Grandview Ausbuilder Pty Ltd v Budget Demolitions & Excavations Pty Ltd

Supreme Court of NSW|2020-03-25|Before: Parker J

Judgment - EX TEMPORE Revised and reissued 6 April 2020

This is an application by the defendant in these proceedings for an order that the plaintiff provide security for its costs of the proceedings. The plaintiff company ("Grandview") formerly carried on business as a builder. The defendant company ("Budget"), as its name suggests, is a building contractor which specialises in demolition and excavation work.
While Grandview was carrying on its building business, it appears to have been controlled by a Mr Jason Zhang. In August 2019 Mr Zhang recognised that Grandview was insolvent, and an administrator was appointed. Grandview is now operating under a Deed of Company Arrangement ("DOCA") approved by the creditors. The deed administrator is Mr Bailey of O'Brien Palmer. I was told that Mr Zhang is currently in China.
The proceedings arise out of a subcontract between Grandview, as head contractor, and Budget, as subcontractor, for demolition and excavation work at a development being constructed by Grandview at Villawood. That subcontract was entered into in June 2017. The contract price was approximately $2.5 million. Work began in July 2017 and the scheduled completion date was in December 2017.
The parties fell into dispute and in late January 2018 Budget suspended work on the contract on the grounds of non-payment of an amount due under the Building and Construction Security of Payment Act 1999 (NSW) ("SOP Act"). In April 2018, not having paid the amount due, Grandview purported to terminate. Budget's position is that the purported termination was invalid and a repudiation by Grandview, which Budget accepted. The parties agree that the contract came to an end at that time.
Grandview commenced these proceedings as plaintiff in February 2019. Grandview's pleaded claim involves three principal elements. First, Grandview claims liquidated damages from the contractual date of completion (December 2017) onwards until termination of the contract. Second, Grandview claims restitution of moneys paid pursuant to payment claims made under the SOP Act. Third, Grandview claims loss of bargain damages consequent upon what it contends was its effective termination of the contract. There is, of course, an overlap between the second and third claims. As well as defending each of these claims Budget has cross-claimed for amounts due under the SOP Act which remain unpaid.

Issues for determination

Counsel for Grandview accepted that there is reason to believe that it will be unable to pay Budget's costs if Budget is successful in its defence of the proceedings. The threshold requirement of the Corporations Act 2001 (Cth), s 1335(1), is therefore satisfied. Counsel also accepted, consistently with well-established authority, that the fact that this requirement is satisfied is in itself a good reason to order security.
Counsel presented four arguments to the effect that, nevertheless, an order for security should be refused. Those arguments were: (1) Budget has a cross-claim and Grandview's defence to that cross-claim raises the same issues, so counsel contended, as are raised by Grandview in its principal claim; (2) an order for security would stultify the proceedings, and thus work to the disadvantage of Grandview's creditors under the DOCA; (3) Budget's own misconduct is the cause of Grandview's impecuniosity; and (4) on the merits, Grandview has a strong claim.
Each of these arguments was contested by counsel for Budget. In addition, should I decide to grant security, there is a question about what the proper quantum should be.

