Orders for security for the respondents' costs should be made
97 The first question to address is the financial status of the applicants.
98 It is convenient to commence the analysis with St Mary's Hog's. Insofar as it is concerned s 1335 of the Corporations Act provides that the Court may make an order for security for a respondent's costs if it appears by "credible testimony" that that there is reason to believe that the corporation will be unable to pay those costs if the respondent is successful in its defence. Similarly, for the purposes of s 56 of the Federal Court Act an applicant's inability to pay a respondent's costs is an important factor in the exercise of the Court's discretion.
99 First, on the applicants' own evidence it appears that at present, based on available cash, they would not be able to pay the respondents' costs. So much is evident from Mr Argy's evidence that, if security was ordered up to the filing of defences and cross-claims, at best they could pay an amount of $20,000 over a period of three to six months but no further amount. That is reinforced by the applicants' contention that the only way they could meet an adverse costs order would be by selling St Mary's Hog's business.
100 Secondly, St Mary's Hog's financial statements for FY2021 do not assist. They show:
(1) in the profit and loss statement net profit before tax of $508,984. However, that amount includes "other revenue" of $185,904 which the notes to the accounts explain is made up of government assistance being principally JobKeeper and, to a much lesser extent, ATO cash boost and Service NSW grants. Mr Garufi calculates earnings before income tax, depreciation and amortisation as $322,082. That is he subtracts the other income which includes the "other revenue";
(2) in the balance sheet:
(a) current assets of $185,937.49 and current liabilities of $349,959.20 amounting to an overall deficiency of $164,021.71. St Mary's Hog's thus has negative working capital (as was the case in FY2020); and
(b) non-current assets of $1,476,333.76 made up of property, plant and equipment of $1,179,333.76 and goodwill of $297,000. However, Mr Garufi has adjusted the value of property, plant and equipment as at 30 June 2021 to $78,991 because the value recorded in the balance sheet includes an unidentified asset recorded at $1,011,710, which he has assumed is the value of the original fit-out of the leased premises from which St Mary's Hog's operates undertaken in 2010 and which in his opinion would have little or no recoverable value.
101 Thirdly, if I accept St Mary's Hog's submission that it has sufficient assets to meet an adverse costs order but would need to sell its business to do so, it is clear that the value of that business is not sufficient to meet the combined estimated total of the respondents' costs. Mr Garufi values 100% of the equity in St Mary's Hog's at $159,593 using the capitalisation of future maintainable earnings valuation methodology (see [25] above). He has assumed that the only asset of St Mary's Hog's is the Hog's Breath Café franchise which it operates. The applicants did not cross-examine Mr Garufi nor did they rely on any other evidence of valuation of St Mary's Hog's (other than the financial statements referred to above).
102 Mr Garufi was also asked to identify any other matter he considered relevant to the reasonable market value of the St Mary's Hog's business based on the material with which he was briefed. He identified the following matters:
(1) as at 30 June the working capital position of the business was negative;
(2) the accounts payable ledger as at 30 June 20201 indicated that rent for the premises was behind by three to four months as were franchise royalties indicating that St Mary's Hog's was in default on "significant business contracts/agreements";
(3) the Franchise Agreement is currently operating on a month to month basis indicating that any prospective purchaser would need to negotiate a new agreement with the franchisor; and
(4) in FY2021 a dividend of $550,0000 was paid on a net profit of $508,984 leaving a deficiency after tax of $126,992 and indicating that cash has been removed from the business leaving it in a negative working capital position.
103 Those matters are sufficient to provide reason to believe that St Mary's Hog's will be unable to pay the respondents' costs as currently estimated by them if they are successful in their defence of the proceeding.
104 I turn then to consider the position of the current franchisees. The applicants, through Ms Nicks, led evidence about those franchisees although the relevance of that evidence was not clear. For example, there was no evidence that the assets of the current franchisees would be available to meet any adverse costs orders and no undertakings were proffered by their directors to that effect, nor was any such submission made. Even if that was the case two issues arise.
105 First, searches of the current franchisees show that Mr Blackstock is only a director of Wilcoola Pastoral and Mr Goodwin is a director of Morayfield Hog's and Aspley Hog's and while each of Messrs Blackstock and Goodwin hold shares in the current franchisees either, in the case of Mr Blackstock, in his own name and, in the case of Mr Goodwin, through another entity, GFDT Pty Ltd of which he is a director and shareholder, there are also other shareholders for each current franchisee. Thus, it is not clear what share, if any, of the assets of the current franchisees would be available to the applicants to meet the respondents' costs.
