Companies - Security for costs - Discretion - Just and reasonable - Companies Act 1961 (Vic.), s. 363 (1).

Costs - Security for costs - $2 company - Just and reasonable - Companies Act 1961 (Vic.), s. 363 (1). Section 363 (1) of the Companies Act 1961 (Vic.) provides: "Where a company 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 company 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". Application was made for security for costs by the several defendants to an action brought by the plaintiff under the Trade Practices Act 1974. The plaintiff, a company with a paid-up capital of $2, brought an action under s. 45 of the Act, by virtue of the right of action conferred by s. 82 of the Act. The plaintiff alleged that the defendants, who were freight carriers, were members of an association and had, by contract, arrangement or understanding, agreed between themselves to refuse to deal with or accept any carrying business offered to them through the plaintiff, which had commenced business as a freight broker. The plaintiff obtained financial assistance throught the Attorney-General pursuant to s. 170 of the Act and conceded that it would be unable to meet the costs of the defendants should they be successful.

Held: (1) Section 363 (1) of the Companies Act 1961 (Vic.) is not contrary to or restricted in its application by the provisions of the Trade Practices Act 1974, or more particularly s. 170 of that Act. The plaintiff, a mere legal entity without substance, is the very type of company Parliament had in mind when it passed this section.

(2) The discretion conferred by s. 363 (1) of the Companies Act 1961 (Vic.) should be exercised merely with a predisposition in favour of the defendant and in coming to its opinion the court should consider what is just and reasonable and take into account the following: (a) the risk of exposing an innocent defendant to the expense of defending his position; (b) the risk of preventing the plaintiff from bringing the action and obtaining relief; (c) whether the application for security was being used oppressively so as to stifle a genuine claim; (d) whether the plaintiff's want of means had been brought about by the conduct of the defendants.

(3) Section 170 of the Trade Practices Act 1974 confers upon the Minister the power, to be exercised in proper cases, to authorize the provision of legal and financial assistance in terms which on their face extend even to the provision of security for costs.

(4) Section 82 of the Trade Practices Act 1974 confers a personal right of action but does not give the plaintiff any special privileges in the conduct of proceedings.

Buckley v. Bennell Design & Constructions Pty. Ltd. (1974), 1 ACLR 301, and Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd., (1973) 1 QB 609, referred to.

Application was made for security for costs by the several defendants to an action brought by the plaintiff under the Trade Practices Act 1974.

J. S. Lockhart Q.C. and L. D. S. Waddy, for the first-named defendant.

C. J. Canavan, for the second, third and fourth-named defendants.

A. J. Rogers Q.C. and A. Chernov, for the sixth-named defendant.

P. R. Francis (solicitor), for the eight-named defendant.

G. Dethridge (solicitor), for the ninth, tenth and eleventh-named defendants.

There was no appearance for the fifth-named defendant.

Cur. adv. vult.

Solicitors for the plaintiff: Ellison Hewison & Whitehead.

Solicitors for the first-named defendant: Blake & Riggall.

Solicitors for the second, third and fourth-named defendants: Allen, Allen &

Solicitors for the sixth-named defendant: Paveys, Wilson, Cohen and Carter.

Solicitors for the seventh-named defendant: Moule, Hamilton & Derham.

Solicitors for the eighth-named defendant: McCracken and McCracken.

Solicitors for the ninth, tenth and eleventh-named defendants: Mallesons.

Solicitors for the twelfth-named defendant: Henderson and Ball.

(Reported by Ada Moshinsky, Barrister-at-Law.)

The following judgment was delivered.

SMITHERS J. The writ in this matter was issued on 17th December, 1976. The

plaintiff is Tradestock Pty. Ltd., a company registered in the State of Victoria. The defendants are various companies who carry on the business of carriers in Australia, interstate and otherwise. (at p344)

2. By the statement of claim it is alleged that the plaintiff is a broker and each of the defendants is or was at all material times a member of an association known as "National Freight Forwarders Association" (hereinafter called the association). It is alleged that in May or alternatively August 1976 or earlier the defendants or some of them made a contract or arrangement or entered into an understanding between themselves in restraint of trade or commerce and gave effect to the same to the extent that it was in restraint of trade or commerce. (at p345)

