Friday, June 28, 2013

Security for costs: Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311

The matter of Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 was a security for costs application before Derham AsJ in the Supreme Court of Victoria. The dispute involved a claim and counterclaim. The claim alleged a breach of contract by the defendant in not supplying recycled glass to the plaintiff, and the defendant counterclaimed alleging that the plaintiff had prevented the defendant from complying with the agreement.

A security for costs application was issued by the defendant against the plaintiff, and the defendant was successful. The matter is particularly helpful because of the articulation, by Derham AsJ, of the principles concerning security for costs applications. I have set this out below:
Applicable legal principles
14 Rule 62.02 of the Supreme Court (General Civil Procedure) Rules 2005 provides, so far as relevant:
62.02 When security for costs may be ordered 
(1) Where –
(b) the plaintiff is a corporation or (not being a plaintiff who sues in a representative capacity) sues, not for the plaintiff’s own benefit, but for the benefit of some other person, and there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so;
(f) under any Act the Court may require security for costs –
the Court may, on the application of a defendant, order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given. 
15 Section 1335 of the Corporations Act 2001 relevantly provides:

(1) 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 a 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 the security is given.
16 The first question is whether the threshold condition for the exercise of the power is satisfied, that is, whether there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful. That jurisdictional condition must be satisfied before the discretionary power to order security for costs is enlivened: Livingspring Pty Ltd v Kliger Partners.[3] 
17 It is well established that the proper approach to the matter is that the Court has an unfettered discretion, but on the footing that the very fact that the jurisdiction has been enlivened in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.[4]
18 If the Court has jurisdiction to order security, the burden rests on the defendant to persuade the Court that an order for security should be made.[5]
19 In exercising the discretion whether to order a company to give security for costs the court must carry out a balancing exercise. It must weigh the injustice to the plaintiff if it is prevented from pursuing a proper claim by an order for security, against the injustice to the defendant if no security is ordered and at trial the plaintiff's claim fails and the defendant is unable to recover costs from the plaintiff: See the observations of Smithers J in Tradestock Pty Ltd v TNT (Management) Pty Ltd.[6] The Court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, but also it will be concerned not to be so reluctant to order security that an impecunious company can use its inability to pay costs to put unfair pressure on the defendant: Keary Developments Ltd v Tarmac Construction Ltd.[7]
20 The various factors that have been found to be potentially relevant in the exercise of the discretion were summarised many years ago, compendiously, by Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd.[8] So far as relevant to the present application, those factors include: 
(a) The plaintiff’s prospects of success: Whether the plaintiff's claim is made bona fide and has reasonable prospects of success. In this regard, the authorities make the following points: 
(i) 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 reasonable prospects of success;[9]
(ii) Assessing the plaintiff's prospects of success is not really a practicable test in any case of reasonable complexity: Interwest Ltd v Tricontinental Corp Ltd;[10] Although it will ordinarily not be practicable to reach any clear view about the merits of the plaintiff's claim, that is not to say that the merits are always irrelevant (unless totally lacking) or that the bona fides of the claim may be disregarded: Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd;[11]
(iii) The court is not obliged to consider at length the merits of the claim, and to do so would ordinarily be a waste of resources: Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440 (QSC)
(b) Plaintiff's impecuniosity caused by defendant: Whether the plaintiff's lack of funds has been caused or contributed to by the conduct of the defendant in relation to the transaction the subject of the claim: Sir Lindsay Parkinson & Co Ltd v Triplan Ltd.[12] In this regard, the authorities make the following points: 
(i) The plaintiff carries the burden of persuasion on the question whether the conduct of the defendant was the cause of the plaintiff's financial difficulties: BPM Pty Ltd v HPM Pty Ltd;[13]
(ii) There must be a solid foundation for that conclusion: Right Home Improvements International Pty Ltd v Imperial Alarm Screens (Aust) Pty Ltd,[14] referred to in Sandl Trading Pty Ltd v North American Oil Co;[15].
(iii) The plaintiff carries the onus of satisfying the court on the basis of admissible evidence, see Ninan v St George Bank Ltd;[16] 
