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Judgment of the Supreme Court of Australia [2020] VSC 659

1.
By their summons dated 17 July 2020, the defendants seek security for the costs of and incidental to this proceeding, from its commencement up to and including the filing of the defendants' defence, by payment of an appropriate amount into Court.
2.
The application is made pursuant to rule 62.02 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic), alternatively, pursuant to s 1335 of the Corporations Act 2001 (Cth).
3.
The application is supported by affidavits of Liam Thomas Prescott, affirmed 16 July 2020, Madeleine Isabelle Howarth, affirmed 16 July 2020, and Gavin Carlyle Wood, sworn 16 July 2020.
4.
In opposition to the application, the plaintiffs rely on an affidavit of Nicholas John Briggs, sworn 28 August 2020 and three affidavits of Albert Jacobs, sworn 28 August 2020, 18 and 21 September 2020 respectively.

Jurisdiction

5.
Rule 62.02 of the Supreme Court Rules relevantly provides:

When security for costs may be ordered

(1) Where—

(a) the plaintiff is ordinarily resident out of Victoria;

(b) the plaintiff is a corporation…, and there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so;

the Court may, on the application of a defendant, order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given.

6.
Section 1335(1) of the Corporations Act provides:

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.

7.
The first plaintiff, Lighthouse Corporation Limited (IBC 051 557) ('Lighthouse IBC'), is incorporated in the Republic of Seychelles thereby satisfying rule 62.02(1)(a) as a plaintiff ordinarily resident out of Victoria. On the undisputed evidence, it has no assets of substance in Victoria, thereby satisfying rule 62.02(1)(b). The second plaintiff, Lighthouse Corporation Pty Ltd (ABN 25 343 263 433) ('Lighthouse Corporation Pty Ltd'), on the undisputed evidence, has no assets of substance in Victoria also thereby satisfying rule 62.02(1)(b).
8.
There is no dispute between the parties that the Court has power to make an order for security for costs. The parties are in dispute over whether the threshold condition for the exercise of the power under section 1335(1) is satisfied. Namely, whether it appears, by credible testimony, that there is reason to believe that the plaintiff corporations will be unable to pay the costs of the defendants if successful. This is the first question to be determined, as the condition must be satisfied before the discretionary power to order security under section 1335(1) is enlivened.1

Assets of Lighthouse IBC

9.
For this purpose it is necessary to consider, among other things, the asset position of Lighthouse IBC.
10.
Mr Jacobs, director of the plaintiff companies, deposed as follows in relation to the assets of Lighthouse IBC:2

13. Other than the Fuel Supply Agreement, Lighthouse IBC's principal asset is a beneficial ownership of 10% of the shares in Lighthouse DonOilGaz (Lighthouse Don), which has been granted in lieu of payment for fuel supply and energy contract brokerage services.

14. The registered owner of the shares in Lighthouse Don is Mr Vladimir D'Jamirze (Mr D'Jamirze). At page 1 of AJ-2 is a copy of a letter dated 10 December 2015 from Mr D'Jamirze in his capacity as president of Lighthouse Don, which confirms that I have been assigned a 10% non-dilutable ownership interest in Lighthouse Don, which is to be transferred to me at my election to be held on trust for Lighthouse IBC.

15. Further, at page 2 of AJ-2 is a copy of a letter from Russian Pravo I Delo, the solicitors for Lighthouse Don and Mr D'Jamirze. The letter confirms that Mr D'Jamirze has provided Pravo I Delo with an irrevocable instruction that no less than 10% of the shares in Lighthouse Don are held in beneficial trust, ultimately for Lighthouse IBC.

16. Lighthouse Don has a beneficial interest in the Russian company JugGeo. The legal interest in those shares is held by Mr Valerian Sichinava. A copy of a letter signed by Mr Sichinava confirming Lighthouse Don's beneficial interest is at page [6] of AJ-2. At page 5 of AJ-2 is a memorandum from Mr J'amirze dated 10 December 2015 in which he states that Mr Sichinava holds the shares in JugGeo on behalf of Lighthouse Don.

17. As set out in the report by the Southern Centre of Subsoil Expertise LLC, dated 26 January 2015, which is a page 8 of AJ-2., JugGeo holds sub-soil licences for the following areas in the Rostov region in Russia:

(a) the Grachiksky licence areas;

(b) the Verhneoblivsky licence area; and

(c) the Krasnoborsky licence area.

(The JugGeo Sub-Soil Licences)

18. In addition to the JugGeo Sub-Soil Licences, Lighthouse Don controls, through a combination of beneficial and legal and beneficial share ownership, two companies which together hold a further nine sub-soil licences for nine separate licence areas in the Rostov region. In total therefore, Lighthouse Don through its controlled companies holds a total of 12 sub-soil licences (together, the Lighthouse Don Sub-Soil Licences), including the JugGeo Sub-Soil Licences.

19. For the purposes of Timor-Leste's application for security for costs in the ICSID Proceedings, I engaged Professor Eduard Sianisyan, the Director of the Institute of Earth Sciences and Head of the Department of Oil and Gas Geology, Southern Federal University, Rostov-on-Don, Russian Federation. At:

(a) page 28 of AJ-2 is a English translation of a summary of Professor Sianisyan's valuation of the Lighthouse Don Sub-Soil Licences dated 14 December 2015. The original summary report, which is in Russian, is at page 33 of AJ-2;

(b) page 37 of AJ-2 is the English translation of Professor Sianisyan's complete report. The original Russian version is at page 71 of AJ-2.

11.
Professor Sianisyan's valuation3 dated 14 December 2015 values the hydrocarbon reserves and resources of the 12 sub-soil areas of the Rostov region, which are the subject of the Lighthouse Don Sub-Soil licenses, at USD$7,843,190,000.

Plaintiffs' submissions

12.
The plaintiffs do not dispute that they do not have substantial assets in Australia, but submit that any assessment of the risk that a costs order would not be satisfied must include consideration of the following matters:

(a) evidence (elaborated on above) that Lighthouse IBC holds a substantial interest in Lighthouse Don, the value of which far exceeds the quantum of security sought by the defendants;

(b) the plaintiffs have already paid to the defendants over USD$1.6 million in adverse costs and interest in respect of arbitral proceedings before the International Centre for Settlement of Investment Disputes ('ICSID proceedings'), and approximately AUD$2 million for their own legal costs in those proceedings. The plaintiffs submit that the payment of these costs weighs against the defendants' contention that the plaintiffs would not be able to satisfy an adverse costs order;

(c) any deficiency in the assets of the plaintiffs must be assessed against the significant impact on the plaintiffs caused by the defendants' conduct (referring to expenses of approximately USD$565,000 in respect of the alleged fuel supply agreement ('FSA'), reputational damage, damage to corporate relationships and loss of income) and that the financial harm caused to the plaintiffs by the conduct exceeds the quantum of the security sought;

(d) the defendants have voluntarily assumed the risk that they will be sued by impecunious plaintiffs;

(e) the defendants' conduct of this proceeding has already caused significant prejudice to the plaintiffs, in that the plaintiffs have incurred approximately $570,000 in legal costs of which only a fraction has been recovered to date;4 and

(f) the proceeding has already been delayed by over two years by reason of interlocutory processes and appeals filed by the defendants.

Defendants' submissions

13.
The defendants submit generally that the evidence in respect of Lighthouse Don is unsatisfactory and unpersuasive.
14.
Specifically, they submit that:

(a) the alleged ownership of 10% of the shares in Lighthouse Don is not a legal interest but a beneficial interest without any trust deed or other document recording it, or any evidence of the payments or services to which the beneficial interest is said to relate or how the interest arises;

(b) Lighthouse Don is a company incorporated in the Russian Federation and control of the company lies in the hands of a third party, Mr D'Jamirze;

(c) the letters dated 10 December 2015 from Mr D'Jamirze (which purport to confirm that Mr Jacobs was lawfully assigned a non-dilutable fully paid up 10% shareholding in Lighthouse Don to be beneficially held on behalf of Lighthouse Corporation Ltd):5

(i) involve assertions none of which can be independently tested;

(ii) contain no evidence of any assignment;

(iii) suggest that any beneficial interest was superseded on 1 February 2014;

(d) the alleged beneficial interest is an interest in another beneficial interest in a different Russian company, JugGeo, which is said to control two other companies through an unexplained and opaque 'beneficial and legal and beneficial share ownership' which is held for the time being by Valerian Sichinava for and on behalf of Lighthouse Don;

(e) no weight should be placed on the purported expert valuation of these assets.

