Supreme Court of WA|2001-12-19|Before: Mr P, Lure J

Geneva Finance Ltd (Receiver and Manager Appointed) v Boys & Ors [2001] WASC 348 (19 December 2001)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : GENEVA FINANCE LTD (Receiver and Manager Appointed) -v- BOYS & ORS [2001] WASC 348

BETWEEN : GENEVA FINANCE LTD (Receiver and Manager Appointed)

Application for further and better discovery of documents - Relevance to damages claim - Objection to discovery of courtrelated documents on the ground of implied undertaking - Inspection of a copy document for which legal professional privilege is claimed - Turns on own facts

Security for costs - Action for benefit of secured creditors - Assessment of merits of claim - Whether application for an improper purpose - Turns on own facts

ACCC v Australian Safeway Stores (1988) 81 FCR 526

Attorney-General (NT) v Maurice [1986] HCA 80; (1986) 161 CLR 475

Beach Petroleum NL v Johnson [1992] FCA 110; (1992) 7 ACSR 203

BP Australia Ltd v Stallwood [2000] WASC 75

Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1

HPM Pty Ltd v BPM Pty Ltd; unreported; FCt SCt of WA; Library No 960206; 17 April 1996

Pearson v Naydler [1977[ 1 WLR 899

Schlam v WA Trustee Executor & Agency Co Ltd [1964] WAR 178

Seabird Corporation Ltd (Receiver & Manager appointed) (In Liq) v National Securities Exchanges Guarantee Corporation Ltd (1989) 7 ACLC 1263

Telstra v BT Australasia (1998) 85 FCR 152

1 McLURE J: The defendants apply for further and better discovery and for security for costs.

2 The plaintiff company claims in this action against its auditors alleging they failed, inter alia, to make a proper assessment of the plaintiff's bad and doubtful debts in five periods ending December 1987 to December 1989.

3 The plaintiff was engaged in the business of raising money from the public by the issue of debenture stock ("debentures") and lending the money so raised to borrowers. Pursuant to a Trust Deed dated 11 June 1986 between the plaintiff and Perpetual Trustees (WA) Ltd ("Perpetual"), Perpetual purchased debentures as trustee for debenture holders. The plaintiff was indebted to Perpetual in respect of premiums and interest payable to the debenture holders ("the Debenture Debt"). The plaintiff charged all its assets and undertakings to Perpetual as security for the Debenture Debt.

4 When the plaintiff wanted to issue debentures, it would furnish to Perpetual a report from its auditors pursuant to cl 7 of the Trust Deed which report stated the amount of debenture stock which in the opinion of the auditors as at the date of the report could be issued by the plaintiff without breach of the limitations contained in cl 9 of the Trust Deed.

5 The plaintiff also had to furnish to Perpetual a written report within four months of the close of each six-month period ending on the last day of June and December in each year relating to the preceding six-month period verified by its auditors ("cl 8 report"). The cl 8 report had to state as at the close of business on the last day of the immediately preceding six-month period, inter alia:

(i) the total of each of the "Total Tangible Assets", the "Total External Liabilities", the "Issued Stock" and the "Total Secured Liabilities" of the plaintiff;

(ii) the amount of any moneys owing to the plaintiff by any "Related Corporation" and showing, where applicable, the requisite amount included by the auditors in their determination of Total Tangible Assets.

6 Under cl 9 of the Trust Deed, the plaintiff was not able to issue or cause to be issued debentures if the aggregate of the Issued Stock and the amount of the Total Secured Liabilities exceeded or would thereupon exceed the lesser of:

(a) fifteen times the amount of the plaintiff's Shareholders' Funds; and

(b) the aggregate of 90 per cent of the amount of the Total Tangible Assets, plus the amount (if any) by which the face value of any Security Stock exceeded the amount of the liability secured by such Security Stock.

7 Further, the plaintiff was not able to borrow moneys or incur or suffer to exist any liabilities if the Total External Liabilities would exceed the lesser of (a) and (b) above (save the percentage in (b) is 95 per cent of the amount of the Total Tangible Assets).

