Kp Cable Investments Pty Limited v Meltglow Pty Limited; Electra Cables (Aust) Pty Limited; Ben Fei Zhou; Ben Yu Zhou and Zhi Xian Liu [1995] FCA 76 (28 February 1995)

FEDERAL COURT OF AUSTRALIA

KP CABLE INVESTMENTS PTY LIMITED v. MELTGLOW PTY LIMITED; ELECTRA CABLES
(AUST) PTY LIMITED; BEN FEI ZHOU; BEN YU ZHOU and ZHI XIAN LIU
No. NG3519 of 1994
FED No. 76/95
Number of pages - 12
Security For Costs - Costs

COURT

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
BEAZLEY J

CATCHWORDS

Security For Costs - factors relevant to exercise of court's discretion - whether proceedings properly characterised as defensive - whether applicant was forced into position of plaintiff to halt "self-help" measures taken by the respondent - appropriate order where applicant's claim is partly defensive and partly offensive - effect of willingness to give undertaking or guarantee by principals of the company.

Costs - application for costs of application that notice of motion be struck out as applicant on motion in contempt of court - principle that a party in breach of the courts orders should be prevented from obtaining relief - whether principle requires a formal finding of guilt after contempt proceedings - whether rule discretionary.

Trade Practices Act, 1974 (Cth)
Corporations Law

Bryan E. Fencot and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509
Interwest Ltd (Receivers and Managers Appointed) v Tricontinental Corporation Ltd (1991) 9 ACLC 1218

Weily's Quarries v Devine Shipping Pty Ltd [1994] TASSC 76; (1994) 14 ACSR 186
Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405
Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542
Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120
Cameron's Unit Services Pty Ltd v Kevin R Whelpton and Associates (Aust) Pty

Ltd (1986) 13 FCR 46

Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325
Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621
Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979)

ACLC 32,446

Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480
Weily's Quarries v Devine Shipping Pty Ltd [1994] TASSC 76; (1994) 14 ACSR 186
Erolen v Baulkham Hill Shire Council (1993) 10 ACSR 441
Young v Jackman (1986) 7 NSWLR 97
Permewan Wright Consolidated Pty Limited v Attorney-General in and for the

State of New South Wales on the Relation of Franklins' Stores Pty Limited, (unreported, NSWCA, 11 December 1978)
Australian Securities Commission v Robert James MacLeod and Ors, Drummond J, unreported, 23 November 1994

HEARING

SYDNEY, 7, 15 December 1994
28:2:1995

Counsel for the Applicant: P.J. Dowdy

Solicitors for the Applicant: Andrew F. Ford

Solicitor for the Respondent: P. Bushby

Solicitors for the Respondent: Lane and Lane

ORDER

The Court orders that:
1. The applicant provide security for costs of the proceedings up to and including discovery and inspection of documents in the sum of $7,000.00, such security to be provided by way of a charge over the rugs and antiques of Paula Kinsella.

2. The proceedings be stayed pending the provision of security.

3. The applicant to pay the respondents' costs of the application for security for costs.

4. Each party pays its owns costs of the application that the respondents' motion for security for costs be struck out.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

BEAZLEY J This is an application for security for costs of proceedings commenced by the applicant on 7 October 1994 brought by notice of motion filed on 4 November 1994 (the application). The application is opposed essentially on the basis that the proceedings brought by the applicant are properly characterised as defensive. Alternatively, if it is determined that an order for security for costs should be made, the applicant contends that adequate security has been offered by the principals who stand behind the applicant by their undertaking to be personally liable for or to guarantee any costs awarded against the applicant.

The proceedings
2. The dispute arises out of a joint venture agreement entered into by the applicant and first and second respondents on 18 June 1992. The joint venture involved the purchase of the business operations and most of the assets of a cable manufacturing company, then in receivership.

3. The first respondent has purported to rescind the joint venture agreement. In addition, the applicant's nominee directors have been removed from the board of the second respondent and the applicant's shareholding in the second respondent has been cancelled. The applicant seeks relief in various forms in respect of these and other matters relating to or arising out of the joint venture. The precise form of relief sought by the applicant is dealt with later in these reasons.

The parties
4. The applicant was formerly called Kinsella Partners (NSW) Pty Limited. Its directors are Paula Kinsella and Dr Xin Sheng Wang. Its shareholders are Paula Kinsella and Teakroll Pty Limited. The shareholders of Teakroll are Paula Kinsella and her husband, Peter Kinsella. In these reasons I will refer to the Kinsellas and Teakroll as the principals of the applicant.

5. The first respondent "is beneficially owned" by Guilin Electric Wire Factory, a cable manufacturing enterprise located in the Guangxi Province in the Peoples Republic of China. The second respondent, which was initially called Knotpine Pty Ltd, is the vehicle through which the applicant and first respondent conducted the joint venture business. It now has the name of the cable manufacturing business purchased by the joint venture. Until the purported cancellation of the applicant's shareholding, the shareholders of the second respondent were the applicant and the first respondent. The shareholders now purport to be the first, third, fourth and fifth respondents. Initially the directors of the second respondent were Dr Wang, Peter Kinsella, the third respondent and two other persons appointed by the first respondent, We Lun Luo and Sheng Min Li. However, at the time of his appointment as director, Peter Kinsella was an undischarged bankrupt and thereby disqualified from appointment as a director. Subsequently, without any resolution of directors and without her consent, Paula Kinsella was purportedly appointed a director. Dr Wang was removed as a director of the second respondent on 12 August 1993.

6. The third respondent is the managing director of Guilin Electric Wire Factory which is a collectively owned enterprise in the Peoples Republic of China and is a director of the first and second respondents. The fourth and fifth respondents are both employed by the first respondent for the purpose of providing management services to the second respondent. They each purport to be a director of the second respondent as from 21 July 1993. In addition, in about July 1993, and presumably prior to 21 July 1993, Dr Wang and Peter Kinsella agreed to the appointment of the fourth and fifth respondents as alternate directors of the second respondent. The evidence does not reveal anything further about those appointments. It should also be noted that the fourth respondent is the third respondent's brother.

