HIS HONOUR: This is an application for security of costs. The plaintiff company commenced proceedings on 25 September 2015 by the filing of a statement of claim that claimed $396,000 (inclusive of GST) in consulting fees, reimbursable expenses of $1,994.92 (inclusive GST) and interest at the rate of 6.5% per annum from 23 July 2014. The statement of claim is brief but relies upon a contract in writing, dated 8 May 2014 which required the defendant to pay to the plaintiff a consulting fee of $44,000 per mensem (inclusive of GST) for provision of corporate and strategic consultancy fees and for facilitating finance for the defendant. The statement of claim pleads, in par 5, that the relevant contract in writing was not at any material time terminated by either the plaintiff or the defendant. What the material time was is completely unclear. It is not clear from the statement of claim if any monies were paid pursuant to the agreement, and if so when they ceased, and for how long after the cessation the plaintiff claims that it was entitled to the monthly fees and the monthly expenses. However, by dividing $396,000 by $44,000 one comes to a quotient of 9 which indicates that 9 months' fees are alleged not to have been paid by the defendant to the plaintiff.
The defendant filed a notice of appearance on 8 October 2015. I have been told from the Bar table by Mr Young, without any demur from Mr Barnett for the plaintiff, that thereafter there were negotiations between the solicitors as to what exactly was being claimed in the statement of claim. On 5 November 2015 the plaintiff filed an affidavit of service of the statement of claim. That was an otiose document as the defendant had appeared and that was an acknowledgment of service. On the same day the plaintiff filed a notice of motion seeking default judgment. Whether that notice of motion was served on the defendant I do not know, but under the heading "Hearing details" the notice of motion said this:
"This motion is to be dealt with in the absence of the parties."
There was no affidavit of service of the notice of motion for default judgment. On 10 November 2015 the Principal Registrar entered default judgment for the plaintiff against the defendant for $433,934.04.
On 20 November 2015 the defendant filed a notice of motion seeking to set aside the default judgment. The registry appears to have assigned to that notice of motion a hearing date of 4 April 2016. However, the matter was mentioned before an assistant registrar on 20 November and a number of orders were made, by consent. The default judgment entered on 10 November 2015 was set aside. The defendant was ordered to file a verified defence or any notice of motion by 27 November 2015. Any prior cost order was vacated and the costs of "this motion" were said to be costs in the cause. Whether that refers to the costs of that day or the costs only of the defendant's motion filed on the same day is unclear. The theoretical hearing date for the defendant's notice of motion of 4 April 2016 was vacated.
On 27 November 2015, pursuant to the consent order made by the Assistant Registrar on 20 November 2015 the defendant filed a notice of motion seeking to strike out the statement of claim, or, in the alternative, striking out pars 4 and 6 of the pleading. That notice of motion was heard by the Judicial Registrar on 11 December 2015. The Judicial Registrar made a number of orders. The first was that the plaintiff was to provide to the defendant the documents identified in pars 3 and 7 of the statement of claim by 18 December 2015. The defendant was to serve any request for further and better particulars by 15 January 2016. The plaintiff was to provide any response to any request for further and better particulars by 5 February 2016. A directions hearing was fixed on 16 February 2016. Formally, the notice of motion filed on 27 November 2015 was adjourned to the same date. The costs of the notice of motion were reserved.
On 16 February a number of consent orders were made. The plaintiff was granted leave to file and serve an amended statement of claim by 19 February 2016 as outlined in a letter from the plaintiff's solicitor dated 5 February 2016. The defendant was ordered to file and serve a defence by 18 March 2016. The defendant's notice of motion, filed on 27 November 2015, was then formally dismissed. The costs of that notice of motion were then declared to be costs in the cause and the matter was stood over for further directions on 4 April 2016.
The plaintiff complied with the order made by the filing of an amended statement of claim on 19 February 2016. The amendment made was, in my view, of no great significance. The defendant filed a defence to the statement of claim on 15 March 2016 complying with the requirement made of it.
On 1 April 2016 the current notice of motion was filed by the defendant seeking security of the costs. In accordance with one of the orders made by the Judicial Registrar on 12 February 2016 the matter was before the Judicial Registrar for directions on 4 April. An order was made that the plaintiff serve its evidence by 2 May 2016. An order was made that the defendant serve its evidence by 10 June. The notice of motion filed on 1 April 2016 was adjourned until today. The plaintiff was ordered to serve any evidence in-reply to the notice of motion on 22 April 2016. The Judicial Registrar then indicated that there was to be a directions hearing after the defendant's notice of motion had been heard.
