Ryan v Great Lakes Council

(1998) 154 ALR 584
BC 9801418

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(Judgment by: WILCOX J) Court:

Judge:
WILCOX J

Subject References:
PRACTICE AND PROCEDURE
Security for costs
Representative proceedings
Impecunious applicants
Power of Court to order provision of security
Discretion
Possibility of group members contributing to pool of funds to provide security
Policy behind Part IVA of Federal Court of Australia Act
Applications refused

Legislative References:
Federal Court of Australia Act 1976 - 43(1A); 56
Federal Court Rules - Orders 28 rule 3

Hearing date: 8 APRIL 1998
Judgment date: 24 APRIL 1998

SYDNEY

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Judgment by:
WILCOX J

Four respondents to this litigation have made application to the Court for orders for provision of security for costs. The relevant respondents are Graham Barclay Oysters Pty Ltd and Graham Barclay Distributors Pty Ltd, the second and twentieth respondents in the action brought by Grant Ryan, and M W & E A Sciacca Pty Ltd and Tadeven Pty Ltd, the eighth and ninth respondents in the action of Kevin Gower. Both applications were heard together. They were argued against the background that the evidence clearly establishes neither Mr Ryan nor Mr Gower has sufficient means to meet the costs of the respondents to his proceeding, if it should fail and the usual costs order be made, or even of the pair of respondents making this application against him.

The legislation

Section 56(1) of the Federal Court of Australia Act 1976 gives to the Court or a Judge a discretion to "order an applicant in a proceeding in the Court ... to give security for the payment of costs that may be awarded against him or her". Subsections (2) and (3) deal with specification of the amount, manner and form of the security and the time of its provision. Subsection (4) provides that, if security is not given in accordance with an order under the section, "the Court or a Judge may order that the proceeding ... be dismissed."

Order 28 of the Federal Court Rules deals with security for costs. Rule 2 requires applications for orders for the provision of security to be made by motion upon notice. Rule 3(1) provides:

"3(1) Where, in any proceeding, it appears to the Court on the application of a respondent -

(a)

that an applicant is ordinarily resident outside Australia;

(b)

that an applicant is suing, not for his own benefit, but for the benefit of some other person and there is reason to believe that the applicant will be unable to pay the costs of the respondent if ordered to do so; or

(c)

subject to sub-rule (2), that the address of an applicant is not stated or is mis-stated in his originating process; or

(d)

that an applicant has changed his address after the commencement of the proceeding with a view to avoiding the consequences of the proceeding,

the Court may order that applicant to give such security as the Court thinks fit for the costs of the respondent of and incidental to the proceeding."

Rule 6 provides that Order 28 "does not affect the provisions of any Act of the Commonwealth or of a State or Territory under which the Court may require security for costs to be given".

At a relatively early stage in the Court's history, a Full Court considered the relationship between these two provisions: see Bell Wholesale Company Ltd v Gates Export Corporation (1984) 2 FCR 1 . The Full Court rejected an argument that the only circumstances in which security might be ordered were those specified in Order 28 rule 3(1). The members of the Court said the Rules could not operate so as to limit the wide power conferred by s 56. At 3 they went on:

The discretion to make orders under s.56 must be exercised judicially, but that is the only relevant limitation. Moreover, it is plain from the terms of O.28 itself that r.3 is not intended to be an exhaustive statement of the cases in which an order for security for costs can be made. Rule 6 is quite inconsistent with such a proposition.

At 4 the Court commented on the position of people standing behind the litigation:

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 the 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 security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

Bell Wholesale has been applied in this Court on innumerable occasions. It clearly establishes the Court's power to make an order for security in the present cases but, also, that the question whether the Court should do so is a matter of discretion, to be considered in the light of all relevant circumstances.

Security in representative proceedings: contentions

One important circumstance of the present applications is that both principal proceedings are brought as representative actions under Part IVA of the Federal Court of Australia Act. Mr D J Fagan SC, counsel for the four applicants for security, argues this circumstance puts the cases into a category similar to one in which the courts have traditionally required security for costs: cases where the plaintiff is merely a nominal plaintiff, in the sense that the plaintiff in truth sues for the benefit of another person or other persons; for examples, see Semler v Murphy [1968] 1 Ch 183 at 191. This is, of course, the situation referred to in para (b) of Order 28 rule 3. Mr Fagan does not claim these cases fall directly into the "nominal plaintiff" category; he accepts that Mr Ryan and Mr Gower each seek damages on their own behalf. However, he says the situation is so similar to that of a "nominal plaintiff" as to indicate the reasonableness of an order for security. Mr Fagan argues it should not be assumed this would stifle the litigation; the group members who stand to benefit from any success in the actions might be willing and able to contribute to a pool of funds out of which security could be provided.

