CATCHWORDS PRACTICE & PROCEDURE - Security for costs - Alternatively stay sought till costs of prior proceeding paid - Nature of Court's discretion ~ Circumstances in which security and stay refused. Federal Court of Australia Act 1976, s.56 Companies (New South Wales) Code, s.533 Federal Court Rules, Order 35, Rule 6(2) Bell Wholesale Co. Pty. Ltd. v. Gates Export Corporation (1984) 2 F.C.R. Sent _v. Jet Corporation of Australia Pty. Ltd. (1984) 2 F.C.R. Harpur v. Ariadne Australia Ltd. (No. 2) [1984] 8 A.C.L.R. 835 Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd. [1973] 1 Q.B. Spiel _v. Commodity Brokers Australia Pty. Ltd. (in Lig.) [1983] 8 A.C.L.R. 410 Rabvila Pty. Ltd. v. Reymor Investments Pty. Ltd., Pincus J., unreported, 16 June 1986 — noted (1986) A.T.P.R. 53,043 Jet Corporation of Australia Pty. Ltd. v. Petres Pty. Ltd. (1983) 50 A.LeR. 722 Caruso Australia Pty. Ltd. v. Portec (Australia) Pty. Ltd. (1984) 1 F.C.R. 311 Lynnebry Pty. Ltd. v. Farquhar Enterprises Pty. Ltd. [1977] 3 A.C.L.R. 133 Thames Investment and Securities plc v. Benjamin [1984] 3 All E.R. 393 Rice v. Henley (1915) 32 W.N.(NSW) 54 CAMERON'S UNIT SERVICES PTY LIMITED & DONALD ALISTAIR CAMERON -V- KEVIN R. WHELPTON & ASSOCIATES (AUST.) PTY LIMITED & KEVIN RICHARD WHELPTON NSW G.345 of 1986 Burchett J. Sydney 24 September 1986 e IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION No. 345 of 1986 ee eee BETWEEN: CAMERON'S UNIT SERVICES PTY LIMITED and DONALD ALISTAIR CAMERON Applicants AND KEVIN R. WHELPION & ASSOCIATES (AUST.) PTY LIMITED and KEVIN RICHARD WHELPTON Respondents MINUTE OF ORDER OF THE COURT Judge Making Orders: Burchett J. Date of Orders: 24 September 1986 Where Made: Sydney THE COURT ORDERS THAT: (1) (2) (3) NOTE: The application for security for costs be dismissed. The application for a stay of proceedings until payment of the respondents' costs in proceedings G.276 of 1984 be dismissed. The respondents, Kevin R. Whelpton & Associates (Aust.) Pty Limited and Kevin Richard Whelpton, pay the applicants" costs of the motion. Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. 345 of 1986 GENERAL DIVISION BETWEEN: . CAMERON'S UNIT SERVICES PTY LIMITED and DONALD ALISTAIR CAMERON Applicants KEVIN R. WHELPTON & ASSOCIATES (AUST.) PTY LIMITED and KEVIN RICHARD WHELPTON Respondents REASONS FOR JUDGMENT BURCHETT J. By an Application and Statement of Claim filed 18 August 1986 the applicants seek relief against the respondents in respect of alleged contraventions of ss.52 and 53 of the Trade Practices Act 1974, in respect of alleged breaches of contract and fraudulent misrepresentations, and upon other causes of action. The alleged misrepresentations involve a total sum of about $85,000-00, and there is a claim for damages for consequential business losses amounting to the destruction, substantially, of what is said to have been a very flourishing business. It is clear that if the applicants were entirely 2. successful the amount involved would be very large, though the respondents, whilst disputing liability, claim that even if the applicants were successful the damages would have to be reduced greatly, and arguably to vanishing point, on the basis that illegalities allegedly committed by the applicants would in any fa event have led to the collapse of the business. The respondents have filed a Notice of Motion in which they seek orders that: "lL. These proceedings be stayed until the applicants pay the respondents' costs in proceedings No. G276 of 1984 commenced in this Court by the applicants. 2. The first named applicant provide such security for the costs of the respondents as this Court may determine. 3. The proceedings herein be stayed until such security for costs has been provided." It is necessary to recite something of the history of the matter. Proceedings raising substantially the same allegations as those now made were first launched by the applicants on 8 August 1984. Shortly afterwards, a number of criminal charges were laid against both Mr. Whelpton and Mr. Cameron. The respondents then moved the Court for a stay on the basis that a hearing would prejudice Mr. Whelpton in his defence of the criminal proceedings. That motion was opposed by the applicants notwithstanding Mr. Cameron's position as a defendant facing similar charges. On 19 December 1984 Wilcox J. refused to 3. stay the civil proceedings (Cameron's Unit Services Pty Ltd v. Whelpton & Associates Pty Ltd 59 A.L.R. 754). The respondents (applicants in the motion) were ordered to pay the applicants' costs of the motion. I do not know whether those costs have ever been taxed or paid. The ironic sequel was that the applicants found themselves unable, despite their success upon the Motion, to continue the proceedings for lack of funds. They sought a