East Kew Construction Pty Ltd v Landspec Investments Pty Ltd

(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter, 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 unsuccessful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given."

1. Whether this Tribunal is a "court" in the sense used in that section is not an easy question to determine. (For a commentary on this issue, see VCAT, Laws and Procedures, ANSTAT 1.06 - 1.07. See also s58AA of the Corporations Law (Comm) and s42B of the Corporations (Victoria) Act 1990.) Counsel for the Applicant did not take issue with this Tribunal's jurisdiction to hear the application under s1335. However, whether this application is brought under s1335 or more properly under s79 of the VCAT Act, my determination is the same. I proceeded to heard this application as if it were brought in the first instance under s 79, which is clearly, in my view, the more appropriate provision under which such an application should be brought in this Tribunal. The law associated with applications under s1335 was, nonetheless, of assistance in determining the application.

(1) On the application of a party to a proceeding, the Tribunal may order at any time -

(a) that another party give security for that party's costs within the time specified in the order; and

(b) that the proceedings against that party be stayed until the security is given.

1. Counsel for the Respondent in support of the application for security for costs relied upon the affidavit of Mr Kelvin Oldridge, solicitor for the Respondent. In it he deposed to, amongst other things, the following:

(i) the Applicant is a company with only $2.00 paid up capital;

(ii) the Applicant is not registered as a proprietor of real estate in Victoria;

(iii) the Respondent's solicitors sent letters to the Applicant's solicitors informing of its concern that the Applicant would not be able to pay the Respondent's costs and demanding proof of a capacity to pay, or the payment of the anticipated costs in advance.

(iv) The Applicant's solicitors failed to respond to the Respondent's demands in a manner that satisfied the Respondent that the Applicant was capable of meeting a costs order against it; and

(v) The Respondent believes it has a good defence to the claim.

1. In reply, a Director of the Applicant filed an affidavit deposing, amongst other things, to the following:

(i) the Applicant has successfully traded for over 20 years;

(ii) there are no outstanding debts or judgments against the Applicant;

(iii) the Applicant had returned a net operating profit for the last 5 years;

(iv) the Applicant owns plant and equipment valued at $30,000;

(v) the Applicant is currently employed in a project the contract price of which is in excess of $2,260,00; and

(vi) the only liabilities of the Applicant are "ordinary trade debts".

1. In addition to the above, both deponents argued the merits of the respective cases of the parties. It is not possible for me, however, based on the very limited material before me, to assess which case is likely to succeed in a full hearing, and I am further unable to say whether the Applicants case is bone fide or not, or whether the Respondent has a good defence to the Applicant's claim.

1. The Respondent, having made very broad, generalised assertions about the financial status of the Applicant, sought to mounts its case by critical examination of the Applicant's responses to those assertions. To answer those assertions and persuade the Tribunal that the Applicant had the capacity to satisfy an order for costs, it was argued, in effect, by the Respondent that the Applicant should have provided credible evidence in support of its statements about its financial status. For instance, that it had traded profitably should have been supported by financials, such as balance sheets and profit & loss statements; that its machinery was valued at $30,000 should be supported by credible valuations, or at the very least, a list and description of the machinery should have been provided; that the amount and breakdown of the "ordinary trade debts" should have been provided; and evidence of the contract for $2,260,000 should have been exhibited. I was asked to apply the rule in Jones v Dunkel (1959) 101 CLR 298, and draw an unfavourable inference from the failure of the Applicant to provide the material as suggested by the Respondent. All this, in my view, was an attempt on the part of the Respondent to reverse the onus. The evidentiary burden of proving that the Applicant would be unable to pay the costs of the Respondent after the disposal of the proceeding clearly falls on the Respondent. (See Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486)) The rule in Jones v Dunkel "cannot be used to fill gaps in the evidence or convert conjecture or suspicion into a matter of inference", per Murray J in Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241 at 244.

1. Counsel for the Respondent also highlighted what appeared to be a contradiction in the position of the Applicant in that the Applicant asserted it is solvent, but should an order be made for security for costs, its financial viability would be put at risk.

1. When asked by me whether the Respondent intended to file a counterclaim , the response was that the solicitors for the Respondent presently do not have "definite instructions" to counterclaim. When pushed, the Respondent conceded that it "couldn't discount the possibility that a counterclaim might be issued". Looking at the nature of the Applicant's case and the Respondent's defence to it, I would suggest that it is highly probable the Respondent will file a counterclaim. I agree with Counsel for the Respondent when he said this interlocutory application before the highly probable filing of a counterclaim, has "aspects of chess playing". Of course, if a counterclaim had been filed, or had it been acknowledged that one would in due course be filed, it would have been, as outlined below, fatal to the application before me.

1. The Respondent relied on the authority of Sydmar Pty Ltd v Statewide Developments Pty Ltd (1987) 73 ALR 289 at 299; as too did the Applicant. The factors listed to be taken into account when exercising the "unfettered discretion" (see Tenth Anemot v Colonial Mutual Insurance [1993] VicRp 56; [1993] 2 VR 48) to make an order for security for costs, in my view, sit more easily with the Applicant's position than that argued by the Respondent.

1. The Applicant argues, which I accept, that the evidentiary burden falls to the Respondent to persuade me that the Applicant could not satisfy an order for costs. (See Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1) That burden, it was argued, can only be satisfied on credible evidence. Whether credible evidence was provided by the Respondent to satisfy the evidentiary burden is a threshold issue. The Applicant submitted that the Tribunal has jurisdiction to entertain an application under s1335 of the Corporations Laws . Of course it suited the Applicant to argue that position, as it more readily allows it to argue, because of the reference in s 1335 to "credible testimony", that the Respondent failed the threshold issue. As stated above, there are doubts about the jurisdiction of the Tribunal to entertain an application under s1335. Nonetheless, although s79 of the VCAT does not conveniently stipulate the need for credible evidence, in my view, a decision under s79 can only be made on the basis of credible evidence provided by the party seeking an order for security for costs against another. In my view, the evidence relied on by the Respondent as outlined in paragraph 6 above, does not amount to credible evidence of the Applicant's impecuniosity and inability to satisfy a costs order. The Respondent's position on this appears to be based on conjecture and speculation. In the words of Lee J, "It is enough to say that speculation as to insolvency or financial difficulties likely to confront the corporation will be insufficient to grant the exercise of the discretion." (Warren Mitchell Pty Ltd v Australian Maritime Officers' Union, supra, p5)

1. There is nothing in the material provided by the Respondent in support of its application that distinguishes the Respondent from the hundreds of solvent companies trading successfully and responsibly throughout the country.

1. If I was satisfied that the Respondent had met the threshold issue as to credible evidence (which I am not), then the Applicant argued that, in the exercise of my unfettered discretion, I should refuse the application, taking into account the relevant factors, for the following reasons:

(i) the Applicant's case is made bone fide and has a reasonable prospect of success;

(ii) an order would stifle the Applicant's pursuit of its claim; and

(iii) that there is the real prospect of a counterclaim, which will explore the same issues as those associated with the claim.

In respect of the relevant factors, see Symdar Pty Ltdv Statewide Developments Pty Ltd See also Red Earth Building Maintenance Services Pty Ltd v Dura (Australia) Constructions Pty Ltd [1999] VCAT 54

1. In addition, the Applicant argued that the Respondent voluntarily entered into contractual relations with the incorporated builder, and as in Tenth Anemot v Colonial Mutual Insurance, it should be a factor I take into account when exercising my discretion to make an order for security for costs.

1. I have formed the view that, in the exercise of my discretion, after taking into account the relevant factors, I must refuse the Respondent's application under s79. The fact is that, on the basis of the material before me, I cannot be satisfied that the Applicant's claim is not made bona fide or lacks a reasonable prospect of success. There is also, in my view, the real prospect of the Respondent counterclaiming, which will necessitate a consideration of the same facts and circumstances relating to the Applicant's claim. There is also no credible evidence before me that would persuade me that there is no reasonable prospect of the Applicant being unable to satisfy an order for costs. I also take into account the factor referred to in paragraph 16 above. When considering the totality of the above factors, I am not persuaded that I should exercise my discretion in favour of the Respondent.

1. Pursuant to s109(2) of the Victorian Civil and Administrative Tribunal Act 1998, being satisfied it is fair to do so, having regard to s109(3)(c) & (e), I order the Respondent pay the Applicant's costs associated with the said application. Such costs are to be assessed on County Court scale "C".