Western Areas Exploration Pty Ltd v Streeter [No 2]
[2008] WASC 217
•9 OCTOBER 2008
WESTERN AREAS EXPLORATION PTY LTD -v- STREETER [No 2] [2008] WASC 217
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2008] WASC 217 | |
| Case No: | CIV:2126/2006 | 28 JULY 2008 | |
| Coram: | LE MIERE J | 9/10/08 | |
| 21 | Judgment Part: | 1 of 1 | |
| Result: | Leave to use discovered documents and to amend writ and statement of claim granted Application for security for costs dismissed | ||
| B | |||
| PDF Version |
| Parties: | WESTERN AREAS EXPLORATION PTY LTD (ACN 076 025 066) TERRENCE ERNEST JAMES STREETER DAVID CHARLES COOPERS JUNGLE CREEK MINES PTY LTD (ACN 008 795 033) |
Catchwords: | Civil practice and procedure Pleadings Application for leave to amend writ and statement of claim Application for leave to use documents discovered in this action for the purposes of pleading and prosecuting a new proposed cause of action Discretion of the court Turns on own facts Corporations law Security for costs Application that the plaintiff provide security for the defendants' costs Whether there is credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defences Discretion of the court Turns on own facts Corporations Act 2001 (Cth) s 1335 |
Legislation: | Corporations Act 2001 (Cth), s 1335 |
Case References: | Allstate Life Insurance Co v ANZ Banking Group (1995) 57 FCR 360 Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507 Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; 33 ACSR 739 Gemelle Investments Pty Ltd v Federal Commissioner of Taxation (1982) 1 ACLC 470 Huang v University of New South Wales (No 3) [2006] FCA 626; (2006) 154 FCR 16 Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 66 ACSR 455 Mann v Medical Defence Union [1997] FCA 45 Queensland v J L Holdings Pty Ltd [1997] HCA 1; (1997) 189 CLR 146 Regal (Hastings) Ltd v Gulliver (1942) 1 All ER 378 SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552 Sybron Corporation v Barclays Bank [1985] Ch 299 Temwood Holdings Pty Ltd v Oliver [1999] WASC 212 Wilden Pump Engineering Co v Fusfield [1985] FSR 581 Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
TERRENCE ERNEST JAMES STREETER
First Defendant
DAVID CHARLES COOPERS
Second Defendant
JUNGLE CREEK MINES PTY LTD (ACN 008 795 033)
Third Defendant
(Page 2)
Catchwords:
Civil practice and procedure - Pleadings - Application for leave to amend writ and statement of claim - Application for leave to use documents discovered in this action for the purposes of pleading and prosecuting a new proposed cause of action - Discretion of the court - Turns on own facts
Corporations law - Security for costs - Application that the plaintiff provide security for the defendants' costs - Whether there is credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defences - Discretion of the court - Turns on own facts - Corporations Act 2001 (Cth) s 1335
Legislation:
Corporations Act 2001 (Cth), s 1335
Result:
Leave to use discovered documents and to amend writ and statement of claim granted
Application for security for costs dismissed
Category: B
Representation:
Counsel:
Plaintiff : Mr M L Bennett & Mr M A MacLennan
First Defendant : Ms P E Cahill
Second Defendant : Ms P E Cahill
Third Defendant : Ms P E Cahill
Solicitors:
Plaintiff : Lavan Legal
First Defendant : Maxim Litigation Consultants
Second Defendant : Maxim Litigation Consultants
Third Defendant : Maxim Litigation Consultants
Case(s) referred to in judgment(s):
Allstate Life Insurance Co v ANZ Banking Group (1995) 57 FCR 360
Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507
Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; 33 ACSR 739
Gemelle Investments Pty Ltd v Federal Commissioner of Taxation (1982) 1 ACLC 470
Huang v University of New South Wales (No 3) [2006] FCA 626; (2006) 154 FCR 16
Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 66 ACSR 455
Mann v Medical Defence Union [1997] FCA 45
Queensland v J L Holdings Pty Ltd [1997] HCA 1; (1997) 189 CLR 146
Regal (Hastings) Ltd v Gulliver (1942) 1 All ER 378
SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552
Sybron Corporation v Barclays Bank [1985] Ch 299
Temwood Holdings Pty Ltd v Oliver [1999] WASC 212
Wilden Pump Engineering Co v Fusfield [1985] FSR 581
Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542
(Page 4)
1 LE MIERE J: These are my reasons for deciding two interlocutory applications. First, the plaintiff applies for leave to amend its writ of summons and statement of claim and for leave to use documents discovered in this action for the purposes of pleading and prosecuting the new cause of action referred to in the proposed amended writ. Secondly, the defendants apply for orders that the plaintiff give security for the defendants' costs of the action.
The action
2 This case as presently pleaded concerns a business opportunity called by the plaintiff the Nickel Opportunity and relating to a project called by the plaintiff the Nickel Project. The plaintiff says that the defendants, in breach of their fiduciary duties to the plaintiff, diverted the Nickel Opportunity away from the plaintiff and pursued it through the incorporation and listing of Western Areas NL.
3 In 1999 the principal activity of the plaintiff company was mineral exploration. The directors of the plaintiff were Lex Brailey (Brailey), the first defendant (Streeter) and the second defendant (Coopers).
4 In 1999, Richard Stuart (Stuart), Terrence Grammer (Grammer) and Julian Hanna (Hanna) operating together under the name Australian Nickel Project Consultants (the Nickel Group) identified a group of tenements to be explored for nickel and gold. The Nickel Group prepared a document dated November 1999 and entitled Nickel Company Proposal (the Nickel Company Document). The Nickel Company Document outlined the Nickel Project. The Nickel Company Document in essence proposed a project that involved raising seed capital from an investor or investors to be invested in a company, which would be listed on the Australian Stock Exchange (ASX) and which would acquire the tenements. The capital would be used to enable the company to carry out a drilling and exploration programme.
5 In about December 1999 Brailey had discussions with Stuart and Grammer concerning the Nickel Project. The plaintiff pleads that Brailey, Stuart and Grammer talked about vending the projects detailed in the Nickel Company Document into the plaintiff, which would subsequently list and Brailey said that the plaintiff would be interested in the Nickel Project. That is denied by the defendants. In their defence the defendants say that in substance the discussions were to the effect that the Nickel Group was seeking to raise seed capital for their project, that Brailey suggested that Streeter may be prepared to provide seed capital and suggested that Stuart and Grammer meet with Streeter.
(Page 5)
6 The plaintiff pleads that the business opportunity diverted away from the plaintiff was the chance for the plaintiff to be the vehicle for the Nickel Project, which would involve it proceeding to a public listing and the vending into the plaintiff of the projects identified in the Nickel Company Document, or alternatively the chance to provide seed capital in respect of the Nickel Project in substantially the manner subsequently provided by Streeter in Western Areas NL in or about May 2000.
7 The plaintiff pleads that after his discussions with Stuart and Grammer, Brailey briefed Streeter on the Nickel Project and the vending of the projects detailed in the Nickel Company Document. The plaintiff pleads that Brailey and Streeter agreed it was a great opportunity for the plaintiff and agreed to organise meetings with the Nickel Group. The plaintiff says that Brailey and Streeter, on behalf of the plaintiff, met with Stuart, Grammer, Hanna and Timothy King, a corporate adviser to the Nickel Group, to discuss developing the Nickel Project and the plaintiff becoming the listed vehicle for that project. The plaintiff says that there were further discussions between Streeter and Coopers on behalf of the plaintiff and representatives of the Nickel Group about the plaintiff's involvement in the project. All of that is denied by the defendants. The defendants plead that in about December 1999 Grammer, King, Hanna and Stuart met with Streeter because he was an investor in the resources sector and had the financial capacity to contribute the seed capital sought by the Nickel Group.
8 On 29 December 1999 Western Areas NL was incorporated and Streeter, Coopers, Hanna and King were each appointed directors and received a share in Western Areas NL. The plaintiff says that that occurred without the knowledge of Brailey.
9 The plaintiff pleads that between about December 1999 and May 2000 Streeter and Coopers took steps to divert the Nickel Opportunity away from the plaintiff to themselves and Western Areas NL and in doing so used information acquired as directors of the plaintiff to benefit themselves and took advantage of an opportunity or knowledge derived from their fiduciary positions and thereby breached the fiduciary obligations owed to the plaintiff. The defendants, in effect, admit that as directors they owed fiduciary duties to the plaintiff but deny the content of the fiduciary duties pleaded by the plaintiff and deny that they breached any fiduciary duty owed to the plaintiff.
10 On 28 July 2000 Western Areas NL listed on the ASX and the interests in the nickel projects identified in the Nickel Company
(Page 6)
- Document were vended into that company. The plaintiff says that the defendants received benefits in relation to the listing of Western Areas NL. Streeter and Coopers each received 100,000 shares in the company and 400,000 options. The third defendant (Jungle Creek) received 4,500,000 shares and 5,626,000 options. Each of the defendants subsequently exercised the options. The plaintiff says that Jungle Creek received the shares and options knowing they were issued as a result of the breaches of fiduciary obligations of Streeter and Coopers.
11 The defendants plead that between December and June 2000 the first defendant provided $300,000, King provided $50,000 and Ross Norgard provided $35,000 to Western Areas NL as seed capital to fund the costs of Western Areas NL issuing a prospectus to raise capital for exploration and other purposes. The defendants plead that on or about 30 May 2000 Streeter subscribed $820,000 for 4,100,000 fully paid ordinary shares in Western Areas NL and that Coopers and his related entities subscribed $20,000 for 100,000 fully paid ordinary shares.
