Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd

[1982] FCA 194

Re: NEWTONS TRAVEL SERVICES PTY. LTD.; GEORGE TRINGAS; STAVROULA TRINGAS
And: ANSETT TRANSPORT INDUSTRIES (OPERATIONS) PTY. LTD. and ANSETT TRANSPORT
INDUSTRIES LIMITED (1982) 64 FLR 205
VG No. 99 of 1982
Security for Costs - Practice

COURT

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Smithers J.(1)

CATCHWORDS

Security for costs - proceedings by company unable to meet the costs of same if unsuccessful - circumstances to be taken into account - whether improper use of company assets a relevant consideration - whether willingness and ability of shareholders to provide funds are relevant considerations.

Trade Practices Act (1974) s.52

Companies (Victoria) Code s.533

Practice - Costs - Security for costs - Company - Proceedings under Trade Practices Act 1974 - Impecunious applicant - Disposal of assets to principal shareholder - Conduct of applicant - Discretion of court - Relevant circumstances - Companies (Victoria) Code - Trade Practices Act 1974 (Cth), s. 52.

HEADNOTE

Held: (1) The court has a discretion to require that an applicant company give sufficient security for the costs of the respondents if successful in their defence. The discretion will be exercised according to the circumstances of the particular case including matters such as: (a) whether the company's claim is bona fide and not a sham; (b) whether the company has reasonably good prospects of success; (c) whether the application is being used oppressively so as to try to frustrate a genuine claim, and (d) whether the company's want of means was brought about by the conduct of the respondents.

Ilat Nominees Pty. Ltd. v. Murragong Nominees Pty. Ltd. (1980) 48 FLR 385; Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd. (1973) QB 609, applied.

(2) The circumstance that the impecunious state of the applicant company was due to some material extent to the conduct of the applicant company itself, is a circumstance fit and proper to be taken into account on the question as to whether security for costs should be ordered.

(3) It is within the competence of the court to make an order for security even though it is obvious that the ability of the applicant company to comply with it will depend on the willingness of the shareholders, creditors and the like to provide the necessary funds.

National Bank of New Zealand Ltd. v. Donald Export Trading Ltd. (1980) 1 NZLR 97; Pacific Acceptance Corporation Ltd. v. Forsyth (No. 2) (1967) 2 NSWR 402, applied.

HEARING

Melbourne, 1982, September 2-8, 20. #DATE 20:9:1982

MOTION.

Application to provide security for costs.

The facts appear in the judgment.

W. Ormiston Q.C., P. Hayes and R. Robson, for the applicants on the motion.

N. Young, for the respondents on the motion.

Cur. adv. vult.

Solicitors for the applicants on the motion: Arthur Robinson & Co.

Solicitors for the respondents on the motion: Webb Stagg Tonkin & Co.

H. W. FRASER

ORDER

1. That so far as an order for security for costs is sought against the second and third named applicants, the motion be dismissed.

2. That the first-named applicant provide security for the costs of the first-named respondent in an amount to be decided hereafter in respect of costs incurred or likely to be incurred up to the point where all interlocutory steps in the application have been completed.

3. That liberty be reserved to any party to apply generally upon seven days notice to the parties.

4. That all questions of costs be reserved. Order:

1. That the first-named applicant provide security for the costs of the first-named respondent in an amount to be decided hereafter in respect of costs incurred or likely to be incurred up to the point where, all interlocutory steps in the application have been completed.
2. That so far as an order for security for costs is sought against the second and third-named applicants, the motion be dismissed.
3. Liberty reserved to any party to apply upon seven days' notice to the other parties.
4. All questions of costs be reserved.

JUDGE1

This is an application on motion brought by the respondents in which, in reliance upon s.533 of the Companies (Victoria) Code, an order is sought that the applicants provide security for costs of their application for relief against the respondents in respect of alleged contraventions of provisions of s.52 of the Trade Practices Act 1974. The Companies (Victoria) Code operates in Victoria in accordance with the Companies (Application of Laws) Act 1981. The relevant section is as follows:-

"533 (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

(2) . . . "

The application in this Court is for damages and other relief in respect of losses arising out of a transaction entered into in November 1981 between Newtons Travel Services Pty. Ltd. (NTS) and Ansett Transport Industries (Operations) Pty. Ltd. (ATO) whereby NTS purchased from ATO for some $300,000 the good will of three business theretofore carried on by ATO.

