FEDERAL COURT OF AUSTRALIA

Jianshe Southern Pty Ltd v Get Motor Cycles Pty Ltd (Formerly Turnbull Cooktown Pty Ltd) (3) [2007] FCA 1078

PROCEDURE – costs – security for costs – where respondents seek security for costs against applicant company – where significant and avoidable delay in bringing application for security – where trial imminent – whether delay in bringing application will prejudice applicant if security is ordered – where applicant is impecunious company – where no evidence put forward about assets or liabilities of persons standing behind applicant company – where cross-claim on foot – where respondents indicate that if security is ordered cross-claim will be abandoned – whether estimate by respondents’ solicitor of respondents’ future costs admissible – relevant principles on application for security for costs.

Held: respondents’ solicitor entitled to give evidence of respondents’ estimated future costs – delay a significant factor – order of security in the form of cash or bank guarantee would result in prejudice to applicant due to delay – order for security in the form of cash or bank guarantee not appropriate in the circumstances – security to be provided in the form of a personal guarantee to the respondents from director and principal shareholder of applicant.

Corporations Act 2001 (Cth) s 1335

Federal Court of Australia Act 1976 (Cth) s 56

Trade Practices Act 1974 (Cth) s 51   

Acohs Pty Ltd v Ucorp Pty Ltd (2006) 155 FCR 181 considered

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

Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd [2004] FCA 1334 considered

Clarence Street v ISIS Projects Pty Ltd  [2007] NSWSC 380 considered

Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 applied

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

Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (Unreported, Supreme Court of New South Wales, Hunter J, 7 November 1995) cited

Jianshe Southern Pty Ltd v Turnbull Cooktown Pty Ltd [2007] FCA 489 referred to

Jianshe Southern Pty Ltd v Turnbull Cooktown Pty Ltd (No 2) [2007] FCA 903 referred to

Jodast Pty Ltd v A & J Blattner Pty Ltd (1991) 104 ALR 248 cited

KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 considered

Lucas v Yorke (1983) 50 ALR 228 referred to

JIANSHE SOUTHERN PTY LTD v GET MOTOR CYCLES PTY LTD (FORMERLY TURNBULL COOKTOWN PTY LTD) AND GRAHAM ELLIS TURNBULL

VID 103 OF 2006

BESANKO J

27 JULY 2007

ADELAIDE (VIA VIDEO LINK TO MELBOURNE)

THE COURT ORDERS THAT:

1.         Nicholas Jules Stewart on or before 23 July 2007 provide a personal guarantee to the respondents whereby he guarantees the payment of any costs the applicant is ordered to pay the respondents and incurred by the respondents on or after 5 July 2007 up to a sum of $200,000.

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

REASONS FOR JUDGMENT

1                     This is an application by the respondents by notice of motion for an order for security for costs. The application is brought pursuant to s 1335 of the Corporations Act 2001 (Cth) or s 56 of the Federal Court of Australia Act 1976 (Cth), or both. There is no dispute that it appears by credible testimony that there is reason to believe that Jianshe Southern Pty Ltd, the applicant in the proceedings, will be unable to pay the respondents’ costs if they are successful in their defence. In those circumstances, similar factors are relevant to whether an order for security for costs should be made whether the application be considered under s 1335 of the Corporations Act 2001 (Cth) or s 56 of the Federal Court of Australia Act 1976 (Cth): Jodast Pty Ltd v A & J Blattner Pty Ltd (1991) 104 ALR 248 per Hill J.

2                     The respondents seek an order that the applicant provide security for their costs by way of a bank guarantee in the sum of $250,000. They seek an order that if the security is not provided, the applicant’s proceeding should be stayed or dismissed. The respondents have brought a cross-claim against the applicant but, on the hearing of their notice of motion, they have indicated that if security is granted they will not pursue the cross-claim.

3                     On 16 July 2007 I made the following order:

“Nicholas Jules Stuart [sic] on or before 23 July 2007 provide a personal guarantee to the respondents whereby he guarantees the payment of any costs the applicant is ordered to pay the respondents and incurred by the respondents on or after 5 July 2007 up to a sum of $200,000.00.”

My reasons for making that order follow.

The facts

4                     The applicant company was incorporated on 13 July 1988. Its directors are Julius John Abrahams and Nicholas Jules Stewart. Mr Stewart is Mr Abrahams’ son and it seems that he changed his name from Abrahams to Stewart. Mr Stewart holds 23 of the applicant’s 24 issued ordinary shares. Mr Abrahams owns the other share. The applicant changed its name from Victorian Tree Services Pty Ltd to Jianshe Southern Pty Ltd in early November 2004. The commercial relationship between the applicant and the first respondent appears to have commenced in about September 2004 and it concluded in about August 2005.

5                     The financial statements of the applicant for the financial years ended 30 June 2005 and 30 June 2006 were put before me. The former also contain the figures for the financial year ended 30 June 2004. Nothing has been put before me as to the financial position of the applicant after 30 June 2006.

6                     The financial statements show that the applicant previously conducted a business referred to as VTS, which presumably is Victorian Tree Services. That business was sold at some time during the financial year ended 30 June 2005 for the sum of $89,859.64. In its statement of claim, the applicant claims that it sold its arboricultural business at an undervalue because there was pressure for it to enter into the agreement with the respondents quickly.

7                     The financial statements show that for the financial year ended 30 June 2006 the retained losses of the applicant were $521,050.48, comprising an operating loss of $247,317.63 and retained losses from the beginning of the financial year of $273,732.85. The net liabilities of the applicant as at 30 June 2006 were $456,297.48.

8                     Counsel for the respondents referred me to matters in the financial statements which, he submitted, showed that the applicant was never profitable, even when conducting its arboricultural business, and that the present parlous position of the applicant was due to the way in which the company was managed rather than any conduct by the respondents. I will need to return to consider those submissions. For present purposes, it is sufficient to note that it is clear the applicant will not be able to meet any costs orders made against it.

9                     The respondents submit that the directors and shareholders, or at least Mr Stewart, are paying the applicant’s legal costs. That is something which would have to be inferred from the financial statements, for there is no express evidence in support of the assertion. On the other hand, there is no evidence of a major creditor or group of creditors funding the proceedings. In my opinion, it is appropriate on the balance of probabilities to infer that Mr Stewart is funding the proceedings. It is also appropriate to infer that Mr Stewart will be a major beneficiary if the proceedings are successful. No evidence was put forward as to the capacity of Mr Stewart to meet an order for costs if an order was made in favour of the respondents. In other words, no information as to his assets or liabilities was put before me.

10                  It is convenient at this point to briefly outline the nature of the applicant’s claim.

11                  A company called Jianshe or Jianshe Industries Co Ltd manufactured motorcycles and all-terrain vehicles in China under the name, logo or style of “Jianshe”. In September 2004 the applicant and the first respondent entered into a distribution agreement in relation to Jianshe motorcycles and other related products and parts (“the products”) from China, whereby the applicant became the first respondent’s distributor of Jianshe products in the States of Victoria, South Australia and Tasmania. The relationship did not last and it came to an end, in circumstances which are in dispute, in about August 2005. The applicant claims to have suffered loss and damage as a result of the respondents’ conduct and it claims that the first respondent was in breach of contract and that it wrongfully repudiated the contract, that it engaged in unconscionable conduct under Part IVA s 51AC of the Trade Practices Act 1974 (Cth) (“TPA”), that it contravened an applicable industry code and, in particular, the Franchising Code of Conduct in the Trade Practices (Industry Codes-Franchising) Regulations 1998 under Part IVB s 51AD of the TPA, that it engaged in misleading or deceptive conduct under Part V s 52 of the TPA, that it breached implied warranties imposed on an importer under Part V Division 2A ss 74B, C, D and F and that the second respondent was liable under the accessorial liability provisions in the TPA. Various forms of relief are claimed, including damages at common law and compensation under s 82 of the TPA. Orders under s 87 of the TPA are also claimed.

12                  The applicant pleads that it still has in its possession Jianshe products for which it paid the first respondent the sum of about $94,019. The respondents claim that these products have depreciated in value.

13                  The proceedings were instituted by the applicant on 6 February 2006 and a defence and cross-claim were filed by the respondents on 5 July 2006. On 15 December 2006 a series of orders were made, including an order listing the matter for trial on 2 June 2007. That date was subsequently vacated and a new trial date of 16 July 2007 was fixed. Subsequently, I vacated that date and the trial will now commence on 13 August 2007. In large measure, the need to vacate that date was brought about by an application by the applicant to amend its statement of claim and the late delivery by the applicant of an outline of a witness statement.

14                  I will not recite the details of all the interlocutory steps taken in the proceedings. However, two should be mentioned. On 4 April 2007 I refused an application by the applicant for summary judgment on part of its claim: Jianshe Southern Pty Ltd v Turnbull Cooktown Pty Ltd [2007] FCA 489. In May 2007 I dealt with an application by the respondents for a stay or dismissal of the proceedings by reason of non-compliance by the applicant with various orders of the Court. The details of the application are set out in my reasons on a question of costs: Jianshe Southern Pty Ltd v Turnbull Cooktown Pty Ltd (No 2) [2007] FCA 903.

15                  The respondents’ notice of motion seeking security for costs was filed and served on 5 July 2007. On the face of it, the application has not been brought promptly. The respondents sought to explain the delay. They put forward evidence establishing that on 25 October 2006 their solicitors wrote to the applicant’s solicitors seeking details of assets held by the applicant and expressing the respondents’ concern about their ability to recover their costs if successful in their defence. An application for security for costs was foreshadowed. The respondents put forward evidence establishing that on 22 February 2007 their solicitors wrote to the applicant’s solicitors requesting, among other things, copies of the applicant’s accounts and that they received a copy of the accounts on 14 June 2007.

16                  The applicant put forward evidence establishing that there were a number of other events relevant to the question of delay. It seems that the respondents’ solicitors raised with the applicant’s former solicitor the respondents’ concern about recovering their costs from the applicant in the event they were successful in their defence as early as March 2006. That was shortly after the proceedings were commenced. The respondents’ solicitors had conducted searches of real property owned by the applicant and they requested details of the applicant’s assets. On 15 March 2006, the applicant’s former solicitor wrote to the respondents’ solicitors in the following terms:

“Security for costs

The Respondents by their own admission and without prejudice to the Applicant’s Application and Statement of Claim does [sic] have an asset – the Stock which for this issue you will no doubt accept is valued at about $100K. Therefore the Respondent can look to that for security for costs.”

17                  On 15 March 2006, the respondents’ solicitors responded to that letter by saying they would seek their clients’ instruction and advise.

18                  It seems that the respondents’ solicitors followed up their letter to the applicant’s solicitors dated 25 October 2006 (see [15]) when on 13 November 2006 they wrote to the applicant’s solicitors in the following terms:

“Security for costs

As outlined in our letter of 25 October 2006, our clients are concerned that if they successfully defend your client’s claim, any costs order made in our clients’ favour may not be enforceable against your client.

If your client cannot (or does not) satisfy us by no later than 17 November 2006 that any costs order made in our clients’ favour can be enforced, we shall apply for an order for security for costs.

As previously outlined, if an application for security for costs is necessary, we will be seeking security for costs in or about the sum of $50,000.”

19                  The evidence establishes that the respondents could have obtained copies of the applicant’s financial statements at any time from October 2006 onwards but they did not do so.

20                  The applicant’s managing director, Mr Stewart, states that past costs and expenses “have been incurred by the applicant in reliance on the assumption induced by the conduct of the Respondents that no security for costs would be sought in the proceeding by the Respondent”. Mr Stewart also states:

“That had the Applicant been required to give security for costs when this matter commenced, or in March 2006, or in October 2006, or in December 2006 when it was set down for hearing or at the time of the two interlocutory decisions of the court the Applicant may well have decided to reconsider continuing this litigation. The Applicant has incurred costs over eighteen months on the basis that there was no order for security for costs.”

21                  I accept that evidence.

22                  In my opinion, the delay by the respondents in applying for security for costs is significant and it is not explained by the respondents in a way which diminishes its significance.

