Araz Investments Pty Ltd v Mitry Lawyers Pty Ltd

Araz Investments Pty Ltd v Mitry Lawyers Pty Ltd - [2019] NSWDC 823 - NSWDC 2019 case summary — Zoe

THRESHOLD TEST
The application is based on UCPR 42.21(1)(d) which provides that the Court may order the plaintiff to give security if "there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so".
This test has been described as setting a "low threshold" and that it is an "undemanding test". [1] It provides the gateway to an order. [2] It requires a "practical commonsense approach to the examination of the financial affairs of the corporation". [3]
In this case, it is difficult for the Court to engage deeply in this "practical commonsense approach" because there is in evidence little information of the corporation's financial affairs.
Mitry relies upon two matters which are not disputed - that the paid‑up share capital is $10,100, and that the Araz company owns no real estate in New South Wales. Neither of these matters is especially informative of the corporation's financial affairs.
The popularity of personal ownership of real estate in Australia may well be within judicial knowledge, but its absence hardly bespeaks financial impecuniosity. Some people prefer to invest in shares or other forms of investment. The popularity, if it be so, of ownership of real estate by a small business company like Araz is not so well-known. Its absence is not probative of an inability to meet a costs order, save that obviously enough, Araz cannot rely on an asset it does not own to counter other evidence of impecuniosity.
As to the relatively modest share capital, I am also unpersuaded that that provides any real guide as to the financial position of Araz. Araz may utilise debt more so than capital to finance its operations. It might have many years of profits and substantial liquid assets, or it might not. Nothing about these matters is to be inferred from a modest share capital.
Mitry sought to obtain further details of Araz's financial affairs by letter requesting the same. Araz did not supply any details, asserting that there was no basis for security to be ordered. Mitry placed emphasis on that asserted lack of response.
Similar emphasis was placed on a lack of response in Shi v Benhamou Designs Pty Ltd. [4] In that case, Ward CJ in Equity referred to a decision of Bergin J in Owners-Strata Plan No 50530 v Walter Construction Group Ltd [5] and stated the proposition that: "an applicant for security will not discharge the onus it bears merely by pointing to an unfulfilled demand to the other party to provide evidence as to its ability to satisfy an adverse costs order". [6]
In this case, the response of Araz did provide some evidence of capacity, though it gave no detail and was perhaps less then convincing. Yet that is not enough to discharge the onus of Mitry.
The decisions of both Shi and Owners-Strata Plan No 50530 made reference to a capacity in the applicant to serve a notice to produce upon the plaintiff for its accounting records and financial statements, and the relevance of the circumstance that no notice was issued. Reference was also made to the circumstance that the failure to issue such a notice is not remedied by the rule in Jones v Dunkel, that the burden remains on the applicant, and that suspicion is not sufficient to establish "reason to believe". As Bergin J stated, "Where forensic steps are available to and not taken by an applicant, whose burden it is to prove its case, I am of the view that a Court should be less inclined to draw such an adverse inference". [7]
Thus, a failure by the plaintiff to respond to an expressed concern about its ability to meet an adverse costs order would of itself not enable the inference that the plaintiff is unlikely to be able to meet an adverse costs order, notwithstanding possible thin capitalisation and the undemanding nature of the test. [8] Less still does it do so where there is a denial of that inability in the response.
I was also referred to the judgment of Norton SC DCJ in Conform Australia Pty Ltd v Yform Pty Ltd [9] to a similar effect. In that case, the plaintiff had less paid up capital, no ownership of New South Wales real estate, a failure to respond to a request for a concession about an inability to meet an adverse costs order, and an unrelated adverse default judgment against it. Reference was made to the decision in Owners-Strata Plan No 50530. The threshold test was held not to be satisfied, her Honour at [29] identifying the absence of evidence of the plaintiff's financial position as the foundation for her being unsatisfied on that matter.
I note that there was also a substantial adverse judgment against the plaintiff in Shi, [10] but that Ward CJ in Eq remained unsatisfied at [23] as to the threshold test.
In this case, the plaintiff's position is stronger. There is a greater paid up capital than in either Shi or Conform. There is a response, albeit general, denying an inability to meet an adverse costs order. And there is no adverse judgment. Whilst none of these earlier decisions are binding on me, I do find the reasoning in them to be persuasive. In all these circumstances, I would be minded to conclude that there is no proper basis to believe, or no "good reason to believe", as Einstein J said in Idoport, [11] that the plaintiff will be unable to meet an adverse costs order.
Mitry, in reply submissions, adopted a consideration raised by the Court about whether s 56 of the Civil Procedure Act 2005 had any impact. Mitry argued that s 56 added weight to the failure of the plaintiff to supply financial details when requested, and that a party should not have to use a notice to produce to reveal that information. I was unconvinced. Perhaps the provision of further details in answer to the letter may have dissuaded the defendant from a security application, but perhaps not. It may rather have led to the ventilation of the discretionary factors. Any excursion into the discretionary aspects of the security application would not necessarily be cheaper or quicker than one that relied upon by Araz, it being an unassailable answer to proof of the threshold question.
On the evidence before me, I am not satisfied that there is reason to believe that Araz would be unable to pay the costs of Mitry if ordered to do so. The threshold issue for an order for security under UCPR 42.21(1)(d) is not established and the application should be dismissed.

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