INDEPENDENT RESOURCES (ASIA) GROUP PTY LTD; DAVID WILLIAM KING; PETER CHARLES

DUNN; MICHAEL WILLIAM ATKINS; GEOFFREY WILLIAM DEWAR; CLAREMONT PETROLEUM NL

[1992] FCA 110; 7 ACSR 203

[1992] FCA 110; (1992) 10 ACLC 525

Practice and Procedure - Security for costs - application against plaintiff corporation under s.1335 of the Corporations Law - meaning of "will be unable to pay the costs of the defendant if successful" discussed.

Counsel for the applicants : Mr J.R. Sulan with Mr C.N.H. Bagot

Counsel for the 2nd and 4th respondents : Mr S.G. Lever

Solicitor for the 2nd and 4th respondents : Baker O'Loughlin

cross-respondents : Mr J.R. Sulan with Mr C.N.H. Bagot

On the Notice of Motion by Michael John Fuller and Joseph Patrick Cummings -

1. The respondents Michael John Fuller and Joseph Patrick Cummings bring into Court short minutes of order to reflect the order proposed in the reasons for decision delivered this day.

2. The parties be at liberty to speak to the minutes.

3. Beach Petroleum NL and Claremont Petroleum NL pay the costs of Michael John Fuller and Joseph Patrick Cummings of and incidental to the Notice of Motion.

2. Jingellic Minerals NL pay the costs of Beach Petroleum NL and Claremont Petroleum NL of and incidental to the Notice of Motion.

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

Security for costs is sought by the second, fourth and sixth respondents ("Fuller", "Cummings", and "Jingellic") against the applicants ("Claremont" and "Beach") pursuant to sub-s.1335(1) of the Corporations Law.

2. A notice of motion for security for costs by the seventh respondent ("Spargos") is to be discontinued, and a further notice of motion for security for costs by the eighth respondent ("Enterprise") has been adjourned sine die.

3. In the principal proceedings there are cross-claims by Jingellic Spargos and Enterprise against Claremont and the directors of Claremont, and by Jingellic against Beach for the debt due under the SCAF Agreement. There is on foot a notice of motion by the applicants for security of costs against Jingellic and Enterprise. That notice of motion as against Enterprise has been adjourned sine die. As against Jingellic the notice of motion came on for hearing at the same time as the notice of motion of Messrs Fuller and Cummings, and Jingellic, but was not fully argued.

4. I propose today to make orders on the security applications of Messrs Fuller and Cummings, and Jingellic, and to indicate briefly my reasons for decision for the orders. Whilst I do not decide the application for security by the applicants against Jingellic, as it has not been fully argued, I think it will be plain from the reasons I am about to give what the fate of the application is likely to be if the applicants proceed with it.

5. The power of the Court to order security for costs under s.1335 is conditioned on the Court being satisfied by credible testimony that there is reason to believe that the applicant corporations (i.e. Claremont and Beach) will be unable to pay the costs of the respondents if they are successful in their defence. Subject to that condition being fulfilled the section gives the Court an unfettered discretion which is to be exercised having regard to all the circumstances of this case: see Sir Lindsay Parkinson and Co. Ltd v. Triplan Ltd (1973) 2 All ER 273 at 285, Bell Wholesale Co. Ltd v. Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 at 4, and Bryan E Fencott and Associates Pty Ltd v. Eretta Pty Ltd and Others [1987] FCA 102; (1987) 16 FCR 497 at 511.

6. The financial position of each of the applicants was the main point of contention between the parties when the notices of motion were argued. I have considered the matters put by each side. I am satisfied that the pre-condition of s.1335 is sufficiently satisfied, and that the unfettered discretion is enlivened.

7. Although s.1335 requires that there be reason to believe that the plaintiff corporation "will be unable to pay the costs of the defendant if successful" - and I emphasise "will be unable to pay" - the section does not, in my opinion, require that the Court be satisfied, as a matter of probability, that every eventuality which could lead to eventual payment of the costs be excluded. The section would be satisfied if it appeared by credible testimony that there is reason to believe that if the defendant is successful circumstances may then exist in which the plaintiff will be unable to pay the costs.

8. An application for security of costs under s.1335 is likely to be made many months, perhaps a year or more, before the trial and judgment is given in the litigation. The Court is required to form an opinion about what the financial position of the plaintiff will be at the time of judgment and immediately thereafter. The financial position of the plaintiff at the time when the application is made will be an important guide, but is not the sole consideration. Not infrequently a plaintiff corporation will be carrying on business. Its financial position at the end of the anticipated trial will depend not only on the outcome of the trial, and the costs likely to be associated with it, but on the successfulness or otherwise of its business and investments in the meantime. Many uncertain factors may influence the corporation's financial position. In many of these cases the uncertainties will mean that the Court will be faced with a range of possibilities, which, depending on whether fortunes run with or against the plaintiff in the meantime, extend from insolvency at one extreme and at the other extreme to more than sufficient immediate cash resources to meet the costs and other debts as they fall due. Between the extremes a variety of quite possible, but not necessarily probable, contingencies could render the plaintiff company, in the event of the proceedings being lost, unable to pay the costs in full and without delay in the ordinary course of business upon service of an allocatur.

