Kupang Resources Pty Ltd v Commonwealth of Australia (No 2)

By a notice of motion filed on 5 September 2023, the defendant, the Commonwealth, seeks additional security from the plaintiff, Kupang Resources Pty Ltd (Kupang), in the sum of $1,250,000 or such other sum as determined by the Court.

Kupang resists providing additional security on two main bases. First, it submits that the Commonwealth has failed to establish that it appears by credible testimony that there is reason to believe that Kupang will be unable to pay its costs (to paraphrase the language of s 1335(1) of the Corporations Act 2001 (Cth)) or that there is reason to believe that Kupang will be unable to pay the Commonwealth’s costs if ordered to do so (to paraphrase Uniform Civil Procedure Rules 2005 (NSW) (UCPR) r 42.21(1)(d)), so as to meet the threshold requirement for an order for security under those two provisions. It is common ground that the Commonwealth bears the onus on that issue. Second, Kupang submits that the application for past costs should be refused because of the delay in making it.

In support of its claim that the threshold issue raised by s 1335(1) and rule 42.21(1)(d) has been satisfied, the Commonwealth relies on the fact that Kupang was under administration until 5 May 2021, it does not hold any real property in its own name and it owes an amount of approximately $2,000,000 to International Litigation Partners Pte Ltd (ILP), a well‑known litigation funder, which has a security interest over all Kupang’s present and after acquired property.

In response to those submissions, Kupang relies on unaudited financial statements of the Kupang Group to demonstrate that it is likely to be able to meet any award of costs above the security of $500,000 it has already provided. Most of the debate between the parties turned on what weight, if any, could be placed on those financial statements and what conclusions could be drawn from them.

Before turning to the financial statements themselves, it is desirable to say something more about the history of the matter.

The Commonwealth originally sought security for its costs by a notice of motion filed on 12 June 2020. At that time, it sought security in the sum of $904,017. After the notice of motion was filed, Kupang provided to the Commonwealth a copy of its unaudited consolidated balance sheet as at 31 March 2020, which was accompanied by a letter signed by its accountants confirming that the balance sheet had been prepared by them on the basis of information supplied by Kupang’s directors. The balance sheet disclosed net assets of $3,043,837. The current assets included cash or its equivalents of $7,375,685. The non‑current liabilities were stated to include borrowings of $18,260,316, which consisted of a loan of $16,260,316 from Incanus Investments Limited and a loan from ILP of $2,000,000, both of which were secured over the assets of the Group (in the case of Incanus) or the assets of Kupang (in the case of ILP). The cash included an amount of $6,987,639.11 held by Kupang Investments Pty Ltd, a wholly owned subsidiary of Kupang.

On 3 July 2020, the Court relevantly made the following orders by consent:

Those orders were subsequently varied so that the $500,000 is held in a solicitor’s trust account.

The financial statements as at 30 June 2023 consist of a consolidated balance sheet as at that date (the 2023 Balance Sheet) together with an adjusted statement of financial position which purports to adjust the value of the assets shown in the balance sheet to what is described as their “fair value” (the Fair Value Statement).

The 2023 Balance Sheet is unaudited but, like the balance sheet as at 31 March 2020, is stated in a “Compilation Report” that appears at the end of the balance sheet to have been prepared by Kupang’s accountants, William Buck Audit (Vic) Pty Ltd, on the basis of information supplied by the directors. The Compilation Report has been signed by a director of the accountants.

The Fair Value Statement is stated to have been made “in accordance with a resolution of directors pursuant to the Corporations Act 2001” and is signed on behalf of the directors by one of them, Ms Qixiang Song. Each page of the financial statements contains the following statement:

The financial statements themselves were exhibited to an affidavit affirmed by Mr Elliott Smith, a partner of Banton Group and the solicitor for Kupang, who states on information supplied to him by Ms Song that the directors of Kupang believe that the financial statements correctly record and explain Kupang’s “transactions, financial position and performance” and “[give] a true and fair view of the financial position and performance of the consolidated entity”.

The 2023 Balance Sheet discloses the following assets and liabilities:

The assets and liabilities are substantially the same in nature as the assets and liabilities disclosed in the March 2020 Balance Sheet. The biological assets are approximately 6,500 head of Brahman cattle owned by Kupang Agricultural Management Pty Ltd (KAMPL), a wholly owned subsidiary of Kupang. The property plant and equipment consist largely of Flying Fox Station, an 89,500 hectare cattle station on the Roper River, 540 kilometres southeast of Darwin, which was acquired by KAMPL in November 2018 and plant and equipment used on that station.

According to note 8 to the 2023 Balance Sheet, the borrowings consist of a loan owed to Incanus of $18,489,926 and a loan owed to ILP of $2,000,000, both of which are related to the ultimate parent of Kupang, which is stated to be Harbour Tower Holdings. That came about as a consequence of a deed of company arrangement (DOCA) approved by the Court on 14 December 2016. ILP had provided litigation funding to Kupang, then known as Chameleon Mining NL, in 2008. Following a failure by Kupang to pay amounts it owed to ILP, on 29 July 2015, ILP appointed an administrator to Kupang. Under the terms of the DOCA, ILP agreed to contribute $45,000 to a deed fund and all the shares in Kupang were transferred to ILP. At that time, it was expected that unsecured creditors would receive nothing if Kupang was placed into liquidation. As a result of the DOCA, they received a modest dividend.

