FEDERAL COURT OF AUSTRALIA Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Oswal (No 3) [2011] FCA 1502 Citation: Burrup Fertilisers Pty Ltd (Receivers and Managers Appointed) v Oswal (No 3) [2011] FCA 1502 Parties: BURRUP FERTILISERS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) v PANKAJ OSWAL, RADHIKA OSWAL, COMICAL ALI MILITANT VEGETARIAN PTY LTD and OSWAL INDUSTRIAL PTY LTD (ACN 121 121 659) File number: WAD 66 of 2011 Judge: MCKERRACHER J Date of judgment: 22 December 2011 Catchwords: COSTS – security for costs – considerations relevant to the Court's discretionary power to order payment of security for costs – respondent outside the Court's jurisdiction – no evidence that the respondent intends to return to Australia – respondent's cross-claim seeking large amount – where the cross-claim is a claim in itself – whether a cross-claim is purely defensive – apparent strength and bona fides of the cross-claim – quantum – Federal Court of Australia Act 1976 (Cth) s 56 – Federal Court Rules 2011 r 19.01 – jurisdiction to order security – Federal Court of Australia Act 1976 (Cth) s 57 – Federal Court Rules 2011 r 19 Legislation: Evidence Act 1995 (Cth) s 69 Corporations Act 2001 (Cth) s 1318 Federal Court of Australia Act 1976 (Cth) s 56 Federal Court Rules 2011 r 19.01 Cases cited: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 Molony v ACN 009 697 367 Pty Ltd [2004] QCA 151 National Biofuels Group Pty Ltd v Elbow River Marketing Ltd [2009] FCA 613 NV Sumatra Tobacco Trading Company v British American Tobacco Australia Services Ltd (2008) 79 IPR 286 PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642 Date of hearing: 28 November 2011 Place: Perth Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 35 Counsel for the Applicant: K de Kerloy with S Dundas Solicitor for the Applicant: Freehills Counsel for the First Respondent: PW Collinson SC with JM Ross Solicitor for the First Respondent: Murcia Pestell Hillard Counsel for the Second and Third Respondents: P Durack SC with KJ Williams Solicitor for the Second and Third Respondents: Jones Day Counsel for the Fourth Respondent: The Fourth Respondent did not appear IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 66 of 2011 BETWEEN: BURRUP FERTILISERS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) Applicant AND: PANKAJ OSWAL First Respondent RADHIKA OSWAL Second Respondent COMICAL ALI MILITANT VEGETARIAN PTY LTD Third Respondent OSWAL INDUSTRIAL PTY LTD (ACN 121 121 659) Fourth Respondent JUDGE: MCKERRACHER J DATE OF ORDER: 22 DECEMBER 2011 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The applicant do draw up a minute to reflect the conclusions in these reasons. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION WAD 66 of 2011 BETWEEN: BURRUP FERTILISERS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) Applicant AND: PANKAJ OSWAL First Respondent RADHIKA OSWAL Second Respondent COMICAL ALI MILITANT VEGETARIAN PTY LTD Third Respondent OSWAL INDUSTRIAL PTY LTD (ACN 121 121 659) Fourth Respondent JUDGE: MCKERRACHER J DATE: 22 DECEMBER 2011 PLACE: PERTH REASONS FOR JUDGMENT INTRODUCTION 1 The applicant (BFPL) seeks security for costs in the amount of $1,144,683.31 from the first respondent (Mr Oswal) in respect of his cross-claim. The application is brought pursuant to r 19.01 of the Federal Court Rules 2011 (the Rules). Associated orders staying Mr Oswal's cross-claim until that security is given and dismissal of it if security is not given are also sought. THE cross-CLAIM 2 BFPL seeks recovery of amounts in excess of $200 million from the respondents. 3 Those claims are defended but Mr Oswal advances a much larger cross-claim. In addition to previous non-admissions by Mr Oswal that he caused BFPL to make the various payments pleaded, he now pleads that if any payments were made as alleged, such payments were properly made in partial satisfaction of one or more debts to him. It is pleaded that insofar as any alleged payment is found to have been made, such payment was in partial satisfaction of principle and/or interest on the debt arising out of an oral agreement between Mr Oswal and BFPL pursuant to which Mr Oswal agreed to pay or cause entities associated with him to pay, on behalf of BFPL, 'costs overruns' associated with the construction of the anhydrous ammonia plant located on the Burrup Peninsula (the Plant). Mr Oswal says that BFPL orally agreed to repay those costs overruns to Mr Oswal or at the direction of Mr Oswal together with interest (the Costs Overruns Agreement). The Costs Overruns Agreement is the basis of the cross-claim advanced by Mr Oswal as well as being part of his defence to BFPL's claim. 