Cleary Bros (Parramatta) Pty Limited & Ors v Commonwealth Bank of Australia & Ors (No 3) [2011] ACTSC 139 (9 August 2011)

Last Updated: 13 September 2011

CLEARY BROS (PARRAMATTA) PTY LIMITED; PARKER CONSTRUCTIONS PTY LIMITED; ICEHOT PTY LIMITED; v COMMONWEALTH BANK OF AUSTRALIA; NATIONAL AUSTRALIA BANK LIMITED; VICTORIAN SECURITIES CORPORATION LIMITED; BENDIGO AND ADELAIDE BANK LIMITED (NO 3) [2011] ACTSC 139 (9 August 2011)

PROCEDURE – costs – impecuniosity of corporate plaintiffs – absence of presumptions in relation to discretion to order corporate plaintiffs to provide security for costs – whether order for security for costs would stultify progress of plaintiffs’ action – absence of evidence about means of current officers and shareholders of corporate plaintiffs – application for security for costs granted.

EX TEMPORE JUDGMENT

No. SC 584 of 2006

Judge: Penfold J

Supreme Court of the ACT

Date: 9 August 2011

IN THE SUPREME COURT OF THE )

) No. SC 584 of 2006

AUSTRALIAN CAPITAL TERRITORY )

BETWEEN: CLEARY BROS (PARRAMATTA) PTY LIMITED (ACN 105 359 957)

First plaintiff

PARKER CONSTRUCTIONS PTY LIMITED (ACN 008 469 743)

Second plaintiff

ICEHOT PTY LIMITED

(ACN 085 175 867)

Third plaintiff

AND: COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)

First defendant

AND NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937)

Second defendant

AND VICTORIAN SECURITIES CORPORATION LIMITED (ACN 004 496 208)

Third defendant

AND BENDIGO AND ADELAIDE BANK LIMITED

Fourth defendant

ORDERS

Judge: Penfold J

Date: 9 August 2011

Place: Canberra

THE COURT ORDERED:

1. That the first, second and third plaintiffs give security for the future costs of these proceedings of the first and second defendants in the amount of $30,000.

2. That the first, second and third plaintiffs give security for the future costs of these proceedings of the third and fourth defendants in the amount of $75,000.

3. That the security for costs ordered be provided on or before 6 September 2011.

4. That if the security for costs as ordered is not provided by 6 September, the proceedings are stayed until further order.

5. That the first, second and third plaintiffs pay the first, second, third and fourth defendants’ costs of this application.

6. That the parties have liberty to apply.

Background

1. [The plaintiffs are three companies closely associated with Mr Michael Buggy, and Mr Buggy himself. The defendants are three banks and a subsidiary company of one of the banks. The actions concern losses alleged to have been suffered by the plaintiff companies, who were engaged in mezzanine lending, when the defendants engaged in conduct alleged to have affected the plaintiff companies’ commercial operations. After trial dates had been vacated on more than one occasion, the trial began on 19 July 2010, and was adjourned part-heard on 23 July 2010. A date for resumption of the hearing was set for April 2011 but was later vacated by consent because of Mr Buggy’s bankruptcy.]

Application for security for costs

2. The four defendants in this case have applied for security for costs against the plaintiffs.

3. The action was commenced in 2006 at which point the plaintiffs were three companies. In 2008, an amended statement of claim was filed and a fourth plaintiff, Michael Buggy, then the director of each of the three companies, was added.

4. After several vacated hearing dates, the trial of the matter began in July 2010. The week allowed for trial proved to be inadequate, and the matter was adjourned part-heard to a date in April 2011. That date was vacated as a result of the bankruptcy of Mr Buggy and a further week has been set aside in June 2012. Under s 60 of the Bankruptcy Act 1966 (Cth), Mr Buggy’s trustee in bankruptcy had 28 days to elect whether to continue Mr Buggy’s action. The deadline for the election was extended several times by court orders but eventually expired without any election having been made, with the effect that under subs 60(3) of the Bankruptcy Act, the trustee was deemed to have abandoned the action.

5. The defendants applied for Mr Buggy’s abandoned action to be dismissed, and yesterday (8 August 2011) I made orders dismissing that action. The defendants had foreshadowed the application for dismissal of Mr Buggy’s action in early June this year and at the same time foreshadowed this application, for a security for costs order. In early June orders were made requiring the plaintiffs to provide, by 8 July, affidavits in reply to the application and affidavits to be filed by the defendants.

6. The application for security for costs was heard yesterday.

7. The application is made in reliance on s 1335 of the Corporations Act 2001 (Cth) and r 1901 of the Court Procedures Rules 2006 (ACT) (CPRs).

The legislation

8. Both those provisions permit the court to order security for costs against a corporation if there is reason to believe that the corporation will not be able to pay the defendants’ costs if ordered to do so. Although the two provisions have slight differences in wording, it has not been submitted, and I do not consider, that there are any differences in the approach that should be taken to the two empowering provisions, at least in the current context; see Canberra Data Centres Pty Ltd v Vibe Constructions (ACT) Pty Ltd (2010) ACTR 33 (Canberra Data Centres) at [197].

9. Once the court is satisfied that there is reason to believe that a corporation will not be able to pay the relevant costs and therefore that there is a discretionary power to order security for costs, it is necessary to consider whether the discretion should be exercised. Rule 1902 of the CPRs lists matters that should be taken into account in deciding whether an order should be made.

Are the plaintiffs impecunious?

10. The defendants’ application was supported by three affidavits prepared by the defendants’ solicitors. The plaintiffs did not file any affidavits in reply, although they did file two affidavits in court in support of an application for an adjournment based on a late change of solicitor (Cleary Brothers (Parramatta) Pty Ltd & Ors v National Australia Bank Ltd & Ors (No.2) [2011] ACTSC 130). Those affidavits were admitted on the application for adjournment, which was refused, but were excluded from the security for costs application following objections from the defendants on the grounds that they were not filed within the deadlines previously ordered, and that their late tender would prejudice the defendants.

11. The defendants’ affidavits provide credible evidence of the following matters:

(a) that the three plaintiff companies have a paid-up capital totalling less than $5,500;

(b) that two of the three companies have ceased trading and the third company has had a receiver and manager appointed to all its assets and undertakings; and

(c) that there are various mortgages and charges over property of the companies, no evidence of property other than that subject to charges or other claims, and no evidence of the value of the relevant properties except that Icehot Pty Ltd, the third plaintiff, is said by its controlling trustee to own property worth several million dollars, which will not, however, be sufficient to meet a judgment debt already owed to one of the defendants in this matter.

12. Furthermore, on 6 October last year, Michael Buggy, who until February this year was the sole director of each of the three companies, swore an affidavit in connection with his bankruptcy proceedings, in which he said:

Icehot’s main asset is the [Tweed Heads property] and I am unable to cause Icehot to realise its equity while the receivers control Icehot’s assets.

The Tweed Heads property, incidentally, is the property that has been identified as not sufficient to fund the outstanding judgment debt. Mr Buggy went on to say:

There are no sizeable assets owned by either Cleary or Parker, [being the first and second plaintiffs respectively] and I alone am funding the ACT proceedings. Consequently, if I am adjudicated bankrupt there is no other source of funds by which the plaintiff companies will be able to continue to prosecute the ACT proceedings.

13. In the absence of evidence from the plaintiffs about their financial position, I am entitled to infer that any such evidence would not have assisted the plaintiffs in resisting an order for security for costs; HJA Holdings Pty Limited v Iliev [2006] ACTSC 8 (HJA) at [6]; Canberra Data Centres at [222]-[228]. I am accordingly satisfied that the three remaining plaintiffs are impecunious companies that would not be able to meet a costs order in favour of the defendants if such an order were made. Thus the ground for making an order for security for costs under r 1901(b) is made out. The question then is whether as a matter of discretion the order should be made.

Should the discretion to order security for costs be exercised?

14. In the case of Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497, French J (in considering s 533(1) of the Companies (Western Australia) Code 1981 (WA) which is relevantly identical to s 1335 of the Corporations Act) canvassed at some length the authorities on the approach to be taken to ordering security for costs against corporate plaintiffs, concluding at 511 that:

The preponderance of Australian, English and New Zealand authority favours the treatment of the discretion conferred by s 533(1) of the Companies (Western Australia) Code 1981 (WA) as a discretion to be exercised according to the merits of each case without any particular predisposition ...

15. Counsel for the defendants made submissions by reference to most of the matters listed in r 1902(1). I note first that there is no argument in this case that the plaintiffs are in any sense in the position of a defendant (r 1902(1)(f)). There is no claim that the current proceeding involves any matter of public importance (r 1902(1)(i)), rather than simply a private, commercial dispute. There have been no admissions or payments into court made by the defendants (r 1902(1)(j)). There is no suggestion that any costs order made against the plaintiffs would not be enforceable within this jurisdiction (r 1902(1)(l)), and there is no suggestion that there has been delay by the plaintiffs in starting the proceedings.

16. The significant matters on which submissions were made now need to be considered.

Means of people standing behind proceeding

17. First is the means of the people standing behind the proceeding (r 1902(1)(a)). Counsel said that only the current officers and shareholders listed in company searches in relation to the three plaintiff companies, being Alan Buggy, Leonie Buggy and Frances Seddon, could be assumed to be people standing behind the proceeding, and that there was no evidence before the court about the means of any of those people.

18. Mr Michael Buggy appears to retain an interest of some kind in the companies and I am not necessarily convinced by counsel’s submission that his interest cannot be taken into account, but the evidence of his bankruptcy does not seem to have any implications for the means of the other people connected with the companies.

Prospects of success, merits and genuineness of proceeding

19. As to the prospects of success or merits of the proceeding (r 1902(1)(b)), and the genuineness of the proceeding (r 1902(1)(c)), counsel expressed the view that the action of the three plaintiffs had low prospects of success but conceded that, because the matter was part-heard, it would be inappropriate for me to express any views about that question. He also noted that a conclusion that an action had low prospects of success also has implications for the genuineness of the proceeding. I am not convinced that the two matters, being low prospects of success and questionable genuineness, would always go together, but in the circumstances do not propose to reach any conclusions about the genuineness of these proceedings either.

Whether plaintiffs’ lack of financial resources is attributable to defendants’ conduct

20. As to whether the plaintiffs’ lack of financial resources is attributable to the defendants’ conduct (r 1902(1)(e)), counsel noted that there was evidence in the defendants’ affidavits supporting the view that the lack of financial resources of the first and third plaintiffs was effectively unrelated to the conduct of the defendants, as raised in the statement of claim. Although the statement of claim asserted that the conduct of the defendants had had a direct impact on the financial position of the second plaintiff, the only evidence for that claim so far tendered in the proceedings had not been admitted.

Whether an order would be oppressive

21. As to whether an order for security for costs would be oppressive (r 1902(1)(g)), counsel pointed out that in the absence of evidence from the plaintiffs, there was nothing to establish that such an order would be oppressive.

Whether an order would stultify the progress of the plaintiffs’ action

22. Counsel for the defendants also submitted that there was no evidence for any claim that an order for security for costs would stultify the progress of the plaintiffs’ action (r 1902(1)(h)). Counsel for the plaintiffs said from the bar table that he was instructed that, if the plaintiffs’ working capital was diverted to meet a security for costs order, then this would reduce the income of the plaintiff companies that had been intended to fund the progress of the proceedings, but conceded that there was no evidence for that assertion. Nor can I see that locking up funds of the plaintiffs in the amount sought could have any significant effect on the plaintiffs’ capacity to generate the necessary revenue, of a presumably significantly higher amount, to fund the plaintiffs’ actions, including presumably the plaintiffs’ potential liability for the defendants’ costs. This would seem to imply a remarkably high profit margin on the companies’ activities in the order of several hundred percent. In the absence of evidence, I see no reason to treat this as a real possibility.

23. There is authority (quoted at [31] below) for the proposition that the possible frustration of the litigation is a relevant matter in deciding whether to order security for costs, but also that there is no principle that security for costs should be refused on that basis, unless the plaintiff companies establish that the persons standing behind the companies are also without means. Further, the burden of proving that matter rests on the company resisting the security for costs order.

The estimated costs of the proceeding

24. As to the estimated costs (r 1902(1)(m)), counsel for the defendants noted that no claim was made in respect of costs to date, but only in respect of future costs. He advised that the estimated solicitor and client costs for the third and fourth defendants were around $117,000 and that the claim was for security for party and party costs estimated at around $75,000. The estimated solicitor and client costs for the first and second defendants were around $47,500, and their claim was for security for costs of $30,000.

25. Counsel for the defendants noted that the timeliness of an application for security for costs was relevant (HJA at [14] and cases cited there), and that it is accepted that late applications for security for costs should not be used for such tactical advantage as might be gained by permitting the plaintiffs to incur substantial costs before suddenly being expected to provide security for costs. Counsel says, however, that the current application could not realistically have been made while Mr Buggy was a party because it was unlikely that security for costs would have been ordered against an individual plaintiff, and it would have been inappropriate to order security for costs against corporate plaintiffs while there is an individual plaintiff pursuing the same claim; Harpur v Ariadne [1984] 2 Qd R 523, in which the Queensland Court of Appeal (Connolly J, with whom Campbell CJ and Demack J agreed) said in relation to s 533(1) of the Companies (Queensland) Code (Qld):

The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied.

26. For this reason the application could only be pursued once Mr Buggy’s action had been dismissed.

27. As to why no application had been made in the roughly two years before Mr Buggy became a party, counsel explained that the original statement of claim had described a relatively circumscribed claim against the defendants; it was the further amended statement of claim, filed at the same time as Mr Buggy was added as the fourth plaintiff, that significantly increased the scale of the action needing to be defended. That is, there was originally no good reason for the defendants to seek security for costs. By the time a good reason emerged, the defendants were constrained by the individual status of one of the plaintiffs, and the application is now made as quickly as possible after those circumstances have changed.

28. I note in this context that the repeated adjournments and vacations of hearing dates, almost always at the plaintiffs’ instigation, have contributed to turning this case into a far more expensive exercise than might have been initially contemplated.

Conclusions

29. The matters that have weighed most heavily in my decision are:

(a) first, the evidence of the impecuniosity of the plaintiff companies and the absence of any evidence at all from the plaintiffs about the financial position of either the plaintiff companies or the individuals involved with those companies; and

(b) secondly, the resulting absence of any evidence that ordering security for costs would stultify the plaintiffs’ actions.

30. The admitted willingness of Mr Michael Buggy to move funds around between bank accounts and apparently between companies in the group of companies, which emerged in evidence at the part-heard trial, also raises concerns about the capacity of the defendants to find relevant funds in the event of a costs order being made in their favour.

31. In the case of Idoport Pty Ltd v National Australia Bank Ltd (No 35) [2001] NSWSC 744, Einstein J said:

the possibility of stultification is a “powerful” factor to be taken into account by the Court in exercising its discretion as to whether an order is appropriate: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542. However, Clarke J in Yandil observed that the fact that a plaintiff is financially unable to provide security does not lead to the inevitable conclusion that the making of the order will stultify the plaintiff’s claim nor does it lead to the automatic refusal of an order. He went on to cite a line of authorities (see Tulloch v Walker, Yeldham J, 8 December 1976, unreported; Bell Wholesale Co Pty Ltd v Gates Export Corp & Ors (No 2) (1984) 8 ACLR 588) in support of the view that it is generally inappropriate to refuse an order for security where:

“the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security.” (at 545)

In other words, without fettering the Court’s discretion, it was said to be unlikely that a plaintiff could successfully resist a security order on the grounds of their own impecuniosity in the absence of evidence of the financial status of those who stand behind it (see Yandil at 545).

32. There has been no challenge to the costs estimates provided by the defendants.

33. There has also, however, been no argument that any failure to provide security should result in dismissal of the action as sought in the application, rather than a stay. That, it seems to me, is a submission that needs to be made out, rather than an automatic consequence of a security for costs order.

Orders

34. The orders accordingly are:

(a) that the first, second and third plaintiffs give security for the future costs of these proceedings of the first and second defendants in the amount of $30,000;

(b) that the first, second and third plaintiffs give security for the future costs of these proceedings of the third and fourth defendants in the amount of $75,000;

(c) that the security for costs ordered be provided on or before 6 September 2011;

(d) that if the security for costs as ordered is not provided by 6 September, the proceedings are stayed until further order;

(e) that the first, second and third plaintiffs pay the first, second, third and fourth defendants’ costs of this application; and

(f) that the parties have liberty to apply.

I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of her Honour, Justice Penfold.

Associate: Riki Sutherland

Date: 30 August 2011

Counsel for the 1^st, 2^nd and 3^rd Plaintiffs: Mr J Choy

Solicitors for the 1^st, 2^nd and 3^rd Plaintiffs: Jeffrey Choy Legal

Counsel for the 1^st and 2^nd Defendants: Mr J Solomon

Solicitors for the 1^st and 2^nd Defendants: Moray & Agnew

Counsel for the 3^rd and 4^th Defendants: Mr T Faulkner

Solicitors for the 3^rd and 4^th Defendants: Middletons

Date of hearing: 8 August 2011

Date of judgment: 9 August 2011