Qintex Australia Limited v Anzcap Nominees Limited & Anor [2000] QSC 394

[1] WILLIAMS J: Each of the defendants in the action has applied for an order for security for costs against the plaintiff, Qintex Australia Limited ("Qintex"). The first defendant, Anzcap Nominees Limited ("Anzcap"), seeks security in the sum of $206,796.07, and the second defendant, Victorian Workcover Authority ("Workcover"), seeks security in the sum of $173,046.

[2] In the circumstances it is necessary to record some of the background facts to the litigation, and also to establish what is in issue in light of the pleadings.

[3] Receivers were appointed for Qintex on 21 November 1989, and it was ordered to be wound up on 22 April 1993. The liquidators have admitted proofs of debt totalling some $775M. In the course of the liquidation the liquidators have recovered approximately $37.6M, of which about $16.3M has already been distributed to creditors. The most recent distribution on 2 August 1999 involved the sum of $749,547. The liquidators currently retain about $329,220 of which it is said $175,000 remains unappropriated. In those circumstances one can only assume that the difference between the $37.6M recovered and the $16.6M distributed to creditors, or currently retained, has been expended in paying liquidator's fees and pursuing directors of Qintex. It will be necessary later to return to the distribution to creditors in August 1999.

[4] Workcover is a body incorporated pursuant to the Victorian Accident Compensation Act 1985. On or about 8 October 1985 it entered into a deed with Anzcap in terms which obliged Anzcap to manage investments on behalf of Workcover. Anzcap was empowered to invest moneys of Workcover in authorised investments as defined in the deed.

[5] It is sufficient for present purposes to say that sometime prior to July 1988 in purported reliance on the deed Anzcap utilised funds of Workcover to acquire shares in Qintex America. As a consequence of that subscription Anzcap was issued 740,000 fully paid $1 shares and the same number of partly paid $1 shares. The latter shares were partly paid to one cent. No consideration passed from Anzcap with respect to the partly paid shares which were described as "bonus". In the action both Anzcap and Workcover allege that the issue of the bonus shares was invalid as being contrary to provisions of the then applicable Companies Code.

[6] Then it is alleged that by document dated 29 July 1988 IPH Trading Pty Ltd (a subsidiary of Qintex) made a public offer for the purchase of all ordinary shares in Qintex America. The offer was that fully paid shares in Qintex America would be acquired in exchange for an issue of fully paid shares in Qintex, and that partly paid shares in Qintex America would be acquired in exchange for an issue of partly paid shares in Qintex.

[7] Anzcap did not accept that offer, at least not fully. Further, Anzcap and Workcover allege that the offer was not validly accepted by 75% or more of the offerees in respect of partly paid shares, was not validly accepted by holders of 90% or more of the partly paid shares, and that in consequence the offeror was not entitled to compulsorily acquire any partly paid shares in Qintex America.

[8] It is then the contention of Anzcap and Workcover that, notwithstanding the above, the partly paid shares in Qintex America held by Anzcap were compulsorily acquired, and Anzcap was registered as a shareholder in Qintex on or about 8 November 1988 as the holder of 370,000 shares in Qintex partly paid to one cent.

[9] The defences of Anzcap and Workcover contend that in the circumstances such registration was contrary to provisions of the applicable corporations law and was void. The defences raise the issue whether a person could be compelled to acquire partly paid shares.

[10] No reply has been filed dealing with either defence, and at this stage it is not clear what the liquidators say in relation to those allegations.

[11] On 24 March 2000 the liquidators commenced this action being a claim for monies said to be owing by way of unpaid calls on the 370,000 partly paid shares. The statement of claim alleges that there were calls lawfully made on 17 November 1988, 31 January 1989, and 31 July 1989. With interest calculated from those respective dates the current claim is for $1.4M. The liquidators rely on s 78(2) of the Companies Code, which provides that moneys payable to a company under the memorandum or articles is in the nature of a specialty debt, and by virtue of s 10 of the Limitation of Actions Act 1974 the relevant limitation period is 12 years.

[12] The liquidators made demands for payment pursuant to the alleged calls on 15 July 1992, but it was clear from the response of 31 July 1992 that the present applicants denied liability. There was further correspondence in the latter half of 1992 relating to the demand and response of the present applicants, but nothing much (if anything) appears to have occurred between the end of 1992 and the commencement of this action in March 2000.

[13] Given the issues raised by Anzcap and Workcover it will be necessary in the action to canvass the conduct of Qintex and its associated companies in 1988, the accuracy of disclosure made to offerees with respect to the offer of 29 July 1988, and all matters associated with that offer and the consequential compulsory acquisition of shares. It is obvious that numerous documents will be of critical importance, and their whereabouts after such a lapse of time is not clear. The matter is further complicated because on 10 July 1992 Anzcap was deregistered. By letter of 2 December 1992 the liquidators of Qintex were advised of that and further advised that if they believed they had an action against Anzcap "you should take whatever steps you consider appropriate in relation to Anzcap including reinstatement." As already indicated nothing was done until the year 2000. On 24 February 2000 the liquidators of Qintex applied ex parte to this court for the reregistration of Anzcap for purposes of commencing these proceedings, and that order was made.

[14] It must have been obvious to the liquidators in August 1999 that it was likely that these proceedings would be commenced. Interestingly in 1993 they had commenced proceedings in the Brisbane District Court against Equity Margins in which a similar claim for calls with respect to partly paid shares in Qintex was made. On 8 July 1993 Judge Pratt QC ordered that the liquidators provide security in the sum of $50,000 with respect to that action. The matter has not yet been tried.

[15] Immediately prior to the distribution of $749,547 in August 1999 the liquidators would have had ample funds to provide security to the applicants with respect to these proceedings. The liquidators do not dispute the entitlement of the applicants to security; they only contest the issue of quantum. The liquidators case is that the combined security should be limited to the $175,000 which remains unappropriated in their hands. It is said on their behalf that an order for any larger sum would stifle the litigation.

[16] One can see from the liquidator's accounts filed with the Australian Securities Commission on 22 November 1999 (exhibit SAS 2 to the affidavit of S A Sullivan sworn 22 August 2000) details of the creditors who received a dividend in August 1999. Five creditors received more than $50,000 from that distribution, including three who received more than $100,000. There is still hundreds of millions of dollars payable to admitted creditors, and it is obvious that if $1.4M was recovered in this action a number would receive considerable amounts. Based on the August 1999 distribution, if that amount was recovered, at least four creditors would each receive more than $200,000.

[17] It is against that background that passages in the affidavit of G E Grady, the chartered accountant with day to day conduct of the liquidation on behalf of the liquidators, assume great significance.

[18] Paragraphs 14 and 15 of his affidavit filed by leave are in the following terms:

"14. It is not, in my opinion, practicable to seek funding from any of the shareholders to continue with these proceedings. In numerous proceedings involving the Plaintiff and other members of the Qintex Group shareholders have been and are defendants (including these proceedings). Furthermore, given the quantum of the creditors of the Plaintiff (as revealed in the Form 524), it is impossible for there to be any further returns to shareholders in the proceedings.

15. Furthermore, and in my opinion, it is impracticable to approach creditors to fund the litigation as it is my experience with this liquidation that given the size of the debts involved, that may of the creditors, rightly or wrongly, foresee little benefit spending any further funds in pursuing claims on behalf of the Plaintiff or any other companies in the Qintex Group."

[19] The only conclusion that can be drawn from those paragraphs is that the liquidators have not attempted to contact creditors with a view to a creditor or creditors becoming an indemnifying creditor with respect to the proceedings in question. Unwillingness of creditors to indemnify the liquidator is not a ground for reducing the amount of security ordered. Recovery of monies in this proceeding can only be for the benefit of the creditors; if they are not interested in backing the litigation then the defendants ought not have to bear the risk of successfully defending costly proceedings brought at the instigation of the liquidators. That is particularly so where there has been inordinate delay such as here.

[20] For the reasons given above this will be a complex action. The defences raise a variety of issues any one of which may result in the defence succeeding. Whilst there would have been complexities if the matter was heard early in the 1990s, the lapse of time makes both preparation and the conduct of the trial for the defendants that much more difficult. Given the legal issues involved, and the consequences of a loss for each of the defendants, I am satisfied that it is appropriate that senior counsel be engaged. Further, there are issues as between the defendants such that it would be inappropriate for them to be represented by the same counsel. The applications are brought pursuant to s 1335 of the Corporations Law and the inherent jurisdiction of the court. Many of the relevant principles are discussed in Harpur v Ariadne Australia Limited (1984) 2 Qd R 523. In the course of argument reference was also made to factors which may influence the court in setting, in the exercise of its discretion, the amount of security; in particular there was reference to the factors referred to in Bruce Pie and Sons Pty Ltd v R H Mainwaring (1985) 1 Qd R 401 and Shannon v Australian and New Zealand Banking Group Limited (No 2) (1994) 2 Qd R 563 as impacting on the determination of quantum. I have had regard to those matters in arriving at the amount fixed by way of security.

[21] I have also had regard to the fact that it now seems clear that if the security ordered is ultimately less than the amount of recoverable costs, a party in the position of the applicants here would not be able to recover from the liquidators personally pursuant to the principle established by Knight v F P Special Assets Ltd (1992) 174 CLR 178.

[22] In this case each of the applicants has placed detailed material before the court in support of its application. That detail has been challenged by the solicitor for the plaintiff but, in my view, that challenge is largely based on the premise that the action is a simple debt claim. I am not persuaded by the material emanating from the solicitor for the plaintiff that the figures relied on by each of the applicants are grossly excessive in all the circumstances.

[23] As noted above, the amount of security is a matter within the discretion of the court. It may well transpire that some of the difficulties presently apparent will disappear, perhaps because of an admission by the plaintiff. But the probability is that the conduct of the litigation will be expensive for the applicants. Further, those who ultimately would benefit from successful prosecution of the action are not prepared to indemnify the liquidator in bringing the proceedings. In addition the liquidator recently put it out of the plaintiff's hands to be able to provide a greater level of security by making a significant distribution to those creditors.

[24] Particularly when one bears in mind the recent dividends paid out by the liquidators and the capacity of those who may benefit from the action to support it, I am not satisfied that the litigation will genuinely be stifled if significant security is ordered.

[25] I do not consider it necessary to go through the breakdown of the amounts claimed for security item by item. Given the issues raised by the pleadings the amounts claimed are a realistic assessment of the costs likely to be incurred in defending the action. However, I am satisfied that there should be some discounting from the amounts claimed to reflect the considerations mentioned in the cases referred to above, and that can be done on a broad brush basis.

[26] I am satisfied that Anzcap is likely to incur significantly more costs than Workcover because much time will be taken up in re-establishing contact with former employees and in locating relevant records, bearing in mind it was deregistered some eight years ago. The liquidators knew of the status of Anzcap back in 1992, yet they then took no steps to prosecute this claim. The fact that costs will be greater for Anzcap in preparing for and conducting the trial is not of its making.

[27] Taking everything into account I determine that the plaintiff should provide security for costs with respect to Anzcap in the sum of $150,000 and with respect to Workcover in the sum of $120,000.

[28] I am prepared to hear submissions as to the appropriate form of order and the time within which the security should be provided.