Court of Appeal
Supreme Court
New South Wales

Medium Neutral Citation:

Golden Mile Property Investments Pty Ltd (in liquidation) v Cudgegong Australia Pty Ltd [2014] NSWCA 224

Hearing dates:

23 June 2014

Decision date:

15 July 2014

Before:

Beazley P

Decision:

(1) Application for security for costs dismissed;

(2) The first respondent to pay the appellant's costs of the application.

[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 - security for costs - application by the first respondent for advance payment of compensation pursuant to the Land Acquisition (Just Terms Compensation) Act 1991, s 68 - the appellant claims a relevant interest in the acquired land - the primary judge found that the appellant did not have a compensable interest in the land

PROCEDURE - security for costs - whether the appeal is bona fide and has a reasonable prospect of success - whether the appellant's impecuniosity arises out of the first respondent's conduct relating to the subject of the appeal - whether an order for security for costs would stifle or stultify the appeal - whether there are persons standing behind the appellant who are reasonably in a financial position to support the appeal

PROCEDURE - security for costs - application refused

Legislation Cited:

Corporations Act 2001 (Cth)
Land Acquisition (Just Terms Compensation) Act 1991
Real Property Act 1900
Uniform Civil Procedure Rules 2005

Cases Cited:

Austin v Sheldon [1974] 2 NSWLR 661; 31 LGRA 274
Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1
Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497
Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972
Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564
FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 147
House v The King [1936] HCA 40; 55 CLR 499
KP Cable Investments v Meltglow [1995] FCA 76; 56 FCR 189
LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited [2014] NSWCA 88
M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97
McMahon v Sydney County Council (194) 40 SR (NSW) 427
Pioneer Park Pty Limited (In Liq) & Ors v ANZ Banking Corporation [2007] NSWCA 344
Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 2) [2014] WASCA 106
Prynew Pty Ltd v Nemeth [2010] NSWCA 94

Category:

Interlocutory applications

Parties:

Golden Mile Property Investments Pty Ltd (In Liquidation) (Appellant)
Cudgegong Australia Pty Ltd (First Respondent)
Transport for NSW (Second Respondent)

Representation:

Counsel:
M R Hall; G Stapleton (Appellant)
R A Dick SC; N M Eastman (First Respondent)
M Peatman (Second Respondent)
Solicitors:
ERA Legal (Appellant)
PC Law Pty Ltd (First Respondent)
Hunt & Hunt Lawyers (Second Respondent)

File Number(s):

CA 2014/109574

Decision under appeal

Citation:

Cudgegong Australia Pty Limited v Transport for NSW [2014] NSWLEC 19

Date of Decision:

2014-03-13 00:00:00

Before:

Pain J

File Number(s):

2013/30171

Judgment

1HER HONOUR: Golden Mile Property Investment Pty Ltd (in liq) (the appellant) seeks leave to appeal against the decision of Pain J in the Land and Environment Court, in which her Honour determined that Cudgegong Australia Pty Ltd (the first respondent) was entitled to an advance payment of compensation under the Land Acquisition (Just Terms Compensation) Act 1991 (the Just Terms Act), s 68(2)(b) in respect of land in Rouse Hill (the land) that had been compulsorily acquired by Transport for NSW (the second respondent): Cudgegong Australia Pty Limited v Transport for NSW [2014] NSWLEC 19. On 20 May 2014, a direction was made that the summons for leave to appeal and the appeal be heard concurrently: Uniform Civil Procedure Rules 2005 (UCPR), r 51.14.

2The first respondent filed a notice of motion seeking security for costs on the appeal from the appellant in the sum of $80,000. The application is brought under the Corporations Act 2001 (Cth), and/or the UCPR, r 42.21(1)(d).

3The appellant has been in liquidation since 2007, and has no significant assets other than its alleged compensable interest the subject of this litigation. The appellant's insolvent state was not in dispute.

Background

4The principal issue before Pain J was whether the appellant or the first respondent had the relevant compensable interest in the land. That remains the issue on the appeal. The background facts giving rise to that issue are as follows.

