Dunnet Properties Pty Limited v Cussen [2009] NSWSC 961 | Case summary

1 HIS HONOUR: There are before the Court two applications for security for costs. One application is brought by the defendants against the plaintiffs. The other is brought by the cross-defendants (who are the plaintiffs in the action) against the cross-claimants (who are the defendants in the action). Each application is brought on the basis that the respondents to it are unlikely to be able to pay the applicants' costs, if called upon to do so (see s 1335 of the Corporations Act 2001, and UCPR r 42.21). 2 The proceedings arise out of the collapse of the second defendant Global College Pty Limited (Global) and an agreement made on 23 May 2008 whereby the plaintiffs agreed to buy the issued shares in Global. The first defendant and second cross-claimant, Mr Cussen, was then the administrator of Global and is now its liquidator. He too was a party to the agreement. 3 Completion of the agreement was to take place on 30 June 2008. A first instalment of the purchase price was paid, in the sum of $100,000. The balance was payable in accordance with cl 5.1 of the agreement. In addition, the plaintiffs, as purchasers, were to pay the costs of running Global's business until completion. 4 There were a number of conditions precedent to the obligations of the parties to complete. One of those (cl 2.1(i)) was that the plaintiffs should complete their due diligence into Global and the assets and shares being sold and be reasonably satisfied with their findings. 5 The plaintiffs carried out their due diligence and apparently formed the view that they were not satisfied with the outcome. Accordingly, on 26 June 2008, they gave notice of that and rescinded, the agreement. They called, among other things, for return of the first instalment. 6 Mr Cussen took a different view. He said that the plaintiffs were not entitled to rescind and that by purporting to do so they had repudiated their obligations under the agreement. He gave other reasons as well for that proposition. Accordingly, by notice dated 30 June 2008, he terminated the agreement, forfeited the first instalment (which had been held by him in trust) and claimed damages arising from termination. 7 The plaintiffs commenced these proceedings, and did so in this Court because (Global by then being in liquidation) they needed leave to do so. That leave has been given although on the usual term as to non-enforcement of any judgment without the further leave of the Court. 8 The plaintiffs claim return of the $100,000 first instalment and repayment of $88,000 or so in operating expenses that they said they paid to Global. Further, they bring a claim for misleading or deceptive conduct, based on representations made as to present and future student enrolments. They say that both defendants are liable under the claim for misleading or deceptive conduct. Their damages include the amounts of $100,000 and $88,000 or so dollars, and, in addition, their due diligence and legal expenses. The Court was informed (the amount is not all that important) that these additional claims totalled about $111,000. 9 By their list response, the defendants say, in effect, that the plaintiffs were not entitled to terminate by reason of the due diligence process. They advance a number of reasons for that. One is that, by reason of what was said to be irrelevant matters taken into consideration, it was not open to the plaintiffs to be reasonably satisfied that they should not proceed. There are also arguments of construction. In this context, and in a way that I have to confess I have not quite understood in the limited time available, the defendants say that the plaintiffs failed to act honestly and reasonably, in breach of an implied contractual undertaking to that end, when they determined that they were not reasonably satisfied with the outcome of the due diligence process. 10 The defendants have also brought a cross-claim. By that cross-claim, the defendants claim damages for repudiation. The damages include payment of amounts that were to have been paid under the agreement (including the balance of the purchase price and reimbursement of certain expenses incurred by Mr Cussen). In addition, and significantly, they claim an amount of almost $6.5 million, being an amount that it is said Global is liable to pay an assurance fund whose role in life is to make good losses (in respect of tuition fees and the like) suffered by students when institutions such as Global collapse. 11 It will be seen that there is a tremendous common area covered by the claim (and the defences to it) and the cross-claim. The matters that seem to stand outside that common area would appear to be the plaintiffs' claim for misleading or deceptive conduct, and the defendants' cross-claim for the amount of their liability to the assurance fund. 12 As I have said, each group of parties applied for security for costs against the other. 13 I am satisfied that in each case the threshold requirement - that there is reason to believe that the respondents to the applications, if called upon to do so, could not pay costs ordered against them - is met. 14 As to the plaintiffs: the evidence is relatively scanty. It seems that when the plaintiffs were called upon to justify their financial position, they produced some financial records. One set of those records was said to relate to the first plaintiff (Dunnet). What was produced was not financial statements of Dunnet but something called a compilation report and financial statements of an entity (if that is the correct term) known as the Carina Unit Trust. Those records related to the financial year ended 30 June 2008. They purported to show that the trust then had net trust funds in excess of $8.2 million. On analysis, a substantial amount of that appears to be made up of property, plant and equipment, inter-entity receivables, and a revaluation of an interest in a joint venture. But it is not necessary to go to any great lengths of analysis because there is nothing in the evidence, let alone in the sale agreement, to show that Dunnet contracted as trustee. Thus, there is nothing in the evidence to show that Dunnet, in respect