Mr Fagan's submissions are put as submissions of principle rather than in reliance upon the particular facts of this case, other than the impecuniosity of the two applicants. There is no evidence as to the means of any represented member or any member's willingness to contribute to a financial pool. Nor does Mr Fagan suggest the fact that the two actions are representative proceedings, rather than actions brought by Mr Ryan and Mr Gower solely for their own benefit, has increased the costs his clients have so far incurred, or are likely to incur in the future in connection with determination of liability. If liability is established, the multiplicity of group members may increase the expense of quantifying total damages. However, at that stage it may be appropriate for the Court to direct the establishment of one or more sub-groups (see s 33Q of the Federal Court of Australia Act ) or to permit an individual group member to appear for the purpose of determining damages (see s 33R). In either of those events a new person, the sub-group representative party or the individual member, would become liable for the respondents' costs.

Mr J Beach, counsel for Mr Ryan and Mr Gower, also argues the case by reference to basic principles. He points out that s 43(1A) of the Federal Court of Australia Act specifically forbids the making of a costs order against a represented party, except in special circumstances. That sub-section provides:

"(1A) In a representative proceeding commenced under Part IVA or a proceeding of a representative character commenced under any other Act that authorises the commencement of a proceeding of that character, the Court or Judge may not award costs against a person on whose behalf the proceeding has been commenced (other than a party to the proceeding who is representing such a person) except as authorised by:

(a)

in the case of a representative proceeding commenced under Part IVA - section 33C or 33R; or

(b)

in the case of a proceeding of a representative character commenced under another Act - any provision in that Act."

Although Mr Beach concedes Mr Fagan's proposal for provision of security for costs out of a financial pool created by the group members does not directly contravene s 43(1A), he argues it conflicts with its spirit. In this respect he calls in aid a recent decision of Merkel J, Woodhouse v McPhee, (1997) 80 FCR 529 . That decision also related to an application for security for costs in a representative proceeding. So far as I am aware, it is the only such decision. It warrants close attention.

Woodhouse v McPhee

The action was brought by Woodhouse on behalf of himself and 97 other ex-employees of Wodonga Meats Pty Ltd. Woodhouse claimed the company had traded as an insolvent company under the control of its directors, the three respondents, until it went into liquidation leaving moneys due to its employees. Woodhouse accepted he was unlikely to be able to meet any order for costs but contended, according to Merkel J, "that the object of facilitating access to justice through representative proceedings under Part IVA will be substantially undermined if the Court renders represented persons ... indirectly liable for costs as a consequence of an order for security" on the basis of being pressured to contribute to a pool of funds.

Merkel J referred to s 56 of the Federal Court of Australia Act and Order 28 rule 3. He noted "the fact that a proceeding by an impecunious applicant is also brought for the benefit of others is a factor which, in general, weighs in favour of ordering security for costs unless it is established that the order will stifle or stultify the proceeding or will otherwise be oppressive". He also mentioned a comment of Burchett J in Cunningham v Olliver (21 November 1994, unreported):

The applicant's impecuniosity should not close the door of the court against his claim. However, to the extent that the claim is put forward on behalf of others, it is appropriate to regard this principle as qualified.

Merkel J then analysed relevant provisions of the Federal Court of Australia Act. He referred especially to s 43(1A). His Honour also quoted the following passage from the then Attorney General's Second Reading Speech on 14 November 1991, in support of the Bill that introduced Part IVA into the Federal Court of Australia Act :

"Such a procedure is needed for two purposes. The first is to provide a real remedy where, although many people are affected and the total amount at issue is significant, each person's loss is small and not economically viable to recover in individual actions. It will thus give access to the courts to those in the community who have been effectively denied justice because of the high cost of taking action.

The second purpose of the Bill is to deal efficiently with the situation where the damages sought by each claimant are large enough to justify individual actions and a large number of persons wish to sue the respondent. The new procedure will mean that groups of persons, whether they be shareholders or investors, or people pursuing consumer claims, will be able to obtain redress and do so more cheaply and efficiently than would be the case with individual actions."

