CATCHWORDS Fractice and Procedure: whether security for awarded against a trustee company. Trade Practices Act 1975 s.52 Federal Court ot Australia Act 1976 s.56(1) Judiciary Act 1903 5.79 Companies (Victoria) Code s.533 Federal Court Rules 0.28 r.3 LAUNDRY COIN-WASH NOMINERS PIY. LIMITED v. costs should be DUNLOP OLYMPIC LIMITED, J.C. & HOWARD WRIGHT PROPRIETARY LIMITED and TREVOP BALDOCK VG Na, 298 of 1984 Smithers d. 28 June 1985 Melbourne. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VG No. 298 of 1984 ~~ ewerw BETWEEN : LAUNDRY COIN-WASH LEASING NOMINEES PTY. LIMITED (Applicant) AND: DUNLOP OLYMPLIC LIMITED, J.C. & HOWARD WRIGHT PROPRIETARY LIMITED AND _TREVOR BALDOCK (Respondents) dudge Making Order: Smithers J. Date of Order: 28 June 1985 Where Made: Melbourne. ORDER (a) Undertakings having been given to the Court by the {b) applicant and its directors that subject to further order the capital assets in the hands of the applicant will not be disposed of by it, there be no order for the provision of security for costs which may be payable to the respondent. The respondents' costs of and incidental to this motion be paid by the applicant. IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG No. 298 of 1984 ) GENERAL DIVISION ) BETWEEN : LAUNDRY _COIN-WASH LEASING NOMINEES PTY. LIMITED (Applicant) AND: DUNLOP OLYMPLIC LIMITED, J.C. & HOWARD WRIGHT PROPRIETARY LIMITED AND TREVOR BALDOCK (Respondents) Coram: Smithers J. Date: 28 June 1985 REASONS FOR JUDGMENT This is a motion in which the respondents seek an order against the applicant for security for costs. According to the statement of claim, which was filed on 14 November 1984, the applicant seeks relief in respect of conduct of the respondents alleged to have been misleading or deceptive in contravention of the provisions of s.52 of the Trade Practices Act 1974 (the Act). It is alleged that in consequence of that conduct the applicant agreed to purchase from the first and second named respondents a business of a manufacturer and wholesaler of bedding furniture theretofor carried on by the first and second named respondents or one of them. The misleading and deceptive conduct was said to consist of a representation to the applicant that the turnover of the business was approximately $500,000 per annum and certain other representations concerning sales, turnover, capacity and profit of the business. These representations are alleged to have been untrue. The applicant, 1t is alleged, was induced by these representations to enter into the agreement and thereby suffered damage. By the defence which was filed on 17 December 1984 the respondents admit that the third named respondent as the servant or agent of the second named respondent represented to the applicant that the turnover of the business was approximately $500,000 per annum but deny that that representation was false. Otherwise they deny that any of the representations were made or were false. They also deny that the agreement to purchase the business was made with the first respondent and that the business had been carried on by the farst respondent. The principle issues are whether the representation concerning the turnover was false, whether, if it was false, the second or third respondents in making the representations were acting on behalf of the first respondent and whether the other representations were made and if so whether they were made by the second or third respondents on behalf of the first respondent and were false. By notice of motion dated 22 March 1985 the respondent sought an order that the applicant give security for costs of their costs in case it be ordered to pay to the respondents the costs of their defence. The application is made pursuant to s.56(1) of the Federal Court of Australia Act (1976), 0.28 r.3(1) of the Federal Court Rules, and s.533 of the Companies (Victoria) Code (the Code) as made applicable by s.79 of the Judiciary Act 1903. Section 56(1) of the Federal Court of Australia Act (1976) confers on the Court or ona Judge jurisdiction to order a plaintiff in a proceeding to give security for payment of costs that may be awarded against them. Order 28 r.3(1) provides that in certain circumstances, including where it appears that an applicant is not suing for his own benefit but for the benefit of some other person and there 1s reason to believe that the applicant will be unable to pay the costs of the respondent if ordered to do so, the court may order the applicant to give such security as the Court thinks fit for the costs of the respondent. Section 533(1) of the Code provides that where a corporation is plaintiff in any action and it appears by credible testimony that there 1s reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his defence, the Court having jurisdiction in the matter may require sufficient security to be given for those costs and stay all proceedings until such security is given. The discretion to make orders under s.S6 must be exercised judicially, but that 15s its only relevant limitation. Order 28 ~r.3 15 not intended to be an exhaustive statement of the cases in which an order for security for costs may be made. See Bell Wholesale Co. Pty. Limited v. Gates Export Corporation (1984) 52 ALR 176 at 178. Section 533 of the Code constitutes an alternative source of power in this Court to make orders for security for costs. The applicant has informed the Court that it acts as trustee of a unit trust called "The Ace Cleaning Unit Trust" established pursuant to a deed of trust dated 11 October 1982, The unit holders of all the units in the applicant are G&™M Phillips Nominees Pty. Ltd., the directors of which are George Phillips and his wife Maria Phillips, and Bilionis Nominees Pty. Ltd., the directors of which are Constantine Bilionis and his wife Carol Anne Bilionis. Each unit holder holds 100 units of $1.00 each, The directors of the applicant are George Phillips and Constantine Bilionis. According to paragraph 2 of the Memorandum of Association of the applicant, one of the objects for which the applicant 1s established is to undertake the office of and to act as trustee and to perform and discharge the duties and functions incidental thereto. The applicant also refers to the Trust deed which contains a provision that the applicant as Trustee shall be entitled to be indemnified out of the assets for the time being comprising the trust fund against liabilities incurred by the trustee in the exercise of any of the powers and discretions "invested" in the trustee. The investment powers include power in the trustee to enter into an agreement and to purchase and conduct a business. On behalf of the applicant George Phillips deposes, "THAT I crave leave to refer to the Trust Deed and to the provisions thereof and in particular to Clause 50 thereof in which provision is made that the Trustee of the Trust shall be entitled to be indemnified out of the assets for the time being comprising the Trust fund against liabilities incurred by the Trustee in the exercise of any of the powers and discretions invested in the Trustee. I further crave leave to refer to the investment powers of the Trust Deed set forth in Clause 43 of the Deed wherein power 1s given to the Trustee to enter into an Agreement and purchase and conduct a business. Pursuant to Clause 50 the Applicant gives an undertaking that, in the event of any Order being made against it in this Application, 1t will seek indemnity pursuant to Clause 50 of the Trust Deed. Further, the assets of the Trust and forming the Trust fund are avallable to meet any Order that may be made against the Applicant and I am duly authorised by each ot the unit holders to undertake that all the assets comprising of the Trust fund shall be made available to meet any Order made against the Applicant. The applicant does have assets in its hands. The major tangible asset is a one half interest in the business of a coffee lounge and cafeteria carried on in leased premises in the Doncaster Shoppingtown in Victoria. It is also entitled to the above mentioned right of indemnity. The business at Doncaster was purchased in July 1983 for the sum of $420,000. It is said by the directors to be presently valued at not less than $600,000. The only liability relating to that business is said to be an amount of approximately $110,000 outstanding on a mortgage to the National Bank of Australia Limited. This liability is fully secured over real estate not owned by the applicant. It is said also, that the applicant is at present in the course of negotiation for the purchase of a 60% interest in a large coffee lounge cafeteria business being conducted in the City of Melbourne, 1n respect of which, the applicant will he involved in an outlay of 60% of $800,000 and that, in respect of this transaction, no charge or other security will he granted over any of the assets of the applicant or of the assets forming the trust fund, or over the proposed business. The applicant contends, that having regard to the disclosed assets of the applicant and the aindemnity the respondents do not show, by credible testimony, that there is reason to believe that the applicant will be unable to pay the costs of the defendant 1f successful in its defence, within the meaning of s.533(1) of the Code, or that there is reason to believe that the applicant will be unable to pay the costs of the respondents if ordered to do so within the meaning of 0.28 r.3(1)(b). But, as a matter of substance, so far as the applicant has any entitlement to the tangible assets referred to, it is an entitlement only as Trustee, the beneficial owner thereof being the Trust. Because the beneficial ownership of the assets, so far as they are in the form of tangible assets, 15 in the trust, any attempt to execute against those assets and to realize on the right title and interest of the applicant company therein would be an unproductive exercise. The respondents are now and have at all material times been aware that the applicant carries on business as a trustee for the Ace Cleaning Unit Trust. With respect to the indemnity, unless the applicant itself co-operated, or the applicant company were wound up, benefit could not be obtained by the respondents thereunder. No direct process of execution would be available for the purpose of obtaining that benefit. Further, the extent to which the indemnity would in any event be productive would depend upon the state of the finances of the trust. And the possibility of some defence cannot be ignored. Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the Court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability. It was pointed out in Bell's Case (supra) at p.179 that +». a Court 1s 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 1s successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means." It was also said: "It is not for the party seeking security to raise the matter; 1t 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 iumpecuniosity of those whom the litigation will benefit and to prove the necessary facts." The situation here is rather the reverse. There 1s no submission in this case that an order for security for costs will frustrate the litigation. But because of the fiduciary -Ccapacity of the applicant 1t is in a position somewhat similar to that of a company resisting an order for security in the circumstances obtaining in Bell's Case (supra). Perhaps with this 1n mind the directors of the applicant made an offer to the respondents 1n March 1985 to provide unconditional guarantees by deed to meet any costs that might be awarded against the applicant and to include the undertaking on behalf of the applicant set forth above in the deposition of Mr. Phillips. The respondents refused to accept such guarantee or undertaking by way of security. The reasonableness of this refusal is in question. There is evidence that there are resources available to the Ace Cleaning Unit Trust. But there is no reasonably informative statement as to what these resources are or what liabilities have been or may be acquired by the Trust in respect of the acquisition of those resources. The sums involved are quite substantial. That obligations similarly substantial have been incurred, or in all probabilitiy incurred, by or on behalf of the Trust for the purposes of completing the negotiations for the new business, or indeed for sustaining the beneficial interest of the Trust in the business at Doncaster, is compatible with the evidence. The actual financial situation of the Trust is left unstated. It has been pointed out by Mr. Jolson, for the respondents, that the applicant company as Trustee for the Trust has a lien on trust property in its hands in respect of liabilities incurred by it in carrying out the terms of the Trust. And there 1s good reason to think that the value of the business at Doncaster over and above $110,000 owing in respect of it 1s substantial. While the legal interest in the lease and business of the Doncaster business remains in the applicant it would be in a position, at all material times, to exercise its rights as lienee should an arder be made against it for costs in these proceedings. In such circumstances, such a lien would, I think. be reasonably accessible to the respondents for the purpose of obtaining satisfaction of an order for costs. In the absence of a restraint imposed upon it by the Court, the applicant as trustee for the Trust might at any time transfer the legal interest 1n the lease and business at Doncaster to the Trust. But unless it does so the respondents would appear to he sufficiently protected in respect of any order for costs which they may possibly obtain. In these circumstances 1t seems appropriate that the current 10. situation could be resolved if the company and the directors undertake that pending further order neither the lease nor the business at Doncaster would be disposed of by the applicant. It was urged by Mr. North, for the applicant, that on whatever basis an order for security for costs was made there was ultimately a question involving the exercise of discretion by the Court. He urged that in this case the court should exercise its discretion against the respondents. It was contended that the respondents have been guilty of delay in seeking security, that they acted unreasonably in refusing to accept the director Mr. Phillips' offer of a guarantee and that in view of the availability of the indemnity it has always been clear that the risk of non-recovery of their costs by the respondents, if any, are ordered to be paid by the applicant, 18s so small that it could be disregarded. It was also contended that on the information before the Court it is reasonable to believe that the prospects of success by the applicant in the litigation, not only against the second and third respondents but also against the first respondent, are good. Of course the likely result of the litigation cannot be assessed onthe information so far available, but I would accept that there are indications supportive of the applicant's contention. However, 1t is my view that where, as here, there is no question of the litigation being frustrated by an order for security for costs, delay in seeking such an order 1s of little significance to the exercise of the Court's discretion. ll. I think it was a matter for the respondents to decide whether they would accept the offer of the directors' guarantees. It may well be that the directors were financially well equipped to give the guarantee. But the applicant did not provide appropriate evidence of that, and in any event I. think the respondents were entitled to take the view that they were entitled to look to the applicant itself to support its litigation and were not required to make a judgment as to the adequacy of a personal guarantee or the efficacy of the applicant's undertaking toa enforce the indemnity. Also, having regard to what I think are the real issues on this motion I feel that the current indications as to the applicant's prospects of success cannot be of material significance. It 1s my view that in the exercise of its discretion the court should have regard to the capacity in which the applicant carries out its business activities and holds such property as comes to its hands, namely, as a trustee for the Ace Cleaning Unit Trust. It 1s a company which in pursuance of its duty as trustee may at any time transfer such property to the unit holders of the Trust. The method by which the parties concerned construct the entities by which their interests are pursued has, no doubt, positive benefits for them, and is a matter for decision by them. But the Trust structure does involve that persons dealing with a company playing the part of trustee in the adopted business structure, necessarily deal with an entity, 12. the beneficial ownership of all property in whose hands is in another entity to whom the legal estate therein may be passed at any time. The accountability of such a company for amounts for which it may be legally liable is inherently less stable and reliable than would be the case 1f it were in business on 1ts own behalf. For reasons mentioned above a creditor with a judgment against the applicant should not normally be restricted to reliance on the applicant's indemnity under the trust deed. Accordingly, but for the giving of the undertaking referred to I would have ordered that the applicant give security for costs. I have concluded that an applicant being a_ trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for ait will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs. In this case I considered the applicant might do this by giving an undertaking such as I have required. It ensures that the applicant will be in actual possession of property and have legal entitlements in respect thereof sufficient in value to provide for the applicant's liability and thus providing a sufficient measure of practical protection of the interests of the respondents. (a) (b) Having regard to the foregoing: I have received undertakings from the company and the directors that, subject to further order, the capital assets in the hands of the applicant will not be disposed of by it, and thereupon, have made no order for further security for costs; and I order that the respondents' costs of and incidental to this motion be paid by the applicant. I certify that this and the fucles (ti) preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Smithers. Foss Nod {: ot ic Associate Dated: LE en 16 CATCITIWORDS Trade Practices - Security for costs - Contract arrangement or understanding in restraint of trade - Contract arrangemens er understanding containing an exclusionary provision - Giving effect to the same - Amcndment to Staterent of Claim ~ Amending legislation effect on cause of action in subsisting proceedings Trade Practices Act 1974 (Comm) ss. 4, 4D, 45, &C and €2 Federal Court of Australia Act 1976 (Comm) s.56 High Court Rules 029R1 Tradestock Pty. Lti. v. Z.N.U. (Management) Pty. Ltd, & Ors. (No.2) VG@ No. 26 of 1977 Coram: Smithers J. Date: 27th January 1978. Melbourne.