5In 2004, the appellant purchased the land. Its interest was subject to two mortgages, the first to Stacks Managed Investments Ltd and the second to RTS Super Pty Ltd. The trial judge referred to the mortgagees of the first and second mortgages collectively as Stacks, a convention which will be adopted in this judgment. At the time the appellant purchased the land, it was in precinct 20 within the State Environmental Planning Policy (Sydney Region Growth Centre) 2006 (the SEPP 2006). This was relevant to the value of the land, given the possibility that the land would be rezoned as residential land if the planning policy in the SEPP 2006 was implemented.

6On 14 September 2007, the appellant was placed into liquidation at the instance of the Office of State Revenue for unpaid land tax. The liquidator did not call for proofs of debt as he considered that there were insufficient monies available for him to expend to engage in that process, although one proof of debt was lodged.

7In early 2008, payments due under the mortgages ceased to be paid. At that time, the land was no longer being considered for inclusion within the SEPP 2006. Stacks obtained a valuation of the land, which revealed that, at that time, the land was valued at $1.4 million, some $2.5 million less than the purchase price. This value was also considerably less that the principal sum of $2.9 million owing under Stacks' mortgages.

8On 5 and 6 February 2008, Stacks sent notices under the Real Property Act 1900, s 57(2)(b) to the liquidator of the appellant, alleging breach of the mortgages for unpaid monies due and owing under the mortgage. The liquidator did not remedy the breach, and on 22 September 2008, Stacks exercised its power of sale as mortgagee and entered into a contract for sale of the land with the first respondent as Trustee for the Cudgegong Family Unit Trust (the first contract): see Real Property Act, s 58. No other purchaser had been sought and there had been no marketing of the property for sale.

9The first respondent had been incorporated in August 2008, a month or so prior to the sale and approximately 11 months after the liquidation of the appellant. As I understand the primary judge's reasons, it was incorporated for the express purpose of purchasing the land from Stacks exercising its power of sale. Two of the three directors of the appellant, Pritam Singh Benipal and Sukhdev Singh, became directors of the first respondent. They each held one ordinary beneficial share in the appellant, and each hold 25 ordinary beneficial shares in the first respondent. The third and final director and shareholder of the first respondent, Pardeep Singh Gill, was also a creditor of the appellant.

10Mr Singh, who is a director of the first respondent and was a director of the appellant, gave evidence that he was able to negotiate favourable terms in respect of the first contract, whereby, as recorded by the primary judge, at [71]:

"... he was able to obtain the right to buy the resumed land, pay a very low deposit and did not have to pay the purchase price for a long time but pay interest every month. He could pay the purchase price earlier if he chose to. Mr Singh was waiting to see whether he would be successful in having the resumed land released and rezoned so that he could determine if he should complete the contract or not. The main goal was to save themselves from bankruptcy."

11On 12 April 2012, the appellant was deregistered. Pursuant to the Corporations Act, s 601AD(2), its property interest in the land vested in the Australian Securities and Investments Commission (ASIC), subject to the security interest of Stacks: s 601AD(3).

12The first contract was rescinded on 21 June 2012, but a second contract for sale of the land was entered into between Stacks and the first respondent on the same day. This was done to allow the first respondent an additional 12 months to raise finance for the purchase of the property. The completion date of the second contract was 1 July 2013. Prior to the second contract being entered into, in about 2010 the land had once again come under the umbrella of SEPP 2006 and had been rezoned for residential housing.

13On 21 September 2012, three months after entry into the second contract, the second respondent compulsorily acquired the land by gazetted notice of acquisition under the Just Terms Act, s 20. The position, therefore, immediately prior to the acquisition, was as follows:

(a) The appellant remained listed as the registered proprietor of the land;

(b) The appellant's property interest in the land was vested in ASIC;

(d) The first respondent had entered into the second contract with Stacks for the sale of the land; and

(e) That contract had not been completed.

14The second contract was discharged by the act of acquisition: Just Terms Act, s 20, as was any other interest in the property. Pursuant to s 37 of the Act, the owner of any interest in the land immediately prior to acquisition is entitled to compensation.

15Following the acquisition of the land, the second respondent issued to Stacks and the appellant a determination of compensation notice in the sum of $4,223,400. The second respondent offered Stacks $3,026,478 of this amount, which they accepted in exchange for a complete discharge of any interest they had in the land under the mortgages. Although the first respondent was not issued with a determination of compensation notice, it filed a claim for compensation in the Land and Environment Court pursuant to the Just Terms Act, s 89 in a sum in excess of $16 million (amended downwards from its initial claim in excess of $19 million).

