Meridian Oil NL v Smyth
[2003] WASC 201
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: MERIDIAN OIL NL -v- SMYTH & ORS [2003] WASC 201
CORAM: MASTER SANDERSON
HEARD: 27 AUGUST 2003
DELIVERED : 28 OCTOBER 2003
FILE NO/S: CIV 1208 of 1995
BETWEEN: MERIDIAN OIL NL
Plaintiff
AND
PETER MARK SMYTH
First DefendantDAVID ALEC ANDREW FLEMING
Second DefendantCHRISTOPHER PAUL McDONALD MAIN
Third DefendantMICHAEL JOHN FULLER
Fourth DefendantCECIL DENNISTON BURNEY
Fifth DefendantLINDSAY GERALD DAVEY CAMERON
Sixth DefendantROSS PHILIP GLOSSOP
Seventh DefendantRICHARD WEBB
Eighth Defendant
Catchwords:
Practice and procedure - Application by first defendant for security for costs and for discovery prior to filing of defence - Turns on own facts
Legislation:
Corporations Act, s 1335
Result:
Application dismissed
Category: B
Representation:
Counsel:
Plaintiff: Mr J Gilmour QC
First Defendant : Mr K De Kerloy
Second Defendant : No appearance
Third Defendant : No appearance
Fourth Defendant : No appearance
Fifth Defendant : No appearance
Sixth Defendant : No appearance
Seventh Defendant : No appearance
Eighth Defendant : No appearance
Solicitors:
Plaintiff: Hotchkin Hanly
First Defendant : Freehills
Second Defendant : No appearance
Third Defendant : No appearance
Fourth Defendant : No appearance
Fifth Defendant : No appearance
Sixth Defendant : No appearance
Seventh Defendant : No appearance
Eighth Defendant : No appearance
Case(s) referred to in judgment(s):
Bell Wholesale Co Pty Ltd v Gates Exports Corporation (1983) 52 ALR 176
BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857
Interwest Ltd (Receivers and Managers Appointed) v Tricontinental Corporation Ltd (1991) 9 ACLC 1218
Meridian Oil NL v Smyth & Ors [1999] WASC 173; [2000] WASC 156; [2003] WASC 49
Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1
Case(s) also cited:
Aquila Design (GRB) Products Ltd v Cornhill Insurance Pty Ltd [1988] BCLC 134
Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1
Bryan E Fenedt Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497
Engel Pty Ltd (In Liq) v Leeds & Ors, unreported; SCt of WA; Library No 940403; 20 July 1994
Erlistoun Gold Pty Ltd (Formerly Erlistoun Gold NL) v Worth Investments Pty Ltd [1999] WASCA 3
North Kalgurli Mines Pty Ltd v GRD Minproc Ltd [2002] WASC 275
Pearson v Naydler (1977) 1 WLR 899
Quick v Stoland Pty Ltd (1998) 157 ALR 615
Ratcliffe v Ratcliffe [2003] WASC 79
Sandell v Porter (1966) 115 CLR 666
Spargos Mining NL v Fuller & Ors [2003] WASCA 37
Temwood Holdings Pty Ltd v Oliver & Ors [1999] WASC 251
Worth Investments Pty Ltd v Erlistoun Gold NL, unreported; SCt of WA; Library No 980724; 11 December 1998
Young & Ors v Harris [2001] SASC 282
Zierenberg v Labouchere [1893] 2 PB 183
Zortec Australia Pty Ltd v DHS Holdings Pty Ltd & Anor, unreported; FCt SCt of WA; Library No 920609; 13 August 1992
MASTER SANDERSON: This is the first defendant's application for security for costs and for discovery. The application for security prior to the filing of a defence is brought under s 1335 of the Corporations Act. The plaintiff conceded that if called upon to do so at conclusion of the trial of this action, it would be unable to pay the costs of the first defendant. Thus the jurisdictional requirements of the section were satisfied. The question is whether, in the exercise of discretion, security ought be ordered. The amount sought by way of security was $310,000. The plaintiff did not dispute that if security was ordered the amount sought by the first defendant was reasonable.
All of the authorities in this area, and there are many of them, support the view that the Court has an unfettered discretion whether to make an order for security for costs and in what amount. As to the way in which that discretion is to be exercised, Anderson J, speaking for the Full Court of the Supreme Court of Western Australia in BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857, put the position as follows (at 860):
"The exercise of the discretion in this case required the Master, on the facts established before him, to make the decision as to security which he considered just, having regard to the competing interests and situations of the respective parties, after taking into account and giving appropriate weight to all relevant considerations and excluding all irrelevant considerations.
In the particular circumstances of this case, in addition to the likely inability of the plaintiff to pay the first defendant's costs and the prejudice to the first defendant that would flow from that should the first defendant succeed in resisting the plaintiff's claim, the matters that had to be considered included the strength and bona fides of the plaintiff's case, the bona fides of the first defendant's application for security, whether the making of an order would shut out the plaintiff from prosecuting its case and whether the inability of the plaintiff to meet a costs order has been caused by the conduct of the first defendant."
In support of his application the first defendant relies on a number of factors. First, if he is successful in defending this action he will be left with a substantial legal bill which he will have no chance of recovering from the plaintiff. Second, there are shareholders of the plaintiff who are financing this litigation and who will be the sole beneficiaries if the action is successful. They have refused to put up security. There is no evidence that they do not have the means to do so. That, the first defendant says, is unfair. The first defendant says that the case against him is weak and that is evidenced by the fact that it has taken so long for the plaintiff to produce a statement of claim which properly articulates the cause of action put against him. At the very least, so it is said on behalf of the first defendant, given the complexity of the action brought against him, no decision on the merits can be made and the strength or otherwise of the plaintiff's claim cannot therefore be a factor in determining whether or not security ought be ordered. Following on from that submission, it is said that if no determination can be made as to the merits of the plaintiff's claim, it is not possible to say whether or not the first defendant has been responsible for the plaintiff's present impecuniosity. The first defendant says that when all relevant considerations are weighed in the balance, the proper exercise of discretion requires that an order for security be made.
For its part, the plaintiff says that there are four factors which, taken in combination, would justify an order for security being refused. First, the plaintiff says it has a strong case and that emerges even on a cursory examination of the pleadings and the evidence filed to date. Secondly, and following on from the first point, it says that the first defendant, among others, is responsible for the plaintiff's present impecuniosity. Third, it is said that the first defendant has delayed too long in bringing this application. Finally, it is said that the application is brought for an improper purpose - that is, to enable the first defendant to avoid having to answer the very serious allegations made against him in the pleadings.
It must be acknowledged at the outset that in the exercise of the discretion the first two points raised by the first defendant carry considerable weight. The plaintiff is impecunious and those who stand behind the plaintiff and will benefit from the litigation have declined to provide security. Counsel for the plaintiff did not seek to argue that these two factors should not be taken into account or that they should not be given weight. Furthermore, counsel did not suggest that the fact made clear by the evidence that an order for security for costs would stultify the proceedings, was a factor against the ordering of security. To have run that argument the plaintiff would need to have established that those who stand behind it and who will benefit from the litigation if it is successful, were without means: see Bell Wholesale Co Pty Ltd v Gates Exports Corporation (1983) 52 ALR 176 at 179; Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1 at 3; BPM Pty Ltd v HPM Pty Ltd (supra) at 862.
During the course of his submissions, counsel for the plaintiff placed heavy emphasis on the merits of his client's claim. It was the central point of his submissions. In approaching the application in this way he set himself a considerable task. In Interwest Ltd (Receivers and Managers Appointed) v Tricontinental Corporation Ltd (1991) 9 ACLC 1218, Ormiston J, dealing with a similar approach by counsel, said (at 1223 ‑ 1224):
"There are dicta which suggest that the prospects of success may be taken into account on the hearing of an application (for security for costs): cf Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 1 QB 609 at 626. I have always found these observations difficult to understand and apply and it has occasionally provoked a mini‑trial with cross‑examination of the relevant deponents. I accept that in simple cases it may be possible for one side or the other to make out on relevant and uncontroverted materials that the other party would have difficulty in winning or defeating the case, and that fact may be taken into account in the exercise of the wide discretion given under the relevant section or rule. In any case of reasonable complexity, however, such a test is impractical and in the present, despite my knowledge gained on numerous directions hearings, it would be quite unfair to pronounce on the chances of success of either party, except that the defendants will be able to make a prima facie case of liability for the various debts, if the plaintiff's allegations are not made out. Otherwise to attempt to look at one claim or the other, as indeed each side tried to do in the course of argument, is a fruitless exercise and not conducive to any logical conclusion. … In any event the evidence relied on was largely assertion and so I proceed to determine the application on what I understand to have been originally conceded on both sides, namely, that for present purposes neither plaintiffs nor defendants could be shown to be mala fide in their claims or defences, as the case may be."
It is not an easy matter to give a concise and intelligible summary of the cause of action brought by the plaintiff against the first defendant. This can perhaps be illustrated by saying that the present statement of claim runs to 77 pages and 120 paragraphs. I have dealt with three separate strike‑out applications in relation to the statement of claim: see Meridian Oil NL v Smyth & Ors [1999] WASC 173; [2000] WASC 156 and [2003] WASC 49. In the first of these decisions I undertook a detailed analysis of the facts and the pleading and by reference to par 4 through to 17 of that decision, some idea may be obtained of the nature of the case put against the first defendant by the plaintiff. (The first defendant's strike‑out application was successful in the earliest of the three decisions I have referred to. The pleading has now changed and in the latest of the decisions, I determined that it was in a satisfactory form. I have referred to the earliest of the decisions because it is possible to ascertain the nature of the claims made by the plaintiff against the first defendant.)
What does emerge from the pleading is that the plaintiff suffered a considerable reduction in its assets during the period when the first defendant was one of its directors. In particular, the plaintiff suffered a significant loss as a consequence of the Shirerise transaction. The first defendant says in his affidavit sworn 8 May 2003 that in the late 1980s, he was concerned with the plaintiff's projects in the Middle East and "had a very limited role in any other affairs of the plaintiff": see par 16. He further says that without access to documents held by the plaintiff, he is unable to offer a greater insight to his defence to the claims put against him. Given the extensive and detailed nature of the claim made against the first defendant by the plaintiff, both in the way that claim is pleaded and the material filed in relation to this application, the first defendant's position is somewhat unsatisfactory. Insofar as he says anything, he seems to be saying that if any improper conduct occurred in relation to the Shirerise transaction, he had no knowledge of it - that despite the fact he was a director. That refrain has a somewhat familiar ring.
There is one aspect of the evidence which is deeply troubling. The case pleaded against the first defendant alleges a close association between him, one Malcolm Johnson ("Mr Johnson"), and the fourth and fifth defendants. In par 15(a) of his affidavit sworn 8 May 2003, the first defendant denies any association with Mr Johnson or the fourth and fifth defendants. In response to that evidence the plaintiff filed an affidavit of George Albert McDougall ("Mr McDougall"), sworn 22 February 2000. Mr McDougall details a meeting he had in London with the first defendant in or about August 1988. The tenor of the evidence is that there was a comfortable working relationship between the first defendant, Mr Johnson, and the fifth defendant. In other words, the evidence of Mr McDougall directly contradicts what was said by the first defendant in par 15(a) of his affidavit.
Faced with Mr McDougall's affidavit, the first defendant filed a further affidavit sworn 20 August 2003. Paragraph 10 of that affidavit deals with par 15(a) of his earlier affidavit. Paragraph 10 of this affidavit is, in my view, vague and evasive, but it does establish that the first defendant knew and had business dealings with Mr Johnson. In other words, par 15(a) of the earlier affidavit was wrong. No explanation is provided by the first defendant as to how it is that he made the mistake in his earlier affidavit. While an application such as this is not to be determined on the basis of credibility, it is incumbent upon an applicant, such as the first defendant, to put his position honestly before the Court. In my view, the first defendant has not done so and that must count against him when it comes to an exercise of discretion.
It was submitted on behalf of the plaintiff that the first defendant's delay in bringing this application was a factor against security being ordered. During the course of submissions, counsel for the first defendant indicated that he was instructed that at an earlier hearing dealing with pleading issues, then counsel for the first defendant had reserved the first defendant's position with respect to making an application for security for costs. Subsequent to the initial hearing, I decided that the evidentiary position on the question of delay was unsatisfactory and invited each of the parties to file further affidavit material. As a consequence, the first defendant filed an affidavit of John Christopher Vaughan ("Mr Vaughan"), sworn 10 September 2003 and the plaintiff filed an affidavit of Michael Charles Hotchkin, sworn 12 September 2003. Essentially Mr Vaughan says that as early as September 1999 he reserved his client's position in relation to an application for security for costs, either by mentioning the matter in court or in his discussions with Mr Hotchkin. Mr Hotchkin has no recollection of any such reservation but appears to concede that Mr Vaughan may be correct. Mr Hotchkin goes on to say that even if such a reservation was made, no formal application was initiated and at no stage was he given any indication of what the amount of security might be. In that situation, he was not in a position to advise his client that an application for security would definitely be made, nor was he in a position to advise as to what the amount of security might be. It is the plaintiff's position that the delay in bringing the application for security for costs is a factor against the ordering of such security.
In my view, the better course would have been for the first defendant to have applied for security at an earlier date. However, it must be remembered that the plaintiff had great difficulty in formulating a statement of claim and that in the course of attacking the statement of claim, the first defendant sought to have the action against him dismissed. In the circumstances, it is understandable that no application for security was brought at an earlier date. While the delay in bringing the application is a factor against ordering the security, it is, in my view, of only minor significance in the overall assessment of the application.
This, in my view, is one of those applications where the position is finely balanced. In favour of an order there is the impecuniosity of the plaintiff and the difficult nature of the plaintiff's claim. There is the fact that there are shareholders standing behind the plaintiff who stand to benefit from the litigation but are not prepared to commit to secure the first defendant's costs in the event he is successful in defending the action. On the other hand, there is high likelihood that if the order for security is made, the action will be stultified. There is the fact that the plaintiff suffered very considerable losses while the first defendant was one of its directors. There is also the fact that in making the application the first defendant swore an affidavit which was clearly incorrect. There is also the factor, as I have said, of limited significance, of the delay in making the application.
In the end, I am satisfied that this is not a case where I should order security. The main factor that has led me to that conclusion is the uncontested evidence that at the time the losses were allegedly sustained by the plaintiff, the first defendant was one of its directors. In saying that I am not purporting in any way to determine the strength or otherwise of the plaintiff's case. But an individual who is a director and during whose stewardship substantial losses are incurred, should explain how it was that such losses were incurred. To point to the impecuniosity of the company as being a reason for not offering such an explanation is, in my view, inappropriate. Accordingly, and as a matter of discretion, I would refuse to make the order for security for costs.
I would, however, not rule out a further application being made at a later date. It may be once the first defendant has filed a defence and discovery has been given, circumstances which would allow the question of security to be revisited. Of course, that is a matter for the first defendant to consider at a later date.
The second aspect of the first defendant's application is for discovery prior to the filing of a defence. Such an order is unusual and, in my view, in this case inappropriate. I accept that the pleading now put against the first defendant is complicated and it relates to matters which took place many years ago. But it is for the first defendant to at least offer some defence to the claims put against him. It can then be seen what issues are live between the parties and discovery can be undertaken. It may be that as a consequence of inspection, the first defendant amends his defence. So be it. But in my view there is no warrant for ordering the plaintiff to give full discovery at this stage.
In the circumstances then, I would dismiss the first defendant's application. I will hear the parties as to costs.
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