Supreme Court New South Wales Medium Neutral Citation: Armstrong Strategic Management and Marketing Pty Limited v Expense Reduction Analysts Group Pty Ltd (No 7) [2015] NSWSC 623 Hearing dates: 24 April 2015, 29 April 2015 and 14 May 2015 Decision date: 28 May 2015 Before: Ball J Decision: 1.The defendants' notices of motion both filed 19 December 2015 be dismissed. 2.The costs of both motions be the defendants' costs in the cause. Catchwords: PRACTICE AND PROCEDURE – Costs – Security for costs – Application for further security for costs – Where full and frank account of plaintiffs' financial position was not given – Whether plaintiffs would be capable of prosecuting proceedings to finality if order is made – Plaintiffs' financial position – Plaintiffs' relationships with business associates – Turns on own facts Legislation Cited: Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Addenbrooke Pty Limited v Duncan (No 3) [2014] FCA 322 Armstrong Strategic Management and Marketing Pty Limited & Ors v Expense Reduction Analysts Group Pty Ltd & Ors [2012] NSWSC 393 Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd; Expense Reduction Analysts Group Pty Limited v Armstrong Strategic Management and Marketing Pty Limited [2012] NSWCA 430 Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd [2013] NSWSC 457 Expense Reduction Analysts Group Pty Ltd & Ors v Armstrong Strategic Management And Marketing Pty Limited & Ors [2013] HCA 46; (2013) 250 CLR 303 LRSM Enterprise Pty Ltd v Zurich Australian Insurance Ltd [2014] NSWCA 88 Category: Procedural and other rulings Parties: Armstrong Strategic Management and Marketing Pty Limited (First Plaintiff) Armstrong Consulting Pty Ltd (Second Plaintiff) Kenneth Alan Armstrong (Third Plaintiff) Expense Reduction Analysts Group Pty Ltd (First Defendant) ERA Insurance Services Pty Ltd (Second Defendant) Expense Reduction Analysts Australasia Pty Ltd (Third Defendant) Stuart Roy Michael (Fourth Defendant) Ronald Clucas (Fifth Defendant) Charles Frederick Marfleet (Sixth Defendant) ERAGICS Limited (Seventh Defendant) Expense Reduction Analysts International Limited (Eighth Defendant) Keith John Chapman (Ninth Defendant) Anthony Frederick Dormer (Tenth Defendant) Representation: Counsel: EW Alstergren QC | D Briggs (Plaintiffs) DL Williams SC | EAJ Hyde (First to Ninth Defendants) EAJ Hyde (Tenth Defendant) Solicitors: Nick Stretch Legal (Plaintiffs) Holding Redlich (First to Ninth Defendants) Hall and Wilcox (Tenth Defendant) File Number(s): 2011/76919 Publication restriction: Nil Judgment 1. By two notices of motion filed on 19 December 2014 by the first to ninth defendants and the tenth defendant, the defendants seek orders the effect of which would be to require the plaintiffs to provide additional security for the defendants' costs of these proceedings. Background 1. In order to understand the application, it is necessary to set out some of the background to the proceedings. 2. Prior to 2004, the Expense Reduction Analysts group of companies (the ERA Group), through franchisees, provided outsourced costs reduction advice and services to clients. 3. In 2004, the first plaintiff, Armstrong Strategic Management and Marketing Pty Ltd (ASMM), and the third plaintiff, Mr Armstrong, entered into a joint venture with the ERA Group for the establishment, initially in Australia, of a business that provided insurance costs reduction consultancy services to clients. For that purpose, the first defendant, Expense Reduction Analysts Group Pty Ltd (ERAG), an Australian subsidiary of the ERA Group, and ASMM established the second defendant, ERA Insurance Services Pty Ltd (ERAIS), in which ASMM held a 49.9 percent interest and ERAG held a 50.1 percent interest. Mr Armstrong became ERAIS's Managing Director. In connection with these arrangements ERAG granted a franchise to the second plaintiff, Armstrong Consulting Pty Ltd (AC), pursuant to a licence agreement dated 1 March 2004. 4. Mr Armstrong alleges that in 2007 he began discussions with the ERA Group about a global expansion of the ERAIS business. For that purpose, the seventh defendant, Eragics Limited (ERAGICS) was established in the United Kingdom. Mr Armstrong entered into a consultancy agreement with ERAGICS and ASMM transferred its shareholding in ERAIS to the eighth defendant, Expense Reduction Analysts International Limited (ERAI), with the intention of ERAGICS allotting shares to Mr Armstrong pursuant to a Cooperation Deed entered into in February 2008 between Mr Armstrong and companies in the ERA Group. 5. No shares in ERAGICS were allotted to Mr Armstrong and, in October and November 2009, ERAG purported to terminate the licence agreement with AC, ERAGICS purported to terminate the consultancy agreement with Mr Armstrong, in each case relying on alleged misconduct by Mr Armstrong, and the relevant ERA Group companies terminated the Cooperation Deed. 6. In these proceedings, the plaintiffs claim damages against ERAG, ERAIS, ERAI and ERAGICS together with another company in the ERA Group arising out of the termination of the relationship between the plaintiffs and the ERA Group. The plaintiffs also claim damages against individuals (the Individual Defendants) who allegedly induced or assisted the breaches of statutory and common law duties on which the plaintiffs rely. 7. On 1 May 2013, Stevenson J ordered the plaintiffs, who had already provided security in the sum of $600,000 for the Individual Defendants' costs, to provide additional security in the sum of $100,000, see: Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd [2013] NSWSC 457). In making that order, his Honour refused to order specific performance of an agreement by which the plaintiffs had agreed to provide security of 65 percent of the costs and 100 percent of the disbursements actually incurred by the Individual Defendants on the basis that the evidence before his Honour demonstrated that the plaintiffs did not have the financial resources to comply with the order for specific performance. 8. The evidence largely consisted of evidence given by Mr Armstrong, who was not cross-examined. According to that evidence, 98 percent of the shares in ASMM were owned by Maria Armstrong, Mr Armstrong's wife, and the remaining 2 percent were owned by Amanda Kelly, Mr Armstrong's daughter. ASMM's principal asset was a property in Mount Eliza, Victoria, which was the Armstrong family home. The value of the property was approximately $1.6 to $1.8 million. The property was subject to a mortgage to Macquarie Bank Limited securing a loan of approximately $1.5 million. ASMM received $50,000 per year rental income from Mr Armstrong, his wife and their son and daughter from rent from the Mount Eliza property. His Honour concluded that "Otherwise, ASMM has no assets, debts or liabilities" (at [46]). 