7. I have referred earlier to Dr Wang. Dr Wang, who is a permanent resident of Australia, was formerly from the Peoples Republic of China. Dr Wang introduced the third respondent to the Kinsellas and proposed the joint venture both to the applicant and the third respondent.

Background to the joint venture
8. In early 1991, Dr Wang was introduced to the third respondent by the fourth respondent. At that time the third respondent, on behalf of Guilin Electric Wire Factory, was looking for an Australian partner for the sale of Guilin Electric Wire Factory's cables in Australia. Between about June 1991 and April 1992, Dr Wang and the third respondent corresponded in respect of a proposed joint venture between Dr Wang's company, Poly's Field Pty Ltd and Guilin Electric Wire Factory. In October 1991 they signed a joint venture agreement. In the meantime, Dr Wang had commenced employment with the applicant. In about April 1992, Dr Wang advised the third respondent that he had joined the applicant company and that he intended "to bring all the business into this new company from now on". Dr Wang says that the third respondent agreed with this, stating "that does not concern us, because we deal with you. Where you go, so does the business."

9. In April 1992, Dr Wang became aware that the receiver and manager of a company called Electra Cables (Aust) Pty Limited (receiver and manager appointed), which conducted a cable manufacturing business, was offering that company's business and assets for sale (the Electra Cable Assets). On 30 April 1992 Dr Wang, after investigating the proposed sale, recommended to the third respondent that the business be purchased by what Dr Wang described as "our joint venture project". He suggested that the proposal would operate with:

"the joint venture between us...trading as (an) importer to
supply the products to the...cable company".

10. By fax dated 8 May 1992, the third respondent advised that the Guilin Electric Wire Factory had decided to purchase the Electra Cable Assets. In his response dated 11 May 1992, Dr Wang referred to Peter Kinsella in the following terms:

"My partner, Peter Kinsella, has a degree of law and
business and has conducted business for more than 10 years.
According to his analysis of Electra-cable, there is a
chance to recover the business and the potential is
obvious...".

11. On 19 June 1992 the applicant and first and second respondents executed the joint venture agreement.

The Joint Venture Agreement
12. It is necessary to refer to certain of the provisions of the joint venture agreement to understand the background to and nature of the proceedings. Article 8 provided that the amount of capital to be contributed by way of share capital to the second respondent was $100,000. The first respondent was to subscribe for 80,000 $1 fully paid shares. The applicant was to subscribe for 20,000 $1 shares, the first 20 of which were to be fully paid and the remainder of which were to be paid at the rate of one cent per share. Provision was made for the making of calls upon the unpaid portion of the applicant's shares.

13. Clause 10 made provision for funding of the second respondent during the early stages of the joint venture. The first respondent was to be responsible for the payment of all costs related to the purchase of the cable factory, including the purchase of machinery, products, raw material and the rights of production information. The applicant was to be responsible for the payment of costs incurred before the signing of the contract, including legal fees. The second respondent was to be responsible for the payment of interest on borrowed monies. Article 11 provided that "liquidity funds" required during the early stages of the joint venture shall be supplied through loans obtained from bank(s)" by the second respondent. It further provided that the second respondent's assets could be used as security for such loans.

14. Article 36 provided that if there were differences between the parties, they were to negotiate in good faith to resolve the dispute. If, after negotiation, agreement could not be reached, either party could give the other 14 days written notice requiring both parties to take all necessary steps to dissolve the joint venture company voluntarily.

15. Article 9 made provision for the applicant to increase its shareholding in the second respondent, up to a total shareholding of 50%, by an irrevocable notice in writing to the first respondent. A mechanism was provided for the calculation of the price to be paid for shares so acquired. Article 9 further provided that the applicant and respondent were required to complete the necessary share transfer within 30 days after the first respondent had received the applicant's written notice. Apart from Article 9, Article 13 provided for the transfer of shares, including provision for a first right of refusal in respect of shares which the other shareholder in the second respondent had decided to sell.

16. Clause 15 provided that the Board of Directors was to comprise 5 directors, 3 of whom would be appointed by the first respondent and two by the applicant. The Chairman of the Board was to be appointed by the first respondent.

17. Articles 34 and 35 dealt with termination of the joint venture, including where a party was in default of its obligations under the joint venture agreement. In that case, the party not in default was deemed to have notified the other that it had decided to transfer and sell the whole of its shareholding to the other party. There was provision for the price at which such sale was to be determined.

18. Notwithstanding the provisions of the joint venture agreement, the applicant contends that there was an agreement that any calls made on the applicant's shares, as well as its obligation to pay legal costs, would be met from the profits earned by the second respondent.

Purchase of the Electra Cable Assets
19. On 3 July 1992, the second respondent entered into a contract to purchase the Electra Cable Assets for $725,000. The purchase was funded as to $80,000 from shareholders' funds and the balance by way of loan obtained by the first respondent from the Industrial and Commercial Bank of China. The purchase was settled on 10 August 1992. Thereafter, for a period of about 12 months, the second respondent conducted the joint venture business and both the applicant and the first respondent provided management services to the second respondent for which they were paid management fees. However, problems soon arose. In summary, those problems related to the payment of the legal costs owed to Messrs Baker and McKenzie arising out of the preparation of the joint venture agreement, the price paid for equipment sent to the Guilin Electric Wire Factory, the cost at which the Guilin Electric Wire Factory was supplying cable to the second respondent and the Guilin Electric Wire Factory's alleged failure to supply goods in accordance with orders placed by the second respondent. In addition, the applicant has alleged that the second respondent failed to pay group tax, that the first respondent diverted some of the monies borrowed from the Industrial and Commercial Bank of China to Guilin Electric Wire Factory, that assets of the second respondent had been appropriated to Guilin Electric Wire Factory and that the fourth respondent was being paid an excessive salary.

20. On 9 July 1993, the applicant wrote to the third respondent requesting that the various disputes be discussed and resolved. The letter also purported to be a notice under article 36 of the joint venture agreement. The parties met on 2 August 1993 but there was no resolution of their disputes.

21. On 3 August 1993, the respondents' solicitors wrote to the applicant's solicitors, disputing the applicant's allegations. In turn, they alleged that the joint venture agreement was void and that Peter Kinsella had illegally taken director's fees from the company. They stated that they had instructions to bring proceedings to have the joint venture agreement set aside and to have Peter Kinsella expelled from the Register of Directors of the second respondent. The solicitors repeated an offer to resolve the dispute made by the respondents at the meeting on 2 August 1993. It is not necessary to consider the terms of that offer for the purposes of this application.

22. On 6 August 1993, the respondents' solicitors wrote to the applicant's solicitors and alleged that the first respondent was induced to enter into the joint venture agreement by the misleading and deceptive conduct of the applicant, Peter Kinsella and Dr Wang. The alleged wrongful conduct was a representation that "Peter Kinsella was a wealthy and substantial businessman who could bring great business experience to our client's venture in Australia" contrary to the fact that, at the time Peter Kinsella was appointed a director of the second respondent, he was an undischarged bankrupt. It was also alleged that there had been fraudulent conduct in the appointment of Paula Kinsella as a director of the second respondent. The letter proceeded by stating that unless the applicant accepted the respondents' offer contained in the earlier letter of 3 August 1993 "...proceedings will be instituted without further warning and without further discussion".

23. The applicant's solicitors responded to this letter in detail by letter dated 9 August 1993. They indicated that if agreement could not be reached, the applicant was content to have the matter resolved by the Court.

24. The first respondent did not commence legal proceedings. Rather, by letter dated 10 August 1993, the respondents' solicitors gave notice to the applicant that the joint venture agreement was rescinded. It was again alleged that the first respondent had been induced to enter the joint venture agreement in reliance upon the applicant's misleading and deceptive conduct within the meaning of s 52 of the Trade Practices Act 1974 (Cth), by fraud and by misrepresentation. There was also an allegation made that during the operation of the joint venture, the applicant had been guilty of breaches of the agreement and further misleading and deceptive conduct, fraud and misrepresentation such as to entitle the first respondent to rescind.

25. The applicant has not accepted the rescission as valid.

26. On 12 August 1993, Dr Wang was removed as a director of the second respondent. On 9 September 1993, the first respondent made a call pursuant to article 9 of the second respondent's Articles of Association to pay one quarter of the nominal value of the applicant's partly paid shares. On 22 September 1993, Paula Kinsella wrote to the directors of the second respondent disputing the validity of the call and also calling upon the first and second respondents to acknowledge the validity of the joint venture agreement and to allow the appointment to the second respondent's Board, of two persons nominated by the applicant. She also stated that these matters constituted a dispute to which article 36 of the joint venture agreement applied.

27. In the following weeks, the second respondent made further calls upon the applicant in respect of its partly paid shares.

28. Between 15 October 1993 and 26 January 1994 the applicant's partly paid shares were "forfeited" for the alleged failure to meet the calls.

29. On 30 December 1993, the second respondent held a general meeting of the company which was voted to be the annual general meeting of the company notwithstanding that 14 days notice of it had not been given. Also at the meeting, a resolution moved by Paula Kinsella that the third respondent be removed as a director of the company was defeated.

30. On 22 June 1994, the applicant gave notice to the first and second respondents pursuant to article 34 of the joint venture agreement alleging a number of breaches of the joint venture agreement and calling upon the second respondent to rectify same. On 29 June 1994, the applicant gave an amended notice pursuant to article 34.

31. On about 1 July 1994, the applicant ascertained that the second respondent had given a charge over the assets of the second respondent to the Bank of China.

32. On 10 August 1994, the applicant's solicitors gave notice that as the second respondent had failed to rectify the default advised in its notice of 29 June 1994, the provisions of article 35 came into operation. The letter called upon the first respondent to nominate a price at which it was prepared to transfer the shares to the applicant. The first respondent's solicitors responded to this letter by letter dated 17 August 1994 asserting that the joint venture agreement had been validly rescinded. The applicant commenced these proceedings shortly thereafter.

Financial position of the applicant and its directors
33. Relevantly, the jurisdictional fact upon which this application for security depends, namely the inability of the applicant to meet an order for costs in favour of the respondents, if made, is conceded. As the principals have offered an undertaking to be liable for or to guarantee any order for costs, their financial position is relevant to the court's determination of whether security should be ordered and if so, the amount and form of the security.

34. Teakroll was incorporated on 30 November 1990 and for a period of about 12 months, operated an insurance agency business. In April 1994, the company commenced and continues to operate an executive recruitment business. Paula Kinsella is employed as a management consultant by Teakroll. Teakroll also employs Peter Kinsella and two permanent staff members. In the first five months of the financial year commencing 1 July 1994, Teakroll earned income of approximately $132,000.00 and recorded a book profit of approximately $20,000.00. Its balance sheet for the financial year ended 30 June 1994 revealed an excess of assets over liabilities of approximately $7,500.00. There were no updated accounts of the company in evidence. In her affidavit sworn 7 December 1994, Paula Kinsella stated that Teakroll "is trading profitably and is able to pay its debts as they fall due." However, she stated that as the company presently had no accumulated reserves it was not able to secure any formal overdraft facility from its bankers and had no security to offer. I note that in the balance sheet for the financial year ended 30 June 1994, Teakroll had a bank overdraft with a then debit balance of approximately $2,500.00. However, as there was no other evidence in respect of this overdraft I am not able to draw any inference as to the availability of such a facility in the amount greater than that shown.

35. Paula Kinsella's gross salary from Teakroll is $41,600.00. Her husband's gross salary from Teakroll is $36,400.00. Paula Kinsella deposes to having joint personal commitments with Peter Kinsella of approximately $1,000.00 per week, although the nature of these commitments is not specified. She leases a motor vehicle has a residual value of about $8,000.00. She owns antiques and rugs worth about $25,000.00 and furniture and personal effects valued at about $10,000.00.

36. Peter Kinsella did not give evidence as to his personal financial position. I have already referred to the income he receives from Teakroll. I have also referred earlier to his being a bankrupt from which he was discharged on 30 March 1994. Mrs Kinsella gave evidence that her husband has no assets apart from his 50% interest in Teakroll and that he has no liabilities.

37. Paula Kinsella stated in her affidavit that she, her husband and Teakroll Pty Limited are prepared to submit to any order of the Court for the payment of any party/party costs that might be awarded against the applicant. Mr Kinsella was in court during the hearing of the application, and this undertaking was confirmed on his behalf by counsel for the applicant. Earlier, by letter dated 24 November 1994, the applicant's solicitors had advised the respondents' solicitors, that Paula and Peter Kinsella and Teakroll Pty Limited had offered their respective guarantees to secure payment of taxed party/party costs in the event that costs were awarded against the applicant in favour of the respondents. Counsel for the applicant informed the Court that the principals would submit to either form of security as the court saw fit.

38. Principles Governing Application for Security for Costs The law is now settled that the discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: see the review of the authorities by French J in Bryan E. Fencot and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 509. See also Interwest Ltd (Receivers and Managers Appointed) v Tricontinental Corporation Ltd (1991) 9 ACLC 1218 at 1226 and Zeeman J's decision in Weily's Quarries v Devine Shipping Pty Ltd [1994] TASSC 76; (1994) 14 ACSR 186 at 188. In Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405 at 415, Cooper J stated that:

"(i)t is not possible or appropriate to list all of the
matters relevant to the exercise of the discretion. The
factors will vary from case to case. The weight to be given
to any circumstance depends upon its own intrinsic
persuasiveness and its impact on other circumstances which
have to be weighed: PS Chellaram and Co v China Ocean Shipping
Co [1991] HCA 36; (1991) 65 ALJR 642 at 643".

39. Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are:
1. That such applications should be brought promptly. This is a

principle of longstanding: see Grant v The Banque Franco-Egyptienne
Egyptienne (1876) 1 CPD 143; see also Smail v Burton (1975) VR 776
per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Aust) Pty
Ltd (1984) 8 ACLR 818 at 820; Bryan E. Fencot Pty Ltd at 514. I
should state immediately that there is no issue of delay in this
case.

2. That regard is to be had to the strength and bona fides of the

applicant's case are relevant considerations: see M A Productions
Pty Ltd v Austarama Television Pty Ltd and Anor (1982) 7 ACLR 97 at
100; Bryan E. Fencot Pty Ltd at 514. As a general rule, where a
claim is prima facie regular on its face and discloses a cause of
action, in the absence of evidence to the contrary, the court
should proceed on the basis that the claim is bona fide with a
reasonable prospect of success. (Bryan E. Fencot at 514).

3. Whether the applicant's impecuniosity was caused by the

respondent's conduct subject of the claim: see M A Productions Pty
Ltd v Austarama Television Pty Ltd at 100.

4. Whether the respondent's application for security is oppressive,

in the sense that it is being used merely to deny an impecunious
applicant a right to litigate: see M A Productions v Austarama
Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North
America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E. Fencot at
513. In Yandil Holdings at 545 Clarke J stated the principle in
these terms:

"(t)he fact that the ordering of security will
frustrate the plaintiff's rights to litigate its claim
because of its financial condition does not
automatically lead to the refusal of an order.
Nonetheless it will usually operate as a powerful
factor in favour of exercising the court's discretion
in the plaintiff's favour."
This factor is related to the next, namely:

5. Whether there are any persons standing behind the company who are

likely to benefit from the litigation and who are willing to
provide the necessary security: see Memetu v Lissenden (1983) 8
ACLR 364; Sent v Jet Corporation [1984] FCA 178; (1984) 2 FCR 201; Bell Wholesale
Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1; Hession v
Century 21 South Pacific Ltd (1992) 28 NSWLR 120 at 123; Bryan E.
Fencot at 513; Yandil Holdings at 545. The combined effect of
these two principles was summarised by Meagher JA in Hession at
123 as follows:
"...a company in liquidation against whom an order for
security for costs is sought cannot successfully
resist such an order merely by proving that it cannot
fund the litigation from its own resources if an order
for security is made; it must prove that it cannot do
so even if it relies on the other resources available
to it (the company's shareholders or
creditors)...Finally, whilst it is both true and
important that poverty must be no bar to litigation,
what that means is that the courts must be astute to
see that no person pursuing a claim which is not
frivolous is precluded from doing so by the erection
of obstacles which poverty is unable to surmount; it
does not mean that proof of insolvency automatically
confers an immunity from statutory provisions which
deal with insolvent plaintiffs."

6. An issue related to the last guideline is whether persons standing

behind the company have offered any personal undertaking to be
liable for the costs and if so, the form of any such undertaking:
see Cameron's Unit Services Pty Ltd v Kevin R Whelpton and
Associates (Aust) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd
v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde
Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325.

7. Security will only ordinarily be ordered against a party who is in

substance a plaintiff, and an order ought not to be made against
parties who are defending themselves and thus forced to litigate:
see Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR
621 at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty
Ltd (in liq) (1979) ACLC 32,446; Sydmar Pty Ltd v Statewise
Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine
Shipping Pty Ltd [1994] TASSC 76; (1994) 14 ACSR 186 where Zeeman J stated at 189:
"(t)he general proposition that security ought not to
be ordered where the proceedings are defensive in the
sense of directly resisting proceedings already
brought or seeking to halt self-help procedures is no
more than that, a general proposition. It ought not
to be elevated to being a rule of law. In many cases
of that nature it could be considered oppressive to
require security and that in itself may be sufficient
to refuse to make an order...(see) Sydmar Pty Ltd v
Statewise Developments(supra) and Interwest Ltd v
Tricontinental(supra)".(emphasis added)

Should security for costs be ordered
40. It is now necessary to consider these various factors to determine if an order for security should be made, and if so, the amount of and what form the security should take. I have already indicated that there is no question of delay in the bringing of the application. I am also of the opinion, and this was not challenged by the respondent, that the applicant has a bona fide and arguable case. I am thus entitled to assume in the circumstances that the claim has reasonable prospects of success: Bryan E. Fencott. There is no doubt that the applicant is impecunious. Counsel for the applicant submitted that the applicant's impecuniosity was caused by the respondent's conduct subject of the proceedings. The difficulty with this submission is that there is no evidence of the applicant's financial position at the commencement of the proceedings, nor was there any evidence of what its anticipated financial position would have been had the joint venture proceeded. The only evidence was that the applicant received management fees from the second respondent although, during the lifetime of the joint venture, those fees were substantially reduced. In any event, there is no evidence as to the application of the management fees. For all that is known, they may have been utilised entirely for salaries and overhead costs of the applicant. Accordingly, I do not consider that this is a factor which should weigh in the balance as to whether an order for security should be made.

