FEDERAL COURT OF AUSTRALIA

John Caines Management Pty Ltd v Adrenalin International Powersports Pty Ltd [2004] FCA 747

COSTS – security for costs – appeal – failure to establish impecuniosity of appellants – whether appeal lacks prospect of success – whether relevant that appellants parties who were sued at first instance and who are compelled to appeal to protect their position – whether application for security for costs a tactical manoeuvre by respondents to retain a favourable judgment.

Federal Court of Australia Act 1976 (Cth) s 56(1)

Federal Court Rules O 52 r 20

Adrenaline International Powersports Pty Ltd v John Caines Management Pty Ltd [2004] FCA 206 discussed

Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 applied

Re Riv-Oland Marble Co (Vic) Pty Ltd v Settef SPA (unreported, Federal Court of Australia, Jenkinson J, 2 May 1988) referred to

Willey v Synan (1935) 54 CLR 175 referred to

Dence v Mason (1879) WN 31 referred to

Dence v Mason (1879) 41 LT 573 referred to

Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd [1999] FCA 764 referred to

Monte v Gianni Versace SpA [2003] FCA 956 referred to

JOHN CAINES MANAGEMENT PTY LTD (ACN 006 050 666), PENELOPE ROSEWARNE, LIAM ROSSNEY, PETER BENSON, JIM KNIGHT AND ADRENALIN INTERNATIONAL POWERSPORTS CENTRE PTY LTD (ACN 082 436 137) v ADRENALIN INTERNATIONAL POWERSPORTS PTY LTD (ACN 089 178 594), DAVID ANTHONY ARNOLD, RAYMOND JOHN SOLOMON AND BRUCE VIVIAN THOMAS

V 391 of 2004

GRAY J

17 MAY 2004

MELBOURNE

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.           The motion the subject of paragraph 2 of the notice of motion filed on 29 March 2004 and of paragraph 2 of the amended notice of motion filed on 7 April 2004 be dismissed.

2.           The respondents pay the appellants’ costs of the notice of motion.

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

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

REASONS FOR JUDGMENT

1                     This is an application by notice of motion, filed on 29 March 2004, seeking that the appellants provide security for costs.  The principal proceeding is an appeal from a judgment of a single judge of the Court, delivered on 10 March 2004 in Adrenaline International Powersports Pty Ltd v John Caines Management Pty Ltd [2004] FCA 206.  The learned primary judge pronounced reasons for judgment on 10 March 2004.  On that day, his Honour directed that the parties bring in minutes of orders to give effect to the reasons for judgment.  In fact, prior to the date on which his Honour had ordered that the minutes of orders be filed, the parties approached his Honour and he made orders in relation to everything except the costs of the proceeding.  Some time later, his Honour resolved a controversy between the parties, as to whether costs should be ordered on an indemnity basis, by ordering that the appellants pay them on a party-party basis.

2                     The power of the Court to require security for costs is found expressly in s 56(1) of the Federal Court of Australia Act 1976 (Cth) under which 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 or her.  The power is thus a discretionary one.  Authorities have laid down over the years principles by which the exercise of the discretion may be guided when a Court is called upon to exercise it.

3                     In the present case, it is common ground between the parties that the standard by which I am to judge the application for security is that referred to by Hill J in Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 at 50,636, where his Honour said that the test was whether:

‘on the balance of probabilities…there is a substantial risk that the respondents may not, if judgment be given in their favour, be reimbursed in full for their costs as taxed.’

4                     I therefore take the standard that the respondents to the appeal must satisfy as being whether, on the balance of probabilities, there is a substantial risk that they will not be able to recover their costs if they succeed in defeating the appeal.

5                     The appellants have relied on very little material; their only affidavit material of any significance is to correct a couple of misapprehensions in the respondents’ material, as to whether one of the appellants has ever been made bankrupt, and as to the date on which the principal behind another entered into a composition with his creditors.  The case falls, therefore, to be determined by reference to the material filed on behalf of the respondents.

