Duragrid (Aust) Pty Ltd v Outback Games Pty Ltd

[1989] FCA 872

JUDGMENT No. ...k?f.2 .... l

IN THE FEDERAL COURT OF AUSTRALIA )

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SOUTH AUSTRALIA DISTRICT REGISTRY ) NO. VG 23 of 1988

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GENERAL DIVISION	)
B E T W E E N :
DURAGRID (AUST) PTY LTD and SPORT COURT OF AUSTRALIA PTY LTD

Applicants

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OUTBACK GAMES PTY LTD

HIRE--FLOOR (AUST) PTY LTD	!
HIRE-FLOOR (NZ) PTY LTD
LINDSAY HAROLD SKINNER
RAYMOND JOHN WHALLEY and	l i
LEE TECK CHEW	I

Respondents	1
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EX TEMPORE REASONS FOR JUDGMENT	I
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This is an application by the respondents for an order	I
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that security for costs be given by the two applicants.	In the
proceedings the two applicant companies seek declarations that	i
the respondents have engaged in conduct contravening ss.52, 52A,
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53, 55 and 55A of the Trade Practices Act	-	1974, and a variety of	i
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consequential reliefs and remedies.	The respondents make their	1
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application under s.533(1) of the Companies (S.A.) Code.	That	I
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sub-section reads :	1

"533(1) 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 defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."	i
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2.

It is now established that this Court, by the operation of s.56 of the Federal Court of Australia Act 1976 and s.79 of	l
the judiciary Act 1903 has jurisdiction to exercise the power

given by s.533(1). See the decision of the Full Court in Bell I

wholesale CO Pty Ltd v. Gates Export Corporation (1984) 52 ALR

176. This application is not made pursuant to the provisions of 0.28, r.3 of the Federal Court Rules to which Mr Garrard, who i

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by leave appearing for the applicants on this application, made

reference.

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The power under s.533(1) is conditioned by the existence of the requisite belief on the part of the court based on credible testimony, namely, a belief: that the applicant companies will be unable to pay the costs of the respondents if successful in their defences. The evidence which the respondents adduce in that regard is to be found in the affidavit	i I
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of Lindsay Harold Skinner filed on 9 February 1989, in	i
particular, in letters dated 10 December 1987 and 7 April 1988
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exhibited thereto.	~ o t h	letters are from Price Waterhouse	i
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addressed by way of circular to creditors of each of the	1
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applicants and another which together comprised a group.	The
first of the letters advises that the acc!ountants are undertaking	i

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a review of the current position of the group and requests	I
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creditors to take no action on debts for the time being.	l
The letter of 7 April 1988 makes proposals to creditors for the compromise or deferment of the debts of the two applicant	l
companies.	In part, the letter reads :

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"We are pleased to advise that negotiations to

overcome this short term problem have been

successful and have as a result, culminated in the	i
introduction of new management personnel, a change in ownership and the inflow of further working capital. Your support over the past months is much appreciated and every effort is being made to ensure that a speedy reso1ut:ion of outstanding debts be reached.
In view of the company's present circumstances we ask that you consider the following alternatives in satisfaction of your outstanding claim, ..."

(In the case of the letter exhibited, the claim was for $1,048.10 but, presumably, different amounts were shown in different

letters). The letter then outlines the two proposals :

"(a) The acceptance of 70 cents in the dollar in full and final consideration of your debt at 31 March 1988;

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(b)	The acceptance of 30 cents in the dollar on the above debt and future repayments on a monthly basis at the rate of 10 cents in the dollar per month to extinguish the remaining amount outstanding.

In considering this offer we point out that the companies have a substantial deficiency of assets

over liabilities. The above offer to compromise i

the debts owing to you has been made possible by	~
the agreement of directors/shareholders to forego	I

claims totalling approximately $150,000. Should I

the companies be placed in liquidation, it is estimated that the unsecured creditors would receive less than 5 cents in the dollar."

It will be noted that the letter refers to a position as at 31
March 1988, and one of the contentions advanced today by Mr	l
Garrard is that the letter provides no evidence of the present	!
circumstances of the applicant companies.	1
Another submission made by Mr Garrard, and supported to some extent by an affidavit filed by the applicants from one Jens	~
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~ ~ n n i n g Christensen, is that the alternative offers made to

creditors in April 1988 were part of a commercial scheme to

restructure the companies and bring in new personnel. ~t is

implied by Mr Garrard that the new personnel came in after that	i
date and that their presence and their financial backing might quite alter the financial position of the applicants.

There are two difficulties with these submissions. The

first is that the letter implies by its terms that the change of	1
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management had occurred prior to the making of the offers, and that the statement as to the deficiency of assets over liabilities mentioned in the last quoted paragraph of the letter described the situation after that change.
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The obher difficulty is that no information has been provided by the applicants to support the suggestion that their	1
financial position may have improved. Ilhe applicants were given	i
ample opportunity to respond to the af:fidavit of Mr Skinner. Their only response has been the affidavit from Mr Christensen, which makes no reference to the current financial position of the

applicants whatsoever; in fact, it studiously avoids the topic. l

Mr Morcombe, who appears for the respondents, relies therefore on the decision of French J. in Orison Pty Ltd v.	I
Strategic Minerals Corporation NL & Ors. (1987) ATPR 40-803 at
PP.48,746 to 48,748 and in particular to the passage which reads:	i
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"More particularly, Orison having it within its power to show that it has the ability to meet a costs order has declined to do so for reasons which remain shrouded in mystery. It is

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significant that Orison has at no stage contended that it has the ability to pay the costs and has asserted through its solicitors that Strategic is the proper party to bear any order for costs."

Likewise here, the applicants, having it within their power to show that they have the ability to meet the costs order and having had the opportunity to disclose their present financial position, have for reasons best known to them declined to do so.

In some cases, it is possible to have regard to the merits of the claim or defence, as the case may be, as a factor indicating whether or not an order for security for costs should be made. In many others, however, it will not be possible to form a view about the merits and this is one such case. I think it sufficient to refer to the observations made by Woodward J. early in the piece and later by Forster J. when he refused the applicants' claim for interlocutory relief. This is a case where the decision might go one way or the other. ~t is not possible, therefore, to decide the application by reference to the likely outcome.

Another matter to which regard should ordinarily be had is the matter of delay on the part of the respondents in bringing

the application for security. There has been some delay in this instance in that the letters upon which they rely bear dates in December 1987 and April 1988; however I do not think it would be appropriate to treat that delay as so serious as to disentitle them to make their application. In the period from about April through to June 1988, the respondents were engaged in defending

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an application for interlocutory relief. When that was refused in mid 1988, the matter simply went dead and the applicants took no further steps in the proceedings. It was not until the court initiated a further directions hearing that any action occurred. ~t that point, the application for security was made.

The substantial ground of opposition advanced by Mr to frustrate the applicants' claims. To make good that submission, it would be necessary - and in this respect the onus

~arrard against the orders for security is that they are likely

l	is upon the applicants asserting the matter - to show that the position of the applicant company or companies and those who stand behind them is such that they would be unable to comply with the order for security and would thereby be forced to drop the proceedings. No attempt has been made to lay the foundation for that submission.
In my view, the respondents have shown by credible evidence that the applicants would be unable to pay the costs of
1	the respondents if they were successful in their defences. The court is empowered to exercise the discretion given to it by s.533(1) of the Companies ( s . A . ) Code to order that security be
given. On the information presently before the court, I think
it would be a proper exercise of that discretion to order that security be given.
The security shall, in terms of s.533(1) be "sufficient securityv. The affidavit of Mr Skinner deposes to advice that
he has received from his solicitors about the costs. On the ,

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strength of that advice, security in the sum of $20,000 is sought. Having regard to the nature of the proceedings and the ,xtensive allegations that are made, that estimate seems to me to be conservative. I think a figure of $20,000 would be an appropriate figure to fix as the amount of the security.

I propose, however, to take a course which was adopted

by French J. in Orison Pty Ltd v. Strategic Minerals Corporation

NL & Ors. (supra), that is to indicate that I am prepared to	i
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reconsider 'the decision regarding security, if the applicants, on	I
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a subsequent application, are able to demonstrate that they will
be able to pay the respondents' costs if they are successful in	i
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the action. I have made the orders that I have, based on the absence of any information from the applicants in that regard	I I
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whatsoever. Mr Garrard was disposed to suggest in his i

submissions that the restructured company might be in a position

to meet orders for costs and that reservation will give the	l
company the opportunity to attempt to prove that, if so advised.	l
The customary order is to direct that the proceedings be stayed

until such time as the security is provided.	That is reflected	I
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in the minutes of order. There will be an order in terms of

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these minutes.

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Mr Garrard, I have extended to you some leniency by that reservation, giving you the opportunity to come back and to try	I
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and do something about it, if you wish; but the onus that would rest upon a company in endeavouring to set aside an order for security in those terms would be quite considerable. There would have to be a full, frank and very thorough disclosure of
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the financial position of the company and, indeed, of those who

stand behind it, if that course is to be pursued.

I certify that this and

the preceding7pages are

a true copy of the Reasons for Judgment of Mr Justice von Doussa.

Associate:  -

(&.At A 6irshcd

-- Dated:

8 Mm& 1487

counsel for the applicants : Mr K. Garrard (leave to

appear )

Counsel for the respondents	: Mr N.W. Morcombe
Solicitors for the respondents	: Andersons
Date of hearing	: 8 March 1989