Drumdurno Pty Ltd v Braham

[1982] FCA 167

Re: DRUMDURNO PTY. LIMITED and RODONO PTY. LIMITED
And: MELVYN MARTIN BRAHAM; ADELE CLAIRE BRAHAM; DANIEL SLATER and JOSEPH KNOWL
(1982) 64 FLR 227
No. VG37 of 1982
Practice and Procedure - Practice
7 ACLR 131

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Sweeney J.(1)

CATCHWORDS

Practice and Procedure: -application by first and second named respondents for an order that the applicants provide security for costs - discretion of the court to make such an order - whether applicants had a reasonably good prospect of success - whether applicants want of means had been brought about by the wrongful conduct of the respondents - whether applicants' claim was bona fide and not a sham - whether the proceedings involved matters of public importance - whether the respondents were using the application oppressively - whether the making of such an order would mean that the applicants' claim would be at an end - no evidence of willingness and means of the shareholders of the applicant companies to assist - exercise of discretion.

Federal Court of Australia Act (C'th): S56

Companies Act (Vic): S363

Practice - Security for costs - Action by impecunious companies - Merits of applicants' cases - Whether respondents had contributed to applicants' impecuniosity - Whether application oppressive - Federal Court of Australia Act 1976 (Cth), s. 56(1) - Companies Act 1961 (Vic.), s. 363.

HEADNOTE

The applicants had brought proceedings against the respondents alleging breaches of Pt V of the Trade Practices Act 1974 in connexion with the creation of a franchise agreement between the applicants as franchisee and a company, of which the respondents were directors, as franchisor. The applicants were corporations with small paid-up capitals. The second respondent by affidavit denied the allegations of the applicants, while the first respondent indirectly, by his solicitor's affidavit, denied those allegations. The first applicant amended its application to delete any claim against the second respondent. The respondents brought an application seeking security for costs.

Held: (1) It had not been shown that any conduct of the respondents had led to the impecuniosity of the applicants.

(2) (a) The second applicant had not established a reasonable prospect of succeeding in its action against the second respondent. (b) The applicants' claim against the first respondent appeared to be bona fide.

(3) (a) The applicants should provide security for costs in respect of their claims against the first respondent up to the completion of interlocutory steps. (b) In the case of the second applicants' action against the second respondent, a similar order should be made. Tradestock Pty. Ltd. v. T.N.T. (Management) Pty. Ltd. (1977) 30 FLR 343; Buckley v. Bennell Design & Constructions Pty. Ltd. (1974) 1 ACLR 301; Pearson v. Naydler (1977) 1 WLR 899; Pacific Acceptance Corporation Ltd. v. Forsyth (No. 2)(1967) 2 NSWR 402; Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd. (1973) 1 QB 609; National Bank of New Zealand Ltd. v. Donald Export Trading Ltd. (1980) 1 NZLR 97, referred to.

HEARING

Melbourne, 1982, June 15; August 13. #DATE 13:8:1982

APPLICATION.

In an action under Pt V of the Trade Practices Act 1974 the respondents sought an order that the applicants provide security for costs.

W. J. Martin, for the applicants.

G. L. Fricke Q.C. and N. J. Young, for the respondents.

Cur. adv. vult.

Solicitors for the applicants: J. S. Tait & Co.

Solicitors for the respondents: J. F. Hennessy & Associates.

T. J. GINNANE

ORDER

1. that the applicants provide security for the costs of the first named respondent in respect of the period up to the point where all interlocutory steps in the application have been completed, in an amount to be decided hereafter.

2. that the first named applicant provide security for the costs of the second named respondent in respect of the period up to 15 June 1982 when the first named applicant obtained leave to amend the application so as to delete any claim by it against the second named respondent, in an amount to be decided hereafter.

3. that the second named applicant provide security for the costs of the second named respondent in respect of the period up to the point where all interlocutory steps in the application have been completed, in an amount to be decided hereafter.

4. that liberty be reserved to any party to apply generally, upon seven days notice to the other parties.

