FEDERAL COURT OF AUSTRALIA

Neptune Hospitality Pty Ltd v Ozmen Entertainment Pty Ltd [2019] FCA 1734

ORDERS

THE COURT ORDERS THAT:

1.    Within 14 days of the date of these Orders the appellant is to provide the respondents with security for their costs of the appeal in the sum of $220,000, failing which the proceeding is stayed.

2.    The security referred to in Order 1 is to be provided by payment into Court or the provision of an irrevocable bank guarantee from an Australian trading bank.

3.    Costs of the respondents’ interlocutory application filed on 2 October 2019 are reserved.

4.    Liberty to restore on two days’ notice.

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

REASONS FOR JUDGMENT

MARKOVIC J:

1    By interlocutory application lodged with the Court on 27 September 2019 the respondents, Ozmen Entertainment Pty Ltd and Kanki Sea Tourism Hospitality & Entertainment Pty Limited (Kanki), seek an order pursuant to s 56(1) of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act) and r 36.09 of the Federal Court Rules 2011 (Cth) (Rules) that the appellant, Neptune Hospitality Pty Ltd, provide the security for the costs of its appeal to them in the amount of $316,275 or such other sum as the Court deems fit as well as other consequential orders (Application).

2    In their written submissions the respondents also contend that they rely on s 1335 of the Corporations Act 2001 (Cth) (Corporations Act). However, there is no reference to that section as a basis for making an order in the Application and little, if anything, was said about reliance on that section in the course of oral submissions. Rather, the Respondents’ submissions were focused on s 56 of the Federal Court Act. Accordingly, I have taken the same approach and confined my consideration to s 56 of the Federal Court Act.

3    The appellant appeals from judgment given and orders made by a judge of this Court 9 May 2019. While I was not told a great deal about them, it was apparent that central to the proceedings before the primary judge was the status of a joint venture agreement between Kanki and the appellant (JVA). The hearing before the primary judge consumed 14 days and, at its conclusion, the primary judge made declarations and orders including declarations that the JVA was validly terminated by Kanki on and from 25 July 2017 and that the joint venture business between Kanki and the appellant established under the JVA was validly terminated on and from 25 July 2017 by reason of the termination of the JVA.

4    In its notice of appeal the appellant raises 23 grounds of appeal. I do not propose to set them out in these reasons.

evidence

5    The respondents relied on an affidavit affirmed by their solicitor My-Linh Dang, a director of Metis Law, on 27 September 2019 in support of the Application. She gives evidence about the correspondence between the parties leading up to the making of the Application; provides an estimate of the respondents’ likely recoverable costs of the appeal, should a costs order be made in their favour; and gives evidence about the appellant’s financial position.

6    The appellant relies on an affidavit sworn by its solicitor Greg Leather of Barringer Leather Lawyers on 11 October 2019 and an affidavit sworn by Carmelo Como, a director of the appellant, on 16 October 2019.

Correspondence between the parties prior to the filing of the Application

7    Ms Dang said that she corresponded over a period of 13 weeks and sent five letters to Mr Leather of Barringer Leather Lawyers, the appellant’s solicitor, in relation to the issue of providing security for the respondents’ costs. It is instructive to set out parts of the correspondence that was exchanged by the parties leading up to the Application:

(1)    the issue of security for the respondents’ costs of the appeal was first raised by Ms Dang in her letter dated 24 June 2019. Ms Dang noted that given that the appellant has virtually no material assets or financial capacity and its sole source of income is its takings from the JVA, which was declared to have been validly terminated by the primary judge, her client’s have serious concerns about the appellant’s ability to meet any costs order made against it. Ms Dang then set out her clients’ costs of the appeal, estimated to be in the sum of $317,150, and concluded her letter as follows:

We require proof that your client will be able to meet these costs in the event that it is unsuccessful in the Appeal.

In the absence of such proof, our clients will be seeking orders in accordance with Rules 36.09 of the Federal Court Rules 2011 for security of costs and will seek that the Appeal be stayed until that security is provided.

(2)    on 1 August 2018 Mr Leather sent an email to Ms Dang in which Mr Leather wrote:

I note that the amount payable by your client to ours on completion of the reference is presently anticipated to be $2.661M. You advised during our meeting in your office on 1 July that your clients did not believe the claim for shared costs incurred by Neptune are verified by source documents. You were to review the files obtained from Holman Webb to satisfy yourself of the source documents. Could you please advise the status of that exercise.

In the event that you advise that your client does not accept the verification by source document of that claim, it will be necessary to proceed with the reference and to appoint an accountant to review the respective claims of the parties. I ask that you let us know by Wednesday, 7 August, whether that will be necessary and, if so, whether a timetable for the conduct of the reference can be agreed, failing which I think orders should be obtained at the case management hearing on 9 August.

In light of the above, we are of the view that our client is perfectly capable of meeting any costs order arising out of the appeal. Nevertheless, I also noted that the estimates set out in Annexure A to your letter are completely rejected. There is no basis on which the appellant can be held liable to pay the costs of your clients’ new solicitors and counsel getting acquainted with the file. We are of the view that a reasonable estimate of costs, inclusive of counsel’s fees and all pre and post hearing matters, would not exceed $40,000 - $50,000. We invite you to reconsider your estimate.

(3)    Ms Dang responded by email dated 5 August 2019. That email relevantly included:

In relation to your comments regarding the security for costs for the appeal, your email below states that ‘In light of the above …” Please can you confirm that your client’s ability to meet a costs order is subject to a reference landing in your client’s favour and in the anticipated sum of $2.661M?

(4)    on 5 August 2019 Mr Leather also sent an email to Ms Dang in which he noted that notwithstanding the matters referred to earlier, which concerned whether the reference to ascertain the amount owing between the parties should proceed or await the outcome of the appeal, “our client’s capacity to pay a costs order is not dependent on the outcome of the reference”;

(5)    in a letter dated 7 August 2019 from Ms Dang to Mr Leather, Ms Dang noted that:

The financial position of your client, as set out in your affidavit made only 3½ months ago, is at odds with your representations to the writer on 1 and 5 August.

Specifically, in paragraph 9 of your affidavit, you deposed that your client has no funds in its bank account, that its other three bank accounts that it used to operate the joint venture had been frozen and the only assets that it has are three leased motor vehicles in which it has very little equity. In paragraph 10 of your affidavit, you depose that your client has no capacity to meet the financial obligations contemplated under the affidavit (being an aggregate of $169,730.00) and that the directors of your client are not in a position to make any further loans to it.

In the premises, it appears that your client is impecunious, therefore, even if the estimate of our fees were to be adjusted (which we reject) your affidavit is credible testimony that your client would not be in a position to meet our clients’ costs with respect to the Appeal in the event that your client was unsuccessful.

We repeat our request that you provide us with credible evidence to substantiate your claim that your client will be able to meet these costs. In the absence of such proof provided to us by 4pm Friday 9 August 2019, our clients will be seeking orders for security of costs and will seek that the Appeal be stayed until that security is provided.

(6)    on 7 August 2019 Mr Leather also sent an email to David Kerr, a solicitor at Metis legal, copied to Ms Dang which included:

Our client is indeed impecunious, as a consequence of the actions of your client. As you would no doubt be aware, there is ample case law to the effect that an application for security for costs cannot be used to quash proceedings in circumstances where the impecuniosity claimed as the basis for the need for security exists as a result of the actions of the party claiming security.

Nevertheless, our client has the support of its director, Mr Gavin Douchkov. Mr Douchkov offers to personally guarantee our client in the event of any adverse costs order arising out of the appeal. In those circumstances, any application on your part will be misguided and we will produce this correspondence on the question of costs.

(7)    Ms Dang next wrote to Mr Leather on 12 August 2019. In that letter she said:

We note your admission that your client is impecunious, despite the representation made in your email of 1 August that your client “is perfectly capable of meeting any costs order arising out of the appeal”. Further, you state that Mr Gavin Douchkov has offered to personally guarantee your client’s liability in the event of an adverse costs order, notwithstanding that in paragraph 10 of your affidavit of 29 April you deposed that the directors of your client are not in a position to make any further loans to it.

In the premises, we request that you provide us with evidence to substantiate Mr Douchkov’s ability to meet our clients’ costs in the event your client is not successful in the Appeal. In the absence of such proof provided to us by 4pm Wednesday 14 August 2019, our clients will be seeking orders for security of costs and will seek that the Appeal be stayed until that security is provided.

(8)    on 19 August 2019 Mr Leather sent an email to Mr Kerr, copied to Ms Dang, which included:

Firstly, our client holds security over the vessel for amounts owed to it by your client. The quantum of that security exceeds the amount likely to be awarded in costs should your clients successfully defend the appeal, by an order of magnitude. The amount ultimately payable to our client (subject to the outcome of the appeal) as a consequence of the primary proceedings is to be determined as agreed between the parties or on a reference. There is no impediment to that determination being made before the appeal is heard unless your clients either refuse to reach agreement or delay the conduct of the reference. It therefore follows that the only reason that security for costs would be required for the appeal at all would be as a consequence of your own client’s conduct. It is of course an important factor in the exercise of the discretion to grant security for costs that the applicant for security is the author of the need for security.

Secondly, in circumstances in which:

•    the reference can be conducted prior to the appeal being heard (subject only to your clients not delaying the conduct of the reference); and

•    our client has sufficiently likely prospects of recovering a sum far in excess of the sum your clients now seek by way of security for costs of the appeal that it was granted a mortgage over your clients’ sole asset to secure that outcome,

what also arises out of the above is that your clients do not obviously satisfy the jurisdictional threshold that there is a reason to believe that our client will not be able to meet an adverse costs order, when it is made. There is accordingly no relevant tension between the statements that, on the one hand, our client was impecunious at a point in time and, on the other, that it is capable of meeting any costs order made against it in the appeal.

Thirdly, our client’s director, Mr Douchkov, has offered a personal guarantee, as to which, see Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, 532; Jazabas Pty Ltd and Ors v Haddad and Ors [2007] NSWCA 291, [12]. The offer made by our client’s director weighs heavily against the exercise of the discretion. We will rely on this correspondence on the question of costs if an application for security is nevertheless made.

(9)    on 3 September 2019 Ms Dang wrote a further letter to Mr Leather which included:

We note that you have not responded to our request to provide evidence of Mr Douchkov’s ability to meet our clients’ costs in the event that your client is unsuccessful in its appeal. Mr Douchkov is not registered as holding any property in Australia. Mr Douchkov, as a director and shareholder of your client, stands to benefit from the appeal. The absence of evidence giving an indication as to the position of Mr Douchkov is a reason for ordering the provision of security, not against it: CBX2 Pty Limited v National Australia Bank (No 2) [2015] NSWSC 1969 at [8].

(10)    by email dated 10 September 2019 Mr Leather responded to Ms Dang’s letter dated 3 September 2019. That email included:

6.    Our client’s impecuniosity at your clients’ hands is clearly particularised in our client’s particulars of claim. So long as your clients refuse to consent to the conduct of the reference, they are the cause of our client’s impecuniosity.

