Phoenix Court Pty Ltd v Melbourne Central Pty Ltd

[1997] FCA 1578

FEDERAL COURT OF AUSTRALIA

COSTS - application by respondent against joint natural and corporate applicants for security of costs - both applicants in perilous financial position

CORPORATIONS - application under s 1335 Corporations Law for costs order - Court’s discretion - factors to be taken into consideration in exercising discretion and determining quantum of costs - effect of applicants’ delay in commencing proceedings - consideration of expenditure on legal costs by parties to date and future expenses - effect of current cross‑claim on quantum of costs - whether claim was bona fide - effect of natural joint applicant on quantum of costs - whether public interest to be considered.

Corporations Law: s 1335

Sir Lindsay Parkinson and Co v Triplan Limited [1973] QB 609, considered
Ariss and Another v Express Interiors Pty Limited (in Liquidation) [1996] 2 VR 507, considered and followed
Pearson v Naydler [1977] 3 All ER 531, considered
James v Australia and New Zealand Banking Group Limited (1985) 9 FCR 442 considered and distinguished

PHOENIX COURT PTY LIMITED & ANOR v MELBOURNE CENTRAL PTY LIMITED
VG 234 of 1996

MELBOURNE
GOLDBERG J
25 JUNE 1997

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 234 of 1996

BETWEEN:

PHOENIX COURT PTY LIMITED
(ACN 007 410 899)
First Applicant

DAVID ANTHONY ROGALSKY
Second Applicant

AND:

MELBOURNE CENTRAL PTY LIMITED
(ACN 006 470 560)
Respondent

JUDGE:	GOLDBERG J
DATE:	25 JUNE 1997
PLACE:	MELBOURNE

EXTEMPORE REASONS FOR JUDGMENT

HIS HONOUR:

The respondent, by motion, filed on 27 May 1997 seeks security for costs in the sum of $58,222 up to trial and an order for the proceeding to be stayed if such security is not provided. It relies upon the provisions of O 28 r3 of the Federal Court Rules, s 56 of the Federal Court of Australia Act, and s 1335 of the Corporations Law. The proceeding which was commenced by application and statement of claim filed on 24 April 1996 seeks relief in relation to leases of two premises at the Melbourne Central complex owned by the respondent.

It is alleged, and not in dispute between the parties, that there were two agreements for lease entered into in August 1991 which brought about two leases, one on 7 July 1992 for 10 years in relation to shop 102 of the complex, the other dated the same date for six years in respect of shops 306 and 307 on level three of the complex.  The business to be carried on, and in fact carried on until March 1996, in the premises was the provision of food and drinks for the purposes of retail sale.

The first applicant, of which the second applicant is now the sole director, alleges that it was induced to enter into the agreements and these leases by representations and warranties which it now says were untrue and broken. In general terms it relies on causes of action under s 52 of the Trade Practices Act 1974 (Cth) and in negligence. On 18 October 1996 the respondent filed a cross‑claim in which it made demands under guarantees given to it in respect of the obligations of the first applicant under the leases for $41,260.94 and $54,622.36. It alleges that the leases were terminated on 13 March 1996. Demands were made under the guarantees on 19 June 1996 and those demands have not been satisfied.

Over the past twelve months or so the proceeding has progressed with there being a number of requests for further and better particulars of pleadings and responses to those requests.  Today I gave leave to the applicants to deliver an amended statement of claim to enable them to attend to criticisms made of the pleading by Mr Walker, who appeared on behalf of the respondent. 

In an affidavit sworn by the respondent's solicitor, Mr Wilson, on 23 May 1997, the respondent says in substance that:

“It has come to the respondent's attention that an application for security of costs was granted in another proceeding in this Court by North J on 20 March 1997.  That was proceeding 418 in which the current applicants were applicants and Highpoint Shopping Centre (Leasing) Pty Limited were respondents.

