CATCHWORDS SECURITY FOR COSTS - Application for security for costs - when applicant in proceedings is a corporation which will be unable to pay its costs - claim that corporation's impecuniosity caused by action of respondent Corporations Law, s 1335 No. NG 22 of 1995 AUSTEUR PTY LIMITED & ors v STOAT PTY LIMITED MOORE J SYDNEY 10 MARCH 1995 IN THE FEDERAL COURT OF AUSTRALIA) ) NEW SOUTH WALES DISTRICT REGISTRY) No. NG 22 of 1995 ) GENERAL DIVISION ) BETWEEN: AUSTEUR PTY LIMITED First Applicant PAUL SIMPSON Second Applicant MARINA PAATH Third Applicant XIN XIN LIU Fourth Applicant AND: STOAT PTY LIMITED Respondent JUDGE: Moore J PLACE: Sydney DATE: 10 March 1995 ORDER OF THE COURT THE COURT ORDERS THAT: 1. The application for security for costs is dismissed. 2. Costs of the application are reserved. NOTE: 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. NG 22 of 1995 ) GENERAL DIVISION ) BETWEEN: AUSTEUR PTY LIMITED First Applicant PAUL SIMPSON Second Applicant MARINA PAATH Third Applicant XIN XIN LIU Fourth Applicant AND: STOAT PTY LIMITED Respondent JUDGE: Moore J PLACE: Sydney DATE: 10 March 1995 REASONS FOR JUDGMENT An application has been filed under the Trade Practices Act 1974 seeking injunctive relief, damages, an order requiring the repayment of purchase moneys and an order setting aside certain security documents. The respondent has made an application under s1335 of the Corporations Law that the first applicant provide security costs in the sum of $42,500. The background to the proceedings is briefly this. The first applicant purchased a business from the respondent which involved the operation of a night club and restaurant. The respondent provided vendor finance which was secured. The second and third applicants are a married couple and are directors of the first applicant as is the fourth applicant. The business did not trade, it is alleged, as the applicants were led to believe it would by the respondent. Security for costs is sought under s1335 which directs attention to the capacity of a corporation to pay its costs. There must be credible evidence that the corporation will be unable to pay the respondent's costs. If there is, the Court has a discretion whether to order security be provided: see Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 73 ALR 289 at 297. In the present case the first applicant did not put in issue its capacity to pay any costs that might be awarded against it if its application failed. Indeed the following is said in an affidavit of the second applicant: "The First Applicant is not able to provide security for costs because the net receipts of the business acquired from the Respondent have not been as represented by the Respondent at the time of purchase of the business. The First Applicant has not been able to accumulate sufficient reserves and has had to borrow the moneys as deposed above. The level of receipts has also rendered the value of the business which is the principal asset of the First Applicant negligible." I take this to be an admission sufficient to satisfy the condition precedent to the operation of s1335: as to what is credible evidence: see Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1. The first applicant submits that I should exercise the discretion arising under s1335 in its favour because its impecuniosity arose from the actions of the respondent. This is one of the matters identified in Sydmar, supra, that might guide a court in exercise of the discretion: see also Feltafield Pty Limited v Heidelberg Graphic Equipment Ltd, 12 August 1994, unreported, Federal Court, Beazley J. It is also, however, one of the issues that arises in the proceedings generally. However the approach to this ground for refusing or order that security be provided was discussed by Ormiston J in Australian Quarry Holdings Pty Ltd v Dougherty (1993) 11 ACLC 52 at 53: "Before turning to that factor, other factors relied upon should be mentioned. First it is said that the plaintiff's impecuniosity has been caused or contributed to by the conduct of the defendants: cf. Sir Lindsay Parkinson Case ibid. It might be said that this factor raises similar difficulties to that relating to the prospects of success but in my opinion the factor is ordinarily taken into account upon the assumption that it would be unfair to deny the plaintiff the right to sue where its impecuniosity may be said to result from the matters complained of, without great regard to the plaintiff's chances of success. In other words it is usually related to a similar factor, that an order for security may stultify the litigation or be otherwise oppressive." I am satisfied there is material in the affidavits filed on behalf of the applicants that permits me to proceed on the basis that the first applicant's impecuniosity may be said to result from the matters complained of in its application for relief. Had the representations complained of concerning the trading position and viability of the business actually been made by the respondent and influenced the price the first applicant was prepared to pay for the business, they may have contributed to the failure of the business to prosper under the management of the applicants. The failure of the business to achieve the represented results may also have justified the considerable amounts spent by the applicants on the business in an attempt to revive its fortunes. It may ultimately emerge, of course, that the applicants do not establish these various elements of their case. However, I can proceed on the basis that there is material which suggests they may. In these proceedings the respondent has made a cross claim seeking to enforce securities it has in relation to the business. The evidence strongly suggests that the first applicant and those supporting it including the second, third and fourth applicants, would be unlikely to be able to raise the sum of $42,500 or anything like it to provide security. Thus to require the first applicant to provide security for costs, putting to one side the question of an order staying the proceedings in part, is likely to have the practical effect of stultifying the first applicant's capacity to prosecute its claims and probably the capacity of the second, third and fourth applicants as well if such resources as they have are directed to satisfying any order for security against the first applicant rather than prosecuting their claims. The respondent would be able to pursue its cross claim without being under a similar disability. I consider, in these circumstances, I should not exercise the discretionary power to order security for costs. I dismiss the application. I certify that this and the preceding four (4) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Moore. Associate: Date: 10 March 1995 Counsel for the Applicants: Mr C. Simpson Solicitor for the Applicants: Bush, Burke & Company Counsel for the Respondent: Mr J. Wilson Solicitor for the Respondent: Tribe, Conway & Co Date of hearing: 10 February 1995 Date of judgment: 10 March 1995