Perform (NSW) Pty Ltd v Mev-Aus Pty Ltd

Building and Construction Industry Security of Payment Act 1999 LEGISLATION CITED : Corporations Act 2001 UCPR

Amalgamated Mining Services Pty Ltd v Warman International Ltd (1988) 88 ALR 63 CASES CITED : Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 Sharjade v Darwinia [2006] NSWSC 708

Perform (NSW) Pty Limited (Plaintiff) PARTIES : Mev-Aus Pty Limited (First Defendant) Paul Mitolo (Second Defendant) Bryan Medbury (Third Defendant)

COUNSEL : N A Nicholls (Plaintiff) Dr A J Greinke (Defendants)

SOLICITORS : Wilkinson Building & Construction Lawyers (Plaintiff) Doyles Construction Lawyers (First, Second and Third Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY & CONSTRUCTION LIST

20 November 2008 ex tempore (revised 20 November 2008)

55066/08 PERFORM (NSW) PTY LTD v MEV-AUS PTY LTD & ORS JUDGMENT 1 HIS HONOUR: This is an application for security for costs. At the outset of the hearing, the issues were stated to be: (1) Whether there was reason to believe that, if the plaintiff (Perform) was ordered to pay the costs of the defendants (to whom I shall refer collectively as Mev-Aus), it would be able to do so (I shall, although not entirely accurately, call this the jurisdictional fact). (2) Whether Perform's financial position was, in substance, the result of the matters of which it complains in these proceedings. (3) Whether in substance Perform was defending an attack made against it by Mev-Aus. 2 There was also an issue as to the amount for which security (if otherwise appropriate to be ordered) should be required to be given. Mev-Aus contended for a figure of some $350,000. Perform contended for a figure of some $187,000. 3 In the course of submissions, Mr N A Nicholls of counsel, who appeared for Perform, accepted that the evidence established the jurisdictional fact. He was correct to do so. Accordingly, it is unnecessary for me to go into that issue. The principles 4 Whether an application for security is brought under s 1335 of the Corporations Act 2001, or UCPR Rule 42.21(d), establishment of the jurisdictional fact does not mean that security must be ordered. It does no more than enliven the discretion to order security. I discussed that discretion in Sharjade v Darwinia [2006] NSWSC 708. After considering numerous authorities, I said at [10] to [12]: 10 Whilst the only formal constraint on the discretion is that it is to be exercised judicially (the nature of this particular constraint may be a matter of some conjecture), there are a number of factors that have been identified as relevant, although not as exhaustive. I take as relevant to my inquiry the seven factors, or "guidelines", identified in the judgment of Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198. Her Honour commenced by stating that: "[t]he discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security." 11 She then referred to a number of decisions, including that of Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405. She cited, with approval, a statement by his Honour in that case at 415 that: "[i]t is not possible or appropriate to list all of the matters relevant to the exercise of discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances that have to be weighed." 12 Her Honour then turned to what she called "a number of well established guidelines which the court typically takes into account" in considering an application for security for costs. Those guidelines were, and I paraphrase her Honour's words:

(2) That regard should be had to the strength and good faith of the applicant's case.

(3) Whether the applicant's impecuniosity was caused by the respondent's conduct, the subject of the claim.

(4) Whether the application for security is oppressive, being used merely to deny an impecunious applicant its right to litigate.

(5) A related factor, namely, whether there were persons standing behind the impecunious litigant who would benefit from any success in the litigation and who were willing to provide the necessary security.

(6) A related issue, namely, whether persons standing behind the impecunious litigant have offered any personal undertaking to be liable for the costs and, if so, the form of that undertaking.

(7) Security should only be ordered against a party who is, in substance, a plaintiff, and an order should not be made against a party who is, in substance, defending itself.

The nature of the proceedings 5 Perform carries on business as a formwork subcontractor. Mev-Aus supplies scaffolding and related equipment used in the formwork industry. The claim that Perform brings relates to three contracts known as the "airport car park" contract, the "airport car park columns" contract and the "city north substation" contract. In each case, as I understand it, Perform, as subcontractor to De Martin & Gasparini Pty Ltd (DMG) or another company, agreed to supply and erect formwork for the purpose of enabling concrete to be poured. Perform says that it agreed to use the products supplied by Mev-Aus on the basis of certain representations made by Mev-Aus. It says that those representations were incorrect, and misleading or deceptive. Further, it says, Mev-Aus breached various terms of the contracts for supply of that equipment. 6 It is likely that the following issues at least will be raised in the proceedings: (1) what, if any, representations were made in respect of the various projects; (2) what were the terms of the various contracts between Perform and Mev-Aus; (3) what, if any, representations were made in connection with the making or performance of those contracts; (4) did Mev-Aus breach any terms of any of the contracts between it and Perform; (5) was Mev-Aus guilty of misleading or deceptive conduct; and (6) what was the true cause of the losses that Perform alleges it sustained. 7 It is also clear that if these pleadings go to hearing, Mev-Aus will bring a cross-claim. From the description of the cross-claim given by Mr Hayek, the solicitor having the carriage of this matter for Mev-Aus, it seems that the cross-claim would be brought not only against Perform but also against DMG, the party to whom Perform was a subcontractor in respect of the two "airport" contracts. 8 From Mr Hayek's description, it seems that the cross-claim would raise the following issues:

