Southern Cross Airlines Holdings Ltd (in liq) v Arthur Andersen & Co
[1997] FCA 742
•6 AUGUST 1997
FEDERAL COURT OF AUSTRALIA
PRACTICE AND PROCEDURE - security for costs - amount of security to be “in a reasonable amount” only and not necessarily an amount equal to the estimate of the respondent’s entire party-and-party costs - in assessing the applicant’s capacity to pay the respondent’s costs of defending the claim, regard not to be had to costs of cross-respondents brought into action by respondent for its own benefit, even where it is likely that the respondent will be entitled to an order that it recover from the applicant the cross-respondents’ costs paid by the respondent, if the action against the respondent fails and the cross-claims are in consequence dismissed - order for security under s 56 the Federal Court of Australia Act 1976 (Cth), but no order under s 1335(1) the Corporations Law.
Federal Court of Australia Act 1976 (Cth), S 56
Corporations Law, s 1335(1)
Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 52 ALR 176
Gladstone Park Shopping Centre Pty Ltd v Ross Wills (1984) 6 FCR 496, distinguished
Quad Consulting Pty Ltd v David R. Bleakley & Associates Pty Ltd (Unreported, Federal Court, 28 June 1991)
SOUTHERN CROSS AIRLINES HOLDINGS LIMITED (IN LIQUIDATION) v ARTHUR ANDERSEN & CO (A FIRM) & Ors
QG 170 of 1996
DRUMMOND J
BRISBANE
6 AUGUST 1997
IN THE FEDERAL COURT OF AUSTRALIA
) ) QUEENSLAND DISTRICT REGISTRY ) QG 170 of 1996 ) GENERAL DIVISION )
BETWEEN: SOUTHERN CROSS AIRLINES HOLDINGS LIMITED (IN LIQUIDATION) ACN 006 892 387
ApplicantAND: ARTHUR ANDERSEN & CO (A FIRM)
RespondentAND:
SIR LEO HIELSCHER, BRIAN HARVEY BADEN POWELL, LEONARD THOMAS GEORGE HEARD, DAME MARGARET GEORGINA CONSTANCE GUILFOYLE, LEIGH MASEL, DAVID SAMUEL COATS, JAMES GRAHAM AMBROSE TUCKER
First Cross-Respondent - Seventh Cross-Respondent
AND:
WESTPAC BANKING CORPORATION ARBN 007 457 113
Eighth Cross-Respondent
AND:
GLEDHILL BURRIDGE & CATHRO
Ninth Cross-Respondent
AND:
THE APOGEE FINANCE GROUP INC
Tenth Cross-Respondent
AND:
GPA GROUP PLC
Eleventh Cross-Respondent
AND:
TYROLEAN LIMITED
Twelfth Cross-Respondent
AND:
IRISH AEROSPACE LIMITED
Thirteenth Cross-Respondent
JUDGE: DRUMMOND J PLACE: BRISBANE DATED: 6 AUGUST 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
By 23 August 1997, Southern Cross Airlines Holdings Limited (In Liquidation) give security in a form acceptable to the District Registrar to the extent of $1 million for Arthur Andersen & Co’s costs of defending the claim brought against it by Southern Cross in consolidated actions QG 170 of 1996 and QG 15 of 1994 incurred and to be incurred in the period from 1 July 1997 to the end of the trial in the consolidated actions.
If such security is not provided by 23 August 1997, Southern Cross’s action against Arthur Andersen & Co be stayed until that security is provided.
