FEDERAL COURT OF AUSTRALIA A.C.N. 002 023 609 Pty Limited v Meware Pty Limited [2001] FCA 650 PRACTICE AND PROCEDURE – security for costs – whether Court should exercise power to order security under Federal Court of Australia Act 1976 (Cth) s 56(1) – where power discretionary – whether relevant consideration ability of corporate applicant to pay respondents' costs should applicant's claim fail – whether relevant consideration making of order for security effectively terminating litigation because of applicant's impecuniosity – whether, when applicant incorporated, impecuniosity to be so considered that of corporate applicant or persons standing behind it – whether burden of persuasion on question of impecuniosity of persons standing behind corporate applicant carried by party seeking or party resisting order for security – whether relevant consideration alleged wrongdoing of respondent said to have brought about applicant's impecuniosity – where applicant incorporated and persons standing behind it themselves not shown to be impecunious – whether relevant consideration strength of applicant's case – whether relevant consideration "public interest" element to litigation – quantum of security. Federal Court of Australia Act 1976 (Cth) s 56(1) Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 followed Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 referred to A.C.N. 002 023 609 PTY LIMITED v MEWARE PTY LIMITED & ORS N 1147 of 2000 KATZ J SYDNEY 1 JUNE 2001 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1147 of 2000 BETWEEN: A.C.N. 002 023 609 PTY LIMITED (ACN 002 023 609) APPLICANT AND: MEWARE PTY LIMITED (ACN 080 551 293) FIRST RESPONDENT WILLIAM KEEN SECOND RESPONDENT MICHAEL DONALD PHILLIPS THIRD RESPONDENT WILLIAM GEORGE KEITH FOURTH RESPONDENT ERIC BOAS FIFTH RESPONDENT HETHERINGTON KINGSBURY PTY LIMITED (ACN 000 565 766) SIXTH RESPONDENT JUDGE: KATZ J DATE OF ORDER: 1 JUNE 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1 The applicant be required to provide security for the respondents' costs in the sum of $15,000 down to the stage at which discovery has been completed and the respondents haveed consider the applicant's affidavit evidence. 2 The parties bring in agreed short minutes of orders giving effect to the reasons for judgment published today, in default of which the matter is to be listed on a mutually convenient date for argument on orders. 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 N 1147 of 2000 BETWEEN: A.C.N. 002 023 609 PTY LIMITED (ACN 002 023 609) APPLICANT AND: MEWARE PTY LIMITED (ACN 080 551 293) FIRST RESPONDENT WILLIAM KEEN SECOND RESPONDENT MICHAEL DONALD PHILLIPS THIRD RESPONDENT WILLIAM GEORGE KEITH FOURTH RESPONDENT ERIC BOAS FIFTH RESPONDENT HETHERINGTON KINGSBURY PTY LIMITED (ACN 000 565 766) SIXTH RESPONDENT JUDGE: KATZ J DATE: 1 JUNE 2001 PLACE: SYDNEY REASONS FOR JUDGMENT 1 The six respondents to a proceeding before the Court have sought from me an order that the sole applicant in the proceeding give security for the payment of costs that I may award in the proceeding against the applicant and in the respondents' favour. The applicant is a company, as are the first and sixth respondents. The second to fifth respondents are individuals. 2 The respondents have sought to rely on a number of sources (or purported sources) of power for the making by me of such an order, but it is sufficient for present purposes to treat the respondents as having sought to rely solely on one of them, namely, subs 56(1) of the Federal Court of Australia Act 1976 (Cth). 3 The proceeding is one in which the applicant complains of the circumstances of the transfer by it of its shares in the sixth respondent to the first respondent. At the relevant time, the second to fifth respondents were the directors both of the sixth respondent and of the first respondent. In substance, the applicant claims that representations made to it by the second to fifth respondents as to the value of the sixth respondent, which representations were misleading, induced it to transfer its shares in the sixth respondent to the first respondent at an undervalue. Among other things, the Trade Practices Act 1974 (Cth) ("the TPA") is relied on to found the respondents' liability. 4 While the respondents admit the making of the relevant representations, they deny their misleading character. Further, the respondents do not admit reliance or loss by the applicant. 5 The applicant has put before me certain evidence as to the merits of its claim against the respondents. That evidence establishes prima facie the facts to which I refer in the following four paragraphs of these reasons for judgment. 6 Until his death in July 1997, Mr Stuart Hugh Deane ("the father") was the effective beneficial owner of the shares in the applicant, which itself owned all of the shares in the sixth respondent. A few months before his death, the father married Ms Rosa Baum ("the new wife"). 