Court Awarded Security for Costs Despite a Litigation Funder’s Indemnity Against Adverse Costs

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March 2019

Court Awarded Security for Costs Despite a Litigation Funder’s Indemnity Against Adverse Costs

Key Takeaways

  • The fact that the Plaintiff company is in liquidation or in the process of winding up in insolvency does not always mean that it will be unable to pay the litigation costs and the costs order.
  • The Court is required to make an assessment under s 1335(1) of the Corporation Act 2001 (Cth) (Act) whether the Plaintiff company will be able to meet the Defendant’s costs, not whether a third-party on the Plaintiff company’s behalf, may be able to meet the Defendant’s costs.
  • The Court will not be satisfied that the indemnity offered by an external financier can be enforced if that financier is outside the Court’s jurisdiction and its assets are out of reach for execution.
  • Much more is required than a mere assertion that the Defendant’s conduct caused the Plaintiff company’s impecuniosity as a ground for refusing an order for security.
  • Although delay is a relevant factor in the exercise of the Court’s discretion, it does not deprive the Court of its power to order for security costs.

Overview of Australian Worldwide Pty Ltd v AW Exports Pty Ltd

Australian Worldwide Pty Ltd (AWW) and Australian Worldwide Exports Pty Ltd (AWE) (together referred to as the Plaintiffs), were both in liquidation.  The Plaintiffs brought proceedings against its directors for breach of their duties in relation to alleged phoenix activities.  In addition, AWW and AWE sued Mr Mozammil Bhojani (Defendant) for participation in the breaches of director’s duty.

A consent order for discovery was made against the Defendant but the Defendant had not complied with that order.  One of the reasons given by the Defendant for not complying with the discovery order, was that he may not be able to recover his costs from the Plaintiffs if he was successful in these proceedings.  The Defendant sought security for costs in the sum of $475,000 and security for costs application was made to the Court by the Defendant under s 1355(1) of the Act.

The Court’s Decision

The Court was satisfied that there was reason to believe that the Plaintiffs would be unable to pay the Defendant’s costs if the Defendant was successful in these proceedings.  This was based on the fact that AWW and AWE were both insolvent and had ceased trading long before the proceedings commenced and there was no direct evidence presented before the Court of their financial position.

The Court indicated that the impecuniosity requirements under s 1355(1) of the Act refer to whether the company will be able to meet the Defendant’s costs, not whether someone else will be able to meet the Defendant’s costs on the company’s behalf.  Furthermore, the Court reiterated that it does not always mean that a company will be unable to meet adverse costs orders simply because it is in liquidation.  For example, an adverse costs order may be able to be funded from the administration fund held by the liquidator from the assets of the company.

Since it was established that the Plaintiffs lacked the ability to meet the Defendant’s costs from their own resources, the evidentiary onus shifted to the Plaintiffs to demonstrate that their third-party indemnity agreement was sufficient to cover any adverse costs order in favour of the Defendant.

Counsel for the Plaintiffs made submissions to the Court that the Plaintiffs had the benefit of an indemnity for any adverse costs order as part of the Plaintiff’s litigation funding agreement with TCA Global Credit Master Fund LP (TCA).  There was no evidence of any TCA assets in Australia, there was no evidence of the type of legal entity that TCA was and no evidence of the financial position of TCA.  In addition, TCA’s address was in Hollywood, Florida and the funding agreement also contained no obligation on TCA to fund the litigation to its conclusion.  On this basis, the Court indicated that it had no power to order TCA, a non-party to these proceedings, to provide a security for costs guarantee for the Plaintiffs.  The Court therefore could not rely on any indemnity from TCA in favour of the Plaintiffs. Accordingly, His Honour was satisfied that the threshold requirements of s 1355(1) were satisfied and ordered the Plaintiffs to provide security for the Defendant’s costs.

Additionally, His Honour considered the following other discretionary factors in his judgement:

  • Although it is a well-recognised legal authority that if the Defendant’s conduct caused the Plaintiff’s impecuniosity that would be grounds to refuse an order for security costs, much more is required than the mere assertion that the Defendant’s conduct caused the Plaintiff’s impecuniosity.
  • A decision to award security costs against one Plaintiff company is independent of a decision against another Plaintiff company, even if those companies are related and both entities are parties are in the same proceedings.
  • Delay in bringing an application for security costs is of little, if any significance, unless the question of the proceedings being stultified is raised.

Implication of the Decision

This decision reiterates that the requirements under s 1355(1) of the Act refer to the Plaintiff’s ability to pay the costs of the Defendant.  Moreover, the Court emphasised that the existence of a third-party indemnity is irrelevant under these requirements. It is relevant in deciding whether the Court should exercise its discretion to award security for costs that the Court has jurisdiction and power to make an order to a third-party litigation financier.

This case also demonstrates the importance of providing sufficient evidence.  Merely asserting that the Plaintiff company is in liquidation will not be enough for the Court to award security costs.  Similarly, if the Plaintiff company wishes to rely on a third-party indemnity it has the onus of proving that the third-party can and will satisfy any adverse costs order.

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Craig Higginbotham and Richen Mojica

6 March 2019

By | 2019-03-11T13:58:30+11:00 March 6th, 2019|Business, Dispute Resolution, Insolvency, Litigation|Comments Off on Court Awarded Security for Costs Despite a Litigation Funder’s Indemnity Against Adverse Costs