of any costs ordered to be paid by it in these proceedings, would have any right of indemnity out of whatever might be the assets of the Carina Unit Trust at the time that right of indemnity was called upon. 15 In the circumstances, the only "evidence" produced as to the financial health of Dunnet being totally incapable of proving that, I am satisfied that the relatively undemanding test posed by the Corporations Act and the UCPR has been met. 16 As to the second plaintiff (AEA): again, a call was made for it to justify its financial position. The documents produced in answer to that call purport to be financial statements for the year ended 30 June 2008. Those financial statements have not been signed either by the accountants who appear to have prepared them, or by the director for whose signature provision was made. 17 To the extent that the unsigned financial statements are capable of showing AEA's position, they suggest that it made a profit of almost $1.2 million after tax for the year in question. That appears to have been referable largely to dividends received. In the notes, reference is made to a Westpac Cash Management Account, said to have a balance of $505,000. A call was made for the statements relating to that cash management account. Statements were produced in answer to it. Those statements show that as at 30 June 2008 (which, I repeat, is the reporting date of the unsigned financial statements with which I am concerned) the amount in the cash account was $364,489. The discrepancy, in excess of $140,000, has not been explained. It can hardly be regarded as insignificant. It does nothing to inspire confidence in the unsigned financial statements. 18 In any event, proof of what might perhaps have been the financial position of AEA as at 30 June 2008 does nothing to prove its financial position now, let alone its financial position as at any time when a call might be made upon it to satisfy a costs order. 19 In an attempt to bolster the evidence as to its financial position, AEA produced a vast pile of bank statements. To the extent that they may be accepted, they appear to show that as at 25 August 2009, AEA had available funds in the Westpac Cash Management Account of almost $446,000. They showed also that some $357,000 of that was accounted for by a deposit made on 14 August 2009 described as "Deposit ACPE Ltd, ACPE dividend". There is no explanation as to that dividend, i.e., as to where it came from, whether it might be repeatable or anything else that would assist the Court to know whether it was a one-off or recurrent style of payment. 20 There are two other payments similarly styled made within the last two months. One, in a sum in excess of $125,000, was made on 24 July 2009. The other, in excess of $94,000, was made on 7 July 2009. The total of those three "dividends" is, I think, about $577,000. In other words, but for those dividends, there would be no current balance of funds available. 21 The statements reveal other things. Specifically, they reveal that the account to which they relate is used, by someone no doubt authorised to have access to it, for day-to-day living expenses and the like. They contain notations of withdrawals for payments to credit card providers (and charge card providers), to supermarkets, to hardware stores, and for all other sorts of ordinary everyday expenses. 22 In short, the bank statements give me no confidence whatsoever that if a call were made upon AEA to pay costs, it would be able to do so. In this context, I note that the balance has fluctuated substantially over the last 18 months or so, and that at one stage it reached a relatively low point of some $32,000 (in March 2009). 23 As to Global: the facts are that it is a company that is in liquidation because it is insolvent. Mr Cussen's reports show that the claims upon its assets vastly exceed the value of those assets. In those circumstances, I have very great difficulty in seeing how (despite Mr Glasson of counsel's valiant submissions to the contrary) the relatively undemanding statutory test is not met. 24 However, Mr Glasson pointed to the circumstance that there was about $1.17 million sitting to the credit of the bank accounts maintained by Mr Cussen as liquidator. The solicitor for the defendants, Ms Perry, swore in an affidavit of 26 August 2009 that Mr Cussen "would not exhaust the fund until after these proceedings have been resolved." That somewhat vague statement has been reduced to a more formal undertaking whereby Mr Cussen has undertaken to the Court in substance not to allow the balance held in the account to fall below $120,000 until after these proceedings have been resolved. The value of that depends on acceptance of the proposition that the plaintiffs would have priority, to the amount of $120,000, for any costs ordered to be paid to them in respect of the cross-claim. That may be correct. But it does not bear on the statutory test of ability to pay; and in any event it is a less acceptable "security" than money on deposit or a bank guarantee. 25 Further, Ms Perry said, the liquidator was receiving substantial monthly amounts pursuant to a settlement between her clients and third parties. There was no indication as to how long those payments might continue to be made, and they do not seem to me to provide much in the way of comfort. 26 As I have said, I am satisfied in each case that the statutory precondition to making an order for security has been made out. 27 That then leads to the following conundrum. If I ordered the plaintiffs to give security, and they failed to do so, their claim would be stayed. However, if the cross-claim proceeded, the cross-claimants would be met with exactly the same arguments, and would incur exactly the same costs (with very few exceptions) as would happen if the plaintiffs' claim proceeded. In an attempt to meet this, the Court was informed (by a partner of Mr Cussen's) that if the plaintiffs' proceedings were to be stayed, Mr Cussen would approach the committee of creditors of Global with a view to considering settlement or discontinuation of the cross-claim. If that were to happen, it might, to some extent, alleviate the problem to which I have referred; but it can hardly be regarded as a statement of definite intention (except as to approaching the committee of creditors). 28 Equally, if I order the cross-claimants to provide security, and they do not do so, the cross-claim will be stayed. In those circumstances, the plaintiff will proceed with the hearing of their case and the defendants will defend it. The same issues will be agitated and substantially the same costs will be incurred. 29 In other words, as it seems to me, the real effect of making any order for security would be to order each party to have security for the costs of prosecuting its own claim. As a matter of discretion, that does not seem to me to be a particularly satisfactory basis for ordering security. 30 Mr Friedgut of counsel, for the plaintiffs, strove valiantly to persuade me that there were separate and distinct issues in the cross-claim, in respect of which costs would not be incurred by the prosecution of his clients' claim. He referred, in particular, to the damages relating to payments due to the assurance fund. 31 I accept that there is an issue of principle (particularly having regard to the less than clear nature of the "pleading" in the cross-claim) as to why it is said amounts payable by the cross-claims to the assurance fund are recoverable as damages for breach of contract. I accept that there would be some small amount of evidence going to this issue of principle. I accept also that if there were to be a real dispute as to quantification of the amount for which the cross-claimants are liable by way of indemnity, then it might be expensive to deal with this, because it would take some time to go through the individual components of the indemnity claim. 32 As to the first aspect - the "liability" aspect - it does not seem to me, as I view matters at present, that there would be any substantial increase in the duration of the hearing simply because, with both claim and cross-claim proceeding, the cross-claimants had to lead some evidence to make good the legal basis of their claim for the particular head of damages in question. To the extent that there is, it seems to me in a rough and ready way to be balanced by the amount that might be referable, in terms of time and cost, to the non-common claim under s 52 of the Trade Practices Act in the plaintiffs' case. 33 If, however, there is to be a real issue as to the quantification of the amount payable to the assurance fund, then it seems to me that it would be sensible for that to be hived off and dealt with, either by reference or some other mechanism, once the question of liability had been determined. 34 In other words, as to the amount payable to the assurance fund, it seems to me at present to be likely that if it is going to be a real and complex issue, and expensive to determine, then there is much to be said for the proposition that it should be put to one side. 35 Viewing the matter thus, it really seems to me that each side's claim is the reflex of the other's. In those circumstances, it seems to me, the interests of justice do not require either party to give security for the costs of the other. 36 There was much debate before me as to who should be considered to be the aggressor. On the view to which I have come, it is not necessary for me to resolve that debate. However, if it were necessary to do so, I would incline to the view that the substantial aggressor was (or more accurately the substantial aggressors were) the defendants. I say that particularly taking into account the way in which Mr Cussen framed his notice of termination and the claims that he proposed to make. It seems to me that Mr Cussen, having peremptorily forfeited the deposit, the plaintiffs were effectively forced to litigate to defend what was by then a fait accompli rather than a pending claim. 37 However, that does not bear upon the view to which I have come. 38 In the circumstances, it is not necessary for me to deal with questions of quantum. Were it necessary for me to do so, I would say in substance that I prefer the approach to quantification taken by Ms Perry, except insofar as she disagrees with the proposition that it is unnecessary, in these circumstances, for the plaintiffs to brief senior counsel for the hearing. In circumstances where (as the matter is presently particularised) the plaintiffs, as cross-defendants, are facing a very substantial claim for damages, I do not think one can say a priori that the reasonable costs of senior counsel would not be allowed even on an assessment on the ordinary basis. 39 However, it is unnecessary for me to resolve that to finality. 40 In the result, each notice of motion should be dismissed and I so order. Unless the parties wish to persuade me to the contrary, I propose to order that costs follow the event in each case and that they be set off. (COUNSEL ADDRESS ON COSTS) 41 HIS HONOUR: Mr Friedgut submits that cost should not follow the event but that his clients should not have to pay the costs of the notice of motion for security filed by them. He relies on correspondence in which his clients attempted to resolve the matter, and points to the fact that his clients' attempts did not succeed. 42 Whilst it is regrettable that the parties were unable to resolve their disputes, the fact remains that the offers were made conditionally (as to how the security would be held, or as to its being reciprocal with security to be provided by the other side) in circumstances where at no stage is it possible to point to an unconditional position that is better than what has been achieved through my decision. 43 In those circumstances, I see no reason to displace the operation of r 42.1, and accordingly as I have indicated, I order that each notice of motion be dismissed with costs and that the costs be set off. 44 I stand the proceedings over for directions on Friday, 18 September 2009. I order that the exhibits on the applications be handed out and I will also hand back the authorities with which counsel provided the Court.

Dunnet Properties Pty Limited v Cussen

At a glance

Court

Decision date

Before

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Judgment (13 paragraphs)

Parties

Cited By (2)