By way of a notice of motion filed on 8 September 2015, the defendant, Merhis Contracting Pty Ltd (Merhis), seeks security for costs against the plaintiff, Bright Ceilings Systems Pty Ltd (Bright Ceilings). The application is brought pursuant to r 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW) (the Rules) and s 1335 of the Corporations Act 2001 (Cth).
Bright Ceiling Systems Pty Ltd v Merhis Contracting Pty Ltd [2016] NSWSC 631 | Case summary | Zoe
Merhis is the defendant in the substantive proceedings and the applicant on the motion; Bright Ceilings is the plaintiff in the substantive proceedings and the respondent to the motion. For ease of comprehension, I shall refer to them by way of their roles in the substantive proceedings.
The primary position before me of the defendant was that I would order security for costs in the sum of $150,000; in the alternative, that I would order security for costs in that sum, but order that it be paid in tranches; and, in the further alternative, that I would make an order for some lesser sum.
The position of the plaintiff was that, on all of the evidence placed before me, I would decline to exercise my discretion to make the order sought.
Background
The background of the motion may be summarised as follows.
The plaintiff is a company that provides plasterwork services for building and construction projects. The defendant is a company that performs contracting work in the building and construction industry.
The plaintiff filed a statement of claim against the defendant on 4 March 2015, and later filed an amended statement of claim on 24 September 2015. In a nutshell, the plaintiff claims that a contract was entered into between the plaintiff and the defendant on 29 May 2012, whereby the plaintiff agreed to perform building work and supply materials to the defendant at premises located in Bankstown. As a result of work performed and materials provided (including both certified work and variations), by way of the amended statement of claim the plaintiff claims unpaid monies in the amount of $1,827,902 (including filing and solicitors fees, but not inclusive of interest).
A portion of this amount, just over $500,000, is referred to in the affidavit of Mr Shixian Lu sworn 11 March 2016 as "certified for payment by defendant" and supported by two payment schedules attached to the affidavit. The remainder of the amount claimed, over $1 million, is in respect of variations to the contract outlined in the amended statement of claim.
The defence of the defendant was filed on 10 April 2015. It admits that a contract was entered into between the plaintiff and the defendant. It denies, however, the contractual price alleged by the plaintiff, denies that it has received repeated demands for payment, and denies that it is indebted to the plaintiff for the amount claimed. In a nutshell, its answer to the claim is that there was a contract, and money owed pursuant to it, in the past, but it disputes the quantum of the debt and asserts that there is currently no outstanding amount owing.
The defendant has paid various amounts in response to garnishee orders in respect of judgments obtained by third parties against the plaintiff in the Local and District Courts. The payments include $39,520.10 in respect of a garnishee order made on 8 September 2014; $239,703.20 in respect of a garnishee order made on 8 September 2014; and $57,517.55 in respect of a garnishee order made on 29 September 2014.
On 1 October 2015, the defendant was served with a further garnishee order in the sum of $1,177,814.68. It has not complied with that order, on the basis that it does not consider itself to be indebted to the plaintiff, and is therefore under no obligation to make payments to a third party to whom the plaintiff is said to be indebted.
Evidence of the defendant
Most (but not all) of the evidence tendered by the defendant in support of the motion was material said to show that the plaintiff is in dire financial straits.
The defendant read three affidavits of Brendan Hoffman sworn 8 September 2015, 24 September 2015, and 13 October 2015. Mr Hoffman is the solicitor for the defendant. Attached to those affidavits were various searches conducted by the defendant in respect of the plaintiff, the garnishee orders referred to above, and correspondence between the parties. They also included a schedule of past and predicted legal costs of the defendant, based on sums already expended and estimated future costs.
The defendant also read the affidavit of Bruce Gordon Hale sworn 3 March 2016. Mr Hale is a solicitor in the law firm representing the defendant. Attached to that affidavit was a notice of application to wind up the plaintiff made by the Chief Commissioner of State Revenue (the Commissioner), the originating process in the proceedings between the Commissioner and the plaintiff, and the online Supreme Court listing for those proceedings.
The defendant also placed other documents before me. They included three notices to produce issued by the defendant in the current proceedings, dated 3 March 2016, 9 March 2016 and 14 March 2016. Those documents became Exhibit A, and were tendered for the purpose of showing that a number of documents sought by the defendant had not been produced by the plaintiff at the time of the hearing of the motion.
The defendant also tendered a bundle of documents consisting of material that had been produced by the plaintiff in compliance with the notices to produce. That bundle became Exhibit B.
The defendant also tendered the short minutes of order dated 14 March 2016 in the proceedings between the Commissioner and the plaintiff. They became Exhibit C, and showed that that matter was adjourned until 15 April 2016.
The defendant tendered three pages of bank statements pertaining to the plaintiff, after further documents were produced by the plaintiff to the defendant in court, and they became Exhibit D.
Finally, the defendant also placed before me a document agreed between the parties. It set out the documents that had not been produced in answer to the first notice to produce, and it became Exhibit E.
Evidence of the plaintiff
The plaintiff read the affidavit of Mr Shixian Lu sworn 11 March 2016. Mr Lu is the sole officer of the plaintiff. His affidavit outlines the business and financial position of the plaintiff. The affidavit includes detail about ongoing jobs being performed and their approximate value (said to be approximately $7,950,000); detail about the assets of the plaintiff (including a company car, $10 worth of shares, and moneys said to be owed for work already done in the approximate sum of $1,330,000); and liabilities of the plaintiff (including $1,177,814 owed to Direct Plasterboard Outlet, the subject of the final garnishee order, as well as approximately $30,000 in trading account liabilities). In that affidavit, sworn 4 days before the hearing date, Mr Lu deposes that the net monthly revenue of the plaintiff is between $60,000 and $90,000.
The affidavit of Mr Lu also states that, in 2010, he purchased real property in the Sydney suburb of Wahroonga for $2.2 million as a tenant in common with his wife, and that he owns a 1/100 share of the property and his wife has a 99/100 share. No reasons are given in the affidavit for that state of affairs. It is said that a debt of $1 million is secured by a mortgage over that property.
The affidavit also states that the plaintiff is in the process of negotiating a resolution of the winding up application, which is in respect of unpaid payroll tax that the plaintiff claims is, in truth, not owing.
The affidavit also states that "Although neither BCS [that is, the plaintiff] nor I can provide security for the defendant's costs, I am prepared to proffer a personal undertaking to be liable for any costs order made in the defendant's favour against BCS in these proceedings".
Separately, the plaintiff tendered tax documentation with regard to the year 2014, which became Exhibit 1, and tax documentation with regard to the year 2015, which became Exhibit 2.
Finally, the plaintiff placed before me an email exchange dated December 2015 between David Lu (as Mr Shixian Lu is also known) and Mr Greg Hammond, the accountant for the plaintiff. That email exchange relates to the winding up proceedings brought against the plaintiff.
Submissions of the defendant
Counsel for the defendant made the following submissions before me.
First, counsel for the defendant referred me to the seminal case of KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189, and the principles for determining a security for costs application set out at pp 197-198 thereof.
Secondly, he said that the affidavit of Mr Lu demonstrates that the plaintiff is making $60,000 - $90,000 profit per month, has significant contracts for ongoing jobs, and has six to seven jobs on foot. He also submitted that the 2015 tax return showed that the plaintiff had a turnover in excess of $10 million for that year. On the basis of that evidence, placed before the Court by his opponent, he submitted that the plaintiff was quite capable of providing security for the costs of the defendant, without potentially stultifying a valid claim.
Thirdly, he submitted that the onus was on the plaintiff to demonstrate the possibility of stultification, and that it had not done so.
Fourthly, he submitted that the test for security for costs is an undemanding one: there must be reason to believe that the plaintiff may be unable to meet a costs order if it is ultimately unsuccessful in its claim against the defendant. In support of that proposition, he referred to the undischarged judgment debt of the plaintiff of almost $1.2 million, and the limited funds shown in the bank statements.
Fifthly, he acknowledged that the defendant had complied with previous garnishee orders served upon it, thereby implicitly accepting that it had indeed been indebted to the plaintiff in the past. But he submitted that the prompt payments by the defendant in compliance with those orders demonstrated the bona fides of the defendant. And he asserted that there was no outstanding debt owed to the plaintiff and submitted that, if there were, its compliance in the past shows that the defendant would have complied with the final garnishee order, at least to the extent necessary to discharge that putative debt.
Sixthly, he submitted that I did not need to consider the minutiae of the substantive claim in order to determine the motion before me. However, if I came to the view that the substantive claim was very weak, that could argue in favour of an order for security for costs being appropriate.
Seventhly, he submitted that there was a possibility that the plaintiff would shortly go into liquidation. In the event that the liquidator maintains the claim against the defendant, that would strengthen the application for security for costs. That is because, he submitted, there is a significant risk of a company in liquidation being unable to meet a costs order against it.
Eighthly, he noted that any personal undertaking of Mr Lu would be effectively worthless, based on the material in his affidavit with regard to his personal assets and income, and submitted that it would be appropriate for me to disregard it.
Ninthly, he noted that there was evidence that the plaintiff was able to fund its own solicitors and counsel in order to conduct the litigation. He submitted that that indicated that the financial position of the plaintiff, and those associated with the plaintiff, is (on the one hand) sufficiently concerning so as to call for an order for security for costs, but (on the other hand) not so parlous as to give rise to a danger that such an order could stultify a potentially valid claim.
Tenthly and finally, he submitted that, although the defendant was seeking $150,000 as security, I had a discretion to order security in tranches or even in an alternative, lesser amount. He referred to the correspondence placed before me that demonstrated communications between the solicitors for the parties whereby the defendant invited the plaintiff to put forward a reasonable proposal in that regard, but it had elected not to do so.
Submissions of the plaintiff
Counsel for the plaintiff made the following submissions in resistance to the order.
First, he submitted that the primary question for consideration, when determining an application for security for costs, is whether, based upon credible evidence, there is reason to believe that the plaintiff corporation will be unable to pay the costs of the defendant, if the latter is successful in the litigation. He further submitted that, if that were established, the secondary consideration is whether making such an order would stultify the proceedings.
Secondly, he submitted that the burden lies upon the defendant, as the moving party, to satisfy me that I should exercise my discretion to make the order.
Thirdly, he submitted that the evidence about the financial state of the plaintiff needed to be read as a whole and in context, rather than placing significant emphasis on particular paragraphs within an affidavit that might indicate that the plaintiff is in a position to provide security for costs. He took me to various pieces of evidence, including the 2014 and 2015 tax returns of the plaintiff, in order to show that the plaintiff would have difficulty raising money to provide security for costs, thereby raising a concern about stultification.
Fourthly, he emphasised the strength and bona fides of the claim of the plaintiff. He submitted that that was a relevant consideration, as outlined in KP Cable Investments Pty Ltd v Meltglow Pty Ltd. He submitted that the defendant had not disputed that it owed any money at all to the plaintiff, as demonstrated by the compliance with previous garnishee orders in substantial amounts. And he emphasised his submission that the plaintiff had a strong prima facie case, based upon the documents that are the centrepiece of it.
Fifthly, he submitted that there is no principle relevant to my determination that a spouse, family member or friend of a shareholder has any obligation to provide security for costs. By that he meant that the obligation to do so may extend to the principal of the plaintiff, Mr Lu, but it would not go beyond him to a consideration of the ability of others (such as his wife, who, it will be recalled, owns valuable real estate) to step into the shoes of the company with regard to costs.
Sixthly, he submitted that the offer of a personal undertaking by Mr Lu was relevant, even if he had neither the personal assets nor the personal income that would permit him to provide any security in the form of funds.
Counsel for the plaintiff submitted that that undertaking, even if nugatory, remains a relevant factor, as outlined in KP Cable Investments Pty Ltd v Meltglow Pty Ltd at p 198, and needed to be taken into account regardless of its practical value.
Seventhly and finally, he submitted that, if security for costs were to be ordered, the sum would be at my discretion. He submitted that, considering the bona fides of the plaintiff's claim and the risk of stultification, I should make an order in a lower amount, if I were to make any order at all. He concluded by submitting that the amount of any order should only reflect future costs, and not past costs already incurred by the defendant.
Determination
Turning to my determination, as for legal principle, there was no dispute between the parties, on the basis of KP Cable Investments Pty Ltd v Meltglow Pty Ltd at pp 197-198, that the factors informing my discretion are as follows:
1. The promptness with which the application has been made;
2. The strength and bona fides of the case of the plaintiff;
3. Whether any impecuniosity of the plaintiff was caused by the defendant's conduct that is the subject of the claim of the plaintiff;
4. Whether the application of the defendant for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate;
5. Whether there are persons standing behind the plaintiff company who are likely to benefit from the litigation and who are willing to provide the necessary security;
6. Whether any person standing behind the company has offered a personal undertaking as to costs; and
7. Whether the party against whom orders are sought is in substance a plaintiff, because an order will not ordinarily be made against a party that is defending itself, and therefore being forced to litigate.
I have also considered the very similar analysis of principle in the more recent decision of Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245.
As I remarked to both counsel during the hearing of the motions, arguably some of those factors are "two-edged swords", which argue for and against the making of an order. For example, on the one hand, impecuniosity could indicate that the plaintiff is not able to pay costs if the defendant is successful in the substantive dispute. On the other hand, impecuniosity on the part of the plaintiff raises the concern that an order for security for costs against the plaintiff may stultify a valid claim.
To my mind, on the evidence placed before me, there is an undoubted concern about the ability of the plaintiff to comply with a costs order in favour of the defendant if, at the end of this litigation, the plaintiff is unsuccessful. The evidence establishes to my satisfaction that the plaintiff is engaged in a "war on many fronts" with regard to a number of creditors. Not least of the battles is the fact that a garnishee order has issued with regard to an outstanding judgment debt of the plaintiff of over $1 million.
In short, I am well satisfied of the basal test with regard to an order for security for costs.
I now turn to consider the factors for my consideration in more detail, and shall deal with them in the order in which they are discussed in KP Cable Investments Pty Ltd v Meltglow Pty Ltd.