The claim for relief in the motion is based on the allegation that the applicant company (NTS) is unable to pay the costs of the proceedings brought by it against the respondents should they be successful in their defence to such proceeding. The respondents applicants in this motion Ansett Transport Industries Limited (ATI) and (ATO) seek an order that the application be dismissed unless security for costs of the application be provided within five days. But in the latter stages of this proceeding ATI and ATO abandoned their applications for relief against the second and third applicants on the ground that in the circumstances no basis could be found for an order against individuals.

The principles applicable to the current problem have been dealt with in various authorities the following references from which provide guidance in the circumstances of this case.

It is submitted on behalf of NTS that the applicants' claim is a bona fide one, that there are good prospects that the applicants will succeed in obtaining relief by damages, that the damages recoverable will be substantial, that on the basis that the applicants' claim is well founded that the wrongful conduct of the respondents will be seen to have contributed significantly to the applicants' impecunious condition. And the general submission made is that on this basis the application for security of costs should be dismissed. Tradestock Pty. Ltd. v. T.N.T. (Management) Pty. Ltd. & Ors (No.2) 32 F.L.R. p.420 is relied upon. Each of the items of fact relied upon were challenged by ATO and ATI and in addition they submitted that the issues in this proceeding could not be decided solely by reference to those items because there were other circumstances relevant and legitimate for consideration of this proceeding. In particular it was said:-

(a) The conduct of NTS in continuing to trade after it knew that its trading was being conducted at a loss was unreasonable and improper;

(b) to continue to trade in such circumstances meant that the debt of NTS to ATO was greatly increased and increased in the sense that ATO money was used in the conduct of the business, such money being in truth money held by NTS on trust for ATO;

(c) that at a time when NTS by its directors and officers were well aware that subject to whatever rights it might have against ATO it was unable to pay its debts and that its financial condition was deteriorating daily, it saw fit to pay to Tringas Nominees Pty. Ltd. (Nominees) sums of money totalling some $70,000, or thereabouts;

(d) that it appeared that Nominees was the main shareholder in NTS and that it was solvent and able to provide money for security for costs if security for costs were ordered to be given;

(e) that this was not a case in which if an order for security for costs were made NTS would be excluded from the pursuit of its litigation against operations;

(f) that there was reason to think that certain of the income of NTS had not been accounted for;

(g) that although an action under the Trade Practices Act had certain features which involved public policy that consideration should not be decisive in this proceeding.

It is useful to have regard to the comment of Megarry V.C. in Pearson v. Naydler (1977) 1 W.L.R. 899 at p.906, 907, (1977) 3 A11 E.R. 513 at p.536 and 537 where he said:-

"It seems plain enough that the inability of the plaintiff company to pay the defendants' costs is a matter which not only opens the jurisdiction but also provides a substantial factor in the decision whether to exercise it. It is inherent in the whole concept of the section that the court is to have power to order the company to do what it is likely to find difficult in doing, namely, to provide security for the costs which ex hypothesi it is likely to be unable to pay. At the same time, the court must not allow the section to be used as an instrument of oppression, as by shutting out a small company from making a genuine claim against a large company. For this reason, Mars-Jones J. was not prepared in the Parkinson case to make an order for security for costs for more than the $1,500 that the master had ordered: see (1973) QB 609, 617. As against that, the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I fully accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section."

