Reported Decision : 56 ACSR 35 64 NSWLR 244 New South Wales Court of Appeal CITATION: WINNOTE PTY LIMITED v PAGE & ORS [2005] NSWCA 362 HEARING DATE(S): 30 September 2005 JUDGMENT DATE: 28 October 2005 JUDGMENT OF: Mason P at 1 DECISION: Application dismissed with costs. CATCHWORDS: COSTS - security for costs - where a corporate appellant is in liquidation - s1335(1) Corporations Act 2001 (Cth) - applicability to appeals - whether plaintiff includes appellant - Pt 51 r16 Supreme Court Rules - whether power to order security is engaged - special circumstances - mere impecuniosity - presence of a litigation funder - where co-appellant is solvent - highly likely that costs will be ordered against both appellants - refusal of discretion - delay. (D) Mines Act 1958 (Vic) Companies Act 1862 (UK) LEGISLATION CITED: Supreme Court Rules Pt 51 r16 Constitution s109 Corporations Act 2001 (Cth) s1335(1) Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 Fiduciary Limited v Morning Star Research Pty Ltd [2004] NSWSC 664, 208 ALR 564 Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd [2005] NSWCA 83 FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 147 Gemelle v Commissioner of Taxation (1982) 7 ACLR 3 Gould v Vaggelas (1985) 157 CLR 215 Harper v Ariadne Aust Ltd [1984] 2 Qd R 523 Harrington Services Pty Ltd (In liq) v Harrington [2003] NSWCA 89 In Re Consolidated Southrand Mines Deep Limited (1909) WN 66 In Re Diamond Fuel Company (1879) 13 Ch D 400 In Re Photographic Artists Co-Operative Supply Association (1883) 23 Ch D 370 Interwest Ltd v Tri-Continental Corporation Ltd (1991) 5 ACSC 621 CASES CITED: J & M O'Brien Enterprises Pty Ltd v The Shell Company of Australia Ltd (1983) 7 ACLR 790 John Bishop (Caterers) Ltd v National Union Bank Ltd [1973] 1 All ER 707 Johnson v Gore Wood & Co [2002] AC 1 Maples v Hughes [2002] NSWSC 617 Melville v Craig Nowlan & Associates Pty Ltd (2001) 54 NSWLR 82 Pearson v Naydler [1977] 1 WLR 899 Project 28 Pty Ltd (Formerly Narui Gold Coast Pty Ltd) v Barr [2005] NSWCA 240 Roach v Page & Ors (No 1) [2003] NSWSC 722 Sinclair v Glasgow Corporation (1904) 6 F (Ct of Sess) 818 Strata Consolidated (Australia) Pty Ltd v Bradshaw [2000] NSWCA 114 (Registrar Jupp) affirmed on appeal [2000] NSWCA 225 Thomas v D'Arcy [2005] QCA 68 Transglobal Capital Pty Ltd v Yolarno Pty Ltd (2004) 60 NSWLR 143 Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No 1) (1993) 11 ACSR 300 PARTIES: Winnote Pty Limited (In liquidation) & Anor v Brian John PAGE & Ors FILE NUMBER(S): CA 41095/2004 Claimants: R Darke SC COUNSEL: Opponent: Dr A S Bell Claimants: Maurice Blackburn Cashman SOLICITORS: Opponent: Allens Arthur Robinson LOWER COURT JURISDICTION: Supreme Court LOWER COURT FILE NUMBER(S): SC 20950/1997 LOWER COURT JUDICIAL OFFICER: Sperling J IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41095/2004 SC 20950/1997 MASON P Friday 28 October 2005 WINNOTE PTY LIMITED (In Liquidation) & Anor v Brian John PAGE & Ors JUDGMENT 1 MASON P: The claimants seek security for costs with an attendant stay of proceedings against the first of two appellants. That appellant is a company in liquidation that is undoubtedly in straitened financial circumstances. Its prosecution of the appeal against the claimants is assisted by a funder that will receive an undisclosed portion of any favourable verdict. Proceedings below 2 The second appellant (Mr Roach) and the first appellant (Winnote) sued the partners of Freehill Hollingdale & Page Sydney (FHPS) and the partners of Freehill Hollingdale & Page Melbourne (FHPM). Damages were claimed on the basis that the solicitors had negligently performed a retainer to assist the plaintiffs in securing an interest in a peat deposit in Victoria. The trial in the Supreme Court before Sperling J lasted more than 80 days and resulted in verdicts for the defendants with costs. 3 Winnote established a breach of duty of care owed to it by FHPM. The solicitor with the carriage of the matter had failed to appreciate that, under Victorian law, peat is not at the exclusive disposal of the landowner, but rather constitutes a mineral subject to the disposal of the Crown under Mines Act 1958 (Vic). Wrong advice to the effect that peat was a stone and not a mineral meant that no steps were taken to obtain a mining lease and/or exploration licence. A third party did so, thereby frustrating the proposed venture. 4 Mr Roach failed to establish that any relevant duty was owed to him in relation to the securing of the peat deposit. The trial judge also found that any mining lease or exploration licence would have been obtained for Winnote, not Mr Roach personally. 5 Despite obtaining a finding as to breach, Winnote was unsuccessful in the proceedings because it failed to prove any ensuing loss. Primarily, this was because Winnote did not prove that its lost opportunity to exploit the peat deposit had any value. Winnote also failed in its alternative claim for reliance damages. These findings as to damages would also have been fatal to Mr Roach's claim, had he established breach of a relevant duty of care. 6 At first instance, there had been an order (by consent) against Winnote for security with respect to pre-trial costs, with leave to apply for a further order in relation to the trial. 7 Further security was sought shortly before the commencement of the trial in August 2003. It was refused (Roach v Page & Ors (No 1) [2003] NSWSC 722). Then, as now, the evidence established that the liabilities of the incorporated plaintiff (in liquidation) far exceeded its assets; the major creditors were other companies directly or indirectly owned and controlled by Mr Roach and his wife; and there was no evidence of the financial condition of those other companies or of Mr and Mrs Roach (per Sperling J at [6]). Sperling J said: 9 The present application came within the class of case where a natural person is joined as a co-plaintiff with an impecunious incorporated plaintiff and where the claims of the plaintiffs overlap in the sense that they call for substantially the same legal work in defence. 10 In such a case, the conflicting interests and considerations are as follows. In favour of making an order there is the consideration that those who stand to benefit from a judgment in favour of the incorporated plaintiff are not exposed to the prospect of having such assets as they own being available to satisfy an order for costs in favour of the defendant. On the other hand, militating against an order, there is the consideration that, irrespective of whether proceedings by the incorporated plaintiff are stayed, the defendant will incur the same costs by reason of the natural person continuing the proceedings as a plaintiff. An order for costs in favour of the defendant would then be worthless if the co-plaintiff is without means. But that is seen to be immaterial because, in an application for a stay of proceedings, it is not a relevant consideration that a plaintiff who is a natural person would be incapable of satisfying an order for costs. 11 How such interests are to be balanced out in such a case was decided in Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, a decision of the Full Court of the Supreme Court of Queensland. It was held that, in such a case, an order for security for costs should not be made (impliedly, all other things being equal). 12 In Maples v Hughes [2002] NSWSC 617, Studdert J refused an application for security for costs in another such case. Appeal 8 Sperling J delivered final judgment on 15 November 2004. On 9 December 2004 a holding notice of appeal was filed by the appellants. The respondents/claimants entered a notice of appearance of 4 February 2005. 9 The active notice of appeal, with grounds, was filed and served on 8 March 2005. 10 Under the Rules, the appellants were required to file their submissions within a further six weeks. Several extensions were granted by consent. The outline of submissions was filed and served on 30 May 2005. It is an 86 page document prepared and signed by Dr Andrew Bell of counsel. It has not been suggested that the appeal is groundless. 11 There is also an application for leave to appeal filed by FHPS and FHPM in relation to a costs issue. 12 First notification of the claimants' intention to seek security for costs of the appeal was given on 15 June 2005. 13 The court was informed that Winnote (but not Mr Roach) is funded in the appeal by a litigation funder on terms that the funder will receive an undisclosed percentage of the fruits of the litigation if successful. Power to order security for costs on appeal 14 The claimants invoke two bases for ordering security for costs of the appeal. 15 First, they rely on s1335(1) of the Corporations Act 2001 (Cth) which states: Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. 16 In Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No 1) (1993) 11 ACSR 300 Kirby P was inclined to think that s1335(1) was inapplicable to appeals, although he refrained from resolving the question finally. His Honour thought the words "plaintiff" and "defendant" to be inapplicable to an appeal, where parties are normally described as "appellant" and "respondent". He considered that this would have been known to the legislature when it enacted s1335(1). 17 With respect to his Honour, this view does did not accord with the liberal, purposive approach consistently taken over many years to a provision that can be traced back as far as s69 of the Companies Act 1862 (UK). With only one exception of which I am aware, courts in the United Kingdom and Australia have seen no difficulty in ordering security for costs against appellant companies for well over a century, usually invoking the provision explicitly (see In Re Diamond Fuel Company (1879) 13 Ch D 400, In Re Photographic Artists Co-Operative Supply Association (1883) 23 Ch D 370, In Re Consolidated Southrand Mines Deep Limited (1909) WN 66, Gemelle v Commissioner of Taxation (1982) 7 ACLR 3, J & M O'Brien Enterprises Pty Ltd v The Shell Company of Australia Ltd (1983) 7 ACLR 790 (Bowen CJ). The exception to the last line of cases is Sinclair v Glasgow Corporation (1904) 6F (Ct of Sess) 818), a case in which the reasoning is not reported. 18 This Court has given the word "plaintiff" in the provision an expansive meaning that extends to a defendant who has filed a cross-claim (Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301). 19 Kirby P's doubts have been put to rest by recent decisions in this Court applying s1335(1) and its predecessor to corporate appellants (Strata Consolidated (Australia) Pty Ltd v Bradshaw [2000] NSWCA 114 (Registrar Jupp), affirmed on appeal [2000] NSWCA 225, Harrington Services Pty Ltd (In liq) v Harrington [2003] NSWCA 89 (Hodgson JA ), FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 147 (Handley JA)). 20 Secondly, the claimants rested the power on Pt 51 r16 of the Supreme Court Rules which states: Security for costs (1) Where a notice of appeal with appointment has been filed under rule 6, the Court of Appeal may, in special circumstances, order that such security as the Court of Appeal thinks fit be given for the costs of the appeal. (2) Subject to subrule (1), no security for the costs of an appeal to the Court of Appeal shall be required. (3) Subrules (1) and (2) do not affect the powers of the Court under Division 6 of Part 42 of the Uniform Civil Procedure Rules 2005 (which relates to security for costs). 21 The requirement to establish "special circumstances" appears designed to negate the common law in which appeals are exceptions to the general rule that impecuniosity is not a bar in itself (Melville v Craig Nowlan & Associates Pty Ltd (2001) 54 NSWLR 82 at 108[100], Transglobal Capital Pty Ltd v Yolarno Pty Ltd (2004) 60 NSWLR 143 at 147[13]). 22 Invocation of r16 led to debate as to whether "special circumstances" had been demonstrated. It was submitted that mere impecuniosity did not establish special circumstances (see generally Transglobal). Here there was more, in that a clearly insolvent corporation is the principal appellant in an appeal which, if successful to a substantial degree, would enure to the benefit of Mr Roach. Furthermore, the appeal is being supported by a funder against which it might not be possible to make an order for costs without a finding of abuse of process (cf UCPR, Pt 42.3(2)(c)). 23 The instant funding arrangement has not been suggested to involve any abuse of process. Nevertheless, a funding arrangement has the tendency if not the purpose of liberating access to justice by a party not otherwise able to afford it (see generally Fostif Pty Ltd v Campbells Cash & Carry Pty Ltd [2005] NSWCA 83). Depending on its terms, it may also have a correlative tendency to loosen some of the restraints that flow from exposure to an adverse costs order (see Project 28 Pty Ltd (Formerly Narui Gold Coast Pty Ltd) v Barr [2005] NSWCA 240 at [112]-[114]). A funder remains protected to a considerable degree from full exposure to adverse costs orders (cf UCPR, r42.3) unless effectively forced to provide necessary security on behalf of the funded party. There is a very long history of requiring those promoting litigation by insolvent companies to come out from behind the corporate shirt-tails to the extent of providing security if sought (see Project 28 at [100]-[109]). I am satisfied that "special circumstances" exist. 24 It is therefore unnecessary to consider the application of s109 of the Constitution to resolve any apparent conflict between the Corporations Act and the Rules. I say no more than that I am troubled by the opponents' submission that the discretion under the federal enactment should be exercised having particular regard to the specific rules of court that derive their operation from a State enactment. 25 The power to order security is clearly engaged. 26 The appellant has not suggested that an order for the provision of security would stifle the appeal. Grounds for withholding security 27 Security remains in the court's discretion, and two particular arguments were raised for the court refusing, in its discretion, to order security. 28 There was also a substantial issue as to the need to order security in the very substantial sums sought by the claimants. The co-appellant Mr Roach 29 The claimants seeking security have made it plain that the order is sought only against the corporate appellant; and only that appellant's appeal is to be stayed pending the provision of security. Mr Roach was not joined as an opponent to the summons for security. 30 The claimants have not endeavoured to show that Mr Roach would be unable to meet the costs of the appeal if added to the costs awarded against him at first instance. 31 In these circumstances, the impecunious corporate appellant invoked as a discretionary bar the principle that a court may take into account the overlap of the claims of the solvent and insolvent plaintiff/appellant in considering whether the defendant/respondent is likely to require the protection of an order for security. As indicated, this was the basis on which Sperling J refused to order Winnote to provide security for the costs of the trial. 32 The leading cases include John Bishop (Caterers) Ltd v National Union Bank Ltd [1973] 1 All ER 707, Pearson v Naydler [1977] 1 WLR 899 and Harpur v Ariadne Aust Ltd [1984] 2 Qd R 523. There is a helpful review by Austin J in Fiduciary Limited v Morning Star Research Pty Ltd [2004] NSWSC 664, 208 ALR 564. 33 The principles are also discussed fully by Studdert J in Maples v Hughes [2002] NSWSC 617, a decision that was followed by Sperling J in refusing to order security for the costs of the trial. In Maples, Studdert J (at [18]-[19]) described the claims of the two plaintiffs as: completely interlocked both as to liability and as to damages, and if the defendant is successful costs would ordinarily follow the event. On the material presently before the Court, it seems to me that the first plaintiff would be exposed to the liability of a costs order for all of the defendant's costs if the defendant succeeds. I have therefore concluded that as this cause is presently constituted the Court should not order security for costs against the second plaintiff because the defendant will have resort to the first plaintiff to recover his costs if the action fails. If, for any reason, the first plaintiff was to cease to be a party to this litigation, the situation would warrant review. 34 It is material to observe that Sperling J went on to make a final order that all plaintiffs pay the defendants' costs. In other words, even at the end of the day, he saw no basis for separating out the issues or shielding Mr Roach from the whole burden of costs. The present decision is to be made while the appeal is pending and with the benefit of the final reasons for judgment. Naturally, I must have regard to the matters in issue on appeal and my estimate of their likely success. 35 No sharp principle emerges from the cases in this area. Ormiston J and Kirby P have remarked that this approach is not a particularly intellectually satisfying one (Interwest Ltd v Tri-Continental Corporation Ltd (1991) 5 ACSC 621 at 625, Uptown Sydney at 303). That is often the case with a judicial discretion in which an identified factor is recognised as relevant but not dispositive. 36 There are 55 grounds of appeal. The first six challenge the finding that FHPS was not in breach of any duty of care owed to either appellant. Grounds 7-55 challenge the findings as to absence of damage on a number of bases. Some of these grounds are expressed in terms of complaints by both appellants, but most of them appear on their face to suggest no basis that the appeal (if successful) might result in a verdict in favour of Mr Roach. 37 This understanding of the grounds is reinforced by the entire thrust of the Appellants' Outline of Submissions. I have not overlooked the challenges to factual findings both in relation to Mr Roach and to the effect that Winnote would have been sold to Mr Groves in 1993 had it not been for the breach of duty by FHPM. The submissions (at §§153ff) do not suggest that Mr Roach would have acted any differently if properly advised. In other words, he would have continued to use Winnote as the corporate vehicle through which he and his associates were to exploit the proposed venture. Thus, §178 describes the submissions as having: … focussed, thus far, on the trial judge's conclusion that the First Appellant [ie Winnote] suffered no loss or damage by reason of the negligence of FHPM. 38 There are, of course, real difficulties in the path of a person with a direct or indirect shareholding in a company seeking to claim damages in his or her own right with respect to a breach of duty owed to the company (see Gould v Vaggelas (1985) 157 CLR 215 at 220, Johnson v Gore Wood & Co [2002] AC 1, Thomas v D'Arcy [2005] QCA 68). The important thing for present purposes is that little in the grounds of appeal or the written submissions suggests any serious attempt by Mr Roach to press a free-standing claim based on breach of a duty towards himself leading to compensable damage. 39 The main thrust and the overwhelming bulk of the written submissions address the damages issue and on the basis that the relevant loss was suffered by Winnote. 40 The exception is ground 8, contending that the trial judge erred in holding that Mr Roach suffered no damages/loss by reason of the negligence of FHPM. This is developed in §§181-194 of the written submissions on the basis that Mr Roach was likely to be investing large sums of money directly or through other companies in his group in whatever entity obtained an exploration licence, be it him, Winnote or some other corporate vehicle (§183). The appellants point to correspondence in the 1988-1990 period indicative of the client then being regarded as Mr Roach. Leaving aside the limitation problems that may be involved in going back this far, the fact remains that this represents a small, discrete part of the appellants' case foreshadowed in their notice of appeal and their written submissions. Its success is still dependent upon overturning the findings as to causation and damages made against both plaintiffs, although addressed particularly to Winnote, the plaintiff that was found to have established a breach of duty. 41 The grounds of appeal and submissions filed in their support indicate that the overwhelming thrust of the appellants' argument will be directed at matters that are either common to each appellant or supportive only of the case of the corporate appellant. This said, Mr Roach's continuing role as a co-appellant who has an indirect interest in Winnote succeeding strongly suggests that, if the appeal fails, costs will be ordered against the appellants jointly, as occurred below. 42 It is undoubtedly the case that both Mr Roach and the funder have significant financial interests in the outcome of the appeal. It is also true that each in a sense shelters behind the impecunious Winnote without expressly volunteering to underwrite the costs of the appeal. These matters clearly engage the power to order security and firmly predispose in favour of granting it. 43 Nevertheless, an order for security should not be made unless it is called for. The continuing presence of Mr Roach (apparently a man of substantial means) shows that it is not called for, so long as it remains highly likely that costs would be awarded against both appellants if the appeal fails. 44 The appellants may consider it in their interest to serve a copy of this judgment on Mr Roach, in order to preclude any argument that he was not on notice of the significance of his presence as a co-appellant. 45 If, for any reason, Mr Roach were to cease to be a party to this appeal, the situation would merit review (cf Maples at [19]). Likewise, if compelling material emerged to cast doubt on his capacity to meet an adverse order for the costs of the appeal. 46 Unlike the situation in John Bishop, upon which some reliance was placed by the claimants, Mr Roach has undoubted locus standi. Locus standi is not to be confused with prospects of success. Delay 47 It is not disputed that delay may be a ground for refusing to award security in an otherwise proper case. 48 There is, however, uncertainty in the case law as to whether delay without prejudice is significant. 49 I am inclined to think that the delay in the present case was not in itself disentitling, although there might be a basis for withholding security in relation to costs incurred in the appeal prior to the first request for security. In the circumstances, it is unnecessary to pursue this matter further. Disposition 50 The application should be dismissed with costs. 51 Armed with a timetable for further steps in the appeal, the parties are directed to approach the Registrar to obtain a fixture for what will be a lengthy hearing. The matter is to be listed for further directions after the respondents' submissions are filed. ********** 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.