Supreme Court New South Wales Medium Neutral Citation: Maecher Pictureproducts Pty Ltd v R E Davison Pty Ltd [2013] NSWSC 352 Hearing dates: 7 March 2013 Decision date: 07 March 2013 Before: Rothman J Decision: (1)The plaintiff provide security for costs of the defendant in the sum of $150,000, in a form acceptable to the Prothonotary, within 28 days of the date of this Order; (2)Order 1 is to be vacated if, within 21 days of the date of this Order, the plaintiff provides to the defendant's solicitors: (a)A Deed of Charge, substantially in the form at page 62 of Exhibit A on the application, to guarantee the payment of the Costs (as defined therein) up to a maximum amount of $150,000, executed by Mr Denis Griffin and Ms Annette Williams; and (b)An executed second mortgage in registrable form over the property at xx xx Road, xxxx in the State of New South Wales ("Property"), in the sum of $150,000, securing the payment of the Costs as aforesaid (the costs of registration of such mortgage to be paid by the plaintiff); and (c)All documents or things that may be necessary to enable registration of the second mortgage, including but not limited to any requisite consent of the first mortgagee to the registration of the second mortgage over the Property. (3)Failing Order 1 being complied with or vacated, the proceedings be stayed. (4)Costs of the application be reserved. (5)The parties have liberty to apply. Catchwords: PRACTICE AND PROCEDURE - application for security for costs - no issue of principle - balance between protecting applicant by appropriate security and framing security in a way that did not obstruct the litigation Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: Brundza v Robbie & Co (No 2) [1952] HCA 49; (1952) 88 CLR 171 Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Sagacious Procurement Pty Ltd v Symbion Health Ltd [2007] NSWCA 205 Category: Interlocutory applications Parties: Maecher Pictureproducts Pty Ltd (Plaintiff/Respondent) R E Davison Pty Ltd (Defendant/Applicant) Representation: Counsel: M J Steele (Plaintiff/Respondent) J O'Sullivan (Defendant/Applicant) Solicitors: Somerville Legal (Plaintiff/Respondent) Gibsons Lawyers (Defendant/Applicant) File Number(s): 2011/282994 Judgment 1These proceedings concern an application, by Further Amended Notice of Motion, that the plaintiff, Maecher Pictureproducts Pty Ltd (hereinafter, "Maecher"), provide security for the defendant's costs by payment into Court. The Court made orders, ex tempore, on 7 March 2013, which were entered on 12 March 2013. These are the reasons those orders were issued. 2The substantive proceedings involve Maecher claiming damages for breach of contract, misleading and deceptive conduct and negligent advice by R E Davison Pty Ltd (hereinafter, "Davison"). 3Briefly, Maecher conducts a business that incorporates children's artwork into melamine tableware and clocks. Davison is a melamine compression moulder. A contract was executed between them on 10 August 2000 pursuant to which Davison was to provide melamine compression moulding services to Maecher. 4Between August 2000 and April 2009 Davison supplied Maecher with the services to which the agreement related with a reject rate that rarely exceeded 4 per cent. Between 2 March 2009 and 7 June 2010 Davison moulded over 77,500 items of which 15,635 were rejected as defective, a reject rate of approximately 20 per cent. In some batches the reject rate was over 50 per cent. 5In or about May 2010, Maecher changed manufacturer and the reject rate fell to approximately 2 per cent. Maecher sued on the causes of action previously outlined and claims damages totalling approximately $890,000. 6The evidence in chief of the plaintiff, Maecher, has been filed. There are nine affidavits, including a report on damages. 7The defendant, Davison, has commenced the process necessary for the filing of its evidence. 8Evidence was adduced relating to the financial position of the plaintiff. Relevantly, that evidence discloses that the year to date sales of Maecher amounted to $861,000, being a gross profit of $365,000 and a net loss of $161,000. Further, the evidence discloses that Maecher's total assets amount to $186,000 and total liabilities amount to $542,000, resulting in a "negative net asset" of $355,000. 9Before the Court it has been conceded that Maecher is unable to pay the costs of Davison, were Davison to be successful in the proceedings. 10Plainly the jurisdiction to order security for costs pursuant to the terms of s 1335 of the Corporations Act 2001 (Cth) and Part 42, Rule 21 of the Uniform Civil Procedure Rules 2005 has been enlivened. 11In Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 at [74], McClellan CJ at CL adopted the summary of the relevant principles adumbrated by Beazley J (as her Honour then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198. With great respect to McClellan CJ at CL (as his Honour then was) I adopt his summary of the principles, in the following terms: "[73] The principles by which orders for security for costs are made in relation to financially stressed corporations are well known. They are frequently considered in relation to matters in the Commercial List. They must often be applied where it is alleged that the stressed financial position of a plaintiff corporation has been caused or contributed to by the conduct of the defendant. [74] A convenient summary of the relevant principles was made by Beazley J, as her Honour then was, in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189. Her Honour's judgment has been applied in many subsequent cases. Beazley J said at 196-198: 'Principles governing application for security for costs The law is now settled that the discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: see the review of the authorities by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 AT 509. See also Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 623-624 and Zeeman J's decision in Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 at 188. In Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 415, Cooper J stated that: "[i]t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642 at 643." Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are: 1. That such applications should be brought promptly. This is a principle of longstanding: see Grant v The Banque Franco-Egyptienne (1876) 1 CPD 143; see also Smail v Burton; Re Insurance Associates Pty Ltd [1975] VR 776 per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311 at 313; Bryan E Fencott at 514. I should state immediately that there is no issue of delay in this case. 2. That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations: see M A Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; Bryan E Fencott at 514. 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. (Bryan E Fencott at 514). 3. Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim: see M A Productions v Austarama Television at 100. 4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate: see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E Fencott at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms: "[t]he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour." This factor is related to the next, namely: 5. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memetu Pty Ltd v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (In liq) (1992) 28 NSWLR 120 at 123; Bryan E Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows: " ... a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors) ... Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs." 6. An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking: see Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325. 7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate: see Interwest at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (1979) ACLC 32,446; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping where Zeeman J stated (at 189): "[t]he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order ... [see] Sydmar Pty Ltd v Statewise Developments Pty Ltd and Interwest Ltd v Tricontinental Corporation Ltd." [emphasis added.] See also the discussion in 'Law of Costs' (LexisNexis Butterworths, 2003) by G E Dal Pont at [29.10]-[29.29], [29.78]-[29.98]. [75] The nature of the defendant is some times relevant to the exercise of the discretion to make an order. The courts are reluctant to make an order which would have the effect of shutting out a small company from making a genuine claim against a large well-resourced and amply funded body such as the State, a council or a major corporation (see KP Cable Investments at 197; Equity Access Ltd v Westpac Banking Corp (1989) ATPR 40-972 at 50,635 and 50,637 per Hill J). A plaintiff should not be denied access to the courts unless the justice of the case makes it imperative ('Law of Costs', G E Dal Pont, [29.87]). [76] In Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180, which involved litigation between an insured person and insurer, King CJ said that the ability of the insurer-defendant 'to absorb the costs, if he is unable to recover them from the plaintiff, is a relevant consideration' (at 186). Likewise, in Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61, Ormiston J described insurers as 'pre-eminently loss-bearing and loss-sharing entities, whose raison d'être is their ability to shoulder the losses of others albeit on a commercial basis...' However, in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1990) 8 ACLC 29, referring to financial institutions, engineering and construction companies, newspaper proprietors, public authorities and other powerful companies in litigation-prone sectors, Brooking J expressed a word of caution. His Honour said at 32-33: 'These large corporations stand in no special need of care and protection. Suing and being sued is for them a normal part of this imperfect world. They can afford to pay the piper, just as they will expect to call the tune. But if one of these wealthy, powerful institutions is sued by an insolvent company, why should it be viewed as outside the policy of the security for costs provisions?' [77] Beazley JA referred to Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1. In a joint judgment in that case, Sheppard, Morling and Neaves JJ expressed the view that a court should not decline to order security on the ground that do to so would frustrate the litigation, unless the company 'establishes that those who stand behind it and who will benefit from