Citation: Star v NAB [1999] NSWSC 353 (revised 10/09/99); reported at 30 ACSR 583
Court: Supreme Court of New South Wales, Commercial Division
Date: 21 April 1999
Judge(s): Rolfe J
Background
The first plaintiff was the liquidator of four insolvent companies (the corporate plaintiffs), each a former subsidiary of Nambucca Investments Pty Limited. He brought proceedings against National Australia Bank Limited in its capacity as the bank that had provided facilities to Nambucca Investments and taken security over its subsidiaries' assets. The plaintiffs alleged that NAB's conduct in those transactions caused loss to debenture holders and others interested in the insolvent companies.
Three related sets of proceedings raising substantially the same issues against NAB were also on foot, brought by other parties who had invested in debentures issued by Nambucca Investments. All four matters were specially fixed to be heard together from October 1999, with a time estimate of eight to ten weeks.
NAB applied by Notice of Motion for the plaintiffs to provide security for its costs. The corporate plaintiffs were concededly insolvent and could not fund security from their own resources. The liquidator declined to provide security personally, having been appointed voluntarily.
Legal Issues
- Whether the court should exercise its discretion to order security for costs under s.1335 of the Corporations Law and Part 53 rule 2(1)(e) of the Supreme Court Rules.
- Whether the plaintiffs established that those who stood to benefit from a successful outcome (creditors and other interested parties) were themselves financially unable to provide funding, such that an order for security would stultify the litigation.
- Whether the existence of related proceedings brought by other parties who would benefit from the same findings was relevant to the stultification question.
- Whether the amount of security sought ($346,230) was appropriate.
Decision
Rolfe J granted the application. His Honour identified a tension within the Corporations Law between provisions enabling liquidators to bring recovery proceedings on behalf of insolvent companies and s.1335, which permits defendants to seek security for costs from those same companies. He resolved that tension by reasoning that the legislature, having enacted both provisions without creating any dispensation for insolvent companies from s.1335, must have intended that those who stand to benefit from the litigation would ordinarily fund it.
Applying the principle established in Bell Wholesale Co Pty Limited v Gates Export Corporation & Ors (No 2) [1984] ACLR 588, Rolfe J held that a court is not justified in declining to order security on stultification grounds unless the plaintiffs establish that those standing behind the litigation and standing to benefit from it are themselves without means. The plaintiffs had not made that case. The inference available on the evidence was not that interested parties were unable to fund the proceedings, but that they were unwilling or disinterested in doing so.
Rolfe J also noted the existence of the related proceedings, which were being brought by creditors and debenture holders who effectively sought the same outcome against NAB. That those parties were pursuing their own claims without any suggestion they lacked funds further undermined the stultification argument. NAB was characterised as doing no more than availing itself of a well-established statutory right, not exploiting superior economic resources.
On quantum, his Honour declined to order the full amount sought ($346,230). Because the matter was still some months from hearing and NAB retained the ability to seek further security later, the court considered it appropriate to reduce the figure. The amount ordered was $275,000.
Orders Made
- The plaintiffs provide security for the defendant's costs in the sum of $275,000, in a form approved by the Registrar of the Court, within 28 days.
- The proceedings be stayed until such security is provided.
- The plaintiffs pay the defendant's costs of the Notice of Motion.
Key Takeaways
- Under s.1335 of the Corporations Law, an insolvent corporate plaintiff cannot defeat a security for costs application simply by pointing to the stultifying effect of the order. The plaintiff must affirmatively establish that those who stand to benefit from the litigation are also without the means to fund it.
- Where the evidence permits the inference that interested parties are able but unwilling to fund the litigation, that inference will tell against the plaintiff on the stultification question, as Rolfe J found here.
- The existence of related proceedings brought by creditors and debenture holders pursuing materially the same outcome against the same defendant was treated as relevant context, reinforcing the view that interested parties had capacity to fund litigation.
- Bell Wholesale Co Pty Limited v Gates Export Corporation & Ors (No 2) [1984] ACLR 588 and Yandill Holdings Pty Limited v Insurance Co of North America & Ors [1985] 3 ACLC 542 were followed; the unreported Western Australian decision in Williamson v Soil Land Garden Suppliers Pty Limited (Sanderson M, 2 June 1998) was expressly not followed.
- On quantum, the Supreme Court reduced the security ordered below the amount claimed, on the basis that the hearing was still some months away and a further application remained available if costs ultimately exceeded the sum secured.
Legislation and Cases Referenced
Legislation
- Corporations Law, s.1335 (security for costs)
- Corporations Law, ss.588FE and 588FF (voidable transactions and insolvent company proceedings)
- Supreme Court Rules (NSW), Part 53 rule 2(1)(e)
Cases
- Bell Wholesale Co Pty Limited v Gates Export Corporation & Ors (No 2) [1984] ACLR 588 (Full Court, Federal Court) — followed
- Yandill Holdings Pty Limited v Insurance Co of North America & Ors [1985] 3 ACLC 542 — followed
- Williamson & Anor v Soil Land Garden Suppliers Pty Limited (Sanderson M, Supreme Court of Western Australia, 2 June 1998, unreported) — not followed