Espanol Holdings Pty Ltd v Banning - [1999] WASC 49

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: ESPANOL HOLDINGS PTY LTD & ANOR -v- BANNING & ORS [1999] WASC 49

CORAM: MASTER SANDERSON

HEARD: 1 JUNE 1999

DELIVERED : 9 JUNE 1999

FILE NO/S: CIV 1172 of 1999

BETWEEN: ESPANOL HOLDINGS PTY LTD
First Plaintiff
MARIA MICHELLE ORTIN
Second Plaintiff
AND
MARTIN PAUL BANNING
First Defendant
DOUGLAS FRANK BREWER
Second Defendant
ESCON LANE PTY LTD
Third Defendant
JOHN ANDREW MILLER
Fourth Defendant
COUNTRYWIDE HOME LOANS PTY LTD
Fifth Defendant
GEORGE JASPER
Sixth Defendant
DON CAMPBELL-SMITH
Seventh Defendant

Catchwords:

Practice and procedure - Application to strike out paragraphs of statement of claim - Application for security for costs - Turns on its own facts

Legislation:

Corporations Law, s 1335

Trade Practices Act, s 52

Rules of the Supreme Court, O 20

Result:

Strike out application dismissed - Security for costs refused

Representation:

Counsel:

First Plaintiff                :     Mr D H Solomon
Second Plaintiff            :     Mr D H Solomon
First Defendant             :     Mr K J O'Toole
Second Defendant         :     Mr K J O'Toole
Third Defendant           :     Mr C R Coulson
Fourth Defendant          :     Mr C R Coulson
Fifth Defendant            :     Mr S Penglis
Sixth Defendant            :     Mrs P M Edward
Seventh Defendant        :     Mrs D M Templeman

Solicitors:

First Plaintiff                :     Solomon Bros
Second Plaintiff            :     Solomon Bros
First Defendant             :     Kevin James O'Toole
Second Defendant         :     Kevin James O'Toole
Third Defendant           :     Coulsons
Fourth Defendant          :     Coulsons
Fifth Defendant            :     Freehill Hollingdale & Page
Sixth Defendant            :     Murie Edward
Seventh Defendant        :     Minter Ellison

Case(s) referred to in judgment(s):

Astley v Austrust Limited (1999) 161 ALR 155
BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857
Bridgewater v Leahy (1998) 158 ALR 66
Commercial Bank of Australia v Amadio (1983) 151 CLR 477
Craig v Troy (1997) 16 WAR 96
Garcia v National Australia Bank Limited (1998) 155 ALR 641
Harpur v Ariadne Australia Ltd (1984) 2 ACLC 356
Henderson v Merrett Syndicate Limited [1995] 2 AC 145
Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1998) 16 ACLC 1
Kimberley Downs Pty Ltd v Western Australia, unreported; SCt of WA; Library No 6414; 25 August 1986
March v E & M H Stramere Pty Ltd (1991) CLR 506
Naxakis v Western General Hospital [1999] HCA 22
Permanent Building Society (In Liq) v Wheeler (1993) 11 WAR 187
Smith v Littlemore (1996) 15 WAR 289
Temwood Holdings Pty Ltd v Oliver, unreported; SCt of WA; Library No 980034; 4 February 1998
Westralian Goldmines Ltd v Westralian Minerals and Drilling Pty Ltd (In Liq) (1986) 4 ACLC 167
Yerkey v Jones (1939) 63 CLR 649

Case(s) also cited:

