1C.. JUDGMENT No. TE... ngounennaae CATCHWORDS PRACTICE AND PROCEDURE - Security of Costs - application for leave to appeal against interlocutory order for security of cots - orders against natural persons - finding that applicant had arranged affairs generally to avoid vicissitudes of commerce including litigation - no evidence that litigation would be stifled by costs order - whether trial judge's discretion miscarried - judgment not attended with sufficient doubt to grant leave. Federal Court of Australia Act 1976 (Cth) s 56(1) Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR Cowell v Taylor (1886) 31 Ch D 34 Decor Corporation Pty Ltd v Dart Industries Ine (1991) 33 FCR Fletcher v Federal Commissioner of Taxation (1992) 110 ALR 233 Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 Jarrett v Seymour (1993) 46 FCR 557 Rajski_v Computer Manufacture & Design Pty Ltd [1982] 2 NSWLR ' . NICHOLAS WILLIAM JOHN CHERRY & ORS v BRIAN READ & ORS OG 68 of 1996 RECEIVED 16 NOV 1998 Black CJ, Sackville, Finn JJ. Brisbane 21 November, 1996 presse os IN THE FEDERAL COURT OF AUSTRALIA } QUEENSLAND DISTRICT REGISTRY ) No. QG 68 of 1996 GENERAL DIVISION ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: ) NICHOLAS WILLIAM JOHN CHERRY First Applicant SEARUSH PTY LTD Second Applicant ERIN PTY LTD Third Applicant PETROLINE OIL REFINING PTY LTD Fourth Applicant ' BRIAN READ First Respondent WOODLANDS GOLF RESORT PTY LTD Second Respondent JUSSON PTY LTD Third Respondent BAR ENTERPRISES PTY LTD Fourth Respondent BARBARA ALICE READ Fifth Respondent A E GROUP PTY LTD Sixth Respondent RAINE & HORNE VALUATIONS (QLD) PTY LTD Seventh Respondent CORAM: BLACK CJ, SACKVILLE, FINN JJ. PLACES BRISBANE DATE: 21 NOVEMBER 1996 THE COURT ORDERS THAT: 1. The application for leave to appeal from the orders made by the Honourable Justice Kiefel dated 15 August 1996 be refused. 2. The applicants pay the costs of the respondents other than MINUTES OF ORDER the sixth respondent. NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) QUEENSLAND DISTRICT REGISTRY ) No. QG 68 of 1996 GENERAL DIVISION ) ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: NICHOLAS WILLIAM JOHN CHERRY First Applicant SEARUSH PTY LTD Second Applicant ERIN PTY LTD Third Applicant PETROLINE OIL REFINING PTY LTD Fourth Applicant AND: BRIAN READ First Respondent WOODLANDS GOLF RESORT PTY LTD Second Respondent JUSSON PTY LTD Third Respondent BAR ENTERPRISES PTY LTD Fourth Respondent BARBARA ALICE READ Fifth Respondent A E GROUP PTY LTD Sixth Respondent RAINE & HORNE VALUATIONS (QLD) PTY LTD Seventh Respondent CORAM: BLACK CJ, SACKVILLE, FINN Jd. PLACE: BRISBANE DATE: 21 NOVEMBER 1996 REASONS FOR JUDGMENT THE COURT: This is an application for leave to appeal against an order of Kiefel J made under s.56 of the Federal Court of Australia Act 1976 (Cth) ("Federal Court Act"), requiring the applicants to provide security for the costs of the first to fifth respondents -2-—- in the sum of $100,000 and of the seventh respondent in the sum of $50,000. Her Honour ordered that the proceedings be stayed until security is provided. Section 56(1) of the Federal Court Act provides as follows: "The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him." The parties have accepted that, in a case such as this, the test to be applied in determining whether leave should be granted is that the applicant must demonstrate that: (a) the judgment under consideration is attended with sufficient doubt to warrant it being reconsidered by a Full court; and (b) substantial injustice would result if leave were refused supposing the decision was wrong. See Decor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397; Jarfett v Seymour (1993) 46 FCR 557 at 559-560. We would add that, while this is the ordinary test, there may be particular cases in which it is inappropriate. This is not such a case. The applicants contended that her Honour erred in making an order to provide security for costs against the first applicant, Mr Cherry. This contention rests on the proposition that an - 3 - order to provide security for costs should be made against a natural person only in limited circumstances and that the present is not such a case. The challenge to the orders made against the other applicants - all corporations - is contingent upon the success of Mr Cherry's