New South Wales Supreme Court CITATION : Northern Southern Western Supermarkets Pty Limited (subject to a Deed of Company Arrangement) v HIH Casualty & General Insurance Limited (in Liquidation) & Anor [2002] NSWSC 541 FILE NUMBER(S) : SC 50150/00 HEARING DATE(S) : 17/06/02 JUDGMENT DATE : 17 June 2002 Northern Southern Western Supermarkets Pty Limited (subject to a Deed of Company Arrangement) (Plaintiff) PARTIES : HIH Casualty & General Insurance Limited (1st Defendant) Heath Lambert Australia Pty Limited (2nd Defendant) JUDGMENT OF : Einstein J Mr L Foster SC (Plaintiff) COUNSEL : Ms E Cheeseman (1st Defendant) Mr D Pritchard (2nd Defendant) Withnell Hetherington (Plaintiff) SOLICITORS : Blake Dawson Waldron (1st Defendant) Malleson Stephen Jaques (2nd Defendant) CATCHWORDS : Practice and Procedure - Costs - Security for costs - Funding arrangements - Principles applicable LEGISLATION CITED : Corporations Act 2001 Supreme Court Rules Bell Wholesale Co Pty Limited v Gates Export Corporation (1984) 2 FCR 1 Chartspike Pty Limited (in Liq) v Chahoud [2001] NSWSC 585 Gore v Justice Corporation Pty Limited [2002] FCA 354 Idoport Pty Limited v National Australia Bank [2001] NSWSC 744 K P Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 CASES CITED : MA Productions Pty Limited v Austaram Television Pty Limited (1982) 7 ACLR 97 Memutu Pty Limited v Lissenden (1983) 8 ACLR 364 National Bank of New Zealand Limited v Donald Export Trading Limited [1980] 1 NZLR 97 Rosenfield Nominees Pty Limited v Bain & Co (1988) 14 ACLR 467 Tulloch v Walker (Yeldham J, 8 December 1987, unreported) Yandil Holdings Pty Limited v Insurance Co of North America (1985) 3 ACLC 542 DECISION : Security for Costs to be ordered; Bank guarantee to be provided; Funders proffer of it's undertaking to the Court not acceptable IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST EINSTEIN J Monday 17 June 2002 Revised Friday 21 June 2002 50150/00 NORTHERN, SOUTHERN & WESTERN SUPERMARKETS PTY LIMITED – SUBJECT TO DEED OF COMPANY ARRANGEMENT ACN 003 353 571 v HIH CASUALTY & GENERAL INSURANCE LIMITED (IN LIQUIDATION) AND HEATH LAMBERT AUSTRALIA PTY LIMITED JUDGMENT The Motions 1 There is before the Court a notice of motion filed by the first defendant on 13 May 2002 seeking: · an order that the plaintiff within fourteen days provide security for costs to the first defendant in the sum of $411,313 or such other amount as the Court deems appropriate by way of bank guarantee in a form acceptable to the first defendant or the Registrar; · a further order that if the security so required be not provided within fourteen days, the proceedings be stayed. 2 Also before the Court is a motion in similar form filed by the second defendant on 11 April 2002 seeking an order for the provision of security for costs of the second defendant. The sum now sought is between $158,514 and $178,075. The Proceedings 3 These proceedings were commenced by the filing of a summons on 30 October 2000 by Northern, Southern & Western Supermarkets Pty Limited [then subject to a deed of company agreement]. A further amended summons joining Heath Lambert Australia Pty Ltd as second defendant was filed on 16 November 2001. 4 The plaintiff claims an amount in the order of 4.75 million dollars plus interest since 1996. The first defendant is said to have been the insurer of the plaintiff. The second defendant was the insurance broker of the plaintiff. The proceedings concern a claim for indemnity by the plaintiff in respect of a fire which occurred at and apparently destroyed supermarket premises situated at 18 Oxley Street Bourke on 8 February 1996, which claim for indemnity has been denied by the first defendant. 5 In its defence HIH does not admit the alleged policy of insurance and alleges that if the policy of insurance was in fact entered into, defences by way of fraud and non-disclosure are available to defeat the plaintiff's claims. 6 The plaintiff's claim against Heath Lambert is an alternative claim. The plaintiff asserts that Heath Lambert breached its retainer or was negligent in effecting the plaintiff's insurance renewal for the relevant period. The allegation in respect of the second defendant's suggested wrongful conduct is relevant to the plaintiff's alleged non-disclosure and to the non-admission of the insurance policy by the first defendant. 7 The notices of motion for hearing are supported by a number of affidavits and exhibits to those affidavits. 8 Of background relevance are the circumstances that the plaintiff operated a number of supermarkets in New South Wales including the subject supermarket. The plaintiff lodged an insurance claim on or about 9 February 1996. On 16 February 1996 the plaintiff was placed into voluntary liquidation. 