JAZABAS PTY LTD & ORS v HADDAD & ORS [2007] NSWCA 291 | Case summary

Court of Appeal (NSW)|2007-08-20|Before: Mason P, Basten JA, McClellan CJ

Background 38 Many of the facts relevant to this application are not controversial. Mr Haigh became interested in the acquisition of a parcel of land at 2-10 Nilson Street, Hillsdale ("Nilson Street land") within the City of Botany Bay for the purpose of development. The land was owned by Amcor Ltd. It was offered for sale by public auction. On 5 November 1993 Amcor's solicitor applied to the Council for a certificate under s 149 of the Environmental Planning and Assessment Act 1979. On 11 November 1993, and again on 29 November 1993 the Council issued certificates, each of which stated that no development control plan nor draft plan applied to the Nilson Street land. They also stated that the land was not "affected by any Council policy to restrict development by reason of … any other risk." 39 By letter dated 10 December 1993 the Council's solicitors wrote to Amcor and its real estate agent, advising that the Council had resolved to prepare a development control plan which would affect the Nilson Street land. The letter contained information as to the effect of the plan on the permissible floor space ratio, the proposed building footprint/site coverage and specified facilities which any residential flat development should incorporate. No information relating to possible contamination was included. 40 Mr Haigh sought further information. He telephoned the Council and spoke to Ms Cuthbert. He says he was informed that provided any proposed development complied with the relevant development standards there would be no problem in obtaining development consent. 41 On 21 December 1993 Evenvest contracted to purchase the Nilson Street land. That purchase was ultimately completed by Jazabas on 28 June 1994. Early in 1994 Evenvest obtained a s 149 certificate which repeated the statement that the land was not affected by any Council policy to restrict development by reason of "any other risk." 42 Jazabas submitted a development application to the Council which was approved on 4 June 1996. On 17 July 1996 Jazabas submitted a building application. A further building application was submitted in October 1997 which was not dealt with by the Council resulting in an appeal to the Land and Environment Court. The Council contested the appeal on the grounds that (i) the land was located in the risk reduction zone; (ii) the land was proximate to a petrochemical complex and chlorine manufacturing plant; and (iii) the building plans did not satisfactorily address measures to warn inhabitants of the proposed buildings or protect them from risk of death or injury in the event of a substantial release of toxic gases or some other contamination event. On 23 April 1998 the appeal was dismissed by Assessor Bly, who was satisfied that the evidence established the Nilson Street site was "unsuited for further residential intensification on hazard grounds." 43 Although the Council had succeeded in the appeal to the Land and Environment Court it took the extraordinary step of appealing that decision, claiming the assessor had made an error of law. On 16 April 1999 Lloyd J upheld the appeal and the application was remitted to an assessor for redetermination. On 15 July 1999 the court granted approval. On 15 August 1999 Jazabas sold the land, with the benefit of the building approval and secured a modest profit. However, it claims that if the land had not been contaminated the profit from the venture would have been greater. 44 In the main proceedings the claimants allege that, at the time of the purchase, the Nilson Street land was seriously affected by contamination from industrial activity which had been taking place within the locality over many years. In 1983 and again in 1985 the Department of Urban Affairs and Planning prepared risk assessment studies for an area which included the Nilson Street land. Only the second of these studies was published. Although it identified a "risk reduction zone", which included the Nilson Street land, the claimants allege that the 1985 study was a "sanitised version of the results" of the 1983 study and contained erroneous representations about the risk of death, serious injury and irritation from toxic hazards to present and future residents.

The case against the opponents in the main proceedings 45 The claimants' case against Mr Haddad has a number of limbs. Although the pleading is not elegant it raises claims in tort, including misfeasance in public office and negligent advice and alleges a breach of s 42 of the Fair Trading Act 1987 (NSW). 46 The claimants allege that Mr Haddad was responsible for the 1985 risk assessment study. It is alleged that in that study the boundaries of the risk reduction zone are misrepresented. It is pleaded that the misrepresentation was either deliberate or reckless. The claimants allege that when embarking on the purchase and development of the land they relied upon the representations made in the study and, because they failed to make the profit they would otherwise have made, have suffered loss. 47 It is further pleaded that the State breached its duty of care to the claimants by failing to take reasonable steps to prevent a foreseeable risk of damage identified as economic loss. The particulars in the pleadings refer to the failure to warn or disclose information about the toxic risks and hazardous industry risk affecting land within the risk reduction zone. The claimants further allege that the State, Mr Haddad and the Mayor of the Council were involved in a conspiracy to conceal the 1983 investigations and report with respect to the toxicity of land in the risk reduction zone. The State is said to be vicariously liable for Mr Haddad's acts. The Mayor of the Council has not been made a party to the main proceedings. 48 The case against the Council is pleaded in negligence, misfeasance in public office and deceit. It is alleged that the Council failed to warn persons likely to be affected of the hazards and toxic risks associated with the relevant areas. 49 It is further alleged that by appealing the decision of Assessor Bly, with the purpose of enabling an approval to issue, the Council breached its duty of care to the claimants. It is pleaded that the appeal from Assessor Bly's decision was made for an improper purpose and to obtain an advantage collateral to and extraneous to those proceedings. That purpose is said to be to increase the value of the property and thereby diminish the Council's potential liability in damages. The ultimate relevance of this allegation is difficult to discern. If, as the claimants allege, the Council acted to reduce its liability this could only have resulted in the claimants suffering less damage. 50 The primary judge described the claimants' statement of claim "as less than crystal clear." However, her Honour identified the critical allegation to be the assertion that the 1983 risk assessment study was concealed by one or more (or all) of the opponents. The fundamental question in the main proceedings will be whether, if this occurred, it could provide the foundation for a successful action in damages.

The earlier proceedings: Jazabas v Botany Council [2000] NSWSC 58 51 This is not the first case brought by Jazabas against the Council. On 12 August 1998 Jazabas commenced proceedings in the Federal Court of Australia claiming damages. It pleaded causes of action in negligent misstatement and misleading and deceptive conduct. Jazabas alleged that the s 149 certificate, the letter of 10 December 1993 and conversations with the Council officer had all, either expressly or by omission, falsely represented that the Nilson Street land was not affected by any Council policy to restrict development, or that there was no planning impediment to the development of the land. The proceedings were transferred to the Supreme Court in September 1998 and were heard by Rolfe J. It was during the course of those proceedings that the Council appealed the decision of Assessor Bly dismissing Jazabas' appeal. 52 On 24 February 2000 Rolfe J delivered judgment and awarded Jazabas $1,218,832 in damages. The Council appealed and this Court, by majority, upheld the appeal and entered judgment for the Council.

Evidence before the primary judge 53 Before the primary judge the claimants accepted that they are all in severe financial difficulties, although receivers have not been appointed. Her Honour was satisfied that the proceedings are likely to take at least 10 days of hearing time. The evidence indicated that the estimated costs to be incurred by Mr Haddad and the State would be of the order of $300,000. The claimants admitted that they could not meet those costs. 54 The evidence before her Honour indicated that the proceedings before Rolfe J had occupied 11 days and the Council had incurred costs of $767,676.51. The appeal and application for special leave to appeal to the High Court brought the total costs to $969,305.51. 55 Evidence was accepted by her Honour going to the strength of the claimants' case. This included a transcript of an interview with the Mayor of the Council, Mr Hoenig on ABC Radio National's program "Background Briefing" in June 2002, when he was recorded as saying: "Well the '83 document [the 1983 Risk Assessment Study] was never a public document. The '83 document was the first time, basically at the Council and community's request, that they underwent proper hazard studies, and on completion of the '83 document, they then wanted to know what to do with it in terms of how they released it to the public or whether it should be released to the public. There was some concern about whether or not the population would panic, would not understand the material they had collated, not understood the risk assessment numbers, and I advocated to the Department at the time, they needed to release the document, and the '85 document was the document modified for public consumption, to avoid public panic." 56 Later, Mr Hoenig was recorded as saying: "We were stuck between the devil and the deep blue sea. Do we tell 4,000 or 5,000 residents in Hillsdale that your land's worthless, or alternatively do we try and encourage the removal of this one plant that had been undertaken to be removed. And we decided on the latter." 57 Later still, the compere of the programme was recorded as saying the following: "Surprisingly, Botany Mayor Ron Hoenig says he thinks the Council was negligent in all this. Here is a reading of comments by Councillor Hoenig in a closed Council meeting in 1998. 'In reality, the fact is that this Council was aware and its planning officers were aware, and should have been aware at all times, that there is a risk assessment lying over the Hillsdale area.' Councillor Hoenig went on to say that it was 'nothing short of negligence' that the Council didn't consider the recommendations of the 1985 study. In his office at Eastgardens, Mayor Hoenig said he hasn't changed his mind." 58 Immediately thereafter Mr Hoenig was recorded as saying: "That was my view. It still is. It still is. The Council was very poorly advise in respect of even allowing that Jazabas site. That was parkland, or it belonged to APM that the Council really didn't want to give development approval, and was advised at the time there was no basis to prevent it. Now we accept responsibility, or I accept responsibility for that. As a result of that advice, certain things were put in train and the quality of the advice is now substantially improved because there is a change in personnel." 59 Mr Hoenig was then asked: "(Q) But if you concede that that decision was negligent, then why take the developer to court, put him through the wringer to their considerable personal and financial expense? (A) Well firstly it was my view, not the view of Council, of the Council lawyers, and not conceded by Council officers, and not agreed to by the Council." 60 The judgments at first instance and on appeal in the previous Supreme Court proceedings together with the pleadings were also before her Honour. An affidavit sworn by the claimants' solicitor and two affidavits sworn by Mr Haigh on 15 November 2005 and 14 December 2005, were also read, although there were successful objections to some matters. 61 Before the primary judge Mr Haigh offered an undertaking to meet the opponents' costs. No undertaking was offered by Mrs Haigh. There was no evidence before her Honour which could establish the impecuniosity of either Mr or Mrs Haigh.

The primary judge's reasoning in granting security for costs 62 The primary judge had regard to UCPR r 42.21 and s 1335(1) of the Corporations Act 2001. UCPR r 42.21(d) provides that security may be ordered where: ."… there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so." 63 Section 1335(1) of the Corporations Act provides as follows: "Costs. 1. Where a corporation is a 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 cost 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." 64 Her Honour summarised the considerations relevant to the making of an order in the following terms: "(a) whether the plaintiff's claim is made in good faith and appears to be reasonably arguable; …

(b) the status of the defendant, for example as an insurer of the plaintiff, is a relevant, but not decisive, consideration against the grant of security; …

(d) whether the plaintiff's proceedings are merely a defence against 'self help' measures taken by the defendant; …

(e) whether the making of the order would unduly stultify the plaintiff's ability to pursue the proceedings; …

(f) the extent to which it is reasonable to expect creditors or shareholders (or other persons financially involved in the conduct of the proceedings, for example, litigation funders) to make funds available to satisfy any order for security which is made; …

(g) the likelihood of a costs order being made at the conclusion of proceedings and the public interest nature of the litigation." 65 Her Honour noted that these principles did not include any reference to the merit of the plaintiffs' claims. However, the parties had proceeded on the basis that it was a relevant consideration although they did not develop submissions as to the manner of its relevance. 66 After this statement of the principles her Honour turned to apply them to the particular case. Her reasons are brief. They do not include consideration of some of the matters which her Honour identified. 67 Her Honour firstly considered the parlous financial position of the plaintiffs but concluded that this was not decisive. In relation to the prospects of success, her Honour concluded that, having regard to the pleading, there were "real and significant difficulties for the (claimants)." Her Honour recognised that there would be a number of interlocutory hearings and a need for the court to intervene in relation to the pleading, unless the claimants could be persuaded to effect "some radical surgery thereto." Her Honour was also satisfied that there was merit in the submission that at least some of the issues raised against the Council had been disposed of by the earlier proceedings and that Jazabas would have to confront the decision in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589. Her Honour did not comment on the fact that neither BAS or Permtree were parties to those earlier proceedings. Presumably the claimants would argue that no Anshun estoppel could extend to them. 68 Her Honour concluded her consideration of the merits of the primary case by saying: "I need only say that I am unpersuaded that they (the plaintiffs) have as yet established any real likelihood that they will ultimately be successful." 69 Her Honour also identified an issue relating to a party being able to rely upon evidence given in other proceedings. However, she does not expose that issue in any detail. 70 After referring to these matters her Honour concluded the discussion by saying: "I am satisfied that each defendant has made good its or his claim for security, and I propose to make orders accordingly."

Scope of this Court's jurisdiction 71 Simpson J was called upon to exercise a discretion. In these circumstances this Court will only intervene where it can be demonstrated that her Honour:

(a) made an error of legal principle (b) made a material error of fact (c) took into account some irrelevant matter (d) failed to take into account, or gave insufficient weight to, some relevant matter, or (e) arrived at a result so unreasonable or unjust as to suggest that one of the foregoing categories of error had occurred, even though the error in question did not explicitly appear on the face of the reasoning. (see House v The King (1936) 55 CLR 499 at 504-505 per Dixon, Evatt and McTiernan JJ; Micallef v ICI Australia Operations Pty Ltd [2001] NSWCA 274 at [45] per Heydon JA, Sheller JA and Studdert AJA agreeing) 72 The claimants submit that her Honour both erred in principle and failed to have regard to relevant matters. It was submitted that her Honour applied the wrong test when considering the claimants' prospects of success in the main proceedings. It was further submitted that she failed to consider the potential stultification of the main proceedings and whether the impecuniosity of the claimants was "caused or contributed to" by the opponents. Finally, it was submitted that her Honour failed to have regard to the undertaking offered by Mr Haigh. The claimants ask for orders which would return the matter to Simpson J for further hearing.

Consideration of relevant principles 73 The principles by which orders for security for costs are made in relation to financially stressed corporations are well known. They are frequently considered in relation to matters in the Commercial List. They must often be applied where it is alleged that the stressed financial position of a plaintiff corporation has been caused or contributed to by the conduct of the defendant. 74 A convenient summary of the relevant principles was made by Beazley J, as her Honour then was, in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189. Her Honour's judgment has been applied in many subsequent cases. Beazley J said at 196-198: "Principles governing application for security for costs

The law is now settled that the discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: see the review of the authorities by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 AT 509. See also Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624 and Zeeman J's decision in Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 at 188. In Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 415, Cooper J stated that: '[i]t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642 at 643.' Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are: 1. That such applications should be brought promptly. This is a principle of longstanding: see Grant v The Banque Franco-Egyptienne (1876) 1 CPD 143; see also Smail v Burton; Re Insurance Associates Pty Ltd [1975] VR 776 per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311 at 313; Bryan E Fencott at 514. I should state immediately that there is no issue of delay in this case. 2. That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations: see M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; Bryan E Fencott at 514. As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success. ( Bryan E Fencott at 514). 3. Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim: see M A Productions v Austarama Television at 100. 4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate: see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E Fencott at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms: '[t]he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour.' This factor is related to the next, namely: 5. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memetu Pty Ltd v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123; Bryan E Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows: ' ... a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors) ... Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs.' 6. An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking: see Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325. 7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate: see Interwest at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (1979) ACLC 32,446; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping where Zeeman J stated (at 189): '[t]he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order ... [see] Sydmar Pty Ltd v Statewise Developments Pty Ltd and Interwest Ltd v Tricontinental Corporation Ltd." [emphasis added.]

See also the discussion in "Law of Costs" (LexisNexis Butterworths, 2003) by G E Dal Pont at [29.10]-[29.29], [29.78]-[29.98]. 75 The nature of the defendant is some times relevant to the exercise of the discretion to make an order. The courts are reluctant to make an order which would have the effect of shutting out a small company from making a genuine claim against a large well-resourced and amply funded body such as the State, a council or a major corporation (see KP Cable Investments at 197; Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 at 50,635 and 50,637 per Hill J). A plaintiff should not be denied access to the courts unless the justice of the case makes it imperative ("Law of Costs", G E Dal Pont, [29.87]).

76 In Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180, which involved litigation between an insured person and insurer, King CJ said that the ability of the insurer-defendant "to absorb the costs, if he is unable to recover them from the plaintiff, is a relevant consideration" (at 186). Likewise, in Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61, Ormiston J described insurers as "pre-eminently loss-bearing and loss-sharing entities, whose raison d'être is their ability to shoulder the losses of others albeit on a commercial basis…" However, in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1990) 8 ACLC 29, referring to financial institutions, engineering and construction companies, newspaper proprietors, public authorities and other powerful companies in litigation-prone sectors, Brooking J expressed a word of caution. His Honour said at 32-33: "These large corporations stand in no special need of care and protection. Suing and being sued is for them a normal part of this imperfect world. They can afford to pay the piper, just as they will expect to call the tune. But if one of these wealthy, powerful institutions is sued by an insolvent company, why should it be viewed as outside the policy of the security for costs provisions? 77 Beazley JA referred to Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1. In a joint judgment in that case, Sheppard, Morling and Neaves JJ expressed the view that a court should not decline to order security on the ground that do to so would frustrate the litigation, unless the company "establishes that those who stand behind it and who will benefit from the litigation if it is successful are also without means." 78 In Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd & Ors (1992) 8 ACSR 405, a decision which has since been criticised, Cooper J stated that the onus falls upon a company seeking to resist an order for security on the ground that it will frustrate the litigation to prove the relevant facts. That principle is not controversial. However, his Honour went on to say that if the shareholders of an impecunious plaintiff company are themselves prepared to stand behind the corporation, this would in itself provide security. Accordingly, the shareholders having exposed themselves to personal liability the weight to be given to the statutory purpose in s 1335 is gone and the defendant in the primary litigation will be in no worse position than if sued by a litigant in person (see Harpur v Ariadne Australia Limited (1984) 2 Qd R 523 and Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545-546. In these circumstances Cooper J said: "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" (page 415.15). 79 This approach has not found favour with the Victorian Court of Appeal. In Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at 197-198 Winneke P and Phillips JA said: "If the comments made by Cooper J. in Gentry Bros. at A.C.S.R. 415; A.C.L.C. 1399 were intended to suggest that the broad discretion, to which the authorities refer, is now to be fettered by a principle to the effect that, in cases where those who stand behind the impecunious company are prepared to expose themselves to a personal liability for the defendant's costs, the court's discretion should rarely be exercised in favour of making an order for security, then, like Powell J. in Erolen at A.C.S.R. 456; A.C.L.C. 524 and Malcolm C.J. in Intercraft , we simply cannot agree - though whether Cooper J. should be read as having said as much is of course another matter; it did not appear so to Beazley J. in K. P. Cable Investments at 203-4. 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 corporate plaintiffs with impecunious individual plaintiffs. The fact that those who stand behind the company are prepared to give an undertaking to the court to pay a successful defendant's costs might be a factor which, on balance, will influence the court's discretion in a particular case - or, more strictly perhaps, influence the manner of its exercise. But to elevate it to a position of critical importance or decisive significance in general seems to us to be requiring the judge to enter upon his or her discretion with a particular predisposition, something which the authorities make clear that the judge should not do. 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: cf. P S Chellaram & Co v China Ocean Shipping Co (1991) 102 A.L.R. 321 at 324; 65 A.L.J.R. 642 at 643. Perhaps, as contended in Intercraft , such an undertaking could have some worth if given by established businessmen who, though impecunious for the time being, might feel impelled by the threat of bankruptcy to honour the undertaking by gaining assistance, perhaps, elsewhere. But, if so, that can be but a relevant consideration; no rule can be laid down - which is how the matter was approached in Intercraft where in all the circumstances the court approved the order for security in the form of a personal guarantee from shareholders and directors though the guarantors were impecunious. In this instance the offer of personal liability was not from all those behind the trusts, nor, on the material put forward, could it be seen as being of any real significance." (emphases added) 80 In words to similar effect Malcolm CJ speaking for the Court in Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 at 316 said: "… the availability of an undertaking of personal liability by the persons who stand behind the company is no more than a factor, albeit an important factor , to be taken into account in the exercise of discretion." (emphasis added)

The "strength" of the main case 81 Her Honour's judgment reveals only a limited consideration of some of the relevant matters and no apparent consideration of others. Her Honour's reasons suggest that she was troubled by the form of the present pleading and was concerned that the claimants may be defeated by an estoppel. 82 It is now established that in certain circumstances a public authority has a duty to disclose information which it has and warn those who may, in ignorance, act to their detriment. (see Alec Finlayson v Armidale City Council (1994) 51 FCR 378; Pyrenees Shire Council v Day (1998) 192 CLR 330). A public body that proffers negligent advice, may depending upon various matters, be liable to a plaintiff who relying on that advice suffers damage including economic loss. (see L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1980) 150 CLR 225; Sutherland Shire Council v Heyman (1985) 157 CLR 424) 83 Her Honour said that she was not persuaded that the claimants had "any real likelihood" of success in the main proceedings. To my mind this was not the correct test to be applied (Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 at 50,636 per Hill J). The question which must be asked is whether the claimants' case is bona fide and raises real issues to be tried. Unless obviously hopeless the prospect of success or failure is of little relevance. This must especially be the case where, as in the present matter, the issues to be litigated are complex and where it may be thought the law is developing. 84 To my mind, although the pleadings require considerable attention, the case as presently pleaded appears bona fide and although it may face difficulties, one of which is whether it is statute barred, it could not presently be said that it is doomed to fail. No defences have yet been filed. The claim is not frivolous and there appear to be real issues to be tried. In my judgment the "strength" of the claimants' case is a neutral factor in the exercise of discretion. (see Litmus Australia Pty Ltd (in Liq) v Paul Brian Canty [2007] NSWSC 670 at [28], Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 574 [37]-[39]).

Impecuniosity of those standing behind the claimants and stultification of the proceedings 85 For the purposes of the application for security for costs, the shareholders in Jazabas are (1) Stephen Haigh (Nominees) Pty Ltd, of which Mr and Mrs Haigh are the only shareholders, and (2) Kikiras Real Estate Pty Ltd. The shareholders in Kikiras are: Dimitrios and Zoe Kikiras. Although an undertaking was proffered to her Honour by Mr Haigh no undertaking was proffered by Mrs Haigh or by Mr and Mrs Kikiras. Mrs Haigh offered an undertaking to this Court but no undertaking has been offered by Mr and Mrs Kikiras. 86 The shares in Permtree and BAS Developments Pty Ltd are held by Stephen Haigh (Nominees) Pty Ltd. The shareholders of that company are Mr and Mrs Haigh. The claimants did not tender any evidence before her Honour which related to any alleged impecuniosity of either Mr or Mrs Haigh. 87 The claimants submitted that because the subpoenaed financial and personal documents of Mr and Mrs Haigh were made available to the Court they had discharged the relevant onus. However, the subpoenaed material was not tendered. Perusal of the transcripts of the hearing before Simpson J reveals a collection of assertions made by counsel for the claimants but this does not provide proof of the Haighs' financial position. 88 The written submissions to this Court maintain the same assertions and include the following: "The individuals behind the companies, whose industry skill and enterprise the companies relied on esp Mr Steve Haigh, have been limited to their own financial circumstances resulting from the inability of the companies to continue their successful businesses…Mr and Mrs Haigh have been forced to sell their family home after the sale of the Nilson Avenue property to survive. They are assetless, and also effectively impecunious." (Plaintiffs' Submissions on Security for Costs, para 7; see also Appeal T69.1-5, 20 August 2007) 89 Before this Court, counsel for the claimants also referred to an annexure to the affidavit of the first and second opponents' solicitor sworn 14 March 2007, which was read in the hearing before the Court of Appeal Registrar on the application for security for costs of this appeal. However, it was not read in this Court and the assertion in the affidavit and the material annexed are not in evidence. 90 In these circumstances the claimants have failed to prove that Mr and Mrs Haigh are impecunious. The same position applies to Mr and Mrs Kikiras. 91 It may be that the failure to tender evidence in relation to the financial position of those persons was an oversight. However, that was not suggested to this Court. Given that the matter has been considered by the primary judge and an application for leave to appeal made to this Court I can only assume that a considered decision was made to confine the evidence with respect to the financial position of the Haighs. The absence of other evidence weighs heavily in favour of the making of an order for security (see Bell Wholesale). The evidence does not enable a finding to be made that the making of an order for security will stultify the main proceedings. It follows that a fundamental element relevant to the exercise of the discretion in favour of the claimants has not been made out.

Was the claimants' impecuniosity caused by the opponents? 92 No evidence was tendered to her Honour on this aspect of the matter. The claimants rely on the findings by Rolfe J to the effect that the actions of the Council caused the claimants to lose the profits which, in his Honour's opinion, they would otherwise have made. 93 The claimants submit that it was after the purchase of the Nilson Street land and the events complained of in the Amended Statement of Claim that the claimants were no longer able to engage in the business of residential property development. It was submitted that it was the breaches of duty and unlawful conduct of the opponents, which led to the loss of revenue and commercial opportunity. Prior to the purchase, the claimants were said to be successful businesses. 94 The claimants carried the onus of establishing both the adequacy of their financial position before their dealings with the opponents and that the opponents' actions have caused or at least materially contributed to the claimants' inability to meet an order for security for costs (see Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [100]). 95 In "Law of Costs", G E Dal Pont says: "[T]he plaintiff must be able to support the allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial. For this reason, it is not enough that the defendant's conduct is merely a contributing factor - it must be the material contributor to or cause of the plaintiff's impecuniosity." (at [29.96] emphasis added)

(see also M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100 per Needham J; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [88] per Austin J; Pioneer Park (in liq) v ANZ [2005] NSWSC 832 at [14] per Einstein J; Sharjade v Darwinia Estate [2006] NSWSC 708 at [17]-[20] per McDougall J) 96 The events of which complaint is made occurred in 1993-1999. It may be that those events, whether by result of actionable fault of the opponents or otherwise, deprived the claimants of anticipated profits. It is conceivable that since those events to date their working capital has diminished, making it more difficult to continue their development activities and take advantage of available business opportunities. However, the evidence before her Honour would not enable these conclusions to be drawn. The fact that the claimants were unable to realise profits from the proposed venture does not, without other evidence, establish that their present impecuniosity has been caused or even materially contributed to by the opponents.

Conclusion 97 As will be apparent I am satisfied that the primary judge did not consider relevant matters and did not ask herself the appropriate question with respect to the prospects of the claimants in the main proceedings. Accordingly, leave to appeal should be granted. 98 The claimants bore the onus of establishing that an order for security would stultify or frustrate the litigation. This required them to prove at least the impecuniosity of both Mr and Mrs Haigh. The absence of evidence leaves the court unable to make these findings. The claimants were also required to establish that their present impecuniosity and inability to meet an order for security for costs was as a result of the opponents' actions. The evidence does not enable that finding to be made. 99 Accordingly, although I would grant leave to appeal I would dismiss the appeal. **********

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION: JAZABAS PTY LTD & ORS v HADDAD & ORS [2007] NSWCA 291

Alec Finlayson v Armidale City Council (1994) 51 FCR 378 Ariss v Express Interiors Pty Ltd (In liq) [1996] 2 VR 507 Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 Cowell v Taylor (1885) 31 Ch D 34 Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 Erolen v Baulkham Hills Shire Council (1993) 10 ACSR 441 Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107 Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) ATPR 40-544 at 46,428 Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd & Ors (1992) 8 ACSR 405 Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 House v The King (1936) 55 CLR 499 Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61 Jazabas v Botany Council [2000] NSWSC 58 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 CASES CITED: L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1980) 150 CLR 225 Litmus Australia Pty Ltd (in Liq) v Paul Brian Canty [2007] NSWSC 670 M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 Mallet v Mallet (1984) 156 CLR 605 Melville v Craig Nowlan & Associates Pty Ltd (2001) 54 NSWLR 82 Micallef v ICI Australia Operations Pty Ltd [2001] NSWCA 274 Norbis v Norbis (1986) 161 CLR 513 Pacific Acceptance Corporation Ltd v Forsyth (No. 2) [1967] 2 NSWR 402 Pioneer Park (in liq) v ANZ [2005] NSWSC 832 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1990) 8 ACLC 29 Project 28 Pty Ltd v Barr [2005] NSWCA 240 Pyrenees Shire Council v Day (1998) 192 CLR 330 Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180 Sharjade v Darwinia Estate [2006] NSWSC 708 Sutherland Shire Council v Heyman (1985) 157 CLR 424 SZEEU v Minister for Immigration and Multicultural and Indigenous Affairs (2006) 150 FCR 214 Uptown Sydney Development Corporation Pty Ltd v Bank of New Zealand (No. 1) (1993) 11 ACSR 300 Winnote Pty Ltd (In liq) v Page (2005) 64 NSWLR 244 Wong and Leung v The Queen (2001) 207 CLR 584 Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542

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."

JAZABAS PTY LTD & ORS v HADDAD & ORS

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