The principal differences between the March 2020 Balance Sheet and the June 2023 Balance Sheet are:

According to the Fair Value Statement, the fair market value of the cattle is now said to be approximately $9,000,000 and the fair market value of the station is said to be $28,449,143. Mr Smith gives some explanation for these figures by reference to what are said to be comparable sales. However, little weight can be placed on that evidence. The evidence is hearsay. Mr Smith has no expertise in valuing cattle or farming property in the Northern Territory and no reasons are given for the current valuations other than the fact that the value of the cattle is said to be based on current prices and the value of the station is said to be based on a single sale of what is said to be a comparable property.

I accept that the balance sheet is not a business record since it appears to have been prepared for the purposes of these proceedings. Rather, it is hearsay evidence based on material provided by the directors to the company’s accountant. However, it is admissible on this application under s 75 of the Evidence Act 1995 (NSW) which provides:

In my opinion, there is no reason not to accept the figures contained in the balance sheet. It seems clear that the principal asset of the group is an operating cattle station in the Northern Territory. The 2023 Balance Sheet has obviously been prepared professionally. It contains detailed notes explaining the basis on which it has been prepared and an explanation of a number of items shown in it. The items on the balance sheet largely reflect the historical costs of assets or amounts owed by or owed to the group. The figures in it do not depend on opinions concerning value. It is consistent with the balance sheet prepared in 2020. The Commonwealth advances no reason for why it should not be accepted as being reliable. Instead, it makes two substantive points about it. First, it submits that the borrowings of Kupang have been incorrectly classified as non-current liabilities. However, in circumstances where those borrowings are owed to related companies, little turns on this. What is significant is that the timing of the repayment of the borrowings is within the control of those who directly or indirectly control Kupang and that Kupang has significant net assets.

The second point made by the Commonwealth is that it is apparent that Kupang could not readily meet a costs order against it because it would be difficult to realise the assets it has. Its principal asset is its shares in KAMPL, which owns the cattle station. I accept that if it were necessary for Kupang to cause KAMPL to sell the station and to distribute the proceeds to it, then that that is likely to take some time to do. But that is not the relevant question. The question is whether there is reason to believe that Kupang will not be able to pay costs if ordered to do. The evidence is that the Commonwealth’s recoverable costs if it is successful are likely to be in the order of $2,385,000 for which it already has $500,000 in security. The question then is whether there is reason to believe that Kupang will not be able to pay approximately $1,900,000 if ordered to do so. I do not think that there are. Kupang owns indirectly a substantial cattle station. The value of its net assets has increased by approximately $4 million over the past three years. It is part of a broader group and is owed substantial sums of money by entities in that group. It has considerable net assets. Although it is not clear from the evidence precisely how Kupang came to acquire the cattle station, it has held (indirectly) the station for five years while under the control of ILP. It does not strike me as plausible in those circumstances that, if a costs order is made in favour of the Commonwealth, the Commonwealth would have to wind-up Kupang and take control of KAMPL to be able to enforce that order. What seems much more likely is that if Kupang did not have sufficient cash on hand at the time costs were payable, it would be able to raise that cash promptly by borrowing money from a related entity, calling on a loan owed to it or selling cattle.

For those reasons, I do not think any further security should be ordered.

Having regard to the conclusions I have reached, it is unnecessary for me to address the other issues raised by the parties. However, I should say something about them in case I am wrong in my primary conclusion.

The other principal issue between the parties is whether the delay in bringing the application for additional security should disentitle the Commonwealth from obtaining security for past costs.

I do not think that it should. The orders made by Court by consent specifically contemplated that the Commonwealth would be entitled to make an application for further security after a mediation. Some delay in the proceedings and, no doubt, the Commonwealth’s application for further security, has been caused by the Commonwealth’s successful appeal in relation to a notice to produce served by Kupang (see Commonwealth of Australia v Kupang Resources Pty Ltd (ACN 098 773 785) [2022] NSWCA 77) and an unsuccessful application for special leave to appeal against that decision by Kupang.

Normally, a Court will refuse additional security or security for past costs where there has been delay because the plaintiff has incurred substantial expenses in connection with the proceedings which it otherwise may not have incurred if it knew that it would have to provide further security: see Karl Suleman Enterprizes Pty Limited (in liquidation) v Pham and Ors [2010] NSWSC 886; Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2009] NSWSC 563. But here it seems clear that an order for additional security at an earlier point in time would not have affected Kupang’s willingness to proceed with the claim. Consequently, it has suffered no prejudice as a consequence of the delay.

Kupang did not in final submissions advance any issues concerning the quantum of the additional security sought by the Commonwealth. Consequently, if I had been minded to order additional security, I would have ordered it in the amount of $1,250,000.

The defendant’s notice of motion filed on 5 September 2023 is dismissed with costs.