Mendham Pty Ltd v the Shell Company of Australia and Greg Sheridan No. Scgrg-96-2283 Judgment No. 6388 Number of Pages 6 Procedure Costs

[1997] SASC 6388

IN THE SUPREME COURT OF SOUTH AUSTRALIA

DOYLE, CJ

CATCHWORDS:

Procedure - costs - security for costs - plaintiff company unable to meet an order for costs - nature of discretion conferred on by s1335(1) - whether nexus between impecuniosity and defendant's conduct - distinction between loss of a promised benefit and by loss of funds in reliance on defendant's conduct - whether order of security may stultify the litigation - the role and resources of those behind the litigation - whether appropriate to make order against person who will benefit from plaintiff company's action - personal undertaking to indemnify trustee corporation by beneficiaries. Corporations Law s1335, referred to. Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) 3 ACLC
312, distinguished. Spiel v Commodity Brokers Australia Pty Ltd (In Liq)
(1983) 35 SASR 294; North Groongal Pty Ltd v ANZ McCaughan Ltd (1973) 61 SASR
302 and (1993) 171 LSJS 284; Commonwealth v Cable Water Ski-ing (Aust) Ltd
(1994) 14 ACSR 760, considered.

HEARING:

ADELAIDE, 24 September 1997 (hearing), 3 October 1997 (decision)

#DATE 3:10:1997

#ADD 7:10:1997

Appearances:

Plaintiff :

Counsel: Mr N J Swan

Solicitors: Finlaysons

Defendants :

Counsel: Mr A J Besanko QC

Solicitors: Kelly & Co

Order: appeal allowed.

DOYLE CJ

This is an appeal against a decision by a Master. The Master refused to order that the plaintiff in this action provide security for the defendant's costs of the proceedings.

The pleadings in the action are somewhat complex. For present purposes a summary will suffice.

The plaintiff, Mendham Pty Ltd ("Mendham") is a company incorporated under the Corporations Law. The defendant, The Shell Company of Australia Limited ("Shell") is the well known distributor of motor fuels and related products.

Mendham, pursuant to agreements with Shell, operates a Shell outlet. Mendham claims that it agreed with Shell to operate the Shell outlet on condition that Shell would substantially upgrade the premises. Mendham claims that the agreement is partly written and partly oral. Mendham pleads that it entered into the agreements under which it operates the Shell outlet, relying upon representations by Shell that it would upgrade the premises. The upgrading of the premises has not taken place. Mendham claims that this has had the result that the business has not attracted the customers and trade that it would have attracted if the premises had been upgraded.

Mendham claims damages for breach of contract, damages for misleading and deceptive conduct under the Trade Practices Act and under the Fair TradingAct, damages for negligent misrepresentation and damages under the Misrepresentation Act. Mendham also seeks specific performance of the agreement to upgrade the premises.

My impression is that the damages claimed are substantial.

It suffices to say that Shell denies all liability. While admitting there has been some talk about improvements to the relevant premises Shell says that there never was a concluded agreement.

Judging by the allegations in the pleadings, it is likely that evidence will be led of a number of discussions between representatives of the parties, as well as evidence about correspondence between them. I anticipate that Shell will want to show that representatives of Mendham knew Shell's normal business procedures, and knew that the claimed arrangements were not made in the manner in which Shell normally does business. Proof of the loss, if any will be quite difficult, because it will involve proving what profits the business would have generated if the premises had been upgraded. In my opinion it is a case that will last at least five days, and probably longer.

When Shell applied for security for costs it estimated the costs of a ten day trial, and the preparation for such a trial. Its estimate was in the sum of $136,635. It sought security in that amount.

It may be that the costs will not be that much, even if the case lasts ten days. But I anticipate that they will be well in excess of $50,000 and are likely to be in the region of $100,000. The conduct of the case so far suggests that the parties will not be able to achieve much by agreement between themselves.

Mendham is a trustee of a discretionary family trust. The beneficiaries of that trust include Mr and Mrs Stripp, the persons who effectively manage the business, their children, and the usual range of spouses and relatives. Although Mr Stripp and Mrs Stripp are active in the business, the shareholders of Mendham are Mrs Stripp and a son of the Stripps, and those two persons are also the directors of Mendham.

Quite extensive affidavit material has been filed on each side relating to the financial position of Mendham, of Mr and Mrs Stripp, of their son (who is also involved in the business) and of their daughter (who has no involvement in the business). As I understand the affidavits, when they provide details of the assets of Mendham the assets referred to are assets that Mendham holds in its capacity as trustee of the relevant family trust. As would be expected, the personal assets of Mr and Mrs Stripp are, by and large, tied up in the business of Mendham, and in the business of another company that operates a different Shell outlet. Their son has assets with a net value estimated at about $51,000, however they are not assets on which significant cash could be raised, in my opinion. Their daughter has an interest in assets, the net value of her assets being about $25,000. My view is that neither son nor daughter has any real capacity to raise money with which to provide security.

