FEDERAL COURT OF AUSTRALIA Australian Building Industries Pty Ltd (In Liq) v Stramit Corp Ltd [2000] FCA 455 PRACTICE AND PROCEDURE - security for costs - whether the appointment of a liquidator bars an order for security for costs. Federal Court of Australia Act 1976 (Cth) s 56 Corporations Law s 1335 Re Pavelic Investments Pty Ltd (1983) 8 ACLR 417 Dist Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 Foll Brookfield v Davey Products Pty Ltd [1994] FCA 191 Cited Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 Cited Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201 Cited Cherry v Read [1996] FCA 1197 Cited AUSTRALIAN BUILDING INDUSTRIES PTY LTD (IN LIQUIDATION) ACN 009 340 952 v STRAMIT CORPORATION LTD ACN 005 010 195 AND DAVID THOMSON QG 70 OF 1997 COOPER J BRISBANE 11 APRIL 2000 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG 70 OF 1997 BETWEEN: AUSTRALIAN BUILDING INDUSTRIES PTY LTD (IN LIQUIDATION) ACN 009 340 952 APPLICANT AND: STRAMIT CORPORATION LIMITED ACN 005 010 195 FIRST RESPONDENT DAVID THOMSON SECOND RESPONDENT JUDGE: COOPER J DATE OF ORDER: 11 APRIL 2000 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. The applicant provide security for costs in the sum of $34,000 in respect of both respondents by way of payment into Court or by way of bank guarantee or in such other form as approved by the District Registrar and that such security be provided on or before 31 May 2000. 2. Liberty be reserved to the respondents to apply thereafter for dismissal of the proceedings if the security is not provided. 3. The applicant pay the respondents' costs of and incidental to the application for security for costs to be taxed if not agreed. 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 QG 70 OF 1997 BETWEEN: AUSTRALIAN BUILDING INDUSTRIES PTY LTD (IN LIQUIDATION) ACN 009 340 952 APPLICANT AND: STRAMIT CORPORATION LIMITED ACN 005 010 195 FIRST RESPONDENT DAVID THOMSON SECOND RESPONDENT JUDGE: COOPER J DATE: 11 APRIL 2000 PLACE: BRISBANE REASONS FOR JUDGMENT 1 This is an application by the first respondent Stramit Corporation Limited ("Stramit") and the second respondent Mr David Thomson ("Thomson") for security for costs. 2 The applicant Australian Building Industries Pty Ltd (In Liquidation) ("ABI") to the principal proceedings filed its application on 13 June 1997. On 17 November 1997 it went into liquidation. 3 The original proceedings were struck out on 1 August 1997 by Drummond J. That decision was set aside by a Full Court of this Court on 1 December 1997. Since that time, ABI has taken no step to advance the litigation save for delivering a bill of costs on 18 August 1999 in respect of the striking out application and appeal to the Full Court. 4 The causes of action pleaded by ABI are for breach of contract and misleading and deceptive conduct under s 52 of the Trade Practices Act 1974 (Cth). Although allowing the appeal, the Full Court noted that ABI's prospects of success were no more than marginal. 5 The application by Stramit and Thomson has been brought under s 56 of the Federal Court of Australia Act 1976 (Cth) and s 1335 of the Corporations Law, and it seeks security for costs estimated at $34,026. 6 In support of its application, Stramit and Thomson submit : (a) ABI is insolvent and there is a real risk that it will be unable to satisfy an order for costs if Stramit and Thomson are successful in the proceedings; (b) the strength of ABI's case is no more than marginal; (c) the proceedings are being brought for the benefit of the creditors and shareholders of ABI; (d) there is no evidence that the creditors and/or shareholders cannot or will not provide ABI with the necessary security to allow the litigation to proceed. 7 In opposition to the application, ABI submits : (a) ABI has no funds with which to pursue the proceedings; (b) ABI is looking to recover monies in preference actions against creditors of ABI, including Stramit, and it will use that money to fund these proceedings; (c) ABI's impecuniosity, if it makes out the allegations in the statement of claim, was caused by Stramit and Thomson; (d) ordinarily, security for costs should not be ordered against a liquidator: Re Pavelic Investments Pty Ltd (1983) 8 ACLR 417; (e) there is no prejudice in staying the present proceedings until after completion of the preference proceedings. If ABI fails in the preference proceedings, there is no real likelihood these proceedings would continue. 8 It is no bar to granting an order for security for costs against a company that the company is in liquidation, where that company itself is the litigant. The decision in Re Pavelic Investments dealt with the making of an order for security for costs against the liquidator personally, where the liquidator was the litigant. The distinction is relevant as was noted by the Court of Appeal (NSW) in Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 at 123 : "A distinction must be made between cases in which the liquidator personally is the plaintiff, and those when the company (albeit by its agent, the liquidator) is the plaintiff, a distinction which his Honour regarded as pedantic. In the former case – a prototype of which is the misfeasance summons – if the proceeding fails costs will be awarded against the liquidator personally (Re W Powell and Sons [1896] 1 Ch 681), but no order for security for costs will be made against him (Re Strand Wood), apparently on the ground that he is exercising a statutory power vested in him personally. Where the company in liquidation is the plaintiff, things are otherwise. In this case, obviously the Court has jurisdiction to order security for costs: that is what s 1335 says. The fact that the company has a deficiency of assets compared to liabilities (a not uncommon feature of companies in liquidation) is evidence of entitlement under the section to an order (Northampton Coal, Iron, and Waggon Co v Midland Waggon Co (1878) 7 Ch D 500 at 503), not (as his Honour seemed to imagine) evidence of immunity from an order. In this regard, it should also be noted that where a company in liquidation sues and fails, there is no jurisdiction in the Court to order the liquidators personally to pay the defendant's costs. Further, a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors): Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; 52 ALR 176. Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs." See also Brookfield v Davey Products Pty Ltd [1994] FCA 191 at p 7 - p 8. 9 Stramit and Thomson have made out a prima facie entitlement to security for costs. The onus is then on ABI to show that to make an order will frustrate the litigation: Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4. 10 In order to satisfy the onus on it, ABI must show that it cannot satisfy an order for security for costs not only from its own resources, but from other resources including those who will benefit from the litigation, in this case the creditors and shareholders of ABI: Hession at 123; Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201; Cherry v Read [1996] FCA 1197 at p 8. 11 The evidence relied on by ABI is contained in the affidavit of John Lethbridge Greig, the liquidator, and Partha Kar, a solicitor in the employ of ABI's solicitors. John Greig deposed : "7. The winding up of the applicant has all but concluded and there are only a small number of outstanding matters including the current proceeding. They are as follows : 7.1 An action by Union Steel against the applicant and the liquidators personally for detinue and conversion. This claim relates to a retention of title claim. 7.2 Two substantial preference claims. One is against the respondent for approximately $1.4 million and the other is against BHP for approximately $500,000.00. 8. I am still in the process of finalising information that is required by my solicitors to commence litigation in relation to both preference claims although I have been advised that my prospects, on the information to hand, are very good. 9. The applicant has limited available funds although I believe substantial funds will be received from the preference claims which will place the administration in a position that it will have more than adequate funds to pay for any adverse costs orders made in relation to the current proceeding. 10. I have not got sufficient funds to pursue the current proceeding until these preference claims are finalised." 12 Partha Kar deposed : "7. I have been instructed by Greig and believe to be true that he believes that he will secure funds to prosecute the preferences actions and undertakes to this Court to prosecute those actions diligently." 13 In my view this evidence does not discharge the onus ABI bears. 14 There was no dispute as to the quantum of security sought and the sum of $34,000 appears reasonable. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper. Associate: Dated: 11 April 2000 Counsel for the Applicant: GA Thompson SC Solicitor for the Applicant: Jones King Counsel for the First and Second Respondents: R Myers Solicitor for the First and Second Respondents: Clayton Utz Date of Hearing: 10 February 2000 Date of Judgment: 11 April 2000