Kadavu Shipping Company Ltd v Dominion Insurance Ltd [2009] FJHC 71; HBC508.2006 (27 February 2009)

IN THE HIGH COURT OF FIJI
AT SUVA
CIVIL JURISDICTION

Civil Action No. HBC 508 of 2006

Between:

KADAVU SHIPPING COMPANY LIMITED (in Liquidation)
Plaintiff

And:

DOMINION INSURANCE LIMITED
Defendant

Before: Master Udit

Counsel: Mr. S. Valenitabua for the Plaintiff
Mr. R. Vananalagi for the Defendant

Date of Decision: 27th February, 2009

DECISION
(Securing for costs – company in liquidation suing – company pleading impecuniosity)

Introduction

[1] On 31st October, 2007 the defendant, Dominion Insurance Company filed a summons inter-alia seeking an order against the Plaintiff Kadavu Shipping Company Limited that it be “ordered within seven days to give security for costs to the defendant in the sum of $110,935.66” or any such other sum deem just and fit by the Court or “a bank bond”. Further if any such security is fixed all further proceeding be stayed pending its compliance.

[2] The grounds upon which security is sought are that:-

(a) The Plaintiff is in liquidation.

(b) Official Receiver as Provisional Liquidation will not be liable to pay for costs.

[3] Mr Valenitabua appearing for the Plaintiff vigorously opposed the application.

Application

[4] The present application is made under 0.23 Rule 1(1) of the High Court Rules 1988 and Inherent Jurisdiction of the Court. I make a preliminary observation that this application is incorrectly made under O. 23, rule 1(1). None of the conditions stipulated for ordering security applies to the plaintiff. The basis of the application for security for costs herein is that the Plaintiff is in liquidation as such will not be able to satisfy any costs orders made against it. Security for costs against a limited liability Company, which is in an impecunious position is permissible under Section 402 of the Companies Act (Cap 247). It states:-

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

[5] Under the Act the Court has an unfettered discretion. This was affirmed in Sir Lindsay Parkinson & Co Ltd -v- Triplan Ltd [1973] QB 609 wherein His Lordship Lord Denning at page 626 said:-

“Turning now to the words of the statutes (the equivalent of our sections 363 of Companies Act). The important word is “may”. That gives the judge discretion to order security or not. There is no burden one way or the other. It is discretion to be exercised in all the circumstances of that case.”

(emphasis added)

[6] Lawton LJ at 629, on the parameters of the discretion said:-

“...once it is established by credible evidence that there is reason to believe that the Plaintiff company will be unable to pay the costs of the defendants if they are successful in their defence, the Court has a discretion, and that discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a straitjacket by considerations of burden of proof. It will exercise having regard to all the circumstances of this case.....”

(emphasis added)

[7] The aforesaid view of Lord Denning as well as Lawton LJ was held as authoritative for the purposes of New Zealand; Concorder Enterprise Ltd -v- Anthony Motors (Hutt) Ltd (No.2) [1977] 1 NZLR 516 at 519 per Quilliam J.

[8] In exercising the discretion it must be borne in mind that the venerable rule is that poverty is no bar to litigation. That, position prevails “from time in immemorial, and has been the rule at common law, and also, ...... in equity”. Cowell –v- Taylor [1885] 31 Ch. D 32 at 38 per Bowen LJ. An archetypal example is the case of a plaintiff suing as a forma pauperis; Ross v Jacques(1841) [1841] EngR 530; 8 M&W 135 at 136 per Alderson B

[9] Whilst the statutory discretion is unqualified, over a period of time the Courts have developed and adopted some very helpful guidelines for the exercise of the discretion. Before I list the factors, I will reiterate the fact that statutory discretion is unfettered and any such factor guiding its exercise are in any event not exhaustive.

[10] The principles or criteria governing the consideration of security for costs against a company in an impecunious position have been judicially agitated on many instances. Law reports are littered with judicial pronouncements on the subject. However, I find the collection statement of the said principles in K P Cable Investments Pty Ltd –v- Meltglow Pty Ltd and others [1995] FCA 76; [1995] 56 FCR 189 most comprehensive. After referring to the leading cases in Australia such Fincott & Associates Pty Ltd –v- Eretta Pty Ltd [1987] FCA 102; [1982] 16 FCR 497 at 509 per French J (now the Honourable Chief Justice) Interwest Ltd –v- Tricontinental Corporation Ltd [1991] 5 ACSR 621 at 623 & 624 and the leading English Authorities, Beagly J at pages 197 & 1981 meticulously summarised the factors with reference to respective authorities as follows:.

“Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are:

1. That such applications should be brought promptly.

This is a principle of longstanding: see Grant v The Banque Franco-Egyptienne Egyptienne [1876] UKLawRpCP 10; (1876) 1 CPD 143; see also Smail v Burton [1975] VicRp 76; (1975) VR 776 per Gillard J at 777; Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd [1984] FCA 65; (1984) 8 ACLR 818 at 820; Bryan E. Fencot Pty Ltd at 514.

2. That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations.

See M A Productions Pty Ltd v Austarama Television Pty Ltd and Anor (1982) 7 ACLR 97 at 100; Bryan E. Fencot Pty Ltd at 514. 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 a reasonable prospect of success. (Bryan E. Fencot at 514).

3. Whether the applicant's impecuniosity was caused by the respondent's conduct the subject of the claim: see M A Productions Pty Ltd v Austarama Television Pty Ltd at 100.

4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate:
   

see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E. Fencot at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms:

"(t)he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour."

This factor is related to the next, namely:

5. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security:
   

see Memetu v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation [1984] FCA 178; (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120 at 123; Bryan E. Fencot at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows:

"...a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors)...Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs."

6. An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking:

see Cameron's Unit Services Pty Ltd v Kevin R Whelpton and Associates (Aust) Pty Ltd (1986) 13 FCR 46 at 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304; Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325.

7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate:
   

: see Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 626; Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) ACLC 32,446; Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480; Weily's Quarries v Devine Shipping Pty Ltd [1994] TASSC 76; (1994) 14 ACSR 186 where Zeeman J stated at 189:

"(t)he general proposition that security ought not to be ordered where the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt self-help procedures is no more than that, a general proposition. It ought not to be elevated to being a rule of law. In many cases of that nature it could be considered oppressive to require security and that in itself may be sufficient to refuse to make an order...(see) Sydmar Pty Ltd v Statewise Developments(supra) and Interwest Ltd v Tricontinental(supra)."

(emphasis added)

[11] In view of the above citation, I have not found it necessary to consider the authorities cited to me by both the counsels. I will now proceed to the consideration of the application.

(a) Was the application promptly made?

[12] A winding–up order was granted on 2nd December 2005 by His lordship Mr. Justice Jitoko. On 14th November 2006 the Plaintiff served the writ of summons to the defendant. Apparently the present application was not filed until 31st October 2007. That is a lapse of almost a year.

[13] In the supporting affidavit the deponent Vikash Kumar, provides no explanation for the delay in filing the application, which in my view was critical for the defendant to do so. Promptness of the pursuance of such an application in the particular circumstances of this case was of great importance because the action was filed ex-post facto the winding up order. In fact the defendant filed the statement of defence without any objection as to the locus of the plaintiff at the time of the commencement of the action. Furthermore, at least by 5th March 2007 the defendant was made aware of the fact that the Plaintiff was in liquidation but still it chose not to seek security.

[14] On the facts of this case, I find that the application was not promptly made. This factor is moreso significant in that the defendant has already incurred an alleged cost of $60,935.66 of the total amount of $110,935.66 sought as security. That is approximately two thirds of the total sum. In this regard I lend support from Bryan F Fincott S Associates Pty Ltd –v- Eretta Pty Ltd and others [1987] FCA 102; [1987] 16 FCR 497 where French J (as he then was now the Hon Chief Justice) at 515 said:

"The further a plaintiff has proceeded in an action and the greater the costs it has been allowed to incur without steps being taken to apply for security for costs, the more difficult it will be to persuade the court that such an order is not, in the circumstances, unfair and oppressive"

(b) Strength or bona fides of the claims

[15] Under this criterion the respondent is to show that it has a prima facie regular claim which discloses a reasonable cause of action. It is not the courts duty to divulge into a detailed analysis of the merits of the case unless it can clearly be demonstrated that there is a relatively high degree of success or failure; Porzelack KG -v- Porzelack (vic) Ltd. [1987] 1 ALLER 1074 at 1077. Once it is established, the Court is to proceed on the basis that the claim is bona-fide.

[16] The primary dispute in this action is the interpretation of the Insurance Policy issued by the defendant to the Plaintiff for an indemnity up to a sum of $1,298,000.00 for a vessel namely Bulou-ni-Ceva.

[17] On 14th June, 2006 the vessel in the course of her voyage from Suva to Rotuma, ran aground in the waters nearer to the island of Rotuma. At the time of the incident indisputably the policy was still current and valid. On behalf of the plaintiff it is alleged that the damage was caused by the "perils of the sea" for which indemnity was specifically provided for by the policy. Mr Valeinitabua submitted that prior to her last journey Bulou-ni-Ceva was checked and cleared for sailing by the Fiji Islands Maritime and Safety Authority (FIMSA). FIMSA is the Statutory Regulator for maritime vessels. It is further claimed that after the accident it lodged an insurance claim in accordance with the policy. However the defendant declined the claim. The vessel was beyond repair as such had to be discarded.

