Practice and procedure - Application for security for costs of counterclaim - Relevant principles - Turns on own facts

Corporations Act 2001 (Cth), s 1335

Fair Trading Act 1987 (WA)

Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA; Library No 980297; 2 June 1998

Brolec Nominees Pty Ltd v Norwich Union Life Australia Ltd [2002] WASC 153

Classic Ceramic Importers Pty Ltd v Ceramica Antiga SA (1994) 13 ACSR 263

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241

Go Export Pty Ltd v Livestock Shipping Services Pty Ltd [2003] WASC 218

Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744

Jackadda Engineers & Planners Pty Ltd v Watson Holdings Pty Ltd (1992) 8 SR(WA) 358

John Hollywood Pty Ltd v Harwood (1990) 25 ACLB 320

Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298

Labour Daily v Keller (1939) 56 WN (NSW) 113

Marand Holdings Pty Ltd v Cateus International Pty Ltd [2003] WASC 238

Pearson v Naydler [1977] 3 All ER 531

Phoenix Court Pty Ltd v High Point Shopping Centre (Leasing) Pty Ltd [1997] 178 FCA

Sarac v Croatian House Hrvatski Dom (Inc), unreported; FCt SCt of WA; Library No 950675; 12 December 1995

Shivor Investments Pty Ltd v William Goode, unreported; SCt of Qld, No 84 of 1978; 19 December 1979

Temwood Holdings Pty Ltd v Oliver [1999] WASC 251

Weily's Quarries v Devine Shipping Pty Ltd [1994] TASSC 76; (1994) 14 ACSR 186

Whiteside Investments Ltd v Voracom International Pte Ltd, unreported; SCt of VIC; 4225 of 1995; 16 October 1997

Willey v Synan [1935] HCA 76; (1935) 54 CLR 175

1 MASTER NEWNES: This is an application by the defendants by counterclaim for an order that security for costs be provided by the plaintiff by counterclaim. The application is made under s 1335 of the Corporations Act 2001 (Cth).

2 As it was in issue on this application whether the counterclaim is essentially defensive in nature and whether factually it covers substantially the same ground as will be covered in the trial of the plaintiffs' claim, it is necessary to say something about the nature of the litigation.

3 In the action, the plaintiffs allege that, in about April 2000, the second plaintiff ("Agri Hay") entered into an agreement with the first defendant ("Allcorp") by which Allcorp agreed to act as the agent of Agri Hay in purchasing hay from growers. Under the agreement, Allcorp was not to supply hay to any other processor or vendor of hay without Agri Hay's consent. Allcorp was to advise growers of the hay varieties preferred by Agri Hay, to provide agronomic and other advice to growers relating to the growing of the hay, to oversee the formation and performance of all contracts for the purchase of hay entered into by Allcorp as agent for Agri Hay, and to oversee and co-ordinate the delivery of hay to Agri Hay's processing facility in Brookton. The plaintiffs say that Agri Hay agreed to pay Allcorp a commission of $4.50 per metric tonne for all hay purchased through Allcorp and a commission of $1.50 per metric tonne for Allcorp's inspection and sampling work.

4 It is also alleged by the plaintiffs that Agri Hay agreed to sell hay products to Allcorp at cost to enable Allcorp to supply hay to BSR Agri Exports ("BSR"), a customer of Allcorp.

5 It is alleged that subsequently, in August 2000, by an assignment, or alternatively a novation, the first plaintiff ("SP Hay") replaced Agri Hay as a party to the agreement. I should mention that Allcorp does not admit that.

6 The plaintiffs allege that between October 2000 and October 2001, Allcorp, without the plaintiffs' knowledge or consent, purchased hay and arranged for it to be processed by Elders Ltd or Milne Feeds Pty Ltd, and then sold it to BSR.

