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[2003] NSWSC 1044
procedural. The defendant’s application for security for costs was dismissed; zero security was recorded as reasonable, and the defendant was ordered to pay the plaintiff’s costs of the application.
The court held that the requirement in s 462(4) to consider reasonable security did not mean that every winding-up applicant who might be a contingent creditor had to pay security. The judge considered the strong evidence of insolvency and the plaintiff's role as a trustee in bankruptcy. Those considerations meant that no security was reasonable in this case. The defendant's application was dismissed, and it had to pay the costs of that application.
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In Macks v Valamios Produce (No 2) [2003] NSWSC 1044, Barrett J dealt with an interlocutory application for security for costs, not the final application to wind up the company. The plaintiff, Peter Ivan Macks, was acting as trustee for the bankrupt estates of Efstratios Valamios and Constantina Valamios. He was seeking an order to wind up Valamios Produce Pty Limited. The company asked the court to require him to provide security for the company's costs if it succeeded in the winding-up proceeding. The judgment was delivered on 12 November 2003.
The company's argument depended on the plaintiff's creditor status. It said he was only a contingent or prospective creditor because he was pursuing separate proceedings in the Federal Magistrates Court under the Bankruptcy Act 1966 (Cth). Those proceedings sought recognition that certain dispositions in favour of the company, including payments, were void. If the orders were made, the relevant money would become recoverable by the trustee (paras 2–3). The judgment does not determine the outcome of those separate proceedings.
The plaintiff's position was that he was proceeding on the basis of an unsatisfied statutory demand and was therefore a present creditor, not a contingent or prospective one (para 8). Barrett J did not need to finally resolve this difference in characterisation. He considered the security question both on the assumption that s 462(4) applied and by reference to ordinary security-for-costs principles.
The court's assessment of the insolvency evidence was important. Barrett J referred to his findings on 31 October, made in another interlocutory application, that the company was insolvent on the evidence then before him, apart from any presumption under s 459C (para 9). He also reported that counsel had told him about a view generally corresponding with his own that a Court of Appeal judge had expressed earlier that week. But Barrett J expressly said he had no additional solvency evidence before him and took into account only the evidence supporting his own earlier conclusion (para 9). That qualification matters: the decision rests on the evidence before Barrett J, not on the reported account of the other proceeding.
The court dismissed the company's security application. It stated that zero security was reasonable in the winding-up proceeding and ordered the company to pay the plaintiff's costs of the security application (paras 15–16). The decision resolved the security issue only. It did not itself order the company to be wound up.
The statutory question arose under s 462(4) of the Corporations Act 2001 (Cth). As quoted in the judgment, the section says the court must not hear an application by a contingent or prospective creditor unless reasonable security for costs has been given and a prima facie winding-up case has been established (para 2). The defendant treated this as requiring security. Barrett J rejected that as an automatic consequence.
The court read the phrase “such security for costs as the Court thinks reasonable” as leaving the court to decide what amount, if any, was reasonable. It said a court could conclude that the circumstances made it reasonable for no security to be given (para 5). The judge considered it implausible that Parliament intended such a conclusion to prevent the court from hearing the winding-up application. Nor, in his view, would it make sense to require a merely nominal order where no security was actually reasonable (para 5).
The judgment described s 462(4) as requiring that the security question be addressed as part of threshold screening. It also treated the provision as providing a specific jurisdiction to order security, including in circumstances where an ordinary application might not independently meet the usual threshold for such an order (paras 6–7). But the way that specific jurisdiction should be exercised, and the amount of any security, remained governed by generally applicable security-for-costs principles (para 7).
The judge then identified two considerations as decisive. First, he considered the plaintiff's prospects of success. Because the winding-up ground was insolvency, and because his earlier finding of insolvency was based on evidence apart from the s 459C presumption, he regarded the prospects of the winding-up application as very high (para 9). He therefore assessed the chance that the plaintiff would fail and become liable for a costs order as very low (para 10). This weighed heavily against security.
Second, the plaintiff was suing as a trustee in bankruptcy. Barrett J distinguished mere impecuniosity from circumstances that could justify protecting a defendant against unrecovered costs. He stated that impecuniosity alone was not a reason to order security (para 11). He relied on the principle in Cowell v Taylor (1885) 31 ChD 34, discussed in Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679, that a trustee in bankruptcy is not generally required to give security merely because the estate is insolvent (para 11).
Barrett J considered that principle applicable to the plaintiff. Drawing on Adsett v Berlouis (1992) 37 FCR 201, he noted that a trustee in bankruptcy has both an estate-administration function and statutory duties performed as a public duty for the public welfare (para 13). Requiring security merely because the trustee's funds were limited could interfere with those functions. The judge allowed for the possibility that an extreme circumstance could justify security, but none had been suggested in this case (para 14).
The judgment mentioned the possibility that security might stultify a plaintiff's ability to pursue an arguable case, but expressly did not need to decide that issue because the insolvency evidence and the trustee principle were sufficient to dispose of the application (para 14).
The judgment's account of the statutory position begins with the wording of s 462(4): a contingent or prospective creditor's winding-up application could not be heard unless reasonable security had been given and a prima facie case for winding up had been established (para 2). The defendant's argument treated the security limb as requiring an order against the plaintiff because it characterised him as a contingent or prospective creditor (paras 2–3).
Barrett J's decision clarified, for the application before him, that the statutory language did not compel a positive security order in every case. It required the court to address security and to decide what was reasonable, which could be zero (paras 5–7, 15). The decision therefore treated the provision as both a screening mechanism and a source of specific jurisdiction, while preserving a discretionary assessment informed by ordinary security-for-costs principles.
The judgment also applied an established trustee-in-bankruptcy principle to the circumstances before it. It relied on the proposition, drawn from Cowell through Timbertown, that a trustee is not ordinarily required to provide security merely because the estate is insolvent, and on Adsett for the trustee's dual functions (paras 11–13). The judgment does not purport to remove all possibility of security against a trustee. It expressly leaves open the possibility of an order in an extreme circumstance (para 14).
There is a textual irregularity in paragraph 6: it refers to “s.462(2)” when describing the purpose of the two limbs, although the provision quoted and applied in the judgment is s 462(4). The judgment does not explain that reference. A careful account should note it rather than silently treating it as a correction.
The source provided is the judgment itself. It does not establish a comprehensive account of the law before the decision, nor does it provide a later judicial history. The significance that can be stated from this text is therefore limited to the court's interpretation and application of the provisions and authorities it discussed.
At paragraph 5, Barrett J said: “It may conclude that circumstances are such as to make it reasonable that no security be given.” In plain English, the statutory requirement to consider security does not necessarily result in the applicant having to pay money into court. The court can decide that the appropriate amount is nothing.
At paragraph 7, the judge said that whether the statutory jurisdiction should be exercised, and how, is to be determined according to generally applicable security-for-costs principles. This explains the relationship between the statutory rule and ordinary security practice. The statute provides a specific route for considering security in the relevant winding-up applications; the exercise of that power still requires a contextual assessment.
At paragraph 9, the judge explained that his strong view of the insolvency case came from evidence considered on 31 October, “apart altogether from any s.459C presumption”. He carefully confined his assessment to that evidence. He mentioned information about the Court of Appeal proceedings only to clarify that it was not additional evidence before him.
At paragraph 10, Barrett J said the chances of the plaintiff failing in the winding-up attempt were “very low”. In context, he treated that assessment as relevant to the risk that the plaintiff would become subject to a costs order. It was not a final determination of the winding-up application.
At paragraph 14, the judge said the insolvency case was “very strong” and that the plaintiff, as trustee in bankruptcy, would not “on principle and as a matter of policy” be required to give security, except perhaps in an extreme circumstance not suggested in the case. This combines the two decisive considerations: the apparent merits and the trustee's role.
Finally, paragraph 15 makes the operative security conclusion explicit: the court thought “zero security for costs” reasonable. Paragraph 16 then orders the defendant to pay the plaintiff's costs of the security application.
The statutory discussion is relevant to a winding-up application where the applicant may be a contingent or prospective creditor. In this case, the alleged contingency arose because the trustee's recovery depended on separate proceedings seeking to set aside dispositions in favour of the company (paras 2–3). The decision is particularly informative where the issue is whether s 462(4) makes security automatic. Its answer is that the court must address the question, but can find no security reasonable.
The trustee principle is relevant where the applicant brings proceedings in the capacity of a trustee in bankruptcy and the opposing party relies on limited funds as a reason for security. The judgment treats that role as significant because the trustee administers the estate for creditors and the bankrupt and performs public statutory functions (para 13). It does not say that a trustee can never be ordered to provide security. It leaves open an exceptional case, while finding that no such circumstance was raised before it (para 14).