7.    With respect, you have misconstrued the effect of CBX2 Pty Limited v National Australia Bank (No 2) [2015] NSWSC 1969. The plaintiff's director in that case offered no security and actively sought to avoid granting any security. The point made at [8] relates to stultification and, per Einstein J in Idoport, to pressing the court to exercise its discretion by refusing to order security. That is not the case here. Our client’s director does offer security (as to which , see Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523,532; Jazabas Pty Ltd and Ors v Haddad and Ors [2007] NSWCA 291, [12]). It is therefore not the case that the appellant is attempting to avoid an order for security for costs. Rather, as we have previously pointed out (in our email of 19 August) our client’s director has offered to step out from behind the corporate veil.

(11)    the final letter in evidence on this issue is dated 26 September 2019 and is from Ms Dang to Mr Leather. In that letter Ms Dang expressed her firm’s disagreement with the issues raised by Mr Leather in his email dated 10 September 2019. Ms Dang noted that Mr Leather “maintained that [his] client’s director has offered to personally guarantee to meet [their] clients’ costs in the event that [his] client is unsuccessful in its appeal” but that he has “still not presented any evidence of [his] client’s director’s ability to meet those costs”. Accordingly Ms Dang notified Mr Leather that she was instructed to file the Application. The Application was lodged with the Court the following day.

The appellant’s financial position

8    Ms Dang’s uncontested evidence is that the appellant has no assets other than its interest in the former joint venture business between it and Kanki. Since 10 May 2019, following the making of the orders by the primary judge the respondents have been in possession of the vessel, Seadeck IMO 8672108, which is the main source of income for the former joint venture business. According to Ms Dang, the appellant has had no other source of income since that time.

9    Based on an affidavit sworn by Mr Leather on 29 April 2019 and filed in the proceeding before the primary judge, Ms Dang says that as at the date of that affidavit the appellant had no funds in its bank account, three other bank accounts that it had previously operated for the joint venture business had been frozen and the appellant had no other assets aside from three leased vehicles in which it had very little equity. According to Ms Dang, Mr Leather also deposed that the appellant had no capacity to repay the sum of $167,730 as ordered by the Court at the time and that the appellant’s directors are not in a position to loan the appellant any further amounts. As to the latter matter, Mr Leather’s evidence was that the directors were not presently able to make any further loans, beyond those already made.

The directors of the appellant

10    The appellant has two directors: Mr Douchkov and Mr Como.

11    Mr Douchkov is willing to provide a personal guarantee for the respondents’ costs. A draft guarantee deed poll is annexed to Mr Leather’s affidavit. Mr Leather gives the following evidence about Mr Douchkov at [21]-[22] of his affidavit:

21.    I note that Mr Douchkov sold his house in order to repay loans he had taken to fund the refitting of the vessel (see Transcript page 651 at 45, 656 at 10). Mr Douchkov did not receive any wage or remuneration of any type from the joint venture business (Transcript page 652 at 11). He continued to fund the business after it commenced trading (Transcript page 653 at 15) and has not been repaid the majority of the monies he lent to the business.

22.    I have been informed and believe that Mr Douchkov lives in rented accommodation and has no substantive assets remaining to him after having funded the joint venture business with all of his savings, borrowed monies and the proceeds of the sale of his house.

12    Mr Como is prepared to give an undertaking to the Court that he will pay any costs order made in the respondent’s favour on the appeal. Originally that undertaking was contingent on any costs order made in the appeal in favour of the respondents not being able to be satisfied from the outcome of the reference yet to be conducted between the parties. However, in the course of argument Mr Leather informed the Court that he had instructions that Mr Como would give an unconditional undertaking to pay the respondents’ costs of the appeal.

13    Mr Como gave evidence that he jointly owns a property situated in Abbotsford purchased in February 2010 for $1.84m, where he resides with his family. A title search of that property shows that it is mortgaged to Westpac Banking Corporation (Westpac) and a Westpac “Rocket Repay Home Loan” account dated 24 July 2019 in the name of Mr Como shows an outstanding balance of approximately $1.28m.

14    Mr Como has renovated the house since purchasing it and it now has five bedrooms, three bathrooms, a pool and a triple garage. He recently had the house valued because he is refinancing his mortgage. A sales history report from allhomes.com.au for the street on which Mr Como’s home is located shows sales prices achieved in that street over recent years.

15    Mr Leather gives evidence that he understands that the appellant will not be able to conduct these proceedings if an order for security for costs is made against it.

An estimate of the respondents’ costs of the appeal

16    Ms Dang provided a detailed calculation of the respondents’ anticipated costs of the appeal. She estimates, based on her experience of assessments of commercial matters, that her practice achieves 65-75% on a party-party assessment and 100% for disbursements, including counsel. On that basis Ms Dang estimates that the likely total costs to be awarded to the respondents, should they be successful on the appeal, is $316,275, which is the amount the respondents claim in their application be provided by way of security for their costs of the appeal. I pause here to note that in their written submissions the respondents seek a slightly lesser amount of $307,431.30

17    Mr Leather take issue with Ms Dang’s estimate of the respondents’ costs of the appeal in a number of respects. I do not propose to set those matters out in any detail save to note that Mr Leather estimates that the respondents’ likely recoverable costs of the appeal are $94,928.70. At this point I note only that I accept some of Mr Leather’s criticisms of Ms Dang’s cost estimate, an issue which I return to below.

relevant principles

18    The parties were somewhat at odds in relation to the applicable principles in an application of this nature. So far as an application for security for costs of an appeal are concerned I set out the applicable principles below.

19    Section 56 of the Federal Court Act gives the Court a wide power to order security for costs. The discretion to order security is broad and unfettered but must be exercised judicially: see Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1 at 3.

20    In Tait v Bindal People [2002] FCA 322 (Tait) at [2]-[4] Spender J noted that there is a difference when ordering security for costs in an appeal as opposed to a first instance matter. His Honour said the following in relation to applications for security for costs under s 56 of the Federal Court Act:

2    The position in relation to security for costs in the present matter is governed by s 56 of the Federal Court of Australia Act 1976 (Cth). Section 56 provides that security is to be of such amount and given at such time and in such manner and form as the Court or Judge directs. As to whether security for costs should be ordered, Cowell v Taylor (1885) 31 Ch D 34 at 38, a case of more than 100 years ago, sets out the fundamental principle:

“The general rule is that poverty is no bar to a litigant, that, from time immemorial, has been the rule at common law. There is an exception in the case of appeals, but there the appellant has had the benefit of a decision by one of Her Majesty’s Courts, and so an insolvent party is not excluded from the Courts, but only prevented, if he cannot find security, from dragging his opponent from one Court to another”.

3    What that passage demonstrates is that there is a difference in principle in relation to the ordering of security for costs in a first instance matter and the ordering, or the consideration of the ordering, of security for costs where one is at the appellate level. The difference is that, at the appellant level, there has already been a determination adverse to the person against whom security for costs is sought and, if it be shown that there is a substantial risk that even if successful the respondent to the application for leave to appeal, or to an appeal, will be deprived of his costs, such an outcome would clearly be unjust.

4    In a sense, it would be giving to a person who has been on the receiving end so to speak of a determination by the courts a free hit at great cost to the other party in the appeal proceedings. That consideration, it seems to me, is also reinforced by the judgment of Gummow J in Wiest v Director of Public Prosecutions and Anor (1988) 23 FCR 472. That case involved appeals against extradition with penal consequences. Such consequences were clearly very relevant considerations, but discretionary reasons moved the Court to order security for costs. Such discretionary considerations, which were particularly noted by Gummow J, included the delay between the filing of the papers and the bringing of the applications for security. His Honour referred to a particular circumstance which is relevant here, and that is that the applicant for security has a judgment in its favour. There was a reference by Gummow J to Bethune v Porteous (1892) 18 VLR 493, again an old case. In that case, Hood J said (at 494):

“the reason underlying the numerous and varying cases in which appellants have been ordered to give security will be found in the injustice to a successful litigant that may be caused if he be compelled to contest the matter for a second time without a probability of obtaining his costs if ultimately successful.”

That really is the fundamental question of justice behind my decision to order security for costs.

21    In Clack v Collins (No 1) [2010] FCA 513 Jagot J also observed the difference in approach. At [8]-[10] her Honour set out a number of decisions which highlighted that difference:

8    In Moore v Macks [2007] FCA 509 at [20] Mansfield J referred with approval to the decision in Cowell v Taylor (1885) 31 Ch D 34 at 38. In that case, Bowen LJ said:

…

9    Mansfield J also referred to the decision of Spender J in Skyring v Sweeney [1999] FCA 61 at [6] to the effect that:

Impecuniosity is a factor which can be taken into account as justifying the grant of security. Impecuniosity ought not to be a bar to a person prosecuting at first instance a claim, but the position on appeal seems to me to be fundamentally different. In effect, in the absence of an order for security for costs in the circumstances of this case, Mr Skyring, in effect, is given a free hit, and that seems to me to be intrinsically unfair.

10    In Singh v Secretary, Department of Employment and Workplace Relations [2007] FCA 90, Sundberg J at [11] also cited with approval the decision in Cowell v Taylor and at [12] emphasised that the question of prospects of success on the appeal are especially relevant in the case of an appeal where “the appellant has had his day in court.” At [13] and [14] Sundberg J referred to a relevant consideration being the fact that the appellant had not paid any of the costs in the proceeding below, although in the case of Singh those costs had already been taxed.

22    After referring to the decision in Tait (see [20] above) her Honour said at [13]:

In Soh v Commonwealth of Australia [2008] FCA 1524, at [10], Moore J identified six factors relevant to the decision whether or not security for costs should be awarded, namely (i) the prospects of success, (ii) the quantum of risk that a costs order will not be satisfied, (iii) whether the making of a costs order would be oppressive in that it would stifle a reasonably arguable claim, (iv) whether any impecuniosity of the party from whom security is sought arises out of the conduct complained of, (v) whether there are aspects of public interest which weigh in the balance against such an order, and (vi) whether there are any particular discretionary matters peculiar to the circumstances of the case. Consistent with the decisions to which I have referred, at [11] in Soh, Moore J also referred to the observations of Spender J in Tait v Bindal People.

consideration

23    The appellant in effect concedes, and it is apparent based on the evidence, that it has no income or assets of any value. It says that it is reliant on the outcome of the reference, which is yet to take place, to be in a position to meet any costs order against it. In a proceeding at first instance, an applicant’s impecuniosity may not be a bar to litigation, particularly in the case of an individual litigant. But, as is made plain by the authorities set out above, the same is not true for an appeal.

24    The appellant submitted that its impecuniosity is caused directly by the respondents’ refusal to allow the reference to proceed until the appeal is concluded, that the Application is oppressive and that the grant of an order for security will stultify the appeal.

25    There was only limited evidence before me about the reference. As I understand the position, following the making of orders by the primary judge it was proposed that the proceeding be referred to a referee for determination of the amounts owing between the parties. In a document titled “respondent’s particulars of amounts claimed on reference” the appellant quantified its claim at $3,268.457.46 and contended that this would be the outcome of the reference based on the primary’s judge’s reasons. In his email dated 1 August 2019 Mr Leather asserted that the amount payable by the respondents to his client on completion of the reference was “presently anticipated to be $2.661M” (see [7(2)] above).

