Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Vintage Marine Art Pty Ltd v Henderson & Cremer (No 2) [2019] NSWCA 252 Hearing dates: 19 September 2019 Date of orders: 19 September 2019 Decision date: 19 September 2019 Before: Bell P at [29] Macfarlan JA at [30] Brereton JA at [2] Decision: (1) Insofar as it is required, time to file the Summons for Leave to Appeal be extended up to and including the date on which it was filed. (2) Leave to appeal be granted, and the applicant file a Notice of Appeal within seven days. (3) The appeal be allowed and the orders of Rothman J made on 14 November 2018 be set aside, and in lieu thereof, upon the undertaking of Gina Edwards to the Court that she will be personally answerable for any costs order made against the Plaintiff in the proceedings below, order that claim 3 in the Defendant's Notice of Motion filed on 1 June 2018 be dismissed with costs. (4) Order that the respondents pay the applicant's costs of the appeal. Catchwords: COSTS – security for costs – where security order already made – where increase ordered three years after original order – where personal undertaking made to pay costs Legislation Cited: Corporations Act 2001 (NSW) s 1335 Cases Cited: Bell Lawyers Pty Ltd v Pentelow [2019] HCA 29 Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 10 ACSR 441 Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 Jazabas v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Newtimber (Operations) Pty Ltd v Tarong Energy Corporation Ltd [2011] FCA 123 Pearson v Naydler [1977] 3 All ER 531 Prynew Pty Ltd v Nemeth [2010] NSWCA 94 Rawson Contractors Pty Ltd v Krogh & Company Pty Ltd (Supreme Court (Qld), Ambrose J, 11 September 1986, unreported) Southern Cross Exploration NL v Fire & All Risks Insurance Company Ltd (1985) 1 NSWLR 114 Street v Luna Park Sydney Pty Ltd [2007] NSWSC 1144 Sykes v Sykes (1869) LR 4 CP 645 London Scottish Benefit Society v Chorley (1884) 13 QBD 872 Texts Cited: Jim Delany, Security for Costs (1989, Law Book Co Ltd) Category: Principal judgment Parties: Vintage Marine Art Pty Ltd (Applicant) Robert Henderson (First Respondent) Douglas Cremer (Second Respondent) Representation: Counsel: Gina Edwards (Director of Applicant, by leave) C Alexander (Respondents) Solicitors: McLaughlin & Riordan (Respondents) File Number(s): 2018/380743 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Common Law Citation: [2019] NSWSC 590 Date of Decision: 20 May 2019 Before: Rothman J File Number(s): 2014/344104 [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] EX TEMPORE Judgment 1. BELL P: I will ask Brereton JA to deliver the first judgment. 2. BRERETON JA: On 14 November 2018, following the hearing that day of the respondents' motion for further security for costs, Rothman J made orders that the plaintiff - the applicant before us - provide further security for the defendants' costs in an amount of a further $40,000, and reserved reasons, which were later published on 20 May 2019. By summons filed in this Court on 7 March 2019, the applicant seeks leave to appeal and, to the extent necessary, an extension of time in which to do so. No opposition has been voiced to the application for an extension of time. Factual Background 1. The factual background may be summarised as follows, for which summary I am indebted to the respondents' outline of submissions. 2. On 21 November 2008, the respondents Mr Henderson and Mr Cremer entered into a licence agreement with a United Kingdom company called Vintage Marine Art Ltd (the UK company). On 31 March 2010, the parties to that agreement entered into a 50 year addendum to it. Chiefly in dispute in the proceedings below is whether on 3 April 2010, Ms Edwards – who claims to have been and to be the chief executive officer of both the UK company and of the applicant in these proceedings Vintage Marine Art Pty Ltd (the NSW company) – caused the UK company to assign its rights under the licence agreement and addendum to the NSW company. By statement of claim filed on 21 November 2014, the NSW company sued the respondents for breach of warranty and misleading or deceptive conduct in connection with the licence agreement, the rights of which it says were assigned to it on 3 April 2010. 3. One of the central issues in dispute in the proceedings is whether, in the circumstances that the original licence agreement contained a restriction to the effect that the licensee shall not sell, transfer, encumber or assign its rights without the written consent of Mr Henderson, and where Mr Henderson says that no such consent was given, there has been any effective assignment. First Application for Security 1. Promptly after commencement of the substantive proceedings, the respondents made an application for security for costs in the sum of about $100,000, invoking Corporations Act 2001 (Cth) s 1335, on the ground of what may shortly be called corporate impecuniosity. In a judgment delivered on 8 October 2015 following a hearing on 31 August 2015, Harrison AsJ ordered that the plaintiff give security for the defendants' costs in the amount of $10,000. [1] Relevantly, her Honour was satisfied that impecuniosity was established and, thus, that the threshold for enlivening the jurisdiction to make an order for security was crossed. As to the discretion whether or not to make an order, the jurisdiction having been enlivened, her Honour had regard chiefly, first, to the conclusion that the issues raised were triable and that the claim was not other than bona fide and had reasonable prospects. Secondly, her Honour was not satisfied that the plaintiff's impecuniosity was attributable to the defendants' actions. Thirdly, as to stultification, and being satisfied that the company was impecunious, her Honour observed that Ms Edwards (in the judgment of Harrison AsJ known as Ms Dombosch) had undertaken to be personally liable for any costs order but was herself impecunious, and that financial position of the other shareholder in the same camp as Ms Edwards - one Ms Demarest - was not satisfactorily established on the evidence and that she did not proffer any such undertaking. Her Honour took Ms Edwards' undertaking into account as a favourable factor weighing against an order for security, and concluded that an order for security in the sum of $100,000 would, as a matter of practical reality, have the effect of stultifying the proceedings. 2. On balancing those factors her Honour nonetheless concluded that there should be an order for security. However, as to quantum, while her Honour identified certain aspects of the defendants' claim which would not be allowed, reached the sum of $10,000 by a process which was not arithmetical, but involved striking a balance between a number of factors - including that a higher sum would likely stultify the proceedings, and also including the undertaking proffered by Ms Edwards. It might be observed that, for reasons to which I shall come, on that undertaking her Honour might well have been justified in refusing to make any order for security. 3. Her Honour specifically adverted to a submission that had been made by the respondents that security could be ordered in a number of stages, but did not adopt that submission. Her Honour's order was expressed as being "security up to the hearing" (see [79]), and her Honour's order was simply "security for the defendants' costs of the plaintiff's claim" (see order 1). No liberty to apply for further security was reserved, as is sometimes done. It is clear that her Honour's orders were intended to be a complete disposition of the question of security for costs at least as it then presented itself. Second Application for Security 1. Some three years later, on 1 June 2018, the respondents filed a further notice of motion seeking, first, liberty to adduce expert evidence; secondly, approval for the taking of certain evidence from overseas witnesses by video link; and thirdly, further security for costs. The first and second aspects of the motion were dealt with by Harrison AsJ and call for no further comment. It was the third aspect of that motion that came before Rothman J on 19 November 2018. 2. The motion was supported by an affidavit of the respondents' solicitor, Mr McLaughlin, sworn on 1 June 2018, which relevantly deposed to an estimate of the further costs to be incurred on behalf of the respondents up to and including the trial. The estimate that had been in evidence before Harrison AsJ was not before his Honour, but had it been, save for an expert's fee already incurred of $7,348, it would have appeared that the evidence before his Honour did not demonstrate any change in the estimates adverse to the respondents; to the contrary, if anything, the anticipated costs of the trial were somewhat reduced, not least because evidence which had originally been anticipated to require witnesses to be brought to Australia was now to be taken by video link. 3. In the course of the hearing before his Honour, the plaintiff submitted that there was no occasion for ordering further security, as "the position had not moved on" since the previous security order. The defendants submitted that stultification was not established; in particular, that there was no evidence as to the position of Ms Demarest, and that it appeared on the evidence that the plaintiff had been able to raise funds to pay its own lawyers some $250,000, most of it after the first order for security had been made. 4. As I have foreshadowed, his Honour made an order for $40,000 for further security, and reserved reasons, which were provided on 20 May 2019, after the summons for leave to appeal was filed. Those reasons reveal, first, that his Honour was satisfied, as was uncontroversial, that the company was impecunious in the relevant sense, so that jurisdiction to make an order for security was enlivened (see [8]–[9]). Secondly, his Honour was not satisfied that an order for further security would stultify the proceedings. In this, his Honour gave particular weight to an inference, drawn from an affidavit of Ms Demarest which was not in fact in evidence before his Honour, that Ms Demarest had available income and resources (see [21]). His Honour observed that the emergence of an issue concerning the authenticity of an email might involve some additional complexity and expert evidence (see [28]), and concluded that further security was appropriate in an amount corresponding to about two-thirds of what his Honour estimated to be the future costs of the proceedings, that two-thirds being $40,000. His Honour did not refer to the intent and scope of the order made by Harrison AsJ, nor to the undertaking of Ms Edwards to be personally responsible for any costs order. 