Deep Sea Oils Ltd v K M Corporation Pty Ltd

[2000] FCA 944

FEDERAL COURT OF AUSTRALIA

Deep Sea Oils Ltd v K M Corporation Pty Ltd [2000] FCA 944

COSTS - Application for security for costs - discretion of a Judge of the Court to order an applicant to give security for the payment of costs against the applicant - determination of application for security for costs in circumstances where applicant is a corporation and has debts which exceed its assets - whether a guarantee of security is appropriate in such circumstances

Life Insurance Act 1995 (Cth) s202(3)

Federal Court of Australia Act 1976 (Cth) s56

Reches Pty Ltd v Tadiran Pty Ltd (1998) 85 FCR 514 followed

Willey v Synan (1935) 54 CLR 175 distinguished

DEEP SEA OILS LTD v K M CORPORATION PTY LTD

T 7 of 2000

MARSHALL J
23 JUNE 2000
HOBART

IN THE FEDERAL COURT OF AUSTRALIA
TASMANIA DISTRICT REGISTRY	T 7 of 2000

BETWEEN:	DEEP SEA OILS LIMITED (ACN 050 205 831) APPLICANT
AND:	K M CORPORATION PTY LTD (ACN 070 858 203) RESPONDENT
JUDGE:	MARSHALL J
DATE OF ORDER:	23 JUNE 2000
WHERE MADE:	HOBART

THE COURT ORDERS THAT:

1.The substantive application be dismissed unless on or before 14 July 2000 the applicant provide security for costs of the application in a sum of $40,000. Such security to be in cash or in a bank guarantee of a kind acceptable to the District Registrar provided that that security will be deemed to be satisfied if there is provided by 14 July 2000 by the applicant’s solicitors a guarantee by Mr and Mrs Yasuda of payment by the applicant of any of the costs which the applicant is ordered to pay to the respondent in this proceeding, if any. Such guarantee to be in a form to be agreed by the parties or approved by the District Registrar.

2.Costs reserved.

3.Having regard to the issues raised by the respondent concerning any difficulties that may come from the guarantee, that liberty to apply be reserved on not less than 48 hours written notice to each other party.

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

IN THE FEDERAL COURT OF AUSTRALIA
TASMANIA DISTRICT REGISTRY	T 7 of 2000

BETWEEN:	DEEP SEA OILS LIMITED (ACN 050 205 831) APPLICANT
AND:	K M CORPORATION PTY LTD (ACN 070 858 203) RESPONDENT

JUDGE:	MARSHALL J
DATE:	23 JUNE 2000
PLACE:	HOBART

REASONS FOR JUDGMENT

1. There is a dispute between the parties in this proceeding concerning which of them is entitled to the proceeds of a policy of insurance (“the policy”) on the life of the late Bernd Kutzner, a former employee of the applicant.

2. On 10 May 2000 the applicant filed an application in the Tasmania District Registry of the Court in which it sought orders inter alia declaring it to be the beneficial owner of the policy and for the proceeds of the policy to be paid to the applicant. Also on 10 May 2000, the Court made an interim ex-parte order restraining MLC Limited (the then first respondent) from dealing with the proceeds of the policy except by paying them into Court.

3. On 18 May 2000 MLC Limited paid into Court the sum of $529,693.09.

4. On 30 May 2000 the Court ordered that pursuant to O29 r2 of the Rules of Court it would determine the following question separately from and before any other question arising in the proceedings:

   “Whether the applicant or the second-named respondent is entitled to the moneys paid into Court by the first-named respondent.”

5. Additionally on 30 May 2000, the first respondent was given leave to withdraw and the second respondent became the only respondent to the application.

6. Given the change in parties, the separate question is now more accurately framed as follows:

   “Whether the applicant or the respondent is entitled to moneys paid into Court by MLC Limited on 18 May 2000.”

7. Further on 30 May 2000, the respondent, through its counsel, foreshadowed an application for security for costs. A notice of motion was filed on 5 June 2000 which, as amended on 20 June 2000, sought the following orders:

   “1.      That pursuant to:-

   (a)       section 1335 of The Corporations Law;

   (b)section 56 of the Federal Court of Australia Act 1976 (Cth); and

   (c)       Order 28, rule 3 of the Federal Court Rules

   the Applicant give security for the Respondent’s legal costs in these proceedings.

   2.Until such security for costs be given by the Applicant these proceedings be stayed.

   3.        The Applicant pay the Respondent’s costs of this Application.”

8. The notice of motion was made returnable, by arrangement with the Court, on 23 June 2000 at 10.15 am in Hobart. At the hearing of the motion, relief based on the Corporations Law was not pressed. The notice of motion was accompanied by an affidavit sworn by Mr David Walker, a director of the respondent. The key points made in Mr Walker’s affidavit were as follows:

   ·    the applicant is struggling to meet its financial commitments given correspondence to that effect from the applicant’s solicitors dated 19 April 1999 to Mr Walker;

   ·    observations had been made by an independent auditor on 25 November 1999 that the applicant’s “… (d)irectors believe that the company will continue as a going concern subject to the continued financial support of secured and unsecured creditors and the continued improvement of the company’s trading position …”;

   ·    the ability of the applicant to continue to trade is due only to creditors not seeking to enforce repayment of debts;

   ·    Yasuda Nominees Pty Ltd (“YN”), a company owned and controlled by the two directors of the applicant, holds a fixed and floating charge over all the assets of the applicant for loan monies in excess of the total assets of the applicant.

   Mr Walker was not seriously challenged on these aspects of his evidence under cross-examination.

9. In reply, the applicant relied upon affidavits sworn by Mr Michael Harris, a chartered accountant and Mrs Zane Yasuda, the Managing Director of the applicant.

10. In his affidavit, Mr Harris made the following key points:

    ·    the applicant is now trading profitably;

    ·    the applicant’s order books are full;

    ·    from July 2000 onwards the applicant will make a pre-tax profit of $17,000 per month;

    ·    the applicant’s prior financial position arose from the lack of adequate creditor records kept by it prior to 30 June 1997;

    ·    the applicant owes $1.25 million to YN, Mr Keiji Yasuda and Mrs Zane Yasuda. That debt is partly secured by a Debenture Charge;

    ·    if the Yasudas and YN postpone any of their claims for repayment of funds due to them, the applicant would have a surplus of in excess of $394,000 of assets over liabilities.

11. In her affidavit, Mrs Yasuda made the following key points:

    ·    the applicant is now trading profitably;

    ·    the applicant’s order books are full, its debtors are paying their accounts and its suppliers have been pre-paid for ten weeks worth of supplies;

    ·    from July 2000 onwards, the applicant will make an average pre-tax profit of at least $17,000 per month;

    ·    the most substantial creditors of the applicant are YN, herself and her husband whose partnership is called Yasuda International (“YI”);

    ·    the repayment of loans – due to YI and YN are secured by a Debenture Charge second to the applicant’s bankers, National Australia Bank Limited (“NAB”);

    ·    YI and YN are owed a total sum of $1.25 million;

    ·    in the event that an order is made for security for costs, YI and YN are prepared to allow any claim by the respondent for costs or a costs award to stand in priority to their claims against the applicant;

    ·    Exhibit “Q” to the affidavit is the applicant’s balance sheet as at 13 June 2000. It discloses liabilities to NAB in the approximate sum of $250,000. There is, however, a term deposit of $150,000 held by the applicant with NAB.

12. A further affidavit sworn by Guy Abel, a solicitor acting for the respondent, was filed. It exhibited mortgage documents by which a loan of $843,920 was advanced to the applicant by YN.

13. Pursuant to s56 of the Federal Court of Australia Act 1976 (Cth), a Judge of the Court has a discretion to order an applicant “to give security for the payment of costs that may be awarded against (the applicant) …”. The amount of any such security and the time and manner of the payment may be directed by the Judge hearing the application.

14. Where an applicant is a corporation and that corporation has debts which exceed its assets and persons who stand behind the corporation are in a position to provide security, then ordinarily, an order for security for costs should be made against the applicant. See Reches Pty Ltd v Tadiran Pty Ltd (1998) 85 FCR 514 at 523 per Lehane J and the cases referred to therein.

15. In Reches, Lehane J observed (at 523) that:

    “The evidence in this case suggests that the cash resources available to the directors and shareholders of the applicant, apart, presumably, from their ability to sell the items of personal property … are very limited. In those circumstances, I think, the substantial question is whether the court should regard a secured undertaking … a satisfactory substitute for security of the more usual kind.”

