Water Treatment Products Limited (in liq) v Falloon HC Tauranga CIV-2010-470-625

[2011] NZHC 1297

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2010-470-625

UNDER  The Companies Act 1993

BETWEEN  WATER TREATMENT PRODUCTS LIMITED (IN LIQUIDATION) Plaintiff

ANDMURRAY JAMES FALLOON Defendant

Hearing:         11 October 2011

Appearances: Mr G Brittain for applicant

Ms K Towt for respondent

Judgment:      21 October 2011 at 11:00 AM

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

21.10.11 at 11 a.m., pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:

Mr G Brittain, P O box 13-473, Tauranga – by email:  [email protected]

Dennis King Law, P O box 1092, New Plymouth – by email:  [email protected]

WATER TREATMENT PRODUCTS LIMITED (IN LIQUIDATION) V FALLOON HC TAU CIV-2010-470-625

21 October 2011

Background

[1]      The plaintiff company, Water Treatments Products Litd (in liq) (―WTP‖) was brought into existence in 2003.  The primary purpose of the company was to develop for the market a type of water filtration technique based upon a technology which involved passing water through a magnetic field to remove metallic particles from it. The  technology  was  the  brainchild  of  Mr  Birchall.    One  of  the  other  main protagonists was a Mr Falloon, an accountant.  Mr Falloon took part in the creation of the plaintiff and subsequent direction of it, as well as providing capital to the company.  Both Mr Birchall and Mr Falloon became directors of the company.  The other directors were Messrs Bracks and Barnfield.   Mr Barnfield appears to have been relatively inactive.  It will be necessary to make reference to these and other persons further on in this judgment.

[2]      While the company was initially incorporated for the purpose of exploiting the ―magnetic circle‖ water filtration technology, in May 2004, it went into the business of well-drilling.   Equipment was purchased and an employee, Mr Nigel Clements, retained operation of the drilling rig together with an assistant.   The purchase of the equipment cost $100,000 which was financed by a loan from UDC Finance of $85,000 and Mr Falloon‘s advance of $15,000.  The business commenced operation in July 2004.

[3]      By the time that the point was reached where the company embarked upon the well-drilling enterprise,  it  had  sold three installations  of the water filtration technology but the cashflow of the company was negative.   There are various accounts given by different persons of how much cash was being used up with one estimate, that of Mr Bracks, being $5,000 per week.   It appears to have been understood by the directors of the company and reflected in the company‘s business plan that the development of the water filtration technology would be a long-term development exercise which would consume quite a lot of capital before profits began to be earned.  However, not all the directors were happy about the foray into well-drilling.

[4]      In  September  2004,  Mr  Birchall  advanced  the  sum  of  $70,000  into  the company by way of a capital contribution.  This was a response to the steady erosion of the company‘s capital.  During the same financial year, Mr Falloon advanced a further $37,000 and Mr Bracks $10,000 to the company.

[5]      The well-drilling business did not appear to be profitable.  One of the main problems, at least on the view of one side of the dispute that developed later, was that Mr Clements, the operator of the well-drilling rig, was not able to perform his functions and there were resulting well failures.   As well, there were tensions developing between Mr Bracks and Mr Birchall which, while stated to be about operational and strategic difficulties, also appeared to have had a personal element. In September 2004, there was a directors‘ meeting.   The main agenda item which was raised by Mr Bracks was the question of why the company had gone into well- drilling.   Mr Bracks was apparently of the view that he had not been properly consulted and that Mr Falloon had been keen on going into the well-drilling business but that it was a disaster.