12 The plaintiff seeks a declaration that each of the defendants holds the shares initially issued to him or it in Western Areas NL and the shares received on exercise of the options on trust for the plaintiff pursuant to a constructive trust. The plaintiff further or alternatively seeks an account of profits against each defendant and equitable compensation.
13 The defendants plead that it would be inequitable to grant, and the plaintiff ought not to be granted, the relief it seeks or any relief. The defendants plead that Brailey did not at any time, in his capacity as a director of the plaintiff, propose to the board of directors of the plaintiff or the shareholders of the plaintiff that the plaintiff seeks to negotiate an agreement with the Nickel Group pursuant to which the proposed project would be implemented through the plaintiff and did not propose to the board of directors of the plaintiff or the shareholders of the plaintiff that the plaintiff seeks to raise funds to invest seed capital to support the implementation of the proposed project.
The new cause of action
14 The plaintiff now seeks to amend its writ and statement of claim to add a new cause of action. The new cause of action concerns a business opportunity called by the plaintiff the Cue Tenements Opportunity relating to certain exploration licence applications for mining tenements located in the Murchison mineral field about 30 km north east of Cue (Cue Tenements).
(Page 7)
15 In their existing defence the defendants plead that on about 28 March 2000 the plaintiff, Jungle Creek and Western Areas NL entered into an agreement whereby the plaintiff sold its interest in the Cue Tenements to Western Areas in consideration for 350,000 shares in Western Areas NL. The defendants say that Western Areas NL expended $117,127 on exploration and evaluation of the Cue Tenements but did not locate any commercially viable mineral deposits on the tenements and by the end of the 2007 financial year Western Areas NL had relinquished its interests in the Cue Tenements.
The proposed amendments to the statement of claim
16 The proposed amendments to the statement of claim are to plead in relation to the Cue Opportunity as follows. On or about 8 April 1998 the plaintiff, as to a 70% share, and Golden Granite Pty Ltd, as to a 30% share, applied for the Cue Tenements. To the knowledge of Streeter, from on or about 29 December 1999 Western Areas NL was willing to issue, in exchange for the Cue Tenements, shares in Western Areas NL upon it being listed on the ASX but not purchase them for cash. To the knowledge of Streeter, between about February 2000 and 27 March 2000 Golden Granite was willing to sell its beneficial interest in the Cue Tenements for about $5,000. The plaintiff says that a business opportunity existed from about March 2000 for the plaintiff to acquire the 30% beneficial interest in the Cue Tenements held by Golden Granite for an amount of about $5,000 and vend it into Western Areas NL in exchange for shares in Western Areas NL on it being listed on the ASX. That is what the plaintiff calls the Cue Tenements Opportunity. In or about March 2000 Jungle Creek acquired from Golden Granite for the consideration of $5,000 the 30% beneficial interest Golden Granite held in the Cue Tenements. On or about 28 March 2000 the plaintiff, Jungle Creek and Western Areas NL entered into a written agreement whereby the plaintiff and Jungle Creek granted to Western Areas NL an option to purchase their interests in the Cue Tenements, the option being exercised upon Western Areas NL being listed on the ASX. The consideration to be received by the plaintiff and Jungle Creek (in the respective proportions 70:30) on exercise of the option by Western Areas NL was shares in Western Areas NL to the value of $200,000 but to be reduced pro rata if the value of the Cue Tenements was determined by independent valuation to be less than $200,000 but not to be reduced lower than $100,000.
17 The plaintiff proposes to plead that in or about March 2000 Streeter diverted the Cue Tenements Opportunity away from the plaintiff to Jungle Creek. That is particularised with the statement that Streeter failed to
(Page 8)
- pursue the Cue Tenements Opportunity on behalf of the plaintiff and instead caused Jungle Creek to acquire Golden Granite's interest in the Cue Tenements. On Western Areas NL being listed on the ASX Jungle Creek received 150,000 shares in Western Areas NL pursuant to the agreement in relation to the Cue Tenements. The plaintiff says that Jungle Creek entered into the agreement to acquire the Cue Tenements and received the Western Areas NL shares in exchange for the Cue Tenements knowing they were the result of the breach of fiduciary obligations of Streeter. The plaintiff wishes to plead that Jungle Creek holds the shares it received in exchange for the Cue Tenements on constructive trust for the plaintiff.
Defendants' opposition to application for leave to amend
18 The defendants oppose the plaintiff's application for leave to amend the writ and statement of claim on the grounds of delay and prejudice. The defendants say that the plaintiff commenced these proceedings six and a half years after the alleged breach of fiduciary duties by the defendants and now seeks to add a new cause of action some 20 months after instituting proceedings and eight years after the transaction relating to the Cue Tenements. The defendants say that the plaintiff was on notice of the proposed cause of action, if any, at the commencement of these proceedings. The defendants say that at the very least the plaintiff knew or ought to have known at the time of reviewing the agreement between the plaintiff, Jungle Creek and Western Areas NL in relation to the Cue Tenements for the purpose of meeting its discovery obligations in these proceedings, whether the proposed cause of action, if any, existed against the defendants.