3. It is said that the contract, arrangement or understanding provided that all members of the association would refuse to deal with or accept any interstate or other carrying business offered to them through brokers or agents, including the plaintiff, and that pursuant to such contract, arrangement or understanding each of the defendants has refused to accept interstate freight forwarding business for customers requiring such service which business has been offered to them through the plaintiff. It is alleged that the contract, arrangement or understanding and the giving effect to the same are acts done in contravention of s. 45 of the Trade Practices Act 1974 and that the plaintiff has suffered loss and damage by reason of the same. It is said that the defendants threaten and intend to continue to abide by the said contract, arrangement or understanding and to give effect thereto and the plaintiff claims: (a) damages; and (b) an injunction restraining the defendants and each of them from continuing to abide by or give effect to the said contract, arrangement or understanding and in particular from refusing to deal with the plaintiff or with customers introduced to or by the plaintiff. (at p345)

4. All the defendants except the ninth and eleventh defendants have entered an appearance but have not pleaded to the statement of claim. The action is presently before the court upon application by summons on the part of the first defendant - TNT (Management) Pty. Ltd., the second defendant - Interstate Parcel Express Co. Pty. Ltd., the third defendant - Tarlee Investments Ltd., the fourth defendant - Ipec (Aust.), the sixth defendant - Brambles Industries Ltd., the seventh defendant - Mayne Nickless Ltd. and the twelfth defendant - Tradex Transport Pty. Ltd., for an order that the proceedings herein be stayed pending provision by the plaintiff of security for costs of those defendants. (at p345)

5. In these proceedings certain of the defendants, by summons, have sought further particulars of the statement of claim and the plaintiff, by summons, has sought some interlocutory orders. By consent these matters have been ordered to stand over to a date to be fixed. (at p345)

6. It appears from the material before the court that the plaintiff company has a capital structure comprising an issued and fully paid-up capital of $2 only and that, on 16th February, 1977, the only shareholders of the plaintiff company were one William James Frewen of 78 Sycamore Street, Caulfield, and Noel Edward Stock of Eliza Lodge, Jackson's Road, Mt. Eliza, each of whom held one share. (at p346)

7. The directors of the company are the said Noel Edward Stock and Eileen Constance Stock of Eliza Lodge, Jackson's Road, Mt. Eliza, and William James Frewen and Margaret Dawn Frewen of 78 Sycamore Street, Caulfield. The registered office of the company is Suite 18, 6th Floor, 422 Collins Street, Melbourne. The last annual return was lodged with the Corporate Affairs Commission on 18th December, 1974. (at p346)

8. On 16th February, 1977, the first-named defendant requested the plaintiff to supply adequate security for costs without a court order and on the same day the plaintiff refused that request. (at p346)

9. From an affidavit by Kenneth Clive Brooks it would appear that although the plaintiff's letterhead gives addresses of the plaintiff in Sydney, Melbourne, Brisbane and Adelaide, there is no evidence that the plaintiff is carrying on business at any of these places except that in answer to a telephone call at the number shown on the plaintiff's letterhead at Melbourne a woman answered and said, "Carpenter Lock". The caller said, "I thought that was Tradestock", whereupon the lady replied, "Oh, yes they are on the same line as us. Who do you want?" (at p346)

10. On behalf of the plaintiff Mr. Stock has stated in an affidavit sworn on 7th April, 1977, that the plaintiff company was incorporated in Victoria on 24th April, 1970, and is a recognized company in New South Wales, that it commenced business as a broker in the transport industry after 25th July, 1975, but has not actually carried on business in Queensland or South Australia. (at p346)

11. Mr. Stock stated that the plaintiff does carry on business in Melbourne and Sydney and has a number of clients who have appointed it as their broker for their transport requirements. He named nine companies. He stated that seven other companies have been clients of the plaintiff but the plaintiff has been unable to service their requirements as a result of the restrictive agreements between the defendants and their refusal to deal with the plaintiff company. He added that the officers of the plaintiff were currently conducting negotiations with more than fifteen other companies with a view to their joining the plaintiff's client list. (at p346)

12. In an affidavit by Mr. David Shavin, the plaintiff's solicitor, sworn on 13th April, 1977, Mr. Shavin stated that the evidence so far made available to him by the plaintiff includes direct and circumstantial evidence of the agreement alleged in the statement of claim. The direct evidence is constituted by certain admissions which have been obtained from officers of some of the defendant companies and from documents obtained by officers of the Trade Practices Commission, in particular minutes relating to decisions taken at a meeting of the National Freight Forwarders Association. The circumstantial evidence is constituted by the express refusal of each of the defendant companies to deal with the plaintiff, not because of any factor peculiar to the plaintiff other than that the plaintiff was a company attempting to get established in the business of a freight forwarding broker. Mr. Shavin added: "On my instructions the plaintiff is in fact likely to establish the relevant facts alleged by him in his statement of claim herein." (at p347)

13. The application for security for costs is founded upon the jurisdiction given by s. 56 of the Federal Court of Australia Act 1976. It is sought on what are said to be principles generally applicable to questions of security for costs, but primarily by reference to the provisions of s. 363 (1) of the Companies Act 1961 (Vic.). That section is in the following terms: "Where a company 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 belive that the company 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." (at p347)

14. It is sufficient at this stage if attention is given to this subsection without reference to any inherent jurisdiction to make an order for security. (at p347)

15. As pointed out by Street C.J. in Buckley v. Bennell Design & Constructions Pty. Ltd. (1974) 1 ACTR 301, at p 303 , s. 363 (1) of the Companies Act has a long history in companies legislation in England and in Australia. It reflects the concern of the legislature that in permitting the incorporation of a limited liability entity it was necessary to ensure that persons who might have dealings whether voluntary or involuntary with such an entity should have protection against the consequences of limited liability. In cases of contract the other party to the dealing is on notice of the limited liability of the company and the transaction being voluntary could be presumed to be competent to look after his own interests in that regard. Where, however, a company commences litigation against another party that other party could find himself involuntarily prejudiced by the limited liability character of the plaintiff who had commenced proceedings against him. To protect the other party from this consequence of limited liability there has always been in company legislation a provision along the lines of s. 363 (1) of the Act. (at p347)

16. The Chief Justice added: "In administering the policy laid down by the provisions of that nature, the courts have been concerned to achieve a balance between ensuring that adequate and fair protection is provided to the other party, and avoiding injustice to impecunious companies by unnecessarily shutting them out or prejudicing them in the conduct of litigation." After discussing the authorities the learned Chief Justice said: "It seems to me that the discretion could properly be regarded as ordinarily exercisable so as to protect a defendant sued by an impecunious company, but that, if the court in any case takes the view that this protection should not be afforded to the defendant, it has an unlimited and unrestricted discretion to give effect to such view without having to look for special circumstances. I prefer to regard the discretion conferred by the section as being one which should be exercised merely with a predisposition in favour of the defendant party." (at p348)

17. I respectfully accept this statement as a correct guide in the exercise of the discretion conferred by the subsection. It is clear, however, that the real problem is to determine whether, in the circumstances of that case, the court ought to take the view that the protection should not be afforded to the defendant. No doubt the answer is to be found by ascertaining where, on considerations of what is just and reasonable, the balance rests between the risk of exposing an innocent defendant to the expense of defending his position and the risk of unnecessarily shutting out from relief a plaintiff whose case if litigated would result in his obtaining that relief. (at p348)

18. Frequently in this sphere, the court is required to act in circumstances where the materials available to it are not sufficient to exclude the possibility that its decision may not represent a result in accordance with the ideal justice of the matter as it would appear if all the facts relating to the matters in issue were before the court. It is a sphere in which that ideal justice simply may not be attainable by procedures themselves as just as may be. However, the parties, at this stage, have the opportunity of putting before the court the facts and circumstances relevant to the problem before it and the balance of justice must be assessed by reference to those facts and circumstances. (at p348)

19. It was said by Lord Denning M.R. in Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd. (1973) 1 QB 609, at p 626 :

"The court has a discretion which it will exercise considering all the circumstances of the particular case . . . Mr. Levy helpfully suggests some of the matters which the court might take into account, such as whether the company's claim is bona fide and not a sham and whether the company has a reasonably good prospect of success. Again it will consider whether there is an admission by the defendants on the pleadings or elsewhere that money is due. . . The court might also consider whether the application for security was being used oppressively - so as to try to stifle a genuine claim. It would also consider whether the company's want of means has been brought about by any conduct by the defendants, such as delay in payment or delay in doing their part of the work.

