Re Molnar Engineering Pty Ltd v the Herald & Weekly Times Ltd and EJ Burns v [1985] FCA 44 (22 February 1985)

FEDERAL COURT OF AUSTRALIA

Re: MOLNAR ENGINEERING PTY. LTD.
And: THE HERALD & WEEKLY TIMES LTD. and E.J. BURNS
V. No. G209 of 1982
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Northrop J.

CATCHWORDS

Practice and procedure - security for costs.

Federal Court of Australia Act 1976 s.56

Companies (Victoria) Code s.583(1)

HEARING

MELBOURNE
22:2:1985

ORDER

1. Molnar Engineering Pty. Ltd. give security in the amount of $35,000 for the costs of the respondent, E. J. Burns, of and incidental to these proceedings in a form to be agreed by the parties, and in default of agreement within fourteen days to be determined by the Court.

2. Further proceedings on the claim against the respondent Burns be stayed until security is provided.

3. Liberty be reserved to either party to apply generally upon five days notice to the other party.

4. The respondent Burns's costs of the motion, including the costs of the day of 7 February 1985, be paid by Molnar Engineering Pty. Ltd.

DECISION

The history of various matters arising in this application appears in Molnar Engineering Pty. Ltd. v. The Herald and Weekly Times Ltd. [1984] FCA 126; (1984) 1 FCR 455 and on appeal in Molnar Engineering Pty. Ltd. v. The Herald and Weekly Times Ltd., 17 July 1984, unreported. The respondent, Mr. Burns, now moves the Court, upon notice, that the applicant, Molnar Engineering, give security for his costs. The motion is based upon s.56 Federal Court of Australia Act 1976 and is sought pursuant to s.533 Companies (Victoria) Code. Sub-section (1) of that section is set out:

"533(1) Where a corporation is plaintiff

in any action or other legal proceeding,
the court having jurisdiction in the
matter may, if it appears 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, require
sufficient security to be given for those
costs and stay all proceedings until the
security is given."

2. The general principles to be applied in determining motions for security for costs are not in dispute. They have been discussed in a number of cases. Details of all cases referred to during the course of the hearing are not set out in these reasons, but for the sake of reference, the cases are listed in an appendix to these reasons. The general principles to be applied are discussed in Jet Corporation of Australia Pty. Ltd. v. Petres Pty. Ltd. and Others (1983) 50 ALR 722 per Northrop J. at pp 731-3 and the cases cited therein and on appeal in Sent and Anor. v. Jet Corporation of Australia Pty. Ltd. [1984] FCA 178; (1984) 54 ALR 237 per McGregor J. at pp 271-6. Those principles will be applied in determining this matter but will not be discussed in detail.

3. In order to exercise the power to grant the order sought, it is necessary that there be "credible testimony that there is reason to believe that the corporation will be unable to pay the costs" of Mr. Burns if he is successful in his defence to the application. In order to satisfy that threshold requirement, Mr. Burns relies upon an affidavit by his solicitor. That affidavit exhibits the two affidavits sworn by Mr. Molnar, the managing director of Molnar Engineering, in support of the motion by Molnar Engineering that Mr. Molnar be granted leave to appear on behalf of Molnar Engineering, as well as a large number of other documents. For present purposes it is accepted that Mr. Burns was unaware of the financial position of Molnar Engineering until the first of the two affidavits by Mr. Molnar was filed on 10 May 1984. Molnar Engineering is an exempt company which has appointed an auditor, and accordingly its financial accounts have not been lodged with the Corporate Affairs Office, nor are its accounts available to public scrutiny.