19 The defendants say that the amendments will prejudice them for the following reasons. The amendments will delay the prosecution of the action. The defendants will be required to amend their defence to traverse the proposed amendments. This will require significant time for senior counsel to consider and draft amendments. The result will be further costs and delay incurred by the defendants. Further, the defendants say that the proposed amendments 'appear to add minimal value to the plaintiff's overall prayer for relief'.
Discretion to grant leave to amend
20 The grant or refusal of leave to amend is a matter of discretion. The discretion must be exercised in the light of the case flow management principles and objects stated in the Rules of the Supreme Court 1971 (WA) O 1 r 4B. However, the ultimate aim of the court is the attainment
(Page 9)
- of justice and no principle of case management can be allowed to supplant that aim: Queensland v J L Holdings Pty Ltd [1997] HCA 1; (1997) 189 CLR 146. The issue sought to be raised by the plaintiff is fairly arguable. I find that the plaintiff has delayed in prosecuting the new cause of action. However, there is no evidence that costs would not be an adequate remedy for any prejudice caused to the defendants by the amendments sought. The plaintiff should have leave to amend the writ and the statement of claim.
Leave to use discovered documents
21 The plaintiff also seeks leave to use the documents discovered in this action for the purposes of pleading and prosecuting the new cause of action. A litigant in court proceedings to whom documents have been produced under the discovery process impliedly undertakes not to use those documents for a collateral or ulterior purpose and such improper use amounts to a contempt: Temwood Holdings Pty Ltd v Oliver [1999] WASC 212 [13] (Steytler J). There is authority suggesting that the implied undertaking does not prevent a party from using documents obtained during legal proceedings to add new causes of action or new parties: Wilden Pump Engineering Co v Fusfield [1985] FSR 581; Sybron Corporation v Barclays Bank [1985] Ch 299; Allstate Life Insurance Co v ANZ Banking Group (1995) 57 FCR 360, 378 - 380 (Hill J). In Mann v Medical Defence Union [1997] FCA 45 Ryan J was of the opinion that there could be no absolute rule that the use of documents to commence a cross-claim or amendments to include a new cause of action against the same party could never constitute a collateral or ulterior motive. His Honour accepted that the implied undertaking would not normally restrict uses that were not significantly different in character to the cause of action under which the material had been obtained. The permissible scope of uses for material did not depend on the causes of action that had been pleaded or the parties that had been joined at the time the material was obtained, but whether the proposed use of the material bore a reasonable relation to the prosecution of the case sought to be made or the mounting of the defence to that case. Ryan J suggested that this test would enable the use of material to which the implied undertaking applied to add a claim that was similar in character to the one that had yielded the material.
22 The cases to which I have referred were discussed by Steytler J in Temwood. However, his Honour did not express a concluded view whether or not the implied taking prevents a party from using documents
(Page 10)
- obtained during the legal proceedings to add new causes of action. It is not necessary for me to reach a concluded view on that issue.
23 The proposed additional cause of action against the first and third defendants alleges, in the case of Streeter, breach of fiduciary duty, and in the case of Jungle Creek, knowing assistance in that breach of duty. The documents are relevant to the proposed new cause of action. In my opinion the subject matter of the proposed new cause of action is sufficiently close to the original proceeding that use of the material for the purposes of bringing the new cause of action renders no injustice to the defendants. Indeed, the transaction which forms part of the proposed new cause of action - that is, the agreement between the plaintiff, Jungle Creek and Western Areas NL whereby the plaintiff sold its interest in the Cue Tenements to Western Areas NL in consideration for shares in Western Areas NL - is pleaded by the defendants in their existing defence. There is no evidence giving rise to any ground for refusing leave. The plaintiff should have leave to use the documents discovered by the defendants in this action for the purposes of pleading and prosecuting the new cause of action referred to in the minute of re-amended writ of summons that is attached to the plaintiff's chamber summons dated 15 July 2008.
Security for costs
24 The defendants apply by chamber summons for an order that the plaintiff give security for the defendants' costs of the action and that in the meantime all further proceedings be stayed. The chamber summons states that the application is made pursuant to s 1335(1) of the Corporations Act 2001 (Cth) and O 25 of the Rules of the Supreme Court. However, the application was argued in reliance upon s 1335(1) of the Corporations Act and it is not necessary to give separate consideration to O 25 of the Rules of the Supreme Court. The application is opposed by the plaintiff.
25 Section 1335(1) of the Corporations Act provides that where a corporation is a plaintiff in any action or other legal proceeding the court may, if it appears that the corporation will be unable to pay the costs of the defendant if successful in the defence, require the corporation to give security for the costs of the defendant. Section 1335 carries both a threshold test and a discretionary test. The threshold test is whether it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the legal costs of the defendant.