In his affidavit Mr Wilson produces evidence, which is not contested, which shows that the paid up capital of the first applicant is $2.  Its sole director is the second applicant and it has two shareholders, being the second applicant and his sister.  The affidavit deposes to the fact that the first applicant has insufficient assets to satisfy any costs order which might be made against it in this proceeding.  It exhibits the order made by North J on 20 March 1997 and asserts that a letter seeking security on 8 May 1997 from the applicant’s solicitors was not responded to.

The applicants do not contest the primary facts relied on by the respondent, but the second applicant has filed an affidavit in which he sets out the circumstances in which the claims made by the applicants have come about.  He says that he proposes to continue the proceeding on his own behalf, no matter what happens, to obtain relief in relation to the termination of any liability he has under the guarantees he has signed.  He gives an explanation as to why the applicants did not commence the proceedings until April 1996, which is substantially that he attempted to preserve what he calls a diplomatic liaison with the respondent.

He also says, in paragraph 11 of his affidavit, that:

“If this honourable court was to make an order that Phoenix provide security for the respondent's costs I verily believe that it would be unable to pursue its case which has been legitimately instituted.  Phoenix is unable to provide any funds for such a purpose from its own resources, nor do I have the capacity to put the company in a position to continue the litigation if security is ordered.  Other than myself the only other person who stands behind Phoenix who will potentially benefit from this litigation is my sister, and I verily believe that she also does not have the capacity to put Phoenix in the position to continue with the proceedings security as ordered.

He then sets out his current financial position which demonstrates that substantially his expenses are equal to or exceed his outgoings.  He says that the first applicant has no assets apart from some specialised plant and equipment valued at $13,600 and that the first applicant no longer trades.  He says that the security which was provided in the proceeding in respect of which North J made an order was borrowed from friends and that since this proceeding commenced the applicants have incurred approximately $35,000 in legal costs. 

Although the motion is based on O 28 r3, s 56 of the Federal Court of Australia Act and s 1335 of the Corporations Law, I think it is far to say that the issue substantially falls to be determined by reference to the principles which are applicable to s 1335 of the Corporations Law which provides:

“Where a corporation is plaintiff in any action or other legal proceeding, the Court having jurisdiction in the matter may if it appear 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/her or its defence require sufficient security to be given for those costs and stay all proceedings until the security is given.”

There is a threshold question as to whether there is credible testimony that there is reason to believe the corporation will be unable to pay the costs of the defendant.  It does not appear to be an issue in this case that there is such credible evidence and that the threshold question is answered in the affirmative.

It is clear from established principle that the matter does not rest there and that the threshold is overcome the discretion is as large.  In Sir Lindsay Parkinson and Co v Triplan Limited [1973] QB 609 Lawton LJ said at 629 when commenting on an earlier English equivalent of s 1335:

“The Court's discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a straight-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.”

I also refer to Barton v Minister for Foreign Affairs (1984) 2 FCR 463. The relevant principles were recently discussed and analysed in considerable detail by Phillips JA with whom Ormiston and Charles JJA agreed; in the Victorian Court of Appeal in Ariss and Another v Express Interiors Pty Limited (in Liquidation) [1996] 2 VR 507. After analysing a number of the decisions Phillips JA said at 514:

“Although, of course, like any discretion conferred upon a court it must be exercised judicially, the discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.

That observation arose in the context of the debate whether there should be a predisposition in favour of the grant of security in circumstances where the threshold question is answered in the affirmative.  In the circumstances of this case it is unnecessary to reactivate that debate.  Suffice it to say that if the credible evidence exists I agree with his Honour that the fact that the corporation will be unable to pay its costs is a factor that cannot be ignored.  In my view it should be taken into account with all the other factors that have to be taken into account.

There are a number of discretionary considerations that have been referred to in a number of the cases to which I will refer shortly.  I note by way of example the discussion by Cooper J in Gentry Brothers Pty Limited v Wilson Brown and Associates Pty Limited (1997) 8 ACSR 405.

