Advance Innovative Solutions Pty Limited (in liquidation) v X-Dem Group

Judgment 1By Summons dated 20 February 2012, the Plaintiff, Advance Innovative Solutions Pty Limited (in liquidation) ("AIS") seeks an order that the First Defendant, X-Dem Group (Aust) Pty Limited (in liquidation) ("X-Dem") pay it the sum of $70,000 and also an order under s 483 of the Corporations Act 2001 (Cth) that the Second Defendant, Mrs Mirna Hijazi ("Mrs Hijazi") deliver to the Plaintiff at specified premises several items of property defined as "the Assets" in an agreement dated 7 October 2011 ("October Agreement") between AIS and X-Dem, formed between the then solicitors for the respective companies. 2By Notice of Motion filed on 8 August 2012, Mrs Hijazi seeks an order, pursuant to r 13.4 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") that the Summons, so far as it relates to her, be dismissed or alternatively an order for security for costs. AIS also seeks leave to further amend that Summons to bring claims for delivery of the Assets, the basis of which is no longer identified by reference to s 483 of the Corporations Act, against X-Dem, Mrs Hijazi and others. Factual background 3Mrs Hijazi is a director of X-Dem. By Deed of Agreement and Release dated 5 April 2011 between AIS, its liquidator, X-Dem and others, AIS's liquidator agreed to sell to X-Dem and X-Dem agreed to buy AIS's right, title and interest in the Assets and X-Dem agreed to pay the sum of $125,000, inclusive of GST, by 31 January 2012 in specified instalments. That Deed provided that the liquidator did not warrant the title to, property in or condition of the Assets and X-Dem acknowledged that the Assets were not in the possession of AIS's liquidator. X-Dem charged its assets and undertakings in favour of AIS to secure its obligations under that Deed. 4It appears that X-Dem breached its obligations under the Deed; AIS brought proceedings in this Court in respect of that matter; and those proceedings were resolved by the October Agreement by which X-Dem transferred to AIS absolute ownership of the Assets and agreed to pay AIS's liquidator $50,000 within 60 days and specified further amounts on a monthly basis, totalling $120,000, subject to which AIS would re-transfer the assets to X-Dem. That agreement was noted by McDougall J in ordering that the proceedings be dismissed on 7 October 2011. 5By letter dated 10 November 2011, another entity, Last Minute Hire Pty Limited ("Last Minute Hire") represented that Mr Hassan Sankari from X-Dem would be contracted by Last Minute Hire and that the equipment to be used would include some of the Assets. By letter dated 10 November 2011, Last Minute Hire wrote to the liquidator of AIS confirming that the liquidator retained ownership of the Assets and the right to immediate possession of the Assets and that a Caterpillar 330B would be released from Pickles Auctions on that basis. Mr Sankari provided the same confirmation by letter of the same date. 6By letter dated 3 May 2012, Mrs Hijazi's former solicitors wrote to AIS's solicitors indicating their instructions that the Assets were owned by Mr Sankari personally and were utilised by X-Dem pursuant to an implied licence between it and Mr Sankari, denying that the October Agreement was binding on X-Dem and denying that its terms were agreed by Mrs Hijazi on behalf of X-Dem. By letter dated 29 June 2012, Mrs Hijazi's current solicitors advanced the different proposition, presumably also on instructions, that the Assets were not the property of AIS but were the property of X-Dem. Mrs Hijazi's application for summary dismissal 7As noted above, Mrs Hijazi seeks an order, pursuant to UCPR r 13.4 that the Summons, so far as it relates to Mrs Hijazi, be dismissed. That rule relevantly provides that if, in any proceedings, it appears to the Court that the proceedings generally or any claim for relief in them are frivolous or vexatious, or no reasonable cause of action is disclosed, or the proceedings are an abuse of the process of the Court, the Court may order that the proceedings be dismissed generally or in relation to that claim. The Court's power to dismiss proceedings under this rule is exercised with caution but may be exercised where a plaintiff's case is so weak that it would be futile to permit the proceedings to go to trial: see Ritchie's Uniform Civil Procedure NSW at [13.4.15]. 8The relevant principles have been identified in the case law. In Burton v Shire of Bairnsdale [1908] HCA 57; (1908) 7 CLR 76 at 98-100, Higgins J observed that the power to strike out a claim: "... has been held not to apply except in plain or obvious cases; and if there is a point of law that requires any serious discussion, it should be set down for argument: Hubbuck v Wilkinson. The pleading must be "obviously frivolous or vexatious, or obviously unsustainable," if it is to be struck out (per Lindley LJ in Attorney General of the Duchy of Lancaster v London and North Western Railway Co). The pleading must be "so clearly frivolous that to put it forward would be an abuse of the process of the Court": Young v Holloway." 9In Cox v Journeaux (No 2) [1935] HCA 48; (1935) 52 CLR 713, the High Court exercised the power to summarily dispose of proceedings. However, the exceptional character of the jurisdiction to do so was emphasised by Sir Owen Dixon who observed that: "It is only when to permit it to proceed would amount to an abuse of jurisdiction, or would clearly inflict unnecessary injustice upon the opposite party that a suit should be stopped. But the Court is not concluded by the manner in which the litigant formulates his case in his pleadings. It may consider the undisputed facts. Further, it is not limited to cases where there is no dispute of fact." 10Similarly, in Brimson v Rocla Concrete Pipes Ltd [1982] 2 NSWLR 937 at 944, Cross J observed that "the fundamental principle is that prima facie a plaintiff is entitled to have his case come to trial; and applications to deprive him of that right will succeed only in the clearest of cases" and that "fatal defects in the plaintiff's case must be very clear before the court will intervene in this fashion". In Shalhoub Holdings Pty Ltd v Commonwealth Bank of Australia [2006] NSWSC 607, after undertaking a comprehensive review of the case law, Rothman J observed that the Court has an inherent jurisdiction, described in the rule, to strike out a plaintiffs' case because it is so weak and/or because it depends upon facts, which, on the plaintiffs' case, cannot be proven, but observed that the Court would take that course "only in exceptional circumstances and only where it came to the view that to proceed further would be futile." 11Notwithstanding Mrs Hijazi's position as a director of X-Dem and notwithstanding that she appears to have authorised the entry into the October Agreement by X-Dem and has at various times advanced various contentions as to the ownership of specified assets of X-Dem, she now contends that, at the time she was a director of X-Dem, the Third Defendant, Mr Hassan Sankari, her brother, was responsible for all day-to-day operations of X-Dem and she had minimal involvement with its trading operations. She also contends that she has never seen the Assets; has never been in "physical possession" of the Assets; does not have any knowledge where the Assets presently are; has no means of determining where the Assets presently are; and is unable to deliver the assets to AIS as sought, as she does not have them and does not know where they presently are. 12These matters may or may not provide an answer to an order for delivery of the Assets at a final hearing if the Court were to accept Mrs Hijazi's evidence in this regard. Mr Farrar, who appears for Mrs Hijazi, points out that she was not cross-examined at this hearing, but AIS was under no obligation to do so in an interlocutory hearing nor is the Court required to treat Mrs Hijazi's evidence as determinative in the absence of such cross-examination. In any event, even if that evidence were accepted, it is not sufficient to require the summary dismissal of AIS's claim. I can give little weight to the propositions that Mrs Hijazi does not have any knowledge of and has no means of determining where the Assets presently are, where she does not indicate whether she has asked her brother that question, and the proposition that she is unable to deliver the assets to AIS is derivative of the statement that she does not know where they presently are. In any event, none of these matters would necessarily be an answer to a claim for damages against Mrs Hijazi, formulated (as AIS has noted) as, for example, a claim for misleading or deceptive conduct or misrepresentation against Mrs Hijazi. 13There may also be issues as to the nature of the relief sought by AIS in the Summons. It is difficult to see how the first order sought in the Summons, a mandatory order for payment of a specified amount, could be made against a company in liquidation. There may also be a question whether the claim against Mrs Hijazi falls within the proper scope of s 483 of the Corporations Act. Broadly, that section allows the Court to require persons associated with the company to deliver its property to the liquidator, and its purpose is "to prevent the expense of the company bringing actions against the persons named, who are its own contributories and officers": Re United English & Scottish Assurance Co; Ex parte Hawkins (1868) LR 3 Ch App 787. An order may be made under this section against persons who are accountable to the company or derive their authority from it: Home v Walsh [1978] VR 688; (1978) 3 ACLR 564; (1977-78) CLC 40-420. That section does not allow the determination of a substantive dispute as to ownership of a company's property which should be the subject of separate proceedings: Home v Walsh above; Re Kenross Homes Pty Ltd (in liq) [1994] 2 Qd R 137; Blackjack Executive Car Services Pty Ltd (in liq) v Koulax [2002] VSC 380. However, it seems to me that these issues are better addressed when the claims made by AIS are properly identified, in accordance with the order that the matter continue on pleadings which I propose to make below. Mrs Hijazi's application for security for costs 14In the alternative, Mrs Hijazi seeks orders under UCPR r 42.21 or s 1335 of the Corporations Act that AIS pay security for costs in an amount of $35,000 plus GST or such other amount as is determined by the Court, or alternatively an order that AIS's liquidator provide security for costs in the same amount. 15The principles applicable to an order for security for costs are well established and not in contest in these proceedings. Section 1335 of the Corporations Act relevantly provides that, where a corporation is the plaintiff in any action, or any other legal proceedings, a 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 defendants' costs if successful in its defence, require sufficient security to be given for those costs and stay the proceedings if the security is not given. UCPR r 42.21(1)(d) relevantly provides that if in any proceedings it appears to the court, on the application of a defendant, that there is reason to believe that a plaintiff, a corporation, will be unable to pay the defendants' costs, if ordered to do so, the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, and that the defendant's costs of the proceedings and the proceedings be stayed until the security is given. 16In Polstead Pty Ltd (in liq) v Shah [2009] NSWSC 560 at [6], Brereton J observed that three issues generally arise in a security for costs application. The first is whether the ground referred to in the section or rule is established; the second is whether, if the ground has been established, as a matter of discretion an order should be made; and the third is the quantum of any order to be made and the terms on which it might be made. His Honour there reviewed the authorities and noted that the jurisdiction to order security for costs under s 1335 of the Corporations Act, and by analogy r 42.21(1)(d), was available where the plaintiff was a company in liquidation as distinct from where a liquidator personally is the plaintiff. In Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; (2008) 67 ACSR 105, Hodgson JA observed at [45] that: "Where the plaintiff is a company in liquidation and not the liquidator, then security for costs will more readily be ordered although the court's discretion is unfettered ... and there is no presupposition in favour of granting security. ... However, the court will not refuse to order security on the ground that this will frustrate the litigation unless the company proves that those who stand behind the company and would benefit from the litigation are unable to provide security". 17Mr Feerick, who appears for AIS, has properly conceded that the threshold for an order for security for costs is satisfied, in that there is reason to believe that AIS will be unable to pay Mrs Hijazi's costs if she is successful in her defence of these proceedings. The Court has a discretion whether to make an order under s 1335 and r 42.21, once the threshold for such an order is established. That discretion is to be exercised so that such an order does not prevent the plaintiff pursuing a genuine claim, but a defendant is not exposed to the risk of a plaintiff's incapacity to pay costs: Health & Life Care Ltd v Price Waterhouse (1993) 11 ACSR 326; 11 ACLC 1110; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664; (2004) 208 ALR 564 at [36]. 18Matters relevant to the exercise of the Court's discretion include the strength and bona fides of AIS's case; whether AIS's impecuniosity was caused by Mrs Hijazi's conduct the subject of the claim; whether the application for security would stultify prosecution of a genuine claim; whether there are any other persons standing behind AIS who are likely to benefit from the litigation and who are willing to provide the necessity security; whether there are aspects of public interest which weigh in the balance against the making of an order, and whether there are any particular discretionary matters peculiar to the circumstances of the case that are also relevant: Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40,972 at 50,635; KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197-8; 13 ACLC 437; Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [19]. 