Jasmine Glen Pty Ltd v Falkirk Nominees Pty Ltd (Administrator Appointed) (ACN 008 796 272) formerly trading as Australian Property Consultants
[2006] WASC 49
•23 MARCH 2006
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: JASMINE GLEN PTY LTD -v- FALKIRK NOMINEES PTY LTD (Administrator Appointed) (ACN 008 796 272) formerly trading as AUSTRALIAN PROPERTY CONSULTANTS & ORS [2006] WASC 49
CORAM: MASTER NEWNES
HEARD: 2 FEBRUARY 2006
DELIVERED : 23 MARCH 2006
FILE NO/S: CIV 2334 of 2003
BETWEEN: JASMINE GLEN PTY LTD (ACN 063 663 089)
Plaintiff
AND
FALKIRK NOMINEES PTY LTD (Administrator Appointed) (ACN 008 796 272) formerly trading as AUSTRALIAN PROPERTY CONSULTANTS
First DefendantBERNIE WORTHINGTON
SANDRA MONTAGUE
Second Defendants
Catchwords:
Practice and procedure - Application to strike out statement of claim - Claim in negligence - Valuation prepared for plaintiff - Second defendants prepared valuation as employees of first defendant - Whether second defendants owed duty of care to plaintiff - Whether plaintiff suffered loss
Practice and procedure - Application for security for costs - Whether undertaking by plaintiff's shareholders sufficient - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 1335
Rules of the Supreme Court 1971 (WA), O 21 r 19(3)
Result:
Statement of claim struck out with leave to replead
Order for security for costs by shareholders' undertakings
Category: B
Representation:
Counsel:
Plaintiff: Mr S Penglis
First Defendant : No appearance
First Named Second Defendant : No appearance
Second Named Second Defendant : Mr J InnessCampbell
Solicitors:
Plaintiff: Freehills
First Defendant : No appearance
First Named Second Defendant : No appearance
Second Named Second Defendant : Phillips Fox
Case(s) referred to in judgment(s):
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769
Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998
Cole v South Tweed Heads Rugby League Football Club Ltd (2004) 207 ALR 52
Dalgety Australia Ltd v Rubin, unreported; SCt of WA; Library No 5485; 24 August 1984
Dare v Pulham (1982) 148 CLR 658
Edgeworth Construction Ltd v N D Lea & Associates Ltd [1993] 3 SCR 206
Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994
Gardiner v Ray [1999] WASC 140
Gould & Ors v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490
Hospitals Contribution Fund of Australia v Hunt (1982) 44 ALR 365
Interchase Corp Ltd (In Liq) v Grosvenor Hill (Queensland) Pty Ltd (No 3) (2003) 1 Qd R 26
Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 25 ACSR 623
Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577
Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 205 ALR 522
Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542
Case(s) also cited:
Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1
Biala Pty Ltd v Mallina Holdings Ltd (1989) 2 WAR 381
Black v Eastern Goldfields Mining Co Pty Ltd, unreported; FCt SCt of WA; Library No 930039; 16 December 1992
Bond v John Fairfax Publications Pty Ltd [2001] WASC 336
BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857
Bruce v Odhams Press Pty Ltd [1936] 1 KB 697
Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497
Byrne v Twaddle [2001] WASC 325
Chandler v Water Corporation [2001] WASC 166
Charlie Charter Pty Ltd v SDAEA (WA) (1987) 13 FCR 413
Esanda Finance Corp Ltd v Peat Marwick Hungerfords (Reg) (1997) 188 CLR 241
H 1976 Nominees Pty Ltd v Galli (1979) 30 ALR 181
Hundt v Slater & Gordon [2003] WASC 248
Idoport Pty Ltd v National Australia Bank Ltd [2005] NSWSC 1273
Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440
Jones v Dunkel (1959) 101 CLR 298
Kimberley Downs Pty Ltd v Western Australia, unreported; SCt of WA; Library No 6414; 25 August 1986
L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225
M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97
Michael Bickley Pty Ltd v Westinghouse Electric Australasia Ltd (1983) 1 ACLC 967
Mutual Life & Citizens Assurance Co Ltd v Evatt (1968) 122 CLR 556
Niven v Grant (1903) 29 VLR 102
Pearson v Naydler [1977] 1 WLR 899
San Sebastian Pty Ltd v Minister Administering Environmental Planning & Assessment Act 1979 (NSW) (1986) 162 CLR 340
Sarac v Croatian House Hrvatski Dom (Inc), unreported; FCt SCt of WA; Library No 950675; 12 December 1995
Trade Practices Commission v Australian Iron & Steel Pty Ltd (1990) 92 ALR 395
MASTER NEWNES: I have before me an application by the second‑named second defendant ("Ms Montague") to strike out the statement of claim as disclosing no reasonable cause of action and an application by Ms Montague for security for costs. In relation to the strike out application, Ms Montague first requires leave to bring it, the application not having been brought within the 21 day period after service of the pleading, as required by O 21 r 19(3). It is to the strike out application that I will turn first.