The respondent relies on a number of factors in support of the submission that the Court should exercise its discretion in favour of ordering security.  First, Mr Walker submits that the applicants delayed almost five years in their complaint about the conduct of the respondent, and the action was only brought after the leases were determined in March 1996.  Secondly, it is submitted, that the sole director’s financial circumstances are such that he is unable to stand behind the corporate applicant in respect of the costs.  It is then submitted that the claim and cross‑claim are separate.  The claim is a claim for damages for pre-contractual representations which go back to the time when trading started in 1991, whereas the cross‑claim is a claim for liquidated sums under the two leases.

It is then said that the position of there being an individual co‑applicant should not affect the Court exercising its discretion in respect of the relief sought by the motion, and it is submitted that the second applicant, on a proper analysis of the pleadings, does not have any claim for relief himself.

The applicants rely on a number of discretionary considerations which one can identify from decided cases which they submit militate against an order for security for costs being made.  Mr Taranto, who appears for the applicant, submits that the respondent itself has delayed in bringing the application for security for costs over twelve months after the proceeding commenced on 24 April 1996.

Next, it is said by the applicants that their claim is bona fide and their prospects of success are reasonable.  It is submitted that the cross‑claim will proceed in any event and that the joint natural applicant has a claim that will proceed in any event.  If an order for security for costs is made it is said the litigation will be stultified.  It is submitted that there is a public interest component in the proceeding continuing having regard to the cause of action. 

It was also put in written submissions, although not elaborated on in oral submissions, that the parlous financial position of the first applicant was caused by the allegations in the statement of claim.  In substance it said the very transaction which is sought to be impugned has been the financial downfall of the corporate applicant.  It is not clear from the material that that is the true position and I note that there are two other court proceedings in existence involving the applicants, raising issues affecting its financial position.  On the material before me I am not able to determine whether or not that is a factor which justifies the exercise of the Court’s discretion consideration or not.

Expert evidence was placed before me by two experienced cost consultants, Ms Harris, on behalf of the respondent, and Mr Westacott on behalf of the applicants.  Ms Harris calculated that to the end of the trial costs would be incurred of some $91,754 and extrapolating from that figure between now and towards the period of the start of the final preparation for the trial it seems the costs are something under $40,000.

Mr Westacott challenges a number of the items and calculations upon which Ms Harris relies.  It is not necessary to try and resolve that dispute at this stage, remembering always that security for costs is no more than what it says - it is not an indemnity and all the Court can do in these circumstances is make a best estimate.

I turn to the submission that the respondent has delayed in bringing the application for security for over twelve months after the proceedings started.  The applicants invite me to infer that the respondent was well aware of the parlous financial position of the first applicant well before it made the application for security for costs.  However, on the material before me there is no clear evidence that the respondent was so aware of that impecuniosity. 

Mr Wilson refers to the fact that what was communicated to the applicants by letter on 8 May 1997 was that it had come to the respondent’s attention that the order had been made by North J.  The applicants submit that there are some connections between employees of the respondent and employees of Highpoint, from which I should infer that there was knowledge of that impecuniosity well before the application was filed.  But on the material before me I am not satisfied that that is the position.

It is clear from the material that prior to the proceeding being commenced the first applicant was not paying its lease fees.  But the fact of a company not paying its debts does not ipso facto mean impecuniosity.  I am not satisfied in this case that such delay as there has been is a factor which vitiates or counts against the grant of security for costs on the basis that otherwise it should be granted.  However, I do think that the fact of the point of time at which the application is made is relevant in relation to the issue of quantum of costs.

In this case the applicants have spent about $35,000 on costs and, in my view, that expenditure having been incurred without any suggestion of there being an application for security of costs being brought, is a matter appropriate to take into account in determining, if any security is to be ordered, what the quantum of that security may be.  In my view in the exercise of the wide discretion I have, I am entitled to take into account what has been spent to date and what the future expenses might be. 

I should point out that the respondent has sought to explain the progress of the action over the period of the last twelve or fourteen months by reference to issues that have been raised on the pleadings which it says are not of its making.  It has been seeking to confine the proceeding to precise allegations.  I accept that that is not an unreasonable interpretation of what has happened but I still think the point of time of which the application is brought is relevant to quantum.

The issue then arises as to whether the claim is bona fide and the prospects of the applicants are reasonable.  What the respondent says is that there was a five year delay in bringing the claim and that the claim was only brought in April 1996 after the leases were terminated on 13 March 1996.  As I noted earlier, the applicants explain that on the basis of seeking to maintain a diplomatic liaison with the landlord, which in the course of argument I suggested to counsel might be expressed colloquially as “keeping in sweet with the landlord.” 

The delay in bringing the proceedings can be explained on a number of bases.  The respondent says, however, when one looks at the representations and warranties that are relied on, and the criticism of them has been such that I was disposed to order that there be an amended statement of claim filed, that I should look sceptically upon the causes of action raised.  It was submitted by Mr Walker that a number of the representations were mere puffs.  It is true that there are problems that need to be resolved with the pleadings but they are capable of being tightened up.  As to the extent to which they can be tightened up and ultimately the relief that might be available is not a matter on which I can, or should, form any view.

Suffice it to say that one can discern specific representations and, having given the applicants a chance to re-plead those matters, it seems to me that it is not appropriate at this stage that I form, nor can I form, any view that the claim is not bona fide or that the prospects of success are not reasonable.  In any event I would not be disposed to determine an issue as to the bona fides of a claim without having had the opportunity for the parties advancing the claims to be cross‑examined, having regard to what the content of the concept of bona fides is.  The respondent also points to the fact that there are claims for trading losses dating from September 1991, and that some of those are statute barred.  That may be the claims are made down to 1996. 

I therefore proceed on the basis that the claims made are bona fide and that the prospects of the applicants are such that I cannot, and should not, use those prospects against the applicant.  It is not appropriate, in my view, for me to form a view as to whether the prospects are reasonable or not.  That would involve an assessment of the proceeding which is not appropriate in my view at this stage.  Established authority requires me to go no further than to determine whether there is any basis for determining that the claim is not bona fide, and at this stage I am not prepared to do so.

The applicants then say that the cross‑claim will proceed and that all the matters raised in the cross‑claim are part of the defence.  However, there are some issues raised in the principal application which are wider than the issues which constitute part of the defence.  The respondent submits that there is no set‑off pleaded in the cross‑claim and that it is only a claim for damages.  I do not need to form any view about that issue; suffice it to say that there is not necessarily a coincidence of all issues between application and cross‑claim.  The fact that the cross‑claim will proceed may also be an issue to be taken into account in determining the quantum.

One of the matters which occupied some time in argument in submissions of counsel was the fact that there was a joint natural applicant.  The applicants relied on two decisions in support of the proposition that where there is a joint natural applicant against who no order for security for costs can be made, such as in these circumstances, that is a factor which should be taken into account on the basis that if the joint natural applicant proceeds with the application, as the second applicant said he intends to do, there is no basis for awarding security for costs.

The matter was considered in Pearson v Naydler [1977] 3 All ER 531 where, in relation to the equivalent English provision, the Vice Chancellor held that the fact that the co‑plaintiff was a natural person who would not be ordered to give security for costs did not deprive the Court of the power to order the corporate applicant to give security for costs. But again it was a matter for discretion.

Sir Robert McGarry V‑C, pointed out, as is pointed out in many of the cases, at 535 that:

“For a natural person the basic rule is that he will not be ordered to give security for costs however poor he is.  To that basic rule there are certain exceptions not relevant here.”

The applicants also relied upon the reasons of Toohey J, then sitting as a judge of this Court, in James v Australia and New Zealand Banking Group Limited (1985) 9 FCR 442, where his Honour refused to order security for costs, it being submitted that a significant reason for doing so was the fact that there was a natural co‑plaintiff.

I am not confident that the reasoning of his Honour goes so far.  At page 445 he pointed out that “All the applicants other than Yallambee Pty Ltd were natural persons” and he then referred to the passage which I have cited from Pearson v Naydler (supra). His Honour thought there was no reason to disturb the usual principle and it seems to me that what motivated his Honour to dismiss the application was the fact that the application was brought some 14 days before the date set for hearing. His Honour said at 446:

“In my view the compelling reason why an order for security for costs should not be made against Yallambee Pty Ltd, a reason which is equally applicable to the other applicants if for any reason the well-established principle to which I have referred is inappropriate, is that the hearing is to begin on 4 November”.