106 Secondly, the financial status of the current franchisees is not clear. Ms Nicks has prepared management accounts for FY2021 for each of Penrith Hog's, Wilcoola Pastoral, Hobart Hog's, Morayfield Hog's and Hogs Breath Northlakes and financial accounts for FY2021 have been prepared for St Mary's Hog's and Aspley Hog's. Ms Nicks' analysis of the combined accounts for FY2021 for the current franchisees is that on a consolidated basis they have net assets of $6,318,124. However, an analysis prepared on behalf of HBCA and Mr Worth casts doubt on that value. That analysis, which removes other income to the extent that it is a government subsidy provided as a result of the COVID-19 pandemic, renders a different result with total net assets on a consolidated basis of $649,710, which would be insufficient to meet the respondents' estimated costs. Notwithstanding that, the reliability of the value of the current franchisees' assets as set out in the accounts put into evidence by Ms Nicks does not need to be resolved given the lack of evidence about the availability of the current franchisees' assets to meet any costs orders.
107 Lastly, I turn to the financial position of Messrs Goodwin and Blackstock. They have not provided evidence of their income and assets. Searches undertaken by the respondents reveal that they hold no real property in their own names and, to the extent that they are shareholders in the current franchisees, the value of their shareholding is uncertain as their ability to realise that value is unknown. That being so the undertakings they have proffered to be personally liable for any costs order made in favour of the respondents is of little, if any, value.
108 Based on those matters I am satisfied that the inability of St Mary's Hog's to pay the respondents' costs, a factor which is relevant to the exercise of the discretion under s 56 of the Federal Court Act, has been established and that the discretion under s 1335 of the Corporations Act in relation to St Mary's Hog's has been enlivened.
109 At the outset I accept that the applicants have a bona fide case with reasonable prospects of success, a factor which weighs in their favour. However, I am unable to and would decline to make any findings about the strength of their case given the nascent stage of the litigation and the limited evidence before me which might inform such findings. In any event the applicants did not urge me to make such a finding.
110 It is convenient next to address the applicants' submission that security would ordinarily not be ordered where as in a case such as this both a corporation and individuals are applicants and the individuals provide an undertaking to be liable for the costs of the corporation. In making that submission the applicants relied on Vintage Marine Art Pty Ltd v Henderson & Cremer (No 2) (2019) 101 NSWLR 77.
111 In that case two applications for security had been made. Following the first application the plaintiff was ordered to pay $10,000 as security for the defendants' costs. In doing so an undertaking proffered by Ms Edwards, who although not clear, was either a director or shareholder of Vintage Marine, to be personally liable for any costs order was taken into account as a favourable factor weighing against an order for security. Three years later the respondents made a further application for security for their costs and an order requiring payment of $40,000 by way of further security was made. In doing so the primary judge did not refer to the intent and scope of the first order for security nor the undertaking given by Ms Edwards to be personally liable for any costs order. Brereton JA (with whom Bell P and Macfarlan JA agreed) held (at [13]) that the fundamental flaw in the primary judge's judgment was that the application was treated as a standalone application rather than as an application for further security in circumstances where the question of security had already been agitated. His Honour concluded (at [16]) that there had been error in the judgment at first instance, that leave to appeal should be granted and that the court should re-exercise the discretion in respect of security for costs.
112 Commencing at [20] Brereton JA considered Ms Edwards' undertaking to be personally liable for any costs. At [21]-[23] his Honour said:
[21] The significance of that undertaking is this. First, courts will not usually order security where a case for security is made out only against one or some of multiple plaintiffs. It was once said, as long ago as Sykes v Sykes, that "unless there is ground for making an order for security against all plaintiffs, it cannot be made against any". That is no longer an absolute rule, as was held by Megarry VC in Pearson v Naydler, but the rationale of the principle was explained by the Vice-Chancellor as follows:
"One consideration seems to be that if the defendant is in any case exposed to proceedings by the plaintiff resident within the jurisdiction, then even if there is no prospect of him being able to pay the costs, the mere existence of another plaintiff who resides abroad ought not to provide means of hampering the bringing of the action by the plaintiff residing within the jurisdiction."
