Suchand Pty Ltd v Jonathon Kingsley Colbran and Richard Stone as Receivers and Managers of Suchand Pty Ltd

Case •

[2024] NSWCA 250

•

21 October 2024

Court of Appeal


Supreme Court


New South Wales

  • Summary available
Medium Neutral Citation: Suchand Pty Ltd v Jonathon Kingsley Colbran and Richard Stone as Receivers and Managers of Suchand Pty Ltd [2024] NSWCA 250
Hearing dates: 23 September 2024
Date of orders: 21 October 2024
Decision date: 21 October 2024
Before: Ward P at [1];
Mitchelmore JA at [9];
Stern JA at [10].
Decision:

(1)   On the proviso that Mr Singh provides a signed unconditional undertaking to the court to be liable for the respondents’ costs of the proceedings, leave to appeal is granted.

(2)   The appeal is allowed.

(3)   Orders 1, 2, 4, 5 and 7-9 of the Orders of Kunc J of 25 March 2024 are set aside.

(4)   The respondents are to pay the applicant’s costs of the appeal.

Catchwords:

COSTS – Security for costs – Relevant factors – Impecuniosity – risk of stultification – where director offers an undertaking as to costs – whether the primary judge erred in ordering security for costs

Legislation Cited:

Corporations Act 2001 (Cth), s 1335

Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.21

Cases Cited:

Adam P. Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170; [1981] HCA 39

Aquatic Air Pty Ltd v Siewert [2016] NSWCA 130

Carolan v AMF Bowling Pty Ltd t/as Bennetts Green Bowl [1995] NSWCA 69

Cornelius v Global Medical Solutions Australia Ltd [2014] NSWCA 65

Elip Pty Ltd v Arch Finance Pty Ltd [2020] NSWSC 752

Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191; [1999] VSCA 43

Erolen v Baulkham Hills Shire Council (1993) 10 ACSR 441

Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd & Ors (1992) 8 ACSR 405

House v The King (1936) 55 CLR 499

Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744

Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306

Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276

KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189

Li v State of New South Wales [2013] NSWCA 165

Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302

Maritime Services Board of New South Wales v Citizens Airport Environment Association Inc (1992) 83 LGERA 107

Newtimber(Operations) Pty Ltd v Tarong Energy Corporation Ltd [2011] FCA 123

Prynew Pty Ltd v Nemeth [2010] NSWCA 94; (2010) 28 ACLC 10-026

Secretary, Department of Family and Community Services v Smith (2017) 95 NSWLR 597; [2017] NSWCA 206

The Age Company Ltd v Liu (2013) 82 NSWLR 268; [2013] NSWCA 26

Treadtel International Pty Ltd v Cocco [2016] NSWCA 360; (2016) 316 FLR 318

Treloar Constructions Pty Limited v McMillan [2016] NSWCA 302

Vintage Marine Art Pty Ltd v Henderson & Cremer (No 2) [2019] NSWCA 252

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

Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542

Texts Cited:

J Edelman, McGregor on Damages (21st ed, 2021, Sweet & Maxwell)

Category:Principal judgment
Parties: Suchand Pty Ltd (Applicant)
Jonathon Kingsley Colbran & Richard Stone as Receivers & Managers of Suchand Pty Ltd (First Respondents)
Robtamy Pty Ltd (Second Respondent)
Representation:

Counsel:
BK Nolan (Applicant)
J Raftery and J Hart (First Respondents)
GM McGrath (Second Respondent)

Solicitors:
Kirath Chand Ramrakha (Applicant)
Dentons (First Respondents)
D’Agostino Solicitors (Second Respondent)
File Number(s): 2024/00139657
Publication restriction: Nil.
 Decision under appeal 
Court or tribunal:
Supreme Court New South Wales
Jurisdiction:
Equity
Citation:

[2024] NSWSC 201

Date of Decision:
4 March 2024
Before:
Kunc J
File Number(s):
2023/00017310

HEADNOTE

[This headnote is not to be read as part of the judgment]

In around June 2009, Charles Stuart Motel Pty Limited (CSM), a company of which Mr Chandra Singh was a director, bought a motel business in Cooma, NSW, and entered into a lease of the property. CSM did not renew its lease of the motel and instead, on 6 August 2014, Suchand Pty Ltd (Suchand) entered into a lease of the motel from MAGS International Traders Pty Limited, which was subsequently replaced as lessor by the second respondent, (the Lease) and commenced operating the business of the motel.

Following a dispute with the Commonwealth Bank of Australia (CBA), on 10 November 2016 the first respondents were appointed as receivers of Suchand’s leasehold interest in the motel and all of Suchand’s rights, property and undertakings. On 18 January 2017, the first respondents partially retired as receivers and, from 22 September 2017, the first respondents fully retired. Suchand has not operated since this retirement.

On 10 October 2017, Mr Singh became the sole director, secretary and shareholder of Suchand. Prior to this, the shares were held by Ronild Singh and Semeret Goitom (Mr Singh’s son and daughter in law), who were also the directors of Suchand.

On 17 January 2023, Suchand commenced these proceedings. Suchand contends that the first respondents abandoned the Lease, causing Suchand to lose a business of value. On 1 March 2024, Suchand added a claim in conversion and debt (pursuant to clause 14.5 of the Lease) against the second respondent in respect of the value of the chattels of the motel business, which it contends to be $409,590. The second respondent disputes this claim and the associated quantum.

The respondents sought orders that the applicant pay security for costs. Mr Singh’s unchallenged evidence was that he had limited income and assets. Mr Singh also proffered an undertaking to be liable for an appropriate amount of security so as to place the defendants in no worse position than they would have been, had they sued Mr Singh as the person standing behind the company as a litigant in person, without the imposition of a corporate entity between them.

The primary judge found that there was reason to believe that Suchand would be unable to pay the costs of the respondents if required to do so and that Suchand’s alleged entitlement to, and the value of, the chattels was not sufficiently certain to be taken into account in Suchand’s favour. The primary judge also found that Suchand’s poor financial position was not attributable to the respondents and that Mr Singh’s undertaking was not an answer to the applications in this case. Furthermore, the risk of stultification had not been made out, including because the Court could not be satisfied that all those who stood for the company or who might benefit from the litigation had come forward to explain their financial positions, noting that no explanation had been given for the change of control of Suchand in October 2017.

The primary judge ordered that Suchand pay security for costs in the sum of $165,000 as regards the first respondents, and $135,000 as regards the second respondent.

Suchand seeks leave to appeal against these orders.

The principal issues in the appeal were if the primary judge erred in:

  1. reaching a state of satisfaction that there was reason to believe that Suchand would be unable to meet the costs of the respondents if ordered to do so (proposed appeal ground one);

  2. failing to accord appropriate weight to the proffered undertaking (proposed ground two);

  3. allowing irrelevant matters to guide or affect his Honour’s decision (proposed ground three); and

  4. exercising the discretion by misconstruing the evidence and mistaking the facts in that there was unchallenged evidence before his Honour that an order for security would cause the proceeding to be stultified (proposed ground four).

The Court (Stern JA, Mitchelmore JA agreeing, Ward P dissenting in part) held, allowing the appeal:

Leave to appeal

  1. Leave to appeal should be granted on the proviso that Mr Singh provide a signed unconditional undertaking to the court to be liable for the respondents’ costs of the proceedings

As to issue (i) (per Stern JA, Ward P and Mitchelmore JA agreeing)

(2) It is for the party seeking an order for security for costs to establish that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, and once this onus has been discharged, the onus shifts to the other party to establish a reason why security should not be granted. The existence of a real risk of an inability to pay a costs order could provide a rational basis for the requisite belief: [48]-[49].

Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245; Treloar Constructions Pty Limited v McMillan [2016] NSWCA 302; Cornelius v Global Medical Solutions Australia Ltd [2014] NSWCA 65, applied.

(3) The primary judge did not err in taking into account that Suchand had secured debts in the sum of $1,347,381.79 as at least 9 May 2017. There was no evidence to support Suchand’s contention that this debt was not owing as at 9 May 2017: [50].

  1. There are a variety of matters which cast real doubt upon Suchand’s ability to rely upon either clause 14.5 of the Lease or its claim in conversion as a means of meeting an adverse order as to costs, including that these claims are vigorously contested by the second respondent on multiple grounds: [52].

  2. Having regard to these matters and the fact that Suchand has not traded since September 2017, has only limited paid up capital, has a poor credit rating and has not adduced any evidence other than its claims under clause 14.5 of the Lease and in conversion to support it being able to meet an order for costs, a rational basis has been established for the belief that Suchand will be unable to pay the costs of the respondents if ordered to do so: [54].

As to issue (ii) (per Stern JA, Mitchelmore JA agreeing, Ward P dissenting in part)

  1. The primary judge did not err in observing that an undertaking from an impecunious director of an impecunious company will not be an answer to an application for security for costs in every case. Further, the impecuniosity of the person offering an undertaking to pay any costs order made against a corporate plaintiff may be a reason why such an undertaking would not be determinative. As the cases show, one factor of relevance to the weight to be given to an undertaking by a person standing behind a corporate plaintiff is whether that undertaking will provide effective security to a “captive” defendant: [64]-[66], [74]-[75].

Vintage Marine Art Pty Ltd v Henderson & Cremer (No 2) [2019] NSWCA 252; Elip Pty Ltd v Arch Finance Pty Ltd [2020] NSWSC 752, considered.

Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276; Erolen v Baulkham Hills Shire Council (1993) 10 ACSR 441; Prynew Pty Ltd v Nemeth [2010] NSWCA 94; (2010) 28 ACLC 10-026, referred to.

  1. The reasoning in Vintage Marine Art Pty Ltd v Henderson & Cremer (No 2) [2019] NSWCA 252 should not be confined to cases under the Corporations Act, s 1335. The rationale for the position applies equally to cases where security for costs is sought against a corporate plaintiff under UCPR, r 42.21. There is no basis for distinguishing the relevant principles as between the two. In holding to the contrary, the primary judge erred: [76].

Vintage Marine Art Pty Ltd v Henderson & Cremer (No 2) [2019] NSWCA 252, considered.

  1. His Honour erred to the extent that his Honour might be taken to have suggested that an order for security for costs should “in general” be made where an impecunious person undertakes to pay any costs order made against an impecunious corporate plaintiff. Further, the primary judge erred in diminishing the weight to be given to the undertaking proffered by Mr Singh on the basis that Mr Singh was not a director at the time of the events giving rise to the litigation: [77]-[78].

(per Stern JA, Mitchelmore JA agreeing)

  1. In re-exercising the discretion of whether to make an order for security for costs no orders should be made for security for costs: [83].

(per Ward P dissenting)

  1. The most relevant factors in the present case are the risk of stultification and the likely worthlessness of the proffered undertaking. In my opinion the worthlessness of the proffered undertaking outweighs what I accept to be the real (but not necessarily insurmountable) risk of stultification of the proceedings and the applications for security for costs should be granted: [5], [8].

As to issues (iii)-(iv) (per Stern JA, Ward P and Mitchelmore JA agreeing)

  1. As the appeal has been upheld on other grounds, it is unnecessary to consider the further proposed grounds of appeal: [79].

JUDGMENT:

  1. WARD P: I have had the considerable advantage of reading Stern JA’s judgment, with which I agree in most respects. Where I differ is as to the re-exercise of the discretion in relation to the applications for security for costs. In what follows, I do not repeat her Honour’s consideration of the background to the present application for leave to appeal, including the reasons of the primary judge, and I do not repeat the citations of authorities to which her Honour has referred.

  2. I agree with Stern JA as to the rejection of proposed ground 1 of the grounds of appeal. In relation to proposed ground 2 of the grounds of appeal, I also agree with Stern JA that the primary judge erred in the exercise of his discretion as to the applications for security for costs (see [76]-[78] of her Honour’s reasons). In those circumstances, while I would have been minded not to grant leave to appeal (since I would have granted the applications for security), I agree with Stern JA that leave to appeal should be granted.

  3. As to the appeal itself, on the re-exercise of the discretion to order security for costs, as Stern JA has explained, the proffering by an impecunious director of a personal undertaking as to costs that may be ordered against an impecunious company of which he or she is a director is not determinative (neither necessarily so nor generally or presumptively so) of an application for security for costs to be provided by that company. While the authorities to which her Honour has referred make clear that such an undertaking is a relevant factor, which has been described as a powerful consideration, in considering an application for security, it is also relevant to consider the worth or sufficiency of such an undertaking (also to my mind a powerful consideration given the purpose of an order for security for costs).

  4. I should add that the suggestion by Counsel for Suchand that, because Mr Singh is able to meet his day to day debts, he is not impecunious for the purposes of considering an application for security for costs must be rejected. It fails to take into account the size of the estimated costs of the respondents in defending these proceedings. Any suggestion that Mr Singh would be able to meet such an undertaking is not tenable in light of the applicant’s own evidence.

  5. Of the factors addressed by Stern JA at [80] of her Honour’s reasons, to my mind the most relevant in the present case are the risk of stultification (which I accept has been established) and the likely worthlessness of the proffered undertaking. Those factors point in opposite directions. Balancing all the factors to which her Honour has referred, in my opinion the worthlessness of the proffered undertaking outweighs what I accept to be the real (but not necessarily insurmountable) risk of stultification of the proceedings.

  6. I cannot see that the proposed undertaking (whether in the form proffered or as framed in the proviso to a grant of leave to appeal) will provide any effective security at all for the respondents’ costs; and hence it will not serve to meet the rationale for the provision of security by an impecunious company. I accept that the provision of an undertaking is an important consideration to take into account but so is the worth of the undertaking so proffered. Further, insofar as it has been suggested that a corporate plaintiff should be in no worse position by reason of its incorporation than a plaintiff who is a natural person, as Stern JA has noted impecuniosity is no bar to an order for security for costs against a natural person in an appropriate case.

  7. In the present case, Mr Singh clearly wishes Suchand to pursue the present proceedings because he is aggrieved by the conduct of the first respondents. It may be accepted that the claims by Suchand are arguable and brought in good faith. However, the primary judge rejected (as would Stern JA, with whom I agree on this aspect) the contention that Suchand’s impecuniosity was caused by the respondents’ conduct.

  8. After much consideration, I would conclude that the applications for security for costs should be granted. I would not necessarily have reached the same view as to the quantum of security to be provided as the primary judge did. In particular, the real risk of stultification would have led me to apply a much greater discount to the sums to be provided (and would have ordered the provision of security in tranches) which might well have significantly reduced (if not eliminated) the risk of stultification. As it is, however, it is not necessary to make a determination as to quantum of security or how it is to be provided, in light of the conclusion that Stern and Mitchelmore JJA have reached as to the dismissal of the applications for security.

  9. MITCHELMORE JA: I agree with Stern JA.

  10. STERN JA: The applicant (Suchand), the plaintiff in the proceedings before the primary judge, seeks leave to appeal, and if leave is granted to appeal, from orders of Kunc J on 25 March 2024 that Suchand:

  1. provide security for the first respondents’ costs in the sum of $165,000 either by way of an unconditional bank guarantee, in a form acceptable to the first respondents in their absolute discretion, or by payment into court in three tranches; and

  2. provide security for the second respondent’s costs (in the same way) in the sum of $135,000, also in three tranches.

  1. Both respondents oppose the grant of leave to appeal and contend that if leave be granted, the appeal should be dismissed.

  2. At the hearing of the application, Suchand sought to read a further affidavit from Chandra Singh (Mr Singh) affirmed on 24 June 2024 solely for the purpose of demonstrating that Suchand would suffer irreparable prejudice if leave were not granted. The affidavit was read on that limited basis, subject to rulings limiting in certain respects Mr Singh’s evidence to his opinion or assertions.

  3. As is well established, a grant of leave to appeal generally requires the identification of an issue of principle, a question of public importance or a reasonably clear injustice going beyond something that is merely arguable: Carolan v AMF Bowling Pty Ltd t/as Bennetts Green Bowl [1995] NSWCA 69 at 3 (Kirby P); see also, for example, The Age Company Ltd v Liu (2013) 82 NSWLR 268; [2013] NSWCA 26 at [13]; Secretary, Department of Family and Community Services v Smith (2017) 95 NSWLR 597; [2017] NSWCA 206 at [28]. There is a well-recognised reluctance of appellate courts to review matters of practice and procedure (see Adam P. Brown Male Fashions Pty Ltd v Phillip Morris Inc (1981) 148 CLR 170 at 177; [1981] HCA 39 (Gibbs CJ, Aickin, Wilson and Brennan JJ); Treadtel International Pty Ltd v Cocco [2016] NSWCA 360; (2016) 316 FLR 318 at [29] (Barrett AJA)).

  4. Notwithstanding this general reluctance, for the reasons set out below, on the proviso that Mr Singh provides a signed unconditional undertaking to the court to be liable for the respondents’ costs of the proceedings, leave to appeal should be granted, the appeal should be allowed, and on the proviso that Mr Singh gives a signed undertaking to the Court on the terms set out below, in the re-exercise of the Court’s discretion no order should be made for security for costs.

The background to the applications for security for costs

  1. The background to the applications for security for costs is uncontentious.

  2. In around June 2009, Charles Stuart Motel Pty Limited (CSM), a company of which Mr Singh was a director, bought the Marlborough Motel Business in Cooma, NSW, and entered into a lease of the property (the motel) from MAGS International Traders Pty Limited (MAGS). In 2009, the shares in CSM were held by Ronild Singh and Semeret Goitom (Mr Singh’s son and daughter in law). However, from 1 July 2010 the shares in CSM were held half by Mr Singh, and half by Sures Wati Singh (Mr Singh’s wife).

  1. Suchand was incorporated on 31 July 2014 and registered on 1 August 2014. At that time the shares in Suchand were held by Ronild Singh and Semeret Goitom, who were also the directors of Suchand.

  2. CSM could have, but did not, renew its lease of the motel for a further five years when it expired on 22 June 2014. Instead, on 6 August 2014, Suchand entered into a lease of the motel from MAGS, which was subsequently replaced as lessor by Robtamy Pty Ltd, the second respondent, (the Lease) and commenced operating the business of the motel. However, Mr Singh and his wife managed and operated the business of the motel and were paid a salary, and given free accommodation, to do so.

  3. A dispute arose with the Commonwealth Bank of Australia (CBA), which had made facilities available to CSM at a time when it leased the motel and carried on the motel business. The dispute related to the circumstances in which Suchand acquired the Lease having regard to CSM being in default of the terms of facilities CBA had provided to it, which were secured over the lease of the motel. On or about 10 November 2016, Suchand, CSM (and others) and CBA entered into a Deed of Settlement and Release (the Deed), pursuant to which Suchand agreed to grant a charge to CBA over its interest in the business of the motel and a mortgage over the Lease. Also on or about 10 November 2016, CBA appointed the first respondents as receivers of Suchand’s leasehold interest in the motel and all of Suchand’s rights, property and undertakings. The Deed also provided that, conditional upon Suchand complying with obligations to provide the receivers with vacant possession of the motel, not challenging or interfering with CBA’s appointment of receivers in respect of the motel and providing the receivers with all records they required to facilitate the sale of the motel, CBA would release Suchand from “Claims” defined broadly in the Deed.

  4. The first respondents (the receivers appointed by CBA) thereafter entered the motel property and commenced carrying on the business of the motel. The evidence of Mr Stone (one of the first respondents) was that at around that time the motel was observed to be “in complete disarray” and that many items of equipment had been removed from the premises. In around November 2016, the first respondents obtained a valuation, prepared by Grays Asset Services, of inventory at the motel. This assessed the total value of the inventory as $36,887 (at market value) and $12,220 (on the basis of estimated auction realisation).

  5. On 22 December 2016, the first respondents offered to sell the motel business to Suchand for consideration of $1.

  6. On 18 January 2017, the first respondents retired from Suchand’s property and undertakings including the motel business (but excluding a bank account and book debts), and, from 22 September 2017, the first respondents fully retired as receivers. Suchand has not operated since September 2017, when the first respondents retired.

  7. In a document dated 9 May 2017, entitled “Presentation of accounts and statements”, prepared by the first respondents and presented to ASIC, it was stated that the amount owing by Suchand under the charge in favour of CBA was $1,347,381.79. Whilst the genesis of this debt is not apparent from the evidence before the Court, this document shows that this significant debt was owing as at 9 May 2017, notwithstanding the terms of the release of Suchand in the Deed.

  8. On 10 October 2017, Mr Singh became the sole director, secretary and shareholder of Suchand. There is no evidence as to the arrangements between Mr Singh on the one hand, and Ronild Singh and Semeret Goitom on the other, as to the terms on which it was agreed that the shares in Suchand would be transferred. Nor is there any evidence on the application as to why it was that Mr Singh took over as director and shareholder of Suchand on 10 October 2017 when the company ceased trading in September 2017 and has not traded since.

  9. From around 18 January 2018 (or possibly from January 2017 noting discrepancies in the evidence as to dates, but nothing turns on these discrepancies), the second respondent (by then the landlord under the Lease) re-entered the motel. The second respondent then operated the motel business initially through a related company, Rostom Pty Ltd, before an operator called Snow Seasons Motor Inn Pty Ltd (Snow Seasons) took over in July 2018 (or possibly July 2017, again noting the discrepancies as to dates).

  10. Over 5 years after Mr Singh became the sole director and shareholder, on 17 January 2023, Suchand commenced these proceedings. Suchand contends that the first respondents abandoned the Lease, causing Suchand to lose a business of value. Both respondents deny this claim.

  11. By way of a Further Amended Statement of Claim filed on 1 March 2024, Suchand added a claim against the second respondent in both conversion and debt in respect of the value of the chattels of the motel business. The claim in debt is said to arise under clause 14.5 of the Lease, which provided that the landlord (here the second respondent) must purchase the “Chattels” (defined as the movable furniture, office equipment, chattels and effects owned and used by the Tenant in the operation of the Tenant’s Business) relevantly, if an Event of Default occurs and as a consequence the Lease is terminated, upon the Landlord re-taking possession of the motel. If there was a dispute as to the purchase price of the chattels, then that dispute was to be settled by a valuer.

