A.J. Thompson Pty Ltd & Anor v. K.L.K. Manufacturing Pty Ltd & Ors [1985] FCA 134

K.L.K. MANUFACTURING PTY. LTD. and KEVIN ERROL KOCH

lL. The application for security of costs against the applicants, A.J. Thompson Pty. Ltd. and Alan John

K.L.K. MANUFACTURING PTY. LTD. , KEVIN ERPOL KOCH and JOHN SCOTT SUTTON

K.L.K. MANUFACTURING PTY. LTD. and KEVIN ERROL KOCH

application was doubtless prompted by the fact that on 25 January 1985 the applicant company called a meeting of its creditors at which 1t was resolved that the company be placed in liquidation and that one Richard Hugh Allert be appointed liquidator. The statement of affairs of the applicant company which was placed before that meeting disclosed that the company was insolvent and that the deficiency omprior te the costs of liquidation was

The proceedings in this matter were commenced by the applicants on 1 December 1983. They claimed that the cespondent company together with the respondents Kevin Errol Koch and John Seatt Sutton had contravened 5.52 and s5.59(2) of the Trade Practices Act 1974 ("The Act") in consequence of which the applicants had suffered loss. They sought damages under 5.82 of the Act and relief under 5.87 as weil as damages for fraudulent

and/or negligent misrepresentation, damages for breach of

contract and pursuant to the Misrepresentation Act 1972 (S.A.).

The applicants pleaded that the respondents Koch and Sutton made, during negotiations in February 1983 for the sale and purchase of the respondent company's Flexebar business, certain oral representations, which in their defence they denied, and certain documentary representations, which documentary representations were not admitted by them. These latter

(a) that the value of the stock held by the said business was then approximately $50,000.00,

(b) that the value of the plant and equipment owned by the said business was approximately $50,000.00,

{c)' that the cast of materials, labour and packaging cf a Flexebar unit was 326.C0,

(d) that the respondent company had 301d as many as two thousand four hundred Flexebar units

per month and that the average number sold in a month was one thousand eight hundred.

A number of affidavits were filed in support and in

opposition to the application, but only Mr. Thompson was cross-examined, primarily on matters personal to him. Upon the unchallenged facts deposed to in these affidavits, 1t 15 possible

to reach certain tentative conclusions. It 1s of course crucial to reiterate that these conclusions are tentative and to date

untested and are tentatively reached only to enable me to

exercise my dascretion on this application for security. I

propose dealing in the first instance with matters to which courts invariably attach significance on applications for security, and to consider thereafter whether, in respect of corporations, courts should be predisposed to order security in circumstances such as the present. Likewise I will at that stage deal with the applicability of the decision of the Full Court of

this Court in Sent v Jet Corporation of Australia Pty. Ltd.

In relation to the applicant company the respondents

based their claim for security upon the provisions of s.533(1) of the Companies (South Australia) Code. They relied upon O 28 r

2¢1)(d) of the Rules of this Court in claiming an order for Security against Mr. Thompson. In each instance they relied in

the alternative upon =.56 of the Federal Court of Australia Act

1976 and the ianherent jurisdiction of this Court. The matters with which I now propose te deal relate primarily to applications Against corporations under s5.533(1) of the Code. It was

accepted that this court has jurisdiction to act under this

oravision of the Code. In Sent v Jet Corporation supra Smithers

"Having regard ta the generality with which a provision im substance similar to 5.533 as in force ain other jurisdictions it would be strange that a provision so widely approved by the legislature, no doubt because of the limitation of the liability of companies, should not extend to this court. But because of the terms of 5.56 of the Federal Court of Australia Act 1976 (Cth)

and s.79 of the Judiciary Act 1973 (Cth) the view that it does confer jurisdiction has been taken and applied

by single judges of this Court in Drumdurno v Braham(1982) 42 A.L.R. 563 and in Tradestock Pty. Ltd. v T.N.T. (Management Pty. Ltd.) (No.1) (1977) 30

F.L.R. 343 and by the Full Court of this Court in Bell Wholesale Co. Pty. Ltd. v Gates Export Corporation (1983) 8 A.C.L.R. 483."

I take into account the circumstances which follow as relevant to the exercise of my discretion whether under the Companies Code or in the exercise of the inherent jurisdiction of this Court. It is accepted by the respondents that the applicants' claim has been made bona fide and I note the fact

that Mr. Thompson has joined the applicant company as an

applicant in the proceedings. He, whether voluntarily or of

necessity, has accepted an unlimited liability for costs 1f the action 18 unsuccessful and has in fact already paid a substantial sum, which he veceived as a windfall, towards the applicants'

It appears to me on the evidence to date that the applicants have reasonable prospects of success in establishing their claims. IT have already drawn attention to the fact that the documentary representations which they have pleaded have not been denied by the respondents. In respect of these representations Mr. Thompson has deposed to the fact that the turn-over was not as represented ta him and Mr. Allert, the liquidator, said that from a perusal of the records of the applicant company after 1 March 1983 the representations appear to be untrue. An independent accountant engaged by the

applicants has sworn an affidavit to the effect that, having

perused the accounts of the respondent company, his conclusions

generally supported those of Mr. Allert, particularly to the effect that no value could properly be attached to the goodwill

of the Flexebar business. It was his opinion, unchallenged and untested at this stage, that at the time of the sale of the

Flexehar business the respondent company was insolvent.

An aimportant factor to be taken anto account is the evidence of Mr. Allert and Mr. Thompson that 1f the representations of the respondents were true the applicant

company would not be in liquidation but would be trading

profitably. Mr. Allert deposed to his opinion that the representations, if made, were directly responsible for the present insolvent state of the applicant company. The affidavit of Mr. Raphael lends some support to this opinion. I also note that the applicants together with Mrs. Thompson are currently being sued by a third party in the Supreme Court of South Australia in eroceedings which allege that they are infringing certain letters patent granted for what 1s said to be a similar

Mr. Allert's evidence was that after a conference with the creditors it was decided to proceed with the applicant company's claim. However an associate of his, in his absence overseas, deposed to the fact that 1f an order was made requiring the applicant company to give security for costs in any amount

the liquidator would not be in a position to proceed with the

Counsel for the applicants contended that the application for security was brought oppressively but I have no hesitation in rejecting this submission. Furthermore in a matter such as the present I attach little significance to the fact that there 15 some element of public interest in allowing the action to proceed, in particular because a contravention of 5.59(2) of the Act 1s a ground for a criminal prosecution. As Toohey J. said in Caruso's case infra at page 314, the representations were

not made to the public at large but to the applicants in

If the above matters were my only concern I would have

little hesitation in exercising my discretion to reject the

application for security. However Mr. Mansfield cf counsel argued strongly that the respondents were entitled te an order because of two additional significant factors. He contended that there was 2 predisposition towards ordering security where the applicant was an impecunious corporation. A further submission upon which he relied strongly was that I should feel bound to

follow the decision of the Full Court in Sent's case and Toohey

J. in Caruso Australia Ptv. Ltd. v Portec (Australia) Pty. Ltd.

£1984] 1 F.C.R. 311 and order security because a major creditor of the applicant company has a substantial interest in the

Present authorities seem to indicate that it is not appropriate to construe 5s.533(1) as predisposing a court to make

an order for security. Courts have been more inclined to exercise a discretion untrammelled by such a predisposition. In Sent's case supra McGregor J. said at page 233;

"Buckley's case suggests that there should bea predisposition towards ordering security where there 15 an impecunious plaintiff. See per Street Co. at p.305.

If there is such a predisposition, it should have greater weight where 1t has not been shown that the provision of security would prevent or stifle the claim being continued by the plaintiff; particularly perhaps where at the least the indications are (or it has not been proved to the contrary) as here, the plaintiff, Jet Corporation,

will not be able to pay all costs if any of the present respondents are successful. But I do not

find 1t necessary to proceed upon the basis that the relevant legislation implicitly yYequires any such predispositzion."

The usreme Court of South Australia considered the extent of the discretion under 5.533/1) in Se22el v Commodity

Brokers Australia Pty. Ltd. £19833 8 A.C.L.P. 410. Bollen J.

delivered the principal judgment of the Full Court and reviewed the relevant authorities. At page 415 he said:

"The discretion is a wide one. The judge or Magistrate asked to order security for costs should not approach the application with any predisposition at all. I octhink it follows that the circumstances in which the discretion should be exercised in favour of making an order cannot be stated exhaustively. Nor should there be any attempt to da so. The judge or magistrate must decide according to his view of the justice of the case. There should be no complaint at the imprecision of that statement. Beyond saying that the judge or magistrate must behave judicially one cannot define or delimit or categorise the circumstances in which security should be ordered to be given. It is quite another thing to speak to some matters which are capable of assuming importance in an application for security."

This decision which indicates the practice or procedure in South Australia is particularly relevant in that Smithers J, Sweeney J. agreeing, indicated in Sent's case that the jurisdiction of this

Court would be exercisable pursuant to the provisions of 5.79 of

The approach of Bollen J. accords with that of Lord

Denning M.R. in Sir Lindsay Parkinson & Co. Ltd. v Triplan Ltd.

"Turning now to the words of the statute, the important

word 15 may'. That gives the judge a dz2zscreticn whether to order security or not. There 15 no burden one way or the other. It 15 a Giscretion to be

exercised in all the circumstances of the case... If there 1s reason to believe that the company cannot pay the costs, then security may be ordered, but not must be oardered,"

discretion under s.833/1i', as aid the Full Court in Spiel's case on the basis that the legislation does not require a predisoosition. This 15 particularly the case, as McGregor J.

said in Sent's case, where there 15 evidence that the provision

of security would "prevent or stifle the claim". I reject the

In both Sent's case and Caruso's case the Court in Making an order for security attached much significance to the

fact that a dJlarge creditor or large creditors had a major

In Sent's case Citicorp was a secured creditor of the applicant company and had appointed a receiver and manager. In

these circumstances Smithers J. at page 214 saw the true position as being that "the action 1s under the control of the receiver and manager appointed by Citicorp, is Financed by Citicorp and 1s pursued for the benefit primarily of Citicorp and, subject to the

interest of Citicorp, for unsecured creditors and Jet Corporation

and that the decision whether the action should proceed or not is

that of Citicorp". This matter he considered of primary importance in the exercise of discretion under s.5272/1). He said at page 215;

"The crommencement and control ef the proceedings Drought in the name of Jet Corporation may be regarded therefore as naving resided in the receiver and manager. There is no suggestion from Jet Corporation that an order for security tor costs wili cause the action to be discontinued. The inference to be drawn from this circumstance and the evidence is that thare are funds avaitlable ror the maintenance of tnese proceedings wnether or mot an order for security for costs 15 made against Jet Corsoration.

Cnce 1t appears, not only that there 1s a secured erediter in respect of whose claims against an insolvent company the proceedings are of special interest, but that the proceedings have been initiated by, and are controlled bv the receiver ana manager appointed by that secured creditor

whose primary purpose 15 the recovery of his own debt, and there 15 a reasonable inference that that secured creditor is supporting the litigation financially, the injustice of that secured creditor pursuing his own interest in an action against the appellant parties with no risk to itself should the appellant parties succeed in their defence assumés a special significance on the question of the justice of granting or refusing an order for security for costs. It isa weighty consideration that the decision whether to sue or not to sue 1s that of Citicorp acting through the receiver and manager."

Smithers J. Qn this point McGregor J. said at page 236;

"Tf to that 1s added that Jet Corp 1s suing, at least in part ain the anterest of Citicorp, and that to order security would not stifle the

action, I consider the argument for exercising the discretion im favour of the granting of security Ls overwheiming."

In Caruse = case the facts opefore Tochey J. were v

"Gn the other hand there are two major creditors the applicant. Standard Chartered Finance presentiy owed 2638,€75 under an agreement fo lease of the plant and there is a isan of due to Caruso Fartnersnip whose name 5udq comnection with the applicant. The cotal c amounts represents more than sixty per cent af applicant's deficiency. The respondent arqu with same force, that these creditors have a majo interest in the outcome of the litigation and, the claim has a reasonable prospect of sucress, they might he xpected to contribute to any security that may be orcerad,"

Primarily in reliance upon these circumstances Toohey J. ordered that security be given for coasts likely to be ancurred

In the present matter the unsecured creditors of the applicant company amount to $202,088, of which sum $129,520 is owed to Doug Godden & Co. Pty. Ltd. ("Doug Godden"). A further $19,815 as owing to Mr. Thompson's wife and $4,527 is owing to Mr. Thompson. The contention was that more than seventy per cent

of the applicant company's debts were due to Mr. Thompson and his

family, aut being contended that Doug Gedden was a family company of Mr. Thompson. The applicant company had no secured creditors. The submission of counsel for the respondents was that the facts

were thus aindistinguishable from those in Sent's case and

Caruso's case and that I should follow the decisions in those

[t is hewever my opinion that the facts in the various matters are significantly dissimilar. fin this matter there was unchallenged evidence to the effect Doug Godden was not a family company of Mr. Thompson but of his wife. Mr. Thompson was net an atficer of that company and held only one share in trust for nis wife. He said that in the past Doug Gedden and his wife had provided considerable assistance ta che applicant company, particularly ain its financial daffaiculties consequent upon the azquisition ot the Flexeoar business. This assistance had been by way ef loans and security for loans and credit facilities provided to the applicant company by third parties. His evidence in his affidavit was that his wife blamed him both for the decision to purchase the FPlexebar business and for the substantial losses that Doug Godden would probably suffer and that the relationship between him and his wife had in consequence deteriorated. This evidence was nat challenged. In my opinion, because the debts cf Doug Godden and the wife of Mr. Thompson were incurred in what I might call domestic rather than

commercial circumstances 1t is quite understandable that Mrs.

Thompson is disinclined to give further assistance. I do not see this disinclination as indicating any loess of confidence in the

applicants case, mor do I see the fact that if the applicants are successful Doug Godden will benefit to a far greater extent than the other creditors as requiring me to exercise my

In Sent's case the evidence was that the action would proceed whether or not security was ordered. Citicorp was, as a secured craqitor which had appointed a receiver and manager, in control of the proceedings, and was a creditor to which a considerable debt was owing which arose out of commercial rransactions. There was as well evidence from which the

inference could be drawn that it was supporting the litigation

financially. Likewise in Carusa's case Standard Chartered

Finance stood ina situation simiiar to that of Citicorp. It

also had appointed yvreceivers and managers of the applicant

property, Purthermore there was nothing ta suggest that the Caruso Partnership debt was incurred in circumstances akin to

I am not persuaded that the fact that considerable debts are due to the wife of Mr. Thompson and' her family company require me, in the circumstances, to exercise my discretion and make an order far security. I take this matter into account but reject the application for an order for security Tor casts

against the applicant company. Nor have the respondents satisfied me that I should look beyond the provisions of s.533(1)

and make an order in the exercise of the iunherent jurisdiction of

this Court having refused to make an order under that section.

The claim for security for costs against Mr. Thompson was based on the provisions of O 28 yr 3(1)(d) of the Rules of

"3¢(1) Where, in any proceeding, it appears to the court on the application of a respondent-

fd) that an applicant has changed his address after the commencement of the proceeding with a4 view to avoiding the consequencze of the proceeding, the court may order that applicant to give such security as the court thinks fit for the casts of the respondent or ana uncidental to the proceeding."

The respondents' evidence in support of the application of the provision was to the effect that Mr. Thompson had subsequent to the commencement of these proceedings, namely in or about May 1984, moved to a dwellinghouse registered in the name ef his wife at 3 Omar Place, Unley Park. The facts as deposed to by Mr. Thompson upon which he was cross-examined are that the previous home owned by himself and his wife was burned to the ground in 1983. Because the major portion of the funds laid out in the purchase of that home had been provided by his wife and Doug Godden, which company also had been required to finance certain credit obligations to the applicant company, the proceeds of the land and insurance claims were, after making repayments to Doug Godden, applied in the purchase of the dwellinghouse at 3

Omar Place 1n the name of Mr. Thompson s wife. This evidence in no way supported a contention that Mr. Thompson had changed his

address with a view to avoiding the consequence of the

preceedings. In so far as 1t 15 basea on the Rules of Court the

application for an arder against Mr. Thompson must be dismissed.

To the extent that reliance was placed upon the inherent Jurisaiction of the Court as empowering an Grder for security, I accept the law to be as stated by Smithers J. in Sent's case at mage 217. He said:

endition of a litigant 25 not a ground for No special circumstances have been established whicn satisfy me

that there should be any departure from this general principle.

I am not prepared in the circumstances to make an order for security for costs of the respondents against either the applicant company or Mr. Thompson. The application to this

effect in the notice of motion is therefore dismissed and the

i certify that this ana the /44 preceding pages are a true copy of the Reasons for