JUDGMENT No. £2.88) 4,227 CATCHWORDS Practice - Security for Costs - precondition in s 1335 of Corporations Law that there is reason to believe in company's inability to meet a costs order - importance of joinder in the action of person responsible for the litigation by the company —- requirement of evidence to justify discretionary order - onus. Corporations Law, s 1335 Federal Court of Australia Act 1976, s 56 Ariss v_ Express Interiors Pty Ltd (1995) 13 ACLC 1585 Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Aesociates Australia) Pty Ltd (1986) 13 FCR 46 K P Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 Erolen Pty Limited v Baulkham Hills Shire Council (1993) 11 ACLC 511 Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR P_S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 S.A. Coppée Lavali .V. v Ken-Ren Chemicals and Fertilizers Ltd (1995} 1 AC 38 CA st A PT TED ANOR_ -V- OUTBAC OYS AND SOUVENIRS PTY LIMITED NG 830 of 1996 Burchett J Sydney 8 April 1997 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 830 of 1996 weer ww GENERAL DIVISION BETWEEN: CA AUSTRALIA PTY LIMITED First Applicant AND: CHRISTOPHER ANTHONY BIDDER Second Applicant AND: QUTBACK TOYS Al SOUVENIRS PTY LIMITED First Respondent AND: GERALD SCHEMAN Second Respondent AND: TERENCE CONDON Third Respondent CORAM: Burchett Jd. PLACE: Sydney DATE: 8 April 1997 MINUTE OF ORDER OF THE COURT THE COURT ORDERS THAT the application for security for costs be dismissed with costs. 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 ) NG 830 of 1996 ) GENERAL DIVISION ) BETWEEN: CA AUSTRALIA PTY LIMITED First Applicant AND: CHRISTOPHER ANTHONY BIDDER Second Applicant AND: OQUTBACK TOYS AND SOUVENIRS PTY LIMITED First Respondent AND: GERALD SCHEMAN Second Respondent AND: TERENCE CONDON Third Respondent CORAM: Burchett J. PLACE: Sydney DATE: 8 April 1997 REASONS FOR JUDGMENT BURCHETT J.: This is an application, made on notice of motion, for an order that the first applicant provide security for the costs of the respondents in the sum of $15,000-00. Although the motion does not refer to the basis of the ay jurisdiction I am asked to exercise, I take it that the application is based on s 56 of the Federal Court of Australia Act 1976 and s 1335 of the Corporations Law. It is not 2. suggested that the case falls within the terms of Order 28 rule 3. Section 1335(1) of the Corporations Law provides: "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, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given." , The precondition of reason to believe that the corporation will be unable to pay the costs of the defendant, and the discretion conferred by the word "may", indicate the areas of debate in cases of this kind. The position has been summarised by Phillips JA, speaking for the Court of Appeal of Victoria, in Ariss v Express Interiors Pty Ltd (1995) 13 ACLC 1585 at 1592: "Although of course, like any discretion conferred upon a court, it must be exercised judicially, the discretion conferred by s.1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion." In the present case, the affidavit in support of the Notice of Motion draws attention to the fact that the first applicant is also involved in two other court proceedings against the second and third respondents, in one of which an order for security for costs in the sum of $15,000-00 was made 3. by consent in the first half of last year; while, in the other, a similar order in the sum of $10,000-00 was made in the previous year. However, the fact that the first applicant was prepared to consent to orders in respect of such relatively paltry sums cannot take the respondents very far. In any case, about a year has passed since the later order, and the evidence indicates that the first applicant's accounts for the year ended 30 June 1996, when they became available, showed a significant improvement in its trading position. And its balance sheet is reasonably healthy. There is really very little in the way of evidence from which a conclusion could be drawn in terms of s 1335. The bare bones of the accounts of the company for the years ended 30 June 1994, 1995 and 1996 have been put before me. These show that sales in the first and second years were just under five million dollars, and in the last just over five million dollars. The results of the company's trading moved from a loss before tax of $47,673-00 in the 1994 year to a small profit before tax of $13,625-00 in the 1995 year and a somewhat larger profit before tax of $71,834-00 in the 1996 year. Obviously, some savings were achieved in the later years, including a saving of about $60,000-00 per annum in rent. However, advertising rose in each of the later years, and both advertising and superannuation contributions rose significantly in the last year. A study of the figures, unaided by any evidence of significant impending difficulties, does not suggest that the company will be unable to pay an 4. order against it in respect of costs. Nor does the balance sheet suggest this. It shows that the total shareholders' equity rose during the period from $705,305-00 to $790,754-00, and that cash at bank rose from $28,397-00 to $143,000-00. Receivables stood, as at 30 June 1996, at almost $700,000-00. It is true that the company's profit margin is extremely low, and that in the 1994 year that margin disappeared altogether, so as to produce a small loss. However, the healthy cash balance and the net asset position suggest that, even if the trend since then to increasing profit were reversed, the company would not therefore become insolvent. On the evidence placed before me, I do not feel able to make the finding of fact which would be a precondition to the exercise of jurisdiction under s 1335. The discretion under s 56 of the Federal Court of Australia Act is expressed in more general terms. However, it is a judicial discretion, and in a case of this kind I do not think it should be exercised on some different basis from that which underlies s 1335. Assuming, contrary to my opinion, that the precondition in s 1335 should be regarded as met in this case, I would still not be disposed to exercise my discretion in favour of the making of an order for security. In this case, the executive director of the first applicant, who is also the 5. holder, either beneficially or as trustee, of all the shares in the first applicant, is himself a party to the action brought by it, as second applicant. That is a most material consideration. I drew attention to its importance in Cameron's Unit Services Pty Ltd ov Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 at 53, where I said: "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 [Harpur _v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523 at 533] 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." This passage was cited by Beazley J in K_P Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 202-203, where her Honour also cited other authorities to similar effect, including the decision of Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 413- 415. I accept, as the decision of Powell J in Erolen Pty Limited v Baulkham Hills Shire Council (1993) 11 ACLC 511 emphasizes, that, once the discretion is enlivened, no single factor will necessarily be' determinative. That must follow 6. from the nature of a judicial discretion to be exercised in all the circumstances of the case. Nevertheless, it seems to me the overwhelming weight of authority points to the considerable importance of the willingness of those who stand behind the company and are responsible for the litigation to put their own assets at risk, whether those assets be large or small. In the present case, there may, of course, be other persons possessed of substantial assets who may stand to gain from the litigation through the trusts which exist in respect of some of the shares in the company. There is no evidence about that, but neither is there any evidence to suggest that the second applicant would himself be unable to meet any order for costs which might be reasonably probable in the event of the applicant's failing in the action. He is not shown to be in fact impecunious. In Be esale Co Lt e fe) Corporation (1984) 2 FCR 1 at 4 (see also P_S Chellaram & Co Ltd _v China Ocean Shipping Co (1991) 102 ALR 321 at 323) a Full Court held that - "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 7. of those whom the litigation will benefit and to prove the necessary facts." But that was not a case where a principal shareholder was also an applicant in the litigation. Where this is the position, the motion for security is not resisted simply on the ground that it would stultify the litigation, but on the ground that it would not be appropriate to order security in the circumstances. For unless the individual party is shown to be impecunious, it is unlikely that the applicants for security will be at risk of inability to recover any costs ordered to be paid to them. Therefore, it seems to me that once a person in the position of the second applicant, being an apparently responsible person, has joined himself with the company as an applicant, a strong reason arises to refuse an order. It must be considered together with all other evidence, and it is not a conclusive reason. Further evidence may alter the complexion of the case. However, I do not think that, standing alone, it has the insubstantial quality of a suggestion that an order for security would stultify a company's action, when that suggestion stands alone and unsupported by evidence of the lack of means of all those who might stand to gain from the litigation. As I have indicated, no one factor should determine the exercise of the Court's discretion, where a case has been made out for the exercise of that discretion. However, in the circumstances of this case, had I been of the view that the precondition in s 1335 was established, I would have declined 8. to exercise my discretion in favour of the respondents. Ultimately, to borrow the language of Lord Slynn of Hadley in S.A. Coppée Lavalin N.V, v Ken-Ren Chemicals and Fertilizers Ltd [1995] 1 AC 38 at 66, an authority which illustrates the importance of the question whether a significantly interested additional party has joined in incurring liability to a costs order, "(t]jhere must be ... factors indicating that the justice of the case requires that security should be ordered"; and the party moving for the order must show the existence of those factors. For these reasons, the motion for security is dismissed with costs. I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Burchett. Associate: § 2 Ci tey Date: 8 April 1997 Counsel for the Applicants/ Respondents in Motion: Mr R.J. Webb Solicitors for the Applicants/ Respondents in Motion: Gilbert & Tobin Counsel for the Respondents/ Applicants in Motion: Mr M. Boyd Solicitors for the Respondents/ Applicants in Motion: Lane & Lane Date of hearing: By consent the matter was dealt with by written submissions