A J Espie Transport Pty Ltd v TNT Australia Pty Ltd [2002] VSC 344

Supreme Court of Victoria|2002-08-16|Before: Nettle J

PRACTICE AND PROCEDURE - Security for costs. Corporations Act 2001, s. 1335

Mr Di Lallo, who appears for the defendant, has argued that when one has regard to considerations which courts have suggested are relevant to the grant of security for costs, it is plain that this case calls out for the making of an order of the kind which was made by the Master and, if anything, that the amount of security which was ordered was inadequate.

The discretion of the court to grant an order for security for costs is unlimited: see Epping Plaza Fresh Fruits and Vegetables Pty Ltd v Bevendale Pty Ltd[1] and Ariss v Express Interiors Pty Ltd (in liq)[2]. Nevertheless, as a result of the many decisions concerning security, there have emerged a number of considerations which, depending upon a particular case, may be regarded as relevant.

The first of those considerations concerns the prospects of success of the plaintiff. If it appears that the case which is brought by the plaintiff is bound to fail or stands very little chance of success, the propensity of the court to make an order for security for costs may be greater than otherwise. But where, as I judge to be the case here, a claim is prima facie regular on its face and discloses a cause of action, the position tends to be different: see, eg, Brian E. Fencott & Associates Pty Ltd v Eretta Pty Ltd[3] and K.P. Cable Investments Pty Ltd v Meltglow Pty Ltd.[4] Obviously, on the making of an interlocutory application for security, it is not always possible or practicable to reach any clear view on the merits. But they may still be relevant: see the decision in Epping Plaza v Bevendale[5].

In the course of his thorough submissions yesterday and again this morning, Mr Di Lallo has identified considerations which he submits show the plaintiff's case to be extremely weak. He submits that, contrary to the plaintiff's claim that it stood to derive substantial profits from its contract with the defendant, and that its present impecuniosity has been brought about by the alleged unlawful termination of the contract by the defendant, the fact was that the company derived little profit from the contract when it was on foot, and was always impecunious; as is demonstrated by its financial statements. In an endeavour to make good that point Mr Di Lallo took me to Exhibits AJF24 and AJF30 to the affidavit of Mr Farr, which are respectively a profit and loss statement for the year of income ended 30 June 2001 of the plaintiff and a personal income tax return for Mr Espie, the sole shareholder and director of the plaintiff, for the year of income ended 30 June 1997, and to a table set out in paragraph 20 of the affidavit which summarises the financial statements of the company.

The financial statements for the company which are summarised in Mr Farr's affidavit of 2 July at paragraph 20 do demonstrate that the accounting profits made by the company were small and, in a number of years, that small losses were incurred. It appears to me, however, that despite the impression which that creates, it tends to leave out of account the fact that the company is a one-man company and thus, in order to gauge its profitability at a commercial level, that it is necessary to ask how much by way of wages or other drawings was taken in each year by the company's principal. Then when one looks to the example upon which Mr Di Lallo relied in Exhibit AJF24, one sees that although a loss of $4,000 was recorded after extraordinary items of netting at approximately $2,000, there were in fact drawings or salaries of $30,000 paid out to the principal. And that means that, give or take a few sundry items, the company generated a commercial profit of approximately $26,000. The same may be said of each of the other years of income, which are dealt with in paragraph 20 of Mr Farr's affidavit.

As I say, on an application of an interlocutory nature of this kind, one cannot go too far in discerning what the position may ultimately prove to be at trial. It is sufficient for me to say, I think, for present purposes that I am far from convinced that the company would not have derived substantial profits from the contract.

A second related consideration is whether or not an impecunious plaintiff's financial position has been caused by the acts of the defendant. When it comes to that consideration, the plaintiff carries the burden of establishing that its impecuniosity was caused by the defendant, but that in effect requires no more than that it adduce sufficient evidence to enable me to form a provisional view of the strength of the case which it seeks to advance at trial: see Impex Pty Ltd v Crowner Products Ltd[6]. It has been said that there must be a solid foundation for any conclusion one may reach on the point: see Home Improvements International Pty Ltd v Imperial Alarm Screens (Aust) Pty Ltd[7]. But that observation must be taken as subject to the sorts of difficulties which I face upon an interlocutory application such as this, where none of the evidence can really be tested, and where there is limited assistance to be derived from comparison and inspection.

