Bell Wholesale Co. Ltd v Gates Export Corporation

Mr Treleaven was asked in cross-examination whether it was his expectation that Charlwood Industries would receive amended assessments from the Australian Taxation Office in respect of its taxation returns over the last few years. He responded: "Well, its my hope that it doesn't but its very subjective. It depends on interpretation and we'll wait and see." In Bell Wholesale Co. Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3, the Full Court said that "[t]he discretion to make orders under s. 56 must be exercised judicially, but that is the only relevant limitation". That judicial exercise of the discretion, in accordance with ordinary principles, will involve consideration of the subject matter, the scope and purpose of the legislation: The Queen v Australian Broadcasting Tribunal; ex parte 2HD Pty Ltd (1979) 144 CLR 45 at 49, Australian Broadcasting Tribunal v Bond (1990) 170 CLR 321 at 348, Aiden Shipping Co. Ltd v Interbulk Ltd [1986] AC 965 at 975, Knight v F.P. Special Assets Limited (1992) 174 CLR 178 at 185, 205. One provision of the statute which is of general significance for the exercise of the original jurisdiction of the Court is s. 22. This states: "22.The Court shall, in every matter before the Court, grant, either absolutely or in such terms and conditions as the Court thinks just, all remedies to which any of the parties appears to be entitled in respect of a legal or equitable claim properly brought forward by him in the matter, so that, as far as possible, all matters in controversy between the parties may be completely and finally determined and all multiplicity of proceedings concerning any of those matters avoided." On the present applications, both sides referred to the approach taken by Hill J in Equity Access Limited v Westpac Banking Corporation (1989) ATPR 40-972. His Honour referred to six factors as among the matters appropriate for consideration of the exercise of the discretion given by s. 56. (1) Chances of success Hill J pointed out that in the ordinary case if the hearing of the motion for security for costs takes place some considerable time before the hearing of the action and before the evidence has been tested, there is a difficulty in embarking in any detail upon a consideration of the prospects of success; more pertinent questions would be whether the applicant appeared to have an arguable or triable case or whether the case appeared to be merely frivolous. In the present matter, the case does not appear to be merely frivolous. It was not suggested that the solicitors' estimate of a 5 day trial was off the mark. (2) Would an order for security shut out the applicant from proceeding with its claim? There was no real suggestion that the present was such a case. (3) Does the impecuniosity of the applicants arise out of the breaches alleged by it against the respondents? This case, like Equity Access, is not a case where the acts in respect of which the applicant complains have rendered it impecunious. (4) The public interest In Equity Access, Hill J said some weight was to be given in trade practices litigation to the provision of an effective mechanism whereby there may be agitated before the Court issues of contravention of the legislation. Here, federal jurisdiction is attracted by the presence of allegations of infringement of copyright. It was not suggested that any particular weight thereby should be given any particular aspect of the public interest. (5) Discretionary matters peculiar to the particular case It will be appropriate to refer to these matters later in these reasons. (6) The quantum of risk that the applicant cannot satisfy an order for costs Hill J was satisfied, on the balance of probabilities, that there was a substantial risk that the respondents before him would not, if judgment be given in their favour, be reimbursed in full for their taxed costs. No financial materials had been placed before the Court to indicate the present liabilities of the applicant, and all that was known was that it had a very small issued share capital and some cash flow from the factoring of debts. Thus, the "substantial risk" which Hill J found that the respondents might not be reimbursed in full for their taxed costs flowed from the apparent impecuniosity of the applicant. Before me, the respondents referred to the discussion by Jenkinson J in Chester & Fein Property Developments Pty Ltd v Candam Investments Pty Ltd (1985) 9 FCR 419 at 422-4, of the significance to be attached in such a case to the availability to the party against whom the costs order is made of an indemnity out of assets of which that party is trustee. This case also indicates that the "real risk" of non-satisfaction of a costs order might arise without any apprehended improper dissipation of assets of the applicant; cf Patterson v BTR Engineering (Aust) Ltd (1989) 18 NSWLR 319 at 325-7. In his submissions, counsel for Charlwood Industries referred to the substance of the Group taken as a whole, to the large turnover of Charlwood Industries and to the operating profit returned by Charlwood Industries in the two most recent years for which there are final accounts, 1992 and 1993. Counsel particularly stressed the large sales receipts, $8.8m. in 1993 and $5.9m. for the first half of the present financial year. It was then submitted that the evidence did not disclose that Charlwood Industries was insolvent in the sense of being unable, utilising such cash resources as it has or can command through the use of its assets, to meet its debts as they fall due: Sandell v Porter (1966) 115 CLR 666 at 670, per Barwick CJ. In that case the High Court was immediately concerned whether a payment was a preference within the meaning of s. 95 of the Bankruptcy Act 1924. This required it to be established by evidence to the satisfaction of the Court that the payer of the alleged preference was at the time of the payment insolvent. Insolvency was expressed in s. 95 as an inability to pay debts as they fell due out of the debtor's own money. A rather different question arises on the hearing of a creditor's petition under s. 52 of the Bankruptcy Act 1966. Sub-section 52 (2) provides that the Court may dismiss the petition if it is satisfied by the debtor that the debtor is "able to pay his debts". For this purpose, a debtor may be able to pay a debt even though unwilling to do so: Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163, (affd. 48 FLR 372). In that case, at first instance, Deane J said (43 FLR at 165-6): "It does not appear to me that it is possible to divine any policy underlying the provisions of the [Bankruptcy] Act to the effect that a creditor should be entitled to make a recalcitrant debtor bankrupt even though the debtor satisfies the court that he is plainly solvent and able to pay his debts. It seems to me that it may well be that the legislative intent was to leave a creditor, in those circumstances, to the ordinary remedies by way of execution and garnishee." On the other hand, in Trojan v Corporation of Hindmarsh (1987) 16 FCR 37, the Full Court held that the fact that a trust had assets sufficient to pay the debt of the appellant did not assist him in demonstrating that he was able to do so, even though he was a named beneficiary of the trust and the trustee had power to advance moneys to pay the debt. The Full Court said (at 47): "So far as the assets of the Trust are concerned, they are available to him only if a discretion is exercised in his favour. The possibility of a favourable exercise of the trustee's discretion as to the utilisation of trust assets is quite different from the ability to 'command' cash resources 'through the use of his assets' to which Barwick CJ referred in Sandell v Porter (1966) 115 CLR 666 at 670." I mention these matters to emphasise that "solvency" in the sense identified by Barwick CJ takes its colour from a particular context and that it is not necessarily a sufficient answer to an application for security for costs in a case such as the present. Various factors are relevant, as indicated in the treatment of the subject by Hill J in Equity Assets. However, in the end, the circumstances must be looked at as a whole, in the light of the general concern for the efficient administration of justice in this Court, manifested in the statute of which s. 56 is a part. It may be that Charlwood Industries throughout the period covered by the evidence has been solvent in the technical sense. The answer to the question is bound up with the extent of the company's capacity to command cash resources through the use of its assets to meet its debts as they fall due. That in turn involves the consideration of the complex, but apparently fluid, structure of the Group by means of which the financial affairs of the business are conducted. The legal rights, the vindication of which is sought in the present litigation, are vested in Charlwood Industries which therefore is the appropriate applicant. However, the commercial substance which it is sought to protect is that of the Group. It is in that setting that, on the present applications, one considers the nature of the risk that the applicant would not be able to satisfy a costs order against it in the total sum suggested in the evidence of about $120,000. Terms such as "able" and "cannot" when used in relation to satisfaction of a costs order should not be given so rigid a meaning as to circumscribe the discretion given by s. 56. Counsel for the applicant submits that if the respondents did not obtain payment from his client of the amount of costs awarded against it, then it would be open to them to "get at" the assets of the applicant. However, a liquidator of the applicant would have the task of unravelling the structure of the Group so as to produce the necessary available funds. There is force in the submission for the respondents that they should not have to carry the risk of the delay and expense which would be involved in the taking of such steps. On the other hand, I do take into account the submission for the applicant that that risk to some extent is diminished by the interest of Mr Charlwood in keeping his business structure intact, rather than risk its dislocation or destruction by resistance on the part of Charlwood Industries to payment of any adverse costs order. But it remains the fact that the structure of the Group was devised to give "flexibility" for distribution of income to family members and to minimise taxation liability. Charlwood Industries, as part of this arrangement, operates without fixed assets and a significant component of its current assets are unsecured loans from other entities in the Group. The financial relations between the components of the Group are fluid. One example is the reduction in the course of six months of the indebtedness of the Accord Trust to Charlwood Industries from over $700,000 to about $3,500. Another example is the computation and charging of the management fee. This remains somewhat obscure. For example, Mr McGarrigle's evidence initially was that his profit and loss analysis for Charlwood Industries for the year to date ending December 1994 should include $918,641 as "finance expenses". When this was questioned, Mr McGarrigle said that the entry included a management fee of $900,000 entered in the books in January 1995 as the management fee applicable for the financial year ending 30 June 1994. He said in his affidavit of 10 February 1995 that the reference to "financial expenses" occurred "by reason of that description being contained in the computer generated spreadsheet".

It also is to be borne in mind that the past income tax characterisation of the management fees is presently under consideration by the Australian Taxation Office. The evidence of Mr McGarrigle provides some inferential support for another point made by the respondents. It is that the financial relationships between the integers of the Group to a significant degree depend upon unsecured loans which are undocumented other than by book entries. There may be, and it is put no higher, difficulty in ascertaining the accuracy of those book entries and in determining whether they reflect true and enforceable obligations. Wholesalers has a significant role as trustee of the Accord Trust and the Charlwood Unit Trust. The terms of those trusts do not appear from the evidence. However, even if the trustee had a broad discretion as to the use of trust assets that, as was pointed out by the Full Court in Trojan would be quite a different matter from any ability of Charlwood Industries to "command" cash resources through the use of its assets. Given the complexity of the structure of the Group and the manner of the conduct of the financial relations between the elements of the Group, what is the result on these motions? Putting to one side any apprehension of evasive action, there is still a real risk that the successful respondents may meet an unacceptably high degree of difficulty and delay in obtaining satisfaction of a costs order in their favour for amounts in the magnitude suggested by the solicitors' estimates. In reaching that conclusion, I have taken into account and weighed the various matters discussed in the course of these reasons. These are not applications which involve the consideration of what one might call "discretionary matters" peculiar to the particular case in the sense of delay, sharp practice or other conduct which helps to indicate a particular outcome. Rather, the Court seeks to achieve a result whereby all those matters peculiar to the particular case which are in controversy between the parties may be completely and finally determined, and multiplicity of proceedings concerning any of the matters in controversy be avoided. To that end, security for the payment of costs may be ordered under s. 56. Any order that is made may be reduced or increased as the litigation proceeds. In the present case, given the conclusion reached above, it is appropriate for the Court to exercise its discretion at this stage of the proceeding by ordering the provision of security in respect of the claim against the first respondent and of the claim against the remaining respondents. The respondents urged the making of an order to take matters up to the conclusion of the trial. In my view, it is more appropriate, and consistent with sub-s. 56 (3), to make an order in a sum designed to take the matter up to setting down for hearing. An application to increase the amount of security may then be made by the respondents if they are so advised. In all the circumstances, I would order that in respect of each of the first respondent on the one hand, and the remaining respondents on the other, the applicant provide security for the payment of costs that may be awarded against the applicant in the sum of $30,000. That security is to be provided within 21 days, and to be in a form agreed between the respective solicitors, and in default of agreement in a form fixed by the District Registrar. The proceeding is to be stayed until the applicant has complied with the orders for security. The costs of the respondents on their motions for security should be their costs in the cause. I certify that this and the preceding twenty (20) pages are a true copy of the reasons for judgment of the Honourable Mr Justice Gummow.

Date: Counsel and solicitors for the applicant (respondent to the motions): Mr A.J. Martin, instructed by Clayton Utz. Counsel and solicitors for the first respondent (applicant on the motion of 15 December 1994): Mr D.L. Williams instructed by Dibbs, Crowther & Osborne. Solicitors for the second to fifth respondents (applicants on the motion of 30 January 1995): Makinson & d'Apice. Dates of hearing: 9, 10 February 1995. Date of judgment: 15 March 1995.