Cairns Festival Faire P/L v AEFC Ltd

[1994] FCA 51

JUDGMENT Ro. ........ S I ,,,,,, ,,,, 1 .,, ,,,,,, ,, 9 Y

C A T C H W O R D S

SECURITY FOR COSTS - insolvent companies suing receivers appointed by lender for breach of duty to companies during receivership - relevance of indemnity for costs given by lender to receivers in return for their acting as such.

Acrmine Ptv. Ltd. v MatDrO Plastics Ptv. Ltd. (in licruidationl
& Ors. (Drummond J, unreported, 30 June, 1993)
Prime Forme Cuttina Ptv. Ltd. & Ors. v Baltica General
Insurance Company (1989) 8 A.C.L.C. 29

Remm Construction IsAI Ptv. Ltd. v Allco Newsteel Ptv. Ltd.

(1992) 57 S.A.S.R. 180

The Frankston Ambassador Ptv. Ltd. v Ciana Insurance Australia

Limited (1991) 9 A.C.L.C. 790

Cairns Festival Faire Ptv. Limited (Receivers and Managers

Appointed) v Land Marque Holdinas Ptv. Ltd.

QG 3183 of 1993

Drummond J
Brisbane

7 Februarv. 1994

REGISTRY

AUSTRALIA PRINCIPAL

S/ 9't-

JUDGMENT No. ....m........ .....I ..,, ,., ...,.

IN THE FEDERAL COURT OF AUSTRALIA )	NO. QG 3183 of 1993
9UEENSLAND DISTRICT REGISTRY GENERAL DIVISION

BETWEEN: CAIRNS FESTIVm FAIRE PTY. LIMITED

[RECEIVERS AND MANAGERS APPOINTED)

First Applicant

AND :  LAND MAROUE HOLDINGS PTY. LTD.
(A.C.N. 010 857 726)

Second Applicant

AND:  AEFC LIMITED (A.C.N. 000 835 243)
(formerly Australian European Finance
Corporation Limited)

First Respondent

AND :  RONALD DAVID BEHAN

Second Respondent

ERNEST GEORGE HARRIS

Third Respondent

RECEIVED AND: SAXTEL PTY. LIMITED

I EDEFUL COURT OF

AuSTMLIA PRINCIPAL REOISTRY

(D

MINUTES OF ORDERS

JUDGE MAKING ORDER:	Drummond J
DATE OF ORDER:	7 February, 1994
WERE MADE:	Brisbane
THE COURT ORDERS THAT:

1.        The applicants provide by Monday, 28 February, 1994 security for the second and third respondents' costs up to but excluding the first day of trial in an amount of $17,500.00 in a form acceptable to the District Registrar.

9 May 1994 l .

Please find catchwords for Judgment 51-94.	Is was delivered	i
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late. Please attach - to judgment.

!

Thank you.

Sonia Cornale

BRISBANE ~ 4 0 0 0 L -

P.0 BOX 84, BRISBANE ROMA ST 4003

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In the event that security is not provided as ordered, the action against the second and third respondents shall be stayed until further order of the Court.

The second and third respondents shall have liberty to apply to dismiss the action if the security as ordered is not provided.

The applicants pay the second and third respondents' costs of and incidental to the application of 30 November, 1993 for further security.

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

IN THE FEDERAL COURT OF AUSTRALIA )	NO. QG 3183 of 1993
QUEENSLAND DISTRICT REGISTRY	)
GENERAL DIVISION	1

BETWEEN: CAIRNS FESTIVAL FAIRE PTY. LIMITED (RECEIVERS AND MANAGERS APPOINTED) (A.C.N. 010 809 177)

First Applicant

AND :  LAND MAROUE HOLDINGS PTY. LTD.
(A.C.N. 010 857 726)

Second Applicant

AND:  AEFC LIMITED (A.C.N. 000 835 243)
(formerly Australian European Finance
Corporation Limited)

First Respondent

AND:  RONALD DAVID BEHAN

Second Respondent

AND :  ERNEST GEORGE HARRIS

Third Respondent

AND :  SAXTEL PTY. LIMITED

Fourth Respondent

Coram:	Drummond J
Date
--	7 February, 1994

Place: Brisbane EX TEMPORE REASONS FOR JUDGMENT

This is an application by the second and third respondents for an order that the applicants provide further security for their costs of the proceedings.

On 27 July last, the applicants undertook to provide $25,000.00 on certain terms by way of security for the costs

of the first, second and third respondents. Today I ordered

the release of that sum to the first respondent in respect of

the costs it incurred in the five day hearing involving also

the second and third respondents before Heerey J in August

last in which certain issues in the action were disposed of

adversely to the applicants. I released that sum to the first

respondent rather than to the three respondents because the

second and third respondents agreed to that course. The

second and third respondents were appointed by the first

respondent as the receivers of the first respondent's shopping

centre. The first respondent is the first applicant's

mortgagee. The evidence shows that in accordance with what I

take to be the ordinary commercial practice, the second and

third respondents have an indemnity from the first respondent	a ,
I .
that extends to their costs of this action; hence their	:
willingness to stand aside from the $25,000.00 in favour of the first respondent.

The applicants are suing the second and third respondents for breach of duty said to be owed to the first	j
! .
i ,
<
applicant as its agents in respect of an agreement the second	,
l -
and third respondents caused the first applicant to enter into
to release a tenant of the centre, who was a lessee to the	I
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first applicant, from certain obligations in respect to rent.	L -
1 ._

I am satisfied that neither applicant will be able to meet any order for costs if the second and third respondents are successful in their defence and obtain an order in their favour. The first applicant's only asset is the centre. The evidence be£ ore me indicates that af ter taking into account payments received, including that from the second and third respondents as rece'ivers, the debt owing to the first respondent in respect of both principal and interest, as at the end of November last, was over $14.3 million. The evidence is that the centre was valued at $12.9 million as at mid-July 1993. It is true that certain leases have been entered into since that valuation was made, but there is no evidence that would justify me finding that the valuation of the centre is any different from that ascribed to it by the valuer who carried out this July 1993 valuation.

Moreover, on the basis of his intimate knowledge of
the affairs of the first applicant obtained in the course of

the receivership and from the report as to the first

applicant's affairs filed in connection with the receivership

by a director of the first applicant, the third respondent

swears that the first applicant is insolvent, an assertion

that is not disputed.

So far as the second applicant's financial position
is concerned, it has a paid up capital of $100.00 and it
ceased trading in May 1991. Counsel for the applicants said

that the second applicant may well abandon its own claim
against the second and third respondents.

I was told that the evidence also shows that the Merediths, who stand to benefit if either applicant's action is successful, are themselves in financial difficulties, and so for that reason, do not offer to assist the applicants with provision of any security of the kind now sought.

The first applicant submitted that its impecuniosity was due to the very conduct of the second and third respondents complained of. There is no evidence to suggest this might possibly be the case.

The only point that favours a refusal of the second and third respondents' application is the existence of the indemnity that covers their costs which they required from the first respondent in return for agreeing to that respondent's request that they undertake the job of receivers of the first

really inure to the first respondent, not to the second and	applicant. The benefit of any order for further security will
third respondents. The first respondent was prepared to accept, among other things, the burden of meeting any costs the second and third respondents might incur in defending their conduct of the receivership, as part of the price it had to pay to procure the agreement of the second and third respondents to act for its benefit. The significance to the second and third respondent of this indemnity was illustrated by their willingness not to seek access to any part of the
$25,000.00 already provided as security for the first, second,
and third respondents' costs.
Remm Construction (SA) Ptv. Ltd. v Allco Newsteel Ptv. Ltd. (1992) 57 S.A.S.R. 180 was a case in which the Full Court of South Australia considered the significance of the fact that a defendant, who was seeking security from an impecunious corporate plaintiff, had insurance cover that included an indemnity in respect of its costs of the action brought against it by the plaintiff. In the course of his judgment, the Chief Justice, with whom Prior J agreed, said, at 186:

"I can see no reason to treat an action against a defendant who is insured against liability differently from one in which the defendant has no such insurance. In weighing the factors affecting the provision of security for costs, the ability of a defendant to absorb the costs, if he is unable to recover them from the plaintiff, is a relevant consideration. Any insurance cover would be relevant in assessing that factor. That, to my

mind, is the only relevance which the existence of	insurance cover can have, whether such insurance has
been taken out of the defendants' own volition or, as contended here, in compliance with a term of the contract with the plaintiff."

