Case: Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497
Outcome: distinguished
Further, in summary the respondents submitted: 1. The applicants suffered no disadvantage whatsoever by the conduct of the respondents in moving for further security in the sum of $200 000 on Friday 24 November 2006 at 5.05 pm. 2. The Court may order security for costs already incurred: Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497. 3. There had been a change of circumstances before the Court which justifies the Court revisiting the issue of security for costs, in particular: &#8226; it is clear that the hearing of this matter will require 18 days &#8226; as is clear from the evidence of the second applicant, the second applicant and Mrs Tracy controlled, in February 2005, net assets of approximately $5 000 000 in value &#8226; Mrs Tracy, is a major beneficiary of the litigation &#8226; there is no dispute that Mr Tracy transferred assets out of his name in June 2005. 4. The evidence of Mr Graham, the expert witness in respect of costs for the applicants, is concerning because: &#8226; he argues legal points in his evidence, which are wrong in law &#8226; the Full Court rejected his evidence as to quantum &#8226; his second affidavit proceeds on the basis of a number false premises, including that the remaining number of days for the trial to be completed is three days (whereas the joint assessment of Counsel had been to allow seven further days); that no valuation evidence was required (whereas four valuers are giving evidence); no non-party disclosure was required from HTW and National Australia Bank (which is not the case); that the solicitors for the respondents would require only 20 hours to prepare all statements (whereas there are 11 affidavits); and no allowances were made for Senior Counsel. 5. The evidence of Mr James McLellan, an expert witness in respect of costs for the respondents, assessed the costs, including preparation and hearing, for a 10 day trial at $347 413, the costs per day following being $8166 (totalling, for a further eight days being seven days in May 2007 and one day in July 2006, $65 328). The total amount in costs for the trial is accordingly $412 741. 6. As the respondents have already paid $150 000 towards security for costs, an order for a further $200 000 is appropriate in all the circumstances of this case. 19 In summary, the submissions of the applicants are as follows: 1. Short notice was given by the respondents for this application. 2. It is admitted that the first and third applicants are unable, from their own resources, to meet any costs order made against them in these proceedings. 3. The respondents have not adduced any new factual evidence in support of the application to justify the costs of $217 229. 4. It is inappropriate to consider future costs in light of the affidavit of Mr McLellan. 5. Mr McLellan made no calculation of the costs now claimed, and there is no suggestion that a person experienced in the calculation of legal costs has turned their mind to claims made in items 4-7 of the schedule. 6. No authority was cited by the respondents or principle enunciated to support the contention that in exercise of its discretion the Court will order security for costs already incurred, particularly where there has been an earlier unsuccessful application. 7. Mr Graham's evidence is that the daily rate for party and party costs is $7124.25, making a total of $21 372.75 for the further three days of the trial. Accordingly, in all the circumstances if the Court decides to exercise its discretion to order further security then the appropriate quantum of such security is $21 372. 8. The effect of Mr Graham's evidence is that the costs claimed at items 1, 2, 3 and 6 of the schedule are not appropriate to form part of an order for security because they have already been incurred and because they have been dealt with by the orders made by the Court on the two previous security for costs applications. 9. In giving his evidence, Mr Graham relies on the fact that all that remains to be done in relation to the witnesses is cross-examination and re-examination. 10. The facts in Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd were not relevant to this case; further the observations of French J in that case concern the issue of power rather than discretion. Neither Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd nor another case, Southern Cross Exploration NL v Fire and All Ricks Insurance Co Ltd (1985) 1 NSWLR 114, are authority for the proposition that the Court has power to order security for costs already incurred in the circumstances of this case. 11. The fact that the respondents have relied on previous affidavits filed by them in support of earlier applications for security for costs is a tacit admission that nothing that has occurred since those affidavits were filed. 12. The respondents chose not to cross-examine Mr Graham, and in those circumstances Mr Graham's evidence as to the quantum of any appropriate security order is uncontested. 