Young & Ors v Harris & Ors No. Scciv-99-1484

YOUNG AND OTHERS v HARRIS AND OTHERS
[2001] SASC 282
Civil
Bleby J

The plaintiffs in this action are two individuals and one company, Leandre Nominees Pty Ltd (“Leandre”). They are former shareholders in a company previously known as Warlan Pty Ltd (“Warlan”). They commenced this action in the Federal Court of Australia, and the proceedings were subsequently transferred to this Court.
In essence, the plaintiffs sue the defendants, a firm of chartered accountants, for damages arising out of three transactions involving or consequent upon the sale of their shares in Warlan. It is not necessary to recite all the details contained in the Statement of Claim. It is sufficient to say that the plaintiffs allege that the defendants aided abetted counselled and procured or were directly or indirectly knowingly concerned in a breach by the directors of Warlan of s 129 of the Companies Code or s 205 of the Corporations Law as the case may be, as a result of which the plaintiffs, as shareholders, suffered loss and damage. They further allege breach of a duty of care and of their retainer as accountants and advisers to the plaintiffs in respect of the transactions concerned, breach of fiduciary duty, aiding and abetting a breach of the directors’ duties under s 229 of the Companies Code and damages for misrepresentation. They further allege a breach of duty of care and of a fiduciary duty in respect of the entry by the plaintiffs into a deed of variation extending a loan granted in respect of the original sale of their shares in Warlan. They allege that the deed of variation had the effect of negating the security given by Warlan for a loan by them to the purchasers of the shares in Warlan because Warlan itself was not a party to the deed.
The defendants have joined a firm of solicitors as third party to the proceedings claiming indemnity or contribution in respect of the plaintiffs’ claim.
A separate action by Warlan, now in liquidation, against the defendants was also commenced, and has also been transferred to this Court. Similar allegations are made in that action, although the deed of variation extending the loan is not in issue in that action. Save in one respect to be mentioned, I am not concerned with those proceedings in relation to the determination of this present application.
The plaintiffs have sued individuals said to be the partners of the firm, including the executrix of a deceased partner. They have also sued BPM Pty Ltd as proprietor of the business and Birdanco Nominees Pty Ltd, said to have “taken over” the obligation, including the liabilities, of BPM Pty Ltd. The defendants plead that the only relevant services provided to the parties were provided by BPM Pty Ltd. It seems tolerably clear that the action cannot succeed against all defendants, even if it succeeds against one.
At all material times the defendants were insured by HIH Casualty and General Insurance Ltd (HIH), and their defence was being conducted in their names by that insurer. On 15 March 2001 HIH was placed in provisional liquidation. With that, the prospect of the defendants now being provided with indemnity by HIH is remote. They are now conducting the action themselves.
By application dated 21 June 2001 the defendants seek an order for security for costs against Leandre, and for disclosure of documents evidencing its present financial position. They do not seek an order for security against the personal plaintiffs.
At all material times, Leandre has acted only as trustee of a trust known as the “Ward Family Trust”. The proceedings are brought by Leandre in its capacity as trustee of that trust. In their Statement of Claim the plaintiffs allege that Leandre is a company controlled by Philip Ward. He and the two personal plaintiffs are brother and sisters.
I have no information as to the nature of the Ward Family Trust or who are its beneficiaries. Philip Ward and the personal plaintiffs were the children of the founder of Warlan. At the time when the first share transaction took place, the shareholders in Warlan, apart from a Mr Callahan, then a 10 per cent shareholder, were the founder’s widow, the two personal plaintiffs and Leandre. As well as alleging that the defendants acted as accountants and advisers to Warlan, the Statement of Claim alleges that they were also accountants and advisers to members of the Ward family. Specifically, there is an allegation that they acted in that capacity for Philip Ward “in particular in relation to his interest in Warlan initially as a direct shareholder and later through Leandre”. In affidavits sworn by Mr Ward, he deposes to the fact that he is a director of Leandre and a debtor to the Ward Family Trust. It is not unreasonable to infer that he and/or members of his family are potential beneficiaries of the Ward Family Trust.
Leandre’s only beneficially owned asset is its three dollars paid up capital. In the latest balance sheet produced, for the year ended 30 June 1997, the only other assets of the company are described as “receivables” in an amount of $548,519, representing monies owing to the Ward Family Trust as at 30 June 1997. That comprised, in part, an amount of $516,624 owed by the Warlan Unit Trust, which was the purchaser of the shares in Warlan from the plaintiffs. I infer that that amount is the outstanding purchase price for the shares which has never been paid. The other component was $31,895 owed to the Trust by Philip Ward, being the debt to which I have already referred.
Although I have no direct information concerning the Warlan Unit Trust, the pleadings indicate that that was formed for the purpose of holding the shares in Warlan purchased from the plaintiffs. The pleadings and the very nature of the action would suggest that there is little or no prospect of recovery of the debt from the Warlan Unit Trust.
As I have already mentioned, Warlan provided security over its assets to the plaintiffs in respect of the respective debts owed to them by the Warlan Unit Trust. When Warlan went into liquidation, the liquidator sold the real estate and challenged the validity of the security. That action was compromised, and as a result the plaintiffs jointly received $50,000. All that has been disclosed about that sum is that it has been “attributed to the costs of the present proceedings”.
In relation to the debt due to the Ward Family Trust by Mr Ward, Mr Ward has deposed to the fact that as a designer he earns approximately $10,000 per annum gross and is currently receiving assistance from the NEIS Scheme, from which he receives approximately $355 per fortnight. That assistance is due to finish in October 2001. He owns the house in which he lives for which he paid $117,000. He does not say when he purchased it, nor does he give any information as to its present value. The Commonwealth Bank holds a $40,000 first mortgage on the property. He has a superannuation entitlement of $129,000 in the MLC Master Key Super Fund, but I have no information as to Mr Ward’s age or when he will be entitled to receive that amount. He owns a motor vehicle worth approximately $15,000. He has no other personal property apart from usual household furniture and effects.
The defendants rely on Rule 100.01 of the Supreme Court Rules and s 1335(1) of the Corporations Law.
So far as is relevant, Rule 100.01 provides that the Court may order security for costs to be furnished “where the plaintiff is a mere nominal plaintiff and is in a condition of poverty or insolvency”. Leandre is a nominal plaintiff in the sense that it does not bring this action for its own benefit but in its capacity as trustee only for the beneficiaries of the Ward Family Trust. It is not in condition of insolvency. Apart from its three dollar share capital, it has no assets in its own right, and acts purely as trustee for the Ward Family Trust. As such, it has a right of indemnity against the Trust assets in respect of any liability properly incurred in the administration of the Trust. The only relevant asset would appear to be a right of action against Mr Ward in respect of the debt owing by him to the Trust out of which, if the debt is recovered, Leandre would have a right of indemnity. The defendants are in no present position to require Leandre to take steps to recover that debt. Leandre has shown no inclination to take such steps, but if it did, it might well be required to or be able to distribute that asset to the beneficiaries of the Trust. There has been incomplete disclosure as to the application of the $50,000 paid jointly to the plaintiffs on settlement of the action concerning the validity of the security given by Warlan. None of the material before me suggests that that sum is available at the disposal of Leandre. I am therefore prepared to conclude that Leandre is in a condition of poverty for the purposes of Rule 100.01(a).
However, the remedy is discretionary, and a prima facie case based on the fact of the plaintiff being a nominal plaintiff and in a condition of poverty may well be defeated by other considerations relevant to the exercise of the discretion. Rule 100.01(a) merely specifies the conditions upon which the discretion may be exercised.
Section 1335(1) of the Corporations Law provides:
“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 a 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.”
Leandre is a corporation. It appears to me on credible testimony that there is reason to believe that Leandre will be unable to pay the costs of the defendants if successful in their defence. Leandre has shown no inclination to recover the debt apparently owed by Mr Ward, and as I have said, there is no guarantee that if it did, it would be able to hold the asset for the purpose of satisfying any costs order. As in the case of Rule 100.01, once the condition stated in the section is fulfilled, the remedy remains discretionary.
