Southern Gold Fields Ltd v Enterprise Gold Mines NL (Receiver and Manager Appointed)

[1993] SASC 3965

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA DEBELLE J

CWDS
Courts - practice and procedure - Security for costs - Plaintiffs are all companies in precarious financial position - Delay in making application by one group of defendants - Factors relevant to exercise of discretion - Security ordered in favour of one group of defendants but not the other. Corporations Laws.1335.
Riviera Development Co Pty Ltd (in liq) v Tantalite Pty Ltd Jacobs J, unreported, 16th April 1981; John Arnolds Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd (1979) 22 SASR 20; Dictating Machine Centre Pty Ltd v Combe
(1981) 26 SASR 316; Spiel v Commodity Brokers Australia Pty Ltd (in liq)
(1983) 35 SASR 294 and Smail v Burton (1975) VR 776, applied.

HRNG ADELAIDE, 5 March 1993 #DATE 20:5:1993
Counsel for plaintiffs:             Mr Howard
Solicitors for plaintiffs:         Anderson Barker
   Gosling
Counsel for defendants:             Mr Blue except those listed below
Solicitors for defendants:         Fisher Jeffries except those listed below
Defendant Macwil Nominees Pty Ltd: No attendance
Defendant N F Burch:                No attendance
Intervener ASC:   No attendance

ORDER
Order that the plaintiffs give security for the costs of the third, fourth, sixth and seventh defendants of the action.

