BETWEEN : MARAND HOLDINGS PTY LTD (ACN 069 216 646)

Practice and procedure - Application for security for costs - s 1335 - Determination of claim and counterclaim involve canvassing substantially same facts - Inability of those behind company to provide security - Turns on own facts

Corporations Act 2001 (Cth), s 1335

Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516

Duskwood Pty Ltd v Bellara Willows Pty Ltd [2001] WASC 281

Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (In Liq) (1979) CLC 40-571

Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440

Idoport Pty Ltd v National Australia Bank Ltd; Idoport Pty Ltd v Argus; Idoport Pty Ltd v National Australia Bank [2002] NSWCA 271

Interwest Ltd v Tricontinental Corporation Ltd (1991) 9 ACLC 1218

Pacific Acceptance Corp Ltd v Forsyth (No 2) (1967) 85 WN (Pt 1) (NSW) 715

Pearson v Naydler [1977] 3 All ER 531

Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 1 QB 609

Southern Cross Exploration NL v Fire and All Risk Insurance Co Ltd (1985) 1 NSWLR 114

Westralian Gold Mines Ltd v Westralian Minerals & Drilling Pty Ltd (1986) 4 ACLC 167

WH Humphries Nominees Pty Ltd v Commissioner of Main Roads (1991) 4 ACSR 729

1 MASTER NEWNES: This is an application by the defendants for security for costs under s 1335 of the Corporations Act 2001 (Cth) and, alternatively, under O 25 of the Rules of the Supreme Court. Security in an amount of $59,793 has been sought.

2 It was not in issue on the application that the plaintiff would be unable to pay the defendants' costs of the action if the defendants were successful at trial. The only issue was whether, as a matter of discretion, an order for security should be made. Before turning to that question, it is necessary to say something about the action.

3 In the statement of claim, the plaintiff alleges that in about July 2000 the plaintiff, by Desire and Armande Pierre, entered into discussions with the first and second defendants, represented by the third defendants, for the purchase of the first and second defendants' business known as "Le Taste - Adelaide Terrace". In the course of those discussions, the plaintiff was provided, by one of the third defendants, with a three-page spreadsheet which set out the till takings for the business from 1 July 1999 to 26 June 2000.

4 Subsequently, one or other of the third defendants said that the total sales figure of $324,582.07 referred to in the spreadsheet had to be increased by an amount of $42,027 for delivery sales. The third defendants represented that the total sales for the business for the financial year ended 30 June 2000 therefore amounted to $366,609. On about 11 August 2000, the plaintiff entered into a contract to purchase the business for the sum of $350,000. It says that it relied on the representation as to the takings of the business in deciding to enter into the contract.

5 The plaintiff alleges that the sales figure was false and that it substantially overstated the true position. According to the plaintiff, it has employed the same manager as the first and second defendants, but the average weekly turnover for the financial years ended 30 June 2001 and 30 June 2002 (including delivery sales) was $5452 and $5686 respectively, compared to the represented sales figures, which were equivalent to an average weekly turnover of $7050.

6 The plaintiff says that, had it known the true position, it would not have entered into the contract to purchase the business. The plaintiff says that the true value of the business was only $175,000.

7 The plaintiff claims against the first and second defendants under s 52 of the Trade Practices Act 1974 (WA) and says that the third defendants aided or abetted, or were knowingly concerned in, the contravention of the Act. Alternatively, the plaintiff claims in negligence, alleging that the defendants owed to the plaintiff a duty to exercise reasonable care to ensure they did not provide the plaintiff with false information concerning the trading results of the business, and that the defendants were in breach of that duty.

8 The plaintiff claims by way of damages, among other things, the difference between the purchase price and what it says was the real value of the business, accumulated trading losses and opportunity costs. The plaintiff's total claim is in the sum of $437,116

9 The defendants deny that the spreadsheet misstated the takings of the business. They say that the purchase price of $350,000 was agreed on the basis of takings of $324,582.07 and that takings for the deliveries (which the defendants say they told the plaintiff were $32,600) were afterwards included in the sale without alteration to the purchase price. The first and second defendants counterclaim against the plaintiff the sum of $29,534, being the balance of the purchase price payable under the contract.

10 The plaintiff has filed a reply and defence to counterclaim. In the defence to counterclaim, relevantly, the plaintiff admits that the balance of the purchase price has not been paid but denies that the first and second defendants are entitled to it because, it is alleged, the plaintiff was induced to enter into the contract by reason of the defendants' wrongful conduct as pleaded in the statement of claim.

11 As it was not in issue that the plaintiff would be unable to pay the defendants' costs of the action if the defendants were successful at trial, I will turn immediately to the question of whether, as a matter of discretion, an order for security for costs should be made. The discretion is, of course, unfettered, but some of the factors to be taken into account are:

(1) whether the plaintiff's claim is bona fide and has reasonable prospects of success;

(2) if there is a counterclaim, whether the claim and the counterclaim cover substantially the same factual ground;

(3) whether the defendant has contributed to the plaintiff's likely inability to pay costs;

(4) whether an order for security for costs would have the effect of stultifying the action;

(5) whether it appears that the applicant is seeking to stifle a legitimate claim;

(6) whether there are others behind the corporate plaintiff who might reasonably be expected to contribute to the satisfaction of an order for security.

Engel Pty Ltd v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 at 4 - 5 and Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998.

12 The fact that the plaintiff will be unable to pay the defendants' costs if the defendants are successful is a factor of great weight in the exercise of the discretion, but it is not necessarily decisive and regard must be had to all of the circumstances of the case.

13 The question of whether the plaintiff's claim is bona fide and has reasonable prospects of success is always a relevant consideration. In this instance, as is so often the case, on the available material it is impossible to form any reliable view of the merits. I accept that, 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 and Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497 at 514. The plaintiff's claim appears to me to meet the criteria referred to and I proceed on the basis that the claim is bona fide with a reasonable prospect of success.

14 The plaintiff says there are several reasons why security should not be ordered in this case.

15 First, it is said that the plaintiff's claim would be stultified if security were ordered as neither the plaintiff, nor those who stand behind it, have the means to provide security. Where that is made out, it is generally inappropriate to order security: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542. But the onus lies on the plaintiff to establish that those who stand behind the company, and will benefit from the litigation if it is successful, are without means: BMP Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857; Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 52 ALR 176 at 179; Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1 at 3.

16 The financial statements of the plaintiff for the financial year ended 30 June 2002, the latest available accounts, are annexed to an affidavit of Mr Pierre of 4 September 2003. They show a trading loss for the financial year ended 30 June 2002 of $20,821.30, on sales of $295,675.72. That follows a trading loss for the previous year of $40,219.47. The balance sheet shows total current assets of $5,468.42 and non-current assets of $317,300.70, of which $241,640.90 is made up of intangible assets. Total liabilities are $383,807.89, leaving an excess of liabilities over assets of $61,038.77.

17 Provisional figures prepared by Mr Pierre for the financial year ended 30 June 2003 show a trading loss of $35,734.62, before depreciation.

18 The position of the directors and shareholders of the plaintiff, Mr and Mrs Pierre, is a little more complicated.

19 Mr Pierre currently owns two businesses, Flavour House and Riviera Food Products. Dealing first with Flavour House, Mr Pierre says that prior to 30 April 2000, he operated that business in conjunction with Pierre & Pierre Investments Pty Ltd. Since 30 April 2002, Mr Pierre has operated the business as a sole trader. According to Mr Pierre, as at 25 April 2003, Flavour House (which I take to mean Mr Pierre) owed the Australian Taxation Office an amount of $45,699.14 in respect of BAS arrears. Initially Mr Pierre was paying that amount by monthly instalments of $1500 but those payments have recently been reduced for reasons to which I will come.

20 As at 18 January 2002, "Flavour House" is said to have owed the Australian Taxation Office an amount of $179,489.90 for excise duty. Initially, that amount was being paid by Mr Pierre by monthly instalments of $5500 from funds generated by the Flavour House business, but those payments have also recently been reduced. According to Mr Pierre, the outstanding amount must be repaid or he will lose his excise licence, which is essential to the operation of the business.

21 The position, then, in respect of Flavour House is that it appears there is an amount of $225,189 owing to the Australian Taxation Office.

22 Turning to Riviera Foods, according to Mr Pierre he became the sole proprietor of that business on 9 May 2001. At some stage the business was owned by Pierre Holdings Pty Ltd, of which Mr Pierre was a shareholder and director. Mr Pierre says that, as at 25 April 2003, Pierre Holdings owed an amount of $15,873.64 to the Australian Taxation Office for BAS arrears. Mr Pierre says that as a "former director" of the company (he does not say when he ceased to be a director), he is personally liable for that amount and that he was paying it by monthly instalments of $1500.

23 Until very recently Pierre Holdings also had an overdraft and a loan from BankWest. At the time Mr Pierre swore an affidavit of 3 July 2003, the balance owing on the overdraft was approximately $39,952 and the balance on the loan approximately $131,575. Both amounts were secured by a mortgage to BankWest over the Pierres' house.

24 An amount of $31,476.73 has also been borrowed from the National Australia Bank for the purposes of the Riviera Foods business and, although that sum is secured against assets of other members of Mr Pierre's family, Mr Pierre says the loan is serviced from the income of Riviera Foods.

25 According to Mr Pierre, Pierre Holdings is no longer trading and has no assets.

26 In his affidavit of 3 July 2003, Mr Pierre says that Flavour House and Riviera Food Products produced an operating profit before tax of $61,157 for "the period ending 31 March 2003". Neither the affidavit nor the financial statements annexed to Mr Pierre's affidavit disclose what "the period" referred to is.

27 There is, however, annexed to Mr Pierre's affidavit a cash flow budget for the 12 months ending 30 April 2004 for the two businesses. That shows a net cash operating surplus of $274,779. The cash flow shows non-operating outflows of $236,377, made up of payments in respect of the various loans and Australian Taxation Office debts referred to previously, hire-purchase on two motor vehicles, legal expenses of $60,000 and proprietor's drawings of $31,200. There is a projected net annual surplus of $38,402.

28 In his affidavit of 4 September 2003, Mr Pierre says that since that cash flow was prepared the businesses have lost two accounts generating income of some $80,000. He expects to gain new customers to make up that revenue but he says that that will take time.

29 Mr Pierre says that the income generated by the two businesses is currently sufficient to cover the cash shortfall suffered by the Le Taste business, to provide daily living expenses for himself and his wife, and to fund the payment of Mr Pierre's debts and the plaintiff's costs of this action, but there is little left after that.

30 On 30 July 2003 Mr Pierre wrote to BankWest enquiring as to the possibility of obtaining a bank guarantee in the sum of $59,793 to enable the plaintiff to provide security for the defendants' costs of this action. He suggested that security could be taken over the assets of any of the plaintiff, Riviera Foods, Flavour House or Pierrre Holdings, the financial affairs of each of which were known to the Bank. The Bank's reply was emphatic. Its Business Loan Recoveries Manager wrote on 1 August 2003 to say that the Bank already had grave concerns about the existing level of debt and the adequacy of the Bank's security. He indicated that recovery action would be instituted shortly and suggested that assets be sold to reduce the debt or that other bankers be found. The suggestion of a bank guarantee was firmly rejected.

31 Mr Pierre says that he was advised by his accountant, Mr Catenacci, that it would be impossible to refinance the debts through another bank in view of the financial position of the businesses and Mr Pierre's own financial position. Mr Catenacci has confirmed that view an affidavit of 4 September 2003. Mr Catenacci says he has been an accountant in private practice for approximately 20 years and has been involved in providing financial advice and assisting clients in applications for finance to banks and other financial institutions over that time.

32 Presumably it was on the basis of that advice that the refinancing of the debt was not pursued by Mr Pierre.

33 On 6 August 2003 BankWest served demands on Pierre Holdings Pty Ltd in relation to its loan and its overdraft in the sums of $133,242.09 and $41,188.58 respectively. On 31 August 2003 Mr and Mrs Pierre sold their house, which was mortgaged to BankWest, for the sum of $295,000. Settlement occurred on 10 November 2003. A total amount of $258,200.50 was paid to BankWest in discharge of the loans to Pierre Holdings and the plaintiff. After payment of various fees and charges, the balance of $27,318.93 was paid to the defendants' solicitors to be held in a joint account with the plaintiff's solicitors until the determination of the counterclaim. That amount was the subject of a caveat lodged by the first and second defendants, pursuant to the contract of sale, to secure the balance of the purchase price.

34 In the meantime, on 4 August 2003 the plaintiff received a statutory demand served by the Deputy Commissioner of Taxation claiming an amount of $37,488.26 in respect of arrears of BAS. Mr Pierre says that because of a downturn in business in Riviera Foods and Flavour House he has been unable to maintain the agreed payments in respect of the various BAS debts, including those owed in respect of Flavour House and Riviera Foods. He has now renegotiated the payments with the Australian Taxation Office to reduce them all to a total figure of $1,500 per month.

35 According to Mr Pierre, neither he nor his wife has any income or assets apart from motor vehicles, household furniture and effects and jewellery. Mr Pierre says they do not have sufficient funds to provide the defendants with the security claimed.

36 It appears that with the sale of the house neither the plaintiff nor Mr and Mrs Pierre have any real property or other tangible assets. I think it can properly be inferred that their capacity to raise money is likely to have diminished rather than improved. Their only remaining assets are the Flavour House and Riviera Foods businesses, and the income from those, on the evidence, is needed to pay the substantial debt to the Deputy Commissioner of Taxation and to provide Mr and Mrs Pierre with an income.

37 In those circumstances, I consider that those who stand behind the plaintiff do not have the capacity to provide security and the effect of an order for security would be to stifle the plaintiff's action.

38 It is also contended by the plaintiff that an order for security should not be made because the determination of its claim and the defendants' counterclaim will involve canvassing the same factual issues. In its defence to the counterclaim, the plaintiff raises the same matters as it relies upon in its claim. As the matter stands, those issues will therefore be litigated on the counterclaim in any event.

39 In Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289, Smart J said (at 300) that a relevant factor in the exercise of the discretion to award security for costs was:

"[w]hether substantially the same facts are likely to be canvassed in determining the action and the cross-action. The court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-action covering substantially the same factual area proceeds."

40 That statement was referred to with approval by Rolfe J in Dalma Formwork Pty Ltd (Administrator Appointed) v Concrete Constructions Pty Ltd and on appeal Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (Administrator Appointed) [1999] NSWCA 16 at [24].

41 It is true that, in this case, the issues raised in the counterclaim itself are limited and discrete. However, as the pleadings stand, the determination of the counterclaim will involve canvassing substantially the same factual issues as those raised in the plaintiff's claim. Accordingly, if the action were stayed because of the plaintiff's inability to provide security, the same factual issues would nevertheless have to be canvassed in order to determine the counterclaim. In my view, a Court should be slow to allow that situation to come about. I do not consider there is anything in the circumstances of this case that would justify the prospect of such a result.

42 In my view, this is not an appropriate case to order security for costs. Neither the plaintiff nor those who stand behind it are in a position to provide security. On the evidence, the effect of an order for security would be to stifle the plaintiff's claim. In addition, as the matter stands, substantially the same factual ground will have to be covered in the determination of both the claim and the counterclaim.

43 It is therefore unnecessary to consider the other grounds relied upon by the plaintiff. I would dismiss the defendants' application.