JUDGE1
OLSSON J This is an application by the defendant for an order that the
plaintiff
furnish security for its costs of defending the present proceedings.
It is suggested that the costs likely to be incurred by the
defendant
(including costs relating to projected third party proceedings) are likely to
be of the order of $3.6m. I take the application
to seek security in about
that sum.
2. These reasons are confined to the issue of whether or not security ought
to be furnished,
leaving the question of quantum for further debate. I merely
comment at this juncture that the figures claimed seem to me to be
extraordinarily high on what I presently know of the litigation.
3. Moreover, a large proportion of the amount estimated appears
to relate to
proposed third party proceedings. As is pointed out in Bruce Pie and Sons Pty
Ltd v Mainwaring (1985) 1 Qd R 410 and Taly NDC International NV v Terra Nova
Insurance Co Ltd (1986) 1 All ER 69, the costs of such proceedings are not, in
any event, normally properly the subject of an order for security for costs.
Such proceedings
are, in substance, a separate action brought by a defendant
which, for reasons of procedural convenience, are combined with the trial
of
the principal proceedings between the plaintiff and defendant. As to such
proceedings the party bringing them is, in practical
terms, a plaintiff.
Dependent upon the outcome of the principal proceedings, the third party
proceedings may or may not prove to
be redundant.
4. The defendant's application follows its appearance to a claim by the
plaintiff against it for a sum of about $105m
for damages. The claim is
brought both in contract and in negligence. It relates to what the plaintiff
asserts were breaches of
the defendant's duty to exercise reasonable skill,
diligence, competence and care in preparing certain advisory reports as to a
proposed
purchase by the plaintiff of certain assets adverted to in the
statement of claim. In essence those assets comprised the undertakings
of
some 21 private hospitals which carried on business under the aegis of what
was known as the Consolidated Health Care Group ("CHC").
5. It is common ground that, in March 1987, the plaintiff entered into an
agreement with the persons and entities comprising CHC
to purchase the assets
in question for an all up consideration of $118m, which was to be satisfied
partly by an allotment of 47,658,333
ordinary shares in the plaintiff to CHC,
the adoption by the plaintiff of certain specified liabilities and obligations
of CHC and
a cash payment to CHC of something in excess of $57m.
6. Having regard to the provisions of section 12(g) of the then Companies
(Acquisition of Shares) (South Australia) Code it was necessary for the
plaintiff to seek the exercise by the National Companies
and Securities
Commission ("NCSC") of its discretion pursuant to section 60 of the
legislation, because of the major issue of shares
involved. The so-called
policy statement number 116 issued by the NCSC applied to the transaction.
This contemplated the procurement
by the plaintiff and the subsequent issue to
the existing shareholders of the plaintiff of an expert's report, which
conformed with
the requirements of the policy statement, prior to a
shareholders' meeting to sanction the proposed transaction.
7. The advisory
reports the subject of the present action are said to be
those which the plaintiff sought from the defendant for its own purposes
and
to satisfy its statutory obligations. The defendant was, at the time, the
auditor of the plaintiff. It was, however, separately
retained and paid a
substantial fee for the preparation and rendering of the reports. Those
reports were, it is said, accepted and
acted upon by the plaintiff and then
placed before the members. They formed a basis for the meeting which
eventually sanctioned
the purchase.
8. It is the plaintiff's case that the advice tendered by the defendant was
patently negligent and erroneous, particularly
with regard to the question of
the fair value of what was described as "new assets". It is asserted that, by
reason of the defendant's
breaches of duty, it has sustained loss and damage
amounting to about $105m.
9. It is beyond dispute that the plaintiff is hopelessly
insolvent. Its
balance sheet for the year ended 30 June 1992 disclosed assets of $31.2m as
contrasted with liabilities of $43.398m.
Secured liabilities totalled
$41.131m, of which I take $33.831m to have been moneys advanced by the State
Bank of South Australia
("the Bank").
10. The documents before me reveal that, by instrument dated 11 August 1988,
the plaintiff granted to the Bank a mortgage
debenture by way of floating
charge over the whole of its undertaking and assets to secure all moneys from
time to time advanced
to it.
11. It is also common ground that, on 22 February 1993, the Bank appointed
Messrs A.G. Hodgson and A.M. Cornell as receivers
and managers of the whole
of the undertaking and assets of the plaintiff. The present action was
instituted against the defendant on the following
day, in the name of the
plaintiff, but at the instance of the receivers and managers. I was informed
that Messrs Hodgson and Cornell
have since sold all of the hospitals
previously owned by the plaintiff, but there is no information before me as to
what sums were
realised in the process.
12. The only other factual material before me which is relevant for present
purposes is an affidavit of
an officer of the defendant which reveals that, at
all materials times, it had in force a policy of insurance against claims such
as that now made by the plaintiff and associated legal costs. Under the terms
of that policy the defendant is required to bear approximately
the first
$2.4m. Any balance is payable by insurers on a layered basis. It is conceded
that the quantum of the insurance cover
is such that it would totally cover
the plaintiff's claim, given the so-called "deductible" required to be met by
the defendant itself.
