Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] VSCA 43

Court of Appeal (Vic)|1999-04-23|Before: WINNEKE, P., PHILLIPS and CALLAWAY, JJ.A.

Practice - Security for costs - Corporate plaintiff impecunious - Trustee of unit trust for discretionary family trusts - Offer of personal liability by director/shareholders of plaintiff - Offerors themselves impecunious - Whether order for other security precluded - Order for other security upheld : Corporations Law s.1335.

In or about May 1996 the appellant, Epping Plaza Fresh Fruit and Vegetables Pty. Ltd., entered into a lease with the respondent Bevendale Pty. Ltd. for the occupation of shop 69 at the Epping Plaza Shopping Centre. The lease was for a term of 6 years commencing on 30 April 1996. The rent agreed for the first year was $31,022.62. The two directors and shareholders of the appellant are cousins, Elmas Emini and Xheso Emini, and they guaranteed the appellant's due performance of its obligations under the lease.

The appellant is the trustee of the "E and X Emini Unit Trust" and the unit holders of that trust are the two Emini cousins, holding their units in turn as trustees respectively of the "E and A Emini Family Discretionary Trust" and the "X and G Emini Family Discretionary Trust". As might be expected, the family members of one or other of the two Eminis are the discretionary beneficiaries under each of the family trusts.

It appears from the material before the Court that substantial sums were expended to fit out shop 69 but that, by October 1996, the appellant was in substantial trading difficulties and owed to the respondent some $24,000 by way of unpaid rent. On 4 October 1996 the respondent commenced a proceeding in the Melbourne Magistrates' Court seeking to recover from the two cousins, as guarantors, the arrears of rent owing by the appellant. The initiating process was served personally upon the two Eminis and, as a result, correspondence ensued between their then solicitors and the respondent. Negotiations came to nought and, on 2 December 1996, the respondent entered judgment in default against each of the Eminis for amounts equivalent to the unpaid rent and costs. The respondent's solicitors later notified each of them that, unless payment of the judgment sum was forthcoming, the respondent would commence bankruptcy proceedings against them. No response was given and on 5 March 1997 bankruptcy notices were issued against each of the Eminis. On 18 March a bankruptcy notice was served on Elmas Emini and shown by him to his cousin.

The service of the bankruptcy notice appears to have precipitated action by the Eminis; for by 17 April 1997 the Eminis had consulted their current solicitors. On that day they made an application to the Magistrates' Court for a rehearing of the proceeding in which judgment had been entered by default. Each swore that he had not been served with the summons or complaint, something which, as the primary judge found, was palpably untrue. In the affidavits which they filed in support of their application for re-hearing they adverted, for the first time, to a potential claim which the appellant had against the respondent, based upon misleading and deceptive conduct in which the respondent had engaged, in the form of false representations upon which the appellant had relied in agreeing to enter into the lease of the shop. Judgment was set aside in the Magistrates' Court on 28 May 1997 and the Eminis were ordered to pay $1,080.50 costs. Those costs were paid and a defence filed. A subsequent application by the Eminis to have the proceeding transferred to this Court remains pending.

On 14 August 1997 the appellant commenced a proceeding in the Supreme Court, alleging misleading and deceptive conduct by the respondent in negotiations leading up to the lease. The respondent filed a defence denying any such misconduct and on 24 September 1997 filed a summons seeking, inter alia, security for the costs of the action pursuant to Rule 62.02 of the Rules of Court, s.1335 of the Corporations Law and/or the inherent jurisdiction of the Court. The application came on before Master Evans on 21 November 1997. The respondent was seeking security for the costs of all steps prior to trial, estimated as in the vicinity of $40,000. The Master ordered that the appellant provide $19,000 by way of security for costs "incurred and to be incurred up to and including the pre-trial directions hearing before the Listing Master".

The appellant appealed against these orders to Beach, J. His Honour reheard the application on 21 January 1998. On 3 February 1998, he allowed the appeal but only to vary the order of the Master by directing the appellant "to provide security for the costs of the respondent, incurred and to be incurred up to and including the pre-trial directions hearing before the Listing Master, in the sum of $27,000".

On 20 March 1998 this Court granted leave to the appellant to appeal against the orders of Beach, J. It is that appeal which is now before us.

No issue is now raised over the particular amount of security ordered below. Mr. Murdoch Q.C., who appeared with Mr. Goldblatt for the appellant, submitted that Beach J.'s order that security be provided in a money sum was vitiated by fundamental error. The fundamental error was primarily, so the submission ran, his Honour's failure to consider as alternative security to a cash payment within a limited time, the offer by the sole directors and shareholders of the company (namely the Eminis) to expose themselves to liability for the costs of the action either by way of undertaking to the Court or by way of guarantee to the defendants. Such a form of security, even though the Eminis had no assets, was, he submitted, the most appropriate form of security to order pursuant to s.1335 of the Corporations Law where not only was the corporate plaintiff presently impecunious, but so too were those who stood behind the corporate plaintiff. Indeed the submission went so far as to assert that in the circumstances predicated that was the only appropriate form of security for a court to order, since any other order must necessarily bring the plaintiff's proceeding to an end prematurely. It seemed to us that the submission, so couched, travelled beyond the written submissions filed on behalf of the appellant where it was accepted that the judge's discretion was "unfettered and to be exercised having regard to whether the interests of justice will be best served by the making or refusing of an order for security ...".

Section 1335 (1), so far as relevant, provides that:

"... 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 ..." .

The submission which Mr. Murdoch makes has, as its starting point, the proposition that the evident purpose behind s.1335 is to ensure that, so far as costs are concerned, defendants are not left in a worse position when sued by a corporate plaintiff than when sued by an individual. The court, he contends, will not, subject to residency, stifle an individual from pursuing an arguable claim on the grounds of impecuniosity alone: see Pearson & Anor. v. Naydler & Ors. [1977] 1 W.L.R. 899 at 904 per Megarry, V.C. If, therefore, those who stand behind the impecunious corporation are prepared to "come out from behind the shield of the company" and expose themselves to personal liability for the costs of the action, even if they themselves have no assets, the Court should rarely make an order for "cash security", any more than it would in the case of an individual litigant.

The primary authority upon which Mr. Murdoch relied for this proposition was the decision of Cooper, J. in the case of Gentry Bros. Pty. Ltd. v. Wilson Brown & Associates Pty. Ltd. (1992) 8 A.S.C.R. 405 where his Honour said, at 415:

"Once the shareholders have been exposed to personal liability for the applicant's costs, the weight to be given to the statutory purpose [that is, of s.1335] is gone. Those who stand behind the applicant once they accept personal liability for the applicant's costs are in no worse position [sic] than they would be as litigants in person in the court : Harpur v. Ariadne Australia Ltd. [1984] 2 Qd.R. 523 at 532; Yandil Holdings Pty. Ltd. v. Insurance Co. of North America (1985) 3 A.C.L.C. 542 at 546. 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 a provision of a cash or other security for costs notwithstanding that the worth of the shareholders may ultimately prove insufficient to satisfy any judgment in whole or in part."

Mr. Murdoch accepted that, in this case, the only offers of the type alluded to by Cooper, J. were those that had been made by the Eminis, the only directors and shareholders of the appellant. As already observed, the appellant was the trustee of a unit trust and the ultimate beneficiaries, via the family trusts of which the two Emini cousins were the respective trustees, were the family members who were discretionary beneficiaries thereunder. There was no material before Beach, J. showing directly what assets those trusts or those beneficiaries possessed; indeed, though it was stated on affidavit that the appellant had debts and the bank held a debenture for moneys lent, there was not very much said about the assets, such as they were, of the unit trust itself (of which the appellant was the trustee), and what material there was scarcely satisfactory. (For instance it was said in an affidavit of Elmas Emini of 19 November 1997 that the three trusts "have for all intents and purposes never traded", which was patently wrong in respect of the unit trust.) There was no material to the effect that any of the family members who were discretionary beneficiaries was prepared to expose personal assets to answer an order for costs if made against the appellant in this litigation. Mr. Murdoch, however, submitted that the Court should be prepared to infer from the material that none of the beneficiaries, nor any of the trusts, had any assets. But the real point, he submitted, was that Beach, J. had failed to consider the matter of "alternative security" at all and that, in this respect, the exercise of his Honour's discretion had fundamentally miscarried.

For our part, we cannot accept that the proposition for which Mr. Murdoch contends is as clear as he asserts. The evident purpose behind statutory provisions such as s.1335 is to draw a distinction between corporate plaintiffs and individual plaintiffs. Thus, whilst it may be said that "the basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is ancient and well established" (Pearson at 902), it is also true that "the whole concept of the general practice with regard to companies is just the opposite. It is the poverty of the company that attracts the power": Rajski & Anor. v. Computer Manufacture & Design Pty. Ltd. [1982] 2 N.S.W.L.R. 443 at 449, per Holland, J. Indeed, as Megarry, V.C. said in Pearson, at 904-5:

"In the case of a limited company, there is no basic rule conferring immunity from any liability to give security for costs. The basic rule is the opposite: section 447 [the equivalent of s.1335 of the Corporations Law] applies to all limited companies and subjects them all to the liability to give security for costs. The whole concept of the section is contrary to the rule developed by the cases that poverty is not to be made a bar to bringing an action. There is nothing in the statutory language (the substance of which goes back at least as far as the Companies Act 1862, s.69) to indicate that there are any exceptions to what is laid down as a broad and general rule for all limited companies. Nor is it surprising that there should be such a rule. A man may bring into being as many limited companies as he wishes, with the privilege of limited liability; and section 447 provides some protection for the community against litigious abuses by artificial persons manipulated by natural persons. One should be as slow to whittle away this protection as one should be to whittle away a natural person's rights to litigate despite poverty."

It is thus apparent that the justification for the statutory rule is that the defendant, not being a voluntary litigant, deserves to be protected from the consequences of limited liability. Those who seek to conduct their businesses through limited liability companies expect to receive the benefits which such liability attracts. It seems to us a necessary corollary that they should be prepared to accept the strictures imposed by the section if the company embarks upon litigation: Buckley v. Bennell Design & Construction Pty. Ltd. (1974) 1 A.C.L.R. 301 at 304 (C.A.. N.S.W.).

It has not been, and could not be, suggested that the section compels the court to order security against an impecunious corporate plaintiff. The court is given an unfettered discretion to do what is justly required by the circumstances of each case. Street, C.J. made this point in Buckley when he said, at 305:

"It seems to me that the discretion could properly be regarded as ordinarily exercisable so as to protect a defendant sued by an impecunious company, but that, if the court in any case takes the view that this protection should not be afforded to the defendant, it has an unlimited and unrestricted discretion to give effect to such view without having to look for special circumstances."

The authorities tend to suggest that the discretion given to the court by s.1335 to make an order for security against an impecunious company is "open ended" and not to be fettered by rigid guidelines or principles of the type which underlie Mr. Murdoch's submission to this Court. As Phillips, J.A. pointed out in Ariss & Anor. v. Express Interiors Pty. Ltd. (in liquidation) [1996] 2 V.R. 507 at 512 ff., various courts in this country have frowned upon the statement made by Street, C.J. in Buckley, at 305, that he "preferred to regard the discretion conferred by the section as being one which should be exercised merely with a predisposition in favour of the defendant party" as an impermissible fetter upon the court's open ended discretion. Having analysed these criticisms, Phillips, J.A. expressed the view in Ariss, at 514, that:

"Although of course, like any discretion conferred upon a court, it must be exercised judicially, the discretion conferred by s.1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place [that is, the existence of credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant] may itself be a factor, even a most significant factor, in the exercise of the discretion."

Consistently with this view, there may be cases where, in the exercise of its discretion, the Court will regard the fact that those who stand behind an impecunious company have bound themselves to assume responsibility for paying the defendant's costs as a relevant factor in favour of the plaintiff; see for example Yandil Holdings Pty. Ltd. v. Insurance Co. of North America (1985) 3 A.C.L.C. 542 (Clarke, J.), especially at 545, Erolen Pty. Ltd. v. Baulkham Hills Shire Council (1993) 10 A.S.C.R. 441, especially at 456 per Powell, J., K.P. Cable Investments v. Meltglow Pty. Ltd. [1995] FCA 76; (1995) 56 F.C.R. 189. But that is as far as it goes; the existence of such an offer to assume personal liability for an order for costs if made against the company, or even a formal guarantee to like effect, cannot be determinative in itself of the application for security, or else the discretion, which is otherwise conferred in general terms, will be impermissibly circumscribed. In Intercraft Cabinets v. Sampas Pty. Ltd. (1997) 18 W.A.R. 306 the Full Court in Western Australia was concerned with an undertaking to accept personal responsibility for costs against an impecunious company, and after reviewing the authorities Malcolm C.J., speaking for the Court, firmly espoused the view that "the availability of an undertaking of personal liability by the persons who stand behind the company is no more than a factor, albeit an important factor, to be taken into account in the exercise of discretion." With respect, that is our view too.

The decision in Intercraft seems to us provide a complete answer to Mr. Murdoch's submission here. Intercraft was not a decision to which we were referred, yet, no doubt by chance, Mr. Murdoch's argument was in many respects similar to the argument rejected by the Full Court in that case. Thus, his submission went far beyond an argument that the offer made by the Eminis was a relevant factor in the exercise of the discretion and, as in Intercraft, the submission was said to gain support from a number of cases which have been decided in this country, in addition to Gentry Bros. Yet we do not read any of the cases to which Mr. Murdoch referred the Court as going as far as his submission suggested. Rather, they appear to us to support the proposition to which we have already referred: namely that those who stand behind the impecunious corporate plaintiff are prepared to expose themselves to liability for the defendant's costs of the action, is but one relevant factor to be taken into account when a judge is exercising his discretion under s.1335.

Thus, in Harpur v. Ariadne Australia Ltd. [1984] 2 Qd.R. 523, on which Mr. Murdoch placed some reliance, there were a number of plaintiffs including Harpur himself (described as a person of substance) and three companies who were said to be impecunious. Connolly, J., whose reasons for judgment were agreed in by the other members of the court, referred to the emphasis which had been given by Lord Denning, M.R. to the word "may" in the English equivalent to s.1335 in his reasons for decision in Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd. [1973] Q.B. 609, his Lordship observing, at 626:

"That gives the judge a discretion whether to order security or not. There is no burden one way or the other. It is a discretion to be exercised in all the circumstances of the case."

"With all respect, in principle that seems to be obviously right. In the view I take, no gloss should be put upon the legislative provision and indeed it needs none. For practical purposes, once the legislature has made it legitimate to regard the lack of means of the plaintiff and its likely inability to meet an order for costs, this must always be a consideration of great weight and it will frequently be the determining factor."

It is true that Connolly, J. eschewed the notion that the court should approach the section with a "predisposition" towards granting security if the relevant impecuniosity was shown and said that, if that is what Megarry, V.C. in Pearson or Holland, J. in Rajski had intended, he did not agree. But his Honour's conclusion to the effect that the section gave to the court an unfettered discretion in the exercise of which the plaintiff company's impecuniosity might, in the circumstances of the particular case, be a factor of weight seems no different from what was said in Ariss, at 514.

