Robust Software v Mann Judd Reis Pty Limited [1997] FCA 1595 (11 February 1997)

Last Updated: 31 January 2012

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION No VG 751 of 1996

BETWEEN:

ROBUST SOFTWARE
Applicant

and

MANN JUDD REIS PTY LIMITED
Respondent

COURT:Merkel J

DATE:11 February 1997

PLACE:Melbourne

EX TEMPORE REASONS FOR JUDGMENT
I have formed a clear view in this matter, and propose to give my reasons for that view.

The respondent has applied for security for costs. It conducts an employment agency, which was involved in the employment of a Mr. Kahir by the applicant. That employment led to somewhat disastrous results.

Mr. Kahir, apparently defrauded the applicant of some $100,000. That event was instrumental in causing the applicant to eventually enter into a deed of administration and suffer significant losses. The applicant, through its administrator, has issued proceedings seeking to recover those losses. Although the amount, the subject of the fraud, appears to be in the vicinity of $100,000, a claim of some $2.7 million is put forward as flowing from the impugned conduct of the respondent, which has given rise to the litigation. That conduct is said to be in breach of section 52 of the Trade Practices Act and fraudulent.

In summary, serious allegations have been made against the respondent, as an employment agency. These allegations are likely to give rise to strong contested litigation.

Under the deed of administration, these proceedings were anticipated. Provision was made in the deed for a litigation fund to be provided by creditors. One of the main creditors is a company associated with Mr. Sampson, who is also the main equity holder involved in the applicant.

The application for security for costs is made in reliance on s.1335 of the Corporations Law, s.56 of the Federal Court of Australia Act, and Order 28, Rule 3 (1) of the Rules of the Federal Court. It is not in dispute between the parties that the threshold required by the Corporations Law, and the threshold for the exercise of my discretion has been met. The threshold requires that there be credible testimony that there is reason to believe that the applicant will be unable to pay the costs of the respondent, if the respondent is successful in its defence.

In those circumstances the parties are in agreement that the discretion I exercise is one that I come to without a predisposition either way. In exercising that discretion, I am required to have regard to all the circumstances of the case. The applicant contends that there are a number of circumstances which should dispose me to exercise the discretion against ordering security for costs. In essence three main contentions were put forward.

The first is that the present plight of the applicant was caused by the respondent. The second is that the evidence before me shows that there is a strong prospect of success in the applicant's claim. Thirdly, it is contended that the respondent has been oppressive in the conduct of the litigation to date.

The respondent contends that there are a number of matters that should cause me to exercise the discretion in its favour. It submits that the applicant is in fact, carrying on the proceeding principally for the benefit of its creditors, and particularly, the interests of Mr. Sampson who is playing a significant role in funding the litigation. It is contended that that is a significant factor in relation to my discretion. Secondly, it is submitted that those interests are able to fund the litigation and I ought to assume, in the absence of evidence to the contrary, that they will meet any order for security for costs. Consequently, it is said, I cannot assume that an order for security for costs will stifle the litigation. The respondent adds that the claims being made are serious claims and involve a claim of fraud, which it will vigorously defend. The respondent disputes that it caused the loss and points to that as being a serious issue between the parties. Finally, it is contended by it that I should have regard to the fact that the claim of $2.7 million is very substantial and if successful will result in significant benefits to creditors and to the company. Accordingly, it is argued, this is a case where I should exercise the discretion in favour of ordering security for costs.

It seems to be common ground between the parties that I should weigh up these factors, and in the end, exercise the discretion accordingly. There are three matters that, in my submission, weigh strongly in favour of the grant of security. The first is that this is a case which is being conducted for the benefit not only of the applicant, but for creditors and the interests behind the applicant. Two decisions regard this factor, in analogous circumstances, as being a factor strongly in favour of an order for security.

The first is Pasdale v. Concrete Constructions [1995] FCA 1471; (1995) 131 ALR 268. The other is Petite Pty Limited v. Bird Smith and Associates, Supreme Court of Victoria, Beach J unreported, 23 April 1996. In both cases, the fact that there were persons behind the company likely to benefit from the litigation, and who appeared to be in a position to provide the necessary security, weighed heavily with their Honours in justifying the exercise of the discretion in favour of the grant of security. No case has been put forward where, in similar circumstances, security has been refused.

The second factor that weighs in favour of the grant of security is that this is not just a claim for the $100,000 loss directly suffered, but it is a claim for consequential losses totalling some $2.7 million. It has been put that the claim is a strong one, and that on the evidence before me, there is a strong probability that it will succeed. It seems to me that, whilst it is not necessary to make any finding in that regard, the fact that the benefit is a very substantial one if this litigation succeeds, and one that will go over to the creditors and interests behind the applicant, is a factor relevant to the exercise of my discretion in favour of the grant of security.

In other words, not only is the litigation not likely to be stifled by the order for security of costs, but parties standing to get a very substantial benefit from the proceeding ought not to be able to do so without bearing some risk in respect of the costs involved to the respondent in contesting the proceeding.

The third matter is of less significance, but nevertheless is relevant. It is that there are serious allegations, including one of fraud, which the respondent will strongly contest. That allegation, together with the other issues, show that the litigation involves matters of substance. It is not a simple claim. In all of the circumstances, I am satisfied that an order for security for costs is warranted.

There was some debate about the extent to which I should have regard to the strength or weakness of the applicant's claim. In my view, on the present application, it is sufficient for me to be satisfied that the applicant's claim is a bona fide and genuine claim, and raises substantial issues of fact and law. Whether or not it is one that is likely to succeed is not a matter that, given the other factors to which I have had regard, is one that I should take into account as weighing in favour of or against the grant of security, other than in the sense that I indicated in my reasons. In substance there is obviously a real possibility of a substantial benefit from the proceeding to persons who should not enjoy the benefit of the litigation process free of all burden. For the reasons I have set out, I am satisfied it is appropriate to make an order for security for costs.

There seems to be a dispute between the parties as to whether the appropriate amount is some $20,000 or $40,000. Given the nature of the issues in the litigation, it is not possible to anticipate at this stage what the appropriate amount ought to be. In all the circumstances, I am satisfied that I should pick a figure in between the two figures. Accordingly, at the present time, it is appropriate that I order security in the sum of $30,000.

I certify that this and the preceding 5 pages are a true copy of the revised Reasons for Judgment of the Honourable Justice Merkel.

Associate:

Date:

Appearances:Mr. D. Clarke instructed by Deacons Graham & James appeared on behalf of the applicant.

Mr. R. Keen of the firm of Minter Ellison appeared on behalf of the respondent.

Heard:11 February 1997.