8 When determining the Total Tangible Assets of the company, loans owed by Related Corporations are to be excluded unless they satisfy specified criteria.

9 The plaintiff's case is that the effect of under-provisioning for bad and doubtful debts is to increase the amount of the Total Tangible Assets. If the Total Tangible Assets are overstated, the amount of debentures which the plaintiff may issue without breaching the limitations in cl 9 of the Trust Deed will also be overstated. Further, if the amount of money owing to the plaintiff by Related Corporations is understated, that will also improperly inflate the Total Tangible Assets.

10 The scheme of the amended statement of claim follows the same structure for the five relevant periods. The first period is for the six months ending 31 December 1987. It is pleaded that in the December 1987 the balance sheet provision for doubtful debts was understated by $1,508,232, the Total Tangible Assets was overstated by the same amount, as was the profit and loss account for that period. The plaintiff then pleads as follows:

"121. Had Horwath & Horwath not breached the Audit Contract as pleaded in paragraphs 26 to 32 above but reached the conclusion which they should have done as pleaded in Part A of Schedule 2:-

121.1 the Directors of the plaintiff, in the performance of their duties and the exercise of their powers acting in the best interests of the plaintiff as a whole should and would have caused the plaintiff to cease issuing Debentures and making further financial accommodation or loan advances as from 20 April 1988;

121.2 Perpetual in the performance of its functions under the Trust Deed should and would have:-

(a) appointed a receiver and manager to conduct the affairs of the plaintiff, pursuant to clause 21 of the Trust Deed and such appointee should and would have caused the plaintiff to cease issuing Debentures and making further advances as from 20 April 1988;

(b) in the alternative taken steps pursuant to clause 20 of the Trust Deed to enter into possession of the plaintiff and cause the plaintiff to cease issuing Debentures and making further advances as from 20 April 1988.

122. The plaintiff continued to carry on its business, including issuing Debentures and making further advances until 26 July 1990, being the date on which Perpetual appointed Peter Reymond Quigley ("Quigley") as receiver and manager of all of the assets and undertakings of Perpetual (the "Appointment Date").

123. By reason of the matters pleaded in paragraphs 26 to 32 and 117 to 122 the plaintiff has suffered loss and damage.

Particulars of Loss and Damage

Particulars of loss and damage are set out in Schedule 4 being the losses resulting from the making of unrecoverable loans and incurring associated expenses between the date of the December 1987 Audit Report (20 April 1988) and the Appointment Date amounting to $21,217,412.00.

124.1 In the alternative to paragraphs 117 to 123 above by reason of the matters pleaded in paragraph 32 above had Horwath & Horwath calculated the limitation referred to in clause 9 of the Trust Deed correctly Horwath & Horwath should have concluded that the plaintiff had exceeded the borrowing limitation and could not issue any further Debentures as from the date of the May 1988 Cl 7 report, being 30 May 1988.

124.2 Had Horwath & Horwath calculated the limitation referred to in paragraph 32 and 124 above correctly:

(a) The Directors of the plaintiff, in performance of their duties and the exercise of their powers in the best interests of the plaintiff as a whole should and would have caused the plaintiff to cease issuing Debentures and making further financial accommodation and loan advances as from 30 May 1988;

(b) Perpetual in the performance of their functions under the Trust Deed should have and would have:-

(i) appointed a receiver and manager to conduct the affairs of the plaintiff pursuant to clause 21 of the Trust Deed and such appointee should and would have caused the plaintiff to cease issuing Debentures and making further advances as from 30 May 1988; or

(ii) in the alternative taken steps pursuant to clause 20 of the Trust Deed to enter into possession of the plaintiff and cause the plaintiff to cease issuing Debentures and making further advances as from 30 May 1988.

125. By reason of the matters pleaded in paragraph 124 above the plaintiff has suffered loss and damage.

Particulars of Loss and Damage

Particulars of loss and damage are set out in schedule 4 being the losses resulting from the making of unrecoverable loans and incurring associated expenses between the date the May 1988 CL 7 report was received by Perpetual (30 May 1988) and the Appointment Date amounting to $21,217,412.00."

11 Schedule 4 to the statement of claim states the loan or transaction number, the name of the borrower, the amount of the loss on advances made during the relevant period (which for pars 123 and 125 of the statement of claim is 20 April 1988 to 26 July 1990), the interest payable and the total loss. The defendants in their defence to the damages pleading put in issue causation, whether the plaintiff itself suffered any loss and, if it did, whether it is recoverable at law and, if so, in what amount. They also plead contributory negligence and claim relief from liability under the relevant corporations legislation.

12 The writ in this action was issued on 23 July 1993 in order to preserve the plaintiff's rights under the Fair Trading Act. It was not served on the defendants at this time. The plaintiff was preparing its statement of claim using information which the Australian Securities Commission ("ASC") had obtained during the course of investigations into the affairs of the plaintiff. The auditors raised objections to the ASC releasing the information to the receiver and his solicitors. The first and second defendants instituted proceedings in the Federal Court against the ASC, the receiver and others restraining the release and/or use of the information obtained by the ASC during its investigation. The defendants' Federal Court action was unsuccessful. They appealed to the Full Court of the Federal Court and were again unsuccessful. Special leave to appeal to the High Court was refused.

13 The plaintiff sought and was granted extensions of time for the service of the writ. The writ was finally served on 22 December 1998. The plaintiff filed and served its statement of claim and accompanying schedules in December 1999. Schedule 2 to the statement of claim identifies the borrowers the plaintiff says the defendants ought to have made provision for in the accounts

14 Around May 2000 the action was entered into the long causes list and assigned to Owen J for management. The defendants' legal and expert accounting advisers were given access to various documents of the plaintiff to assist in drafting the defence and to enable them to comply with an order requiring the defendants to serve schedules in answer to the schedules attached to the statement of claim.

15 In September 2000 Owen J ordered the parties to confer concerning the factual basis of the plaintiff's schedules and the utility of the defendants' answers to those allegations. The conferral process was not successful and in October 2000 Owen J ordered the litigation to proceed in the usual manner.

16 In November 2000 the plaintiff filed an amended statement of claim and amended schedules, in relation to which the defendant sought particulars. Shortly thereafter the plaintiff was given leave to file a substituted amended statement of claim and orders were made for the filing and service of answers to a request for further and better particulars. There were communications between the parties and a further directions hearing concerning the adequacy of the plaintiff's answers. At a hearing in June 2001 Owen J dismissed the defendants' application for further particulars of Sch 2 to the statement of claim. The defendants applied to appeal from that decision.

17 Schedule 2 states the borrowers and the provision said to be required in the plaintiff's accounts for each borrower, that provision equating to "the shortfall in the value of the borrower's assets available to meet the plaintiff's total loan exposure". The defendants sought details of "all facts, matters, circumstances and things upon which the plaintiff relies in support of the allegation that there were shortfalls". The Full Court has now ordered the plaintiff to provide those particulars: Boys and Ors v Geneva Finance Ltd [2001] WASCA 376.

Application for Further and Better Discovery

18 The defendants seek further and better discovery of the following categories of documents:

(i) all correspondence, court documents, notes, memoranda, witness statements, briefs to counsel, legal advice and other documents relating to the recovery by the Plaintiff of the loans referred to in Sch 4 to the statement of claim;

(ii) all correspondence, court documents, notes, memoranda, witness statements, briefs to counsel, legal advice and other documents relating to the recovery by the Plaintiff of loans other than the loans referred to in Sch 4 to the statement of claim;

(iii) the accounts of the receiver and manager of the Plaintiff dated 26 January 1991, 25 July 1991, 26 January 1992, 26 July 1992, 25 January 1993, 26 July 1993, 26 January 1994, 26 July 1994, 26 January 1995, 26 July 1995, 26 January 1996, 3 May 1996, 26 July 1996, 26 January 1997, 26 July 1997, 27 January 1998, 26 July 1998, 2 November 1998, 26 January 1999, 26 July 1999, 26 January 2000, 26 July 2000 and 26 January 2001 ('Accounts');

(iv) all books, financial reports and records, accounts, bank statements, receipts, cheque books and other documents relating to all receipts and payments of the Plaintiff after 26 July 1990 (being the source information of the Accounts); and

(v) the written records of ASC examinations of Messrs Hawkins, Shillington, Jones, Townsend, Howat and McAlwey.

