Minero P/L v Ajam, G.N.
[1994] FCA 682
•20 Jun 1994
l 682 4'9
JUDGMENT No. .,..,.. ....... J , ...... ,..
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| ) | ) | No NG 3194 of 1992 |
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| GENERAL DIVISION | ) |
BETWEEN: MINER0 PTY LIMITED
Applicant
m: NABBIE A J W First Respondent AJAM PTY LIMITED Second Respondent
HILL J
SYDNEY 23 SEP 1994 20 JUNE 1994
E X O R E REASONS FOR JUD- -
The respondents moved the Court for an order that the applicant provide security for costs in these proceedings which commenced by appllcatlon in September 1992. This 1s the second such motion. The first was filed 12 May 1993 and was heard by Whitlam J on 4 June 1993 and 15 October 1993, judgment being given ex tempore on 15 October 1993.
| trial of the ultlmate merits of the case. |
Some of the financial evidence that was before hls Honour has been read before me, but some of the evidence that was before his Honour which went to the merits of the applicant's case has not been read on the basis that it was inappropriate to conduct what, in essence, would be a mini-
As I understand it, the substance of the substantive application is that Mr Ajam, the first respondent, misappropriated a large sum of money claimed to be in the order of $828,000.
As there are no pleadings in the present matter my understanding of the issues between the parties comes largely from what has been said at the bar table and having regard to statements of witnesses that have been filed and also statements of facts, issues and contentions which have been prepared. In outlining these I do not wish it to be thought that counsel is in any way confined at the trial by the way in which the issues have been stated to me.
It is in respect of the alleged misappropriation by Mr Ajam that the applicant, Minero Pty Limited, sues. The respondents counter by conceding that some amounts (between $340,000 as a lowest limit and $446,000 as an upper limit)
| were outlaid by Minero Pty Limited in ways which ultimately | benefited Mr A]am, but say that thls arose as a result of | |
| agreements reached in conversations and other matters which are dealt with in the witness statements. Thus the parties are at issue in part as to the amount outlaid by the company ultimately for the advantage of Mr Ajam and the question of whether those outlays were made by agreement between the parties. | ||
| In the above comments I have oversimplified the issues between the parties. Indeed it is contemplated that the trial will take two weeks of hearing time, it being scheduled to commence in approximately four weeks from today. The parties both now agree that the issues between them are substantial, that the applicant's claim is a bona fide one, that it is defended and that the respondents have, on the face of it, also a bona fide defence depending upon the evidence that is ultimately led at the trial. | ||
| When the matter came before Whitlam J, his Honour refused to grant security for costs, although he did make an order that the applicant provide a security in the sum of | ||
| $40,000 as security for costs incurred by the respondents in | ||
| certain interlocutory applications. That security has in the meantime been provided from funds made available by the directors. | ||
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| his Honour was satisfied that the applicant had a very strong case in relation to at least a large part of its claim. His Honour's judgment deals somewhat briefly with the case which his Honour saw as being strong. | ||
| Since that judgment all of the affidavits and/or witness statements to be relied upon by the parties have been filed and served. Indeed I was advised from the bar table that the respondents' affidavits and statements were all filed by the end of 1993. There may have been some evidence flled in reply after that time. | ||
| Some six months thereafter elapsed before the preeent motion which was filed on 3 June 1994, just over six weeks before the substantive hearing was due to commence. I should say that it is my understanding that there are various other interlocutory matters still in dlspute between the parties, which is a somewhat lamentable situation, glven that the hearing is not far away. | ||
| It is the case for Mlnero Pty Limited that the present application has, in all the circumstances, been made at too late a time. Anticipating this submission I asked | ||
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| Whitlam J's judgment and today, whlch account for the fact that no application had been made since his Honour's judgment nor any attempt to seek leave to appeal it. | ||
| In essence it seems that the matters relied upon by the respondent can be summarised as follows: |
(1) It is said there has been a substantial deterioration in the financial position of the company. In support of this, reports of accountants and a report from the company were read to me.
(2) In the meantime accounts had become available for the full year ended 30 June 1993 for the six months to 31 December 1993 and for the ten months to 30
April 1994, all of which are now before me. I shall come back to those in a moment.
The next matter to which reference is made is an increase of capital by the company by way of a rights issue to shareholders to take up redeemable preference shares. That issue, made round February of 1994, ultimately raised $80,000. However, it is said the issue did not increase the cash assets of the company by that amount because all that happened was that shareholder's debt was satisfied by an increase in
| to be a re-financing by the National Australia Bank by way of | shareholder capital. Next, reference is made to what appears |
| a term facillty which, at least in part, replaced a prevlous term facility from Westpac. | |
| Evidence before me indicates that the National Australia Bank secured this facility by mortgage over the company's land as well as security, presumably by way of charge, over the entlre assets and undertaking of Minero Pty Limited. | |
| Reference is also made to the material which suggests that the company is proposing to seek overseas finance by way of re-financing, but thls does not seem to have happened yet. Finally, reference is made to a statement on behalf of the directors of the applicant that they wlsh to be relieved from their securlty and the attempts so to do, which appear to have been successful by one of them, a Mr de Luca, who has subsequently reslgned as a director to be relieved from his guarantee to the National Australia Bank. |
A perusal of the accounting material reveals a
number of things. Flrst, there is substantial agreement between the accounting experts whose affidavits have been read, that the company would not be in a position at the moment to fund, by way of security, $60,000 if such fundlng
| were required. There is perhaps some difference of emphasis | between the accountants as to the solvency of the company at | |
| the present time but it seems fairly clear that the company has a liquldlty problem. Second, it must be said that the profit and loss account shows a loss; a considerable loss over the period covered by the three accounts to which I have referred, particularly if regard is to be had to accounting and legal fees which have obviously been lncurred for the purposes of the present case. | ||
| By way of example, in the ten months ended 30 April 1994, $71,126.81 had been incurred by way of accounting fees for expert evidence in the trial and $124,998.21 for legal fees . Material I have seen indicates that both the | ||
| accountants and the solicitors have, at this stage at least, agreed that their accounts may be deferred. If these items treated by the company as extraordinary items are taken out of account, there is still a loss shown by the company in the profit and loss account and in the ten months ended 30 April 1994 the loss suffered was $10,593.27. | ||
| It may be noted that that loss arose after taking into account interest expenses of approximately $19,000 for the ten month period. Although counsel for the respondent relied upon argument that the balance sheet showed a deterioration, it is of course clear that thls is so only because of the cost of the present case. If one excluded the cost of the present case there has been an improvement in the | ||
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| lost by virtue of the trading loss that has occurred since Whitlam J delivered his judgment. | ||
| The conclusions relied upon by counsel for the respondent of Mr Brook, a partner in the insolvency division of Thompson Douglass Butterell, chartered accountants, are stated as follows: |
"Minero's recent r e su l t s indicate that i t i s un l ike ly t o be able t o generate any s ign i f i can t funds i n the short term, from i t s operations. Over the l a s t 18 months the Company has generated substantial losses and a
negative cashflow. This ignores
extraordinary income re f lec ted i n the 30 June 1993 accounts which i s considered t o be questionable and d i d not give r i s e t o any cashflow.
The Company's financial position has deteriorated between 30 June 1993 and 31
December 1993 . Based upon the existence o f a material current asset deficiency Minero may be insolvent a s a t 31 December 1993 i n
accordance with Section 95A o f the Corporations Law.
The directors o f Minero considered it necessary t o issue preference shares i n the Company t o raise funds and improve i t s financial position.
A preference share issued i n early 1994
should have improved the Company's
financial position. However, the majority
o f the capital ralsed d i d not resu l t i n the in jec t ion o f new funds, but rather the conversion o f shareholder debt t o equity. The application o f those funds t o remove bank debt and shareholder loans may not
have alleviated the working capital de f ic iency . "
The parties, whi ls t i n disagreement about almost
everything, are not i n disagreement a t l eas t t h a t , pr ima f ac i e , a corporation may be ordered t o pay amounts by way o f security i n circumstances a t l eas t where it i s shown tha t
| there may | be | an | i n a b i l i t y on | the part | o f t he corporate |
| applicant t o meet | a | costs order | i n the event t h a t t he |
| respondent i s success ful . | The argument before me proceeded on |
the basis, which is clearly correct, that the Court has a discretion whether or not to order costs. The matters to be taken into account in making a cost order are of course not closed, but a large number of cases now have recorded matters which are appropriately taken into account.
Among those matters, in addition to any matters that may be particularly relevant in havlng regard to the circumstances of a particular case, are the applicant's chances of success, the question of whether the inability of an appllcant to meet a cost order is brought about by the actions of the respondent complained of ln the proceedings and the public interest in matters where the public interest is raised.
In the present case the appllcant points to the
second of these matters submitting, having regard to what was
said in b t v Access Ltd v Westpac Bankina Cor~oration (1989)
| ATPR 40-972, that the very action'complained of which is the | subject matter of the proceedings, namely, the | |
| misappropriation alleged to have occurred, has brought about the financial difficulty with which the applicant is now faced. | ||
| This demonstrates itself in a number of ways. First, had the misappropriation alleged not occurred, it is said that the company's assets would have been, on the figures submitted by the respondents, at a mlnimum $340,000 greater and a maximum $446,000 greater. This would, no doubt, have allowed the company to proceed without overdraft facilities and no doubt could have eliminated in a ten month period some, if not all, of the $19,000 of interest charges. Second, the real difficulty that the company has by way of cash flow or otherwise which contributes to such losses it has incurred, has been largely brought about by the costs of the litigation itself which have eroded the asset base of the applicant. | ||
| The first matter referred to, namely, the strength of the applicant's case, is of course not one that I can adjudicate upon here. A real factor to be taken into account, it seems to me as well, is the timing of the present application and the delay which has occurred since the last and unsuccessful application before Whitlam J. When I look at the various matters said to be new, the reallty of the matter is they amount to little more than saying that, in the | ||
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| Indeed, one would have thought this probably to be expected having regard to the nature of the litigation engaged upon. If anything, some attempt has been made at least to put creditors in a better position by substituting equity for directors' debt, but this improvement has not contributed greatly to the financial stability of the company. | ||
| It is of course true that cases can be found where security for costs will be ordered shortly before a trial is to commence. Each case will depend upon its own circumstances. However, in the present case, it seems to me that given the time lapse and the fact that very little has changed in the period, coupled with a case where there is a serious allegation of misappropriation whlch raises a real issue to be tried, and where an order for security might well preclude the applicant from bringing a case before the Court, in circumstances where its financial difficulties, at least in part, are attributable to the acts of the respondents alleged to be misappropriations, the present seems to me to be a case where it is inappropriate to make an order at this late stage for security for costs and I would accordingly dismiss the application by way of motion. | ||
| I order the applicants to the motion, the respondents to the proceedings, to pay the costs of the | ||
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| I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of his Honour Mr Justice Hill. | ||
| Associate: |
a
| Date | : |
ZZ SP+c~& 1774
| Counsel and Solicitors | GE Underwood instructed by |
| for Applicant: | Gadens Ridgeway |
| Counsel and Solicitors | GA Laughton instructed by |
| for Respondents: | Coleman & Greig |
| Date of Hearing: | 20 June 1994 |
| Date Judgment Delivered: | 20 June 1994 |
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