Re Town and Country Sport Resorts (Holdings) Pty Ltd; Town and Country Sport Resorts Pty Ltd; Vimited Pty Ltd; Krakat Pty Ltd; Aphid Pty Ltd; Barbara Joy Hunt and Sophia Karounos v Partnership Pacific Limited [1991] FCA 319 (19 July 1991)

FEDERAL COURT OF AUSTRALIA

Re: TOWN and COUNTRY SPORT RESORTS (HOLDINGS) PTY. LTD.; TOWN and COUNTRY
SPORT RESORTS PTY. LTD.; VIMITED PTY. LTD.; KRAKAT PTY. LTD.; APHID PTY. LTD.;
BARBARA JOY HUNT and SOPHIA KAROUNOS
And: PARTNERSHIP PACIFIC LIMITED
No. SA G51 of 1988
FED No. 459
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIAN DISTRICT REGISTRY
GENERAL DIVISION
O'Loughlin J.(1)

CATCHWORDS

Practice and Procedure - Application for security for payment of costs - second such application - the first application having been unsuccessful there was a need to satisfy the Court that there had been a material change in circumstances - the fact that the parties having claimed impecuniosity were apparently able to find funds to support the prosecution of the proceedings was not a material change - Indemnity - circumstances when it is appropriate to order directors of a company that is in receivership to indemnify the company against costs.

Security for Costs - See above

Indemnity from directors in favour of company in receivership.

HEARING

ADELAIDE
19:7:1991

Counsel for the Applicants :Mr I. Robertson and Mr S. Manuel

Solicitors for the Applicants :Piper Alderman

Counsel for the Respondents :Mr I.D.F. Callinan QC Mr
0

N.G. Rochow and Miss A. Bowne

Solicitors for the Respondents :Finlaysons

ORDER

The respondent's application for security for the payment of costs be dismissed.

The 6th and 7th named applicants Barbara Joy Hunt and Sophia Karounos jointly and severally indemnify the first three named corporate applicants Town and Country Sport Resorts (Holdings) Pty. Ltd., Town and Country Sport Resorts Pty. Ltd., and Vimited Pty. Ltd., in respect of costs which they or any one or more of them may incur in the continued prosecution of these proceedings.

All proceedings be stayed until such time as indemnity in terms agreed by the parties or otherwise taxed by Court is given.

Liberty to the parties to speak to the terms of these orders including the terms of any indemnity.

Question of costs reserved.

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

DECISION

Application by respondent for orders for:-
1. Security for Payment of costs
and
2. Indemnities in favour of first, second and third applicants.

2. The substantive proceedings in this matter were instituted in June 1988. They then, as now, made allegations of misleading and deceptive and fraudulent conduct against the respondent. In its present amended form, the statement of claim pleads up to five separate causes of action but only two were referred to in this application; the first can be described as "the off-shore loan cause of action" and the second as "the public float cause of action".

3. First, the applicants have alleged that the respondent was instrumental in having one of the applicants borrow heavily in Swiss francs in a transaction that took place outside Australia. It is said that all applicants suffered losses as a result of that transaction. The respondent denies any liability but it is content to put that matter to one side - directing its criticisms to the public float cause of action. The respondent has claimed that the circumstances surrounding this second claim are such that the orders, as sought, should be made so that the appropriate security is given to the respondent for the payment of its costs in the event of the matter proceeding to trial and it being successful, and also so that the sixth and seventh applicants, Mrs Hunt and Mrs Karounos, give indemnity to the first three applicants in respect of such orders for costs as may be made against those corporate applicants by virtue of the prosecution of the trial.

4. This particular application comes before the Court by way of notice of motion dated 18 June 1991 and at a point of time when all parties have known, since early February 1991, that this matter had been listed for trial to commence on Monday, 29 July 1991 (subsequently, that date was changed by the Court to Thursday, 1 August). Furthermore, the matter comes before the Court as a second such application for security for the payment of costs. An earlier application for security had been unsuccessful when it was argued in early February. In fact, it was as a consequence of that unsuccessful application that the matter was given an early trial date, even though, in February, the parties were not then ready for trial. The early trial was given, partly in fairness to the respondent because the matter had been inadequately prosecuted by the applicants since its inception and partly because of the serious nature of the allegations that had been made against the respondent. Furthermore, the respondent, in its cross-claim, has alleged that it is owed by the applicants (who are said to be either primary debtors or guarantors) moneys lent, plus accrued interest, totalling in excess of $13 million. The huge amount of interest accruing on this debt not only dwarfed the amount involved in the application for security for costs but also supported the proposition that there be an early trial.

5. In February, I was told that all corporate applicants and all natural persons who stood to gain from the litigation - and I understood and still understand those natural persons to be limited to the sixth and seventh applicants, Mrs Hunt and Mrs Karounos - were impecunious. As I understood it, that financial status was then conceded by the respondent. That concession in turn led to the formation of the view that an order for security for the payment of costs would have shut the applicants out of this litigation. That also assisted in determining that this was a deserving case for an early trial.

6. What then has happened which would justify an order for security for the payment of costs that is heard three weeks before trial? First, it should be acknowledged that there are no time bars on applications of this nature. Indeed, they can be made during the course of a trial. But the rule of thumb calls for expeditious applications and it is a rare occurrence when an unsuccessful respondent returns to the Court on a subsequent occasion seeking security. Understandably, there must be important new issues which would justify the Court taking a material change in direction - the more so if the consequence, or the likely consequence, of an order would be to shut the applicants out of Court so close to trial.

7. Although he made no concessions with respect to the off-shore loan cause of action, Mr Callinan QC, counsel for the respondent, concentrated his submissions in support of the orders that he sought on the public float cause of action, the factual details of which may be briefly stated. It has been pleaded that the applicant, Town and Country Sports Resorts (Holdings) Pty. Ltd., had intended to make a public issue of share capital and that the respondent had been its adviser and intended underwriter. The float never proceeded beyond a draft prospectus. The claim is that the failure to achieve the float was a direct consequence of misleading, deceptive and fraudulent conduct on the part of the respondent.

8. Mr Callinan pointed to several factors, each of which suggested that there were dubious qualities about this claim. First, there was a letter written by Mrs Hunt on 25 September 1987 to the solicitors then acting for her group, complaining about the failure of the float and blaming a variety of causes and a variety of parties - none of whom included the respondent. In action No. 1010 of 1988 in the Supreme Court of South Australia, several of the applicants in these proceedings instituted proceedings against various parties - none of whom was the respondent Partnership Pacific Limited - claiming that those parties were the parties responsible for the failure of the float; those proceedings were discontinued. Why is it now that the applicants seek to lay the blame at the door of Partnership Pacific Limited? There will come a time when the applicants must give a convincing answer to that question. At this stage, the answer is not apparent.

9. The amount of the claim against the respondent in respect of the public float cause of action also gives some cause for concern. It has been quantified in the vicinity of $34 million, when the intended float would have raised $3.59 million if fully subscribed. The new subscription would have increased the company's issued capital to only $6.3 million. It will rest upon the applicants to explain convincingly the relationship between a relatively small capital base and losses of the magnitude of $34 million. That relationship is not yet apparent.

10. No doubt, it may be possible for the applicants to surmount these hurdles but I must say that I view their chances of success in the public float cause of action with severe reservations at this stage of the proceedings - the more so when it is noted that the applicants' expert witness has attributed a nil value to land and improvements which were once said to be worth $12 million. However, it must be made clear that these statements constitute observations on the pleadings and the affidavit evidence presently before the Court; they have been made solely for the purpose of considering the present application.

11. The statement of claim pleaded that the public float losses were caused by the misleading, deceptive and fraudulent conduct of the respondent. Mr Callinan claims that the applicants have now shifted ground, arguing that their expert witness, in his report, attributes the $12 million loss on land and buildings to the appointment by the resondent of receivers and managers over the first, second and third corporate applicants. This may be an available interpretation of a short sentence in the report, but I am by no means satisfied that it is the correct and only interpretation. It might be a case of laxity in language; I will therefore consider the issue of causation on the basis of the pleadings.

