Thalanga Copper Mines Pty Ltd v Brandrill Ltd

[2004] NSWSC 349

CITATION:	Thalanga Copper Mines Pty Ltd v Brandrill Ltd [2004] NSWSC 349
HEARING DATE(S):	27 April 2004
JUDGMENT DATE:	28 April 2004
JURISDICTION:	Equity Technology and Construction List
JUDGMENT OF:	Hamilton J
DECISION:	Application for security for costs of arbitration refused.
CATCHWORDS:	CORPORATIONS [23] - Constitution and legal capacity - External litigation - Security for costs - Discretion of court - Personal guarantee by directions or shareholders - Lateness of application.
LEGISLATION CITED:	Commercial Arbitration Act 1984 s 47 Supreme Court Rules 1970 Part 53
CASES CITED:	Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 Baulderstone Hornibrook Engineering Pty Limited v State Constructions Pty Limited (1993) 61 SASR 94 Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 Endormer Pty Limited (in liq) v Australian Guarantee Corp Limited [2001] FCA 548 Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 Idoport Pty Limited v National Australia Bank Ltd (No 35) [2001] NSWSC 744 K P Cable Investments Pty Limited v Meltglow Pty Limited (1995) 56 FCR 189 Morris v Hanley [2001] NSWCA 374
PARTIES :	Thalanga Copper Mines Pty Limited (P) Brandrill Limited (D)
FILE NUMBER(S):	SC 55024/04
COUNSEL:	S R Donaldson SC (P) Dr C J Birch SC (D)
SOLICITORS:	Henry Davis York (P) Stephen Blanks & Assocs (D)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
TECHNOLOGY & CONSTRUCTION LIST

HAMILTON J

WEDNESDAY, 28 APRIL 2004

55024/04 THALANGA COPPER MINES PTY LIMITED v BRANDRILL LIMITED

JUDGMENT

1 HIS HONOUR: These proceedings, commenced by summons issued on 2 April 2004, are for security for costs in an arbitration. They are therefore not proceedings under Part 53 of the Supreme Court Rules 1970 (“the SCR”), but the order for security is sought under s 47 of the Commercial Arbitration Act 1984. I am informed that Judges of this Court have proceeded on the basis that the general power in that section encompasses a power to make orders for security for costs. It was so held under the corresponding section of the South Australian Act by the Full Court of the Supreme Court of South Australia in Baulderstone Hornibrook Engineering Pty Limited v State Constructions Pty Limited (1993) 61 SASR 94. So far as can be ascertained in the short time that has been available between the argument and the delivery of this judgment, there is no decision of the New South Wales Court of Appeal dealing with the matter. However, not only does it seem to me, with respect, that the decision of the South Australian Full Court is correct but, this being a matter dealt with by legislation common to the States, I am encouraged by the decision of the High Court in Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 to regard the decision of an interstate Full Court as binding in those circumstances unless there is some very good reason for not doing so.

2 Although matters relating to security for costs are in this Court generally dealt with by a Registrar, there are two reasons that I have dealt with this matter. It is dubious whether, in the present state of the Rules, a Registrar has power to do so. That is something that probably ought be remedied, as there is no reason in principle why Registrars should not deal with security for costs applications relating to arbitrations as well as to proceedings in the Court. In addition to the doubt as to jurisdiction, this matter relates to arbitration proceedings, the hearing of which is fixed to commence in less than two weeks, and in those circumstances it is desirable that it be dealt with quickly and by a Judge.

3 The plaintiff here is, in effect, the defendant in the arbitration. The arbitration was commenced last year. Mr Wensley QC of the Queensland Bar is the appointed arbitrator and the law of Queensland applies to the contract which is the subject of the arbitration. This contract relates to a copper mine near Charters Towers which is owned by the plaintiff and at which the defendant was employed to carry out mining operations. The claim, as it at present stands, is for about $7 million but there are suggestions that there will be brought into play in the arbitration a further claim which could extend the amount claimed to as much as $15 or $16 million.

4 After the matter was referred to arbitration there were preliminary conferences held before the arbitrator on 10 September 2003, 23 January 2004 and 24 March 2004. Early hearing was pressed for and the hearing date has been readjusted on at least one occasion. The present situation is that the matter is fixed for hearing before Mr Wensley for two weeks commencing on 10 May 2004. There is then to be a gap of a fortnight, after which the matter is fixed for a further four weeks of hearing.

