Re AJ Thompson Pty Ltd and Alan John Thompson v KLK Manufacturing Pty Ltd; Kevin Errol Koch and John Scott Sutton Re KLK Manufacturing Pty Ltd and Kevin Errol Koch v AJ Thompson Pty Ltd and Alan John Thompson NoG43 of 1983 Practic [1985] FCA 109 (4 April 1985)

FEDERAL COURT OF AUSTRALIA

Re: A.J. THOMPSON PTY. LTD and ALAN JOHN THOMPSON
And: K.L.K. MANUFACTURING PTY. LTD.; KEVIN ERROL KOCH and JOHN SCOTT SUTTON
Re: K.L.K. MANUFACTURING PTY. LTD. and KEVIN ERROL KOCH
And: A.J. THOMPSON PTY. LTD. and ALAN JOHN THOMPSON
No.G43 of 1983
Practice & Procedure
(1985) 3 ACLC 414

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Fisher J.

CATCHWORDS

PRACTICE & PROCEDURE - security for costs - insolvent company - whether companies (South Australia) Code S.533(1) applicable in Federal Court - Federal Court of Australia Act s.56 - inherent jurisdiction - relevant considerations in exercise of courts discretion - whether predisposition to order security for costs - Jurisdiction Act s.79 - whether insolvent company suing at behest of major creditor - domestic rather than commercial circumstances - natural person - Federal Court Rules 0 28 r 3(1)(d).

Federal Court of Australia Act 1976 s.56

Judiciary Act s.79

Companies (South Australia) Code s.533(1)

Federal Court Rules 0 28 r 3(1)(d)

HEARING

ADELAIDE
4:4:1985

ORDER

1. The application for security of costs against the applicants, A.J. Thompson Pty. Ltd. and Alan John Thompson, be dismissed.

2. The question of costs be reserved.

DECISION

This is a motion by the respondents and the cross-claimants ("the respondents") seeking, inter alia, an order that the applicants A.J. Thompson Pty. Ltd. ("the applicant company") and Alan John Thompson ("Mr. Thompson") each provide security for the costs of the respondents in this action. The application was doubtless prompted by the fact that on 25 January 1985 the applicant company called a meeting of its creditors at which it was resolved that the company be placed in liquidation and that one Richard Hugh Allert be appointed liquidator. The statement of affairs of the applicant company which was placed before that meeting disclosed that the company was insolvent and that the deficiency prior to the costs of liquidation was expected to be $168,761.

The proceedings in this matter were commenced by the applicants on 1 December 1983. They claimed that the respondent company together with the respondents Kevin Errol Koch and John Scott Sutton had contravened s.52 and s.59(2) of the Trade Practices Act 1974 ("The Act") in consequence of which the applicants had suffered loss. They sought damages under s.82 of the Act and relief under s.87 as well as damages for fraudulent and/or negligent misrepresentation, damages for breach of contract and pursuant to the Misrepresentation Act 1972 (S.A.). The applicants pleaded that the respondents Koch and Sutton made, during negotiations in February 1983 for the sale and purchase of the respondent company's Flexbar business, certain oral representations, which in their defence they denied, and certain documentary representations, which documentary representations were not admitted by them. These latter representations were stated to be as follows:

(a) that the value of the stock held by the said business was then approximately $50,000.00,

(b) that the value of the plant and equipment owned by the said business was approximately $50,000.00,

(c) that the cost of materials, labour and packaging of a Flexebar unit was $36.00.

(d) that the respondent company had sold as many as two thousand four hundred Flexebar units per month and that the average number sold in a month was one thousand eight hundred.

A number of affidavits were filed in support and in opposition to the application, but only Mr. Thompson was cross-examined, primarily on matters personal to him. Upon the unchallenged facts deposed to in these affidavits, it is possible to reach certain tentative conclusions. It is of course crucial to reiterate that these conclusions are tentative and to date untested and are tentatively reached only to enable me to exercise my discretion on this application for security. I propose dealing in the first instance with matters to which courts invariably attach significance on applications for security, and to consider thereafter whether, in respect of corporations, courts should be predisposed to order security in circumstances such as the present. Likewise I will at that stage deal with the applicability of the decision of the Full Court of this Court in Sent v Jet Corporation of Australia Pty. Ltd. [1984] FCA 178; (1984) 2 F.C.R. 201 to the facts of this matter.

In relation to the applicant company the respondents based their claim for security upon the provisions of s.533(1) of the Companies (South Australia) Code. They relied upon O 28 r 3(1)(d) of the Rules of this Court in claiming an order for security against Mr. Thompson. In each instance they relied in the alternative upon s.56 of the Federal Court of Australia Act 1976 and the inherent jurisdiction of this Court. The matters with which I now propose to deal relate primarily to applications against corporations under s.533(1) of the Code. It was accepted that this court has jurisdiction to act under this provision of the Code. In Sent v Jet Corporation supra Smithers J. with whom Sweeney J. agreed, said at page 213;

"Having regard to the generality with which a provision in substance similar to s.533 is in force in other jurisdictions it would be strange that a provision so widely approved by the legislature, no doubt because of the limitation of the liability of companies, should not extend to this court. But because of the terms of s.56 of the Federal Court of Australia Act 1976 (Cth) and s.79 of the Judiciary Act 1973 (Cth) the view that it does confer jurisdiction has been taken and applied by single judges of this Court in Drumdurno v Braham(1982) 42 A.L.R. 563 and in Tradestock Pty. Ltd. v T.N.T. (Management Pty. Ltd.) (No.1) [1977] FCA 1; (1977) 30 F.L.R. 343 and by the Full Court of this Court in Bell Wholesale Co. Pty. Ltd. v Gates Export Corporation [1983] FCA 299; (1983) 8 A.C.L.R. 483."

I take into account the circumstances which follow as relevant to the exercise of my discretion whether under the Companies Code or in the exercise of the inherent jurisdiction of this Court. It is accepted by the respondents that the applicants' claim has been made bona fide and I note the fact that Mr. Thompson has joined the applicant company as an applicant in the proceedings. He, whether voluntarily or of necessity, has accepted an unlimited liability for costs if the action is unsuccessful and has in fact already paid a substantial sum, which he received as a windfall, towards the applicants' costs of the proceedings.

It appears to me on the evidence to date that the applicants have reasonable prospects of success in establishing their claims. I have already drawn attention to the fact that the documentary representations which they have pleaded have not been denied by the respondents. In respect of these representations Mr. Thompson has deposed to the fact that the turn-over was not as represented to him and Mr. Allert, the liquidator, said that from a perusal of the records of the applicant company after 1 March 1983 the representations appear to be untrue. An independent accountant engaged by the applicants has sworn an affidavit to the effect that, having perused the accounts of the respondent company, his conclusions generally supported those of Mr. Allert, particularly to the effect that no value could properly be attached to the goodwill of the Flexebar business. It was his opinion, unchallenged and untested at this stage, that at the time of the sale of the Flexebar business the respondent company was insolvent.

An important factor to be taken into account is the evidence of Mr. Allert and Mr. Thompson that if the representations of the respondents were true the applicant company would not be in liquidation but would be trading profitably. Mr. Allert deposed to his opinion that the representations, if made, were directly responsible for the present insolvent state of the applicant company. The affidavit of Mr. Raphael lends some support to this opinion. I also note that the applicants together with Mrs. Thompson are currently being sued by a third party in the Supreme Court of South Australia in proceedings which allege that they are infringing certain letters patent granted for what is said to be a similar invention to Flexebar.

Mr. Allert's evidence was that after a conference with the creditors it was decided to proceed with the applicant company's claim. However an associate of his, in his absence overseas, deposed to the fact that if an order was made requiring the applicant company to give security for costs in any amount the liquidator would not be in a position to proceed with the action. This statement was also unchallenged.

Counsel for the applicants contended that the application for security was brought oppressively but I have no hesitation in rejecting this submission. Furthermore in a matter such as the present I attach little significance to the fact that there is some element of public interest in allowing the action to proceed, in particular because a contravention of s. 59(2) of the Act is a ground for a criminal prosecution. As Toohey J. said in Caruso's case infra at page 314, the representations were not made to the public at large but to the applicants in pre-contract negotiations.

If the above matters were my only concern I would have little hesitation in exercising my discretion to reject the application for security. However Mr. Mansfield of counsel argued strongly that the respondents were entitled to an order because of two additional significant factors. He contended that there was a predisposition towards ordering security where the applicant was an impecunious corporation. A further submission upon which he relied strongly was that I should feel bound to follow the decision of the Full Court in Sent's case and Toohey J. in Caruso Australia Pty. Ltd. v Portec (Australia) Pty. Ltd. (1984) 1 F.C.R. 311 and order security because a major creditor of the applicant company has a substantial interest in the outcome of the litigation.

Present authorities seem to indicate that it is not appropriate to construe s.533(1) as predisposing a court to make an order for security. Courts have been more inclined to exercise a discretion untrammelled by such a predisposition. In Sent's case supra McGregor J. said at page 233;

"Buckley's case suggests that there should be a predisposition towards ordering security where there is an impecunious plaintiff. See per Street CJ. at p.305.

If there is such a predisposition, it should have greater weight where it has not been shown that the provision of security would prevent or stifle the claim being continued by the plaintiff; particularly perhaps where at the least the indications are (or it has not been proved to the contrary) as here, the plaintiff, Jet Corporation, will not be able to pay all costs if any of the present respondents are successful. But I do not find it necessary to proceed upon the basis that the relevant legislation implicitly requires any such predisposition."

The Supreme Court of South Australia considered the extent of the discretion under s.533(1) in Spiel v Commodity Brokers Australia Pty. Ltd. (1983) 8 A.C.L.R. 410. Bollen J. delivered the principal judgment of the Full Court and reviewed the relevant authorities. At page 415 he said:

"The discretion is a wide one. The judge or magistrate asked to order security for costs should not approach the application with any predisposition at all. I think it follows that the circumstances in which the discretion should be exercised in favour of making an order cannot be stated exhaustively. Nor should there be any attempt to do so. The judge or magistrate must decide according to his view of the justice of the case. There should be no complaint at the imprecision of that statement. Beyond saying that the judge or magistrate must behave judicially one cannot define or delimit or categorise the circumstances in which security should be ordered to be given. It is quite another thing to speak to some matters which are capable of assuming importance in an application for security."

This decision which indicates the practice or procedure in South Australia is particularly relevant in that Smithers J. Sweeney J. agreeing, indicated in Sent's case that the jurisdiction of this Court would be exercisable pursuant to the provisions of s.79 of The Judiciary Act 1973 (Cth).

The approach of Bollen J. accords with that of Lord Denning M.R. in Sir Lindsay Parkinson & Co. Ltd. v Triplan Ltd. (1972) 2 All E.R. 273 when he said at page 285:

"Turning now to the words of the statute, the important word is 'may'. That gives the judge a discretion whether to order security or not. There is no burden one way or the other. It is a discretion to be exercised in all the circumstances of the case. . . If there is reason to believe that the company cannot pay the costs, then security may be ordered, but not must be ordered."

In my opinion I should appraoch the exercise of my discretion under s.533(1), as did the Full Court in Spiel's case on the basis that the legislation does not require a predisposition. This is particularly the case, as McGregor J. said in Sent's case, where there is evidence that the provision of security would "prevent or stifle the claim". I reject the respondents' submissions in this regard.

In both Sent's case and Caruso's case the Court in making an order for security attached much significance to the fact that a large creditor or large creditors had a major interest in the outcome of the litigation.

In Sent's case Citicorp was a secured creditor of the applicant company and had appointed a receiver and manager. In these circumstances Smithers J. at page 214 saw the true position as being that "the action is under the control of the receiver and manager appointed by Citicorp, is financed by Citicorp and is pursued for the benefit primarily of Citicorp and, subject to the interest of Citicorp, for unsecured creditors and Jet Corporation and that the decision whether the action sould proceed or not is that of Citicorp". This matter he considered of primary importance in the exercise of discretion under s.533(1). He said at page 215;

"The commencement and control of the proceedings brought in the name of Jet Corporation may be regarded therefore as having resided in the receiver and manager. There is no suggestion from Jet Corporation that an order for security for costs will cause the action to be discontinued. The inference to be drawn from this circumstance and the evidence is that there are funds available for the maintenance of these proceedings whether or not an order for security for costs is made against Jet Corporation.

Once it appears, not only that there is a secured creditor in respect of whose claims against an insolvent company the proceedings are of special interest, but that the proceedings have been initiated by, and are controlled by the receiver and manager appointed by that secured creditor whose primary purpose is the recovery of his own debt, and there is a reasonable inference that that secured creditor is supporting the litigation financially, the injustice of that secured creditor pursuing his own interest in an action against the appellant parties with no risk to itself should the appellant parties succeed in their defence assumes a special significance on the question of the justice of granting or refusing an order for security for costs. It is a weighty consideration that the decision whether to sue or not to sue is that of Citicorp acting through the receiver and manager."

Sweeney J. agreed with the reasons for judgment of Smithers J. On this point McGregor J. said at page 236;

"If to that is added that Jet Corp is suing, at least in part in the interest of Citicorp, and that to order security would not stifle the action, I consider the argument for exercising the discretion in favour of the granting of security is overwhelming."

In Caruso's case the facts before Toohey J. were very similar. He said at page 314;

"On the other hand there are two major creditors of the applicant. Standard Chartered Finance is presently owed $638,675 under an agreement for the lease of the plant and there is a loan of $287,000 due to Caruso Partnership whose name suggests a connection with the applicant. The total of these amounts represents more than sixty per cent of the applicant's deficiency. The respondent argues with some force, that these creditors have a major interest in the outcome of the litigation and, if the claim has a reasonable prospect of success, they might be expected to contribute to any security that may be ordered."

Primarily in reliance upon these circumstances Toohey J. ordered that security be given for costs likely to be incurred thereafter.

In the present matter the unsecured creditors of the applicant company amount to $202,088, of which sum $120,520 is owed to Doug Godden & Co. Pty. Ltd. ("Doug Godden"). A further $19,815 is owing to Mr. Thompson's wife and $4,627 is owing to Mr. Thompson. The contention was that more than seventy per cent of the applicant company's debts were due to Mr. Thompson and his family, it being contended that Doug Godden was a family company of Mr. Thompson. The applicant company had no secured creditors. The submission of counsel for the respondents was that the facts were thus indistinguishable from those in Sent's case and Caruso's case and that I should follow the decisions in those cases.

It is however my opinion that the facts in the various matters are significantly dissimilar. In this matter there was unchallenged evidence to the effect Doug Godden was not a family company of Mr. Thompson but of his wife. Mr. Thompson was not an officer of that company and held only one share in trust for his wife. He said that in the past Doug Godden and his wife had provided considerable assistance to the applicant company, particularly in its financial difficulties consequent upon the acquisition of the Flexebar business. This assistance had been by way of loans and security for loans and credit facilities provided to the applicant company by third parties. His evidence in his affidavit was that his wife blamed him both for the decision to purchase the Flexebar business and for the substantial losses that Doug Godden would probably suffer and that the relationship between him and his wife had in consequence deteriorated. This evidence was not challenged. In my opinion, because the debts of Doug Godden and the wife of Mr. Thompson were incurred in what I might call domestic rather than commercial circumstances it is quite understandable that Mrs. Thompson is disinclined to give further assistance. I do not see this disinclination as indicating any loss of confidence in the applicants' case, nor do I see the fact that if the applicants are successful Doug Godden will benefit to a far greater extent than the other creditors as requiring me to exercise my discretion in favour of an order for security.

In Sent's case the evidence was that the action would proceed whether or not security was ordered. Citicorp was, as a secured creditor which had appointed a receiver and manager, in control of the proceedings, and was a creditor to which a considerable debt was owing which arose out of commercial transactions. There was as well evidence from which the inference could be drawn that it was supporting the litigation financially. Likewise in Caruso's case Standard Chartered Finance stood in a situation similar to that of Citicorp. It also had appointed receivers and managers of the applicant's property. Furthermore there was nothing to suggest that the Caruso Partnership debt was incurred in circumstances akin to that of Doug Godden and Mrs. Thompson.

I am not persuaded that the fact that considerable debts are due to the wife of Mr. Thompson and her family company require me, in the circumstances, to exercise my discretion and make an order for security. I take this matter into account but reject the application for an order for security for costs against the applicant company. Nor have the respondents satisfied me that I should look beyond the provisions of s.533(1) and make an order in the exercise of the inherent jurisdiction of this Court having refused to make an order under that section.

The claim for security for costs against Mr. Thompson was based on the provisions of 0 28 r 3(1)(d) of the Rules of Court. It is in the following terms:

"3(1) Where, in any proceeding, it appears to the court on the application of a respondent-

(a) . . .

(b) . . .

(c) . . .

(d) that an applicant has changed his address after the

commencement of the proceeding with a view to avoiding the consequence of the proceeding,

the court may order that applicant to give such security as the court thinks fit for the costs of the respondent of and incidental to the proceeding."

The respondents' evidence in support of the application of the provision was to the effect that Mr. Thompson had subsequent to the commencement of these proceedings, namely in or about May 1984, moved to a dwellinghouse registered in the name of his wife at 3 Omar Place, Unley Park. The facts as deposed to by Mr. Thompson upon which he was cross-examined are that the previous home owned by himself and his wife was burned to the ground in 1983. Because the major portion of the funds laid out in the purchase of that home had been provided by his wife and Doug Godden, which company also had been required to finance certain credit obligations to the applicant company, the proceeds of the land and insurance claims were, after making repayments to Doug Godden, applied in the purchase of the dwellinghouse at 3 Omar Place in the name of Mr. Thompson's wife. This evidence in no way supported a contention that Mr. Thompson had changed his address with a view to avoiding the consequence of the proceedings. In so far as it is based on the Rules of Court the application for an order against Mr. Thompson must be dismissed.

To the extent that reliance was placed upon the inherent jurisdiction of the Court as empowering an order for security, I accept the law to be as stated by Smithers J. in Sent's case at page 217. He said:

"In general the impecunious condition of a litigant who is a natural person is not a ground for security for costs."

No special circumstances have been established which satisfy me that there should be any departure from this general principle.

I am not prepared in the circumstances to make an order for security for costs of the respondents against either the applicant company or Mr. Thompson. The application to this effect in the notice of motion is therefore dismissed and the question of costs is reserved.