9. The evidence before his Honour was that AC had no assets, income or shareholder funds: at [48]. 10. The evidence was that Mr Armstrong had $100,000 in cash, $50,000 of which was held by Marque Lawyers "for the payment of future legal fees". Mr Armstrong also gave evidence of some motor vehicles and a boat that he owned. He said that his wife owned no additional assets and their living expenses were $4,000 per month. 11. His Honour also recorded Ms Kelly's assets based on evidence that Mr Armstrong had given. 12. In addition, it was apparent from evidence before his Honour that Mr and Mrs Armstrong were shareholders in Sans Regis Pty Ltd which owned 30 percent of the shares in The Lion Partnership Pty Ltd, that Ms Kelly owned a further 10 percent of the shares in that company and that Mr Armstrong's son, Mr Matthew Armstrong, owned a fraction over a further 10 percent of the shares in that company, with the result that the Armstrong family had a fraction over 50 percent of the shareholding in The Lion Partnership. According to The Lion Partnership's website, Mr Armstrong was the "Managing Partner" of that business, although he was more recently described as its "Non-Executive Chairman". There was evidence before his Honour that The Lion Partnership had made a profit of $364,161.13 in the financial year ending 30 June 2012. Also tendered before his Honour was a letter dated 18 December 2012 from Norton Rose, the solicitors for The Lion Partnership, which stated: Ken Armstrong does not provide any services to [The Lion Partnership] for which he is remunerated or receives a commission. We have already informed the Court that Mr Armstrong has received no dividends or any other form of remuneration from [The Lion Partnership]. 1. His Honour inferred from this evidence that The Lion Partnership was now the entity through which Mr Armstrong was carrying on the business originally conducted by ASMM, that the business appeared to be trading profitably and that Mr Armstrong received no remuneration from it. His Honour also recorded that Mr Armstrong did not disclose his indirect interest in The Lion Partnership in his affidavit. However, in the absence of any evidence, his Honour was unable to reach a conclusion on whether Mr Armstrong was providing services to The Lion Partnership of a kind for which remuneration or commission would normally be payable or whether the position was that he was not taking any remuneration to "assist his children": at [67]. 2. Stevenson J also concluded that if he were to award the security sought by the Individual Defendants against the plaintiffs under Pt 42 r 21 of the Uniform Civil Procedure Rules 2005 (NSW) or under s 1335 of the Corporations Act 2001 (Cth), that that would have the effect of stultifying the proceedings. His Honour was not prepared to make an order that would have that effect. However, his Honour did order that the plaintiffs provide additional security in the sum of $100,000. His Honour arrived at that figure in this way. Mr Klotz, who was at the time was the solicitor for the defendants, had given evidence that the defendants' likely costs of the proceedings were $2.5 million. His Honour assumed that the Individual Defendants' share of those costs was half that amount ($1.25 million). Sixty-five percent of that amount ($812,500) less the amount of security that had been provided was $212,500. Assuming that 50 percent of that amount was attributable to the claims brought by the corporate plaintiffs, it was appropriate that the Individual Defendants should have further security of $106,250, which his Honour rounded down to $100,000. His Honour accepted that that amount was not sufficient to protect the Individual Defendants from the likely consequence to them of a costs order in their favour. However, he thought an order for further security would very likely bring the proceedings to an end: at [223]. Subsequently, on 14 May 2013, his Honour ordered that the plaintiffs pay the Individual Defendants' costs of the motion and that those costs be paid forthwith. 3. The application for security was not the only significant interlocutory application in the proceedings. In the course of giving discovery, the defendants had inadvertently disclosed a small number of privileged documents to the plaintiffs. The plaintiffs refused to return those documents, claiming that the defendants had waived privilege in them. The Individual Defendants filed a motion on 23 December 2011 seeking orders restraining the plaintiffs from making any further use of the documents and for the delivery up of them. Bergin CJ in Eq granted that relief in part (see Armstrong Strategic Management and Marketing Pty Limited & Ors v Expense Reduction Analysts Group Pty Ltd & Ors [2012] NSWSC 393). The plaintiffs successfully appealed to the Court of Appeal (see Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analysts Group Pty Ltd; Expense Reduction Analysts Group Pty Limited v Armstrong Strategic Management and Marketing Pty Limited [2012] NSWCA 430). The defendants then sought leave to appeal to the High Court. That leave was granted on 7 June 2012 and, following the delivery of Stevenson J's judgment in relation to the security application, the High Court in a judgment delivered on 6 November 2013 (see Expense Reduction Analysts Group Pty Ltd & Ors v Armstrong Strategic Management And Marketing Pty Limited & Ors [2013] HCA 46; (2013) 250 CLR 303) reversed the decision of the Court of Appeal and ordered that the plaintiffs pay the defendants costs of the motion and the appeals. 