26    The reference has not proceeded. The correspondence between the parties discloses that the respondents’ view is that the reference should await the outcome of the appeal given that it may result in an outcome that is different to that based on the judgment of the primary judge and that the grounds of appeal challenge issues which would go to any directions given to a referee for the purposes of a reference.

27    The appellant has not taken any steps to resolve the impasse that has arisen in relation to the proposed reference. There is no evidence that it has sought to relist the matter before the primary judge to attempt to put its case that the reference should proceed notwithstanding the appeal and to have the matter resolved. In oral submissions the solicitor for the appellant informed me that the reason no such application had been made to the primary judge to date is because the appellant accepted that in light of the appeal and the overarching purpose (I infer as set out in the Federal Court Act) it is perhaps more appropriate that the reference be deferred until the conclusion of the appeal. However, he also submitted that the filing of the Application changed the landscape and that the reference should now proceed because, it seems, according to the appellant it will result in a payment to it. Despite that change in circumstances and attitude, the appellant has taken no steps to agitate the issue before the primary judge since the filing of the Application.

28    Further on the state of the evidence, I am not able to say what amount, if any, would be determined to be payable to the appellant by a referee. The only evidence before me is the appellant’s own calculation and the amount that Mr Leather anticipates will be payable, which is less than the amount so calculated. I understand that the respondents do not accept that this amount will be payable and, indeed, based on the content and tone of the correspondence it appears that the respondents do not concede that that or any amount is payable.

29    That all leads me to a point where I am unable to accept that the appellant’s impecuniosity is caused by the respondents’ conduct in refusing to allow the reference to proceed. The respondents have taken a particular position, as they are entitled to do, and the appellant has elected not to agitate the matter before the primary judge in an attempt to resolve the issue.

30    The appellant offers, by way of satisfying the respondents and the Court that an order for security is not required, a guarantee from Mr Douchkov and a personal undertaking from Mr Como to pay the respondent’s costs of the appeal, should a costs order be made in their favour. The appellant submitted that the provision of personal undertakings by those who stand behind the company, irrespective of whether those persons have sufficient means to meet an adverse costs order, is a material factor which may weigh heavily in the discretionary balance and refers to authorities in support of that proposition.

31    One of the authorities relied on by the appellant is Prynew Pty Ltd v Nemeth [2010] NSWCA 94 which concerned an application for security costs of an appeal by one of the respondents, Piling, pursuant to s 1335 of the Corporations Act and, in the alternative, r 51.50 of the Uniform Civil Procedure Rules 2005 from Prynew Pty Ltd (Prynew). Prynew contended that the presence of Mr Tsu as a co-appellant and his offer to be responsible for its’ costs militated strongly against making an order for security against Prynew in Piling’s favour. It submitted that the financial situation of an individual, whether a co-plaintiff or person prepared to “step out” from behind the corporate entity and offer an undertaking in respect of any costs order, is irrelevant, a submission which was based on the comments of Basten JA in Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291 (Jazabas), which were not endorsed by Mason P or McClellan CJ at CL, and those of Lindgren J in Instyle Contract Textiles Pty Ltd v Good Environmental Choice Services Pty Ltd (2009) 181 FCR 360 (Instyle Contract Textiles).

32    At [36]-[37] Beazley JA (as her Honour then was) said:

36    As I understand the reasoning of Basten JA in Jazabas v Haddad, it is that regard must be had to the rationale for the principle explained in Buckley v Bennell Design and Constructions. Given that rationale, it is then necessary to determine how the discretion is properly to be exercised where a person is prepared to come out from behind the shield of the company and be responsible for the costs of the impecunious corporate plaintiff. In this regard, Cooper J in Gentry Bros v Wilson Brown & Associates said, at 415:

“In the instant case once the shareholders of the applicant have agreed to accept personal liability for any judgment for costs against the applicant, the statutory purpose of s 1335 as explained in the authorities to which reference has been made is satisfied. The making of an order which secures the personal liability of the shareholders is in itself the provision of security: see for example Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364 at 366; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 546; Appleglen Pty Ltd v Mainzeal Corp Pty Ltd (1988) 79 ALR 634 at 635-6.

Once the shareholders have been exposed to personal liability for the applicant’s costs, the weight to be given to the statutory purpose is gone. Those who stand behind the applicant once they accept personal liability for the applicant’s costs are in no worse position than they would be as litigants in person in the court: Harpur at 533; Yandil Holdings Pty Ltd at 546.

The offer by the shareholders of the applicant to accept personal liability for the applicant’s costs is a factor weighing heavily against the making of an order against the applicant for provision of a cash or other security for costs notwithstanding that the worth of the shareholders may ultimately prove insufficient to satisfy any judgment in whole or in part.” (emphasis added)

37    However, this reasoning did not find favour with Winneke P and Phillips JA in Epping Plaza v Bevendale, if its effect was to constrain the manner in which the discretion to order security was to be exercised. As their Honours explained:

“[23] If the comments made by Cooper J. in Gentry Bros. at A.C.S.R. 415; A.C.L.C. 1399 were intended to suggest that the broad discretion, to which the authorities refer, is now to be fettered by a principle to the effect that, in cases where those who stand behind the impecunious company are prepared to expose themselves to a personal liability for the defendant’s costs, the court’s discretion should rarely be exercised in favour of making an order for security, then, like Powell J. in Erolen at A.C.S.R. 456; A.C.L.C. 524 and Malcolm C.J. in Intercraft, we simply cannot agree — though whether Cooper J. should be read as having said as much is of course another matter; it did not appear so to Beazley J. in K. P. Cable Investments at 203-4. Not only does the suggested principle cut across the authorities which make it abundantly clear that the discretion is to be unfettered and exercised in accordance with what the circumstances of the particular case require, but it ascribes a purpose for its existence which we do not accept; namely that the statutory purpose of s. 1335 is to align the position of impecunious corporate plaintiffs with impecunious individual plaintiffs. The fact that those who stand behind the company are prepared to give an undertaking to the court to pay a successful defendant’s costs might be a factor which, on balance, will influence the court’s discretion in a particular case — or, more strictly perhaps, influence the manner of its exercise. But to elevate it to a position of critical importance or decisive significance in general seems to us to be requiring the judge to enter upon his or her discretion with a particular predisposition, something which the authorities make clear that the judge should not do.

