Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd

CATCHWORIjS

Fractlse and Procedure: whether securlty	for	costs should be
avarded agalnst a trustee company.
Trade Practlces Act 1975 5 .52

Federal Court Rules

o . 2 @ r.3

LAUNDRY COIN-WASH NOMINEES

FTY.

LIMITED

V . DUNLOP

OLYMPIC

LIMITED, J.	C.	h HOWARD W I G H T FROFRIETARP	LIMITED and TREVOP
BALTrWk'
Srnlthers J.

28 June 1985

Melbourne.

IN THE FEDERAL COURT OF AUSTRALIA )

)

VICTORIA DISTRICT REGISTRY	1	VG	No.	298 of 1984
)
GENERAL DIVISION	)

BETWEEN:

LAUNDRY

COIN-WASH

LEASING NOMINEES

PTY. LIMITED

(Applicant)

-	AND: DUNLOF OLYMPLIC

LIMITED, J.C. &

HOWARD WRIGHT

FROFRIETARY LIMITED

AND TREV@R BALDOCK

(Respondents)

Judse Makinq Order: Smlthers J.

Date of Order:	28 June 1985
Where Made:	Melbourne.

O R D E R

(a) Undertakings

havlnq

been

glven

to the

Court

the

applicant and Its dlrectors that subject to further

order the capital assets In the hands

of the applicant

wlll not be disposed of by it, there be

no order for the

provislon of security for costs which may	be payable to
the respondent.

(b)

The respondents' costs

of and incldental to this motion

be pald by the applicant.

IN THE FEDERAL COURT

OF AUSTRALIA )

)

VICTORIA DISTRICT REGISTRY	)	VG No. 298 of 1984
\
GENERAL DIVISION	)

BETWEEN:

LAUNDRY

COIN-WASH

LEASING NOMINEES

PTY. LIMITED

(Applicant)

(Respondents)

Coram: Smithers J.

D,te:

28 June 1985

REASONS FOR JUDGMENT

This is a motion in which the respondents seek

an order

against the applicant for securlty for costs.

According to the statement of claim, whlch was flled on

November 1984, the applicant seeks relief

respect of

conduct of the respondents alleged to have been mlsleadlng or

deceptive in contravention

of the provlsions of s.52 of the

Trade Practices Act 1974

(the Act). It

is alleged that in

consequence of that conduct the applicant agreed

to purchase

from the first and second named respondents a business

of a

manufacturer and wholesaler

of bedding furniture theretofor

carried on by the first and second named respondents or one

c .

2 .

them. The misleading

and

deceptive

conduct

was

said

conslst of a representation to the appllcant that the turnover

of the

business was approxlmately

$500.000

per annum and

certain

other

representatlons

concernlng

sales,

turnover,

capacity and profit

of the business.

These representations

are

alleged

have

been

untrue.

The appllcant. It is

alleged, was

induced by

these representations to enter into

the agreement and thereby suffered damage.

By the defence whlch was flled on

17 December 1984 the

respondents admit that the thlrd named respondent as the

servant or aqent

of the second named respondent represented to

the

appllcant

that

the

turnover

the

buslness

was

approxlmately $500,000 per

annum

hut

deny

that

representation was false. Otherwise they deny that any

of the

representatlons were made or

were false. They also deny that

the agreement to purchase the

busmess was made wlth the flrst

respondent and that the business had been carried on by the

flrst respondent.

The

prlnciple issues

are whether the representation

concerning the turnover was false, whether,

if it was false,

the second or third respondents in making the representations were actlng on behalf of the first respondent and whether the

other representatlons were made and

if so whether they were

made by the second or third respondents on behalf of the first

respondent and were false.

. .

3 .

By notice of

motion dated 22 March 1985 the respondent

sought an order that the applicant give security for costs

thelr costs in

case it be ordered to pay to the respondents

the costs of their defence.

The applicatlon is made pursuant

to s.56(1) of the

Federal Court of Australia Act (19761, 0.28

r.3(1) of the Federal Court Rules, and 5.533 of the Companies

(Victoria) Code

(the Code) as made applicable by 5.79 of the

Judiciarv Act 1903.

Section 56(1)

of the Federal Court

Australla Act

(1976) confers on the Court or on a Judge

~ur~sdiction

to order a plaintlff in

a proceedlng to glve

security for payment of costs that may

awarded against

them. Order 28

r.3(1) provides that In certam clrcumstances,

lncludlng where it appears that an applicant is not suing for

his own

benefit but for the benefit of some other person and

there 1 s

reason to believe that the applicant wlll be unable

to pay the costs of

the respondent

if ordered to

do s o , the

court may order the applicant to glve such securlty

as the

Court thinks fit for the costs

the respondent. Section

533(1)

the Code provides that where a corporation is

plaintiff in any action and it

appears by credible testlmony

that there

1 s reason to belleve that the corporation will be

unable to pay the costs of the defendant if successful In his

defence,

the Court having jurisdiction

the matter may

require sufficient security to

glven for those costs and

stay all proceedings until such security is glven.

