Cashflow Finance Solutions Pty Limited v Compagnie Francaise D'assurance Pour Le Commerce Exterieur

REASONS FOR JUDGMENT 1 This is an application for security for costs brought by the respondent (Compagnie Francaise) against the applicant (Cashflow) under s 1335 of the Corporations Act 2001 (Cth), s 56 of the Federal Court Act 1976 (Cth) and r 19.01 of the Federal Court Rules 2011. 2 The evidence establishes that Cashflow is impecunious. An unaudited balance sheet of Cashflow "as of January 2012" shows a deficiency of assets of over $4.8m. The power to order security for costs under any of the provisions referred to above is therefore enlivened. The only question which arises is whether I ought to exercise my discretion to make an order. 3 The order which Compagnie Francaise seeks is that within 14 days, Cashflow provide further security for costs in the sum of $310,000 for costs up to the commencement of the trial by way of payment into Court, bank guarantee or such other form of security as is acceptable to the District Registrar and, subsequently, an additional amount of $190,000 for security of the trial. The latter is to be provided 14 days before the commencement of the trial. 4 Once the threshold prescribed by the abovementioned provisions is satisfied, the discretion to make an order is a very wide one. It must be exercised judicially but that is the only relevant limitation: Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1 at 3. 5 The authorities establish that a number of factors are relevant to the exercise of the discretion but the particular factors to be taken into account depend upon the circumstances of the individual case: Cosdean Investments Pty Limited v Football Federation Aust Ltd (No 2) [2007] FCA 163 at [20]. 6 A list of the seven guidelines which the courts typically take into account is set out in Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276 at [74]. 7 In the present case, the application was brought promptly, having regard to the previous history of the matter. This is because earlier orders for security were made by consent. Those orders covered defined stages of the proceeding. It is not necessary that Compagnie Francaise should prove that the earlier security has been exhausted because the orders now sought relate to later stages of the proceeding. 8 I have had regard to the general rule that where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, it is appropriate to proceed on the basis that the claim is bona fide with reasonable prospects of success: Jazabas at [74]. 9 Although Cashflow contends that its impecuniosity was caused by the conduct of Compagnie Francaise, it is not possible on the evidence before me to make that finding. 10 The present application turns almost entirely upon the application of the 4th, 5th and 6th factors listed in Jazabas. Those factors may be reduced to 2 propositions which are said to emerge from the evidence. 11 The first is that Cashflow contends that the application is oppressive and that if security is ordered it will stultify the claim. The second is that Cashflow has offered to provide a guarantee from one of its directors, Mr Michael O'Sullivan, to pay the costs of the proceedings, if ordered in favour of Compagnie Francaise, up to a maximum amount of $500,000. 12 The essential question which then arises is whether Cashflow has established that those who stand behind it and will benefit from the litigation, if successful, are without means: Bell Wholesale at 4. 13 In that case, the Full Court observed at 4 that it is not for the party seeking security to raise the matter of the impecuniosity of those who stand behind the company; it is an essential part of the case of a company which seeks to resist security on the ground that an order will stultify the litigation:- "to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts." 14 As is evident from what was said in Bell Wholesale, the onus falls on the party asserting stultification to prove that fact and to put before the Court the necessary facts to establish that, relevantly in the present case, the shareholders of Cashflow are without the means to provide security. 15 In my view, the evidence filed (very belatedly) by Cashflow falls well below that which is necessary to make good the claim of stultification in light of the principle stated in Bell Wholesale. This is because the evidence does not establish the identity of all of the persons who stand behind Cashflow, let alone whether they are without the necessary means. 16 The directors of Cashflow are Mr O'Sullivan, Mr Trevor John Seymour and Mr Malcolm Phillip Bersten. 17 An ASIC search shows that there are 1,000 issued ordinary shares in Cashflow with three corporate shareholders, none of whom own their shares beneficially. 18 The shareholders are Provident Asset Management Pty Limited ("Provident") as to 510 shares, Brentnall Financial Group Pty Limited ("Brentnall") as to 245 shares and Caldabra Investments Pty Limited ("Caldabra") as to the remaining 245 shares. 19 It appears, from a copy trust deed annexed to Mr O'Sullivan's affidavit that Provident (formerly known as Provident Capital Nominees Pty Limited) was the trustee of a trust known as the O'Sullivan Trust. The Trust was established as a discretionary trust which named three classes of discretionary beneficiaries. 20 The "Primary Beneficiaries" of the O'Sullivan Trust are described in the Trust Deed as Mr O'Sullivan and Ms Lara Ann Goring and their spouses, de facto spouses or widows. 21 Mr O'Sullivan is a director of Provident and is the beneficial owner of the two issued shares in that company. That is to say, he is a director and sole shareholder of the company that appears to be the trustee of the O'Sullivan Trust of which he is one of the primary beneficiaries. 22 Mr Seymour is a director of Brentnall. A search annexed to Mr O'Sullivan's affidavit shows that there are six issued shares in Brentnall which are owned by four corporate entities. The search states that, subject to one exception, none of those entities owns the shares beneficially. The only exception is that a company called Davies Nominees Pty Limited beneficially owns one of the six issued shares in Brentnall. 23 Mr Bersten is a director of Caldabra. The search annexed to Mr O'Sullivan's affidavit states that Mr Bersten is the beneficial owner of all the issued shares in Caldabra. 24 The effect of this evidence is therefore that I am unable to determine the identity of all of the persons who stand to benefit from the litigation. 25 I am prepared to infer that Mr O'Sullivan is a potential beneficiary of the proceedings, although the evidence as to this is unsatisfactory. Nevertheless, it seems to me to be unlikely that he would offer a guarantee in the terms proposed unless he stands to benefit from a successful resolution of the litigation. 26 However, put at its highest, the evidence establishes no more than one of at least three possible beneficiaries of the litigation is prepared to come out from behind the corporate veil and I do not know whether any of those persons has any assets. 27 It is true that Mr O'Sullivan has offered a guarantee, limited to $500,000 and that he has given evidence that he is a director of nine companies but none of this says anything about his worth. 28 There is no evidence at all of the assets or worth of Mr Seymour of Mr Bersten. 29 Ms Nolan, who appears for Cashflow, relies on a line of authorities which suggest that once the shareholders of the company have agreed to accept personal liability for any judgment for costs, the statutory purpose which underlies s 1335 of the Corporations Act is satisfied; see Gentry Bros Pty Limited v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 415 and the authorities there cited. 30 It is not necessary for me to decide whether the observations made by Cooper J in Gentry Brothers are correct; see in particular, Jazabas at [2] and [79]. 31 The short answer to Ms Nolan's submission is that the statutory purpose cannot be said to have been achieved where only one of the potential beneficiaries has come out "from behind the skirts of the company" and offered to put his assets into play, up to a limited amount; cf Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 at 533. 32 Here, those who stand to benefit have been selective as to who will come out and for what amount. Even if Mr. O'Sullivan were to offer an unlimited guarantee, I cannot say that on the evidence before me it would be an appropriate exercise of the discretion to refuse to order security. 33 The selective approach as to who is prepared to come forward, and the absence of any evidence of the worth of any potential beneficiaries leave me in the position where it is not appropriate to apply the approach adopted by Burchett J in Cameron's Unit Services Pty Ltd v Kevin Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46. 34 His Honour there said at 53 that what was relevant was that the company was not a "stalking horse to enable someone else to evade personal responsibility"; if the person accepts responsibility, an impecunious natural person is entitled to rely on the general rule that poverty is no bar to a litigant. 35 Whatever the reach of that "general rule", I see no possibility of taking it into account in light of the selective approach of those who stand to benefit from Cashflow's success in the litigation. 36 In the present case, there are two critical factors in the exercise of my discretion. The first is Mr O'Sullivan's failure to give any evidence as to his ability to meet the guarantee if called upon. I reject Ms Nolan's submission that his undertaking is one of weight or value. 37 Taking Mr O'Sullivan's evidence at its highest, he is only one of two primary beneficiaries in a discretionary trust which may be the beneficial owner of 51% of the issued shares in Cashflow. He is a director of a large number of companies but I know nothing of his worth. 38 The second critical factor is the absence of any evidence of the worth of Mr Seymour or Mr Bersten. 39 The only other issues raised in the application go to the amount of the security. 40 I am satisfied that the regime and the amount proposed on behalf of Compagnie Francaise is a proper exercise of my discretion. 41 I reject Ms Nolan's submissions that I should discount the amount of the security upon the basis that it is possible that the case will be conducted in an abbreviated way rather than in the manner contemplated by Mr Henry's draft orders. 42 No alternative approach to the conduct of the case was put to me in a way which would enable me to consider a more limited amount of security than was the subject of the evidence given by Compagnie Francaise. 43 I propose to make orders in accordance with the short minutes handed up by Mr Henry. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson.