Passenger Transport Systems Pty Ltd (In Liq) v Darwin Radio Taxi Co-op Ltd

It is pleaded that the Court made certain injunctive orders against Darwin Taxi.

10 This then is the base upon which Passenger Transport has commenced its action against Darwin Taxi. It will be seeking to establish a causative link between the conduct of Darwin Taxi and the losses and damages that it has allegedly suffered. Those losses are alleged to be in the sum of $1.28m or thereabouts as appears in the report of Messrs Deloitte Touche Tohmatsu dated 14 April 1999, a copy of which was served with the statement of claim. 11 Geoffrey Wayne Nourse, a partner in the firm of Deloitte Touche Tohmatsu is the official liquidator of Passenger Transport. Initially he was appointed provisional liquidator on 15 November 1996 and later as liquidator on 19 December 1996 by orders of the Supreme Court of the Northern Territory. The fact that the liquidation of Passenger Transport is a Court winding-up and that Mr Nourse is thereby an officer of the Court are factors that are to be borne in mind when considering whether or not it is appropriate to order that an applicant company which is in liquidation, give security for costs. 12 In Spiel v Commodity Brokers Australia Pty Ltd (In Liquidation) (1983) 35 SASR 294, Bollen J, with whom Zelling and Wells JJ agreed, said at p 302: "I think it relevant in the exercise of discretion to remember that the claim is really being brought by the liquidator. He is an officer of the Court. He has available to him information which reasonably suggests to him that the appellant owes a substantial sum to the respondent. His duty is to take reasonable steps to recover what he can for creditors and shareholders. Moreover he has a duty to the Court. I need not dwell on that duty." 13 At the time of Mr Nourse's appointment as the provisional liquidator of Passenger Transport, the Australia and New Zealand Banking Group Ltd ("the Bank") had appointed Robert William Cowling as receiver and manager of all the assets and undertakings of Passenger Transport pursuant to a charge that Passenger Transport had granted to the Bank. Mr Nourse has satisfied himself that the Bank has been paid out, however, partly through a realisation of assets and partly by having recourse to a director's guarantee. Mr Nourse has also deposed that the receiver and manager has advised him that all wages and staff superannuation and annual leave entitlements have been paid; there are therefore no employees who are priority creditors. 14 According to Mr Nourse, Passenger Transport has creditors who, to date, have made claims totalling $649,887. There are 120 individual creditors in all. Of that number only fifteen creditors have claims over $20,000. However, there is a suggestion that there may be further large creditors who have not yet lodged claims. 15 Mr Whittaker, at $175,000, is the largest unsecured creditor but he is an undischarged bankrupt. 16 Mr Nourse was of the opinion that it would be : "Commercially impractical for me to obtain agreement amongst all the creditors to provide security."

He was of the opinion that there was no single creditor who was owed a sufficient amount to warrant putting up security for costs.

17 The application for security has been made under s 1335(1) of the Corporations Law which reads: "Where a corporation is plaintiff in any action or other legal proceedings, 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."

It was common ground that the facts that gave rise to this litigation were such as to attract the provisions of that subsection.

18 Counsel for Passenger Transport has acknowledged that there is reason to believe that Passenger Transport would be unable to pay the costs of Darwin Taxi if Passenger Transport is unsuccessful in this litigation. That, of course, is another factor to bear in mind. Furthermore, it was not specifically submitted that Passenger Transport's impecuniosity was caused by the conduct of Darwin Taxi. On the other hand, counsel for Darwin Taxi does not contend that the liquidator is acting other than bona fide in bringing this action: nor did she suggest that Passenger Transport did not have a maintainable cause or action. 19 The discretion that is vested in the Court on an application for security for costs is wide but it must be exercised judicially: see Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 2-3. But in cases, of which it could be said that this is one, where there is a public interest in the outcome of the litigation, that interest is an important consideration: see Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46; and Pasdale Pty Ltd v Concrete Constructions (1995) 59 FCR 446. In exercising a discretion whether security should be ordered, there is to be no pre-disposition in favour of the granting of security where the applicant is unable to meet the costs of the respondent in the event that the action should fail: Spiel v Commodity Brokers Australia Pty Ltd (In Liquidation) (see above); North Groongal Pty Ltd v ANZ McCaughan Ltd (1993) 61 SASR 302. While there must be impecuniosity before there can be a discretion to order security for costs, it is but one factor to be taken into account along with others. In the present case, the applicant is clearly impecunious and if the order for security is made, the action will be stayed unless the creditors can be persuaded to provide the security required. 20 When the matter was called on for hearing on 28 October1999, Ms Kelly, counsel for Darwin Taxi, submitted that the opposition to her client's application for security for costs centred upon the sole proposition that an order for security would stultify the litigation. As to this, she maintained that the onus was on Passenger Transport to establish that fact and that it had failed to do so. In Ariss v Express Interiors Pty Ltd (in liquidation) (1995) 122 FLR 343 Phillips JA (with whom Ormiston and Charles JJA agreed) said on this issue: "… if a plaintiff company seeks to resist an order for security on the ground of stultification, then it must establish the necessary factual basis before the argument can be weighed in the exercise of discretion."(at 352)

