Cons Food Market Pty Ltd v Garrard Hotels Pty Ltd

[1991] FCA 369

Re: CON'S FOOD MARKET PTY. LTD.
And: GARRARD HOTELS PTY. LTD.; VERSACE SHAW JONES PTY. LTD.; SHEF RASHEED;
IVAN KEITH GARRARD and DAVID JAMES GARRARD
No. 163 of 1989
FED No. 369
Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
O'Loughlin J.(1)

CATCHWORDS

Procedure - Application for security for the payment of costs - impecunious company - whether "those who stand behind the company" include beneficiaries in the deceased estate of a shareholder the administration of which has yet to be completed - allegation that respondents to substantive proceedings are responsible for the impecuniosity of the company.

HEARING

ADELAIDE

#DATE 28:6:1991

Counsel for the Applicant Mr. R. Mellows

Solicitors for the Applicant Kemp and Co

Counsel for 1st, 4th and 5th Mr. N. Morcombe
Respondents

Solicitors for the 1st, 4th
and 5th Respondents Poveys

ORDER

The application for security for the payment of costs is dismissed.

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

JUDGE1

Application for the security for the payment of costs.

1. On 27 May 1991, having heard argument, I dismissed an application for security for costs, stating that I would supply written reasons if that became necessary. As the unsuccessful parties have sought leave to appeal against the order of dismissal I now publish these reasons.

2. The applicant in the substantive proceedings, Con's Food Market Pty. Ltd. (hereinafter called Con's Food) entered into a contract dated 9 February 1989 to purchase the freehold of the Peninsula Hotel/Motel at Bagot Street, Wallaroo in the State of South Australia ("the hotel premises"); settlement in respect of the purchase was effected in May 1989. The purchase price was $700,000 with attendant costs of acquisition of about $30,000.

3. The respondents to the substantive proceedings are, first, Garrard Hotels Pty. Ltd, the former owner of the hotel premises, next, Ivan Keith Garrard and David James Garrard, both of whom are and have been directors of the first mentioned respondent at all relevant times (and all of whom are hereinafter called "the Garrards") and finally Versace Shaw Jones Pty. Ltd. and Shef Rasheed. Versace Shaw Jones Pty. Ltd. was retained by the Garrards as their selling agent and Mr. Rasheed was its salesman who was involved in the negotiations between the vendor and purchaser.

4. The case for Con's Food includes an allegation that it was induced to purchase the hotel premises as a result of a representation that they were leased at a rental of $105,800 per annum to Pentrix Pty. Ltd. Con's Food also claims that it was further untruthfully represented to it that Pentrix was a reliable tenant and that:-
   

"... the business operated by Pentrix was a successful business and had been successfully operated since Pentrix took possession as

lessee during the year 1984."

1. Those allegations have been denied by the respondents.

2. Con's Food has further complained that, within a week of settlement, Pentrix defaulted in the payment of its rent and that it surrendered its lease on about 2 August 1989. It would seem that Con's Food thereafter entered into possession of the hotel premises and has since endeavoured to run the business.

3. Con's Food commenced proceedings in this Court on 3 October 1989 and the notice of motion seeking security for costs was filed on behalf of the Garrards ten months or so later in August 1990; neither Versace Shaw Jones Pty. Ltd. nor Mr. Rasheed joined in the application for security for costs.

4. At the time of the purchase of the hotel premises and at the time when the substantive proceedings were instituted there were only two shareholders in Con's Food - Constantinos Markobotsaris and his wife Vasiliki, each holding one fully paid share of $1.00. However, Mr. Markobotsaris died intestate on 21 September 1990, shortly after the filing of the notice of motion seeking security for costs. He was survived by his widow and three adult children. Under the Administration and Probate Act 1919 (S.A.) the rules of intestacy provide for the widow to receive the first $10,000 and one half of the residue of the estate. The remaining half is to be divided equally between the three adult children of the marriage.

5. The solicitor for Con's Food, Mr. Kemp, has deposed to the assets and liabilities in the estate of the late Mr. Markobotsaris and their likely value. The contents of Mr. Kemp's affidavit, which were not challenged, contain various estimates suggesting a net estate of about $270,000. One asset, claimed by Mr. Kemp to be of dubious value, is a book debt of about $60,000 owing by Con's Food. Over and above those estimates, the deceased and Mrs. Markobotsaris had guaranteed the borrowings of their company from its banker. That contingent liability remains undischarged. According to Mr. Kemp's affidavit, Mrs. Markobotsaris has no independent assets of any value; that assertion was not challenged.

