Farmwide Pty Ltd v Commonwealth of Australia [2013] ACTSC 74

Supreme Court of the ACT|2013-04-29

1. the defendant's application dated 2 May 2011 be dismissed

2. the defendant pay the plaintiff's costs of the application

1. This is an application by the defendant for security for costs. The power to order security is conferred on the Court by s 1335 of the Corporations Act 2001 (Cth) and also by r 1900 of the Court Procedures Rules 2006. The principles to be applied, and the considerations to be taken into account, are the same. The application for security was filed on 2 May 2011.

2. The plaintiff commenced the action by originating claim in May 2007. Its claim is for damages for breach of contract, the contract being a deed dated 30 June 2000 between the parties. The originating claim was accompanied by a statement of claim. The plaintiff asserted in the statement of claim that the deed sued upon was a deed of grant between the plaintiff and the defendant through the Commonwealth Department of Communication, Information Technology and the Arts. The deed is said to have provided a regime for the defendant to make payments to the plaintiff on terms and conditions set out in the deed, for a project for the provision of internet access to rural and regional Australia. The total grant payments were agreed not to exceed $20,378,000.00.

3. The plaintiff asserted in the statement of claim that subject to parliamentary appropriation and to compliance by the plaintiff with the terms and conditions of the grant, the defendant was obliged to make payments to the plaintiff at times specified in a schedule to the deed. Any assets purchased by the plaintiff using grant moneys and any intellectual property brought into existence for the purpose of performing the project were to be vested in the plaintiff. The deed specified circumstances in which the defendant was to be entitled to terminate the deed or to suspend grant payments. The plaintiff asserted that none of those circumstances applied, and that the defendant did not give written notice either terminating the deed or suspending payments. The plaintiff between the date of the deed and 25 May 2001 carried out activities by way of implementation of the program, and the defendant made payments to the plaintiff. The work done included calling for tenders for the provision of internet services for eighty-three locations, processing the tender proposals received and arriving at a short list for tenders.

4. The statement of claim then asserted that the defendant, by letter dated 25 May 2001, notified its intention not to pursue the remaining activities for the project. Thereafter the defendant treated the project, and the grant deed, as at an end. The plaintiff says that the defendant thereby committed a breach of the provisions of the deed, causing damage to the plaintiff including loss of the surplus the plaintiff would otherwise have retained from the grant over and above its expenses in implementing the project, and loss of opportunity to make other profits.

5. In November 2008 the defendant sought further and better particulars of the statement of claim. These were provided by the plaintiff in May 2009.

6. In August 2009 the defendant filed a defence. The defendant admitted most of the factual assertions in the statement of claim but denied that it had breached any of its obligations under the deed, further denying that the plaintiff had suffered any loss or damage. The defendant said that it had not been under any obligation to pay for work beyond the preparatory stage of the project, and that it had made all payments to the plaintiff which it had been obliged to make. The defendant further asserted a verbal agreement reached between Mr Ceramidas of the plaintiff and Mr Williamson of the Commonwealth in May 2001, that the project was no longer necessary and that the remaining activities under the deed would not be pursued.

7. In November 2009 the plaintiff sought further and better particulars of the defence. At the same time the plaintiff put a proposal that the parties approach the Court for the splitting of the hearing, with the Court to make a preliminary determination of certain issues generally going to liability. In December 2009 the defendant provided the particulars requested, and an indication that the proposal as to splitting the hearing might be agreed to.

8. On 1 October 2010 the solicitors for the defendant raised for the first time with the solicitors for the plaintiff the question of security for costs. They estimated that if the action were to proceed to trial, the hearing might take two weeks and costs on each side would be likely to exceed $400,000.00. They attached a copy of an ASIC search of the defendant company and of its sole member, Australian Farmers Services Association Pty Ltd (AFSA). Each had a paid up capital of $400.00. They said that this gave reason to believe that the plaintiff would not be able to satisfy an order for costs if unsuccessful in the action, and sought security in the sum of $130,000.00, enough to cover preparation for and hearing for the preliminary issues which had been discussed in earlier correspondence. Alternatively they asked for adequate information to establish that the company would be in a position to meet an adverse costs order.

9. The search of the defendant showed that there were four current directors, Mr Ceramidas, who lives in the Australian Capital Territory, Messrs Mackenzie and Kennedy, resident in Queensland, and Mr McMenemy, resident in Western Australia. The search disclosed that the plaintiff company had previously had some fifteen shareholders, each being a State farmers' or graziers' association. Over the years there had been numerous directors, each associated with one of the shareholder associations. The company had been incorporated in 1988, and Mr Ceramidas had been secretary since then. He had become a director in 2004. The other three directors had been in office for much longer. It is not obvious from the search when the original shareholders transferred their shares to AFSA. That company was incorporated in 2004 and has the same directors at the plaintiff company. Its only shareholders are Messrs Mackenzie, Kennedy and McMenemy.