5. In my respectful view, the fundamental flaw in the judgment at first instance is that the application was treated as a stand-alone application for security, rather than as an application for further security in circumstances where the question of security had already been fully agitated and determined. It ought to have been viewed in light of the earlier application and its outcome, which had not been the subject of any appeal. That the earlier application was not the subject of any appeal is particularly relevant in circumstances where it might well be said that both sides had grounds for calling it into question. The present applicant might have argued that, in light of the undertaking which she had offered, no order for security should have been made. The present respondents might have argued that, in light of the decision to make an order for security, the quantum ordered was manifestly inadequate. The decision of both parties not to appeal the first judgment reinforces an acceptance of that judgment as resolving for better or for worse, with benefits and detriments on both sides, the overall question of security for costs in the proceedings. 6. As was argued before Harrison AsJ, it is not uncommon for security to be ordered in stages or tranches to enable it to be provided progressively during proceedings. As I have said, that was raised and rejected by Harrison AsJ. As I have also foreshadowed, it is not uncommon for liberty to apply for further security to be reserved, but it was not. Absent factors of that kind, courts discourage repeated interlocutory applications covering substantially the same subject matter. Undoubtedly, where there are changes in circumstances, a "top-up" application for further security may be made. That will be so, for example, where the estimate of the duration of a trial on the basis for which an order for security has been made turns out to be quite insufficient. Thus, in Southern Cross Exploration NL v Fire & All Risks Insurance Company Ltd, [2] 65 days of a projected 100 day trial had elapsed. The trial had unexpectedly been lengthened, and the plaintiff's financial situation had deteriorated so that it was now clear that it would have difficulty in meeting an order for costs. In those circumstances, Waddell J made an order for security, as I have said, as late as 65 days into the trial. [3] 7. Similarly, I would accept that the emergence of a requirement for expert evidence and additional complexity not foreseen when the original order was made could constitute such a circumstance, but in this case the evidence before the primary judge did not reveal any increase in the estimated costs of preparation for trial or of the trial itself. It might be said that a requirement for expert evidence had emerged, which might have justified an additional $8,000 security (if it had not already been incurred), but it could not have justified an additional $40,000. 8. For those reasons, in my view, error in the judgment at first instance is established, and it amounts to an error of principle, resulting in an injustice. For those reasons, in my view, leave to appeal should be granted, and it falls to this Court to re‑exercise the discretion in respect of security for costs. Re-exercise of Discretion 1. For the respondents, it was argued that a relevant additional consideration was a matter which had been raised by them in argument before the primary judge but not referred to in his Honour's reasons, namely that the applicant had been able to source some $250,000, most of it since the first order, in order to pay its own lawyers. Just how those funds were sourced is not entirely clear on the evidence, but it seems that it was from realising personal chattels of Ms Edwards, raising funds on a credit card, and raising moneys from personal borrowings. I do not doubt that if, for example, a litigation funder who took a stake in the proceedings as part of the consideration became available to a plaintiff, that could well be a relevant change of circumstances; but I am far less persuaded that the ability of an impecunious litigant to garner funds from diverse sources, including from personal loans and the sale of personal chattels, falls in the same category. Such funds would probably not have been made available if they were for the purpose of providing security, and they may well not have been made available - or even sought - if security of the order of $40,000 had already been ordered. After all, the principle that security for costs should not be allowed to stultify proceedings has to be given practical effect. The rationale of that principle is that the right of a litigant to bring bona fide proceedings in the Court should not be shut out by a requirement to put up security. Its rationale is not that an impecunious litigant should be forced to conduct proceedings on a shoestring or without lawyers. The thesis of the respondents' argument here is that if somehow an impecunious litigant can raise funds to retain legal assistance, then that means that an order for security can be satisfied. I do not think that that follows at all, because those funds may be raised from sources which simply would not be available or willing to provide them if they were to satisfy an order for security. 2. In my view, there are three significant discretionary considerations as to whether an order for security should be made. The first is that, for reasons to which I have already adverted, no material change of circumstances has occurred since the judgment of Harrison AsJ such as would justify revisiting the issue. True it is there has been a passage of time and some adjournments and the emergence of an issue which was once thought to require the giving of expert evidence but which now, apparently, does not do so. But the estimates of the pre-trial and trial costs have not been shown to have blown out significantly, if at all. The fact that the $10,000 has, in a sense, "already been spent", is beside the point: $10,000 was always going to be spent by the respondents a long time before the matter got near trial. Given the compromise nature of the initial $10,000 order and the multifarious factors that it reflected in seeking to balance the interests of the parties, I am quite unpersuaded that there has been any such change as to call for that question to be revisited. 3. Secondly, the incurring by the applicant of costs to the applicant's own lawyers - perhaps $200,000 - since the first order was made, cuts both ways. In the absence of any notice that further security was to be sought, it may be taken that those costs were incurred on the basis of getting the proceedings to trial, rather than risking that they would be frustrated by an order for further security on the eve of the trial. That is the rationale of the rule that requires that applications for security be made promptly. The incurring of those costs and the liabilities to satisfy them in the meantime weighs against making an order for security on the eve of the trial. 4. Thirdly, and most importantly, is a matter not referred to by his Honour, being the undertaking recorded by Harrison AsJ at [58] of her Honour's judgment of Ms Edwards "to be personally liable for any costs". It was suggested that this undertaking had never formally been given, but the Court was informed that it was contained in an affidavit sworn by Ms Edwards. For more abundant caution, and lest there be any doubt about it, the orders of this Court will provide for that undertaking to be formally noted, though I doubt that any more is necessary. 5. The significance of that undertaking is this. First, Courts will not usually order security where a case for security is made out only against one or some of multiple plaintiffs. It was once said, as long ago as Sykes v Sykes, that "unless there is ground for making an order for security against all plaintiffs, it cannot be made against any". [4] That is no longer an absolute rule, as was held by Megarry VC in Pearson v Naydler, but the rationale of the principle was explained by his Lordship as follows: [5] "One consideration seems to be that if the defendant is in any case exposed to proceedings by the plaintiff resident within the jurisdiction, then even if there is no prospect of him being able to pay the costs, the mere existence of another plaintiff who resides abroad ought not to provide means of hampering the bringing of the action by the plaintiff residing within the jurisdiction." 1. As I have said, that is no longer an absolute rule, but it remains a significant consideration. One of the chief exceptions to it is where it is foreseeable that an ultimate costs order may be made only against a plaintiff who is amenable to an order for security and not against others who are not. 2. This, of course, is not a case of there being one plaintiff, strictly speaking, in the jurisdiction and another out of the jurisdiction, but it is closely analogous to it once the undertaking proffered by Ms Edwards is taken into account. That is because at least part of the rationale of Corporations Act s 1335 is to require an individual who conducts his or her business affairs through a corporation without assets to "come out from behind the skirts of the company, at least to bring his own assets into play". [6] 3. In that context, a number of decisions in Queensland have established a rule that in such a case, if those behind the corporation make their own assets, such as they are, available to answer a costs order, then security would not be ordered. So, in Rawson Contractors Pty Ltd v Krogh & Company Pty Ltd [7] noted in Delany's Security for Costs: [8] "The plaintiffs' … mortgaged their home and personally guaranteed many of the obligations of [their earthmoving] business. They had judgment entered against them on one such guarantee for $64,990. In the present litigation they argued, that as they now had no personal assets, and the plaintiff had none, the defendant was no worse off in the litigation by reason of the company bringing the action. Ambrose J declined to order security provided the individuals executed personal guarantees, reasoning that whilst the individuals were themselves impecunious, the defendant was entitled to have the potential benefit of whatever they were worth". 