Federal Court of Australia Act 1976 - s.56

Bell Wholesale Co. Ltd. v. Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1

Drake v. Hunter Douglas Ltd. (1983) 8 ACLR 39

Harpur v. Ariadne Australia Ltd. (1984) 2 ACLC 356

John Bishop (Caterers) Ltd. v. National Union Bank (1973) 1 All ER 707

Solicitors for the First-named : Baker & Mackenzie Respondent

Motion for an order that an applicant provide security for the first respondent's costs.

2. The applicant Whitby Enterprises Pty. Ltd. ("Whitby") began trading on 26 August 1988. The business which Whitby conducted was the provision by retail at premises in Geelong of coloured photographic reproductions of documents, including photographs, by the operation of an instrument known as a Canon Laser Copier ("the copier") which Whitby hired from the respondent Westpac Banking Corporation ("Westpac"), which had purchased the copier at Whitby's request from the respondent Canon Australia Pty. Ltd. ("Canon"). Having sustained substantial losses, Whitby rescinded the hiring agreement and ceased carrying on the business in March 1989, when this proceeding commenced. Notice of Canon's motion for security for costs was filed on 2 October 1989.

3. The applicant Eric Hughes was at material times one of the four shareholders and directors of Whitby, who are a pair of married couples. The applicants allege that the copier was neither fit for the purpose of use in a business of photocopying nor of merchantable quality, and that Westpac committed breaches of the conditions which in the circumstances alleged it is said that ss. 106 and 107 of the Goods Act 1958 (Vic.) operated to imply in the hiring agreement. The applicants further allege that Whitby was induced to enter into the hiring agreement by Canon's representations concerning several capacities and characteristics of the copier, which representations are said to have been false and to have constituted contraventions by Canon of ss. 11 and 12 of the Fair Trading Act 1985 (Vic.) and of ss. 52 and 53(a) of the Trade Practices Act 1974. Those capacities and characteristics are alleged also to have been warranted to Whitby by Canon, and Canon is alleged to have been negligent in making the representations. Mr. Hughes is alleged to have been induced by the representations to give up lucrative employment in order to manage the business which Whitby had been induced to undertake. It is alleged that the substantial trading losses sustained by Whitby in the conduct of the business and substantial losses of remuneration and profits sustained by Mr. Hughes were caused by the copier's lack of the capacities and characteristics which it was represented and warranted to have had. Against Canon the applicants claim damages for the breaches of the Fair Trading Act 1985 and the Trade Practices Act 1974. There is no claim for relief in respect of the negligence or of the warranties, but that may have been a slip.

4. The evidence established that Whitby has not the capacity to pay Canon's costs of the proceeding, if Whitby were to be ordered to pay them. Its assets, other than the causes of action in the proceeding, do not equal in value the amount of its liabilities. On the first day of hearing the evidence then before the Court for and against the motion suggested that Whitby may have been carrying on business as a trustee. The evidence revealed nothing as to the identities of beneficiaries, and nothing as to the capacities of Whitby's shareholders or of any beneficiaries to provide Whitby with the funds which would be required to enable Whitby to pay Canon's costs. When the hearing of the motion was resumed a fortnight later proof was made that Whitby had not carried on the business as a trustee, but no evidence was adduced about the financial capacities of Whitby's shareholders, notwithstanding that the attention of counsel for Whitby had been drawn to Bell Wholesale Co. Ltd. v. Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 and Chester & Fein Property Developments Pty. Ltd. v. Candam Investments Pty. Ltd. (1985) 9 FCR 419. In the former case a Full Court was dealing with an appeal from an order that an applicant company provide security for the respondent's costs. It was accepted by the parties that an order for costs in favour of the respondent could not be satisfied out of the applicant company's assets. The Full Court observed (2 FCR 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."

One of the grounds of opposition to Canon's motion was that the order sought would frustrate the litigation of Whitby's claims. Having regard to Whitby's failure to disclose its four shareholders' financial capacities, I decline to allow any weight against the motion to that ground. Mr. Hughes offered to consent to an order that Canon's costs of defending successfully the proceeding by Whitby be paid out of any damages awarded Mr. Hughes against the respondents or either of them. That offer does not really meet the point that the four persons who will benefit by a judgment in favour of Whitby have failed to disclose their capacities to bear costs which Whitby may be ordered to pay if its claims against Canon are dismissed. And it is an offer the value of which is diminished by the persuasive submission advanced by counsel for the applicant that it was very likely that Hughes and Whitby would either both succeed or both fail in the proceeding.

5. Mr. Szabo of counsel for the applicants sought to draw support from cases in which an order for security has been refused against one of two plaintiffs on the ground that only one cause of action was alleged, vested either in the two jointly or alternatively in the one or the other, and the other plaintiff was a natural person resident within the jurisdiction and so not liable to be ordered to give security for costs. (See Harpur v. Ariadne Australia Ltd. (1984) 2 ACLC 356; Drake v. Hunter Douglas Ltd. (1983) 8 ACLR 39; John Bishop (Caterers) Ltd. v. National Union Bank (1973) 1 ALL ER 707; and the cases therein cited.) Although none of the causes of action alleged in this proceeding is vested in the applicants jointly or in one or the other alternatively, Mr. Szabo pointed out that the principal issues in the proceeding - whether the copier lacked certain capacities and characteristics, whether the copier was represented by Canon to Hughes (and so to Whitby) as having those capacities and characteristics, whether Hughes (and so Whitby) was induced by such representations to embark himself, and to cause Whitby to embark, on the commercial venture which failed, and whether that failure was caused by the copier's lack of those capacities and characteristics - were all issues upon which each applicant had joined with Canon, and he submitted that in the circumstances disclosed by the evidence adduced for and against the motion it was very probable that either both applicants would succeed in the proceeding as against Canon or both would fail as against Canon. I accept that submission. Mr. Szabo further submitted that, if both failed, an order that Hughes pay Canon its costs of Hughes' proceeding against Canon would carry a very substantial part of the costs incurred by Canon in defending Whitby's proceeding against Canon, and certainly would carry virtually the whole of Canon's costs of the trial of the proceeding. I think that such an order would comprehend a substantial part of the whole of Canon's costs. In those circumstances there were strong grounds, in Mr. Szabo's submission, for refusing the order sought. No order for security for costs could be made against Mr. Hughes and those common issues would be resolved in the proceeding by him against Canon. It was in all the circumstances desirable that those same issues be resolved in the proceeding by Whitby against Canon, and that to that end the order sought be refused, the submission concluded.

6. Sub-section 533(1) of the Companies Code 1981 (Vic.) provides:

"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 the costs of the defendant if

successful in his defence, require sufficient

security to be given for those costs and stay

all proceedings until the security is given."

In Bell Wholesale Co. Ltd. v. Gates Export Corporation 2 FCR at 3 the Full Court observed of the corresponding provision in the Companies Code 1981 (Qld.):

"Having regard to what we have already said as

to the effect of s.56 of the Federal Court of

Australia Act 1976 it is unnecessary to find

any alternative source of power for the making

of the order in the instant case. However, we

express our concurrence with the primary

judge's view that the relevant provision of

the Queensland Companies Cide 1981 is a State

law falling squarely within the operation of

s.79 of the Judiciary Act 1903. We refer

generally to John Robertson and Co. Ltd. v.

Ferguson Transformers Pty. Ltd. (1973) 129 CLR 65."

Section 56 of the Federal Court of Australia Act 1976 provides:

"(1) The Court of a Judge may order a

plaintiff in a proceeding in the Court or an

appellant in an appeal to the Court to give

security for the payment of costs that may be

awarded against him.

(2) The security shall be of such amount, and

given at such time and in such manner and

form, as the Court or Judge directs.

(3) The Court or a Judge may reduce or

increase the amount of security ordered to be

given and may vary the time at which, or

manner or form in which, the security is to be

given.

(4) If security, or further security, is not

given in accordance with an order under this

section, the Court or a Judge may order that

the proceeding or appeal be dismissed.

(5) This section does not affect the

operation of any provision made by or under

any other Act or by the Rules of Court for or

in relation to the furnishing of security."

In the Bell Wholesale Case the Full Court identified s.56 as the source of a wide discretionary power, unconfined by any exercise of the rule making power of the Court, such as is found in O.28 of the Federal Court Rules. In Harpur v. Adriadne Australia Ltd. (1984) 2 ACLC 356, Connolly J., in whose reasons for judgment W.B. Campbell C.J. and Demack J. concurred, considered recent authorities upon provisions of which s.533(1) is an example, applicable only to companies, and authorities relating to applications for security for costs by one of several plaintiffs where another of the plaintiffs is a person who could not be ordered to provide security. Speaking of s.533(1) Connolly J. observed (2 ACLC at 362):

"The mischief at which the provision is aimed

is obvious. An individual who conducts his

business affairs by medium of a corporation

without assets would otherwise be in a

position to expose his opponent to a massive

bill of costs without hazarding his own

assets. The purpose of an order for security

is to require him, if not to come out from

behind the skirts of the company, at least to

bring his own assets into play. If however he

is already available for whatever he is worth,

the object of the legislation is seen to be

satisfied."

Unlike the natural person against whose company security for costs was sought in Harpur's Case, Mr. Hughes is not able to say that there is "a complete overlap of the interests put in suit" by him and Whitby, so that one order for payment of the whole costs of the proceeding could be expected if the applicants failed. But if that consideration be put aside, for the reasons advanced by Mr. Szabo, there remains the circumstance that in this case only one of the four persons who conducted their business affairs by medium of a corporation without assets has brought his own assets into play. That circumstance in my opinion diminishes the strength of the consideration that Canon has the prospect of obtaining an order against Mr. Hughes for a substantial part of its whole costs of defending the proceeding.

7. The evidence establishes that both applicants have bona fide claims with good prospects of success. It is undesirable that the Court allow too much weight to the apparent prospects of success, lest parties lengthen inordinately the hearing of motions for security by evidence directed to the issues for trial. In this case the applicants made use of documents discovered by Canon to show the strengths of their cases. The evidence also showed substantial grounds for the submission of Mr. Szabo that the impecuniosity of Whitby had been caused by the defects alleged to have interrupted the operation of the copier and to have made it unfit for use in Whitby's business.

8. The unexplained failure of Canon to move for the order for security until more than 5 months had passed after the first directions hearing, and until after the proceeding had been referred to the list of cases for call-over, was characterised in Mr. Szabo's submission as tantamount to waiver of the right Canon had to seek security. He relied also on the circumstance that before notice of the motion had been served the applicants had incurred costs of more than $20,000.00 in respect of the proceeding and of Westpac's cross-claim against the three other parties.

9. I respectfully accept the opinion Toohey J. expressed in Caruso Australia Pty. Ltd. v. Portec (Aust.) Pty. Ltd. [1984] FCA 65; (1984) 8 ACLR 818 at 821 that, while the public interest in the judicial determination of allegations of conduct contravening ss. 52 and 53 of the Trade Practices Act 1974 tends against making an order for security which may prevent that determination, that consideration is of less weight when the conduct is not manifested to the public at large. Further, in this case Mr. Hughes may well maintain his claims against Canon even if the proceeding by Whitby were stayed.

10. On balance I think the motion should be dismissed. That is a conclusion I have reached hesitantly because of the absence of evidence about the capacities of Whitby's four shareholders to hazard their own assets. But I think the other considerations against an order, particularly the delay in bringing on the motion while substantial costs were being incurred in prosecuting the proceeding, require that the order be refused.

11. In the particular circumstances of this case I think that Whitby's costs of the motion should be its costs in the proceeding on the originating application.