One Lake Macquarie Pty Ltd (In Liquidation) v Athena Rose Capital Pty Ltd

[2025] NSWSC 177

Supreme Court

New South Wales

Medium Neutral Citation:

One Lake Macquarie Pty Ltd (In Liquidation) v Athena Rose Capital Pty Ltd [2025] NSWSC 177

Hearing dates:

13 December 2024

Decision date:

11 March 2025

Jurisdiction:

Equity - Applications List

Before:

Kunc J

Decision:

Registrar’s decision set aside and security for costs ordered

Catchwords:

CIVIL PROCEDURE – Registrars – Review of Registrar’s decision – Error not required to be shown – Court must be satisfied that it is in the interests of justice to exercise its discretion to vary or set aside Registrar’s order

COSTS – Security for costs – Relevant factors – Insolvent plaintiff – Stultification – Court must consider what resources may reasonably be expected to be available to plaintiff – Position of those standing behind plaintiff’s major creditor – Availability of commercial litigation funding

Legislation Cited:

Corporations Act 2001 (Cth) s 1335

Evidence Act 1995 (NSW) ss 75, 140(2)

Uniform Civil Procedure Rules 2005 (NSW) r 42.21

Cases Cited:

Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11

Duke Holdings Ltd (in liq) v Duke Group (in liq) [2009] SASC 245

Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191

KavcorPty Ltd (in liq) v Kavanagh [2005] NSWSC 1163

LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited [2014] NSWCA 88

Madgwick v Kelly (2013) 299 ALR 188; [2013] FCAFC 61

Tomko v Palasty (No 2) (2007) 71 NSWLR 61

Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245

Woolworths Limited v About Life Pty Ltd (No 2) [2018] NSWSC 1340

Texts Cited:

P Herzfeld and T Prince, Interpretation, (Thomson Reuters, 2024, 3rd ed)

Category:

Procedural rulings

Parties:

One Lake Macquarie Pty Ltd (In Liquidation) (Plaintiff)
Athena Rose Capital Pty Ltd (Defendant)

Representation:

Counsel:
E A Walker (Plaintiff)
S Thomson (Defendant)

Solicitors:
Piper Alderman (Plaintiff)
Mack Lions Lawyers (Defendant)

File Number(s):

2024/102800

Publication restriction:

None

JUDGMENT

Summary

1. When determining whether an insolvent plaintiff should be ordered to provide security for costs, it is well accepted that the Court will inquire whether those “standing behind” the plaintiff, or those who “stand to benefit” from the litigation, are able and willing to provide security. That is necessary to test the plaintiff’s almost inevitable response that to order security would stultify its ability to prosecute its proceedings.

2. The present application raises three issues:

1. What does the applicant have to show on a review of a Registrar’s decision for the Court to exercise its discretion to vary or set aside that decision?

2. In the case of the insolvent plaintiff’s major creditor, how far is the plaintiff required to go to identify the person or entity “standing behind” or “standing to benefit” from the litigation?

3. What role does the appropriateness or availability of commercial litigation funding play in considering the plaintiff’s position?

3. This judgment considers those issues in determining a notice of motion filed by the defendant, Athena Rose Capital Pty Ltd (ARC) on 8 October 2024. The motion seeks a review and the setting aside of orders made by Acting Registrar Onisforou on 12 September 2024 which dismissed ARC’s original motion filed on 28 May 2024.

4. The original motion sought orders pursuant to UCPR Pt 42 r 42.21 or alternatively s 1335 of the Corporations Act 2001 (Cth) for the plaintiff, One Lake Macquarie Pty Ltd (In liquidation) (OLM), to provide security for costs in the amount of $282,700 or such other amount as the Court may order. If the Court finds that the Registrar’s decision should be set aside, ARC submits that the security for costs order sought in the original motion should be made.

5. Because OLM is in liquidation, it was accepted that it bore the onus of demonstrating why security should not be ordered. There was no dispute that OLM’s sole shareholder did not stand to benefit from the litigation. ARC is a secured creditor which on any view would be paid. The decision below largely turned on the Registrar’s admission into evidence and acceptance of a Letter dated 27 June 2024 from the solicitors for OLM’s largest unsecured creditor, Forbair Pty Ltd, stating that their client was “incapable” of providing OLM’s liquidator with funds for security for costs.

6. Giving dispositive weight to the Letter, the Registrar concluded the proceedings would be stultified if security was awarded. He also concluded that the quantum of security being sought was excessive, and ordered ARC to pay OLM’s costs of the motion forthwith.

7. ARC initially challenged the Registrar’s decision on three grounds:

1. The Registrar had erred by admitting the Letter into evidence because it contained hearsay and opinion evidence;

2. The Registrar had erred in determining that OLM had successfully established its claim for stultification; and

3. The Registrar erred in determining that the quantum of security sought by ARC was excessive.

8. Before the hearing of the motion, the parties narrowed the issues in dispute because OLM sought, on the review before me, to rely on additional evidence in support of its stultification argument. ARC did not object to that evidence. The admissibility of the Letter was no longer in dispute. The issues became:

1. Because OLM was attempting to rely on new evidence, was it necessary for ARC to demonstrate the Registrar had made an error for the Court to exercise its jurisdiction to review the Registrar’s decision?

2. Did the Registrar err in finding that OLM had established its stultification claim?

3. Did the new evidence establish that OLM’s proceedings would be stultified if security was ordered?

9. For the reasons which follow, the Court has determined that the decision should be set aside and security for costs ordered. Those reasons may be summarised as:

1. It was not necessary for ARC to demonstrate that the Registrar had erred;

2. For the Court to exercise its discretion to vary or set aside the decision, ARC had to satisfy the Court that it should intervene in the decision in the interests of justice;

3. The Registrar had erred because the Letter was an insufficient basis for OLM to have satisfied the Court that its proceedings would be stultified if security was ordered. That error warranted the review. In any event, the introduction of the new evidence made it in the interests of justice for the Court to review the decision. The review was a de novo hearing;

4. In considering a claim of stultification, the fundamental question was what resources may reasonably be expected to be available to the plaintiff. In this case, this required evidence as to whether Forbair, as OLM’s major creditor which stood to benefit from OLM’s proceedings, was unable or unwilling to provide security and, to the extent it was unable or unwilling, evidence about the position of Forbair’s sole shareholder. OLM had failed to lead any evidence about whether that sole shareholder was unable or unwilling to provide security;

5. That same fundamental question also required, in this case, that OLM demonstrate that commercial litigation funding was either inappropriate or unavailable. OLM had not done so; and

6. OLM’s failures referred to in the preceding two sub-paragraphs meant it had not satisfied its onus to demonstrate why security should not be ordered. Its opposition to security based on a claim of stultification had not been proven.

10. Mr S Thomson of Counsel appeared for ARC. Mr E A Walker of Counsel appeared for OLM.

The underlying dispute

11. In these proceedings, OLM seeks an account by ARC as the mortgagee in possession of two parcels of land which had been owned by OLM. OLM contends that an account is necessary after ARC claimed that it has a secured debt far exceeding the sale price of the land after purporting to have taken an assignment of a debt that OLM owed to a director of ARC, Ms Cheng (assigned debt).

12. Initially, ARC informed OLM when ARC was exercising its power of sale on 26 June 2023 that OLM was only indebted to ARC in the amount of $608,038. This would have led to approximately $5.5 million being paid to OLM from the net proceeds of sale after OLM’s debt to ARC had been fully satisfied. OLM contends that the assigned debt is unsecured, and that no assignment to ARC of the debt owed by OLM to Ms Cheng personally had ever occurred. ARC argues that all debts claimed are legitimate and properly owed to ARC. OLM accepts that it owes $20,102,302 to Ms Cheng but says this is an unsecured debt owed to her personally. The validity of the security documents which ARC relies upon is also in issue in the proceedings.

13. ARC now argues that the mortgages over the land secure $22,903,487 instead of $608,038. This would have the effect that there would be no surplus available to OLM from the sale of the land and there would be no money left for OLM’s unsecured creditors. Therefore, OLM contends that an account is necessary because ARC is allegedly acting inconsistently with its duties as a mortgagee.

The evidence before the Registrar

14. In support of its application before the Registrar, ARC relied on two affidavits from its solicitor, Mr Cong Xue. OLM did not object to any part of those affidavits.

15. OLM relied on two affidavits of Mr Mark Roufeil, one of the liquidators of OLM. OLM also relied on an affidavit from its solicitor, Mr Thomas Russell.

16. ARC only objected to the Letter, which was an annexure to Mr Russell’s affidavit. The Letter was from CJ Boyd Solicitors, the legal representatives for Forbair, to Piper Alderman, the legal representatives for OLM. The Letter was sent in response to Piper Alderman’s request to CJ Boyd Solicitors on 17 June 2024 for an indication as to whether Forbair would be willing to pay any quantum of security ordered by the Court if ARC was successful in its security for costs application.

17. The Letter included:

SECURITY FOR COSTS:

Our client has carefully considered its financial capacity and has unfortunately reached the conclusion that it is incapable of providing the funds sought by the Liquidator for the purpose of lodging the security for costs sought by the defendant in the above proceedings.

Our client is a small business, and its financial resources are completely depleted as a result of the significant amount that it is owed by One Lake Macquarie Pty Ltd. It is unlikely that our client will be able to remain solvent for much longer unless it receives a reasonable dividend from the liquidation of that company in the near future.

In the premises of the above, our client’s only option is to hope that the Court will not grant the defendant’s application for security, which appears to be little more than an attempt to stymie the proceedings.

18. The Registrar admitted the Letter into evidence on the basis that the security for costs hearing was an interlocutory proceeding and that by including evidence of the history of correspondence between Piper Alderman and CJ Boyd Solicitors, OLM had sufficiently demonstrated that the parties were aware Forbair was the client of CJ Boyd Solicitors. Therefore, the letter came within the exception to the hearsay rule pursuant to s 75 of the Evidence Act 1995 (NSW). The Registrar also accepted Mr Walker’s submission that once the Letter came within the hearsay exception the fact that it might contain an opinion did not make it inadmissible.

The decision

19. Once he had determined that the letter was admissible, the Registrar then went on to consider whether an order for security should be made.

20. OLM conceded that the Court’s discretion was engaged because OLM was in liquidation. The parties’ submissions focused on whether an order for security would stifle or stultify the proceedings (Uniform Civil Procedure Rules 2005 (NSW) Pt 42 r 42.21(1A)(f) (‘UCPR’)).

21. ARC resisted OLM’s stultification argument on the basis that OLM had failed to satisfy its evidentiary burden that persons who stand behind OLM and who would benefit from the litigation if successful were without means (Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [25]).

22. At [31] of his reasons, the Registrar accepted that the sole shareholder of OLM, Ms Meihong Yang, is not a creditor of OLM and does not stand to benefit from the litigation. At reasons [32], the Registrar also accepted that Forbair was the only unsecured creditor which could be expected to fund the litigation.

23. The Registrar then determined that the Letter was sufficient evidence to demonstrate that Forbair was unwilling and unable to provide security. ARC challenged this critical part of the reasons:

[33] The Letter, is for the reasons already outlined, sufficient evidence in an interlocutory application, that Forbair is unwilling and unable to fund the litigation. The Plaintiff’s Counsel conceded that there could be more evidence of Forbair’s position. However, the Plaintiff has furnished significant evidence in support of Folbair’s [sic] creditor claims which total $20,755,664.38 – an amount which is not insignificant.

[34] However, in circumstances where the Letter states:

It is unlikely that our client will be able to remain solvent for much longer unless it receives a reasonable dividend from the liquidation of the company in the near future

further consideration needs to be given to whether looking only to Forbair’s position is sufficient.

[35] Both parties referred to Duke Holdings Ltd (In Liq) v Duke Group Ltd (In Liq) [2009] SASC 245 and the following at [35] cannot be disregarded:

… When a plea of stultification is made by a company in liquidation which has one major creditor who stands to benefit from the plaintiff’s success, but who is itself unable to provide funding assistance, the plaintiff should also demonstrate that those who stand behind the major creditor are also unable to provide that assistance.

[36] The Defendant’s Counsel is correct: in these proceedings, there is one major creditor, Forbair, for which no company search has been provided and its creditors are unknown, as are its related companies.

[37] I accept the Plaintiffs Counsel’s argument that companies are under no obligation to pay a dividend to shareholders, and accordingly, that Forbair’s shareholders may not stand to gain anything from the present litigation.

[38] However, I also accept the Defendant’s position that the Plaintiff could have further explored the financial backing of Forbair and those behind it, particularly where Forbair’s own impecuniosity has been raised: Bell Wholesale Co Pty Ltd v Gates Export Corp (No 2) [1984] 2 FCR.

24. ARC also submitted that because the underlying dispute was commercial, OLM needed to demonstrate that litigation funding was not available or viable. ARC cited Kavcor Pty Limited v Kavanagh [2005] NSWSC 1163 in support of this proposition, where Palmer J held (emphasis added):

[13] The Liquidator does not say whether he has, in fact, explored the possibility funding by a commercial litigation funder. He does not say why he does not consider it to be in the interests of creditors of Kavcor to enter into such a funding arrangement. Further, it is unclear from his evidence whether he has sought litigation funds from Kavcor’s creditors and has been refused or whether he has not sought litigation funding and no creditor has volunteered it.

[14] Before the Court could be satisfied that Kavcor has a claim deserving of prosecution and that insurmountable impecuniosity will stifle it if a security for costs order is made, the Court would need evidence as to the circumstances in which the Liquidator has endeavoured unsuccessfully to procure litigation funding from Kavcor’s creditors; it would need evidence explaining why commercial litigation funding is unavailable or inappropriate. In short, the Court requires evidence to satisfy it that insurmountable impecuniosity justifies departure from the usual requirement that a company in liquidation provide security for the costs of its litigation.

25. OLM refuted this submission on the basis that the liquidator did not believe that litigation funding was appropriate in the present case, “particularly where the liquidator has not seen reasons to raise the spectre of litigation funding” (reasons [34]). OLM also cited Kavcor at [11] to support this submission:

[11] However, liquidators now have more than one source of funding open to them: in certain types of cases and with proper safeguards against abuse of process – see e.g. Project 28 Pty Ltd v Barr [2005] NSWCA 240 – it may be appropriate to procure litigation funding from a commercial litigation funder.

26. The Registrar accepted OLM’s submission that it was not necessary or appropriate for OLM to demonstrate it had or should obtain litigation funding:

[41] I note that, a Court should be more ready to order security for costs when a non-party, who is not having their own rights vindicated, is funding litigation and will benefit financially from the proceedings: Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd (2008) 67 ACSR 105 at [51].

[42] The Plaintiff’s argument that one must look to the people who stand to benefit is particularly relevant: commercial litigation funding, which stands to financially benefit the provider, is to the detriment of creditors who will already not be seeing a full return on their outlay. Accordingly, I accept the Plaintiff’s view that the commercial funding is discretionary and not required here.

[43] I also accept Plaintiffs Counsel’s argument that stultification would be prejudicial to the liquidators of the Plaintiff, who have undertaken a considerable amount of work attending to their statutory duties and pursuing the recovery of a dividend for creditors, pointing to All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Ltd [2020] FCA 840 at [55]:

It seemed to me possibly unfair and contrary to the public interest that a liquidator stood to lose these fees if they were legitimately incurred as a result of the carrying out of his or her statutory duties. This is why it is uncommon for security for costs to be ordered against a liquidator when proceedings are brought in the liquidator’s name.

[44] I find that, the Plaintiff’s evidence was the bear [sic] minimum to satisfy their burden, but nonetheless, stultification has been established.

27. Because of the conclusion to which he had come, the Registrar did need to go on to what he described (reasons [33]) as “an analysis of the third issue of quantum”. However, at reasons [44] he observed that “if I were to consider quantum, in my opinion, the amount sought is excessive”.

Additional evidence on the review

The new evidence read or tendered

28. At the review hearing before me, OLM relied upon the three affidavits and exhibits which they read before the Registrar. They also relied on three new affidavits: two further affidavits of Mr Roufeil and an affidavit of Mr Cristian Sotelo, a solicitor acting for OLM.

29. Mr Sotelo’s affidavit sets out evidence of Forbair’s financial position with material produced pursuant to a subpoena issued at OLM’s request on 23 October 2024, being fifteen days after ARC filed the motion. Mr Roufeil’s affidavit outlines the steps taken by the liquidators to obtain litigation funding.

30. For its part at the review hearing, ARC read a further affidavit of its solicitor, Mr Cong Xue together with an affidavit of Ms Wanqiong Wang which provided evidence in reply to the new evidence adduced by OLM. ARC also tendered a draft funding agreement from Clover Risk Funding Pty Ltd, which was sent to OLM by email on 6 November 2024 and a draft term sheet also provided by Clover Risk. These documents were obtained by ARC pursuant to a notice to produce issued to OLM.