7 On the father's death, his son, Mr Stuart Colin Deane ("the son"), became entitled, pursuant to the father's will, to effective beneficial ownership of the shares in the applicant and therefore of the shares in the sixth respondent. The new wife was also a beneficiary under the father's will. 8 In September 1997, the second to fifth respondents made, to the two executors of the father's will ("the executors"), who were also the directors of the applicant and a solicitor and an accountant respectively, an offer to purchase from the applicant for $130,000 the applicant's shares in the sixth respondent ("the first offer"). The first offer was accompanied by representations as to the sixth respondent's then-value. In early October 1997, the executors obtained a valuation of the sixth respondent, which valuation relied on representations which had been made by the second to fifth respondents, including those representations which had accompanied the first offer. That valuation showed that the sixth respondent had a net deficiency of assets of about $1.5M. Shortly thereafter, in late October 1997, the second to fifth respondents increased their offer price to $175,000 ("the second offer"). The executors advised the son to accept the second offer, given the valuation of the sixth respondent which they had obtained. The son accepted that advice and the applicant accordingly accepted the second offer. The applicant then, on 28 October 1997, transferred its shares in the sixth respondent to the first respondent, with the sale price which had been agreed upon being paid to the executors. 9 The valuation which had been obtained by the executors had been prepared in ignorance of the fact, not made known to the valuer by the second to fifth respondents, that the sixth respondent had, in early September 1997, shortly before the making of the first offer, received from an insurer about $2.3M as a result of a "key man" insurance policy which the sixth respondent had held on the life of the father. 10 In addition to the evidence which I have set out in the preceding four paragraphs of these reasons for judgment, I also have before me certain evidence, which I accept for the purpose of the present application for security for costs, relating to the circumstances of the applicant following its transfer of its shares in the sixth respondent to the first respondent. 11 After the executors had received from the second to fifth respondents the sale price for the shares in the sixth applicant, the son effectively decided that the proceeds (less the cost of the valuation) should be paid to the new wife to compromise a "family provision" claim which the new wife then had on foot against the father's estate. That decision was implemented by the executors. 12 Then, in 1998, the applicant was deregistered as a defunct company, it having ceased to trade. Subsequently, however, an employee or former employee of the sixth respondent gave to the son certain information about the circumstances of the transfer by the applicant of its shares in the sixth respondent to the first respondent. Consequently, the applicant was, in 2000, restored to the register by court order. That step was taken so as to permit the applicant's commencement of the present proceeding. Prosecution of the present proceeding is the applicant's only activity; the applicant does not trade. The applicant's only assets are the choses in action constituted by the causes of action on which it relies in the present proceeding. The applicant has liabilities, consisting of obligations to repay to the son sums which he has advanced to it by way of loan to cover its legal expenses in the present proceeding. The son is a director of the applicant, the executors having resigned. The son intends that, if the applicant should recover compensation in the present proceeding, he will procure the distribution of that compensation by the applicant to himself. 13 I turn now to the parties' respective submissions, based on the evidence which is before me for the purpose of the security for costs application and on such facts as have been admitted by the respondents in their defence. 14 Both sides of the record accept that the power which I have to make an order requiring the applicant to give security for the respondents' costs is a discretionary one. 15 The respondents submit that a relevant consideration in the exercise of that discretionary power is whether an applicant, being a company, will be able to pay a respondent's costs of the proceeding if the applicant's claim against the respondent fails. I accept that that is a relevant consideration in the exercise of the discretionary power and it is one to which significant weight should ordinarily be accorded. 16 The respondents further submit that, in the present case, the fact is that the applicant will be unable to pay the respondents' costs of the proceeding if its claims against them fail. 17 The fact that, if its claims against the respondents fail, it will be unable to pay the respondents' costs of the proceeding is a matter which is conceded by the applicant. However, it makes submissions of two different types seeking to overcome the significance of that fact for present purposes. 18 First, it submits that a relevant consideration in the exercise of a discretionary power to order the giving of security for costs is whether the litigation in which such an order is being sought would be effectively terminated by the making of such an order. I accept that that is a relevant consideration in the exercise of the discretionary power and it is one to which significant weight should ordinarily be accorded. 