19It is difficult to form a view as to the strength of AIS's claim against Mrs Hijazi in the absence of pleadings and given the matters to which I referred in paragraph 13 above. AIS contends that its impecuniosity was caused by Mrs Hijazi since, had Mrs Hijazi identified the location of the Assets or secured their delivery to AIS, then it would have had access to the Assets. I do not accept this submission since, as Mrs Hijazi points out, AIS was placed in liquidation prior to the agreements in respect of the Assets. Moreover, in BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 346, Anderson J (with whom Kennedy and Ipp JJ agreed) observed that the question of the defendant's contribution to a company's impecuniosity should not be taken in isolation and: "It must be considered together with the assertion that the effect on the plaintiff of an order for security will be to stultify the action. If that will not be or is not shown to be the effect of the order, that is, if other parties who benefit from the plaintiff's success are financially able to provide the security and it is reasonable that they do so, the fact that the defendant has caused the plaintiff's own impecuniosity will hardly be good reason to decline security." AIS has not established that any creditors of AIS standing behind the liquidator are unable to fund the proceedings if security for costs was ordered. In these circumstances, AIS has not established that an order for security for costs would stultify the proceedings: KP Cable Investments Pty Ltd v Meltglow Pty Ltd above; Ryberg Telecommunications Pty Ltd (in liq) v Optus Mobile Pty Ltd [2011] NSWSC 1268 at [16]. 20Whether an application for security for costs is brought promptly is also relevant to the exercise of the Court's discretion whether to order security for costs: Caruso Australia Pty Ltd v Portec (Australia) Pty Ltd (1984) 1 FCR 311; 8 ACLR 818 at 820; Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514. In this case, as AIS points out, directions made on 11 May 2012 that any notice of motion seeking security for costs should be filed and served on or before 18 May 2012 and be made returnable on 31 May 2012 were not complied with by Mrs Hijazi. In my view, Ms Hijazi's delay in bringing a security for costs application tends against an order for security for costs, particularly where it involves non-compliance with the Court's directions in that regard. On the other hand, there is no evidence of the extent of work done by AIS since May 2012 and any detriment to AIS by the delay could be mitigated by limiting any order for security to the future costs of the proceedings. 21Mrs Hijazi's solicitor, by his affidavit dated 31 August 2012, estimated the likely costs and disbursements of the proceedings as $58,075 based on a 2 day hearing, and adopted a recovery rate of approximately 70% of the actual costs incurred, excluding disbursements, giving rise to a total of $40,652.50 exclusive of GST. However, a substantial part of the costs for which security is claimed appear to have been incurred by Mrs Hijazi in the period between May 2012 and 9 August 2012 when the application for security for costs was brought, and include the costs of this application. 22On balance, I consider that I should order security for costs in favour of Mrs Hijazi limited to costs that are identifiable as future and not past costs, and payable in tranches so that security for costs of the hearing is not required to be provided until shortly before the hearing. Doing the best I can with the available evidence, I propose to order that AIS provide security in the amount of $21,000 (quantified as approximately 70% of costs to be incurred by Mrs Hijazi from the point of considering other parties' evidence in the proceedings onward), with one-third of that amount to be provided within 28 days and the other two-thirds to be provided 21 days prior to the allocated commencement date for the hearing. Notice to Produce 23Mrs Hijazi also seeks an order that AIS comply with a Notice to Produce that she issued dated 26 July 2012. Paragraphs 1-5 of the Notice to Produce were directed to the financial position of AIS and have no continuing relevance, both because of the concession made by AIS in the course of the security for costs application in respect of that position, and because that application has now been determined. 