6                     In the appeal, there are six appellants.  The sixth appellant is a company, in effect controlled by the second, third and fourth respondents to the appeal.  As part of the appeal, the individual appellants seek to exercise rights of that company that they contend have not been exercised by those who control it.  The first appellant is a corporation and there is no material at all as to the nature of its assets.  I have been asked to assume, and am prepared to assume that, being a private company, the first appellant does not have significant assets.  That leaves the second, third, fourth and fifth appellants, who are all natural persons.  The material before the Court discloses that each of them has an interest in real property.  In some cases those interests are by way of joint tenancy or tenancy in common and in some cases there are encumbrances by way of mortgages registered in relation to the properties.  The fact is, however, that those four appellants do have interests in real estate, which are likely to be significant.

7                     The evidence discloses that, at least so far as is known to the respondents, the second appellant was employed full-time as a schoolteacher.  The third and fourth appellants have been involved in business ventures, or in the performance of work, although the income declared by them in their tax returns for the years ended 30 June 2001 and 30 June 2002 has been in relatively low figures.  The fifth appellant has also had involvement in business ventures, although the income from those ventures seems to have found its way into a unit trust, of which a corporation is a trustee, and from there to another corporation which is trustee of a superannuation fund, so it is difficult to see how the fifth appellant has greatly significant income.

8                     When the application first came before me on 21 April 2004, there was no material from any individual respondent about their knowledge of the assets or financial resources of the appellants.  Counsel for the respondents sought an adjournment of the application on that day.  I granted it, in part to enable the appellants to amend their notice of appeal, so as perhaps better to address the orders that were made by the primary judge, but also for the purpose of giving the respondents an opportunity to say what they could.  I did express surprise on that occasion that the respondents, who had been business associates of the appellants, had not committed themselves to any statement as to the financial resources of the appellants.  The only material that was available was that of the respondents’ solicitor, who had conducted searches relating to the ownership of real property and to the question of past bankruptcies.  It now appears to be accepted that the fifth appellant has not previously been made bankrupt, and that none of the other individual appellants has been made bankrupt, but one natural person involved with the first appellant previously made an arrangement or composition with his creditors.

9                     The significant factor in the present case is one which, to some extent, is common ground between the parties.  One of the orders made by the primary judge on 18 March 2004 was a declaration to the effect that three of the individual appellants, between them, are entitled to a 2.95 per cent shareholding in the company which is the first respondent to the appeal.  That company, it appears, has an asset consisting of cash to the value of approximately $16.4 million, being the net proceeds of sale of the asset, the land, which is at the very heart of the dispute between the parties.  On any view, the shareholding, even to the extent of 2.95 per cent in that company, must be an asset of considerable value.  Counsel for the appellant suggests that I should simply accept that, on a mathematical calculation, it is worth $483 800.  I do not necessarily accept that, because the asset is not a share of the cash, it is a shareholding in the company that owns the cash.  I do accept, however, that it must be of considerable value.

10                  The net effect is that, so far as the evidence on this application goes, between them the second, third, fourth and fifth appellants have substantial assets and so far as the evidence goes, have the availability of income.  In these circumstances, it seems to me strange that the respondents have sought to attempt to establish that there is sufficient impecuniosity to warrant an order for security for costs.

11                  The respondents say that the appellants already owe them the costs of the proceeding at first instance.  The trial was long.  They have submitted a detailed bill of costs for taxing, which presently stands at $719 000.  Again, as I do not accept the direct mathematical calculation of the value of the shareholding of the appellants, I do not accept that the bill of costs for the trial will be taxed at anything like $719 000.  It will, however, amount to several hundred thousand dollars.

12                  The estimate of the costs of the appeal for the respondents, which has been made by a costs consultant, is in the vicinity of $120 000 (down, I might say, from the staggeringly high $250 000 that the respondents’ solicitor initially estimated).  Against that, the appellants’ costs expert has made an assessment in the region of $50 000.  The truth probably lies somewhere in between.

