CATCHWORDS

PRACTICE AND PROCEDURE- security for costs - insolvent applicant company - for whose benefit litigation being conducted 

Federal Court of Australia Act 1976 s 56

Corporations Law s 1335(1)

Companies (Queensland) Code s 533(1)

Harpur v Ariadne [1984] 2 Qd R 523 Cons

Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 Refd

Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 Refd

Jalpalm Pty Ltd v Hamilton Island Enterprises Pty Ltd & Anor

No QG198 of 1995

Kiefel J  Brisbane 29 March 1995

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY

GENERAL DIVISION                                                            No. QG198 of 1995

BETWEEN:

                               JALPALM PTY LTD (ACN 010 560 915)

                                                                                                           Applicant

AND:

                               HAMILTON ISLAND ENTERPRISES PTY LTD (ACN 009 946 909)

                                                                                                 First Respondent

AND:

                               JOHN PALMER

                                                                                             Second Respondent

JUDGE MAKING ORDER:    Kiefel J.

DATE OF ORDER:                  29 March 1995

WHERE MADE:                      Brisbane

                                           MINUTES OF ORDERS

THE COURT ORDERS THAT:

1.             Security of $25,000 be provided by the applicant or on its behalf within twenty one days, to be in a form agreed between the respective solicitors and in default of agreement in a form fixed by the District Registrar with liberty to apply.

2.             The applicant's proceedings be stayed until compliance with the order for security.

3.             The applicant pay the respondents' costs of the hearing on 27 March 1995.

4.             The respondents' costs in the motion otherwise be their costs in the cause.

NOTE:     Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY

GENERAL DIVISION                                                            No. QG198 of 1995

BETWEEN:

                               JALPALM PTY LTD (ACN 010 560 915)

                                                                                                           Applicant

AND:

                               HAMILTON ISLAND ENTERPRISES PTY LTD (ACN 009 946 909)

                                                                                                 First Respondent

AND:

                               JOHN PALMER

                                                                                             Second Respondent

CORAM:                                 Kiefel J.

DATE:                                     29 March 1995

PLACE:                                  Brisbane

                                       REASONS FOR JUDGMENT

               The respondents apply for an order for security for costs.  Resolution of the application turns largely upon the question whether an offer by the beneficiaries of the trust administered by the applicant company, to make their assets available to meet any order for costs, but where however they do not have assets, is sufficient for that purpose. 

               Section 56 of the Federal Court of Australia Act 1976 provides:

               "56.(1)     The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him."

and s.1335(1) of the Corporations Law provides: 

               "1335(1)  [Security given by corporation]  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."

               The applicant company is clearly insolvent and that is not the subject of dispute.  Receivers and Managers have recently been appointed by a secured creditor, the Commonwealth Bank of Australia.  It is not however submitted that the company's position has been brought about by the actions of the first respondent, although no doubt it would be contended that it has at least in recent times contributed to the extent of it. 

               The material discloses the existence of other unsecured creditors including the Australian Taxation Office, with which Office arrangements for payments of outstanding tax have been entered into.  The material does not disclose the extent of the company's liabilities.

               The applicant is the trustee of the Sugarloaf Estate Family Trust.  The only two shareholders and directors of the company are Mrs Evans and her son and they are the only potential beneficiaries of the trust, Mrs Evans' former husband having transferred any interest in the company and the trust following orders made in Family Court proceedings. 

               Mrs Evans and her son themselves offer undertakings to the Court to make their assets available to meet any order for costs.  Mrs Evans' assets however are limited to a house property which she is attempting to sell to meet some of the company's debts and it is not suggested there will be any surplus.  Mr Evans has no assets of any great worth.  The business formerly conducted by the company is no longer available as an asset, following the conclusion of the tenancy and the refusal of the first respondent to renew it.  The applicant's property in the action itself is the subject of an equitable mortgage to the bank, but the bank has agreed to a partial release with respect to the action.  The decision to continue the action is said to be taken by Mrs Evans and her son.  The receivers and managers express no interest in the action perhaps for the reason that it is the only asset and there are no funds available to them to fund the action.

               Mrs Evans had, prior to this hearing, forwarded to unsecured creditors a notice informing them of the existence of the action and advising them that in the event of success they are likely to be paid in full and in the event of partial success some proportion.  It is not suggested that success in the action would result in there being any surplus monies in the company and which could be made available to the beneficiaries.  Although the unsecured creditors have been requested to provide a "fighting fund" Mrs Evans has not received any response to her circular to date.  It is not clear whether the bank has been asked to provide funds.

               The applicant submits that, given the fact of the offer of undertakings made by Mrs Evans and Mr Evans, the object of s.1335(1) Corporations Law is met.  The argument proceeds, that in that event the respondents are in no different position than if Mrs Evans and her son had brought the action personally, in which case the Court would not make an order for security for costs.  Reliance is placed upon Harpur v. Ariadne [1984] 2 Qd. R. 523 and Mantaray Pty Ltd v. Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304.  In Harpur v. Ariadne, 532, Connolly J. said, with reference to the then s.533(1) of the Companies (Queensland) Code:

               "The mischief at which the provision is aimed is obvious.  An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets.  The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play.  If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied.",

and (533) after referring to the question as to whether the real plaintiff was a man of substantial means and holding this to be not of great moment went on:

               "... Once it be seen that this action is Harpur's and that he is liable for the costs of the action, the fact that the law calls for the joinder of his companies ought not to put him in any different position from any other plaintiff in this Court.  In my opinion, the learned Chamber Judge was led, by applying the wrong approach to the weight to be attached to s. 533(1), to overlook the highly relevant factor that the action is in truth the first plaintiff's and that in no relevant sense is he in any different position from any other plaintiff. ..."

His Honour did not however hold that once a person standing behind the company makes his or her own assets available that that concludes the question as to whether security ought to be provided, such an approach would seem to me to be contrary to
His Honour's view (523.15) that s. 533(1) was only one factor to be taken into account in the exercise, there, of the inherent jurisdiction of the Court (here of s. 56).  It is, on the other hand, no doubt a correct observation that His Honour was of the view that the Court would not ordinarily shut out a plaintiff resident within the jurisdiction because of impecuniosity (see 530, 532.42) but I do not think this is to be regarded as itself without qualification.  Further, the "rule" to which His Honour refers, said to follow from long standing principle, would seem to rest upon the concept of the right  of a person to prosecute an action as absolute and not to be affected by the exercise of the powers of the Court, an approach which now however I would think to be open to debate.  It is however, happily, unnecessary for me to resolve such a significant, but complex, question for the "rule" to which His Honour referred was always, as His Honour noted, (531), subject to an exception where the plaintiff was not really enforcing his own interest.  In Harpur the personal plaintiff was.  The presence of the companies as plaintiffs was to establish his claims (532.30).  In Bell Wholesale Co Ltd v. Gates Export Corporation (1984) 2 FCR 1, 4, the Full Court said:

                   "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means.  It is not for the party seeking security to raise the matter;  it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts".

The threshold question then is, for whose benefit, in reality, is this litigation being conducted?  Whilst I do not deny Mrs Evans has a genuine interest in the litigation and no doubt has a strong sense of personal grievance, the only financial interest to be benefited is that of the creditors and it is not suggested that they, and in particular the bank, are without means.  I am therefore unable to conclude that an order for security would necessarily stifle the litigation.  That is a matter within the creditors' power. 

               I was also asked by the respondents to take into account the applicant's prospects of success, which they submitted were poor.  In an appropriate case I consider it may be proper to do so, and in a case where the question was whether the party to benefit from the litigation was unable to fund it, but where the issues in the action were purely personal to the plaintiff and involved no question of public interest, a Court may require that some real prospects be shown.

                   As to the quantum of security, the respondents' material discloses that solicitor and client costs and disbursements associated with the remaining interlocutory steps and a hearing are in the order of $50,000 and I was told that party and party costs would be approximately 70-75% of that figure.  The applicant does not dispute the estimate of costs.  I am not in a position to undertake a detailed estimate of how those costs are made up although experience suggests that such assessments tend to be made on a "worst case" basis. In these circumstances I consider that it is appropriate to require the provision by the applicant or on its behalf of $25,000 by way of security for costs, to be provided within twenty one days and to be in a form agreed between the respective solicitors and in default of agreement in a form fixed by
the District Registrar, with liberty to apply.  The applicant's proceedings are to be stayed until compliance with the order for security.

               There will be a further order that the applicant pay the respondents' costs of the further hearing on 27 March 1995 occasioned by the applicant's requirement for further, necessary, material. 

               The respondents' costs in the motion otherwise will be their costs in the cause.

               I certify that this and the preceding six pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel.

               Associate

               Date:       29 March 1995

Counsel for the applicant:                          M. Daubney

Solicitors for the applicant:                        Watkins Stokes Templeton as town agents for Grevell Virgo

Counsel for the respondents:                     R. Derrington

Solicitors for the respondents:                   Bain Gasteen

Date of Hearing:                                    22, 27 March 1995

Place of Hearing:                                   Brisbane

Date of Judgment:                                 29 March 1995