5. that all questions of costs be reserved. Orders accordingly.

JUDGE1

By notice of motion filed 18 May 1982 the first and second named respondents Melvyn Martin Braham and Adele Claire Braham seek, inter alia, the following order:

"That an order be made requiring the Applicants to provide $50,000.00 by way of security for costs."

Mr Fricke QC of Counsel together with Mr N. J. Young of Counsel appeared on behalf of the first and second named respondents. ("the respondents"). The respondents relied upon S56(1) of the Federal Court of Australia Act 1976 and S363(1) of the Companies Act of the State of Victoria to found their application.

S56(1) of the Federal Court of Australia Act 1976 provides as follows:
"The Court or a Judge may order a plaintiff 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."

S363(1) of the Companies Act provides as follows:
"Where a company 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 company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."

S363(1) of the Companies Act and the nature of the discretion vested in the court by it and its predecessors have a long history in company legislation in England and in Australia. In Tradestock v TNT 30 F.L.R. 343 at p.347 Smithers J cited the following passage from the judgment of Street CJ in Buckley v Bennell 1974 1 ACLR 301 at 303 which he accepted as a correct guide in the exercise of the discretion conferred by the sub-section:
"It seems to me that the discretion could properly be regarded as ordinarily exercisable so as to protect a defendant sued by an impecunious company, but that, if the court in any case takes the view that this protection should not be afforded to the defendant, it has an unlimited and unrestricted discretion to give effect to such view without having to look for special circumstances. I prefer to regard the discretion conferred by the section as being one which should be exercised merely with a predisposition in favour of the defendant party."

Mr Fricke referred to this passage emphasising the use of the expressions "ordinarily exercisable" and "predisposition" and submitted that it was appropriate in the present situation for the court so to exercise its discretion.

The rationale underlying the sub-section was explained by Street CJ in Buckley v Bennell supra in the following terms (at pp303,304):
"It reflects the concern of the legislature that in permitting the incorporation of a limited liability entity it was necessary to ensure that persons who might have dealings whether voluntary or involuntary with such an entity should have protection against the consequences of limited liability. In cases of contract the other party to the dealing is on notice of the limited liability of the company and the transaction being voluntary could be presumed to be competent to look after his own interests in that regard. Where, however, a company commences litigation against another party that other party could find himself involuntarily prejudiced by the limited liability character of the plantiff who had commenced proceedings against him. To protect the other party from this consequence of limited liability there has always been in company legislation a provision along the lines of S363(1) of the Act."

Mr Fricke submitted that the present situation was a clear illustration of respondents being involuntarily prejudiced by the impecuniosity of the applicants.

In exercising its discretion the court needs to weigh up the competing interests of the parties having regard to all of the facts and circumstances of the particular case. Smithers J in Tradestock supra at p.348 said:
"No doubt the answer is to be found by ascertaining where, on considerations of what is just and reasonable, the balance rests between the risk of exposing an innocent defendant to the expense of defending his position and the risk of unnecessarily shutting out from relief a plaintiff whose case if litigated would result in his obtaining that relief".

Mr Fricke pointed to the authorities which recognise the distinction between natural persons and limited companies in relation to security for costs. As was said by Megarry V-C in Pearson v Naydler 1977 1 WLR 899 at p904
"In relation to security for costs, there seems to me to be an essential distinction between natural persons and limited companies as plaintiffs. For a natural person, the basic rule is that he will not be ordered to give security for costs, however poor he is. To that basic rule there are certain exceptions, originally evolved in case law but now set forth in the rules of court. - - - - - - In the case of a limited company, there is no basic rule conferring immunity from any liability to give security for costs. The basic rule is the opposite".

In Pacific Acceptance Corp. Ltd. v Forsyth 1967 NSWR 402 at p407 Moffitt J said:
"However, the very basis of the exercise of jurisdiction to order security for costs against a company as distinct from an individual is that the company is impoverished. It recognizes that if a company wins it will get the benefit of its verdict and an order for costs against the defendant to the advantage of those who have an interest in the assets of the company but that the defendant sued will, if successful, be at a disadvantage in being unable to recover costs if the company is financially insecure, and that it is fair that he be placed in an equal position with the company by the company providing or having provided by those concerned in the fruits of the litigation a means of the defendant sued recovering his costs, if he wins."