His Honour thus considered that the existence of a
costs indemnity is a relevant matter in deciding how to deal

with an application like the present although its relevance is

limited in the way indicated. The approach taken in the % m m

case is, I think, inconsistent with a view expressed in Prime

1. Forme Cuttina Ptv. Ltd. & Ors. v Baltica General Insurance

!

Companv (1989) 8 A.C.L.C. 29 at 32, where Brooking J said of the section empowering the Court to order security:

"I believe that the remedy given by the section is designed simply to protect defendants sued by insolvent companies against the rlsk that an order for costs in their favour will be fruitless."

This view was accepted as the correct one by Beech J in The Frankston Ambassador Ptv. Ltd. v Ciana Insurance Australia Limited (1991) 9 A.C.L.C. 790. In the latter two cases, the view taken as to the significance of the relevant statutory provision implies that the capacity of a financially strong defendant to absorb its costs of defending itself against an ultimately unsuccessful claim by an insolvent

I

plaintiff is of no relevance in considering an application by such a defendant for an order for security in its favour. The second and third respondents are, of course, because of the strength of the indemnity they have, in a similar position to a financially strong defendant.

I think the statement in = m is more consistent

with the nature of the discretion conferred by the statutory provision on the Court. I propose to follow the view expressed by the Chief Justice in that case, as I did in the decision of Aamine Ptv. Ltd. v Mat~ro Plastics Ptv. Ltd. fin liwidationl h Ors., an unreported judgment of 30 June, 1993 where, after referring to the statement in m, I said:

"I proceed on the basis that because the second

respondent has professional indemnity insurance, even if security is not ordered, he will not personally be out of pocket in the sense of having outlaid costs in his defence that axe irrecoverable from the applicant if he succeeds in the action. Against that, he has presumably had to purchase any such protection by paying for that insurance. I am not prepared to hold that the fact that the second respondent appears to have purchased insurance against the particular liability to which he is sued, and purchased also the right to require his insurer to conduct his 'defence is a matter sufficient to justify denial of security in a case such as this where there are several factors that favour the grant of the security."

I propose to order further security because the claims are brought against these two respondents by impecunious corporate applicants and, apart from the existence of the costs indemnity, there are no considerations that would justify a refusal of security. But I will take into account, in fixing the quantum of the security, the existence of the indemnity.

The acceptable evidence relevant to what should be

fixed by way of quantum for further security for the costs of

the second and third respondents in conducting the remaining	issues in the action is of a quite general nature. I will fix
the amount of the security to be provided up to the commencement of the trial on the basis of Mr. Humble's estimate at $17,500.00, made up as follows:

(a) cost of discovery - $5,000.00

(b) costs of preparing for trial - $20,000.00

(c) costs of expert evidence - $10,000.00

totalling $35,000.00, reduced by one half because of the existence of the costs indemnity. I make this reduction having regard to the fact that the security order will really be for the benefit of the first respondent rather than the second and third respondents, and. to the fact that the indemnity was given by the first respondent for its own purposes, i.e., to procure the services of the second and third respondents for its own commercial advantage.

The security can be provided either in cash or by bank undertaking, or some similar form of security, or by way of charge of sufficient worth over property within the jurisdiction. Personal guarantees will not be acceptable. If the second and third respondents want security for the first and later days of the hearing, they will have to apply to the trial judge, or preferably shortly before hearing, for such additional security. It will be necessary, in that event, for

costs they have, in fact, incurred in getting ready for trial

the respondents to provide more accurate evidence as to the

which I just now estimated at $35,000.00.

I certify that this and the preceding

seven pages are a true copy of the reasons for judgment herein of the Honourable Mr. Justice Drummond.

Associate:	a. 4
Date:	7 February, 1994