Shareholder accepting personal liability
5 The primary basis of challenge to the order made by Simpson J was that her Honour disregarded the personal undertaking proffered by Mr Stephen Haigh as shareholder of the plaintiff companies. The principles relevant to this complaint, as articulated in the cases, reveal a double tension between conflicting principles.
6 The first tension is between the principle that an insurmountable obstacle should not be placed in the way of a bona fide litigant with an arguable case (see e.g. Melville v Craig Nowlan & Associates Pty Ltd (2001) 54 NSWLR 82 at [99]-[100] (Heydon JA), and the principle that an impecunious corporate plaintiff should not be able to litigate without the means to meet an adverse costs order, should it be unsuccessful. The conflict was described as "a striking contrast", the justification for which "is not immediately obvious", by Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [53]. To apply one principle will often be to frustrate the other.
7 The second tension arises between the principle that an impecunious plaintiff should not be allowed to litigate for the benefit of others unless those who will benefit from success are willing to take the financial risk of failure (which could include those standing behind a corporation), and the line of authority that it is not necessarily sufficient for the individuals who stand to benefit from corporate litigation to step out from behind the corporation and take responsibility for an adverse costs order, should the claim fail.
8 As noted by Mason P in Winnote Pty Ltd (In liq) v Page (2005) 64 NSWLR 244 at [23] there is "a very long history of requiring those promoting litigation by insolvent companies to come out from behind the corporate shirt-tails to the extent of providing security if sought". One question is whether, without providing security, it is sufficient that such persons agree to be fully liable for costs, thus avoiding the abuse which is conceived to arise from litigating behind the shield of limited liability, as explained in Project 28 Pty Ltd v Barr [2005] NSWCA 240 at [115]-[116] (Ipp JA, Hodgson JA and Campbell AJA agreeing).
9 The cases tend to set out the range of material considerations without articulating a principled approach to their application. Indeed, such an approach is sometimes eschewed on the basis that it would tend to constrain an unfettered discretion: see, eg, Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191, set out at [79] below. However, the need to avoid confining an unfettered discretionary power should not be pursued to the exclusion of the need to ensure that material factors are assessed in a coherent and principled fashion. As stated by Mason and Deane JJ in Norbis v Norbis (1986) 161 CLR 513 at 519:
"It has sometimes been said by judges of high authority that a broad discretion left largely unfettered by Parliament cannot be fettered by the judicial enunciation of guidance in the form of binding rules governing the manner in which the discretion is to be exercised … . However, it does not follow that, because a discretion is expressed in general terms, Parliament intended that the courts should refrain from developing rules or guidelines affecting its exercise. One very significant strand in the development of the law has been the judicial transformation of discretionary remedies into remedies which are granted or refused according to well-settled principles … . It has been a development which has promoted consistency in decision-making and diminished the risks of arbitrary and capricious adjudication. The proposition referred to at the beginning of this paragraph should not be seen as inhibiting an appellate court from giving guidance, which falls short of constituting a binding rule, as to the manner in which the discretion should be exercised … . And despite the generality of some of the statements to which we have referred, there may well be situations in which an appellate court will be justified in giving such guidance the force of a binding rule by treating a failure to observe it as constituting grounds for a finding that the discretion has miscarried."
10 Other members of the Court in Norbis, in part following Gibbs CJ in Mallet v Mallet (1984) 156 CLR 605 at 608-609, took a more guarded approach in relation to the level of inflexibility which might be achieved by the formulation of guidelines, whilst acknowledging the need to avoid arbitrary and capricious decision-making: at 533-534 (Wilson and Dawson JJ and at 537-539 (Brennan J) and Wong and Leung v The Queen (2001) 207 CLR 584 at [6] (Gleeson CJ albeit in dissent); [83]-[85] (Gaudron, Gummow and Hayne JJ); [89]-[92], [121]-[122] and [137]-[139] (Kirby J). In truth, the power to make an order for security is not unfettered, in the sense of being at large. While there are no express constraints imposed by the legislation or rules conferring the power, it must nevertheless only be exercised for the purpose for which it is conferred: articulation of the purpose will assist the ascertainment of a principled approach to the reconciliation of the conflicts noted above.
11 In Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 Street CJ (Moffitt P and Hutley JA agreeing) sought to identify the purpose behind statutory provisions relating to security payable by corporations enjoying the protection of limited liability. His Honour stated (at pp 303-304):
"In cases of contract the other party to the dealing would be on notice of the limited liability of the company and, the transaction being voluntary, he could be presumed to be competent to look after his own interests in that regard. Where, however, a company commences litigation against another party, that other party could find himself involuntarily prejudiced by the limited liability character of the plaintiff who had commenced proceedings against him. To protect the other party from this consequence of limited liability, there has always in companies legislation been a provision along the lines of [a predecessor to s 1335 of the Corporations Act ]."
12 It has long been held that "poverty is no bar to a litigant", so that, in relation to individual plaintiffs, impecuniosity alone has never been a sufficient reason to order security for costs: see, eg, Cowell v Taylor (1885) 31 Ch D 34 at 38 (Bowen LJ); Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No. 1) (1993) 11 ACSR 300 at 301 (Kirby P). Accordingly, if the individual or individuals who carry on a business through a company and would benefit from its success in the litigation or would, absent limited liability, suffer the costs of failure, were to stand out from behind the company and undertake to meet any liability in costs personally, the key purpose underlying the power to order security for costs against a corporation would be missing. As explained by Connolly J (Campbell CJ and Demack J agreeing) in Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 at 532:
"The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied."
13 In Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 at 53, Burchett J noted, in relation to the principal of the plaintiff company:
"I think it is also relevant that the individual responsible for this litigation, Mr Cameron, is not sheltering behind a corporate shield in order to protect some assets of his own from liability to meet a costs order. In the Ariadne case (supra, at 533 …) the Full Court of the Supreme Court of Queensland made it clear that in such a case the means of the individual concerned are 'not really relevant'. What is relevant is that the company is not a stalking horse to enable someone else to evade personal responsibility. If he accepts responsibility, an impecunious natural person is entitled to rely on the general rule that poverty is no bar to a litigant: Barton v Minister for Foreign Affairs (1984) 2 FCR 463 at 469."
14 The principle so stated, by reference to a number of authorities including the last-mentioned, was accepted and applied by Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 415:
"In the instant case once the shareholders of the applicant have agreed to accept personal liability for any judgment for costs against the applicant, the statutory purpose of s 1335 as explained in the authorities to which reference has been made is satisfied. The making of an order which secures the personal liability of the shareholders is in itself the provision of security: see for example Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364 at 366; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 546; Appleglen Pty Ltd v Mainzeal Corp Pty Ltd (1988) 79 ALR 634 at 635-6.
Once the shareholders have been exposed to personal liability for the applicant's costs, the weight to be given to the statutory purpose is gone. Those who stand behind the applicant once they accept personal liability for the applicant's costs are in no worse position than they would be as litigants in person in the court: Harpur at 533; Yandil Holdings Pty Ltd at 546.
The offer by the shareholders of the applicant to accept personal liability for the applicant's costs is a factor weighing heavily against the making of an order against the applicant for provision of a cash or other security for costs notwithstanding that the worth of the shareholders may ultimately prove insufficient to satisfy any judgment in whole or in part."
15 Such an approach has been criticised in a number of subsequent decisions, but for reasons which, for the most part, fail to address the underlying principle, which reflects the purpose of the special rule applicable to corporations. Thus in Erolen v Baulkham Hills Shire Council (1993) 10 ACSR 441, Powell J stated at 456:
"While I am prepared to accept that the offer of a guarantee is a factor to be taken into account in determining what is the proper form of security to be provided in a case in which an order for security is appropriate, I am quite unable to share the views expressed by Byrne J in Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd [(1990) 8 ACLC 304] and by Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd … which are to the effect that, once the shareholders have agreed to accept personal liability for any judgment for costs, the statutory purpose of s 1335 of the Corporations Law is fulfilled - such an approach, so it seems to me, would be as much 'a fetter' on the court's discretion as the, now discarded, approach of 'a "bias" in favour of making an order once it is shown that the plaintiff is impecunious'."
16 To treat reliance upon a principle that the statutory purpose is fulfilled as a fetter may be correct; the question is whether it is an unjustifiable fetter. In Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 the Full Court of the Supreme Court of Western Australia (Malcolm CJ, Pidgeon and Steytler JJ agreeing) sought to identify differences of principle which had arisen in earlier decisions in the following way (at p 316):
"The question is whether an undertaking, which has the effect of making those who stand behind the company as shareholders or directors personally liable, precludes an order that the company provide security on the basis that the liability of such persons, even if impecunious, is at least supported by the threat of bankruptcy."
17 Malcolm CJ held that the proposition was supported by the decision of the Full Court of the Federal Court in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4 and Harpur v Ariadne Australia Ltd. His Honour continued:
"To the extent that the judgments in Harpur and other cases suggest that once a personal undertaking is available, that is necessarily 'sufficient' security as a general principle, I cannot agree. The availability of such an undertaking is not the only consideration. The issue has to be looked at in the light of all relevant considerations including the merits of the action and whether the ordering of security will stifle an action which has some apparent merit."
18 The establishment of a general principle does not preclude other results in particular circumstances. However, an injunction to look at an issue "in the light of all relevant considerations", unspecified, provides little assistance in relation to the weight which might properly be given both to the principle identified and to other considerations, if one were satisfied that the principle underlying the statutory power had been fulfilled by the offer of guarantees or undertakings from those standing behind the corporation. To the extent that the merits of the action are relevant, it seems doubtful whether, beyond accepting that there should be a bona fide and arguable claim, it is usually appropriate for the Court to canvas the merits of the litigation in any detail: see Ariss v Express Interiors Pty Ltd (In liq) [1996] 2 VR 507 at 514 (Phillips JA, Ormiston JA and Charles JA agreeing). Finally, Malcolm CJ referred to the consideration "whether the ordering of security will stifle an action which has some apparent merit". How that consideration could arise as a qualification on the general principle that it is sufficient that the individual stand out from behind the company is unclear. It is only if that is not considered a sufficient security that questions of stultification will arise. Thus, although his Honour concluded that it was an error of principle to hold that "the statutory purpose of s 1335 of the Corporations Law is met once the shareholders had come out from behind the corporate veil and personally undertaken to meet any costs ordered against the company", the reason for that conclusion was not fully articulated.
19 Doubts were also cast on the general principle by the Victorian Court of Appeal in Epping Plaza (above at [5]). The joint judgment of Winneke P and Phillips JA, after referring to the importance of not imposing "an impermissible fetter upon the court's open ended discretion" stated at [17]:
"Consistently with this view, there may be cases where, in the exercise of its discretion, the court will regard the fact that those who stand behind an impecunious company have bound themselves to assume responsibility for paying the defendant's costs as a relevant factor in favour of the plaintiff … . But that is as far as it goes; the existence of such an offer to assume personal liability for an order for costs if made against the company, or even a formal guarantee to like effect, cannot be determinative in itself of the application for security, or else the discretion, which is otherwise conferred in general terms, will be impermissibly circumscribed."
20 At [24] the joint judgment went further stating:
"Furthermore, in our view the court should not readily accept an undertaking to pay costs from impecunious individuals who, at least at the time when such an undertaking is given, have no chance of making it good. Such an undertaking could not be an effective alternative security because it could only be enforced (at least for the time being) by proceedings for contempt … ."
21 To an extent the discussion in Epping Plaza may be seen as obiter, because the offer of personal liability was not made by all those standing behind the trusts: [24]. However, it is appropriate to note the extent to which the Court treated as a relevant consideration fulfilment of the statutory purpose. At [14] the joint judgment stated:
"It is thus apparent that the justification for the statutory rule is that the defendant, not being a voluntary litigant, deserves to be protected from the consequences of limited liability. Those who seek to conduct their businesses through limited liability companies expect to receive the benefits which such liability attracts. It seems to us a necessary corollary that they should be prepared to accept the strictures imposed by the section if the company embarks upon litigation: Buckley v Bennell Design and Constructions Pty Ltd … ."
22 However, at [23], following a discussion of the comments of Cooper J in Gentry Bros, the joint judgment stated:
"Not only does the suggested principle cut across the authorities which make it abundantly clear that the discretion is to be unfettered and exercised in accordance with what the circumstances of the particular case require, but it ascribes a purpose for its existence which we do not accept; namely that the statutory purpose of s 1335 is to align the position of impecunious corporative plaintiffs with impecunious individual plaintiffs."
23 The statutory purpose, as explained by Street CJ in Buckley, and by Connolly J in Harpur, is to ensure that those who carry on a business through a company having limited liability are not thereby protected against the effects of an adverse costs order. If that approach (adopted by Full Courts in this State, in Queensland and perhaps in the Federal Court) were not accepted the question which needs to be addressed is why the defendant should be better off because the business was run through a company than if it had been sued by the individuals directly. Looked at from the other perspective, it is not clear why those standing behind the company should be worse off because they adopted a corporate structure for their business operations than if they had not.
24 Before leaving Epping Plaza, reference should be made to the judgment of Callaway JA who commenced with the proposition that he was "at first strongly attracted" to the reasoning of Cooper J in Gentry Bros. His Honour continued, identifying the essential proposition in Gentry Bros in the following terms:
"[39] That proposition is, as I understand it, that where -
(a) a small group of shareholders is in substance the company and the litigation is their litigation as much as it is the company's; and
(b) the shareholders are willing to be personally liable to satisfy an order for costs against the company if the proceeding is unsuccessful,
they should be in no worse position (scil. from the point of view of resisting an application for security for costs) than litigants in person even if neither the company nor the shareholders have any assets.
[40] It is not uncommon for a small number of people to set up a business and carry it on by means of a company. Although the company is the proper plaintiff, it may seem unfair if the position with regard to security for costs is any different from that which would obtain if they had been able to bring the proceeding in their own names.
[41] In the course of argument the learned President gave as a counter-example an impecunious company with impecunious shareholders and a trial that will last for six months. Can the defendant not invoke s 1335 of the Corporations Law? Is it a complete answer that the shareholders are willing to stand behind the company? To my mind the defendant can invoke the section and the willingness of the shareholders to put their exiguous assets at risk is not an answer. The reason is limited liability. If the order for security means that the company cannot prosecute its claim, becomes or remains insolvent and is wound up, all that the shareholders lose, as shareholders, is their investment. Those who incorporate a limited company must take the disadvantages of such incorporation along with its advantages even if they have given guarantees. Contrary to first impressions, the position in Gentry is not dictated by fairness. Those who would rely on it are trying to have their cake and eat it too."
25 Whether shareholders who forego the protection of limited liability to permit their company to pursue litigation are "trying to have their cake and eat it too" may be doubtful. Similarly, the assertion that the principle established in Gentry Bros is not dictated by "fairness" may require some elucidation of the specific aspect of fairness in issue: c.f. the references to fairness in Pacific Acceptance Corporation Ltd v Forsyth (No. 2) [1967] 2 NSWR 402 at 407, in a passage adopted by Street CJ in Buckley at 304. More importantly, the passage illustrates a principle which may also inform the reasoning in the joint judgment, namely that the purpose underlying s 1335 is not in fact fulfilled by foregoing the protection of limited liability enjoyed by the corporate litigant. In the example given at [41] one might ask why it is that s 1335, and its equivalent provisions such as UCPR r 42.21(d), would not provide protection to a defendant if the plaintiffs were individuals, but does provide such protection where the plaintiff is a corporation. The line of authority derived from Buckley, Harpur and Gentry Bros is based upon an understanding that s 1335 confers a power to order security against a corporate plaintiff in order to avoid the disadvantage of a defendant involuntarily facing an impecunious plaintiff with limited liability. To reject the logic of Gentry Bros is to reject that understanding.
26 There may be disputation as to the strength and scope of the Gentry Bros' general principle. Thus, it may be unfair to suggest that in circumstances where it is engaged, an order for security is "precluded"; similarly, whether it is engaged where one shareholder amongst several is unwilling to stand behind the company may give rise to questions as to scope: see Epping Plaza at [38] (Callaway JA). Similarly, the operation of the principle may depend upon it being established that the plaintiff corporation has a bona fide and reasonably arguable claim. Putting these questions aside, there appears to remain a division in the authorities on the issue of principle, being the acceptance or rejection of the proposition set out by Callaway JA in Epping Plaza at [39].
27 This conclusion gives rise to a real issue as to the correct approach to be adopted by this Court. In Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107 at [135] the High Court stated, in a joint judgment:
"Intermediate appellate courts and trial judges in Australia should not depart from decisions in intermediate appellate courts in another jurisdiction on the interpretation of Commonwealth legislation or uniform national legislation unless they are convinced that the interpretation is plainly wrong. Since there is a common law of Australia rather than of each Australian jurisdiction, the same principle applies in relation to non-statutory law."