[22] As I have said, that is no longer an absolute rule, but it remains a significant consideration. One of the chief exceptions to it is where it is foreseeable that an ultimate costs order may be made only against a plaintiff who is amenable to an order for security and not against others who are not.
[23] This, of course, is not a case of there being one plaintiff, strictly speaking, in the jurisdiction and another out of the jurisdiction, but it is closely analogous to it once the undertaking proffered by Ms Edwards is taken into account. That is because at least part of the rationale of Corporations Act, s 1335 is to require an individual who conducts his or her business affairs through a corporation without assets to "come out from behind the skirts of the company, at least to bring his own assets into play".
113 At [24]-[25] Brereton JA referred to a number of Queensland decisions which established a rule that if those behind a corporation make their own assets available to answer a costs order then security will not be ordered, but observed (at [26]) that if that is meant to state an absolute rule then it is not the law in New South Wales. His Honour then referred to the decision of Beazley JA in Prynew Pty Ltd v Nemeth [2010] NSWCA 94; (2010) 28 ACLC 10-026 where her Honour, after reviewing the authorities, concluded that the correct approach was, as has been previously expressed in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (at 204), that "the offer of security by way of a guarantee from the directors or shareholders or other persons interested in the outcome of the litigation was a factor, which could be decisive in a given case, to be considered in determining whether any other form of order for security for costs should be made".
114 At [28] Brereton JA concluded that:
But while those cases make clear enough that in this court the proffer of an undertaking of the kind proffered by Ms Edwards does not conclusively determine the question, they also indicate that the existence of such an undertaking is a very powerful consideration which may, in a particular case, be determinative, and that is so whether or not the undertaking or guarantee is supported by any assets. In my view, the proffer of that undertaking, coupled with the other two discretionary considerations to which I have referred, combine to make an overwhelming discretionary case for declining to make an order for further security.
115 It is also instructive to have regard to the decision of Beazley JA in Prynew which concerned an application for security for costs of an appeal by one of the respondents pursuant to s 1335 of the Corporation Act. Prynew contended that the presence of an individual co-appellant and his offer to be responsible for its costs militated strongly against making an order for security against it and that an individual's financial situation, whether a co-plaintiff or a person prepared to step out from behind a corporation and offer an undertaking in respect of any costs, is irrelevant. At [36]-[37] her Honour said:
[36] As I understand the reasoning of Basten JA in Jazabas v Haddad, it is that regard must be had to the rationale for the principle explained in Buckley v Bennell Design and Constructions. Given that rationale, it is then necessary to determine how the discretion is properly to be exercised where a person is prepared to come out from behind the shield of the company and be responsible for the costs of the impecunious corporate plaintiff. In this regard, Cooper J in Gentry Bros v Wilson Brown & Associates said, at 415:
In the instant case once the shareholders of the applicant have agreed to accept personal liability for any judgment for costs against the applicant, the statutory purpose of s 1335 as explained in the authorities to which reference has been made is satisfied. The making of an order which secures the personal liability of the shareholders is in itself the provision of security: see for example Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364 at 366; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 546; Appleglen Pty Ltd v Mainzeal Corp Pty Ltd (1988) 79 ALR 634 at 635-6.
Once the shareholders have been exposed to personal liability for the applicant's costs, the weight to be given to the statutory purpose is gone. Those who stand behind the applicant once they accept personal liability for the applicant's costs are in no worse position than they would be as litigants in person in the court: Harpur at 533; Yandil Holdings Pty Ltd at 546.
The offer by the shareholders of the applicant to accept personal liability for the applicant's costs is a factor weighing heavily against the making of an order against the applicant for provision of a cash or other security for costs notwithstanding that the worth of the shareholders may ultimately prove insufficient to satisfy any judgment in whole or in part. (emphasis added)
[37] However, this reasoning did not find favour with Winneke P and Phillips JA in Epping Plaza v Bevendale, if its effect was to constrain the manner in which the discretion to order security was to be exercised. As their Honours explained:
[23] If the comments made by Cooper J in Gentry Bros at ACSR 415; ACLC 1399 were intended to suggest that the broad discretion, to which the authorities refer, is now to be fettered by a principle to the effect that, in cases where those who stand behind the impecunious company are prepared to expose themselves to a personal liability for the defendant's costs, the court's discretion should rarely be exercised in favour of making an order for security, then, like Powell J in Erolen at ACSR 456; ACLC 524 and Malcolm CJ in Intercraft, we simply cannot agree - though whether Cooper J should be read as having said as much is of course another matter; it did not appear so to Beazley J in KP Cable Investments at 203-4. Not only does the suggested principle cut across the authorities which make it abundantly clear that the discretion is to be unfettered and exercised in accordance with what the circumstances of the particular case require, but it ascribes a purpose for its existence which we do not accept; namely that the statutory purpose of s 1335 is to align the position of impecunious corporate plaintiffs with impecunious individual plaintiffs. The fact that those who stand behind the company are prepared to give an undertaking to the court to pay a successful defendant's costs might be a factor which, on balance, will influence the court's discretion in a particular case - or, more strictly perhaps, influence the manner of its exercise. But to elevate it to a position of critical importance or decisive significance in general seems to us to be requiring the judge to enter upon his or her discretion with a particular predisposition, something which the authorities make clear that the judge should not do.