grant of legal aid, but this was refused by the Australian Legal Aid Office, although that Office suggested that possibly legal aid might be obtained, pursuant to s.170 of the Trade Practices Act 1974, through the Community Affairs Division of the Attorney-General's Department. (I interpolate the comment that gross delays, productive of hardship and injustice, not only for an applicant for legal aid but also for other parties, can be caused when one Government body, charged with the administration of legal aid, takes the course of deferring an applicant's hopes, rather than dealing fully with his application, by sending him to some other Government body. If the Australian Legal Aid Office thought the case one more appropriate to be dealt with under s.170 of the Trade Practices Act than under the general provisions for legal aid, I am unable to understand why it could not itself have raised that question with the Attorney-General's Department in the course of its own consideration of the application made to it. Both parties in this case have suffered from its failure to do so.) The applicants being without funds, and at that stage without a grant of legal aid, Wilcox J. on 18 July 1985 acceded to the respondents' submission that the application should be dismissed for want of prosecution. He added to the order however: "Such dismissal to be without prejudice to any rights of the applicants to bring fresh proceedings or to claim the same relief in fresh proceedings." He ordered the applicants to pay the respondents' costs of the application and the cross-claim, but directed that this order was not to affect the order he had made on 19 December 1984 in relation to the motion for a stay pending the prosecution. Ultimately, the applicants' application for legal aid pursuant to s.170(1) of the Trade Practices Act was successful. That provision (inter alia) permits a person who proposes to institute a proceeding before the Court under Part VI of that Act to "apply to the Attorney-General for a grant of assistance under this section in respect of the proceeding." By sub-s.(2): "Where an application is made by a person under sub-section (1), the Attorney-General, or an officer of the Australian Public Service authorized in writing by the Attorney-General, may, if he is satisfied that it would involve hardship to that person to refuse the application and that, in all the circumstances, it is reasonable that the application should be granted, authorize the -- grant by the Commonwealth to the person, either unconditionally or subject to such 5. conditions as the Attorney~General or officer determines, of such legal or financial assistance in relation to the proceeding as the Attorney-General or officer determines." Upon receiving the grant of financial assistance for the purpose of the proceeding, the applicants took out the application and statement of claim which are the subject of the motion now before me. The respondents without delay took out their motion for security and for a stay. It is common ground that the applicant company is insolvent, that Mr. Cameron is the only shareholder with a substantial interest in any proceeds of the litigation, and that he also is insolvent. He has been committed for trial upon the criminal charges referred to earlier, though no date has yet been set for their hearing, and his counsel informed me the submission of a no bill application is under consideration. I do not of course know whether it would have any substance or not. The charges against Mr. Whelpton mentioned in the reported judgment of Wilcox J., to which I referred earlier in these reasons, have been withdrawn. The respondents point out that s.170 of the Trade Practices Act places no obligation on the Attorney~General to provide for their costs if they are successful in defending the matter. They have already incurred very substantial costs in connection with the earlier proceeding and have lodged a-bill-for taxation in a total sum of $31,230-55. The bill, however, is not 6. due to be taxed till some time in November, so that one can only speculate at what figure it is likely ultimately to be taxed. Counsel for the respondents, in opening the matter, submitted that his strongest case was under s.533(1) of the Companies (New South Wales) Code, so I turn to that first. It is in the following terms: "Where a corporation 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 corporation 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." It is clear that by virtue of s.79 of the Judiciary Act 1903 this provision of the Companies (New South Wales) Code is made applicable in the present proceeding: Bell Wholesale Co. Pty. Ltd. v. Gates Export Corporation (1984) 2 F.C.R. 1; Sent v. Jet Corporation of Australia Pty. Ltd. (1984) 2 F.C.R. 