13. There is no admissible evidence before the Court to support the assertion that the trial will take a further seven days to complete. The only admissible evidence which comprehends the extent to which the trial has been heard and the likely further duration of the trial is Mr Graham's evidence in which he gives his expert opinion that the trial will take a further three days to complete. This estimate is based on a consideration of the remaining witnesses to be cross-examined by the applicants and has regard to the fact that written submissions are likely to be required. 14. It is inappropriate for the Court to take into account any of the evidence adduced thus far at the trial because the evidence is incomplete and no findings of fact have yet been made, including in relation to whether the third applicant was trading whilst insolvent or whether Mr Tracy had transferred property to which he was beneficially entitled in order to defeat creditors. 15. As the respondent had failed in its most recent application for security for costs ( Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 3) [2006] FCA 1498) and had not appealed the decision, the decision created an estoppel against a further application based on the facts extant at the date of the order. The policy reason for such an estoppel is that, had the applicants known on the date upon which the Court dismissed the most recent security for costs application that they would have to provide a further $200 000 security, they may have elected to discontinue the proceedings at that point, thereby saving the costs of the 10 day trial because of their inability to meet the further security order. This is prejudice which cannot now be remedied. 16. Mr McLellan's evidence is unhelpful in that it does not contain any assessment of the likely further duration of the trial having regard to the witnesses already dealt with or remaining witnesses; whether the respondents are able to obtain an order for security for incurred costs or whether the respondents are estopped from obtaining further security; or whether the respondents are entitled on a party and party basis to obtain an allowance for preparation for trial more than once. 32 In Australia the substantial weight of authority has rejected any suggestion that a defendant is entitled to an order for security as of right where the impecuniosity of the company has been established: French J in Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 506. However the differing approaches are reflected by the broad terms of s 56 Federal Court Act, and the specific terms of s 1335 Corporations Act which apply where there is evidence that a corporate plaintiff is insolvent. A statutory predecessor of s 1335 was explained by the Full Court of the Supreme Court of Queensland in Harpur v Ariadne (1984) 2 Qd R 523 at 532 in the following terms: 'The mischief at which the provision 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 whatever he is worth, the object of the legislation is seen to be satisfied.' 38 In my view an award of security in respect of future costs in this matter is appropriate. In forming this view I take into account the following factors: 1. The first and third applicants were ordered earlier this year to pay the first and second respondents security for costs up to the end of the first day of trial in the sum of $150 000: Sunstate Orchards Pty Ltd v Citrus Queensland Pty Ltd [2006] FCAFC 93. To paraphrase Emmett J in Checked-Out Pty Ltd v Eagle Eye Inspections Pty Ltd [2001] FCA 1475 at [26] , for reasons I detail below I do not see any reason at all to depart from the view of the Full Court in making an order that security for costs were payable, and note that the Full Court did not preclude a subsequent application at an appropriate time. 2. The first and third applicants have admitted that they are unable, from their own resources, to meet any costs order made against them in these proceedings. This admission of the applicants means that under both s 56 Federal Court Act and s 1335 Corporations Act the Court has a broad discretion, fettered only by the requirement that the Court act judicially, to order the applicant to give security for the payment of the respondent's costs (Branson J in Hopeshore Pty Limited v Melroad Equipment Pty Limited [2004] FCA 1445 at [3] ). 3. The application was filed and served on 22 November 2006 once it was clear that the trial would not finish on 24 November 2006, and the matter has been adjourned until May 2007. There is no issue of delay in respect of this application in respect of future costs. 4. Although the courts have shown reluctance to order security for future costs in respect of part-heard trial, on the basis that, if the applicant cannot provide security, it runs the risk of having wasted costs of the trial days already heard, the fact that the length of the proceedings was not foreseen is a factor which may influence the court to exercise its discretion in ordering security for those costs (see comments of Street CJ in Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 at 308). 