Top Slice Deli Pty Ltd v George Maliganis and Edmund Craig Edwards carrying on business as Maliganis Edwards Johnson [1999] ACTSC 71 (9 July 1999)

Last Updated: 6 October 1999

Top Slice Deli Pty Ltd v George Maliganis and Edmund Craig Edwards carrying on business as Maliganis Edwards Johnson

[1999] ACTSC 71 (9 July 1999)

CATCHWORDS

PRACTICE & PROCEDURE - Application for security for costs against plaintiff company - Previous order for security for costs in respect of interlocutory steps - Impecuniosity of plaintiff company - Factors relevant to the exercise of discretion to order security for costs - No issue of principle.

No. SC 179 of 1995

Coram: Master T Connolly

Supreme Court of the ACT

Date: 9 July 1999

IN THE SUPREME COURT OF THE )

) No. SC 179 of 1995

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: TOP SLICE DELI PTY LTD

Plaintiff

AND: GEORGE MALIGANIS and

EDMUND CRAIG EDWARDS

carrying on business as MALIGANIS EDWARDS JOHNSON

Defendant

ORDER

Judge Making Order: Master T Connolly

Where Made: Canberra

Date of Order: 9 July 1999

THE COURT ORDERS THAT:

1. The plaintiff provide security for costs to the defendant in the sum of $50,000 within 21 days.

2. The proceedings be stayed until such time as that security is provided.

3. The plaintiff pay the defendant's costs of and incidental to this application.

1. This is a further application for security for costs brought by the defendants in this action. The action is a claim for damages alleging professional negligence in relation to the sale of a business by the plaintiffs in 1989. The sale was the subject of an action in this Court which resulted in an order by Justice Gallop that the present plaintiff pay damages in the sum of $245,888.35 plus costs. Top Slice Deli, the present plaintiff, seeks to recover these sums against its then solicitors.

2. 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 a plaintiff has the choice of continuing the litigation or not, whereas the defendant must incur the costs of defending an action, whatever the real merits, or risk a form of default judgment. In such circumstances a final judgment and a costs order is of little comfort to a defendant if a plaintiff is unable to meet such an order.

3. 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 O61A, r.1(i).

4. An application for security for costs in respect of the interlocutory stages of this litigation was heard by me on 30 August 1996 and on 13 September 1996 I ordered the plaintiff to provide security in the sum of $25,000. This order has been complied with, the plaintiff having provided a bank security in that sum. The defendant now seeks security for costs in the sum of $68,690, being the sum which Mr Clynes has set out in an affidavit as being the costs he expects to be incurred in the hearing of this matter. I am satisfied that he is an experienced litigation solicitor, and accept this estimation as satisfying the requirement that an applicant for security bears to bring evidence as to the likely costs.

5. The basis for the defendant's application is again that the plaintiff is impecunious. Impecuniosity of a plaintiff is not a sufficient ground for an application for security for costs except, as is the case here, where the plaintiff is a corporation. I am satisfied that the law is well set out by the learned author of Williams, Civil Procedure Victoria, where it is said (I 62.02.70)

"The court may order the plaintiff to give security for costs if `there is reason to believe' that the plaintiff will be unable to pay the costs of the defendant. The defendant must adduce evidence which gives the court reason to believe that the plaintiff will be unable to pay the costs. The evidence need not be conclusive. A prima facie case is sufficient: Churchills Ltd v Pilcher (1940) 57WR (NSW) 109. Being in liquidation affords such prima facie evidence...Where the plaintiff corporation is not in liquidation, the defendant must show by evidence that the financial situation of the plaintiff is such that it will be unable to pay the defendant's costs if ordered to do so. The power to require security be given arises if credible evidence establishes that there is reason to believe that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant: Beach Petroleum NL v Johnson (1992) 7 ASCR 203."

6. The evidence in support of the application is an affidavit of Barry Anthony Taylor, a Fellow of the Institute of Chartered Accountants of Australia, and an experienced liquidator. In opposition to the application is an affidavit of Mr Memmelo, solicitor for the plaintiff, which attaches a report from Mr DellaVedova, the chartered accountant for the plaintiff company. Mr DellaVedova states that the plaintiff company recorded a net profit of $115,767 for the financial year 1997/98.

7. In his analysis of the accounts of the plaintiff company for the years 1995 to 1998, Mr Taylor notes that the company operated three delicatessen outlets in the Australian Capital Territory at the opening of the period, but that by the end of the 1997 financial year it had disposed of two of these, and continues to operate only one retail outlet. He notes that the company has over these years derived its income from two sources, being its core business operations as a retail delicatessen, and secondly by way of discretionary income distributions from certain discretionary trusts, controlled by members of the family who control the company.

8. Mr Taylor expressed the view that the net cash generated from the core business was a deficiency of $203,732 for the financial year ending 30 June 1996, a loss of $26,889 for the financial year ending 30 June 1997 and a loss of $13,134 for the financial year ending 30 June 1998, being the latest figures available.

9. Counsel for the applicant defendant argued that in looking at the question of whether there is reason to believe that the plaintiff company would be unable to pay any costs order, I should look at the real trading position of the company, and disregard any discretionary payments made by discretionary trusts. He submitted that, should an adverse order eventuate, the trustees would be under no obligation to distribute any funds to the company, and the only source of funds would be the trading profit, or, in this case, loss. Counsel for the plaintiff company conceded that there would of course be no obligation for the trustees to contribute in these circumstances. I am satisfied that the company has made a trading loss on its core operations in the last three years.