The discretion

make

orders

under

5.56 must

exercised

~udicially, but

that

its

only

relevant

limitation. Order 28 r.3

is not intended to be an exhaustive

4 .

statement

of the cases in which

order for security for

costs may be made.

See Bell Wholesale Co.

Ftv. Limited v.

Gates Export Corporation (1984) S2 ALR 176 at 178. Section 533 of the Code constitutes an alternative source of power in this Court to make orders for security for costs.

The

applicant has lnformed the Court that it acts

trustee of

a unit trust called "The Ace Cleanlng Unit Trust"

establlshed pursuant to a deed

of trust dated

11 October 1982.

The unit holders

of all the units in the applicant are G

& M

Phillips Nomlnees Pty. Ltd., the dlrect.ors

cjf which are George

Philllps and his wife Marla Fhlllips, and Bilionls Nominees

Fty. Ltd., the directors

of whlch are Constantine Bilionls and

his wife Carol Anne Bilionis.

Each

unlt holder holds

100

unlts of $1.00 each. The dlrectors of

the

applicant are

George Philllps and Constantine Bilionis.

According

paragraph

the

Memorandum

Assoclatlon of the applicant, one

of the ob~ects

for which the

appllcant 1 s established is

to undertake the office of and to

act as

trustee and to perform and discharge the dutles and

€unctions incidental thereto.

The	appllcant also refers to the Trust deed whlch

contams a

provislon that the applicant as Trustee shall

entltled to

lndemnlfied out of the assets for the time

being comprising the trust fund against liabilities incurred

the trustee

in the exerclse

any of the powers and

discretlons "invested" in the trustee.

The Investment powers

include power In the trustee to enter into

an agreement and to

purchase and conduct a business. On behalf of the applicant

George Phillips deposes,

"THAT I crave leave to refer to the Trust Deed and

to the provlsions

thereof and in partlcular to

Clause 50 thereof in which provision

is made that

the Trustee of the Trust shall be entitled to be indemnified out of the assets for the tlme belng

comprlsing the

Trust

fund

against

liabllitles

incurred by the Trustee ln the exerclse of any of

the

powers

and

discretlons

invested

the

Trustee.

I further crave leave to refer to the

investment powers of the

Trust Deed set forth in

Clause 43

of the Deed wherein power

1 s

given to

the

Trustee

enter

Into an Agreement

and

purchase and conduct a

business.

Pursuant

Clause 50 the Applicant glves

an undertaking that,

In the event of

any Order belng made agalnst it In

this Application, ~t

will seek lndemnlty pursuant

to Clause

the Trust Deed. Further, the

assets of the Trust and formlng the Trust fund are

avallable to meet any Order that may be made

against the Applicant and I am duly authorlsed by

each ot the unlt holders to undertake that all the

assets comprlsing of the

Trust fund shall be made

available to meet any Order made against the

Applicant.

The appllcant does have assets In Its hands.

The malar

tangible asset is a one half interest in the busmess of a coffee lounge and cafeteria carrled on in leased premlses In the Doncaster Shoppingtown in Victoria. It is also entitled

to the above mentloned right

of indemnity.

The business at Doncaster was purchased in July 1983 for

the sum

$420,000.

It is said by

the dlrectors to be

presently

valued

not

less

than

$ 6 0 0 , 0 0 0 .

The

only

llability relating to that buslness

is sald to be an amount of

approximately

$110,000

outstandlng

on a' mortgage

the

Natlonal Bank

of Australla Limited.

This liability is fully

6 .

secured over real estate not owned by the applicant. It

sald also,

that the applicant is at present in the course of

negotlation for the purchase

a 60%

interest in a large

coffee lounge cafeteria business being conducted in the Clty

of Melbourne, m respect of which, the applicant wlll be

involved in an outlay of 60% of $800,000 and that, in respect

of thls transaction, no charge or other security wlll be

granted over any

the assets

the applicant or of the

assets forming the

trust fund, or over the proposed business.

The applicant contends, that

having

regard

the

disclosed

assets of the

applicant

and

the

lndemnlty

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 meanlng of s.533(1) of the Code, or that

there is reason

t o belleve that the appllcant will

be unable to pay the costs

of the respondents If ordered to do so

withln the meanlng of

0 . 2 8

r.3(l)(b).

