Re Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd and Permanent Trustee Nominees (Canberra) Limited [1988] FCA 15 (3 February 1988)

FEDERAL COURT OF AUSTRALIA

Re: APPLEGLEN PTY LTD
And: MAINZEAL CORPORATION PTY LTD and PERMANENT TRUSTEE NOMINEES (CANBERRA)
LIMITED
No. QLD G125 of 1987
Practice

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Pincus J.(1)

CATCHWORDS

Practice - security for costs - applicant trustee - whether right to indemnity sufficient - general rule as to applicant trustees - security by way of directors' guarantee - whether prospects of success in suit should be considered.

Companies (Queensland) Code, s.229A

HEARING

BRISBANE
3:2:1988

Counsel for the applicant: Mr T. Matthews

Solicitors for the applicant: Messrs Georgeson & Company

Counsel for the second respondent: Mr R.A. Perry

Solicitors for the second respondent: Messrs Flower & Hart

ORDER

Security be given to cover the costs of the second respondent in these proceedings, by deed of guarantee executed by the directors, Mr and Mrs Oram, in a form satisfactory to the Registrar, limited to $20,000;

The applicant's proceedings against the second respondent be stayed until such a deed is filed and it is established that an executed copy of the same has been served upon the solicitors for the second respondent;

The costs of the application for security be the costs of the second respondent in the proceedings.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

The principal claim is under s.52 of the Trade Practices Act, and there is also a claim under the general law, relating to a shopping centre tenancy. The applicant in the principal proceedings, who is the tenant, is a trustee for a family trust; the second respondent, which is also a trustee company, applies for security for costs on the ground that the applicant has no assets in its own right, and that its claim for indemnity under the trust deed may not be a very substantial one.

2. In these reasons I shall refer to the parties by the designations they bear in the principal proceedings. Neither side has attempted to establish either that the applicant is or that it is not likely to succeed at the hearing of the suit, but Mr Matthews for the applicant argued that I should consider the matter on the basis that it was conceded that the applicant has a prima facie case.

3. In Porzelack K.G. v. Porzelack (U.K.) Ltd (1987) 1 WLR 420, consideration was given to a statement in the English Supreme Court Practice which says: "A major matter for consideration is the likelihood of the plaintiff succeeding" - meaning, a major matter for consideration in applications for security for costs. The Vice Chancellor, at p.423 of the report, said:

"This is the second occasion recently on which I

have had a major hearing on security for costs and
in which the parties have sought to investigate in
considerable detail the likelihood or otherwise of
success in the action. I do not think that is a
right course to adopt on an application for
security for costs."

It appears to me that the view taken in the Porzelack Case must be at least the general rule. Here, although Mr Matthews's submission suggested otherwise, I really have no information on which I could possibly assess the merits of the applicant's claim.

4. The principal ground of resistance put forward by Mr Matthews was that, on the documents before me, the trust assets are sufficient to meet any likely claim for costs. On the face of the documents, that is so, but I accept Mr Perry's submission that one cannot have complete confidence in them. For example, exhibit "E" to the affidavit of Kenneth Ian Ferguson, put forward by the applicant says that the item "liabilities on plant, fixtures, fittings, and motor vehicles" is the sum of $17,000. Exhibit "D" to the same affidavit, put forward by the applicant shows total liabilities of $34,550, of which all but $8,000 would appear to fall within the category of "liabilities on plant, fixtures, fittings, and motor vehicles".

5. As another example of the unsatisfactory nature of the material, the assessment of the value of goodwill at $12,000 put forward on behalf of the applicant must be regarded as a guess, in the absence of any figures for the income earned in recent years.

6. Experience suggests that the financial position of businesses, particularly small businesses, is difficult to assess on the basis of rough and incomplete information of the type placed before me; all the figures are round. It may turn out, as Mr Matthews says, that if the applicant fails, the right of indemnity will be enough to satisfy the liability for the second respondent's costs. One could not, however, feel any absolute confidence about that.

7. My attention was drawn to s.229A of the Companies (Queensland) Code , which imposes liabilities on directors of companies acting as trustees, in certain circumstances. It was suggested that the section may improve the position of the second respondent in that it will not necessarily have to rely, if successful in the proceedings, on the applicant's right of indemnity under the trust deed, but may be able to recover by action against the directors, a Mr and Mrs Oram. Mr Matthews informed me that Mr and Mrs Oram have a substantial equity in real property. I accept that s.229A improves the position of the second respondent, but it should be noted that the provision does not apply where the trustee company is entitled to be fully indemnified out of the trust assets, and under subs.2 that entitlement may exist although the trust has, in fact, no assets.

8. As a general rule, it appears to me undesirable that those interested in a small applicant trustee company - small in the sense of having no significant capital - should be able to defeat applications for security merely on the basis that the applicant company may well be able to obtain indemnity out of the trust assets, including assets such as stock and goodwill, to meet an order for costs. Trustee companies of this sort are usually formed to reduce the impact of income tax which may, from the point of view of those interested in them, be a laudable objective. If the applicant's submissions here are accepted, trading in this way is accorded another advantage, namely one with respect to costs. Were there no trustee company interposed between Mr and Mrs Oram and the second respondent, the two of them would, of course, simply be liable for the costs.

9. The material filed on behalf of the second respondent suggests that its costs will be likely to exceed $20,000 on a party-and-party basis. Mr Matthews advanced some criticisms of the figures presented, but general experience of this sort of case suggests that a figure of $20,000 for security would not be unreasonable. I therefore propose to order, subject to a matter I shall mention, that security be provided to the extent of $20,000 in respect of the costs of the second respondent. In the particular circumstances of this case, however, I would allow the applicant to provide such security by way of a deed of guarantee executed by the directors, Mr and Mrs Oram. I appreciate that a guarantee by the Orams is by no means as certain as a cash security from the point of view of the second respondent, but in my opinion, provision of such security by them would be a reasonably just outcome.

10. I am now told by Mr Matthews that Mr and Mrs Oram are willing to give a guarantee.

11. I order that security be given to cover the costs of the second respondent in these proceedings, by deed of guarantee executed by the directors, Mr and Mrs Oram, in a form satisfactory to the Registrar, limited to $20,000. I order that the applicant's proceedings against the second respondent be stayed until such a deed is filed and it is established that an executed copy of the same has been served upon the solicitors for the second respondent.

12. The costs of the application for security will be the costs of the second respondent in the proceedings.