FEDERAL COURT OF AUSTRALIA Gazebo Hotels Pty Ltd v Bugledich [2002] FCA 1412 GAZEBO HOTELS PTY LTD v BUGLEDICH N3009 of 2002 JACOBSON J SYDNEY 6 NOVEMBER 2002 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N3009 OF 2002 BETWEEN: GAZEBO HOTELS PTY LTD APPLICANT AND: JULIAN ATTILA BUGLEDICH RESPONDENT JUDGE: JACOBSON DATE OF ORDER: 6 NOVEMBER 2002 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The applicant, on or before Friday 15 November 2002, provide by way of a cash deposit with the Court, security for the respondent's costs of these proceedings in the amount of $30,000. 2. The security for costs referred to in order 1 would be the applicant's security for the costs of the proceeding up to the conclusion of the hearing at first instance in this application. 3. The security for costs will only be released to the applicant upon the happening of one or more of the following events:- (a) an order of the court, (b) an agreement of the parties, (c) a final determination of these proceedings. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N3009 OF 2002 BETWEEN: GAZEBO HOTELS PTY LTD APPLICANT AND: JULIAN ATTILA BUGLEDICH RESPONDENT JUDGE: JACOBSON DATE: 6 NOVEMBER 2002 PLACE: SYDNEY REASONS FOR JUDGMENT 1 I have before me this morning a notice of motion brought by the respondents seeking an order that the applicant in the proceedings provide security for the respondents' costs of the proceedings. The motion was filed on 1 November 2002 and made returnable today. The proceedings have been fixed for hearing on 18 November 2002. Because of the lateness in bringing the application I have limited time this morning to deal with the matter. 2 The court has power to order security for costs under s 1335 of the Corporations Act provided I am satisfied that there is "credible testimony", that there is reason to believe that the applicant will be unable to pay the respondents' costs if they are successful in their defence of the proceedings. There is no evidence at all as to the financial position of the applicant, however, on 2 September 2002 the respondents' solicitors wrote to the applicant's legal officer indicating that the respondents would seek security because the applicant is not a trading entity since its major asset, the Gazebo Hotel, is said to be "no longer in existence". I understand this is because the hotel is in the process of conversion into home units. 3 The proposition stated in the letter from the respondents' solicitors has not been disputed by the applicant. The correspondence reveals that the applicant initially proposed an undertaking by Australian Development Corporation Pty Limited ("ADC") which is the parent of the applicant. 4 There was correspondence about the form of the undertaking and about the financial position of ADC. On 25 October 2002 the respondents' solicitors informed the applicant's legal officer that they did not consider an undertaking from ADC to be acceptable. They requested cash security of $60,000. 5 On 28 October the applicant offered an undertaking from Gazebo Properties Pty Limited which is a wholly owned subsidiary of ADC, This was offered in lieu of an undertaking from the parent company. On 30 October 2002 the respondents' solicitors wrote to the applicant stating that it would accept signed undertakings from both Gazebo Properties Pty Limited and ADC. The applicant rejected this but renewed its offer to provide an undertaking from Gazebo Properties Pty Limited. 6 In my opinion I am entitled to infer from the applicant's failure to dispute the statement in the letter of 2 September 2002 that there is credible testimony which enlivens my discretion under s 1335 of the Corporations Act. The applicant did not in the correspondence dispute that security ought to be provided. The only debate between the parties both in the correspondence and today has been as to the form of security. 7 I have been taken to a number of authorities this morning. I do not propose to refer to them in detail. It is well established that the form of security is a matter for the court. It also seems clear enough from the textbook by Mr S Colbran, Security for Costs, that as a general rule the form of security ought to afford an immediate security upon demand for the costs of the party. The undertaking which has been offered by the applicant in the proceedings was marked as exhibit one in the motion. The undertaking which has been offered is from Gazebo Hotels Pty Limited which is the owner of the Gazebo Hotel property. The company undertakes to meet any costs orders made by the court in favour of the respondents to the proceedings. Mr White who appeared for the applicant today offered, on instructions from his client, a further undertaking that Gazebo Hotels Pty Limited would not dispose of the property pending the resolution of these proceedings. 8 This form of security has not been accepted by the respondents. I was concerned that the matters raised by the respondent today had not been referred to in correspondence between the parties prior to the filing of the notice of motion. The correspondence discloses that the respondents were prepared to accept an undertaking in the form presently offered but they required further information and shortly before the filing of the motion rejected the offer of security from Gazebo Hotels Pty Limited. They required instead undertakings from both Gazebo Hotels Pty Limited and ADC. 9 It seems to me that the effect of the authorities to which I have been taken this morning is that a party who seeks security is not required to accept undertakings to indemnify that party where there is no assurance that the undertaking would remain adequate and where further proceedings would be necessary to enforce the undertaking. It is well established that where the personal shareholders of a corporation are prepared to offer an undertaking to pay the costs the court will not require the undertaking to be secured because the effect of such an undertaking is that the persons who stand behind the company step into the shoes of the company for the purpose of meeting a costs order. It is well established in this court that as a general rule personal individuals are not required to secure their guarantee or undertaking to meet the costs. 10 The applicant has not suggested that an order for security in the form of a cash deposit might stultify the proceedings. Nor has the applicant raised any suggestion that it would be unable to provide a bank guarantee for security in the event that I make such an order. 11 Although, as I have said, I was concerned that the matters raised today by counsel for the respondents had not been raised in the correspondence it does seem to me that the security offered by the applicant in the form of a guarantee from Gazebo Properties Pty Limited does not meet the general rule applicable to cases in which security is ordered against a corporation. Although the evidence in Mr Fisher's affidavit indicates that the company has a net equity in the order of $24 million I cannot be satisfied that changes in the financial position of the company offering the undertaking will not occur prior to the resolution of the proceedings. It is true that an undertaking is offered not to dispose of the hotel but there may be other circumstances which arise which would render the form of security inadequate. 12 In those circumstances it seems to me that I ought to order security for costs in the form of a cash deposit. 13 There has been no debate before me as to the amount to be provided by way of security. Mr Imlay's affidavit indicates that the respondents will incur costs of not less than $52,000. However, there has been no attempt in the affidavit to estimate the costs that would be incurred on a party and party basis. Nor does the affidavit attempt to provide an itemised list and break down of the costs which are said to be incurred. I am entitled to order security in an amount which in my opinion provides sufficient protection to the respondents. Doing the best I can on the limited evidence before me the amount which I propose to order is $30,000. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jacobson. Associate: Dated: 18 November 2002 Counsel for the Applicant: Mr M S White Solicitor for the Applicant: Mr Graham Nicholls of Australian Development Corporation Pty Ltd Counsel for the Respondents: Mr H Stowe Solicitor for the Respondents: Selby Levitt Date of Hearing: 6 November 2002 Date of Judgment: 6 November 2002