Re: Van Coblyn

[1992] FCA 1089

IN THE FEDERAL COURT OF AUSTRALIA)

NEW SOUTH WALES DISTRICT REGISTRY)	No NG 515 of 1992
GENERAL DIVISION	1

RE:  JOHN VAN COBLYN
Debtor

EX PARTE:	MERCANTILE LIMITED
Creditor

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EX TEMPORE JUDGMENT

EINFELD J SYDNEY 4 NOVEMBER 1992

On or about 29 October 1992 the applicant entered into a deed of arrangement with his creditors pursuant to part X of the Bankruptcy Act and has appointed a trustee under that deed. By the terms of the deed, so far as relevant for present purposes, the applicant is required to convey and assign to the trustee the whole of his divisible property upon trust to deal with it in accordance with the deed. The applicant admits to a very substantial indebtedness to creditors amounting to several million dollars and by the terms of the deed has agreed to pay $105,000 of which not less than $100,000 is to be distributed to creditors by instalments concluding on or before 20 December 1995.

Trade Practices Act is or is likely to be problematic. The	has now made in the general division of the Court under the
respondent moves now for security for costs, relying upon order 28 rule 3(l)(b). This states:

The applicant's statement of claim reveals that the claim he

Where, in any proceeding, it appears to the Court on the application of a respondent -

(b) that an applicant is suing, not for his own benefit, but for the benefit of some other person and there is reason to believe that the applicant will be unable to pay the costs of the respondent if ordered to do so;...

the Court may order the applicant to give such security as the Court thinks fit for the costs of the respondent of and incidental to the proceeding.

The applicant does not seriously deny that he will be unable to pay the costs of the respondent if ordered to do so although he does suggest through counsel that he is conscious of his responsibilities in this regard. Whilst not a lot of hope could be held out that he would be able to pay the costs, nonetheless he says he would try. In the light of his recent financial history, that is demonstrative of an element of unreal optimism.

construction of the deed, the applicant is suing as the rule	The question that arises now is whether on the true
requires, "not for his own benefit but for the benefit of some other person". The respondent says that the applicant is bringing this action for the benefit of his creditors. This requires attention to be given to the only exception to the assignment of the whole of his property under the deed. In
clause 3(b) of the deed it is provided that he "will use his best endeavours to continue the legal proceedings commenced by him against Mercantile Credits Limited in the Federal Court and subject to any direction from his trustee, will in the event of being successful in the action or the proceedings settled, pay to his trustee by way of further contributions 60 per cent of that sum after payment of legal costs and disbursements".
This sum is said by the clause to be in addition to the other payments required by the deed of arrangement. No argument was directed to, and I must confess to entertaining some doubts about, the use of the words in clause 3(b), "subject to any direction from his trustee." This seems to suggest that the trustee has some right to direct the applicant to pay either more or less than the 60 per cent in the event that the applicant is successful.
The law on this provision is not without doubt. In Andrews v Caltex Oil Australia Ptv Limited [l9821 40 ALR 305, Justice
Lockhart said at 308 line 15 that:

I t would be wrong t o c o n s t r u e b e n e f i t m e r e l y i n t h e

s e n s e o f f i n a n c i a l b e n e f i t . More i m p o r t a n t , i t i s

unnecessary i n my o p i n i o n t o a t t r i b u t e t o t h e words

some f i x e d meaning and n e c e s s a r i l y a p p l y i n g to each

and every c a s e o f t h e wide and v a r i e d c a s e s t h a t

come w i t h i n the Courts' j u r i s d i c t i o n . Indeed a n y

such d e f i n i t i o n may be s o general a s t o be

m e a n i n g l e s s .

His Honour went on at line 21:

The r u l e i s addressed to the f i x i n g o f s e c u r i t y " i n

any proceeding". In my view, the meaning o f

" b e n e f i t " i s t o be gleaned from the charac ter o f the

p a r t i c u l a r case before the Court. I t derives i t s

complexion	from	the	s p e c i f i c s t a t u t e	involved	and
the	circumstances	o f	the	case .	I t s meaning i s

ambulatory.

In Uwton v TVW Enterprises Ptv Limited [l9851 57 ALR 361

Justice Toohey, when a member of this Court, held that:

Where a c r e d i t o r s tands t o b e n e f i t from proceedings

brought by an app l i can t , the subrule i s n o t

app l i cab le .

Referring to some observations of Justice Lockhart at another point in Andrews, Justice Toohey said at 363 that attention must be given to both of the provisions of the rule in that the proceedings must be brought not only for the benefit of the creditors but it must not be brought for the benefit of the applicant.

In Hiahtower Ptv Limited v Island Motel Ptv Limited, unreported 12 April 1989, Justice Von Doussa said that an

unsecured creditors in circumstances where the applicant's	applicant who was supposedly suing for the benefit of
secured creditor was conducting the applicant's business as a mortgagee in possession, is not suing for the benefit of others within the meaning of the rule. It was also said that an applicant who is a guarantor of the obligations of another applicant will be found to be suing in his own interests outside the rule where the guarantor will benefit by a judgment in favour of the guarantee providing funds to reduce the guarantee's debt.
This case is different again. Clearly the applicant will retain a reasonably high proportion of any verdict obtained so that it cannot be said that he is bringing the action for the entire benefit of others and not at all for his own benefit. The way in which clause 3(b) is worded, apart from the provision that any payment is subject to any direction from the trustee, is that the creditors will obtain 60 per cent of any verdict he obtains, less the payment of legal costs and disbursements, that is, 60% of what is left from the verdict after those costs and disbursements have been paid.
Yet the remaining 40 per cent appears to be 40 per cent clear of costs. That is, one reading of the clause may be that the creditors bear the costs and disbursements which in the presumed circumstances would be the solicitor and client or unrecovered component of the successful applicant's costs. Another reading of it would suggest that the sum from which
the 60-40 split is to be taken is the amount of the verdict less any costs and disbursements not recovered from the
unsuccessful party. Accepting that latter interpretation as probably the better view, the proceedings provide the applicant with the direct interest or incentive of his own enrichment.
On the other hand, as Justice Lockhart said, it is not only proper to consider financial matters. The applicant obviously had to try to persuade his creditors that they should accept the deed of arrangement and that he should not go into bankruptcy. Considering that, apart from the outstanding legal action, the creditors are only to obtain of the order of $100,000 over the next three years towards debts of the order of $7,000,000, it ought to be assumed that the additional impetus or encouragement of a share of the verdict moneys from the present case was an inducement which significantly helped to bring about the creditors' agreement to the deed.
So that when Justice Lockhart said that the rule must be construed within the framework of the particular statute under consideration, and that "benefit" is to mean things other than and in addition to direct financial benefit, a conclusion emerges within the context of the Bankruptcy Act that the applicant gains, by his undertaking to pursue this litigation, the benefit of being able to avoid bankruptcy through the deed of arrangement. But there are qualifying hurdles before that
conclusion resolves this case.
It could be argued that it is a real or significant benefit other than a financial one for the applicant to remain out of bankruptcy. However, this need not be decided here. Such a conclusion would contrast with the English position as stated in Llovd v Hathern Station Brick CO [l9011 85 LT 158, where an insolvent plaintiff executed a deed in which he assigned all his estate to a trustee for the benefit of his creditors. This included the whole of his interest in a chose in action, although the interest was expressed not to vest in the trustee until judgment was obtained. Because the plaintiff had no beneficial interest in the litigation, he was treated as a nominal plaintiff.
While it can be stated as a general rule that a person with no beneficial interest in a proceeding, who sues for the benefit of others, will be treated as a nominal plaintiff, there are exceptions. These exceptions correspond, or ought to correspond, to situations where the mischief which the rule addresses is not applicable or is less acute. The principal mischief is the possibility that people avoid conducting litigation themselves, and have it conducted by others, in order to avoid the risk of having to satisfy an adverse costs order in the litigation. The injustice lies in exposing the respondent to the risk of not being able to recoup its costs if it wins.
benefit of others, he has a duty to conduct litigation where On the other hand, while a trustee in bankruptcy sues for the
that is requisite: see Cowell v Tavlor [l8851 31 Ch D 34 at
38-9. The conduct of litigation here cannot be seen as an
unfair tactical manoeuvre. With respect to the Australian position on trustees, see Riot Nominees Ptv Ltd v Suzuki Australia Ptv Ltd [l9811 34 ALR 653 and Justice Toohey in UDt0n at 383. Another exception to the general rule is where
the litigant is a next friend of a person under a disability, such as a child or a mentally incompetent person: see Jones v Evans [l8861 31 SJ 11; Didisheim v London and Westminster Ban@ [l9001 2 Ch 15 at 44.
The position is different where the litigant does have an interest in the proceeding. Certainly, if others also have a substantial interest in the litigation, there is an injustice to the respondent, if those other persons can avoid liability for a costs order. On the other hand, to bar insolvent persons from suing where others also benefit has the potential to work an injustice about the applicants, since they could be barred from pursuing litigation in which they have a significant interest if the other beneficiaries refuse to provide security.
In weighing these competing interests, a relevant consideration must be how significant the applicant's interest is. If it is insignificant, the balance must or should lie in the respondent's favour. While I respectfully agree with
to only financial benefits, it seems that the term should not Justice Lockhart that the word "benefit" should not be limited
include benefits which are insignificant. There is no doubt that this applicant has a significant interest in the proceeding.
The second problem for the conclusion required by order 28 is the strange result that the action be pursued so that the applicant can carry out his obligation to the creditors to pay them 60 per cent of the net verdict from this action while the creditors are not at risk in the event that the action is lost. Qn the face of it that would be a quite unjust result. The creditors have absolutely nothing to lose by putting themselves in the hands of the applicant. Nothing is at risk. There would be no incentive to settle the action and there would be every incentive of pursuing it even under a regime of harassment and delay. That is quite contrary to the public interest and surely cannot be the intent of the circumstances here under discussion.
Having regard to the judgments to which I have made reference,
I think that on its proper construction the rule requires a
conclusion that the action benefit persons other than the debtor, and that the debtor gain no or no significant benefit from it. Having said that, it seems to me that the rule requires some review because the decisions are not entirely consistent as to the circumstances that make it applicable. It is one rule posing three or perhaps four criteria. The
purpose of the action is to benefit or substantially benefit first is that the debtor is suing. The second is that the
someone other than the debtor. The third is that the debtor should not gain any or any significant self benefit. The fourth is that the debtor would otherwise be unable to pay the costs of the respondent if so ordered.

