Equa Building Services Pty Ltd as trustee for The Equa Trust v KLG Trading Pty Ltd

Should security be ordered?

1. The application for security is made under Uniform Civil Procedure Rules 2005 (NSW) r 42.21 and s 1335(1) of the Corporations Act 2001 (Cth). Both provisions have a threshold requirement that there be reason to believe that the corporate plaintiff will be unable to pay the costs of the defendant if successful in its defence (to paraphrase s 1335(1)). If that threshold requirement is satisfied, the Court has a discretion whether to order security and, if an order is made, a discretion concerning the amount to be ordered.
2. Before addressing the question of security directly, it is necessary to say something about the proceedings.
3. KLG had been engaged by Equa to supply and install aluminium windows, cladding and façade elements of a medium-rise residential complex in Miranda (the Project) for an amount of $1,596,000 (excluding GST). Equa is a member of a group of companies, one of which was the developer of the Project.
4. It is Equa's case that on 15 March 2021, KLG abandoned the Project site in circumstances where the work was incomplete and a substantial number of defects with its work remained unrectified. On 14 May 2021, Equa served a notice under the relevant sub-contract requiring KLG to show cause why the work should not be taken out of its hands and why Equa should not suspend payment or alternatively why Equa should not terminate the contract. Notwithstanding that notice, KLG did not return to the site and on 28 June 2021 Equa served a notice to the effect that it would engage third parties to complete the work and claim the costs of doing so from KLG. On 27 August 2021, it also served a notice claiming liquidated damages in the sum of $255,000 for delay of 102 days.
5. On 3 September 2021, KLG submitted a payment claim for $454,757.60. In response, Equa served a payment schedule in the amount of -$232,961.16. There was an adjudication determination in KLG's favour under the Building and Construction Industry Security of Payment Act 1999 (NSW) in the sum of $394,148.39. The determination was the subject of a challenge in this Court, which was dismissed on 17 December 2021: Equa Building Services Pty Ltd v KLG Trading Pty Ltd [2021] NSWSC 1674.
6. In these proceedings, Equa claims: 1. The costs of rectifying defects in the work performed by KLG, which are said to total $949,630.07, $170,830.07 of which has already been paid by Equa and the balance of which is the estimated costs of the remaining work; 2. Consequential losses of $4,281,870.90 which are said to include management costs of $254,550.39, overheads of $76,365.12, land tax of $51,446.54, rescinded contract costs of $283,275.71, additional interest of $1,784,999.35 and preliminaries and management costs for project management of $1,824,982.22. In addition, or in the alternative to consequential loss, Equa claims liquidated damages of $159,600.
7. It appears to be common ground that the threshold requirement for an award of security is satisfied in this case. However, Equa submits that the Court should not in the exercise of its discretion order security for two reasons. First, it submits that in substance it should be regarded as the defendant in these proceedings. Second, it submits that its impecuniosity has been brought about by KLG's conduct.
8. Equa is said in substance to be the defendant in the proceedings because in effect it is seeking a determination on the merits of KLG's claim for payment. I do not accept that submission. As I indicated during the course of the hearing, a submission along those lines has been rejected in other cases: see Procorp Civil Pty Ltd v Napoli Excavations & Contracting Pty Ltd (No 2) [2006] NSWCA 147 at [10] per Hodgson JA; Perform (NSW) Pty Ltd v Mev-Aus Pty Ltd [2008] NSWSC 1329 at [28] per McDougall J. Here, the position is clear. Equa claims that the work performed by KLG was defective. It seeks damages on that basis. There is no basis for saying that that claim is essentially defensive in nature.
9. Equa submits that its impecuniosity has been brought about by KLG's conduct because it has lost the whole profit it would have earned on the Project because of KLG's defective work. In my opinion, the evidence does not establish that. There is reason to believe that Equa will not be able to pay KLG's costs if KLG is successful because searches undertaken by KLG indicate that Equa has no assets. However, Equa has chosen not to lead any evidence of its financial position, and it is simply unclear whether its financial position, whatever precisely it is, could be said to have been brought about by KLG's defective work, assuming that can be proved. Although Equa claims that the costs of rectifying the defects will be in excess of $900,000, it appears that it has only actually paid approximately $170,000 of that amount. Mr Derek McCartney, the director of Equa, swore an affidavit stating that Equa had incurred other costs totalling approximately $90,000 as a consequence of KLG's alleged breaches. However, none of those costs are substantiated by objective evidence. Moreover, Mr McCartney's principal point is that once Equa has paid all the amounts it is or will be liable to pay, it will make no profit on the Project. But that does not establish that Equa does not currently have cash to provide security, or that it is not entitled to obtain cash from related companies for work that it has done or through the repayment of inter-company loans in order to provide security. Similarly, if Equa itself is unable to provide security, it is not possible on the evidence to say whether that arises from KLG's alleged defective work or, for example, as a consequence of the financial arrangements that exist between Equa and other companies in the group.
10. During the course of the hearing of the motion, KLG accepted that an appropriate amount of security was $300,000. That amount was not substantially greater than the quantum accepted by Equa as being appropriate ($264,000). The amount proposed by Equa was based on evidence given by its solicitor, Mr Jury. Some of the assumptions made by Mr Jury to arrive at a figure of $264,000 appear to be overly conservative. For example, KLG's original claim for security was based on evidence given by its solicitor, Mr Chedid. Mr Chedid used his firm's actual charge-out rates to calculate the estimated costs of the proceedings. Those rates, which appear to me to be reasonable, were $600 per hour for a principal, $370 per hour for an associate and $320 per hour for a solicitor. Mr Jury, however, assumed lower recoverable charge-out rates than those used by Mr Chedid. Mr Jury made significant reductions for the time taken to complete certain tasks compared to the estimates made by Mr Chedid. He also reduced the estimated solicitors' fees by 35 percent to arrive at an estimate of recoverable party/party costs. Although many of the reductions made by Mr Jury to the estimated hours that it would take to complete certain tasks appear to be reasonable, it seems to me to be overly conservative both to make those reductions and to reduce the total costs by 35 percent to arrive at a figure for party/party costs. Taking those matters into account, in my opinion, KLG's proposal to accept $300,000 was a very reasonable one.

Costs and orders

1. KLG has been successful in obtaining an order for security. Equa submitted that nonetheless it should not have to pay KLG's costs because KLG agreed to an amount of security that was far less than the amount for which it asked. However, Equa resisted providing any security. It also resisted (unreasonably, in my opinion) providing security in the amount of $300,000 if the Court was minded to make an order for security. In those circumstances, in my opinion there is no reason to displace the normal principle that costs should follow the event.
2. The parties agreed that it was appropriate that security be provided in tranches.
3. Accordingly, the orders of the Court are: 1. The plaintiff provide security for the defendant's costs in the sum of $300,000 by way of payment into Court or the provision of a bank guarantee in a form which is acceptable to the defendant or approved by the Court; 2. The security be provided in the following three tranches: 1. $100,000 within 21 days of the date of this judgment; 2. $100,000 within 21 days after the date on which the proceedings are set down for hearing; 3. $100,000 at least 14 days before the date on which the final hearing is scheduled to commence; 1. The proceedings be stayed if security is not provided in accordance with order (2) until such time as the amount of security then due is provided; 2. The plaintiff pay the defendant's costs of the notice of motion filed on 24 February 2022 and amended on 22 July 2022; and 3. Matter stood over for directions on 5 August 2022.

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