5. In my view it is not appropriate to form any views as to the strength of the applicants' case at this stage of the trial (cf comments of Hill J in Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972 at 50,636). It is clear however that there are triable issues, and it has not been suggested to me that the case of the applicants is frivolous. 6. Insofar as this application is concerned, it is clear that the first and third applicants are unable to satisfy a costs order. I do not need to go to the evidence which has been heard to be so satisfied. Further, in my view the impropriety of reaching conclusions in this respect works both ways clearly the respondents strongly deny that their conduct has caused the impecuniosity of the first and third applicants (indeed it is a basis of the litigation), and in my view it is not proper at this stage when some, but not all, of the evidence has been heard, to make any findings as to this issue. I believe it is acceptable, however, to note evidence given in Court by Mr Hambleton, the administrator under the third applicant's deed of company arrangement, that in his opinion there was a strong prospect that the third applicant was insolvent from incorporation (TS 23 November p 572 ll 24-25). 7. Although the applicants contend that the reliance by the respondents on previous material filed in respect of security for costs is a tacit admission that nothing has occurred to justify this application for security for costs, I cannot accept that contention. Plainly, circumstances have altered. A trial which was listed for 10 days being the best estimate of Counsel as communicated to the Court is now manifestly running over that time. I shall consider this issue later in this judgment in relation to quantum. However I fail to see how the respondents, in relying on evidence of Mr McLellan that the costs for each day beyond 10 days would be $8166, is a tacit admission of the kind submitted by the applicants, notwithstanding that the affidavit of Mr McLellan was filed 27 March 2006. In my view the only 'admission' of the respondents in this respect is that their trial costs beyond 10 days would not exceed $8166 per day, and would not increase in the 2007 calendar year. 8. There is no evidence before me that the effect of an order awarding security for costs would be to stultify the litigation. Indeed as was clear during the hearing it would be the second applicant, Mr Tracy, who would be providing any security for costs ordered (TS 23 November 2006 p 585 ll 25-27). As pointed out by Jessup J in Acohs Pty Ltd v Ucorp Pty Ltd [2006] FCA 1279 at [49] , there is an intrinsic connection between the 'stultify factor' and the 'persons standing behind' factor as described by Beazley J in KB Cable . That the second applicant and his wife, Mrs Adrienne Tracy, are principal beneficiaries (and in the case of the second applicant, the principal architect), of the litigation before me is also clear from the evidence (for example TS 17 November 2006 p 194 ll 31; TS 17 November 2006 p 219 ll 41-43; TS 20 November 2006 p 233 ll 16-19, and exhibit R15). Further, that Mr and Mrs Tracy are of considerable means was made clear from evidence before the Court, including a balance sheet describing assets and liabilities of the second applicant, Mrs Tracy and their companies as at 12 November 2004 (exhibit R14). The first and third applicants appear to be impecunious, however there is no evidence before me that the second applicant or Mrs Tracy are at a similar financial disadvantage notwithstanding the events which have resulted in the litigation before me. No undertakings have been provided by the second applicant or any other person as to the costs to which the first and third applicants may become liable. Accordingly in such circumstances security for costs may be ordered to ensure that those who stand to benefit from the litigation undertake some of the risks. ( Rosenfield Nominees Pty Ltd v Bain &amp; Co (1988) 14 ACLR 467 at 472-473; Acohs Pty Ltd v Merck Ltd [1997] FCA 573 ; Costa Vraca v Bell Regal Pty Ltd [2003] FCA 65 at [77] ; Harpur v Ariadne at 532; Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4; Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 511; Interline Hydrocarbon at [35]; Acohs Pty Ltd v Ucorp Pty Ltd [2006] FCA 1279 at [49] - [51] .) 