Corporations - motion for security for costs - whether leave required pursuant to s440D(1) of the Corporations Law - whether the applicant against which security was being sought was in "administration" - whether a motion for security for costs is a "proceeding" within the meaning of that provision.

Solicitors for the applicant : Messrs James Conomos

Solicitors for the respondent: Corrs Chambers Westgarth

THE COURT ORDERS THAT:

1. The further hearing of the motion for security for costs be stood

over to a date to be fixed for the purpose of making formal orders

as to the provision of security.

2. The respondent file and serve, within 7 days, a draft of the

orders it now seeks in accordance with these reasons.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

FINN J On 26 September 1994 an application and statement of claim were filed claiming relief against the respondent in respect of matters arising out of a contractual dealing between the parties. The respondent entered an appearance on 7 October 1994. Further and better particulars were sought. These were filed on 25 November 1994. On 20 December 1994 the board of the applicant company appointed an administrator of the company under the provisions of Part 5.3A of the Corporations Law. Nonetheless, the application continued in its course. A defence and cross-claim were filed on 17 February 1995. Then began the matter of present concern.

A Company under Administration and the Corporations Law s440D

2. A Notice of Motion was filed on 20 February 1995 seeking a stay of proceedings until security for costs had been provided. Some weeks later the solicitors for the administrator at the behest of the administrator drew the attention of the respondents to the provisions of s440D of the Corporations Law in a way which suggested that the Notice of Motion itself was caught by that section.

s440D(1) During the administration of a company, a

proceeding in a court against the company or in

relation to any of its property cannot be begun or

proceeded with, except:

(a) with the administrator's written consent; or

(b) with the leave of the court and in accordance

with such terms (if any) as the Court imposes.

4. It is not immediately apparent why it should be thought that a motion brought by a respondent in the course of a proceeding against it by a company under administration would fall within this section - the more so given the history and apparent purpose of Part 5.3A (a matter returned to below).

5. To continue the narrative, on 23 March 1995 the applicant's creditors resolved to execute a deed of company arrangement and to appoint a committee of creditors. On 12 April 1995 the deed was executed by the administrator. There is no evidence before me as to its execution by the company, but annexed to the affidavit of Mr Whitton, the administrator, is a copy of the deed which bears the seal of the company though not the signatures of any of its officers. Given both the provisions of s444B (2),(3) and (7) of the Corporations Law (which it is unnecessary to set out here) and the apparent basis on which the affairs of the applicant continue to be conducted, and the provisions of the Evidence Act, 1995, ss150 and 151, I am prepared to proceed on the assumption that the company also has executed the deed of company arrangement. The effect of this, as is made plain by s435C of the Corporations Law, is to bring to an end "the administration of the company". Accordingly, even if s440D applied to the respondent's motion for security, up to that point, it could not do so thereafter as the section is operative only "during the administration of a company".

6. This notwithstanding, on 14 July 1995, the respondent filed in Court an Amended Notice of Motion again seeking a stay pending the provision of security for costs but seeking first the leave of the Court to proceed pursuant to s440D(1) of the Corporations Law.

7. As I have already indicated, such leave is not necessary. I have been referred to no other section of the Corporations Law which would require leave to be obtained in the present circumstances. Accordingly I make no order in relation to leave.

8. I should also indicate that, even if the company were still in administration, the respondent would not require the Court's leave to pursue its motion for security. In my view for a respondent to initiate a claim for security for costs during proceedings against it by a company under administration, is not to begin or to proceed with a "proceeding in a court against the company": s440D(1).

9. It is the case that the word "proceeding" can, as a matter of express definition or of proper construction in a given setting, both include or exclude the initiation in a court of a step in an application or action. The definition of "proceeding" in the Federal Court of Australia Act, 1976 s3, for example, in its reference to "an incidental proceeding in the course of, or in connexion with, a proceeding", is apt to encompass a motion for security for costs. I would also note in passing the considerable variety of contrasting instances noted in exemplification of the word in Stroud's Judicial Dictionary, 4th Ed., p.2124ff. Counsel for the respective parties in their joint written submission equally drew attention to authorities which in particular settings give a broad or narrow meaning to the term.

