Practice and procedure - Security for costs - Role of frustrating claim - Turns on own facts

Associations Incorporation Act 1987 (WA)

Corporations Act 2001 (Cth), s 1335

Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1

BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857

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

Carey-Hazell v Getz Brothers & Co (Aust) Pty Ltd [2004] FCA 1334

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241

Harpur v Ariadne Australia Ltd (1984) 2 ACLC 356

Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120

Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744

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

Pearson v Naydler (1977) 1 WLR 899

Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344; (2007) 65 ACSR 383

Re Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497

Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180

Robson v Robson [2008] QCA 36

Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201

Spiel v Commodity Brokers Australia Pty Ltd (in liq) (1983) 35 SASR 294

Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129

Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [No 2] [2010] WASC 225

Tirops Safety Technology Pty Ltd v Lazer Safe Pty Ltd [2005] WASC 164

Unified Pty Ltd v The Cancer Council of Western Australia Inc [2010] WASC 55

Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542

1 The defendant applies for further security for costs under s 1335(1) of the Corporations Act 2001 (Cth).

2 In March 2010, Murphy J ordered security in the sum of $76,945 (there was no dispute as to quantum), up to entry for trial, with liberty to apply for further security if necessary: Unified Pty Ltd v The Cancer Council of Western Australia Inc [2010] WASC 55. The order was also made upon the undertaking from the defendant that it would not pursue its counterclaim during the pendency of any consequential stay.

3 The plaintiff is a proprietary company with paid-up capital of $1. Mr Julian Coyne is its sole shareholder and director. The plaintiff does not own any property in Western Australia. In an affidavit sworn 18 December 2009 in opposition to the first application for security, Mr Coyne, stated:

1. I use the plaintiff as the corporate vehicle to conduct a business of the design, development, installation and support of computer software programs and systems (Business).
2. The Business has been in operation since 2002.
3. The plaintiff does not retain profits made under contracts carried out by it, but distributes at my direction.
4. The plaintiff does not have funds from which it could pay the defendant's costs, should its defence succeed, and is not able to provide any security for the defendant's costs of defending the claim.

4 I accept that the threshold under s 1335(1) has been established (it was not disputed). The question is whether the court should exercise its discretion to make an order for security. Some of the matters relevant to the exercise of the discretion were identified by French J in Carey-Hazell v Getz Brothers & Co (Aust) Pty Ltd [2004] FCA 1334 [28].

5 The parties have identified particular factors as relevant in this case. First, the weight to be given to the accepted fact that the plaintiff will be unable to pay the defendant's costs if the defendant is successful. Second, the position of Mr Coyne and his ability to provide security. Third, whether the requirement of security would be oppressive and stultify litigation by the plaintiff. Finally, and overarching, whether there is a real risk of injustice if security is not ordered.

6 A brief description of the litigation is given by Murphy J in his decision at [2] - [4]:

The plaintiff pleads that it conducts the business of the design, development, installation and support of computer systems. It says that it entered into a written contract with the defendant for the 'supply, implementation and maintenance of an integrated client relationship and case management system' in September 2008. It pleads a number of alleged terms of the contract, including alleged implied terms, and says, in effect, that under the contract prior to its variation, it carried out work to the value of approximately $60,000 for which it has not been paid. It says that the plaintiff commenced work under the contract in May 2008. It also says that there was an oral variation of the contract on 26 February 2009, in which it was agreed that the plaintiff would carry out 'additional work' at a sum to be agreed at a later date. The plaintiff says that there arose a contractual obligation to pay a reasonable sum or, alternatively, that it has a claim on a quantum meruit, in relation to the 'additional work'. It says that it is entitled to approximately $440,000 for the 'additional work'. The plaintiff also says that the defendant repudiated the contract in about June 2009 and the plaintiff accepted the repudiation in July 2009. The plaintiff claims, in addition, damages in consequence of the alleged repudiation and says that had the contract continued, the plaintiff would have earned profits of approximately $1.7 million.

The defendant admits that there was a written contract which it says was for a fixed price. It disputes a number of the express and implied terms of the contract alleged by the plaintiff, and says that there was a waiver of the performance of certain terms. The defendant also says that work under the contract commenced after the date of its execution, and not four months before then, as the plaintiff alleges. It denies that there was any variation to the contract on 26 February 2009 as alleged, and says that there was no other arrangement for the plaintiff to carry out the alleged 'additional work'. The defendant also says that it terminated the contract orally on 17 June 2009 in accordance with rights conferred by law, or in writing on 26 June 2009, in accordance with its rights at law, or on the basis of a contractual right to terminate. It relies on various alleged breaches of express terms and alleged breaches of terms said to be implied under s 74 of the Trade Practices Act 1974 (Cth) (TPA). The defendant also denies the plaintiff's claim to damages and says, inter alia, that even if it did not terminate the contract as alleged, the defendant would have terminated in any event under a termination 'for convenience' clause. The defendant also alleged misleading and deceptive conduct based on silence in circumstances where it says there was an obligation on the plaintiff to inform.