7 The plaintiffs claim that, in doing so, Allcorp was in breach of the agency agreement and of its fiduciary obligations to SP Hay, alternatively Agri Hay. SP Hay, alternatively Agri Hay, says, among other things, that as a consequence it has been denied profits of $516,939.06 which it would otherwise have earned. A claim is also made against the second defendant ("Mr Blechynden") as a director of Allcorp on the basis that Mr Blechynden was involved in Allcorp's alleged breach of fiduciary duty.

8 In addition, a claim in conversion is made against one or other of the defendants on the basis, so it is alleged, that in a number of instances SP Hay had purchased and paid for hay from growers and was entitled to possession of it but one or other of the defendants subsequently unlawfully acquired the hay and delivered it to BSR as the defendants' hay. An amount of some $190,000 is claimed by way of damages for conversion.

9 The plaintiffs also make claims under the Trade Practices Act 1974 (WA) and the Fair Trading Act 1987 (WA) in respect of the same matters.

10 The defendants plead in their defence that the agency agreement did not require the first defendant to purchase hay exclusively as agent for Agri Hay. According to the defendants, Allcorp acted as Agri Hay's agent for the purchase of hay from October/November 2000 to January 2002, when Agri Hay purported to terminate the agreement. The defendants say that during that period Agri Hay's Brookton Plant, which had become operational in about October 2000, had limited processing capacity and that Agri Hay directed Allcorp to purchase on its behalf only hay which was suitable for processing at the Brookton Plant. The requirements for hay to be processed at the Brookton Plant included a specific moisture content, a maximum bale length and no soft or poorly-constructed bales.

11 The defendants admit that during the term of the agency agreement Allcorp purchased hay on its own account, arranged for that hay to be processed by Elders or Milne and then sold it to BSR. The defendants say that Allcorp was entitled to do so first, because some of that hay was purchased before the agency agreement was entered into and, in any event, the hay concerned did not meet the requirements of the Brookton Plant and the Brookton Plant did not have the capacity to process it. The defendants say that Agri Hay knew that Allcorp was selling the hay to BSR and did not complain about it until January 2002, when Agri Hay purported to terminate the agency agreement. The defendants say that, by its conduct, Agri Hay consented to Allcorp selling the hay to BSR.

12 The defendants deny that either of the plaintiffs owned or was entitled to possession of any of the hay that it is claimed Allcorp converted to its own use.

13 The defendants allege in their defence that it was a term of the agency agreement that Agri Hay would supply to Allcorp, at cost, 40 per cent of the production of the Brookton Plant in its first year of operation, a minimum of 80 to 100 full container loads (FCLs) of hay per month, (the "minimum quantity agreement") for sale by Allcorp to BSR. That forms the basis of one of the counterclaims made by Allcorp.

14 The counterclaim is not easy to follow in parts. In it Allcorp claims against SP Hay, Agri Hay and a director of Agri Hay, Mr Price. Allcorp alleges that, in about April 2000, Mr Price, on behalf of Agri Hay, represented that when the Brookton Plant was operational Agri Hay would supply Allcorp with a minimum of 80 to 100 FCLs of hay per month ("the Representation"). Allcorp says the Representation was misleading or deceptive, contrary to s 52 of the Trade Practices Act and s 10 of the Fair Trading Act. The basis of that plea is not clear, however. It is alleged that Agri Hay delivered only approximately 18 per cent of the production of the Brookton Plant to Allcorp and it appears to be alleged that therefore substantially less than 80 - 100 FCLs of hay per month were provided to Allcorp.

15 Allcorp alleges that, in April 2000, in reliance on the Representation, Allcorp entered into a profit-sharing agreement with BSR by which Allcorp was to purchase hay from Agri Hay to provide to BSR at cost and BSR was then to supply it to customers in Japan and Taiwan. The gross profits made on the latter sales were to be shared between Allcorp and BSR. Initially the agreement required Allcorp to purchase the hay from Agri Hay but in about November 2000 the agreement was varied to allow Allcorp to acquire the hay from any source. The Allcorp says that Agri Hay and Mr Price knew that Allcorp was entering into the agreement with BSR on the basis of the Representation.