5 The plaintiff concedes that in the particular circumstances of this case there is a threshold question as to whether there is reason to believe that a plaintiff, being a body corporate, will be unable to pay the costs of the defendant if ordered to do so. Those words are taken from Part 53 r 1(e) of the SCR. Although the Rules, as I have observed, do not apply, there is no difficulty in regarding that realistically as a threshold question in this case.

6 In support of its case the plaintiff drew attention to a body of documents. They included the following. The plaintiff on 8 January 2004 wrote to the defendant’s solicitors expressing concern about the defendant’s financial position. This included reference to the defendant’s making, in 2003, application to the plaintiff for early payment of progress claims and a concession made by the defendant to the plaintiff that it had serious liquidity problems. To these matters I shall return. The plaintiff requested some assurance from the defendant that it had funds available to meet costs, estimated at $750,000. To that letter there is not in evidence any written reply, but there is no doubt that telephone conversations took place between the parties. On 12 March 2004 the plaintiff again wrote to the defendant’s solicitors referring to further public announcements as to the defendant’s financial position made on 28 February 2004 and threatening that if appropriate arrangements were not made, the present application would be brought to the Court. I should say that by that stage it was clear, as a result of the January preliminary meeting before the arbitrator, that a hearing of the arbitration was anticipated in April or May. As I have already indicated, the summons was taken out on 2 April 2004.

7 The documents relating to the defendant’s finances to which the plaintiff in its case in chief principally drew attention were the documents made public on 28 February 2004 which announced a trading loss for the six months to 31 December 2003 of $8.9 million. By that stage in any event there was no positive shareholders’ equity left in the company. The documentation also included an Independent Review Report to members of the defendant by Ernst and Young, Accountants, which cast doubt on the ability of the Brandrill Group to continue as a going concern unless at least some of a number of events occurred, including the finalisation of the sale of the defendant’s South African business. On 5 March 2004 there was a public announcement by Brandrill Limited that, following the due diligence of the proposed purchaser of the South African operations, that purchaser had withdrawn from the transaction. An announcement was made on 17 March 2004 that Brandrill Limited had requested a suspension of trading in its securities.

8 The defendant presented its documentary evidence as going to three strains to be considered in its argument as follows:

(1) There were documents that demonstrated that there was no mention at the preliminary hearings before the arbitrator of the possibility of a security for costs application, nor written reference to it other than the two letters I have already mentioned.
(2) There was material relating to the defendant’s financial plight, which made it clear long before early this year that the defendant was in a serious financial plight.
(3) There were documents that demonstrated, so far as demonstration was necessary, that that financial plight was in fact known to the plaintiff throughout 2003.

9 As to (1) above, it is clear that in the preliminary conferences with the arbitrator no mention was made of the possibility of an application for security for the plaintiff’s costs, although there was discussion of security for the costs of the arbitrator.

10 As to (2), Dr Birch, of Senior Counsel for the defendant, drew attention to written material publicly available last year in which a situation was painted, not completely identical with that revealed by the release of 27 February 2004, but foreshadowing similar difficulties. I should make it clear at this stage that the defendant is a company listed on the Australian Stock Exchange. It is based in Perth, but in part its operations are conducted in South Africa through South African subsidiaries and part of the financial difficulties that the Group is in arise from the operation or financial state of those subsidiaries. Its status as a publicly listed company makes, of course, publicly available a great deal more financial material relating to it than is available in the case of a proprietary company. On 21 August 2003 there was an announcement that the defendant’s loss for 2002/03 was expected to be approximately $20 million. The actual results announced on 12 September 2003 showed a loss of $31 million.

11 As to (3), there can be no doubt that these matters were communicated to the present plaintiff. Of particular significance among the matters drawn to my attention by Dr Birch is material going back to a meeting between representatives of the parties which occurred on 29 January 2003 where the defendant’s financial difficulties were frankly discussed between the parties. I do not need to set out in detail the material from the minutes of that meeting, but their flavour can be gauged from the item on the agenda of that meeting indicating that the defendant “requires temporary cash flow assistance”. Further, on 21 March 2003 the defendant wrote to the plaintiff a letter in which its financial plight was made plain. The fact that this was communicated to the plaintiff is in fact conceded by the plaintiff in its letter of 8 January 2004 to which I have already referred. These communications have a double significance. Not only do they quite directly draw the financial difficulty to attention, but one would have thought, where the entity involved a public company, that they would have encouraged the inquirer to watch carefully thereafter, to any extent that it was not already doing so, the public announcements of that company which would reflect upon its financial position.

12 The first question is whether it is established on this material that there is reason to believe that the defendant will be unable to pay costs, if ordered to do so. It does seem to me that that proposition is established in the requisite way on the material. Dr Birch has adverted to material (to which I shall refer again) that there is hope that the necessary money for security could be raised from the defendant’s banker if there were time to make and pursue an application. Equally, he has drawn attention to the fact that during 2003 various small amounts - and by “small” I mean amounts in the range of $500,000 to $1 million - were raised by placements of shares. There is currently a proposal for a rights issue of shares hoped to raise in the range of $11 million to $16 million. The ability to raise these smaller amounts by placements during 2003 encourages the belief that the rights issue will succeed, return the defendant to a positive equity situation and provide funds from which costs, if ordered in favour of the plaintiff, could be paid. However, what must be established is the requisite doubt and in my view that doubt is established. There is nothing in the material that leads me to reach a firm conclusion that the banker would grant the accommodation referred to or that the rights issue will proceed and succeed to the extent hoped.

13 Once the doubt as to payment of costs is established, the Court has a discretion as to whether or not to make an order for security for costs. That discretion is a wide discretion. It was discussed in Idoport Pty Limited v National Australia Bank Ltd (No 35) [2001] NSWSC 744 by Einstein J. In that judgment his Honour said:

“47 It is clear that the discretion to award security for costs requires to take into account all of the relevant facts matters and circumstances and is a judicial discretion to be exercised following the adducing of all evidence by each party to an application seeking to have such an award made. As Giles J (as His Honour then was) made plain in Rosenfield Nominees Pty Ltd v Bain and Co (1988) 14 ACLR 467 at 470, in exercising the discretion as to whether or not to make an order for costs, the Court must have a concern to achieve a balance between ensuring that adequate and fair protection is provided to the defendant, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings [cf Street CJ in Buckley v Bennell (1974) 1 ACLR 301 at 304]. Giles J referred to the debate over whether the discretion should be exercised with some predisposition in favour of the defendant and expressed the view with which I agree, that the debate is largely semantic. The principle which his Honour identified at 470 was that:
‘the discretion must be exercised having regard to all the circumstances of the case, but the inability of the plaintiff to meet the costs of the successful defendant, being the occasion for invoking the exercise of the discretion, is likely to play an important if not decisive role’.
48 Because the discretion to be exercised by the Court is a wide one which should remain unfettered, the circumstances in which the discretion should be exercised in favour of making the order cannot and should not be stated exhaustively: Spiel v Commodity Brokers Australia Pty Ltd at 415. In Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405, Cooper J stated:

‘(i)t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: P S Chellaram and Mr Courtney v Chine Ocean Shipping Co (1991) 65 ALJR 642 at 643.’ (at 415)”

14 His Honour proceeded in [49] of that judgment to refer to the judgment of Beazley J, when a Judge of the Federal Court of Australia, in K P Cable Investments Pty Limited v Meltglow Pty Limited (1995) 56 FCR 189 at 196 - 198. Her Honour stated 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.” Her Honour then referred to “a number of well established guidelines” which the court, notwithstanding its broad unfettered discretion, “typically takes into account in determining any such application.” Her Honour then enumerated seven guidelines and these have been referred to in subsequent cases. Among those seven guidelines the following have some bearing upon the present application. They may be summarised as follows (in my words):

(1) That such applications should be brought promptly.
(2) That regard is to be had to the strength and bona fides of the plaintiff’s case.
(3) Whether the plaintiff’s impecuniosity was caused by the defendant’s conduct, the subject of the claim.
(4) Whether the defendant’s application for security is oppressive in that it is being used to deny an impecunious plaintiff a right to litigate.
(5) Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security.
(6) Related to the last guideline is an issue as to whether persons standing behind the company have offered any personal undertaking to be liable for the costs and the form of that undertaking.

15 I shall say something first about the consideration of the strength of the plaintiff’s case (guideline (2)). In relation to that Beazley J said (at 197):

“As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success.”

It has been put to me, I think correctly in this case, particularly bearing in mind the size of the dispute subject to arbitration and estimated length of those proceedings, that it is quite impossible for me to form any estimate of the prospects of success. Indeed, there is no evidence on which I could do so. I therefore proceed on the basis stated by Beazley J as quoted above.