Adshead, Premier Gold NL v Ocean Resources NL, unreported; SCt of WA; Library No 940738; 14 December 1994
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 175 CLR 485
Avspares Pty Ltd v Skywest Aviation Pty Ltd (1997) 24 ACSR 272
Begbie v State Bank of NSW (1994) ATPR 41
Breen v Williams (1996) 186 CLR 71
Bruce v Odhams Press Ltd [1936] 1 KB 697
Caffrey v Darby (1801) 6 Ves Jun 488
Chan v Zacharia (1984) 154 CLR 178
Chappel v Hart (1998) 156 ALR 157
Clough v Bond (1838) 3 My & Cr 490
Commonwealth Bank Ltd v Smith (1991) 102 ALR 453
Cubillo v Commonwealth of Australia [1999] FCA 518
Dare v Pulham (1982) 148 CLR 658
Dalecoast Pty Ltd v Guardian International Pty Ltd, unreported; SCt of WA; Library No 990168; 7April 1999
Dalecoast Pty Ltd v Guardian International Pty Ltd, unreported; FCt SCt of WA; Library No 990208; 23 April 1999
Demagogue v Eurolynx Properties Pty Ltd (1995) 183 CLR 563
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Dey v Victorian Railways Commission (1949) 78 CLR 62
Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1998] VSCA 43
Fountain Selected Meat (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397
Fraser v NRMA Holdings Ltd (1995) 55 FCR 452
Gallo v Dawson (1990) 93 ALR 479
General Steel Industries Inc v Commissioner of Railways (NSW) (1964) 112 CLR 125
Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405
Hawkins v Clayton (1988) 164 CLR 539
Health Lifecare Ltd v Price Waterhouse (1993) 11 ACSR 326
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83
Hill v Van Erp (1997) 188 CLR 159
Interchase Corporation Ltd (In Liq) v Colliers Jardine (Qld) Pty Ltd (1995) 13 ACLC 1105
Kelly v Cooper [1993] AC 205
Keppel v Wheeler [1927] 1 KB 577
KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 13 ACLC 437
Leicester v Walton, unreported; NSWCA; Library No 40354; 22 November 1995
Louth v Diprose (1992) 175 CLR 621
Maguire v Makaronis (1997) 144 ALR 729
March v E & M H Stramere Pty Ltd (1991) 171 CLR 506
MA Productions Pty Ltd v Austrama Television Pty Ltd (1982) 1 ACLC 404
Niven v Grant [1903] 29 VLR 102
Nocton v Lord Ashburton [1914] AC 932
Northern Land Council v The Commonwealth (1987) 75 ALR 210
O'Halloran v R T Thomas & Family Pty Ltd (1998) 29 ACSR 148
Olex Focas Pty Ltd v Skodaexport Co Ltd (1997) ATPR (Digest) 46-163
Pando v Brockway (1998) 20 SR (WA) 1
Pegrum v Fatharly (1996) 14 WAR 92
Perrins v Bellamy [1899] 1 Ch 797
Pritchard v Racecage Pty Ltd (1996) 142 ALR 527
Pulham v Dare [1982] VR 648
Queensland Nakano High School Ltd v G H N Gakuen, unreported; SCt of Qld; 116 of 1992; 21 April 1993
Ratman v Cumarasamy [1965] 1 WLR 8
Ravi Nominees Pty Ltd v Phillips Fox (1992) 10 ACLC 1313
Real Estate and Business Agents Supervisory Board; ex parte Cohen, unreported; SCt of WA (Scott J); Library No 980668; 17 November 1998
Rhone-Poulenc Agrochimie SA v UIM Chemical Services Pty Ltd (1986) 12 FCR 477
Ritter v Northside Enterprises Pty Ltd (1975) 132 CLR 301
Robinson v Adshead [No 2] (1995) 12 WAR 577
Russell-Davison v Prosin, unreported; SCt of WA; Library No 980277; 22 May 1998
San Sabastian Pty Ltd v The Minister (1986) 162 CLR 340
Stern v McArthur (1988) 165 CLR 489
Sutherland Shire Council v Heyman (1985) 157 CLR 424
Tweedvale Investments Pty Ltd v Thiran Pty Ltd (1995) 14 WAR 109
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
Warman International Ltd v Dwyer (1995) 182 CLR 544
Williams and Humbert Ltd v W & H Trademarks (Jersey) Ltd [1986] AC 368
Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 543

