Cherry, Nicholas William John v Read, Brian

[1996] FCA 815

CATCHWORDS

COSTS - security for costs - whether an order for security for costs would stifle the litigation - consideration of who stands to benefit from the litigation - whether all the relevant parties are impecunious - order for security of costs is discretionary

Federal Court Act 1976 s 56
Corporations Law s 1335
Federal Court Rules O 28 r 3(1)(b), 5(1)

Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 Appr
Andrews & Anor v Caltex Oil Australia Pty Ltd (1982) 40 ALR 305 Cons
Shannon v Australia & New Zealand Banking Group Limited (No 2) [1994] 2 Qd R 563 Cons
Rajski & Anor v Computer Manufacture & Design Pty Ltd & Ors [1982] 2 NSWLR 443 Cons
Equity Access Ltd v Westpac Banking Corporation & Ors (1989) ATPR ¶40-972 Appr
Harpur v Ariadne [1984] 2 Qd R 523 Dist
Cowell v Taylor (1885) 31 Ch D 34 Cons
Pearson v Maydler [1977] 1 WLR 899 Cons
James & Ors v Australia & New Zealand Banking Group Ltd & Ors(1985) 9 FCR 442 Cons
Orr v Lusute Pty Ltd & Ors (1987) 72 ALR 617 Cons

Nicholas William John Cherry, Searush Pty Ltd, Erin Pty Ltd, Petroline Oil Refining Pty Ltd v Brian Read, Woodlands Golf Resort Pty Ltd, Jusson Pty Ltd, Bar Enterprises Pty Ltd, Barbara Alice Read, A.E. Group Pty Ltd and Raine & Horne Valuations (Qld) Pty Ltd & Ors
No QG 68 of 1996

Kiefel J Brisbane 15 August 1996

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
  No QG 68 of 1996

BETWEEN:

NICHOLAS WILLIAM JOHN CHERRY

First Applicant

AND:

SEARUSH PTY LTD

Second Applicant

AND:

ERIN PTY LTD

Third Applicant
AND:

PETROLINE OIL REFINING PTY LTD

Fourth Applicant
AND:

BRIAN READ

First Respondent
AND:

WOODLANDS GOLF RESORT PTY LTD

Second Respondent
AND:

JUSSON PTY LTD

Third Respondent
AND:

BAR ENTERPRISES PTY LTD

Fourth Respondent
AND:

BARBARA ALICE READ

Fifth Respondent
AND:

A.E. GROUP PTY LTD

Sixth Respondent

AND:

RAINE & HORNE VALUATIONS (QLD) PTY LTD

Seventh Respondent

AND:

BRIAN READ

BARBARA ALICE READ

BAR ENTERPRISES PTY LTD

First Cross Claimants

AND:

JUSSON PTY LTD

Second Cross Claimant

AND:

NICHOLAS WILLIAM JOHN CHERRY

First Cross Respondent

AND:

ERIN PTY LTD

Second Cross Respondent

AND:

ANTHONY JAMES ALFORD

Third Cross Respondent

AND:

A.E. GROUP PTY LTD

Fourth Cross Respondent

AND:

ANTHONY JOHN CRONIN FREESTONE

Fifth Cross Respondent

AND:

PETER JAMIESON KUMNICK

Sixth Cross Respondent

JUDGE MAKING ORDER:   Kiefel J

DATE OF ORDER:                 15 August 1996

WHERE MADE:  Brisbane

MINUTES OF ORDERS

THE COURT ORDERS THAT:

1. The applicants provide security for the costs of the first to fifth respondents in the sum of $100,000 and for the seventh respondent in the sum of $50,000.

1. Subject to any extension granted by the Court, such security is to be provided within twenty one (21) days from the date hereof and in a form acceptable to the District Registrar.

1. Subject to further Order of the Court on any application for leave to appeal, the applicants’ proceeding be stayed until security is provided.

