Inghams Enterprises Pty Ltd v Bark Creek Pty Ltd t/as Grands Poultry Service
[1997] FCA 464
•17 JANUARY 1997
CATCHWORDS
Practice and Procedure - security for costs - application by applicant in principal proceedings for order for security in respect of the costs of defending a counter-claim made by a corporate respondent
Matter No. SG 39 of 1996
INGHAMS ENTERPRISES PTY LTD v BARK CREEK PTY LTD trading as G.R.A.N.D.S. POULTRY SERVICE and FRANCESCO BARBARO
von Doussa J
Adelaide
17 January 1997
IN THE FEDERAL COURT
OF AUSTRALIA
SOUTH AUSTRALIA No. SG 39 of 1996
DISTRICT REGISTRY
GENERAL DIVISION
BETWEEN: INGHAMS ENTERPRISES PTY LTD
Applicant
AND: BARK CREEK PTY LTD trading as G.R.A.N.D.S. POULTRY SERVICE and FRANCESCO BARBARO
Respondents
AND: BARK CREEK PTY LTD
trading as G.R.A.N.D.S.
POULTRY SERVICE and
FRANCESCO BARBARO
Cross Claimants
AND:
INGHAMS ENTERPRISES
PTY LTDCross Respondent
MINUTES OF ORDER
JUDGE MAKING ORDER : VON DOUSSA J
WHERE MADE : ADELAIDE
DATE ORDER MADE : 17 JANUARY 1997
THE COURT ORDERS THAT:
The respondent Bark Creek Pty Ltd pay into Court the amount of $70,000 or otherwise give security for costs satisfactory to the applicant or approved by order of the Court in a like sum, within 28 days. In the meantime the counter-claim is stayed.
Adjourn directions hearing to 9.00 a.m. on 3 April 1997.
The costs of the application for security be paid by Bark Creek Pty Ltd to the applicant.
Note: Settlement and orders are dealt with by Order 36 of the Court Rules.
IN THE FEDERAL COURT
OF AUSTRALIA
SOUTH AUSTRALIA No. SG 39 of 1996
DISTRICT REGISTRY
GENERAL DIVISION
BETWEEN: INGHAMS ENTERPRISES PTY LTD
Applicant
AND: BARK CREEK PTY LTD trading as G.R.A.N.D.S. POULTRY SERVICE and FRANCESCO BARBARO and
Respondents
AND: BARK CREEK PTY LTD
trading as G.R.A.N.D.S.
POULTRY SERVICE and
FRANCESCO BARBARO
Cross Claimants
AND:
INGHAMS ENTERPRISES
PTY LTDCross Respondent
REASONS FOR JUDGMENT
Coram : von Doussa J
Place : Adelaide
Date : 17 January 1997
This is an application for security for costs brought by Inghams Enterprises Pty Ltd (“Inghams”). Inghams is the applicant in the principal proceedings, but brings this application as respondent to a counter-claim, and seeks security for costs of the counter-claim. The proceedings were commenced in August 1994 in the District Court of South Australia claiming $353,698. The pleadings alleged that Inghams was a supplier of chickens to the respondent company Bark Creek whose liability to Inghams was guaranteed by its shareholders and directors, Francesco Barbaro and Glenda Barbaro, the other respondents named in the proceedings. The claim was answered by a defence filed in October 1994 which raised numerous grounds of defence including contraventions of certain provisions of the Trade Practices Act 1974 (“the TPA”), and a counter-claim based on the same allegations. The counter-claim was not at that time quantified.
An application for particulars of the defence and counter-claim was made in the District Court South Australia in October 1994. At a status conference in the District Court in January 1995, the question of jurisdiction was raised. The District Court had no jurisdiction to deal with some of the grounds of defence and counter-claim based on the TPA. The need to have the proceedings cross-vested to the Federal Court was discussed. On an oral application an order was made transferring the proceedings to the Supreme Court of South Australia as that is the court with power under the cross-vesting legislation to transfer the matter to the Federal Court.
