled to security over Ms Ng’s share in the Belrose property, not only for its costs under the China Grand retainer but also for its costs under the retainer in these proceedings. SR accepts that this security ranks after the registered bank mortgage over the property, but takes the position that it holds the second ranking security which prevails over the subsequent caveators (Property IQ and LLC).

25. I am not sure this is correct. It may be accepted that, pursuant to the China Grand retainer, SR has a second ranking security over Ms Ng’s share of the Belrose property. However, the charging clause in that retainer (quoted at [24] above) appears to extend only to the costs incurred under the retainer. The written costs agreement for these proceedings contains no entitlement to security. The prior oral agreement to provide security for costs incurred under the retainer in these proceedings must surmount the obstacle presented by the Legal Profession Uniform Law (NSW), ss 180(2), 185(1), which provides that a “costs agreement” which is not in writing “is void”. It may be possible to argue that this provision only renders such an agreement void for the purposes of assessment proceedings, or that the provision only applies to agreements relating to the costs to be charged and not to security arrangements, but this is far from clear.

26. If SR could point to a security interest over Ms Ng’s property sufficient to cover its costs, it might have been possible to argue that its recovery of its fees did not depend upon the outcome of these proceedings. However, given the uncertainty, I am not satisfied that this is so. In my opinion, if Longjing fails in its claim against Perpetual, then it would be at best doubtful whether SR would be able to recover the costs incurred under the retainer out of Ms Ng’s share of the Belrose property. On the other hand, if Longjing succeeds against Perpetual, SR’s lien will give it a clear right to recoup itself for its costs under the retainer out of any damages and costs awarded: Firth v Centrelink (2002) 55 NSWLR 451 at 463-465 [35].

27. There is also more evidence in the review application concerning Property IQ. The Deed of Settlement and Release pursuant to which Ms Ng guaranteed the obligations of Longjing arising out of the prior loan to Longjing by Property IQ is in evidence. The Deed is dated 22 June 2016 (thus post-dating the retainer of SR to act on the claim against Perpetual). Under the Deed, Property IQ agreed to accept payment in the sum of $458,491.66 (defined as the “Settlement Sum” if made by 1 September 2016: cl 2.1). Recitals J and K provide:

J.   On or around 22 April 2016, [Perpetual] commenced proceedings against the Borrower [Longjing] in the Supreme Court of Queensland, in Proceedings No. BS4144/16, the subject of which relates, inter alia, to the purported termination by Perpetual of a lease entered into between Perpetual, as lessor, and the Borrower, as lessee, on or around 24 November 2015 for the premises [Springfield Lakes] (Perpetual’s Claim).

K.   The Borrower’s case in the Perpetual Proceedings, or to be brought in separate proceedings commenced by the Borrower against Perpetual, is a claim by the Borrower against Perpetual for damages arising from Perpetual’s termination of the lease, which relies on Perpetual’s earlier purported termination of the lease as a repudiation of the lease (Borrower’s Claim).

37. Clause 6 provides:

6.1   The Borrower irrevocably agrees to:

(a)   direct that a bank cheque be drawn on the earlier of the settlement of the QLD Proceedings or the recovery from or payment by Perpetual, or any of its associated or related entities, of damages or any other sum awarded in favour of the Borrower, for the entirety of the Settlement Sum, or such lesser amount as may be expressly agreed to in writing by the Lender [Property IQ], in favour of the Trust Account of Somerset Ryckmans, the Borrower’s solicitor; and

(b)   duly complete and sign the Irrevocable Authority in the form set out in Schedule 2 and:

(i)   provide a copy to the Lender as required by the terms of this Deed, which the Lender may provide to the solicitor of the Borrower as valid authority to deal with the moneys held in trust which the Lender is entitled under this Deed; and

(ii)   provide the original signed Irrevocable Authority to the Borrower’s solicitor upon execution of this Deed.

6.2   The Borrower undertakes to:

(a)   diligently and promptly, at its cost, pursue the Borrower’s Claim against Perpetual seeking damages;

(b)   keep the Lender fully informed of all developments in the QLD Proceedings;

(c)   provide to the Lender a copy of any, pleadings, court document or affidavit relating to the QLD Proceedings, within three (3) days of the Lender’s request;

(d)   engage and maintain legal representation at all material times in respect of the QLD Proceedings;

(e)   in the event that the Borrower’s legal representation changes during the course of the QLD Proceedings, the Borrower agrees that the Irrevocable Authority shall extend to and be binding on any legal representative engaged to act on the Borrower’s behalf in relation to the QLD proceedings.

