Sazzi (SA) Pty Ltd v Chang - [2011] SADC 120

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Appeal Against a Master's Decision)
SAZZI (SA) PTY LTD v CHANG & ORS
[2011] SADC 120
Judgment of His Honour Judge Cuthbertson
16 August 2011
PROCEDURE - COSTS - SECURITY FOR COSTS - POVERTY
SECURITY FOR COSTS ORDER
Appeal against decision of Master varying costs security order made against plaintiff / appellant - Whether Master should have varied order that the directors of plaintiff corporation do provide personal guarantees to fifth defendant of costs of action to require that plaintiff corporation provide cash security.
HELD: Master should not have exercised discretion to vary security order to require the corporation to make cash security for costs when effect of new material before Master was to merely confirm impecuniosity of directors, the impecuniosity of the corporation having already been demonstrated.
Corporations Act 2001 (Cth) s 1335; District Court Rules Rule 6 DCR 194; McLean v D.I.D. Piling Pty Ltd [2010] SASC 33; Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 11 ACLC 1238; Cameron's Unit Services Pty Ltd & Anor v Kevin R Whelpton and Assoc. Pty Ltd (1986) 13 FCR 46 at 52; Mantaray Pty Ltd v Brookfield Breeding Co. Pty Ltd (1990) 8 ACLC 304; Yandil Holdings Pty Ltd v Insurance Co. of North America (1985) 3 ACLC 542; Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325; Moir v Vodafone [2009] SASC 234; Octocane Pty Ltd v SRJ Property Development Pty Ltd (1999) 74 SASR 471; Specialised Explosives Blasting and Training Pty Ltd v Huddys Plant Hire Pty Ltd (2009) 259 ALR 387; Food Channel Network Pty Ltd v Televison Food Network G.P. [2009] FCA 68; Spiel v Commodity Brokers Australia Pty Ltd (in liq) (1983) 35 SASR 294 at 301, 302; Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 at 532, referred to.

SAZZI (SA) PTY LTD v CHANG & ORS
[2011] SADC 120

This is an appeal against a decision of a Master made on 18 May 2011 and 3 June 2011 wherein the Master ordered that the plaintiff corporation provide security by way of cash or unconditional bank guarantee within 8 days in the sum of $28,000 plus GST in respect of costs in respect of the proceedings instituted by the plaintiff against the fifth defendant.
The application for security for costs is made pursuant to both 6 DCR 194 of the District Court Civil Rules 2006 and s 1335 of the Corporations Act 2001 (Cth).
Appeals from a Master to a Judge of the District Court are governed by 6 DCR 17 which provides for an appeal as of right from a judgment of a Master to the Court constituted of a Judge.
The appeal is by way of rehearing on the documents considered at first instance but the Court has power to receive further evidence. Although the appeal is a complete rehearing on the merits, before allowing the appeal, there is a need to identify some error of the Master. (See McLean v D.I.D. Piling Pty Ltd [2010] SASC 33)
Although the application is said to be pursuant to the District Court Rules and s 1335 of the Corporations Act the provisions in the Corporations Act are so wide that if an application fails under s 1335 it will fail under any other provision. (See Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union (1993) 11 ACLC 1,238 at 1240)
An undertaking by the natural person shareholders interested in the judgment ordinarily would preclude a security order. See Cameron’s Unit Services Pty Ltd v Kevin R Whelpton and Assoc. Pty Ltd (1986) 13 FCR 46, 11 ACLR 43; Mantaray Pty v Brookfield Breeding Co. Pty Ltd (1990) 8 ACLC 304, Yandil Holdings Pty Ltd v Insurance Co. of North America (1985) 3 ACLC 542.
If the action is arguable and the requirement for security will stultify it, a security order is less likely. (See Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 at 317 & 319) Further, even if the undertaking is given by business persons with limited assets, the fact that they have their own business careers to consider means they would avoid bankruptcy if possible and their undertaking is therefore indirect security. (See Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325)
The principal action is by the plaintiff corporation against five defendants. The plaintiff operated a restaurant in premises owned by the landlords, the first four defendants. The fifth defendant carried on another business in the same building owned by the first four defendants.
The plaintiff claims that it was having difficulty making rental payments and negotiated with and reached an arrangement with the fifth defendant that for consideration, the fifth defendant would purchase the plaintiff’s restaurant business and continue to run it and take over the lease. Part of the consideration was used by the plaintiff to make rental payments but the cheques provided by the fifth defendant were not honoured.
The plaintiff claims that upon the rental charges not being honoured the first four defendants evicted the plaintiff whereupon the fifth defendant took over the lease of the premises from the first four defendants and failed to pay any of the consideration which had been agreed to be paid to the plaintiff.
There is little doubt that it has been established on credible testimony that the plaintiff will be unable to pay the costs of the defendant should the defendant win. The Master so found in his decision (No. 3 of 6 July 2010).
On 6 July 2010 on the application of the fifth defendant the Master ordered that the then two shareholders of the plaintiff provide personal guarantees that they would be responsible for the fifth defendant’s costs of the action.
Evidence had been presented that there were then two shareholders of the plaintiff. One being Lang Lien who had operated the restaurant business and the other being Christina Lien a student and the daughter of Lang Lien.
For reasons that are not immediately apparent the Master also ordered that:
[T]he shareholders of the plaintiff are to separately provide by affidavit a sworn statement of their assets and liabilities as at 30 June 2010, and a statement of their current monthly income and expenditure, as at 30 June 2010, both within 14 days.
There has been no appeal from the Master’s Decision No. 3.
Subsequently, the plaintiff sought clarification as to whether it was intended that a personal guarantee should be required from Christina Lien when, so it was asserted, the material presented to the Master on the application had demonstrated that she held her shares in trust for her mother Lang Lien.
In a Supplementary Decision (No. 4 of 6 August 2010) the Master indicated that it was appropriate that both shareholders provide personal guarantees as directed as both were, in the view of the Master, beneficial shareholders. There has been no appeal against this decision.
When the plaintiff shareholders got around to providing the material required in Decision No. 3, which they were late in providing due to the seeking of clarification as to whether the Master’s order should apply to Christina Lien, the legal representatives of the fifth defendant sought to challenge Decision No. 3 on the basis that the material earlier submitted on the financial situation of Lang Lien and Christina Lien demonstrated that the Court was being misled.
In further reasons in a Decision No. 5 of 18 May 2011 the Master, having regard to the new material, reconsidered his decision in Decision No. 3 and altered his orders by requiring cash or equivalent security.
His Honour said:
[46]I have reread all of the material. It is appropriate to reopen the Security Application (FDN 48) issued by the fifth defendant, based on the further information that has been discovered and which had been omitted or not explained or inconsistently stated by Christina and Lang Lien in their affidavits.
[47]The transactions that have occurred and the explanations given or the failure to give explanations as the case may be have caused me to reflect on whether the plaintiff should be able to pursue its action without providing cash or equivalent security. I have concluded, as advised to the parties, that it was necessary, in the exercise of my discretion, to vary the order from personal guarantees to cash security. The provision of further information in March concerning Christina Lien’s current financial position reaffirms to me, without hesitation, that the order should be varied. I so vary the order.
[48]I had grave concerns as to whether Ms Lang Lien, following her affidavit (FDN 87), would ever be able to meet an order for costs following my earlier security order. The vagueness and inaccuracies and the omissions and even the bare information provided caused me this concern.
[49]The same applied with regard to the material in Ms Christina Lien’s affidavit. I was concerned that the financial information was never fixed and varied as the circumstances of their personal situation might require.
It should be pointed out that between the making of Decision No. 3 and Decision No. 5 Lang Lien had gone bankrupt and her shares were asserted to have been transferred to her daughter, Christina Lien, shortly prior to the bankruptcy.
When examining the reasons for Decision No. 5 it is apparent to me that the real reason that the Master has varied his previous costs order (Decision No. 3) and required cash is because he has formed the view that the Liens, senior and junior, were essentially prevaricating as to their assets to make it look as if they did have assets so as to be able to satisfy a cost order when in reality they didn’t have any such assets.
In doing so it seems to me with respect that the Master has elevated the question of whether the Liens could meet the cost order as being the criterion for whether the company should be required to fulfil a cash security.
In focussing on this as the prime consideration the Master has failed to give adequate consideration to the effect on the exercise of his discretion of the question of whether there is an arguable case and whether the poverty of the plaintiff is a result of the actions of the defendant and whether, given the proposed guarantors’ business or other circumstances, a fear of becoming bankrupt is likely to be a genuine factor in motivating the guarantor genuinely to want to fulfil the terms of any guarantee so as to prevent bankruptcy.
Burchett J in Cameron’s Unit Services Pty Ltd & Anor v Kevin R Whelpton and Assoc. Pty Ltd (1986) 13 FCR 46 at 52 said:
The applicants also rely on the contention that their financial difficulties stemmed from the very transactions the subject of the proceedings. In Lynnebry Pty Ltd v Farquhar Enterprises Pty Ltd (1977) 3 ACLR 133 at 136 – 367; Mears J, … said that such a consideration was “a most relevant circumstance … and one which warrants the application being refused”.
It is not the position here that the Master is asserting as part of his reasons that the shareholders are trying to minimise their assets so as to avoid the need for them to give security. Rather he seems to suggest they are trying to maximise their assets to make themselves out as worthwhile security guarantors.
Putting it another way, the new material, if anything, confirms that those behind the company have no significant assets so as to be able effectively to provide cash security for the company. In these circumstances, it would follow that the stringency of the security requirement to be provided by the company should be reduced rather than increased, other things being equal.
The Master having already found that neither the company nor the two shareholders have the cash to make cash security of $28,000, the new material only confirms that.
The Master has failed to consider those authorities which suggest that in certain circumstances where the person standing behind the company is also impecunious the Court can still, in its discretion, dismiss the application for security. (See Specialised Explosives Blasting and Training Pty Ltd v Huddys Plant Hire Pty Ltd (2009) 259 ALR 387 and Food Channel Network Pty Ltd v Television Food Network G.P. [2009] FCR 68).
As it was put by Connolly J in Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 at 532:
The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of the corporation without assets would otherwise be in a position to expose his opponent to a massive 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 skirt 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. (My underlining)
In the above respects the discretion of the learned Master has miscarried.
It is appropriate that this Court exercise the discretion in the Master’s place.
Relevant factors are as follows:
1.The proceedings are arguable.
2.A significant factor in the plaintiff’s lack of funds is the actions alleged by the plaintiff which, if true, have entitled the fifth defendant to obtain the benefit of a business which the plaintiff has lost for no consideration. (See Octocane Pty Ltd v SRJ Property Development Pty Ltd (1999) 74 SASR 471).
3. The sole shareholder has pledged her personal guarantee. She owns certain property which, although on present estimates may be mortgaged to the extent of any equity, it is still property which is earning an income of sorts. She is a law student as well. It is unlikely that she would wish to go bankrupt given the implications for her business and if she proposes to practice in the law. The fact that she may be impecunious is not necessarily the crucial point. Indeed, in certain circumstances the overwhelming factor may well be the fact that she offers the guarantee. These are such circumstances.
4.The proceedings will be stultified if a cash guarantor is required.
The comments of Bollen J in Spiel v Commodity Brokers Australia Pty Ltd (in liq) (1983) 35 SASR 294 at 301, 302 are pertinent:
The respondent would have been prevented from proceeding with an arguable case legitimately instituted.
Each side has an arguable case. … The fact was that such an order would have produced victory for the appellant without a contest. The respondent would have been prevented from proceeding with an arguable case legitimately instituted. The hardship to creditors produced by such a course would, in my opinion, far outweigh the hardship, which possible inability to recover costs may cause the appellant.
Here the hardship is to the appellant and the persons who stand to benefit from the company’s success in the litigation.
I cannot restore the original order of the Master as it is now apparent that Lang Lien is bankrupt and therefore cannot pledge a guarantee.
I propose making the following orders:
1. Time to appeal extended to the date on which the appeal was lodged.
2.Christina Lien to give a personal guarantee in respect of the fifth defendant’s costs of the action from the date of the first application for security up to and excluding costs of this appeal.
3.Christina Lien to give a personal undertaking to the Court in writing that she will not divest herself of any assets, except for personal living expenses, until 10 days after the delivery of judgment in this matter.
4.The action against the fifth defendant is stayed until such time as the said Christina Lien executes and forwards to the fifth defendant such a personal guarantee and provides to the Court such a personal undertaking.
I will hear the parties as to the form of the proposed orders and as to any other orders.