4. On 23 May 2014, the Individual Defendants filed a motion seeking an order that the plaintiffs pay the Individual Defendants' costs of $130,000 of the security motion, which included agreed costs of $120,000. On 18 June 2014, Hammerschlag J gave judgment on that application in favour of the Individual Defendants in the sum of $120,000 and stayed that judgment until 11 July 2014 to allow the plaintiffs time in which to file additional evidence in support of an application to extend the stay. His Honour also ordered that the plaintiffs pay the Individual Defendants' costs of the motion, which were provisionally assessed at $5,000. Eventually, the costs claimed by the Individual Defendants were paid as were the costs of the motion. That was in a context where Mr Armstrong had filed further evidence of the plaintiffs' financial position in support of an application that the judgment be stayed, the defendants had obtained further documents on subpoena relating to the plaintiffs' financial position and Hammerschlag J had been critical of the evidence given by Mr Armstrong and had indicated that the plaintiffs should obtain an audit report in relation to their financial position if they wanted to press for an extension of the stay. 5. On 14 July 2014, the Taxing Officer of the High Court certified the Individual Defendants' costs in the High Court to be $188,105.78 and on 30 July 2014 the Individual Defendants' costs in the courts below were assessed at $175,946.46. On 11 August 2014, the defendants filed a motion seeking orders that the proceedings be stayed until the plaintiffs paid those costs orders. On 15 August 2014, Stevenson J stayed the proceedings pending the plaintiffs either paying the costs order obtained in the High Court or obtaining a stay of the operation of that order. The plaintiffs eventually paid those costs on 17 November 2014, with the result that the stay was lifted. 6. In the result, the plaintiffs have so far given security in the sum of $700,000 and paid the defendants $313,105.78 in respect of the costs orders made against them. 7. It was apparent from the additional affidavits filed by Mr Armstrong and the documents that had been produced in response to subpoenas that Mr Armstrong had not given a full and frank account of the financial position of the plaintiffs in the affidavit he swore in opposition to the application for security heard by Stevenson J. It is not necessary to describe all the respects in which the evidence given by Mr Armstrong was deficient. I will say more about the current position shortly. However, it became apparent that The Lion Partnership earned substantial fees, that a proportion of those fees was paid to ASMM for services that were provided to The Lion Partnership by Mr Armstrong and that the income earned by ASMM was available to Mr Armstrong and his wife to meet their expenses, including the expenses of these proceedings. There were also discrepancies between the evidence Mr Armstrong originally gave in connection with the security of costs application and subsequently gave in connection with the stay application. 8. It was in that context that the defendants filed the motions with which this judgment is concerned. In their motions, the defendants seek orders that the judgment given by Stevenson J be set aside on the basis that the plaintiffs had not been frank with the Court in relation to their financial position. They sought an order that the agreement in relation to security for costs that Stevenson J had refused to enforce be specifically enforced. Alternatively, the first to ninth defendants sought additional security in the amount of $3,156,973.53 and the tenth defendant, who was represented by the same junior counsel but different solicitors, sought additional security in the amount of $989,272.82. 9. The defendants launched a major investigation of the plaintiffs' financial affairs in connection with their motions. Normally, an investigation of the scope they undertook might be regarded as quite disproportionate to the significance of the issue to which the investigation related in the context of the case as a whole. However, in this case, the extent of those investigations must be understood in a context where the plaintiffs had failed to give a frank account of their financial position and where it emerged in a way that could not be regarded as clear and coherent that the plaintiffs had access to financial resources that had not been disclosed in the evidence led before Stevenson J, and where Mr Armstrong sought, in later affidavits and when cross-examined, to defend or to ignore his earlier evidence rather than candidly to admit that it was incomplete or inaccurate. 10. Even so, a significant feature of the defendants' investigations is that, extensive as they were, they failed to establish that the plaintiffs had available to them substantial resources that had not to some extent at least been revealed in evidence provided by Mr Armstrong following the initial hearing before Stevenson J. In particular, the investigations did not reveal that any of the plaintiffs or their associates held real property that had not been disclosed or that they had major sources of income other than the income they could derive from The Lion Partnership, although, as I have said, the investigations did reveal discrepancies in the financial information given by the plaintiffs, some of which remain unexplained. 11. During the course of the hearing, I indicated that, notwithstanding the fact that I was satisfied that the plaintiffs had not in the past given a frank account of their financial position, I would not be prepared to make an order that would have the effect of stultifying the proceedings. Stevenson J had concluded that the Court should not make an order that would have that effect. There was no reason to depart from his Honour's conclusion in that regard. If the Court was to reconsider the question of security, its reconsideration was not for the purpose of punishing the plaintiffs for their conduct but to put in place appropriate security having regard to their true financial position and the resources that were properly available to them to provide security. 12. I also indicated that any award of security had to recognise the fact that the plaintiffs faced substantial future legal costs of their own. There was no evidence before me of those legal costs. The case has not yet been set down for hearing. The hearing is estimated to take approximately five weeks. The plaintiffs are yet to file their evidence in reply. The defendants have given very substantial discovery, which will require analysis by the plaintiffs' legal advisors; and, of course, it will be necessary for the plaintiffs' legal advisors to prepare the case for hearing. I indicated to the parties that experience suggested that the plaintiffs' legal costs going forward were likely to be at least $500,000 to $1 million. That estimate was consistent with the estimate of the tenth defendant's estimate of his legal costs. Neither the plaintiffs nor the defendants took issue with that estimate. 13. Conversely, if the plaintiffs could provide further security without stultifying the proceedings, it was evident from what I said to the parties that I was inclined to order that additional security be provided having regard to Mr Armstrong's lack of candour at the time of the application heard by Stevenson J. It was appropriate to reconsider the question of security in those circumstances: see Addenbrooke Pty Limited v Duncan (No 3) [2014] FCA 322. 14. In that context, the defendants in their final submissions did not seek orders in the terms set out in their motions. Rather, they proposed that the plaintiffs should be required to provide additional security of $30,000 per month until the date of final judgment, without resiling from their position that the plaintiffs' disclosure of their financial position remained incomplete. 15. Against that background, it is now possible to turn to the financial position of the plaintiffs and the sources of funds the defendants submit are available to provide further security. The plaintiffs' financial position and sources of funds The Lion Partnership 1. It is convenient to begin with The Lion Partnership. The Lion Partnership is not, of course, a plaintiff. However, Stevenson J was correct to infer that it is now the entity through which Mr Armstrong now carries on business. Mr Armstrong works for The Lion Partnership and it is through the provision of his services that ASMM earns substantial sums of money. The amount that The Lion Partnership earns is therefore very relevant to the amount available to ASMM. 2. As I have said, the Armstrong family holds slightly more than 50 percent of the shares in The Lion Partnership. The balance of the shares is held by Mr Sellwood (or entities associated with him) (as to approximately 30 percent) and Mr Tobin (as to approximately 20 percent). Mr Sellwood was the Chief Executive Officer of ERAIS from 4 February 2008 until 10 August 2009. He is a close personal friend of Mr Armstrong and, as will become apparent, has lent Mr Armstrong considerable sums of money. 3. The Lion Partnership provides risk management consulting services to clients. It earns fees through providing those services. According to its accounts for the year ended 30 June 2014, it earned a gross profit of $1,768,548. After operating expenses, it distributes most of its income as fees payable to consultants. The 2014 accounts show that The Lion Partnership in that year paid consulting fees to Mr Tobin, Mr Sellwood, ASMM, Mr Gimson, Mr Davies and Mr Prentagast, who is based in New Zealand. The evidence given by both Mr Armstrong and Mr Sellwood is that Mr Armstrong, or more accurately ASMM, is entitled to approximately 50 percent of the consulting fees paid by The Lion Partnership and the 2014 accounts disclose that in that year ASMM was paid consulting fees of $472,822. In that year, The Lion Partnership also earned a profit before tax of $109,445. 4. The Lion Partnership accounts for the financial year ended 30 June 2013 show that it earned a similar gross profit in that year, that it paid consulting fees to ASMM of $531,500 and that it incurred a loss before income tax of $13,893. Curiously, the comparative figures for 2013 included in the 2014 accounts show that the total consulting fees of $1,610,354 that were paid in 2013 were paid to Mr Tobin. That is clearly an error. 5. The evidence given by Mr Armstrong and Mr Sellwood was that The Lion Partnership expected to earn substantially less in the current financial year than it earned in 2014 and 2013. The plaintiffs relied on management accounts for the half year ending 31 December 2014 to support that evidence. However, it is apparent that The Lion Partnership earns most of its income in the last few months of the financial year. In addition, Mr Sellwood conceded that The Lion Partnership had "a lot of work in the pipeline". On the basis of the evidence before me, I think the likelihood is that The Lion Partnership will earn a similar income in this financial year to the income it earned last financial year. 6. The Lion Partnership also obtained an overdraft of $250,000 from Macquarie Bank to be used solely by Mr Armstrong to fund these proceedings. Mr and Mrs Armstrong guaranteed the facility and it was secured by a mortgage over the property at Mount Eliza. When asked about that overdraft, Mr Sellwood gave the following evidence: Q. Now, can I ask you about the $250,000 overdraft. Is it the case that you as a director and shareholder of the Lion Partnership Pty Ltd were prepared to support Mr Armstrong in his litigation in whatever way the company was able to. A. Yes. In addition, Mr Armstrong says in his affidavit sworn on 31 March 2015 that he borrowed an additional amount of $67,255 from The Lion Partnership's surplus cash between June 2012 and June 2013. The Lion Partnership balance sheet as at 30 June 2013 discloses as an asset "Loans – Unsecured" of $72,677, which presumably includes the amount owing by Mr Armstrong. 1. The defendants submit that more was available to Mr Armstrong from the Lion Partnership than the accounts disclose. 2. First, they submit that the accounts do not disclose the full income earned by The Lion Partnership. They point to the fact that in 2013 the accounts disclose that The Lion Partnership earned $135,636 in consulting fees in the United States. The management accounts for the 9 months ending 31 March 2014 showed income from that source of $152,000, but the final accounts for that year showed no income from that source. 3. Second, they submit that the accounts of ASMM show that it wrote off a loan to "TLP Private Company" of $929,074 in 2014, that the reference to "TLP Private Company" was a reference to The Lion Partnership and that that was evidence that The Lion Partnership owed ASMM the amount written off. 4. Third, they point to the overdraft obtained by The Lion Partnership for the benefit of Mr Armstrong and to the bank accounts of The Lion Partnership which show large sums of money being paid by The Lion Partnership into the overdraft account and out to Mr and Mrs Armstrong. 5. Fourth, they point to Mr Sellwood's evidence that as a director and shareholder of The Lion Partnership he would support the company assisting Mr Armstrong in the litigation in any way that it could. They also point out that the accounts for The Lion Partnership for the year ended 30 June 2013 contain the following profit reconciliation: Base Annual Fees Drawings Total Fees and Drawing Paid Profit Reconciliation Partner J Tobin 120,000 64,600 184,600 P Sellwood 200,000 39,900 239,900 K/M Armstrong 320,000 235,426 555,426 Total 640,000 339,926 979,926 Adjusted Profit before Tax 366,239 56,833 The defendants submit that the figures are likely to be similar for future years and that it follows from this evidence that The Lion Partnership has substantial profits available to repay the loan it owes ASMM or to assist Mr Armstrong. 