16 As to the question of the cause of the applicant’s impecuniosity (guideline (3)), there is certainly some indication on the material before me, including the nature and amount of the claim, that there is at least a significant contribution to the plaintiff’s impecuniosity by the conduct of the respondent that is complained of, or, at least, that that will be established if the defendant’s case be established upon the arbitration.

17 A deal has been said in the argument before me about guidelines (5) and (6) enunciated by Beazley J. Reference to her Honour’s judgment in this regard has been amplified by reference to two appellate cases, the decision of the Full Court of the Federal Court in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 and the decision of the Court of Appeal in Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120. In the former case the following was said in the judgment of the Court (Sheppard, Morling and Neaves JJ):

“In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.”

In the second case Meagher JA, with whom Kirby P and Cripps JA agreed, said at 123:

“Further, a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors): Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; 52 ALR 176. Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.”

18 The plaintiff has said that it tells strongly in its favour that no evidence has been brought forward as to unwillingness by those behind the company to step forward and expose themselves to the costs burden and that this is something which ought be proved in the defendant’s case. As Dr Birch has pointed out, it is not entirely true to say that this is not dealt with by the defendant. Whilst there are people who, no doubt, stand to benefit from the defendant succeeding in the litigation, Dr Birch draws attention to the fact that this is a publicly listed company which is in a different situation in this regard from a proprietary company. Furthermore, the evidence shows that it is a public company of widely diffuse shareholding. The 20 largest shareholders hold about 35 per cent of the capital and the largest single shareholding is in the vicinity of 10 per cent. Dr Birch does not for a moment suggest that any persons behind the company have come forward and offered to make themselves personally liable, but he says that that can hardly be expected in the case of a publicly listed company structured as the defendant is structured.

19 I have left till last guidelines (1) and (4) enunciated by Beazley J. Guideline (4) is, in my view, somewhat associated with guideline (1). Guideline (4), as to whether the defendant’s application is oppressive in the way her Honour indicated, has some connection in my view with guideline (1), as to whether the application has been brought promptly. However, I should say that I cannot and do not come to the conclusion on the material available that the purpose of the application or the purpose of its being brought late is simply to cause difficulty to the defendant or to embarrass it in the conduct of the litigation or stultify the litigation, although it must be recognised it may have that effect.

20 However, the time of the application being brought forward and pressed before the Court is, in my view, a question of very considerable importance in the present case. I do not want it to be thought - and I think that what I have already said makes it plain - that I have concentrated upon this consideration to the exclusion of other considerations. The decision I shall come to will be a decision come to upon a consideration of all the circumstances of the case, as is required by the authorities. However, there are cases in which the lateness of application has a particular importance. This has been emphasised in at least two recent appellate decisions. The first is the decision of the Court of Appeal in Morris v Hanley [2001] NSWCA 374. There the Court of Appeal took the view that the primary Judge who heard the security for costs application did not pay sufficient attention to the lateness of application and that that Judge’s exercise of discretion was thereby flawed. Coming to discuss the exercise of the Court of Appeal’s own discretion Heydon JA said at [30]:

“In my judgment it is appropriate for this Court to exercise the discretion against the defendants because they have not explicitly explained why they delayed until 2000 before making the application, though there are circumstances which might indicate why they delayed, and because of the hardship suffered by the plaintiff in having expended significant sums on costs during the period of that delay. There can be little doubt that at least some of the matters on which the defendants relied in their application were known to them well before it was made. The affidavits on which the defendants relied referred to incidents in the years 1996, 1997 and 1998. Further, the searches which the defendants procured their solicitors to make, and consequential inquiries, which were made in 2000 could have been made in earlier years. There can never have been any reason for supposing that the plaintiff was anything other than a person of very limited assets.”

The importance of this consideration in appropriate cases was also emphasised by the Full Court of the Federal Court (Lee, Finn and Conti JJ) in its short but forceful judgment in Endormer Pty Limited (in liq) v Australian Guarantee Corp Limited [2001] FCA 548.

21 It is important at this stage to say something of the orders in fact sought by the plaintiff and, indeed, the position of both parties as to the incurring of costs. The plaintiff has provided evidence which suggests that about $900,000 will be recoverable by it in costs if it is completely successful in the litigation. Of this, about half has already been expended. It asks for security to be provided in the sum of $900,000 or, if the Court takes the view that security should be provided only for prospective costs, in the sum of $450,000. Ideally it would ask that the amount ordered be paid into court or secured in some appropriate fashion before the commencement of the hearing on 10 May 2004. Alternatively, if difficulty is occasioned by the payment or securing taking place on short notice, then the first fortnight of the hearing should be allowed to proceed and the payment or securing of the relevant amount should take place before the resumption of the hearing of the arbitration some five or six weeks hence. The evidence shows that by January 2004 the defendant had expended about $360,000 on the litigation and that it has expended about a further $160,000 since that time.

22 The plaintiff submits that this is not a case like Morris v Hanley supra where, as Heydon JA remarked, the applicants for security had had a matter of years to put on their application before they did. It has said that, bearing in mind the swift progress of this matter, the plaintiff has proceeded timeously. It has said that there is no significance in the question of the plaintiff’s security for costs not being mentioned at interlocutory hearings before the arbitrator, because the arbitrator had no power to deal with an application for security for costs by a party, as opposed to dealing with the securing of his own fees.

23 I do not agree with these propositions. It seems to me that, for instance, in January 2004, when there was being agitated between the parties, both before the arbitrator and in correspondence, the tightest possible timetable for the arbitration to be brought on for hearing, it was not at that stage mentioned on the part of the present plaintiff that there was an intention to bring an application to court for security for costs. Furthermore, the degree to which the bringing of such an application is timeous or not timeous must be judged in the light of the pace at which the proceedings are being pursued. These proceedings were already before the arbitrator in September 2003 and it was plain from the start that they would be pushed forward as quickly as possible. The intention was that the whole process was going to take months rather than years and, indeed, to date so it has proved to be. Already by September 2003 the plaintiff was aware of the tight liquidity and financial problems of the defendant. The maturation of its loss of $31 million in the 2002/2003 year was apparent by that time. The financial situation as to the December half year announced on 27 February 2003 did not radically change the situation as it was already known. It did not improve it, but the situation, in essence, already existed.

24 A letter of inquiry was written in January 2004 which admitted knowledge on the plaintiff’s part of the defendant’s tight liquidity situation. Yet, although no written, nor, it would appear, any other, assurance was given which would remedy the situation, was even the firm threat of an application made until 12 March 2004. After that, bearing in mind the speed with which this weighty matter was proceeding, the delay of a further three weeks in issuing a summons was a not inconsiderable delay. There is no explanation proffered in evidence for these delays. Nor, bearing in mind the facility offered in this Division of this Court for the urgent hearing of matters which merit it, is there explanation as to why this application, the evidence on which is not in huge compass, was not brought on for hearing before a Duty Judge before yesterday, 27 April 2004, and only about 10 days before the hearing was due to commence before the arbitrator.

25 Mr Donaldson, of Senior Counsel for the plaintiff, has also said that it is not demonstrated that the litigation would be stultified by the making of an order for security, since either the defendant’s banker may provide it or persons behind the company who have not yet volunteered to come forward with support may do so faced with that situation. It can be said that the issue of the summons had not led the defendant to approach its banker after 2 April 2004 when the proceedings commenced. However, a company, particularly one which has financial difficulties, may be loath to approach its banker until it is quite necessary to do so. In any event it seems to me that by an application made in April the defendant is placed in a difficult and prejudicial situation. First of all, it has gone on expending costs from the start and has expended costs exceeding $500,000 on the basis that an application for security had not been made. Secondly, in the very time when preparation for a six week hearing before the arbitrator will be at its height, the plaintiff suggests that its executives and lawyers should be diverted from that activity to feverish attempts to raise a large sum of money as security for costs.

26 It seems to me that this is a case where the lateness of the application is of very considerable significance for the reasons stated. Taking into account all of the matters laid before me in relation to this application, the determination that I have come to is that the application for security for costs should be refused. There has been discussed before me the appropriate orders to be made. The orders that I proposed were that the summons should be dismissed and the plaintiff ordered to pay the defendant’s costs of the proceedings. Mr Donaldson asks that I not take this course, but leave the summons on foot in case the circumstances of the case change as, for example, by the arbitrator not proceeding on the fixed days in such a way that a renewal of the plaintiff’s application for security for costs might be justified. Whilst, no doubt, that possibility exists, since my judgment determines the matter only as at the present time and on the matters now laid before me as being material, I think the cleaner result is to dispose of these proceedings, leaving the plaintiff to bring fresh proceedings if it contends that the circumstances warrant such a course.

27 The orders of the Court will therefore be:

(1) Summons dismissed.
(2) Order that the plaintiff pay the defendant’s costs of the proceedings.

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Last Modified: 08/10/2004