LIVESTOCK SHIPPING SERVICES PTY LTD (ACN 084 806 404)

LIVESTOCK SHIPPING SERVICES PTY LTD (ACN 804 806 404)

Practice and procedure - Security for costs - Delay - Common factual issues arising in claim and counterclaim - Turns on own facts

Corporations Act 2001 (Cth), s 1335

Alpine Holdings Pty Ltd v Warwick Entertainment Pty Ltd, unreported; SCt of WA; Library No 980395; 13 July 1998

Black v Brockley Investments Ltd, unreported; FCt SCt of WA; Library No 930039; 16 December 1992

Cabinets Pty Ltd v Sampas Pty Ltd (1997) 25 ACSR 623

Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd [1984] FCA 65; (1984) 2 ACLC 286

Chellaram & Co Ltd v China Ocean Shipping Co [1991] HCA 36; (1991) 102 ALR 321

Clyde Industries Ltd V Ryan Engineering Pty Ltd, unreported; SCt of WA; Library No 920270; 11 March 1992

Crestland Investments Pty Ltd v Parisi Holdings Pty Ltd [2003] WASC 181

Crypta Fuels Pty Ltd v Svelte Corp Pty Ltd 91995) 19 ACSR 71

Deltrend Pty Ltd v AST Australia Pty Ltd (1995) 16 ACSR 762

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

Espanol Holdings Pty Ltd v Banning [1999] WASC 49

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69

Gathercole v Smith (1881) 7 QBD 626

Health and Life Care Ltd v Price Waterhouse, unreported; SCt of SA; 13 August 1993

Idoport Pty Ltd v National Australia Bank [2000] NSWSC 63

Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440

Indaba Pty Ltd v McVeigh [2000] WASCA 332

Interwest Ltd v Tri Continental Corporation Ltd (1991) 5 ACSR 621

M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97

Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364

Motest Pty Ltd v Burns Corporation Pty Ltd, unreported; SCt of WA; Library No 9780; 26 March 1991

Owners/Strata Plan No 50 530 v Wolta Construction Group Ltd [2001] NSWSC 820

Parle Foods Pty Ltd v McClunie Birch Ltd [2003] NSWSC 180

Porzelack KG v Porzelack (UK) Ltd [1987] 1 All ER 1074

Procon (Great Britain) Ltd v Provincial Building Co Ltd [1984] 2 All ER 368

Ravi Nominees Pty Ltd v Phillips Fox (1992) 10 ACLC 1313

Rickard v Bonacci [2000] NSWSC 1124

Right Home Improvements International Pty Ltd v Imperial Alarm Screens (Aust) Pty Ltd (1986) ATPR 40¬641

Sarac v Croatian House Hrvatski Dom (Inc), unreported; FCt SCt of WA; Library No 950675; 12 December 1995

Somersall Investments Ltd v Pinnacle VRB [2001] VSC 283

Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114

Spargos Mining NL v Fuller [2003] WASC 37

Tune Masters Pty Ltd (In Liq) v Sectem Pty Ltd, unreported; SCt of WA; Library No 970267; 23 May 1997

WH Humphries Nominees Pty Ltd v Commissioner of Main Roads (1991) 4 ACSR 729

Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542

1 MASTER NEWNES: This is an application by the defendants for an order for security for costs. The application is expressed as being made under s 1335 of the Corporations Act 2001 (Cth) and the inherent jurisdiction of the Court. In respect of the third plaintiff, however, it was argued under O 25 of the Rules of the Supreme Court and I will treat the application in respect of the third plaintiff on that basis.

2 The action arises out of various dealings between the plaintiffs and the defendants in relation to the export of livestock from Australia. The first plaintiff makes no claims in the action and is effectively playing no part in it. The second plaintiff is described in the statement of claim as "a business vehicle" used by the first-named third plaintiff ("Mr Carpenter") to contract his services as a livestock consultant. The third plaintiff is a partnership between Mr Carpenter and his wife. The partnership conducts a family business under the name "North Farming".

3 The first defendant carries on business as an exporter of livestock to international markets, and the second defendant provides administrative and other services to the first defendant.

4 According to the statement of claim, Mr Carpenter was a director of the first defendant from about October 1998 until February 2002. He also provided consultancy services to the second defendant, under an agreement made between the second defendant and the second plaintiff. The second plaintiff says that it was entitled to an annual fee, a monthly fee and reimbursement of expenses for those consultancy services. It claims that Mr Carpenter's consultancy services were provided from 12 February 1998 to 11 February 2002, but that the second defendant has failed to pay to it moneys due under the consultancy agreement for the period 12 February 2001 to 11 February 2002. The second plaintiff claims an amount of some $104,000.

5 The second plaintiff also claims that it entered into a second consultancy agreement in August 2001 for the provision of the services of a Mr Walling to the second defendant and that the second plaintiff is owed an amount of $2420 under that agreement.

6 There is also a claim by the second plaintiff against the first defendant. It is alleged that, in about 2001, a representative of the first defendant arranged for Elders Ltd to purchase on the first defendant's behalf some 751 head of cattle for a total price of $371,475. It is alleged Elders would not agree to debit the purchase price to the first defendant's trading account with Elders, as the amount involved would put the account beyond its credit limit. To enable the transaction to proceed, Mr Carpenter agreed with the first defendant that the purchase price would be debited to the second plaintiff's trading account with Elders. Under the arrangement, by 1 February 2000 the first defendant was to pay to the second plaintiff the full amount of the purchase price of the cattle, plus all expenses charged by Elders and, in addition, a transaction fee of $15 per head of cattle.

7 The second plaintiff alleges that the first defendant has paid only an amount of $143,547.50 and that, with fees and charges, an amount of $320,190.75 remains due and payable.

8 It is also alleged that, as a result of the first defendant's failure to pay the outstanding amount, the second plaintiff has not been able to utilise its credit facility with Elders to its full extent, with the result that it has lost profits it would otherwise have been able to make from livestock trading.

9 The third plaintiff's claim relates to livestock it says it has supplied to the first defendant and for which it has not been paid. The livestock is alleged to consist of 206 wethers supplied in January 2002 at a price of $14,452.74, 1212 rams and ewes supplied in January 2002 at a price of $83,070.48 and 684 long tail rams supplied in January 2002 at a price of $48,762. The third plaintiff also says it purchased goods for the maintenance and upkeep of sheep owned by the first defendant in a total amount of $16,630.39. The third plaintiff claims an amount in the order of $162,000 against the first defendant.

10 The defendants deny the plaintiffs' claims. The defendants admit that Mr Carpenter was a director of the defendants and that the first defendant entered into a consultancy agreement with the second plaintiff for the provision of Mr Carpenter's services. The defendants allege that the consultancy agreement, and Mr Carpenter's appointment as a director of the defendants, came about after he represented to the defendants that he was not involved in dealings in livestock or in the livestock export trade and that**,** during the term of the consultancy agreement, he would not engage in such activities on his own behalf but only on behalf of the defendants.

11 The defendants say that under the consultancy agreement, among other things, Mr Carpenter was to source, buy and sell livestock on the defendants' behalf and generally to supervise and co-ordinate the defendants' business activities in Australia. The defendants say it was a term of the agreement that Mr Carpenter would provide services as general manager and livestock consultant to the defendants exclusively, would not engage, directly or indirectly, in competition with the business of the defendants, would avoid any conflict between his interests, and those of entities associated with him, and the interests of the defendants, and would generally serve the defendants with fidelity and good faith.

12 The defendants plead that, from about February 2001, Mr Carpenter, through the other plaintiffs, engaged in a livestock business or a livestock export business, in competition with the defendants and without their knowledge. It is also alleged that, from about February 2001 to February 2002, Mr Carpenter, or one or other of the other plaintiffs, supplied livestock to the defendants without disclosing Mr Carpenter's interest. In particular, it is alleged that 24,286 head of inferior grade sheep were so supplied, that 3891 inferior grade ewes were so supplied at an excessive price for the quality of the ewes and that, in February 2002, Mr Carpenter purported to purchase 751 head of cattle for the defendants, but that the arrangement was a sham contract intended to provide a secret profit to Mr Carpenter, or one of the entities with which he was associated.

13 It is also alleged that one or other of the plaintiffs converted to their own use some 6000 to 7000 ewes, 131 bales of wool and certain fodder owned by the defendants, and that the plaintiffs have diverted business opportunities from the defendants to the plaintiffs and have made secret commissions on the purchase of livestock for the defendants. A variety of other allegations of, among other things, breach of duty and negligence in relation to the conduct of Mr Carpenter, and the trading activities of the plaintiffs, are also made by the defendants.