38. The Irrevocable Authority is as follows:

I, Merry Ng of [address], sole director and secretary of [Longjing] or its nominee irrevocably authorise and direct you to pay the Settlement Sum, or such lesser amount as may be expressly agreed to in writing by [Property IQ], to [Property IQ] by way of solicitor’s trust cheque immediately upon receipt of funds from the earlier of the settlement of the QLD Proceedings, or the recovery from or payment by Perpetual, or any of its associated or related entitles, of damages or any other sum awarded in favour of Longjing, for the entirety of the Settlement Sum, or such lesser amount as may be expressly agreed to in writing by [Property IQ], in the trust account of Somerset Ryckmans.

This payment shall have priority over all other individuals, corporations, entities and Longjing itself.

In the event that Longjing’s legal representation changes during the course of the QLD Proceedings for any reason, I direct that this Irrevocable Authority shall extend to and be binding on any legal representative engaged to act on Longjing’s behalf.

I agree that Longjing must engage and maintain legal representation at all material times in respect of the QLD proceedings.

39. Longjing’s claim has been pursued in these proceedings rather than the Queensland proceedings, but that is contemplated in recital K. I think cl 6.1 and the Irrevocable Authority would apply to the settlement of these proceedings. This means that Property IQ has an interest in the outcome of the proceedings which goes beyond that of an ordinary trade creditor. Property IQ’s interest would not, of course, overcome SR’s lien; but to the extent that there were any surplus available after payment of SR’s costs pursuant to the lien, that surplus would flow to Property IQ ahead of any other creditors of Longjing. Property IQ also has the benefit of covenants by Longjing to pursue the proceedings.

Solicitor as creditor

40. The evidence before me, summarised at [24]-[35] above, confirms the Registrar’s conclusion that SR has an interest in the outcome of the proceedings. Counsel for Longjing argued that, even so, the Registrar had been wrong to award security for costs on the strength of SR’s interest as creditor in the outcome of the proceedings.

41. Counsel’s first argument was that the principles which apply to the potential stifling of proceedings where the company has a creditor who would be capable of financing the litigation should not apply where the creditor is the company’s solicitor. Counsel argued that any other approach would put pressure on the company’s solicitor to provide security, which would give rise to undesirable risks of conflict between the solicitor’s role as creditor and the solicitor’s professional duties to the client and to the Court in the conduct of the proceedings.

42. Ballard v Brookfield Australia Investments Ltd [2012] NSWCA 434 was a decision of a single Judge of Appeal (Ward JA) on an application by the respondents for security for the costs of an appeal. The appellant, Mr Ballard, had obtained litigation funding which had enabled him to bring the proceedings at first instance. The solicitor retained on the appeal had agreed to conduct the appeal without charging Mr Ballard, and to pay all expenses and disbursements connected with the appeal (including counsel’s fees), on the basis that Mr Ballard would only be liable for legal costs and disbursements of the appeal if the funder had been fully paid (presumably this would only happen if the appeal was successful and substantial damages recovered). The evidence showed that Mr Ballard would be unable himself to meet the respondents’ costs of the appeal, but it was contended for Mr Ballard that an order for security should not be granted as it would stifle the appeal. Security was ordered. Her Honour said:

41.   I am not satisfied that the making of an order for security for costs will necessarily stifle the appeal. I say that for the reason that Mr Ballard has been able not only to procure funding for the litigation below but, and more relevantly, has been able to secure an arrangement with his solicitor for the appeal to be carried out at the solicitor’s cost. There is nothing to suggest that Mr Ballard would be unable to secure additional funding if required to provide security for costs (or that his solicitor, who would appear from the Deed to have some personal interest in the maintenance of the appeal, would not be in a position to provide such security).

43. Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd [2013] NSWCA 404 was another decision of a single Judge of Appeal (Sackville AJA) on an application by the respondents for security for the costs of an appeal. His Honour said that, on the evidence, there were two possible sources of funding. One was the daughter of one of the appellants. The other was the firm of solicitors acting for the appellants. Security was ordered. His Honour said:

27.   As I have indicated, the evidence shows that the appellants’ solicitors are owed at least $371,000 on account of costs and that they are prepared to defer their payment of costs and disbursements in relation to the appeal until judgment is delivered. Clearly the solicitors have substantial interest in the outcome of the appeal: cf Ballard v Brookfield Australia Investments Ltd [2012] NSWCA 434, at [41], per Ward JA. Mr Smallbone asserted from the bar table that the solicitors would not be prepared to contribute towards an order for security, but there was no evidence to that effect.

28.   I am not satisfied on the evidence that the solicitors, given that they have such a large stake in the outcome of the proceedings, would not be prepared to advance further funds, if an order for security were made, to ensure that the appeal could go ahead.

44. The decision of Sackville AJA was the subject of an application for review which was heard by a bench of three Judges of Appeal: Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd (2014) 103 ACSR 201. By the time the review application was heard, the solicitors who had been acting in the principal appeal had withdrawn; the security ordered by Sackville AJA had not been provided and the principal appeal was liable to be dismissed as a result. There were a number of procedural complexities, but both Emmett JA (with whom Meagher JA agreed) and Basten JA considered that the withdrawal of the solicitors gave rise to a significant change of circumstances which permitted reconsideration of the security order: at 211 [43] (Basten JA), 224 [119] (Emmett JA). Emmett JA concluded, however, that the appellants had very limited prospects of success in the appeal, an analysis with which Basten JA agreed: at 213 [52] (Basten JA), 234 [165] (Emmett JA). Essentially for this reason, the decision to order security stood, although a further period of time was granted in order to comply with it. So far as Sackville AJA’s findings concerning the solicitor’s role were concerned, Emmett JA said only that those findings had been open to him: at 221 [97] (Emmett JA).

45. Counsel argued that the context for Ward JA’s remarks in Ballard was distinguishable from the present case because of the unusual arrangements with respect to the costs of the appeal. Counsel acknowledged that the circumstances in Tyneside were not so readily distinguishable. But he contended that the remarks of Sackville AJA addressed only the willingness of the solicitors to pay rather than ability to pay. I deal with this submission below. Counsel submitted that if the case was not so distinguishable, it was wrongly decided.

46. The decisions of Ward JA in Ballard and of Sackville AJA in Tyneside are not, strictly speaking, binding on me: see Short v Crawley (No 45) [2013] NSWSC 1541 at [66] and the cases there cited. I acknowledge that neither decision directly addressed the point now in question. Nevertheless, I think it is of some significance that both Ward JA and Sackville AJA saw no difficulty in applying to solicitors the principles that apply generally to creditors in the context of possible stifling of the proceedings. As will be seen, the Court of Appeal in LRSM (below at [51]) seems to have seen no difficulty with such an approach either.

47. The question posed by counsel’s submission comes down to whether, in a case such as the present, a solicitor creditor should be treated differently from other creditors having an interest in the outcome of the litigation. In my opinion, there is no reason in principle for any such exception to be recognised. I agree that for a solicitor to advance monies to his or her client may put the solicitor in a delicate position so far as his fiduciary duties to the client and his professional duties to the Court are concerned. It may also give rise to issues of undue influence. But these problems are not new and they are not confined to loans for the purposes of legal proceedings.

48. Even if monies are not separately advanced, a solicitor who defers payment of his or her fees pending the outcome of the proceedings, where the client is unable to pay, is effectively speculating on the outcome of the litigation (a conditional costs agreement was referred to as a form of “indirect” litigation funding by Basten JA in Green v CGU Insurance Ltd (2008) 67 ACSR 105 at 123 [67]). That is not a criticism of the practice in general or of SR’s conduct in these proceedings in particular. A retainer on such a basis is entirely legitimate and may be important in affording access to justice. But we should not pretend that such arrangements are not a source of profit for solicitors or that they do not create the potential for conflict. They clearly are and they clearly do.

49. In a case such as this, the rationale for awarding security is to mitigate the unfairness of the defendant being exposed to the full risk of loss if the litigation succeeds, but having no recourse if it fails from those who stand to benefit from the litigation. I see no reason why the fact that the person who stands to benefit is a solicitor should make any difference. A solicitor in such a situation may need to be more careful in explaining the implications to the client, and may perhaps even need to ensure that the client obtains independent legal advice. But that is what the solicitor should do anyway and the difficulty and potential additional expense is no reason to make an exception which would disadvantage the defendant.

Inability to provide security

50. Counsel’s second argument was that even if there was no special rule for solicitor creditors, in the present case SR was not prepared to finance the security. It followed, in counsel’s contention, that security should be refused so as to avoid the proceedings being stifled.

51. Counsel relied on the decision of the Court of Appeal in LRSM Enterprise Pty Ltd v Zurich Australian Insurance Ltd [2014] NSWCA 88. In those proceedings, neither the appellant company, nor the individual who controlled it, had the means to meet an order for security. The company had a number of trade creditors who had been asked whether they would provide financial assistance for the costs of the proceedings and who had replied that they were unwilling to do so. The trial Judge rejected an argument from the appellant that security should be refused because if ordered it would stifle the proceedings. An appeal was allowed, the order for security was set aside and the application for security was dismissed. Barrett JA (with whom McColl JA and Macfarlan JA agreed) said:

48.   I am of the opinion that no objective reason has been shown in this case for an expectation that any of the identified creditors should provide financial support to the appellant for the purposes of its litigation. There is nothing to suggest that any of those creditors is distinguishable from a bank whose customer's account is overdrawn or a supplier who has cut off supplies because past payments have not been made. Creditors of that kind are independent actors whose own interests may legitimately be uppermost in their minds. There is no legal or commercial expectation that they should turn themselves into litigation funders.

49.   On this aspect, the primary judge did not, in my view, have proper regard to the relevance of unwillingness, as distinct from inability, to assist financially when the persons whose potential assistance is under consideration do not occupy an "insider" position and have no separate interest in supporting the plaintiff. In that way, a material consideration was not taken into account.

52. It will be recalled that both Ward JA (in Ballard) and Sackville AJA (in Tyneside) referred to a lack of evidence as to whether the solicitor was prepared to fund the litigation, rather than a lack of evidence as to whether the solicitor was able to fund it. Similarly, the Registrar referred to there being no evidence that SR would not agree to fund the litigation. Counsel for Longjing submitted that that gap in the evidence had now been closed, since there was evidence that SR was not prepared to hazard funds on the litigation. Counsel submitted, by reference to LRSM, that this was a reasonable commercial position to take and that, accordingly, the application for security should be refused.

53. The evidence upon which counsel relied to close the gap appeared in Mr Ryckmans’ affidavit. He said:

Although my law firm has incurred fees acting for Longjing and is a creditor of Longjing, my firm is not prepared to lend any money to Longjing or extend other financial accommodation to Longjing in connection with the current proceedings. My law firm is already significantly exposed to the risk that it will be unable to recover all of its outstanding legal fees under the security interest granted by Merry Ng to my firm. Although my firm is willing to write off part of the legal fees which cannot otherwise be recovered from the equity in the strata unit, it is not prepared to increase its financial exposure by meeting payment of any security for costs as may be ordered in these proceedings.

54. There was also evidence on the review application concerning Property IQ’s attitude to funding the litigation. Mr Ryckmans’ affidavit stated that he had been told by Property IQ’s solicitor that it would not agree to advance any further funds to fund security or legal costs. Property IQ had reserved its right to pursue recovery action but so far had not done so.

55. In my view, this further evidence still leaves questions unanswered.

56. SR are apparently still deferring payment of their fees, but there are expenses of litigation beyond the solicitor’s own fees which cannot be deferred. How are disbursements such as hearing allocation fees going to be funded? And what about counsel’s fees? The evidence before me shows that at least some of counsel’s fees have been paid out of the China Grand settlement. There is no evidence that counsel have agreed to defer their fees. A full understanding of how the proceedings are to be funded is important. There is no point in refusing security at this stage if the expenditure necessary to carry the proceedings through to completion cannot be funded and the case may collapse at a later point anyway.