[6]      In the last quarter of 2004, Mr Falloon‘s view seems to have been that, notwithstanding the difficulties encountered with the well-drilling position and the problems arising from uncompleted work, the position could be retrieved by making arrangements for another well-driller to complete the partially finished work and, having completed the work, profits would then be available.   In October 2004, Drilling Fluid Equipment Ltd (―DFE‖) contracted with the plaintiff to provide the services of a Mr Jamie Thomas, who was regarded as a competent and experienced well-driller  to  finish  off  the  work  with  some  wells  in  the  Bay  of  Plenty  area. However, this arrangement did not last long.   DFE abandoned a partly completed well at Paengaroa in December 2004.  This was because of a claim that it had not been paid what was owing it.   That particular well collapsed, leading to further problems.   The amount of DFE‘s claim from WTP for the period October to December 2004 was $41,807.05.

[7]      In December 2004, a further entity associated with some of the directors of the plaintiff was set up.  This was Borewell Services Ltd.  Borewell was to acquire the well-drilling assets that WTP owned.  This transaction was for a total of about

$150,000 with part of the consideration being met by Borewell taking over the

$85,000 loan mentioned above that had been obtained from UDC Finance to acquire the well-drilling equipment.  As well, the plaintiff took back a debt of about $60,000.

[8]      By this time, Mr Bracks had departed (in October 2004) because of his serious concerns about the financial position of the plaintiff and his belief that the plaintiff had lost its way.

[9]      In January 2005, the Paengaroa well which had been abandoned by DFE was completed.   However, early in 2005 it became apparent to the directors that the company would have to cease trading.  Part of the problem had been that there was no improvement in the cashflow from the magnetic circle filtration business.  The water filtration equipment that the plaintiff owned was sold to a new company, Technical Water Systems Ltd, for about $48,000 which was paid in cash of about

$40,000 in cash and the remainder by taking over a debt of about $8,000 owed by the plaintiff.

[10]     The company was placed in liquidation on 11 September 2006 and was subsequently struck off.

[11]     In December 2005, DFE, still claiming to be owed money for the well- drilling work it carried out for the company, issued proceedings against the plaintiff and Mr Falloon.   Mr Falloon was alleged to be a guarantor of the debt that the plaintiff incurred with DFE.

[12]     Mr  Falloon  estimates  that  during  the  period  when  the  company  was operative, he spent about 30% of his working time on that company's business but drew no salary from it.

[13]     In April 2007, Mr Falloon successfully applied for summary judgment on those proceedings that had been issued against him and during the defended hearing, DFE elected to discontinue its claim against Mr Falloon and agreed to pay costs of

$11,078.

[14]     On 30 May 2007, Mr Falloon served a statutory demand on DFE to recover the costs that had been awarded in his favour in respect of the District Court proceedings.  DFE applied to set aside the statutory demand in August 2008 and also stated that it considered it would have a claim against  Mr Falloon for reckless trading of the plaintiff.   Still, further proceedings were launched.   In September

2008, DFE applied for the reinstatement of the plaintiff company which had by then been struck off and an order was made to that effect by Dobson J.

[15]     Later,  on  27  March  2009,  DFE‘s  application  to  set  aside  Mr  Falloon‘s statutory demand was declined.   DFE became indebted to Mr Falloon for an additional costs order for those proceedings.  DFE paid the costs awards.

[16]     Then, following the reinstatement of the company, the current liquidators were appointed and they filed their first report on 29 January 2009.  In July 2010, the plaintiff filed the current proceeding.

[17]     One matter that was raised at the hearing before me which can be dealt with at this point concerns the matter of who is funding the current proceedings.   Ms Towt for WTP told me that the source of funding is not DFE, as Mr Brittain for Mr Falloon had submitted, but was in fact the Official Assignee as custodian of the liquidation recovery fund.  I was told that these are public monies which are made available on a discretionary basis to pursue proceedings in cases where companies in liquidation do not have the necessary resources to do so themselves.   I appreciate that no evidence has been provided that this is the case, but given that this is a matter that  is  squarely  within  counsel‘s  knowledge  and  given  Ms  Towt‘s  unequivocal advice to me that such is the case, I accept that the litigation is being funded out of that fund.  I record that Mr Brittain was not happy with the matters being left on that basis.   No doubt reflecting his client‘s scepticism about everything to do with the plaintiff, he made vigorous submissions about the inexplicability of reasons why, on an application for security for costs, the matter of who was funding the litigation had not been dealt with in affidavits filed by the plaintiff.

