FEDERAL COURT OF AUSTRALIA Australian Securities & Investments Commission v Stone Assets Management Pty Ltd (No 2) [2014] FCA 1099 Citation: Australian Securities & Investments Commission v Stone Assets Management Pty Ltd (No 2) [2014] FCA 1099 Parties: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION v STONE ASSETS MANAGEMENT PTY LTD ACN 141 699 854 File number: SAD 277 of 2011 Judge: BESANKO J Date of judgment: 13 October 2014 Catchwords: PRACTICE AND PROCEDURE – application for security for costs – where applicant on interlocutory process filed in winding up proceeding claiming beneficial interest in funds held in company liquidation – where liquidator applying for security for costs against applicant – where applicant ordinarily resident outside of jurisdiction – whether potential dividends to applicant out of funds held in company liquidation a fund within jurisdiction that the liquidator may enforce costs against – whether applicant's claim defensive. Held: Application allowed. Security for costs ordered. Legislation: Corporations Act 2001 (Cth) s 9 Customs Act 1901-1934 (Cth) Federal Court of Australia Act 1976 (Cth) s 56 Federal Court Rules 2011 (Cth) r 19.01 Cases cited: Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 622 Aurora Networks Pty Ltd v Halbedl; In the Matter of Aurora Networks Pty Ltd [2013] FCA 632 Australian Securities & Investments Commission v Stone Assets Management Pty Ltd [2012] FCA 630 P S Chellaram & Co Ltd v China Ocean Shipping Co and Another (1991) 102 ALR 321 Willey v Synan (1935) 54 CLR 175 Dates of hearing: 12, 24 September 2014 Place: Adelaide Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 23 Counsel for Mr Qiang Lu: Mr J Johnson Solicitor for Mr Qiang Lu: Kazi Portolesi Lawyers Counsel for the Liquidator: Mr S Evans Solicitor for the Liquidator: Fenwick Elliott Grace IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 277 of 2011 BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff AND: STONE ASSETS MANAGEMENT PTY LTD ACN 141 699 854 Defendant JUDGE: BESANKO J DATE OF ORDER: 13 OCTOBER 2014 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. Paragraph 3 of the interlocutory application dated 3 September 2014 be adjourned to Monday, 20 October 2014 at 9:15 am (Adelaide time). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION SAD 277 of 2011 BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff AND: STONE ASSETS MANAGEMENT PTY LTD ACN 141 699 854 Defendant JUDGE: BESANKO J DATE: 13 october 2014 PLACE: ADELAIDE REASONS FOR JUDGMENT 1 This is an interlocutory application by the second respondent, Ms Hilary Orr, in her capacity as liquidator of Stone Assets Management (In Liquidation) ("the company"), wherein she seeks, among other orders, an order that the applicant, Mr Qiang Lu, provide security for costs in relation to his interlocutory process filed on 13 August 2014. The security for costs sought by the liquidator is the payment into Court of $46,475 within 21 days. She also seeks an order that the interlocutory process be stayed until the security is given and an order that, if the applicant fails to comply with the order to provide security within 21 days, the proceeding be permanently stayed or dismissed. 2 The applicant's interlocutory process is issued in the proceeding in which the company was wound up by order of this Court on the application of the Australian Investments & Securities Commission ("ASIC"). That order was made on 19 June 2012 (Australian Securities & Investments Commission v Stone Assets Management Pty Ltd [2012] FCA 630). Other orders were also made on that day, including declarations that the company had contravened various provisions of the Corporations Act 2001 (Cth) in connection with an unlicensed financial services business conducted by it. 3 Since the order was made, the liquidator has set about performing her obligations as liquidator under the Corporations Act. She has been hampered in that task by the lack of books and records of the company. 4 On 19 December 2012, the applicant's solicitors wrote to the liquidator making a claim against the funds held in the company liquidation on the basis that a total of $1,929,000 was deposited in the company's account by the applicant for "CFD Trades" (i.e., contract for difference trading), which money did not become money of the company. There was then a period during which correspondence was exchanged between the liquidator's solicitors and the applicant's solicitors before the liquidator determined that she could not determine the applicant's claim (and a claim by another party) as there were no books and records of the company. 5 On 25 February 2014, the liquidator issued an interlocutory process in the winding up proceeding whereby she sought the following orders: 1. That this application be made returnable before His Honour Justice Besanko. 2. Directions of this Honourable Court in relation to the following matters: (a) Whether the Liquidator is required to: (i) take steps to advertise for creditors of Stone Assets Management Pty Ltd (in liq) ("the Company"); and/or (ii) formally call for proofs of debt in circumstances where the Liquidator has insufficient books and records of the Company to adjudicate on any proof of debt or claim; (b) Whether the Liquidator is entitled to reject the claim of Yong Qiang Lu submitted in the liquidation of the Company; (c) How the Liquidator is to deal with any present or future claims made in the liquidation of the Company in circumstances where the Liquidator has insufficient books and records of the Company to adjudicate on any proof of debt or claim; (d) How the liquidator is to apply the surplus funds available in the liquidation of the Company; (e) What further steps the Liquidator ought take to finalise the winding up of the Company. 3. The Liquidator's costs of and incidental to this application (including reserved costs, if any) be taxed and reimbursed out of the property of the Company. 