New South Wales Supreme Court CITATION : Gujarat NRE Australia Pty Limited & Anor v Gary Alexander Williams & Ors [2006] NSWSC 992 HEARING DATE(S) : 20/9/06 JURISDICTION : Equity Division Commercial List JUDGMENT OF : Einstein J EX TEMPORE JUDGMENT DATE : 09/20/2006 DECISION : Security to be ordered. Amount not yet determined. CATCHWORDS : Security for costs - Multiple defendants - Need for position of all putative applicants for security to be ascertained before any security amount is determined Corporations Act 2001 (Cth) LEGISLATION CITED : Fair Trading Act 1987 (NSW) Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005 (NSW) Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 Byron Shire Business for the Future Inc v Byron Shire Council and Holiday Villages (Byron Bay) Pty Ltd (1994) LGERA 59 Energy Drilling Inc v Petroz NL (1989) ATPR 40-954 Heller Factors Pty Ltd (in lia) v John Arnold's Surf Shop Pty Ltd (1979) 4 ACLR 492 Idoport Pty Ltd v National Australia Bank and Ors [2001] NSWSC 744 Kent Heating Ltd v Cook-On Gas Products Pty Ltd (1984) 59 ALR 277 Lynnberry Pty Ltd v Farquhar Enterprises Pty Ltd (1977) 3 ACLR 133 M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 Manta Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 CASES CITED : Morris v Hanley [2001] NSWCA 374 Pearson v Naydler [1977] 1 WLR 899 Pioneer Park Pty Limited (in liquidation) v Australia and New Zealand Banking Group Limited; Clifford John Carpenter v Australia and New Zealand Banking Group Limited [2005] NSWSC 498 P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 Rajski v Computer Manufacture and Design Pty Ltd [1982] 2 NSWLR 443 Rosenfield Nominees Pty Ltd v Bain and Co (1988) 14 ACLR 467 Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201 Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 Weily's Quarries v Devine Shipping (1994) 14 ACSR 18 Worldwide Australia LLC v Jacobsen Platinum Pty Limited & Ors [2005] NSWSC 846 Gujarat NRE Australia Pty Limited (First Plaintiff) Gujarat NRE Coke Pty Limited (Second Plaintiff) Gary Alexander Williams (First Defendant) Mark Ngataiawhio William Gray (Second Defendant) PARTIES : Malcolm Anthony Carson (Third Defendant) Continental Mining and Materials Handling Pty Limited (Fourth Defendant) Billiva Pty Limited (Fifth Defendant) Ambigo Pty Limited (Sixth Defendant) Bounty Industries Australia Pty Limited (Seventh Defendant) FILE NUMBER(S) : SC 50056/06 COUNSEL : R Horsley (Plaintiffs) JP Redmond (Second and Seventh Defendants) SOLICITORS : Gillard Consulting Lawyers (Plaintiffs) Horton Rhodes (Second and Seventh Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Wednesday 20 September 2006 ex tempore Revised 22 September 2006 50056/06 Gujarat NRE Australia Pty Limited & Anor v Gary Alexander Williams & Ors JUDGMENT The notice of motion 1 There is before the Court a notice of motion brought by the second and seventh defendants [Mr Gray and Coal Contractors Australia Pty Ltd formerly Bounty Industries Australia Pty Limited] seeking: i. security for costs; ii. a stay order pending payment of the amount which may be ordered; and iii. in the event of a failure of the plaintiffs to provide the security ordered, for the proceedings to be dismissed. The first plaintiff [Gujarat NRE Australia Pty Ltd]["GNAL"] is incorporated in Victoria. The second plaintiff [Gujarat NRE Coke Ltd]["GNCL"] is incorporated and listed in India. It should be noted that approximately 95 per cent of the shares in GNAL are held by GNCL. The proceedings 2 It is unnecessary to repeat the record. The central nature of the claim by the plaintiffs involves the circumstance that the first plaintiff funded by the second plaintiff and others purchased a colliery and associated assets ["the colliery"] under a number of agreements. 3 The plaintiff's case is that a Consortium comprised of all of the defendants entered into an initial agreement ["the Letter Agreement"] with the then owner of the colliery as agent for an undisclosed principal [later revealed to have been the second plaintiff]. That agreement was broadly intended to lead to the anticipated acquisition. 4 The plaintiffs' pleading includes allegations that the Consortium provided a deal of information in documentary form, inter alia in the form of what is described as an "Investor Letter" as well as what is described as an "Information Memorandum". 5 GNCL claims that four documents were provided by the Consortium which contained a number of warranties and representations. 6 On the basis of these warranties and representations the plaintiffs and the defendants are alleged to have agreed to purchase the colliery from the third party and GNAL was incorporated, with certain representatives of the defendants appointed to the board of directors of GNAL. 7 An asset sale agreement and a venture agreement are alleged to have been executed by the parties. The plaintiffs claim these agreements contained further warranties and representations. 8 The sundry representations pleaded to have been made to one or other of the plaintiffs are set out in the Commercial List Statement. 9 The particular warranties in focus are said to have been given by certain of the defendants concerning the conduct of a comprehensive due diligence investigation and in terms of other disclosures, representations and statements having been correct. 10 Post contractual dealings between the parties are also pleaded. 11 Ultimately on 3 December 2004, the plaintiffs apparently completed the Venture Agreement and the first plaintiff apparently completed the Land and Asset Sale Agreement. 12 The plaintiffs have then pleaded that a number of the alleged representations and warranties said to have been made and said to have induced the plaintiffs to enter into contracts were false or misleading or incorrect, for reasons which are particularised. 13 Specifically, the plaintiffs claim the defendants either misrepresented the state and income producing ability of the colliery or misrepresented the level of due diligence that had been undertaken in relation to the colliery. 14 The plaintiff's case is put in a number of ways including: i. breaches by certain of the defendants of their duties as directors of GNAL; ii. breaches by the Consortium of a common law duty of care to exercise reasonable care and skill in conducting the due diligence investigations; iii. various failures by the Consortium to take reasonable adequate measures to ensure that no adverse material existed or was likely to exist; iv. the failure to inform the plaintiffs of material adverse matters that existed or were likely to require to be disclosed. 15 Both the Trade Practices Act and the Fair Trading Act are mobilised in pleading conduct said to be misleading or deceptive or likely to mislead or deceive. 16 The plaintiffs have pleaded that the defendants aided and abetted each of the other defendants in breaches of the above-described legislation. 17 The first plaintiff claims loss and damage in the order of $35 million. 18 The second plaintiff claims loss and damage by dint of the reduction of the value of its shares in the first plaintiff and claims the loss of profit from lost supply of coal in the sum of $65 million. 19 There are a number of cross claims pleaded, the particular nature of which does not required to be summarised in full: i. The first cross claim pursued by three of the defendants generally relies upon alleged breaches of Clause 3.6 A of a Joint Venture; ii. The second cross claim brought by the seventh defendant claims breaches by the first plaintiff of obligations to grant to the first cross claimant's nominee, a mining contract to mine the colliery for a minimum period of five years. The power to order security 20 The Court has power to make an order for security for costs from various sources: (a) The Court has inherent power to require security for costs; (b) The Court may order security for costs under s. 1335 of the Corporations Act 2001("the Act"); and (c) The Court may order security for costs under Part 42 Rule 21 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"). Inherent power 21 The Court has inherent jurisdiction to make an order for security as based upon the authority of Rajski v Computer Manufacture and Design Pty Ltd [1982] 2 NSWLR 443 and Morris v Hanley [2001] NSWCA 374 (reversed, but not on this point, by the Court of appeal in Morris v Hanley [2001] NSWCA 374. UCP Rules 22 The Court's statutory power is discretionary and can be made on such terms as the Court requires: see Rule 42. 21(1) and (2) of the Uniform Civil Procedure Rules (NSW) 2005. UCPR r 42.21 is specific in its terms and provides as follows: 42.21 Security for Costs (1) If, in any proceedings, it appears to the court on the application of a defendant: (a) that a plaintiff is ordinarily resident outside New South Wales, or (b) that the address of a plaintiff is not stated or is mis-stated in his or her originating process, and there is reason to believe that the failure to state an address or the mis-statement of the address was made with intention to deceive, or (c) that, after the commencement of the proceedings, a plaintiff has changed his or her address, and there is reason to believe that the change was made by the plaintiff with a view to avoiding the consequences of the proceedings, or (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or (e) that a plaintiff is suing, not for his or her own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so, the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. (2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct. (3) If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff's claim for relief in the proceedings be dismissed. (4) This rule does not affect the provisions of any Act under which the court may require security for costs to be given. 23 UCPR 42.21, however, is not exhaustive since the Court has inherent power to make such an order. Corporations Act 2001 24 Section 1335 of the Corporations Act 2001 also empowers the Court to make an order for security for costs. The section states: (1) 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. (2) The costs of any proceeding before a court under this Act is to be borne by such party to the proceeding as the court, in its discretion, directs." 25 Pursuant to section 1335 of the Corporations Act 2001, the Court has the power to award security for costs if is appears, by credible testimony, that there is reason to believe that a corporation will be unable to pay the costs of the defendant if successful in its defence see: Weily's Quarries v Devine Shipping (1994) 14 ACSR 18, and require sufficient security to be given for those costs and stay all proceedings until the security is given. The principles which inform the exercise of the discretion 26 The relevant principles applicable to an application for security for costs have been well covered by the Court in Idoport Pty Ltd v National Australia Bank and Ors [2001] NSWSC 744 and in Pioneer Park Pty Limited (in liquidation) v Australia and New Zealand Banking Group Limited; Clifford John Carpenter v Australia and New Zealand Banking Group Limited [2005] NSWSC 498. 27 Whilst the Court has to take into account all the relevant facts, matters and circumstances, and has a concern to achieve a balance between ensuring that adequate and fair protection is provided to the defendant, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings: Rosenfield Nominees Pty Ltd v Bain and Co (1988) 14 ACLR 467 AT 470, the relevant factors to be looked at include: a) whether the application has been brought promptly: Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 AT 514; b) the likelihood of a costs order being made at the conclusion of proceedings and the public interest nature of the litigation: Byron Shire Business for the Future Inc v Byron Shire Council and Holiday Villages (Byron Bay) Pty Ltd (1994) LGERA 59; c) whether the plaintiff's impecuniosity was caused by the defendant's conduct: M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97. d) whether the plaintiff's claim is made in good faith and appears to be reasonably arguable: Lynnberry Pty Ltd v Farquhar Enterprises Pty Ltd (1977) 3 ACLR 133; e) whether the proceedings are merely a defence against "self help" measures taken by the defendant: Heller Factors Pty Ltd v John Arnold Surf Shop Pty Ltd ; f) where there persons standing behind the plaintiff have offered any personal undertaking to be liable for any adverse cost order: Manta Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; g) more specifically in relation to the discretion exercised under section 1335 of the Act, in Pearson v Naydler [1977] 1 WLR 899 (cited with approval in Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201 at 215) the Court stated (at 906-907): …the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I accept that there is no burden of proof one way or the other, I think that the court ought not be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section. h) Further, that the use of the word "credible" in section 1335 of the Act suggests that an evidentiary burden rests on the party seeking the order to show: "…that the material before the Court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings. ": Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 28 In Idoport the holding at 62 was that: The approach followed in these reasons is that once the defendants have led evidence to establish the above described entitlement, an evidentiary onus falls upon the plaintiffs to satisfy the Court that taking into account all relevant factors, the Court's discretion ought to be exercised by either refusing to order security in some lesser amount than was sought by the defendant. First Plaintiff incorporated in a foreign country 29 On general principles an order for security for costs against a respondent resident outside the jurisdiction is made to ensure that a successful applicant will have funds available within the jurisdiction of the court against which it can enforce judgment: see Energy Drilling Inc v Petroz NL (1989) ATPR 40-954 at 50-422 per Gummow J. This is so that the applicant does not have to bear the uncertainty of enforcement in a foreign country. See also Worldwide Australia LLC v Jacobsen Platinum Pty Limited & Ors [2005] NSWSC 846, unreported, 24 August 2005. 30 In P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 McHugh J observed at 323: To make or refuse to make an order for security for costs involves the exercise of a discretionary judgment. That means that the court exercising the discretion must weigh all the circumstances of the case. The weight to be given to any circumstance depends not only upon its own intrinsic persuasiveness but upon the impact of the other circumstances which have to be weighed. A circumstance which may have very great weight when only two or three circumstances have to be weighed may be of minor significance when many circumstances have to be weighed. However, for over 200 years, the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide security for costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has assets within the jurisdiction. An unusual environment in which the Court is asked to determine security for costs 31 The particularly unusual feature of the current notice of motion concerns the fact that the current applicants for security for costs are only two of the seven defendants. 32 As will become clear, this causes real difficulties, both for the plaintiffs in responding to the application, and for the Court. Effectively, those defendants who are not currently applying for security for costs, if intending to later mount an application for security for costs, are likely to be in the fortunate position of being able to reap the benefits of the result of today's application. If, for example, the Court today, based on the evidence before it adduced by the current applicants, were to order that a particular sum of money be paid by the plaintiffs as security for costs to the current applicants, one may confidently anticipate that the putative applicants, who have not yet sought security for costs [and may, for all the Court knows, be intending to do so], will each be asking, if they are to be separately represented, for the same amount of money or something similar. 33 Had it been the case that all of the defendants were applying for security for costs today, the Court may well have, and would likely have, closely investigated the extent to which separate representation of the putative applicants would be proposed during the hearing. All sorts of questions, [such as the fairness of some or all of the defendants having separate representation], would have to have been dealt with. Indeed it seems to me a real possibility that ultimately, if the Court was to be ordering security for costs, the measure of that security to be provided by the plaintiffs to the several applicants would have depended to a certain extent, upon which applicants were going to be separately represented. 34 For those reasons, the principled approach to the application which is presently before the Court is to presently deal with the application in principle and to indicate whether or not security is to be ordered, but not to proceed to make any finding as to the amount by which the plaintiffs are to pay security qua the two current applicants. 35 The proper case management in the circumstances is, as it were to bifurcate the hearing of the motion. 36 For reasons which I will come to, it is appropriate for some form of security for costs to be paid by the plaintiffs to the current applicants, but it is not appropriate to presently identify what the amount should be or what the form of that security should be. The Uniform Civil Procedure Act has as its overriding purpose rule the necessity for quick, just and resolution of the real issues in cheap litigation. The proper case management of the unusual situation which prevails, is for the plaintiffs to be directed to notify those defendants who have not applied for security for costs, that on a particular date to be nominated, the Court will enquire as to whether or not those defendants are also applying for security for costs, and, if so, their application will be heard at the same time as the second tranche hearing of the current application and determined on the merits. 37 For those reasons, the Court will presently proceed only to determine the question of principle as between the current applicants and the plaintiffs. I proceed accordingly. Dealing with the instant circumstances Concessions by the plaintiffs 38 In dealing with the instant circumstances it is first appropriate to note that the plaintiffs have made the following concessions: i. no issue is taken as to the timeliness of the application for security for costs. ii. the plaintiffs do not allege that appropriate security for costs would prevent them from pursuing their claims. iii. the condition of the first plaintiff (GNAL)—in particular, the charge given by GNAL to the second plaintiff (GNCL)—is such that, were GNAL the only plaintiff, it would be appropriate that the court order security. iv. the second plaintiff — a) is not resident or sited in Australia, b) has no direct presence in Australia, and c) has no accounts in financial institutions in Australia. v. there is no reciprocal enforcement treaty between Australia (or any part of Australia) and India (or any part of India). 39 The burden of focus in the plaintiff's submissions seems to be as follows: i. to suggest that the position of the first plaintiff may be insignificant in any event [for the reason that the second plaintiff clearly has the capacity to pay any sum which may be awarded against the plaintiffs in terms of costs of the proceedings]; ii. to submit that on the evidence the second plaintiff is a substantial corporation and that there is no evidence that it is likely to divest itself of assets or otherwise to become unable to meet a costs order. 40 The proposition is that on the evidence, the second plaintiff is: i. a clearly well resourced public company, listed on three stock exchanges in India; ii. a company possessed of significant assets in Australia, in the form of : a) investments in Australian companies (including, but not limited to, the first plaintiff); b) it's charge over the assets of the first plaintiff. iii. a company which has offered unconditionally, and still offers unconditionally, to give to the court its undertaking to meet any costs order made against the first plaintiff. 41 The essential submission put by the plaintiffs is that the defendants bear the onus [which it is suggested they are unable to discharge], of showing: i. not only [in a case such as the present], that a material plaintiff against whom security for costs is sought is ordinarily resident outside New South Wales, but also; ii. that there is reason to believe that such plaintiff being a corporation will be unable to pay the costs of the defendant if ordered to do so. 42 Pausing briefly to deal with certain of the materials before the Court, it is fair to summarise the position as follows: i. The plaintiffs have conceded that albeit that GNAL has substantial assets and liabilities, it is presently shown to be balance sheet deficient to the tune of approximately $1.5 million. ii. In so far as the current evidence before the Court is concerned, the position of the second plaintiff as shown on its balance sheet as at 31 March 2006 is as follows: Total of shareholders' funds and loan funds AU$312,180,200; Fixed assets and investments AU$114,682,885; Net current assets AU$63,121,885. Its profit and loss account for the period ended 31 March 2006 shows a profit before tax of AU$110,364,657. iii. Next, the shareholding of GNCL as proven by the affidavit of Mr Gillard of 20 September 2006 (Annexure B) is as follows: i. shareholding in listed Australian companies, valued at AU$10,643,000; ii. shareholding in unlisted Australian companies, valued at an amount in the order of approximately $400,00; iii. shareholding in a New Zealand unlisted company, valued at an amount of $16,884,761; iv. in short, a total shareholding in unlisted companies of $17,282,961. Decision 43 It is important to bear in mind that the discretion to award security for costs is a wide discretion which requires to be adapted to the particular set of proceedings in hand and nonetheless must be exercised on a principled basis. 44 Authorities such as Kent Heating Ltd v Cook-On Gas Products Pty Ltd (1984) 59 ALR 277 [Sheppard J], Energy Drilling and PS Chellaram supra, emphasise the entitlement of the Court to take into account difficulties of enforcement of judgments in other jurisdictions. In the present circumstance the plaintiffs appear to readily accept that their difficulty reposes in the simple fact that the second plaintiff is incorporated in India. 45 The nature of the proceedings and the issues raised also require to be taken into consideration. The proceedings are substantial. The order of claims is $100 million. 46 To my mind, the defendants are shown to be entitled to an order which will give them substantial assurance that any costs orders in their favours will be promptly met without difficulty. 41 I reject the submission that the only appropriate exercise is to look to at the position of the second of the plaintiffs. To my mind the fact that the first of the plaintiffs is a plaintiff and displays presently a balance sheet deficiency in the order of $1.5 million, by itself furnishes a proper ground to base an order for security for costs. It is plainly very important to appreciate that the second plaintiff has a fixed and floating charge over the assets and undertaking of GNAL. In short, GNCL is a secured creditor of GNAL. 42 Returning to the parameter of the awkwardness of the Court's position presently, it is inappropriate to presently make a decision as to the amount of security for costs to be paid by the plaintiffs to the current applicants. A decision as to what that amount should be must await the further determination of whether or not, and if so when and with what result, the defendants who are not moving parties today, bring forward any applications for securities for costs. 47 There may be, if such applications are to be brought forward, defences which are already available to the plaintiffs, such as delay. 48 The Court is unaware of the precise position with respect to correspondence between the parties. In short applications by the other 5 defendants, or by some of them, will have to be determined on the merits. Orders 49 The Court makes the following orders: 1. I order that the plaintiff communicate to the legal advisors for each of the defendants who were not applicants [on the motion for security for costs] a copy of the transcript of the hearing today and a copy of the short judgment which I have delivered. 2. I order that the proceedings be further before the Court for the purpose of ascertaining whether or not the defendants who are not currently applicants intend to pursue any motions for security and be before the Court for that purpose at 9.30am on Thursday 19 October 2006. 3. I order that any applications for security for costs which the defendants who are not presently applicants for security for costs determine to press, be filed and served on or before 5 October 2006 and be returnable on Thursday 19 October 2006 at 9.30am. 4. The present parties to the motion for security for costs are, pending the decision on costs of the motion, to jointly pay for the cost of the external transcription. Those costs will in due course abide the costs of the motion. 5. Costs are presently reserved. 6. All orders currently in place for the case management of the proceedings are presently stayed save for the part heard hearing of the motion seeking security for costs and save for the entitlement of those defendants who are not presently applicants for security for costs to proceed to file notices of motion seeking security for costs. ************ 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.