Brookfield, I.W. v Davey Products P/L

[1994] FCA 191

IAN WALTER BROOKFIELD and SEPTIC PRODUCTS AUSTRALIA PTY LTD (IN LIQUIDATION)
v. DAVEY PRODUCTS PTY LTD, ITT FLYGT LTD and WHITE INTERNATIONAL PTY LTD
No. SG 112 of 1993
FED No.191/94
Number of pages - 5
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
HEEREY J

CATCHWORDS

Practice and Procedure - security for costs - security sought against applicant company in liquidation - bona fide claim by applicant - claim of defective products - if claim made out defective products precipitated liquidation of company - indemnity received by liquidator from undisclosed third party - cause of action of company assigned to another applicant - other applicant a natural person - likelihood that the applicants' causes of action will succeed or fall together - undertaking given by natural person applicant to not oppose a costs order against himself in the same terms as any made against the company - irrelevance of respondents' possible protection by insurance and respondents' "international connections".

Federal Court Act 1976 (Cth) s.56

Corporations Law s.1335

Trade Practices Act 1974 (Cth) s.52

Federal Court Rules O.28 r.3(1)(b)

Fletcher v Federal Commissioner of Taxation (1992) 97 ATC 4437

Hession v Century 21 South Pacific Limited (in liquidation) (1992) 28 NSWLR 120

Re Pavelic Investments Pty Limited (1983) 8 ACLR 417

Pearson v Naydler [1977! 1 WLR 899

Remm Construction (SA) Pty Limited v Allco Newsteel Pty Limited (1992) 57 SASR 180

Tradestock Pty Ltd v TNT (Management) Pty Ltd (1978) 17 ALR 257

Ian Walter Brookfield and Anor v Davey Products Pty Ltd and Anor No.SG 112 of 1993

HEARING

ADELAIDE, 7 April 1994
#DATE 7:4:1994

Counsel for the applicants: R Cameron

Solicitor for the applicants: Morcombe Townsend

Counsel for the first and
second respondent: T L Stanley

Solicitor for the first and
second respondent: Piper Alderman

Counsel for the third respondent: M G Evans

Solicitor for the third respondent: Fisher Jeffries

ORDER

The Court Orders that
1. The application for security for costs is dismissed.

1. Respondents pay the applicants' costs of the application for
   

security for costs.

1. The time for the applicants' filing of the list of documents be
   

extended to 6 April 1994.

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

JUDGE1

HEEREY J The three respondents apply for an order for security for costs against the second applicant ("the company") which is a company in liquidation.

1. The proceedings, which are of a substantial nature and which it is estimated are likely to result in a trial of 40 days, arise from the supply of water pumps by the respondents to the company. The company was carrying on a joint venture with the first applicant, Mr Brookfield, for the manufacture of waste water systems.

2. The three respondents are competing manufacturers or suppliers of water pumps and successively each of them supplied pumps to the company. The claim is that the pumps were not of merchantable quality, were not fit for the purpose and that there were misrepresentations and also misleading and deceptive conduct on the part of the respondents contrary to s.52 of the Trade Practices Act 1974 (Cth).

3. The respondents rest their claim for security on three bases. The first of these is O. 28, r.3(1)(b) of the Federal Court Rules which provides:
   

"3(1) where in any proceeding it appears to the court on

the application of a respondent

(b) that an applicant is suing, not for his own benefit but for the benefit of some other person and there is reason to believe that the applicant would be unable to pay the costs of the respondent if ordered so to do, the court may order that applicant to give such security as the court thinks fit for the costs of the respondent of and incidental to the

proceedings."

Secondly, the respondents rely on s.56 of the Federal Court Act 1976 (Cth) which confers on the Court a discretion to

"order an applicant in a proceeding in the court to give security for the payment of costs that may be ordered against him."

Thirdly, the respondents rely on s.1335 of the Corporations Law which provides:

"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 all the security is given."

1. Security is only sought against the company. Counsel appeared both for the company and Mr Brookfield. He conceded that the jurisdictional facts enlivening the exercise of the jurisdiction under the three provisions had been established. The question therefore is whether, in the exercise of my discretion, I should make the order sought.

2. There has been a great deal of reported authority on applications for security for costs and it is not necessary for me to refer at any great length to those authorities or to rehearse statements of principles well established. I will simply advert to the issues which seem to me important in resolving how the discretion should be exercised in the present case.

3. First, it is clear, and the contrary was not suggested, that the applicants' claim is bona fide and not a sham. It seems a typical type of commercial litigation where there is complaint about the quality of products, allegations that the products did not perform as promised with consequent loss and counter-assertions by the supplier that promises were not made or that the consumer was warned of the unsuitability of the products or that the consumer used them in the wrong way or for the wrong purpose.

4. There has been some substantial affidavit material already filed as to the competing merits of claim and defence. I am quite unable to make any sensible prediction as to the likely outcome of the proceedings on the basis of such material, incomplete and untested as it is. Nevertheless, I think I can conclude that if the various products supplied by the respondents were defective in the way alleged, then this was the precipitating cause of the collapse of the company.

