Chester & Fein Property Developments Pty Ltd v Candam Investments Pty Ltd

424

s e c u r i t y

f o r

c i r c u m s t a n c e s

t o

t aken

In to

accoun t

a p p l l c a n t

S e n e f l c l a r y

u n i t

t r u s t

a v a l l a b l l l t y

o f

t r u s t

assets t o

meet

order

f o r c o s t s

capaclty or

w i l i l n g n e s s

b e n e f i c i a r i e s

t o

‘;up~ly f u n d s

t o

meet

o r d e r

f o r

c o s t s

avallablllty of	n e t t	p r o f l ! , s	f r o m t r u s t	hus~ness	t o meet order- f a r
c o s t s .

B e l l Nholesale C o .

Fty . Ltb.

Gates Expot-t Corpora t lon (1983)

A . C . L . R .

48?, on a p p a l !l9843

52 A . L . R .

176 .

P.W.G. Manacrement

L t d .

Cornmissloner

f o r

C o r p o r a t e

Affalrs

C19857 V . R .

385.

Re Z n h i i l C t y . Ltd.

C19831 1 V . E .

561.

Rlo t Nomznees

P t y .

L td . v.

Suzuki Australia

P ty .

L td . (1981)

A . L . R .

€53.

Laundry

Cox-Wash

Leaslnq Norni-nees Ptv . L t d .

v . Dunloo

Cllyrnnir

L t d .

and Ors.

unrepor ted

(Smi thecs

J.) 28 June 1985.

Federa l

Cour t

Austrslla

A c t 1 9 7 6 -

s.56

Federa l

Cour t

Rlules - 0.28 r.3(l)(b)

Companies Code - s.533(1?

CHESTER & FEIN FROF’EXTY

DFLTELOPMENTS

FT?.

LTD.

C.?NDAbl

IMVESTMENTS

FTY.

LTD. and. JSSEPX MCIPRIS MELNIK

No. VG95 of 19e5

Jenkinson J .

Melbourne

30 August 1985

I N THE FEDE2AL

L'O'JRT

OF AUSTFALIZ.

)

VICTORIA	DISTRTCT	PECISTE'f	> NO. V G 9 5 0:	1385
GENEFAL	DIVISION	>

BZTKEEN:

CHESTER

Si FEIN PROPERTY

DEVELOPMENTS FTP . LTD.

AND:

rANDAM

IMVESTPENTS

FTY.

LTD. and TOSEPH MOPEIS

Lespondents

W:	Mr. Justice Jenklnson
DATE:	3 0 August, 1985
PLACE :	Melbourne

MTNUTES O F ORDEP.

The Court Orders that:

The

applicant

withln

28 days glve security f o r the

payment to the

respondents or elther of them of the

costs that may be

awarded against it in the proceeding

the

sun of

$ 5 , 0 0 G .

2 .

The said

security he given by payment

into Court or by

bond in suc5 manner and form as the Court shall approve.

3 .

I f the

apnlicant

falls to comply

wlth this Order for

securlty w~thin 28 days the croceeding be	thereupor,
stayed.

4. The motlon of whlch notice was file? on 21 June 1985 be adpurned sine die.

The respcndents'

costs of the motion to and includinq

the entry of thls Order 5e pald hy the applicant.

(Settlement and entry

Orders is dealt with

0 . 3 6 of

the

Federal

Court

R u l e s . )

ETWEEX: CilECTEP S, FEIN PROPERTY

DEVELO?WNTS

PT';.

LTD.

App1lcar.t

Respondents

Yr. Justlce Jenkinson

Meltourne

30 August,

l335

RFASOWS FOR JTJCGNENT

Motior. for an o r d e r that the 3 p p l i c a n t provlde

secjlrity

f e r eozts.