16The liquidator of the appellant successfully sought an order from the Supreme Court to have the appellant's registration as a company reinstated, for the purpose of asserting a claim to the surplus compensation: Corporations Act, s 601AH(2). Upon the appellant's reinstatement on 21 March 2013, its interest in the land revested from ASIC to the appellant, subject to any security or other interests: s 601AH(5).

17On the hearing of the compensation claim before Pain J, the appellant asserted an interest in the land by way of an equity of redemption. Her Honour rejected this claim and observed that an equity of redemption may found an action to restrain a mortgagee from exercising a power of sale under a mortgage or to restrain completion if the contract was not entered into in good faith. The appellant had not exercised any such right prior to the compulsory acquisition by the second respondent. Her Honour held that after acquisition there was no basis upon which the appellant, as mortgagor, could seek to restrain the mortgagee sale or to restrain completion as the contract for sale had been discharged. Her Honour found, at [120], that the acquisition "was fatal to Golden Mile having an equitable interest in the land in the form of an equity of redemption". Her Honour further held, at [123], that the appellant could not challenge Stacks' exercise of the power of sale because Stacks did not owe a duty of care to a deregistered company. In any event, her Honour considered that the evidence did not establish a breach of any such duty as was alleged: see at [132].

18Her Honour also held that the first respondent had an equitable interest in the land, and that such interest was recognised under the Just Terms Act: see McMahon v Sydney County Council (194) 40 SR (NSW) 427; Austin v Sheldon [1974] 2 NSWLR 661; 31 LGRA 274.

19Her Honour concluded that after acquisition the first respondent, as the purchaser of the land, had a relevant compensable interest and the appellant had no compensable interest. Pain J exercised her discretion under the Just Terms Act, s 68(2)(b), to make an order that the second respondent make an advance payment of $757,300 to the first respondent.

Principles governing applications for security for costs

20The appellant brought its application for security both under the Corporations Act, s 1335 and the UCPR, r 42.21(1)(d). Those provisions provide:

"[Corporations Act, s]1335 Costs

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

(1A) Subsection (1) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.

(2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs."

"[UCPR, Pt 42.21] Security for costs

(1) If, in any proceedings, it appears to the court on the application of a defendant:

...

(d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or

...

the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given."

21Rule 42.21 applies to proceedings in the Court of Appeal and in that circumstance the reference in the rule to the plaintiff and defendant is a reference to the appellant and respondent respectively: see UCPR, r 51.1(3). UCPR, r 51.50 also provides for the Court, in special circumstances, to order security for costs of an appeal. However that rule is expressly stated not to affect the powers of the Court under r 42.21: see r 51.50(3), and was not relied upon by Cudgegong.

22The court has a wide discretion in determining whether to order security for costs: see the review of the authorities by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509: Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245; LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited [2014] NSWCA 88 at [43]. The authorities also establish that the party who seeks security for costs bears an initial onus of establishing that the party against whom security is sought will be unable to meet an order for costs should that party be unsuccessful in the litigation. If the party seeking security discharges that onus, the party against whom security is sought bears an evidentiary burden to establish a reason why security should not be granted: see KP Cable Investments v Meltglow [1995] FCA 76; 56 FCR 189; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Pioneer Park Pty Limited (In Liq) & Ors v ANZ Banking Corporation [2007] NSWCA 344; Prynew Pty Ltd v Nemeth [2010] NSWCA 94.

23Although the discretion to order security for costs is a wide one, there are a number of factors that have consistently been held, in the case law, to be relevant to the Court's exercise of discretion: see KP Cable Investments v Meltglow at 196-198; Pioneer Park Pty Ltd at [47]-[58]. To the extent that they are relevant to this case, those factors are:

(1) The strength and bona fides of the applicant's case;

(2) Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim;

(3) Whether the application will tend to stultify or stifle litigation; and

(4) Whether there are persons standing behind the party against whom security is sought who are in a position to financially support the litigation.

24As I explain below, it is the last of these considerations that is particularly contentious in the circumstances of this case.

