FEDERAL COURT OF AUSTRALIA Day v Mercedes-Benz Australia Pacific Pty Ltd [2009] FCA 464 GRAEME DAY, FYSHWICK PROPERTIES PTY LTD and CANBERRA STAR MOTORS PTY LTD v MERCEDES-BENZ AUSTRALIA PACIFIC PTY LTD and MERCEDES-BENZ FINANCIAL SERVICES AUSTRALIA PTY LTD NSD800 of 2008 STONE J 8 MAY 2009 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD800 of 2008 BETWEEN: GRAEME DAY First Applicant FYSHWICK PROPERTIES PTY LTD Second Applicant CANBERRA STAR MOTORS PTY LTD (IN LIQ) Third Applicant AND: MERCEDES-BENZ AUSTRALIA PACIFIC PTY LTD First Respondent MERCEDES-BENZ FINANCIAL SERVICES AUSTRALIA PTY LTD Second Respondent JUDGE: STONE J DATE OF ORDER: 8 MAY 2009 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The application in the Notice of Motion filed on 20 January 2009 be dismissed. 2. The costs of the Notice of Motion be reserved. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD800 of 2008 BETWEEN: GRAEME DAY First Applicant FYSHWICK PROPERTIES PTY LTD Second Applicant CANBERRA STAR MOTORS PTY LTD (IN LIQ) Third Applicant AND: MERCEDES-BENZ AUSTRALIA PACIFIC PTY LTD First Respondent MERCEDES-BENZ FINANCIAL SERVICES AUSTRALIA PTY LTD Second Respondent JUDGE: STONE J DATE: 8 May APRIL 2009 PLACE: SYDNEY REASONS FOR JUDGMENT 1 By notice of motion filed on 20 January 2009 the respondents in this proceeding move the Court for orders that the third applicant, Canberra Star Motors Pty Ltd (in Liq) provide security for the costs of the first and second respondents. The dispute between the parties concerns the breakdown of a car dealer agreement between the third applicant, Canberra Star Motors (CSM), and the first respondent. 2 The Statement of Claim filed on 30 May 2008 asserts causes of action arising out of breach of the dealer agreement, unconscionable conduct, misleading or deceptive conduct, misrepresentations as to taxation liability and breach of a bailment agreement. The respondents have filed a cross-claim against the applicants claiming that the first applicant breached its guarantee of the performance of CSM and CSM repudiated the dealer agreement causing loss or damage to the first respondent. 3 CSM was owned and operated by the first applicant, Mr Day. The company carried on the business of a dealer in a variety of motor cars, including Mercedes-Benz vehicles, in the Canberra area between 1994 and August 2006. In August 2006 CSM went into voluntary administration and proceeded into liquidation in November 2006. In May 2008, CSM purported to assign all causes of action against the respondents to Mr Day. The respondents challenge the efficacy of the assignment of the causes of actions, particularly those arising under the Trade Practices Act 1974 (Cth). While the first applicant contends that the assignment was effective, as I understand it, the third applicant has been joined to the proceeding as an exercise in caution. 4 In an affidavit affirmed on 20 January 2009, the solicitor for the respondents, Mr David Rydon, set out the history and structure of the proceedings so far and added: In my submission, it is likely that if this matter proceeds to trial it will involve; (a) complex questions of law; (b) complicated and extensive issues of fact which extend over a decade. I believe that it will be necessary for the Respondents to call extensive evidence from at least 12 witnesses as to matters of fact on behalf of the Respondents; (c) extensive discovery both from the parties to the proceedings and from non-parties (to be obtained by subpoena). I am informed by the general counsel for the primary Respondent, MBAP and believe that his assessment (based on the current discovery categories being pursued by the Applicants) is that discovery is most likely to be very extensive and time consuming and will most likely involve voluminous documentation, both paper and electronic. I deal briefly and separately below with the likely impact of discovery in this matter; (d) expert evidence from accountants, business valuers, property valuers and tax experts to deal with the claims by CSM. 5 Mr Rydon also estimated that extensive discovery would be sought and that it would require "significant time and effort to locate, review and then discover documents". He outlined the steps that, in his view, would be involved in preparing the proceedings for hearing and gave a breakdown of the time that would be required to be spent by counsel and others. His estimate of the total cost of preparing the matter for hearing, assuming that it were to progress efficiently and expeditiously, as being in the order of $402,500 plus GST. 6 There is considerable disagreement between the parties as to the quantum of security should the Court be minded to order that security be provided. For this reason, at the hearing of the application the parties accepted that I should hear argument on the core question of whether security would be ordered and hear argument as to quantum only if that question were decided in favour of the respondents. Since, for reasons that follow, I have decided that the application for security should be dismissed it is not necessary to say anything more in these reasons about the quantum of security. 7 The Court's jurisdiction to order security for payment of costs arises under s 56 of the Federal Court of Australia Act 1976 (Cth) which 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. 8 In addition to s 56, the applicants rely on s 1335 of the Corporations Act 2001 (Cth) which is as follows: 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. 9 As can be seen, s 1335 gives the Court a very similar discretion to s 56 however, unlike s 56, there is a threshold requirement that there be credible testimony concerning the corporation's inability to pay the costs of the defendant if successful. Is not disputed that the applicant is insolvent and that the threshold requirement has been met. The report of the administrator to the creditors of the company in liquidation states that the company has insufficient funds to pay a dividend to priority employee creditors or unsecured creditors. For present purposes therefore there is no need to distinguish between s 56 and s 1335 and for convenience I shall refer only to s 56. 10 It is well established that the Court's discretion under s 56 is broad and unfettered although it must be exercised judicially. Order 28 r 3 of the Federal Court Rules lists matters that the Court may take into account in considering an application however the circumstances listed are neither necessary nor sufficient. The fact that an applicant is impecunious understandably often prompts an application for security for costs. While clearly relevant to such an application, however, impecuniosity is not in itself a sufficient reason to order security especially if to do so would preclude the applicant from pursuing the claim. 11 There is, however, considerable support for the proposition that, in relation to an application for security for cost there are considerations relevant to an insolvent company that do not arise where security is sought from an individual. In Pacific Acceptance Corporation Ltd v Forsyth (No 2) [1967] 2 NSWR 402 at 407, Moffitt J said: [T]he very basis of the exercise of jurisdiction to order security for costs against a company as distinct from an individual is that the company is impoverished. It recognises that if a company wins it will get the benefit of its verdict and an order for costs against the defendant to the advantage of those who have an interest in the assets of the company, but that the defendant sued will, if successful, be at a disadvantage in being unable to recover his costs if the company is financially insecure and that it is fair that he be placed in an equal position with the company by the company providing or having provided by those concerned in the fruits of the litigation a means of the defendant sued recovering his costs, if he wins. 12 Similar comments were made by Connolly J in Harpur v Ariadne Australia Limited [1984] 2 QdR 523 at 532 and Waddell J in Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 116. 13 These authorities would weigh heavily in favour of the respondents' application were it not for two highly relevant considerations. The first consideration is that the company in liquidation is only one of three applicants so that should an order for costs be made against the applicants jointly the first and second applicants would be liable to meet those costs irrespective of the ability of the third applicant to contribute. In this regard it is relevant to note that no order for security has been sought against the first and second applicants. The likelihood of any costs order being made against all three applicants jointly depends upon the extent to which the claims of the applicants overlap; see generally; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 and the authorities mentioned therein. 14 In this case the respondents submit that there is limited overlap between the claims of the three applicants. In particular counsel for the respondents, Mr Pritchard, submitted that aspects of the third applicant's claim are quite separate from those of the other applicants so that it was possible the respondents might fail in relation to the claims brought by the first and second applicants but succeed in relation to at least one claim made by the third applicant. In those circumstances Mr Pritchard submitted that the possibility of the first and second applicants being jointly and severally responsible with the third applicant for any costs order should be discounted. 15 Accepting for present purposes only that the claims of the applicants are legally independent to some extent, it seems to me that if, as appears to be the case, the evidence largely arises out of the same set of circumstances the conduct and duration of the trial would not be significantly extended by the independent claim of the third applicant even though there may be some separate legal argument. In the circumstances, the extent of the overlap – or rather the lack of it – would not be an important factor in the calculation of costs. Even if, as Mr Pritchard suggests, the first and second applicants were to succeed and the third applicant fail, if the claims of the third applicant had not significantly added to the costs of the trial then any separate costs order made against it would presumably not be great. 16 The second consideration which weighs against the respondents' application is that security for costs is less likely to be ordered against an insolvent company if a person standing behind the company has offered a personal undertaking to be liable for the costs. In such a case the form of the undertaking is highly relevant. Counsel for the applicants, Mr Lazarus, submits that this principle applies here in that the respondents' positions are protected by obligations entered into in the form of a "Supplementary Deed". The Supplementary Deed, dated 15 October 2008, witnesses an agreement between the third applicant and the Liquidator of the third applicant on the one part and on the other part, Mr Day, Day & Co Pty Limited as trustee of the Day Family Trust and the second applicant. 