The purpose of the time limit in O 21 r 19(3) is to ensure that, if a strike out application is to be brought, it is brought promptly so that it might be disposed of at an early stage and the action continue without further interruption. The time limit is one to which more than lip service should be paid: Gardiner v Ray [1999] WASC 140.
In this case, the statement of claim was filed and served on 12 July 2005. At a status conference on 14 July 2005, Registrar Johnston directed that any application to strike out the statement of claim be filed and served by 4 August 2005. In fact, Ms Montague's solicitors first wrote to the plaintiff's solicitors on 9 August 2005 to articulate a number of objections to the statement of claim. The plaintiff's solicitors replied by letter dated 11 August 2005 in which, with one relatively minor exception, they denied that the objections were well founded. This application was filed and served on 20 August 2005. The application is therefore some two weeks outside the time required by the order of Registrar Johnston. There is no specific explanation for that delay.
But the question of whether leave should be granted to bring a strike out application generally cannot be divorced from the substantive merits of the application. It is plainly not in the interests of the parties, or in the effective utilisation of the resources of the Court, for an action to proceed to trial if it is clearly doomed to fail or is pleaded in a manner that is likely to cause undue difficulty or delay in the disposition of the action. In this case, in light of the nature of the complaints made by Ms Montague's solicitors about the statement of claim, it is necessary to consider the substantive merits in order to determine the leave question.
It is pleaded in the statement of claim that the first defendant carried on business in Western Australia as a valuer and that the first‑named second defendant, who was a licensed valuer, and Ms Montague, who was a graduate valuer, were employees of the first defendant.
It is alleged that, in about October 1997, the plaintiff engaged the first defendant to determine the current market value of certain property (the "property") owned by the plaintiff. It is alleged the valuation was undertaken by the second defendants on behalf of the first defendant and that the first defendant provided a written valuation report dated 7 November 1997, signed by the second defendants. In the report the defendants expressed the opinion that the market value of the property was $4,500,000.
The plaintiff pleads that, at all material times, the defendants knew that the plaintiff had applied, or intended to apply, to the National Australia Bank ("NAB") for a loan and that the plaintiff was contemplating increasing its borrowings from NAB by up‑stamping the existing first mortgage over the property to secure the proposed loan. It is alleged the defendants knew that both NAB and the plaintiff would rely on the valuation.
The plaintiff alleges that the defendants owed a duty to take reasonable care in respect of the valuation but in breach of that duty valued the property at $4,500,000 when the true value was no more than $3,300,000, an over‑valuation beyond any reasonable margin of error.
The plaintiff intends to go on to plead (the proposed amendment being raised shortly before the hearing) that it relied on the valuation by increasing its borrowings from NAB and spending the increased borrowings on the basis that the value of the property was such that, if the plaintiff was otherwise unable to repay the increased borrowings, they could be wholly discharged from the proceeds of the sale of the property. In fact, when the property was sold, the proceeds were insufficient to discharge the increased borrowings. I should interpose that the plaintiff does not provide any particulars of the amount by which the plaintiff increased its borrowings, the sale price of the property, the amount of the plaintiff's indebtedness when the property was sold or the extent to which the proceeds of sale were insufficient to discharge the increased borrowings.
It is alleged that by reason of the defendants' negligence, the plaintiff has suffered loss and damage. It says particulars of that loss and damage will be provided prior to trial.
It was submitted on behalf of Ms Montague that first, no facts have been pleaded which are capable of establishing a duty of care on her part; secondly, no facts are pleaded which are capable of establishing that the plaintiff relied on the alleged negligent misstatement; and thirdly, there is no plea of any loss or damage that was materially caused by the alleged breach of duty.
The principles to be applied on such an application are well known and were not in dispute. It is fundamental that a party is entitled to a statement of the opponent's case sufficiently clear to allow the party a fair opportunity to meet it: Gould & Ors v Mount Oxide Mines Ltd (in liq) (1916) 22 CLR 490 at 517; Dare v Pulham (1982) 148 CLR 658 at 664. The material facts must be pleaded with clarity and appropriate particularity.
On an application to strike out a claim, great care must be exercised to ensure that the plaintiff is not improperly deprived of the opportunity for a trial of their claim. A claim will only be struck out where it is clear that on the facts pleaded the claim cannot succeed: Dalgety Australia Ltd v Rubin, unreported; SCt of WA; Library No 5485; 24 August 1984. A court at first instance should be careful not to risk stifling the development of the law by summarily rejecting a claim where there is a reasonable possibility that, as the law develops, it will be found that a cause of action will lie: Hospitals Contribution Fund of Australia v Hunt (1982) 44 ALR 365 at 373.
The basic principles applicable to a claim in negligence are not in doubt and were recently succinctly stated by McHugh J in Cole v South Tweed Heads Rugby League Football Club Ltd (2004) 207 ALR 52 (at 59 ‑ 60) as follows:
"Basic principle in the law of negligence holds that a defendant is liable in negligence only when the defendant owed a duty of care to the plaintiff, [or, in cases where the plaintiff sues in respect of injury to a third person – such as cases under Lord Campbell's Act, or in actions for nervous shock or per quod servitium amisit – the third person] breached that duty, and, as a result, caused injury to the plaintiff of a kind that was reasonably foreseeable. If the defendant owed a duty of care to the plaintiff, breach of duty is determined by considering whether an act or omission of the defendant gave rise to a risk of injury to the plaintiff that, by the exercise of reasonable care, could have been foreseen and avoided. In determining the breach issue, what the defendant knew or ought to have known is critical. If the duty has been breached, the defendant will be responsible for any injury suffered by the plaintiff that, as a matter of common sense, is causally connected with the breach and is of a kind that was a reasonably foreseeable consequence of the breach."
In cases of pure economic loss, that is, economic loss not consequential upon injury to person or property, it is not sufficient to show that the defendant's negligence caused the loss and the loss was reasonably foreseeable. Something more must be shown before a duty of care will be found to have arisen. In a number of cases an assumption of responsibility by the defendant and known reliance by the plaintiff have been found to give rise to a duty of care, although in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 205 ALR 522, Gleeson CJ, Gummow, Hayne and Heydon JJ observed (at 528):
"Since Caltex Oil, and most notably in Perre v Apand Pty Ltd (1999) 198 CLR 180, the vulnerability of the plaintiff has emerged as an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed. 'Vulnerability', in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, 'vulnerability' is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant."
Their Honours went on to suggest that it might be possible to explain the cases that have been determined by reference to assumption of responsibility and known reliance, by reference to notions of vulnerability, but considered it unnecessary, and therefore did not attempt, to identify or articulate the breadth of any general proposition about the importance of vulnerability.
It was submitted on behalf of Ms Montague that there was no plea of any facts which were capable of establishing any assumption of responsibility by Ms Montague and therefore no plea of any facts which were capable of establishing that she owed a duty of care to the plaintiff. It is not alleged in the statement of claim that there was any contractual relationship between the plaintiff and Ms Montague. At all times Ms Montague acted simply as an employee of the first defendant, which the plaintiff had engaged to provide the valuation. On the pleaded facts, a duty of care was owed only by the first defendant to the plaintiff.
Counsel for the plaintiff submitted that the existence of a duty of care was obvious in these circumstances. The plaintiff was an identified recipient of the advice and a person which it is alleged the defendants knew would rely on it. There was no need to establish any direct relationship between the plaintiff and Ms Montague to make out an arguable duty of care.
I was not referred to any authority on the issue of the liability of an employee where the employer was the person which contracted to do the work, but the tenor of the submissions by counsel for Ms Montague appeared to be similar to the conclusion reached by the Supreme Court of Canada in Edgeworth Construction Ltd v N D Lea & Associates Ltd [1993] 3 SCR 206, which was applied by the House of Lords in Williams v Natural Life Health Foods Ltd [1998] 2 All ER 577.
In Edgeworth Construction Ltd v N D Lea & Associates Ltd (supra), the plaintiffs had made a successful bid for a road building contract with a province. The plaintiffs allegedly lost money as a result of errors in the specifications and drawings prepared for the province by an engineering company. The Supreme Court of Canada held that the plaintiffs had a prima facie cause of action against the engineering company for negligent misrepresentation. It held, however, that by affixing their seals to the drawing the individual engineers did not assume personal responsibility to the plaintiffs. La Forest J said (at 212):
"The situation of the individual engineers is quite different. While they may, in one sense, have expected that persons in the position of the appellant would rely on their work, they would expect that the appellant would place reliance on their firm's pocketbook and not theirs for indemnification; see London Drugs (1992) 97 DLR (4th) 261 at 286 ‑ 287. Looked at the other way, the appellant could not reasonably rely for indemnification on the individual engineers. It would have to show that it was relying on the particular expertise of an individual engineer without regard to the corporate character of the engineering firm. It would seem quite unrealistic, as my colleague observes, to hold that the mere presence of an individual engineer's seal was sufficient indication of personal reliance (or for that matter voluntary assumption of risk)."
In Williams v Natural Life Health Foods Ltd (supra), the respondent plaintiffs approached a franchisor to obtain information about a possible franchise for a health food shop. They were provided with a brochure and detailed financial projections. The managing director of the franchisor, Mr Mistlin, whom the plaintiffs did not know and with whom they had no material pre‑contractual dealings, had played a prominent part in the production of the projections. The plaintiffs entered into a franchise but the business failed. The plaintiffs sued the company and Mr Mistlin for damages for negligence in providing the financial projections. At trial it was held that the company was liable to the plaintiffs for negligent advice and that Mr Mistlin was personally liable on the basis of an assumption of responsibility. Mr Mistlin appealed against the finding against him. Lord Steyn (with whom the other members of the House agreed) referred to the above quoted passage from the judgment of La Forest J in Edgeworth Construction Ltd (supra) and went on:
"This reasoning is instructive. The test is not simply reliance in fact. The test is whether the plaintiff could reasonably rely on an assumption of personal responsibility by the individual who performed the services on behalf of the company. To that extent I regard what La Forest J said in the Edgeworth case as consistent with English law."
Lord Steyn concluded that on the facts there had been no assumption of personal responsibility by Mr Mistlin. His Lordship said (at 585):
"In the present case there were no personal dealings between Mr Mistlin and the plaintiffs. There were no exchanges or conduct crossing the line which could have conveyed to the plaintiffs that Mr Mistlin was willing to assume personal responsibility to them. Contrary to the submissions of counsel for the plaintiffs, I am also satisfied that there was not even evidence that the plaintiffs believed that Mr Mistlin was undertaking personal responsibility to them. Certainly, there was nothing in the circumstances to show that the plaintiffs could reasonably have looked to Mr Mistlin for indemnification of any loss."
