Corporations Act 2001 (Cth), s 1335

BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339

Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405

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

MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97

Mabrouk Minerals Pty Ltd v Mabrouk Holdings Ltd [2008] WASC 132

Smail v Burton [1975] VicRp 76; [1975] VR 776

1 The defendant applies for an order that the plaintiff provide security for its costs of defending these proceedings. The application is made pursuant to s 1335 of the Corporations Act 2001 (Cth), which empowers the court to order a plaintiff corporation to provide security for the defendant's costs '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 ... its defence'.

The jurisdictional threshold and the discretion questions

2 The plaintiff concedes that the jurisdiction of the court to order security for costs is enlivened because there is credible testimony that it will be unable to pay the defendant's costs if the defendant is successful in its defence. This concession is properly made. The evidence adduced in relation to the application establishes that the plaintiff has ceased trading and has no land registered in its name in Western Australia which would be available for execution in the event a costs order is made against it. A director of the plaintiff, Mr Craig Kelly, has sworn an affidavit dated 9 November 2009 in which he deposes, at par 5, that if the court orders the plaintiff to provide security for the defendant's costs 'the plaintiff will have to rely on an injection of funds from other sources in order to continue the action'. The clear implication from this assertion is that the plaintiff has no tangible assets that would be readily available to satisfy any order for costs made in favour of the defendant.

3 Accordingly, the defendant has crossed the jurisdictional threshold empowering the court to order the plaintiff to provide security for its costs, enlivening the unfettered discretion of the court with respect to the making of such an order: BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339.

4 Because the discretion is unfettered, its exercise will depend critically upon the particular circumstances of each case. As there is an almost infinite range of circumstances that might be relevant to the exercise of the unfettered discretion, it is neither possible nor desirable to attempt to exhaustively identify those factors: Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405, 415 (Cooper J). Nevertheless, a number of factors are established as appropriately guiding the exercise of the discretion, and I will therefore address those accepted factors that appear to me to be relevant to this case.

5 The first is the fact which has enlivened the court's jurisdiction - namely, that there is every reason to believe that the plaintiff would be unable to pay the defendant's costs if the defendant is successful in its defence of these proceedings. This is a fact which not only opens the jurisdiction, but also provides a substantial factor in favour of its exercise: see BPM Pty Ltd v HPM Pty Ltd (343).

6 The defendant's application has been brought promptly, as it should have been: Smail v Burton [1975] VicRp 76; [1975] VR 776, 777 (Gillard J). Accordingly, this is not one of those cases in which delay in the bringing of the application might have encouraged the plaintiff to rely to its detriment upon the defendant's failure to apply.

7 However, the fact that the application is brought at a relatively early stage in the proceedings makes it difficult to make any meaningful assessment of the relative strengths and weaknesses of the cases of the parties. The plaintiff's claim is for the price of goods sold and delivered - in this case, substantial quantities of canned abalone. The defendant resists the claim on the basis that the goods delivered were defective. It seems likely that the case will ultimately turn upon the findings made with respect to the condition and quality of the goods at the time they were delivered to the defendant. It is neither possible nor appropriate to make any meaningful assessment of that disputed factual issue on the basis of the limited affidavit evidence before me. Accordingly, in this case, the relative strengths and weaknesses of the positions of the parties is not a factor which assists in the exercise of the discretion to order security for costs.

8 The plaintiff asserts that its impecuniousity was caused by the defendant having undertaken the conduct that is the subject of the claim. If established, this is a relevant factor: see for example MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97, 100 (Needham J). However, the only evidence in support of that proposition is the assertion of Mr Kelly, at par 3(a) of the affidavit to which I earlier referred, that 'the current state of the Plaintiff ... is mainly due to the actions of the Defendants'.

9 This assertion is made at such a level of generality as to be of little or no weight. If in any event, as the defendant asserts, the canned abalone was defective, the financial consequences of that fact cannot be visited upon the defendant. It follows that the plaintiff's assertion depends critically upon the contested issue of fact to which I have already referred, and of which it is not possible to make any meaningful assessment at this stage of the proceedings.

10 Turning to the circumstances of the plaintiff company, it is clear from the evidentiary material that there are a number of persons standing behind the company who are likely to benefit from the litigation. They include most significantly Mr Kelly, who is one of two directors and the secretary of the plaintiff. He is also a shareholder in the plaintiff. Further, Mr Kelly is sole director and secretary of another company, Cradia Investments Pty Ltd, which is also a shareholder in the plaintiff. He is also a shareholder in that company. There is evidence which suggests that Mr Kelly might have the financial capacity to support the plaintiff, reinforced by the reference in his affidavit to which I have already referred. Accordingly, this is a case in which there are persons who stand to benefit from the success of the litigation, but who are not presently exposed to personal liability in the event the plaintiff's claim fails. It is not one of those cases in which it has been established that the making of an order for security would frustrate the plaintiff's right to pursue its claim. These are significant factors in favour of the exercise of the discretion to order security: see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189, 197 (Beazley J).

11 The plaintiff asserts that the defendant is in substance a plaintiff as a consequence of its conduct. If that proposition were correct, it would be a significant factor counting against the exercise of the discretion to order security: see Mabrouk Minerals Pty Ltd v Mabrouk Holdings Ltd [2008] WASC 132, [62]. However, this does not appear to me to be the proper characterisation of the defendant's role in these proceedings.

12 The plaintiff sues for the price of goods sold and delivered. It will carry the burden of proving that it performed its contractual obligations, and in particular, delivered goods of the quality required under the terms of the contract between the parties. The defendant denies that the plaintiff has performed its contractual obligations and asserts that it is not entitled to the price. The defendant brings no counterclaim. It is therefore not correct to say, as the plaintiff asserts, that the defendant carries the substantive onus in these proceedings. Nor does the fact that the defendant has apparently sold some of the goods delivered and has received an, as yet, unidentified amount as a result of those sales mean that the defendant is, in substance, the moving party or plaintiff in these proceedings. It is, after all, the plaintiff who sues to recover the price due under the contract, notwithstanding that the defendant asserts that it suffered damage by reason of the defective quality of the goods supplied.

13 Accordingly, for these reasons I conclude that in this case all factors relevant to the exercise of the discretion to order that the plaintiff pay security for the defendant's costs favour the making of such an order.

14 Turning then to the quantum of such an order, the evidence establishes that costs in the order of $50,000 or more might be incurred by the defendant up to and including the trial of these proceedings. However, the defendant is content for security to be posted in tranches. It seeks an initial instalment of $18,000, which seems reasonable. I will therefore order that the plaintiff pay, within 28 days, the amount of $18,000 as and by way of security for the defendant's costs of the proceedings. That amount is to be paid into an account under arrangements to be agreed between the solicitors for the plaintiff and the defendant, or in default of agreement, into court. If payment is not made within 28 days of publication of these proceedings, the plaintiff's claim will be stayed until such time as my order is complied with. The defendant is to have liberty to apply for an order requiring the plaintiff to post further instalments of security in due course.