19 It is not in dispute that the documents the subject of the application exist and have not been discovered by the plaintiff. The plaintiff objects to giving discovery on a number of grounds.

20 The first category of documents concerns loans referred to in Sch 4 of the statement of claim. The defendants say the documents are relevant to the plaintiff's plea that the loans in Sch 4 are "unrecoverable loans". The plaintiff resists the application on the grounds that the documents are not relevant and are the subject of an implied undertaking of non-disclosure or are protected by legal professional privilege.

21 Dealing firstly with relevance. Upon receipt of a request for discovery a party is obliged to give discovery of all documents relating to any matter in question in the action. In Mulley v Manifold [1959] HCA 23; (1959) 103 CLR 341 at 345 Menzies J said:

"I now turn to the pleadings to determine what are the matters at issue between the parties, because discovery is a procedure directed towards obtaining a proper examination and determination of these issues - not towards assisting a party upon a fishing expedition. Only a document which relates in some way to a matter in issue is discoverable, but it is sufficient if it would, or would lead to a train of inquiry which would, either advance a party's own case or damage that of his adversary."

22 A document is discoverable if it would be evidence upon any issue or which contains information which may, not must, either directly or indirectly enable the party requiring discovery to advance his case or damage that of his adversary: Compagnie Financiere Du Pacifique v Peruvian Guano Co (1982) 11 QBD 55 per Brett LJ at 63.

23 The plaintiff pleads that the Sch 4 loans are unrecoverable. It does not by its particulars confine that concept in any way. Thus, it is wide enough to cover disputed debts which are the subject of litigation. Accordingly, the documents requested by the defendants in this category are relevant.

24 The second ground of objection relates to an alleged implied undertaking. The plaintiff submits that the implied undertaking relating to the use of discovered documents extends to other court documents and prevents the documents from being discovered in this action.

25 In relation to documents produced by one party to another in the course of discovery in court proceedings, there is an implied undertaking that the party to whom discovery is given will not make the contents of discovered documents public, communicate the contents of such documents to any stranger to the suit or use the documents or copies of them for any collateral purpose: Hamersley Iron Pty Ltd v Lovell (1998) 19 WAR 316 at 334.

26 There remains a live question as to whether the implied undertaking ceases once material is adduced in evidence in court proceedings: Esso Australia Resources Ltd v Plowman (1995) 183 CLR 10 per Mason CJ at 32 - 33; Hamersley Iron per Anderson J at 338 - 342. It has been held that the implied undertaking also applies to answers to interrogatories not yet tendered in evidence (Ainsworth v Hanrahan (1991) 25 NSWLR 155) and witness statements (Central Queensland Cement Pty Ltd v Hardie (1989) 2 Qd R 509).

27 The plaintiff says the full scope of the implied undertaking is yet to be determined but suggests it applies to all but the writ of summons which is the only publicly available court document.

28 As with questions relating to legal professional privilege, it is necessary to distinguish between the obligation to give discovery of documents and the right to resist inspection of discovered documents.

29 Wherever be the outer limits of the scope of the implied undertaking, the principle relates to the disclosure or use of the contents of the document, not to the existence of the document. That being the case, the implied undertaking does not prevent a party from describing it (sufficiently to enable it to be identified) in the party's list of documents. Adequate description is required of documents for which privilege or other protection from production is claimed, but not such a description as would enable the opponent to discover the contents of the documents: Buttes Gas and Oil Co v Hammer (No 3) (1981) QB 223 at 265. Thus, the plaintiff's objection to giving discovery of documents on this basis is misconceived.

30 Further, if I am incorrect and the implied undertaking prevents discovery of relevant documents, I am satisfied that the implied undertaking is confined to the voluntary use of relevant documents for a collateral purpose and does not prevent compulsory disclosure. I see no basis in principle or by reference to the rationale for the implied undertaking for it to give rise to, in effect, a privilege from production. There is support for this conclusion in Esso Australia Resources Ltd v Plowman per Mason CJ at 33 (with whom Dawson and McHugh JJ agreed).