4. In his first affidavit, Mr. Molnar claims that Molnar Engineering's financial position has been brought about substantially by the actions of the Victorian Department of Labour and Industry, in which Mr. Burns is the Chief Inspector of Lifts and Cranes, condemning the hoists produced by Molnar Engineering on the ground that they are unsafe to operate. In that affidavit Mr. Molnar stated that Molnar Engineering was neither able, nor prepared, to expend the large amount of money immediately required to enable it to pay its legal advisers to continue to represent it in the proceedings which were then part heard. In his second affidavit sworn on 11 May 1984, Mr. Molnar stated that Molnar Engineering did not have sufficient liquid funds currently at its disposal, or through credit facilities, to continue to engage legal advisers. He stated that the company owned its own factory site, plant and stock, but that it was unable to borrow on its assets to finance the continuation of the action as the downturn in its trade had placed it in a situation where it was not earning sufficient income to service the interest payable on that borrowing. He stated that Molnar Engineering was paying interest and making repayments on a loan of $450,000 secured by a mortgage over its factory. He said also that it had about one hundred hoists in stock valued at approximately $250,000, but they could not be sold until the dispute with the Victorian Department had been resolved. Paragraphs 6 and 7 of that affidavit are set out. In those paragraphs Molnar Engineering is called "the Applicant":

"6. The Applicant's receipts from sales
since October 1982 have diminished to a
point where the Applicant is now
operating at a substantial loss. If it
were to borrow monies to pay further
legal costs, it would mean that it would
be necessary to close its business and
dismiss its employees. It does not have
sufficient funds or access to credit
facilities sufficient to remain in
production and further pay its legal
advisers.

7. The decision now taken by the
Applicant's Board to conduct the case
myself has been an endeavour to balance
the requirements of salvaging what is
left of the Applicant's business and
endeavouring to succeed in this action.
The estimated costs for my legal
representation for the balance of the
expected duration of this action are in
excess of $100,000.00. The Applicant
cannot both pay those costs and continue
in business."

5. Other exhibits disclose that Molnar Engineering purchased its factory site from the Broken Hill Associated Smelters Pty. Ltd., which granted a loan to Molnar Engineering on the security of a first mortgage. The sale and mortgage took place in June 1981. Molnar Engineering borrowed the sum of $500,000 repayable as to $25,000 in June 1982, $25,000 in June 1983 and the balance on or before June 1986, but the applicant had the right to make early repayments of the principal or parts thereof. In addition, interest at the rate of 13.5% was payable. There is no evidence before the Court of the value of the factory site or the amount of the loan currently outstanding. There is an obvious discrepancy between the amount of the loan referred to in Mr. Molnar's affidavit and the mortgage document.

6. The motion was to be heard on 7 February 1985. An answering affidavit sworn by Mr. Molnar was served on the solicitors for Mr. Burns on 6 February 1985. Counsel for Mr. Burns desired to cross-examine Mr. Molnar on his affidavit. The hearing of the motion was adjourned to 14 February 1985 to enable Mr. Molnar to attend to be cross-examined. Notice under O.14 r.9 of the Rules of Court was given. Mr. Molnar did not attend Court on 14 February 1985, nor was any explanation given for his non-attendance. The Court refused leave under O.14 r.9(3) and accordingly Mr. Molnar's affidavit was not used. In the result, apart from the affidavit by the solicitor for Mr. Burns and the exhibits thereto, there is no evidence directed to the financial position of Molnar Engineering.

7. It is estimated that the hearing of the application will take between three and four weeks. The solicitor for Mr. Burns estimates that Mr. Burns's costs will be approximately $2,000 per day for the balance of the hearing. Those costs are on a solicitor and client basis. In his first affidavit, Mr. Molnar estimated that his costs for the expected duration of the action would be in excess of $100,000. It is apparent, therefore, that the costs of Mr. Burns, on a party to party basis, will be very substantial and could well exceed $100,000.

8. From the material before the Court, I am satisfied there is reason to believe Molnar Engineering will be unable to pay the costs of Mr. Burns if he is successful in his defence. There can be no doubt that Molnar Engineering has a serious cash flow problem. There is no evidence of the value of the assets of Molnar Engineering. If the application fails, the value of the hoists in stock will be very small. Debate took place in Court concerning the meaning to be given to the words "unable to pay the costs" where they appear in s.533 of the Companies (Victoria) Code, namely whether regard should be had to liquid assets or to the total assets of the corporation. In the present case there is no evidence of the value of all the assets of the applicant and the amount of monies secured by way of mortgage or otherwise over those assets. This is not a case where a liquidator or a receiver/manager has been appointed. I am satisfied from the material before the Court, and in the absence of any evidence given on behalf of Molnar Engineering, that the threshold requirement has been established. At the very least, that material is sufficient to place the evidentiary onus on the applicant to give evidence that it would not be unable to pay the costs. Mr. Molnar, at an earlier stage, gave evidence on affidavit as to the difficult financial position facing Molnar Engineering. He has given no evidence regarding the current financial position of Molnar Engineering. In these circumstances, I do not find it necessary to consider in detail the numerous authorities referred to in arguments. It appears by credible testimony that there is reason to believe that Molnar Engineering will be unable to pay the costs of Mr. Burns, if successful in his defence.

9. It remains to consider whether, as a matter of discretion, an order should be made awarding security for costs. There appears to be some difference of opinion regarding the existence of a predisposition to make an order once the threshold requirement to enable an order to be made has been established; see for example Plaza Print Pty. Ltd. v. South British Insurance Co. Ltd. per Blackburn C.J. at pp 799-800, and Caruso Australia Pty. Ltd. v. Portec (Aust.) Pty. Ltd. per Toohey J. at p 819. It is not necessary to express a preference on this matter. The discretion to make an order is unfettered by the legislation. The fact that there is reason to believe that Molnar Engineering will be unable to pay the costs of Mr. Burns if he is successful in his defence is a factor to be taken into account in the exercise of the discretion conferred upon the Court. The power to make the order is limited to cases where the plaintiff is a corporation. In the present case there is no evidence disclosing the financial position of the persons, whether natural or corporate, behind Molnar Engineering. There has been no undue delay in seeking the order for security for costs since Mr. Burns first became aware of the financial position of Molnar Engineering. A motion by Mr. Burns for an order for security for costs in respect of the appeal refusing leave to Mr. Molnar to appear on behalf of Molnar Engineering was refused by the Court constituted by a single Judge on the basis that, having regard to the relatively small amount of the costs of the appeal, the threshold requirement had not been established. That appeal and subsequent delays by Molnar Engineering explain the apparent delay between May 1984 and October 1984 when notice of the present motion was given.

10. At this stage it is impossible to form a view whether Molnar Engineering's claim is likely to be successful or not. Weight is given to the fact that I am satisfied that the application is genuine. I have taken into account also the fact that the applicant's claim has in it an element of public interest based on the provisions of the Trade Practices Act 1974. At this stage it is impossible to form a view whether Molnar Engineering's financial position is due to the action of Burns, as is claimed in the application, or the Victorian Department, but it is noted that the Department is not a party to the proceedings. It must be remembered also that Mr. Burns has raised a defence based on what can be described as "the shield of the Crown". Consideration is given also to the undesirability of preventing a plaintiff, being a corporation, from proceeding with an action, but less weight is given to this factor because of the absence of evidence of the financial position of the persons behind Molnar Engineering. I am satisfied further that the motion has not been brought to oppress the applicant but to protect the financial position of Mr. Burns. In all the circumstances, an order should be made.

11. The amount of security to be ordered should be based on party to party costs. The amount of security should not be for the full amount of the anticipated party to party costs. The amount depends upon the likely future costs, not costs incurred to date. In all the circumstances, an amount of $35,000 is appropriate.

12. Accordingly, I would make the following orders:

1. Molnar Engineering Pty. Ltd. give security in the

amount of $35,000 for the costs of the respondent,
E. J. Burns, of and incidental to these proceedings
in a form to be agreed by the parties, and in
default of agreement within fourteen days to be
determined by the Court.

2. Further proceedings on the claim against the

respondent Burns be stayed until security is
provided.

3. Liberty be reserved to either party to apply

generally upon five days notice to the other party.

4. The respondent Burns's costs of the motion,

including the costs of the day of 7 February 1985,
be paid by Molnar Engineering Pty. Ltd.