41. Counsel for the applicant did not submit that the application for security was oppressive in the sense of being used merely to deny the applicant the right to litigate. Rather, it was submitted that the respondents were acting oppressively in not accepting the undertaking or guarantee which had been proffered by the Kinsellas and Teakroll. The principals are not insolvent, and therefore do not attract the benefit of the rule that an impecunious litigant should not be denied the right to litigate. However, whether the respondent's refusal to accept their undertaking to be liable for any order for costs made against the applicant is oppressive will depend upon whether, if this is an appropriate case in which to order security, the undertaking or guarantee is sufficient. Before dealing with this question, it is desirable that I deal with the major ground advanced as to why an order for security ought not to be made, namely, that these proceedings are purely defensive proceedings brought in response to the respondents' actions, which it was submitted, demonstrated that it was the commercial aggressor.

Whether proceedings are defensive
42. Proceedings have been characterised as defensive where, as Ormiston J stated in Interwest at 627:

"...they are...either directly resisting proceedings
already brought or seeking to "halt self-help procedures"."

43. His Honour continued that in such circumstances:

"...it would seem that to require security would be
oppressive, or at least would provide serious grounds for
refusing to make an order. At the least it is a factor to
be considered in the exercise of the discretion. In
particular, it is a basis for reducing the amount of
security ordered to a sum related to the cost of those
claims which cannot be characterised as defensive".

44. In Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd at 32,449, Mitchell J stated that a court, in deciding whether or not to exercise its discretion to make an order for security for costs:

"is entitled to consider whether the company is a true
plaintiff or is forced into the position of plaintiff
because the defendant is empowered to take..."self help"
procedures..."

45. His Honour went on to state that it was one factor:

"which may be placed in the scales in making the decision as
to which way the discretion should be exercised".

46. That passage was referred to with approval by Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480 at 484.

47. The usual, and probably only, proceedings which fall into the category of defensive proceedings are cross claims brought by a respondent against an applicant in response to the applicant's claim. However, a cross claim is not necessarily defensive. In T Sloyan and Sons (Builders) Ltd v Brothers of Christian Instruction (1974) 3 All ER 715, Lane J ordered security for costs on so much of a counterclaim as was more than a defence against the applicant's claim. In the present case, no cross claim has yet been filed. The respondent's solicitors stated that a cross claim would be filed in which the respondents would claim relief under s 52 of the Trade Practices Act for misleading and deceptive conduct. He also stated that the respondent intended joining the Kinsellas and Dr Wang under s 75B. However, at this stage, I do not consider that I should take that factor into account. Forensic and commercial decisions may be made in relation to a cross claim which I cannot and ought not anticipate.

48. The more difficult question, and the one which is relevant here, is what are appropriately characterised as defensive proceedings to halt "self-help procedures". It is useful to consider what have been held to be defensive proceedings in this context. In Heller Factors Pty Ltd, the defendant had purported to exercise rights under a guarantee secured by a debenture by appointing a receiver and manager to the plaintiff company. The plaintiff sought declarations that the deed of guarantee had been discharged, or that it was void and unenforceable and that no moneys were payable under it. It sought consequential orders to restrain the defendant from taking any action under or to enforce the guarantee. It also sought an account and damages including exemplary damages. The Full Court held that to the extent that the claim related to the guarantee it was defensive. However, the claims for an account and damages were offensive. Mitchell J stated at 32,450:

"(i)t was not clear to us how the plaintiff could have hoped
to obtain an order for damages in respect of what it said
was a failure of a duty owed by the receiver in dealing with
the business and assets...Be that as it may these claims, if
established, clearly could not be described as a shield
against the actions of the defendant but might constitute a
sword to be used against the defendant.

49. In Interwest, the defendant, Tricontinental Corporation, had, prior to the commencement of proceedings sought to recover monies from the applicants pursuant to certain loan facilities and guarantees. Tricontinental had appointed receivers and managers to the corporate plaintiff and had otherwise sought to enforce securities. It was also seeking to wind up certain of the plaintiffs. It had also sought to recover monies from the guarantors in other proceedings. Ormiston J accepted that the litigious steps taken to halt those measures were defensive. However, the plaintiffs had sought relief beyond those defensive measures. To that extent, his Honour, ordered security for costs, limited to the defensive measures.

