Jadwan Pty Ltd v Rae & Partners
[2015] TASSC 11
•30 March 2015
[2015] TASSC 11
COURT: SUPREME COURT OF TASMANIA
CITATION: Jadwan Pty Ltd v Rae & Partners [2015] TASSC 11
PARTIES: JADWAN PTY LTD (ACN 006 203 112)
v
RAE & PARTNERS (a firm)
WILSON DOWD (a firm)
TOOMEY MANNING & CO (a firm)JANET KAY HOGAN as Executor of the Estate of the Late John Michael Hogan
WORSLEY DARCEY & ASSOCIATES (a firm)
FILE NO: 35/2003
DELIVERED ON: 30 March 2015
DELIVERED AT: Hobart
HEARING DATES: 11 and 12 February 2015
(written submissions closed 25 March 2015)
JUDGMENT OF: Holt AsJ
CATCHWORDS:
Corporations – Legal capacity and relations with outsiders – External litigation procedure – Costs – Security for costs – Reason to believe corporation unable to pay defendant's costs – Corporation bringing proceedings as trustee.
Corporations Act 2001 (Cth), s 1335.
Aust Dig Corporations [1071]
REPRESENTATION:
Counsel:
Plaintiff: S Matters
1st, 2nd & 3rd defendants: G Tremayne
4th defendant: C Gunson
5th defendant: P Sutherland
Solicitors:
Plaintiff: Fitzgerald & Browne
1st, 2nd & 3rd defendants: Tremayne Faye & Rheinberger
4th defendant: Lander & Rogers
5th defendant: Murdoch Clarke
Judgment Number: [2015] TASSC 11
Number of paragraphs: 39
Serial No 11/2015
File No 35/2003
JADWAN PTY LTD v RAE & PARTNERS (a firm) and
WILSON DOWD (a firm) and TOOMEY MANING & CO (a firm) and
JANET KAY HOGAN as Executor of the Estate of the Late John Michael Hogan and WORSLEY DARCEY & ASSOCIATES (a firm)
REASONS FOR JUDGMENT Holt AsJ
30 March 2015
The five defendants have applied for orders that the plaintiff company give security for their costs of the litigation. The total of the security sought is about $710,000.
The proceedings, which have since been consolidated, were initiated by the plaintiff in three actions, each commenced in 2003. The security for costs applications were filed in late 2014.
The jurisdiction of this court to make an order giving security for costs exists in its inherent jurisdiction, under rules of court and by legislation.
In the case of plaintiff corporations the power is regulated by s 1335(1) of the Corporations Act 2001 (Cth) which is as follows:
"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."
As can be seen, the only fetters on the jurisdiction imposed by the provision are the requirements that the corporation is a plaintiff and that it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendants if successful in their defences. If the statutory pre-requisites are fulfilled, so as to enliven the discretion, the governing consideration is where the justice of the case lies. Merribee Pastoral v ANZ Banking Group Ltd (1998) 193 CLR 502 at [26].
The most recent accounts available for the plaintiff company are contained in the plaintiff's financial report for the year ended 30 June 2013. The accounts show that the plaintiff was operating solely as the trustee of the JG & JI Alexander Family Trust. The plaintiff's assets, with the exception of its share capital of $2, were all held for the benefit of the trust. The assets included cash and cash equivalents of about $1.7 million and land and buildings recorded with a book value of about $700,000.
Recent title searches show that the land is comprised in three parcels, being properties at Fitzroy Place Hobart, Star Street Hobart, and Main Road Glenorchy. The most recent government valuations show the capital values of the properties to be respectively $1.29 million, $680,000 and $310,000. Each property is mortgaged to the Commonwealth Bank. The evidence is that as at February 2015 there were no loans secured by the mortgages.
The accounts show that as at 30 June 2013 the liabilities of the plaintiff were comprised almost entirely of unpaid present entitlements to the beneficiaries under the trust. These liabilities account for effectively the whole of the cash and cash equivalents held by the plaintiff and the land and buildings owned by the plaintiff.
There is nothing in the endorsements on the writs or in the subsequent pleadings disclosing that the plaintiff is bringing the proceedings in a representative capacity as the trustee of the JG & JI Alexander Family Trust.
The plaintiff company, having no assets of substance itself and suing on behalf of the trust, should be taken to be unable to pay the costs of the defendants if the defendants are successful in their defences and obtain costs orders. This is so regardless of the fact that there are substantial trust assets. The rationale was explained by Smithers J in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd & Ors (1985) ATPR 40-584. His Honour said at 46,729:
"The applicant contends, that having regard to the disclosed assets of the applicant and the indemnity the respondents do not show, by credible testimony, that there is reason to believe that the applicant will be unable to pay the costs of the defendant if successful in its defence, within the meaning of s 533(1) of the Code, or that there is reason to believe that the applicant will be unable to pay the costs of the respondents if ordered to do so within the meaning of 0 28 r 3(1)(b).
But, as a matter of substance, so far as the applicant has any entitlement to the tangible assets referred to, it is an entitlement only as Trustee, the beneficial owner thereof being the Trust. Because the beneficial ownership of the assets, so far as they are in the form of tangible assets, is in the trust, any attempt to execute against those assets and to realize on the right title and interest of the applicant company therein would be an unproductive exercise. The respondents are now and have at all material times been aware that the applicant carries on business as a trustee for the Ace Cleaning Unit Trust.
With respect to the indemnity, unless the applicant itself co-operated, or the applicant company were wound up, benefit could not be obtained by the respondents thereunder. No direct process of execution would be available for the purpose of obtaining that benefit. Further, the extent to which the indemnity would in any event be productive would depend upon the state of the finances of the trust. And the possibility of some defence cannot be ignored.
Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability."
Underwood J (as he then was) referred with approval to the reasoning in Laundry Coin-Wash Nominees in Leary v Tasmanian Kit Homes Pty Ltd [1995] TASSC 93. His Honour also repeated the following passage appearing in the judgment of Smithers J at 46,731:
"I have concluded that an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs."
Laundry Coin-Wash Nominees has been cited with approval on many occasions. I will not attempt to refer to them all. A couple of the more recent examples are SAS Global Forrestdale Pty Ltd v Samsera Pty Ltd (2010) WASC 309 at [29] and ACN 105 921 962 Pty Ltd & Ors v Domenic Wiggett & Anor [2012] NSWSC 1526 at [10].
The plaintiff being a trustee company with no tangible assets other than those held beneficially for the trust, I am satisfied that there is reason to believe that it is without assets to satisfy its liability if the costs of the action are awarded against it.
The statutory threshold question having been answered in the affirmative, the discretion to make an order for security for costs is enlivened.
The fact that the plaintiff is bringing the proceedings in a representative capacity as trustee does not protect it from an order that it provide security for costs. This may be the case where an impecunious natural person sues as trustee as explained by Ashley J in Perry v Jackson [1998] 4 VR 463. His Honour said at 465:
"Before r 62.02(1)(b) of Ch I of the rules was introduced in 1986, the court had power to order that the security for costs be given, this deriving from its inherent power to regulate its own proceeding: Lines v Tana Pty Ltd. [1987] VR 641 at 642. A considerable jurisprudence had developed as to the circumstances in which such an order should or might be made. In the case of the plaintiffs who are natural persons, 'The general rule is that poverty is no bar to a litigant, that, from time immemorial, has been the rule at common law, and also, I believe, in equity': Cowell v Taylor (1885) 31 Ch D 34 at 38 per Bowen LJ. The general rule was subject to exception in the case of so-called 'nominal' plaintiffs. The exception was explained by Baggallay LJ in Cowell as follows at 38: 'Suppose I, having a shadowy case, assign it over to a man of straw that he may sue for my benefit, then security for costs will be ordered.' Bowen LJ described the exception thus at 38:
There is also an exception introduced in order to prevent abuse, that if an insolvent sues as nominal plaintiff for the benefit of somebody else, he must give security. In that case the nominal plaintiff is a mere shadow. The two most familiar classes of cases of this kind are cases where a person has divested himself of his interest and handed it over to someone else that the transferee may sue for him, and cases where a person who has commenced a suit divests himself of his interest during the course of the suit in order that another person may carry it on for his benefit. Those are the common cases, I do not say that there may not be others. In those cases Courts of Common Law required security for costs to be given.
The key to the exception was the prevention of abuse. Executors, administrators, trustees having no interest in the subject matter of the trust, trustees in bankruptcy and at least some liquidators were not required to give security even if impecunious: Sykes v Sykes (1869) L.R. 4 C.P. 645; Rainbow v Kittoe [1916] 1 Ch 313; White v Butt [1909] 1 KB 50; Cowell; Mackie v Clough (1891) 17 VLR 201. Such persons, though suing for the benefit of others, were not mere nominal plaintiffs. They sued in what might be called a representative capacity. No abuse was involved. "
The position is different in the case of corporate trustees. Section 1335(1) of the Corporations Act 2001 does not fetter the power to make an order for security for costs and the statutory power exists independently of the power derived from the inherent jurisdiction of the court. In Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd [1995] 19 ACSR 68, Lehane J said at 70-71:
"I was referred also to other authorities, for example, the decision of Sheppard J in this Court in Orr v Lusute Pty Ltd (1987) 72 ALR 617, to the effect that in certain circumstances it may not be appropriate to make an order for security for costs against a trustee. I confess to a considerable degree of scepticism in relation to that argument. Principally and obviously, this is not a motion under the rules of court, but rather, one relying on ss 56 and 1335 of the Federal Court of Australia Act and Corporations Law respectively, as I have said. Consequently, the question whether for the purposes of O 28 r 3(1)(b) Crypta is a nominal plaintiff probably does not arise. In any event, I must say that I can see no reason why authorities which hold that security for costs may, as a discretionary matter, be awarded where an impecunious corporate applicant or plaintiff has substantial parties standing behind it, whether they be shareholders or creditors as in the recent decision of Finn J in Pasdale Pty Ltd v Concrete Constructions (1995) 131 ALR 268 should not apply equally to a situation where a trustee company has standing behind it, and in a position to benefit from any decision in its favour, substantial beneficiaries of a trust."
Although in Crypta Fuels Lehane J found it unnecessary to come to a definite conclusion about the matter, Goldberg J had no such hesitation in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd (1999) FCA 486 at [24].
In light of these authorities I proceed on the basis that a corporate trustee may be required to give security for costs.
I now turn to the exercise of the discretion.
The fact that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants, if awarded against it, although being a factor supporting a favourable exercise of the discretion, should not, of itself, give rise to any predisposition in favour of the granting of the protection of an order for security. Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509, per French J.
The only factor relied upon by the defendants in support of their applications is that the plaintiff has no material assets of its own and sues as trustee with the result that direct processes of execution will be of no utility to the defendants if awarded the costs of the action.
The factors relied upon by the plaintiff as going against the making of an order for security for costs are as follows:
·The plaintiff has a right to be indemnified from the assets which it holds on trust.
·The plaintiff's claim is bona fide with reasonable prospects of success.
·A director of the company, Ms Julie Alexander, has offered a personal guarantee to indemnify the plaintiff up to the total of the security sought, namely about $710,000; and
·The bringing of the application is belated with the plaintiff having already spent several hundred thousand dollars on the litigation when a decision not to pursue the matter might have been made long ago if an order for security for costs had been made.
I deal firstly with the plaintiff's right to be indemnified from trust assets. The assets are far in excess of what might ultimately be required to satisfy any adverse costs orders. There is, however, no certainty that these assets will be available at the conclusion of the trial. The beneficiaries of the trust have a present entitlement to distribution of almost the entirety of the trust assets. They could be paid at any time out of the cash and equivalent assets. Further, the land and buildings could be sold or used as security for loans the proceeds of which might then be distributed to the trust beneficiaries.
The next factor relied upon by the plaintiff is that the claim is bona fide and not without some prospect of success. I proceed on the basis that the claim is meritorious. However, there is no assertion that an order for security for costs would put an end to the litigation. The claim is being brought for the benefit of the trust and there are ample trust funds to cover the costs. I have no reason to think that an order would prevent or impede the pursuit of the claim.
There is the offer of a personal guarantee by the plaintiff's director, Ms Julie Alexander. Ms Alexander's ability to satisfy such a guarantee, if called upon to do so, is less than certain. She is not shown as a beneficiary of the trust. The relevant beneficiary named in the accounts is "Julie Ann Trust". No details of this trust have been provided by Ms Alexander other than the fact that she is the trustee. In particular, it is not known whether Ms Alexander has definite entitlements under the trust or is simply a discretionary beneficiary. Ms Alexander lives in rented accommodation but is the owner of an unmortgaged investment property in Victoria. She said in her evidence that she had no idea what the property was worth. She also said that her annual income was only about $20,000. Unsupported by clear evidence that Ms Alexander would satisfy her obligations under the guarantee, if called upon to do so, I do not regard her offer to give a guarantee as sufficient to provide the defendants with the equivalent security which might be required by an order.
The applications for security for costs were not brought until about 12 years after the commencement of the litigation. Ms Alexander said in her affidavit that if the applications had been brought "… at any time until about 2009, I would have had the view that it would have been better not to proceed with the litigation …". Ms Alexander also gave evidence that to date the plaintiff had incurred legal costs of "well over half a million dollars" (transcript 12/2/15 p9 line 31).
I do not accept the proposition that if an application for security for costs had been made earlier the claim would not or might not have been continued. The claim is being brought on behalf of the trust and the trust has owned the three parcels of land, referred to earlier in these reasons, since the inception of the litigation and so has apparently had at all times ample funds to indemnify the plaintiff against any adverse costs orders. In the ordinary course a litigant would be aware of the possibility that, if unsuccessful, costs might be awarded to the other party. There was no assertion from Ms Alexander that the plaintiff was unaware of the risk of an adverse costs order before the litigation had substantially progressed. There was no assertion from Ms Alexander that she was unaware of the plaintiff's right to be indemnified for costs out of trust assets. I conclude that the timing of the applications has not resulted in any prejudice to the plaintiff.
In any event, the delay has been caused by the plaintiff's longstanding failure to disclose that it is bringing the action as trustee. Until recently the appearance was that the plaintiff was bringing the claim on its own behalf backed by its own assets including the parcels of real estate in Hobart and Glenorchy. The disclosure that the plaintiff acts solely as trustee did not occur until the filing of the affidavit of Ms Julie Alexander on 12 February 2015.
The disclosure should have occurred at the time the litigation was commenced. A trustee who sues for the benefit of the trust acts in a representative capacity. Perry v Jackson (supra) at 465. Rule 111 of the Supreme Court Rules 2000 provides:
"If a plaintiff sues, or a defendant is sued, in a representative capacity, the endorsement of claim is to show the relevant capacity."
The writs do not contain the necessary disclosure either in the description of the plaintiff or in the endorsements of claim.
The factors which I have mentioned need to be considered and weighed in the discretionary determination of where the justice of the case lies. However, the exercise of the discretion is not necessarily to be approached in a highly analytical way. Often what is determined as being just is a matter of impression. In Maritime Services Board of New South Wales & Anor v Citizens Airport Environmental Association Inc (1992) 83 LGERA 107 Kirby P said at 110:
"… I would emphasise that an over analytical approach to decisions of this character can distort the real process of reasoning by which such a decision is made. In the end, it is usually a matter of impression which is derived at the close of hearing the evidence and listening to the argument. It is not always one susceptible to precise explanation."
The plaintiff sues for the benefit of a trust, but has not disclosed that until recently. The only assets of substance held by the plaintiff are trust assets. The result is that any costs orders obtained by the defendants could not be enforced by direct process of execution. An order for the provision of security can be satisfied out of trust assets with no substantial harm to the trust. Although the applications for security were not brought until long after the litigation had commenced, there has been no prejudice to the plaintiff and in any event the delay is attributable to the plaintiff's failure to disclose that it sues as trustee. The offer of a guarantee from the plaintiff's director Ms Julie Alexander was unaccompanied by detailed evidence of her means. It would appear likely that if a guarantee from her was to be satisfied the money would come out of trust funds. The making of an order for security for costs will not produce any different result and will ensure that assets are available to satisfy any adverse costs orders. On balance I am persuaded that the justice of the case lies with the making of orders giving to the defendants security for their costs.
As to the appropriate form of security I consider that a bank guarantee would protect the defendants and disadvantage the plaintiff less than would be the case if a payment into court was required. The plaintiff did not submit that security in the form of a bank guarantee would be inappropriate.
All that remains to be considered is the amount of the security to be provided. The amounts sought are as follows. $250,000 for the first, second and third defendants, $248,220 for the fourth defendant and $210,645.05 for the fifth defendant.
The defendants have provided breakdowns of their cost estimates. The estimates include trial costs. The plaintiff did not submit that any orders should be staged so that an obligation to provide security for trial costs would not arise until closer to the trial date. The security to be provided will be in the form of a guarantee and I see no great disadvantage to the plaintiff in making orders for security encompassing the whole of the anticipated recoverable costs of the litigation.
The estimates between the various defendants range between about $350,000 and about $300,000. Two of the estimates include a component for past costs. The plaintiff did not submit that these components should be disallowed. Taking into account my finding that the delay in bringing the applications is attributable to the plaintiff's non-disclosure that the proceedings are being brought by the plaintiff as trustee, I am satisfied that it is just to allow these components.
The amounts contained in the estimates are substantially more than the amounts sought in the applications. On the basis that generally costs orders do not provide a party with a complete indemnity it was appropriate for the defendants to significantly discount their estimates in the applications. However, a further discount should be made. Each of the defendants has included an estimate of $45,000 for expert witness expenses. No justification for each of the defendants engaging their own expert witnesses, rather than sharing resources, has been given. Allowing a total of $45,000 for expert witness expenses for all defendants, rather than a combined total of $135,000, a reduction of $30,000 on each of the amounts claimed in the applications should be made.
Rounded off, the amounts required will be $220,000 for the first, second and third defendants, $220,000 for the fourth defendant and $180,000 for the fifth defendant.
There will be orders as follows:
(1)The plaintiff is to give security for the costs of the first, second and third defendants by lodging, in a form approved by the Registrar, a bank guarantee for $220,000 with the action against the first, second and third defendants stayed until such security is given.
(2)The plaintiff is to give security for the costs of the fourth defendant by lodging, in a form approved by the Registrar, a bank guarantee for $220,000 with the action against the fourth defendant stayed until such security is given.
(3)The plaintiff is to give security for the costs of the fifth defendant by lodging, in a form approved by the Registrar, a bank guarantee for $180,000 with the action against the fifth defendant stayed until such security is given.
(4)The security is to be given within 28 days.
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