Alliance Multimedia v Pugh & Lawrence, unreported; FCt SCt of WA; Library No 970568; 21 October 1997

Blakney v Savage [1973] VicRp 37; [1973] VR 385

Erolen v Baulkham Hills Shire Council (1993) 10 ACSR 441

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

Laundry Coin Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584

MA Productions Pty Ltd v Austrama Television Pty Ltd (1983) 7 ACLR 97

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

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

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

1 MASTER SANDERSON: This was the hearing of two chamber summons brought by the first defendants. The first application in time was an application to strike out the plaintiff's statement of claim. The second application was an application for security for costs. During his submissions, counsel for the first defendant dealt first with the application for security for costs then with the strike out application. I have found it more convenient in these reasons to deal first with the strike out application and then with the application for security for costs.

2 On the morning of the hearing counsel for the plaintiff tendered a minute of amended statement of claim. This minute had not been filed and had only been provided to counsel for the first defendant shortly before the hearing. Counsel indicated he was prepared to deal with the application to strike out on the basis of the minute. However, there was one issue not contained in the earlier pleading that he was not in a position to address. I indicated that I would allow counsel to file further submissions in relation to this specific matter. In fact counsel subsequently provided a list of cases dealing with issues he had raised during the course of his submissions.

3 The first four paragraphs of the minute identified the parties. By par 5 it is pleaded that in April 1996 the first defendants became the registered proprietors of Lots 1, 3, 4 and 5 Belgravia Street, Cloverdale. Paragraph 6 pleads that all four lots were commercial premises which the first defendant acquired for the purpose of leasing. Paragraph 7 pleads that, by agreement in writing dated 13 March 1997, the plaintiff agreed to purchase all four lots from the first defendant. It is further pleaded that this agreement was subject to a number of conditions, including that each of the lots was leased for a certain term at a certain rental. Paragraph 8 deals with the actual rental position with respect to each of the lots. Paragraphs 9 and 10 deal with other parties to the proceedings and are not presently of concern. Paragraph 11 is of importance in the context of this application. It reads as follows:

"11. Prior to execution of the Agreement and in or about early March 1997 the Second Defendant made oral representations to Barry Scofield, who repeated the representation to Kevan Best on behalf of the Plaintiff, that:

11.1 Lots 3, 4 and 5 were leased by Leece and May for a term of 5 years at a rental of $30,000 per annum.

11.2 Lot 1 was leased for a term of 3 years at a rental of $16,000 per annum with 4 options for renewal each for a further terms of 3 years.

11.3 the leases of Lots 1, 3, 4 and 5 were legally enforceable."

4 Paragraph 12 through to par 16 deal with questions of inducement and reliance in relation to representations pleaded in par 11. Although necessary in the context of the pleading, they are not the subject of this application. It is part of the plea that written lease agreements between the first defendant and Leece and May (who were the lessees of Lots 3, 4 and 5) were shown to the plaintiff. Paragraph 17.2 then pleads that, as a consequence of the first defendants showing the written leases to the plaintiff, it was represented by implication that Leece and May had paid rent in accordance with the terms of the written lease. In my view, that plea cannot be sustained. If one party shows to another a written lease document purportedly signed by a lessee, there is a clear representation that the premises are leased to the named lessee on the terms and conditions contained in the written document. But without more, there is no representation that the lessee has complied with all of the terms of the lease. Paragraph 17.2 should be struck out.

5 Paragraphs 18 and 19 deal with the second and third defendants and are not presently relevant. Paragraph 20 is central to the defendants' application. It reads as follows (in its amended form, leaving out what has been amended):

"20. Subsequent to settlement and on or about 7 June 1997 the Plaintiff discovered that the representations referred to in paragraphs 11.1, 11.3, 17 and 18 were false. As a result of the falsity of the representations Condition 5 of the Agreement was not satisfied in that Lots 3, 4 and 5 were not leased on terms acceptable to the Plaintiff.

20.1 The agreement between Leece and May and the First Defendants in relation to the lease of Lots 3, 4 and 5 was not fully comprised in the Written Lease and included an oral term.

20.2 Although the Written Lease provided for a term of five years at a rental of $30,000 per annum the agreement referred to in paragraph 20.1 included an oral term made between James McVeigh on behalf of the First Defendants and Leece and May that the rent payable would be determined by the performance of the video store.

20.3 Leece and May executed the written lease, commenced trading and incurred expense in reliance upon an oral assurance from Mr McVeigh that the rental payable would be determined by the performance of the video store.

20.4 During the period approximately August 1996 until the settlement date of 5 June 1997 Leece and May, with the concurrence of the First Defendants, paid a total rent of approximately $1,350 only."