[18]     The  importance  of  the  issue  of  funding  will  be  explained  later  in  this judgment.

Security for costs principles

[19]     I accept that the following statements of principles, which are quoted from the submissions of Mr Brittain, are correct and should guide the Court when determining the present application:

22.The  court  has  a  broad  discretion  to  order  security,  requiring  a  careful assessment of the circumstances of the particular case.

23.The court must balance the plaintiff‘s interest in pursuing the claim  against the defendant‘s interest in being ―protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted‖.1

24.      The court will endeavour to assess the merits.

25.If the defendant‘s actions have caused the plaintiff‘s impecuniosity,   that may be taken into account. There must be something more than an assertion that the defendant‘s conduct has caused the plaintiff some impecuniosity. At least, there must be a ―reasonable probability‖ established by persuasive evidence.2    There is an element of circularity with this factor, which is a feature of most security for costs applications, and not in itself a reason to refuse an application.

26.      In Birnie Capital Property, Asher J said:3

Also, it is relevant to discern whether when, if an order is  made, there are parties or funds available to meet it.   Will an order for security and an order for stay until the security is provided mean that the plaintiff cannot proceed and the case will fail?  This will be the case if there are no funds of the plaintiff, and no access to funds of those who support the plaintiff.   Or is there a third party who stands to benefit from the litigation and has funds which could be used to pay security?  There is a well established line of authority where the Courts have ordered security be paid by impecunious companies knowing that those who have an interest in the company will meet the order.  The Court is able to look behind the resources of the plaintiff company itself, and consider who is behind the litigation and who is funding it, to gain an accurate commercial assessment of who might meet a security for costs order.

27.Historically, there was a reluctance to order security in cases brought   by liquidators.  That reluctance has softened in recent years.  For example, in [Cory-Wright & Salmon Ltd (in rec and liq) v KPMG Peat Marwick (No 7)], Gallen J, ordered costs against the official liquidator, holding that:4

1      McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [16].

2      Birnie Capital Property Partnership Ltd v Birnie HC Auckland CIV-2010-404-3000, 29 October

2010 at [51].

3 Ibid, at [28].

4      Cory-Wright and Salmon Ltd (in rec and in liq) v KPMG Peat Marwick [1993] 2 NZLR 701

Because, effectively, one set of parties is represented by the Official Liquidator, they are not at this stage at risk for costs whereas the defendants, a number of whom are private citizens, are at risk and at present, even if successful, have no assurance of recovering the amounts they are obliged to outlay.  Under those circumstances it seems to me that this is an appropriate case to order security for costs and I propose to do so.

28.Security  can  be  ordered  against  a  company  in  liquidation  (c.f.  the liquidators).

29.The court cannot compel the liquidators to disclose the source of litigation funding.  However, if the liquidators elect not to provide that information, then the court may draw an inference about the arrangements that are in place.

[20]     The following are the main issues that arise from application of the above statements of principles to this case.   First, the Court is required to undertake an assessment of the merits of the claimant‘s case if that is possible: McLachlan Ltd v MEL Network Ltd.5     Second, it can be an important discretionary element on an application  for  summary  judgment  to  have  regard  to  whether  persons  standing behind a company in liquidation should be required, in a case where the company itself has no funds, to make a contribution in the form of providing security for costs. A further issue is that the Court should be reluctant to order security where the

company‘s impecuniosity was caused by the actions of the applicant for security for costs.

Merits of the claim

[21]     The plaintiff advances two different causes of action pursuant to ss 135 and

136 of the Companies Act 1993.  Those causes of action are concerned with reckless trading and duty in relation to obligations, respectively.  Those sections provide as follows:

135     Reckless trading

A director of a company must not—

(HC) at 707.

