Supreme Court of NSW|1998-06-19|Before: Rolfe J, Smart J

Dalma Formwork Pty Limited (Administrator Appointed) v Concrete Constructions Group Limited Matter No 55006/98 [1998] NSWSC 472 (19 June 1998)

DALMA FORMWORK PTY LIMITED (ADMINISTRATOR APPOINTED) v CONCRETE CONSTRUCTIONS GROUP LIMITED

The Supreme Court of New South Wales Common Law Division

Dates of Hearing of Motion: 7 May 1998, 10 June 1998

Counsel for Plaintiff/Respondent: Mr F C Corsaro

Solicitors for Plaintiff/Respondent: Clayton Utz

Solicitors for Defendants/Applicant: Corrs Chambers Westgarth

Principles in such an application as stated by Smart J in Sydmar Pty Limited v Statewise Developments Pty Limited (1987) 11 ACLR 616 considered and particularly whether lack of funds must be "contributed to" as well as "caused by" conduct of the defendant.

Held only appropriate to come to a prima facie view as to whether there is a bona fide case with reasonable prospects of success.

Held that the existence of a defence to a cross-claim, although pleaded as a positive claim, arising out of the same, or essentially the same, factual matrix is sufficient reason, in the exercise of discretion, to refuse the application, the defendant having stated that it would pursue portion of the debt and not having foregone the balance of the set-off by agreeing not to make a claim on the Administrator or a liquidator.

Or Contributed To By the Conduct Of The Defendant? 8

Whether Substantially The Same Facts Are Likely

DALMA FORMWORK PTY LIMITED (ADMINISTRATOR APPOINTED) v CONCRETE CONSTRUCTIONS GROUP LIMITED

This litigation commenced on 23 February 1998 when Concrete Constructions Group Limited, ("CCG"), for which Mr R.W. Hunt of Counsel appeared, instituted proceedings in the Equity Division against Mr Maxwell William Prentice, who is the Administrator of Dalma Formwork Pty Limited (Administrator Appointed), ("Dalma"), and Dalma, for which Mr F.C. Corsaro of Counsel appeared, whereby it sought certain orders in the administration of Dalma by Mr Prentice. Dalma, at all material times, carried on the business of supplying, fixing and dismantling formwork and, on or about 19 February 1997, it entered into a sub-contract with CCG to carry out that work on the Broadway Shopping Centre project, Parramatta Road, Sydney, pursuant to which contract CCG was to pay it $7,050,000 as adjusted by the terms of the sub-contract.

It immediately became apparent that the fate of the proceedings depended upon a dispute between CCG and Dalma in relation to that sub-contract and, on 26 February 1998, an order was made transferring the proceedings to the Construction List of the Common Law Division and the matter was listed for directions before me on 27 February 1998.

I directed that Dalma, as plaintiff, file a Summons, which it did on 9 March 1998. By that Summons it sought damages for alleged breaches of the sub-contract and pursuant to s.82 of the Trade Practices Act 1974 ; the payment of moneys allegedly owing under the sub-contract and reasonable remuneration for the sub-contract works; and, in the alternative to the claim for reasonable remuneration, damages for repudiation of the sub-contract. Dalma also sought ancillary relief by way of interest and costs.

On 20 March 1998 CCG filed its Defence asserting that the sub-contract was entered into on 10 April 1997. The Defence, generally speaking, denied Dalma's allegations, and asserted that in breach of the sub-contract Dalma had failed to make payment to three organisations in respect of its employees and that, by Deed dated 23 December 1997, CCG agreed to make those payments and Dalma agreed to repay CCG and that, pursuant to that Deed, CCG made the payments totalling $175,251.90, which Dalma is liable to repay to it. The Defence also pleaded an entitlement to set-off against any moneys to which Dalma may be entitled $1,676,125 for loss and damage allegedly suffered by CCG by dint of Dalma's failure to perform the sub-contract and the said sum of $175,251.90. CCG did not seek to recover these moneys by way of a cross-claim.

On 20 March 1998 CCG filed a Notice of Motion seeking an order that Dalma provide security for its costs of the proceedings in the sum of $250,256 "or such other amount as the Court thinks fit" pursuant to s.1335(1) of The Corporations Law, which provides:-

"Where a corporation is a 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."

It was common ground that Mr Prentice was appointed as Dalma's Administrator on 8 January 1998, and that its first creditors' meeting was held on 14 January 1998. It was expressly conceded by Mr Corsaro:-

".. that if a costs order were made in the proceedings in favour of the defendant, the plaintiff would not be able to meet that costs order": Tp.1.