There be liberty to apply.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) ) QUEENSLAND DISTRICT REGISTRY ) QG 170 of 1996 ) GENERAL DIVISION )
BETWEEN: SOUTHERN CROSS AIRLINES HOLDINGS LIMITED (IN LIQUIDATION) ACN 006 892 387
ApplicantAND: ARTHUR ANDERSEN & CO (A FIRM)
RespondentAND:
SIR LEO HIELSCHER, BRIAN HARVEY BADEN POWELL, LEONARD THOMAS GEORGE HEARD, DAME MARGARET GEORGINA CONSTANCE GUILFOYLE, LEIGH MASEL, DAVID SAMUEL COATS, JAMES GRAHAM AMBROSE TUCKER
First Cross-Respondent - Seventh Cross-Respondent
AND:
WESTPAC BANKING CORPORATION ARBN 007 457 113
Eighth Cross-Respondent
AND:
GLEDHILL BURRIDGE & CATHRO
Ninth Cross-Respondent
AND:
THE APOGEE FINANCE GROUP INC
Tenth Cross-Respondent
AND:
GPA GROUP PLC
Eleventh Cross-Respondent
AND:
TYROLEAN LIMITED
Twelfth Cross-Respondent
AND:
IRISH AEROSPACE LIMITED
Thirteenth Cross-Respondent
JUDGE: DRUMMOND J PLACE: BRISBANE DATED: 6 AUGUST 1997
REASONS FOR JUDGMENT
This is an application by the respondent, Arthur Andersen & Co, for an order that the applicant, Southern Cross Airlines Holdings Limited (In Liquidation) (“Southern Cross), give $2,156,560 for security for Arthur Andersen's costs of defending the action.
The application is brought under section 56 the Federal Court of Australia Act 1976 (Cth), and section 1335(1) the Corporations Law. The Court's jurisdiction to make an order for security is enlivened under the latter provision only where there is credible testimony which shows that the applicant corporation:
“ ... will be unable to pay the costs of [Arthur Andersen] if it is successful in .... its defence.”
The discretionary power conferred by the Federal Court of Australia Act is not so constrained: cf Bell Wholesale Co Proprietary Limited v Gates Export Corporation (1984) 52 ALR 176 at 178.
The action is brought by the liquidator of Southern Cross, which has been wound up in insolvency. However, the liquidator has realised the assets of Southern Cross, in the course of which he has settled an action against Westpac Banking Corporation for $6.25 million. He now holds $4,466,900 in a cash reserve, available for distribution to creditors. This is invested at 5.5 per cent per annum. All secured and priority creditors of Southern Cross have now been paid. The liquidator will not, however, make any distribution to unsecured creditors until this action, Southern Cross’s only remaining unrealised asset, is concluded.
The liquidator, after allowing for his own future remuneration and expenses of his administration, and the legal costs, estimated at $1,604,000, which he will incur in running this litigation to judgment, expects to have $2,336,000 left of the $4,466,900 cash now on hand. The liquidator therefore contends that there is no basis for concluding that Southern Cross will, if unsuccessful in its action against Arthur Andersen, be unable to pay Arthur Andersen's costs. Resolution of this issue requires the Court to form a view on the costs Southern Cross is likely to incur to its own legal advisers in running the litigation to judgment, and on the costs that Arthur Andersen is likely to recover from Southern Cross, should its defence be successful. It is also necessary for the Court to form a view on Southern Cross’s likely costs exposure to the former directors, whom it has also recently sued.
Southern Cross’s solicitor, Mr Rankin, who is experienced in commercial litigation, has estimated the legal costs not already paid but which Southern Cross will be likely to incur in running this litigation from 1 July last through to judgment at $1,604,000 on a solicitor-and-client basis; his assumption is that the trial will take twelve weeks. The $1,604,000 is an estimate of running not only the Southern Cross case against Arthur Andersen, but also its case against eight of the former directors of the company. Mr Rankin's twelve weeks trial estimate is based on allowing nine weeks for the litigation of Southern Cross’s claims against Arthur Andersen and the former directors, and a further three weeks for litigation of the numerous cross-claims in which Southern Cross is not involved. Mr Rankin says that a significant part of Southern Cross’s evidence in chief will consist of transcripts of evidence taken at liquidator's examinations under the Corporations Law; hence his nine week estimate.
The core of the first part of Southern Cross’s claim against Arthur Andersen involves the allegations that the prospectus on which Southern Cross was floated on 17 July 1992 allowed for an initial period of trading losses before Southern Cross commenced to trade profitably; that, but for the misappropriation of a total of $15.7 million by Mr Reid, a director of Southern Cross, the company would have traded conformably with the prospectus; and that, by reason of the misconduct of Arthur Andersen, it was not disclosed to Southern Cross that it did not have sufficient cash reserves to sustain the initial trading losses and to begin to trade profitably. It is said that the misconduct alleged consists of misleading or deceptive conduct and negligence by Arthur Andersen. In particular it is alleged that, had Arthur Andersen not been negligent, Southern Cross would have discovered Mr Reid's misappropriation and would have stopped the float from proceeding with the result that trading would not have commenced, and Southern Cross would not have suffered the losses pleaded. The first part of the case of Southern Cross against Arthur Andersen includes the allegations that Southern Cross lost approximately $48.5 million as a result of its relatively short life of unsuccessful trading. The second part of Southern Cross’s case against Arthur Andersen involves a claim by the liquidator to a little over $23 million, being part of the $48.5 million I have already referred to. The statement of claim alleges that Arthur Andersen negligently performed an audit in June 1992; that Southern Cross, but for that negligence, would have discovered Mr Reid's misappropriation and would have realised that it had insufficient cash resources to continue trading and would, in that event, have ceased to trade from about 21 September 1992. It is then said Southern Cross would have avoided the $23 million of losses that accrued in trading subsequent to that date.
Southern Cross’s case against its former directors is that they were guilty of neglect in failing to detect Mr Reid's misappropriation, and in failing to take action to stop Southern Cross trading when they ought to have known it was doomed to fail.
Arthur Andersen has cross-claimed against various parties. Firstly, it has cross-claimed against seven of the eight former directors for contribution or indemnity with respect to any amount Arthur Andersen is found liable to pay to Southern Cross, and also for contribution or indemnity with respect to any amount Arthur Andersen is found liable to pay to Westpac Banking Corporation in respect of the $6.25 million paid by Westpac to Southern Cross to settle the latter's claim on Westpac. Arthur Andersen here says that the directors failed to provide critical information to Arthur Andersen and failed to intervene to stop Southern Cross trading when they ought to have known it was doomed.
Secondly, Arthur Andersen has cross-claimed against Westpac for contribution or indemnity with respect to any amount it may be found liable to pay to Southern Cross, and for damages measured by the amount it may be held liable to pay to Southern Cross. Westpac is said in this cross-claim to have aided Mr Reid to make the misappropriation which is said to be the cause of Southern Cross’s collapse.
Next, Arthur Andersen has cross-claimed against Gledhill Burridge and Cathrow, Southern Cross’s legal advisers with respect to its prospectus, for contribution with respect to any amount Arthur Andersen may be liable to pay to Southern Cross, and for contribution with respect to any amount it may be liable to pay to Westpac in respect of the $6.25 million settlement payment by the bank. Arthur Andersen here says that if Gledhill Burridge and Cathrow had discharged their duty to Southern Cross as its solicitors, the float would not have gone ahead and Southern Cross would therefore not have incurred any of the losses it now claims against Arthur Andersen, and Westpac would not have any basis for claiming from Arthur Andersen in respect to the $6.25 million it paid to Southern Cross.
Finally, Arthur Andersen has also cross-claimed against two overseas groups of companies, Apogee and GPA Group, for contribution with respect to any sum Arthur Andersen is found liable to pay to Southern Cross. They are each said to have knowingly received a substantial part of the Southern Cross funds misappropriated by Mr Reid, and thus to be responsible for all the losses suffered by Southern Cross which it is claiming from Arthur Andersen.
In this action Westpac has also cross-claimed against the former directors for contribution or indemnity with respect to any amount Westpac is found liable to pay to Arthur Andersen.
This action, QG 170 of 1996, was originally commenced by Southern Cross’s liquidator against Arthur Andersen in the Supreme Court. It was cross-vested to this Court in September 1996. At that time, there was pending between Southern Cross and Westpac action QG15 of 1994 in this Court. That is the action that Westpac settled by its payment of $6.25 million. However, in action QG 15 of 1994 Westpac cross-claimed against Arthur Andersen for contribution or indemnity to anything Westpac was found liable to pay to Southern Cross. This cross-claim by Westpac remains on foot. Whatever happens in action QG 170 of 1996, it can be expected that Westpac will pursue Arthur Andersen to recover the $6.25 million it has paid to Southern Cross in settlement of the latter's claim on Westpac. Litigation of this claim by Westpac against Arthur Andersen will require Arthur Andersen to prepare a case which, in substantial part, is the case Arthur Andersen will also have to prepare to defend Southern Cross’s claims on it. In action QG 15 of 1994, Westpac has also cross-claimed against seven of the eight former directors, sued by Southern Cross for similar relief to that claimed by Westpac against Arthur Andersen. Six of the seven former directors have also cross-claimed in this second action against Arthur Andersen for contribution or indemnity with respect to any amount they are found liable to pay to Westpac.
All these cross-claims have been consolidated with the claims in action QG 170 of 1996. Action QG 10 of 1997 between Arthur Andersen and Westpac has also been consolidated with action 170 of 1996.
Arthur Andersen's solicitor, Mr Roberts, has had many years experience in commercial litigation. He estimates the trial of the issues between Southern Cross and Arthur Andersen will take twelve weeks, while the litigation of Arthur Andersen's cross-claims will take a further three weeks. Mr Roberts says there are complex issues of causation and quantum to be determined in the action between Southern Cross and Arthur Andersen given that Southern Cross is seeking to recover from Arthur Andersen the entirety of its trading losses.
I accept that twelve weeks is a reasonable estimate of the trial of the issues between Southern Cross and Arthur Andersen. Mr Rankin estimates twelve weeks of trial costs, which the liquidator will incur on a solicitor-and-client basis, at $804,000. This equates to about $530,000 if those costs were taxed on a party-and-party basis on the assumption that party-and-party costs are approximately equal to two-thirds of the solicitor-and-client costs. $530,000 trial costs is very close to the trial cost figure that Mr Roberts estimates.
However, Mr Roberts estimates that Arthur Andersen will incur costs assessed on a party-and-party basis from 1 April 1997 to the start of the trial of $1.619 million. An independent solicitor specialising in the assessment of costs, Mr Garrett, who has been retained by Arthur Andersen's solicitors, estimates Arthur Andersen's preparation costs from 1 July 1997 to the start of the trial at $1.506 million. Mr Roberts' figure of $1.619 million, and Mr Garrett's figure of $1.506 million are, however, almost twice Mr Rankin's estimate of the solicitor-and-client costs of $800,000 he anticipates Southern Cross will incur in respect of preparation in the period from 1 July 1997 to the start of the trial. Mr Roberts and Mr Garrett's estimates are very close to three times the party-and-party costs that Southern Cross would, on its solicitor's evidence, be likely to be incur in respect of its work in preparation for trial.
Of course, it is quite possible that Arthur Andersen may, entirely properly, have to do more work by way of preparation for trial than will Southern Cross. But the threefold difference between Southern Cross’s likely party-and-party costs, and Arthur Andersen’s party-and-party costs of preparing for trial is so great, given the stage litigation has reached, as to suggest that the estimates on one side must be wrong.
It is clear enough, in my opinion, that Mr Roberts and Mr Garrett's figures overestimate Arthur Andersen's costs recoverable from Southern Cross if Arthur Andersen succeeds. Mr Roberts acknowledged in cross-examination that his estimate of preparation costs is too high because he failed to take into account the fact that some of the work of trial preparation to be done by Arthur Andersen to meet the Southern Cross claims would have to be done by Arthur Andersen to resist the director's claims on it, and also to resist Westpac's claims on it which Westpac can be expected to pursue to recover the $6.25 million it has paid to Southern Cross whatever is the fate of the litigation between Southern Cross and Arthur Andersen. Mr Garrett's estimate of $1.506 million suffers from the same overestimation.
