IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY SG 87 of 1995 BETWEEN: jacob jack kochergen and joaquin investments pty ltd (acn 008 165 197) Applicants AND: geoffrey york bell, and: bruce raymond spangler, and: cw pty ltd (acn 007 901 546), nicholas john storer, christopher martin garrett and bentleys services pty ltd (acn 007 534 643) Respondents geoffrey york bell, bruce raymond spangler, cw pty ltd (acn 007 901 546), nicholas john storer, christopher martin garrett, bentleys services pty ltd (acn 007 534 643) and envirowaste enterprises pty ltd (acn 008 046 562) cross claimants jacob jack kochergen, joaquin investments pty ltd (acn 008 165 197), jackie billie kochergen and elaine ann kochergen cross respondents JUDGE: MANSFIELD J DATE: 4 december 1998 PLACE: ADELAIDE REASONS FOR JUDGMENT This matter has had a long and unfortunate procedural history. It commenced as long ago as 15 November 1995. The respondents changed solicitors shortly before the trial was proposed to commence on 12 October 1998. Over the opposition of the applicants, the matter was adjourned to a date to be fixed. The first and second respondents and the fourth to sixth respondents are now represented by different solicitors. Shortly before the date fixed for the trial the respondents sought, and were granted, leave to amend their defences extensively. The cross claim instituted by the respondents against the applicants and two other persons has been dismissed. The first to third respondents ("the principal respondents") on 25 September 1998 applied for an order that the applicants provide security for costs, and that the action be further stayed until that security is provided. It was acknowledged by counsel for the applicants that the motion should be considered as if it were made on the eve of trial, notwithstanding that the trial has been adjourned, because that adjournment was itself granted on the application of the principal respondents. They were simply unable to be ready for the trial with their new solicitors. There were reasons which it is now unnecessary to expand upon which caused their previous solicitors to cease acting for them rather belatedly. The motion is brought under s 56 of the Federal Court of Australia Act 1976 (Cth) and O 28 of the Federal Court Rules, and in respect of the corporate applicant under s 1335(1) of the Corporations Law ("the Law"). The primary material before me on this application (other than the costs estimate) is all either hearsay or assertive by reference to exhibited documents. The parties have not themselves deposed themselves to any matters, except by their respective solicitors asserting their respective position. THE FACTS (1) Impecuniosity of applicants The applicant Joaquin Investments Pty Ltd ("Joaquin") was registered on 17 February 1988. Its current directors are Elaine Ann Kochergen ("Elaine") and Jackie Billie Kochergen ("Jack"), who each hold one of the 100,000 issued shares. The balance of the shares are held by the applicant Jacob Jack Kochergen ("Jacob"). Between 28 June 1996 and 8 November 1996, Joaquin had a controller appointed to it by a merchant bank under a mortgage granted on 14 August 1991 over certain land owned by Joaquin to secure repayment of indebtedness apparently of Consolidated Waste Pty Ltd which, at 28 June 1996, stood at $274,167.93. That property was sold by the secured creditor in October 1996 to discharge the debt partially, producing a net payment of $190,349.85. There are not current undischarged registered charges over Joaquin. Its most recent annual return describes its principal activity as commercial property investment. It is not the registered owner of any real estate. The applicant Jacob is now twenty-five. He is not the registered owner of any real estate. It is suggested that he is owed $343,500 by Consolidated Waste Pty Ltd. It is unclear what prospect, if any, he has of recovering that debt. It is submitted that, in the absence of further information from Joaquin and Jacob, the Court should conclude that they are each impecunious. The directors of Joaquin, Jack and Elaine, each entered into an arrangement under Part X of the Bankruptcy Act 1966 in November 1996. Their joint statement of affairs dated 28 November 1996 showed amounts owing to unsecured creditors of $1,506,100 and only $15,052 assets essentially represented by household furniture and effects. They were in receipt of payments under the Social Security Act 1991 (Cth). They have not subsequently gone bankrupt. The costs estimate of the principal respondents shows that the amount of their costs and potential costs is substantial. Neither Joaquin nor Jacob has deposed to their financial position, although it is submitted on behalf of each that they are not shown to be impecunious. The absence of that evidence enables me to draw more confidently the inference which I was prepared to draw on the material from the principal respondents, that they are each likely to be unable to meet in full any order for costs against them if their claim fails. In addressing the present application, I therefore conclude that, despite the relatively scanty evidence, both Joaquin and Jacob are impecunious, and that prima facie at least reason exists for the making of the orders sought. It is also my conclusion that if an order for security for costs is made against the applicants, neither will be able to meet it and the application itself is likely to be stultified. (2) Nominal applicants In proceedings in Action No 843 of 1997 in the District Court of South Australia, John Kochergen ("John") has sued the respondents Geoffrey York Bell and Bruce Raymond Spangler. John is the uncle of Jack. The claim is for damages for loss suffered by John because $A600,000 or $US500,00 which he invested in Consolidated Waste Pty Ltd ("Conswaste"), is irrecoverable following Conswaste going into liquidation in August 1993. It is alleged that John invested that sum on the professional accounting advice and the misrepresentations of the first and second respondents, and that that advice was negligent. It is asserted by affidavit of a solicitor for the principal respondents that they "consider" that Joaquin and Jacob are nominal applicants, and that the real beneficiary of this application if it is successful will be John. The argument runs that, in these proceedings, it is said on this application that in August 1991 Conswaste sold to Joaquin certain bins, and that it is alleged but not admitted that subsequently in November 1992 Joaquin transferred those bins to Jack. The bins are asserted to be valued at about $1 million. Then, it is argued, it is not credible that Jack, then aged nineteen, could have afforded to pay for the bins. The principal respondents assert, without more detailed evidence, that they believe John is the person most likely to be funding this action because he is the only member of the Kochergen family "known by them" to have the means to do so. I am not persuaded that the pleadings have the effect stated. The applicants submit that there is no cogent evidence that they are merely nominal applicants. I am not of the view that Joaquin and Jacob are nominal applicants for John, notwithstanding that the only denial of the allegation is made on instructions by the solicitor and not directly deposed to by them. John's claim in District Court Action 843 of 1997 is a direct one, and if it succeeds he is likely to recover his claimed loss. There is no cogent evidence that, in those circumstances, he is pursuing the present application through Joaquin and Jacob for his own benefit, or is funding them in the action in a way that ultimately will directly benefit him. It may be that he is a creditor of Joaquin or Jacob, but that is not clear; even so, nothing indicates that he would be a preferred creditor of either of them. As noted above, the claim that John is the real funding applicant in this application is only made by a process of speculative reasoning and is without any firm evidentiary base. Accordingly, this aspect of the contentions does not further bear upon the exercise of any discretion in relation to the application generally. (3) The prospects of success The principal respondents assert that their proposed amended defence will demonstrate that the claims of Joaquin and Jacob are without merit. I have carefully considered that document. It largely comprises denials of allegations in relation to the current statement of claim, and assertions that the principal respondents engaged in a series of different transactions than those alleged. There will clearly be a significant conflict of evidence at the trial. There is no matter pleaded in the proposed defence which has the effect asserted. It could not really have that effect, as it constitutes no more than the principal respondents' allegations in response to the allegations in the statement of claim. It cannot of itself make out the truth of the assertions contained within it; they remain as assertions of fact. I have considered the respective contentions, put orally by counsel and through affidavits. Resolution of the issues will, to a significant degree, turn upon the assessment of the credibility of the parties involved in the transactions referred to in the pleadings. The documentary material referred to, particularly the expert's report produced by the applicants, may have the consequence for which the principal respondents contend, but it is not so clear that ultimately it will do so that I am prepared to conclude that the principal respondents have such a prospect of success in the proceedings as to have that factor weigh heavily in their favour on their present application. The ownership of the bins at material times remains a contested issue, and will have to be resolved at trial. It is my view that the material presently indicates no more than that each party has a reasonable prospect of success on the main application, or to put it another way, each has a reasonably arguable case. (4) Reasons for impecuniosity The principal respondents contend that the impecuniosity of Joaquin and Jacob (if established) is not related to their alleged conduct. The applicants contest that fact, at least to the extent of submitting that "any impecuniosity on behalf of Jacob/Joaquin may be laid" at the feet of the principal respondents. The material on this application does not lead me to the conclusion that it is the conduct of the principal respondents which has caused the impecuniosity of Joaquin and Jacob. It may have played a part, even a substantial part, in their current impecuniosity. I do not know. There is no evidence proffered directly by either of them as to their respective financial positions between 1990 and now, or to identify the cause of any significant adverse changes in their respective positions: cp. Drumdurno Pty Ltd v Braham (1982) 1 ACLC 397. Accordingly, this is not a factor which militates against the grant of the order sought. (8) Public Interest It is contended, and accepted, that there are no relevant public interest considerations in relation to this application, other than that professional persons in a position of trust in relation to their clients should be accountable for breach of that trust. (9) Delay The principal respondents accept that this application is belated. They depose to having been advised by their former solicitors not to make such a claim, as well as to their former solicitors having "failed to act upon the issue". It is hard to reconcile those statements. No detail is given. Either the instruction was given to make a claim for security for costs, and it was not acted upon, or no such instruction was given after advice was procured as to whether to make such a claim. I am unable to place much weight upon the reason proffered in the circumstances. On 1 March 1996 the then solicitors for the respondents requested security for costs be provided by Joaquin. On 7 March 1996, that request was refused. No further correspondence between the parties on this topic ensued, until the recent application. The delay means that the applicants have prepared for trial, and that inevitably much of that work will now require to be retraversed when a new trial date has been fixed. In addition, the issues in the proposed amended defence are somewhat different from these previously pleaded and will require additional work on the part of the applicants and their solicitors. (10) Overall The principal respondents therefore contend that they are at risk of the applicants being unable to meet any order for costs made against them, even if they successfully defend the application. They have estimated their costs, in total, to be $307,203.13. The applicants have sought certain information as to how these estimates were arrived at, and also assert that almost half the costs estimate is inappropriately claimed because it relates to work which will be duplicated by reason of the change of solicitors, or to matters for which they should not be responsible in any event such as amending pleadings, or to the "uplift". They also claim that the costs estimates are inappropriately based upon a costs indemnity basis, and do not reflect that costs have been awarded in their favour from time to time during this matter, including costs thrown away by reason of the adjournment, which should also be taken off the estimate. Their estimate of the principal respondents' costs which might properly qualify for an order for security for costs, if one is made, is about $95,000. In the light of the decision I have made on this application, it is not necessary to reach any conclusions on those matters, but I observe that the applicants' contentions do appear to have considerable merit. The belated nature of the application would tend to support the conclusion that past costs should not be the subject of an order for security, and the costs incurred by reason of their revised approach also may well not be an appropriate topic for such an order. There would remain the fees to be incurred during the trial, to be approached having regard to the timing of the application. For reasons set out below, I have not needed to reach a final view on those questions. CONSIDERATION OF APPLICATION The power to award security for costs under s 56 is discretionary. That discretion must be exercised judicially and in all the circumstances of the case: Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1; Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates Pty Ltd (1986) 13 FCR 46. In James v Australia and New Zealand Banking Group Ltd (1985) 9 FCR 442, the Court recognised that the general rule that a natural person who sues will not be ordered to give security for costs, notwithstanding impecuniosity, is an appropriate guideline under s 56, although it is of course no more than a relevant guideline. That consideration does not apply in the case of Joaquin: Drumdurno at 229. In relation to Joaquin, s 1335 of the Law also provides a foundation for an order if in the exercise of my discretion, it is appropriate to make such an order. In James, Toohey J addressed the question of delay in making an application for costs. His Honour said at 446 "It is well established that an application for security for costs should be made promptly: see Smail v Burton [1975] VR 776. The matter is now so close to a hearing, so much time and costs have been expended, that it would work a grave injustice to the applicants if they were ordered to provide security for costs when it is apparent that they could not comply with such an order." There have, of course, been cases where security for costs has been ordered notwithstanding the proximity of the trial, or that the trial has commenced, eg Town & Country Sports Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (Federal Court, O'Loughlin J, 19 July 1991, unreported). In my consideration of the various factors identified by the parties as relevant, the delay in the present circumstances ultimately has weighed the scales quite heavily against the grant of the application. The proceedings have been on foot for a considerable period. The applicants have obviously expended considerable time and resources in conducting them. On the eve of trial, this application was made for the first time. So far as the applicants are concerned, the issue had been raised early in the conduct of the proceedings but not then pursued. It would, in these circumstances, be unfair to confront them with an order which might put them out of court only at such a late stage of the proceeding. The applicants were entitled, in view of the exchange of correspondence in March 1996, to proceed thereafter with preparation for trial on the basis of their available resources without factoring into that process the consequences of the order now, only so belatedly, sought. There is no material to indicate any change in circumstances of the applicants over that period which justifies the timing of this application. There is also nothing to indicate that the principal respondents learnt some new and significant matter so as to explain the timing of the application. It appears that a decision was made by them, or by their then advisers, not to pursue a claim for security for costs and the timing of the application is simply due to a changed decision: cp Smail v Burton [1975] VR 776; Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301; Stack v Brisbane City Council (1996) 71 FCR 523 per Drummond J at 531. I have had regard to the policy which underlies s 1335(1) of the Law and its predecessors in relation to Joaquin, enunciated for example in Buckley at 303. Ultimately, as Street CJ there recognised, it is necessary to achieve a balance between ensuring that adequate and fair protection is provided to the principal respondents on the one hand, and avoiding injustice to Joaquin by necessarily shutting it out or prejudicing it in the conduct of this application, on the other. Those principles are also discussed in John Arnold's Surf Shop Pty Ltd (In Liquidation) v Heller Factors Pty Ltd (1979) 22 SASR 20. In the case of Jacob, it is also necessary to have regard to the rule that a natural person will not generally be ordered to give security for costs, recognised for instance by Toohey J in James at 445. I have had regard to the various matters to which the parties have directed me. They reflect the sort of issues which are generally recognised as applicable to motions such as the present: eg. Equity Access Ltd v Westpac Banking Corp (1989) 11 ATPR 40-972 at 50, 635 per Hill J. In my judgment the factors which lead to the balance being struck against an order for security for costs are the personal status of Jacob, the fact that the applicants have a reasonably arguable case, the nature of the claims and the general public interest in such claims not being prevented from being pursued in the Court, the probability that the applicants will be unable to meet any order for security for costs so that the application is not then likely to be pursued, the delay in the making of the claim for security and the fact that the applicants have thereby been permitted to prepare fully the matter for trial before being confronted with the application, and the absence of any proper circumstance to explain the belated nature of the application. There is also an absence of any material which indicates that the applicants have sought to divest themselves of assets in the course of the proceeding. On balance, I have come to the firm view that this application should be refused. I accordingly dismiss the application of the principal respondents brought on the notice of motion filed 25 September 1998. I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield Associate: Dated: 4 December 1998 Counsel for the Applicants: Mr C Brohier with him Mr J Lumsden Solicitor for the Applicants: Thomson Playford Counsel for the First and Second Respondents: Ms S Maharaj with her Mr S Cullimore Solicitor for the First and Second Respondents: Lynch and Meyer Date of Hearing: 22 October 1998 Date of Judgment: 4 December 1998