Supreme Court of Tasmania|1985-07-29|Before: Cox J

Electrona Carbide Industries Pty Ltd v Tasmanian Government Insurance Board [1985] TASSC 34 (29 July 1985)

CITATION: Electrona Carbide Industries Pty Ltd v Tasmanian Government Insurance Board [1985] TASSC 34; [1985] Tas R 68; A34/1985

1 The defendants have applied for an order that the first-named plaintiff (hereinafter referred to as "the plaintiff company") should give security for their costs of this action and that all proceedings be stayed until that security be given. The applicants rely on s533(1) of the Companies (Tasmania) Code which reads as follows:-

"533(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, 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 his defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."

2 The plaintiff company is alleged at all material times to have been the manufacturer of, inter alia, carbide products and to have effected an industrial special risks policy of insurance with the defendants indemnifying the plaintiff company against property damage and loss of profits occasioned thereby during a period of time between September 1979 and June 1980. It is alleged that a series of breakdowns amounting to insured contingencies giving rise to such indemnity occurred within that period and the plaintiff company issued a writ in 1980 seeking recovery pursuant to the policy of sums exceeding $1,700,000.00. Liability is denied by the defendants on the basis that there were material non-disclosures which void the policy and that by virtue of certain exceptions in the policy breakdowns are not insured risks. Furthermore, the defendants claim that even if they are liable the plaintiff company cannot establish the quantum of damages it has claimed. It was not clear to me whether they claim that the plaintiff company cannot establish any loss at all or merely that at the least the plaintiff company could establish only a very small loss in respect of material damage and none in respect of loss of profits. In any event, as I understood the submission, the defendants assert that the bulk of the claim is in respect of a loss of profits which cannot be demonstrated and that this is the substantial area of dispute in respect of which costs have been and will continue to be incurred.

3 It is not possible for me to make any assessment of the relative merits of the parties' cases and I record merely that it seems to be common ground that each has an arguable case. The plaintiff company may succeed in recovering a substantial part of the claim, or may be so unsuccessful as to be visited with an order that it pay the defendants' costs. In the latter event it is also common ground that there is every likelihood that the plaintiff company would not have the ability to meet any such costs.

4 It will be noted from the title of the proceedings that the Attorney-General is co-plaintiff, leave having been granted to him to join the action by order of the Master on the 17th December 1984. Although no formal pleadings have yet been exchanged in respect of his interest in the action, I was told that his claim is based on the allegation that the Minister for Resources and Development is a co-insured for his respective rights and interests pursuant to two registered debentures and the Carbide Industries Agreement Act 1984. He is represented by the same solicitors and counsel who have been instructed by the plaintiff company.

5 It is clear from the admitted fact of the plaintiff company's impecuniosity and from a perusal of the last mentioned Act, which has as a schedule an agreement entered into by the company which contains recitals bearing upon its financial status, that the conditions requisite for an exercise of the power given by s533(1) of the Companies (Tasmania) Code have been fulfilled. It is equally clear that the discretion to make the order I am empowered to make is an unfettered one (see Export Packers Ltd v Blue Moon Fruit Co-operative Ltd, unreported, Serial No 20/1984, per Brettingham-Moore J, and the cases he cites at p3).

6 On the material presented to me it is apparent that the defendants' costs to date are of the order of $115,000, that between now and the date of trial which has been set for early September of this year their costs will increase by approximately $29,000, and that each day of the trial, allowing for the fees and expenses of counsel, instructing solicitor and apprentice and expert witnesses and the provision of a transcript, would be in the order of $4,300. The best present estimate of the length of the trial is 50 days. If the plaintiff company is ordered to pay the whole of the defendants' costs of the action it will become liable to pay a sum approximating $360,000.

7 Were the plaintiff company the sole plaintiff I think this would clearly be a case where an order for security for costs should be made, although not necessarily for the whole of that sum, for there is a strong argument that the security should not extend to past costs and it might be inappropriate at this stage to order security for costs of all the anticipated 50 days of the trial. I shall deal with these considerations later. Counsel for the plaintiff company submits that the defendants have failed to demonstrate that they are at risk of not recovering their costs if the plaintiff company is unsuccessful, for the presence of the Attorney-General as a co-plaintiff will in all probability enable them to recover their costs from him. This assumes that an order would be made against both plaintiffs if they are unsuccessful. If such an order is made then the defendants cannot be at risk for the Executive must find the funds the Attorney-General is called upon to pay. However, although counsel says he can advance no argument why in that eventuality the Attorney-General could resist the making of such an order, he is not instructed to give any present undertaking or indemnity. The position would therefore seem to be that the Attorney-General reserves his right when the time comes to advance such argument as is proper that he should not be called upon to pay the defendants' costs if they are successful. There is therefore a risk that the successful defendants will be left with an order for payment of their costs by a company which has not the means to pay them. That risk may not be great for, as matters stand now, no-one seems to be able to advance any reason why the Attorney-General would not be called upon to indemnify the plaintiff company. Nevertheless it is a risk and it is one which the defendants say they should not be called upon to bear in the circumstances.

