FEDERAL COURT OF AUSTRALIA The Airtourer Co‑operative Limited v Millicer Aircraft Industries Pty Limited [2004] FCA 1400 PROCEDURE – security for costs – impecuniosity of the applicant – 'usual rule' that poverty no bar to litigation – whether usual rule survived enactment of s 56(1) Federal Court of Australia Act 1976 (Cth) PROCEDURE – security for costs – co-operatives – whether co-operative to be treated as a natural person PROCEDURE – security for costs – discretion – factors relevant to exercise of discretion Co-operatives Act 1992 (NSW) s 9(1) Corporations Act 2001 (Cth) s 5F, s 1335 Federal Court of Australia Act 1976 (Cth) s 56 Australian Broadcasting Corporation v Lenah Game Meats Pty Limited (2001) 208 CLR 199 cited Australian Communist Party v The Commonwealth (1951) 83 CLR 1 cited Barton v Minister for Foreign Affairs (1984) 2 FCR 463 applied Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 applied Buckley v Bennell Design and Construction Pty Ltd (1974) 1 ACLR 301 cited Chang v Comcare Australia [1999] FCA 1677 cited Co-operative Farmers' and Graziers' Direct Meat Supply Limited v Smart ('Co-operative Farmers' and Graziers'') [1977] VR 386 considered Gartner v Ernst & Young (No 3) [2003] FCA 1437 cited Melville v Craig Nowlan & Associates Pty Ltd (2002) 54 NSWLR 82 referred to Morris v Handley [2000] NSWSC 957 considered Oshlack v Richmond River Council (1998) 193 CLR 72 cited Plaintiff S157/2002 v Commonwealth of Australia (2003) 211 CLR 476 cited Procon Ltd v Provincial Building Ltd [1984] 1 WLR 557 cited THE AIRTOURER CO‑OPERATIVE LIMITED v MILLICER AIRCRAFT INDUSTRIES PTY LIMITED ACN 072 258 032 (Subject to Deed of Company Arrangement) AND MICHAEL JAMES HUMPHRIS AND LAURENCE ANDREW FITZGERALD in their capacity as Deed Administrators of Millicer Aircraft Industries Pty Limited ACN 072 258 032 (Subject to Deed of Company Arrangement) N 1599 of 2003 BRANSON J 1 NOVEMBER 2004 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1599 of 2003 BETWEEN: THE AIRTOURER CO-OPERATIVE LIMITED APPLICANT AND FIRST CROSS RESPONDENT AND: MILLICER AIRCRAFT INDUSTRIES PTY LIMITED ACN 072 258 032 (Subject to Deed of Company Arrangement) FIRST RESPONDENT AND SECOND CROSS RESPONDENT MICHAEL JAMES HUMPHRIS AND LAURENCE ANDREW FITZGERALD in their capacity as Deed Administrators of Millicer Aircraft Industries Pty Limited ACN 072 258 032 (Subject to Deed of Company Arrangement) SECOND RESPONDENT AND CROSS CLAIMANTS JUDGE: BRANSON J DATE OF ORDER: 1 NOVEMBER 2004 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The applicant give security in a form satisfactory to the Registrar for the payment of costs that may be awarded against it in the sum of $20 000.00. 2. Pending the provision of security as required by par 1 hereof, this proceeding be stayed. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1599 of 2003 BETWEEN: THE AIRTOURER CO-OPERATIVE LIMITED APPLICANT AND FIRST CROSS RESPONDENT AND: MILLICER AIRCRAFT INDUSTRIES PTY LIMITED ACN 072 258 032 (Subject to Deed of Company Arrangement) FIRST RESPONDENT AND SECOND CROSS RESPONDENT MICHAEL JAMES HUMPHRIS AND LAURENCE ANDREW FITZGERALD in their capacity as Deed Administrators of Millicer Aircraft Industries Pty Limited ACN 072 258 032 (Subject to Deed of Company Arrangement) SECOND RESPONDENT AND CROSS CLAIMANT JUDGE: BRANSON J DATE: 1 NOVEMBER 2004 PLACE: SYDNEY REASONS FOR JUDGMENT INTRODUCTION 1 With the agreement of the parties, on 20 October 2004 I assumed responsibility for the determination of the respondents' motion that the applicant provide security in a form satisfactory to the Registrar for the costs of the respondents in a sum of $100 000.00 or such other amount as the Court deems appropriate. Beaumont J had commenced to hear the motion on 7 July 2004 but on that day determined to reserve his decision on the admissibility of certain evidence on which the respondents sought to place reliance. His Honour's ruling on the admissibility of that evidence was published on 23 July 2004. Beaumont J may now not be available for some time to resume the hearing of the motion. The parties are agreed that, in the circumstances, I should do so 'standing in the shoes' of Beaumont J. That is, that I should complete the hearing of the motion and determine it on the basis that the evidence received by his Honour is to be treated as evidence before me and on the further basis that his Honour's ruling binds the parties before me. statutory authority 2 Section 56 of the Federal Court of Australia Act 1976 (Cth) ('the Federal Court Act') provides: '(1) The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security.' 3 The respondents formally placed reliance also on s 1335 of the Corporations Act 2001 (Cth) ('the Corporations Act') which provides: '(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter 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 in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. (2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.' However, I am satisfied that the combined effect of s 5F of the Corporations Act and s 9(1) of the Co-operatives Act 1992 (NSW) is that s 1335 of the Corporations Act has no application to the applicant. contentions of the parties 4 The respondents' case on the motion is summarised in their outline of submissions in the following way: '7. The evidence indicates that Airtourer's financial circumstances are both precarious and worsening. Reserves of operating income, cash and other assets – already of a most limited nature – are in a process of depletion. Airtourer's reorganization of its capital, in such a way as to place its share capital beyond the reach of creditors (including, potentially, the respondents) is a matter of some considerable significance, …. 