Australia: Key issues with emerging security for costs options in overseas funded litigation

Introduction

In two recent decisions, the Supreme Court of Victoria has provided useful practical guidance on the type of evidence that will be required when a plaintiff wishes to provide security for costs in the form of a deed of indemnity from an overseas insurer or litigation funder.

The use of litigation funders to finance legal proceedings is becoming increasingly common in Australia. This is particularly true in the case of plaintiff liquidators and companies in liquidation, which frequently rely on litigation funding from overseas funders to finance legal proceedings and often find themselves the target of security for costs applications.

This article will examine the decisions of DIF III Global Co-Investment Fund LP & Anor v BBLP LLC & Ors [2015] VSC 484 (DIF III Proceedings) and Australian Property Custodian Holdings Ltd (In Liquidation) v Pitcher Partners (a firm) & Ors [2015] VSC 513 (APCH Proceedings) and will address some of the key issues that should be taken into account in legal proceedings where the plaintiff is funded by an overseas funder or insurer.

Background

Each of the proceedings concerned an application for security for costs.

In the DIF III Proceedings the plaintiffs were a limited partnership registered in the United States and a company registered in the Cayman Islands. Neither plaintiff had any assets in Australia.

In the APCH Proceedings the plaintiff was an Australian company in liquidation.

It was not in dispute, in either case, that the plaintiffs should provide security. The principal dispute in each proceedings was the form of security to be provided. The defendants in both cases sought that security be provided in the usual form, that is, a bank guarantee from an Australian financial institution or the payment of cash into Court. The plaintiffs sought, in both cases (though the proceedings were not related), to provide security by way of a deed of indemnity from AM Trust Europe Limited, a UK based insurer with no assets in Australia (AM Trust).

Decisions

Associate Justice Lansdowne found against the plaintiffs in the DIF III Proceedings, however, she indicated that in certain circumstances the provision of security by an overseas insurer or funder may be appropriate.

In the APCH Proceedings, Associate Justice Ierodiaconou found in favour of the plaintiffs, ruling that a deed of indemnity from AM Trust was satisfactory security.

Relevant principles

In each proceedings, the Judges set out a number of crucial evidentiary matters that plaintiffs should address if they propose to convince the Court that security should be provided by a third party, overseas entity.

  1. The plaintiff must provide direct evidence from an officer of the proposed security provider as to the creditworthiness of the security provider.

In the DIF III Proceedings, evidence as to the creditworthiness of AM Trust was provided by the plaintiffs' solicitors based on instructions they had received from AM Trust.

Lansdowne AsJ noted at [61] that in Nylex Corporation Pty Ltd v Basell Australia Pty Ltd [2009] VSC 97, Justice Mandie held that evidence given by a solicitor as to the creditworthiness of a third party security provider was hearsay and insufficient to demonstrate the financial position of the proposed security provider.

The lack of direct evidence from AM Trust as to its financial position meant that the Court was unable to determine whether the proposed security provider had sufficient assets to meet the quantum of security (though Lansdowne AsJ was prepared to allow the plaintiffs to rectify this deficiency in the evidence if she found in their favour on the other issues).

In the APCH Proceedings, Ierodiaconou AsJ accepted the plaintiff's evidence of AM Trust's creditworthiness, because it was direct evidence from Michael Pinner, the CFO of AM Trust.

Accordingly, plaintiffs should provide direct evidence from an officer of the proposed security provider that plainly sets out:

  1. the security provider's asset position and cash at hand;
  2. that the security provider is in the business of either funding litigation or underwriting litigation expenses risk; and
  3. if possible, that the security provider has a history or established practice of entering into and complying with deeds of indemnity.
  1. The plaintiff must provide evidence as to why they would be prejudiced by an order that they provide security in the "usual form".

In the DIF III Proceedings, the plaintiffs did not tender any evidence which set out why they were unable to obtain a bank guarantee from an Australian financial institution or pay funds into Court.

This issue was not raised by either party in the APCH Proceedings.