On the same subject Lord Denning M.R. and Lawton L.J. in Parkinson & Co. v. Triplan Ltd. (1973) Q.B. 609 affirmed the view of Mars-Jones J. who had acted on the view that under s.447, of the Companies Act (1948), the English counterpart of s.533 of the Companies (Victoria) Code, the Court had a wide discretion even though there was credible evidence that the plaintiff would be unable to pay the defendant's costs if the defendant were successful, and, that the discretion was wide enough to enable the Court to take account of all relevant circumstances. Lord Denning added "There is no burden, one way or the other". Lawton J. added that the "discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a strait-jacket by considerations of burden of proof. It is a discretion which the Court will exercise having regard to all the circumstances of the case". In Ilat Nominees Pty. Ltd. v. Murragong Nominees Pty. Ltd. (1980) 48 F.L.R. p.385 I said that it seemed to me from what Lord Denning said in Parkinson's Case (supra) that the Court has a discretion that it will exercise according to the circumstances of the particular case including matters such as whether the company's claim is bona fide and not a sham and whether the company has reasonably good prospects of success and whether the application is being used oppressively so as to try to frustrate a genuine claim, and whether the company's want of means was brought about by the conduct of the defendant. It is to be noted also that in National Bank of New Zealand Ltd. v. Donald Export Trading Ltd. (1980) 1 NZLR 97 it was held by the Court of Appeal that it is within the competence of the Court to make an order for security even though it is obvious that the ability of the company to comply with it will depend on the willingness of shareholders, creditors and the like to provide the necessary funds. The comments of Moffitt J. in Pacific Acceptance Corporation Limited v. Forsythe (No. 2) (1967) 2 N.S.W.R. 402 at p.407 were adopted.

None of the authorities to which I was referred relate to a case in which the impecunious state of a plaintiff company could be said to be due to some material extent to the conduct of the company itself. It seems to me however, that in this case, that circumstance if established, is a circumstance fit and proper to be taken into account on the questions as to whether the security for costs should be ordered. And in this case that circumstance if established has particular point because the payments made by the company which contributed materially to its present unfinancial condition were made to the company's only substantial shareholder, namely Nominees. It is Nominees which stands to gain should NTS succeed in its action against ATO and it is Nominees which has gained, by payments said to be preferential payments, or at least payments made in circumstances which as a matter of justice as between the NTS and ATO go directly to the justice of the present application.

One of the three businesses purchased by NTS was carried on in Melbourne, one in Perth and one in Sydney. The businesses were carried on at 59 Swanston Street, Melbourne, 37 St. George's Terrace, Perth and 147 King Street, Sydney. The class of business conducted in each business was the sale of tickets for what were known as Ansett Pioneer Products, comprising various tourist coach travel packages, tours, charters, accommodation and other services marketed by the Ansett-Pioneer Division of ATO., namely bus and other domestic and international travel tickets for bus tours and air travel.

At the time of the making of the agreement what is called the Ansett-Pioneer division of ATO carried on business in Melbourne, not only at 59 Swanston Street, but also at the terminal for Ansett Pioneer buses, namely, 465 Swanston Street, Melbourne. Tickets were sold there for Ansett Pioneer bus tours and tickets also for domestic and overseas airline journeys in the same way as was done by ordinary travel agencies. It also carried on a similar business at its Perth bus terminal, namely 26 St. George's Terrace. It does not appear whether there was a similar business at the Sydney Terminal.

In addition to the above, ATO by its Ansett Airlines Division conducted certain travel agencies in Melbourne and Sydney. And in addition to these, hundreds of independent travel agencies carried on similar businesses throughout Australia. In about the middle of 1981 ATO disposed of businesses similar to those the subject of the sale to NTS which it had theretofore carried on in Brisbane, Adelaide, Darwin, Surfers Paradise and Mt. Isa. ATO so disposed of those businesses and those at 59 Swanston Street Melbourne, 37 St. George's Terrace Perth and 147 King Street Sydney, pursuant to a policy decision made in its Ansett-Pioneer division that the division would cease to be involved in retail sales of what were called Ansett-Pioneer products and the business of retail travel agencies.

In the course of business in Melbourne it was common for intending travellers to telephone Ansett-Pioneer headquarters to enquire as to the steps to be taken to acquire tickets. Such persons were regularly referred to 59 Swanston Street if that were a convenient address for the enquirer, or possibly the Ansett-Pioneer terminal at 465 Swanston Street or some convenient district travel agency. It is clear that much of the business at 59 Swanston Street originated through such referrals.