But, as a matter of substance, so far as the appllcant has any entltlement to the tanglble assets referred

to, It is

an entitlement only

as Trustee, the beneflcial owner thereof

being the Trust. Because the beneficial

ownership

of the

assets, so far as they are

in the form

of tanglble assets, 1 s

In the trust, any attempt to execute agalnst those assets and

to reallze on the right title and interest

of the applicant

company

therein

would

an unproductive

exercise. The

respondents are now and have at all material tlmes been aware

that the applicant carrles	on	business as a trustee for the
Ace Cleanlng Unlt Trust.

With respect to the indemnity, unless the applicant

itself co-operated, or the appllcant company were

wound up,

benefit could not be obtained by

the respondents thereunder.

direct process

of execution would be available for the

purpose

obtainlng that benefit. Further, the extent to

whlch the indemnity would

in any event

productlve would

depend upon the state

of the finances of the trust. And the

posslbillty of some defence cannot be ignored.

Where the only tanglble assets of

an applicant company

are held In trust for another entlty and its solvency depends

on Its right

as trustee to lndemnlty ayalnst that entlty

it is

necessary for the Court to have

ln mind the difficulties whlch

a successful respondent would face

In attempting to execute

I n

respect of

an order for costs. Indeed, unless some step

1 s

taken

to alleviate those difficultles

It 1s

reasonable and

lust to treat the applicant company as	if it	were without
assets to meet such a liability.

It was polnted out in Bell's Case (supra) at p.179 that

" . .. a Court is not ~ustlfied in declining to order

securlty

the

qround

that

do so wlll

frustrate the litigation unless a company In the posltion of the appellant here establlshes that those who stand behind it and who wlll benefit from the litigation if it is successful (whether they be shareholders or creditors or, as In thls case, beneficiaries under a trust) are also

wi thout means.

It was also said:

"It is not for the party seeklnq security

to raise

the matter; it is an essential part of the case of a company seeking to reslst an order for security on the ground that the granting of security will

frustrate the litigation to raise the issue

of the

mpecunlosity

of those whom the lltiqation

will

benefit and to prove the necessary facts."

The situation here is rather the reverse. There

IS no

submission in this case that an order for securlty for costs

wlll frustrate

the litigation. But because of the fiduclary

-capacity of the applicant

It is in a position somewhat simllar

to that of a company reslstinq an order for security in the clrcumstances obtaining in Bell's Case (supra).

Perhaps with this In mind the directors of the applicant

made

an offer to the respondents in March

1985

to provlde

unconditional guarantees by deed to meet any costs that might

awarded

against

the

appllcant

and

include

the

undertaking on behalf of the applicant set forth above In the

deposition of Mr. Phlllips. The respondents refused to accept

such

guarantee or undertaking by way

security.

The

reasonableness of this refusal is in question.

There is evidence that there are resources available to

the Ace Cleanlng Unit Trust. But there 1s

reasonably

informative statement

as to what these resources are or what

liabilities have been

may be acquired by the Trust in

respect

the

acquisition

those

resources.

The sums

involved are quite substantial. That obligations similarly

. .

substantial

have

been

Incurred,

or in all probabllitiy

Incurred, by or on behalf of the

Trust for the purposes

completing the negotiations for the

new business, or

indeed

for sustaining the beneficial interest

the Trust in the

business at

Doncaster, is compatible with the evidence.

The

actual financial situatlon

of the Trust is left unstated.

It has

been

polnted

out

Mr.

Jolson, for

the

respondents, that the applicant company as Trustee for

the

Trust has a lien on trust property in its hands in respect

liabillties incurred by it in

carrying out the terms

of the

Trust.

And there

is good reason to think that the value of

the business at Doncaster over and above $110,000 owing In

respect of it is substantlal. While the legal interest in the

lease and business of the Doncaster business remains in the

appllcant it would be in a position,

at all material tunes, to

exercise its rlghts

lienee should an order be made against

it for costs In these proceedings.

such circumstances,

such a lien

would, I

think. be reasonably accessible to the

respondents for the purpose

of obtaining satisfaction

of an

order for costs. In the absence of a restralnt imposed upcm

it by the Court, the applicant as trustee for the Trust might

at	any time transfer the legal interest In the lease and

business at Doncaster to the Trust. But unless It

does so the

respondents would appear to

sufficiently

protected

respect of any order for costs which they may posslbly obtain.

1n.these circumstances

it seems appropriate that the current

10.

situation could be resolved if the company and the directors

undertake that pending further order nelther the lease nor the

busmess at Doncaster would be disposed

of by the applicant.

It was

urged by Mr.

North, for the applicant, that on

whatever basls an order for security for costs was made there

was ultlmately a question lnvolving the exercise

of discretion

by the Court.

urged that in this case the court should

exercise

Its

dlscretion

agalnst

the

respondents.

