IS eases CATCHWORDS Practice and procedure - security for costs. Federal Court of Australia Act 1976 5.56 Companies (Victoria) Code MOLNAR LIMES ENGINEERING FTY. Lip. and E. d. LID. BURRIS G.209 of 1982 Northrop J. Melbourne 22 February 1985. ee x Not considered s.583(1) v. THE HERALD & WEEKLY appropriate for further distribution, IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) V. No. G209 of 1982 ) GENERAL DIVISION ) BETWEEN : MOLNAR ENGINEERING PTY. LTO. Applicant and THE HERALD & WEEKLY TIMES LID. and E. J. BURNS Respondent = CORAM: Northrop J. DATE: 22 February 1985 PLACE: Melbourne ORDER THE COURT ORDERS THAT: Molnar Engineering Fty. Ltd. give security ain the amount of $35,000 for the costs of the respondent, E. J. Burns, of and incidental to these proceedings in a form to be agreed by the parties, and in default of agreement within fourteen days to be determined by the Court. Further proceedings on the claim against the respondent Burns be stayed until security 1s provided. i Liberty be reserved to either party to apply generally upon five days notice to the other party. - " soy The respondent Burns's costs of the motion, ancluding the costs of the day of 7 February 1985, be paid by Molnar Engineering Fiy. Ltd. IN THE FEDERAL COURT OF VICTORIA ) ) VICTORIA DISTRICT REGISTRY ) V. No. G.Z09 of 1982 ) ) GENERAL DIVISION BETWEEN : MOLNAR ENGINEERING FTY. LTD. Applicant and THE HERALD & WEEKLY TIMES LTD. and E. 3g. BURNS - Respondents COURT: Northrop Jd. DATE 22 February 1385 EFLACE: Melbourne - REASONS FOR JUDGMENT The history of various matters arising in this application appears in Molnar Engineering Pty. Ltd. v. The Herald and Weekly Times Ltd. (1984) 1 F.C.R. 455 and on appeal in Molnar Engineering Pty. Ltd. v. The Herald and Weekly Times Ltd., 17 July 1984, unreported. The respondent, Mr. Burns, now moves the Court, upon notice, that the applicant, Molnar Engineering, give security for his costs. The motion 15 based upon s.56 Federal Court of Australia Act 1976 and is sought pursuant to s.533 Companies (Victoria) Code. Sub-section (1) of that section 1S set out: "B33(1) Where a corporation 15 plaintiff in any action or other legal proceeding, the court having jurisdiction in the Matter may, 1f it appears by credible testimony that theré 1s reason to believe that the carperation will be unable tc pay the costs of the detenaant 1f successful in his defence, rouuire surtficient security to be given for tnose costs and stay all proceedings until the security 15 given." The general principles to be applied an determining motions for security for costs aré not in dispute. Thev have been aiscussed in a number of cases. Details of all cases referrea to during the course of the hearing are not set out in these reasons, but for the sake of reference, the cases are listed in an appendix to tnese reasons. The general principles tc be applied are discusséd in Jet Corporation of Austraiia Pty. Ltd. v. Fetres Pty. Ltd. and Gchers (149682) 50 A.L.R. 722i per Northrop J. at op.731-2 and the cases cited therein and on appeal in Sent ana Anor. v. de Corporation of Australia Pty. Ltd. (1984) 54 A.iL.k. du Ul hi per McGregor J. at pp.271-5. Tno u @ principles will he applied in aetermining this matter but will not be discussed in detail. In order to exercise the power to grant the order sought, it is necessary that there be "credible testimony that there 1s reason to believe that the corporation will be unable to pay the costs" of Mr. Burns if he 18S successful in his defence to the application. in order to satisfy that threshold requirement, Mr. Burns relies upon an affidavit by his solicitor, That affidavit exhibits the two affidavits sworn by Mr. Molnar, the managing director of Molnar Engineering, in support of the motion by Molnar Engineering that Mr. Molnar be granted leave to appear on behalf of Molnar Engineering, as well as a large number of other documents. For present purposes it 15s accepted that Mr. Burns was unaware of the financial position of Molnar Engineering until the first of the two affidavits by