Kenoss Contractors Pty Limited v Allied Constructions Pty Limited [2001] NSWIRComm 36 | Case summary

1 The present proceedings commenced on 5 February 2001 when the applicant made an application seeking urgent interlocutory relief. That application was concluded against the applicant by judgment delivered on 19 February 2001: Kenoss Contractors Pty Limited v Allied Constructions Pty Limited [2001] NSWIRComm 19. Prior to the proceedings as to the interlocutory relief being concluded, the respondent foreshadowed, and then filed and served, a notice of motion seeking certain other interlocutory relief. Two of the matters raised by that motion have been stood over by consent of the parties. 2 The matter which is still pressed by the respondent (the parties will be referred to by their respective roles in the proceedings proper rather than in this motion) is an application that the applicant be required to provide security for costs. The Commission in Court Session has power to make the necessary order. The possible sources of power, and the consideration that it may not be necessary precisely to identify the source, were considered recently in Knott v Signature Security Group Pty Limited [2001] NSWIRComm 12 at [29]. The same approach should be taken since, in this matter, there is also power to make the orders sought by the respondent pursuant to s 1335(1) of the Corporations Law , which provides: Section 1335. Costs (1) Where a corporation is plaintiff in any action or other legal proceedings, 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. 3 The respondent makes its application on the basis that there is doubt as to the ability of the applicant to meet any costs order against it. It relies on the applicant's admission that it does not have funds at least at present to meet any costs order against it and also on the applicant's assertion that it cannot itself provide security for costs. Reliance is also placed on the fact that the applicant does not assert, however, that those standing behind it who may gain the benefit of any litigation are not in a position to provide the security sought by the respondent. The respondent points to the evidence that the applicant's majority shareholder would appear to have assets of substance and relies in this regard upon the statement of Connolly J in Harpur v Ariadne Australia Limited [1984] 2 Qd R 523 at 532 where his Honour sitting as a member of the Full Court of the Supreme Court of Queensland said: The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. 4 Whilst the respondent accepts that all factors must be taken into account it also relies on the judgment of Street CJ in Buckley v Bennell Design and Constructions Pty Limited (1974) 1 ACLR 301 at 305 for the proposition that a court would ordinarily require security where a defendant is being sued by an impecunious company and that this statement reflects the approach in cases such as National Bank of New Zealand v Donald Export Trading [1980] 1 NZLR 97 at 101, Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52 and Drumdurno Pty Limited v Barham (1982) 7 ACLR 131, which are authority for the proposition that where there is no evidence placed before the Court as to the willingness or ability of creditors or shareholders to stand behind the company, the Court will order security for costs. 5 The respondent also relies upon the judgments in National Bank of New Zealand v Donald Export Trading , Newtons Travel v Ansett Transport (1982) 7 ACLR 556 and Pacific Acceptance Corporation v Forsyth (No 2) [1967] 2 NSWR 402 at 407 for the proposition that an order for security of costs will be made even though it is obvious that for the order to be complied with the willingness of shareholders, creditors and the like to provide the necessary funds will be relevant. 6 The respondent, in conclusion, submits that the matters relied upon by the applicant do not substantiate the denial of its claim. For example, it is not correct to say that the applicant is in substance the defendant in the proceedings because, by its summons, it seeks $1.1 million after any cross claim. To be truly in the position of a defendant it must limit its claim to any amount owing to the respondent and it refuses to do so. Further, to the extent that the applicant says that its financial position has been caused by the respondent, there is no evidence of the applicant's financial position or what has caused it and this submission accordingly fails in limine . The evidence 7 It is not necessary to refer in any detail to the evidence as to the applicant's present impecuniosity since the applicant states candidly that it is, at present, in no position to pay a substantial costs award against it. It does, however, submit that the position may be different after its contract for a road construction project for the Australian Capital Territory Government is completed. In the light of the apparently changing nature of the financial position of the applicant, or at least the potential for change in that situation, it is appropriate to refer briefly to the evidence as to that aspect. 8 The starting point is that an important basis of the earlier proceedings for interlocutory relief was the applicant's contention that to decline such relief, would place it in a position of technical insolvency or potential insolvency. Further, there is evidence as to the changing situation, although that evidence is in the form of a solicitor's affidavit put before the Court at short notice for the purpose of interlocutory relief. The solicitor's affidavit on information and belief (upon the advice of the sole director of the applicant, a Ms Beverley Brendas) was to the effect that the applicant has experienced working capital and cash flow difficulties as a result of the financial problems occasioned to it by the subcontract the subject of the s 106 proceedings. It has recently been awarded a substantial construction contract by the ACT Government. The contract has a value of $4.2 million but there is a government payout limitation in the 2001 financial year of $1.8 million for the contract. The construction program requires expenditure of approximately $2.8 million before 30 June 2001 and it requires a substantial amount of cash or credit to fund the substantial expenses that will necessarily be incurred in the establishment and initial phase of the new contract before funds will become available by way of progress payments. Finally, although the applicant has a number of small contracts which it is currently completing, the ACT Government contract is the only substantial work that it has in the immediate future. 9 Notwithstanding the limitations of the evidence in this area, I am nevertheless prepared to accept, for the purposes of this interlocutory application, the substance of it. I make the following findings for the purposes of the present application: (a) The applicant's present financial position as to its potential insolvency and its cash flow difficulties are related to matters the subject of the substantive s 106 proceedings. (b) The applicant's s 106 application is brought bona fide and has reasonable prospects of success. (c) Some hardship will be caused to the applicant if the application for security for costs is granted although I do not find that the application will not necessarily proceed if the application is granted. (d) In that regard, those standing behind the applicant are a corporation and persons of financial substance and therefore are likely to be able to provide any security ordered; however, I do not accept that the evidence leads to the conclusion that this is a situation of persons consciously conducting business through a corporation without assets in terms of the discussion by Connolly J in Harpur v Ariadne Australia Limited . (e) A reason why the applicant has commenced the s 106 proceedings is the steps taken by the respondent by way of "self help" under the subcontract. In referring to this consideration, it must be accepted that the resort to "self help" was open to the respondent. The relevant steps relate to the negative variations which have been made or claimed by the respondent and the calling in of the bank guarantee. However, it would not be appropriate to hold that the applicant is in effect the defendant or respondent in the proceedings. Principles to be applied 10 Notwithstanding that there is some debate in the authorities as to whether the power of the Court to make an order for security of costs in the case of a plaintiff's impecuniosity, is entirely discretionary, I consider that the matter should be approached in that way. See for example the judgment of Lord Denning MR in Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609 at 625 - 626. I do not consider the dicta of Street CJ in Buckley v Bennell Design and Constructions Pty Limited at 305 should be seen as a "fetter" on the discretion in any relevant sense: see, for example, the analysis of that judgment by Phillips JA in Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507 at 514; also the judgment of the Full Court of the Supreme Court of South Australia in Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLR 492 at 497. 11 As observed by Phillips JA, the judgment of Sir Robert Megarry VC in Pearson v Naydler [1977] 1 WLR 899 at 906 - 907 usefully identifies the issues commonly underlying an application for security of costs and affords useful guidance for their proper application. His Lordship said: It seems plain enough that the inability of the plaintiff company to pay the defendants' costs is a matter which not only opens the jurisdiction but also provides a substantial factor in the decision whether to exercise it. It is inherent in the whole concept of the section that the court is to have power to order the company to do what it is likely to find difficulty in doing, namely, to provide security for costs which ex hypothesi it is likely to be unable to pay. At the same time, the court must not allow the section to be used as an instrument of oppression, as by shutting out a small company from making a genuine claim against a large company. For this reason, Mars-Jones J. was not prepared in the Parkinson case to make an order for security for costs for more than the £1,500 that the master had ordered: see [1973] Q.B. 609, 617. As against that, the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I fully accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section. 12 I also agree with Phillips JA's opinion that it must be doubted that there is any significant practical difference between the approach of Megarry VC and Street CJ in Buckley . As Connolly J said in Harpur at 840 the debate is "largely a semantic one". In addition, the passage earlier cited from the judgment in Harpur also raises important considerations to the extent relevant. 13 Finally, reference should be made to the statements of principle of Meares J as to an application for security of costs in Lynnebry Pty Ltd v Farquhar Enterprises Pty Ltd (1977) 3 ACLR 133 at 135: There is no doubt that I have a discretion under the section but in exercising it, I am mindful of what Bowen LJ, said in Gardner v Jay (1885) 29 Ch D 50, at 58: "… when a tribunal is invested by Act of Parliament or by rules with a discretion, without any indication in the Act or rules of the grounds upon which the discretion is to be exercised, it is a mistake to lay down any rules with a view of indicating the particular grooves in which the discretion should run, for if the Act or the rules did not fetter the discretion of the judge why should the court do so?" And of the following extract from the judgment of Lawton LJ in Sir Lindsay Parkinson & Co Ltd v Triplan Ltd, supra at 629: "… the court has a discretion, and that discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a straitjacket by considerations of