1. The applicants pay the first to fifth respondents and the seventh respondent’s costs of the applications to be taxed.

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

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
  No QG 68 of 1996

BETWEEN:

NICHOLAS WILLIAM JOHN CHERRY

First Applicant

AND:

SEARUSH PTY LTD

Second Applicant

AND:

ERIN PTY LTD

Third Applicant
AND:

PETROLINE OIL REFINING PTY LTD

Fourth Applicant
AND:

BRIAN READ

First Respondent
AND:

WOODLANDS GOLF RESORT PTY LTD

Second Respondent
AND:

JUSSON PTY LTD

Third Respondent
AND:

BAR ENTERPRISES PTY LTD

Fourth Respondent
AND:

BARBARA ALICE READ

Fifth Respondent
AND:

A.E. GROUP PTY LTD

Sixth Respondent

AND:

RAINE & HORNE VALUATIONS (QLD) PTY LTD

Seventh Respondent

AND:

BRIAN READ

BARBARA ALICE READ

BAR ENTERPRISES PTY LTD

First Cross Claimants

AND:

JUSSON PTY LTD

Second Cross Claimant

AND:

NICHOLAS WILLIAM JOHN CHERRY

First Cross Respondent

AND:

ERIN PTY LTD

Second Cross Respondent

AND:

ANTHONY JAMES ALFORD

Third Cross Respondent

AND:

A.E. GROUP PTY LTD

Fourth Cross Respondent

AND:

ANTHONY JOHN CRONIN FREESTONE

Fifth Cross Respondent

AND:

PETER JAMIESON KUMNICK

Sixth Cross Respondent

CORAM:Kiefel J

DATE:15 August 1996

PLACE:Brisbane

REASONS FOR JUDGMENT

Applications are here brought for orders for security for costs in circumstances where, it is alleged by the respondents to them, that not only the corporate applicants but also Mr Cherry, who is also an applicant who might be subjected to orders for costs, are impecunious.  It is also contended that there is no other person who would “benefit” from the litigation.  In these circumstances the orders sought, it is submitted, would prevent the litigation proceeding.

Mr Cherry and three companies with which he is associated have brought these proceedings against Mr and Mrs Read and companies with which they have a connection.  The action proceeds also against a company which provided a valuation.  The accountant who was responsible for passing on what is said to be the first set of representations, and who appears to have acted for both Mr Read and his interests and Mr Cherry and his, has been let out of the action.  Mr Cherry alleges that in June 1995 the accountant, Mr Alford, provided him with the details of an investment proposal with respect to a large parcel of land in the Redlands Shire.  The development proposed was to combine a number of uses - a golf course and club house, a mobile home park, an aged care hostel and an extractive industry.  With respect to this somewhat unusual mix of land uses the letter of 8 June 1995 is said to have conveyed that some necessary approvals for those uses were already in existence and others were under consideration.  And, it is alleged, that letter taken with what Mr Read himself said in mid-June 1995 amounted to an assurance that all was well with the approval process and, with respect to some of those approvals, that the Council was more or less obliged to grant them.  The valuation later provided in October, by the financier’s valuer, also proceeded on the basis that there were extant some planning permits.  It valued the land at $5M.  $3M was then borrowed from the bank and guaranteed by Mr Cherry and the three corporate applicants.  The applicants say however that the planning permissions had either lapsed or there were difficulties associated with them issuing and that the land was worth only $1.5M.  In reliance upon the representations however Mr Cherry and the companies entered into an agreement with Mr Read’s companies and guaranteed the sum which was advanced to Woodlands Golf Resort Pty Ltd to facilitate the development.  Whatever has become of those sums is unclear but it appears to be accepted by the parties that in October next Mr Cherry and the other applicants are likely to be called upon by the bank to repay the full $3M. 

It was submitted for the applicants for security for costs (the first to fifth and seventh respondents) that this was a case where regard could usefully be had to the applicants’ prospects of success.  Ordinarily it is only in that relatively rare category of cases, where the Court can readily discern that a proceeding is without substance, that the likelihood of success will be taken into account.  A larger enquiry at this stage is usually not practicable.  Nevertheless the respondents pointed to the letter of 8 June 1995 which, they said, could be shown to have been produced as late as December 1995 after the agreements were entered into.  How the particular copy came to be made is the subject of explanation by the applicants’ solicitors and this may or may not be accepted at trial.  It is not a matter which I can now resolve.  The defence also specifically alleged, amongst other things, that Mr Cherry had engaged his own advisers - town planners and engineers - to make investigations for him.  It is then contended that, since he has not filed affidavits by those named persons to rebut the allegation that they did advise him, I ought to infer that that was the case.  It would follow that he may not then be in a strong position with respect to the issue of reliance.  I am not prepared to do so.  It is for the applicants for security of costs to show, on the material before the Court, that some assessment of the merits is possible and they have not done so.

The three corporate applicants do not, it is conceded, have the funds to meet any substantial order for costs.  Erin Pty Ltd has an asset in the residence in which Mr Cherry and his family reside.  Attempts are presently being made to sell it.  The proceeds from any sale, after payment of the mortgage debt, will likely amount to only some $80,000 and this will be used to assist in funding the applicants’ litigation.  Mr Cherry is available as an applicant in the proceedings for a costs order.  This is however more a matter of form than substance, for he also has no
substantial assets, his solicitor says, having arranged his affairs over the years to that end.  Counsel for the Cherry interests submit that there is no other person or entity having an interest in the litigation.

So far as Searush Pty Ltd is concerned, it was acquired by the Cherry interests in 1994.  The then shareholders, the Cherrys, remain on the register but Mr Cherry has taken steps recently to regularise this.  Whilst it was sought to cast doubt upon the bona fides of this recent arrangement, I have no reason to doubt it.  Transfers have apparently been executed.  The registered shareholders will then be Cherry Investments (Qld) Pty Ltd and Mr Freestone, a solicitor for the Cherrys.  Mr Cherry and his wife are directors of Cherry Investments.  Mr Cherry and Mr Freestone hold shares in that company on trust for the Cherry Trust.  If, then, there were perceived to be a benefit in the outcome of the litigation, Mrs Cherry and those having an interest in the trusts may be the ultimate beneficiaries.  Their position is not gone into on the material.  Mr Cherry holds all the shares save one (this is held by Mrs Cherry) in Erin Pty Ltd which however is a trustee company. 
  In Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1, 4 the Full 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”.

There is a dearth of information concerning those having any interest as beneficiaries in the trusts or as creditors of the companies in the books of account, although the material contained reference to Mrs Cherry and the Cherry children as the potential beneficiaries.  This is not however a case where
there is a prospect of monies coming to the companies or to them out of the litigation.  But, from a company’s point of view, relief from liability can be of benefit in a number of ways.  Whilst it is suggested that the deficiency of assets disclosed in the annual returns would therefore not result in any tangible benefit to the companies and those who stand behind them, there are other practical outcomes of insolvency which the companies or their trusts may desire to avoid.  One may infer this from the fact of their bringing what is, for present purposes, taken to be bona fide litigation which is to say that the motive for its commencement relates to the preservation of the companies’ present position.  And it does not seem to me to be a very satisfactory course to conclude, to the contrary, that there is no benefit on the basis of the limited financial information placed before the Court.  At least so far as the matter concerns Mr Cherry’s interests in the litigation this point is made more clear.  He is, it was submitted, interested in it not for what he might reap, but what he might avoid - bankruptcy.  In this respect it was said he did not wish to have his commercial reputation adversely affected.

