Avspares Pty Ltd v Skywest Aviation Pty Ltd & Ors [1997] FCA 645

FEDERAL COURT OF AUSTRALIA COSTS - security for costs - where applicant an impecunious corporation which would be unable to meet an order for costs - where directors and shareholders prepared to assume personal liability for a costs order - whether security should be granted - whether appropriate to order that assets of directors and shareholders be charged to secure personal liability. Federal Court of Australia Act 1976 (Cth), s 56 Corporations Law, s 1335 Equity Access Ltd v Westpac Banking Corporation (1989) ATPR ¶40-972, cited Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, cited Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46, cited KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 13 ACLC, applied Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, cited AVSPARES PTY LIMITED -v- SKYWEST AVIATION PTY LIMITED & SKYWEST AVIATION PTY LIMITED (Cross Claimant) and AVPSPARES PTY LIMITED (Cross Respondent) No NG 707 of 1996 TAMBERLIN J SYDNEY 21 JULY 1997

IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 707 of 1996 ) GENERAL DIVISION )

BETWEEN: AVSPARES PTY LIMITED

(ACN 070 037 215)

Applicant

AND: SKYWEST AVIATION PTY LIMITED

(ACN 008 903 017)

Respondent

SKYWEST AVIATION PTY LIMITED

(ACN 008 903 017)

Cross Claimant

AVSPARES PTY LIMITED

(ACN 070 037 215)

Cross Respondent

JUDGE: TAMBERLIN J PLACE: SYDNEY DATED: 21 JULY 1997

REASONS FOR JUDGMENT The respondent seeks security for costs in the sum of $29,876. The application is resisted. It is agreed that the applicant, if it loses the main action, has no funds to meet the costs of the respondent. It is also agreed, for the purposes of this application, that the outcome of the substantive litigation is "unclear" which I take to be a concession that the applicant has a reasonably arguable case. Evidence has been filed by both parties. There has been no cross-examination. Statutory provisions Section 56 of the Federal Court of Australia Act 1976 (Cth) provides: "(1) The Court ...may order an applicant ... to give security for the payment of costs that may be awarded against him or her . .... (5) This section does not affect the operation of ... any other Act ... in relation to the furnishing of security." Section 1335(1) of the Corporations Law provides: "Where a corporation is plaintiff in any action ... the court ... 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 .... require sufficient security to be given for those costs and stay all proceedings until the security is given." It is common ground that the discretionary power conferred by the above provisions is wide and unfettered but that it must be exercised judicially. Some of the factors to take into account in a judicial exercise of the discretion were referred to by Hill J in Equity Access Ltd v Westpac Banking Corporation (1989) ATPR ¶ 40-972 at 50,635 as follows: "∙ the chances of success of the applicant; whether the applicant's claim is bona fide or a sham; ∙ the quantum of risk that the applicant cannot satisfy a cost order; ∙ whether use of the power would shut out a small company from making a genuine claim against a large company, ie is the power being used oppressively; ∙ whether the impecuniosity arises out of the act in respect of which relief is sought; ∙ whether there are aspects of public interest which weigh in the balance against the making of an order; ∙ whether there are any particular discretionary matters peculiar to the circumstances of the case." Evidence Mr Cheer, a director of the applicant, has given evidence that the two issued shares in the applicant are owned jointly by himself and his wife. They are the sole directors. His wife is employed and she receives a net income of about $34,000 per annum. He receives a salary of about $30,000 from the applicant. They owe debts in the order of $24,000 to various creditors. Mr Cheer then lists the assets of his wife and himself. These comprise two motor vehicles estimated to be worth about $26,000 and furniture and home contents said to have a value of about $91,000. Mr Cheer says that the applicant does not have the cash or assets to provide the security. He also says that neither his wife nor himself are in a financial position to guarantee or offer security as requested by the respondent. The respondent seeks cash or its equivalent by way of security. Mr Cheer asserts that an order by the Court requiring security, as sought by the respondent, would prevent the applicant from proceeding with the application. After some discussion during the course of submissions, the position taken by Mr and Mrs Cheer is that they do not dispute the quantum of the security sought. They are also prepared to assume personal responsibility by way of guarantee or otherwise for the costs. Counsel for Mr and Mrs Cheer further informed me that in order to secure the amount of security claimed they would be prepared to charge the motor vehicles and furniture and house contents, referred to above, if the applicant is allowed to proceed with the action. Even allowing for a substantial over estimation of the value of the assets of Mr and Mrs Cheer and after taking into account their debts, it seems to me that the value of their assets would be sufficient to meet the amount sought by way of security. Submissions and conclusions The case for the respondent is that Mr and Mrs Cheer have chosen to conduct their business affairs though the medium of a corporation. This attracts s 1335 of the Corporations Law in respect of the action brought. That section is designed to protect respondents against claims by companies without any financial substance, and to avoid the consequence that an applicant if unsuccessful is unable to meet an award of costs. The respondent submits that it is for the persons resisting security to prove that the grant of security will frustrate the litigation and to establish the impecuniosity of those who stand to benefit by the litigation. The respondent refers to the observations of the Full Federal Court in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4. The respondent submits that the fact that the shareholders are prepared to assume personal liability for costs affords them no real protection because on the evidence the applicants are not in a position to provide cash. Moreover, it is submitted, that the assets proffered are not sufficiently liquid and could not readily be converted to cash. In addition there must be substantial doubt as to their value. The respondent also raised an argument based on accounting documents annexed to the affidavit of Mr Cheer. The submission was that since the earlier hearing several months ago, moneys have been paid out of the applicant to related persons. This raises the inference that this was done in order to defeat the application for security for costs. The respondent submitted that there is an onus on the applicant and the creditors of the company to show that these transactions were genuine and not simply an attempt to channel assets from the company into safe hands in circumstances where such funds might otherwise be used to provide the necessary security. Moreover, it is said, the fact and timing of the payments should persuade the Court to order security and to grant a stay of the proceedings until security is provided. The applicant sought to explain the payments and rebut the inference suggested by the respondent. On the limited material placed before me, and in the absence of cross-examination, I am unable to conclude that the transactions were a sham or that the payments were made to frustrate the respondent's claim for security. A much more detailed investigation as to the circumstances and arrangements behind these transactions would be necessary before such an advanced inference could reasonably be made. The applicant's submission is that because the shareholders are prepared to assume personal liability for the costs there should be no need to provide security as sought. In assuming personal liability, Mr and Mrs Cheer have exposed themselves to the possibility of bankruptcy. In addition, counsel for the applicant informed me that Mr and Mrs Cheer were prepared to give a charge over the cars and household contents and furniture to secure the sum sought by way of security. Counsel points out that these assets have a net worth considerably in excess of the sum sought even allowing for a substantial discount having regard to the debts owed and the possibility of a significant over-estimation. There was no objective or expert evidence before me as to the value of these assets. A considerable number of authorities were referred to by the parties. However, as a result of submissions and discussions between the parties, the real issue has been substantially narrowed. Two cases are of particular relevance. The first case is Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46, a decision of Burchett J. His Honour said in that case at 53: "... I think it is also relevant that the individual responsible for this litigation .. is not sheltering behind a corporate shield in order to protect some assets of his own from liability to meet a costs order. In the Ariadne case 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 above decision was considered and applied by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 13 ACLC 437. Her Honour's reasons include a comprehensive review of the authorities relevant to the present issue. Her Honour considered that an offer of a guarantee to assume personal responsibility by a director was a relevant and important factor for consideration but, of course, it was not of itself determinative. She thought that merely because an offer was made to assume personal liability it did not necessarily or automatically follow that security should not be provided or that a stay should not be granted. In the particular circumstances her Honour considered it was appropriate for a director to provide a charge over certain personal assets to secure personal liability for costs assured by the director. At 445 after referring to the offer to assume personal liability, her Honour said: