Seminars Australia Pty Limited v ABN Amro Morgans Limited
[2006] ACTSC 101
SEMINARS AUSTRALIA PTY LIMITED v ABN AMRO MORGANS LIMITED [2006] ACTSC 101 (17 October 2006)
PRACTICE AND PROCEDURE – security for costs – plaintiff company a trustee.
Corporations Act 2001 (Cth), s 1335
Court Procedures Rules 2006, rr 1900, 1901, 1902
Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40‑584
Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150
Leary v Tasmanian Kit Homes Pty Ltd (unreported, 15 August 1995, Supreme Court of Tasmania)
No SC 968 of 2005
Judge: Connolly J
Supreme Court of the ACT
Date: 17 October 2006
IN THE SUPREME COURT OF THE )
) No SC 968 of 2005
AUSTRALIAN CAPITAL TERRITORY )
BETWEEN:SEMINARS AUSTRALIA PTY
LIMITED (ACN 008 659 158)
Plaintiff
AND:ABN AMRO MORGANS LIMITED
(ACN 010 669 726)
Defendant
ORDER
Judge: Connolly J
Date: 17 October 2006
Place: Canberra
THE COURT ORDERS THAT:
The plaintiff is to provide security for costs in the sum of $75,000.
The plaintiff pay the defendant’s costs of this application.
The parties be heard on the form of security.
This is an application for security for costs brought by the applicant/defendant, a bank, against the respondent/plaintiff company, which has identified itself as a trustee. The substantive action is a claim in respect of what is said to have been inappropriate investment advice which is said to have caused loss to the operations of the plaintiff. The plaintiff company is the trustee of an entity known as Seminars Australia Service Trust, through which professional education training services are conducted. The directors of the company are two Canberra residents, Mr and Mrs Klomp.
The action was originally commenced as a claim by way of negligence and the action was brought by Mr Klomp, who is a barrister. In affidavits filed in support of an application that the plaintiff company be represented by Mr Klomp, it was asserted by both Mr and Mrs Klomp that the plaintiff company did not have sufficient liquid funds to engage solicitors to represent it in the action, and that the directors themselves did not have sufficient liquid funds to engage solicitors to represent the companies. Such assertions, not surprisingly, caused concern to the defendant.
Mr Klomp was granted leave to represent the plaintiff as a director.
The defendants sought to have the original statement of claim struck out, and this was successful. The plaintiff is now represented by a firm of solicitors and has repleaded the claim. In the amended statement of claim, the plaintiff is identified as “at all material times a duly registered corporation and the trustee of a trust styled as ‘Seminars Australia Service Trust’”.
The defendant has sought undertakings and guarantees from Mr and Mrs Klomp in relation to costs, but these have not been forthcoming. Accordingly, an application was brought for an order for security for costs, pursuant to both s 1335 of the Corporations Act 2001 (Cth) (the Corporations Act) and r 1900 of the Court Procedures Rules 2006 (the Court Procedure Rules). The basis for the claim is identical, namely that, under the Court Procedures Rules, “the plaintiff is a corporation and there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them”. The equivalent provision of the Corporations Act provides (s 1335(1)) that:
Where a corporation is plaintiff in any action or other legal proceedings, 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.
An application for security for costs is a remedy to ensure that a defendant will not be put to the significant costs of litigation and find that, although ultimately fully successful and awarded costs, the impecunious state of the plaintiff means that it is unable to recover the costs. The principles governing such applications are well established and are to some extent codified in rr 1901 and 1902 of the Court Procedures Rules.
Where the basis for the application is that the plaintiff is a corporation and there is reason to believe that the plaintiff will be unable to pay the defendant’s costs, it will normally involve an examination of the balance sheets and taxation returns of the corporation. Where the plaintiff company is a trustee, however, special considerations apply.
The use of trusts is an entirely legitimate form of organising a business enterprise, and it can bring with it significant legitimate taxation and other benefits. However, it also means that when the entity operates in such a way, the assets of the corporate entity are liable at any time to be altered or moved, and it cannot be said, merely because the financial statements demonstrate that the business entity has a strong cash flow and assets of some significance, that the trustee plaintiff corporation would be able to meet any costs order.
There is affidavit material filed by the plaintiff company showing that the Seminars Australia Service Trust has for some years conducted a business of real significance, with revenues regularly in the order of amounts in excess of $600,000, and generating net operating profits in the range of $200,000. It has assets in the way of residential property both in Canberra and Batemans Bay. It has significant unsecured loans in the names of the directors, Mr and Mrs Klomp. While the Trust identifies in its most recent balance sheet, to 30 June 2006, total assets in the order of $3 million, including an item of $1 million for goodwill, this is matched by liabilities of the same order, leaving a declared net asset position of $50. Significant in the liabilities are monies owed to the Directors in excess of $1 million.
