Mac Audio & Acoustical Consultants Pty Ltd (in liq) v Eddy

[1999] SASC 443

MAC AUDIO & ACOUSTICAL CONSULTANTS PTY LTD (IN LIQUIDATION)  v  EDDY & THE TRUSTEE OF THE ESTATE OF MORPHETT
[1999] SASC 443

Magistrates Appeal:  Civil

1. WICKS J          This is an appeal against an order of a Magistrate that the plaintiff provide security for the defendants’ costs. The order to provide security was made in the course of an action in the Magistrates Court for damages for various alleged breaches of directors’ duties contrary to s232 of the Corporations Law.   A brief overview of the history of this matter will suffice to place this appeal in context.

2. Graham Wallace Morphett (“Morphett”) and Robert Alfred Eddy (“the first defendant”) were the directors of the plaintiff company Mac Audio Acoustical Consultants Pty Ltd.  Leslie Helen Eddy, the first defendant’s wife, was an employee of the plaintiff.  On 12 July 1991 the plaintiff, by its directors Morphett and the first defendant, entered into a contract for the sale of real property owned by the plaintiff.  Upon settlement of the contract on 6 September 1991 the plaintiff alleges that the proceeds, or part thereof, were paid into the plaintiff’s fully drawn advance account and cheque account.  Subsequently Morphett and Leslie Eddy received payments from the company which represented backpay to December 1990.  The plaintiff further alleges that from 30 June 1991 to 31 January 1992 the first defendant and Morphett authorised the payment of additional wages to themselves and Leslie Eddy.  According to the plaintiff, at the time these payments were made, the company was trading at a loss and was unable to pay its debts as and when they fell due.

3. On 10 June 1992, this Court ordered that the plaintiff be wound up and that a liquidator be appointed. By Statement of Claim filed in the Magistrates Court on 11 July 1997, the plaintiff claims $42,860.22 damages for various alleged breaches of directors’ duties under s232 of the Corporations Law.  As Morphett died on 4 June 1996, the claim is brought against his estate.  A defence and a further amended defence were filed on 26 May 1998 and 29 July 1998 respectively.

4. The trial was scheduled to commence on 2 March 1999.  On 22 February 1999 the defendants filed an application for security for costs marked specially returnable.  The application was heard on 25 February 1999, 3 days prior to the scheduled commencement of the trial and the learned Magistrate delivered his ruling on the same day.  An order for security of costs was made against the plaintiff.

5. By application dated 11 March 1999 the plaintiff sought leave from this court to appeal against the Magistrate’s order for security for costs.  Leave was granted by a Judge of this Court on 9 April 1999.  The Notice of Appeal dated 13 April 1999 sets out the following grounds of appeal:

   “1..... That the learned Magistrate wrongfully exercised his discretion in ordering that the plaintiff provide security for costs and acted against the weight of the evidence.

   2That the learned Magistrate wrongfully exercised his discretion in ordering that the plaintiff provide security for costs in that he failed to give sufficient weight to the effect of delay by the respondents in bringing the application for security for costs.

   3... That the learned Magistrate wrongfully exercised his discretion in ordering that the plaintiff provide for security for costs in that he failed to give sufficient weight to the fact that the order would stultify the proceedings by the liquidator which proceedings were issued bona fide against the [defendants] and particularly given that the liquidator had prepared for a trial which was to take place three days after the order for security for costs was made.

   4That the learned Magistrate wrongfully exercised his discretion in granting security for costs in the sum of $10,300 (sic) when there was insufficient evidence before him to grant security for costs in that quantum and particularly that the quantum of costs sought included costs of conducting the trial.

   5... That the learned Magistrate wrongfully exercised his discretion in finding that in all the circumstances the justice of this case required that security for costs be provided by the liquidator of the plaintiff company.”

6. This appeal is by way of re-hearing and not by way of re-hearing de novo:  SCR 97.17.  An appellate court is required to make an independent assessment of the material that was before the learned Magistrate and may draw any inferences from the facts which may be appropriate:  Warren v Coombes (1979) 142 CLR 531. An appellate court, hearing an appeal is not, however, entitled to substitute its own discretion for that of the Magistrate in the court below unless an error in the exercise of discretion can be detected: Mullett v Gabriel (1989) 52 SASR 330 at p 333. For this purpose there will be such an error where matters which should have been taken into account were not taken into account or where matters which should not have been taken into account were taken into account.

7. In exercising a discretion as to whether or not security should be ordered, there is to be no pre-disposition in favour of the granting of security where the plaintiff is unable to meet the costs of the defendant in the event that the action should fail:  Spiel v Commodity Brokers Australia Pty Ltd (In Liquidation) (1983) 35 SASR 294, North Groongal Pty Ltd v ANZ McCaughan Ltd (1993) 61 SASR 302 (Perry J) and (1993) 171 LSJS 284 (Full Court) and Mendham Pty Ltd v Shell Company of Australia and Sheridan (unreported, 3 October 1997, Doyle CJ, Judgment No S6388).  While there must be impecuniosity before there can be a discretion to order security for costs, it is nevertheless one factor to be taken into account along with others.  Initially, it is given no special weight.  In the present case, the plaintiff is clearly impecunious and if the order for security remains, the action will continue to be stayed unless creditors can be persuaded to provide the security required.  These are matters which the learned Magistrate took into account when making his order.

8. The learned Magistrate noted that the application was very late and that that should count against the defendants.  He thought, nevertheless, that the delay could be compensated for in costs.  He also noted that the plaintiff had no assets and that, should the defendants succeed, a costs order in their favour would be nugatory.  He took into account that if he made an order for security for costs, it may defeat the litigation.

9. The defendants knew of the impecuniosity of the plaintiff from the outset.  The action was commenced by it as a company in liquidation.  This fact distinguishes the case from North Groongal v ANZ McCaughan Ltd (cited above) where the lateness of the application for security was forgiven by Perry J because the defendant did not become aware of the impecuniosity of the plaintiff until very close to trial.  That is not the position here.

10. In this matter the plaintiff is in liquidation and a liquidator has been appointed.  In Spiel v Commodity Brokers Australia Pty Ltd (In Liquidation) (cited above), Bollen J, with whom Zelling and Wells J agreed, said at p 302:

    “I think it relevant in the exercise of discretion to remember that the claim is really being brought by the liquidator.  He is an officer of the Court.  He has available to him information which reasonably suggests to him that the appellant owes a substantial sum to the respondent.  His duty is to take reasonable steps to recover what he can for creditors and shareholders.  Moreover he has a duty to the Court.  I need not dwell on that duty.”

In coming to a decision, the learned Magistrate did not have regard to the fact that the plaintiff was a company in liquidation and the consequences of the fact that a liquidator had been appointed by the Court.

1. In considering the impecuniosity of the plaintiff, regard must also be had to the position of those behind it.  If those persons, be they shareholders or creditors, have means and are able to provide security, then that is a consideration in favour of the making of an order for security for costs.  The onus in this matter rests with the party opposing the making of the order to establish that there are no persons with means standing behind the plaintiff who could provide or contribute to security which might be ordered:  Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 52 ALR 176 at p179.

2. In my opinion, the fact that the plaintiff is subject to a court-ordered liquidation and the fact that the onus of establishing that there are no persons of means behind the plaintiff should be dealt together as one factor in determining whether security for costs should be ordered.  These were matters not considered by the learned Magistrate and, in my view, he was in error in not considering them and bringing them to account with other material factors to which I have made reference.

3. In view of the error made by the learned Magistrate, I am at liberty to use my own discretion in respect of all matters which were before him.

4. Having regard to all of the matters discussed in these reasons, I am of the view that an order for security for costs should not have been made.

5. In the circumstances, I allow the appeal and set aside the order for security for costs made by the learned Magistrate.

6. I will hear counsel for the parties as to costs.