Lanton Productions Pty Ltd v Edward Rushton Pty Ltd

[1996] FCA 842

FEDERAL COURT OF AUSTRALIA           No. QG 160 of 1992
QUEENSLAND DISTRICT REGISTRY  
GENERAL DIVISION  

BETWEEN:LANTON PRODUCTIONS PTY LTD

Applicant

AND:EDWARD RUSHTON PTY LTD

First Respondent

AND:ELECTRONIC LEARNING SYSTEMS PTY LTD

Second Respondent

AND:GRAEME CHARLES PITTS

Third Respondent

AND:MOORGATE FINANCE PTY LTD

Fourth Respondent

AND:FRANK EDGE

Fifth Respondent

AND:FRANK EDGE

First Cross-Claimant

AND:MOORGATE FINANCE PTY LTD

First Respondent to the Cross-Claim

AND:EDWARD RUSHTON PTY LTD

Second Cross-Claimant

AND:MOORGATE FINANCE PTY LTD

First Respondent to the Second Cross-Claim

AND:FRANK EDGE

Second Respondent to the Second Cross-Claim

AND:EDWARD RUSHTON PTY LTD

Third Cross-Claimant

AND:ELECTRONIC LEARNING SYSTEMS

INTERNATIONAL PTY LTD

First Respondent to the Third Cross-Claim

AND:GRAEME CHARLES PITTS

Second Respondent to the Third Cross-Claim

AND:ELECTRONIC LEARNING SYSTEMS

INTERNATIONAL PTY LTD

Fourth Cross-Claimant

AND:EDWARD RUSHTON PTY LTD

First Respondent to the Fourth Cross-Claim

AND:GRAEME CHARLES PITTS

Fifth Cross-Claimant

AND:EDWARD RUSHTON PTY LTD

First Respondent to the Fifth Cross-Claim

AND:ELECTRONIC LEARNING SYSTEMS

INTERNATIONAL PTY LTD

Sixth Cross-Claimant

AND:LANTON PRODUCTIONS PTY LTD

First Respondent to the Sixth Cross-Claim

MINUTES OF ORDERS

JUDGE MAKING ORDER:  Drummond J
DATE OF ORDER:  13 September 1996
WHERE MADE:  Brisbane

THE COURT ORDERS THAT:

1.  The fifth respondent’s motion is dismissed.

2.  The fifth respondent pay AGC’s costs of and incidental to the security application to be taxed on an indemnity basis and grants AGC leave to tax its costs forthwith.

3.  The fifth respondent pay the applicant’s costs of and incidental to the security application to be taxed on an indemnity basis.