Previous proceedings

Previous proceedings in the Court have touched on the subject matter of the dispute. In January 2018 Budget served on Grandview a statutory demand in the sum of $1.02 million, representing payment entitlements under the SOP Act arising from progress claims issued in November and December 2017. Grandview thereupon commenced proceedings in the Corporations List as plaintiff, naming Budget as defendant, seeking an order that the statutory demand be set aside. The basis for Grandview's application was that it claimed to have cross-demands which eliminated, or at least reduced, the amount in the statutory demand.
The application came before me for hearing in October 2018 and I delivered judgment on 2 November: Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Ltd [2018] NSWSC 1647. I concluded that Grandview had an arguable cross-claim of $220,000, but that was all. I was prepared to make an order reducing the amount of the statutory demand by $220,000, but only on terms, among others, that Grandview pay that sum of money into Court. These terms were not acceptable to Grandview and, as a result, on 7 November I dismissed the proceedings: Grandview Ausbuilder Pty Ltd v Budget Demolitions Pty Limited (No 2) [2018] NSWSC 1713.
Grandview challenged my decision in the Court of Appeal. As part of the appeal proceedings, the Court of Appeal required Grandview pay a total of $347,000 into Court.
The Court of Appeal delivered its judgment on 29 March 2019: Grandview Ausbuilder Pty Limited v Budget Demolitions Pty Limited (2019) 99 NSWLR 397. The Court granted Grandview leave to appeal. The Court also concluded that I have been wrong in the reasons I gave for rejecting the maintainability of one of Grandview's cross-demands. But the Court decided, based on a notice of contention, that my ultimate conclusion that the cross-demand was not maintainable was correct for a different reason. Other challenges to my decision were rejected. The result was that Grandview's appeal was dismissed and the $340,000 paid into Court by Grandview was paid out to Budget.
Budget then pursued winding up proceedings against Grandview in the Corporations List, based on Grandview's failure to pay the balance of the statutory demand. In September 2019, Grandview's Administrator, Mr Bailey, applied to adjourn the hearing of the winding up application so that Grandview's creditors could instead consider a resolution to enter into the DOCA. Rees J granted the adjournment: In the matter of Grandview Ausbuilder Pty Ltd [2019] NSWSC 1243. As already noted, the resolution was passed (over Grandview's dissent) and Grandview is now being administered under that DOCA. I assume that the winding up application was eventually dismissed or withdrawn.

Budget's cross-claim

A recognised ground for refusing an order for security for costs against a plaintiff is where the plaintiff's proceedings are, as a matter of substance, defensive. But it is difficult to see how the fact that Budget has made a cross-claim means that Grandview's proceedings can be characterised in that way. Grandview is the plaintiff. Grandview brought its claims against Budget before the cross-claim had been instituted and has continued to pursue those claims, which go well beyond the cross-claim made by Budget.
In presenting her argument on this point, counsel for Grandview did not rely on the "defensive proceedings" ground in those terms. She simply asserted that the making of the cross-claim was an answer to Budget's claim for security.
In my opinion, there is no such principle. A claim which is not a defensive one at the time of its commencement does not somehow become a defensive claim, retrospectively, simply because a cross-claim is filed. The proper response from a plaintiff facing a cross-claim by an impecunious cross-claimant, which extends beyond the scope of the plaintiff's claim, is for the plaintiff/cross-defendant to apply for security of the costs of the cross-claim. That has not been done in the present case, nor, it seems to me, could it realistically be done.
In Grandview's Statement of Claim, it acknowledges an obligation to bring to account in its claim for restitution, by way of set-off, the unpaid portion of the payments it is obliged to make under the SOP Act. Grandview's attempt, by filing a defence which repeats matters set out in a Statement of Claim, to present itself as acting defensively, lacks substance. The reality is that the obligation to pay the amounts under the SOP Act has already been acknowledged by Grandview. The cross-claim is only a reflection of that acknowledgment. In my view it is no answer to Budget's claim for security.