13                  In my view, even taking into account that the appellants currently have a significant liability for the costs of the trial, it is not established that they do not have sufficient assets between them against which the respondents, if they are successful in the appeal, could levy execution for their costs.  In essence, the respondents have failed to show sufficient impecuniosity to justify the order.

14                  I should make some comments about other points that were argued.  One of the issues that counsel for the respondents has urged me to take into account was what he characterised as the extreme difficulty facing the appellants in the way in which they have framed their appeal.  He drew attention to a number of paragraphs in the amended notice of appeal, filed on 7 May 2004, in order to suggest that the appeal was very largely one challenging the findings of fact made by the primary judge, including findings of fact based on findings of credit.  There is no doubt that the notice of appeal does, in many respects, challenge findings of fact.  That is not all it does.

15                  The appellants in effect seek to overturn a judgment that allows a corporation controlled by the second, third, and fourth respondents to continue to hold a substantial asset that was formerly an asset of the corporation that is the sixth appellant.  Those interested in the sixth appellant consist of the other appellants, as well as certain other people, and the second, third and fourth respondents.  The effect of the judgment below is that the asset passed from the sixth appellant to the first respondent and that any question of benefit to those interested in the sixth appellant became lost.  On the face of it, there would seem to be something to be said for the appeal.  Reading the reasons for judgment of the primary judge suggests that his Honour found in favour of the respondents to the appeal in respect of a very large number of issues.  Some of those are factual issues; some of them are issues of law.  Given that the consideration of an application for security for costs necessitates making some estimate, although not a detailed one, of the prospects of success of the appeal, I am bound to say that my impression is that the appellants are not lacking in prospects of success of the appeal.

16                  At a fairly early stage on 21 April, I raised with counsel for the respondents the question whether his clients, having secured a very favourable judgment at first instance, were not perhaps using this application for security for costs as a tactical manoeuvre, as a means of keeping hold of their favourable judgment.  Counsel for the respondents referred me to what he says is a line of authority that suggests that the Court should not approach any differently an appellant who is seeking to protect a position for which it is necessary for that appellant to bring the appeal from an appellant who is simply pursuing a lost cause.

17                  On that occasion, counsel for the appellants referred me to the judgment of Jenkinson J in Re Riv-Oland Marble Co (Vic) Pty Ltd v Settef SPA (unreported, Federal Court of Australia, Jenkinson J, 2 May 1988).  In that judgment at par 4, his Honour referred to the principle that security will not be ordered to be provided by a plaintiff who has been put into a position in which he had to sue in order to defend himself or herself against attack.  That was a principle laid down by the High Court of Australia in Willey v Synan (1935) 54 CLR 175.  At par 5, his Honour said:

‘I do not think that the principle expounded by Latham CJ (54 CLR at 179-180) and by Dixon J (54 CLR at 184-185) in Willey v Synan will ordinarily have any application in relation to a motion for security for the costs of an appeal.  In Dence v Mason (1879) WN 31 an appellant urged as a consideration against ordering him to give security for the respondent’s costs of the appeal the circumstance that he had been the defendant in the proceeding out of which the appeal had arisen.  The Court of Appeal (Jessel MR Bramwell and Brett L JJ) said that “made no difference”.’

18                  In the short time that has been available to me today, I have not been able to locate the Weekly Notes for 1879.  I have found in the Law Times Reports, vol 41 at 573, a report of Dence v Mason, but it is a report of the actual appeal, rather than of any question of security for costs, so it sheds no light on the circumstances of the case in which such a remark might have been made.

19                  Today, counsel for the respondents pressed the Riv-Oland Marble proposition on me, referring to two cases in which it has been followed.  In Morlea Professional Services Pty Ltd v Richard Walter Pty Ltd [1999] FCA 764 at [4], Tamberlin J said:

‘In substance, it is said that the characterisation of the role of AT and Morlea, is really a continuation of their role as presenting a defensive case rather than being the initiating party.’

20                  His Honour then referred to the judgment in Riv-Oland Marble.  At [6], his Honour continued:

‘The thrust of the authorities is to the effect that where a party has a choice as to whether proceedings are initiated or not, then it is normally appropriate such party, if it is impecunious, should provide security as to costs.  I think the position is considerably different in the case of an appeal to that in the case of a trial where a cross-claim does no more than raise the same issues as raised in the defence.

