FEDERAL COURT OF AUSTRALIA

TSDack Pty Limited v Australian Water Holdings Pty Limited [2015] FCA 931

THE COURT ORDERS THAT:

1.    The first, second and third applicants provide security for the costs of:

(a)    the first respondent in the amount of $300,000; and

(b)    the second, third, sixth, seventh and eighth respondents in the amount of $200,000,

by payment into a bank account of the Court or provision of a bank guarantee.

2.    The first, second, third and fourth applicants provide security for the costs of:

(a)    the fourth respondent in the amount of $100,000; and

(b)    the ninth, tenth and eleventh respondents in the amount of $100,000,

by payment into a bank account of the Court or provision of a bank guarantee.

3.    Within 14 days after the applicants’ evidence is served, the first, second and third applicants provide security for the costs of:

(a)    the first respondent in the amount of $300,000; and

(b)    the second, third, sixth, seventh and eighth respondents in the amount of $300,000,

by payment into a bank account of the Court or provision of a bank guarantee.

4.    Within 14 days after the applicants’ evidence is served, the first, second, third and fourth applicants provide security for the costs of:

(a)    the fourth respondent in the amount of $100,000; and

(b)    the ninth, tenth and eleventh respondents in the amount of $100,000,

by payment into a bank account of the Court or provision of a bank guarantee.

5.    Within seven days after the order is made listing the matter for final hearing, the first, second and third applicants provide security for the costs of:

(a)    the first respondent in the amount of $300,000; and

(b)    the second, third, sixth, seventh and eighth respondents in the amount of $350,000,

by payment into a bank account of the Court or provision of a bank guarantee.

6.    Within seven days after the order listing the matter for final hearing, the first, second, third and fourth applicants provide security for the costs of:

(a)    the fourth respondent in the amount of $100,000; and

(b)    the ninth, tenth and eleventh respondents in the amount of $115,000,

by payment into a bank account of the Court or provision of a bank guarantee.

7.    The proceedings be stayed until such time as the applicants have complied with orders 1 and 2.

8.    Upon service of the applicants’ evidence, the proceedings be stayed again until such time as the applicants have complied with orders 3 and 4.

9.    Upon the making of the order listing the matter for final hearing, the proceedings be stayed again until such time as the final tranche of security is provided.

10.    The first, second, third and fourth applicants pay the respondents’ costs of their applications for security.

11.    Upon the provision of the first tranche of security, the applicants contact the Court to arrange for the matter to be listed for directions.

12.    Liberty be granted to the applicants to apply to vary the amounts set out in orders 3–6 inclusive in the event that after the close of pleadings, discovery or the exchange of evidence, there has been such a narrowing of the issues as to call into serious question the assessments of costs upon which these orders were made.

13.    Liberty be granted to the respondents to apply for further security, if necessary.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

1    This is an application for interlocutory relief. In the substantive proceedings the applicants complain about the conduct of a number of individuals and entities they allege persuaded them to invest substantial sums of money only to squander their investments.

BACKGROUND

2    The following account is largely taken from the amended statement of claim and the applicants’ chronology. For present purposes at least, it does not appear to be contentious.

3    The first respondent, Australian Water Holdings Pty Limited (“AWH”) (originally Rouse Hill Infrastructure Consortium Pty Limited), was established as a not-for-profit venture in response to a particular problem in the supply of water and sewerage infrastructure in northwest Sydney. It was originally owned by a number of commercial landholders and the Housing Commission of New South Wales. Its sole client for water infrastructure projects was the Sydney Water Corporation, a government instrumentality. Some time before 2005 or 2006 John Rippon, the second respondent, and William MacGregor-Fraser, the third respondent, purchased AWH. Mr Rippon invited Nicholas Di Girolamo, the fourth respondent, to join the board as a non-executive director for the specific purposes of expanding the company’s existing business and developing and exploring new business opportunities.

4    On 9 November 2006 another company, Australian Water Pty Limited (“AW”), was registered. AW was the brainchild of Messrs Rippon, MacGregor-Fraser and Di Girolamo. It was apparently conceived as a corporate vehicle to secure and pursue the new business opportunities identified by AWH but which would not be subject to any not-for-profit status or restrictions. In or about February 2007 Mr Di Girolamo was appointed Chief Executive Officer of AW.

5    On various dates in 2007 and 2008 each of the applicants (the third by a different trustee) entered into convertible note agreements (“CNAs”) with AWH and AW. Their investments ranged from $275,000–$1 million. Under the terms of the CNAs, those sums were transferred to AWH and AW, now called ACN 122 590 836 Pty Limited.

6    Each CNA was for a fixed term, after which the applicants were entitled to have the sums repaid together with interest. However, the applicants chose not to exercise their entitlements and instead converted their interests into equity in AWH. By the end of 2008 all the money they had caused to be paid to AW was gone. In the middle of 2012 the applicants agreed to a proposal by which they converted the convertible notes into what were ultimately worthless shares in AWH. They blame their predicament on AWH and its then directors.

7    The second to tenth respondents are former and current directors of AWH. They included a fifth respondent, Arthur Sinodinos. As I explain later, however, he is no longer a party. Each of Messrs Rippon, MacGregor-Fraser and Di Girolamo was a director of both AWH and AW.

