the Good Motel Company Pty Limited (In Liquidation) v Edward John Shepherd and Harold Spencer Cottee [1992] ACTSC 107; (1992) 110 FLR 87 (28 October 1992)

SUPREME COURT OF THE ACT

THE GOOD MOTEL COMPANY PTY LIMITED (IN LIQUIDATION) v. EDWARD JOHN SHEPHERD
and HAROLD SPENCER COTTEE
No. SC 771 of 1990
Number of pages - 10
Costs
[1992] ACTSC 107; (1992) 110 FLR 87

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Higgins J.(1)

CATCHWORDS

Costs - Security for costs - Company in liquidation - Court appointed liquidator - Whether security should be ordered - Principles.

Companies Act 1981 (Cth), ss.533, 540, 542

Limitation Act 1985 (ACT)

Corporations Law, s.1335

Companies Act 1961 (VIC), s.363(1)

August Investments Pty Ltd v Poseidon NL (1971) 2 SASR 65

McSharry v The Railway Commissioners (1897) 18 LR(NSW) 33

Co-operative Farmers' and Graziers' Direct Meat Supply Ltd v Smart (1977) VR 386

Sent and Anor v Jet Corporation of Australia Pty Ltd (1985) 3 ACLC 397

Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480

Individual Homes Pty Ltd v NRMA Insurance Ltd (ACTSC; SC 1006/88; Gallop J.; 10/12/91; unreported)

Re Mocoa Holdings Pty Ltd (ACTSC; SC 342/90; Miles C.J.; 10/12/91; unreported)

Plaza Print Pty Ltd v South British Insurance Co Ltd (1984) 54 ACTR 3

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

Spiel v Commodity Brokers Australia Pty Ltd (In Liq) (1983) 8 ACLR 410

Drumdurno Pty Ltd v Braham (1982) 42 ALR 563

Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304

HEARING

CANBERRA
28:10:1992

Counsel for the Plaintiff: Mr P C Comans

Instructing solicitors: Messrs Abbott Tout Russell

Kennedy

Counsel for the Firstnamed

Defendant: Mr P L Sheils QC

Instructing solicitors: Messrs Scott Sheils and Glover

Counsel for Secondnamed

Defendant: Mr N J Topfer

Instructing solicitors: Messrs Mallesons Stephen
Jaques

ORDER

The Court orders that:<: 1. The plaintiff give security, in the sum of $30,000.00, for the costs of the first defendant and a further sum of $30,000.00 for the costs of the second defendant.

2. Leave be granted to the parties to bring in short minutes of orders.

3. Leave be reserved to the parties to seek further directions as to the form and sufficiency of any security offered.

4. Further proceedings by the plaintiff be stayed until security is provided.

DECISION

HIGGIONS J. On 10 December 1990 the plaintiff caused a Writ to issue seeking damages from the defendants for the sum allegedly lost by the plaintiff

"as a result of the fraud, negligence, default, breach of trust,
and breach of duty of the defendants as directors of the plaintiff in
transferring assets of the plaintiff to Rodeway Pacific International
Limited (formerly known as The Tourist Group Limited) in early 1985".

2. The Statement of Claim was not filed until 12 December 1991. Appearances were entered by the defendants on 16 December and 5 December 1991 respectively.

3. On 3 February 1992 the plaintiff's solicitors notified the defendants of an intention to apply to add the Australian Securities Commission ("ASC") as a second plaintiff. It was said that the proposed intervention would remove any basis for an application for security for costs. A "Notice of Intervention by the Commission under Section 540 of the Companies Act" was filed on 5 February 1992. A Notice of Motion was filed and served seeking orders to give effect to that intention.

4. The Registrar dismissed the ASC's application on 10 February 1992. It was ordered to pay the defendants' costs thereof.

5. On 19 February 1992, the second defendant applied to "strike out" the Notice of Intervention. He also sought security for his costs in the sum of $30,000.00.