13. As I understand the situation, and subject to a perusal of the actual
policy document, the defendant would, in the event of
the dismissal of the
plaintiff's claim, personally be required to meet any liability for party and
party and solicitor and client
costs up to a maximum sum of about $2.4m,
assuming that it could not make any recovery from the plaintiff.
14. The defendant's present
application is prosecuted under both section
1335(1) of the Corporations Law and SCR 100.01.
15. Section 1335(1) stipulates that:-
"1335. (1) 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
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.
(2) The costs of any proceeding before a court under this Law
shall
be borne by such party to the proceeding as the court, in
its discretion, directs."
16. By way of contrast SCR 100.01 is expressed
in these terms:-
"R100.01 The Court may order security for costs to be
furnished:
(a) where the plaintiff is a mere nominal
plaintiff and is in a
condition of poverty or insolvency;
(b) where the plaintiff is ordinarily resident out of the
jurisdiction;
(c) where the residence of the plaintiff is incorrectly stated in
the summons with an intention to deceive;
(d) in circumstances
authorised by any statute;
(e) where for special circumstances the justice of the case so
requires."
17. It is at once apparent
that, save to the extent that any application
solely based on SCR 100.01 must meet the criteria stipulated by it, the
discretion
of the Court as to security for costs is at large. It is both
impractical and undesirable to seek to limit it by self imposed, rigid
rules.
(Spiel v Commodity Brokers Australia Pty Ltd (in liquidation) (1983) 35 SASR
294 at 300.) The discretion is unfettered (Interwest Ltd v Tricontinental
Corporation Ltd and Anor (1991) 5 ACSR 621).
18. All that may properly be said is that resort may be had to the published
decisions on the topic with a view to gleaning some
assistance as to factors
properly to be taken into consideration. At the end of the day a decision must
be made in light of the particular
facts of the specific case and as a
consequence of balancing relevant considerations. The discretion arising
under SCR 100.01(d)
necessarily casts the net as wide as the incorporated
provisions of section 1335.
19. There can be no doubt that it is a relevant
consideration that, in a
particular situation, an insolvent plaintiff may, in fact, merely be a mere
nominal claimant, in the sense
that it is merely a vehicle for a third party
to recover moneys said to be due to it.
20. So it was that in Sent and Ors v Jet Corporation
of Australia Pty Ltd
[1984] FCA 178; (1984) 54 ALR 237 that the Federal Court held that it was an important
consideration that a finance company had appointed a receiver and manager of
the plaintiff, was in practical control of the litigation and that the action
was primarily being pursued by the finance company
in its own interest and
possibly that of the unsecured creditors as well. In practical terms the
plaintiff did not stand to benefit
from the fruits of any probable success.
In such a scenario it was the view of the Federal Court that it would be
inappropriate for
the finance company to have "the privilege of suing on its
own initiative and responsibility, for its benefit, on terms that, if
it
loses, it has no responsibility for costs". (See per Smithers J at pp252-3.)
21. Later in his judgment in that case Smithers
J was careful to make the
point that he was heavily influenced by the factual situation, there apparent,
that the action was brought
by the finance company "for its own immediate
benefit rather than upon some hope that success in the proceedings will
provide some
benefit to ... (the plaintiff) ... itself".
22. As Mr Gray QC, of senior counsel for the plaintiff pointed out, there is
a very
real factual contrast between that case and the present action. Here,
if the claim succeeds, not only will the Bank benefit but,
potentially, there
could well be a substantial benefit to the Company itself and, in turn, the
shareholders of it. Indeed, if the
claim made is substantially successful the
plaintiff, as a corporate entity, stands to gain benefits well in excess of
those which
would accrue to the Bank.
23. It is not to be forgotten that the Courts have not, in the past,
proceeded upon the assumption that,
once it is shown that a plaintiff
corporation is insolvent, the exercise of discretion ought to be exercised
with a pre-disposition
in favour of the defendant party. (See discussion on
this topic in John Arnold's Surf Shop Pty Ltd (In Liquidation) v Heller
Factors
Pty Ltd and Anor (1979) 22 SASR 20 at 33-4.) Where there is a bona
fide claim which a plaintiff desires to have pursued, albeit that it will
substantially benefit a
specific creditor who may stand behind it, the court
will be slow to order security.
24. On the reasoning adopted by Megarry V-C
in Pearson v Naydler (1977) 3 All
ER 531 at 537 it may fairly be said that, on the one hand, the relevant
statutory provisions ought not to be allowed to be used as an instrument
of
oppression to block a bona fide claimant from pursuing a genuine claim, but,
on the other hand, an impecunious company ought not
to be permitted to use its
incapacity to pay costs as a means of putting unfair pressure on a more
prosperous defendant.
25. In
the instant case it seems to me that these factors, additional to
those to which I have adverted, are of particular importance:-
- The defendant, at the relevant time, had been the auditor of the
plaintiff. It clearly contracted, for a fee, to prepare
the
reports in question.