4 The particulars of the Costs Overruns Agreement are as follows: PARTICULARS The Costs Overruns Agreement was oral and consisted of conversations between Vikas Rambal on behalf of BFPL and [Mr Oswal], on behalf of BFPL and on his own behalf, on the dates, and in the substance, set out below: (i) In or about June or July 2001, Mr Vikras Rambal asked Mr Oswal whether he would be willing to enter into an agreement with BFPL to provide a guarantee and indemnity on behalf of BFPL, in consideration for which BFPL would pay Mr Oswal all sums paid by him pursuant to any such agreement payable when the Plant had commenced production and was generating a profit. (ii) In our about June or July 2001, Mr Oswal stated to Mr Rambal that he would agree to provide a guarantee and indemnity on the condition that BFPL would pay to him all amounts paid by him, or by entities associated with him on his behalf, for the benefit of BFPL. (iii) [deleted] (iv) Between in or around June 2004 and in or around November 2006, Mr Oswal: A. paid approximately US$343,000,000.00 at the request of, and for the benefit of, BFPL for the purpose of funding cost overruns associated with construction of the Plant; and B. caused companies associated with him to pay a further US$148,000,000.00 at the request of, and for the benefit of, BFPL, for the purpose of funding cost overruns associated with construction of the Plant. (Cost Overruns Payments) (v) The Cost Overruns Payments were made following a series of requests by Vikas Rambal on behalf of BFPL during discussions with Mr Oswal. 5 Mr Oswal pleads an estoppel against BFPL relying on essentially the same particulars. 6 Under the costs overruns claim, inclusive of interest, the cross-claim by Mr Oswal against BFPL exceeds USD490 million. RELEVANT PROVISIONS UNDER THE RULES AND STATUTE 7 Rule 19 of the Rules provides as follows: PART 19 SECURITY FOR COSTS 19.01 Application for an order for security for costs (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought. 19.02 Matters to be addressed by the respondent The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. 8 Further, the Court has power to order an applicant in a proceeding (or a cross-claimant), in the appropriate circumstance, to pay security for costs pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) (the Act). Section 56 of the Act provides as follows: 56 Security (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security. 9 Although 'applicant' is not defined in the Act, it is well established that it refers to the party which occupies the position of the aggressor or plaintiff in the proceeding. That is so regardless of who commences the proceeding. CONSIDERATION 10 The power to order security for costs is a discretionary power which should not be exercised with any predisposition in favour of the award of security (Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 (at 511)). 11 Mr Oswal opposes the giving of any security for costs in respect of the cross-claim on the basis that the cross-claim should properly be regarded as a defensive proceeding in which case it is submitted that the Court cannot or ought not order security for costs. Secondly, it is said that Mr Oswal's defence and cross-claim raise substantially the same issues for determination. If security for costs were ordered and the cross-claim stayed, the Court would still have to decide the issues the subject of the cross-claim. Thirdly, security is opposed on the basis that while the fact that Mr Oswal residing overseas enlivens the Court's jurisdiction, taken alone, it is not sufficient a ground to make an order. Fourthly, it is said that it is not appropriate for the Court to conduct a detailed examination of the merits of the cross-claim in the circumstances, and the Court ought to infer that the cross-claim is made bona fide with reasonable prospects of success. The cross-claim is not purely defensive 12 The first two points advanced by Mr Oswal may be considered together. Mr Oswal contends that the claim can be characterised as defensive because it raises substantially the same issues for determination as the defence pleaded in relation to the Costs Overruns Agreement. He contends that properly characterised, those issues are linked to and directly resist BFPL's claims that Mr Oswal breached his duties to the company by causing it to make payments to him for his benefit or the benefit of persons associated with him. In particular, Mr Oswal alleges that an overlap arises in the following ways: (a) that if any of the payments were made, they were made to discharge the debt owed by BFPL to him pursuant to the Costs Overruns Agreement such that BFPL suffered no loss; (b) that the Board of BFPL was aware of the Costs Overruns Agreement. Therefore, consent may be defence to a claim for breach of director's duties; and (c) that if he breached his duties, he is entitled to be excused for those breaches under s 1318 of the Corporations Act 2001 (Cth) (CA) by reason of the Costs Overruns Agreement and the surrounding circumstances. 13 While it is self-evident that the cross-claim raises the same matters as the defence, that is not sufficient a basis in the present circumstances to conclude that it is purely defensive in nature. In my view, while Mr Oswal's cross-claim may be partially defensive, it cannot, on balance, be described as a totally defensive claim in circumstances where it introduces matters which were entirely extraneous to the issues on which BFPL's claim is advanced and, in particular, relies upon an alleged oral agreement constituted at a much earlier time and in different circumstances from those raised on the statement of claim. It follows that the cross-claim will require reference to entirely different factual material in order to substantiate it. 14 Given that the amount sought by Mr Oswal far exceeds the claim made by BFPL, this is a further factor to take into account in deciding whether the cross-claim is purely defensive or amounts to a claim in its own right. There can be no suggestion that if Mr Oswal were to succeed, he would not willingly take the benefit of the difference of some $290 million. This is not a case where the cross-claim exceeds the claim by a small amount. The cross-claim is for a very substantial amount, albeit that the factual foundation for it is pleaded in the most minimalist detail. While I accept that there are some defensive characteristics of the cross-claim, a substantial portion of it is pursued by way of a claim substantially greater than the statement of claim and independently of it. It seems to me, therefore, that the arguments that the cross-claim is defensive are not strong. Ordinarily resident outside of and assets within the jurisdiction 15 Mr Oswal argues that the fact that he is a resident outside the jurisdiction does no more than enliven the Court's jurisdiction to order security for costs. He argues that it is not sufficient a ground for making an order. He contends that the same principle applies to the fact that Mr Oswal does not have assets within the jurisdiction capable of satisfying an adverse costs order and submits that it is 'not a decisive consideration' in considering an application for security for costs. Again, Mr Oswal argues that in exercise of a discretion to award security for costs it is clear that these considerations must give way where the party's claim is defensive. 16 The fact that Mr Oswal is outside of the jurisdiction without unencumbered assets within the jurisdiction is but one factor to consider. On the latter point, there is evidence that the Australian and New Zealand Banking Group Limited (ANZ) have called upon a personal guarantee granted by Mr Oswal in the amount of USD372,196,275 said to be due and owing in respect of Maruti Investments Limited, and USD157 million due and owing in respect of the Burrup Trust. The demands under these guarantees remain entirely unmet. 17 Mr Oswal was also ordered to pay security for costs in respect of proceedings in the Victorian Supreme Court of $150,000 by 7 September 2011 and $120,000 within 21 days of the date of the proceeding being set down for trial. None of those amounts was paid. There is some suggestion that this was because the Victorian Supreme Court proceedings were transferred to this Court. 18 There is no evidence to suggest that Mr Oswal, now apparently residing in Dubai, has any intention of returning to Australia. In the circumstances of this case, in my view, where the departure was linked in time with litigation which is now before the Court, the fact that Mr Oswal is a resident outside the jurisdiction without unencumbered assets within the jurisdiction is a circumstance of significant weight. This has been so for a long time in Australia: PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642 per McHugh J (at 643) and NV Sumatra Tobacco Trading Company v British American Tobacco Australia Services Ltd (2008) 79 IPR 286 per Greenwood J (at [13]). 19 I accept BFPL's submission that where a foreign respondent cross-claims, it will usually be ordered to provide security for costs if, in substance, what it puts forward is not simply a defence for the claim but a distinct claim in itself, provided that on an overall assessment by the Court it is just and fair that such an order be made: National Biofuels Group Pty Ltd v Elbow River Marketing Ltd [2009] FCA 613 where Rares J said: 19. In my opinion, the authorities establish that where a foreign defendant counterclaims or cross-claims, it will be ordered to provide security for costs if, in substance, what it puts forward is not simply a defence to the claim, but a distinct claim in itself, provided that on an overall assessment by the Court it is just and fair that such an order be made. In Neck v Taylor [1893] 1 QB 560 at 562 Lord Esher MR identified the applicable principles (see also at 563 per Lindley LJ and per Lopes LJ). Those principles were applied by Street CJ in Buckley 1 ACLR at 307; see too Bev Wizz Group Pty Ltd v Transport Solutions Pty Ltd [2008] NSWSC 1399 at [12]-[18] where Brereton J summarised a number of the authorities. Lord Esher MR said (Neck [1893] 1 QB at 562): "Where the counterclaim is put forward in respect of a matter wholly distinct from the claim, and the person putting it forward is a foreigner resident