The Hair Shack Pty Ltd v Bonnefin, A

[1990] FCA 86

6 =D-

JUDGMENT No. ... ......- ...y-

IN THE FEDERAL COURT OF AUSTRALIA	1	NOS G746 of 1989
NEW SOUTH WALES DISTRICT REGISTRY	1	G782 of 1989
GENERAL DIVISION	)	G870 of 1989

THE HAIR SHACK PTY LIMITED h ORS

Applicants

ANGELA BONNEFIN & ORS

Respondents

MOTIONS FOR SECURITY OF COSTS (EX TEMPORE)

Applications have been made under section 533(1) of the Companies Code by a respondent to these proceedings, Angela Bonnefin, ("Bonnefin") and a number of other respondents grouped by different numbers in different proceedings ("the Richardson respondents") for security of costs against four corporate applicants - Starday Pty Ltd, The Hair Shack Pty Limited, Phu On Trading Pty Limited and Van Hue Asian Foods Pty Limited. The Starday matter has not been heard and was adjourned by consent to today.

now unlikely to occur. The case sought to be made by these	premise of a 3 week jolnt hearing Involving these applicants is
respondents is that the 3 companies are impecunious, even indigent, and if unsuccessful in the litigation, would not have the funds to meet a bill for those costs.
The evidence establishes that these companies have paid up capital assets of $2, $ 3 or $ 4 , that the most recent annual balance sheets and income and expenditure statements available show either deficits or only very small surpluses, that their bank trading accounts are elther in overdraft or small surplus, and that the applicants' failures to produce more material despite comprehensive and far reaching notices to produce should lead to the inference that other material existed which was not produced and which would not advance the applicants' positions on these matters.
Respondents' counsel argued that his cllents were entirely in the hands of the applicants in these respects. One example he specifically instanced was that there were 4 cheque butts produced by Van Hue Asian Foods Pty Limited which, he said, established some sort of liability to Citibank for $ 3 5 0 0 per month which was not explained by the company. I was asked to
draw the inference that this was a liability, presumably a continuing one, which threatened the company's viability, or at least weakened or undercut its capacity to pay the respondentsr
costs in the litigation if necessary.
At first counsel for Bonnefin and the Richardson respondents sought to argue the matter, as he called it, " ~ n principle", in accordance with an agreement he believed he had negotiated with the applicants' counsel that if I ordered security of costs, the parties would work out between themselves how much should be ordered in each case. Not unexpectedly in this case, where sensible agreements of this klnd to permit the matters in dispute to proceed intelligently have been all but non existent until very recently, this agreement was disavowed by counsel for the applicants. I was therefore asked to fix the amount of the security in each case myself, presumably so that the total amount of security ordered was $120,000.
This was important because the motions for security seek, as it happens erroneously or accidentally, $100,000 in each case. It is obvious that the sum sought could be crucial in a case where impecuniosity is alleged. It is well established, and should go without saying, that the Courts cannot only be open to the rich or the well-to-do. Desplte the crippling costs of litigation in these times, people who are poor and small businesses which work on low margins between overheads and selling prices and low or sporadic and unpredictable profits must be permitted to present and conduct genulne lltlgation as far as possible. In such circumstances, Courts must be careful to hold the balance very
be asked to order security of $100,000; it is quite another if arguably deserving litigants. It is one thing in such cases to circumspectly so as not to vislt prejudice and adversity on $5000 is sought.
In antlclpation that the applicants' response to the case of Bonnefin and the Richardson respondents would be built on those lines, counsel for these respondents cited the decislon of a ~ u l l

These respondents led evidence that a 3 week hearing at which they were jointly represented and present the whole time, as they are currently, would cost them, on a party and party basis, about $120,000 in legal costs. This estimate 1s not contested but the

Court of this Court (Sheppard, Morllng and Neaves JJ) in
Wholesale CO Pty Ltd v Gates Export Corporation and Ors (No 2)
[l9841 8 ACLR 588. At 591 their Honours sald (my underlining):

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

osition of the appellant here establishes that those :ho stand behlnd it and who will benefit from the litigation if i t 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.

Naturally I accept, and agree with respect with, this as the law in the appropriate case. But it does not say that an applicant for security who produces a little evidence that a trading corporation has few assets and liquid funds today has done enough to pass an onus onto a corporation to produce evidence that it has the present capacity to meet a possible costs order months ahead.