A matter, which arose at a fairly early stage in the proceedings, was whether, if an order for security were made and not met, CCG would none-the-less seek to recover the amount of the set-off. The relevance of this was that if CCG had that intention it would be open to Dalma, in defence of that claim, to raise by way of defence the matters it was asserting as plaintiff and, accordingly, as all the matters arose out of the same essential factual matrix or situation as the present proceedings there would be no real point in ordering security for costs. At Tp.2 I asked Mr Hunt:-

"If an order for security is made and security is not provided, I assume, Mr Hunt, your client will give an undertaking that it will not proceed to seek to recover against the plaintiff, any amount, other than the $175,251.90, arising out of the contract, save perhaps for any costs to which they may be entitled to in the proceedings?

HUNT: That is on the assumption that the proceedings are permanently stayed. We certainly don't seek to agitate, in a cross-claim, any part of the set-off for those payments."

It was clear at the time, although the answer Mr Hunt gave may be susceptible of several meanings, that CCG intends to pursue the claim for $175,251.90. This was subsequently confirmed in final submissions by Mr Hunt. His submission, in this regard, was that CCG would seek to recover that amount pursuant to the terms of the Deed. As the pleadings presently stand the amount is only pleaded as a set-off and, if it is to be pursued, it will be necessary for CCG to propound either a cross-claim in these proceedings or an independent claim.

Mr Corsaro's response was that if this amount was to be claimed, it would be necessary for it to be claimed by way of cross-claim in these proceedings and, accordingly, that would enable Dalma to raise by way of a defence the issues it propounds in its Summons. The potentially interesting question as to an Anshun type estoppel, which may apply, if CCG does not pursue that claim in these proceedings, may well have to be considered. Mr Corsaro also made the point that CCG had not offered or given any undertaking that it would not seek to prove as an unsecured creditor in the administration or subsequent liquidation of Dalma. He submitted that if it did the administrator or liquidator would be able to raise, in support of a rejection of that claim, the question of the damages allegedly payable by CCG to Dalma.

In the light of Dalma's concession, it is necessary to consider the bases on which it is able to resist the order for security, in circumstances where there was no challenge to the estimate of costs of $250,256. Mr Corsaro raised the following matters. Firstly, he submitted that there is an "unfettered" discretion as to whether an order should be made. Whilst it is correct to say the discretion is wide, I am not satisfied it is "unfettered". Moreover it is a discretion exercised in a matter of practice and procedure at an interlocutory level: Hession v Century 21 South Pacific Limited (in liq) (1992) 28 NSWLR 120. However, Mr Corsaro's submissions did not go beyond the accepted discretionary considerations. Secondly, he submitted that when one had regard to the evidence Dalma has reasonable prospects of success. Thirdly, he submitted that the evidence established that Dalma's financial difficulties stemmed from the conduct of CCG, with the consequence that consistently with a number of authorities CCG should not be entitled to take advantage of its conduct by preventing Dalma's pursuing a claim with reasonable prospects of success. The second submission necessarily requires consideration. The third constitutes a serious allegation, which, in my opinion, should be considered. Fourthly, he submitted that as there were outstanding claims by CCG, one of which was being, and some of which may be, pursued arising out of the same factual matrix, it was not appropriate to order security.

Finally Mr Corsaro submitted that if an order were made, in circumstances where Dalma was unable to give the security, the litigation would be stultified. In those circumstances, he contended that the Court should accept security offered by a director and shareholder of Dalma, he being a person who was prepared "to stand behind" it. The potentiality of stultification of proceedings will always be in contemplation unless, of course, security can be provided by creditors or persons with an interest in the company, such as directors or shareholders. If such entities cannot provide security, in circumstances where the Court thinks it appropriate that that should occur, the proceedings will be stayed. The difficulty with the preparedness of the director and shareholder giving security in this case is that the evidence tends to indicate that he may not have the financial wherewithal to meet an order or, to put it another way, to make good his guarantee. In those circumstances I suggested to Mr Corsaro that to allow an order for security to be satisfied by such a guarantee would amount to little more than substituting one impecunious party for another, which, in my respectful opinion, hardly seems to meet the mischief at which s.1335(1) is directed.

A number of the principles relevant to the way in which the discretion should be exercised were considered by Smart J in Sydmar Pty Limited v Statewise Developments Pty Limited (1987) 11 ACLR 616. At pp.626-627 his Honour set forth matters, which were included as being relevant to the exercise of the discretion thus:-

1. Whether the plaintiff's claim is made bona fide and has reasonable prospects of success.

2. Whether the plaintiff's lack of funds has been caused or contributed to by the conduct of the defendant.

3. Whether the plaintiff's proceedings are merely a defence against `self help' measures taken by the defendant.

4. Whether the making of the order would unduly stultify the plaintiff's ability to pursue the proceedings.

5. The extent to which it is reasonable to expect creditors or shareholders to make funds available to satisfy any order for security which is made.