5. There was some argument on this point and admittedly one has to draw out the picture from the pleadings and affidavit material in a somewhat indirect fashion. Nevertheless it does appear that the case mounted by the applicants is that the company was successful until fairly recently; its sales turnover increased from $168,584 in the 1988-89 year to $804,360 in the 1990-91 year. I infer from the material that the water treatment systems for which the respondents' pumps were used by the company was the substantial part of the company's business. I also think that a reasonable construction of the case put forward by the applicants is that it is a claim that the defects in the pumps led to the collapse of the company. I note in this regard, without repeating them, paragraphs 140 to 149 of the affidavit of Mr Brookfield sworn 10 February 1994.

6. That material supports the allegation in para 81(e) of the statement of claim to the effect that the company
   

"was forced into liquidation by creditors when it too suffered losses due to the faulty pumps."

That being the case, it is a factor pointing towards the refusal of an application of an order for security: Tradestock Pty Ltd v TNT (Management) Pty Ltd (1978) 17 ALR 257 at 275.

1. There is another important factor, namely this: the company is clearly insolvent. Its assets and liabilities as at 5 April 1993 indicate an estimated deficiency, subject to costs of liquidation, of $196,358.29. The material before me discloses that the company has assigned the cause of action the subject of these proceedings to Mr Brookfield and that the liquidator has received an indemnity in relation to the action from another party whose identity has not been disclosed.

2. In the absence of anything further, the case would be a clear example of the obviously unjust situation with which O.28 r.3(1)(b) is designed to deal, that is to say a person is getting the benefit of a proceeding should it succeed, but is protected from the risk of an order for costs should it fail.

3. However, in the present case there is the important distinction that Mr Brookfield is also a party. The general rule of course is that a natural person will not be required to provide security for costs on the basis that he is impecunious. As was said by Vice-Chancellor Megarry in Pearson v Naydler [1977! 1 WLR 899 at 902:
   

"The basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is ancient and well-established. The power to require security for costs ought not be used so as to bar even the poorest

man from the courts."

That passage was cited with approval by Hill J in Fletcher v Federal Commissioner of Taxation (1992) 97 ATC 4437 at 4439.

1. As far as I can see from my initial encounter with this complicated litigation, the most likely result is that the two applicants, Mr Brookfield and the company, will succeed or fall together. It seems improbable that the company could fail and Mr Brookfield succeed. If that happened of course Mr Brookfield would get his costs and would not be liable for the costs ordered against the company. However, that situation, unlikely though it be, is met by an undertaking which has been proffered to the Court by counsel on behalf of Mr Brookfield that in the event of an order for costs being made against the company at the conclusion of the trial, he would not oppose the making of a like order against himself.

2. Counsel for the first and second respondents says that that is a hollow undertaking because Mr Brookfield himself is impecunious. But one should look at the question from the starting point of the principle to which I have referred, namely, that an impecunious individual will not ordinarily be required to provide security for costs even though failure of the claim will inevitably result in the successful respondent being out of pocket. The practical result now is that Mr Brookfield, who is to benefit from the proceeding if it succeeds, will equally be liable for the loss if it fails, and the injustice at which O.28 r.3(1)(b) is directed is, practically speaking, overcome.

3. Counsel for the third respondent adverted to the existence of the mysterious indemnity provider and argued that this person also must be getting some benefit from the proceeding, but I do not think at the moment the material on that point extends beyond the realm of speculation.

4. There were some other matters which I do not regard as relevant. It was said on behalf of the company that the respondents were or might be protected to some extent by insurance. With respect to what was said in Remm Construction (SA) Pty Limited v Allco Newsteel Pty Limited (1992) 57 SASR 180, I do not regard that as a relevant factor, and I do not take that into account in support of the company's case. Nor do I think it matters, as counsel for the company suggested, that the respondents or some of them have "international connections." I do not think the Court is required to be so xenophobic as to take into account against a respondent the fact that it has some international connections.

5. Nor do I take into account as weighing against an order for security the fact that the company is in liquidation. Reference was made to the judgment of Blackburn CJ in Re Pavelic Investments Pty Limited (1983) 8 ACLR 417, where his Honour said at 417 that:
   

"This court should apply what appears to be a rule of practice so inveterate as to be almost a rule of law, namely that the

liquidator of the company appointed by the court is not required to give security for costs save in very exceptional

circumstances."

1. As is made clear by the decision of the New South Wales Court of Appeal in Hession v Century 21 South Pacific Limited (in liquidation) (1992) 28 NSWLR 120 at 123, that observation refers to the case where the liquidator personally is the plaintiff as, for example, in a misfeasance summons, and not to the case where the company, albeit by its agent the liquidator, is the plaintiff.

2. So for those reasons, the application for the security for costs is dismissed. I will therefore order that the respondents pay the applicants' costs of the application for security for costs.

3. I will extend the time for the applicants' filing of the list of documents to 6 April 1994.