9. A corporation "will be unable to pay" the costs within the meaning of the section if it can only do so if given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over other liabilities, sufficient to pay the costs: see Southern Cross Exploration NL and Others v. Fire and All Risks Insurance Co. Ltd and Others (1985) 1 NSWLR 114 at 121. The company will also be unable to pay the costs within the meaning of the section if the payment would be one that will amount to a preference of the defendant over other creditors such that the payment would be liable to be set aside either as a preference or as a fraudulent disposition (that is a payment made by the plaintiff corporation with the intention to defeat or delay one or more other creditors) in the event of the plaintiff corporation later going into liquidation. When the Court is required to make a judgment which anticipates future events the Court of necessity is required to judge the degree of probability that a particular event might occur. The Court can do no more than evaluate the chances: cf. Malec v. J.C. Hutton Pty Ltd [1990] HCA 20; (1990) 92 ALR 545.

10. In my opinion the power of the Court under s.1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then to be taken into account in the exercise of the discretion, and in framing the orders of the Court if the decision is to order security.

11. In the present case the evidence led by the parties seeking security on the question of the likely financial position of the applicants is credible evidence. In my opinion it establishes reason to believe that events could occur before the conclusion of these proceedings which would render each of them unable to pay the costs of the respondents to the principal action in the manner contemplated by s.1335. It is also possible that the applicants might then be able to pay the costs, but the respondents are entitled to seek protection under the section for the adverse possibility.

12. I do not propose to go through that evidence. I am led to this conclusion in particular by the notes and qualifications by the auditors to the statements of account of each company to 30 June 1991, and by the extent of the losses incurred in the year ended 30 June 1991 by each company. In addition in the case of Claremont I am influenced by the statements by the directors in the annual report for the year ended 30 June 1991 which acknowledge the extent of the debt burden of Claremont, by the state of its payments to Westpac Banking Corporation under the Discount/Multi Currency Loan Agreement, by the deficiency between total current assets and total current liabilities, and by the uncertainty whether the "receivables" would be received in the event of this litigation being lost. In the case of Beach I am also influenced by the heavy dependence of its cash flows on the price of oil which could fluctuate adversely to the interests of Beach in the ensuing year, by the effect which adverse oil prices could have on the value of its three main assets, and by the extent of the liabilities which would become due by it if the action were lost - i.e. liabilities to Jingellic under the SCAF Agreement, to its own solicitors for costs, and to such of the ten respondents to these proceedings who decide to take part in the trial.

13. It is quite possible in my view, if the case were lost by Claremont and Beach, if oil prices remain depressed, and if recessionary trends in the community continue, that neither Claremont nor Beach alone, or the two of them together, will be able to pay the costs of the respondents, at least not without delay, and in circumstances where the successful respondents would not be receiving a preferential payment.

15. First it is to be noted that Claremont and Beach assert that they are in a position if ordered now to do so, "to pay costs...in the amount of $500,000", these being the words used in a supporting affidavit from Mr Couttas. I interpret this to mean that the applicants, if ordered to do so, could pay into Court as security the sum of $500,000. Whilst I accept that the applicants could pay over this amount, the cash flows and other information leave me in considerable doubt whether this could be done without causing considerable difficulty to both companies in the short and medium term. But accepting for the moment that the applicants are able to provide security - that disposes of arguments that were advanced by the applicants to the effect that security should not be ordered because there are public interest and other considerations which require that the case proceed to trial. If the applicants are able to provide security, an order in the usual terms that the action be stayed until security is given will not preclude the applicants from prosecuting their claim.

16. I consider that the claims for security by Messrs Fuller and Cummings stand in a position which is significantly different to that of Jingellic. Messrs Fuller and Cummings are faced with very serious claims of personal fraud, and a 12 week trial. There is no reason to doubt the assertion by their counsel that if they win the case, the costs of the trial are likely to ruin them financially if they cannot recover costs from the unsuccessful applicants. Counsel for the applicants however advance a number of arguments why the protection of a security order should not be given. The applicants contended that the conduct of Messrs Fuller and Cummings, and Jingellic, (along with other respondents) has brought about the applicants' complaints in the action, and their impecuniosity, and, moreover, that the applicants have a strong case. In part these submissions pre-judge the case. The case is obviously a most complex one. I am unable to say at this stage that the chances of success point in one direction rather than another.

17. There is some force however in the submission that even if fraud, breach of duty and so on as alleged is not established it was nevertheless decisions in which Messrs Fuller and Cummings participated as directors of the respondent corporations that led to the purchase of the Burbank oil interests at a price which greatly exceeds their present values. That is a significant reason why the asset position of the applicants is now as unfavourable as it is. That Messrs Fuller and Cummings participated in those decisions, assuming their conduct not to be wrongful in the manner alleged, is a factor which I consider does not disqualify them from a favourable exercise of the discretion, but it is one to be taken into account in framing an order for security which will interfere with the operations of Beach and Claremont as little as possible between now and the resolution of the proceedings.