out of the jurisdiction, the case may be treated as if that person were a plaintiff, and only a plaintiff, and an order for security for costs may be made accordingly in the absence of anything to the contrary. Where, however, the counterclaim is not in respect of a wholly distinct matter, but arises in respect of the same matter or transaction upon which the claim is founded, the Court will not, merely because the party counterclaiming is resident out of the jurisdiction, order security for costs; it will in that case consider whether the counterclaim is not in substance put forward as a defence to the claim, whatever form in point of strict law and pleading it may take, and, if so, what under all the circumstances will be just and fair as between the parties and will act accordingly." 20. In Willey v Synan (1935) 54 CLR 175 at 184, Dixon J, with whom Rich J expressly agreed, identified the principle as follows: "... a party to judicial proceedings, who resides beyond the jurisdiction, should not be required to give security for costs unless, however the parties were arranged upon the record, he is the person invoking or resorting to the jurisdiction for the purposes of establishing rights or obtaining relief. If he does avail himself of the remedies the jurisdiction provides in order to obtain affirmative relief or redress, he may be ordered to give security, although he becomes a defendant in the action." 21. There, Dixon J analysed the substantive positions of the parties. He held that the foreign plaintiff had assumed the position of a defending party principally because he was compelled to do so by the provisions of the legislation under which his goods would otherwise be condemned. He characterised that position as being one in which the foreign plaintiff had assumed the burden of commencing the proceedings in order to defeat the true moving party's claim, being that of the Collector of Customs to be entitled to condemn and forfeit the plaintiff's goods. Bona fides of the claim 20 Mr Oswal submits that on an application of this nature, the Court should not conduct a detailed consideration of the merits or of the likelihood of success of the claim. It is not appropriate, he says, for him to go into affidavit evidence to establish the merits of his case before discovery, the close of pleadings and at an early stage in the litigation. Particularly in circumstances where: BFPL concedes that the cross-claim is complex and the discovery of contemporaneous documents is required; and the points of claim cannot be properly assessed without evidence such as the Costs Overruns Agreement which was an oral agreement constituted by conversations between Mr Oswal and Vikas Rambal. 21 In my view, it is possible, purely for the purposes of this application, to form some view of the apparent strength and bona fides of the cross-claim as it presently stands: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 per Beazley J (at 197), citing MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 per Needham J (at 100) and Fencott v Eretta per French J (at 514); Molony v ACN 009 697 367 Pty Ltd [2004] QCA 151. 22 The effect of the Costs Overruns Agreement and/or the costs overruns assumption is that BFPL is, and has been for years, indebted to Mr Oswal and entities associated with him in substantial amounts – now exceeding USD490 million. 23 Despite this, such alleged indebtedness is not referred to in any of BFPL's financial reports covering the period from when the liability allegedly arose, some time in 2002, to the last report of BFPL in 2010. At no time was there any liability of that amount or anything approaching that amount noted in the reports. This is particularly significant in circumstances where the company was substantially under the control of Mr Oswal and he signed most, if not all, those documents himself. 24 In addition, there was no liability of USD490 million by BFPL to Mr Oswal and entities associated with him or any similar liability recorded in the prospectus lodged by Burrup Holdings Limited (BHL) in 2008 with the Australian Securities and Investments Commission (ASIC) (the BHL prospectus). That BHL prospectus was approved by circular resolution of the directors of BHL and Mr Oswal on or about 16 May 2008 (the prospectus resolution). The prospectus resolution noted that the documents that were provided to the directors with the BHL prospectus for the purpose of the resolution, formally confirmed and adopted certain statements in the prospectus and approved the BHL prospectus as well as its lodgement with ASIC and its circulation. 