The Australian Derivatives Exchange Ltd v Doubell [2008] NSWSC 1174

New South Wales Supreme Court

CITATION : The Australian Derivatives Exchange Ltd v Doubell [2008] NSWSC 1174

HEARING DATE(S) : 13/10/08

JUDGMENT DATE : 6 November 2008

JURISDICTION : Equity Division Corporations List

JUDGMENT OF : Barrett J

DECISION : Application adjourned

CATCHWORDS : PROCEDURE - defendants apply for security for costs - proceedings initiated by liquidator - potential personal liability of liquidator for costs - liquidator party to litigation funding agreement - funder's promise to indemnify liquidator against costs orders - agreement terminable by funder - liquidator willing to undertake to court to inform defendants of termination or threatened termination - whether liquidator should also give undertaking to ensure defendants have benefit of indemnity

LEGISLATION CITED : Corporations Act 2001 (Cth), ss 588G(2), (3), 588M(2)

CATEGORY : Principal judgment

CASES CITED : Chartspipe Pty Ltd v Chahoud [2001] NSWSC 585 Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105

The Australian Derivatives Exchange Limited - First Plaintiff PARTIES : Stephen James Parbery - Second Plaintiff Ralph Douglas Doubell - First Defendant John Henry Harron - Second Defendant

FILE NUMBER(S) : SC 1382/07

COUNSEL : Mr C R C Newlinds SC - Plaintiffs Mr M K Condon - Defendants

SOLICITORS : Clayton Utz - Plaintiffs Dibbs Abbott Stillman - Defendants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