16 Allcorp also pleads that, in about April 2001, it entered into an agreement with Mr Price by which a company to be known as WA Farms Pty Ltd would be established and Allcorp and Mr Price, or his nominee, would each hold 50 per cent of the shares. The intention was that WA Farms would eventually purchase the business of BSR and Agri Hay would then sell hay direct to WA Farms. The defendants say that Allcorp entered into that agreement on the basis of the Representation.

17 Allcorp also claims that, during the 2000 and 2001 hay season, it delivered approximately 2011 metric tonnes of wheaten hay to the Brookton Plant for processing pursuant to an agreement with Agri Hay that it would process it for $75 per metric tonne, plus related costs. Allcorp says that approximately 1553.58 metric tonnes of processed wheaten hay were returned to Allcorp, but the balance has not been returned and the credit given for it by Agri Hay to Allcorp was inadequate. It is not clear from the prayer for relief that Allcorp seeks any relief in respect of these allegations.

18 In the counterclaim, Allcorp also pleads that the agency agreement was to remain in force until 30 June 2002. It alleges that on 22 January 2002 the plaintiffs, by Mr Price, purported to terminate the agency agreement, but Allcorp did not accept the termination. Allcorp seeks payment of the commission it says it was entitled to in respect of all hay received into the Brookton Plant between 22 January 2000 and 30 June 2002, all that hay having been obtained by Agri Hay from growers with whom Allcorp, on behalf of Agri Hay, had entered into contracts.

19 Allcorp counterclaims, among other things, against Agri Hay, damages for the alleged breach of the minimum quantity agreement and against Agri Hay and Mr Price, damages under s 82 of the Trade Practices Act and s 79 of the Fair Trading Act in respect of the Representation.

20 No defence to counterclaim has yet been filed by the defendants to counterclaim, but they say, among other things, that Agri Hay and Mr Price will deny that the Representation was made and further say that, in any event, such a representation would not have been misleading or deceptive.

21 Section 1335 of the Corporations Act provides:

"Where a corporation is plaintiff in any action or 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 ... its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."

22 Two threshold questions arise on this application. They are first, whether Allcorp, as the plaintiff by counterclaim, is a "plaintiff" within the meaning of s 1335, so as to be amenable to an order for security for costs, and secondly, if so, whether it appears by credible evidence that there is reason to believe that Allcorp will be unable to pay the costs of the defendants to counterclaim if the latter are successful in their defence to the counterclaim.

23 A defendant who counterclaims will be a plaintiff within the meaning of s 1335 where the counterclaim is a separate and distinct claim from that of the plaintiff: Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301, John Arnold's Surf Shop Pty Ltd (In Liq) v Heller Factors Pty Ltd and Allert [1979] 22 SASR 20; Ramsay Contracting Pty Ltd v Matthew Hall Mechanical and Electrical Engineers Pty Ltd [1993] SASC 4156. That will depend upon the connection between the claim and the counterclaim. A counterclaimant will not be a plaintiff where the counterclaim is merely defensive, arising out of the same transaction as the claim: Mapleson v Masini (1879) 5 QBD 144. Accordingly, where a respondent counter-attacks on the same front on which it is being attacked by the applicant, it will be regarded as a defensive manoeuvre. But if a respondent opens an attack on a different front, even to relieve pressure on the front attack by the applicant, it is in danger of an order for security for costs: Visco v Minter [1969] 2 All ER 714. Where the counterclaim raises separate issues outside those raised by way of defence to the plaintiffs' claim, the cross-claimant assumes, in relation to those issues, the position of a plaintiff and s 1335 applies to the cross-claimant as if it were a plaintiff.

