Solicitors:
Mr Peter Micevski, Building & Planning Lawyers (plaintiff)
Ross Rydge, O'Neill Partners (1st defendant)
Mr Brian Hillman, Hillman Lawyers (2nd defendant)
File Number(s): 2013/241230
[2]
Judgment
On 8 August 2013, Dix Gardner Group Pty Ltd commenced proceedings by statement of claim against Harold Walter Boas (the 1st defendant) and his wife, Beverley Michelle Boas (the 2nd defendant). The defendants were the directors of a company, Marville Services Pty Ltd, which provided financial services. Put shortly, the case claimed against them is that Mr Boas was employed by the plaintiff company as its financial controller and that during the period of his employment he misappropriated money of the company. Mrs Boas is alleged to bear responsibility for that misappropriation.
Dix Gardner Group Pty Ltd v Harold Walter Boas & Beverley Michelle Boas [2015] NSWSC 314 | Case summary | Zoe
There is unchallenged evidence that the plaintiff is wrongly named, due to a clerical error in the office of its solicitors. Mr Boas was in fact employed by a related entity, Dix Gardner Pty Ltd, and leave is sought to substitute that corporation as the plaintiff. However, no order to that effect is sought at this stage. What is before me is a motion by the 2nd defendant, Mrs Boas, that the current plaintiff or the prospective plaintiff provide security for her costs. As the matter was argued at the hearing of the motion, the prospective plaintiff was the focus of the application. I shall refer to it in these reasons as "Dix Gardner."
Security is sought pursuant alternatively to UCPR 42.21, s 1335 of the Corporations Act 2001 (Cth) or in the court's inherent jurisdiction. Both rule 42.21 and s 1335 of the Corporations Act provide expressly for such an order when it appears that a plaintiff corporation would be unable to pay a defendant's costs if ordered to do so. The first defendant, Mr Boas, was represented at the hearing of the motion but did not seek to be heard.
Dix Gardner conducts a building certification business. The statement of claim recites that the company employed Mr Boas as its financial controller between 2000 and early 2013. By the statement of claim, expanded upon in an affidavit by the company's solicitor, Mr Peter Micevski, it is alleged that between about 2009 and 2012 Mr Boas misappropriated sums of money totalling about $900,000. This is said to have been effected by transfers of money from the company's account to the account of Marville Services, and by the purchase of goods and services for his own benefit using a Dix Gardner credit card which had been supplied to him for the purpose of paying legitimate company expenses.
Put shortly, Mr Boas is alleged to have been in breach of the terms of his employment and of a fiduciary duty to the plaintiff. By the misappropriation he is said to have intended to secure a financial advantage for himself and for Mrs Boas, and to have converted the misappropriated funds to the use and benefit of both of them. He is also alleged to have been in breach of the requirement, imposed by s 180(1) of the Corporations Act 2001, to exercise his powers and duties as a director of Marville Services with care and diligence.
The case against Mrs Boas centres upon the money alleged to have been transferred to the Marville Services account. Also put shortly, it is said that, in her capacity as a director of Marville Services, she was aware, or ought reasonably to have been aware, of her husband's position as a financial controller of the plaintiff, and had actual or constructive knowledge of the circumstances for payment of the relevant money into the Marville Services account. Thus she is alleged to have been involved in her husband's breach of fiduciary duty and, as a director of Marville Services, to have obtained an interest in the money paid. She is said to have acted "with reckless indifference and/or reckless disregard" towards that money and, by failing to take issue with the payments, to have been knowingly concerned and/or to have acquiesced in her husband's misappropriation. As a result of her "involvement and/or participation" in her husband's breach of his fiduciary duty, she is alleged to have acted dishonestly and thereby to have contributed to the plaintiff's loss and damage.
Mrs Boas is 56 years old, and is the primary carer of the couple's three children. She is employed in an administrative position by the New South Wales Health Service, earning a little under $42,000 per year. She seeks security in the amount of $40,000, based upon the estimate of her solicitor, Mr Brian Hillman, of the costs of preparing her case.
Rule 42.21(1)(d) empowers the court to order a plaintiff corporation to give security for costs if there is "reason to believe" that the plaintiff "will be unable to pay the costs of the defendant if ordered to do so … ." Section 1335 of the Corporations Act provides for such an order "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 … ." As Stevenson J observed in Global Medical Solutions Australia Pty Ltd v Axiom Molecular Pty Ltd [2013] NSWSC 1433 at [6], there is no relevant distinction between the two provisions.
The applicant for security bears the burden of establishing the threshold test expressed in them, but that test has been described as "undemanding" in authority reviewed by Ward JA in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at [6] ff. Nevertheless, the decision whether to order security remains a discretionary one. Some of the discretionary factors recognised by the authorities were referred to by Ward JA in HP Mercantile at [10], and these and other factors are enshrined in subrule(1A) of r 42.21.
Financial records in relation to Dix Gardner are in evidence, and I also have the assistance of a summary, Exhibit A. This material discloses that in the financial years ending June 2012 and June 2013 the company had traded at a loss. That continued to be the case as at January 2014, the month before this motion was heard. (The same appears from records of the current plaintiff, also showing a negative total equity, for the year ending June 2013 and as at January 2014.) On the other hand, the balance sheet of Dix Gardner as at January 2014 reveals a total equity of a little under $330,000. Current assets are estimated at a figure just over $574,000 and current liabilities at a little over $137,000.
Counsel for the plaintiff, Mr Stephen Smith, relied upon those January 2014 figures, showing an excess of current assets over current liabilities, to submit that the threshold test for the making of an order for security for costs had not been established. Counsel for Mrs Boas, Ms Katharine Morgan, noted that the material does not disclose the cash value of those assets or how they might be liquidated to meet any costs order. She also noted that the records do not disclose cash or cash equivalents as at January 2014, observing that the figure for that item as at 30 June 2013 was only a little over $21,000.
There was an exchange of correspondence between Mr Hillman and Mr Micevski in November 2013, in which Mr Hillman sought documentary evidence that the plaintiff was in a position to meet a substantial costs order and Mr Micevski conveyed the plaintiff's refusal to provide it. Nor has Dix Gardener done so. Mr Smith argued that it was under no obligation to do so as Mrs Boas bears the burden of establishing the threshold position. My task, however, is to determine whether the test has been met on the material which is before me. On that evidence, I am persuaded by the submissions of Ms Morgan that there is reason to believe that Dix Gardner would be unable to pay the costs of Mrs Boas if her defence of the proceedings were successful.
In the alternative, Mr Smith submitted that, if I found the threshold test to be met, I should exercise my discretion against an order for security on the basis that Dix Gardner's impecuniosity is attributable to the conduct of their defendants. That discretionary consideration is established by the authorities, and is spelled out in r 42.21(1A)(d). Mr Smith argued that the sum of $900,000 said to have been misappropriated should be seen as a significant cause of, or contribution to, the company's financial deficit.
In response, Ms Morgan pointed out that the financial records from Dix Gardner show very substantial expenditure, exceeding its income, in the financial years ending June 2012 and 2013 and as at January 2014. She referred, in particular, to the outlay in 2012 of almost $1,200,000 in salaries and almost $500,000 in consultants' fees. Generally, she argued, all the records disclose that the company was spending more than it earned.
Here also, there is force in Ms Morgan's submissions, although the dissipation of Dix Gardner's funds in the order of $900,000 over the period alleged would have had some impact upon its position. It is to be borne in mind, however, that it is Mrs Boas, not her husband, who seeks security for costs. The question is whether the company's impecuniosity could be seen to be attributable to her conduct. That requires consideration of the merit of the case against her which, in any event, is another matter to be taken into account: subrule (1A)(a). On that issue I accept Mr Smith's submission that this is an assessment which must be made with caution, given that the true merit of a case may not emerge until the matter comes to trial. He submitted that the claim against Mrs Boas is bona fide, with a reasonable prospect of success: cf Fiduciary Limited v Morningstar Research Pty Limited [2004] NSWSC 664, 208 ALR 564, at [39] (Austin J).
Prior to the hearing of the motion Mr Micevski had responded to a request by Mr Hillman for particulars of the claim against Mrs Boas. In my view, the claim, as pleaded and particularised, was fairly characterised by Ms Morgan as "highly unusual and speculative." The only basis for the elements of her knowledge of her husband's activities, her involvement in them and her financial benefit from them is her position as a shareholder and director of Marville Services.
Ms Morgan selected one portion of the request for particulars and the response to it to exemplify the nature of the claim generally. Paragraph 18 of the statement of claim alleges that Mr Boas improperly used his position as an employee of Dix Gardner to gain an advantage for himself, Mrs Boas and/or Marville Services. In response to a request to identify precisely the advantage alleged to have been obtained by Mrs Boas, the answer was that as a director of Marville Services Mr Boas "may have been personally liable for some or all of Marville Services' debts", and the advantage obtained by Mrs Boas was "to the extent that the misappropriated monies were used to retire that debt."
The speculative nature of the claim against Mrs Boas is a matter favouring the order which she seeks. It is also a factor militating against a finding that her conduct contributed to Dix Gardner's impecuniosity and the exercise of my discretion to refuse the order on that basis.
Mr Smith also raised as a discretionary factor the timing of the application for security: subrule (1A)(l). That such an application should be made promptly is supported by longstanding authority: KP Cable Investments Pty Limited v Meltglow Pty Limited [1995] FCA 76, 56 FCR 189 at 197 (Beazley J, as she then was). The present application was made about 3 months after service of the statement of claim. The various procedural steps taken in the meantime are set out in affidavits of Mr Hillman and Mr Micevski. This included correspondence about the substitution of Dix Gardner as the plaintiff and the provision of security for the costs of the claim against Mrs Boas. It is not necessary to examine this material in any detail. There does not appear to me to have been such delay in filing the motion for security as might enliven the discretion to refuse the order sought.
Finally, Mr Smith took issue with Mr Hillman's assessment of the costs of the proceedings to the end of discovery, upon which the figure of $40,000 as security was estimated. Mr Hillman arrived (in round figures) at a figure of $49,395 including GST. He estimated that at least 70% of those costs might be recovered on assessment, leading to a figure of $34,576. There is no evidence from Dix Gardner on this issue.
Mr Smith questioned the estimate of 70% of the costs being recovered on assessment, as well as an amount of $6,550 for giving verified discovery. However, neither of these figures appears to me to be unreasonable. On the other hand, there is force in Mr Smith's criticism of an estimate of $10,300 for considering and, if necessary, preparing any cross-claim or claim for contribution. Such a cross-claim seems to me to be somewhat speculative, as is the prospect of the plaintiff having to pay the costs of such a claim if it were pursued. I would not allow that item in assessing the appropriate amount for security. In my view, justice would be achieved by ordering security in the amount of $30,000.
I shall consult the parties about the formal orders to be made and, if necessary, hear argument on costs. If appropriate, I shall also deal with any directions required for the conduct of the proceedings.
[3]
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Decision last updated: 15 April 2015