5      McLachlan Ltd, above n 1.

(a)       agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company‘s creditors; or

(b)       cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company‘s creditors.

136     Duty in relation to obligations

A director of a company must not agree to the company incurring an obligation  unless  the  director  believes  at  that  time  on  reasonable grounds that the company will be able to perform the obligation when it is required to do so.

[22]     The details of the claims are discussed further on in this judgment.

[23]     At the outset, Ms Towt in her careful submissions made reference to the fact that on two previous occasions, Judges had considered the circumstances of the plaintiff‘s claim.   Ms Towt said that the outcome of both of those cases indicated that the Judges had confidence that the proceedings were of substance.  She said that Dobson J, when considering the reinstatement of the company, and Abbott AJ, when considering the application to set aside the statutory demand, had both taken the view  that  there  was  a  substantial  case  for  the  defendant  to  answer.     That consideration, she submitted, should be influential in my decision.

[24]     I do not accept that submission.  Without in any way doubting the correctness of the decisions made by the two Judges in the cases mentioned, I have no way of knowing what submissions were made to them, and what grounds they relied on in coming to their decisions.  Further, the decision that Dobson J made to reinstate the company was made in quite a different context where the merits of the case may have  been  given  only  passing  consideration.    As  I  see  it,  my  obligation  is  to undertake my own assessment of the merits of the case which I will now briefly attempt to do.

[25]     I will turn first to the plaintiff‘s claim under s 135 of the Companies Act

1993.  The plaintiff alleges that Mr Falloon, at the helm of the plaintiff from October

2003 until it went into liquidation, was a major shareholder of WTP and effectively functioned as the managing director of that company.  He was responsible, it is said,

for managing the  administration  and  legal  affairs  and  the financing side of the company‘s operation and it is also clear that he was influential in making the critical decision (as the plaintiff characterised it) of the company‘s commencement of work in the well-drilling business.

[26]     Ms Towt referred me to the authority of Mason v Lewis6 where the Court said that directors must carefully consider:7

… whether continuing to trade has realistic prospects of generating cash that will service both pre-existing debt and meet the commitments that such trading inevitably attracts.

[27]     She said in her submissions that:

39Any sober assessment of risk in this case necessarily involved consideration of the following facts:

39.1     a consistently high cash burn rate

39.2the necessity of purchasing a truck, well drilling rig, and its accessories at approximately $130,000

39.3     the need to hire additional staff

39.4     the well documented struggles between staff and directors

39.5the  numerous  warnings  Bracks  gave  Falloon  about  the future     of the company between October 2003 and his resignation in October 2004[; and]

39.6the cost of rectifying mistakes that had already been made with the well drilling side of the business.

40.There is no evidence that any such ‗sober‘ assessment took  place and  in those circumstances, it cannot be accepted that the decision to start well drilling, and later to continue trading beyond September

2004 amounted to a legitimate risk that was objectively reasonable.

41.Nor  can  it  be  accepted  that  there  were  reasonable  grounds  in October  2004 for Falloon to believe that the shareholders would be prepared to advance WTP even further monies which is the required test under [Re Condrens Parking Ltd (in rec and liq)].8

6      Mason v Lewis [2006] 3 NZLR 225 (CA).

7 Ibid, at [50].

8      Re Condrens Parking Ltd (in rec and liq) HC Wellington CIV-2004-485-2611, 13 May 2008 at

[59].

[28]     Mr Brittain on the other hand submitted that the fact that WTP encountered financial difficulties during 2004 does not mean it is axiomatic that the plaintiff traded recklessly.   In his submission, he agreed that the directors were required to carry out a ―sober assessment‖ and he noted that:

Reckless trading will typically be upheld where a company operates at a loss for an extended period, or after disclosure of a large debt which makes the company hopelessly insolvent.

[29]     But Mr Brittain also submitted:

35.       As the learned authors of Brookers Company Law opine:9

Therefore, it is thought that s 135 should not operate to require  directors  to  shut  down  the  operation  of  their company   immediately   on   the   first   sign   of   financial problems.