8. There is also the evidence of Mr Humphris lead at the 7 July hearing as to his conversation with Mr Knox, a director of Airtourer, on 3 June 2004. The admission of that evidence – which extracts Mr Humphris' conversation with Mr Knox in full – was subject of the Court's separate determination on 23 July 2004 ([2004] FCA 948). Relevantly, the evidence was as follows (T15): "Mr Knox indicated to me that he had, and my recollection of the words were that he had no concern about the cash imposition of legal fees as the coop had arrangements with its lawyers. He then indicated to me – sorry, I put it to Mr Knox that in the event that the co‑op did lose the action the co‑op could be facing significant costs which would have been of course our costs in the matter as well. Mr Knox indicated to me and my recollection of his words were at that stage once again he was not concerned about that as the co‑op actually had no funds and he would be quite comfortable to see the co-op go into liquidation and in his words would be happy for me to be the liquidator. At that time I said well regardless of that I hoped it was not going to come to that point and suggested to him that a commercial settlement of $50,000 may have been appropriate. Mr Knox said to me that that was not possible as the co‑op couldn't even pay half of that amount. However, he would put it to his board and take the – given me to understand however that it was not possible or [sic] them to consider such an amount because they had no money."' 5 The applicant opposed the respondents' motion on two principal bases. First, it contended that for the purposes of an application for security for costs a co‑operative is to be equated to an individual and given the benefit of the ordinary rule that the poverty of an individual litigant is not a ground for requiring him or her to provide security for costs. Secondly the applicant contended that the respondents' delay in bringing their motion for security for costs is a strong discretionary factor militating against the granting of security for costs. the applicant's financial position 6 The financial records of the applicant reveal that as at 31 December 2002 it had total members' funds of $98 855.67 and that as at 31 December 2003 it had total members' funds of $54 119.08. For the year ending 31 December 2002 the applicant experienced an operating surplus of $4 203.39 but for the year ending 31 December 2003 it experienced an operating loss of $20 236.59. There is no direct evidence before me as to the present level of members' funds held by the applicant. 7 Evidence concerning a reorganisation of the applicant's capital is found in the minutes of the annual general meeting of the applicant held on 23 March 2003. Those minutes record the following special resolution: 'the Airtourer Co‑operative Limited will convert from a co‑operative with share capital to a co‑operative without capital registered under the Co‑operative Act 1992and that the Co‑operative, having obtained consent from each member, will repay that member's share.' 8 I accept the submission of the respondents that the conversion of the applicant to a co‑operative without capital is likely to reduce the funds that would otherwise be available to the applicant to pay a costs order made against it. It appears from a copy letter received in evidence that repayments of capital subscribed to the applicant were being made during the calendar year 2004. However, I am not prepared to draw the inference that the special resolution was passed for the purpose of limiting the funds available to the applicant to pay any costs order made against it in this proceeding. The proposal to convert the applicant to a co‑operative without capital was made, I conclude, some time earlier than 4 February 2002. By a letter dated 4 February 2002 the applicant advised the Registry of Co‑operatives of the view of its directors that, for the reasons set out in that letter, the applicant would be more appropriately structured without share capital. The reasons set out in the letter were unrelated to this, or any, litigation. Further, there is nothing before me to suggest that this proceeding, which was initiated on 24 October 2003, was in anybody's contemplation in early 2002. 9 I do, however, draw the following inferences from the evidence before me: (a) that the applicant is willing to exhaust its available funds in meeting its own legal costs of this proceeding; (b) the applicant is willing, if necessary, to seek additional funds from its members to allow it to complete this litigation; (c) the applicant does not presently contemplate that its funds will be available to meet a costs order in favour of the respondents; and (d) the applicant does not presently contemplate seeking additional funds from its members to allow it to pay any costs order in favour of the respondents. 10 I draw the above inferences principally from a draft letter ('the draft letter'), apparently prepared by the applicant's directors for submission to the applicant's solicitor, and from the terms of the conversation between Mr Michael Humphris, one of the second respondents, and Mr Hugh Knox, a director of the applicant, referred to in the respondents' outline of submissions (see [4] above). The draft letter is referred to in the minutes of a meeting of the directors of the applicant held on 5 March 2003 and is attached to those minutes. The terms of the draft letter suggest that the directors envisaged that the letter, in final form, would be sent to the first respondent. The draft letter includes the following paragraphs: 'We originally had a financial kitty of $50,000.00 with [sic] which we were prepared to allocate to recover the Type Certificates. To date, we have consumed $17,000.00 in legal fees and our remaining funds are in the order of $33,000.00. We are prepared to use these funds to initiate legal proceedings. If and when required, we can seek additional funds from our members to complete the legal action we intend to initiate. … We see 3 possible outcomes … after we proceed with legal action and in each one of these outcomes, we see almost no opportunity for you to recover the costs that you have incurred to date. In the unlikely event that you win the court case, you still will not have received any funds for the Type Certificate and your expenses will have increased. You will also be subject to the possibility of paying our court costs. Our company has a limited liability.' CONSIDERATION Co-operative Status 11 As mentioned above, the applicant contends that, being a co-operative, it must, for the purposes of the application for security for costs, be treated as if it were a natural person. In support of this contention it placed reliance on Co-operative Farmers' and Graziers' Direct Meat Supply Limited v Smart [1977] VR 386 ('Co-operative Farmers' and Graziers''). 12 In Co-operative Farmers' and Graziers' at 389 Kaye J noted that there was authority supporting the view that, in the absence of statutory provisions to the contrary, the general rule that poverty of a litigant is not a ground for ordering the litigant to provide security for the costs of an action initiated by him or her applies both to an artificial legal person as well as a natural person. At 392 his Honour concluded that nothing took the action before his Honour outside the general rule that poverty of a plaintiff is not a ground requiring the plaintiff to give security for costs. 13 I do not regard Co-operative Farmers' and Graziers' as authority for the proposition that a co-operative must be equated with a natural person for the purposes of an application for security for costs. The approach adopted by Kaye J was simply that, in the absence of a legislative direction to the contrary, the general rule to which his Honour referred applied equally to natural persons and artificial legal persons. I reject the submission that the applicant must, for the purposes of this application, be equated with a natural person. 14 A significant difference between a co‑operative and a natural person is that an order for costs made against a natural person, if not met, can found a bankruptcy petition. The making of a sequestration order against a person's estate has significant consequences for that person. By contrast, an order for costs made against a co‑operative, if not met, may have no adverse consequences of significance for any individual co‑operative member. In this case it seems fair to conclude that at least the directors of the applicant would not be greatly troubled were steps to be taken to wind up the applicant. That is not to say that the applicant is merely a nominal applicant. I do not conclude that the proceedings are being brought, not for the benefit of the applicant, but principally to benefit individuals unwilling to render themselves vulnerable to an order for costs. However, as indicated above, I do conclude that the directors of the applicant are willing to organise the financial affairs of the applicant in a way calculated to result in its being able to prosecute this proceeding but unable to meet any order requiring it to pay a significant sum to the respondents in respect of their legal costs. The Usual Rule as to Impecuniosity 15 Rejection of the submission that the applicant is entitled to be equated with a natural person for the purposes of this application does not render the usual rule as to impecuniosity, should it have survived the enactment of subs 56(1) of the Federal Court Act, irrelevant to this application (Co-operative Farmers' and Graziers'). It is therefore necessary to give consideration to whether the usual rule as to impecuniosity has survived the enactment of subs 56(1) and, if it has, its relevance to this application. 16 The Full Court observed in Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 ('Bell Wholesale') at 3: 'Section 56(1) is in general terms. … The discretion to make orders under s 56 must be exercised judicially, but that is the only relevant limitation.' Consideration must therefore be given to the content of the requirement that the discretion be exercised judicially. 17 Where a power conferred by legislation is to be exercised judicially, it is to be exercised 'not arbitrarily, capriciously or so as to frustrate the legislative intent' (Oshlack v Richmond River Council [1998] HCA 11; 193 CLR 72 per Gaudron and Gummow JJ at [22]). Further, where a power of the nature of that conferred by legislation has a long history, the legislative power is to be exercised according to principle, not unguided discretion (Australian Broadcasting Corporation v Lenah Game Meats Pty Limited [2001] HCA 63; 208 CLR 199 per Gleeson CJ at [10]). Additionally, as Gleeson CJ stated in Plaintiff S157/2002 v Commonwealth of Australia [2003] HCA 2; 211 CLR 476 at [30]: '…courts do not impute to the legislature an intention to abrogate or curtail fundamental rights or freedoms unless such an intention is clearly manifested by unmistakable and unambiguous language. General words will rarely be sufficient for that purpose.' 18 The common law has long regarded it as a fundamental right of a citizen, including an impecunious citizen, to have access to the courts. Indeed, this fundamental right might be thought to be immanent in the rule of law. The rule of law, as Dixon J observed in Australian Communist Party v The Commonwealth (1951) 83 CLR 1 at 193, is assumed by the Australian Constitution. It would be strongly arguable, in my view, that a legislative provision that purported to restrict access to this Court to litigants able to provide security for the payment of costs that might be awarded against them would offend Chapter III of the Constitution. However, in my view, nothing suggests that subs 56(1) of the Federal Court Act was intended to curtail that fundamental right. The authorities have not understood it to do so. For example, Morling J, who only a month before had been a member of the Full Court that delivered judgment in Bell Wholesale, in Barton v Minister for Foreign Affairs (1984) 2 FCR 463 at 469 accorded recognition to the fundamental right of a citizen to have access to the courts when he observed that: 'It has never been the case that impecuniosity on the part of a plaintiff is a ground for ordering him to give security for costs. In Pearson v Naydler [1977] 1 WLR 899, Megarry V-C said: "The basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is ancient and well-established. As Bowen LJ said in Cowell v Taylor (1885) 31 Ch D 34 at 38, both at law and in equity 'the general rule is that poverty is no bar to a litigant'. The power to require security for costs ought not to be used so as to bar even the poorest man from the courts."' 19 Other Federal Court authorities to the same effect are identified in Heydon JA's review of authorities concerning the proper construction of s 56 of the Federal Court Act in Melville v Craig Nowlan & Associates Pty Ltd [2002] NSWCA 32; 54 NSWLR 82 ('Melville v Craig Nowlan') at [82]-[94]. These authorities demonstrate that this Court has a long history of exercising the broad discretion vested in it by s 56 in a way that accords respect to the principle that it is a fundamental right of citizens, whether poor or wealthy, to be able to access the courts to protect their legitimate legal rights. 20 The answer to the question of how the general rule that poverty is no bar to a litigant survived the enactment of s 56(1) of the Federal Court Act (see Melville v Craig Nowlan at [84]‑[89]) is to be found, in my respectful view, in the fact that the rule derives from the principle that citizens have a right of access to the courts. That is, the provenance of the rule is such that the requirement that the discretion vested in the Court by the subsection be exercised judicially, in the sense identified in [17] and [18] above, mandates its survival. 21 Recognition by this Court of the general rule that poverty is no bar to a litigant has not meant that the Court has proceeded on the basis that an order for security for costs can never be made against an impecunious litigant. An order for security for costs is only rarely sought against a litigant who is not impecunious. An order for security for costs made against an impecunious litigant when justified by a factor other than mere impecuniosity does not offend the general rule that poverty is no bar to a litigant. Indeed in Morris v Handley [2000] NSWSC 957 at [12] Young J pointed out that what we call applications for security for costs have their origin in 'de-pauperisation' applications. Such applications, it seems, were intended to result in a pauper shown to have brought a vexatious or oppressive action losing his or her entitlement to sue in forma pauperis. 22 For the above reasons, I consider that I am bound both by authority and principle to act on the basis that subs 56(1) of the Federal Court Act is not intended to empower the Court to act in disregard of the principle that poverty of itself is no ground for ordering a litigant to provide security for costs. Relevant Factors 23 As Moore J pointed out in Chang v Comcare Australia [1999] FCA 1677 at [25]: 'While impecuniosity is not, by itself, sufficient to warrant an order for security, it is generally a relevant consideration.' 24 The above analysis of the evidence concerning the applicant's financial position reveals that it is impecunious in the sense that it is unlikely, if unsuccessful in this proceeding, to be able to meet an order for costs in favour of the respondents. The evidence discloses factors additional to the applicant's impecuniosity, albeit related to it, that I regard as significant in the context of this application. Those factors are first, that the applicant has a limited pool of funds available to it, which it plans to utilise to meet its own legal costs but which it does not plan should be available to meet any costs order made in favour of the respondents. Second, the applicant has members to which its directors consider that they can turn should the applicant require additional funds. 25 Additional considerations generally regarded in this Court as relevant to the exercise of the discretion vested in the Court by subs 56(1), as Mansfield J recognised in Gartner v Ernst & Young (No 3) [2003] FCA 1437 at [10], include: '● the prospects of success in the proceedings, subject to the practical circumstance that the Court will generally not be required to investigate in considerable detail the likelihood or otherwise of success in the action; ● whether an order for security for costs would preclude the applicant from pursuing the claim; ● whether the impecuniosity of the applicant arises out of the breaches of conduct alleged against the respondent; ● the public interest; and ● the timing of the application, namely that it should be brought promptly.' 26 I am satisfied that the applicant's claim is made bona fide and see no reason to conclude that it does not have reasonable prospects of success. That is, I do not consider that this is a case in which an impecunious litigant is abusing the Court's process or otherwise acting vexatiously or oppressively. 27 I do not conclude that an order requiring the applicant to provide a relatively modest sum by way of security for costs would preclude the applicant from pursuing its application to the Court. It might require the directors of the applicant to request additional funds from members of the applicant but, as the proceeding is presumably being pursued by the applicant in the interests of its members, I see nothing inappropriate in such an outcome. 28 It has not been suggested that the impecuniosity of the applicant arises out of the conduct of the respondents that is the subject of this proceeding. 29 This is not a case of a kind such that, in my view, the public interest suggests either that an order under subs 56(1) should be made or that it should not be. 30 The applicant sought to persuade me that the respondents have delayed bringing the present motion and for that reason should be denied the order that they seek. Delay is an important factor where an order for security for costs is sought, principally for the reason identified by Moffit P in Buckley v Bennell Design and Construction Pty Ltd (1974) 1 ACLR 301 at 309 where the learned President observed: 'The primary reason why the application should be brought promptly and pressed to determination promptly is that the company, which by assumption has financial problems, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it is allowed to or commits substantial sums of money towards litigating its claim.' 31 I am not satisfied that this application for an order under subs 56(1) should fail on the ground that it was not brought promptly. The evidence discloses that the respondents wrote to the applicant's solicitors promptly after the conversation between Mr Humphris and Mr Knox referred to above. I am satisfied that it was that conversation that alerted the respondents to the apparent willingness of the directors of the applicant to allow the funds of the applicant to be exhausted in payment of the applicant's own legal costs and further to allow the applicant to be wound up should an order for costs in favour of the respondents be made against it. As indicated above, I regard these as important factors so far as this application is concerned. CONCLUSION 32 Having regard to all of the factors identified above, I have concluded that it is appropriate in the circumstances of this case to require the applicant to provide security for the costs of the respondents. I do not consider that the interests of justice require that the costs incurred by the respondents before the filing of the notice of motion seeking an order for security for costs should be disregarded in determining the amount for which security should be provided. It seems to me that the appropriate approach is that 'the security should be such as the court thinks in all the circumstances of the case is just' (Procon Ltd v Provincial Building Ltd [1984] 1 WLR 557 at 567). 33 I consider that the interests of justice will be best served by the amount being set at a relatively modest level. The amount should not be so large as to stifle the litigation. However, the amount should be sufficient to ensure that the directors of the applicant appreciate that the risk that the applicant might be ordered to pay the respondents' costs has more than notional significance. 34 It seems likely that the amount now held by the applicant as members' funds is well below $50 000.00 (see [6] above). The process of fixing on a sum in which the applicant must provide security necessarily has an arbitrary element but I have concluded that the appropriate sum in this case is $20 000.00. The applicant will be ordered to give security in that amount. It will further be ordered that, pending provision of security in that amount, this proceeding be stayed. I will hear the parties on the question of the costs of the motion. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Branson. Associate: Dated: 1 November 2004 Counsel for the Applicant and First Cross Respondent: M Leeming with J Hewitt Solicitor for the Applicant and First Cross Respondent: Norton White Counsel for the First and Second Respondents, Second Cross Respondent and Cross Claimant: J White Solicitor for the First and Second Respondent, Second Cross Respondent and Cross Claimant: Cowley Hearne Lawyers Pty Limited Date of Hearing of Motion: 20 October 2004 Date of Judgment: 1 November 2004