31 The third ground of objection is based on legal professional privilege. As already stated, the privilege does not excuse the plaintiff from giving discovery of documents. Save for the documents in category 5, I will not deal with the question of inspection of what will inevitably be different classes of documents until after the discovery application has been determined and the plaintiff has filed any supplementary affidavit of discovery.

32 The plaintiff also says it wishes to defer any discovery obligation relating to the documents in this category until after it has determined the defendants' ability to meet any judgment sum. It may then reconsider whether it will pursue all the losses currently pleaded in Sch 4. The plaintiff has applied to examine the defendants as to their means although I understand the application has had limited success. I am not satisfied that any further significant or open-ended delay in the defendants being given that to which they are entitled under the Rules is in the best interests of any party.

33 Documents in the second category relate to recovery by the plaintiff of loans not referred to in Sch 4 of the statement of claim. The defendants say they want to compare the plaintiff's conduct in its recovery action of Sch 4 loans with its conduct in relation to non-Sch 4 loans. I decline to order discovery of these documents because the connection with the pleaded issues is too remote.

34 The third and fourth categories are related and can be dealt with together. The defendants say the documents are relevant to the plaintiff's claim that but for the defendants' default, the plaintiff would have ceased trading. The submission is that the plaintiff can only claim its net loss and must bring to account the profitable loans made after the relevant dates.

35 The pleaded allegation is that the plaintiff should have ceased issuing debentures and thus ceased making further loans from the specified dates. There is no allegation that the plaintiff should have ceased trading. However, as a matter of fact on the pleading, there appears to be no practical difference between the two. Further, the plaintiff says it is claiming the net loss. I am satisfied that the documents sought by the defendants are relevant to the question of the loss suffered by the plaintiff after the relevant dates.

36 The plaintiff also objects to giving discovery because it says all the necessary information is contained in other discovered documents including its books of account which were prepared using the accrual method of accounting and that the defendants should not be permitted to go behind the accounts and other discovered documents to examine the records which came into existence after the receivers' appointment relating to transactions the subject of the action. I do not accept that submission. The defendants should be given access to the documentation for verification purposes. The documents in categories three and four are relevant and ought to be discovered.

37 The last category refers to the transcripts of examinations conducted by or for the ASC. According to the evidence, they are the transcripts of examinations of the directors of the plaintiff conducted pursuant to the ASC Act in connection with the affairs of the plaintiff. It is not suggested the documents are irrelevant. The plaintiff refuses to supply the documents on the ground of legal professional privilege. The receiver deposes in an affidavit sworn on 26 September 2001 that he was informed by Mr Andrew Mason and believes that Tottle Christensen (the plaintiff's solicitors) were provided with copies of the documents by the Australian Securities and Investments Commission ("ASIC") solely for the purpose of use in these and other proceedings and refers to a letter from ASIC to Tottle Christensen dated 30 May 2001.

38 The letter from ASIC refers to Tottle Christensen's request for complete copies of the relevant transcripts (described as the "Information"). ASIC authorised the disclosed to Tottle Christensen of the Information on the following terms:

"Pursuant to s 25(3), ASIC approves the provision of the Information on a strictly confidential basis to Tottle Christensen solely for the purpose of conducting the Proceedings. The Information may be disclosed to the extent reasonably necessary and for the sole purpose of the conduct of the Proceedings, on a strictly confidential basis to the following people:

(a) Counsel;

(b) Independent experts; and

(c) Members of, or persons employed by, Tottle Christensen.

It is a further condition of release that if it is intended that the Information be produced in Open Court, prior notice shall be given to any person who would be affected by such publication.

It is a further condition that the Information may be referred to in the discovery in relation to the Proceedings and copies provided to other parties to the Proceedings in the usual course of the discovery process."

39 There is no question the documents must be discovered. I am here dealing with the question whether the plaintiff is obliged to give inspection. I deal with that issue on this application because the documents are clearly identified and relevant evidence is adduced.