[19] In defence the defendant claims that the Plaintiff breached some of the terms and conditions of the Policy. However there is no denial that at the time the vessel was wrecked the policy was in force. Since the validity of the policy is not contested on the face of it that is a meritorious case for the plaintiff to test the defendant’s contention of the breach of the terms and condition of the policy.

[20] Having considered the evidence, pleading and submission of the counsel, I am satisfied that the Plaintiff has a bona fide claim and a reasonable cause of action thus meeting the requisite threshold.

(c) Whether impecuniosity is caused by the defendant

[21] The Plaintiff was wound-up by Fiji National Provident Fund. However, Mr Valenitabua submitted that the vessel was the primary income earner for the plaintiff. Furthermore, the dishonouring of the claim by the defendant resulted in a direct loss of capital and means of generating income. Be that as it may, Mr Valenitabua failed to address this specific point in the form stated above.

[23] On the face of the winding-up order, I do not find the defendant has directly lead to the Plaintiff’s impecuniosity, although in an indirect way the unavailability of the vessel resulted in total loss of income.

(d) Whether security is oppressive?

[24] On behalf of the Plaintiff it is submitted that the application for security for cost is used oppressively to stifle a bona fide cause of action. The submission is premised on the fact that the Plaintiff is in liquidation therefore is unable to pay bearing in mind that there are preferential creditors. Since Bulou Ni Ceva is no longer in operation, it is obvious that there is no possible source of income for the Plaintiff in liquidation. At least, there is no such evidence before me.

[25] Where a company is in liquidation it is prima facia evidence of its inability to pay; Northampton Coal & Iron Wagon Co –v- Midland Wagon Co [1878] UKLawRpCh 18; [1878] 7 Ch D 500 or where the company has stopped trading; Trident International Freight Services Ltd. –v- Mandesher Ship Canal Co. [1990] BCLL 263. Logically in those circumstances it follows that the Plaintiff is incapable of and in reality will not be able to comply with an order for security.

[26] Whilst the general rule is that poverty is no bar to litigation, it does not as a matter of right be a ground for exempting a Plaintiff from giving security. But if in the event of ordering security would result in a bona-fide proceeding being prematurely brought to an end, this issue becomes a powerful factor operating in favour of the Plaintiff.

[27] In this case there is evidence that if security is ordered the Plaintiff will not be able to pay it. Mr Valenitabua stressed this fact in the submissions apart from the affidavit material. On the other hand if the defendant succeeds it will be denied its lawful entitlement to costs if any so ordered.

[28] "In exercising its discretion the court needs to weigh up the competing interest of parties having regard to all the facts and circumstances of the particular case"; Drumdurno Pty Ltd v Braham [1982] FCA 161; [1982] 64 FLR 227. The onus is upon the plaintiff company to show that it would be prevented from continuing its bona-fide claim as a consequence of an order for security for costs; Keary Developments Ltd –v- Tarmac Construction Ltd and Anor [1995] 3 ALLER 534. I have given a serious consideration to this balancing factor. Since the claim is based on a contract of Insurance, in my opinion the Plaintiff which has paid the premium is entitled to at least test the defendant’s contentions of the breach of the policy. It has a lot to lose if the claim would inevitably have to be abandoned as a consequence of an order for security. It stands to loss over one million dollars compared to just over $100,000.00 purportedly sought as security by the defendant.

[29] For the foregoing reason I find that the application is used oppressively to stultify the claim. Any order for security for costs will undoubtedly prematurely terminate this proceeding.

(e) Parties standing behind the company

[30] This was not contended by the defendant. Security is directly sought from the company and not extended to the parties behind it in this litigation. Since this was not raised, I do not need to consider this issue.

Conclusion

[31] Having considered all the circumstances of this case, I find that the Plaintiff has a bona fide claim on a valid and enforceable insurance policy. The vessel was the primary income earner for the Plaintiff. It having being damaged beyond repair the only recourse open to the plaintiff is to recover the insurable value of the loss of the vessel under the policy. To allow security for costs, which is a colossal sum of $110,000.00 will inevitably result in the cessation of this proceeding. Since the Plaintiff is in liquidation it has no recourse to raise funds to meet any order for security. Accordingly, the justice of the case necessitates the dismissal of the application, which I so order.

The application for security for costs is dismissed with parties to bear their own costs.

Accordingly, so ordered.

J. J. Udit
Master

23rd February, 2009