Jeffcott Holdings Ltd (in Liquidation) (Respondent) v Paior and Others No. SCGRG 94/28 Judgment No. 5260 Number of Pages 5 Practice and Procedure (1995) 18 Acsr 213

[1995] SASC 5260

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA DEBELLE J

CWDS
Practice and procedure - security for costs - plaintiff company in liquidation - action against directors - one defendant applies for security for costs in form of charge over choses in action held by company - defendant seeks to share pari passu with solicitors for company - solicitors' lien - whether defendant entitles to security. Companies (South Australia) Code ss 441, 386(3), referred to. re Massey, re Freehold Land and Brickmaking Co
(1870) LR 9 Eq 367; re Born, Curnock v Born (1900) 2 Ch 433; ex parte Patience; Makinson v The Minister (1940) 40 SR NSW 96; Worrell v Power and Power (1993) 118 ALR 237; Kison v Papasian (1994) 61 SASR 567; Potter v Minahan (1908) 7 CLR 277; re Capital Fire Insurance Association (1883) 24 Ch D
408; re Anglo-Maltese Hydraulic Dock Co (1885) 54 CJ Ch 370; re Rapid Road TRansit Co (1909) 1 Ch 96; re Meter Cabs, Ltd (1911) 2 Ch 557; re Trent and Humber Ship-Building Co; Bailey and Leetham's Case (1869) 8 Eq 94; Madrid Bank v Polly (1869) 7 Eq 442; re Dominion of Canada Plumbago Co (1884) 27 Ch D 33; re TRanscontinental Townsite Co (1915) 25 DLR 803, applied.

HRNG ADELAIDE, 15 June 1995 #DATE 13:9:1995 #ADD 27:11:1995

Counsel for appellant R Douglas-Hill: Mr N Morcombe QC with
   Mr B O'Brien

Solicitors for appellant:             Windervere Bellman

Counsel for respondent:                Mr N Strawbridge

Solicitors for respondent:             Minter Ellison Baker
   O'Loughlin

ORDER
Appeal dismissed.

JUDGE1 DEBELLE J This is an appeal from a decision of a Master refusing the appellant's application for an order that the respondent, the plaintiff in the action, provide security for his costs.

2. The respondent is a public company which, by order of this Court made on 13 September 1991 was ordered to be wound up. The liquidator has instituted this action in the name of the company. The five defendants in the action were directors of the respondent. The appellant is the third defendant. The respondent alleges that all five directors have acted in breach of s229 of the Companies Code in relation to certain financial transactions. It further alleges that three of the five directors, including the appellant, have acted negligently and in breach of their duties. The respondent claims damages from the defendant directors in the sum of $1,583,033.54 being the loss and damage alleged to have been caused to the respondent.

3. The second defendant applied for security for costs. On 10 June 1994 a Master dismissed the application. On 28 October 1994 Perry J dismissed an appeal from the decision of the Master.

4. On 2 December 1994 the appellant applied for security for costs. He sought orders:
    1. That the respondent provide him with security for his
    costs in the sum of $425,250 or such other sum as the Court
    thinks fit; and

2. That in part satisfaction of the order sought for
    security the respondent grant to the appellant a first
    registered charge over any choses in action to which the
    respondent may be entitled or such other security that the
    Court thinks fit.

5. When the application came on for hearing on 9 February 1995 before a Master, counsel for the appellant abandoned the application for a monetary sum by way of security for costs. However, the appellant pressed his application for a charge over any choses in action to which the respondent might be entitled. He did not seek a registered charge.

6. The choses in action in respect of which the appellant sought a charge as security for his costs were the causes of action which the respondent has against the other defendants in the action. In effect, the appellant contended that his security for costs should consist of a first charge over any monies recovered by the respondent against any of the other defendants in the action.

7. The appellant asserts that he stands in a different position from the other directors and has defences which are not available to the other directors. He did not assert, however, that the facts which otherwise relate to his application were different from those concerning the application by the second defendant. Instead, he submitted that, because he was not seeking an order directing the respondent to provide security for costs in the form of a sum of money which would inevitably lead to the stifling of the respondent's claim, security in the form of the charge should be granted because it would not stifle the claim. As a result, it was contended that security for costs should be granted in that form. The appellant's concern was that any amount recovered by the respondent from the other defendants might not be sufficient to meet all claims upon the liquidator including the repayment of the appellant's costs in full.

8. It was common ground that, because the winding up of the respondent had commenced when the provisions of the Companies (South Australia) Code were in operation, the relevant provisions in s441 of the Code applied. It is necessary to refer only to para(a) of s441 which provides:
    "S.441 Subject to the following provisions of this
    Subdivision, in the winding up of a company the following
    debts shall be paid in priority to all other unsecured
    debts:
    (a) first, the costs, charges and expenses of the winding
    up, including the taxed costs of an applicant payable under
    section 366, the remuneration of the liquidator and the
    costs of any audit carried out under section 422."

9. The Master held that the expression "the costs, charges and expenses of the winding up" included the costs of recovery, preservation and realisation of the assets, such as costs awarded against the liquidator in proceedings brought, continued or defended by him: Re Trent and Humber Ship Building Co.: Bailey Leetham's case (1869) 8 Eq.94, Madrid Bank v Pelly (1869) 7 Eq.442, Re Dominion of Canada Plumbago Co. (1884) 27 ChD 33 and Re Transcontinental Townsite Co. (1915) 25 DLR 803. If the appellant succeeded in the action and obtained an order for costs against the respondent, he would be included in the debtors who have priority under s441(a). He then held that, in the event that there were insufficient assets to satisfy in full all the costs and expenses of winding up, an application could be made pursuant to s386(3) of the Code to determine the priority in which those costs should be paid. The Master concluded that it would not be a proper exercise of his discretion to confer upon the appellant a priority which he would not otherwise have over other possible claimants to any monies which the respondent might recover from the other defendants. He, therefore, refused the appellant's application.

10. The appellant submits that the Master erred in failing to give effect to the principle that the solicitors for the company will have a lien for their costs over monies recovered and will thus recover their costs in priority over all other creditors. The appellant seeks an order that he be at liberty at least to share pari passu with the solicitors. The appellant did not challenge the Master's decision as to the operation of s441(a) but asserted that the Master had erred in failing to have regard to the solicitors' lien for costs.

11. It seems that a solicitor appointed by a liquidator is entitled to a lien for his costs on a fund recovered in the winding up as a result of his exertions: Re Massey, Re Freehold Land and Brickmaking Co (1870) LR 9 Eq 367. The solicitor has no lien on monies which were in the hands of the company before the winding up or the general assets of the company, where neither has come into the hands of the company as a result of any action on the part of the solicitor: Re Massey (supra). He is, however, entitled, after the winding up, to obtain a charging order on a fund in court recovered by the company as a result of his exertions before the winding up: Re Born, Curnock v Born (1900) 2 Ch 433. These principles are but instances of the equitable right or lien of a solicitor to be paid his costs out of monies recovered by his own exertion. That right or lien was explained by Jordan CJ in Ex parte Patience; Makinson v The Minister (1940) 40 SR(NSW) 96, 100. The lien also exists in the case of a bankrupt estate where a fund has resulted from the efforts of a solicitor: Worrell v Power and Power (1993) 118 ALR 237; Kison v Papasian (1994) 61 SASR 567. I do not think that a solicitor's entitlement to a lien is affected by s441(a). There is nothing in s441(a) which expressly purports to alter the entitlement nor does it appear by necessary intendment. Had it been intended to affect the entitlement to that lien, that intention would have been clearly ascertainable: Potter v Minahan (1908) 7 CLR 277, 304.

12. (The position relating to a lien over documents appears to be different. The solicitor does not have a lien on documents which he acquires in the course of the winding up: Re Capital Fire Insurance Association (1883) 24 Ch D 408; Re Anglo-Maltese Hydraulic Dock Co (1885) 54 LJ Ch 730; Re Rapid Road Transit Co (1909) 1 Ch 96; Re Meter Cabs, Ltd (1911) 2 Ch 557. On p251 of McPherson, The Law of Company Liquidation (3rd ed) the following sentence appears:
    "A solicitor is entitled to a lien in respect of monies and
    documents to the company which came into his possession
    prior to liquidation but not in respect of those which he
    acquired in the course of the winding up."

I respectfully suggest that it might be necessary to qualify that sentence to allow for the fact that a solicitor's lien in respect of monies acquired in the course of the winding up as a consequence of his exertion.)

13. The fund to which the appellant looks for security for his costs and which he seeks to charge is the fund which will be generated by the exertion of the solicitors for the company, if the company succeeds in the action. I do not think it equitable that the appellant should have a charge upon this fund to the detriment of the solicitors whose efforts would have brought about the existence of the fund. Nor is it equitable that they be able to share pari passu with the solicitors. Although the power to make an order for security for costs provides a means by which the Court might alter the priorities otherwise applicable on a winding up, I do not think it proper in this action to make an order which would qualify or affect the solicitor's lien in any respect. I would, therefore, dismiss the appeal.

14. Even if s441(a) had the effect of altering the entitlement of the company's solicitors to a lien so that they must rank for their costs with all others who have priority pursuant to that provision, I would not order the security for costs which the appellant seeks. Any costs payable to the appellant will be costs of the winding up and will rank with other claims made pursuant to s441(a). Section 386(3) provides a means by which the Court can attempt a just distribution among the claimants if the fund is inadequate to meet all the claims upon it. At the risk of repetition, it cannot be overlooked that any fund which will come into existence will be the result of the exertions of the solicitors for the company. It would be inequitable if the appellant were able to gain a priority over those whose efforts have created the fund. I agree with the learned Master that it would not be a proper exercise of the discretion in relation to making an order for security for costs to give the appellant the priority he seeks or to entitle the appellant to share pari passu with the solicitors for the company. If the fund is inadequate to meet all claims upon it, the parties can, if necessary, apply to the Court pursuant to s386(3). That is the appropriate time for the appellant to apply. To grant his present application could result in an inequity to those who have at least an equal claim to that of the appellant.

15. The appellant expressed concern that the solicitors for the company could enter into an arrangement with the liquidator to recover their costs at a rate higher than the scale or on the basis of a contingency fee or on some other basis which could defeat the legitimate interests of others with claims which fell within s441(a). There is no evidence of such an agreement. If such an agreement does exist, it might then be appropriate to make an order which stipulates the terms upon which the solicitors will recover their costs. Such an order would reflect the spirit of Part XVI of the Companies Rules, 1985 (Part XV of the Corporations Rules).

16. For all of these reasons the appeal is dismissed.