Arthur Andersen cannot expect to recover from Southern Cross the costs of all the work included in the estimates of Mr Roberts and Mr Garrett, even if it is successful against Southern Cross, to the extent that this same body of work of trial preparation to be undertaken by Arthur Andersen serves the purpose of preparing to meet Westpac's claims and the director's claims, as well as Southern Cross’s claims on it.
It is clear, for example, from the material prepared by Arthur Andersen's solicitors to show their own assessment of the overlap between the issues in the two actions, QG 170 of 1996 and QG 15 of 1994, that there is a very significant overlapping of this trial preparation work, and in the costly area of discovery, inspection, and perusal of documentations for the purposes of trial preparation, there will probably be a lot of duplication of work. Moreover, it is likely that there will be some work that Arthur Andersen will have to do to prepare to meet Westpac's claims and the director's claims that it will not have to do to prepare to meet Southern Cross’s claims, although it is likely that not a great deal will be involved in that respect.
Adopting a broad approach, I estimate that about two-thirds of Arthur Andersen's work of preparation will serve the threefold purposes I have mentioned, ie, only about one-third of this preparation work will have to be done by Arthur Andersen solely for the purpose of defending Southern Cross’s claims.
Adopting Mr Garrett's estimate of $1.506 million, Arthur Andersen should be entitled to recover from Southern Cross one-third, or $502,000, for its costs devoted solely to preparing to meet Southern Cross’s claims, plus one-third of the other two-thirds of its total trial preparation costs, or a further $335,000, a total of $837,000. That is, ignoring Southern Cross’s criticisms of the amounts allowed by Mr Garrett and Mr Roberts for certain items of Arthur Andersen's preparation, Arthur Andersen could expect to recover about $837,000 in party-and-party costs for preparation, and a further $540,000 for its trial costs if it is successful against Southern Cross.
But that is not, I think, the measure of Arthur Andersen's likely entitlement to its costs of defending the Southern Cross claims, since there is force in some of Southern Cross’s criticisms of the amounts allowed by Mr Garrett for some items of Arthur Andersen's preparation. Mr Rankin and Southern Cross’s independent legal costs assessor, Mr McLellan, criticises as overly generous the allowances made by Mr Garrett and Mr Roberts for some items of Arthur Andersen's trial preparation; Mr Roberts' estimate of preparation costs includes $880,000 for perusing 80,000 pages, while Mr Garrett's figure is $560,000 for perusing 70,000 pages. Both, in addition, allow $96,700 for a solicitor and a clerk to inspect Southern Cross’s discovered documents. Mr McLellan says that the views he expresses in his affidavit about the excessive allowance by Mr Garrett in respect of certain items included in the latter's estimate are based solely on the information contained in Mr Garrett's affidavit. He says he has not questioned the appropriateness of the instructions given to Mr Garrett, but has focused instead on what he considers would be allowed by a taxing officer if Mr Garrett’s draft bill of costs were to be taxed on a party-and-party basis. He says that, based on his experience, the amount claimed for item 10 (ie, the amount for perusing estimated by Mr Garrett at $560,000) is excessive and would not be allowed by a taxing officer; the amounts claimed in items 9, 9A (in respect of inspection) and 10, total $656,900, and that represents in excess of 60 per cent of the total professional costs claimed by the first respondent for preparation. Mr McLellan says 60 per cent is an extraordinarily high percentage in this context because, in his experience, the total professional costs of the discovery process, including perusing that side's own documents, preparing its own list of documents and perusing the other party's documents, would not usually exceed 25 per cent of the total professional costs up to and including the first day of trial.
Mr McLellan offers other criticisms of the quantification of this perusal item by Mr Garrett. He suggests that $200,000, versus Mr Robert's $880,000 and Mr Garrett's $560,000, would be a proper allowance for this particular item. But he acknowledges that his opinions are based on the instructions in Mr Garrett's brief, and that it is difficult for him to calculate with any precision the amount which a taxing officer would allow in respect of item 10 because he does not know the relevance of each document in the binders containing the material the subject of Mr Roberts and Mr Garrett's assessment.
Mr Rankin says of this particular item 10 that it refers to documents contained in 200 binders of Southern Cross’s discovered material. Mr Rankin says at least 60 per cent of these documents are accounting and administrative records created by Southern Cross in its day-to-day operations from late August 1992 to 11 March 1993, or source documents collated by Southern Cross in its day-to-day operations, or documents created by the liquidator in realising assets, and in assessing ticket refunds in consultation with National Mutual Trustees Limited. He says that as to the documents relating to the issue of liability, he and his staff have prepared approximately 50 binders of relevant documents which he considers contain the great majority of the documents relevant to the issues of liability as between the applicant and the first to ninth respondents. He says he would not expect more than 100 binders of relevant documents covering both liability and quantum should need to be assembled from the applicant's discovery by any party.
I have regard to the fact that Mr Roberts' and Mr Garrett’s estimates of Arthur Andersen's preparation party-and-party costs are about three times Mr Rankin's estimate of Southern Cross’s party-and-party costs. I have regard to what Mr McLellan says about the amount of costs put forward in respect of perusal of documents being extraordinarily high (60 per cent of the total professional fees claimed by the solicitors for Arthur Andersen for preparation) and also to Mr McLellan's inability to express a precise view for want of necessary information on what may be recoverable for this item of preparation on taxation. I also have regard to what Mr Rankin says about much of the Southern Cross discovered documents, the subject of the perusal item of work, comprising primary accounting records. I also take into account that Mr Garrett's estimate for perusal is substantially less than Mr Roberts. I will therefore assume that one half of Mr Garrett's figure, ie, $280,000, is likely to be recoverable on a party-and-party taxation by Arthur Andersen, if the fact that some of this item is in respect of duplicated work of a kind they have already referred to is ignored for the moment.
I also accept what Mr McLellan and Mr Rankin say about the duplication involved in junior and senior counsels' fees for preparation which are contained in items 13, 13(a), 37, 38, 40 and 43 to 45 of Mr Garrett's schedule. In view of Mr Garrett's allowance for advising on evidence and his substantial allowances for counsels' conference fees and consultations, I do not think that more than two weeks' preparation costs should be accepted as likely to be recoverable under items 37 and 40 by Arthur Andersen. These amounts should therefore be reduced to $30,000 and $22,000 respectively for the purposes of the present exercise. Once again, I ignore here that this work will involve duplication in respect of Arthur Andersen's preparation to meet the claims on it by Westpac and the Southern Cross directors.
I have considered Mr McLellan's other criticisms of Mr Garrett's estimate but do not propose to discount any other items in that estimate save for items 54 and 55, totalling $7000, which, as Mr McLellan says, appear to duplicate items 41 and 42.
Mr Garrett's figure of $1.506 million should therefore be reduced by $280,000 plus $78,000 plus $7000, that is, to $1.141 million. Allowing for the duplication involved in the estimate for preparation to meet the Westpac and directors claims on Arthur Andersen, the amount which I assess as likely to be recoverable by Arthur Andersen as party-and-party costs from Southern Cross, if it is successful in its defence, is one-third of $1.141 million or $380,000 plus one-third of the other two-thirds of $1.141 million or $254,000, a subtotal of $634,000. To this should be added a further $540,000 for the applicant's costs of a twelve-week trial, an overall figure of $1.174 million.