6. Before turning to a summary of the company's assets and liabilities, mention should be made of the fact that at about the time when Pentrix surrendered its lease Con's Food paid approximately $100,000 to Pentrix' secured creditor to acquire the plant and stock and other moveables that were essential for the ongoing conduct of the business. In other words, the company's outlay to acquire the hotel premises and the relevant business was in the vicinity of $830,000.

7. Mr. Koutsouvelis, the accountant for Con's Food, compiled a statement of its assets and liabilities as at 31 July 1990. In his opinion, the hotel assets that had been acquired at a cost of $830,000 had a value of only $500,000 (or perhaps $520,000 depending upon the manner in which one should treat stock on hand at $20,000). In paragraph 4 of his affidavit that was filed on 16 August 1990 Mr. Koutsouvelis said:-
   

"The applicant's purchase and subsequent experience as owner of that property is the sole explanation for about a $500,000.00 adverse

development in its financial position to the extent that its assets are now about $265,000.00 deficient of its total liabilities."

1. The manner in which the figure of $500,000 was calculated is not readily apparent but then it should be emphasised that all figures and values are, at this stage, approximations. The matter of significance is that Mr. Koutsouvelis' figures claim that the company would have been solvent if it had been appropriate to include in the statement of assets and liabilities figures representing the historical cost of the hotel assets.

2. One argument advanced by Mr. Morcombe, counsel for the Garrards, raises the interesting question of the identity of those standing behind the company or the identity of those who might be likely to benefit from this litigation. He concentrated his argument on the three adult children (as distinct from the widow) claiming that they were relevant persons; as he correctly pointed out, there was no information before the Court about their respective financial positions. In Bell Wholesale Co. Ltd. v Gates Export Corporation (1984) 2 FCR 1 the Full Court said at p 4:-
   

"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."

1. But I do not believe that this authority applies to the facts of this case; I am of the clear opinion that, at this stage of the litigation, those who stand behind Con's Food are its present shareholders: and they are the deceased estate of Mr. Markobotsaris and Mrs. Markobotsaris. I reject the argument that the three adult children presently are, or are to be regarded as, parties who will or may benefit from the litigation if it is successful. The estate has not yet been administered and its administration will not be concluded until all outstanding liabilities have been discharged. One such liability is the joint and several contingent liability of the estate and Mrs. Markobotsaris to the company's banker presently standing at about $986,000. In an application such as this, a beneficiary in the estate of a deceased shareholder should not be the subject of any financial inquiry until such time as that beneficiary is entitled to look to the administrator of the estate for his or her share of the estate. Hence there was no obligation on Con's Food, as respondent to this present application, to satisfy the court that each of the three adult children were without means.

2. There is however, another factor which militates against making an order for security for costs:- the question of the cause of the company's alleged insolvency. The prima facie assertion of Mr. Koutsouvelis is that the respondents are collectively responsible for the applicant's parlous financial position; they, so it is claimed, induced Con's Food to pay far too much for the hotel premises and the business was not as profitable as had been represented. If these allegations are eventually made out then there would be a case for saying that it would not be proper to order security for costs. But if, on the other hand, the opinions expressed by Mr. Koutsouvelis about the worth of the hotel assets are incorrect so that their worth approximates their cost then the statement of assets and liabilities that he compiled would likewise be incorrect; in such a case the financial position of the company would be improved materially - even to the point where it night be said that Con's Food would be able to meet the costs of the litigation in the event of it being unsuccessful.

3. There is no way of knowing at this stage whether an order for security would frustrate the company's claims; much would depend upon the nature of the security that was ordered. Mr. Kemp has commendably disclosed that two of the children have undertaken to meet his costs in the event that Mrs. Markobotsaris cannot make payment. They might likewise assist if an order for security was made. At this stage, I will not take further note of this issue.

4. It was also argued that there had been a 10 month delay in the bringing of this application and that such a delay should react adversely against the Garrards. I accept that unexplained delay is ordinarily an adverse factor but I have not attributed overly great weight to that issue because of the failure on the part of Con's Food to point to prejudice or injustice as a consequence of the delay.

5. This is not a case where an impecunious company is the alter ego of wealthy shareholders; see Tradestock Pty. Ltd. v TNT (Management) Pty. Ltd. (1977) 14 ALR 52 at 59. This is a case where the court has been told that the applicant-company is impecunious, that the conduct of the respondents is, allegedly, the dominant cause of its impecuniosity and that the persons standing behind the company and likely to benefit from the litigation are not financially able to give security. At this stage of the proceedings the financial affairs of the two shareholders are, by virtue of the joint and several guarantee to the bank, dominated by the company's financial position. I do not consider that the deceased estate and Mrs. Markobotsaris would have the financial ability to give any security that the Court might order. For these reasons the application for security for the payment of costs is dismissed.