FEDERAL COURT OF AUSTRALIA

Bonham as trustee for the Aucham Super Fund v Iluka Resources Ltd (Security for Costs) [2019] FCA 1693

File number:

NSD 576 of 2018

Judge:

PERRAM J

Date of judgment:

16 October 2019

Catchwords:

PRACTICE AND PROCEDURE – application to provide security for Respondent’s future costs by providing deeds of indemnity issued by insurance or reinsurance companies – where quantum of future costs agreed during course of hearing – application to replace earlier sum paid into Court by way of security for Respondent’s costs with deed of indemnity from insurance or reinsurance company – consideration of relevant principles

Cases cited:

Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44

DIF III Global Co-Investment Fund, LP v BBLP LLC [2016] VSC 401

Date of hearing:

8 October 2019

Registry:

New South Wales

Division:

General Division

National Practice Area:

Commercial and Corporations

Sub-area:

Corporations and Corporate Insolvency

Category:

Catchwords

Number of paragraphs:

14

Counsel for the Applicant:

Mr J C Conde

Solicitor for the Applicant:

Shine Lawyers

Counsel for the Respondent:

Mr C Withers

Solicitor for the Respondent:

Herbert Smith Freehills

ORDERS

NSD 576 of 2018

BETWEEN:

JAMES BONHAM AS TRUSTEE FOR THE AUCHAM SUPER FUND

Applicant

AND:

ILUKA RESOURCES LTD ABN 34 008 675 018

Respondent

JUDGE:

PERRAM J

DATE OF ORDER:

16 OCTOBER 2019

THE COURT ORDERS THAT:

1.    The parties bring in short minutes of order giving effect to these reasons and disposing of the interlocutory applications within 21 days.

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

REASONS FOR JUDGMENT

PERRAM J:

1    This application for security for costs raises two issues: (a) whether the Applicant should be permitted to provide security for the Respondent’s future costs by providing the Respondent with deeds of indemnity issued by insurance or reinsurance companies; and (b) if yes, whether the Applicant should be permitted to revisit an earlier amount it has paid into Court by way of security for the Respondent’s costs and replace that sum with a deed of indemnity from an insurance or reinsurance company.

2    The Applicant’s proceeding is a funded class action. There have been several funders, the present of which is Augusta Pool 1 UK Ltd (‘the Funder’). The funding agreement with it has been novated from an earlier funder. The obligation of that earlier funder became unconditional when it indicated that it had decided that it would proceed with funding. Accordingly, the funding agreement with the Funder is also unconditional since the agreement was novated. Under the agreement, the Funder has agreed to fund not only the costs of conducting the proceedings but also to meet any adverse costs order to which the Applicant becomes subject: cl 5.2(b). The Funder has also agreed in the same clause to put up any security which he may be ordered to provide. Clause 5.2(c) requires the Funder to do so in a manner most advantageous to the Applicant and the group members.

3    It was submitted that the existence of this indemnity from the Funder bore, to an extent, upon the issue of whether security should be ordered. Here the thought was that if the Applicant had an indemnity from the Funder to cover any adverse costs order then the Applicant would be able to meet any adverse costs order with the consequence that security should not be ordered. At the hearing, this last step was eschewed, but it was still said to be relevant to the question of the quantum of the security and its form. During the hearing, the question of quantum was resolved by agreement between the parties and is no longer material.

4    This leaves then only the submission that the existence of the indemnity by the Funder is relevant to the form of the security. The evidence shows that the Funder was incorporated in the United Kingdom in March 2019 and is a subsidiary of a special purpose vehicle incorporated in Jersey. In turn, a majority of the special purpose vehicle’s shares are owned indirectly by Augusta Securities Ltd, a litigation funder. A director of the special purpose vehicle has written a letter of comfort to its subsidiary the Funder dated 11 September 2019 in these terms:

Pool 1 has recently raised committed financing from a US debt fund which (in conjunction with co-funding from ASL) amounts to £105,000,000. This facility can be drawn down quarterly with 30 days’ notice. Current cash on balance sheet of Pool 1 is £35,000,000 as of today.