14 The defendants have counterclaimed, in respect of those various allegations, a total amount of $3,360,847, in addition to other relief. They also seek to set off the amount counterclaimed against any amount for which they may be found liable to any of the plaintiffs.

15 The proceedings were commenced by the plaintiffs in May 2002. Since then, a number of substantial interlocutory steps have been taken. It appears that the matter is approaching the point at which it will be ready to be entered for trial.

16 The application for security for costs was made on 11 August 2003. In explanation of the delay, the defendants relied on an affidavit of the plaintiffs' solicitor, Mr Cocks, filed in support of the application. In that affidavit Mr Cocks says, in effect, that the application has been brought at this stage because it appears that the plaintiffs' financial position has recently deteriorated and it now appears that they will not be in a position to meet any order for costs that might be made against them.

17 Mr Cocks refers to an affidavit of Mr Carpenter of 2 May 2002, sworn in connection with an application made at that time by the first plaintiff for an interlocutory injunction. At that stage, the second and third plaintiffs were not parties to the proceedings, but they were joined very shortly afterwards. In his affidavit, Mr Carpenter said that the first plaintiff had "minimal assets" and that he had net assets of some $272,000. The major part of those assets consisted of a half-share in a property in Upper Swan, the value of his half-share being said to be $125,000, and a half-share in some livestock, the value of his share being said to be $160,000. The only liabilities to which he referred were under a mortgage to the ANZ Bank in an amount of $29,000 and an amount of $4000 for credit cards.

18 Mr Cocks then refers to an affidavit of Mr Carpenter sworn 28 July 2003 in support of an application by the plaintiffs to have the action entered on the Expedited List. In that affidavit, Mr Carpenter said that a demand had recently been made of the second plaintiff by Elders for payment of an amount of $348,487.84 due under the finance facility referred to in the second plaintiff's claim in this action in respect of the 751 head of cattle. Mr Carpenter said that the plaintiffs sought expedition of the action because the plaintiffs were unable to pay the debt and the further legal costs of this action. Mr Carpenter went on to depose to the financial position of the plaintiffs. He said that the first plaintiff has no assets. The second plaintiff has assets of $25,000. The third plaintiff has a house valued at $240,000 to $280,000 and 14,000 sheep. It also appears that, at that stage, the third plaintiff owed an amount of approximately $350,000 to Wesfarmers, which holds security over the house, the sheep and any wool. It appears that, under the security documents, the third plaintiff is required to have on hand sheep to twice the value of the debt to Wesfarmers.

19 Mr Cocks says that it appeared from Mr Carpenter's affidavit of 28 July 2003 that the plaintiffs' financial position had changed substantially for the worse since May 2002. As a result, Mr Cocks caused land title searches to be made. They revealed that neither the first nor third plaintiff has any real property in the State and that Mr Carpenter has only an interest in his home in Upper Swan.

20 It emerged from an affidavit filed on behalf of the plaintiffs on the morning of the hearing of the application that Mr Carpenter also has an amount in the order of $100,000 in an overseas bank account and that the third plaintiff has additional debts of some $210,000 to various agricultural suppliers. Counsel for the plaintiffs told me from the bar table that the third plaintiff's current debt to Wesfarmers is in the order of $432,000 and that the 14,000 sheep are valued at between $800,000 and $850,000.

21 The application for security for costs is opposed by the plaintiffs. It is clear that the first plaintiff makes no claim in the action and will play no effective part in it. I do not consider that, in those circumstances, any question of security for costs arises in respect of it.

22 It is necessary to deal with the second plaintiff and the third plaintiff separately, because of the different considerations that apply to each. I will turn first, then, to the second plaintiff.

23 The first ground upon which the application is opposed by the second plaintiff is that of delay. The defendants say there has been no relevant delay, because they were not aware of the defendants' parlous financial position until Mr Carpenter's affidavit of 28 July 2003. That, however, does not appear to be borne out by the evidence. In a letter from the defendants' solicitors to the plaintiffs' solicitors of 20 February 2003, the defendants' solicitors said:

"Your client has already conceded that he is virtually impecunious in the injunction proceedings and we believe the same applies to the other plaintiffs."

24 They then went on a little later in the letter to say:

"Given the indications received from your client as to the lack of success of [the first plaintiff's] trading, we have the reasonable belief that it is impecunious, and in the circumstances request security for costs. In principle, please advise whether your client will agree to this and we shall then prepare a skeleton Bill of Costs. The same applies for Ourimbah Holdings Pty Ltd."

25 The plaintiffs' solicitors responded by letter 24 February 2003, in which they said they were taking instructions on the various matters raised in the letter of 20 February 2003 and, in relation to the issue of security for costs, requested the defendants' solicitors to provide a draft bill of costs. The defendants' solicitors wrote again on 27 February 2003 and, among other things, said that they awaited the defendants' draft bill of costs, following receipt of which they would provide a substantive response on the issue of security for costs. I should say that Mr Cocks deposes to not having seen the letter of 27 February 2003 before a copy was produced on this application, but it is not suggested that the defendants' solicitors did not receive the letter of 24 February 2003.

26 It appears nothing further was done by the defendants' solicitors in relation to security for costs until early August 2003, when the matter was taken up again. At that time, the defendants' solicitors provided the plaintiffs' solicitors with a draft bill of costs in a total sum of $233,847. The issue could not be resolved between the parties and this application was made on 11 August 2003.

27 It is significant that there is no evidence of any material change in the second plaintiff's financial circumstances since it became a party to the action in June 2002. What the defendants refer to as the justification for the late application is what is said to be the change in the financial position of Mr Carpenter.

28 It is well established that an application for security for costs must be made promptly: McLaughlin v Daily Telegraph Newspaper Co Ltd & Anor [1904] HCA 5; (1904) 1 CLR 143; Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1. The further a plaintiff has proceeded in an action and the greater the costs the plaintiff has been allowed to incur without steps being taken to apply for an order for security for costs, the more difficult it will be for the defendant to persuade the Court that such an order is not, in the circumstances, unfair or oppressive: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497 at 514; Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 at 309. The need for such an application, which could have a substantial effect on the litigation, to be made promptly is reinforced by O 1 r 4A and 4B.

29 Mr Carpenter, in his affidavit of 28 July 2003, says that he has incurred legal costs of approximately $191,000 since 9 May 2002 and some $72,000 since 27 February 2003. Although Mr Carpenter says he has incurred the costs, I think it is properly to be inferred that the costs have been incurred by both the second and third plaintiffs.

30 In my view, there has been excessive delay by the plaintiffs in making this application. As I have said, there is no evidence that the financial position of the second plaintiff has changed over the duration of the action. There is no explanation as to why relevant enquiries as to its financial position could not have been made, and the issue raised with the second plaintiff's solicitors, much earlier than occurred or why, after the issue was raised in February 2003, it was not followed up for some six months.

31 I accept, however, that delay is not of itself necessarily decisive and that it must be considered in the light of all of the circumstances of the case.

32 It is also contended by the second plaintiff that an order for security would stultify its action because it simply does not have the capacity to provide security for costs. It is, however, established that security will not be refused on that ground unless those who stand behind the company also lack the means to provide appropriate security.

33 In Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 2 FCR 1, the Full Court of the Federal Court said:

"In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts."

See also Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1 at 3; BPM Pty Ltd v HPM Pty Ltd, unreported; FCt SCt of WA; Library No 960206; 17 April 1996 at 12.

34 Mr and Mrs Carpenter are the only shareholders and directors of the second plaintiff. The present state of their financial affairs is not entirely clear from the affidavits but, even allowing for that uncertainty, it appears from Mr Carpenter's affidavit of 26 July 2003, to which I have referred, that they have significant assets and are carrying on a substantial farming or livestock business. On the basis of the evidence in that affidavit as to their current financial position, I am not satisfied that an order for security for costs would stultify the second plaintiff's claim.

35 The plaintiffs also say that the merits of the action are strongly in their favour and that this is an important consideration on an application for security for costs. I do not, however, consider that this is a case where any reliable view of the merits can be formed at this stage. The defendants deny any liability to the plaintiffs and they plead a substantial setoff. The claims are factually detailed and relatively complex and, in my view, the appropriate conclusion, in the circumstances, can go no further than that the plaintiffs' claims, and indeed the defendants' claims, are reasonably arguable. It is not a factor that weighs one way or the other in the balance.

36 The plaintiffs also contend that it is an important consideration militating against an order for security for costs that the counterclaim covers substantially the same factual ground as the claim. In Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289, Smart J noted (at 300) that a factor relevant to the exercise of the discretion to award security for costs was:

"[w]hether substantially the same facts are likely to be canvassed in determining the action and the cross action. The court will be slow to allow a situation where the action is stayed because of the inability to provide security but the cross action covering substantially the same factual area proceeds."

See also Concrete Constructions v Dalma Formwork [1999] NSWCA 16.

37 It is clear that there is some overlap between the plaintiffs' claims and the defendants' counterclaims, but it is not easy to identify from the pleadings precisely the extent of the common ground. The second plaintiff's claim for $320,000 in respect of the 751 head of cattle is met by a counterclaim of $184,000 by the second defendant in respect of that transaction. There also appears to be some common ground factually between the second plaintiff's claims under the consultancy agreement and the second defendant's claims that the second plaintiff was in breach of the covenants of that agreement and thereby caused damage to the second defendant's export trade. Beyond that, the position is not entirely clear. I accept, however, that even the extent of the overlap that is apparent from the pleadings militates against security for costs being ordered.

38 Finally, the third plaintiff says that it has offered, and remains prepared, to provide personal undertakings in relation to any costs order made against the second plaintiff and, in the light of that, it would be inappropriate to order the second plaintiff to provide security for costs.

39 The question, then, is whether, in the light of those matters, security should be ordered. As I have said, the application has been made late in the day. I do not find the explanation that has been given for the delay to be persuasive. It is also clear that substantial costs have been incurred by or on behalf of the second plaintiff in these proceedings to date. Moreover, there appears to be a good deal of common ground between the claim of the second plaintiff and the second defendant's counterclaim, although on the pleadings it is very difficult to discern precisely the extent of that overlap.

40 On balance, I would not be prepared to order the second plaintiff to provide security for costs, on the basis that the third plaintiff, that is, Mr and Mrs Carpenter, furnish the personal undertakings that have been proffered.

41 I turn now to the position of the third plaintiff. Different considerations arise under O 25 of the Rules. In particular, where the plaintiff is a natural person, an order for costs will not be made simply on the basis that the plaintiff is impecunious, although that is a factor to be weighed in the balance.

42 Although on this application it appeared to be assumed by both sides that the third plaintiff would not be in a position to meet any order for costs made against it, I should say that on the rather limited information before me as to its assets and liabilities, and in the absence of any information about the partnership income, it is not apparent that that is necessarily the case, much less that the third plaintiff is impecunious. On the information that is available, the third plaintiff would appear to have significant net assets, although I accept that, for the time being, there may be problems associated with realising any substantial value through the sale of sheep, because that is likely to trigger the obligation under the Wesfarmers securities to repay the entirety of the Wesfarmers debt, and that, in turn, could lead to difficulties in maintaining the business and earning an income.

43 In any event, I do not consider that this is an appropriate case for an order for security for costs to be made against the third plaintiff. It is, in my view, a factor of considerable weight, militating against ordering security, that this application has been brought so late in the proceedings. The matter is now well advanced and substantial costs have been incurred by the third plaintiff. For the reasons I have set out previously, I do not find the plaintiffs' explanation for the delay in bringing the application persuasive. It appears from their solicitor's letter of 20 February 2003, that from the time of the injunction proceedings in May 2002 the defendants had held the belief that the third plaintiff was not in a position to meet any order for costs that might be made against it in the action. In addition, no steps were taken by the defendants from February 2003, when the issue of security for costs was first raised, until about August 2003, over which time further significant costs were incurred by the third plaintiff. It is also the case that the circumstances in which the third plaintiff supplied livestock to the defendants, and issues as to the quality of, and price for which, the livestock was supplied, lie at the heart of the defendants' counterclaims. On the material before me, it is difficult, if not impossible, to disentangle the third plaintiff's claims and the defendants' counterclaims in that respect.

44 I would therefore dismiss the application for security for costs so far as it relates to the third plaintiff.

45 I will hear the parties on the appropriate form of orders and costs.