Sbs Group Pl v Pak-Poy Enterprises Pl No. DCCIV-01-200

SBS GROUP PTY LTD v PAK-POY ENTERPRISES PTY LTD
[2002] SADC 55
Judge Herriman
Civil

This matter comes before me by way of an appeal by the defendant from an order of Acting Master Kelly dated 3 October 2001, as varied by his later order of 25 January 2002.
The background of the matter is adequately outlined in the reasons of Acting Master Kelly dated 3 October 2001 and I will not now repeat it. It is sufficient to say that upon the defendant’s application filed on 14 May 2001, the following orders were made on that date, namely:
“1.    that the plaintiff do provide security for the defendant’s costs in the sum of $18,000 up to the date of trial; and that that amount be paid into Court within 21 days:
2.     That this action be stayed until such security for costs is provided as aforesaid or until further order:
3.     That the stay of the action be discharged upon Mr Pak‑Poy filing in Court within the said period of 21 days a Deed of Undertaking under seal to the effect that he will be personally responsible for the costs of action of the defendant in the event that the plaintiff fails in the action: and
4.     Liberty to apply.”
When this appeal was first heard, the true intent of order number 3 was questioned and the matter was sent back to the learned Acting Master for clarification. On 25 January 2002, the learned Acting Master varied its terms by deleting the words “That the stay of the action be discharged” and inserting in lieu of them “That the above order for security to be taken to have been and to be satisfied in full ...”.
There is no need for me to discuss at length the submissions of the appellant and the respondent on the appeal because the matter in issue is a narrow one. The appellant contends that the learned Acting Master erred in the exercise of his discretion in determining that an undertaking by Mr Pak‑Poy to accept personal responsibility for any costs recoverable against the plaintiff would be sufficient to satisfy the primary security and stay orders (orders 1 and 2) and otherwise the defendant’s application under section 1335 of the Corporations Law.
That section reads as follows:
“(1)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.” (my emphasis)
The appellant contended that the discretion was not properly exercised by reason of the fact that, whilst the learned Acting Master was properly entitled to have regard to the offering of a personal guarantee by a person standing behind the plaintiff company, he did not enquire into and have regard to the value of that undertaking or that, if he did so, he failed to take proper account of the fact it was of limited or no value. On the defendant’s case, Mr Pak‑Poy was effectively insolvent.
For its part, the respondent contended that the Acting Master took proper account of Mr Pak‑Poy’s proposed undertaking and that, in all the circumstances, including consideration of the plaintiff’s financial status, he properly exercised his discretion in making the amended order, number 3.
At the outset, it is appropriate that I deal with two issues that arose upon the hearing of the appeal and which were, ultimately, not contentious:
(1)The appellant contended that the learned Acting Master erred in the costs order he made on the hearing of the application. He said costs should have been the defendant’s in the cause, or in any event. Mr Hoile, for the appellant, readily conceded that that question need only be considered in the event of this appeal being successful.
(2)A rather more difficult question arose, initially, as to the extent of the undertaking held by the learned Acting Master to be a sufficient substitute for the primary security order. The wording of order number 3 arguably implied that an undertaking for all of the costs of the action was required. Mr Hoile ultimately and properly conceded that the likely intent of the proposed order was that the Deed of Undertaking be limited to the amount of security ordered in order number 1, namely, the sum of $18,000. I will treat it in that way.
The only matter argued before me was, therefore, as to the exercise of discretion by the learned Acting Master: whether it was a proper exercise and, if not, whether it would be appropriate for me to approach that exercise again, and, if so, on what bases.
It was not disputed by either party that the learned Acting Master, in reaching his decision, properly took into account the following matters:
(1)the unchallenged impecuniosity of the corporate plaintiff;
(2)the conclusion that, on the pleadings, there was a genuine issue to be tried requiring the making of factual and legal findings;
(3)his inability to find (as the plaintiff had contended in answer to the application) that the defendant’s conduct had caused or contributed to the plaintiff’s insolvency;
(4)that Mr Mark Pak‑Poy was the sole director and shareholder of the plaintiff and the appropriate amount of the security up to the trial stage was the sum of $18,000;
(5)that, due to the plaintiff’s insolvency, the orders for security and stay would, of themselves, “stifle” its claim.
In making his orders, in particular number 3, the learned Acting Master had before him the affidavit of Mr Pak‑Poy, sworn on 20 June 2001 and describing the respective financial positions of the plaintiff and Mr Pak‑Poy himself. His reasons do not disclose, however, any findings as to Mr Pak‑Poy’s worth, nor whether he had regard to that question in making order number 3. Certainly, there were submissions put before him about that matter; indeed, the appellant itself then contended that Mr Pak‑Poy may have had some means. Perversely, before me, it argued otherwise, suggesting the material disclosed that Mr Pak‑Poy was impecunious. Just as oddly, the respondent argued before the learned Acting Master that Mr Pak‑Poy was insolvent, but before me, it was considerably less robust on that matter.
The appellant contended that in the absence of detailed reasons as to the basis for order number 3, it should be concluded that the learned Acting Master failed to exercise his discretion in making that order; alternatively, if he exercised it, that he did so wrongly.
The respondent argued the position that, on one line of authority at least, once a personal guarantee was proffered by a person behind the corporation, it was quite unnecessary for a court to have any regard to that person’s means: that here, as the alter‑ego of the company, the offering by Mr Pak‑Poy of his personal guarantee was a sufficient answer to a section 1335 application. Alternatively, the respondent contended that, were I not satisfied as to the exercise of that discretion, I should exercise it afresh and order in similar terms.
Both counsel referred me to a number of authorities dealing with the security question generally and, more particularly, with the differing approaches taken by courts to security claims against insolvent companies, where personal/director undertakings have been proffered. There are obvious dangers in seeking to reconcile authorities dealing with a particular exercise of discretion where the factors relevant to that exercise are numerous and varied. Those dangers are amply illustrated by the authorities before me.
The respondent described them as occupying two camps. One espoused that whenever personal guarantees were offered in lieu of security, by those behind a corporate entity, the court must accept their sufficiency, regardless of the means of the offerors. That position is best exemplified by the cases of Harpur & Ors v Ariadne Australia Ltd & Ors (No. 2) [1984] 8 ACLR 835 and Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405.
In Harpur, the Full Court of the Supreme Court of Queensland noted that it was well‑settled law that poverty can be no bar to the maintenance of proceedings by a natural person. It then had regard to the predecessor section to section 1335. It reaffirmed the view that the decision must always be a discretionary one, but at page 842 of the principal judgment, Connolly J observed:
“The mischief 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 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 skirts 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 emphasis)
In that case, the personal plaintiff was treated as the “prime plaintiff”, the other plaintiffs being companies through which he conducted his business. The court did note that he was a man of substantial means, but, in passing, Connolly J observed:
“ ... in the view which I take of this case the question (of means) is not really relevant. Once it be seen that this action is Harpur’s and that he is liable for the costs of the action, the fact that the law calls for the joinder of his companies ought not to put him in any different position from any other plaintiff in this court.” (p. 842)
In Gentry (supra), Cooper J had regard to section 1335 and observed that, whilst it was apparent that the corporate plaintiff would be unable to pay the respondents’ costs, were the latter successful in defending the action, even so, the court still retained a discretion under section 1335 - and, indeed, with respect, so much must be inferred from the wording of the section.
His Honour went on to say that it was not possible to list all the matters relevant to the exercise of that discretion, but he then had regard to the question of whether an offer by the corporation’s shareholders to accept personal liability for costs was sufficient to offset the risk inherent in the defendant’s position. He followed Harpur’s case with approval, observing at page 415:
“In the instant case once the shareholders of the applicant have agreed to accept personal liability for any judgment for costs against the applicant, the statutory purpose of s 1335 as explained in the authorities to which reference has been made is satisfied ... Once the shareholders have been exposed to personal liability for the applicant’s costs, the weight to be given to the statutory purpose is gone. Those who stand behind the applicant once they accept personal liability for the applicant’s costs are in no worse position than they would be as litigants in person in the court ...” (my emphasis)
The second camp, said the respondent, held that the proffering of such personal guarantees was an “important but not determinative matter” to be considered in the exercise of the general discretion. The authorities supporting this view were, of course, most emphasised by the appellant.
In Erolen & Anor v Baulkham Hills Shire Council & Ors (1992-93) 10 ACSR 441, Powell J discussed the reasoning in Harpur’s case (supra) and concluded, at page 456:
“While I am prepared to accept that the offer of a guarantee is a factor to be taken into account in determining what is the proper form of security to be provided in a case in which an order for security is appropriate, I am quite unable to share the views expressed by Byrne J in Mantaray Pty Ltd v Brookfield Breeding Co. Pty Ltd, supra, and by Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd, supra, which are to the effect that, once the shareholders have agreed to accept personal liability for any judgment for costs, the statutory purpose of s 1335 of the Corporations Law is fulfilled - such an approach, so it seems to me, would be as much ‘a fetter’ on the court’s discretion as the, now discarded, approach of ‘a “bias” in favour of making an order once it is shown that the plaintiff is impecunious’.”
He went on to hold in that case that:
“I do not believe that the position of the defendants would be sufficiently protected if their security were limited to such a guarantee. On the contrary, if Toveglass defaults in its obligations to Esanda, and the guarantees of the brothers Papasavvas to Esanda be called up, the guarantee now offered would be worthless, as Mr D L Williams who appeared for the Council and Hills, rather colourfully put it, ‘that is “Clayton’s” security, the security you get when you get no security’.”
In short, His Honour plainly had regard to the worth of the personal guarantees by the shareholders and not merely to the fact that they had been offered.
It should be noted that, in that case, His Honour also observed that the plaintiff’s prospects of success were weak, if not remote.
Further, the appellant relied upon KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189, ACN 007 528 207 Pty Ltd (in Liq.) v Bird Cameron & Ors [2001] SASC 247 and Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325. In KP Cable Investments (supra), Beazley J held that the sufficiency or the adequacy of the guarantee was a matter relevant for the court to consider in the exercise of its discretion. In Bird Cameron (supra), Bleby J supported that approach. In Clyde Industries (supra), the Full Court of the Supreme Court of Western Australia recognised that the status of the indemnifying directors was a relevant factor, but it did not appear to go as far as to support a detailed examination of their capacity to meet any costs order. Roland J, at page 328, remarked:
“The appellant’s case seems to be based on the idea that the bare undertaking given by the respondent’s directors is virtually worthless. I cannot agree. The directors are businessmen who are gradually lifting the respondent out of a very parlous financial position. Even if that fails, they each have their own future business careers to consider and I would have thought, for myself, that the threat of bankruptcy, if they were ever called upon to honour the written undertaking given, would provide some form of security, albeit indirect, for the appellant.”
Elsewhere, His Honour remarked that the offering of indemnities by two directors who were “... practising businessmen ... (was) ... no empty undertaking”.
Prima facie, there is conflicting authority as to the significance of a shareholder’s/director’s offer of guarantee or indemnity in respect of the costs of an insolvent corporate plaintiff. Gentry (supra) and Harpur (supra) tend to support to the proposition that once those natural persons, behind a company, expose themselves to its litigation risks, the object of section 1335 is immediately satisfied; that is to say, that a court should then approach a security application as if those natural persons were suing in their own right, and, accordingly, refuse relief. Erolen’s case (supra) and probably Bird & Cameron (supra) support a less absolute rule and espouse the view that it is relevant and appropriate for a court, in exercising its discretion, to take account of the adequacy or sufficiency of the security conferred by personal guarantees.
In considering those apparently conflicting views, I have been particularly assisted by the decision in Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 25 ACSR 623. The court there discussed the relevant authorities and reconciled them in a manner which, with respect, I adopt. At page 630.16 and 17, Malcolm CJ observed:
“... The true position is that there is a discretion, but the fact that shareholders or other persons behind the company are exposed to personal liability for whatever they may be worth, is a relevant but not necessarily a decisive consideration ...” (my emphasis), and
at page 631.6:
“... While the fact that those who stand behind the company have offered to guarantee payment of the taxed costs of the appellant is a material consideration, it is not the only consideration. There are other matters to be considered such as the merits of the action, the conduct of the parties and any other matter relevant to the exercise of the discretion, including the proposition that the mere impecuniosity of a plaintiff should not be a bar to the commencement of proceedings.” (my emphasis), and
at page 633.26:
“The claim as formulated may not be strong, but it is at the least arguable. In the absence of any detailed relevant evidence regarding the surrounding circumstances the respondent’s claim against the appellant should be presumed to have been made in good faith.”
Steytler J, at page 635.16, then observed:
“In reaching this conclusion I share the opinion of the Chief Justice, supported as it is by the preponderance of the authorities to which he has referred, that the availability of an undertaking of personal liability by the persons who stand behind the company is only one factor, albeit an important and sometimes determinative factor, to be taken into account in the exercise of a discretion.” (my emphasis)
Malcolm CJ concluded (at 634.9):
“In my opinion, when proper account is taken of all the relevant circumstances, including the merits of the claim, the presumption, in the absence of evidence to the contrary, that the claim is bona fide and the financial position of the directors and shareholders, an order that security be by way of the personal guarantees of the directors and shareholders would constitute sufficient security for the purposes of s 1335 of the Corporations Law.”
His Honour there considered the assets of the guarantors, noting that at least two of them were unable to put up “any significant amount of cash by way of security” and, further, that the risk of their bankruptcy was a relevant consideration.
