International Alpaca Management Pty Ltd v Ensor, B.K.E

[1995] FCA 581

CATCHWORDS

SECURITY FOR COSTS: Principles to be applied - nature of discretion conferred by s 56 - relevant factors - risk that costs order would not be met - solvency not the sole criterion

Federal Court of Australia Act 1976 (Cth)

Bell Wholesale Co Ltd v Gates Export Corporation 1984 2 FCR 1
Chester Fein Property Developments Pty Limited v Candam Investments Pty Limited (1985) 9 FCR 419
Bryan E. Fencot & Associates Pty Ltd v Enetta Pty Ltd (1987) 16 FCR 497
Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972
Charlwood Industries Pty Limited v Cubitt & Ors (unreported Gummow J; 15 March 1995)
Beach Petroleum NL & Anor v Johnson & Ors (1992) 10 ACLC 525

INTERNATIONAL ALPACA MANAGEMENT PTY LIMITED & ORS v BEN K E ENSOR & ORS
No G690 of 1992
Beazley J
7 August 1995
Sydney

IN THE FEDERAL COURT OF AUSTRALIA )

)No. G690 OF 1992

NEW SOUTH WALES DISTRICT REGISTRY )
  )
GENERAL DIVISION                 )

BETWEEN:INTERNATIONAL ALPACA MANAGEMENT PTY LIMITED

First Applicant

TEXTILE FINANCE LIMITED

Second Applicant

COOLAROO ALPACA GENERAL PARTNER PTY LIMITED

Third Applicant

AND:BEN K E ENSOR

First Respondent

GARRYMERE FARMS LIMITED

Second Respondent

DEPARTMENT OF PRIMARY INDUSTRY AND ENERGY

Third Respondent

CORAM:BEAZLEY J

PLACE:    SYDNEY
DATE:     7 August 1995

REASONS FOR JUDGMENT

BEAZLEY J:    In this matter I made declarations and orders in favour of the respondents' entitlement to the 100 alpaca subject of the proceedings.  The applicants have appealed against the judgment and have sought a stay of the orders made pending the outcome of the appeal which has been set down for hearing for 5 days in late September 1995.  The respondents do not oppose a stay provided that certain conditions are imposed.  A number of the conditions they seek have been agreed to by the applicants.  However, the respondents have sought three conditions to which the applicants have not agreed.  Those conditions are: (1) that the applicants undertake testing for Johnnes disease of the whole alpaca herd running upon the property Coolaroo where the subject alpaca are presently located; (2) that the applicants maintain the registration of the 100 alpaca with the Australian Alpaca Association, or alternatively to reinstate that registration; and (3) that the applicants provide security for the costs of the appeal.

During the course of the hearing of the stay application, I rejected conditions (1) and (2) sought by the respondents.  The question of security remains outstanding. The applicants resisted any such order, contending that the first applicant, at least, was able to meet any order for costs which might be made on the appeal.

The application for security was sought, as I have stated, as a condition of the grant of a stay and was not made directly under s 56 of the Federal Court Act 1976 (Cth).  Nonetheless, I am of the opinion that the same principles should be applied to the present application as apply to an application made under that section.  Neither counsel directed attention to the juridical basis upon which the order for security was sought.  However, counsel for the applicants submitted that the respondents had to positively satisfy the court that the applicants would be unable to meet any order for costs that might be made against them.  Counsel for the respondents did not disagree with this proposition, save that she submitted that the recoverability of any costs order was a relevant consideration.  No other issues arose such as are often relevant in security for costs applications: see generally Bryan E. Fencot & Associates Pty Ltd v Enetta Pty Ltd (1987) 16 FCR 497; Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972. There was a dispute between the parties as to the quantum of costs which might be ordered as well as the ability of the applicants to pay. It is appropriate in the first instance to look at the financial position of the applicants.

Financial Position of the Applicants: General
The first and third applicants are Australian corporations.  The second applicant is a Canadian corporation.  There is no evidence whatsoever as to the financial position of the second applicant.  The June 1994 accounts for the first and third applicants are in evidence and there is also some evidence as to the current asset and cash position of the third applicant.  The 1995 accounts have not yet been prepared and there is no evidence as to the overall financial position of the first and third applicants at the present time.  Counsel for the applicants submitted that I should consider the matter on the basis of the current asset and cash position of the first and third applicants.  Counsel for the respondents resisted this approach, submitting that to do so would not give a true reflection of their financial position.  I shall return to this issue shortly.

