Ant & Ballast Pty Ltd v City of Greater Geelong

Should security for costs be ordered?

At the hearing, the plaintiff's solicitor accepted that the defendant had established there was a reason to believe that the plaintiff does not have the financial ability to meet any adverse costs order and on a prima facie level the defendant was entitled to an order for security for its costs (T:10:3-5).
This was an appropriate concession given the evidence indicates that the plaintiff has paid share capital of only $10.00, no cash reserves, a negative equity position of -$24,798.57, does not own any real property in Victoria or New South Wales, and the plaintiff's sole director is unaware of any means by which the plaintiff could obtain finance to provide security for the defendant's costs if ordered to do so (affidavit of Peter Aston sworn 24 April 2019 at [16]).
In those circumstances, the threshold question regarding the plaintiff's ability to meet an order for costs has been satisfied and it is the plaintiff's evidentiary burden to show why, based on a range of discretionary factors, the Court should not make any order for security for costs in this case.
The plaintiff submits that the defendant's conduct in calling on the Bank guarantee has caused the plaintiff's impecuniosity which, it argues, weighs heavily against awarding security for costs: MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100; KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at [38]; Lynnebry Pty Ltd v Farquhar Enterprises Pty Ltd (1977) 3 ACLR 133 at 136-137.
The plaintiff relies on it having had $973,000 cash in the bank prior to the defendant's call upon the bank guarantee, which was reduced to a nominal sum by that call.
In making this submission, the plaintiff has the onus of showing both the adequacy of its financial position before its dealings with the defendant and that the defendant's actions have caused or materially contributed to its inability to meet an order for security for costs: Jazabas Pty Ltd v Haddad & Ors [2007] NSWCA 291; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [100].
The evidence indicates that the plaintiff was incorporated for the purpose of providing the Bank guarantee to the defendant (affidavit of Peter Aston sworn 24 April 2019 at [3]). At the time of its incorporation on 4 March 2015, the plaintiff's paid share capital was $10.00 and a company, SDLF2 Pty Ltd (SDLF2) was its only shareholder. That remained the position as at the date of the hearing.
The plaintiff's sole director also gave evidence that the collateral for the Bank guarantee was obtained by way of a loan to the plaintiff from SDLF2 and that the only asset held by the plaintiff at the time of the call on the Bank guarantee was $973,000 cash obtained by way of that loan, and some accumulated interest: (affidavit of Peter Aston sworn 24 April 2019 at [4]-[5]).
The plaintiff's balance sheets, which were in evidence, indicates that, as at 30 June 2016 and before the call on the Bank guarantee, the plaintiff had a negative total equity position of -$7,245.77 and that its only assets comprised $99.03 in a transaction account and term deposits of $973,015.00, the latter comprising the cash from the loan from SDLF2 of $973,043.00. As at 3 June 2019, the plaintiff was in a similar position, with a negative total equity position of -$24,798.57, and the only asset being the $958,000 held by the defendant.
In view of this evidence, it is apparent that the plaintiff was not in a sound financial position prior to the defendant calling on the Bank guarantee. The $973,000 cash in the bank was held by the plaintiff as collateral for the guarantees given in favour of the defendant and represented a liability to SDLF2 if either of those guarantees were ever called on, including the $958,000 for the Bank guarantee.
This is not a situation where the plaintiff had its own funds in the bank or had the ability to generate an income prior to the defendant calling on the Bank guarantee. The plaintiff had no assets of its own and was reliant on the funds from SDLF2 to support the Bank guarantee. It had not traded or conducted business and there was no evidence to suggest that it had the capacity to do so either prior to or after the Bank guarantee was called on.
Accordingly, I do not accept that the plaintiff has shown that it was in an adequate financial position before it dealt with the defendant or that the defendant's actions have rendered the plaintiff impecunious. As the defendant rightly submits, the plaintiff had no assets available to it for the purposes of meeting a costs order both before and after the defendant called on the Bank guarantee.
The plaintiff also submits that granting an order for security for costs would have the effect of stultifying the proceedings given the evidence from the plaintiff's sole director that the plaintiff does not have the assets to enable it to provide security, he is unaware of any means for it to do so and, if he had known at or near the commencement of these proceedings that the plaintiff would have been required to secure the defendant's costs, he would not have caused the plaintiff to press the proceedings and incur the costs of doing so (affidavit of Peter Aston sworn 24 April 2019 at [16]-[20]).
There are two issues with that submission.
First, it does not deal with how the plaintiff has funded the proceedings to date. Given the current financial position of the plaintiff (as referred to above), and in the absence of any evidence to suggest that the plaintiff is being represented on a no-win no-fee basis, it seems reasonable to infer that the plaintiff must have received funding to pursue this litigation from third parties, such as the entities or persons standing behind the plaintiff.
Second, the plaintiff has chosen not to put on any evidence regarding the financial position of the entities or people who stand behind it and who may benefit from or have an interest in the litigation, such as the plaintiff's shareholders or director, and no explanation was given as to why such evidence was not led.
The courts have recognised that an obligation to provide security for costs can be an obstacle to pursuing a claim, which may result in a bona fide litigant being unable to prosecute a legitimate case and that it may be inappropriate to make such an order when the effect would be to shut out a small company from making a genuine claim against a large, well-resourced and amply funded body such as the state, a council or a major corporation: Jazabas Pty Ltd v Haddad [2007] NSWCA 291 at [75]; KP Cable Investments v Meltglow Pty Ltd (1995) 56 FCR 189 at [196]-[198].
However, in considering whether a corporate plaintiff will be shut out of pursuing a legitimate claim, it is also relevant to have regard to evidence about the financial resources of persons standing behind the company, who stand to benefit from the action if it succeeds (such as shareholders and directors) and whether they are also without means: Bell Wholesale Co Pty Ltd v Gates Export Corp (1984) 2 FCR 1.
As noted by Barrett JA (with whom McColl and Macfarlan JJA agreed) in LRSM Enterprise Pty Ltd v Zurich Australian Insurance Limited [2014] NSWCA 88 at [37]: "It is the ability of the plaintiff to meet an order for security that is in issue; and, just as the inability of persons standing behind it to give it financial support will be relevant to the inquiry, so too may be unwillingness of those persons (despite ability) and all other reasons for the unavailability of their support. A finding of stultification becomes available only to the extent that the reasons of relevant persons other than the plaintiff itself for not giving financial support truly reflect an inability, rather than unwillingness, of the plaintiff to marshall the relevant financial resources. It is for this reason that unwillingness of other persons is viewed differently from their inability."
The persons standing behind the plaintiff include SDLF2 (the plaintiff's sole shareholder), the shareholders in SDLF2 (being Margaret Aston and Jenca Downs Pty Ltd, who holds its shares in SDLF2 on trust for an unknown third party or parties) and the plaintiff's sole director, Mr Aston.
Other than showing that SDLF2 provided the loan of $973,043.00 to the plaintiff as collateral for the Bank guarantee, the plaintiff has not led any evidence about SDLF2's financial position or whether it is willing or able to provide further financial support to the plaintiff in this case. Nor has any evidence been led as to the financial position of the other people and the entity associated with the plaintiff and who have an interest in the outcome of the plaintiff's claim. Mr Aston's assertion that he is currently unaware of any means by which the plaintiff may obtain finance to provide security does not, in my view, comprise evidence of the ability or willingness of those people or that entity to provide financial support to the plaintiff.
Where a plaintiff adduces insufficient or no evidence of the financial position or willingness of persons standing behind a corporate plaintiff, a Court may infer they have the financial ability to meet an order for security: Drumdurno Pty Ltd v Braham (1982) 42 ALR 563 at 571; MHG Plastic Industries v Quality Assurance Services Pty Ltd [2002] FCA 821 at [22]. An inference can, therefore, be drawn in this case that the persons standing behind the plaintiff, or at the very least SDLF2, have the ability to provide financial support to the plaintiff if needed. This inference raises significant doubts about the plaintiff's claim that an order for security would result in stultification of the proceedings.
The plaintiff also submits that security for costs should not be ordered because the defendant is already adequately secured as it holds $958,000 of the plaintiff's money, which exceeds the likely costs of the Works which that money is to secure. The plaintiff contends that it would be unjust for the Court to order security for costs when any excess funds could be made available to the defendant for its costs if needed.
There is a factual dispute between the parties as to the likely costs of the Works and whether the Bank guarantee sum of $958,000 plus any accumulated interest will cover those costs. The plaintiff says that sum will exceed the cost of the Works and relies on a costs estimate prepared for Sunland by Spire Consulting in mid-2013 in the amount of $537,997 (as adjusted for CPI). The defendant contends that there is doubt about whether the sum will cover the cost of the Works and relies on a costs estimate prepared by the defendant in November 2012 (for the purposes of establishing bond amounts payable by Lilibuck) in the amount of $843,152.20, which is not adjusted for CPI but includes an allowance of 25% for the bonding requirement. It also refers to the possibility of additional costs due to the presence of contamination and the need for rehabilitation works (affidavit of Richard Anderson sworn 7 May 2019 at [6]-[10]).
