Bluewater Boating Pty Ltd v Wark Marine Services Pty Ltd & Ors [1998] FCA 75 (12 February 1998)

FEDERAL COURT OF AUSTRALIA

SECURITY FOR COSTS - no point of principle

BLUEWATER BOATING PTY LIMITED v WARK MARINE SERVICES PTY LIMITED & ORS

NG 445 of 1997

MOORE J

SYDNEY

12 FEBRUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 445 of 1997

BETWEEN:	BLUEWATER BOATING PTY LIMITED Applicant
AND:	WARK MARINE SERVICES PTY LIMITED FIRST Respondent Gary Wark SECOND RESPONDENT J & m BURROWS PTY LIMITED THIRD RESPONDENT JOHN FELLOWS DIESEL PTY LIMITED FOURTH RESPONDENT JOHN FELLOWS FIFTH RESPONDENT
JUDGE:	MOORE J
DATE OF ORDER:	12 FeBRUARY 1998
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The interlocutory application of the first and second respondents is dismissed.

2. The first and second respondents pay the applicant's cost of the notice of motion.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	ng 445 of 1997

BETWEEN:	BLUEWATER BOATING PTY LIMITED Applicant
AND:	WARK MARINE SERVICES PTY LIMITED FIRST Respondent Gary Wark SECOND RESPONDENT J & m BURROWS PTY LIMITED THIRD RESPONDENT JOHN FELLOWS DIESEL PTY LIMITED FOURTH RESPONDENT JOHN FELLOWS FIFTH RESPONDENT

JUDGE:	MOORE J
DATE:	12 february 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

On 10 June 1997 an application was filed by Bluewater Boating Pty Limited ("Bluewater") seeking relief, including damages, against Wark Marine Services Pty Limited ("Wark Marine") and others. Bluewater is the owner of a charter vessel "Nautitax" ("the vessel") into which were installed in early 1997 two reconditioned motors.

This judgment deals with an application by Wark Marine and the second respondent, Mr Gary Wark, filed in late October 1997 seeking an order for security for costs in the sum of $25,441.

The application was heard on 14 and 28 November 1997. When the proceedings concluded I indicated that some consideration should be given by the parties to whether an agreement concerning security for costs might be reached. I was subsequently led to believe that discussions were occurring which might bear fruit. I was advised in writing on 21 January 1998 that no agreement would be reached and I was invited to give judgment.

Bluewater was first registered on 2 October 1996 and its principal activity is described in the company extract from the Australian Securities Commission as a trustee company. Its directors are Mr Keith Freeman and Mr Robert Riggs and the issued capital is two one dollar shares. Mr Riggs gave evidence that Bluewater had been formed principally for the purpose of acquiring the vessel and using it to conduct a charter boat business. In early 1997 the vessel was leased to a Mr Andrew Legge on a month by month basis. Mr Legge paid $3,000 monthly to Bluewater for the use of the vessel. That payment covered Bluewater's expenses in relation to the vessel including loan repayments. Mr Riggs gave evidence, which was not challenged, that during its initial operations the boat was being regularly chartered with four or five charters a week for which $1,000 was being paid. In early February 1997 problems arose in relation to the engines with the result that the vessel was out of operations from March 1997 until early July 1997 while repairs to both engines were carried out. Mr Riggs gave evidence, again which was not challenged, that after the vessel had been repaired no charters were obtained. From September 1997 onwards Bluewater was able to secure only two charter bookings per fortnight or less. When the problems with the engine arose in February 1997 Mr Legge terminated his lease of the vessel and he was hired by Bluewater to supervise repairs and arrange alternative charters. It is not entirely clear from the evidence how the vessel was managed from July 1997 onwards. Mr Riggs gave evidence that the direct cost caused by the problems with the motors totalled $50,400.88. There is documentary evidence indicating that the cost of the repairs carried out by a firm called Impact Marine Engineering ("Impact Marine") was $43,770.20.

There are financial records of Bluewater in evidence which disclose that between the period 16 October 1996 and 15 July 1997 there had been deposited in a cash management account conducted on behalf of Bluewater a total of $104,595.16 against which there had been drawings totalling $98,385.65. At no time in this period had there been a debit balance. More recent accounts for the period 15 October 1997 to 10 November 1997 show a slightly different picture. During that period there had been credits totalling $3,135.09 and drawings totalling $4,428.82 and, as at 10 November 1997, a debit balance of $1,288.90. While the evidence is not entirely clear it appears that it was necessary for Bluewater to pay Impact Marine a sum of $32,000 as a progress payment towards the repairs on the vessel in late May 1997. Again it is not entirely clear, but it appears this sum or at least some of it was borrowed by either Bluewater or another company with which Mr Riggs was associated. Mr Riggs gave evidence that both he and Mr Freeman provided funds to Bluewater to supplement its income so that it could meet its expenses. When asked, Mr Riggs proffered the opinion that Bluewater was able to pay its debts as they fell due though the import of his answer was that this was because he would honour any obligation Bluewater had to pay a debt.