On the material before me there is no reason to doubt that in 1981 Mr. Thornton, the then General Manager of the Ansett-Pioneer Division of ATO explained to the intending purchasers the policy and intention of his division and stated that ATO would not open retail or other outlets to sell Ansett-Pioneer products or any other retail travel agencies. I do not draw an inference that there was any undertaking that the business at the terminal would be discontinued. Indeed it would have been surprising if that were suggested.

However, on the material before me it is reasonably clear that it was contemplated and represented that the telephone referrals to 59 Swanston Street would continue according to existing practice. Arrangements were made for NTS to pay for telephone lines for this purpose. No direct evidence of the extent to which such referrals were to be made was given but I would infer that at least Ansett-Pioneer represented that they would continue at the existing level. And I infer that similar representations were made with respect to the Perth business and, I would think, also the Sydney business. It is quite clear that ATO represented that the total annual sales of the three businesses as then conducted amounted to about $6,800,000 and that the gross retail sales of Ansett-Pioneer products which were generated by these businesses as then conducted amounted to $2,784,232. It is clear that in the middle of 1981 Mr. Thornton in a draft proposal in writing showed annual total retail sales of Ansett-Pioneer Products amounted to $2,784,232 and as the evidence stands it appears that he informed the representatives of NTS that the gross sales of other products amounted to $3.4 - $4 million and that the profit of the businesses were in the order of $100,000. In June 1981 a document had been delivered by Mr. Madden in the course of relevant negotiations showing the financial performance of the three businesses in respect of a recent "past period" probably July 1980 to June 1981 of 52 weeks. That document revealed:-
As to the Perth Business

Sales: $2,089,303 Profit: 31,286 As to the Sydney Business
Sales: $1,095,492 Loss: 23,158 As to the Melbourne Business
Domestic Sales: $1,913,554 Profit: 46,727 International Sales: $1,352,609 Profit: 31,418

The sales but not the revenue of the Sydney business should be increased by $385,595 which was shown but not included in the total. Thus according to that 52 weeks record total sales were $6,836,553, total profit was $85,673. The rate of revenue (commission) on sales was 7.6%.

The weekly average of sales was for Perth $40,179, for Melbourne $628,197, and for Sydney $21,067. According to NTS figures in these regions were not achieved. There was, it is claimed, an almost immediate drop of considerable magnitude which persisted until July 1982 when NTS purported to rescind the agreement to purchase the business. And there is reason to believe this because the decline was the subject of letters by Mr. Papas, NTS' executive officer, on 31 December 1981; to Mr. Lamb, the Perth Manager, on 5 January 1982; to Mr. Thornton, on 30 December 1981; and to Mr. Madden, the financial controller, on 28 January 1982 drawing the attention of these persons to the apparent decline from the contemplated returns of between $25,000 and $77,000 for various weeks. It is said that the decline was explained verbally by Mr. Thornton or some other officer but it is yet to appear what the explanation was.

The variation between the weekly sales required to support total yearly sales of $6,800,000 and actual sales continued during the nine months of NTS' conduct of the business, the short fall being overall of the order of 40%. It was said for NTS that the shortfall in Perth commenced after two weeks and continued during subsequent weeks while the Perth business was still in the management of Ansett-Pioneer staff and continued thereafter, and that in Sydney it commenced immediately after the purchase by NTS and continued until July 1982, the business in Sydney being operated throughout by the same staff of Ansett-Pioneer who previously carried it on and actually under the management of Ansett-Pioneer. It is said that the inference to be drawn is that some factor adverse to the success of the businesses obtruded immediately after NTS purchased the businesses and that it was not incompetent management by NTS. The suggestion on behalf of NTS is that the Ansett organization ceased to refer customers to NTS' businesses or otherwise so conducted its sales operations that it wrongfully reduced the sales of the businesses.

As to this contention it was said for ATO, that there can be no confidence in the accuracy of NTS' statement of its takings, there is a minimum of evidence that telephone referrals were not faithfully continued, and that a falling off in gross sales was consistent with a mere falling off in customer demand.