[24] Furthermore, in our view the court should not readily accept an undertaking to pay costs from impecunious individuals who, at least at the time when such an undertaking is given, have no chance of making it good. Such an undertaking could not be an effective alternative security because it could only be enforced (at least for the time being) by proceedings for contempt: cf. P S Chellaram & Co v China Ocean Shipping Co [1991] HCA 36; (1991) 102 A.L.R. 321 at 324; [1991] HCA 36; 65 A.L.J.R. 642 at 643. ...”

(original emphasis.)

33    Commencing at [41] Beazley JA noted that, despite the strong statement of the Victorian Court of Appeal in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 (Epping Plaza v Bevendale) there remained judicial disagreement as to how a court should approach the award of security when an individual offers to be responsible for the costs of the corporate plaintiff. Her Honour then referred to Instyle Contract Textiles:

41    … In Instyle Contract Textiles Lindgren J refused to order security against a corporate plaintiff, in circumstances where the principal of the company offered to give a deed of guarantee, so as to secure the costs that might be ordered against the company if it was unsuccessful in the litigation. In doing so, his Honour relied upon Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523; (1984) 8 ACLR 835, in which Connolly J (Campbell CJ and Demack J agreeing) stated, at 533:

“The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied.” (emphasis added)

Connolly J also observed, at 533, that in that case, the financial worth of the individual was “not really relevant”.

42    In Instyle Contract Textiles Lindgren J, at [53], considered that the effect of the decision in Harpur v Ariadne was that if the respondents in the case before him could be:

“... placed in a position in which they will enjoy the same remedies against Mr Fitzsimons in respect of costs as they would if he were the applicant instead of Instyle, the object of s 1335(1) of the Corporations Act would be achieved and Mr Fitzsimons’s own worth would be ‘not really relevant’. The basis of this approach is the proposition that the impecuniosity of an individual is not a ground on which to order him or her to give security for costs: see Cowell v Taylor (1885) 31 ChD 34 at 38; Pearson v Naydler [1977] 1 WLR 899 at 902; Barton v Minister for Foreign Affairs [1984] FCA 89; (1984) 2 FCR 463 at 469.”

43    Lindgren J, at [54], also referred to the decision of Burchett J in Cameron’s Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46, where his Honour refused to order security in circumstances where both the corporate and individual applicants were impecunious. Burchett J considered that provided the individual accepted responsibility for the costs of the proceedings then the individual was entitled to rely on the general rule that poverty was no bar to a litigant. (It should be observed that the Federal Court Rules are in different terms to the UCPR and save for the general principle as to impecuniosity, accommodate an order for security against an individual applicant.)

34    At [44] her Honour recorded that she preferred the approach in Epping Plaza v Bevendale, endorsed by Mason P and McClellan CJ at CL in Jazabas, being an approach which her Honour considered to be consistent with the underlying rationale of the jurisdiction to award security for costs. At [45] her Honour said:

45.    ... A defendant is a captive audience to a plaintiff’s claim. In my opinion, the purpose of the security for costs jurisdiction would be rendered ineffective if a defendant sued by an impecunious company was denied security because, persons themselves impecunious, were prepared to offer to be responsible for the costs of the litigation. Correspondingly, if the principles that relate to exercise of the discretion where there is an impecunious co-plaintiff, also apply where an impecunious person agrees to be responsible for the costs of the litigation, the corporate plaintiff would be unfairly advantaged. Indeed, it would expose the captive defendant to a form of double jeopardy.

46    In short, I do not consider the position of an individual co-plaintiff to be analogous to the position of an impecunious shareholder, or other person interested in the litigation, who agrees to be responsible for the costs of the litigation.

35    The authorities relied on by the appellant concern, in the main, the application of s 1335 of the Corporations Act. This includes the decision in Instyle Contract Textiles. In oral argument the solicitor for the appellant also referred me to the decision in In the matter of Australian Style Holdings Pty Ltd as trustee of The Australian Style Investments Unit Trust [2018] NSWSC 1368 which I do not think advances the issue any further.

36    As I have already observed, despite a reference to s 1335 of the Corporations Act in their written submissions, the respondents’ application proceeded on the basis of s 56 of the Federal Court Act. The principles to be applied on an application of that nature are as set out at [20]-[22] above. To the extent that one may consider the impact of those standing behind a corporate appellant coming out and offering to be responsible for the appellant’s costs, that is a factor that may be relevant to the question of risk that a costs order will not be met and/or might generally be a matter peculiar to the case that would weigh in the exercise of the discretion. But, contrary to the appellant’s submission, I do not accept that it weighs heavily in the balance or that the means of those individuals is not a factor to be considered in determining the manner of the exercise of the discretion.

37    Here it is clear that Mr Douchkov does not have the means to meet any call on the guarantee he proffers for the costs of the appeal. He has sold his house and has no substantial assets.

