BETWEEN : SPENCE FINANCIAL GROUP PTY LTD (ACN 100 351 693)

GE COMMERCIAL CORPORATION (AUSTRALIA) PTY LTD (ACN 000 974 747)

Practice and procedure - Application for security for costs - Action against defendant for conversion of boat - Boat in possession of plaintiff - Seized by defendant - Competing claims to title to boat by plaintiff and defendant - Whether defendant entitled to security for costs - Turns on own facts

Corporations Act 2001 (Cth), s 1335

Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 2 FCR 1

Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998

BPM Pty Ltd v HPM Pty Ltd, unreported; FCt SCt of WA; Library No 960206; 17 April 1996

Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301

Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994

Esanda v Spence Financial Group Pty Ltd [2006] WASC 177

Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405

KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189

Maatschappij voor Fondsenbezit v Shell Transport and Trading Co [1923] 2 KB 166

Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1

Re Western Australian Planning Commission; Ex parte South Fremantle/Hamilton Hill Residents' Association Inc [2005] WASC 50

Tradestock Pty Ltd v TNT (Management) Pty Ltd [1977] FCA 1; (1977) 14 ALR 52

Willey v Synan [1935] HCA 76; (1935) 54 CLR 175

1 MASTER NEWNES: This is an application by the defendant for an order that the plaintiff provides security for costs in the amount of $100,000 within 21 days and that the action be stayed unless the security is provided.

2 The action was commenced by the plaintiff on 22 May 2006. In it the plaintiff claims that, on 6 September 2005, a Sunseeker 60 foot motor launch was in its actual or constructive possession and was moored in the Swan River in Mosman Park. On that date, the defendant, by its agents, boarded and took possession of the boat and has failed to return it. It is alleged that the defendant has thereby converted the boat to its own use. Alternatively, it is pleaded that the defendant was negligent in that, having no right or title in the boat and having made no or no reasonable enquiries to determine that it had any right or title in the boat, it took possession of the boat. The plaintiff claims damages, including exemplary damages, for trespass and conversion. In the statement of claim the value of the boat is said to be not less than $1,650,000.

3 In its defence, filed on 27 June 2006, the defendant says, so far as relevant, that it lawfully took possession of the boat, of which it was the owner under a retail bailment agreement dated 28 June 2004, made between the defendant and Boat World Australia Pty Ltd ("Boat World"). The defendant was therefore entitled to possession of and had a power of sale over the boat. It is pleaded that on 23 June 2004 the defendant had registered its interest in the boat on the register of encumbered vehicles maintained by the Department of Consumer and Employment Protection.

4 In its reply, filed on 18 September 2006, the plaintiff says, among other things, that it purchased the boat from Boat World for value without notice of any encumbrance. It denies that the defendant had any relevant interest in the boat but says that, if it did, it did not have a "security interest" or "inventory security interest" within the meaning of s 3(1) of the Chattel Securities Act 1987 (WA) capable of registration at the time it purported to register its interests in the boat. The plaintiff pleads that the retail bailment agreement between the defendant and Boat World had not then been executed. Accordingly, any interest of the defendant was an unregistered interest within the meaning of s 3(1) of the Chattel Securities Act and was extinguished by the operation of s 7(1) of that Act, the plaintiff having purchased the boat for value without notice of any encumbrance or security interest over the boat held by the defendant.

5 The plaintiff pleads, in the alternative, that the boat was sold by Boat World to the plaintiff in a market overt and the plaintiff acquired good title pursuant to s 22 of the Sale of Goods of Act 1895 (WA).

6 There is a further plea, in the alternative, that, if the defendant was the owner of the boat, the defendant was negligent. The defendant knew that Boat World would offer the boat for sale in circumstances where Boat World was not required to notify a potential purchaser of the defendant's interest in the boat and where a purchaser would be induced to believe that no-one else had any right or title in the boat. The defendant failed to take any reasonable steps by way of a system or otherwise to alert potential purchasers to the terms of the arrangement between the defendant and Boat World under the retail bailment agreement and failed to ensure that the registration details of the boat in the register of encumbered vehicles matched those of the boat.

7 It is pleaded that the defendant is thereby precluded from denying Boat World's authority to sell the boat or that the plaintiff acquired good title on the boat and is otherwise estopped from denying that the plaintiff has good title to the boat.

8 The present application for security for costs was made by the defendant on 26 September 2006.

9 I did not understand it to be in dispute that the plaintiff would be unable to meet any order for costs that might be made against it in the action. The plaintiff has a paid up capital of $100 and there are three fixed and floating charges over the assets of the company, two in favour of Esanda Finance Corporation Ltd and one in favour of the plaintiff's current solicitors. The sole director of the plaintiff is Mr Sean Spence and the sole shareholder is his wife, Michelle Spence.

10 In an affidavit in opposition to the application, Mr Spence says that the seizure of the boat by the defendant resulted in the plaintiff no longing having possession of it as security for its loan from Esanda, and the plaintiff was thereby in breach of the terms of the loan agreement. In late September or early October 2005, a representative of Esanda advised Mr Spence that as none of the plaintiff, Mr Spence or Mrs Spence was able to provide Esanda with sufficient security for the loan, the loan would be terminated and Esanda would commence legal action to recover the full amount outstanding under the loan agreement, whether or not the plaintiff continued to make the loan repayments. On 18 October 2005, Esanda demanded repayment of the amount payable under the loan agreement.

11 Those legal proceedings were subsequently commenced (the "Esanda action") and Esanda applied for summary judgment. On 18 August 2006, the Court held that the plaintiff and Mr Spence (as a guarantor) had no arguable defence to Esanda's claim for judgment in the sum of $1,007,896 and interest: Esanda v Spence Financial Group Pty Ltd [2006] WASC 177. Judgment has not yet been entered and the application is now the subject of further argument.

12 In the meantime, on 17 August 2006, the plaintiff and Mr and Mrs Spence commenced third party proceedings in the Esanda action against John Hughes Finance Broking Corp Pty Ltd ("John Hughes Finance") asserting that John Hughes Finance had acted as the plaintiff's broker in obtaining the loan from Esanda for the purchase of the boat and in doing so had engaged in misleading or deceptive conduct, or was negligent or in breach of a contractual duty of care. In the third party proceedings, the plaintiff and Mr and Mrs Spence claim against John Hughes Finance the full amount of the claim by Esanda against them and the moneys already paid by the plaintiff to Esanda under the finance agreement.

13 Mr Spence says that, as a result of the seizure of the boat by the defendant, the plaintiff was left with an unsecured debt to Esanda of approximately $1,000,000. The plaintiff, which was primarily an accounting practice, subsequently sold that practice to a related entity, Spence Trading Pty Ltd, of which Mr Spence is the director, and the plaintiff ceased trading in order to avoid the risk of insolvent trading. Mr Spence says that, as a result of the seizure of the boat by the defendant, the plaintiff has since become entangled in a number of costly legal actions, including this action and the Esanda action. The plaintiff's asset and liability position has become dire.

14 Mr Spence has put into evidence a statement of the plaintiff's assets and liabilities as at 30 October 2006. Apart from possible recoveries in respect of the litigation involving the boat, and a disputed GST imput tax credit of $107,438.05 which has been disallowed by the Australian Taxation Office, the statement of assets and liabilities shows that the plaintiff has no assets. It has, however, liabilities of $135,639.61. Of those, an amount of $65,000 is a current liability, being penalties in relation to the GST input tax credit. There is also a loan made to the plaintiff by Mrs Spence of $25,639.61 and legal fees of $45,000 which are not yet due and payable. The legal fees are secured by a charge granted by the plaintiff to its current solicitors. In notes to the statement of assets and liabilities, the loan by Mrs Spence is said to be repayable on demand and no demand has been made.

15 It also appears from a company search annexed to Mr Spence's affidavit that there is currently pending in the Federal Court an application by the Australian Taxation Office to wind up the plaintiff.

16 Mr Spence says that he does not own any assets which could be sold or used as security for borrowings to provide security for costs. His only assets are contingent in nature, being the legal claim against John Hughes Finance in the third party proceedings in the Esanda action. A statement of his assets and liabilities, verified by Mr Spence, shows that he has total assets of $22,500 and total liabilities of some $1,038,000, including a liability of some $966,000 to Esanda.

17 Mr Spence says that his income and the combined income with his wife are not sufficient to allow any security to be provided. A statement of income and expenditure for Mr and Mrs Spence has been put into evidence and verified by Mr Spence. It shows a total combined weekly income of $1330 and expenditure of $1005.

18 Mr Spence also says that since the seizure of the boat, and the various legal actions related to it, much of his time has been devoted to those actions and to Family Court proceedings in respect of his former marriage, which has severely restricted his ability to work as an accountant and tax agent, and resulted in a significant loss of income.

19 In his affidavit (confirmed in an affidavit of Mrs Spence), Mr Spence says that Mrs Spence does not own any assets which could be sold or used as security or income which would allow security to be paid. Her current income is approximately $50,000 per year as an employee of Spence Trading Pty Ltd. A statement of the assets and liabilities of Mrs Spence shows total assets of $4500 and total liabilities of some $1,117,000.

20 Mr Spence is the trustee of the Spence Holding Trust which is a discretionary trust of which, among others, he and Mrs Spence are general beneficiaries. The Spence Holding Trust owns 100 per cent of the shares in Spence Investments Pty Ltd. In his affidavit, Mr Spence says he is the sole director of that company. In fact, a company search which he annexes shows that he ceased to be a director on 20 September 2006 and on that date Mrs Spence became the sole director. Mr Spence is shown as the sole shareholder, presumably in his capacity as trustee of the Spence Holding Trust.

21 Mr Spence says that Spence Investments Pty Ltd does not own any assets in its own name and acts solely as trustee for the Spence Investment Trust. That Trust is a discretionary trust of which, among others, he and Mrs Spence are general beneficiaries.

22 The Spence Investment Trust is the sole shareholder of Commercial Design and Construction Pty Ltd (of which Mr Spence is the sole director), Quality Enterprises Pty Ltd (of which Mrs Spence is the sole director) and Spence Trading Pty Ltd (of which Mr Spence is the sole director). Mr Spence says that Commercial Design and Construction Pty Ltd never commenced trading. There is no evidence as to the assets and liabilities of Quality Enterprises Pty Ltd or Spence Trading Pty Ltd. Mr Spence says, however, that Spence Trading Pty Ltd has been and continues to be willing to make funds available for the action to the extent that its funds permit. Its funds are produced from its ongoing cash flow and its only asset is the accounting business it acquired from the plaintiff. It has since incurred its own liabilities since it commenced trading in December 2005.

23 Mr Spence says that Spence Trading Pty Ltd has agreed to fund the litigation by way of ongoing loans to the plaintiff because Mr Spence is a director of Spence Trading Pty Ltd and he wishes the claim to be prosecuted. If the plaintiff is successful, Spence Trading Pty Ltd should be able to recover its loans to the plaintiff, the plaintiff will be left with few creditors, Esanda will be paid in full and Mr Spence will be able to maintain his tax agent's registration and be able again to devote his efforts to the accounting business. Mr Spence says that if he becomes bankrupt he will necessarily lose his tax agent's registration.

24 According to Mr Spence, at the time of swearing his affidavit, the cash flow of Spence Trading Pty Ltd was not sufficient to meet the level of expenses being incurred in the action and Spence Financial Group was incurring a debt to the plaintiff's solicitor which was accruing faster than it was being paid.

25 It was submitted on behalf of the defendant that it was clear the plaintiff did not have the capacity to meet any order for costs that may be made against it in the action. The issue was whether Mr and Mrs Spence, who stood behind the plaintiff, had sufficient assets to do so or whether they had contrived to dispose of their assets to put them beyond reach.

26 It was submitted by counsel for the defendant that while it appeared from Mr Spence's affidavit that the plaintiff, which was primarily an accounting practice, had sold the practice to a related entity, Spence Trading Pty Ltd, in about December 2005, no financial details have been provided as to the sale or as to the financial circumstances of Spence Trading Pty Ltd. In addition, little information had been provided as to the financial affairs of the two trusts, the Spence Holding Trust and the Spence Investment Trust, and there was no financial information in respect of Commercial Design and Construction Pty Ltd and Quality Enterprises Pty Ltd.

27 Counsel submitted that it was incumbent upon the plaintiff to put before the Court a full and frank statement of the assets and liabilities of the shareholders and creditors of the plaintiff. In the absence of that information it cannot be concluded that the effect of an order for security for costs would be to frustrate the plaintiff's claim. It was further submitted that as the plaintiff had sold its major asset, the accounting practice, to a related entity after the boat was seized, the plaintiff cannot rely on impecuniosity as a ground to defeat the defendant's application for security for costs.

28 It was submitted on behalf of the plaintiff that there were a number of grounds upon which security for costs should be refused. In the first place, the plaintiff's claim was defensive in nature in that it was seeking to reverse the "self-help" procedure taken by the defendant in seizing possession of the boat. Had the defendant not seized the boat, it would be the defendant, and not the current plaintiff, who would be the plaintiff in the action. If the defendant had not resorted to self-help in seizing the boat, the question of provision of security for costs could therefore never have arisen.

29 It was submitted the defendant should not be permitted to rely upon its conduct in seizing the boat, the lawfulness of that conduct being an issue in this action, as a basis to force Spence Financial Group to take the position of the plaintiff and then require it to provide security for costs. Moreover, the seizure of the boat was the cause of the plaintiff's current impecuniosity.

30 Those who stand behind the plaintiff, Mr and Mrs Spence, have deposed that they do not have funds or assets which would enable them to provide security for costs. As a result of the seizure of the boat, Mr Spence's work has been restricted by the need to attend to the subsequent legal actions, and both the Spences and the plaintiff have incurred substantial legal costs in these proceedings and in the Esanda action. The plaintiff has had funds to enable it to instruct its own solicitors only because it has been provided with loans by Spence Trading Pty Ltd. Even then, the cash flow of Spence Trading Pty Ltd is not sufficient to meet all the legal costs incurred by the plaintiff. It cannot be said that the proceedings are being brought for the "benefit" of Spence Trading Pty Ltd, which is simply making loans to the plaintiff which the plaintiff is liable to repay. There is no separate benefit derived by Spence Trading Pty Ltd.

31 It was submitted that the proceedings are well advanced, the pleadings having closed and discovery and inspection completed. There was no suggestion by the defendant that the plaintiff's claim was not bona fide or that it did not have reasonable prospects of success. In the circumstances, the application for security was oppressive in that it was being used to frustrate the plaintiff's right to litigate its claim.

32 Section 1335 of the Corporations Act 2001 (Cth) provides, in effect, that the jurisdiction to order security for costs is enlivened where it appears by credible evidence that there is reason to believe the plaintiff will be unable to meet an order for costs if it is unsuccessful in the action. The Court then has a discretion whether or not to make an order for security for costs.

33 It is trite law that the discretion to order security for costs is unfettered and depends upon an examination of all of the circumstances of the case. The circumstances in which the discretion should be exercised cannot be stated exhaustively. In Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405, Cooper J said (at 415):

"[i]t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed."

34 It is, however, accepted that some of the relevant factors are:

(1) whether the plaintiff's claim is bona fide and has reasonable prospects of success;

(2) whether the defendant has contributed to the plaintiff's likely inability to pay costs;

(3) whether an order for security for costs may have the effect of stultifying the action;

(4) whether it appears the applicant is seeking to stifle a legitimate claim;

(5) whether there are others behind the corporate plaintiff who might reasonably be expected to contribute to the satisfaction of an order for security.

35 See Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 at 4 - 5 and Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998.

36 The fact that the plaintiff will be unable to pay the defendant's costs if the defendant is successful is a factor of great weight in the exercise of the discretion, but it is not necessarily decisive and regard must be had to all of the circumstances of the case.

37 It is also relevant whether the applicant for security is in substance the plaintiff or the proceedings are defensive in nature: KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 at 197; Re Western Australian Planning Commission; Ex parte South Fremantle/Hamilton Hill Residents' Association Inc [2005] WASC 50 at [75].

38 In the exercise of its discretion the Court will be concerned to achieve a balance between ensuring the defendant is adequately and fairly protected, and avoiding injustice to an impecunious plaintiff company by unnecessarily shutting it out or prejudicing it in the conduct of the litigation: Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 at 304; Tradestock Pty Ltd v TNT (Management) Pty Ltd [1977] FCA 1; (1977) 14 ALR 52 at 56.

39 A court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless the plaintiff company establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts: Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 2 FCR 1.

40 It is therefore incumbent upon a plaintiff who wishes to resist an application for security to put before the Court a full and frank statement of the assets and liabilities of the shareholders and creditors of the plaintiff: Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1 at 3. Unless a plaintiff establishes that those who stand behind it and who will benefit from the litigation if it is successful are also without means, no conclusion can properly be reached that the effect of an order for security will be to frustrate the plaintiff's claim: BPM Pty Ltd v HPM Pty Ltd, unreported; FCt SCt of WA; Library No 960206; 17 April 1996.

41 As I have said, it was not in issue that the plaintiff would be unable to meet any order for costs that might be made against it in the action. The primary contention on behalf of the defendant was that there was no, or insufficient, evidence to establish that those who stand behind the plaintiff, namely Mr and Mrs Spence, would be unable to do so.

42 It is fair to say that the financial affairs of Mr and Mrs Spence are comparatively complicated, involving as they do several interwoven discretionary trusts and companies. On the evidence, however, it appears that neither Mr Spence nor Mrs Spence has an income or specific assets in their own names which would enable them to provide security for costs. They are, however, each general beneficiaries of the Spence Holding Trust and the Spence Investment Trust. As I understand the evidence, the only asset of the Spence Holding Trust is its 100 per cent shareholding in Spence Investments Pty Ltd. The latter company has no assets in its own right but simply acts as trustee of the Spence Investment Trust and in that capacity holds all of the issued shares in Commercial Design and Construction Pty Ltd, Quality Enterprises Pty Ltd and Spence Trading Pty Ltd. In a practical sense, therefore, the ultimate assets of the trusts of which Mr and Mrs Spence are beneficiaries are the shares in Commercial Design and Construction Pty Ltd, Quality Enterprises Pty Ltd and Spence Trading Pty Ltd. It is, of course, the case that both trusts are discretionary trusts so that in each case Mr and Mrs Spence have no entitlement to any distribution from the trust, but in circumstances where Mr Spence is the trustee of one and he was, and Mrs Spence now is, the sole director of the trustee of the other, it would be commercially unrealistic to place too much weight on that.

43 The evidence as to the value of the shares is inadequate to form any firm view as to the value of the assets of the trusts. No financial statements of any of the companies were put into evidence. Mr Spence says in his affidavit that Commercial Design and Construction Pty Ltd never commenced trading. There is, however, no evidence in relation to Quality Enterprises Pty Ltd. Spence Trading Pty Ltd acquired the accounting practice formerly operated by the plaintiff but again there is no evidence as to its current financial position, apart from the statement by Mr Spence that it is unable to lend the plaintiff sufficient funds to meet the plaintiff's on-going legal expenses.

44 It is also the case that there is no evidence as to the terms upon which the plaintiff transferred the accounting practice to Spence Trading Pty Ltd. No documents relating to the transaction have been put into evidence. Therefore, although Mr Spence says the plaintiff sold the accounting practice to Spence Trading Pty Ltd, he does not say for what amount it was sold or what happened to the proceeds of sale.

45 In the end, I do not consider that the evidence is sufficient to enable it to be concluded that those who stand behind the plaintiff do not have the capacity to meet any order for security for costs so that the effect of an order may be to stifle the plaintiff's claim.

46 That, of course, is not decisive of the application. Regard must be had to all of the circumstances. In my view, one of the important circumstances in this case is that the action follows the defendant's seizure of the boat, without notice to the plaintiff.

47 It was, of course, open to the defendant to make demand on the plaintiff for delivery up of the boat and, in the absence of compliance with the demand, to commence proceedings against the plaintiff for its recovery. It appears from the evidence, however, that without any prior notice to the plaintiff or Mr and Mrs Spence that it claimed title to the boat, or any warning of its intention to do so, the defendant simply removed the boat from the mooring on which the plaintiff had placed it and took possession of it, leaving it to the plaintiff (when it became aware of the seizure) to commence proceedings to challenge the defendant's title to the boat. Why the defendant chose to take that course has not been explained and I must, of course, resist any temptation to speculate as to that.

48 What is clear, however, is that title to, and the right to possession of, the boat are the subject of competing claims by the plaintiff and the defendant, and that those claims are central issues in the action. It is not suggested at this stage that the plaintiff's claim is not bona fide or is devoid of any merit. Nor is there any question but that the plaintiff had been in possession of the boat. The issue of who should be the plaintiff and who should be the defendant in the proceedings which are necessary to determine the issue of title would therefore have fallen the other way had the defendant not undertaken the pre-emptive "self-help" remedy of seizing possession of the boat. That is a relevant factor in circumstances where the defendant now seeks an order that the plaintiff provide security for costs. See Maatschappij voor Fondsenbezit v Shell Transport and Trading Co [1923] 2 KB 166 per Scrutton LJ at 177; Willey v Synan [1935] HCA 76; (1935) 54 CLR 175 per Dixon J at 184 - 185.

49 It is also, in my view, relevant that this application has been made relatively late in the interlocutory process. It appears that the question of security for costs was first raised by the defendant's solicitors in a letter to the plaintiff's solicitors of 8 September 2005. In that letter, two grounds were advanced for the request for security; namely the fact that the plaintiff had a paid up capital of only $100 and "a number" of charges were registered against it, and the finding on 18 August 2006 in the Esanda action that the plaintiff had no arguable defence to Esanda's claim. A response to the request for security was requested by 15 September 2006.

50 As I have mentioned, the action was commenced on 22 May 2006. The defence was filed on 27 June 2006. The plaintiff sought particulars of the defence on 4 August 2006, those particulars being provided by the defendant on 29 August and 11 September 2006. The defendant gave discovery on 20 July 2006. On 1 September 2006, the plaintiff applied for the action to be admitted to the Commercial and Managed Cases List and such an order was made, and detailed directions given in relation to further interlocutory steps, on 7 September 2006. That required, among other things, that the plaintiff file any reply by 18 September 2006 and that discovery be completed by 26 September 2006. The plaintiff filed its reply on 18 September 2006 and gave discovery on 26 September 2006.

51 On the hearing of this application, counsel were in agreement that there was little left to be done before the matter would be ready to be entered for trial. The defendant will apparently seek leave to file a rejoinder but it seems there are currently no other substantial interlocutory steps to be taken before entry.

52 In the circumstances I do not consider that an order for security for the defendant's costs should be made and I would refuse the application.