6 To put this paragraph in context, it is necessary to refer to the offer and acceptance entered into by the parties (Annexure "JCM" to affidavit of James Gerad McVeigh sworn 23 December 1999). It was subject to the following two clauses (5 and 6):

"5. This Offer and Acceptance is subject to Lots 3, 4 and 5 being leased on a five year lease for $30,000 per annum on terms acceptable to the purchaser.

6. This Offer and Acceptance is subject to Lot 1 being leased on a three year lease with four options each of three years at a yearly rental of $16,000 on similar terms and conditions as per the lease on Lots 3, 4 and 5 with a personal guarantee by the vendor."

7 The pleading in par 20 is predicated on the basis that special conditions 5 and 6 were conditions subsequent. That is to say the plaintiff's case is that if, at some time after settlement, the plaintiff found that the lease arrangements on the lots was not as set out in special conditions 5 and 6 the contract could be terminated. With respect, that seems to me to misunderstand the nature of the two conditions. They are clearly conditions precedent to the contract between the plaintiff and the first defendant becoming binding and enforceable. The fact that the plaintiff settled the transaction indicates either that it waived compliance with the requirements of par 5 and/or par 6 or that it was satisfied there had been compliance with each of the two clauses. Either way, the matter cannot be pleaded as it is presently pleaded in par 20.

8 There is a further difficulty. The particulars in par 20.1, par 20.2 and par 20.3 cannot support the plea in par 20. It is pleaded that Leece and May entered into a written lease. It is then pleaded that there was a further collateral agreement between the first defendant and Leece and May which was directly at odds with the terms of the written agreement. As a matter of law, that cannot be the case: see Hoyt's Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133. As to the particulars in par 20.4, they relate to the plea that showing to the plaintiff the written lease agreement was a representation that the rent had in fact been paid. As I have said, I am not satisfied that the plea as to the representation can stand and therefore the particulars in par 20.4 cannot stand. Once these deficiencies in the minute are acknowledged then par 21, par 23, par 27 and par 34 are untenable. Furthermore, the claims of fraud and misrepresentation contained in par 22 through to par 29 seem to me to suffer from the same problems with respect to the representations. Although these paragraphs were not the subject of specific submissions by counsel for the first defendant, it follows that if par 11 and par 17 are struck out these paragraphs would all need to be repleaded. Much the same can be said of the claim brought under the Trade Practices Act. In my view, leave to amend in terms of the minute of amended statement of claim should be refused. I will grant leave to replead and I will hear the parties as to the precise form of the orders.

9 Turning then to the application for security for costs, the application was brought under the provisions of s 1335 of the Corporations Law. That section reads as follows:

"(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

10 An application brought under this section requires a two-stage process. First, the applicant must establish by credible testimony that the respondent will be unable to meet a costs order when called upon to do so. If, and only if this test is satisfied, then the court may exercise its discretion and order that security be provided. The onus is on the applicant to establish that the respondent will not be able to meet the costs order: see Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241; Second Lenbourne Pty Ltd v Beagle Management Pty Ltd (1999) FCA 486. In this case it was not seriously contested by the respondent that it would be unable to meet any costs order which was made against it. However, the respondent submitted that in the circumstances of this case no order for security ought be made in the exercise of the court's discretion.

11 Counsel for the respondent submitted that there were a number of discretionary factors which, when properly considered, mitigated against ordering security. First, it was submitted that the respondent had a strong bona fide case against the defendants. Given that I have determined the statement of claim in this matter should be struck out, it is very difficult to assess the strength or otherwise of the respondent's claim. However, it is necessary to make some assessment of the intrinsic merit of the claim, leaving to one side the difficulties with the present pleading: see BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857 per Anderson J at 860. The nature of the plaintiff's claim has emerged from my dealing with the strike out application. However, for present purposes, it can be summarised in the following way: The first defendants were the owners of four commercial lots. The plaintiff contracted to purchase those lots on the condition that they were all leased. Written leases were shown to the plaintiff which led it to believe that the conditions in the contract had been satisfied. The plaintiff 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 plaintiff. The plaintiff says it was misled and has suffered loss and damage.

12 In opposition to the application for security for costs, the plaintiff filed an affidavit of Kevan Best, sworn 21 January 2000. Paragraph 13 of that affidavit reads as follows:

"13. Robert Leece and Julie May also told me that James McVeigh had agreed to give them $15,000 which they were to use to pay rent to the Plaintiff after settlement so as to give the appearance that they had been in the habit of paying rent of $2,500 per month. They said that although this suggestion had been made by McVeigh that he did not advance any funds to them."