19 The applicant further submits that, in the present case, I should proceed on the basis that the litigation would be effectively terminated if an order for security for costs were made against it. That is because of the applicant's inability itself to provide any security ordered and because it has not been established that the son, as the effective beneficial owner of the applicant, has the capacity to put the applicant in a position to provide any such security. 20 That submission by the applicant to which I have just referred seeks to reverse the burden of persuasion so far as concerns the question of effective termination, by reason of an order for security for costs, of litigation brought by a company. The matter was analysed as follows by a Full Court of this Court (Sheppard, Morling and Neaves JJ) in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 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 [that is, one without the means to satisfy a costs order if one should be made against it] 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." 21 Not only is there no evidence before me from the applicant that the son, who stands behind the applicant and who will benefit from the present litigation if it succeeds, is impecunious, there is evidence to the contrary. I refer again to the evidence to which I have already referred above that the son has in the past lent to the applicant the funds required to cover its legal expenses in the proceeding. 22 I therefore do not accept the applicant's submissions of the first type made in an attempt to overcome the significance for present purposes of the fact that, if the applicant's claims against the respondents fail, it will be unable to pay the respondents' costs of the proceeding. 23 The applicant's submissions of the second type made in an attempt to overcome the significance of the fact for present purposes that, if the applicant's claims against the respondents fail, it will be unable to pay the respondents' costs of the proceeding begin with the submission that it is a relevant consideration in the exercise of a discretionary power to make an order for security for costs whether any impecuniosity of an applicant has arisen out of the wrongdoing alleged against the respondent. The applicant further submits that, in the present case, the fact is that the applicant's impecuniosity arose out of the wrongdoing alleged against the respondents. 24 I am doubtful that the consideration the subject of the applicant's submissions which I am presently discussing is relevant when an applicant is a company having persons standing behind it who will benefit from the litigation if successful and it has not been shown that those persons are themselves impecunious. However, assuming that the consideration is a relevant one even in those circumstances, I am not satisfied that, in the present proceeding, the applicant's impecuniosity did arise out of the wrongdoing alleged against the respondents. The evidence establishes for the purpose of the present application for security for costs that the applicant received the sum of $175,000 for the sale of its shares in the sixth respondent, a sum which, after deduction of the cost of the valuation, no doubt still significantly exceeded the quantum of security for costs presently being sought by the respondents. The applicant no longer has that approximately $175,000 because of a decision by the son that it should be paid by the applicant to the new wife to compromise her claim against the father's estate. It appears to me that it is that decision out of which the applicant's present impecuniosity has, as a matter of common sense, arisen, rather than out of the wrongdoing alleged against the respondents. 25 I turn now to another submission made by the applicant, which is that a relevant consideration in the exercise of a discretionary power to order the giving of security for costs is the strength of an applicant's case. The applicant further submits that, in the present case, the fact is that the applicant appears to have a strong case. 26 Given that I am hearing the present application for security for costs long in advance of any hearing of the applicant's claims on their merits, I do not consider that the present consideration is one to which I should attach much weight. However, as to the fact of the matter, I proceed on the basis that the applicant has at least an arguable case, as the respondents conceded before me. 27 The last of the considerations submitted by the applicant to be relevant in the exercise of my discretionary power to order the giving of security for costs is whether there exists a "public interest" element to the litigation. The applicant further submits that, in the present case, the fact is that there does exist a "public interest" element to the litigation, given the nature of the claims that are being made in it. The applicant points, among other things, to the fact that it relies in the proceeding on alleged breaches of the TPA (compare Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 at 50,637 (Hill J)). The applicant points also to the fact that it alleges against the second to fifth respondents breaches of fiduciary duties owed by them, in their capacities as directors of the sixth respondent, to the applicant, in its capacity as the owner of the shares in the sixth respondent. 28 Accepting for present purposes that the fact is that there does exist a "public interest" element to the litigation, I nevertheless have difficulty in seeing how the consideration presently under discussion is to be given much weight in circumstances in which I am not satisfied that ordering the applicant to give security for costs will effectively terminate the present proceeding. My difficulty in that respect is magnified by the fact that I do not consider myself in a position presently to form a considered (albeit provisional) view as to the strength of the applicant's case, other than that it is arguable. Obviously, the weight to be accorded to the consideration presently under discussion must vary according to the strength of an applicant's case. 29 Balancing the various considerations to which I have referred above, so far as I have found them to be relevant on the facts, I have come to the view that the present is a case in which it would be appropriate to order the applicant to give security for the respondents' costs. I have been influenced in particular by the facts that, without the giving of security, the respondents will be unprotected, so far as their costs are concerned, while, at the same time, a requirement that the applicant give security will not, so far as I am able to tell on the evidence put before me, effectively terminate the proceeding. 30 A question arises, however, as to the quantum of the security which I should require the applicant to give. 31 In their amended notice of motion seeking an order for security for costs, the respondents sought security in the sum of $118,780. That sum was sought in reliance on the opinion of Ms Deborah Susan Vine-Hall, a solicitor and legal costs consultant, expressed in an affidavit sworn by her and read by the respondents on their security for costs application. Ms Vine-Hall's opinion, as expressed in her affidavit, had been that, assuming failure of the applicant's claims against them, the respondents' taxed party and party costs from the date of the service on them of the application to the date of hearing would be approximately the sum mentioned in the amended notice of motion. Ms Vine-Hall had derived that sum by estimating the recoverable party and party costs so far incurred by the respondents at the date of the swearing of her affidavit ($2,350), by estimating the time to be spent by the respondents' counsel, solicitors and paralegals on various litigious steps up to the date of hearing (89 hours, 248 hours and 60 hours respectively), by multiplying those time estimates by certain hourly rates ($250, $245 and $57 respectively) and by adding to the sums so derived sums for general disbursements ($15,000, mostly for photocopying, apparently) and for an expert's report ($15,000). 32 It will be apparent that the persuasiveness of Ms Vine-Hall's opinion depends in significant measure on the accuracy of her estimates of the amounts of time to be spent on future litigious steps by counsel, solicitors and paralegals down to the stage of the hearing of the present proceeding. Naturally, she conceded so much in cross-examination. She also conceded that those estimates could very significantly exceed the times actually required to perform the allotted tasks. Those concessions caused the applicant to submit that, if I were, contrary to its submissions, to decide that it should be required to give security for the respondents' costs, that security should only be down to the stage at which discovery had been completed and the respondents had considered the applicant's affidavit evidence. Beyond that stage, it was submitted, Ms Vine-Hall's estimates became too speculative to rely on. That submission was one from which, in the result, the respondents did not demur, provided that they were not precluded from making a further application for security for costs at a later stage of the proceeding, if so advised. 33 I have decided that the better course to follow is that which, as I understood it, both sides of the record accepted as sensible, if an order for security for costs were to be made. In the circumstances, I consider that the applicant should be required to provide security, which I will fix in the sum of $15,000, for the respondents' costs down to the stage at which discovery has been completed and the respondents have considered the applicant's affidavit evidence. 34 If the parties are unable to agree on the form which that security should take and on other consequential aspects of the matter, I will hear them on those questions. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Katz. Associate: Dated: 1 June 2001 Counsel for the Applicant/ C Harris Respondent on the Notice of Motion: Solicitors for the Applicant: Piper Alderman Counsel for the Respondents/ J W Stevenson Applicants on the Notice of Motion: Solicitors for the Respondents: Middletons Moore & Bevins Date of Hearing: 2 May 2001 Date of Judgment: 1 June 2001