26 The plaintiff's company secretary issued a document dated 17 October 2006 and entitled 'Update of Notice of Meeting'. The document refers to a notice of meeting dated and mailed on 26 September
(Page 11)
- 2006 in relation to a general meeting to be held on 3 November 2006. The document says:
Since we issued the Notice, we have had the Company's sole asset, its shares in Western Areas NL transferred into the Company's name. We have also sold 25,000 shares at an average price of $3.04. The proceeds received will allow the Company to meet its legal bills and its general administrative expenses up until the date of the meeting.
28 The plaintiff has now disposed of all of its shares in Western Areas NL. The plaintiff sold 120,000 shares on 24 August 2007 at a price of $4.279900 per share and on 27 August 2007 sold 80,000 shares at a price of $4.260756 per share. That is, the plaintiff sold the balance of its shares and received approximately $854,000.
29 There is no evidence of what the plaintiff has done with the proceeds of the sale of the shares.
30 The trial of this action is likely to take place in early 2009 and judgment to be delivered in mid-2009. By that time the plaintiff will have spent money on its own legal expenses of these proceedings and its general administrative expenses. There is no evidence of the plaintiff's
(Page 12)
- administrative expenses. However, it appears that the plaintiff's principal activity is conducting this litigation. Brailey's 'Update of Notice of Meeting' of 17 October 2006 estimated that the plaintiff's legal costs of prosecuting this action including a trial would be in the vicinity of $200,000 plus GST. That estimate may turn out to be an underestimate of the legal costs. Furthermore, by mid-2009 the plaintiff is likely to have expended further funds on its administrative expenses.
31 The defendants have prepared a draft bill of their likely legal costs for the matter to proceed up to entry of the matter for trial. The draft bill is in the amount of $421,329, including $180,000 for experts' reports. The defendants' solicitors have subsequently been informed that the preparation of an expert accounting report would likely cost approximately $30,000 exclusive of GST and the preparation of a report by a corporate advisory expert would likely cost approximately $20,000, exclusive of GST. In light of that further information the defendants revised the estimate of the cost of expert reports from $180,000 to $80,000. The estimate includes the likely need for the experts to consider further information, including but not limited to responsive evidence, and to provide reports in response. Accordingly, the defendants' draft bill of costs and the amount of security sought by the defendants is reduced from $421,329 to $321,329. At a subsequent directions hearing I was informed by counsel for the defendants that the defendants intend only to lead expert evidence from a corporate advisory expert and do not intend to lead expert accounting evidence. Thus, the defendants draft bill of costs should be further reduced to something less than $300,000 although a precise estimate cannot be made.
32 The plaintiff submits that the costs set out in the defendants' draft bill of costs are excessive and unreasonable and has provided a critique of many items in the defendants' draft bill. Counsel for the defendants conceded that some of the items included in the draft bill of costs could not be substantiated and others were broad estimates. The defendants have not put forward any evidence of the amount that they have actually incurred in legal costs to date.
33 The defendants' draft bill of costs is for costs up to the entry for trial, including getting up case for trial. The estimated length of the trial is 15 days. The schedule fees allowed by the Legal Practitioners (Supreme Court) Contentious Business Determination 2006 (WA) for senior counsel, junior counsel and instructing solicitor for a trial of 15 days, is in excess of $100,000.
(Page 13)
34 I am not satisfied that the defendants' draft bill of costs is an accurate estimate of the defendants' likely legal costs for the matter to proceed up to entry of the matter for trial. As I have said, counsel for the defendants conceded that some of the items included in the draft bill could not be substantiated and others were broad estimates. Having regard to the matters raised by the plaintiff, and Brailey's estimate in the 'Update of Notice of Meeting' of 17 October 2006 that the plaintiff's legal costs of prosecuting the action including the trial would be in the order of $200,000 plus GST, I estimate that the defendants' costs of prosecuting the action including a trial would be in the vicinity of $300,000. It may well be that the defendants' costs will turn out to be more than that but the evidence does not enable me to assume that that will be so.
Security for costs - Legal principles
35 Section 1335(1) was considered by the Full Court in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; 33 ACSR 739. Pidgeon and Owen JJ said:
The change first appearing in the 1862 Act of deleting the reference to proving a matter to the satisfaction of the Judge and replacing it by the phrase 'if it appears by any credible testimony that there is reason to believe…' must be interpreted as meaning that there was a lessening of the threshold requirement of the person making the application. Proof was no longer required. What was required was that there be credible testimony giving rise to a belief. We would see the rule in Jones v Dunkel [(1959) 101 CLR 298] as having no application in determining this question. This rule normally arises when a matter is sought to be proved and in that situation the question is what inferences can be drawn. Here the applicant is not seeking to prove the state of the company's finances. The applicant is required to do no more than place on the record credible testimony and the exercise of the court at this stage is in judging the testimony and its quality rather than seeing if a matter has been proved by inference. The company, at this stage, is not being asked to explain or contradict something for the purposes of avoiding an inference being drawn. If there is credible testimony, then the court has jurisdiction to make the order and a company which called no evidence to show it could meet a costs order would run the risk of having an order made against it [11].
