Pty Ltd v Mainwaring [1993] SASC 4092 | Case summary

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.

Pty Ltd v Mainwaring

At a glance

Court

Decision date

Before

Source

Judgment (8 paragraphs)

HEALTH AND LIFE CARE LTD (RECEIVERS AND MANAGERS APPOINTED) v. PRICE WATERHOUSE No. SCGRG 93/289 Judgment No. 4092 Number of pages - 7 Costs - security for costs (1993) 11 ACLC 1110 [1993] SASC 4092 (13 August 1993)

Parties

Cases Cited (9)