Corporations Act - Application for security for costs - Turns on own facts

Abdurahman v Field, unreported; SCT of NSW; 4 March 1986

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

E & I Steigman Holdings Pty Ltd v Simons (1986) 4 ACLC 64

Eden Constructions NSW Pty Ltd v Haines, unreported; SCt of NSW; 14 September 1988

Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 50-631

Erolen Pty Ltd v Baulkham Shire Council (1993) 11 ACLC 511

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] 2 WAR 241

Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523

Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440

Indaba Pty Ltd v McVeigh [2000] WASC 39

Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304

Molnar Engineering Pty Ltd v Herald & Weekly Times Ltd, unreported; Fed Ct; 22 February 1985

New Trend Pty Ltd v Oceanic Life Ltd (1989) 7 ACLC 656

Pacific Acceptance Corp Ltd v Forsyth (trading as Flack & Flack) (No 2) [1967] 2 NSWR 402

Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467

Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609

Wrenfield Pty Ltd (trading as Compudraft Australia) v G D Finch, unreported; SCt of NT; 23 July 1991

1 MASTER SANDERSON: This is the defendant's application for security for costs. At the conclusion of the hearing I indicated that I would not make orders as sought by the defendant and that I would dismiss the chamber summons. I indicated to the parties that I would publish reasons for the decision. These are those reasons.

2 The application is brought under s 1335 of the Corporations Act. It was conceded by the plaintiff, and properly conceded, that if called upon to do so, the plaintiff would not be in a position to meet any costs order that might be made against it in these proceedings. The question then was whether, in the exercise of my discretion, I ought order the plaintiff to provide security for the defendant's costs.

3 The facts of the case are somewhat unusual. The defendant, as its title suggests, is a company which provides life insurance. By a policy of insurance which commenced 1 December 1995 the plaintiff insured the life of Marsha Caroline Cowie ("Marsha Cowie") for an amount of $700,000. Marsha Cowie died on 1 April 1996. The plaintiff duly notified the defendant of the death of Marsha Cowie and sought payment under the policy. An amount of $15,000 by way of interim payment was made on a without prejudice basis. The defendant has refused to make payment of the remaining $685,000. The defendant says that it has avoided the policy on the basis of fraudulent misrepresentation and non-disclosure. It denies that it is liable to the plaintiff as alleged or at all. The plaintiff for its part says that even if there was non-disclosure on the part of Marsha Cowie, it would still be entitled to part payment of the sum insured. The plaintiff says that if it is not entitled to the full amount remaining unpaid under the policy, it is entitled to an amount of $331,579.

4 The defendant has initiated a counterclaim against the plaintiff and also against one Eric John Innes ("Innes") who is now the second defendant by counterclaim. By its counterclaim, the defendant seeks to recover the $15,000 it has paid to the plaintiff either from the plaintiff or from Innes. Innes is presently the secretary of the plaintiff and, it would appear, its moving hand.

5 This rather brief outline of the facts drawn from the pleadings was filled out by the evidence filed on behalf of the plaintiff. Of particular importance is a statement by Sharon Louise Cowie ("Sharon Cowie") which appears as annexure "JAF3" to the affidavit of Jennifer Anne Fielding, sworn 25 March 2002 and filed in support of the application. Sharon Cowie and Marsha Cowie were sisters. The statement itself was taken by police officers who were making inquiries into the death of Marsha Cowie. It discloses that in 1989 Sharon Cowie was employed by a firm known as Perishable & General Air Cargo. The firm was managed by Innes. Sharon Cowie was employed as a receptionist. Some six to eight months after her employment commenced, Sharon Cowie took up a relationship with Innes.

6 Some few months later Perishable & General Air Cargo began to experience financial difficulties. Without going through all of the evidence, it is sufficient if I say that the firm was sold and the plaintiff was established. Sharon Cowie became one of its directors. The plaintiff failed to prosper. It too ran into financial difficulties. In her statement Sharon Cowie details what can only be described as a fraudulent transaction pursuant to which she and Innes obtained finance from the National Bank on security of equipment of the plaintiff which had been sold at auction. While nothing turns on this alleged fraud, at least in terms of the present action, it was relied upon by counsel for the defendant to attack the credibility of Innes and of course, the plaintiff. Despite having the opportunity to do so, Innes made no response to the allegations made by Sharon Cowie in her statement. I will have more to say about the relevance of these matters later in these reasons.

7 As part of the alleged fraudulent financing scheme, Sharon Cowie says that she and Innes determined that Innes should not be a director of the plaintiff. She asked her sister, Marsha Cowie, if she would be a director of the company and Marsha Cowie agreed. According to Sharon Cowie, Marsha Cowie understood that the scheme was fraudulent, although she was assured by Innes that this was not the case. Sharon Cowie says that once the money was received from the bank it went to Innes and she saw none of it. No repayments were made to the bank and eventually she lost her house and her car.

8 According to Sharon Cowie, there was animosity between Marsha Cowie and Innes. It came as something of a surprise to her then when she discovered in December 1995 the plaintiff had taken out an insurance policy on the life of Marsha Cowie. When she challenged Innes about this policy he provided no explanation as to why it had been taken out. Sharon Cowie thought it unlikely that there was any relationship between her sister and Innes but, at least by implication, it would appear that this was a possibility. Be that as it may, Sharon Cowie says that so far as she was aware Marsha Cowie had no real involvement with the plaintiff, was not involved in the plaintiff's business and there was no reason why the plaintiff, which was impecunious, should have insured the life of Sharon Cowie.