Merkel J went on:

"Section 56 confers a broad discretion on the Court which is to be exercised by reference to the particular circumstances arising in each case. Accordingly, the Court should be cautious about enunciating general rules that might fetter that discretion. However, in my view there is no reason why, in general, the fact that a proceeding is brought for the benefit of others under Part IVA ought not to be a consideration which together with other considerations can favour the ordering of security. Indeed, s 33ZG Copyright(v) provides that, except as otherwise provided by Part IVA, nothing in the Part affects the operation of any law relating to security for costs. Consequently nothing in Part IVA is to affect the operation of s 56 and O 28 in relation to security for costs or is to impede orders being made for security for costs in Part IVA cases on the same basis as may be ordered in other cases.

On the other hand it would be incongruous and anomalous for Parliament specially to confer a direct costs immunity under s 43(1A), inter alia to afford represented persons greater access to justice, and then for the courts indirectly to remove the effect of that immunity by making orders for security for costs on the basis that the applicant is bringing the proceedings for the benefit of others who ought to bear their share of the potential costs liability to other parties. In my view, in order to deal with that incongruity and anomaly the fact that an impecunious applicant is bringing a Part IVA proceeding for the benefit of represented persons, whilst a relevant consideration in favour of granting security, ought not of itself be as significant a consideration as it might otherwise be in favour of the granting of security." (Original emphasis)

Turning to the exercise of discretion in the particular case, Merkel J noted three considerations that operated against the making of an order for security:

"

*

the individual applicant has a bona fide claim and has a reasonably arguable case for relief under Part IVA of the Act in a matter which raises important issues of principle in relation to the rights of former employees of a company in liquidation;

*

public policy considerations weigh strongly against any order for security that might impede a group claim for accrued employee entitlements brought against directors on the basis of their liability for insolvent trading by their company;

*

an order for security is likely to stultify proceedings unless the security is obtained from the represented parties."

Merkel J then said:

"The respondents accept the difficulty in obtaining an order for security for costs against an impecunious but bona fide individual applicant but have put their claim on the basis of the benefits to be derived from the proceeding by the other employees. As pointed out above policy considerations derived from s 43(1A) will usually dilute the significance of, and the weight to be given to, that consideration in a properly brought Part IVA claim. Even if, contrary to that view, I were to disregard these policy considerations, in the circumstances of the present case the importance of the issues raised by the claim and the public policy considerations to which I have referred above are of such weight that I would nevertheless exercise my discretion against ordering security for costs.

There may be circumstances which arise in a particular case under Part IVA that may warrant a different approach to that set out above. For example if the claim was spurious, oppressive or clearly disproportionate to the costs involved in pursuing it or if the proceedings were structured so as to immunise persons of substance from costs orders I would not consider the fact that the represented persons were entitled to the benefit of s 43(1A) to be a consideration which in any way operates against an order for security in such cases."

Conclusion

I have referred to Merkel J's judgment in Woodhouse at length not only because of the novelty of the issue but also because, if I may so say with respect, his Honour sets out felicitously views I have myself formed. Like Merkel J, I think s 43(1A) ought generally to be regarded as a substantial impediment to the "financial pool" approach urged by Mr Fagan. That approach would have the effect of exerting substantial pressure on group members to make a contribution to securing the respondents' costs, even though s 43(1A) expressly exempts them from liability to meet those costs. Moreover, it may do so after the termination of the opt-out period (see s 33J of the Act). The group members may have decided to remain in the representative proceeding, and not opt out or embark on a separate action, in reliance on the protection afforded by s 43(1A).

In agreeing generally with Merkel J, I accept his view about a claim that is "spurious, oppressive or clearly disproportionate to the costs involved in pursuing it" or structured so as to immunise persons of substance. Mr Fagan does not suggest any of these strictures apply to these claims. I think this attitude is realistic. Whatever may be the ultimate fate of the claims, they are brought bona fide and on an arguable basis. In total, the claims are substantial. They are being conducted by the applicants' advisers in an efficient manner. Although the proceedings are necessarily complex, having regard to the number of parties involved, it should be possible to ensure their cost does not become disproportionate to the stakes.

Although I accept I have power to make orders for the provision of security for costs in these cases, in the exercise of my discretion I decline to do so. If an order were made, it would have one of two consequences. Either it would stultify the continuance of the actions, at least as representative proceedings, leading to abandonment of what seem to be genuine and arguable group members' claims, or it would force on the parties a multitude of individual actions. Either result would be at odds with the purposes of Part IVA outlined by the Attorney General.

Each application will be dismissed with costs.