8    The 11th respondent, BG&E Pty Limited (“BG&E”), allegedly invested in AWH in 2012 and procured or arranged for two other companies — BG&E Management Pty Limited (“BG&E Management”) and Superra Pty Limited (“Superra”) — to acquire significant shareholdings in AWH.

9    The eighth to tenth respondents (Peter Canaway, Giuseppe Catanzariti and Francesco Cerra) are current directors of AWH. Mr Canaway is also a current director of BG&E Management and another company, BG&E Holdings Pty Limited (“BG&E Holdings”), Mr Catanzariti is a current director of BG&E and shareholder in BG&E Holdings, and Mr Cerra is a current director of BG&E, BG&E Management, BG&E Holdings and Superra and a shareholder in the latter two companies.

10    The proceedings are at a very early stage. Although the originating application was filed on 30 January 2014, little progress has been made. There are two reasons for this.

11    First, less than three weeks after proceedings were instituted, the NSW Independent Commission against Corruption (“ICAC”) publicly announced that it was inquiring into corrupt conduct involving AWH. A large amount of evidence was thereby generated. A director of TSDack, Anthony Karam, and Rod de Aboitiz, the son of Patricia de Aboitiz, as well as a number of the respondents, gave evidence at the ICAC hearings and documents said to be relevant to these proceeding were produced to the ICAC. On 31 March 2014, when the matter first came before the Court for directions, the applicants sought and were given a lengthy adjournment to consider that evidence and to amend their statement of claim.

12    The second reason the proceedings have languished is that there has been a protracted dispute about the applicants’ pleading. That dispute has now come to a head.

THE INTERLOCUTORY APPLICATIONS

13    On 8 December 2014 AWH applied for an order pursuant to r 16.21 of the Federal Court Rules 2011 (Cth) (“Rules” or “FCR”) that the amended statement of claim be struck out as against the first respondent. In fact, however, that proved not to be the order AWH asked the Court to make. Instead, AWH asked the Court to strike out all the claims relating to misleading or deceptive conduct (contained in parts E, I and J of the amended statement of claim) and the claim that AWH was knowingly concerned in breaches of trust by Messrs Rippon, MacGregor-Fraser and Di Girolamo (contained in part G of the amended statement of claim). That would leave the claim for breach of contract.

14    Messrs Rippon, MacGregor-Fraser, Skehan, Costa and Canaway (together “the majority directors”) filed their interlocutory application on 23 December 2014. They sought an order under the same rule that the amended statement of claim be struck out as against them. The basis for their application was twofold: they claimed that in part the pleading does not disclose an arguable cause of action and the balance is so “inadequately pleaded” as to cause prejudice and embarrassment to them, deny them basic procedural fairness and delay the proceedings as a whole. The causes of action said to be unarguable are the claims alleging:

(a)    accessorial liability for misleading or deceptive conduct;

(b)    misleading or deceptive conduct based on “mere silence”;

(c)    breaches of directors duties;

(d)    liability of directors for breaches of trust by the company (s 197 of the Corporations Act 2001 (Cth));

(e)    liability for breach of trust; and

(f)    breach of fiduciary duties.

15    Mr Di Girolamo was granted leave at the hearing to make an application to like effect.

16    Messrs Catanzariti and Cerra and BG&E filed their application on 8 December 2014. They sought summary judgment in their favour pursuant to r 26.01 and, in the alternative, orders striking the amended statement of claim as against them.

17    The exception is Senator Sinodinos who made no such application.

18    All respondents however, applied for security for costs. The applications were heard together. No one sought an order limiting the use to which the evidence of any one party could be put.

19    AWH’s application was supported by an affidavit sworn on 8 December 2014 by Pamela Madafiglio, a partner in the firm of Minter Ellison Lawyers, the solicitors for AWH. The majority directors’ application was supported by an affidavit of Tricia Hobson, a partner of Norton Rose Fulbright, sworn on 16 February 2015. Mr Di Girolamo’s application was supported by an affidavit of his solicitor, Jonathan Hunt of Lander & Rogers, sworn on 8 December 2014. The application by Senator Sinodinos was supported by an affidavit sworn on 8 December 2014 by Jonathan Milner, a partner in the firm of Arnold Bloch Leibler. The application by Catanzariti, Cerra and BG&E was supported by an affidavit of Katherine Ruschen, a solicitor director of Yeldham Price O’Brien Lusk.

20    The interlocutory applications were heard on 10 and 11 March 2015. While judgment was reserved, my chambers were advised that the applicants had changed solicitors and counsel and that they wished to further amend the pleading. I was encouraged in the meantime not to write a judgment. The matter returned to Court on 16 June 2015 when Mr Pike SC announced his appearance with Mr Hynes for the applicants instructed by Henry Davis York. Still no amended pleading was produced, in part, at least, it seems, because of difficulties the solicitors have had in obtaining the former solicitors’ file. But the applicants sought various orders to enable them to file further amended pleadings which they hoped would obviate the need for a judgment on the interlocutory applications.

21    Despite the obvious attraction this proposal presented, I declined to make the orders in the face of opposition from all respondents who strenuously resisted incurring further costs without the protection of an order for security. This position is entirely understandable. No offer of security has been forthcoming. Accordingly, it is necessary for me to give judgment on that question. On the eve of publication, however, and after the parties had been notified that judgment would be published, the applicants filed a notice of discontinuance, discontinuing the proceeding against Senator Sinodinos, with no order as to costs. In these circumstances, it is unnecessary to refer to the allegations made against the Senator. That said, I do propose to refer later in these reasons to the affidavit of Mr Milner, which was read at the hearing of the security for costs applications, as some of the evidence given on Senator Sinodinos’s behalf is relevant to the applications of the other respondents.

22    Before dealing with the application for security, it is necessary to say something about what is left of the current pleading and the strikeout applications.

THE ALLEGATIONS IN THE PLEADING

23    The amended statement of claim is prolix. It is this very circumstance which has contributed to the present applications. It spans some 96 pages and, to adopt the applicants’ description, it makes multiple “separate but factually related claims against [11] [r]espondents arising out of facts that occurred over a period of five years”. Most of the allegations are levelled against AWH and Messrs Rippon, MacGregor-Fraser and Di Girolamo.

24    In relation to those respondents, broadly speaking, the statement of claim alleges that:

(1)    AWH and Rippon, MacGregor-Fraser and Di Girolamo engaged in misleading or deceptive conduct in contravention of various provisions of the Trade Practices Act 1974 (Cth) or the Fair Trading Act 1987 (NSW), the Australian Consumer Law contained in Sch 2 to the Competition and Consumer Act 2010 (Cth) (depending on when they were made), the Corporations Act and the Australian Securities and Investments Commission Act 2001 (Cth), which caused the applicants to:

(a)    invest in the CNAs (paragraphs 37–65 of the amended statement of claim);

(b)    elect not to exercise their rights before the end dates of the CNAs (paragraphs 68–113 of the amended statement of claim);

(c)    not to call for repayment of their investment sums until they converted their investments into shares in AWH (paragraphs 135–237 and 292–389 of the amended statement of claim);

(d)    convert their investments into shares in AWH (paragraphs 238–285 and 292–389 of the amended statement of claim);

(2)    between 2007 and 2008 and between 2008 and 2012 Rippon, MacGregor-Fraser and Di Girolamo were in breach of fiduciary duties they owed to the applicants (as promoters of a scheme for establishing AW as the corporate vehicle for carrying out the proposed business of delivering water infrastructure in NSW) by:

(a)    providing misleading and unreliable information to the applicants to induce them to enter into the CNAs;

(b)    providing or acquiescing in the provision of misleading and unreliable information to the applicants after they entered into the CNAs and before the time came when they could exercise their rights to withdraw their investments;

(c)    conducting the financial affairs of AW so as to prefer their own personal interests in a way which was inimical to the interests of the applicants;

(d)    failing to disclose to the applicants various matters concerning their mismanagement of AW and AWH;

(e)    providing misleading and unreliable information to the applicants to induce them not to call for repayment of the investment sums and to convert their investments into shares in AWH;

(f)    conducting the financial affairs of AWH so as to prefer their own interests and those of Sinodinos and Skehan in a way which was inimical to the interests of the applicants;

(g)    preferring their own interests and those of BG&E to those of the applicants;

(3)    AWH, Rippon, MacGregor-Fraser and Di Girolamo are liable to the applicants for a breach of trust by AW based on the first limb of Barnes v Addy (1874) LR 9 Ch, App 244 on the premise that:

(a)    AW held the applicants’ funds under an implied trust for specific purposes which it then dissipated in breach of its duties as trustee and

(b)    Either:

(i)    AWH, Rippon, MacGregor-Fraser and Di Girolamo received part of the investment funds for their own use or benefit knowing of AW’s breach of trust; or

(ii)    each of Rippon, MacGregor-Fraser and Di Girolamo as agents of AWH caused AW to dissipate the funds knowing that the funds were being spent in breach of AW’s duties as trustee;

(4)    Rippon, MacGregor-Fraser and Di Girolamo were directors of AW while AW was acting as trustee for the applicants’ funds and when it dissipated those funds for ulterior purposes and so are liable under s 197 of the Corporations Act to discharge the whole of AW’s liability to each of the applicants;

(5)    AWH is liable to the applicants in contract because it breached the terms of the CNAs in numerous respects. The essence of that case is that the monies paid under the CNAs were not applied to legitimate purposes but to fund donations to political parties, to pay excessive amounts in salaries and wages, and to finance “non-core business expenses”.

25    In the case of Messrs Skehan and Costa, the amended statement of claim alleges that, while they were directors, they made misleading or deceptive representations to Rod de Aboitiz in a letter dated 21 March 2012, repeated in letters to the other applicants on 4 April 2012, about the financial affairs of AWH (including its liquidity) which, to their knowledge, were misleading in numerous respects. They are also alleged to have had an obligation to the applicants “to speak and make proper disclosure”, in default of which they are said to have engaged in misleading or deceptive conduct. Furthermore, they are also said to have been knowingly concerned in misleading or deceptive representations made by AWH and Di Girolamo during their periods of tenure as directors (26 March 2009 and 22 January 2013 in the case of Mr Skehan and 9 November 2011 and 3 November 2012 in the case of Mr Costa). Mr Costa is also alleged to have been a party to, and to have adopted and confirmed the representations made by Mr Di Girolamo to John Koutsogiannis. Mr Skehan (but not Mr Costa) is alleged to have breached his duties as a director under ss 180 and 181 of the Corporations Act.