I confirm that we (Pool 1) intend to support the Company by providing adequate financial assistance to enable the Company to continue its business operations in line with approved budgets. This includes the provision of funding by the Company in relation to any approved litigation funding investment, being funding approved by the Company having been considered by Pool 1 and approved pursuant to the Pool 1’s internal processes.

5    It follows from this that the Funder does not presently have access to the £105 million fund. One view of the drafting of the letter of comfort is that it does not create any legally enforceable right to have access to those funds. If that be so, then the indemnity in the funding agreement may turn out to be worthless if the special purpose vehicle does not wish to play ball. The Applicant may well be able to enforce the indemnity against the Funder but the Funder would appear not to have any rights itself against the special purpose vehicle which has the cash. No doubt, the letter of comfort serves to satisfy the directors of the Funder that they may continue to incur debts as the letter provides them with a reasonable basis for thinking that the Funder can meet its debts as and when they fall due. But whether the special purpose vehicle will actually honour the letter of comfort when the pressing moment arises is a question which, like many matters, is hostage to an unknowable future. For example, if the Funder itself became insolvent it is not self-evident that it would be in the interests of the special purpose vehicle to throw good money after bad. In that circumstance, I am not disposed to think that the existence of the indemnity in the funding agreement provides a good reason not to order security or to vary the form of the security.

6    Turning then to the substance of issue (a), the Funder has procured the provision of two deeds of indemnity which it suggests should be adequate security for the Respondent. The first deed of indemnity is to be provided by PartnerRe Ireland Insurance dac (‘PartnerRe’). It has a number of features which are relevant:

    PartnerRe unconditionally and irrevocably undertakes to pay within seven days to the Respondent any costs that the Applicant is liable to pay in respect of the Respondent’s costs: cll 2, 3.

    PartnerRe’s liability is the lesser of 50% of the Respondent’s costs or $1.8 million: cl 5. This means its liability is capped at $1.8 million.

    If PartnerRe does not pay it consents to a judgment against it in the appropriate amount in the Federal Court, consents to that judgment being registered in the High Court of the United Kingdom, agrees not to seek to set aside that registration and not to seek, in the High Court, security for costs: cl 7.

7    The evidence before me disclosed that PartnerRe is an Irish-based multi-class insurance company. It is a fully-owned subsidiary of the PartnerRe Group. The parent company for that group is PartnerRe Ltd which, like many reinsurers, is incorporated in Bermuda. The ultimate parent company is Exor N.V., a Dutch public limited liability company in the Netherlands. PartnerRe is subject to regulation by the Central Bank of Ireland. The business of PartnerRe is described in a Solvency and Financial Condition Report for 2018 in these terms:

PartnerRe Ireland Insurance dac (“the Company” or “PRIIdac”) is an Irish based multi-class insurance company capable of writing worldwide risks with multi-national access. The Company is a fully owned subsidiary of the PartnerRe Group (“the Group”), the parent company of the PartnerRe Group is PartnerRe Ltd (“the Group parent”), a company incorporated in Bermuda. The Group is supervised by the Bermuda Monetary Authority. The ultimate parent company is Exor N.V. (EXOR), a Dutch public limited liability company (Naamloze Vennootschap). See section A.1. of this report for further details about the business of this Company.

8    In 2018, PartnerRe held €91,438,000 as Tier One Capital. I am satisfied that the PartnerRe is plainly solvent and able to meet its obligations under the proposed deed. The Respondent submitted, however, that there was no reason that PartnerRe could not be part of a corporate restructure which could leave the Respondent, as the entity having the benefit of the deed of indemnity, out on a limb given its status as a contingent creditor. Of course, because PartnerRe is an insurer (or reinsurer) most of its creditors will be contingent in this sense. This is why the insolvency of insurance companies and their reconstruction when distressed has always been a reasonably complex topic: when is a company, most of whose future liabilities may be subject to long distant contingencies, unable to meet its debts as and when they fall due? I accept that it is theoretically possible that a reinsurer might seek to restructure its affairs by means of a scheme of arrangement or some such so as to avoid any liability to its policy holders and other contingent creditors. However, it seems very unlikely that it would do so. There would no doubt be regulatory push back and there would be a significant and negative impact on the reputation of the reinsurer were it to seek, in effect, to cut its policy holders out. Consequently, whilst I accept the existence of the theoretical risk to which the Respondent points, I do not regard it as being in any way likely. It seems to me that a very similar risk attends those parties who are satisfied with security being provided by means of a bank guarantee where there always exists the risk that the bank will become insolvent.

9    The other deed of indemnity was proffered by Hiscox Insurance Company Limited. Its position is not materially different to that of PartnerRe.

10    Consequently, I accept in principle that a deed of indemnity of the kind proffered in this case can be sufficient security. Of course, there remain the difficulties that the insurers have no assets in the jurisdiction. This requires, and the Applicant does not deny, that there should be in place additional elements of security to ensure that that enforcement in the United Kingdom and Ireland can proceed at no expense to the Respondent and smoothly. In principle, I accept therefore that what the Applicant proposes by way of the deeds of indemnity is acceptable.

11    I would note for completeness that a deed of indemnity proffered by an insurer has on other occasions been accepted as an appropriate way in which security may be proffered: DIF III Global Co-Investment Fund, LP v BBLP LLC [2016] VSC 401. That case does not hold, and neither do I, that a deed of indemnity will always be suitable. It will depend on the party proffering the deed and the evidence put before the Court about its solidity. The insolvency of insurers is a more common event than the insolvency of banks and the solvency of insurers and reinsurers can be variable. The solidity of the insurance company will be, in general, a legitimate topic of inquiry.

12    I turn then to the second issue (b) which is whether the Applicant should be permitted to replace the $1,254,760 he has previously paid into Court as security for costs and to cover it instead with the deeds of indemnity referred to in the previous section and $50,000 paid into Court. The Applicant agreed to pay that sum into Court on 18 March 2019 and eventually did so in early August 2019. He did so in circumstances which were, I accept, difficult. Without weighing into the dispute his initial funder had refused to provide funding and the Applicant’s side of the ledger was, for a time, without funding for the litigation. His payment into Court in August 2019 happened as there was a real likelihood that the proceeding was going to be dismissed for failure to put up the security ordered on 18 March 2019. I accept that when the issue of security for costs arose the Applicant was very much without the wherewithal to suggest an alternative form of security and as August 2019 approached the weakness of his position only deteriorated further. However, that was the situation in which the Applicant found himself which was not the Respondent’s fault. Consequently, his decision to agree to put up security in cash was not vitiated by concepts such as duress or unconscionable behaviour on the part of the Respondent. It was a considered decision made in difficult circumstances which were not of the Respondent’s making.

13    The question then is whether I should relieve the Applicant of the consequences of his decision by permitting a revocation of the order to which he formerly consented. I do not regard the fact that the Applicant’s circumstances have improved (in the sense that he now has the Funder in his corner) as constituting a sufficient change in circumstances to warrant a revisiting of the interlocutory consent order which has been made. Whilst there is always jurisdiction to recall an interlocutory order, generally some sufficient change of circumstances needs to be shown before that course can be taken: Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44 at 46-47 per McLelland J. If there was some suggestion that the consent order had involved some wrongful conduct on the part of the Respondent then the matter might be different. But here all that has happened is that the Respondent has vigorously pursued its entitlement to security for costs and the Applicant, to avoid the loss of the entire suit, has paid the security into Court. The bargain made by the Applicant, in light of my conclusions on issue (a), was not perhaps the best bargain viewed in the rear vision mirror. However, the jurisdiction to revisit interlocutory orders is not enlivened just because one party comes to the view that the bargain it reached was not a good one.

14    The parties are to bring in short minutes of order giving effect to these reasons and the new agreed quantum and disposing of the various interlocutory applications. Subject to anyone wanting to argue the matter, my present thinking is that costs should be costs in the cause.

I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

Associate:

Dated:    16 October 2019