16. There was evidence given under cross-examination by Mrs Yasuda which suggests that the directors and major shareholders of the applicant have current liquidity problems. Accordingly, if an order for security for costs was made, it would be appropriate to order that such security be deemed to be satisfied if secured by a guarantee from Mr and Mrs Yasuda to pay the costs of the respondent should such costs be ordered.

17. The next question that arises is the amount of security which would ordinarily be ordered in the circumstances. Each party has submitted an estimate. The draft bill of costs supplied by the respondent is $57,456.25. In my view, this overstates the position. It refers to counsel’s fees for a three day trial when only two days have been set aside and it refers to fees for a second counsel. No suggestion has yet been made that two counsel will be engaged at the hearing of the separate question. Appropriate deductions to the respondent’s draft bill would see it reduced to approximately $40,000. This figure is close to the $35,000 estimate provided by the applicant.

18. Given all the above circumstances, the Court intends to order that the applicant provide security for the respondent’s costs in the application in the sum of $40,000 in a form agreed by the parties or approved by the District Registrar, but allowing Mr and Mrs Yasuda to guarantee the payment of at least that sum in the event that security for costs is ordered. However, the guarantee will relate to the entire amount of costs to be ordered in the event that the applicant is unsuccessful in the proceeding.

19. I will also order that the costs of the motion be reserved.

20. Although counsel for the applicant opposed the grant of security for costs on the basis that the respondent delayed in making the application, I do not consider the delay to have been so great, given the importance of the factors referred to by Lehane J in Reches which support the grant of an order, that I would have refused to make an order on account of such delay. The respondent’s intention to make its application for security for costs was, after all, announced less than three weeks after the application was filed and served.

21. Counsel for each party also invited the Court to consider the merits of the applicant’s case in coming to a view about security for costs. In the circumstances, there is insufficient time to deeply delve into the necessary analysis to form a view about the merits. It is more appropriate to treat the merits as a neutral factor. It was also suggested that the applicant was forced to bring this action and therefore should not be liable for a security for costs order as was recognised in Willey v Synan (1935) 54 CLR 175. Willey v Synan is distinguishable. In that case, the applicant was required by the Collector of Customs to commence a proceeding. No one required the applicant to commence this action. It did so as a matter of its own choosing. That it did so to preserve a putative right places it in no different position than the position of most applicants in the vast majority of matters coming before the Court. It is not to the point that the Court may have required MLC Limited to commence a proceeding which would in substance have overlapped with this matter. MLC Limited would only have been obliged to commence a relevant proceeding if it made a payment under s202(3) of the Life Insurance Act 1995 (Cth). It is a moot point whether the payment was made pursuant to that statutory provision or pursuant to an order of the Court that MLC Limited make the payment into Court.

22. Having regard to all of the foregoing, the Court will order as follows:

    1.The substantive application be dismissed unless on or before 14 July 2000 the applicant provide security for costs of the application in a sum of $40,000. Such security to be in cash or in a bank guarantee of a kind acceptable to the District Registrar provided that that security will be deemed to be satisfied if there is provided by 14 July 2000 by the applicant’s solicitors a guarantee by Mr and Mrs Yasuda of payment by the applicant of any of the costs which the applicant is ordered to pay to the respondent in this proceeding, if any. Such guarantee to be in a form to be agreed by the parties or approved by the District Registrar.

    2.Costs reserved.

    3.Having regard to the issues raised by the respondent concerning any difficulties that may come from the guarantee, that liberty to apply be reserved on not less than 48 hours written notice to each other party.

23. The form of the order requiring a guarantee is made having regard to Mrs Yasuda’s evidence of preparedness to give such a guarantee. Mrs Yasuda also gave evidence that YI and YN would undertake to give priority to any claim by the respondent for its costs as against their claims against the applicant company. I consider such undertakings to be unnecessary, having regard to Mrs Yasuda’s willingness to personally guarantee the payment of any costs awarded to the respondent in this proceeding. I also have regard to her evidence that Mr Yasuda would similarly be prepared to guarantee the payment of such costs.

I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marshall.

Associate:

Dated:             13 July 2000

Counsel for the Applicant:	Mr R Young
Solicitor for the Applicant:	Ayliffe & Ayliffe
Counsel for the Respondent:	Mr D Wallace
Solicitor for the Respondent:	Wallace Wilkinson & Webster
Date of Hearing:	23 June 2000
Date of Judgment:	23 June 2000 (ex - tempore as revised from the transcript)