the litigation if it is successful are also without means.' [78] In Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd & Ors (1992) 8 ACSR 405, a decision which has since been criticised, Cooper J stated that the onus falls upon a company seeking to resist an order for security on the ground that it will frustrate the litigation to prove the relevant facts. That principle is not controversial. However, his Honour went on to say that if the shareholders of an impecunious plaintiff company are themselves prepared to stand behind the corporation, this would in itself provide security. Accordingly, the shareholders having exposed themselves to personal liability the weight to be given to the statutory purpose in s 1335 is gone and the defendant in the primary litigation will be in no worse position than if sued by a litigant in person (see Harpur v Ariadne Australia Limited (1984) 2 Qd R 523 and Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545-546. In these circumstances Cooper J said: 'The offer by the shareholders of the applicant to accept personal liability for the applicant's costs is a factor weighing heavily against the making of an order against the applicant for provision of a cash or other security for costs notwithstanding that the worth of the shareholders may ultimately prove insufficient to satisfy any judgment in whole or in part" (page 415.15).' [79] This approach has not found favour with the Victorian Court of Appeal. In Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at 197-198 Winneke P and Phillips JA said: 'If the comments made by Cooper J. in Gentry Bros. at A.C.S.R. 415; A.C.L.C. 1399 were intended to suggest that the broad discretion, to which the authorities refer, is now to be fettered by a principle to the effect that, in cases where those who stand behind the impecunious company are prepared to expose themselves to a personal liability for the defendant's costs, the court's discretion should rarely be exercised in favour of making an order for security, then, like Powell J. in Erolen at A.C.S.R. 456; A.C.L.C. 524 and Malcolm C.J. in Intercraft, we simply cannot agree - though whether Cooper J. should be read as having said as much is of course another matter; it did not appear so to Beazley J. in K. P. Cable Investments at 203-4. Not only does the suggested principle cut across the authorities which make it abundantly clear that the discretion is to be unfettered and exercised in accordance with what the circumstances of the particular case require, but it ascribes a purpose for its existence which we do not accept; namely that the statutory purpose of s. 1335 is to align the position of impecunious corporate plaintiffs with impecunious individual plaintiffs. The fact that those who stand behind the company are prepared to give an undertaking to the court to pay a successful defendant's costs might be a factor which, on balance, will influence the court's discretion in a particular case - or, more strictly perhaps, influence the manner of its exercise. But to elevate it to a position of critical importance or decisive significance in general seems to us to be requiring the judge to enter upon his or her discretion with a particular predisposition, something which the authorities make clear that the judge should not do. Furthermore, in our view the court should not readily accept an undertaking to pay costs from impecunious individuals who, at least at the time when such an undertaking is given, have no chance of making it good. Such an undertaking could not be an effective alternative security because it could only be enforced (at least for the time being) by proceedings for contempt: cf. P S Chellaram & Co v China Ocean Shipping Co (1991) 102 A.L.R. 321 at 324; 65 A.L.J.R. 642 at 643. Perhaps, as contended in Intercraft, such an undertaking could have some worth if given by established businessmen who, though impecunious for the time being, might feel impelled by the threat of bankruptcy to honour the undertaking by gaining assistance, perhaps, elsewhere. But, if so, that can be but a relevant consideration; no rule can be laid down - which is how the matter was approached in Intercraft where in all the circumstances the court approved the order for security in the form of a personal guarantee from shareholders and directors though the guarantors were impecunious. In this instance the offer of personal liability was not from all those behind the trusts, nor, on the material put forward, could it be seen as being of any real significance.' (emphases added) [80] In words to similar effect Malcolm CJ speaking for the Court in Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 at 316 said: '... the availability of an undertaking of personal liability by the persons who stand behind the company is no more than a factor, albeit an important factor, to be taken into account in the exercise of discretion.'" (emphasis added) 12In the present proceedings, the principles to be applied in determining whether security for costs should be awarded and the amount thereof are not seriously in issue. I apply the principles as cited above. 