40 It is accepted that there is no entitlement to legal professional privilege in respect of the original transcripts of examination. However, copies of non-privileged documents are privileged if the copies are brought into existence for the dominant purpose of providing them to a legal adviser for, inter alia, use in pending litigation: Commissioner of Australian Federal Police v Propend (1997) 188 CLR 501 per Brennan CJ at 508; per Gaudron J at 544, per McHugh J at 571 and per Kirby J at 587; Esso Australia Resources Ltd v Commissioner of Taxation [1999] HCA 67; (1999) 201 CLR 49.

41 The law of privilege protects communications. The relevant communication with the legal advisers must be confidential for the privilege to arise: Commissioner of AFP v Propend per Brennan CJ at 508 - 509 and McHugh J at 552 - 554; Dalleagles Pty Ltd and Ors v Australian Securities Commission and Ors (1991) 4 WAR 325.

42 Confidentiality is not lost because ASIC gave the plaintiff the discretion to produce the documents to the defendants. I equate that with a party's discretion to waive privilege. However, ASIC by letter dated 30 May 2001 to the defendants' former solicitors, Hunt and Humphry, informed them of the decision to release the Information to the plaintiff's solicitors and enclosed a copy of its letter dated 30 May 2001 to Tottle Christensen.

43 For the purposes of legal professional privilege in relation to a document, the relevant communication is (usually) of the contents of the document. A letter to a legal adviser enclosing and describing a privileged document may also be privileged. Neither communication will be privileged if it is not confidential. However, disclosure of the covering letter identifying or describing the privileged document does not itself impair the confidentiality (if any) of the communication to the legal adviser of the contents of the document.

44 The question in this case is whether the privilege attaching to copies of otherwise non-privileged documents protects the contents of the document or just the fact of its communication to the legal adviser for the stated purpose. Although the matter is not free from difficulty, it seems to me the rationale for the privilege accorded to copy documents extends to the fact of its communication and the communication of the content of the copy document: Commissioner of AFP v Propend per Brennan CJ at 508 - 509; per Gaudron J at 543 - 544 and per McHugh J at 554 - 555.

45 Accordingly, I find that the communication of the contents of the copy documents to the plaintiff's solicitors remained confidential and, as a result, the documents in category five are privileged and are not available for inspection.

46 By application dated 3 August 2001 the defendants seek security for costs pursuant to s 1335(1) of the Corporations Act 2001 (Cth). Section 1335 gives the Court a discretion to order a corporate plaintiff to provide security for costs if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendants if successful in their defence.

47 The inability of a corporation to pay the defendants' costs is a matter which not only opens the jurisdiction, but also provides a substantial factor in the exercise of the discretion: Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201 at 215.

48 The evidence establishes that the plaintiff has cash reserves to fund this (and other actions) but that the secured debt to the debenture holders significantly exceeds the plaintiff's assets. Thus, if the plaintiff's action is unsuccessful and the plaintiff is ordered to pay the defendants' costs, the defendants will be unable to recover them from the plaintiff as all remaining assets (if any) including cash reserves will be paid to the debenture holders in priority to the defendants who will be unsecured creditors.

49 The evidence also establishes that Perpetual Trustees appointed the receiver on 26 July 1990. Perpetual Trustees convened a meeting of debenture holders in September 1993 and sought and obtained approval of a resolution in terms that "the receiver and manager is requested to cause the company to continue the legal action against the auditors". The debenture holders are, in effect, supporting the litigation financially. If the plaintiff succeeds, only the debenture holders will benefit from any judgment.

50 The quantum of the loss the defendants would suffer if a costs order against the plaintiff remained unsatisfied will be substantial. In its draft bill of costs dated 3 August 2001 the defendants estimate the party and party costs to be $367,735.

51 The position of secured creditors was considered in Sent at 214 and 215 and Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587 at 593.

"Once it appears, not only that there is a secured creditor in respect of whose claims against an insolvent company the proceedings are of special interest, but that the proceedings have been initiated by, and are controlled by the receiver and manager appointed by that secured creditor whose primary purpose is the recovery of his own debt, and there is a reasonable inference that that secured creditor is supporting the litigation financially, the injustice of that secured creditor pursuing his own interest in an action against the appellant parties with no risk to himself should the appellant parties succeed in their defence assumes a special significance on the question of the justice of granting or refusing an order for security for costs."

