Bosun Pty Ltd (in liq) v Makris

REASONS FOR JUDGMENT 1 The applicant, Bosun Pty Ltd (in liq), was incorporated in 1983 and wound up in insolvency in 1990. By then it had debts which exceeded $35 million. Ultimately its creditors lodged proofs for approximately $26 million. Some twelve years after the liquidator took control of the applicant, it brought this action seeking to recover from the respondent, Mr Makris, by way of equitable compensation, something in the order of approximately $1 million (it is simply impossible to determine the precise amount). The respondent applies to stay the action on the ground that its institution or continuation is harsh and oppressive and an abuse of process. The respondent says that if he does not succeed on this point, he is at least entitled to an order for security for his costs up to the first day of the trial. 2 The applicant's claim can be briefly stated. The respondent and one Kotses were the directors of the applicant until its winding up. Whilst they were directors, each of them regularly withdrew money from the applicant's account and recorded those withdrawals as loans in its books. The directors, so it is alleged, did not intend to repay the loans, but proposed to keep the money. The applicant therefore claims that the directors breached their fiduciary duties and the duties imposed by s 229 of the Corporations Code (SA) which was then in force. Accordingly, the applicant seeks relief against the respondent as a primary offender and on the basis that he assisted Kotses to act in breach of his duties. In order to bring the claim within the relevant limitation period (fifteen years), the applicant alleges that the breaches were fraudulent. 3 The respondent denies the allegations. He says that the applicant was a used car trader and its subsidiaries (seven in all) speculated in real estate. Kotses ran the used car operation and the respondent was in charge of the property portfolio. Whilst admitting that he and Kotses took loans from the applicant (there may be some dispute as to the quantum of these loans), the respondent denies that he did not intend to repay them. He seeks to rebut the allegation of fraud by pointing to the fact that the loans were recorded in the applicant's books, that he or his companies provided financial assistance to the applicant and its subsidiaries by personal guarantees and security over land and that he provided capital to the applicant. The respondent also relies upon special defences, the details of which need not be mentioned. 4 This outline is a sufficient summary of the pleadings. It is accepted by both sides that I need not go into them in any further detail because, at this stage, I am not concerned in any way with the merits of the parties' respective contentions. That said, while I accept that the applicant's claim is bona fide, it is plainly a difficult case which is based largely on inference, there being an absence of any hard evidence of fraudulent intent. 5 The period between the applicant's winding up and the commencement of this action has not been uneventful. A number of significant, or potentially significant, events occurred. One is that the respondent became bankrupt on 22 June 1992 when a sequestration order was made against his estate. The applicant proved in the bankruptcy and received a dividend. The respondent was discharged from bankruptcy on 31 March 1995 when he entered into a composition with his creditors. The defence asserts that the bankruptcy and the composition bar the applicant's claim. In answer, the applicant relies on s 153(2)(b) of the Bankruptcy Act 1966 under which debts incurred by fraud are not released upon discharge. Another relevant event occurred in December 2000 when the respondent was compulsorily examined by the liquidator. It can be assumed that at least by the end of the examination, if not earlier, the liquidator was sufficiently appraised of the facts to decide whether the applicant should bring the present claim. The delay in not doing for another three years is without justification. 6 It is also necessary to describe the course of the litigation. The action commenced on 28 May 2002. Contemporaneously, the applicant took out a motion for summary judgment. This was a rather bold move having regard to the nature of its claim. The respondent countered by moving to have the summary judgment application struck out as an abuse of process. I dealt with that motion on 21 August 2002. I was able to persuade the parties that it was in their interests to have an expedited trial rather than pursue lengthy, expensive and potentially futile interlocutory applications. Accordingly, the parties' motions were put to one side and directions were given for the delivery of pleadings, discovery and the filing of evidence on the basis that the trial would be by affidavit. It was later ordered that the trial commence on 17 March 2003. 7 By 18 December 2002, the pleadings had closed, discovery had substantially been completed and the applicant's evidence in chief had been filed. On that day the respondent took out its present motion. For a number of reasons the motion could not be heard before last week. To be fair this was not the respondent's fault, although a number of the affidavits upon which he relies were sworn as late as 12 February 2003. I presume that if the motion had been returned on an earlier date, the affidavits would still have been prepared. 