MASTER SANDERSON: This is the return of a number of chamber summons issued by the defendants. Dealing with the various applications chronologically, the fifth defendant applied to strike out certain paragraphs of the statement of claim, but made no application for security for costs. The first, second, third and fourth defendants applied to strike out certain parts of the plaintiffs' statement of claim. They also sought an order for security for costs of the action. The seventh defendant sought an extension of time within which to apply to strike out certain paragraphs of the statement of claim and also sought an order for security for costs. There was no application made by the sixth defendant and, although counsel for the sixth defendant appeared on the hearing of the applications, she took no part in the proceedings. The present solicitors for the third and fourth defendants were appointed after the applications on behalf of their clients were initiated. Counsel for the third and fourth defendants supported the submissions made by other counsel for the defendants but did not make submissions independently.
By arrangement between the parties, the application of the fifth defendant was heard first. It will be convenient if I deal with that application, then move on to the other strike‑out applications and move finally to the applications for security for costs. The fifth defendant seeks to strike out par 83 and par 108.3 of the statement of claim. (The application also made reference to certain paragraphs of the prayer for relief, but these paragraphs were not dealt with separately by counsel. It followed that if the paragraphs of the statement of claim complained of were struck out then the paragraphs in the prayer for relief would fall away.)
The plaintiffs filed an amended statement of claim dated 20 May 1999. The statement of claim was amended without leave, pursuant to O 21 r 3. The amendments made did not affect the fifth defendant.
To understand the nature of the fifth defendant's application, it is necessary to say something about the scheme of the amended statement of claim. The first nine paragraphs of the statement of claim identify the parties. The second plaintiff is said to be the sole director of, and shareholder of, the first plaintiff. The first defendant is a real estate agent employed by the second defendant. The fifth defendant is a finance broker who employed the sixth defendant. The fourth defendant is the sole director and shareholder of the third defendant. In par 10 and par 11 what is referred to as the "First Transaction" is pleaded. It is enough for present purposes if I say that it involved property transactions nominally between the first plaintiff and the third defendant. These transactions were negotiated by the first defendant while he was employed by the second defendant. The transaction was somewhat complicated, but the detail is not relevant to the fifth defendant's application. What is relevant is that the first transaction in part was subject to finance which was to be obtained on or before 21 January 1998 (par 31.5).
It is then pleaded that, by facsimile dated 5 February 1998, the fifth defendant represented to the fourth defendant that finance had been obtained (par 38). It is said (by par 39) that this representation was false. Paragraph 40 pleads that on or about 16 February 1998 the first defendant visited the second plaintiff and arranged for new offer and acceptance documents to be signed by the second plaintiff on behalf of the first plaintiff. These new offer and acceptance documents did not have the subject to finance clause in them. This omission resulted, it is said, from the first defendant showing the second plaintiff the facsimile dated 5 February from the fifth defendant. By par 44 it is pleaded that the plaintiffs, relying inter alia on the 5 February letter, executed the new offer and acceptance documentation.
It is subsequently pleaded that the fifth defendant did actually provide finance to the plaintiffs to allow the transaction to be completed. However, because of certain other matters which it is alleged transpired between the plaintiffs and other defendants certain further borrowings were necessary which, it seemed, resulted in the transactions being uncommercial. As a consequence, it is said, the plaintiffs have suffered loss and damage.