1. A similar view was taken by Cooper J in Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd. [9] 2. If that is meant to state an absolute rule, then that is not the law in this State. So much was held by Powell J in Erolen Pty Ltd v Baulkham Hills Shire Council. [10] Two previous decisions of this Court are to the same effect. The majority in Jazabas v Haddad, [11] constituted by Mason P and McClellan CJ at CL, preferred another approach – to which I shall come – although Basten JA would have accepted the reasoning in the Queensland cases. Then in Prynew Pty Ltd v Nemeth, [12] Beazley JA, as her Excellency then was, sitting as a single judge of this Court on an application for security for costs of an appeal, reviewed the cases in this line of authority - including her Honour's earlier decision as a judge of the Federal Court of Australia in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [13] - and concluded that the correct approach was, as expressed in KP Cable, that: "… the offer of security by way of a guarantee from the directors or shareholders or other persons interested in the outcome of the litigation was a factor, which could be decisive in a given case, to be considered in determining whether any other form of order for security for costs should be made." 1. That approach is consistent with that favoured by Mason P and McLellan CJ at CL in Jazabas v Haddad; see also Intercraft Cabinets Pty Ltd v Sampas Pty Ltd [14] and Newtimber (Operations) Pty Ltd v Tarong Energy Corporation Ltd. [15] 2. But while those cases make clear enough that in this Court the proffer of an undertaking of the kind proffered by Ms Edwards does not conclusively determine the question, they also indicate that the existence of such an undertaking is a very powerful consideration which may, in a particular case, be determinative, and that is so whether or not the undertaking or guarantee is supported by any assets. In my view, the proffer of that undertaking, coupled with the other two discretionary considerations to which I have referred, combine to make an overwhelming discretionary case for declining to make an order for further security. Costs 1. As to the question of costs, the outcome of the foregoing reasoning is that the present applicant should have succeeded at first instance. As the applicant was legally represented before Rothman J, it would follow that the motion before his Honour should have been dismissed with costs. In this Court, the applicant is not legally represented and whether or not she has yet been admitted to practice makes no difference in the light of the recent decision of the High Court in Bell Lawyers Pty Ltd v Pentelow, [16] which rejects the old Chorley exception. [17] She would, nonetheless, be entitled to a party/party costs order insofar as it covers disbursements, such as the filing fee, although I have in mind that that filing fee may have been dispensed with. Orders 1. For those reasons, I propose the following orders: 1. Insofar as it is required, time to file the Summons for Leave to Appeal be extended up to and including the date on which it was filed. 2. Leave to appeal be granted, and the applicant file a Notice of Appeal within seven days. 3. The appeal be allowed and the orders of Rothman J made on 14 November 2018 be set aside, and in lieu thereof, upon the undertaking of Gina Edwards to the Court that she will be personally answerable for any costs order made against the Plaintiff in the proceedings below, claim 3 in the Defendant's Notice of Motion filed on 1 June 2018 be dismissed with costs. 4. The respondents pay the applicant's costs of the application for leave to appeal and the appeal. 1. BELL P: I agree with the reasons given by Brereton JA and the orders his Honour proposes. 2. MACFARLAN JA: I also agree with Brereton JA. 3. BELL P: The orders of the Court are therefore as proposed by Brereton JA. ********** Endnotes 1. Vintage Marine Art Pty Ltd v Robert Craig Henderson [2015] NSWSC 1439. 2. (1985) 1 NSWLR 114 at 125. 3. See also Street v Luna Park Sydney Pty Ltd [2007] NSWSC 1144. 4. (1869) LR 4 CP 645 at 650 (Brett J). 5. [1977] 3 All ER 531 at 533. 6. Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 at 532 (Connolly J). 7. (Supreme Court (Qld), Ambrose J, 11 September 1986, unreported). 8. Jim Delany, Security for Costs (1989, Law Book Co Ltd) at 66. 9. (1992) 8 ACSR 405. 10. (1993) 10 ACSR 441 at 456. 11. (2007) 65 ACSR 276; [2007] NSWCA 291. 12. [2010] NSWCA 94. 13. (1995) 56 FCR 189. 14. (1997) 18 WAR 306 at 316 (Malcolm CJ). 15. [2011] FCA 123 at [31] (Greenwood J). 16. [2019] HCA 29. 17. London Scottish Benefit Society v Chorley (1884) 13 QBD 872. 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: 16 October 2019