That was a case where the liquidator of a company sued its former directors, alleging (among other things) that they incurred debts in the name of the company in sums in excess of $900,000 whilst the company was insolvent. In the Court below, the application for security was refused largely because the judge concluded, on the evidence before him, that to order security would stultify the action; his Honour accepted an unchallenged statement from the liquidator that no creditor "with a sufficient amount of gain" would be prepared to fund the proceeding and a further statement in which the liquidator said:

"The prospects of securing agreement across such a large number and spread of creditors to enable contribution to be made by them on a rateable basis is, in my experience as a liquidator, remote."(at 346) 21 The Court of Appeal was of the unanimous view that the chamber judge's discretion had miscarried. Phillips JA said (at 352) that the evidence of the liquidator, even though it had not been challenged, failed to establish the commercial impracticability of meeting an order for costs. As his Honour pointed out at the same page, it had been demonstrated in Bell Wholesale Co Pty Ltd v Gates Export Corporation (see above) that it is up to the applicant to establish the fact upon which it relies to make out its opposition. In Bell Wholesale the Full Court observed at 4: "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts." 22 Ariss v Express Interiors was not a Court winding-up. Whilst not overlooking the responsibilities of a Court appointed liquidator, the fact remains that the pursuit of this litigation will, if successful, be for the benefit of the unsecured creditors. As Phillips JA said in Ariss "… and in those circumstances, as they stand to gain so much if the litigation succeeds it seems to me not unfair to expect them also to make some provision for the costs of the appellant-defendants, in case the litigation fails."(at 355) 23 Ormiston J said on this subject (at 344) that: "It is not unreasonable to require the insolvent plaintiff to provide some security". He added: "It may be that this will require the liquidator at some stage to ask the creditors if they are prepared to fund part of the costs of a case brought primarily for their benefit. So be it; in the end it may lead to a realistic appraisal of how the company's funds are being and should be applied." 24 Mr Wilkinson, counsel for Passenger Transport said that stultification, whilst an essential part of his argument was not his sole point. He also submitted that particular weight had to be given to the fact that this was a court ordered winding up and that the liquidator must, at all times, be conscious of his obligations as an officer of the Court. Without addressing his second argument I nevertheless pointed Mr Wilkinson to the following features in the case which, in my opinion, should have been addressed by the liquidator: · Who are the shareholders in Passenger Transport? Do they stand to gain and should they be considered as parties who are able to assist in offering security? · What inquiries, if any, had the liquidator made of creditors of the company about them offering security? · If shareholders and creditors refused to participate in offering security, was their conduct reasonable?

Not having any of this material before the Court made it difficult, if not impossible, to give proper consideration to the merits of the matter.

25 Ms Kelly submitted that these omissions were all the responsibility of the liquidator; his failure to address these matters should not prevent her clients pursuing and obtaining an order for security. I appreciated the force of her comments but if, as Mr Wilkinson submitted, the total assets of Darwin Taxi would not be sufficient to meet the claims of the creditors of Passenger Transport (so that there was no possible benefit for shareholders), the liquidator should be given the opportunity to place that information before the Court. Likewise, so he submitted, the liquidator should be given the opportunity to place before the Court the circumstances relating to the company's creditors, their wishes and their reasons (should it be the case) for not wishing to participate in the subject of security for costs. 26 As these matters developed during the course of argument, Mr Wilkinson sought and obtained an adjournment of the proceedings so that the liquidator could place further information before the Court. In granting the adjournment I reserved the questions of costs but, on reflection, I have concluded that Passenger Transport should pay these costs in any event. The information to which I have referred was material that quite clearly should have been put before the Court so that the Court would be able to come to a conclusion that was based on the merits of the case. It was the failure of the liquidator to place all relevant material before the Court that caused the adjournment. The justification for ordering the liquidator to pay costs can be better understood if the matter is viewed through a different perspective. It is this: if the adjournment had not been granted and the matter was decided on the limited material that was on the file, an order for security would have been made with costs. That could have necessitated the liquidator making a subsequent application to the Court to vary that order because of the presentation of further evidence. It was far more expeditious to grant the adjournment so that any decision that was made was fairly based on all relevant material. However, as the liquidator was the cause of that adjournment he should pay the costs in any event. 27 Mr Nourse filed a further affidavit dated 16 December 1999 and the argument on the application for security for costs resumed on 3 February 2000. In his most recent affidavit, Mr Nourse said that since the matter was first argued he had circulated 113 creditors of Passenger Transport advising them of the application for security for costs and asking whether creditors would be willing to offer some indemnity. As at the date of his affidavit, he has received only four written responses. None of those creditors was willing to offer any assistance to the liquidator. Two additional creditors made telephone contact: one offered an indemnity up to $1,500.00 and the other up to $1,000.00. 28 The liquidator is not satisfied with the records of the company that relate to the details of its paid-up capital. His estimates are therefore tentative at this stage. But the matter of more significance is that he has reason to believe that Darwin Taxis does not have sufficient funds to satisfy a judgment debt should its defence be unsuccessful. As creditors substantially exceed the value of the estimated assets of Darwin Taxis, there is no prospect of the shareholders benefiting from this litigation and I therefore propose to have no further regard to their situation. 29 The liquidator is pursuing this action as an officer of the Court in respect of a cause of action that is, if established, a matter of public interest and concern. At this interlocutory level, there is an arguable case that the liquidator should be allowed to pursue the action: · it has not been disputed that the claim is bona fide; · the claim is regular on its face and arguably has a reasonable prospect of success; · there is an unanswered allegation that Darwin Taxis admitted in other proceedings that its conduct breached relevant provisions of the TPA; · the liquidator has sworn that Passenger Transport has suffered loss and damage as a result of the conduct of Darwin Taxis and there is presently no sworn evidence to the contrary.

Those factors militate against an order for security for costs.

30 On the other hand, the creditors, who would be the ultimate beneficiaries of these proceedings should they be successful, have shown virtual disinterest. I am disturbed about the reaction of the unsecured creditors; some of them who are owed large amounts are well known trading houses. But the attitude of the creditors does not determine the outcome of this application, even though it remains a matter to be weighed in the balance: "Their likely attitude, their likely unwillingness to do so, was merely something to be discussed in that context, that is, as to whether in all the circumstances it would be reasonable to require the creditors to provide the first defendant with security for its costs."

BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 345 per Anderson J (with whom Kennedy and Ipp JJ agreed).

31 Save for cash on hand of $23,000.00 that the liquidator presently holds, I am satisfied that an order for security would stultify this action when, prima facie, it is the type of action that should be pursued. In these circumstances, I propose that there be an order for security, limited to the funds on hand (from which a reasonable amount to cover out-of pocket expenses may be retained). The liquidator is to submit the amount that he considers should be retained and his calculations in support of it. Darwin Taxis is to be at liberty to address on the liquidator's calculations. The amount of security, once fixed, is to be paid into Court. 32 Further consideration of these proceedings adjourned to a date to be fixed. Darwin Taxis is to have the costs of its application and is to bring in short minutes of order in terms consistent with these reasons. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Loughlin.

Associate: Dated: 23 February 2000 Counsel for the Applicant on the Notice of Motion: Ms J Kelly Solicitor for the Applicant on the Notice of Motion: David de L Winter

Counsel for the Respondent on the Notice of Motion: Mr J Wilkinson Solicitor for the Respondent on the Notice of Motion: Cowell Clarke

Date of Hearing: 28 October 1999 and 3 February 2000 Date of Judgment: 23 February 2000