4. Such further or other Orders as this Honourable Court deems fit. 6 After directions hearings in relation to the liquidator's interlocutory process, the liquidator amended her interlocutory process to delete paragraph 2(b). The applicant made it clear that he would not be lodging a proof of debt in the liquidation. His case is that he has a proprietary interest in the funds held by the liquidator and is not merely a creditor of the company. The funds held by the liquidator total $577,000 before the costs of ASIC and the liquidator are paid. 7 On 13 August 2014, the applicant filed an interlocutory process and points of claim in the winding up proceeding wherein he sought a declaration that the funds held in the company's liquidation were held on trust for him, and an order directing the liquidator to distribute those funds to him. 8 The applicant's case as revealed by the points of claim is that he entered into a "Customer Agreement" with the company and, pursuant to that agreement, he paid $1,919,000 to the company. The applicant claims that he paid that money to the company over a period from March 2011 to October 2011. The applicant claims that the company held itself out as having an Australian Financial Services licence to provide clients with foreign exchange, bullion contracts, and contracts of difference trading facilities. The applicant claims that the company did not hold such a licence. The applicant claims that, by virtue of certain provisions of the Corporations Act which I need not set out, the monies he provided to the company were held on trust for him. He alleges that, therefore, the monies did not form part of the property of the company within s 9 of the Corporations Act. 9 The liquidator brings her application for security for costs pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) and r 19.01 of the Federal Court Rules 2011 (Cth). 10 The liquidator advances her application for security for costs on two grounds. First, she contends that the applicant is ordinarily resident outside of Australia (r 19.01(3)(b)). It is common ground that the applicant is ordinarily resident outside of Australia. The evidence suggests that he is ordinarily resident in the People's Republic of China. There is no treaty, convention, or system of reciprocal enforcement of foreign judgments which would allow the liquidator to enforce an Australian judgment, including an order for costs, in the People's Republic of China. There is no evidence suggesting that, other than his claim to the monies held by the liquidator, the applicant has any assets in Australia which may be taken in execution of a judgment. Although it was not his principal argument, the applicant contends that, at the very least, he is a major creditor of the company and that, even if he lost his claim that he is the beneficial owner of the monies and was ordered to pay costs, there would be funds to which he was entitled and from which costs could be paid. I reject that argument. The liquidator has not indicated that she would accept a proof of debt. Furthermore, there are claims for costs and expenses in relation to the funds, for example, the costs of ASIC in the winding up application, and the possibility of late claims by other creditors, and, even if a dividend was payable to the applicant, it may not be sufficient to pay a costs order. Finally, I think that there is force in the liquidator's submission that she may encounter practical difficulties accessing any dividend in satisfaction of a costs order. The applicant's principal argument is that, although he is ordinarily resident outside Australia, his proceeding is of a defensive character and the Court will not order security for costs in those circumstances. I address this argument below. 11 The second ground upon which the liquidator advances her application for security for costs is that she contends that, on the facts, there is reason to believe that the applicant will not voluntarily meet any award of costs made against him (r 19.01(3)(e)). She points to the fact that the applicant is married to the company's sole director, Ms Qing Liang, and she identified a number of matters which she submitted suggest that the applicant and his wife have misled the liquidator or, at least, been less than forthright in their dealings with her. These allegations were disputed by the applicant. 12 I have decided that security for costs should be awarded on the first ground advanced by the liquidator. In those circumstances, it is not necessary for me to consider the second ground. I would make the observation, however, that had I concluded that the applicant's interlocutory process was truly defensive in character, then I would not have been disposed to order security for costs. 13 In P S Chellaram & Co Ltd v China Ocean Shipping Co and Another (1991) 102 ALR 321, McHugh J said (at 323): However, for over 200 years, the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide security for costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction. 14 As I understood the applicant's submissions, he did not gainsay the force of those observations. However, as I have said, he submits that security for costs will not be ordered against an applicant or plaintiff ordinarily resident outside the jurisdiction if, in truth, that person's proceeding or action is a defensive one. He invites me to find that that is how his claim should be characterised. 15 The relevant principle was discussed by the High Court in Willey v Synan (1935) 54 CLR 175 ("Willey v Synan"). In that case, the plaintiff was a seaman who found English silver coins with a value of £351 on a vessel while it was travelling from New Zealand to Australia. Officials of the Customs Department took possession of the coins upon the arrival of the vessel in Australia. Thereafter, the Collector of Customs gave the plaintiff a notice requiring him to commence an action to recover the coins or, otherwise, they would be condemned without further proceedings. The plaintiff, who was not ordinarily resident within the Commonwealth, commenced an action for recovery of the coins. The Collector of Customs then applied for security for costs. 16 Dixon J (as his Honour then was) described the relevant principle as follows (at 184): The principle is that a party to judicial proceedings, who resides beyond the jurisdiction, should not be required to give security for costs unless, however the parties are arranged upon the record, he is the person invoking or resorting to the jurisdiction for the purpose 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. Thus, on the one hand, a defendant in an action at law who filed a bill in equity to restrain the proceedings at law, was not required by the Court of Chancery to give security for the costs of the suit although he resided out of the jurisdiction Watteeu v. Billam). And, on the other hand, a distraining landlord who became a defendant in an action of replevin in respect of the goods distrained was ordered to give security on the ground that he resided out of the jurisdiction (Selby v. Cruchley). The principle was considered in Maatschappij voor Fondsenbezit v. Shell Transport and Trading Co., where a number of illustrative cases are collected in the judgment of Scrutton L.J. He said: "The position, I think, extends to every case where the person against whom security is sought is really defending himself against attack, even if he be nominally a plaintiff, but really defending himself against defendants' previous action against him". (Citations omitted.) 17 His Honour said that the application of the principle to the circumstances of the case before the Court was difficult. The resolution of the difficulty lay in a consideration of the provisions of the Customs Act 1901-1934 (Cth). By serving a notice under the Act which might lead to the equivalent of condemnation of the coins, the Collector of Customs proceeded on the assumption that the plaintiff was the owner of the coins. As Dixon J said (at 185): It was open to the Customs to retain the money without seeking to forfeit it and, if the plaintiff carried out his threat to sue for it, to rely upon any weakness in the title he set up to the possession of the money. But, in that case, the Crown would be exposed to the risk of the plaintiff's recovering the money if he established a prior possessory title. The Customs did not take this risk but proceeded under sec. 207 to obtain the equivalent of a condemnation. This step involved the assumption that the plaintiff was "owner" of the coins. It may be granted that the assumption was made only for the purpose of obtaining a forfeiture and that, if the forfeiture proves not to have been effected, the Customs are not precluded from denying his ownership. Nevertheless for that purpose his prima facie title is assumed. The purpose of assuming it is to defeat it. But that purpose can only be accomplished by calling upon him to enter the present action. If he does not, the goods assumed to be his are condemned. 18 His Honour concluded that the Collector of Customs was the "actor" and that security for costs against the plaintiff should not have been ordered at first instance (see also Latham CJ at 180, Rich J at 181, McTiernan J at 187). 19 I do not think the decision in Willey v Synan assists the applicant. The liquidator has not done anything which assumes the applicant is the beneficial owner of the monies he claims as his property. 20 The applicant also referred to two cases involving a creditor's statutory demand for payment: Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 622 and Aurora Networks Pty Ltd v Halbedl; In the Matter of Aurora Networks Pty Ltd [2013] FCA 632 at [15]-[20]. I think that those cases are distinguishable on the ground that, in those cases, the party who is, in truth, the claimant has taken action under a statutory procedure available to that party which requires the other party to take action to protect his or her position. That is not this case. 21 The applicant relied on two matters in support of his contention that his interlocutory process was, in truth, defensive in character. First, he submitted that, on her own evidence, the liquidator agreed that he had paid the monies to the company. In those circumstances, he was, at the very least, a creditor, and the only issue was whether, by reason of various matters, he had or retained a beneficial interest in the monies. As I have said, the liquidator is in a difficult position in this liquidation because, apart from some limited documentation, she lacks proper books and records of the company. She has not admitted that the applicant is at least a creditor, and she has sought and obtained orders, such as an order for third party discovery, with a view to obtaining further information about the applicant's claim. I do not think that it is appropriate, at this stage, to proceed on the basis that the applicant is at least a creditor of the company in relation to the money claimed by him. Secondly, the applicant referred to the liquidator's application for directions and submitted that, as I understood it, despite his interlocutory process, the liquidator is the moving party to the dispute. I reject this submission. I think that once it became clear at the various directions hearings what the applicant was asserting, then the onus was on the applicant to bring an action to enforce the rights he alleges he has, and that is what he has done. I think that the applicant should provide security for costs in relation to his interlocutory process. 22 The applicant does not dispute the quantum of the security sought by the liquidator. I am satisfied on the evidence that it is appropriate. 23 The applicant must provide security for costs in the amount of $46,475. I will adjourn the liquidator's application for a short period to give the parties the opportunity to agree the appropriate orders. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko. Associate: Dated: 13 October 2014