ACN 007 528 207 Pty Ltd (in Liq) v Bird Cameron (Reg) and Ors (No 8) No. Scciv-99-1392

ACN 007 528 207 PTY LTD (IN LIQUIDATION) V BIRD CAMERON (REG) AND ORS (NO 8)
[2003] SASC 359

JUDGE BURLEY. This is an application for security for costs by the first third party (the third party) against one of the defendants which joined the third party, namely BPM Pty Ltd. At the hearing of the application, the third party relied upon Section 1335(1) of the Corporations Act which is as follows:
“1335(1) 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.”
These proceedings consist of a claim against the defendants, a firm of chartered accountants, arising out of two transactions involving the sale of shares in the company. In relation to each of the transactions the plaintiff alleges a breach of Section 129 of the Companies Code or Section 205 of the Corporations Law, a breach of duty of care of the firm’s retainer, breach of fiduciary duty, aiding and abetting, a breach of statutory duty of the directors of the company and damages for misrepresentation. Two of the defendants, who are natural persons, and BPM Pty Ltd have joined a firm of solicitors as third party to the proceedings claiming indemnity or contribution in respect of the plaintiff’s claim.
I shall refer to the respondent to this application as BPM. It is common ground that BPM is impecunious in the sense that if an order for costs in the third party proceedings is made solely against it or against it and the other two defendants referred to, it would not be able either to meet or contribute to that liability and, consequently, the third party has established that it is entitled to ask the Court to exercise its unfettered discretion to make an order for security for costs.
I mention also that the quantum of the costs, in respect of which security is sought, is $38,675.00. I accept this sum as being a reasonable pre-estimate of costs up to and including the first day of trial. It is not clear from the affidavit of Mr Forrest, the third party’s solicitor, whether his estimate is based on solicitor/client or party/party costs. Based on my experience of this litigation, I think the estimate is closer to party/party costs rather than solicitor/client costs but I would make a small deduction to account for any difference that may be applicable. Consequently, if an order for security for costs is to be made, I would make it in the sum of $35,000.00.
The submissions of Mr Slattery, counsel for the third party, addressed two main points: first, the question which arises when security for costs is sought against a corporate defendant who has joined with two other defendants who are natural persons in prosecuting the third party proceedings; and, secondly, the contention that, since the alleged causes of action arose, the net asset position of BPM has fallen by about $2 million.
As to the first point, Mr Slattery submitted that the Court has jurisdiction to make an order against BPM even though it is only one of three defendants who have joined the third party. He relied principally upon the decision of Megarry V-C in Pearson and Another v Naydler and Others [1977] 3 All ER at 531. The point was conceded, correctly in my view, by Mr Strawbridge, counsel for BPM.
During the course of argument I raised with Mr Slattery the question of whether or not the fact that two other defendants, in addition to BPM, were, if the defendants fail on the third party claim, liable for an order for costs, has any bearing upon the question of whether or not security should be ordered and, if so, to what extent. As I understand Mr Slattery’s response, it was that the determination of such a question depended upon the asset position of the other defendants and whether or not there might be separate orders for costs against each of the defendants in the third party proceedings.
Dealing with the second point first, it seems to me that if an order for costs were made against the defendants in the third party proceedings, the likely order is that the three defendants would be the subject of the order because the essence of their claim against the third party is jointly to pursue an order for contribution or indemnity from the third party. It is in that context that the first part of the response by Mr Slattery must be examined. I now turn to that point.
It could well be argued that the three defendants, two of them being natural persons and one of them a corporation, jointly pursued a claim against a third party. If one or more of the natural persons was a person of substance, the discretion to order security for costs against the corporate defendant may not be exercised in favour of the third party because the third party’s position as to costs in respect of the third party proceedings is protected. At least one of the defendants who joined the third party would be able to satisfy an order for costs if it were made jointly against the three defendants.
In this matter, there is no evidence one way or the other as to whether or not the other two defendants who are natural persons would be able to satisfy an order for costs. The question therefore arises whether the third party should adduce such evidence as is available to the third party as to the solvency or otherwise of the two defendants who are natural persons. There does not appear to be any authority on the question but, in my view, if BPM is to resist an order that it provide security for costs, on the basis that at least one of the other defendants is a person of substance, such evidence should be adduced by BPM. It is evidence which is peculiarly within the knowledge of the other two defendants and they are persons who are joined with BPM in prosecuting these third party proceedings. It would be unreasonable, in those circumstances, to expect the third party to adduce evidence that the other two defendants are also impecunious.
That being the case, I do not think that the fact that two other defendants have joined BPM in prosecuting the third party proceedings precludes the third party from obtaining an order for security for costs.
The next major point advanced by Mr Slattery was the diminution of the net assets of BPM. The third party relies upon two ASIC returns respectively for the financial years ended 30 June 2001 and 2002. In each of the returns the total amount paid for issued shares of varying types comes to $1,964,462.00. However, information supplied by BPM’s solicitors prior to this application discloses that BPM has net assets of $762.00. Mr Slattery submitted that in the absence of any explanation, the inference to be drawn is that those in control of the company may have taken steps to remove the company’s ability to satisfy any judgment that may be obtained against it, including judgment for costs obtained by the third party against BPM. I accept that submission in this sense: it is impossible to know in the absence of an explanation by BPM what has occurred but there is a possibility that the company has either denuded itself of assets or incurred liabilities with a view to minimising its exposure to adverse judgments. To that extent this is a factor which supports the third party’s application for security for costs.
Mr Strawbridge argued that the third party has unduly delayed in bringing the application and has done so at a late stage. However, that submission overlooks that the plaintiff and the defendants over a period of approximately two years have been arguing about the sufficiency of the statement of claim. That argument has only recently been resolved by the filing and service of a sixth amended statement of claim by the plaintiff. During that time the third parties have not been called upon to participate in the proceedings. Consequently, in my view, there has been no inappropriate delay on the part of the third party in pursuing an application for security. I add also that the application itself was filed on 27 May 2003. The hearing of the application was postponed until such time as the dispute relating to the sufficiency of the statement of claim was completed. In any event, the third party has not sought to include backdated costs in the security that it seeks.
Mr Strawbridge submitted that, on the assumption that an order for security would be made, it was inappropriate to impose upon only one of three parties the obligation to provide security in respect of all of the costs of the third party proceedings if an order were made adverse to the three defendants who have prosecuted the third party proceedings. Mr Slattery’s response was that such a factor did not preclude Megarry V-C from making an order in Pearson v Naydler. However, the principal argument advanced in that case by the respondent was that there was no power to order security for costs in circumstances where a co-plaintiff is a natural person and against whom no order for security for costs would be made. Megarry V-C did not have to deal with the type of argument put by Mr Strawbridge.
In my view, the answer to Mr Strawbridge’s submission is that, if a corporate plaintiff is a co-plaintiff and seeks to avoid an order for security for costs based on unfairness because of the existence of a co-plaintiff who is a natural person, the factual substratum underlying that argument must be before the Court. No such evidence has been put before the Court. I do not know, one way or the other, what, if any, ability the other defendants who joined the third party have in relation to meeting an order for costs. In the absence of such evidence I can make no adequate assessment of the worth of Mr Strawbridge’s submission.
Having considered counsel’s respective submissions, I have come to the view that the application should be granted. The respondent is clearly unable to meet an order for costs and nothing has been put to me to suggest that the discretion should not be exercised in favour of the applicant. The considerable difference between the amount of the fully paid share capital and the net assets of the company suggests that the Court should intervene in favour of the applicant.
For the above reasons, there will be orders:
(1)That the defendant provide security for costs in the sum of $35,000.00, the form of the security to either be agreed between the parties or as determined by the Court.
(2)That the third party proceedings be stayed until the provision of the security for costs referred to in paragraph 1.

[2003] SASC 359

17 October 2003