The 5tatemer.t of claim

in the prnceedlng contains

allegations that 5:- misrepres?ntatlcns for whlch both resgondents

are rsspnnsi5le t h e applicznt w a s induced to become a beneflclary

of a u n l t t r u s t , an2 to entst- into an agreement i n performance

whlch l t

lent the trustee

$158,000 arld

guaranteed regayrent

S J f

mcney to be l e n t ta the truste? by a bank. The trustet? cart-le& cr. S tuslness ~n ex;.cutlcn af the telAst, the bus iness fall4, the

trustee has been wound U,?, the money lent is irrecoverable and the

applicant "may be llable" to pay the bank $5R,:49.50

In discharge

of a liability under the guarantee : so much

appears

respectLvely. A t th? lat:+t

(lake and d,xln; the preceding

two

ycars t!le

Issued .rapi :a l

af the applicant was $ 2 , tn which the ?:m

natE:;al :>ersons G J ~ Z wet-? the directors of the applicant werz ?.qually entltled as tlk holders of the two 1sswd 5lhares,

L _ L

accordlni; L ' J m-hosc returns.

From t h e sontents of the returns

can be inferred that durl.ng those two years the o n l y trading activlty of thr applicant was 111 cxssutlon of ;I trust known as C L

F Developxents Unlt Trust No. 1, of whhlch the applicant was

trustee. Tne balance

sheet of the aF2l;cAnt

3 s at 30 Jlune 1983

fll?d with the later of the two returns

disclosed =x-lrr?nt

liablllties aggregating $197,563, balanced by a current asset

described as " R l q h i : of Indemnir-y of Assets of C F, F

Developxrnta

Unlt Trust No. 1".	No othsr asset	except the share capital was
disclosed.

An affldavlt sworn by one

of the appllcant'r

directors

was read In opposltlon to the motian. It contalned no suggestion

that the applicant h%s ever carrlo? XI any business actlvlty other

that-. the cnnduct of "the

business nf Sullding construction,

proper-ty drvelogment and prslert nar!agement" In execution of t:??

trust disclosed In the ann1:al re';urns.

A balance zheet af

crust

assets and

llabillties exhlblted to the affi.davxt discldsed a

"settled s u m " of $100, represented by assets of an aqgregate value

of $196,333.32,

less balancing l i a b ~ l ~ t ~ e s .

The

o n l y item

o f

I, .

siqnlflsant value a ~ e ,

3 s

to asscts,

Interest bearing deposits"

( $ 7 0 , 0 0 0 . 0 0 ) ,

"Loar.5

(general)"

f$172,075.2e)

and

"Offlce

Ecju12ment (at cgst less Depreclatlon)" ($2,722.941; a5 to liabilities, "Bank O-zel-draf t ' ' ( $ 9 , 1 6 9 . 3 6 ) acd "Current LlaSilitles" (Vonday Uo18i1ngs Pty. Ltd. $93,531.99, Ocaia Nomir.ees

The 13uslne35

conliucted

t'ns

a p p l i c a n t I n execu t ion

'ilis t r u s t i s

swot-i-

t o be

" t h r l v l n g " , w l t h 3

n e t p r u f r t €or

the

?ear ended 3 0 June 1985 i n excess of

$125,OOC and a n e t

p r o f i t

a3ou:

$290,000 prophesied f o r t!;t

year er.ding 3 0 June 1386.

There was no ev1de:ice as t=l the

terms

of tile ?rust ,

1 1 ~ ~ -

ar.y evidence a5 t o

t h e

identity

t h e financial

p o s l t l o n of

any

bene fxc la ry .

The

t r u s t

a s s e t ; ,

a t h e r

tha!-~ the

o f f i ce

equ ipmen t ,

and

the

t r u E L

l i a h z l i t l e s

a r e

& s c r i b e d

" c u r r e n t "

i n

t h e

b a l a n c e

s h e e t

t o

x h i c h

h a v e

r e f e r r e d .

Eut

there was

o t h e r

evldence a s

t o the

terms on which

the

mnr,eys

spe i l l f i ed In

t h e

ba l ance

shee t

C J ~ ~ E

owed by oc t o tire trustee, !-.or any evldence a:

t o

t h e

solvency

or the

1Lent i t j r

t h e

6 e k t o r r ;

t o

~7hcrn amounts

aggrega t ing $132,075.28	of	t r u s t	funi;s	had beer. l e n t	by	the
L
Lrustee.

I n

E e l 1

'Aolesale

C o .

PtV.

L td .

Ga te s

v .

Exf ior t

CnrDora t lon

F l tzgera ld

J .

(!1983) 8 A.C.L.E.

4 8 3 )

an?,

a p p a l ,

a Ful l a p p l i c a t i o n

Cour t

((1984) 5 2

A . L . E .