(c) Plaintiff's proceeding merely defensive: Whether the plaintiff's proceeding is merely a defence against "self-help" measures taken by the defendant: Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq);[17] Sydmar Pty Ltd v Statewise Developments Pty Ltd;[18] Interwest Ltd v Tricontinental Corp Ltd.[19] Each case must be looked at to see whether in substance the claim set up is by way of defence such that the plaintiff's claims are properly characterised as defensive; 
(d) Security order would stultify pursuit of legitimate claim: Whether the making of the order would unduly stultify the ability of the plaintiff to pursue an arguable case legitimately instituted: See MA Productions Pty Ltd v Austarama Television Pty Ltd;[20] Drumdurno Pty Ltd v Braham;[21] Ariss v Express Interiors Pty Ltd (in liq);[22] Excelsior Run Pty Ltd (in liq) v Nelius Pty Ltd;[23] 
(e) Contribution by shareholders or creditors to security ordered: The extent to which it is reasonable to expect shareholders or creditors (or beneficiaries, if the company is a trustee) to make funds available to satisfy any order for security which is made: National Bank of New Zealand Ltd v Donald Export Trading Ltd;[24] Pacific Acceptance Corp Ltd (t/as Flack & Flack) v Forsyth (No 2);[25] Drumdurno Pty Ltd v Braham;[26] Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd;[27] 
(f) Delay in applying for security: Delay in applying for security may be ground for refusing to order security. The company, which can be assumed to be in financial difficulties, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it makes a substantial financial commitment toward litigating the claim. See Buckley v Bennell Design & Construction Pty Ltd;[28] Smail v Burton; Re Insurance Assocs Pty Ltd (in liq);[29]
(g) Defendant's cross-claim raising same facts: where the defendant has raised a cross-claim, whether substantially the same facts are likely to be canvassed in determining the claim and cross-claim. The court would ordinarily seek to avoid the situation where the claim is stayed because of the inability of the plaintiff to provide security while the defendant's cross-claim covering the same factual areas proceeds: Sydmar Pty Ltd v Statewise Developments Pty Ltd.[30] 
21 In Livingspring Pty Ltd v Kliger Partners the Court of Appeal said:[31] 
There are, of course, particular discretionary matters of which the plaintiff must necessarily have carriage. If, for example, the plaintiff corporation asserts that an order for security would impose on it such a financial burden as would stultify the litigation, the plaintiff must establish the facts which make good that assertion. We respectfully adopt what the Full Federal Court said in this regard in Bell v Wholesale Co Pty Ltd v Gates Export Corporation (No 2):
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 a company in the position 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 a 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 the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts.
The same would be true of a contention that the plaintiff’s impecuniosity was caused by the defendant.
22 In Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd,[32] Winneke P and Phillips JA, made the following observations:[33] 
It is thus apparent that the justification for the statutory rule is that the defendant, not being a voluntary litigant, deserves to be protected from the consequences of limited liability. Those who seek to conduct their businesses through limited liability companies expect to receive the benefits which such liability attracts. It seems to us a necessary corollary that they should be prepared to accept the strictures imposed by the section [s 1335] if the company embarks upon litigation: Buckley v Bennell Design and Constructions Pty. Ltd. (1974) 1 ACLR 301at 304 (NSW Court of Appeal).
It has not been, and could not be, suggested that the section compels the court to order security against an impecunious corporate plaintiff. The court is given an unfettered discretion to do what is justly required by the circumstances of each case. Street CJ made this point in Buckley when he said, at 305: 
It seems to me that the discretion could properly be regarded as ordinarily exercisable so as to protect a defendant sued by an impecunious company, but that, if the court in any case takes the view that this protection should not be afforded to the defendant, it has an unlimited and unrestricted discretion to give effect to such view without having to look for special circumstances.
The defendant persuaded Derham AsJ that the threshold question was satisfied because the company had no paid up capital, had no property in Victoria, was the subject of many winding up applications, had refused to provide evidence of its capacity to pay costs, and its plant and equipment was under charge to the NAB. An unaudited balance sheet produced by the plaintiff did not help the situation either, revealing a dire situation. His Honour ordered that security be provided even though His Honour found that the claim was bona fide, there was some foundation for the submission that the plaintiff's impecuniosity was caused by the defendant, and there was some delay by the defendant in issuing the application for security.

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