Amalgamated Mining Services Pty Ltd v. Warman International Ltd [1988] FCA 309; (1988) 19 FCR 324

Interwest Ltd v. Tricontinental Corporation (1991) 9 ACLC 1218

Classic Ceramic Importers Pty Ltd v. Ceramica Antiga SA (1994) 12 ACLC 334.

Solicitors for the Respondent: McBride Harle and Martin

1. In so far as it seeks an order for security for costs, the

motion notice of which was filed on 13 October 1995 be dismissed.

2. The respondent pay the applicant's costs of the application for

security.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

SUNDBERG J On 11 September 1995 the respondent served on the applicant a statutory demand under s.459E of the Corporations Law. The demand required the applicant to pay the sum of $8305.60 within 21 days after service, stated that the respondent could rely on a failure to comply with the demand as grounds for an application to wind up the applicant, and noted that s.459G of the Corporations Law enabled a company served with a demand to apply to the Court for an order setting aside the demand, such an application to be made within 21 days of service of the demand.

2. Within the 21 day period the applicant applied to set aside the statutory demand. On 13 October 1995 the respondent applied for an order that the applicant provide security for the respondent's costs of the application. The application was not preceded by a request for security. In support of the application the respondent relied on the applicant's 1984 Annual Return which showed current assets of $97,862, current liabilities of $169,178, and a deficiency of shareholders' funds of $28,750. The respondent also relied on an affidavit from its solicitor in which it was estimated that the party/party costs of the proceeding would be in the order of $6,000 to $10,000.

3. In response, a director of the applicant swore that the applicant was not insolvent, and was able to pay its debts as they fell due. He produced the applicant's financial accounts for the year ending 30 June 1995, from which it appears that the company had an after tax operating profit of $30,884 and an unappropriated profit of $2,026 after deducting accumulated losses of $28,858. The Balance Sheet disclosed total assets of $149,680, total liabilities of $147,554, and net assets of $2,126.

4. The application for security was made under s.1335 of the Corporations Law:

Where a corporation is plaintiff in any action or other

legal proceeding, 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 the 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.

5. Although the applicant is a "plaintiff" in the ordinary sense of the word, a long line of authority establishes that security is not ordered where the plaintiff/applicant is the party attacked and is really in the position of a defendant/respondent. The court is guided by the substance and not the form of the matter. In Willey v. Synan [1935] HCA 76; (1935) 54 CLR 175 a member of the crew of a ship travelling from New Zealand to Melbourne claimed that he had found on board some valuable coins. When the ship arrived in Melbourne the Collector of Customs took possession of the coins. The crewman made a claim to them under s.207 of the Customs Act 1901. The Collector gave notice to the crewman requiring him to commence an action for recovery of the coins, stating that in default of bringing such action the coins would be condemned without further proceedings. That was indeed the effect of s.207. The crewman, who was not ordinarily resident in Australia, thereupon commenced an action against the Collector for the recovery of the coins. The Collector's application for security for costs was rejected by the High Court. Dixon J, with whom Rich J agreed, said:

The principle is that a party to judicial proceedings, who

resides beyond the jurisdiction, should not be required to

give security for costs unless, however the parties are

arranged upon the record, he is the person invoking or

resorting to the jurisdiction for the purpose of

establishing rights or obtaining relief.

...

The position was considered in Maatschappij voor

Fondsenbezit v. Shell Transport and Trading Co. (1923) 2

KB 166, where ... Scrutton LJ ... said: "The position, I

think, extends to every case where the person against whom

security is sought is really defending himself against

attack, even if he be nominally a plaintiff, but really

defending himself against defendants' previous action

against him".

His Honour then examined the relevant provisions of the Customs Act, and continued:

It appears to me that the Collector is the actor. The

notice is a step taken by him directed at obtaining a

condemnation. It is a statutory substitute for judicial

proceedings by the Crown against the goods. Its effect is

to cast the onus of taking proceedings upon the owner or

supposed owner.

...

The provisions of the Customs Act, in effect, enable the

officers of the Crown to take the preliminary steps by

simple notices out of the Court so that it is the claimant

who must issue process. But when he does issue a writ he

does so to protect his supposed ownership. In substance he

is not the attacker, actor or person seeking redress.

For these reasons I think he is not liable to give security

for the costs of the action.

6. Latham CJ said that the plaintiff was really in the position of the defendant: "as the collector has given him a notice under s.207, he is, in effect, forced into legal proceedings, not merely to enforce his claim, but to prevent his claim from being extinguished": p.180. McTiernan J said that the action "was truly instituted by way of defence" to a claim by the Collector for condemnation of the plaintiff's goods, and that the rule that a plaintiff out of the jurisdiction should give security "should not be applied to the plaintiff in this action": p.187.

7. In Re Travelodge Australia Ltd. (1978) 21 ACTR 17 the applicant held stock in a company which had been the subject of a takeover offer. The applicant did not accept the offer and thus became a "dissenting offeree" within the meaning of the Companies Ordinance 1962. He was served with a notice the effect of which would have been that, if nothing more occurred, the respondent would have been entitled and bound to acquire the applicant's stock units. See s.180X(5). In an endeavour to prevent this happening the applicant commenced proceedings for an order under that sub-s.(5) was inapplicable to him. The respondent applied for security. In refusing it, Blackburn CJ said that the case came within the general principle illustrated by Willey v. Synan:

The applicant is a person who invokes a special statutory

procedure in order to preserve to himself a right which he

considers a valuable one, which by the combined effect of a

statute and the actions of the respondent may be taken away

from him. The respondent asserts that the applicant is the

owner of the stock units and relies on the statute to effect

a transfer of these stock units to himself.

8. The principle was again applied by Wilcox J in Amalgamated Mining Services Pty. Ltd. v. Warman International Ltd. [1988] FCA 309; (1988) 19 FCR 324. Warman's solicitors had written to Queensland Mining Supplies ("QMS") complaining that QMS had been offering to supply parts made by Amalgamated Mining Services ("AMS") for Warman pumps, thus infringing Warman's copyright in the drawings of those parts. The letter concluded by saying that unless QMS desisted, Warman would take proceedings. AMS commenced proceedings against Warman for a declaration that the threats made by Warman were unjustifiable within the meaning of s.202 of the Copyright Act 1968. Warman applied for security for costs under s.56 of the Federal Court of Australia Act 1976. The application was dismissed. Wilcox J said that although the case was not as strong as Willey v. Synan, where the plaintiff was forced to take proceedings or lose any claim to the coins, "in a practical sense, the present applicant has been forced to take legal action". His Honour concluded:

If one applies the homely test adopted by Scrutton LJ of

asking who, in the litigation, was the attacker and who was

the defender, I think it must be said that the first attack

came in the letter from Phillips Fox. Although the letter

was not written directly to Amalgamated Mining, it is that

company which has an interest in defending and, in a

commercial sense, probably has very little alternative other

than to take that course. I think that it is an accurate

analysis of the matter to say, therefore, that it is the

respondents to the principal proceeding who are the

attackers and that Amalgamated Mining is, in substance, the

defender.

9. In my view the principle illustrated by these cases is applicable to the present case. As the statutory demand pointed out, non-compliance would give rise to a ground upon which the applicant could be wound up. Unless it paid the respondent money it contends is not due, the only way the applicant could avoid that detriment was to apply under s.459G to have the demand set aside. To use the words of Wilcox J, "in a practical sense" the applicant was forced by the respondent to take legal action.

10. Counsel for the respondent contended that the cases I have mentioned are distinguishable on the ground that in each of them the plaintiff/applicant had to institute proceedings in order to protect a proprietary interest. Had proceedings not been taken, property in the coins, the stock and the right to copyright would have been lost. That is true of the coins in Willey v. Synan and the stock in Re Travelodge, but it is not true of Amalgamated Mining, where the detriment to be avoided was simply the possible loss of sales. Nor was it the case in Maatschappij, which is the foundation of the Australian cases I have mentioned.

11. The applicant's counsel relied upon a somewhat different ground from the principle the respondent's counsel sought to distinguish. He referred to Heller Factors Pty. Ltd. v. John Arnold's Surf Shop Pty. Ltd. (1979) ACLC 32,446 where Mitchell J, with whom King CJ and Legoe J agreed, said that the trial judge was entitled, in the exercise of his discretion, to take into account whether the plaintiff was a true plaintiff or had been forced into the position of a plaintiff because the defendant was empowered to take self help procedure. No reference was made to the Willey v. Synan line of cases. These cases appear to establish that security is not to be ordered where a litigant, though technically a plaintiff, is in substance a defendant. None of them treats the "reality" as merely a matter to be taken into account together with others in the exercise of the court's discretion. Heller Factors was considered by Ormiston J in Interwest Ltd. v. Tricontinental Corporation (1991) 9 ACLC 1,218. At p 1,228 his Honour said:

Perhaps it may be said that the authorities support the

proposition that security will only ordinarily be ordered

against a party who is in substance the plaintiff, and that

an order ought not to be made against parties who are

defending themselves and thus forced to litigate: cf.

Accidental and Marine Insurance Co. v. Mercati (1866) LR 3

Eq. 200. That would appear to be an overstatement, but the

fact that a plaintiff ... has instituted essentially

defensive proceedings, must be a significant factor in the

exercise of the Court's discretion.

12. After noting Sydmar Pty. Ltd. v. Statewise Developments Pty. Ltd. (1987) 73 ALR 289 where, at p 300, Smart J said that the factors relevant to the exercise of the discretion to order security include "whether the plaintiff's proceedings are merely a defence against 'self-help' measures taken by the defendant", Ormiston J said:

Principally it would appear necessary to characterise the

proceedings in respect of which security is sought. If they

are "defensive" proceedings, either directly resisting

proceedings already brought or seeking to "halt self-help

procedures", it would seem that to require security would be

oppressive, or at least would provide serious grounds for

refusing to make an order. At the least it is a factor to

be considered in the exercise of the discretion.

13. No reference was made to Willey v. Synan or the other cases in which it has been followed. In my view these cases justify the proposition that Ormiston J rejected as an overstatement, namely that an order ought not to be made against parties who are defending themselves and thus forced to litigate. In the Accidental and Marine Case, to which his Honour referred, Sir William Page Wood V.C. said:

in this case, as in Watteew v. Billam, the company, though

called a Plaintiff, is really a Defendant. The principle is

not based on the narrow ground that the Plaintiff in the

original suit, having admitted the jurisdiction, is not at

liberty to deny it: the true ground is, that a person who is

in the position of the Defendant (though nominally the

Plaintiff) is to be at liberty to defend himself.

...

Where a company is defending itself, it must be regarded as,

in substance, a Defendant, and, therefore, is not to be

called upon to give security. In this instance the company

must be considered as a Defendant, and not as a "plaintiff

or pursuer", within the meaning of (s.69 of the Companies

Act 1862).

14. The passage "a person who is in the position of a Defendant (though nominally a Plaintiff) is to be at liberty to defend himself" was the foundation of Scrutton LJ's judgment in Maatschappij which was applied in Willey v. Synan. Watteew v. Billam (1849) 3 De G and Sm 516; [1849] EngR 817; 64 ER 586, referred to by the Vice-Chancellor, was mentioned by Dixon J in Willey v. Synan as an illustration of the principle he distilled and applied.

15. Accordingly, I am of the view that the principle to apply in the present case is that espoused in Willey v. Synan, and that the fact that a plaintiff/applicant has been forced into litigation so as to be a true defendant is more than a matter to be taken into consideration in the exercise of the discretion whether to require security. In the present case the applicant was in a practical sense forced into initiating litigation in order to avoid a ground upon which it could be wound up coming into existence. In those circumstances, security is not to be ordered. Cf. Willey v. Synan, at p 186, per Dixon J and Amalgamated Mining, at p 329.

16. It is interesting to note that in Classic Ceramic Importers Pty. Ltd. v. Ceramica Antiga S.A. (1994) 12 ACLC 334 Young J in the Supreme Court of New South Wales ordered the server of a statutory demand to give security to the plaintiff applying to set it aside. His Honour said:

Commercially speaking, the person who issued the statutory

demand is the attacker and an applicant for an order under

s.459G is responding to that attack. ... one should focus

on the question as to whether in a commercial sense the

defendant to litigation is the aggressor. Even if one takes

a different tack and says that one must find a legal

aggressor, it seems to me that under the existing structure

of the Corporations Law the person who issues the statutory

demand is the legal aggressor.

17. However, if contrary to my view the matter is to be approached along the lines favoured by Ormiston J in Interwest, I would, after taking the "reality" into account, have declined in the exercise of my discretion to order security in the present case. I would also have taken into account that, as I have said, the respondent did not request security before issuing its notice of motion.

18. I will dismiss the motion notice of which was filed on 13 October 1995 in so far as it seeks an order for security for costs. The remaining relief sought in the motion, namely a change of venue, is adjourned to a date to be fixed.