In Pearson v Naydler supra Megarry V-C went on to say (at p907) "While I fully accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section."

Mr Martin of Counsel on behalf of the applicants submitted that the court should decide the question of security of costs by weighing up the relevant discretionary factors to determine where the balance of discretion rested on the facts and circumstances of the case. He referred to the judgment of Lord Denning MR in Parkinson & Co. v Triplan Ltd. 1973 1 QB 609 as providing the court with guidance concerning the factors which are relevant for it to consider. At p626 Lord Denning said:
"If there is reason to believe that the company cannot pay the costs, then security may be ordered, but not must be ordered. The court has a discretion which it will exercise considering all the circumstances of the particular case. So I turn to consider the circumstances. Mr Levy helpfully suggests some of the matters which the court might take into account, such as whether the company's claim is bona fide and not a sham and whether the company has a reasonably good prospect of success. Again it will consider whether there is an admission by the defendants on the pleadings or elsewhere that money is due. If there was a payment into court of a substantial sum of money (not merely a payment into court to get rid of a nuisance claim), that, too, would count. The court might also consider whether the application for security was being used oppressively - so as to try to stifle a genuine claim. It would also consider whether the company's want of means has been brought about by any conduct by the defendants, such as delay in payment or delay in doing their part of the work."

Mr Martin submitted that the onus upon his clients was only to show that the balance of discretion favoured them without having to look for special circumstances. He relied upon several factors to support his submission that the balance was in favour of his clients.

Firstly, he submitted that the applicants had a reasonably good prospect of success. The respondents were directors of a company which was the franchisor of a fast food restaurant chain. The applicants entered into franchise agreements with the franchisor to establish restaurants in Warrnambool and Mt. Gambier. The applicants alleged in their amended statement of claim that the conduct of the franchisor in the negotiation and performance of these agreements amounted to contraventions of S52 and S53 of the Trade Practices Act and that the respondents aided, abetted, counselled, procured, were knowingly concerned in, and conspired in that conduct.

Although it appeared from the original application dated and filed by the applicants on 7 April 1982 that both applicants sought relief against all of the respondents, Mr Martin made it quite clear that the first named applicant was not seeking relief against the second named respondent. He applied for leave to amend the application accordingly. Such leave was granted, with Mr Fricke not wishing to be heard on the matter.

A distinction needs to be made between the allegations made by the applicants against the first named respondent and those made by the second named applicant against the second named respondent. Mr Martin conceded that the case against the first named respondent was stronger than that against the second named respondent. The allegations against the first named respondent were verified by the affidavit of Roger Damian Fitzgerald sworn 3 June 1982 and filed on behalf of the applicants. The first named respondent was said to be directly involved with the challenged conduct of the franchisor in that it was said that he made some of the representations complained of on behalf of the franchisor, he was the managing director of the franchisor, he was the man behind the franchisor who made the decisions, and he was mentioned in various newspaper articles concerning the franchisor and its restaurants.

Mr Martin stressed that there was no defence filed or affidavit sworn by the first named respondent in opposition to the statement of claim and affidavit of Mr Fitzgerald in support of the application. The allegations against the first named respondent were only refuted indirectly by the affidavit of Timothy Gerard McHenry, the solicitor for the respondents, sworn 15 June 1982. In paragraph 2 of his affidavit Mr McHenry stated that he was informed by the first named respondent that the contents of the proposed defence of the first named respondent to the amended statement of claim which was exhibited to his affidavit were true and correct.