As I have mentioned, Southern Cross has recently sued the former directors. I accept that it is relevant, as Arthur Andersen contends, in determining whether there is a prospect that, if Arthur Andersen succeeds in its defence, Southern Cross would be unable to pay Arthur Andersen's recoverable costs of the defence, to take into account that Southern Cross’s claim against the directors may also fail and Southern Cross will have to pay those costs also, thereby depleting its cash reserves to which Arthur Andersen must look for payment of its costs. The preparation work the directors will have to do in defending Southern Cross’s claims on them will, I think, duplicate, in large part, the work they will do in preparing for the litigation between themselves and Arthur Andersen. I assume, in the absence of better information, that the directors will incur the same total amount of $1.174 million in costs of defending the Southern Cross claims that will be recoverable from Southern Cross.
Southern Cross thus has a likely costs exposure to both Arthur Andersen and the directors of about $2.348 million. On Southern Cross’s evidence, it has cash reserves available to meet Arthur Andersen costs of $2.336 million, reduced by Southern Cross’s potential indebtedness to the directors of $1.174 million. There is, therefore, a likely shortfall of only about $12,000 on the figures I have used. These figures are, necessarily, very generalised estimates. They may significantly over-estimate the actual shortfall just as they may significantly under-estimate it.
In coming to the conclusion that Southern Cross has nearly enough in cash reserves to cover Arthur Andersen's costs, I reject Arthur Andersen's submission that, in assessing whether Southern Cross will be able to pay the costs of Arthur Andersen, I should take into account the liability of Southern Cross for the costs of the third parties joined by Arthur Andersen, in the event that Arthur Andersen is successful in its defence: if Arthur Andersen is successful in its defence, it will follow that the proceedings for contribution brought by Arthur Andersen against Westpac, Gledhills, Apogee and the GPA group of companies will also fail. In those circumstances, so Arthur Andersen submits, those third parties will be entitled to orders for their costs of defending the cross-claims against them that Southern Cross will have to satisfy.
The costs that Arthur Andersen will incur to the parties it has taken third-party proceedings against are not costs of defending Southern Cross’s claim on it, which alone Arthur Andersen can claim security for from Southern Cross. Rather, they are costs which Arthur Andersen has voluntarily elected to incur for its own purposes, ie, in seeking to protect itself against any liability it may be found to owe to Southern Cross. It cannot be within the power of a respondent, by taking action against third parties in order to advance its own interests, to create a situation in which the Court's jurisdiction under section 1335 the Corporations Law to order security is enlivened, when that would not be the case if the respondent claiming security for its defence costs had not chosen to take such third-party action. This consideration is also relevant when a decision has to be made as to whether to order security under section 56 the Federal Court of Australia Act.
It does not, in my opinion, make any difference that if Arthur Andersen succeeds against Southern Cross and, accordingly, fails against its third parties, Arthur Andersen's costs of those third party proceedings may ultimately have to be borne by Southern Cross under the sort of costs order affirmed in Gladstone Park Shopping Centre Pty Ltd v Ross Wills (1984) 6 FCR 496. That potential demand on Southern Cross’s cash resources should, accordingly, be ignored in assessing whether, if Arthur Andersen succeeds in its defence, Southern Cross will be able to pay Arthur Andersen's costs.
The cases cited by Arthur Andersen in this regard lend no support to its contentions. For example, Gladstone Park shows only that, where a respondent sues a third party to advance its own interests in circumstances similar to those in which Arthur Andersen has sued the third parties here, if the respondent succeeds in its defence to the applicant's claim and, accordingly, has its third party proceedings dismissed with costs, it is the respondent who should bear primary responsibility for the third party's costs in accordance with the ordinary rule that costs follow the event. As between the respondent and a third party in such a situation, the risk that the applicant, if unsuccessful, will be unable to meet the third party's costs is borne by the respondent who initiated the third party proceedings.