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AB the rule is framed, each one of those criteria has to be found in favour of the respondent before security for costs can be ordered and I do not think that this respondent is able to discharge that quite onerous responsibility. For the reasons I have given, it produces what seems to be an unjust result, but I am bound by the rule a@ only have a discretion in relation to the ordering of security in the event that all the rule's criteria are established. If there were a broader discretion, I would have ordered security but it does seem that the applicant gains not only a financial benefit, but what might be described as an entrepreneurial or perhaps commercial benefit from the action, because the offering to the creditors of the continuation of the action was quite likely to have been an inducement to them to allow the applicant to remain free of a sequestration order.

Particularly because the Bankruptcy Act, especially nowadays, makes every effort to enable a person to remain out of bankruptcy and to become free of bankruptcy at the earliest time and in the easiest way, that must be a benefit within the	context of the Bankruptcy Act and the framework of the	interpretation given by Justice Lockhart in Andrews. This is
a large change from the bankruptcy laws of the last century which have pertained in Australia until quite recently, but it does seem to me that the enabling criteria of the rule, which are quite strict and quite narrow, mean that in this particular case the applicant should succeed on the motion for security. The application will therefore be dismissed.

RECORDED : NOT TRANSCRIBED

The respondent will pay the applicant's costs of the application for security.

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