12. There is material before me which would justify an order for security for the payment of costs if the applicants' sole cause of action was the public float issue. But that is not the case - it is not the only cause of action. There is the offshore loan; there are also the other matters that are referred to in the statement of claim which have not been the subject of discussion in this application. But, in addition there is the existence of the respondent's $13 million cross-claim. What will happen to those matters if an order for security for costs was made? Mr Callinan's answer was that they and their existence could be acknowledged by an order for security for the payment of costs that was determinable in percentage terms. I am not prepared to accept such a proposition. I believe, on what is before me, that such an order would equally and effectively shut the applicants out of the prosecution of their causes of action, thereby leaving the respondent free to pursue its cross-claim.

13. Perhaps an order for security for costs could be couched in terms that only shut out the applicants from the public float cause of action. I have considered that possibility and brought it into the melting pot. My decision is that it would be in everyone's interests to have all issues between these parties resolved. I have been influenced in coming to this decision as a result of Mr Callinan informing me that his present instructions were such that there is no reason to believe that the respondent will not prosecute its cross-claim. Consider then the state of the confusion that would arise. First, if security for costs was ordered, there is at least a strong possibility that the applicants will be unable to prosecute their claims; secondly, the respondent may still prosecute its cross-claim; thirdly, if the respondent pursues its cross-claim, the applicants will be entitled to defend and will be entitled to raise by way of defence and/or by way of set off or counter-claim, most if not all of the issues that they would have raised if their proceedings had not been stayed. It need hardly be said that such a situation would be wholly unsatisfactory.

14. When in February 1991, the respondent sought an order for security for the payment of costs, the matter was argued upon the concession by the respondent that all applicants, including the sixth and seventh applicants, Mrs Hunt and Mrs Karounos, were impecunious. As I have already said, that issue weighed heavily in my final determination against then making an order for security for the payment of costs. Mr Callinan made it clear in this application that that concession was no longer extended. But, the concession having once been made, the respondent bears the responsibility of satisfying the Court that there are now proper grounds for justifying the withdrawal of the concession. To do this, the respondent relied heavily on two matters. The first was what was described as the extensive and expensive conduct involved in the preparation for trial by the applicants since February 1991. Included in that preparation was the expense that would have been incurred in the obtaining of experts' reports.

15. I acknowledge that the court file strongly indicates that both sides have incurred heavy legal expenses at the least, and I am prepared to assume that those costs would have been exacerbated by the costs of accountants and other experts. The applicants' answer to that point is said to be found in paragraph 33(g) of the affidavit of Ian Carlyle Robertson, the solicitor for the applicants, where, in a hearsay statement, he deposes to the belief, obtained in the course of his instructions, to the effect that friends and relatives have assisted Mrs Karounos and Mrs Hunt in meeting such costs. This issue became somewhat clearer this morning when Mrs Karounos was cross-examined on an affidavit that she filed earlier this day. According to her evidence, her brother had assisted to the extent of $30,000 by forwarding that sum to the solicitors for the applicants.

16. The second point advanced by Mr Callinan is quite important. Bearing in mind the concession that both ladies were impecunious when the issue for security for costs was litigated in February 1991, Mr Callinan pointed to the affidavit of John Matthew Marsden in which Mr Marsden, the solicitor for the respondent deposed to the fact that on 9 and 10 July 1991 he attended at and made searches at the Lands Titles Office. Mr Marsden found that on 4 March 1991, Sophia Karounos had registered a transfer of an estate in fee simple in certain land to herself and to John Karounos for no monetary consideration but by way of natural love and affection. The relevant transfer was dated 28 February 1991 and it dealt with their family home.

