Doran, M.A. v Cottam, M.T
[1995] FCA 439
•27 JUNE 1995
CATCHWORDS
PRACTICE and PROCEDURE - application for security for costs - nature of court's discretion - factors relevant to exercise of discretion - circumstances of particular case - one of two shareholders prepared to meet any costs order - that shareholder impecunious - other shareholder (his wife) not prepared to do so - purpose of the legislation only partly satisfied in absence of wife bringing her assets into play.
Federal Court of Australia Act 1976 s.56
The Corporations Law s.1335
Bell Wholesale Co Ltd v. Gates Export Corporation (1984) 2 FCR 1
Charlwood Industries Pty Ltd v. Cubitt [Gummow J, unreported 15 March 1995, Judgment No. NG838 of 1994]
Equity Access Ltd v. Westpac Banking Corporation & Ors (1989) 11 ATPR 40-972
Market Services International Pty Ltd v. Nutri-Metics (International) Australia Pty Ltd [Olney J, unreported 4 April 1995, Judgment No. VG 57 of 1993].
Southern Cross Exploration NL v. Fire and All Risks Insurance Co Ltd (1985) NSWLR 114
Estates Property Investment Corporation Ltd v. Pooley (1975) 3 ACLR 256
Harpur & Ors v. Ariadne Australia Ltd & Ors (1984) 2 ACLC 356
Cameron's Unit Services Pty Ltd v. Kevin R. Whalpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46
James v. Australia and New Zealand Banking Group Ltd (1985) 9 FCR 442
Janus v. A.G.C. (Advances) Ltd (Pincus J, unreported 19 October 1988, Judgment No. 642/88 ).
Erolen v. Baulkham Hills Shire Council (1993) 10 ACSC 441
MARK ANTHONY DORAN & ANOR v. MICHAEL TRISTRAM
COTTAM & ORS
WAG 83 of 1994
CARR J.
PERTH
27 JUNE 1995
IN THE FEDERAL COURT )
OF AUSTRALIA )
WESTERN AUSTRALIA ) No. WAG 83 of 1994
DISTRICT REGISTRY )
GENERAL DIVISION )
B E T W E E N : MARK ANTHONY DORAN
First Applicant
and
WAIMEX PTY LTD
ACN 009 453 525
Second Applicant
and
MICHAEL TRISTRAM COTTAM
First Respondent
and
COTTAM PTY LTD
ACN 003 903 455
Second Respondent
and
PETER VAN HALEWYN
Third Respondent
and
TRINITY ENTERPRISES PTY LTD
ACN 009 466 362
Fourth Respondent
JUDGE MAKING ORDER: CARR J.
WHERE MADE: PERTH
DATE OF ORDER: 27 JUNE 1995
MINUTE OF ORDER
THE COURT ORDERS THAT:
1. The second applicant provide security in the sum of $13,000 for the payment of costs that may be awarded to the first and second respondents against the
second applicant.
2. In respect of Order 1, security be provided in the sum of $5,000 within twenty-one days and in the sum of a further $8,000 within seven days of a hearing date being fixed for the application.
3. The abovementioned security be provided in a form agreed between the respective solicitors, and in default of such agreement, in a form fixed by the District Registrar.
4. These proceedings be stayed until the applicant has complied with Order 2 to the extent of providing security in the sum of $5,000 provided that this order shall not apply to any mediation or other non-judicial dispute resolution proceedings.
5. The first and second respondents' costs on this motion for security be their costs in the cause.
6. Any party to this motion have liberty to apply on not less than two days written notice to the others.
NOTE: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT )
OF AUSTRALIA )
WESTERN AUSTRALIA ) No. WAG 83 of 1994
DISTRICT REGISTRY )
GENERAL DIVISION )
B E T W E E N : MARK ANTHONY DORAN
First Applicant
and
WAIMEX PTY LTD
ACN 009 453 525
Second Applicant
and
MICHAEL TRISTRAM COTTAM
First Respondent
and
COTTAM PTY LTD
ACN 003 903 455
Second Respondent
and
PETER VAN HALEWYN
Third Respondent
and
TRINITY ENTERPRISES PTY LTD
ACN 009 466 362
Fourth Respondent
CORAM: CARR J.