In this case I find that there is a solid foundation laid in support of the contention that the plaintiff's impecuniosity has been brought about by the defendant, in the evidence which is set out in paragraphs 29 to 88 of the affidavit of Anthony John Espie sworn on 18 July 2002.

A third and in my view important consideration upon applications such as this is whether the requirement of security would stultify the action or, more accurately, whether the making of the order would unduly stultify the ability of a plaintiff to pursue an arguable case legitimately instituted: see Imaging Applications Pty Ltd v Sun Alliance Australia Ltd[8]. Again, the onus lies on the plaintiff to show that this is so.

Yesterday, and again this morning, Mr Di Lallo took me to financial statements, and also to the affidavit of Mr Espie himself, in support of contentions: first, that notwithstanding the termination of the contract, it appears from Mr Espie's affidavit that he is employed on a casual basis as a truck driver; secondly, that he owns a home, the value of which has been assessed at $130,000, which is mortgaged only to the extent of $100,000; and, thirdly, that there is no express denial by Mr Espie of the existence of a capacity to raise either himself or with the assistance of third parties funds from an external lender to secure the defendant's position.

Arguing to the contrary, Mr Gillies has pointed to specific parts of the affidavit of Mr Espie and also to another affidavit lately sworn by Mr Espie's mother, Margaret Jane Espie, upon which he seeks special leave to rely.

In his affidavit of 16 July 2002, Mr Espie deposes that pursuant to the contract he invested a sum of $200,000 in the purchase of a RAPT prime mover, which was purpose-built for the functions that he was to perform for the defendant, and that he does not consider that it is likely to fetch upon sale any more than $150,000. That will leave a loss of $50,000 for which he will be personally liable as guarantor to CBFC Finance. He also deposes that he does not have assets of value other than the equity of $20,000 or so in his home. He also deposes that, because he is only employed on a casual basis on a weekly wage, he has no prospects of raising a further loan.

Because of the nature of this it has not been practicable for Mr Di Lallo to cross-examine Mr Espie upon what is deposed to in the affidavit. Thus, what is said there must be taken subject to the limitation that it stands untested. I must say, however, that for the purposes of the present application, it strikes me as having the ring of truth about it. It is deposed in the affidavit that Mr Espie has been a truck driver all his life. I think that I am permitted to take notice of the fact that truck drivers do not ordinarily receive a great deal of income. It also seems to me that the sort of money which would be paid for casual work of the kind to which he deposes would be unlikely to yield a particularly large weekly income. I think I can also infer for the purposes of this application, that it would be difficult, if not impossible, to obtain much accommodation on the security of a second mortgage on a home located in the country of value $130,000 which has already been charged by way of first mortgage to the extent of $100,000.

Accordingly, and although the position may later be shown to be different, I reach the view for present purposes that Mr Espie would not be able to obtain from third parties security to secure the defendant's costs.

I turn then to the affidavit sworn by Mr Espie's mother on 11 August 2002, which is directed to two issues: first, the fact that although Mrs Espie Senior was once a shareholder and director of the plaintiff, she has since ceased to be so; and, secondly, to her financial position, capacity and lack of willingness to pledge her assets and those of her husband and company to provide security for the defendant's costs.

Mr Di Lallo opposed the application for special leave to rely upon the affidavit. He submitted, first, that the matters to which the affidavit is directed were within the knowledge of the plaintiff - and, to be fair, I would include the plaintiff's camp - when the application for security was first made to the Master; secondly, that no explanation has been given on oath, and thus there is no explanation, as to why the material was not placed before the Master at the time of the hearing before him; thirdly, that it cannot be said that the affidavit is intended to overcome a formal defect or irregularity in material placed before the Master; and finally, that there are no special circumstances to justify the grant of leave. Helpfully he has referred me to the decision of the Northern Territory Supreme Court in Gameson v McKechnie[9] and to Vasilou v Australian County Homes[10] in support of his contentions.

Mr Gillies submits that the affidavit should be received, first, because it is directed to facts which have occurred since the Master's decision, namely, that whereas at the time of the application to the Master, Mrs Espie Senior held six shares in the capital of the plaintiff, she has since transferred those shares to Mr Espie; and, secondly, that I should regard the matter of Mrs Espie's personal financial circumstances as an issue of formal proof.

There is some strength in Mr Di Lallo's submissions. There is no explanation on oath as to why the material was not placed before the Master below, and I find it difficult to accept the contention that the affidavit is directed to correcting a defect or irregularity of a technical or formal kind.

Nevertheless, it is within my discretion to grant special leave, and I am disposed to do so in this case. I consider that it is important that the affidavit goes to show that shares which were thought to be registered in the name of Mrs Espie are now, at the time at which this appeal comes de novo before me, registered in the name of Mr Espie. I also consider that the Master may have proceeded upon the basis that Mrs Espie Senior was a woman of wealth, whereas the affidavit shows that to be anything but the case.

The affidavit shows that Mrs Espie was only a director and shareholder of convenience. She was a director because it was thought to be required that there be not less than two directors, and I infer that she was a shareholder because it was thought desirable that there be more than one. The affidavit corroborates evidence given in Mr Espie's affidavit, that it was not intended that Mrs Espie have any interest in the company or participate in its management and that after the company was incorporated the fact of her directorship and shareholding was forgotten about. Insofar as the affidavit bears upon Mrs Espie's financial affairs, it shows that she is, with her husband, a director and shareholder of another company, J.W. & M.J. Espie Pty Ltd. It has a truck and trailer with a sale value of approximately $195,000, upon which is owed approximately $181,000. It owns tools and equipment with a sale value of $4,000 and a car with a sale value of $8,000, and a leased Mazda utility of a value of $23,000 but in which it has no equity. Mrs Espie has a personal superannuation entitlement of only about $20,000, she has no liquid assets which would enable her to pay security for costs of $25,000, and she deposes that she would not be prepared to pay any amount which her son's company was ordered to pay by way of security for costs. She has never exercised any authority over the plaintiff company, she has not ever benefited and does not expect to benefit from ownership of the shares in it, and she would not benefit from any judgment in favour of the plaintiff company as a result of the proceedings.

On the basis of the affidavits, I reach the view, with sufficient strength for the purposes of an application of this kind, that if any substantial security were to be ordered, the company would not be able to proceed further with the litigation.

I come then to a fourth consideration which the authorities suggest is significant, and that is whether an action should be stayed in the case of an impecunious company, where those that stand behind or to benefit from the company's success are not prepared to secure the defendant's costs. In Epping Plaza[11], it was said that the fact that those who stand behind the company are not prepared to assume responsibility may be regarded as a relevant consideration. It was also said, however, that the court should not readily accept such an undertaking from persons who have no chance of making it good and because an undertaking can only be enforced by proceedings for contempt. It is to be noted, however, that what fell from the Court of Appeal in that respect was informed by the view that those who seek to conduct their business through limited liability companies ordinarily expect to receive benefits which limited liability attracts, and that a necessary corollary of that is that those persons should accept the strictures which s. 1335 of the Corporations Act imposes: see in the judgment of Winneke P at 185.

In this case the evidence shows that the use of a company was not the choice of those that stand behind it. It was rather the preference, indeed the requirement, of the defendant that Mr Espie contract through a corporation. The defendant may have required that because of the industrial and fiscal advantages available to an employer when it chooses to retain workers through corporate vehicles, or it may have had some other reason. But whatever its reason, it was the defendant that wanted Mr Espie to contract through a corporate vehicle. In those circumstances I consider that, in the exercise of the discretion conferred upon me to determine whether or not security ought go, those who stand behind the plaintiff should not be placed in any worse position as to the provision of security than they would have been if Mr Espie had been engaged directly rather than through the medium of a corporate vehicle. If Mr Espie had contracted directly with the defendant he could not be required to provide security. The position would be, however, that he, and ultimately his assets, would be liable to execution to satisfy any judgment for costs which the defendant might recover. I consider that something of the same situation ought apply here, and I am strengthened in that view by what was said by McDonald J in Letore Pty Ltd v Associated International Finance[12], in a different context. Mr Espie can be placed in the same position that he would have been if he had contracted directly with the defendant, if he is required to provide a personal guarantee for the plaintiff's liability for any order for costs recovered by the defendant. I am of the view that he should be required to do so.

That leaves for consideration Mr Espie's mother and whether there ought be a requirement that she, either directly or indirectly, provide security. The material to which I have already referred shows that if she ever had more than a nominal interest in the company it is now gone, and she no longer has even a nominal interest. Mr Di Lallo points out, however, that when one has regard to the financial statements it is plain, and indeed I so find, that there is a liability of some $25,000 owing by the plaintiff company to the company of which Mrs Espie Senior and her husband are directors and shareholders. He submits that the existence of that liability gives Mrs Espie or her company an interest in the litigation which warrants that they provide security.

I do not think that is right. I agree with Mr Gillies that it is unrealistic to expect of a creditor of a company which is impecunious that they provide security of $20,000 or greater to secure the chance of the company recovering sufficient out of this litigation to satisfy the creditor.

The precepts which have been laid down concerning those that stand behind companies have been developed largely in the contexts of companies in liquidation and where groups of creditors have banded together in order to conduct litigation in the name of the company debtor. That is not the sole province of the doctrine, for it has been held also to apply to trust companies and to warrant that beneficiaries sometimes provide security. But in each case what has been involved is a person or a group of persons who stand, if not immediately, then in effect in a position where they are likely to benefit from the litigation. I do not consider that that is the position here. When one has regard to the present financial predicament of the plaintiff company, there appears to be a very small chance of enough being recovered to satisfy the debt of $25,000.

For those reasons I am prepared to allow the appeal against so much of the Master's judgment as was directed to the provision of security and to order in lieu:

1. That the plaintiff give security for the defendant's costs for the period 29 July 2002 to the completion of mediation in the sum of $20,000.

2. That the security referred to in paragraph 1 of this order shall be given by way of personal guarantee to be executed under seal by Anthony John Espie in such manner as is acceptable to the Prothonotary by 4 p.m. on 23 August 2002.

Otherwise the judgment of the Master will stand and thus paragraphs 3 through 25 of the orders which he made would continue to apply.

A question has arisen as to the form of order as to costs I should make on the appeal. Ordinarily, if an appellant is successful he ought have the costs of the appeal and also the costs of the proceeding from which the appeal is brought. In this case, however, complication is added by the fact that to some considerable extent both parties have had a degree of success. The defendant has been successful in maintaining an order as to security, but the plaintiff has been successful in persuading me significantly to change the nature of the security required to be provided from third party security to a guarantee by Mr Espie. If there were available means more precisely to quantify the issues which have been considered in the course of the hearing before the Master and before me, I would be disposed to order that costs as to issues go in favour of the parties that have been successful. But in an application of this kind and sitting where I am, that is not really practicable. Therefore, despite the shortcomings of the course I propose to adopt, I think that the best thing for me to do is to set aside paragraph 25 of the Master's order and order in lieu that each party's costs of the application to the Master, including reserved costs, and each party's costs of the appeal to me be that party's costs in the proceeding.

(Mr Di Lallo applied for a certificate under the Appeal Costs Act.)

1. The appeal from the order of Master Wheeler of 29 July 2002 is allowed.

3. In place of the Master's order it is ordered that:

There will then follow paragraph 1 as it stands. Paragraph 2 will read:

2. The security referred to in paragraph 1 of this order shall be given by personal guarantee to be executed under seal by Anthony John Espie in a form acceptable to the Prothonotary by 4 pm on 23 August 2002.

Paragraphs 3, 4 and 5 will be as they were ordered by the Master. Paragraph 6 will be:

6. The plaintiff have leave to file and serve a further amended statement of claim by 23 August 2002.

Paragraphs 7 through 24 will be as they were pronounced by the Master. Paragraph 25 will read:

25. That each party's costs of the application to the Master, including reserved costs, and each party's costs of the appeal be that party's costs in the proceeding.

Grant to the defendant a certificate pursuant to s. 4 of the Appeal Costs Act.

Upon the defendant's appeal made by notice dated 5 August 2002, orders:

At a glance

Court

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Judgment (52 paragraphs)

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Cases Cited (2)