54. Mr Ryckmans’ affidavit was sworn on 22 June. Mr Ryckmans said that his firm was not prepared to increase its financial exposure by meeting payment of any security for Perpetual’s costs at all. Yet, subsequently, the sum of $22,500 has been provided. The evidence does not allow a finding as to where that money came from but whoever did provide the money appears to have calculated that it was worth doing so to preserve Longjing’s right to challenge the security order.

55. In my view, considerations like this show that where a respondent to an application for security claims that an order for security will stultify the proceedings, it is incumbent on that respondent to provide a full explanation of how the proceedings are to be funded to completion. To use the language in Bell Wholesale v Gates Export, it should be seen as an essential part of the case of a company seeking to resist an order for security to prove all the necessary facts in this regard. The Court should also recognise that evidence from creditors that they are unwilling to fund security is inevitably self-serving, and that it is often not until security is actually specified and ordered that one finds out exactly how much those who stand behind the litigation are really prepared to pay.

56. The evidence shows that when the Registrar made her order in these proceedings, Longjing had the financial capacity to meet at least some of the security ordered, and Longjing appears to retain the capacity to provide some further money. The amount of security ordered ($90,000) is relatively small in the scheme of things. The sum of $10,000 or so remains in trust. It may be that given the amounts already committed, and the fact that Ms Ng has obtained a new job, it is possible to squeeze sufficient money to meet the order out of those who stand behind Ms Ng and the litigation. While it may be doubtful that Longjing can raise the funds to provide the whole of the security ordered, that is not certain.

57. But, in my view, it is not simply a question of the plaintiff’s ability to raise part, or all, of the security.

58. Contrary to the assumption inherent in Longjing’s submission, there is, in my opinion, no rule that mere unwillingness of a creditor to fund the litigation will in all circumstances require that creditor’s interest to be ignored. In Bell Wholesale v Gates Export, the Full Court spoke of the need to show that creditors or other persons who stood behind, and would benefit from, the litigation were “without means”. In Green v CGU, Hodgson JA (with whom Campbell JA agreed) spoke at 119 [45(2)] of the need to prove that such persons were “unable to provide security”. This implies that it is ability to fund the litigation, not willingness, which is the relevant test for such persons.

59. Such a test is, in my view, consistent with principle. To allow the litigation to continue without security where there is a creditor standing behind the litigation in the hope of benefiting from the outcome, but without exposure to the defendant’s costs, would be to encourage the very asymmetry of risk which an order for security is designed to ameliorate. If an order for security is made and the creditor then decides not to underwrite the security, the plaintiff may not be able to pursue the proceedings. But this does not mean that the proceedings have been stifled in the relevant sense. It is simply a consequence of the creditor not being prepared to underwrite all the costs required to prosecute the litigation to conclusion. It is no different in principle from an unwillingness on the part of such a creditor to fund counsel’s fees or other disbursements which must be met in order to take the matter to trial.

60. I think that the practical considerations on which I touched at [57] above also support such a test. Suppose the evidence shows, as in this case, that money could be made available to meet some, but not all, of the security. In such a situation, justice would appear to require that such security as can be made available should be. Some security may not fully mitigate the unfairness to the defendant, but it is better than nothing. But is the result, namely that the plaintiff’s other expenses of conducting the litigation are fully covered but the defendant’s entitlement to security is only partly covered, acceptable? And how hard should the Court push the plaintiff and the plaintiff’s legal representatives? Should the Court ask, for instance, whether counsel can be found who would be prepared to act on a conditional basis or to defer their fees so that more monies can be made available to meet the security?

61. One of the advantages of the test which focuses on the means of those who stand behind the litigation is that it is not necessary to go into such matters. Once satisfied that those persons have sufficient means to fund the litigation, including the security, the Court simply orders the appropriate amount of security and leaves the financial negotiations where they belong: inside the plaintiff’s camp. If those behind the litigation ultimately choose not to provide the security, that is their commercial decision.

