COSTS - security for costs - corporate plaintiff - no issue of principle

Corporations Act 2001, s1335

Land Titles Act 1925, ss 58, 59

Idoport Pty Limited v National Australia Bank Limited (No 35) [2001] NSWSC 744 (13 September 2001, Einstein J, unreported)

BETWEEN: MARKETLINK EXHIBITIONS AND EVENTS PTY LIMITED

1. The plaintiff provide security for costs in the sum of $14,000.00

2. The action be stayed until the security is provided.

3. The costs of the application be the first and second defendants' costs in the cause.

1. This is an application by the first and second defendants for security for costs pursuant to section 1335 of the Corporations Act 2001.

2. The plaintiff is a company, incorporated in the Australian Capital Territory some ten years ago. It has two issued $2 shares owned by Stephen Keith Watson and Anne Catherine Watson. Mr and Mrs Watson are the directors of the company, and Mrs Watson is secretary. They live at Mawson in the ACT, and the company carries on business at the premises formerly occupied by the Solander Gallery in Grey Street, Deakin. A company search discloses that the plaintiff company has complied with its obligations as to the filing of annual returns, and that there are no charges registered against it.

3. In March 1999, the plaintiff took a ten-year lease of the Deakin premises from the second defendant. The lease was duly stamped and registered. The obligations of the plaintiff company were guaranteed personally by Mr and Mrs Watson. The lease included a clause in the following terms.

22 First Right of Refusal

The Owner will not sell or agree to sell the Land at any time to any person or corporation other than the Tenant unless:

(1)(a) The Land is sold at an auction of which not less than 14 days notice in writing has been given to the Tenant;

(b) The Owner has first offered in writing to sell the Land to the Tenant at a price not greater than a price at which it is actually sold or agreed to be sold and upon terms as to payment and otherwise not less favourable to the Tenant than the terms upon which the property is actually sold or agreed to be sold, and the Tenant has not accepted that offer within 14 days after receipt of that offer,

But this condition does not prohibit the Owner from entering into or giving effect to a contract to sell the Land conditional upon the rejection by the Tenant of an offer of sale made in accordance with subclause 1(b).

(2) If the Owner registers a Units Plan, the right of first refusal comprised in this clause relates only to the existing gallery premises.

4. The present action was commenced in October 2003. The statement of claim has been amended twice. The nature of the action is described as "constructive trust, equitable fraud, actual fraud within the meaning of s 58 and 59 of the Land Titles Act 1925". The plaintiff claims declaratory relief and also correction of the Land Titles Register.

5. The statement of claim as amended pleads that on 2 July 2001 the directors of the second defendant resolved to distribute its assets and, having done so, to wind it up. As part of the distribution, it is asserted that the directors agreed to transfer the second defendant's rights and obligations in the Deakin premises to Paul Wilson or his nominee. Mr Wilson is one of the directors of the second defendant. The plaintiff asserts that the second defendant entered an agreement with its three directors, Messrs Wilson, Honkanen and Turco, agreeing to sell the second defendant's interest in the Deakin premises to Mr Wilson or his nominee for $900,000.00.

6. Counsel for the defendant tendered a copy of a deed of transfer from the second defendant to the first defendant as trustee for the Paul Wilson Family Trust, of the Deakin property at a "transfer price" of $900,000.00. The plaintiff's case is that the transfer amounted to a sale which was effected without giving the plaintiff the opportunity to purchase the property at the same price, placing the second defendant in breach of clause 22 of the lease. In the alternative, the plaintiff asserts that the transaction was carried out in such a way as to defraud it of its entitlements under the clause. The plaintiff seeks declaratory and injunctive relief against the transferor and transferee companies. The Registrar-General is also a defendant, and has entered a submitting appearance.

7. The rent payable by the plaintiff has been in arrears for much of the period since the commencement of the lease. The arrears at the date of the hearing of the application were a little under $50,000.00. The plaintiff concedes that it owes some $32,000.00 to the second defendant, up to the date of the transfer of ownership; and some $17,000.00 to the second defendant for the period since. The plaintiff argues that there was a flexible arrangement with the second defendant as to payment of rent, and that the second defendant has never formally demanded payment of the arrears, so that the plaintiff should not be seen as in default in relation to the $32,000.00. The plaintiff concedes that it is behind with its rent since the transfer, and that it is on notice that the second defendant requires immediate payment of the arrears and prompt payment of rent in the future.

8. The first and second defendants, who are represented by the same solicitors and counsel, say that the amount of $32,000.00 has been paid by the second defendant to the first defendant, and that it is now the first defendant which is entitled to payment of the whole of the arrears.

9. Mr Watson has sworn an affidavit which was read on the hearing of the application, but the affidavit does not contain any evidence as to the financial position of the plaintiff company, or of Mr and Mrs Watson.

10. Mr R L Travers, a legal cost consultant of great experience in Canberra, has sworn an affidavit in which he estimates the costs of the first and second defendants to date at $5,000.00 plus $2,000.00 in disbursements, a total of $7,000.00. He estimates that between now and the commencement of the hearing of the action, further costs of $16,000.00 and disbursements of $5,000.00 are likely to be incurred, a total of $21,000.00. He further estimates, assuming a three-day hearing, that the costs of the defendants of the hearing are likely to amount to $6,000.00 plus $16,000.00 dollars disbursements, a total of $22,000.00. On the basis of these estimates by Mr Travers, the defendants seek security for costs in the sum of $50,000.00.

11. Subsection 1335(1) of the Corporations Act 2001 is in the following terms:

Where a corporation is 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 costs 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.

12. A similar power is conferred generally in relation to actions in the Court by Order 33B, which applies to individual as well as corporate plaintiffs, though in more restricted circumstances. Order 33B r 4 gives the Court, in ordering security, some discretion as to amount, manner, time and terms of payment. It is common ground that the principles which apply to applications for security under the Corporations Act are the same as those which apply to applications under the Rules of Court. The principles are uncontroversial, and are conveniently set out by Einstein J in Idoport Pty Limited v National Australia Bank Limited (No 35) [2001] NSWSC 744 (13 September 2001, unreported). I need not repeat them in detail, other than to set out the general rule that where an action is 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. Another important issue is whether there are any persons standing behind the company who are likely to benefit from the litigation and who may be in a position to provide security. The reverse of this is that where the persons standing behind the company are themselves without funds, it may be oppressive to deny the company the right to proceed with the litigation, if it is clear that the company and those behind it have no funds and that to order security would prevent it from doing so.

13. In the present case, I am satisfied that the plaintiff has an arguable cause of action. I am certainly not satisfied that the case is hopeless.

14. At the same time, on the limited evidence before me, I am satisfied on the balance of probabilities that the company's financial position is such that it has continually found difficulty in paying its rent as it has fallen due, and that it is still substantially in arrears with its rent. In the absence of any evidence to the contrary, I infer that the company is not in a financial position to pay those arrears immediately, and that it would not be in a position to meet a costs order for an amount in the vicinity of $50,000.00.

15. In those circumstances, it seems to me that the first and second defendants have made out their case for security. The directors of the plaintiff company have chosen not to give evidence as to their own financial positions and that being so I am not able to infer that an order for security would have the effect of stultifying the action.

16. I indicated on the hearing of the application that if I were satisfied that security should be ordered, I would not be minded to order payment of an amount calculated to meet all of the costs of the first and second defendants on the assumption that the action went to trial and that the trial lasted three days. I said that it appeared to me fairer to the parties to order that security be provided in stages. I accept the evidence of Mr Travers that the plaintiff's costs and disbursements are likely to be of the order of $7,000.00 to date and a further $21,000.00 by the commencement of the trial. It seems to me reasonable to require that the plaintiff provide security in an amount sufficient to cover the costs to date, and one-third of the estimated costs to the commencement of the trial, giving the defendants liberty to apply for further security should it become necessary. The policy of the court is to encourage parties to explore the prospects of settlement of an action of this kind, and it should not be assumed that all of the estimated costs of preparation and a full hearing will inevitably be incurred. It may be that the funds of both parties would be more economically expended on a mediation. This will be a matter for consideration by their directors with the benefit of advice from their solicitors and counsel.

17. The order I will make is that the plaintiff provide security for costs in the sum of $14,000.00. It may be possible for this to be done by bank guarantee or in some other manner acceptable to the parties. If it is to be by payment of money, an issue may arise as to whether the amount should be invested at interest, and if so in whose name or names. I shall grant liberty to apply in case it becomes necessary to return to the Court to make specific orders about provision of the security or investment of funds.

18. I order that the action be stayed until the security is provided.

19. As to costs, the application by the first and second defendant has proved to be justified, and it does not seem to me that the plaintiff should recover its costs of the application if it is ultimately successful in the action. At the same time, the defendants should not get the costs of the application if they fail in the action. The appropriate order is that the costs of the application be the first and second defendants' costs in the cause.

I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Decision herein of Master Harper.