PLACE: PERTH
DATE: 27 JUNE 1995
REASONS FOR JUDGMENT
This is a motion on notice whereby the first respondent, Mr Michael Tristram Cottam ("Mr Cottam") and the second respondent Cottam Pty Ltd ("Cottam") seek an
order that the second applicant, Waimex Pty Ltd ("Waimex") provide security in the sum of $30,000 for their costs of these proceedings.
The Court's power to order security for costs is found in s.56 of the Federal Court of Australia Act 1976 and in s.1335(1) of the Corporations Law. The matter is also dealt with in Order 28 of the Federal Court Rules but in these proceedings no reliance has been placed on that provision. The power is a discretionary one and must be exercised judicially, but that is the only relevant limitation: Bell Wholesale Co Ltd v. Gates Export Corporation (1984) 2 FCR 1 at p.3. The principal application is of a familiar type. In essence, Waimex says that it purchased a business from Cottam in reliance upon certain conduct engaged in by Mr Cottam and others on Cottam's behalf. Waimex says that such conduct was misleading or deceptive and that by reason of the conduct it suffered loss and damage. Mr Doran says that he raised the money to finance Waimex's purchase of the business and also suffered loss by reason of the fact that the first and second respondents engaged in misleading or deceptive conduct. In so summarising the applicants' claims a degree of accuracy will have been sacrificed in the interests of brevity, but my intention is to convey the essence of these proceedings.
The Legislative Provisions
Section 56 of the Federal Court of Australia Act and s.1335(1) of the Corporations Law respectively read as follows:
The Federal Court of Australia Act
SECTION 56 SECURITY
56(1) [Power of Court] The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him.
56(2) [Terms of security as Court directs] The security shall be of such amount and given at such time and in such manner and form, as the Court or Judge directs.
56(3) [Security may be varied] The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given.
56(4) [Proceedings dismissed if no security given] If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceedings or appeal be dismissed.
56(5) [Section subject to Rules of Court or other Acts] This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.
The Corporations Law
SECTION 1335 COSTS
1335(1) [Security given by corporation] 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 applicants concede that the first and second respondents have produced credible testimony which provides reason to believe that Waimex will be unable to pay the first and second respondents' costs should they successfully defend the application.
In Charlwood Industries Pty Ltd v. Cubitt [unreported: Federal Court of Australia NG838 of 1994, 15 March 1995] Gummow J. followed the course adopted
by Hill J. in Equity Access Ltd v. Westpac Banking Corporation & Ors (1989) 11 ATPR 40-972 of listing six factors as being matters appropriate for consideration in the exercise of the discretion whether to order security for costs under either of the above provisions. Olney J. adopted the same course in Market Services International Pty Ltd v. Nutri-Metics (International) Australia Pty Ltd [unreported: Federal Court of Australia VG 57 of 1993, 4 April 1995]. I shall follow a similar, but not identical course.
Chances of Success
I respectfully agree with the reservations expressed by Hill J. in Equity Access and Gummow J. in Charlwood concerning this factor. The evidence in this matter has yet to be tested and, accordingly, it is difficult to form any opinion as to the prospects of success. As Olney J. observed in Market Services International (at p.10) it is relevant to consider whether the second applicant has an arguable or triable case as distinct from a case which is merely frivolous. In my view, in the present matter, the second applicant's claims are at least arguable.
Would an order for security shut out the second applicant from proceeding with the claim?
Initially, Mr J.R.B. Ley who appeared as counsel for the first and second respondents, conceded that the orders sought would probably shut out the second applicant from proceeding with its claim. Doubtless that was on the basis of the order for security for costs being for the sum of $30,000 which is the amount sought in his clients' motion. In any event, that concession was subsequently withdrawn.
Were it not for the possibility that Mrs Doran might have assets which could be made available by way of security for costs, the evidence satisfies me that Waimex would probably be shut out by the making of an order for security in the amount sought. It seems to be common ground that Waimex had liabilities which exceeded its assets by $196,758 as at 30 June 1994. Mr Doran, in an affidavit sworn and filed on 22 June 1995, states that Waimex is unable to pay into Court the sum of $30,000 as security for the first and second respondents' costs. He says that Waimex does not have any assets sufficient to secure such a payment, that it is generating no income and has generated none since April 1994. Mr Doran says further that Waimex's only assets comprise some office furniture which only has a nominal value and that the company is incurring liabilities of some $260 a month for office rental and other office facilities which he is paying personally. Mr Doran says that he does not personally have sufficient funds or assets to pay into Court security or to provide alternative forms of security. He says that he owns no real estate and has no shares or other forms of investment. He owns some household furniture and goods which have only nominal value and he is the half owner of a 1990 Mitsubishi Magna stationwagon which Mr Doran estimates has a value of approximately $10,000. Mr Doran says that he operates a joint bank account with his wife which has the sum of $2,000 in it and that it would be impossible for him to provide security on behalf of the second applicant.
