Capital Securities XV Pty Ltd v Calleja

The plaintiff's financial position

1. Relevantly to the present application, the ground upon which security for costs may be ordered under r 42.21 of the UCPR is: (1) If, in any proceedings, it appears to the court on the application of a defendant (d) that 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.
2. Section 1335(1) of the Corporations Act 2001 (Cth) is to the same effect: (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
3. Ms Calleja has adduced evidence which indicates the plaintiff has ceased trading, probably with effect from the end of 2016. Searches obtained from the Australian Securities and Investment Commission ("ASIC") show that the plaintiff was registered on 20 March 2014. It had the name Prime Capital Securities Pty Ltd until 28 November 2017. By resolution of that date its name was changed to Capital Securities XV Pty Ltd. Then on 1 December 2017 a new corporation was formed with the name Prime Capital Securities Pty Ltd.
4. On 14 November 2017 Paul Scanlon, the sole director and secretary of the plaintiff, deposed that the plaintiff's parent company is Prime IBC Ltd and that this company has a number of subsidiaries "named in accordance with the calendar year for the portfolio they hold". I infer from this that the plaintiff, now named Capital Securities XV Pty Ltd, holds or held a portfolio of loans which were advanced by it during 2015.
5. Ms Calleja has tendered ASIC searches of three further companies of which Mr Scanlon is sole director and secretary: Capital Securities XVI Pty Ltd (registered 24 March 2015), Capital Securities XVII Pty Ltd (registered 28 November 2016) and Capital Securities XVIII Pty Ltd (registered 1 December 2017). I infer that each of these companies holds or held a portfolio of loans advanced in calendar years 2016, 2017 and 2018 respectively.
6. From these searches and from Mr Scanlon's deposition quoted at [11] above I infer that the plaintiff has not issued further loans since calendar year 2015. In the absence of any more detailed explanation from him of how these multiple subsidiaries carry on business, there appears to be no competing inference let alone any stronger inference.
7. On 31 October 2017 Mr Scanlon gave the following evidence in the course of the trial before Wilson J: [I]t is our usual practice our [Business Development Managers] are instructed we are only able to provide 12 month terms. That is what we are able to do under our funding loans.
8. I infer that the reference to "our funding loans" is to borrowings that the plaintiff obtained from third parties from which it, in turn, provided finance to its customers. This understanding of Mr Scanlon's evidence is consistent with a trust account statement issued by Gadens/Dentons, the plaintiff's solicitors, recording funds movements for the period 22 April 2015 to 12 May 2015 in respect of the loan to Calleja PJC. That statement shows deposits of approximately $250,000 to the trust account of Gadens/Dentons, from which payments totalling an equivalent amount were made, allegedly by way of advance to Calleja PJC under the disputed loan facility. Two of the deposits came from the ANZ Bank and the other from an entity named Dipvis Pty Ltd. There is no suggestion that the plaintiff had funds of its own in any account with the ANZ Bank or that it was related to Dipvis Pty Ltd. These deposits to Gadens/Dentons were within Mr Scanlon's description of "funding loans" from third parties. On 1 November 2017 he gave evidence that "They're drawdowns of our funding lines."
9. On 14 October 2016 Peter Ainsworth, a former employee of the plaintiff, deposed that in his experience "Prime's loans are for a duration of 12 months or less". He defined "Prime" in par 1 of his affidavit as the plaintiff.
10. From all of the evidence I infer that during 2015 the plaintiff borrowed money from third-party sources and loaned it to its customers for terms of 12 months or less. All of the plaintiff's loans would therefore have been repaid by at latest 31 December 2016, except for any which might be in recovery mode such as the loan to Calleja PJC. I infer also that the plaintiff's borrowings from third parties, by which it funded the loans to its customers, must have been repaid by about 31 December 2016. It is not in the nature of a business of this type that the proceeds of a liquidated portfolio of loans to customers would be retained. Where that portfolio had been funded from external third-party sources, in the ordinary and usual course of business the borrowings from third parties would be discharged upon the loans to customers expiring and being recovered.
11. Thus I infer that the plaintiff has for all practical purposes ceased to carry on any business except to the extent that it is still endeavouring to recover from Calleja PJC. There is no evidence of any other loan advanced by the plaintiff during 2015 which is still in recovery. The inference that the plaintiff has ceased to conduct business is further supported by the fact it does not have financial statements for of the financial year ended 30 June 2017, for the period ended 31 March 2018 or for the financial year ended 30 June 2018 2018. Documents of that description were sought under a notice to produce served by Ms Calleja. When the notice was called upon during the hearing of the application for security the plaintiff's counsel stated there was nothing to produce and that financial statements for the dates nominated had not been finalised. What counsel meant by "finalised" was not expanded upon. I made it clear that I consider that the notice was wide enough to require production of financial statements prepared for management purposes.
12. It would not be possible to manage a lending business of the type which the plaintiff has conducted without periodic financial reports to show the balance of assets over liabilities, the availability of working capital, revenue and expenditure. If the plaintiff were attempting to trade without such statements of financial position and of financial performance, Paul Scanlon would be unable to discharge his duties under the Corporations Act as a director, he would be unable to guard against the risk of insolvent trading which might give rise to personal liability and he would be unable to ensure compliance of the company with Australian Taxation Office requirements and other revenue and regulatory obligations.
