Hja Holdings Pty Ltd v Zoran Iliev and Anor [2006] ACTSC 8

1. This is an application for security for costs brought by the defendants against the plaintiff company. The plaintiff's claim in the action is framed as a claim for damages for breach of contract and other relief against a former employee and a company associated with him. The statement of claim does not purport to set out full details of the plaintiff's claim, stating in a number of places that full particulars will be provided after discovery, including the administration of interrogatories.

2. The action was commenced in February 2005. Affidavits of documents were filed on behalf of each of the parties during October 2005. The present application was made by Notice of Motion dated 15 November 2005. I am informed that inspection of documents is not yet complete. I am unaware whether any party has delivered interrogatories.

3. Until January 2005, the plaintiff company was named ESolve IT Pty Limited, and carried on business as an information technology consulting firm, providing support services for home, small office and corporate clients. The company had six employees, including, for a number of years, the first defendant. He started with the company in 2001 and left in December 2004, by which time he was manager. After the resignation of the first defendant and a senior engineer who left with him, the directors formed the view that it would effectively be impossible to replace them and that the company would be unable to continue trading. They decided to sell the business. They did so early in January 2005, achieving a sale price of $70,000, with $20,000 paid immediately and the balance being lent by the plaintiff company to the purchaser. It was a term of the sale agreement that the company change its name and transfer the business name ESolve IT to the purchaser.

4. It appears that since then the company has not traded. One of its directors, Mr Harry Konstantinou, has deposed that the company is not insolvent and has no external creditors. It is, in his words, "associated" with the Konstantinou group of companies which, he says, have substantial assets including a 30 million dollar sports and aquatic centre. He also deposes that the directors of the companies in the Konstantinou group have substantial interests in a number of other companies which he names, though he does not provide any information as to their financial position.

5. Mr Konstantinou annexes to his affidavit a company search and a copy of the sale agreement. Pursuant to the agreement, the buyer agreed to pay the balance of the purchase price over ten months, but there is no evidence as to whether or not all or any of these payments were made. Significantly to my mind, Mr Konstantinou did not annex to his affidavit a copy of a balance sheet or profit and loss account, or copies of bank statements, and he did not elaborate on his statement that the company has no external creditors. The use of that expression carries some implication that the company may have internal creditors, perhaps the directors or shareholders, or related companies. Despite his reference to the substantial assets of the directors and of other companies in the Konstantinou group, Mr Konstantinou does not commit himself or other directors, or other group companies, to stand behind the plaintiff in respect of any costs order it may suffer.

6. From the affidavit material put on by the plaintiff, I am unable to arrive at any conclusion as to the plaintiff's financial position. Whilst this application is brought by the defendants who accordingly carry the onus of satisfying the Court that security should be ordered, it seems to me that I am able to draw an inference, as my predecessor (now Connolly J) did in Master Club Consultants Pty Ltd v Stanbritt Pty Ltd [2000] ACTSC 18 (18 February 2000, unreported) that documentation available to the plaintiff which would show its true financial position would not assist the plaintiff's case on this application: Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298.

7. The application for security is made pursuant to subsection 1335(1) of the Corporations Act 2001 which is in the following terms:

s. 1335 Costs

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

8. In Beach Petroleum NL v Johnson [1992] FCA 110; (1992) 7 ACSR 203, Von Doussa J explained the effect of the section as follows:

In my opinion the power of the Court under section 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendants of service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the discretion is to order security.

9. It is not necessary for the applicant to establish that the plaintiff company is presently insolvent, or likely to become so: Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1.

10. It seems to me relevant in the present case that the plaintiff company has sold its business and is no longer trading. There is no suggestion that the company has, or ever had, any assets other than the information technology consulting business.

11. There were in evidence a number of emails between Mr Konstantinou and the first defendant, who was seeking an increase in remuneration, in which Mr Konstantinou made reference to substantial losses having been incurred by the company. In an email of 11 November 2004, Mr Konstantinou referred to "the $350,000 I've lost over the life of ESolve." On 18 July 2004 he mentioned "having to justify to my bank lately because of the huge losses ESolve is causing for the group". Counsel for the plaintiff invited me to dismiss these references as mere hyperbole which might be expected in the context of pressure from a senior employee for an increase in remuneration. Whilst I accept that there may have been some element of exaggeration by Mr Konstantinou, I am inclined to the view that his comments were in general terms factually based.

12. Counsel for the applicant defendants referred me to a number of first-instance decisions of this court in which orders for security had been made in similar circumstances: Sridow Pty Ltd v Nowlan (Master Hogan, 4 October 1991, unreported); Top Slice Deli Pty Ltd v Maliganis [1996] ACTSC 96; Master Club Consultants Pty Ltd v Stanbritt Pty Ltd (supra); and Stelmag Pty Ltd v Tifferly Manufacturing Pty Ltd [2002] ACTSC 99, the latter three being decisions of Connolly J when Master.

13. Counsel for the plaintiff submitted that even if otherwise persuaded that security should be ordered, I should decline to exercise my discretion to do so because of the delay of the defendants in bringing the application. Counsel relied on P. G. Gabel Pty Ltd (in liq) v Katherine Enterprises Pty Ltd (1977) 29 FLR 108, a decision of Ward J in the Supreme Court of the Northern Territory, where his Honour refused an application for security. In that case there had been numerous applications in chambers and the defendant had had ample opportunity to apply earlier for security, having known of the pecuniary state of the plaintiff company from the outset. The action had been listed for hearing on several occasions and adjourned from time to time, apparently at the defendant's request. In those circumstances his Honour considered that he should not exercise the discretion to order security in favour of the defendant.

14. It has been held that delay in lodging an application for security will not necessarily prevent an order: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at para 70 per Einstein J. Notwithstanding this, it seems to be generally accepted that an application should be brought in a timely manner: see for example Eddy v Mac Audio and Accoustical Consultants Pty Ltd (in liq) [2000] SASC 145 at para 48 per Lander J. In the present case I am not persuaded that there has been any relevant delay in the bringing of the application. I note in particular that the process of discovery is not yet complete. The action is well short of being ready for hearing.

15. I am satisfied to the requisite degree that there is reason to believe that the plaintiff will be unable to meet a costs order, so that it should be required to provide security.

16. The plaintiff's solicitor has deposed, in an affidavit sworn a week ago, that proceedings were commenced by the first defendant against the plaintiff in the Magistrates Court in December 2005 claiming an amount of $12,697.54 plus interest in respect of annual leave, sick leave and public holidays under the Workplace Relations Act 1996 (Cth). I do not see the fact that these proceedings are on foot as relevant to the determination of the present application.

17. The solicitor for the defendants has deposed that the defendants' costs up to mid-November 2005 were about $15,000, and that the total party-and-party costs of the defendants, past and future, would be $50,000. The plaintiff's solicitor has expressed the opinion that the defendants' total party-and-party costs would be of the order of $30,000.

18. Counsel for the plaintiff submits that if the Court orders security, the security should relate only to costs to be incurred in the future. Counsel was unable to refer me to any authority for this proposition and it does not appear to me consistent with the rationale for the existence of the discretion.

19. I am satisfied that as a minimum, it is likely that the defendants' costs of the action, unless it is settled, will amount to at least $30,000. I propose to order security in that amount, and to grant the defendants liberty to apply for further security should that become necessary. The proceedings will be stayed unless security is provided within 21 days.

20. Security having been requested by letter before the Notice of Motion was filed, costs should follow the event of the application: the plaintiff must pay the defendants' costs. I propose to grant liberty to apply in relation to the nature of the security to be provided, and in relation to any claim for additional security.

I certify that the preceding twenty (20) numbered paragraphs are

a true copy of the Reasons for Judgment herein of the Master.

Solicitors for the defendants: Williams Love & Nicol