6. Whether the defendant has delayed in making the application for security.

8. Whether substantially the same facts are likely to be canvassed in determining the action and the cross-action.

I shall deal with those necessary, in my opinion, to determine the issue and to deal with the serious allegation, which I have identified.

Is Dalma's Claim Made Bona Fide And Has It Reasonable Prospects of Success?

At this stage it is only possible, and, in my view permissible, to form a prima facie view about bona fides and the prospects of success. Such an application should not be a rehearsal for the main hearing, nor, in my opinion, should the Judge hearing it be required to come to ultimate conclusions, which may well disqualify his hearing the substantive matter. I have considered the evidence which has been given and there is nothing, which satisfies me, that Dalma's claim has not been brought bona fide. Further, although certain submissions were directed to the reasonable prospects of success, I am not satisfied that it is possible to say, as the evidence presently stands and taking a prima facie view, that there are not reasonable prospects of success. I am fortified in this conclusion by the absence of any application by CCG to dismiss the proceedings as being frivolous, vexatious or an abuse of process or as failing to disclose any arguable case. If such an application were made CCG would, of course, have to meet the stringent General Steel's test.

In all the circumstances I am satisfied that Dalma has established that the claim has been made bona fide and has, at least at the prima facie level at which I consider I must presently consider the matter, reasonable prospects of success.

Whether Dalma's Lack Of Funds Has Been Caused Or Contributed To By the Conduct Of CCG?

The allegation that Dalma's lack of funds was either caused by or contributed to by CCG is a serious one, was fully contested, and, in my opinion, demands my conclusion.

For the proposition stated in the heading Smart J relied upon Lynnebry Pty Limited v Farquhar Enterprises Pty Limited (1977) 3 ACLR 133; Spiel v Commodity Brokers Australia Pty Limited (1988) 8 ACLR 410 and Sir Lindsay Parkinson & Co Limited v Triplan Limited [1973] 2 All ER 273. Mr Hunt challenged that part of the test was concerned with "contributed to".

In Triplan Lord Denning MR, at pp.285-6, stated the submission for the test thus:-

"The Court might also consider whether the application for security was being used oppressively - so as to try and stifle a genuine claim. It will also consider whether the company's want of means has been brought about by any conduct by the defendants, such as delay in payment or delay in doing their part of the work."

His Lordship did not indicate any disagreement with that submission and the other two Lord Justices did not comment on the point. The submission did not include "contributed to".

"Lack of means of an individual plaintiff is no ground for ordering security for costs but the plaintiff in this case is not an individual; it is a company and s.363, of course, applies even though it is a family company with a paid up capital of $2 and consisting of two shareholders ...

The Master, however, in exercising his discretion, also took into account the fact that, in his view, the present parlous financial position of the plaintiff and of its two shareholders had been brought about by the alleged fraudulent misrepresentation made by the vendor company and by the alleged negligence of the solicitors in the course of their alleged retainer.

I am unable to accept Mr Einstein's submission that the plaintiff would have been in insolvent circumstances irrespective of the land transaction, the subject of the action. Mr B.J. Fehon stated before the Master that the company was in a healthy situation until the time when the subject land was bought and he had been pouring money into the company from his other sources and those of his wife, ever since the purchase.

On a consideration of this evidence and of the plaintiff's balance sheets, I am of the opinion that the plaintiff's present financial difficulties are largely due to the transaction. This is, I think, a most relevant circumstance (Sir Lindsay Parkinson ..) and one which warrants the application being refused."

In J. & M. O'Brien Enterprises Pty Limited v The Shell Co of Australia Limited [1983] FCA 96; (1983) 7 ACLR 790, to which Smart J did not refer in this context, Bowen CJ considered a submission that the impecuniosity of the plaintiff "was due to the actions of Shell". His Honour said he thought it was true to say that the actions of Shell, particularly its decision in 1979 to require the plaintiff, along with other of their distributors, to change to a cash basis in paying for deliveries of petrol, produced a liquidity problem for the plaintiff from which some of its difficulties had stemmed. His Honour said that he considered that that "was no more than a contributing factor to their financial difficulties". In Spiel v Commodity Brokers Australia Pty Limited, Bollen J, delivering the decision of the Full Court of the Supreme Court of South Australia, repeated the fact that a matter to be considered would be "whether the company's want of means has been brought about by any conduct by the defendants": p.415, but he did not elaborate on it.