Mr. Molnar was fileg on 10 May 1984, Molnar Engineering 18 an exempt company which has appointed an auditor, and accordingly ats financial accounts have not been lodged with the Corporate Affairs Office, mor are 1ts accounts available to public scrutiny. - In his first affidavit, Mr. Molnar claims that Molnar Engineering's financial position has been brought about substantially by the actions of the Victorian Department of Labour and Industry, in which Mr. Burns is the Chief Inspector of Lifts and Cranes, condemning the hoists produced by Molnar Engineering on the ground that they are unsafe to operate. In that affidavit Mr. Molnar stated that Molnar Engineering was neither able, nor prepared, to expend the large amount of money immediately required to enable it to pay its legal advisers to continue to represent it in the proceedings which were then part heard. In his second affidavit sworn on ll May 1984, Mr. Molnar stated that Molnar Engineering did not have sufficient liquid funas currently at 1ts disposal, or through credit facilities, to continue to éngage leqal advisers. me stated that tne company owned ats own factory site, plant and stock, but that 1t was unable tao borrow on 1ts assets to finance the continuation of the action as the downturn in its trade had placed it an a situation where 1t war not earning sufficient income to service the interest payable on that borrowing. He stated that Molnar Engineering was paying interest and making repayments on a loan of $450,000 secured by a mortdage over its factory. He said alse that 1t had about cne hundred heists an stock valued at approximately $750,00u, but they could not be sold until the dispute with th itt Victorian Departmene had been resolved. Faraqraphs 6 and ; of that affidavit are set out. In those paragraphs Molnar Engineering 1s called "the Applicant": "6. The Applicant's receipts from sales since October 1982 have diminished toa point where the Applicant 15 now operating at a substantial loss. If it were to borrow monies to pay further legal costs, 1t would mean that it would be necessary to close its husiness and dismiss its empioyees. It does not have sufficient funds or access to credit facilities sufficient to remain in production and further pay iuts legal advisers. 7. The decision now taken by the Applicant's Hoard to conduct the case myself has been an endeavour to balance the requirements of salvaging what 15 left of the Applicant's business and endeavouring to succeed in this action. The estimated costs for my legal representation for the balance of the expected duration of this action are in excess of $100,000.00. The Applicant cannot both pay those costs and continue in business." Other exhibits disclose that Molnar Engineering purchased its factory site from the Broken Hili Associated Smelters Fty. Ltd., which granted a loan to Molnar Engineering on the security of a first mortgage. The sale and mortgage took place in June 1981. Molinar Engineering borrowed the sum of $500,000 repayable as to 825,000 1n June 1982, $25,000 ain June 1983 and the balance on or before June 1986, but the applicant had the right to make early repayments of the principal or parts thereof. In addition, interest at the rate of 13.5% was payable. There 1S no evidence before the Court of fhe value of the factory site or the amount of tne loan currently outstanding. There 15 an obvious discrepancy between the amount of the loan referred to ain Mr. Molnar's affidavit and the mortgage document. Tne motion was to be heard on 7 February 1985. An answering affidavit sworn by Mr. Molnar was served on the solicitors for Mr. Burns on 6 February 19585. Counsel for Mr. Burns desired to cross-examine Mr. Molnar on his affidavit. The hearing of the motion was adjourned to 14 February 1985 to enable Mr. Molnar to attend to be cross-examined. Notice under 0.14 r.9 of the Rules of Court was given. Mr. Molnar did not attend Court on 14 February 1985, nor was any explanation given for his non-attendance. The Court refused leave under 0.14 -.9(3) and accordingly Mr. Molnar's