Lansdowne AsJ considered herself bound by Nylex and noted that, in that case, evidence of the plaintiff's ability (or inability) to obtain a bank guarantee or pay money into Court was a crucial consideration as to whether security other than in the usual form should be provided.

Plaintiffs who seek to provide security by way of an overseas funder should, therefore, provide evidence that they would be prejudiced if ordered to provide security by way of a bank guarantee from an Australian financial institution or payment of cash into Court.

Such evidence would, of course, be available to a company in liquidation and any order requiring it to provide security in the "usual form" would effectively shut the plaintiff out from bringing its claim.

  1. Proposed deed of indemnity

Each of the proceedings examined the crucial characteristics that a proposed deed of indemnity must possess in order to provide the defendants with sufficient security. The most important of these are set out below.

  1. The deed should be executed. At [111] of the DIF III Proceedings, Lansdowne AsJ noted that a draft deed would require the defendants to assume that AM Trust would make them an offer in the form expressed in the draft deed. This uncertainty contributed to the insufficiency of the proposed security.
  2. Unless the quantum of security is agreed, the deed should not be limited to a specific amount of security. In the DIF Proceedings, the proposed deed limited the amount of security to $75,000. The Court held that the quantum of security to be provided was substantially in excess of this sum, rendering the deed useless as security for the defendants' costs.
  3. The deed should submit to the laws of the jurisdiction in which the proceedings are on foot.
  4. The deed should be directly enforceable against the security provider.
  5. The deed should be unconditional and irrevocable.
  6. The deed should set out that the security provider undertakes not to commence its own security for costs application in relation to any proceedings seeking enforcement of the deed or defend such proceedings.
  7. To the extent possible, the terms of the deed should be agreed between the parties.

In the APCH Proceedings the proposed deed of indemnity was accepted by the Court primarily because it adhered to the above characteristics.

  1. Evidence of ability to enforce, and the costs of enforcing, an Australian judgment in the security provider's jurisdiction.

In each of the proceedings, the Court considered it important that the country in which the security provider was based (in these cases, the United Kingdom) had regimes in place for the registration and enforcement of Australian judgments.

In the DIF III proceedings, the plaintiffs relied on evidence of a UK solicitor as to the procedure and the likely costs of registering and enforcing an Australian judgment in the UK. The plaintiffs then undertook to obtain a bank guarantee for the estimated sum of such enforcement. Although in the DIF III proceedings the security was deemed unsatisfactory for other reasons, the Court noted that the plaintiffs' evidence and offer of a bank guarantee would otherwise have been a key consideration.

In the APCH Proceedings, the plaintiff simply offered the sum of $20,000 as security for the costs of any overseas enforcement. This amount was not disputed by the defendants.

Accordingly, plaintiffs should be prepared to provide evidence of the procedure for registering and enforcing Australian judgments in the security provider's jurisdiction and the likely costs of such enforcement action.

Conclusion

Although the Judges in each of the proceedings agreed that security in the form of a bank guarantee by an Australian bank or cash paid into court is a superior form of security, they noted that the most critical consideration was "what the interests of justice required" in each individual case. The Courts will be loath to order a form of security that would have the effect of "shutting out" a plaintiff from bringing its action.

The DIF III Proceedings are currently the subject of an appeal however, given the reasoning set out in the APCH Proceedings, it is unlikely that the reasoning of Lansdowne AsJ in the DIF III Proceedings will be disturbed.

Liquidator plaintiffs can take heart in the willingness demonstrated by the Courts to allow security to be provided by way of a deed of indemnity from a foreign insurer or funder and, in particular, the comments of Ierodiaconou AsJ at [56] and [57] of the APCH Proceedings where Her Honour relevantly stated that "The form of security is immaterial, so long as it can achieve its object as security" and "Given that the defendant will be adequately protected by the proposed security, it is right and proper that it be given in a way which is least disadvantageous to the plaintiff".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Kemp Strang has received acknowledgements for the quality of our work in the most recent editions of Chambers & Partners, Best Lawyers and IFLR1000.

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