18. Then it is said that Messrs Fuller and Cummings are directors of Jingellic, and were directors of Enterprise, at times when Jingellic and Enterprise instituted proceedings in the Supreme Court of South Australia, and later in the Federal Court in the New South Wales Registry, which, it is submitted, should be treated as having the purpose of impeding, stopping, or delaying this action so that Messrs Fuller and Cummings avoid having the allegation as to their fraud tried. The litigation instituted by Jingellic and Enterprise is capable of being interpreted as having this purpose - but that is only one possible interpretation. The nature of the litigation between the companies provides reason in my view for not granting security to Jingellic, but I do not think that it provides reason for depriving Messrs Fuller and Cummings of a favourable exercise of the discretion to protect them individually. I consider they are entitled to be secured for their costs in the event that the allegations of wrongdoing against them are not proved.

19. As I have said, I consider the position of Jingellic to be different. Litigation between the applicants and Jingellic began with the proceedings by Jingellic against Beach in the Supreme Court, which Jingellic ultimately lost. In those proceedings Jingellic pressed on with the winding-up application after Beach had indicated grounds on which it genuinely disputed the debt the subject of the s.460 notice. It also pressed on with an application to appoint a provisional liquidator when there were inadequate grounds for such an appointment. I note that costs were ordered against Jingellic in favour of Beach, and that these costs have not yet been paid. In a sense the proceedings taken in this Court by the applicants were taken in defence of Jingellic's claim under the SCAF Agreement. If the present claim went no further, the real aggressor would be Jingellic and it would not be appropriate to consider ordering security. The proceedings in this Court however go further and seek to assert positive claims against Jingellic by not only Beach but also by Claremont. Nevertheless the fact that Jingellic started the litigation and is now prosecuting its claim by cross-proceedings is an important factor to be weighed in the scales on the exercise of the discretion. Another factor is the proceedings in this Court in the New South Wales Registry. In those proceedings the present applicants are the respondents, and an application for security for costs by them against Jingellic (and the other applicants in those proceedings) was dismissed: see Moage Ltd and Others v. Claremont Petroleum and Anor, unreported judgment 7 November 1991, Lockhart J. The applicants and Jingellic are each public listed companies. The financial position of each of them is tight. The issues raised in the proceedings between them have important repercussions for the companies and their shareholders. It is in the public interest that the allegations and counter-allegations, particularly those in these proceedings, be resolved as quickly as possible whilst keeping the companies afloat in the meantime. The vigour with which the several proceedings have been prosecuted in different forums raises as a distinct likelihood that there is a measure of tactical manoeuvring involved. To make an order for security of costs either on Jingellic's notice of motion against the applicants, or on the applicants' notice of motion against Jingellic may well give one side or the other a tactical advantage the implications of which cannot be gauged by the Court. In my opinion no order for security of costs should be made in favour of Jingellic.

20. It is then necessary to frame an order for security which is least likely to disrupt the continued operations of Claremont and Beach until judgment. The Burbank oil interests are presently valued in the books of Beach at $11.462M. These oil interests are the major asset of Beach. As Claremont holds 65% of the issued capital of Beach, the Burbank oil interests also represent a substantial part of the value of Claremont's assets. The Burbank oil interests are presently charged to Jingellic for the disputed amount claimed by it from Beach, the amount of the charge being in the order of $6M. In my opinion justice will be done between Messrs Fuller and Cummings and the applicants if Messrs Fuller and Cummings are given a second ranking charge (behind Jingellic) over the Mazeley share scrip which is, effectively, the title to the Burbank oil interests. Such a charge should cause minimal disruption to the operations and cash flow of Beach and Claremont. I am informed from the Bar table that the scrip is presently charged only to Jingellic.

21. The final question is the amount in which security should be ordered. I indicated to counsel during argument that if I reached this point I would discuss the estimate of cost - which for Messrs Fuller and Cummings appears in the affidavit of Mr Gregory Brown sworn on 16 January 1992 - with the Registrar of this Court who has the responsibility of taxing bills of costs in the Registry. I have done so. He confirms that the recommended scale of fees for counsel in the South Australian Supreme Court is used as a guide to counsel fees in this Registry. I have had regard to this scale. I propose to order security on the footing that Messrs Fuller and Cummings will share equally the costs of the solicitors they have jointly instructed, but will each instruct separate counsel, both a leader and a junior.

22. I consider security should be given at this stage for the costs up to and including the first day of trial, and then not later than the first day of trial, for the expected duration of the trial which is presently estimated to run for 12 weeks.

23. The security should be given separately to each of Messrs Fuller and Cummings (to rank equally between them) in the following amounts:

Security to the first day of trial

Solicitors fees $30,000

Counsel fees, including fee on brief 20,000

$50,000

Security for balance of trial

Solicitors fees $30,000

Disbursements (including transcript) 25,000

Counsel fees 100,000

$155,000

24. The notice of motion for security of costs by Jingellic will be dismissed.

25. Messrs Fuller and Cummings should bring into Court short minutes to reflect the orders I have proposed. The parties may need to confer as to the procedure and documentation necessary to effect the charge which will constitute the security. There will be liberty to speak to the minutes. I will also hear the parties on the question of costs.