challenge. Put shortly, the case of the other applicants is that, if the order against Mr Cherry was wrongly made, to allow the orders against them to stand would result in the differential treatment of the applicants. The submission made for Mr Cherry can be summarised as follows. The general rule followed by courts in this country and in England is that, save in special circumstances, orders for security for costs are not to be made against natural persons no matter how impecunious: see for example Fletcher v Federal Commission of Taxation (1992) 110 ALR 233, at 235-236. The rationale for this "rule" is said to be that a person, whatever his or her means, ought not be denied access to the courts for the resolution of a legitimate dispute and it was submitted that, notwithstanding the amplitude of the language of s.56(1) of the Fedéral court Act, the rule ought to be applied generally. Mr Doyle SC, who appeared with Mr Clothier for the applicant, accepted that there was jurisdiction for her Honour to make the orders she did. He contended, however, that, in view of the fact that Mr Cherry was a party to the litigation and therefore presumably exposed to a costs order, her Honour had erred in requiring him to provide security for costs. -4- Mr Doyle acknowledged that there are exceptions to the general rule. One of these is that security will be ordered where, after commencing an action, a natural person plaintiff or applicant divests himself or herself of assets in order to frustrate an adverse costs order: cf Cowell v Taylor (1886) 31 Ch D 34, at 38; Shannon v Australian and New Zealand Banking Group Ltd (No 2) [1994] 2 Qd R 563. It was not suggested to her Honour that Mr Cherry had acted in this way. Mr Doyle distinguished two cases. The first is where assets are divested in the course of litigation, in order to frustrate a potential adverse costs order. The second is where the affairs of the plaintiff or applicant are organised prior to the litigation so as to make the party 'judgment proof' and thus effectively immune from any costs order. According to Mr Doyle, an order for security can properly be made in the first case, since an abuse of the court's process is involved. However, it should not be made in the second case, since the affairs of the applicant or plaintiff have not been organised with the litigation specifically in mind. Accordingly, he submitted, there is no @buse of process, and poverty as such is never a ground for denying a person access to the courts. Her Honour accepted that, since Mr Cherry was a party to the litigation, he was "available", in the sense that any costs order could be enforced against his assets. However, she made two findings that are of considerable significance. First, she found that Mr Cherry was worth nothing because "he has ensured - 5 - that income earned or assets acquired through his endeavours are not to be exposed to the vicissitudes of commercial life and litigation". Secondly, her Honour said that she was not satisfied that the litigation would be prevented if the orders requiring security for costs were made. In making the second finding, her Honour took into account that Mr Cherry failed to give evidence, notwithstanding. that in the course of the hearing attention was drawn to the inferences which might be drawn if he chose not to give evidence. Her Honour observed that no adjournment was 'sought in order to enable Mr Cherry to swear an affidavit. She also observed that Mr Cherry, through his solicitor who swore an affidavit on information and belief, did not say that he would not be able to fund the litigation if the order for security for costs was made against him. The short issue, therefore, is whether, in the light of her Honour's findings, there is sufficient doubt about the correctness of the manner in which she exercised the discretion conferred by s.56(1) of the Federal Court Act to warrant the grant of leave to appeal. The respondents submitted that there is no such doubt. Their submissions were as follows: (i) the general terms in which $.56(1). is couched should disincline the Court to adopt the so-called natural (ii) (iii) (iv) -~6- person rule in the rigid form propounded by the applicant; her Honour/s exercise of discretion was unexceptionable, in that she properly took into account two critical considerations, namely, ° that court orders as to costs should not be rendered nugatory by artifice (that is, by Mr Cherry ordering his affairs so as to make him judgment proof); and ° that Mr Cherry had failed to establish that an order for security would lead to the litigation being stifled: cf Bell Wholesale Co Ltd v Gates. Export Corporation (1984) 2 FCR 1, at 4; the "denuding of assets" exception, accepted by the applicant, could not and should not be limited to cases where the denuding occurred after proceedings had commenced (see eg Rajski v Computer Manufacture & Design Pty Ltd [1982} 2 NSWLR 443, at 445) but should apply equally to the 'prudential anticipator' of adverse court orders; and in any event, the natural person rule presupposes that the plaintiff or applicant, "whether or not impecunious, has made his or her worth available to -7- meet an adverse costs order (Harpur v_ Ariadne Australia Limited [1984] 2 Qd R 523 at 532); here Mr Cherry, as her Honour found, had acted so as to ensure that the fruits of his endeavours were not exposed to the hazards of litigation. In our view, it has not been shown that, in the particular circumstances of the present case, her Honour erred in the manner in which she exercised her discretion. Her Honour found that Mr Cherry had deliberately organised his affairs so that he would not be subject to the vicissitudes of litigation. We agree with the submission of the respondents that there is no sound policy reason to distinguish between an applicant who divests himself or herself of assets after litigation commences and one who does so in advance of proceedings or whose affairs are otherwise deliberately organised in order to obtain practical immunity from an adverse costs order in any future litigation. In short, we can see no justification for limiting the circumstances in which a court can order an individual to provide security for costs to cases where the denuding of assets, or .the deliberate organisation of affairs to avoid acquiring assets, occurs after proceedings have been commenced or are in active contemplation. The vice of someone in Mr Cherry's position organising his affairs for the purpose of avoiding (inter alia) the 'vicissitudes of litigation' is that he seeks, at the expense of his opponent, to take advantage of the benefits of civil -g- litigation without being subjected to its burdens. As the respondents point out, one of the reasons for the courts exercising caution in ordering a natural person to provide security for costs, is that the person's worth is available to meet an adverse costs order. That rationale does not apply in the circumstances of this case. Nor do we think her Honour fell into error by expressing herself as "not satisfied" that the litigation would be stifled by an order for security. Doubtless, it would have been relevant to her Honour's discretion if Mr Cherry's impecuniosity, albeit self-inflicted, prevented him from pursing the litigation. But in view of her Honour's findings as to Mr Cherry's motivation for organising his affairs, the position is analogous to that considered by the Full Court in Bell Wholesale Co Ltd v Gates Export Corporation, at 4: "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. It is not for the party seeking security to raise the matter; it 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 impecuniosity of those whom the litigation will benefit and to prove the necessary facts." Given her Honour's finding, Mr Cherry's apparent poverty was not enough to warrant concluding that an order-~for security would stifle the litigation. If Mr Cherry wanted to rely on that -9- "fact" he had to establish it by evidence. The first limb of the ordinary test for leave to appeal not having been satisfied, we refuse the application for leave with costs. Counsel for the applicants: Solicitors for the applicants: Counsel for the lst to 5th respondents: Solicitors for the lst to Sth respondents: Counsel for the 7th respondent: Solicitors for the 7th respondent: Date of hearing: Date of judgment: I certify that this and the preceding 8 pages are a true copy of the reasons for judgment of the Court. Light tary Associate Date: LO . ll, FE Mr S L Doyle SC, Mr C Clothier Corrs Chambers Westgarth Mr P A Keane QC, Mr L, Kelly Clayton Utz Mr RG Bain QC Minter Ellison 7 November, 1996 21 November, 1996