10. In interpreting a provision of the Corporations Law a construction which promotes the purpose or object of the Law is to be preferred to one that would not: see Corporations Law, s109H. The declared object of Part 5.3A is indicated in s435A:

"... to provide for the business, property and affairs of an

insolvent company to be administered in a way that:

(a) maximises the chances of the company, or as much as

possible of its business, continuing in existence; or

(b) if it is not possible for the company or its business

to continue in existence - results in a better return

for the company's creditors and members than would

result from an immediate winding up of the company."

11. To further this object, the scheme of the Part as it applies to the period of administration would seem to be that of creating a moratorium period for a company which is or is likely to become insolvent - a moratorium period in which (a) claimants against the company or its property are held at bay: see Division 6 of Part 5.3A generally (which includes s440D); and (b) creditors are afforded the opportunity in meeting to decide the company's future: see Division 5 of Part 5.3A. Both the Explanatory Memorandum to the Corporate Law Reform Act 1992, para 513 specifically and, more generally, The Law Reform Commission's Report No. 45, "General Insolvency Inquiry", V51, 1, Ch3, emphasise these characteristics of the legislative scheme.

12. Considered in this light, and bearing in mind the purposive construction enjoined by s109H of the Corporations Law, the words "a proceeding in a court against the company" are not in my view properly amenable to a construction which would cover a step taken in court by a respondent to an application brought against it by a company in administration. If such were the case the result would be that, while the company in the pursuit of its claim against the respondent could approach the court in the ordinary way for orders of a procedural or interlocutory nature, the respondent would be unable to so act to protect its own interests without first obtaining either the consent or the leave specified by s440D. In other words the aggressor-applicant could act in an unfettered way while the defender-respondent would be procedurally disadvantaged. Far from holding at bay a claimant on the company or its property (which is a purpose of the moratorium period), such a construction would privilege the company in proceedings which it had iself commenced. While Part 5.3A does provide a form of preferential treatment for a company in administration, preferential treatment of this character is, in my view, quite unrelated to the object and purpose of that Part.

13. The motion for security for costs and for a stay unless it is provided as ordered, is brought under both the Corporations Law s1335(1), and the Federal Court of Australia Act, 1976, s56(1). I should note at the outset that the condition precedent to invoking s1335(1) is satisfied on the evidence before me, the company's administrator in his affidavit of 18 April 1995 and in oral evidence swearing that the company is insolvent with over $4 million of unsecured creditors. Hence in the terms of the section "there is reason to believe that the corporation will be unable to pay the costs of the (respondent) if successful in ... its defence."

14. The nature of the discretion conferred by these provisions in cases involving corporations has been the subject of exhaustive judicial analysis in this court of recent times. Here I would merely note that the discretion is to be exercised having regard to all the circumstances of the case and without any predisposition in favour of the award of security: see Bryan E. Fencott and Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497 and the review of authorities therein; Feltafield Pty Ltd v Heidelberg Graphic Equipment Ltd, a decision of Beazley J of this Court of 12 August 1994. Of the now well-recognised and well-settled factors which are relevant to the determination to be made, two in particular have been relied upon by the applicant in opposing the motion. These are -

(1) that the application for security is oppressive; and

(2) that the applicant's impecuniosity was caused by the

respondent's conduct the subject of the claim.

(3) that there are persons standing behind the company who are

likely to benefit from the litigation and who are in a

position to provide the necessary security.

15. When regard is had to the fact that the applicant is party to a deed of company arrangement and that the future of the company in consequence is in the hands of its creditors, such stance as the creditors might take both in relation to the continuation of the application and to the provision of security for costs should, one would have thought, have been a matter of particular importance in this motion. In fact no particular emphasis at all was placed on the deed of company arrangement in the hearing before me. I will return to this matter.

