Airwaves Goldcoast Pty Ltd v Caneflight Enterprises Pty Ltd - [2013] WADC 24

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: AIRWAVES GOLDCOAST PTY LTD -v- CANEFLIGHT ENTERPRISES PTY LTD [2013] WADC 24

CORAM: PRINCIPAL REGISTRAR GETHING

HEARD: 29 JANUARY 2013

DELIVERED : 20 FEBRUARY 2013

FILE NO/S: CIV 1409 of 2010

BETWEEN: AIRWAVES GOLDCOAST PTY LTD (ACN 074 353 852)
Plaintiff
AND
CANEFLIGHT ENTERPRISES PTY LTD (ACN 010 812 718)
First Defendant
ADRIAN GOULD
Second Defendant

Catchwords:

Practice and procedure - Security for costs

Legislation:

Corporations Act 2001 (Cth) s 1335
Rules of the Supreme Court 1971 (WA) O 25

Result:

Security for costs ordered

Representation:

Counsel:

Plaintiff:     Mr J Lo Schiavo
First Defendant             :     Mr A Guzman
Second Defendant         :     No appearance

Solicitors:

Plaintiff:     SRB Legal
First Defendant             :     Equitas Lawyers
Second Defendant         :     CSS Insurance Law

Case(s) referred to in judgment(s):

57 Moss Rd Pty Ltd v T & M Buckley Pty Ltd t/as Shailer Constructions [2010] QSC 278
Attorney-General of Botswana v Aussie Diamond Products [2009] WASC 299
BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81
Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34
Bryan E v Fencott v Eretta Pty Ltd (1987) 16 FCR 497
Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301
Commonwealth of Australia and Another v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760
Darwin Offshore Logistics Base Pty Ltd v Cox [2010] WASC 356
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241
Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405
Harpur v Ariadne Australia Limited [1984] 2 Qd R 523
Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744
Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298
Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; (2008) 66 ACSR 455
Mabrouk Minerals Pty Ltd v Mabourak Holdings Pty Ltd [2008] WASC 132
Meni's Tailoring & Alterations Pty Ltd v Jeanswest Corp Pty Ltd [2003] FCA 1108
Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1
Smail v Burton; Re Insurance Associates Pty Ltd (in liq) (1975) 1 ACLR 74
Spence Financial Group Pty Ltd v GE Commercial Corporation (Australia) Pty Ltd [2007] WASC 15
The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239
Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241
Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161
Vicon Services Pty Ltd v BHP Billiton Worsley Alumina Pty Ltd [2012] WASC 109
Western Areas Exploration Pty Ltd v Streeter [2008] WASCA 218
YICI Pty Ltd v Sun Wah Marine Products (HK) Co Ltd [No 2] [2010] WASC 27

PRINCIPAL REGISTRAR GETHING:

Overview

On 9 August 2009 a De Havilland DHC‑2 seaplane registration number VH‑IDO (Seaplane) crashed on landing on the water at Talbot Bay in the Kimberley region of Western Australia. The Seaplane is owned by the plaintiff, Airwaves Goldcoast Pty Ltd. At the time of crash it was leased to the first defendant, Caneflight Enterprises Pty Ltd. The pilot at the time of the crash was the second defendant, Adrian Gould, who was an employee of Caneflight.
Airwaves asserts that Mr Gould attempted to land the Seaplane on water with its wheels extended, and that this caused the accident. It claims damages, principally for the loss of income it incurred whilst the Seaplane was being repaired. The Seaplane was repaired in Canada. The repair costs were paid for by Airwaves' insurer and do not form part of this claim. Caneflight and Mr Gould deny that the accident arose as a consequence of negligence and assert that it occurred as a result of the poor mechanical state of the Seaplane at the time of the accident and/or incorrect information as its empty weight.
By application dated 29 November 2012 Caneflight sought orders that Airwaves provide security for its future costs. By an earlier application, dated 10 September 2012, Mr Gould had sought a similar order. Mr Gould's application was not able to be heard with Caneflight's, and is yet to be allocated a hearing date.
In the same applications, both Caneflight and Mr Gould sought orders for further and better discovery against Airwaves. I have made separate orders programming these applications through to a hearing.
At the hearing of Caneflight's application for security for costs, I allowed Caneflight to rely on the affidavits filed on behalf of Mr Gould. I did this to ensure that I was able to consider all relevant evidence, in particular as to the financial position of Airwaves, when hearing Caneflight's application. This also minimises the risk of conflicting decisions on Caneflight's and Mr Gould's applications. I also advised counsel for Airwaves and Caneflight that I would hear Mr Gould's application for security for costs.

Issues arising for determination

Caneflight seeks orders for security for costs pursuant Corporations Act 2001 (Cth) (CA) s 1335 and Rules of the Supreme Court 1971 (WA) (RSC) O 25. It is convenient to deal with the application by first considering CA s 1335, and then analysing whether a different conclusion is warranted by RSC O 25. Corporations Act s 1335 relevantly provides:
(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.
The power in CA s 1335 contains a threshold test or jurisdictional requirement and a discretion: Western Areas Exploration Pty Ltd v Streeter [2008] WASCA 218 [2]; BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81 [11]. The threshold requirement is that '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': CA s 1335. Once enlivened, the discretion is unlimited: Darwin Offshore Logistics Base Pty Ltd v Cox [2010] WASC 356 [3]; FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [21].
It is instructive to commence these reasons with an analysis of the merits of Airwaves' claim as this provides the context for the remainder of the issues. There are then seven further issues which need to be analysed:
(a)the current financial position of Airwaves;
(b)the significance of the financial records not produced by Airwaves;
(c)the likely future costs of Caneflight;
(d)whether Caneflight has satisfied the threshold requirement in CA s 1335;
(e)the appropriate exercise of the discretion in CA s 1335;
(f)whether the application of RSC O 25 would produce a different outcome; and
(g)the appropriate final orders.

What are the merits of Airwaves' claim?

The primary claim made by Airwaves is for damages for breach of a bailment agreement by Caneflight, or alternatively negligence, in relation to the damage caused to the Seaplane in the accident. Airwaves also asserts that Caneflight is vicariously liable for the negligence of Mr Gould. The damages are said to be in the amount of $623,541.20, comprising in the main loss of income while the aircraft was being repaired. Full particulars of these damages have not yet been provided.
Airwaves make five further claims against Caneflight:
(a)for breach of the rental agreement arising out of the failure by Caneflight to return the Seaplane to Queensland on 31 August 2009, which meant that Airwaves could not lease the aircraft to another operator, and which gives rise to a claimed loss of $534,600 (comprising income of $24,300 per month for the period from 1 September 2009 to 1 July 2011, when the repairs to the aircraft were completed);
(b)for the failure to pay an invoice of $3,272.50 relating to an agreement by Caneflight to pay the costs of ferrying the Seaplane to and from Gold Coast airport;
(c)for the failure to pay certain invoices totalling $37,965.36 pursuant to the agreement by which the Seaplane was leased to Caneflight;
(d)a claim for damages in the amount of $5,975.84 for breach of the rental agreement arising out of unscheduled maintenance Airwaves says it was required to carry out as a result of the accident; and
(e)a claim for damages in the amount of $12,600 for breach of an agreement by which Airwaves provided Caneflight with spare parts for the Seaplane.
In its defence, Caneflight asserts that the Seaplane was not in good mechanical condition and was not fit for the purpose for which it leased the aircraft (in relation to which it has also counterclaimed). It asserts that the information provided by Airwaves as to the empty weight was inaccurate. It says it could not return the Seaplane to Queensland at the end of August 2009 as it was being repaired. It further says that the unscheduled maintenance was not caused by the accident, but by wear and tear arising from Airwaves not keeping the Seaplane in good mechanical condition. Caneflight also asserts that Airwaves requested modifications to the Seaplane that were not required as a result of the accident and thereby caused delay to the repair of the aircraft. It disputes the circumstances surrounding the provision of the spare parts. Finally, Caneflight contends that it operated the Seaplane appropriately and that Mr Gould was properly qualified trained and experienced in flying the aircraft.
The most significant factual disputes in the action appear to be:
(a)the mechanical condition of the Seaplane at the time of delivery to Caneflight;
(b)the mechanical condition of the Seaplane at the time of the accident; and
(c)the extent to which the repairs carried out to the Seaplane following the accident were as a result of the accident or as a result of ongoing wear and tear and/or modifications to the aircraft.
In relation to the merits of Airwaves' claim, one of its directors, Todd Green, annexes to an affidavit a report to the Australian Air Transport Safety Bureau (ATSB) in relation to the accident. This report contains a statement that the 'aircraft landed on water with the wheels extended' and as 'a result the aircraft flipped'. Mr Green refers to an email from Mr Gould to Caneflight immediately after the accident. This email is annexed to an affidavit of Byron Winburn‑Clarke (a principal of Airwaves' lawyers) filed 9 March 2012. In it, Mr Gould states that:
It is currently my belief that I have failed to retract the gear after take off from Derby and that they were never retracted therefore the lights I thought were blue were in fact green.
Mr Green also annexes a copy of the daily inspection certification for the aircraft. He states that the Civil Aviation Regulations (Cth) (CAR) Sch 5 Pt 1 specifies that a daily inspection is required before the first flight on each day the aircraft is flown. The Civil Aviation Regulations r 233 defines the responsibilities of a pilot before a flight so as to include satisfying himself that the aircraft is airworthy. From this document it appears that the last inspection made was 8 August 2009, that is, the day before the accident. Counsel for Airwaves stated that the significance of this entry is that, the day before the accident, Mr Gould certified that the Seaplane was airworthy.
Mr Green further annexes certain maintenance release forms required to be issued in relation to the aircraft pursuant to the CAR. In essence Airwaves relies on this documentation to support its contention that the aircraft was airworthy immediately prior to the accident.
On the other hand, the evidence relied on by Caneflight includes documents suggesting that there were significant, ongoing, mechanical issues with the aircraft. For example, the materials annexed to affidavit by its solicitor, Mr Tuohy, dated 29 November 2012 indicate that there was an issue as between Airwaves and its insurer as to what work related to pre-existing damage, in particular corrosion, and what work was accident related. Caneflight has identified what it sees as defects in the maintenance records maintained by Airwaves. This is the subject of its parallel application for further and better discovery.
As to the quantum of damages, Mr Green's evidence is that the aircraft was unserviceable for hire or reward from 9 August 2009 to 15 July 2011 whilst it was being repaired. He states that during this period it ought to have earned approximately $558,900. This appears to be gross income and I am not told what the net income would have been. Caneflight asserts that the repair of the pre-existing damage and the modifications sought by Airwaves significantly increased the time taken to repair the aircraft.

What is the current financial position of Airwaves?

Both directors of Airwaves, Mr Green and Donald McWatters, provided affidavits as to the financial position of Airwaves. Their evidence is that, as at 28 January 2012:
(a)Airwave had been trading for over 14 years in the aviation industry;
(b)its major asset is the Seaplane;
(c)the Seaplane is under finance from Esanda Finance Corporation Limited/ Australian & New Zealand Banking Group Ltd (ANZ);
(d)the remaining loan balance is $16,196;
(e)the company does not own any real property;
(f)it has trade debtors of $88,500;
(g)its only other asset is plant and equipment, valued at $50,000, which includes spare parts for the aircraft; and
(h)it has trade creditors of $85,000, including legal fees and aircraft repairs.
They assert that Airwaves is solvent and has sufficient assets to cover the costs of Caneflight if ordered to pay those costs, by reason of the sale of the Seaplane.
To this is added the evidence relied on by Caneflight that:
(a)the paid up capital of Airwaves is $2;
(b)Mr Green and Mr McWatters are its two shareholders;
(c)the interest of ANZ over the Seaplane is registered in the Personal Property Securities Register; and
(d)ANZ and Esanda have registered securities interests on all present and after‑acquired property of Airwaves.
Assuming that trade creditors and debtors balance each other out, and taking into account the difficulty of attaining any value on the forced sale of plant and equipment, it appears to me that the only asset of Airwaves available to satisfy any adverse costs order is the Seaplane.
Both Mr Green and Mr McWatters assert that the market value of the Seaplane is $550,000. It is insured for this amount as 'reasonable market value'. The Seaplane is under finance from ANZ/ESANDA on the basis of a market value of $550,000.
Mr De Souza, a solicitor employed by Mr Gould's lawyers, annexes to an affidavit dated 30 November 2012 what appears to be the result of an internet search of the same type of aircraft as the Seaplane (being a De Havilland DHC‑2 seaplane, otherwise known as a De Havilland Beaver) for sale worldwide. Eleven aircraft are identified. He notes that the Seaplane has in excess of 16,000 flying hours and has undergone substantial repair works, each of which will adversely impact on its value. Mr De Souza identifies the most comparable aircraft as being one with a sale price of $235,000.
Mr Green responds that the aircraft referred to by Mr De Souza is materially different from the Seaplane, in particular as to the nature of the amphibious floats. He identifies the most comparable aircraft as being one advertised for $599,000. He also makes the point that none of the identified aircraft for sale are located in Australia and that it would cost about $50,000 to disassemble an aircraft located in the USA, relocate it to Australia, reconstruct it and get it certified and registered.
Subsequent to the hearing on 29 January 2013, Airwaves' lawyers sent me a letter identifying two further websites that might be of assistance in ascertaining the value of the Seaplane. Caneflight's lawyers sent me correspondence in response, objecting to the court considering further information. They did so on the basis that to do so would in effect reopen the hearing, without giving Caneflight the opportunity to respond. I advised the parties that I did not propose to review the websites identified and have not done so.
The information about the value of the Seaplane is somewhat vague. It was open to both parties to provide a short valuation from a suitably qualified expert, but neither did so. The differences identified by Mr Green between the comparable aircraft asserted by Mr De Souza and the Seaplane persuade me that it is not the most comparable aircraft listed. There is no evidence before me that there is any comparable aircraft currently for sale in Australia. This, together with the cost of relocating an aircraft from overseas, supports the marketability of the Seaplane if put on the market for sale in Australia. My sense from the evidence before me is that the Seaplane is probably worth closer to the $550,000 asserted by Airwaves than the $235,000 asserted by Caneflight.
My last comment assumes that the Seaplane is operational. I say this because it is currently undergoing what I understand to be significant repairs. This involves the replacement of the 'birdcage'. This process involves the total disassembly of the cockpit, the removal of the engine and disconnection of all flight controls, forward fuel tank, fuel wobble pump and engine controls. Mr Green deposes that the birdcage became corroded as a result of poor anticorrosive treatment following the accident. There is no expert evidence to support this statement. He further deposes that a new birdcage has been purchased and is being shipped from the United States. Once it arrives it will take about seven days to install. Mr De Souza attaches a quote for this work, estimating it to cost $38,720. Mr Green did not provide any evidence disputing this amount. There is no evidence before me to the effect that the Seaplane will not be able to be repaired so as to be fully operational following the replacement of the birdcage.
I will therefore make the current determination on the basis that the Seaplane will become fully operational at some stage in the near future. However, the final orders need to provide a mechanism to ensure this assumption proves to be correct.
In relation to income, Mr Green deposes that since the aircraft returned to service on 15 July 2011, it has earned approximately $180,399, or about $10,000 per month. Counsel for Caneflight observed that this appears to be gross income and that there is no evidence as to net income.
Mr De Souza observes that from the aircraft's log book it is apparent that it flew for only 37.3 hours between March 2007 and August 2009. He is advised by Caneflight that the gross return rate for the Seaplane is $405 per flying hour. Multiplying this by the 37.3 hours, the gross return is $15,106.50 for this two year period.
In my view, the earnings from 2007 to 2009 are sufficiently historical so as not to provide any assistance in ascertaining the likely future earnings from the Seaplane.
Caneflight did not adduce any evidence challenging the evidence of Mr Green as to the earnings from the aircraft after 15 July 2011. However, I do agree that Mr Green's reference to earnings appears to be to gross earnings, and I am not told what the net profit is.

What is the significance of the financial information not produced by Airwaves?

On 29 November 2012 Caneflight's lawyers served on Airwaves' lawyers a Notice to Produce the following documents:
(a)profit and loss statements and balance sheets for the financial years ending on 30 June 2009, 30 June 2010, 30 June 2011 and 30 June 2012;
(b)tax returns for the periods in (a);
(c)business activity statements for the period from 1 July 2008 to the present;
(d)management accounts from 1 July 2010 to 30 June 2012 and from July 2012 to present; and
(e)documents evidencing the current assets and the current liabilities of Airwaves for period from 1 July 2012 to present.

Counsel for Caneflight formally called on the Notice to Produce at the commencement of the hearing before me. Airwaves declined to produce any documents in response.
Counsel for Caneflight then invited me to draw an adverse inference against Airwaves because of the failure to provide detailed financial records. Counsel relied on the rule in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. That rule is to the effect that the unexplained failure by a party to give evidence or to call a witness or tender certain documents may, in appropriate circumstances, lead to an inference that the uncalled evidence would not have assisted the party's case: Jones v Dunkel (308), (312), (320 – 321); The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9][2008] WASC 239 [1003] ‑ [1041].
The rule in Jones v Dunkel does not, however, apply to the context of CA s 1335: FFE Minerals [11], [37] ‑ [38]; Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241, 244. The reason for his is explained by Pidgeon and Owen JJ in FFE Minerals[11]:
This rule normally arises when a matter is sought to be proved and in that situation the question is what inferences can be drawn. Here the applicant is not seeking to prove the state of the company's finances. The applicant is required to do no more than place on the record credible testimony and the exercise of the court at this stage is in judging the testimony and its quality rather than seeing if a matter has been proved by inference. The company, at this stage, is not being asked to explain or contradict something for the purposes of avoiding an inference being drawn. If there is credible testimony, then the court has jurisdiction to make the order and a company which called no evidence to show it could meet a costs order would run the risk of having an order made against it.
The application is simply to be determined on the evidence before me.

What are Caneflight's likely future costs?

Mr Tuohey, the solicitor for Caneflight, swore an affidavit dated 29 November 2012 in which he set out the likely future costs of Caneflight. In relation to trial costs, he observes that:
(a)the matter is complex as it will involve technical questions regarding the mechanical condition and weight of the Seaplane, which will require, among other things, the analysis of technical documents;
(b)expert witnesses will be required;
(c)given the history of the proceedings, the trial is likely to be protracted; and
(d)it is likely that there will be further interlocutory disputes prior to the trial.
Mr Tuohey sets out detailed calculations in which he estimates that the cost up to trial will be $124,500, and that the cost of a 10 day trial will be $87,000, totalling $206,500.
There was no affidavit filed on behalf of Airwaves which contested this analysis. In submissions, counsel for Airwaves noted that the trial had initially been listed for five days. His submission was to the effect that the additional trial time arose as a result of the manner in which Caneflight now sought to defend the action, the implications of which should not be visited upon Airwaves in determining whether to order security for costs. Airwaves submits that five days continues to be sufficient for the trial to be completed.
In considering whether Airwaves 'will be unable to pay the costs of the defendant if successful in his, her or its defence' for the purposes of CA s 1335, it is relevant that there are two defendants. Counsel for Airwaves did not disagree when I put to him the proposition that, in assessing whether it is appropriate to order security for costs, I ought to consider the costs of both defendants. Practically speaking, it is difficult to see an outcome in which Airwaves is successful against only one of the defendants.
Caneflight relied on an affidavit by Edward Maitland, the principal of Mr Gould's lawyers. For similar reasons to Mr Tuohey, Mr Maitland estimates that Mr Gould's costs going forward to trial will be in the order of $237,150 based on a 13 day trial with experts.
Whilst it is difficult to accurately predict the costs of ligation, in my view the estimates of Mr Tuohey and Mr Maitland form the upper limits of a reasonable range of estimates costs for the trial. I agree with the view that the trial could take 10 days or more days, though with tight case management and document presentation a shorter trial should be able to be achieved. For present purposes, a figure of $200,000 per defendant is an appropriate one to use.
I am not advised of the costs incurred to date by either party. However, given the stage at which the application is made, it is appropriate that I only consider likely future costs in considering whether to order security for costs.

Has Caneflight satisfied the threshold requirement in CA s 1335?

The threshold requirement in CA s 1335 is that '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'. This requires 'an evaluation of the evidence led by the applicant to see whether that leads to a reason to believe that the corporation will be unable to pay the costs of the defendant': FFE Minerals [24]. 'In ascertaining whether there is credible testimony, the court does no more than judge the quality of the evidence to see if it objectively gives rise to a reason to believe': Western Areas [5]; FFE Minerals [22].
The onus is on the applicant to produce the necessary credible testimony that there is reason to believe the corporation will be unable to pay the costs in issue: Western Areas [15]. The threshold test is, however, a 'fairly modest' test: Western Areas [4]; Meni's Tailoring & Alterations Pty Ltd v Jeanswest Corp Pty Ltd [2003] FCA 1108 [4].
In FFE Minerals Pigeon and Owen JJ declined to define further the expression of the threshold requirement, being content that the words speak for themselves: [24]. In Western Areas, Pullin JA took a different approach, stating that ([3] ‑ [4]):
The threshold requirement is met if credible testimony establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the appellate corporation will be unable to pay the respondents' costs of the appeal if the appeal is unsuccessful.
This will be so even if in other events which can also be fairly described as reasonably possible the appellant would be able to pay the costs.
The threshold test was also discussed by Maxwell P and Buchanan JA of the Victorian Court of Appeal in Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; (2008) 66 ACSR 455. Their Honours stated ([15] ‑ [16]):
The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'if the court is satisfied that' or 'if in the view of the court it is likely that.' The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a 'real risk'.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs.
It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk.
This formulation was adopted by Le Miere J in Vicon Services Pty Ltd v BHP Billiton Worsley Alumina Pty Ltd [2012] WASC 109 [17].
The evidence which I have set out above may be summarised as:
(a)if Caneflight is successful in its defence, it is highly likely that Mr Gould will be as well, meaning that Airwaves would be responsible for two sets of costs;
(b)there is a risk that the taxed costs for each defendant will exceed $200,000, totalling $400,000;
(c)the key asset of Airwaves that would be need to be sold to satisfy any order for costs is the Seaplane;
(d)my sense from the evidence before me is that the Seaplane (once operational) is probably worth closer to the $550,000 asserted by Airwaves than the $235,000 asserted by Caneflight; and
(e)once operational, the aircraft is capable of producing gross income of about $10,000 per month.
In addition to this, Caneflight places some weight on the fact that Airwaves has not paid a costs order made against it on 24 July 2012. However, this order is expressed to be payable 'in the cause' and is subject to taxation. There thus is no current obligation to pay it.
I am satisfied that Caneflight has, by credible testimony, established that there is reason to believe that Airwaves will be unable to pay at least some of the costs of the defendants if successful in their defences. This is because the ability of Airwaves to satisfy any costs order is largely dependent on its ability to sell the Seaplane for something close to the market value stated by its directors. The passage quoted from the decision in Livingspring makes it clear that the application of the threshold test in CA s 1335 is one of risk management. Given the paucity of evidence on the likely sale price of the Seaplane, I am satisfied that there is a risk that this will not exceed $400,000, being the likely future legal costs of Caneflight and Mr Gould. Or to use the formulation adopted by Pullin JA in Western Areas, on the material before me, 'there is a real chance that in events which can fairly be described as reasonably possible' that the sale price of the Seaplane will not exceed $400,000.
The discretion in CA s 1335 is thus enlivened.

How should the court exercise the discretion in CA s 1335?

As I have noted, once enlivened, the discretion in CA s 1335 is unlimited: Darwin Offshore Logistics [3]; FFE Minerals [21]. The circumstances in which the discretion should be exercised cannot be stated exhaustively, and all of the circumstances of the case should be examined: Spence Financial Group Pty Ltd v GE Commercial Corporation (Australia) Pty Ltd [2007] WASC 15 [33]; YICI Pty Ltd v Sun Wah Marine Products (HK) Co Ltd [No 2] [2010] WASC 27 [3].
The issues argued before me as being relevant to Caneflight's application were:
(a)the merits of Airwaves' claim;
(b)the delay by Caneflight in making the application;
(c)whether the financial position of Airwaves warrants an order for security for costs;
(d)whether Airwaves' current financial position was caused by Caneflight;
(e)whether the making of an order for security for costs would stultify Airwaves' ability to continue the action; and
(f)whether an offer by Mr Green to be personally liable for the costs of Airwaves is sufficient to offset any risk the Caneflight may not be paid its costs if it successfully defends the action.