Based on the competing evidence, there appears to be real doubt about whether the sum held by the defendant would cover the cost of the Works and if it did, what amount would be left over and held by the defendant. In any event, there is also real doubt that the defendant could retain any surplus funds and use that money to satisfy any order for costs made in its favour.
The plaintiff submits that, as it has provided the Bank guarantee, any surplus monies would come back to it rather than the owner of the land. The difficulty with this submission is that it is reliant on the plaintiff amending the statement of claim to plead an oral agreement which it says arose by implication at the time the Bank guarantee was provided, which pleading is not yet before the Court. As the plaintiff's solicitor put it at the hearing (T:11:24-27): "Essentially Ant & Ballast put up a bond in 2015. It certainly didn't do it on the basis that the money was going to go back to another entity, that will be pleaded ultimately. But in any event, there is nothing before your Honour to say that the money goes back to the owner".
As to the plaintiff's solicitor's last statement, there was material before the Court that suggests that the surplus monies will revert to the owner of the land. As the defendant noted in its submissions, clause 6.10 of the s 173 Agreement provides that any unused portion of the bond remaining after the defendant carries out the Works are required to be returned to the registered proprietor of the lands, being Lilibuck and not the plaintiff.
Further, assuming the defendant was obliged to return any surplus money to the plaintiff after carrying out the Works, there must be a doubt about whether those funds would be available to satisfy the defendant's costs given the plaintiff's liability to SDLF2 to repay the loan of $973,043.
Another relevant discretionary consideration is the plaintiff's prospects of success.
The plaintiff's case is that it was wrongful for the defendant to call on the Bank guarantee when it did because the Works could not have been performed at that time as other civil works needed to be undertaken first; the appointment of a liquidator to Lilibuck did not give the defendant the right to call on the Bank guarantee; and the plaintiff was ready, willing and able to step in to undertake the Works in place of Lilibuck. It is apparent that these claims rely on the terms of the s 173 Agreement as well as the terms of the (yet to be pleaded) oral agreement.
The defendant submits that the plaintiff's prospects are poor because the Bank guarantee was unconditional and could be called on without reference to the plaintiff; it was given to secure Lilibuck's obligations to complete the Works which cannot now be performed due to Lilibuck being in liquidation; and the plaintiff cannot sue on the s 173 Agreement because it was not a party to it.
There is force to the defendant's submission. Further, in circumstances where the plaintiff has conceded that it cannot sue on the s 173 Agreement and intends to amend its pleading, it is difficult not to conclude that, as currently formulated, the plaintiff's prospects on its claim are not strong. The plaintiff's concession that it needs to amend, while appropriate in the circumstances, supports this view and weighs in favour of ordering security for costs given the change of position in respect of the plaintiff's claim.
The plaintiff also pointed to the defendant's delay in making the application for security for costs, given it was filed almost 6 months after the proceedings were commenced. While delay can be relevant to whether an order for security should be made, it is of itself, not a disentitling factor: Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 at [32].
In this case, the plaintiff had been on notice via correspondence since November 2018 that the defendant may seek security for its costs. The hearing of the proceedings is not imminent, the pleadings are not yet closed and the plaintiff has accepted it needs to file an amended statement of claim. On the other hand, the defendant's application for security could have been brought on earlier and it would have been more cost-effective to do so to at the same time as its transfer application.
I accept there has been some delay in this case on the part of the defendant. But, in my view, that delay is not significant enough to tip the balance when considered with the other factors raised by the plaintiff (which I have found are not disentitling factors either together or by themselves) to justify not ordering security for costs in this matter. The delay can be dealt with by limiting any order for security for costs to be incurred in the future, rather than covering costs incurred to date.
Accordingly, I am satisfied that it is appropriate to make an order for security in this case and the only issue to be resolved is the quantum and other terms of the order to be made.