13. Thus the evidence before me on the application for security is to the effect that the only business the plaintiff has ever conducted was that of lending during the closed period of calendar 2015. I infer that business was for all practical purposes wound up nearly two years ago, in December 2016. I infer that the plaintiff would not have owned any real property assets for a business of this nature nor any plant or equipment. In the nature of such a business its assets would have been its loans to customers and its liabilities would have been its borrowings from third-party funders. I infer that all of this has been liquidated upon the cessation of business, with the exception of the loan to Calleja PJC.
14. Although the evidence is very limited the Court can the more comfortably draw the above inferences because no evidence has been adduced by the plaintiff to present any different picture. It lay entirely within the power of the plaintiff to present evidence on this application which would explain its current financial status. If the inferences which flow from the limited primary material to which I have referred can be rebutted, a short affidavit or a handful of business records could have provided such rebuttal. Whereas the defendant, as an outsider to the plaintiff's financial affairs and at arm's length from it, can only adduce fragments of information, it would have been a very simple matter for the plaintiff to provide an affidavit disclosing its financial circumstances. Those within the plaintiff who would know its financial position in detail, particularly Mr Scanlon who as sole director has statutory responsibility for the company's solvency, have preferred to remain silent.
15. The plaintiff tendered statements issued by Westpac Bank for an account No 368-224 in the name Prime Capital Securities Pty Ltd showing transactions between 29 December 2017 and 29 June 2018. On these statements numerous credits and debits are recorded, some of them large, consistent with a lending business being carried on. No Australian Company Number is shown for the bank customer's name and I am not satisfied that this is an account conducted by the plaintiff during the period to which the statements relate.
16. As earlier mentioned the plaintiff ceased to be named Prime Capital Securities Pty Ltd from 28 November 2017 and another corporation was registered in that name from 1 December 2017. ASIC searches tendered by Ms Calleja show that Mr Scanlon has been the sole director and shareholder of five distinct corporations which have all borne the name Prime Capital Securities Pty Ltd for varying periods between 16 December 2010 and the present. He has utilised that corporate name as a revolving door through which a series of discrete legal entities have passed, assuming and then discarding the name. All of them have been under his sole control.
17. In these circumstances, without tender of Westpac records to establish that the present account-holder is the company with the unique Australian Company Number of the plaintiff, I could not be satisfied that these Westpac Bank statements have any relationship to any business activity of the plaintiff or that the credit balance of the account at any date shown on the statements is an asset of the plaintiff, in whole or in part.
18. In an affidavit sworn 14 December 2017 Mr Scanlon referred to two further statements in respect of Westpac account No 368-224 showing transactions in the period 27 July 2017 to 13 December 2017. Redacted copies of these statements were attached to the affidavit. Again they showed transactions consistent with the conduct of a business of lending money. At pars 3 and 4 of this affidavit Mr Scanlon described the statements as being "in the name of 'Prime Capital Securities Pty Ltd'". In par 5 he deposed that "the account statements … are held by Prime". In par 1 he defined the name "Prime" as meaning the plaintiff. Significantly, Mr Scanlon did not depose that this was an account operated between July and December 2017 by the plaintiff or that the account balance at any time, or any part of such balance was owned by the plaintiff. The curious wording of this affidavit is consistent with the account having been owned and operated from July 2017 onwards by an entity other than the plaintiff but in the name by which the plaintiff was known up until 28 November 2017.
19. In pars 8 and 9 of the affidavit of 14 December 2017 Mr Scanlon deposed that at 13 December 2017 the plaintiff's "total loan portfolio … exceeds $100,000,000" and that it is "the registered security holder in respect of more than 140 loans including registered mortgages which form part of the security for the" loan portfolio. I do not accept this evidence. It is inconsistent with the other evidence already referred to. At lending rates of 2% per month a portfolio of loans in excess of $100 million would generate annual gross revenue of $24 million. It is inconceivable that the plaintiff would currently have a lending business of this magnitude yet have no financial statements for the past two years. Such a business could not be carried on without the preparation of management accounts at least quarterly and statements of financial position and of trading performance annually.
20. It has been said that the test in r 42.21 of the UCPR and s 1335 of the Corporations Act 2001 (NSW), namely, "reason to believe" that the plaintiff will be unable to pay the costs, is "undemanding": HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87. In Livingspring v Kliger Partners [2008] VSCA 93 it was said (at [15]): It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'If the court is satisfied that ... ' or 'If in the view of the court it is likely that ...'. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay?
21. On the analysis of the evidence made above and applying the test according to the understanding of it expressed in the above authorities, I find that there is reason to believe the plaintiff will be unable to pay Ms Calleja's costs of the possession proceedings if ordered to do so. There is no evidence that any of the numerous companies related to the plaintiff or the plaintiff's parent corporation would be willing to fund the plaintiff to enable it to satisfy a costs order.

Delay in applying for security

1. Rule 42.21(1A)(l) requires that in determining whether it is appropriate to order security for costs the Court may have regard to "the timing of the application for security for costs". In taking account of this factor the Court must have regard to all of the circumstances and consequences of the delay, including any unexpected protraction or complication of the proceedings: Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114.
2. The plaintiff's possession proceedings were commenced by the filing of the statement of claim on 20 May 2016. At that time the plaintiff would still have been actively trading. The nature of its business, being limited to a 2015 portfolio of loans, is unusual and there would have been no reason for Ms Calleja or her advisors to suspect the corporate structure and arrangements described above. The evidence concerning a series of similarly named companies, all writing loans only for one year and succeeding each other in the conduct of such a business, only emerged at the trial in October and November 2017 and during Ms Calleja's application for security for the costs of the plaintiff's appeal, later that year. Also, expansion of the proceedings to require a second trial could not have been anticipated at earlier stages of the proceedings.
3. For these reasons I do not consider that the late stage at which Ms Calleja's application is brought should be treated as a significant factor adverse to an order for security being made. However it has a bearing upon whether the plaintiff should be required to provide retrospective security for costs incurred by Ms Calleja over the two years in which the proceedings were on foot before her application was brought.

Other factors under r 42.21(1A)

1. The factors listed in r 42.21(1A) are in substance the same as those which have been established in case law with respect to the operation of s 1335 of the Corporations Act and its statutory predecessors. Apart from the factors already considered, the others set out in rule are either neutral or inapplicable. The plaintiff has at least some prospects of success in the proceedings. Its prospects have been enhanced in relation to some issues by the determination of the Court of Appeal that on the retrial there should be admitted as business records certain electronic diary notes of Baycorp Collections PDL (Aust) Pty Ltd. These would tend to support the plaintiff's claim that it is payment to Bankwest was authorised on behalf of Calleja PJC as part of the company's drawdown on the lending facility. However significant other aspects of Ms Calleja's case for having the guarantee mortgage set aside would not be affected by this documentary evidence. The plaintiff's prospects appear to me to be a neutral consideration on the present application.
2. There is no suggestion that the plaintiff's apparent impecuniosity is attributable to any conduct of Ms Calleja. The plaintiff denies that it is impecunious. It is not asserted by the plaintiff that an order for security would stifle the proceedings.

Amount of security

1. Ms Calleja's solicitor has deposed that up to 19 December 2017 her client has incurred costs of $436,332 in respect of both proceedings (comprising the plaintiff's claim for possession and Ms Calleja's cross-claim plus Calleja PJC's separate claim to have the lending transactions set aside and for damages). That does not include the costs of the appeal. This figure for past costs is surprisingly high having regard to the nature of the proceedings. I would not consider that any more than half, approximately $220,000, could represent Ms Calleja's costs of defending the possession claim on the grounds she has pleaded, including those in her cross-claim. Some part of the very large figure deposed to by the solicitor may be attributable to Calleja PJC's separate damages claim but I would not have thought that the costs of that part of the case could be the whole of the other half of the solicitor's figure.
2. It has been accepted on behalf of Ms Calleja that a discount of 35% should be applied for the purpose of estimating what her assessed costs might be. On that basis I would estimate the assessed costs up to 19 December 2017, solely attributable to defence of the possession claim, in the order of $145,000.
3. Ms Calleja's solicitor has deposed that the costs of the retrial will be $147,000. A breakdown of this estimate has been provided showing that it assumes a seven-day hearing. Making allowance for the fact that this will include the hearing and determination of Calleja PJC's substantial damages claim, I consider a reasonable approximation of the solicitor and client costs attributable to defence of the possession proceedings would be $120,000. The likely assessed costs, at 65%, would be in the order of $80,000.