1. Taking those matters into account, the defendants submit that The Lion Partnership has the capacity and could be expected to contribute $20,000 per month in security. ASMM 1. Contrary to the evidence given by Mr Armstrong in his first affidavit, Mrs Armstrong actually holds 99.99 percent of the shares in ASMM. The balance of the shares is held by Ms Kelly. 2. The 2014 accounts of ASMM were audited by Ernst & Young and include for comparison purposes the unaudited results for 2013. The accounts show income from The Lion Partnership which is consistent with the amounts shown in the accounts of The Lion Partnership. They also show that ASMM earned rent of $50,000 in 2014 and $53,600 in 2013, which was rent paid by Mr and Mrs Armstrong in respect of the family home. As I have said, the accounts show that an amount of $929,074 owing by "TLP Private Company" was written off in 2014. They also show a debt owed by Mr Armstrong of legal fees of $1,103,423 which was fully provided for. 3. Since the accounts were prepared, ASMM has sold the property at Mount Eliza. The sale price was $1,950,000. The proceeds of sale were used to pay the costs of sale, to repay the loan owed by ASMM and to reduce the overdraft in the name of The Lion Partnership (which was secured against the property) to approximately $115,000. Mr Armstrong gave evidence that Macquarie Bank may be willing to permit the overdraft to increase to $166,000, although it had not made a decision at the time the motions were heard. It is to be expected that, in the absence of security, Macquarie Bank would not permit the overdraft limit to remain at $250,000. 4. Apart from the write-off of the loan said to be owed by The Lion Partnership, the defendants do not suggest that the accounts of ASMM contain serious inaccuracies. However, they submit that it is reasonable to assume that ASMM will continue to earn approximately the same income as it earned in 2014 and that, after adjusting the accounts for one off items and the amount of interest previously paid to Macquarie Bank, it is apparent that ASMM could pay legal expenses of $815,000 over the next three years and could pay Mr and Mrs Armstrong sufficient salaries to meet their living expenses, still leaving a yearly profit of $60,000. On that basis, they submit that ASMM could contribute $5,000 per month in security. Mr and Mrs Armstrong 1. Mr Armstrong's evidence is that, apart from the shares Mrs Armstrong holds in ASMM and motor vehicles and personal effects, he and his wife have no assets and no sources of income other than ASMM. 2. Mr Armstrong gave evidence that he had borrowed the following sums of money: 1. $383,680 from Mr Neil Musgrave, his brother-in-law; 2. $510,000 from Mr Sellwood and his partner, Ms McLelland; 3. $300,000 from Mr James Carter; 4. $320,984 from the Sans Regis Superannuation Fund, which is a superannuation fund established by Mr and Mrs Armstrong; 5. $48,934 from Ms Kristina Armstrong, one of Mr Armstrong's daughters; 6. $61,018 from Ms Allison Armstrong, another of Mr Armstrong's daughters. 1. The evidence in relation to the loans given by Mr Sellwood and Ms McLelland and Mr Carter was corroborated by evidence given by Mr Sellwood and Mr Carter. Mr Carter gave evidence that $225,000 of the amount he lent came from his superannuation fund and that the balance was lent to him by a friend. 2. In giving evidence of the amount that he has borrowed, Mr Armstrong does not clearly distinguish between himself and ASMM. For example, the amounts borrowed from his daughters were paid in February 2010. According to the bank records evidencing the payments, the money was paid by ASMM. However, no amount is shown in the accounts of that company as being owed to either daughter and the Report of the Factual Findings for the Assets and Liabilities of Kenneth and Maria Armstrong prepared by Ernst & Young show the amounts as being owed by Mr Armstrong. On the other hand, the balance sheet for ASMM as at 30 June 2014 shows that ASMM had current liabilities at that time to Mr Musgrave of $263,680 and Mr Sellwood and Ms McLelland of $350,000 and the evidence is that Mr Musgrave has taken security over the assets of ASMM and AC to secure repayment of the amounts owing to him. 3. The defendants sought to challenge the evidence of Mr and Mrs Armstrong's assets in two principal ways. 4. First, they challenged Mr Armstrong's evidence concerning his superannuation entitlements. Part of that challenge was historical in the sense that they pointed out that Mr Armstrong had said in his original affidavit that he was not a beneficiary of the superannuation fund, whereas he clearly was. It is apparent, however, that the true position is that Mr Armstrong has withdrawn his superannuation entitlements and has borrowed from the fund the amount of his wife's entitlement, which has given rise to issues with the tax office. The defendants do not now suggest that there are amounts held in the Sans Regis superannuation fund that could be accessed by Mr Armstrong. 5. More significantly, the defendants relied on evidence given by Mr Debney, a consultant with Expense Reduction Analysts. Mr Debney gave evidence that on a flight from Melbourne to Sydney he overheard a conversation between Mr Armstrong and Mr Sellwood in which Mr Armstrong was coaching Mr Sellwood about what to say when giving evidence in the proceedings and a later conversation in which Mr Armstrong said "I have no money but they [meaning the defendants] do not know about my super". Mr Armstrong and Mr Sellwood admit that they were on the flight but both denied that they had conversations in the terms alleged by Mr Debney. Mr Sellwood said plausibly that he would have been upset to hear that Mr Armstrong had undisclosed resources in the form of superannuation when he (Mr Sellwood) had lent Mr Armstrong substantial sums of money. Despite the detailed investigations undertaken by the defendants, they have not discovered any other superannuation funds of which Mr Armstrong is a beneficiary. It would be odd for Mr Armstrong to have more than one self-managed superannuation fund and there is no reason for thinking that he is a member of an employee fund in relation to which he has significant entitlements. Whatever Mr Debney overheard, I think it is unlikely that Mr Armstrong has any superannuation entitlements beyond those that he has now disclosed. 