Consideration

25It is not in dispute that the appellant is in liquidation and has no significant assets other than its alleged compensable interest the subject of this litigation. A copy of the Company's Report as to Affairs (RATA) submitted to the liquidator by the former directors and secretary of the appellant, pursuant to the Corporations Act, s 475, revealed that the appellant had debts totalling $5,726,297.59 at the date of the winding up. Of that indebtedness, the amount owed to Stacks under the mortgages, which was recorded in the Report as to Affairs to total $2,843,000, was paid out by the second respondent on acquisition of the land: see [15] above. The first respondent has therefore discharged its onus of establishing that the appellant would be unable to pay an order for costs if unsuccessful in the litigation. It is therefore necessary to determine whether, as a matter of discretion, an order for security for costs ought to be made against the appellant and if so, in what amount. For the purposes of this case, that involves a consideration of the four matters referred to above at [23]. As factors (2) and (3) require analysis of the same factual material, they will be addressed together.

(a) Strength and bona fides of the appellant's claim

26As a general rule, the court should proceed on the basis that a party's claim is bona fide and has a reasonable prospect of success if it is prima facie regular on its face and discloses a cause of action: see KP Cable Investments; M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; Bryan E Fencott at 514. In the case of an appeal, that 'rule' has to be considered in the light of the reasons of the court in the proceedings at first instance and the nature of the appeal. Once a court has a given a determination on a matter, that determination is presumed to be correct until overturned: Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd (No 2) [2014] WASCA 106 at [20].

27The first respondent submitted that it not only had the advantage of having a judgment in its favour, but that the appellant's prospects of success on the appeal were weak, as the decision of Pain J to order an advance payment under the Just Terms Act, s 68(2)(b) was a discretionary one, so that the appellant was required to establish an error of the nature described in House v The King [1936] HCA 40; 55 CLR 499 at 505. This last contention does not carry the matter very far. Although the order made was discretionary, the underlying challenge to the making of an order for an advance payment raises the substantive question whether the appellant has an interest in property such as to entitle it to the compensation payable upon the compulsory acquisition of property. If her Honour made an error of law in concluding that the first respondent rather than the appellant had the relevant interest under the Just Terms Act, then an error will have been established within the meaning of House v The King.

28The appellant submitted that there were novel and important questions of law to be considered on the appeal, including:

Whether a purchaser under a contract for the sale of land is entitled to an order for specific performance prior to the date of settlement, and so obtains an equitable title, when there were defects in the mortgagee's exercise of the power of sale. In this regard, the appellant contended that the sale by Stacks as mortgagee to the respondent was at an undervalue;

Whether a duty is owed by a mortgagee to a deregistered company, or at least to ASIC in whom the deregistered company's property is vested or the unpaid creditors potentially represented by a restored company;

The extent of the retrospective effect of the deeming provision in the Corporations Act, s 601AH(5) upon re-enlistment of a deregistered company.

29The fact that, on the appellant's own case, its claim to be entitled to compensation consequent upon the compulsory acquisition of land raises novel questions is a factor that tends in favour of the making of an order for security. Even in a case where the litigation does not involve novel questions of law, the question to be asked, as Basten JA pointed out in Pioneer Park Pty Ltd (in liq), at [55], is:

"...not whether an impecunious corporate appellant has a 'right to litigate' but rather who should be required to bear the costs of the litigation if the appellant is unsuccessful."

That depends upon a balancing of all the circumstances, as has been explained above. However, in general terms, a respondent should not, without good reason, be required to bear the costs of an appeal, where the success of an impecunious corporate appellant's case depends upon novel propositions of law.

30Other than the propositions to which I have referred, little argument was advanced by the parties, and by the appellant in particular, as to the strength of the appellant's case. However, if the contract of sale from Stacks to the respondents was liable to have been impugned, the appellant's case may have some substance. It is also relevant to note that by letter dated 4 February 2013, ASIC wrote to the liquidator advising that the property had been the subject of compulsory acquisition and that it had been advised by the second respondent's solicitors that the appellant, as a former owner of the property, still had a compensable interest in the property, while the first respondent, as a potential purchaser, had a beneficial interest in the property pursuant to the Just Terms Act. There was no objection to this material on the motion for security for costs.

31It is apparent on the face of the issues identified by the appellant that its case is not straightforward. As I have already indicated, the appellant itself recognised that it was novel. However, the first respondent did not submit that it was not maintainable. Its submission was that the case sought to be argued on the appeal was weak. This raises for the consideration the nature of the proceedings before Pain J and what the appellant seeks by way of relief on the appeal. The proceedings before her Honour were for an advance payment of compensation for the acquisition of the first respondent's interest in the land. The appellant challenged the first respondent's application on the basis that it had the relevant interest in the land.

32Her Honour rejected the appellant's challenge and made an order for advance compensation. That order was discretionary and interlocutory. Accordingly, to the extent that her Honour made findings as to the interests of the appellant and first respondent in the land, those findings, having been made in the course of an interlocutory determination, would not be subject of, for example, an issue estoppel.

33On the appeal, the appellant seeks relief by way of orders: setting aside the decision in the Court below; dismissing the order sought in paragraph (1) of the first respondent's notice of motion; declaring that it has the legal and equitable interest in the land; or alternatively, an order that the proceedings be remitted to the Land and Environment Court for all questions of the respective interests of the parties to be determined as part of the first respondent's appeal to that Court pursuant to the Just Terms Act.

34The orders sought by the first appellant pose the questions underlying the observations I have made at [32]. Her Honour's findings are not finally binding on the parties so that the question whether the appellant has a relevant interest remains to be finally litigated. Indeed, there remains before the Land and Environment Court the appellant's notice of motion seeking a determination as to who is entitled to the interest in land for the purposes of compensation under the Just Terms Act and an order for compensation if it has a relevant interest. It should also be noted that the appellant has been joined as a party in the first respondent's appeal to the Land and Environment Court: see the Just Terms Act, s 67.

35There may be questions as to what other parties ought to be joined, and in particular if Stacks should be joined at the instance of the appellant, having regard to the basis of the claim made by the appellant to an interest in the land. Stacks was not a party to the motion before her Honour. I raise these matters to indicate that the nature of the relief sought in this Court will need careful attention. At the end of the day, it may be that the only relief to which the appellant should be entitled on the current proceeding in this Court is an order whereby the funds paid or to be paid out to the first respondent are appropriately preserved. However, that will be a matter for the Court on the appeal, provided, of course, the appellant seeks such relief.

36Notwithstanding the various matters to which I have referred, and having regard to the absence of any contention by the first respondent that the appeal is not arguable, I am prepared to make a finding that the appellant has made out at least an arguable case on the appeal.

(b) Whether the first respondent was the cause of the appellant's impecuniosity

37A factor relevant to the exercise of the discretion in this case is whether the appellant's impecuniosity arises out of the first respondent's conduct relating to the subject of the appeal. A court will be more reluctant to order security where:

"... success in the appeal would establish that [the defendant] was responsible for the very impecuniosity of the company on which it relies in the present application."

See FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 147 at [11].

38This consideration usually arises where a defendant's conduct which is the basis of the claim made by a plaintiff has caused the impecuniosity. That is not this case. However, the appellant submitted that the directors of the first respondent (or at least two of them), when directors of the appellant, had elected to cease funding the repayment of the mortgage, so as to cause a mortgagee sale. This in turn facilitated their purchase of the land through the first respondent. By this "piece of corporate manoeuvring", it was submitted that the directors had effectively transferred their interests to a new corporate entity so that they could take the benefit of the property investment without regard to the unsecured creditors of their previous corporate entity.

39Counsel for the first respondent submitted that this argument was not raised in the proceedings below, and so was not the subject of any findings by the trial judge. He also contended that there was little evidence to otherwise support a claim that the liquidation of the appellant was improper or in breach of duty.

40In my opinion, it is to be inferred from the evidence that the directors and shareholders of the first appellant were effectively responsible for the appellant going into liquidation. It is apparent that the shareholders did not support the appellant in respect of its liability to pay land tax, as it was upon the basis of that debt that the appellant went into liquidation at the instance of the Office of State Revenue.

41The shareholders also failed to support the appellant thereafter, as no payments were made under the mortgage from January 2008, in circumstances where it appears that they had made or caused those payments to be made prior to that date. The appellant was at that time in liquidation and the evidence established that the appellant had no funds or assets from which to make the payments. Overall, the evidence indicates that the land was not income producing and was purchased to take advantage of the SEPP 2006.