I turn then to consider the merits of this appeal. First, I am persuaded on the basis of the above authorities, and particularly KP Cable, Bird Cameron and Intercraft (supra), that the learned Acting Master ought to have considered the financial position of Mr Pak‑Poy, as the proffered guarantor, and to have manifestly taken it into account in exercising his discretion with respect to order number 3.
The question was clearly raised in argument before him, but his reasons do not disclose what (if any) conclusions he reached as to the value of any proffered guarantee, nor (if such conclusions were reached) what significance he attached to them in exercising his discretion. In those circumstances, I cannot be satisfied that it was an appropriate exercise of his discretion.
To that extent, the appeal must succeed, but, given my powers under District Court Rule 97.01, I am persuaded that the most appropriate course for me to adopt is to exercise my own discretion on the matter. In doing so, however, I will adopt the unchallenged findings of the learned Acting Master as to other matters relevant to that exercise. I have set them out above. In addition, I will take account of the matters deposed to in the affidavit of Mr Pak‑Poy sworn on 20 June 2001 - no more contemporaneous materials were advanced relating to his financial position - and of the submissions of the parties.
With respect to the affidavit material, I should say I am not satisfied that Mr Pak‑Poy was then, or might now be, insolvent. True it is that the house and the cars to which he refers are jointly owned with his wife and there is a reasonably high debt level. Against that, however, the plaintiff earns a substantial annual income and, on the basis of his loan repayment rate (which, on his income, it appears he can manage), it is reasonable to conclude that, in the period since his affidavit was sworn, his liabilities have been substantially reduced. Despite his then professed pessimism about his financial position, I am not persuaded that, either then or since the swearing of his affidavit, he was or has been unable to pay his debts as they have fallen due.

His wife’s financial position is relevant to the extent that Mr Pak‑Poy may be called upon to satisfy any of their joint liabilities, but there are no detailed disclosures as to her income or means, save as to her previous employment by the defendant.
These observations do not lead to the conclusion that Mr Pak‑Poy could, by the time this matter reaches trial, readily meet a costs liability of $18,000 if he were called upon to do so, but nor do I read the authorities as requiring (as a pre‑condition for a personal security order) proof that a claim upon the personal guarantee would be satisfied in full. Here, I am persuaded there is some evidence of assets being available to creditors and there is, as well, an attendant risk of his bankruptcy and the possible loss of the house he shares with his wife. I regard these matters as material to the exercise of my discretion. In some respects, his position differs little from that of two of the guarantors discussed in Intercraft Cabinets (supra).
Further, I consider I am entitled to, and I do, take account of the undisputed fact that he is the sole shareholder and director of the company - it is not a case of only one of a group of shareholders coming forward with an undertaking - and that, apparently, he has fixed and favourable employment with a substantial employer. I am thus satisfied he would have much to lose were he to offer and then be called upon to pay the proposed guarantee.
I am satisfied here that there is a real issue to be tried: it is by no means a speculative action. I am further satisfied, on the evidence, that the plaintiff is impecunious. Having said that, however, it is noted that the plaintiff’s only substantial liabilities are to Mr Pak‑Poy and his wife. I am further satisfied that the effect of the primary orders for security (orders 1 and 2) would be to stifle the plaintiff’s claim.
Whilst, on the authorities which I accept, the fact that the sole director and shareholder of the plaintiff has proffered security is not of itself determinative, I am persuaded that it is a factor and, in this case, a significant factor to be taken into account in the exercise of my discretion on the security application. I couple with that my findings as to Mr Pak‑Poy’s solvency and the risks faced by him should the guarantee be called upon.
I am persuaded in all those circumstances that it is a proper exercise of my discretion to find that the provision of a personal guarantee or indemnity by Mr Pak‑Poy to the extent of $18,000 will sufficiently satisfy the security ordered in paragraph 1 of the learned Acting Master’s order.
It might be that an order in such or similar terms would be all that would be required for the purposes of the application, but the matter was not argued before me that way and I think it best if orders 1 and 2 of the learned Acting Master do stand, namely:
“1.That the plaintiff do provide security for the defendant’s costs in the sum of $18,000 up to the date of trial; and that that amount be paid into Court within 21 days:
2.That this action be stayed until such security for costs is provided as aforesaid or until further order:”
and that I vary the third order of the learned Acting Master in the following way:
“3.That order number 1 be deemed to have been satisfied upon the filing in Court, within 21 days of this date, of a Deed of Undertaking by Mark Pak‑Poy wherein he agrees to accept personal responsibility for payment, up to a maximum sum of $18,000, of any nett costs payable by the plaintiff to the defendant in respect of the period up to the date of trial.”

[2002] SADC 55

24 May 2002