The hearing date was fixed in August of that year, and his Honour then analysed why the delay in bringing the application had occurred.  He noted the principles that an application for security for costs should be made promptly, referring to Smail v Burton [1975] VR 776, and his Honour concluded that:

“The matter is now so close to a hearing, so much time and cost had been expended that it would work a grave injustice to the applicants if they were ordered to provide security for costs when it is apparent that they could not comply with such an order.”

Toohey J dismissed the application.  It seems to me that the facts before me are distinguishable from James v Australia and New Zealand National Bank (supra).  Certainly the proceeding is not close to trial.  The applicants submit, in effect, that fourteen months have gone by, $35,000 of costs have been incurred, and that there would be a similar injustice if security was awarded.  The response to that submission is that the proceeding is not yet ready for trial; it has not been set down.  An amended pleading will soon be delivered, and if the case was to be set down for hearing with the present state of the list and the docket system I would not be able to provide a date for hearing before February 1998, some seven months hence.

Another point that is relevant in relation to the joint natural applicant is that on one view some of the issues raised by him are different, although in a sense dependent upon the issues raised in relation to the corporate applicant.  Indeed, Mr Walker challenges the cause of action of the second applicant, but that is a matter yet to be determined.

In all the circumstances it seems to me that the fact that there is a joint natural applicant is not a matter, I should use against the exercise of a discretion, but it is a matter that should be taken into account in determining quantum of costs having regard to the fact that there would be costs incurred in relation to that applicant in any event. 

I turn to the submission that the litigation will be stultified if an order for security for costs is made.  It is not clear on the material before me that that consequence will follow.  As I pointed out earlier in these reasons, the second applicant deposed to the fact that if an order for security for costs was made that the corporate applicant provide security:

“I verily believe that it would be unable to pursue its case which has been legitimately instituted.” 

And he then says that the first applicant is unable to provide any funds for itself.  He does not have the capacity and his sister says the same.  It is relevant to note that in the proceedings brought against Highpoint, similar submissions were made.  In the course of his judgment North J said:

“The first applicant argued that it could not pay security for costs and an order requiring it to do so would mean that it could not pursue the litigation, and that such result was unjust in all the circumstances”.

North J then went on to note that the onus is on the corporate applicant to show that the shareholders or any other persons with an interest in the company cannot provide security for costs.  His Honour was satisfied that the parties in that case could not provide security in the sum sought, $25,000, and that that sum might stultify the litigation.  But he was not satisfied that a lesser sum would stultify the litigation.

It is not clear to me that there may not be other resources available to the applicants, having regard to what occurred in the Highpoint case where the second applicant said the money was borrowed.  He has been somewhat guarded in what he said and it is not clear to me that a similar situation might not apply here, depending of course on the amount of sum to be ordered.

I turn to the issue of public interest.  It was submitted by the applicants relying upon principles found in such cases as Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union (1993) 12 ACSR 1 and Jodast Pty Limited v A & J Blattner Pty Limited (1991) 104 ALR 248:

“Where the cause of action is one that involves a public interest element a court should take that into account in determining whether or not the order for security for costs having regard to the desire of the public interest be maintained and vindicated. It is true the proceedings are brought under section 52 of the Trade Practices Act”.

Essentially the dispute though is one between private individuals arising out of a contractual and property transaction. Save for reliance on s 52 of the Trade Practices Act 1974 (Cth) there is no public element involved in the proceedings, and in my view, there is no sufficient or discernible public interest in the circumstances of this case that I should take into account in determining whether or not to exercise the discretion committed to me under s 1335 of the Corporations Law.

Mr Taranto sought to distinguish the proceeding before North J by saying that the motion for security for costs in that proceeding had been filed in August 1996 in relation to a proceeding which had been commenced that year, so his Honour was not concerned about any delay by the respondent.

