Bryan E. Fencot & Associates Pty Ltd v Eretta Pty Ltd

An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking: see Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Aust) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325. 7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate: see Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) [1979] ACLC 32,446; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 where Zeeman J stated at 189: "[t]he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order...[see] Sydmar Pty Ltd v Statewise Developments[supra] and Interwest Ltd v Tricontinental[supra]".(emphasis added) Should security for costs be ordered It is now necessary to consider these various factors to determine if an order for security should be made, and if so, the amount of and what form the security should take. I have already indicated that there is no question of delay in the bringing of the application. I am also of the opinion, and this was not challenged by the respondent, that the applicant has a bona fide and arguable case. I am thus entitled to assume in the circumstances that the claim has reasonable prospects of success: Bryan E. Fencott. There is no doubt that the applicant is impecunious. Counsel for the applicant submitted that the applicant's impecuniosity was caused by the respondent's conduct subject of the proceedings. The difficulty with this submission is that there is no evidence of the applicant's financial position at the commencement of the proceedings, nor was there any evidence of what its anticipated financial position would have been had the joint venture proceeded. The only evidence was that the applicant received management fees from the second respondent although, during the lifetime of the joint venture, those fees were substantially reduced. In any event, there is no evidence as to the application of the management fees. For all that is known, they may have been utilised entirely for salaries and overhead costs of the applicant. Accordingly, I do not consider that this is a factor which should weigh in the balance as to whether an order for security should be made. Counsel for the applicant did not submit that the application for security was oppressive in the sense of being used merely to deny the applicant the right to litigate. Rather, it was submitted that the respondents were acting oppressively in not accepting the undertaking or guarantee which had been proffered by the Kinsellas and Teakroll. The principals are not insolvent, and therefore do not attract the benefit of the rule that an impecunious litigant should not be denied the right to litigate. However, whether the respondent's refusal to accept their undertaking to be liable for any order for costs made against the applicant is oppressive will depend upon whether, if this is an appropriate case in which to order security, the undertaking or guarantee is sufficient. Before dealing with this question, it is desirable that I deal with the major ground advanced as to why an order for security ought not to be made, namely, that these proceedings are purely defensive proceedings brought in response to the respondents' actions, which it was submitted, demonstrated that it was the commercial aggressor. Whether proceedings are defensive Proceedings have been characterised as defensive where, as Ormiston J stated in Interwest at 627: "...they are...either directly resisting proceedings already brought or seeking to "halt self-help procedures"." His Honour continued that in such circumstances: "...it would seem that to require security would be oppressive, or at least would provide serious grounds for refusing to make an order. At the least it is a factor to be considered in the exercise of the discretion. In particular, it is a basis for reducing the amount of security ordered to a sum related to the cost of those claims which cannot be characterised as defensive". In Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd at 32,449, Mitchell J stated that a court, in deciding whether or not to exercise its discretion to make an order for security for costs: "is entitled to consider whether the company is a true plaintiff or is forced into the position of plaintiff because the defendant is empowered to take..."self help" procedures..." His Honour went on to state that it was one factor: "which may be placed in the scales in making the decision as to which way the discretion should be exercised". That passage was referred to with approval by Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480 at 484. The usual, and probably only, proceedings which fall into the category of defensive proceedings are cross claims brought by a respondent against an applicant in response to the applicant's claim. However, a cross claim is not necessarily defensive. In T Sloyan & Sons (Builders) Ltd v Brothers of Christian Instruction [1974] 3 All ER 715, Lane J ordered security for costs on so much of a counterclaim as was more than a defence against the applicant's claim. In the present case, no cross claim has yet been filed. The respondent's solicitors stated that a cross claim would be filed in which the respondents would claim relief under s 52 of the Trade Practices Act for misleading and deceptive conduct. He also stated that the respondent intended joining the Kinsellas and Dr Wang under s 75B. However, at this stage, I do not consider that I should take that factor into account. Forensic and commercial decisions may be made in relation to a cross claim which I cannot and ought not anticipate. The more difficult question, and the one which is relevant here, is what are appropriately characterised as defensive proceedings to halt "self-help procedures". It is useful to consider what have been held to be defensive proceedings in this context. In Heller Factors Pty Ltd, the defendant had purported to exercise rights under a guarantee secured by a debenture by appointing a receiver and manager to the plaintiff company. The plaintiff sought declarations that the deed of guarantee had been discharged, or that it was void and unenforceable and that no moneys were payable under it. It sought consequential orders to restrain the defendant from taking any action under or to enforce the guarantee. It also sought an account and damages including exemplary damages. The Full Court held that to the extent that the claim related to the guarantee it was defensive. However, the claims for an account and damages were offensive. Mitchell J stated at 32,450: "[i]t was not clear to us how the plaintiff could have hoped to obtain an order for damages in respect of what it said was a failure of a duty owed by the receiver in dealing with the business and assets...Be that as it may these claims, if established, clearly could not be described as a shield against the actions of the defendant but might constitute a sword to be used against the defendant. In Interwest, the defendant, Tricontinental Corporation, had, prior to the commencement of proceedings sought to recover monies from the applicants pursuant to certain loan facilities and guarantees. Tricontinental had appointed receivers and managers to the corporate plaintiff and had otherwise sought to enforce securities. It was also seeking to wind up certain of the plaintiffs. It had also sought to recover monies from the guarantors in other proceedings. Ormiston J accepted that the litigious steps taken to halt those measures were defensive. However, the plaintiffs had sought relief beyond those defensive measures. To that extent, his Honour, ordered security for costs, limited to the defensive measures. In the present case, the applicant commenced proceedings by way of application supported by affidavit. The claim is framed alternatively. In the first part of its claim, it has sought: - a declaration that the joint venture agreement has not been validly rescinded; - a declaration that the removal of Dr Wang as a director of the second respondent was in breach of the joint venture agreement or ultra vires the second respondent's Articles of Association; - a consequential order for rectification of the Register of Directors; - a declaration that the purported appointment of the fourth and fifth respondents as alternate directors of the second respondent was ultra vires the second respondent's Articles of Association; - a declaration that the purported appointments of those respondents as directors of the second respondent was in breach of article 15 of the joint venture agreement and ultra vires the second respondent's Articles of Association; - a consequential order for rectification of the Register of Directors; - a further consequential order that the second and third respondents take the necessary steps to effect the appointment of two directors nominated by the applicant in compliance with article 15 of the joint venture agreement; - a declaration that the forfeiture by the second respondent of the applicant's ordinary partly paid shares in the second respondent was in breach of article 8.2 of the joint venture agreement and ultra vires the second respondent's Articles of Association; - a consequential order that the Register of Members be rectified; - a declaration as to the proper price to be paid by the applicant to the first respondent for the exercise of the applicant's right pursuant to article 9 of the joint venture agreement; - a declaration that the first respondent has failed to comply with a notice given under article 34.1 of the joint venture agreement so that the applicant is entitled to compulsorily acquire the first respondent's shares in the second respondent and a consequential order for the transfer of those shares to the applicant; - a declaration that the transfers by the first respondent of the applicant's 20 ordinary fully paid shares in the second respondent to the third, fourth and fifth respondents was in breach of article 13.1 of the joint venture agreement and invalid;

a consequential order rectifying the Register. The alternate claim is pleaded as follows: - a declaration that the third, fourth and fifth respondents in procuring or acquiescing in the procurement of the purported termination of the joint venture agreement failed to discharge his individual duty as a director of the second respondent to act in the best interest of the second respondent and have thus caused the second respondent to conduct its affairs in the manner that is contrary to the interests of the members as a whole; - a declaration that the respondents by making calls on the unpaid portion of the nominal value of the applicant's shares in the second respondent conducted itself oppressively or unfairly prejudicial to or discriminatorily against the applicant; - declarations that by failing to make available the second respondent's financial records to the applicant and by failing to give credit for legal costs paid by the applicant when determining the amount to be paid in respect of the calls, the second respondent acted oppressively to the applicant; - declarations that the second respondent had conducted its affairs in a manner contrary to the interests of the members as a whole by transferring some of its property to the owner of the first respondent for less than adequate consideration and for purchasing property from the owners of the first respondent for more than the agreed or adequate consideration; - orders that the Register of Members be rectified by cancelling the forfeiture of the applicant's shares and reinstating the applicant as the owner; - orders that the first respondent transfer all of its remaining shares and the third, fourth and fifth respondents transfer all their respective shares in the second respondent to the applicant at a price to be fixed and the second respondent repay the sum of $10,980.00 that has been paid by the applicant to the benefit of the second respondent; - alternatively, an order that two of the third, fourth and fifth respondents be removed as directors of the second respondent and that a director of the applicant together with an independant person be appointed directors of the second respondents and that the independant person be appointed Chairman of directors and that the second respondent appoint an auditor. To the extent that the application relates to the removal of Dr Wang as a director, the appointment of the fourth and fifth respondents as directors of the second respondent, the appointment of the applicant's nominees to the Board of the second respondent, the transfer of the applicant's shares to the individual respondents and the consequential orders sought in respect of those claims, it is properly characterised as defensive. It is made in direct response to actions taken by the respondents, or some of them, in purported exercise of their rights under the joint venture agreement and the Articles of Association of the second respondent. The only recourse the applicant had in such circumstances was to seek relief from the court to reinstate the position as it was prior to these actions being taken. It seems to me that the claim in relation to the joint venture agreement is also defensive in nature. The first respondent has purported to terminate the agreement pursuant to its alleged rights at law. Again, the only action available to the applicant was to seek relief by seeking to have the purported rescission declared invalid. In my opinion, that is no different in character to seeking relief in relation to guarantees or the appointment of receivers and the like as occurred in Heller Factors and Interwest notwithstanding that in this case the "self help procedure" was one which was purportedly taken pursuant to a common law right. The balance of the application makes claims either pursuant to the applicant's alleged rights under the joint venture agreement or by way of an oppression suit against the respondents or arising out of an alleged agreement that calls on the applicant's shares were to be paid out of profits. To that extent the proceedings are offensive. Indeed, these claims reflect in large measure the nature of the relationship as it evolved between the parties. From an early stage that relationship was characterised by claim and counter claim, threat and counter threat. Having regard to the manner in which their affairs were conducted, it was inevitable that a serious dispute, and most probably litigation, would eventuate. As a substantial part of the applicant's claim is offensive in character, I consider it is appropriate that there be an order for security. It is thus necessary to determine what order ought to be made. The validity of the rescission of the joint venture agreement is a major issue, both legally and factually, and one which will substantially determine the outcome of the other defensive claims. The oppression claim, at least in so far as it involves a consideration of the manner in which the second respondent was managed, also appears to be one which will involve substantial factual issues. I am not able to assess whether one aspect will involve more difficulty or more time than the other. However, as both are substantial matters, I consider that, at this stage at least, I should treat them as involving equal costs in their preparation. Subject to the question whether the undertaking offered by the principals is sufficient security, I consider that I should order security up to a certain point in the proceedings only, namely, up to and including discovery and inspection. After that, the respondents should be in a better position to more accurately assess the costs which are likely to be incurred, at least for the balance of the preparation of the matter. The evidence is that the lowest estimate of anticipated costs up until the stage of discovery are approximately $15,000. Accordingly, the appropriate order to make will be in respect of 50% of that amount. Principals' offer to be liable for the costs That leaves for determination the question whether the offer of the principals is sufficient and if so whether I should limit its extent to the amount of security which I consider is appropriate to order at this point of time. In Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Aust) Pty Ltd (1986) 13 FCR 46 Burchett J stated at 53: "...the hardship that is most relevant is the hardship to the applicants themselves...I think it is also relevant that the individual responsible for this litigation...is not sheltering behind a corporate shield in order to protect some assets of his own from liability to meet a cost order. In [Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523 at 533] the Full Court of the Supreme Court of Queensland made it clear that in such a case the means of the individual concerned are "not really relevant". What is relevant is that the company is not a storking horse to enable someone else to evade personal responsibility. If he accepts responsibility, an impecunious natural person is entitled to rely on the general rule that poverty is no bar to a litigant: Barton v Minister for Foreign Affairs (1984) 2 FCR 263 at 469". In Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 Byrne J at 306 adopted what was said by Connolly J, Campbell CJ and Demack J concurring, in Harpur & Ors v Ariadne Australia Ltd & Ors (1984) 2 ACLC 356 at 362 that: "[t]he mischief at which the provision [for security] is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. If however he is already available