Precious Jewellers (Canberra) Pty Limited (In Liquidation) v Robert George Campbell; Janice Doreen June Harper and Dyskrip Pty Limited [1993] ACTSC 70 (30 July 1993)

SUPREME COURT OF THE ACT

PRECIOUS JEWELLERS (CANBERRA) PTY LIMITED (IN LIQUIDATION) v. ROBERT GEORGE
CAMPBELL; JANICE DOREEN JUNE HARPER and DYSKRIP PTY LIMITED
No. SC656 of 1992
Number of pages - 4
Practice and Procedure

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
MASTER A. HOGAN

CATCHWORDS

Practice and procedure - Security for costs - Plaintiff a company in liquidation - Plaintiff technically insolvent - Proceeds of sale of business being received by liquidator in instalments - Priority of order for costs over other costs of administration - Fund available for payment of costs order - Matters relevant to discretion - Inherent jurisdiction now expressed in Rules.

Companies Act 1981 s.533

Supreme Court Rules O.33B r 3

Re Speedifix Building Products (1987) 11 ACLR 86

Re Wilson Lovatt and Sons Ltd (1977) 1 ALL ER 274

In re Pacific Coast Syndicate Limited (1913) 2 Ch 26

Individual Homes Pty Ltd v NRMA Insurance Ltd (ACT Supreme Court, 27 June 1989, unreported)

Resource Promotions Pty Limited v Smits Investments Pty Limited (ACT Supreme Court, 30 June 1990, unreported)

Wallace and Young Australian Company Law and Practice (4th Ed) p 680

HEARING

CANBERRA, 22 April 1993
30:7:1993

Counsel for the Plaintiff: T. Johnstone

Instructing Solicitors: Gillespie-Jones and Co

Counsel for the
First Defendant: R. P. Clynes

Instructing Solicitors: Minter Ellison Morris Fletcher

Counsel for the

Second Defendant: B. Meagher

Instructing Solicitors: Worth and Co

ORDER

The court orders that:

1. The Notices of Motion are dismissed.
2. I order the defendants to pay the plaintiff's costs of and
incidental to the applications.

DECISION

MASTER A. HOGAN The plaintiff in this action is a company in liquidation.

2. The first defendant is a solicitor. The second defendant is the wife of the first defendant. The third defendant is a company, of which the second defendant was a director.

3. The action arises out of a contract for the sale of a business by the plaintiff to the third defendant. It is alleged that the third defendant defaulted in payment of the purchase price, and that the first and second defendants had promised to indemnify the plaintiff against any loss that it might suffer in such an event.

4. It is also alleged that the first defendant acted for the plaintiff as its solicitor in connection with the agreement for sale, and that he failed to fulfil his duties to take reasonable care and to resolve the conflict of duty and interest that arose in those circumstances.

5. All defendants have appeared. The first defendant is represented separately from the second and the third defendants. All defendants have filed defences which raise triable issues. The third defendant also raised a counterclaim.

6. By one Notice of Motion the first defendant, and by another the second and third defendants, seek an order for security for costs. By consent the two motions have been heard together.

7. The evidence discloses that the plaintiff company commenced a member's voluntary winding up under the Companies Act 1981 on 31 August 1989. A summary of affairs lodged at the Australian Securities Commission by the liquidator suggests that the assets of the plaintiff company in September 1992 were estimated at $623,115.

8. The solicitor for the plaintiff gave evidence that the assets of the company comprise the fruits of this action, the proceeds of sale of the business, and moneys received by the liquidator.

9. The liabilities comprised debts for sales tax, income tax, interest, and penalties, owed to the Australian Taxation Office, and claimed to total $1,090,396. Income tax amounting to $598,941, included in that sum, had been assessed as if the whole of the purchase price of the business had been paid. The liquidator had sought a review of the assessment.

10. He also gave evidence that on 24 December 1992 the liquidator had caused the plaintiff to sell the business that had been the subject of the agreement for sale, for a price of $289,679, payable in instalments over 39 months. The arrangement was complex, and it was not possible to forecast a regular cash flow of instalments. Pursuant to that agreement payments had been received by the liquidator as follows:

24 December 1992 $500
4 January 1993 $30,903
19 January 1993 $7,016
3 February 1993 $2,426
15 February 1993 $211
2 March 1993 $2,300
25 March 1993 $1,116
16 April 1993 $264

11. On the material admitted into evidence on this application, there is a prima facie case that the plaintiff company is insolvent.

12. Counsel for the plaintiff submitted that there was no requirement to order security for the defendant's costs because, if the plaintiff failed in the action and were ordered to pay the defendant's costs, there would be a fund from which they could be met, namely the proceeds of the contract of sale which are being received in instalments. He submitted that costs ordered to be paid by the plaintiff would be part of the costs of administration of the winding up, which the liquidator would be bound to pay in priority to any other debts.

13. The evidence read for each of the defendants estimated the proper sum to be provided for security at $20,000. The solicitor for the plaintiff deposed that in his expert opinion no more than $8,000 would be called for, if an order were to be made. The issue was not explored by any cross examination, but I am inclined to the view that in litigation of this type a figure of $20,000 for each defendant is reasonable, and one of $8,000 would be inadequate.

14. This action is brought by the company, not by the liquidator personally. There is therefore no suggestion that an order for the costs of the defendants would be made against the liquidator personally, leaving him to recoup himself out of the assets of the company as best he could. Such an order was made in Re Speedifix Building Products (1987) 11 ACLR 86, to which counsel referred me.

15. Reference to the decision of Oliver J in Re Wilson Lovatt and Sons Ltd (1977) 1 ALL ER 274, to which Master Weld made reference in the Speedifix case, makes it clear that such an order should be made only when the liquidator has instituted proceedings in his own name.

16. The following summary of the position given at p 680 of Wallace and Young Australian Company Law and Practice (4th Ed) is helpful and accurate:

"Generally speaking, there is a difference between the case where
proceedings are brought or defended by the liquidator in the name
of the company, and the case where the liquidator proceeds or is
proceeded against in the winding up in his own name.
In the former case an unsuccessful liquidator prima facie does not
personally pay the costs of the other party--such costs coming out
of the estate.
In the latter case the position varies according as to whether the
liquidator is applicant or respondent.
An unsuccessful liquidator-applicant should prima facie be ordered
to pay costs (he may subsequently be allowed these costs out of
the estate): Hounslow Brewery (1896) WN (Eng) 45; Powell and
Sons (1896) 1 Ch 681; Sichell's Case (1897) 3 Ch 119; ef
Dominion of Canada Plumbago (1884) 27 Ch D 33; Kingston Cotton
Mill Co. (No. 2) (1896) 1 Ch 331, at p 350.
As against an unsuccessful liquidator-respondent, however, the
order is costs out of the estate: Salisbury Jones and Dale's Case
(1895) 1 Ch 333. But see Van den Hurk v Martens Ltd. (1920) 1
KB 850. As between costs which have been ordered to be paid by
the liquidator out of the estate of the company and costs of the
winding up, the former take priority: Home Investment Society
(1880) 14 Ch D 167; Dominion of Canada Plumbago Co. (supra);
Pacific Coast Syndicate (1913) 2 Ch 26."

17. It is the last proposition in that passage on which counsel for the plaintiff relies. There is further support for the proposition, if it were needed, In re Pacific Coast Syndicate Limited (1913) 2 Ch 26, the headquote of which accurately summarises the decision of Neville J as follows:

"Costs of unsuccessful litigation incurred by a liquidator, whether
in a voluntary or compulsory winding-up, are payable to the party
entitled out of the assets of the company in priority to the costs
of the liquidation. This rule applies whether the order simply
directs payment of costs, or directs that the costs be paid out of
the assets of the company, or that the liquidator do pay the costs
with liberty to recoup himself out of the assets."

18. The Court's power to make an order for security arises both under the Companies Act 1981 s.533 and under the inherent jurisdiction of the Court, now made express in O.33B r.3.

19. The Court has a discretion whether to make the order or not. The manner of its exercise has been discussed by Gallop J in Individual Homes Pty Ltd v NRMA Insurance Ltd (ACT Supreme Court, 27 June 1989, unreported) and Resource Promotions Pty Limited v Smits Investments Pty Limited (ACT Supreme Court, 30 June 1990, unreported).

20. When those cases were decided, O.33B had not been enacted. The existence of the inherent power did not give any indication of the circumstances in which it should be exercised. Rule 3(1) of O.33B now makes explicit the grounds. The only grounds relevant to these motions are that it should be made to appear to the Court that the plaintiff will not be able to pay the defendant's costs if ordered to do so, or that the interests of justice so require.

21. The ground expressed in s.533 of the Companies Act 1981 is that it should appear 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.

22. The circumstances that appear to me to be relevant to the exercise of the discretion in this case are as follows:

1. The plaintiff company is presently insolvent.
2. The liquidator is entitled to receive funds in the course of
the liquidation, resulting from the sale of the business.
3. Those funds may well be sufficient for meeting an order for the
costs of the defendants if the action does not succeed. But it is
not certain that they will be sufficient.
4. The liquidator would be obliged to pay any order for costs
made in favour of the defendants out of any moneys in his hands
in priority to any other claims, including his own costs of
administration.
5. It is not possible to forecast the chances of success by the
plaintiff in this action. It is certainly not shown that there
is a substantial risk of its failing in it.
6. Because of the funds that are coming to the liquidator from the
sale of the business, the making of an order would not have the
effect of preventing the plaintiff from pursuing its claim.

23. In those circumstances I am not persuaded positively that the plaintiff will be unable to pay the costs of the defendants if ordered to do so.

24. Nor am I persuaded that the interests of justice require that I should make an order for security.

25. The Notices of Motion are dismissed. I order the respective defendants to pay the plaintiff's costs of and incidental to the application.