That appears to have been the position at trial in the present case.  However, once one comes to the question of an appeal, it seems to me that the initiating party having the carriage of the matter and forcing the other party into the litigation, or into the continuance of the litigation, is the appellant.  In such circumstances, I agree with the conclusions expressed by Jenkinson J in Riv-Oland and also the English Court of Appeal in Dence, that in an appeal the position is different.  In an appeal the appellant ought, where it is impecunious, provide security for costs unless there are particular circumstances which support a contrary conclusion.  Moreover, on an appeal the respondent has the benefit of a considered judgment in his favour, unlike the position before trial.’

21                  In Monte v Gianni Versace SpA [2003] FCA 956 at [19] Whitlam J, in dealing with an application for security for costs in an appeal said:

‘The fact that the appellant is the party against whom relief was claimed at first instance makes no difference.  He is the person who brings the appeal.’

22                  His Honour referred to Riv-Oland Marble.  I must confess that I have great difficulty understanding the logic of the proposition that seems to underlie these authorities.  It seems to me that there is a world of difference between a party who has initiated proceedings at first instance without a solid case, has lost and insists on appealing, on the one hand, and on the other, a party who has been sued successfully at first instance and who has no choice but to appeal, in order to preserve a position that may well be open.  In my view, it is only common sense to take into account the way in which the proceeding from which the appeal has been brought was structured.

23                  It would be wrong to force the appellants in the present case to make security for costs if they have a position that they seek to establish on the appeal that would be beneficial to them and that would suggest that they have been placed by the respondents in the position of missing out on their interests in a substantial asset.  Some of the propositions to which Tamberlin J commits himself in Morlea seem to me to be rather too wide.  They almost seem to amount to a presumption that every appellant should provide security for costs.  That would certainly be too wide: see O 52 r 20 of the Federal Court Rules.  It is certainly the case that, on appeal, the respondent has the benefit of a considered judgment in favour of his, her or its position and that an appeal in that respect is unlike a proceeding at first instance before the trial.  With that in mind, however, there seems to be no reason why the respective positions of the parties should not be taken into account.

24                  As I have said, in the present case, the respondents, having secured a very favourable judgment at first instance, no doubt seek to hold it.  In my view, they have sought to hold that judgment by using this application for security for costs as a tactical manoeuvre.  It seems very strange to me that, when the original notice of motion seeking security for costs was filed, it was accompanied by no material as to the financial position of the appellants.  Subsequently, on 7 April the respondents filed two affidavits by their solicitor as to the searches that he had undertaken in relation to the resources of the appellants.  He indicated that those searches were done by him during the week ending 26 March 2004.  Given that the notice of motion and its accompanying original material were filed on 29 March 2004, it does appear as if the decision to file the notice of motion was taken without any real knowledge of what resources the appellants might have.

25                  As I have said, it was only after I expressed surprise that the respondents, who appeared to have had business dealings with the appellants for some time, had said nothing as to their knowledge, if any, of the resources of the appellants, that the respondents were prompted to place before the Court any material of that kind.  In those circumstances, without any evidence to the contrary, I can only regard the attempt to claim security for costs as a tactical manoeuvre.  In par 3 of the notice of motion filed on 29 March 2004, the respondents, somewhat strangely, sought an order that the appellants pay the costs of the application on an indemnity basis.  That itself suggests that the application was some kind of attempt to put pressure on the appellants in relation to their appeal.

26                  For all of those reasons, it seems to me that I should dismiss the application for security for costs.  The appellants should have their costs of the unsuccessful motion.  The orders that I make are as follows:

1.           The motion the subject of paragraph 2 of the notice of motion filed on 29 March 2004 and of paragraph 2 of the amended notice of motion filed on 7 April 2004 be dismissed.

2.           The respondents pay the appellants’ costs of the notice of motion.

Associate:

Dated:              15 June 2004