53 The plaintiff opposes the application on the basis of:

(a) the strength and bona fides of the plaintiff's case;

(d) the making of an order would (or may) prevent the plaintiff from prosecuting its action;

(e) the inability of the plaintiff to meet a costs order has been caused by the defendants' conduct; and

(f) the existence of a substantive cross-claim places the plaintiff in a defensive position.

Strength and Bona Fides of the Plaintiff's Case

54 The plaintiff says its evidence demonstrates that it has a high probability of succeeding on the claim. It makes that submission based on the receiver's evidence concerning provision he says should have been made in the plaintiff's accounts for the 12-month period ending 30 June 1988 for loans to Aistrope Holdings Pty Ltd, Lombardo Seafood Pty Ltd and Lyzon Holdings Pty Ltd in the sum of $590,089 and that loans owing by a related corporation (First Western Group Ltd) in the sum of $2,195,868 should have been deducted from the Total Tangible Assets shown in the balance sheet of the plaintiff as at 30 June 1988.

55 The receiver provides a detailed explanation of how he estimated the shortfall in relation to the above three borrowers for the stated period. However, Sch 2 lists shortfalls for a significantly larger number of borrowers over a number of different periods. The plaintiff has now been ordered to provide further and better particulars of the allegations of shortfall in Sch 2 to the statement of claim and has not discovered all relevant documents relating to its damages claim.

56 The evidence relied on by the plaintiff does not address all aspects of the matters in issue in the action, in particular, the link between the alleged overstatement of Total Tangible Assets and the nature and extent of the relief claimed. It is not appropriate at this stage of the case and before the defendants have been provided with particulars of the shortfall allegations and full discovery on damages to form a view as to the probability of success of the plaintiff's case. The matter is one of considerable factual complexity and it would be premature to make such a judgment. However, I approach the application on the basis that the plaintiff is acting in good faith and has a good arguable case.

57 The evidence establishes that the defendants first raised the question of security for costs with the plaintiff's solicitors in February 2001. Although the writ was issued on 23 July 1993, it was not served until 22 December 1998 and the statement of claim was served a year later in December 1999.

58 The plaintiff says that the delay should be measured from when the action was initiated in July 1993 or within a reasonable time thereafter. It also says the defendants could have applied for the writ to be served and then made application for security.

59 In the usual course of events, a defendant would not be expected to take steps to apply for security for costs before a plaintiff had voluntarily effected service of the writ. Until the writ is served there is no clear manifestation of intention to pursue a claim. However, this matter is complicated by the defendants taking Federal Court action which, if successful, would have impacted on the plaintiffs pursuit of this action. Even so, until it had become clear that this action was to proceed, it would have been premature for the defendants to have sought security for its costs.

60 However, I accept that the defendants were dilatory in making a security for costs application after service of the writ and once it had become clear the plaintiff intended to pursue the action. In this case the prejudice occasioned by the delay can be accommodated by granting security in relation to the costs incurred after the plaintiff was on notice of the defendants' intention to claim security (that is, February 2001).

Bona Fides of the Defendants' Application for Security

61 The plaintiff says the evidence supports an inference that the application for security for costs is brought by the defendants for the improper purpose of frustrating the litigation.

62 In support of its submission of improper purpose, the plaintiff relies on the defendants' objections to the use by the receiver of information gathered by the ASC, the institution and continuation of the Federal Court proceedings, the failures associated with the conferral process (which includes complaints about missed deadlines, the failure to plead a positive case to the shortfall allegations and the defendants' efforts to seek particulars of the shortfalls) and the defendants' opposition in separate proceedings to the plaintiff's application for examination of the defendants concerning their financial affairs and available insurance to meet any judgment in this action.