The defendant says that in reliance on the alleged misleading and deceptive conduct, it paid the plaintiff approximately $37,000 and incurred other expenditure. By its counterclaim, the defendant seeks, inter alia, damages for breach of contract, and/or an order under s 87 of the TPA setting aside the contract, and/or damages under s 82 of the TPA.

7 Later in the decision, his Honour briefly discussed the merits of both the claim and the defence. He accepted that both were bona fide and reasonably arguable, so that the merits were not a consideration of any real weight in the determination of the application [24]. Neither party suggests that the merits are a strong consideration in the application before me, and I am not in a position to make any assessment of the merits. I do, however, take into account that the plaintiff has a case which is properly brought and reasonably arguable, and that the claim is for more than $2 million.

8 Since the decision of Murphy J a lot has been done. Each party has amended its pleadings. The parties have prepared and exchanged the statements of non expert witnesses, although the process for resolving objections to those statements is not complete. The defendant has filed statements of 13 witnesses, and the plaintiff four witnesses. The statements filed by both parties total about 1,400 pages, excluding annexures. There will be expert evidence. Senior counsel for the defendant estimates the trial will take more than 20 days.

9 A draft bill of costs prepared by the defendant's solicitors for the purposes of this application for security estimates the defendant's costs to the conclusion of trial at $947,000 (an estimate they say is conservative). The plaintiff does not dispute that the estimate is reasonable. The draft bill shows the cost of work already done would greatly exceed the estimates made at the time of the application before Murphy J. The estimate provided to the plaintiff by its solicitors is more than $1 million.

10 The relevant principles are not in dispute: see, for example, FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241; Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129. Once the court has jurisdiction under s 1335, there is an unlimited discretion which is to be exercised considering all of the circumstances of the case. Essentially, the section requires a balance to be struck between protecting the defendant from the possible consequences of being sued by an impecunious corporation with limited liability and avoiding injustice to the corporation by unnecessarily prejudicing it in the conduct of litigation: see Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301.

11 I approach this matter on the basis that there is not an entitlement to security as of right once the defendant has established that the plaintiff will be unable to pay its costs if the defendant is successful; nor is there a predisposition towards an order for security: see the extensive review of the authorities in Re Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497. In the circumstances of a particular case, however, the fact that the plaintiff is impecunious may be an important factor in determining the application: Spiel v Commodity Brokers Australia Pty Ltd (in liq) (1983) 35 SASR 294, 300; Pearson v Naydler (1977) 1 WLR 899, 906; BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857, 860; Harpur v Ariadne Australia Ltd (1984) 2 ACLC 356, 361.

12 Further, the court may give weight to the amount of the defendant's loss if the risk materialises: Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201, 217.

13 Where those who stand behind the company and would gain from the litigation are financially able to provide adequate security, it is at least a weighty consideration in favour of an order for security: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542, 545; Sent v Jet Corporation (215). A court is not justified in declining to make an order on the basis that the proceedings will be stultified unless the impecunious plaintiff establishes that those who stand behind it are also unable to provide the requisite security for costs: Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1, 3; Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 [66]; Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120, 123.

14 Where, however, those who will benefit are without means, an order for security may stultify the litigation. Where the plaintiff does establish the possibility of stultification, that is a powerful factor to be taken into account in exercising the court's discretion, although it does not automatically lead to refusal of the order: Yandil Holdings Pty Ltd v Insurance Co of North America (545).

15 The effect of the authorities is that a company seeking to resist an order for security on the ground that it will frustrate the litigation must '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. It is 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 plaintiff, and also of its shareholders and creditors (if relevant), and, if there are trust assets, of the beneficiaries of the trust: Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1, 3; Tirops Safety Technology Pty Ltd v Lazer Safe Pty Ltd [2005] WASC 164. Without that evidence, no conclusion can properly be reached that the effect of an order for security will be to frustrate the plaintiff's claim. In this sense there is an onus on a plaintiff resisting an order for security: see BPM Pty Ltd v HPM Pty Ltd (862); Bell Wholesale Co Pty Ltd v Gates Export Corporation.

16 Finally, the ability of the defendant to absorb the costs if successful may be a relevant consideration. The court may have regard to the position of the defendant, and may be 'more sympathetic to an application from a respondent with limited funds than a respondent which is a major corporation': Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344; (2007) 65 ACSR 383 [56]; Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180, 186.

17 The plaintiff contends that Mr Coyne, its sole director and shareholder, is the only person standing behind it. Mr Coyne has sworn two affidavits, dated 18 March 2011 and 1 April 2011, in response to the present application. He relies also on an affidavit sworn on 18 December 2009 in response to the earlier application before Murphy J.

18 The evidence regarding the conduct of the plaintiff's business is that it does not retain profits made under contracts carried out by it, but distributes them at Mr Coyne's direction. It is not apparent on the material before me whether this involves the use of a trust or some other device.

19 In his affidavit of 18 March 2011, Mr Coyne states:

(1) the time he has spent in matters relating to the proceedings has heavily curtailed the time he has been able to spend in obtaining and carrying out work for the plaintiff;

(2) a large proportion of the plaintiff's revenue has been used to pay accounts of its solicitors, Lavan Legal;

(3) Lavan Legal have estimated further costs to completion of the trial, including GST, at $1,044, 521;

(4) he owns two properties (in Wellington Street, Perth and Abbotsford Street, West Leederville);

(5) to meet the plaintiff's costs obligations to Lavan Legal, he granted mortgages over the two properties to Lavan Legal in November 2010;

(6) he has been informed by Lavan Legal that they will seek a deposit before trial to cover the whole of the estimated costs up to the completion of the trial.

20 In response to the defendant's submissions that he had not made full disclosure, and to evidence put forward by the defendant that Mr Coyne held directorships in two other companies (Coyne Pty Ltd and Unified Systems Pty Ltd), Mr Coyne made a further affidavit dated 1 April 2011 in which he states:

(1) he set the plaintiff up in 2002 after graduating from university;

(2) the plaintiff has never retained profits, save for about three years ago when some profits were held over to the next financial year;

(3) he purchased the properties in Wellington Street (in 2004) and Abbotsford Street (in 2007) with income from his work for the plaintiff;

(4) he is the director and secretary of Coyne Pty Ltd which is the trustee company of a discretionary family trust (the JMC Family Trust);

(5) he is the director and secretary of Unified Systems Pty Ltd which was set up as a holding company for some intellectual property and trade marks - he did not develop the intellectual property and did not register any trade marks. Unified Systems Pty Ltd has $1 of issued capital which is held by Coyne Pty Ltd;

(6) he is not aware of any assets in the JMC Family Trust other than that $1 share;

(7) neither Coyne Pty Ltd nor Unified Systems owns any other assets that could be used to provide further security;

(8) the plaintiff's tax return for the 2009/10 year has not been completed;

(9) since 1 July 2010, he has not received any salary, drawings or other payments from the plaintiff and has been living mostly off his wife's income;

(10) he received annual rent of about $23,000 from the Wellington Street property;

(11) at 1 April, the plaintiff had paid $65,860.55 since July 2010, and owed Lavan Legal $31,248.58 on invoices rendered;

(12) he does not have any assets, other than the mortgaged properties, of any significant value;

(13) he expects that he will need to sell the both the Wellington Street and Leederville properties to cover the deposit required by Lavan Legal;

(14) without his assistance the plaintiff would not be able to provide the security sought by the defendant.

21 In the affidavit sworn 18 March 2011, Mr Coyne states that he is not able to make any payment into court by way of security. But in the affidavit sworn 1 April 2011, he says that he is 'prepared to make arrangements to double the amount of cash security currently held by the defendant' and also to provide a charge over a motor vehicle owned by the plaintiff. The added cash security would be paid out of the plaintiff's revenue over five months or by loans from family members.

22 Mr Coyne's evidence as to both the plaintiff's and his own financial position remains at a very general level, and is not supported by any financial documents. The plaintiff produces no tax returns or financial statements. While it is said the plaintiff distributes all of its profits, there is no evidence about how that is done. The statement that a large proportion of its revenue has been used to pay accounts of Lavan Legal is of limited value without evidence of what revenue it earned, and how it was distributed.

23 There is no evidence of Mr Coyne's income. He does not produce his own tax returns. In the affidavit of 1 April 2011 he refers (for the first time) to the existence of a family trust, although with no substantial assets. There is no evidence regarding whether there may be other relevant trusts.

24 The two properties owned by Mr Coyne have not been valued.

25 The defendant submits, in my opinion correctly, that the evidence is in the form of conclusions or a summary, without any supporting material. In the circumstances, it is difficult to feel satisfied that there has been full and frank disclosure.

26 The plaintiff's position is that it is not financially able, itself or through Mr Coyne, to provide adequate security as well as meet its own costs obligations. The granting of the mortgage over the two properties owned by Mr Coyne makes them presently unavailable as a source of security.

27 The defendant submits that the present case may be akin to where an impecunious natural person has 'voluntarily taken steps to divest himself of herself of assets so as to ensure that he or she is able to pursue his or her claim while effectively immune from adverse consequences of the failure of that person's claim': Robson v Robson [2008] QCA 36 [25]. In such a case, the poverty of the individual has been manufactured to defeat an order for costs, and the justice of the case requires an order for security despite the policy of the law that poverty should not be a barrier to justice. While I accept that Mr Coyne has mortgaged two substantial assets for the purpose of securing his own legal representation, and did so voluntarily, I do not accept that this conduct was the 'cynical thwarting' of the court's power spoken of by Keane JA in Robson.

28 The plaintiff has chosen solicitors who require security for anticipated fees of such a large amount and when counsel is to be engaged. The solicitors require a mortgage as well as a deposit in advance of trial. That method of securing fees does not in any way alter the extent of the plaintiff's liabilities for its own legal fees. I do not believe that the plaintiff's conduct in securing his own obligations means that I should discount the risk that the proceedings would be stifled, and do not accept the defendant's submission that I should give that factor little weight.

29 The defendant also points to the failure of Mr Coyne to give any undertaking that would make him personally liable. The plaintiff says that a personal undertaking is not reasonably required as Mr Coyne is exposed to considerable risk in view of the significant costs to be met to take the matter to trial. That risk, however, is largely in relation to the costs to be paid to the plaintiff's solicitors. Mr Coyne proposes security for the defendant's costs limited to about $150,000, plus security over a motor vehicle, when on a conservative estimate the costs of the defendant are likely to be around $1 million. I accept that the failure of Mr Coyne to offer any personal undertaking is a factor I should consider.

30 I also take into account the likely level of costs the defendant will incur in taking this matter to trial, and the risk that it will be unable to recover them if it succeeds. In considering the size of the risk to the defendant, it is appropriate, in my opinion, to have regard to the nature of the defendant. It is not a major corporation or an insurer, able to absorb such costs. Rather, it is an association incorporated under the Associations Incorporation Act 1987 (WA), and accordingly must meet the criteria of eligibility for incorporation under s 4 of that Act, including that it is not 'formed for the purpose of trading or securing pecuniary profit to the members from the transactions of the association'.

31 While I recognise that an order for substantial security may frustrate the progress of a claim which may have merit, I am satisfied that I should order security in a greater amount than that offered by the plaintiff. There is no doubt that the plaintiff would be unable to meet the defendant's costs if the defendant was successful at trial, and that, in itself, is an important factor. It is necessary to consider whether the plaintiff has demonstrated that there is no one standing behind the plaintiff who is able to provide adequate security. The plaintiff has not, in my opinion, given a full and frank disclosure of its financial position, and that of Mr Coyne. In particular, there is a complete lack of financial records to support the conclusions asserted by Mr Coyne. Mr Coyne declines to give a personal undertaking to be liable for costs. There is a risk that an order for security in the sum sought by the defendant would frustrate the plaintiff's claim, but I can make no definite finding as the plaintiff has not put the evidence forward.

32 Even if I were satisfied that the order is likely to stultify the plaintiff's action, I would still make the order. The amount of the costs that the defendant will incur if this matter proceeds is very large. I must strike a balance between protecting the defendant from the possible consequences of being sued by an impecunious corporation with limited liability, and avoiding injustice to the plaintiff by unnecessarily prejudicing it in the conduct of this litigation. The balance, in my opinion, requires the defendant to have greater protection than that offered by the plaintiff.

33 It is not disputed that costs to the end of trial are likely to at least meet the defendant's estimate of $947,000. The additional amount sought by the defendant ($469,000) is appropriate to that estimate. The plaintiff has not suggested that the security should be reduced because part of the costs may relate to the counterclaim (see, for example, Technomin Australia Pty Ltd v Xstrata Nickel Australasia Operations Pty Ltd [No 2] [2010] WASC 225), and the total security sought is, in my opinion, reasonable.

34 As this matter was determined on the papers, however, I will hear the plaintiff as to whether Mr Coyne is prepared to offer a personal undertaking, and whether the plaintiff can provide the court with suitable evidence of the value of the land owned by Mr Coyne. Some other sum (greater than that already proposed by the plaintiff) may be appropriate to the justice of the case.

35 I will also hear the parties on whether, in ordering further security, I should require the defendant to undertake not to proceed on the counterclaim while the plaintiff's claim is stayed. It appears to have been assumed that an undertaking would again be given.