Star v NAB [1999] NSWSC 353

Reported Decision : 30 ACSR 583

New South Wales Supreme Court CITATION : Star v NAB [1999] NSWSC 353 revised - 10/09/99 CURRENT JURISDICTION : Commercial FILE NUMBER(S) : 50193/97 HEARING DATE(S) : 16 April 1999 JUDGMENT DATE : 21 April 1999

PARTIES : John Edward Star in his capacity as Liquidator of Lawnkin Pty Limited (In Liquidation), Integrated Developments Pty Limited (In Liquidation), Gurial Pty Limited (In Liquidation) Pty Limited, Gaopaten Pty Limited (In Liquidation) - First Plaintiff & Ors National Australia Bank Limited - Defendant JUDGMENT OF : Rolfe J

COUNSEL : Mr V.R.W. Gray - Plaintiffs Mr S.M.P. Reeves - Defendant SOLICITORS : P.A. Somerset & Co - Plaintiffs Mallesons Stephen Jaques - Defendant CATCHWORDS : DECISION : Application for Security for Costs.; Application granted.; Held it was not established by the plaintiffs that those who stood to gain from the prosecution of the claim were financially unable to stand behind them: the inference was that they were not prepared to or interested in doing so: Bell Wholesale Co Pty Limited v Gates Export Corporation & Ors [1984] ACLR 588 and Yandill Holdings Pty Limited v Insurance Co of North America & Ors [1985] 3 ACLC 542 followed.; Williamson & Anor v Soil Land Garden Suppliers Pty Limited (Sanderson M - Supreme Court of Western Australia - 2 June 1998 - unreported) not followed.

17

JUDGMENT

HIS HONOUR:

