Nedlands v Chisholm No. Scciv-96-844

NEDLANDS v CHISHOLM
[2001] SASC 144
Appeal Against the Decision of a Master

MARTIN J. The appellant (“the plaintiff”) has instituted proceedings against the defendant alleging that, as a director, the defendant removed funds from the plaintiff in breach of the fiduciary duty that he owed to the plaintiff. On 5 February 2001 a Master of this Court ordered that the plaintiff pay $150 000 as security for the costs of the defendant up to and including the first day of the trial and that the action be stayed until that amount had been paid into court. The plaintiff appeals against that decision.
The plaintiff was incorporated in South Australia pursuant to the Corporations Law. Its principal activity was investment. The second plaintiff in the proceedings was appointed liquidator of the company by order of the Federal Court made on 20 September 1994.
The defendant was appointed a director of the plaintiff on 24 October 1991. A deceased person, Mr Gary Milton Killington, was a controlling shareholder and governing director of the plaintiff. Over a period from 20 January 1992 to 7 May 1992, the defendant carried out five transactions which had the effect of transferring just over $550 000 from the company to Mr Killington. It is those transactions that the plaintiff claims were conducted by the defendant in breach of the fiduciary duty that he owed to the plaintiff. The defendant has denied that he was in breach of his fiduciary duty. He has pleaded that the transactions were carried out in accordance with the instructions of Mr Killington and that he was obliged by the Articles of the plaintiff to comply with those instructions. It is the case for the defendant that Mr Killington misappropriated the funds and that the defendant is not responsible for that misappropriation.
As a consequence of the removal of the assets, the plaintiff is impecunious. Section 1335 of the Corporations Law provides that where a Corporation is a plaintiff, and it appears by credible testimony that there is reason to believe that the Corporation will be unable to pay the costs of a successful defendant, the court may require sufficient security to be given for such costs and stay the proceedings until the security is given. The plaintiff conceded that the threshold question of impecuniosity was satisfied.
The Master possessed an unfettered discretion. The plaintiff argued that the Master erred in a number of respects and that factors such as the defendant’s conduct having caused the impecuniosity and the defendant’s delay in bringing the application for security strongly favoured the rejection of the application.
As to the issue of delay, the Master expressed his reasons as follows:
“Firstly, the plaintiff claims that the defendant has grossly delayed in bringing the application and has delayed in pressing the application. Amongst other things, the plaintiff points to the fact that the defendant made an application for security in 1996 and abandoned that application. Whilst that may be an accurate statement, it does not take into consideration that the solicitors acting for the defendant were then different, nor that certain information with regard to the plaintiff’s true financial position has only come to light within the last 12 months. I do not consider that the delay should deprive the defendant of security which he might otherwise be entitled to. Insofar as it is suggested that the defendant has delayed in pressing the application, it seems to me that this has been the result of the way in which this matter has proceeded with the various applications, appeals and mediations and again should not tell against the defendant.”
The plaintiff submitted that the Master erred in a number of respects on this aspect. In order to understand the approach of the Master, it is necessary to refer to some of the detailed history of these proceedings.
The plaintiff issued the summons in April 1996. Following an order made on 11 June 1996, the statement of claim was amended. The defence was filed on 2 July 1996 and discovery was made by the plaintiff on 28 August 1996. On 30 August 1996 the defendant applied for security for costs. That application was opposed. Significantly, in response to the application, the liquidator filed an affidavit dated 20 September 1996 in which he stated that he had insufficient funds available from the resources of the plaintiff to satisfy any order as to security for costs and that the effect of such an order would be to prevent the plaintiff from pursuing its claim. The application was due to be heard on 8 October 1996. On 4 October 1996 the defendant advised the plaintiff that it was not pursuing the claim. Accordingly, the claim was dismissed on 8 October 1996.
Counsel for the defendant submitted that it was not surprising that the defendant abandoned the application in the face of the affidavit of the liquidator. While the assertion by the liquidator that an order would prevent the plaintiff from pursuing its claim is capable of providing a reasonable explanation for the defendant withdrawing the application, I note that the defendant did not file any material for consideration by the Master or this Court on appeal identifying the statement of the liquidator as the reason for withdrawing the application.
The application under consideration was not made until 26 March 1999. I was referred to a detailed chronology of events that occurred between October 1996 and March 1999. The plaintiff submitted that the delay was unreasonable and that, in substance, all that had changed was that the defendant became aware that the plaintiff was being funded by two insurers. The defendant submitted that the delay was understandable in the face of the original statement by the liquidator to which I have referred and that after the defendant, through investigations it initiated, became aware that the plaintiff was being funded, the defendant proceeded with reasonable expedition.
It is unnecessary for me to canvass the details of the chronology of events to which I was referred. It is correct, as counsel for the plaintiff submitted, that in October 1998 during the course of an examination of the administrator of the bankrupt estate of Mr Killington, the defendant became aware that the liquidator had been granted leave pursuant to s 477(2)(b) of the Corporations Law to enter into an agreement with Royal and Sun Insurance and Lumley General Insurance. Although there was no evidence given that the agreement related to the funding of the proceedings against the defendant, counsel submitted that a conclusion to that effect was the only reasonable conclusion that could have been drawn by the defendant. While there is considerable force in that submission, in the context of the entire history of this matter, I would not regard a delay from October 1998 until March 1999 as of particular significance.
