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[2011] NSWSC 1076
procedural. The application for security for costs was dismissed. Leave was granted to bring the cross-claim, with the reference in the order corrected to s 444E(3) of the Corporations Act 2001 (Cth). The...
The plaintiff builder was financially distressed, so the defendants met the threshold for asking it to provide security for their costs. But the judge refused to order security. The defendants would need to litigate their proof of debt to recover bank guarantees, and the plaintiff would be able to contest the same issues in those proceedings. Requiring security in those circumstances would serve little purpose. The judge also considered it likely that the defendants' failure to pay adjudicated amounts had contributed to the plaintiff's financial position. The court granted the defendants leave to bring their cross-claim and made the motion's costs costs in the proceedings.
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Paul Michael Pty Ltd was a builder engaged under a construction contract with J.A. Westaway & Son Pty Limited and Urban Traders Pty Limited, the proprietors, to construct home units at Pittwater Road, Bayview [1]. The builder sued for damages alleging breach of contract and repudiation. It was subject to a deed of company arrangement when the court considered the defendants' motion [2].
The motion had two parts. First, the defendants sought security for their costs, relying on s 1335 of the Corporations Act 2001 (Cth) and, alternatively, r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW) [3]. Second, they sought leave to bring a cross-claim against the plaintiff [2], [33].
The security application arose against a background of payment adjudications. The plaintiff had submitted two payment claims under the Building and Construction Industry Security of Payment Act 1999 (NSW), and both had been adjudicated in its favour. The amounts, including adjudication expenses, totalled about $1.9 million [12]. The plaintiff's case was that the defendants' purported taking of the work out of its hands was repudiation. The plaintiff had suspended work when at least one adjudicator's determination remained unpaid, and it relied on s 27(2)(a) of the Security of Payment Act as the source of a legal right to suspend [6].
The plaintiff was in serious financial difficulty. The administrator's circular to creditors reported an estimated deficiency exceeding $5.2 million [9]. That estimate included as an asset about $5.1 million claimed from the defendants, while leaving out a proof of debt for almost $7.5 million lodged by the defendants [10]. The report also recorded $1.4 million owed to a secured creditor and $3.8 million owed to unsecured creditors [11]. The judge noted that the company had reported net shareholders' funds of $208,000 for the year ended 30 June 2008, although the financial documents were unsigned and their reliability was qualified [14].
The court dismissed the application for security, granted leave for the cross-claim, and ordered that the costs of the motion be costs in the proceedings [28], [35]-[36].
The judge treated the financial threshold for security as clearly satisfied. The defendants' application did not face an evidentiary dispute on that threshold: even a brief examination of the administrator's circular was enough to support it [4]. That finding did not, however, determine whether security should be ordered. The court then considered the discretionary factors raised by the plaintiff [5]-[6], [24]-[28].
One factor was the apparent strength and good faith of the plaintiff's case. The plaintiff argued that the central issue was whether the defendants had repudiated the contract. Its submission relied on earlier judicial views, and on the circumstances of the suspension and the defendants' subsequent taking of the work out of its hands [6]. McDougall J expressly declined to form a concluded, or even provisional, view on the merits because he did not have enough material. He nevertheless said the circumstances lent support to the plaintiff's submission [7]. Later, he described the case as not appearing entirely lacking in merit [24]. These comments were relevant to the security application, not a determination of the contract dispute.
The judge also considered whether the defendants' conduct had contributed to the plaintiff's impecuniosity. He contrasted the company's relatively modest net shareholders' funds in 2008 with its later position and noted that the adjudicated amounts owing by the defendants totalled about $1.9 million [12], [14]. Although he acknowledged that it might seem surprising for non-payment of that amount to cause catastrophic losses, he considered the context: the company had limited financial resources and, on the evidence, the Bayview project was its only project [13]-[15]. His conclusion was cautiously framed: the defendants' failure to pay adjudicated amounts and related judgment debts was “likely to have at least contributed” to the plaintiff's present impecuniosity [15]. He did not determine the ultimate liability for those amounts in this motion.
By contrast, the plaintiff's argument that security would stultify the proceedings was not made out. The director could not personally provide all the security sought, and one creditor he approached did not think he could assist. But there was no acceptable evidence that the unsecured creditors had refused to support the litigation [16]-[17]. The judge therefore did not rely on stultification when balancing the factors [25].