It was common ground before me that Mendham does not have the capacity to provide the security sought. It follows that an order for security to be provided by Mendham is likely to mean that the action will not proceed.

That is not to say that Mendham is without assets. Moreover, it is conducting the Shell outlet at present. Despite that, its cash flow is relatively modest, profitability is relatively low and, as I have already mentioned, the trust assets appear to be committed to Mendham's existing financiers. The material before me indicates that there is little, if any, capacity for Mendham to borrow further money or to provide worthwhile security in support of further borrowings.

For completeness I add that the other company to which I referred, which operates a separate Shell outlet, is also in dispute with Shell, and litigation is on foot between Shell and that company.

In summary, the position is that Mendham and the members of the Stripp family, the persons likely to benefit from the action if it succeeds, do not have the ability, in my opinion, to provide anything significant by way of security for the costs of Shell.

The Master found that neither Mendham nor the potential beneficiaries could meet or properly secure Shell's costs. I agree with that finding.

The Master went on to find that it was reasonably arguable, having regard to the pleadings, that the lack of means of Mendham and the beneficiaries has been brought about by Shell's wrongful actions. It was on that basis that he refused to order security. I should add that the Master said that he was in no position to forecast the prosects of the action succeeding, and with that I agree.

The power the exercise of which the Master had to consider, is the well known power conferred by s1335 of The Corporations Law. That confers a wide discretion on the Master. Indeed, it may be said that the discretion is unfettered, except by the requirements of justice. There is no doubt that in the present case the jurisdiction to make an order for security was enlivened, because there is no doubt that there is reason to believe that Mendham will be unable to pay the costs of Shell, if Shell is successful in its defence.

The effect of the decisions in this Court is that the exercise of the power is not to be approached with any pre-disposition in favour of an order for security, when the plaintiff is unable to meet the costs of the defendant: see Spiel v Commodity Brokers Australia Pty Ltd (In liquidation) (1983) 35 SASR
294 and North Groongal Pty Ltd v ANZ McCaughan Ltd (1993) 61 SASR 302 (Perry J) and (1993) 171 LSJS 284 (Full Court). What that means, I consider, is that while the impecuniosity of the plaintiff enlivens the discretion, and is a matter to be taken into account in deciding whether to make an order, the impecuniosity of the plaintiff is no more than one factor to be considered along with other relevant factors. Impecuniosity is not to be given special weight. The weight to be attributed to it will depend upon all the circumstances of the case. Nor is there any point in attempting to state exhaustively the other circumstances to be taken into account, or the weight to be given to each of them. Each of those will depend upon the circumstances of the case.

I start, then, from the position that Mendham, Mr and Mrs Stripp and their daughter and son lack the means to provide substantial security.

The Master found that on the pleadings it was arguable that their lack of means was brought about by the wrong-doing of Shell. In my opinion that finding requires some qualification. The complaint by Mendham is that, had Shell carried out the upgrade that it agreed to carry out, the business conducted by Mendham would have been more profitable. Mendham's assets have not been diminished, nor its liabilities increased, by reason of what Shell has done or failed to do. It is broadly true to say that Mendham still has the assets, and has the liabilities, which it acquired when it undertook the operation of the Shell outlet. The same comment applies to Mr and Mrs Stripp. The complaint is that if Shell had carried out the upgrade, Mendham's business would have been more profitable and Mendham might be better able to provide security. Likewise, in that event Mr and Mrs Strip might be better able to provide security, as a result of having received distributions from Mendham pursuant to the discretionary trust.

Mr Swan, counsel for Shell, pressed this point in particular. He argued that while the cases support the view that it is an answer for the plaintiff to show that its impecuniosity results from the wrongful conduct of the defendant, this is not such a case. He argued that Mendham is claiming profits or gains that it would have made, not the recoupment of losses inflicted upon it. He relied upon the decision of the Federal Court in Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) 3 ACLC 312. There, Beaumont J said (at 315):

"... it is one thing to refuse security where the party claiming relief can show that the party sued brought about the impecunious party's insolvency by causing him to act to his detriment and to lose funds in that connection; it is a different thing where, as here, the applicant has not thrown away funds in reliance on the respondent's conduct but rather seeks to recover profits which the respondent's representations are alleged to have led it to expect to earn in the future."

