Dwyer & Maxted v Canning Vale

[2005] SASC 80

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

DWYER & MAXTED v CANNING VALE

Reasons of Judge Lunn a Master of the Supreme Court

11 March 2005

PROCEDURE - COSTS - SECURITY FOR COSTS - PRACTICE MATTERS

Plaintiffs as liquidators pursuing action in their own names to set aside alleged voidable preferences - application by defendant for security for costs - held plaintiffs not nominal plaintiffs under r 100.01(a) - held no special circumstances under r 100.01(e) for security to be ordered - held plaintiffs not shown to be in condition of poverty or impecunious - application dismissed.

DWYER & MAXTED v CANNING VALE
[2005] SASC 80

JUDGE LUNN
Reasons on the Defendant’s Application for Security for Costs

The plaintiffs were appointed joint and several liquidators of Harris Scarfe Limited (“Harris Scarfe”) on 3 January 2002. On 2 April 2004 they instituted this action under s 588FF of the Corporations Act2001 seeking recovery of alleged voidable preferential payments of $723,298.00 made by Harris Scarfe to the defendant.  The defendant has filed a defence raising numerous grounds of opposition to the claim.

On 20 December 2004 the defendant issued an application seeking an order under r 100 that the plaintiffs provide security for the defendant’s costs of the action.  The plaintiffs have instituted similar actions, inter alia, against KA Australia Pty Ltd trading as Kolotex (Action No. 365/04), Janome Sewing Machine Co. (Aust) Pty Ltd (Action No. 370/04), Chicago Boot Company Pty Ltd (Action No. 371/04), Hanimex Pty Ltd (Action No. 374/04) and Mediactive Pty Ltd (Action No. 372/04).  The defendants in each of those actions have taken out similar applications for security for costs.  All such applications were heard at the same time as the application in this action and all defendants were represented by the same counsel.  My reasons for dismissing the application in this action apply equally to the applications in each of the other actions.  There was nothing in the circumstances of any of the other applications which would have produced a different result.

The application is not brought under s 1335(1) of the Corporations Act2001 which only applies where the plaintiff is a corporation. If s 1335 had applied, different considerations would have been relevant. Here both plaintiffs are natural persons, albeit they are suing in their capacities as liquidators appointed pursuant to the Corporations Act2001.  It was not disputed that the  Court could make orders for costs against the plaintiffs personally, and was most likely to do so if the action was ultimately unsuccessful:  re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285; re Buena Vista Motors Pty Ltd [1971] 1 NSWLR 72 at 75. While the plaintiffs have a right to be indemnified against any such orders for costs out of the assets of Harris Scarfe, the defendant’s right of recovery is not limited to the extent of any such indemnity, and can be enforced against the plaintiffs’ personal estates: re Speedifix Building Products Pty Ltd (1987) 11 ACLR 863. “The basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is ancient and well established”: Pearson v Naydler [1997] 3 All ER 531 at 533 per Megarry V-C. The issue on this application is whether the Court can, and should, order security for costs against the plaintiffs as natural persons.

In other jurisdictions there have been various judicial pronouncements on when liquidators suing personally might be ordered to give security for costs.  In re Pavelic Investments Pty Ltd (1983) 8 ACLR 417 at 418, Blackburn J said:

“The foundation of my decision … is that this Court should apply what appears to be a rule of practice so inveterate as to be almost a rule of law, namely that the liquidator of a company, appointed by the Court, is not required to give security for costs save in very exceptional circumstances …..”

In Ferrier v Civil Aviation Authority (Federal Court of Australia 24 March 1994 unreported judgment BC 9405882) Lockhart J said that liquidators suing personally on preference claims were at least generally not liable to provide security for costs.  In Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120 at 123 Meagher JA for the Court of Appeal said at p 123 as dicta that no security for costs would be ordered against liquidators suing personally. The defendant also cited the New Zealand case of Cory-Wright v KPMG (1993) 2 NZLR 701 which while stating such an order would be exceptional was more in its favour than the Australian authorities. There is no South Australian authority directly on the point.