6. On 26th February 1992, the first defendant gave Notice of Motion seeking similar relief as to security for costs.

7. On 13 March 1992, Gallop J. struck out the Notice of Intervention. All other applications were adjourned.

8. On 14 May 1992, the plaintiff sought to amend its Statement of Claim. On 5 June 1992, the Master dismissed that application with costs.

9. The applications of the defendants for security for costs were brought on before me on 13 August 1992. Affidavits supporting those applications were filed on 19 February 1992 (deponent, Neville John Topfer for the second defendant) and 26 February 1992 (deponent Michael Charles Scott). Each defendant relied on similar grounds. They referred to the liquidator's accounts dated 1 October 1990. Those accounts are conceded to demonstrate that the plaintiff is impecunious. Both deponents asserted that considerable legal costs had been already incurred and more were in contemplation. Each gave estimates of the further legal work likely to be required if the matter proceeds to trial. The reasonableness of those estimates was not seriously challenged.

10. The plaintiff relied on two Affidavits. First, that of Gerald Santucci, dated 23 July 1992. Second, that of Douglas Stuart Galbraith, dated 24 July 1992.

11. Mr Santucci, a solicitor, had acted for the plaintiff opposing a winding up application by Chasewater Pty Ltd ("Chasewater"). He received his instructions "mainly" from the first named defendant ("Shepherd"). He deposed that Shepherd had told him that the proceeds of the sale of a motel, owned by the plaintiff in Canberra had been transferred to Tourist Group Ltd ("Tourist") to assist with a Tourist venture in Western Australia but that venture resulted in a loss. The funds transferred were, it appears, lost.

12. Mr Galbraith was the solicitor for Chasewater. He now is the solicitor for the plaintiff. The proceedings by Chasewater against the plaintiff resulted in a winding up order on 7 October 1986. Thereafter, then acting for the plaintiff, Mr Galbraith had the carriage of an action against Tourist to recover the proceeds of the sale of the motel referred to. On 23 December 1988 judgment was given for the plaintiff against Tourist in the sum of $776,391.60. Tourist was then wound up on 23 January 1991. No part of the sum transferred to Tourist from the plaintiff has been recovered.

13. The facts relied on to found the claim against the defendants are also referred to by Mr Galbraith. Between 4 September 1980 and 6 July 1981, the second defendant ("Cottee") was a director of Chasewater. Chasewater, during that period, agreed to lend $180,000.00 to the plaintiff to purchase the motel in question. Cottee supported the making of that loan. From the correspondence annexed to Mr Galbraith's affidavit it is clear that Cottee controlled two out of three votes on the Board. A loan was proposed rather than taking shares in the plaintiff to avoid the appearance that the plaintiff was a subsidiary of the plaintiff. On 6 July 1981, Chasewater's shareholders, by majority, purported to dismiss Cottee (and Mrs Cottee) from its Board, replacing them with others.

14. By 9 September 1981, Chasewater had received $55,000.00. The balance of the loan was then $125,000.00. Discussions took place between the plaintiff's and Chasewater's representatives but no further repayments were made.

15. On 2 July 1984 Chasewater commenced proceedings to recover the loan.

16. It appears that Cottee became a director of the plaintiff on 7 October 1980 but Shepherd did not become a director until 28 March 1983.

17. Shepherd and Cottee were also directors of Tourist. There were, however, at least four other directors. At a meeting of Tourist on 14 September 1984, Shepherd obtained approval for a proposal that the $125,000.00 owing be paid over three years, without interest, to be guaranteed by Tourist. He advised that Chasewater would then cease legal actions against it.

18. Pursuant to that approval, Shepherd, on behalf of Tourist, but not on behalf of the plaintiff, proposed a repayment schedule to Chasewater's accountant. That schedule, it appears was not deemed acceptable by Chasewater. The plaintiff then proceeded to resist Chasewater's legal proceedings for recovery of the sum loaned by it to the plaintiff.

19. On 23 November 1984, the motel was sold for a price of $1.1 million. The sale was completed on 11 January 1985. A net surplus of $449,333.00 was received. That sum was advanced to Tourist by way of an unsecured loan. Chasewater and Tourist were shareholders in the plaintiff.

