Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd

Security for costs principles 9 In each case, security for costs are sought pursuant to either s 56 of the Federal Court Act 1976 (Cth), r 19.01 of the Federal Court Rules 2011 (Cth), or s 1335 of the Corporations Act 2001 (Cth). In this case nothing turns upon small differences in approach to security for costs in each of those provisions or in the inherent jurisdiction. 10 None of the principles concerning security for costs was in dispute in this case. The written submissions of the parties did not seek to address those principles. They are well known and are summarised in broad terms below. 11 In Madgwick v Kelly [2013] FCAFC 61; (2013) 212 FCR 1, 4 [6], Allsop CJ and Middleton J endorsed the comments of the primary judge, who explained that the discretion to award security for costs is broad and unfettered. The only limitation is that it must be exercised judicially according to the merits of each case and without any particular predisposition. 12 The substantive onus of proof rests throughout upon the party seeking security. The threshold issue, in the terms of s 1335(1) of the Corporations Act, is that there is "credible testimony" demonstrating "reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence". However, once this conclusion is reached, there is an evidentiary burden on the party resisting the order for security for costs to establish a reason why security should not be granted. That requires only that the applicant raise (with some basis to do so) the matters that it wishes to be taken into account in determining whether the order for security for costs should be made: Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 [25]-[28] (Gleeson J). 13 Some of the common factors to be considered by the Court in the grant of security for costs were recently summarised by Collier J in Hii v Federal Commissioner of Taxation (No 3) [2016] FCA 58 [9] - [10]. Those factors, and others which are often referred to, include: (1) the likelihood of the applicant being unable to pay the respondent's costs; (2) the characteristics of the applicant including whether it is a corporation or a natural person, the wealth of the applicant, whether the applicant is a foreign resident and, if so, the assets held by the applicant in Australia; (3) whether any impecuniosity of the applicant was caused by the respondent's conduct which is the subject of the claim, to the extent to which that can be assessed; (4) whether the application for security is oppressive; (5) whether the award of security would deny an impecunious applicant a right to litigate; (6) whether there are persons standing behind the applicant who are likely to benefit from the litigation; (7) whether the persons standing behind the applicant have offered any security or personal undertaking to be liable for the costs, and if so, the form of that security or undertaking; (8) whether the proceedings are in substance defensive in the sense of directly resisting proceedings already brought or seeking to halt the respondent's self-help procedures so that the applicant is, in substance, forced to litigate; (9) whether the application for security had been brought promptly; (10) whether the applicant has any rights which it can exercise against assets of the respondent to satisfy an order for costs in its favour; (11) the strength and bona fides of the applicant's case, although this will invariably only be determined in a provisional manner and in many cases will only be a broad brush impression of little weight; and (12) any factors relating to the public interest.

The application by Cellcrete Australia and Mr Reiniger (the Cellcrete parties) 14 The first application is by the Cellcrete parties for security for costs from the CMS parties. They also seek security from the CMS parties for undertakings as to damages that the CMS parties gave on 20 August 2015. 15 The Cellcrete parties assert that there is reason to believe that that the CMS parties will be unable to pay the costs of the Cellcrete parties, and that the undertakings as to damages are essentially worthless. The Cellcrete parties say that the CMS parties are impecunious. 16 CMS and its directors are all resident in Australia. CMS's solicitor says in his affidavit that "CMS is asset rich, but cash poor due to recent payments of its debt to St George Bank [of $1.1 million]". CMS says that its net asset position is $948,470. Among CMS's many assets is a Coalcreter Underground Concrete and Backfilling Plant (Coalcreter) which CMS says is worth $335,000. 17 The Cellcrete parties dispute that the St George Bank debt has been paid. Initially no documents were produced to support the assertion. In late March 2016, documents were requested by the Cellcrete parties, and two letters from St George Bank were produced. The letters referred to various agreements and to equipment provided as security for facilities. They contained the statement that "the above account has been finalised". The Cellcrete parties were not satisfied. On 23 March 2016 at 5.00pm, they sought further evidence of the discharge of the St George Bank debt. At 10.44am the following morning, the Cellcrete parties filed affidavit evidence asserting that no further documents had been produced. 18 In the circumstances of the very short period of time in which this evidence was required to be produced, it appears to me extremely likely that the St George Bank debt was discharged. In any event, any doubt is dispelled by a document tendered with submissions from CMS, to which no objection was taken. That document is a letter from the St George Bank referring to the Master Asset Finance Facility of $1,500,000. It explains that all contracts under the facility have been fully repaid. It said that the facility has been cancelled and all securities discharged. The letter concludes by saying that the "only arrangement with the Bank for [CMS] is the Business Credit Card facility of $3,000" and that there are no securities held for that facility. 19 The Cellcrete parties also dispute that CMS has net assets of $948,470. They assert that the Coalcreter is not worth $335,000. It is hard to understand the basis of this submission. The Coalcreter is unencumbered by any security. It was purchased from Cellcrete Australia in used condition for $335,000 (exclusive of GST and duty). Even if depreciation were applied to the Coalcreter since it was purchased on 8 January 2013, it would still be of very significant value. 20 The Cellcrete parties assert that the Coalcreter must have negligible value because CMS asserts that Cellcrete Australia's assets (including two Coalcreters) have only a market value of $220,600 and, if sold at auction, $84,200. These figures are derived from the report from Slattery Asset Advisory (the Slattery Report). I explain later in these reasons why those figures are not reliable. In any event, there is no necessary inconsistency here. The evidence of CMS, based on the Slattery Report, is that the Coalcreters owned by Cellcrete Australia have an auction value of $28,000 because (unlike CMS's Coalcreter) they (i) are not suitable for underground work, and (ii) are dissembled and stored in a shelfery container. Further, Cellcrete Australia's own evidence is that its Coalcreters are valued at $1,100,000 because they are new rather than used (which would support a value of $335,000 for CMS's Coalcreter). 21 The costs of the Cellcrete parties up to trial for defending the claim by CMS is estimated, on a party/party basis (assuming a very high recovery of 70-80% of costs), at between $198,761.50 and $227,156.00. As a very broad brush assessment, I doubt whether costs of more than $200,000 would be recovered. Even if I were to operate on the assumption that the Cellcrete parties would recover $200,000 for the period up to trial if successful in their defence, I would not be not satisfied that there is "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". Although CMS cannot be described as being in a very strong financial position, I am not satisfied on the evidence before me that that there is reason to believe that that the CMS parties will be unable to pay the costs of the Cellcrete parties. 22 In any event, even if my discretion were enlivened to order security for costs I would decline to do so in the exercise of discretion. On the evidence before the Court, even if the threshold issue had been met, I would conclude that the risk is very small that some of the costs of the Cellcrete parties would not be paid. Even taking into account that the litigation is conducted in part for the benefit of persons standing behind CMS as shareholders (Mr Holt and Mr Pallas), it is pertinent that Mr Reiniger also owns a 37.5% share of CMS. 23 I would also decline, in the exercise of discretion, to order further security for the undertaking given by CMS and Mr Holt, which included leaving equipment at a particular engineering premises and not to sell the CA10MK3 pump. The Cellcrete parties gave the undertakings in circumstances which included Mr Reiniger's statements that the Cellcrete parties had no interest in purchasing, ordering, obtaining, selling, or offering for sale the CA10MK3 pump. At the time these undertakings were given, senior counsel for the Cellcrete parties conceded that there was no information that would reasonably suggest that there was any prospect of them suffering financial loss as a consequence of being ordered to give the undertakings. The Cellcrete parties now allege that equipment that they have left with CMS might not be secure, might not be in good condition, and might be converted by CMS. But CMS has submitted that it will release Mr Reiniger from his undertaking in relation to the equipment at the engineering premises and return that equipment to him.

The application by CMS, Mr Holt, and Mr Pallas (the CMS parties) 24 The second application is by the CMS parties for security from the Cellcrete parties for the costs of the cross-claim by the Cellcrete parties. The CMS parties seek security for party/party costs of $131,946.50 for the period up to and including a three day trial. There are two difficulties with this. The first is that I do not presently consider it necessary to award security for costs for the entire period of preparation leading up to a trial as well as the trial. The security for costs application by Cellcrete Australia was properly limited to the period up to the trial. The second difficulty is that it is excessive to apportion half of the trial to the cross-claim. A realistic claim for security for costs would be around $80,000 for the period leading up to the trial. 25 As to the threshold issue, although Cellcrete Australia is an Australian corporation, Mr Reiniger is its sole director and shareholder. He resides in Thailand. He is unable to enter Australia. He owns no real property in Australia. 26 The absence of a fund within Australia against which a successful respondent could enforce a judgment for costs is significant. Although judgments can be enforced in some other jurisdictions, the process of enforcement involves delay, uncertainty and, sometimes, significant cost. In PS Chellaram & Co Ltd v China Ocean Shipping Co [1991] HCA 36; (1991) 102 ALR 321, 323, McHugh J said the following: However, for over 200 years, the fact that a party, bringing proceedings, is resident out of the jurisdiction and has no assets within the jurisdiction has been seen as a circumstance of great weight in determining whether an order for security for costs should be made. Indeed, for many years the practice has been to order such a party to provide security for costs unless that party can point to other circumstances which overcome the weight of the circumstance that that person is resident out of and has no assets within the jurisdiction. 27 The Cellcrete parties say that they have assets as follows: (1) a claim against CMS (as part of the cross-claim) for a debt of nearly $500,000; (2) a large amount of equipment owned by Cellcrete Australia which Mr Reiniger initially asserted to be worth $1.9 million and now estimates to be worth $3 million; and (3) Mr Reiniger's 37.5% shareholding in CMS. 28 On an assumption generous to the CMS parties, the asset in (1) can be put to one side because if the cross-claim by the Cellcrete parties were to fail in its entirety then (1) would not be of any value. This assumption is generous because it is possible that the cross-claim concerning (3) might succeed in part. 29 As to (2), there is considerable dispute about the value of the equipment owned by Cellcrete Australia. CMS's expert evidence, in the Slattery Report, suggests that this equipment is worth only $84,200. It is unnecessary to descend into the detail of this dispute because, on any view, the value of the equipment is more than sufficient for any security I would consider awarding. It suffices to refer to several unsatisfactory aspects underlying the submission that the equipment is worth only $84,200. The first is that although the 26 page Slattery Report is dated 21 September 2015, it was not provided to the Cellcrete parties until 3 March 2016, one week before the evidence of the Cellcrete parties' was due. The Cellcrete parties did not have adequate time to respond with any expert evidence. The second is that the figure of $84,200 is the auction value of the equipment. The Slattery Report estimates the market value to be $220,600. There is no evidence concerning the extent to which a private sale at market value could be achieved without auction. The third is that, as I have mentioned, there is a significant dispute about the value of two Coalcreters owned by Cellcrete Australia. The valuation in the Slattery Report is based on an assumption that the Concreters are not suitable for underground work. The evidence of the Cellcrete parties is that the two Concreters are similar equipment to the "2 new Coalcreter Underground Concrete and Backfilling Plants", one of which is valued by CMS at $335,000 in used (rather than new) condition. 30 As to (3), if the cross-claim by the Cellcrete parties were to fail in its entirety then there are two alternatives. 31 The first possibility is if the cross-claim by the Cellcrete parties fails in its entirety and the claim by CMS were to succeed then Mr Reiniger's 37.5% shareholding in CMS would be of substantial value and, on a rough basis, I am satisfied that it would be more than sufficient to cover CMS's costs of the cross-claim. 32 Alternatively, if the cross-claim by the Cellcrete parties were to fail in its entirety but the claim by CMS were also to fail then it is unlikely that any assets would be needed to cover security for costs. A costs award which, at this stage, would seem to be very favourable to CMS (whose claim seems at this stage to be larger and more costly) is that there would be no order as to costs. 33 The application by the CMS parties for security from the Cellcrete parties for the costs of the cross-claim by the Cellcrete parties fails at the threshold stage. Again, even if it did not, I would not have exercised my discretion to order security for costs. Any deficiency in the sufficiency of assets held by the Cellcrete parties would be small. And a number of matters in the cross-claim are closely related to matters raised in CMS's claim. Although the Cellcrete parties' cross-claim cannot be described as "defensive", I accept the submission of the Cellcrete parties that they would not have brought their cross-claim if there were not otherwise litigation on foot against them.

Conclusion 34 All applications for security for costs are refused. Although each of the relevant parties has sufficient assets to pay the costs of the other's claims, the combination of its own costs of a contested six day trial together with a payment of the costs of the opposing party might nevertheless impose a huge burden on either CMS or Cellcrete Australia. It is easy to see how the individuals involved in this case are antagonistic to each other. It is far less easy to see why commercial rationality should not prevail. The parties should give consideration to further mediation if they wish to avoid spending many of their valuable assets on their own costs, and potentially the costs of the other side, in litigation. 35 In circumstances in which these two applications involved overlapping evidence and submissions, and in circumstances where the two applications were of similar length and complexity, my preliminary view is that it is hard to see why the appropriate order as to costs should not be that there is no order as to costs. Unless either party wishes to make submissions to the contrary I will make that order as to costs. I certify that the preceding thirty five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman.