Rondor Investments P/L v Victoria Station Travel Goods and Handbags P/L and Ors.

[1993] FCA 200

IN THE FEDERAL COURT OF AUSTRALIA	)
VICTORIA DISTRICT REGISTRY	1
INDUSTRIAL DIVISION	) VG 409 of 1992
B E T W E E N :

RONDOR INVESTMENTS PTY LTD

Applicant
. .

- and -

VICTORIA STATION TRAVEL GOODS & HANDBAGS PTY LTD, PAUL NATHANIEL RAITER, and MICHAEL GABRIEL RAITER,

CORBIN SHEPHERD PTY LTD and GREGORY CORBIN

Respondents

- and -

CORBIN SHEPHERD PTY LTD and GREGORY CORBIN

Cross-Claimant

- and -

VICTORIA STATION TRAVEL GOODS & HANDBAGS PTY LTD. PAUL
NATHANIEL RAITER and MICHAEL GABRIEL RAITER

Cross-Respondents

Olney J
Sydney (heard in Melbourne)

24 March 1993

MINUTE OF ORDERS

the fourth and fifth respondents be stayed;

THE COURT ORDERS:

1.    That the applicant provide security for the costs of the fourth and fifth respondents in the sum of $20,000 such security to be in the form of cash paid into Court or a bank guarantee approved by the District Registrar;

2.    That unless and until the applicant provides the security for costs referred to in order 1, all proceedings against

1. That the applicant pay the costs of the fourth and fifth respondents of the application for security for costs.

NOTE:	Settlement and entry of orders is dealt with in	.
Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA	)
VICTORIA DISTRICT REGISTRY	)
INDUSTRIAL DIVISION	) VG 409 of 1992
B E T W E E N :

RONDOR INVESTMENTS PTY LTD

Applicant

- and -

VICTORIA STATION TRAVEL GOODS & HANDBAGS PTY LTD, PAUL NATHANIEL RAITER. and MICHAEL GABRIEL RAITER.

CORBIN SHEPHERD PTY LTD and GREGORY CORBIN

Respondents

- and -

CORBIN SHEPHERD PTY LTD and GREGORY CORBIN

Cross-Claimant

- and -

VICTORIA STATION TRAVEL GOODS & HANDBAGS PTY LTD. PAUL
NATHANIEL RAITER and MICHAEL GABRIEL RAITER

Cross-Respondents

Olney J

Sydney (heard in Melbourne)

24 March 1993

INTRODUCTION REASONS FOR JUDGMENT

This is an application by the fourth and fifth respondents for an order first, that the applicant provide security in the sum of $27,800 for the costs incurred and to be incurred by them and second, that proceedings be stayed pending compliance with such order.

Although the notice of motion seeks to have all proceedings stayed pending compliance with any order for security that the Court may make, it would seem that if such an order were made, the stay should apply only in so far as the applicant seeks relief against the fourth and fifth respondents.

THE PLEADINGS
The applicant claims copyright in certain artistic works being
drawings, designs and a logo said to have been created by
members of the applicant's staff in the course of their
employment in connection with a shop at Chadstone. The
applicant says that it granted a licence to the first, second
and third respondents to make use of the artistic works for
the Chadstone shop pursuant to an agreement dated 12 December
1989 (the agreement). The applicant complains that the first,
second and/or third respondents have without its licence and
in breach of the agreement reproduced and/or adapted the
artistic works or a substantial part thereof and/or authorised
the reproduction and/or adaptation of them or a substantial

