Ross Ambrose Group Pty Ltd v Renkon Pty Ltd
[2007] TASSC 75
•28 September 2007
[2007] TASSC 75
CITATION: Ross Ambrose Group Pty Ltd v Renkon Pty Ltd [2007] TASSC 75
PARTIES: ROSS AMBROSE GROUP PTY LTD Plaintiff
v
RENKON PTY LTD First defendant
REES, Suzanne Second defendantSHIPTON, Peter John Third defendant
PLUNKETT, Rodney Fourth defendantPLUNKETT, Susan Elaine Fifth defendant
vDOOLAN, Bruce Richard
ELLIS, Timothy James
WELCH, Philip Andrew
SMITH, David Anthony
BAILEY, Raymond Frederick Third Party
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NO/S: LDR 442/1992
DELIVERED ON: 28 September 2007
DELIVERED AT: Hobart
HEARING DATES: 14 and 21 September 2007
DECISION OF: Master S J Holt
CATCHWORDS:
Corporations – Legal capacity and relations with outsiders – External litigation procedure – Costs – Security for costs – Discretion of the Court – Delay
Corporations Act 2001 (Cth), s1335.
Aust Dig Corporations [1074]
REPRESENTATION:
Counsel:
First defendant: P W Tree SC
Third party: K B Procter SC
Solicitors:
First defendant: Page Seager
Third party: Murdoch Clarke
Judgment Number: [2007] TASSC 75
Number of paragraphs: 40
Serial No 75/2007
File No LDR 442/1992
ROSS AMBROSE GROUP PTY LTD v RENKON PTY LTD
REASONS FOR DECISION MASTER S J HOLT
28 September 2007
This is an application for an order that the first defendant, Renkon Pty Ltd ("the company"), which issued a third party notice, give security for the costs of the third parties.
The claim of the company is as follows. The third parties were the members of a law firm. The firm acted for the company in negotiations for the purchase of a hotel business and the lease of the business premises. The purchase was completed on 30 June 1989. The agreement included a clause to the effect that if within two years of the completion date a covenant restricting the use of the property had not been removed from the title of the leased property the company had an option to surrender the lease and upon surrender the company would be paid the sum of $1,000,000.00 less some adjustments. Shortly before the second anniversary of the completion date, the company sought advice from the firm as to whether "there was any potential that the purchase of the Business and the Lease could be negated". Despite the premises still being subject to the covenant and despite the provision in the agreement for surrender, the company was advised "that there was no general relief or remedy available" and "that the purchase of the Business or the Lease could not be negated". In September 1992 the land was still subject to the covenant and the company acting on different legal advice issued a letter dated 30 September 1992 purporting to surrender the lease. The surrender was not accepted and the surrender sum was not paid. Instead it was asserted that as the option to surrender had not been exercised within a reasonable time it had been lost. The company claims from the third parties damages including damages arising from being kept out of the surrender sum.
The company counterclaimed the surrender sum in the primary action in these proceedings, being an action by the lessor against the company and its shareholders (who guaranteed performance of the company's obligations under the lease) for rent, interest and damages. The counterclaim failed because the option to surrender had not been exercised within a reasonable time. Ross Ambrose Group Pty Ltd v Renkon [1998] TASSC 72. In February 2001 consent judgment was entered for the lessor on its claim against the company and the shareholders for $304,485.16 plus costs which were later taxed at $58,000.00. The judgment was in terms that execution on it be stayed until further order, the lessor, the company and the shareholders having agreed that the stay should remain pending the outcome of the third party proceedings.
The company has delivered particulars stating the amount of its claim against the third parties. The particulars are dated 9 July 2002 and comprise a claim for $820,505.00 (being the surrender sum of $1,000,000.00 less adjustments); $1,509,860.20 (being damages for loss of use of the sum of $820,505.00, calculated to 30 June 2002); $304,485.16 (being the judgment sum awarded to the lessor) and $58,000.00 (being the judgment costs). The total is $2,692,850.36.
The company has four shareholders each holding one $1.00 share. Three of them are the directors of the company. The directors have passed negative solvency resolutions pursuant to the Corporations Act 2001 ("the Act"), s347A in 2004, 2005 and 2006. The latest resolution is in terms that in the directors' opinion "there are reasonable grounds to believe that the company WILL NOT be able to pay its debts as and when they become due and payable" [original emphasis].
The Act, s1335(1) is as follows:
"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, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."
Renkon Pty Ltd is a corporation and in the third party proceedings it is in substance the plaintiff. There is the evidence of the passing of negative solvency resolutions to which I have referred. Accordingly, it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the third parties if successful in their defence. The jurisdiction to make an order under s1335(1) has been established. There was no suggestion to the contrary.