affidavit was not used. In the result, apart from the atfidavit by the solicitor for Mr. Burns and the exhibits thereto, there 1s no evidence directed to the financial position of Molnar Engineering. It 15 estimated that the hearing of the application will take between three and four weeks. The solicitor for Mr. Burns estimates that Mr. Burns s costs will be approximately $2,000 per day for the balance of the hearing. Those costs are on a solicitor and client basis. In has first affidavit, Mr. Moinar estimated that his costs for the expected duration of the action would bé in excess of $100,000. It 15 apparent, therefore, that the costs of Mr. Burns, ona party to party basis, will be very substantial and could well exceed $100,000. From the material before the Court, I am satisfied there 1s reason to believe Molnar Engineering will be unable to pay the costs of Mr. Burns if he is successful in his defence. There can be no doubt that Molnar Engineering has a sericus cash fiow problem. There 15 no evidence of the value of the assets of Molnar Engineering. If the application fails, the value of the hoists an stock will be very small. Debate took place in Court concerning the meaning to be given to tne words "unable to pay the costs" where they appear in s,533 of the Companies (Victoria) Code, namely whether regard should be had to liquid assets or to the total assets of the corporation. In the present case there 15 ets of the m ne evidence of the value of all the as applicant and the amount of monies secured by way of mortgage or otherwise over those assets. This 15 not a case where a liquidator or a receéiver/manager has been appointed. I am satisfied from the material before the Court, and in the absence of any evidence given on behalf of Molnar Engineering, that the threshold requirement has heen established. At the very least, that material is sufficient to place the evidentiary onus on the applicant to give evidence that 1t would not be unable to pay the casts. Mr. Molnar, at an earlier stage, gave evidence on affidavit as to the daffacult financial position facing Nolnar Engineering. He has qdiven no evidence regarding the current financial position of Molnar Engineering. In these circumstances, Ido not find it necessary to consider in detail the numerous authorities referred to in arguments. It appears by credible testimony that there 15 reason to believe that Molnar Engineering will be unabie to pay the costs of Mr. Burns, if successful in his defence. It remains to consider whether, as a matter of discretion, an order should be made awarding security for costs. There appears to be some difference of opinion regarding the existence of a predisposition to make an order once the threshold requirement to enable an order to be made has been established; see for example Flaza Frint Fty. Ltd. v. South British Insurance Ca. Ltd. per Biackburn C.J. at pp.799-800, and Carusa Australia Pry. Ltd. v. Portec (Aust.) -Ptv. Ltd. per Toohey J. at p.819. It 1s not necessary to express @ preference on this matter. The discretion to make an order is unfettered by the legislation. The fact that there 15 reason toa believe that Molnar Engineering wiil be unable to pay the costs of Mr. Burns aif he 41s successful in his defence is a factor. to he taken into account in the exercise of the discretion conferred uzon the Court. The power to make the order ais limited ta cases where the plaintiff 18s a corporation. In the Present case there 1s no evidence disclosing the financial position 6f the persons, whether natural or corporate, pehind Molnar Engineering. There has been no undue delay in seeking the order for security for casts since Mr. Burns first became aware of the financial position of Molnar Engineering. A motion by Mr. Burns for an oraer for security for costs in respect of the appeal refusing leave to Mr. Molnar to appear on hehaif of Molnar Engineering was refused by the Court constituted by a single Judge on the basis that, having regard to the relatively small amount cof the casts of the appeal, the threshold requirement had not heen established. That appeal and subsequent delays by Molnar Engineering explain the apparent delay between May 1984 and October 1984 when notice of the present motion was given. At this stage it 15 impossible to form a view whether Molnar Engineering's claim is likely to he successful or not. Weaght is given to the fact that I am satisfied that the application 1s genuine. I have taken into account also the fact that the applicant's claim has ain ait an element of public interest based on the provisions of the Trade Practices Act 1974. At this stage it 1S impossible to form a view whether Molnar Engineering's financial position is due to the action of Burns, as is claimead ain the application, or the Victorian Devartment, But it is noted that the Department 15 not a party to the proceeaings. It must be remembere also that Mr. Burns has raised a defence based on what can be described as "the shiela of the Crown". Consideration 1s Given also to the undesirability of preventing a plaintiff, being a corporation, from proceeding with an action, but less weight 1s given to this factor because of the absence of evidence of the financial position of the persons behind Molnar Engineering. Iam satisfied further that the motion has not been brought to oppress the applicant but to protect the financial position of Mr. Burns. In all the circumstances, an order should be made. - 10 - The amount of security to be ordered should be based on party to party costs. The amount of security should not be for the full amount of the anticipated party to party costs. The amount depends upe the likely future costs, not costs incurred to date. in ail the circumstances, an amount of $35,000 1s appropriate. Accordingly, I would make the following orders: 1. Molnar Engineering Pty. Ltd. give security in the amount of $35,000 for the costs of the respondent, E. J. Burns, of and incidental to these proceedings in a form to be agreed by the parties, ana in default of agreement within fourteen days tc be determined hy the Court. Bw Further proceedings on the claim against the respondent Burns Be stayed until security 15 provided. 3. Liberty be reserved to either party to apply generally upon five days notice to the other party. 4. The respondent Burns's costs of the motion, anciudinag the costs of the day of 7 February 1985, be paid by Molnar Engineering Pty. Ltd. I certify that th1rs and the nine (9) preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr. Justice R. M. Northrop. Dated: 22 February 1985. APPENDI? Ee Cc Eat Beli Wholesale Co. Pty. Ltd. v. Gates Export Corporation (No. 1) (1984) 8 A.C.L.R. Bell Wholesale Co. Pty. Ltd. v. Gates Export Corpnoration (No. 2) (1984) 52 A.L.R. 176 Buckley v. Bennell Design and Constructions Fty. Ltd. (1974) 1 A.C.L.R. 301 a Pty. btd. v. Portec (Aust.) Ftv. Ltd. Caruso Australi (1984) 1 F.C.R. 311 Co-Orerative Farmers' & Grariers Direct Meat Surply Ltd. v. Smare £19771 V.F. 366 DBrumaurna Ptv. Ltd. v. Braham (1982) 42 A.L.R. 503 Tronite Pavangs Ltda. v. Harr2as (1914) 31 W.N. (N.S.W.) 60 - det Corporation of Australia Pty. Ltd. v. Eetres Pty. Ltd. and Ors. (1953) 50 A.L.F. 722 John Arnoid Surf Shop Pty. Ltd. (an liq.) v. Heiler Factors Pty. Ltd. (1979) 22 S.A.S.R. 29 M.A. Productions Pty. Ltd. v. Austarama Television Pty. Ltd. (1982) 7 A.C.L.R. 97 Newtons Travel Services Fty. Ltd. v. Ansett Transport Industries (Operations) Pty. Ltd. (1982) 44 A.L.P. 163 Pacific Acceptance Ccrporatiorn Ltd. v. Forsyth £1967] 2 N.S.W.R. 402 = Flaza Print Fty. Ltd. v. South British Insurance Co. Ltd. (1954) S4 A.C.T.R. 3 Sent & Anor. v. Jet Corporation of Australia Fty. Ltd. (1984) 54 A.L.R. 237 sir Lindsay Parkinson & Co. Ltd. v. Tripian Ltd. £19731 O.B. 609 Smail v. Burton; Re: Insurance Associates Ftv. Ltd. (in lag.) £19751 V.R. 776 Spiel v. Commodity Brokers Australia Pty. Ltd. (in liq.) (1953) 8 A.C.L.R. 410 The Victorian Mortgage & Deposit Bank Lrd. v. The Australian Financial Agency & Guarantee Company Lta. (1892) 18 V.L.R. 754 Ltd. m Tragestock Fty. Lta. v. T.N.T. (Management) Ftv. (1977) 14 A.L.R. Sz