Whilst the proceedings were still in the Supreme Court an application was made on 1 February 1996 to strike out the defence and counter-claim because of the failure of the respondents to give the further particulars that had been requested. When that application came on for hearing the Master before whom it was listed took the view that he should not deal with the application because it raised questions of exclusive Federal jurisdiction. That led to the application for cross-vesting being further considered, and on 10 May 1996 an order was made transferring the matter to this Court. It was apparent once the proceedings got into this Court that there was a need for further and better particulars and that was discussed at early directions hearings.
In the result, on 25 October 1996 an amended defence and counter-claim was filed which included many of the particulars that were outstanding, and also quantified various claims, including counter-claims, made by the respondents. Inghams’ claim was for the price of chickens supplied. The defence and counter-claim as particularised in October 1996 alleged that the chickens were of a substantially lesser value than the invoiced prices. The invoiced prices for chickens supplied between July 1992 and July 1994 aggregated some $1.2 million. However it was alleged by the respondents that there should be a downgrading in the value, because the chickens had various defects or deficiencies, to the extent of $675,759.89 whereas Inghams had only given credits in relation to downgrading claims of $28,804.74.
The downgrading issue is raised both as a defence, in the sense that as a set off it extinguishes the claim by Inghams, and as a ground of counter-claim in that the amount over and above Inghams’ claim leaves a net balance in favour of Bark Creek of $293,256.89. That, however, is not the full extent of the matters raised in the defence and counter-claim.
There is a claim arising because chickens of the appropriate size were not supplied as requested, quantified in paragraph 40.3 of the amended defence and counter-claim of $44,976.00.
There is a further claim in respect of chickens that it was necessary to purchase in from outside to meet orders of $2,673.60 made in paragraph 40.4. In paragraph 40.5 there is a claim, unquantified at this stage, in respect of extra chickens which it is alleged had to be purchased from a third party because Inghams did not supply live chickens which corresponded with the descriptions ordered. It is said that Bark Creek was invoiced approximately $711,432 by third parties for extra chickens ordered, but a claim is not then quantified. It is not clear whether it is suggested that a substantial part of the sum of $711,432 constitutes a claim or whether it is some minor part of that sum; nevertheless there is a significant unquantified claim in paragraph 40.5.
In paragraph 59.2 of the amended defence and counter-claim there is a claim for $156,000 lost gross profits in relation to allegations relating to the supply of chickens by the respondents to an enterprise called “Bangers, Snags ‘n Chooks”. That claim is asserted on a variety of grounds including contraventions of various sections of Part IV of the TPA. In the claim in paragraph 65.1 a misuse of market power, in contravention of s.46 of the TPA is alleged which gives rise to a question of definition of the relevant market. There is a further unquantified claim for price discrimination under the former s.49 of the TPA formulated in paragraphs 67 to 70 of the amended defence and counter-claim.
The application for security for costs is brought on the footing that whilst the respondents initially were faced with the need to defend Inghams’ claim, they have gone beyond being defenders and have become substantial aggressors. The claim for security is in respect of the additional costs which Inghams says will be incurred in the future in respect of defending issues raised in the counter-claim that it would not otherwise have had to address merely in the defence of the proceedings. It is not possible to identify precisely what extra work would be involved in defending matters in the counter-claim which would not be matters which Inghams would have to attend to anyway in dealing with the defence. However, it is reasonable to assume that a different level of attention would be given to the case if Inghams were merely dealing with a defence to a trading debt claim of $353,000 than would be necessary if Inghams were required to address a counter-claim of at least $500,000 (and possibly much higher) over and above the trading debt claim.
Not only is it reasonable to assume that the size of the counter-claim would require a different order of attention which is going to add expense, there would also be the need to engage in substantial discovery on questions of damages and the extent of losses. I think that the expenses that would be involved in the discovery aspects of the additional amounts sought in the counter-claim, and in getting accounting evidence in relation to those claims, would make a substantial inroad into the amount which is sought by Inghams for security for costs, if not exceed that amount.
The application for security is made both under the rules of court and s.1335 of the Corporations Law. Although the notice of motion seeks an order for security against “the respondents”, in respect of the counter-claim the order is now sought only against Bark Creek. A respondent to the initiating proceedings in a court who becomes a cross-claimant in a counter-claim is, relevantly an “applicant” within the meaning of s.56(1) of the Federal Court of Australia Act 1976, and a “plaintiff” within the meaning of s.1335 of the Corporations Law: see Willey v Synan (1935) 54 CLR 175, Amalgamated Mining Services Pty Ltd v Warman International Ltd (1988) 19 FCR 324 and Townsend Controls Pty Ltd v Gilead and Others (1989) 14 IPR 443. Credible testimony about the financial position of Bark Creek has been adduced by Inghams. In the course of seeking information about the company it was learned that Bark Creek had been deregistered in June 1996, but steps are on foot to have it reinstated. I shall proceed with this application on the footing that the company will be reinstated. The company had trading losses of $223,000 in the financial year to 30 June 1991 and trading losses of $15,358 and $46,486 in the succeeding two years. It was a two dollar company. By 30 June 1993 it had accumulated trading losses of $130,406.
The company ceased trading in March 1995. It was then unable, so it appears on the papers before the Court, to continue trading because of its financial position. Apparently accounts have been prepared for the years subsequent to 30 June 1993 but they are not on the public register and the respondents have not put them before the Court. It is plain that Bark Creek is hopelessly insolvent. Moreover the Commonwealth Development Bank has a debenture registered over Bark Creek and a related company stamped to $779,000. From information that was given in the course of a directions hearing it appears that Bark Creek is indebted to the Commonwealth Development Bank for some $600,000.
Given that information, it seems to me that Inghams have established a strong prima facie case in favour of an order for security against Bark Creek. In opposition to the order, however, it is said first, that the order should be refused because there have been delays in making the application for security. There plainly have been delays in the proceedings since they were commenced in October 1994. I have the impression from the papers that it has been convenient to both sides at different times to delay, but a lot of the delay is not that of Inghams. Moreover, I think a significant factor when considering the delay is the fact that the counter-claim was not quantified until October 1995, and before that date steps had been taken by Inghams to get particulars to better indicate the nature of the claims and their amount.
In my view it is reasonable for the parties in litigation to hold their hands to some extent until they know the amount that is involved in proceedings. Applications for security for costs are not inexpensive to make and I can understand that Inghams may not have been disposed to make an application had the amount of the counter-claim not significantly exceeded the amount of the claim. Now that it transpires that the counter-claim is some $500,000, possibly as much as $1,000,000, greater than the claim, that puts an entirely different complexion on the matter. In my view, whilst there has been some delay it is not of a kind and degree that should disqualify the applicant from now obtaining an order in respect of the future costs associated with the defence of the counter-claim, as opposed to dealing with the defence raised by the respondents to the claim itself.
It is then said that in the exercise of the discretion of the Court that an order for security should not be made because the counter-claim is brought bona fide with reasonable prospects of success. I couple with this submission the further argument that the impecuniosity of Bark Creek is the product of the conduct complained about in the proceedings on the part of Inghams. There are cases where the criterion of a bona fide claim with reasonable prospects of success, and the criterion that the impecuniosity of the applicant has been brought about by the wrongful conduct of the respondent, have been treated as significant issues in the exercise of the discretion. In this case, however, they are not factors to which I consider any weight can be given because the information before the Court does not enable one to judge the merits of the allegations in the counter-claim, nor to judge whether the impecuniosity of Bark Creek is due to the conduct of Inghams.
It would be speculative to take a view one way or the other on those matters. The pleadings, particularly in respect to the TPA claims, still are extremely brief and really give no clear picture of whether there is any prospect of success lying within any of them. So far as the impecuniosity of the company is concerned, it is to be noted that there were trading losses arising before the events, the subject of the proceedings, occurred. It is also to be noted that the respondent Mr Barbaro himself says that some of the difficulties of the company were encountered from about 1991 onwards, after it expanded its processing capacity. That not being a matter for which Inghams have any responsibility.
Then it is said that it would be oppressive to the respondents to make an order for security for costs at this stage because the proceedings had been on foot for quite some time, and the claim for security, which is in the amount of $70,000, came out of the blue. In my view there is no oppression which justifies refusing security in this case. The question of delay I have already addressed. It seems to me that the nature of the counter-claim, the extremely complex issues raised by some of the pleadings, and the quantum alleged, should have indicated to those propounding the counter-claim, that an application for security for costs against Bark Creek was extremely likely. I do not think that the fact that the claim has now been brought not long after the counter-claim was quantified, gives rise to oppression which justifies an exercise of discretion against making the order.
Next it is said that the Court should have regard to the relative resources of the parties, Inghams on the one hand being a large national company, is apparently well able to afford litigation of this kind, whereas Bark Creek is impecunious, and Mr Barbaro himself has only very limited means. As Mr Mathwin, who appears for Inghams, has pointed out, frequently the parties will not be of equal financial strength, and if one party is otherwise entitled to an order for security, it would be unjust to refuse that order simply on the ground that that party is already well healed.
The plain fact is that if a party is put to defending expensive, complex litigation which fails, it does suffer significant hardship if it is then unable to recover its costs. Whilst the comparative financial positions of the parties may, in some circumstances, be a factor to be weighed both in deciding whether to make the order at all, and if so, in the amount that should be ordered, I do not think that it is a factor in this case that justifies not making an order at all. It is a factor that I think should be taken into account in fixing the quantum of the security, and I will come to that shortly.
Then it is said that the order should not be made because it will defeat the counter-claim. Again, the evidence is thin on this topic, but on the assumption that Bark Creek is impecunious, and that Mr Barbaro is a man of limited means, it is not improbable that this will be the result of making an order. On the other hand, the potential beneficiary of the counter-claim is the Commonwealth Development Bank. It has a debenture over the assets and undertaking of Bark Creek, and a debt of some $600,000. Even if the counter-claim were substantially successful, it appears that the proceeds would be claimed under the debenture by the Commonwealth Development Bank. In these circumstances, there remains the possibility that if an order for security is made, and if the counter-claim is viewed by the ultimate beneficiary as being likely to succeed, the beneficiary, namely the Commonwealth Development Bank, could prevent the counter-claim being defeated by funding the action. In my view, the possibility that the making of the order will defeat the counter-claim is not a sufficient reason for exercising the discretion against making the order.
I should add that one of the parties named as a cross-claimant is Mr Barbaro. It is submitted that if the counter-claim were to fail, he would be liable for an order for costs on the counter-claim. It is difficult to see how Mr Barbaro is an appropriate party to the counter-claim. The losses alleged in the counter-claim are the losses of Bark Creek. Insofar as Mr Barbaro seeks to rely on contraventions of the TPA, he does so only as a ground for defeating the guarantee which he has given. That is part of the defence to the claim itself, not a separate ground which justifies him being a party to the counter-claim. If he were to succeed on the issuesraised in the defence, the claim against him would be dismissed, and the dismissal would stand as a judgment vindicating his position without the need for any further orders.
I have dealt with the matters that were raised in opposition to the proceedings. The counter-claim raises extremely complex issues for a very large sum of money, and Bark Creek is without any means at all. I think an order for security should be made.
The next question is for how much. As I have already indicated, the claim is brought for the additional costs of defending the counter-claim over and above moneys that would be expended on merely dealing with a defence to a trading debt claim of $353,698. A cost estimate has been handed up, and I have had regard to that. I think the amounts that are sought are, in some respects, conservative, even within that estimate. As I have said earlier in this judgment, I think a major part of the costs involved in defending the counter-claim will lie in the extra discovery and accounting exercises that will be necessary to deal with the quantification of the counter-claim.
In my view, the sum of $70,000 that is sought is conservative, and I do not think that any lesser sum should be awarded. That security is ordered in respect of the applicant’s defence of the counter-claim. I consider the order should be framed so that the failure to comply with the order, if there is a failure, does not defeat the defence to the claim. In other words, failure to comply with the order for security for costs may defeat the prosecution of the counter-claim, but it should not be allowed to defeat the defence of the claim itself.
I will hear the parties as to the precise terms of the order.
I certify that this and the preceding pages are a true copy of the Reasons for Judgment of Justice von Doussa
Associate:
Dated:
Counsel for the applicant : Mr S P Mathwin
Solicitor for the applicant : Kelly & Co.
Counsel for the respondent : Mr J S Royle
Solicitor for the respondent : Donaldson Walsh
Date of hearing : 17 January 1997
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