Introduction

1 By a Notice of Motion filed on 1 March 1999 the defendant, National Australia Bank Limited, ("NAB"), for which Mr S.M.P. Reeves of Counsel appeared, sought an order that the plaintiffs, for whom and which Mr V.R.W. Gray of Counsel appeared, or, in the alternative, the second to fifth plaintiffs, provide security for NAB's costs of the proceedings in the sum of $346,230 or such other sum as the Court deems appropriate, and an order that the proceedings be stayed until such security is provided. The nature of the plaintiffs' proceedings are set forth sufficiently in a judgment I delivered on 8 April 1999 by which I granted them leave to amend their Summons. I shall not repeat what I said there, save in so far as is absolutely necessary, and I shall assume that the reader has access to that judgment. 2 NAB's application is based upon s.1335 of the Corporations Law, ("the Law"), and Part 53 rule 2(1)(e) of the Supreme Court Rules. In his written submissions Mr Gray stated that the plaintiffs do not dispute the jurisdiction of the Court to order security as the corporate plaintiffs are insolvent, the essential issue being whether it should be ordered in the exercise of the very wide, and often stated as "unfettered", discretion of the Court to make such an order in circumstances where its effect would be to stultify the litigation. That will happen in all probability, because it is clear that the corporate plaintiffs do not have the financial wherewithal to provide the security sought, and the first plaintiff, who is their liquidator, is not prepared to provide security personally. The first plaintiff was appointed voluntarily as liquidator by the corporate plaintiffs. 3 The sum of $346,230 was supported by the affidavit of the solicitor for NAB, Ms Linda Ellen Johnson, sworn 28 February 1999. She set forth, in some detail, how the figure was calculated and, in paragraph 13, stated:- "Having regard to the foregoing, I estimate that the properly recoverable party party costs for the Bank would be $346,230 (being 65% of the costs of the Bank). In calculating this sum, I have excluded the costs of solicitors and counsel incurred by the Bank to date in relation to these proceedings." 4 These proceedings, together with three other proceedings raising related issues, have been specially fixed for hearing to commence on 5 October 1999 with a time estimate of eight to ten weeks. Mr Reeves tendered the Second Amended Summons in proceedings 50260 of 1995 in which Bernard Laverty Pty Limited is the plaintiff and NAB is the fifth defendant, and the Amended Summons in proceedings 50140 of 1997 in which Mr Gordon McNichol Finlay is the plaintiff and NAB is the first defendant. These are two of the related proceedings. 5 In the first mentioned of those proceedings the plaintiff asserts that NAB is liable to it because of NAB's role in inducing, procuring and being knowingly concerned in Nambucca Investments Pty Limited engaging in misleading and deceptive conduct in relation to the solicitation of debenture funds during the currency of NAB's facilities and, by reason thereof, NAB is allegedly liable to the plaintiff, Bernard Laverty Pty Limited, in damages. It is pleaded that NAB required Nambucca Investments Pty Limited and its subsidiaries, which include the corporate plaintiffs in the present case, to provide security for its loans and other facilities, which purportedly took priority over the Mortgage Debenture, except as to a second ranking charge in favour of NAB, in breach of the terms of the Mortgage Debenture, and:- "By reason of the Bank's security arrangements and priority agreement, and the fact that subsidiaries held the significant assets acquired by the use of the debenture holder's moneys including the plaintiff's and the represented parties the Bank knew that debenture holders including the plaintiff and the represented parties had little or no security for the repayment of moneys lent to the Company." This is essentially the same issue as is raised in these proceedings, although the relief sought is different. However, from a practical point of view, if the plaintiff is entitled to succeed it may end up with a similar financial result as if the present proceedings go forward. 6 In the second mentioned proceedings Mr Finlay seeks an order that NAB account to him for all benefits by way of payment of principal, interest, charges and fees received by NAB out of the assets of Nambucca Investments Pty Limited and its subsidiaries during the currency of the facilities referred to in the Amended Summons by reason of the realisation of its securities over the assets of Nambucca Investments Pty Limited or any of its subsidiaries. Certain other relief was sought against NAB including an order that its securities over the assets of Nambucca Investments Pty Limited, or any of its securities, be set aside:- ".. so far as they impede, directly or indirectly, the recovery of the debt of the debenture holders referred to herein or create any priority equal to or greater than that of the said debenture holders." Thus essentially the same result is sought, so far as Mr Finlay is concerned, as the plaintiffs seek in these proceedings. 7 The purpose of tendering those pleadings in this application was to show that similar issues were raised in the related proceedings by Bernard Laverty Pty Limited and Mr Finlay, each of which and whom has an interest in establishing liability on the part of NAB in respect of its various transactions, including its transactions with the present corporate plaintiffs which were subsidiaries of Nambucca Investments Pty Limited. A Tension Exists 8 There is a clearly a tension between s.1335 of the Law and the various sections, such as ss.588FE and FF, which allow proceedings to be brought by the liquidator to set aside certain transactions in the event of companies being insolvent. On the one hand the Law contemplates a requirement for the giving of security and, on the other, the bringing of proceedings by or on behalf of insolvent companies. The fact that the latter sections do not excuse an insolvent company from the provisions of s.1335 show, in my opinion, that the legislature did not intend that there should be any dispensation given to those companies in relation to the application of s.1335. The rationale behind this would seem to be that the parties who would benefit by proceedings under s.588FF will, generally speaking, be creditors and others interested in the insolvent companies recovering moneys and, therefore, sufficiently interested in the outcome of such proceedings to provide funds to the liquidator to prosecute them. It seems to me that unless this is the reasoning the situation will exist whereby insolvent companies, notwithstanding the provisions of s.1335, can rely upon its stultifying effect to avoid the provision of security, and thereby defeat the purpose of s.1335. 9 That this is not the position was made clear by the Full Court of the Federal Court in Bell Wholesale Co Pty Limited v Gates Export Corporation & Ors (No 2) [1984] ACLR 588. At p.591 Sheppard, Morling and Neaves JJ said:- "In our opinion the Court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and prove the necessary facts. We pause to make it clear that the matters we have considered are by no means the only relevant ones. We have concentrated our attention on them because they were at the forefront of the appellant's argument. But the Court's discretion is unfettered; each case must depend on its own circumstances; see generally Patterson, Ednie & Ford, Australian Company Law Third Edition para 533/1 et seq." 10 In Yandil Holdings Pty Limited v Insurance Co of North America & Ors (1985) 3 ACLC 542 at p.545, Clarke J said:- "The principles which should guide me in resolving the present dispute are not in doubt. The Court is vested with an unfettered discretion as to whether an order is made and, if so, upon what terms. The fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the Court's discretion in the plaintiff's favour. It must be observed however in this respect that the mere fact that the plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order will stultify the plaintiff's claim. There is a line of authority, commencing with the unreported decision of Yeldham J in Tullock v Walker (8 December 1976), standing for the proposition that if the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security then it is, generally speaking, inappropriate to refuse an order." 11 His Honour then quoted the passage from Bell Wholesale to which I have referred and continued:- "Read literally this statement suggests that a court is bound to order security unless the evidence referred to is forthcoming. But I do not understand their Honours to be suggesting that the Court's discretion was fettered in this way. They were dealing with a case in which the primary question was whether the onus lay on the applicant for security to bring forth evidence of the ability of the persons likely to benefit to provide the adequate security. Their Honours made the statement quoted in decisively rejecting the plaintiff's submission that that question should be answered affirmatively." 12 Mr Reeves, with typical frankness, referred me to the decision of Sanderson M in Williamson & Anor v Soil Land Garden Suppliers Pty Limited & Ors (Supreme Court of Western Australia - 2 June 1998 - unreported). In that case the insolvent companies had made applications pursuant, inter alia, to s.588FF, and there was an application for security for costs. 13 Whilst the Master agreed that the discretion to order security is unfettered, he came to the conclusion that in that case it was inappropriate to so order. He did not consider that the liquidator was under an obligation to give security, it being noted in that case, unlike the present, that the liquidator was appointed by the Court on the application of creditors. 14 The Master considered it was "most important to focus upon the position held by the liquidator" and the duties thereby imposed on him, and that to impose upon the liquidator an obligation to provide security "seems to me likely to frustrate the liquidator in the exercise of his duty". 15 The Master noted that not only was the liquidator suing, but so also was the company in liquidation, and he considered that if an order for security for costs was not to be made against the liquidator it also ought not to be made against the company because the two causes of action were intertwined, and that to effectively bring one to a halt and to allow the other to proceed would not only be inconsistent, but might frustrate the conduct of the litigation as a whole. In the result the Master did not consider that it was appropriate to grant security and, if I may say so with respect, he does not seem to have considered the prospect of those interested in the liquidator recovering assets for the insolvent companies indemnifying the liquidator.