10. Mr DellaVedova states that the company has a net asset position at the end of the 1998 financial year of $70,857.73. On its face this would be a strong reason to decline an order for security for costs, as the company could, if wound up, meet its obligations. Mr Taylor, however, notes that this net asset position is reached by valuing goodwill at $634,126. He notes that this figure has been shown in the accounts for several years, when the business was conducting three retail delicatessens. Mr Taylor notes that the business has operated at a loss on its retail operations for three years, and says

"On the basis of the information available to me I do not believe that Top Slice Deli Pty Ltd is justified in maintaining that its Goodwill has a book value of over $600,000."

11. Mr Taylor was not required for cross examination on his affidavit, and I accept his opinions and analysis. I am not satisfied that the company has a positive net asset position, because I find that its book net asset position of $70,857.73 referred to by Mr DellaVedova is based in part on an unrealistic value attributed for goodwill of $634,126 for one retail delicatessen which has not made a profit for some years.

12. On the material before me I am satisfied that the applicant defendant has established that there is reason to believe that the plaintiff would be unable to satisfy a costs order.

13. This finding does not however resolve the matter. The court has a discretion in these matters. While it was once the view that the discretion was ordinarily exercisable in favour of the making of an order, the better view now is that the discretion should be exercised with no predisposition to make an order: Heller Factors Pty Ltd v John Arnold Surf Shop (1979) 22 SASR 20, Colbran, Security for Costs p 245. The position is again well stated by the learned author of Williams, Civil Procedure Victoria at I 62.02.75:

"In exercising the discretion the courts will be concerned to achieve a balance between ensuring that the defendant is adequately and fairly protected from prejudice arising from the limited liability character of the plaintiff and avoiding injustice to an impecunious company by unnecessarily shutting it out or prejudicing it in the conduct of litigation".

14. Where the impecuniosity of a plaintiff is caused by the defendants conduct the subject of the principal proceedings this will go against the exercise of the discretion to order security for costs. While I accept that Mr Taylor's affidavit accepts that in the financial year ending 30 June 1996 two shareholders advanced funds to the company in order to allow the company to meet the judgment of Justice Gallop, I accept counsel for the applicant defendant's submissions that this loan does not of itself cause the impecuniosity of the plaintiff, and the underlying trading loss continues.

15. In the earlier application for security for costs it was argued that an order might frustrate the plaintiff company's ability to continue with the litigation. This had been claimed by the solicitors for the plaintiff, but I held 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 would stand to benefit if the litigation is successful (Bell Wholesalke Co Pty Ltd v Gaey Export Corp [1984] FCA 34; (1984) 52 ALR 176). There was no evidence to support this assertion on the earlier occasion, and there was no additional evidence adduced on this occasion. Indeed, the accounts show that those standing behind the company have in fact been putting money into the company by way of loans and distributions from a discretionary trust.

16. I am satisfied that the applicant defendant 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. I am therefore satisfied that I ought to order that the plaintiff provide additional security for costs for the trial of this matter.

17. Mr Clynes was not called for cross examination on his draft bill of costs. He based this on a three day hearing, which counsel for the applicant defendant said would be necessary because it would be necessary in the course of the hearing to re examine many of the matters canvassed in the hearing before Justice Gallop. Counsel for the plaintiff submitted that the trial of this claim would in fact be a relatively straightforward matter. He said that the issue was whether the defendant solicitors had negligently failed to give effect to their proper instructions, and that the hearing would proceed to find the facts as to what those instructions were. He submitted that the draft bill of costs was based on a three day hearing, and that, if I was minded to make an order for costs, I ought to exercise a discretion to order security in a smaller amount than that claimed for a complex three day hearing. He said that I should in these circumstances take into account the fact that there is an existing security providing the applicant defendant with security in the sum of $25,000.

18. The amount of security to be ordered is within the discretion of the court, and should be such sum as is just having regard to all of the circumstances of the case: Allstate Insurance Co v Australia & New Zealand Banking Group Ltd (No 19) (1995) 134 ALR 187 at 197. In that case Lindgren J said

"The amount is in the discretion of the court and should be such sum as the court thinks just, having regard to all the circumstances of the case. Obviously, a factor of prime importance will be the amount of a respondent's costs which an applicant, if unsuccessful, will be ordered to pay to the respondent if the proceeding continues to a determination by the court. But the estimation of that amount involves many factors, some of them imponderable. Generally speaking, it cannot be assumed that a failure by an applicant will be on any particular basis. Moreover, the course of events down to and during the trial may be relevant to the particular order for costs to be made. The assessment of the work which will be done in the respondents case is also difficult."

19. I am satisfied that the amount sought is based on an estimate of a three day hearing which may not come to pass. It seems to me that it is appropriate to discount the claim. Taking into account the previous security, it seems to me that an order that the plaintiff provide security in the sum of an additional $50,000 will best serve the interests of justice in this case, and I so order.

20. I therefore order:

(a) that the plaintiff provide security for costs to the defendant in the sum of $50,000 within 21 days;

(b) that the proceedings be stayed until such time as that security is provided; and

(c) the plaintiff pay the defendant's costs of and incidental to this application.

I certify that this and the six (6) preceding pages are a true copy of the Reasons for Judgment herein of the Master, Mr T Connolly.

Associate:

Date: 9 July 1999

Counsel for the Applicant/Defendant: Mr G Richardson SC

Instructing Solicitors: Minter Ellison

Counsel for the Respondent/Plaintiff: Mr C Erskine

Instructing Solicitors: Romano & Co

Dates of hearing: 5 July 1999

Date of judgment: 9 July 1999