36 In Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 66 ACSR 455 [14] - [16] Maxwell P and Buchanan JA said:
The language of the statutory test is clear. The court must address the question which the section poses:
Is there reason to believe that the corporation will be unable to pay the defendant's costs?
(Page 14)
- There is no warrant for - and no apparent advantage in - adopting the much lengthier 'Beach Petroleum' [v Johnson (1992) 7 ACSR 203] formulation.
The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'if the court is satisfied that …' or 'if in the view of the court it is likely that …' The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say it must be a 'real risk'). A risk assessment is, of necessity imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs.
It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk.
Consideration of Court of Appeal transcript
37 In a letter dated 10 September 2008 the plaintiff, without leave, provided the court with transcript of argument before Pullin JA on the defendants' application for security for costs in an appeal from a decision of Master Sanderson in these proceedings. The plaintiff wrote that Pullin JA delivered reasons ex tempore and dismissed the application. The plaintiff also stated that it considered it appropriate to provide me with a copy of the transcript. In a letter dated 17 September 2008 and at the directions hearing on 18 September 2008 the defendants raised objections about the provision of and the assistance that could be derived from reading the transcript. I gave leave to both parties to file submissions in relation to the transcript.
38 On 27 November 2007 the plaintiff and defendants attended a court supervised mediation conference (Mediation). A settlement was not achieved at the Mediation and the conference was adjourned sine die. On 10 December 2007 the plaintiff made an application that the defendants pay the plaintiff's costs thrown away in respect of the Mediation. The application was heard on 9 April 2008 by Master Sanderson so that I, as case manager and possible trial judge, would not be exposed to any privileged or confidential discussions and materials related to the Mediation. On 13 May 2008 the Master delivered reasons and found that all evidence contained in the affidavits filed by the parties in relation to the application should be excluded from consideration. The plaintiff appealed the Master's decision. On 16 July 2008 the defendants filed an application seeking an order that the plaintiff provide security for costs of
(Page 15)
- the appeal. On 28 August 2008 Pullin JA dismissed the defendants' application for security for costs of the appeal and delivered reasons ex tempore.
39 The defendants submit that after a hearing is concluded, it is impermissible to file further submissions or evidence without leave and rely upon Huang v University of New South Wales (No 3) [2006] FCA 626; (2006) 154 FCR 16. In that case one of the appellant's grounds of appeal was that the affidavits she filed without leave after the hearing was finished and the decision reserved were not referred to in the subsequent judgment. Rares J dismissed the ground of appeal and explained that after the hearing was finished
no leave was given to file further evidence, nor was I referred to any motion by which leave was sought. The appellant did not address any oral argument on this point … The appellant did not refer to any motion she put before his Honour to reopen the proceedings. Just as it is impermissible to file further submissions without leave of the court after the hearing has concluded, further evidence cannot be filed without leave. The appellant advanced no basis as to why she should have been permitted to reopen [the proceedings] [76] - [77].
40 The situation before me is distinguishable from that in Huang v University of New South Wales. In this case counsel seeks to inform the court of a relevant decision on a point of law arising out of the same proceedings that has been handed down after I reserved my decision and which counsel believes is on point. In my opinion this does not amount to reopening the case. Where counsel becomes aware of such an authority after a decision has been reserved and while it remains pending, counsel may inform the court of that decision by a letter to the court, copied to the other parties to the action, and limited to the relevant reference unless the parties have consented beforehand to further material in the letter. If counsel wishes to do more than inform the court of the relevant reference then counsel should seek leave to make further submissions. As I have said, I gave leave to both parties to file submissions in relation to the transcript.
41 The defendants submit that the plaintiff has not provided the court with the Court of Appeal security application itself nor the affidavit material and written submissions filed by the parties in respect of it. The plaintiff submits that the defendants supplied identical evidence in support of each of their security for costs applications in the Court of Appeal and before me. Nonetheless, both parties acknowledge in their submissions that there is a difference in the amount of security for costs sought.
(Page 16)
- Pullin JA was required to consider the ability of the plaintiff to pay the defendants' estimated costs of $15,000 in respect of the interlocutory appeal. The defendants' draft bill of costs in respect of main proceedings is for $321,329; although, as I have said, this should be further reduced to something less than $300,000.
42 I find that it is open to me to read the transcript of the proceedings before Pullin JA and his Honour's ex tempore reasons for decision. Both applications arise from the same proceedings and are concerned with the same jurisdictional question under s 1335(1) of the Corporations Act. However, I place little weight on Pullin JA's reasons for decision because of the difference in the amount of security sought in the separate applications.