These authorities, if I may say so with respect, do not support the view that the impecuniosity has been "contributed to" by the conduct of the defendant. In my opinion they establish that there must be a real causal connection between the conduct and the impecuniosity which, in the exercise of the Court's discretion, would make it unjust to require security. That, in turn, requires a consideration of not only the causal nexus, but also the nature of the conduct. In my opinion, the fact that the defendant has not made payment to the plaintiff because there is a bona fide dispute between the parties, cannot, without more, exculpate the plaintiff from providing security for costs if the other requirements are met. If this were so a defendant may be required to abandon its defence simply to ensure that the plaintiff is in a better financial position than it would have been, but for the non payment of the money the obligation to pay which the defendant disputes. That would be a strange result and would apply whether the amount payable is relatively large or small. It may also mean that a defendant was bound to pay over money to an impecunious plaintiff in circumstances where, if the defendant was ultimately successful, it could not recover from the plaintiff. This would only make the result more odd. In my opinion, before this matter can be given any real weight, it must be established that the defendant has been guilty, in not making payment, of some form of misconduct or unacceptable business dealings qua the plaintiff.

This point is highlighted in the present case. It has been submitted that had CCG made certain payments to Dalma, Dalma, in turn, would have discharged certain indebtedness to its workers compensation insurer and, accordingly, the indebtedness, which triggered the appointment of the Administrator, would not have continued. For purposes of examining the proposition, I am prepared to assume that may be so. But that has to be viewed in the context that there was, at all relevant times, a substantial dispute between the parties as to the liability of CCG to pay Dalma, and, if there was any such liability, the obligation of Dalma to set-off against that indebtedness amounts claimed by CCG. In my opinion, that assumed position, without more, does not give rise to conduct on the part of CCG disentitling it to security because of its conduct.

However, the parties conducted the matter on the basis of reasonably detailed financial and other evidence and, in those circumstances and because of the seriousness of such an allegation, I shall decide it.

CCG relied upon the affidavits of Mr Mark Bryant sworn 17 and 30 April 1998 and the exhibit to his first affidavit, which became Exhibit B, to seek to establish that Dalma's financial position was not, in any relevant sense, caused by any actions by CCG. Mr Bryant is a chartered accountant and a partner of Arthur Andersen and his qualifications to express the views he did were not in issue. His initial report was commissioned to comment on the report of another accountant, Mr Gregory Paul Sutton, dated 30 March 1998, on which Dalma relied. Mr Bryant noted that that report dealt with the causes of Dalma's "present lack of funds", and the effect on it were it to be ordered to provide security for CCG's costs.

Mr Bryant noted that Mr Sutton had been instructed to assess whether Dalma's present lack of funds had been caused or contributed to by CCG's failure to pay approximately $500,000 in progress claims, and it summarised Mr Sutton's conclusions by stating that the placing of Dalma in voluntary administration resulted from its inability to satisfy a creditor's statutory demand for payment of debt served on Dalma by solicitors for GIO Workers Compensation (NSW) Ltd on 14 November 1997 in respect of a debt of $627,470 for workers compensation premiums. Mr Sutton also concluded that had Dalma received the $500,000 on or before 12 November 1997 it was highly probable that that funding would have been utilised in negotiating a premium funding agreement, which may well have satisfied the requirements of the insurer and "possibly" avoided the voluntary administration.

Mr Bryant also noted that Mr Sutton was instructed to assess whether an order for security for costs of some $300,000 "would unduly stultify" Dalma's ability to pursue its action and his conclusion that Dalma, in its own right, would find it extremely difficult to arrange any further financial guarantees, and any such requirements would impede its ability to pursue recovery action against CCG.

Mr Bryant expressed the opinion that the analysis undertaken in Mr Sutton's report did not provide a reliable basis for a conclusion that Dalma's present financial difficulties were "caused" by CCG's failure to pay the progress claims, and that based on the information provided, it was his, Mr Bryant's, opinion, that Dalma's financial difficulties appeared to have arisen as a result of a combination of factors including:-

(a) an inappropriate capital structure and inadequate working capital, which created an increased risk that a mismatch in the timing of its cash inflows and outflows occurring in the normal course of its operations would result in its becoming insolvent;

(b) its agreeing to pay and actually paying significant of its funds to another company within the group, Dalma Constructions Pty Limited, ("Constructions"), in the form of management and hiring facility fees, "which sums appear disproportionate to both the expenses actually incurred by Constructions to provide such services and the benefits, if any, actually received by" Dalma "in return for these payments";

(c) the payment of those fees in advance of the provision of the associated services, and the failure to obtain recovery of the pre-paid fees to pay amounts then owing to the creditors of Dalma, which had provided services to it and whose accounts had not been paid within normal trading terms;

(d) the decision to transfer the rights to contracts tendered for and won by Dalma to Dalma Constructions (Australia) Pty Limited, ("Australia"), thereby depriving Dalma of the profits, if any, associated with those contracts;

(e) Dalma's inability to obtain, or where available, its failure to utilise alternative sources of funding to cover its short term liabilities; and

(f) Dalma's ceasing to trade since entering into voluntary administration.