  12. Whilst neither respondent has yet pleaded to these new claims, in the second respondent’s submissions opposing leave to appeal, which were relied upon also on the application for security for costs, the second respondent denied these claims, contending that the plaintiff had no entitlement to make a claim under clause 14.5 of the Lease and that in any event, under clause 16.3 of the Lease, the second respondent was entitled to offset “many and substantial” claims which the second respondent said it had under the Lease against any amounts which Suchand could claim under clause 14.5. Clause 16.3 provides that the Landlord is entitled to withhold from the purchase price payable under clause 14.5 “any amount payable by the Tenant under this Lease and all costs and other expenses incurred by the Landlord arising out of or in any way resulting from an Event of Default”.

  13. The second respondent said that its own claims would exceed any liability which it could have to Suchand under clause 14.5 of the Lease. The second respondent also said that Suchand’s claims for conversion and under clause 14.5 of the Lease were precluded by a limitation defence, having been added to the claim more than six years after the dates when the cause of action was pleaded as arising.

  14. It should also be observed that during the hearing of the application, counsel for Suchand acknowledged that the obligation of the second respondent to purchase chattels under clause 14.5 of the Lease only arose if the Lease had been terminated as a consequence of an “Event of Default” (under the Lease), and that Suchand’s case in the proceedings was that the Lease had not been terminated as a consequence of an “Event of Default” because there had not been any such event. Counsel’s submission was, however, that while that “may very well be put against me”, Suchand also pursued a claim for conversion in its Further Amended Statement of Claim, and that Suchand’s entitlement to damages for conversion would be the same as its entitlement under clause 14.5 of the Lease.

The applications for security for costs

  1. By letters dated 14 and 16 March 2023, the second and first respondents (respectively) wrote to Suchand identifying that they had concerns as to Suchand’s ability to satisfy any adverse costs order that may be made against it and seeking evidence of Suchand’s ability to meet an adverse costs order. Annexed to the second respondent’s letter of 14 March 2023 was a “(creditor)watch” report indicating that Suchand had an “impaired” risk level and that the credit advice for Suchand was that the “[e]ntity is currently vulnerable to non-payment and default”.

  2. Suchand’s responses, both dated 4 April 2023, said that Suchand had not traded since 22 September 2017 (when the first respondents retired as receivers) and added:

“The company rejects the assertion that it is without assets to pay any adverse costs order. As the defendants would well know, the company is the owner of a large inventory of hotel, furniture, and fittings, which is of an estimated value of $1,428,574.46.”

  1. By notices of motion dated, respectively, 14 April 2023 and 27 April 2023, the second and first respondents sought orders under both the Corporations Act 2001 (Cth), s 1335, and the Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.21, that the applicant pay security for costs. Apparently as a result of a number of interlocutory steps being taken, the hearing of those applications did not take place until 23 February 2024.

  2. For the purposes of the applications, Suchand relied upon a report dated 2 November 2023 from Leeson Valuers (respectively the Leeson Report, and Leeson).

  3. Leeson valued a schedule of items, which Mr Singh said was the inventory of the business of the motel and which he said he could see in photographs of the motel on booking.com in the period since the second respondent started operating the business. The schedule was a record which Mr Singh prepared on 10 November 2016 of the inventory of the motel business. Leeson valued the items in the schedule to the extent it identified items meeting that description on 19 September 2023 when Leeson inspected the motel premises. Those items were valued by Leeson on a forced liquidation value at $30,614 (incl GST), on an orderly liquidation value at $66,944 (incl GST), and at fair value, being market value existing use, at $409,590 (excl GST).

  4. The Leeson Report was relied upon by Suchand before the primary judge on the issue of Suchand’s ability to meet any adverse costs order in the proceedings. Suchand’s submission, before the primary judge and on appeal, is that the Court would not be satisfied that there is reason to believe that Suchand will be unable to meet the respondents’ costs of successfully defended proceedings given that the debt owed under clause 14.5 of the Lease is “indefensible” and the amount of $409,590 is thus “incontrovertibly” owed by the second respondent to Suchand.

  5. There was some dispute on appeal as to whether the instruction of Leeson was joint, or an instruction by Suchand. There was also some dispute as to whether the second respondent had been shown the list of items to be valued. For present purposes it is unnecessary to resolve these disputes. This is because there can be no doubt that, before the primary judge, the second respondent disputed that a number of items valued by Leeson were in fact items which were the property of Suchand. Before the primary judge the second respondent relied on affidavit evidence from:

  1. Roberto Mena, a director of the second respondent, who said that he had inspected the motel when the receivers left in January 2017 and that the premises were in total disarray, many items had been removed from the premises or were unusable and were discarded. He had needed to purchase and repair multiple items. He also said that Snow Seasons, who operated the motel from July 2018, had also had to replace and purchase many items for the motel;

  2. Lai Pan Chung, a director of Snow Seasons, who identified multiple items at the motel that Snow Seasons had replaced since June 2017 (noting the discrepancy as to dates); and

  3. Anthony Catarino, a chef who operated the restaurant at the motel from 2005 to 2014 and then from 2015 to the end of 2017, who said that Mr Singh had removed a large quantity of items from the motel before the receivers took over and that there were items in the inventory prepared by Mr Singh that were not at the motel during his time there.

  1. On the application for security for costs the first respondents contended before the primary judge that the Leeson Report did not establish the ownership of the items valued and contended that the best evidence of the chattels likely owned by the plaintiff was the Grays Asset Services valuation prepared in 2016. The first respondents further contended that in any event, valuation of the items on a going concern basis was an inappropriate means of valuing them if they had to be liquidated to meet an adverse costs order.

  2. On 22 October 2023, the parties obtained a joint report from John Bartos on the question of the respondents’ reasonably likely costs of the proceedings. Mr Bartos estimated costs for the first respondents to be $161,606.33 and costs for the second respondent to be $127,388.65 (having adopted a discount for both solicitors’ and counsels’ fees as adjusted).

Mr Singh’s financial position

  1. By evidence set out in an affidavit of 3 December 2023, which was not challenged, Mr Singh set out the details of his financial position:

  1. neither he nor his wife own any real property;

  2. he is in receipt of an age pension, which according to his tax return was in the sum of $18,905 in the 2022-2023 financial year; and

  3. he has net assets of $67,030 – including superannuation of $61,530 and having regard to a HECS debt of $26,983.

  1. Mr Singh stated in that affidavit that “as the director of Suchand” he was unable to raise the money the subject of the claim for security for costs, and “[i]f an award for security were to be made it would stultify the litigation”. As to the former, this statement is clearly qualified, on the basis that he could not raise the necessary funds “as the director of Suchand”. As to the latter, this is clearly a statement of Mr Singh’s opinion, presumably based upon the matters which I have summarised above.

The undertaking proffered by Mr Singh

  1. Suchand’s written submissions before the primary judge, dated 14 February 2024, stated that Mr Singh was willing to provide the following undertaking:

“[Mr Singh] is willing to provide an undertaking acceptable to the Court to be liable for an appropriate amount of security so as to place the defendants in no worse position than they would have been, had they sued Mr Singh as the person standing behind the company as a litigant in person, without the imposition of a corporate entity between them.”

  1. The primary judge recorded that counsel for Suchand accepted that Mr Singh was without sufficient means to meet an adverse costs order of the size postulated by Mr Bartos: J[30]. Indeed, Suchand relied in its written submissions before the primary judge on Mr Singh’s inability to meet an adverse costs order.

  2. On appeal, counsel for Suchand confirmed that Mr Singh’s undertaking proffered in Suchand’s submissions before the primary judge remained on offer and “is given as unconditional … to be framed in whatever way this Court sees it as appropriate, should it consider it being worthy of satisfying the grant”. As set out below, the form of undertaking that I consider appropriate is not an undertaking in the form proffered before the primary judge, but an undertaking to the court to be liable for the respondents’ costs of the proceedings.

The primary judgment

  1. As set out above, the primary judge ordered that Suchand pay security for costs in the sum of $165,000 as regards the first respondents, and $135,000 as regards the second respondent. The primary judge’s reasons for so ordering were, in summary, that:

  1. for the purposes of the UCPR, there was reason to believe that Suchand, being a corporation, would be unable to pay the costs of the respondents, if ordered to do so; and, for the purposes of the Corporations Act, that it appeared by credible testimony that there was reason to believe that Suchand would be unable to pay the costs of the respondents if they were successful in their defence: J[19]. The primary judge relied upon Suchand’s paid up capital being only $100, its debts being $1,347,381.79 at least as at 9 May 2017, Suchand having made an operating loss of $215,300.67 in the 12 months to 30 June 2016, prior to the appointment of the first respondents and that at the time of the appointment of the first respondents, Suchand was apparently unable to meet all of its obligations as and when they fell due: J[14]. The primary judge rejected Suchand’s contention that the debt it alleged was owing to it under the Lease sufficed to preclude such findings. The primary judge noted that Suchand’s debt under the Lease was “hotly disputed” by the parties and found that Suchand’s alleged entitlement to the debt was not sufficiently certain to be taken into account in Suchand’s favour for the purpose of the jurisdictional question: J[17]. Further, the true value of the chattels to be valued under clause 14.5 of the Lease was not sufficiently clear for the purpose of being taken into account in Suchand’s favour on the application: J[18].

  2. Suchand’s poor financial position was not attributable to the respondents: J[22].

  3. The undertaking from Mr Singh was not an answer to the applications for security for costs in this case: J[33]. In so finding, the primary judge observed that: “irrespective of the jurisdictional basis for an application for security for costs, an undertaking from an impecunious director of an impecunious company will not be an answer to an application for security for costs in every case… An impecunious person, having accepted the benefits of incorporation and limited liability for their venture should, in general, be required to accept its burdens, including the possibility that a security for costs order will be made against the impecunious corporate plaintiff”. The primary judge also found that the undertaking should be given little weight where Mr Singh became a director after the events giving rise to the litigation: J[34].

  4. The risk of stultification had not been made out: J[36]. The primary judge relied upon four matters in this regard: no explanation had been given as to how Suchand had funded the litigation to date; the Court could not be satisfied that all those who stood for the company or who might benefit from the litigation had come forward to explain their financial positions; no explanation had been given for the change of control of Suchand in October 2017; and there was no sufficient evidence that Mr Singh would cause Suchand to abandon the litigation if orders for security were made: J[37]-[40].

  5. The delay of at least five years in issuing proceedings was a further factor which favoured security being ordered: J[43].

  6. The primary judge was not persuaded that there was any public interest element in the case weighing against an order for security for costs: J[44].

  7. As to quantum, other than the respondents’ contention that the amendments in the Further Amended Statement of Claim had not been taken into account and Suchand’s contention that the amounts should be further discounted, the parties accepted the amounts proposed by Mr Bartos in his report: J[45], [49]. The primary judge was not willing, on the evidence, to adjust the figures to take into account the amendments to the statement of claim but, on that account, rounded the figures in Mr Bartos’ report up rather than down, and relied upon those matters in rejecting Suchand’s contention that the figures should be further discounted: J[48]-[49].

Grounds of appeal

  1. In its draft notice of appeal, Suchand contends that the primary judge erred in:

  1. reaching a state of satisfaction that there was reason to believe that Suchand would be unable to meet the costs of the respondents if ordered to do so (proposed ground one);

  2. exercising the discretion to order security for costs by failing to afford the appropriate weight to the company’s sole director, secretary and shareholder’s proffered undertaking (proposed ground two);

  1. exercising the discretion by allowing extraneous and irrelevant matters to guide or affect his Honour’s decision (proposed ground three); and

  2. exercising the discretion by misconstruing the evidence and mistaking the facts in that there was unchallenged evidence before his Honour that an order for security would cause the proceeding to be stultified (proposed ground four).

Proposed ground one

  1. UCPR, r 42.21(1)(d) relevantly provides that the discretion to order security for costs is enlivened if, on an application for security for costs, it appears to the court that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so. Under the Corporations Act, s 1335:

1335 Costs

(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

…

  1. It is for the party seeking an order for security for costs to establish that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, and once this onus has been discharged, the onus shifts to the other party to establish a reason why security should not be granted: Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245. The test has been described as an “undemanding one”, requiring that a rational basis be established for the requisite belief: Treloar Constructions Pty Limited v McMillan [2016] NSWCA 302 at [11] (Beazley ACJ).

  2. The words “reason to believe” acknowledge that, as a matter of practicality, on an application for security for costs a court will not be able to undertake as thorough an examination of the financial position of a plaintiff as it would at a final hearing. In this regard, the words of the statute should be applied and a conclusion that there is a risk that a plaintiff will not be able to pay a costs order will not suffice: Cornelius v Global Medical Solutions Australia Ltd [2014] NSWCA 65 at [16] (Macfarlan JA, Tobias AJA agreeing). As Ward JA (Tobias AJA agreeing) added at [59], the existence of a real risk of an inability to pay a costs order could provide a rational basis for the requisite belief.

  3. Suchand’s first contention in support of proposed ground 1 is that the primary judge erred in taking into account that Suchand had secured debts in the sum of $1,347,381.79 having regard to the release in clause 10.2 of the Deed. That contention should be rejected. The primary judge relied upon Suchand having secured debts of $1,347,381.79 at least as at 9 May 2017, and that was readily established by the “Presentation of accounts and statements” presented to ASIC. That post-dated the Deed, and there is no evidence to support Suchand’s contention that this debt was not owing as at 9 May 2017, nor, for that matter, was there any evidence that the debt had subsequently been released in reliance upon the Deed.

  4. The essence of Suchand’s second contention in support of this proposed ground of appeal was that the primary judge erred in reaching the requisite state of satisfaction having regard to Suchand’s contentions as to its entitlement under clause 14.5 of the Lease or its alternative claim to conversion, given that the Leeson Report valued the inventory at the motel on a fair value basis at $409,590, which well exceeded the estimates of the reasonable costs of the respondents as set out in the report of Mr Bartos. Suchand also relied in this regard on the failure of either of the respondents to put any questions to Leeson, notwithstanding that they had the ability to do so after a draft of the Leeson Report was circulated. Suchand contended that the question for the primary judge was whether the assertions in the letters of 14 and 16 March 2023 had been refuted by the conclusions in the Leeson Report, and that the primary judge erred in his conclusion having regard to the “credible testimony of a joint expert” instructed to value the “Chattels under the Lease”.

  5. This contention is also without merit. As is apparent from my outline of the background to the applications for security for costs, there are a variety of matters which cast real doubt upon Suchand’s ability to rely upon either clause 14.5 of the Lease or its claim in conversion as a means of meeting an adverse order as to costs. First, Suchand’s claims are vigorously contested by the second respondent on multiple grounds. Second, the evidence before the Court shows that in significant respects the items valued in the Leeson Report, in September 2023, were not owned and used by Suchand up until November 2016 when the first respondents took possession of the motel premises and business. Third, were there a need for the chattels to be sold to meet a costs liability, they would need to be sold within a given time frame which may more closely accord with the Leeson “orderly liquidation value” of $66,944, rather than the fair value of $409,590. Fourth, Suchand’s claim under clause 14.5 of the Lease is inconsistent with its own case in the proceedings that the Lease was not terminated as a consequence of an Event of Default (as defined in the Lease). To the extent that Suchand seeks to meet this difficulty by relying upon its alternative claim for conversion, it is clear that the claim in conversion is contested.

  6. Noting the prima facie position that damages are assessed at the date of the wrong: J Edelman, McGregor on Damages (21st ed, 2021, Sweet & Maxwell) at [38-013], it is also open to doubt whether damages for conversion would be assessed by reference to the market value of the items in September 2023, and where there is a delay of over six years between the alleged act of conversion, pleaded to be February 2017, and the amendment of the pleading to include the conversion claim in March 2024. Fifth, the circumstance that Suchand has to meet an order for costs presupposes that Suchand has been at least in part unsuccessful in its claims. Whilst it is of course possible that Suchand might succeed in its claim under either clause 14.5 of the Lease or in conversion, and still have to meet an adverse costs order, there is also the real prospect that Suchand is required to meet an order for costs in circumstances in which it has not succeeded in either of those claims.

  7. Having regard to these matters, and to the fact that Suchand has not traded since September 2017, has only limited paid up capital, has a poor credit rating (as set out above) and has not adduced any evidence other than its claims under clause 14.5 of the Lease and in conversion to support it being able to meet an order for costs, a rational basis has been established for the belief that Suchand will be unable to pay the costs of the respondents if ordered to do so. His Honour did not err in finding that jurisdiction to order security for costs under both UCPR, r 42.21 and the Corporations Act, s 1335 was enlivened.

Proposed ground two

Suchand’s contentions

  1. The essence of Suchand’s contentions on proposed ground 2 is that the primary judge erred in principle in the approach his Honour took to the undertaking proffered by Mr Singh, having regard to the judgment of this Court in Vintage Marine Art Pty Ltd v Henderson & Cremer (No 2) [2019] NSWCA 252 (Brereton JA, Bell P and Macfarlan JA agreeing) (“Vintage Marine”). Suchand relies, in particular, on Brereton JA’s statement in Vintage Marine at [28] that an undertaking from the person standing behind an impecunious corporate plaintiff is a very powerful consideration against ordering security for costs against an impecunious corporate plaintiff and may be determinative even where not supported by any assets. Such an error of legal principle, if established, would provide a basis for allowing an appeal against his Honour’s discretionary judgment to order security for costs: House v The King (1936) 55 CLR 499 at 504-5 (Dixon, Evatt and McTiernan JJ).

  2. Suchand submits that Vintage Marine is “conspicuously aligned with” and was “returning to”, or “bring[ing] the approach to the proffering of an undertaking back in line with” the earlier judgment of Basten JA in Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 (“Jazabas”) at [23]. In this regard, Suchand contends that the judgment of Basten JA in Jazabas suggests that the statutory purpose underlying orders for security for costs against corporate plaintiffs is to ensure that those who carry on business through a company are not thereby protected against the effects of an adverse costs order, but that it was not clear why a defendant should be put in a better position than they would have been in had they been sued by an individual of modest means when those standing behind a company proffer undertakings.

  3. Suchand also contends that the primary judge erred in maintaining (at J[32]) the views that his Honour expressed in Elip Pty Ltd v Arch Finance Pty Ltd [2020] NSWSC 752 (“Elip”) that Vintage Marine was confined to applications under the Corporations Act, s 1335, and in the breadth of his Honour’s statement that an impecunious person, having accepted the benefits of incorporation, should “in general” be required to accept the possibility that an order for security for costs will be made against the impecunious corporate plaintiff: J[33].

  4. Whilst counsel for Suchand contended that the purpose of an order for security for costs where a corporate plaintiff is impecunious is to ensure that there is recourse, by the defendants, to a fund which could be made available for their costs, she submitted that this purpose was met by an undertaking given by an impecunious person because “poverty is considered no bar to litigation” bearing in mind that “an individual who is not impecunious but able to meet their day-to-day expenses would not be the subject of [an order for] security for costs”.

  5. Further, Suchand contends that the primary judge erred at J[34] in holding:

“Furthermore, while it may be said that a defendant is no worse off when the impecunious director who comes out from behind the corporation was a director at the time of the events giving rise to the litigation, as a matter of discretion I give such an undertaking little weight where, as here, Mr Chandra Singh became a director after those events.”

  1. Suchand contends on appeal, in the context of these submissions, that Mr Singh was not impecunious, but was able to pay his bills and had money in the bank. In this context, the critical question is whether Mr Singh will be able to meet an order for costs if his undertaking is called upon. As to that question, the evidence relied upon by Suchand on this application, as set out above, supports a finding that Mr Singh will likely not be able to do so if an order is made in anything like the sums set out in Mr Bartos’ report. Indeed, as recorded by the primary judge at J[35], Suchand’s submission below was that Mr Singh was not in a position to meet any possible future costs order of the size identified by Mr Bartos.

The relevant principles

  1. Consideration of these contentions requires a careful analysis of the judgment in Vintage Marine.

  2. Vintage Marine concerned a further application, on 1 June 2018, for security for costs (the Further Application), security in the amount of $10,000 having already been ordered on the ground of corporate impecuniosity, but having regard to an undertaking to be personally liable for costs from one impecunious director, on 8 October 2015. The evidence relied upon in the Further Application showed that, if anything, the estimated costs of the respondents were lower than they had been at the time of the earlier application for security for costs (at [10]). The primary judge made an order that $40,000 be paid as security for costs on the Further Application. Brereton JA held that the “fundamental flaw” in the judgment at first instance was that it was not treated as a further application where the question of security had already been fully agitated and determined, and not appealed (at [13]).

  3. On the re-exercise of discretion, Brereton JA identified three significant discretionary considerations as to whether an order for security should be made. The first was that there was no material change of circumstances since the earlier application had been determined that called for the issue to be revisited (at [18]). Secondly, the incurring of significant costs by the plaintiff weighed against making an order for security (at [19]). Thirdly, and “most importantly”, was the undertaking proffered by one (of two) of the directors of the plaintiff (who was described as impecunious) to be personally liable for costs (at [20]). His Honour held that these three factors combined to make an “overwhelming discretionary case” for declining to grant security (at [28]).

  4. As to the relevance of the undertaking, having reviewed the relevant caselaw, including Queensland cases which appeared to have established a rule that security would not be ordered if those standing behind a corporation made their own assets, such as they were, available to answer a costs order, Brereton JA observed that if those cases were meant to state an absolute rule, then that did not reflect the law in New South Wales. Rather, the law in New South Wales was as stated by Powell J in Erolen v Baulkham Hills Shire Council (1993) 10 ACSR 441 (“Erolen”) at 456, Mason P and McClellan CJ at CL in Jazabas (although Brereton JA noted that Basten JA in Jazabas would have accepted the reasoning in the Queensland cases), and Beazley JA in Prynew Pty Ltd v Nemeth [2010] NSWCA 94; (2010) 28 ACLC 10-026 (“Prynew”). Brereton JA identified that Beazley JA’s statement in Prynew that an offer of security by way of a guarantee from the directors or shareholders “was a factor, which could be decisive in a given case, to be considered” was consistent with that favoured by Mason P and McLellan CJ at CL in Jazabas and with the decisions of Malcolm CJ in Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 (“Intercraft”) at 316 and Greenwood J in Newtimber (Operations) Pty Ltd v Tarong Energy Corporation Ltd [2011] FCA 123 at [31].

  5. Brereton JA concluded on this issue (at [28]):

“But while those cases make clear enough that in this court the proffer of an undertaking of the kind proffered by Ms Edwards does not conclusively determine the question, they also indicate that the existence of such an undertaking is a very powerful consideration which may, in a particular case, be determinative, and that is so whether or not the undertaking or guarantee is supported by any assets. In my view, the proffer of that undertaking, coupled with the other two discretionary considerations to which I have referred, combine to make an overwhelming discretionary case for declining to make an order for further security.”

  1. It should be observed that Brereton JA in Vintage Marine affirmed the approach taken by Powell J in Erolen, Mason P and McClellan CJ at CL in Jazabas and Beazley JA in Prynew.

  2. Starting with the judgment of Powell J in Erolen at 456, his Honour held:

“While I am prepared to accept that the offer of a guarantee is a factor to be taken into account in determining what is the proper form of security to be provided in a case in which an order for security is appropriate, I am quite unable to share the views expressed by Byrne J in Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd, supra, and by Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd, supra, which are to the effect that, once the shareholders have agreed to accept personal liability for any judgment for costs, the statutory purpose of s 1335 of the Corporations Law is fulfilled — such an approach, so it seems to me, would be as much ‘a fetter’ on the court's discretion as the, now discarded, approach of ‘a “bias” in favour of making an order once it is shown that the plaintiff is impecunious’.

In the present case, in which the plaintiffs, despite the evidence to the contrary, continue to assert that Erolen is not impecunious, and is trading profitably, and in which the guarantee now relied upon — which guarantee would be wholly unsecured — was proffered only belatedly, I do not believe that the position of the defendants would be sufficiently protected if their security were limited to such a guarantee. On the contrary, if Toveglass defaults in its obligations to Esanda, and the guarantees of the brothers Papasavvas to Esanda be called up, the guarantee now offered would be worthless, as Mr D L Williams, who appeared for the Council and Hills, rather colourfully put it, ‘that is “Claytons” security, the security you get when you get no security’.”

  1. Turning then to the judgment of McClellan CJ at CL, with which Mason P agreed, in Jazabas, his Honour identified (at [74]) the relevant principles as being stated by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (“KP Cable”) at 196-8, namely that the 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. Two factors which her Honour identified in KP Cable as being of relevance were whether there were any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security, and the related issue of whether persons standing behind the company had offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking.

  2. As to the latter of these factors, McClellan CJ at CL in Jazabas (at [78]) considered, but should not be taken to have approved, the decision of Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd & Ors (1992) 8 ACSR 405 (“Gentry Bros”), in which his Honour said (at 415) that the statutory purpose of the Corporations Act, s 1335, is satisfied if the shareholders of the plaintiff company expose themselves to personal liability, and the defendant in the primary litigation will be in no worse position than if sued by a litigant in person.

  3. In Jazabas, McClellan CJ at CL at [78]-[79] observed that this principle had since been criticised, including by the Victorian Court of Appeal in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191; [1999] VSCA 43 (“Epping Plaza”) at [23]-[24], in which Winneke P and Phillips JA rejected the proposition that “an undertaking to pay costs from impecunious individuals who, at least at the time when such an undertaking is given, have no chance of making it good” could not “be an effective alternative security because it could only be enforced (at least for the time being) by proceedings for contempt” (references omitted). Winneke P and Phillips JA in Epping Plaza also rejected the proposition that the statutory purpose of the Corporations Act, s 1335, was to align the position of impecunious corporate plaintiffs with impecunious individual plaintiffs. In Jazabas, McClellan CJ at CL at [80] also observed that in “words to similar effect”, Malcolm CJ, speaking for the Court in Intercraft at 316, said that “the availability of an undertaking of personal liability by the persons who stand behind the company is no more than a factor, albeit an important factor, to be taken into account in the exercise of discretion” (emphasis in original).

  4. Mason P in Jazabas said, at [2], that he was “strongly inclined to agree with the remarks of Winneke P and Phillips JA in Epping Plaza” but did not need to take the matter further given that the matter was not fully argued or critical to the disposition of the appeal.

  1. Beazley JA in Prynew at [40] endorsed the following view that her Honour had taken in KP Cable at 204:

“Once the statements in Mantaray and Gentry are considered in context, it is clear that no more was being said than that the offer of security by way of a guarantee from the directors or shareholders or other persons interested in the outcome of the litigation was a factor, which could be decisive in a given case, to be considered in determining whether any other form of order for security for costs should be made. In my opinion, this is the correct approach to take when such an offer has been made.”

  1. Her Honour added, at [44], that she preferred the approach taken in Epping Plaza and endorsed by Mason P and McClellan CJ at CL in Jazabas and considered that approach “to be consistent with the underlying rationale of the jurisdiction to award security for costs”. Elaborating upon that, her Honour stated at [45]-[46] that:

“… A defendant is a captive audience to a plaintiff’s claim. In my opinion, the purpose of the security for costs jurisdiction would be rendered ineffective if a defendant sued by an impecunious company was denied security because, persons themselves impecunious, were prepared to offer to be responsible for the costs of the litigation. Correspondingly, if the principles that relate to exercise of the discretion where there is an impecunious co-plaintiff, also apply where an impecunious person agrees to be responsible for the costs of the litigation, the corporate plaintiff would be unfairly advantaged. Indeed, it would expose the captive defendant to a form of double jeopardy.

In short, I do not consider the position of an individual co-plaintiff to be analogous to the position of an impecunious shareholder, or other person interested in the litigation, who agrees to be responsible for the costs of the litigation.”

Determination

  1. Brereton JA in Vintage Marine did not suggest that an undertaking from an impecunious director will necessarily, nor generally or presumptively, be determinative on an application for security for costs against an impecunious company. Rather, his Honour held that it is a consideration, albeit a very powerful consideration, to be considered alongside other relevant discretionary considerations. Contrary to Suchand’s contention, Brereton JA did not in any way affirm or seek to bring the position in New South Wales back in line with the judgment of Basten JA in Jazabas. Instead, his Honour held that the law in New South Wales was as stated in Erolen, by Mason P and McClellan CJ at CL in Jazabas, and by Beazley JA in Prynew. As those cases show, one factor of relevance to the weight to be given to an undertaking by a person standing behind a corporate plaintiff is whether that undertaking will provide effective security to a “captive” defendant.

  2. In this regard, the primary judge did not err in observing that an undertaking from an impecunious director of an impecunious company will not be an answer to an application for security for costs in every case (at [33]). So to hold is consistent with the judgment of Macfarlan JA in Aquatic Air Pty Ltd v Siewert [2016] NSWCA 130 at [25] where his Honour had regard to the likelihood that an undertaking from a director would be of “sufficient value” to the defendants in assessing the weight to be given to that as a factor and ultimately made an order for security for costs notwithstanding the undertaking. Nor, in my judgment, did the primary judge err in affirming the view his Honour had earlier expressed in Elip, that the impecuniosity of the person offering an undertaking to pay any costs order made against a corporate plaintiff may be a reason why such an undertaking would not be determinative. So to hold is entirely consistent with the judgment of Powell J in Erolen and, in particular, his Honour’s consideration of what protection would be given by the (in that case) guarantee offered.

  3. The reasoning in Vintage Marine should not, however, be confined to cases under the Corporations Act, s 1335. The rationale for the position adopted in the cases discussed above, including Vintage Marine, applies equally, in my judgment, to cases where security for costs is sought against a corporate plaintiff under UCPR, r 42.21. There is no basis for distinguishing the relevant principles as between the two. In holding to the contrary, the primary judge erred.

  4. Further, whilst his Honour did not err in identifying as a matter of principle that an impecunious person who has accepted the benefits of incorporation should, in general, be required to accept the possibility that a security for costs order will be made against the impecunious corporate plaintiff (at [33]), his Honour did err to the extent that his Honour might be taken to have suggested that an order for security for costs should “in general” be made where an impecunious person undertakes to pay any costs order made against an impecunious corporate plaintiff. So to hold would be inconsistent with the relevant principles discussed above.

  5. Suchand’s contention that the primary judge erred in diminishing the weight to be given to the undertaking proffered by Mr Singh on the basis that Mr Singh was not a director at the time of the events giving rise to the litigation should also be accepted. That factor does not bear on the extent to which the undertaking provides protection to the respondents. Mr Singh is the person who stands behind Suchand, and who has done so at all relevant times since October 2017. He is the person who stands to benefit if Suchand succeeds in this litigation, and it is his willingness to come out from behind the corporate veil and be liable for costs that is relevant. This is not a case in which an inference should be drawn that Mr Singh assumed the role of director and shareholder of Suchand as a means of ensuring that the assets of the former directors and shareholders could not be adversely affected by the litigation.

  6. It follows that it is necessary for this Court to re-exercise the discretion whether to make an order for security for costs. In these circumstances, it is unnecessary to consider the applicant’s further proposed grounds of appeal.

Re-exercise of the discretion

  1. Whilst the court has a broad discretion on an application for security for costs, which should remain unfettered, Beazley J in KP Cable set out seven guidelines which the court will typically take into account on such applications: Idoport Pty Limited v National Australia Bank Limited [2001] NSWSC 744 at [49]. The following are of relevance in the present case.

  1. The applications were made promptly.

  2. No contention was made that Suchand’s claims lacked merit or were other than bona fides.

  3. The applications are not being brought to deny Suchand a right to litigate.

  4. I am, however, satisfied that there is a real risk that these proceedings will be stultified if an order for security for costs is made in anything like the sums set out in Mr Bartos’ report. This is a powerful factor standing against an order being made for security for costs: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545 (Clarke J), although it is not determinative: Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302 at [92]-[96] (Bathurst CJ, Leeming JA, Barrett AJA). Nor is impecuniosity an absolute barrier even in the case of a natural person: Li v State of New South Wales [2013] NSWCA 165 at [46]-[47] (Ward JA, Macfarlan and Gleeson JJA agreeing). Whilst Mr Singh’s own opinion as to whether the proceedings will be stultified (as set out his affidavit) should be given little weight, the evidence discloses that Suchand has no assets to meet an adverse costs order and will likely be unable to do so save to the extent that it succeeds in its claim as regards the chattels of the motel business. Mr Singh is also unlikely to be able to meet any order for security for costs given his limited financial resources. Whilst, as the respondents contend, Mr Singh has been able to fund the litigation to date, as was held by Brereton JA in Vintage Marine at [17], “the principle that security for costs should not be allowed to stultify proceedings has to be given practical effect” and the rationale of that principle is “not that an impecunious litigant should be forced to conduct proceedings on a shoestring or without lawyers.” His Honour added that it did not follow from the fact that a litigant had been able to source funds to litigate that such funds would be available to meet an order for security for costs. Further, in this case, there is no suggestion that the litigation is funded by a litigation funder.

  5. For the reasons given by the primary judge, I would reject any contention that Suchand’s impecuniosity was caused by the respondents’ conduct. Suchand was in a poor financial position prior to the receivers entering the motel and the business.

  6. This is not a case in which an inference should be drawn that there are persons other than Mr Singh who stand behind the company or who are likely to benefit from the litigation. The passage of over five years between Mr Singh taking over as director and shareholder of Suchand, and the commencement of the litigation precludes any inference being drawn that the previous directors and shareholders stand to benefit from the litigation or stand behind Suchand. Nor is there any suggestion that any other person is in that position.

  7. Mr Singh has proffered an undertaking, however, on the evidence before the Court, that undertaking is unlikely to provide any real protection to the respondents. Mr Singh’s financial position is such that he is unlikely to be able to pay the significant sums estimated as the respondents’ costs by Mr Bartos in his report of 22 October 2023. Notwithstanding this, consistent with the judgment of this Court in Vintage Marine, this is a powerful consideration to take into account on the issue of security for costs.

  1. I would reject Suchand’s contention that this litigation is underscored by any public interest and that this is a factor weighing against any order being made as to security for costs: see eg Maritime Services Board of New South Wales v Citizens Airport Environment Association Inc (1992) 83 LGERA 107 (Kirby P). It is litigation which seeks to further Suchand’s commercial objectives as to which there is no element of public interest.

  2. I have also had regard to the fact that Suchand did not issue these proceedings until the very end of the applicable limitation period of six years, and that there is no apparent reason for this delay. Further, Suchand did not add the claims relating to the chattels of the motel business until its application to amend its statement of claim filed on 25 November 2023.

  3. Taking all of these matters into account, and on the proviso that Mr Singh provides this Court with a signed unconditional undertaking to the court to be liable for the respondents’ costs of the proceedings (which, as set out above, is the appropriate form of undertaking in the circumstances), I would not make any order for security for costs against Suchand. I have given particular weight on the facts of this case to the risk of stultification of the proceedings in circumstances where there is no third party standing behind the litigation, or who stands to gain from it, other than Mr Singh who is himself not in a position to satisfy an order for security for costs in the sums sought, and to the unconditional undertaking as to costs offered by Mr Singh and which I would make a condition of the Court allowing leave to appeal.

Conclusion

  1. As set out above, leave to appeal should be granted but only on the proviso that Mr Singh provides a signed undertaking to the Court to be liable for the respondents’ costs of the proceedings and the appeal should be allowed. The respondents should pay Suchand’s costs of the appeal.

  2. I would not, however, disturb the costs orders at first instance. The applications for security for costs were made in April 2023 and it was only on 14 February 2024 that Mr Singh proffered an undertaking. That was well after most of the costs associated with prosecuting and defending the applications for security for costs had been incurred and was only shortly before the hearing (which took place on 23 February 2024). Further, the undertaking offered at that stage, as opposed to that offered before this Court, was only to be liable “for an appropriate amount of security”, it was not an undertaking to be liable for the respondents’ costs of the proceedings. It can also readily be inferred that it was the impending hearing of the applications for security for costs that prompted the giving of the undertaking.

  3. The orders I propose are:

  1. On the proviso that Mr Singh provides a signed unconditional undertaking to the court to be liable for the respondents’ costs of the proceedings, leave to appeal is granted.

  2. The appeal is allowed.

  3. Orders 1, 2, 4, 5 and 7-9 of the Orders of Kunc J of 25 March 2024 are set aside.

  4. The respondents are to pay the applicant’s costs of the appeal.

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Decision last updated: 21 October 2024

Citations

Suchand Pty Ltd v Jonathon Kingsley Colbran and Richard Stone as Receivers and Managers of Suchand Pty Ltd [2024] NSWCA 250

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