(1) As against Perform, whether Perform is liable for additional hire and for damages for the detention or conversion of equipment supplied to it.

(2) As against DMG, whether DMG engaged in misleading or deceptive conduct by making representations to Mev-Aus as to construction programs relating to the two "airport" projects. Did Mev-Aus cause Perform's financial predicament? 9 What were said to be the financial statements of Perform for the financial years ended 30 June 2006, 30 June 2007 and 30 June 2008 were in evidence. I say that these documents "were said to be" the financial statements of Perform because, on their face, they relate to what appears to be a partnership or joint venture of two family trusts, for whom Perform was the "nominee". However, Mr Ilijanic, a director of Perform and I think a person associated with one of the trusts to which I have referred, said without objection that the financial statements in question were the financial statements of Perform. I proceed on that basis. 10 For the year ended 30 June 2005, Perform recorded a net profit before tax of (these and all other figures are rounded off to the nearest thousand dollars) $134,000. For the financial year ended 30 June 2006, net profit before tax was $310,000. For the financial year ended 30 June 2007, net profit before tax was $160,000. For the financial year ended 30 June 2008, Perform recorded a net loss before tax of $1,203,000. 11 The net assets of Perform for those financial years were said to be, respectively, $64,000, $54,000, a deficit of $144,000 and a deficit of $1,662,000. 12 The deficit of $1,622,000 (for the financial year ended 30 June 2008) was calculated after bringing to account, as an asset, the sum of $322,000 paid into Court as security for a determination recovered by Mev-Aus against Perform under the Building and Construction Industry Security of Payment Act 1999 (Security of Payment Act). That amount has since been paid out to Mev-Aus pursuant to an order of the Court. Dr A J Greinke of counsel, who appeared for Mev-Aus, submitted that this amount should not have been taken into account, or alternatively, that the deficit should be adjusted by removing it from the gross assets of Perform as at 30 June 1998. Whether or not that is correct as a matter of accounting principle, I certainly think it is correct as a matter of substance. Making that adjustment, the deficiency as at 30 June 1998 would become $1,998,000. 13 The total of the damages claimed by Perform in these proceedings is (Mr Nicholls said) $1.7 million. I have not checked that arithmetic for myself but accept that it is so. Thus, if one were to make the assumption that Perform succeeded in full, and that the 1998 figures should be notionally adjusted by adding this amount back, there would still be a deficit of some $298,000. In this context, I note that most (although not all) of the matters of complaint occurred during the 1998 financial year. 14 This somewhat rudimentary financial analysis suggests that if each of the matters complained of had not occurred, or even if they are to be notionally "backed out" by adding the amount of damages into the balance sheet as at 30 June 1998, Perform would still have a deficiency of assets over liabilities. Not only would there be such a (notional) deficiency, it would be a deficiency that has steadily grown over the years. 15 I accept that there is a temporal correlation between the events of which Perform complains and the large loss recorded by it for the financial year ended 30 June 2008. I accept that the large loss so recorded is completely out of pattern when one looks at the entire trading history of Perform. (It made a relatively small loss at the end of the first financial year in which it traded, but the evidence suggests that this was, in large part, due to start up costs.) Thus, there may be an inference that the matter of which complaint is made did cause the adverse results recorded in the year ended 30 June 2008. In any event, I am prepared to accept, for the purpose of argument, that if Perform makes goods its claim, it could be said that Mev-Aus has been, in large part, responsible for the poor balance sheet position as at 30 June 2008, and wholly responsible for the drop from a profit in the financial year ended 30 June 2007 (and earlier years) into a loss for the financial year ended 30 June 2008. 16 Perform says that both before 1 July 2007 and since 30 June 2008 it has traded profitably. Accepting that, it does not follow that, but for the matter of which complaint is made in these proceedings, Perform would have been able to meet a costs order against it. 17 As I have said, if one seeks to back out the matters of which complaint is made by adding the damages back to the balance sheet, there remains a notional deficiency as at 30 June 2008 of $298,000. 18 The evidence shows that Perform has given four charges. One, dated 18 June 2007, was given to the Commonwealth Bank of Australia. Another (made earlier) was given to a company known as Castlove Pty Ltd on 16 April 2004. A third was given to a company known as Lipman Pty Ltd on 18 December 2007. The fourth was given on 16 June 2008 to people who appear to be either the directors of Perform or the principals of the trusts to which I have referred more than once already. 19 Each of those charges operates, according to its terms, as a fixed charge as regards certain assets and a floating charge as regards other assets. In each case, the floating charge may be crystallised either by notice or automatically on the occurrence of certain events. It is apparent that when it comes to sharing out the assets underlying the notional deficit of $298,000 in respect of any costs order that might be made, there are a number of entities who would stand between Mev-Aus and recovery. In truth of course, unless that notional deficit is reversed in the near future, this is all entirely hypothetical.

20 It is not clear what is the consideration for the charge granted to those to whom I shall refer for convenience as the directors. The recitals simply refer to the granting or agreement to grant in relation to absolute discretion of the directors, advances and accommodation to or for the benefit of Perform. I have the uncomfortable suspicion that the charge was granted in an attempt to give the directors priority over other unsecured creditors. However, having voiced that suspicion, I should make it plain that I do not regard it as dispositive in the consideration of the discretionary issue with which I am at present concerned. 21 In my view, Perform has not shown that, but for the matters of which it complains in these proceedings (which, as I have said, I am prepared to accept for the purpose of argument) it would have been able to pay any costs that might have been ordered against it. Its ability to do so would depend, both now and at least for some time in the future, on cash flow; and that is no answer. 22 In any event, I think, the more fundamental and appropriate question is whether (on the assumption governing these parts of my reasons) Mev-Aus was the cause of Perform's impecuniosity. On the assumption to which I have referred Mev-Aus was undoubtedly a substantial contributor to the present extent of that impecuniosity. But even putting aside the notional or hypothetical contribution of Mev-Aus, Perform has simply not shown that but for the matters of complaint it would have been in a sound or adequate financial position. On the contrary, the evidence shows pre-existing and growing deficiencies; and it suggests that the root cause of those deficiencies of assets was the withdrawal of funds from Perform over the years by way of "drawings". For the years in question, those drawings total some $1.2 million - including $316,000 for the most recent financial year when a net loss in excess of $1.2 million was recorded. 23 On that approach to what I think is the real question, there is no discretionary consideration of the kind with which this issue is concerned which would require, or even suggest, that the admittedly enlivened discretion to order security costs should not be exercised. 24 It is thus unnecessary to consider whether, in any event, it is correct to say, as Austin J suggested in Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 587 [101], the proposition presently under consideration is ever sufficient, by itself, to justify the refusal of security for costs where the discretion to order them has otherwise been enlivened. I will say only that if (as his Honour suggested) this matter should be considered in conjunction with the question of stultification, there was no evidence that the making of an order for security would stultify the litigation. Indeed, Mr Nicholls expressly disavowed stultification as a relevant issue.