25 Moreover, there is a share sale agreement dated 19 September 2008 between Mr Oswal, Yara Australia Pty Ltd (Yara) and Mr Oswal as trustee for the Burrup Trust, pursuant to which Mr Oswal sold 5% of the issued shares in BHL to Yara for USD141 million (the 2008 share sale agreement). The 2008 share sale agreement contains a clause confirming that as at September 2008, the amount owing by all Group Companies, which included BHL and BFPL, to any bank, financier or similar financial institution in respect of borrowings or other financial indebtedness was approximately USD360 million and to all shareholders of BHL was approximately USD30 million. Those statements were warranties said to be true and correct as at the date of execution of the 2008 share sale agreement and immediately prior to it. At the time of the agreement, Mr Oswal was a 35% shareholder of BHL as was the second respondent (Mrs Oswal) and Yara held 30%. No indebtedness to Mr Oswal was disclosed. 26 BFPL argues that it is 'inconceivable' that if there was, in truth, liability of the nature and amount now alleged under the Costs Overruns Agreement and/or costs overruns assumption, it would not have been reported by BFPL in its annual financial reports disclosed in the BHL prospectus or disclosed in the 2008 share sale agreement. BFPL contends that at least for the purpose of this application and the exercise of the Court's discretion, the Court is entitled to be extremely suspicious of the merits and bona fides of the Costs Overruns Agreement and/or the costs overruns assumption claims and should not proceed on the basis that the claim is bona fide with reasonable prospects of success. 27 I accept that it is not open for the Court to form any final views as to the strength or merits of Mr Oswal's cross-claim. Nor is it appropriate to expect particularly detailed affidavit evidence to be filed on the issue by Mr Oswal. However, it would be completely inappropriate to totally disregard the complete absence of any reference to anything remotely resembling Mr Oswal's claim in the official and formal documents to which I have referred, most, if not all of which were signed by Mr Oswal. While it may be that, Mr Oswal ultimately proves his claim, for present purposes no explanation at all has been offered as to the absence of such a record. 28 In those circumstances, including the departure from the jurisdiction of Mr Oswal at or about the time of the appointment of receivers and managers of BFPL, the lack of support for the claim, at least at this stage, is something I do take into account. 29 Taking into account all these factors, BFPL is entitled to security for costs. QUANTUM 30 Both BFPL and Mr Oswal have made detailed submissions and relied upon expert evidence on the topic of costs. Mr Oswal's expert estimates that BFPL's party and party costs for the conduct of the entire proceeding to the first day of trial would be in excess of $527,000. However, Mr Oswal argues that the figure needs to be discounted to reflect the overlap of issues on the claim and cross-claim and the extent to which some of Mr Oswal's case may be classified as defensive. It is argued that the only additional issues to be determined on the cross-claim relate to quantum which 'ought to be easily proved or disproved on the production of business records in accordance with section 69 of the Evidence Act 1995 (Cth)' . 31 In my view, that submission is optimistic. The suggestion that a $490 million claim would not require much discovery and would be 'easily proved or disproved' is not, with respect, one that would reasonably reflect one's experience of such matters. It is entirely probable that the claim will involve a substantial discovery exercise in relation to expenditure which has no relationship to BFPL's actual claim. 32 BFPL's expert estimates costs in the amount referred to in the introduction to these reasons. However, in argument, Mr de Kerloy for BFPL accepted that security should be provided in tranches and indicated that a sum of, for example, $125,000 up until discovery would be an appropriate amount. As he points out, that figure is 'sympathetic with' the order that was made in the Supreme Court of Victoria. 33 There is not a great deal of precision to support that figure but, in my view, considering the content of the expert evidence for both BFPL and for Mr Oswal, and doing the best I can in a balancing exercise which involves some degree of anticipation in relation to future events, BFPL should have security for costs in respect of the cross-claim in the amount of $100,000 up until the date that Mr Oswal files and serves an affidavit of discovery. There would then be liberty to re-apply for further security. I would not presently fix the total amount of security but would rather, review the updated position when the liberty to apply is exercised. 34 As this application was vigorously opposed, costs should follow the event. The relief I propose granting differs slightly from that which was sought in the summons, but orders in terms of the summons will be made subject to substitution of the figure of $100,000 up until the date at which Mr Oswal gives discovery. There will be liberty to apply for further security at that point. 35 I will direct BFPL to draw up a minute to reflect the content of this decision. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate: Dated: 22 December 2011