Bernies Fresh Drive-Thru Restaurants v Prentice
[2002] FMCA 152
•12 March 2002
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| BERNIES FRESH DRIVE-THRU RESTAURANTS v PRENTICE | [2002] FMCA 152 |
| BANKRUPTCY – Security for costs. PRACTICE AND PROCEDURE – Whether the court is justified in declining to order security for costs on the ground that to do so will frustrate the litigation. Federal Magistrates Court Act 1999 s.80(2) Australian Building Industries Pty Ltd (in Liquidation) v Stramit Corp Ltd (200) FCA 455 |
| Applicant: | BERNIES FRESH DRIVE-THRU RESTAURANTS |
| Respondent: | MAXWELL WILLIAM PRENTICE |
| File No: | BZ 424 of 2001 |
| Delivered on: | 12 March 2002 |
| Delivered at: | Brisbane |
| Hearing Date: | 5 March 2002 |
| Judgment of: | Rimmer FM |
REPRESENTATION
| Solicitors for the Applicant: | Morgan Conley, Solicitors of Brisbane |
| Solicitors for the Respondent: | Sally Nash & Co, Solicitors of Surry Hills |
ORDERS
That pursuant to section 80 of the Federal Magistrates Act 1999 and Part 21.01 of the Federal Magistrates Court Rules 2001, the Applicant is to give security for the Respondents’ costs in the proceedings fixed in the sum of $8,000.00 within 28 days of today’s date.
That all other applications sought in the Notice of Motion filed
8 October 2001 be dismissed.That there be no order for costs arising from the Notice of Motion filed 8 October 2001.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BZ 424 of 2001
| BERNIES FRESH DRIVE-THRU RESTAURANTS |
Applicant
And
| MAXWELL WILLIAM PRENTICE |
Respondent
REASONS FOR JUDGMENT
This is an application which is brought by way of notice of motion by the respondent, who is the trustee in bankruptcy, Maxwell William Prentice. He is the respondent to the substantive application between Bernies Fresh Drive-Thru Restaurants Proprietary Limited (In Liquidation) as the applicant and the trustee in bankruptcy as the respondent. The trustee in bankruptcy is the trustee of the estate of the bankrupt, Anthony Leonard Kinch. Before me for determination at this point in time is part of an interlocutory application brought, as I said, by way of notice of motion by the respondent that the applicant provide to the respondent security for costs in relation to those substantive proceedings.
The substantive proceedings are now allocated for final hearing for four days commencing 30 July 2002. It is common ground between the parties that the issue for determination at that hearing has been identified as the Court determining the date at which the company Bernies Fresh Drive-Thru Restaurant Proprietary Limited became insolvent. This application arose as a review of the trustee's decision in respect of a proof of debt which was lodged by the liquidator of the applicant company in the bankrupt estate of Anthony Kinch, Anthony Kinch having been a director of that company. The proof of debt was rejected by the trustee in bankruptcy.
As I identified on 15 November 2001, when determining the other part of the interlocutory application, the issue of change of venue and adjourning this matter to allow the extensive exchange of discoverable documents between the parties, this is not a case where the parties before the Court are the bankrupt himself and some third party seeking to establish their rights and claims for payment of that claim in the bankrupt estate. It is a matter where a liquidator of a company of whom the bankrupt was a director with all the responsibilities of law of a director is now seeking to establish those rights on behalf of a great number of unidentified creditors of that company against the director's bankrupt estate via this trustee of the bankrupt estate, Maxwell William Prentice.
It is an undisputed fact that given the company is in liquidation and as such the liquidator will have great difficulty in meeting legal costs unless those are met by affected creditors of the company or in the first instance the liquidator personally. The applicant trustee in bankruptcy submits that on the proper available evidence obtained from his current investigations of the bankrupt's estate, there is a real issue as to the quantum of that estate from which to meet the ultimate claims of creditors, let alone provide for legal costs of this action in establishing the applicant's claim in the estate. That therefore forms the basis of their claim to be indemnified by way of security for costs.
This application is made pursuant to section 80(2) of the Federal Magistrates Court Act 1999, Part 21.01 of the Federal Magistrates Court Rules2001 and section 1335 of the Corporations Act 2001. The application is opposed by the applicant. It is submitted by the trustee in bankruptcy that an order for security of costs should be made as the applicant company is in liquidation and there are no funds or assets held by the liquidator as deposed to in the affidavit of Mark Pearce, accountant for the liquidator, filed on 31 October 2001. It is therefore their submission that if the applicant is unsuccessful in its application the company in liquidation will be unable to pay any ultimate order or judgment for costs made against it.
Clearly it is submitted that it is no bar for granting an order for security for costs against a company that the company is in liquidation, and a number of authorities are relied upon by the trustee for that proposition, including Australian Building Industries Proprietary Limited (In Liquidation) v Stramit Corp Limited (2000) FCA 455, Hessian v Century 21 South Pacific Limited (In Liquidation) (1992) 28 NSWLR 120 at 123 and Bell Wholesale Company Limited v State Export Corporation (1984) 2 FCR 1. It is further submitted by the trustee to avoid an order for security of costs the onus is on the company to show that it cannot satisfy an order for security for costs, not only from its own resources but from other resources including those who may benefit from the litigation and the decision of Bell Wholesale supra is relied upon for that proposition together with ABI v Strammit and Hessian supra.
It is further submitted that one other resource which may be available to the liquidator in this matter includes litigation funding and that there is no evidence before the Court that such litigation funding has been applied for or sought by the liquidator. It is submitted that it is an essential part of the applicant's case as a company seeking to resist an order for security for costs on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and prove the necessary facts, and again the decision of Bell Wholesale supra is relied upon for that proposition.
It is submitted that the evidence adduced by the applicant does not discharge this onus in that it is not shown on the evidence that the liquidator has made any request of the creditors or shareholders in respect of funding of the action and the financial resources available to those creditors or shareholders, and that there is no evidence that those creditors or shareholders are clearly without a means to fund the action, and that there is no evidence that other resources such as litigation funding are not available to the liquidator. Further submission were made that the Court has a clear and unfettered discretion whether to order security for costs and that in exercising this discretion I should take into account that it is not necessarily the case that an order for security of costs would be an end to this action.
It is submitted further that there is simply no evidence before the Court as to whether creditors who stand to benefit have been asked to fund the action that the trustee is simply, in this instance, undertaking the proper exercise of his duties and obligations in bankruptcy and that discovery has disclosed that the financial records of the company are in such a state as to make it impossible for the trustee to properly ascertain the proper extent of the company's financial affairs, given that no financial statements have been prepared by any external accountant during the period of operation of the company and therefore the trustee is in a position whereby they cannot properly ascertain the proper extent of the claim made by the applicants.
In response, the applicant opposes the order being made for security of costs and indicates in submissions that there are many and important and relevant factors why the order should not be made. It was submitted that Mr Pearce in his affidavit of 31 October deposes that if security is ordered the primary application is unlikely to be pursued because at present there is no money in the liquidation and none of those persons who stand to benefit are likely to provide funding. However, there is no evidence by Mr Pearce as to what approaches have been made to those who stand to benefit behind the litigation as to their means and assets and if they can provide funding. It is also submitted that it is significant because the order, if made, would have the effect of bringing to an end important public interest litigation to the claims against the bankrupt concerning his involvement in insolvent trading.
It was submitted by the applicant that it is not a case where it is suggested that the proceedings brought by the applicant are other than bona fide and appear at least prima facie to have real prospects of success, having regard to the material including the respondent's willingness to concede some part of the claim alleged and the nature of the claim, the dispute is likely to concern only the date of insolvency and therefore the quantum of the debt. It is further submitted that to order security for costs would unfairly benefit the bankrupt by allowing him to avoid a claim made directly against him by the company when he was a director at the time it went into liquidation.