Although the application was made in March 1999, it was not heard until October 2000 when it proceeded by way of written submissions to the Master. The plaintiff submitted that the delay was primarily due to the conduct of the defendant in pursuing other applications, particularly in instituting proceedings in the Federal Court seeking to set aside the order winding up the plaintiff. There is no doubt that the existence of those proceedings delayed the course of other applications in the proceedings in this Court, but on the material before me I am unable to reach a conclusion that the Federal Court proceedings were taken for an improper purpose of causing a delay to the proceedings in this Court.
In conjunction with the application for security for costs, the defendant had also sought discovery of documents relevant to the funding of the plaintiff by other parties. The application for discovery of those funding documents was not successful. However, during the course of proceedings before Williams J concerning discovery of funding documents and other interlocutory issues, counsel for the plaintiff acknowledged that the plaintiff was being funded by insurers. I am satisfied that this is the information to which the Master was referring when he said that certain information concerning the plaintiff’s true financial position had only come to light within the last twelve months.
Generally speaking, the issue of delay has caused me some disquiet. In particular, there was a considerable delay before the application was heard. In a practical sense, that delay was caused by other applications made by the defendant. As a consequence, the plaintiff incurred considerable costs in defending the other applications, but it did so in the knowledge that the application for security for costs was pending. I am not prepared to infer that the defendant actively sought to delay the hearing of the application for security while other applications in this Court were determined.
The Master possessed an intimate knowledge of the course of the proceedings. He dealt with the issue of delay briefly and in general language. I am not prepared to infer that he made any error of fact or that he misunderstood the well known principles to be applied in the circumstances under consideration. In my view there is no basis upon which it would be appropriate to infer that the Master’s discretion miscarried in respect of his consideration of the issue of delay.
As to the issue of impecuniosity, the plaintiff argued that the Master erred in his approach to the relevance of the conduct of the defendant in causing the plaintiff’s impecuniosity. The Master dealt with that issue in the following way:
“The second reason why the plaintiff submits that no [order] should be made is that it is suggested that the defendant’s conduct has caused the impecuniosity of the company. Whilst this may be substantiated in due course, it certainly cannot be said without qualification to be the situation at this stage. When the trial proceeds and the evidence is before the Court, this situation may be different.”
In a practical sense, the consequence of the defendant transferring the funds to Mr Killington was to cause the company to become impecunious. Such a fact is relevant, but it does not carry the particular significance applicable in circumstances when an order for security would stultify the claim.
As to the approach of the Master, it is the defendant’s case that it was the breach of fiduciary duty by Mr Killington that caused the impecuniosity of the plaintiff and not any breach of duty by the defendant. This is a critical issue that will be determined at the trial. While initial impressions can be gained as to the strengths of the respective cases, it cannot be said that the defendant has little prospect of success fully defending the action on that basis. It is in that sense that the Master observed that while the claim that the defendant’s conduct caused the impecuniosity might be substantiated in due course, “it certainly cannot be said without qualification to be the situation at this stage.”
In my opinion the plaintiff has failed to demonstrate that the Master erred in his approach to the relevance of the assertion that the defendant caused the impecuniosity of the plaintiff.
During the course of his reasons, the Master referred to a submission that the making of an order for security for costs would stultify the litigation. The parties agree that such a submission was not made to the Master. As the Master erred with respect to a matter of fact, consideration must then be given to whether that error was of any significance in the exercise of his discretion.
The Master’s remarks concerning this issue were as follows:
“It is further argued that the use of the security application is oppressive. It is argued that to make such an order will stultify the litigation. I would beg to differ with regard to such an assertion, because the insurers who are presently financing the plaintiff and who are the parties most likely to gain from the action, if they are not themselves playing a game of bluff, would be quite prepared to support the plaintiff.”
The plaintiff argued that having rejected the suggestion that an order would stultify the litigation, the Master erroneously used the existence of insurers who had the capacity to meet an order for security as a positive factor favouring the grant of the application. That submission led to an interesting debate on a matter of principle which it is unnecessary for me to resolve. In my opinion, the Master did not use the existence of the insurers as a positive factor favouring an order for security. He simply referred to their existence as an answer to the proposition he mistakenly thought had been raised that an order would stultify the litigation. The existence of the insurers negatived the existence of a factor that would otherwise have been adverse to the making of an order for security. In these circumstances, in my opinion the error of fact made by the Master was of no significance to the exercise of his discretion.
The principles governing the approach of an appellate court to the exercise of the discretion by the Master are well established. I am not persuaded that the Master made any relevant mistake of fact or that he misapprehended any principle. Notwithstanding my disquiet about certain aspects of the defendant’s conduct, I am not persuaded that the Master was plainly wrong in exercising his discretion in favour of the application for security.
The Master ordered that the plaintiff provide security to the amount of $150 000. He assessed that amount in respect of the period after the application was made on 26 March 1999 and to the conclusion of the first day of the trial. The plaintiff suggested that on the figures put before the Master he had allowed too much. The defendant responded that figures put before the Master were estimates provided at the time the application was made and that the Master was in a better position to assess costs incurred because he was familiar with the proceedings that had taken place since March 1999. Counsel acknowledged that the estimated costs had included a figure for counsel which was higher than would be ordered on taxation.
The Master was in the best position to assess the likely costs that had been incurred and would be incurred between March 1999 and the conclusion of the first day of the trial. I am not persuaded that there is any basis upon which it is appropriate to interfere with the Master’s assessment.
The appeal is dismissed.

[2001] SASC 144

9 May 2001