GENDREDGE PTY LTD -v- VDM CONSTRUCTION PTY LTD (ACN 008 785 662) [2011] WASC 353 (22 December 2011)

3 In fact, the plaintiff filed an affidavit of Persa Gougoulas in opposition to the application on 7 November 2011 - just over a week late. The defendant did not file any affidavit in response, but filed submissions in support of the application on 22 November 2011. The slippage of one week had been maintained. The plaintiff then filed submissions in opposition to the application on 8 December 2011. The timetable had slipped a little further, but not to an extent to cause concern, given the matter was listed for hearing on 12 December 2011.

4 On 9 December 2011, the plaintiff filed three further affidavits of Ms Gougoulas. It was clear from the submissions filed in opposition to the application the plaintiff intended to rely on further affidavit material. It would seem this material, in one form or another, reached the defendant's solicitors around 8 or 9 December 2011. The first time I saw it was when it was tendered by counsel on the morning of the hearing. So, prior to the commencement of the hearing, I had not had the opportunity to read any of the further affidavits upon which the plaintiff proposed to rely.

5 There can simply be no excuse for such flagrant disregard for programming orders. These orders were made by consent. If the plaintiff found the timetable unsatisfactory, then after consultation with the defendant's solicitors (and assuming agreement could not be reached) an application should have been made to the court for a variation of the timetable. Such an application should have been supported by an affidavit. In restating this position, I do not do so because the position needs restating. It should be obvious to any solicitor who practises in this court.

6 A number of options were available. One option was to refuse the plaintiff leave to rely on the affidavit material. Had counsel for the defendant objected to the late tendering of the affidavits, that is the course I would have adopted. However, counsel did not object. Nor did he seek an adjournment. To his credit, he took the view the application should be considered on its merits. So, the affidavit material was admitted and formed the basis of the plaintiff's opposition to the application. Two further matters require comment.

7 First, the initial affidavit filed in opposition to the application was hopelessly inadequate. It could not possibly have provided any basis for opposing the application. It should never have been filed. Its only purpose was to annex a letter from a firm of accountants who made a bald assertion as to the net asset value of the plaintiff. No detail was provided. It should have been apparent to the plaintiff's solicitors, even at that stage, they could not comply with the timetable agreed with the defendant and they should have taken the appropriate action.

8 Second, it is clear from the O 59 r 9 certificate filed by the defendant the plaintiff and its solicitors have not complied with the spirit and perhaps not the letter of O 59 r 9. The certificate sets out in detail attempts made by the defendant to confer with the plaintiff via its solicitors. It is clear the plaintiff's solicitors were evasive and uncooperative. Eventually, the plaintiff's solicitors advised the defendant's solicitors 'a verbal conferral would serve no useful purpose'.

9 It is clear from the certificate, the defendant's solicitors did everything they could to comply with their obligations under O 59 r 9. The same cannot be said for the plaintiff's solicitors. They did not confer and they should have done so. At the very least, a discussion between the solicitors may have highlighted the difficulties the plaintiff was experiencing in putting on evidence in a timely fashion. As has so often been said, the purpose of O 59 r 9 is not just to encourage the parties to resolve their differences. There are times when it is obvious no such resolution will be possible. In any circumstance, a discussion may resolve a discrete issue or may give the parties a better understanding of their respective positions. In this case, it may have led to an amendment to a timetable by consent. The plaintiff's solicitors stand condemned for not fully engaging in the O 59 r 9 process.

10 There was no difference between the parties as to the legal principles to be applied in an application under s 1335(1) of the Corporations Act. The defendant referred to the judgment of Beech J in BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81 and the plaintiff relied upon the decision of Corboy J in Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19. There is a large measure of agreement between these two decisions and they build upon earlier authorities such as Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1.

11 Essentially, the defendant relied upon two matters. First, the plaintiff has a paidup capital of $1. Second, it does not own any real property in any State or Territory. In his submissions, counsel referred to other matters which it was said pointed to an inability of the plaintiff to meet any costs orders. These matters related to earlier proceedings brought by a creditor of the plaintiff and a failure of another company associated with the sole director of the plaintiff. Neither of these matters were pressed by counsel for the defendant and, in my view, neither was relevant to the application.

12 It was the plaintiff's position the defendant would, on the evidence, be able to meet any costs order made against it. In other words, it was submitted the precondition to making an order was not satisfied. Reliance was placed on a document annexed to one of Ms Gougoulas' later affidavits entitled 'Special Purpose Financial Report for the Year Ended 30 June 2011'. This was a signed set of accounts prepared by the plaintiff's accountant. Both counsel analysed these accounts in some detail.

13 The accounts show for the year ended 30 June 2011 the plaintiff had a net profit of $1,049,769. This was up from a profit of $84,188 in the 2010 financial year. The operating profit before income tax was shown an $972,348, as against $200,109 for the financial year 2010. On the face of it, then, the plaintiff appears to have been trading profitably and to have significantly increased its profit over the last 12 months.

14 The balance sheet shows cash at bank at $147,925. In fact, in the body of the affidavit, Ms Gougoulas says she has been informed by a director of the plaintiff that as at 6 December 2011, the cash at bank was $21,128.97. Clearly, the cash position has deteriorated significantly. I will come back to that fact later in these reasons.

15 The current assets also show unsecured loans in an amount of $4,564,295. That is down from the previous year when the figure was $5,327,610. So, during the course of the 2011 financial year, the plaintiff had been repaid some $800,000 it had loaned out. Note 8 to the accounts shows these loans had been made to three entities. The bulk of the loans just under $4,00,000 was made to an entity described as 'Spencer 61 Pty Ltd as trustee for the Spencer Family Trust'. Almost $500,000 had been loaned to Mr Henry Ynema, the sole director and shareholder of the plaintiff. The remainder had been lent to 'Spencer 61 Pty Ltd as trustee for the Getaway Family Trust'. Nowhere in the evidence are the loans explained. Nothing is said about the terms and conditions on which they were made, when they might be repayable and whether or not the entities concerned have the wherewithal to make repayment if called upon to do so. All that can be said is that the loans are unsecured.

16 Also appearing in current assets, is an entry for trade debtors put at $846,866. This figure included the amount the plaintiff is claiming from the defendant. Of course, this action will determine whether or not the amount appearing in the accounts is, in fact, due and owing by the defendant to the plaintiff. Assuming the defendant is successful on the proceedings (and it is only if that is the case the plaintiff would be called upon to meet a costs order), the current assets of the plaintiff are very limited.

17 The fixed assets are shown in the balance sheet as being $4,131,277. The depreciated value of the plant and equipment is put at $591,440 and the depreciated value of motor vehicles is put at $463,273. The dredging assets (and the plaintiff is in the business of dredging) are put at $3,076,205. The accounts have annexed to them, a depreciation schedule and it may well be these fixed assets would yield their writtendown value on disposal. However, they are fixed assets which would have to be realised if they were to go to satisfying any order for costs.

18 The plaintiff's current liabilities are shown as $6,324,097. The majority of this amount is 'Loans - unsecured' in an amount of $6,042,745. The majority of this amount - just under $6,000,000 - is owed to Bridge Pump Company Pty Ltd. No detail is provided as to what these loans involve and the terms and conditions on which they were made. It is not clear whether they are related party loans, whether they are repayable at call, or on some deferred basis. It does not appear as though the plaintiff is paying interest on the loans. Under 'Expenditure', there is an item for interest paid, but it is modest and could not possibly be interest paid on these loans.