38    Mr Como is in a different position. He jointly owns a property in which, based on the evidence, I would infer there is some equity although I am not able to determine how much given that the statement of account for the mortgage to Westpac gives an amount owing as at July 2019 and there is no evidence of current value of the property before me. I can give no weight to the evidence of other sales in the street. However, the undertaking proffered by Mr Como does not in my view assist the appellant’s position. It is an undertaking to the Court to pay the respondents’ costs of the appeal in circumstances where it seems the only asset Mr Como has available is his joint interest in his home, which is the subject of a mortgage to Westpac.

39    Further, given the irresistible inference that this is the only asset available to Mr Como from which he could meet the undertaking, there is no evidence of his ability to make his interest in the property liquid in the face of the inevitable hurdles presented by his joint ownership and the current mortgage to Westpac.

40    In those circumstances, the proferring of the guarantee by Mr Douchkov and the undertaking by Mr Como do not alleviate the impecuniosity of the appellant and the risk that it will not be able to meet a costs order in favour of the respondents, if made, and do not, in my opinion, weigh in favour of the appellant on the exercise of the discretion.

41    Both parties addressed me on the merits of the appeal. As the respondents pointed out this is not the occasion on which the Court would descend into determining the prospects of success of the appeal. The respondents contended that this was an appeal which broadly challenged the conclusions and inferences drawn on facts as found by the primary judge and that the judge’s conclusions and findings accord to the weight of evidence and to the range of permissible inferences. The respondents submitted that findings of fact, such as those that are the basis of the primary judge’s conclusions, will not be disturbed on appeal unless they are shown to be wrong by “incontrovertible facts or uncontested testimony” or are “glaringly improbable” or are “contrary to compelling inferences”. In other words the respondents ask me to find that, given that the grounds of appeal confront findings of fact, this is a difficult appeal.

42    The appellant accepted that the Court is not yet in a position to assess the strength and bona fides of its appeal but submitted that the appeal raises a number of substantive questions of law including as to construction of the JVA and its interpretation in the context of its termination.

43    Only the notice of appeal was before me. Based on my review of it, the appeal seems to raise a number of challenges to the conclusions drawn by the primary judge on the facts but, as the appellant said, also raises issues in relation to the construction of the JVA. I am unable to say, based on the material provided, whether this is a difficult appeal for the appellant as the respondents contend or whether it raises substantive issues of law as the appellant contends. Based on the limited information and evidence before me, in my view the issue of prospects of the appeal is a neutral factor in the exercise of my discretion.

44    In the context of the ability to assess the strength of an appeal, the appellant submitted that the discretion to order security for costs is exercised more sparingly if a respondent to primary proceedings appeals an adverse finding, relying on the decision in John Caines Management Pty Ltd v Adrenalin International Powersports Pty Ltd [2004] FCA 747. In that case, which concerned an application for security for costs in relation to an appeal pursuant to s 56(1) of the Federal Court Act, Gray J determined that the respondents were not entitled to security because they failed to show sufficient impecuniosity on the part of the appellant to justify the order. His Honour then went on to comment in obiter dicta on other points that had been argued. This included a line of authority to the effect that the Court should not approach any differently an appellant who is seeking to protect a position for which it is necessary for the appellant to bring an appeal from an appellant who is simply pursuing a lost cause. At [17] his Honour said: :

On that occasion, counsel for the appellants referred me to the judgment of Jenkinson J in Re Riv-Oland Marble Co (Vic) Pty Ltd v Settef SPA (unreported, Federal Court of Australia, Jenkinson J, 2 May 1988). In that judgment at par 4, his Honour referred to the principle that security will not be ordered to be provided by a plaintiff who has been put into a position in which he had to sue in order to defend himself or herself against attack. That was a principle laid down by the High Court of Australia in Willey v Synan (1935) 54 CLR 175. At par 5, his Honour said:

‘I do not think that the principle expounded by Latham CJ (54 CLR at 179-180) and by Dixon J (54 CLR at 184-185) in Willey v Synan will ordinarily have any application in relation to a motion for security for the costs of an appeal. In Dence v Mason (1879) WN 31 an appellant urged as a consideration against ordering him to give security for the respondent’s costs of the appeal the circumstance that he had been the defendant in the proceeding out of which the appeal had arisen. The Court of Appeal (Jessel MR Bramwell and Brett L JJ) said that “made no difference”.’

45    At [19]-[21] his Honour then referred to two cases in which Riv-Oland Marble Co (Vic) Pty Ltd v Settef SPA (1988) AIPC 90-503 had been followed:

19    Today, counsel for the respondents pressed the Riv-Oland Marble proposition on me, referring to two cases in which it has been followed. In Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd [1999] FCA 764 at [4], Tamberlin J said:

‘In substance, it is said that the characterisation of the role of AT and Morlea, is really a continuation of their role as presenting a defensive case rather than being the initiating party.’

20    His Honour then referred to the judgment in Riv-Oland Marble. At [6], his Honour continued:

‘The thrust of the authorities is to the effect that where a party has a choice as to whether proceedings are initiated or not, then it is normally appropriate such party, if it is impecunious, should provide security as to costs. I think the position is considerably different in the case of an appeal to that in the case of a trial where a cross-claim does no more than raise the same issues as raised in the defence.

That appears to have been the position at trial in the present case. However, once one comes to the question of an appeal, it seems to me that the initiating party having the carriage of the matter and forcing the other party into the litigation, or into the continuance of the litigation, is the appellant. In such circumstances, I agree with the conclusions expressed by Jenkinson J in Riv-Oland and also the English Court of Appeal in Dence, that in an appeal the position is different. In an appeal the appellant ought, where it is impecunious, provide security for costs unless there are particular circumstances which support a contrary conclusion. Moreover, on an appeal the respondent has the benefit of a considered judgment in his favour, unlike the position before trial.’

21    In Monte v Gianni Versace SpA [2003] FCA 956 at [19] Whitlam J, in dealing with an application for security for costs in an appeal said:

‘The fact that the appellant is the party against whom relief was claimed at first instance makes no difference. He is the person who brings the appeal.’

46    At [22] Gray J expressed his difficulty in understanding the logic of the proposition that underlay the authorities to which he had referred. His Honour said that it seemed to him that “there is a world of difference between a party who had initiated proceedings at first instance without a solid case, has lost and insists on appealing, on the one hand, and the other, a party who has been sued successfully at first instance and who has no choice but to appeal, in order to preserve a position that may well be open”. His Honour said that in his view it was only “common sense” to take into account the way in which the proceeding from which the appeal has been brought was structured.

47    There is nothing before me to suggest that the appellant “has no choice but to appeal”. As I understand it, it brings the appeal from the orders made because it disagrees with the findings and conclusions made by the primary judge and seeks to improve its position. In any event, to the extent that the question of the way in which the proceeding from which the appeal has been brought was structured is a relevant factor in the exercise of the discretion, these is nothing before me about the proceeding at first instance and the appellant’s role in it that would weigh as a factor in exercising my discretion in its favour.

48    The final issue of significance raised by the parties is that of delay. The appellant contended that the respondents had delayed in the making of the Application. It observed that the appeal was commenced on 6 June 2019, has been set down for hearing on 18 November 2019 and the respondent first raised the question of security on 24 June 2019. It said that correspondence ensued for 13 weeks thereafter and it was not until 27 September 2019 that the Application was filed.

49    The appellant referred to the Court’s Practice Note APP2: Content of Appeal Books and Preparation for Hearing which, among other things, requires the appellant to file and serve its submissions and chronology by no later than 20 business days before the hearing, in this case by 21 October 2019. The appellant contended that it has accordingly now incurred further significant expense in engaging counsel to prepare submissions and, given that the Application was not listed for hearing until 17 October 2019, the appellant could not defer the incurring of this cost to await its outcome. In that regard, the appellant contends that there is prejudice to it arising from the delay in making the Application.

50    The dealings between the parties in relation to the provision of security are set out at [7] above. The respondents were prompt in their first request for the provision of security, which came within three weeks of the commencement of the appeal. Thereafter the parties engaged in correspondence. This was no doubt in an attempt to avoid the need for the making of the Application. However, the parties’ efforts in that regard did not succeed.

51    It is regrettable that the respondents did not proceed with more diligence in responding to Mr Leather’s email dated 10 September 2019 and signalling their intention to file and lodge the Application on 26 and 27 September 2019 respectively. Putting that to one side, I do not think this is a case where the respondents delayed in making the Application. The period between the commencement of the appeal and its hearing date is relatively short. That fact may make the time to filing of the Application seem, by contrast, extenuated, But, in the interim, the respondents were not sitting on their hands but engaging on the issue with the appellant. The period after lodging and up to hearing, in this case some three weeks, when the parties are in the hands of the Court, cannot figure in considering the issue of delay.

52    Having regard to the matters set out above, in my opinion the respondents have established that they are entitled to an order that the appellant pay an amount for security for its costs of the appeal. The appellant is impecunious, the alternative forms of security proffered by its directors are insufficient to permit a conclusion that a costs order will be met and there is thus a significant risk that a costs order will not be satisfied. The appellant’s impecuniosity does not arise out of the respondents’ conduct and there has been no relevant delay in bringing the Application. As to other matters which might impact on the exercise of my discretion, I note that my attention was not drawn to any aspects of public interest which might weigh in the balance against making such an order nor was I able to identify any such aspects.

53    I understand that making an order for the provision of security may mean that the appeal cannot proceed. However, having regard to the factors I have identified and the fact that the parties have already had their day in court and the benefit of a judgment, permitting the appeal to proceed in circumstances where there is a substantial risk that the respondents would be deprived of their costs would be unjust in the sense described in Tait.

54    That then leaves the question of quantum. The amount claimed by the respondents is set out at [16] above and is the subject of some criticism by Mr Leather, some of which I accept. That said, the notice of appeal is extensive, raising some 23 grounds, and I accept that it requires consideration of the proceedings before the primary judge which continued over 14 days.

55    Having regard to the evidence before me in relation to quantum and the parties’ submissions, I consider that the quantum of security should be less than that which is sought. Based on Mr  Leather’s evidence there are a number of items where the time to be spent appears to have been be overestimated and, in light of the respondents’ own submissions, it also appears that the time estimated to be spent by counsel has been overestimated. Adopting the broad brush approach that is permitted (see, for example, In the matter of Felan’s Fisheries Pty Limited [2016] NSWSC 1351 at [40]), in my opinion the appropriate amount of security to be provided is $220,000.

conclusion

56    I will make an order requiring the appellant to provide security for the respondent’s costs of the appeal in the amount of $220,000 by payment into Court or the provision of an irrevocable bank guarantee from an Australian trading bank. Although the respondents seek that the appeal be immediately stayed upon operation of the order for security until security is given, I do not propose to make such an order. Rather I will allow the appellant 14 days to provide the security, failing which the appeal will be stayed.

57    I will not at this stage make an order that the appeal be dismissed if the appellant fails to provide security. Such an application, if necessary, can be made on another occasion if the security as ordered is not provided. I will grant liberty to restore on two days’ notice.

58    The respondents have not sought an order for payment of their costs of the Application either in the Application or in their submissions. I will therefore reserve on the question of costs. If the parties wish to make any application in relation to the costs of the Application they may do so in due course.

59    I will make orders accordingly.

Associate:

Dated:    22 October 2019