16. To appreciate the burden of the applicant's submissions in opposition to the motion, it is necessary to enlarge briefly upon the nature of the claim and the cross-claim in this application.

17. The respondent, having secured a contract from the Commonwealth of Australia to construct a building on the York Park site in Canberra, entered into a sub-contract with the applicant for the supply, erection, stripping and renewal of all formwork, to stage one of the York Park Project. This contract is alleged to be both oral and in writing. In its performance the applicant intended to utilise prefabricated formwork systems, it being alleged that the respondent represented to the applicant (i) that this method of construction was appropriate and/or suitable for the execution of the works under the sub-contract; and (ii) that the tender drawings reflected what was to be constructed. These representations are alleged to have been misleading and deceptive. It is claimed that the drawings issued by the respondent "For Construction Purposes" did not allow the effective use of prefabricated form systems. In consequence the initial work undertaken by the applicant was ineffective and a delay of 28 weeks was occasioned in the execution of works under the contract. The applicant claims over $6 million for loss sustained by that delay.

18. In addition the applicant makes a further and more specific claim for payment of the reasonable value of variations made by the respondent, such variations being provided for in the sub-contract. The variations were valued by the applicant at $965,328.84 whereas the respondent allegedly valued them at, and paid only, $192,941.14. The applicant's claim is for $772,384.76 being the difference between the two sums.

19. The respondent in its defence denies that it engaged in misleading and deceptive conduct; alleges that it has paid $473,022 in respect of variations as it was required to do pursuant to its contract; and contends that the applicant has not complied with the procedures of the sub-contract in respect of making claims against the respondent. Further and by way of cross-claim, the respondent alleges that (i) the applicant has committed almost 40 distinct breaches of the sub-contract; (ii) the applicant was, on a particular date, either not ready and willing, or not able, to perform its obligations under the sub-contract; (iii) the effect of these breaches was to render the respondent liable to pay liquidated damages of $750,000 under the head contract which it now seeks to recover from the applicant; (iv) the respondent was in the circumstances entitled to and did, cancel the sub-contract and in the manner expressly provided by the sub-contract; and (v) in accordance with the terms of the sub-contract relating to the cost of completion after cancellation, the respondent claims the sum of $2,620,756.62 as a debt due and owing to it from the applicant.

20. It is not open to doubt that there are genuine disputes between the parties which raise serious issues for resolution. The evidence before me does not justify drawing the conclusion that the applicant has no reasonable prospect of success in its claim.

21. The applicant submitted, first, in a global way that an order for security would bring its application to an end. It is perfectly clear on the evidence that the company itself is in no position to provide security. But as I will indicate below, the real fate of the application does not in a practical sense turn upon the company's capacity to provide security. Standing behind the company for present purposes are creditors (a) who, under Part 5.3A of the Corporations Law, are involving themselves in the company's fate; (b) whose capacity to provide security if they are so minded, is unquestionable; and (c) who alone, seemingly, stand to benefit from such success as the application may enjoy. In these circumstances an order for security may have the effect of bringing the application to an end. But whether or not it has that effect will depend, not on the applicant's impecuniosity, but on the judgment made by a creditor or creditors as to whether the furtherance of the application should be supported.

22. The more specific submissions of the applicant, as I noted earlier in these reasons, were (a) that the application for security is being used oppressively; and (b) that the applicant's impecuniosity was caused by the respondent's conduct.

23. An oppression submission ordinarily connotes that the motion for security is being used merely to deny an impecunious applicant a right to litigate: see Feltafield Pty Ltd v Heidelberg Graphic Equipment Ltd, unreported decision of Beazley J. As such, at least in the corporate context, it tends to raise the types of consideration I foreshadowed above when referring to the possible role of the company's creditors in the matter.