19 The plaintiff is a company that owns and operates dredges. The evidence shows none of the company's dredges are presently working. One is stranded in the Cocos Islands. The rest have been demobilised to Singapore and are being cleaned and refitted. The plaintiff anticipates some of its barges will be available to take on work from March 2012. There is nothing in the evidence to suggest at present any contracts for dredging work have been obtained. Ms Gougoulas does say in her affidavit she has been advised by a director of the plaintiff dredging work is available, but no details are provided as to what income that work may yield.

20 In the circumstances, I am satisfied there is credible testimony the plaintiff will not be able to meet a costs order when called upon to do so. As is always the case in such applications, there is an element of doubt. It is likely to be 18 months before the plaintiff would be called upon to meet a costs order. By then, its circumstances may have changed dramatically. At the moment, it seems to me to be short of funds. It only has $21,000 in cash, it is undertaking a refit of its dredges and it will be March at least before it can take on new contract work. There is no evidence of what this work might be and what return the work may yield. I am not satisfied on the evidence provided there is sufficient to say the plaintiff will have a cash flow which will allow it to meet a substantial costs order.

21 Moreover, it is difficult to get any real feel for the financial health of the plaintiff. It has lent out substantial funds and it has borrowed substantial funds. If it was called upon to repay the loans made to it and it was not able to recover the loans it had made, it would be insolvent. Of course, the reverse is true. If it did not have to repay, at least immediately, its borrowings, but the unsecured loans it has made were repaid, it would be flush with cash. But in the absence of evidence about the loans, it is not possible for form a view. The safer option is to look at the present cash flow position. In other words, I am not satisfied an analysis of the accounts discloses the plaintiff is in such a strong financial position it would be able, absent positive cash flow in the future, to meet any costs order made against it.

22 Turning, then, to the discretionary considerations, there is only one factor which, in my view, is relevant. The plaintiff has only one director and shareholder. That is Mr Henry Ynema. He has not offered to stand behind the plaintiff and offer a personal undertaking to be responsible for any costs order made against the plaintiff. If he had done so, there may have been grounds for refusing the order. In the absence of such an offer, there is no discretionary consideration on this point against an order being made.

23 Looking at the other discretionary factors, the application has been made promptly and any delay in actually getting the matter before the court was due rather more to the inaction of the plaintiff's solicitors than any other reason. So, delay is not a reason for refusing the application. At this stage, it is not possible to form any view of the strength of the case. A statement of claim has not been delivered. The indorsement of claim is lengthy, but provides no basis for any assessment of the merits.

24 There was some suggestion, by counsel for the plaintiff, any impecuniosity on the part of the plaintiff was due to the actions of the defendant. This raises the question of the merits of the claim. As I have indicated, no assessment of the merits is possible at this stage. So, there is no warrant to refuse to order security on the basis the plaintiff's impecuniosity has been caused by the defendant. This is not a case where the plaintiff's proceedings are defensive and, in truth, the action is being brought by the defendant. Counsel for the plaintiff did not seek to argue otherwise.

25 In the circumstances, then, I am satisfied an order for security ought be made. The remaining question is quantum. The defendant, in its chamber summons, sought security in an amount of $170,000. That would cover the costs through to trial. In my view, the better course is to order security in stages. At present, the plaintiff should provide security in an amount of $50,000. This should cover the costs through until entry for trial, including the mediation process. The defendant should have liberty to apply to top up the security at any time, depending upon the course the action takes. It would be surprising if a further order was made prior to the entry of the matter for trial.

26 As a general rule, in applications for security for costs, I order the costs of the application ought be costs in the cause. The conduct of the plaintiff's solicitors in this matter has been such I would be prepared to consider a special costs order. The defendant ought file short submissions on costs and the plaintiff can have the opportunity to respond. I will deal with the question of costs based upon those submissions.

27 There remains the question of the form of the security to be provided. I will allow the parties to negotiate on this issue. Failing agreement, the plaintiff ought provide the security by way of a bank guarantee, or by payment of $50,000 into court. If no agreement is reached, I will make orders dealing with this aspect of the application.