- It is covered by an insurance policy, save for the deductible
which the defendant must meet.
By paying the fee to the defendant
the plaintiff was de facto indirectly contributing to the premium
for that cover. (Cf
Remm Construction Pty Ltd v Wallbridge and
Anor (1992) 57 SASR 180.)
- The reports were sought and given for the purpose of satisfying
an important statutory requirement. In the broad sense
the
litigation raises an important public interest question as to the
duty and responsibility of the defendant in such circumstances.
(As to the relevance of this - see Northrop J in Jet Corporation
of Australia Pty Ltd and Ors v Petres Pty Ltd and Ors [1983] FCA 240; (1983) 8
ACLR 334 at 336). Also Caruso Australia Pty Ltd v Portec
(Australia) Pty Limited [1984] FCA 65; (1984) 8 ACLR 818, Ilat Nominees Pty Ltd v
Murragong Nominees Pty Ltd [1980] FCA 162; (1980) 48 FLR 385, Cameron's Unit
Services Pty Ltd and Anor v Kevin Whelpton and Anor (1986) 11 ACLR
43 and Smail v Burton [1975] VicRp 76; (1975) VR 776 at 780.)
- What is here in issue is what is said to have been the direct
product of the defendant's own alleged breach of
duty - a breach
which, the plaintiff claims, brought about the very insolvency
upon which the defendant now relies. (As
to the relevance of
which see Newtrend Pty Limited v Oceanic Life Limited (1990) WAR
1, Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2
FCR 1, Australian Quarry Holdings Pty Ltd (In Liquidation) v
Dougherty and Ors (1992) 8 ACSR 569 and the Cameron's Unit
Services Case (supra).)
- There can be little doubt that the figures proffered by the
defendant
and on which it relies are prima facie so large that it
is open to the suggestion that they may well be advanced in
terrorem,
as a means of potentially stifling or frustrating the
claim now sought to be advanced. In my view this case is very
close
to the borderline, there being significant factors for and
against the making of an order.
26. However, at the end of the day,
the relevant propositions which must
firmly be borne in mind are:-
- It cannot be forgotten that the protection of defendants
against
insolvency of a plaintiff is one of the primary purposes of the
legislative provisions.
- Although the plaintiff
and its shareholders stand to benefit
from success it is clear that it is the Bank which, in reality,
primarily stands behind
the claim for its own benefit. (As to
this see Vandil Holdings Pty Ltd v Insurance Co of North America
and Ors (1985) 3 ACLC 542 at 545.)
- Whilst insolvency must be no bar to a bona fide claim and the
section must not be resorted to simply to frustrate
such a claim,
that concept ought not to be relied upon to, in effect, confer
immunity from the operation of a statutory provision
which clearly
contemplates security where a plaintiff is suing at the instance
of another party who has not been shown to
be unable to provide
security (Hession and Ors v Century 21 South Pacific Ltd (In
Liquidation) (1992) 28 NSWSR 120, Interwest Ltd v Tricontinental
Corporation Ltd and Anor (supra), Harpur v Ariadne Australia Ltd
(1984) 2 ACLC 356). Paying due regard to the other factors to
which I have referred and which tell against the ordering of
security (and adopting
the balance of justice and common sense
adverted to by Smithers J in the Ilat Nominees Case (supra)) it
seems to me that
the justice of the case will be to make a
conservative (and to some extent interim) order at this juncture
in relation to
the period prior to trial, excluding any allowance
for third party proceedings.
27. Although I have not received detailed argument
as to precise quantum at
this point I do not consider that this would carry the situation much further,
as I have not yet obtained
a detailed grasp of the litigation and, in any
event, I propose to take a global, broad axe view, which I may review at a
later date.
28. I order that the plaintiff provide to the defendant security for costs up
to trial in the sum of $100,000, such security to
be in the form of a formal
undertaking by the Bank to provide that sum towards satisfaction of any costs
which may, after trial,
be ordered to be paid by the plaintiff to the
defendant. There will be liberty to speak to the minutes and I will hear
counsel as
to the costs of this application.
29. In so doing let me make clear my stance as to one aspect of this case.
It seems apparent to
me that at least the defendant contemplates a very great
expenditure on discovery and other interlocutory aspects of this case.
I am,
at this stage, by no means clear as to how the proposed expenditures referred
to in the cost estimates put before me will be
necessary for the fair trial of
the action, excluding from consideration the proposed third party proceedings.
30. This is a case
in which discovery by phases will obviously be a
consideration and it may be that, under SCR 58.04 (in its present form) there
will
be a need to consider some limitation of discovery - bearing in mind the
substantial issues to be tried. I will also be alert to
ensure that the
interlocutory phases of these proceedings are not permitted, unnecessarily, to
assume the gargantuan proportions
- in terms of costs and processes - which
have developed in some cases in the recent past. I expect those advising both
parties
to focus on the true issues and not engage in multitudinous forays
into what may be truly peripheral aspects. The conduct of the
parties may well
greatly influence any further review of this question.