Campbell & Ors v Rivett & Ors - [2005] SADC 84

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
CAMPBELL & ORS v RIVETT & ORS
Judgment of His Honour Judge Lee
22 September 2005
EQUITY - EQUITABLE REMEDIES - INJUNCTIONS - INTERLOCUTORY INJUNCTIONS - UNDERTAKING AS TO DAMAGES
Application by first defendant for order discharging or varying Mareva injunction – Mareva injunction initially made by consent and endorsed with usual undertaking by plaintiffs as to damages – plaintiffs did not and do not have financial capacity to satisfy a judgment that they pay damages to first defendant in accordance with their undertaking – whether plaintiffs’ lack of financial capacity should lead to a discharge or variation of injunction – factors and principles discussed – application dismissed.
Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249; Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1991) 56 SASR 515; Allen v Jambo Holdings Ltd (1980) 1 WLR 1252; Szentessy v Woo Ran (Australia) Pty Ltd (1985) 64 ACTR 98, considered.

PROCEDURE - COSTS - SECURITY FOR COSTS
Application by first and second defendants for security for costs against third plaintiff – third plaintiff an impecunious corporation – first and second plaintiffs also impecunious – defendants rely upon s 1335(1) of Corporations Law – protracted interlocutory history – delay in bringing application – other factors discussed – application dismissed.
Rule 97.01; Corporations Law s 1335(1), referred to.
Ariss v Express Interiors Pty Ltd (in liqu) (1996) 2 VR 507; Stack v Brisbane City Council (1996) 71 FCR 523; Southern Cross Exploration v Fire and All Risks Insurance (1985) 1 NSWLR 114; Buckley v Bennell Design and Constructions (1974) 1 ACLR 301; Octocane v SRJ Property Development (1999) 74SASR 471; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564, considered.

CAMPBELL & ORS v RIVETT & ORS
[2005] SADC 84
Introduction

Two separate matters are before me for determination. The first concerns an application by the first defendant to discharge a Mareva injunction made earlier against him with respect to property in Queensland. The second concerns an appeal by the first and second defendants against the dismissal by a Master of their application against the third plaintiff for security for costs.
The action within which the matters arise, which I will call the principal action, concerns an allegation by the first and second plaintiffs that they were induced to enter into a contract to buy a service station business in Mt Gambier in March 1999 by the deceptive and misleading statements of the first defendant made on his own account and for his company, the second defendant. The third plaintiff was incorporated to act as trustee of a family trust and to be the trading entity of the first and second plaintiffs. The losses claimed include the difference between the $200,000 purchase price and the true value of the business, and the trading losses of the business since 1 July 1999. The third defendant is an accountancy firm, which the first and second plaintiffs allege gave negligent advice to them with respect to the purchase of the business. The first defendant has counterclaimed the sum of approximately $350,000 for losses allegedly sustained with respect to a car-wash business which did not pass with the sale. The first plaintiff is the daughter of the second plaintiff. The first plaintiff was formerly the de facto partner of the first defendant. They have three children.
In a separate action, which I will call the Scott Agencies action, the owner of the premises upon which the business was conducted, and a distributor of fuel in the area, is claiming from the plaintiffs (meaning the plaintiffs in the principal action) approximately $83,000 for fuel. The plaintiffs allege by counterclaim that they are entitled to damages by reason of the owner’s unlawful termination of the lease on or about 25 May 2001. They have also issued a third party claim against the abovementioned accountancy firm.
The interlocutory history of the actions
The Scott Agencies action was commenced on 26 September 2001, but most of the interlocutory history has been in the principal action.
The principal action was commenced on 4 March 2003. The first and second defendants did not file defences in time, despite the grant on 14 May 2003 of an extension to 23 May 2003. The plaintiffs signed judgment by default against the first and second defendants on 29 May 2003. Master Norman set the judgment aside on 20 August 2003. Defences were filed on 3 September 2003. The first defendant also filed his counterclaim on that day.
There then followed directions hearings on 7 October 2003 and 12 November 2003. On the second of those hearings, Master Norman made orders with respect to discovery and experts reports, directed that the two actions be heard together, and referred them to a listing conference. The Master also gave a direction in the following terms:
If any applications for security for costs are to be made, parties at liberty to do so notwithstanding listing, but applications to be filed and served within 14 days.
