Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd - [2011] WASC 19

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: SUGARLOAF HILL NOMINEES PTY LTD As Trustee For The Richard And Anna Trust -v- REWARDS PROJECTS LTD [2011] WASC 19

CORAM: CORBOY J

HEARD: 10 DECEMBER 2010

DELIVERED : 31 JANUARY 2011

FILE NO/S: CIV 3147 of 2009

BETWEEN: SUGARLOAF HILL NOMINEES PTY LTD As Trustee For The Richard And Anna Trust
Plaintiff
AND
REWARDS PROJECTS LTD
First Defendant
CRAIG STEPHEN ANDERSON
Second Defendant
DAVID JAMES HUMANN
Third Defendant
BRIAN JAMES AITKEN
Fourth Defendant
ANDREW MICHAEL RADOMILJAC
Fifth Defendant

Catchwords:

Practice

Legislation:

Australian Securities and Investment Commission Act 2001 (Cth), s 12DA,
s 12GF, s 12GM
Companies Act 1862 (20 & 26 Vict c 89 (Imp))
Corporations Act 2001 (Cth), s 601FC, s 602FD, s 601FG, s 601LC, s 769,
s 1041H, s 1041I, s 1325, s 1325
Joint Stock Companies Amendment Act 1857 (20 & 21 Vict c 14 (Imp))
Trade Practices Act 1974 (Cth), s 51A, s 52, s 53, s 53A, s 75B, s 82, s 84

Result:

Security for costs ordered

Category: B

Representation:

Counsel:

Plaintiff:     Mr D S Romano
First Defendant            :     No appearance
Second Defendant        :     Mr J D Steedman
Third Defendant           :     Mr M D Sonter
Fourth Defendant         :     Mr M D Sonter
Fifth Defendant            :     Mr J D Steedman

Solicitors:

Plaintiff:     Wilson & Atkinson
First Defendant            :     No appearance
Second Defendant        :     Karp Steedman Ross-Adjie
Third Defendant           :     Pynt & Partners
Fourth Defendant         :     Pynt & Partners
Fifth Defendant            :     Karp Steedman Ross-Adjie

Case(s) referred to in judgment(s):

Ann Street Mezzanine Pty Ltd (in liq) v Beck [2009] FCA 333; (2009) 255 ALR 324
Ann Street Mezzanine Pty Ltd (in liq) v Beck [2010] FCA 260
Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507
Baden v Societe Generale pour Favouriser le Developpement du Commerce et de L'Industrie en France SA [1993] 1 WLR 509
Barnes v Addy (1874) LR 9 Ch App 244
BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81
Beach Petroleum NL v Johnson (1992) 7 ACSR 203; (1992) 10 ACLC 525
Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) and (No 10) [2008] WASC 239; [2009] WASC 107; (2009) 39 WAR 1
Bell Wholesale Co Pty Ltd v Gates Export Corporation (1983) 52 ALR 176
BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857
Brundza v Robbie & Co (No 2) [1952] HCA 49; (1952) 88 CLR 171
Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301
Carey‑Hazell v Getz Brothers & Co (Aust) Pty Ltd [2004] FCA 1334
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241
Fiduciary Ltd v Morning Star Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564
Gartner v Ernst & Young (No 3) [2003] FCA 1437
Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523
Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744
Kalamazoo (Aust) Pty Ltd v Compact Business Systems Pty Ltd (1985) 84 FLR 101
Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150
Laundry Coin‑Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40‑584
Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 66 ACSR 455
Pearson v Naydlar (1977) 1 WLR 899
Performing Right Society Ltd v Ciryl Theatrical Syndicate Ltd [1924] 1 KB 1
Professional Vending Services Pty Ltd v Christou [2010] FCA 580
Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd [1921] 2 AC 465
Reinsurance Australia Corp Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803
Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129
Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241
Topcide Pty Ltd v Charter Financial Planning Ltd [2010] FCA 1151
Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1, 11 ACLC 1238
Westralian Goldmines Ltd v Westralian Minerals & Drilling Pty Ltd (in liq) (1986) 4 ACLC 167
Yorke v Lucas (1985) 158 CLR 661

CORBOY J:

Introduction

The plaintiff, Sugarloaf Hill Nominees Pty Ltd (Sugarloaf), is the trustee of a family trust known as the 'Richard and Anna Trust' (the Trust) and sues in that capacity. The reference to 'Richard' in the title of the trust is to Cedric Richard Palmer Beck and the reference to 'Anna' is to his wife, Anna Harris.
Conical Hill Nominees Pty Ltd was the trustee of the Trust until about July 2008, when it was removed and Sugarloaf was appointed trustee (par 4 of the affidavit of Ms Harris, sworn 27 October 2010) (Ms Harris' first affidavit). Mr Beck and Ms Harris were the directors of Conical Hill Nominees at the time that is relevant to these proceedings (see annexure 'ELM 1' to the affidavit of Elizabeth Lorraine Madden, sworn 9 December 2010).
Ms Harris is and was at all relevant times, the sole director of Sugarloaf. The issued share capital of Sugarloaf comprises 101 ordinary shares of $1 each held by Mystery Bay Nominees Pty Ltd (attachment 'RTH 32' to the affidavit of Rebecca Tenille Heath, sworn 8 October 2010). According to Ms Harris, the Trust was settled in December 2002 for the purpose of 'passively purchasing residential waterfront property in various locations in Australia' (par 3, Ms Harris' first affidavit).
Sugarloaf was a member of a managed investment scheme that raised funds for the 'Rewards Group Tropical Fruits Project' (the Project). As its name suggests, the Project involved growing, harvesting and selling fruit, with members of the managed investment scheme being allocated groves of fruit trees proportional to their investment.
The first defendant, Rewards Projects Ltd (Rewards), was the responsible entity for the managed investment scheme and the manager of the Project. It is now in administration (see attachment 'RTH 13' to the affidavit of Ms Heath). The second to fifth defendants (collectively, the Directors) were the directors of Rewards at the time relevant to these proceedings, except for the fourth defendant, Mr Aitken, who is alleged to have been a director of Rewards from 25 January 2007.
Sugarloaf claims that Rewards contravened various provisions of the Corporations Act 2001 (Cth), the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act) and the Trade Practices Act 1974 (Cth) (TPA) and that it breached duties of care and duties owed as a fiduciary. It alleges that it suffered loss and damage as a result of those contraventions and breaches. It further claims that the Directors were involved in the contraventions and/or assisted in the breaches of fiduciary duty so that they are directly liable for the loss and damage allegedly suffered by Sugarloaf or liable as accessories.
The Directors have applied for an order that the plaintiff give security for the costs that they may incur in these proceedings. Their summons did not identify the basis upon which the application was made but the parties' submissions were, understandably, directed primarily to s 1335 of the Corporations Act. I have determined the application by reference to the power conferred by that section; it has not been necessary to consider the court's inherent jurisdiction or the power contained in O 25 of the Rules of the Supreme Court 1971 (WA).
I have decided that Sugarloaf should provide security for the Directors' costs up to the commencement of the trial.

Sugarloaf's claims against Rewards

It is necessary to consider the statement of claim in some detail as the Directors' submissions include a challenge to the merits of Sugarloaf's claims. Further, there are, in my view, difficulties with the pleading of Sugarloaf's claims against the Directors that are relevant to the determination of this application.
The statement of claim pleads several causes of action which, with certain exceptions, are alternative formulations of the legal consequences of essentially the same factual allegations. Those allegations primarily concern representations allegedly made by Rewards in the course of its dealings with Sugarloaf that are said to be false. (The statement of claim refers to 'the plaintiff' regardless of whether Sugarloaf was the trustee of the Trust at the relevant time. I will ignore the change in trustee in mid‑2008 and refer to the plaintiff as Sugarloaf throughout these reasons.)
It is alleged that Rewards made the following representations prior to Sugarloaf deciding to participate in the Project:
(a)the cash flow of the Project would be 'of a certain level' ‑ that apparently is a reference back to a representation pleaded earlier in the statement of claim to the effect that Sugarloaf 'could expect at the very least an inflow of cash as estimated' in cash flow projections that were said to have been provided;
(b)the proceeds from the sale of fruit would cover the annual management and rent fee for the Project from year four;
(c)Rewards was 'flexible' in allowing growers to apply the proceeds from the harvest of fruit against the annual management and rent fee; and
(d)Rewards was 'flexible in payment arrangements regarding any shortfall amount'.
Those representations are referred to in the statement of claim as the 'First Representation' (par 12) and are alleged to have been made to Mr Beck and Ms Harris in April 2003 by an agent of Rewards, Mr Drage (par 11). The First Representation is said to have been made orally by Mr Drage, except for the statement concerning cash flow (Mr Drage is alleged to have provided cash flow projections in the course of the meeting with Mr Beck and Ms Harris). Two of the representations forming part of the First Representation plainly concern future matters. However, the remaining representations are pleaded as statements of existing fact (Rewards 'was' flexible …) and the statement of claim makes no reference to s 51A of the TPA or its equivalents under the Corporations Act or the ASIC Act.
It is further alleged that by a notice of default dated 6 April 2009, Rewards represented that:
(a)there was a shortfall in the amount paid by Sugarloaf on account of the annual management and rent fee for the 2008/09 harvest;
(b)payment of the shortfall amount was in arrears;
(c)unless Sugarloaf remedied its default by 27 April 2009, the sublease and management agreement (the Agreement) made between Sugarloaf and Rewards may be terminated without further notice; and
(d)the effect of the Agreement was that on termination, the trees and fruit forming part of Sugarloaf's groves would vest in Rewards without compensation for money contributed by Sugarloaf to the Project in the past.
Those allegations are referred to in the statement of claim as the 'Second Representation' (par 23).
Finally, it is alleged that by a notice of termination dated 18 May 2009, Rewards represented that the Agreement made with Sugarloaf was terminated as a consequence of Sugarloaf's default. That representation is referred to in the statement of claim as the 'Third Representation' (par 24).
It is not easy to understand the allegations by which it is said that the First, Second and Third Representations were false. That is because little attempt has been made to fully plead the connection between each representation and the matters that allegedly falsify the representation. It is alleged that:
(a)The First Representation was false by reason of the fact that on 31 March 2009, Sugarloaf paid an amount from the proceeds of the 2008/09 harvest on account of the annual management and rent fee that was less than the amount payable, the difference being the shortfall referred to in the Second Representation (pars 22A and 22B of the statement of claim). Presumably, the allegation is that contrary to the cash flow projections and/or the representations said to have been made by Mr Drage to the effect that the proceeds from harvested fruit would be sufficient to pay the annual management and rent fee from year four, the proceeds of the 2008/09 harvest were insufficient for that purpose.
(b)As a result of the Second and Third Representation, the First Representation was false (par 24A of the statement of claim). How the Second and Third Representations falsify the First Representation is not clear. There are no particulars or other material facts pleaded that elucidate the allegation of falsity; possibly, what is intended to be alleged is that the issue of the notices of default and termination were inconsistent with the representations said to have been made by Mr Drage to the effect that Rewards was 'flexible in payment arrangements regarding any shortfall amount'. That would appear to accord with an allegation made elsewhere in the statement of claim that the termination of the Agreement was invalid.
(c)As a result of the First Representation, the Second and Third Representations were false (par 24B of the statement of claim). Again, it is difficult to understand how the making of the First Representation could falsify the Second and Third Representations. The Second and Third Representations concern the extent of Sugarloaf's alleged default and the consequences of default and termination. Perhaps it is intended to allege that the notices of default and termination contained a representation, not pleaded, that Rewards was entitled to issue the notices which was contrary to the representations said to have been made about Rewards being flexible in relation to payment arrangements.
(d)As a result of the 'statutory obligations' imposed by s 601FC and s 601FG of the Corporations Act, the Second and Third Representations were false (par 24C of the statement of claim). Section 601FC imposes duties on a responsible entity, while s 601FG concerns the acquisition of an interest in a managed investment scheme by such an entity. The most that can be taken from the plea is, possibly, an allegation that the notice of termination misrepresented the consequences of the termination of the Agreement having regard to the provisions of s 601FG. There may also be implicit in the plea an allegation that Rewards misrepresented its entitlement to terminate the Agreement having regard to the duties imposed by s 601FC.
Those allegations of misrepresentation are relied upon to further allege that:
(a)The termination notice was not a valid termination of the Agreement (pars 26 and 26A of the statement of claim).
(b)Rewards contravened s 601FC of the Corporations Act ‑ multiple contraventions are alleged, each relying on the same allegation that Rewards made representations that were false and purported to terminate the Agreement in a way that was invalid. The contraventions alleged include that Rewards acted dishonestly (pars 31 and 32 of the statement of claim).
The claim that the termination of the Agreement was invalid does not rest solely on the allegations of misrepresentation. It is also alleged that the termination notice did not effect a valid termination of the Agreement 'as a result of [Sugarloaf] and [Rewards] varying the terms of payment of the shortfall in the annual management and rent fee for the 2008/09 harvest' (par 25). No particulars of that allegation are provided, other than to allege that the terms of payment of the annual management and rent fee were varied 'on a number of occasions' to 'extend payment' of any shortfall in the fee.
It is further alleged that Rewards engaged in conduct that was misleading or deceptive by making representations that were similar to, but not the same as, the First, Second and Third Representations (par 55 of the statement of claim). For example, it is alleged that Rewards represented that the proceeds from the sale of fruit would cover the annual management and rent fee for the project without any temporal limitation; that is, the representation was not limited to year four and following of the Project (see par 55.1 of the statement of claim).
There are also representations pleaded about matters that do not (at least, expressly) form part of the First, Second and Third Representations ‑ that Rewards had the power to terminate the Agreement and that, on termination, it was entitled to take possession of Sugarloaf's groves without paying compensation for past contributions by Sugarloaf (pars 55.4 and 55.5 of the statement of claim). The conduct by which the representations are said to have been made is pleaded by cross‑reference to a number of earlier paragraphs in the statement of claim. Several of those paragraphs do not appear to allege any representational conduct by Rewards.
The representations are alleged to have been misleading or deceptive by reason of the matters pleaded in pars 22B, 24A, 24B and 24C of the statement of claim. Consequently, there does not appear to be significant factual differences between the claims based on the making of the First, Second and Third Representations and the claims founded upon the allegations of misleading or deceptive conduct despite the variations previously noted. The allegations of misleading and deceptive conduct are relied on to claim that Rewards contravened s 1041H(1) of the Corporations Act, further or alternatively s 52, 53(g) and s 53A(1)(b) of the TPA and further or alternatively, s 12DA of the ASIC Act (pars 55 ‑ 72 of the statement of claim).
It is further alleged that Rewards contravened:
(a)s 601FG(1)(a) of the Corporations Act by acquiring Sugarloaf's groves following termination of the Agreement for no consideration, alternatively for less consideration than would be payable if the groves had been acquired by another person (pars 36 and 37 of the statement of claim);
(b)s 601LC of the Corporations Act by giving a benefit (the payment of $17,563) to an entity related to the second and fifth defendants (pars 42 and 43).
Finally, it is alleged that Rewards breached duties of care or duties that it owed as a fiduciary to Sugarloaf, further or alternatively engaged in conduct that was unconscionable by contravening the Corporations Act, TPA and ASIC Act (by reason of the matters pleaded earlier in the statement of claim) and by making the First, Second and Third Representations (pars 81 ‑ 89 of the statement of claim).

Sugarloaf's claims against the Directors

The claims against the Directors are formulated in alternatives that involve direct and accessorial liability. However, central to each claim is an allegation that the Directors were involved in the conduct that forms the basis for the claims made against Rewards.
The claims against the Directors are that:
(a)The Directors are jointly and severally liable pursuant to s 1325 of the Corporations Act for 'being engaged' in Rewards' conduct or for being involved in its contraventions of the Corporations Act (par 50 of the statement of claim). The allegations of engagement or involvement in Rewards' conduct are based on further allegations that each of the Directors 'procured and directed' the conduct by being a director of Rewards and because Rewards 'could only act through him' (par 49).
(b)The Directors contravened the duties imposed by s 601FD of the Corporations Act as officers of a responsible entity (par 53 of the statement of claim). Multiple contraventions are alleged but the particulars of breach are the same for each contravention. It is alleged that the Directors breached their duties as a consequence of Rewards making representations that were false and purporting to terminate the Agreement in a way that was invalid and because they were the directors of Rewards and Rewards could only act through them. The alleged contraventions include acting dishonestly.
(c)The Directors 'procured and directed' the misleading or deceptive conduct of Rewards and therefore, they engaged in conduct that was misleading or deceptive or likely to mislead or deceive contrary to s 1041H(1) of the Corporations Act and s 12DA of the ASIC Act (pars 58 ‑ 61 and 74 ‑ 78 of the statement of claim). This is a claim for direct liability for contravention of those provisions.
(d)The Directors 'procured and directed' the misleading or deceptive conduct of Rewards and are therefore, 'liable for aiding, abetting, counselling, procuring or being knowingly concerned in Rewards' contravention of the TPA and are thereby, persons involved in those contraventions for the purposes of s 75B of that Act' (pars 66 ‑ 69 of the statement of claim). Obviously, this is a claim for accessorial liability.
(e)The second and fifth defendants knowingly assisted Rewards to breach the duties it owed to Sugarloaf as a fiduciary. It is alleged that Rewards acted dishonestly and fraudulently by making the First, Second and Third Representations and/or engaging in conduct that was misleading or deceptive. It is further alleged that each of the second and fifth defendants knew of Rewards' fiduciary duties and of its dishonest and fraudulent conduct and with that knowledge, assisted by procuring and directing the dishonest and fraudulent conduct of Rewards. The second and fifth defendants' knowledge is said to be derived from their position as directors of Rewards and because it could only act through them. There is no apparent reason why the knowing assistance claim has been limited to the second and fifth defendants (the only contravention alleged against Rewards that related solely to the second and fifth defendants was of s 601LC of the Corporations Act).

Sugarloaf claims as damages against Rewards and the Directors 'loss of future earnings from the sale of the fruit for the remainder of the Project (minus all costs)' and further and alternatively, the loss of Sugarloaf's investment in the Project to date. The first of those claims for loss and damage is quantified at $2,154,829.50 and the second at $1,312,253. No further particulars are provided. Presumably, the amount expended by Sugarloaf on the Project is derived from its accounting records. It is, however, impossible to discern how the claim for lost future earnings might have been quantified, especially as it is alleged that the term of the Project was expected to be 20 years commencing, I infer, in 2003 (par 10 of the statement of claim).
The claims for damages against the Directors are made pursuant to s 1325 and s 1041I of the Corporations Act, s 82 of the TPA and s 12GM of the ASIC Act.

The security sought by the Directors

The Directors' application is that Sugarloaf provides security for their costs in an amount of $104,137 and that the proceedings be otherwise stayed until payment of that amount into court.
The amount sought as security is based on an estimate of the Directors' likely costs of defending Sugarloaf's action made by Mr Graeme Slattery, a solicitor employed by Minter Ellison. That firm was retained by the Directors at the time that the application was commenced. Mr Slattery attached to an affidavit he made on 8 October 2010 a draft bill of costs that estimated the likely costs to be incurred by the Directors by reference to the 'Supreme Court Scale of Costs 2010' (which I assume was a reference to the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2010). The draft bill contained estimates for completing various interlocutory steps, preparing for and attending trial and associated matters. The total cost estimate made by Mr Slattery was $139,062. That included $54,516 for costs likely to be incurred in appearing at and subsequent to the trial. It also included an amount referrable to this application and an amount of $51,480 for getting up.
Sugarloaf did not provide any evidence of its estimate of the likely costs of the Directors or contest in any other way Mr Slattery's estimate. The estimate was drawn strictly by reference to the costs allowed for each of the relevant items in the 2010 costs determination for contentious business. That may explain the lack of any challenge to Mr Slattery's estimate. I accept that the amounts allowed according to the determination are reasonable having regard to the nature of the claims made by Sugarloaf.

The relevant principles

The power to order security for costs against a corporate plaintiff can be traced back to the Joint Stock Companies Amendment Act 1857 (20 & 21 Vict c 14 (Imp)). It was enacted in substantially the same form as s 1335 of the Corporations Act in the Companies Act 1862 (25 & 26 Vict c 89 (Imp)): see FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [7] ‑ [10] (Pidgeon & Owen JJ). Notwithstanding that history, there remain some differences in the authorities over the approach to be taken to the section. The parties' submissions reflect those differences. Essentially, the section requires a balance to be struck between protecting the defendant from the possible consequences of being sued by an impecunious corporation with limited liability and avoiding injustice to the corporation by unnecessarily prejudicing it in the conduct of litigation: see Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301.
The 'threshold question' posed by s 1335 of the Corporations Act is whether it appears by credible testimony that there is a reason to believe that the corporation will be unable to pay the costs of the defendant. The test formulated by von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203; (1992) 10 ACLC 525 has been applied in many cases: whether 'credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant … even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs' (ACSR, 205; ACLC, 527). However, in Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 66 ACSR 455, the Victorian Court of Appeal emphasised that it was the statute itself that a court must address and that it was wrong and unhelpful to substitute a judicial exposition for the statutory wording [13] – [14]. It is the phrase 'reason to believe' that is the touchstone of the court's jurisdiction rather than some elaboration of that phrase: and see FFE Minerals [24] (Pidgeon & Owen JJ).
The parties suggested by their submissions that there were differences in the authorities concerning the burden, if any, borne by each party to the application for security. Sugarloaf referred to the view expressed by the Victorian Court of Appeal in Livingspring that 'the burden rests on the defendant, from first to last, to persuade the court that the order for security should be made' [21] (emphasis added). The Directors, on the other hand, referred to Fiduciary Ltd v Morning Star Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 where Austin J (citing Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 (Einstein J)) accepted that, 'once the defendant has shown that the corporate plaintiff will be unable to meet its reasonable costs, the evidentiary burden shifts to the plaintiff to satisfy the court that, taking into account all relevant factors, the court should exercise its discretion by refusing to order security or by ordering security of a lesser amount than the defendant seeks' [36] (emphasis added).
In my view, considerations of onus often provide little assistance in determining interlocutory applications on matters of practice and procedure. However, I need to explain my approach to the question of onus as it differs in some respects from the position taken by the parties:
(a)The applicant‑defendant does not bear an evidentiary onus on the issue of whether there is reason to believe that the plaintiff corporation will be unable to pay costs: 'what is required is an evaluation of the evidence led by the applicant to see whether that leads to a reason to believe that the corporation will be unable to pay the costs of the defendant': FFE Minerals [24] (Pidgeon & Owen JJ). In FFE Minerals, Pidgeon and Owen JJ rejected the suggestion of Lee J in Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1, 11 ACLC 1238 that the qualification of the word 'testimony' by the word 'credible' in s 1335 implied that an evidentiary burden was cast on the applicant for security ‑ 'we would not see any burden as nothing is sought to be proved' [24]. This aspect of FFE Minerals was recently accepted and applied by the Court of Appeal in Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [69].
(b)In Livingspring, the Victorian Court of Appeal held that the judge at first instance had erred by approaching the application on the basis that once the threshold condition had been satisfied, the power to order security should be exercised in favour of the defendant unless the plaintiff corporation persuaded the court, by reference to discretionary factors, that it should not be so exercised [21]. The Court of Appeal considered that on ordinary principles it was for the applicant‑defendant to persuade the court that the discretion should be exercised in its favour [20]. Consequently, 'while the satisfaction of the threshold condition in the relevant sense "calls for" the exercise of the power, this does not alter the fact that the burden rests on the defendant, from first to last, to persuade the court that the order for security should be made' [21]. That approach was consistent with the Victorian Court of Appeal's earlier decision in Ariss v Express Interiors Pty Ltd(in liq) [1996] 2 VR 507, which was to the effect that there was no pre‑disposition to exercising the discretion in favour of ordering security once the threshold condition had been satisfied (513-14).
(c)In Topcide Pty Ltd v Charter Financial Planning Ltd [2010] FCA 1151, Katzmann J accepted that there was a shifting evidentiary burden of the kind referred to in Idoport and Fiduciary Ltd, while citing Livingspring to emphasise that the legal burden always remained with the moving party [12]. The Court of Appeal in Livingspring referred to the burden resting on the defendant‑applicant to 'persuade' the court that the order for security should be made. However, I am not certain that it was drawing a distinction between evidentiary and persuasive burdens in its reasoning. In the passage that immediately followed (at [22]), the court observed that:
There are, of course, particular discretionary matters of which the plaintiff must necessarily have carriage. If, for example, the plaintiff corporation asserts that an order for security would impose on it such a financial burden as would stultify the litigation, the plaintiff must establish the facts which make good that assertion.
The proposition entailed in that observation does not involve shifting the evidentiary onus once the threshold requirement has been satisfied in the manner suggested in Idoport and Fiduciary Ltd. Rather, the observation merely recognises that there will be an onus on a party (plaintiff‑respondent or defendant‑applicant) to advance evidence to support a particular factual assertion that forms part of its case. That is different to casting an evidentiary burden on the plaintiff to satisfy the court on the ultimate issue to be determined.
(d)That view is consistent with what was said by Murray J in Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241 where at 244, his Honour observed that no particular onus of proof arose in relation to those matters which might be considered relevant to the exercise of the discretion conferred by s 1335 of the Corporations Act, 'although I think it be the case that, subject to the evidentiary onus attaching to a party who wishes to rely upon a particular fact or circumstance, the discretion to order security will not be exercised unless upon the whole of the evidence, proper ground for the exercise of the discretion is made out' (and see also BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857, 862 and Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 52 ALR 176, 179).
(e)With respect, in the context of an interlocutory application, an evidentiary burden of the kind referred to in Idoport and Fiduciary Ltd appears to be perilously close to (if not, in practice, the same as) a shifting persuasive onus; an 'evidentiary burden … [on] the plaintiff to satisfy the court that, taking into account all relevant factors, the court should exercise its discretion by refusing to order security …' (Fiduciary Ltd at [36]) appears to reflect a pre‑disposition in favour of the grant of security. That seems to have been the view adopted by Victorian Court of Appeal in Livingspring: see at [20], where the court noted that the judge at first instance applied the statement of Jacobson J in Reinsurance Australia Corporation Ltd v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803 which referred to a shifting evidentiary onus on the exercise of the discretion and at [21] and [22], where the court held that this approach involved an error (with the court referring to the onus resting on the defendant as applicant to persuade the court that an order for security should be made). In any event, it does not appear to me to be particularly helpful to refer to an evidentiary onus in considering the exercise of the discretion conferred by s 1335 of the Corporations Act other than in the sense previously explained.
(f)It follows that I do not consider that applications under s 1335 are to be determined by reference to shifting evidentiary burdens. In my view, there is no particular evidentiary onus that must be discharged by either party on the threshold condition or on the exercise of the discretion conferred by the section once that condition has been satisfied. A party may be required to advance evidence on a particular factual matter that it wishes to assert as part of its case. Otherwise, there is a persuasive onus that rests on the defendant as applicant.
As to the determination of the threshold question:
(a)The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. It is necessary to make an assessment of the risk that the corporation will be unable to pay ‑ an assessment that will be imprecise. A 'reason to believe' is a low threshold test: Livingspring [15] ‑ [16].
(b)However, the need for credible testimony is an obvious safeguard to ensure that the application is not founded purely upon speculation. To that extent, I agree with the observation of Lee J in Warren Mitchell that 'speculation as to insolvency or financial difficulties likely to confront the corporation will be insufficient to ground the exercise of the discretion' (5).
(c)Determining whether a corporation will be unable to pay involves two considerations. First, it is necessary to fix the time at which the plaintiff's inability, or apprehended inability, is to be assessed. That generally requires an opinion to be formed at the time of judgment and immediately following. Second, it is necessary to identify the range of assets to which recourse might be had for the purpose of enforcing an adverse costs order. Generally, the relevant assets will be those that might be immediately realised and those which could be realised in sufficient time to enable the plaintiff to comply with a costs order in the usual terms: Professional Vending Services Pty Ltd v Christou [2010] FCA 580.
(d)Where the only tangible assets of a plaintiff corporation are held in trust and solvency depends on its right as trustee to an indemnity against the trust property, it is necessary for the court to have in mind the difficulties which a successful defendant would face in attempting to execute an order for costs: Laundry Coin‑Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40‑584 (46,729); BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81 [14] ‑ [15]. In Laundry Coin‑Wash, Smithers J observed that 'indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability' (46,729). Similarly, in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150, Tadgell J held that the fact that the plaintiff trustee company owned unencumbered real estate, the value of which exceeded the likely costs of an appeal and over which it had a right of recourse as trustee by way of indemnity, did not justify a conclusion that security ought not to be given. The trustee might be required at any time to transfer its legal interest in the unencumbered property to the beneficiaries of the trust or to encumber it: and see BBC Nominees where the observations of Tadgell J in Lagarna were cited with apparent approval by Beech J.
As to the exercise of the discretion conferred by s 1335 of the Corporations Act:
(a)The discretion is unfettered: Westralian Goldmines Ltd v Westralian Minerals & Drilling Pty Ltd (in liq) (1986) 4 ACLC 167; FFE Minerals; Livingspring and BBC Nominees.
(b)The factors that may be relevant to the exercise of the discretion were said by Beech J in BBC Nominees (citing French J in Carey‑Hazell v Getz Brothers & Co (Aust) Pty Ltd [2004] FCA 1334) to include:
(i)whether the application for security had been brought promptly;
(ii)the strength and bona fides of the plaintiff's case;
(iii)whether the plaintiff's impecuniosity was caused by the defendant's conduct the subject of the claim;
(iv)whether the application for security was oppressive in the sense that it was being used to deny an impecunious applicant a right to litigate;
(v)whether there were persons standing behind the plaintiff who were likely to benefit from the litigation and who were likely to provide the necessary security;
(vi)whether the persons standing behind the plaintiff have offered any personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
(vii)whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant's self‑help procedures.
(c)To that list can be added the inability of the plaintiff to pay the defendant's costs; indeed, in BPM Anderson J observed that the fact that the court had reason to believe that the plaintiff could not pay the defendant's costs was the starting point for the exercise of the discretion (citing Megarry VC in Pearson v Naydlar (1977) 1 WLR 899 and Connolly J in Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523. In Harpur, Connolly J observed that:
… once the legislature has made it legitimate to regard the lack of means of the plaintiff and its likely inability to meet an order for costs, this must always be a consideration of great weight and it will frequently be the determining factor (529).
(d)The public interest may also be added to the list of relevant factors: Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [71].
(e)There are obvious and practical limits on the extent to which an assessment can be made of the substantive merits of the plaintiff's claims and the defendant's defence. The court will generally not be required to investigate in considerable detail the likelihood or otherwise of success in the action: Swansdale [72] ‑ [74], citing Gartner v Ernst & Young(No 3) [2003] FCA 1437.

The Directors' evidence in support of their application

The Directors relied in support of their application on the affidavits of Ms Heath, Ms Madden and Mr Slattery.
Ms Heath is a solicitor employed by Minter Ellison. Her affidavit attached correspondence between her firm and Sugarloaf's solicitors, Wilson & Atkinson, concerning the provision of security. The correspondence disclosed that Minter Ellison first made a request that security be provided by letter dated 18 March 2010. As often occurs following such a request, considerable correspondence was exchanged between the parties' solicitors prior to the application eventually being made. It is not necessary to fully recount the course of that correspondence other than to note that, contrary to a submission made by Sugarloaf, I am satisfied that there was no relevant delay in the application being commenced.
Ms Heath also gave evidence concerning the financial position of Sugarloaf. That evidence included emails exchanged on 24 April 2009 between Mr Beck and Mr John Kenny, who I infer from the content of the emails was involved in the executive management of Rewards and the managed investment scheme. Mr Kenny's email to Mr Beck attached notices of default which were said to be in respect of the Rewards 'Tropical Fruits 2003 project' (which is the project that is the subject of these proceedings - see par 15, Ms Harris' first affidavit) and two vineyard projects in which apparently Mr Beck and Ms Harris held investments. The emails stated that should payment not be made according to the terms of the notices, various subleases (which I infer were over the groves) would be terminated and Rewards would immediately commence proceedings for the recovery of management and rent fees totalling $114,000.

Mr Beck's email to Mr Kenny of 24 April 2009 acknowledged receipt of Mr Kenny's email and the attached notices and stated that:
We do not have the cash available to pay you in the time frame. If you are not prepared to work with us you will never get paid. You can issue a writ, obtain judgment and bankrupt us. This will trigger ASICs claim for $245 m and believe me you will gain nothing by this action. Anna and the Richard and Anna Trust have joined in this litigation.
All of our lenders are working with us in these very difficult times. My assets are still frozen by the Federal Court pending a global mediation settlement commencing July 21st. All payments for the last 3 1/2 years have come from Anna and she is not in default at all for her investments.
Further, in the correspondence exchanged between Minter Ellison and Wilson & Atkinson:
(a)Minter Ellison asserted that Ms Harris was involved in a Federal Court action in which reference was made to a bankruptcy notice issued against her and to a judgment entered in default against her in proceedings in this court; that bankruptcy notices had been issued against Mr Beck and Ms Harris; that Mr Beck was a defendant in a number of proceedings relating to the Westpoint Group of companies and that it was understood that he would incur a 'significant' liability if he failed in his defence of those proceedings (letter dated 18 March 2010, attachment 'RTH 2' to Ms Heath's affidavit).
(b)Wilson & Atkinson replied by stating that the Federal Court proceedings were being 'dealt with' by Ms Harris and were not likely to 'materially impact' on her financial position and that she and Mr Beck were 'dealing with' the bankruptcy notices and they would not result in sequestration orders being made (letter dated 24 March 2010, attachment 'RTH 3').
(c)Wilson & Atkinson provided an extract from an affidavit sworn by Ms Harris in other, unidentified proceedings and which related to the financial position of the Trust (attachment 'RTH 22'). The affidavit contained some general information concerning properties held by the Trust. That information was repeated in an affidavit sworn by Ms Harris for the purpose of this application and which is referred to later in these reasons.
(d)Minter Ellison further asserted that a number of fixed and floating charges had been granted over the assets of Sugarloaf; that there were caveats over a number of properties held by the Trust; that Sugarloaf was involved in Federal Court proceedings; that a statutory demand had been issued against Sugarloaf by the Deputy Commissioner of Taxation and an asset preservation order had been made against Mr Beck (letter dated 31 August 2010, attachment 'RTH 26').
(e)Wilson & Atkinson replied by stating that charges had been granted over the assets of Sugarloaf; that Sugarloaf had an express right to be indemnified out of the assets of the Trust pursuant to the trust deed constituting the Trust; that Sugarloaf was a party to Federal Court proceedings but 'preliminary' discussions with senior counsel regarding the matter had indicated that those proceedings were not likely to adversely affect Sugarloaf; that the asset preservation order made against Mr Beck did not extend to the property held by Sugarloaf and that an application by the Deputy Commissioner of Taxation to wind up Sugarloaf had been dismissed by consent with the Deputy Commissioner being satisfied that Sugarloaf was not insolvent. The letter also referred to the email exchange between Mr Beck and Mr Kenny on 24 April 2009, suggesting that Mr Beck's comments had to be read in a 'temporal context'.
In addition to the correspondence exchanged between the parties' solicitors, Ms Heath attached to her affidavit an order made by Kenny J on 30 September 2010 in proceedings commenced in the Federal Court by Ann Street Mezzanine Pty Ltd (in liq) against Mr Beck, Ms Harris and a number of other defendants, including Conical Hill Nominees Pty Ltd and Sugarloaf (the Ann Street Mezzanine Proceedings). The order was the asset protection order referred to in the correspondence exchange between the solicitors. It appears, as Sugarloaf's solicitors had asserted, that the orders made against Mr Beck did not directly affect Sugarloaf or the Trust.
Ms Madden's affidavit attached copies of the certificates of title for properties registered in the name of Sugarloaf, mortgages granted by Sugarloaf and transfers of land. Certificates of title for 10 properties were attached to Ms Madden's affidavit. Transfers of land for seven of those 10 properties were attached. The transfers disclosed that the seven properties concerned were purchased for a total price of $5,015,000. As best as I have been able to ascertain, the mortgages granted by Sugarloaf and evidenced by the attachments to Ms Madden's affidavit secured loans of $11,185,500. The mortgages were granted to Angas Securities Ltd, Barker Mortgages Pty Ltd, Bank of Western Australia Ltd, La Redoute Pty Ltd and C.R.S. Pty Ltd.
In addition, caveats had been lodged against a number of the titles by Neil Philip Gentilli, Questco Pty Ltd and John Michael Wojtowrcz, Anthony Cheng‑Hai Quahe and Gavin Louis Kelly. There were also memorials lodged pursuant to the Taxation Administration Act 2003 (WA) in respect of land tax.
The attachments to Ms Madden's affidavit included full copies of two of the mortgages granted by Sugarloaf. The first, granted by Sugarloaf to La Redoute ('ELM 27') included among the events of default, execution being levied against any of Sugarloaf's property for $10,000 or more and which was not stayed or satisfied within seven days. The second mortgage granted to C.R.S ('ELM 30') contained covenants given by Sugarloaf to the effect that it would not, other than in the ordinary course of business, permit the compromise of any claim in relation to the 'Trust Fund' (defined in such a way as to capture all of the property held by the Trust), permit any debt to be incurred against the Trust Fund, dispose or part with possession of the Trust Fund or encumber the Trust Fund. It should also be noted that the mortgage granted to C.R.S. was to secure repayment of $500,000 on or before 18 December 2010. The court was not advised about whether the loan had been repaid.
Finally, it should be noted that the trust deed constituting the Trust expressly excludes a right of indemnity against any of the beneficiaries of the Trust: see cl 15.1 of the Trust Deed (page 81 and following of Ms Heath's affidavit).

Sugarloaf's evidence in opposition to the application

Ms Harris and Mr Beck each swore two affidavits in opposition to the Directors' application. In her first affidavit:
(a)Ms Harris stated that the Trust was the registered proprietor of a number of vacant residential properties located around Australia. She listed 13 properties which were said to have been purchased from about 2003 and were financed, as to 20%, by funds provided by entities related to Sugarloaf and as to the balance, initially through a facility granted by Westpac Bank Ltd. In about 2006, the Westpac facility was discharged and replaced with facilities granted by Angas Securities and a subsidiary of Angas Securities, Barker Securities Pty Ltd. The finance was secured by registered mortgages over the properties.
(b)Ms Harris annexed to her affidavit a spreadsheet that was said to have been prepared by the accountant for Sugarloaf (who was not identified). The spreadsheet recorded the current value, current mortgage balance and resulting equity for each property held by Sugarloaf. The spreadsheet showed a net equity of $4,984,000. However, there was no information provided by Ms Harris as to how the current values of the properties were estimated and there were no supporting valuations or other documents to verify the values given in the spreadsheet. The spreadsheet referred to 13 properties (Ms Madden's affidavit attached title documents for 10 properties). According to the spreadsheet, the amount outstanding pursuant to mortgages granted by Sugarloaf was $12.966 m. The total 'current' value of the properties was said to be $17.950 m.
(c)Ms Harris also annexed to her affidavit the financial statements for the Trust for the year ended 30 June 2007 and copies of what were described as draft financial statements for the Trust for the years ended 30 June 2008 and 2009. In relation to the draft financial statements, Ms Harris stated that they were a true reflection of the position of the Trust and that at the time of swearing her affidavit there had been no material transactions or events that would substantially alter the position reflected in the statements.
(d)Ms Harris stated that the current position of Sugarloaf was that it had sufficient assets to meet a call of $104,137 (the amount which Mr Slattery estimated as the costs likely to be incurred by the Directors) in the future but it did not have any cash immediately available to meet a call in that amount. She did not elaborate on when in the future a 'call' could be met.
(e)Ms Harris further stated that:
(i)The proceedings commenced by the Deputy Commissioner of Taxation had been finalised on a confidential basis and had resulted in the proceedings being dismissed with no order as to costs.
(ii)Ms Harris and Mr Beck had each commenced proceedings against Rewards in respect of other managed investment schemes in which they participated. Sugarloaf, Ms Harris and Mr Beck had paid a total of approximately $3.3m to Rewards for participation in the various projects. As Sugarloaf did not have the cash immediately available to comply with an order to pay the amount sought by the Directors as security, the proceedings might not be able to be progressed by Sugarloaf notwithstanding that the proceedings commenced by Ms Harris and Mr Beck would be independently prosecuted. There was no evidence as to how Mr Beck and Ms Harris were funding the proceedings they had commenced.
In her second affidavit, sworn 8 December 2010, Ms Harris stated that:
(a)The orders made by Kenny J in the Ann Street Mezzanine Proceedings had expired.
(b)The land and property owned by the Trust had been 'recorded' at cost. I assume that this was a reference to the amounts attributed to the land in the financial statements annexed to Ms Harris' affidavit.
(c)Various short‑term liabilities recorded in the financial statements were amounts owing to parties related to Sugarloaf and the Trust: R & A Beck, R & A Beck (NZ), Anna Beck, AA, AHA, BUT, Needles End Nominees, Herald Bluff Nominees, SIN and SIN Exmouth Canals.
Mr Beck's affidavit of 26 October 2010 confirmed that the assets of Sugarloaf and the Trust were not affected by the orders made by Kenny J in the Ann Street Mezzanine Proceedings. He also stated that he and Ms Harris had each commenced separate proceedings against Rewards. Mr Beck confirmed in his second affidavit, made on 8 December 2010, that the orders made in the Ann Street Mezzanine Proceedings had expired.

