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

Mulley v Manifold [1959] HCA 23; (1959) 103 CLR 341

Western Areas Exploration Pty Ltd v Streeter [No 2] [2008] WASC 217

1 MASTER SANDERSON: This was the return of applications by both defendants. The first defendants applied for security for costs. The second defendant applied for (effectively) further and better discovery and security for costs. During the course of the hearing I advised the parties that I would not order further and better discovery and that I would publish reasons for doing so. These reasons deal with the discovery question as well as the security for costs issue.

2 In relation to further and better discovery not a great deal needs to be said. The plaintiff has filed two affidavits of discovery and a starting point is to assume that it has complied with its obligations. The second defendant relies on a contentious affidavit sworn by Anthony Farris on 3 July 2009. The thrust of the affidavit is that certain documents 'must' exist. This claim is put on the basis of certain statements made by representatives of the plaintiff from time to time. It has been long established that further and better discovery cannot be ordered on the basis of a contentious affidavit. That principle was established by Mulley v Manifold [1959] HCA 23; (1959) 103 CLR 341 and 50 years later that case is still good law.

3 In short, there was no basis for ordering further and better discovery and I dismissed this aspect of the second defendant's application.

4 That leaves both defendants' application for security for costs. The application was brought under s 1335(1) of the Corporations Act 2001 (Cth). The plaintiff in this case is a trustee company. Paragraph 1 of the plaintiff's statement of claim pleads that the plaintiff is the trustee of the Mindarie Property Trust. Based on the affidavit of Andrea Georgina Rawson sworn 22 July 2009 and filed in support of this application for the second defendant, it is clear that the plaintiff owns a number of properties. However, Landgate searches of these properties do not indicate whether the plaintiff owns them in its own right or whether it owns them as trustee. The defendants invited the plaintiff to both produce a copy of the trust deed of any trust where it is the trustee and confirm the capacity in which it holds the various properties registered in its name. The plaintiff did not respond to either request.

5 Some evidence was provided by the plaintiff but it is very limited. It is found in pars 12 and 13 of the affidavit of John Andrew Miller sworn 17 August 2009 and filed in opposition to this application. These paragraphs read as follows:

1. The only substantive assets held by Mila (the plaintiff) in its capacity as trustee of the Mindarie Property Trust are real property. Mila does not currently have sufficient cash to provide the security sought by the defendants.
2. If the orders sought by the defendants are made, Mila, in its capacity as trustee for the Mindarie Property Trust, will need to sell or further encumber its real property, or have funds advanced to it from other sources, if it is to provide the requisite security. I do not intend to cause any of these steps to happen.

6 The approach to be adopted to applications for security for costs when the plaintiff is a trustee company was considered by Barrett J in Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806; [2006] 202 FLR 270. What follows is a relatively lengthy passage but it so clearly captures the applicable principles that it is worth quoting in full:

The defendants contend that security for costs should be ordered because, on the basis of 'credible testimony' (to use the words in s 1335(1) of the Corporations Act), there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defence. That is the first stage of the inquiry upon an application such as this. If reason so to believe is found, the court moves to the second and discretionary question of whether security should be ordered.

The defendants point to two particular matters emerging from the evidence: first, that the plaintiff is a newly formed company that has an issued capital of $30; and second, that it sues as a trustee.

The evidence of the first matter comes from an ASIC search annexed to an affidavit of the defendants' solicitor. The search shows that the plaintiff was registered on 5 July 2005 and that it has on issue 30 ordinary shares on which a total of $30 is 'paid/taken to be paid'. The shares are shown as held, in parcels of 15, 10 and 5, respectively, by three proprietary companies each of which is shown as holding the shares non-beneficially.

Evidence of the plaintiff's trustee status comes from the statement of claim where it is said, first, that the plaintiff is the trustee of the Transocean Capital Unit Trust; and, second, that the plaintiff, as trustee of the Transocean Capital Unit Trust, has been, since 5 July 2005, 'part of a group of companies known as the Transocean Group which conducts a boutique investment banking and corporate advisory business and which, amongst other things, provides corporate finance and capital raising services to emerging businesses'.

The plaintiff has not placed before the court any evidence of its financial position or of any express right of indemnity it enjoys as trustee. It has been content to meet the security for costs application on the ground mapped out by the defendants. It says, quite simply, that the evidence about a paid up share capital of $30 and the plaintiff's trustee status 'establishes nothing' and that the idea that the plaintiff does not have the capacity to meet an adverse costs order flies in the face of the very subject matter of the proceedings - in essence, that the defendants solicited the plaintiff as an investor of $2 million in their project.

I refer, in this connection, to observations of Smithers J in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd [1985] ATPR 40-584. His Honour said (at 46,729):

'Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability.'

'I have concluded that an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs.'

This approach was accepted and adopted by Tadgell and Cummins JJ in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corp (Aust) Ltd [1995] VicRp 9; [1995] 1 VR 150. In that case there was evidence that the party against which security was sought in the Court of Appeal (a defendant) was a trustee and that it held, as trustee, substantial real estate assets, some of which were unencumbered. The company's paid up capital was $3. In ordering security for costs, Tadgell and Cummins JJ said:

'It was contended for the defendants that in order for security for costs of the appeal should be refused because [sic] holds unencumbered real estate the value of which exceeds the likely cost of the appeal and over which it has a right of recourse as trustee by way of indemnity. These facts, however, by themselves seem scarcely to meet the plaintiff's contention. The solicitors for the plaintiff have sought to inspect the trust deed under which Lagarna is constituted trustee but it has not been produced to them and it was not in evidence before us. For all that appears the trustee may, and I am prepared to assume that it would, be required at any time to transfer its legal interest in the unencumbered property to the beneficiaries of the trust or to encumber it.'

Also instructive is the judgment of Goldberg J in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486. I quote from [18] of the judgment:

'The evidence discloses that each applicant has a paid up capital of $2. It is not disputed that each applicant is a trustee company so that it has no other assets. On this ground alone I consider that there is credible testimony that there is reason to believe that the applicants will be unable to pay the respondents' costs if the respondents are successful. Assuming that the applicants have a right of indemnity out of the relevant trust funds which they administer is it necessary to consider what is the position of those trust funds.'

Goldberg J went on to refer to the evidence about the trust assets and their substance.

In the present case, the defendants have shown the two matters to which I have referred: first, that the plaintiff has a paid up capital of $30 only; and, second, that it is a trustee. In the absence of countervailing evidence, those matters alone must be taken to represent 'credible testimony' of the plaintiff's likely inability to pay the defendants' costs if the defendants are successful. The plaintiff has not sought to adduce evidence of the relevant trust instrument and its provisions as to indemnity. Nor has the plaintiff sought to show the extent of the trust assets that may be available in support of any indemnity. It has been content merely to observe that the defendants were willing to regard it as a good source of the $2 million they required for investment purposes. But, of course, there is a great difference between the plaintiff's own ability to obtain funds if and when it needs them for deployment in its business and the ability of a creditor of the plaintiff to force the plaintiff to obtain and disgorge funds when the creditor seeks to enforce a right to be paid.

I am satisfied that the defendants have shown reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defence. I therefore turn to the discretionary question whether security should be ordered.

The discretionary question should be approached by reference to a number of factors referred to in the judgment of Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189. They are set out in a well known passage at 197 - 198 which I need not repeat. Consideration of those criteria in this case leads to the conclusion that security should be ordered. In particular:

1. The defendants have not been guilty of delay.
2. The plaintiff's impecuniosity has not been caused in any way by the defendants.
3. The defendants' application for security cannot be said to be oppressive.
4. No one standing behind the plaintiff has come forward with any offer of support or indemnity.

I therefore need to consider the amount of security that should be ordered. The defendants propose a sum of $75,000. No fully articulated basis for that is put forward, beyond the bare facts that the hearing is expected to take three days and it is said that there are to be ten witnesses. With those matters unchallenged, I propose to order security in the sum of $50,000 in the first instance. The objective is not to provide the defendants with full indemnity against all eventualities: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497. The defendants may make a further application at a later stage if they think it necessary to do so [29] - [42].

7 Applying these principles it is clear in this case the defendants have established by credible testimony that the plaintiff will be unable to pay costs if called upon to do so. During the course of his submissions, counsel for the plaintiff acknowledged the ambiguous nature of the statements made by Mr Miller in his affidavit and which I have quoted above. As I understand the submission, it was said that based upon Mr Miller's evidence it was unclear whether or not the plaintiff could meet any costs order from its own assets. That being so the court could not be satisfied that the threshold test was overcome.

8 That submission should be rejected. If a party in the position of the plaintiff wishes to establish that despite its trustee status it has assets from which it could meet the costs of any judgment, it should produce evidence to that effect. To attempt to avoid giving security based on ambiguous evidence is inappropriate and doomed to fail.

9 So the threshold test has been satisfied by the defendants and the question is whether, in the exercise of my discretion, I should make an order for security and if so, in what amount.

10 On behalf of the plaintiff it was submitted that the defendants' delay in making the application was such that it now ought be refused. It was said that as the pleadings were closed, discovery by the parties had been given, and a mediation conference had taken place (although this conference was set to reconvene late in October), the matter was now too far advanced to warrant security being ordered. In effect, it was submitted that the plaintiff, having incurred substantial costs to take the action this far, should not now have to find security for costs. If a security for costs order was to be made it should have been made on an application brought early in the proceedings.