Although the plaintiff had been ordered to serve its evidence by 2 May 2016, it was not in fact filed until 4 May 2016. However, the plaintiff did not serve the evidence to be relied upon on this notice of motion until 13 May 2016, almost a month after the appointed date. Even then the evidence served by the plaintiff was deficient.
In the meantime the plaintiff also filed a notice of motion on 13 May seeking summary judgment for the plaintiff, or, in the alternative, that the defence be struck out. That notice of motion has been listed for hearing on 3 June 2016.
The pleadings themselves are hardly ideal. For example, the defence to par 5 of the amended statement of claim, which is the same as the original statement of claim, merely denies par 5: it does not positively assert when the contract was terminated, although I am told that that is its defence. Furthermore, the statement of claim appears to acknowledge that because, there is no continuing claim at a rate of $44,000 per mensem contained in the statement of claim.
The principles governing the exercise of my discretion concerning security for costs have been usefully summarised by McDougall J in Sharjade Pty Ltd v Darwinia Estate [2006] NSWSC 708 commencing at [8]. I have power to order a corporate plaintiff to provide security for costs pursuant to UCPR 42.21 and s 1335(1) of the Corporations Act 2001 (Cth). The discretion is a broad one and is unfettered except, of course, that it must be exercised judicially. It is impossible to list all matters relevant to the exercise of the Court's discretion as those will vary from case to case. However, certain factors are typically taken into account by the Court, these include whether there has been delay in bringing the motion seeking security for costs; the merits and good faith of the plaintiff's case; whether the defendant's action caused the plaintiff to become impecunious; and whether the application for security is oppressive. The Court also needs to consider whether there are persons standing behind an impecunious corporate plaintiff who would benefit from the success of the litigation and might be willing to provide the necessary security. The Court should also consider whether any such person has offered any personal undertaking to be liable for the costs and should also consider the nature of that undertaking. A further consideration is that security should only be ordered against a litigant who is in substance a plaintiff and not in substance a defendant. The latter consideration plays no part in the current proceedings.
The current defendant was incorporated on 6 February 2014. In the financial year ending 30 June 2014 it only existed for five months. According to exhibit 2-2 its total paid up capital must be $15 as the total amount paid for the issue of 1,000 shares to Mr Anton Rohner was $10, and his wife, Cherie Rohner, has paid for 500 shares, so that must represent a further $5. It would appear therefore that the paid up capital of the plaintiff company is $15.
I have been provided with one set of accounts. That set of accounts is for the year ended 30 June 2015. They also provide the figures for the financial year ending in 30 June 2014, which must only represent the five months that the plaintiff company was incorporated. Nevertheless, the accounts for those five months have not been put before me. The accounts are, to use a neutral expression, "interesting." They indicate total sales in the twelve months ended 30 June 2015 as being $78,800. Other income included fringe benefits tax, an employee contribution of $979 and interest of $4,342 showing the total of other income to be $5,321. The total operating expenses for the year were $99,945, giving a net loss of $15,824. I have not checked the figures to see if the mathematics be correct. There is a deduction of $32,000 for superannuation but in the same period, no wages or salaries were paid. There are travelling expenses within Australia of $20,745 and travelling expenses internationally of $9,485. Presumably they would be of the only director of the defendant, Mr Rohner. There are also motor vehicle expenses of $4,894. Whilst the statement of claim says that the plaintiff was owed consultancy fees for providing "exclusive corporate and strategic consultancy services" to the defendant and to facilitate finance, one of the fees deducted from the total income was consultancy and accounting fees of $10,779.
The balance sheet is even more "interesting." That indicates that the plaintiff had, as at 30 June 2015, cash in the National Australia Bank of $21,490. The only other current assets were cash in hand, $100, and "loan-directors" of $37,213. If that represents money lent by the director to the plaintiff then there is no contra entry in the liabilities for the company's indebtedness to the director. If the asset is, in fact, money lent by the company to the director then it is unclear on what basis it was lent and as to whether the defendant is a registered money lender, and as to whether the loan is an appropriate loan in the circumstances. Under the heading "Liabilities" are a number of matters in brackets. The brackets would indicate that these are not negative liabilities but positive liabilities. However, they are said to be for a NAB credit card, $5,643; for GST, $1,341; and for income tax payable, $6,650. They look awfully like ordinary liabilities and not what the bracketing of the liabilities indicates, which is that they are positive liabilities and therefore offsets. However, because they have been bracketed the total of the bracketed liabilities was $13,640, and that sum has been added to the total current assets to indicate total net assets of $72,442, which is said to represent the total equity, although the total equity has been divided up into other categories which I find impossible to understand. For example, an equity is claimed to be dividends paid of $91,732, but that again has been bracketed.
If I deduct on the total assets of $58,303 the total liabilities, assuming they are not bracketed, of $13,640 I come up with total net assets of $44,663, half of which, in essence, is money in the bank, and if the rest appears to be "Director's loan." Whether that is an asset or a liability is unclear. If it be a loan made to the company by Mr Rohner and/or his wife, it can be recalled at any time. If one takes the loan from net assets of $44,663 one is left with no asset at all.
The problems with the accounts have been discussed with counsel. Those problems are patently clear and nothing that Mr Barnett said or could not say detracts from the unsatisfactory nature of those accounts. The only thing of which I can be confident of is that as at 30 June 2015 the plaintiff company had cash in the bank of $21,490. Whether that remains the case at the current time, I do not know. There is no evidence before me as to how the company has performed financially in the last ten months that have elapsed in the current financial year.
Mr Rohner's affidavit merely sets out his view of what those accounts are, and it is clear from the accounts that they have been made by him solely on information that he provided to himself.
It is clear that the plaintiff company has no real property and the extent of its assets is limited. The defendant has submitted that the plaintiff company has a "dearth of assets" and I concur. There is reason to believe that the plaintiff would be unable to pay any costs order, in full, made against it, if the defendant be successful in its defence. The costs of litigation in this Court will be much greater than $22,000.
Turning to the list of matters outlined by McDougall J there has been little, if any, delay in the defendant's application seeking security of costs. The defendant filed its defence on the Ides of March and filed the notice of motion seeking security on the Kalends of April, a delay of some 16 days.
The defendant submits that the plaintiff's case is weak and the defendant says the plaintiff's case relies upon a proposition that the plaintiff is entitled to payment despite providing no consideration. That clearly is an issue in the case. Each of the statement of claim and the defence has been verified so there are real issues of fact to be tried and I leave that consideration to one side.
There is no evidence that the plaintiff has been made impecunious by the actions of the defendant. There is such a statement in a letter from the plaintiff's solicitor to the defendant's solicitor of 22 April 2016, but despite that averment, there is no evidence to support the contention. If the principal or main source of income for the plaintiff company was fees payable by the defendant, and there was a dispute between the two, then one would think that a person offering the services that the plaintiff says it offers would be able to pick up work from an alternative source, much like a solicitor, who lost a client, might find work from other clients who were willing to pay his or her fees for the work that he did. Indeed, if the plaintiff is "impecunious" because it lost work from the defendant that might indicate that there was some substance to the defendant's case that there was a failure of consideration.
There is no evidence that an order requiring the payment of security for costs would be oppressive. The policy behind both the provisions of the Corporations Act and the UCPR has been well expressed in Harpur v Ariadne Australia Ltd [1984] 2 QdR 523 at 532:
"The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play."
In the current proceedings, late in the piece, in the affidavit of Mr Rohner filed on 13 May 2016, filed, as I have pointed out, quite late, Mr Rohner said that he was willing to be jointly and severally liable with the plaintiff in respect of any costs order made in the proceedings against the plaintiff. However, there is no statement from him of his net assets, there is no statement of assets and liability, and there is no direct evidence of whether he is a man of substance or a man of straw. That is despite the fact that these proceedings have been on foot for over seven weeks and there were seven weeks in which he could have put before the Court a statement as to his assets and liabilities and as to his net worth and, therefore, the value of any of his undertaking to give security for costs. There is little point of him coming out from behind the skirts of his own company if, in fact, he is a man of straw rather than a man of substance.
In my view, the defendant has made out a case for the giving of security. However, if the plaintiff's notice of motion, returnable on 3 June 2016 is successful the proceedings will come to a swift and abrupt end.
The form of orders I propose are the following:
I stay proceedings until the plaintiff provides security for costs in the sum of $20,000 by 4.00pm on Monday 30 May 2016. The form of the security is to be to the satisfaction of the Registrar.
If such security be paid but the plaintiff's notice of motion, filed on 13 May 2016, be dismissed or withdrawn, the plaintiff is to provide further security for costs in the sum of $80,000 and the further proceedings are to be stayed from the time of the dismissal of the plaintiff's notice of motion, filed 13 May 2016, until such security be paid.
Costs of the notice of motion filed 1 April 2016 are defendant's costs in the cause.
Defendant to file and serve any evidence regarding the plaintiff's notice of motion by 10am on Thursday 2 June 2016.
For further directions on 3 June 2016 after hearing of plaintiff's notice of motion.
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Decision last updated: 14 July 2016