First, as I have said, a statement of claim was filed on 4 March 2015, the defence on 10 April 2015, the amended statement of claim on 24 September 2015, and the relevant notice of motion on 8 September 2015. I consider that the application has been brought promptly.
Secondly, there is nothing to suggest that the claim of the plaintiff is a sham or brought without good faith. Indeed, the documents that found it, including the two payment schedules attached to the affidavit of Mr Lu, and the fact that, in the past, the defendant has implicitly accepted that it was indebted to the plaintiff in substantial amounts, suggest that the claim is not weak.
Thirdly, it is possible that the conduct of the defendant has contributed to the impecuniosity of the plaintiff. On the evidence before me, however, there are many other bases for that impecuniosity.
Fourthly, stultification of a potentially valid claim is always a concern in a matter such as this, because the impecuniosity of the plaintiff that founds the application can itself found the countervailing consideration. Although I do not come to the affirmative opinion that the application by the defendant is oppressive, I have borne the question of stultification firmly in mind.
To be weighed against that concern is the fact the affidavit of Mr Lu is a solemn document of recent provenance containing his sworn evidence relied upon by the plaintiff before me. It shows that the plaintiff company has a substantial monthly net income. I do not believe that that sworn evidence can be discounted, or subsumed by the evidence that the plaintiff may soon be placed into liquidation. To my mind, the defendant is entitled to call in aid that evidence in support of the proposition that an order of appropriate quantum would not run the risk of stultification.
Focussing upon the fifth and sixth factors discussed in the seminal decision, this is not a case where those associated with the plaintiff company have not come forward by way of an offer to provide personal security for costs. As I have said, Mr Lu has offered to provide a personal undertaking in that regard. It is true, as counsel for the plaintiff submitted, that, in accordance with what was said in KP Cable Investments Pty Ltd v Meltglow Pty Ltd at 198, that has some value. But in light of the financial position of Mr Lu, his undertaking must be assessed as having negligible practical value, in terms of actually protecting the defendant from a substantial liability for costs, with regard to which it may have no effective recourse against the plaintiff.
Seventhly, to my mind, Bright Ceilings is indeed a plaintiff in the true sense, and not a de facto defendant.
Eighthly, there are no other factors playing upon my discretion, either pointed to by one or both parties, or taken into account by me.
Seeking to balance all of the countervailing factors arising from the evidence placed before me, I propose to order security for costs, but for a sum substantially less than primarily sought by the defendant. That is so for the following reasons.
First, it is impossible to predict the forensic progress of the matter, especially in light of the pending possibility of the plaintiff being placed into liquidation.
Secondly, a reduction in the quantum will reduce the risk of stultification of a potentially valid claim.
Thirdly, in light of the lack of clarity of the future progress of the matter, I do not propose to order that security be provided in tranches. If the litigation continues to advance, and the sum that I order can be shown by the defendant to be insufficient to protect its interests, then this Court may be approached again, by way of a further motion.
In short, I determine that it is appropriate in this case to make an order for security for costs in the sum of $50,000, to be paid into Court by the plaintiff before any further forensic step is taken.
Finally, contrary to the orders sought in the notice of motion, I have not imposed a time limit during which the security must be provided. That is because I consider that the position of the defendant is amply protected by the fact that, unless and until the sum is paid into Court in its entirety, the proceedings will be stayed in their entirety.
Costs
Counsel for the plaintiff submitted that, contrary to the usual rule that costs should follow the event with regard to a fully argued motion, there is a particular rule that applies to applications of this kind. It was said that often, even if a defendant is successful (as here) in obtaining an order for security for costs against the plaintiff, still and all, the successful defendant will not have the entirety of its costs on the motion. Counsel for the plaintiff referred me to Collingnon Developments Pty Ltd v Wurth (1975) 1 ACLR 314 and Mignon Cakes Pty Ltd v Hiltide Pty Ltd [2004] FCA 142, as discussed in latest edition of G E Dal Pont, Law of Costs (3rd ed, 2013, Butterworths) at pp 965-966.
Although the primary position of counsel for the defendant with regard to costs was that, if his client were to be successful on the motion, it should have its costs, he did not seek strongly to dissuade me from the submission of counsel for the plaintiff.
In the circumstances, I accept that the unusual approach that applies with regard to applications of this kind should be adopted in this case, and propose to order that each party should pay its own costs of the motion.
Orders
Accordingly, I make the following orders:
1. Bright Ceilings Systems Pty Ltd must provide security for the costs of Merhis Contracting Pty Ltd in these proceedings in the sum of $50,000.
2. The security in the sum of $50,000 must be paid into Court.
3. Until such security is provided, these proceedings are stayed.
4. Each party must pay its own costs of the proceedings before me.
5. The matter is listed for directions at 9 AM before the Common Law Registrar on 31 May 2016.
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Decision last updated: 20 May 2016