The authorities in this State on the inherent jurisdiction of the Court to order security for costs differ from those in other jurisdictions.  In August Investments Pty Ltd v Poseidon No Liability (1971) 2 SASR 65 at 69 Zelling J held that at common law and in Equity this Court had no inherent jurisdiction to order security for costs other than on four grounds which now correspond to rr 101.01(a)-(d). In Jownal v Commonwealth Bank [1999] SASC 72 Lander J referred to what Zelling J had said and indicated that the four categories were those in rr 100.01(a)-(d) and that there had been an additional category added in r 101.01(e). These authorities, which are binding on me, are to the effect that the only jurisdiction of this Court to order security for costs of an action are those now laid down in rr 101.01(a)-(e). This is inconsistent with a number of decisions elsewhere (conveniently noted in ‘Williams Victoria Supreme Court Practice’ I 62.01.20), but, if there is any wider inherent jurisdiction in this State, it is a matter for the Full Court to rule upon.

The defendant submitted that security could be ordered under r 100.01(a) which provides for security:

“Where the plaintiff is a mere nominal plaintiff and is in a condition of poverty or insolvency”

The plaintiffs here are not nominal plaintiffs.  They are not “mere shadow(s)” or “a front” for someone who stands behind them:  Coyle v Cassimatis [1994] 2 Qd R 262 at 264-5; Co-operative Farmers & Direct Meat Supply Ltd v Smart [1997] VR 386. They are persons performing a statutory role and function under the Corporations Act2001 to effect the winding up of a company according to law, albeit it may be for the benefit of the creditors of the company. In any event subparagraph (a) only applies where the alleged nominal plaintiff “is in a condition of poverty or insolvency”. This is expressed in the present tense and presumably means at the time of the application and its hearing. Unlike s 1335 of the Corporations Act 2001 it is not projected forward to the point of the final judgment in the action.  For the same reasons set out below on whether the plaintiffs are “impecunious” I find they are not in a condition of poverty or insolvency.  Accordingly, no security is to be ordered under subpara (a).

The defendant also relied upon subparagraph (e) which provides security can be ordered:

“Where for special circumstances the justice of the case so requires”.

The onus is on the defendant to show there are “special circumstances”.  What that means in the context of subparagraph (e) has not been judicially expounded, as far as I am aware, but the phrase has been judicially considered in many other contexts.  The cases are noted in “Civil Procedure SA” [55.09.05].  The general thrust of these authorities is that there must be something in the circumstances which is unusual and out of the ordinary. 

The circumstances relied upon here were set out in paragraphs 54 to 68 of the affidavit of the defendant’s solicitor, Natasha Riach, sworn on 20 December 2004.  The grounds of defence relied on by the defendant are the types frequently encountered in voidable preference actions.  For the purpose of this exercise I am prepared to treat them as strong grounds of defence, but it is impossible for me to resolve the issues.  Conversely the plaintiffs also at least have a reasonably arguable case.  The plaintiffs have brought 65 such actions, and at the worst for them, if they all proceeded to trial and were unsuccessful, they could be personally liable for some millions of dollars in costs.  However, in large liquidations, such as that of Harris Scarfe and its associated companies, it is not unusual for there to be a multitude of preference claims.  The plaintiffs do not have enough funds or assets in the liquidation to meet the costs incurred to date in the winding up, let alone for any orders for costs which might be made against them.  However, if some of the preference claims and other litigation being pursued by the liquidators succeed, that would provide funds in the future to meet both the expenses of the liquidation and any costs which the plaintiffs might be ordered to pay in unsuccessful litigation.  Again it is not an uncommon situation in which liquidators find themselves.  Furthermore, there is some likelihood of the plaintiffs entering into a litigation indemnity agreement with a litigation funder which would substantially reduce the risk of any costs orders made against them not being meet.  The consideration for this agreement will be that the funder will obtain a share of the proceeds of the litigation if it is successful, but nothing if it fails.  It does not cover the expenses of the litigation of the plaintiffs.  If it eventuates it will be very much for the benefit of the defendant.  I take judicial notice from the many matters coming before this Court involving such windings up that the circumstances referred by the defendant are often encountered in such liquidations.  I find that the defendant has not proved on the balance of probabilities that they amount to “special circumstances” for the purposes of subparagraph (e).

Even if there are special circumstances, there are other reasons why subparagraph (e) has not been satisfied.  In Eddy v Mac Audio & Acoustical Consultants Pty Ltd Full Court 13 July 2000 [2000] SASC 145 unreported Lander J, with whom the other members of the Court agreed, said at page 6:

“Impecuniosity by itself is not, in my opinion, sufficient to justify an order for security for costs. If it was no impecunious plaintiff could bring proceedings against any other party without running the risk of having to submit to such an order. … Impecuniosity is one of the circumstances which enlivens the jurisdiction to make an order in this Court: r 100.01. It is the relevant matter which enlivens the jurisdiction to make an order under s 1335. Impecuniosity will be a relevant factor in determining whether an order for security for costs ought to be made but it is only one of what may be a number of other factors which must be considered in determining whether it is appropriate to make an order for security for costs.”

In Collins v Emacord Autos Pty Ltd  3 November 1997, Judgment No S6418, unreported, Lander J, with the agreement of the other members of the Full Court, said at 4-5:

“The defendant’s application relied upon r 100.01(e).  An order for security for costs under that rule can only be made where special circumstances exist.  The fact that the plaintiff is impecunious would not, of itself, give rise to the making of an order ….. although of course, impecuniosity will be highly relevant factor in determining whether an order should be made.  There must, at the end, be special circumstances which will demonstrate that the justice of the case requires the making of the order.”

In the latter case, and in the only other case where I am aware an order for security was made under subparagraph (e), Leighton  Hill Pty Ltd v Wilshire-Smith Lander J, 21 April 1995, Judgment No S5050, unreported, the plaintiffs were clearly impecunious.  What is not addressed in the authorities is what, if any, circumstances would give rise to an order for security under subparagraph (e) if the plaintiff was not shown to be impecunious.  It would seem that impecuniosity is generally a very significant factor, and any other circumstances in the absence of impecuniosity which could give rise to an order would need to be very substantial abuses of process by the plaintiff.

I can find no judicial exposition or definition of “impecunious”.  The “Macquarie Dictionary” Second Revised Edition defines it as “having no money; penniless;  poor”.  In order to rely on impecuniosity under (e) the defendant must establish it on the balance of probabilities.  I need not go into the question of whether it is to be impecuniosity at the time of the application or of the anticipated final judgment, or both.  The plaintiffs are practising accountants and registered liquidators.  Such persons would not be categorised as “penniless” or “poor” unless there was some other evidence pointing towards their insolvency, which there is not.  The limited enquiries made by the defendant’s solicitors did not reveal that they had any significant assets but that does not persuade me that they should be described as “poor”.  They declined to provide details of their personal financial positions.  I do not criticise them for that.  It would be most unfortunate if every personal plaintiff in the Court had to disclose his or her financial position to the other party to avoid an inference that they were “impecunious” and possibly subject to an order for security for costs.  (As has been recognised in the authorities quoted above impecuniosity in itself is not grounds for ordering security).  Accordingly I do not find the defendant to have shown that the plaintiffs are, or will be, impecunious.

For similar reasons to those given above as to why there were no special circumstances, the actions of the plaintiffs could not be said to amount to such an abuse of process as to require security to be given under (e) even if they are not impecunious.

The plaintiffs disclosed in the affidavits filed on their behalf that they are no longer the liquidators of Harris Scarfe.  On 21 January 2005 another Master of this Court appointed Colin Nicol and Samuel Davies to be the joint and several liquidators of Harris Scarfe in place of the present plaintiffs in this action.  Counsel for the plaintiffs indicated that applications were being prepared to substitute the new liquidators as the plaintiffs in this action.  I do not see that the change of liquidators affects this application for security for costs.  If new liquidators are not appointed that would probably be grounds for staying or striking out the action on the basis that the plaintiffs no longer have a statutory right to pursue the cause of action.  However, while they remain the plaintiffs they are potentially liable for costs and to have orders for security for costs made against them. 

As the defendant has not satisfied either rr 101.01(a) or (e) its application for security for costs is dismissed