If these were the accounts of a non-trust entity, it would seem to me that the strong trading record and history of generating substantial trade profits would be sufficient to satisfy me that the corporation would be in a position to meet any order for costs. Where the financial reports are of a trust entity, however, special considerations apply. In Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40‑584, Smithers J in the Federal Court said (at 46,729):
Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the Court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability.
This passage was cited with approval by the Appeal Division of the Supreme Court of Victoria in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150. In that case Tadgell J noted that the entity from whom security was sought held unencumbered real estate the value of which exceeded the likely costs of the appeal, but his Honour noted (at 154) that this hardly satisfied the concern of the applicant because, that entity being a trustee:
... the trustee may, and I am prepared to assume that it would, be required at any time to transfer its legal interest in the unencumbered property to the beneficiaries of the trust or to encumber it.
His Honour then cited the passage referred to above from Smithers J, and also a passage where Smithers J said (at 46,731):
I have concluded that an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs.
It seems to me that these principles are applicable in the present application. I would respectfully endorse Tadgell J’s view (at 154) that to apply this approach:
... does not, in my opinion, involve any reversal of the onus which rests on an applicant for security for costs to demonstrate a probable inability of a respondent to the application to meet an order for costs. Rather, it recognises that, in circumstances such as are now disclosed by the evidence, the applicant for security should be taken to have discharged that onus.
I note that in Leary v Tasmanian Kit Homes Pty Ltd (unreported, 15 August 1995, Supreme Court of Tasmania), Underwood J (as he then was) applied these principles, and also referred to the observation of Smithers J in the Laundry Coin-Wash case (at 46,730) that:
The method by which the parties concerned construct the entities by which their interests are pursued has, no doubt, positive benefits for them, and is a matter for decision by them. But the trust structure does involve that persons dealing with a company playing the part of trustee in the adopted business structure, necessarily deal with an entity, the beneficial ownership of all property in whose hands is in another entity to whom the legal estate therein may be passed at any time. The accountability of such a company for amounts for which it may be legally liable is inherently less stable and reliable than would be the case if it were in business on its own behalf.
In the present case it seems to me that although the trading entity, Seminars Australia, can clearly be seen to be a strong and viable business with regular substantial earnings and significant assets by way of real property, such that an application for security for costs against it if it were an ordinary trading corporation, would be unsuccessful, the trust arrangements do mean that the defendant cannot be sure that an order for costs would be met. Although in the course of the hearing counsel for the plaintiff offered certain undertakings on behalf of the plaintiff and Mr Klomp, these were not sufficient to assuage the concerns of the defendant. It seems to me that, in the absence of an order for security for costs, there is a real and genuine concern that the beneficiaries under the trust, which include Mr and Mrs Klomp, their children, and a church, could require the plaintiff to transfer property or distribute trust monies at any time in such a way that there would be nothing for a successful defendant in this action to recover against. Those behind the activities of Seminars Australia have chosen, no doubt for sound commercial and accounting reasons, to conduct their trading activities through a trust structure, but this necessarily carries consequences where such an entity commences commercial litigation. I am satisfied that the requirements for an order for security for costs have been made out.
The principal solicitor for the defendant has put on an affidavit setting out a skeleton bill of costs for the successful conduct of this litigation to trial, and has asserted that costs to date have exceeded $70,000. I note that the defendant, having been successful in its application to strike out the original statement of claim, has obtained a costs order in its favour, but that this has yet to be taxed or enforced. The skeleton bill of costs is in the sum of $182,205, which he acknowledges is on a solicitor and client basis, and would be reduced appropriately on taxation. The application is for security in the sum of $75,000 which, it seems to me, is appropriate in the circumstances of this case, and I will so order. I will hear the parties on the appropriate form of security, which could amount to a form of commercial guarantee, or, indeed an appropriate guarantee by the directors themselves, which was all that was originally sought by the defendant. The defendant should have the costs of this application.
I certify that the preceding fifteen (15) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Connolly.
Associate:
Date: 17 October 2006
Counsel for the applicant: Mr RL Crowe SC
Solicitor for the applicant: Minter Ellison
Counsel for the respondent: Mr PG Willis
Solicitor for the respondent: Slater & Gordon
Date of hearing: 6 October 2006
Date of judgment: 17 October 2006
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