Ji-Shen Chen v Pyramid Building Society

REASONS FOR JUDGMENT 1 This is an application by Pyramid Building Society (In Liquidation) ("Pyramid") for an order requiring Ji-Shen Chen ("the appellant") to provide security for costs in an appeal against an order of O'Connor J of 4 February 1999 sequestrating his estate under s 52 of the Bankruptcy Act 1966 (Cth) ("the Act"). It was common ground that the appellant could appeal against the order without the involvement of the trustee: see Jury v Westpac Banking Corporation [1997] FCA 1277. 2 Before discussing the appropriate principles and their application to the circumstances of this case it is necessary to very briefly set out some of the background against which the sequestration order was made. In September 1989 the appellant, along with others, guaranteed a loan of approximately $4 million by Farrow Mortgage Services Pty Ltd ("Farrow") to Fortuna Co Pty Ltd ("Fortuna"). A further loan of approximately $460,000 was made in February/March 1990 by Farrow to Fortuna. For reasons which it is unnecessary to detail, Pyramid was able to enforce the guarantees and judgment was obtained against the appellant on 6 December 1993 in the sum of $3,517,706.18. That judgment arose after a contested hearing in the Commercial Division of the Supreme Court of New South Wales. Others involved in related proceedings appealed the judgment against them. While their appeals were unsuccessful, observations made by Meagher JA in the Court of Appeal suggested that others who had provided guarantees (and this could have included the appellant) were not liable under the guarantees because the principal due had increased as a result of the transaction in February/March 1990. This suggestion was founded on the judgment of the High Court in Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549. After the judgment of the Court of Appeal others who had had judgment entered against them but who had not appealed, sought to appeal out of time. The appellant did not. Those applications to appeal out of time were unsuccessful. 3 In the proceedings before O'Connor J the appellant sought to argue that for the purposes of s 52 of the Act there was no debt owing to the petitioning creditor, Pyramid for the reasons identified by Meagher JA. Of this argument her Honour said in her reasons for judgment published on 4 February 1999: The respondent debtor argued that even if the $460,000 was held in trust for Farrow on its transfer, it still created a legal debt to Pyramid for Fortuna, guaranteed by the debtor, and this was enough to vitiate the guarantee as stated previously. Both sides of this are arguable. If called upon to decide the question, I would favour the applicant creditor. 4 The point the appellant proposes to argue in the appeal in this Court is that because O'Connor J viewed as arguable the contention the appellant had been discharged from any liability under the guarantee, her Honour was obliged to determine that issue and, in so doing, determine whether there was a debt owing. The obligation to follow this course was said to arise having regard to the observations of Barwick CJ in Wren v Mahony (1972) 126 CLR 212 at 224. The Chief Justice said: … the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that Court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind a judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, that Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. (Emphasis added) 5 The point the appellant seeks to raise is one of substance. However whether the appellant ultimately succeeds in setting aside the sequestration order may well depend upon the strength of the argument that the events in early 1990 had the effect of discharging the appellant from liability under the guarantee. That is, it may depend on the acceptance by the Full Court of the correctness of the remarks of Meagher JA in the Court of Appeal. On this point, as earlier noted, O'Connor J indicated after hearing full argument that she would have decided that point in the applicant creditor's favour. That is, impliedly, she would not have accepted the views of Meagher JA if called upon to do so. 6 The principles governing an application for security for costs in an appeal are not necessarily the same as those that arise in an application at first instance. As Bowen J noted in J & M O'Brien Enterprises Pty Ltd v Shell Co Ltd (1983) 70 FLR 261 at 264: One matter which is generally considered in relation to applications for security for costs in relation to proceedings at first instance is what prospects of success the plaintiff has in the proceedings. If the plaintiff has a strong and apparently meritorious case the Court is reluctant to make an order which may have the effect of shutting the plaintiff out. In the case of an appeal the position is slightly different. For one thing the plaintiff has had his day in court. 7 His Honour went on to consider whether the appellant in that case had a point of substance that was raised bona fide in the appeal. The special position of appeals has been long recognized: see Cowell v Taylor [1885] 31 ChD 34 at 38. 8 More generally, the discretion to be exercised in deciding whether or not to order security has been described by McHugh J in P S Chellaram & Co v China Ocean Shipping Co (1991) 65 ALJR 642 at 643 in the following way: To make or refuse to make an order for security for costs involves the exercise of a discretionary judgment. That means that the court exercising the discretion must weigh all the circumstances of the case. The weight to be given to any circumstance depends not only upon its own intrinsic persuasiveness but upon the impact of the other circumstances which have to be weighed. 9 I have already referred to the question of whether a point of substance is raised in the appeal. I have indicated that the immediate point is of substance. However whether the appellant will succeed in setting aside the sequestration order is a more doubtful proposition. The appellant is plainly impecunious at least in the sense that his property has vested in the trustee by virtue of the sequestration order. It has not been stayed. Thus, it can be assumed he does not personally have any capacity to satisfy an order for security. However notwithstanding that the appellant is a bankrupt, the Court is entitled to look through the form of the applicant's circumstances to his substance: see Bond v Trustee of the Property of Alan Bond, A Bankrupt (1994) 32 ALD 770. There is evidence from the appellant of his limited circumstances, apart from his bankruptcy, and his dependency on his parents who, according to his evidence, are withdrawing support from him because of his bankruptcy. However in this application he has retained solicitors and counsel from which it might be inferred that the appellant is not devoid of financial support from others. 10 It may be accepted that if the appellant is unsuccessful in this appeal Pyramid may not be able to recover or fully recover its costs even on a party/party basis. 11 These various considerations, namely whether the appeal raises a point of substance, the impecuniosity of the appellant, whether financial support might be forthcoming from others and the effect on Pyramid in the event of the appeal not succeeding tend to create a balance providing no clear indication as to whether security should be ordered. However one feature of the present case suggests to me, in the circumstances, that security should not be ordered. The order made by O'Connor J has a profound effect on the appellant. It will expose his financial circumstances to close scrutiny and substantially limit what he may do during his bankruptcy. One limitation concerns his ability to travel. The appellant has already sought to travel to Taiwan to obtain employment and the trustee has refused permission. This is but an illustration of the effect of the sequestration order. It is an order that affects his liberty and that it has this character is a relevant consideration in deciding whether to order security in an appeal against it: see Hood Barrs v Heriot [1896] 2 QB 375 at 376. 12 Unless I was satisfied that funds were available from others to satisfy any order for security then I would not order it in this case. While, as I earlier noted, the appellant has retained solicitors and counsel in this application, that fact is not a sufficient foundation for concluding that funds would be available to provide security. An affidavit of the appellant was read in these proceedings and no attempt was made to cross-examine him about the source of funds he may be deploying to retain solicitors and counsel in these proceedings. 13 I dismiss the application for security and order Pyramid to pay the appellant's costs of the motion. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.