Consideration of evidence
43 In August 2007 the only asset of the plaintiff was the proceeds from the sale of its Western Areas NL shares, an amount of approximately $854,000 and the amount, if any, remaining from the proceeds of the earlier sale of Western Areas NL shares. By the time judgment is likely to be rendered in this matter in mid-2009 the plaintiff is likely to have expended an indeterminate part of those funds on its own legal expenses of this action and its administrative costs. In October 2006 the plaintiff's directors estimated that its legal costs of the proceedings would be in the order of $200,000 plus GST.
44 As I have said, for the purposes of this application and on the basis of the evidence before me I estimate that the defendants' costs of this action including trial might be in the order of $300,000.
45 The question is whether there is credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if successful in their defences. The defendants are not required to prove that the plaintiff would not be able to meet a costs order.
46 There is no evidence, and it cannot be inferred, precisely what money or assets the plaintiff presently has. In August 2007 the plaintiff had $854,000 and the amount, if any, remaining from the proceeds of the earlier sale of Western Areas NL shares. Since August 2007 there have been various steps taken in these proceedings. The plaintiff will have incurred legal costs in prosecuting those steps. There is no evidence how much the plaintiff is likely to have incurred in those legal costs. The defendants have not led any evidence of how much they have incurred in legal costs in that period and have not attempted to estimate how much the
(Page 17)
- plaintiff is likely to have incurred in legal costs in that period. There is no evidence to suggest that the plaintiff is likely to have incurred any substantial amount on any other outgoings since August 2007.
47 I am not satisfied that there is credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defences.
48 In August 2007 the plaintiff had assets of approximately $840,000. It may be inferred that since then the plaintiff will have expended some, but an unknown amount, on legal expenses and general administration expenses. There is no credible testimony that, or from which I may infer, that by about mid-2009 the plaintiff will not have money or realisable assets that would enable it to pay costs of the defendants in the vicinity of $300,000. The defendants have failed to satisfy the threshold test. For that reason the defendants' application must be dismissed. However, I will go on to consider whether the court should exercise its discretionary power to order security for costs if the jurisdictional condition had been satisfied.
Discretion
49 There has for many years been a debate about whether the court's discretion to grant security for costs is fettered - whether, in other words, the court should approach its task with a predisposition toward awarding security once the relevant facts have been established. The unfettered discretion approach appears to enjoy the preponderance of judicial authority. In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd Pidgeon and Owen JJ said that once the court has jurisdiction 'there is an unlimited discretion' [21]. In Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507, 513 - 514 Phillips JA (with whom Ormiston and Charles JJA agreed) said:
[T]he debate about the word 'predisposition' … is a sterile one and should no longer be pursued … [T]he discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.
50 In Livingspring Pty Ltd v Kliger Partners Maxwell P and Buchanan JA said:
The threshold condition for the exercise of the power to order security defines the circumstances in which Parliament contemplated that the
(Page 18)
- power would be exercised. That is, the power was conferred for the purpose of protecting the defendant against the very risk which must be shown to exist before the power can be exercised. In this sense, satisfaction of the threshold condition - demonstrating the existence of the risk - 'calls for' the fulfilment of the purpose for which the power was conferred. Whether the power should be exercised in the particular case will, of course, depend upon all the circumstances [19].
- Their Honours went on to say that it is for the defendant - applicant to persuade the court that the discretion should be exercised in its favour.
51 It is now necessary to consider factors relevant to the exercise of the court's discretion. I will refer to the matters relevant to discretion that were raised by the parties.
52 The defendants say in essence that the plaintiff does not have reasonable prospects of success. The plaintiff in response says that it has reasonably good prospects of success.
53 The defendants submit that the Nickel Opportunity could not in any sense, having regard to the plaintiff's financial, asset and corporate position and history, have belonged or been available to the plaintiff. They submit that the allegation of a situation of a real and sensible possibility of conflict accordingly lacks substance.
54 Directors who exploit an opportunity or knowledge gained as a result of their office, breach their fiduciary duty to the company and may be liable to account for any profit made or to compensate the company for any loss it has suffered. This is the case even where the company itself was unable to take advantage of the opportunity: Regal (Hastings) Ltd v Gulliver (1942) 1 All ER 378. In SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552, when considering if an opportunity came to a director due to his position, Cooper J took into consideration 'the nature and extent of the company's operations and anticipated future operations' in determining if there had been a breach of fiduciary duty. Cooper J found that the opportunity did not belong to the company as it was demonstrated that the company had considered the opportunity and rejected it due to financial and other business considerations.