10. The solicitors for the plaintiff responded on 29 October 2010. They conceded that the plaintiff company would not be able to meet a costs order in the range suggested. They said that there was no one standing behind the company who was prepared to or in a position to do so. They pointed out that the application was made late, after a considerable amount of work had been done and costs incurred on both sides. They asserted that the impecuniosity of the plaintiff company was because of the breach by the Commonwealth of the deed. They said that an order by the Court for security would stultify the litigation.

11. They pointed out in later correspondence that whilst the plaintiff company was limited by shares and not by guarantee, it was by its Constitution a non-profit company required to apply its assets and income in furtherance of its objects, and proscribed from distributing directly or indirectly to any shareholder or other individual or entity any portion of its assets or income other than as compensation for services rendered or reimbursement of expenses. The object of the company was the promotion of the development of the agricultural, horticultural, pastoral, viticultural, aquacultural, fishing and information and communications technology resources of Australia.

12. The defendant concedes that the issue of security was raised late with the defendant. Counsel who appeared for the defendant on the application, Mr Clynes, had raised the question of security for costs at a conference in May 2010, referred to the issue in a short written advice in July 2010, and provided a more extensive memorandum of advice later in that month. Ms McCormick, the solicitor for the defendant, agreed that she did not raise the question of security with the solicitors for the plaintiff until October 2010.

13. On 17 December 2010 the solicitors for the defendant wrote to the solicitors for the plaintiff with a proposal that the shareholders of AFSA provide security on the basis that they were likely to benefit from the proceeds of the action if successful. A week later they wrote to the plaintiff's solicitors seeking further particulars of the damages claimed. In further correspondence during January 2011, the solicitors for the defendant made it clear that they would not be obtaining instructions about the splitting of the case or about settlement until the question of security for costs had been resolved satisfactorily.

14. In a letter in late February 2011, the solicitors for the defendant noted that the Constitution and rules of both companies could be amended by resolution of the shareholders, the suggestion being that the individual shareholders of the company which owned the shares in the plaintiff could change the non-profit status of both companies (and presumably their objects) and (again presumably) share personally in any fruits of the litigation.

15. In March 2011 the solicitor acting for the plaintiff provided additional particulars, not including particulars of quantum. On 1 April he issued a notice to the defendant to discover limited categories of documents.

16. On 11 April 2011 the solicitors for the defendant sent the solicitor for the plaintiff two letters. In the first they said that they were instructed to apply for security for costs and were deferring their response to the request for discovery. In the second, they pressed for particulars of quantum and threatened an application for an order for the supply of those particulars and for costs.

17. Later in April the solicitor for the plaintiff wrote requesting that the question of particulars be deferred pending the outcome of the application for security. He offered an undertaking by the individual shareholders not to alter the Constitution or rules of the companies.

18. As previously mentioned, the application for security was filed on 2 May 2011 and heard on 9 September 2011.

19. The application was supported by an affidavit sworn on 29 April 2011 by Ms McCormick, upon which she was cross-examined. She estimated that the hearing would be likely to take five days. She provided a detailed estimate of the total costs and disbursements likely to be incurred by the defendant up to the end of such a hearing at a figure slightly in excess of $500,000.00. She expressed the opinion that 70% to 75% of those costs were likely to be recoverable as between party and party.

20. During June and July 2011, affidavits as to documents were filed by both sides.

21. A week before the hearing of the application, Ms McCormick swore a further affidavit. She said that when she first wrote to the plaintiff's solicitors on 1 October 2010 asking for security, the defendant's costs were about $41,000.00. By December 2010 they had increased to $75,000.00, and by the end of February 2011 they were about $105,000.00. By 11 April 2011, when they wrote saying they had instructions to put on an application for security, the costs were about $122,000.00 and by the date the application for security was filed they were about $147,000.00. By the date of her affidavit at the beginning of September 2011, they had increased to $190,000.00.

22. Ms McCormick sought to explain the Commonwealth's delay in bringing the application for security before the Court. She said that the Commonwealth had always maintained that the proceedings were misconceived and doomed to fail. During August 2011 she had "attempted to resolve the proceedings on a walk-away basis".

23. There had been some delay in her obtaining instructions to make a formal application for security after she received advice from counsel in mid-2010. After first raising the issue with the other side, she had, she said, attempted to resolve the issue of security consensually. It did not become clear to her until February 2011 that neither the plaintiff company nor those standing behind it would provide security unless ordered to do so. She had then obtained instructions and commenced preparations to file the application.

24. In cross-examination, Ms McCormick conceded that the plaintiff's solicitors had told her on 29 October 2010 that the plaintiff could not meet an order for security. She agreed that she had been aware that the plaintiff would be forced to incur costs in complying with her request for the provision of particulars.

25. Mr Ceramidas affirmed an affidavit on 15 July 2011. He gave evidence that the plaintiff company had incurred costs of almost $85,000.00, plus a further estimated $20,000.00 for work in progress and unbilled disbursements, up to 30 June 2011. The company had paid some $57,000.00 in legal costs by mid-December 2010 and some $67,500.00 by 11 April 2011. Mr Ceramidas did not say in his affidavit where that money came from, but he did annex copies of the company's balance sheets and income and expenditure statements for the financial years from 2004 to 2011, and minutes of various meetings of directors, from which appears that the plaintiff company has no other activities other than the prosecution of this litigation, and that funding in recent years has come from loans by directors. The history suggests that the companies were originally associated with the National Farmers Federation and its constituent bodies, but it cannot be inferred from the present evidence that there remains any link with any of those bodies, or that the shareholders hold their shares in anything other than a personal capacity.

26. Section 1335 of the Corporations Act provides that where a corporation is a plaintiff in an action, the court 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, require sufficient security to be given for those costs and stay all proceedings until the security is given. The section does not set out any criteria or principles to be applied in exercising the discretion. There are numerous reported decisions which provide assistance in that regard.

27. Rule 1900 of the Court Procedures Rules gives a discretion to the court to order a plaintiff to give security for a defendant's costs. Rule 1901 limits the circumstances in which the discretion can be exercised. One of the prescribed circumstances is that the plaintiff is a corporation and there is reason to believe that it will not be able to pay the defendant's costs if ordered to do so.

28. Rule 1902 sets out a number of discretionary factors to which the court may have regard in determining an application for security. These include the means of the people standing behind the proceeding; the prospects of success or merits of the proceeding; the genuineness of the proceeding; for a corporation, its lack of financial resources; whether the plaintiff's lack of financial resources is attributable to the defendant's conduct; whether an order for security would be oppressive; whether an order would stop or limit the progress of the proceeding; whether the proceeding involves a matter of public importance; and the estimated costs of the proceeding. The rule does not limit the matters to which the Court may have regard.

29. On 22 January 2004 Messrs Mackenzie, McMenemy, Kennedy and Ceramidas executed a declaration of trust, purportedly on behalf of Australian Farmers Services Association Pty Ltd as trustee, although the attestation portion of the document does not state that it was executed by the company. The declaration recites that the objects of Farmwide and the AFSA are identical, and that the latter has resolved to effect those objects not for the profit or gain of any individual member, but will hold all shares in the plaintiff company on trust to effect those objects.

30. Whilst I have some reservations about the wording and execution of the document, its intention is clear. It would provide a strong ground for a court to restrain the company or its directors or shareholders from using company funds for other purposes. I am satisfied that the plaintiff company is not in a financial position to satisfy an order for costs against it. I am further satisfied that the individual shareholders and directors do not stand to benefit personally from the litigation, and that in those circumstances it would not be fair to expect them to provide security personally.

31. As to prospects of success, the claim is a complex one. The evidence does not permit me to arrive at a view as to its likelihood of success. I am not, however, persuaded that the claim is entirely without merit or that it is inevitably doomed to failure. It seems to me that the plaintiff has an arguable case, and that the defendant has an arguable defence. In these circumstances the issue of the prospects of success of the litigation is a neutral one, not favouring either party on the question of security for costs.

32. I must accept the evidence of Mr Ceramidas that an order for security for costs in the amount sought would bring the litigation to an end. There is no evidence of any source from which the plaintiff company could obtain such an amount. In that sense, an order for security could be seen as oppressive toward the plaintiff.

33. Counsel for the plaintiff submits that a major factor which should influence the court against the ordering of security is the delay by the defendant in bringing the application. There is no satisfactory explanation for the delay between commencement of proceedings in 2007 and the first letter asking for security in October 2010. The available inference is that those advising the defendant simply did not direct their minds to the question prior to it being raised by counsel in July 2010. I do not find the explanation for the delay between July and October 2010 satisfactory. It is not clear why the solicitors for the defendant could not have informed the plaintiff promptly that consideration was being given to applying for security.

34. Nor is there a satisfactory explanation for the lengthy delay between October 2010 and the filing and service of the application for security in May 2011. These delays are significant having regard to the amount of continuing legal work being done on both sides during the period, reflected in the costs figures of which the solicitors for both parties have given evidence. The effect of the delay is exacerbated by the pressure from the defendant's solicitors on the plaintiff's solicitors to undertake further work, incurring further costs, prior to the filing of the application, and prior to its hearing.

