Chong Yon Han and Jung Ok Min as trustee for H M Trust trading as Eastpoint Newsagency v Tanert Pty Limited

District Court of NSW|2014-01-24

EX TEMPORE Judgment 1Chong Yon Han and Jung Ok Min conduct a family-owned newsagency business. The business is conducted through a trust. They are the trustees and, with their two children, the beneficiaries. 2On 22 October 2011 water leaked from above into the newsagency causing damage. Mr Han and Mrs Min, as trustees, sued the owner of the shopping centre where the newsagency is located and the owners corporation that owns that part of the building where the leak originated, including the leaking pipe. 3The owners corporation in December 2013 applied for security for costs. The owner takes no interest in the application. The basis of the application is that the case of Mr Han and Mrs Min against the owners corporation is weak and that the trust cannot be relied upon to meet an adverse costs order if the proceedings are unsuccessful.

THE STRENGTH OF THE CASE 4The owners corporation says the case is weak for two reasons. First, it is said that by an agreement reflected in the bylaws the owners of the shopping centre rather than the owners corporation has accepted responsibility for the pipes. Neither the plaintiffs nor the owner accept this proposition. 5The second reason is said to be that the Court of Appeal in Owners Strata Plan 50276 v Thoo [2013] NSWCA 270 has decided that breach of s 62 of the Strata Schemes Management Act 1996 does not give rise to a cause of action in damages. This submission does not appear to deal with the plaintiffs' cause of action pleaded in negligence. 6There can be no suggestion that the proceedings are frivolous or vexatious. The proceedings comprise a bona fide claim in respect of an undisputed loss although its quantum is not agreed. Although liability evidence appears not yet to have been filed and served by Mr Han and Mrs Min, despite a direction some time ago requiring it, the second defendant, the owner, has not yet filed a defence. The incomplete pleadings might provide some explanation for the delay in the filing of evidence. 7Rule 42.21(1A)(b) specifies that the genuineness of the proceedings is a matter I should take into account. That consideration operates in favour of the plaintiffs. 8Rule 42.21(1A)(a) requires consideration of the prospects of success or merits of the proceedings. It is difficult to assess prospects when all the evidence is not available, see Appleglen Pty Ltd v Mainzeal Corporation Pty Ltd (1988) 79 ALR 634. 9Also, a regular claim disclosing a cause of action should in the absence of other evidence be treated as a bona fide claim with reasonable prospects of success, see KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197, Staff Development and Training Centre Pty Ltd v Commonwealth of Australia [2005] FCA 1643 at [12], [13].

THE IMPECUNIOSITY OF THE TRUST 10I have been provided with the accounts of the trust. They indicate that the bulk of the trust assets are goodwill with a significant amount of value attributed to property, plant and equipment and stock on hand. However, the liabilities of the trust are also significant, leaving a very small net asset position. Most of the liabilities comprise amounts owed to Mr Han and Mrs Min. 11Mr Han and Mrs Min point to a significant amount of funds in a bank account. However, the balance of the bank account of the trust was not so favourable at the time of the compilation of the last accounts, nor after 9 January 2014 when a substantial withdrawal occurred. That withdrawal seemed to have resulted in a substantial deposit into a personal account. 12It cannot be said with confidence that the trust bank account will continue to hold a substantial amount of funds. Were Mr Han or Mrs Min to demand repayment of the loan listed in the current liability section of the trust's accounts it is difficult to see how, short of a sale of the business, that demand could be met. Neither Mr Han nor Mrs Min has undertaken not to call upon the loan. 13In my view, there may be a genuine concern that the trust might not be able to meet any adverse costs order in the proceedings.

OTHER CONSIDERATIONS 14There are other relevant matters impacting upon the application. In Ritchie's Uniform Civil Procedure NSW, the following passage appears at paragraph 42.21.85: "[42.21.85] Nominal plaintiff A party who is merely a nominal plaintiff may be ordered to provide security under this rule...Ordinarily persons who are suing in a representative capacity such as a trustee in bankruptcy: Cowell v Taylor (1885) 31 Ch D 34 at 38; a liquidator: Re Strand Wood Co Ltd [1904] 2 Ch 1; an administrator: Rainbow v Kittoe [1916] 1 Ch 313; or a trustee: White v Butt [1909] 1 KB 50; Riot Nominees Pty Ltd v Suzuki Australian Pty Ltd (1981) 34 ALR 653...will be personally liable for the costs of unsuccessful proceedings and, accordingly, they ought not to be required to provide security for costs." 15This principle seems to be a weighty matter against an order for security. The owners corporation was initially reluctant to concede that Mr Han and Mrs Min may be liable for costs if the proceedings were unsuccessful. The reluctance to make that concession was shared by Mr Han and Mrs Min. 16Ultimately, the owners corporation submitted that Mr Han and Mrs Min were not shown to have any assets. One could not be confident, it was said, that the trust's obligation to indemnify the trustees would be of substantial value. However, Mr Han and Mrs Min have the benefit of substantial loans payable to them from the trust. If those loans are met the trustees are able to meet an adverse costs order. If those loans were ignored the trust would have a substantial positive net asset position. Admittedly the assets are largely, but not wholly, in the form of goodwill. 17There is no evidence to indicate that Mr Han and Mrs Min do not receive regular payments of significance for their labours in running the newsagency. It is unclear whether the items of wages and contract payments in the profit and loss statement of the trust relate to monies paid to Mr Han and Mrs Min. 18In these circumstances, I am not satisfied that the owners corporation has established the impecuniosity of Mr Han and Mrs Min (see r 42.21(1A)(c)). Even if it did, that would not be sufficient to warrant an order under r 42.21 because of the operation of subr (1B), which provides that if the plaintiff is a natural person an order for security for costs cannot be made merely on account of his or her impecuniosity. 19I have considered the other relevant matters specified in r 42.21(1A). There is no evidence that an order would stifle the proceedings so that r 42.21(1A)(f) is not a factor in favour of the plaintiffs. 20Delay is a relevant issue, see Morris v Hanley & Ors [2001] NSWCA 374 [30] and 42.21(1A)(i). The owners corporation has not satisfactorily explained why the security for costs application was made 18 months after the commencement of the proceedings. 21It was submitted that not until the middle of 2013 was a pleading amendment made which revealed that the plaintiffs were suing on behalf of the trust. If that is an excuse for some delay there remains a delay of several months before the application was made. 22The evidence discloses that the owners corporation has incurred $63,000 in costs in the proceedings and it says that a further $30,000 in costs will be incurred. The plaintiffs have also incurred substantial costs in this period. If about two-thirds of the costs of the proceedings have already been incurred then this is a matter weighing against any order for security. 23Were I minded to make an order, it would only be appropriate in this case to order security for the future costs to be incurred (reduced to a party/party basis) so that an amount of say $20,000 of the $30,000 of future costs said to be remaining would be ordered in respect of security. 24However, the principal reason why the owners corporation is not entitled to an order for security is it cannot bring itself within the provisions of r 42.21(1). 25The owners corporation submitted that it fell within paragraph (e), that Mr Han and Mrs Min were suing not for their benefit but for the benefit of another person and there was reason to believe that they would be unable to pay the costs of the owners corporation. But, in my view, the plaintiffs, Mr Han and Mrs Min, do have a real interest in the proceedings and could not be described as a nominal plaintiff. I do not accept that they were suing "not for [their] own benefit". 26A nominal plaintiff is "nothing but a puppet for some third party, a mere shadow, in the sense that he has parted with any right he may have had in the subject matter", Andrews v Caltex Oil (Australia) Pty Ltd (1982) 40 ALR 305 at 309. A real plaintiff is not allowed to enforce a right through a nominal plaintiff who is a person of straw: Sykes, Shaw & Hannah v Sykes (1869) LR4CP 645 at 648, Riot Nominees Pty Ltd v Suzuki Australian Pty Ltd (1981) 34 ALR 653. See also the passage that I quoted from Ritchie's above. 27In my view, the proceedings are properly for the benefit of Mr Han and Mrs Min. Rule 42.21(1)(e) is inapplicable for that reason. Furthermore, I am not satisfied that there is reason to believe that Mr Han and Mrs Min will be unable to pay the costs of the defendants if ordered to do so, which is another reason why paragraph (e) is not applicable. 28A principal policy foundation for an order for security for costs is to ensure that the real plaintiffs do not hide behind the "skirts" of a company or some other person or body of no value and thus seek to take the benefit of litigation without bearing the risks and responsibilities of a loss. That is not the case here. The plaintiffs are natural persons, are the real plaintiffs, have a real interest in the outcome and if successful will be available for all that they are worth to meet an adverse costs order. 29There may be questions about the plaintiffs' prospects of success but in my view a security for costs application is not the occasion for determining an entitlement to summary judgment, see Staff Development at [12] and [13]. If the case is so weak that it should not be permitted to continue, it is open to the owners corporation to make an application for summary dismissal. 30For these reasons, I am not minded to make any order in respect of security. 31In respect of costs, the plaintiffs seek only an order that the first defendant pay the costs of today and that otherwise the costs of the application be costs in the proceedings. I see no reason why that limited costs order should not be made, given the success of the plaintiffs in the application, and accordingly the orders of the Court are: (1)The application for security for costs dismissed. (2)The first defendant, The Owners - Strata Plan No 21608, pay the plaintiffs' costs of today, and otherwise the costs of the application be costs in the proceedings.

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