24Paragraphs 6 and 7 of the Notice to Produce refer to the pleadings, evidence and submissions in the earlier proceedings to which I referred in paragraph 3 above and "RTA registration papers" referred to in a letter from AIS's solicitors to Mrs Hijazi's solicitors. In my view, it would be premature to order disclosure of documents falling within paragraph 6 of the Notice to Produce, in circumstances that evidence has not yet been filed by the parties. Although Practice Note SC Eq 11, Disclosure in the Equity Division, does not directly apply to Notices to Produce, the Court will readily otherwise order under r 21.11 of the UCPR and relieve the recipient of a Notice to Produce of the obligation to produce unless "exceptional circumstances" are established for the purposes of the relevant Practice Note: Owners Strata Plan SP 69565 v Baseline Constructions Pty Ltd [2012] NSWSC 502 at [23]-[28]; Re Octaviar Ltd (recs and mgrs apptd) (in liq) [2012] NSWSC 1027 at [19]. I am not satisfied that exceptional circumstances are established for the purposes of the requirement to produce documents relating to the other proceedings. I am satisfied that such circumstances exist in respect of the "RTA registration papers" where there appears to be a dispute as to whether those papers were signed by Mrs Hijazi which would properly be addressed by her evidence. X-Dem application 25By Notice of Motion dated 31 August 2012, AIS seeks leave under s 471B of the Corporations Act to continue the proceedings against X-Dem. By letter dated 13 August 2012, the liquidator of X-Dem advised the solicitors for the liquidator for AIS that he did not object to AIS continuing proceedings against X-Dem for the purposes of that section and that the liquidator of X-Dem would not be represented at any hearing against X-Dem, since he had no funds in the matter. The Court has a broad discretionary power under s 471B of the Corporations Act in respect of the grant of leave to begin or proceed with proceedings against a company in liquidation and such leave can be granted nunc pro tunc: Vagrand Pty Ltd (in liq) v Fielding (1993) 41 FCR 550; 113 ALR 128 at 131; Swaby v Lift Capital Partners Pty Ltd; [2009] FCA 749; (2009) 72 ACSR 627 at [22]-[33]; Hu v PS Securities Pty Ltd [2011] NSWSC 303. Such leave will readily be granted where the relief sought, namely an order for delivery of the Assets to AIS, is an order of a kind which could not be the subject of a proof of debt in X-Dem's liquidation. 26AIS also sought leave to proceed with the proceedings against the Third Defendant, Mr Hassan Sankari, a bankrupt. An application for such leave should properly be made in the Federal Court of Australia or the Federal Magistrates Court which have the relevant bankruptcy jurisdiction. 27AIS also seeks further to amend the Summons to bring claims for delivery of the Assets, the basis of which is no longer identified by reference to s 483 of the Corporations Act, against X-Dem, Mrs Hijazi, Mr Sankari and Last Minute Hire, which AIS seeks to join as a Fourth Defendant in the proceedings. I do not think that such leave should be granted until the basis of the claims against the Defendants is properly identified and any amended process should also be in the form of an Originating Process required by the Supreme Court (Corporations) Rules 1999 (NSW) rather than a Summons. I propose to direct that the proceedings continue on pleadings and that AIS serve any proposed Amended Orginating Process and Statement of Claim within 21 days of the date of these orders. 28The Plaintiff does not seek any order for costs as to its Notice of Motion. Mrs Hijazi was unsuccessful in her application for summary dismissal and has had partial success in respect of her notice of motion. I consider that the costs of her motion should be costs in the cause. 29Accordingly, I make the following orders:

1. The Plaintiff provide security for the Second Defendant's costs of the proceedings in such form as may be agreed between the parties, or otherwise in a form to be determined by a Registrar, in two tranches: (a) the amount of $7,000 within 28 days; and (b) the amount of $14,000 no later than 21 days prior to the date allocated for the commencement of the final hearing of the proceedings.
2. The proceedings be stayed, as between the Plaintiff and the Second Defendant, if security is not provided when due in accordance with Order 1 above.
3. The Plaintiff comply with paragraph 7 of the Notice to Produce issued by the Second Defendant dated 26 July 2012 within 48 hours of these orders.
4. The Notice of Motion dated 8 August 2012 filed by the Second Defendant otherwise be dismissed.
5. The Plaintiff have leave pursuant to s 471B of the Corporations Act 2001 (Cth) to proceed with these proceedings against the First Defendant in liquidation on the condition that any judgment against the First Defendant not be enforced without the leave of the Court.
6. The proceedings continue on pleadings and the Plaintiff serve any proposed Amended Originating Process and Amended Statement of Claim on or before 5 October 2012.
7. The matter be listed for further directions in the Corporations List on 15 October 2012.
8. There be no order as to the costs of the Second Defendant's motion dated 8 August 2012.

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