Financial position of the first applicant as at June 1994
As at 30 June 1994, the first applicant had total shareholders' equity of $172,944.  Its non-current assets were minimal, comprising office furniture valued at $3,092 on an at cost basis less depreciation.  Its substantial asset was its "Receivables" in an amount of $769,654.  Its "Receivables" account comprised two substantial loans at call, the first to the second applicant in the sum of $344,131 and the second to Mr Andrew Forrest, a director of the company, in the sum of $384,781.  There was an almost 100% increase in the loan to the second applicant from the 1993 year.  The loan to Mr Forrest remained constant in the two years.  There were two smaller loans to Mr Inglis and Mr Morales, who were both players in the alpaca venture subject of the proceedings, of $20,200 and $20,000 respectively.  There is no evidence of the present financial position of any of these debtors.  There was evidence in the proceedings that Mr Morales had, from time to time, found himself in financial difficulties.  There was also evidence that both Inglis and Morales had a financial stake in the outcome of proceedings.  The accounts also revealed that the first applicant owed $146,540 to one of its directors, Judith Street.  It also had current creditors and borrowings of $396,910 and a $75,000 secured loan at call.

There had been a substantial drop in the first applicant's income from the 1993 year - from $889,944 in 1993 to $318,482.  Expenses had also dropped - from $893,913 to $537,075.  However, the net effect was a substantial increase in its operating loss - from $3,969 to $218,593.

The first applicant's expenses for the 1994 year included an item of $200,317 for professional fees.  It was stated by counsel for the applicants that the nature of these fees would be obvious.  I understood that it was being said they were legal fees associated with this litigation.  There is no evidence, however, as to the nature of these fees.  There were also professional fees of almost $100,000 incurred in the 1993 financial year.  There was no evidence or suggestion as to what these fees might have related to.  They too, may have related to legal expenses.  However, in the absence of any evidence I do not consider that I should draw any inferences as to the nature of the fees or as to whether they should be treated as an unusual or non-recurring expenditure.  Given that the proceedings continued on into the 1995 financial year and are still continuing, that would, in any event, appear to be an unwarranted inference.

Financial position of the third applicant as at June 1994
The third applicant's balance sheet for the 1994 year reveals a deficit of $3,374,534.  In large measure, this was reflected in its non-current liabilities, which included a loan of $3,070,200 from the second applicant.  It also had current liabilities comprising trade debtors of $233,878.  Its assets represented its stock of 108 alpaca "at average cost" totalling $338,126.  It had cash at bank and trade debtors of approximately $100,000.

There was evidence that as at 26 June 1995, the third applicant had cash at bank of $155,716 and as at 27 July 1995, its cash at bank was $352,299.27.  A stock schedule revealed that as at 30 June 1995, it had 551 stock on hand of which 47 were leased.  There had been purchases of 309 alpaca, 300 of which were purchased from Chile and which, as at 30 June 1995, were "en route" to Australia.  The schedule also revealed that there were 237 stock on hand as at 1 July 1994.  This is to be contrasted with the closing stock figure of 108 as at 30 June 1994 as disclosed in the livestock trading account.  There is no evidence to explain the differential of 129 stock between the two dates.  It may be that the 129 stock were leased stock, which would not be shown in the third applicant's livestock account.  In that regard, I note that there are "leasing charges" in the 1994 profit and loss account of almost $700,000.  The only other evidence as to the third applicant's asset position is that, according to Mrs Judith Street, there are approximately 400 alpaca running on Coolaroo.  These include the 100 alpaca the subject of these proceedings.  Having regard to the other evidence, the figure of 400 alpaca would also include leased and agisted animals.

In my judgment in the substantive proceedings, I stated that alpaca were valued at about $20,000 each.  The evidence on this application revealed that the average sale price of alpaca sold by the third applicant during the financial year ending 30 June 1995 was approximately $15,000.  Whether the average value of the third applicant's alpaca be $15,000 or $20,000, it is clear that its true asset position in 1994 was substantially greater than the amount of $430,000 revealed in its balance sheet.  However, whichever figure is adopted, the third applicant still had a substantial deficit for the year of somewhere between approximately $1.5 and $2 million, depending upon what value was applied to the alpaca.

Counsel for the applicants submitted that I should consider this matter on the basis of the third applicant's present asset position.  It was submitted, therefore, that I should treat the third applicant as having assets valued at somewhere between $4.5 and $6 million, depending upon whether a value of $15,000 or $20,000 was applied for each alpaca.  It was also submitted that the third applicant had ample cash at bank to pay an order for costs.  There are a number of difficulties with this approach.  First, the evidence as to the number of alpaca owned by the third alpaca is imprecise.  It could be anywhere between approximately 250 and 350.  Secondly, although there is currently a substantial figure for cash at bank, there was evidence that this account was a working account and that its balance fluctuated.   However, there is a more fundamental difficulty, and it is the one relied upon by counsel for the respondents.  There is no evidence whatsoever of the liability position of the third applicant.  When the matter was first before me I considered that to approach the matter on the basis suggested by counsel for the applicants would give an unbalanced view of the third applicant's financial position.  I indicated on that occasion that I considered I should approach the matter on the basis of the 1994 accounts.  The applicants sought and were granted a week's adjournment to provide the court with further evidence as to the third applicant's financial position.  The only additional evidence adduced was in relation to assets.  However, a fair assessment of the third applicant's financial position requires that its asset and liability position be considered as at the same date, unless it could be said that an inference should be drawn that the liability position remained substantially the same.  It may be that in an appropriate case such an inference could be drawn.  I do not think that it can in the present case.  The purchase of the 300 alpaca alone would have involved a substantial cost.

That leaves the question, whether having regard to the first applicant's financial position, security should be ordered.  Before looking at the principles which govern an application for security, it is necessary to determine the amount of any costs order which might be made in the matter.

Amount of security
An estimate was provided of the costs for senior and junior counsel for the 5 day appeal totalling $28,750.  Initially, counsel for the applicants submitted that allowance should only be made for a 4 day appeal.  However, as the matter has been set down for 5 days, counsel did not persist in that submission.  No other issue was taken in relation to that item.  An allowance was also claimed for attendance by the instructing solicitor at the hearing at the rate of $165 per hour.  I accept that $165 per hour is a reasonable estimate of the hourly rate which would be allowed in the matter.  Accepting an 8 hour per day attendance at the hearing and with counsel before or after court, a reasonable estimate of costs for the hearing would be $35,350.

It was estimated that preparation for the appeal would take 5 days for senior and junior counsel at the same rate as that estimated for the hearing.  There was no dispute as to the rate.  However, counsel for the applicants submitted that the estimated 5 days preparation by counsel was excessive and that allowance should only be made for two and a half days.  I do not agree.  The total hearing time in this matter was 18 days.  There were approximately 800 pages of exhibits and one and half lever arch folders of affidavit evidence.  There was over 1500 pages of transcript and almost 200 pages of written submissions.  The judgment comprised 144 pages.  There are 9 principal and 68 subsidiary grounds of appeal.  Many of the factual and legal issues in the case were complex.  Even if the same counsel appear in the appeal, and assuming that work done in relation to the transcript during the hearing can be utilised in the appeal, I consider that 5 days preparation is a reasonable estimate of what would be required in the matter.

That leaves only the question of the claim for solicitors' time.  It was estimated that 160 hours or about 4 weeks preparation, "including the reading and verification of appeal books, attendance at the hearing and reporting to the client" would be involved in the matter at the rate of $165 per hour.  I have already dealt with an allowance for the hearing of the matter.  That leaves for consideration whether 120 hours of preparation is a reasonable estimate.  The respondents' solicitor gave evidence that this estimate took into account, in a global way, the work which would be involved by a supervising partner as well as her own work.  Counsel for the applicant submitted, however, that very little was required of the solicitors by way of preparation and indeed, much of what would be involved in this estimate would involve a double up of preparation work undertaken by counsel.  Whilst I do not agree that the solicitors' work involved in this appeal would be of the small magnitude submitted by counsel for the applicants, it may be that the estimate of 120 hours in addition to the hearing time may be generous.  It seems to me that two weeks or 80 hours of preparation, including preparation time with counsel would be reasonable.  That brings the total estimate of costs to $77,300.

Principles to apply where security for costs sought as a condition of a stay

As I stated above, the claim for security in this matter is sought as a condition of the stay which is sought by the applicants. However, I am of the opinion that the same considerations apply as to an application for security under s 56 of the Federal Court of Australia Act 1976 (Cth). That section provides, relevantly:

"The Court or a Judge may order...an appellant in an appeal to the court to give security for the payment of costs that may be awarded against him."

Order 28 R 3 of the Federal Court Rules also provides for the making of an order for security for costs if any of the matters specified in order are satisfied. Those provisions do not have strict relevance here, save in respect of the second applicant, which is an overseas corporation. However, this is not a case where it is likely that a costs order would differentiate between the applicants. If that did occur, the differentiation would be directed against the third applicant. Accordingly, I consider that the proper approach in this case is to consider the global position of the applicants, so far as that is known.

One test which is frequently cited on a security for costs application is that the court has to be satisfied by credible evidence that the applicants will be unable to pay the costs of a successful defendant: see Ilat Nominees Pty Ltd v Murragong Nominess Pty Ltd (1980) 48 FLR 385. However, that test is derived directly from the language of s 1335 of the
Corporations Law and its predecessor provisions. The language of s 56 is different. The power to award costs given by s 56 is in general terms. It is not constrained by Order 28: see Bell Wholesale Co Ltd v Gates Export Corporation 1984 2 FCR 1. The only constraint is that the discretion conferred by s 56 must be exercised judicially, having regard to all the circumstances of the case: see Bell Wholesale Co Ltd v Gates Export Corporation 1984 2 FCR 1; Chester Fein Property Developments Pty Limited v Candam Investments Pty Limited (1985) 9 FCR 419; Bryan E. Fencot & Associates Pty Ltd v Enetta Pty Ltd (1987) 16 FCR 497 at 509 and cases reviewed therein; Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972; Charlwood Industries Pty Limited v Cubitt & Ors (unreported Gummow J; 15 March 1995).  There are well settled factors which are usually relevant to the determination of whether an order for security should be made. However, none of those factors are relevant in this case.  The sole issue is whether, having regard to the financial position of the first applicant, an order for security should be made.  To this extent, one of the factors relevant to the exercise of the discretion is "the quantum of risk that the applicant cannot satisfy a cost order": Equity Access Limited v Westpac Banking Corporation per Hill J at 50,635; see also Charlwood Industries Pty Limited v Cubitt & Ors.  In Charlwood Industries, Gummow J held that it was not necessarily sufficient for a party to be solvent in order to resist an order for security. His Honour considered the meaning of solvency in the context of s 95 of the Bankruptcy Act 1924 (Cth) as well as the meaning of "able to pay...debts" for the purposes of s 52 of the Bankruptcy Act and concluded at 17:

"Terms such as "able" and "cannot" when used in relation to satisfaction of a costs order should not be given so rigid a meaning as to circumscribe the discretion given by s 56.

His Honour had earlier stated at 16:

"...in the end, the circumstances must be looked at as a whole, in the light of the general concern for the efficient administration of justice in this Court, manifested in the statute of which s 56 is a part".

Counsel for the applicants submitted that not only was the first applicant solvent, its net assets position was ample to cover an order for costs in the vicinity of $80,000. Accordingly, no order should be made.  Counsel for the respondents submitted however that the first applicant's solvency was not sufficient to enable the court to be satisfied that it would be able to meet an order for costs.

She submitted that the nature of the first applicant's assets was relevant to the question whether security should be provided.  She submitted that the court could not be satisfied as to the recoverability of the loans to Messrs Forrest, Inglis and Morales.  She also pointed out that each of those individuals had an association, either direct or indirect with the first applicant.  She submitted that the fact that these persons were not at arms lengths from the first applicant raised a question as to the recoverability of the loans. 

Counsel for the respondent submitted that the it should be accepted that the accounts were prepared in accordance with proper accounting standards.  He submitted that, in accordance with those accounting standards, the auditors would have satisfied themselves that the three loans in question were recoverable.  There was no evidence before the court, either as to the usual accounting standards or as to whether the auditors made any inquiries of the debtors to ascertain whether the loans were recoverable.  I do not consider therefore that I should make any assumption about them.

In Chester & Fein Property Developments, Jenkinson J considered that the basis of a party's solvency was a relevant consideration in an application for security for costs.   His Honour noted at 423 that "the respondents have shown the applicant's solvency to be dependant on it gaining very substantial funds to which it claims entitlement as a right of Indemnity of Assets of C&F Development Unit trust No. 1".  His Honour noted that of the three possible sources of those funds, nothing was known of two of them and nothing was known of the availability of the stated assets of the third.  He observed that there was nothing to indicate the respondent's directors had any knowledge of these assets which was not disclosed.  On the other hand, his Honour found that there was reason to expect that the applicant's directors would have knowledge of the source, nature and availability of such funds.  In the circumstances, security was ordered.
In Beach Petroleum NL & Anor v Johnson & Ors (1992) 10 ACLC 525 von Doussa J also applied a more extended meaning to the ability of a company to pay a costs order than the traditional sense of solvency. His Honour stated at 526-527:

"A corporation "will be unable to pay" the costs within the meaning of the section if it can only do so if given extended time to realise assets which might be difficult to realise..."

In that case his Honour considered that the uncertainty as to whether the "receivables" specified in the accounts would be received was a relevant factor to take into account in an application under s 56.

These approaches clearly accord with the principled approach to the section taken in Equity Access Limited v Westpac Banking Corporation and in Charlwood Industries Pty Limited v Cubitt & Ors.  In my view Jenkinson J was also correct in his expectation in Chester & Fein Property Developments that some explanation of the company's solvency should have been forthcoming from the company's directors.

In the present case, the first applicant's substantial asset is its receivables accounts.  One major loan reflected in that account is to the second applicant, a Canadian company.  However, the applicants have failed to provide any financial information about that company, save that it is known that it is owed $3 million by the third applicant.  The other substantial loan is to one of the first applicant's  directors.  Nothing is known of his financial position, or
whether he would have the ready means to repay the loan.  Mr Forrest was a witness in the substantive proceedings and resides in New South Wales.  There would not appear to be any difficulty in his having provided that evidence.  The other two debtors, Inglis and Morales, are resident outside the jurisdiction.  There was evidence in the substantive proceedings that Morales was from time to time short of money.
In the circumstances, I am of the opinion that, on the financial information available to the court, there is a risk that the applicants would not be able to satisfy an order for costs without there being a delay in it doing so.  The delay could arise from the need to pursue the major debt owed by the second applicant or that owed by the director, Mr Forrest.  The applicants could have provided sufficient information to the court to demonstrate that there was no such risk of delay.  They chose not to do so.  The question for determination is whether that is a risk which in all the circumstances the respondents should be required to bear.  In my opinion, it is not.  It was within the power of the applicants to have provided more or updated financial information to the court.  They did not do so.  The first applicant's financial position deteriorated between the financial years ended 1993 and 1994.  In that year the third respondent has a substantial deficiency of assets over liabilities.  Further the effect of the granting of a stay is to deprive the respondents of the judgment which they presently have in their favour.  In all the circumstances, I am of the opinion that the stay should be
subject to a condition that security for the costs of the appeal be provided.

As there are other conditions to which the stay is subject, I direct the parties to bring in short minutes of order reflecting their agreement and these reasons.

I certify that this and the preceding 16 pages
are a true copy of the Reasons for Judgment
of the Honourable Justice Beazley.

Associate:

Dated:    7 August 1995

APPEARANCES

Counsel for the Applicant:   N.Cotman          

Solicitors for the Applicant:     Messrs Webeck Farland Pender

Counsel for the Respondent:  R. Sofroniou

Solicitors for the Respondent:Messrs Mallesons Stephen Jaques

Date of hearing:            28 July 1995