The decisive consideration was that the defendants would have to litigate the underlying dispute in any event if they wanted to recover the bank guarantees. Earlier arrangements had stayed judgments obtained by the plaintiff on the adjudications, on condition that the defendants provide bank guarantees from the proceeds of sale of the units [19]-[20]. To recover those guarantees and the underlying $1.9 million, the defendants would need to pursue their proof of debt. The administrator had declined to determine it, leaving the dispute to be dealt with in court [21]-[22]. The defendants could pursue that dispute by cross-claim in the existing proceedings or by starting separate proceedings [21]-[23].
That meant the plaintiff would have an opportunity to defend the defendants' claim, including by advancing its own cross-claim, and the same issues would be litigated regardless [23]. McDougall J applied the reasoning associated with Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (administrator appointed) [1999] NSWCA 16 at [24]: security would be an “arid exercise” if the plaintiff could later litigate the same matters as a defendant [26]. Because no undertaking not to prosecute the cross-claim was offered, and such an undertaking was not realistic in light of the bank guarantees, this consideration strongly favoured the plaintiff [27]-[28].
The cross-claim application was separately granted. The administrator had declined to determine the substance of the proof of debt, and the court considered it appropriate for the underlying dispute to be agitated there. The judge also noted that the plaintiff's director had undertaken under the deed of company arrangement to indemnify the company for all costs relating to the proceedings, including the cross-claim [33]. Whether any judgment on the cross-claim would require further leave before enforcement was reserved for later consideration [34].
This judgment does not announce a new general rule or purport to alter the law of security for costs. It applies the discretionary framework invoked by the parties under s 1335 of the Corporations Act and UCPR r 42.21(1)(d), after finding the financial threshold satisfied [3]-[4]. Its contribution in this dispute is the application of the “arid exercise” reasoning to circumstances where the defendants' own need to recover bank guarantees made future litigation of the same underlying issues likely [21]-[28].
The judgment relies on Concrete Constructions for that reasoning. It notes that both the primary judge, Rolfe J, and Sheppard AJA, with whom Mason P and Handley JA agreed, took account of the fact that the party seeking security had declined an undertaking not to prosecute its cross-claim [26]-[27]. McDougall J identified a factual difference: no such undertaking was offered in the present case, and, given the guarantees, the defendants could not sensibly offer one [27]. The judgment therefore presents the earlier reasoning as relevant by analogy, while explaining why the underlying need to litigate was particularly clear here.
The judgment also discusses other considerations, but does not formulate them as standalone legal tests. The possible contribution of the defendants' non-payment to the plaintiff's impecuniosity was a factor in the exercise of discretion [15], [24]. The plaintiff's assertion that security would stultify its case was rejected for want of evidence [16]-[17], [25]. The decision is therefore fact-sensitive: the court balanced these matters rather than treating any one financial circumstance as determinative.
The judgment gives no account of later decisions or subsequent amendments to the relevant law. On the text provided, it is possible to describe the approach taken in 2011, but not to state how the law has since developed or how later courts have treated this decision.
At [4], the court said the financial threshold was “clearly satisfied”. In plain English, the judge accepted that the plaintiff's financial condition provided a proper basis for considering security. That finding opened the door to the discretionary assessment; it did not make an order inevitable.
At [7], the judge said the circumstances lent support to the plaintiff's submission but declined to express even a provisional view on the merits due to insufficient material. This matters because the comments about the plaintiff's case should not be read as a final finding that the defendants repudiated the contract.
At [15], the judge said the defendants' failure to pay adjudicated amounts and related judgment debts was “likely to have at least contributed” to the plaintiff's impecuniosity. The qualification is important: this was an assessment for the security application, not a final finding on causation or contractual liability.
At [17], the evidence fell “well short” of showing stultification. Put simply, the evidence that the director and one creditor could not provide the requested security did not establish that the company or its creditors could not support the litigation.
At [26], the court adopted the observation that it would be an “arid exercise” to order security if the same issues would later be litigated by way of defence. Here, the defendants' need to pursue their proof of debt to recover the guarantees meant that an order for security would not avoid litigation of the underlying issues.
At [34], the court called the leave application “a clear case for the granting of leave”. That conclusion rested on the administrator's decision not to deal with the substance of the proof of debt and the need for the dispute to be resolved in court [22], [33]-[34].
The decision is most directly relevant to a security-for-costs application where the plaintiff is financially distressed, the defendant can establish the applicable financial threshold, and the defendant will nevertheless have to litigate substantially the same dispute through a cross-claim or related proceeding. In this case, the defendants' proof of debt was not determined by the administrator, and they needed to pursue it to recover bank guarantees [21]-[23]. Those facts made the prospect of later litigation concrete rather than merely possible.