Offset for Ms Calleja's liability in restitution

1. Taking Ms Calleja's cross-claim and defence at their highest, if she establishes an entitlement to have the guarantee and mortgage set aside she would still exposed to a claim by the plaintiff for restitution of the principal sum of $152,496.44 which was paid to Bankwest for her benefit. She has acknowledged in her pleadings that this credit to her Bankwest loan account was received. She has not personally paid interest to the plaintiff and therefore could not successfully withhold against the $152,496.44 any damages calculated on the basis that interest under the loan agreement from the plaintiff to Calleja PJC was at a higher rate than that charged by Bankwest.
2. If Ms Calleja's guarantee and mortgage should be set aside on the basis that these instruments were procured by misrepresentations or unconscionable conduct Ms Calleja would not be permitted to retain "an unwarranted benefit": Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102; [1995] HCA 14. The widest and potentially most favourable scope of relief available to Ms Calleja would be that which she could obtain under the Contracts Review Act. But even if the transactions should be set aside under that Act the principle against retention of "an unwarranted benefit" would apply: First Mortgage Managed Investments Pty Limited v Pittman [2014] NSWCA 110 at [167]-[173].
3. Where funds advanced under an impugned mortgage lending transaction are applied in discharge or reduction of a prior debt secured over the same property, the credit against the prior debt will not necessarily be treated as "an unwarranted benefit" for the purposes of applying the authorities cited in the preceding paragraph: St George Bank Ltd v Trimarchi [2004] NSWCA 120. However there is no reason why the reduction of Ms Calleja's loan account with Bankwest would not be so treated in the present case. Consequently, if the transactions are set aside Ms Calleja will likely have to make restitution to the plaintiff of $152,496.44.
4. In my judgment in Capital Securities XV Pty Ltd v Calleja (No 2) I considered the possible alternative claim by the plaintiff that the payment to Bankwest was made under a mistake of fact, namely, a mistaken belief that this payment was authorised by Calleja PJC as part of that company's loan drawdown. I concluded that if such a claim should be made by the plaintiff then on that basis, also, Ms Calleja would be obliged to disgorge the $152,496.44. Although it appears the plaintiff would be entitled to restitution of this sum on the grounds of mistake, it has not sought such relief. Restitution on this basis would not be secured by the plaintiff's second mortgage of the Heatherbrae property. The second mortgage is a guarantee security in respect of debts owed by Calleja PJC under the lending agreement.
5. For two reasons I consider that the maximum amount of security which Ms Calleja could reasonably seek in respect of costs up to the end of the first trial ($145,000, as explained at [3534]) should not be ordered. First, considerations surrounding delay in bringing the application are more significant in relation to past costs than in relation to those yet to be incurred. Secondly, there appears to me a very strong probability that even if Ms Calleja is completely successful in having the guarantee mortgage over the Heatherbrae property set aside, she will have to disgorge the $152,496.44 which the plaintiff paid off the Bankwest loan formerly secured over the property. It has been recognised in the authorities that in determining whether to order security for costs the Court may take into account any opportunity the applicant may have to satisfy a plaintiff's prospective cost liability by withholding a payment which will otherwise fall due from the applicant to the plaintiff: Precious 1 Pty Ltd v Chamberlain Early Learning Centre Pty Ltd [2017] NSWCA 259.
6. The orders of the Court will be: 1. Within 14 days the plaintiff is to provide security for the costs of the defendant in the amount of $80,000, by cash deposit or bank guarantee or in some other form acceptable to the Registrar. 2. In the event of security not being provided in accordance with order 1 (a) the proceedings will thereafter be stayed unless and until such security is provided and (b) the defendant may apply any time after 15 February 2019 for the proceedings to be permanently stayed or struck out.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 11 October 2018