The plaintiffs have not provided evidence of the instructions to the experts, or the basis of their expertise, the basis upon which they were engaged; and

(f) all of the evidence said to support the assertions of Mr Jacobs dates from 2015 and neither Mr Jamirze or Mr Sichiniva have given evidence.

15.
Further, the defendants submit that:

(a) the plaintiffs have no assets in Australia;

(b) whilst there have been expenses incurred in previous interlocutory applications, they are not relevant as it is not suggested they were not arguable or were pursued for a collateral purpose; and

(c) the plaintiffs do not say that provision of security for costs would stifle the litigation.

Analysis

16.
I am satisfied that the preconditions to the exercise of the discretion exist and that an order for security for the defendants' costs should be made.
17.
First, Lighthouse IBC is a foreign corporation with no assets in Victoria and Lighthouse Corporation Pty Ltd has no assets of substance in Victoria or elsewhere.
18.
Secondly, the Lighthouse IBC beneficial shareholding in Lighthouse Don has minimal documentation supporting the existence of both the shareholding and the underlying assets. This is not to say that the rights, as asserted by Mr Jacobs, do not exist, but with threadbare documentation, I infer that it would be difficult for a third party credit provider in due course to readily lend against this asset. Although the gas and oil condensate resources, which are the subject of the Lighthouse Don Sub-Soil licences, may be valuable resources, they are not yet monetised: they are licences over prospective oil and gas fields. There is no evidence to suggest that any revenue (for example, in the nature of royalties) is likely flow from exploiting the underlying resources or that any dividends are, or ever have been, payable in connection with the assets; or indeed how Lighthouse IBC could, if the need arose, easily access or collateralise any value represented by the 10% shareholding.
19.
In the circumstances, I am satisfied there is reason to believe that Lighthouse IBC will be unable to pay the costs of the defendants if successful in the defence in the proceeding. I have reached the same conclusion with respect to the second plaintiff Lighthouse Corporation Pty Ltd, which has no assets of substance in Victoria or elsewhere.
20.
I have formed this view notwithstanding that the plaintiffs have already paid to the defendants over USD$1.6 million in adverse costs and interest in respect of the ICSID proceedings, and approximately AUD$2 million for their own legal costs in those proceedings. The track record of past payment of costs is not necessarily a reliable guide to the future. The plaintiffs (or third party interests associated with the plaintiffs) may have been willing to fund the proceeding prospectively in pursuit of the claim whilst there is a prospect of success, but may not be willing to do so retrospectively if the plaintiffs' claim is unsuccessful.
21.
Further, the absence of financial statements of the plaintiffs means it is not possible to consider what liabilities they may have.
22.
For present purposes, I do not give any weight to the proposition that any deficiency in the assets of the plaintiffs must be assessed against the significant financial impact on the plaintiffs by reason of the defendants' conduct in connection with the FSA, reputational damage, damage to corporate relationships and loss of income. At this stage, these matters are based on allegations yet to be established at trial.
23.
Nor do I accept that the defendants have voluntarily assumed the risk that they would be sued by impecunious plaintiffs if they breached the FSA. There is no evidence to show that the defendants knew they were entering into an agreement with an impecunious contracting party. Furthermore, part of the defendants' case is an allegation to the effect that the plaintiffs represented that they had financial standing and experience which they did not have. Presumably this will be contested at trial.
24.
Likewise, the delay in the progress of the proceeding is not relevant delay for present purposes. Despite significant but legitimate digressions, the proceeding is still at a very early stage with a defence yet to be filed.
25.
Nevertheless, I do accept that this proceeding has already caused significant prejudice to the plaintiffs by reason of the fact that the plaintiffs have incurred approximately AUD$570,000 in legal costs according to the evidence of Mr Jacobs, of which only a fraction (AUD$143,936.55) has been recovered to date.6 The unsuccessful prosecution by the defendants of an application to stay the proceeding, the unsuccessful appeal, and the failure to obtain special leave does not in my view constitute conduct which would disqualify the defendants from a favourable exercise of discretion on the question of security for costs. But I accept these steps in the proceeding have generated unrecoverable costs, which is a relevant consideration and does affect the exercise of discretion with respect to the amount of any security to be provided.

Form of security

26.
The plaintiffs propose that in the event that the Court requires security to be given security should be in the form of:

(i) an unlimited guarantee, or alternatively an undertaking from Mr Jacobs to be responsible for payment of such costs, duly assessed, as may be ordered by the Court to be paid by the plaintiffs; and

(ii) a limited guarantee, or alternatively an undertaking, from a non-party

(Lighthouse Capital Properties Pty Limited ('Lighthouse Capital Properties')) to pay up to $500,000 in costs, duly assessed, as may be ordered by the Court to be paid by the plaintiffs and to retain a net asset position of at least $500,000.

27.
The plaintiffs submit that:

(a) if they were required to pay an amount into Court, Lighthouse Capital Properties would have to liquidate assets at a sub-optimal time in the market and would likely suffer financial detriment as a result;

(b) security in the form proposed would provide the defendants with a contractual claim against Mr Jacobs and Lighthouse Capital Properties;

(c) the offer to be personally liable for adverse costs involves Mr Jacobs stepping out from behind the corporate veil to expose himself to potential liability, which is a significant matter.

28.
The defendants submit that:

(a) the offers by each of Mr Jacobs and Lighthouse Capital Properties of a guarantee (or alternatively, an undertaking) to the Court suffer from the same problem, in that the defendant would be required to take enforcement steps in the event that they were not honoured;

(b) security should be provided by payment into Court of a suitable amount, or alternatively by the provision of a bank guarantee so that security can be accessed on demand without requiring the defendants to engage in a separate enforcement process.

29.
I accept Mr Jacobs' evidence that if the plaintiffs were required to pay an amount into Court, Lighthouse Capital Properties would have to liquidate assets at a sub-optimal time in the market and would likely suffer financial detriment as a result. In the circumstances, it is appropriate that security be provided in a form other than a liquidated amount.
30.
However in my view, the plaintiffs' proposed form of security is problematic. The personal financial position of Mr Jacobs (that is, his full asset and liability position) is not disclosed on the material. Accordingly, it is not possible to evaluate whether his proffered guarantee or undertaking is meaningful in the context of this case. Further, the proposed security of a guarantee (alternatively, an undertaking) cannot be readily enforced,7 and would involve the defendants engaging in further litigation against the plaintiffs or a third party to secure enforcement, should that become necessary. Although a plaintiff is entitled to offer security in a form least disadvantageous to it, the defendant must be adequately protected.8 I am not satisfied that the defendants would be adequately protected by the proposed guarantees (or undertakings) in the circumstances of this case.
31.
I note that Mr Jacobs, neither for himself or on behalf of the plaintiffs or the non-party, Lighthouse Capital Properties, has deposed that it would not be possible to obtain security in the nature of an on-demand bank guarantee or that if an order was made to that effect it would stifle the litigation.
32.
In the circumstances, I propose to order that the plaintiffs, alternatively Mr Jacobs or Lighthouse Capital Properties, provide a conditional bank guarantee accessible by the defendants on demand (up to the limit of the amount of security ordered) but only for the purpose of the payment of costs, duly assessed, as may be ordered by the Court to be paid by the plaintiffs to the defendants in this proceeding.