6. Secondly, the defendants point to bank records of Mr and Mrs Armstrong that suggest that their living expenses have been far greater than $4,000 per month disclosed by Mr Armstrong in his original affidavit and that they have made significant gifts to their children. To take just one example, it seems clear that they paid $100,000 for Ms Alison Armstrong's wedding. 7. Mr and Mrs Armstrong's bank account records certainly suggest that their living expenses have been much more than $4,000 per month and that they have enjoyed a very comfortable if not extravagant lifestyle. However, I do not think that demonstrates that they have a source of funds that has not now been disclosed to the Court. It more likely demonstrates that they have been living beyond their means, particularly having regard to the very large expenses they face in funding these proceedings. 8. In order to establish from their bank statements that Mr and Mrs Armstrong have a source of income that was not disclosed, it would be necessary to undertake a detailed forensic analysis of their expenditure as disclosed by the bank statements to establish that it has exceeded the amount that they have earned and borrowed. Sensibly, the defendants drew the line short of incurring the expenditure that such an exercise would involve. However, without that exercise, it is not possible to conclude that Mr and Mrs Armstrong have undisclosed sources of income; and their disclosed financial position suggests that they do not. Mr Armstrong has borrowed heavily from friends and relatives. He and his wife have sold what was their family home for 30 years to live in rented accommodation. The proceeds of sale have been consumed by the mortgage to Macquarie Bank and the costs of sale. 9. In my opinion, the only reasonable inference available from this evidence is that Mr and Mrs Armstrong were forced to sell their family home because of their financial position and their heavy indebtedness to Macquarie Bank. That conclusion is inconsistent with the notion that Mr and Mrs Armstrong have significant undisclosed sources of money. Ultimately, although I did not understand the defendants to resile from their position that Mr Armstrong had not been frank about his financial position, they did not submit that he had some source of money available to him which would justify an order for further security. AC 1. Burday Pty Ltd holds all of the issued shares in AC as trustee of the KMA Trust. The KMA Trust is a discretionary trust. Its beneficiaries include Mr Armstrong, his wife, their children, the children's spouses and any grandchildren. Mr Armstrong is a director of Burday and it may be inferred that he is its directing mind and will. It appears to be accepted that AC's only significant asset is its claim in these proceedings. The children 1. The defendants submit that the children have an interest in the outcome of the proceedings and for that reason can be expected to provide security. 2. Mr Armstrong has four children: Mrs Kelly, Ms Alison Armstrong, Ms Kristina Armstrong and Mr Matthew Armstrong. 3. Each of the children are said to benefit indirectly from the proceedings because they are beneficiaries of the KMA Trust. Ms Kelly is also said to have an interest in the proceedings because of her shareholding in ASMM and Mr Armstrong's other two daughters are said to have an interest because they each lent ASMM money before the proceedings were commenced. 4. There is some evidence of the financial position of Ms Kelly given by Mr Armstrong. There is no evidence of the financial position of the other three children. 5. The defendants submit that in the absence of any evidence concerning the children's financial position, the Court should infer that they can provide some security. The defendants submit that an appropriate amount would be $5,000 per month, which only amounts to $300 per week per child. Other creditors 1. The defendants suggest that Mr Sellwood can be expected to support Mr Armstrong in the future. In support of that proposition, they rely on evidence given by Mr Sellwood that he was prepared to support Mr Armstrong notwithstanding that he knew that Mr Armstrong had given substantial gifts to his children – in particular, paid for Ms Alison Armstrong's wedding. They also rely on the evidence given by Mr Sellwood to the effect that as a director and shareholder of The Lion Partnership he would support Mr Armstrong in the proceedings in any way in which he was able. In addition, they point to the fact that there is no evidence from which the Court could conclude that Mr Sellwood and his partner do not have the financial capacity to provide additional support. Nonetheless, they do not suggest that Mr Sellwood is a further source of additional security. Rather, the submission appears to be directed at establishing that the proceedings will not be stultified if the Court were to order the additional security they seek, since Mr Sellwood can be expected to assist Mr Armstrong in paying his own legal costs. Should additional security be ordered? 1. As I have said, the question whether additional security should be ordered depends on whether, if the order was made, it will have the effect of stultifying the proceedings. 2. The principles that the court should apply in considering that question were described by Barrett JA (with whom McColl and Macfarlan JJA agreed) in LRSM Enterprise Pty Ltd v Zurich Australian Insurance Ltd [2014] NSWCA 88 at [36]-[38] in these terms: [36] It may be accepted that, in Bell Wholesale Co Pty Ltd v Gates Export Corp [(1984) 2 FCR 1] the Full Federal Court said that, if a corporate plaintiff seeks to resist an application for security for costs on the ground that the making of the order would frustrate the litigation, that plaintiff must establish "that those who stand behind the action and who will benefit from the litigation if it is successful … are also without means". According to this formulation, a plaintiff seeking to resist an application for security for costs has to demonstrate a state of impecuniosity on the part of not only itself but also those "standing behind it" who will "benefit from the litigation if it is successful". The focus is on the inability, as distinct from mere unwillingness, of relevant persons to give financial assistance — the lack of financial capability or means, as distinct from lack of willingness. [37] As was noted in Ariss v Express Interiors Pty Ltd (1995) 13 ACLC 1585, however, the question of lack of means is, in such cases, merely an aspect of a more broadly based inquiry whether, if an order for security is made, the order cannot be met with the result that the litigation will be brought to a premature end. It is the ability of the plaintiff to meet an order for security that is in issue; and, just as the inability of persons standing behind it to give it financial support will be relevant to the inquiry, so too may be unwillingness of those persons (despite ability) and all other reasons for the unavailability of their support. A finding of stultifaction becomes available only to the extent that the reasons of relevant persons other than the plaintiff itself for not giving financial support truly reflect an inability, rather than unwillingness, of the plaintiff to marshall the relevant financial resources. It is for this reason that unwillingness of other persons is viewed differently from their inability. [38] It was held in Arris by Phillips JA (with whom Ormiston JA and Charles JA agreed) that, when the question of stultification is under consideration, it is proper to take account of "commercial impracticability", in the sense of any practically insurmountable difficulty facing the plaintiff in gaining any advantage from such financial capacity as may exist in other persons, and notably its creditors. Phillips JA saw no reason why, as a matter of principle, such "commercial impracticability" should not be a relevant circumstance when the plaintiff seeks to demonstrate that any order for security cannot be met — even though it be different from the circumstance that those who must meet any order for security are themselves without means. 1. Although Barrett JA speaks of stultification in terms of an order for security that cannot be complied with, with the result that the stay which is conditional on the provision of security remains in effect, I do not take that to be the only circumstance in which it can be said that proceedings would be stultified by an order for security. If, for example, the true position is that a company can raise sufficient funds to satisfy an order for security but only at the price later of being unable to continue the proceedings because it does not have sufficient funds to pay its legal advisors, in my opinion it is still correct to say that the proceedings will be stultified as a consequence of the order for security. It is necessary for the Court to consider the effect of the order for security on the ability of the plaintiff to prosecute the proceedings to finality. If the likely effect of the order is that the plaintiff will not be able to do so, then the effect of the order will be to stultify the proceedings, even if they are never stayed. 2. It is not suggested that The Lion Partnership is an entity that stands behind the corporate plaintiffs. Rather, the claim that The Lion Partnership is a source of additional security rests on three propositions. The first is that The Lion Partnership is able to and has provided ASMM or Mr Armstrong with more money than its accounts show. The second is that it owes ASMM the sum of $929,074 that was written off in 2014. The third is that it is willing to provide additional support notwithstanding that it has no obligation to do so and, apart from a desire to help Mr Armstrong, has no interest in the outcome of the litigation. 3. The defendants do not expressly rely on the first of these propositions in their final submissions, although they did not abandon it either. In any event, I am not satisfied that The Lion Partnership's profits are greater than those revealed in its financial statements. The discrepancy between the final 2014 accounts and the management accounts for the 9 months ending 31 March 2014 in relation to consulting fees earned in the United States was not put to Mr Armstrong or Mr Sellwood. Mr Sellwood did explain that the consultant who had generated income in the United States, Ms Barbara Campbell, had contracted breast cancer and was unable to continue to work. There is no reason to doubt that evidence. In those circumstances, little weight can be placed on the discrepancy. Mr Armstrong explained that, from time to time, he drew on the overdraft and that it was then paid down by The Lion Partnership using drawings to which ASMM was entitled. That evidence was plausible. Absent a detailed analysis of the accounts, which the defendants did not undertake, it is not possible to say that The Lion Partnership paid Mr Armstrong more than the drawings to which ASMM was entitled. 4. As to the second proposition, the evidence in relation to the amount said to have been owing by "TLP Private Company" is not satisfactory. Mr Armstrong's evidence is that "TLP" is a reference to "The Litigation Process" and that the amount written off related to personal expenditure by him and for money setting up and developing a business to be known as "The Lion Global Partnership", which was to act as an insurance broker. A company by the name of The Lion Global Partnership Pty Limited was incorporated on 25 October 2011. Mr Matthew Armstrong owned 50 percent of the shares in that company, Mr Sellwood, 30 percent and Mr Tobin, 20 percent. However, all the expenditure written off was incurred before the company was incorporated. That is evident from ASMM's financial statements for the year ended 30 June 2011, which record a debt of $938,481 owed by "TL - Private Company". 5. Mr Armstrong's evidence that "TLP" stands for "The Litigation Process" is implausible and, although a company may assume pre-incorporation liabilities, it is hard to believe that all the liabilities incurred in connection with The Lion Global Partnership were incurred before the company was registered. 6. On the other hand, Mr Armstrong's evidence that he attempted to establish a company to act as an insurance broker and that the attempt failed is plausible and is consistent with the fact that The Lion Global Partnership was incorporated. There is nothing in the accounts of The Lion Partnership suggesting that it owed ASMM the amount written off. There is no suggestion that those accounts were prepared by Mr Armstrong and no plausible explanation was offered for why the debt was not disclosed in the accounts if it existed. The evidence is that The Lion Partnership has been trading profitably for a number of years. Indeed, the defendants place considerable emphasis on that fact. It would be surprising in those circumstances if in the past ASMM had not sought to recover at least part of the loan said to be owing to it. However, there is no evidence that it did. Despite the unsatisfactory nature of the evidence, in my opinion, the likelihood is that the debt was not owed by The Lion Partnership. 