Cahalan, Adrienne v Dalman Nominees Pty Ltd
[1997] FCA 641
•21 July 1997
FEDERAL COURT OF AUSTRALIA
COSTS - application by cross-defendant for security for costs - where cross-claimant unable to provide security - where director of cross-claimant prepared to assume personal liability for a costs order - whether appropriate to order that assets of director be charged to secure personal liability.
Federal Court of Australia Act 1976 (Cth), s 56
Corporations Law, s 1335
Equity Access Ltd v Westpac Banking Corporation (1989) ATPR ¶40-972, cited
Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, cited
Cameron’s Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46, cited
Pearson v Naydler [1977] 1 WLR 899, cited
KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 13 ACLC 437, applied
Harpur v Ariadne Australia Ltd [1984] 2 Qd 523, cited
ADRIENNE CAHALAN - v -
DALMAN NOMINEES PTY LIMITED
No NG 27 of 1997
TAMBERLIN J
SYDNEY
21 JULY 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 27 of 1997 ) GENERAL DIVISION
IN ADMIRALTY
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)
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BETWEEN: ADRIENNE CAHALAN
Plaintiff/Cross DefendantAND: DALMAN NOMINEES PTY LIMITED
Defendant/Cross Claimant
JUDGE: TAMBERLIN J PLACE: SYDNEY DATED: 21 JULY 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
Security for costs be provided in an amount and form to be determined by the Court.
The cross-defendant pay the costs of this application.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 27 of 1997 ) GENERAL DIVISION
IN ADMIRALTY
)
)
)
BETWEEN: ADRIENNE CAHALAN
Plaintiff/Cross DefendantAND: DALMAN NOMINEES PTY LIMITED
Defendant/Cross Claimant
JUDGE: TAMBERLIN J PLACE: SYDNEY DATED: 21 JULY 1997
REASONS FOR JUDGMENT
The cross-defendant, Ms Cahalan, seeks an order for security for costs against the cross-claimant, Dalman Nominees Pty Limited (“Dalman”) in respect of costs incurred and likely to be incurred by her in defending the cross-claim.
The amount sought is $30,000 by way of bank guarantee or other security as the Court thinks fit. Ms Cahalan seeks a stay of further proceedings until satisfactory security is provided. It is common ground that Dalman cannot provide security.
Dalman resists the application and says that security is not necessary because a shareholder and director who controls Dalman, Mr Harvey, will undertake to assume personal liability in respect of the costs. Mr Harvey, in an affidavit of 15 May 1997, states that he is prepared to provide a personal undertaking to pay any order for costs made against Dalman in respect of the first cross-claim filed on 7 February 1997. He says that he does not wish to pursue a second cross-claim against Ms Cahalan. He says that he has instructed his solicitors to file a defence and cross-claim alleging that Ms Cahalan engaged in acts of misconduct and that such misconduct constituted a repudiation by her of her contract of service, or alternatively a constructive termination justifiable on the grounds of misconduct. This amendment means, it is said, that the cross-claim will not involve significant costs because the same matters will be canvassed on the cross-claim as would be traversed in the amended defence.
There is no evidence as to the net worth of Mr Harvey nor has he proffered any security in respect of his undertaking. Nor is there any evidence that the proceeding would be frustrated if security were to be ordered. There is no contention that the cross-claim does not raise an arguable cause of action. It should be noted in his affidavit of 15 May 1997 certain assertions are made as to the assets of Mr Harvey but, on objection, based on lateness and unfairness to Ms Cahalan, I rejected that evidence.
Essentially the case for Dalman is that Mr Harvey is prepared to assume personal liability and in so doing expose his personal assets to liability in respect of costs. It is submitted that in the circumstances of this case that exposure is sufficient to persuade the Court that an order for security for costs is not necessary.
Statutory provisions
Section 56 of the Federal Court of Australia Act 1976 (Cth) provides:
“(1) The Court ...may order an applicant ... to give security for the payment of costs that may be awarded against him or her .
....
(5) This section does not affect the operation of ... any other Act ... in relation to the furnishing of security.”
Section 1335(1) of the Corporations Law provides:
“Where a corporation is plaintiff in any action ... the court ... 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 .... require sufficient security to be given for those costs and stay all proceedings until the security is given.”
It is common ground that the discretionary power conferred by the above provisions is wide and unfettered but that it must be exercised judicially. Some of the factors to take into account in a judicial exercise of the discretion were referred to by Hill J in Equity Access Ltd v Westpac Banking Corporation (1989) ATPR ¶40-972 at 50,635 as follows:
“∙ the chances of success of the applicant; whether the applicant’s claim is bona fide or a sham;
∙the quantum of risk that the applicant cannot satisfy a cost order;
∙whether use of the power would shut out a small company from making a genuine claim against a large company, ie is the power being used oppressively;
∙whether the impecuniosity arises out of the act in respect of which relief is sought;
∙whether there are aspects of public interest which weigh in the balance against the making of an order;
∙whether there are any particular discretionary matters peculiar to the circumstances of the case.”
Principles
With respect to the relevant principles a convenient starting point is the Full Federal Court decision in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4, where the Court said:
“In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security 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 to prove the necessary facts.” (Emphasis added)
The Court made it clear that the above considerations were by no means the only relevant ones and that attention was focussed on the above considerations because they were to the forefront of the appellant’s argument. Their Honours went on to emphasise that the discretion is unfettered and that each case must depend on its own circumstances. There is no presumption to be made in favour of awarding security in all cases of a corporate claimant.