burden of proof. It is a discretion which the court will exercise having regard to all the circumstances of the case." 14 In the relevant exercise of discretion, as with all discretions to be exercised judicially the task of the Court, to adapt the approach and words of Hungerford J in Van Rooy Machinery Pty Limited v WorkCover Authority of New South Wales (Inspector Wolf) (2000) 97 IR 436 at [33], "comes down to the proposition of doing justice between the parties and ensuring the proper administration of justice". Consideration 15 The first matter to be considered is the present financial difficulties of the applicant and the related consideration that impecuniosity of a plaintiff has always been considered to be a very important factor in applications for security. The question then becomes one whether the other factors to be taken into account are such, when put into the relevant discretionary balance, as to lead to a refusal to the respondent's application. The other significant factors, in addition to the findings set out earlier are: (a) the circumstance that the applicant has an important contract of some substance with the Government of the Australian Capital Territory; (b) the applicant may, as a result of that contract emerge from its difficulties. That possibility is certainly complicated by the applicant's present financial situation and may not become clear until the end of the present financial year and may not be clear until some time after that; (c) proceedings under s 106 are unusual in terms of litigation generally because, prior to any contested hearing, there must be a conciliation of the matter pursuant to s 109 of the Industrial Relations Act . 16 It is also relevant that the applicant is in its present situation because the respondent was in a position to, and did undertake certain "self help" procedures: Heller Factors Pty Limited v John Arnold's Surf Shop Pty Ltd (in liq) at 496; and that the applicant's financial position, if not contributed to by the conduct of the respondent, is at least related to the subject matter of the substantive proceedings: Hallford Pty Ltd v Caltex Petroleum Pty Ltd [2000] NSWIRComm 81 and compare Jeffcott Holdings Ltd (in liq) v Paio (1994) 14 ASCR 239 at 241. 17 The requirement for the matter to be conciliated pursuant to s 109 is a very important consideration; as is the possibility that the applicant's financial difficulties may be transitory; and also that that situation will become clearer at a time which may well coincide with the conciliation of the proceedings. This may take some months not only because of the state of the Court's lists but also because there will need to be a large amount of preparation by both parties before the conciliation occurs. This latter consideration also is a factor in favour of the grant of the respondent's application because of the possibility that it will be required to expend costs which it may not recover if the application is refused. In Knott v Signature Security Group Pty Limited at [36], reference was made to the considerations which may make it inappropriate to make an order for security for the purposes only of the conciliation process or up until that point. The approach adopted in Knott should also be applied here. However, there is a different situation here which should lead to a somewhat different but nevertheless tailored approach being adopted to the question of the application for security. 18 All of the circumstances referred to result in a relatively fine balance of the interests of the respective parties. Although on the one hand the impecuniosity of the applicant is a very weighty consideration, balanced against that factor must be the finding that circumstance might be resolved within the next six months coupled with the related considerations that the current financial circumstances of the applicant are related to the subject matter of the substantive s 106 application and the resort by the respondent to certain "self help". Although I have accepted that those standing behind the applicant are of financial substance and therefore are likely to be able to provide any security ordered, the limits on or qualifications to that finding are important. 19 I consider that in the interests of justice in this case, with particular regard to the consideration that the courts should be available to parties to litigate what appear to be genuine disputes between them, would lead to a refusal of the application but reservation of the right to the respondent to make further application should it appear, at the appropriate time, that the applicant's financial difficulties are not, or are not likely to be, resolved. That right should be exercisable in approximately six months time, when the proceedings should be at least at the point where preparation for the conciliation should be well advanced. I consider that this result is the one which represents the most appropriate balance of all the relevant considerations. For example, it also gives appropriate weight to the strength and apparent bona fides of the applicant's claim and the reasons that have apparently led to its commencement. In that situation there is no reason why those "behind" the applicant should have to provide security at least in the short term. Orders 20 The Court makes the following orders in relation to the respondent's application for security of costs: 1. Application refused. 2. Leave granted to the respondent to make such further application for security of costs as it may be advised after 15 September 2001, unless the applicant has prior to that time provided evidence by affidavit as to its satisfactory financial position. 3. The costs of the application are reserved.

Kenoss Contractors Pty Limited v Allied Constructions Pty Limited

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Judgment (10 paragraphs)

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Cases Cited (5)

Cited By (2)