Anutech Pty Limited v Latent Energy Systems Pty Limited [1996] ACTSC 83 (2 August 1996)

SUPREME COURT OF THE ACT

ANUTECH PTY LIMITED v. LATENT ENERGY SYSTEMS PTY LIMITED
No. SC401 of 1992
Number of pages - 5
Practice and Procedure

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
MASTER T. CONNOLLY

CATCHWORDS

Practice and Procedure - Application for Security for Costs - Application by Plaintiff Brought as Subject of Counterclaim - Counterclaim Stands Apart from Defence - Whether the Defendant is, in Substance, the Aggressor - Impecuniosity of Defendant - No Evidence of Financial Position of those Standing Behind the Defendant Company.

Corporations Law, s.1335
ACT Supreme Court Rules, O.75B,r.7; Schedule 13; O.61A,r.1(i); O.33B

Delany, Security for Costs (Law Book Co, 1989)
Halsbury's Laws of England, Vol.37 Butterworths (4th Ed)

Classic Ceramic Importers v Ceramica Antiga (1994) 12 ACLC 344
Willey v Synar [1935] HCA 76; (1935) 54 CLR 175
Visco v Minter (1969) P 82
Thunderdome Racetiming v Dorian Industries [1992] FCA 291; (1992) 109 ALR 196
M.A. Productions Pty Ltd v Austarama Television Pty Ltd (1982) 1 ACLC 404
Drumdurno Pty Ltd v Brahan (1982) 1 ACLC 397
Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) ATPR 40-544
Bell Wholesale Co Pty Ltd v Gates Export Corp [1984] FCA 34; (1984) 52 ALR 176
Ariss v Express Interiors [1995] VSC 192; (1995) 13 ACLC 1585
National Bank of New Zealand v Donald Export Trading (1980) NZLR 97

HEARING

CANBERRA, 26 July 1996
2:8:1996

Counsel for the Plaintiff: Mr G. Richardson SC

Instructing Solicitors: Minter Ellison

Counsel for the Defendant: Mr R. Refshauge

Instructing Solicitors: Deacons Graham and James

ORDER

THE COURT ORDERS THAT:
1. The defendant provide security in the sum of $160,000.
2. Pending compliance by the defendant with this order, all further proceedings by the defendant be stayed.
3. The defendant pay the plaintiff's costs of this application.

DECISION

MASTER T. CONNOLLY This is an application for security for costs brought by ANUTECH Pty Ltd, the plaintiff in these proceedings, but, for the purposes of this application, the subject of a counterclaim by Latent Energy Systems Pty Ltd.

2. An application for security for costs is properly within my jurisdiction as Master either, in respect of an application brought under s.1335 of the Corporations Law, pursuant to O.75B,r.7 and Schedule 13 of the Supreme Court Rules or, in respect of the general power to seek security contained in O.33B, pursuant to O.61A, r.1(i).

3. These proceedings were commenced by way of a claim by ANUTECH for payment of a contractual debt of $309,250.96. This relates to non payment of sums allegedly due under a contract whereby ANUTECH provided certain "phase change materials" to Latent Energy Systems. Phase change materials are substances which will, in effect, preserve a low temperature environment without refrigeration or cooling, and the successful development of such a substance has enormous commercial potential.

4. The counterclaim brought by Latent Energy Systems seeks damages for alleged breach of contract and misrepresentation. The substance of this claim is the allegation that ANUTECH failed to provide phase change materials of an appropriate quality, and Latent Energy Systems claims damages, including a loss of profit component, of some $5.4 million.

5. Security for costs may be awarded, in a court's discretion, where a party is forced into court to defend an action in circumstances where, even if that party is eventually successful, the party bringing the unsuccessful action would be unable to meet the costs orders that would flow. This acknowledges the reality of litigation - that the plaintiff has the choice of continuing the process or not, whereas the defendant must incur the costs of the defence, or risk a form of default judgment, whatever the real merits of the case. The position is succinctly stated in Delany, Security for Costs (Law Book Co, 1989):

"Traditionally, security would only be ordered against a person in
substance the plaintiff. The rationale was that security should
not be ordered against persons compelled to litigate"

(at 17).

6. The question of who, for the purposes of a security for costs order, is a defendant and who is a plaintiff has been established as a question of substance and not of form.

7. In Classic Ceramic Importers v Ceramica Antiga (1994) 12 ACLC 344, Young J said, citing Dixon J's decision in Willey v Synar [1935] HCA 76; (1935) 54 CLR 175:

"The approach of Dixon J shows that one must analyse the piece of
litigation that is actually before the Court"

in order the decide this question. Young J adopted the terminology of Ormond J in Visco v Minter (1969) P 82 at 85, where His Honour said:

"The principle seems to be that where a defendant counter attacks
on the same front on which he is being attacked by the plaintiff,
it will be regarded as a defensive manoeuvre. But if he opens a
counter attack on a different front, even to relieve pressure on
the front attacked by the plaintiff, he is in danger of an order
for security for costs depending on the Court's assessment of the
position in each case."

(Also cited with approval by Olney J in Thunderdome Racetiming v Dorian Industries [1992] FCA 291; (1992) 109 ALR 196 at 205).

8. Mr Justice Young in that case then analysed a series of recent decisions of the Federal Court and recent academic writing on the question and said that in deciding this question,

"...one should focus on the question as to whether in a commercial
sense the defendant to litigation is the aggressor"

(at 338).

9. This makes sense of the classic description of the position of a plaintiff seeking security for costs in the case of a counterclaim, which is the instant position. The law is stated by Halsbury thus:

"Where the defendant makes a counterclaim, he does not necessarily
place himself in the position of a plaintiff so as to be liable to
give security for costs. The crucial question is whether, on
analysis, the counterclaim operates as a defence, in which case
the defendant is merely defending himself, or it amounts to a
cross claim, in which case he is in a position of a plaintiff
prosecuting his own claim"

(Vol.37, 4th Ed, Para.303).

10. In approaching this traditional question, the terminology of Young J - "who is, in the real sense, the aggressor?" - is of assistance.

11. The reality is in this case that if the plaintiff, ANUTECH, was to abandon its claim for some $300,000 for monies allegedly unpaid under the contract, it would still face a claim from Latent Energy Systems of some $5.4 million. This claim goes beyond a mere defence to the demand for unpaid monies, and involves substantial claims for damages and lost profits. The counterclaim is, on the pleadings, quite apart from and additional to the mere defence.

12. I am satisfied that in the present case, looking at the substance of the litigation before the Court, Latent Energy Systems is in this sense the aggressor, in that its counterclaim goes so far beyond a mere defence as to make it in effect a claim against ANUTECH which may, provided the other requirements are made out, attract an order for security for costs.

13. Affidavit material properly before me establishes an estimate, by an appropriately experienced practitioner, of the likely costs of defending the counterclaim. These were not disputed. There was an appropriate demand for security of $153,121 contained in a hand delivered letter to Latent Energy Systems' solicitors of 18 April 1996.

14. The affidavit material reveals that Latent Energy Systems has a paid up capital of two shares at $1 each, and that the company has no discernible assets against which ANUTECH might execute upon any future costs orders.

15. An affidavit filed by the Sydney principal solicitor for Latent Energy Systems confirms that the company is without its own funds, and that costs orders made to date and paid, amounting to some $54,000, have been met by funds made available by the directors of Latent Energy Systems.

16. The grounds which would permit an exercise of the discretion in favour of an order for security for costs have thus been made out. A substantial argument made on behalf of Latent Energy Systems to resist such an order is that, to the extent that the company is in a financial position which would justify an order, it is in that position because of ANUTECH. The affidavit filed by the company's principal solicitor in Sydney, however, reveals that the company has always been impecunious - it was established as a vehicle for the venture of developing phase change materials which it was hoped would be profitable. This is indeed the basis of the substantial claim for loss of profit. In such circumstances, where a company only had expectations, the conduct of the other party is not relevant to avoid an order for security for costs. (See M.A. Productions Pty Ltd v Austarama Television Pty Ltd (1982) 1 ACLC 404; Drumdurno Pty Ltd v Brahan (1982) 1 ACLC 397. See generally Delany p156).

17. The affidavit material emphasises that the company was expecting to make substantial profits from the venture, for the loss of which it now brings the counterclaim. This makes it more difficult for impecuniosity as a result of ANUTECH's alleged conduct to be pleaded in resistance to an application for security for costs, for, as Beaumont J said in Fat-sel Pty Ltd v Brambles Holdings Ltd (1985) ATPR 40-544:

"..it is one thing to refuse security where the party claiming
relief can show that the party sued brought about the impecunious
party's insolvency by causing him to act to his detriment and to
lose funds in that connection; it is a different thing where, as
here, the applicant has not thrown away funds in reliance upon the
respondent's conduct but rather seeks to recover profits which the
respondent's representations are alleged to have led it to expect
to earn in the future. In the latter class of case the
respondent's conduct may not have improved the applicant's
financial position but, in contrast to the former class of case,
the conduct complained of has not worsened the applicant's
financial position"

(at 46,428).

18. A further factor raised by Latent Energy Systems as a consideration relevant to the exercise of the Court's discretion is the claim that the making of an order for security for costs in the terms sought might frustrate the company's ability to continue with the litigation. The risk that an order might stultify the litigation is a recognised factor adverse to the granting of such an order.

19. But in order to successfully resist an application on such a ground, it is necessary to prove not just that the corporate entity is without funds (that, after all, is the premise for making the application in the first place) but that those standing behind the corporate entity are not in a position to continue the litigation in the face of an order. The Full Court of the Federal Court in Bell Wholesale Co Pty Ltd v Gates Export Corp [1984] FCA 34; (1984) 52 ALR 176 made it clear that an application should not be refused on this ground unless there is evidence of the financial position of those standing behind the company who stand to benefit if the litigation is successful -

"..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
the security will frustrate the litigation to raise the issue of
the impecuniosity of those whom the litigation will benefit and to
prove the necessary facts"

(at 179).

20. As Phillips JA said in Ariss v Express Interiors [1995] VSC 192; (1995) 13 ACLC 1585 at 1588, it is for the party making this assertion to

"...establish the necessary factual basis before that argument can
be weighed in the exercise of discretion."

21. This Latent Energy Systems has failed to do. The affidavit material deposes to the fact that funds have previously been made available to meet the costs orders made to date adverse to Latent Energy Systems of some $54,000, and asserts that to meet the order sought would create difficulties. But it does not identify the persons behind the company and their financial position. The counterclaim is for some $5.4 million, and presumably those behind the company have a real interest in securing such a judgment. As the Court said in National Bank of New Zealand v Donald Export Trading (1980) NZLR 97:

"It seems likely that if the creditors and the shareholders have
any real interest and faith in the outcome of the litigation ...
no difficulty should be experienced in providing security."

22. I am satisfied that the applicant has made out all the necessary elements to justify an order for security for costs, and that furthermore there has been no factor made out which weighs against the exercise of the discretion to make such an order. The applicant has demonstrated the appropriateness of an order in the sum of $153,121, and has given the respondent company the opportunity to provide such security before bringing this application. It has also satisfied me that the costs of bringing this application would amount to at least $8,000.

23. Accordingly, I order that the respondent, Latent Energy Systems Pty Ltd, provide security in the sum of $160,000, and pending compliance by the defendant with this order, all further proceedings by the defendant be stayed.

24. I award the costs of this application to the plaintiff.