Re Fat-Sel Pty Limited v Brambles Holdings Limited [1985] FCA 89 (22 March 1985)

FEDERAL COURT OF AUSTRALIA

Re: FAT-SEL PTY. LIMITED
And: BRAMBLES HOLDINGS LIMITED
No. G16 of 1985
Practice and Procedure
(1985) ATPR para 40 - 544

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES REGISTRY
GENERAL DIVISION
Beaumont J.

CATCHWORDS

Practice and Procedure - security for costs - s.533(1)

Companies (N.S.W.) Code, 1981 - discretion whether applicant's impecuniosity attributable to respondent's conduct - exercise of discretion where respondent's conduct causes loss of profit only - quantum of costs.

Bell Wholesale Co. Ltd. v. Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 - con.

Gates v. City Mutual Life Assurance Society Ltd. (1983) ATPR 40-355 - con.

Frith v. Gold Coast Mineral Springs Pty. Ltd. (1982) 47 ALR 547 - con.

HEARING

SYDNEY
22:3:1985

ORDER

1. Order that the respondent's costs in the principal proceedings to date be taxed.

2. Stand application for security over to a date to be fixed.

3. Reserve costs of proceedings before the Deputy District Registrar in respect of the taxation of the respondent's costs; otherwise costs of this application to be the respondent's costs in the proceedings.

DECISION

(ON APPLICATION FOR SECURITY FOR COSTS)

2. This is an application for security for costs made by the respondent in proceedings brought against it alleging misleading and deceptive conduct in contravention of s.52 of the Trade Practices Act, 1974. Amendments to the applicant's claim to include other causes of action under the general law have been foreshadowed but not yet made. It will be necessary later to describe in some detail the case sought to be made by the applicant, but for immediate purposes, it will suffice to say that the litigation arises out of a series of complex commercial dealings between the parties and is estimated to have a hearing time of some weeks (the final hearing is fixed to commence on l8 April next).

3. The first issue which arises for determination on the application concerns the solvency of the applicant (see Bell Wholesale Co. Ltd. v. Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1). It is convenient, in the first instance, to consider the financial position of the applicant apart from the value to be attributed to security already held by the respondent in the form of a charge held by the respondent to secure payment of the sum of $300,000.00. This charge lies at the heart of the litigation and will be dealt with later in these reasons.

4. The last annual accounts of the applicant which have been adopted at a general meeting of the company relate to the year ended 30 June 1983 and are thus out of date for present purposes. A better insight into the applicant's current financial situation is provided by the draft annual accounts prepared for the year ended 30 June 1984. Those accounts show that the applicant has accumulated losses in the sum of $431,672.42; and that current assets total only $43,670.50 as compared with current liabilities of $524,266.77. True it is that, overall, assets are said to exceed liabilities by $914,084.54 but the major assets of the applicant are not in liquid form (land and buildings - $916,000.00 and plant, fittings and equipment - $1,031,591.46). In fact, the company has virtually no liquid assets to service considerable current liabilities. Symptomatic of the applicant's financial strains are agreements recently made by it to pay two debts by instalments: first, overdue group tax in the amount of $26,806.00 owed to the Deputy Commissioner of Taxation; secondly, a judgment debt in the sum of $10,567.30, payable by instalments of $1,000.00 per month.

5. Although the parties are at issue as to the proper amount to be allowed for the respondent's costs of the proceedings, it is plain enough that, if successful, the costs to be awarded to the respondent will be substantial. The picture of the applicant's current financial standing which emerges from its last annual accounts, apart from the impact, if any, of the value to be attributed to the property the subject of the charge already mentioned, gives cause at least for concern as to its ability to fund its own costs of the litigation, let alone the costs of the respondents. Prima facie then, apart from the value to be attributed to the property charged, the respondent is entitled to security for its costs.

6. The charge given by the applicant to the respondent secures payment of the sum of $300,000.00 then advanced by the respondent to the applicant together with all other monies owing on any other account. The property the subject of the charge consists of certain plant and equipment situate at Terry Hills, N.S.W. being process plant, workshop equipment and other associated items. According to an expert valuer, who was not cross-examined, the plant and equipment has an "open market value for exchange purposes" of $376,695.00 and an "auction realisation value" of $l7l,080.00. It is submitted on behalf of the applicant that the latter figure should be ignored for present purposes since it is, in truth, a break-up valuation. Although there is force in this criticism, even if the higher value of $376,695.00 were adopted, the charge must first satisfy the payment of a principal liability of $300,000.00. (It is said that interest of some $30,000.00 is also owing on this account but it is apparently unsecured). A further complication arises from the circumstance that a third party holds a second charge over the plant and equipment. I was informed that the third party would agree to the postponement of its security so as to defer to the applicant's claim for costs but, for reasons to be given, it is unnecessary to pursue this question.

7. Taking the most favourable view from the applicant's standpoint of this aspect of the matter, I am not satisfied that, after discharge of the liability in respect of the principal sum of $300,000.00, a sufficient margin will remain to satisfy entirely the significant costs likely to be awarded to a successful respondent in an action of this size and complexity. For one thing, a change in market conditions could bring about a depreciation in the value of the plant and equipment. For another, it is not reasonable that the respondent should be forced to accept as security for its costs anything that is not liquid or virtually liquid and it cannot be suggested that the assets charged have this character.

8. In my opinion, the respondent has established, for the purposes of s.533(1) of the Companies Code that there is reason to believe that the applicant will be unable to pay the respondent's costs if successful in its defence.

9. It is also submitted on behalf of the applicant that, in the exercise of its discretion, the Court should refuse to order security for costs because the applicant's financial difficulties are attributable to the respondent's conduct now complained of (see Lucas v. Yorke (1983) 50 ALR 228 per Brennan, J. at p 229). In order to deal with this submission, it is necessary to describe in more detail the nature of the claims now advanced by the applicant, at least as presently framed. By its statement of claim, the applicant, which is engaged in the production and marketing of fats recovered from grease-trap waste, alleges that on 4 September 1981 it entered into a deed with, inter alia, the respondent which is engaged in the collection of waste materials including grease-trap waste. The applicant claims that under the said deed the respondent covenanted to deliver to the applicant all grease-trap waste material collected by the respondent in the ordinary course of its business within certain areas; to assist the applicant to establish places of business at certain of the respondent's depots; and to construct such places of business at its expense but with technical assistance from the applicant. The charge referred to earlier was entered into pursuant to this deed.

10. The applicant alleges that at the time of entering into the said deed, the respondent represented to the applicant that it was able and willing to supply a quantity of grease-trap waste or concentrate; that prior to entry into the said deed, the respondent represented to the applicant that the volume of grease-trap waste and the tonnage of recoverable fat associated with the activities of the respondent at Tullamarine, Vic., would be sufficient to meet the undertakings to supply grease-trap waste given by the respondent at the time; that, at the time, the respondent further represented to the applicant that the amount of waste material which would be supplied by the respondent to the applicant was in the order of 12.15 million litres (2.7 million gallons); and that, at the time, the respondent further represented to the applicant that it was the respondent's intention immediately to commence an operation at Tullamarine to facilitate the collection of grease-trap waste for processing by the applicant. The applicant alleges that it was never the respondent's intention to honour these undertakings.

11. Contraventions of s.52 are alleged and a declaration avoiding the deed of charge and consequential injunctive relief are sought. In addition, "damages" for loss of profits under s.82 of the Trade Practices Act are claimed: the suggestion is that the Court has jurisdiction to award damages for loss of the benefit of the representations. In other words, it is contended on behalf of the applicant that statutory jurisdiction to award damages is not confined to "reliance" damages (see Gates v. The City Mutual Life Assurance Society Ltd. (1983) ATPR 40-335 at p 44-045; cf. Frith v. Gold Coast Mineral Springs Pty. Ltd. (1982) 47 ALR 547 per Fitzgerald, J. at p 565). It is not appropriate that this important point of principle be determined in an interlocutory application in the absence of full argument. But, in any event, the applicant has failed to demonstrate, as a matter of economic causation, that the respondent's alleged conduct was in any material sense responsible for the applicant's impecuniosity. Certainly, no serious attempt was made to establish such a case by reference to specific evidence. If anything, the evidence indicates that the applicant's financial troubles existed before the events now in question.

12. Moreover, there are difficulties in making out a case of impecuniosity attributable to the respondent's conduct as a ground for denying security for costs where the applicant relies on an alleged loss of a promissory kind rather than "reliance" damages of the type conventionally awarded under s.82: 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 on the respondent's conduct but rather seeks to recover profits which the respondent's representations are alleged to have lead 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 condition. It follows, in my view, that the applicant has failed to bring itself within the exceptional class of case of which Lucas v. Yorke, supra, is an example.

13. In my opinion, security for the respondent's costs should be provided. An issue has arisen as to the quantum of those costs. The amount claimed for these costs is substantial. Because I am unable at the moment to form a view as to a proper amount to be allowed in respect of the respondent's costs, it is appropriate that the matter proceed in stages. The first step will be to ascertain the costs of the respondent incurred to date as taxed on a party and party basis. A draft bill of costs was put in evidence but the amount claimed is vigorously disputed. I propose to order the applicant to provide security for costs at this and later stages of the proceedings but it will first be necessary to direct Deputy District Registrar Inga, who already has some acquaintance with the matter, to tax the respondent's costs to date. When that is done, I will make formal orders for security then and thereafter as the occasion requires. When ordering security, I propose to follow the approach taken by Fullagar J. in Brundza v. Robbie & Co. (No. 2) [1952] HCA 49; (1952) 88 CLR 171 at 175:

"... the Court does not set out to give a
complete and certain indemnity to a
respondent."

14. I make the following orders:

1. Order that the respondent's costs in the principal proceedings to date be taxed.
2. Stand application for security over to a date to be fixed.
3. Reserve costs of proceedings before the Deputy District Registrar in respect of the taxation of the respondent's costs; otherwise costs of this application to be the respondent's costs in the proceedings.