The prospects consideration is relevant where the court has evidence bearing on the underlying claim. Here, the apparent strength of the insolvency case was grounded in the judge's earlier findings based on evidence, rather than simply the statutory presumption under s 459C (paras 9, 14). The decision does not establish that a strong case always defeats security. It shows that prospects were weighed alongside the plaintiff's trustee status and the purpose of the security application.
The judgment also considers an alternative framing: if the plaintiff was a present creditor relying on an unsatisfied statutory demand, the question would be whether the ordinary security-for-costs threshold was met (para 8). It did not need to determine the creditor-status dispute conclusively because the relevant considerations led to the same result under either approach.
The judgment supplied here does not cite any later cases or describe subsequent judicial treatment of Macks v Valamios Produce (No 2). On this source alone, it is not possible to say whether later courts followed, distinguished, limited or questioned the decision.
The authorities identified in the judgment are earlier authorities, not later treatment of this case. Barrett J referred to Australia & New Zealand Banking Group Ltd v Ringrong Pty Ltd for the view that the court had discretion to dispense with security for a contingent or prospective creditor (para 4). He also considered Re Austral Group Investment Management Ltd, a New Zealand decision under an analogous provision, as supporting a discretionary reading of the security requirement (para 4). For the trustee principle, he relied on Timbertown, Cowell and Adsett (paras 11–13).
Accordingly, the judgment text supports an account of the authorities Barrett J used, but not a claim about how the precedent was treated after 2003.
The judgment left the underlying winding-up application unresolved. It assessed the insolvency case as very strong for the limited purpose of deciding security, but it did not make the final winding-up order in this decision (paras 1, 9–15). The ultimate outcome of the winding-up proceeding is not stated in the provided text.
The judge did not finally decide whether the plaintiff was a present creditor or a contingent or prospective creditor. He addressed the security application on both possible approaches (paras 8–9). The precise effect of the statutory demand and of the separate Bankruptcy Act proceedings therefore remained outside the determination necessary to decide this application.
The scope of the “extreme circumstance” that might justify security against a trustee in bankruptcy was not defined. The court said no such circumstance had been suggested here, without setting out a test or examples (para 14). The decision accordingly leaves that boundary open.
Nor did the court decide whether a security order would stultify the plaintiff's ability to pursue an arguable case. It mentioned that consideration but said the other factors disposed of the application (para 14). Finally, the reference in paragraph 6 to s 462(2), rather than the s 462(4) provision quoted and applied elsewhere, is not explained by the judgment.
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CITATION : Macks v Valamios Produce (No 2) [2003] NSWSC 1044 revised - 12/11/2003 HEARING DATE(S) : 10/11/03 JUDGMENT DATE : 12 November 2003
JURISDICTION: Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : Application for security for costs dismissed
CATCHWORDS : CORPORATIONS - winding up - application on grounds of insolvency - strong evidence of insolvency even apart from s.459C presumption - plaintiff seen by defendant as contingent or prospective creditor but claims to be direct creditor - plaintiff is trustee in bankruptcy - whether security for costs mandatory under s.462(4) - whether security for costs should be ordered LEGISLATION CITED : Corporations Act 2001 (Cth), s.459C, 462(4) Adsett v Berlouis (1992) 37 FCR 201 Re Austral Group Investment Management Ltd [1993] 2 NZLR 693 CASES CITED : Australia and New Zealand Banking Group Ltd v Ringrong Pty Ltd (unreported, FCA, 11 September 1995) Cowell v Taylor (1885) 31 ChD 34 Riot Nominees Pty Ltd v Suzuki Australia Pty Ltd (1981) 34 ALR 653 Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679 PARTIES : Peter Ivan Macks as Trustee for Efstratios Valamios and Constantina Valamios - Plaintiff Valamios Produce Pty Limited - Defendant FILE NUMBER(S) : SC 5299/03 COUNSEL : Mr J T Johnson - Plaintiff Mr R K Newton - Defendant SOLICITORS : Sally Nash & Co - Plaintiff Brown & Partners - Defendant
IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST
5299/03 - PETER IVAN MACKS AS TRUSTEE FOR EFSTRATIOS VALAMIOS AKA STEVE VALAMIOS AND CONSTANTINA VALAMIOS v VALAMIOS PRODUCE PTY LTD
1 The defendant seeks an order for security for costs against the plaintiff who is the applicant for an order that the defendant be wound up. 2 The defendant's contention is that the plaintiff is only a contingent or prospective creditor and that an entitlement to an order for security for costs arises under s.462(4) of the Corporations Act 2001 (Cth). That section is as follows: "The Court must not hear an application by a person being, or persons including, a contingent or prospective creditor of a company for an order to wind up the company unless and until: (a) such security for costs has been given as the Court thinks reasonable; and (b) a prima facie case for winding up the company has been established to the Court's satisfaction." 3 The proposition that the plaintiff is only a contingent or prospective creditor is advanced by the defendant on the basis that the plaintiff, as the trustee under the Bankruptcy Act 1966 (Cth) of the estates of Efstratios Valamios and Constantina Valamios, seeks in the Federal Magistrates Court orders under that Act recognising as void certain dispositions by those persons in favour of the defendant, including payments of money. Such orders, if made, will have the effect that the relevant money becomes recoverable by the plaintiff. 4 Even if it is accepted that this circumstance makes the plaintiff a contingent or prospective creditor of the defendant, it does not follow that the court is compelled to make an order for security for costs or that, in the absence of such an order, the winding up application cannot be pursued. In Australia & New Zealand Banking Group Ltd v Ringrong Pty Ltd (unreported, Ryan J, FCA, 11 September 1995), it was recognised that the court has a discretion to dispense with the provision of security for costs by a contingent or prospective creditor applicant despite the terms of the section. In Re Austral Group Investment Management Ltd (1993) 2 NZLR 693, a case under an analogous New Zealand provision, the statutory prerequisite was seen by the judge as concerned with "such order for security as I might see fit to impose", thus again indicating that the condition applies only if the court sees fit to order security. 5 Section 462(4) itself does no more than say that the court may not hear an application by a contingent or prospective creditor unless the plaintiff has given such security for costs as the court thinks reasonable. It is for the court to decide in all the circumstances what is reasonable. It may conclude that circumstances are such as to make it reasonable that no security be given. It cannot have been the intention of the legislature that such a finding should then preclude the court's hearing the winding up application; nor would it be sensible to think that in such a case the court should go through the charade of ordering security in some purely nominal sum. 6 The purpose of s.462(2) in both its limbs is to ensure that the viability of winding up applications by contingent and prospective creditors is screened at the threshold and that the question whether security for costs should be ordered is directly addressed in that screening. Insofar as it is concerned with security for costs, the section aims not to cause an order for security for costs to be made in every case, but rather to make it clear that the issue is to be addressed in every case and that an order may be made whether or not the case is one in which such an application would, on ordinary principles, be entertained. In other words, the section itself causes the case with which it deals to be one in which there is a specific jurisdiction to order security, even though the circumstances are not otherwise such would cause the court to consider an application. The circumstances to which I refer are, in general terms, those enumerated in Part 53 rule 2 of the Supreme Court Rules. 7 Where s.462(4) applies, it thus supplies a specific and discrete jurisdiction to order security for costs but, as I view matters, the question whether that jurisdiction should be exercised (and, if so, how) is to be answered according to the generally applicable principles concerning security for costs, being in the main the principles applying in cases arising under Part 53 rule 2. 8 The plaintiff's view of matters does not coincide with that of the defendant. The plaintiff considers himself to be proceeding on the basis of an unsatisfied statutory demand and therefore with the status of a present creditor, as distinct from a contingent or prospective creditor, so that s.462(4) plays no part and the security for costs application is to be approached without regard to that section. When the matter is viewed in that way, the threshold question becomes whether one of the circumstances generally accepted as providing access to the jurisdiction to order security for costs exists, they being the circumstances referred to in Part 53 rule 2. On that, the plaintiff concedes that he falls within Part 52 rule 2(1)(a), being resident in Adelaide and therefore outside New South Wales. (I might add as an aside that it could not be suggested that Part 52 rule 2(1)(b) applies: although the plaintiff is a trustee, he can on no view be said to be suing for the benefit of some other person as a real plaintiff: see Riot Nominees Pty Ltd v Suzuki Australia Pty Ltd (1981) 34 ALR 653.) 9 When it comes to the substantive question whether the court should exercise the jurisdiction to order security for costs, whether the jurisdiction is regarded as arising specifically from s.462(4) or more generally in the way recognized in Part 53 rule 2, the first matter to be considered is the plaintiff's prospects of success. Given that the ground upon which the plaintiff seeks a winding up order is that the defendant is insolvent, the prospects of success, as they currently appear to the court, are very high. I say this because of the adverse findings I made as to the defendant's solvency, apart altogether from any s.459C presumption, when determining, on 31 October, another interlocutory application initiated by the defendant. My conclusion at that point, on the basis of the evidence adduced, was that the defendant was insolvent. I was told from the bar table when the present application was argued after 4 o'clock on Monday of this week that the solvency issue had again been canvassed upon an application by the defendant to Giles JA in the Court of Appeal earlier that day and that his Honour took a view generally corresponding with mine, although I hasten to say that no evidence on the matter of solvency has been adduced before me beyond that on which I based my decision of 31 October and that I take that alone into account now. 10 In this state of affairs, I must rate the chances of the plaintiff's failing in his attempt to obtain a winding up order and thereby becoming subject to a cost order as very low. That is something that tells heavily against the making of on order for security for costs. 11 The next consideration is whether the plaintiff is impecunious in such a way that the defendant may be entitled to some form of protection in respect of costs. I put the matter in that way because the plaintiff's impecuniosity alone, assuming it to exist, represents no reason for ordering security. On this aspect one can go straight to a principle referred to by Young J in Timbertown Community Enterprises Ltd v Holiday Coast Credit Union Ltd (1997) 15 ACLC 1679, as extracted from Cowell v Taylor (1885) 31 ChD 34. His Honour said: "The general rule is that the court does not require security for costs to be given by a plaintiff who sues as a trustee in bankruptcy even when the estate is in insolvent circumstances. This is the rule in Cowell v Taylor (1885) 31 ChD 34. There is another aspect of that rule that the court does not deprive a person of the opportunity for litigating a matter solely because he or she is impecunious but that is not directly in point in the instant case. The basic rule in Cowell v Taylor has been considered to be applicable in Australia and its scope is noted in the leading book, Delany on Security for Costs (LBC, Sydney, 1989) at pages 34 and 43." 12 Young J went on to say that a similar principle holds good in relation to an administrator in an administration under Part 5.3A of the Corporations Act. Because they are instructive in the present context, I quote his Honour's observations on that aspect: "The real question is whether that principle applies to an administrator. In my view, it does. The administrator is, almost by definition, dealing with a company whose solvency is questionable and the policy of the Corporations Law is that there shall be a complete freeze on people altering their positions whilst the administrator is assessing the situation. There would be a complete breakdown of this policy if as soon as the administrator tried to protect the assets of the company generally, he could be foiled by a stay because of failure to meet an order for security for costs. Indeed in most cases of administration, the administrator would be in no position to marshal sufficient resources to meet any security ordered. Counsel have cited to me a case where security for costs was ordered against a company in administration, namely, Pasdale v Concrete Constructions (1995) 131 ALR 268 . It would not appear that Cowell v Taylor was referred to in that case either by counsel or the judge. Doubtless, there may be situations where it would be appropriate to order security for costs against an administrator, but I think that would rarely be the situation where the administrator is trying to protect the company generally against a person who, if the administrator is correct, may have acted contrary to the policy of Division 6 of Pt5.3A of the Corporations Law ." 13 The observations apply, with at least equal force, to a trustee under the Bankruptcy Act. It was said by the Full Federal Court in Adsett v Berlouis (1992) 37 FCR 201, that such a trustee has a dual function: first, to administer the estate in the interests of the creditors and the bankrupt; and second, to exercise, as a public duty and for the public welfare, certain powers given and duties imposed under the Bankruptcy Act. It would interfere with the due performance of these functions to regard any shortage of funds in the trustees's hands as a pretext for a security for costs order. 14 Security for costs applications also raise other considerations such as whether a requirement for security would stultify the ability of the plaintiff to pursue an arguable case legitimately instituted. In the present case, however, I regard the two particular considerations to which I have referred as so compelling as to dispose of the application. The case for the making of a winding up order on the grounds of insolvency, apart altogether from any s.459C presumption, is, on the evidence I have seen, very strong. The plaintiff, being a trustee in bankruptcy, will not, on principle and as a matter of policy, be required to give security for costs, except perhaps in some extreme circumstance of a kind not in any way suggested here. 15 The defendant's application for an order that the plaintiff give security for costs is dismissed and I record, in case due administration of the provisions of s.462(4)(a) will be assisted by my doing so, that the court thinks zero security for costs to be reasonable in relation to this winding up proceeding. 16 The defendant will pay the plaintiff's costs of the application for security for costs.
Last Modified: 11/13/2003 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.
Macks
Valamios Produce
(1992) 37 FCR 201
(1981) 34 ALR 653
(1995) 131 ALR 268
The defendant’s application for security for costs was dismissed; zero security was recorded as reasonable, and the defendant was ordered to pay the plaintiff’s costs of the application.