7. As to the third proposition, there is no reason to think that The Lion Partnership would be prepared to provide security in the sum of $20,000 per month. Essentially, the defendants submit that Mr Sellwood and Mr Tobin would be prepared to forego a large proportion of their drawings from The Lion Partnership to permit the company to pay to the plaintiffs an amount of $20,000 towards an obligation to provide further security. There is no reason to think that they would be willing to do so. There is no suggestion that they have been willing to do so in the past. The Lion Partnership was willing to make an overdraft facility available to ASMM and Mr Sellwood has been willing in the past to lend money to Mr Armstrong to fund the proceedings. In may be that, in the future, The Lion Partnership will be willing if it has the resources to provide further assistance. However, there is no reason to expect that to happen and no reason to think that whatever assistance may be provided will be measured by the "profit" that Mr Sellwood and Mr Tobin are entitled to receive from the company. 8. Obviously, the resources available to ASMM are relevant to the question of stultification. On the evidence available, ASMM can be expected to earn approximately $500,000 per year. From that amount must be deducted Mr and Mrs Armstrong's living expenses (including rent), which are paid for in the form of salaries for the services they provide. It is also necessary to deduct tax, although how much tax will be payable is unclear, given that ASMM has losses carried forward from previous years. However, the important point is that ASMM is clearly the entity that will be responsible for paying the plaintiffs' legal fees. The defendants seek to spread those legal fees over the financial years ended 30 June 2015, 2016 and 2017. However, there is no justification for doing so. It is obvious that the plaintiffs have incurred substantial legal fees in the current financial year and the likelihood is that any surplus income derived by ASMM from The Lion Partnership will have been used to pay those legal fees. The likelihood is that the proceedings will be heard in the first half of next year. Consequently, the likelihood is that the plaintiffs' legal costs over the next financial year will exceed ASMM's total income for that year. Far from having a surplus of cash after the payment of the plaintiffs' own legal costs, ASMM is unlikely to have sufficient income to meet those costs. 9. That leaves the children. I do not accept that the children stand behind AC and stand to benefit from its success by virtue of the fact that they are beneficiaries of the KMA Trust. The trust is a discretionary one. The trustee of that trust is Burday Pty Ltd, which appears to be controlled by Mr Armstrong. Mr and Mrs Armstrong are also beneficiaries of the trust. There is no reason to think that if AC is successful in the proceedings Mr Armstrong will cause the trust to distribute part of the amount recovered to his children. It is more likely that the amount that is recovered will be distributed to Mr and Mrs Armstrong. 10. Mrs Kelly's shareholding in ASMM is so small (0.01 percent) that I do not think that it can be said that she a person who stands behind that company. Clearly, the person who stands behind that company as shareholder is Mrs Armstrong. 11. There is a question whether the loans made by Mr Armstrong's other two daughters were made to ASMM or to him personally. The evidence is that the initial payments were made to ASMM. However, as I have said, the loans are not referred to in ASMM's accounts. Moreover, the report prepared by Ernst & Young suggests that the loans are owed by Mr Armstrong. It is true that that report depends solely on information given to Ernst & Young by Mr Armstrong and his daughters. However, if both creditor and debtor agree on who owes the debts and the debts never appeared in the accounts of ASMM, it is difficult to see how it could be asserted that in fact the debts are owed by ASMM. Even if the debts are owed by ASMM, I do not think that is sufficient to establish that the daughters are persons who stand behind ASMM in the relevant sense. The debts are small relative to the costs of the proceedings and the amount in issue. The proceedings have not been brought for the purpose of recovering those debts. In my opinion, it would not be reasonable to expect Mr Armstrong's daughters to contribute towards any security for costs because of the amount that they have lent. 12. As I have said, it is not suggested that Mr Sellwood and his partner are a source of additional security. However, it is submitted that they are persons who are in fact likely to be able to be called upon to provide further financial support. Even accepting that, it does not alter the conclusions I have reached. The likelihood is that, as things stand, even if no additional security is ordered, the plaintiffs will struggle to pay the future legal fees of pursuing their claim and it is possible that they will depend on the generosity of friends and family of Mr Armstrong to fund future legal fees. The fact that that generosity may be forthcoming if that position is reached does not establish that further security could be ordered without stultifying the proceedings. Orders 1. Both notices of motion should be dismissed. 2. That leaves the question of costs. Mr Alstergren QC, who appeared for the plaintiffs, correctly conceded that the plaintiffs could not have their costs in circumstances where the motions arose because of the plaintiffs' lack of candour on the original application for security. He submitted that the appropriate order was that the costs be costs in the cause. 3. In my view, the appropriate order is that the costs of the first to ninth defendants' motion be the first to ninth defendants' costs in the cause and the costs of the tenth defendants' motions be the tenth defendant's costs in the cause. Having regard to the circumstances in which the motions were brought, it is not appropriate that the plaintiffs recover their costs of the motions even if they are successful in the proceedings. ********** 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. Decision last updated: 29 May 2015