"Mr. Tackaberry accepted that most of these matters were matters proper for consideration . . ." (at p349)

20. In this case Mr. Castan, on behalf of the plaintiff company, conceded that the plaintiff's resources were such that it could not meet an order for costs should it fail to win the action and be required to pay the defendants' costs thereof. However, in resisting the making of an order for security for costs he contended:

(a) On the materials before the court it ought to be satisfied that the plaintiff's claim is a bona fide one, serious consideration has been given to it, and the damages which would be recovered if the claim is successful would be substantial. He pointed out that there is no unequivocal denial on the part of any of the defendants that they are not parties to the agreement alleged in the statement of claim and have not acted in accordance therewith in relation to refraining from doing business with the plaintiff.

(b) Having regard to the policy of the Trade Practices Act it is an important consideration that the plaintiff as a small company is attempting to confront a group of substantial companies, all members of a trade association, all engaged in the same class of business and all having adopted a common negative attitude towards trading with the plaintiff. Accordingly there was in these proceedings a special reason why the court should hesitate to make an order that the plaintiff should provide security for costs, the inevitable consequence of which would be that the plaintiff would be unable to proceed with its action. He urged that in this respect a plaintiff in an action under the Trade Practices Act may be in a more favourable position than a plaintiff seeking relief on a more traditional cause of action. He pointed out that in an action seeking relief under s. 82 of the Trade Practices Act where the claim is that the plaintiff has been injured by reason of an agreement between a number of companies and multiple defendants are necessarily involved, security for costs if ordered may be in a substantial sum. He contended also that there was a nexus between the alleged wrongful conduct of the defendants and the impecunious condition of the plaintiff. He argued in this connection also, that to make an order for security for costs against a plaintiff who like this plaintiff had been granted a degree of legal aid pursuant to s. 170 would conflict with the underlying assumption of that section.

(c) As the relief sought in this action is relief to which the shareholders of the plaintiff are entitled pursuant to s. 82 of the Act equally with the plaintiff company an order for security for costs might result in no more than the addition or substitution of the shareholders as parties in these proceedings. (at p350)

21. In my opinion these submissions do not disclose grounds for holding that the protection contemplated by s. 363 (1) of the Companies Act should not be extended to the defendants. (at p350)

22. It may well be that the plaintiff's claim is bona fide and has been the subject of serious consideration. But the conclusions of those who have given this consideration do not appear other than as stated in the affidavit of Mr. Shavin. His deposition is in most guarded terms. It fails to assert in unequivocal terms that, in his opinion, on the materials available to him, the plaintiff's claim has a good chance of success. He gives no particulars of the contents of the admissions to which he refers or by whom they are said to have been made. He does not say what instructions he has received as to the contents of the documents obtained by the officers of the Trade Practices Commission or whether they or copies thereof have been sighted by him or representatives of his client or have ever been sought. (at p350)

23. So far as the plaintiff's prospect of substantial damages is concerned should the plaintiff prove a contravention of the Act, there is nothing before the court to induce a belief that that prospect is a good one. (at p350)

24. Reference to the plaintiff's correspondence seeking to do business as a carrier's broker indicates that although the plaintiff has sought to do business it has done so only on conditions suggested by itself, as to the reasonableness of which or the likelihood of their being accepted by any of the defendants if the alleged wrongful agreement between them did not exist, nothing is said. These comments are relevant also to the plaintiff's claim for an injunction. (at p350)

25. As to submission (b), it is true that the making of an order for security for costs may well mean that the plaintiff's action can never proceed. It is true also that some of the defendants are in common knowledge substantial companies in a large way of business. Both these factors have relevance. However, at this stage it cannot be regarded as certain that an order for security would bring the action to an end. The current financial resources of the plaintiff's shareholders or of any other person who may be willing to assist the plaintiff are not shown. (at p350)

26. It is to be observed also that the terms of s. 170 confer upon the Minister a power, to be exercised in proper cases, to authorize the provision of legal and financial assistance in terms which on their face extend even to the provision of security for costs. Mr. Castan indicated that certain assistance had been granted to the plaintiff pursuant to s. 170, but did not state to what extent or whether assistance to the plaintiff to meet an order for security for the costs of the defendants had been sought and if so with what result. (at p350)

27. As to the more general observations of Mr. Castan concerning the Trade Practices Act, and the policy which it is intended to implement, I should have regard to the fact that the power and duty of enforcing the Act has been entrusted to the Trade Practices Commission and the Minister and that the right of action conferred by s. 82 is a personal right of action on a new and specified ground, but one in respect of which I do not discern any statutory intention that it carries with it any special privileges for a plaintiff in the conduct of proceedings brought by him. This is not to say that in some circumstances, perhaps where there is real evidence of a contravention of the requirements of the Act, conditions arising from the operation of its provisions are excluded from relevance in an application for security for costs. (at p351)

28. As to the alleged nexus between the impecunious condition of the plaintiff and the defendants' wrongful act that nexus is tenuous indeed. As indicated in Parkinson's case (1973) 1 QB 609 , the court may well look with disfavour upon a defendant seeking security for costs if the acts of that defendant have disabled the plaintiff from complying with an order for such security. But this is not such a case. So far as appears the plaintiff company's impecunious condition has existed since the company came into being, and before it attempted to do business with the defendants or any of them. It may be that the defendants' conduct, wrongful or otherwise, has created a situation in which the plaintiff has had less opportunity than it otherwise might have had to cure its original impecuniosity, but it did not cause it. (at p351)

29. As to submission (c), it may be a nice question whether the shareholders are persons who suffer loss within the meaning of s. 82 of the Act. In any event, however, the possibility that an order for security for costs may result in their becoming parties to this action does not constitute a reason why an order should not be made. And indeed it is a major, if not a dominating, consideration in this case that the plaintiff company is but a legal entity without substance, a convenient financially bereft alter ego for the two shareholders. Its capital is minimal, its assets are not disclosed but the inference to be drawn is that they are minimal, and it is not shown that it has any business of substance. This is not the case of a company whose shareholders have committed capital and established a real business but finds itself currently without funds because of some business reverse. This company would appear to be the type of legal entity, par excellence, which Parliament had in mind when it passed s. 363 (1). (at p351)

30. In these circumstances and in the light of the observations above I am of opinion that on the balance of justice and reasonableness the defendants are entitled to an order for security for costs. (at p351)

31. The question then arises as to the quantum of security to be provided. (at p352)

32. Mr. Lockhart Q.C. suggested that security in the sum of $2,000 in the case of each set of represented defendants claiming security might be reasonable to suffice to protect them through the pleadings and the processes of interrogatories and discovery. Mr. Rogers Q.C. suggested that security in the sum of $5,000 would be reasonable protection up to the stage of readiness for hearing. Mr. Castan did not canvass these estimates. (at p352)

33. In view of the number of defendants and because it seems to me to be realistic I propose to adopt the suggestion of Mr. Lockhart. I will reserve liberty to apply so that if this sum turns out to be too realistic it can be reviewed. (at p352)

34. Mr. Castan indicated a strong desire that the plaintiff be afforded an opportunity to place before the court further materials which might affect the view of the court as to the justice of an order for security. In view of the probability of serious consequences to the plaintiff of an order for security for costs I am unwilling to preclude the plaintiff from submitting such further materials as may be available to it. (at p352)

35. Accordingly I order that, subject to such further order as may be made in these applications, the plaintiff's action so far as it relates to the first, second, third, fourth, sixth, seventh and twelfth defendants be stayed, with respect to the first defendant until security for the costs of that defendant is provided in the sum of $2,000 to the satisfaction of the registrar, and with respect to the second, third and fourth defendants until security for the costs of those defendants is provided in the sum of $2,000 to the satisfaction of the registrar, and with respect to the sixth defendant until security for the costs of that defendant is provided in the sum of $2,000 to the satisfaction of the registrar, and with respect to the seventh defendant until security for the costs of that defendant is provided in the sum of $2,000 to the satisfaction of the registrar and with respect to the twelfth defendant until security for the costs of that defendant is provided in the sum of $2,000 to the satisfaction of the registrar and I reserve liberty to the plaintiff and each party to any of the applications for security for costs to apply herein as it may be advised either before or after any security is provided pursuant to this order and I certify for counsel, including senior counsel. (at p352)

36. The costs of these applications to this stage are the defendants' costs in the cause. (at p352)