Beaumont J considered that such a case was not a case in which the respondent's conduct should cause the court to refuse to grant security.

However, in my opinion the reasoning of Beaumont J is not applicable to the present case. Mendham is not simply seeking to recover a promised benefit. Mendham's case is that, relying upon representations by Shell, it has undertaken substantial commitments that go with operating the relevant Shell outlet, and has encumbered trust assets. Mendham alleges that it undertook these commitments on the basis of representations made by Shell. In a sense, Mendham is now trapped in that situation. This is not the case of one who simply seeks to recover a promised benefit. In this case the plaintiff has incurred substantial obligations on the basis of that promised benefit.

Accordingly, in my opinion the true position is that Mendham lacks the means to provide security in part because of the commitments that it has undertaken, allegedly in reliance upon representations by Shell. Granted, Mendham's assets were not substantial when it began to operate the business, but its position is made worse by the commitments that it has undertaken as part of the operation of that business. In my opinion, there is a clear analogy to the situation of a plaintiff whose lack of assets is attributable to alleged wrong-doing by a defendant.

Another relevant matter is that there is no suggestion here that Mendham has in any sense been improvident with its assets or with its funds.

In my opinion an order for security for costs made against Mendham is likely to mean that the action cannot be pursued. That is not decisive, but in the light of the circumstances so far identified it suggests that an order for security should not be made: Commonwealth v Cable Water Ski-ing (Aust) Ltd
(1994) 14 ACSR 760.

In my opinion, in the light of those matters, it cannot be said that the Master erred in declining to order that Mendham provide security. In my opinion there were solid grounds upon which he was entitled to come to that conclusion.

I turn now to the question of provision of security by Mr and Mrs Stripp. As I have already said, their personal assets appear to be committed to the business ventures in which Mendham and the other company referred to are engaged. This is not a case in which there is any suggestion that they are sheltering personal assets behind the shield of Mendham or behind the shield of the family trust. And, for what it is worth, the trust assets, such as they are, appear to be likewise committed to the business of Mendham and of the other company. On the other hand, Mrs Stripp, because of her position in Mendham, is in a position to influence its actions as trustee. Although her husband does not appear to be a shareholder or director of Mendham, I am prepared to assume that the fact that he plays a key role in the operation of Mendham's business means that his views would be given weight. Mendham is in a position to direct benefits to Mr and Mrs Stripp, or to their son.

As Shell will incur substantial costs in the action, and there is a real risk that much of those costs will be irrecoverable if Shell succeeds, it seems to me just to require Mr and Mrs Stripp to provide such security as they can. In so concluding I proceed on the basis that it is not just that they should be in a position to benefit personally, or to see members of their family benefit, as a result of the action, while at the same time shielding themselves from liabilities that Mendham might incur.

It is well established that, in deciding whether to order security, the court can have regard to the position of those who stand behind a corporate plaintiff, be they shareholders of that plaintiff or beneficiaries under a trust: Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 52 ALR 176.

In the present case, I consider that in the exercise of his discretion the Master should have required Mr and Mrs Stripp to provide security. Their financial position is such that there is no prospect of them being able to provide substantial security, by which I mean security which would ensure that the costs of Shell will be met should it succeed in the action. But they do have some assets, and no argument has been put forward to the effect that they cannot provide a personal guarantee in favour of Mendham to pay to Mendham costs which Mendham might be ordered to pay to Shell. Requiring such a guarantee or undertaking is a course of action that appealed to Rogers J in Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364 and to Martin CJ in Territory Broadcasting Pty Ltd v Darwin Broadcasters Pty Ltd (1992) 106 FLR 66. I consider that under all the circumstances such an order should have been made by the Master. It should have been made because, in my opinion, Mendham being impecunious, there is good reason why those who, in a sense, stand behind Mendham should not be left in a position to control or, take the benefits of a successful action without running the risks of an unsuccessful action.

I have considered whether the son and daughter or Mr and Mrs Stripp should likewise be required to provide security, but on balance do not consider it just to so order.

Accordingly, I would allow the appeal to the extent of ordering that the action be stayed unless Mrs E M E Stripp and Mr G T Stripp provide a joint and several guarantee to pay to Mendham any costs that Mendham might be ordered to pay to Shell, in a sum not exceeding $50,000. I have arrived at that amount on the basis that it should be sufficient to cover costs to the conclusion of the first day of trial. Further application can be made by Shell in due course. If the parties cannot agree upon the form of the guarantee, I am prepared to hear the parties further.

As to the costs of the appeal, I am minded to order that there be no order as to costs, because Shell has failed in part and succeeded in part. However, I will hear the parties on that matter.