You can’t rely on anyone but yourself – insolvent companies, litigation funding and security for costs

This week’s TGIF considers Australian Worldwide Pty Ltd v AW Exports Pty Ltd where the Court awarded security for costs against plaintiff companies in liquidation, despite a litigation funder’s indemnity against adverse costs.

Background

The plaintiffs, Australian Worldwide Pty Ltd (AWW) and Australian Worldwide Exports Pty Ltd (AWE), both in liquidation, brought a claim against previous and current directors in relation to alleged phoenix activities.

The plaintiffs had obtained litigation funding for the proceedings from TCA Global Credit Master LLP (TCA). Notably, the litigation funding agreement indemnified the plaintiffs against any adverse costs awards.

One of the directors, Mr Bhojani, made an application under s 1335(1) of the Corporations Act 2001 (Cth) for security for costs.

Inability to pay costs

The first question for the Court to decide was whether it appeared by credible testimony that the plaintiff companies would be unable to pay Mr Bhojani’s costs. The Court ultimately found the plaintiffs would be unable to pay an adverse costs award.

The plaintiffs' main argument was that they were able to pay the costs given the indemnity in the litigation funding agreement with TCA. The Court considered that this was irrelevant to the first question, which was whether the plaintiffs could pay the costs themselves.

When considering the ability to pay costs, the Court noted that the fact that a company is in liquidation does not always mean that it will be unable to pay an adverse costs award. Parker J considered that a defendant seeking security would be “well advised” to lead evidence negativing the relevant company’s ability to pay an adverse costs award. No such evidence was provided in this case.

However, Parker J did not consider this to be fatal to the application, noting that in the four years since the plaintiffs ceased trading, considerable liquidation and legal costs would have been incurred. Parker J also logically noted that if there were significant funds still available, he would have been told about it.

Discretion

The existence of the litigation funding agreement was, however, a relevant factor in deciding whether the Court should exercise its discretion to award security for costs in the circumstances of this case.

Ultimately, the Court held that the litigation funding agreement was not an answer to Mr Bhojani’s application.

With regard to the indemnity from TCA, Parker J found that was no guarantee that TCA would pay in the event of an adverse costs award because:

1. it was not clear whether the costs order could be enforced against TCA, who was based in Florida;
2. it was unknown whether TCA had sufficient assets to meet an adverse costs award; and
3. the funding agreement contained no obligation to fund the litigation to its conclusion, with TCA being able to withdraw at any point.

Other discretionary grounds were raised by the plaintiff companies, but none were successful.

Result

The Court ordered the plaintiff companies to provide security, totalling $170,000, for Mr Bhojani’s costs.

His Honour noted in the judgment his view that a financier who agrees to fund litigation by an insolvent company should ordinarily expect that the company will be required to give security and that the provision of security by the financier should be seen as “part of the cost of doing business.”

Comment

The decision shows that in answering the question of whether a plaintiff can satisfy a defendant’s costs under s 1335(1), it is the plaintiff’s ability to pay the costs that is to be considered. The existence of a funder or indemnity cannot be taken into account under this head, although it will be a relevant discretionary factor for a Court in deciding whether or not security should be granted.

This case also serves to highlight the importance of providing sufficient evidence. A party pursuing security for costs against an insolvent company should still provide evidence to demonstrate the company’s inability to pay costs. Merely asserting that the company is in liquidation may not be enough. Similarly, a party seeking to defend a claim for security for costs on the basis that they have funding from a third party has the onus of showing that that third party can and will satisfy an adverse costs award if necessary.