[24] Furthermore, in our view the court should not readily accept an undertaking to pay costs from impecunious individuals who, at least at the time when such an undertaking is given, have no chance of making it good. Such an undertaking could not be an effective alternative security because it could only be enforced (at least for the time being) by proceedings for contempt: cf P S Chellaram & Co v China Ocean Shipping Co [1991] HCA 36; (1991) 102 ALR 321 at 324; [1991] HCA 36; 65 ALJR. 642 at 643. ... (emphases added)
(Emphasis in original.)
116 Her Honour preferred the approach in Epping Plaza v Bevendale subsequently endorsed in Jazabas v Haddad. At [45]-[46] she said:
[45] … A defendant is a captive audience to a plaintiff's claim. In my opinion, the purpose of the security for costs jurisdiction would be rendered ineffective if a defendant sued by an impecunious company was denied security because, persons themselves impecunious, were prepared to offer to be responsible for the costs of the litigation. Correspondingly, if the principles that relate to exercise of the discretion where there is an impecunious co-plaintiff, also apply where an impecunious person agrees to be responsible for the costs of the litigation, the corporate plaintiff would be unfairly advantaged. Indeed, it would expose the captive defendant to a form of double jeopardy.
[46] In short, I do not consider the position of an individual co-plaintiff to be analogous to the position of an impecunious shareholder, or other person interested in the litigation, who agrees to be responsible for the costs of the litigation.
117 Thus the undertakings are not conclusive and their mere existence does not mean that I would not make an order for security for costs as the applicants suggested. They are matters to be taken into account in the exercise of the discretion. In a particular case they may be determinative. But their import must depend on the circumstances of the case.
118 Having regard to the facts of this case, the undertakings proffered by Messrs Goodwin and Blackstock are not sufficient for me to refuse to make the orders sought for payment of security for costs, nor do they weigh in any significant way in the applicants' favour in the exercise of the discretion. Messrs Goodwin and Blackstock have not provided any evidence of their financial status and the only inference to be drawn based on the available evidence is that they have no assets in their respective names and no ready access to assets or funds.
119 The next question to consider is whether the orders sought by the respondents for security will stultify the proceeding. The applicants bear the onus of establishing that to be the case. However, they have failed to do so. They have not provided any evidence about the financial position of Messrs Goodwin and Blackstock or of the financial position of group members who are not related to the applicants.
120 As the former, the applicants say that they would only be able to pay $20,000 in security over a period of three to six months but have not led any evidence to support this assertion, nor have they led any evidence about the financial position of Messrs Goodwin and Blackstock. Further, St Mary's Hog's has continued to trade. It made modest profits before tax in FY2018, FY2019 and FY2020 and an after tax loss in FY2021. However, in FY2021, a significant dividend (amounting to all of its profits) was paid out in dividends to its shareholders.
121 As to the latter, the applicants have not disclosed the financial position of group members (other than the current franchisees) beyond Mr Argy's evidence that a number of group members have said that they could not afford to contribute to the costs of the proceeding, nor any evidence of the willingness or otherwise of group members to contribute, should an order for payment of security for the respondents' costs be made against the applicants. Against that, Mr Nase's evidence on behalf of HBCM is that, in the six-month period between February and July 2021, the stores in the Franchise System made total gross sales on a monthly basis of between a low of approximately $5.8 million (in July 2021) and a high of approximately $7.23 million (in April 2021).
122 There is also only limited evidence of the applicants' attempts to obtain funding. One potential funder has been approached on their behalf. It declined to fund the action. Based on Mr Argy's conversation with Ms Silvers, a representative of that funder, he concluded without further exploration or, in my opinion, sufficient explanation that the applicants could not obtain third party funding. For example there is no evidence of HBCA's financial status or to support the proposition that it won't have any assets "by the end of the case" nor any explanation as to why Ms Silvers' approach should carry conclusive weight on the subject of funding.
123 In Abbott v Zoetis Australia Pty Limited (No 2) [2019] FCA 462; (2019) 369 ALR 512 at [33]-[40] Lee J considered whether he should exercise his discretion to make an order for security in a class action which was, to adopt his Honour's words, an "unfunded mass tort or product liability open class action". In considering the question of stultification in that context at [38]-[39] his Honour said:
[38] Sixthly, although I do not consider that the applicant has discharged its burden of proving, in accordance with s 140(1) of the Evidence Act 1995 (Cth) stultification will necessarily occur (as that concept has been understood in the authorities), it would be a mistake, in the context of a class action such as the present, to consider that this is determinative. I accept the Full Court explained in Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4; 52 ALR 176 at 179; 8 ACLR 588 at 591 that:
… 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 shareholder 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.
[39] But if one was to apply this principle indiscriminately to Pt IVA proceedings, then strictly speaking, the only true way of proving stultification with certitude in an open class proceeding would be to prove that no group member had assets sufficient to proffer security or that no group member, with such assets, would pledge them. Whatever be the case in the different context of unfunded closed classes or unfunded commercial class actions, to place that burden on an applicant in an unfunded mass tort or product liability open class action such as the present, would necessarily require a costly and time consuming interrogation of the financial position of a very large number of group members - most of whom, no doubt, have no other connexion with the applicant other than the happenstance of being named as group members (and hence being someone who may benefit from a positive determination in relation to the common questions). To contend that current authority developed in the context of ordinary, inter partes litigation requires such an approach, ignores, or at least diminishes: the breadth of the discretion exercised in security applications; the unusual nature of open class Part IVA proceedings; and the concern of the Court expressed in Madgwick (at [77]) that the Court's approach in that case should not be taken as advocating that litigation funding should be put in place to avoid an order for security.
(Emphasis in original.)
124 In contrast this is an unfunded commercial class action brought on behalf of counterparties to the Franchise Agreements and their guarantors who ran or continue to run Hog's Breath cafés. Those parties are not in the same position as an individual applicant in an unfunded mass tort class action where most if not all members of the class are likely to be individuals. In those circumstances, I accept the submission made by Messrs Dryland, Spurgin and Jesse that, while the orders for security are sought against the applicants only, in order to satisfy the Court that making such orders would stultify the proceeding the applicants should have taken steps to demonstrate that they could not meet any order for security with support from other group members.
125 In a similar vein the applicants contended that their impecuniosity was caused by the respondents' conduct. It is difficult to accept that to be the case when the applicants also candidly acknowledged that their current cash flow difficulties have been caused by the COVID-19 pandemic restrictions. The applicants said that the respondents' conduct has likely increased franchisee susceptibility to the COVID-19 related difficulties. However, there is no evidence upon which I can draw such a conclusion and I am not satisfied based on the evidence before me that is the case.
126 The next issue raised is whether this proceeding is defensive in nature. The applicants contended that they were forced to bring this proceeding urgently in order to comply with an order made in the Local Court Proceeding and, as I understand it, other State Court Proceedings.
127 In Visco v Minter [1969] 2 All ER 714 at 716 Ormrod J said:
There is no dispute as to the basic principles, which are clearly set out in the judgment of SCRUTTON, L.J., in Mootschappij Voor Fondsenbezit v. Shell Transport and Trading Co. The court will not order a defendant resident abroad to give security for the plaintiff's costs because the plaintiff has chosen to institute the suit against him in this country where he has no assets. The defendant is entitled to defend himself here without the added embarrassment of having to find security for the plaintiff's costs. So, if the defendant wishes to raise a counterclaim by way of defence, he is allowed to do so without incurring the liability of having to provide security for the costs of the counterclaim. But this rule is subject to certain limits, because otherwise it would enable a defendant, sued in this court, to bring a cross-action about something quite different. Where the counterclaim or cross-action raises matters quite outside the plaintiff's claim, the defendant will be treated as a plaintiff so far as the cross-action is concerned and may be ordered to find security for costs. (See New Fenix Compagnie Anonyme D'Assurances de Madrid v. General Accident, Fire and Life Assurance Corpn., Ltd)
The principle seems to be that where a defendant counter-attacks on the same front on which he is being attacked by the plaintiff, it will be regarded as a defensive manoeuvre. But if he opens a counter-attack on a different front, even to relieve pressure on the front attacked by the plaintiff, he is in danger of an order for security for costs depending on the court's assessment of the position in each case.
(Footnotes omitted.)
To similar effect see: Australian Battery Distributors Pty Ltd v Robert Bosch (Australia) Pty Ltd [2015] FCA 1164 at [46]-[51].
128 Thus whether the applicants are correct in their characterisation of this proceeding depends on the nature of the Local Court Proceeding and this proceeding and, in particular, whether by this proceeding the applicants have opened a "counter-attack on a different front".
129 In the Local Court Proceeding, by its amended statement of claim HBCA as plaintiff:
(1) refers to the Franchise Agreement and the holding over of that agreement on a month to month basis following its termination;
(2) pleads that it was a term of the Franchise Agreement (and continues to be the case under the holding over) that St Mary's Hog's would pay royalties to it on the 15th day of each month based on a percentage of the gross monthly sales of the restaurant;
(3) contends that Messrs Goodwin and Blackstock personally guaranteed St Mary's Hog's performance under the Franchise Agreement (and as it continues under the holding over arrangement); and
(4) claims the amount of unpaid royalties plus interest and legal costs, calculated in accordance with the Franchise Agreement, from St Mary's Hog's and from Messrs Goodwin and Blackstock in their capacity as guarantors.
130 By way of defence the applicants, who are defendants in the Local Court Proceeding, among other things:
(1) admit that it was a term of the Franchise Agreement that St Mary's Hog's would pay royalties to HBCA on the 15th day of each month equal to 5% of its monthly gross sales;
(2) deny that the gross sales are as claimed by HBCA in its statement of claim;
(3) deny the existence of a holding over agreement;
(4) allege that HBCA repudiated the Franchise Agreement; and
(5) further or in the alternative, raise in answer to HBCA's amended statement of claim a number of matters including that HBCA is estopped or otherwise disentitled from commencing or taking any further steps in the Local Court Proceeding until it participates in a mediation, alleges that the form of the Franchise Agreement was not approved by HBC, that HBCA repudiated the Franchise Agreement in a number of ways as particularised and that HBCA contravened the Franchising Code, engaged in unconscionable conduct, both at common law and in contravention of the Australian Consumer Law, and in misleading and deceptive conduct contrary to s 18 of the Australian Consumer Law.
131 The applicants have also filed a cross-claim in the Local Court Proceeding in which they seek relief for alleged breaches of the St Mary's Hog's Franchising Agreement and pursuant to various sections of the Competition and Consumer Act and the ACL.
132 The applicants' claims made in this proceeding are summarised at [6] above. As is evident, the ASOC filed by the applicants in this proceeding is not defensive to the claim made by HBCA in the Local Court Proceeding. The latter is a claim for a debt alleged to be owing while in this proceeding the applicants make a number of claims against the respondents unrelated to the claim in debt but rather similar to or by way of expansion of the claim made in the cross-claim filed in the Local Court Proceeding.
133 In those circumstances it cannot be said that the proceeding commenced by the applicants in this Court is defensive. The applicants could have continued their defence of the claim in debt and prosecuted their cross-claim in the Local Court Proceeding. To the extent that the same defences and cross-claims may have been raised in other State Court Proceedings the parties, acting properly, could have come to an arrangement to ensure that the same issues were not litigated in multiple fora and that a process was agreed by which one of those proceedings might proceed to hearing in advance and so as to inform the balance.
134 The final matter to consider is the position of Messrs Goodwin and Blackstock as co-applicants. They are applicants in their capacity as guarantors of HBCA under the Franchise Agreement.
135 There is a disinclination to order an individual applicant to provide security, at least, in the absence of a factor in addition to impecuniosity: see Knight v Beyond Properties Pty Ltd [2005] FCA 764 at [32]. At [33] of Knight Lindgren J identified the types of additional factors, in addition to impecuniosity, which had persuaded courts to make an order for security against natural persons. They were: where the individual is resident outside Australia; bringing a claim to a significant extent for the benefit of others; failure to show that an order would stultify a proceeding and that the sum ordered was not oppressive; and lack of prospects of success and large costs involved to defendants.
