CATCHWORDS SECURITY FOR COSTS - variation of earlier order - circumstances that warrant variation - personal indemnities - cash security PRACTICE AND PROCEDURE - splitting issues - two separate hearings - filing additional evidence Trade Practices Act 1974 s 52 Federal Court Rules O 28 r 5(2) Cameron's Unit Services Pty Ltd & Anor v Kevin R. Whelpton Associates (Australia) Pty Ltd & Anor [1986] 13 FCR 46 R D Werner & Co Inc v Bailey Aluminium Products Pty Ltd [1988] 18 FCR 389 Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] 52 ALR 176 Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd and Ors [1992] 8 ASCR 405 Sanirise Pty Ltd v Darling Harbourside (Sydney) Pty Ltd (Davies J unreported 14 December 1994) Brimand v Honeysett Print Pty Ltd (McLelland J unreported 19 September 1988) SANIRISE PTY LTD v DARLING HARBOURSIDE (SYDNEY) PTY LTD NG 325 OF 1993 EINFELD J SYDNEY 15 DECEMBER 1995 IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 325 of 1993 GENERAL DIVISION ) Between: SANIRISE PTY LTD Applicant And: DARLING HARBOURSIDE (SYDNEY) PTY LTD & ANOR Respondent MINUTE OF ORDERS The Court orders that: 1. the applicant's notice of motion of 29 May 1995 be allowed in part. 2. the orders of Justice Davies of 14 December 1994 be vacated. 3. the applicant provide security for costs of the respondent in the sum of $40,000 of which $20,000 is payable on or before 15 January 1996, the remainder one month prior to the commencement of the hearing. 4. the applicant cause its directors Mr Nejad and Ms Kelly to provide written guarantees, to the satisfaction of a Registrar, indemnifying the applicant against any order for costs which may be made in favour of the respondent at the hearing. 5. the proceedings be stayed in the event these orders are not complied with. 6. the applicant's motion be otherwise dismissed. 7. costs of the motion be costs in the cause. The Court directs that: 8. the parties compile a set of agreed facts and questions for determination in a case stated format for presentation to the Court prior to the fixing of a date for hearing, with or without the assistance of a registrar. Note: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules. EINFELD J SYDNEY 15 DECEMBER 1995 IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 325 of 1993 GENERAL DIVISION ) Between: SANIRISE PTY LTD Applicant And: DARLING HARBOURSIDE (SYDNEY) PTY LTD & ANOR Respondent REASONS FOR JUDGMENT EINFELD J SYDNEY 15 DECEMBER 1995 Between 1988 and 1994 Sanirise Pty Ltd was the tenant of various retail shops selling tourist goods at the Darling Harbour complex owned and conducted by Darling Harbourside (Sydney) Pty Ltd. On 9 October 1994, Sanirise entered into a deed of company arrangement and on 13 October 1994 it was locked out of the shops for non payment of rent. The stock and other contents of the shops remained with the respondent pending arrangements being made between the administrator and Sanirise for their disposal. Much earlier, on 21 May 1993, Sanirise instituted proceedings in this Court seeking damages for alleged breaches by Darling Harbourside (the respondent) of section 52 of the Trade Practices Act. It also alleged breaches of certain terms of shop leases entered into with the respondent. The respondent filed a cross claim for possession of the premises, rent and money due, and damages. Sanirise is also conducting contemporaneous proceedings against the administrator. The proceedings have been interrupted on several occasions. The first hearing date of 31 August 1993 was vacated on the motion of Sanirise. At the callover in March 1994 the matter was relisted for hearing in March 1995. However, in December 1994 the respondent moved the Court for an order for security for costs which was granted by Justice Davies on 14 December 1994 such that at the beginning of February 1995 the proceedings were stayed due to the failure of Sanirise to comply with this order. By motion filed on 29 May 1995 Sanirise has sought a variation of the order for security for costs. In a bid to reduce costs Sanirise has also sought to separate the issues of liability and damages, a separate expedited hearing of the alleged overpayment of certain outgoings, and leave to file further evidence. At a directions hearing on 15 June 1995 the parties were ordered to file written submissions relating to all aspects of the motion, including any reasons why oral submissions should also be taken. The submissions and affidavit evidence have now all been filed and neither party has requested the scheduling of oral argument, so I proceed to give reasons for my decision on the motion. Separate hearing: liability and damages At first glance this proposal appears sensible, but in practice, this Court has found that separate hearings of this kind tend neither to reduce costs nor court time. The additional cost of preparing the case on damages is often negligible when compared to the cost of preparing for two distinct hearings, and much of the Court's time is wasted retracing steps. The issue of separate trials was considered, on motion by the applicant, and denied by Justice Wilcox on 14 July 1993. The matter has been twice listed for hearing of all the issues and presumably the respondent has prepared its case accordingly. Additionally, a cross claim has been instituted entangling the issues. Finally, splitting the issues at this time would seriously delay the trial, because congestion in the Court lists would mean that the second stage