FEDERAL COURT OF AUSTRALIA Ocean Energy Construction Pty Ltd v Oceanlinx Limited (in liq) (Receivers and Managers Appointed) [2016] FCA 1055 File number(s): NSD 337 of 2016 Judge(s): JAGOT J Date of judgment: 29 August 2016 Catchwords: PRACTICE AND PROCEDURE – security for costs – where plaintiff company impecunious – whether order for security would stultify proceedings Date of hearing: 29 August 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 12 Counsel for the Plaintiff: Mr J Kohn Solicitor for the Plaintiff: JPM Lawyers Pty Ltd Counsel for the First, Second and Third Defendants: Mr D R Stack Solicitor for the First, Second and Third Defendants: Bridges Lawyers Counsel for the Fourth and Fifth Defendants: Mr J C Hewitt Solicitor for the Fourth and Fifth Defendants: Baker & McKenzie ORDERS NSD 337 of 2016 BETWEEN: OCEAN ENERGY CONSTRUCTION PTY LTD ACN 164 105 944 Plaintiff AND: OCEANLINX LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 104 404 First Defendant VAUGHAN NEIL STRAWBRIDGE IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF OCEANLINX LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 104 404 Second Defendant JASON TRACY IN HIS CAPACITY AS JOINT AND SEVERAL LIQUIDATOR OF OCEANLINX LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 104 404 (and others named in the Schedule) Third Defendant JUDGE: JAGOT J DATE OF ORDER: 29 AUGUST 2016 THE COURT ORDERS THAT: 1. The Plaintiff provide security in the following amounts, to be paid into Court or provided in a form otherwise acceptable to the Registrar, within 28 days of these orders: (a) For the First, Second and Third Respondents' costs of the proceedings: $60,000 (b) For the Fourth and Fifth Respondents' costs of the proceedings: $37,500. 2. The Plaintiff provide further security in the following amounts, to be paid into Court or provided in a form otherwise acceptable to the Registrar, no later than six weeks before the commencement of the hearing: (a) For the First, Second and Third Respondents' costs of the proceedings: $60,000. (b) For the Fourth and Fifth Respondents' costs of the proceedings: $37,500. 3. The proceedings be stayed until payment of security in accordance with these orders. 4. The plaintiff pay the costs of the First, Second and Third Respondents, and Fourth and Fifth Respondents, in relation to the interlocutory applications, as agreed or taxed. 5. The matter be adjourned for further directions at 9.30am on 6 October 2016. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT JAGOT J: 1 These are two applications for security for costs against the plaintiff company, Ocean Energy Construction Pty Ltd, which is admittedly impecunious. 2 Leaving aside the question of prospects of success, which I do not feel it is necessary to delve into at this stage, the particularly relevant facts are: 3 First, the plaintiff company itself is undoubtedly impecunious and has no capacity to make good any order for costs should it be unsuccessful. 4 Second, it is apparent that all of the money which the plaintiff company claims against the defendants in this proceeding is also identified in the plaintiff's own evidence to be money which is owed by it to third-party creditors. 5 Third, and as a result, the persons who stand to benefit from this proceeding are not the plaintiff company or any person with an interest in the plaintiff company, but the third-party creditors. 6 Fourth, according to the evidence from Mr Wilson, who is the sole director of the plaintiff, he was made bankrupt in May 2006. His financial position is unconnected with any alleged conduct of the defendants. 7 Fifth, in his affidavit, Mr Wilson says that he owns no "substantial assets to mortgage or charge" and has no access to funds, other than funds which come to him at time to time from the provision of consulting engineering services. According to his evidence, Mr Wilson is "just able to provide enough funding for disbursements for the ongoing prosecution of [the] proceedings" and the income received from the provision of the consulting services is "modest and irregular", yet "sufficient to cover the immediate needs of [his] family". He also says that the family home is wholly owned by his wife, which she purchased by using her own funds, and she owned that home before they were married. 8 Sixth, the evidence shows that Mr Wilson's wife's ownership of the family home, which was purchased for a purchase price of approximately $1.2 million, is apparently unencumbered. Mr Wilson's wife also owns at least three other properties encumbered by mortgages. 9 The reason these facts are relevant is that, despite the submissions to the contrary, it cannot be said that any wrong done by the defendants is the cause of the current financial position of either the plaintiff company or Mr Wilson. I have already observed that Mr Wilson was made bankrupt by reason of unconnected circumstances. Insofar as the plaintiff company is concerned, the company owes to third-party creditors amounts at least equal to the amount claimed in the proceedings. In other words, regardless of any wrong done by the defendants, the company would still be impecunious because the money claimed in these proceedings is all owed to third-party creditors; the impecuniosity of the plaintiff company thus exists, and would exist, irrespective of the alleged wrongs by the defendants. 10 The other consequence is that in circumstances where the plaintiff company is obviously impecunious, and third-party creditors stand to benefit from these proceedings, no inference should be drawn that the making of these orders for security for costs would stultify the proceedings, because there is no evidence as to the position of the creditors who stand to benefit from the proceedings. Contrary to the submission for the plaintiff company, this does not involve speculation about the position of the creditors. It is simply to recognise that in circumstances where creditors alone stand to benefit, but the plaintiff company is impecunious, it would be wrong not to order security on the basis of purported stultification in circumstances where there is no evidence of any creditor's unwillingness to remove themselves from behind the company and expose their own assets in order to achieve a return on the debts said to be owed to them. 11 Another relevant matter is that it is Mr Wilson's evidence that he chooses to direct an unidentified income stream to cover the immediate needs of his family, where there is other evidence that his family (which I infer includes his wife) has available substantial assets. In circumstances where the plaintiff company is impecunious, I do not accept that it would necessarily stultify these proceedings if an order for security is made - all that might occur is that Mr Wilson may be forced to make a choice about where he directs his so-called "modest and irregular income". The effect of this conclusion is not, as was submitted, to force a partner who has no interest in a company to come forward and place his or her assets at risk. Rather, it is to recognise that when a person says that the effect of an order for security against an impecunious company will be to stultify proceedings, care must be taken not do an injustice to other parties by failing to recognise, first, that other people (in this case, the creditors) may stand to benefit from proceedings, and those other people ought not to be shielded from the risks of litigation in those circumstances and, second, that assets or funds might be or become available depending upon how a person who does have an interest in the company (in this case, Mr Wilson) chooses to organise their financial affairs. 12 Accordingly, I can see no reason, as a matter of principle, why on the facts of this case there should not be orders for security for costs in appropriate amounts, an issue which I will take up separately with the parties. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate: Dated: 1 September 2016 SCHEDULE OF PARTIES NSD 337 of 2016 Defendants Fourth Defendant: RAHUL GOYAL IN HIS CAPACITY AS RECEIVER AND MANAGER OF OCEANLINX LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 104 404 Fifth Defendant: CASSANDRA ELYSIUM MATHEWS IN HER CAPACITY AS RECEIVER AND MANAGER OF OCEANLINX LIMITED (IN LIQUIDATION) (RECEIVERS AND MANAGERS APPOINTED) ACN 077 104 404