The allegations against the second named respondent were also verified by the affidavit of Mr Fitzgerald sworn 3 June 1982. However the alleged involvement of the second named respondent in the challenged conduct of the franchisor is less direct than that of the first named respondent. It was described by Mr Fitzgerald in paragraph 11 of his affidavit in the following terms:
"As to the involvement of the second named respondent, by reason of the fact that she is the wife of the first named respondent and was a director of the franchisor at the relevant time (as I am informed by my solicitor and verily believe) I verily believe she must have known that the first named respondent was meeting my co-directors of the second named applicant and myself for the purposes of discussing and with a view to making the agreement referred to in paragraph 14 of the amended Statement of Claim."

However the second named respondent in an affidavit sworn 10 June 1982 denied any involvement with the challenged conduct of the franchisor. The affidavit was in the following terms:
"1. I am the second above-named respondent.

2. I have read a copy of the Statement of Claim herein as amended and insofar as there is any allegation against myself I deny each and every such allegation.

3. I have never met the directors or any one of them of the the applicant companies nor spoken with them either directly or indirectly.

4. As to the allegation relating to restaurants in Mount Gambier and Warrnambool, I know nothing about such restaurants and I have never discussed any such restaurants or any business dealing relating to them, with any of the respondents or with any other person directly or indirectly. I have had no written correspondence with any person about these matters in any way.

5. I have never discussed either of the Warrnambool or Mount Gambier restaurants or any business arrangement relating thereto with Melvyn Martin Braham.

6. I have only ever attended one Board Meeting of Big Al's Sandwich Joints Pty. Ltd. and that related to a Western Australian business matter and there was no discussion about any of the matters relating herein.(sic).

7. I have not aided or abetted or counselled or agreed in any conspiracy in any way as alleged in this claim herein."

Mr Martin maintained that the second named applicant had a reasonably good prospect of success against the second named respondent although he conceded that the prospect of success was not as strong as that against the first named respondent.

The second discretionary factor which Mr Martin relied upon was his submission that the applicants' want of means had been brought about by the wrongful conduct of the respondents. In other words there was a so called "nexus" between the admitted impecunious condition of the applicants and the alleged wrongful conduct of the respondents. In paragraph 14 of his affidavit sworn 3 June 1982 Mr Fitzgerald stated:-
" - - - - - I say that as a direct result of the conduct of the respondents and the franchisor the applicants do not have the means to meet an order for security for costs in the sum of $50,000.00 or any other sum or obtain borrowings to satisfy any such order. The applicants' ventures into the Warrnambool and Mt Gambier stores were financed by way of loans from my co-directors and myself via their respective family trusts, which advances total $191,153.00 and, of course, the Applicants have no prospect of repaying those loans (unless they are successful in the application herein)."

Smithers J in Tradestock supra at p351 said:
"As indicated in Parkinson's case (supra) the Court may well look with disfavour upon a defendant seeking security for costs if the acts of the defendant have disabled the plaintiff from complying with an order for such security."

In relation to this factor Mr Fricke pointed out the distinction drawn by Smithers J in Tradestock supra between a situation where the applicants' want of means is caused by the wrongful conduct of the respondents and a situation where the applicants are already impecunious at the time when they come into contact with the respondents when his Honour said at p351:
"But this is not such a case. So far as appears the plaintiff company's impecunious condition has existed since the company came into being, and before it attempted to do business with the defendants or any of them. It may be that the defendants' conduct, wrongful or otherwise, has created a situation in which the plaintiff has had less opportunity than it otherwise might have had to cure its original impecuniosity, but it did not cause it."

Mr Fricke submitted that the situation in the present case was one where the applicants' impecunious condition had existed from the time they had come into being. It could not be said that the respondents' conduct had caused the impecuniosity. At worst, it had given the applicants less opportunity to cure their original impecuniosity. In this regard it is relevant that the applicants had minimal share capital, that they did not engage in any business other than the restaurants, and that that business was financed by loans from the family trusts of their directors.

Mr Fricke also referred to the passage from Lord Denning's judgment in Parkinson's case quoted above in relation to this factor and submitted that when Lord Denning spoke of "any conduct by the defendants, such as delay in payment or delay in doing their part of the work" he was not referring to conduct of the defendants upon which the principal action of the plaintiff was based but rather some other extraneous conduct. He said that the court on the hearing of an application for security for costs could not engage on a ministerial of the principal action.

The third discretionary factor which Mr Martin referred to was that the applicants' claim was bona fide and not a sham. Mr Fricke has submitted that the claim was novel in that the applicants were alleging contraventions of Part V of the Trade Practices Act yet the relief sought was against the directors of the challenged corporation and not the corporation itself. Mr Martin submitted that the claim was not novel or a sham and cited Muller v Fencott (1982) ATPR 40-266 as an example of another instance of proceedings where similar relief was sought.

Fourthly, Mr Martin submitted that having regard to the policy of the Trade Practices Act an order for security for costs should not be made because the proceedings involved matters of public importance. He referred to Smail v Burton 1975 V.R.776 where the Full Court of the Supreme Court of Victoria refused to order that the appellant provide security for costs because the appeal involved matters of public importance. That case concerned S367B of the Companies Act of the State of Victoria.

Reference was also made to the statement by Smithers J in Ilat Nominees Pty. Ltd. v Murragong Nominees Pty. Ltd. 48 F.L.R.385 at p.387 that the Trade Practices Act has a "strong public element about it". On the other hand Mr Fricke argued that the proceedings basically concerned an ordinary type of private commercial transaction and involved no public importance element.

Fifthly, Mr Martin alleged that the respondents were using the application for security oppressively so as to try to stifle the genuine claim of the applicants. He submitted that this was apparent from paragraphs 10 & 11 of the affidavit of Neil Essex Roberts sworn 27 May 1982 and filed on behalf of the respondents. Those paragraphs read as follows:
"10. On the 24th. May 1982 I had a conversation with Mr David Chambers who I believe is a solicitor in Sydney acting on behalf of a client, namely B.J.M. Refrigeration. Mr David Chambers indicated to me that his client had given him instructions to bring an action against the franchisee who operated the Big Al's Restaurant at Mt Gambier, who he thought was Mr Mark Wilson. I am aware that there are other possible cross-claimants against the applicants or their directors herein by other persons arising out of allegations in the amended statement of claim herein.

11. As to the matter of legal costs involved in these proceedings and the application made in paragraph 6 of the said notice of motion to be heard on the 4th. June 1982 I say that to properly prepare the case to be met as a result of the allegations made in the amended statement of claim herein and to interview witnesses who are now scattered over Australia and in the United States of America and to have them give evidence at the hearing will be very expensive: now produced and shown to me at the time of swearing this affidavit and marked with the letter "B" is the original of a quotation for the cost of one attendance by each of those witnesses at a hearing in Melbourne. The scale rate in the Supreme Court of New South Wales for work done for the applicant in proceedings in a winding up under the Companies Act 1961 up to and including service of the order under the Rules is $698.75. If as anticipated, many parties join in into the present proceedings herein, then the legal costs involved in the hearing would be very considerable. If this Honourable Court is prepared to allow costs for travelling to interview witnesses for the taking of statements before the hearing then it may be the air-fares could approximate $25,000 - $30,000, which would include counsels' fees travelling to Melbourne, cartage of approximately two filing cabinets of documents to Melbourne, from Sydney."

Another relevant matter for the court to consider in exercising its discretion is whether the making of an order for security would mean that the applicants could never proceed and their claim would be at an end.

I have already referred to paragraph 14 of the affidavit of Mr Fitzgerald sworn 3 June 1982 in which he said:
" - - - - the Applicants do not have the means to meet an order for security for costs in the sum of $50,000.00 or any other sum or obtain borrowings to satisfy any such order."

Mr Fricke submitted that it could not be concluded that the making of an order for security would spell the end of the action. Such a conclusion failed to take account of the financial resources of the shareholders of the applicant companies and of other people who might bear the fruits of the litigation were it to be successful. Smithers J in Tradestock supra at p.350 said:
"However, at this stage it cannot be regarded as certain that an order for security would bring the action to an end. The current financial resources of the plaintiff's shareholders or of any other person who may be willing to assist the plaintiff are not shown."