62. In my opinion, the Court of Appeal did not decide to the contrary in LRSM. The conclusions of Barrett JA which I have quoted at [51] above expressly referred to the creditors in question not being “insiders”. The same distinction runs through his Honour’s earlier reasoning. His Honour said:

40.   Counsel for the appellant referred to a number of cases in which creditors whose support had not been forthcoming were seen as occupying a position that made it unreasonable for them not to give financial assistance to the corporate plaintiff. In Pasdale Pty Ltd v Concrete Constructions (1995) 131 ALR 268, Finn J was influenced by the fact that the corporate plaintiff was subject to a deed of company arrangement which acknowledged a possible need for the creditors to provide financial support if the litigation was to proceed and that the creditors as a body had, by a process of voting, assented to that. In Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201, the company's decision to sue was viewed as that of its financier "acting through" a receiver and manager appointed by it. In Reches Pty Ltd v Tadiran Ltd (1998) 85 FCR 514, the creditors were the shareholders. In all of those cases, creditors whose position was relevant to the assessment of the company’s ability to meet an order for costs had some attribute of relevance over and above creditor status.

…

44. The creditors mentioned at [31] and [32] above are arm's length trade creditors. They have no connection with the company or Mr Naboulsi [the director who controlled the company] akin to the connections that existed in the cases mentioned at [40] above - or, for that matter, the connection of the solicitors in Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd[2013] NSWCA 404 who were willing to continue acting in the litigation on a deferred payment basis. There is therefore a question as to whether those arm's length trade creditors should be regarded as "standing behind" the corporate plaintiff in the sense relevant to this area of discourse.

66. His Honour’s view that the trade creditors in that case did not “stand behind” the company in the relevant sense fits comfortably with the statement of principle from the Full Court in Bell Wholesale v Gates Export which was endorsed by the Court of Appeal in Green v CGU. That statement of principle referred to the relevant person both standing behind and standing to benefit from the litigation. The two concepts are not the same. A person can stand behind litigation, by funding it or otherwise exercising a degree of influence or control over its course, without necessarily standing to benefit from the outcome at all. On the other hand, a person may stand to benefit from litigation without having, or seeking to exercise, any degree of influence over whether that litigation is pursued and how it is conducted. It may not be reasonable for litigation to be stifled by an order for security simply because a person who stands to benefit, but no more, from the litigation is not willing to provide the security (although this may be open to argument: see [71]-[72] below). But where a person stands behind the litigation as well as standing to benefit from it, it may properly be thought unreasonable for the proceedings to be allowed to continue if that person is not willing to provide security.

67. I have already explained why, in the present case, SR stands to benefit from the success of the litigation. In my opinion, SR should be seen, in addition, as standing behind the litigation in the relevant sense.

68. SR has the conduct of the proceedings as Longjing’s solicitor. SR also has the practical ability to control the proceedings because SR can, under the terms of its costs agreement, require payment of its outstanding fees, and thereby, in effect, bring the proceedings to an end, at any time (see [26] above). SR has also allowed the funding of the litigation from (at least) the China Grand settlement payment. In my opinion, SR is in an entirely different position from the ordinary trade creditors considered by the Court of Appeal in LRSM. It is notable that in LRSM at [44] (quoted at [65] above), Barrett JA expressly referred to solicitors acting on a deferred payment basis as having a relevant “connection with the company” which distinguished them from such trade creditors.

69. In supplementary submissions, reference was made to the decision of a Full Court of the Federal Court in Madgwick v Kelly (2013) 212 FCR 1. Those were class action proceedings in which the solicitors for the plaintiffs were acting on a contingency basis, which included an uplift in the event that the proceedings were successful. It was argued on behalf of the defendants that solicitors should be seen as standing behind the litigation because of their interest in the outcome. This argument was rejected by the Full Court, although the appeal against the dismissal of the defendants’ applications for security succeeded for other reasons. Allsop CJ and Middleton J said (at 13-14):

47.   … There are principled reasons to distinguish between a commercial litigation funder and solicitors such as Macpherson and Kelley under these agreements. The former take a percentage of the judgment; the latter earn professional fees. Here, the fees could not rise above costs as recovered. Solicitors are entitled to charge professional fees for undertaking the professional responsibilities of running the case, as officers of the Court, with all the attendant responsibilities (including duties to the Court) that that entails. No-one, the solicitors included, should ever lose sight of those responsibilities. The expected or contingent receipt of proper professional fees … is not a basis for requiring an officer of the Court to contribute to a fund for the costs of the other side of the litigation. …

70. If I considered that this was inconsistent with what the Court of Appeal said about solicitors acting on a deferred fee basis in LRSM, I would be obliged to follow LRSM in any event. But I do not think that what the Full Court said is inconsistent with LRSM. A solicitor who accepts a retainer on a conditional basis is obliged, as a matter of contract, to conduct the case through to completion without requiring payment of fees in the meantime (unless the retainer is terminated for some other reason). That is quite different from the position of SR here.