At a listing appointment on 10 December 2003, the actions were listed for trial on 2 August 2004. The first and second defendants filed lists of documents on 12 December 2003, and the plaintiffs filed lists of documents on 17 December 2003 and 24 February 2004. No applications for security for costs were made at that time.
Further directions hearings followed on 26 February 2004 and 18 March 2004. On the second of those hearings, the Master made orders with respect to experts reports and amendments to pleadings.
The Mareva injunction now under challenge was made on 26 March 2004.
The defendants foreshadowed an application to adjourn the trial at a directions hearing on 17 June 2004, and the application was argued on 30 June 2004. The Master delivered a reserved decision on 2 July 2004, and ordered that the trial date of both actions be vacated. The Master criticised each of the defendants for not being ready for trial. The parties argued the costs of the adjournment on 9 August 2004, and the Master’s reserved decision to order costs against the defendants “for failing to prepare their cases in a timely manner” was delivered on 26 August 2004.
There then followed further hearings before the Master on 6 December 2004, 7 February 2005, 28 February 2005, 17 May 2005 and 20 June 2005. In reasons for decision posted to the parties on 13 July 2005, the Master ordered the plaintiffs to file an affidavit with respect to discovery, and refused the application of the first and second defendants against the third plaintiff for security for costs.
At a further directions hearing on 22 August 2005, the Master advised the first and second defendants that further documents sought by them should be made the subject of an application for non-party discovery. The Master is also recorded as having said:
Noting there is an appeal against my ruling on security for costs, I direct the plaintiff to contact my Clerk within 7 days of publication of any decision of that appeal so that the matter can be listed before me for further directions. On that occasion I will give directions on outstanding interlocutory matters, including experts reports, and any other matters.
So the principal action is still not ready to be heard. The Scott Agencies action has now been disjoined from the principal action, and is listed for trial on 30 January 2006.
It is against this history that I turn now to deal with each of the matters in turn.
Application to discharge Mareva injunction
The application seeking a Mareva injunction was filed by the plaintiffs in the principal action on 23 March 2004. The application sought an order restraining the first defendant from selling or encumbering his properties in Cape Douglas in South Australia and in Cairns in Queensland.
In an affidavit which the first plaintiff filed in support, she said, for herself and on behalf of the other plaintiffs, that they had reason to believe that the first defendant was dissipating his assets and would be unable to satisfy any judgment against him. She referred to a recent listing of the Cape Douglas property for sale. She said that the plaintiffs “offer the usual undertaking as to damages”.
The application went before a judge of this Court on 26 March 2004. An order was made on that day with the consent of the first defendant through his solicitor, and without the need for any independent consideration by the judge. The order was confined to the Cairns property. Paragraph 2 gave the first defendant liberty to apply upon 24 hours notice to dissolve the injunction. The order was prefaced with an undertaking in the usual terms, namely
AND the Plaintiffs’ by their solicitor undertaking to abide by any order the Court or a Judge may make as to damages in case the Court or a Judge should hereafter be of the opinion that the First Defendant shall have sustained any by reason of this order, which the Plaintiffs ought to pay…
It is common ground that, at the time of the order, and at all times since then, the plaintiffs did not have, and have not had, the financial capacity to satisfy a judgment that they pay damages to the first defendant in accordance with their undertaking.
By notice for specific directions, the first defendant now seeks an order that the injunction be discharged, or in the alternative that the order be varied to allow the first defendant to encumber the property.
In his affidavit in support, the first defendant says that he listed his Cape Douglas property for sale by auction the day after the plaintiffs filed their application, and consented to the order with respect to his Cairns property after the plaintiffs had agreed to allow him to sell his Cape Douglas property. He then explained why he needs access to his equity in the Cairns property. He has not worked since moving to Cairns. His intention was not to work until this matter was concluded so that he could devote his time to preparing his defence and counterclaim. His financial position is such that he must return to work or sell his Cairns property in order to continue to fund his defence. He believes his financial position would be improved by purchasing a business. Recently he entered into negotiations to buy a carrier business in Cairns for $450,000. Those negotiations have stalled, and he is now considering purchasing another business.
The first defendant’s affidavit also discloses that, in response to the plaintiffs’ request that a more conclusive valuation be obtained from a qualified valuer, the first defendant successively supplied written opinions that the property was worth “in the high 500’s mark” (from a sales consultant), “at least $500,000” (from a licensed broker) and “$580,000 to $590,000” (from a sales representative).
The essence of the plaintiffs’ opposition to the application to discharge the injunction is that the first defendant must have known and must be taken to have accepted the plaintiffs’ precarious financial position when he consented to the order, that I should start from the proposition that the injunction was properly made, that the first defendant bears the onus of establishing that there has been a significant change of circumstances, that as yet the first defendant has no firm intention to buy the carrier or any other business, and that, in relation to the alternative claim that the defendant should be free to encumber the property, he has not provided satisfactory evidence of its value.
The rationale of an undertaking as to damages was explained in Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd (1981) 146 CLR 249 by Gibbs J (at 311-312):
The object of requiring a plaintiff who seeks an interlocutory injunction to enter into an undertaking of this kind is to attempt to ensure that a defendant will receive compensation for any loss which he suffers by reason of the grant of the injunction if it appears in the event that the plaintiff was not entitled to obtain it. The insistence upon the giving of an undertaking is a very important, if not an essential, means of preventing injustice from being done by the court when it makes an order at an interlocutory stage, before the rights of the parties have been finally determined. The court has a discretion not to enforce such an undertaking, but unless the defendant has been guilty of conduct that would render it inequitable to enforce the undertaking it would seem just, speaking generally, that a plaintiff who has failed on the merits should recompense the defendant for the damage that he has suffered as the result of the making of the interlocutory order.
and by Stephen J (at 318):
Perhaps the first point to be observed is that undertakings such as this are given to the court and not to be party enjoined. Brett L.J. made this point when, in Smith v. Day , at p. 428 he said: "Now in the present case there is no undertaking with the opposite party, but only with the Court. There is no contract on which the opposite party could sue." A claimant under an undertaking cannot complain of any breach of contract nor of any breach of duty, tortious or otherwise, owed to him, nor, of course, of any breach of the undertaking. What occurs when such an undertaking is extracted from a plaintiff is that the court, as a condition of its grant of interim or interlocutory injunctive relief, has ensured that, should it turn out that that relief should never have been granted, it will have the power, so far as monetary compensation allows, to make good the harm which the grant has done to the defendant. The court acquires powers to do justice between the parties which it would not otherwise possess.
In Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1991) 56 SASR 515, after discussing Air Express and other authorities, Mulligan J said (at 520-521):
True it is that before granting an injunction the court may consider the efficacy of the undertaking proposed and if it is decided that the undertaking will not afford adequate protection to the party to be enjoined, it may decline the injunction or it may require security. If the latter, and security is not provided, the injunction will not be made. That question was here considered and it was decided that security need not be provided. After an injunction has been made the court does, in a sense, have a supervisory role, on the application of a party. It may vary or discharge the injunction, but I do not think it has the power to vary the undertaking or require the undertaking to be maintained on a basis other than that upon which it was given, such as by ordering security. If it is established that the party who gave the undertaking lacks sufficient substance to pay damages which may be assessed, the injunction may, and usually would, be discharged. That party would then lose the benefit of the injunction because it can no longer afford to pay the price.
Although counsel for the first and second defendants emphasised the observation of Mullighan J that “If it is established that the party who gave the undertaking lacks sufficient substance to pay damages which may be assessed, the injunction may, and usually would, be discharged”, the key word for present purposes is “usually”. Although I expect that unusual circumstances would be required, examples can be found in the cases of the ordering of injunctive relief in the absence of an undertaking. I refer to the judgments of the members of the Court of Appeal in England in Allen v Jambo Holdings Ltd (1980) 1 WLR 1252, followed in Australia by Kelly J of the Supreme Court of the ACT in Szentessy v Woo Ran (Australia) Pty Ltd (1985) 64 ACTR 98.
The first defendant says that the plaintiffs’ lack of financial capacity to meet the undertaking only came to light in affidavits filed subsequently by the first and second plaintiffs, and in a concession made subsequently by their counsel before the Master. Yet the first defendant had been embroiled with the first plaintiff in Family Court proceedings for some time, and I am satisfied that the first defendant knew or at least strongly suspected that the financial position of the plaintiffs was precarious at the time he gave his consent to the order. I also agree with the plaintiffs’ counsel that the first defendant must be taken by his consent to have accepted the undertaking upon the basis of whatever the plaintiffs’ position was at the time. A further point is that the first of the abovementioned affidavits was sworn on 30 June 2004, yet the first defendant did not see fit to challenge the undertaking at that time. A further point is that I doubt the veracity of the first defendant’s assertion in his affidavit in support that his intention was not to work so that he could devote his time to preparing his defence and counterclaim. These are all matters which should bear upon the exercise of my discretion. In the end, the first defendant has not satisfied me that the injunction should be discharged.
As for the application in the alternative to vary the injunction, I am not prepared to make an order in those terms at this stage. The first defendant needs to advance a specific proposal for a variation which would still leave a significant level of equity in the property against the event that the plaintiffs are successful in the action. The proposal would have to be supported by evidence, and the first defendant would need to show that he does not have access to funds from any other source.
Appeal against dismissal of application for security for costs
The application was made by the first and second defendants against the third plaintiff on 25 February 2005. The first and second plaintiffs are the shareholders and directors of the third plaintiff. The Master’s decision to refuse the application was made on 30 July 2005.
The appeal is brought pursuant to rule 97.01 of the Rules. The appeal is by way of rehearing and, in matters involving the exercise of a discretion, I may exercise my own discretion without regard to the manner in which it was exercised by the Master.
Counsel for the first and second defendants relies upon s 1335(1) of the Corporations Law. That subsection reads:
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 primary purpose of the provision is to provide protection for defendants who are sued by indigent companies, and the very impecuniosity of the company which serves to attract the jurisdiction in the first place may be ground for an order for security: Ariss v Express Interiors Pty Ltd (in liqu) (1996) 2 VR 507 at 514.
In the end, however, the Master refused the application mainly on the ground of delay. Some of the facts in his reasons were said to be wrong, but I propose to exercise my own discretion in any event. As I have said, the application was filed on 25 February 2005. This was despite the Master’s direction as far back as 12 November 2003 that any applications for security for costs should be made within 14 days. I have already referred to the protracted interlocutory history of the actions. Notwithstanding two changes of solicitors, the first and second defendants had numerous opportunities to pursue applications for security well before they chose to do so. Those opportunities included on or about 10 December 2003 when the actions were listed for trial, on or about 26 March 2004 when the first defendant submitted to the Mareva injunction, and on or about 2 July 2004 when the trial of the actions was adjourned. As Drummond J said in Stack v Brisbane City Council (1996) 71 FCR 523 at 531:
In the absence of a satisfactory justification for delay in seeking security, it tells against a late application that a corporate applicant shown to be unable to meet the respondents' costs of successfully defending the proceedings, has been allowed by the applicant for security to progress its action a substantial way towards being ready for trial and to incur substantial costs in doing that, an expense which will be rendered futile if security which the corporate applicant cannot provide is only ordered at a late stage.

I have already concluded that the first defendant knew or at least strongly suspected that the financial position of the plaintiffs was precarious at the time he gave his consent to the Mareva injunction in March 2004. In an affidavit filed on 23 February 2005, a member of the first and second defendants’ Queensland solicitors said (in paragraph 6):
The defendant, Brice Rivett, informed me and I verily believe that he has been concerned for a long time about the plaintiffs’ ability to meet any costs order made in his favour should he successfully defend the plaintiffs’ claim.
Indeed, as early as May 2001 the first and second defendants must have expected that the plaintiffs would be in financial difficulty, given that the plaintiffs were evicted from the premises at that time.