…

36.WTP ceased  trading in January 2005,  so  if a  claim of  reckless trading  is going to succeed, it must be for the period from 1 April

2004 until 31 December 2004.

[30]     Mr Brittain also made submissions on the alternative basis for the plaintiff‘s claim under s 136 of the Companies Act which involves incurring an obligation without a reasonably held belief that the company will be able to perform it.  In the context of this case, such an allegation requires the plaintiff to prove that the plaintiff‘s directors, at the point they permitted or caused the company to assume the liabilities that it did, did so without a reasonably held belief that the company would be able to pay the money back.

[31]     I agree with Mr Brittain that analysis of the cause of action under s 136 involves an enquiry into whether the director genuinely held the belief (a subjective element), and whether it was held on reasonable grounds (an objective element).  He also said that the belief in the company‘s ability to perform the obligation could be

based on funding from outside sources.

9      Brookers Insolvency Law & Practice Companies Act 1993 (online ed) at [CA301.07(3)(b)]

Decision

[32]     I shall now set out my conclusions.

Merits of case

[33]     The central  factual  issue is  whether the directors,  including  Mr  Falloon, permitted the company to continue trading at a time when it was unable to pay its debts.  As Mr Brittain submitted, the critical period that will need to be examined at trial is the last financial year of the company‘s life, the 2005 financial year.

[34]     Even if it can be assumed that the company was solvent at the beginning of that year, it is accepted that it was not at the end of the year, when an unopposed court ordered liquidation of the company took place.  At some point in that year, the position was reached where the finances of the company were plainly insufficient for the company‘s purposes.  As to the last point, it is to be noted that there is evidence that the company was burning cash at the rate of several thousand dollars per week throughout most of the financial year.  The best estimate I can make is that the cash outflow was in the vicinity of $3,000–$4,000 per week.

[35]     The negative earnings  position  of the company that  caused that  state  of affairs was inherent in the nature of the business which it had gone into when it started life.  It was a company formed to develop, exploit and market Mr Birchall‘s invention of a system of magnetic water filtration.  This was a new technology and one  which  had  not  been  deployed  in  the  industries  which  the  directors  of  the company targeted for sales.   Those industries were, broadly, the agriculture and horticulture industries.  I accept that the directors of such a company had to expect that during the development phase, the company was unlikely to earn profits.  That is inherent in the marketing of a new type of process which will consume resources for research and development and which does not have a ready-made market.   While that may explain why the financial profile of this company showed a steady outflow of capital which continued into the 2005 financial year, it is important to keep in mind that there are no special rules for companies engaged in ―start-up‖-type enterprises.   The directors must still be prudent and be alive to the interests of creditors.

[36]     As the company went  on to the 2005 financial  year, installations of the magnetic circle had been sold to three sites only.   No sales occurred after 1 April

2004.  This was obviously of concern to some of the directors.

[37]     In  particular,  Mr  Bracks  became  increasingly  apprehensive  about  the financial risks throughout 2004, leading up to his resignation as a director following a crucial directors‘ meeting in September of that year.

[38]     The first matter to be briefly examined is the broad position of the company as at the commencement of that year, in April 2004.

[39]     This needs to be looked at in the light of what a reasonable director might have thought was necessary to have on hand to continue trading through the rest of the year.

[40]     There are limits to how complete a picture can be obtained from the material which has been produced in the context of an application for security for costs.  It must be said though that such material as is before the Court arguably shows that a prudent director would have taken the view at the end of financial year 2004 that all was not well.  While the company made a gross profit of $73,098 for that financial year, after overhead expenses were included, that became a loss of approximately

$93,000.  As at the end of the 2004 financial year, the accounts showed an excess of current assets over liabilities of $89,045.  At that point it was a fair inference that the company was able to pay its current creditors.

[41]     However, the balance sheet overall was perhaps less encouraging.  While it showed net assets of $322,249, this included goodwill and patents valued at about

$245,000.  It is not clear how the value of the goodwill which was included in this figure (around $236,000) was calculated.

[42]     To summarise, the plaintiff can point to the following matters in support of its case, which is essentially that the directors behaved recklessly.  The company was losing money.  While it is the case that the company could expect to go through a lean period before it began recovering on its investment, that state of affairs could

not be allowed to continue to the point where the company‘s capital was exhausted. There were no tangible prospects of any additional sales of magnetic circle filtration systems  on  the  horizon  throughout  calendar  year  2004.    Further,  at  a  time  of financial vulnerability, the directors elected to steer the company into the well- drilling business from which it was hoped that profits would be earned.   The collective personnel of the company did not apparently include anyone who had expertise in, and a track record of operating, businesses in the well-drilling industry, although Mr Falloon said that Mr Birchall had some experience in that industry.

[43]     The vulnerability of the company is underlined by the fact that it did not take a lot to bring the company to its knees eventually.   The immediate cause of the company‘s  failure  was  the  unfortunate  appointment  of  a  person  to  manage  the drilling rig who was apparently not competent or effective.   It is not necessary to express a firm view on the merits of that employee and it would be unfair to do so given the limited information which is before the Court.   But there is sufficient substance   to   the   plaintiff‘s   complaints   that   they   cannot   be   disregarded   as insubstantial or completely unjustified in the context of the present application.

[44]     In order to salvage the position, it was necessary to retain on contract the services of an experienced well-driller at a cost which the company could not afford. Not only did the company have its own well-drilling machinery and staff which it had to pay for, but an added layer of expense was introduced when it became necessary to retain the DFE.

[45]     Even if the conclusion about the employee was wrong, there is no doubt that the well-drilling venture was disastrous.   There are also substantial grounds to suppose that, because of the make-up of the personnel of the company, the well- drilling business was one that the company ought never have gone into.

[46]     Further, it is at least arguable that the rationale for going into the well-drilling business was not clearly analysed.  One view that could be taken of the facts is that those who advocated the acquisition of the business saw the possible profits to be generated from such a business as setting off the losses accruing from the core

business of water filtration.  That is, this was a decision that was more explicable by mounting anxiety about the company‘s losses than by sound analysis.

[47]     I do not overlook that Mr Brittain placed strong emphasis on the fact that those standing behind the company had been prepared to introduce further capital.  I agree that there had been a pattern in the past of some of the directors, including Mr Falloon, injecting further capital as the company required it.   I would not take a further step and accept that it is self-evident that the directors would again intervene on this occasion and shore up the company if insolvency threatened.

[48]     My assessment on the merits of the case is that the plaintiff has a reasonably arguable case.  While it may be argued that as at the beginning of the financial year ended 2005 the plaintiff was not insolvent, it was sailing close to the wind.   The sales of magnetic circle systems had not progressed beyond the original three.  No such sales were made during the financial year to which I am now making reference.

Other considerations

[49]     I also accept, though, the criticism that Mr Brittain made of the way in which the plaintiff has prosecuted its claim.  More accurately, the criticism concerned the way in which DFE has gone about trying to recover the amount that was owed to it. There has been a number of proceedings issued, all of which have been unsuccessful. These included a claim that Mr Falloon guaranteed the debt of the company.  As I have noted, that claim was withdrawn, as was a statutory demand that DFE later served.   Next, DFE arranged for the company to be resurrected and for the appointment of fresh liquidators in order to pursue Mr Falloon.  The way in which the claim has been prosecuted does not instil confidence that the present proceedings will be managed in a businesslike and expeditious way.  That is a factor that may influence whether it is reasonable for an order for security for costs to be declined lest the plaintiffs be constrained to give up their claim.

[50]     The next question is whether the plaintiff is likely to be able to meet an order for costs.   There is a complete absence of evidence on this point.   I do not know whether  the liquidation  fund out  of  which  the  plaintiff‘s proceedings  are being

resourced would extend to making payment for security for costs, whether such payment is permissible, whether the costs will only be payable at the discretion of the guardians of the fund, and the extent of any contribution to costs that might be forthcoming.