The financial statements annexed to Ms Harris' affidavit

Ms Harris annexed to her first affidavit financial statements for Conical Hill Nominees as trustee for the Richard & Anna Trust for the year ended 30 June 2007 that were prepared by a firm of accountants and which were in a conventional form ‑ that is, they included income and expenditure statements, a balance sheet, depreciation schedules and a statement of the loan and capital accounts of various persons and entities (annexure 'AH 2' to Ms Harris' first affidavit). The loan and capital accounts recorded profit distributions and advances to Mr Beck and Ms Harris.
The documents described by Ms Harris in her first affidavit as being draft financial statements for the Trust for the years ended 30 June 2008 and 2009 were not in a form that suggested they had been prepared by accountants (annexures 'AH 3' and 'AH 4' to Ms Harris' first affidavit). The documents comprised printouts of entries made in an accounting package and which were said to be profit and loss statements and balance sheets.
The profit and loss statement for the year ended 30 June 2008 showed a net profit of $182,055 and, for the year ended 30 June 2009, a net profit of $154,431. However, most of the income recorded in each year as having been received by Sugarloaf was attributable to an item described as 'Distribution from group trusts'. There was no explanation as to the basis upon which Sugarloaf was entitled to receive such distributions and as there were no cash statements, there was no confirmation that the distributions were received as cash rather than effected by book entries. There was an equivalent item in the income and expenditure statement for year ended 30 June 2007, but it was a minor component of total income.
There were also difficulties in interpreting the balance sheets incorporated in the draft 'financial statements'. The balance sheet for the year ended 30 June 2008 showed net assets of $2.010 m, while the balance sheet for the year ended 30 June 2009 showed net assets of approximately $2.165 m. However, the assets and liabilities included a significant number of related party transactions (by reference to the entities identified by Ms Harris as being related to Sugarloaf).
Further, the asset entries included items that would not ordinarily be treated as assets, unless they represented prepayments ‑ borrowing costs, rates and taxes and interest payments. By way of example, lot 763 Cormorant Court, Wannanup was a property which, according to the relevant transfer of land attached to Ms Madden's affidavit, was purchased by Conical Hill Nominees on 14 June 2004 for $460,000 (attachment 'ELM 3'). In the balance sheet for the year ending 30 June 2009, and forming part of the draft financial statements attached to Ms Harris' first affidavit, the following entries appear as assets in respect of lot 763: 'land' ($485,486.77), 'interest' ($209,654.40), 'rates and taxes ($47,617.24) and 'others' ($31,079.37). Similar entries appear for other properties, along with items such as construction costs.
Counsel for Sugarloaf explained that those items appeared as assets in the draft financial statements as they represented capitalised expenses which were added to the cost base of the relevant properties (ts 52). I understood from that explanation that the primary purpose of the draft 'balance sheets' was to record transactions for capital gains purposes. As such, the draft financial statements provide only limited assistance in determining Sugarloaf's true equity position. In particular, they could not be relied on to assert that Sugarloaf, as trustee of the Trust, had net assets in excess of $2 m (as was submitted by Sugarloaf).

The Ann Street Mezzanine Proceedings

Reference was made in the correspondence exchanged between Minter Ellison and Wilson & Atkinson to Federal Court proceedings involving Mr Beck and Sugarloaf. I assume that those proceedings were the Ann Street Mezzanine Proceedings. The proceedings were also referred to by the Directors in their submissions, the suggestion being that they represented a threat to the future financial position of Sugarloaf, Mr Beck and Ms Harris and a drain on their finances.
It is plain that the Ann Street Mezzanine Proceedings are complex: see Ann Street Mezzanine Pty Ltd (in liq) v Beck [2009] FCA 333; (2009) 255 ALR 324. They are connected to the collapse of the Westpoint Group of companies and there are several other proceedings which are closely related: see Ann Street Mezzanine Pty Ltd (in liq) v Beck [2010] FCA 260 [1].
There is no evidence as to the effect that those proceedings have had, and may in the future have, on the financial position of Sugarloaf, Mr Beck and Ms Harris. There is also no evidence as to the likely future course of those proceedings; for example, when they may be tried.

The threshold question

I am satisfied that there is reason to believe that Sugarloaf will not be able to pay the Directors' costs if they successfully defend Sugarloaf's action having regard to the following matters:
(a)Ms Harris stated that Sugarloaf did not have any cash immediately available to provide the amount sought by the Directors as security but that it could meet a 'call' in the future for that amount. She provided no explanation as to how a call might be met in the future and importantly, how long it might take Sugarloaf to complete whatever arrangements would be necessary to discharge a costs order in favour of the Directors. I conclude from those matters that:
(i)Sugarloaf has little or no cash reserves or assets which can be immediately realised or realised within a short time;
(ii)Sugarloaf's solvency is most likely to depend on its right of indemnity against the assets of the Trust.
(b)Those matters, together with the financial statements and draft 'financial statements' of Sugarloaf, suggest that the only assets to which Sugarloaf might have recourse through its right to be indemnified are the real estate properties. Those properties are encumbered by various mortgages (including in some instances, second mortgages). There are also caveats and memorials lodged against a number of the properties. Assuming that Sugarloaf actively pursued its right of indemnity against the Trust assets in order to meet a costs order, there would be obvious difficulties and delays in following that course, including the risk of defaults and cross‑defaults under the various securities that have been granted: see Professional Vending Services and the earlier references in these reasons to the terms of the two mortgages granted by Sugarloaf and attached to Ms Madden's affidavit.
(c)The observations of Smithers J in Laundry Coin-Wash Nominees are also relevant. It would be necessary for the Directors to exercise a right of subrogation if Sugarloaf refused to pursue its right of indemnity and at that point, the Directors would be faced with the difficulties and costs involved in seeking to enforce a judgment for their costs against encumbered property involving several mortgagees and chargees.
(d)There is significant doubt over the net asset position of Sugarloaf. The balance sheet for the year ended 30 June 2009 attached to Ms Harris' first affidavit stated that its net assets were $2.165 m. The total amount brought to account as 'borrowing costs', 'interest', 'rates and taxes' and 'others' was substantially more than $2.165 m.
(e)Ms Harris described the real estate registered in the name of Sugarloaf as being vacant. Accordingly, it appears that Sugarloaf does not receive rental income and as has already been noted, there was no evidence concerning its ongoing entitlement to receive distributions from other trusts or about the capacity of those trusts to continue to make distributions. The fact that Sugarloaf was unable to pay the annual management and rent fee in April 2009 and apparently cannot now provide cash security suggests that it either no longer receives distributions from other trusts or that those distributions are not being paid in cash (or that they are insufficient to meet Sugarloaf's expenses).
(f)Assuming a judgment in approximately 18 months, there is nothing in the evidence to suggest that Sugarloaf's financial position will have improved by that time. Rather, the evidence suggests the contrary. I do not place as much weight on the emails exchanged between Mr Beck and Mr Kenny in April 2009 as the Directors did in their submissions. However, the amount apparently owed by Sugarloaf to Rewards at that time was $114,000, which is approximately the amount sought by the Directors as security. Sugarloaf was unable to pay that amount in April 2009, suggesting that its financial circumstances have not materially altered between April 2009 and October 2010 (when Ms Harris made her first affidavit). It is clear that the financial position of Sugarloaf is closely bound up with the affairs of Ms Harris and Mr Beck and other entities associated with them. There was no direct evidence as to the financial circumstances of Ms Harris and Mr Beck and the entities they controlled, although such indirect evidence as was available suggested that their financial position was at risk - for example, the emails exchanged between Mr Beck and Mr Kenny and the references in the correspondence between Minter Ellison and Wilson & Atkinson to bankruptcy proceedings or the threat of such proceedings. I accept that the exchange of correspondence between Minter Ellison and Wilson & Atkinson prior to the commencement of the application could provide credible testimony concerning Sugarloaf's financial position given the form of the correspondence (assertions by the Directors through their solicitors and replies to those assertions by Sugarloaf's solicitors, presumably on instructions from Ms Harris). It is also apparent that Mr Beck, Ms Harris and Sugarloaf are involved in litigation with ASIC and that the proceedings are complex, ongoing and no doubt, expensive.
(g)Fixed and floating charges have been granted by Sugarloaf to Turtle Bay Nominees Pty Ltd, Aptitude Australia Pty Ltd, Statewide Secured Investments Pty Ltd and Balanced Securities Pty Ltd (see attachment 'RTH 32' to the affidavit of Ms Heath). The charges are not in evidence. There is also no evidence as to the circumstances in which they were granted. It is apparent from the Ann Street Mezzanine Proceedings that Turtle Bay Nominees is a company associated with Mr Beck. The other chargees are not referred to in those proceedings. Although there is little information concerning the charges, I consider the fact that they have been granted is relevant, particularly as Sugarloaf is a trustee company with little paid‑up capital and no real assets apart from its right of indemnity ‑ see in that regard, the comments of Goldberg J in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486.

The merits of Sugarloaf's claims against the Directors

The direct liability claims against the Directors comprise:
(a)the claim made under s 1325 for contraventions of the Corporations Act, in particular of s 601FD;
(b)the claims made under s 1041I of the Corporations Act for contravention of s 1041H and/or under s12 GF of the ASIC Act for contravention of s 12DA.
The only accessorial liability claim made against all of the Directors is that made under s 75B TPA for knowing involvement in the alleged contraventions of the TPA by Rewards. In addition, a claim is made against the second and fifth defendants for knowingly assisting Rewards to breach duties allegedly owed as a fiduciary.
An investor's standing to bring a claim under s 1325 of the Corporations Act for loss allegedly caused by a contravention of s 601FD (or other provisions of the Corporations Act) would appear, on the face of s 1325, to be clear (s 1325(2) confers a power in the court to make orders 'on the application of a person who has suffered, or is likely to suffer, loss or damage because of the conduct of another person'). However, there is an argument that a more limited view should be taken of s 1325: see Hanrahan, PF Funds Management in Australia (Lexis Nexis Butterworths 2007) at 14.52 and following. Nevertheless, for the purpose of this interlocutory application, I accept that there is a good argument that Sugarloaf can maintain a claim against the Directors under s 1325 for any loss or damage that it can establish was caused by their alleged contraventions of the Corporations Act and, in particular, s 601FD.
For the same reason, I accept that there is a good argument that Sugarloaf has standing to pursue claims against the Directors for the alleged contraventions of s 1041H and s 12DA of the ASIC Act: see s 1041I of the Corporations Act and s 12GF and s 12GM of the ASIC Act.
Arguably, where a corporation:
(a)contravenes a provision such as s 1041H of the Corporations Act as a consequence of the conduct of a person associated with the corporation being attributed to it, the person concerned is not also primarily liable for the contravention but may only be liable as an accessory;
(b)is liable for the contravention of a provision such as s 1041H as a consequence of the conduct of an agent, including a director acting as its agent, the corporation and the agent are primarily liable for the contravention - that is, each is a contravenor.
See Austin and others, Company Directors - Principles of Law and Corporate Governance at 13.40 and 13.41.
I have ignored these possible arguments in considering the merits of Sugarloaf's claims against the Directors for the purpose of determining this application. However, there are more fundamental difficulties with the pleading that I consider do materially impact on the possible merits of the claims made by Sugarloaf.
The direct liability claims rest on an allegation repeated throughout the statement of claim that the Directors 'procured and directed' Rewards to engage in conduct, the particulars of that allegation being that the Directors were each directors of Rewards and Rewards could only act through them. Similarly, the accessorial claim pursuant to s 75B of the TPA relies on an allegation that each Director 'procured and directed the conduct of [Rewards] … and is therefore liable for aiding, abetting, counselling, procuring or being knowingly concerned in [Rewards'] contraventions … and thereby being a person involved in those contraventions within the meaning of section 75B of the Trade Practices Act' (see, for example, par 66 of the statement of claim). The particulars to that allegation are that each Director was the director of Rewards and it could only act through him.
In my view, the pleading of the claims reflect misconceptions about a corporation's liability for its civil wrongs and the liability of others connected with the corporation for those wrongs which goes to the merits of Sugarloaf's claims. The relevant principles are summarised in RP Austin, Ford, HAJ and Ramsay, IM Company Directors: Principles of Law and Corporate Governance (Lexis Nexis Butterworths 2005) (13.37 and following and 16.3 and following) and in chapter 16 of Austin, RP and Ramsay, IM Ford's Principles of Company Law (Lexis Nexis Butterworth's loose leaf edition).
Directors are not personally liable for the torts committed by a corporation merely because they have general control of the corporation's business. They cannot be held liable for the torts of the employees and agents of the corporation, unless they ordered or procured the acts to be done, merely by reason of their position as directors: and see Clerk & Lindsell on Torts (20th ed, Sweet & Maxwell 2010) at 5‑75.
The expression 'directed and procured' to describe the circumstances in which a director may be liable for a tort committed by a corporation is derived from the judgments of Lord Buckmaster in Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd [1921] 2 AC 465 and Atkin LJ in Performing Right Society Ltd v Ciryl Theatrical Syndicate Ltd [1924] 1 KB 1, 14. In the latter case, Atkin LJ stated that the principle that 'prima facie a managing director is not liable for tortious acts done by servants of the company unless he himself is privy to the acts, that is to say unless he ordered or procured the acts to be done' was authoritatively established by Rainham Chemical Works. That is the position in Australian common law: see for example, Kalamazoo (Aust) Pty Ltd v Compact Business Systems Pty Ltd (1985) 84 FLR 101, 127.The principle is expressed this way in Ford's Principles of Corporations Law: 'to be liable as an accessory the agent must be involved in the corporation's tortious conduct beyond being merely a member, officer or employee' (at [16.080]).
At common law, the conduct of a person associated with a corporation may be attributed to the corporation where that person can be said to be the directing mind and will of the corporation ‑ the person is the very embodiment of the corporation so that his/her acts are the acts of the corporation. A statute may enlarge the circumstances in which there can be an attribution of the conduct of individuals to a corporation: see, for example, s 84 TPA and s 769(1) of the Corporations Act. The corporation will be primarily liable where there is attribution of an individual's conduct to the corporation pursuant to such a statutory provision.
Further, the individual may be liable as an accessory if the statute imposes accessorial liability; for example, s 75B TPA. Under s 75B TPA and its equivalents in the Corporations Act and the ASIC Act, a director will not be a party to the corporation's contraventions merely by being a director. A party to a contravention must be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention: Yorke v Lucas (1985) 158 CLR 661, 670 (Brennan J). There is some divergence of authority about whether the accessory must have knowledge that the representation was false or misleading or merely knowledge of the facts upon which a representation can be characterised as false or misleading in cases involving accessorial liability for contravention of s 52 and similar provisions of the TPA: see Brent M, 'Must An Accessory Be A Know‑It‑All?' (2010) 18 TPLJ 234. However, there is no doubt that the accessory must have knowledge that the representation has been made and must be involved in the contravention with that knowledge. Further, there must be some act of involvement ‑ an act of aiding or assistance or procurement etcetera. A director is not involved in a contravention of the TPA, the Corporations Act or the ASIC Act merely by being the director of a corporation that has contravened.
Similarly, a director will not be liable to a beneficiary or other third party for the breach by a corporation of a fiduciary duty owed to that party merely by being a director of the corporate fiduciary. At general law, accessorial liability depends on the principles of Barnes v Addy (1874) LR 9 Ch App 244; in a knowing participation claim, the third party must have assisted with knowledge in a fraudulent and dishonest design on the part of the trustee or fiduciary. In Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) and (No 10) [2008] WASC 239; [2009] WASC 107; (2009) 39 WAR 1 Owen J held that any of the first four categories of knowledge identified by Peter Gibson J in Baden v Societe Generale pour Favouriser le Developpement du Commerce et de L'Industrie en France SA [1993] 1 WLR 509 satisfied the knowledge requirement for such a claim. None of those states of knowledge can be established merely by proving that the third party was a director of the trustee/fiduciary corporation; some knowledge of the circumstances surrounding the breach of trust or duty is required even for the fourth category.
Consequently, an allegation that the Directors directed and procured a contravention of the relevant statute by Rewards, supported by particulars that they directed and procured the contravention by being a director and because Rewards could 'only' act through them is not sufficient to establish any liability against the Directors ‑ primary or accessorial:
(a)A corporation may act through its employees and agents not merely through its directors (who may, of course, also be employees and/or agents).
(b)At common law, directors will not be liable for the torts of a corporation or its employees and agents merely because of their office.
(c)The 'directed and procured' formula reflects one way in which the common law imposes liability for tortious conduct on persons associated with a corporation. There must, however, be some act, express or implied, that constitutes the direction or the procurement.
(d)Sugarloaf's claims are statutory and it is the relevant statutory provisions that must be applied. Those provisions, however, reflect and enlarge upon common law concepts.
(e)There is no allegation of an act or omission by the Directors that formed part of the contraventions alleged against Rewards. Since a corporation may act through its employees and agents, it cannot be said that the Directors directed and procured acts such as the making of the First Representation by Mr Drage or the issuing of the notices of default and termination merely by being the directors of Rewards. It is not alleged that any of the Directors had any connection with those matters so as to make their act, the act of Rewards by s 84 TPA or its equivalents in the Corporations Act and the ASIC Act.
(f)Consequently, there is no act or omission pleaded by which it could be found that the Directors themselves contravened the Corporations Act or the ASIC Act. The mere fact that they were the directors of Rewards does not mean that they 'engaged in the conduct' of Rewards, contrary to what is pleaded in pars 50, 53 (by cross-reference), 58 ‑ 61 and 75 ‑ 78 of the statement of claim or that they contravened s 601FD by, for example, acting dishonestly.
(g)Further, there is no act pleaded by which it could be found that the Directors were persons 'involved in' a contravention of the Corporations Act or the TPA, contrary to what is pleaded in pars 50, 53 and 66 ‑ 69 of the statement of claim.
(h)There are also no matters pleaded by which it could be found that the Directors had knowledge of the essential facts of the alleged contraventions of the TPA by Rewards for the purpose of s 75B. For example, there is no matter alleged to establish that any of the directors knew of the representations said to have been made by Mr Drage other than that the Directors were the directors of Rewards.
(i)There are insufficient matters pleaded by which it could be found that the second and fifth defendants possessed knowledge of the alleged breaches of fiduciary duty by Rewards to make them liable as accessories to those breaches. The only matters alleged against the second and fifth defendants other than their position as directors of Rewards is that they are 'controlling' shareholders in the related party for the purpose of the alleged contravention by Rewards of s 601LC of the Corporations Act. Paragraph 95.5 of the statement of claim pleads as particulars of knowledge each of the first four categories of Baden knowledge but that is merely to plead law and not matters of fact from which the knowledge of second and fifth defendants of the alleged breaches of duty could be established. As to the allegation that the second and fifth defendants were knowing participants in a breach of fiduciary duty by Rewards in respect of the related party transaction, it is difficult to see how the allegations concerning the transaction (par 42 of the statement of claim) could provide the basis for a further allegation that Rewards breached a duty owed to Sugarloaf as a fiduciary or that any breach of duty was part of a fraudulent and dishonest design. In any event, an allegation that the second and fifth defendants were shareholders in the related party would not be sufficient to establish knowledge having regard to the nature of the alleged transaction.
There are other difficulties with the pleading of Sugarloaf's claims that impact on their merit. Those difficulties include:
(a)It is alleged that Rewards acted dishonestly in contravention of s 601FC(1)(a) of the Corporations Act by making the First, Second and Third Representations and by terminating the Agreement (par 32.1 of the statement of claim). It is then pleaded that the Directors procured and directed the conduct of Rewards, including its alleged dishonesty (par 49) and that the Directors themselves acted dishonestly in breach of s 601FD(1)(a). The allegations of dishonesty are, of course, most serious and, accordingly, should be carefully and fully pleaded. The particulars of dishonesty again merely refer to the position of the Directors as the directors of Rewards and to the allegations that the First, Second and Third Representations were false and that the Agreement was invalidly terminated with certain consequences for Sugarloaf (the non‑application of the proceeds of the forthcoming harvest to pay the annual management and rent fee and failure to account for the proceeds). The fact that a representation is not made good does not mean that the representor acted dishonestly. Similarly, the fact that a party may have breached a contract by purporting to unlawfully terminate the contract does not mean it acted dishonestly. There is no attempt in the statement of claim to plead matters that could sustain an allegation of dishonesty against Rewards or the Directors. I doubt whether such matters could be pleaded given the nature of the representations allegedly made and the basis upon which it is said that they are false (so far as that can be ascertained from the statement of claim).
(b)Similar comments can be made in respect of the allegation that the second and fifth defendants knowingly assisted in the alleged breaches of fiduciary duty by Rewards. It is simply alleged that matters such as the making of the First, Second and Third Representations and the termination of the Agreement constituted conduct by Rewards that was dishonest and fraudulent. In my view, those matters do not, by themselves, disclose a proper basis for alleging a fraudulent and dishonest design on the part of Rewards.
(c)It is alleged that Sugarloaf suffered loss and damage as a result of the conduct of Rewards in making, among other things, the Second and Third Representations and by the Directors procuring and directing Rewards to make those representations. As previously noted, the Second and Third Representations are alleged to be false but there is no allegation that Sugarloaf took or refrained from taking any step as a consequence of the representations. Rather, it is simply alleged that Sugarloaf suffered loss and damage as a result of the making of the representations but the particulars indicate that the loss and damage claimed is a consequence of the termination of the Agreement rather than as a result of a change in position by Rewards. The falsity or otherwise of anything stated in the notices of default and termination appears to be irrelevant; the real question is whether the termination was invalid having regard to the terms of the Agreement and any provisions of the Corporations Act that might apply. Essentially, the question is whether Rewards breached the Agreement (and hence, why the loss claimed is an expectation rather than reliance loss). The allegations of falsity made in respect of the Second and Third Representations seem to be a tenuous means of constructing a claim against the Directors for what is, essentially, a claim against Rewards for breach of contract.
(d)There will obviously be questions concerning the reasonableness of any reliance by Sugarloaf on the representations allegedly made by Rewards. For example, it can be anticipated that the Directors will argue that it was not reasonable for Sugarloaf to rely on a representation that the proceeds from harvests would be sufficient to pay the annual management and rent fees given the uncertainties that inevitably surround a horticultural project which was expected to be undertaken over a period of 20 years.
(e)There are obvious difficulties with the damages claim and there are other problems that are buried by the extensive use of cross‑referencing in the pleadings. For example, the allegations made against the fourth defendant include references to the making of the First Representation. He is alleged to have directed and procured the making of that representation but he was not a director of Rewards at the relevant time according to what is alleged in par 8 of the statement of claim. Similarly, Rewards is alleged to have breached a duty owed to Sugarloaf as a fiduciary by making the First Representation. However, the First Representation was made prior to Rewards entering into any relationship with Sugarloaf.
In my view, the claims made against the Directors are beset with pleading problems that reflect underlying and significant difficulties. Those difficulties favour the exercise of the court's discretion to grant security.

Other discretionary factors

There was no direct evidence as to who controlled Mystery Bay, the sole shareholder in Sugarloaf. However, I infer that Ms Harris and Mr Beck controlled Mystery Bay having regard to Sugarloaf's position as the trustee of the Trust, the purpose of the Trust and the fact that Ms Harris is the sole director of Sugarloaf. It is clear that Ms Harris and Mr Beck stand behind Sugarloaf and the Trust (and that was not really in issue).
There was no evidence as to the financial position of Ms Harris and Mr Beck and no explanation as to why they could not fund the litigation. Rather, it was said that the proceedings they had commenced against Rewards would continue even if Sugarloaf's action was stayed. Ms Harris and/or Mr Beck and/or Mystery Bay have not offered to provide an undertaking in relation to the Directors' costs, nor was any evidence adduced that they were unable to provide security for those costs because of their financial circumstances. Those matters favour granting the Directors' application.
The absence of any direct evidence concerning the financial position of Ms Harris and Mr Beck also undermines the submission that was made by Sugarloaf that acceding to the application will stifle the litigation.
Finally, the fact that Sugarloaf is a trustee company, its financial position and the limits sought to be placed on its right and indemnity under the deed constituting the Trust all favour exercising the discretion to order security for costs.

The form of the order

I consider that the amount to be provided as security should secure the Directors' costs up to the commencement of the trial. I regard Mr Slattery's estimate of the costs as reasonable having regard to how the estimate has been prepared, the terms of the 2010 determination for the costs of contentious business and the nature of the claims made by Sugarloaf against the Directors. The amount estimated to complete all interlocutory steps, inclusive of getting up and an amount referrable to this application, was $84,546 ($139,062 - $54,516). I consider that the amount that ought to be provided as security up to the commencement of trial is $70,000 having regard to the principle that the order is not intended to provide a complete indemnity (see Brundza v Robbie & Co (No 2) [1952] HCA 49; (1952) 88 CLR 171, 175 (Fullagar J)) and the uncertainty that the full amount allowed by the 2010 costs determination for getting up will be required. However, I recognise that an assessment of the appropriate amount is to some extent arbitrary and I will give either party liberty to apply to vary the amount of security if they consider that future circumstances warrant a further application. I will give Sugarloaf 30 days within which to provide the security. The action will be stayed at the expiry of that period if the security ordered has not been provided.