Stultification

The terms of Grandview's DOCA are not in evidence. All I know is what can be gleaned from Rees J's judgment. From that judgment, it appears that the major creditors of Grandview are Budget and the Australian Taxation Office. There are other smaller creditors, including Ms Julie Orsini, who is the solicitor for Grandview in these proceedings and acted for Grandview in the earlier litigation to which I have referred.
It also appears from Rees J's judgment that Mr Zhang agreed to put up $100,000 to fund the present litigation. This, it seems, was on the understanding that that amount would be sufficient to cover the costs of prosecuting Grandview's claim against Budget. There is no evidence before me of what those costs now are or whether the $100,000 figure is realistic.
In Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, the Full Court of the Federal Court said at 4: In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts
This principle was not referred to by counsel for Grandview in her written submissions. When I put it to her in the course of her oral submissions, she responded by arguing, as I understood her, that it was only a general principle and should not be applied to the facts of this case. I found it difficult to understand the precise factual circumstances of this case upon which counsel relied to distinguish the Bell principle. All Counsel referred to was the circumstance that Grandview is subject to the DOCA and the litigation as being conducted for the benefit, as she submitted, of its creditors.
In my view, the application of the principle cannot be so easily dismissed. I do not think the evidence before me establishes that the creditors under the DOCA (who are not even identified in the evidence) are the only persons who stand behind or would benefit from the litigation if it is successful.
On the face of it, Mr Zhang is supporting the litigation. For all the Court knows, he may in fact have sufficient means to fund proper security for Grandview and the ability to do so. Counsel herself invited me to infer that, in undertaking to put up $100,000 towards prosecuting the proceedings under the terms of the DOCA, Mr Zhang also agreed to put up an equivalent amount (but, on counsel's submission, discounted for recovery on a party-party basis, to about $70,000) for Budget's costs. I do not think this is a safe inference at all but it does underline the possibility, not dispelled by the evidence, that Mr Zhang is standing behind Grandview or hoping to benefit from its success in the litigation.
There is also the fact that Grandview's solicitor Ms Orsini is a pre-existing creditor of Grandview. In Longjing Pty Ltd v Perpetual Nominees Ltd [2017] NSWSC 1690, I dealt with an application for security which had that feature. The solicitors acting for the plaintiff company in that case were creditors of the company as a result of having acted for it in previous litigation and not having been fully paid. The solicitors were acting in the case on a contingent basis. To that extent they were, in effect, supporting the litigation, but they were not willing to put up security.
In these circumstances I concluded that the obligation cast on the plaintiff company by the Bell principle had not been discharged. On what appears from the material put before the Court on this application, Ms Orsini may be in an analogous position.
In the present case, the Court does not know how the litigation is being funded. As I pointed out in Longjing, that is itself a factor of significance. There would be no point in refusing an order for security if Grandview were unable to fund the litigation through to completion so that it will collapse anyway. On the other hand, if Grandview does have sufficient funding to conduct the litigation, those who are funding the litigation might have the ability to fund an appropriate level of security for Grandview as well.
More fundamentally, because the Court does not know how the litigation is being funded, the Court can only surmise about who is truly standing behind the litigation and directing it. Nor does the Court know the terms of the DOCA. That means the Court can only surmise about those who will stand to benefit from the outcome of the litigation.
In my view, Grandview has failed to take even the first step in discharging the obligation it has under the Bell principle to show that those who stand behind the litigation or will benefit from it are without means. Grandview has not even identified who those persons are.
In LRSM Enterprise Pty Ltd v Zurich Australian Insurance Ltd [2014] NSWCA 88, Barrett JA suggested that it might be unreasonable to apply the Bell principle to a plaintiff company whose creditors are trade creditors who are not company "insiders" and have no separate interest in supporting the company in the litigation. Counsel for Grandview did not invoke this authority and, for reasons I have given, I am not satisfied that Grandview's creditors are all non-"insiders" for this purpose. Accordingly, it is not necessary to consider this possible qualification to the Bell principle in the present case.