63 The defendants' conduct in this action is vindicated in part by the decision of the Full Court to compel the plaintiff to provide particulars of the shortfalls pleaded in Sch 2. The other conduct complained of is primarily taking and resisting court action. A person has a right to seek to vindicate their legal position by taking or defending proceedings in Court. That right would be jeopardised if a party is penalised for that conduct without clear evidence of improper collateral purpose. The principles relating to abuse of process can be applied by analogy, as to which see: Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509; Flower v Hart (1999) 163 ALR 193; Brunswick v Blossomtree (1992) 7 WAR 226.

64 I am not prepared on the evidence of the conduct complained of to draw an adverse inference concerning the defendants' purposes. The obvious objective purpose of a security for costs application is to protect the financial interests of the applicant for security. That purpose is not displaced by the evidence.

65 For these reasons, I am not satisfied on the evidence that the security for costs application is brought for the improper purpose of frustrating the litigation.

Whether the Plaintiff Will Be Shut Out From Prosecuting Its Case

66 As at 9 November 2001, the plaintiff held funds in the sum $1,543,709. The receiver's evidence is that after deducting the estimated costs of this action and five other actions commenced by the plaintiff against its former borrowers, together with estimates of the receiver's fees ($450,000) and expert fees, the uncommitted balance is estimated to be $23,709.

67 The receiver's evidence concerning the position of the persons who will benefit from success in this action was in the following terms:

"Perpetual has informed me and I truly believe it to be the fact that it will not fund the plaintiff or provide security for costs for the plaintiff for any litigation conducted by the plaintiff. The reason for that is that Perpetual merely holds the security for the benefit of the debenture stockholders who had deposited money with the plaintiff.

I truly believe it to be the fact that the debenture stockholders who had deposited money with the plaintiff will not fund the plaintiff or provide security for costs for the plaintiff for any litigation conducted by the plaintiff. The grounds for this belief are that:

(a) None of the depositors have ever indicated that they would, or were in a position to, fund the plaintiff or provide security for costs for the plaintiff;

(b) To the contrary, numerous depositors with whom I have discussed the receivership have expressed concern that the plaintiff have sufficient funds to pursue litigation;

(c) A number of the depositors have advised me they have lost their life savings by reason of the plaintiff's failure; and

(d) The majority of the depositors were small investors (approximately 80 per cent of the investors held holdings of less than $15,000) many of whom were elderly and they were not in a position to provide funds."

68 The plaintiff has funds to provide security. Whether an order to provide security will have any impact on the future of this action (or the other actions) is not established by the evidence. Further, the plaintiff must prove that in practical commonsense terms it is unreasonable to expect the secured creditors of the plaintiff (or some of them) to contribute to the prosecution by the plaintiff of this action. It has not done so.

Whether the Inability of the Plaintiff to Meet a Costs Order Has Been Caused by the Conduct of the Defendants

69 This factor is closely linked with the merits of the plaintiff's claim particularly in relation to damages. That raises complex factual issues. I am unable at this stage of the proceedings on the evidence before me to conclude that the financial plight of the plaintiff was caused by the defendants' conduct the subject of the action.

Whether the Plaintiff in the Position of the Attacked

70 It is said by the plaintiff that as the defendants do no more than deny that their conduct as alleged by the plaintiff occurred, they are in substance the applicant for relief from that conduct by way of counterclaim and the plaintiff is in substance defending itself.

71 In my view, there is no substance to that submission. Security will only ordinarily be ordered against a party who is in substance a plaintiff and an order ought not be made against parties who are defending themselves and thus forced to litigate: Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 13 ACLC 437 at 440.

72 However, in this case the plaintiff is so in form and in substance. The counterclaim is in form and largely in effect a defence by way of set-off.

73 Having regard to all the circumstances, in particular the cash reserves of the plaintiff and the secured creditors standing behind it who will be the sole beneficiaries of the fruits of any success in the action, I propose to order that the plaintiff provide security for costs from February 2001 in the sum of $250,000.

74 I also propose to order that the plaintiff give discovery of the documents identified in par 1(b)(i), (iii) and (iv) of the defendants' summons dated 22 August 2001.

Geneva Finance Ltd (Receiver and Manager Appointed) v Boys & Ors [2001] WASC 348

At a glance

Court

Decision date

Before

Catchwords

Source