9 There are two inter-related points that can be drawn from this evidence. First, the credibility of Innes must be open to question. As I have indicated above, Sharon Cowie's statement accuses him in direct terms of criminal conduct. He has been provided with the opportunity to answer those allegations and has chosen not to do so. Second, the circumstances in which the policy of insurance was taken out by the plaintiff over the life of Marsha Cowie are most unusual. It is quite common for corporations to insure individuals who are important to the proper functioning of the business - this is sometimes referred to as "key man" insurance. The evidence in this case suggests that the plaintiff was not trading, had no assets of note and that Marsha Cowie played no role in the affairs of the company. Why then, it may be asked, should the plaintiff take out insurance on her life?

10 That said, none of the matters raised are directly relevant to the issues between the parties on the pleadings. The basis upon which the defendant has purported to avoid the policy are fraudulent misrepresentations allegedly made by Marsha Cowie when she applied for insurance cover. These matters are detailed in par 8 and par 10 of the defence. By par 8 it is alleged misrepresentations were made by Marsha Cowie about her earnings, occupation and relationship with the plaintiff. By par 10 it is alleged that Marsha Cowie misrepresented her medical condition. By par 28 of the defence it is alleged that Innes procured the defendant to make the misrepresentations. How that allegation against Innes ties in with the defence or the counterclaim is unclear. In any event, what is clear is that the material contained in the statement by Sharon Cowie, although it may provide fertile ground for cross-examination of Innes, is not directly relevant to the strength or otherwise of the plaintiff's claim.

11 The approach to be adopted on an application for security for costs was considered by the Full Court of this Court in the decision of BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857. Anderson J, in the course of his judgment, put the position as follows (at 860):

"The exercise of the discretion in this case required the Master, on the facts established before him, to make the decision as to security which he considered just, having regard to the competing interests and the situations of the respective parties, after taking into account and giving appropriate weight to all relevant considerations and excluding all irrelevant considerations.

In the particular circumstances of this case, in addition to the likely inability of the plaintiff to pay the first defendant's costs and the prejudice to the first defendant that would flow from that should the first defendant succeed in resisting the plaintiff's claim, the matters that had to be considered including the strength and bona fides of the plaintiff's case, the bona fides of the first defendant's application for security, whether the making of an order which shut out the plaintiff from prosecuting its case and whether the inability of the plaintiff to meet a costs order has been caused by conduct of the first defendant."

12 His Honour did not purport to set out a comprehensive list of the matters which are relevant to an application. But clearly the considerations referred to by his Honour are of importance. In this case there is undoubted prejudice to the defendant because it is conceded that the plaintiff will not be able to meet any costs order that might be made. That is the first point to bear in mind. The second is that there is no suggestion that the application is not brought bona fides. That, of course, is a different thing from saying that the application might stultify the proceedings. On the facts in this case it could not be said that the defendant is attempting by this application to prevent the plaintiff proceeding with the action.

13 On behalf of the plaintiff it was submitted that the effect of an order for security of costs would be to stultify the proceedings. In answer to that submission, counsel for the defendant pointed out that it was for the plaintiff to establish that any costs order would have that effect. It was submitted that this had not been done. Moreover, counsel submitted that those who stood behind the plaintiff, in particular Innes, had not made a full and frank disclosure of their financial position to enable a finding that, if an order was made, the action would not proceed. With respect to counsel, the reality of the situation is that it is clear that both the plaintiff and Innes are impecunious. There can be no doubt about the plaintiff. As to Innes, all of the evidence led by the defendant shows that his various business ventures had been unsuccessful and he was perennially short of funds. Indeed, it seems implicit in the way that counsel for the defendant relied upon the evidence of Sharon Cowie that the defendant's case will be that Innes' impecuniosity was the reason why the insurance policy was taken out on Marsha Cowie's life. In the light of that argument, it is difficult to see how the defendant could suggest that Innes, or any other person associated with the plaintiff, has the wherewithal to satisfy an order for security for costs. There is an additional fact which is of importance when dealing with this issue. It is sometimes the case that an individual who is likely to benefit from the litigation - such as Innes in this case - is prepared to give a personal undertaking for the defendant's costs of the action. Innes has not made such an offer in this case. However, he is a party to the proceedings. There would appear to be no reason why, if the Court thought it appropriate, the costs of the defendant, if it is successful in resisting the plaintiff's claim, could not be ordered against him. I appreciate that that is not quite the same as Innes offering his personal undertaking. Nonetheless, the very fact that he is at risk with respect to costs does provide the defendant with some security.

14 There are two further matters which, in my view, mitigate against any order for security being made. First, there is the fact that the plaintiff is seeking to enforce a contract with the defendant which the defendant now says has been avoided. It might then be said that, properly considered, the plaintiff is in the position of a defendant. Put another way, the plaintiff's action may be characterised as "defensive". The applicable principles in such a case were discussed by Ormiston J in Interwest Ltd (Receivers & Managers appointed) v Tricontinental Corporation Ltd (1991) 9 ACLC 1218 at 1228 - 1230. In my view, taking into account the nature of the proceedings, it would be inappropriate to order that the defendant provide security.

15 The second point follows on from the first. There is, in this case, a counterclaim. If security for costs were ordered, that would have no effect on the defendant's right to pursue its counterclaim. The effect may be that the claim itself was brought to an end by the plaintiff's failure to provide security, while the counterclaim, which is intimately connected with the claim itself, was allowed to proceed. That would be an unfair and unreasonable result.

16 For these reasons, I concluded that no order for security ought be made. I am of the view that costs of the application should be in the cause, but I will hear the parties on this question.