The Court's power to order security derives from both s 56 of the Federal Court of Australia Act 1976 and s 1335 of the Corporations Law. That latter section provides:

"Where a corporation is plaintiff in any action or other legal proceeding, the Court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until security is given."

Ordinarily the power conferred by s 56 is, in relation to a corporation, exercised in the same way as the special power conferred by s 1335: see Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497. Thus a threshold question arises as to whether there is credible testimony that there is reason to believe that Bluewater will be unable to pay the costs of Wark Marine or Mr Wark if they are successful in their defence. What is necessary to establish this was described by Lee J in Warren Mitchell Pty Limited v Australian Maritime Officers Union (1993) 12 ACSR 1 as requiring the applicant for security:

"to show that the material before the Court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings."

In the present case I am satisfied, having regard to the evidence, that Bluewater will be unable to pay the costs of Wark Marine and Mr Wark if they are successful in their defence. The import of the evidence of Mr Riggs was that the charter business of Bluewater was now struggling. I infer from the evidence that the only cash reserves of Bluewater are those which were in the cash management account. That account, on the best evidence, is now in debit. It may be accepted that in the ordinary course Mr Riggs or Mr Freeman might, or would, provide funds to Bluewater to meet any debt it incurred. However, from an answer he gave at the conclusion of his cross examination, Mr Riggs appeared to be aggrieved by what had occurred and by the large sums Bluewater has had to expend in the recent past arising from what has been described as the incident in February 1997 concerning the motors. Even if, when considering the ability of a corporation to pay costs, it is permissible to have regard to the prospect that a director and/or shareholder might provide funds to the company to meet its debt, there is a real risk that were Bluewater to fail against Wark Marine and Mr Wark, funds would not be available to satisfy any order as to costs.

However, this conclusion simply raises the question of how the broad discretion conferred by s 1335 should be exercised. I think the better view is now that the discretion is not exercised with any predisposition to order that security be provided by an impecunious company: see Hunt Contracting Company Pty Ltd v Roebuck Resources NL (unreported, Federal Court of Australia, R D Nicholson J, 26 July 1995) and Jeffcot Holdings Limited v Paior (1997) 15 ACLC 28. The principal reason advanced by Bluewater why the discretion should be exercised in its favour was that it was the conduct of the respondents that has caused Bluewater's current financial difficulties.

Certain allegations are made against the first and second respondents in a statement of claim filed on behalf of Bluewater . They were that representations were made about the capacity of Wark Marine and Mr Wark to undertake repairs and the means by which they should be effected. It is alleged that this conduct contravened certain provisions of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1987 (NSW). It is also alleged that Wark Marine contracted to install, test and supervise the installation of reconditioned motors in the vessel. The defence puts most matters in issue though a concluding paragraph in the defence rather suggests that there is no serious issue that work of the type alleged to have been undertaken by Wark Marine was in fact undertaken by it. While this is not the occasion to make concluded findings of fact, it presently appears to be the case that Wark Marine undertook work on the motors of the vessel in February 1997. Shortly after an incident occurred that required further work to be done on the motors by Impact Marine at considerable cost to Bluewater.

The submissions made on behalf of Wark Marine and Mr Wark were that there is a predisposition in favour of requiring an impecunious company to provide security if an application is made. I have already indicated, I do not accept this is the correct approach. Reference was also made to Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 as to the approach to be adopted if the impecunious company contends the provision of security would frustrate the litigation. However, no such contention is made by counsel for Bluewater.

Counsel for Wark Marine and Mr Wark referred to the unreported judgment of von Doussa J of 12 April 1989 in High Tower Ltd and Ors v Island Motel Pty Ltd to support a submission that if it is contended the impecuniosity of the applicant in the proceedings was caused by the conduct of the party seeking security then there must be evidence that their conduct was the real cause. In the present case it is submitted by Wark Marine and Mr Wark that the evidence does not demonstrate the causal link. As earlier noted, the defence indicates that Wark Marine and Mr Wark were involved in installing reconditioned motors into the vessel in February 1997. Documentary evidence establishes that notwithstanding that, the motors later had to be extensively overhauled by Impact Marine with the result that the vessel was not in service for several months and generated no income. Mr Riggs gave evidence that charter business was lost, the reputation of the vessel as a reliable charter vessel was adversely affected and it has been difficult to secure charter work since the vessel again became operational. This evidence was not challenged. In my view there is some evidence to indicate for the purposes of this application for security for costs, a causal link between the present financial circumstances of Bluewater and the conduct of Wark Marine and Mr Wark which founds Bluewater's contractual and other claims against them. While I accept that if Wark Marine and Mr Wark succeed in their defence then there is a real risk that they may not obtain, or readily obtain, their costs. However, as there presently appears to be a causal link of the type just discussed and no compelling reason to order security for costs, I do not propose to order security.

I dismiss the application.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore

Associate:

Dated:

Counsel for the Applicant:	Mr M Condon
Solicitor for the Applicant:	Thomas Rich O'Connor
Counsel for the first and second Respondents:	Mr M Macrossan
Solicitor for the first and second Respondents:	McClellands
Date of Hearing:	14 and 28 November 1997
Date of Judgment:	12 February 1998