Wheels & Rims Engineering Pty Ltd v Bridgestone Earth Mover Tyres Pty Ltd

[1990] FCA 818

IN THE COURT OF AUSTRALIA )

DIS- REGISTRY ) No QG 60 of 1990

- 1

BETWEEN:	-G
PTY LIMITED

Applicant

AND: BRIDGESTONE EARTH MOVER

S PTY LIMITED

Respondent

E i n m d ~ Z Brisbane 5 December 199Q

By its amended application filed on 21 May 1990, the applicant

seeks damages for breach of contract and contravention of

section 46 of the Trade Practices Act, as well as other

relief. The amended statement of claim provides the basis for a claim that the respondent has been using its market power to the detriment of the applicant. In a cross-claim, the

respondent claims some $176,000 for products purchased by the

applicant. The respondent applies for an order for security

of costs. The amount sought is $60,000.

The applicant's assets are comprised in a unit trust. In 1989 the trust's net assets were a mere $10 and the net income a rather small $22,000 odd. I say small, because it was, in effect, the net profit on sales of over $1.1 million. In 1990 by comparison, the net assets were close to $61,000 and the net income was of the same order although some $6,000 of the	mainly asset sales. The real tradlng profit for that year	amount making up the net income were extraordinary items,
appears to have been closer to $55,000, agalnst sales of almost $1.35 million, up by $250,000 over the figure for the previous year.
The applicant says that thls information, together with the statement of the managing director in his affidavit that the trust has been trading profitably since 1 July 1990, leads to the conclusion that its ab~lity to meet any judgment for costs has been increased since the last set of accounts which was annexed to the affidavit. I am asked to accept that if the company was able to pay a costs bill of $20,000 as of June 1990, it is better able to do so as at December 1990. Presumably this is a general continuing increase despite the overall economic downturn in the nation as a whole.
Criticism has been made of this financial material. The respondent said, first of all, that the balance sheets and accompanying material do not appear to have been audited and their veracity has not been verified in the affidavit. I
was any real doubt about the fact that these financial think this is perhaps a semantic objection because if there
documents more or less correctly indicated the company's financial position, the managing director could have been given notice to attend for cross-examination on his affidavit and the position clarified.
A more valid criticism of the documents is that when they are
analysed, it would appear that the trust's position is, to say
the least, still quite precarious. The major asset of the company appears to be directors' loans or inter-company loans of some kind which between 1989 and 1990 have, for some reason or other, been taken from a heading of current assets and placed in a heading of non-current assets. They have also increased by some $26,000. Both of these matters appear to raise a suspicion, as the respondent has argued, that the liquid assets of the company, or the realisable assets of the trust, are a little imaginary or at least not part~cularly
readily available.
Other criticisms of the documents are made which, I think, have some force. But it does not appear to me that I can roam through a set of accounts by myself, without any cross- examination, evidence or details, and draw too many conclusions of the kind which the respondent would wish me to draw. The respondent bears the onus of proof in the matter and I think it must stand or fall on the position disclosed by the affidavit to which all this documentation is annexed, viz.
that the trust is trading profitably and is able to meet a judgment for costs of the kind that could be anticipated.
Order 28 rule 3(l)(b) requires that the respondent establish that the applicant will be unable to pay the costs if it is ordered to do so. Whilst I agree that the respondent has raised doubts about the applicant's capacity to pay the costs, ~t seems to me that ~t has fallen well short of the requirements of the rule.
The applicant raised an argument of the possible inapplicability of Order 28 rule 3(l)(b) to the facts of this case because of the representative character of the applicant. The respondent replied that it would be entitled to the same relief under section 533 of the Companies Code. This requires that the respondent provide credible testimony that there is reason to believe that the corporation which rs the sole funder of the trust will be unable to pay these costs. That sets up a different test to the one appropriate to the Federal Court rule and raises a more discretionary analysis of the position. Again I think there are some matters which give rise to concern about the applicant's situation in thls connection but again having regard to where the onus of proof lies, I think that the respondent again falls into the difficulty of the limited evidentiary materlal it has been able to point to and bring to the court.
Where there is a cross-claim by a respondent for a substantial sum, albeit in this case that the cross-claim does not appear
being claimed, it seems to me that there is an additional to be opposed other than on the reasonableness of the amount responsibility on a respondent to establish which part of the costs for which it is seeking security is strictly referable to the applicant's claim as distinct from the cross-clalm. The effect of ordering security is that an impecunious applicant may well be prevented from bringing a claim to the court by reason of the fact that it might not be able to meet the costs if it is unsuccessful. In a case involving a cross-