Mr Bryant also noted that Mr Sutton's report focussed on only one of Dalma's liabilities, namely the amount payable to GIO, and one funding source, namely the progress payments which Dalma alleged were owed to it by CCG. He concluded that this did not provide a complete analysis of either Dalma's financial position or its causes. Prima facie this must be so.

He observed that Mr Sutton's report assumed that Dalma was entitled to the amounts it claimed CCG should have paid in November 1997, and that Mr Sutton did not identify an alternative funding source to meet that liability if that assumption was not made good. He said, finally, that in his opinion Mr Sutton's report ignored the existence of claims made by CCG against Dalma and, as a result, did not consider how Dalma could have satisfied such claims, if they were established, nor whether the existence of them may have resulted in its failing to receive the amounts it claimed from CCG.

Mr Bryant dealt with these various matters in detail and, after analysing Dalma's capital structure, he concluded it was inappropriate and that there was inadequate working capital, which factors created an increased risk that a mismatch in the timing of its cash inflows and outflows "occurring in the normal course of its operation could result in the company becoming insolvent". He considered these factors represented the effect of decisions made by the shareholders and directors of Dalma, and were not the effect of actions by CCG.

Mr Bryant turned his attention, nextly, to the payment of management and hiring facility fees, and noted that Dalma's financial statements recorded an expense against "management and hiring facility" or "management and rental facility" fees over four years to 30 June 1997 of $2,764,000, although he contrasted that with amounts shown as payable by Constructions to Dalma for the same period of $894,426. This was, in effect, overcome by the recording of such fees paid by Dalma to Constructions of $3,658,427, which is the sum of $2,764,000 and $894,426.

Mr Bryant traced investigations made by the Administrator and stated, in paragraph 66, that it was not clear whether he ever received a reconciliation he requested. He also said that there were no documents, which supported Mr Rade Cikes' assertion that the quantum of these charges was based on commercial market rates prevailing when they were paid. Mr Bryant opined that from about July 1994 Constructions ceased construction projects and, from that point, derived virtually all its revenue from such fees and described how Constructions made a significant profit from its relationship with Dalma. He was of the view the profit was in the order of $299,000 and, further, that whilst financial statements for Constructions for the year ended 30 June 1997 had not been furnished there was an increase in those fees charged by Constructions to Dalma of eighty five per cent from $650,000 to $1,200,000. He concluded that these fees appeared both disproportionate to the expenses actually incurred and the benefits actually received by Dalma in return for the payments.

Mr Bryant then considered the time of the making of these payments, from which he concluded that the payment and the failure to recover pre-paid fees were "significant contributing factors" to Dalma's present financial position.

Mr Bryant referred to the transfer of contracts to Australia and recorded that between July and September 1997 Dalma tendered for thirty five projects of which it won five, but that each of the contracts was subsequently entered into by Australia, which had only been established in August 1997, rather than with Dalma. He referred to Mr Cikes' assertion that this decision was taken at the request of the main contractors who, in turn, cited Dalma's financial difficulties as the basis for their requests. He repeated that the financial difficulties apparently encountered by Dalma in the early part of the 1997/1998 financial year would have been greatly diminished had Dalma not paid Constructions nearly $900,000 for "management and hiring facility" fees or if, having done so, it had recovered that portion of the amount paid, which related to the future.

The next portion of Mr Bryant's report dealt with the inability of Dalma to obtain or utilise alternative funding and its ceasing to trade. He observed that in June 1997 National Australia Bank Limited agreed to an increase in Dalma's overdraft facility if Mr Rade Cikes provided it with additional security, which he did not. The additional finance would have amounted to $250,000.

After repeating a number of criticisms of Mr Sutton's analysis, Mr Bryant expressed the opinion that before it could be considered a reasonable assessment of the cause of Dalma's financial difficulties, it would be necessary to establish that, at the date of the alleged failure to pay $500,000 in progress claims, Dalma had no other overdue creditors, and that if it had received the $500,000 it would have been able to pay not only the GIO debt, which exceeded $600,000, but also all of Dalma's remaining debts as and when they fell due. He suggested, correctly in my opinion, that Mr Sutton had not considered this.

Annexed to his second affidavit was a supplementary report, which considered further material furnished since the initial report and as to which Mr Bryant expressed the view that the additional material did not cause him to alter any of the opinions expressed in the first report, but rather provided additional support for them.

Mr Bryant was cross-examined in detail and, at Tp.5, agreed that whilst he used the word "caused", he did not refer to "contributed". He agreed that the failure to receive the $500,000 in August or September 1997 did contribute to the fact that Dalma went into voluntary administration and its present financial circumstances. He was not prepared to agree that Dalma was able to fund its operations "by a variety of means before August 1997 without obvious distress". He offered two reasons for that, firstly, what he had gleaned from diary notes of Mr Cooney, the accountant for Dalma, and, secondly, that Dalma exceeded its overdraft limit on a number of occasions.

At Tp.6 Mr Bryant said he had some severe doubts about whether Dalma was capable of continuing to trade regardless of whether or not the $500,000 was owed to it.

Mr Corsaro then put to Mr Bryant that up to August 1997 he found no evidence of any receipt by Dalma of a notice to wind it up; nor of an inability by it to pay any judgment debt; nor any other demand made on it; and he agreed that those matters would certainly be an indication about whether a company was in financial distress and able to trade.

He was taken through the diary entries and agreed that many did not indicate any financial distress and, by May 1997, the records showed that the Broadway project was of concern to those controlling Dalma; and he agreed that that would be consistent, assuming it to be accurate, with Dalma's claim against CCG not being met and the first recording of cash flow problems on the Broadway project in May 1997. He also agreed that the borrowings or external funding for Dalma increased substantially between March and July 1997, and that as at June 1997 Dalma was trading, there were no judgment debts owed, there were no other demands being made, and there was no claim by creditors for payment. He further agreed that a graph he had prepared would be consistent with a situation where Dalma was being delayed and was losing money on the Broadway project, and with Dalma's assertion that CCG was breaching its obligations and causing it loss. He agreed the same situation obtained as at August 1997, and that the cash flow problem was consistent with the proposition that Dalma was losing money "hand over fist on this job": Tp.14.

He was referred, in re-examination, to a table he prepared, which he said showed that by 30 June 1996 Dalma had current liabilities that were more than twice its current assets, which position had worsened by 30 June 1997. This was long before there was any dispute with CCG. He was asked whether the matters, which he had said in cross-examination were consistent with CCG's failure to pay, were consistent with any other situation, and he said, Tp.16, that it was also consistent with Dalma continuing to make payments to Constructions and not recovering those payments to the extent that they were pre-paid.

In his affidavit of 1 April 1998 Mr Sutton set forth his qualifications and stated that he had been asked to address two issues, namely whether Dalma's present lack of funds has been caused or contributed to by CCG's failure to pay approximately $500,000 in progress claims; and whether an order that Dalma provide security, in the order of some $300,000, would unduly stultify its ability to pursue its actions against CCG. Although Mr Sutton's instructions were limited, he expressed the view that over an extended period Dalma had been able to operate on a profitable basis, that during the calendar year 1997 it accumulated a significant trade debtor "totally disproportionate to any other trade debtor" in its history, that its working capital position became totally dependent upon that debtor, and that as a consequence of a deterioration in commercial relationships "for reasons not addressed in this report" funds of some $512,693 were not paid by CCG to Dalma on or about 7 November 1997. He was of the view that had that amount been paid on or about 12 November 1997:-

".. it is highly probable that this funding, if available to Dalma, would have been utilised in negotiating a premium funding agreement to satisfy the requirements of the GIO and possibly avoid the" voluntary administration.

In paragraph 3.3 he said that the report had been prepared on the basis of limited information, and he reserved the right to vary any of the findings, assumptions made or conclusions reached should further information become available "or should you instruct us to review the records retained by the Administrator".

In cross-examination Mr Sutton agreed that his report was based on the assumption that Dalma was owed $500,000 by CCG, which was payable on or about 7 November 1997. He said he had not considered any other income, the scope of his instructions being "to consider that amount in isolation". He said his analysis had been carried out on the basis of satisfying demands made by GIO only.

Mr Sutton, for some reason which was not explained to my satisfaction, brought into account the amount allegedly owing by CCG to Dalma, but not the amount allegedly owing by Dalma to CCG, and he agreed that if that had been done there would have been a deficiency of some $1.1m.

Mr Sutton was asked to make various assumptions about when the work commenced on the Broadway project and as to the payment until August 1997 of progress claims agreed between Dalma and CCG and, on those assumptions, he said he would assume that the financial problem did not arise from the Broadway project.