BARRETT J

THURSDAY, 6 NOVEMBER 2008

1382/07 THE AUSTRALIAN DERIVATIVES EXCHANGE LIMITED & ANOR v RALPH DOUGLAS DOUBELL & ANOR JUDGMENT 1 These are proceedings in which the liquidator of The Australian Derivatives Exchange Limited ("ADE") sues to recover from directors of ADE, as a debt due to ADE, an amount equal to loss or damage said to have been suffered by creditors of ADE because of the incurring by ADE of debts to those creditors in circumstances where those directors allegedly contravened s 588G(2) or (3) of the Corporations Act 2001 (Cth). The liquidator thus pursues claims under s 588M(2) of the Corporations Act. 2 Each of the defendants has made an application for security for costs. 3 Those applications are advanced in a context where no return is expected for creditors in the winding up of ADE (unless the present proceedings are successful) and the liquidator accepts that he will himself be unable to meet any adverse costs order. 4 Proceedings of this kind are, because of the way s 588M(2) is framed, proceedings brought by the liquidator, not the company in liquidation. The liquidator may therefore be expected to pay the defendants' costs if he is unsuccessful. But, as a natural person plaintiff, a liquidator would not normally be subjected to an order that he or she give security for costs, however great may appear the likelihood of inability to meet any costs order eventually made. It is not suggested that the court may not make such an order against a normal person. 5 There is also a general expectation (which, again, may be departed from) that a liquidator who, as a natural person, sues for the benefit of the estate of the insolvent company will not be ordered to provide security for costs. Again, it is not suggested that an order cannot be made in such a case – merely that it should not be made in the generality of cases. 6 The correct approach to security for costs in a case such as the present was indicated by Hodgson JA in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105 at [45]: "In my opinion, on the basis of this review of cases, and especially on the basis of the previous Court of Appeal decisions in Hession and Melville , a court considering applications for security for costs against liquidators should not treat the matter as being entirely at large, but should have regard to guidelines, which I would express as follows: (1) Liquidators suing personally are generally to be treated in the same way as natural persons, so that, on the one hand, costs orders will be made against them if proceedings fail, and, on the other hand, security for costs may be ordered against them when the conditions set out in UCPR 42.21 are satisfied or (on appeal) there are 'special circumstances' within UCPR 51.50. Although security for costs can be ordered (at first instance only) in other circumstances, this is not the usual or normal course; and it is relevant that, in order that security for costs be ordered in other circumstances on an appeal, where at general law security was more readily granted, 'special circumstances' are required. It is to be noted also that mere inability to meet costs orders does not amount to special circumstances ( Transglobal Capital Pty Ltd v Yolarno Pty Ltd [2004] NSWCA 136) and thus does not of itself put an onus on an appellant to prove that an order for security would stultify the appeal. (2) Where the plaintiff is a company in liquidation, and not the liquidator, then security for costs will more readily be ordered, although the court's discretion is unfettered ( Bell Wholesale P/L v Gates Export Corporation (No 2) (1984) 8 ACLR 588) and there is no presupposition in favour of granting security ( Bryan E Fincott P/L v Eretta P/L (1987) 16 FCR 497). However, the court will not refuse to order security on the ground that this will frustrate the litigation unless the company proves that those who stand behind the company and would benefit from the litigation are unable to provide security ( Bell Wholesale ). (3) Cases in which security for costs might be ordered against a natural person or a liquidator outside those provided for in UCPR 42.21 include cases where (in addition to proof that there is reason to believe the plaintiff will be unable to pay the defendant's costs) the plaintiff has dissipated assets and/or has not paid previous costs orders (especially if those costs orders were in favour of the defendant) and/or brings a weak case to harass the defendant and/or brings a case for the benefit of others (albeit not solely for their benefit as apparently required by UCPR 42.21(1)(e)). There is of course a sense in which a liquidator is suing for the benefit of others; but what was decided in Cowell and Strand Wood was that this was not of itself sufficient to justify security for costs in relation to a person who has the statutory right and duty to do this." 7 There is, however, a particular factor in this case which, according to the defendants, warrants an order for security for costs in this case is that the liquidator is pursuing the claims – albeit for the ultimate benefit of the estate of the insolvent company – with the aid of financial assistance provided by a "litigation funder". It was said by members of the Court of Appeal in the case just mentioned that this is a relevant factor in deciding whether security should be ordered, although much will depend on the terms of the funding agreement. 8 Hodgson JA said at [51]: "However, in my opinion a court should be readier to order security for costs where the non-party who stands to benefit from the proceedings is not a person interested in having rights vindicated, as would be a shareholder or creditor of a plaintiff corporation, but rather is a person whose interest is solely to make a commercial profit from funding the litigation. Although litigation funding is not against public policy ( Campbells Cash and Carry Pty Limited v Fostif Pty Limited [2006] HCA 41; 229 CLR 386 at [87]-[95]), the court system is primarily there to enable rights to be vindicated rather than commercial profits to be made; and in my opinion, courts should be particularly concerned that persons whose involvement in litigation is purely for commercial profit should not avoid responsibility for costs if the litigation fails." 9 After reviewing aspects of the funding agreement, his Honour continued at [53]: "In all these circumstances, in my opinion, the existence of the funder and the funding agreement is a matter that favours an order for security which, according to the funding agreement, the funder would be obliged to comply with. This view is supported by the consideration that in this case the court is left in the dark as to the proportion to which the funder is entitled of any verdict obtained by the liquidator; although, because this is the result of a claim of legal professional privilege, the court would not be justified in drawing any conclusion that the proportion to which the funder is entitled is unreasonably high: cf Wentworth v Lloyd (1864) 10 HL Cas 589; 11 ER 1154. (It may be that where the court knows the extent of the funder's interest in the outcome of the case, this could be a factor which might lead the court to order security for less than the totality of the costs.)" 