of the hearing, if it is required, could not be listed for many months after the delivery of any judgment regarding liability. In my opinion it would not be in the interests of justice to further delay the determination of the proceedings. Justice Davies may have had the same view in mind when he wrote in his judgment of 14 December at page 11: The matter has been on foot for some time. If it is to be heard at all, it should be heard in March 1995. It is undesirable that an order be made which may delay the trial. I will therefore not allow this aspect of the motion. Separate hearing: the outgoings claim Sanirise submitted that the question of the alleged overpayment of outgoings is a discrete issue that should be hived off and could be dealt with in the course of one day. The respondent argued that the issue is not discrete and that in any event, a determination in favour of Sanirise would not necessarily advance the case. This is because even a successful outcome for Sanirise would not result in a nett payment to it considering the cross claims which the respondent would seek to pursue. Thus any judgment in favour of Sanirise would be likely to be stayed pending the final determination of all the issues and sub-issues. I can see no advantage in limiting the trial to this initial issue. Even limiting security for costs to this separate hearing would be of no advantage if Sanirise could not continue the case after it was concluded because of an inability to put up security for the costs of litigating the remaining issues. Thus the interests of justice would not be served by severing this aspect of the case. If the case is to go to trial, it should go as a whole. I disallow this aspect of the motion. However, there would be merit in the parties narrowing the issues. I direct that the parties compile a set of agreed facts and questions for determination in a case stated format. If the parties cannot agree, then I will invite a registrar to mediate. Variation of security for costs Justice Davies ordered that Sanirise provide security for the costs of the respondent in the sum of $100,000 by 31 January 1995. Sanirise has now sought a variation of this order not, as it submitted, to avoid providing security, but to find an alternative means of protecting the respondent's position without frustrating the proceedings. Sanirise avowed that if the current security order is not varied, it is unlikely that the proceeds of sale of the remaining stock, fittings and fixtures will be sufficient both to satisfy the existing order and to fund the future proceedings, thereby aborting the proceedings. These goods having since been sold at auction and by private sale, that prediction has turned out to be correct. In the course of his judgment, Justice Davies accepted that neither Sanirise not its directors could provide security (at p 11). It was his Honour's view that: ..... the making of a reasonable order as to security would not be likely to stifle the litigation if it is litigation that ought to proceed. If the creditors who are owed over $2 million are not prepared to back the litigation with funds, I would draw the conclusion that it was not litigation which should be allowed to involve Darling Harbourside in a great deal of expense or to occupy 20 days of the Court's valuable hearing time. [Emphasis added]. Evidence submitted by the respondent disclosed that at a creditors' meeting in May 1995 one creditor personally offered to put up the security ordered (affidavit of Selwyn Black 22 June 1995 para 4.10). As this offer has apparently not been taken up, I can only assume that it was not or is not now a viable option. As the assertion of Sanirise through its lawyer that it cannot both meet the requirement for security and continue the proceedings has not been challenged, I must also proceed on the basis that it is sincere (see affidavit of Richard Willcock 30 May 1995 para 21). Affidavit evidence for Sanirise (ibid para 20) also demonstrates that rather than providing the ordered security, the creditors have resolved to seek from the Court a variation of the orders made earlier. This does not satisfy the test laid down in the joint judgment of Sheppard, Morling and Neaves JJ in Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] 52 ALR 176 at 179: In our opinion a court is 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 is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. However, Sanirise does not ask that the order be set aside. It offers security for costs in the sum of $40,000 in two stages, with personal indemnities offered by its directors. Traditionally, the courts look at a number of factors to determine when an order for security is appropriate, including the prospects of success of the litigation, the bona fides of the litigation, whether the applicant is impecunious, whether or not the impecuniosity is a result of the impugned actions of the respondent, whether an order for security might stifle the litigation, and whether the litigation involves a matter of public interest: see generally Colbran, Application for Security for Costs 10 Australian Bar Review 11; Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd and Ors [1992] 8 ASCR 405. However, there is no need in this case to delve into a consideration of the merits of ordering security for costs as this was the subject of the detailed judgment by Justice Davies only one year ago and the applicant did not appeal that decision. The present question is simply whether there are grounds to vary the decision. Order 28 rule 5(2) provides an overriding power to the Court to control its own proceedings and inter alia to vary its earlier orders regarding security for costs: R D Werner & Co Inc v Bailey Aluminium Products Pty Ltd [1988] 18 FCR 389 at 392. The respondent did not challenge the Court's discretion to set aside or vary any interlocutory order up to the final determination of the proceedings. However, they submitted that this is not a case where the Court should do so. The respondent submitted that this claim has been previously comprehensively litigated and determined, and therefore variation of the order made is contrary to the interests of justice. They relied on the views of McLelland J in Brimand v Honeysett Instant Print Pty Ltd (NSW Supreme Court, Equity Division, unreported, 19 September 1988) who explained: The private injustice and public undesirability of permitting the re-litigation of matters already litigated once is recognised in a number of principles of law... In the present case I am dealing with an interlocutory order of a substantive nature made after a contested hearing in contemplation that it would operate until the final disposition of the proceedings. In such a case the ordinary rule of practice is that an application to set aside, vary or discharge the order must be founded on a material change of circumstances since the original application was heard, or the discovery of new material which could not reasonably have been put before the court on the hearing of the original application... ..."A court must remain in control of its interlocutory orders. A further order will be appropriate whenever, inter alia, new facts come into existence or are discovered which render its enforcement unjust ... Of course the changed circumstances must be established by evidence. Adam P Brown Male Fashions, at 178, per Gibbs, CJ, Aickin, Wilson and Brennan JJ. (Emphasis added.) The respondent submitted that no new material has come into existence that would warrant the Court's consideration of a variation of the order. Alternatively, at the very least, the indemnities offered by the directors should reasonably have been offered at the time of the hearing of the application for security before Justice Davies. The respondent claimed that the offered personal indemnities do not add anything and are, in their words, illusory. Their argument was that the directors are themselves cross respondents to the first cross claim, being the claim brought by the respondent for unpaid rent and other monies, and are thereby already personally exposed to the costs of the proceedings. The respondent highlighted that the defences to its cross claim, being the primary claim of Sanirise, do not deny that the directors jointly and severally guaranteed that Sanirise would comply with the terms of the lease. The respondent reasoned that if Sanirise's claim is unsuccessful, its own claim against the directors of Sanirise will succeed and they will be susceptible to a costs order. Whilst this assertion is true of the costs of the cross claim, it is not the full story. Costs of pursuing the cross claim are only part of the total costs of preparing the defence. Costs of defending the primary application commenced by Sanirise could not be shunted home to its directors. As it stands, the directors may be liable for costs on the cross claim, but this does not equate to their being personally liable for all or most of the costs of the litigation if Sanirise, a corporation, fails as against the respondent. Additionally, the significance of the personal indemnities is that the directors bring themselves out from behind the corporate veil in the primary action. As I read the authorities referred to in Gentry Bros, that is what should be persuasive in not ordering security of costs. To a great extent it is irrelevant that the respondent has made the individuals susceptible to costs by means of a cross claim. The offer of personal indemnities is a significant new fact that I believe warrants a reconsideration of the order for security. There is no evidence as to why the indemnities were not offered previously, nor why it would not have been reasonable or expected to have done so. Perhaps it was thought at the time that they were not necessary, whereas today all avenues have been exhausted and Sanirise believes it is the only choice. In my opinion, the mere fact that it was not raised before Justice Davies does not warrant a refusal to consider the issue now. Personal indemnities are not given lightly. It is apparent that the legal ramifications of following this course have been thoroughly explained and the directors remain willing. The courts have considered that offering personal indemnities by those who make up and stand behind companies is highly persuasive in tipping the balance against an award of security for costs. See Peter Short, Securities and Mortgages, Journal of Banking and Finance Law and Practice, September 1993, page 202 at page 203: The effect of those authorities is that, so long as the shareholders had come out from behind the skirt of the company by joining themselves to the action or by providing an indemnity or guarantee and thereby exposing their personal assets to any costs order, the object of the relevant legislation or court rule is seen to be satisfied. This was so even in the cases where it was clear on the material before the Court that the indemnity was worthless as the individuals, for all intents and purposes, were insolvent. Justice Cooper summarised the relevant issues and authorities relating to personal indemnities in Gentry Bros at 413-415. Of particular relevance to this case is his Honour's approval at 414 of the remarks of Justice Burchett in Cameron's Unit Services Pty Ltd & Anor v Kevin R. Whelpton Associates (Australia) Pty Ltd & Anor [1986] 13 FCR 46 at 53: 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 liability to meet a costs order. In [Harpur v Ariadne Australia Ltd (No. 2) [1984] 8 ACLR 835 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] 2 FCR 463 at 469. 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. The personal indemnities are new facts to be given significant weight in this motion for variation of security. I do not consider the fact they were not previously offered, when they might have been, determinative. The indemnities show the sincerity of the persons behind the company and their willingness to come out from behind the corporate veil. Nonetheless, I strongly agree with Justice Davies that if this litigation is to go ahead, it will be by the force of the creditors, not merely by dint of the directors' passions. Sanirise adds to its offer of personal indemnities from the directors a cash security, meaning that the creditors have demonstrated their support for pursuing the litigation by resolving that the company contribute a cash amount as security. Consequently, I do not believe that varying the security would be contrary to the spirit of the order made by Justice Davies. The combination of personal indemnities and cash outlay persuade me that it is appropriate in this case to vary the order for security of costs. Filing of additional evidence As far as I can see, this matter was well and truly disposed of by order of Justice Wilcox on 12 November 1993. Counsel for Sanirise then advised the learned Judge that its case was now closed other than the filing of two specific affidavits by experts on the question of damages. Justice Wilcox ordered that these affidavits be filed by 10 December 1993 and that barring dramatic unforseen circumstances no extension would be entertained. Sanirise now seeks to file additional evidence on both liability and damages. However, it does not advance a single compelling reason to grant any extension. It is true that the present lawyer for Sanirise is relatively new to the case and he may well identify gaps in its case that were not noted at an earlier stage. However, Sanirise was legally represented at the time it notified the Court that its evidence was complete on liability. The words of Justice Wilcox to which I have added emphasis sum up my thoughts on this matter: I note the whole of the applicant's evidence now filed except the expert evidence of Messrs Belfield and Alcock. All right then, well you can act on that basis, Mr Black, and if there is a chasm in their case then you can go away rejoicing... (T3) All right. I extend the time for the applicant's experts affidavits until Friday, 10 December - this date is fixed - except for some unforeseen fact occurring after today no extension will be granted. Now I mean that, Mr Gracie. I think it is silly to .... make an absolute order. If the expert were to have a heart attack the day before the affidavit was to be signed it would be a bit unrealistic not to grant some extension, but that is the sort of drama I am talking about. (T10) I have not been informed whether or how the proposed additional evidence will affect the existing case. Nor has evidence been led explaining why the orders of Justice Wilcox in November 1993 were not complied with, nor why the evidence for Sanirise is not closed despite counsel's assertion before his Honour that it was. I am therefore disinclined to grant Sanirise any indulgence at this time. If there is to be additional evidence, it will only be with the consent of the trial judge in the light of the circumstances and evidence at the trial. The respondent must be served with the affidavits of the proposed additional witnesses well before the hearing so that adequate prior notice of the material cannot be reasonably put forward as a ground for refusing to permit them to be filed and relied on. Orders Sanirise's motion to vary the security ordered by Justice Davies will be granted. The applicant is to provide security for costs of the respondent in the sum of $40,000, to be paid in two equal instalments, the first on or before 15 January 1996, the second one month before the commencement of the hearing. Additionally, by not later than 15 January 1996, Sanirise is to cause its directors Mr Nejad and Ms Kelly to provide written guarantees to the satisfaction of a registrar indemnifying Sanirise against any order for costs which may be made in favour of the respondent at the hearing. If Sanirise fails to make its first payment or does not provide the indemnities by the due day, the proceedings will be stayed. Sanirise's motion for separate trials of certain issues and to file further evidence is dismissed. I order that costs of the motion be costs in the cause. The case will be listed for further directions on 21 February 1996. For the applicant: Mr R. Willcock of Abbott Tout Solicitors For the respondent: Mr P Comans instructed by Harris & Company, Solicitors. Date of Hearing: 15 June 1995 Written submissions completed:7 July 1995 Date of judgment: 15 December 1995