The defendants argue that, because Leandre is acting solely as trustee for the Ward Family Trust, the action is being brought for the benefit of third parties, being the beneficiaries (whoever they may be) of the Ward Family Trust. They argue that the beneficiaries can and should provide security, and that security should therefore be ordered. However, that consideration can only ever favour a defendant where there is a positive averment on behalf of the plaintiff that the making of an order for security will have the practical effect of stultifying its claim, because of its financial inability to provide security. In other words, where a plaintiff claims that its action will be stultified by an order for security, it is unlikely that the plaintiff could successfully resist an order on the grounds of its own inability to provide an adequate sum unless it provides evidence of the financial status of those who stand behind it and for whose benefit the action is said to be brought: Bell Wholesale Pty Ltd v Gates Export Corporation (No 2) (1954) 2 FCR 1; Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542; Octocane Pty Ltd v SRJ Property Development Pty Ltd (1998) 74 SASR 471 at 478 ‑ 479. Leandre, through its counsel and in the affidavit sworn by Mr Ward, claims that it cannot provide the security, and that its action will be stultified if it is required to do so. The fact that the action is for the benefit of persons other than the plaintiff therefore becomes a relevant consideration in favour of granting security.
The defendants also point to the fact that the plaintiffs have joined not only the persons alleged to be partners in the firm but two other entities as well. There is some substance in the submission that, if the plaintiffs do succeed, they cannot succeed against all the defendants, and that one or more of the defendants will be entitled to an order for costs.
Leandre resists the application on the ground of delay in bringing it. The plaintiffs’ original Statement of Claim was filed in the Federal Court on 3 July 1998. The action has now reached the stage where, subject to pleadings relating to recently joined third parties, the pleadings are closed, interlocutory steps have been concluded, and preparations for trial are underway. Normally, that sort of delay might well be fatal in an application for security. However, it is only since March this year, as a result of the collapse of HIH, that the defendants themselves have had control of the action. They have already made a decision to join two further third parties, and until March this year they were not in a position to make any decision as to whether an application for security should be made. In those circumstances, I am not prepared to hold against the defendants that their delay in bringing the application is fatal. They may well have good reason to bring such an application, whereas an insurer might not.
The plaintiffs further claim that it is the actions of the defendants which have brought about their demise and the impecuniosity of Leandre. However, as far as Leandre is concerned, that cannot be the case. Leandre has never had any significant assets in its own right. But in any event, this is one of those cases where it is almost impossible to make a judgment about that claim at this stage of the proceedings. The defendants deny negligence and the various breaches of duty alleged. Such a denial does not preclude the making of an order. However, they plead that they advised the plaintiffs to seek independent legal advice which they duly obtained, and that any loss they have suffered has been as a result of the default of the solicitors. The solicitors have not been sued as defendants. In their defence they also raise serious questions of causation. Therefore, it is not possible to tell at this stage, what or who may have caused the plaintiffs’ loss.
In all the circumstances I am persuaded that an order for security should be made. I base that principally on the impecunious state of Leandre, the fact that it brings the action for the benefit of unnamed beneficiaries and that it avers that if an order is made it will have the effect of stultifying its action, together with the fact that the only asset to which Leandre might have access is a cause of action in debt against a person who I infer is one of the beneficiaries of the Trust for whom the action is brought. I also have regard to the fact that the plaintiffs, of which Leandre is one, has chosen to sue a number of parties and that it is unlikely to succeed against all of them.
The question arises as to the form of the security. No application has been made against the two personal plaintiffs. In my view, the defendants should be in no better position in respect of Leandre than it would have been if the beneficiaries of the Trust themselves were the owners of the shares which were sold, the sale of which has given rise to this action. In my opinion the security should be in the form of a guarantee by Philip John Ward, the person said to have control of Leandre.
As to the amount of the guarantee, the defendants have already made a similar application in respect of the action brought by Warlan, now in liquidation. They seek the same order for security in these proceedings as they did in the other proceedings. For reasons which I have already given in deciding that application (ACN 007 528 207 Pty Ltd (In liquidation) v Bird Cameron and Others [2001] SASC 247) there has been a certain element of double counting by the defendants and lack of precision in the estimates of costs from now to the close of the first day of trial. I will not repeat the reasons which I there set out for deciding that the amount of security should be the sum of $40,000. I reach the same conclusion in this case.
There will therefore be an order that the plaintiff Leandre Nominees Pty Ltd provide security for the defendants’ costs in the sum of $40,000 by way of guarantee under seal from Philip John Ward in a form to be agreed between Leandre and the defendants or, failing agreement to be determined by a Master. The application made in paragraph 1 of the defendants’ application filed on 21 June 2001 is dismissed. I will hear the parties as to the costs of this application and order. It will follow from Rule 100.03 that the proceedings at the instance of Leandre will be stayed until the security is furnished.

[2001] SASC 282

14 August 2001