35. The evidence does not satisfy me that the impecuniousity of the plaintiff was caused by the defendant. A plaintiff asserting that its impecuniousity was so caused faces a higher hurdle in a claim for loss of profit than in a claim arising out of the infliction of damage: Fat-Sel Pty Ltd v Brambles Holdings Limited (1985) ATPR 40-544 at 46, 428 per Beaumont J; Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 at [33] per Basten JA.

36. There is ample authority for the longstanding principle that applications for security for costs must be brought promptly. A number of authorities for the proposition were set out by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189 at 197. Bollen J in Commonwealth v Cable Water Skiing (Aust) Ltd (1994) 14 ACSR 760 at 763 quoted with approval from the judgment of Prior J at first instance a passage to the effect that such applications must be made promptly. Costs incurred during the passage of time must not be overlooked. It is a matter of significance if a party incurs costs that would not have been incurred if the application had been made sooner. A question always arises on such applications whether having regard to the length of the delay and the nature of acts done during the interval, a party has been affected so as to cause a balance of justice or injustice in taking one course or another with respect to security for costs. The order of Prior J at first instance to refuse to order security because of delay was upheld on appeal.

37. In Staff Development and Training Centre Pty Ltd v Commonwealth [2005] FCA 1643, Spender J refused an application for security for the same reason. The Commonwealth's application for security had been filed some two years after the commencement of proceedings, and after close of pleadings, the exchange of particulars, discovery, an attempt at mediation and some amendments to pleadings.

38. In Fire Containment Pty Ltd v Robins [2011] NSWSC 444, Hallen AsJ refused an application for security on the ground of delay, where the application for security was filed some sixteen months after the institution of proceedings.

39. In Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176, the Court of Appeal of the Supreme Court of Western Australia (Newnes and Murphy JJA) allowed an appeal from a Master, saying:

[20] It is, however, incumbent upon a defendant who wishes to obtain security for its costs to apply promptly for that relief once it is, or ought reasonably be, aware that that plaintiff would be unable to meet an order for costs. Security for costs is a not a card that a defendant can keep up its sleeve and play at its convenience. Delay is an important consideration in the determination of an application for security for costs because it is capable of causing prejudice or unfairness to the plaintiff. A plaintiff is entitled to know at the earliest opportunity, before it has committed substantial resources to pursuing the litigation, whether it will be required to provide security. The later an application is made the greater the likelihood that it will cause substantial disruption or distraction in the conduct of the plaintiff's case, and if the plaintiff is unable to provide security, the greater the costs that will have been wasted. The oft-cited words of Moffitt P in Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 are apposite:

The right to seek security for costs and to the proceeding, 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 reason 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 amounts of money toward litigating its claim.

[21] I would add that in an era when the need to ensure the efficient use of judicial resources has become increasingly important, delay may also be significant in that regard. A late application which frustrates the action will mean that the judicial resources already devoted to the case will have been wasted.

40. There is some authority for the proposition that a factor militating against ordering security is that the defendant is a large, well-resourced and amply-funded body such as a State, council or major corporation: see for example Jazabas at [75] per McClellan CJ at Common Law; Top Stuff 4 Business Holdings Pty Ltd v Vodafone Pty Ltd (No 2) [2012] FCA 645 at [8] per Rares J, where his Honour suggested that it might be relevant that the quantum of costs would be a relatively insignificant amount for the respondent or defendant. That must be seen as the case here, where the defendant is the Commonwealth.

41. Whilst I take account of the relative financial positions of the plaintiff and the defendant to the extent that that may be a factor relevant to security for costs, and the fact that the plaintiff plainly could not satisfy an order for costs of the magnitude likely to flow from its failure in the action, it seems to me that the significant factor telling against the Commonwealth's present application is its delay in bringing it.

42. Where there is any doubt about the financial health of a corporate plaintiff it is open to the defendant to apply for security, either under the Corporations Act or under the Rules. The present action arose out of a deed between the parties which provided potentially for the payment of sums running into millions of dollars. Although there is no evidence about it, I can assume that the Commonwealth had some information about the plaintiff company at the time the deed was entered. It is apparent that those advising the defendant simply did not direct their minds to the issue of security of costs until it was raised by counsel. By that time the plaintiff had incurred a substantial liability for its own legal costs, something its directors may have chosen not to do if they had had to face an application for security at the outset. The solicitors for the defendant acted in such a way as to require the plaintiff to spend considerably more money on legal costs after the question of security had been raised by counsel prior to making the application, and after making the application, prior to its being heard.

43. Delay is the factor which weighs the balance of this application heavily against the defendant, and which would make it unfair for the plaintiff to be required to provide security for costs at this stage of the action.

I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Master Harper.

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