Amount of security and other terms

The defendant claims security in the amount of $91,385. That figure is based on evidence given by the defendant's solicitor, Mr Anderson, an experienced litigator, who has estimated the defendant's costs and disbursements (including counsel's fees) incurred to date and likely to be incurred in the future up to and including a trial lasting three days.
The estimates provided include the defendant's solicitor's costs on a solicitor/client basis. The parties accepted that, if security was to be ordered, the solicitor's costs should be discounted by 20-25% to equate to costs on a party/party basis. I have, therefore, approached the calculation of the quantum of security on the basis of allowing 75% of the solicitor's costs claimed.
Mr Anderson's estimate is broken down by reference to five categories of work being: 1. commencement of proceedings - $11,990; 2. discovery - $3,320; 3. interlocutory matters - $11,075; 4. mediation - $12,950; and 5. preparing for trial - $52,050.
In the ordinary course, delay in seeking security for costs will result in security being ordered in respect of the future unincurred costs only and not those costs which have already been expended: Chocron v Onkoud [2018] NSWSC 1205 at [10]; Re Colorado Products Pty Ltd (in provisional liquidation) [2013] NSWSC 611 at [69].
Two of the categories of work included in Mr Anderson's estimate, being the commencement of proceedings and interlocutory matters, relate to costs that have already been expended, including the costs of the transfer application which the defendant lost and for which the plaintiff obtained a costs order. That said, the plaintiff has conceded that it will be amending its claim which will necessitate additional work by the defendant under the category of 'commencement of proceedings', such as considering the amended pleading, briefing counsel, corresponding with the plaintiff's solicitors, considering whether particulars are required, preparing a defence and interviewing witnesses. The volume of that additional work was not identified but it could be expected to be not insignificant.
In those circumstances, I have approached the quantum of future costs by allowing 70% of the costs and disbursements relating to the 'commencement of proceedings' and 50% of the costs and disbursements relating to the 'interlocutory matters' categories, in addition to the other three future categories of costs, all of which are subject to the discount of 25% on the solicitor's costs (as referred to above).
The plaintiff also contended that if security was to be ordered, the amount should be reduced to take account of the unsatisfied costs order in the plaintiff's favour resulting from the defendant's unsuccessful application to transfer the proceedings to the Supreme Court of Victoria, which costs were estimated to be $12,500 (transfer costs).
The defendant submits that the transfer costs should not be taken into account as costs orders are not automatically set-off against each other and it would be premature to do so at this stage. If the Court was minded to take the transfer costs into account, the defendant submits they should be discounted as they appear to be calculated on a solicitor/client basis.
If the defendant succeeds in its defence, a set-off order may be made as between any competing costs orders. Even absent a formal set-off order, the practical approach of the parties to costs at the end of these proceedings will likely involve calculating the net amount that must be paid by one party to the other, taking into account the value of the various costs orders.
In either scenario, it is the net amount of costs which the defendant can be said to be at risk of not recouping if no security is ordered. Accordingly, I consider it appropriate to take the value of the transfer costs, discounted by 25%, into account in calculating the quantum of security to be provided by the plaintiff in this case.
The defendant claims security up to the end of a three-day hearing but the estimate contemplates the parties attending a mediation after discovery and other interlocutory steps. A Court will frequently order that security be provided in tranches. In circumstances where the plaintiff is going to amend its pleading, the parties are expected to attend a mediation and the matter is at an early stage of preparation, I consider it appropriate to exercise my discretion and order security to be provided in tranches, with the first tranche to cover the costs up to and including the time that a mediation is held.
Taking into account the matters I have identified above, and applying what is necessarily a broad-brush approach, in my opinion, it is appropriate to order the plaintiff to pay security in the sum of $60,000, with $20,000 to be provided by way of a first tranche. That amount (of $20,000) is security for the defendant's costs for the future conduct of the matter only up to the end of the anticipated mediation. In the event that the matter does not resolve at that mediation and proceeds to trial, the plaintiff is to provide a second tranche of security in the amount of $40,000.
Given the way the notice of motion for security for costs was argued and the outcome, I consider that the appropriate costs order is that the plaintiff should pay the defendant's costs of the notice of motion.

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Judgment (8 paragraphs)

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Legislation Cited (3)

Cases Cited (15)