Carrano Investment Holding Pty Ltd v Siennamia Investments Pty Ltd

Background

1. Siennamia claimed damages against the Carrano parties for breach of a shareholders' agreement in respect of Ikon Technology Group Northern Rivers Pty Ltd (Ikon), which operated a Fuji Xerox dealership in Lismore, and for unconscionable conduct contrary to s 21 of the Australian Consumer Law. The contract claim alleged that the Carrano parties had secretly run a competing business, Storata Pty Ltd (Storata), at the Lismore premises, which was a breach of the terms of the Fuji dealership agreement, and in turn a breach of express and implied terms of the shareholders' agreement. The unconscionability claim alleged that the breaches of the shareholders' agreement and the failure of the Carrano parties to ensure that no business of Storata be conducted in breach of the Fuji dealership agreement constituted unconscionable conduct.
2. The application for security for costs was made by the Carrano parties under Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.21 and s 1335 of the Corporations Act 2001 (Cth). The principles governing the exercise of the discretion are well-established and are relevantly the same. A convenient summary is given in Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [28]-[34] (Beazley JA).
3. Following a short oral hearing addressing objections to affidavit evidence, the primary judge dealt with the application on the papers by reference to UCPR r 42.21(1)(d). The first question, adapting the language of r 42.21(1)(d), was whether there was reason to believe that Siennamia will be unable to pay the costs of the Carrano parties if ordered to do so. If that threshold requirement was satisfied, the second question was whether it was appropriate to make an order that Siennamia provide security for costs. In exercising that discretionary judgment, the Court may have regard to the non-exhaustive list of matters set out in sub-par (1A) of r 42.21, together with such other matters as it considers relevant.

The primary judge's reasons

1. After finding at J[34] that the threshold requirement in UCPR, r 42.21(1)(d) was satisfied, the primary judge proceeded on the basis that:

• Siennamia's claim appeared to be reasonably arguable, with reasonable prospects of success: at J[32],
• the circumstances of the Carrano parties seeking security for costs before any filed defences "strongly indicates that the defendants are seeking to stifle the plaintiff's claim against them": at J[33],
• the parties are genuinely and legitimately engaged in a substantive commercial dispute: at J[35], and
• absent filed defences, the amount of $150,000 sought as security appeared unreasonably excessive: at J[37].

1. The primary judge concluded at [38]: In those circumstances, I am persuaded to conclude that the defendants' motion for security for costs is intimidatory in its nature, and is aimed at stifling the plaintiff's action. As such, on principle, it should not succeed.
2. The Carrano parties require leave to challenge the primary judge's decision as it is interlocutory: District Court Act 1973 (NSW), s 127(2)(a).

Concurrent hearing

1. Siennamia did not file a notice of appearance or appear on the concurrent hearing of the application for leave to appeal with the appeal. Affidavit evidence from the solicitors for the Carrano parties establishes service of the White Book containing the applicants' summary of argument at the registered office of Siennamia on 25 October 2022, together with notice of the date for hearing of the leave application fixed for 6 December 2022. On 30 November 2022, following an enquiry by the Registrar, the solicitors for Siennamia in the District Court proceedings informed the Registrar that they did not hold instructions in this matter and no longer act for Siennamia. Also, on 30 November 2022, a notice of ceasing to act was filed in the District Court.
2. On 1 December 2022, the Registrar vacated the leave only hearing, gave a direction for a concurrent hearing of the leave application with the appeal, and fixed the matters for a concurrent hearing on 13 December 2022. The Registrar also directed the solicitors for the Carrano parties to notify Siennamia of those directions and the date fixed for the concurrent hearing. Affidavit evidence from the solicitors for the Carrano parties establishes compliance with those directions by service of a letter from the solicitors for the Carrano parties to Siennamia at the registered office of Siennamia on 2 December 2022. The solicitor acting for the Carrano parties swore an affidavit dated 13 December 2022 recounting a telephone conversation with a person at the respondent's telephone number confirming that the respondent was aware of the hearing listed for today. I am satisfied that Siennamia has been given notice of the concurrent hearing.

Grounds of appeal

1. The decision whether to order security for costs involved a matter of practice and procedure and the exercise of judicial discretion. Decisions of this kind are difficult to challenge for sound reasons: PPK Willoughby Pty Ltd v Baird [2019] NSWCA 48 at [5]; House v The King (1936) 55 CLR 499 at 504-505; [1936] HCA 40. Ground 1 of the proposed appeal contends that the primary judge denied the Carrano parties procedural fairness in refusing their application for security for costs on the basis of "stultification", in circumstances where Siennamia did not raise stultification as a reason for refusing security and his Honour did not give the Carrano parties an opportunity to be heard on the issue.
2. That the Carrano parties were denied procedural fairness is manifest from his Honour's reasons at J[33] and J[38], in circumstances where it was no part of Siennamia's submissions opposing the application for security for costs that an order for security for costs would stultify the proceedings, or that such an order would be oppressive in the sense that it is being used merely to deny an impecunious plaintiff a right to litigate: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197; Pioneer Park Pty Ltd (in liq) & Others v Australia and New Zealand Banking Group Limited [2007] NSWCA 344; (2007) 65 ACSR 383 at [54]-[56] (Basten JA). Nor did his Honour give the Carrano parties an opportunity to be heard on those issues.
3. The primary judge also erred as a matter of principle in his approach to the issue of stultification. In Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1; [1984] FCA 34, the Full Court of the Federal Court said (at 4): In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