Discretion – merits

In Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405, Cooper J identified the limited relevance of the merits of a claim in the exercise of the discretion to order security for costs (416):
Ordinarily in my view the likelihood or otherwise of success in the proceedings ought not to be investigated on an application for security for costs ... There may be circumstances where the merits are clear or where the claim cannot succeed in point of law or is not brought bona fide. Should that occur, regard will be had to those circumstances. However, those cases in my view are the exception to the ordinary rule.
I have briefly analysed the relative merits of the Airwaves' claim and Caneflight's defence above. In the present case, it is not necessary for me to say anything further about the merits or potential quantum of the claim by Airwaves, and the defences raised by Caneflight, beyond the observation that both appear to be bona fide and raise issues which will need to be determined at trial.
There is nothing that would weigh one way or the other in favour or against the making of an order for security for costs on this ground.

Discretion - delay

An application for security for costs must be made promptly: YICI [6]; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 [70]. Delay in making the application is a significant factor against the exercise of the discretion: Attorney-General of Botswana v Aussie Diamond Products [2009] WASC 299. The 'further a plaintiff has proceeded in an action and the greater the costs it has been allowed to incur without steps being taken to apply for an order for costs, the more difficult it will be to persuade the court that such an order is not, in the circumstances, unfair or oppressive': Bryan E v Fencott v Eretta Pty Ltd(1987) 16 FCR 497, 514; Attorney‑General of Botswana [23]. This is for at least two reasons. The first is that a late application, without explanation, offends modern case management principles: Attorney‑General of Botswana [14] ‑ [21]. The second is that it will generally be unjust to permit a defendant who stood by and allowed the plaintiff to work on their case to ask for security after expenses had been incurred: Idoport [70]; Smail v Burton; Re Insurance Associates Pty Ltd (in liq)(1975) 1 ACLR 74, 75.
On the other hand, evidence of delay does not necessarily render the application fatal on its own: Idoport [70]. Rather, the passage of time is merely one factor to be taken into account during the balancing exercise undertaken by the Court: Idoport [70]; Commonwealth of Australia and Another v Cable Water Skiing (Australia) Ltd(1994) 14 ACSR 760, 762.
The present action was commenced by writ filed 11 May 2010, making it now one of the oldest active matters in the court. It proceeded through the usual interlocutory processes throughout the following 12 or so months. At a listing conference on 3 October 2011, the action was listed for a trial for three days commencing 21 March 2012. By application dated 10 February 2012, the then solicitors for the two defendants applied for leave to cease to act, which leave was granted on 20 February 2012. This ultimately led to the trial dates being vacated, though the issue of inadequate discovery by Airwaves was also raised as a reason for the trial not being able to proceed. Airwaves then filed a substituted statement of claim, to which Caneflight and Mr Gould responded with amended defences. On the current listings of the court, and my understanding of the outstanding issues, the action is likely to proceed to trial in the second half of this year.
Caneflight has not put forward any recent catalyst for its application for security for costs, such as evidence of recent financial distress. I do not consider that the change of solicitors by Caneflight prior to the first listing of the trial adequately explains the delay in making the application.
In my view, the delay in making the application is a factor against an order for security for costs, or at least a factor suggesting that, if security is to be given, it should be given in as least oppressive a form as practicable.

Discretion – the financial position of Airwaves

The fact which enlivened the jurisdiction in CA s 1335 - namely that there is reason to believe that Airwaves will be unable to pay at least some of the costs of the defendants if successful in their defences - is a substantial factor in favour of its exercise: YICI [5]. It does not, however, establish an entitlement, or even a predisposition, in favour of ordering security for costs: Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161 [11].
Caneflight appears to accept that the Seaplane has a market value (assuming it to be operational), suggesting it to be in the order of $235,000. As I have indicated, my sense is that its sale value (if operational) is probably closer to the $550,000 suggested by the directors of Airwaves. Thus, although 'there is a real chance that in events which can fairly be described as reasonably possible' that the sale price of the Seaplane will not exceed $400,000, there is also a real chance that it will.
Further, accepting Caneflight's suggested value of $235,000 as a minimum, the evidence is that Airwaves will still be able to meet some, though not all, of the anticipated costs of the defendants (which I am taking to be $200,000 per defendant). This strongly suggests that an order to provide security for the entirety of Caneflight's costs is not warranted.
It is significant that there is no evidence before me that Airwaves is currently experiencing any financial distress at the moment. There is no evidence that the fact that the Seaplane is currently undergoing repairs is causing Airwaves financial distress. There is no other evidence before me to suggest that Airwaves has not paid any debts that are due and payable, nor that there is any litigation against Airwaves relating to the failure to pay any debts.
In the present case, the financial position of Airwaves indicates that, if an order is to be made, it should only be for a portion of Caneflight's anticipated future legal costs.