136 In this proceeding Messrs Goodwin and Blackstock do not seek any relief different to, or beyond that, sought by St Mary's Hog's but make the same claims and seek the same relief as St Mary's Hog's. If the claim is successful, they will be relieved from liability under their guarantees including, I assume, in relation to the extant claim made by HBCA in the Local Court Proceeding. But, it does not follow and it is not apparent that Messrs Goodwin and Blackstock are necessary parties. In other words if St Mary's Hog's was the sole applicant and successful in its claim they would, in any event, take the benefit of that success in their capacity as guarantors.
137 Putting that matter to one side, and assuming for present purposes that Messrs Goodwin and Blackstock have a claim in their own right, the proceeding in this Court is clearly brought for the benefit of others: see Madgwick at [12].
138 Those factors, coupled with the apparent impecuniosity of Messrs Goodwin and Blackstock, make this an instance in which it would be appropriate to order security against them.
139 In summary, these applications were brought promptly; the evidence establishes that the applicants are unlikely to be able to pay the respondents' costs of the proceeding should an order for costs be made; the evidence does not establish that the applicants' impecuniosity was caused by the respondents' conduct, the more likely and, indeed, admitted cause being the COVID-19 pandemic; the undertakings proffered by Messrs Goodwin and Blackstock are not, in the circumstances of this case, a complete answer to the applications for security and in the absence of evidence of their financial worth are of very limited assistance; relatedly the proceeding is brought for the benefit of others; the applicants, who bear the onus, have not established that the making of orders for security will stultify the proceeding; there is insufficient evidence of the ability and willingness of group members to contribute to any order for security; and the claims made by the applicants on behalf of all group members are commercial in nature. Based on those factors, subject to one matter which I address below, I am satisfied that I should exercise my discretion in favour of making orders for payment of security for the respondents' costs.
140 HBCA and Mr Worth also sought an order that, to extent that the applicants are unwilling or unable to pay any security for their costs, group members be required to do so. I do not intend to make such an order. While I accept that this proceeding is brought for the benefit of parties to commercial transactions who wish to recoup alleged losses arising out of those transactions, it is not appropriate to make the additional order sought.
141 HBCA and Mr Worth rely on Madgwick at [99] (see [70] above) to support the making of the order they seek. But Madgwick does not support the proposition that where an impecunious applicant brings proceedings for the benefit of others, who may be able to meet an order for security for costs, security can then be ordered against the group members.
142 As was recognised at [37] of Madgwick, in referring without disapproval to a part of the reasons of the primary judge, "group members are not parties to a class action, are not required to take active steps in the class action, and do not control the conduct of the proceeding". It would be strange indeed if, that being so, a court could then make an order of the type sought by HBCA and Mr Worth that group members pay security for costs where the applicant is unwilling or unable to do so. The inappropriateness of such an order in this case is highlighted by the fact that putting to one side the current franchisees, who I assume to be group members, the group members are not identified and no information is provided about their asset position. The only available evidence is that, to the extent inquiries have been made, the group members are unwilling or unable to provide security.
143 Further, despite the observations of Allsop CJ and Middleton J in Madgwick at [99], the Full Court did not make an order requiring group members to contribute to orders for payment of security, let alone an order in the nature of that sought by HBCA and Mr Worth. The Full Court made an order for the applicants to provide security for the costs of the respondents "in a sum and manner to be assessed by the primary judge" and the application for security for costs was remitted for the primary judge to fix any sum and the manner and terms of its provision.
144 On remittal the primary judge undertook that task. In doing so his Honour gave effect to the decision of the Full Court by requiring the applicants to write to the group members informing them that the Court intended to fix an amount of security for costs in the proceeding and that it was likely that the Court would stay the proceeding if the security was not paid, and requesting the group members to inform the applicants' solicitors whether they were prepared to make a rateable contribution to a fund for security (and, if not, to provide the reason for their refusal). If such refusal was based on an asserted financial incapacity to make the contribution, the group member was requested to provide information as to that inability: see Kelly v Willmott Forests Ltd (in liq) (No 3) [2014] FCA 78 at [9]-[10]. Ultimately, the primary judge made orders for security for costs against the applicants (not the group members), fixed in a sum which corresponded to the figure that the applicants had submitted that they, together with contributions from group members, could proffer.