17. There was also exhibited to Mr Marsden's affidavit a copy of the relevant certificate of title which indicated that on the same day, 4 March 1991, the following documents were lodged for registration of the Lands Titles Office - first, a discharge of a mortgage in favour of the State Bank of South Australia, followed thereafter by the relevant memorandum of transfer which, in turn, was followed immediately by a fresh mortgage from John and Sophia Karounos to the State Bank.

18. To the extent to which Mr Callinan emphasised that this transfer was a new and serious matter justifying the Court looking afresh at the question of security for costs one cannot help but question why it was that the fresh application for security for costs was based on a notice of motion that was filed on 18 June, some 3 weeks before this information was obtained from the Lands Titles Office.

19. Nevertheless, I viewed with concern any suggestion that the Court might have been misled in February 1991 with respect to the financial circumstances of any applicant (and, as events have transpired, specifically, those of Mrs Karounos). Whilst I am satisfied, having regard to the chronology of events, that the transfer of this land did not play any part in the respondent's decision to make this second application, I, nevertheless, express my grave concern about the events surrounding the transfer of the relevant property. In her attempt to justify her conduct, Mrs Karounos unconvincingly said that her ownership of the family home in February 1991 did not seem to her to be worthy of consideration when she was asked to address the question of her financial circumstances. I must limit my remarks in these interlocutory proceedings but I nevertheless feel compelled to say that I had grave difficulties in accepting this evidence. The ironic aspect of the whole matter - and I believe that this will become apparent at a later stage of these reasons - is that the probabilities are that a full and true disclosure of the existence of the house and the value of the house in February 1991 would not have made any difference to the outcome of proceedings in February 1991.

20. I do not regard the fact that the applicants have been able to proceed with the preparation of their case for trial since February as a matter of significance in this application for security for the payment of costs. The pleadings reveal a close financial connection between the applicants and the respondent. The respondent, so it would seem, was their financier and their financial adviser or, at least, their financial adviser for a significant period of time. It was that type of relationship which, better than most, would give the respondent a detailed knowledge of the financial affairs of the applicants. If the respondent conceded in February 1991 that each of the applicants was impecunious, it was because the respondent would have well known that to have been the case.

21. Sir Robert Megarry said in Pearson v Naydler (1977) 3 All ER 531 at 533, that the basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is "ancient and well established". Morling J. quoted and followed that passage in Barton v The Minister of Foreign Affairs [1984] FCA 89; (1984) 2 F.C.R. 463 at 469. It is difficult to see how such a rule could be honoured if an impecunious plaintiff was to be challenged only because he had managed to overcome the apparent financial hurdles in his preparation for trial. In my opinion, the same principle applies when the Court is considering the financial circumstances of the only natural persons who stand behind corporate applicants.

22. Mr Callinan argued that the onus was on the applicants including Mrs Hunt and Mrs Karounos, to satisfy the Court that all applicants were without means. He relied upon the well known passage in the decision of the Full Court in Bell Wholesale v Gates Export Corporation [1984] FCA 34; (1984) 2 F.C.R. 1 at 4.

"In our opinion a Court is not justified in declining to
order security on the ground that to do so will frustrate
the litigation unless the company in the posision of the
appellant here establishes that those who stand behind it
and who will benefit from the litigation if it is successful
(whether they be shareholders or creditors or, as in this
case, beneficiaries under a trust) are also without means.
It is not for the party seeking security to raise the
matter; it is an essential part of the case of a company
seeking to resist an order for security on the ground that
the granting of security will frustrate the litigation to
raise the issue of the impecuniosity of those whom the
litigation will benefit and to prove the necessary facts."

23. I am, of course, bound by that decision and I respectfully endorse it. However, I think that it is distinguishable for the reason that the corporate applicant in Bell's case was the only applicant in the proceedings and the court was there concerned to go behind the corporate veil to see who would benefit in the event of the corporate applicant being successful. In this case, there is information to the effect that Mrs Hunt and Mrs Karounos are the two shareholders standing behind the corporate veil in respect of all applicants. It is a matter of great significance that they are also co-applicants.

24. In Bell's case, those standing behind the corporate applicant were free of risk; if the corporate applicant had failed then, unless there had been an order for security for the payment of costs, those standing behind the corporate applicant were not at risk. That does not apply in the case before me because of the fact that Mrs Hunt and Mrs Karounos are co-applicants.

25. In my view, the remarks that I have just made accord with the views of the Queensland Supreme Court as expressed by Connolly J. in Harpur v Ariadne Australia Limited (1984) 2 A.C.L.C. 356 at 363.

26. In Blanchard, The Law of Company Receiverships in Australia and New Zealand at p 118, there appears a passage strongly supporting the principle of indemnity:-

"As a consequence, the directors will normally have to
indemnify the company, and may possibly be required to give
security. If they do not do so, the Receiver may have their
proceedings stopped. It may be that the practice will arise
of requiring directors who have commenced proceedings to
come before the Court to explain how the action is to be funded.

27. This call for indemnity can arise in cases such as Newhart Developments Ltd. v Co-operative Commercial Bank Ltd. (1978) 1 Q.B. 814, where it was held that the powers given by a debenture holder to a receiver of a company, which enabled him to realise the company's assets and carry on the business for the benefit of the debenture holder, did not thereby divest the directors of the company of their power to pursue a right of action. However, where the directors exercise such a right, it must be recognised that the company is put at risk in the event of the attempted enforcement of the right being unsuccessful. In such circumstances it may be prudent on the part of the receivers and it may be appropriate on the part of the Court to require directors to give some form of indemnity. This occurred in Nec Information Systems Australia Pty. Ltd. v Lockhart an unreported decision of the Supreme Court of New South Wales dated 8 June 1990, which in turn was followed by Northrop J. in this Court in Charmae Investments Pty. Ltd. v Australia and New Zealand Banking Group Ltd. (1991) ATPR 41-063. The order sought was in the following terms:-

"An order restraining... from causing Charmae Investments
Pty. Ltd. to prosecute this proceeding or otherwise to
dissipate the assets of Charmae Investments Pty. Ltd.
without first indemnifying Charmae Investments Pty. Ltd. in
respect of any liability for costs that would thereby be
incurred by Charmae Investments Pty. Ltd. in providing
security for that indemnity."

28. Such an order is sought in these proceedings against Mrs Hunt and Mrs Karounos for the benefit of the first three named companies - these three being the only three under receivership at the suit of the respondent. However, in addition to seeking the relevant form of indemnity from the two ladies, the respondent also seeks that the indemnity be bolstered by some form of security. I consider that there is good reason to require the ladies to give the indemnity but without security. I have already addressed the question of security and what I have there said also applies with equal force to the question of indemnity.

29. There is one last matter which warrants attention and it comes within the general concept of public policy. Mr Callinan challenged my right to assume that an order for security for costs would frustrate the ongoing prosecution of these proceedings and, in particular, the commencement of the trial on 1 August 1991. He claimed that the information that was before me was insufficient to justify the making of such an assumption. If we were engaged in a trial I would be inclined to agree with him. At the interlocutory level however, one is entitled to be less demanding and, in particular, one is entitled to take a pragmatic view. For example, it is an uncontroverted fact that the first three corporate applicants are in receivership as a result of action taken by their secured creditor, the respondent, Partnership Pacific Limited. I know little about the specific affairs of the fourth and fifth applicants, Krakat Pty. Limited and Aphid Pty. Limited, but what little I do know supports an assumption of impecuniosity. Then there are the financial circumstances of the two ladies. I have now heard evidence from Mrs Karounos as a result of her appearing before me this morning. That evidence, admittedly perfunctory, nevertheless suggests that she is not a person of means. I have not had the benefit of the same information from Mrs Hunt, but every indication is to the same effect.