13The Court must weigh the provision of security, where necessary, with the avoidance of an obstacle to the preparation and presentation of a party's arguable case. An order for security for costs is not a punishment, but is necessary in order to ensure that the party seeking security, faced with litigation, will be protected, in the ordinary way, by a costs order if successful. 14I have, briefly, described the stage to which the proceedings have "progressed". As already stated, the plaintiff has filed its affidavit material, including expert reports. Experts have already been commissioned by the defendant and preliminary work has already been done on the compilation of its evidence. 15The material before the Court, being the affidavit of Norman Gibson of 6 February 2013, discloses that, since the commencement of the proceedings, Davison has incurred costs of approximately $65,000. As earlier stated, a significant amount of preparation has already been performed. 16The evidence served by Maecher includes three lever arch folders, including expert technical and accounting evidence. An estimate, seemingly (and without criticism) more by way of guess work than anything else, is that the matter will be heard for approximately ten days. Maecher has quantified its loss, at this stage, at just under $900,000, plus interest and costs. Senior Counsel has been retained. 17The Further Amended Notice of Motion filed in Court on 7 March 2013 seeks security in the sum of $200,000 by a payment into Court or such other form as may be acceptable to the Prothonotary. 18The principles generally suggest that security will not be ordered in relation to past costs: see Sagacious Procurement Pty Ltd v Symbion Health Ltd [2007] NSWCA 205. Nevertheless, where, as here, the application for security for costs has been made relatively promptly, security may include both past and future costs: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497. 19On the basis of the material before the Court, and notwithstanding the "generous" costs estimated by the defendant, it seems that the proceedings are approximately one-third of the way through. Further, the Court is not intending to provide a complete indemnity for the costs that may be incurred by Davison: Brundza v Robbie & Co (No 2) [1952] HCA 49; (1952) 88 CLR 171. I take account that all of the amounts that may be expended may not be recoverable as a reasonable cost on assessment of the costs. Given that $65,000 has already been expended, and we are approximately one-third of the way through the proceedings (i.e. preparation and hearing), it seems that the total costs should be approximately $200,000 and something less than that is appropriate for security for costs. I fix an amount of $150,000 in relation thereto. If that figure proves grossly inadequate, further application is not precluded. 20The remaining issue related to the form in which the security should take. It is clear that Maecher does not have the resources or capacity to meet any costs order, if one were to be made. Further, the principals of Maecher are not able, readily, to meet any such costs and would not be liable, if any such costs order were made. Further, the principals' lack of resources significantly affects their capacity to provide security on behalf of Maecher. They offer premises, which are subject to a current mortgage and in which they have, on the material before the Court, significant equity. But an alternative to the sale or realisation of the family home is appropriate. 21Balancing the desire to afford Davison proper security for any costs order that may arise and, at the same time, not placing an obstacle in the way of Maecher (or its principals) in proceeding with its claim, the appropriate approach is to order security for costs in the amount of $150,000, in the usual form, but subject to the capacity of the principals of Maecher to provide alternative security being a mortgage on the premises that have been proposed up to the amount of $150,000. 22It is for the foregoing reasons that the following orders were made on 7 March 2013: (1)The plaintiff provide security for costs of the defendant in the sum of $150,000, in a form acceptable to the Prothonotary, within 28 days of the date of this Order; (2)Order 1 is to be vacated if, within 21 days of the date of this Order, the plaintiff provides to the defendant's solicitors: (a)A Deed of Charge, substantially in the form at page 62 of Exhibit A on the application, to guarantee the payment of the Costs (as defined therein) up to a maximum amount of $150,000, executed by Mr Denis Griffin and Ms Annette Williams; and (b)An executed second mortgage in registrable form over the property at xx xx Road, xxxx in the State of New South Wales ("Property"), in the sum of $150,000, securing the payment of the Costs as aforesaid (the costs of registration of such mortgage to be paid by the plaintiff); and (c)All documents or things that may be necessary to enable registration of the second mortgage, including but not limited to any requisite consent of the first mortgagee to the registration of the second mortgage over the Property. (3)Failing Order 1 being complied with or vacated, the proceedings be stayed. (4)Costs of the application be reserved. (5)The parties have liberty to apply. ********** 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. Decision last updated: 17 April 2013