24. Here, however, the oppression alleged is a variant upon the ordinary theme. The motion for security is alleged to be part of a pincer movement designed to crush the applicant's pursuit of its claim. The other arm of the pincer movement, it is said, is the making of the cross-claim. I was invited to infer, largely from the time lapse (almost 5 months) between the commencing of the application and the filing of the claim, that the cross claim is not a genuine claim. This was strongly denied by the respondent. Despite the applicant's assertion, the evidence before me does not properly permit the drawing of the conclusion that the cross claim is not genuine or that it has no reasonable prospect of success.

25. It doubtless is the case that the fact of the cross-claim does add another factor to those that the persons standing behind the company for present purposes will need to take account of when determining whether to support the continuation of the application. I return to this matter below. But to the extent that the cross claim constitutes a further disincentive to continuing the claim beyond that which may be occasioned by the motion for security itself, all that properly can be said of this is that such disincentive would be created by any substantial cross-claim which could be said to have a reasonable prospect of success. Accordingly unless the motion for security itself can be said to be oppressive there is no substance to this submission. For reasons I will give below even this much is not apparent in the circumstances of this case.

26. The second submission - the respondent is the author of the applicant's impecuniosity - is based upon the effect that the alleged non-payment for variations had on the company's ability to pay its debts as they fell due. The administrator, Mr Whitton, gave evidence attributing the company's financial difficulties to this. He did indicate that the applicant, along with another company in the Pask group of companies (as they have been called in these proceedings), provided the cash flow for the group so that the non-payment apparently had effects throughout the group. Be this as it may, if there is a genuine dispute about the respondent's liability to pay for the variations claimed and in the amounts claimed - and I find such to be the case - the fact that this dispute produces the effect on the applicant I have noted can in no way disentitle the applicant from raising that dispute. Neither can it of itself provide cause for disentitling the respondent to security if the circumstances otherwise are appropriate ones for the making of such an order.

27. This brings me to what is the essence of the matter. The full amount of the applicant's claim against the respondent is in the order of $6.9 million. If the applicant was wholly successful in this and if, equally, it fully repelled the cross claim, it nonetheless seems to be the case, as counsel for the applicant appeared to concede to me (Transcript of Proceedings, pp 57 - 58) that neither the applicant nor its shareholders would enjoy the fruits of their success. Unsecured creditors of the company have claims in the order of $4.6 million, and I was informed in argument that the company has exposure to related companies of around $2.3 million.

28. Among the unsecured creditors, simply to mention those with debts of some magnitude, are Commissioner of Payroll Tax (Qld) ($158,595), Commissioner for ACT Revenue ($161,426), Deputy Commissioner of Taxation ($1,333,134 and $19,429). There are equally 7 business creditors unrelated to the applicant with debts of between $10,000 and $50,000. There are then creditors standing behind the company "who are likely to benefit from the litigation (if successful) and who are in a position to provide the necessary security": Feltafield Pty Ltd at 14. As I will indicate below the creditors have been informed directly of the need for them to consider providing that security. The bare point to be made here, though, is that the creditors have the clear capacity to put the company in a position to continue its application notwithstanding the making of an order for security for costs. For this reason it cannot be said that "if an order for security were made, the litigation would be stifled": Bell Wholesale Co Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1, at 4; see also P S Chellaram and Co Ltd v China Ocean Shipping Co [1991] HCA 36; (1991) 102 ALR 321; Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542.

29. In the present circumstances this would be enough to justify an exercise of discretion favourable to the respondent. In saying this I have not had regard to the possible capacity of the company's principal shareholder, Mr Pask, to provide the security. I have no evidence before me which would discount that possibility. Neither is there evidence that he may not benefit indirectly through other companies in the group from this litigation. But quite apart from Mr Pask's circumstances there is an additional consideration which requires note. It was not relied upon by either party in the proceedings before me although their attention was drawn to it and it is in evidence before me.