Connolly, J., however, went on to consider what "the rule" was where there were multiple plaintiffs, each of whom had the same interest, and one was an individual and the other an impecunious company. His Honour said (at 532):

"This mischief at which the provision [that is, s.1335] 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 whatever he is worth, the object of the legislation is seen to be satisfied."

In that case, his Honour was satisfied that the individual, Harpur, was a man of substantial means and that he had simply joined "his companies" to pursue his rights and that, in ordering the impecunious company to give security, the primary judge had "been led, by applying the wrong approach to [the section] to overlook the highly relevant factor that the action is in truth [Harpur's] and that, in no relevant sense, is he in any different position from any other plaintiff".

As we read it, the decision in Harpur was no more than an application of the "unfettered discretion" in the circumstances of the case. It is not authority for the proposition that orders for security against impecunious corporate plaintiffs should rarely, if ever be made, where those who stand behind the company, whether co-plaintiffs or not, and whether pecunious or not, are prepared to "come out from behind the skirts of the company" and pledge what they have. To suggest, as it seems to us Mr. Murdoch was contending, that the decision of the court in Harpur is authority for such a proposition is clearly incorrect.

If the comments made by Cooper, J. in Gentry Bros. at 415 were intended to suggest that the broad discretion, to which the authorities refer, is now to be fettered by a principle to the effect that, in cases where those who stand behind the impecunious company are prepared to expose themselves to a personal liability for the defendant's costs, the court's discretion should rarely be exercised in favour of making an order for security, then, like Powell, J. in Erolen at 456 and Malcolm C.J. in Intercraft, we simply cannot agree - though whether Cooper, J. should be read as having said as much is of course another matter; it did not appear so to Beazley, J. in K.P. Cable Investments at 203-4. Not only does the suggested principle cut across the authorities which make it abundantly clear that the discretion is to be unfettered and exercised in accordance with what the circumstances of the particular case require, but it ascribes a purpose for its existence which we do not accept; namely that the statutory purpose of s.1335 is to align the position of impecunious corporate plaintiffs with impecunious individual plaintiffs. The fact that those who stand behind the company are prepared to give an undertaking to the court to pay a successful defendant's costs might be a factor which, on balance, will influence the court's discretion in a particular case - or, more strictly perhaps, influence the manner of its exercise. But to elevate it to a position of critical importance or decisive significance in general seems to us to be requiring the judge to enter upon his or her discretion with a particular predisposition, something which the authorities make clear that the judge should not do.

Furthermore, in our view the court should not readily accept an undertaking to pay costs from impecunious individuals who, at least at the time when such an undertaking is given, have no chance of making it good. Such an undertaking could not be an effective alternative security because it could only be enforced (at least for the time being) by proceedings for contempt: compare P.S. Chellaram & Co. v. China Ocean Shipping Co. [1991] HCA 36; (1991) 65 A.L.J.R. 642 at 643. Perhaps, as contended in Intercraft, such an undertaking could have some worth if given by established business men who, though impecunious for the time being, might feel impelled by the threat of bankruptcy to honour the undertaking by gaining assistance, perhaps, elsewhere. But, if so, that can be but a relevant consideration; no rule can be laid down - which is how the matter was approached in Intercraft where in all the circumstances the Court approved the order for security in the form of a personal guarantee from shareholders and directors though the guarantors were impecunious. In this instance the offer of personal liability was not from all those behind the trusts, nor, on the material put forward, could it be seen as being of any real significance.