Although the discretionary power is activated by evidence that gives reason to believe that the company will be unable to pay costs, the discretion is to be exercised without any predisposition in favour of granting the protection of an order for security. Byron E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FLR 497 at 506 - 511; Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624; Weily's Quarries v Devine Shipping Pty Ltd Tas U/R B30/1994 also reported at (1994) 14 ACSR 186 at 188 and KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196.
The discretion is not fettered by the terms of the statute. In Merribee Pastoral Industries Pty Ltd v ANZ Banking Group Ltd [1998] 155 ALR 1, Kirby J said at par26:
"… It would be wrong to attempt to hedge the jurisdiction about by rules or practices, even where derived from a number of instances. This is because what should be done in each case depends entirely on the circumstances of the case. The governing consideration is what is required by the justice of the matter."
His Honour then set out a number of considerations which in the circumstances of particular cases have been regarded as relevant. They include the strength of the case; whether the trial is close at hand; whether there has been delay in bringing the application and whether an order might effectively shut a party out of relief. He then observed: "Doubtless there are as many further considerations as there are cases".
There are a number of factors which favour the making of an order that the company give security. As I have said it appears from the evidence that that there is reason to believe that it will be unable to pay the costs of the third parties if they are successful in their defence. There will be an injustice to the third parties if they successfully defend the claim, but are unable to recover their costs. There is no assertion that the company's impecuniosity has been caused by the conduct which is the subject of the claim. If the claim is successful the persons who will benefit will include the shareholders of the company and there is no evidence that they lack the resolve or the resources to fund the litigation. Not only will success increase share value, but the shareholders will have an indemnity for the judgment which has been entered against them by the lessor and which has been stayed pending the outcome of the third party proceedings. There is no assertion that an order for security will frustrate the litigation. The case is yet to be set down for trial and there is no suggestion that an order for security will cause delay.
Against these considerations it was submitted that security should be declined as the company has a meritorious claim and there has been considerable delay by the third parties in bringing the application.
As to the merits of the claim counsel for the company, Mr Tree SC, referred to Bryan E Fencott Pty Ltd v Eretta Pty Ltd (supra), where French J said at 514:
"Where there is a claim prima facie regular and disclosing a cause of action, I see no reason why the Court would, in the absence of evidence, proceed on the basis that the claim was other than bona fide with a reasonable prospect of success."
The third parties in their defence to the claim admit the existence of the surrender clause, but deny that the impugned advice was either sought or given. The allegation is that the request for advice was oral rather than written and I was told that there is no assertion that the alleged advice was given in writing. It was said that credit would be an issue at the trial. In the circumstances no submission was made that the company's case was strong and conversely no submission was made that the company's case was weak. I proceed on the basis that the company's claim is bona fide with a reasonable prospect of success without considering the merits further.
I now turn to consider the delay. It is lengthy. The third party claim was instituted in 1996 and this application was not brought until 2007. There has been reason to believe from the outset that the company will be unable to pay the costs of the third parties if they are successful in their defence.
Despite a submission by Mr Tree that delay of itself counts against a favourable exercise of the discretion, it is obvious that delay without culpability or consequences would be immaterial. There are numerous cases which show that the material consideration is whether delay will have operated to cause prejudice or oppression if security is ordered.
French J in Byron E Fencott Pty Ltd v Eretta Pty Ltd (supra), said at 515:
"In the context of the broad discretion … delay is best regarded simply as a factor whose consequences are to be weighed in the balance in determining what is just between the parties."
In Dalrymple Park Pty Ltd v Tabe & Lees Pty Ltd [1996] 6 TAS R 111, Crawford J quoting from the judgment of Underwood J (as he then was) in Goliath Portland Cement Company Pty Ltd v McNalley Australia Pty Ltd [1993] TASSC 62 at par14 said at 117:
"Nevertheless delay in making an application is a relevant consideration to be taken into account along with other relevant matters, because it may operate to the prejudice of the plaintiff. Smail v Burton (1975) VR 776; PG Gabel Pty Ltd v Katherine Enterprises Pty Ltd (1977) 2 ACLR 400."
Referring to a decision of the Full Court of the Supreme Court of Western Australia, Master Bredmeyer said in Ravi Nominees Pty Ltd v Phillips Fox (1992) 10 ACLC 1313 at 1317 and 1318:
"That decision is Broekhoven Australia BV and Anor v Diptych Pty Limited (In Liquidation) Full Court 25 May 1992. In particular, I refer to a passage from Franklyn J at page 5. The other two Judges agreed with his decision. He said:
'As to the first of such factors, delay since August 1987 and until 28 February 1992, in my opinion, it is of no relevance. No prejudice to the respondent was relied on or alleged.'
