Corporations Act 2001 (Cth), s 1335(1)

Property Law Act 1969 (WA), s 11(2)

Australian Quarry Holdings Pty Ltd (in liq) v Dougherty (1992) 8 ACSR 569

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241

Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523

Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLR 492

K & J Acquisitions Pty Ltd v Manauzzi [2009] NSWSC 279; (2009) 27 ACLC 512

Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377; (2008) 66 ACSR 455

Prynew Pty Ltd v Nemeth [2010] NSWCA 94

Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289

Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No 1) (1993) 11 ACLC 862

1 LE MIERE J: The first to fourth defendants and the fifth to tenth defendants have applied for an order that the first plaintiff, Jaddcal Pty Ltd (Jaddcal), give security for their costs and the action be stayed until the security is given.

2 The second and third plaintiffs (the Anuriws) together with the first to fourth defendants formed the plaintiff company in February 2008 to establish an ice rink business in Malaga. The Anuriws and the first to fourth defendants were directors and shareholders of Jaddcal. The ice rink opened for business on 15 April 2009 under the name Perth Ice Arena.

3 Differences arose between the Anuriws and the first to fourth defendants and court proceedings were commenced in 2009 by the Anuriws. The proceedings were settled by way of a deed dated 28 August 2009 (the Deed). The Deed provided that the Anuriws pay to the first to fourth defendants $160,000 each for their respective shares in Jaddcal. The first defendant and the third defendant were paid additional amounts to refund them for their initial investment. The Deed also contained a restraint clause (Restraint Clause) which restrained the first to fourth defendants (the Restrained Parties) from being directly or indirectly involved in various capacities in an ice rink business within certain distances from the Perth GPO for certain periods. Jaddcal continues to own and operate the Perth Ice Arena.

4 In 2009 there were discussions between various people about building a new ice rink in Perth. In February 2010 the fifth defendant (Roselink Enterprises Pty Ltd) was incorporated for the purpose of establishing and operating an ice rink in Mirrabooka. The sixth to tenth defendants (Roselink Defendants) are directors of Roselink.

5 The plaintiffs allege that the Restrained Parties are involved in the operation of the Mirrabooka ice rink in breach of the Restraint Clause. The plaintiffs allege that the Roselink Defendants unlawfully interfered with the contractual relations between the Anuriws and the Restrained Parties by inducing or procuring the Restrained Parties to breach the Restraint Clause.

6 Where a corporation is a plaintiff in a legal proceeding, the court, 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 its defence, may require sufficient security to be given for those costs and stay all proceedings until the security is given: Corporations Act 2001 (Cth) s 1335(1) (the Act).

7 Section 1335 carries both a threshold test and a discretionary test. The first question is whether the threshold condition for the exercise of the power is satisfied, that is, whether there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful. The jurisdictional condition must be satisfied before the discretionary power to order security for costs is enlivened: FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [21] (Pidgeon & Owen JJ).

8 The threshold test was discussed by Maxwell P and Buchanan JA in Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377; (2008) 66 ACSR 455, where they said:

The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'If the court is satisfied that ...' or 'If in the view of the court it is likely that ...' The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a 'real risk'.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs.

It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk [15] - [16].

9 Mr Anuriw has produced a balance sheet for Jaddcal for the year ending 30 June 2010. It shows net assets of $148,465. However, the assets include $240,871 described as 'legal fees re shareholder dispute'. That is at best a contingent asset. The major asset is plant and equipment of $503,727. That figure appears to be a book value rather than a market valuation. There is no evidence of the realisable value of the plant and equipment. In support of their application to reopen their application for an interlocutory injunction the plaintiffs sought to rely upon an affidavit of an accountant, Mr Christopher Daws. According to the evidence of Mr Daws, Jaddcal will suffer a significant loss for the 2010/2011 financial year.

10 The threshold test is not whether the corporation will be unable to pay the defendants' legal costs, it is whether it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the defendants' legal costs. I find that it appears by credible testimony that there is reason to believe that Jaddcal will be unable to pay the costs of the defendants if they are successful in their defence. Furthermore, the evidence discloses a real likelihood that Jaddcal will be unable to pay the defendants' legal costs if they are successful in their defence.

11 Proof of the corporation's unsatisfactory financial position enlivens the court's discretion. It is also a relevant factor, along with other factors, in determining whether an order for security costs should be made. Different views have been expressed from time to time whether the court should approach the exercise of its discretion under s 1335 with a predisposition to make an order for costs once the threshold test was met and its jurisdiction was enlivened. In this case there is a likelihood that the plaintiff will not be able to meet the defendants' legal costs if they are successful in their defences. That is a most significant factor going to the exercise of the court's discretion.

12 There are a number of well-established guidelines or factors which the court typically takes into account in exercising its discretion whether or not to order security for costs. The factors include whether the plaintiff's claim is bona fide and has reasonable prospects of success: Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289.

13 Jaddcal raises a number of matters which it says are relevant to the exercise of the court's discretion. The first is that the plaintiffs' claim is made bona fide and has a reasonable prospect of success.

14 I am satisfied that Jaddcal's claim is bona fide. A material consideration is the probability of the success of Jaddcal. In this case the facts are in dispute. Furthermore, there are serious questions concerning Jaddcal's right to relief. I approach this application on the basis that Jaddcal's claim is brought in good faith, its claim raises serious issues to be tried but there are substantial obstacles in the way of it obtaining relief.

15 Secondly, Jaddcal says that the defendants are using s 1335 of the Act oppressively to stifle the plaintiffs' genuine claim. Security for costs have been refused by the court where the court has concluded that the application is oppressive and brought for the purpose of shutting out the plaintiff from its claims: Australian Quarry Holdings Pty Ltd (in liq) v Dougherty (1992) 8 ACSR 569. I am not satisfied that that is so in this case. Each set of defendants has a serious defence to the claims against them. They have not conducted their defences in a way so as to unnecessarily prolong the proceedings or to add to the cost of the proceedings.

16 Jaddcal submits that the making of an order would frustrate the plaintiffs' claim. The evidence does not establish that Jaddcal and its directors will be unable to raise the funds if security for costs is ordered.

17 Jaddcal says that the plaintiffs have been forced to defend their interests because of the defendants' egregious conduct. Jaddcal refers to Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLR 492. In that case Mitchell J, with whom King CJ and Legoe J agreed, held that the court, in deciding whether or not to exercise its discretion to make an order for security for costs, is entitled to consider whether the corporation is a true plaintiff on the one hand or, on the other hand, is forced into the position of plaintiff because the defendant is empowered to take what may be described as 'self help' procedures. This is not a case of defendants having taken self help remedies and forced the plaintiffs into a position of commencing proceedings.

18 Whether the corporation's want of means has been brought about by the conduct of the defendants is a further relevant factor. The plaintiffs have not led any cogent evidence that its poor financial position is a result of the defendants' conduct. There is evidence that Jaddcal's revenue and its profits had been declining before the Mirrabooka ice rink opened for business.

19 In my view, the principal factor against ordering security for costs is that Jaddcal and the Anuriws are joint plaintiffs. Where a corporation sues jointly with individuals, the fact that the individuals cannot be ordered to give security for costs does not deprive the court of the power to order the corporation to give security. It is however a matter to be taken into account by the court in exercising its discretion.

20 In Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 Connolly J, with whom Campbell CJ and Demack J agreed, considered whether the court should order security for costs against a corporate plaintiff when there was also a natural plaintiff of substantial means. Connolly J said at 531 that if one of the joint plaintiffs is an individual of substance by whom costs could be paid, the defendant will have as much as any litigant is entitled to and security will not be ordered.

21 In Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No 1) (1993) 11 ACLC 862 Kirby P said that where both companies and natural persons are suing together the authorities suggested that it is ordinarily inappropriate to order security for costs upon the basis that doing so would lead to a different treatment of the corporate moving party and the natural person.

22 Relevant authorities relating to situations where both companies and natural persons are suing were considered by Kirby J in K & J Acquisitions Pty Ltd v Manauzzi [2009] NSWSC 279; (2009) 27 ACLC 512. Kirby J referred to Harpur v Ariadne Australia Ltd and to other cases where the court had declined to order a company to provide security for costs when there was a natural person as a co-plaintiff. Counsel for the defendants in that case sought to distinguish the earlier cases upon the basis that the claim of each plaintiff was substantially the same and hence if the defendant succeeded against the corporate plaintiff he was also likely to succeed against the natural plaintiff and recover his costs from that plaintiff. In that case Kirby J considered that there was not a complete overlap between the cases to be presented by the corporate and natural plaintiffs but they appeared to be very similar, indeed substantially the same. One possibility was that the natural plaintiff might succeed and the corporate plaintiff fail, in which case the defendants would only be entitled to the particular costs arising from the joinder of the corporate plaintiff in the action, not the general costs. In that case the corporate plaintiff had already lodged security for costs and Kirby J held that the security already lodged was more than adequate to cover the possibility of costs to be paid by the corporate plaintiff.