24 I do not consider that the counterclaim, so far as it relates to claims for damages for the alleged breach of the minimum quantity agreement or in respect of the Representation, is defensive in nature. Allcorp does not by those parts of the counterclaim seek to resist the plaintiffs' claim, but rather seeks to assert quite different and distinct claims for damages. Moreover, the defendants to those claims include not only the existing plaintiffs to the action, but also Mr Price, who is joined in the action solely as a defendant to counterclaim.

25 No step taken by the plaintiffs can be said, in any relevant sense, to have prompted the counterclaim for damages for the alleged breach of the minimum quantity agreement or the Representation. The plaintiffs' claim relates to an alleged failure by Allcorp to buy hay for processing exclusively on behalf of one or other of the plaintiffs. These parts of Allcorp's counterclaim, on the other hand, are claims for damages arising out of statements allegedly made by Mr Price on behalf of Agri Hay as to the quantity of processed hay Agri Hay would supply to Allcorp, on the basis of which Allcorp says it entered into contracts with third parties to supply them with processed hay.

26 While there may be some overlap between the plaintiffs' action and this counterclaim, in my view this counterclaim is in substance an offensive, not a defensive, measure.

27 It is the case that, nevertheless, account must be taken of the extent to which the claim and the counterclaim will cover the same factual ground. As the Court would be slow to allow a situation to arise where an action would be liable to be stayed because of an inability to provide security for costs but a counter claim covering substantially the same factual ground would proceed: Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289, so it would be equally slow to allow the converse to arise. In this case, on the material before me, I do not consider that the trial of the plaintiffs' claim and of these parts of Allcorp's counterclaim will cover substantially the same factual ground. The issues are substantially distinct and the evidence will likewise be substantially distinct.

28 The plaintiff by counterclaim also submitted that what it called "the issue of mutuality" should be considered. It was argued that the plaintiffs' claim would continue regardless of the outcome of this application, but the plaintiff by counterclaim may be unable to continue should an order for security for costs be made. It was argued that it would be unfair to stifle one party's claim while allowing the other party's claim to continue.

29 I accept that it would be inappropriate to order security for costs in respect of a counterclaim where the counterclaim is essentially a defensive measure or where it covers substantially the same factual ground as will be covered in the defence of the plaintiff's claim. But I do not accept it is unfair that a defendant who brings what is in substance a separate claim for damages by way of a counterclaim should be liable to provide security for costs. A defendant cannot, simply by bringing such a claim by way of a counterclaim, gain an advantage that it would not enjoy if it had brought the claim as a plaintiff. What is relevant is the fact that an offensive claim has been brought, not the procedural form in which it is brought. Where parties have distinct claims of such a nature against each other, the question of whether or not security for costs is available to a party cannot depend upon whether, by a circumstance of timing or otherwise, the other party is able to bring their claim as a counterclaim rather than by original proceedings. Any notion of "mutuality" requires that any party who brings a non-defensive claim against another is amenable to an application for security for costs and that a party cannot gain immunity from that by bringing it as a counterclaim.

30 It follows, in my view, that the counterclaim, so far as it relates to the claims for damages for the alleged breach of the minimum quantity agreement and in respect of the Representation, is a distinct claim in respect of which the plaintiff by counterclaim is a plaintiff and is amenable to an order for security for costs.

31 It is therefore necessary to turn to the threshold question of whether it appears by credible evidence that there is reason to believe Allcorp will be unable to meet an order for costs if such an order is made against it at trial. A number of affidavits were filed by each side on that issue.

32 It was not in dispute that, between 3 February 2003 and 22 July 2003, Allcorp was in receivership. The receiver, Mr J F Totterdell of PriceWaterhouseCoopers, in his report as to Allcorp's affairs disclosed that, as at 3 April 2003, liabilities exceeded assets by approximately $1.5 million. It is notable that the receiver's estimate of the realisable value of the assets was in each case substantially less than the book value of those assets. For instance, the book value of sundry debtors was $545,000, but the receiver's estimated realisable value was $16,986; the book value of stock was $200,000 and the estimated realisable value was $50,000; the inventory of plant and equipment showed a value of $782,300, but the estimated realisable value was $387,100. The overall result was that, whereas the books of Allcorp valued its assets at $1,829,578, the receiver estimated the realisable value of the same assets at only $650,864. On this application Allcorp did not take issue with the receiver's report as to its affairs.

