Individual Homes Pty Ltd v Nrma Insurance Ltd [1989] ACTSC 28 (27 June 1989)

SUPREME COURT OF THE ACT

INDIVIDUAL HOMES PTY LTD v. N.R.M.A. INSURANCE LTD
S.C. No. 1006 of 1988
Companies

COURT

IN THE SUPREME COURT OF THE AUTRALIAN CAPITAL TERRITORY
Gallop J.(1)

CATCHWORDS

Companies - practice and procedure - stay - security for costs - exercise of discretion - relevant considerations

August Investments Pty Ltd v. Poseidon NL and Others (1971) 12 SASR 65

Buckley v. Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301

Harpur and Ors v. Ariadne Australia Ltd (No. 2) (1983-1984) 8 ACLR 835

Sydmar Pty Ltd v. Statewise Developments Pty Ltd (1986-1987) 11 ACLR 616

Plaza Print Pty Ltd v. South British Insurance Co Limited (1984) 8 ACLR 797

Cameron's Units Services Pty Ltd and Anor v. Kevin R. Whelpton and Associates Pty Ltd and Anor (1986) 11 ACLR 43

Rosenfield Nominees Pty Ltd and Anor v. Bain & Co. and Ors (Supreme Court of NSW, unreported, delivered 13 October 1988)

Lynnebry Pty Ltd v. Farquhar Enterprises Pty Ltd (1977-1978) 3 ACLR 133

J & M O'Brien Enterprises Pty Ltd v. The Shell Company of Australia Ltd (1982-1983) 7 ACLR 790

Sir Lindsay Parkinson & Co Ltd v. Triplan Ltd (1973) QB 609

Bryan E Fencott & Associates Pty Ltd v. Eretta Pty Ltd and Ors (1987) 16 FCR 497

Brutan Investments Pty Ltd v. Underwriting and Insurance Ltd and Another (1980) 39 ACTR 47

Bell Wholesale Co Pty Ltd v. Gates Export Corporation and Ors (No. 2) (1984) 8 ACLR 588

Matexim v. The State Transport Authority of Victoria t/as V/Line (unreported decision, ACT Supreme Court, 7 March 1989)

Tulloch v. Walker (Yeldham J., 8 December 1987, unreported)

National Bank of NZ Ltd v. Donald Export Trading Ltd (1980) 1 NZLR 97

MA Productions Pty Ltd v. Austarama Television Pty Ltd and Anor (1982) 7 ACLR 97

Memutu Pty Ltd v. Lissenden (1983) 8 ACLR 364

HEARING

CANBERRA
27:6:1989

ORDER

That the plaintiff give security for costs in the sum of $21,750.

That all proceedings in the action be stayed until security is given.

That the plaintiff pay the defendant's costs of this application.

Reserve liberty to either party to apply for more detailed orders as to the form of the security or otherwise.

DECISION

This is an application by the defendant that the plaintiff be required to give security for the defendant's costs. By writ of summons issued on 1 August 1988 the plaintiff sues the defendant for breach of an alleged duty of care owed by the defendant to the plaintiff in respect of the exercise of the defendant's power of sale over certain real estate owned by the plaintiff and mortgaged by the defendant.

2. By its statement of claim the plaintiff pleads that it is a company capable of suing in its own name and that at the relevant time it was the registered proprietor of 12 unit title leaseholds comprised in Register Book Volume 948, Folios 51-62 inclusive. The defendant is the first registered mortgagee under a mortgage securing a loan from the defendant to the plaintiff of $650,000 plus interest, the principal being due and repayable on 23 December 1987.

3. It is common ground that the plaintiff was in default under the mortgage in that it failed to repay the principal sum and interest as it fell due. The plaintiff endeavoured to sell the properties at an auction on 17 March 1988. The auction was unsuccessful in that no bids were received for any of the units. A further auction was conducted by the defendant under its mortgagee's power of sale on 27 July 1988. That auction was also unsuccessful. The property was successfully sold by the defendant by private negotiation after the second auction and the sale was finalised on 23 September 1988.

4. The plaintiff claims that in exercising its power of sale the defendant had a duty to use reasonable care to otain the best possible price in all the circumstances, or alternatively to act without wilfully or recklessly sacrificing the interest of the plaintiff. The plaintiff alleges that the defendant breached its duty to the plaintiff, particulars whereof are:
(a) Failing to mount an adequate and proper marketing

campaign in the selling of the units;
(b) After having entered into possession of the units,
failing to maintain the units in proper condition;
(c) After having entered into possession of the units
failing to properly manage the existing tenancies;
(d) Allowing a significant decline in rental income;
(e) Advertising a rental return substantially below
that which could be expected from the units if
properly managed;
(f) Failing to properly advertise the sale;
(g) Obtaining $825,000.00 for the units when the
market value was in excess of $1.4 million dollars.

5. In the action based upon breach of duty the plaintiff seeks orders restraining the defendant from proceeding to complete the sale, setting aside the agreement for sale and damages and costs.

6. It is necessary to make some findings of fact in respect of the present application. In late 1984 the defendant lent the plaintiff the sum of $650,000 which was secured by memorandum of mortgage over the land mentioned in Registered Volume 948, Folios 51-62 inclusive, upon which were constructed 12 townhouses or units in the suburb of Kambah. The principal sum and interest at the rate of 16% reducible to 14% on prompt payment were repayable on 23 December 1987. On that date the plaintiff did not repay the principal sum and there were arrears of interest amounting to $65,149.32. The defendant served a notice of demand upon the plaintiff on 24 December 1987. By 20 January 1988 there had been no response by the plaintiff, and on 21 January 1988 the defendant served upon the plaintiff a default notice under ss.93 and 94 of the Real Property Ordinance 1925.

7. By letter dated 22 January 1988 the plaintiff requested that the defendant not proceed to exercise its power of sale on the grounds that it had listed the property for public auction on 17 March 1988 and that there was an expectation that it would sell for around $1,200,000. At a meeting on 1 February 1988 between representatives of the plaintiff and defendant respectively, the defendant agreed to withhold any action to exercise its power of sale until after the auction on 17 March 1988. At that auction no bids were received and no sales otherwise negotiated.

8. I am satisfied that it is customary for contracts to be prepared before an auction so that they may be inspected by prospective buyers before the auction and signed by the successful bidders immediately after their successful bid has been accepted. By arrangement Anthony Gilbert Martin, who was the Director of the plaintiff who had the principal conduct of the plaintiff's affairs and, in particular, its dealings with the units, was to prepare the contracts through his own solicitors and bring them to the auction on 17 March 1988 prior to its commencement. He did not arrive until some time after the auction had commenced. He then produced the contracts. His late production of the draft contracts was a hindrance for the auctioneer.

9. Pursuant to its intimation to the plaintiff that it would proceed to exercise its power of sale, the defendant engaged the services of Mr Kenneth George Pullen of L.J. Hooker Limited, Real Estate Agents, Erindale in the Australian Capital Territory, to arrange the sale of the subject units. He had been the agent engaged by the plaintiff and had been responsible for the conduct of the unsuccessful auction on 17 March 1988. The defendant instructed Pullen to advertise the units for sale individually. He did so and received some enquiries from potential buyers, but he encountered some difficulties because all the units were occupied by tenants and not readily available for inspection.

10. On 27 March 1988 Martin purported to direct Pullen not to go near the units and that, if he did, Martin would have Pullen charged with trespass. For that reason if for no other, Pullen was unable to show the units to potential buyers. Martin also failed to provide keys or tenancy agreements in respect of the units.

11. On or about 28 March 1988 Pullen sent a letter to Martin requesting copies of all current tenancy agreements, keys to all the units and a list of the units which were furnished or unfurnished. He also requested a record of all bond moneys held in trust. No answer was received to that letter. On or about 31 March 1988 Pullen delivered a letter to each of the tenants of the units requesting that payment of rent should be made to L.J. Hooker Limited, Erindale, on the due dates. Rent was received from only one of the tenants.

12. The sale of the units was further impeded by the lodgment by the plaintiff of a caveat upon the title to the land.

13. Certain proceedings between the parties then took place and on 10 June 1988 Kelly J. declared that the defendant, as mortgagee, was entitled to exercise its power of sale over the subject land and ordered that the plaintiff forthwith deliver to the defendant keys and tenancy agreements for each of the units comprised in the said property, do no act which would hinder the defendant in effecting such sale and other orders which it is not necessary to recite.

14. The defendant thereupon arranged the auction of the 12 units for 27 July 1988 using the services of Kevin John Sawyer as real estate agent. Sawyer advertised the auction in the "Canberra Times" on 4, 11, 18 and 26 June 1988, and 2, 9, 16, 20, 23 and 27 July 1988. He also caused an article to be published in the "Canberra Times" on 16 July 1988 headed "Solar units put up for auction". This article specified full particulars of the units and invited P-N inspection through Sawyer. He also advertised in the "Sydney Morning Herald" on 25 June, 2, 23, 25, 26 and 27 July 1988; in the "Australian Financial Review" on 24 June, 1, 15 and 22 July 1988; in the "Australian" on 9, 16 and 23 July 1988; in the "Real Estate Times" on 2 and 8 July 1988; in the "Melbourne Age" on 2 and 23 July 1988; in the "Realtor" on 29 June and 13 July 1988; and in "Australian Property News" on 30 June 1988.