Delay is ordinarily a most important factor. In Southern Cross Exploration v Fire and All Risks Insurance (1985) 1 NSWLR 114 at 123, the following dicta of Street CJ in Buckley v Bennell Design and Constructions (1974) 1 ACLR 301 at 308 was quoted with approval:
A significant matter to be weighed in determining whether or not an extension of time should now be allowed is that this arbitration has run on for some eight hearing days. The builder has expended money in respect of its own legal costs for those eight days. And, if security now be ordered, accompanied by the usual sanction that the arbitration as well as the proceedings in this court be stayed until such security be furnished, this would, in effect, place the company in the position of running a risk, if unable to provide security, of having wasted the costs of these eight days. It is an accepted principle in the ordering of security for costs that such an application should be made promptly. There may, of course, be cases where the impecuniosity of the company may only be discoverable or provable at a later stage of the proceedings. Similarly, there may be cases in which the length of the proceedings was not foreseen when they commenced. Other situations could occur in which a late application could, without procedural prejudice, be brought forward during the currency of the disputed proceedings. But ordinarily, I reiterate, the application ought to be made promptly in order to avoid the very situation which has developed in this case.
There are other factors which I will mention briefly.
The personal plaintiffs are also impecunious, and will not be in a position to pay the corporate plaintiff’s costs. So it is likely that an order for security for costs against the corporate plaintiff will lead to a stay of that part of the litigation which relates to that plaintiff’s trading losses. The case for the plaintiffs is that their impecuniosity was bought about by the conduct of the first and second defendants. The authorities and principles with respect to those factors were discussed by Olsson J in Octocane v SRJ Property Development (1999) 74 SASR 471 at 477 to 479.
The third plaintiff’s claim to recover trading losses will be determined in the context of the overlapping claims of the personal plaintiffs, and in the context also of the first defendant’s counterclaim against the plaintiffs. There is no suggestion that the personal plaintiffs are hiding behind the corporate plaintiff for the purpose of avoiding a liability for costs. There is no basis for suggesting that the plaintiffs’ claims lack bona fides and have no reasonable prospect of success. If each of the plaintiffs’ claims is unsuccessful, it is likely that the personal plaintiffs will be ordered to pay all of the costs of the action. The authorities and principles with respect to those factors were discussed by Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 576 to 581.
Here I should interpose the comment that, although the claim with respect to trading losses is made in clause 52.2 of the further amended statement of claim by all three plaintiffs, earlier clauses, namely clauses 40 and 43, assert that the business was conducted by the third plaintiff. I expect that the role of the third plaintiff in the business will need to be the subject of a finding of the trial judge in due course.
Counsel for the first and second defendants submitted that a factor favourable to them is the costs that they have had to incur as a result of the plaintiffs’ non-compliance with rules and orders with respect to discovery. The Master dealt with that matter in his reasons of 13 July 2005. Some of the documents in contention had been seized by Scott Agencies after the termination of the lease, and the Master concluded that they were not in the “power, possession or control” of the plaintiffs, and should be pursued by way of non-party discovery. As to the other documents, the Master ordered that they be made the subject of a further affidavit, and I note that further affidavits have now been filed by the first and second plaintiffs.
Counsel for the first and second defendants submitted that the transfer by the second plaintiff of his only significant asset prior to commencing this action is a factor. That did not amount, however, to the divesting of an asset in any relevant sense. As the Master observed, the transfer was to the second plaintiff’s then spouse pursuant to an order of the Family Court on 31 July 2002.
Counsel submitted that the plaintiffs have made inconsistent allegations in the actions: in the principal action that their losses were caused by the conduct of the defendants, and in the Scott Agencies action that their losses were caused by the landlord who evicted them from the premises. I do not consider, however, that the allegations are necessarily inconsistent.
In the end, I am of the opinion that the factors against an order for security for costs, especially the factor of delay, should prevail.
Conclusion
The formal orders are that the application and the appeal both be dismissed.
I have been left with the strong impression that the costs to the parties of the interlocutory procedures that have been invoked in the principal action will turn out to be wholly disproportionate to the outcome of the dispute in that action. Even if I am shown to be wrong about that, there can be no doubt that the procedures have placed a strain on the finances of the parties and the resources of the Court. I trust that the energies of the parties and their advisors will now focus upon the need for the principal action to be listed for trial with a minimum of further delay.