David Hurst and Philip Hosking in their capacities as Joint and Several Liquidators of One Build Pty Limited (In Liquidation) v Metroplex Investments Pty Limited
The second plaintiff, One Build Pty Limited (In Liquidation), made repayments of loans in the amount of $340,000 to the defendant, Metroplex Investments Pty Limited, a related company, on Friday, 28 July 2013, two days before those loans were due. On 26 November 2013 One Build went into liquidation. The current liquidators are the first plaintiffs. The plaintiffs seek to recover the payments made in respect of the loans. Although the payments were within the relation-back period, most of the other elements of the plaintiffs' claim appear to be disputed.
Metroplex seeks an order for security for costs. Power to order security for costs is found in r 42.21(1) of the Uniform Civil Procedure Rules 2005. That subrule requires the satisfaction of one of the six paragraphs, (a) through (f), in that subrule. Metroplex contends that in respect of the liquidators para (e) is applicable, namely:
"that a plaintiff is suing, not for his or her own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so".
In respect of One Build, Metroplex contends that para (d) is applicable, namely, "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".
There was evidence before me that One Build has cash assets of an amount in the order of $66,000. Yet I did not understand it to be seriously contested that the company in liquidation might reasonably be believed to be unable to pay an adverse costs order. Therefore, it seems to me that in respect of One Build there is power to order security by virtue of the fulfilment of r 42.21(1)(d).
In respect of the liquidators, it was also not genuinely contested that the liquidators are suing, not for their benefit but for the benefit of some other person including, presumably, the creditors of the company in liquidation. However, that is not sufficient under the subrule to empower the Court to make an order against the liquidators. Paragraph 42.21(1) also requires that "there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so". Is there reason to believe that the liquidators will be unable to meet an adverse costs order?
The likely costs are evidenced to be, on a party/party basis, in the range of $40,000 to $80,000. Metroplex contends that the plaintiffs would need to file expert evidence to prove insolvency of One Build, one of the elements of the primary claim, but have not yet done so. As there is no certainty as to what evidence will be filed by the plaintiffs, a proper approach may be to assess the likely costs orders in favour of the defendant at the lower end of the scale. I accept the lower figure as the appropriate figure for the purposes of security for costs at this stage of the proceedings.
There is evidence that each of the liquidators separately own real estate, which in each case is subject to a mortgage, but there is no evidence that the liquidators are impecunious. The evidence of them each owning mortgaged real estate does not establish this. I am not satisfied that there is reason to believe that the liquidators would not together be able to meet a costs order in the magnitude of $40,000.
On that basis, whilst there is power to make an order for security in respect of the company, there is not, under r 42.21(1)(e), power to make an order against the individual liquidators.
There are also other reasons, appearing below, why I would not be inclined to make an order against the liquidators.
Many of the discretionary factors that impact on whether a court should make an order for security against an impecunious company are listed in subrule 42.21(1A). The parties addressed their submissions to each of those factors.
As to the first factor, the prospects of success or merits of the proceedings, Metroplex submitted that the plaintiffs had no prospect of proving insolvency because there was shown to be a profit. Accounts in evidence recorded a profit. Metroplex submitted that other indicia of insolvency, such as the substantial deficiency of assets over liabilities, generally and in respect of working capital, were insufficient to establish insolvency.
Questions of insolvency are not able to be determined at this stage of the proceedings. The prospects of success or the merits of the proceedings may sometimes be probative in an application such as this, but not in this case, both because of the complexity of the insolvency question at any particular time and also because all the evidence that might be led in respect of insolvency has not yet been filed.
All that can be said is that the accounts indicate a substantial asset deficiency and a recent trading profit. These matters do not establish that the plaintiffs' prospects are poor or that there is no real merit in the proceedings.
Other defences that may be available to resist the claim by the plaintiffs were not explored before me and so I could not fairly consider them in assessing the prospects of success.
The second factor is the genuineness of the proceedings. The defendant conceded that the proceedings were not an abuse of process. I would infer, in the absence of some evidence to the contrary, that an action brought by liquidators would be genuine.
The third factor is the impecuniosity of the plaintiffs. In respect of the company, One Build, that is conceded. It is neither conceded nor established in respect of the liquidators.
The next factor is whether the plaintiffs' impecuniosity is attributable to Metroplex's conduct. The plaintiffs submitted that Metroplex's conduct diminished the asset position of the second plaintiff, but this submission was not developed. In circumstances where that deficiency was said to be in the order of $17 million, a payment of $340,000 is unlikely to be the cause of One Build's insolvency. Further, the payment operated to reduce the indebtedness of One Build to one creditor (Metroplex) by increasing the indebtedness to another or diminishing an asset. I am not persuaded that the payment to Metroplex was the cause of One Build's impecuniosity.
Neither party contended that para (e) was relevant.
As to para (f) in subrule (1A), there was some evidence before me that an order for security would stifle the proceedings. The liquidators' affidavit read, "It will likely stifle these proceedings" on the basis that it would "likely significantly reduce the amounts available to the liquidators to be able to prosecute these proceedings". Although the amount of security is not large, it is significant compared to the amount of cash reserves of the company so there is some independent support for the liquidators' statement.
I also take into account that there was no attempt to question the liquidators about that statement: there was no application for cross‑examination. Whilst I am cautious about giving too much weight to the liquidators' opinion on a matter in their interest, on balance I conclude that there is a risk that an order for security would stifle the proceedings.
As to factor (g), whether the proceedings involve a matter of public importance, the proceedings involve liquidators fulfilling a public function, statutorily endorsed or imposed. But a private action to recover moneys paid to a company is unlikely to be such a matter of public importance as to weigh on whether security should not be ordered. I do not regard para (g) as a matter of significance in my decision.
Paragraph (h) was not regarded by the parties as relevant in that there had been no "admission or payment in court".
The next factor (i), delay by the plaintiffs in commencing the proceedings, was also not submitted to be relevant.
As to factor (j), the costs of the proceedings are not especially large. The defendant submitted that this weighed in favour of an order for security. But if the costs are large, the threshold test that an adverse costs order might not be met is more likely. Conversely, ordering a larger amount of security increases the risk that an order may stultify the proceedings. To find that a small amount of costs is a factor in favour of security indicates that a defendant who may be unable to recover a very large amount of costs is less likely to obtain security, a principle the correctness of which is not at all clear. Nor is the way in which the size of the costs of the proceedings might impact on whether an order for security should be made. In the circumstances of this case, I do not think that the likely amount of costs impacts on whether security should be ordered.
The next factor (k) concerns the proportionality of the costs. The plaintiffs did not contend that the amount of costs sought by Metroplex was disproportional to the amount of the claim and the complexity of the issues. I bear that matter in mind in favour of the defendant.
The next factor (l), "the timing of the application for security for costs", was raised by the plaintiffs as a relevant matter. There was a delay of approximately eight months from the time of the commencement of the proceedings until an application for security, including a delay of some months after the filing of a defence. That is a matter that weighs against an order for security: moneys have been spent on the proceedings, at a time when the issue could have been raised by the defendant and potentially avoided wasted costs. In the present circumstances, the delay by Metroplex in making the application should especially weigh against it receiving security for past costs, if I am minded to grant security.
No issue was raised about paras (m) and (n).
The defendant also referred me to the principle set out by his Honour McLelland J in Horn v York Paper Co Ltd, [1] where his Honour noted that:
"[I]t is appropriate to join the company itself as a co-plaintiff with the liquidator, since the rights of the company will be directly affected by a judicial determination that the relevant transaction is avoided."
There is no issue about whether the two plaintiffs are appropriate plaintiffs. The circumstance that the plaintiffs are properly parties to the proceedings emphasizes that the joinder of the natural person liquidators is not a device to avoid a security application but the proper procedure to be adopted. This is also a matter to be taken into account.
The defendant also raised the principle recently stated in In the matter of HIH Insurance Limited (In Liquidation); Cuong Ly v HIH Insurance Limited (In Liquidation). [2] Brereton J there stated in respect of a natural person plaintiff:
"The purpose of an order for security for costs is to avoid the injustice to a successful defendant of being unable to enforce a costs order in its favour for a reason other the mere impecuniosity of the plaintiff…The true touchstone must be the risk that a costs order will not be satisfied for some reason other than mere impecuniosity. In the context of the inherent jurisdiction, I think in so far as a general test can be stated, it was best captured by Young J in Morris v Hanley [2000] NSWSC 957 as being that the proceedings are 'harassing or vexatious' in nature unless an order for security is made."
There is no suggestion here of a "risk that a costs order will not be satisfied for some reason other than impecuniosity". That may be an added reason why an order should not be made against the liquidators. In any event, I have already indicated that I find that I do not have the power to make an order against the liquidators in the circumstances of the present case.
Metroplex previously had particularly relied on the impecuniosity of the liquidators. In a letter earlier this year about security, the defendant stated:
"In circumstances where [the liquidators] will be personally liable for any adverse costs order made against the plaintiffs in the Proceedings and where it is evident from the Accounts that One Build has insufficient assets and cash at bank with which to indemnify [the liquidators], our client is concerned that [the liquidators] will be unable to meet any adverse costs order made against them in our client's favour."
The statement of Brereton J quoted above indicates that the impecuniosity of the liquidators is not sufficient reason for security to be ordered.
Metroplex also submitted, in favour of an order for security (presumably, only against One Build), that costs are not generally ordered against liquidators. I was referred to a decision of Hodgson JA in Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd, [3] with which Campbell JA at [82] agreed, which indicates the contrary. At [45] of the decision, Hodgson JA sets out some relevant principles, including:
"(1) Liquidators suing personally are generally to be treated in the same way as natural persons, so that, on the one hand, costs orders will be made against them if proceedings fail, and, on the other hand, security for costs may be ordered against them when the conditions set out in UCPR 42.21 are satisfied…
(2) Where the plaintiff is a company in liquidation, and not the liquidator, then security for costs will more readily be ordered, although the court's discretion is unfettered and there is no presupposition in favour of granting security. However, the court will not refuse to order security on the ground that this will frustrate the litigation unless the company proves that those who stand behind the company and would benefit from the litigation are unable to provide security.
(3) Cases in which security for costs might be ordered against a natural person or a liquidator outside those provided for in UCPR 42.21 include cases where (in addition to proof that there is reason to believe the plaintiff will be unable to pay the defendant's costs) the plaintiff has dissipated assets and/or has not paid previous costs orders (especially if those costs orders were in favour of the defendant) and/or brings a weak case to harass the defendant and/or brings a case for the benefit of others (albeit not solely for their benefit as apparently required by UCPR 42.21(1)(e)). There is of course a sense in which a liquidator is suing for the benefit of others; but what was decided in Cowell and Strand Wood was that this was not of itself sufficient to justify security for costs in relation to a person who has the statutory right and duty to do this." (Citations omitted).
See also the commentary in Ritchie's Uniform Civil Procedure NSW, p 8,844 at [42.21.70].
Metroplex submitted that I should not give any real weight to the circumstance that the order might stifle the proceedings because there was no evidence before me that those who stand behind the company and would benefit are unable to provide security. That is contrary to the unchallenged affidavit evidence of the liquidators, quoted above. But, in any event, the passage from Green is support for the proposition that ordinarily liquidators, like natural persons, should not be ordered to provide security.
In Ritchie's at [42.21.75], there is reference to the principle that where there are multiple plaintiffs and security would not be appropriate against some then security should not be ordered against any.
I also take into account that one purpose of an order for security is to prevent persons hiding behind the "skirts" of a company to avoid an adverse costs order. [4] But in this case, liquidators are available to satisfy a costs order for all that they are worth and, in my view, the presence of the liquidators as plaintiffs is a weighty matter in refusing an order for security against the company.
Bearing all these matters in mind, and in particular that the natural person liquidators are plaintiffs available to satisfy any costs orders, I am not persuaded that this is an appropriate case for security for costs. Accordingly, the notice of motion is dismissed.
In respect of the costs of the application, Metroplex sought an order that in the event the plaintiffs were successful, each party bear their own costs. The reason proffered in support of this order is that there was a genuine argument put forward by Metroplex in the application. The circumstance that there was a genuine argument does not outweigh the ordinary rule that costs should follow the event. Metroplex itself submitted that in the event that it was successful, it should be awarded its costs irrespective of any "genuine argument" in favour of the plaintiffs. In my view, the plaintiffs are entitled to their costs of the notice of motion.
The plaintiffs seek an order both for indemnity costs and for an order that costs be payable forthwith. They referred to a letter dated 21 August 2015, which set out why the motion for security was unlikely to succeed and sought that the defendant withdraw the motion within a short period in which case the plaintiffs would not seek costs in relation to the motion. But it is difficult to construe the letter as a genuine offer to compromise the application for security. It is more in the nature of a demand for capitulation.
The letter referred to and relied upon One Build being insolvent for a year prior to the liquidation as a reason for why security would not be granted. The existence, timing and duration of the insolvency of the second plaintiff may be a matter fiercely in contest in the proceedings, but it is not a factor that establishes the futility of the application for security.
I am not persuaded that Metroplex's application for security was other than a genuine application. Nor do I find that the defence is weak.
I also take into account the provision in r 42.7 of the Uniform Civil Procedure Rules 2005, which indicates some limited presumption in favour of costs in an interlocutory matter being costs in the proceedings, and this weighs against a special costs order in favour of the plaintiffs.
Accordingly, I do not propose to make a special costs order in favour of the plaintiffs.
The orders of the Court shall be:
1. Defendant's application for an adjournment refused.
2. The defendant's notice of motion (filed 18 August 2015) is dismissed.
3. The defendant pay the plaintiffs' costs of the notice of motion.
4. List the matter for further directions on Monday, 23 November 2015 at 9.30am before the Judicial Registrar.
[2]
Endnotes
(1991) 23 NSWLR 622 at 623.
[2014] NSWSC 1587 at [7].
[2008] NSWCA 148.
KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189.
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: 03 August 2018
Parties
Applicant/Plaintiff:
David Hurst and Philip Hosking in their capacities as Joint and Several Liquidators of One Build Pty Limited (In Liquidation)