It was not suggested that O 28 r 3(1)(b) applies to a situation where both the corporate applicant and those standing behind it have an interest, in or will benefit from, the litigation - and see Andrews & Anor v Caltex Oil Australia Pty Ltd (1982) 40 ALR 305. But the power to order security for costs given by s 56 Federal Court Act 1976 (and also with respect to the companies, s 1335 Corporations Law) is not confined to the circumstances envisaged by that Order.  As the passage from Bell Wholesale set out above makes plain, the wider enquiry is not just whether there are others who might benefit from the litigation, but whether the litigation could be said to be unable to continue given, in particular, that they could take steps to prevent that occurring.  All that I am able to conclude on the present material is that there may be such persons. 
Even were I to consider, as Counsel for the Cherry interests contended, that only Mr Cherry had a real interest in the litigation I remain unconvinced that the litigation would necessarily be frustrated.

It was submitted that Mr Cherry is in the same position as a litigant who happens to be poor, and for that reason unable to meet any order for security for costs.  And, whilst accepting that his status is by design, not accident, a distinction was sought to be drawn from those cases where a plaintiff or applicant has taken steps, after the commencement of litigation, or with it in view, to ensure that they would not be able to meet any orders for costs:  see for example Shannon v Australia & New Zealand Banking Group Limited (No. 2) [1994] 2 Qd R 563 and Rajski & Anor v Computer Manufacture & Design Pty Ltd & Ors [1982] 2 NSWLR 443. Here however Mr Cherry, it was said, has at all material times arranged his affairs so that he owns nothing. And, it was explained, this is not an unusual course for entrepreneurs.

The power to order security for costs is discretionary.  It is not to be exercised with a predisposition to the protection of a respondent:  Equity Access Ltd v Westpac Banking Corporation & Ors (1989) ATPR ¶40-972, 50, 635. It has, I think, never been doubted that the Court will not permit orders for security “to be used as a means of keeping a plaintiff out of Court”:  Harpur v Ariadne [1984] 2 Qd R 523, 532 (Connolly J). This is a rule of long-standing. The poverty of a natural person will not prevent them bringing and continuing litigation: see Cowell v Taylor (1885) 31 Ch D 34, 38; Pearson v Naydler [1977] 1 WLR 899, 902; James & Ors v Australia & New Zealand Banking Group Ltd & Ors (1985) 9 FCR 442, 445; Orr v Lusute Pty Ltd & Ors (1987) 72 ALR 617, 622. In the context of an impoverished corporation however, where there would be shareholders, creditors or others who might stand to gain from successful litigation,
the rule does not operate.  In Harpur v Ariadne (532) Connolly J said of the then equivalent provision to s 1533:

“The mischief at which the provision is aimed is obvious.  An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets.  The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play.  If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied.”

In principle one would think the case where another person stands to gain but shelters behind a named and impecunious applicant, should be approached in the same way.  Order 28 r 3(1)(b) recognises the situation where that person alone is to benefit.  The circumstance where there are others, in addition to the applicant who may benefit, may be dealt with under the general discretion to order security where the Court cannot be satisfied that the litigation will necessarily be halted.

In Harpur v Ariadne (533) his Honour also expressed the view that once a person such as Mr Harpur had come forward and exposed his assets to the risk of an order for costs, that was all that would be required.  But, in context, I take his Honour to refer to the relevance of any examination as to whether Mr Harpur had the assets he claimed to have.  Mr Harpur had said that he had substantial means to meet any order for costs.  The point was that it would not matter if he had not, for he was making available whatever he had and there was no suggestion of another party having a relevant interest in the outcome.  The situation here is rather different.  Whilst Mr Cherry is “available” he is worth nothing, he says, for he has ensured that income earned or assets acquired through his endeavours are not to be exposed to the vicissitudes of commercial life and of litigation.  But I do not think the question whether security should be ordered is answered simply by pointing
to the fact that his impecuniosity is brought about by his own actions.  Rather it will be answered by enquiring whether he has established that the litigation will be stifled.  And, in situations like this, it seems to me that will often be the appropriate enquiry.  It might of course occur that a person has so successfully secured their position against payment of costs that there will be no means by which an order could be met.  But in practical terms the nature of the arrangements usually put in place will mean that there are likely to be others who will benefit from the litigation or the person putting them into effect will nevertheless be able to organise funding.  And it is of some importance that the critical conclusion, namely that an order for security would prevent the litigation proceeding, must be established by the respondents to the application for security:  Bell Wholesale (4).

In my view the companies are to be taken as deriving benefit from the litigation.  And, with respect to two of them, there are persons having interests in the trusts which the companies administer whose position is not gone into at all.  I have considerable doubt about the position of Mr Cherry and his associated entities, not the least because he was not himself prepared to swear to it.  The explanation offered, that he did not wish to expose himself to cross-examination on the merits of the case, is unconvincing.  I find it difficult to accept that his advisors could have thought a Court would permit such a cross-examination on an application such as this.  Although it is possible that they were acting out of an abundance of caution.  More importantly, no adjournment was sought to enable Mr Cherry to swear an affidavit when his failure to do so and the inferences which might be drawn from it were adverted to during the hearing and the prospect of an adjournment raised.  And it is also noteworthy that Mr Cherry, through his solicitor, does not say that he will be unable to fund the litigation.  The affidavit sworn on his behalf does not explain whether he is in receipt of income, other than to deny he has ever received as much as the Read
interests suggest he does.  And, whilst hardly conclusive, the fact that a bank has accepted his personal guarantee in addition to the three companies which are said to have no means, raises questions.  One is left to wonder how he is able to live and carry on business and where the products of the years of his endeavours reside.  It is not enough, in my view, for respondents to an application for security for costs to assert they have no means and point to part of the overall picture concerning their financial affairs. I am not satisfied that the litigation will be prevented if orders such as those sought are made.

At least as far as the application for security brought by the Read interests was concerned, I have considered whether the fact that they have had the benefit of the advance of $5M ought operate as some discretionary bar to an order, but do not think that it can.  No specific reason was advanced to show how it might and, so far as the seventh respondent’s application was concerned, it could not be.  Whilst that produces the situation where Mr Cherry and the applicant companies will be called upon under the guarantees it is not the cause of their present financial position.  The respondent companies and Mr Read are themselves exposed to orders for costs and it is not suggested that Mr Read’s assets have been placed beyond reach.

There is at least not much dispute about the costs which might be occasioned should the matter proceed to hearing.  There are other factors which are taken into account, such as those referred to by Williams J in Shannon v Australia & New Zealand Banking Group Limited (561).  It seems to me that an appropriate order would be to require the applicants to provide security for the costs of the first to fifth respondents in the sum of $100,000.  The seventh respondent’s preparation is, it is conceded, not likely to be as extensive and, it seems to me, arrangements might
be made to reduce the need for attendance at the hearing.  In those circumstances the applicants ought provide security for the seventh respondents in the sum of $50,000.  I will hear Counsel as to the form of security and as to any orders for stay (O 28 r 5(1)).

I certify that this and the preceding ten pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel.

Associate

Date:15 August 1996

Counsel for the applicants:  Mr J D.McKenna

Solicitors for the applicants:  Corrs Chambers Westgarth

Counsel for the second respondent:             Mr P A Keane QC S-G with him

Mr P.E. Hack and Mr L.F. Kelly

Solicitors for the second respondent:       Clayton Utz

Counsel for the first, third, fourth

and fifth respondents:  Mr P A Keane QC S-G with him

Mr P.E. Hack and Mr L.F. Kelly

Solicitors for the first, third, fourth

and fifth respondents:  Kenny & Co

Counsel for the seventh respondent:        Mr R G Bain QC

Solicitors for the seventh respondent:      Minter Ellison

Date of Hearing:                   9 August 1996

Place of Hearing:  Brisbane

Place of Judgment:  Brisbane

Date of Judgment:  15 August 1996