55 In this case the defendant submits that the Nickel Opportunity cannot properly be identified as one belonging to the plaintiff. This issue raises matters concerning the nature of the opportunity, Streeter's relation to it, the amount of knowledge possessed and the circumstances in which it was obtained. The matter is arguable but I am unable to assess the strength of the plaintiff's case. There is a factual conflict whether the defendants
(Page 19)
- exploited an opportunity or knowledge gained as a result of their office or otherwise breached their fiduciary duty to the plaintiff. The plaintiff says that Brailey, as a director of the plaintiff, briefed Streeter, as a director of the plaintiff, on the Nickel Project and the vending of the projects detailed in the Nickel Company Document. The plaintiff pleads that Brailey and Streeter agreed it was a great opportunity for the plaintiff and agreed to organise meetings with the Nickel Group and that Brailey and Streeter, on behalf of the plaintiff, met with representatives of the Nickel Group to discuss developing the Nickel Project and the plaintiff becoming the listed vehicle for that project. All of that is denied by the defendants. The defendants say that the representatives of the Nickel Group met with Streeter because he was an investor in the resources sector and had the financial capacity to contribute the seed capital sought by the Nickel Group. I am unable to determine that conflict. It is not appropriate to attempt to undertake any more detailed analysis of the merits of the plaintiff's case on this application. It is sufficient to say that there is nothing to suggest that the plaintiff's claim is not bona fide and to the extent that the court can make any assessment of the merits of its claim at this stage of the proceedings I am not persuaded that the plaintiff does not have reasonable prospects of success. That is not to say that I have formed a positive view that the plaintiff has a reasonably good prospect of success.
56 The defendants submit that they have not contributed to the plaintiff's impecuniosity. Whether the plaintiff's want of means has been brought about by any conduct of the defendants is a relevant consideration: Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542. The plaintiff's case is that the defendants caused it to lose a business opportunity. The plaintiff's case is not that it lost any assets or funds which it held or incurred any liability by reason of any conduct of the defendants. I am not satisfied that the plaintiff's present financial position has been relevantly brought about by any conduct of the defendants.
57 The plaintiff submits that the defendants have delayed in seeking security for costs. The action was commenced on 18 October 2006 but the defendants request for security was not made until 13 March 2008. The plaintiff submits that the late application combined with the defendants' delay in complying with court orders throughout the action is evidence of a desire on the part of the defendants to stifle the action. The defendants say that in about February 2008 Coopers advised his solicitor that the plaintiff had disposed of the balance of its shares in Western Areas NL on 24 and 27 August 2007. It was then that the defendants had
(Page 20)
- reason to believe that the plaintiff would be unable to pay the costs of the defendants if the defendants are successful in their defence.
58 An application for security for costs should be made promptly. In Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301, 309 Moffitt P said:
The right to seek security for costs and to stay proceedings, with the possible result that a claim for damages is frustrated, is a powerful weapon. Therefore, the litigant who seeks to use it against his opponent is at risk of not having it available, unless the application is made and persevered with in circumstances involving the least oppression of his opponent. The primary reasoning why the application should be brought promptly and pressed to determination promptly is that the company, which by assumption has financial problems, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it is allowed to or commits substantial sums of money toward litigating its claim.
59 The defendants say that they did not have reason to believe that the plaintiff would be unable to pay the costs of the defendants if the defendants are successful in their defence until Coopers advised his solicitor that the plaintiff had disposed of the balance of its shares in Western Areas NL on 24 and 27 August 2007. I do not accept that argument. The defendants knew, or ought to have known, in October 2006 that on 17 October 2006 the plaintiff's sole asset, other than what remained of the proceeds of the sale of 25,000 shares in September or October 2006, was its shares in Western Areas NL. The defendants knew, or ought to have known, at that time that that was the sole asset of the plaintiff from which it would have to meet all of its expenses, including the legal costs of these proceedings. Selling the shares merely converted the company's assets from one form to another.
60 The action is at an advanced stage. It is anticipated that it will be tried in early 2009. I infer that the plaintiff has incurred or committed a substantial amount on prosecuting this action. I would for that reason decline to order security for costs at this stage in the proceedings.
Amount of security
61 In case I am wrong in the findings I have made, I will briefly address the question of the amount of security that should be ordered, if, contrary to my decision, the plaintiff should be ordered to provide security for costs.
(Page 21)
62 The amount of security to be ordered is in the discretion of the court. In Gemelle Investments Pty Ltd v Federal Commissioner of Taxation (1982) 1 ACLC 470, 473 Anderson J said:
The appropriate order for security for costs is for an amount which may fairly be an approximation of what the party and party costs of the successful respondent would be if the respondent were successful.
63 The court does not have to abide by the defendants' estimates of their costs.
64 The defendants seek security in a sum to cover the costs of getting the case up to trial. The plaintiff did not oppose that course if the court determined to order that security be given. The defendants have estimated their costs up to entry for trial to be $321,329. The plaintiff submits that the costs set out in the defendants' draft bill of costs are excessive and unreasonable and has provided a critique of many items in the defendants' draft bill. Counsel for the defendants conceded that some of the items included in the draft bill of costs could not be substantiated and others were broad estimates. Having regard to the matters raised by the plaintiff I consider that if the plaintiff was ordered to give security for costs the appropriate amount of security is $200,000.
Conclusion
65 The defendants' application for security for costs is dismissed.
5
11
1