71. In Australian Equity Investors v Colliers International (NSW) Pty Ltd [2012] FCAFC 57, a Full Court of the Federal Court had to consider an appeal from an order for security for costs. Counsel for the appellants pointed to the distinction between standing behind the litigation and standing to benefit from the litigation. Counsel argued that the creditors who stood to benefit were at arm’s length and that their interest was irrelevant. The Full Court responded:

30.   We do not accept these arguments. The passage in Bell Wholesale is not to be read like a statute and the discretion thereby ossified. It does not require that the class of those benefited by the litigation be divided into two further sub-classes viz those standing behind the applicant and those standing, presumably, elsewhere. The principle at play is a simple one: those who stand to share the benefits of litigation cannot shirk its burdens. We do not think the Court in Bell Wholesale intended to say any more than that. Indeed this is clear from the last sentence of the passage quoted above which, in terms, talks only of those standing to benefit from the litigation [see [16] above]. It follows that the concepts of ‘benefiting from’ and ‘standing behind’ are elements in the same concept. It is no surprise, therefore, that arms length creditors have been held to be persons to whom the principle applies: see, for example, Cosdean Investments Pty Ltd v Football Federation of Australia Limited (No 2) [2007] FCA 163 at [15]-[29] per Mansfield J. Mr Lee SC invited us to regard Cosdean as wrongly decided because his Honour had misquoted Bell Wholesale by substituting an ‘or’ where there should have been an ‘and’. The relevant passage is at [25] and does not, so it seems to us, contain the suggested misquotation. …

72. This statement of principle does suggest that there may be circumstances where the fact that a creditor, who stands to benefit from the litigation, is at arm’s length will not be sufficient to defeat the application for security. At the very least, in such a situation it may be necessary to consider the prospects of success more closely as a discretionary factor. For his part, counsel for Longjing submitted that what the Full Court said is inconsistent with LRSM. It is not necessary to go into this for present purposes. The Full Court went on to observe at [31] that the relevant creditors were not necessarily at arm’s length, and in the present case I consider SR was not. The reconciliation of any differences between LRSM and earlier authorities can be left for another day.

73. For these reasons, I consider that the further evidence on the application before me, and the further analysis which has resulted from considering the additional submissions by counsel for Longjing, does not displace the Registrar’s conclusion. Even if Longjing and Ms Ng prove unable to provide or raise funds for the security ordered, SR stands behind, and stands to benefit from, the litigation. Longjing not having shown that SR lacks the means to fund the litigation, I consider it appropriate to exercise my discretion to require Longjing to provide security.

74. It would appear from the Registrar’s reasons for judgment quoted at [22] above that she regarded Property IQ as an ordinary arm’s length creditor who could not be expected to underwrite the costs of security. But the evidence before me presented a somewhat different picture. The provisions concerning representation give Property IQ priority over all other creditors from the proceeds of the litigation (after the legal costs are paid) and some specific contractual control over the conduct of the proceedings. However, given my conclusions concerning SR, it is not necessary to consider whether this sufficiently distinguishes Property IQ from being a mere arm’s length trade creditor for relevant purposes.

Conclusion and orders

75. For these reasons, I conclude that the challenge to the Registrar’s decision to order security fails. On review, I exercise my discretion to confirm the security order.

76. As mentioned, the orders made by the Registrar originally provided for security in four tranches over the ensuing twelve months, but the order providing for those payments was stayed pending the determination of the review application. The stay should now be lifted but the dates should be varied so as to set a fresh timetable (agreed, if possible, between the parties) for the provision of the security. The review application should otherwise be dismissed.

77. I see no reason why the costs of the review application should not follow the event. I do not propose to make an order that those costs be payable and assessable forthwith but I will order that the monies paid into Court as security for Perpetual’s costs of the review application be released to Perpetual.

78. The orders of the Court are:

1.   Direct that the defendant bring in Short Minutes of Order to give effect to this judgment.

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Decision last updated: 08 December 2017