Discretion - financial impact of Caneflight's conduct

In exercising the discretion in CA s 1335, it is relevant to consider whether the any conduct of Caneflight caused or substantially contributed to any financial issues experienced by Airwaves: Gentry (415 ‑ 416); Spence [35].
Mr Green deposes that Airwaves has suffered a significant detriment in trading figures as a result of the loss of availability of the aircraft due to the accident. Airwaves claim is for lost earnings in excess of $500,000. He also states that the provision of security for costs would severely restrict the ability of the company to trade.
The question of whether Caneflight's conduct contributed to the financial issues of Airwaves is inexorably linked to the merits of the claim. For example, one of Caneflight's arguments is that the time taken to repair the Seaplane (and thus the time which it was not able to be used to generate income) was substantially increased beyond that needed purely for accident related repairs by the need to repair pre‑existing damage and Airwave's decision to modify the aircraft.
In my view, as with the merits, there is no material before me that would weigh one way or the other in favour or against the making of an order for security for costs on this ground.

Discretion – stultifying Airwaves' ability to continue the action

In exercising the discretion in CA s 1335, the court may consider whether ordering security for costs would stultify the ability of the company to continue with the action: Unified [13]; Spence [39]; Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1, 4.
A court will not be justified in declining to make an order on the basis that the proceedings will be stultified unless the impecunious plaintiff company establishes that those who stand behind it are also unable to provide the requisite security for costs: Unified [13]; Spence [34]; Bell Wholesale (4). It is incumbent upon a plaintiff who wishes to resist an application for security on this basis to put before the court a full and frank statement of the assets and liabilities of the plaintiff, and also of its shareholders: Unified [15]; Spence [39]; Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1, 3. 'Without that evidence, no conclusion can properly be reached that the effect of an order for security will be to frustrate the plaintiff's claim': Unified [15]. In this sense it can be said that there is an onus on a plaintiff company resisting an order for security for costs: Unified [15]; Spence [39].
Mr Green has deposed that any order to provide security for costs will further restrict the ability of Airwaves to trade and will stifle the conduct of the litigation. However, neither he nor Mr Green nor his fellow director and shareholder Mr McWatters have put before the court full and frank disclosure of their financial position. It follows that, with one caveat, this factor must be given very little, if any, weight.

The caveat is that the order should not have the effect of requiring Airwaves to sell the Seaplane, which is its only productive asset. I accept Caneflight's submission that an order for security for costs would not necessarily require Airwaves to sell the Seaplane. Caneflight suggests that security for costs could, for example, be provided by way of irrevocable bank guarantee.

Discretion – shareholder's undertaking

In the event that security is required, Mr Green, in his affidavit sworn 28 January 2013, proffers an undertaking to provide a guarantee for the difference between any amount realised from the sale of the aircraft and any costs orders made. He deposes that both he and Mr McWatters both have assets in excess of $250,000 each, and that he is currently employed as a pilot earning $102,000 per annum. Neither director gives any further details of their assets and liabilities.
Caneflight submitted that any undertaking by the shareholders (who are also the directors) of Airwaves to pay any shortfall would not provide sufficient security as there is insufficient information before the court as to their assets and liabilities.
The relevance of an undertaking by the shareholder or director of a company, was explained by Connelly J (with whom Campbell CJ and Demack J agreed) in Harpur v Ariadne Australia Limited [1984] 2 Qd R 523, 532:
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.
An undertaking by a person standing behind a corporate plaintiff to be liable for its legal costs is a relevant, though not a determinative, factor: 57 Moss Rd Pty Ltd v T & M Buckley Pty Ltd t/as Shailer Constructions[2010] QSC 278 [31] ‑ [33]; Gentry Bros (415). This is so notwithstanding that the worth of the directors may ultimately prove insufficient to satisfy any judgment in whole or in part: Gentry Bros (415). This is because it places the party seeking security in no worse position than it would have been in had it sued those standing behind the company as litigants in person, without the imposition of the corporate entity between them: Gentry Bros (415).
Thus the fact that neither Mr Green nor Mr McWatters have provided details of their financial position does not undermine the weight to be given to this factor.