15. Sawyer has deposed to the following facts in his affidavit of 4 August 1988 and for the purposes of this application I accept those facts as a narrative of events at the auction on 27 July 1988.

"3.The auction sale commenced at 11.00 am on 27 July
1988 in 'the Gallery' Canberra Theatre Centre, London
Circuit, Canberra City. I was the auctioneer. The
auction proceeded essentially as follows:
(a) Introduction and welcome by myself, reading of
agreement for sale by Mr E. Green discussion about
the property with the aid of colour slides by myself.
(b) Explanation of auction by myself. I explained to
the assembled buyers that the property would be up
for sale in 'in one line' initially. This meant
that subject to a reserve price the entire
development was being offered for sale. I
explained further that if the reserve price was
not reached the property would be passed in and
the highest bidder had the first right to buy the
property at the reserve. I explained further that
if the buyer was not prepared to negotiate
successfully with the purchaser then the property
would then be again put up for sale, subject to a
reserve price and sold individually, that is Unit
by Unit.
(c) I asked if there were any questions. There were a
number of questions which I answered.
(d) Bidding commenced at $700,000.00 and there were
bids up to $745,000.00. The highest bid was from
a person I now know to be a Mr Carlyon at
$745,000.00 and the next highest of $740,000.00
from a person I now know to be a Mr Smith.
(e) A representative of the defendant then offered the
property to the said Mr Carlyon for $850,000.00.
He refused to increase his bid beyond
$745,000.00. The said Mr Smith then indicated
that he wished to put in a higher bid and I
accordingly proceeded to re-open bidding.
(f) I opened the bidding again at $745,000.00 and the
said Mr Smith put in a bid of $750,000.00. I
again passed the property in.
(g) A private discussion then took place at which the
representative of the NRMA offered the property to
Mr Smith for $850,000.00. The said Mr Smith
indicated that he was prepared only to pay
$780,000.00. This was not accepted.
(h) I then re-opened the auction explaining to the
assembled buyers that as the property as a whole
had not sold each Unit would now be offered for
sale individually. The following bids were
received for each Unit from the indicated buyer:
Unit No. 1 Mr Smith $65,000.00
Unit No. 2 Mr Smith 65,000.00
Unit No. 3 Mr Smith 65,000.00
Unit No. 4 Mr Smith 66,000.00
Unit No. 5 Mr Carlyon 70,000.00
Unit No. 6 Mr Smith 68,000.00
Unit No. 7 Mr Smith 69,000.00
Unit No. 8 Mr Carlyon 70,000.00
Unit No. 9 Mr Carlyon 70,000.00
Unit No.10 Mr Carlyon 70,000.00
Unit No.11 Mr Carlyon 63,000.00
Unit No.12 Mr Carlyon 63,000.00
All the Units were passed in as they did not reach
the reserve price.
(i) At the end of the auction further negotiations
took place and the said Mr Smith made a final
offer of $825,000.00 so long as the defendant
provided him with a loan of $550,000.00 at a
reasonable interest rate. The offer was accepted
by the defendant."

16. On 5 August 1988 Miles CJ refused an order for the continuation of an ex parte injunction restraining the defendant from entering into a contract or contracts for the sale of the subject units. He took the view that it was extremely likely that, if the case went to an ultimate hearing, damages would be regarded as an adequate remedy. Nor was he convinced that the ex parte injunction should be continued on the balance of convenience.

17. The court has power to order security for costs against a company by virtue of s.533 of the Companies Act 1981 "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 defence".

18. By s.15 of the Australian Capital Territory Supreme Court Act 1933 the court has jurisdiction to award costs in all matters. Order 65, r.4 provides that security for costs shall be of such amount and given at such time or times and in such manner and form as the court or judge directs. It appears that the court also has an inherent power to order security for costs (August Investments Pty Ltd v. Poseidon NL and Others 2 SASR (1971-72) 65 per Zelling J. at p 69 where the authorities are collated).