Amount of security

33.
The defendants seek security for costs in the amount of $370,000 or alternatively $390,000 (inclusive of the costs of this application) and rely upon the affidavit of Mr Wood, who is an experienced costs consultant retained to prepare an estimate of costs to be incurred on a standard basis from the commencement of the proceeding up to and including the filing of the defence. In Mr Wood's opinion the appropriate amount of security to be provided if an order is made is the amount sought.
34.
The plaintiffs submit that:

(a) the amount is excessive;

(b) in determining the amount of any security, the Court is to order an amount which is 'just and reasonable' having regard to all the circumstances of the case;

(c) the purpose of security for costs is not to provide full protection for the estimated costs of the party seeking security;9

(d) the amount of security must be assessed against the claims in the amended statement of claim;

(e) the claim is a relatively simply contractual claim;

(f) the matters the subject of the proceeding have been the subject of pleadings and evidence in the ICSID arbitration commenced in 2014 and concern a narrower subset of facts;10

(g) the claims are almost identical to those made in the ICSID arbitration, with each of the defences foreshadowed by the defendants having been canvassed in some detail by the defendants in the ICSID arbitration, and this is reflected by the fact that defendants' likely witnesses of fact, and the issues they could depose to, are the same individuals (save for Mr Pereira).

35.
Finally, the plaintiffs submit that despite statements to the contrary, it is difficult to see how the costs do not take into account the proposed counterclaim where the factual foundation of the counterclaim appears to be identical to the matters to be raised in the foreshadowed defence. raised in the foreshadowed defence.

Analysis

36.
In my view, the amount sought by way of security ($370,000 or $390,000 including the costs of the application) is excessive. As a general observation, I note there has been a tendency on behalf of the defendants throughout to characterise the proceeding as more complex than perhaps it is. Certainly, it may raise questions of the governing law, including questions of Timorese law, procurement processes and ministerial authority, but the underlying case is a relatively straightforward contractual claim, a fact which the defendants were at pains to emphasise in the arbitral proceeding when, in a preliminary objection document, they variously described the case as 'an ordinary commercial transaction', and '[a] promise to supply goods for profit in an ordinary cross-border transaction…', noting that '[i]t just so happens that the buyer was a sovereign nation'.11 It is sufficient to say that the evidence would need to be compelling to justify security for costs in the order of magnitude sought merely up to and including the filing of the defendants' defence.
37.
I broadly accept the comparative analysis set out in Mr Briggs' affidavit which demonstrates there is a substantial overlap in matters addressed for the purposes of the ICSID arbitration and the matters which will be addressed in preparation of the defence. When arguing the issue of forum non-conveniens, the defendants sought to identify the field of intended controversy by setting out the intended defences in Mr Prescott's affidavit affirmed 30 April 2018, and the Court was informed that 'Mr Prescott had for two or three years been involved in a nearly equivalent fight in the arbitration'.12
38.
Further, I note that in his first witness statement dated 9 October 2015, relied on in the ICSID arbitration, Mr Prescott states:

… [A]t the outset of this proceeding DLA Piper undertook extensive work, primarily in February 2015 and thereafter, to thoroughly examine the Lighthouse entities and those standing behind them. This work required Timor-Leste to incur substantial costs at an early stage in the proceeding and it is intended that the work will be used for the purpose of this application and in any future stage of the p roceeding'.13

39.
In the circumstances, I am satisfied that the preparation for the arbitral proceeding involved a substantial amount of work by the legal advisers to the defendants in relation to the foreshadowed defences including:

(a) consideration of the question whether Timor-Leste was induced to enter into a negotiation process with the plaintiffs and signed documents on the basis of fraudulent misrepresentations;

(b) analysis of procurement processes and processes necessary under Timorese law to enter into any contract with Zebra Fuels or the plaintiffs;

(c) whether any Lighthouse entity was a shareholder in Zebra Fuels;

(d) whether the plaintiffs had the experience, financial standing, size or exclusive agency that they claimed; and

(e) whether documents which the plaintiffs allege form part of the fuel supply agreement were provided to Timor-Leste,

which will not need to be duplicated.

40.
Furthermore, to the extent of the overlap, the plaintiffs have already contributed to payment for this work in payment for the costs of the unsuccessful arbitral proceeding. Whilst the costs consultant Mr Wood has followed the instructions of the defendants' solicitors in relation to excluding work carried out with respect to the jurisdictional issue, no allowance or discount has been made for duplication, overlap or the past payment of overlapping costs. In the circumstances, in my view, the expert opinion as to costs is significantly flawed and cannot be used as a reliable guide to the appropriate amount required for security.
41.
That said, I am mindful of the need to do justice to both the plaintiffs and the defendants and the need to set a reasonable sum without attempting a detailed costs assessment.14 In my view, sufficient security in the circumstances of this case, allowing for its unusual history, is $150,000.