The reasoning may also be pertinent where the defendant's claim is not merely an optional defensive response, but is practically necessary to resolve connected financial arrangements. The judge rejected the description of the proposed cross-claim as “purely defensive” because the defendants needed to pursue it to recover the guarantees [18], [21]-[22].
The judgment also shows how evidence about the cause of financial distress may fit into the discretionary balance. The court considered the company's earlier reported financial position, the amount of adjudicated debt, and the timing and context of its decline [12]-[15]. It did not treat those facts as proof of final liability; they informed the security application.
The decision does not establish that security must be refused whenever a cross-claim exists. The court's reasoning depended on the practical need to litigate the same issues in order to deal with the proof of debt and the guarantees. Nor did the court accept stultification merely because the director and one creditor could not provide the security sought [16]-[17]. The evidentiary basis and procedural relationship between the claim and cross-claim were central.
The judgment supplied here contains no later judicial treatment of Paul Michael Pty Ltd v J A Westaway & Son. It therefore does not establish whether later courts have followed, distinguished, or otherwise considered this decision. The decision itself relies on Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (administrator appointed) [1999] NSWCA 16 at [24], describing the Court of Appeal as agreeing with the observation that security could be an arid exercise where the same matters would be litigated by way of defence [26].
The judgment also refers to the earlier proceedings reported as [2010] NSWSC 1246, in which the judgments obtained by the plaintiff on the adjudications were stayed on conditions concerning bank guarantees [19]. That is procedural background to this decision, not evidence of later treatment of its reasoning.
Any account of subsequent use, approval, limitation, or distinction would require later sources not included in the judgment text provided here. No such cases or developments can be identified from this source alone.
The judgment leaves several matters unresolved. First, it did not determine the merits of the plaintiff's claim for breach and repudiation. The judge expressly said that there was insufficient material to form a concluded or provisional view [7]. The security ruling should therefore not be treated as a final determination of which party was responsible for the contractual breakdown.
Second, the court did not finally determine the defendants' proof of debt or the plaintiff's liability for the adjudicated amounts. It recorded that the administrator had declined to deal with the proof and considered that the underlying dispute should be addressed by the court [22]. Those issues remained for the substantive proceedings.
Third, the court reserved whether a judgment obtained on the cross-claim should be enforceable only with leave of the court [34]. The judgment granted leave to bring the cross-claim but did not decide that enforcement question.
Fourth, the court discussed a hypothetical amount of security only in case its primary decision was wrong. It considered $340,000, payable in tranches roughly aligned with the timetable of expenditure, but expressly did not make such an order [29]-[32]. That alternative assessment was not part of the operative disposition.
Finally, the decision does not address how the balance might change if a defendant would not otherwise need to litigate the same issues, if the cross-claim were abandoned, or if different evidence were available about the plaintiff's creditors' willingness or ability to support the litigation. The court's stated reason for refusing security was the particular likelihood that the same dispute would be litigated in any event [21]-[28].
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Judgment - (EX TEMPORE) 1HIS HONOUR: These proceedings relate to a construction contract made between the plaintiff as builder and the defendants as proprietors for the construction of home units at Pittwater Road, Bayview. 2The plaintiff, which is subject to a deed of company arrangement, sues to recover damages for breach of that contract and repudiation. I am concerned today with the defendants' application for security for costs and for leave to bring a cross-claim. 3The application for security relies on s 1335 of the Corporations Act 2001 (Cth) or alternatively UCPR r 42.21(1)(d). 4The threshold question raised by those provisions - that there is credible testimony, or reason to believe, that the plaintiff will be unable to meet a costs order against it - is clearly satisfied. Since there was no argument put to the contrary, it is unnecessary to do more than note that the threshold question can be shown to be satisfied by even the briefest perusal of the administrator's circular to creditors dated 26 May 2009. 5The plaintiff raised four issues in opposition to the order for security. 6The first related to the strength and good faith of the plaintiff's case. Mr Goldstein of counsel, for the plaintiff, submitted that the fundamental question was whether the defendants had repudiated the contract. He relied on views expressed by White J in earlier litigation and by me in other earlier litigation. The fundamental point is that the asserted repudiation arose because the defendants purported to take the work out of the plaintiff's hands, pursuant to a contractual right to do so, at a time when on any view the plaintiff had suspended the work under the contract pursuant to the legal right to do so given by s 27(2)(a) of the Building and Construction Industry Security of Payment Act 1999 (NSW). That legal right was given to the plaintiff, at the time when it suspended work, because there was at least one unpaid adjudicator's determination in its favour. 