42The appellant's failure to pay interest was the precursor to Stacks exercising its power of sale. The first respondent was incorporated shortly before the first contract was entered into and it is apparent from Mr Singh's evidence that the first contract was entered in an attempt to obtain the advantages of a potential rezoning under the SEPP 2006. As discussed above, the terms of the first contract were advantageous to the first respondent. Mr Singh's evidence reveals that it was to his personal advantage and to the personal advantage of the other two shareholders of the first respondent for the first respondent to enter into the first and then the second contract: see [9]-[12] above. The first respondent's submissions, to which I have referred below at [58], also make this apparent.

43Whilst there is no prohibition on persons or entities seeking to take advantage of strategic governmental planning decisions for personal gain, nor indeed, is any adverse comment to be made in respect of such conduct, the picture painted here is one of those standing behind the first respondent having chosen their personal interests over the interests of the creditors of the appellant, or at least some of those creditors. As I have explained above, the directors of the first respondent allowed the appellant to go into liquidation and then sought to take advantage of the same development proposal as had been the business interest of the appellant, by negotiating the first and second contracts for the purchase of the land by the first respondent. Their objection to the liquidator continuing with these proceedings furthers their preference of the first respondent's interest over the appellant's.

44Subject to one consideration to which I refer below, whilst the shareholders were not obliged to prevent the appellant going into liquidation, the circumstances to which I have referred satisfy me that the appellant ought not to be required to provide security for costs of the appeal.

(c) Stultification and position of shareholders

45A factor that may tend against an order for security is the likelihood that the order would stifle or stultify proceedings: Pioneer Park Pty Ltd (In Liq), at [51]. While proof of stultification will require as a starting point a demonstration that an impecunious corporate plaintiff is unable to provide security, it is also necessary to consider the position of others who "stand behind" the company that may be able to satisfy the order on the plaintiff's behalf: see Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [74]. In Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1 at 4, Sheppard, Morling and Neaves JJ explained the proof required to establish stultification as follows:

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

46However, in LRSM Enterprise v Zurich Australian Insurance Barrett JA (McColl and Macfarlan JJA agreeing) held that, in some circumstances, it may not be necessary to show an actual inability to provide the security by the people standing to benefit from the litigation, and, at [43], that:

"... proof by a corporate plaintiff of what might be termed rationally and practically reasonable unwillingness of creditors to give financial support is something that may be taken into account in the exercise of the undoubtedly wide discretion with respect to security for costs."

47In that case, it was considered that even though some creditors were unwilling, as distinct from unable, to make resources available for the litigation, it was still a relevant consideration in determining whether security should be ordered, as the creditors were arms length trade creditors who could not be said to "stand behind" the company in the relevant sense.

48In this case, Thomas Russell, the solicitor for the appellant, stated in his affidavit evidence that he believed and was instructed by the liquidator that:

"... if an order for security is made (particularly in the amount claimed) and [the liquidator] is not able to source litigation funding to meet that order, the Company may not be able to proceed with the appeal."

49However, the appellant provided no evidence that those that stand behind the company and who would benefit from the litigation, including the appellant's shareholders and creditors, were similarly unable to meet the order. Nor did he advance any information as to whether steps had been taken to source litigation funding and, if so, with what success.

50The first respondent submitted that this lack of evidence was of particular relevance. It pointed to evidence that the majority of the appellant's creditors were opposed to the continuation of litigation and submitted that this indicated an unwillingness, as opposed to an inability, to fund further litigation. It contended the position taken by the creditors was not "reasonable unwillingness" in the sense described in LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited. It therefore contended that the evidentiary burden for establishing stultification was not made out, and that security ought to be ordered.

51In order to determine whether a relevant case of "stultification" has been made out, the evidence upon which the first respondent relied, as well as the evidence pertaining to the overlap of directors in the appellant and first respondent, the relationship of those directors with the other creditors, and the quantum of debt owed to the various creditors of the appellant, requires further analysis.

52As already indicated, Pritam Singh Benipal and Sukhdev Singh were directors of the appellant and each had a one third shareholding in the appellant. They are also directors of the first respondent and each holds a one third shareholding in the first respondent. They are owed a total of $670,004 by the appellant. These debts represented a total of 12 per cent (5 per cent and 7 per cent respectively) of the total indebtedness of the appellant to creditors at the time of liquidation. Pardeep Singh Gill is the third director of the first respondent and holds the remaining third shareholding in the first respondent. He is owed $226,923.70, or 4 per cent of the total monies the appellant owed to the debtors at the time of liquidation.

53Leaving aside the monies owed to the Office of State Revenue for Land Tax, the appellant's indebtedness to the three directors of the first respondent was approximately 16 per cent of the total debts owed at the time of liquidation, or 32 per cent of the monies owed by the appellant to the unsecured creditors.

54The three directors and eight other unsecured creditors of the appellant informed the liquidator by letter dated 30 March 2014 that they objected to any further legal action against the first respondent. Five creditors did not sign that letter, namely, Jasvir Randhawa, Ajay Kumar, Debie Dhillon, Puranavati Raju and Jasjit Singh. Pardeep Singh Gill, in an affidavit sworn 2 April 2014 in the Land and Environment Court proceedings, stated that four of the creditors could not be located. Pardeep Singh Gill also stated that the fifth person who had not signed the letter, Ajay Kumar, had advised him that he also opposed the liquidator taking further action. Ajay Kumar was owed $81,475.35 or 1 per cent of the appellant's total indebtedness to creditors.

55It is not known why these persons have objected to the liquidator bringing the claim. Pardeep Singh Gill did not, in his affidavit, provide any reasons for their doing so. The Court has not heard from them directly. It is not known whether they have had legal advice as to their rights or whether they have been promised anything for agreeing that they do not want the proceedings pursued by the liquidator. In making this latter statement, I am not to be taken to indicate that it would necessarily be wrong for them to have been offered an incentive to do so. Rather the court simply has no information as to what the position is. The directors of the first respondent are in the best position to so advise the Court and have chosen not to do so.

56The remaining four creditors who have not objected to the litigation were owed a total of $456,875 or about 8 per cent of the appellant's total indebtedness to creditors both secured and unsecured. This also represents 24 per cent of the monies owed to creditors excluding the three directors of the first respondent and the Land Tax Office.

57The first respondent submitted that it was incumbent upon the liquidator to contact those four creditors to ascertain their attitude. However, Pardeep Singh Gill stated in his affidavit of 2 April 2014 that he was not able to contact these other persons. It is a reasonable inference that the directors knew these four creditors, given that the appellant was a small, closely held, non-trading company. In any event, the first respondent was in the best position to put this information before the Court or at least to explain why they had not been able to contact these persons. I would not, in the circumstances, draw any adverse inference from the liquidator's failure to find these persons.

58The application for security for costs in this case is somewhat unusual. The persons who might, in usual circumstances, be expected to stand behind a company in liquidation which seeks to assert a claim would include the shareholders and creditors who may benefit from a successful outcome of the litigation. One of the explanations for the unwillingness of the creditors to do so in this case proffered by counsel for the first respondent was that there was at least some overlap between the creditors of the appellant and the office holders of the first respondent (as described at [9] above), such that they would "prefer to have their interests served and progressed with the successful party who now has an advance payment of some $700,000".

59However, the overlap of the interests held in each company is limited to three persons. As has been noted, two of the three equal shareholders of the first respondent, Pritam Singh Benipal and Sukhdev Singh, each had a one third shareholding in the appellant. If the appellant is successful, they are likely to benefit, over and above the amount they were owed by the appellant, provided that the amount of compensation found to be payable for the acquisition is in excess of the amount required to pay out the creditors. If the first respondent's assessment of the compensation payable is correct, the benefit will be considerable. The third shareholder of the first respondent, Pardeep Singh Gill, will also benefit through repayment of his debt.

60These same three people all stand to benefit if the first respondent rather than the appellant is successful, by virtue of their shareholdings in that company. Again, on the assumption that the value of the land is in the order of the value asserted by the first respondent, the benefit will be substantial.

61However, should the first respondent be successful, the four unsecured shareholders who have not registered an objection to the liquidator pursuing the proceedings will not be paid the debt (in whole or in part) each is owed by the appellant. Nor will the other unsecured creditors who have objected be paid the debts they are owed, unless some arrangement has been entered into with the first respondent or its directors for that to happen. The comparative indebtedness of the appellant to the directors of the first respondent and to the other unsecured creditors respectively, is $896,927.70, as compared to $1,883,369.89 (the land tax liability aside).

62There was also a question, seemingly unresolved on the evidence, as to whether any land tax remains owing by the appellant. The liquidator, in his evidence before the primary judge, expressed concern as to the appellant's possible liability for land tax. Although an attempt was made in cross examination to have the liquidator accept that the appellant had no continuing liability, that assertion was not accepted by the liquidator. The cross-examination appears to have been based upon a clause in the first contract of sale from Stacks to the first respondent. Neither the first or second contract was before the Court on this application.