claim, I do not think that the applicant should face problems in presenting its own claim because the costs involved in presenting the respondent's cross-claim can be treated as if they were to be incurred in the applicant's claim.
Having regard to the issues raised in the pleadings of each claim, I accept the submission of counsel for the respondent that by comparison between the two, the greater proportion of the costs will be incurred in preparing the defence to the applicant's claim rather than the prosecution of the cross- claim. I also accept what is implicit in her submissions that even if one extracted a proportion of the costs for the preparation of the cross-claim, there would be a significant balance left in order to meet the applicant's claim. However, in this case I do not believe it would be fair, nor that it is comprised within the concepts that lie behlnd security, that the applicant should have to give security for the significant portion of the costs that will be incurred in litigating the cross-claim.
As its second basis for resisting the application for security, the applicant has offered two undertakings made
through its solicitor on instructions. The first is that pending the finalisation of this litigation, the trustee will not deal with the assets of the trust other than in the normal course of business. By this I understood counsel to mean that the income and assets of the trust will be applied to the conduct of the business and not to anything else. This would,
for example, preclude, as I would understand it, any further increase in the directors', inter-company or inter-entity loans, and that the income should be spent solely on matters which arise in a profit and loss context to enable the trust to continue its strictly commercial operations.
The second undertaking is that the applicant will make all the assets of the trust available to meet any order for costs. I am inclined to agree with the respondent that this is not an undertaking of any serious significance, because it presumably would have to be done in any event, as the applicant deposes that its only income and activity is from and relating to the trust itself.
In answer to a question from me in the course of argument, the applicant added an undertaking that it would advise the respondent and, if required the court, if there was any material change in the trust's operational and financial position as deposed to in the managing director's affidavit
and accompanying financial documents.
It seems to me that those undertakings, particularly the first and the last of them, provide a not insignificant security to the respondent concerning the costs, particularly the costs that would properly be applicable to the claim as distinct from the cross-claim. Having in mind the requirement both of Order 28 and section 533 in relation to the onus of proof, these circumstances lead me to conclude that the respondent
has not established that the applicant's position is such as to warrant an order for further security.
The question then arises as to what should be done with the motion. In the first instance, I think that the undertakings need to be properly formulated, particularly the one offered during the course of argument and the undertaking against adverse dealings. In its present form, the latter is inadequately expressed because it needs to embrace the types of matters to which I have adverted in the course of these reasons.
I think, also, that as the defeat of one application for security of costs does not necessarily exclude another, especially when there are yet several months likely to pass before the hearing, the respondent's position should be preserved in the event that there is a change of circumstances or in the event that other evidence should come to attention which might have the effect of changing the impressions which
I have formed.
For that reason, I think the parties should bring in short minutes of appropriate orders which would give effect to my view that the notice of motion for security of costs should be adjourned to the hearing on the undertakings given with liberty to apply to any party on a reasonable degree of notice. This would enable it to be restored to the list if the circumstances require or suggest that that is appropriate.
The short minutes will of course formulate the applicant's undertakings in an acceptable form to embrace the conclusions which I have drawn. These short minutes may be submitted to my associate by mail or facsimile transmission and the parties will be advised in due course as to the final orders made. The liberty to apply, which will be reserved, may be made either to my associate or to any judge of the court conveniently available.
Anybody want to say anything about costs of the motion?
[ Discussion ]
I reserve the issue of costs to the hearing or such earlier time as the motion for security is finally disposed of.
There is another notice of motion before the court which is being dealt with by consent, and I make the following orders:
(1) paragraphs 10A and 10E of the amended statement of claim

are struck out

(2) the applicant is to provlde further particulars of the statement of claim as requested in a letter from the respondent's solicitor of 5 December 1990 by not later than 4 p.m. on 12 December

(3) the costs of that motion are to be costs in the cause.

[ Discussion ]

I give leave to the parties to approach the Registrar to

organise with one of the Queensland judges a hearing date for

the action.

[ Discussion ]

Costs of the directions hearing will also be costs in the cause.

. " .--- U

7

I cert~fy that thls and the C

preceding pages are a true copy of the

Reasons for Judgment herefn of h ~ s Honour

Just~ce Lnfeld	!<~&(1_1(1	-
4 ,
4,
Assoclate

Dated: 6 >C< . ' '*A- , - - I