26    Mr Canaway was appointed a director of AWH on 3 April 2012, Messrs Catanzariti and Cerra a year later, on 29 April 2013. The allegations made against them and BG&E relate to the period from November 2011 and the dates the applicants converted their investments into shares in AWH (in or about 2012). These respondents are said to have been knowingly concerned in the misleading or deceptive conduct of AWH, Di Girolamo, Skehan and Costa that occurred from March 2012. Furthermore, the representations made by AWH and Di Girolamo, Skehan and Costa were allegedly “made on behalf of BG&E and Canaway, Catanzariti and Cerra”. It is that conduct which is said to have induced the applicants to agree in the middle of that year to the proposed conversion of their convertible notes to what were ultimately worthless shares in AWH. In particular, Canaway is said to have actual or imputed knowledge of the contents of the letters of 21 March 2012 and 4 April 2012. In addition, in January 2012 he, Catanzariti, Cerra and BG&E “acting on their own behalf and on behalf of BG&E” are alleged to have negotiated a credit facility agreement with AWH without the applicants’ knowledge pursuant to which BG&E lent AWH $5 million secured by a fixed and floating charge over all of AWH’s assets. Canaway and BG&E are also said to have had an obligation “to speak and make proper disclosure” of what they knew of AWH’s position and of the presence of a conflict between the interests of the applicants on the one hand and those of Mr Canaway as a director of AWH and BG&E, BG&E Management and BG&E Holdings, those of AWH’s other directors and those of BG&E on the other.

27    The principal allegations were summarised by the applicants’ former solicitor, Robert McGregor, in an affidavit affirmed on 24 December 2014 in opposition to the respondents’ applications. They are that:

    some of the respondents made representations to each of them that the CNA investments were performing well and that they would shortly be able to realise their investments;

    some overstated the success, prospects and projected values of AWH and AW;

    some paid themselves exorbitant salaries and misappropriated (for other purposes) the monies deposited by the applicants pursuant to the CNAs; and

    if the applicants had been informed of the true financial position of the two companies and the ways in which their investments were being utilised, each of them would have taken steps to recover their investments.

SECURITY FOR COSTS

The applications

28    AWH and the majority directors seek security from the first three applicants. So did Senator Sinodinos before the proceeding against him was discontinued. The first two applicants are companies: TSDack and Conca D’Oro. In the latest incarnation of the statement of claim so, too, is the third applicant: Brayside. In the original statement of claim the third applicant was Patricia de Aboitiz as trustee for the Brayside Discretionary Trust. According to the amended statement of claim Brayside was appointed trustee on 8 May 2014 –– almost five months after this proceeding was commenced. An ASIC search discloses that the company was registered on 29 April 2014, about one month after the first directions hearing. Its only officer is Mrs de Aboitiz.

29    In his interlocutory application, Mr Di Girolamo sought security from all the applicants, but resiled from that position in his written submissions so that now, he and the remaining respondents seek security from the first three applicants and also from the trustees of the Koutsogiannis Family Trust.

The principles

30    Section 1335(1) of the Corporations Act is in the following terms:

Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

31    Thus, in the case of a corporate applicant, the power to order security is only enlivened if there is credible evidence that there is reason to believe the corporation will be unable to pay the respondent’s costs should the defence succeed. If that threshold is crossed, the evidential burden shifts to the applicant to satisfy the Court that, taking into account all relevant considerations, its discretion should be exercised to refuse security: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 (Idoport) at [60]–[62] and Reinsurance Australia Corporation Ltd v HIH Casualty & General Insurance (in liq) [2003] FCA 803 at [25]. The history of this provision was discussed by the Western Australian Court of Appeal in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241.

32    While the discretion is a broad one, limited only by the obligation to exercise it judicially, there are a number of considerations which bear upon its exercise. Those which are most commonly cited in the case law were summarised by Beazley J (as her Honour then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (“KP Cable”) at 197-8. Relevantly, they include:

(1)    whether the application was brought promptly;

(2)    whether the claim is bona fide and the pleading discloses an arguable cause of action;

(3)    whether the applicant’s impecuniosity was caused by the respondent’s conduct the subject of the claim;

(4)    whether the respondent’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate;

(5)    whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security;

(6)    whether such persons have offered an undertaking to be personally liable for the costs and, if so, the form of the undertaking; and

(7)    whether the applicant is in substance a plaintiff or the proceedings are really defensive in that the applicant has been forced to litigate.

33    Moreover, the inability of a corporate plaintiff to pay a defendant’s costs not only enlivens the jurisdiction to require security but is “a substantial factor in the decision whether to exercise it”: Pearson v Naydler [1997] 3 All ER 531 at 537 (Megarry V-C); Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd (1982) 44 ALR 163 at 165–166.

34    Section 56 of the Federal Court of Australia Act 1976 (Cth) (“FCA Act”) also confers power on the Court to order an applicant to give security for costs but it is not confined in its terms to corporate applicants and there is no threshold requirement. Where relevant, the same considerations will affect the way the discretion to make such an order is exercised.

35    The purpose of these powers is “to ensure that a party to a proceeding brought by an impecunious claimant is not oppressed in consequence of the moving party litigating without responsibility”: Sagacious Procurement Pty Ltd v Symbion Health Ltd [2007] NSWCA 205 at [53] (Mason P).

Is there credible evidence that the corporate applicants may be unable to pay the respondents’ costs if their defences succeed?

36    There is no doubt that credible evidence has been adduced. The applicants do not contend otherwise. Indeed, their own evidence alone provides reason to believe that they will not be able to pay the respondents’ costs in the event that the respondents prevail.

37    This is what the evidence reveals.

38    TSDack is an Australian proprietary company, limited by shares, with four directors and three shareholders. It is an investment vehicle. It was incorporated on about 12 March 2008 for the sole purpose of the CNA investment and has no other business operations. It has a paid up capital of $4 and holds no interest in land. Through its solicitor it has conceded it has no assets. Its directors are George Daaboul, Anthony and Corriene Karam and Tony Saad. None of them has offered to stand behind the company.

39    Conca D’Oro is also an Australian proprietary company, limited by shares. It has five directors and two shareholders. The directors are Maria Florio and John, Salvatore, Filippo and Sarina Navarra. None of them has come forward offering security.

40    Unlike TSDack, Conca D’Oro has interests in a number of pieces of real estate. But it has a paid up share capital of only $2. Some of its landholdings are mortgaged to the Westpac Banking Corporation, and all of its present and future assets are subject to a fixed and floating charge in Westpac’s favour. Despite repeated requests, it has refused to provide details of its financial position. In his affidavit Mr McGregor said that Mr Navarra (presumably John, as he is the only Navarra mentioned in the affidavit) told him that Conca D’Oro is a substantial trading entity and information relating to its assets and financial position is “commercially sensitive”. He also told Mr McGregor that the company was unwilling to divulge information about its assets and financial position because to do so would result in:

(a)    Conca D’Oro’s profits and margins being disclosed. If this information were to be obtained by market competitors, Conca D’Oro would be operating at a commercial disadvantage and substantial harm could result to its business; and

(b)    Conca D’Oro’s commercial interests and business assets being disclosed. In the hospitality and venue hire industry, the location of venues is critical to profits and success. If Conca D’Oro’s asset position were disclosed, then the information concerning its ventures in potential growth locations would be revealed. This would flag to competitors the future opportunities that Conca D’Oro is considering and thereby erode its competitive advantage.

41    This evidence provides an explanation for the company’s failure to disclose the information but it is an unsatisfactory explanation. The Court has the power to make orders protecting confidential information from publication.

42    Thus, while the evidence in Mr McGregor’s affidavit suggests that Conca D’Oro might well be able to meet any adverse costs order, its refusal for no good reason to disclose its financial position to the respondents or to the Court leads me to believe that it might not.

43    Brayside has paid up capital of $3 and does not hold any land interests in NSW. Mr McGregor stated that he was informed by Mr de Aboitiz that Brayside has no assets and is unable to provide security.

44    In a letter to Lander & Rogers, the solicitors for Mr Di Girolamo, Mr McGregor said that both TSDack and Brayside were “special purpose companies that were incorporated specifically for the purpose of investing in the Convertible Note Agreements (CNAs)” and that, because of Mr Di Girolamo’s conduct, they are now “devoid of any assets …”. This advice was reaffirmed in Mr McGregor’s affidavit.

The applicants’ submissions

45    The applicants contended that the orders sought would stultify the proceedings. They submitted that their claims are made in good faith and are at least reasonably arguable: Jazabas Pty Ltd v Haddad [2007] NSWCA 291; 65 ACSR 276 (“Jazabas”) at [18]. To the extent that the evidence reveals that the corporate applicants have no assets of any value, they maintained that the respondents are the cause of this. Indeed, they submitted that the primary purpose of the proceeding is to restore the value of their assets. They argued that they should be treated for present purposes as parties who are defending themselves because they were given, in effect, Hobson’s choice: accept your losses or litigate.

How should the discretion be exercised?

46    For the following reasons I am satisfied that an order for security should be made against each of the corporate applicants.

47    There was some delay in bringing the applications, but I do not consider it to have been at all unreasonable. In the first place, by consent, no steps were taken in the proceedings for some time while the ICAC inquiry was on foot. In any case, for much of the time the respondents had been preoccupied with trying to sort out precisely the cases they were being called upon to meet and quite properly sought to deal with the matter informally before troubling the Court.

48    Notwithstanding the difficulties with the applicants’ pleading, I accept that their claims are bona fide and that the pleading discloses an arguable cause of action. That is indisputably the case in relation to the claim against AWH to the extent that it pleads breaches of contract and I am prepared to assume for present purposes that there is an arguable cause of action for misleading or deceptive conduct by all respondents, despite any difficulties the applicants may encounter in establishing causation or reliance. It is unnecessary to express an opinion on the remaining causes of action.

49    If, as here, an applicant’s adverse financial circumstances are said to be due to the respondent’s alleged conduct, the applicant has an onus of establishing that its financial position before the conduct in question would have enabled it to meet an adverse costs order and that its present position should be sheeted home to the respondent: Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [33] (Beazley JA, as her Honour then was, and the cases referred to there), Meagher and Barrett JJA agreeing at [53] and [61] respectively.

50    Here, however, there is no evidence that the impecuniosity of either TSDack or Brayside was caused by the conduct of any of the respondents, save for hearsay statements about the opinions of some of their directors. Even on the pleadings, however, it is difficult to see how the impecuniosity of the corporate applicants could have been caused by the conduct of Messrs Catanzariti or Cerra or that of BG&E (the 9th to 11th respondents). As Mr Ng, counsel for those respondents, submitted, the applicants allege that the dissipation of the assets of AWH and Brayside occurred well before the conversion of their convertible notes into AWH shares.