I have reached the position where I think, on my assessment of the evidence before me, that Southern Cross may have almost enough in cash reserves to be able to meet Arthur Andersen's costs if it is successful in its defence. Because of the inherent imprecision in the figures I have relied on in coming to this conclusion, I do not think it appropriate to make an order for security under section 1335(1) the Corporations Law, a power exercisable only if the Court is of the affirmative opinion that there is reason to believe that Southern Cross will be unable to pay Arthur Andersen's costs of its defence if that defence succeeds.
However, as I have said, section 56 the Federal Court of Australia Act is not so constrained. Given that the cash reserve is the only means available to Southern Cross to satisfy any order for costs Arthur Andersen may obtain and the risk that the liquidator's own demands on Southern Cross’s cash reserves may increase, and given also the necessary imprecision in the estimates of Arthur Andersen's costs, and the fact that Southern Cross’s likely ability to meet Arthur Andersen's costs on the evidence as assessed by me is finally balanced, I will make an order for security in favour of Arthur Andersen under the Federal Court of Australia Act provision.
I should say that I do not think Arthur Andersen is guilty of delay in seeking security that disentitles it to such an order. It was only, in my view, when Southern Cross joined the directors in May last that Arthur Andersen could say that Southern Cross might, because of its potential exposure in costs to the directors, be unable from that point on to pay the costs of a successful defence by Arthur Andersen. Prior to Southern Cross actually suing the directors, it would have been futile for Arthur Andersen to argue that, if Southern Cross should happen to sue them, then its costs exposure to them could alter Southern Cross’s then-existing ability to pay Arthur Andersen’s costs.
It remains to deal with the question of the quantum of a security that I should order. In a detailed summary of the principles applicable to fixing the amount of a defendant's established entitlement to security, Burchett J in Quad Consulting Pty Ltd v David R. Bleakley & Associates Pty Ltd (Unreported, Federal Court, 28 June 1991) discussed the now-discredited rule of fixing security at about two-thirds of the estimated party-and-party costs and went on to identify the following principles as governing the quantification of the amount the Court ordinarily orders as security: firstly, the Court does not set out to give a complete and certain indemnity; it follows from this that the sum provided might not be adequate to indemnify the respondent in respect of its costs. Secondly, the quantum of the security to be provided is a matter for discretion. Finally, it remains open to the Court to apply a discount of about two-thirds, not because it is a conventional figure to deduct, but because in all the circumstances of the particular case such a discount can be appropriate. In this regard his Honour added:
“The discount may be seen to be appropriate particularly in cases where the chances of settlement, or the possibility that substantial amounts may be taxed off the bill, or the prospect or actuality of off-setting costs orders, may provide a tangible basis for reducing the amount proposed. In making a reduction, apart from some specific matter, the court will bear in mind the view accepted by Fullagar J that the object is not to set out to give a complete and certain indemnity, but to order security to be given "of a reasonable amount”.”
The figure of $1.174 million, which I have arrived at as the estimate of Arthur Andersen's recoverable party-and-party costs of defending the Southern Cross claims, does allow for the likelihood that substantial amounts might be taxed off the cost estimates put forward by Arthur Andersen as the likely measure of its cost of defending the Southern Cross claims. But the $1.174 million does not make any allowance for the possibility that the litigation between Southern Cross and Arthur Andersen may settle at some time before the end of the trial. This is a possibility which I do not think can be completely ignored. Nor does the $1.174 million reflect the principle that security is only ordered "in a reasonable amount" and not for the entirety of the respondent's likely recoverable party-and-party costs. Taking these matters into account, I think that Southern Cross should be ordered to provided security to the extent of $1 million for Arthur Andersen's costs for defending Southern Cross’s claims from 1 July 1997 to the end of the trial of the consolidated actions.
I certify that this and the preceding 9 pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Drummond.
Associate:
Dated: 6 August 1997
Counsel for the applicant: A Morris QC & L Kelly
Solicitor for the applicant: Allen Allen & Hemsley
Counsel for the respondent: PD McMurdo QC
Solicitor for the respondent: Minter Ellison
Date of hearing: 29 July 1997.
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