33 A number of affidavits were filed on behalf of the defendants to counterclaim in an endeavour to demonstrate that Allcorp was currently unable to pay its debts as they fell due. Allcorp filed a number of affidavits in reply in an endeavour to show that some of the debts referred to were disputed and generally that things were not as bad as they looked. In cases where the debt was not disputed, Allcorp said that payment arrangements had been entered into with the creditor concerned, or other arrangements had been made to extinguish the debt.

34 Allcorp conceded that it is "under some degree of financial pressure" but submitted that that was not to the point. It was argued that, on the evidence, Allcorp had a substantial surplus of assets over liabilities, so it could not be said that there was credible evidence that Allcorp would not be able to satisfy a costs order. In that respect, Allcorp relied on an affidavit of Luke Ronald Blechynden, a director Allcorp, sworn on 17 March 2004. In that affidavit, Mr Blechynden says:

"3. Annexed hereto and marked 'LRB1' are true and correct figures of the Plaintiff by counterclaim's assets and liabilities taken from the financial accounts of the Plaintiff by counterclaim as at 15 March 2004.

4. I have conducted a detailed examination of the financial accounts of the Plaintiff by counterclaim and I state that the figures contained in annexure 'LRB1' hereto are true and correct. Following that detailed examination I prepared the document at annexure 'LRB1'."

36 No information, however, was provided as to the plant and equipment, trade debtors or stock on hand referred to, and there was no explanation as to how the valuation of each had been calculated. Nor was any attempt made to explain how, in a period of just under 12 months, Allcorp had gone from a position where, on an independent assessment by a chartered accountant, it had a deficiency of liabilities over assets of $1.5 million to a position where it now has surplus assets of over $2,000,000. I should also say that Mr Blechynden does not refer to any expertise that he has in the valuation of such assets or the preparation of accounts.

37 The defendants by counterclaim also pointed out, as I have mentioned, that when the receiver prepared Allcorp's statement of affairs in April 2003, the book valuation of its assets was substantially written-down to reflect what the receiver considered to be their realisable value. If the company's current assessment of each of its assets was written-down in the same way, and to the same extent, its liabilities would once again exceed its assets.

38 The defendants by counterclaim relied on an affidavit of a chartered accountant, Kevin Judge, who has examined the figures contained in Mr Blechynden's affidavit and the receiver's statement of affairs of 3 April 2003. Mr Judge is an experienced chartered accountant and company liquidator.

39 On the information available to him, Mr Judge says he is unable to conclude whether or not the figures provided by Mr Blechynden are accurate, but he points to a number of difficulties with them. Those difficulties include that it is not clear whether the valuation of plant and equipment is at cost or current valuation. Mr Judge notes that in April 2003 the receiver wrote down the book value of the plant and equipment by more than 50 per cent and says that that may indicate the age, quality and saleability of it.

40 There is also no indication of the separate values of the encumbered and unencumbered assets, although it is apparent that a significant proportion of the plant and equipment is subject to hire-purchase contracts. Mr Judge also points out that the trade debtors have not been listed and there are no details of the debts or their age. Mr Judge notes, however, that in April 2003 the receiver wrote down the then book debts by more than 96 per cent.

41 Mr Judge points out that it is not clear if there has been any formal stock-take to determine the value of the stock, and comments that, in his experience, the value of stock recorded in the books of a business is rarely its realisable value. A full stock-take would be required to identify discrepancies and losses through damage, theft and obsolescence.

42 In relation to trade creditors, Mr Judge says that it is impossible to determine whether all trade creditors have been included. In that respect, it is particularly significant to ascertain what "cut-off" date was used, to ensure that all costs for goods and services received up to and including 15 March 2004 have been included, even if invoices had not been received as of that date.

43 Apart from those matters, Mr Judge notes that no amount has been recorded for non-trade debts such as accrued wages, employee entitlements, and GST and pay-as-you-go withholding amounts due to the Australian Taxation Office. Mr Judge comments that if Allcorp has been earning substantial profits, it is likely that a provision for income tax should be included in the assets and liability statement.

44 All that must be viewed, too, against the background of Allcorp's financial position as independently assessed just 12 months ago and the absence of any attempt to explain the apparently dramatic improvement in the company's asset position since that assessment. It is also notable that no trading figures have been produced by Allcorp on this application. Although Mr Luke Blechynden says in his affidavit that he has made a "detailed examination of the financial accounts of [Allcorp]", he is silent on the question of its profitability. All that is said in that regard is a bland statement in an affidavit of the second defendant, a director of Allcorp, that since the receiver returned Allcorp to the control of the directors "Allcorp has been trading profitably and working to pay off its debts." I might add that the circumstances in which the receiver's appointment was terminated are not explained.

45 I do not consider that in these circumstances any real weight can be given to the figures produced by Mr Blechynden. No attempt has been made to explain how those figures were arrived at or to provide any details of the assets referred to, including critical information relating to the manner of valuation and the saleability of them. Mr Blechynden does not profess any expertise in the valuation of such assets or the preparation of accounts. Mr Judge has identified a number of uncertainties about the accuracy of those figures simply on their face.

46 In my view, there is credible evidence that there is reason to believe Allcorp will be unable to meet an order for costs. On the last proper assessment of Allcorp's financial position, in April 2003, Allcorp was, at best, in a parlous financial state. Allcorp accepts that it is still "under some degree of financial pressure" and, although it disputed a number of the debts referred to by the plaintiffs, it is apparent that Allcorp is not in a position to meet all of its current debts. Arrangements have been made with some creditors to pay off their debts over time or in other ways. The evidence falls well short of establishing Allcorp's contention that nevertheless it has a sufficient surplus of realisable assets.

47 I consider that Agri Hay and Mr Price have satisfied the threshold requirements to entitle them to an order for security for costs in respect of the claims against them relating to the minimum quantity agreement and the Representation.

48 The question, then, is whether, as a matter of discretion an order for security for costs should be made.

49 On that issue, it was submitted on behalf of Allcorp that if such an order were made, it would be likely to stifle the counterclaim. There is, however, no evidence that those who stand behind Allcorp, and who stand to benefit from the counterclaim, are unable to provide any security which might be ordered to be provided and accordingly I am not satisfied that that contention has been made out.

50 I did not understand it to be in issue that the counterclaim is bona fide and is reasonably arguable. There was certainly nothing in the material before me to suggest otherwise. Nor was it suggested that the plaintiffs did not have an arguable defence to it.

51 In the circumstances I am satisfied that an order for security for costs is appropriate.

52 The defendants by counterclaim seek an order for security in the sum of $89,936.50. A draft bill of costs has been provided in which the costs of the relevant parts of the counterclaim are assessed in that sum. It is, however, as I have said, the case that there will be some, although relatively small, overlap between the trial of the plaintiffs' action and the trial of the relevant part of the counterclaim. That must be taken into account in determining the level of security to be provided. In addition, in my view the amount claimed exceeds, in any event, what would appear to be the costs likely to be recovered after trial in respect of this aspect of the litigation.

53 In my view, in the circumstances an appropriate amount to be provided by way of security would be $45,000. I would allow Agri Hay and Mr Price the liberty they seek to apply to top up the amount of the security should circumstances change.

54 I will hear the parties on the form of orders and on costs.