Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Blue Oil Energy Pty Limited v Tan [2014] NSWCA 81
• Hearing dates: On the papers
• Decision date: 26 March 2014
• Before: Beazley P; Tobias AJA

Decision

Summons for leave to appeal dismissed with costs.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: PROCEDURE - costs - security for costs - reason to believe that plaintiff will be unable to pay the costs of the defendant - Uniform Civil Procedure Rules, r 42.21 - agreement with third party to subordinate debt; PROCEDURE - costs - security for costs - reason to believe that plaintiff will be unable to pay the costs of the defendant - Uniform Civil Procedure Rules, r 42.21 - cash security deposit; PROCEDURE - costs - security for costs - Uniform Civil Procedure Rules, r 42.21 - form of order - whether security required to be in form least disruptive or disadvantageous form; PROCEDURE - costs - security for costs - Corporations Act 2001 (Cth), s 1335 - form of order - whether security required to be in least disruptive or disadvantageous form; APPEAL AND NEW TRIAL - appeal - general principles - points and objections not taken below - party bound by conduct of case - exceptions
• Legislation Cited: Civil Procedure Act 2005; Corporations Act 2001 (Cth); Uniform Civil Procedure Rules 2005
• Cases Cited: Adam P Brown Male Fashions Pty Limited v Phillip Morris Inc [1981] HCA 39; 148 CLR 170; Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; Coulton v Holcombe [1986] HCA 33; 162 CLR 1; Gujarat NRE Australia Pty Limited v Williams [2006] NSWSC 992; In re the Will of FB Gilbert (1946) 46 SR (NSW) 318; Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631; Rosengrens Limited v Safe Deposit Centres Limited [1984] 3 All ER 198; University of Wollongong v Metwally [1984] HCA 74; 158 CLR 447
• Category: Principal judgment
• Parties: Blue Oil Energy Pty Ltd (First Applicant); Blue Diamond Australia Pty Ltd (Second Applicant); Chark Hoe Tan (First Respondent); Peter Ng (Second Respondent); Jeremy Tan (Third Respondent); Harry Ubhi (Fourth Respondent); Morgan Stanley Capital Group Inc (Fifth Respondent)
• Representation: Counsel: Solicitors:
• File Number(s): 2013/310252

Decision under appeal

• Citation: In the matter of Pioneer Energy Holdings Pty Limited [2013] NSWSC 1366
• Date of Decision: 2013-09-19 00:00:00
• Before: Black J
• File Number(s): 2013/102212

Judgment

1 THE COURT: The summons for leave to appeal in this matter arises out of an application for security for costs with respect to proceedings in which the plaintiffs claim, inter alia, breach of directors' duties and breach of contract by the defendants (the main proceedings). There are four plaintiffs in the main proceedings. The first and second plaintiffs are natural persons who are associated with the third plaintiff, Blue Oil Energy Pty Limited (Blue Oil), and the fourth plaintiff, Blue Diamond Australia (Blue Diamond). The first defendant is Pioneer Energy Holdings Pty Limited (Holdings) and the second to fifth defendants are directors of Holdings and Pioneer Energy Pty Limited, the seventh defendant (Pioneer Energy). Blue Oil holds 25 per cent and the sixth defendant, Morgan Stanley Capital Group Inc (Morgan Stanley), holds 75 per cent of the shares in Holdings. Holdings in turn holds all of the issued capital of Pioneer Energy.

2 Neither Holdings nor Pioneer Energy appear to be taking any active role in the main proceedings. It would appear that at the present stage of the main proceedings no defences have been filed. Holdings and Pioneer Energy did not appear in the application for security for costs before the primary judge on 16 September 2013 (though a Notice of Appearance was filed on their behalf on 24 September 2013).

3 By notice of motion filed on 28 June 2013, the second to sixth defendants, being the four directors and Morgan Stanley (together, the respondents), sought an order that the third and fourth plaintiffs, being Blue Oil and Blue Diamond (together, the applicants), provide security for their costs pursuant to the Uniform Civil Procedure Rules 2005 (UCPR), r 42.21(1)(d) or s 1335 of the Corporations Act 2001 (Cth). No application for security was made with respect to the first and second plaintiffs.