23 The issue arose again in Prynew Pty Ltd v Nemeth [2010] NSWCA 94, an appeal by an individual appellant (Tsu) and a corporate appellant (Prynew). Prynew contended that Tsu would be able to prosecute the appeal in any event so that no order for security should be made against Prynew. Beazley JA considered that the matter was not that simple:

The fact that Mr Tsu is a co-plaintiff is a relevant factor. However, in a particular case, it may be relevant to have regard to the extent to which the claims made by parties are co-extensive. If the claims of each are co-extensive, that may provide a strong basis for not ordering security. If the claims are not co-extensive at all, that factor may point to the exercise of the court's discretion in the opposite manner. There are then a multitude of intermediate positions which may need to be considered in a particular case [56].

24 Beazley JA considered that the case would not be proceeding in any event against Piling, the defendant, at the instance of Mr Tsu. Mr Tsu's case was not co-extensive with Prynew's and may not relate to Piling at all. Beazley JA considered that a substantial proportion of the time on appeal would be occupied by the challenges made solely by Prynew. In those circumstances her Honour considered that an order for security should be made against Prynew.

25 At the heart of the plaintiffs' action is the claim that the Restrained Parties are, or were, involved in the Mirrabooka ice rink in breach of the Restraint Clause. The plaintiffs allege that the Roselink Defendants induced or procured the Restrained Parties to breach the Restraint Clause. The Restrained Parties deny that they breached the Restraint Clause by being directly or indirectly involved in the Mirrabooka ice rink business. The Restrained Parties further deny that the Restraint Clause is a reasonable restraint and hence enforceable. The Roselink Defendants deny that the Restraint Clause is a reasonable restraint, deny that the Restrained Parties are or were involved in the Mirrabooka ice rink or Roselink, deny that they knew of the existence of the Deed or the Restraint Clause and deny that they were complicit in the alleged breach of the Restraint Clause by the Restrained Parties.

26 The only difference in the cases of Jaddcal and the Anuriws is that the Anuriws are parties to the Deed and entitled to sue on it on that basis. Jaddcal claims that cl 8.10 of the Deed expressly purported to confer the benefit of covenants in the Deed, including the Restraint Clause, directly on Jaddcal and therefore by reason of Property Law Act 1969 (WA) s 11(2) Jaddcal is entitled to enforce the Restraint Clause in its own name.

27 It is possible that the Anuriws may succeed in their claim against one or more of the defendants but that Jaddcal may fail. In that event it is likely that the court would order Jaddcal to pay to the defendants the particular costs arising from the joinder of Jaddcal in the action, not the general costs of the action.

28 In these circumstances I consider that an order for security should be made against Jaddcal.

29 The first defendant has annexed to his affidavit sworn 29 November 2010 an estimated bill of costs which demonstrates that the first to fourth defendants' costs after a 10 day trial will be approximately $100,000. At the hearing of the interlocutory injunction proceedings on 8 November 2010 it was agreed by counsel for all parties that the duration of the trial would be in the order of 10 days. The cost estimate by the first to fourth defendants is entirely reasonable for a trial of that length. However, for the reasons I have given, the amount of security should be an amount to cover the defendants against the particular costs arising from the joinder of Jaddcal in the action, not the general costs of the action. The basic rule regarding the appropriate quantum of security is that the court should fix an amount it considers will be adequate. The court must have regard to the probable costs which the defendants may be put to so far as it can be ascertained, by reason of the joinder of Jaddcal. I consider that an amount of $12,500 for each set of defendants is adequate. Jaddcal should provide security to the first to fourth defendants and to the fifth to tenth defendants in the sum of $12,500 each. The action should be stayed until security is given. The parties should confer in relation to the form of security to be given.