It is further submitted that equally the action is more than just a claim by a company in liquidation. Its pursuit is for the benefit of the shareholders and creditors who allege to have suffered loss as a direct result of the bankrupt's conduct. In addition, it is submitted that since inspection of documents it's clear that the real question for the Court's determination will be when this company became insolvent and the exercise will be to determine that fact and then fix the quantum of the claim of the company in liquidation in the bankrupt's estate. It was submitted that this clearly indicates that the application will be successful, but the determination of the Court then going to how much the claim will be rather than whether or not there will be a successful claim.
It is common ground in this matter that a judgment for costs in favour of the respondent could not be satisfied out of the assets of the applicant company in liquidation. Due to the nature of this matter, that is, whether it is reasonable for the trustee to reject the claim of the applicant in the bankrupt estate, is a difficult issue for me to determine at this interlocutory stage. There are, it is clear, a number of real disputes about the state of the financial records of the company in liquidation and the impact that this has upon the trustee in fulfilling his duties, which are clearly imposed upon him in the administration of the bankrupt estate to be properly satisfied as to the quantum of the claim by the applicant.
In my view, to speculate about the outcome of the proceedings in this Court would not be appropriate for me at this particular time in the proceedings, and I am of the view that it is not possible at this stage to say what the outcome is likely to be. Therefore, whilst I accept that the issue may not be that there is and will be a claim that the applicant will have in the bankrupt estate, it is a real issue as to the quantum of that claim and the reasons behind which the trustee has been able or not able to ascertain the quantum of that claim and issues as to where in fact at the end of the day the Court might hold responsibility for that fact, that is, whether it is the responsibility of the liquidator in terms of providing appropriate documentation or that the trustee has been unreasonable in the request for the information that they have made.
As I have said, I am not in a position at this stage of these proceedings to determine the outcome of that. My discretion is, of course, unfettered, and whilst there are a number of relevant considerations raised in the submissions of the applicant, I am persuaded that the most critical issue in my determination that there should be an order made that the applicant provide security for costs is that which is referred to in the decision of Bell Wholesale v State Export supra, and that is that a Court is not justified in declining an order to order security for costs on the ground that to do so will frustrate the litigation unless the company and the position of the company here establishes by the evidence that those who stand behind it and those who will benefit from the litigation, if it is successful, that is, the creditors in this case, are also without means.
I am of the view, as was held in that same decision by the Full Court of the Federal Court of Australia, that it is not for the trustee in bankruptcy to raise the matter, albeit that it is essential argument in submissions to this Court. It is essential on the part of the liquidator in this matter in seeking to resist an order for security on the ground that security will frustrate the litigation, not only to raise the issue of impecuniosity of those whom the litigation will benefit, but, as held in Bell Wholesale, to prove and establish that by the necessary facts.
I am not satisfied that that has been done by the company in liquidation, the applicant in this particular matter, therefore, I propose to make an order for security for costs as sought by the respondent. Given the length of this trial, which has now been allocated for four days, and the steps that will need to be undertaken to establish the quantum of claim, I am satisfied that the amount sought by the trustee in the sum of $8000 as security is a reasonable amount to so seek and for the Court to so order.
The second issue was raised in respect of costs of the interlocutory applications, both this application and the application before me on
15 November, for the two issues including the transfer of proceedings from Brisbane to Sydney and this issue, security for costs. In my view each party has been either successful or unsuccessful on one of those issues and in those circumstances I do not propose to order that either party pay the other's costs of either of those applications. Each of them stand in the position of having been successful in one or other of the two interlocutory applications raised in the notice of motion.
I therefore propose to order, firstly, that pursuant to section 80 of the Federal Magistrates Court Act 1999, and Part 21.01 of the Federal Magistrate Court Rules 2001, the applicant is to give security for the respondent's costs in the proceedings fixed in the sum of $8000.
I will fix that within 28 days. I will order that all other applications sought in the notice of motion filed on 8 October 2001 be dismissed and so that it is clear I will order that there be no order for costs arising from the notice of motion.
I will also order that my reasons for judgment be taken out.
I certify that the preceding twenty-one (21) paragraphs are a true copy of the reasons for judgment of Rimmer FM
Associate: Susan Weise
Date: 25 July 2002
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