23                  Before turning to consider the matters relevant to the exercise of the discretion, it is necessary to consider the quantum of costs sought by the respondents. The respondents’ solicitor estimates their future costs from 5 July 2007 (that is, the date of the notice of motion) at around $300,000 comprising:

1.         Preparation for trial of 10 days at $10,670 per day for senior and junior counsel and instructing solicitors.

2.         A 15-day trial at $10,670 per day.

3.         Disbursements by way of witness fees and travelling expenses.

24                  The applicant challenged the estimates on the ground that the respondents’ solicitors did not have the necessary qualifications to make them. I think they were qualified to make the estimates and I reject the challenge. It seems to me that the estimates are within an appropriate range.

25                  Had this been a case in which it was appropriate to order security by way of cash deposit or bank guarantee, it would be necessary to consider the extent to which the figure of $300,000 should be discounted to reflect various contingencies, including the possibility that the proceedings may settle (GE Dal Pont, Law of Costs (LexisNexis Butterworths) at [28.29]-[28.39]). However, it is not necessary to do that because I do not think that an order of that nature should be made.

Exercise of the discretion

26                  The discretion to order security for costs is a very broad one: Lucas v Yorke (1983) 50 ALR 228. The authorities have identified a number of factors relevant to the exercise of the discretion. I refer, by way of example, to the discussion by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198, French J in Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd [2004] FCA 1334 at [28], Hill J in Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 and Jessup J in Acohs Pty Ltd v Ucorp Pty Ltd (2006) 155 FCR 181 at 183-186 [7]-[12].

27                  The factors which have been identified in the authorities are as follows:

1.         Whether the application for security is brought promptly;

2.         The strength and bone fides of the applicant’s case;

3.         Whether the applicant’s impecuniosity was caused by the respondent’s conduct the subject of the claim;

4.         Whether the respondent’s application for security is oppressive in the sense that it is being used merely to deny an impecunious applicant a right to litigate;

5.         Whether there are any persons standing behind the applicant who are likely to benefit from the litigation and who are willing to provide the necessary security;

6.         Whether the persons standing behind the applicant have offered any personal undertaking to be liable for the costs and, if so, the form of any such undertaking;

7.         Whether the applicant is in substance a plaintiff or the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt the respondent’s self-help procedures;

8.         Whether there are aspects of public interest which weigh in the balance against making an order.

9.         Whether there are any particular discretionary matters peculiar to the circumstances of the case.

28                  Not all of these factors are necessarily relevant in every case. Furthermore, one may be decisive or of very great weight in the circumstances of a particular case.

29                  In this case the first matter, namely, the delay in bringing the application is a very significant matter. There is no doubt the respondents were aware of the Court’s power to make an order for security for costs and, indeed, they raised the issue with the applicant’s former solicitor in March 2006 and with the applicant’s present solicitor in October 2006. The applicant’s financial statements could have been obtained by the respondents from October 2006. The application for security was not brought until less than two weeks before the first adjusted trial date. The fact that that trial date has now been changed to 13 August 2007 is relevant but, in the end, I do not think that it detracts in any significant way from the importance to be attached to the respondents’ delay. The respondents submit that any delay on their part cannot be decisive of their application and, in fact, in the absence of prejudice, is of minimal significance. They referred to Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (Unreported, Supreme Court of New South Wales, Hunter J, 7 November 1995); Clarence Street v ISIS Projects Pty Ltd  [2007] NSWSC 380. In Clarence St, McDougall J said (at [22]):

“The authorities, I think, on a proper analysis also make it plain that delay is not to be looked at in the abstract. What is important is whether, assuming that delay has been shown, such delay causes actual prejudice to the party against whom the order is sought. Even if prejudice is shown, the application need not fail; but unless it is shown, the significance of delay as a countervailing factor disappears. See the decision of Hunter J in Hughes Bros Pty Limited v Trustees of the Roman Catholic Church for the Archdiocese of Sydney(7 November 1995, unreported; BC 95079079).”

30                  There are other authorities which suggest that the weight to be attached to delay by an applicant for security will depend on whether there is any prejudice to the party against whom security is sought (see the authorities referred to in GE Dal Pont, Law of Costs (LexisNexis Butterworths) at [29.129]). For present purposes, I will assume that delay is only of significance if prejudice to the applicant is shown. I am satisfied that the applicant will suffer prejudice if an order for security is made. It is plain from its financial statements that it cannot provide security by way of a cash deposit or bank guarantee and it has expended what are presumably substantial costs in preparing its case for trial. It is clear from Mr Stewart’s evidence that the applicant may not have proceeded this far had an application for security for costs been made earlier.

31                  In my opinion, it would cause prejudice to the applicant and be quite unfair to it to make an order for security for costs by way of a cash deposit or bank guarantee at this late stage. To my mind, that is a sufficient reason to refuse the application insofar as it seeks security of that nature.  However, having regard to the matters outlined below, it does not stand in the way of an order that the party who will benefit from the proceeding if it is successful, Nicholas Jules Stewart, be required to provide a personal guarantee whereby he guarantees the payment of any costs the applicant is ordered to pay the respondents and incurred by the respondents on or after 5 July 2007. I realise that I have conducted no inquiry into Mr Stewart’s financial position and his ability to meet a costs order, but I do not think that that means that such a guarantee cannot constitute a form of security: Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 at 328 per Rowland J (see also the discussion in Dal Pont at 964-965 [29.28]-[29.29]). In any event, if such a guarantee is worthless, that would be a reason to refuse an order for security for costs because the proceedings would otherwise be stifled.

32                  My conclusions have been reached not only in the context of the delay, but also having regard to the other factors which I turn now to address.

33                  As to the second matter referred to in [27], I am satisfied that the applicant’s claim is bona fide. However, I am not prepared to go any further than that because there are a number of contested issues and, in those circumstances, it would be inappropriate for me to comment on the merits of the applicant’s claim.

34                  As to the third matter, there is no doubt that the applicant is impecunious. However, the respondents contend that the applicant was impecunious before it entered into a commercial relationship with the respondents or that its present parlous position is due to the applicant’s poor financial management or both. As to the respondents’ first submission, it is not easy without more information to determine how the applicant was performing before it entered into a commercial relationship with the first respondent. On the one hand, the VTS business was sold for $89,859.64 suggesting that it was a profitable business. On the other hand, for the financial year ended 30 June 2004, the applicant earned income of around $7,000 but had retained losses of about $62,000. The balance sheet of the applicant as at 30 June 2004 indicates net liabilities of about $37,000. As I have said, at some stage in the financial year ended 30 June 2005 the applicant sold the VTS business. A profit and loss statement by segment for the financial year ended 30 June 2005 suggests that the VTS business was profitable until it was sold although the statement was subject to various criticisms by counsel for the respondents. It is not possible for me to resolve those issues on this application. As to the respondents’ second submission, there is simply no evidence which would enable me, assuming it was otherwise appropriate for me to do so, to draw any conclusions as to causation. I think that all that I can say in fairness to both parties is that, if liability and causation are made out it would seem that the respondents’ conduct has contributed to a fairly significant decline in the applicant’s business.

35                  As to the fourth matter, the applicant has not established that the litigation will be stifled if an order for security for costs is made. The onus is on it to do so: Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1. While it has been established that it will not be able to pay the respondents’ costs if they are successful in their defence it has not been established that those who stand behind the applicant cannot provide security. As I have said, no evidence as to the financial position of Mr Stewart has been put before me.

36                  As to the fifth and sixth matters, in view of the order which I have made, it is not necessary for me to say anything more about those factors.

37                  As to the seventh matter, it is not relevant here.

38                  As to the eighth matter, this provides some moderate support for refusing an order for security for costs. The applicant points to its claim in relation to the Franchising Code of Conduct and submits that there is a public interest in allowing a claim to proceed which involves what the applicant submits is a blatant breach of what are consumer protection provisions. I have accorded this matter some weight.

39                  As to the ninth matter, there are no particular discretionary matters in this case other than those which I have identified.

Conclusion

40                  It was for these reasons that I made the order I did on 16 July 2007.

Associate:

Dated:         27 July 2007