FEDERAL COURT OF AUSTRALIA

Powell v Leighton [2011] FCA 730

THE COURT ORDERS THAT:

1.    On or before 19 July 2011 the applicants provide security in the amount of $157,500 in a manner satisfactory to the first and second respondents or, failing agreement by those respondents, then to the satisfaction of a Registrar of the Court.

2.    On or before 19 July 2011 the applicants provide security in the amount of $100,000 in a manner satisfactory to the third and fourth respondents or, failing agreement by those respondents, then to the satisfaction of a Registrar of the Court.

3.    Unless the applicants provide security by 19 July 2011 in conformity with Order 1, the proceeding in so far as it concerns the first and second respondents is stayed.

4.    Unless the applicants provide security by 19 July 2011 in conformity with Order 2, the proceeding in so far as it concerns the third and fourth respondents is stayed.

5.    The first applicant pay the first and second respondents’ costs of paragraph 2 of their amended motion of 8 November 2010, to be taxed in default of agreement.

6.    The first applicant pay the third and fourth respondents’ costs of their amended motion of 15 November 2010, to be taxed in default of agreement.

7.    The directions hearing is adjourned to 28 July 2011 at 9.30 am.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    The respondents in this proceeding have applied to the Court for orders that the applicants provide security for their costs. The first and second respondents seek that relief in paragraph 2 of an amended motion which was originally filed on 8 November 2010. The separately represented third and fourth respondents, by their amended motion filed on 15 November 2010, seek the same relief as sought by the first and second respondents. The third and fourth respondents’ motion only raises the security for costs issue. The first and second respondents’ motion also raises, in paragraph 1, an application to strike out the applicants’ statement of claim. That issue may require addressing at a later stage of this proceeding, depending on the outcome of the security for costs applications.

Substantive proceeding in outline

2    In the substantive proceeding the applicants seek, by their amended statement of claim, orders against the first and second respondents:

    declaring that the first and second respondents have repudiated an agreement made between the applicants and those respondents and a company called Business Expansion Capital Pty Ltd (“BEC”) made in September 2007 (“the September 2007 agreement”);

    declaring void and setting aside certain debentures; and

    granting the applicants aggravated and exemplary damages for breach of the September 2007 agreement, for trespass and for conversion.

3    Despite the claim for relief in the pleading being so limited, the amended statement of claim also makes claims against the first and second respondents, alleging that they:

    breached s 52 of the Trade Practices Act 1974 (Cth) (“the Act”);

    breached ss 51AA and/or s 51AC of the Act; and

    breached s 12 of the Australian Securities and Investments Commission Act 2001 (Cth).

4    Against the third and fourth respondents the applicants allege breach of contract, negligence and breach of ss 52 and 51A of the Act, although no specific relief is sought against them in the concluding part of the pleading where the applicants’ claims are summarised.

5    A similar proceeding was commenced in the Supreme Court of Tasmania in 2008 (“the Supreme Court proceeding”). The first applicant, Mr Powell, and the corporate applicants in this proceeding were all plaintiffs in the Supreme Court proceeding. The corporate applicants are controlled by Mr Powell. Two other corporate applicants, also controlled by Mr Powell, were plaintiffs in the Supreme Court proceeding but are not current applicants. The defendant in the Supreme Court proceeding is BEC. BEC is controlled by the first respondent, Mr Leighton.

Factual background

6    There is a substantial overlap between the matters dealt with in an interlocutory judgment in the Supreme Court proceeding and the issues likely to be dealt with in the instant matter, if it proceeds to trial. There is no dispute, for the purposes of the security for costs applications, about the factual findings made by Evans J in Powell v Business Expansion Capital [2008] TASSC 26 (“Powell”).

7    In Powell, Evans J:

    set out, in summary form, the terms of the September 2007 agreement which essentially involved the applicants agreeing to BEC investing in them (“the Hartz group”) and supervising the companies in return for repayment of those invested funds and a risk fee;

    said that the second applicant and another company in the Hartz group (not currently an applicant here, but a plaintiff in the Supreme Court proceeding) each provided BEC with a debenture charge, and the fifth applicant (“Forest Marsh”) provided BEC with a mortgage to secure payment of an amount of $630,000;

    stated that on 1 April 2008, BEC appointed the first respondent, Mr Leighton, and the second respondent, BEC’s lawyer Mr Gawler, as joint and several managing controllers over the second applicant and the other company that had given a mortgage debenture;

    noted that by 23 April 2008, Mr Powell and the Hartz group of companies were in dispute with BEC about the terms of the September 2007 agreement and the terms of the invitation to purchase the assets and business operations of the managed companies;

    referred to the purchase by “Hartz” of the third applicant (“Mountain Maid”) in 2002 which was not a financial success, and noted that by July 2004 Hartz was sustaining substantial trading losses (emphasis added for current purposes);

    observed that by June 2007, Hartz’s banker, National Australia Bank, (“NAB”) put the group under asset management and on 28 June 2007 instructed accountants PPB to investigate and review the finances of the Hartz group, which led to NAB requiring Hartz to find an alternative financier by 1 November 2007;

    noted that in June 2007, Mr Powell engaged the fourth respondent, Mr Seymour of the third respondent company (“Focussed Strategy”), to apply to NAB for further financing and that that application prompted NAB to seek the services of PPB;

    found that Mr Seymour introduced Mr Powell to BEC and authorised him to negotiate with it about finance and that, ultimately, BEC agreed to inject finance into the Hartz group for an ultimate return of that finance in due course and a risk fee; and

    found that the injection of funds enabled pressing trade creditors to be paid and that, at this time (September 2007), the Hartz group was “in diabolical strife” (emphasis added for current purposes).

8    At [25] of his judgment, Evans J said:

Within a short time of Hartz’ execution of the letter of offer on 11 September 2007, relations between Hartz and BE began to sour. A number of matters that Hartz was required to attend to, pursuant to the agreement, were not done, in part because of the inadequacy of Hartz’ accounting system.

9    At [26], his Honour referred to a factoring agreement entered into by Hartz with Bibby Financial Services (“Bibby”) for the payment of its invoices. This arrangement flowed from the September 2007 agreement. Justice Evans then referred to issues arising between the Hartz group and Bibby.

10    At [34] of his judgment, Evans J said he was “dubious” about the prospects of the plaintiffs before him (which include the current applicants), “obtaining relief that includes a declaration that the whole of the [September 2007] agreement is void ab initio”. His Honour was “similarly dubious about the plaintiffs obtaining similar consequential relief in relation to the mortgage debentures”.

11    A review of the judgment of Evans J supports the Court taking the view in the current application that, on the basis of currently uncontested factual findings, the case against Mr Leighton and Mr Gawler, who were the human faces of BEC, is very weak. That is so at least in respect of the claims for relief as set out in the current pleading.

12    The case against Focussed Strategy and Mr Seymour is essentially based on their referral of Mr Powell to BEC, Focussed Strategy’s relationship with BEC and claims that they should have given advice to Mr Powell to accept offers made by other companies for the sale of the Hartz group. On the basis of submissions put on the security for costs application and the limited evidence dealing with these issues, it appears that the case against Focussed Strategy and Mr Seymour is also not strong, and to a large extent is dependant on the applicants succeeding against Mr Leighton and Mr Gawler, which they are most unlikely to do on currently known facts and pleadings.

Should security for costs be ordered?

13    Pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”), the Court may order an applicant, in a proceeding before it, to give security for the payment of costs that may be awarded against the applicant. The Court has the discretion to set the amount of security, the time for its payment and the form it is to take.

14    The court has a wide discretion to award security for costs, but the discretion must be exercised judicially; see Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3.

15    The corporate applicants here are impecunious. Mr Powell is also impecunious. The focus of the competing submissions was on whether security for costs ought to be ordered against Mr Powell, because the position of the corporate applicants would not add in any material way to the further costs of the litigation. If security for costs should be ordered against Mr Powell it would follow that the same should apply to the impecunious companies. However, if Mr Powell is successful in resisting an order for security for costs there is no point in separately considering the position of the companies. In that situation no order would be made for the provision of security by any applicant.

16    What is the correct approach to the provision of security when the Court has before it an impecunious personal applicant with an apparently weak case on current pleadings and currently accepted relevant facts, based on recent litigation in Tasmania?

17    In Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 at 50 635, Hill J observed that whether security for costs should be ordered will be informed by several considerations including the following matters of current relevance:

    the chances of success of the applicant;

    the quantum of risk that the applicant cannot satisfy a costs order;

    whether the impecuniosities arises out of an act in respect of whether relief is sought; and

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

18    Counsel for the applicants, Mr Cairns, conceded frankly that there was no prospect that Mr Powell could satisfy any costs order. However, he submitted that he was in that position because of the conduct of the respondents. That submission is rejected. Mr Powell and the Hartz Group were in considerable financial difficulty as long ago as 2004 and the Hartz group were insolvent prior to the injection of funds in 2007 by BEC. Since the injection of those funds the financial situation of Mr Powell and his companies has become even worse. Currently, Mr Powell and his associated companies are liable to pay about $400,000 in costs arising out of Powell. The same parties have become embroiled in litigation in the New South Wales District Registry of the Court before Yates J. In that proceeding, Mr Powell and Forest Marsh have been ordered to pay costs, including payment of indemnity costs by Mr Powell, concerning the costs thrown away by the grant of an adjournment; see Forest Marsh Pty Ltd v Pleash [2011] FCA 134. Further costs have been incurred in an unsuccessful attempt to seek stay orders pending an appeal from the judgment of Yates J; see Forest Marsh Pty Ltd v Pleash (No 2) [2011] FCA 570, per Nicholas J.

19    The further incurring of adverse costs orders over and above those incurred before Evans J in Powell demonstrate a desire by Mr Powell to continue to litigate issues arising from the collapse of his corporate empire without regard to the interests of those who defend his actions, with no prospect of them seeking any redress for their costs.

20    The above matters concerning the continuing costs being incurred in litigation in Tasmania (where the costs order of a registrar is on review to an Associate judge) and the litigation in this Court in Sydney are important discretionary matters peculiar to the circumstances of this case which support the making of a security for costs order.

21    In summary the Court relies on the following matters in ordering security for costs against Mr Powell (and, it follows, the corporate applicants):

    Mr Powell’s impecuniosity did not arise out of an act in respect of which relief was sought. On the contrary Mr Powell and the Hartz group were in dire financial trouble before the September 2007 agreement;

    there are discretionary considerations concerning the further costs orders which are being made against Mr Powell and associated interests in litigation in the Supreme Court of Tasmania and in the New South Wales District Registry of this Court;

    the prospects of success of the claim in the instant substantive proceeding, on current pleadings and accepted findings of fact made by Evans J in Powell, appear weak;

    there is no likelihood that any costs order, no matter how small, made against Mr Powell and the other applicants will ever be satisfied.

22    In all of the above circumstances, in the exercise of the Court’s wide discretion under s 56 of the Federal Court Act, the Court considers that the respondents have made out an appropriate case for an order for security for costs.

Quantum

23    There was no contest by Mr Cairns concerning the amounts claimed by the respondents.

24    These amounts appear to be modest in the circumstances, although for practical reasons they may prove to be academic. The relevant figures are $157,500 for the first and second respondents and $100,000 for the third and further respondents.

Associate:

Dated:    28 June 2011