FEDERAL COURT OF AUSTRALIA Parker v Laureti, in the matter of Waverley Estate Aged Wines Pty Limited (in liq) [2016] FCA 352 File numbers: NSD 1709 of 2015 NSD 1710 of 2015 Judge: GLEESON J Date of judgment: 14 April 2016 Catchwords: COSTS – security for costs – security for costs against liquidator – costs of withdrawn application – circumstances do not warrant any departure from the usual rule that costs follow the event PRACTICE AND PROCEDURE – notice to produce seeking litigation funding agreement – no basis identified upon which defendant is entitled to be told by plaintiff whether plaintiff has secured litigation funding Legislation: Federal Court of Australia Act 1976 (Cth) s 56 Corporations Act 2001 (Cth) ss 477(2B), 588M Federal Court (Corporations) Rules 2000 (Cth) r 1.3 Federal Court Rules 2011 r 19.01 Cases cited: Commonwealth of Australia v Gretton [2008] NSWCA 117 Cowell v Taylor (1885) 31 Ch D 34 DSE (Holdings) Pty Ltd v InterTAN Inc [2004] FCA 1251; (2004) 51 ACSR 555 Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 Gray v Richards (No 2) [2014] HCA 47; (2014) 89 ALJR 113 Greek Orthodox Church and Community of Marrickville and District Ltd (1993) 10 ACSR 134 Green v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 Jones v North Australian Aboriginal Legal Aid Service Inc (1986) 82 FLR 264 Old v McInnes [2011] NSWCA 410 Re Strand Wood Co Ltd [1904] 2 Ch 1 Ritter v Godfrey [1920] 2 KB 47 TCN Channel 9 Pty Ltd v Scotney [1994] FCA 858 (Federal Court); [1994] FCA 1489 (AustLII) Date of hearing: 15 March 2015 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 36 Solicitor for the Plaintiff: Mr D Farrar of Farrar Lawyers Counsel for the Defendant: Ms J Shepard Solicitor for the Defendant: Carroll & O'Dea ORDERS NSD 1709 of 2015 IN THE MATTER OF WAVERLEY ESTATE AGED WINES PTY LIMITED (IN LIQ) (ACN 129 593 004) BETWEEN: GREGORY JAY PARKER IN HIS CAPACITY AS LIQUIDATOR OF WAVERLEY ESTATE AGED WINES PTY LIMITED (IN LIQ) (ACN 129 593 004) Plaintiff AND: SERGIO LAURETI Defendant JUDGE: GLEESON J DATE OF ORDER: 14 APRIL 2016 THE COURT ORDERS THAT: 1. The defendant pay the plaintiff's costs of the defendant's interlocutory application for security for costs filed 26 February 2016. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ORDERS NSD 1710 of 2015 IN THE MATTER OF BERANEW AUSTRALIA PTY LIMITED (IN LIQ) (ACN 119 056 263) BETWEEN: GREGORY JAY PARKER IN HIS CAPACITY AS LIQUIDATOR OF BERANEW AUSTRALIA PTY LIMITED (IN LIQ) (ACN 119 056 263) Plaintiff AND: SERGIO LAURETI Defendant JUDGE: gleeson j DATE OF ORDER: 14 APRIL 2016 THE COURT ORDERS THAT: 1. The defendant pay the plaintiff's costs of the defendant's interlocutory application for security for costs filed 26 February 2016. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GLEESON J: 1 By interlocutory applications filed 26 February 2016, the defendant ("Mr Laureti") sought security for costs against the applicant ("Mr Parker"), pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) ("Act") and r 19.01 of the Federal Court Rules 2011 ("Federal Court Rules"). 2 At the commencement of hearing of the interlocutory applications, Mr Laureti's counsel called on two notices to produce a litigation funding agreement that Mr Laureti claimed to have reason to believe had been entered into between Mr Parker and a third party. In answer to the notice to produce, Mr Farrar, solicitor for Mr Parker, informed the Court that there was nothing to produce. 3 In the absence of production of a litigation funding agreement, Mr Laureti withdrew the applications for security for costs and sought costs of the applications. Relevant Principles Security for costs 4 Section 56(1) of the Act provides: 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. 5 Rule 19.01 of the Federal Court Rules provides: (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. (3) 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. 6 By r 1.3 of the Federal Court (Corporations) Rules 2000 (Cth), the Federal Court Rules apply to these proceedings. 7 A plaintiff's position as a liquidator does not of itself prevent the making of an order for the provision of security for costs. "Liquidators suing personally are generally to be treated in the same way as natural persons": Green v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 at [45] ("Green") (per Hodgson JA, Basten and Campbell JJA agreeing on this point). 8 Although there is a sense in which a liquidator is suing for the benefit of others, this is not of itself sufficient to justify security for costs in relation to a person who has a statutory right and duty to do this: Green at [45], citing Cowell v Taylor (1885) 31 Ch D 34 and Re Strand Wood Co Ltd [1904] 2 Ch 1. Costs of unsuccessful application 9 Section 43 of the Act confers jurisdiction on the Court to award costs. The power is a "broad and ample power not to be read down otherwise than by judicial principle conformable with the amplitude of the power": DSE (Holdings) Pty Ltd v InterTAN Inc [2004] FCA 1251; (2004) 51 ACSR 555 at [14]. 10 The award of costs is discretionary but generally that discretion is exercised in favour of the successful party: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52 at [25]; Gray v Richards (No 2) [2014] HCA 47; (2014) 89 ALJR 113 at [2]. 11 In Old v McInnes [2011] NSWCA 410 at [33], Beazley JA (as her Honour then was) cited with approval the following passage from the reasons of Hodgson JA in Commonwealth of Australia v Gretton [2008] NSWCA 117 at [121]: In my opinion, underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs. Costs follow the event generally because, if a plaintiff wins, the incurring of the costs was the defendant's responsibility because the plaintiff was caused to incur costs by the defendant's failure otherwise to accord to the plaintiff that to which the plaintiff was entitled; while if a defendant wins, the defendant was caused to incur costs in resisting a claim for something to which the plaintiff was not entitled: cf Ohn v Walton (1995) 36 NSWLR 77 at 79 per Gleeson CJ. Departures from the general rule that costs follow the event are broadly based on a similar approach. 12 In Ritter v Godfrey [1920] 2 KB 47 at 60 to 62, Atkin LJ explained the general rule that, in the absence of special circumstances, the judicial exercise of discretion requires that a successful defendant obtain a costs order in his favour. 13 In Jones v North Australian Aboriginal Legal Aid Service Inc (1986) 82 FLR 264, the plaintiff was awarded his costs of a hearing in the course of an unsuccessful application for an interlocutory injunction to restrain the defendant from terminating the plaintiff's employment until the final hearing of the action. The court found the only reason that it was necessary for the plaintiff to apply to the court on the particular date in respect of which the costs order was made was that the plaintiff's notice of termination was to expire the following day and the defendant had declined to honour an undertaking given to the Conciliation and Arbitration Commission that it would not terminate the plaintiff on that date. The court concluded that this was behaviour on the part of the defendant connected with the conduct of the interlocutory proceedings and calculated to occasion unnecessary litigation and expense in the proceedings, being special circumstances warranting a departure from the usual rule. 14 In Mitropoulos v Greek Orthodox Church and Community of Marrickville and District Ltd (1993) 10 ACSR 134 at 139, McClelland J concluded that there should be no order against the plaintiffs in respect of the defendant's costs in proceedings that were dismissed where his Honour found that the President of the defendant engaged in conduct that was such as to encourage the plaintiffs to believe that they had a valid claim to relief. 15 In TCN Channel 9 Pty Ltd v Scotney [1994] FCA 858 (Federal Court); [1994] FCA 1489 (AustLII), Tamberlin J made no order for costs in dismissing an application for a Mareva injunction where the respondents had failed to provide information sought in relation to their assets. His Honour said at [29]: In this case my view is that the respondents' unreasonable failure to answer, or even acknowledge, the letter from the solicitors of the applicant of 28 September 1994 led to the making of the application on which the respondents have been successful. The unexplained inactivity of the respondents in not providing the information requested in the letter from the applicant's solicitor, which material could have easily been provided in response to that letter, led to the filing of the Notice of Motion. The applicant in the present case has not acted with undue haste and it is clear that the applicant would not have pursued the motion if it had been fully informed of the position. This fact is an important material factor to take into account. Another important related consideration is that unnecessary expense and time-consuming litigation are to be avoided where reasonably possible. In the present circumstances I do not think that the proceedings were unreasonably brought. Facts 16 Mr Parker was appointed voluntary administrator of Waverley Estate Aged Wines Pty Ltd (in liq) ("Waverley") on 8 July 2014 and creditor's voluntary liquidator of Waverley on 12 August 2014. 17 He was appointed creditor's voluntary liquidator of Beranew Australia Pty Ltd (in liq) ("Beranew") on 19 June 2014. 18 Shortly before these proceedings were commenced, there were annual meetings of the creditors of Beranew and Waverley. The minutes of those meetings record resolutions that the liquidator was authorised pursuant to s 477(2B) of the Corporations Act 2001 (Cth) ("Corporations Act") to enter into any litigation funding facilities to pursue any legal actions including voidable and insolvent transaction actions that have arisen in the liquidation. 19 These proceedings were commenced by originating processes dated 18 December 2015. Mr Parker seeks orders pursuant to s 588M of the Corporations Act that Mr Laureti pay to him in his capacity as liquidator the sum of: (a) $2,744,823.20 in the Beranew proceeding, and (b) $1,020,081.05 in the Waverley proceeding. 20 By letter dated 22 January 2016, Mr Laureti's solicitors, Carroll & O'Dea, wrote a lengthy letter to the solicitor for Mr Parker, Farrar Lawyers. At [19], the letter records that, according to reports to creditors for each company: (a) the creditors were not willing to fund the current proceedings or any proceedings; (b) there were limited resources remaining for the companies; (c) Mr Parker was to seek litigation funding. 21 At [20], the letter asserts: The inference from this and the commencement of the proceedings is that: (a) a litigation funder has been secured; or (b) Mr Parker is expecting to secure such a funder. 22 At [23], Carroll & O'Dea requested the following: (a) confirmation that all of Mr Parker's personal assets are available to meet an order for costs against the applicant in each proceeding; (b) confirmation that Mr Parker's assets would be sufficient for that purpose; (c) details of those persons who stand to benefit from the litigation and as to what security they are prepared to provide so that Mr Laureti can consider what order for security of costs may be necessary. 23 By letter dated 27 January 2016, Farrar Lawyers responded saying, at [19]: We suggest you refer both to the Federal Court Rules (Rules) and the authorities in relation to security for costs applications against a liquidator in these circumstances. Once you have done so, you may wish to consider the matters raised in paragraphs 19-23 (all inclusive) of your letter. 24 By letter dated 29 January 2016, Carroll & O'Dea replied: 1. You will be aware from the cases that the general rule that a liquidator is to be treated in the same way as a natural person, for the purpose of security for costs applications, is not absolute. 2. The general rule is in part based on the premise that the liquidator would ordinarily be personally liable for costs (that is, from his own personal assets). Your correspondence seems to dispute that, although this may not have been what you intended. 3. The presence of a litigation funder is a well-trodden path to obtaining security even when there is a liquidator. 4. Please provide: (a) your client's unconditional undertaking that he will not assert, by reason of the words "as liquidator of …." in the title to each set of proceedings (or otherwise), that his liability on any costs order against him is limited to the assets held by him in that capacity; and (b) a copy of each litigation funding agreement under which funding is or may be provided for either set of proceedings. 5. Following receipt of those materials, we will reconsider the position on security for costs. 6. In the absence of your client voluntarily providing this, we anticipate issuing a notice to produce to court seeking production of relevant documents. 25 By letter dated 2 February 2016, Farrar Lawyers wrote to Carroll & O'Dea; [Mr Parker] considers there is no basis to order security for costs against him in relation to the Proceedings … If you contend otherwise, you are open to file an interlocutory process seeking security for costs. We put you on notice that any such application is doomed to fail and that [Mr Laureti] will be the subject of the claim for costs by [Mr Parker]. 26 By letter dated 5 February 2016, Carroll & O'Dea replied: We have asked you to provide information relevant to litigation funding in both these proceedings. We note that minutes of meetings of creditors of both companies show authorisation to obtain a litigation funder. You have failed to deny there is a litigation funder. As to that, we refer you to Green v CGU [2008] NSWCA 148. You have also failed to confirm, after 2 requests, that your client's liability to costs is not limited to the assets held by him in his capacity as liquidator. As to that, we refer you to International Cap Manufacturing Pty Limited (in liq) & Anor v Rodrick & Ors [2013] QSC 307. Please confirm by 4:00pm on 8 February 2016: 1. that there is no litigation funding; and 2. in the event Mr Parker is unsuccessful in the proceedings, he will not be making any argument that he would not be liable for costs personally. If these matters are not confirmed, we anticipate being instructed to apply for an order for security for costs. If that is resisted on either of those grounds, we will rely on this letter to seek orders that your client pay the costs of the application, even if that application is not successful. 27 By letter dated 8 February 2016, Farrar Lawyers wrote: 1. In relation to the first paragraph of your letter, you have referred us to the decision in Green. You state 'you have failed to deny there is a litigation funder'. Having regard to this statement, and the decision in Green, we are unable to appreciate the significance of your statement in terms of the decision in Green. Would you please identify which particular passage or passages of Green that are relied upon and their significance in the present context? 2. In relation to your second paragraph, you have referred us to the decision in Rodrick. Again, you have asserted that we have failed to confirm … 'that the [Applicant]'s liability to costs is not limited to the assets held by him in his capacity as liquidator'. Again, by reference to your statement, could you please direct us to the particular passages relied upon in Rodrick in terms of the point you are seeking to make? (Emphasis in original.) 28 By letter dated 9 February 2016 from Carroll & O'Dea, the debate continued as follows: 1. The decision of Green v CGU Insurance Ltd (2008) 67 ACSR 105 is authority for the discretionary guideline that usually a liquidator, bringing proceedings in his or her own name, is to be treated as a personal litigant for the purposes of an application for security for costs. However, in so far as the litigation is for the private benefit of a funder, it may be appropriate for security to be supplied: per Hodgson JA at [50]-[54] and per Campbell JA at [83]-[86]. As adverted to in our previous correspondence, we have reason to believe that a commercial litigation funder may be standing behind the liquidator. This belief is based upon what has taken place in meetings attended by your client. Nothing in your correspondence refutes this reasonably based belief and indeed, by failing to deny such a simple matter, your correspondence, tends to confirm it. We, therefore, consider our client has a sound basis upon which to seek security. However, should it transpire, at the hearing of any application, that your client does not have a litigation funder and relies upon that matter to resist the application, our client will rely upon this and our previous letters on the question of costs since that matter could have been clarified without the need for the application to be filed. 2. Our client relies upon paragraphs 3 to 7 (inc) of International Cat Manufacturing Pty Ltd (in liq) v Rodrick [2013] QSC 307. Those paragraphs restate the fundamental principle that a liquidator, bringing a suit in his or her own name and, not being subject to security for costs in the normal course, must accept personal liability for the costs of the failed proceedings beyond the mere assets of the company the subject of liquidation. Your client's failure to acknowledge his personal liability, beyond the assets of the companies, for any award of costs in our client's favour, suggests your client is aware of matters which he may raise to thwart such a costs order. Those same matters would support an order for security being made now. This is because the rationale for not awarding security against a liquidator is that the liquidator will be personally liable to any costs order ultimately made. Again, this is a simple matter to acknowledge and your client's failure to do so confirms our client's need to apply for security to protect his position on costs. However, should your client rely upon the fact that he is personally exposed to any costs award to resist an application for security, our client will rely upon this letter on the question of the costs of bringing an application. 29 By letter dated 11 February 2016, Farrar Lawyers responded: 1. The decision in Green and the passages you have identified do not support the proposition that a liquidator must disclose whether or not he has secured litigation funding to pursue an action against a defendant. One of the reasons, no doubt, is that it may be to the liquidator's forensic disadvantage to disclose whether or not he has secured litigation funding as it will inform the defendant's attitude to the way in which the defendant will conduct his defence. To be very clear, can you please identify the legal obligation imposed on a liquidator to disclose to a defendant against whom the liquidator has commenced legal proceedings to disclose whether or not the liquidator has entered into a litigation funding agreement in respect of those proceedings? In the absence of a direct response to this question, we suggest that you do not occupy any further time drafting unnecessary correspondence such as your recent letters on this topic. 2. Again, the passages referred to in Rodrick, do not appear to support the proposition that a liquidator must confirm, to the satisfaction of a defendant against whom the liquidator has commenced proceedings, what attitude the liquidator will take in the event that an adverse cost order is made against him if the liquidator is unsuccessful. You appear to be aware of some of the authorities in relation to this issue and we would ask that you identify the particular authority that requires the liquidator to make some form of binding statement of what his intentions are in the event that an adverse cost order is made against him. Again, in the absence of providing such an authority, we suggest you spend time preparing the defendant's defence to the statements of claim rather than occupying time on peripheral and largely irrelevant matters such as these. (Emphasis in original.) 30 By letter dated 19 February 2016, Farrar Lawyers made the following additional observations: 1. In accordance with the decision in Re Wilson Lovatt and Sons Limited [1977] 1 All ER 274, the plaintiff says that as the Proceedings are brought by him as liquidator in relation to the company's affairs that an order for security for costs would generally not be made. This decision was endorsed by the New South Wales Court of Appeal Silvia v Brodyn Pty Limited (2007) 25 ACLC 385 at 393-394; 2. The plaintiff acknowledges that if he were unsuccessful in the prosecution of the Proceedings against the defendant that the plaintiff has a potential exposure for an adverse cost order against him and that he is entitled to an indemnity out of the assets of the company in respect of any such liability, and to the extent that there is a deficiency, that he has a personal exposure. 3. The liquidator is to be treated as a natural person, notwithstanding that he brings the Proceedings in a representative capacity, and by reason of that he exposes himself to personal liability. However, by reason of that exposure and the fact that the court will only grant security for costs against an individual in exceptional circumstances, the court will not order the plaintiff to provide security for costs of the defendant. 4. Your counsel indicated at court, and to the Judge, that a relevant consideration on an application for security for costs is the existence of a funding agreement. Whilst it is true that the existence of a funding agreement is something which is considered in the context of applications under section 1335 of the Corporations Act (2001) Cth and other applications against a corporation, that the existence of a funding agreement in the context of an action brought by an individual liquidator is not one that has been regularly dealt with before the courts. 5. As such, if there is no ability to obtain an order for security for costs against the plaintiff in the Proceedings, then it is wholly irrelevant as to whether the plaintiff has secured litigation funding or not. Indeed, it is the plaintiff's strong suspicion that the defendant is merely 'fishing' to determine whether there is a funding agreement in place, and the extent of that funding, to inform the attitude the defendant will take in defending the Proceedings. The plaintiff considers this is not a proper purpose, and indeed represents an abuse of process, in the circumstances. 31 In the affidavit filed in support of the applications, Mr Laureti's solicitor, Mr Rollo stated that there was no reason to believe that Mr Parker was impecunious. The affidavit did not state that there was reason to believe that Mr Parker will be unable to pay Mr Laureti's costs if so ordered. Consideration 32 Applying the usual rule that costs follow the event, Mr Parker would be entitled to an order that Mr Laureti pay Mr Parker's costs of the withdrawn applications for security for costs. 33 The applications were made on the stated basis that there was "reason to believe" that Mr Parker was suing for the benefit of a person other than Waverley, Beranew and their creditors ([4] of Mr Rollo's 26 February 2016 affidavit). That was not a sufficient basis for an order for security for costs. The correspondence set out above shows that Mr Laureti's lawyers recognised that they did not have sufficient evidence to obtain security for costs when they filed the interlocutory applications. They filed the applications, taking a calculated risk that Mr Laureti would fail to obtain security for costs if it turned out that there was no funding agreement. 34 Mr Laureti's counsel did not identify any basis upon which Mr Laureti was entitled to be told by Mr Parker whether he had secured litigation funding. Mr Parker acknowledged that he had a personal exposure to an adverse costs order before the interlocutory applications were filed and there was no evidence of information as to Mr Parker's financial circumstances until property searches were conducted shortly before the hearing. In those circumstances, I do not see why Mr Parker should have told Mr Laureti whether he had secured litigation funding. Litigants are not ordinarily required to disclose information of this kind to each other, and it is information which may confer a tactical advantage upon its recipient. There was nothing special about Mr Parker's situation which obliged him to disclose whether there was a funding agreement, at least prior to the filing of the interlocutory processes which led to the service of the notices to produce. Accordingly, Mr Parker was entitled to resist the significant pressure placed upon him to disclose his funding situation. 35 These circumstances do not warrant any departure from the usual rule that costs follow the event. Conclusion 36 Mr Parker is entitled to an order for costs of the interlocutory applications. Mr Laureti is not entitled to costs. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate: Dated: 14 April 2016