Jodast Pty Ltd v A & J. Blattner Pty Ltd

[1991] FCA 492

IN THE FEDERAL COURT OF AUSTRALIA	)
1
NEW SOUTH WALES DISTRICT REGISTRY )	NOS SG 119/90 &

1     G 651-2/90

GENERAL DIVISION 1

BETWEEN:	JODAST PTY LTD. W & J BOHNER R & J MATTHEWS. SLOKAR PTY LTD J G & B BECKETT. BARMERA PTY LTD
Applicants

AND :	A. AND J. BLATTNER PTY LIMITED. H MUNRO. A BLATTNER
Respondents

RECEIVED

CORAM:	HILL J
PLACE :	SYDNEY
DATED :	17 JUNE  1991

EX TEMPORE REASONS FOR JUDGMENT

Before the court are three motions for security for costs brought by A and J Blattner Pty Limited and persons or companies related to that company in three separate proceedings, being respectively numbered SG119/90, G651/90 and G652/90. By consent the three motions were argued together, although of course the parties in each case differ and should it be relevant, the financial circumstances of the respondent companies to each motion will also differ.

Alternatively, the respondents to the motion submit that if	all that is shown in such an application is that the
respondent t o the motion i s impecunious, then the court w i l l not make an order granting security. Finally, it i s submitted that even i f there were such power, the court would not, i n the circumstances o f each o f the present cases, make an order.

The respondents to the motion submit that the court no longer has, since the enactment of the Corporations Law and its coming into operation, jurisdiction to make an order for security for costs where the applicant to the proceedings is a corporation incorporated in a State in Australia.

The submission that the court no longer has power

re l i es upon the wording o f s.1335	o f the Corporations Law
which provides as follows:

"(1) Where a body corporate i s p l a i n t i f f i n any action or other legal proceeding under t h i s Law, the court having jurisdiction i n the matter may, i f it appears by credible testimony that there

i s reason t o believe that the body

corporate w i l l be unable t o pay the costs o f the defendant i f successful i n h i s , her or i t s defence, require su f f i c i en t security t o be given for those costs and s tay a l l proceedings until the security i s given. "

That section i s t o be contrasted with s.533 o f the Companies Code sub-sec.(l) which was expressed i n the following terms:

"Where a corporation i s p l a i n t i f f i n any

action or other legal proceeding, the court having jurisdiction i n the matter may, i f it appears b y credible testimony that there i s reason t o believe that the corporation w i l l be unable t o pay the costs o f the defendant i f successful i n h i s defence, require su f f i c i en t security t o be given for those costs and s tay a l l

proceedings until the security i s given. "

The rules o f t h i s court deal with security for costs

i n Order 28 which l i s t s i n r.3 a number o f cases where

security for costs may be ordered in an appropriate case. It is common ground that Order 28 r.3 has no application in the present circumstances. Rule 6 of the same order provides that Order 28 will not affect the provisions of any Act of the Commonwealth or of a State or Territory under which the court may require security for costs to be given. That saving provision no doubt had in mind the provisions of s.533 of the Comuanies Code.

There remains to be mentioned the provisions of s.56 of the Federal Court of Australia Act 1976 (Cth) which is in general terms and provides:

" ( 1 ) The Court or a Judge may o r d e r an

app l i can t i n a proceeding i n t h e Court t o

g i v e s e c u r i t y for t h e payment o f costs

t h a t may be awarded aga ins t him.

( 2 ) The s e c u r i t y s h a l l be o f such amount and given a t such t i m e and i n such manner

and form, a s t h e Court o r Judge d i r e c t s . "

Prior to the Cor~orations Law coming into operation,

it was not necessary to determine whether the provisions of s.56 of the Federal Court Act would provide an independent power for the ordering of security for costs because the provisions of s .533(1) of the Companies Code were by force of s.79 of the Judic 1903 (Cth) made applicable to proceedings in the court exercising jurisdiction in a State: Cameron's Unit Services Ptv Limited v Kevin R. Wheluton and Associates (Australia) Ptv Limited (1986) 13 FCR 46 at 48-49.

It is submitted by the respondents to the motion

that the position prevailing while s.533(1) of the Comoanies

Code was in force, has been radically altered by the enactment

and coming into effect of s.1335(1) of the Cor~orations Law. The respondents point to similar rules existing in the Rules of the Supreme Court of New South Wales, and note that the rules of that court were altered in May of this year conferring expressly power upon that court to make an order for security for costs where a body corporate is plaintiff in proceedings in that court. No comparable amendments have been made to the rules of this court.

The applicant in the motion submits firstly that clear words indeed would be needed to take away the longstanding power of the court to grant security for costs against companies. Secondly, the applicant to the motion

submits that, as a matter of construction, the provisions of	s.1335 operate in any event to empower the court to make an
order for security for costs.
Finally, the applicant to the motion relies upon s.56 of the Federal Court Act and the general power of this court to control its own proceedings, and its power to order a stay of proceedings in an appropriate case: cf Hucrhes Motor Service Ptv Limited v Wana ComDuter Ptv Limited (1978) 35 FLR 346, a case, however, which turned upon the High Court Rules then applicable to the proceedings before the court under the Trade Practices Act 1974 (Cth).
While it may be conceded that clear words might be expected before a provision of an Act of Parliament would take away a power conferred upon the court to grant security for costs against corporations, ultimately, the provisions of s.1335 must be given effect to. That section seems, on its face, quite clear. It is concerned with the grant of security for costs where a body corporate is a plaintiff but only where that body corporate is a plaintiff in an action or legal
proceeding under the Cor~orations Law itself.
The clear words of which the applicant in the motion speaks are, of course, to be found in the specific provisions of s.76 of the Corporations Law, which has the effect of ensuring that the national scheme for the regulation of
corporations supersedes the previous legislation referred to in s.76(1) as "the Co-operative Scheme Acts" which Acts
continue to operate only in relation to matters arising before the new scheme commenced, or matters arising directly or indirectly out of such matters.
The submission that as a matter of construction s.1335 can be read as if it empowered a court to make an order for security in cases where a body corporate was plaintiff in any action, but distinguish that situation from legal proceedings which were brought under this law is, in my opinion, ill-conceived. The difficulty with that construction is the use of the words "other legal proceeding" in s.1335 which make it clear that both actions and proceedings have to be under the Coroorations Law before they attract the power conferred by that section.
However, it does not follow from this that the court has no power to make an order for security for costs or, indeed, as was submitted by, or on behalf of, the respondents to the motion, that Order 28 r.3 provides an exclusive code for the conferring upon the court of a power to order security for costs. Prior to the enactment of the Corporations Law, s.56 of the Federal Court Act had been treated in a number of cases as providing, in any event, an alternative source of power to s.533 of the Companies Code. Reference may be made to Sent v Jet Corporation of Aust Ptv Limited (1984) 2 FCR
201; Bell Wholesale Co. Limited v Gates Exuort Corporation (1984) 2 FCR 1; Cameron's Unit Services Ptv Limited v Kevin R.
Whelpton and Associates Aust Ptv Limited (supra) and Euuitv Access Limited v Westoac Bankina Corooration (Federal Court of Australia, unreported, 8 September 1989).
The power conferred by s.56 of the Federal Court of Australia Act is discretionary and, as Morling J observed in Barton v Minister for Foreian Affairs (1984) 2 FCR 463 at 468,
it should be exercised "having regard t o t h e f a c t s o f each
c a s e " . That was originally not the view taken in respect of
provisions in the Companies Legislation in the United Kingdom and, indeed, it was said in Buckley v Bennell Desian and Constructions Ptv Limited (1974) 1 ACLR 301 at 305 that the discretion conferred under the then s.533(1) of the Companies Code is to be regarded as one which should be exercised merely with a predisposition in favour of the defendant party.
The view, however, generally accepted as being correct in the context of the Companies Legislation is that enunciated by Lord Denning MR and Laughton LJ in Sir Lindsay Parkinson and CO Limited v Triplan Limited [l9731 1 QB 609 at 626:

"Turning	now	t o	t h e	words	. . .	t h e
important	word	i s	'may'.	That	g i v e s	t h e

judge a d i s c r e t i o n whether t o o r d e r

s e c u r i t y or n o t . There i s no burden one

way o r t h e o t h e r . I t i s a d i s c r e t i o n t o

be e x e r c i s e d i n a l l t h e c ircumstances o f

t h e c a s e . "

A similar view was expressed in Bell Wholesale (supra at 4) and with perhaps more reservation by Smithers J in Sent v Jet Corp. (supra at 217). In my view, one approaches the issue under s.56 in the same way as the more recent cases have approached it under the Comoanies Code, namely as treating the matter as one of discretion to be exercised having regard to the facts of the particular case.

Before considering the matters which go to discretion, it is perhaps appropriate to say a word about the subject matter of the litigation. The dispute between the parties arises out of agreements that were entered into between the corporate applicants to the proceedings and the corporate respondent to the proceedings. It is alleged that the corporate respondent, which I will hereafter refer to as "the respondent", manufactures a product known as Alpha Therapy Home Spa and appoints persons or corporations distributors of its product.

In each case the corporate applicants executed agreements with the respondent pursuant to which they paid sums of money to the respondent and became obliged to pay further amounts. It is alleged that representations made in connection with the entering into of that agreement constituted misleading or deceptive conduct for which the respondent was liable to the corporate applicants.

The pleadings do not seek separately, as presently framed, to suggest that the liability to the individual applicants is separate and distinct from the liability to the corporate applicants. In the matters involving Slokar Pty Limited and Barmera Pty Limited, the corporate applicants are trustees of trusts, the precise terms upon which the trust is held by each of the corporate applicants not being before me. In the case of Jodast Pty Limited, that company is not a trustee to the extent that it is a party at least to the agreement with the respondent entered into in its own right.

While there is clearly no exclusive list of matters which would be taken into account in exercising discretion in each case, a number of matters have been considered by the courts from time to time as relevant to the exercise of discretion and they provide a convenient framework to consider the present case. These matters have been said to be:

1. the chances of success of the applicant and particularly whether the applicant's claim is bona fide;

2)    the quantum of risk that the applicant could not satisfy a cost order;

3)   whether the granting of a security would shut out a small company from making a genuine claim against a larger company, i.e. whether the order would, in all the circumstances, be seen to be not only oppressive but used

oppressively by the applicant to the motion;

1. whether the impecuniosity of the respondent to the motion arises out of the very act in respect of which that corporation is complaining by the proceedings which it has brought;

2. whether there are aspects of public interest which weigh in the balance against the making of the order; and

6)  whether there are any particular circumstances which would be taken into account as peculiar to the facts of the particular case.

Those considerations are listed by C.A. Sweeney J in Drumdurno Ptv Limited v Braham (1982) 64 FLR 227. I turn to

consider those factors in respect of the motions before me.

(1) Chances of Success

Although it has been suggested that the chances of success are a relevant matter to be taken into account in the exercise of discretion, there is no universal agreement to that proposition. As I pointed out in Euuitv Access, Pincus J in Appleqlen v Mainzeal (1988) 79 ALR 634 at 635 was of a contrary view and in arriving at that view took into account what was said in Porzelack KG v Porzelack (UKI Limited [l9871

1 WLR 420.

The difficulty, of course, is that an application be made promptly it will be made at a time when it will be	for security for costs must be made promptly, but if it is to
virtually impossible to assess whether the case brought by a corporate applicant is a good one or not. There may be occasions, and the present is not one of them, where on the face of the pleadings itself it might appear that the case of a corporate applicant is merely frivolous or vexatious, but be it as it may, the present is not such a case.
(2) Quantum of Risk
It is difficult, on the evidence before me, to form a view as to the possibilities that the corporate applicants will be unable to satisfy a cost order should the respondent ultimately turn out to be successful in the substantive proceedings. As I have already indicated, both the corporate applicants in matters G651 and G652 of 1990 are trustees. In essence little more is known about them. In the case of Slokar Pty Limited (G651/90) it is said that there are assets of approximately $10,000 held by the trustee and it is said that the only liabilities of the corporate applicant are debts or liabilities incurred in normal day to day trading. What the quantum of those liabilities may be is unknown.
In the case of Barmera Pty Limited (G652/90) it is said that that company has assets of $2 and liabilities of $2, but has a right of indemnity against trust assets in the sum
of $122,078. Prima facie, such a right of indemnity would
arise only where a trustee incurred a liability acting within
the powers conferred upon the trustee, in which event one would expect that there would be balancing the right of indemnity a liability of a similar amount. This was not explored in evidence, but I can think of no other way in which the right of indemnity could arise, other than to offset an existing liability.
The situation in respect of Jodast Pty Limited (SG119/90) is somewhat different. According to the balance sheet of that company as at 30 June 1990 which was put in evidence but without the accompanying notes which one would ordinarily expect to be associated with it, that company had shareholders funds of $283,423.50. However, the substantial part of the shareholders funds are shown in the balance sheet as receivables. Reference to the source and applications of funds statement which accompanied the financial statements suggests that these receivables may be found in two assets, the first the investment by the corporation in the spa distributorshlp which is in dispute in the proceedings, and the second and more substantial sum in loans made to the directors, which apparently, as at 30 June 1990, total $126,021.88.
The accounts suggested indeed that the company which apparently had a trading operation with a relatively large
business; and the current accounts show no figures for cash flow in the 1989 year no longer carried on the same
inventory or pre-payments which supports this prima facie position. The question, therefore, whether Jodast Pty Limited would be able to satisfy any order for costs, clearly depends on the asset position of the directors and/or shareholders to whom the funds have been advanced. Evidence was adduced of a cash management account in the name of Mr and Mrs Bohner which showed balances ranging from $20,074.21 to $121,041.57, the latter balance being as at 3 August 1990. No subsequent details of assets and liabilities were adduced in evidence.
The amount claimed by way of security in each case is $10,000. There is no dispute between the parties as to that figure should security be ultimately granted. In the case of both of the trustee companies, it seems to me that there must be a real risk that those companies could not satisfy a cost order were it to be granted against them. The situation is not so clear in the case of Jodast Pty Limited, and certainly, to the extent to which the onus lies upon the applicant to the motion to show that there is such a risk, I do not think that that onus has been discharged.
(3) Would an order shut out the a~~licants from makinq a

qenuine claim?

I can infer that, at least that in the case of the applicants other than Jodast Pty Limited, they have no or	insufficient assets to meet a cost order, were such an order
to be made. I do not think that the evidence would entitle me to infer that the applicants, if ordered to give security for costs, could not proceed with the claim against the respondents, but to some extent that question depends upon the form of security which is ultimately ordered. If the form of security were merely a guarantee of the individual applicants, clearly that would not, nor would not be expected to, shut out the corporate applicants from proceeding with their claims. On the other hand, a security by way of the lodgment of cash, for example, might have a different consequence.
(4) Whether the im~ecuniositv arose out of the breaches

alleqed

It is clear that funds of Jodast Pty Limited were directly paid to the respondent in connection with the distributorship agreement. It is not quite so clear how the applicants in each of the other proceedings were financed into the arrangement, although one can probably infer that that financing was by way of loan having regard to evidence as to the assets and liabilities of the respective applicants.

One of the problems is no doubt the fact that
corporations acting as trustees, having only nominal share

capital, which proceed to trade, are clearly not adequately

readily incur personal liability in so doing unless the trust	capitalized, and the directors of trustee companies may
assets themselves are sufficiently substantial to render valuable a right of indemnity in respect of liabilities which they incur. As I do not know how the corporate trustees were financed into the business venture with the respondent, it is difficult to conclude that, on the evidence before me, any impecuniousity that they have arose out of the breaches alleged, rather than out of an inadequate initial capitalization.
(5) The public interest
It has been pointed out in a number of cases that there is an essential difference between proceedings under s.52 of the Trade Practices Act on the one hand, and proceedings which may sound in tort or as in the present case, for breach of collateral warranties. This is so, as Fox J said in Brown v Jam Factorv Ptv Limited (1981) 53 FLR 340 at
348, because s.52 prescribes a "norm o f c o n d u c t , f a i l u r e t o
observe which h a s c o n s e q u e n c e s p r o v i d e d for e l s e w h e r e i n the
same s t a t u t e , or u n d e r the genera l law." Section 52 is
concerned with consumer protection and, particularly, to regulate unfair practices that may arise.

As I said in Ecruitv Access (supra at 15);

" I t i s the p o l i c y o f the l e g i s l a t u r e t h a t

t r a d e and commerce w i l l be made more

c o m p e t i t i v e and free if c o n d u c t , wh ich i s

e s s e n t i a l l y u n f a i r , m i s l e a d i n g or

d e c e p t i v e or l ikely t o m i s l e a d or d e c e i v e ,

i s p r o h i b i t e d .	Thus ,	there	i s	a	p u b l i c
interest	t o	be	c o n s i d e r e d	i n	p r o c e e d i n g s
b a s e d	upon	s.52	which p u b l i c	interest	i s
not	p r e s e n t	i n	o r d i n a r y	inter	p a r t e s

common l a w a c t i o n s and t o r t . "

The same of course is true of actions based in contract for breach of warranty. However, while it may be the case that the more serious the allegation of unfair practice, the greater the public interest which will be taken into account, it is difficult, in the present case, to form a view at this early stage of the proceedings because the only thing before the court for consideration is, in essence, the pleadings of the respective parties.

(6) Discretion - the matters peculiar to the facts of the

present case

For the respondents to the motion it was submitted that the respondent had cross-claimed against the applicants for monies owing under the distributorship agreement. In such a cross-claim, of course, the corporate applicants would be defendants rather than plaintiffs. It is said that cross- claim is intertwined with the claim under the Trade Practices Act and the common law.

It was said that the cross-claim involved the same issues as the original application. This submission can be answered simply in two ways. First, the security is not given in respect of the cross-claim but merely in respect of the application to which the applicants are plaintiffs rather than respondents. Second, it is clear that the issues arising under the cross-claim are quite different from those arising under the original application under the cross-claim. The only issue is whether, assuming there is an agreement, the amount of money in question has not been paid. That proceeding does not involve the issues of misrepresentation, reliance and damage upon which the trade practices claim depends.

It was also submitted on behalf of the applicants that those standing behind each of the respective companies were men or women of substance whose claims were intertwined with those of the corporate applicant. It may well be that the individual applicants are indeed of substance, but it is difficult to see how that of itself would be relevant to whether some form of security should be ordered as against what sort of security. The individual applicants have not offered to stand behind the corporate applicant. Second, although clearly enough, no security will be ordered against an individual applicant, there are clearly cases where the claim of the corporate applicant is subservient to that of the individual applicant.

The present, however, does not appear to be such a claim. Indeed, as the cases are presently pleaded, it is difficult to see that the individual applicants have a cause of action which is independent of the cause of action of the corporate applicants.

Finally, it was submitted, that mere impecuniosity should not be a ground for ordering security for costs. Reference was made to Barton v The Minister (supra). Alternatively, it was said that there was no evidence of impecuniosity in the present case.

The purpose, ultimately, of ordering security for costs is to ensure to a respondent that in the event that he is successful in the proceedings, his costs will be met. Some cases, of course, are treated prima facie, such as the case where an applicant resides outside the jurisdiction. Where, however, the applicant is in the jurisdiction, the question of the financial standing of the applicant is one obviously which requires considerable consideration, and it is clearly a significant matter to take into account. The evidence here I have already traversed and need not repeat. Of the two trustees, only Slokar Pty Limited on the evidence appears to have assets just equal to the amount claimed. However, those assets are tied up in office equipment and stock and the evidence does not enable me to determine whether those figures

Limited, of course, depends upon the value of its loan to its	represent gross or net assets. The situation with Jodast Pty	directors.
Having regard to all these matters, it seems to me appropriate that security should be granted in the two cases involving the trustees. I shall deal later with Jodast Pty Limited because it is in a slightly different position. I propose then in matters G651 of 1990 and G652 of 1990 to order the corporate applicants in each case to provide security for costs in the sum of $10,000 in the form of a guarantee to be entered into by each of the individual applicants in those proceedings who are respectively directors and shareholders of the respective applicants, or such other form as the court shall approve, within 21 days the date hereof, failing which I order that until further orders, the proceedings be stayed.
In the case of Jodast Pty Limited, the situation already is that that company is owed, by each of the individual applicants, sums of money greatly in excess of the $10,000 amount in respect of which security is sought. In these circumstances, and there being no real suggestion that the individual applicants are not of substance, I do not propose to make any order.
What I propose to do in matters G651 and G652 of 1990 is order the respondents to the motion to pay the
applicant the cost of the motion today, the applicants
remaining costs to be costs in the cause. In the case of
Jodast Pty Limited (SG119 of 1990), I order the applicant to the motion to pay the respondent's costs.

I certify that this and the preceding eighteen (18) pages are a true copy of the Reasons for Judgment herein of his Honour Mr Justic

Associate:

Date: 17

Counsel and Solicitors for	Ian Wales instructed by
Applicants to the motions:	William Witts
Counsel and Solicitors for	Miss E A Cohen instructed
Respondents to the motions:	by H.D. Kelly in matters G651 and G652 of 1990
M r P A Karp of McCabe Brown
in matter SG119 of 1990.
Dates of Hearing:	17 June 1991
Date Judgment Delivered:	17 June 1991