Practice and procedure - Application for security for costs against company - Requirement for "credible testimony" - Matters affecting exercise of discretion

Respondents (First Defendants) : Preuss Feinauer & Associates

Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; (1981) 148 CLR 170

Australian Co-operative Foods Ltd v Norco Co-operative Ltd [1999] NSWSC 274; (1999) 46 NSWLR 267

Blakney v JJ Savage & Sons Pty Ltd [1973] VicRp 37; [1973] VR 385

BPM Limited v HPM Ltd (1996) 14 ACLC 857

Carr v Finance Corporation of Australia Ltd (No 1) [1981] HCA 20; (1981) 147 CLR 246

Clark Equipment v Covcat Pty Ltd (1987) 71 ALR 367

Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1

Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 11 ACLC 511

Finborough Investments Pty Ltd v Airlie Beach Pty Ltd [1995] 1 Qd R 12

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

Gurfinkel v Bentley [1966] HCA 75; (1966) 116 CLR 98

Henjo Investments v Collins [1988] FCA 40; (1988) 79 ALR 83

Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120

Home Management Maintenance Pty Ltd v Doyle (1992) 107 FLR 225

Hope v RCA Photophone of Australia Pty Ltd [1937] HCA 90; (1937) 59 CLR 348

Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306

Johnson Matthey Ltd v AC Rochester Overseas Corporation (1990) 23 NSWLR 190

MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 1 ACLC 405

New Holland Mining NL v Weaver Oil & Gas Corporation Australia Ltd, unreported; SCt of WA (Wheeler J); Library No 980112; 12 March 1998

Norbis v Norbis [1986] HCA 17; (1986) 161 CLR 513

Perri v Coolangatta Investments Pty Ltd [1982] HCA 29; (1982) 149 CLR 537

Singh v Crafter, unreported; FCt SCt of WA; Library No 8434; 15 August 1990

Skywest Aviation Pty Ltd v Commonwealth of Australia (1995) 126 FLR 61

Snarski v Barbarich (1969) WAR 46

State Rail Authority of New South Wales v Heath Outdoor Pty Ltd (1986) 7 NSWLR 170

Walton Stores (Interstate) Ltd v Maher [1988] HCA 7; (1988) 164 CLR 387

Watson v Metropolitan (Perth) Passenger Transport Trust (1965) WAR 88

Whittet v State Bank of New South Wales (1991) 24 NSWLR 146

Wing Luck Foods v Lay Choo Lim [1989] WAR 358

1 JUDGMENT OF THE COURT: This matter came before the Court in the form of an appeal, but because the subject-matter of the appeal is an order of a Master of this Court dealing with interlocutory applications by the respondents the matter is to be dealt with as an application for leave to appeal.

2 For present purposes, it is unnecessary to refer to authority in respect of the approach this Court will take to such an application beyond referring to the principles which will generally be applied as set forth by this Court in WA v Bond Corporation Holding Ltd (1991) 5 WAR 40 per Malcolm CJ, with whom Rowland and Walsh JJ agreed at 54 - 7. Whilst the following were there held not to constitute rigid or exhaustive criteria for the exercise of the discretion to grant or refuse leave, it was held that generally the applicant must show both that the decision appealed from was wrong, or at least attended with sufficient doubt to justify the grant of leave, and, in addition, that substantial injustice would be done by leaving the decision unreversed. Those tests may be applied in this case.

3 The application to strike out the statement of claim on the various grounds specified in the Rules of the Supreme Court 1971, O 20 r 19, proceeded before the Master by consent in respect of a minute of a proposed amended statement of claim provided to the Court and defence counsel, but not filed, on the day of the application. Having regard to that proposed pleading, the Master noted that it would be pleaded that the respondents purchased four lots in Cloverdale as commercial premises to be leased. By an agreement in writing dated 13 March 1997, the plaintiff agreed to purchase the four lots. It was pleaded that a condition precedent to the purchase was that the four lots were leased for a certain term and rental. Particular oral representations said to have been made on behalf of the respondents to that effect were pleaded. It was said that the plaintiff was induced to make the purchase in reliance upon the representations so made, reinforced by showing to the applicant's representative written lease agreements in respect of three of the lots. It was pleaded that after settlement took place the applicant discovered the falsity of these representations, in one case as to whether there was an enforceable lease agreement at all and in the other case as to the rental which it was asserted was to be paid.

4 It was pleaded that the applicant sustained loss because it was receiving no rental income from the premises, could not sell them and had to maintain payments to a mortgagee who subsequently obtained judgment against the applicant and its principals, a husband and wife, who had guaranteed repayment of the mortgage. The mortgagee had commenced proceedings to wind up the applicant and bankrupt the guarantors.

5 The applicant sought a declaration that the respondents had by their conduct rescinded the agreement to purchase the land. Alternatively, the applicant sought to avoid the contract pursuant to the _Trade Practices Act (Cth)_or the Fair Trading Act (WA) and the applicant sued for damages for fraudulent misrepresentation, negligence and misleading or deceptive conduct.

6 The Master held that to merely plead in par 20 and par 21 of the proposed statement of claim that subsequent to settlement the applicant discovered that the representations to which we have referred were false and therefore the relevant conditions of the agreement to purchase which required that the lots were leased on certain terms were not satisfied did not properly support that conclusion. Further, the Master thought that the pleading suffered from the difficulty that in the case of the majority of the lots it was said that although the appropriate lease agreements had been entered into, that had been upon the respondents' assurance that the rental which would, in fact, be accepted would be dependent upon the commercial return of the business being carried out upon the premises. The Master pointed out that to accept rent on this basis was, on its face, at odds with the written agreement and did not support the plaintiff's case.

7 Problems of that kind, the Master thought, led the proposed pleading to inevitable collapse in that the pleading of the various causes of action was not supported by the way in which the facts had been pleaded. That was not to say that the applicant may not have had good claims for fraudulent misrepresentation under the Trade Practices Act or the Fair Trading Act and in negligence, but the Master concluded that the way in which the pleading was framed failed to properly raise those causes of action.

8 For the applicant, it is argued that the pleading might give rise to an equitable estoppel against the respondents, notwithstanding inconsistency with the lease. With respect, in our view, that misses the point, which was that the causes of action relied upon in the way they were pleaded and particularised were not supported by the pleaded facts. Further, at the centre of the case was the proposition that the applicant was entitled to rescind the agreement to purchase because of events which occurred after it had been entered into which were said to affect the respondents' compliance with conditions precedent as to the leasing of the premises. The way in which the pleading tied in alleged oral representations in some fashion as modifying the written agreement to purchase was held by the Master to be legally untenable. The effect of the pleading was to assert that in relation to three out of the four lots the written lease agreement was modified by oral representations, which, as the Master said, relying on Hoyt's Pty Ltd v Spencer [1919] HCA 64; (1991) 27 CLR 133 could not, as a matter of law, be the case.

9 We have not felt it necessary in these reasons to go in detail to the pleading or the debate about its adequacy. In our respectful opinion, the decision of the learned Master was not arguably wrong and leave to appeal it is not justified. In any event, although the Master struck out the statement of claim and refused leave to amend it in terms of the minute of amended statement of claim, he granted leave to file and serve a new statement of claim, raising in appropriate terms such causes of action as the applicant might consider it had against the background of appropriately pleaded facts. The Master's decision was not that the applicant's proposed case was necessarily fundamentally flawed, but that the statement of claim as a whole did not present the case in terms which raised clear issues maintainable in law to which the defendants in their turn might plead. Those circumstances, in our opinion, reinforce our view that leave to appeal against this decision of the Master should not be granted because to maintain his order in place will not occasion substantial injustice to the applicant.

10 We turn, then, to the question of the grant of leave to appeal from the decision of the Master in respect of the application made by the respondents pursuant to the Corporations Law s 1335 for the applicant to give security for costs. The Master ordered that the action be stayed unless and until the applicant paid into court the sum of $20,000 by way of security for the respondents' costs. Section 1335 confers a discretion upon the Court where a corporation is a plaintiff, to grant a stay of proceedings pending the provision of sufficient security for the costs of the defendant "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". The Master correctly directed himself that the section involves a two-stage process. The first is described as answering the threshold or jurisdictional question whether it appeared by credible testimony that there was reason to believe that the corporation would ultimately be unable to pay the costs of a successful defendant. The second stage in the process, if that question was answered affirmatively, is to exercise a general and unfettered discretion whether or not to make an order and, if so, how much security is to be provided and in what form. The Master regarded the onus as being upon the respondents to establish the threshold question. That would appear to put the matter too high following the decision of the Full Court in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; 22 March 2000. But the threshold was crossed and, as the Master put it, it was not seriously contested by the applicant that it would be unable, in due course, to meet any costs order which may be made against it.

11 That issue is not raised by the grounds of appeal which assert that the Master erred in the exercise of his discretion in respect of his asserted incapacity to draw any conclusion as to the strength of the applicant's claims, in finding that any personal guarantees to be offered by the directors of the applicant would be of limited value and in his conclusion that to make an order requiring the applicant to provide security for costs would not stultify the action.