4 The notice of motion was heard by Black J who on 19 September 2013 indicated that he proposed to accede to the respondents' application: In the matter of Pioneer Energy Holdings Pty Limited [2013] NSWSC 1366. Having indicated the nature of the orders proposed, his Honour allowed the parties the opportunity to be heard as to the form of the orders. The parties agreed on the orders necessary to give effect to his Honour's judgment. They were as follows:

"(1) The Third and Fourth Plaintiffs are to give security for the Second to Sixth Defendants' costs of the proceedings, up to and including the date of the next directions hearing after the Plaintiffs have filed their lay evidence in chief, in the sum of $338,000 by 17 October 2013.

(2) The security ordered to be provided pursuant to paragraph 1 above is to be by way of payment into Court or in the form of an unconditional guarantee from an Australia-owned Bank (as recognised by the Australian Prudential Regulation Authority) in favour of the Principal Registrar of the Supreme Court of New South Wales, which security is to be held by the Principal Registrar of the Supreme Court of New South Wales.

(3) The proceedings are stayed if security is not provided when due in accordance with paragraphs 1 and 2 above.

(4) The Second to Sixth Defendants are granted liberty to make further applications for additional security for costs.

(5) The Second to Sixth Defendants' costs of and incidental to the notice of motion filed on 28 June 2013 are payable by the Third and Fourth Plaintiffs."

5 It is from these orders that the applicants now seek leave to appeal. In our view, that leave should be refused for the reasons that follow. The application has, with the consent of the parties, been dealt with on the papers and without any oral hearing.

6 Subject to one matter concerning the form of security, no challenge has been made with respect to the principles applied by the primary judge in his determination as to whether security should be given. In this respect his Honour adopted the two step approach of determining first, whether there was reason to believe (as contemplated by UCPR, r 42.21(1)(d)) or credible testimony (as contemplated by s 1335 of the Corporations Act) that Blue Oil and Blue Diamond would be unable to pay the costs of the respondents if ordered to do so; and if so, secondly, whether to exercise his discretion to approve or withhold security.

7 At [6] of his reasons his Honour noted that the primary dispute with respect to the first or threshold question was in respect of Blue Oil. Senior counsel who appeared for Blue Oil and Blue Diamond conceded in oral submissions that the Court would be entitled to proceed on the basis that there was reason to believe that Blue Diamond would be unable to pay the respondents' costs if ordered to do so: see [10]. His Honour found that there was reason to believe that not only Blue Oil but also Blue Diamond would be unable to pay any costs ordered against it (at [9]-[10]).

8 The primary judge then turned to the discretionary factors raised by the parties and determined (at [18]) that he was not satisfied that any discretionary basis existed which would justify declining to order security for costs in favour of the applicants. His Honour then determined the quantum of security. The applicants do not challenge that determination. However, both the order for security and the form of security ordered by the primary judge is the subject of challenge. The primary judge ordered that the security should be in what he referred to as "the usual form" namely, by way of payment into court or by unconditional bank guarantee. It was in respect of this aspect of the matter that it was submitted by the applicants that his Honour failed, as required by principle, to order a form of security that was the least disruptive or disadvantageous to the applicants. It is convenient to deal with the applicants' arguments as related to in their draft amended grounds of appeal.

Ground 1

9 Ground 1 alleges that his Honour's finding that Blue Oil would not have the capacity to meet an adverse costs order was not supported by the evidence and was made without giving any weight or any adequate weight to an agreement by a company known as Pure Energy Investments Limited (Pure Energy), (which was not a party to the main proceedings and which was incorporated in the British Virgin Islands) and which was a creditor of Blue Oil, to subordinate its debt so that any costs order in favour of the respondents would be met by Blue Oil in priority to any repayment of the amount it owed to Pure Energy.