Discretion - application

'In the exercise of its discretion the court will be concerned to achieve a balance between ensuring the defendant is adequately and fairly protected, and avoiding injustice to an impecunious plaintiff company by unnecessarily shutting it out or prejudicing it in the conduct of the litigation': Spence [38]; Unified [10]; Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301, 304.
On balance, Caneflight has made out a case for some form of security for costs to protect it from the risk that Airwaves will not be able to fully satisfy any award of costs against it.
In considering the nature of the security to be provided, the court is not required to order such security as will provide a complete and effective indemnity for costs: Gentry (415).
In my view, considering all the factors identified above, the appropriate balance is struck by requiring Airwaves to provide security for costs in favour of Caneflight in the amount of $50,000. This may not be provided by way of security over the Seaplane, as this asset needs to be substantially unencumbered so be sold to cover the balance of Caneflight's anticipated costs (in the eventuality that a costs order is made in its favour).
The security ought to be provided only in the event of a shortfall in the proceeds of the sale of the Seaplane and the liquidation of the other assets of Airwaves. The appropriate form of the security is a deed or undertaking to the court by either Mr Green or Mr McWatters. I will proceed on the basis that it will be by Mr Green, given his offer in this regard. Given what Mr Green has said on oath as to his assets, they should be well sufficient to cover an obligation of up to $50,000. The obligation need not be secured.
I gave some thought to crafting an order which sought to limit any contribution by Mr Green to any deficit in the recovery by Caneflight of its future costs (which for present purposes, I have taken to be $200,000), as opposed to recovery of both its past and future costs. However, an order in these terms is likely to be complex and convoluted. In the end, I took into account the fact that any security provided by Mr Green may practically relate to at least some of the costs incurred by Caneflight to date in limiting his exposure to $50,000.
There is minimal injustice in this outcome. If Mr Green is correct in his valuation of the Seaplane, then the proceeds of its sale ought to be well sufficient to satisfy any adverse costs order. If the valuation of the Seaplane is significantly lower than asserted by Mr Green, then there is no injustice in him having to provide security for costs as proposed, as the case for ordering security for costs would become more persuasive.

Would the application of RSC O 25 justify a different outcome?

The Rules of the Supreme Court O 25 relevantly provides:
1. Factors that are not grounds for ordering security for costs
The Court may order security for costs to be given by a plaintiff, but no order shall be made merely on account of the poverty of the plaintiff or the likely inability of the plaintiff to pay any costs which may be awarded against him.
…

3. Court has discretion

The granting of security shall be in the discretion of the Court, and in determining whether an order should be made the Court shall take into consideration —
(a)the prima facie merits of the claim;
(b)what property within the jurisdiction may be available to satisfy any order for costs against the plaintiff;
(c)whether the normal processes of the Court would be available within the jurisdiction for enforcement of any order for costs made against the plaintiff.

The Rules of the Supreme Court O 25 r 4 identifies nine circumstances in which the court 'may' order security for costs. None of these circumstances applies in the present case.
As with CA s 1335, the discretion in RSC O 25 to order security for costs is unfettered and depends upon an examination of all of the relevant circumstances: Mabrouk Minerals Pty Ltd v Mabourak Holdings Pty Ltd [2008] WASC 132 [57]. In my view, the application of the discretion in RSC O 25 would produce the same outcome as under CA s 1335. In particular, no principle or authority was drawn to my attention which would warrant an order for security for costs in a greater amount, or a more oppressive form, than what I have indicated is appropriate under CA s 1335.

What are the appropriate final orders?

My preliminary view is that a suite of orders along the following lines will appropriately give effect to the reasons I have set out above and thereby balance the competing risks of injustice:
1.unless by 15 March 2013 Todd Green executes and serves on the first defendant a deed in favour of the first defendant as set out in par 2, the plaintiff's claim herein be stayed;
2.in relation to the deed:
(a)Mr Green is to pay the balance of the taxed or agreed costs of the first defendant in the action not paid by the plaintiff within six months of the date of the taxing officer signing the certificate of taxation costs (if taxed) or the date of the agreement as to costs (if agreed);
(b)the obligation to pay is to be limited to $50,000; and
(c)the obligation need not be secured.
3.there be liberty to apply to the trial judge in relation to the orders in par 1 and 2;
4.in the event that the plaintiff's claim herein is stayed pursuant to the order in par 1 for a period in excess of three months, the first defendant have liberty to move for judgment against the plaintiff;
5.by 30 June 2013, a director of the plaintiff must file and serve an affidavit deposing as to whether or not the repairs to the De Havilland DHC-2 seaplane registration number VH‑IDO aircraft owned by it (Seaplane) have been completed and whether the Seaplane has been certified as being airworthy (and if so from what date);
6.in the event of either:
(a)non‑compliance with the order in par 5; or
(b)the Seaplane not being certified as being airworthy as at 30 June 2013;
the first defendant have liberty to apply in relation to the issue of security for costs.
I do not have a settled view as to whether a stand-alone deed or undertaking to the court would be the more appropriate form in which to provide the security. Nor do I have a settled view as to whether any deed to be executed by Mr Green to provide the security described is more appropriately described as an indemnity or a guarantee.
There ought to be liberty to apply to the trial judge in case the orders I propose have an unjust or unintended consequence in the context of the ultimate judgment in the action following trial. Further, Mr Green ought to have the ability to seek to be discharged from his obligation in the event of, say, undue delay by Caneflight in exercising its rights. This again can be accommodated in giving liberty to apply to the trial judge.
I will hear from counsel as to the final form of the orders, including the compliance dates, along with costs. Unless the parties wish the court to convene an earlier hearing, this can be done at the directions hearing already listed for 5 March 2013. In the meantime, I direct counsel to confer as to the form of the order and the terms of the deed or undertaking.