part thereof in connection with shops opened by the first

reason thereof it is said that the first, and/or second and/or	respondent at Northland, Doncaster and Melbourne, and by
third respondents have infringed the applicant's copyright in the artistic works.
The fourth and/or fifth respondents are also said to have reproduced and/or adapted the artistic works or a substantial part thereof without the licence of the applicant, they having, so it is said, prepared plans which were used for the design of the first respondent's shops at Doncaster and Melbourne.
In these proceedings the applicant claims declaratory and injunctive relief and damages and other consequential relief for breach of copyright and also pursuant to sections 52 and
53 of the T r a d e P r a c t i c e s A c t .
The first, second and third respondents have pleaded in their defence, inter alia, a denial of the applicant's claimed copyright and a denial of any infringement thereof and of any
contravention of the T r a d e P r a c t i c e s A c t .
The fourth and fifth respondents have pleaded similar denials and have also cross-claimed against the first, second and third respondents claiming an indemnity or contribution.
THE APPLICATION FOR SECURITY By affidavit sworn on 9 February 1993 Joseph Katz (Katz), the
fourth and fifth respondents' solicitor, deposed that on 12
November 1992 he instigated a search of the records of the Australian Securities Commission (the ASC) in relation to the applicant and on 13 November 1992 he ascertained from that search that the applicant has a paid up capital of $2 and that all of its assets are subject to a charge in favour of National Australia Bank Limited securing an unspecified liability to the bank. A computer produced extract from the ASC database which Katz obtained on 13 November 1992 discloses that the applicant was incorporated in Victoria on 16 January 1990. The applicant adopted the name Rondor Investments Pty Ltd with effect from 15 February 1990. It is an exempt proprietary company. Since 17 January 1990 the directors of the applicant have been Dora Hechtman and Aaron Hechtman both of 323 Glen Eira Road, Caulfield, and from the same date Dora Hechtman has been the secretary. Dora Hechtman and Aaron Hechtman each hold one share and are the only shareholders. On 3 December 1992 Katz wrote to the applicant's solicitors expressing concern as to the financial stability of the applicant and its ability to meet any order for costs in the event that the applicant's claim was unsuccessful and costs were awarded against it. Katz referred to the fact that his search had revealed that the applicant had a paid up capital of only $2 and that its assets and undertaking were charged in favour of the National Australia Bank Limited. Katz's letter continued:

In the particular c~rcumstances unless you can satisfy us as to

the financial viability of the Applicant Company and/or unless suitable security can be made available our instructions are to make application to the Court for securLty of costs m the region of $50,000.00. Incidentally if you are concerned as to our provisional assessment as to the amount required by way of security we are quite prepared to join with you in instructing the Law Institute Costing Service to provide an estimate of costs, on a given scenario agreed upon between US, at the joint expense of the Applicants and our clients.

Unless we receive your full advlces by 5.00 p.m. on Tuesday 8 December 1992 an Application for security of costs will be made

to the Court w~thout further notice.

The applicant's solicitors replied by letter dated 4 December 1992. It is unnecessary to refer specifically to the contents of the reply except to say it was an extraordinary response to a perfectly normal request. It is not what was contained in the reply that is significant, but rather what was omitted. No attempt was made to allay the concerns expressed in Katz's letter nor was any information provided concerning the applicant.

Katz wrote again on 8 December 1992 and indicated that he would obtain as assessment of costs from the Law Institute Costing Service. Such an assessment was obtained and is referred to hereafter. Katz deposed that he was experienced in commercial litigation and that there are real issues to be tried between the parties. He estimated that the trial would last 5 days and that in his opinion the assessment by the Law Institute Costing Service was a conservatively fair and reasonable estimate of the party/party costs that might be incurred by the fourth and fifth respondents in the proceedings. Katz concluded his affidavit by asserting that

there was reason to believe that the applicant will not be in	a position to satisfy any adverse order for costs which may be
made against it.
The application for security was also supported by an affidavit of Keith William Crilly, a legal costs consultant, who estimated that the fourth and fifth respondents' party/party costs in defending the proceedings would be approximately $27,869. In his affidavit Crilly particularised the items of cost giving rise to his estimate. Reference will be made to the particulars later.
The notice of motion for security for costs was returnable on 26 February 1993. No affidavit material was filed on behalf of the applicant in advance of the return date but at the commencement of the hearing counsel for the applicant tendered by leave an affidavit of Effie Kavadas, a solicitor in the employ of the applicant's solicitors, sworn 25 February 1993 in which she deposed to having on 23 February 1993 written to the solicitors acting for the fourth and fifth respondents in these terms:

We refer to your clrents' application seeking security for costs against the Applicant.

We are instructed that Mr. & Mrs. Hechtman, directors of our clrent company are prepared to offer personal guarantees in respect to any costs ordered against the Applicant.

In her affidavit MS Kavadas said that at the time of swearing her affidavit she had not received a response to her letter

but at the hearing it was conceded that on 24 February 1993

the solicitors acting for the fourth and fifth respondents had

forwarded by fax the following reply:

We refer to your communication of 23 February.

In order that our clients can consider your proposal could you forward, by return, detarled particulars as to the financial status of Mr. and Mrs. Hechtman, which may assist in our quallfylng the offer of personal guarantees.

At the commencement of the hearing counsel for the fourth and fifth respondents tendered by leave an affidavit sworn by Dennis Liner on 26 February 1993. Liner deposed to being a solicitor acting for a firm of architects which had obtained a judgment in the County Court of Victoria against Aaron Hechtman for the sum of $50,000 and costs. Liner said that to the best of his information the judgment remained unsatisfied and he exhibited to his affidavit a copy of a bankruptcy notice issued out of the Federal Court on 10 November 1992 relating to the judgment. He said that he had been informed and believed that the bankruptcy notice had been served on Hechtman on 23 January 1993 and had not been complied with. He had been instructed by the judgment creditor to proceed with a creditor's petition which had been sworn on 17 February

1993 and which would shortly be presented to the Federal

Court.

During the course of argument some comments were made from the bench suggesting that the state of the evidence before the Court was unsatisfactory, and following the luncheon

adjournment counsel for the applicant sought and was granted,
leave to tender a further affidavit which had been sworn by MS

Kavadas during the adjournment. The substance of the affidavit is as follows:

1.     I am a Sol~citor in the sole and permanent employ of Barker Gosling and have the care and conduct of this proceeding on behalf of the Applicant herein. I am authorised to make this aff~davit on behalf of the Applicant and save where I say to the contrary the matters deposed to herein are deposed to from my own knowledge of the facts.

2.     I refer to the Affrdavit of Dennis Liner sworn 26 February, 1993 and filed herein. I am instructed by Mr Hechtman and verily believe that he has not been served with the Bankruptcy Notice referred to in paragraph 3 of Mr Liner's affidavit.

3.     I have discussed the matter w ~ t h the directors of the Applicant Mr Aaron Hechtman and Mrs Dora Hechtman. I am informed by Mr & Mrs Hechtman and verily believe that their personal means are as follows:-

(a) Assets

5

Family home situated at

323 Glen Eira Road, Caulfield	400,000
Furniture	5,000

(b)

Liabilities

National Australia Bank Ltd.	400,000
Peter Kay	100,000

4.     Further to the matters referred to in paragraph 3 I am informed by Mr Hechtman and verily believe that he has a personal liability in the sum of approximately $50,000 in connection with the judgment referred to in the Affidavit of Mr Liner.

5.     I am informed by Mr Hechtman and verily believe that the assets referred to in paragraph 3 herein are owned jointly by Mr & Mrs Hechtman and the liabilities are also joint.

6.     I am instructed by Mr & Mrs Hechtman and verily believe that if the Fourth and Fifthnamed Respondents are successful In obtaining an order for security of costs against the Applicant, the Applicant will not be in a positlon to continue to prosecute this proceeding.

THE COURT'S POWER TO ORDER SECURITY

provide security for the costs of a respondent in a proceeding	The source of the Court's authority to require an applicant to
in the Federal Court is twofold. First, there is section 56 of the Federal Court Act which in part provides:

56(1) The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to glve securlty for the payment of costs that may be awarded against him.

56(5) This section does not affect the operat~on of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.

Second, in the case of an applicant which is a corporation, there is section 1335(1) of the Cor~orations Law which provides :

Where a corporatLon is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if ~t 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, her or its defence, require sufficient security to be given for those costs and stay all

proceed~ngs until the security is given.

Counsel for the applicant relied heavily on the decision of Cooper J in Gentrv Bros Ptv Ltd v Wilson Brown & Associates Ptv Ltd (1992) 10 ACLC 1394, a case which was said to be on all fours with the instant case. As I understand it, counsel relied upon Gentry as supporting the proposition that once the shareholders of an applicant corporation have agreed to accept personal liability for any judgment for costs against the corporation, the statutory purpose of section 1335 is

shareholders may ultimately prove insufficient to satisfy any	satisfied and this notwithstanding that the worth of the
judgment for costs in whole or in part. In the course of his reasons in Gentry Cooper J said (at p. 1397):

The purpose behind section 1335 of the Law and its precursors was explained by Connolly J., with whom Campbell C.J. and

Demack J. agreed in Harpur & Ors. v. Ariadne Australia Ltd. &
Ors. (1984) 2 ACLC 356 at 362; [l9841 2 Qd.R. 523 at 532:-

"The misch~ef at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a masslve bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skrrts of the company, at least to bring his own assets into play. If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied."

Statements to similar effect are to be found in Cameron's Unit Services Pty. Ltd. v. Kevin R. Whelpton & Associates (Australia) Pty. Ltd. (1986) 13 FCR 46 at 49, 53 and Mantaray

Pty. Ltd. v. Brookfield Breeding Co. Pty. Ltd. (1990) 8 ACLC

304 at 306.

In my opinion the facts in Gentry were fundamentally different from the facts proved in these proceedings. At p. 1396 of the report Cooper J said:

There seems to be no questlon that the applicant wrll be unable to pay the costs of the respondents if they or any of them successfully defend the action. On the evidence, the applicant cannot from its own funds, or using its own assets, provide security for costs in any significant amount, if at all. Counsel for the applicant did not dispute either proposition. Without the assistance of a third party providing to the applicant funds or assets to satrsfy any order for security for costs, the making of such an order would result in the premature termination of the proceedings without a trial on the merits.

These findings of fact qualify the judge's statement at p.

1399 where he said:

In the instant case once the shareholders of the applicant have	agreed to accept personal liability for any judgment for costs
agalnst the applicant, the statutory purpose of sectlon 1335 as explained in the authorities to whrch reference has been made is satisfied. The making of an order which secures the personal liability of the shareholders is in itself the provisron of security ...

In Bell Wholesale Co. Ltd v Gates ExDort Corporation (1984) 2 FCR 1 the Full Court of the Federal Court (Sheppard, Morling, Neaves JJ) said at p. 4:

In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

We pause to make it clear that the matters we have considered are by no means the only relevant ones. We have concentrated our attention on them because they were to the forefront of the appellant's argument. But the court's discretion is unfettered; each case must depend on its own circumstances; see generally Paterson, Ednie and Ford, Australaan Company Law (3rd ed.), par. 533-1 et seq.

Both the Full Court in Bell Wholesale and Cooper J in Gentry formulated the relevant principle on the basis that there was an onus on a corporation seeking to resist an order for security for costs on the ground that such an order would frustrate the litigation to establish first that the corporation lacked the means to provide security.

In the absence of authority which binds me to a contrary view, I reject the suggestion that the sole statutory purpose of

section 1335 of the Corporations Law is satisfied if those who

stand to benefit from the litigation are prepared to make

themselves personally liable for any costs awarded against the corporation. The section is expressed in clear and unequivocal terms. There is no ambiguity about it. Whether or not an order for security should be made in any particular case is a matter of judicial discretion. In an appropriate case the willingness or otherwise of the shareholders or other beneficiaries to provide security is but one of the matters for the Court to take into account in exercising its discretion. This view is I believe consistent with that expressed by McHugh J in P.S. Chelloram & Co. v China Ocean ShiDDinCi Co. (1991) 65 ALJR 642 at p. 643:

To make or refuse to make an order for security for costs ~nvolves the exercise of a discretionary judgment. That means that the court exercising the dlscretron must welgh all the circumstances of the case. The weight to be given to any circumstance depends not only upon its own intrinsic

persuasiveness but upon the impact of the other circumstances

which have to be weighed.

THE FACTS OF THIS CASE
In the present case no effort has been made by the applicant
to discharge the onus which lies upon it to prove that it
lacks the means to provide security. All that is known about
the applicant is what can be gleaned from the public records
of the ASC. That information was sufficient to warrant the
respondents making the type of enquiry they did by their
solicitor's letter on 3 December 1992. That enquiry called
for a sensible response but none was forthcoming. Neither

director of the applicant nor any other person with knowledge

of the applicant's affairs has been prepared to provide a	single detail concerning the assets, liabilities or financial
resources of the applicant. In circumstances in which an onus rests upon the applicant to prove by evidence what has been blandly asserted from the bar table, the only inference I can draw from the reluctance of the applicant to provide such evidence is that to do so would not assist its case. I give no weight whatever to paragraph 6 of MS Kavadas's affidavit sworn on 26 February 1993 in which she expresses both her instructions and belief but fails to provide any factual basis for her belief.
CONCLUSION The decision to grant or refuse an application of this type, whether it be sought pursuant to section 1335 of the Corworations Law or section 56 of the Federal Court Act is ultimately a matter of judicial discretion. The matters which I propose to take into consideration in exercising my discretion are first, whether the making of an order for security would frustrate the applicant's claim; second, whether the offer of the shareholders to make themselves personally liable for any order for costs against the applicant is sufficient to offset any risk to the respondents in having an unsatisfied judgment for costs; third, whether the applicant has a meritorious claim; and last, whether in all the circumstances of the case it is just and equitable that an order for security should be made. I will deal with
each matter in turn.
It has not been established that the making of an order for security for costs against the applicant would frustrate the litigation. I have already dealt with this issue in detail and need add nothing further.
The offer of the shareholders to make themselves personally liable is but one form of security open to the Court to order. In the present case the offer has been shown to be worthless.
It is not possible to make a comprehensive assessment of the merit of the applicant's claim. On the facts as pleaded there are obviously serious issues to be tried although the applicant does seem to have something of a problem in that it in part relies upon an agreement to which it is said to be a party but which is dated more than a month prior to the date on which the applicant was incorporated. On the face of it, it would seem that the statement of claim does not tell the whole story.
The general conduct of the applicant, in particular, its response to the respondent's initial request for information on 3 December 1992 and the manner in which it approached the application for security, suggests that the applicant has embarked upon a deliberate policy to keep secret all relevant facts concerning its affairs. The respondents have good reason to believe that the applicant will be unable to pay
their costs if they are successful in this litigation.
Having regard to all of the foregoing, it is in my opinion appropriate that the applicant be required to give security for the fourth and fifth respondents' costs and that until such security is given the proceedings against the fourth and fifth respondents should be stayed.
The particulars provided with Crilly's affidavit indicate that the estimate of $27,869 takes into account the costs of the cross-claim by the fourth and fifth respondents against the first, second and third respondents. The fourth and fifth respondents do not assert that the applicant should be required to give security for the cost of the cross-claim. It is not possible to make any precise assessment of how much of Crilly's estimate would relate to the cross-claim but having regard to the issues as pleaded it would seem that the amount in question would be relatively small.
In ordering security for costs it is not the Court's role to provide the respondent with an indemnity. The quantum of security ordered is a matter of judgment and on the facts of this case it is my view that it would be appropriate that security in the sum of $20,000 be given.
The applicant will have the opportunity to provide security either by paying the sum ordered into Court or by providing a bank guarantee to the satisfaction of the Registrar.
costs of the application for security for costs. Although the The applicant should pay the fourth and fifth respondents'
first, second and third respondents were represented at the hearing they were not parties to the matter in contest and no order should be made in respect of their costs.

I certify that this and the

preceding 15 pages are a true copy of the Reasons for Judgment of the Honourable Mr Justice Olney

&#W-., Associate:

.J

Dated:  Qy MW\-\ l y q 3

M r C. Golvan (instructed by Barker Gosling) appeared for the

applicant.

Mrs M. Head (instructed by Wisewoulds) appeared for the first, second and third respondents.

Mr S. Gillespe-Jones (instructed by Katz Solicitors) appeared for the fourth and fifth respondents.

Date of Hearinq:	26 February 1993
Place:	Sydney (heard in Melbourne)
Date of Judament:	24 March 1993