Mr Sutton agreed, Tp.22, that the accounts of Dalma showed what he regarded as unexplained matters, including the turn around from the financial year ended 30 June 1995 to the financial year ended 30 June 1996 of some $1.1m from a net profit to a net loss position. He did not seek to find out how that occurred, although he agreed it was "a fairly traumatic situation within a company". He said that whilst he thought that an assessment of the financial problems that Dalma was suffering may have been assisted by looking into that turn around, the scope of his instructions "was somewhat narrow and did not include undertaking of the financial analysis of the company over that period": Tp.23.

Mr Sutton was asked more questions about Dalma's accounts which led to evidence substantially corroborative of Mr Bryant's in relation to them.

At Tp.34 he expressed the view that the problem about the non-payment of the GIO debt, or a debt of similar magnitude, would have been the catalyst for the voluntary administration. Although Mr Sutton was asked about the management and hiring charges he said he did not seek to analyse them.

When I compare the evidence of Mr Bryant and Mr Sutton I am completely satisfied that the evidence of Mr Bryant, which ranged over the full ambit of Dalma's financial affairs, provides a far better and more satisfactory picture than does that of Mr Sutton. In saying that I am not necessarily being critical of Mr Sutton. However, as he pointed out, his instructions were limited and, in my view, that limitation precluded his forming as informed a view as did Mr Bryant. Accordingly, I am not satisfied on the evidence of the accountants that the failure by CCG to pay the progress claims either caused or materially contributed to Dalma's financial position. I say "materially contributed" because, in my opinion, that is a more correct test than "contributed". However, if the view be taken that "contributed", irrespective of the extent of such contribution, is the appropriate test then I am not satisfied that any such contribution has been established. There were too many other factors at work to come to that conclusion. In my view a substantial portion of the problem, if not the whole of the problem, stemmed from the payment of management and hire fees and the failure to recover pre-paid fees.

Detailed evidence was called from Mr Rade Cikes, who described himself as the manager of Dalma and as a director of Constructions and Australia. Mr Cikes was cross-examined at some length about his evidence. I do not propose to analyse it in the same detail as I have analysed that of the accountants. It seems to me, for reasons I have given already, that it is appropriate to hold, at least prima facie, that Dalma has a bona fide and arguable case. It further seems to me that the evidence of Mr Cikes does not derogate from the view to which I have come based on the evidence of the accountants. Rather, in my opinion, it tends to support the conclusions of Mr Bryant. Finally, I am not satisfied that his evidence establishes any relevant wrong-doing on the part of CCG. It has to be matched against the evidence of Mr A.M. Hobden, which is contained in his affidavit of 15 April 1998 and the exhibits thereto, which became Exhibit A on the application. In particular it is necessary to note that on 7 April 1997 Mr Hobden met with Mr Cikes and Mr Mason of CCG, who agreed to assist Dalma with its cash flow problems by making "an up front payment" of $750,000. On 10 June 1997 there was a further meeting at which it was agreed, in response to Mr Cikes' request for another advance payment, to pay a further amount of $250,000, which occurred on 13 June 1997.

Mr Hobden also dealt with the payments to the three Authorities totalling approximately $175,000.

Finally Mr Hobden deposed to the amounts CCG alleged were owing by Dalma and he was not challenged on this.

In all the circumstances Dalma has not satisfied me that its lack of funds was caused or, in any relevant way, contributed to by the conduct of CCG.

Whether Substantially The Same Facts Are Likely To Be Canvassed In Determining The Action And The Cross-action?

In circumstances where the claim and the cross-claim arise out of the same, or essentially the same, factual matrix this, in my opinion, is a very important consideration. It has been frequently and consistently said by Judges sitting in this Division that an order for security will not generally be made in such circumstances, in the exercise of the Court's discretion. It would, in my view, be quite wrong to preclude a party from litigating matters by way of a defence to a cross-claim merely because that party has been the initial institutor of the proceedings. The conduct of the other party may have forced the allegedly impecunious party to take the litigious initiative, whilst not constituting misconduct. Put simply if CCG seeks to recover any part of the debt the issues raised by Dalma in its claim would be available to it as a defence, and there has never been any suggestion that a party could be precluded from defending proceedings, where the defence is bona fide, by reason of impecuniosity. It is, therefore, a somewhat arid exercise to be considering an application for security for costs if the plaintiff can be cast in the role of a defendant and can litigate the very matters the subject of its claim by way of defence. This situation can be overcome by a defendant if it unequivocally states that it will not pursue any claims against the plaintiff in the event of an order for security being made and not met. There is obvious logic in a defendant not wishing to pursue cross-claims against an insolvent plaintiff, not the least of which would be the necessity to pay its own costs and, even if ultimately successful, risk receiving little or nothing.

As I have sought to describe Mr Hunt submitted that this situation is different. Mr Corsaro has submitted it is not and, in my opinion, that submission must be correct. There are several reasons why I think that result flows. Firstly, CCG has not proffered any undertaking that it will not seek to prove as an unsecured creditor either in the voluntary administration or in any liquidation of Dalma. If it did seek to prove in one of those situations it would be open to the liquidator to raise, by way of defence, the matters to which I have referred. Secondly, CCG has not abandoned its claim to the payments under the Deed.

The set-off, as I have stated, claims the amount owing under the Deed. A submission was made that this amount is not, conformably with the Deed, presently payable. That is a somewhat strange submission in view of the claim for a set-off of that amount. It also requires a consideration of the Deed.

The recitals set out the relationship between the parties, the requirement that Dalma was required to make the payments, and the agreement of CCG to pay those amounts "subject to the terms" of the Deed.

In clause 2.1 CCG agreed, without admission of any obligation to do so or any liability arising therefrom, to make the payments. In clause 2.2 it was stated:-

"In consideration of the direct payment by Concretes to ACIRT, CBUS and CTAS respectively of the amounts referred to in clause 2.1 of this Deed, Dalma agrees on the earlier of resolution of the matters currently the subject of mediation between Concretes and Dalma or 1 July 1999 that"

CCG will be entitled to off-set any moneys which may be owed by it to Dalma or, in the event that CCG owes Dalma a sum of money in respect of any claim made by Dalma arising from, incidental to or associated with the relevant contract, Dalma will repay to CCG the difference between the total sum of the payments made by CCG pursuant to clause 2.1 and the money owed by CCG to Dalma; or, in the event that CCG does not owe Dalma any money any respect of any claim made by it arising from, incidental or associated with the contract, Dalma will pay to CCG the total sum of the payments made by CCG pursuant to clause 2.1 of the Deed.

Provision was made for the payment by Dalma of interest and, pursuant to clause 2A, CCG agreed that it would not issue a statutory demand pursuant to the deemed insolvency provisions of the Corporations Law for these moneys.

There was no suggestion that the mediation between CCG and Dalma had not ceased and, accordingly, it seems to me that under the terms of the Deed the respective rights of set-off or payment have arisen. The difficulty from CCG's point of view is that the amount to be set-off or paid cannot be determined until the disputes between CCG and Dalma are resolved. Thus, to take the best position from the point of view of CCG, if it sued pursuant to clause 2.2(c) to recover the money, it would have to plead, firstly, that it does not owe Dalma any money in respect of any claim made by Dalma arising from, incidental to or associated with the contract, whereby Dalma is obliged to repay the amount to it. It is quite clear, in my opinion, that in response to that claim Dalma could and would assert that CCG does owe it money in relation to the contract.

Thirdly, the fact that one so casts the claim in the trms of "set-off" is only presently relevant if the defendant does not intend to pursue the recovery of the whole or any part of it.

An interesting question may arise as to the extent to which Dalma would be able to assert that an amount in excess of that provided for in the Deed was owing, but that is fairly hypothetical because the determination of the amount, which may or may not be owing, would require a litigation of all the matters. In other words it could not be said that Dalma would be confined to pleading the entitlement to the amount owing under the Deed. It would have to proceed on the basis that it may win some portion of the arguments and lose some portion of them.

In the result I consider that by virtue of the pendency of claims and counter claims arising out of the same or essentially the same factual matrix, the proper exercise of discretion dictates that this is not an appropriate case in which to order security.

A number of submissions were made about the stultification of litigation and the ability of a director, shareholder or creditor, to provide the security and, in particular, the circumstances in which this may be done. These are undoubtedly interesting, but they proceeded on the basis that security would be ordered. As I am of the view that it should not be ordered I do not find it necessary and, accordingly, I do not propose, to enter into a consideration of them.

(1) The defendant's Notice of Motion filed on 20 March 1998 for security for costs be dismissed.

(2) The defendant pay the plaintiff's costs of the Notice of Motion.

Dalma Formwork Pty Limited (Administrator Appointed) v Concrete Constructions Group Limited Matter No 55006/98 [1998] NSWSC 472

At a glance

Court

Decision date

Before

Source

Judgment (110 paragraphs)

Dalma Formwork Pty Limited (Administrator Appointed) v Concrete Constructions Group Limited Matter No 55006/98 [1998] NSWSC 472 (19 June 1998)

Parties

Legislation Cited (2)

Cases Cited (1)