Blade Developments Pty Limited entered into a residential building contract with Robert Bishop. Not all of its invoices were paid and Blade commenced proceedings in the Local Court in respect of the unpaid invoices. Mr Bishop filed a defence alleging certain defective and incomplete works. He also filed a cross‑claim for an amount beyond the jurisdiction of the Local Court and included other claims, including one for misleading conduct. The matter was transferred to this Court, and Mr Bishop seeks security for the costs of Blade's claim.
[2]
Threshold test
Commonly, the first issue in any security for costs application made against a corporate claimant is whether "there is reason to believe that [the corporation] will be unable to pay the costs of the defendant if ordered to do so". [1] In this case, Mr Bishop submits that Blade's accounts show small losses in each of the last two years, that the accounts are only current to 30 June 2016, that an ANZ cheque account of Blade had a balance of over $137,000 on 30 June 2015 but had a zero balance a year later, and that the financial statements were not signed.
All of those facts cannot be disputed. I do not attribute any significance to the accounts being unsigned, given that there was no objection to the accounts being admitted into evidence, and Mr Bishop did not seek to cross‑examine the director of Blade, Matthew Sciuriaga, who swore the affidavit annexing the financial statements and deposed to the truth of them.
Nor do I think there is great significance in the nil balance in the ANZ cheque account. The current assets overall have increased by more than $100,000 in the year from 2015 to 2016. The circumstance that the deposit in the ANZ cheque account may have been utilised some two or three years ago, partly as a deposit into another bank account and partly to provide a loan to the sole shareholder and director, Mr Sciuriaga (as the balance sheet might suggest), is not a reason to believe that Blade will be unable to pay an adverse costs order. Nor does there seem to be any significance that in September 2017, the 2017 financial statements remained unavailable.
As to the losses in the two previous years, Blade referred me to the substantial depreciation recorded in those years. I accept that depreciation might not be an expense impacting adversely on the liquidity of the company, and that if it is removed from the profit and loss statement, then Blade has been profitable or, more accurately, cash flow positive for each of the past two years. I also note that wages, presumably including Mr Sciuriaga's wages, have increased substantially from 2015 to 2016. In those circumstances, I am not persuaded that the existence of a small loss (or of a not insignificant profit when depreciation is reversed) is a weighty matter in determining whether there is reason to believe that Blade will be unable to meet an adverse costs order.
Blade pointed to growing sales in excess of $2 million for each of the past two years, and an increase in trading profit annually of about $800,000. Those figures indicate that Blade is a significant operation. But they do not, to my mind, indicate that the liquidity position of Blade is favourable, or that it has the ability to meet an adverse costs order.
In my view, two matters are significant to the question of whether there is reason to believe that Blade will be unable to meet an adverse costs order.
First, the evidence tendered by Mr Bishop shows that Blade has a current credit score of 703. The score can range from 0 to 850, and anything over 551 is a Low Risk level (the most favourable rating) where the "[e]ntity has acceptable creditworthiness". A score of 703 by Blade seems to be significantly above the average score of an Australian proprietary company and, thus, would be a lower risk than average.
Secondly, the current assets of Blade total in excess of $700,000, whereas current liabilities total less than $400,000. Thus, there is a substantial surplus of current assets that can be utilised, if necessary, to meet an adverse costs order. In excess of $300,000 of those current assets are in the form of loans, much of which is a loan to the existing director. But there is no evidence to displace the inference in the accounts from the title "current assets" that those assets can relatively readily be converted into cash. There is no basis for me to draw any adverse inference about the creditworthiness of the persons or companies to whom those loans are extended.
For these two reasons, and the absence of other matters of concern, I am not persuaded that there is reason to believe that Blade will be unable to meet an adverse costs order and the application should be dismissed.
[3]
Discretionary matters
Even were I of a contrary view, the discretionary factors pertaining to the application would cause me to refrain from making any order.
I have considered the list of matters in r 42.21(1A) of the Uniform Civil Procedure Rules 2005. The matters of significance in this case seem to be as follows.
First, the cross-claim by Mr Bishop embraces the matters that are also relied upon in the defence. There is no suggestion that the cross‑claim will not continue if the security order is granted. Mr Sciuriaga deposed that the proceedings would be "stifled" or stayed as a result of a security order, and he was not challenged on this evidence. As the cross‑claim raises the same issues as the claim by Blade, and more issues, it would be inappropriate to preclude those issues being raised in one claim, but allow them in another, since to raise them would involve no significant additional costs.
Secondly, the philosophy underlying a security for costs order is to preclude individuals from hiding behind the skirts of a company so as to avoid responsibility for costs if the claim by the company fails. [2] Although Mr Sciuriaga is not directly liable for Mr Bishop's costs if the claim by Blade fails, nevertheless, he is able to be pursued in any liquidation because of the substantial loan to him by Blade. Blade is a company with a paid‑up capital in excess of $150,000, the shares of which are all owned by Mr Sciuriaga. For these reasons, he has as much to lose as Blade from any adverse costs order. He is not, in a practical sense, hiding behind a worthless company.
Thirdly, the evidence of the likely costs of Mr Bishop in the proceedings does not distinguish between costs incurred by the cross‑claim and costs incurred by the defence, and plainly include certain costs of the cross‑claim such as "Review Defence to Cross‑Claim". Although an assessment of costs of a cross‑claim only includes costs additional to those related to the claim, [3] in a case where a cross‑claim is to continue even if the claim is stayed, the defence costs additional to the cross‑claim seem to me to be the appropriate sum relevant to security. In this case, that sum is not the subject of evidence. Because of the overlap between the issues in the claim and the cross-claim, I would not infer that the amount of costs likely to be incurred unrelated to the substantial cross‑claim would be significant.
Fourthly, the proceedings do appear to have some merit, in part at least because the cross‑claim appears to concede [4] that Blade was given two separate defects lists towards or at the conclusion of the building works, and those defects were apparently remedied by Blade.
[4]
Costs
Blade seeks its costs. Mr Bishop submitted that if he failed, any costs order should take account of the circumstances that the accounts of Blade had been sought since 29 June, but were only provided two days ago. I accept the contrary submission that the 2016 accounts might not have been available earlier (although there is no evidence of that), but that did not prevent Blade providing the 2015 accounts if they were the most current. There is no suggestion that Mr Bishop's request for the accounts was in anyway inappropriate, nor is an application for security inappropriate in circumstances where there is a refusal by a private company to provide financial statements.
Blade's provision of its accounts did not ultimately result in the discontinuance of the application. Nevertheless, the lateness of the provision may have been a factor in the application continuing. In the circumstances, the costs of the hearing before me should be the plaintiff's costs in the proceedings, otherwise the costs of the application should be costs in the cause. The costs of the hearing should include the costs for and including yesterday, being the date after the provision of the accounts of Blade in Mr Sciuriaga's affidavit.
Accordingly, the orders are:
1. Defendant's notice of motion for security for costs dismissed.
2. Costs of the application up to and including 13 July 2017 be costs of the proceedings, but costs thereafter, including the costs of the hearing, be plaintiff's costs of the proceedings.
[5]
Endnotes
See r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005.
KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 203C.
See Mahlo & Ors v Westpac Banking Corporation Ltd [1999] NSWCA 358.
See paras 9 and 10 of the cross-claim.
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Decision last updated: 01 April 2019