Paragraph 83 of the amended statement of claim pleads that the conduct of the fifth defendant was misleading and deceptive, contrary to s 52 of the Trade Practices Act. It is to be noted that the facsimile of 5 February was not directed by the fifth defendant to the plaintiff. It was sent to the fourth defendant. What is more, the fifth defendant actually provided finance to the plaintiffs, however it is pleaded, and it must be accepted for the purposes of this application, that as at 5 February the representation made in the facsimile of that date was false. It is pleaded that the reliance placed by the plaintiffs on the false facsimile led them to commit to the new offer and acceptance documentation. Thus, it is said by the plaintiff there was a representation which was false and which was relied upon in entering into the transaction. By par 108.3 the plaintiff says, as against the fifth defendant, that where it not, at least in part, for the false representation in the facsimile of 5 February the plaintiffs would not have entered into the further offer and acceptances. As a consequence of having done so, it is said they suffered loss and damage.
In my view the cause of action against the fifth defendant is properly pleaded. It may well be the case that the fifth defendant did not know that the plaintiffs would rely upon the facsimile of 5 February. It may also be the case that the fifth defendants did not intend that the plaintiffs should so rely on that facsimile. But that is not to the point. The question raised by the application was whether or not causation has been properly pleaded. Given that knowledge and intention on the part of the fifth defendant is not a relevant consideration, it seems to me that the pleading is entirely proper. During the course of submissions counsel for the plaintiffs questioned whether or not it was necessary for the plaintiffs to plead causation. Reference was made to March v E & M H Stramere Pty Ltd (1991) CLR 506 and Naxakis v Western General Hospital [1999] HCA 22. It is unnecessary for me to express any view on this point. It was the fifth defendant's contention that causation had not been pleaded. In my view it has been so pleaded and I see the amended statement of claim as being unobjectionable. I would therefore dismiss the fifth defendant's application.
At the commencement of the hearing counsel for the first and second defendants provided a revised outline of submissions which was drawn after the filing of the amended statement of claim. It appears that a number of the complaints of the defendants have been addressed by amendments. However, a number of objections to the statement of claim are maintained. I will deal first with the objections raised by the first and second defendants and, tacitly, by the third and fourth defendants.
Objection is taken to par 12.3 and par 25.1 of the amended statement of claim. Both of these paragraphs plead that a certain property defined as the Kardinya property was valued at $350,000. It is said that neither of these two pleas go to any issue between the parties and that as a consequence a false issue is raised which could embarrass or delay a fair trial of the action.
It is pleaded at par 16.3.2 of the amended statement of claim that in the first transaction the sale price of the Kardinya property was $200,000. It seems to me that the pleading in par 12.3 and 25.1 are necessary to establish the nature of the transaction or transactions between the parties. I would agree that not much appears to turn on the valuation of these properties. But I accept the submission of the plaintiffs that without this detail being provided the picture of the transactions as a whole would be incomplete. In my view, the pleading is unobjectionable.
Counsel for the first and second defendants also sought to rely on affidavit evidence which had been filed to support their application to strike out these paragraphs. Under O 20 r 19(2) no evidence is admissible on an application to strike out brought under O 20 r 19(1)(a). Counsel submitted that evidence was admissible when an application was brought under r 19(1)(c) - that is on the basis the plea might prejudice, embarrass or delay a fair trial of the action. It may be that in very limited circumstances evidence would be admissible in relation to applications brought under r 19(1)(b), (c) and (d). But, essentially, a pleading summons is just that - it is an application based upon the pleading being bad on its face. A party wishing to seek summary judgment can do so under either O 14 or O 16. As a general rule it is inappropriate to allow evidence on a strike‑out application. The principles in relation to strike‑out applications were clearly set out in Kimberley Downs Pty Ltd v Western Australia, unreported; SCt of WA; Library No 6414; 25 August 1986. These principles succinctly stated in that case make it plain that it is only in the clearest case that pleadings should be struck out. It is inappropriate to deal with the evidence which might or might not show that the claim will not be successful.
The next complaint was as to par 13. This paragraph pleaded that representations made in par 12.1 and par 12.2 were "to the knowledge of [the first defendant], false". It was said that this plea was bad for want of particularity. Particulars of knowledge do not need to be pleaded: see Smith v Littlemore (1996) 15 WAR 289 at 300. In my view there is nothing amiss with this plea and it should be allowed to stand.
The next complaint related to par 17. To explain this plea some background is required. It is part of the plaintiffs' claim that the first defendant and the second plaintiff formed an attachment. As a consequence of this attachment it is pleaded that the first defendant took unfair advantage of his position of influence over the second plaintiff and that certain transactions should be set aside because they are unconscionable. This is very much a truncated version of what is a complicated pleading, but it is in essence the claim made by the plaintiffs against the first defendant. What par 17 does is to plead the facts which, it is said, give rise to the dependency of the second plaintiff on the first defendant.
It is clear that the plaintiffs are attempting to establish the nature of the relationship between the second defendant and the plaintiffs. In cases such as Yerkey v Jones (1939) 63 CLR 649, Garcia v National Australia Bank Limited (1998) 155 ALR 641, Bridgewater v Leahy (1998) 158 ALR 66 and Commercial Bank of Australia v Amadio (1983) 151 CLR 477 the nature of the relationship between the parties was seen as decisive in whether or not relief was available based on unconscionable conduct. It is at least arguable that the matters pleaded in par 17 could give rise to a relationship which might, in turn, lead to a finding of unconscionable conduct. This is an area of the law which is in a state of flux and, for that reason, apart from anything else, it would be inappropriate to strike out this pleading even if it did not fit squarely within the categories of unconscionable conduct so far recognised. To do so might stultify the development of the law. In any event, it seems to me that the pleading in its present form contains sufficient material facts to make it arguable that a court could find the second plaintiff was in a dependency relationship with the first defendant so as to give rise to a right to equitable relief. Paragraph 17 should stand.
Objection is taken to par 40.3. By this paragraph it is pleaded that on or about 16 February 1998 the first defendant visited the second plaintiff and did not tell her that certain contracts had terminated. As I understand the plea, it is contended that there should be a plea specifically that the contracts had terminated. With respect, it seems to me that this fact is adequately covered in earlier paragraphs of the pleading. In particular, par 33, par 35 and par 37 make it plain that the finance conditions of earlier contracts had not been satisfied and that, as a consequence, those contracts had terminated. In my view a separate and distinct plea is unnecessary.
Finally, objection is taken to par 82B which forms part of the particulars to par 82. The objection to this paragraph appears to be based on affidavit evidence. I have already dealt with the question of use to be made of evidence in an application such as this and I need not repeat those observations. Insofar as it is said that the paragraph cannot be supported as a matter of logic, it seems to me, with respect, that the inference contended for is at least open. At trial the inference may not be drawn. But as a pleading, par 82B is unobjectionable.
I am satisfied that there is no substance in any of the objections raised by the first and second defendants and, collaterally, by the third and fourth defendants. I would therefore dismiss the chamber summons.
Turning then to the application of the seventh defendant, an extension of time to bring the strike‑out application was required. I did not deal with this as a separate issue. I invited counsel to address the merits of the application with a view to considering both the application for the extension of time and the strike‑out application at the same time. In the event, I have determined that the strike‑out application fails. I have therefore dealt with the application on its merits without giving careful attention to whether or not the extension ought be granted. In the context of the various applications, this seemed to be the most practical way of dealing with the application.

Objection was taken to par 36. By that paragraph it is said that the seventh defendant did not advise the plaintiffs that certain contracts had terminated on 21 January 1998 when finance was not obtained. In essence, this is the same complaint made by counsel for the first and second defendants. As I have noted above, there is no direct plea that the contracts did terminate as a consequence of a failure to obtain finance. But that fact is perfectly plain from the way the pleading is structured. I need not repeat what I have already said. There is no substance in this objection. Objection is then taken to par 91. By par 91.2 the plaintiffs plead that the seventh defendant owed either the second and/or the first plaintiff "duties of care and in contract". It is said that the pleading is bad because no indication of how the duty in contract arose. The answer is, I think, that it arises by operation of law: see Astley v Austrust Limited (1999) 161 ALR 155; Henderson v Merrett Syndicate Limited [1995] 2 AC 145; Craig v Troy (1997) 16 WAR 96. Once the nature of the engagement is pleaded - in this case engagement as a settlement agent - then certain duties in that contractual arrangement arise as a matter of law. No further pleading is necessary. Paragraph 91.2 is unobjectionable and should stand.
Objections were raised to par 103, par 105, par 107, par 109 and par 111. In each of these paragraphs, save par 105, there is a reference to further particulars of loss and damage being provided prior to trial. In relation to par 105 it is said the particulars provided are inadequate. At some stage full particulars will have to be provided. But it is unobjectionable that they have not been provided to date. Their absence does not prevent the seventh defendant pleading to the claims made in the statement of claim. The failure to provide these particulars does not provide a basis for striking out any of these paragraphs.
The final complaint of the seventh defendant related to par 92 of the statement of claim. This is a plea that the seventh defendant had breached his fiduciary duty. The fiduciary duty is pleaded in par 91.1. The duty owed by the seventh defendant was said to be:
"a fiduciary duty not to prefer Escon Lane's or Miller's interests, further or alternatively Banning's interests, to Espanol's interests, further or alternatively Ortin's interests;"
It is pleaded that the conduct set out in par 36 forms the basis of the alleged breach of fiduciary duty by the seventh defendant. Paragraph 36 relates to a failure by the seventh defendant to advise the plaintiffs of certain matters.
Counsel for the seventh defendant submitted that a failure to advise in and of itself is not a breach of fiduciary duty. Counsel relied upon Permanent Building Society (In Liq) v Wheeler (1993) 11 WAR 187. That principle is undoubtedly correct. But what is pleaded here is that a failure to advise in turn led to the seventh defendant advancing the interests of other parties against the interests of the plaintiffs with whom, it is alleged, he had a fiduciary relationship. It does not seem to me that the plea is simply that a failure to give advice is breach of a fiduciary duty. Rather, the pleading is that given the relationship between the parties, the seventh defendant had a fiduciary obligation not to prefer the first, third and fourth defendants' interests to the plaintiffs' interests. If that is established on the evidence then it may be that the failure to warn, leading as it did in the circumstances to a preferring of the defendants' interests to the plaintiffs' interests, might give rise to a breach of fiduciary duty. The position is at least arguable. In my view, the pleading should stand.
In the result then, none of the objections taken by the defendants to the plaintiffs' amended statement of claim succeed.
Before leaving these applications I should say something, once again, about strike‑out applications in cases such as this. This is an extremely complicated case. Complicated cases lead to complicated pleadings. The amended statement of claim runs to 43 pages and 111 paragraphs. If one reads the pleading from beginning to end the nature of the claims made against each of the defendants clearly emerges. The arrangement of the pleading, taken as a whole, is neither illogical nor inconsistent. Counsel for the plaintiffs made this point in his submissions, drawing upon comments that I made in Temwood Holdings Pty Ltd v Oliver, unreported; SCt of WA; Library No 980034; 4 February 1998. Counsel for the first and second defendants referred to this approach as "holistic". While eschewing any reference to new age theory, it would seem to me that there is something to be said for approaching the pleading as a complete narrative and not attempting to pick at minor blemishes in the fabric. To do so serves no purpose. Of course, that is not to say that a pleading which is bad should not be attacked, but where, as here, a reading of the statement of claim in its entirety discloses the nature of the case that the defendant has to meet with a degree of clarity then, in my view, strike‑out applications are of limited value.
Turning then to the applications for security for costs, the submissions put on behalf of each of the defendants were, in essence, the same. The applications were brought under s 1335 of the Corporations Law. It was not in dispute that, if an award of costs was made against the first plaintiff it would not be able to meet that award. It is a $2 company and it has no assets. The question then is whether I should exercise my discretion in favour of making an order for security for costs. It is to be noted that no order for security was sought against the second plaintiff. It is apparent that she is impecunious but that does not form a basis upon which security for costs can be ordered: see O 25 r 1.
In opposing the applications for security for costs, counsel for the plaintiffs relied upon Harpur v Ariadne Australia Ltd (1984) 2 ACLC 356. This case dealt with a situation where there were a number of plaintiffs, one of whom was an individual. An application for security for costs was brought against the corporations but not against the individual. The headnote relevantly summarises the conclusions as follows:
"Where there is more than one plaintiff, all plaintiffs suing in the same interest and by the same solicitors and counsel, there is one set of costs. If the defendants have an opponent of substance they have as much as any litigant is entitled to. Where a co‑plaintiff is within the jurisdiction there is no ground for ordering security. Unless there is ground for making an order for security against all plaintiffs it should not be made against any."
The decision of the court was given by Connolly J. At 362, his Honour referred to there being one set of costs in the proceedings, and continued:
"If the defendants have an opponent who is worth powder and shot they have as much as any litigant is fairly entitled to. The Court cannot by its orders guarantee a successful outcome in a practical sense to any party. It is thus no answer when security for costs is sought to say that a person of apparent substance may be able to make away with his assets within the jurisdiction before a judgment for costs can be executed. ... The 'two plaintiffs' cases start with the situation in which one is out of the jurisdiction. Prima facie he ought to be ordered to provide security but his co‑plaintiff is within the jurisdiction. In such a case it was considered that there was no ground for ordering security. ... This principle was held to apply even where the plaintiff within the jurisdiction was insolvent. I take the underlying reason to be that the defendant was really in no worse position than if he had been sued by a single plaintiff resident within the jurisdiction and insolvent. ... unless there is ground for making an order for security against all the plaintiffs, it cannot be made against any."
The status of the Harpur decision in this State is uncertain. In Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1998) 16 ACLC 1 the Full Court considered the question of whether or not personal guarantees given by the directors of a corporation were sufficient to satisfy the requirements of s 1335. The facts of the case were relatively simple. Sampas brought an action in the Commercial Tribunal against Intercraft. Intercraft applied for an order for security for costs under s 1335. It was conceded that Sampas would not be able to meet any costs ordered against it. Sampas' shareholders were in financial difficulties. The Tribunal ordered security by way of personal guarantee by Sampas' shareholders. From this order, Intercraft appealed. Malcolm CJ, giving the decision of the Court, reviewed the authorities at some length. His Honour concluded (at 9 and 10):
"To the extent that the judgments in Harpur and other cases suggest that once a personal undertaking is available, that is necessarily 'sufficient' security as a general principle, I cannot agree. The availability of such an undertaking is not the only consideration. The issue has to be looked at in the light of all relevant considerations including the merits of the action and whether the ordering of security will stifle an action which has some apparent merit.
Counsel for the respondent went so far as to say that the effect of the authorities was that once the directors and shareholders have come out from behind the corporate veil an undertaking to give security over their own assets for whatever they might be worth, that was sufficient security, notwithstanding that they were impecunious because they were exposed to personal liability for whatever they may be worth, including being made bankrupt. This, it was contended, was the approach taken by the learned Commissioner.
The Tribunal had also held that the statutory purpose of s 1335 of the Corporations Law is met once the shareholders had come out from behind the corporate veil and personally undertaken to meet any costs ordered against the company. It was irrelevant that those shareholders were themselves impecunious. In my opinion, for reasons already stated, that was an error of principle. Once that point was reached it was necessary for the learned Commissioner to exercise the discretion anew."
It seems then that the proper position is this. The fact that those standing behind the company and who are likely to benefit from any litigation will be liable to have a costs order made against them because they are a party to the proceedings in their own right is but one factor to be considered in the exercise of discretion. It is not determinative of the question. Other factors, such as the merits of the action, the likelihood that any order for costs will stultify the proceedings and the issue of whether the defendants are responsible for the plaintiffs' impecuniosity must also be considered.
In this case, as in most cases, it is virtually impossible to assess at this stage in the proceedings the strength of each parties' case. At present, the plaintiffs have filed an amended statement of claim. No defences have been filed. There is some affidavit material filed in support of, and in opposition to, this application which gives the flavour of each parties' position. But I am not in any position to determine where the merits might lie. That is a matter which must await trial. What can be said is this. Neither the plaintiffs nor the defendants are in a position where they can apply for summary judgment. That suggests that each concedes that the other has an arguable case. That is as much as I could conclude and consideration of the merits does not suggest an exercise of discretion one way or the other.
The plaintiffs claimed that the evidence established that it was the actions of the defendant which had led to its presently impoverished position. It is clear that, if a plaintiff intends to run this argument in opposition to an application for security for costs, it has the evidentiary onus of establishing its financial position both before and after the transaction: see BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857 per Anderson J at 862. In opposition to this application, the plaintiffs filed an affidavit of the second plaintiff sworn 14 May 1999. The plaintiff deposes (in par 1) that she is the sole director and sole beneficial shareholder of the first plaintiff. In par 42 of that affidavit the second plaintiff alleges that the impecuniosity of the first plaintiff has been occasioned by the actions of the defendants. This claim is supported by Annexure "MMO20" to the second plaintiff's affidavit. That report from an accountant suggests that prior to entering into these transactions the company was solvent and was trading satisfactorily. I am satisfied that this evidence discloses the evidentiary requirements necessary to establish that the present impecuniosity of the first plaintiff is due to the transactions complained of in the amended statement of claim. To reach that conclusion is to say nothing about the merits of the claim itself. It is simply to acknowledge that before the first plaintiff entered into this transaction it was solvent and able to pay its debts and now it is impecunious.
This then leads on to what is sometimes called the "commercial morality" argument. This submission relies upon the decision of the Full Court of this Court in Westralian Goldmines Ltd v Westralian Minerals and Drilling Pty Ltd (In Liq) (1986) 4 ACLC 167. With respect, I am not sure that to focus on the reference in the decision of Brinsden J to "commercial morality" advances the argument a great deal. What the Westralian Goldmines' case indicates is, first, that there is no predisposition in favour of making an order for security and, second, that whether or not to grant security is a matter of discretion to be exercised taking into account all relevant matters. In that case one of the relevant matters was the nature of the relationship between the companies to the litigation. As counsel for the second defendant pointed out, there is no such special relationship in this case and to that extent no basis for declining to exercise the discretion.
Finally, there is the question of whether or not an order for security for costs will stultify the proceedings. In this regard the question of whether or not creditors who may stand to benefit from any litigation will be prepared to fund that litigation falls for consideration: see BPM Pty Ltd v HPM Pty Ltd (supra) at 855. In this case it appears from the documents annexed to the affidavit of the second plaintiff that the only creditors are secured creditors who have no incentive to fund the litigation. It would therefore appear that there is a real prospect that if security for costs is ordered, the action, at least by the first defendant, will be stultified.
In my view, there are two factors which lead to the conclusion that the order for security ought be refused. First, it would appear that the present impecuniosity of the first plaintiff is due to the transactions complained of. In saying that, I repeat, I am not in any way seeking to comment upon the merits or otherwise of the action. But the evidence shows that, prior to entering into the transaction complained of, the first plaintiff was trading profitably and was solvent. Now it is impecunious. I must assume that it has an arguable case. Secondly, there seems to me to be a real prospect that if security for costs is ordered, the first plaintiff will not be able to proceed with this action. The second plaintiff will be able to proceed. The case made by the second plaintiff is inextricably linked to the case made by the first plaintiff. Thus it will be that the defendants will be put to the cost and expense of defending the action by the second plaintiff in any event. In these circumstances, it surely stands to reason that both plaintiffs should proceed. In other words, I am satisfied that an order for costs will stultify the proceedings and that this, in the circumstances, warrants an exercise of my discretion so as to refuse an order for security for costs.
On that basis the chamber summonses of the first, second, third, fourth and seventh defendant seeking security for costs will be dismissed. I will hear the parties as to the costs on these chamber summonses but my preliminary view is that the costs of the applications ought be costs in the cause.