201. In the former case the Full Court grounded the power to order an applicant company to provide security alternatively upon s.56 of the Federal Court of Australia Act 1976 and upon the applicable Companies Code. In Ford, Principles of Company Law, 4th ed., page 71 the learned author says: "The mischief at which s.533 is directed is said to be the possibility that the 7. controllers of an impecunious company would otherwise be able to expose a defendant to liability for costs without exposing their own assets: Harpur v. Ariadne Australia Ltd. (No. 2) [1984] 8 A.C.L.R. 835 at 842. [In that case the view was taken that s.533 1s not simply an isolated provision but a statement of the rule applicable to companies, to be applied as one factor by the court in exercise of a jurisdiction inherent in the court to order, in its discretion, security for costs in certain circumstances." It has been held that the discretion conferred by the section can be regarded as one "which should be exercised merely with a predisposition in favour of the defendant party": Buckley v. Bennell Design and Constructions Pty. Limited [1974] 1 A.C.L.R. 301 at 305. More recent decisions have placed emphasis on the views of Lord Denning M.R. and Lawton L.J. in Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd. [1973] 1 Q.B. 609. In that case at 626 Lord Denning M.R. said: "Turning now to the words of the statute, the important word is 'may'. That gives the judge a discretion whether to order security or not. There is no burden one way or the other. It is a discretion to be exercised in all the circumstances of the case." At 628-9 Lawton L.J. said: "I agree with Lord Denning M.R. that the effect of section 447 is that once it is established by credible evidence that there is reason to believe that the plaintiff company will be unable to pay the costs of the defendants if they are successful in their defence, the court has a discretion, and that discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a straitjacket by 8. considerations of burden of proof. It is a discretion which the court will exercise having regard to all the circumstances of the case." These views have been accepted as correct, in the Ariadne Case (supra at 839-840) by the Full Cqurt of the Supreme Court of Queensland, and also by the Full Court of the Supreme Court of South Australia in Spiel v. Commodity Brokers Australia Pty. Ltd. (in Lig.) [1983] 8 A.C.L.R. 410 at 414-5, where it was pointed out that the same approach had been adopted in New Zealand. I think, so far as I am concerned, the question is concluded in favour of Lord Denning's view by the decision of the Full Court of this Court in the Bell Wholesale Case (supra, at 4) where the joint judgment states: "But the court's discretion is unfettered; each case must depend on its own circumstances...". In the present case there is no difficulty in accepting that "there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his defence", But that only means the Court is called upon to exercise its discretion. I am quite satisfied that, if an order for security were made, the likely effect would be to stifle the action. The case is therefore to be distinguished from Drumdurno Pty. Ltd. v. Braham (1982) 42 A.L.R. 563, a decision relied on by the respondents, where as appears -at p.571 of the report there 9. was no evidence of inability of the applicant companies to provide the security sought. Neither the company nor its interested shareholder, in the present matter, could give security. The only other persons who could fall within the description of "those who stand behind it and who will benefit from the litigation if it is successful" (see the Bell Wholesale Case at p.4) are the company's creditors. If one were to assume that the bill of costs which has been lodged will be allowed at approximately the figure brought in, and if one were to add to it the amount of a District Court judgment which has been recovered in respect of unpaid premiums, the company's major creditor by far would be the corporate respondent. For the rest, most of the creditors are creditors in relatively small amounts, and I do not think there is any practical prospect of security being provided by the creditors (cf. the position of the discretionary beneficiaries in Rabvila Pty. Ltd. v. Reymor Investments Pty. Ltd. (Pincus J., unreported, 16 June 1986 — noted (1986) A.T.P.R. 53,043)). The situation is quite different from that in the Jet Corporation Case where a large creditor was, as Smithers J. said, dominus litis. See his Honour's comments at the foot of p.214, and at p.217. But, as is emphasised in the Bell Wholesale Case at p-.-4, these are by no means the only relevant factors. It is necessary to look at all the circumstances. Much of the argument presented to me concentrated upon the issue of the strength or otherwise of the applicants' case. For the respondents, it was 10. submitted that the present application had only been made after winding up proceedings had been instituted by the respondents against the corporate applicant. It was contended that there was no substance in the claim, that Mr. Cameron was simply seeking to shift the blame for his own breaches of fiduciary duty, and that the claim for damages for "the loss of the applicants' business lacked reality since that business would in any event have been lost by reason of other breaches of fiduciary duty than those directly in issue in the proceedings. I do not accept the contention that the proceedings were commenced only in reaction to the winding up proceedings in the Supreme Court. It was made perfectly clear at the time of the order of Wilcox J. that the applicants proposed to pursue the obtaining of financial assistance under s.170 of the Trade Practices Act. Nor am I persuaded that the claim is other than bona fide. Counsel for the applicants was able to point to documents which appear to provide some prima facie support to the applicants' case. I hasten to add that I am not attempting to make findings in the case, which both sides agreed will ultimately depend in great measure upon the oral evidence of Mr. Cameron and Mz. Whelpton respectively. But, having regard to the submissions made, it is necessary for the purpose of the present motion to consider the strengths of the respective cases so far as they are revealed by the evidence before me. An examination in some detail was made by Pincus J. in Rabvila Pty. Ltd. v. Reymor Investments Pty. Ltd. (supra), and the Court has frequently attempted such a task. ll. The relevant circumstances in the present matter may be summarised as follows. The corporate applicant was the vehicle through which Mr. Cameron provided management services for a very large number of unit buildings. Insurance was required by the unit holders, and an agreement was made between the corporate applicant and the corporate respondent, which was controlled by Mr. Whelpton, under which the corporate respondent acted as insurance broker to arrange insurance for the units. Mr. Cameron collected from the unit holders their respective contributions towards the insurance premiums, and paid to the corporate respondent lump sum amounts upon invoices rendered to him by the corporate respondent. The respondents were supplied with (or obtained) letterheads bearing the name of the _ corporate applicant, upon which they made out invoices which showed "premium payable", These invoices were then given to the applicants and sent out by them. So much seems to be common ground. It is also common ground that in very many cases the amount shown against the words on the invoices "premium payable" was false. It was in fact loaded by about 10% on average above the amount which was the true premium charged by the insurance company. The dispute is as to how this came about. The applicants allege that the broker was retained upon a normal brokerage contract, subject only to the qualification that the broker agreed to share his commission of 20% equally with the applicants, whose half share (10%) was to be deducted from amounts paid by them to-the broker. Mr. Cameron claims to have 12. known nothing of the manipulations of the premium figures, which form the basis of the applicants' case. The respondents' case is that there was no agreement to share the commission at all, that the commission was in fact 25%, and that there was a special agreement varying the normal brokerage arrangements under which it was agreed that a somewhat variable amount, approximating 10% on the average, would be added to each premium, but would be deducted by the applicants when forwarding the amounts collected to the broker. It is obvious that each of the versions of the arrangement could involve a secret commission being taken by the applicants. However Mr. Cameron contends that his clients were aware that he was receiving a share of the commission, while Mr. Whelpton contends that he understood Mr. Cameron had the consent of his clients to his obtaining the additional loading involved in his version of the arrangement. There is a further complication which is relevant to the criminal charges laid against Mr. Cameron. It is alleged that he secretly invested the amounts received from unit holders prior to paying Mr. Whelpton, and kept for himself the interest paid on those investments. The respondents' counsel levelled some criticism at Mr. Cameron's failure to set out in his affidavit in detail his version of the conversation or conversations in which the 13. original arrangement was reached between the parties. The affidavit is less than ideal, but I think there is force in the answer made by counsel for the applicants that their case does not depend upon the positive terms of the agreement, but on the simple negative that nothing was said about a loading on the premium, and on the acknowledged fact that the documents falsely stating the amount of the premium payable were prepared by Mr. Whelpton or in his office. The applicants' counsel also drew my attention to certain correspondence which passed between the parties at about the time when a query was first raised concerning the amount of the premiums; counsel submitted that Mr. Whelpton's letters in response to the query provided objective support for the applicants' case in two ways. In the first place, they show that a refund was sent in respect of the excess over the proper amount of a particular premium. It was pointed out that, according to Mr. Whelpton, the excess was the subject of an express oral term of the arrangement, sought by Mr. Cameron and for his benefit, and that the amount it represented was alleged to have been deducted by Mr. Cameron from the moneys he had remitted to Mr. Whelpton. In those circumstances, it was exceedingly odd that Mr. Whelpton made the refund, and even more so that he made it without the slightest hint that he was shouldering Mr. Cameron's burden. In the second place, counsel contended, the letters put forward explanations of such obscurity as to suggest that a smoke-screen was their real intention. The terms of the letters do lend support to the argument, particularly as; on Mz. Whelpton's version, a curt and unqualified response was clearly called for. Chet 14. On the face of the material before me, the matter does appear to raise disquieting questions, which only a full hearing can answer, concerning the conduct of both parties. On the one hand, there are the questions about the discharge of Mr. Cameron's fiduciary obligations, and on the other there is Mr. Whelpton's part in the preparation of the false invoices, overshadowed by the grave allegations Mr. Cameron makes. These questions involve the interests of a very large number of unit holders who, on any view, were defrauded by some person or persons, and the general interest in the integrity of fiduciaries and brokers. The public interest is a relevant factor upon an application for security for costs: Jet Corporation of Australia Pty. Ltd. v. Petres Pty. Ltd. (1983) 50 A.L.R. 722 at 733; and on appeal, sub nom. Sent v. Jet Corporation of Australia Pty. Ltd. (supra, at 217); Caruso Australia Pty. Ltd. v. Portec (Australia) Pty. Ltd. (1984) 1 F.C.R. 311 at 314. In the Jet Corporation Case Northrop J., at first instance, referred to the public nature of the standards set by the Trade Practices Act, which were relied on in the suit, and commented: "To some extent the existence of that public interest transcends the private interests of the parties to these proceedings and at this stage weighs in the balance against making the orders sought by the respondents." On appeal, the applicability of this view upon the facts was rejected, but not the validity of the proposition of law. 15. The applicants also rely on the contention that their financial difficulties stemmed from the very transactions the subject of the proceedings. In Lynnebry Pty. Ltd. v. Farquhar Enterprises Pty. Ltd. [1977] 3 A.C.L.R. 133 at 136-7 Meares J., who referred to the Sir Lindsay Parkinson Case, said that such a consideration was "a most relevant circumstance... and one which warrants the application being refused." In the end, having considered all the circumstances and in particular the matters relied upon by the parties, the Court must exercise, whether under the Companies Code provision or under s.56 of the Federal Court of Australia Act, a broad discretion which is not to be regarded as limited by any judicial gloss, although the cases afford guidance as to the relevant factors: Bell Wholesale Case supra; Chester & Fein Property Developments Pty. Ltd. v. Candam Investments Pty. Ltd. (1985) 61 A.L.R. 729. In exercising that discretion, I think the language adopted by the Full Court of the Supreme Court of South Australia in Spiel v. Commodity Brokers (supra, at 415-6), is applicable: "Each side has an arguable case... The fact was that such an order (i.e. one requiring the provision of security) would have produced victory for the appellant without a contest. The respondent would have been prevented from proceeding with an arguable case legitimately instituted. The hardship to creditors produced by such a course would, in my opinion, far outweigh the hardship-which possible inability to recover costs may cause the 16. appellant." (In the present case, of course, the hardship which is most relevant is the hardship to the applicants themselves.) I think it is also relevant that the individual responsible for this litigation, Mr. Cameron, is not sheltering behind a corporate shield in order to protect some assets of his own from liability to meet a costs order. In the Ariadne Case (supra, at 842) the Full Court of the Supreme Court of Queensland made it clear that in such a case the means of the individual concerned are "not really relevant". What is relevant is that the company is not a stalking horse to enable someone else to evade personal responsibility. If he accepts responsibility, an impecunious natural person is entitled to rely on the general rule that poverty is no bar to a litigant: Barton v. Minister for Foreign Affairs (1984) 54 A.L.R. 586 at 592. In all the circumstances, and without attributing decisive weight to any one of the factors mentioned in these reasons, I decline to make any order for security upon the basis of the provision in the Code or s.56 of the Federal Court of Australia Act. It is then necessary to consider the alternative submission that the proceeding should be stayed under Order 35 Rule 6(2) until the costs payable in respect of the earlier proceeding have been paid or secured. There is an initial difficulty that the costs have not yet been taxed and cannot be said actually to be payable. (See Thames Investment and Securities plc v. Benjamin [1984] 3 All E.R. 393.) However in my view the matter can be decided upon broader considerations. ? 17. In Rice v. Henley (1915) 32 W.N.(NSW) 54 Harvey J. stated the effect of the authorities as follows: "(I)t is a rule that when a plaintiff brings an action and fails, he shall not bring another action for the same cause and against the same defendant till he has paid the costs of the first action. Prima facie under these circumstances the second action is in the eyes of the Court vexatious. «.. But there is no absolute rule under which the Court exercises its discretion, and I do not wish to lay down any rule which may fetter the Court in the exercise of such discretion." Rice v. Henley was held to have correctly stated the law in Bowen ve Hickey (1958) 78 W.N.(NSW) 820. There the Full Court of the Supreme Court of New South Wales held that no distinction could fairly be drawn in a case where the first action had terminated, not by the return of a verdict for the defendant, but by a judgment of nonsuit. However it seems to me that a distinction can be fairly drawn between cases where an action is fought out to a conclusion in favour of the defendant and a case, such as the present, where the first proceeding never got to trial. Furthermore, I respectfully agree with the view expressed in the Thames Investment Case at 394 that "there is no rigid and inflexible rule that dictates what the court must do." In the present case, the applicants' inability to proceed without legal aid resulted in a dismissal for want of prosecution-without any evidence having been offered. At that stage, the applicants had obtained several adjournments in order . 18. to pursue their application for legal aid, and Wilcox J. expressed the view that "it would be an incorrect course to fix a hearing date in the present uncertain position." As I have already said, he expressly reserved the applicants' right to bring fresh proceedings. In this situation, no doubt the delays which had occurred, prior to Wilcox J. making his order dismissing the case for want of prosecution, would have increased somewhat the costs of the respondents. Nevertheless, had the grant of legal aid which was subsequently obtained been made at that time, there is no doubt the action would have proceeded, and it was not suggested in argument that any security would have been applied for or ordered. Indeed, it is likely any such application would have failed on the ground of delay: James v. ANZ Banking Group Ltd. (1986) A.T.P.R. 47202 at 47205. The fact is that, in the special circumstances of this case, the costs of the first action do not include the costs of a full hearing, while the costs of the present action must be substantially less than the costs of an initial proceeding because of the work in respect of statements, advices, interrogatories and other matters already done. In my view, the present proceeding is in no sense vexatious. Having regard to these considerations, and the matters earlier discussed in these reasons, I do not think it would be just to grant the stay which has been sought. u 19. I dismiss the motion and order the respondents, Kevin R. Whelpton & Associates (Aust) Pty. Limited and Kevin Richard Whelpton to pay the applicants' costs of the motion. I certify that this and the preceding eighteen (18) pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Burchett. pra Chie Associate Dated: 24 September, 1986.