Bell Wholesale concerned s 56 of the Federal Court Act which makes provision for security of costs. The same general principles apply with equal force in respect to s 1335 of the Corporations Law pursuant to which the present application is made.
In Cameron’s Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 Burchett J, in outlining the principles underlying the award of security for costs against corporate plaintiffs, said (at 53):
“... I think it is also relevant that the individual responsible for this litigation .. is not sheltering behind a corporate shield in order to protect some assets of his own from liability to meet a costs order. In the Ariadne case the Full Court of the Supreme Court of Queensland made it clear that in such a case the means of the individual concerned are ‘not really relevant’. What is relevant is that the company is not a stalking horse to enable someone else to evade personal responsibility. If he accepts responsibility, an impecunious natural person is entitled to rely on the general rule that poverty is no bar to a litigant: Barton v Minister for Foreign Affairs (1984) 2 FCR 463 at 469. In all the circumstances, and without attributing decisive weight to any one of the factors mentioned in these reasons, I decline to make any order for security upon the basis of the provision in the Code or s 56 of the Federal Court of Australia Act.”
It is a basic principle that a natural person who sues will not be ordered to give security for costs however poor he is. Poverty is no bar to a litigant: Pearson v Naydler [1977] 1 WLR 899.
The decision in Cameron’s Unit Services was considered and applied by Beazley J in KP CableInvestments Pty Ltd v Meltglow Pty Ltd (1995) 13 ACLC 437. Her Honour’s reasons include a comprehensive review of the authorities relevant to the present issue. Her Honour considered that an offer of a guarantee to assume personal responsibility by a director was a relevant and important factor for consideration but, of course, it was not of itself determinative. She thought that merely because an offer was made to assume personal liability it did not necessarily or automatically follow that security should not be provided or that a stay should not be granted. In the particular circumstances her Honour considered it was appropriate for a director to provide a charge over certain personal assets to secure personal liability for costs assured by the director. At 445 after referring to the offer to assume personal liability, her Honour said:
“The question which arises in this case is whether the respondents should be deprived of the provision of security such as cash security or a charge over assets merely because such an offer has been made. In my opinion, there is no reason why they should be so deprived. Mrs Kinsella has rugs and antiques which she values at $30,000. They are not necessary for her daily living needs although, she may use them for such, nor are they used by her for the purposes of her earning a living. There is no reason, therefore, why those assets should not be charged to the extent of the security which I propose to order.”
As pointed out in Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523 the mischief at which the provision requiring security is aimed is the avoidance by a claimant of an adverse order for costs by engaging in litigation through the medium of a body corporate which does not have the resources to meet those costs. The requirement is designed to cause the shareholders, directors or creditors who stand behind the corporation and have an interest in its assets and who also stand to benefit from the litigation, to bring their own assets into play.
The present case
On the evidence in the present case it is apparent that while Mr Harvey is prepared to assume personal responsibility, he has given no evidence that he is impecunious. Nor is there evidence that he is prepared to grant any security over any assets which he may have in respect of the costs likely to be incurred by Ms Cahalan.
As the above authorities make clear it is not necessarily sufficient of itself for a shareholder, director or creditor to come forward from the protection of the corporate entity and assume personal responsibility. However, it is an important consideration to take into account. Each case must depend on its own circumstances. For example, where the cross-claimant is resisting an order for security for costs and can demonstrate that:
(a)the litigation would be frustrated if an order for security were made;
(b)that the shareholders and directors are impecunious;
(c)there are no other persons such as creditors who stand to benefit by the litigation who are not impecunious; and
(d)the cross claimant has a reasonably arguable case,
then the reasons for refusal of an order for security for costs may be compelling. That is not to say that it is essential to establish the above matters and that no others are relevant. That is simply an example. The discretion is broad and open ended.
By contrast, in the present case, the evidence does not show that the litigation would be frustrated. It does not show whether there are any persons who stand to benefit from the litigation other than Mr Harvey.
In these circumstances I think it is appropriate to accept the personal undertaking of Mr Harvey and to make an order for security for costs in the nature of a charge over his assets to secure an appropriate amount of costs. However, I am not satisfied, in the present case, that the amount claimed has been sufficiently particularised or substantiated. The claim for an amount of $30,000 is made in the broadest terms without any detail. It is no more than a bare assertion.
The amount of $30,000 appears to relate to both the first and second cross-claims. Mr Harvey has now indicated that he does not propose to pursue the second cross-claim. This may significantly bear on the quantum of costs to be nominated as security. In addition, Dalman says that it proposes to amend its defence by including, as part of its defence, the substance of what has been alleged in its first cross-claim, with the consequence that the amendment will raise matters which will also be raised by the defence. There will therefore be little in the way of new material canvassed by the cross-claim. This amendment has not yet been made.
The matter should be stayed until security is provided. However, I am not satisfied as to the appropriate quantum. I will hear the parties further on the question of quantum. Dalman has been successful on the principal matter argued and therefore should be awarded the costs on this application.
I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin
Associate:
Dated: 21 July 1997
Counsel for the Applicant: Mr G J Nell Solicitor for the Applicant: Callen Paton Lawyers Counsel for the Respondent: Mr R Alkadamani Solicitor for the Respondent: Ebsworth & Ebsworth Date of Hearing: 15 May 1997 Date of Judgment: 21 July 1997
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