50. In the present case, the applicant commenced proceedings by way of application supported by affidavit. The claim is framed alternatively. In the first part of its claim, it has sought:

- a declaration that the joint venture agreement has not been
validly rescinded;
- a declaration that the removal of Dr Wang as a director of
the second respondent was in breach of the joint venture
agreement or ultra vires the second respondent's Articles of
Association;
- a consequential order for rectification of the
Register of Directors;
- a declaration that the purported appointment of the fourth
and fifth respondents as alternate directors of the second
respondent was ultra vires the second respondent's Articles
of Association;
- a declaration that the purported appointments of those
respondents as directors of the second respondent was in
breach of article 15 of the joint venture agreement and
ultra vires the second respondent's Articles of Association;
- a consequential order for rectification of the Register of
Directors;
- a further consequential order that the second and third
respondents take the necessary steps to effect the
appointment of two directors nominated by the applicant in
compliance with article 15 of the joint venture agreement;
- a declaration that the forfeiture by the second respondent
of the applicant's ordinary partly paid shares in the second
respondent was in breach of article 8.2 of the joint venture
agreement and ultra vires the second respondent's Articles
of Association;

- a consequential order that the Register of Members be
rectified;
- a declaration as to the proper price to be paid by the
applicant to the first respondent for the exercise of the
applicant's right pursuant to article 9 of the joint venture
agreement;
- a declaration that the first respondent has failed to comply
with a notice given under article 34.1 of the joint venture
agreement so that the applicant is entitled to compulsorily
acquire the first respondent's shares in the second
respondent and a consequential order for the transfer of
those shares to the applicant;
- a declaration that the transfers by the first respondent of
the applicant's 20 ordinary fully paid shares in the second
respondent to the third, fourth and fifth respondents was in
breach of article 13.1 of the joint venture agreement and
invalid;
- a consequential order rectifying the Register.

51. The alternate claim is pleaded as follows:

- a declaration that the third, fourth and fifth respondents
in procuring or acquiescing in the procurement of the
purported termination of the joint venture agreement failed
to discharge his individual duty as a director of the second
respondent to act in the best interest of the second
respondent and have thus caused the second respondent to
conduct its affairs in the manner that is contrary to the
interests of the members as a whole;
- a declaration that the respondents by making calls on the
unpaid portion of the nominal value of the applicant's
shares in the second respondent conducted itself
oppressively or unfairly prejudicial to or discriminatorily
against the applicant;
- declarations that by failing to make available the second
respondent's financial records to the applicant and by
failing to give credit for legal costs paid by the applicant
when determining the amount to be paid in respect of the
calls, the second respondent acted oppressively to the
applicant;
- declarations that the second respondent had conducted its
affairs in a manner contrary to the interests of the members
as a whole by transferring some of its property to the owner
of the first respondent for less than adequate consideration
and for purchasing property from the owners of the first
respondent for more than the agreed or adequate
consideration;

- orders that the Register of Members be rectified by
cancelling the forfeiture of the applicant's shares and
reinstating the applicant as the owner;
- orders that the first respondent transfer all of its
remaining shares and the third, fourth and fifth respondents
transfer all their respective shares in the second
respondent to the applicant at a price to be fixed and the
second respondent repay the sum of $10,980.00 that has been
paid by the applicant to the benefit of the second
respondent;
- alternatively, an order that two of the third, fourth and
fifth respondents be removed as directors of the second
respondent and that a director of the applicant together
with an independant person be appointed directors of the
second respondents and that the independant person be
appointed Chairman of directors and that the second
respondent appoint an auditor.

52. To the extent that the application relates to the removal of Dr Wang as a director, the appointment of the fourth and fifth respondents as directors of the second respondent, the appointment of the applicant's nominees to the Board of the second respondent, the transfer of the applicant's shares to the individual respondents and the consequential orders sought in respect of those claims, it is properly characterised as defensive. It is made in direct response to actions taken by the respondents, or some of them, in purported exercise of their rights under the joint venture agreement and the Articles of Association of the second respondent. The only recourse the applicant had in such circumstances was to seek relief from the court to reinstate the position as it was prior to these actions being taken. It seems to me that the claim in relation to the joint venture agreement is also defensive in nature. The first respondent has purported to terminate the agreement pursuant to its alleged rights at law. Again, the only action available to the applicant was to seek relief by seeking to have the purported rescission declared invalid. In my opinion, that is no different in character to seeking relief in relation to guarantees or the appointment of receivers and the like as occurred in Heller Factors and Interwest notwithstanding that in this case the "self help procedure" was one which was purportedly taken pursuant to a common law right.

53. The balance of the application makes claims either pursuant to the applicant's alleged rights under the joint venture agreement or by way of an oppression suit against the respondents or arising out of an alleged agreement that calls on the applicant's shares were to be paid out of profits. To that extent the proceedings are offensive. Indeed, these claims reflect in large measure the nature of the relationship as it evolved between the parties. From an early stage that relationship was characterised by claim and counter claim, threat and counter threat. Having regard to the manner in which their affairs were conducted, it was inevitable that a serious dispute, and most probably litigation, would eventuate.

54. As a substantial part of the applicant's claim is offensive in character, I consider it is appropriate that there be an order for security. It is thus necessary to determine what order ought to be made. The validity of the rescission of the joint venture agreement is a major issue, both legally and factually, and one which will substantially determine the outcome of the other defensive claims. The oppression claim, at least in so far as it involves a consideration of the manner in which the second respondent was managed, also appears to be one which will involve substantial factual issues. I am not able to assess whether one aspect will involve more difficulty or more time than the other. However, as both are substantial matters, I consider that, at this stage at least, I should treat them as involving equal costs in their preparation. Subject to the question whether the undertaking offered by the principals is sufficient security, I consider that I should order security up to a certain point in the proceedings only, namely, up to and including discovery and inspection. After that, the respondents should be in a better position to more accurately assess the costs which are likely to be incurred, at least for the balance of the preparation of the matter. The evidence is that the lowest estimate of anticipated costs up until the stage of discovery are approximately $15,000. Accordingly, the appropriate order to make will be in respect of 50% of that amount.

Principals' offer to be liable for the costs
55. That leaves for determination the question whether the offer of the principals is sufficient and if so whether I should limit its extent to the amount of security which I consider is appropriate to order at this point of time.

56. In Cameron's Unit Services Pty Ltd v Kevin R Whelpton and Associates (Aust) Pty Ltd (1986) 13 FCR 46 Burchett J stated at 53:

"...the hardship that is most relevant is the hardship to
the applicants themselves...I think it is also relevant that
the individual responsible for this litigation...is not
sheltering behind a corporate shield in order to protect
some assets of his own from liability to meet a cost order.
In (Harpur v Ariadne Australia Ltd (No 2) (1984) 2 Qd R 523
at 533) the Full Court of the Supreme Court of Queensland
made it clear that in such a case the means of the
individual concerned are "not really relevant". What is
relevant is that the company is not a storking horse to
enable someone else to evade personal responsibility. If he
accepts responsibility, an impecunious natural person is
entitled to rely on the general rule that poverty is no bar
to a litigant: Barton v Minister for Foreign Affairs (1984)
2 FCR 263 at 469".

57. In Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 Byrne J at 306 adopted what was said by Connolly J, Campbell CJ and Demack J concurring, in Harpur and Ors v Ariadne Australia Ltd and Ors (1984) 2 ACLC 356 at 362 that:

"(t)he mischief at which the provision (for security) is
aimed is obvious. An individual who conducts his business
affairs by medium of a corporation without assets would
otherwise be in a position to expose his opponent to a
massive bill of costs without hazarding his own assets. The
purpose of an order for security is to require him, if not
to come out from behind the skirts of the company, at least
to bring his own assets into play. If however he is already
available for what ever he is worth, the object of the
legislation is seen to be satisfied".

58. Cooper J expressed a similar view in Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405 at 415:

"(o)nce the shareholders have been exposed to personal
liability for the applicant's costs, the weight to be given
to the statutory purpose is gone".

59. In Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 at 328, the Full Court of the Supreme Court of Western Australia examined whether undertakings given by directors or those standing behind a company were sufficient security. Rowland J, with whom Ipp and Anderson JJ agreed, stated:

"(t)he appellant's case seems to be based on the idea that
the bare undertaking given by the respondent's directors is
virtually worthless. I cannot agree. The directors are
businessmen who are gradually lifting the respondent out of
a very parlous financial position. Even if that fails, they
each have their own future business careers to consider and
I would have thought, for myself, that the threat of
Bankruptcy, if they were ever called upon to honour the
written undertaking given, would provide some form of
security, albeit indirect, for the appellant".

60. Mantaray and Gentry Bros were considered by Powell J in Erolen v Baulkham Hill Shire Council (1993) 10 ACSR 441 at 455. There, his Honour stated at 456:

"(w)hile I am prepared to accept that the offer of a
guarantee is a factor to be taken into account in
determining what is the proper form of security to be
provided in a case for which an order for security is
appropriate, I am quite unable to share the views expressed
by Byrne J in Mantaray Pty Limited v Brookfield Breeding Co
Pty Limited, supra, and by Cooper J in Gentry Bros Pty
Limited v Wilson Brown and Associates Pty Limited...which
are to the effect that, once the shareholders have agreed to
accept personal liability for any judgment for costs, the
statutory purpose of section 1335 of the Corporations Law is
fulfilled - such an approach, so it seems to me, would be as
much "a fetter" on the Court's discretion as the, now
discarded, approach of "a 'bias'" in favour of making an
order once it is shown that the plaintiff is impecunious."

61. With respect to Powell J, I do not agree that Mantaray and Gentry stand for the proposition as his Honour has put it. In Mantaray before referring to the passage from Harpur, Byrne J stated, at 306, "(a)nother important consideration supports refusal of security". He then set out the passage from Harpur and concluded "(the director)...has accepted personal responsibility for the defendant's costs. In this case that satisfies the object of (the section)" (emphasis added).

62. The full passage from Gentry is as follows:

"Once the shareholders have been exposed to personal
liability for the applicant's costs, the weight to be given
to the statutory purpose is gone...
The offer by the shareholders of the applicant to accept
personal liability for the applicant's costs is a factor
weighing heavily against the making of an order against the
applicant for provision of a cash or other security for
costs notwithstanding that the worth of the shareholders may
ultimately prove insufficient to satisfy any judgement in
whole or in part".

63. Once the statements in Mantaray and Gentry are considered in context, it is clear that no more was being said than that the offer of security by way of a guarantee from the directors or shareholders or other persons interested in the outcome of the litigation was a factor, which could be decisive in a given case, to be considered in determining whether any other form of order for security for costs should be made. In my opinion, this is the correct approach to take when such an offer has been made.

64. The question which arises in this case is whether the respondents should be deprived of the provision of security such as cash security or a charge over assets merely because such an offer has been made. In my opinion, there is no reason why they should be so deprived. Mrs Kinsella has rugs and antiques which she values at $30,000. They are not necessary for her daily living needs, although she may use them for such, nor are they used by her for the purposes of her earning a living. There is no reason, therefore, why those assets should not be charged to the extent of the security which I propose to order.

65. I should add that nothing that I have said on this application should be taken as an indication that security for the whole of the proceedings is or will be ordered. That question will have to be determined if and when any other application is made for the provision of further security, having regard to the circumstances as they exist at that time, although undoubtedly some of the matters which I have considered relevant will be relevant on any subsequent application.

Application for costs in respect of application relating to the respondent's contempt
66. The applicant also made an application for the costs of an application made during the hearing of the security for costs motion, whereby it sought to have the latter motion struck out because, at the time it was made, the second respondent was in contempt of an undertaking given to the Court. It is necessary to provide some detail of this application.

67. On 20 October 1994, the applicant filed a notice of motion seeking various restraining orders against the respondent dealing with its assets. Those proceedings were resolved between the parties by the second respondent giving a number of undertakings including the following:

"(t)hat it will not make any payments to Electra Cables
(Production) Pty Limited".

68. Electra Cables (Production) Pty Limited was incorporated in about November 1993 for, what was described by the third respondent in his affidavit of 1 November 1994 as "internal administrative reasons". The third respondent also stated in that affidavit that no payments of money or exchange of goods was made between the second respondent and Electra Cables (Production) Pty Limited. This turned out not to be so. In a further affidavit of 30 November 1994, the third respondent stated:

"(w)hat I meant is that Electra Cables (Production) is paid
nothing for its services by the Second Respondent. In fact
money does pass between the Second Respondent and Electra
Cables (Production). That money is the exact amount of
salary paid to the production employees of Electra Cables.
A cheque is drawn on the account of Electra Cables for the
amount of those salaries each week and paid to Electra
Cables (Productions). Wages are then paid by Electra Cables
(Productions) to the staff involved. The amounts are equal
and there is no profit component in the transaction".

69. This evidence was still not entirely accurate, as monies were also channelled through Electra Cables for the payment of payroll tax, workers' compensation insurance premiums and other payments directly associated with the employment of employees. During the course of the security for costs application, counsel for the applicant examined subpoenaed material which showed that payments were being made by the second respondent to Electra Cables (Production). Counsel seized upon that material, apparently unaware of the content of the third respondent's 30 November 1994 affidavit and made the application to which I have referred. It was not obvious from the subpoenaed material what these various payments were for. Strictly, the second respondent was in breach of its undertaking and although not admitting the breach, subsequently, at the adjourned hearing of the matter, "for more abundant caution and clarity" sought leave to withdraw the undertaking and in its place, offered the following undertaking to the court:

"...that the first, second, third and fourth respondents
will not make payments to Electra Cables Productions Pty
Limited other than in respect of usual weekly wages and
payments made in the ordinary course of business in relation
to the employment of production staff made available by
Electro (sic) to the second respondent".

70. There was no opposition to this course and I accepted the new undertaking.

71. The application for costs of this application was resisted essentially on the same basis as the respondents had opposed the application. It was submitted that the application was "a stunt", that it was made contrary to the true legal principles which governed such applications and was contrary to the evidence.

72. It was not in dispute that, to state the matter in broad terms, a party in contempt of court will not be heard by the court. The respondent's solicitor submitted that the true rule was that the principle only applied after there had been a formal finding of contempt after properly constituted contempt proceedings had been heard. He relied upon Permewan Wright Consolidated Pty Limited v Attorney-General in and for the State of New South Wales on the Relation of Franklins' Stores Pty Limited, (unreported, NSWCA, Reynolds and Hutley, Mahoney JJA, 11 December 1978). Hutley JA at 3, after referring to:

"(t)he fundamental rule that a party guilty of contempt
should not be heard in respect of an application made on his
part to a court."

73. determined at page 6, in respect of the case before the court that:

"(if) it were not for certain (responses) by counsel for the
appellant to proposals put by me towards the end of the
case, I would have been of the opinion that the application
(of the appellant)...should have been out of hand and the
applicant ordered to pay the costs, leave being given to the
appellant to make a further application for stay after the
contempt proceedings had been heard and when it had complied
with all the orders made in the contempt proceedings or had
otherwise purged its contempt."

74. For reasons particular to the case, the Court determined that it was appropriate that the application not be heard without the respondent purging its contempt to the extent that it was able. To this end, the notice of motion was stood over either until the contempt had been purged or contempt proceedings, if pursued, were finalised. The solicitor for the respondents submitted that his Honour's reasoning was authority for the proposition that there had to be a finding of contempt after a formal hearing of contempt proceedings. However, this misunderstands his Honour's judgment and the judgment of the court as a whole. I do not propose to analyse the judgment in detail. It is sufficient to note that in dealing with the principle, the court was referring to a party having disobeyed the court's order.

75. In Young v Jackman (1986) 7 NSWLR 97, Young J applied that principle in circumstances where there had been no contempt proceedings. Rather, the party seeking relief from the court was in disobeyance of orders of the court. His Honour then considered whether the rule was subject to an exception that the Court had an overriding discretion as to whether to hear a party in contempt or not. His Honour stated at 101:

"I am greatly attracted by this argument because it seems
realistic, modern and sensible, but, unfortunately, it does
not seem to me that it is the law in New South Wales..."

76. However, in Australian Securities Commission v Robert James MacLeod and Ors (Drummond J, unreported, 23 November 1994). Drummond J indicated that he preferred the view that the application of the rule was subject to an overriding discretion, although he found it unnecessary to determine that matter. It should be noted that in ASC v MacLeod, Drummond J was dealing with a case where there had been no contempt proceedings.

77. In my opinion, the principle is not one which is confined to the case where an applicant has already been found guilty of contempt. Contempt cases whilst not unusual are not common. There are undoubtedly many reasons for that, not the least of which is likely to be the attendant costs of bringing such proceedings. However, there is no reason in principle, where there has been a breach of the court's orders, that the party in breach should be prevented from obtaining relief from the court just as that principle applies where a party has been found guilty of contempt. I am also of the opinion that the court has a discretion as to whether to hear such a party. Were it otherwise, a technical or explicable disobeyance could result in a party being seriously prejudiced.

78. In the present case I have no doubt that counsel for the applicant made the application as a forensic reaction to material which he saw for the first time in Court. However, the undertaking which had been given by the second respondent was precise in its terms, and was to be contrasted with other undertakings contained in the same affidavit, which specifically made reference to not making payments "other than in the ordinary course of business". The undertaking given in respect of Electra Cables (Production) Pty Limited was not so qualified although the third respondent's affidavit of 30 November 1994 had clearly indicated that there was an error in his earlier affidavit and he disclosed the fact that payments were made. However, that affidavit failed to reveal the true situation accurately. Although the third respondent is a national of the Peoples Republic of China and does not speak English, there is no suggestion that he was hampered in any way through the lack of appropriate translation facilities or the lack of appropriate legal advice. Indeed to the converse, his solicitors are experienced litigation solicitors who have in their employ at least one consultant who gave evidence in the proceedings and who is both legally qualified, and whose first language is Mandarin, being the third respondent's language.

79. It seems to me that there are two competing principles here. It is not the Court's function to punish persons for innocent or technical mistakes, at least where those mistakes have no bearing on any issue. On the other hand, it is entitled to expect parties through their solicitors to give careful attention to the matters which they put before the Court. It appears that the failure to do so, for whatever reason, was the genesis of the application. However, I am of the opinion that the breach of the undertaking was of a technical nature. This should have been apparent to the applicant's legal representatives upon the reading of the third respondent's 30 November 1994 affidavit. Although that affidavit was still not accurate, it provided enough information to show payments were made. In all the circumstances, I am of the opinion that the appropriate order to make is that each party pays its owns costs of this application.