43 Stephen Colbran notes in his text Security for Costs (Longman Professional, 1993) at 41, that prior to the enactment of the Supreme Court of Judicature Act 1873 (UK) [36 &amp; 37 Vict, c 66) security for costs did not apply to past costs and nor would further security be required for a new trial (although an interesting exception to this rule appears to be in the case of Harvey v Jacob (1817) 1 B &amp; Ald 159, 106 ER 59 where the plaintiff, having been convicted of a felony and receiving a sentence of transportation to Australia, was ordered to give security for costs retrospective and prospective). However in 2006 the discretion of the Federal Court vested by s 56 Federal Court Act and s 1335 Corporations Act is very broad, and there is nothing in the terms of either section which would in any way limit the discretion of the Court or its jurisdiction to order security for costs already incurred by the respondents. Indeed, a review of the case law indicates that it is not uncommon for courts to order security for costs already incurred. Examples of cases where such orders have been made are Brocklebank &amp; Co v King's Lynn Steam Ship Co (1878) 3 CPD 365; Massey v Allen (1879) 12 ChD 807; JWH Turner &amp; Co Ltd v O'Riordan (1923) 40 WN (NSW) 64; Estates Property Investment Corporation Ltd v Pooley (1975) 3 ACLR 256; Procon (Great Britain) Ltd v Provincial Building Co Ltd [1984] 1 WLR 557; and Bryan E Fencott (and see the discussion of this topic in Colbran at pp 291-292). 48 In my view there are, as Hill J said in Equity Access , a number of discretionary issues peculiar to the facts of the present case which are persuade me that it is not appropriate to order that costs of 10 days of the trial already heard be encompassed in an award for security for costs. They are as follows: 1. In cases where security for costs have been awarded in respect of costs already incurred, there is often a catalyst which distinguishes the case from the usual circumstance where security is awarded in respect of prospective costs, and therefore justifies the application. So, for example: &#8226; in Pooley , Procon and Bryan E Fencott the retrospectivity of the award for security was not in contention &#8226; in Turner and Pooley the respondents had only immediately prior to bringing the application discovered that the applicants were insolvent. In the case before me, no such catalyst is evident. 2. In my view it would be oppressive to require the first and third applicants to now pay security for costs for those 10 days of trial already held, when they could reasonably rely on the decision in Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 3) [2006] FCA 1498 as meaning that they were not subject to a security for costs order in respect of that part of the trial. Although Mr Bell on behalf of the respondents made no secret of the fact that, if the trial did not commence within the scheduled time, his clients would be making an application for security for costs in the sum of $200 000, in my view to allow the respondents to have security for costs which have already been denied would be unjust in the circumstances. 3. Following on from this point, I note that I had dismissed the application by the first and second respondents for security for costs for that part of the trial just heard, on the basis of delay in bringing that application . Notwithstanding that the matter has now been adjourned, that the respondents indicated that they would seek security for costs if the trial did not get underway, and that the respondents were prompt in renewing their call for security for costs in respect of the trial dates once it was clear that the trial would not conclude within the scheduled 10 days, nothing has occurred which impacts on the reasons I gave dismissing the application of the respondents in respect of security for costs for the 10 days of trial. 4. The fact that the trial was not completed within the 10 days could substantially be attributed to such actions which could properly be laid at the feet of the applicants including the failure of the applicants to comply with earlier directions in relation to exchanging objections to evidence (thus requiring valuable scheduled trial time to be spent dealing with such issues), an adjournment requested by the applicants for the entirety of Wednesday 15 November 2006, and the failure of a key witness of the applicants to appear at Court which required me to stand down the Court while I considered an appropriate ruling in the circumstances. Having said that, it appeared that, despite my formal direction that the parties seek to resolve objections to evidence in advance of the trial and further attempts by Counsel on this score, the respondents' objections to evidence required two days of trial time which was considerably more than had been anticipated. Further, while no blame at all attaches to Counsel the fact remains that the examination, cross-examination and re-examination of the second applicant extended over four days, which also appeared to be considerably more than had been anticipated. Accordingly, in light of these developments it would be unfair to lay fault for the failure of the trial to finish during the allotted time completely at the feet of the applicants. 