It was

contended that the respondents have been gullty of delay in seeklng securlty, that they acted unreasonably m refusing to

accept the dlrector Mr. Phillips' offer

of a guarantee and

that In vlew

the avallabllity

of the

indemnlty It has

always been clear that the risk

of non-recovery of their costs

by the respondents, If

any,

are ordered to be paid

by the

appllcant, 1 s

so small that It could be dlsregarded. It was

also contended that on the lnformatlon before the Court

It 1 s

reasonable to believe that the prospects

of success

by the

applicant In the lltigation, not only agalnst the second and thlrd respondents but also against the first respondent, are good. Of course the llkely result of the lltlgation cannot be

assessed on the informatlon

so far avallable, but

I would

that

there

are

lndlcations

supportlve

of the

applicant's contention.

However, It is my view

that where, as

here, there is no

.question of the lltigatlon being frustrated by

order for

securlty for costs, delay

In seeklng such

an order 1 s of

llttle signlficance to the exerclse

of the Court's dlscretlon.

11.

I think it was a

matter for the respondents

to decide whether

they would accept the offer of

the directors’ guarantees. It

may well be that the directors were financially well equipped

give the guarantee.

But the applicant did not provide

appropriate evldence

that, and In any event I think the

respondents were entitled to take the vlew that they were

entltled to

look

to the appllcant Itself to support its

litigation and were not requlred to make a

~udgment

as to the

adequacy

a personal guarantee

or the efficacy of the

applicant‘s undertaklng

enforce

the

lndemnlty.

Also,

havlng regard to what

thlnk are the real issues on this

motion I feel that

the

current

indications

as to

the

applicant’s prospects of success	cannot	be	of	materlal
slgnlficance.

It is my view that in the exercise of Its

discretion the

court

should

have

reqard

the

capaclty

which

the

applicant carries out Its business actlvitles and holds such property as comes to its hands, namely, as a trustee for the

Ace Cleanmg

Unit Trust.

It 1 s a company whlch in pursuance

of Its dluty as trustee may at any time transfer such property

to the unit holders

of the Trust.

The method by

which the parties concerned construct the

entities by which their interests are pursued has, no doubt, positive benefits for them, and is a matter for declslon

them.

But

the

Trust

structure

does involve

that

persons

dealing with a company playlng the part

of trustee

in the

adopted buslness structure, necessarily deal wlth

an entlty,

the beneficial ownership

all property in whose hands is

another entity to whom the legal estate therein may

be passed

at any time.

The accountability of such a company for amounts

for which it may be legally liable is inherently less stable and reliable than would be the case

If it were in business on

its own behalf.

For reasons mentioned above

a creditor with a

~udgment against

the

applicant

should

not

normally

restricted to reliance on the applicant's indemnity under the

trust

deed.

Accordingly,

but

for

the

glving

the

undertaking

referred

I would

have

ordered

that

the

applicant give securlty for costs.

I have concluded that

an applicant being

a trustee

company whlch deslres to reslst

order for securlty for

costs should

establish that recourse to property held by

f o r it wlll be avallable to the party agalnst whom it has brought Its action and be adequate, at the appropriate time, to meet the posslble liability for costs. In this case I

consldered

the

applicant

might

do this

giving

undertaking such

I have

required. It ensures that the

applicant wlll be

In actual possession

of property and have

legal entitlements

in respect thereof sufficient in value to

provide for the applicant's liability and thus providing a

sufflclent measure of practical protection of the interests of

the respondents.

, 4. ”

13.

Having regard to the foregolng:

(a)

I have received undertakings from the company and the

directors that, sub~ect

to further order, the capital

assets in the

hands of

the

appllcant wlLl not

disposed of by It, and thereupon, have made no order for

further security for costs; and

(b)

I order that the respondents’ costs of and incidental to

thls motion be paid by the applicant.

I certlfy that thls and

the

j-bd?l

( i ; ) preceding

pages are a true copy of

the Reasons f o r Judgment

hereln of his Honour Mr.

Associate

Trade Prac t ices -

Secur i ty f o r cos t s - Cmtrac-l;

arrangement

o r u n d e r s t m d i n g i n

res-r;rainG o f

t rade

Contrect

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t o S ta tecent o f Ciaix - kregellzg

l c g i c l a t i o n e f f e c t

o n

c a s e o f

act ion in subsis t ing proceedings

Trade

Practices

Bet

1974 ( C o m ) s s . 4, $D, 45, EC and F2

Federal C o u r t o€ Anst ra l ia Act 197G

(Corn) s.56

XE;h Court

Rules

029R

[1985] FCA 292

28 Jun 1985