In his affidavit, Mr Doran undertakes to be personally liable for Waimex's costs in the event that Waimex's action against the respondents is unsuccessful.
There is another aspect to be considered. Waimex is not a trustee company. It carries on business in its own right. Its share capital comprises the sum of $2 represented by two ordinary shares. One such share is held by Mr Doran and the other is owned by his wife. Mrs Doran is not a party to these proceedings. Both Mr and Mrs Doran are directors of Waimex. Mrs Doran has sworn an affidavit deposing that she became a director and shareholder of Waimex at her husband's behest so that it would have at least two directors and shareholders. Mrs Doran says that since incorporation of Waimex her husband has had the sole day-to-day control of the company and manages its affairs, and that she did not act on Waimex's behalf in its purchase of the business which is the subject of these proceedings although her husband had discussed that purchase with her. Mrs Doran says that following Waimex's purchase of that business she took no part in its management and that all management and control of the business was undertaken by her husband. Mrs Doran further says that she has not acted on the company's behalf in relation to the litigation nor provided instructions to the company's solicitors. She says that although she is a shareholder in the company she has no interest in the litigation and does not pay any of the costs associated with it. She says that she will not be receiving any benefits in the event that the company is successful. The reason given by Mrs Doran for making this statement is that she agreed with her husband, at the commencement of the proceedings, that as she had no financial interest or risk in the litigation, any judgment proceeds would belong solely to her husband. Mr Doran in his affidavit says that his wife is unwilling to provide security for Waimex as he had agreed withher at the commencement of the proceedings that any financial interest or risk in thelitigation would be his. He says that he also agreed with Mrs Doran that any benefits obtained
by Waimex as a result of the action would belong to him.
I must say I have some difficulty with this proposition. If Waimex is successful in these proceedings then as owner of half the issued share capital in the company, Mrs Doran stands to benefit effectively to the extent of one-half of any improvement in the net asset position or decrease in the net liability position of Waimex. No evidence was put before me to the effect that Mrs Doran was not in a financial position to provide some security. It would have been easy for Mrs Doran to have set out particulars of her assets and liabilities in her affidavit. The situation is that I do not have the benefit of that evidence. Mrs Doran is one of the two directors of the company and the holder of half the issued shares in Waimex but is simply taking the position that she has no interest in the litigation. Mr M.F. Holler who appeared for Waimex submitted that in the context of a husband and wife arranging their affairs in relation to what was in effect the husband's company, I should not look for anything more formal to show that the parties had arranged matters so that Mrs Doran had no financial interest whatsoever in Waimex's success or failure in its application. On this point I have derived some guidance from the following passage in the Bell Wholesale case 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."
If it had been Mr and Mrs Doran's intention from the time of incorporation of Waimex that Mrs Doran should have no beneficial interest in that company then it would have been very easy to give legal effect to that intention. In my view, the evidence does not go so far as to suggest let alone to establish that this was their common intention and it seems that no step was taken to exclude Mrs Doran from having any beneficial interest in Waimex.
I now move forward to the time at which this litigation commenced. It seems to me to be rather a doubtful proposition that a company may be able to resist an application for security for costs on the basis that its shareholders have, at the commencement of the proceedings, arranged matters so that the only shareholder to benefit from the litigation is impecunious and accordingly an order for security for costs would shut out the company from proceeding with its claim.
Furthermore, even if the proposition were a valid one, in my opinion something even slightly more formal would be required than the arrangements here deposed to by Mr and Mrs Doran. Informal arrangements can too easily be undone or ignored subsequently.
I think that, in all the circumstances, the appropriate course is to have regard to the legal position of Mrs Doran's shareholding and to take into account Mr and Mrs Doran's present intentions, as referred to above, only to a very limited extent when making findings about the likelihood of Waimex being shut out of the proceedings by the making of an order for security for costs.
After weighing up all the circumstances, including the absence of any evidence of marital discord, I am not prepared to find, on the basis of the evidence before me, that Waimex would be shut out by the making of an order for security.
Does the impecuniosity of Waimex arise out of the breaches alleged against the respondent?
