UDGMENT No. 2 728_. THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ©) -V. 'No. G 227 of 1987 ) GENERAL DIVISION ) BETWEEN: - {2} S Applicants and D and D TOLHURST LTD. Respondent "er COURT: | NORTHROP J. NO r ray CN DATE : 11 MARCH 1988 ? aad Me WS » SeNY \ PLACE: § MELBOURNE yas en | x iS aren ' ! +, Oo, "in ' BN on c , Oy Ox . _ ° ONS FOR Set This is the return of a motion in which the respondent is seeking an order that the applicants provide security for costs of the action which has been brought by them in this Court against the respondent. The history of this matter, as appearing from the material before the Court, can be stated briefly. Early in the year 1987, the applicants entered into an arrangement with the respondent, a sharebroker, whereby a schene was arranged for the respondent to advise the applicants on the purchase of shares to be bought and sold 2. under a scheme whereby the obligation to pay did not arise, apparently, until sometime after purchase, by which time the value of those shares would have increased and could be sold at a higher price thereby allowing the applicants to pay the cost from the proceeds of the sale thus leaving a profit with the applicants. Those profits, in theory, would be sufficient to pay the commission charged by the respondent on the arrangements. Each of the applicants is a company with a 6§2 paid-up capital only and each has nd assets from which it could pay any costs which each might be obliged to pay to the respondent. For some reason or other the scheme did not operate and eventually losses were made and the applicants owed a large sum of money to the respondent pursuant to the arrangements made between them. Pursuant to the provisions of the Companies Code, the respondent gave the required notice and then moved in the Supreme Court for orders that the applicants be wound up pursuant to the Companies Code. The proceedings in the Supreme Court were instituted in August 1987. Shortly after those proceedings were instituted, the applicants commenced these proceedings in the Federal Court seeking declarations that the conduct of the respondent was in contravention of s.52(1) of the Trade Practices Act 1974, and seeking damages under the Trade Practices Act. There are also claims based on breach of contract and for negligent advice. Eventually the matter in the Supreme Court came on for hearing but on 9 October 1987 those proceedings were stayed by consent of the parties to 3. enable the question of the liability of the applicants to be determined in these proceedings. As far as these proceedings are concerned they have progressed to the extent of a statement of claim, defence and cross-claim against the applicants and although there was mention of the need by the respondent to have security for costs made against the applicants from a fairly early stage, no action was taken by the respondent to seek such an order for security for costs until this motion was taken out on 29 February of this year. In the same motion the respondent is seeking an order that it have leave to join as cross~-respondents directors of the applicant companies and to make claims against those directors pursuant to the provisions of the Companies Code, and in particular, 5.556. On the face of it, this is a classic case where the Federal Court should make an order for security for costs based upon 556 of the Federal Court Act, the provisions of the Companies Code in Victoria and 0.28 of the Federal Court Rules. It is a case where the applicants are companies which have no assets, where the legal proceedings are going to be lengthy and expensive and it is a typical case where security for costs should be ordered. In opposition to the making of the order, counsel for the applicants have relied upon a number of arguments. First they argued that there has been a long delay in moving this Court for an order for security for costs. This is a 4. factor to be taken into account, but by itself is not conclusive because in appropriate cases security can be ordered even as late as just before the trial commences. Hut in the present case there is also the fact that the question of security had been raised early in the proceedings, and that the motion for the winding up of the applicant companies had been commenced in the Supreme Court when it should have been obvious that they had no assets, but nevertheless after proceedings had been commenced in this Court there was a consent order made that the motion for winding up be stayed pending the hearing of these proceedings here. TI see no reason why the Supreme Court could not have heard, on that motion, evidence and argument to support a contention that the Federal Court proceedings were not genuine, but were brought solely for the purposes of delaying the motion. The fact that the proceedings in the Federal Court are said to be not genuine was raised both by the affidavit in support of the motion and in the course of the hearing, but again in my opinion, this is something that could have been raised in the Supreme Court proceedings and also should have been raised at an early stage of these proceedings in the Federal Court. Counsel also relied upon the fact that on a true analysis the applicants in reality are seeking to defend claims brought against them by the respondent who was acting as an agent and gave them had advice which is part of their claim against the respondent, and in those circumstances rely 5. upon a principle, which is stated in Bowstead on Agency, 15th edition, at page 252. I quote: "No agent is entitled to reimbursement of expenses incurred by hin, nor to indemnity against losses or liabilities- (a) nveee (b) in consequence of his own negligence, default, insolvency, or breach of duty; Reference is also made to the fact that in reality what is being sought by the applicants is in the nature of a set-off against the claim by the respondent and in this regard counsel rely upon the provisions of 0.11 of the Federal Court Rules which enables this to be raised, as it were, by way of defence, and relies also upon the decision of Gowans J. in Edward Ward and Co. v. McDougall £19723 V.R.433, and of the Full Court of the Supreme Court of Victoria in Indrisie v General Credits Ltd. £19851 V.R.251. In reality, these cases illustrate the general principle enunciated and applied by the High Court in Willey v Synan (1935) 54 C.L.R.175 . Again this is similar to another principle which has been applied in many cases namely, where the person against whom an order for security for costs is being made claims that any incapacity, or lack of assets, to pay is caused by the conduct of the party claiming security is a circumstance the courts have had regard to as a factor against the ordering of security. In a different context, but in relation to an order for security for costs on an 6. appeal, I discussed that principle in the case of Beard v Prestige Baking Industries Pty Ltd (1980) 51 F.L.R.454, and that principle has been applied in subsequent cases. The facts of this case are slightly different but there is in existence a claim by the respondent against the applicants and on one view, and I do not express any final view on this at the moment, it can be argued that the applicants are in substance making their claim against the respondent by way of set-off against the respondent's claim and this is a factor which is relevant to take into account on the question of security for costs. This is made stronger by the fact that the respondent has cross-claimed in these proceedings against the applicants and if an order for security for costs is made against the applicants and the action is stayed in the event that security is not given, presumably the respondent could continue with its action against the applicants. In those circumstances there is a degree of unfairness arising from the procedural matters which would flow from an order that security for costs be given. It is also to be remembered that in the motion before the Court there is also a claim being made for an order that directors of the applicants be made cross-respondents in respect of a claim brought by the respondent based upon 5.556 of the Companies Code. From what has been put to me, I see no reason why the respondent could 7. not take this action in the Supreme Court, but at the same time, having regard to the existence of the application in this court and the cross-claim against the applicants, it would be far more desirable for the whole of these actions to be heard by the one court. In these circumstances, it seems to me that there should be an order made that the respondent have leave to cross-claim against those persons and if that is done it is a further reason why, in my opinion, there should be no order for security for costs. If such an order were made and security not given, one would have a one-sided t approach to the whole matter. This is a case where, having regard to the delay in the moving for security for costs, particularly having regard to the proceedings in the Supreme Court, the nature of the proceedings in this Court and the position of the applicants in relation to their claim that they were, in substance, shelf companies formed as part of the scheme entered into with the respondent for the purpose of making profits from the purchase and sale of shares, it is not a case where the applicants had had no previous experience of the respondent and vice versa, and the need that all issues between the parties be heard together, are to be weighed against the prima facie case that this is one where security for costs would normally be made. In the exercise of discretion I would order that there be no order for security for costs. At the same time I order that the respondent have leave to add Periklis Ginis and Philip Felman as cross-respondents in the action, pursuant to the form of the statement of claim annexed to the affidavit of Mr Newman filed in support of the motion. Aik SE es I certify that this and the Seven ('7> preceding pages are a trae copy of the Reasons for Judgment herein of the Honourable Mr. Justics . 11. Northrop } Dated: 1) Manh 1988, | ce SO ee