HP Mercantile Pty Ltd v Dierickx

Judgment (Ex tempore) 1HER HONOUR: This is an application brought by notice of appeal, filed 14 March 2013, by the respondents to the appeal, seeking an order pursuant to s 1335 of the Corporations Act 2005 (Cth) and/or r 50.8 of the Uniform Civil Procedure Rules 2005 (NSW) and/or r 42.21 of the Uniform Civil Procedure Rules for the provision of security for anticipated future costs and disbursements of the respondents in relation to the appeal proceeding. The sum of $120,000 has been sought or such other amount as the Court might determine, and consequential orders are sought in relation thereto. 2The basis on which the application for security for costs has been made is set out in the short outline of submissions that has been handed up before me today. Reliance is placed on two affidavits sworn by Florian Samuel Ammer, sworn 14 March 2013 and 4 April 2013 respectively. Mr Ammer is the solicitor with the conduct of the proceedings on behalf of the respondents. 3The appellant is a company, HP Mercantile Pty Ltd. It sought to recover a loan under a loan agreement from the respondents. The matter came for hearing before White J in December 2011. His Honour accepted that there were misleading and deceptive statements in a particular prospectus as to the manner in which project expenses would be paid out of monies paid into the investment scheme. His Honour accepted that there had been reliance by the respondents on those statements. 4The application for security for costs follows correspondence between the solicitors acting for the respective parties in relation to provision of material, such as bank statements and the like, from which the respondents sought to satisfy themselves as to the ability of the company to pay the costs if the company's appeal were to be unsuccessful. (I note that is in the context of the fact that White J made orders for the appellant to pay two thirds of the costs of the respondents at first instance, and it is submitted that those costs are likely to be in the order of at least around $400,000.) 5The submission by the respondents is that the authorities make clear that the Court's power under s 1335 is not constrained by the requirement of special circumstances that applies where an order for costs of an appeal is sought under Part 40 of the Rules, citing Pioneer Park Pty Ltd v Australian ANZ Banking Group [2007] NSWCA 344 at 22 and Harrington Services Pty Ltd (In Liquidation) v Harrington [2003] NSWCA 89 at 31. 6I have been referred to authorities in relation to the nature of the test to be applied on an application for security for costs pursuant to s 1335, in particular the test outlined in Beach Petroleum NL v Johnson [1992] 7 ACSR 2003, which has been followed in various judgments including Livingspring v Kliger Partners [2008] VSCA 93, and is commonly referred to as an undemanding test. 7In Livingspring, in the Court of Appeal in Victoria, it was suggested that, in fact, the test is less demanding than has otherwise been thought, on the basis that the Beach Petroleum formulation requires the Court to decide whether 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, and the Court in Livingspring considered that it may be sufficient simply for there to be a possibility that the company would be unable to pay. At [15] it was said: The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'If the court is satisfied that ... ' or 'If in the view of the court it is likely that ...'. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a "real risk".) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. 8Reference was also made to what was said by Merkel J in Meni's Tailoring and Alterations Pty Ltd v Jeanswest Corporation Pty Ltd [2003] FCA 1108 as to the undemanding nature of the test. Security was there ordered even though the applicant company had a significant business in the sense of turnover and staff. There the applicant company was a two dollar paid up capital company that did not have substantial fixed or liquid assets. 9Similarly in Hurworth Nominees Pty Ltd v ANZ Banking Group [2005] NSWSC 1360 White J applied the test in Beach Petroleum, and referred to it as an undemanding test. His Honour there looked at the evidence of available assets of the plaintiffs, noting there that legal representation by the plaintiffs for the proceedings in question would "eat into" the plaintiff's available assets and therefore the likely consumption of some of those assets in paying for legal representation in the proceedings. 10In Hurworth Nominees v ANZ the Court also considered the discretionary considerations that would apply in cases of this kind. There, White J noted that no individual discretionary factor is decisive and referred to the factors that had been referred to by Hill J in Equity Access v Westpac Banking Corporation [1989] ATPR 40-972, including the chances of success, the quantum of risk that the plaintiffs could not satisfy in order for costs, whether an affirmative exercise of the discretion would shut a small company out from making a genuine claim, whether the impecuniosity arose out of the conduct in respect of which relief was sought by the plaintiffs, and whether there were aspects of public interest which weighed in the balance or particular discretionary matters peculiar to the circumstances of the case. 11There is no submission put that the order for security would stultify the current appeal. The issue is as to whether the material relied upon by the respondents is sufficient to satisfy the onus of proof that the respondents bear as to establish a reasonable possibility, or a basis on which it is reasonable to believe, that the appellant will be unable to pay a costs order if and when its appeal is unsuccessful. 12In that regard the respondents rely upon the fact that, and it is established in the material before me, the company is a "two dollar company". It is submitted that the company's net profits from the collection of its only asset of significance, the loan books, are nil. Reference was made to cross examination before White J in which the principal of the appellant company (Mr Chapman) was cross examined as to the business of the company and confirmed that its only business was to recover debts, and also confirmed that as at June 2011 the company had approximately $10 million in gross recoveries, but that in terms of the net recoveries had zero because the cost to recover those had equalled the $10 million. 13Mr Chapman confirmed that there was an agreement in place whereby a company with which he was associated recovered substantial consultancy fees from the appellant. Mr Chapman also accepted that, if and when the company was able to recover funds in relation to the debts there in question, he would have a beneficial interest in those profits. 14I have been taken to evidence put forward by the respondents as to earlier financial statements. I note that what has been shown is that over a period of time from at least around 2009 there have been varying amounts shown in the profit and loss statements for the company in respect of the cash held by the company. Although reference is made by Senior Counsel for the respondents to the reduction in cash from the amount held in cash in 2011 to that held in cash in 2012, the amount shown in the financial statements as at June 2012 of roughly $350,000 is not inconsistent with amounts earlier held by way of cash, and there has been no suggestion that there has been any improper conduct in relation to the manner in which the company's assets have been dealt with. 15The force of the application for security for costs in the present case lies in the fact that the company's readily realisable assets at present (by reference at least to the financial statements), are comprised of cash. There are amounts shown by way of receivables in the current year, but there is no (and can be no) certainty having regard simply to the financial statements as to whether those receivables would be readily able to be recovered within any particular time frame for satisfaction of a costs judgment, in circumstances where the costs judgment for the appeal coupled with the costs judgment at trial is likely to exceed the current amount held by way of cash. 16It is submitted for the appellant that the strong net operating profit over the period shows that this company does have monies available to it, and would be in a position to pay out costs orders. Nevertheless the evidence of Mr Chapman suggests that the manner in which the company operates is to incur costs in making loan recoveries, and for those costs, in effect through consultancy fees or otherwise, to equal the recoveries, such that there is not a profit element. In other words that the company appears to be recovering the costs on a break even basis. 17In all the circumstances it seems to me, given the undemanding nature of the test, that there is reason to believe that the plaintiff corporation may be unable to pay the costs of an unsuccessful appeal by it, in addition to the costs of the proceedings that it has been ordered to pay at trial. I am satisfied that I should order security for costs. The question is how much and over what time. In my view it is appropriate for the security for costs to be provided on a staged basis and for it to be provided on the basis of party/party costs, not solicitor/client costs. 18The affidavit evidence by Mr Ammer outlines those costs on a solicitor/client basis and I have been given estimates depending on whether the hearing is a one day hearing or a one day plus hearing. 19Counsel for the appellant, Mr Knowles, raised issues as to whether the costs, as outlined by Mr Ammer, are excessive for a one day or a one day plus appeal. As to that, there is no evidence from the appellant to challenge particular items of the costs estimates, and it does not seem to me that I can form the view that they are manifestly unreasonable. There was issue taken with the provision of security for costs for the notice of contention as a separate issue, in circumstances where that is, in effect, an application by the plaintiff, but I am satisfied that the notice of contention costs would be likely to form part of the costs of appeal if the appeal were to be unsuccessful. 20I add that the affidavit relied on by the appellant, being an affidavit by its solicitor Mr Geoffrey Versace, contains various matters either on information and belief or was by way of assertion to the effect that: the appellant had never failed to pay a costs order awarded against the company; that there was no third party funder; and that the appellant had not granted any charges or liens over any assets of the company. He also deposed to his belief that certain amounts had been provided for in the 2012 accounts. The difficulty I have is to be able to determine what weight should be placed on that belief or those assertions in circumstances where the appellant has not provided evidence setting out the basis on which it makes (or has sought for its solicitor to make) those assertions. 21There was a suggestion by the respondents that the result of White J's decision was in effect to cause a likely diminution in the value of the loan book, having regard to the findings his Honour made as to the misleading and deceptive nature of certain statements contained in a prospectus. Mr Versace has deposed at paragraph 4 of his affidavit to his belief or his assertion that there are no other loan accounts subject to the same prospectus and loan agreement. Again, accepting that that may be the case, that does not necessarily address the question as to whether or not other prospectuses may contain similar material. In any event, I place no weight on the concern raised by the respondents as to the potential diminution in value of the loan book. I consider that the respondents' application for security for costs is established by reference to the financial statements, coupled with the evidence by Mr Chapman given before White J as to the manner in which the company operates in terms of recovery of costs and the basis on which the recoveries are dealt with, to which I have referred earlier. 22I also note that in the submissions for the respondent there is reference to the fact that Mr Chapman is a director of the appellant and a beneficiary of a company which has received a substantial amount of money pursuant to an oral agreement in relation to the management of this and other litigation. The submission is made that Mr Chapman and the company "should not be given a free kick by seeking to share in the spoils of any victory but not have the burden of paying the costs associated with that". There are authorities in which the willingness of a third party who stands to benefit from particular litigation may be taken into account in determining whether or not security for costs should be provided in the circumstances. I have not found it necessary to have regard to those authorities in coming to the view to which I have come in relation to security for costs. 23Accordingly, I propose to order that security for 70% of the sums in the schedule in Exhibit B be provided on dates to be fixed by reference to the hearing timetable. 24[After discussion as to the short minutes, her Honour ordered the parties to submit short minutes of order reflecting the following timetable - 70% of the amounts in items 1 and 2 of the schedule within 14 days; 70% of the amounts in 3 and 4 of the schedule six weeks before the commencement of the appeal; and 70% of the amount in item 5 one week before the hearing of the appeal - and staying proceedings (if payment of the security ordered in any of the tranches is not paid in accordance with the orders), pending payment of the amount due in accordance with the order.] 25I order that the appellant pay the respondent's costs of the motion on the ordinary basis.