However, if there has been any delay by the respondent, it is by no means clear that there has been such a significant delay on the evidence since it became aware of the impecuniosity of the corporate applicant that that should be a vitiating factor.  It is a matter, however, I regard as relevant, as I said earlier, on the question of quantum.

Mr Taranto also sought to distinguish North J’s decision by reference to the argument that there was a natural person who was a co‑applicant.  North J took that matter into account and said it would be unreasonable to require the first applicant to provide security for costs in an amount representing the entire cost of defending the proceedings, and he regarded a significant reduction in any amount of security to be ordered as appropriate to take account of this factor.  That is an appropriate matter for me to take into account in these proceedings. 

At the end of the day I have to undertake a balancing exercise.  Notwithstanding the fact that my discretion is at large, there are a number of matters which are relevant to take into account and I have identified those that have been the subject of submission before me and the arguments based upon such matters.  On the one hand the respondent is entitled to say that if there is an impecunious applicant, the respondent should be secured in respect of its costs.  On the other hand an applicant should not be put in a position where it is, in effect, forced to abandon the proceedings by an unreasonable order for security for costs.

I have taken into account the costs referred to by the costs consultants.  Mr Walker accepts that it is not appropriate to make any order in respect of costs which have been incurred to date, nor should I, if I am disposed to order security for costs, in those costs include costs of the trial of the proceeding.  If any order for security for costs is to be made it should be made up to the period shortly before the commencement of the trial, that is up to a period of some three weeks prior to the hearing.

In all the circumstances I think an order for security for costs should be made but not in the terms sought by the respondent, nor by reference to the quantum identified by Ms Harris.  As I have noted, Mr Westacott made a number of observations about some of those costs.  Those observations may be valid; they may not be valid.  But the significance of them, is that I should recognise that security for costs is not an indemnity and that I should take into account the fact that there is a dispute as to what the proper and appropriate quantum should be.  It can only be an estimate because one does not know, until the work is carried out, what is the nature and extent of the work which will be carried out although reasonable estimates can be opined.

I also think it relevant to take into account, in determining the quantum of costs to be ordered as security, the fact that substantial costs have been incurred to date in the circumstances to which I have referred and the fact that there is a co-applicant who says the proceeding will continue.  Notwithstanding the criticism made of the pleading of the second applicant by Mr Walker I think there is an opportunity that can be taken to tighten up that pleading, although I express no view of the validity or otherwise of the cause of action maintained.

I also think it is necessary to take into account, although there is not a complete coincidence between cross‑claim and application, that there are a number of matters that would be dealt with in the cross‑claim that would substantially overlap matters brought in relation to the application.  In all those circumstances, for the period to which I have referred, there should be an order that the first applicant provide as security for the costs of the respondent the sum of $4000 and there will be a consequential order that in default of payment of that sum the application by the first applicant be stayed until further order.

The order will be that the first applicant provide security in the sum of $4000 in a form acceptable to the Victoria District Registry by 4.00pm on 16 July 1997.  I will also order in default of the provision of such security that the application of the first applicant be stayed until further order.  I will also give the applicants leave to deliver an amended statement of claim by 4.00pm on 16 July 1997 on the assumption that the security is paid.  A defence to the amended statement of claim and any amended cross‑claim by 4.00pm on 30 July 1997 and any reply and defence to any amended cross‑claim by 6 August 1997. 

I order that the applicants pay to the respondent its costs of the motion of 27 May 1997 which include the costs of the hearing this day.  I order that the costs of the hearing on 2 June 1997, which was specified as a directions hearing, be reserved.  Having regard to the orders I have made in relation to the pleadings today, I propose to reserve the costs of all parties in respect of any costs thrown away by any amendment to the statement of claim.

I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg

Associate:

Dated:            6 April 1998

Counsel for the Applicants:	Mr P Cawthorn and Mr J Nixon
Solicitor for the Applicants:	Taylor Splatt & Partners
Counsel for the Respondent:	Mr T Walker
Solicitor for the Respondent:	Freehill Hollingdale & Page
Date of Hearing:	25 June 1997
Date of Judgment:	25 June 1997