Minero P/L v Ajam, G.N

[1993] FCA 762

JUDGMENT No. ........ ........ ..I ........ .... 762 93

IN THE FEDERAL COURT OF AUSTRALIA	)
1
NEW SOUTH 'WALES DISTRICT REGISTRY )	NG 3194 of 1992

1

GENERAL DIVISION 1

IN THE MATTER OF MINERO PTY

LIMITED (A.C.N. 050 048 256)

MINERO PTY LIMITED

Applicant

GOOLAM NABBIE AJAM

First Respondent

AJAM PTY LIMITED

Second Respondent

Coram:	Whitlam J
Place:	Sydney
Date:	15 October 1993

RECEIVED

01 NOV 1993

FEDERAL COURT OF

AUSTRALIA

REASONS FOR JUDGMENT PRINCIPAL REGISTRY

(EX TEMPORE)

By notice of motion filed 15 May 1993 the respondents seek an order that the applicant provide security for costs and an order entitling them to tax forthwith costs earlier awarded in their favour.

the applicant.

The motion is supported by aff idavits sworn on 11 May 1993, 3 June 1993 and 4 June 1993 by Joanne Kelly, the respondents'

solicitor. Counsel for the respondents also tendered reports dated 3 June 1993 and 4 June 1993 by Mark Taylor, a chartered

accountant, and the applicant's draft management accounts for March and April 1993. This evidence relates to the past and projected costs of the proceeding and the financial standing of

In opposition to the motion, the applicant read the affidavits of Mr Buxton, Mr Conlon, Mr Hurley and Mr Anastasia and affidavits sworn on 22 October 1992 and 24 May 1993 by David Nott, the applicant's auditor. Counsel for the applicant also tendered a transcript of Mr Nott's evidence before Beaumont J on 14 and 15 December 1992. Most of this material relates to the merits of the applicant's claim. Only the evidence of Mr Nott touched on the financial standing of the applicant.

It is convenient to deal at once with the initial question under s 1335 of the Corporations Law, namely, whether there is reason to believe that the applicant will be unable to pay the costs of the respondents if they are successful in their defence. No one disputes the estimates of MS Kelly, the effect of which is that such costs could easily exceed $100,000.

It requires no detailed examination of the evidence to
conclude that the applicant would be quite unable to pay such an

amount. The 1992 audited accounts of the applicant were so

heavily qualified as to be virtually meaningless. Counsel for	the applicant pointed (somewhat half-heartedly it seemed to me)
to the cash surplus from operations of $80,609 as at April 1993 noted in Appendix I1 to Mr Nott's report dated 2 4 May 1993. However, this is only achieved by an entirely unrealistic adjustment for legal and accounting fees. The true picture is that the applicant is actually incurring an operating loss. Mr Taylor's first report shows quite convincingly that the applicant's cash generating capacity is deteriorating. The
continuing support of its bankers must be critical to the applicant's solvency, as Mr Taylor observes in his second report. The cash position of the applicant is apparently affected by changes in the way in which the applicant conducts its business and by the activities of companies related to its shareholders, about which the applicant offers no explanation. Finally, it cannot be gainsaid that Mr Taylor is obviously correct in his observation that the treatment of shareholders' contributions is crucial to the balance sheet solvency of the applicant. If the contributions are short term loans, there will be a massive deficiency in net assets.
However, my satisfaction about the applicant's inability to pay does not mean that I should approach the exercise of discretion with any predisposition to order security for costs. Counsel for the applicant boldly contends, in effect, that the merits of his client's case are so overwhelming and the conduct of the first respondent in dealing with the applicant during the events out of which its causes of action arise so extraordinary
that I should exercise my discretion against making such an
order. The applicant's case is essentially one of
misappropriation, involving very grave allegations against the first respondent. The applicant's statement of facts, issues and contentions details huge sums of the applicant's funds being applied to pay bookmakers. These payments are confirmed in the affidavits of the bookmakers concerned, Mr Buxton, M r Conlon and Mr Hurley. The applicant's case rests upon other misappropriations too in different categories, butthe bookmakers payments are discreet and extraordinary.
Counsel for the respondents was permitted to read in reply to the applicant's evidence paragraphs 41 to 47 of a witness statement by one Glenda Lee Hudson signed on 4 June 1993. This material touched on certain allegations of misappropriation by the first respondent and on the capitalization of the applicant. However, it did not deal at all with the payments to the bookmakers. At present it is not proposed (as foreshadowed by Beaumont J) that this matter be tried on pleadings and the respondents have, accordingly, filed no defence. I can see the applicant having real difficulties with parts of its case, particularly the claim in respect of the shares which appears to be contradicted by the information furnished by Dr Goh in item
17 of the applicant's 1992 annual return.
This is a very unusual case and is one where at this preliminary stage I am satisfied that the applicant has a very strong case in relation to a large part of its claim. In the
circumstances, I do not propose to order that the applicant
provide security for the costs of the trial.
This leaves the question of an order under 0 62 r 3 (3). As Olney J observed in Thunderdome Racetimina and Scorina Ptv Ltd v. Dorian Industries Ptv Ltd (1992) 36 FCR 297 the rule does not
suggest any particular criteria by which the Court should be guided. I respectfully agree with his Honour's view that discretion should be exercised in favour of a party who
establishes that the demands of justice require that there be a departure from the general practice envisaged by the rule. There is certainly nothing unusual about successful motions to strike
out pleadings. Counsel for the respondents submits that the reason why the applicant should have to pay the interlocutory costs orders now rather than later is that, "whether by design or accident", the applicant is "not going well". Counsel for the applicant contends that his client is likely to finish up with a costs order for the trial against the respondents for a much larger amount.
I think that there is something to be said for both these submissions. The applicant is in a perilous (but not parlous) situation and, as I have said, its case appears to have considerable merits. I do not propose to make an order entitling the respondents to tax their costs forthwith. However, I do not think that that is the end of the matter. The respondents will be entitled to be paid such costs eventually. Meanwhile the applicant should provide security for those costs, which, having
conservative sum of $40,000. I will hear counsel on the form of regard to the evidence of MS Kelly, I fix in the modestly
order and the costs of the motion.

I certify that this and the preceding five pages are a true copy of the Reasons for Judgment herein of the Honourable Mr Justlce A.P. Whitlam.

associate:^

Date:  l8 October 1993

Counsel for the applicant:  G.A. Laughton

instructed by Coleman & Greig

Counsel for the respondent:  G.E. Underwood

instructed by Gadens Ridgeway

Dates of hearing:  4 June 1993 & 15 October 1993