12 It is not therefore asserted that the Master overlooked relevant considerations in considering the exercise of his discretion. As to the question of the strength of the applicant's claims, the Master summarised the case in the following way:

"The [respondents] were the owners of four commercial lots. The [applicant] contracted to purchase those lots on the condition that they were all leased. Written leases were shown to the [applicant] which led it to believe that the conditions in the contract had been satisfied. The [applicant] says, the first defendants had come to an agreement with the lessees that no rent would be payable for a period of time. That fact was not disclosed to the [applicant]. The [applicant] says it was misled and has suffered loss and damage."

13 The Master concluded on the materials before him that the applicant may well have a case which, properly pleaded, the respondents would have to answer, but he thought the position could be put no higher than that and, therefore, he concluded that consideration of the merits of the applicant's claim did not assist him as to how the discretion should be exercised. In our opinion, that is not an unfair view in the circumstances. The strength of the applicant's foreshadowed case would, it would seem, be a matter which could not adequately be tested until the consideration of viva voce evidence at a trial. We do not see that it can be said that upon affidavit evidence untested and unanswered, the Master erred in not concluding that the applicant's case was of such strength that the capacity to present it should not be put at risk by ordering security for costs.

14 The other aspect upon which the applicant principally relied below as affecting the exercise of discretion was whether an order for security for costs would stultify the action. The Master discussed the evidence in respect of this issue at some length. He is not said to have erred in his consideration of this material, including his reference to the statutory demand made by the mortgagee to who we have previously referred. The sum involved was an amount in excess of $360,000 said to comprise a judgment obtained in the Supreme Court, together with interest. It was clear, the Master concluded, that the applicant would not be able to meet the statutory demand. It was, therefore, relevantly insolvent and the Master had regard to the question whether the mortgagee who would benefit from the applicant being able to successful pursue the litigation might be expected to provide the security.

15 The Master said there was no direct evidence about this issue and in that regard he was correct. For the applicant, it is contended that further affidavit evidence which it sought to provide the Master would have further illuminated this question. The Master would not accept any further such material. He detailed the history which showed that the applicant had had ample opportunity in that regard. This affidavit was sought to be tendered after the hearing, informally, by letter. Originally, the affidavit had been sought to be tendered unsworn at the hearing on 10 February 2000. The affidavit in question was not sworn until 14 February. The Master gave his reasons for judgment on 22 February.

16 The affidavit undoubtedly related to relevant matters, but that was not to the point. The Master's view was that there had been ample opportunity for the applicant to present its case in opposition to the respondents' applications in a timely way. In this case, the principles of effective case management, in our opinion, coincided with the object of securing the ventilation of the matters at issue which was fair to both sides, including the respondents. It was not as if the matters raised in the affidavit were novel or arose ex improviso. They provided further evidence in respect of issues which had been debated at the hearing. We are unable to conclude that the Master erred in refusing the informal application to reopen the case which was opposed by the respondents.

17 Another issue debated before the Master in respect of the discretion to require security for costs was that the directors of the applicant had offered to provide personal undertakings to the respondents in relation to the costs which the applicant might incur. The Master discussed the evidence in respect of their financial position. They had personal assets, but the mortgagee in pursuance of the guarantees personally offered in respect of the loan provided to the applicant had issued bankruptcy notices. The Master thought it evident that if the applicant could not meet the statutory demand made by the mortgagee, as appeared unarguably to be the case, liability would fall upon the directors in respect of their personal guarantees and he considered that the affidavit evidence revealed they would not be in a position to meet the full amount of the debt, even taking into account their equity in their home. He concluded that, in those circumstances, "any personal guarantees they might offer are of limited value". In our respectful view, there was evidence to support this conclusion and the Master cannot be said to have erred in reaching it.

18 In those circumstances, the order for security was made, the Master expressing his conclusion that:

"I am satisfied that I ought to exercise my discretion and grant an order for security for costs in this case. The [respondents] have established that the [applicant] will be unable to meet any costs order and I am not satisfied there are any discretionary factors which mitigate against the making of an order. Rather, taking into account all the evidence, I am satisfied the balance favours the making of an order."

19 To succeed on this aspect of the application for leave, the applicant must establish that in respect of the various aspects bearing upon the exercise of the discretion considered by the learned Master, he was at least arguably wrong. That would necessitate persuading this Court to the view that it was at least arguably the case that, in the circumstances demonstrated by the evidence before the Master, it was not reasonably open to him to exercise his discretion as he did. In our opinion, it has not been established that in his discretionary judgment upon this aspect of the case the Master's decision was attended by sufficient doubt to warrant the intervention of this Court. In our view, leave to appeal should be refused in this case.