Waimex does not make any suggestion to this effect.
The public interest
The subject matter of the litigation is essentially a private dispute between the parties and does not involve any question of public interest other than the public interest in compliance with s.52 of the Trade Practices Act. The authorities to which I have referred above, suggest that such public interest is a factor to which some weight should be given. However, I do not consider it requires any particular weight in this matter. This case does not raise the sort of concerns which surfaced in, for example, Cameron's Unit Services Pty Ltd v. Kevin R. Whalpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46.
Discretionary matters peculiar to the particular case
The main discretionary matter argued was the question of delay. In a letter dated 20 April 1995 from the applicants' solicitors to the first and second respondents' solicitors rejecting the suggestion that Waimex should provide security for costs (being Exhibit DMC4 to the affidavit of Mr David Murray Clayton filed on26 May 1995) there is listed a chronology of the steps taken in these proceedings. Mr Andrew John Gabrielson, in his affidavit sworn and filed on 22 June 1995, has listed further steps which have been taken in the proceedings. As Olney J. noted in Market Services, the general rule is that an application for security for costs should be brought promptly. These proceedings commenced on 4 August 1994 and the list of steps referred to in the above documents is a long one. It was not until 6 April 1995 that the first and second respondents' solicitors wrote to Waimex's solicitors raising the question of security for costs. The first and second respondents say that there was no unreasonable delay because it was not until the applicants filed and served their re-amended statement of claim in March 1995 that they were in a position to assess whether an application for security for costs was appropriate. This, so it is argued, was because the first and second respondents were unable prior to that time to ascertain what claim Waimex was alleged to have or indeed whether Waimex had any claim at all.
I do not accept that submission. Even in a case such as this, where the first and second respondents were proposing to file a strike-out motion in respect of the statement of claim and in fact filed such a motion, the time to consider whether an application should be made for security for costs was when the application was initiated or within a reasonable time thereafter. An argument similar to the above submission was considered and rejected by Toohey J. in James v. Australia and New Zealand Banking Group Ltd (1985) 9 FCR 442 at p.446, and (with a degree of hesitation) by Pincus J. in Janus v. A.G.C. (Advances) Ltd (unreported judgment No. 642/88 19 October 1988). There is evidence before me that at the time when the application was filed, a search at the Australian Securities Commission would have disclosed that Waimex was not in a position to satisfy an order for substantial costs.
Furthermore, that situation was apparent from documents discovered and inspected in mid-October 1994. Mr Ley submitted, in the alternative, that delay was not relevant unless Waimex could show prejudice, citing as authority for that proposition a decision of the Full Court of the Supreme Court of Western Australia in Black v. Eastern Goldfields Mining Co Pty Ltd (unreported, 16 December 1992 Supreme Court Judgment No. 930039). He submitted that although Waimex may have incurred the costs referred to above, there was no evidence that any of the costs have been paid and the evidence was that neither Waimex nor Mr Doran had any assets from which to pay those costs. In my view, it is sufficient to constitute adverse affection or prejudice that Waimex has incurred these substantial costs and thus caused its financial position to be even worse than it might otherwise have been. The undisputed evidence is that Mr Doran, in the belief that the respondents would not be seeking security for costs, allowed Waimex to incur the further costs which are referred to above. For this reason (delay) I do not propose to make an order for security for costs incurred to date.
However, this does not, in my view, render it inappropriate for me, in the exercise of the Court's discretion, to make an order in respect of security for costs to be incurred in the future. There are several reported cases in which a successful application for security has been made as late as during the course of trial: Southern Cross Exploration NL v. Fire and All Risks Insurance Co Ltd (1985) NSWLR 114; Estates Property Investment Corporation Ltd v. Pooley (1975) 3 ACLR 256; Equity Access Ltd v. Westpac Banking Corporation & Ors.
The quantum of risk that Waimex cannot satisfy an order for costs
It is conceded that Waimex will not be able to satisfy an order for costs.
Quantum and other discretionary matters
The first and second respondents' estimate their costs to date at $15,541.20. Their estimate of the further costs and disbursements which they will incur to the conclusion of a five day trial is close to $22,000.