It is my impression that the takings as stated by NTS may well be correct and that some development of a managerial quality on the part of Ansett-Pioneer probably did contribute to the sudden short falls. It is relevant that the officers of Ansett-Pioneer who conducted the sale of the business to NTS operated under the impression that the Ansett-Pioneer Division and Ansett Airlines Division were separate legal entities and that Ansett-Pioneer had no responsibility for what Ansett Airlines might do and that Ansett Airlines was not bound by any undertakings Ansett Pioneer might give. It is to be noted also that some months after the purchase of the three businesses by NTS, Ansett Pioneer's business at 465 Swanston Street was "transferred" to Ansett Airlines. Thus Ansett Airlines may have had no realization of any responsibility to continue referrals to 59 Swanston Street. As against this it is pointed out that pursuant to the arrangement contained in the agreement of purchase of the businesses the Ansett organization did during 1982 frequently advertise Ansett Pioneer tours with information and tickets obtainable not only from 465 Swanston Street, but also from 59 Swanston Street.

There is, however, one other aspect of the circumstances in which the sale to NTS was negotiated which I think is relevant to this application. That arises in that ATO has filed an affidavit by one, Mr. Juris Ozols, a solicitor, stating that he was involved in that capacity in the relevant negotiations and at a meeting on 7 September 1981 at which were present Mr. Papas and Mr. Tringas, then representing a company called Parthenon Travel Service Pty. Ltd. and Mr. Thornton, Mr. Madden and himself representing Ansett-Pioneer. Mr. Ozols states in his affidavit that Mr. Papas asked for a guarantee that "the current level" of sales of the three shops would be maintained if Parthenon bought them and that that was rejected by one or more of Mr. Thornton, Mr. Madden or himself, and "furthermore, the representatives of Parthenon were told that Ansett-Pioneer could give no such guarantees, that Ansett-Pioneer had been making losses in its running of the said shops, and that the purchaser would be expected to appraise the worth of the shops according to its own assessment of their future potential.".

That there was any suggestion at any time that the Ansett-Pioneer businesses were running at a loss is firmly denied by Mr. Tringas and Mr. Papas. It is not supported by Mr. Madden in his affidavit or evidence or by any other evidence. Mr. Thornton does not support it. In fact although the evidence is that it was Mr. Thornton who stated to Mr. Tringas and Mr. Papas that the businesses were making profits of approximately $100,000 per year or thereabouts, ATO has not filed any affidavit by Mr. Thornton. It is clear that there are no practical obstacles in his doing so. In addition, in the face of Mr. Madden's statement of takings and costs and profits for 1980/81 an announcement in September 1981 that the three businesses were actually making losses would have been a dramatic one. Mr. Madden could hardly have failed to notice it and Mr. Papas and Mr. Tringas could hardly have failed to seek further information about it. Yet Mr. Madden does not mention the matter and Mr. Thornton does not speak at all. The result is that although on the evidence as it at present exists I would not accept that Mr. Papas and Mr. Tringas were told that the businesses were making losses, there is evidence called by ATO itself that that was the situation. Mr. Papas said that he did not know that the businesses were making losses until he read it in Mr. Ozols' affidavit. It is reasonable to make the same inference as to Mr. Tringas' knowledge on the subject. Thus the statement of claim contains no allegation that ATO falsely represented the businesses to have been trading profitably. But obviously in the circumstances an application to amend could hardly be resisted and counsel for NTS indicated that such leave would be applied for and an amendment made.

I think for the purposes of this application this is a circumstance that should be treated as relevant. Mr. Papas and Mr. Tringas stated in evidence that if they had known that the businesses were making losses they would not have entered into the purchase. Having regard to the deliberate provision by ATO itself of evidence that the three businesses were running at a loss at the relevant time I cannot disbelieve that that was the position. On this aspect of the matter therefore I think I should act on the view that NTS has good prospects, indeed a strong prospect of establishing that ATO's conduct was misleading and deceptive and in contravention of s.52 of the Trade Practices Act 1974 and that NTS is entitled to appropriate relief in respect thereof.