for what ever he is worth, the object of the legislation is seen to be satisfied". Cooper J expressed a similar view in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 415: "[o]nce the shareholders have been exposed to personal liability for the applicant's costs, the weight to be given to the statutory purpose is gone". In Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 at 328, the Full Court of the Supreme Court of Western Australia examined whether undertakings given by directors or those standing behind a company were sufficient security. Rowland J, with whom Ipp and Anderson JJ agreed, stated: "[t]he appellant's case seems to be based on the idea that the bare undertaking given by the respondent's directors is virtually worthless. I cannot agree. The directors are businessmen who are gradually lifting the respondent out of a very parlous financial position. Even if that fails, they each have their own future business careers to consider and I would have thought, for myself, that the threat of Bankruptcy, if they were ever called upon to honour the written undertaking given, would provide some form of security, albeit indirect, for the appellant". Mantaray and Gentry Bros were considered by Powell J in Erolen v Baulkham Hill Shire Council (1993) 10 ACSR 441 at 455. There, his Honour stated at 456: "[w]hile I am prepared to accept that the offer of a guarantee is a factor to be taken into account in determining what is the proper form of security to be provided in a case for which an order for security is appropriate, I am quite unable to share the views expressed by Byrne J in Mantaray Pty Limited v Brookfield Breeding Co Pty Limited, supra, and by Cooper J in Gentry Bros Pty Limited v Wilson Brown and Associates Pty Limited...which are to the effect that, once the shareholders have agreed to accept personal liability for any judgment for costs, the statutory purpose of section 1335 of the Corporations Law is fulfilled - such an approach, so it seems to me, would be as much "a fetter" on the Court's discretion as the, now discarded, approach of "a 'bias'" in favour of making an order once it is shown that the plaintiff is impecunious." With respect to Powell J, I do not agree that Mantaray and Gentry stand for the proposition as his Honour has put it. In Mantaray before referring to the passage from Harpur, Byrne J stated, at 306, "[a]nother important consideration supports refusal of security". He then set out the passage from Harpur and concluded "[the director]...has accepted personal responsibility for the defendant's costs. In this case that satisfies the object of [the section]" (emphasis added). The full passage from Gentry is as follows: "Once the shareholders have been exposed to personal liability for the applicant's costs, the weight to be given to the statutory purpose is gone... The offer by the shareholders of the applicant to accept personal liability for the applicant's costs is a factor weighing heavily against the making of an order against the applicant for provision of a cash or other security for costs notwithstanding that the worth of the shareholders may ultimately prove insufficient to satisfy any judgement in whole or in part". Once the statements in Mantaray and Gentry are considered in context, it is clear that no more was being said than that the offer of security by way of a guarantee from the directors or shareholders or other persons interested in the outcome of the litigation was a factor, which could be decisive in a given case, to be considered in determining whether any other form of order for security for costs should be made. In my opinion, this is the correct approach to take when such an offer has been made. The question which arises in this case is whether the respondents should be deprived of the provision of security such as cash security or a charge over assets merely because such an offer has been made. In my opinion, there is no reason why they should be so deprived. Mrs Kinsella has rugs and antiques which she values at $30,000. They are not necessary for her daily living needs, although she may use them for such, nor are they used by her for the purposes of her earning a living. There is no reason, therefore, why those assets should not be charged to the extent of the security which I propose to order. I should add that nothing that I have said on this application should be taken as an indication that security for the whole of the proceedings is or will be ordered. That question will have to be determined if and when any other application is made for the provision of further security, having regard to the circumstances as they exist at that time, although undoubtedly some of the matters which I have considered relevant will be relevant on any subsequent application. Application for costs in respect of application relating to the respondent's contempt The applicant also made an application for the costs of an application made during the hearing of the security for costs motion, whereby it sought to have the latter motion struck out because, at the time it was made, the second respondent was in contempt of an undertaking given to the Court. It is necessary to provide some detail of this application. On 20 October 1994, the applicant filed a notice of motion seeking various restraining orders against the respondent dealing with its assets. Those proceedings were resolved between the parties by the second respondent giving a number of undertakings including the following: "[t]hat it will not make any payments to Electra Cables (Production) Pty Limited". Electra Cables (Production) Pty Limited was incorporated in about November 1993 for, what was described by the third respondent in his affidavit of 1 November 1994 as "internal administrative reasons". The third respondent also stated in that affidavit that no payments of money or exchange of goods was made between the second respondent and Electra Cables (Production) Pty Limited. This turned out not to be so. In a further affidavit of 30 November 1994, the third respondent stated: "[w]hat I meant is that Electra Cables (Production) is paid nothing for its services by the Second Respondent. In fact money does pass between the Second Respondent and Electra Cables (Production). That money is the exact amount of salary paid to the production employees of Electra Cables. A cheque is drawn on the account of Electra Cables for the amount of those salaries each week and paid to Electra Cables (Productions). Wages are then paid by Electra Cables (Productions) to the staff involved. The amounts are equal and there is no profit component in the transaction". This evidence was still not entirely accurate, as monies were also channelled through Electra Cables for the payment of payroll tax, workers' compensation insurance premiums and other payments directly associated with the employment of employees. During the course of the security for costs application, counsel for the applicant examined subpoenaed material which showed that payments were being made by the second respondent to Electra Cables (Production). Counsel seized upon that material, apparently unaware of the content of the third respondent's 30 November 1994 affidavit and made the application to which I have referred. It was not obvious from the subpoenaed material what these various payments were for. Strictly, the second respondent was in breach of its undertaking and although not admitting the breach, subsequently, at the adjourned hearing of the matter, "for more abundant caution and clarity" sought leave to withdraw the undertaking and in its place, offered the following undertaking to the court: "...that the first, second, third and fourth respondents will not make payments to Electra Cables Productions Pty Limited other than in respect of usual weekly wages and payments made in the ordinary course of business in relation to the employment of production staff made available by Electro [sic] to the second respondent". There was no opposition to this course and I accepted the new undertaking. The application for costs of this application was resisted essentially on the same basis as the respondents had opposed the application. It was submitted that the application was "a stunt", that it was made contrary to the true legal principles which governed such applications and was contrary to the evidence. It was not in dispute that, to state the matter in broad terms, a party in contempt of court will not be heard by the court. The respondent's solicitor submitted that the true rule was that the principle only applied after there had been a formal finding of contempt after properly constituted contempt proceedings had been heard. He relied upon Permewan Wright Consolidated Pty Limited v Attorney-General in and for the State of New South Wales on the Relation of Franklins' Stores Pty Limited, (unreported, NSWCA, Reynolds and Hutley, Mahoney JJA, 11 December 1978). Hutley JA at 3, after referring to: "[t]he fundamental rule that a party guilty of contempt should not be heard in respect of an application made on his part to a court." determined at page 6, in respect of the case before the court that: "[if] it were not for certain [responses] by counsel for the appellant to proposals put by me towards the end of the case, I would have been of the opinion that the application [of the appellant]...should have been out of hand and the applicant ordered to pay the costs, leave being given to the appellant to make a further application for stay after the contempt proceedings had been heard and when it had complied with all the orders made in the contempt proceedings or had otherwise purged its contempt." For reasons particular to the case, the Court determined that it was appropriate that the application not be heard without the respondent purging its contempt to the extent that it was able. To this end, the notice of motion was stood over either until the contempt had been purged or contempt proceedings, if pursued, were finalised. The solicitor for the respondents submitted that his Honour's reasoning was authority for the proposition that there had to be a finding of contempt after a formal hearing of contempt proceedings. However, this misunderstands his Honour's judgment and the judgment of the court as a whole. I do not propose to analyse the judgment in detail. It is sufficient to note that in dealing with the principle, the court was referring to a party having disobeyed the court's order. In Young v Jackman (1986) 7 NSWLR 97, Young J applied that principle in circumstances where there had been no contempt proceedings. Rather, the party seeking relief from the court was in disobeyance of orders of the court. His Honour then considered whether the rule was subject to an exception that the Court had an overriding discretion as to whether to hear a party in contempt or not. His Honour stated at 101: "I am greatly attracted by this argument because it seems realistic, modern and sensible, but, unfortunately, it does not seem to me that it is the law in New South Wales..." However, in Australian Securities Commission v Robert James MacLeod & Ors (Drummond J, unreported, 23 November 1994). Drummond J indicated that he preferred the view that the application of the rule was subject to an overriding discretion, although he found it unnecessary to determine that matter. It should be noted that in ASC v MacLeod, Drummond J was dealing with a case where there had been no contempt proceedings.

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Judgment (9 paragraphs)

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Cases Cited (8)