As mentioned above, in view of the delay in bringing this application, I propose to disregard the costs incurred to date for the purposes of calculating an appropriate order for security for costs. In this manner I hope to adjust reasonably the interests of the two sides. I refer to the evidence adduced and the submissions made by the applicants that they have been lured into incurring and have in fact incurred substantial costs to date in reliance upon the fact that the first and second respondents have not made any application for security for costs. Mr Doran deposes, in his affidavit, to the fact that he was advised at the outset that there was a strong likelihood of such an application being made. He says that as Waimex's application progressed he did not hear anything further regarding security for costs and that he allowed Waimex to incur some $21,000 in costs in the belief that such security would not be sought by the respondents.
Mr Ley submitted that the fact that Mr Doran undertook (after, but not before the first and second respondents filed this motion) to pay any costs ordered against Waimex in favour of the first and second respondents did not preclude an order for security for costs being made. He relied upon the following observations of Powell J. in Erolen v. Baulkham Hills Shire Council (1993) 10 ACSC 441 at p.456:
"While I am prepared to accept that the offer of a guarantee is a factor to be taken into account in determining what is the proper form of security to be provided in a case in which an order for security is appropriate, I am quite unable to share the views expressed by Byrne J in Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd, supra, and by Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd, supra, which are to the effect that, once the shareholders have agreed to accept personal liability for any judgment for costs, the statutory purpose of s.1335 of the Corporations Law is fulfilled - such an approach, so it seems to me, would be as much "a fetter" on the court's discretion as the, now discarded, approach of "a `bias' in favour of making an order once it is shown that the plaintiff is impecunious"."
In my view, after reading their respective reasons for judgment neither Byrne J. in Mantaray nor Cooper J. in Gentry Bros regarded their discretion as being fettered by the factor that guarantees were offered by the individuals in those cases. However, it is not necessary for me to resolve what Powell J. perceived as a difference of views because in the present matter there is a shareholder (Mrs Doran) who refuses to accept personal liability for Waimex's costs.
In Harpur & Ors v. Ariadne Australia Ltd & Ors (1984) 2 ACLC 356 Connolly J., Campbell CJ and Demack J. concurring, said at p.362 in relation to the predecessor to s.1335 of the Corporations Law:
"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 my view the object of the legislation is satisfied to a very substantial extent by the fact that Mr Doran is an applicant and by the fact that he has undertaken to be responsible for Waimex's costs if a costs order is made against that company. In my (albeit provisional) opinion, if the first and second respondents are successful in defending the proceedings brought against them by Waimex then the reasonable probability is that they will similarly be successful against Mr Doran and, even apart from his undertaking, Mr Doran would be liable for the one set of costs incurred by the applicants. Mr Ley drew my attention to circumstances in which his clients might be successful in their defence of Waimex's application (for example, on the question of causation) but be unsuccessful against Mr Doran's claim. I am not persuaded that there is insufficient overlap between the interests of the two applicants for their claims to be regarded as different for costs purposes.
In my opinion, the object of the legislation is partially thwarted by the fact that Mrs Doran refuses to make her assets available even for partial satisfaction of any order for security for costs. In his affidavit Mr Doran says that his wife is unwilling to provide security for Waimex, not that she is unable to do. By way of alternative submission, Mr Holler argued that this was "just another discretionary factor" which I must take into account. I accept that submission but in all the circumstances of the present matter including the fact that Mr Doran's guarantee would appear to be worthless, I consider it is an important factor to be weighed in the balance with the other matters to which I have referred above.
Mr Holler submitted that if I were minded to make an order for security for
costs then I should "look critically" at a large figure set out at the end of the first and second respondents' draft bill of costs. Waimex has not adduced any evidence to suggest that the first and second respondents' estimate of likely costs is excessive. However, I have examined the draft bill and in my view it seems to be a reasonable estimate.
It is well accepted that security for costs is not intended to provide full indemnity even for party and party costs. In all the circumstances, I consider that it would be just to order Waimex to provide security for costs in the sum of $5,000 in respect of the first and second respondents' costs between now and the date of entry for trial and that when the matter is entered for trial in the further sum of $8,000 by way of security for costs of the first and second respondents to the conclusion of the trial.
I certify that this and the preceding sixteen (16) pages are a true copy of the Reasons for Judgment of Justice Carr.
Associate:
Date: 27 June 1995
Counsel for the second applicant: Mr M.F. Holler
Solicitors for the second applicant: Summers Partners
Counsel for the first and second
respondents: Mr J.R.B. Ley
Solicitors for the first and
second respondents: Freehill Hollingdale & Page
Date of Hearing: 23 June 1995
Date of Judgment: 27 June 1995
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