OCTOCANE P/L v S R J PROPERTY DEV & NAT AUST BANK No. SCGRG-98-831 Judgment No. S231 [1999] SASC 231

It is alleged by the appellant that, prior to entry into the contract, the second respondent made certain specific representations to the appellant, both orally (through the latter's banker) and in writing to it. These were to the effect that the post dated cheques contemplated by the then proposed transaction would be honoured on presentation. It is not in dispute that, at the relevant time, the second respondent was the banker of the first respondent.

In its statement of claim the appellant asserts that, had the lastmentioned representations not been made, it would never have entered into the contract for the sale of the subject property.

It is not in dispute that settlement in respect of the subject property was duly effected in accordance with the contract entered into between the appellant and the first respondent. The subject property was duly transferred into the name of the first respondent which thereupon encumbered it in favour of the second respondent. A second unregistered security was executed by the first respondent in favour of the appellant and protected by lodgement of a caveat.

The practical effect of the lastmentioned situation was that the second respondent significantly improved its security position in relation to moneys owed to it by the first respondent, at the expense of the appellant. It later rejected liability in relation to its previous representation.

It is not in dispute that both of the post dated cheques were dishonoured by the second respondent upon presentation.

Against the foregoing background the appellant sues both respondents in respect of the loss sustained by it. It seeks to found its claim variously in contract, guarantee and indemnity, misrepresentation, misleading and deceptive conduct, estoppel, negligence, and constructive trust or unjust enrichment. The two respondents raise a variety of issues in their defences, but it is unnecessary, for present purposes, to dilate upon these.

Suffice to say that, on the face of the pleadings, the appellant's case is patently of substance and not merely ephemeral.

By application filed on 2 December 1998, the second respondent, inter alia, sought an order that the appellant provide security for its costs of action in the sum of $100000.

In an affidavit filed in support of that application the second respondent sought to demonstrate that, upon a realistic appraisal of the appellant's financial position, its liabilities exceeded its assets. It asserted that the directors and shareholders of the appellant owned or controlled significant real estate and sought to argue before the learned Master that, in reality, the proceedings were being brought for the benefit of a third party which had loaned money to the appellant.

This assertion was founded on the fact that the appellant had endorsed the two post dated cheques in favour of one Lang. It had been deposed that Lang had advanced moneys to the appellant, by way of bridging finance, pending payment on the cheques, to enable clear title to be given by the appellant to the first respondent.

In course of brief reasons published by him, the learned Master expressed the view that the evidence gave rise to a very strong inference that the proceedings were intended to benefit Lang. However, he stated that he was not influenced by that factor for the purpose of his decision.

The learned Master accepted that it had been demonstrated that the respondent's assets were exceeded by its liabilities. He noted in passing that it was asserted in an affidavit filed on behalf of the appellant that its financial position had been brought about because of the actions of the second respondent. However, he did not comment further upon the latter aspect.

He then went on to reason in the following terms:-

"I consider that the defendant has demonstrated that there is a strong likelihood that, if this matter proceeds to trial and if the plaintiff is unsuccessful, it will be unable to pay its own legal costs, let alone those of the defendants. The plaintiff has not put forward any material to suggest that, if an order for security for costs is made, it will stultify the proceedings. Indeed, no argument to that effect was put. Mr Tilmouth QC, for the plaintiff, submitted that there had been excessive delay in this matter and that is a factor which should weigh against the defendant in the exercise of my discretion. The extent of the delay was only a matter of a couple of months after the defendant obtained a copy of the balance sheet of the plaintiff company. In the circumstances, if this is to be a factor in influencing the exercise of my discretion, it is of minimal consequence. Weighing up all the various factors, I consider that it is appropriate that an order for security for costs should be given, but at this stage I do not consider that it should be of such dimension as to cover the potential costs of trial. I will accordingly hear the parties as to the amount of the security to be given and will then make the appropriate orders."

Having further heard counsel the learned Master made a formal order to the effect that the appellant provide to the second respondent $30000 security for costs in a form to be agreed by the parties. It is against that order that the present appeal is brought.

The present appeal comes before me pursuant to the provisions of SCR 106.05 and SCR 97. By virtue of SCR 97.17 the appeal is by way of re-hearing. It is not, however, an appeal de novo. The effect of the relevant rules is that the appeal is one of fact as well as of law. I am required to make an independent review of the evidence and am entitled, where necessary, to draw my own inferences from the facts. (T v Medical Board (1992) 52 SASR 382, Warren v Coombes & Anor [1979] HCA 9; (1979) 142 CLR 531).

In so far as the appeal seeks to place in issue the proper exercise of discretion by the learned Master then it is incumbent on the appellant to demonstrate error on his part. As was said in Mullet & Anor v Gabriel & Anor [1989] SASC 1647; (1989) 52 SASR 330 at 333, "the appellate court is not at liberty to exercise its discretion in preference to that of the learned Master unless and until the latter is shown to have been flawed in its exercise. The appellants, therefore, face the task of establishing that the learned Master did not pay regard, or did not pay sufficient regard, to the [relevant] factors... "

By its notice of appeal the appellant complains that the learned Master fell into error in holding that the second respondent had established a basis for ordering security for costs; or that it had been established that the appellant would not be able to pay its own legal costs. It is also said that the Master's exercise of discretion had miscarried because, inter alia, he failed adequately to take into account the fact that the financial position of the appellant had been brought about by the actions of the second respondent.

I agree with Mr Tilmouth QC, of senior counsel for the appellant, that, in approaching the issues arising on this appeal, it is important to bear in mind that the second respondent did not ever place in issue, in its defence, the primary narrative facts relied upon by the appellant. In particular, the essential terms of the transaction as between the appellant and the first respondent were not in contention; it was agreed that the representations alleged were made by the second respondent concerning the honouring of two cheques; and it was conceded that the cheques presented by the appellant were dishonoured. Rather, the defence was based, as Mr Tilmouth QC put it, on the basis of confession and avoidance.

I further accept that it is important to bear in mind that the effect of the transaction was that the second respondent obtained a benefit to which it would otherwise not to have been entitled, namely that it improved its security position in relation to moneys owed to it by the first respondent at the expense of the appellant.

In advancing his submissions Mr Tilmouth QC stressed that, prior to the entry into the agreement for the sale of the subject property, the appellant had successfully traded for some years, which demonstrated its ability to pay its debts as they fell due. It was said that the subject property had been leased and had produced rental revenue. He argued that, whilst its financial position may not be strong, there had been no suasive evidence placed before the learned Master to establish that the appellant was, in fact, unable to pay its own costs as asserted by the latter.

He also complained that it was apparent, on reading the reasons published by the learned Master, that he had not given proper, or any, consideration to the important factor that any impecuniosity on the part of the appellant had been either caused, or at least substantially contributed to, by the failure of the second respondent to honour its undertaking. That was, he said, a critically important consideration in relation to any exercise of discretion.

Further, he criticised the conclusion of the learned Master that there had not been significant delay in bringing the application for security.

The foregoing assertions must be considered against the background of the principles related to the making of orders of the type here sought to be impugned.

It is beyond question that the correct commencement point for a consideration of such principles is the judgment of Mitchell J in Dictating Machine Centre Pty Ltd v Combe (1981) 26 SASR 316. In the course of her judgment in that case, Mitchell J identified seven specific factors which she considered to be relevant to applications for security for costs. These were:-

(1) the existence of any relevant special relationship between the parties;

(2) the stage at which the application is made and whether or not this was timely;

(3) whether the plaintiff's claim appeared to be bona fide;

(4) the true role of the plaintiff and, in particular, whether it appeared that the action was being prosecuted for the benefit of some third party;

(5) the prospect of the plaintiff's claim succeeding;

(6) whether the application for security is, in the circumstances, oppressive; and

(7) whether the plaintiff's want of means was induced by the conduct of the defendant.

The subsequent authorities clearly indicate an acceptance of the relevance of those considerations, although it must be said that there has been some development of the conceptual approach to certain parts of them.

As was recognised by the learned Master, the primary basis for the application before him was to be found in the provisions of s 1335(1) of the Corporations Law. That section is expressed as below:-

"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 respondent 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."

It is at once to be seen that a pre-requisite to the making of any order based on the section must be proof of the existence of a reason to believe that the relevant corporate plaintiff will be unable to pay the costs of the defendant if successful.

In the course of the present appeal there was considerable debate as to what was disclosed by the evidence before the learned Master in that regard. In essence, the second respondent strongly relied upon a document in which it set out to portray an analysis of the financial position of the appellant, both at 30 June 1997 and immediately post settlement in respect of the subject property.

Mr Clayton QC, of senior counsel for the second respondent, sought to demonstrate that even prior to settlement, the balance sheet of the appellant adjusted to disclose what, he said, was the realistic value of the subject property. It indicated that the appellant had a deficiency of assets in relation to liabilities amounting to $29643. Immediately post settlement that deficiency escalated to $55667, because the subject property had been the substantial asset of the appellant.

Mr Tilmouth QC criticised the validity of that approach on two bases.

First, he said that it was inappropriate to conclude insolvency of the appellant, simply based on the ultimate contract price for the subject property. True it was, he said, that the relevant asset was ultimately sold for an amount $200000 less than its previous book value. However, the appellant was only induced to do so by the representation of the second respondent. Prior to then the subject property had returned rental revenue sufficient to enable the appellant to trade successfully.

Second, he contended that the post settlement adjustment totally ignored the fact that an asset of the appellant was its claim for $250000 in respect of the dishonoured cheques.

It seems to me that, despite these arguments, the learned Master was entitled to conclude, as he did, that, in the practical sense, the available evidence strongly indicated that, in the event of a successful defence, it was most likely that the appellant would be unable to pay the costs of the second respondent out of its assets. The argument advanced by Mr Tilmouth QC simply begs the question as to whether, in reality, the appellant did or did not have an asset of $250000 as asserted. Whether or not that was so was entirely dependent on the outcome of the present proceedings.

It must therefore be accepted that the second respondent duly satisfied the initial requirement of s 1335(1) of the Corporations Law. However, that is not conclusive of the application for security.

Next, it was pointed out on behalf of the appellant that the mere fact that a plaintiff who had brought an apparently bona fide claim happened to be impecunious did not, of itself, justify the making of an order for security for costs. Mr Tilmouth QC contended that the evidence clearly disclosed that, in the instant case, the very conduct of the second respondent complained of by the appellant was that which had brought about any impecuniosity of the latter. It was well established that in such cases the making of an order for security for costs could constitute a denial of justice to a plaintiff and was inappropriate. (See North Groongal Pty Ltd v ANZ McCaughan Ltd and Ors [1993] SASC 3905; (1993) 61 SASR 302 at 306, Lucas v York & Anor (1983) 50 ALR 208 at 230 and the authorities therein referred to).

The response of Mr Clayton QC to this proposition was that, as a matter of fact, it was not any action on the part of the second respondent which had brought about the impecuniosity of the appellant. He contended that, as his calculations indicated, the appellant was already impecunious - in a realistic, practical sense - prior to entering into the sale transaction. It was submitted that the appellant would have been insolvent even if the relevant cheques had been honoured.

In my opinion this lastmentioned ingenious argument cannot stand close scrutiny. It is undeniable on the material presently before the court that, had the appellant not entered into the disastrous transaction and sustained a loss of $250000, it would, more probably than not, have been able to continue trading as it had previously done. The very calculations relied upon by Mr Clayton QC demonstrate, beyond question, that the real impecuniosity of the appellant is, in a practical sense, the direct product of that loss. If the $250000 was written back into assets, they would substantially exceed liabilities.

Moreover, I consider that a highly relevant matter to be taken into account in the present context is the fact that, seemingly, the second respondent, by making its representation to the appellant, plainly engineered a situation in which it achieved a very significant advantage to itself. The second respondent, by securing the indebtedness of the first respondent in a manner which would otherwise not have been available to it, created a situation which operated to the very direct and distinct disadvantage of the appellant. I infer from the material on file that the second mortgage security protected by caveat proved to be of no value.