13 During the course of his submissions, counsel for the plaintiff made much of the fact that this evidence was not disputed by the first defendants. Counsel for the first defendant made the point that an application for security for costs does not provide the opportunity for a trial of the action as a whole and submitted nothing could be read into the defendants' failure to deal with the plaintiff's point in their evidence. Be that as it may, I do not think that there is sufficient material before the court to allow a conclusion as to the strength of the case one way or the other. But what I think can be said is that the plaintiff may well have a case which, properly pleaded, the defendants will have to answer. I think the position can be put no higher than that. In my view, a consideration of the merits of the plaintiff's claim gives no indication one way or the other as to how any discretion should be exercised.

14 The second and third points put by counsel for the plaintiff can be taken together. It was submitted that the present financial position of the plaintiff resulted directly from the transaction the subject of this litigation and, further, it was alleged that the financial position of the plaintiff was such that any order for security for costs would stultify the action. These two submissions raised squarely the present financial position of the plaintiff and its likely financial position when it might be called upon to pay any costs order. The authorities clearly establish that the plaintiff carries the onus of establishing its present financial position and demonstrating that any impecuniosity has resulted from the defendants' actions: see Blackbird Entertainment Pty Ltd v IQ Research Pty Ltd, unreported; SCt of WA; Library No 980297; 2 June 1998 at 13; Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1 at 3; BPM Pty Ltd v HPM Pty Ltd, (supra) at 862. In opposition to this application, the plaintiff filed a further affidavit of Kevan Best, sworn 8 February 2000. Mr Best says that in 1988 the plaintiff purchased a business known as Kenwick Outdoor Supplies for a sum of $380,000. The purchase included an area of industrial land as well as stock, plant, equipment and goodwill. In 1997 the business of Kenwick Outdoor Supplies was sold for approximately $580,000. The purchase price was made up of approximately $230,000 in cash and the balance was made up of land with an agreed value of $350,000. The land consisted of four lots at Hopetoun and six lots at Bakers Hill. Although it is not entirely clear from the affidavit, it appears that the sale of the Kenwick Outdoor Supplies business also included the sale of the land on which it was operated. In other words, that which was purchase in 1988 for $380,000 was sold in 1997 for $580,000. At the time of the sale of the business the National Australia Bank was owed $235,000. The bank was paid out in full on settlement of the sale. The plaintiff did not have any other liabilities.

15 As part of its case to establish that the plaintiff was impecunious, the first defendants produced in evidence the annual company returns up to 1995 lodged with the Australian Securities Commission (as it was then known). The 1995 return shows that the plaintiff had debts of $430,250. After the 1995 return was filed the Corporations Law was changed and no further returns showing the financial position of the plaintiff had to be filed. It is not entirely clear how the debt shown in the return was made up. Counsel for the first defendant submitted that it was incumbent upon the plaintiff to fully explain the affairs of the company and to show how it was that upon sale of Kenwick Outdoor Supplies all debts were discharged. With respect, I think that is expecting too much of the plaintiff. The 1995 return really is of historical interest only. For the purposes of this application, I am satisfied that by detailing the history as has been done in par 5 through to par 8 of his affidavit Mr Best has provided enough by way of background.

16 Mr Best then says that since the sale of Kenwick Outdoor Supplies the only business venture in which the plaintiff has been engaged is the purchase of Lots 1, 3, 4 and 5 Belgravia Street. Apart from the special conditions in the offer and acceptance for the purchase of the Belgravia Street lots that I have mentioned, the offer was also conditional upon the first defendants purchasing from the plaintiff two lots in Hopetoun valued at $80,000 each and two lots in Bakers Hill valued at $50,000 each. That suggests, then, that after the settlement of the Belgravia Street lots the assets of the plaintiff were two remaining lots at Hopetoun and four remaining lots at Bakers Hill. Based upon the valuations put on these properties in the offer and acceptance, the Hopetoun lots would have had a value of $160,000 and the Bakers Hill lots would have had a value of $200,000. The total assets of the plaintiff would then have been in the region of $360,000, together with the value of the Belgravia Street lots. However, Mr Best says in his affidavit (par 10) that the plaintiff's assets are the Blue Dolphin Caravan Park in Denham valued at $180,000, Lots 201 and 202 Ash Mews, Collie and Lot 19 Hamersley Drive, Hopetoun, which have a combined value of $74,000, together with the Belgravia Street lots. What became of the four Bakers Hill lots and the one Hopetoun lot is not specified. Nor does Mr Best say when and in what circumstances the caravan park and the properties in Collie were acquired. There is no detail at all as to the plaintiff's financial transactions between the acquisition of the Belgravia Street lots and the date of swearing of the affidavit.

17 One other matter of relevance should be mentioned. The first relates to a statutory demand dated 16 December 1999 served by Home Building Society Ltd on the plaintiff. The amount of the demand is $360,421.21. This amount is said to comprise a judgment obtained in the Supreme Court together with interest on the sum owing. There is nowhere in the affidavit material any indication that the plaintiff will be able to meet this statutory demand. What this indicates is that if this litigation is successful Home Building Society Ltd will benefit. In these circumstances, it was submitted on behalf of the first defendant the plaintiff was required to produce evidence which established that Home Building Society Ltd or other creditors standing behind the plaintiff who would benefit from the litigation would not provide security for costs when called upon to do so.

18 In BPM Pty Ltd v HPM Pty Ltd (supra), Anderson J approached this question in the following way (at 861):

"I think the Master is to be understood as having decided the correct question, namely whether in practical common sense terms it was reasonable to expect the creditors of this plaintiff company to put up a very substantial sum as security for costs. Their likely attitude, their likely willingness to do so, was merely something to be discussed in that context, that is, as to whether in all the circumstances it would be reasonable to require the creditors to provide the first defendant with security for its costs. ... All the same, however, there was not nearly enough information before the Master in this case from which to make a proper judgment that it was indeed unreasonable for any of the creditors to be required to put up security. In the first place their attitude is not the subject of direct evidence ... Secondly it is not known ... who are the creditors who will benefit from the action, and to what extent they stand to do so. I think it would be necessary to know the situation of various creditors before it could be determined that an order for security should not be made on the ground that to make the order would frustrate the case ie on the ground that there is no creditor with sufficient interest in the successful outcome of the litigation to whom it would be reasonable to look to provide the security to assist the company to continue it."

19 With respect, his Honour's comments seem to me to fit this case squarely. There is no direct evidence of the attitude of Home Building Society to providing security for costs. Furthermore, it is not clear who the creditors of the plaintiff might be, apart from Home Building Society Ltd. There may be none, but the evidence does not deal with the question. On that basis I could not conclude that an order requiring the plaintiff to provide security for costs would stultify the action. Nor, on the evidence, could I conclude that the plaintiff's present financial position, whatever that may be, results directly from the action of the defendants.

20 The fourth matter referred to by counsel for the plaintiff is that the directors of the plaintiff have offered to provide personal undertakings to the defendants in relation to costs incurred by the plaintiff in pursuing the action. This is one factor to be taken into account in assessing whether an order for security for costs ought be made: see Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306. In his affidavit of 8 February 2000 Mr Best says that he and his wife, the two directors of the plaintiff, own a property at 21 Joyce Road, Lesmurdie. The property is valued at $230,000 and is mortgaged for $165,000. On the face of it, then, the directors' guarantees might secure the defendants' position. However, the Home Building Society Ltd have issued a bankruptcy notice against Mr and Mrs Best. Although it is not dealt with specifically in the affidavit material, it appears the liability arises because Mr and Mrs Best were personal guarantors of the loan to the plaintiff. Given that the plaintiff will not be able to meet the demand made by Home Building Society Ltd, liability will fall on Mr and Mrs Best. As I read the affidavit material, they would not be in a position to meet the full amount of the debt. That is the case even taking into account the equity in the Lesmurdie property. In the circumstances then, any personal guarantees they might offer are of limited value.

21 Subsequent to the hearing of this matter counsel for the plaintiff sought, by letter, to tender further material dealing with the plaintiff's financial position. This material, when first tendered, was in the form of an unsworn affidavit. During the course of the hearing counsel did not seek leave to tender any further material, nor was any move made to relist the matter so the question of further evidence could be considered. By letter the defendants objected to the plaintiff filing further evidence.

22 I am not prepared to accept any further affidavit material in relation to this matter. These applications were first returned in chambers on 20 December 1999. The parties on that date produced a consent order. That order required the plaintiff to file answering affidavits by 13 January 2000. In fact, counsel for the plaintiff tendered two affidavits in opposition to this application on the morning of the hearing. No explanation was provided as to why the affidavits were tendered late. Leaving that to one side, applications for security for costs are hardly novel. The principles are well understood and have been developed in numerous cases. The plaintiff had ample opportunity to consider the issues and the evidence needed to support the contentions that they intended to advance. To allow the addition of further affidavit evidence after the hearing has taken place would do nothing more than prejudice the position of the defendants and it would not be in the interests of justice. I will not grant leave to file further affidavit material and such material as has been forwarded to the court has not been considered in the context of this application.

23 In all the circumstances, I am satisfied that I ought to exercise my discretion and grant an order for security for costs in this case. The first defendant has established the plaintiff 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. The draft bill of costs filed by the defendants seeks security in the sum of $54,100. This would take the matter right through until the end of any trial. In my view it would be more appropriate to order security in stages. The plaintiff should provide security in the sum of $20,000 with leave granted to the defendants to apply for further top-up security once the matter has been entered for trial.

24 I will hear the parties as to the precise form of the orders.