Are the proceedings defensive? 25 Mr Nicholls relied on the decision of Wilcox J in Amalgamated Mining Services Pty Ltd v Warman International Ltd (1988) 88 ALR 63. As his Honour showed at 64 to 65, the relevant principle is that where a plaintiff is forced to litigate to protect a right or interest that the defendant has threatened, that plaintiff may be treated in substance as a defender, and security for costs may be refused if otherwise the discretion to order it is available. 26 In my view, the evidence falls well short of showing that Perform in these proceedings is, in substance, a defender, responding to Mev-Aus's threat of attack. 27 Mr Nicholls referred to a number of adjudication applications made by Mev-Aus under the Security of Payment Act. There have been to date four such applications. One was withdrawn. Two were dismissed, in the sense that the adjudicator found an adjudicated amount of "nil". The other one produced the outcome of $322,000 odd in favour of Mev-Aus to which I have referred already. (The adjudicated amount was somewhat less, and the amount to which I have referred includes, I think, some amount for interest.) 28 It may be accepted that Perform is seeking, amongst other things, to claw back the amount found in favour of Mev-Aus and paid out to it. And it may be accepted that some of the issues raised by Perform in these proceedings were raised by it in its payment schedules and adjudication responses. But accepting those things simply does not demonstrate that Perform is in substance a defender and that Mev-Aus is in substance an attacker. 29 It follows that this discretionary consideration does not afford a ground for refusing to exercise the enlivened discretion to order security. Quantum 30 Since the discretion to order security has been enlivened, and since the only discretionary considerations relied upon in opposition have failed, it is necessary to deal with the amount for which security should be given. 31 The evidence as to quantum came from the parties' solicitors. Mr Hayek swore an affidavit in which, based on his experience (apparently, of a little more than a year) he thought it would cost to defend the proceedings. He set out, month by month, general descriptions of the work to be completed and those by whom the work would be completed. He attributed a number of hours to the performance of each item of work and multiplied those out by the relevant hourly rates. He thus arrive at a total, exclusive of GST and counsel's fees, of some $34,000. He then added an amount for counsel's fees which was, again exclusive of GST, some $123,000. Combining those two matters and adding GST, Mr Hayek reached a total and then proceeded on the assumption that some seventy percent would be recoverable on what he called "a party/party basis" (as I understand it, a reference to what is now called "the ordinary basis"). Thus Mr Hayek derived an amount of $356,937.35 which has been rounded down to $350,000. 32 Perform's solicitor, Mr Wilkinson, considered this estimate. He accepted that the charge-out rates on which Mr Hayek relied were within the range of rates ordinarily charged for work such as this. However, he derived a substantially lower total: $266,685.08 inclusive of GST. Applying a thirty percent reduction (which Mr Wilkinson was content to accept as reasonable) he derived a figure of $186,679.55. 33 One significant difference between Mr Hayek and Mr Wilkinson relates to their respective assessments of the likely duration of the hearing. Mr Hayek put it at fifteen days, and his calculation both of costs relating to the hearing and costs of preparation for hearing reflected this. Mr Wilkinson put it at eight days. 34 There were other difference between them including as to the amount and type of work that would be done along the way to getting the matter ready for hearing.

35 Whilst I accept that Mr Hayek was doing his best to produce an accurate estimate of costs, I do not find it persuasive. It was given at a high level of generality. It is not possible to proceed from the general description of work given to the estimate of time given, and understand why so much time should be required for the various items of work. Again, there is a formulaic quality to the narration of the items of work that makes it difficult to assess what in reality is involved. 36 The same comments may be made as to the estimate of some fifteen days for hearing. 37 Further, Mr Hayek's estimate of costs included work relating to the proposed cross-claim. That is not a cross-claim which (if brought) would be merely reflective of the claims made by Perform against Mev-Aus. It is in truth an independent and aggressive claim. It raises issues not only against Perform but also against DMG. I do not think that the amount for which security is to be ordered should take account of work, or hearing time, referable to that cross-claim. 38 Although, as I have said, it is clear that Mr Hayek's estimate of costs included costs referable to the cross-claim, the high level of generality attending his estimate make it impossible to separate out with any confidence the costs that would relate to the preparation of the cross-claim, and the hearing time spent on cross-claim issues. 39 Mr Wilkinson's analysis did provide me with a basis on which I could make some assessment of his approach. Perhaps unfortunately, that very transparency enabled me to perceive, I think, that Mr Wilkinson's analysis of the time that would be spent in preparing the defence was very much of a "bare bones" quality. I think it states the likely time, and therefore quantum of costs, so far towards the bottom end of the range that it cannot be accepted without some degree of qualification. 40 Mr Wilkinson made the point, which is another reason for having some reservations about Mr Hayek's estimate, that the solicitors for Mev-Aus have not come to this matter "cold". It appears that they were involved in each of the adjudication applications to which I have referred and no doubt in the antecedent work. Thus, they will have a substantial degree of familiarity not only with the issues but also with the detail. 41 On balance, and bearing in mind also that a party is not necessarily entitled to security for all its costs (even assessed on the ordinary basis), and considering also that each of the estimates given is very much at the opposite end of the scale or spectrum, I think that the appropriate amount for which security should be provided is $220,000. 42 It was accepted that if I proposed an order for security, it could be ordered in tranches. I propose to do so.

(1) I order the plaintiff to give security for the defendant's costs, in such a manner as may be agreed between them, or in default, in a manner approved by the Registrar of the Court as follows: (i) in the sum of $120,000 by 27 February 2009; and (ii) in the further sum of $100,000, within seven days after an order is made setting these proceedings down for hearing, or referring them (wholly or in part) to a referee. (2) I order that the proceedings be stayed for as long as security is not given in accordance with the foregoing order. (3) I reserve liberty to apply on two days' notice. (4) I order that the costs of the application for security for costs be the defendant's costs in the proceedings. (5) I order that the exhibits on the application be handed out. (6) I vacate the directions hearing fixed for 5 December 2008 and place the matter in the list for directions on 6 March 2009. **********

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