51    I do not regard the applications for security as oppressive in the sense that they are being used merely to deny the applicants a right to litigate.

52    The applicants have at least an evidential onus to show that the provision of security would stultify the proceedings and that those who stand to benefit from the litigation are without means. In Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4 the Full Court (Sheppard, Morling and Neaves JJ) said:

In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

(Emphasis added.)

53    In Jazabas at [78] McClellan CJ at CL described as uncontroversial the principle that the onus falls upon a company seeking to resist an order for security on the ground that it will frustrate the litigation to prove the relevant facts.

54    Here, the applicants called no evidence to prove that those who stand behind the companies or the Trust were without means. Indeed, the applicants actually submitted otherwise in the mistaken belief that the onus was upon the respondents to prove that they had no means, an onus the respondents did not discharge. I am not therefore satisfied that the proceedings would be stultified if an order for security were made.

55    No offer of a personal guarantee or undertaking was made which might conceivably obviate the need for an order.

56    And, while I am satisfied that there is reason to believe that Conca D’Oro might not be able to meet an adverse costs order, I am far from satisfied that that company does not have the means to come up with a substantial sum in security.

57    The applicants urged the Court to take into account that the facts in this case were “fully ventilated” at the ICAC hearings. They submitted that “the lion’s (scil) share of the fact finding exercise must have been completed in parallel or collateral to these proceedings”. Additionally, they stated that Sydney Water is also seeking restitution of moneys it had paid to AWH in separate proceedings in this Court which, in their submission “will involve consideration of matters concerning the alleged improper claims made on behalf of AWH for reimbursement which also forms part of the allegations in the current proceedings”.

58    The difficulty with these arguments is that there is no evidentiary basis for them. There is no reason to assume an identity of issues. As the applicants admitted, the focus of the ICAC was not on the dealings the applicants had with AW and AWH. I know nothing about the Sydney Water proceedings.

59    The applicants’ submission that these proceedings are in substance defensive should also be rejected. As Beazley J pointed out in KP Cable, proceedings have been characterised as defensive where, as Ormiston J sated in Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 (“Interwest”) at 627 “… they are … either directly resisting proceedings already brought or seeking to ‘halt self-help procedures’”. In Interwest Ormiston J made a limited order for security. As Beazley JA explained in KP Cable at 200, in Interwest, before the proceedings were instituted, the defendant, Tricontinental Corporation, had taken steps to recover moneys from the plaintiffs under certain loan facilities and guarantees. Ormiston J accepted that, to the extent that the plaintiffs were bringing the proceedings in order to halt those steps, they were defensive and limited the order for security to the defensive measures. There is no material before me to indicate that this is such a case.

Should security be ordered against the trustees for the Koutsogiannis Family Trust?

60    The only respondents seeking such an order are Di Girolamo, Catanzariti, Cerra and BG&E.

61    Mr Di Girolamo’s solicitors wrote to the applicants’ then solicitors on 4 June 2014 seeking information about the financial positions of all the applicants. In that letter they stated, amongst other things, that they were unable to determine whether Mr and Mrs Koutsogiannis held any assets in their capacity as trustees of the Trust. They sought from the applicants’ solicitors:

    details of the applicants’ assets and liabilities to enable them to determine whether they had the financial capacity to meet any adverse costs orders; and

    any other information evidencing the applicants’ capacity to meet any adverse costs orders.

62    They did not receive a reply for over three months. When it arrived, Mr Di Girolamo was none the wiser. In relation to the financial position of the Koutsogiannis applicants Mr McGregor wrote:

As regards, the fourth and fifth applicants, we note these applicants are not corporate entities and we do not see the basis upon which your client could properly seek to obtain security for costs against them and they are entitled to prosecute their claims without the burden of security for your client’s costs.

63    This curt response ignored the Court’s powers under s 56 of the FCA Act.

64    None of the respondents has applied for an order that the fifth applicant (Danny Koutsogiannis) pay security for its or his costs. The issue here concerns the Trust. In his affidavit Mr McGregor did not address the position of the Koutsogiannis trustees at all. The inference to be drawn is that the Koutsogiannis trustees are either unwilling or unable to show that the Trust has the capacity to meet an adverse costs order.

65    In these circumstances, I have concluded that security should be ordered against the Trust as well but only in favour of those respondents who sought such an order.

In what amounts and by what means should security be required?

66    No two cases are the same, so little assistance can be gained from reference to the case law. But some general observations may be made.

67    First, the Court is required to fix an adequate amount for the services to be rendered: Sunday Times Newspaper Company Ltd v McIntosh (1933) 33 SR (NSW) 371 at 373.

68    Secondly, the evidence as to the costs to which the respondents are likely to be put must be considered.

69    Thirdly, because of the vagaries of litigation there can be no certainty about what the costs are likely to be. The earlier the application is made the more uncertainties there are. That is particularly so in a complex piece of litigation such as this. The proceedings might settle well before the hearing, either against all or some of the respondents. They might not. There might be numerous interlocutory applications. There might not.

70    Fourthly, the Court’s jurisdiction is not limited to future costs but extends to requiring security for costs actually incurred: Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 5) [2006] FCA 1672 at [43].

71    Fifthly, the matters bearing upon the exercise of the discretion to order security at all are also relevant to the question of quantum. In particular, an order for security should not be used as a de facto strike-out order. As Sedley LJ observed in Al-Koronky v Time-Life Entertainment Group Ltd [2006] EWCA Civ 1123 at [26]:

The way to deal with extravagant litigation is by the use of the court's case management powers, including the striking out of unnecessary or unsustainable pleadings, the capping of costs and the restriction of disclosure and evidence. Deliberately to require an unaffordable amount of security as a separate way of disciplining a wayward claimant is to transform security for costs into a means of striking out a claim without any of the ordinary safeguards.

72    AWH seeks an order against each of the applicants in the sum of $900,000. The amount sought by the majority directors is $901,284, Mr Di Girolamo $515,000, and the remaining respondents $361,558. These sums are said to represent the party and party costs the respondents are likely to incur based on a trial variously estimated to last between three and six weeks. The estimates are given by experienced solicitors on oath. The total figure is $2,677,842.

73    The applicants made no submissions concerning the length of the trial. Rather, they contended that the assessments of costs made by the respondents’ solicitors in their affidavits contained likely duplication because, in effect, it is inevitable that the respondents will rely on the same material and information and work will be shared between them. But the applicants did not require any of the deponents for cross-examination and led no evidence to contradict what any of the deponents said. While I accept that there is likely to be an element of duplication in the preparation for the hearing, in the scheme of things that is likely to have a minimal impact on the overall costs. The amounts in which security is sought are undoubtedly high. Yet, this may be an inevitable result of the way the claim is pleaded. For the most part, I see no reason to discount the assessments given by the solicitors. I will return to this question shortly.

74    The applicants also complained that they should not have to “fund the separate representation of the various respondents with respect to the largely common facts based upon asserted conflicts of interest over which the [a]pplicants have no control”.

75    If the imputation here is that the separate representation of various respondents is unnecessary, I cannot accept it. There is no reason to suppose that the decision taken by the parties and/or their solicitors that joint representation was inappropriate was taken lightly or was unjustified. In any case, in large part, the circumstance of separate representation is likely to be a natural consequence of the applicants’ pleading.

76    Having regard to the uncertainties of the litigation I gave serious consideration to ordering security only up to the conclusion of an early mediation. Upon reflection, however, I have decided otherwise. In my view it would only generate the unnecessary expense of one or more additional applications in the event that the case failed to settle at mediation and would not conform to the overarching purpose of the civil procedure provisions of the FCA Act and Rules, which is concerned with minimising costs: see FCA Act, s 37M. In the circumstances, the better course is to order that security be provided in tranches.

77    That said, the costs assessments were made on the basis of the current state of the applicants’ pleading. It is clear that, if there is to be a trial, the trial will not take place on that pleading. If, as I have been given to understand by the applicants’ new senior counsel, the pleadings are revised in such a way as to reduce the complexity of the proceeding and limit the likely issues, some of the assessments may prove to be wrong. Moreover, the full scope of the dispute will not be known until the defences are filed, discovery and inspection of documents takes place and evidence is served. One would reasonably expect that some issues would fall away in due course. It seems to me that the best way to deal with these eventualities is to give the applicants liberty to apply to vary the orders if they can demonstrate that, on the new pleading or following discovery or the exchange of evidence, the costs are unlikely to be as high as the respondents envisaged and there is good reason to reduce the amounts ordered.

AWH

78    In its submissions AWH suggested two possible orders: security in the sum of $900,000 (being 80% of Ms Madafiglio’s assessment of the total costs including past costs) or security in three tranches:

(a)    an initial tranche of $300,000;

(b)    a second tranche of $300,000 when the timetable requires service of the applicants’ evidence is served; and

(c)    a third tranche of $300,000 within seven days of the Court listing the matter for hearing.

79    As I have already indicated, I favour making an order that security be provided in tranches. In substance, I consider the stages suggested by AWH to be eminently reasonable and I propose to adopt them with slight variations in each case.

80    According to Ms Madafiglio, costs incurred by her firm to 8 December 2014 were approximately $305,000. This evidence was not disputed.

81    While at first blush some of the figures seem excessive, such as $22,000 for settling the defence, based on 40 hours of work by the solicitors, and 20 by counsel, I am not satisfied that there is any proper basis to call into question most of the estimates made with respect to future costs. Necessarily, certain assumptions are made about the work that will be undertaken and the time it will take but those assumptions are adequately exposed in Ms Madafiglio’s affidavit. One obvious explanation for the high costs of preparing the defence lies in the convoluted way in which the statement of claim is pleaded.

82    Mr Feller submitted, in effect, that the amounts allowed for preparation of witness statements and other evidence, ($50,000), consideration of witness statements and evidence served by other respondents, assuming 11 such statements and one expert report ($20,000), retaining and briefing one expert witness ($21,000) and the discovery process ($91,000) would duplicate costs incurred by AWH directors. While there is no evidence as to who AWH’s witnesses would be, it is reasonable to suppose that they will include some of the respondents and that the 11 statements Ms Madafiglio assumed might be served on her client would include statements from her own witnesses. In these circumstances, there is reason to believe that there is an element of duplication in the estimates of all respondents relating to the preparation of witness statements.

83    On the other hand, Ms Madafiglio assumed the interlocutory applications would be heard in one day. That was an optimistic assumption and proved to be wrong. Furthermore, her estimate of the length of the trial was three to four weeks, whereas some of the other respondents considered it would take six. No provision is made for future interlocutory applications.

84    Ms Hobson, who assumed the trial would last six weeks, did not explain why Ms Madafiglio’s more conservative estimate was wrong. Mr Milner, however, whose affidavit was read in support of Senator Sinodinos’s application, supported Ms Hobson’s assessment. I found his evidence persuasive. Mr Milner has some 13 years’ experience specialising in large, complex commercial litigation in the superior courts, including this Court, frequently prepares bills of costs for the purpose of costs assessments and provides costs estimates to clients in cases of varying degrees of complexity. Alone of all the solicitors he explained in some detail why it is more likely that the trial would run for “at least [six] weeks”.

85    Taking all these matters into account, I see no reason to discount the figures in Ms Madafiglio’s affidavit and would grant the application for security in three tranches of $300,000.

86    The order, however, should not be made against each applicant but against all the applicants with the exception of Danny Koutsogiannis.

The majority directors

87    Ms Hobson’s evidence recognises the fact that until December 2014 the respondents were all represented by AWH’s solicitors and counsel. Consequently, the application by these respondents relates to costs incurred from that time. Ms Hobson stated that in the period from December 2014 to 13 February 2015 her firm’s costs were “approximately $130,000”. I was taken aback by this evidence. After all, the period during which these costs were incurred could be no more than 10 weeks. But she explained:

Broadly, this included obtaining and reviewing voluminous pleadings, numerous applications, preparing briefs to Counsel (x2), corresponding with multiple parties in relation to applications, considering evidence prepared on behalf of the Applicants and Respondents, meetings with counsel and clients (x5), taking instructions from clients (x5).

88    It was open to the applicants to challenge this evidence. Presumably there would be records which would either substantiate or undermine it. But the applicants elected not to mount a challenge. Ms Hobson was not required for cross-examination and no evidence to contradict her was adduced. In these circumstances, I accept it.

89    Ms Hobson estimated that her recoverable costs (past and future) are likely to total $901,284. As I have already indicated, I accept her estimate of the likely length of the trial but, like Ms Madafiglio, she does not appear to have made any allowance for the possibility of duplication. She certainly does not say that she did. In these circumstances I am not prepared to order security in the total sum nominated. Rather, I would order that security for the costs of these respondents be provided in three tranches totalling $850,000:

    an initial tranche of $200,000;

    a second tranche of $300,000 within 14 days after the applicants’ evidence is served;

    a third tranche of $350,000 within seven days of the date the trial is fixed for hearing.

Di Girolamo

90    The figure of $80,000 in costs and expenses incurred to the date of the swearing of Mr Hunt’s affidavit was not challenged. The additional estimate of $562,500 was broken up by reference to various tasks but without any indication of the basis upon which the sums had been derived or the rates at which the work would be charged. In these circumstances I have difficulty accepting them.

91    In addition, $80,000 of that sum was allocated to expert and lay evidence, the sum divided equally. There is no indication of the kind of expert evidence or the number of lay or expert witnesses that Mr Di Girolamo would wish to call nor how much additional work would be necessary given the work undertaken by AWH.

92    Mr Hunt’s assessment of the total party and party costs for Mr Di Girolamo was about $450,000 to $515,000 based on a 20–30% reduction from the costs actually incurred or charged.

93    In view of my misgivings about the quality of the evidence, the prospect of duplication and the numerous uncertainties attending the progress of the proceedings, I would order security for Mr Girolamo’s costs in three tranches of $100,000.

Catanzariti, Cerra and BG&E

94    According to Ms Ruschen, costs incurred to 9 December 2014 totalled $45,860 excluding GST, and total party and party costs would be $361,558 (made up of $208,342, representing 85% of the solicitors’ fees, and $153,216, being 100% of counsel’s fees). The assumptions underlying these figures are substantially exposed. While it lacks the level of detail contained in Mr Milner’s affidavit and some of the figures suffer on that account, the assessment is based on a four-week trial. As I am persuaded by Mr Milner’s evidence that the trial is more likely to last six, than four, weeks, I am inclined not to make any substantial adjustment to the figure to take into account the possibility of duplication in work. On the other hand, Ms Ruschen assumed her clients would be able to recover 85% of their solicitor’s fees and 100% of counsel’s fees, when her counsel, Mr Ng, conceded at the hearing (consistently with the preponderance of the evidence) that his clients would only be able to recover 80% of their costs.

95    For these reasons I would order that security for these costs be provided in the total amount of $315,000, payable in three tranches as follows:

    an initial tranche of $100,000;

    a second tranche of $100,000 within 14 days after the applicants’ evidence is served;

    a third tranche of $115,000 within seven days of the date the proceedings are listed for trial.

Summary

96    In sum, then, there is credible evidence that the corporate applicants may not be able to pay the respondents’ costs should their claims fail. I am also satisfied that this is a proper case in which to order that all the applicants, with the exception of Danny Koutsogiannis against whom no application was made, should pay security for the respondents’ costs. While there are numerous imponderables in the litigation, I am not disposed to limit the order to a certain point in the litigation. Rather, I have concluded that the provision of security should be staged. This will adequately deal with the uncertainties while at the same time containing costs by obviating the need to make further applications. On the other hand, as I have been given to believe that the form the statement of claim will take will be materially different from the amended statement of claim which has been filed, I propose making allowance for this change of circumstance in the orders.

97    The applicants should pay the costs of the respondents’ application.

Associate:    

Dated:    25 August 2015