In short, we are not satisfied that Beach J.'s discretion has miscarried as the result of erroneous application of the principles which he was required to apply; nor are we satisfied that the decision to which he came in the circumstances of this case is manifestly erroneous. His Honour clearly had regard to the fact that the appellant company and its shareholders, the Eminis, were impecunious and that it "might well be" that an order requiring security would frustrate the claim. However, as the authorities make clear, his Honour's findings in that regard were only some of the factors which he was bound to take into account. His Honour was also entitled to take into account the fact that the litigation had not, so far, been stifled and also the fact that there was no material before him tending to demonstrate that the beneficiaries of the trusts were unable, or unwilling, to contribute to the costs of the litigation. Furthermore, his Honour was entitled to take into account, as he did, matters which suggested that the claim was likely to be lengthy and expensive in its resolution and that there were reasons to doubt the bona fides of the claim.

Two points were made in this regard by Mr. Murdoch. First, he said, the Judge had erred in concluding only that an order for security "might well" frustrate the claim of the appellant when it was obvious from the impecuniosity of the appellant and the two Eminis that an order for security, if going beyond the offer of the two cousins to accept personal liability for costs must inevitably frustrate the claim, the judge thereby undervaluing this aspect of the appellant's opposition to any order. Secondly, Mr. Murdoch said that while the merits of the plaintiff's claim might sometimes be relevant, that is not the case unless the claim is patently hopeless or if, for instance, there is a complete defence to it in law. Otherwise, he said, the Court is in effect ending the litigation prematurely when such cannot be justified, contrary to such authorities as Dey v. Victorian Railways Commissioners. [1949] HCA 1; (1949) 78 C.L.R. 62 at 91-2.

As at present advised, however, we do not accept that Dey is necessarily a good analogy when an order for security is being sought; but anyway both submissions overlook a critical element in Beach, J. s reasons for judgment - namely, that his Honour was far from satisfied about the bona fides of the appellant's claim of misleading or deceptive conduct or, indeed, the credibility of the Eminis themselves. We do not detail the reasons for that disquiet; they are set out in the judgment below. Suffice it to say that, despite Mr. Murdoch's attempts to show them wrong, they seem to us to have been enough. And once grant that disquiet, we can see no error of principle in his Honour's concluding that an order for security, in this instance in a money sum or its equivalent, was warranted in all the circumstances.

Obviously enough, on the making of an interlocutory application for security it will not ordinarily be possible - or practicable - to reach any very clear view about the merits of the plaintiff's claim and on that account it is sometimes said that a detailed examination of the merits is scarcely warranted: see for example Porzelack KG v. Porzelack (UK) Ltd. [1987] 1 W.L.R. 420 at 423, Appleglen Pty. Ltd. v. Mainzeal Corporation Pty. Ltd. (1988) 79 A.L.R. 634 at 635, Lagarna Pty. Ltd. v. Bridge Wholesale Acceptance Corporation Ltd. [1995] VicRp 9; [1995] 1 V.R. 150 at 154, Ariss at 514. So much may be accepted but that is not to say that the merits are always irrelevant (unless totally lacking) or, as here, that the bona fides of the claim may be disregarded. On this application the judge was able to conclude, and properly so, that there were very real grounds for doubting the bona fides of the appellant's claim and that was plainly a relevant consideration to the respondent's application for security. No appealable error is shown in that regard.

Finally, Mr. Murdoch pointed to the fact that his Honour's reasons for judgment make no mention of the offer of the Emini cousins to accept personal liability for the costs of the litigation; nor is there any mention of the appellant's impecuniosity having been the direct result of the respondent's misconduct. On both counts therefore, he submitted, there was appealable error in that the judge had failed to have regard to important - indeed critical - relevant considerations. As to the first of these, it would be inappropriate for an appellate court to conclude that the primary judge had not taken into consideration a matter simply because no mention is made of it in his reasons - particularly where, as here, the appellant had laid such emphasis upon the offer of the Eminis before the judge. As already indicated, such undertakings would have been entitled to little weight in the circumstances which confronted the judge.

