Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd

Re: GENTRY BROS PTY. LTD.
And: WILSON BROWN AND ASSOCIATES PTY. LTD.; BRUCE JAMES BROWN; ANSCAPE PTY.
LTD. and BRIAN JOHN CLARKE
No. G93 of 1992
FED No. 592
Practice and Procedure - Security of costs - Interlocutory relief
(1992) 14 ATPR 41-184 / (1992) 10 ACLC 1394 / (1992) 8 ACSR 405

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Cooper J.(1)

CATCHWORDS

Practice and procedure - application to strike out statement of claim - discloses no reasonable cause of action - whether circumstances constitute conduct within the meaning of trade and commerce in section 52 Trade Practices Act.

Security for costs - whether making of an order would result in the premature termination of the proceedings - discretion of the Court - regard to whether the interests of justice will be served - relevant factors vary from case to case - weight depends on circumstances - considerations peculiar to corporate entitles - potential liability of shareholders - whether respondent caused or substantially contributed to the applicant's impecuniosity - likelihood of success not to be investigated on application for security for costs.

Interlocutory relief - whether misleading and deceptive conduct - requisite character of trade and commerce - relevant considerations - protection of status quo for what purpose - section 87 Trade Practices Act provides compensation for the particular loss suffered - whether will interfere with rights under a mortgage - whether payment of monetary compensation sufficient if succeed in the action.

Trade Practices Act Section 52, Section 87

Corporations Law Section 1335

Federal Court Act Section 56

O'Brien v. Smolonogov (1983) 53 ALR 107

Argy v Blunts and Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112

Begelfer v Najarian 409 NE (2d) 167 (1980)

Lyan v Nashauvaty 423 NE (2d) 1052 (1981) 1054

Lanther v Carson 373 NE (2d) 973 (1978)

P.S. Chellaram and Co v China Ocean Shipping Co. (1991) 65 ALJR 642 at 643

Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1

Harpur and Ors v Ariadne Australia Ltd and Ors (1984) 2 Qd R 523

Cameron's Unit Services Pty Ltd v Kevin R. Whelpton and Associates (Australia) Pty Ltd (1986) 13 FCR 46

Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304

Bryan E. Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497

Equity Access Ltd v Westpac Banking Corporation (1989) 11 ATPR 40-972

Manutu Pty Ltd v Lissenden (1983) 8 ACLR 364

Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542

Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 79 ALR 634

ASX Operations Pty Ltd v Pont Data Australia Pty Limited

ASX Operations Pty Ltd v Pont Data Australia Pty Limited (No. 2) (1991) 27 FCR 492

Allied Westralian Finance Ltd v Wenpac Pty Ltd (1992) ATPR (Digest) 46-082

HEARING

BRISBANE

#DATE 18:8:1992

Counsel for Applicant: Mr L. Harrison QC and Mrs P. Wolfe

Solicitors for Applicant: Sutherlands

Counsel for 1st and 2nd Respondents: Mr R. Bain

Solicitors for 1st and 2nd Respondents: Clayton Utz

Counsel for 3rd and 4th Respondents: Mr Lee

Solicitors for 3rd and 4th Respondents: Ffrench and Associates

ORDER

THE COURT ORDERS:

On the third and fourth respondents notice of motion :-

1. The notice of motion of the third and fourth respondents to strike out the statement of claim so far as it relates to those respondents is dismissed.

2. The third and fourth respondents pay the applicant's costs of and incidental to the motion to be taxed.

On the applications by the respondents for security for costs:-

1. Security be given by Clement Gentry, Ciaran Gentry, James Gentry and Damien Gentry by a deed of guarantee executed by them in a form satisfactory to the Registry for the joint and several payment by them of any order for costs made against the applicant in favour of the respondents or any of them up to a sum of $20,000.00 as agreed between the solicitors for the applicant and the respective solicitors for the respondents or in default of such agreement as are taxed on a party and party basis.

2. Security by deed of guarantee be provided within twenty-one

(21) days and that the applicant's proceedings be stayed until such a deed is filed and a duly executed copy is served on the respective solicitors for the respondents.

3. The costs of the application for security for costs will be the costs of the respondents in the proceedings.

On the applicant's application for interlocutory orders:-

1. The application is dismissed.

2. The applicant pay the third respondent's costs of and incidental to the application to be taxed.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

The applicant by application filed on 22 June, 1992 seeks damages against all respondents for misleading and deceptive conduct. The applicant seeks further relief, including as against the fourth respondent a declaration that no further monies are payable in respect of the purchase of a house property at Carrara, and as against the third respondent, the setting aside of a mortgage held by the third respondent over the house property. The applicant also seeks interlocutory relief against the third respondent seeking the release of the mortgage to allow for the sale of the property and the payment into Court of so much of the proceeds of sale as represents the sum secured by the mortgage.

The third and fourth respondents by notice of motion filed 17 July, 1992 have sought that the statement of claim, insofar as it relates to the third and fourth respondents, be struck out on the ground that it discloses no reasonable cause of action or alternatively that the applicant give security for costs in the sum of $20,000.00.
The first and second respondents by notice of motion filed on 30 July, 1992 seek an order for security for costs against the applicant in the sum of $62,000.00.
The claims as pleaded
On 29 July, 1992 the applicant filed an amended statement of claim. In the amended statement of claim the applicant makes the following allegations :-

(a) In March, 1991 the applicant owned a Pastoral Holding Lease over Rosewood Island and other property sold to the third respondent by a contract of sale dated 14 August, 1991 (the "Rosewood Island property").

(b) The value of the Rosewood Island property in March, 1991 and at all relevant times thereafter was $1.6 million.

(c) The first respondent conducts a real estate business under the name "Elders Real Estate Brisbane Commercial" ("Elders") and the second respondent (Brown) was a director, servant and agent of Elders.

(d) On 23 March, 1991 the applicant engaged Elders as real estate agent for the sale of the Rosewood Island property.

(e) Elders, by Brown, advised the applicant or caused the applicant to believe that the Rosewood Island property was worth $1.6 million and offered the property for sale at that price.

(f) On 13 May, 1991 Clarke suggested to the applicant that it take a house property at Carrara in payment for the Rosewood Island property and told the applicant or caused it to believe that the house property had a value of $1.6 million, was worth not less than the Rosewood Island property and could be sold for a consideration of $1.6 million.

(h) On 2 August, 1991 Brown told the applicant that it could "trade the house at $1.6 million for a stocked cattle property".

(i) Elders and Brown by their conduct represented to the applicant that :-

(i) the house property was worth $1.6 million;

(ii) the house property was worth no less than the Rosewood Island property;

(iii) the applicant would be able to sell the house property for a consideration of $1.6 million.

(j) At all material times Clarke was a director, servant and agent of the third respondent and acted both for himself and on behalf of the third respondent.

(k) Clarke and the third respondent by their conduct made the same representations as set out in (i) above.

(l) The conduct of the respondents induced the applicant to believe that the house property was worth $1.6 million and that it was worth not less than the Rosewood Island property and the conduct of Clarke and the third respondent additionally induced the applicant to believe that the applicant could sell the house property for $1.6 million.

(m) The conduct of the respondents induced the applicant on or about 14 August, 1991 to enter into :-

(i) a contract to sell the Rosewood Island property to the third respondent;

(ii) a contract to buy the house property from Clarke for the same price under each contract and, at the request of Clarke to grant a mortgage of the house property to the third respondent to secure $400,000.00 being part of the purpose price of the house property.

(n) The two contracts were settled on 12 September, 1991.

(o) The representations of the respondents amounted to misleading and deceptive conduct in that the respondents had no reasonable grounds for making the representations.

(p) The conduct of the respondents occurred in trade or commerce.

(q) The value of the house property was not more than $468,000.00.

The third and fourth respondents submit that conduct on the part of Clarke in relation to the sale of his residence cannot be conduct engaged in in trade or commerce by Clarke. It was further submitted that there was no relevant conduct as to the sale of the house property whether in trade or commerce or at all engaged in by the third respondent as it had no interest in the house property sold by Clarke to the applicant. In support of these submissions, reliance was had upon the decision of the Full Court (Fox, Sheppard and Beaumont JJ.) in O'Brien v. Smolonogov (1983) 53 ALR 107 and that of Hill J. in Argy v. Blunts and Lane Cove Real Estate Pty. Ltd. (1990) 26 FCR 112.
In O'Brien v. Smolonogov, the Court, in determining whether or not the conduct there in question had the requisite character of trade or commerce was guided by a series of United States decisions on consumer protection legislation containing the element of trade or commerce. In those decisions "the view has been consistently taken that a private sale of property by an individual is not conduct in trade or commerce for the purposes of that legislation except if done in the course of a business activity or otherwise arising in a 'business context'" (53 ALR at 111). The Full Court cited with apparent approval the observations of Abrams J. in Begelfer v. Najarian 409 NE(2d) 167 (1980) at 176 :-

"The question of whether a private individual's participation in an isolated transaction takes place in a 'business context' must be determined from the circumstances of each case. To establish a private person's liability under s 11 we assess the nature of the transaction, the character of the parties involved, and the activities engaged in by the parties: see Lantner v. Carson, supra. Other relevant factors are whether similar transactions have been undertaken in the past, whether the transaction is motivated by business or personal reasons (as in the sale of a home), and whether the participate played an active part in the transaction. We do not read s 11 as requiring that a commercial transaction must take place only in the ordinary course of a person's business or occupation before its participants may be subject to liability under GL c 93A, s 11".

The "business context" test was applied by the Appeals Court of Massachusetts in Lyan v. Nashauvaty 423 NE (2d) 1052 (1981) at 1054.
In Argy, Hill J., after a consideration of the reasons in O'Brien and the United States cases referred to in those reasons said at page 129 :-

"The question to be determined is whether the owner of a house by selling it does so in trade or commerce. It could scarcely be said that a person who sells his home, whether by private treaty or by auction and whether he conducts the negotiations personally or through a real estate agent, is undertaking what he does in the course of a trade or business or in a business context. The conclusion in O'Brien v. Smolonogov was reached because the land there had never been used at all for the purposes of any business. It was not a case where land held as a capital asset was thereafter subdivided and sold as in Whitfords Beach (supra) so that the circumstances of sale arose in a business context".

It does not appear from the amended statement of claim that the house property was the private residence of Clarke. However, even if one makes the assumption that it was his residence, that by itself does not mean that the sale of it was not an act done in a business context. The applicant alleges that the sale of the Rosewood Island property to the third respondent and the acts and conduct leading up to that sale were done in trade or commerce. The third and fourth respondents have not submitted that this could not be so. The business context in which that sale occurred on the pleadings includes an allegation that the house property was offered as the consideration or part consideration for that sale. The allegation is that the applicant was induced on the same day to sell the Rosewood Island property to the third respondent and to agree to purchase the house property for the same price and to grant to the third respondent a mortgage of the house property to secure $400,000.00 being part of the purchase price for the house property.
As pleaded, the sale of the house property does not stand as a single transaction which "is strictly private and is no way undertaken in the ordinary course of trade or business" (Lanther v. Carson 373 NE (2d) 973 (1978) at 975). The sale is pleaded as part of a series of transactions involving dealings in land arising out of one course of dealing initiated by the offering for sale of the Rosewood Island property which it is alleged occurred in trade or commerce.
It cannot be said in my view that in the circumstances pleaded in the amended statement of claim the sale of the house property and the representations alleged to have been made by Clarke on his own behalf and on behalf of the third respondent could not, if made out at trial constitutes conduct by the third respondent or by Clarke in trade or commerce within the meaning of that term as used in section 52 of the Trade Practices Act. In consequence the third and fourth respondents do not make out on the ground argued that the amended statement of claim discloses no cause of action against them. The application to strike out is dismissed. The third and fourth respondents are ordered to pay the applicant's costs of the motion to strike out to be taxed.
The application for security for costs
The first and second respondents and the third and fourth respondents have separately sought security for costs. The applications are made under section 1335 of the Corporations Law ("the Law") and section 56 of the Federal Court Act.
Section 1335(1) of the Law provides :-

"Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given".

There seems to be no question that the applicant will be unable to pay the costs of the respondents if they or any of them successfully defend the action. On the evidence, the applicant cannot from its own funds, or using its own assets, provide security for costs in any significant amount, if at all. Counsel for the applicant did not dispute either proposition. Without the assistance of a third party providing to the applicant funds or assets to satisfy any order for security for costs, the making of such an order would result in the premature termination of the proceedings without a trial on the merits.
The Court is not bound to make an order under section 1335 of the Law or section 56 of the Federal Court Act in these circumstances and retains a discretion as to whether or not security for costs will be ordered. The discretion is to be exercised having regard to whether the interests of justice will be best served in any particular case by the making or refusing of an order for security for costs.
It is not possible or appropriate to attempt to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed (P.S. Chellaram and Co. v. China Ocean Shipping Co. (1991) 65 ALJR 642 at 643).
The issues argued before me as being relevant in the present proceedings were :-

(a) Whether the making of an order for security for costs would frustrate the applicants' claim?

(b) Whether the offering of the shareholders to make themselves personally liable for any order for costs made against the applicant was sufficient to offset any risk to the respondents in having an unsatisfied judgment for costs?

(c) Whether the impecuniosity of the applicants was caused by conduct of the respondents or any of them?

(d) Whether the applicant had a meritorious claim?

Issue (a)

In Bell Wholesale Co. Pty. Ltd. v. Gates Export Corporation (1984) 2 FCR 1 the Full Court (Sheppard, Morling, Neaves JJ.) said at 4 :-

"In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts. We pause to make it clear that the matters we have considered are by no means the only relevant ones. We have concentrated our attention on them because they were to the forefront of the appellant's argument. But the court's discretion is unfettered; each case must depend on its own circumstances; see generally Paterson, Ednie and Ford, Australian Company Law (3rd ed.), par. 533-1 et seq."

The respondents submit that the applicant has not discharged that onus. The respondents submit that although there is evidence that the applicant is impecunious, there is no evidence that those who stand behind it are impecunious or that the proceedings would be frustrated by the making of an order.
In the present case the applicant submits that there is evidence from which it may be inferred that assistance from third parties beyond the offering of the undertakings is not available and that the action will be stifled if any order is made. The evidence relied upon is in the affidavit of the applicant's solicitor, Mr G. Down, who deposes :-

2. I am informed by the Applicant and each of the shareholders of the Applicant and verily believe that neither the Applicant nor any of the shareholders has the resources to provide security for costs by way of a cash payment unless the ANZ Banking Corporation Limited ("the Bank") allows the Applicant or any of the shareholders to draw further on the accounts with the Bank. I am informed by the Customer Lending Manager of the Bank and verily believe that the Bank would not permit this to happen.

3. I am further informed by the Customer Lending Manager with whom I have had a number of conversations about the financial position of the Applicant and the Bank's requirements and verily believe that the Bank now requires the Applicant's debt to be substantially reduced and it has required this reduction as a result of the house property at 604 Nerang Broadbeach Road, Carrara being sold for such a substantially reduced price".

The applicant additionally relies upon an affidavit of Mr Clement Gentry, a director of the applicant where he deposes :-

"4. I own "Myora" which is a cattle property of about 2600 acres at Goomeri. I believe it is worth about $1 million today. ........ ..

25. As at 30 June 1992 the applicant owed $1,028,154.50 dollars to the Bank. ........ ..

27. As at the 30 June 1992 the amount secured on "Myora" to the Bank was $1,028,154.50. The Applicant's debt to its Bank is currently secured by a first bill of mortgage over "Myora", and a mortgage over another property owned by Bernard (Gentry) which is also worth about $1 million.

........ ..

32. I am informed by my sons, Ciaran, James and Damien, and verily believe that they do not have any debts and that collectively their assets are worth approximately $30,000.00 being stock which they graze on Myora".

The Bernard Gentry referred to in the affidavit is the brother of Clement Gentry. Mr Bernard Gentry is not a shareholder in the applicant and is merely a director of it. On the evidence he refuses to provide a cash sum to assist the applicant provide security for costs or allow the applicant to further borrow against the security of his property for that purpose.
The evidence establishes that those who stand behind the applicant and who will benefit if it succeeds in the action do not have the cash resources to provide security for costs by payment of a cash sum. The evidence does not establish to my mind that the shareholders of the applicant are impecunious. The material does not disclose what, if any, assets beyond the grazing property and the cattle are held by the shareholders and what their income and outgoings are at this time. There is no positive swearing to the fact that if security for costs were granted the proceedings would be frustrated.
The applicant does not therefore make out the onus imposed on it by the decision in Bell Wholesale to show that the proceedings would be frustrated by the making of an order due to the impecuniosity of the applicant and those who stand behind it and will gain from the proceedings if successful.
The evidence, however, does go far enough to satisfy me that there is some risk that the litigation may be frustrated because of the financial circumstances of the applicant and the extent to which those circumstances have impinged on the financial standing of its shareholders and in particular Mr Clement Gentry. Having regard to the limited nature of the disclosure of the personal circumstances of the applicant's shareholders, the risk has to be weighed accordingly.
Issue (b)
The purpose behind section 1335 of the Law and its precursors was explained by Connolly J., with whom Campbell C.J. and Demack J. agreed in Harpur and Ors. v. Ariadne Australia Ltd. and Ors. (1984) 2 Qd R 523 at 532 :-

"The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied".

Statements to similar effect are to be found in Cameron's Unit Services Pty. Ltd. v. Kevin R. Whelpton and Associates (Australia) Pty. Ltd. (1986) 13 FCR 46 at 49, 53 and Mantaray Pty. Ltd. v. Brookfield Breeding Co. Pty. Ltd. (1990) 8 ACLC 304 at 306.
On 3 August, 1992 Messrs Sutherlands, the solicitors for the applicant, wrote to Messrs. Clayton Utz, the solicitors for the first and second respondents and to Messrs. Ffrench Wright and Dennett, solicitors for the third and fourth respondents, in identical terms as follows :-

"We write to advise that the shareholders of Gentry Bros. Pty. Ltd. being Clement Gentry, James Gentry, Ciaran Gentry and Damian Gentry are prepared to undertake to be personally liable to your clients in the event that costs and/or damages are awarded against the Applicant in this action to the extent of $20,000.00 or if taxed party and party costs exceed that amount then for the amount of taxed costs".

Mr Harrison QC for the applicant submitted that the effect of the undertaking, if accepted by the Court, was to expose the shareholders of the applicant to unlimited liability for any order for taxed costs should the respondents succeed in the action. He submitted that irrespective of whether or not the shareholders were impecunious, the respondents were in no worse position than they would be if the corporate applicant was not interposed between them and the respondents. In those circumstances he submitted that the existence of an impecunious corporate applicant did not of itself justify the making of an order for security for costs. Although Mr Harrison did not refer the Court to any authority in support of the submission, I am of the view that the submission is correct. It follows from the treating as a relevant factor to the exercise of the discretion that those standing behind a corporate applicant are not trying to protect their assets from an order for costs. That such is a relevant consideration is established by a number of cases, including Cameron's Unit Services Pty. Ltd. and Mantaray Pty. Ltd.
In Cameron's Unit Services Pty. Ltd., Burchett J. at 53 said:-

"I think it is also relevant that the individual responsible for this litigation, Mr Cameron, is not sheltering behind a corporate shield in order to protect some assets of his own from liability to meet a costs order. In the Ariadne case (supra, at 533; 842) the Full Court of the Supreme Court of Queensland made it clear that in such a case the means of the individual concerned are "not really relevant". What is relevant is that the company is not a stalking horse to enable someone else to evade personal responsibility. If he accepts responsibility, an impecunious natural person is entitled to rely on the general rule that poverty is no bar to a litigant: Barton v. Minister for Foreign Affairs (1984) 2 FCR 463 at 469. In all the circumstances, and without attributing decisive weight to any one of the factors mentioned in these reasons, I decline to make any order for security upon the basis of the provision in the Code or s 56 of the Federal Court of Australia Act".

In Mantaray Pty. Ltd., where the only person interested offered to give his personal guarantee of the liability of Mantaray Pty. Ltd. in respect of any order for costs in the action, Byrne J. said at 306 :-

"There is no one who might benefit if the plaintiff is successful attempting to take advantage of the plaintiff's corporate status to avoid responsibility for the defendant's costs ........ ..

Mr Newton, for whatever he is worth, has accepted personal responsibility for the defendant's costs. In this case, that satisfies the object of sec. 533. In all the circumstances, that Mr Newton and the plaintiff are impecunious should not be a bar to the litigation's proceeding: cf. Rawson Contractors Pty. Ltd. v. C. Krough and Co. Pty. Ltd. No. 2753 of 1985, Ambrose J., 11 September, 1986; Cameron's Unit Services Pty. Ltd. and Anor. v. Kevin R. Whelpton and Associates (Australia) Pty. Ltd. and Anor. (1986) 13 FCR 46".

It was submitted by counsel for the respondents that acceptance of the undertaking as sufficient protection of the respondents for the satisfaction of orders for costs was a course of last resort. Until it was established by the applicant that it and those who stood behind it were impecunious and that any order for security would prematurely terminate the proceedings, it was submitted that an order should be made. The basis of the submission was that where there was a demonstrable risk to the respondents that an order for costs would not be satisfied, such a circumstance was sufficient to justify an order, unless the applicant established other relevant factors which outweighed the making of an order.
If the submission on behalf of the respondents was intended to carry the implication that there is a predisposition in favour of making an order under section 1335 of the Law where the circumstances prescribed in the section are satisfied, I cannot agree with it. The present state of the authorities persuades me that establishment of the prescribed circumstances are but one matter to be taken into account (Bell Wholesale at 4; Cameron's Unit Services Pty. Ltd. at 49-50; Bryan E Fencott Pty. Ltd. v. Eretta Pty. Ltd. (1987) 16 FCR 497 at 511; Equity Access Ltd. v. Westpac Banking Corporation (1989) 11 ATPR 40-972 at 50,635).
In the instant case once the shareholders of the applicant have agreed to accept personal liability for any judgment for costs against the applicant, the statutory purpose of section 1335 as explained in the authorities to which reference has been made is satisfied. The making of an order which secures the personal liability of the shareholders is in itself the provision of security (see for example Manutu Pty. Ltd. v. Lissenden (1983) 8 ACLR 364 at 366; Yandil Holdings Pty. Ltd. v. Insurance Co. of North America (1985) 3 ACLC 542 at 546; Appleglen Pty. Ltd. v. Mainzeal Corporation Pty. Ltd. (1988) 79 ALR 634 at 635-636).
Once the shareholders have been exposed to personal liability for the applicant's costs, the weight to be given to the statutory purpose is gone. Those who stand behind the applicant once they accept personal liability for the applicant's costs are in no worse position than they would be as litigants in person in the Court (Harpur at 533; Yandil Holdings Pty. Ltd. at 546).
The offer by the shareholders of the applicant to accept personal liability for the applicant's costs is a factor weighing heavily against the making of an order against the applicant for provision of a cash or other security for costs notwithstanding that the worth of the shareholders may ultimately prove insufficient to satisfy any judgment in whole or in part.
Issue (c)
There is no evidence to support a finding that any conduct on the part of the respondents caused or substantially contributed to the applicant's impecuniosity. The applicant was suffering losses in its pastoral business before the conduct complained of. The increase in trading losses had nothing to do with the respondents. The applicant was paying interest to the bank and the second mortgagee of the Rosewood Island property prior to entering into the sale and purchase transactions. On the evidence it cannot be said that but for the sale of the Rosewood Island property the applicant had an asset worth $1.6 million. The valuation evidence at the relevant time values the island property at $750,000.00. It is unclear whether this valuation covered all the property sold. However, there is sufficient material to demonstrate a substantial difference between the value of the Rosewood Island property claimed and its value in fact. Additionally, the material discloses that the Rosewood Island property was not readily saleable at the relevant time and that the second mortgagee was in the process of exercising his power of sale consequent upon the applicant's default under the second mortgage.
There is no evidence that if the Carrara house property at completion had been worth $1.4 million it was readily saleable at that time for a cash consideration at around that figure. Consequently it cannot be said that the applicant could have sold the property at a figure which would have discharged its indebtedness to the bank and saved it from interest payments which it has become liable to pay.
There is valuation evidence that the Carrara house property was at about the time of settlement worth $750,000.00. The applicant's net worth immediately before and immediately after entering into the contracts for sale and purchase was therefore approximately the same. It is not possible to say on the material before the Court that the value of the house property was at the date of the transactions, and now is, $468,000.00. If the present value is the contract price of $468,000.00, at which the applicant wishes to sell the property, any variation in the value of the property since completion of the sale on 12 September, 1991 is explicable by a change in the economic climate.
The material before the Court, incomplete as it is, suggests that the applicants net financial position after completion was approximately the same and that its worsening financial position since that time flows from its exposure to debt which was not caused by the respondents.
There is therefore no circumstance under this head which would weigh against the ordering of security for costs.
Issue (d)
Ordinarily in my view the likelihood or otherwise of success in the proceedings ought not to be investigated on an application for security for costs (Appleglen at 635; Equity Access Ltd. at 50,636). There may be circumstances where the merits are clear or where the claim cannot succeed in point of law or is not brought bona fide. Should that occur, regard will be had to those circumstances. However, those cases in my view are the exception to the ordinary rule.
In the instant case the alleged representations were oral and they are denied. It cannot be said that the pleadings disclose no cause of action nor that the applicant is not bona fide in bringing the application. The question of the quantum of any damages the applicant would recover if successful will depend heavily upon what valuation evidence is tendered at trial. The present valuation evidence suggests that the applicant's claim is overstated. However that evidence has not been tested at this time.
In the end result there is nothing which would weigh one way or the other in favour or against the making of an order for security for costs on this ground.
Conclusion
On balance the respondents have made out a case for some form of security for costs to protect them from the risk that the applicant will not be able to satisfy any judgment for costs made against it. The question becomes one as to the nature of the security to be provided. The Court is not required to order such security as will provide a complete and effective indemnity for costs.
Although the securing of an effective guarantee from the shareholders in terms of the offer contained in the letter of 3 August, 1992 is by no means as secure as a cash security, it exposes the assets of all shareholders of the applicant to provide the potential of full indemnity for costs should the respondents succeed in the proceedings. Such a result provides to all parties a reasonably just outcome conformably with the policy underlying section 1335 of the Law and the general approach taken by the Court in cases involving litigants in person.
I order that security be given by Clement Gentry, Ciaran Gentry, James Gentry and Damien Gentry by a deed of guarantee executed by them in a form satisfactory to the Registry for the joint and several payment by them of any order for costs made against the applicant in favour of the respondents or any of them up to a sum of $20,000.00 as agreed between the solicitors for the applicant and the respective solicitors for the respondents or in default of such agreement as are taxed on a party and party basis.
I order that security by deed of guarantee be provided within twenty-one (21) days and that the applicant's proceedings be stayed until such a deed is filed and a duly executed copy is served on the respective solicitors for the respondents.
The costs of the application for security will be the costs of the respondents in the proceedings.
The applicant's application for interlocutory relief
The applicant by its application sought the following interlocutory relief :-

"(a) Such orders as the court thinks appropriate to allow the proposed sale of the property subject to that mortgage to be completed, including an order that subject to the Applicant giving security over the proceeds of such sale, and undertaking to cause those proceeds to be paid into court or into such form of trust account or investment as the Applicant and the Third Respondent may agree upon, the Third Respondent do all such acts and things as may be necessary to release the mortgaged property from that mortgage but without prejudice to the personal covenants contained in it.

(b) In the alternative to (a) an order that until the trial of this action the Third Respondent be restrained from exercising or purporting to exercise any power of sale which it may have under the said mortgage".

On the hearing before me the applicant only sought relief in terms of paragraph (a).
The applicant by its pleading asserts that the representations alleged induced the applicant to :-

"20.(a) to believe that the house property was worth $1.6m.

(b) to believe that the house property was worth not less than the Rosewood Island property;

(c) On or about 14 August, 1991 to enter into:

(i) a contract to sell the Rosewood Island property to Anscape; and

(ii) a contract to buy the house property from Clarke for the same price under each contract.

(d) At the request of Clarke, to grant a mortgage of the house property to Anscape to secure $400,000.00 being part of the purchase price of the house property".

(See also paragraph 24 of the Amended Statement of Claim).

The contract for the purchase of the Rosewood Island property provided for a cash sale for the sum of $1.3 million and further provided that the property sold was to be free of encumbrances. Special Condition 3 provided :-

"3. Completion of this contract is also subject to the contemporaneous completion of a contract for the sale and purchase of premises 604 Nerang/Broadbeach Road, Carrara entered into on even date herewith between Brian John Clarke (as vendor) and Gentry Bros. Pty Ltd (as purchaser)."

The contract for the sale of the Carrara house property provided for a cash sale for the sum of $1.3 million. Completion was subject to contemporaneous completion of the sale and purchase of the Rosewood Island property. The contract contained the following special condition :-

"4. Notwithstanding anything else herein contained or implied the purchase price of ONE MILLION THREE HUNDRED THOUSAND DOLLARS

($1,300,000.00) shall be paid by the purchaser to the vendor as follows :-

(a) An amount of NINE HUNDRED THOUSAND DOLLARS

($900,000.00) shall be paid on completion.

(b) The balance of FOUR HUNDRED THOUSAND DOLLARS ($400,000.00) shall be paid on the 7th day of September 1992 or upon the date that the purchaser completes a re-sale of the subject premises (whichever first occurs) and such payment shall be secured by the purchaser granting on completion to the vendor a registered first Bill of Mortgage over the title to the subject premises. Such Bill of Mortgage shall be prepared by the vendor's solicitor (at the expense of the purchaser) and shall contain such covenants and conditions as the vendor's solicitor shall reasonably require".

At the time the contracts were entered into the Rosewood Island Pastoral Holding No. 35/5170 being part of the Rosewood Island property was mortgaged to SW Kele and Co. Pty. Ltd. The mortgage was to secure the indebtedness of the applicant to the mortgagee in the sum of $400,000.00, being the balance purchase price outstanding to SW Kele and Co. Pty. Ltd. from the time the applicant acquired the Pastoral Holding in 1989. The mortgagee by notice in the Queensland Government Gazette of 25 May, 1991 gave notice under the Land Act 1962 - 1989 of Intention to Sell as Mortgagee in consequence of the applicant's alleged default under the mortgage.
On settlement of the contracts relevant to these proceedings on 12 September, 1991, the mortgage to SW Kele and Co. Pty. Ltd. was paid out in order to enable the applicant to make a clear and unencumbered title to the Rosewood Island property. The money to discharge the applicant's debt was paid by the third respondent for and on behalf of the applicant.
The written contracts for the sale of the Rosewood Island property contemplated that the applicant would pay to SW Kele and Co. Pty. Ltd. the $400,000.00 necessary to obtain a release of mortgage to pass a clear title. That money as a practical matter was either to be paid from the funds of the applicant or from the purchase price of $1.3 million to be paid by the third respondent.
In fact it was never intended that cash would be paid for the purchase of the respective properties and that the respective transfers would be treated as the equivalent of cash payment. It seems a reasonable inference from all of the material as to the applicant's financial affairs at the time that the applicant did not have available to it $400,000.00 to discharge the mortgage to SW Kele and Co. Pty. Ltd. Therefore it was intended that the third respondent would accept the encumbered title without abatement of price and that the fourth respondent would treat the transfer of the Rosewood Island property as the equivalent to a cash payment of $900,000.00 with a cash payment to be made by the applicant in accordance with special condition 4 of the contract of sale for the Carrara house property. Payment of the $400,000.00 remaining outstanding was to be secured by mortgage to the fourth respondent, Clarke.
What in fact occurred was that the third respondent paid out the mortgage of SW Kele and Co. Pty. Ltd. for and on behalf of the applicant and took a mortgage over the Carrara house property to secure this indebtedness. On settlement the applicant made clear title to the Rosewood Island property and that property was treated as equivalent to a cash payment of $1.4 million. The way the transaction was in fact effected resulted in no part of the purchase price of the Carrara house property being outstanding.
The bill of mortgage signed 28 August, 1991 to my mind makes it clear that the security given was to secure an indebtedness from the applicant to the third respondent. The mortgage provides :-

"CONSIDERATION (8) See Annexure "A" RATE OF INTEREST

TERMS OF REPAYMENT/

PAYMENT ETC

(9) THE MORTGAGOR FOR THE ABOVE CONSIDERATION HEREBY COVENANTS WITH THE MORTGAGEE IN TERMS OF THE MEMORANDUM NO H902333 FILED IN THE OFFICE OF THE REGISTRAR OF TITLES AND CHARGES THE ESTATE OR INTEREST HEREIN SPECIFIED IN THE LAND ABOVE DESCRIBED WITH THE REPAYMENT/PAYMENT OF ALL SUMS OF MONEY REFERRED TO IN ITEM (8) ABOVE IN THE MANNER THEREIN EXPRESSED."

Annexure "A" provided :-

"CONSIDERATION

RATE OF INTEREST,

TERMS OF REPAYMENT/

PAYMENT, ETC.

(8) CONSIDERATION $400,000.00 RATE OF INTEREST No interest shall be payable unless the mortgagor makes default for a period in excess of fourteen (14) days in repayment of the principal sum on its due date in which case interest at the rate of sixteen percentum (16%) per annum shall be paid calculated from the date of default until the actual date of payment. TERMS OF The principal sum shall be paid REPAYMENT ETC in full either on the 7th day of September 1992 or upon the date that the mortgagor completes a sale of the mortgaged premises (whichever first occurs)."

The covenant as to payment provided :-

"PAYMENT: The Mortgagor will pay to the Mortgagee instalments (which unless otherwise so stated shall be inclusive of principal and interest) in reduction of the moneys secured in the manner and on the dates or intervals as set out in the Bill of Mortgage commencing on the date set out in the Bill of Mortgage PROVIDED ALWAYS and notwithstanding anything to the contrary herein contained the amount outstanding of the moneys secured shall be fully paid and discharged on the due date specified in the Bill of Mortgage and if not specified (or unless otherwise expressly agreed in writing between the Mortgagor and the Mortgagee) then upon demand".

The mortgage does not secure payment of the balance purchase price to the fourth respondent. The only reasonable inference is that the mortgage was to secure repayment of the payment made by the third respondent on behalf of the applicant to discharge the latter's debt to SW Kele and Co. Pty. Ltd.
The above analysis as to what in fact occurred was submitted by Counsel for the third respondent and in my view is the reasonable inference from the material available. The applicant placed no material before the Court as to the circumstances whereby it is alleged in paragraphs 20(d) and 24(d) that the fourth respondent requested the applicant to grant a mortgage over the Carrara house property to secure $400,000.00 of the purchase price of that property.
The applicant submits that the interlocutory relief ought to be granted to protect the status quo. The question arises as to protecting the status quo for what purpose. If, as appears probable from the evidence placed before the Court on the application, the mortgage is to support the indebtedness of the applicant to the third respondent for the payment out of the debt due by the applicant to SW Kele and Co. Pty. Ltd. a declaration that there is no further money payable to the fourth respondent under the sale agreement does not discharge the applicant from its indebtedness to the third respondent.
There is no allegation in the pleading that the creation of the mortgage to the third respondent came about as the result of any misleading and deceptive conduct on the third respondent's part save the allegation that the mortgage was granted to the third respondent to secure the balance of the purchase price due to the fourth respondent; which allegation is not borne out on the material.
It was submitted by Counsel for the applicant that but for the misleading and deceptive conduct alleged, the applicant would not have entered into the contract of sale to sell the Rosewood Island property without receiving the Carrara house property and a further cash consideration which would have been used to pay out SW Kele and Co. Pty. Ltd. Thus it was submitted that but for the conduct complained of the applicant "would not have been left in the position of being incumbent to Clarke's company".
The submission in my view ignores two important matters; firstly that the sum of $400,000.00 was paid to SW Kele and Co. Pty. Ltd. to discharge the applicant's indebtedness. Secondly, the evidence is totally against the proposition that either the third or fourth respondent would have provided a further cash consideration.
On the evidence, if the third respondent had not provided the monies to pay out SW Kele and Co. Pty. Ltd., the likelihood is that there was no buyer for the Rosewood Island property and the applicant would have had to borrow from other sources to discharge the mortgage. Whether or not the purported exercise of the power of sale by SW Kele and Co. Pty. Ltd. was valid, the fact remains that steps were being taken to exercise it and the applicant was attempting to sell the Rosewood Island property to realise its interest in it and discharge the major debts secured against it. The third respondent provided full consideration in making the payment and the applicant took full advantage of the payment to secure its equity in the Rosewood Island property.
In my opinion the situation is not altered by submitting that all that is being asked for is that one form of security be substituted for another pending suit. What is sought is the exclusion of the third respondent from the benefit of that security in circumstances where it is not shown that at the end of the day there is some prospect that the Court under section 87 of the Trade Practices Act will strip the third respondent of the benefit of its security. On the material before the Court the applicant and the third respondent made a bargain whereby $400,000.00 was advanced to the benefit of the applicant and the applicant agreed to secure repayment of that amount. When the Court exercises its power under section 87 of the Trade Practices Act it does so only so far as is necessary to provide proper compensation for the particular loss suffered and the Court "must be slow to impose upon the parties a regime which could not represent the bargain they would have struck between them" (ASX Operations Pty. Ltd. v. Pont Data Australia Pty. Limited (No. 2) (1991) 27 FCR 492 at 503; Allied Westralian Finance Ltd. v. Wenpac Pty. Ltd. (1992) ATPR (Digest) 46-082 at 53,310).
If the applicant succeeds in the action there is nothing to suggest that it is necessary to do other than order the payment of monetary compensation. It was not suggested that the third respondent was dealing with its assets so as to defeat any judgment which may be granted. Nor was it suggested that the third respondent would not be able to meet any judgment which may be awarded against it. Additionally, the third respondent has foreshadowed a cross-claim against the applicant for breach of an express warranty in the contract for the sale of the Rosewood Island property and for misrepresentation as to the carrying capacity of the pastoral holding.
The applicant's application for interlocutory relief is dismissed with costs.
THE COURT ORDERS:
On the third and fourth respondents notice of motion :-

1. The notice of motion of the third and fourth respondents to strike out the statement of claim so far as it relates to those respondents is dismissed.

2. The third and fourth respondents pay the applicant's costs of and incidental to the motion to be taxed.

On the applications by the respondents for security for costs :-

1. Security be given by Clement Gentry, Ciaran Gentry, James Gentry and Damien Gentry by a deed of guarantee executed by them in a form satisfactory to the Registry for the joint and several payment by them of any order for costs made against the applicant in favour of the respondents or any of them up to a sum of $20,000.00 as agreed between the solicitors for the applicant and the respective solicitors for the respondents or in default of such agreement as are taxed on a party and party basis.

2. Security by deed of guarantee be provided within twenty-one

(21) days and that the applicant's proceedings be stayed until such a deed is filed and a duly executed copy is served on the respective solicitors for the respondents.

3. The costs of the application for security for costs will be the costs of the respondents in the proceedings.

On the applicant's application for interlocutory orders :-

1. The application is dismissed.

2. The applicant pay the third respondent's costs of and incidental to the application to be taxed.

[1992] FCA 592

18 AUGUST 1992