Apart, altogether from questions of the effect of delay on the right of NTS to rescind the agreement to purchase the businesses it would seem that the value of a business making unspecified losses compared with one making profits approaching $100,000 would be greatly diminished. The damages would therefore be expected to be substantial. Subject to the amendment of the statement of claim there would seem to be a strong likelihood that NTS is entitled to substantial relief.

Mr. Ormiston said that even in that event s.533 of the Companies (Victoria) Code must be accorded its full influence. In that respect he contends that even had the sales of the three businesses been maintained at the rate of $6.8 million per year NTS would still be unable to meet the costs of its action against the respondents. He points to the fact that on its own statements its weekly costs were of the order of double those shown in Mr. Madden's 1980/81 statement. And of course Mr. Ormiston contended strongly that the conduct of NTS in making substantial payments to Nominees at a time when it knew that it was unable to discharge its liability to ATO in respect of moneys which were essentially moneys held in trust for ATO, and at a time when it was continuing to incur similar additional liabilities to ATO, both denuded NTS of funds and operated to prefer Nominees to the detriment of ATO and the other creditors of NTS.

It appears from the evidence of Mr. Tringas that from early 1982 he knew that the three businesses taken together were making a loss, and, that although until March or April NTS was paying its debts, that was achieved by using money really belonging to ATO or an entity known as IATA. It appears that IATA, the International Airline Traffic Authority, co-ordinates the collection and distribution of moneys paid to it by its accredited travel agencies for travel arranged by them for overseas travellers. Yet, payments were made to Nominees on 30 June of $20,000, on 27 July of $40,000; and 30 August of $13,242 in all $73,342. These payments were made by way of repayment to Nominees of money advanced by it to NTS for various purposes. It has to be remembered that Nominees was not only a creditor but was also, save for one share held by Mr. Tringas, the only shareholder of NTS. The situation is therefore that the entity having the only real interest in the fate of proceedings in respect of which a stay is sought is Nominees. It appears also that Nominees is a company structured to benefit ultimately Mr. Tringas, his wife and family. It appears also that the structure of Nominees is sufficiently flexible to enable it to use its funds in business ventures, at least to lend its funds to NTS for its business ventures. It was Nominees which invested $25,000 in NTS to start and continue its businesses and lent it $155,000 to assist in the purchase of the three businesses. Mr. Tringas was unable to state precisely the financial position of Nominees but he said in cross-examination that he regarded it as a "solvent and good going organization" which "could produce some money to put up for costs for this action". This was not elaborated or qualified in cross-examination. The reason for the payment to Nominees was stated to be that it currently needed the money. But the critical facts are that the payments were made to the only shareholder, that they were made out of moneys mostly acquired as payments for travel tickets issued by NTS and honoured by ATO and IATA. Furthermore, the payments were made when NTS was seriously in debt to ATO and IATA and were made at a time when there was a real prospect that NTS would have to cease trading. I draw the inference that in all probability Nominees has the capacity to provide security for the costs of NTS' application for relief under the Trade Practices Act.

In all the circumstances, therefore and particularly in the light of what was said in National Bank v. Donald Export Trading Ltd. (supra) and Pacific Acceptance Corporation Ltd. v. Forsyth (supra), and taking the view that as the evidence stands an order for security is unlikely to exclude the applicant from pursuing its claims for relief, I consider that the justice of the case requires that an appropriate order be made with respect to the provision by NTS of security for costs of the application.

It should be stated that the "findings" on the basis of which I have acted on this motion are made on the basis of the evidence as it now stands and are subject to reversal or qualification should it be thought on further evidence that there should be such a reversal or qualification.

The Order of the Court is:

1. That so far as an order for security for costs is sought against the second and third named applicants, the motion be dismissed.

2. That the first-named applicant provide security for the costs of the first-named respondent in an amount to be decided hereafter in respect of costs incurred or likely to be incurred up to the point where all interlocutory steps in the application have been completed.

3. That liverty be reserved to any party to apply generally upon seven days notice to the other parties.

4. That all questions of costs be reserved.