20. Following Chasewater's application to wind up the plaintiff, the liquidator, after the winding up order was made, sued Tourist to recover the sum which the plaintiff had loaned to Tourist.

21. In evidence before the Chief Justice in those proceedings, Shepherd, on 24 August 1988, referred to the sale of the motel. At the time of the sale, he agreed, the directorships of the plaintiff and of Tourist overlapped. It was contemplated then that the funds from the motel sale could be used by Tourist to acquire the shareholding in Chasewater.

22. Mr Galbraith, in his affidavit, also refers to Annual Returns of Tourist for the 82/3, 83/4 and 84/5 financial years. There was a meeting of Tourist on 7 June 1985. Reference was made in the minutes to "the liquidity problem of the group". At a meeting of 8 March 1985, Tourist's Board was informed that Chasewater's Board was prepared to sell the shares in Chasewater to Tourist. A profit for the group was reported.

23. Affidavits in the winding up proceedings were also referred to. From those it appears that the plaintiff became subject to the obligation to repay Chasewater by reason of a change of directors and shareholders following Mr and Mrs Cottee's removal as directors. Effectively the company was taken over by interests no longer under the control of Mr and Mrs Cottee. However, there was no dispute that the sum of $125,000.00 was due to Chasewater when lawfully demanded. There was an issue as to interest and the timing of repayments.

24. The Corporate Affairs Commission, the predecessor of the ASC, on 29 November 1985, had noted that up to the Cottees' removal, Chasewater had been "controlled by the Cottee family". That seems to be undisputed. By a Supplementary Affidavit, however, he has qualified that statement. The ASC ceased funding on 13 March 1992. That funding was said to be pursuant to s.540 of the Companies Act 1981 (Cth). However, Mr Galbraith says

"... that intervention ... is no longer possible as a result of
decisions of his Honour Mr Justice Gallop on 13 March 1992 and of the
Master on 5 June 1992. As a result of those decisions the Australian
Securities Commission can no longer provide funding for the action."

25. Mr Galbraith also deposed that, up to the date of his affidavit (24 July 1992), the proceedings taken by the plaintiff had been funded by the ASC.

26. As I have noted, that statement is qualified to the extent that no funding has been offered or given following 13 March 1992.

27. I was informed that the ASC has commenced separate proceedings against Shepherd and Cottee claiming the same relief as is sought by the plaintiff in these proceedings. It has not made progress in that action, however, because of doubts as to whether its right to proceed is barred by the Limitation Act 1985 (ACT).

28. Although originally, the endorsement on the Writ of Summons in this matter included an allegation of breach of s.542 of the Companies Act, the Statement of Claim delivered on 12 December 1991 failed to make any such allegation. The Master, in his decision of 5 June 1992, concluded that

(8) "... It may be taken therefore that the allegations of fraud,
breach of trust and Section 542 of the Companies Act were abandoned by
the plaintiff by the filing of the original statement of claim, and if
they would now be statute barred they may not be reintroduced by
amendment."

29. The Master refused leave to amend the Statement of Claim so as to reintroduce allegations of breach of s.542 and other sections of the Companies Act as well as to rely on the allegations of dishonesty which had also been omitted. No appeal has been instituted against the Master's decision. The plaintiff is bound by it.

30. Neither party has addressed the more fundamental difficulty the Master raised as to whether a breach of duty to Chasewater gives rise to a claim for relief by the plaintiff. I am not required to address that issue on this application.

31. I was not told why Gallop J. refused the application to add the ASC as a party. However, without an allegation in these proceedings of a breach of the Companies Act, I assume that there was no basis for permitting the ASC to intervene.

32. Nevertheless, I was not told why the ASC cannot, if it chooses to do so, continue to fund the liquidator of the plaintiff as it has, apparently, done previously. I am not satisfied that it cannot do so.

33. Mr Galbraith also deposed that Chasewater, the plaintiff's major creditor

"... may have capacity to fund the liquidator but does not have
the capacity to provide, in addition, the requested security for
costs."

34. Chasewater had, of course, already incurred expense in funding the proceedings against both the plaintiff and Tourist which have been referred to previously. It has paid or become liable to pay approximately $88,000.00 already. However, I was not given any detail which justifies Mr Galbraith's stated conclusion about the capacity of Chasewater (or its shareholders) to fund this action. I am not satisfied, therefore, that Chasewater could not fund any order made for security for costs, even if the ASC maintains a refusal to guarantee or fund the costs of this action.

35. This Court is empowered to order security to be given by the plaintiff. The Corporations Law, s.1335, so provides. So also does s.533 of the Companies Act 1981. There is an inherent power (see August Investments Pty Ltd v Poseidon NL (1971) 2 SASR 65, 69 per Zelling J.). The admitted impecuniosity of the plaintiff is a necessary but not a sufficient condition for security to be ordered.

36. In McSharry v The Railway Commissioners (1897) 18 LR(NSW) 33, Darley C.J. said

(36) "... the rule to be applied under ordinary circumstances is
this: that to entitle a defendant to security he must shew, not only
that the plaintiff is insolvent, but that he is suing as a nominal
plaintiff in the sense of another person being beneficially interested
in the result of the action."

37. A company in liquidation obtaining judgment in a case such as the present benefits only its creditors assuming that there will, in fact, be no surplus available to shareholders. Of course, a body such as the ASC may perceive public benefit in that result as well, but the funds recovered benefit only creditors and, possibly, shareholders directly.

38. Co-operative Farmers' and Graziers' Direct Meat Supply Ltd v Smart (1977) VR 386 was referred to but it is distinguishable. Firstly, the Companies Act provision (then s.363(1) Companies Act 1961 (VIC)) had no application to the plaintiff. Secondly, the plaintiff in that case was in receivership not in liquidation. If it succeeded in its motion then, whilst the secured creditors would benefit, it was not clear that the plaintiff would cease to carry on business. It had a beneficial interest in any surplus.

39. In the present case, the only direct likely beneficiary of this action will be Chasewater (after the costs of litigation and administration). There is no real likelihood of the plaintiff continuing to trade or even of its contributories obtaining a dividend.

40. Where it appears that a company in liquidation sues for the benefit of another, be that other a creditor or a contributory, there is a predisposition to order that security be given. Justice requires that the real beneficiaries of the action, if successful, be as much at risk of paying costs as are the defendants who do not enjoy limited liability.

41. (See, for example, Sent and Anor v Jet Corporation of Australia Pty Ltd (1985) 3 ACLC 397, 400-401 per Smithers J.; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Individual Homes Pty Ltd v NRMA Insurance Ltd (ACTSC; SC 1006/88; Gallop J.; 10/12/91; unreported); Re Mocoa Holdings Pty Ltd (ACTSC; SC 342/90; Miles C.J.; 10/12/91; unreported).)

42. Mr Comans, for the plaintiff, submitted, however, that security should not be ordered for two reasons. First, that the action is being taken by a court-appointed liquidator seeking to enforce an apparently bona fide claim against former directors. Second, not unrelated to the first, that to order security would effectively stifle a claim which, at least arguably, is a strong one.

Whether security should be ordered
43. A court-appointed liquidator is, I accept, not an agent of, or trustee for, the creditors. A receiver is in an analogous position (see Co-operative Farmers' and Graziers' Direct Meat Supply Ltd v Smart (supra), 391).

44. The case of Plaza Print Pty Ltd v South British Insurance Co Ltd (1984) 54 ACTR 3, has some similarity to the present. There was not the same element of alleged misfeasance on the part of directors but there was litigation directed by a court-appointed liquidator. Blackburn C.J. approached the matter by refusing to follow Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301. His Honour entertained no "predisposition" in favour of ordering security. That approach was not followed by Gallop J. in Individual Homes Pty Ltd v NRMA Insurance Ltd (supra). Miles C.J. endorsed the view adopted by Gallop J. of the "predisposition" question in Re Mocoa Holdings Pty Ltd (supra). I consider that the weight of authority favours the approach of Gallop J.

45. Nevertheless, the lack of "predisposition" adopted in Plaza Print Pty Ltd v South British Insurance Co Ltd (supra) does not help the plaintiff. In that case, Blackburn C.J. referred to Spiel v Commodity Brokers Australia Pty Ltd (In Liq) (1983) 8 ACLR 410, citing, with approval, a passage from the judgment of Bollen J. at p 416. Bollen J. had said

"I think it is relevant in the exercise of discretion to remember
that the claim is really being brought by the liquidator. He is an
officer of the court. He has available to him information which
reasonably suggests to him that the appellant owes a substantial sum
to the respondent. His duty is to take reasonable steps
to recover what he can for creditors and shareholders. Moreover he
has a duty to the court. I need not dwell on that duty."

46. Blackburn C.J. commented on that passage as follows

(7) "That reason seems to me to be a point in favour of the
plaintiff in this case, but I do not think that it alone is
sufficient."

Indeed his Honour, even without embracing a "predisposition" to order security, did so. His Honour might have declined to so order had he been satisfied that to order security might have stifled a bona fide action responsibly commenced by a court appointed officer.

47. I note, as a useful guide, the factors referred to by Sweeney J. in Drumdurno Pty Ltd v Braham (1982) 42 ALR 563.

48. The critical factors favouring the plaintiff in this case are:-

(i) Strongly arguable case - Prima facie, the claim shows
possible conflicts of interest and breaches of fiduciary duty to the
plaintiff in lending funds unsecured to Tourist when the plaintiff was
under threat of action from Chasewater, the latter having turned from
ally to enemy. Of course, the defendants may well contend, as did
Shepherd in his evidence, that no breach of duty was involved and that
the action pursued by Chasewater was unexpected and unreasonable.
(ii) Want of means brought about by defendants' wrongful conduct - It
is arguable that such is the case but I am not affirmatively so
satisfied. The plaintiff did have an asset remaining after the sale
of the motel. It had the income from the motel business. It had sold
the Crown Lease but it had a long-term sub-lease back. I have no
evidence as to whether the Chasewater action could have been avoided
had it been willing to adopt payment by instalments of its debt rather
than setting in motion the current series of liquidations and
consequent legal actions.
(iii) Stifling of the action - It would not be in the interests of
justice generally to stifle a genuine claim. This is particularly so
where the action is being brought by, and is under the control and
direction of, an officer of the court such as a liquidator.

49. However, it is for the plaintiff to show that it is not practicable for it or those likely to benefit from the action to obtain the necessary security. It has not done so.

50. Generally, it is also to be noted that had the plaintiff persisted in a claim for relief relying on breaches of the Companies Act 1981, the power of the ASC to intervene would have been activated. If the ASC had intervened in those circumstances, it would have assumed liability for costs. The ASC has not indicated why, short of intervention, it will not support the plaintiff's case by, at least, undertaking to meet the defendants' costs if they are successful. There is no real information as to the asset backing or credit worthiness of Chasewater or its major shareholders (assuming Chasewater to be the only direct beneficiary). Nor has the plaintiff advanced any reason why it chose to abandon the Companies Act claim which would have enabled the ASC to intervene.

51. It follows that there should be an order that the plaintiff give security for the defendants' costs. In each case, I accept the estimates given. They seem reasonable to me. The sum in each case should be $30,000.00.

52. It is not essential that the security be cash. Indeed, in one case, the guarantee of an impecunious shareholder was deemed sufficient (see, for example, Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304).

53. I give leave, therefore, to the parties to bring in short minutes of orders giving effect to my decision. I reserve leave to the parties to seek further directions as to the form and sufficiency of any security offered.

54. I stay further proceedings by the plaintiff herein until that security is provided. That does not, of course, prevent the plaintiff from complying with any request for particulars already made and which it has to date not answered.

55. I will hear the parties as to costs.