Summary of evidence

31. On 5 December 2022, Forbair issued an invoice for $654,393.81 to Dr John Li, a director of OLM, in relation to works carried out at one of the properties owned by OLM. That amount constituted the November 2022 Progress Claim. That invoice included a cost-plus margin, reflecting the amount of profit the builder took on the invoice being $63,739.66.

31. On 20 December 2022, Forbair issued a further invoice for $344,869.89 to Dr Li, being the December 2022 Progress Claim. That invoice included a cost-plus margin of $33,593.85.

32. On 15 March 2023, the solicitors for Forbair wrote to the then provisional liquidators of OLM. This letter was in evidence before the Registrar:

THE PAYMENT DEMAND

As you are aware our client is contracted with the Company and its director Dr John Li, to carry out construction work at XXX Eraring NSW (the “Contract”) (the “property”).

In our letter of 21 December 2022, we set out the amounts owing to our client by the Company for unpaid progress payments due in November 2022 ($654,393.10) and December 2022 ($344,869.89). Supporting documentation was also provided.

However, our client remains unpaid and reiterates its demand for payment, plus interest of 8% in accordance with Schedule 2, item (d) of the Contract, which calculates to a total of $20, 729 pus GST to 15 March 2023, as follows;

1.   November claim - $15,060

2.   December claim - $5,669.

Accordingly, this is a demand for payment in the amount of $1,022,092. 60

SECURITY OF PAYMENTS CLAIM:

As you are aware, a creditor contractor is entitled to make a claim for payment of a progress claim under the Building and Construction Industry Security of Payment Act 1999 upon a respondent in administration.

Whilst the Company is in provisional liquidation and not administration, this is in our view analogous to administration, particularly in circumstances where the Company is in provisional liquidation, not due [sic] insolvency but rather, due to a dispute between its members, which we understand to be the case in the present circumstances.

Accordingly, you are on notice that, this is a payment claim made under the Building and Construction Industry Security of Payment Act 1999.

Our client reserves its rights to pursue its progress payment accordingly.

34. The material subpoenaed from Forbair included a ‘Builder Eligibility Assessment Report’ for Forbair from iCare HBCF dated 3 November 2023. That report included a section on ‘Conditions’ which set out the additional requirements with which Forbair needed to comply to be an eligible building company. This included:

Condition

Condition Requirements

Provide a Letter of Undertaking from Director(s) restricting loan advances

A high proportion of the builder’s retained earnings have been distributed to close associates and required repatriation to the builder to meet minimum ANTA requirement.

This condition requires the builder to provide a letter of undertaking signed by the director(S) on company letter stating, ‘No further loans to be advanced to related parties for the next 12 months’.

35. On 28 March 2024, the solicitors for Forbair wrote to the then provisional liquidators of OLM:

We are instructed that your office communicated with Mr Braden Johnson of our client on 26 March 2024 and advised to the following effect:

1.   An accommodation has now been reached with the (disputed) secured creditor Athena Rose Capital, which will allow the following to take place shortly.

2.   Completion of the contract of sale by the Company of the Eraring property to a third-party purchaser which contract has been exchanged for some time but challenged by you.

3.   You will then be in a position to make a final adjudication of our client’s claim.

4.   The above settlement is expected to inject sufficient funds into the Company to pay a dividend to our client of 100 cents in the dollar.

…

Contractual basis of claim:

As you are aware the debt from the Company to our client was incurred under a construction contract which was partially completed and on-going at the time that the Company entered provisional liquidation (the ‘Contract’). As we understand it, you have a copy of the Contract.

The Contract was a ‘cost-plus’ contract, that is, the Company was obliged to pay our client all costs paid to third parties in relation to the construction of the house, plus its direct costs, plus margin.

…

The financial calculations that comprise the final claim

9. The enclosed spreadsheet sets out firstly, that there were two invoices that have been unpaid (17 and 20) in the amounts of $344, 896.88 and $654, 393.81. Those invoices are self-explanatory and were due and payable respectively on 12 December 2022 and 27 December 2022.

10. In addition to the above, our client has set out further incurred costs that were yet un-invoiced as of 1 September 2023 at $264,493.93.

11. In addition to the above, the spreadsheet sets out a claim for ‘break costs’ in the total amount of $283,273.20 that is, costs that have been incurred on forward orders of significant items, which were lost due to the suspension/termination.

12. In addition, the spreadsheet notes our client’s entitlement to delay costs in the amount of $181,500 as set out above.

13. Finally, the spreadsheet notes our client’s entitlement to interest in the amount of $113,806.78 in accordance with the interest calculator enclosed with this letter.

In summary, Forbair’s total claim against the Company now stands at $1,797,364.60…

36. Forbair’s bank statements between 24 July 2024 and 24 October 2024 showed:

1. The account balance reduced from $530,286 to $17,556 in a period of six days from 27 August 2024;

1. The account balance reduced from $152,038 to $27 in a period of eight days from 5 September 2024; and

2. The account balance reduced from $268,872 to $260 in a period of eleven days from 27 September 2024.

37. Ms Wang’s affidavit included a review of the sources of funding which Forbair was receiving. According to Ms Wang, between 13 May 2024 and 1 July 2024, a company called Sarland Pty Ltd deposited $197,747.96 into Forbair’s bank account.

38. According to Ms Wang, between 22 May 2024 and 21 October 2024 a company called Johnson & Johnson Real Estate Pty Ltd deposited $872,196.15 into Forbair’s account.

39. The financial material subpoenaed from Forbair also included a balance sheet as at 4 November 2024 which included this information:

1. Savings Account: $0.16

2. Accounts Receivable: $1,656,675.26

3. Shareholder Loans: $430, 806.55

4. Dividends paid on Ordinary Shares $140,000.00

40. Mr Walker drew to attention that as at 30 June 2024, Forbair’s savings account had a credit balance of $48,421.92. He submitted this demonstrated that Forbair was spending significant amounts of money between June to November 2024. In this context it was to be recalled that the Letter is dated 27 June 2024 (see [17] above).

41. Mr Roufeil gave this evidence in his affidavit sworn on 15 November 2024 about steps that had been taken to obtain litigation funding:

4.   On 11 October 2024 at 4:49pm, my staff issued emails to known litigation funders that called for expression of interests to provide litigation funding for these proceedings, and to conduct examinations and pursue recovery actions in the liquidation of One Lake Macquarie. This email enclosed a litigation funding summary brief and requested that a confidentiality agreement be executed and returned by Interested parties to gain further information and relevant documents. Annexed and marked "A" (pages 5 to 16) is a copy of this email and its attachment. That email was sent to the following litigation funders:

4.1   Litigation Lending Services Pty Ltd;

4.2   Clover Risk Management Pty Ltd;

4.3   lronbark Management Company Pty Ltd (lronbark Funding);

4.4   LCM Operations Pty Ltd (Litigation Capital Management);

4.5   Court House Capital;

4.6   Pretium Funding Pty Ltd;

4.7   Premier Litigation Funding Management; and

4.8   The Advocate Fund.

5.   Since sending the email on 11 October 2024, six funders have returned executed confidentiality agreements. Those recipients are:

5.1   Litigation Lending Services Pty Ltd;

5.2   Clover Risk Management Pty Ltd;

5.3   lronbark Management Company Pty Ltd (lronbark Funding);

5.4   LCM Operations Pty Ltd (Litigation Capital Management);

5.5   Court House Capital Pty Ltd; and

5.6   Pretium Funding Pty Ltd.

6.   Since receiving the executed confidentiality agreements, those parties have been provided further documents for consideration.

7.   Negotiations are continuing with the following funders, who have requested further information:

7.1   Clover Risk Management Pty Ltd; and

7.2   Court House Capital Pty Ltd.

8.   My negotiations with Clover Risk Funding are the most advanced. On 6 November 2024, Nicole Burns of Clover Risk Funding sent an email attaching a Term Sheet and a Funding Agreement. A copy of that email, excluding its attachments, is at annexed and marked "B" (pages 17 to 24).

9.   I have been informed by both Clover Risk Management Pty Ltd and and Court House Capital that their funding remains subject to obtaining legal advice on prospects. I also consider that, if a commercially acceptable offer for funding is received, I will need to obtain the consent of One Lake Macquarie's creditors or the Court to enter into the funding agreement. That is because I anticipate that it is likely to be an agreement with a term which could extend more than three months into the future.

42. On 6 November 2024, Clover Risk sent OLM a copy of a proposed funding agreement. That agreement included:

5   Adverse Costs

5.1   Subject to clauses 5.2 and 5.3, the Funder will pay the amount of any Adverse Costs Order made against the Companies or the Practitioners provided that the Adverse Costs Order was not made as a consequence of any negligent action (or inaction) of the Practitioners or the Lawyers. …

6   Security for Costs

6.1   If a Security for Costs Order is made in the Proceedings the Funder will provide to the Practitioners such monies (or other form of security as may have been ordered) as are required to comply with the order and the Practitioners must use such monies or security to satisfy the Security for Costs Order. In the usual course this money will be provided by way of the Funder paying the money directly into Court on behalf of the Companies and/or the Practitioners …

11   No Success/No Return

11.1   The Funder enters into this Funding Agreement on the basis that the prospects of it being repaid the Funding Costs and being paid the Funder's Return depend on the Settlement Sum being paid to or realised by the Companies and/or the Practitioners so that if a negotiated settlement of the Claims does not occur or the Proceedings do not result in a judgment in favour of the Companies and/or the Practitioners or any judgement obtained in the Proceedings is irrecoverable, the Funder will not be paid. …

43. On the same day a ‘Potential Funding Term Sheet’ was also provided to OLM. That document indicated that Clover Risk would fund OLM’s costs including costs to run the proceedings capped at $262,000 and adverse costs capped at $280,000.

44. Ms Wang’s affidavit also attached ASIC searches which disclosed that Forbair’s sole shareholder (and one of its two directors) was Mr Braden Johnson. A search of Forbair’s website confirmed Mr Johnson’s role at Forbair as “director and secretary” and that he is the founder of a development and consulting company called “Sarland.” Internet searches for further information about “Sarland” identified a company called “Johnson Projects” which is the “sale and marketing division of Sarland”.

45. Further ASIC searches demonstrate that:

1. Mr Johnson owns 100% of Sarland; and

2. Mr Johnson, through his 100% ownership of Sarland, owns 100% of Johnson Real Estate.

46. On 11 December 2024, Mr Roufeil swore an affidavit which purported to explain the reasons for rejecting the offer from Clover Risk (the italicised sentence was admitted only as evidence of Mr Roufeil’s state of mind):

[5] In my last affidavit, I referred at paragraphs 8 and 9 to my negotiations with Clover Risk Capital, and a Term Sheet and Funding Agreement which had been received from Clover Risk Capital which was subject to advice on prospects and consideration of the terms of the offer. Those negotiations have not resulted in a litigation funding agreement being entered. I formed the view that the terms proposed by Clover Risk Capital were not in the commercial interests of creditors.

[6] I am presently in ongoing discussions with Court House Capital and Pretium Funding regarding litigation funding.

[7] My staff have responded to a request for information from Court House Capital, however, Court House Capital has not yet obtained advice on prospects.

[8] Pretium Funding Pty Ltd has also requested further information, which has been provided. On 20 November 2024, Kylie Rizzo of Pretium Funding sent an email attaching a draft Litigation Funding Agreement. A copy of that email, excluding its attachments, is annexed and marked “A”.

[9] I am currently considering the alternate draft offers for litigation funding and seeking more information and advice to assess which is the best offer in the interest of the Company and its creditors.

[10] As at the date of swearing this affidavit, One Lake Macquarie has not obtained litigation funding.

Issue 1 – Does ARC have to demonstrate error given the new evidence? ARC’s submissions

47. ARC submits that it is not necessary for it to identify an error in the Registrar’s reasons for the Court to review the decision. It was enough that the Registrar’s order had a decisive impact on ARC’s rights and that OLM had adduced (without objection from ARC) new evidence on the review application was sufficient to warrant the Court reviewing the decision.

48. Both parties accepted that Tomko v Palasty (No 2) (2008) 71 NSWLR 61 was the leading authority on the review of Registrars decisions pursuant to UCPR Pt 49 r 49.19. ARC relied on Hodgson JA’s decision (with whom Ipp JA agreed) to support the proposition that a Court is more likely to exercise the discretion to review a decision where that decision has a decisive impact on the rights and obligations of one of the parties:

[9] In the case of a decision which finally determines a party’s rights, or which (albeit one of practice or procedure) has a decisive impact on those rights, a court may be more willing to intervene. It may permit further evidence to be led which does not satisfy the strict requirements for fresh evidence, if it is satisfied that the interests of justice require this. It may decide to substitute its own discretionary decision for that of the registrar, even though no House v. The King error is shown, again if it is satisfied that the interests of justice require this. To that extent, the review may be considered a de novo hearing.

49. Whilst accepting that an order for security for costs is one of practice and procedure, ARC submitted that the Court refusing such an order had a decisive impact on its rights: namely, because OLM is insolvent, the likely denial of ARC’s ability to recover costs from OLM if OLM is unsuccessful in the proceedings. It was also argued that such a situation represents a windfall to OLM and its creditors who can pursue the claim without the risk of incurring costs or negotiating litigation funding from commercial sources. The risk of ARC being left to incur significant legal costs with no real chance of recovery was submitted to be a potential injustice which warranted a review of the decision by the Court.

50. OLM adducing new evidence in the review application was submitted to be a further reason why the Court could review the decision irrespective of whether any error was identified. It was not in dispute that the Court has a broad discretion to accept fresh evidence on a review application. ARC did not oppose OLM relying on the new evidence and had filed new evidence in reply. ARC relied on the decision of Basten JA in Tomko at [52] (Hodgson and Ipp JJA agreeing) that a Court “may be more inclined to review based on fresh evidence”.

51. It was submitted that the Court should view OLM’s decision to file new stultification evidence as a tacit admission that its evidence before the Registrar was insufficient to meet its onus to establish the stultification claim. To achieve the overriding purpose of resolving the “real issues in the proceedings”, it was submitted that the Court should review the decision de novo without requiring persuasion as to an error of law in the Registrar’s reasons.

Issue 1 – Does ARC have to demonstrate error given the new evidence? OLM’s submissions

52. Mr Walker pressed that ARC had to demonstrate that the Registrar had erred for the Court to review the decision. It was OLM’s position that there was no obvious error in the Registrar’s reasons. It was only if the Court determined that there was an error that the Court should consider the new evidence. In accordance with Hodgson JA’s decision at [9] in Tomko, Mr Walker submitted there was no error which would create an injustice which would warrant the court intervening in this case.

Issue 1 – Does ARC have to demonstrate error given the new evidence? Determination

53. With no disrespect to the parties, the argument on this and Issue 2 had an air of unreality about them when the Court received – without objection – a considerable body of new evidence going to the issue of stultification. As will be apparent from what follows, I am of the view that the learned Registrar erred, and that is sufficient to engage the Court’s discretion to review his decision. However, as I will next set out, Tomko is clear authority for the proposition that error is not a necessary precondition to the exercise of the discretion.

54. In my respectful opinion, the correct application of Tomko invites these conclusions:

1. Error does not have to be demonstrated. This follows from Basten JA in terms at [52], Ipp JA at [17] agreeing, who also agrees with Hodgson JA at [8]. Importantly, Hodgson JA at [8] qualifies his statement in relation to decisions concerning practice and procedure by saying that error will “normally” be required, making it clear that even in those cases the requirement for error is not absolute.

2. Neither the dicta of Hodgson JA at [8] – [9] nor Basten JA at [52] are to be read as statutes intended to cover the field and I do not suggest their Honours were proposing they were to be read in that way. So much is clear from the language each of them uses, replete with multiple uses of “may”.

3. The passages to which I have referred in the previous sub-paragraph are non-exhaustive expositions of what might satisfy the “interests of justice” in accordance with these dicta of Hodgson JA:

[6] I agree that a review of a decision of a registrar is not an appeal, subject to s 75A of the Supreme Court Act; and that in such a review a court must exercise its own discretion.

[7]    In my opinion, this discretion extends to a discretion as to whether, and if so how, to intervene; and in my opinion, there is an onus on a person seeking to have a court set aside or vary a registrar's decision to make out a case that the court, in the interests of justice, should exercise its discretion to do so.

4. The dicta set out in the preceding sub-paragraph are the binding ratio of Tomko: see P Herzfeld and T Prince, Interpretation, 3^rd edn, Thomson Reuters, 2024 at [34.10] on the identification of the ratio decidendi. This is because those conclusions are necessary for the decision and common to the majority because Ipp JA agrees with Hodgson JA. While Ipp JA also agrees with Basten JA, he states his agreement to be “subject to” the judgment of Hodgson JA and, in any event, Basten JA (at [50]) also states that the Court “must exercise its own discretion on the material before it”.

55. As I set out in what follows, I am satisfied that the learned Registrar erred. However, even if it were otherwise, I find that ARC has met its onus to demonstrate that the interests of justice require the Court to exercise its discretion to review and, in this case, set aside the Registrar’s decision by reason of these matters:

1. The Registrar himself saw the issue as finely balanced and characterised OLM’s evidence of stultification as the “bare minimum”;

1. Given that OLM is in liquidation, the decision had a decisive impact on ARC’s potential right to recover its costs if successful by leaving it only with recourse against an insolvent plaintiff. There is always a risk in litigation that a successful party may not recover its costs, but here it was for all intents and purposes a certainty that ARC would not recover its costs against OLM; and

2. The Court has now received, without objection, a great deal more evidence than the Registrar had on the issue of stultification.

Issue 2 – Did the Registrar err in accepting OLM’s stultification claim? ARC’S submissions

56. Even with the Letter in evidence, ARC contended that the Registrar should have rejected OLM’s stultification claim on the basis that OLM had failed to satisfy its evidentiary onus to establish that its claim would be stultified if the Court ordered it to pay security.

57. ARC submitted that as a company in liquidation, OLM had a heavy onus to show that any application for security for costs would cause its proceedings to be stultified. ARC submitted that OLM must show that those who stand behind the company (and who stand to benefit from success in the litigation) are unable to provide security (see Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11, [23]-[27] (Hodgson JA)). This includes the shareholders and creditors of the company in liquidation and those who stand behind the creditors. As authority for this latter proposition, ARC relied on the decision of White J in the Supreme Court of South Australia in Duke Holdings Ltd (in liq) v Duke Group (in liq) [2009] SASC 245:

[35]… When a plea of stultification is made by a company in liquidation which has one major creditor who stands to benefit from the plaintiff’s success, but who is itself unable to provide funding assistance, the plaintiff should also demonstrate that those who stand behind the major creditor are also unable to provide that assistance….

58. ARC again relied on the decision of Palmer J in Kavcor in support of the proposition that a company in liquidation participating in proceedings of a commercial nature must also address the possibility of litigation funding by a third party when defending security for costs claims (see [24] above).

59. It was submitted on behalf of ARC that none of the evidentiary matters required by those authorities, including evidence of those who stand behind the creditors as was held to be required in Duke Group, was satisfied by OLM’s evidence before the Registrar. The only evidence of Forbair’s financial position was the Letter, which was submitted to be ‘perfunctory’. The reliance on the Letter alone was submitted to be inadequate to meet the evidentiary threshold required on the authorities.

60. ARC specifically challenged the following reasons of the Registrar as to why OLM’s stultification claim had been satisfied:

[37] I accept the Plaintiffs Counsel’s argument that companies are under no obligation to pay a dividend to shareholders, and accordingly, that Forbair’s shareholders may not stand to gain anything from the present litigation.

…

[42] The Plaintiff’s argument that one must look to the people who stand to benefit is particularly relevant: commercial litigation funding, which stands to financially benefit the provider, is to the detriment of creditors who will already not be seeing a full return on their outlay. Accordingly, I accept the Plaintiff’s view that commercial funding is discretionary and not required here.

[43] I also accept the Plaintiff’s Counsel’s argument that stultification would be prejudicial to the liquidators of the Plaintiff, who have undertaken a considerable amount of work attending to their statutory duties and pursuing the recovery of a dividend for creditors…

61. ARC submitted that these propositions were contrary to the authorities considering the evidentiary requirements for impecunious companies resisting security for costs applications. In particular, the finding that it was unnecessary for Forbair to provide evidence of those who stood to benefit because litigation funding is discretionary and its shareholders may not obtain a benefit from the litigation was said to be contrary to Duke Group and Kavcor. There was also submitted to be no basis for the finding that shareholders of Forbair may not benefit from the litigation or for any finding of prejudice if security was ordered against OLM because the Letter provided no basis for such a finding.

62. ARC also submitted that the Registrar had made a mistake of fact in his reasons. In particular, at reasons [33], he records that “the Plaintiff has furnished significant evidence in support of Folbair’s [sic] creditor claims which total $20,755,664.38 – an amount which is not insignificant”.

63. This amount was submitted to reflect incorrectly the size of Forbair’s claim on OLM. Forbair had told OLM on 28 March 2024 that its claim was $1,797,364.60 (see [35] above) which is almost ten times less than the amount the Registrar recorded. The Registrar’s error was submitted to be not a typographical error but was instead the Registrar misapprehending what was said to be the erroneous evidence Mr Roufeil, who in his affidavit sworn on 5 August 2024 recorded the value of Forbair’s claim as at 21 December 2023 as $9,978,795.24 and as at 28 March 2024 as $10,776,869.14. The amount recorded by the Registrar is the sum of those two erroneous amounts.

64. Therefore, it was said that even if the Court found that ARC had to demonstrate an error in the Registrar’s reasons for the Court to review the decision, it submitted that it had made out at least two bases for the Court to do so.

Issue 2 – Did the Registrar err in accepting OLM’s stultification claim? OLM’s submissions

65. OLM submitted that the Letter was not the entirety of the evidence that it relied upon in support of the stultification claim. It was submitted that the Letter needed to be read in the context of all the other correspondence between Forbair and OLM which was before the Registrar including:

1. On 15 March 2023, the solicitors for Forbair wrote to OLM noting that Forbair was contracted to carry out construction work on the relevant land, and claimed it was entitled to payment of two invoices issued in November and December 2022 totalling over $1,000,000 (see [33] above);

2. On 28 March 2024, the solicitors for Forbair wrote again stating the amount Forbair claimed was in fact $1,800,000 having regard to delay and break costs, advising that the construction work was partly completed when OLM went into liquidation, and that because the construction was a ‘cost-plus’ contract, Forbair had itself been required to make payments to third parties in relation to the construction it was undertaking which had not been recovered (See [35] above);

3. The builder’s margin under the cost-plus contract recorded in the two unpaid invoices is 10%. Therefore, the liability incurred by Forbair to third parties under the cost-plus contract with OLM which Forbair would be responsible for meeting out of its own funds was approximately $900,000 (see total cost-plus margins from November and December progress claims at [31]-[33] above);

4. On 17 June 2024, the solicitors for ARC wrote to Forbair to ascertain Forbair’s capacity to meet a security for costs order and fund the litigation; and

5. On 27 June 2024, Forbair’s solicitors responded with the Letter (see [17] above).

66. Relying upon the evidence referred to in the preceding paragraph, OLM submitted that the contention in the Letter that Forbair’s resources were depleted as a result of the amounts owed by OLM was unsurprising and supported by the facts. Therefore, it was contended that the Registrar had sufficient grounds to hold that Forbair was unable to provide security and that the proceedings would be stultified if OLM was ordered to provide security.

Issue 2 – Did the Registrar err in accepting OLM’s stultification claim? Determination

67. The Court accepts ARC’s submissions and concludes the learned Registrar erred in at least these two respects:

1. The letter was less than the “bare minimum” to establish stultification. While it may have been admissible, it was a conclusionary, hearsay statement. It also said nothing about the capacity of whoever stood behind Forbair. The onus was on OLM to demonstrate that the creditor who stood to benefit from the litigation could not provide security or had some other good reason why it would not do so. While the risk of stultification must be established on the balance of probabilities, both the nature of the claim (stultification) and the proceedings (an application for security against an insolvent plaintiff) required evidence of substance to satisfy the Court to that standard (see Evidence Act 1995 (NSW), s 140(2)). The Letter was of insufficient weight to meet that standard both of itself, or when the other evidence referred to in [65] above is taken into account; and

2. Contrary to the Registrar’s conclusion, evidence of why commercial litigation funding was either unobtainable or for some proper reason otherwise not suitable was required: Kavcor. OLM had led no such evidence.

Issue 3 – In light of the new evidence, should the Court order security for costs? ARC’s submissions

68. ARC submitted that OLM’s attempts to rely on fresh evidence in this review hearing itself provides the Court with sufficient grounds to conduct a de novo hearing of the application (see Tomko at [9]).

69. The effect of the hearing being conducted de novo was that the application is heard anew. ARC had to discharge the onus of establishing reason to believe that OLM will be unable to pay the costs of the litigation if unsuccessful and then OLM bore the onus to demonstrate why security should not be ordered (Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [30]).

70. Because OLM was in liquidation, there was no dispute that the discretion to order security was engaged. By reference to OLM’s new evidence, ARC submitted there were two discretionary factors which needed to be considered on review. The first was whether OLM had sufficiently established that those who stand to benefit from the ligation are unable to provide security. The second issue was whether OLM needed to prove that it had taken steps to obtain litigation funding and that it was unobtainable or not appropriate.

Sufficiency of evidence of those who stand to benefit from the litigation?

71. ARC continued to rely on Duke Group (see [57] above) to submit that OLM was not only required to demonstrate that those who stand behind the company (including major creditors) cannot provide security but also that those who stand behind the major creditor are unable to provide security.

72. ARC refuted OLM’s submission (see [97] below) that the effect of Duke Group is that it would require an impecunious plaintiff to prove in every case that each potential indirect beneficiary, irrespective of how remote their benefit may be, is unable to provide security. ARC submitted that it is a matter of fact in each case who may be a potential beneficiary of the litigation and who therefore may be required to provide security.

73. Some of the relevant considerations may include whether the creditor is a “major creditor” or one of many creditors; the number of people who stand behind a major creditor; how much those persons stand to gain if the plaintiff is successful; whether there is any special relationship between the plaintiff and those individuals; and whether it is commercially practicable to expect the plaintiff to obtain funding from those potential beneficiaries. ARC submitted it is for the Court to determine whether these questions are relevant for each particular case.

74. ARC submitted that the approach adopted in Duke Group is consistent with the exercise of the Court’s discretion generally, when considering whether to require third party beneficiaries of litigation to provide security. ARC relied as an example on the decision of Callaway JA in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at [38] where his Honour held that where beneficiaries of a trust stood to gain from litigation, whether those beneficiaries “should be required to bring their own assets into play” should be determined on a case-by-case basis. OLM for its part cited the decision of Parker J in Woolworths Limited v About Life Pty Ltd (No 2) [2018] NSWSC 1340 at [53] who noted Callaway JA’s dictum and said that there may be “scope for an exception to such a requirement where it would be unreasonable to expect all of the persons standing behind the company to provide security and to insist on that would result in the litigation being stultified”.

75. While OLM had filed further evidence regarding Forbair’s financial position, there was no evidence of the financial capacity of those who stood behind the company. It was contended by Mr Thomson that Duke Group invites the Court to make a determination that there should be evidence before the Court of the financial position of those who stand behind Forbair. If the Court were to adopt such an approach, then the absence of evidence explaining the position of those standing behind Forbair would mean that OLM could not satisfy its onus to demonstrate that their claim would be stultified and security should be ordered.

76. It was submitted that obtaining evidence of those who stand behind Forbair was not a cumbersome process and as such the evidentiary requirements of Duke Group cannot be considered ‘overly burdensome’. For example, ARC’s solicitor Ms Wang deposed that she conducted an ASIC search and general internet search for information about Forbair. Those searches resulted in the following information being revealed:

1. The ASIC search cost $47.05 and took around six minutes. It identified Mr Braden Johnson as the sole shareholder in Forbair;

2. Forbair’s website confirms Mr Johnson’s role at Forbair and that he is the founder of a development and consulting company called “Sarland”; and

3. Internet searches for further information about “Sarland” identified a company called “Johnson Projects” which is the “sale and marketing division” of Sarland.

77. Ms Wang performed further ASIC searches for Sarland and Johnson Real Estate finding that:

1. Mr Johnson owns 100% of Sarland; and

2. Mr Johnson via his 100% ownership of Sarland Pty Limited, owns 100% of Johnson Real Estate.

78. ARC submitted that the 28 March 2024 letter between Forbair’s solicitor to OLM’s liquidator (see [35] above), referencing that they had taken instructions from Mr Johnson, demonstrates that OLM were aware of who Mr Johnson was and how to contact him. That letter also provides evidence that OLM had also approached Mr Johnson personally on 26 March 2024.

79. ARC argued that the publicly available evidence of who stands behind Forbair and Mr Johnson being the sole shareholder in that company means that the Court should reject OLM’s submission that where the creditor of an impecunious plaintiff is a company there is no way of knowing if the creditor can or will actually pass on the benefits to shareholders or beneficiaries. While that may be true in some cases, ARC argued it was clearly not applicable in this case because it was obvious that Forbair would act in the interests of its shareholder. For the same reason, OLM’s submission that where the creditor is a company, its shareholders and potential beneficiaries may be very large in number was also contended to be an inapt submission in the circumstances of this case.

80. The simplicity of Forbair’s corporate structure and the limited number of creditors of OLM, was submitted by Mr Thomson to be a further reason why the Court should apply Duke Group. The facts of this case are distinguishable from Duke Group where the creditor behind the impecunious plaintiff also had 44 unsecured creditors. If the Court were to follow Duke Group, the Court would only have to expect evidence from one creditor which had a sole shareholder.

81. ARC contended that the evidence which was before the Registrar demonstrated that Mr Johnson was plainly going to benefit if OLM was successful in the litigation. That evidence was that Forbair would stand to gain 51c in the dollar of its creditor claim against OLM. This would provide Forbair with $918,066.88 which would inure to the benefit of Mr Johnson as Forbair’s sole shareholder. Therefore, it was argued that there was no reason why OLM could not have led evidence regarding Mr Johnson’s ability to provide security either before the Registrar or on the current review. The fact that Mr Johnson is the sole shareholder of Forbair, who stands to significantly benefit from the litigation if OLM is successful, and from whom evidence was easily attainable meant, ARC submitted, that the Court should expect Mr Johnson to provide security. The absence of evidence from him was submitted to be a forensic choice which the Court should find counted against OLM’s claim of stultification.

82. Even if the Court did not require evidence from OLM regarding Mr Johnson’s ability to provide security, ARC submitted that the Court would not be satisfied from the subpoenaed evidence of Forbair’s circumstances that it is unable to provide security. ARC advanced three reasons why the subpoenaed evidence demonstrates Forbair could provide security.

83. First, the balance sheet dated 4 November 2024 (see [39] above) shows that Forbair:

1. Owed over $430,000 in debts to those standing behind the company, including shareholder loans to Mr Johnson;

2. Had paid over $140,000 in dividends to shareholders in the previous financial year. As Mr Johnson is the sole shareholder, that money was paid directly to him; and

3. Has substantial assets in the form of receivables of about $1.65m.

84. Second, while OLM submits that Forbair’s bank account is frequently topped up and then depleted, Ms Wang identified that the sources of the funds are often payments which come from Mr Johnson’s wholly-owned companies. For example, Johnson Real Estate deposited $872,196.15 between 22 May 2024 and 21 October 2024 and Sarland deposited $197,747.96 between 13 May 2024 and 1 July 2024 (see [37]-[38] above). ARC submitted that the Court should assume that some of these payments are loans.

85. Third, according to the insurer’s Building Eligibility Assessment Report regarding Forbair dated November 2023 (see [34] above), Forbair has distributed a “high proportion” of its retained earnings to “close associates” which are payments to those individuals who are behind the company. Mr Thomson submitted that the evidence of money being taken out of Forbair despite its earnings required an explanation from OLM. The absence of such evidence was contended to be a reason for the Court to order security.

86. During oral submissions, I asked Mr Thomson whether the accounts receivable figure of approximately $1.6 million was in fact the value of the expected claim Forbair has against OLM. Mr Thomson submitted that the number was unexplained in the evidence and it was for OLM to explain.

87. ARC submitted that this evidence demonstrates that if OLM wanted to establish that Forbair could not assist in providing security, OLM should have provided evidence from an officer of Forbair, such as Mr Johnson, explaining the source and purpose of funds that had been advanced to Forbair, and why Forbair would not have access to such funds if required to pay security for the costs of OLM’s proceedings from which Forbair stood to benefit.

Evidence of litigation funding

88. ARC submitted that the new evidence provided by OLM meant that it was not necessary for ARC to demonstrate that the Registrar erred by finding that it was not essential that OLM demonstrate that litigation funding is unavailable or inappropriate.

89. The new evidence outlining the steps taken by OLM’s liquidator to obtain litigation funding appears in Mr Roufeil’s affidavit of 15 November 2024 (see [41] above). That evidence was submitted to demonstrate that:

1. OLM began to pursue litigation funding three days after ARC filed the review application;

2. As of 15 November 2024, OLM was in the process of obtaining litigation funding; and

3. OLM have received an offer for “full funding in this matter” from Clover Risk on terms.

90. ARC rejected OLM’s submission that it is only necessary for a party to provide evidence that litigation funding has been ‘pursued’ to resist a security application. ARC reiterated that Palmer J’s decision in Kavcor required a party to provide evidence that litigation funding is “unavailable or inappropriate”. It was submitted to be an unjust outcome if the Court were to refuse to make an order for security and expose a defendant to the risk of non-payment if there was evidence that a plaintiff could obtain litigation funding.

91. During the hearing, Mr Thomson submitted there is evidence of the offer of litigation funding and evidence about the state of mind of the liquidator that rejected the offer, but there is no evidence of whether or not that offer was commercial or not and the reasons for the rejection. The absence of evidence about whether the litigation funding was commercially viable was contended to be a forensic choice by OLM and which the Court should not accept as sufficient to determine that litigation funding was not appropriate or available to OLM. Although the proposed funding terms were in evidence, Mr Thomson did not ask the Court to review their sufficiency. However, he submitted that the Court would expect a more detailed explanation as to why the offer was rejected.

92. While Mr Roufeil’s 11 December 2024 affidavit records that he declined litigation funding (see [46] above), that affidavit did not suggest that it was impossible that other offers would be accepted in the future. Neither did the affidavit suggest that litigation funding was either unavailable or inappropriate in accordance with the requirements of Kavcor. To say only that OLM did not have litigation funding was not sufficient to avoid an order for security.

93. In the circumstances, ARC submitted that Mr Roufeil’s affidavit demonstrated that commercial litigation is both available and appropriate for OLM and that, therefore, an order for security for costs should be made.

Issue 3 – In light of the new evidence, should the Court order security for costs? OLM’s submissions

Sufficiency of evidence of those standing behind the company

94. OLM submitted that Forbair’s financial records in evidence further demonstrated that Forbair was without the means to give security:

1. Forbair’s balance sheet as at 4 November 2024 shows that Forbair had 16c cash at bank (down from about $48,000 on 30 June 2024), with liabilities presently due and payable totalling $128,000;

2. Forbair’s balance sheet as at 4 November 2024 also shows that its only substantial asset was accounts receivable of about $1.65m; and

3. Forbair’s account statements between 24 April 2024 to 24 October 2024 was also submitted to show that any cash which entered its account was quickly depleted:

1. From $530,286 to $17,556 in a period of six days from 27 August 2024;

2. From $152,038 to $27 in a period of eight days from 5 September 2024: and

3. From $268,872.24 to $360 in a period of eleven days from 27 September 2024.

95. OLM submitted this evidence is enough to show that Forbair, as OLM’s largest creditor, is not able to provide any security which the Court might order. It was argued the evidence demonstrates that Forbair is burning through cash quickly and, as a result, the Court could not be satisfied that Forbair is able to pay any security.

96. Mr Walker also submitted that it is not clear whether the accounts receivable amount in Forbair’s balance sheet (see [94] above) is referable to its claim against OLM. However, given Forbair’s claim against OLM ($1.8 million) exceeds the $1.65 million amount stated in the balance sheet, Mr Walker put that the Court could not assume that this $1.65 million amount would be available to Forbair to meet any order for security.

97. OLM also rejected ARC’s contention that Duke Group also requires those who stand behind Forbair to show they are without means to provide security for OLM to satisfy its stultification claim. This court was not bound by Duke Group and there were six reasons why it should not be followed:

1. Duke Group at [35] (see [57] above) had neither been approved by an intermediate appellate court nor followed by another court at first instance;

2. No authority was cited by White J to support the proposition at [35];

3. The enquiry is overly burdensome in the context of an interlocutory security for costs application especially where the creditor is not an entity related to the company in liquidation and the financial position of those behind Forbair is not easily ascertainable;

4. Where the creditor is itself a company or a trustee, there is no way of knowing if the creditor can or will actually pass on the benefits or part of them to shareholders or beneficiaries. This was because companies have no obligation to pay dividends to their shareholders and depending on the terms of the trust, the beneficiaries may not be identifiable, or the trustee may not have an obligation to make a distribution to any particular person;

5. Where the creditor is a company or trustee, its shareholders and the potential beneficiaries may be very large in number; and

6. The logical conclusion of the decision in Duke Group was submitted potentially to require shareholders of shareholders to demonstrate their financial position in security for costs application. In other words, Duke Group was a decision which excessively broadened the line of inquiry as to who may be behind the company. The preponderance of authority was to the effect that it is the position of those people who stand to benefit from the litigation which is to be considered (such as creditors and shareholders), not people who are further steps removed from such beneficiaries.

98. In this case, Mr Walker submitted that Forbair was too far removed from OLM to justify OLM needing to seek evidence from Forbair’s director Mr Johnson to resist the security for costs claim. In particular, it was observed that Forbair is not a related entity of OLM in any way and does not have any other relevant close association with OLM. The extent of its relationship was submitted to be as a separate company which was the builder of a property owned by OLM and which is also a creditor of OLM. Therefore, it was submitted that the Court should be satisfied that the beneficiary of the litigation, Forbair, is unable to provide security.

99. The position of the liquidator was also submitted to support OLM’s stultification claim. Should OLM be unable to pay the amount of security and the proceedings were stultified, it was submitted that the liquidator would not be remunerated for work legitimately incurred in carrying out the task as a liquidator. It was not in dispute that the liquidator had carried out considerable work to date, evidence of which was before the Registrar, who had also considered this factor to be relevant at reasons [43] (see [26] above).

Evidence of litigation funding

100. In response to ARC’s contention that OLM must also show whether litigation funding may be available, OLM asked the Court to accept the Registrar’s determination that it is not essential for a party in OLM’s position to show litigation funding is unavailable or inappropriate (reasons [41]-[44] - see [26] above).

101. OLM relied on the decision of the Full Federal Court in Madgwick v Kelly (2013) 299 ALR 188; [2013] FCAFC 61 at [77] as authority for the proposition that whether or not litigation funding is available or appropriate is a matter that the Court may take into account, but there is no blanket requirement that liquidators must look beyond those who stand to benefit from the litigation to third party financiers for funding before stultification be established:

[77]  We consider there to be force in the submission. The applicants adduced no evidence as to whether litigation funding had been sought; and, if not, why not; and, if so, with what result. The costs agreements contemplated the possibility of litigation funding at a later stage, after a (presumably unsuccessful) mediation. Presumably, the introduction of such an external commercial funder would reduce the available funds for group members on success. That would be a relevant commercial consideration. There may be others. The evidence was silent on the matter. We should not be taken as advocating a rule that a step such as the retention of litigation funding should always be taken to avoid an order for security. This, however, when all is said and done, is a piece of commercial litigation. Investors with sufficient income or assets to protect entered commercial arrangements, many for hoped for taxation advantages. They now seek to engage in commercial litigation to repair perceived wrongs attending the entry into the arrangements. It is not unreasonable to want to understand, in the balancing of the interests of the parties, what has been done, if anything, about commercial funding of the litigation. Without that knowledge, at least in a case such as this, one cannot conclude that the proceedings would be stifled by any order for security.

102. Even if it were necessary to show that litigation funding had been pursued, OLM submitted that requirement had been met. It was contended that Mr Roufeil’s affidavits demonstrated that the liquidators had sought funding from commercial funders but had not yet been able to obtain it.

103. Mr Walker submitted that Mr Roufeil’s affidavit (see [46] above) which explained that the proposed funding offer from Clover Risk had been subject to advice and consideration and that Mr Roufeil had formed the view that the terms proposed “were not in the interests of creditors” was a sufficient explanation for the Court to be satisfied that OLM obtaining litigation funding was not appropriate in this case.

104. Mr Walker accepted both that Mr Roufeil did not explain why he had formed this view and that the onus is on OLM to explain why litigation funding is inappropriate. However, Mr Walker contended that the issue of whether litigation funding is appropriate or inappropriate is not a decisive factor in security for costs applications, and that it is enough that the Court is informed that steps have been taken to obtain litigation funding. In this case, none of the negotiations to obtain funding had yet been successful but discussions remained ongoing.

105. To that end, Mr Walker informed the Court that he had instructions to offer that if the application was dismissed and no security was ordered, OLM would undertake to the Court that OLM would continue to make reasonable efforts to obtain litigation funding from a commercial funder and would inform ARC immediately if OLM obtained such funding. This would enable ARC to return to Court to make a further application for security in those changed circumstances.

Issue 3 – In light of the new evidence, should the Court order security for costs? ARC’s submissions in reply

106. In reply, ARC submitted that even though OLM argued that there was other evidence before the Registrar that supported its stultification claim, the Registrar’s reasons made plain that his decision was not based on any other evidence:

[33] The Letter is, for the reasons already outlined, sufficient evidence in an interlocutory application, that Forbair is unwilling and unable to fund the litigation. The Plaintiff’s Counsel conceded that there could be more evidence of Forbair’s position. However, the Plaintiff has furnished significant evidence in support of Forbair’s creditor claims which total $20, 755, 664.38 – an amount which is not insignificant.

107. Two errors were submitted to be demonstrated in this reasoning.

108. First, the Letter was considered to be sufficient evidence “for the reasons already outlined” to prove Forbair’s position notwithstanding the Registrar also recorded a concession by Mr Walker that there could be more evidence as to Forbair’s position.

109. Second, notwithstanding that the Registrar prefaced his conclusion with “for the reasons already outlined”, the only paragraph in his reasons which addressed the Letter’s sufficiency was [33]. This was submitted to demonstrate that the Registrar impermissibly conflated the question of admissibility of the Letter (to which he had devoted several paragraphs of his reasons) with the separate question of sufficiency. It was submitted that after considering the admissibility of the Letter, the Acting Registrar had failed to consider properly whether the letter was sufficient evidence for OLM to discharge its onus as to why security should not be ordered.

110. Furthermore, even though the subpoenaed material provided some insight into Forbair’s financial affairs, Mr Thomson submitted that OLM should have obtained evidence from Mr Johnson explaining the significance of this financial material. Mr Thomson submitted that the Court is placed in an unsatisfactory position by being required to discern what these documents show when it would have been open to OLM to call Mr Johnson to give evidence, or to subpoena Mr Johnson to give evidence, so that the Court could be persuaded that Forbair was not in a position to provide security.

111. Mr Thomson also submitted that the proffered undertaking was insufficient because the position remains that ARC would be exposed to the situation where it had no ability to recover costs if it is successful in the proceedings, and the undertaking amounted only to a promise to seek security rather than to obtain security.

Issue 3 – In light of the new evidence, should the Court order security for costs? Determination

112. The Court generally accepts ARC’s arguments with the result that security should be ordered. However, the issues raised by the parties about creditors and litigation funders are best resolved by identifying why they are relevant at all in a security for costs application when the plaintiff, as in this case, bears the onus of demonstrating stultification as the reason why security should not be ordered. The answer as to why they are relevant, in my respectful opinion, is provided by this observation of Barrett JA (McColl and Macfarlan JJA agreeing) in LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited [2014] NSWCA 88 at [45]: “The focus is, of necessity, on resources that may reasonably be expected to be available to the [plaintiff] company”.

113. LRSM also concerned creditors in the context of a security for costs application. However, while the plaintiff in that case had conceded it could not meet an order for the defendant’s costs, it was not in liquidation. Furthermore, the creditors whose willingness (or unwillingness) to provide security was in issue were trade creditors of whom his Honour said (at [49]) that they “do not occupy an ‘insider’ position and have no separate interest in supporting the plaintiff”. The major creditor of a company in liquidation, in contrast, is an “insider” because of its interest in recovering as much as possible from the insolvent administration and its other statutory rights in respect of the conduct of the administration. Nevertheless, Barrett JA’s observation exposes the fundamental inquiry in any security for costs application where stultification is alleged.

114. Turning to the question of creditors, I do not accept OLM’s criticisms of Duke (see [97] above) and respectfully agree with White J at [35] of his judgment because the creditor he describes “may reasonably be expected” to provide resources to the plaintiff. White J’s proposition is confined to the one major creditor of a company in liquidation which stands to benefit from the litigation and those who stand behind it. That major creditor or those standing behind it “may reasonably be expected” to make resources available to the plaintiff precisely because they stand to benefit directly or indirectly from the litigation.

115. The notion of reasonable expectation also answers OLM’s floodgates or unreasonableness argument arising from the potential complexity of who may be standing behind the creditor. The more complex the situation (which may, for example, arise from the number of persons standing behind the creditor and their respective interests), the less reasonable it will be for the plaintiff to investigate their circumstances or to expect them individually to make resources available. In such a case, evidence of their ability or willingness to assist would not be required. But the touchstone of reasonable expectation means that each case will turn on its facts as to how far behind the creditor or shareholder any inquiry as to willingness or ability to provide funds should go.

116. In the case at bar, Forbair is the major creditor of OLM which stands to benefit from the proceedings. As such, it might reasonably be expected to provide resources to the plaintiff. There is no complexity about who stands behind Forbair and who also stands to benefit from Forbair’s recovery if OLM succeeds: it is Mr Johnson. OLM has not demonstrated that Forbair cannot provide the security. The evidence is clear that Forbair, apart from anything else, is able to be put in funds by other companies controlled directly or indirectly by Mr Johnson.

117. The result would be no different if OLM had proven Forbair could not provide security. With no disrespect intended, all roads lead to Mr Johnson. There is no evidence from Mr Johnson demonstrating his inability or explaining his unwillingness to put Forbair in funds to provide security for costs either from his own resources or through a company under his control such as Sarland or Johnson Real Estate. The absence of that evidence means that OLM has failed to discharge its onus in this respect.

118. Turning to the question of litigation funding, I respectfully agree with, and propose to apply, Kavcor. However, mindful of OLM’s reliance on Madgwick (see [101] above), I hasten to add that to follow Kavcor is not to lay down “a rule that a step such as the retention of litigation funding should always be taken to avoid an order for security”. I readily accept that “rules” have no place in such a heavily discretionary area of practice and procedure such as security for costs.

119. However, underlying Kavcor is the proposition that it is relevant to the Court’s discretion whether a plaintiff company seeking to demonstrate stultification can show that litigation funding is not among the “resources that may reasonably be expected to be available to the [plaintiff] company”. This will be done by proving any of:

1. that such funding is not available for the type of litigation concerned (some element of judicial notice may be applicable to this fact); or

2. in the case of commercial litigation:

3. that such funding is for some particular reason inappropriate, so no attempt to obtain the funding might reasonably be expected; or

4. after reasonable efforts to obtain such funding have been made, it is not obtainable on commercially acceptable terms.

120. These proceedings are commercial litigation (see [11] to [13] above). There is no initial issue of litigation funding being inappropriate. On the contrary, Mr Roufeil has made attempts to obtain it. However, the difficulty for OLM then becomes twofold:

1. In relation to the offer of funding from Clover Risk, there is no evidence as to the reasons why Mr Roufeil rejected it. In the absence of reasons, the Court cannot determine why that particular funding is not reasonably to be expected to be available to OLM. Contrary to OLM’s submission, the mere facts of obtaining the offer and its rejection are insufficient to establish stultification; and

2. Mr Roufeil’s evidence is that OLM’s presumptively reasonable efforts to obtain litigation funding are continuing, so the Court does not have evidence to conclude that it is unavailable to OLM.

121. OLM has undertaken the task of demonstrating that security should not be ordered because it will stultify the proceedings. As part of that task it bears the onus to show that litigation funding is not among the “resources that may reasonably be expected to be available” to it. By reason of the matters identified in the preceding paragraph, OLM has not discharged that onus.

Conclusion

122. Even with the additional evidence tendered on this review, OLM has failed to establish that security should not be ordered because such an order would stultify the proceedings. There is no dispute that the Court’s discretion to order security is engaged because OLM is in liquidation. No other discretionary matter has been relied on to resist that discretion being exercised. Therefore, the Registrar’s order dismissing ARC’s application for security will be set aside and an order will be made for the provision of security.

123. There are two remaining issues.

124. The first issue is costs, about which some submissions were made at the hearing, but which were necessarily hypothetical depending on the outcome. Subject to hearing the parties further, my preliminary view is that the Registrar’s costs order should also be set aside and that OLM should be ordered to pay ARC’s costs before the Registrar and of this review on the basis that costs should follow the event.

125. The second issue is the quantum and timing of security. The Court has not heard the parties on quantum. Whatever quantum is ordered, it would, absent particular reasons, be ordered in tranches tied to the course of the proceedings.

126. As to both of these issues, the Court will make provision for further brief written submissions and, if necessary, a short hearing to the extent that the parties are unable to agree on the outcome. The parties will be directed to make good faith endeavours to reach an agreement, consistently with their obligation to facilitate the just, quick and cheap conduct of the proceedings.

**********

Decision last updated: 11 March 2025