10 In our view, there was more than sufficient evidence referred to in his Honour's reasons at [6]-[9] to justify the finding that there was reason to believe that Blue Oil would be unable to meet an order for costs if ordered against it in the main proceedings. As to the issue of subordination, the primary judge initially dealt with that matter at [8] of his reasons noting that Pure Energy was, according to the second plaintiff (Mr Seth), a trustee for a family trust and that his brother, who resided in India, was the principal decision-maker in respect of matters affecting that trust.

11 His Honour returned to the subordination issue at [28] where he noted the submission of senior counsel for the applicants that if security was ordered it should be by way of a lien over Blue Oil's shares in Holdings given the offer of subordination by Pure Energy. In other words, the issue of subordination was raised at trial in the context of the form of security to be provided, and not with respect to the issue of whether security should be provided at all.

12 Furthermore, as his Honour pointed out at [29], the letter from Pure Energy containing the offer of subordination was not signed by Mr Seth's brother, who on Mr Seth's evidence, controlled Pure Energy. His Honour also noted that Pure Energy was incorporated in the British Virgin Islands as a consequence of which the Court should be cautious in accepting an undertaking, which it may have no capacity to enforce. Finally, his Honour considered that it was difficult for the Court to assess the efficacy of the subordination arrangement without access to the relevant loan documents which Pure Energy had declined to produce. Accordingly, he rejected the submission of the applicants that the form of security should be by way of lien over Blue Oil's shares in Holdings.

13 In our view, none of the submissions of the applicants on this issue arguably undermine the primary judge's reasons for rejecting the offer of subordination as being relevant to the form of security to be provided, let alone as to whether security should be provided at all. Although it was accepted that the letter of offer was not signed by Mr Seth's brother but by another gentlemen who purported to be a director of Pure Energy, his Honour was entitled to take the view, given that Mr Seth's evidence was that his brother controlled Pure Energy, that he could not place any weight upon the signatory to that letter.

14 Ground 1 in our view has no merit.

Grounds 2 and 3

15 Grounds 2 and 3 seek to challenge Order 3 made by the primary judge which ordered that the main proceedings be stayed if security is not provided when due in accordance with Orders 1 and 2. The applicants submitted that the effect of the stay was to stay the plaintiffs' proceedings not only against the respondents who had sought security, but also against Holdings and Pioneer Energy who had not. It was submitted that the stay would prevent the plaintiffs from proceeding against those two defendants.

16 As we have indicated, Blue Oil and Morgan Stanley are shareholders in Holdings, and Pioneer Energy is a wholly owned subsidiary of Holdings. At the time of the application for security, neither Holdings nor Pioneer Energy had participated in the proceedings and no appearance had been filed on behalf of them at the time the motion for security was heard.

17 The applicants nevertheless placed reliance upon an ex tempore judgment of Einstein J in Gujarat NRE Australia Pty Limited v Williams [2006] NSWSC 992 to which the primary judge was not referred. The particular issue addressed by Einstein J concerned the quantum of security where the application for security was brought only by two out of seven defendants although security was ordered against the plaintiffs in favour of those defendants.

18 This issue was raised before Black J with senior counsel for the applicants. His Honour stated that if he awarded security and it was not provided then:

"... wouldn't the position be that I would stay the proceedings in their present form and if your client seeks to amend them and seeks to proceed against Pioneer Energy ... you might apply to do so."

Senior counsel responded:

"That might be a better way of dealing with it."

19 That is how the matter was left with his Honour. In other words, the applicants were prepared to accept that in the event that security was not provided, it would be appropriate, at least at that point of time, for there to be a general stay of the main proceedings which would be subject to an application for that stay to be lifted in the event that the plaintiffs wished only to proceed against Holdings and Pioneer Energy. Given that that course was accepted by senior counsel for the applicants, in our view it is now too late for them to make the complaint now sought to be advanced.

20 Furthermore, as already noted, the primary judge at the end of his judgment, having indicated the orders he proposed, allowed the parties an opportunity to be heard as to their form. The parties agreed on their form including the terms of Order 3. In our view it is now inappropriate for the applicants to, in effect, renege on an order to which they had agreed. It follows that Grounds 2 and 3 have no substance.

Ground 4

21 Ground 4 relates to the form of the security. It was submitted that the correct approach was for the Court to only order security in a form which was the least disruptive or disadvantageous to Blue Oil and Blue Diamond. It was submitted that such an approach was correct as a matter of principle, the authority for which was said to be a passage from the reasons of Parker LJ in Rosengrens Limited v Safe Deposit Centres Limited [1984] 3 All ER 198. As the respondents observed, his Lordship stated (at [200j]) that the process of giving security "arises constantly" and that often "very large sums may be involved". In that context, his Lordship relevantly continued (at [200j]-[201a]):

"So long as the opposite party can be adequately protected, it is right and proper that the security should be given in a way, which is the least disadvantageous to the party giving that security.

It may take many forms. Bank guarantee and payment into court are but two of them. Frequently security is considered wholly adequate when it is provided merely by a London solicitor's undertaking. So long as it is adequate, then the form of it is a matter which is immaterial ...as long as it is adequate to protect the opposite party, it is not his concern whether it should be in one form rather than another."

22 As the respondents submitted, his Lordship was not laying down some general proposition to the effect that security can only be ordered in favour of a defendant in a manner which is the least disadvantageous to a plaintiff. The true issue was whether the form of security ordered was adequate to protect the party seeking it.

23 In the present case, as we have already observed, the primary judge rejected the submission of senior counsel for the applicants that security should be ordered by way of a lien over Blue Oil's shares in Holdings as that was reliant upon the offer of subordination by Pure Energy. The transcript of the hearing before the primary judge reveals that prior to the hearing the parties had engaged in negotiations concerning the security sought. One possibility raised was that a lien be given over Blue Oil's shares in Holdings. However, those negotiations came to nothing. Furthermore, as the respondents submit, there is nothing in r 42.21(2) or s 1335(1) of the Corporations Act that contains any limitation as to the form of security which may be ordered. The former relevantly provides that the security should be given in such manner as the court may by order direct. The latter simply provides that the court may require sufficient security to be given. No principle of construction requires a court's discretion as to the form of security to be constricted in the manner now advanced by the applicants. Accordingly, Ground 4 has no prospect of success.

Ground 5

24 Ground 5 asserts that the primary judge erred in failing to take into account "future income" of Blue Diamond which was said to arise out of an agreement between Blue Diamond and Pioneer Energy described before his Honour as the "OMM Agreement". Although it would appear that under the OMM Agreement there was potential for Blue Diamond to receive payments which would commence in or about September 2014, there was no evidence before the primary judge as to the substantive financial position of Blue Diamond with the consequence that he was not in a position to consider how the "future income" would affect its financial position whatever it might be.

25 Importantly, and in our view decisively, at [10] of his reasons the primary judge recorded the concession made in oral argument by senior counsel for the applicants that the Court would be entitled to proceed on the basis that there was reason to believe that Blue Diamond would be unable to pay the respondents' costs if ordered to do so as it held no substantial assets in New South Wales and Queensland and no evidence had been led by the applicants as to its substantive financial position. In light of that concession, this ground of appeal has no prospects of success.

Ground 6

26 Ground 6 contains to an allegation that the primary judge failed to give appropriate weight to a $2,000,000 cash security deposit which had been provided by the applicants in favour of Holdings and Pioneer Energy. In this respect, as the respondents' note, Holdings was the joint venture vehicle through which Morgan Stanley and Blue Oil were constructing a diesel terminal facility in Mackay in Queensland. Pioneer Energy was carrying out the construction and Blue Diamond was, until early 2013, the head contractor engaged by Pioneer Energy to undertake the construction. Pursuant to agreements between the parties, the $2,000,000 deposit was held by Holdings and Pioneer Energy so as to secure Blue Oil's and Blue Diamond's obligations in relation to the construction of the Mackay facility. Accordingly, it is apparent that the deposit was made in favour of Holdings and Pioneer Energy and not in favour of the respondents. It was therefore not available to Blue Oil or Blue Diamond to be pledged as security for the respondents' costs, regardless of whether or not it was likely that the security would be called on by the parties in whose favour it had been given.