8 In Pearson v Naydler [1977] 3 All ER 531, Megarry VC rejected an argument that because the plaintiff company in that action had as a co-plaintiff a natural person (the Governing Director and principal shareholder in effect of that company) and because the basic rule is that a natural person will not be called upon to give security, however poor he is, the court had no power to order the company to do so. The learned Vice Chancellor held that where the company was suing jointly the fact that the co-plaintiff was a natural person who would not be ordered to give security for costs did not deprive the court of power to order the company to do so, but was merely a matter to be taken into account by the court in exercising its discretion. At p537 Megarry VC said:-

"It is inherent in the whole concept of the section that the court is to have power to do what the company is likely to find difficulty in doing, namely, to order the company to provide security for the costs which ex hypothesi it is unlikely to be unable to pay. At the same time, the court must not allow the section to be used as an instrument of oppression, as by shutting out a small company from making a genuine claim against a large company. For this reason, Mars-Jones J was not prepared in the Parkinson case ((1973) 2 All ER 273) to make an order for security for costs for more than the £1,500 that the master had ordered. As against that the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged."

9 As I have observed there can be no fear that the Attorney-General will not have the necessary funds to meet an order. While I would have thought that ordinarily such a factor as the presence of a natural person as co-plaintiff might be expected to militate against the making of the order, for the inability of a company to comply with it might lead to a stay of proceedings which had the effect of causing oppression to the co-plaintiff, I think in the circumstances of this case it is a factor which, if anything, operates the other way. If the plaintiff company is unable to give the security ordered and if those who stand to gain from the success of the action (and quite apart from the Attorney-General a company which is a party to the agreement contained in the Carbide Industries Agreement Act 1984 clearly has such an interest) are not prepared to assist it to do so then the Attorney-General himself may have to reconsider his position. This is not however a case where, in my view, unfair or improper repercussions can reasonably be expected to fall upon the Attorney-General as co-plaintiff by virtue of the making of the order. There is no reason to suppose that the inability of the plaintiff company to provide the security could lead to a result which would be unduly oppressive of the Attorney-General as a party to these proceedings.

10 I hold in consequence that this is a proper case to order that security be given.

11 Mr Faulkner however submits on behalf of the plaintiff company that the security should be limited to prospective rather than past costs. The fact is that this is the first application for security since the action commenced in October 1980. For their own reasons, which I have no reason to suppose are any other than perfectly laudable, the defendants have chosen to incur the extensive costs to date which I have mentioned without seeking the protection of the order they now seek. I do not understand it to be the case that it has only just come to their knowledge that the plaintiff company has not the ability to meet these costs if it is unsuccessful. On the contrary the tribulations of the plaintiff company seem to have been matters of common knowledge for several years and if judicial notice cannot be taken of them newspaper clippings from 1981 annexed to the affidavit in support of the application make specific references to the "collapse" of the company. In my view, in these circumstances no reason has been shown why the defendants should now be given protection for past costs which they were prepared to incur notwithstanding their knowledge of the plaintiff company's straightened circumstances. Because I do not propose to make an order for security in respect of past costs, the fact that the plaintiff company has a present entitlement to payment of costs in any event in respect of certain interlocutory matters is no longer relevant.

12 As to the amount of the security to be ordered, it seems clear from the review of the cases by the Court of Appeal in Procon Ltd v Provincial Building Co Ltd [1984] 2 All ER 368, that there is no justification for an arbitrary[1] discount of one third of the genuinely estimated party and party costs of the applicant rather than ordering security on a full indemnity basis. That discount had been asserted as a conventional approach by the editors of the Supreme Court Practice. The court did however acknowledge that where the application is made at a very early stage in the proceedings, it may be appropriate to make an arbitrary[1] discount of the estimated probable future costs having regard to the possibilities of settlement. With respect, I would not have thought that this was a factor which could be taken into account only at a "very early stage" of the proceedings. Be that as it may, it seems to me that it could be unnecessarily oppressive to the plaintiff company to require it to give security now for costs which may not be incurred. The parties estimate that the case will last 50 days. It may however last only a small part of that time. I see no injustice in making an order securing the defendants' costs up to the end of the first 10 days of the trial to the amount of $72,000 and adjourning the further hearing of this application to the commencement of the trial so that the trial judge himself may determine what security, if any, should be given beyond that period of time. By that stage, and as the trial progresses, the court will be in a far better position than I to determine the likely length of the trial. Forewarned of the possibility of a renewed application by the defendants, the plaintiff company can in the meantime take steps to enable it to promptly reply with any further order made.

13 Alternatively, if there is any doubt as to the power to make a piece-meal order in this way or to adjourn the further hearing of the application to another judge it may be more appropriate to order that security for the costs of the remaining days of the trial should be provided at a later time. I shall give the parties the opportunity to make submissions as to which course ought to be followed.

Electrona Carbide Industries Pty Ltd v Tasmanian Government Insurance Board [1985] TASSC 34

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Judgment (18 paragraphs)

Electrona Carbide Industries Pty Ltd v Tasmanian Government Insurance Board [1985] TASSC 34 (29 July 1985)

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