I accept that decision as binding on me and I consider that principle is not a novel one of law. It is a well-known proposition of law that if delay is to bar a security for costs application or to be a reason for refusing it then there must also be some prejudice to the plaintiff."
Mr Procter SC for the third parties referred to Acohs Pty Ltd v Ucorp Pty Ltd [2006] FCA 1279. There Jessup J said at par63:
"There is no shortage of instances of security being ordered notwithstanding a respondent’s delay. Mr Anderson referred me to Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68, and to January Force Pty Ltd v Trico Restaurants Australia Pty Ltd [1999] FCA 1746, in each of which case a judge of this court ordered security notwithstanding what appeared, on the face, to be considerable delay. In the latter case, Goldberg J said that ‘delays should be considered by reference to whether the delay has occasioned any prejudice to the applicant’: at [18]. …"
As Mr Tree pointed out, it has been said in many cases that an application for security for costs ought to be made promptly. But this is for a reason. It is to avoid a situation arising where an order for security places a litigant at risk of being unable to provide security and hence at risk of wasting the costs already incurred. This was made clear by Street CJ in his judgment in the New South Wales Court of Appeal in Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 where he said at 308:
"A significant matter to be weighed in determining whether or not an extension of time should now be allowed is that this arbitration has run on for some eight hearing days. The builder has expended money in respect of its own legal costs for those eight days. And, if security now be ordered, accompanied by the usual sanction that the arbitration as well as the proceedings in this court be stayed until such security be furnished, this would, in effect, place the company in the position of running a risk, if unable to provide security, of having wasted the costs of these eight days. It is an accepted principle in the ordering of security for costs that such an application should be made promptly. There may, of course, be cases where the impecuniosity of the company may only be discoverable or provable at a later stage of the proceedings. Similarly, there may be cases in which the length of the proceedings was not foreseen when they commenced. Other situations could occur in which a late application could, without procedural prejudice, be brought forward during the currency of the disputed proceedings. But ordinarily, I reiterate, the application ought to be made promptly in order to avoid the very situation which has developed in this case."[emphasis added]
The passage from the judgment of Street CJ which I have quoted was relied upon by Waddell J in Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 514 in reaching the conclusion which he expressed at 125. He said:
"In the present case it seems to me that the circumstances mentioned are such as to make it quite impossible, without severe and unexpected prejudice to the plaintiffs, to make an order for security in respect of costs which have already been incurred by the defendants. The plaintiffs have incurred very substantial costs in relation to the proceedings to date and have been allowed to do so by the defendants in the absence of any intimation of any application for security for costs. It would clearly be highly unjust to make such an order in respect of costs already incurred."
In Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326, Lee J said at 333:
"It seems to me that before there can be prejudice to the plaintiff if an order for security is made, it must appear that the plaintiff is unable to afford providing security of its own resources or that those who stand behind the litigation and who will benefit from it also are unable to fund and provide the security. There can be no prejudice to the plaintiff if the costs it has incurred are not thrown away as a result of security, if ordered, being provided by those behind the litigation and who will benefit from it." [emphasis added]
If there is a risk that an order for security will result in the action being stifled it is for the person resisting the making of the order to ensure that evidence accordingly is before the Court. I refer to the often quoted passage from the decision of Sheppard Morling & Neaves JJ in the Federal Court in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1. At 4 the Court said:
"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."
There being no evidence, Mr Tree made no submission that there is a risk that an order for security might frustrate the litigation. However, relying upon the decision in Felsink Pty Ltd v City of Maribyrnong (2007) VSC 49, he submitted that there was nonetheless prejudice caused by delay, in particular, "the incurring of costs and being deprived of an opportunity to consider whether to press the litigation further in light of an intimation of a desire for security".
In Felsink, the defendant, had previously obtained two orders for security. By letter dated 2 June 2006 the defendant warned that if the plaintiff did not agree to provide further security by 13 June a summons would issue. However, no summons issued until September 2006. In the meantime the plaintiff had incurred further costs. The application was being considered in the context described in the reasons at par16, namely, in the context that "there are strong indications that the present application is in fact an attempt to stultify the action rather than a genuine application for security for costs". It is against this background that the issue of delay was being addressed. Smith J said at pars24 and 25:
"… Counsel submitted that the underlying principle addressing the issue of delay is that it is unfair to a party who has prepared a case to be faced by an application for security for costs. Counsel submitted that there is no evidence that the plaintiff in this case suffered any such prejudice because it thought that security would not be sought. Counsel accepted, however, that in most cases where delay has been taken into account, it cannot be demonstrated that the plaintiff placed any actual reliance on the failure to seek security for costs and rather the issue was that because the defendant had not applied promptly, the plaintiff suffers prejudice because it is denied the opportunity to reconsider its position prior to incurring further costs itself. …
In my view, there was a delay by the first defendant for which it was responsible and the delay and what occurred during it was prejudicial to the plaintiff because it incurred further costs while it was left with the impression by the first defendant’s conduct that the first defendant was not pressing a claim for security for costs. It should not prevent the first defendant from seeking security for costs in respect of costs to be incurred after the date. That appears to be the normal practice in any event and sufficiently addresses any prejudice that the delay may have caused to the plaintiff."
I do not think that Smith J was diverging from or adding to the earlier authorities. Of course leaving a party with the impression that security will not be sought and so depriving a party of an opportunity to consider whether or not to press the litigation in the face of a prompt application for security can only have a prejudicial affect if there is a risk that an order will stifle the action and hence cause costs incurred to have been wasted. No prejudice can possibly exist where there is no such risk. Where the persons who will benefit from the litigation can and will, in order to pursue the benefit, cover the opponent's costs there can be no injustice in having them do so even where the application is belated. Where there is no possibility of an order bringing an action to an end, no adverse consequence will have resulted from the loss of an earlier occasion on which to consider the future of the action in the context of security being required. In such a case there is no prejudice which needs to be addressed either by declining to order security or by limiting the order to future costs.
There being no suggestion that a risk exists that an order for security might bring an end to the proceedings and there being no reason for me to conclude that such a risk exists I find that an order will not put an end to the company's claim. Accordingly, I find that the delay in bringing the application will have caused no prejudice if security is ordered.
There was no good reason why the application for security for costs should not have been made immediately following the commencement of the third party proceedings. The evidence is that from time-to-time the possibility of an application has been considered, but discounted in light of the company's case being punctuated by very lengthy periods of inactivity giving the impression that the case may not be pursued. There was nothing to suggest that the delay was the result of a deliberate tactical ploy to disadvantage the company. Although the delay was deliberate and should not have occurred I attach little weight to this feature because of my finding that the delay has not resulted in any prejudice to the company.
If the third parties successfully defend the claim there will be an injustice if they are unable to recover their costs. There is no rule against security being ordered in respect of costs already incurred. Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (supra) at 122 and 123. There is no injustice to the company in making an order that it give security, including security for costs already incurred. An order for security will not bring the action to an end. There has been delay in bringing the application, but as it will not have operated to cause prejudice or oppression to the company if security is ordered the justice of the matter requires the making of an order for the giving of security for the whole of the third parties' recoverable costs of resisting the claim.
I now turn to consider the amount and form of the security to be given.
The solicitors for the third parties estimate the costs of defending the third party proceedings to date taxed on a party and party basis and including GST where applicable to be $29,490.00. The solicitors estimate the likely length of the trial to be four to five days and allowing for solicitors' work in the meantime and counsel's fees estimate further party and party costs including GST to be $28,600.00. The total is about $58,000.00.
There was a submission by Mr Tree that I should take into account that some of the past costs of the third parties have been paid by the insurer which had been standing behind them until it went into liquidation. No authority for a proposition that costs paid by an insurer should be distinguished from costs paid directly by a party was cited. I see no basis for making such a distinction. There was no suggestion that the insurance company had ceased to exist so that there is nobody to be reimbursed for those costs. I will not adjust the amount of security to be given because of the fact that some of the costs have already been paid by an insurer in liquidation.
The solicitors' estimate of the past costs includes the costs of an unsuccessful appeal brought by the third parties against an interlocutory order. Upon the dismissal of the appeal an order was made that the third parties pay the company's costs of that appeal. Obviously, the company cannot be required to provide security in respect of costs which it can have no liability to pay. Mr Procter estimated the costs of the unsuccessful appeal to be about $6,000.00. Mr Tree did not dispute the reasonableness of the estimate. I proceed on the basis that if the third parties are successful in the action and they are awarded costs the costs to date are likely to be taxed in an amount of about $6,000.00 less than the solicitors' original estimate.
Mr Tree did not dispute the reasonableness of the estimate for future costs at $28,600.00 based upon a four or five day trial. I have no reason to doubt the estimated trial length. The member of the third party law firm who gave evidence in support of this application is a very experienced legal practitioner. He said that there had been "sabre rattling" on behalf of the company that it had eight witnesses available on the liability issue. He thought that two and one half days or more was a reasonable estimate for the trial of liability alone. He said that credit would be in issue and for that reason the third parties would resist any application for a separate trial of liability. His opinion was the same as that of Mr Procter, namely, that the trial of the claim on liability and quantum would occupy about four or five days.
If the claim by the company is unsuccessful and the company is ordered to pay the party and party costs of the third parties the amount is likely to be about $52,000.00. However, the company will be able to set off against this liability the liability which the third parties have to it to pay the costs of the unsuccessful appeal to which I have referred. The third parties' estimate of their costs of the appeal was about $6,000.00. I have no reason to think that the company's costs were substantially different. Accordingly, the total amount which the company might have to pay to the third parties for costs is about $46,000.00, if the collection of the appeal costs is left to the conclusion of the trial and dealt with by set off.
It was submitted by Mr Tree that if security was to be ordered it should be staged so that the only security immediately required should be for the costs up until the time when the proceedings are set down for trial. He suggested that an amount of about $10,000.00 was a reasonable pre-estimate of the third parties' costs between now and then. He said this would mitigate any hardship or inconvenience which might be caused by providing security and would ensure that the order accommodated an appropriate allowance for the possibility that a four or five day trial may not ensue, if for example an order is made that liability be tried separately. Mr Tree submitted that the inherent justice of such an order was increased if the security is to be provided by a payment into Court rather than the execution of guarantees.
I have decided not to make an order providing for the giving of security by instalments. My reasons are as follows. Firstly, it is likely that a trial will occur, the parties having failed to negotiate a settlement at a mediation which occurred in 2006. Secondly, I have no reason to think that a separate trial of liability is a significant possibility. There has been no application to date and even on the hearing of this application no request for a split trial was foreshadowed. The idea was simply floated by Mr Tree as a theoretical possibility. Thirdly, it is common ground that the trial will occupy only about four or five days. Fourthly, the amount of security required on current estimates is not great especially in the context of a claim for about $2.7 million.
As to the form of security the Supreme Court Rules 2000, r829 and r833 are as follows:
"829 Amount and form of security
(1) If an order for security for costs is made under rule 828 or security for costs is otherwise required, it is to be of any amount and be given at any time or times and in any manner and form the Court or a judge directs.
(2) Subject to any direction given as to the manner and form in which the security is to be given, it is to be given by an instrument that –
(a) is signed by the person to be bound, whether as principal or surety; and
(b) sets out that the person submits to the jurisdiction of the Court; and
(c) contains that person's consent to judgment being signed against that person for the amount for which the security is given on the happening of the event specified in the instrument.
(3) Subject to any direction to the contrary, security is to be given by 2 sureties approved by the Principal Registrar, each of whom is to be bound in the full amount of the security.
(4) An instrument for the purposes of subrule (2) –
(a) is to be entitled in the proceeding in which the security is given; and
(b) is to be executed by each surety in the presence of the registrar or a commissioner; and
(c) if there is more than one surety, may be executed by them either separately or together; and
(d) is to be filed; and
(e) becomes a record of the Court when it is filed.
(5) A person in whose presence an instrument is executed is to satisfy himself or herself that the surety understands –
(a) the liability which the surety incurs; and
(b) that the liability may be enforced against the surety in a summary way.
(6) A person is not to attest the execution of a security by another person for whom that person or the partner of that person is acting as solicitor or agent.
833 Security by payment into Court
A party directed to give security may give it by –
(a) paying it into Court; and
(b) giving to the party for whose benefit the security is to be given –
(i) notice of the payment; and
(ii) an original receipt for the money paid into Court."
In light of these rules I see no reason to specify how the security is to be given. Obviously, a payment into Court would provide the greatest comfort to the third parties, but if instead sureties are used they must be approved by the Principal Registrar. Obviously the Registrar will not approve persons as sureties without first being satisfied that at the conclusion of the proceedings those persons will be in an immediate position to satisfy their obligations and that they will have assets easily accessible to the third parties. If there is any doubt about this a letter from a bank guaranteeing performance of the sureties' obligation might be required by the Registrar.
These will be the orders:
1The first defendant is to give security for the costs of the third parties in the amount of $46,000.00 within 14 days, with the third party proceedings stayed until such security is given.
2In the event that the first defendant recovers its costs of the appeal, which was dismissed by order made 24 March 2003, prior to the conclusion of the trial of the third party proceedings, it is to give further security for the costs of the third parties in the amount of $6,000.00 immediately upon the recovery, with the third party proceedings stayed until such security is given.
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