8 This brings me to the first issue which I must resolve namely whether the action should be stayed. The court has inherent power: "… to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of justice into disrepute among right-thinking people": Hunter v Chief Constable of the West Midlands Police [1982] AC 529, 536 per Lord Diplock. 9 In a case where the abuse of process is said to flow from inordinate or inexcusable delay in the institution of proceedings the defendant is usually required to show that he will suffer an unacceptable injustice or unfairness if the case were to proceed: Walton v Gardiner (1993) 177 CLR 378, 392, 413-414. In civil proceedings where, as here, there is a limitation period within which the action must be brought it is exceptionally difficult to establish the requisite degree of injustice or unfairness. The reason was explained by McHugh JA in Herron v McGregor (1986) 6 NSWLR 246, 253: "In civil and summary criminal cases, therefore, it hardly seems possible for a court to say that an action brought within the limitation period is oppressive because mere delay in commencing the proceeding has prejudiced the defendant or accused person. The limitation period represents the legislature's judgment as to what the public interest requires after taking into account the relevant factors including the prejudice which delay may create. In respect of criminal charges triable on indictment, limitation periods are rarely enacted. In the absence of legislation, the maxim nullum tempus occurrit Regi (time never runs against the Crown) applies. Nevertheless, in my opinion the courts have power to stay an action, though brought within the relevant limitation period or even though not governed by such a period, if the conduct of the plaintiff or prosecutor is oppressive to the defendant or accused person." [Citations omitted] 10 Mr Harris QC for the respondent summarised the areas in which he says his client will be unfairly prejudiced if forced to go to trial. Without wishing to minimise the importance of the points made, I think I can briefly summarise them. One is concerned with Mr Noonan who is to be called by the applicant. Mr Noonan is an important witness. He was the applicant's former accountant and will give evidence about its financial position during the relevant period. He will also give evidence about counselling the directors not to withdraw funds from the company. It is said that Mr Noonan's evidence may be compromised by reason of the delay. Other potential witnesses (including two accountants who investigated the affairs of the applicant in 1990) may also be in the position where they are unable to give detailed evidence. Another point is the difficulty the respondent has in locating potential witnesses. There is a problem about obtaining relevant documents. Mr Harris says that many documents that relate to the dealings between the applicant and its financiers have not been discovered and are not otherwise in his client's possession. These are the principal points. There were others, but they are of marginal significance. 11 I am in no doubt that while the respondent's case may now be more difficult to run he falls far short of establishing that the trial will be so unfair that the process should be stopped. The factors which have led me to that conclusion are as follows. First there is Mr Noonan. Perhaps his memory of events has faded over the years and his evidence may turn out to be unreliable. In truth, however, that is unlikely to prejudice the respondent. On the contrary, if Mr Noonan is an unreliable witness that should advance his case. As regards other witnesses I note that those who have been identified have not been approached to see what recollections they have about the events and there has been no effort to locate the others. A similar comment can be made about the missing documents which the respondent says will assist his case. To this point the respondent has not gone beyond discovery to obtain the documents. There are, of course, other means by which he can obtain them. Most of the relevant documents appear to be in the possession of institutions which provided funds to the applicant. Their production can be compelled. Even if none are available (an unlikely prospect) that should have little effect on the trial. This is not really a documentary case. The defence of the action will rest largely on the respondent's own evidence. For the applicant to succeed it must establish that the respondent acted dishonestly. If the applicant is able to make out a prima facie case of fraud, it can be rebutted with little reference to the documents. 12 This brings me to the alternative relief which the respondent seeks, which is that provision should be made to secure his costs. The jurisdiction to make the order is not in doubt. It has various sources: the court's inherent power; s 56 of the Federal Court of Australia Act 1974 (Cth); O 28 of the Federal Court Rules; and, importantly for the purpose of this application, s 1335 of the Corporations Act 2000 (Cth). 13 The cases establish that, whatever be the source of jurisdiction, the power to make an order for security is discretionary and has to be exercised after considering all the circumstances of the case. Mr Harris QC submits that the circumstances of this case point to an order being made and so it should be made. 14 Before turning to those circumstances I should mention the principle against which the issue should be considered. The system of justice under which we operate assumes that the interests of justice are best served if a successful litigant will receive his litigation costs and that the unsuccessful party will pay them: Kloeckner Co AG v Gatoil Overseas Inc [1990] CA Transcript 250 Bingham LJ. This is one reason why courts have assumed the jurisdiction to require security. It also explains why s 1335 and its predecessors were enacted. 15 In a case such as the present, that is in an action brought by an insolvent company in liquidation and not by its liquidator, there is always the danger that the liquidator will not have sufficient funds to satisfy a costs order made against the company. Ordinarily this danger will not be overcome by an order requiring the liquidator to pay the costs, because such an order will rarely be made, and it is not likely to be made where security can be made available by the company itself: Knight v F P Special Assets Limited (19920 174 CLR 178, 204 per Dawson J; 217-218 per McHugh J; Eastglen Ltd (in liq) v Grafton [1996] 2 BCLC 279; Metalloy Supplies Ltd v M A (UK) Ltd [1997] 1 WLR 1613; Macks v Hedley (1999) 94 FCR 188 (where it was said that liquidators stood in a special position and should be given more benign consideration). One reason why it would require an exceptional case to secure a non-party costs order against a liquidator is that, if the order were made, the costs may not be part of the expenses of the winding up: Re M C Bacon Ltd (No 2) [1991] Ch 127 but compare Madrid Bank v Pelly (1869) 7 Eq 442. 16 Here my task is to carry out a balancing exercise. In undertaking that task I propose to take into account the following matters. At the forefront of its submissions the applicant contends that if an order for security is made, the action will come to an end because the liquidator will not have the funds required to be brought in and a principal creditor of the applicant has said that it will not make any funds available. There are a number of reasons why I propose to give little weight to this argument. Speaking generally, I am disposed to the view that by itself a lack of funds is not a sufficient basis to refuse the order. In this regard I agree with Peter Gibson LJ (with whom Butler-Sloss LJ agreed), who said in Keary Developments Ltd v Tarmac Construction Ltd [1995] 2 BCLC 395, 400: "The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security. By making the exercise of discretion under s 726(1) conditional on it being shown that the company is not likely to be unable to pay costs awarded against it, Parliament must have envisaged that the order might be made in respect of a plaintiff company that would find difficulty in providing security." That is to say, the jurisdiction under s 1335 can only be exercised when it is shown that the insolvent company will be unable to pay the defendant's costs. It is designed to prevent a successful defendant from being substantially out of pocket and parliament must have assumed that this is precisely the circumstance in which the jurisdiction will be exercised. 17 There is in this case an even more compelling reason to disregard the submission. When it was wound up the applicant had sufficient assets to fund the litigation. In all the liquidator collected around $3 million. He has disposed of this money, save for a few thousand dollars which he still holds to pay counsel. I have not been told why the liquidator did not retain sufficient funds to fight the case. Perhaps the reason is that he initially decided against bringing the action. Be that as it may, the important point remains that the liquidator has insufficient funds to provide security because he disposed of the money that would otherwise have been available for that purpose. This is not a case where an impecunious company is being shut out of a genuine claim. If it is to be held out it is the fault of the liquidator. 18 In any event, I am not satisfied that the applicant's claim will be stifled. Sometimes such a conclusion can be inferred without direct evidence, as was done in Trident International Freight Services Ltd v Manchester Ship Canal Co [1990] BCLC 263. Here all the liquidator has told me is that a substantial creditor has refused to provide any money. There is no evidence that any other creditor has refused to do so. It may be accepted that creditors who have already lost money are unlikely to be willing to stake any more. On the other hand, if a creditor does agree to fund litigation he will usually obtain an order under s 564 for priority over the others in respect of the money that comes in. An examination of the cases indicates a number of instances of generous orders being made under this section. This is often used to persuade creditors to provide funds for litigation. 19 Another factor which is often taken into account on these applications, and it is a factor upon which this applicant places reliance, is that the applicant's impecuniosity has been significantly contributed to by the respondent. In this action the applicant seeks to recover more than $1 million which allegedly has been fraudulently taken by the respondent. But that is not enough to make out the ground. The applicant and its subsidiaries, along with a host of other property speculators, appear to have been victims of the property market collapse which occurred in this country in the early 1990s. I accept that it would be appropriate to refuse security if the order would stifle a genuine claim where the failure to meet that claim might in itself have been a material cause of the plaintiff's impecuniosity: Farrer v Lacey (1885) 28 Ch D 482, 485 per Bowen LJ. Here it is extremely unlikely that the respondent's impugned conduct was a material cause of the applicant's insolvency. And on no view did the respondent's conduct produce the situation where the applicant is unable to fund the action. 20 There is another factor raised by the applicant to which I would give little weight. It submits that an order for security may require the vacation of the trial date to allow the liquidator to make arrangements for funds if they were to become available. The cases suggest that vacating the trial date is a factor which should be taken into account: see for example Town and Country Sports Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (O'Loughlin J, 19 July 1991, unreported). For my own part I rather doubt whether the scarce availability of court time and the undesirability of vacating on short notice hearing dates have much to do with applications for security for costs. Security is given because it is unfair to deprive a successful party of his costs. The interests of the court and of other litigants raise unconnected issues. 21 This brings me to the only ground which assists the applicant. The ground is delay. On one view it might seem incongruous that the applicant complains about the respondent's delay when it waited twelve years to bring the action. Nevertheless the applicant points out that the respondent brought his application after the applicant had incurred the cost of delivering an amended statement of claim, a reply, and filing its evidence in chief in the form of affidavits, and it says that is a sufficient reason to deny the application. 22 It is accepted on all sides that an application for security must be made promptly: Loreva Pty Ltd v CEFA Associated Agencies Pty Ltd (1982) 7 ACLR 164; P G Gabel Pty Ltd v Katherine Enterprises Pty Ltd (1977) 2 ACLR 400. Yet, there are cases where delay has not proved to be fatal. In Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68, 71 Lehane J said that where an order for security has been made despite delay one of two factors has been present. One is that the hearing was not imminent. The other is that there had been forewarning that security would be sought. I think that the circumstances in which security may be granted notwithstanding delay are broader. The true position is this. What weight is to be given to delay must depend upon the circumstance of the case. It is proper to take into account that the plaintiff has incurred costs which he might otherwise not have done. On the other hand the court cannot ignore the fact that costs are still to be incurred, and in some cases those costs may be significant. It is also important to consider who caused the delay; whether it was the plaintiff or the defendant. Other factors may also be relevant. 23 In the present case the period of delay is not great. It is in order of four months: the period between the hearing on 21 August 2002, at which point one might have expected the respondent to seek security, and 18 December 2002 when it filed its motion. It was during this period that the applicant took the steps which I identified earlier. From the little information I have I would assume that the cost of taking these steps was not great. During the same period the respondent also incurred costs, but his application does not seek security for them. It only seeks security for his future costs. To some extent this eliminates one of the vices of a late application but, of course, it does not completely eliminate them. 24 In the end I will require the applicant to provide security, not for any factor which is determinative but because in aggregate the relevant factors demand that an order be made. First there are the policy considerations to which I have referred. I do not wish to encourage litigation where a successful defendant will be out of pocket. Second, while I have not formed any particular view about the merits of the case, I have already adverted to the fact that the applicant's case is a difficult one. That encourages me to make the order. And, finally, there are no significant countervailing factors, once delay turns out not to be decisive. 25 I will not spend much time deciding what the appropriate sum should be. I have an affidavit from a solicitor who estimates the respondent's costs until trial to be $50,450. I think in all the circumstances the appropriate sum to be ordered to stand as security for the costs up to and including the first day of trial is $40,000. Ordinarily I would direct that the action be stayed until this sum is provided in cash or by way of a guarantee in a form satisfactory to the Registrar. But in virtue of the fact that it may take the liquidator some time to get in the money, if he is able to get it at all, the applicant should be allowed fourteen days to provide the security before the action is stayed.