10 Campbell JA said at [86]: "A special problem is posed for the court when any proceeds of litigation brought in the name of the liquidator will go partly to a funder for its private profit, and partly remain with the liquidator for distribution among the creditors and others entitled in a winding up. Guidelines usually applied in connection with security of costs would suggest that, in so far as the litigation is for the private profit of the funder, it is appropriate for security to be supplied, but insofar as it is brought by a liquidator for distribution in the ordinary course of a winding up security for costs ought not be required. Clearly, those two approaches are mutually incompatible. In a situation where the rationale for a guideline concerning the exercise of discretion is not present, there may be good reason for departing from that guideline. Whether to depart from it, and if so, how, will depend very much of the facts of the case." 11 Basten JA emphasised the importance of avoiding the creation of any general expectation in favour of ordering security in a case of the present kind just because there is a litigation funder. His Honour said at [76]: "The mere fact that there is a litigation funder which has a commercial interest in the outcome, given that there is no longer any public policy concern with respect to maintenance of proceedings in which one has no prior interest, does not self-evidently render the circumstances relevantly distinguishable from the maintenance of such proceedings by a creditor whose interest similarly will not be in the subject-matter of the proceedings, except in the sense that success in the litigation will expand the resources of the corporation from which the creditor may receive payment at least of an enhanced dividend. Nor is it clear how the position of the litigation funder differs from that of a creditor which acquired its interest by assignment. The point of distinction relied upon by other members of the Court, as I understand it, is that the litigation funder will, at least in the event of a successful outcome, profit from the litigation. Profit, in this context, means more than merely recovering a prior debt, but recovering also a profit margin." 12 Basten JA went on to point out that it is of limited relevance that a litigation funder has a commercial interest in the outcome of the proceedings. So too does a funding creditor. That the litigation funder expects profit was also seen by his Honour as being of limited relevance: a creditor for goods sold and delivered who funds an action by the liquidator seeks to enhance his prospect of deriving the profit that the sale transaction involves. 13 The main purpose of the power to order security for costs is to ensure that lack of success by a plaintiff does not visit injustice upon a defendant who would, in that event, expect to have an order that the plaintiff pay the defendant's costs. The power is discretionary. Security, if granted, serves the purpose of providing to the defendant a measure of assurance that, having been brought to court by the plaintiff and having successfully resisted the plaintiff's claim, the defendant will have some means of recovering costs awarded to the defendant. 14 Central to any decision to award security for costs, therefore, is a conclusion reached by the court that the prospects that the defendant, if successful, will enjoy the fruits of a costs order against the plaintiff are somehow in jeopardy. 15 If, in the present case, those prospects centred on the personal financial capacity of the liquidator, the court would reach such a conclusion: see paragraph [3] above. But an added dimension comes from the litigation funding agreement. 16 The copy of the agreement put into evidence is incomplete, since certain parts deemed commercially sensitive have been masked. Relevant aspects are, however, clear. 17 Clauses 6.1 and 6.2 of the agreement are in these terms ("LLS" being the litigation funder and the "Insolvency Practitioner" being the liquidator of ADE): "6.1 LLS hereby indemnifies the Insolvency Practitioner from and against any Order for Costs against the Insolvency Practitioner made in the Proceedings in respect of the period from the date of this Agreement up to the date of termination or conclusion of this Agreement. 6.2 At the request of the Insolvency Practitioner, LLS will provide a Bank Guarantee in favour of the Insolvency Practitioner to support the indemnity set out in 6.1 above." 18 Clause 1.2 of the agreement defines "Order for Costs" as follows: "' Order for Costs ' means any order made against the Insolvency Practitioner for the payment of costs in the Proceedings relating to the period after the date of this Agreement." 19 The "Proceedings" are these proceedings. 20 It is thus clear that, until termination or conclusion of the agreement, the liquidator will enjoy the benefit of a promise by the litigation funder not only to indemnify the liquidator against all and any costs orders made against the liquidator in these proceedings but also the benefit of a promise by the funder to provide on demand by the liquidator a bank guarantee to support the indemnity. 21 The liquidator submits that, with these protections in place, there is no need for security to be ordered – at least until there is some apprehension that the benefit of the indemnity against costs orders may be lost through "termination or conclusion" of the agreement. And that apprehension, the liquidator says, could be satisfactorily dealt with by an undertaking. 22 The funder's liability under the agreement, according to its terms, may come to an end in one of two ways. The first is by expiration upon the liquidator's receiving the "Final Amount" – in essence, the proceeds of judgment or settlement. That is what is meant by "conclusion". The second is by termination. The right to terminate rests with the funder and is exercisable at any time without cause. 23 Counsel for the liquidator has indicated the liquidator's willingness to give to the court an undertaking to inform the defendants immediately if the funder terminates the agreement (which probably should be extended also to any communicated intention or threat of the funder so to do.) The defendants could then renew their application for security. 24 The defendants say that the funder's clause 6 undertakings are of little comfort to it even if an undertaking as just outlined is given. They point to difficulties described by Young CJ in Eq in Chartspipe Pty Ltd v Chahoud [2001] NSWSC 585 and referred to at paragraph [52] of the judgment of Hodgson JA in the Arimco Mining case (above): "In this case, the funder could perhaps be liable for costs, at the instance of the defendant; although Young CJ in Eq in Chartspike Pty Limited v Chahoud [2001] NSWSC 585 said there would be difficulty in enforcing this kind of indemnity, because the funder is not an insurer who could be sued pursuant to the Law Reform (Miscellaneous Provisions) Act 1946 (NSW) s6. If in such a case the funder did not willingly pay a costs order against the plaintiff, there is a question whether the defendant could bring proceedings in which the plaintiff and the funder were joined as defendants in order to enforce the indemnity against the funder; and even if this were possible, the proceedings would be cumbersome and could well be highly contentious." 25 Again, however, the matter could be dealt with by an undertaking given by the liquidator to the court to the effect that he would pursue the indemnity for the benefit of the defendants if he suffered an adverse costs order; also, perhaps, an undertaking to assign or hold on trust for the defendants the benefit of the indemnity and the proceeds of it. 26 In summary, I accept the liquidator's submission that clause 6 of the agreement, if bolstered and supplemented by appropriate undertakings given by the liquidator to the court, will allow the security for costs application to be disposed of on the footing that security should not at this point be ordered, this being without prejudice to any future application that the defendants may see fit to make. 27 I shall therefore adjourn the application so that the liquidator may formally proffer suitable undertakings to the court. **********