176)

were

dea i ing

w l t h

for

a n

o r d e r

that

a n

a p p l i c a n t

corn?aly

provlde

s e c c r l t y f o r

c o s t s .

The

a p p l l c a n t w a s

t n l s t e e

s f

a f a m l l y

trust

which

had

conducted

b u s i n e s s

I n

? x e c u t n n of

t h e

trust; .

I t s

asset;

w e r e sald

t o cnns;z . t

on ly ,GF

$ 2 cash, thr l s r u e d

ca?:tal

he-ng

two

ska?-er;

o €

each .

Its

l i a b l l l l e s

x e r ~ v e r y

s u b s t a n t i a l .

N e l t h e r

F i t z g e r d l d

J. nor

t h e members of the

Tu11

Court expres s ly

r e f e r r e d

l n

the:r

reasnns f o r

~udgment;

t r u s t e e ' s

r l g h t

t o

1ndsrnn:t:y

the bene f : c l a r l e s

against

c o s t s

and expenses properly

Lqcurre,?

i n

execu t ion of

t h e

t r u s t

t o

t r u s t e e ' s r i g h t s n €

1derrn:ty

out

o f

tlhe

t r u s t

a s s e t s .

C o u n s e l

f o r

t!-Le

appl1, :~r . t

t L e

p r e s e n t

c a s e

has

s u b n l t t e d

t h a t

t h e

clrcumstance upon t h e

m?xulstence of w h c h

t h e power confe r r ed

s . 5 3 3 ( l) of

the

Comparles Code

t o

requ1t-e s e c u r i t y f . 1 ~

co;ts

1 s

cqndi t ioned - t h a t

~t shculd apge3r

" b y

c r e d i b l e

test1mcn:r

that

t,iiere 1 s t-rason to bellev+ t ha t

t he

co t -po ra t lon

w l l l

unable

t o

pa;.

t h e

c o s t s

d e f e n d a n t

i f

s u c c e _ : s f u l

i n

h ~ s

defence" - has

n o t

b e e n

f u l f i i l e d ,

5ecause

t h e r e i s no

r eason

t o

form such a

b e l l e f

when

r e g a r l 1s had

t o

t h e

mcsneys w h i c h

t h e

a p p l l c a n t ,

and

subroga t ion

t he

r e sponden t s

they become

c red i t -o r s of

t h e

a p p l i c a n t ,

n a y

command

t h e e x e r c i s e

t h e a p p l i c a n t ' s r i g h t c f

Indemcity	cut	of	t h e	a s s e t s	of	C G F gevelopments rJr.lt	T r u s t	No.
i

I f , as

the

l anguage

s.533(1) seems

t o s u g g e s t ,

a n

onus af

F r o o f , that

reason t o

belleve t h e

c o r p o r a t i o n

G i l l

unabl2 tc >ay

the

r ~ s t s

a p p e a r s , 1s lmpoaed sp. 3 def?nZant

t h e

sub - sec t lon , l t -nay

be that. In

this case t h e

onus has not

been

d l scha rged .

The

ev idence

a f fo rds

means

e s t ima t tn r ;

w h a t

money

t h e exerclse

the a p p l i c a n t ' s

r l q h t

indemnlty

would

l i k e l y t o yleld.

Not

on ly

1s ~t

qui te u n c e r t a i n w h a t

t h e

t r u s t

a s s e t s disclosed

I n t h e

b a l a r c e

s h e e t

mrght

r e a l i s e ,

b u t

t l i e t e

i s

no means

e s t l n a t l n g

whci t

lilcelll-rood t h e r e 1 s that

t h e

t r u r t e e

w l l l

a t t e m p t ,

t h ?

e x e r c i s e

lien over t he

3 s se t s

ich

now &re,

or which before judgment w l l l ceme,

under I t s c o n t r n l ,

t o

make? p r o v l s l n n f o r

satisfaction of

order

for-

payment

t h e

r e sponden t s '

cos t s

this

pt-oceedl7g.

unde r t ak lng w a s

o f f e r e d

on behalf

t h e

a p p l i c a n t

t h a t

i t

would make

s u c h a

p r ~ v l s i o n .