[51]     I next consider whether the plaintiff could succeed in its contention that the impecuniosity of the company was caused by Mr Falloon.  This overlaps with the issue of whether there is a case that the directors, including Mr Falloon, in carrying on the company‘s business in circumstances where it was arguably insolvent, were the cause of the company‘s failure.  This factor must be established, as Mr Brittain submitted, as a reasonable probability.

[52]     There is no doubt that if the directors were in breach of their duty, then Mr Falloon must be treated as one of the responsible directors who is liable.   As Mr Brittain also submitted, the fact that the company failed does not in itself mean that the directors, or any of them, were negligent.

[53]     My assessment is that in this case there are indications that the directors were negligent.    The  respondent  does  not,  of  course,  have  to  prove  that  they  were negligent.   Nor do the applicants have to establish that they were not negligent. Given the rapid descent of the company into insolvency, the shortage of capital at a time when the company was already coping with one struggling business, and the concurrent decision to go into yet another business, it would seem that the actions of the directors were not prudent.  Not only were the financial resources scarce, but it seems further open to suggestion that the direction and management of the company was placing demands on the directors which they were having difficulty meeting even before the advent of the well-drilling business.  I consider that the plaintiff can reasonably claim that its impecuniosity was due to the directors‘ acts and omissions, and Mr Falloon as one of the directors is answerable.

[54]     If an order for security for costs is directed, the plaintiff may not be able to proceed with its claim.  However, because of the sparseness of information about the funding of the application, it is difficult to be sure.  Clearly it is within the plaintiff's knowledge what the factual position is.  There is no basis upon which the Court is

able to conclude that the fund which is financing the claim would also agree to stand behind any costs order.  Given that decisions to fund litigation are discretionary it would seem to be the case that, at its highest, the fund may also have a discretion to pay costs to an unsuccessful litigant without being under any obligation to do so. In summary, the presence in the background of the litigation fund is not a reason to be reassured that any costs orders will be met is not for the defendant to speculate about whether a costs order would be paid.

Conclusion

[55]     I now come to a consideration of the way in which the discretion under the rules should be exercised in this case.  The following matters are persuasive in my view:

a)        the plaintiff has a reasonably arguable case;

b)that being the case, the defendant cannot say that it is being subjected to speculative litigation which may result in it incurring costs for which it has no recourse;

c)       on the other hand, prosecution of the claim by DFE and the plaintiffs, viewed collectively, has been unsatisfactory and dilatory; the matters which are the subject of this litigation occurred some six or seven years ago; and as the claims are not complex, those delays have not been justified.  This does not bode well for the future direction of the litigation,  although  I acknowledge that  one  would  expect  that  the liquidators would adopt a more professional approach in bringing the claim before the Court; and

d)on balance, the conduct of those behind the litigation has been unsatisfactory and an order for costs would be justified to protect the defendant from further protracted litigation in circumstances where there is no certainty of a costs order being paid.

[56]     One final matter which I mention is that those who would ultimately benefit from a successful outcome to the litigation may well be able to make a contribution to any security order.

[57]     Turning to the matter of quantum, my judgment is that a proper balance between the positions of the parties would be struck by making a modest order for security and I direct that the plaintiffs are to pay the sum of $33,000 in three tranches of $11,000, each tranche payable at monthly intervals with the first tranche being required one month from the date of this judgment.  Security is to be provided in the form of cash which is to be held on interest-bearing deposit by the Registrar until required for the purposes of meeting any order for costs that might be made at the conclusion of the substantive proceedings.  The proceeding is to be subject to a stay order in the event that any tranche of the security is not paid as and when it is required.

[58]     The  applicant  as  the  successful  party  is  to  have  costs  on  the  present application.

J.P. Doogue

Associate Judge