There was certainly no such evldence tendered by the applicants

in this case. But this is because no case was argued of the kind

to which their Honours were referring in Bell v Gates. These

applicants say that they are not in the position of the appellant

in that case. They do not say that they cannot pay and that to order security would be to shut them out of their cases. They say that under section 533 (1) of the Code, the onus was on Bonnefin and the Richardson respondents to Satlsfy the Court by credible testimony that these applicants were or were likely to be unable to pay these respondents' costs, and that they had failed to do so. This amounted to an assertion that these respondents had failed to make out a case for security of costs.

One specific matter relied on was that the evidence revealed the Hair Shack Pty Llmited to be carrying on 3 separate businesses, of which only one was relevant here, and that despite returning for the year ending June 1989 a loss for taxation purposes of about $21,000, it actually had a trading profit of over $320,000. From the Atlantean heights of a profession the members of which presumably, like everyone else with substantial incomes, seek to use every legitimate means to minimise their taxation liabilities, counsel for Bonnefin and the Richardson properties, while not contesting the figures, responded to this assertion of the applicants by warning me solemnly against going behind or analysing the tax return in question to find the true trading viability of the company. I am grateful for the warning but regrettably it conflicts with my duty in this case to find the facts as they are, on the evidence tendered by the respondents, not to interpret tax law and speculate as to whether the Tax commissioner did or did not, or should or should not, approve the particular company's tax arrangements and returns. I did note

that the wages paid to earn $320,000 was about $200,000.	Perhaps
this has its own story to tell.	I do not know and cannot guess.

I do not accept the submission put by Bonnefin and the Richardson respondents that they are in the hands of the applicants in their efforts to prove the applicants' financial positions. The applicants are small tradlng companies which have been operating for between one and about three years. Few such companies could trade at a loss for long unless they had access to outside or shareholders' funds, borrowed or otherwise. Nothing was shown in this connection. No effort was made to prove whether the applicants had regularly paid thelr rents to their landlord, the first respondent, notwithstanding that until quite recently the Richardson respondents were linked, in a corporate sense at least, with the first respondent. There was no evidence of any defaults with trade creditors. Yet at least some of this information, if it existed, would have been readlly available.

Despite establishing that between the applicant companies they operated several bank accounts, some in continuing and sometimes not inconsequential overdraft, no bank managers were called to give evidence and produce their banksr records in relation to the operation of the accounts, including details of the applicantsf overdraft arrangements and whether they had or had not honoured thelr commitments and undertakings in these regards. Moneys borrowed from banks are usually secured in some way. There was no evldence as to any such securities. If a bank overdraft or a small paid up asset base of a company was a major indicator of

the legal profession might be at rlsk.	pitched at somewhat higher fliers than at present. Even some of insolvency or indigence, the poverty llne in Australia would be
Despite the revelation of monthly $3500 payments to Citibank on 4 occasions in 1989 and 1990 by Van Hue Asian Foods Pty Limited, no attempt was made by the respondents to establish from Citibank itself how long the payments had been made, how much longer they
were bound to be made, what they were for, whether they involved a contra or set off in favour of the company, whether they created a debt situation in an individual to the company, or any other basis for givlng the payments the type of adverse conclusions advocated for them. Nothing in Bell v Gates suggests that the fact of the 4 payments having been proved, the responsibillty was then on the company to fill in these gaps.
It is true that these companies do not seem to have sufficient liquid funds in the accounts shown to me to pay all the costs of these respondents for a 3 week hearing if the total of these costs were payable today by each company. But these criteria are all false and should not be used to determine this matter. There is not much to show that they can pay for their own costs either, if the same criterla were applied. Yet I do not feel entitled to draw the Inference that this means that their own counsel and solicitor cannot be paid.
These applicants, like all of those in the 16 matters involved in this litigation, are jointly represented. Up to now, all or most of the directions hearings and the interlocutory proceedings in
all 16 matters have taken place together. It is now proposed by consent that the trials be conducted in batches of selected cases
with the flrst batch of 5 cases and the second batch of 8 cases being allocated two and four consecutive weeks each in June and October respectively. I was not told what effect this eminently sensible arrangement of the litigation would have on the respondents' estimate of $120,000 for a 3 week hearing on all matters in which they are involved, but I note that only one of
these applicants is included in the first batch (the Hair Shack Pty Ltd). Nothing has been put as to the chances, and the consequent effect on this company's financial situation, of success against the first respondent in that hearing, and of the first respondent's chances of success in its cross claim against these respondents. Nor was there any allowance made for the fact that no doubt a considerable proportion of these respondents' costs will be common to the applicants' claims and the first respondent's cross claims. There will be many costs that the applicants will bear jointly, by apportionment or in groups, including the costs of Bonnefln and the Rlchardson respondents if it is ordered in due course that they are to be paid by all or any group of applicants.
These motions for security are brought only against corporate respondents. Yet most of the cases to be heard at the same time involve individual applicants (4 out of 5 rn the first batch; 6 out of 8 in the second). The costs of these respondents now sought to be secured will very largely overlap with the costs involved in the cases of individuals. Although each case will of course have to be decided separately, the legal and factual issues in each also considerably overlap. The risks to these
respondents' costs must be viewed in thrs context.
These matters were slmply not addressed in these applications, yet they are in many respects the most critical Issues of all. Nor was it argued, on these motions, that the applicants' cases were unlikely to succeed, still less that they are hopeless or unarguable or doomed to or headed for failure.
I should observe in this connectlon that just prior to these motions for security, these respondents moved to strike out the amended statements of claim of these respondents and others. In fact only the striking out of particular paragraphs was argued expressly, but senior counsel for these respondents Indicated that she supported what was then to have been an argument of the flrst respondent that the amended statements of claim should be entirely struck out and the proceedings dismissed. As this argument was never in fact put because the first respondent's motions to that effect were settled, it remains to be seen whether these respondents will seek to re-open their earlier motions to put this argument themselves. At present the matters are adjourned to March 21 to permit discussions between counsel as to what should now be done in this connection.
It follows, in my view, that Bonnefin and the Richardson respondents have failed to establish by credible available testimony that the 3 applicants named will be unable to pay the costs of these respondents if they are successful in their defences. Even if such testimony did exist, this is not in my
view an appropriate case for ordering security for such costs against these applicants. In addition to all the matters earlier mentioned, I take into account in this respect that Bonnefin has
been a party to these proceedings from the outset and has been represented by the same lawyers at all times and at many hearings. The Richardson respondents are relatively new to the record but one or more of them have been waiting to be added for some time. Bonnefin's lawyers very falrly announced some time
ago which Richardson company was Bonnefin's employer at the time of the events alleged here. Thls was for the entlrely correct purpose of permitting its jolnder if desired. When this inevitably if belatedly occurred, Bonnefin and the Richardson respondents were, as they have remained, jointly represented, as was earlier foreshadowed would be the case.
I also take into account that some time ago Bonnefin's representatives agreed to the expediting of the hearing of this litigation and to the fixing of #arch 12 1990 as the date for that hearing. I note that they have always agreed to the fixing, to the same end, of other dates of various kinds, without then or for a long time after even mentlonlng the possibility of any applications for security of costs. No subpoenas were sought or issued or made returnable for earlier hearings on such matters. Even in these motions for security, the procedure they adopted to obtain the applicants' documentation appeared makeshift and belated. To their credit, the applicants1 legal advisers responded constructively to my urgings not to take technical points which could at best delay production, and to produce whatever they could as quickly as possible.
Especially in urgent and complex matters involving many parties, some with limited financial resources, the Court should generally

not lend itself to procedures which permit a party who has chosen to proceed on one basls, with full knowledge, or at least reasonable suspicion and a capacity to obtain full knowledge, of the facts, suddenly to decide to proceed on another, so as to effect, even accidentally, a frustration of much that has gone

before and of the future expedltious despatch of the litigation with conslderable financial and other consequences to other parties and their advisers.

? .:

The 3 applications for security of costs are dismissed with	l
: L
costs.	c  .
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16 March 1990	EINFELD J	! .	I:
r:

1 I certrfy that t l vs 2nd :he t.-

preccd~ng paqes are a true: COT{ of the I 4

: Reasons for Judgment h?retn of hls Honour

I

Justrce Ernfeld 1