9 The plaintiff entered into a deed of company arrangement which commenced on 14 March 1996. Mr Watson was committed to stand trial on arson charges on 19 July 1997 and was acquitted after a five week trial on 21 August 1998. The funding agreement 10 On 22 June 2000 the plaintiff entered into a funding agreement with Insolvency Litigation Fund Pty Limited, (previously called Insolvency Management Fund Pty Limited), in order to fund the proceedings. A copy of the funding agreement has been admitted into evidence, subject to certain confidentiality orders relating to percentages and matters highlighted on the document in yellow. The principles 11 In Idoport Pty Limited v National Australia Bank (2001) NSWSC 744 the Court generally dealt with the subject of security for costs applications and the principles which obtain in relation to those applications. That judgment dealt inter alia with circumstances in which plaintiffs sue, at least in substantial part, for the benefit of other persons. Clearly enough where there are persons standing behind an impecunious plaintiff or plaintiffs and who seek to take the benefit of our system of justice without the corresponding burden (in the form of a potential adverse costs order), the considerations in favour of an order for security for costs are powerful considerations. See for example Chartspike Pty Limited (in Liq) v Chahoud [2001] NSWSC 585 (Young CJ in EQ). It has been said that in this situation it will generally be inappropriate to refuse to make an order for security. Yandil Holdings Pty Limited v Insurance Co of North America (1985) 3 ACLC 542 at 545. As Giles J said in Rosenfield Nominees Pty Limited v Bain & Co (1988) 14 ACLR 467 at 472 to 473: "I consider that those behind plaintiffs should be and can be required to undertake some of the risks of the proceedings if they wish to have its benefits: Tulloch v Walker (Yeldham J, 8 December 1987, unreported); National Bank of New Zealand Limited v Donald Export Trading Limited [1980] 1 NZLR 97; MA Productions Pty Limited v Austaram Television Pty Limited (1982) 7 ACLR 97; Memutu Pty Limited v Lissenden (1983) 8 ACLR 364; Bell Wholesale Co Pty Limited v Gates Export Corporation (1984) 2 FCR 1". 12 It is plain enough that the discretion to award security for costs requires to take into account all of the relevant facts, matters and circumstances and is a judicial discretion to be exercised following the adducing of all evidence by each party to an application seeking to have such an award made. The principles were generally the subject of a judgment by Beazley J in K P Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 referred to in paragraph 49 of the Idoport judgment. The power of the Supreme Court to make an order for security for costs 13 First, the Court has inherent jurisdiction to make such an order in addition to its specific statutory jurisdiction. Secondly, s 1335 of the Corporations Act 2001 generally outlined in paras 18 and following of the Idoport judgment, provides a power insofar as a corporation as a plaintiff is concerned. Thirdly, Pt 53 of the Supreme Court Rules which is set out in paragraph 21 of the Idoport judgment is relevantly engaged. 14 There is no issue raised at the bar table in terms of the impecuniosity of the plaintiff. Principally Mr Foster SC has sought to address submissions in order to accommodate the position of the funding, these being in part submissions as to principle and in part submissions which directly go to the facts said to be before the Court on this interlocutory application. 15 Insofar as the questions of principle are concerned Mr Foster has submitted, as I understood him, that in a circumstance where an impecunious plaintiff commences proceedings which are the subject of a funding agreement which is exposed and where the funder does not stand, in the event of the plaintiff's success, to acquire the whole of the proceeds, the Court ought take that circumstance into account as an important discretionary consideration. 16 An additional and/or a supplementary part of the submission is that where it is possible for a plaintiff to establish that the Plaintiffs impecuniosity is directly attributable to a defendant's conduct ["the nexus factor"] and but for the plaintiff having to obtain funding from an outside funder, such plaintiff may have been entitled to oppose all or part of an order for security for costs on the basis of the significance of the nexus factor, the mere fact that a funding arrangement has now been procured ought not, as a matter of principle, deny to the plaintiff resisting the security for costs application, the benefit of that factor as a continued and important discretionary consideration. The submission was that in part, the entitlement, well established through the authorities, of a plaintiff to rely on the nexus factor as a powerful discretionary factor in defending a security for costs application, remains a live consideration for the court, to be necessarily accommodated alongside the circumstance that, at the time of the security for costs application, a funding arrangement was a material part of the matrix of circumstances before the court. 17 It seems to me that the submission has clear difficulties as a matter of principle for the reason that once a funding arrangement has been consummated, a dimensional change has taken place in respect of the anterior dynamics, that is to say in respect of the position as it had been prior to the effecting of the funding arrangement. 18 In any event, the matter being discretionary, the evidence presently before the court on the instant interlocutory application makes it clear that there is no place for the operation of the nexus factor in the decision to award security and that there is no form of discount in the appropriate amount to be awarded which is to be taken into account by reference to some such nexus factor. 19 The central questions which have been the subject of cross submissions have related to the amount for which security should be ordered, the rates by reference to which security should be ordered and the form in which security should be ordered. 20 Early in the course of the hearing of the motions, the Court made plain to the parties that there appeared to be a particular difficulty in resolving at this point in time the matters which were the subject of contradictory evidence and cross contentions at the bar table. That matter concerned the proper estimate of the amount of Court hearing time which the final hearing of the present proceedings is likely to take. It seems that at least on a possibly optimistic estimate, Mr Hetherington, the solicitor for the plaintiff, was of the view that the proceedings might, in terms of the final hearing, be concluded within a period of three weeks. He however had, as I understood his evidence, been of the view that four weeks may be appropriate, although hopefully three weeks would see the final hearing through. On the other hand each of the defendants' counsel and their relevant evidence suggested a period of five weeks as an appropriate period for the duration of the final hearing. 21 At this stage of the interlocutory proceedings where the evidence is a distance from being complete, (the defendants' evidence is certainly not yet due) it seems to me that it is very difficult for a court to assess the likely duration of the final hearing. One has in court presently senior counsel for the plaintiff strongly pressing upon the Court the perception, based as I understand it upon his and his instructing solicitor's beliefs and experience, that the defendants may be altogether exaggerating the type, the substance and particularly the time to be taken in dealing with the issues which seem to be live on the existing pleadings. On the other hand the defendants, well within their entitlement, each represented by counsel and with their solicitors having given evidence to this effect, are seeking to have the Court accept a five-week estimate as appropriate. 22 My own view is that the case management procedures open to the Court permit the Court to accommodate the difficulty that at some stage in the future one ought, by reference to far more information than is currently available, to be in a better position to estimate the likely duration of the final hearing. For that reason I have suggested to the parties and the defendants have accepted, and as I understand it subject to the matters the subject of this judgment, the plaintiffs did not dissent a procedure whereby the Court would now make an order for the provision of security for costs on the basis of an estimated three week final hearing, but would further order that the matter not be fixed for hearing until the defendants have had an opportunity to make a further application to the Court for an increased security order or have determined and communicated this to the plaintiff and to the Court, that they were content to proceed to a final hearing under the aegis of the existing security for costs orders. In short that accommodation ought enable all three parties when next before the Court, to far better identify the likely duration of a final hearing so that a judge with more information than is now available to me, would be in a position to increase the security for costs order or to refuse to do that, but on detailed evidence as to issues, statements and as to any further amendments to the pleadings which may come forward. 23 Remaining with the issue of the precise orders insofar as security is concerned, there is a difficulty in the way in which the evidence has come forward from all three parties by reason of the way in which the time estimates and the rate estimates for matters outside the three week hearing, as well as for the three week hearing, are concerned. In short, it is not possible to simply look at three sets of material from the three parties and to find a common approach from which to determine what the appropriate rate should be. 24 An example of the different approaches which are taken may be seen for example in the affidavit of Mr Fox of 13 May 2002, particularly insofar as exhibit HCF1 at pages 68 and 69 are concerned, [that exhibit becoming exhibit D1(i) before the Court]. The other approach is exposed by Mr Hetherington in his affidavit of 16 May 2002 where his estimates are given generally on page 3. 