His Lordship rejected the proposition that Mr Mistlin was a joint tortfeasor with the company, being liable to the plaintiffs on the Hedley Byrne principle. His Lordship said:
"… the argument is unsustainable. A moment's reflection will show that, if the argument were to be accepted in the present case, it would expose directors, officers and employees of companies carrying on business as providers of services to a plethora of new tort claims. The fallacy in the argument is clear. In the present case liability of the company is dependent on a special relationship with the plaintiffs giving raise to an assumption of responsibility. Mr Mistlin was a stranger to that particular relationship. He cannot therefore be liable as a joint tortfeasor with the company. If he is to be held liable to the plaintiffs, it could only be on the basis of a special relationship between himself and the plaintiffs. There was none."
I do not, however, consider that what was said in Williams v Natural Life Health Foods Ltd (supra) can be regarded as a statement of settled law in Australia. In that respect it is sufficient, for present purposes, to refer to the decision of the Queensland Court of Appeal in Interchase Corp Ltd (In Liq) v Grosvenor Hill (Queensland) Pty Ltd (No 3) (2003) 1 Qd R 26 and, in particular, to the judgment of McPherson JA (with whom Thomas JA agreed). In that case, which was also a valuation case, the trial Judge followed the decision in Williams v Natural Life Health Foods Ltd (supra) in holding that the valuer, Mr Waghorn, who had signed the relevant valuation report, had not assumed personal liability for the valuation he had carried out and signed on behalf of his employer, Hillier Parker. On appeal, McPherson JA said (at [77]):
"I have some serious misgivings about [the] decision [in Williams v Natural Life Health Foods Ltd] as well as others in which it has been followed. Hillier Parker was held liable to Interchase in tort because Mr Waghorn was personally negligent in carrying out his valuation of the Myer Centre, for which Hillier Parker as his employer or principal was in law vicariously responsible to Interchase. Vicarious liability proceeds on the footing that the individual wrongdoer and the person who is vicariously liable are joint tortfeasors. To say that the principal or employer is legally responsible, but that the actual wrongdoer is not, seems to me to be an inversion of the whole doctrine. The growing support for it in decisions outside Australia has recently been the subject of a critical examination by Mr Peter Watts in (2000) 116 LQR 525. It is fundamentally opposed to the decision of the House of Lords in Lister v Romford Ice & Cold Storage Ltd [1957] AC 555, where it was held that an employer who is liable only vicariously may recover indemnity against the employee for breach of an implied term in his contract of employment that he will use reasonable care and skill in performing the duties of his employment."
As the liability of Mr Waghorn was not in issue on the appeal, it was not necessary for the Court of Appeal to reach any conclusion on that issue.
In the present case, it is alleged that the valuation was commissioned by the plaintiff and, to the knowledge of the defendants, was to enable the plaintiff to borrow further funds from the NAB. It is alleged that the defendants knew that the property would be used to secure the plaintiff's proposed borrowings; that is, it would be available (at least as a last resort) to repay the proposed loan. The valuation report was signed by, and in its terms expressed to be the opinion of, Ms Montague and the first‑named second defendant.
I do not think that in the circumstances it can be said that the plaintiff's claim against Ms Montague is unarguable on the basis that no duty of care was owed by her to the plaintiff. Whether the approach taken in Edgeworth Construction Ltd v N D Lea & Associates Ltd (supra) and Williams v Natural Life Health Foods Ltd (supra) would be followed in Australia is by no means certain and still awaits authoritative determination.
The plaintiff sought to make the amendment to the statement of claim to which I referred earlier in order to meet Ms Montague's contention that the statement of claim was defective because the plaintiff did not allege that it acted in reliance on the valuation. The proposed amendment was specifically to plead that the plaintiff relied upon the valuation in increasing its borrowings from the NAB and spending the increased borrowings, on the basis that if the plaintiff was unable to repay the increased borrowings they could be discharged from the proceeds of selling the property.
I consider that the amended pleading sufficiently overcomes any difficulties there may have been with the original statement of claim on the question of reliance.
In support of the contention that the plaintiff did not plead any actionable loss or damage arising by reason of the alleged breach of duty, Ms Montague's counsel argued that any losses the plaintiff may have suffered as a result of entering into the loan transaction with the NAB could not, under any circumstances, be said to have been materially caused by the valuation. The valuation may have facilitated the transaction, but it was not a material cause of the loss of the funds. Counsel relied heavily on the decision in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] 2 All ER 769. It was argued that the fact the plaintiff used the valuation to obtain an advance of funds from the NAB which the plaintiff was unable to repay did not give rise to any loss recoverable from Ms Montague.
Counsel for the plaintiff submitted that that argument ignored the basic proposition that a person who unknowingly overextends themselves by borrowing more than the true value of the security offered, thinking that the security is sufficient to discharge the loan if they are otherwise unable to do so, suffers loss and damage if they have been misled as to the value of the security.
It was further submitted that, in any event, the precise nature of the plaintiff's loss and damage is not a matter which goes to the existence of the cause of action and it is sufficient that the plaintiff pleads, as it has, that it has suffered loss and damage by reason of the negligent conduct. If Ms Montague requires particulars of the alleged damage, the appropriate course is to request particulars of it.
The plaintiff's case is unusual in that the action is brought by the borrower, rather than the lender, in circumstances where the plaintiff did not acquire the property on the basis of the valuation: rather, it already owned the property and simply borrowed against the security of it. It is not therefore the more usual case of a purchaser having allegedly been misled as to the value of the asset it was acquiring. The plaintiff's case seems to be that it was induced to borrow a sum of money that it would not otherwise have borrowed, because it was misled as to the value of the asset it had available to repay the loan if it was otherwise unable to do so.
It is not, however, clear from the pleading whether it is the plaintiff's case that, had it not been for the alleged negligence of the defendants, the plaintiff would not have entered into the loan transaction with NAB at all, or whether it is the plaintiff's case that it would have entered into some other (unspecified) transaction. It is also not clear whether the plaintiff seeks to recover by way of damages, for instance, transaction costs, and/or some other costs and expenses associated with the transaction, or whether it seeks to recover (either alone or in addition to the former) the shortfall between the amount of the increased borrowings and the alleged real value of the property. Quite different considerations may apply to the question of causation in respect of each of those.
The plaintiff's argument that the claim for loss and damage is a matter for further and better particulars may be a sufficient answer in a case where the nature of the damage claimed is obvious, but I do not think this is such a case. It is not, in my view, clear what damage the plaintiff claims to have suffered and therefore whether it claims damage of a kind that is recoverable by reason of the defendants' alleged negligence. In that respect, I consider the plea as to loss and damage is cast at too high a level of generality. In the circumstances, it is not appropriate that the nature of the claim for damages should only emerge at some later stage upon a request for further and better particulars.
I also consider that in order to make the nature of the claim clear, the plaintiff should set out in the statement of claim, among other things, particulars of the amount by which the plaintiff increased its borrowings, the sale price of the property, the amount of the plaintiff's indebtedness when the property was sold and the extent to which the proceeds of sale were insufficient to discharge the increased borrowings. While their absence may not necessarily provide a ground upon which to strike out the statement of claim, in a negligent valuation claim those are the sort of matters that, in my view, the plaintiff ought to include in the statement of claim, unless for good reason the plaintiff is not at that stage in a position to do so.
Overall, in my view, the statement of claim is cast at too high a level of generality adequately to inform Ms Montague of the case she must meet.
In the light of the conclusions I have reached on the form of the statement of claim, and also having regard to the fact that although there was delay in bringing the strike out application the length of the delay was not substantial, I would grant leave to Ms Montague to bring the application out of time and would strike out the statement of claim with leave to the plaintiff to replead.
I turn then to Ms Montague's application for security for costs.
It was not in issue that the plaintiff is not in a position to meet any order for costs that may be made against it in the proceedings. It has a paid up capital of $2 and enquiries by Ms Montague's solicitors have disclosed no land owned by it. A director of the plaintiff, Mr Ziatas, says in an affidavit filed in this application that the plaintiff does not have the capacity to meet any order for costs that might be made against it.
It was also not in issue that the shareholders of the plaintiff are not in a position to meet any order for costs. The sole directors and shareholders of the plaintiff are Mr Laurence Ziatas and Ms Pamela Ziatas, who are a married couple. It appears from the affidavit of Mr Ziatas that he and his wife have substantial liabilities and a comparatively modest joint income. Mr Ziatas has said in his affidavit that neither he nor his wife is in a position to meet any order for costs that may be made against the plaintiff. The plaintiff apparently has no secured creditors who would stand to benefit from the litigation if it were successful.
It was common ground that Ms Montague had made out the threshold issue under s 1335 of the Corporations Act 2001 (Cth).
Ms Montague's counsel submitted that, in circumstances where the plaintiff's claim had no merit and the plaintiff was unable to pay any order for costs that may be made against it, this was an appropriate case for security to be ordered. Ms Montague's solicitors have provided a draft bill of costs in which her costs of the action are estimated at $54,368. It was submitted that the fact that the making of an order for security for costs might frustrate the plaintiff's right to litigate its claim was not of itself a ground for refusing an order: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545.
Counsel for the plaintiff referred to an offer made to Ms Montague by Mr and Ms Ziatas in which they offered to undertake to the Court to assume personal liability for any order for costs made against the plaintiff in the action. That offer was communicated to Ms Montague's solicitors in September 2005. It was not accepted. Counsel submitted that such an undertaking was appropriate security for costs. Any order which required the plaintiff, or those who stood behind it, to provide security by way of a money sum would, on the evidence of Mr Ziatas, inevitably stultify the plaintiff's claim.
It is trite law that the discretion to order security for costs is unfettered and depends upon an examination of all of the circumstances of the case, but it is also accepted that some of the relevant factors are:
(1)whether the plaintiff's claim is bona fide and has reasonable prospects of success;
(2)whether the defendants have contributed to the plaintiff's likely inability to pay costs;
(3)whether an order for security for costs may have the effect of stultifying the action;
(4)whether it appears the applicants are seeking to stifle a legitimate claim;
(5)whether there are others behind the corporate plaintiff who might reasonably be expected to contribute to the satisfaction of an order for security.
See Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 at 4 ‑ 5 and Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998.
It is also established that the fact the plaintiff will be unable to pay the defendants' costs if the defendants are successful is a factor of great weight in the exercise of the discretion, but it is not necessarily decisive and regard must be had to all the circumstances of the case. The fact that shareholders or other persons standing behind the company are exposed to personal liability for whatever they may be worth is a relevant, but not necessarily decisive, consideration weighing against an order for further security: Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 25 ACSR 623.
In the present case, the claim is by no means a straightforward one, but as matters currently stand I am not satisfied the claim is not bona fide or without any reasonable prospects of success. Certainly there is no evidence to suggest that it is not bona fide and for the moment I consider that it must be taken to have reasonable prospects of success.
I am satisfied on the evidence that neither the plaintiff nor its shareholders, Mr and Ms Ziatas, have the capacity to provide security for costs by way of a cash security. If such security were required it would have the effect of stultifying the plaintiff's claim.
In the circumstances, I consider that, for the time being at least, the interests of justice would be served by an order for security by way of personal undertakings to the Court by Mr and Ms Ziatas. It would be open to Ms Montague to seek to vary that security should circumstances change.
I will hear the parties on the appropriate form of orders and on the question of the costs of the application.
1