New South Wales Supreme Court CITATION : Bruce Harvey Enterprises Pty Ltd v Forrest and Anor [2002] NSWSC 962 CURRENT JURISDICTION: Common Law FILE NUMBER(S) : SC 20525/01 HEARING DATE(S) : 4 October 2002 JUDGMENT DATE : 17 October 2002 Bruce Harvey Enterprises Pty Ltd PARTIES : Victor Tjakamarra Forrest Henry Denis Kelly JUDGMENT OF : Sperling J at 1 Mr F Donohoe for the Plaintiff COUNSEL : Mr S Goodman for the First Defendant Mr G Curtin for the Second Defendant Carneys Lawyers for the Plaintiff SOLICITORS : Minter Ellison Lawyers for the First Defendant Phillips Fox Lawyers for the Second Defendant CATCHWORDS : Practice & Procedure - application for security of costs - no question of principle LEGISLATION CITED : Corporations Act 2001 (Cth), s1335 Supreme Court Rules 1970, Pt53 r2 Harpur v Ariadne [1984] 2 QdR 523 CASES CITED : Idoport Pty Limited v National Australia Bank Limited & Ors [2002] NSWCA 271 Idoport Pty Limited & Anor v National Australia Bank Limited & Ors (No.35) [2001] NSWSC 744 DECISION : Having noted the undertaking given by Mr Bruce Harvey to the Court to provide, on request, a personal guarantee in favour of the defendants or either of them in relation to any costs awarded against the plaintiff in the cause - 1. Notices of motion filed respectively on 20 August 2002 and 3 September 2002 dismissed; 2. Defendants to pay plaintiff's costs of the notices of motion. - 6 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION Professional Negligence List Sperling J Thursday, 17 October 2002 20525/01 Bruce Harvey Enterprises Pty Ltd v Forrest & Anor Judgment 1 His Honour: In these proceedings, the plaintiff, Bruce Harvey Enterprises Pty Limited (hereafter BHE), sues the first defendant, Mr VT Forrest, and the second defendant, Mr HD Kelly. 2 BHE was the purchaser of certain land at Hill End under a contract for sale. The first defendant was retained by BHE as its solicitor on the sale. The second defendant was solicitor for the vendor. 3 It is alleged that, in consequence of breach of duty by each of the defendants, BHE lost the benefit of the sale, which is alleged to have had special value for BHE because of the way in which BHE intended to utilise the property. 4 The defendant's apply for security for costs. They move under the following provisions, which are materially to the same effect: (1) Section 1335 of the Corporations Act 2001 (Cth) which provides: 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) Part 53, rule 2(1)(e) of the Supreme Court Rules which provides: (1) Where, in any proceedings, it appears to the Court on the application of a defendant: … … … (e) that there is reason to believe that a plaintiff being a body corporate will be unable to pay the costs of the defendant if ordered to do so, the Court may order that plaintiff to give such security as the Court thinks fit for the costs of the defendant of and incidental to the proceedings and that the proceedings be stayed until the security is given. 5 On the hearing of the motions, Mr Goodman appeared for the first defendant, Mr Curtin for the second defendant and Mr Donohoe for BHE. 6 It was conceded by Mr Donohoe that the BHE would be unable to pay the costs of either of the defendants if successful in their respective defences and if the plaintiff were ordered to pay such costs. The court, accordingly, has jurisdiction to make orders for security of costs. 7 BHE's balance sheet discloses a deficiency of liabilities over assets of about $160,000 as at 30 June 2000, and of approximately $180,000 as at 30 June 2001. That does not take into account an investment of $10,000 by BHE in Prescription Healthcare Ltd, a medical centre proprietor. On unaudited figures, the investment might be worth much more, but the paper value of Prescription Healthcare is so grossly out of proportion to the cost of entry that I could not be satisfied that the value of the investment exceeds the contribution by BHE. So, for present purposes, the deficiency is broadly as I have stated above. 8 Mr B Harvey is the alter ego of BHE. Mr Harvey offers an undertaking to execute a personal guarantee in relation to any costs ordered to be paid by BHE. His listed liabilities exceed his listed assets by about $150,000. His listed expenses exceed his listed income by about $600 per week. On the evidence before the court, he would be unable to satisfy an order for security for costs made against BHE. 9 In his affidavit, Mr Harvey states that, if security is ordered as sought by the defendants, BHE would be unable to comply and the proceedings would be stultified by the consequential stay. That was not challenged, nor could it be in the light of the other evidence to which I have referred. 10 The principles which govern the exercise of the court's discretion in relation to an application for an order for security for costs are conveniently collected in Idoport Pty Limited & Anor v National Australia Bank Limited & Ors (No.35) [2001] NSWSC 744 . So far as is presently material, the principles are as follows: (1) The inability of a plaintiff company to pay the costs of the defendant not only opens the jurisdiction for ordering the provision of security, but also provides a substantial factor in favour of exercising the jurisdiction. (2) That the ordering of security will frustrate the plaintiff company's right to litigate its claim, because of the company's financial condition, does not automatically lead to the refusal of an order. But that will usually be a powerful consideration against making an order. (3) Impecuniosity on the part of a plaintiff company does not count without proof that the plaintiff company could not draw on other resources available to it in order to satisfy an order for costs, such as the company's shareholders or creditors. (4) The strength and bona fides of the plaintiff's case are relevant considerations. But, as a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success. 11 The principles which I have reviewed raise a presumption against making an order for security of costs where, by reason of the impecuniosity of the plaintiff company, the proceedings would be stultified by making the order. It may seem strange that the very fact which grounds the jurisdiction to make such an order provides a presumption against doing so. The resolution of this conundrum is to be found in the policy behind the statutory provisions. That was explained in Harpur v Ariadne [1984] 2 QdR 523 at 532 in the following terms: The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. 12 On appeal from Einstein J to the Court of Appeal ([2002] NSWCA 271), Mason P (with whom Stein and Giles JJA agreed) approved Einstein J's reference to that passage. Mason P also said, at [39]: In Rugby Union Players Association Inc v Australia Rugby Union Ltd (SCNSW, 50225/96, unreported, 30 July 1997) Giles CJ Com Div described the rationale behind the exceptions to the general rule that the impecuniosity of a plaintiff should not be a ground for making an order for security for costs. This general rule is well established at common law in relation to natural persons: Cowell v Taylor (1885) 31 Ch D 34, Melville v Craig Nowlan & Associates Pty Ltd (2002) 119 LGERA 186 at 192-3, 212-3, 223. Giles J explained why corporations are different, when he pointed out the injustice: …that those who will benefit from success in the proceedings, as shareholders in or creditors of a corporation or as third parties for whose benefit the plaintiff (whether a natural person or a corporation) sues, should be able to litigate and expose the defendant to the risk of irrecoverable costs while themselves shielded, by reason of the interposition of the impecunious plaintiff, from the burden of an adverse order for costs. 13 In that way, a defendant, otherwise faced with the prospect of an empty order for costs (should costs be awarded against the plaintiff company), is, in effect, given access to the assets of those who stand behind the company. Unless such assets are made available, the proceedings will, generally speaking, be stayed. Where, however, as in this case, the sole person with an interest in the plaintiff company is himself impecunious, the impecuniosity of the plaintiff company will ordinarily carry the day. 14 It was argued that the plaintiff would have significant difficulty in establishing its case in relation to damage and causation of damage. Settlement of the sale had been postponed once already due to lack of finance. It was at and in relation to the adjourned settlement appointment that the negligence is alleged to have occurred and as a result of which BHE is alleged to have suffered the loss of the sale. It is said, on behalf of the defendants, that it is unlikely in the extreme that BHE would ever have been able to complete the sale but for the negligence of the defendants in view of its parlous financial situation. 15 BHE's answer is that the transaction was in two parts, one being the sale of the real estate for a modest sum and the other being the sale of certain associated intellectual property for a much larger amount. It is said that BHE was able to complete the sale of the real estate and that there would then have been the prospect of completion of the sale of the intellectual property. It has not been established to my satisfaction that this analysis is plainly wrong or that BHE would have been unable to finance the purchase of the intellectual property if the sale of the real estate had gone through. 16 The presumption of a good cause of action therefore survives, and there is nothing of significance to be set in favour of making an order in this respect. 17 The only remaining point is whether the prospective stultification of the proceedings is an answer to the claim for security for costs. Ordinarily it is. No reason was shown why it should not be so in the circumstances of the present case. 18 For these reasons, the applications should be dismissed with costs. 19 I make the following orders. Having noted the undertaking given by Mr Bruce Harvey to the Court to provide, on request, a personal guarantee in favour of the defendants or either of them in relation to any costs awarded against the plaintiff in the cause - 1. Notices of motion filed respectively on 20 August 2002 and 3 September 2002 dismissed. 2. Defendants to pay plaintiff's costs of the notices of motion. -o0o- Last Modified: 10/17/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.