30. When asked to address the question of the quantification of an amount for security, Mr Callinan suggested an opening figure of $130,000 based on information set out in the affidavit of Mr Ericson, a solicitor in the firm of solicitors acting for the respondent. Mr Callinan fairly suggested that if an order for security was made it would not necessarily be in that sum but in some proportionate part of it. But even security in the sum of 50 per cent or $65,000 is still an exceptionally heavy burden to people who have limited or no means.

31. The chances of people even of moderate means obtaining a bank guarantee in such a large amount are uncertain. Such guarantees are only forthcoming for a fee, but then only when the bank is abundantly satisfied that its customers would be able to reimburse it if it were ever called upon to meet the guarantee. Despite Mr Callinan's strictures, I prefer to assess this application and I proceed to assess this application upon the basis that there is, at least, a strong likelihood that the applicants would be shut out of the prosecution of these proceedings if an order for security was made.

32. I turn then to a matter of some importance to the court: it raises the issue that I have identified as one of public policy. This action was listed for trial in February and a period in excess of five months notice was thereby given to the litigants. If the effect of an order for security is to cause the vacation of the trial at this very late stage, then it is most unlikely that the period of time allocated to the trial - presently five weeks - would be filled. I am not presently able to say that I could call up any cases to fill any part of the time allocated for the trial of these proceedings.

33. Despite the explanations that it has offered, the respondent has made this application very late in the day. One of the consequences of granting the application and making an order for security, if indeed it did shut out the applicants, would mean that it would be too late to utilise the period of time set aside for this trial for the benefit of other litigants. Like all other issues this is not a conclusive factor, but it is important that litigants and legal advisers know that it is regarded as a factor of some importance and one which is to be weighed when determining applications of this nature.

34. I have already said, but I repeat, that there are factors supporting the making of an order for the payment for security for costs. They are the weakness of the public float issue and, independently of that weakness, the question of the quantification of the claim of $34 million; for example, if liability was established against the respondent, quantum might still be nominal so that, at the best, any quantification of the applicants' damages might still be materially less than the $13 million said to be owing by them to the respondent. I also allow for Mr Callinan's argument, which I have not previously mentioned, that the public float claim might not even be bona fide. Secondly, there was Mrs Karounos' dealing with her land in late February and the failure by her to inform her solicitors so that in turn the court could be informed about that. There is a possibility - and this is the third matter that Mr Callinan raised - that the applicants will prosecute the litigation at the exclusive cost of the respondent without any meaningful risk to themselves. The next matter that Mr Callinan relied on was the history of the matter since last February. He argued that there were indications that contradicted impecuniosity - those indications suggested that, since February, the applicants have been able to fund expensive legal proceedings. Finally, I note that there is nothing to suggest that the respondent could be identified as the cause of the applicants impecuniosity. All of these matters, in their totality, have been taken into account, as have matters that react against the making of an order for security; the first and most important of those is the delay in bringing this matter before the court.

35. The second reason weighing heavily against the granting of an order for security is the fact that the previous application having been made and having been unsuccessful, the quality of the allegedly fresh information is of doubtful value. Finally, there is the possibility of the applicants being shut out of the prosecution of these proceedings and, in that event, the consequential loss of court time. In turn, none of those matters is a decisive factor. It is a question of balancing all matters and doing the best I can to arrive at a position which is equitable to both sides, even though unsatisfactory to both sides.

36. But in the final analysis I do not consider it appropriate to make an order for the giving of security for the payment of costs. I do, however, believe that it is appropriate for an order to be made that Mrs Hunt and Mrs Karounos indemnify the first three corporate applicants in respect of costs which they or any one or more of them may incur in the continued prosecution of these proceedings.

37. I reserve to counsel liberty to speak to the terms of the orders that should be made as a consequence of these reasons. However, I consider that it should be made clear that the prosecution of these proceedings will be stayed in the event of the requisite indemnity not being given as a matter of urgency. It has occurred to me that the fourth and fifth applicants, Krakat Pty. Limited and Aphid Pty. Limited are not directly affected by the application for indemnification. Nevertheless it is impractical to consider a continuation of the proceedings in their interests only and hence any stay of the proceedings would have general effect against all applicants.