30. The original motion for security for costs was filed after the administration began but before the creditors agreed to the deed of arrangement. They were appraised of the motion. So significant was the view taken of it apparently, that the Deed of Arrangement to which they agreed contained the following provisions:

"DEED FUND

There shall be a Deed Fund which shall be comprised of all and any

amounts contributed by the creditors or directors of the Company

or entities associated with them and any assets of the Company.

APPLICATION OF DEED FUND

The Administrator shall apply the Deed Fund as follows:

(a) FIRSTLY, in payment of the Administrator's remuneration and

the expenses, debts and liabilities incurred by him in the

course of the administration and the administration of this

Deed, including any amounts payable pursuant to Section 441A

and 443B of the Corporation Law.

(b) SECONDLY, in payment of the costs on the security for costs

application to be heard on 21 April 1995 in the Federal

Court of Australia, Australian Capital Territory,

proceedings No. G67 of 1994 ('the litigation').

(c) THIRDLY, in payment of the costs of running the litigation

generally."

31. In his affidavit of 18 April 1995, the administrator Mr Whitton indicated that, as at that date, no moneys were held in the "deed fund". I am unaware from the evidence whether there has been any change to this position. It is the case that changes in proposals made by the directors to the creditors as to the funding of the litigation may account for their lack of contribution to the fund. All I wish to note though is first, that the deed itself acknowledges that there may be a need for the creditors to provide financial support if the litigation is to proceed and secondly, that the creditors have assented to this. These considerations simply reinforce the conclusion at which I have arrived.

32. This application is one in which it is appropriate to make an order for security for costs. I propose so to do. As I intend to stand the motion over to a date to be fixed for the purpose of making formal orders it is appropriate now to indicate to the parties how I propose to proceed in the matter.

33. It is the usual practice of this Court in cases of some magnitude at least, to order that security be paid in instalments. This practice is particularly appropriate in the circumstances both of the present motion and of the application generally. Whether or not the application proceeds will, in all probability, depend upon such judgment as a creditor or creditors make to provide the financial support necessary to satisfy the security ordered. In making that judgment they should be provided with the opportunity at various defined stages up to trial to withdraw their support if it has previously been given. Accordingly I would propose orders to the effect that (i) the amount estimated to be the respondent's costs to be incurred up to the completion of discovery and inspection be provided as security for costs incurred to that stage in the proceedings, upon the making of formal orders in this matter; (ii) the amount estimated to be the respondent's costs to be incurred up to the date of hearing be provided as security for costs after the completion of discovery and inspection; and (iii) one week before the commencement of the trial of the application an estimate should then be made of the respondent's likely costs of the hearing and security for these should be provided on or before the first hearing day of the trial.

34. The respondent has in its application sought, unless otherwise ordered, a global sum of $588,000 as representing its estimate of the costs likely to be incurred by it. I would note in passing that almost one third of this sum is constituted by the costs of reports to be prepared by one consultant. Because of the manner in which I propose the instalments of security to be estimated and provided and because the sum sought by the respondent (though itemised by it in affidavit evidence) is not necessarily adaptable to the schedule I have suggested, I would propose inviting the parties to enter into discussions with a view to reaching agreement on the amount of security appropriate to the first two of the three stages I have mentioned. If they are unable to reach agreement on this I would invite them to approach the District Registrar to make a provisional and informal estimate in the light of such submissions oral and/or written as they make to the District Registrar. In making the orders I propose as to those two stages I would be prepared with the parties' agreement to give appropriate weight to that estimate in arriving at my own conclusion as to the quantum of security which will be ordered.

35. I would equally propose a similar course being taken in relation to the third stage, i.e. for the trial itself.

36. Given the course proposed, I order that the further hearing of the motion for security for costs be stood over to a date to be fixed for the purpose of making formal orders as to the provision of security. I direct that the respondent file and serve, within 7 days, a draft of the orders it now seeks in accordance with these reasons.