Re-exercise of discretion

1. It is sufficient to address the application for security for costs by reference to the power in UCPR, r 42.21(1)(d). Before the primary judge, the evidence adduced by the Carrano parties established that Siennamia has no apparent value or assets; its paid-up share capital is $100, and it has no real property. Other than its holding of shares in Ikon, which were sold in 2018, it has no other known business purpose. Nor did Siennamia adduce any evidence as to its financial circumstances; it took the position that it was a matter for the Court as to whether the threshold issue was satisfied. On the evidence, the primary judge was correct to find that the Carrano parties had discharged the onus of establishing that there is reason to believe that Siennamia will be unable to pay the costs of the Carrano parties if ordered to do so.
2. The discretionary factors to which the parties directed submissions below focused on four matters: the prospects of success of the proceedings, the genuineness of the proceedings, whether there has been admission or payment into court, and the timing of the application for security for costs: UCPR, r 42.21(1A)(a), (b), (h) and (l).
3. In this Court, the Carrano parties did not challenge the primary judge's characterisation of Siennamia's claim as bona fide, with reasonable prospects of success. That concession was appropriate; the claim as pleaded appears bona fide, the claim is not frivolous and there appear to be real issues to be tried. It is otherwise unnecessary to undertake any detailed examination of the proceedings and the "strength" of Siennamia's case: Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 at [84] (Basten JA).
4. There is no reason to depart from the primary judge's finding that there had been no admissions or payment into court by the defendants: at J[35].
5. The application for security was brought promptly. Siennamia filed its statement of claim on 27 April 2021. After interlocutory disputes which resulted in orders on 19 August 2021 setting aside subpoenas issued by Siennamia and striking out the statement of claim (with leave to amend), the Carrano parties and the then fifth and sixth defendants (against whom the proceedings were subsequently discontinued) applied for security for costs by motion filed on 13 October 2021.
6. One further matter should be mentioned. No person standing behind Siennamia, such as Mr Juan Aguilar, the shareholder of Siennamia, has offered any personal undertaking to be liable for the costs of the Carrano parties if the proceedings are unsuccessful: KP Cable Investments at 198.

Quantum

1. In terms of quantum, the Carrano parties seek an amount of $150,000 based on the evidence of their solicitor, Mr Fitzharris, who estimated the defendants' actual future costs as between $179,019 to $225,974 assuming a 3 - 5 day hearing. Although Siennamia adduced no evidence regarding quantum and did not seek to cross examine Mr Fitzharris, it submitted below that Mr Fitzharris' estimate was "very high" and, in any event, that any security should be ordered in tranches.
2. Accepting that the Court should take a broad-brush approach to the quantum for an order for security for costs and not attempt a detailed costs assessment (Milosevska v Milosevski [2019] NSWSC 711 at [79(t)] (Hallen J)), two observations can be made in relation to the estimates given by Mr Fitzharris.
3. First, given the early stage of the proceedings and in the absence of a filed defence, it is appropriate to assume that a hearing would take three days, rather than the longer estimate of five days.
4. Second, some of the allowances by Mr Fitzharris for the interlocutory steps appear to involve a degree of duplication or unnecessary work. For example, there appears to be duplication in the estimate for taking instructions and preparing defences (solicitor: 12 hours and counsel: 25 hours) and conferences with witnesses and preparing affidavit evidence (solicitors: 40 and 20 hours, counsel: 30 hours). In addition, with respect to discovery, the estimate that counsel would be involved for between 16-37 hours seems unwarranted.
5. In my view, assuming a 3-day hearing, an award of security in an amount of $125,000 would be reasonable.
6. As to the provision of security in tranches, the Carrano parties accept that this is appropriate. They seek an order for the provision of 75 per cent of the relevant figure within 28 days and the balance of 25 per cent to be paid no later than eight weeks prior to the date allocated for the trial. In the circumstances of this case, I consider that the appropriate tranches are 60 per cent of the relevant figure to be paid by 31 January 2023 and the other 40 per cent to be paid no later than eight weeks prior to the trial date.

Orders

1. I propose the following orders: 1. Grant leave to appeal on ground 1. 2. Dispense with the filing of a notice of appeal. 3. Appeal allowed. 4. Set aside the orders made by Levy SC DCJ on 19 August 2022, and in lieu, order that: 1. the plaintiff is to provide security for the first, second, third and fourth defendants' costs of the proceedings in the sum of $125,000 in the following tranches: 1. the sum of $75,000 by 31 January 2023; and 2. the sum of $50,000 to be paid eight weeks prior to the date allocated for the trial of the proceedings; 1. the security the subject of par (a) is to be provided by payments into the District Court or provision of bank guarantees from an Australian bank; 2. in default of compliance with par (a) the proceedings are stayed; 3. the plaintiff pay the first, second, third and fourth defendants' costs of the motion filed 13 October 2021. 1. Direct that any case management application in relation to the orders referred to in (4) above be made in the District Court. 2. The respondent to pay the appellants' costs in this Court. 3. Direct the appellants to serve a copy of these orders on the respondent within 7 days.
2. BASTEN AJA: I agree with the presiding judge.
3. GRIFFITHS AJA: I agree with the presiding judge.

Amendments 13 December 2022 - Amended citation. 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: 13 December 2022