63It is not clear whether the first respondent contends that all land tax has been paid. In this regard, I note that in the schedule of creditors set out in the first respondent's written submission, there is a blank against that item under the column "creditor's attitude to the proceedings". Pardeep Singh Gill's affidavit does not deal with the question of land tax. Again, the first respondent and its directors were in the best position to make this apparent to the Court, as land tax was apparently the subject of specific clauses in both the first and second contract.

64I should add that there is another curiosity. ASIC's records indicate that there are three shares in the appellant company and one that is held by each director. My reasons to this point have proceeded on that basis. The first respondent's submissions, however, contain a table indicating that there are six other shareholders, all of whom are also creditors of the appellant in an amount totalling $1,160,854.77. If the appellant's claim is successful, on the information provided to the Court, there would be funds to pay them, in whole or part, depending upon the amount of compensation payable for the acquisition.

65The first respondent further submitted that the liquidator was also likely to be a significant creditor of the appellant, and would have a lien for the costs of administration, including the costs of proceedings, that would take priority over the claims of the unsecured creditors: see Corporations Act, s 556(1)(a). The first respondent asked the Court to infer that they would be significant, given the size and complexity of the proceedings so far. The first respondent submitted that in such circumstances, the liquidator ought to be prepared to stand behind the appeal himself by putting up security for costs.

66There was, however, no evidence as to the liquidator's fees that remain unpaid. This is a deficit in the material before the Court, although it is apparent from the liquidator's evidence in the court below that he had attempted to keep costs at a minimum because there were no assets from which to recover his costs. Had the position been that the only indebtedness of the appellant were the fees owed to the liquidator in respect of the liquidation, there would have been considerable merit in the first respondent's submission. However, as explained, there were other significant debts owed by the company, possibly including land tax, which have not been paid and which the liquidator has a statutory duty to pay, to the extent that there are assets to which recourse can be had to do so.

67As I have indicated, this case is somewhat unusual. In the usual case, a party against whom an action is taken or an appeal is lodged by a corporation, may seek an order for security for costs. But for the unusual features of this case, security may well have been ordered against the appellant unless the persons standing behind the company, and in particular its principals, were willing to be liable for the costs of the litigation should it be unsuccessful.

68Those principals, namely, the three shareholders, have refused to do so in circumstances where two of three shareholders, Sukhdev Singh and Pritem Singh, stand to benefit from the litigation, potentially in a significant sum, if the appellant is prevented from litigating its claim in competition to the first respondent's claim. This last observation presupposes that the appellant would be successful. However, keeping the appellant out of a claim for compensation for any interest it may have had in the land at the time of the acquisition insures against that possibility. Those principals have also refused to support the litigation in circumstances where there are other creditors who are entitled to be paid should the appellant have funds out of which their debts may be satisfied. Such funds can only come from success in the litigation.

69An order for security for costs would assist the shareholders of the first respondent in stifling the litigation in order to prefer their own interests over the statutory duty of the liquidator to recover the assets of the company, and the rights of the creditors of the appellant to be paid out of those assets. This amounts to a significant factor weighing against this Court ordering security for costs. Two of the shareholders in the first respondent were shareholders in the appellant. The third shareholder is a substantial creditor of the appellant. They are persons who, at the least, would in normal circumstances be expected to stand behind the appellant. The fact they chose not to do so should not be a factor that stultifies the appellant in its litigation.

70Although I have noted that the liquidator was not to be criticised for not having attempted to locate the creditors, there is a final matter that should be considered. As the first respondent has pointed out, the liquidator is entitled to be paid his fees in priority to the unsecured creditors. However, he has not provided any information to the Court to enable an assessment of whether he would be the only effective beneficiary if the litigation was successful. I have already indicated that he should have done so. Having said that, and as I have already observed, the liquidation has been conducted very leanly, with the liquidator not even having called for proofs of debt. I am prepared to infer, therefore, that the liquidator's fees will not absorb, in any substantial sum, the balance of the compensation monies remaining after payment of the secured creditors. On the offer made by the second respondent, that is a sum of slightly less than $1.2 million.

71Accordingly, I make the following orders: