Sharjade v Darwinia Estate

[2006] NSWSC 708

CITATION:	Sharjade v Darwinia Estate & Anor [2006] NSWSC 708
HEARING DATE(S):	07/07/2006
JUDGMENT DATE :	7 July 2006
JUDGMENT OF:	McDougall J at 1
EX TEMPORE JUDGMENT DATE:	07/07/2006
DECISION:	See paras [43] and [55] of judgment
CATCHWORDS:	SECURITY FOR COSTS - where plaintiff is impecunious and its directors offer to accept personal liability for defendants' costs - whether defendants' conduct is cause of plaintiff's impecuniosity - whether security will stultify litigation - whether directors' offer means that plaintiff should not be ordered to provide security
LEGISLATION CITED:	Corporations Act 2001 Uniform Civil Procedure Rules
CASES CITED:	Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd [1998] VSCA 43 Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 10 ACSR 441 Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 K P Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97
PARTIES:	Sharjade Pty Limited (Plaintiff) Darwinia Estate Pty Limited (First Defendant) Commonwealth of Australia (Second Defendant)
FILE NUMBER(S):	SC 50024/06
COUNSEL:	J Stoljar/K W Dawson (Plaintiff) J B Simpkins SC (First Defendant) R P L Lancaster (Second Defendant)
SOLICITORS:	Thomson Playford (Plaintiff) Gadens Lawyers (First Defendant) Blake Dawson Waldron (Second Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

7 July 2006 Ex tempore (revised 11 July 2006)

50024/06 SHARJADE PTY LTD v DARWINIA ESTATE PTY LTD & ANOR

JUDGMENT (On application for security for costs)

1 HIS HONOUR: The first and second defendants (respectively Darwinia and the Commonwealth, and together the defendants) seek security for costs from the plaintiff (Sharjade) and consequential relief. The defendants rely on UCPR Rule 42.21 and on s 1335 of the Corporations Act 2001.

2 Sharjade acknowledges that it would not be able to meet any costs order that may be made against it, but it says that it should not be ordered to give security for three reasons:

(1) The defendants, it says, caused its admittedly impecunious state.

(2) Any order for security would, it says, stultify the litigation.

(3) Its directors, Mr Mohsen Akbarian and Ms Sima Akbarian, have offered to accept personal liability for any costs that Sharjade might be ordered to pay.

3 The debate before me centred on these issues. There was, in addition, a dispute as to the amount of any security that should be ordered. As will become apparent, I am not in a position to resolve this last debate.

Background

4 Sharjade's case is that it was party to an agreement with Darwinia to develop land at North Turramurra. It says that the agreement is on the terms of a "Heads of Agreement" made on 18 October 1995 between Darwinia and a company known as Kezarne Pty Ltd.

5 Sharjade was incorporated as a $2 company on 15 April 1998. It says that the Heads of Agreement were novated to it on 24 April 1998. I infer from this, and it appeared to be common ground in argument, that Sharjade is a special purpose company formed for the purpose of carrying out the joint venture on the terms of the heads of agreement.

6 Sharjade's case is that Darwinia wrongfully terminated its agreement with Sharjade on 27 June 2000. Further, Sharjade says, Darwinia did this in pursuance of a tortious conspiracy with the Commonwealth.

7 The defendant did not submit that the action was brought with any lack of good faith. Nor, although they said that the action would fail, did they submit that it was hopeless. Sharjade said that it had at least reasonable prospects of success.

Power to order security

8 It was common ground that Sharjade's admittedly impecunious state enlivened the Court's discretion to order the provision for security for costs. No one submitted that any particular consideration or factor, relevant to the exercise of the discretion, was governed by the source of the power; that is to say, no one said that the question should be approached in a different way, depending on whether one had regard to r 42.21, s 1335 or (if it be relevant) the inherent power of the Court.

9 The parties pressed me with numerous decisions bearing on the factors that, they submitted, were relevant to the exercise of the discretion.

10 Whilst the only formal constraint on the discretion is that it is to be exercised judicially (the nature of this particular constraint may be a matter of some conjecture), there are a number of factors that have been identified as relevant, although not as exhaustive. I take as relevant to my inquiry the seven factors, or "guidelines", identified in the judgment of Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198. Her Honour commenced by stating that:

“[t]he discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security.”

11 She then referred to a number of decisions, including that of Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405. She cited, with approval, a statement by his Honour in that case at 415 that:

“[i]t is not possible or appropriate to list all of the matters relevant to the exercise of discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances that have to be weighed.”

12 Her Honour then turned to what she called “a number of well established guidelines which the court typically takes into account” in considering an application for security for costs. Those guidelines were, and I paraphrase her Honour’s words:

(1) That the application be brought promptly.

(2) That regard should be had to the strength and good faith of the applicant's case.

(3) Whether the applicant's impecuniosity was caused by the respondent's conduct, the subject of the claim.

(4) Whether the application for security is oppressive, being used merely to deny an impecunious applicant its right to litigate.

(5) A related factor, namely, whether there were persons standing behind the impecunious litigant who would benefit from any success in the litigation and who were willing to provide the necessary security.

(6) A related issue, namely, whether persons standing behind the impecunious litigant have offered any personal undertaking to be liable for the costs and, if so, the form of that undertaking.

(7) Security should only be ordered against a party who is, in substance, a plaintiff, and an order should not be made against a party who is, in substance, defending itself.

13 The first, second and seventh guidelines are of no relevance in this case. The fourth and fifth guidelines were, in the way the applications were argued, condensed into the concept of “stifling” the litigation.

Cause of Sharjade's impecuniosity

14 As I have said, Sharjade was incorporated as a $2 company. It is still a $2 company. It gave a charge over its assets to Lumby Pty Ltd, a company under external administration, before 24 April 1998. Lumby claims to be a creditor of Sharjade for about $1.1 million, and has commenced proceedings to recover that sum. Sharjade is defending those proceedings. Mr Akbarian has guaranteed that liability, and presumably will be called upon to meet that guarantee if Sharjade is unsuccessful in its defence.

15 None of the matters to which I have referred can be attributed to the defendants.

16 Sharjade claims that, had the joint venture with Darwinia proceeded, it would have enjoyed substantial assets. It says that the reason why it does not is the defendants’ wrongful conduct alleged in these proceedings. Thus, it says, the defendants’ wrongful conduct is the cause of its current impecuniosity.

17 In MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97, Needham J dealt at 100 with a similar submission. He said that:

“There is no evidence that the financial stringency of the plaintiff's position has been caused by any act of the defendant. The plaintiff clearly has always been in an impecunious position. It may be that if the defendant operating Channel 10 had agreed to purchase the concept which the plaintiffs say that they have created, the plaintiff would be in a financial position superior to that to which it now finds itself. However, there is nothing which the defendant has done which has caused the impecunious state of the plaintiff.”

18 Austin J took a similar approach in Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 585 [88] and 587 [100]. In the former paragraph, he said that in some circumstances the inference that the defendants’ conduct had caused the plaintiff’s impecuniosity might be plain. He referred to the example of a successful plaintiff carrying on business for some time that had been ruined after the intervening of conduct of the defendant. In such a case, his Honour said:

“[t]he court be may be able to conclude that the defendant’s wrongdoing caused the plaintiff’s financial collapse, without the plaintiff having to prove its previous financial strength in detail.”

But, his Honour said:

“[w]here the corporate plaintiffs had not been operating in Australia for a sufficiently lengthy period of time to establish a track record, it is correct, in my view, to require them to prove that they were in an adequate financial state, prior to the commencement of their association with Morningstar's interests, to have been able to meet an adverse costs order ...”.

19 In the latter paragraph, his Honour referred to the “evidentiary onus of establishing the adequacy of their financial position before they came into contact with Morningstar's interests” which the corporate plaintiffs bore.

20 In my view, the approach outlined by Needham J in MA Productions and followed by Austin J in Fiduciary is the correct approach. Indeed, I think, that is so a fortiori in a case like this where the corporate plaintiff was set up as a special purpose vehicle to carry out the transaction with the defendant, in relation to which it now sues.

21 The plaintiff’s solicitor, Ms Staff, gave some evidence on information and belief from Mr Akbarian as to the defendants’ responsibility for the plaintiff’s present condition. That evidence seems to me to suffer from two problems. One is that it is entirely non-specific and thus not of any great weight (a factor attributable to the source and not the vehicle). The other, and more serious, objection to it is that it ignores the approach that, as I have indicated, I think is the correct approach.

22 I do not accept that the defendants’ alleged wrongful conduct has been shown to have caused, in the relevant sense, the current impecuniosity of Sharjade.

Stifling the litigation

23 Clearly Sharjade is in no position, on its own, to raise funds for security on commercial terms to enable it to give security for costs. As Needham J said in MA Productions at 101:

“It seems clear that the plaintiff is unable to give security for costs; it has no assets and therefore could not obtain commercial assistance in providing security ...”.

24 Sharjade does not have the benefit of support from a litigation funder. Whether that term should be limited to organisations that fund litigation as a commercial venture, or whether it extends to any external source of funds, was a matter of some debate. For the reasons that I shall give, it is unnecessary to resolve that debate.

25 On the approach taken by Austin J in Fiduciary at 582 [78] and following, it is necessary for a plaintiff, resisting an order for security, to show that the litigation would be stultified if security were ordered to be given. As his Honour said (drawing on the judgment of Einstein J in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [66]), that will require an examination of the various sources that the plaintiff might have available to it for the provision of security. That, in turn, requires an analysis of who it is that might benefit from the litigation if it is pursued to a successful conclusion.

26 In the present case the secured creditor, Lumby, is an obvious candidate. Given that it has a claim against Sharjade for $1.1 million, it might be thought to have an interest in the successful prosecution of these proceedings. But, given that it is under external administration, it may not have any realistic prospects of providing security. There was no evidence either way.

27 There was no evidence either way as to the existence of unsecured creditors of Sharjade. Nor, if there were any such creditors, was there evidence of their willingness and ability to provide security. Given that Sharjade bears the onus of proof, this can be of little comfort to it.

28 Even without taking into account the financial position of Mr and Ms Akbarian, a matter to which I turn in the next section of these reasons, I am not satisfied that Sharjade has discharged its onus. It appears to have assumed that one need consider only the position of the shareholders. But, as Austin J made clear in Fiduciary, the enquiry may go further. Sharjade's evidence did not.

The shareholders' offer

29 Each of Mr and Ms Akbarian has now offered to accept personal liability for any costs that Sharjade may be ordered to pay. In some cases such an offer has been regarded as a factor of decisive weight. The decisions of Byrne J in Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 and of Cooper J in Gentry Bros have been said to illustrate that principle. But there is no authority for the proposition that this must always follow. Any such principle of universal application would constitute a fetter on what is relevantly an unfettered discretion. Powell J pointed this out in Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 10 ACSR 441 at 456. Beazley J said much the same (although disagreeing with one aspect of what Powell J had said) in KP Cable at 204. Similar opinions have been expressed in numerous other decisions, including that of the Full Court of the Supreme Court of Western Australia in Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 and the Court of Appeal of the Supreme Court of Victoria in Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd [1998] VSCA 43.

30 In truth, and consistent with the analysis of Beazley J in KP Cable, this is but one of many factors; and it is a factor that, as Cooper J pointed out in Gentry Bros, may bear differing significance in differing cases.

31 The only substantial assets of which Mr and Ms Akbarian gave evidence were personal and households effects, including rugs and antiquities, said to be owned by Mr Akbarian. It was said of these items that “they may be [worth] of the order of $500,000.” Otherwise the evidence indicated no assets of substantial value.

32 There are three qualifications. The first is that each of Mr and Ms Akbarian had credits in a personal superannuation fund. Presumably they will not be able to have access to these until they retire.

33 Secondly, Mr Akbarian gave evidence of owning shares in two private companies. There was no evidence of the value of these (totally unfounded opinion evidence on information and belief from Mr Akbarian was objected to and rejected).

34 Thirdly, and more significantly, it appears (from evidence tendered by Darwinia) that Ms Akbarian is the principal of a real estate agency known as Ray White Gordon/St Ives.

35 Ms Akbarian gave no evidence on this application, either directly or through her solicitor on information and belief. The evidence given by the plaintiffs did not disclose the existence of this business. It did not indicate the nature or value of any direct or indirect financial interest that Ms Akbarian might have in that business. It did not indicate the earnings that she might derive from it.

36 In those circumstances, and quite apart from the other criticisms of the plaintiff’s evidence on this point that were made by the defendants, I do not think that I should be swift to draw inferences in favour of the plaintiff who has left matters in a clearly incomplete and unsatisfactory state.

37 I assume that, somehow or another, Sharjade has funded its legal costs to date. I assume that it proposes to fund them in the future. I do not know how it has done so or how it proposes to do so. For all I know, it may be doing so out of Ms Akbarian's earnings through the real estate agency. But it is extremely unsatisfactory for the Court to be left in a position of speculation; and, as I have said, I do not propose to speculate in favour of the plaintiff when it could have cured the problem.

38 On the current state of the evidence there are two alternative conclusions that are available. One is that the personal undertakings proffered by Mr and Ms Akbarian are of little worth, save perhaps for the intangible factors described by Rowland J in Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 at 328. His Honour there referred to the fact that each of the directors had his own future business career to consider. He said that he “would have thought ... that the threat of bankruptcy, if they were ever called upon to honour the written undertaking given, would provide some form of security, albeit indirect, for the appellant".

39 I think that little comfort can be obtained for the defendants in this case on similar grounds.

40 Thus, and particularly having regard to the Lumby claim and to Mr Akbarian's guarantee of any amount owing under it, on this possible view of the evidence I would not view the undertakings as of any real worth. I would certainly not view them as a factor of sufficient weight to count against the provision of security if otherwise that were appropriate.

41 The alternative view is that the undertakings are of real pecuniary worth. If that be so, there is no reason why Mr and Ms Akbarian could not utilise their assets to enable Sharjade to put up security. On this view, the litigation would not be stifled.

42 I therefore conclude that neither the personal undertakings, nor the assets that are said to make up their underlying value, should dissuade me from ordering security.

Conclusion in principle

43 In my view, each of the defendants has made out a clear case for the provision of security for its costs. None of the discretionary factors relied upon by Sharjade, either taken individually or considered together, dissuades me from that view. In other words, I think, the balance of discretion clearly requires that orders should be made for the giving of security.

Amount of security

44 I turn now to the contested question of amount.

45 Darwinia estimated its total costs at (in round figures) $372,000. It sought security for what it said it was likely to recover, namely two-thirds or (again in round figures) $248,000. The equivalent figures for the Commonwealth were $177,000 and $125,000. Each estimate was broken down in some detail and was given by a solicitor of substantial experience.

46 For Sharjade, Ms Staff gave evidence that each estimate was overstated, both by what she said were inappropriately high charge-out rates and by the allowance of too much time to be charged out at those allegedly excessive rates. On the former point, she referred to evidence on information and belief from a costs consultant to bolster her view of what the correct rates should be. On Ms Staff’s view the figures for Darwinia should be respectively $144,000 (total) and $96,000 (recoverable). For the Commonwealth, the relevant figures should be $101,000 and $68,000.

47 Again, Ms Staff is a solicitor of substantial experience; and, again, her approach to the estimates proffered on behalf of the defendants was detailed.

48 None of the solicitors was cross-examined on the evidence that he or she gave. The parties therefore left me in a position where I was confronted with competing affidavits, and no means of choosing between the competing views proffered.

49 If I were required to express a concluded view, I would prefer Ms Staff’s evidence as to the appropriate hourly rates. I say that because she supported her view by reference to the view of an independent expert. But there is no basis on which I could resolve the conflict as to the amount of time likely to be charged out at those rates. In those circumstances, and for reasons that I hope will soon be apparent, the provisional approval that I have given to Ms Staff’s evidence should not be taken to be a concluded view.

50 The defendants submitted that I could take a number of courses. One, they said, was to order security now for the respective amounts suggested by Ms Staff and to reserve to the defendants liberty to apply.

51 I do not regard that as satisfactory. What the Court is required to do is to assess the likely amount of costs that will be incurred until the conclusion of the hearing, and to order security for that amount (or for such proportion thereof as is likely to be recoverable on assessment). Whilst liberty to apply may properly be reserved, that should be utilised to cover cases where, because of changes in the nature or complexity of the litigation, some revision is required to the estimates that had been given and accepted. It is not, in my view, appropriate simply to defer an essential part of the Court’s task by the mechanism of reserving liberty to apply. All that does is put off the debate to another day.

52 It therefore seems to me that there are two courses. One is to leave it to the parties to seek to agree on the amounts that should be given by way of security. The other, if the parties cannot agree, is to send that matter to a costs consultant for inquiry and report.

53 I would prefer it, for obvious reasons, if the parties could agree. But given the wide disparities in their estimates, I suspect that this may be unlikely. What I will therefore do, having decided in principle that security should be given, is order that the proceedings be adjourned for seven days. If, during that time, the parties can agree on the quantum of security, I will make orders accordingly. If they cannot, they should be in a position to suggest to me a referee who can undertake the enquiry expeditiously and I will make an order for reference. It should be understood that the referee will not be bound by my provisional acceptance of Ms Staff’s suggested hourly rates.

54 So far, what I have said is intended to deal, one way or another, with the total amount of costs for which security should be given. However, I do not wish it to be thought that it is my view that security must necessarily be given in one lump sum. Obviously enough the defendants will incur costs over time. This seems to me to be a case where it is appropriate for security (in such amount as agreed or determined) to be ordered by stages. Thus, I would expect the parties also to seek to agree on a staged timetable for the provision of security. If they cannot, then the orders for reference should require the referee to consider what convenient stages there are and what amounts of security should be provided by each stage.

55 In those circumstances, having indicated (as I have said) that this is a case in which the defendants should have security for their costs, I stand the proceedings over until 10 am on Friday 14 July 2004 before me for the parties to bring in short minutes of order. As I have indicated, those short minutes should deal with the question of quantum, either by agreement or by nominating an appropriate referee and including an order for reference.

56 If the parties cannot agree on the appropriate costs order to be made, I will hear argument on costs on that day.

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