17 Mr Lazarus submitted that the arrangements made in the Supplementary Deed are unusual in that "this liquidator is particularly prudent to ensure that not just his position is secured, but also that he is protected and therefore the respondents are protected in the event that a costs order is made in favour of the respondents. That is the whole purpose of the detailed provisions in clauses 5 and 6 of the supplementary deed". Clauses 5 and 6 of the Supplementary Deed refer to the present proceedings. Under clause 5.1 the third applicant and the Liquidator undertake that any costs awarded in their favour will be paid to Mr Day. Under clause 5.2 of the deed Mr Day undertakes that any costs awarded against the second or third applicants or against him will be paid by or on behalf of him to the party in whose favour the award has been made "within the times for payment stipulated by the award, or the rules of the Court". 18 Clause 6.1, headed "Indemnity and Security" provide for Mr Day and Day & Co to indemnify the third applicant and the Liquidator in respect of "all remuneration, costs, losses, expenses and damages, legal fees (on a full indemnity basis) and all other outgoings and liabilities incurred by [Mr Day, the second and third applicants] or the Liquidator or properly claimed against or suffered" by them "in connection with the execution of the Deeds of Assignment (or either of them), the execution of [the Supplementary Deed], the initiation and prosecution of the Proceedings…". There are extensive provisions in the various subclauses of clause 6 designed to provide security by way of a fixed and floating charge over the assets of Day & Co. The secured amount is expressed to be $200,000 with a provision in clause 6.2 (c) (ii) for that amount to be adjusted every six months to the amount "estimated by the Liquidator to be the potential liability" of Mr Day pursuant to clause 6.1. 19 In an affidavit made on 10 March 2009, Mr Christopher Gillis, who is the solicitor for the applicants in this proceeding, stated that in November 2008 Day & Co granted a fixed and floating charge over its assets in favour of the third applicant. Mr Gillis' evidence satisfies me that the charge granted to the third applicant is a first and only fixed and floating charge over its assets and that the company has no other creditors. 20 Clause 6.2(b) of the Supplementary Deed provides that if a material part of the real estate assets of Day & Co is sold then "on or prior to such sale" the third applicant will discharge the fixed and floating charge on condition that a bank guarantee in favour of the third applicant and the Liquidator or, at Mr Day's option, a bank deposit in their joint names, will be provided. Further protection is given by clause 6.2(D) which provides, as Mr Lazarus explained, that: in the event that it any time, the Liquidator acting reasonably formed the opinion that the then current value should be increased, so as to cover any possible contingent liability of the Liquidator, then the Liquidator may notify Mr Day in writing if the secured amount is to be increased and Mr Day is under a contractual obligation to so increase the amount of the security. 21 In addition, clause 6.4 provides that if Mr Day fails to provide the security or the secured amount then the third applicant and the Liquidator may, by written notice, take any step necessary to cause the third applicant to be removed as a party to the proceeding or to cause the proceedings to be discontinued or dismissed. 22 Mr Pritchard for the respondents had objected that the undertakings given by Mr Day and by Day & Co in the Supplementary Deed were not given in favour of his client and thus should be given no weight in considering the application for security for costs. In my view, the Supplementary Deed should give the respondents very substantial comfort. It is inconceivable that if a costs order were to be made against the third applicant or the Liquidator that the Liquidator would not call on this indemnity. In addition, there are other provisions in the supplementary deed which I have not detailed but which also bolster the undertakings given in clause 6.1 and which, in my view, should also add to the comfort given to the respondents. The fact that the deed does not provide security in the strict sense is not a reason for the Court to order that security be provided. 23 Mr Lazarus also submitted for the applicants that the application for security should be rejected for the reason that the respondents' actions are responsible for the third applicant being impecunious. Given the view I have expressed about the provisions of the Supplementary Deed it is not necessary for me to make any comment concerning this submission. 24 For the sake of completeness I should also mention an additional submission made in support of the respondents' application and premised on the proposition that Mr Day could simply have provided funding for the company to prosecute these proceedings rather than taking an assignment of the present causes of action. Mr Day's role, it was submitted, is akin to that of a litigation funder pursuing commercial return rather than seeking to vindicate a personal right and for this reason the Court should look with more favour on the application for security for costs. I do not accept that this is an appropriate characterisation of Mr Day's role and I reject that submission. 25 For the reasons stated the respondents' motion for security for costs should be dismissed. The costs of the motion are reserved. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Stone. Associate: Dated: 8 May 2009 Counsel for the Applicants: J Lazarus Solicitor for the Applicants: C G Gillis & Co. Counsel for the Respondents: D R Pritchard SC Solicitor for the Respondents: Robinson Legal Date of Hearing: 22 April 2009 Date of Judgment: 8 May 2009