NOTE:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

FEDERAL COURT OF AUSTRALIA  No. QG 160 of 1992
QUEENSLAND DISTRICT REGISTRY  
GENERAL DIVISION  

BETWEEN:LANTON PRODUCTIONS PTY LTD

Applicant

AND:EDWARD RUSHTON PTY LTD

First Respondent

AND:ELECTRONIC LEARNING SYSTEMS PTY LTD

Second Respondent

AND:GRAEME CHARLES PITTS

Third Respondent

AND:MOORGATE FINANCE PTY LTD

Fourth Respondent

AND:FRANK EDGE

Fifth Respondent

AND:FRANK EDGE

First Cross-Claimant

AND:MOORGATE FINANCE PTY LTD

First Respondent to the Cross-Claim

AND:EDWARD RUSHTON PTY LTD

Second Cross-Claimant

AND:MOORGATE FINANCE PTY LTD

First Respondent to the Second Cross-Claim

AND:FRANK EDGE

Second Respondent to the Second Cross-Claim

AND:EDWARD RUSHTON PTY LTD

Third Cross-Claimant

AND:ELECTRONIC LEARNING SYSTEMS

INTERNATIONAL PTY LTD

First Respondent to the Third Cross-Claim

AND:GRAEME CHARLES PITTS

Second Respondent to the Third Cross-Claim

AND:ELECTRONIC LEARNING SYSTEMS

INTERNATIONAL PTY LTD

Fourth Cross-Claimant

AND:EDWARD RUSHTON PTY LTD

First Respondent to the Fourth Cross-Claim

AND:GRAEME CHARLES PITTS

Fifth Cross-Claimant

AND:EDWARD RUSHTON PTY LTD

First Respondent to the Fifth Cross-Claim

AND:ELECTRONIC LEARNING SYSTEMS

INTERNATIONAL PTY LTD

Sixth Cross-Claimant

AND:LANTON PRODUCTIONS PTY LTD

First Respondent to the Sixth Cross-Claim

CORAM:Drummond J

DATE:13 September 1996

PLACE:Brisbane

REASONS FOR JUDGMENT

This is a motion by the fifth respondent for various orders with respect to security for its costs of defending the action brought by the applicant, Lanton Productions Pty Ltd, against the vendors of certain businesses, a valuer, and a finance broker who is said to have recommended the financial attractiveness of the business to Lanton. The fifth respondent was an employee of the broker, the fourth respondent, now dissolved. The applicant relies, among other things, on s 52 of the Trade Practices Act 1974 (Cth) to make out its claims for relief against the various respondents.

At the hearing, the fifth respondent abandoned its claims for the security orders sought in its notice of motion, which included an order that AGC, a non-party, provide such security, and instead sought an order that Lanton provide, on account of security for the fifth respondent's costs, the sum of $70,000 in a form satisfactory to the District Registrar.  If such an order is made, I infer from the evidence as to the extent of the indebtedness to AGC of what is called the Birt Group, which includes Lanton, Q H & M Birt Pty Ltd and Mr Q H  Birt, that that group is unlikely to be able to provide any security in cash or its equivalent and that, unless AGC provides any additional security ordered, the action against the fifth respondent is likely to be brought to a halt.

It appears from the second Deed of Forbearance between AGC and the Birt Group that, at the date of the Deed, 21 June 1994, the members of this group, including, as I have said, Lanton, were jointly and severally indebted to AGC for about $9.6M, that the assets of the group members were secured to AGC and that the group members undertook to realise their assets to reduce this indebtedness.  Such a program has been implemented.  AGC has now released all its securities over group assets to permit their sale.  The debt has been reduced, but it still stands at well in excess of $3M.

While AGC has not yet released any of the group members from their personal liability, they can, by force of cl 8(c) of the Deed, limit their liability to AGC to a maximum of $3M by complying with all their obligations under the Deed.  In addition to the obligations on various of the group members to reduce the debt by the assets realisation program and various other obligations, the main obligation imposed by the deed on Lanton is to prosecute the present action and to pay to AGC from its fruits the lesser of $3M or the full amount of the moneys then outstanding and due to AGC:  see cl 4(g)(iii) of the Deed.

On 26 February 1993, Einfeld J, after a contested hearing, made an order that security for the fifth respondent's costs of the proceedings to the extent of $50,000 be provided in the form of deeds of guarantee by non-parties Q H & M Birt Pty Ltd and Mr Birt, who are both associated with Lanton and to whom I have already referred.  Einfeld J otherwise rejected the fifth respondent's application for security.  It is clear from his Honour's reasons that the fifth respondent, although seeking security,
unsuccessfully opposed security in the only form ordered on the basis that Q H & M Birt Pty Ltd and Mr Birt were "hardly more able to meet an order for costs than" the applicant, Lanton.

It was common ground in those proceedings that Lanton was impecunious.  The only dispute was whether security should be limited to the personal guarantees offered by Q H & M Birt Pty Ltd and Mr Birt or whether such security should be in the form of cash or a suitable substitute.  Lanton submits that this application for security is an abuse of process because it is effectively the renewal of the fifth respondent's previous application, when there has been no relevant change of circumstances.  Lanton relied on, among other things, Cunningham v Brian Olliver, an unreported decision of Burchett J on 21 November 1994, where his Honour said, after referring to s 56 of the Federal Court of Australia Act 1976 (Cth):

“It should be noted that by subs. (3) it is made clear that any order made may be reduced or increased on some subsequent occasion.  In other words, the Court does not lose control at the interlocutory stage, and an order for security is not something totally irrevocable.  However, plainly, when such an order is made, it is intended under all foreseeable circumstances to provide the solution to the security problem.”

The fifth respondent's claim involves the proposition that the security in the form of the guarantees provided by Q H & M Birt Pty Ltd and Mr Birt pursuant to Einfeld J’s order are worthless, exactly the same proposition the respondent relied on in his unsuccessful endeavour to persuade Einfeld J to order more substantial security than the guarantees.  But the fifth respondent says that there has been a relevant change of circumstances since Einfeld J’s order was made in that the fifth respondent
has only recently discovered, as a result of obtaining an order from Kiefel J in May last against Lanton for further discovery, that Lanton's financier, AGC, has a substantial interest in the action, so that it is appropriate for the Court to make an order for security that will give the fifth respondent protection for his costs which the existing order does not give him because of the poor financial circumstances of Q H & M Birt Pty Ltd and Mr Birt.

The fifth respondent's expectation is that, if further security is ordered, AGC, in view of its interest in the action, will have to provide it on pain of the action being stifled, since it is highly unlikely, as I said, that Lanton or anyone associated with it, can provide any security in cash or its equivalent.

I reject the submissions by the fifth respondent that Lanton has no real interest in the action, that the action is being prosecuted effectively for the entire benefit of AGC and that AGC is probably funding Lanton's case, as well as controlling its prosecution.  Those propositions are inconsistent with the terms of the Deed.  For example, cl 4(g)(iv) entitles Lanton, in the event that it is successful in the action, to any recoveries in excess of the maximum of $3M to be paid to AGC and the amount of Lanton's costs of the proceedings, and cl 8(c), in the event of Lanton's success in the action, entitles Lanton and all the other Birt Group members to be released from their joint and several liability to AGC for their substantial indebtedness to AGC in excess of $3M.  Lanton thus has a real interest of its own to advance by prosecuting the action.  I also accept that Lanton's claim is for well in excess of $3M, although I am not able to form any assessment of its prospects of succeeding in the action, let alone of
recovering more than $3M.  That was an exercise I was not asked to undertake and it would be inappropriate in a case like this to attempt it, in the context of a security for costs application.  Moreover, the Deed gives AGC no right to control the way in which Lanton runs its case.  There is no evidentiary basis at all in my opinion for the proposition that AGC is funding the action.  It appears to be Lanton which is in full control of the prosecution of the proceedings.

I accept that discovery by the fifth respondent of AGC’s interest in the action only recently and as a result of a coercive process of the Court is a sufficient change of circumstances from those existing at the time the fifth respondent made his original application for security to prevent the making of this application amounting to an abuse of the Court's process.  But Einfeld J considered that personal guarantees from Q H & M Birt Pty Ltd and Mr Birt, despite their questionable worth, were all the security the fifth respondent could properly expect. 

The only change in circumstances since then is the discovery of AGC’s interest in the litigation.  That interest is limited to what I think to be AGC’s willingness to refrain from taking insolvency proceedings against Lanton, Q H & M Birt Pty Ltd, Mr Birt and the other members of the Birt Group, provided Lanton, as required by cl 4(a) of the Deed, diligently pursues this action to judgment or settlement, given the possibility seen to exist by AGC that it may be able to get $3M of the total debt owing to it, if Lanton is free to and does pursue the present action.

I have already explained why this is not, in my opinion, a case in which
litigation brought by an impecunious plaintiff will, if successful, benefit only a non-party creditor.  Let alone is it a case in which the litigation is controlled by such a creditor.  It can be compared with Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201 at 215. This conclusion, in my opinion, destroys much of the justification for the fifth respondent's application for further security.

Given Lanton's real interest of its own in the litigation, I do not think an order is justified which would require a creditor who has been prepared to forbear from enforcing its rights against Lanton in the expectation that Lanton's prosecution of the action may turn out to be for their joint benefit, to assume the further burden of protecting a respondent in the action for his costs if Lanton's action fails.

The fifth respondent has what Einfeld J considered was appropriate security for his entire costs of the action.  That the quantum of those costs may now be more accurately estimated was not relied on by the fifth respondent to seek additional security from Q H & M Birt Pty Ltd and Mr Birt, for obvious reasons.  As I have said, although the fifth respondent did seek security in an amount greater than that ordered by Einfeld J, the application was designed to force AGC to provide security in place of what the fifth respondent considers to be worthless security which is all that it obtained under Einfeld J’s order.

For these reasons, I propose to dismiss the fifth respondent's application.

The only question for my decision now is whether the costs which the unsuccessful applicant on the motion should be ordered to pay to the applicant in the proceedings and to AGC should be taxed on the ordinary basis or an indemnity basis.  It seems to me that the authorities show that the unusual indemnity costs order is only appropriate where there is some special feature of a case that takes it out of the ordinary and that that special feature is generally to be found in what can be described as wholly unreasonable behaviour on the part of the person against whom the order for indemnity costs is sought.

The object of the application was, as I have said, to try to coerce AGC into putting up substantial and effective security for the fifth respondent's costs.  The case was presented on the basis that circumstances had changed since Einfeld J made the order for security with which the fifth respondent is dissatisfied in that relatively recently the applicant disclosed a copy of the Deed of Forbearance with AGC.

My attention has now been drawn to an affidavit filed on behalf of Lanton in the proceedings before Einfeld J in which AGC's interest in the litigation was accurately exposed by the solicitor for Lanton who said that:

“The principle (sic) beneficiary of this action will be AGC to which Lanton is indebted ¼”

That raises the real question as to whether there has in truth been any relevant change of circumstances which would prevent the application amounting to
an abuse of process.  However, it is unnecessary for me to review my reasons for deciding to dismiss the application.  I can still take that factor into account in determining whether the action of the fifth respondent in bringing and pressing this claim for additional security against AGC effectively is wholly unreasonable.

It seems to me that the fifth respondent elected to bring the proceedings with the object of coercing AGC into providing security in circumstances where it has long been aware of the precise nature of the interest which I have found AGC has in the litigation.  That is a factor which suggests a considerable degree of unreasonableness on the fifth respondent’s part in bringing a second security application based on AGC’s interest in the action.

The weakness of the fifth respondent's position in resisting an indemnity costs order is further enhanced by the action taken by the solicitor for AGC to put the fifth respondent on notice of the untenability of the claim for security sought from AGC and, when that did not succeed in causing the fifth respondent to desist, to further put the fifth respondent on notice that, if it proceeded with the request, its untenable application, the costs order sought would be on an indemnity basis.

Such a letter is of real relevance, it seems to me, on the issue of whether indemnity costs should be ordered when an application has failed in circumstances where it was one which can fairly be described as "doomed to fail".  See the judgment of Heerey J in Henderson v Amadio Pty Ltd, judgment delivered 22 March 1996.

For those reasons, I propose to order that the fifth respondent, as applicant on the notice of motion, shall pay the costs of AGC to be taxed on an indemnity basis.

The applicant, Lanton, also makes a claim for costs on the same basis.  It, too, wrote to put the fifth respondent on notice, after receipt of the application for security, that it would make such a costs claim.  That is a relevant factor, as is also the consideration that I have referred to in dealing with AGC's application that the fifth respondent has brought this further application for security on the basis of the same kind of information that was available to him when his original application was brought before Einfeld J.

It seems to me that those two circumstances together, so far as the applicant is concerned, justify it in saying that this further application for security is wholly unreasonable and that I will therefore order the fifth respondent to pay the applicant's costs of and incidental to the security application to be taxed on an indemnity basis.

I note that the solicitor for the applicant in the action informed me, after I published my reasons, that it did not disclose the Deed of Forbearance under the compulsion of an order for further discovery, but rather as a result of deciding that, once directed by Kiefel J in May to file witness statements on certain issues, it should disclose that Deed.

I certify that the preceding eleven
pages are a true copy of the reasons
for judgment herein of the Honourable
Justice Drummond.

Associate:

Date:  13 September 1996