19. In Buckley and Anor v. Bennell Design and Constructions Pty Ltd and Anor (1974) 1 ACLR 301, the Court of Appeal of New South Wales considered the ambit of the power to order security for costs under s.363 of the Companies Act 1961 (NSW), the forerunner to s.533. Street CJ traced the history of provisions such as s.363 and observed that the provision reflects the concern of the legislature that in permitting the incorporation of a limited liability entity it was necessary to ensure that persons who might have dealings, whether voluntarily or involuntarily, with such an entity should have a measure of protection against the consequences of limited liability. He said that the courts have been concerned to achieve a balance between ensuring that adequate and fair protection is provided to the other party and avoiding injustice to impecunious companies by unnecessarily shutting them out or prejudicing them in the conduct of litigation. He said that the discretion conferred by s.363 should be exercised merely with a predisposition in favour of the defendant party. Since that decision there has been some debate over whether the discretion should be exercised with some such predisposition (Harpur and Ors v. Ariadne Australia Ltd and Ors (No. 2) (1983-1984) 8 ACLR 835; Sydmar Pty Ltd v. Statewise Developments Pty Ltd (1986-1987) 11 ACLR 616 and Plaza Print Pty Ltd v. South British Insurance Co Limited (1984) 8 ACLR 797). The current view is that the claim for security for costs should be exercised in all the circumstances of the case (Cameron's Unit Services Pty Ltd and Anor v. Kevin R. Whelpton & Associates Pty Ltd and Anor (1986) 11 ACLR 43) and I proceed accordingly.

20. I agree with the observation of Giles J. in Rosenfield Nominees Pty Ltd and Anor v. Bain & Co. and Ors (Supreme Court of New South Wales, unreported decision delivered 13 October 1988) that the discretion must be exercised having regard to all the circumstances of the case, but the inability of the plaintiff to meet the costs of a successful defendant is likely to play an important, if not decisive role.

21. I should take into account whether the plaintiff's claim is made bona fide and has reasonable prospects of success. Counsel for the defendant submitted that although the plaintiff's case may be said to be brought bona fide it does not have reasonable prospects of success. Counsel for the plaintiff asserted that not only is the claim made bona fide, it also has reasonable prospects of success. If that were clearly established, no doubt it would be relevant to take it into account (Lynnebry Pty Ltd v. Farquhar Enterprises Pty Ltd (1977-1978) 3 ACLR 133; J & M O'Brien Enterprises Pty Ltd v. The Shell Company of Australia Ltd (1982-1983) 7 ACLR 790; Sir Lindsay Parkinson & Co Ltd v. Triplan Ltd (1973) QB 609; Sydmar Pty ltd v. Statewide Developments Pty Ltd, supra; Bryan E Fencott & Associates Pty Ltd v. Eretta Pty Ltd and Others (1987) 16 FCR 497). But the reason for this must be appreciated as was said by Bowen CJ in J & M O'Brien Enterprises Pty Ltd v. The Shell Company of Australia Ltd, if the plaintiff has a strong and apparently meritorious case the court is reluctant to make an order which may have the effect of shutting it out.

22. It was common ground that the duty of a mortgagee exercising power of a sale is to act in good faith, that is, to act without fraud and without wilfully or recklessly sacrificing the interests of the mortgagor. The mortgagee's duty does not require him to take reasonable care to obtain the true market value of the mortgaged property. The principles were restated by Sheppard J. in Brutan Investments Pty Ltd v. Underwriting and Insurance Ltd and Another (1980) 39 ACTR 47.

23. It was submitted on behalf of the defendant that the evidence on this application falls far short of establishing that the plaintiff has reasonable prospects of success in the substantive action against the defendant. Counsel relied upon the evidence that the defendant had given the plaintiff full opportunity to sell when the principal and interest under the mortgage became due on 23 December 1987, including the opportunity to sell the units as a block or individually. The plaintiff was permitted to arrange its own auction of the units through the estate agents of its choice. That auction wholly failed as no bids were received and no sales were otherwise negotiated.

24. Counsel further relied upon the evidence of the estate agent who conducted the auction on behalf of the plaintiff to the effect that the plaintiff, through Martin, had fixed excessive reserve prices for each unit. Pullen had said in evidence that the reserves set by the plaintiff averaged around about $123,000 each. He said that he was personally horrified, but as the agent he had to accept the reserve prices fixed by the vendor. He said that he thought that the units might have sold quite well at $83,000, even fractionally more, but certainly nowhere in excess of $88,000 to $90,000.

25. Counsel for the defendant submitted that after the abortive auction the defendant really had no choice but to take over the sale of the units pursuant to its power of sale to protect its investment. I think there is much force in that submission and I am satisfied on the evidence that the defendant advertised extensively and appropriately in an effort to attract interested purchasers and to penetrate available markets in Canberra and elsewhere.

26. When the second auction was conducted on 27 July 1988, the defendant held a valuation for all the blocks dated 22 July 1988 for $750,000. It is true that it also held a valuation from LJ Hooker International dated 21 July 1988 for $1,002,000. It is also relevant that in order to negotiate a successful sale to the eventual purchaser at a price of $825,000 the defendant had to finance the transaction.

27. Whether the plaintiff would have reasonable prospects of success in the action is very much a matter of impression. On balance, however, I am of the view on the present state of the evidence that the plaintiff's action does not have reasonable prospects of success. It would be difficult for the plaintiff to prove that the defendant breached or failed in its duty to act without fraud and without wilfully or recklessly sacrificing the interests of the plainiff. For that reason alone, I am of the view that an order for security for costs should be made.

28. Next, it is relevant to consider whether the impecuniosity of the plaintiff is due to the conduct of the defendant. In a sense it is, because the plaintiff was relying very heavily upon the successful sale of the units and, depending on the ultimate price, may well have made a profit. By failing to pay the principal and interest due under the mortgage and failing to negotiate a successful sale itself, it put itself in the position where the power of sale under the mortgage was exercised and unfortunately for the plaintiff the ultimate price obtained was not as high as it would have hoped. On the other hand, it is reasonably clear on the evidence that the plaintiff was in dire financial trouble even before it failed to pay the principal and interest. I am not satisfied that the plaintiff's present position is due to the activities of the defendant. The properties were not sacrificed. The best price possible in all the circumstances was obtained.

29. I should take into account whether an order for security for costs will stultify the action either by unnecessarily shutting the plaintiff out or prejudicing it in the conduct of the proceedings. There is authority for the proposition that the onus lies upon the plaintiff to show that the proceedings will be stultified and, for that purpose, to show that those who stand behind the plaintiff cannot fund the litigation.

30. In Bell Wholesale Co Pty Ltd v. Gates Export Corporation (No. 2) and Ors (1984) 8 ACLR 588 at 599, a Full Court of the Federal Court (Sheppard, Morling and Neaves JJ) said:

"In our opinion a court is not justified in
declining to order security on the ground that to do so
will frustrate the litigation unless a company in the
position of the appellant here establishes that those
who stand behind it and will benefit from the
litigation if it is successful (whether they be
shareholders or creditors or, as in this case,
beneficiaries under a trust) are also without means.
It is not for the party seeking security to raise the
matter; it is an essential part of the case of a
company seeking to resist an order for security on the
ground that the granting of security will frustrate the
litigation to raise the impecuniosity of those whom the
litigation will benefit and to prove the necessary facts."

31. In this regard there is also much force in the submission put on behalf of the defendant that the impecuniosity of those who stand behind the company, and in particular that of its director Martin, is self-imposed. He has a degree in Civil Engineering from Sydney University and a degree in Arts from the Australian National University. I find that he chooses not to exploit all his earning capacity. In the last few years he has worked independently of the plaintiff for only five weeks as an estimator earning in the order of $500 to $550 per week.

32. I venture to repeat what I said in Matexim v. The State Transport Authority of Victoria trading as V/Line (unreported decision of 7 March 1989) that those behind the plaintiff should be required to undertake some of the risks of the proceedings if they wish to have its benefits (Tulloch v. Walker (Yeldham J, 8 December 1987, unreported); National Bank of NZ Ltd v. Donald Export Trading Ltd (1980) 1 NZLR 97; MA Productions Pty Ltd v. Austarama Television Pty Ltd and Anor (1982) 7 ACLR 97; Memutu Pty Ltd v. Lissenden (1983) 8 ACLR 364; Bell Wholesale Co Pty Ltd v. Gates Export Corporation (No. 2), supra).

33. I have also had regard to the principles set out in Annotations to s.533 in Paterson Ednie and Ford, Australian Company Law, in the exercise of my discretion. I have reached a firm conclusion that it is an appropriate case in which to order that the plaintiff give security for costs and that all proceedings in the matter be stayed until the security is given.

34. The amount of security sought in para.1 of the Notice of Motion of 22 November 1988 is $21,750. The calculation of that sum was supported by the affidavit of Douglas Stewart Galbraith sworn 22 November 1988. Counsel for the plaintiff did not wish to be heard on the quantum of security. I think that the amount calculated is reasonable in the circumstances.

35. I make the following orders:

(1) that the plaintiff give security for costs in the
sum of $21,750;
(2) that all proceedings in the action be stayed until
security is given; and
(3) that the plaintiff pay the defendant's costs of
this application.

36. I reserve liberty to either party to apply for more detailed orders as to the form of the security or otherwise.