7Although it is neither necessary nor desirable that I should express a more concluded view, and indeed I do not have nearly enough material to enable me to express even a provisional view, the factors to which I have referred lend support to Mr Goldstein's submission. 8The second matter raised by Mr Goldstein was that the plaintiff's impecuniosity was caused or contributed to by the defendants' alleged wrongdoing. 9The administrator's circular to which I have referred included, based on the director's report as to affairs, an estimated deficiency in excess of $5.2 million dollars as at the date to which the circular spoke. 10It may be noted that even that figure was reached by taking into account, as an asset, the estimated amount of $5.1 million claimed to be recoverable from the defendants, and by ignoring as a liability the amount of almost $7.5 million that is now the subject of the defendants' proof of debt lodged with the administrator. 11The financial position stated in the director's report as to affairs discloses an amount owed to a secured creditor of $1.4 million and an amount totalling $3.8 million owing to unsecured creditors. 12The evidence is that the amounts that on any view are owed by the defendants to the plaintiff (subject to any defence set-off, or cross-claim) total, in round figures, $1.9 million. I reach that figure because there have been two payment claims submitted for adjudication under the Security of Payment Act and those claims have been adjudicated, in the plaintiff's favour, for amounts that total the figure that I have now given (which includes some amount for adjudication expenses and the like). 13It may be thought to be, at least prima facie, surprising that a failure to pay $1.9 million could have caused the catastrophic losses of which I have spoken, but the position is not quite so simple. 14The unsigned financial statements and tax return for the plaintiff show that it was solvent, and made a small profit, for the year ended 30 June 2008. Those documents (to the extent that they can be relied upon) demonstrate net shareholders' funds of $208,000. In those circumstances, it is hardly surprising that the failure to pay even $1.9 million (and I put aside the remaining $3.2 million of the amount claimed to be owing in the administrator's circular) would tip the plaintiff over the edge into insolvency. 15In my view, an analysis of the figures, even ignoring the context of a rapid decline from profitable and solvent trading to loss-making and insolvent trading at a time when, on the evidence, the only project was the subject one, shows that the defendants' failure to pay the amounts adjudicated in favour of the plaintiff, and to meet their liabilities under the resultant judgment debts, are indeed likely to have at least contributed to the plaintiff's present impecuniosity. 16The third point relied upon by Mr Goldstein was that the making of an order for security would stultify the litigation. Under the deed of company arrangement, the fruits of success in any litigation will flow, in the main part, to unsecured creditors. There is no evidence of any acceptable kind that those creditors have refused to stand behind the litigation by offering to put up security. The furthest that the evidence goes is to show that: (1) the plaintiff's director, Mr Charles Michael, is unable to himself to afford to provide the full amount of security sought; and (2) another creditor of the plaintiff approached by Mr Michael has said that he does not think he can help the plaintiff by providing security. 17The evidence falls well short of showing stultification. 18The fourth matter is that the very same issues will be litigated in the defendants' cross-claim, even if the plaintiff succeeds. In this context, Mr Alexis of Senior Counsel, who appeared with Mr Mitchell of counsel for the defendants, submitted that the proposed cross-claim was purely defensive. I do not think that this is a correct characterisation of what is likely to happen. 19Under the regime that was put in place following the hearing before White J and his Honour's reasons for judgment given on 29 October 2010 ([2010] NSWSC 1246), the judgments recovered by the plaintiff pursuant to the two determinations in its favour were stayed on condition that the defendants provide, from the proceeds of sale of the units, bank guarantees for the combined total of those judgments. In round figures, that total is the amount of about $1.9 million to which I have referred more than once. 20Those bank guarantees are to be available for the plaintiff until the defendants' proof of debt is ultimately dealt with either by the administrator (which, as I shall show in a moment, will not happen) or by the court. 21On the assumption that the defendants have performed their obligation to put up, or start putting up, security, they are in the position that to recover the bank guarantees and the underlying $1.9 million, they will need to press their proposed cross-claim in any event; and if they do not do so by cross-claim in these proceedings, they will need to do so in fresh proceedings. 22Application was made to the administrator to deal with the defendants' proof of debt. He declined to do so, I suspect on the basis that there was no money to enable him to investigate it, and on the further basis that, since there were in any event proceedings relating to the underlying dispute on foot in this court, the proof of debt could be dealt with by the court. That means that the defendants will need to agitate their proof of debt, either by way of cross-claim or by way of separate claim, to enable them to recover the guarantees to which I have referred. 23If that happens, the plaintiff will be able to defend the claim, including by bringing its own cross-claim for damages, and all the issues that are presently foreshadowed will be litigated in any event. 24When one considers the factors to which I have referred overall, one starts from the point, as I have said, that there is a clear case for the provision of security based on the financial position of the plaintiff. One moves from there to the fact that the plaintiff's case does not appear to be entirely lacking in merit, and takes into account the view that I have expressed that to some significant extent at least the plaintiff's impecuniosity has been contributed to by the defendants' failure to pay amounts owing under adjudication determinations and judgments founded on those determinations. 25One does not take into account the question of stultification, because in my view the evidence does not make it out. 26Leaving the matter there, the factors might be thought to be relatively finely balanced. However, when one takes into account the fourth factor, it seems to me that it tips the exercise of discretion very much in the plaintiff's favour. As Rolfe J observed in a case that went to the Court of Appeal, in an observation that attracted the agreement of the Court of Appeal, it would be an arid exercise to order security for costs if in due course the plaintiff could be cast in the role of a defendant and could litigate the very matters the subject of its claim by way of defence. See Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (administrator appointed) [1999] NSWCA 16 at [24] (Sheppard AJA, with whom Mason P and Handley JA agreed). 27In that case, both Rolfe J and Sheppard AJA took into account the fact that the appellant (defendant below) had been asked to give, but had declined to give, an undertaking not to prosecute its cross-claim. No such undertaking is offered in the present case; nor could it be, for the reasons that I have indicated in relation to the bank guarantees. 28In those circumstances, it seems to me that the appropriate exercise of the discretion that has been enlivened is to decline to order for security for costs. 29In case I am wrong in what I have said, I will look briefly at the evidence of the amount claimed. The estimate was given by the defendants' solicitor Mr Bruno Cara. In round figures, he assessed the total costs, excluding GST, at about $366,000. He said that the assessment did not include costs referable to the cross-claim. There was evidence sought to be led from a barrister and costs assessor, Ms Kim Dulhunty. Although her affidavit was admitted and I did not reject the various argumentative and unsupported parts of it, I do not regard it as detracting in any great way from Mr Cara's estimate. For example, in paragraph 28, Ms Dulhunty deposes to her observation that "many building and construction cases only take a couple of days to hear". I wish that were the case with building and construction cases heard in this list, but in my experience (which is not insubstantial) it is not. 30To the extent that the observation made by Ms Dulhunty was intended to suggest that Mr Cara's estimate of the time likely to be taken was excessive, I do not accept it. Likewise, to the extent that Ms Dulhunty suggests that the costs for which security is sought "would appear to include time for the hearing of the cross-claim", that is inconsistent with Mr Cara's evidence. 31Nonetheless, I do think that there is some padding in Mr Cara's estimate. I would also have taken into account the truism that a defendant is not entitled as a matter of course to security for the whole of its course, even assessed on the ordinary basis. Had I come to the view that security should have been ordered, and bearing in mind that any estimate of the amount likely to be required requires the application of a very broad brush, I would have concluded that: (1) security should be ordered in the sum of $340,000; and (2) that security should be ordered to be given in tranches, roughly coinciding with the timetable of expenditure. 32But since I have concluded, on the principal discretionary question, that security should not be ordered, I will not say more. 33I turn to the application for leave to bring the cross-claim. That application invokes s 444E of the Corporations Act . In circumstances where, in substance, the administrator invited the underlying-claim to be agitated in court and declined to deal with its substance himself, it is clearly appropriate that leave should be granted. It may be noted that the cross-claim will not prejudice the plaintiff or its creditors because Mr Michael has undertaken, pursuant to the deed of company arrangement, to indemnify the company in full for all costs relating to the proceedings that it has instituted. That would include the costs of the cross-claim. 34I do not know whether the application for leave is sought on the usual basis, that any judgment recovered on the cross-claim not be enforced without the leave of the court. It is not necessary to deal with that at this point, because it may be reserved for further consideration. It is sufficient to say that it is a clear case for the granting of leave. 35In those circumstances I make an order in terms of prayer 4 of the defendants' notice of motion filed on 16 June 2011 (substituting for the reference to s 440D(1)(b) a reference to s 444E(3). I order that the notice of motion be otherwise dismissed. I will hear the parties on costs. (Counsel addressed.) 36I order that the costs of the notice of motion be costs in the proceedings.
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: 13 September 2011
Paul Michael Pty Ltd
J A Westaway & Son
The application for security for costs was dismissed. Leave was granted to bring the cross-claim, with the reference in the order corrected to s 444E(3) of the Corporations Act 2001 (Cth). The costs of the notice of motion were ordered to be costs in the proceedings. [28], [33]-[36]