Application for confidentiality

42.
The plaintiffs seek an order for confidentiality with respect to the financial position of Lighthouse Capital Properties set out in exhibit AJ-3 to the affidavit of Mr Jacobs dated 18 September 2020.
43.
Mr Jacobs deposed that Lighthouse Capital Properties holds interests in a range of companies with which he is associated. Interests held by Lighthouse Capital Properties include a 100% shareholding in Lighthouse Corporation (Commercial) Pty Ltd ('Lighthouse Commercial'). Mr Jacobs is the sole director of Lighthouse Commercial. Mr Jacobs is the sole director and 100% shareholder in Lighthouse Corporation (Capital) Pty Ltd ('Lighthouse Capital'). Both Lighthouse Commercial and Lighthouse Capital conduct businesses which Mr Jacobs deposed would be adversely affected by the public disclosure of the Lighthouse Capital Properties' financial statements.
44.
In relation to detriment to Lighthouse Commercial's business, Mr Jacobs deposed that Lighthouse Commercial operates as a builder for construction projects and specialises in the construction of apartment complexes with a construction price of between approximately $1 million to $7 million. It generally obtains its work via a competitive tendering process. In these tender processes, Lighthouse Commercial usually competes with ten or more bidders for each project, with bidders usually being aware of who they are competing with in the course of the tender process. Disclosure of relevant financial information is usually prescribed as part of a tender application and the financial statements of Lighthouse Commercial and Lighthouse Capital Properties are usually disclosed (on a confidential basis) in and form part of Lighthouse Commercial's bids.
45.
In Mr Jacobs' experience, for most developers the strength of a builder's financial and asset position is a significant consideration in the ultimate awarding of tenders. Mr Jacobs deposed that if Lighthouse Commercial's competitors had access to the Lighthouse Capital Properties' financial statements, that would provide them with an advantage when bidding for work against Lighthouse Commercial.
46.
In relation to detriment to Lighthouse Capital's business which would arise by reason of disclosure of Lighthouse Capital Properties' financial statements, Mr Jacobs deposed that Lighthouse Capital supplies finance for clients, usually for commercial property transactions but also business loans; that Lighthouse Capital supplies fully secured loans from its own funds but also acts as a broker or intermediary, and arranges finances with first and second tier Australian lenders. Mr Jacobs expects that customers would assess Lighthouse Capital's upper limit of its finance capacity by reference to Lighthouse Capital Properties balance sheets on the basis that Lighthouse Capital Properties is a key holding company in the same corporate group. In Mr Jacob's view this would cause detriment because Lighthouse Capital has the capacity to, and has arranged finance in, sums substantially larger than the asset position set out in the Lighthouse Capital Properties financial statements.
47.
I am satisfied that if the financial statements of Lighthouse Commercial and Lighthouse Capital Properties were publicly disclosed, Lighthouse Commercial's competitors could obtain an advantage when bidding for work against Lighthouse Commercial and thereby cause detriment.
48.
I am not as convinced that customers may seek to use the information to inhibit the upper limit of the capacity of Lighthouse Capital Properties to arrange finance.15 However, I do not need to decide this aspect of the argument, as I am persuaded that an order for confidentiality should be made with respect to the financial position of Lighthouse Capital Properties to protect the interests of its wholly owned subsidiary Lighthouse Commercial in competitive tendering processes.
49.
I am satisfied that protection of the commercial information is necessary for the due administration of justice. The controversy between the plaintiffs and the defendants in this case can be resolved without the need for disclosure of Lighthouse Capital Properties' financial statements and the attendant risk of causing collateral commercial damage to that entity. The Court can convey an adequate account of the disputed issues and the reasons underlying the orders to be made in this application without referring to the specific financial details revealed in the financial statements.16
50.
Accordingly, I propose to make an order restricting the access to pages 1-5 of exhibit AJ-3 to the affidavit of Mr Jacobs dated 18 September 2020 in the terms proposed by the plaintiffs.
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