53 I am prepared however to order security in the amount of $75 000, being in respect of seven further days of trial and further preparation for the May 2007 hearing. My reasons are as follows: 1. Although the applicants' costs assessor, Mr Graham, has deposed to a view that the trial will take a further three days, as distinct from the seven days which have now been allocated, I do not accept this view. During the 10 days of trial in November (of which seven days was hearing) Counsel made opening submissions and the evidence of only six witnesses was given. Nine witnesses of the respondent remain to be heard. This includes the second respondent, Mr Strahley, who I anticipate will be in the witness box for some time. Further, the seven days allocated in May 2007 includes closing submissions from Counsel, and dealing with the respondent's objections to the applicants evidence. On two occasions during the second week of the hearing I advised Counsel that I intended to list this matter for a further seven days in May 2007 (see TS 23 November 2006 p 585 ll 12-17 and TS 24 November 2006 p 775 ll 45-47. I note that on the second occasion the transcript reads that I indicated eight days, however, I believe it was understood by all parties in the room that I meant seven days being the 8-16 of May 2007). A listing for this matter for a period of seven days commencing 8 May 2006 has been made by the Federal Court Registry. At no time did either Counsel demur from this estimation. In my view this is a fair estimate of the time required and the respondents should be entitled to security for costs for seven further hearing days. I have compared the estimates of Mr McLellan in his affidavit filed 27 March 2006 ($8166 per day being fees for senior and junior counsel and the professional fees for the lawyers per day of trial) and Mr Graham in his affidavit filed 13 April 2006 ($7124.25 per day being fees for senior and junior counsel, the professional fees for the lawyers and the transcript fees per day of trial). In my view it is reasonable to order $50 000 in respect of the seven days of trial remaining. 2. Although the applicants dispute that any security for costs should include further preparation time, in my view it is appropriate to order security to encompass costs for further preparation. Notwithstanding the submission of Mr Perry that the applicants' case has now closed and that the majority of the work to be done henceforth is by Counsel for the applicants (TS 24 November 2006 p 755 ll 4-19), an adjournment part way through the trial will inevitably result in additional preparation costs being incurred by the parties prior to the resumption of the hearing: Brown v Rodgers [2006] FCA 713. It is to be expected that Counsel for the respondents will need to prepare once again for the May 2007 hearing. This is particularly so in light of the unfortunately lengthy adjournment of this matter from November 2006 to May 2007. In any event, as a general rule, costs of and incidental to an application include costs reasonably incurred both in the litigation and in preparation for the litigation ( Re Gibson's Settlement Trusts [1981] 1 All ER 233, Higgins v Nichol (No 2) (1972) 21 FLR 34, Liverpool City Council v Commonwealth of Australia (1993) 46 FCR 67, and I also note O 62 r 19 which contemplates preparation costs included in a taxation). It is reasonable that an award of security for costs should include preparation as well as trial time: The Council of the City of Sydney v Goldspar Australia Pty Ltd [2004] FCA 1023. In this matter the respondents claim five days preparation. Mr McLellan estimates preparation by senior and junior counsel at $5500 per day in total. Although the applicants dispute that further preparation for the trial is recoverable by the respondents, I note that in the affidavit of Mr Graham filed 13 April 2006 Mr Graham accepts the daily rate for preparation by Counsel except to the extent that the figure should be discounted by 10 per cent on the basis that no allowance should be made for GST. In my view it is reasonable to order the first and third applicants to pay security for costs in the sum of $25 000 in respect of preparation. 3. In making an order for security for costs the Court does not set out to give a complete and certain indemnity to a respondent, nor is it to be assumed that the applicant will fail in the proceeding: Brundza v Robbie &amp; Co [No 2] [1952] HCA 49 ; (1952) 88 CLR 171 at 175; Menhaden Pty Ltd v Citibank NA (1984) 1 FCR 542 at 547; Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311 at 314; Re Quad Consulting Pty Ltd (unreported, Federal Court of Australia, Burchett J, 28 June 1991 par 7); Bryan E Fencott at 515; Billinudgel Pastoral Co Pty Ltd &amp; Ors v Westpac Banking Corp &amp; Ors [1997] FCA 863. In my view the quantum of costs I have ordered is reasonable in the circumstances, taking into consideration the estimates of the expert witnesses for both parties, the likely length of the resumed hearing and the need for preparation after a lengthy adjournment. I do not consider it necessary to make any award in respect of general attendance.