In National Bank v Donald Export Trading Ltd. 1980 1 NZLR 97 at p.101 the Court of Appeal spoke of "the possibility and propriety of a company overcoming the problems arising from its own impoverishment by seeking the assistance of individuals interested in the assets of the company and the outcome of the litigation. In the present case no evidence was placed before the court as to the willingness of creditors or shareholders to give assistance of this kind."

Similarly in the present case no evidence was before the court as to the resources or willingness of the shareholders or other interested people. It is relevant that the capital of the applicant companies is minimal, the first named applicant having a paid up capital of $898.00 and the second named applicant a paid up capital of $2.00. Mr Fricke cited the following passage of Smithers J's judgment in Tradestock supra at p.351:
"And indeed it is a major, if not a dominating, consideration in this case that the plaintiff company is but a legal entity without substance, a convenient financially bereft alter ego for the two shareholders. Its capital, is minimal, its assets are not disclosed but the inference to be drawn is that they are minimal, and it is not shown that it has any business of substance. This is not the case of a company whose shareholders have committed capital and established a real business but finds itself currently without funds for some business reverse. This company would appear to be the type of legal entity, par excellence, which Parliament had in mind when it passed S363(1)."
and submitted that it applied equally to the present applicants.

There is a certain irony in the fact that the applicants are looking beyond the franchisor company, which they have not sued, to its directors, whereas they have been resistant to the notion that their own directors should place the respondents in a position to meet the applicants on equal financial terms, in the sense that either side should, if successful, be able to recover costs awarded to it. No attempt has been made to show that the shareholders of the applicant companies lack the means to provide security.

It has not been shown to my satisfaction that any conduct of the respondents has led to the impecuniosity of the applicants but rather that they have been in that state throughout their legal lives, with the possible exception of a very short period immediately after their incorporation. The second named applicant has not established, at this stage, a reasonable prospect of success against the second named respondent. As the evidence presently stands, the first named respondent has shown an apparent reluctance to pledge his oath to a denial of the allegations of the applicants. The claim made against him appears to be bona fide. The public element involved in proceedings under the Trade Practices Act is a factor to be weighed but it does not seem to me to justify the conclusion in the circumstances of this case that the financially naked applicants should be free to proceed to the hearing and determination of their application on the footing that they may recover costs if successful, but the respondents would be denied the corresponding opportunity. The case put by the respondents in relation to the amount of costs likely to be involved appeared to be rather exaggerated but I do not regard their application for security as being made oppressively. As the evidence stands, there is no satisfactory basis upon which one could decide the appropriate amount of any security which should be ordered, and counsel very sensibly agreed that, if the conclusion were reached that security should be ordered, liberty should be given to the respondents to file affidavits bearing on the question of amount and the applicants should have an opportunity to file answering affidavits.

Weighing all the factors as best one can, the appropriate conclusion seems to be that the court should order that the applicants should provide security for costs in respect of their claims against the first and second named respondents in respect of the period up to the point where all interlocutory steps in the application have been completed, reserving to any party liberty to apply in relation to the position thereafter. At that stage, after the results of discovery and interrogatories are known, the parties may well be in a better position to decide their attitudes to the questions whether a further claim for security should be made, and if so, in what amount, and whether in the event of a claim being made, security should be provided, or the claim should be resisted.

The orders of the court are:

1. that the applicants provide security for the costs of the first named respondent in respect of the period up to the point where all interlocutory steps in the application have been completed, in an amount to be decided hereafter.

2. that the first named applicant provide security for the costs of the second named respondent in respect of the period up to 15 June 1982 when the first named applicant obtained leave to amend the application so as to delete any claim by it against the second named respondent, in an amount to be decided hereafter.

3. that the second named applicant provide security for the costs of the second named respondent in respect of the period up to the point where all interlocutory steps in the application have been completed, in an amount to be decided hereafter.

4. that liberty be reserved to any party to apply generally, upon seven days notice to the other parties.

5. that all questions of costs be reserved.