Cause of Grandview's impecuniosity

It is well recognised that where the defendant's conduct complained of by the plaintiff in the proceedings was itself responsible for the plaintiff's financial position, that may be a factor in whether to grant security for costs. It may be that this factor is only relevant if the claim would otherwise be stultified. If so, it could not be relevant in this case, but in the end I do not need to deal with the argument on this basis.
In Jazabas Pty Ltd v Haddad [2007] NSWCA 291, McClellan CJ at CL (with whom Mason P agreed) quoted at [95] the following statement from Gino E Dal Pont, The Law of Costs (LexisNexis Butterworth, 2003) at [29.96]: [T]he plaintiff must be able to support the allegation with relatively straightforward and unambiguous evidence of a fairly compelling nature, because otherwise the hearing of the issue of security might become a trial within a trial. For this reason, it is not enough that the defendant's conduct is merely a contributing factor - it must be the material contributor to or cause of the plaintiff's impecuniosity.
There was no evidence before me on this application from Mr Zhang or anyone else with responsibility for, or direct knowledge, of Grandview's financial history. Counsel for Grandview relied on the following extract from an affidavit of Mr Bailey which was quoted by Rees J in her judgment: From my initial review of the Company, it appears to me that the Company's history was unremarkable and was supported by its director and related parties from time to time until recently. There appears to be a single dispute between the Petitioning Creditor [Budget] and the Company which has resulted in significant litigation which remains ongoing. It is clear to me that there is a genuine dispute that is the subject of formal court proceedings in the Supreme Court of New South Wales. l am of the opinion that but for the dispute between the petitioning creditor which has since 2018 been the subject to protracted and ongoing litigation which is not yet finalised, the Company would have remained solvent and continued to trade. It is my preliminary view that the Company become [sic] insolvent when related party creditors supporting the Company withdrew financial support upon a failure to achieve a settlement of the disputes between the petitioning creditor and the Company shortly prior to my appointment.
This application is an interlocutory one. But even so, I have considerable doubt that evidence on the question of why Grandview fell into financial difficulties can properly be led in this way. But, in any event, all Mr Bailey said was that the litigation since 2018 had affected the company's solvency and that the company became insolvent when related party creditors were no longer prepared to support the company.
In referring to the litigation, Mr Bailey must have been referring to, or at least including, the statutory demand proceedings in which Grandview was unsuccessful. Grandview does not, in these proceedings, nor could it, complain about the costs which it has incurred as a result of that litigation. Those costs are not Budget's fault. In my opinion, the second-hand opinion from Mr Bailey recorded by Rees J falls far short of the sort of evidence necessary to sustain this ground of resistance to the making of an order for security.
In fact, Grandview's financial statements for the years ended 30 June 2017, 2018 and 2019 are in evidence and tell a different story. Grandview's net assets as at 30 June according to its balance sheet as at 30 June 2017 were only about $400. This was before work under the contract which is the subject of these proceedings had even begun. Within twelve months Grandview's balance sheet showed a deterioration of $3.3 million. Grandview's 2018/2019 balance showed, as at 30 June 2019, that it still had a negative net value of $2.2 million. This evidence strongly suggests that Grandview's impecuniosity is the result of factors which are quite independent of the claim which is the subject of these proceedings.

Strength of Grandview's claim

In her written submissions, counsel for Grandview went into Grandview's claim at great length. She submitted that the claim is a strong one. For his part, counsel for Budget responded at equivalent length and presented a diametrically opposed submission.
But in my view, all of this is beside the point for present purposes. If the Court is satisfied in accordance with the Bell principle that the claim will be stultified because those who stand to benefit from it and stand behind it are unable to fund the litigation, then the strength of the claim may (and I emphasise the word "may") be a relevant factor in deciding whether to grant security. But I have trouble seeing how the strength of the claim can be independently relevant.
In the present case I have not been satisfied that the claim will be stultified if security is ordered. I do not think that this conclusion can be side stepped by showing that it is a strong claim. There is no public interest in a claim being brought as such. This is commercial litigation which is about money. The court grants security in such cases because, as a general rule, the court considers that it is wrong for those who stand behind a company and will benefit from the litigation to be able to conduct the litigation without any financial risk. This has nothing to do with the strength of the claim.
I will only add that, if, contrary to my view, it is important to evaluate the strength of the claim, then I am far from persuaded that it is a strong one. Indeed, as I discuss below, I think the claim may well require reconsideration from the ground up before it should be allowed to proceed at all.

Quantum and form of orders

Both parties put on cost estimates from their respective solicitors. Budget's solicitor, Mr Ziman, gave what he described as an estimate based on "fair and reasonable" recovery which totalled $278,000. For Grandview, Ms Orsini contended that any security would be far less. Her figure was $50,000 to $70,000.
I do not propose to go into the details of the disagreements between Mr Ziman and Ms Orsini. The future shape of the case is uncertain and what the costs will be is more than usually unpredictable. As will be seen, prediction at this stage, even on a "broad brush" basis, is unnecessary.
In the course of the debate on quantum, it was necessary to go into the claims in some detail. I questioned whether the claims could be maintained, or at least maintained for the amounts sought in the Statement of Claim.
I did so because there is some overlap between claims pleaded in the Statement of Claim and the cross-demand claims which were considered in the statutory demand proceedings. In particular, the Court of Appeal expressed the view, in strong terms, that any claim by Grandview for loss of bargain damages was manifestly untenable. I also said in my judgment that Grandview could not maintain a claim for liquidated damages, to the extent that the claim covered the period after Budget, as it was entitled to do, suspended work under the SOP Act, and this aspect of my decision was not questioned in the Court of Appeal.
These questions placed counsel in an uncomfortable position. She candidly stated that she had not been responsible for the drafting of the Statement of Claim and it was clear that she did not wish to accept responsibility for that document. Instead, she assured me that Ms Orsini, who counsel said is very experienced in building litigation, had carefully considered what the statutory demand decisions and satisfied herself that the claims as propounded in Grandview's Statement of Claim were maintainable.
When I pressed further, Ms Orsini, who was present instructing counsel, addressed me directly. She said that the Statement of Claim did not need to be amended in the light of the decisions to which I have referred. She asserted, at a general level, that there was evidence which meant that the decisions were not necessarily valid.
After this exchange counsel for Budget indicated that should the litigation go on, Budget would be moving to strike out or obtain summary dismissal of the Statement of Claim, at least in part. In my view this is quite understandable. I found the bland assurances which I was given wholly unsatisfactory. I have no confidence that the questions that I asked had been properly considered. Nothing in what I was told gave me any reason to think that the strongly expressed conclusions of the Court of Appeal (and my own conclusion concerning the liquidated damages claim) can be treated so dismissively.
It seems to me that if these proceedings go on at all Grandview will have to limit its claim and reconsider the balance from the ground up, or at least seriously consider doing so. If that happens Budget will have to reframe its defence.
Counsel for Grandview submitted that the evidence gathered and assembled for the purposes of the earlier proceedings would essentially be sufficient for the conduct of these proceedings. I was referred in particular to expert reports which were prepared by Mr Brincat. I am not at all persuaded that this is correct. Mr Brincat did not address what I regard as the fundamental issue in the restitution claim, namely whether the amounts payable under the SOP Act for the period up to December 2018 exceeded the amounts that Budget was contractually entitled to receive by way of progress payments for that period.
Counsel suggested that, even so, the correct answer can in effect be reverse engineered from what Mr Brincat has done. I am not sure that this is correct and I venture to think that some of the difficulties with the way in which Grandview has so far presented its case may stem from a failure to appreciate that Mr Brincat's report does not, at least directly, address the particular questions raised by the legal claims which Grandview wishes to make.
In these circumstances I see no point in attempting to resolve the dispute between Mr Ziman and Ms Orsini about the likely level of future costs in the proceedings. What I propose to do is to fix an amount of security to be paid now to cover the initial costs of the proceedings and the costs of putting them on track. If the security is paid and the proceedings continue, then Budget may return to Court and have a further tranche or tranches of security ordered to cover the balance of the proceedings, when the Court will be better placed to know what the claims and defences truly are and what factual and legal issues are truly likely to arise.
For the purpose of assessing what amount should be awarded, counsel for Budget sought $6,000 on account of costs so far incurred and $15,000 for a strike out or summary judgment application and consequential amendments to the pleadings. Counsel for Grandview did not dispute either of these figures.

Conclusions and orders

For these reasons I have concluded that: (1) Budget is entitled to security for its costs of the proceedings; (2) the court should order $21,000 in security now, with leave reserved to Budget to seek further security in the event that the proceedings are prosecuted further. [Parties addressed on the question of costs]
The Court makes the following orders:
Order that the plaintiff provide interim security for the defendants' costs of the proceedings in the sum of $21,000 to be paid within 21 days;
Order that the security be paid by payment into Court or such other form as may be agreed with the Registrar or between the parties;
Order that the plaintiff's proceedings be stayed against the defendant in the event of failure to make payment of the security provided for under this order;
Grant liberty to the defendant to apply for further security in the event that the proceedings are further prosecuted by the plaintiff, such liberty to be exercised by the filing of a separate notice of motion in the proceedings.
Order that the plaintiff/respondent pay the costs of the defendant/applicant of the notice of motion, such costs to be assessable forthwith.
I direct that the proceedings be listed for directions before the Registrar in Equity on 22 April 2020.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 06 April 2020

Building and Construction Security of Payment Act 1999(NSW)

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