Hercules Carparking Systems 2004 Pty Ltd v Gennie Holdings Pty Ltd

Relevant background

1. In or about August 2019 the defendant filed a Notice of Motion seeking security for costs. On 4 October 2019 Consent Orders were entered by the Court providing that the plaintiff pay into Court the amount of $50,000 as security for the defendant's costs and that the plaintiff pay the defendant's costs of the motion, as agreed or assessed.

The evidence on the Notices of Motion

1. The plaintiff relied on the following affidavits, which were read without objection: 1. Affidavit of John Philip Dawson dated 8 February 2021; 2. Affidavit of John Philip Dawson dated 10 February 2021; 3. Affidavit of Terence Smith dated 22 February 2021; 4. Affidavit of Terence Smith dated 24 February 2021.
2. The defendant relied on the following affidavits which were read without objection: 1. Affidavit of Michael William Joseph dated 15 December 2020; 2. Affidavit of Michael William Joseph dated 26 February 2021.

The relevant law

1. Rule 42.21 of the Uniform Civil Procedure Rules 2005 provides a power to award security for costs where, relevantly, there is reason to believe that a plaintiff corporation will be unable to pay the costs if ordered to do so. In determining whether it is appropriate to make an order for security for costs the court may have regard to relevant matters including those specified in rule 42.21(1A) as follows: 1. the prospects of success or merits of the proceedings, 2. the genuineness of the proceedings, 3. the impecuniosity of the plaintiff, 4. whether the plaintiff's impecuniosity is attributable to the defendant's conduct, 5. whether the plaintiff is effectively in the position of a defendant, 6. whether an order for security for costs would stifle the proceedings, 7. whether the proceedings involves a matter of public importance, 8. whether there has been an admission or payment in court, 9. whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant, 10. the costs of the proceedings, 11. whether the security sought is proportionate to the importance and complexity of the subject matter in dispute, 12. the timing of the application for security for costs, 13. whether an order for costs made against the plaintiff would be enforceable within Australia, 14. the ease and convenience or otherwise of enforcing a New South Wales court judgment or order in the country of a non-resident plaintiff.
2. Section 1335 Corporations Act 2001 (Cth) provides for a similar power, if it is established on credible testimony that there is reason to believe that a plaintiff corporation will be unable to pay the costs of the defendant if successful in the defence.
3. An applicant for security for costs is required to prove that there is reason to believe that the plaintiff will be unable to meet an adverse costs order and it is not enough to merely point to a real or sensible risk: Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [15-[17].
4. It is only if the applicant proves the threshold question, that the Court is required to consider the discretionary factors set out in r 42.21(1A) UCPR: Modakboard Australia Pty Ltd v Brady [2018] NSWSC 399 at [246].
5. The power to order security is discretionary and not automatic: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [20], [56]-[57] and [60]-[62]. The discretion is to be exercised judicially on the facts of the case: Oshlack v Richmond River Council (1998) 193 CLR 72 and Merribee Pastoral Industries v Australia and New Zealand Banking Group Ltd (1998) 193 CLR 502.
6. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: Acohs Pty Ltd v Ucorp Pty Ltd (2006) 236 ALR 143 at [12].

Hercules' financial position

1. The evidence of Mr Smith discloses that Hercules operates three bank accounts with the Commonwealth Bank. Mr Smith provided the balance of those accounts in the period 30 June 2019 to the present on three specific dates. The most up to date balances for each account are: 1. $140,000 as at 31 January 2021; 2. $180,020.86 as at 31 December 2020; and 3. $50,584.77 as at 31 January 2021.
2. The draft financial accounts for Hercules as at 30 June 2020 demonstrate that Hercules: 1. had a turnover of approximately $5.7 million and returned a gross profit of approximately $2.1 million; 2. recorded a net profit of approximately $52,000; 3. has a net asset position of in excess of $1 million; 4. had as at 30 June 2019 and 30 June 2020 substantially more cash in the Bank than it held as at the times referred to in the preceding paragraph.
3. Gennie estimates that its costs of the proceedings for all past and future work will amount to approximately $220,000 inclusive of GST. It should be noted that Gennie is unlikely to obtain an order for security in this amount because it does not take into account the sum of $50,000 already provided by way of security, and it would be unusual to make an order in favour of an applicant for all of its estimated costs.
4. Put simply, Hercules currently has sufficient funds in the bank to meet the entirety of Gennie's costs if it was successful at trial.
5. I am not satisfied on the balance of probabilities that Gennie has proved that there is reason to believe that Hercules will be unable to meet an adverse costs order.

Discretionary matters

1. If I am wrong on the finding in the preceding paragraph, I would not exercise my discretion to make an order for security for costs for the reasons that follow.
2. First, an application for security for costs must be brought at the earliest available opportunity and there has been delay in Gennie seeking further security for costs. Gennie contended that the delay was the result of amendments to Hercules' claim, which had the effect of substantially altering the case that Gennie thought it was required to meet. I do not accept that submission. Whilst there have been some amendments to Hercules' claim, these are partially responsive to the filing of Gennie's cross-claim. The issues as they are now identified between the parties should have come as no surprise by reference to the authorities.
3. Second, the costs claimed by Gennie seem disproportionate to the amount that is in dispute. Gennie has estimated that its total legal costs will be in the vicinity of $220,000 to defend a claim against it that at its highest, equates to $342,000 plus interest and costs.
4. Third, the proceedings are at an advanced stage of preparation with the hearing listed in June 2021. An order for security at this late stage has the potential to stifle the proceedings.
5. Fourth, Gennie exercised self-help in calling on the bank guarantee, which Hercules' contends was in breach of the contract. In this way, Gennie is partially responsible for any impecuniosity of Hercules.
6. Fifth, Hercules has already provided $50,000 by way of security for costs.

Gennie's financial position

1. The evidence discloses that Gennie is the registered proprietor of a strata title building with a value of approximately $25 million, which is unencumbered. This position became clear after an exchange of correspondence between the parties as to the security held by the bank over this property. The later correspondence demonstrated that the security over the property had been released.
2. Hercules accepts that Gennie has this unencumbered asset but complains that Gennie has not disclosed its net financial position. Hercules contends that the Court should infer that Gennie has not exposed its net financial position because that would not have assisted its case: In the Matter of Metal Storm Limited (in liquidation) [2018] NSWSC 900 at [10].
3. In the circumstances, Metal Storm can be distinguished. On 8 February 2021, Hercules requested Gennie to provide it with "any evidence" of its ability to meet an adverse costs order. Gennie responded by establishing that it had an asset of substantial value as a way of demonstrating its solvency. In later correspondence, Hercules did not request that Gennie provide evidence of its net position. I do not think it would be fair to proceed on the basis that Gennie should have disclosed a matter that it was not asked to provide.
4. The extent of security sought by Hercules relating to the cross-claim was relatively modest, at $26,567.
5. I am not satisfied on the balance of probabilities that Hercules has proved that there is reason to believe that Gennie will be unable to meet an adverse costs order.

Discretionary matters

1. If I am wrong on the finding in the preceding paragraph, I would not exercise my discretion to make an order for security for costs for the reasons that follow.
2. First, the cross-claim is defensive in nature. In this case, the fact that there has been a significant proportion of the contract price that has been paid by instalments may necessitate an order for some refund to be made to Gennie. The cross-claim does no more than formalise Gennie's position.
3. Second, the cross-claim was commenced in May 2020 and as such, there has been a delay in Hercules' making an application for security.

Orders

1. The orders I make are as follows: 1. The defendant's Notice of Motion filed 15 December 2020 is dismissed. 2. The plaintiff's Notice of Motion filed 8 February 2021 is dismissed. 3. The costs of the Notices of Motion are costs in the cause.

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: 08 March 2021