As to the second point, that the impecuniosity of the appellant was directly attributable to the respondent's misconduct, that was the very conduct denied by the respondent and put in issue. None the less it remains a factor which has weight according to the circumstances. In this instance, there was not much evidence (beyond assertion) bearing on the point (even if one puts aside the added factor of the judge's disquiet about the credibility of the Eminis and the bona fides of the appellant's claim). For instance, while there was evidence of certain specific outlays, nothing was said about the projected viability of the business in any event. It is tolerably clear from the whole of his Honour's reasons that he was not prepared to place much, if any, weight upon this factor and, in our view, this Court is not in a position to say that he was wrong. It must be steadily borne in mind that questions of the weight to be given to competing relevant factors are, of necessity, questions upon which reasonable minds might differ. Given the nature of the discretion which the judge is called upon to exercise, it must primarily be a matter for him to determine the weight which is to be ascribed to the relevant and competing factors. It will rarely be helpful to an appellate court to be invited, as we were, to go through the various findings made by the primary judge with a view to interfering with his discretion on the basis that he accorded too much weight to some factors and too little to others. We agree with the submission made by Mr. Archibald Q.C., who appeared with Mr. North for the respondent, that an appellate court must act with caution before disturbing the exercise of a judge's discretion in a matter of practice and procedure: Adam P. Brown Male Fashions Pty. Ltd. v. Philip Morris Inc. [1981] HCA 39; (1981) 148 C.L.R. 170 at 177.

For these reasons, we are not satisfied that his Honour's discretion to order security in the sum which he did miscarried. Accordingly the appeal should be dismissed.

As the appeal was argued, it was submitted for the appellant that the discretion exercised by Beach, J. was vitiated for five main reasons.

After setting out the history of the proceeding in the Magistrates' Court his Honour said, correctly in my respectful opinion, that ordinarily the likelihood or otherwise of success will not be investigated on an application for security for costs but that there are exceptional cases in which it is appropriate to do so. (The learned judge chose his words carefully, and so do I. An impression of the merits is relevant in many cases, even though they are not investigated.) When he turned to the merits of the appellant's claim he drew attention to eight matters, the first of which was that the alleged representations were said to have been made to the Eminis before the appellant was incorporated. Mr. Murdoch submitted that that was an irrelevant consideration. I think it probably was. A company that takes a lease is often in a position to rely on misrepresentations to those who were in the process of incorporating it. It is clear, however, that this factor played an insufficient part in his Honour's reasoning to require us to re-exercise the discretion. It was little more than an introductory observation and the learned judge said expressly that all he was doing was questioning whether the company could rely on such a representation.

At page 6 of his reasons for judgment Beach, J. said:

"There is no doubt that the present plaintiff and those standing behind it, namely the Eminis, are impecunious, and that the plaintiff will be unable to pay the defendant's costs if the defendant is successful in the proceeding. That much was conceded by senior counsel for the plaintiff during the course of the hearing before me. It may well be that if an order is made requiring the plaintiff to give security for costs that will frustrate the plaintiff's claim. I say 'may well frustrate the plaintiff's claim' because thus far its claim has not been frustrated. Not only has it been able to launch a large commercial dispute in the court, it has been able to retain senior counsel to appear on its behalf. In that regard I have grave reservations concerning the credibility of the Eminis in the matter. I have those reservations because of matters to which I shall refer in a moment."

Counsel's second and third criticisms derived from that passage, which was said to disclose two errors of fact: cf. House v. R. [1936] HCA 40; (1936) 55 C.L.R. 499 at 505 lines 5 and 6 and R. v. Cardona [1998] 2 V.R. 126 at 137-138. Mr. Murdoch submitted that his Honour should have found that requiring the appellant to give security for costs would frustrate its claim and should have recalled that he had been informed from the Bar table that senior counsel had declined a fee. I am not persuaded that the learned judge was bound to make the first finding or that his overlooking the second point was material. The observation about senior counsel was as little determinative as the earlier observation concerning the alleged representations.

The fourth reason why it was said that his Honour's discretion was vitiated was that he should have found that those representations had caused the appellant's impecuniosity. Compare Colbran, Security for Costs (1993), at [14.18]-[14.20]. Mr. Archibald defended the decision below by saying that there was little evidence to support such a finding. I agree that that is so, but there was evidence from which such an inference could be drawn. Mr. Elmas Emini swore that the appellant's "financial deterioration has resulted due to low turnover resulting from small volumes of customers at Epping Plaza, contrary to the representations". More importantly, there was evidence that $180,000 had been borrowed to set up the business, of which at least $142,000 had been spent on fit-out. The difficulty with the submission made for the appellant is that the discretion is indivisible: see, for example, Farrer v. Lacy, Hartland, & Co. (1885) 28 Ch. D. 482 at 485 lines 5 and 6 and Intercraft Cabinets Pty. Ltd. v. Sampas Pty. Ltd. (1997) 18 W.A.R. 306 at 316E. The view the learned judge took of the merits of the claim, which was open to him, reduced the evidence to insignificance.

The fifth vitiating factor was his Honour's alleged failure to give effect to the proposition in Gentry Bros Pty. Ltd. v. Wilson Brown & Associates Pty. Ltd. (1992) 8 A.C.S.R. 405 at 413-415. (I shall refer to it as a proposition, because the appellant would say it is; see, however, Intercraft Cabinets at 314B.) I agree with Winneke, P. and Phillips, J.A. that Mr. Murdoch's contention to that effect should be rejected, substantially for the reasons that their Honours have given. I desire to add something briefly on my own account.

Any decision of Cooper, J. commands respect, and I was at first strongly attracted to his Honour's reasoning. Indeed the case had appeared to me in the same light even before I read Gentry. I was not dissuaded by the questions to which it gives rise, such as the position where all but one of the shareholders are willing to stand behind the company and there are genuine difficulties in securing the co-operation of the remaining shareholder. He or she may, for example, be antagonistic to the others, on reasonable or unreasonable grounds, or may be under a disability. Where one or more of the shareholders is a trustee, questions arise as to whether all, or some only, and which, of the beneficiaries should be required to bring their own assets into play. These and other difficulties could be overcome on a case by case basis if the essential proposition in Gentry is correct.

That proposition is, as I understand it, that where -

(a) a small group of shareholders is in substance the company and the litigation is their litigation as much as it is the company's; and

(b) the shareholders are willing to be personally liable to satisfy an order for costs against the company if the proceeding is unsuccessful,

they should be in no worse position (sc. from the point of view of resisting an application for security for costs) than litigants in person even if neither the company nor the shareholders have any assets.

It is not uncommon for a small number of people to set up a business and carry it on by means of a company. Although the company is the proper plaintiff, it may seem unfair if the position with regard to security for costs is any different from that which would obtain if they had been able to bring the proceeding in their own names.

In the course of the argument the learned President gave as a counter-example an impecunious company with impecunious shareholders and a trial that will last for six months. Can the defendant not invoke s.1335 of the Corporations Law? Is it a complete answer that the shareholders are willing to stand behind the company? To my mind the defendant can invoke the section and the willingness of the shareholders to put their exiguous assets at risk is not an answer. The reason is limited liability. If the order for security means that the company cannot prosecute its claim, becomes or remains insolvent and is wound up, all that the shareholders lose, as shareholders, is their investment. Those who incorporate a limited company must take the disadvantages of such incorporation along with its advantages even if they have given guarantees. Contrary to first impressions, the proposition in Gentry is not dictated by fairness. Those who would rely on it are trying to have their cake and eat it too.

I express no opinion on the way in which an application for security for costs should be approached in the case of an unlimited company. Section 1335 applies to such a corporation and there is an increasing number of them, now that professional practices are often incorporated in that form.

For these reasons I, too, would dismiss the appeal.

At a glance

Court

Decision date

Before

Source

Judgment (57 paragraphs)

Parties