And t h e svldence d81es not d:zclose

w h a t competction tlierc- n-iqht

between

o t h e f

c r e d ~ t o r s

h a v l n g

r i y h t c

subroga t ion

t o

enforcement of

t h e q p l l c a n t ' s r l g h t a:

1ndemnlt:I

(such a5

Vondajr

E:sldings Fty. Ltd.,

$?3,531.9? ; and Ocala Noninees

Pty.

Ltd. ,

$93,531.97) and

the

respondents ,

lf and when the respondents

galnei! an

o rde r for

c o s t s I n

t h e l r

Favour.

(See and

cornpars

R . W . G .

Manacremen!

Ltd .

Commissiener

f o r

C o r p o r a t e

hf€sirs

C19857 V . 2 .

3 8 5 ;

R e Enhil ;

?t?i.

Ltd .

[IlS827 1

V . R .

561 ar.d

t h e

cas%.--

t h e r e i n c i t e d . )

"hkere, in ar.y

proceedlng , it a p p e a r s

t o

t h e

Caur t

t h e a p p l i c a t i o n

O E

res2or.dent;

........ ........ ........ ........ ........ ......

( b )

that a n applicant

is su lng ,

no t

for h l s

own b e n e f l t ,

but

for the

b e n e f i t

some o t h e r person

and

t he re

i= reason

b e l i e v e

t h a t

the a p p l i c a n t will

unable

pay

c o s t s

t h e

the

respordent i f ordered to do so;

........ ........ ........ ........ ........ ......

the Court

may ocder

that a p p l i c a n t

t o

glve

z ~ ~ c h s e c u r i t y

the Court

t h i n k s f i t

f n r

t h e

c o s t s of

the

respondent of

and

i n c i d e n t a l

t o

:he	proce rd lng . "

Agalrl the #-nu5 o f proof may

preclude t h e mak1nrJ of

c r d e r fnurlded on

t ha t

p t -ov i s lon .

Fu r the r ,

the

d e c l s i o r

Nominees

F ty .

L td .

St l zuk l

Australis

F ty .

L td .

(19el) 34

A.L .R .

553 may

inconsistent :n th

conclusion t h a t

t h e

a p p l i c a n t

sat1s:Ies

t h e

c t h e r

r e q u l r e n e n t

r.3!1)!3),

is suing, not

for h l s own

h s n e f i t ,

b u t

f o r

Corporation (1983) 8 >..C.L.F.. a t 486;

appeal,

(1934) 57

A . L . 3 .

a t 180.

)

In r e ~ e c t ~ n g

a su3n l sa lun

that only

I n

c i rcumstances

def

l ned b y fine o r &:?er

o f

t h e

s e v e r a l

p a r a g r a p h s

OF 0 . 2 8 r.3

was

th is

c o u r t

a u t h o r i s e d

t o

!cake

o rde r

reyulrlng

t h e

p r o v i s i o n

securlty

€ o r c o s t s ,

the

F u l l Cour t

he ld

In t h e Bell Idholesal5 Case

t h a t %he

ru le

dld

no t

have

the e f f e c t

l lml t lnr j

t h e

power

conferred 39

5.56 of

the

Federa l

Cour t

A u s t r a l i a Act

1 9 7 6 ,

whlch srovides:

"56. (1; The Court i3r a Jludgs may oreet- a

p l a i n t l f f

i n

a p-oceedlng i n tLe

Court

o r

a n a p p e l l a n t

i n a n a p p e a l

t o the Court

t o q1ve

s e c u r i t y

f u r

t h e payment, of	c o s t = that may	be
awar&ed a g a l x s t	him.

( 2 )

The

s e c u r i t y

shall be

such

amount, and g iven a t such

t lme

and

In such manner

and

f o r r . , as

t h e

COurt

o r

judge

d i r e c t s , .

( 2 )

The Court u r a Judge may reduce o r l n c r e a s e the anocnt of s e c u r i t y

ordered t o

b e

given

and

ma:J

va ry

the

t lme

whlch,

manr.er

o r

forn i n w h c h ,

t h e

s e c u r i t y

1 s

t o

be g1ven.

( 4 )

I f

s e c u r i t y ,

G r

f u r t h e r

s e c u r i t y ,

i s

not

g lven

accorc?ar.ce w i t h an

arder

under

t h i s

s e c t i o n ,

t h e

Court er :

Judge may order t h a t

pt-oseeding	the	or	appp3.i	be
dls9issed.

15:

T h s s; .ct lan

d@e.?

not

a f f e c t

t h e

o p e r a t i o n

any

provisior.

nade

ur.der

any

o t h e r Act

cc by

t h e

Rl,lles nf

Caur-t lot - Er

I n

r r l a t l o n

to the furnishlng of secut-:ty."

m 3

L L I ~ Full Court observsd ( 5 2 A.L.R.

178):

"The discret~on

to make orders under

5 . 5 6

must

be exercised ~udlcially,	hut that is the only
relevant limitatlon."

In the B e l l Wnalesale Cas;. the lncapaclty of tlie

applicant to

provlde

security from moneys under lts

immediate

control was established. Nothlng

was

said in

the reasons for

ludgment of Fitzger-ald J. ot- of the Full Court about the appllcant'a rlght to lndranity. The exercise of that t-lght was not mentioned as a means of provlding the applicant with money. 9ut both Fltzgerald J. and the Full Court regarded the

beneficlarles' capaclty to provide the applicant with funds as ar?

answer to the submlssicon that the makzng of an order for provision of securlty by the appllcant should not be made because the maklng of th? order would stifle the prosecutlon of an impecunlous aL>plisant's claim f o r rellef. And they grounded. the conclusion on

conslderatlons simllac to those

whlch m a y be thought to

~uztlfy

the eyultable rlght af 3 trustee to indemnity and lien over trust

assets and

the subrogatlon of

trust creditors to the trustee's

right of

indemnik:~ :

that those for

LJhose

beneflt the trustee

execute: the trust slioul3 shoulder the finar.cla1 burdens Incident to tk.at endeavour azd that thnse I;n whom the trustee becomes lndebtec! In carrylng on bl-siness In ese;uti,xl of the trust zhould have recsurse to trust assets at least to the extent that the

trustee does. In the Full Court the suhmlssion was advanced that the beneflclarles' incapaclty to provide the appllcant wlth

funds

:la? nat bee?,

hut must h+, proved by the respnndent. Thls

submlssinn the C u l l

Court

r e ~ e i ' l r d

L I I

theze terms (5; A.L.P..

179-180)

"In our oplnion a court is not ~ustlfied in declinlng to order security on the ground that to do so wlll frustrate the litlgatlon unle55

a compary In the positlon of the appellant

here establishes that those who stand behlnd

It and who will benefit

from tlie litiqatir~n If

It 1s successful (whether they be

sharehalders

or creditors or, as ir. thls case, beneflclaries under a trust) are also wlthout means. It 1 s not for the party seeking securlty to raise the matker; it 1s an essentlal part of the ,case of a conpany seeking to reslst an order for security on the ground that the granting of security wlll frustrate tlie 1:tigatlon to raise the 15sur of che lmpecunloslty of those whjhom the lltigation wlll benefit and to prrjve the necessary

facts.

In thls case the applicant's aubmlsslons are

different.

They are, first

c?.zt an incapaclty of the applicant to satisfy an

order that it pay

the respondent'z costs

has not been, but

must

be, proved; second, that exercise of the applicanz's right to tndemnity out of trust assets has not been, but must be, proved unlikely to be pL-3dLlCti-Je of the money required ts satizfy such an order if the applicant's lncapacltjr to satisfy the order 1s to be proved. It mlgh: S e sald, a propos the flrst of those submrsslons, that there is an incongruity in rejecting the s u h . l s s l o n when 11: li ?rade In relation to an exercise o f the power

accepting It,

3omethlr.t; very

l t k e

It, when

it is

nade in

relatlon to an exercise of the power conferred by 0.26, r.3(l)(b), or of the power c , x n f e ~ - r e d ?my S. 5 3 3 ( 1) of the Companies Code. But

if t h e r e acceptance of the

l n c o n q r u l t y ,

t h a t

1s In my

op1nl .m

be p r 2 f e r r e d

submlssion ln clt-cumztances

such as those

which

t h e

e v l d e n c e

d i s c l o s e s

I n

this cas*.

The responmlents

have

shcwn

t h e

a p p l i c a n t ' s

s o l v e n c y

t o

dependent

i t s g a l n ~ n g

the

ve ry

substantial

Eunds

( a p p r o x ~ m a t e l y

e q u a l

amount

t h e

t o

a n t i c l p a t e d

a n n u a l

n e t t

p r o f i t

i t s b u s l n e s s

activities)

t o

whlch

i t

c l a lms

en t l t l emen t

"Right of

indemnity of

A s s e k s of

h F Developments

Unit

Trust

No.

1."

t h e

t h r e e

poss l51e

sources

of those

funds ,

virtually

no th ing 1s

t o be l ea rn t ,

from

the

evldence ,

about

two.

Nei ther

th?

c a p a c l t y

n o r

t h e

w i l l i n g n e s s

b e n e f l c i a r i e a

t o

s u p p l y

t h e

f u n d s

15 d l s c l o r e d .

Nothing

appears

t o t h e

a v a i l a b i l i t y

t h e

a s s e t s

i n

the t r u s t ba l ance

sheet,

except

that

t h e y

a r e

described

c u r r e n t .

O f

t h e

t h r r c !

p o s s i b l e

source of

funds, about

$ 2 Q , O , O O O

per

ar.num n e t t

2 t - o f l t s

t,he

t r u s t

b u s i n e s s ,

n o t h i n g

a p p e a r s

8 s

t o

t h e

a v a l i a b i l i t y

t h o s e

funds

: whethe r

t he

app l i can t

w i l l

pay

them

k o the

b e n e f i c l a r i e s

t o

c r e d i t o i s

or w l l l

r e t a i n

n u t

those

funds

enough

s a t i s f y

a n

order f o r

c o s t s

i n

f a v o u r

the

respondents ;

whethet-

creditors,

o t h e r

t h a n

t h e

r e s p o n d e n t s ,

w l l :

succeed

ob ta in ing

paym?nt

d e b t s

d u e

t o

them

ou t

t h o s e

f u n d s

b e f c r e

t h e

t i m e

when

any order f o r c o s t s

I n f avour sf

t he

r e sponden t s

1 s

l l k e l y

t o

be made.

Concerning a l l those matters there is no reascn t o

f i n d

that

the

respondents

have

knowledqe

which

they

have

n o t

d i s c l o s e d

i n

e v l d e n c e ,

b u t

t h e r e

i s reasrJn

t o

e x p e c t

t h a t

t h e

a p p l i c a n t ' s

d i r e c t o r s

would

have

knowledge.

Xeither

them

ha: It:

evldence

denied

kncwledge

o r

o t h e r w i s e

e r p l a l n e d

the

failure

t o

d~sclose

the

knowledge

whlch

they

would

expected

have.

a l l

t h e

c l r cums tances

t he

p rope r

exe rc i se

t he

d l sc re t iona t -y

power

coqferred by s.56 of t h e ?&era1 Court of Australia Act. 1?76 15,

in my oplr-ron, to make an order that. t3.e ApBlicant provlde security for costs. I an f o r t l f l e d 1-1 ?hat conclusion Liy t h e

reasons f o r ]ad,gment of Sm1l;hers J . rn Launsdry Coin-Hash

N3minees

W?. Ltd. v. Dunlop Olymljic Ltd. and Ors . !unreported; ~udqment

7 8

June l?E5), the application of which rea5on; to the circumstances of thls motlon would, as I thrnk, lead to the same conclusion.

Ths amount prcposed an behalf of the

responAents,

$5,000, was nzt questluned by counsel

f o r the applrcant.

It will be crdered that the applic3nt within

'-2 days

g l v e securltjr f o r payment to tile recpondents Szr elther of thev of costs that may be awarded against rt in the proceedlnp in the sum of $5,000; that t??e 5 a ~ d security be given by pajrnent ;nto Court

or by bond

In such manner

and form as

the Court shall approve;

that If the aspllsant fail t o comply with this order f o r

security

wlthln 25 days the proceeding be thereupon stayed; that the motion of which notrce was filcd on 2 1 June lOS5 be adjourned sine dle; and that the respondents' sosts of the motion to and including the entry Gf thls order be paid by the applicant.

[1985] FCA 424

30 Aug 1985