25 In those circumstances, as I have indicated to the parties, the appropriate procedure is to refer to a Registrar the issue of determining the rates which are appropriate in terms of a three week hearing so that some precision would be given to the security for costs orders. I propose to so refer that issue to a Registrar when short minutes of order are brought in. The form of the security to be provided 26 The next issue which Mr Foster addressed upon related to the form of security to be provided to the Court. It is common ground apparently that the party to the funding agreement, namely Insolvency Litigation Fund Pty Limited is as I understand it a wholly owned subsidiary of the public company, Insolvency Management Fund Limited. In those circumstances the submission from the plaintiff's side of the bar table has been that the Court ought accept an undertaking given to it by the holding company to pay any adverse costs order made against the plaintiff in the proceedings in favour of the defendants. In relation to that contention the second defendants have tendered and drawn the Court's attention to the half yearly report of the holding company (exhibit D2(iv)). That exhibit makes plain, in the "Review and Result of Operations" section of the directors report signed by the managing director on 14 March 2002, the following: "1. The net loss after tax, of the consolidated entity, for the 6 month period ending 31 December 2001 amounted to $1,237 million (2000: $2,904 million). 2. The prospectus to raise the initial capital of the company arrived with prospective shareholders on 11 September 2001. Despite this unfortunate timing the issue closed oversubscribed and the company commenced business as a litigation funder in October 2001. 3. The first aim of management was to retire the $3 million due to Expectation Pty Ltd by 30 June 2002. At the time of writing we are half way towards that goal and believe that, if the current list of cases go according to plan, we should have those monies repaid around 30 June 2002. 4. The company has two case streams: (a) 80 or so smaller cases overseen by the Sydney Office; (b) 10 or so large cases split between the Sydney and the Perth Office. 5. Large cases are considered to be those likely to bring in $1 million or more in net income to IMF. 6. It is the intention of the Board to announce the signing of agreements to fund these large cases as and when future funding agreements are completed. We will also announce to the ASX any settlement, judgment and abandonment of these cases. 7. The current large cases being funded by the company are as follows: (a) an action pursuing $10 million by 200 applicants in the Federal Court in Queensland against Patrick Corporation and others; (b) an action by 1,200 plaintiffs in the Supreme Court of Western Australia pursuing about $80 million from the Finance Brokers Control Board and various legal firms in Western Australia; (c) an action by some 200 plaintiffs in the Supreme Court of New South Wales pursuing about $30 million from Financial Wisdom and Twenty First Australia Inc; (d) an action by defendants of the deceased passengers in the Whyalla Airlines crash in the USA pursuing approximately $50 million; (e) an action by a liquidator in the Supreme Court of New South Wales pursuing the directors of Doran Construction for approximately $4 million; (f) an action in the Supreme Court of New South Wales on behalf of a liquidator suing to enforce an insurance policy for approximately $5 million; (g) an action in the Supreme Court of Queensland on behalf of a liquidator pursuing the Queensland Local Government Super Board for approximately $5 million as the result of an alleged uncommercial transaction; (h) an action by a liquidator to be lodged in the Supreme Court of New South Wales claiming $18 million as damages for breach of fiduciary duty and other remedies; (i) an action to be lodged in the Supreme Court of New South Wales against a firm of solicitors alleging negligence and claiming damages of $10 million; (j) an action to be lodged in the Supreme Court of South Australia on behalf of the liquidator of Monaad Corporation against an Aerospace company claiming breach of contract and negligence in manufacture with the claim set at $7 million; (k) an action by the liquidator of Nomad Telecommunications claiming insolvent trading and preferential payments to be lodged in the Supreme Court of Victoria; (l) a claim against an investor in relation to an investment contract claiming $30 million in the Federal Court in New South Wales. 8. Theses large cases are at various stages of completion ranging from the recent issue of legal proceedings to being on the verge of settlement. 9. At the present time in the absence of serious competition the company is able to pick and choose cases it will fund from the many opportunities which are presented to it. This will no doubt change with the advent of competition. 10. The company's operations are running generally according to its expense budget. 11. All amounts contained in this report and in the financial report have been rounded to the nearest $000 (where rounding is applicable) under the option available to the company under ASIC Class Order 98/0100. The company is an entity to which the class order applies." [Review and Result of Operations section running from paragraph 1 through to paragraph 11 inclusive]. 27 The defendants have sought that the form of security to be provided be a bank guarantee. 28 It is plain enough that the Court's discretion in relation to the form of guarantee to be provided is at large. 29 Mr Foster has submitted that the holding company offering the undertaking to the Court, is a public company with net assets of approximately twelve million dollars. Mr Pritchard of counsel for the second defendant, in drawing the Court's attention to the Review and Results of Operation section of the half yearly report, has made the point, which it seems to me is one of real substance, that the nature of the activities of Insolvency Litigation Fund Pty Limited in terms of the cases being funded by it and the scale of the litigation currently being funded by the company, is such that defendants, entitled to certainty in terms of security for costs, should not be obliged to have any possible question marks over the value of their security for costs protection in the form of a mere undertaking to the Court, albeit by the public company. Clearly enough the list of proceedings in respect of which the funder is currently funding large cases may involve costs of very high order if plaintiffs were unsuccessful. Additionally, as it seems to me, the mere proffering to Court of an undertaking by the funder of the type Mr Foster suggests should be sufficient, exposes the defendants to the circumstance that other large cases may well become the subject of funding, so that over a period of time during the pendency of the remaining interlocutory steps in these proceedings, the defendants would simply necessarily have no control over precisely what it was that Insolvency Management Fund Limited or its subsidiary were or were not disposed to fund. 30 In all of those circumstances and bearing in mind what I understand from its name, Insolvency Litigation Fund Pty Limited, to be the central undertaking of this company, it seems to me appropriate to require as part of the orders for security, that a bank guarantee in conventional form for the payment by the plaintiff or funder be provided to the defendants. Other matters 31 The judgment should record that as I understand the facts the plaintiff did go into voluntary administration subject to a deed of arrangement. 32 Mr Pritchard has cited in the course of his submissions, the decision in Gore v Justice Corporation Pty Limited [2002] FCA 354 being a decision of the full Federal Court which, in paragraph 64, refers to Justice Corporation, whilst not controlling the litigation in question, having had a direct financial interest in the outcome of the proceedings. That judgment included the Court making the point that Justice Corporation had offered no explanation for its participation in the litigation, the only inference drawn by the Court being that it was a commercial investment. The Court made plain that Justice Corporation was there prepared to take a commercial risk and the holding was that there were no extenuating circumstances to save that corporation from an order to pay certain of the costs in that case of Clayton Utz. It seems on my understanding of the evidence before the Court on this interlocutory application appropriate also to infer that Justice Corporation has a direct financial interest in the outcome of these proceedings and it having offered no explanation for its participation in the litigation, the appropriate inference is that it is a commercial investment. 33 Finally there were some short submissions addressed to the exercise by the Court in a security for costs context, of authorities generally dealing with the proposition that when the existence of an insurance policy is not disputed in an action for indemnity under the policy, it is not ordinarily appropriate to grant security for costs in favour of an insurer. The decisions are usefully collated in the first defendant's written submissions paragraphs 13 and 14 and the paragraph misnumbered 23 on p 9. 34 As I understood the submissions of Mr Foster, whilst the plaintiff to a certain extent sought to rely upon the circumstance that one does have here, as the first defendant, an insurer, he accepted that there was no cast iron rule in the circumstances to bind the Court's discretion and that the facts, matters and circumstances to be found in the whole of the materials before the Court on the interlocutory application are to be taken into account in the proper exercise of the Court's discretion. 35 For those reasons the security for costs motions will be dealt with by short minutes of order which when they are brought in should accommodate each of the parameters referred to above. I certify that paragraphs 1 - 35 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 17 June and revised on 21 June 2002 Susan Piggott Associate to Justice Einstein 21 June 2002 Last Modified: 07/25/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.