27 In any event, the argument now sought to be put was not raised before the primary judge as a reason why security should not be ordered. It was raised by Mr Seth as a director of Blue Oil in his affidavit in support of Blue Oil's opposition to the application for security but only as to the form of security to be provided. As his Honour observed at [30] he could not accept the submission that the cash deposit could stand as security for the respondents' costs of the proceedings as the deposit had been given for the benefit of entities other than the respondents and, therefore, their consent would be required before the deposit could be used for a purpose different to that for which it was originally provided. In our view, there is no substance in this ground.

Ground 7

28 The final draft ground of appeal asserted that his Honour erred in ordering security for costs in circumstances where there were two natural plaintiffs in the main proceedings against whom an order for security was not sought and whose claims would overlap with those of the applicants. As all plaintiffs were suing in the same interests and by the same legal representatives, there would only be one set of costs. That order could be enforced against the two natural plaintiffs as a consequence whereof no basis existed for ordering security against the corporate plaintiffs.

29 As the respondents note, this point was also not taken before the primary judge. A party is bound by the manner in which the case was conducted at first instance: Coulton v Holcombe [1986] HCA 33; 162 CLR 1; University of Wollongong v Metwally [1984] HCA 74; 158 CLR 447. This principle is subject to recognised exceptions, for example, where the new point involves the construction of a document, or a point of law, or where the facts have been found by the primary judge. But the exception does not apply as of right. It is a matter for the Court to determine whether it is in the interests of the justice and expedient that the new point be raised and determined: Multicon Engineering Pty Ltd v Federal Airports Corporation (1997) 47 NSWLR 631 at 645-6.

30 If this point had been taken before the primary judge, the respondents may well have wished to provide some evidence to refute the substance of the claim, which is a factor militating against granting an exception to the rule that a party is bound by the conduct of his or her case.

31 In any event, as the respondents submit, an analysis of the Further Amended Statement of Claim reveals that neither of the two natural plaintiffs seeks to bring a claim against any of the defendants. All claims are brought by Blue Oil and Blue Diamond and no cause of action is sued on by the first and second plaintiffs and they claim no relief.

32 But whatever the merits or lack of them of the complaint now sought to be made by the applicants, the fact remains that this is a new issue that was never raised by senior counsel for the applicants before the primary judge and that is where, particularly in an interlocutory application in the nature of a claim for security of costs, such an argument should have been advanced. It is now too late for it to be raised by new counsel who now appears to be representing the applicants. The well established principles to which we refer militate against leave being granted to raise this new point and in our view that leave should be refused.

Conclusion

33 Finally, as observed by Macfarlan JA, with whom Ward JA and Tobias AJA agreed, in Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [21], we would draw attention to the fact that the primary judge's decision concerned a matter of practice and procedure. Appellate courts are reluctant to intervene in relation to decisions made prior to the termination of proceedings at first instance. It is not usually conducive to the "just, quick and cheap resolution of the real issues" in proceedings for that to occur: Civil Procedure Act 2005, s 56(1); In re the Will of FB Gilbert (1946) 46SR (NSW) 318 at 323; Adam P Brown Male Fashions Pty Limited v Phillip Morris Inc [1981] HCA 39; 148 CLR 170 at 177. As a result, an applicant for leave to appeal in such a matter will normally be required to establish at least a clear case of material error in the decision of first instance in order to obtain leave to appeal.

34 In our view, this threshold has not been overcome by the applicants in this case. Accordingly, we order that the summons for leave to appeal filed on 19 December 2013 be dismissed with costs.

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Decision last updated: 26 March 2014