JUDGE1 DEBELLE J The defendants, other than the fifth and eighth defendants, have applied for orders that the plaintiffs provide security for costs. There were two separate applications. The third, fourth, sixth and seventh defendants made their application on 22 January 1993. The first and second defendants made their application on 4 March. Both applications were made under s.1335 of the Corporations Law and Rule 100 of the Supreme Court Rules. The applications were heard together. 2. This action was commenced on 23 December 1991. The then plaintiffs were Consolidated Gold Mining Areas NL ("CGMA") and Jingellic Minerals NL ("Jingellic"). There were then only two defendants, Enterprise Gold Mines NL (Receiver and Manager Appointed) ("Enterprise") and Mr J.L. Herbert, who on 8 November 1991 had been appointed receiver and manager of Enterprise. The plaintiffs sought an injunction to restrain the defendants from enforcing an equitable charge given by CGMA in favour of Enterprise. 3. The plaintiffs sought to restrain the enforcement of the equitable charge on the ground that by reason of a number of events the charge is no longer enforceable. They allege also that Enterprise was in breach of an agreement with the plaintiffs and others in not proceeding with an offer to acquire shares in CGMA and, if the charge were enforced, it would result in breaches of s.615 of the Corporations Law. It is also alleged that the appointment of Mr Herbert as receiver and manager of Enterprise is invalid. By an order made on 13 January 1992 the plaintiffs Rostight Pty Ltd ("Rostight"), 4. Independent Resources Limited ("IRL") and Southern Goldfields Limited ("Southern") were added as plaintiffs. 5. On 9 November 1991 the third to eighth defendants had joined Mr Herbert in requisitioning general meetings of the members of both Jingellic and Southern to consider inter alia resolutions to alter the composition of the board of each company. Injunctions were ordered restraining the holding of the requisitioned meetings. On 15 May 1992, the plaintiffs obtained leave to join the third to eighth defendants. The plaintiffs allege inter alia that all of the defendants are associates within the meaning of the Corporations Law and in consequence of the appointment of Mr Herbert as receiver and manager of Enterprise they will acquire a relevant interest in the shares of Jingellic and Southern respectively in contravention of s.615 of the Corporations Law. 6. On 23 November 1992 an order was made appointing Mr M.J. Mount receiver and manager of Jingellic for a period of six months. In the course of this and some other applications in this action heard in the early part of 1993, counsel have mentioned that Jingellic might withdraw as plaintiff. This application was argued on 5 March 1993. I thought it appropriate not to make any order for security for costs until the position of Jingellic had been resolved. On 29 March 1993 an order was made by consent permitting Jingellic to withdraw as a plaintiff. This application, therefore, relates only to the plaintiffs CGMA, Rostight, IRL and Southern. 7. I turn to the financial position of each of the plaintiffs. 8. The financial position of CGMA is precarious. The balance sheet for the year ending 30 June 1990 discloses an excess of liabilities over assets of $19,137,953, an increase of some $4.6m over the previous year. The total value of assets is some $8.7m of which some $7.5m represents investments held by CGMA. The investments are shares in Jingellic and Southern. The Auditor's Report attached to the accounts for the year ending 30 June 1990 notes that the recorded value of the investment in those shares exceeded market value by $6,250,038. In other words the auditors write down the value of the shares to approximately one-seventh of their stated value. In 1991 Enterprise instructed Turnbull Doyle Resources Pty Ltd ("Turnbull Doyle") to prepare a report as to how much of the amount due by CGMA to Enterprise under the equitable charge might be recovered should Enterprise demand repayment. In a report dated 29 July 1991, Turnbull Doyle substantially wrote down the value of the shareholding of CGMA in both Jingellic and Southern. The report confirmed the auditor's view that the value of the investments held by CGMA was substantially overstated in its balance sheet. The accounts of CGMA for the year ending 30 June 1990 also show that CGMA incurred an operating loss of $4,295,974, taking its accumulated losses to some $52.9m. The annual return of CGMA for year ending 30 June 1991 reports an operating loss of $5,531,698 and an excess of liabilities over assets of $24,857,002. The financial position of Rostight is also precarious. 9. In January 1992, the plaintiffs proved that it then had cash on deposit with the National Australia Bank in the sum of $657,756. However, it now has liabilities in excess of $16m. Rostight is party to a Deed of Indemnity between Rostight, its holding company, Cortaus Limited ("Cortaus"), and Lecknall Pty Ltd, a wholly owned subsidiary of Cortaus, pursuant to NCSC Class Order No. 633 which exempts Rostight from setting out particulars of its assets, liabilities and operating profits in its annual returns. The 1991 annual return filed by Cortaus revealed that it incurred operating losses after income tax for the years 1990 and 1991 of $12,871,935 and $1,608,331 respectively. It also disclosed an excess of current liabilities over current assets for the years 1990 and 1991 of $2,813,773 and $2,368,076 respectively. By virtue of the Deed of Indemnity referred to in paragraph 7 above, Rostight is in the same position as Cortaus. 10. The annual returns of IRL for the years ended 30th June 1990 and 1991 disclose that it incurred operating losses after income tax for the years 1989, 1990 and 1991 of $48,004,866, $27,886,517 and $2,733,227 respectively. They disclose also an excess of current liabilities over current assets for the years 1989, 1990 and 1991 of $948,689, $9,053,541 and $7,194,449 respectively. In January 1992, the plaintiffs proved that, apart from some small shareholdings in Enterprise and Jingellic, IRL has no readily realisable assets or income which is either unencumbered or available for payment of costs. 11. The financial position of Southern is also poor. It recorded operating losses before tax in the years ending 30 June 1989, 1990, 1991 and 1992 of $12,463,434, $1,384,288, $4,565,464 and $407,039. However, the current assets of Southern include cash on deposit with a foreign bank of $2,090,832. The auditor's report notes that the foreign bank has declined to pay the debt and that brings into question the ability of the company to trade as a going concern. 12. I am satisfied that there is reason to believe that each of the plaintiffs will be unable to pay the costs of the defendants if the defendants succeed in their respective defences. I turn to the question whether in the exercise of my discretion an order for security for costs should be made. 13. The discretion to be exercised is a wide one. It is unfettered in the sense that the discretion is not subject to anything in the nature of a statutory bias that was once thought to exist in favour of making the order: Riviera Development Co Pty Ltd (In Liquidation) v Tantalite Pty Ltd (Jacobs J, unreported, 16th April 1981). The principles which guide a court in the exercise of its discretion have been considered in John Arnolds Surf Shop Pty Ltd (In Liquidation) v Heller Factors Pty Ltd (1979) 22 SASR 20; Dictating Machine Centre Pty Ltd v Combe (1981) 26 SASR 316; Spiel v Commodity Brokers Australia Pty Ltd (In Liquidation) (1983) 35 SASR 294. 14. The defendants Enterprise and Herbert have known for more than 12 months that the financial position of each of the plaintiffs is precarious. In early January 1992, Enterprise and Mr Herbert sought to discharge the injunctions which had been ordered on 24 December 1992. On 10 and 13 January 1992 they lead evidence for the purpose of proving that the financial position of each was so precarious that any undertaking for damages was quite futile. The financial position of each of the plaintiffs has not materially altered since that evidence was lead. 15. Enterprise and Mr Herbert have delayed making the application until the pleadings have closed and all other interlocutory processes have been completed. The action is about to be listed for trial. They did not make this application until 4 March, on the eve of the hearing of the application for security for costs of the other defendants. It is true that an application for security for costs may be made too early. It might be appropriate to delay the application until a defence has been filed and the issues identified: Dictating Machines Centre Pty Ltd v Combe. Enterprise and Mr Herbert filed their defence on 6 February 1992. True it is that the plaintiffs then applied on 18 February 1992 to join the third to eighth defendants and to amend the statement of claim to include fresh allegations against Enterprise and Mr Herbert. That application was initially refused but the decision refusing leave was reversed on appeal and on 15 May 1992 an order was made joining the third to eighth defendants. On 19 May 1992 the plaintiffs filed amended points of claim and on 26 May 1992 the defendants Enterprise and Herbert filed an amended defence. Thereafter, Enterprise and Herbert and the other defendants entered into negotiations with the plaintiffs in an attempt to resolve the issues. The negotiations were protracted. While the negotiations were proceeding, interlocutory proceedings were not pursued. 16. When in early November 1992 it appeared that there was no real likelihood of any compromise, I ordered that pretrial procedures should be resumed. The delay of Enterprise and Mr Herbert in bringing this application is, therefore, not as serious as it first appears. However, the fact remains that both Enterprise and Mr Herbert have been aware of the financial position for a very long time and even in late 1992, when it was clear that the actions were going to proceed, they did not make an application for security for costs. The application has all the hallmarks of being made on the coat tails of the application of the other defendants. 17. Generally speaking, applications for security for costs should be made promptly. If a party has expended money in preparing an action for hearing and the trial is ready to proceed, it is patently unjust to permit a defendant who, though he is aware of the financial position of the plaintiff, stands by and allows work to be done and expense incurred by the plaintiff to make an application just before the trial of the action. It is well established that as general rule applications for security for costs should be made promptly: Smail v Burton (1975) VR 776, 777. Regard, will, however, be had to whether there are reasonable causes for delay: Smail v Burton. 18. While every allowance should be made for the fact that there were negotiations between the parties over a period of six months, the fact nevertheless remains that Enterprise and Mr Herbert did not with reasonable promptness make their application. They did not, for example, make any application in November or December 1992 or in the first weeks of 1993. They delayed making the application until some weeks after the other defendants had made their application. In my view Enterprise and Herbert have been guilty of unreasonable delay in bringing this application. Their application is therefore refused. 19. I turn to the application of the other defendants. Because of the negotiations to which I have referred, these defendants did not file a defence in the period from May to November 1992. However, when it was ordered that pretrial procedures should be resumed, they filed their defences and soon after filed this application for security for costs. The application was preceded by a letter requesting $26,000 as security. Although that letter was written on the same day as the application was filed, I do not think that that fact should effect the exercise of my discretion. The plaintiffs have had a period of several weeks in which to make some offer to give security for costs but no offer has been forthcoming. These defendants made this application soon after their defences had been filed. They have not been guilty of any delay which should defeat the application. 20. The plaintiff also sought to oppose the application on the ground that they are in truth being forced to litigate to prevent the wrongful exercise by Enterprise of the equitable charge. The plaintiffs called in aid the reasons of White J. in John Arnold's Surf Shop Pty Ltd (in liq) v Heller Factors Pty Ltd (supra) approved by Mitchell J. at page 35. In that case it was held that the plaintiff was merely seeking the protection of the court as a shield against what it claimed to be an oppressive or baseless self help procedure. It was held, therefore, that in truth the plaintiff was not really a plaintiff within the meaning of s.663 of the Companies Act, 1962, the predecessor of s.1335. Whatever may be the force of that submission as against Enterprise and Mr Herbert, I do not think it applies to the other defendants. The third to eighth defendants have exercised their right to requisition meetings of Jingellic and Southern. In doing so, they were exercising a right provided by s.246 of the Corporations Law. It is within the power of members of a company at a requisitioned meeting to change the structure of the board of the directors of the company provided that they comply with the formal requirements of the Corporations Law relating to the requisitioning, convening and conduct of the meetings and recording of voting at those meetings. All of this accords with the well-known principle that it is the shareholders who control the destiny of their company: see O'Loughlin J in re North Flinders Mines Ltd (1988) 52 SASR 22 at 44-45. True it is that the plaintiffs seek to restrain the exercise of that right on the ground that in requisitioning the meetings the third to eighth defendants are acting pursuant to an understanding with the defendants Enterprise and Mr Herbert so as to influence the composition of the board in such a way that will result in a breach of the Corporations Law. However, I do not think it proper to characterise the plaintiffs' claim against the third to eighth defendants as a shield against what are oppressive or baseless self-help procedures. Instead, it is an attempt to restrain members of a company from exercising a statutory right. 21. In my view this is an appropriate case in which to require the plaintiffs to provide security for the costs of the third, fourth, sixth and seventh defendants. Those defendants seek $26,000 as security for their costs up to and including the first day of the trial. There is no dispute as to the amount of the costs sought. In any event I believe the amount claimed to be proper. 22. There will therefore be an order that the plaintiffs give security for the costs of the third, fourth, sixth and seventh defendants of the action incurred up to an including the end of the first day of the hearing of this action in the sum of $26,000. I will hear counsel as to the precise terms of the order.