Next, Mr Clayton QC strongly relied upon an argument to the effect that, notwithstanding that this was an aspect discounted by the learned Master, the evidence strongly indicated that the present proceedings were being mounted principally for the benefit of Lang, rather than the appellant itself. He contended, on the authority of cases such as Yandil Holdings Pty Ltd v Insurance Company of North America and Ors (1985) 3 ACLC 542 ("Yandil"), Troisi Steel Fabrications Pty Ltd v Johns Perry Industries Pty Ltd (1992) 165 LSJS 334 and the decisions therein referred to, that the correct principle is that if there is an entity behind a plaintiff who will benefit if it succeeds and who is financially able to provide security, it is generally inappropriate to refuse an order for security for costs. That, he said, is the situation in the instant case.

Mr Tilmouth QC sought to challenge that summation as a correct statement of the relevant principle. He submitted that such an issue can only arise in circumstances in which there is a positive averment on behalf of a plaintiff that the making of an order for security will have the practical effect of stultifying its claim, because of its financial inability to provide security. He pointed out that no such contention had ever been advanced in the present case.

In my opinion Mr Tilmouth QC is correct in this submission, as was recognised by the learned Master in declining to be influenced by the submissions made to him concerning the bringing of the action on behalf of a third party. The trigger for an examination of parties possibly standing behind the appellant did not ever exist.

The principle discussed in the above cases only arises for consideration in circumstances in which the inability of the plaintiff to provide security (either itself or through some third party) could lead to a denial of prosecution of its claim. In this regard the situation is most clearly stated by Clarke J in Yandil at 545 where he said:-

"The principles which should guide me in resolving the present dispute are not in doubt. The Court is vested with an unfettered discretion as to whether an order is made and, if so, upon what terms. The 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. It must be observed however in this respect that the mere fact that the plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order will stultify the plaintiff's claim. There is a line of authority, commencing with the unreported decision of Yeldham J in Tullock v Walker (8 December 1976), standing for proposition that if the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security then it is, generally speaking, inappropriate to refuse an order."

Having discussed what fell from the full bench of the Federal Court in Bell Wholesale Pty Ltd v Gates Export Corporation and Ors (No 2) (1984) 8 ACLR 588 Clarke J went on to comment:-

".... a later portion of the judgment makes it quite clear that the court does enjoy an unfettered discretion. In the circumstances of the present case it is sufficient for me to say that it is unlikely that a plaintiff could successfully resist a security order on the grounds of its own inability to provide an adequate sum unless it provides evidence of the financial status of those who stand behind it."

The learned judge was there referring to the issue of onus of proof, arising in a context in which the evidence disclosed that the plaintiff was plainly insolvent and unable to provide security; and there were third parties effectively standing behind it.

It seems to me, as it seemed to the learned Master, that this matter fell to be determined on the basis that it is to be inferred that security could be provided by all on behalf of the appellant if ordered.

Like the learned Master I have concluded that the appellant's argument based upon an alleged undue delay in making application cannot be sustained. True it is that the application for security was not made for almost six months after the commencement of the action. However, that period was occupied in fairly intense activity on the part of all parties in relation to both pleadings and an application for summary judgment. It was only in the relatively late stages of those processes that the second respondent became aware of the content of the balance sheet of the appellant. The application was then made within the space of about two months thereafter.

I consider that the real issue arising on this appeal is that which arises from the evidence of the conduct of the second respondent in making the relevant representation and bettering its own position as a consequence. Oddly enough, although this was raised on the initial hearing of the application for security, it does not appear to have been the subject of detailed consideration by the learned Master. It rated no more than a passing mention, in a narrative fashion, in the reasons published by him.

I have dealt with this in extenso earlier in these reasons. I will not retrace that ground. In my view this factor necessarily loomed as the major issue on the application and it seems to me that the failure of the learned Master to address it as such constitutes a conceptual flaw in his approach.

The whole crux of the appellant's case is that it was this conduct which has precipitated a significant reduction in the means of the appellant; and there is a substantial basis of admitted fact upon which it is able to maintain that assertion. In my opinion that factor alone militates strongly against the making of the order which was sought. Had it been given full consideration it should, as I see the position, have been a decisive aspect.

In exercising the discretion in this matter afresh, I have come to the conclusion that this is not an appropriate case in which to order security for the costs of the second respondent.

The appeal must be allowed and the order for security set aside. The appellant must have the costs of the appeal and at first instance, to be taxed.