11 In making this submission, counsel for the plaintiff relied upon the well-established principle as set out by Moffitt P in Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 where his Honour said:

The right to seek security for costs and to stay proceedings, with the possible result that a claim for damages is frustrated, is a powerful weapon. Therefore, the litigant who seeks to use it against his opponent is at risk of not having it available, unless the application is made and persevered with in circumstances involving the least oppression of his opponent. The primary reasoning why the application should be brought promptly and pressed to determination promptly is that the company, which by assumption has financial problems, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it is allowed to or commits substantial sums of money towards litigating its claim (309).

12 It is worth noting that this statement of principle was approved of and applied by Le Miere J in Western Areas Exploration Pty Ltd v Streeter [No 2] [2008] WASC 217. In that case, applying what was said by Moffitt P, his Honour refused to order security.

13 For their part the defendants relied on two matters in explaining the delay in bringing their applications for security. The first had to do with case management principles. It was said the application was not made because it was thought best to progress the matter to mediation, before what might prove to be an unnecessary interlocutory step in the proceedings was taken. That approach suggests that what was said by Moffitt P in Buckley was to be modified in the light of case management principles. It was submitted this was particularly the case when, as at present, interlocutory applications were discouraged.

14 In my view, there is nothing in the case management regime as it applies in this court, or in case management principles generally, which would support that submission. It remains the case that an application for security for costs ought be made at the earliest possible time. Of course, if circumstances change during the course of the litigation so that a plaintiff who may have had assets to meet a costs order consequent upon the happening of a certain event no longer has the wherewithal to meet the costs then there is an adequate explanation for the delay. But the starting point in any application for security for costs is that it ought be foreshadowed at the earliest possible opportunity and if no agreement is reached the application should be made promptly. A defendant who does not follow this practice runs a real risk that no security order will be made.

15 The second basis of the defendants' claim in this case was that the position of the plaintiff had altered. It was said as at December 2008 the plaintiff's assets were subject to a charge in an amount of $4.2 million. As at 29 June 2009 notification of charge details were lodged with ASIC showing a liability of $8 million. It was submitted this increase in the plaintiff's liabilities justified the delay in making the application.

16 That submission should be rejected. The simple fact is the defendants never had any idea as to the financial health or otherwise of the plaintiff, either in December 2008 or in June 2009. The plaintiff would not provide them with any information. There is nothing in the evidence to suggest the defendants held off making the security for costs application until they learned of the increase in the plaintiff's liabilities. In other words, the increase in the amount of the charge over the plaintiff's assets in no way explains the delay in making this application.

17 In the circumstances I am satisfied the delay in bringing this application is such that security ought not be ordered. In my view, the action is just too far advanced. If the resumed mediation does not resolve the parties' differences the next step will be to enter the matter for trial. Given how far the matter has progressed, it is hard to see the plaintiff has anything left to do other than file the necessary entry for trial documents and the papers for the judge. To have got to this point the parties' witnesses must have been proofed, all the documents assembled and, even if an advice on evidence has not been drawn, in a case such as this, which so far as the plaintiff is concerned is relatively straight-forward, that would not be an onerous step. So the application is too late. It should be refused.

18 Having reached that conclusion I should, lest at a later date I am found to have been in error, deal with the question of quantum. The first defendants seek security in an amount of $77,500. The basis upon which this amount is calculated is set out in a letter from the first defendants' solicitor to the plaintiff's solicitor on 3 August 2009. A copy of this letter appears as annexure DFB5 to the affidavit of Dennis Frank Beere sworn 7 August 2009 and filed in support of the application for security. The amount of security anticipates a three day trial. The amounts claimed are not the full entitlement under the appropriate costs order.

19 The second defendant seeks an amount of security of $96,474. The draft bill lodged by the second defendant anticipates senior counsel being instructed and claims amounts close to the maximum allowed under the scale.

20 When assessing the security it should be borne in mind that this is a case where the first defendants have taken third party proceedings against the second defendant. Although it is not entirely clear from the papers filed, it is reasonable to assume that if three days are to be occupied by the trial, at least part of that time will be spent dealing with the issues between the defendants. Necessarily, this must affect the quantum of any security.

21 In the circumstances, were I to have ordered security I would have ordered it be provided in an amount of $50,000 - being $25,000 in relation to each of the defendants. While this would not cover either of the defendants' costs it is, in my view, a reasonable figure bearing in mind how far the action had progressed before the security application was made and the fact that part of the time at trial would be occupied by issues between the first and second defendants.

22 In the event I would dismiss the application for security by both defendants. Subject to hearing from counsel, costs of the application for security should be costs in the cause. The costs in relation to the second defendant's application for further and better discovery should be paid by the second defendant to the plaintiff.