Plaintiff v Defendant

Supreme Court of Victoria|2008-05-08|Before: HANSEN J

PRACTICE AND PROCEDURE - Security for costs - Corporations Act 2001, s 1335.

1 This is an appeal from an order of Master Daly refusing to order security for the defendant's costs of the proceeding.

2 The proceeding was commenced by writ filed on 12 December 2006. The defendant filed an appearance on 17 January 2007, requested particulars of the statement of claim on 22 January 2007, and filed a defence on 26 February 2007. The Court convened a directions hearing on 20 March 2007 at which Master Daly ordered by consent that:

(a) by 3 April 2007 the plaintiff provide particulars of the statement of claim and file any request for particulars of the defence,

(b) by 17 April 2007 the defendant provide particulars of the defence,

(e) a further directions hearing be held on 12 June 2007.

3 Pursuant to those orders, on 21 March 2007 the plaintiff filed a request for particulars of the defence and on 3 April 2007 filed particulars of the statement of claim. That was followed, on 2 May 2007, by the defendant filing the summons seeking security for its costs of the proceeding pursuant to O 62.02(b) or s 1335(1) of the Corporations Act 2001. Subsequently, on 14 May 2007, the defendant filed particulars of its defence and on 5 June 2007 the plaintiff filed an affidavit of documents.

4 The defendant's application for security was heard by Master Daly on 7 June 2007. The Master then adjourned the further hearing of the application to 15 June 2007, adjourned the directions hearing to that day and vacated the existing order for discovery. On 15 June 2007 the Master refused the application and dismissed the summons with costs. The Master also ordered that the defendant file an affidavit of documents by 29 June 2007, that the parties complete inspection of documents by 13 July 2007, exchange reports of experts by 24 August 2007, and exchange reports in reply by 21 September 2007, and referred the proceeding to the Listing Master on 9 October 2007.

5 The defendant appealed from the orders dismissing the application for security and the associated order for costs. The appeal was returnable in the Practice Court on 29 June 2007. Unfortunately, however, due to the defendant having estimated the time for hearing as approximately one day the parties consented to, and the judge made, orders on the papers by which the appeal was referred to the Listing Master for listing as a cause and that otherwise the orders of the Master be stayed pending the outcome of the appeal. In due course the Listing Master fixed the appeal for hearing on 7 April 2008 on an estimate of duration of one day. As it transpired, there being no other judge available, I heard the appeal when sitting as the judge in the Practice Court. When the appeal came on counsel estimated the likely duration as two hours, and that is the time that it took, and it was ample time for the purpose. I mention this as these events provide an example of the waste and inefficiency in the conduct of litigation resulting from the profession providing an erroneous estimate of hearing time. If not for that estimate the appeal should, and doubtless would, have been heard on or near to the time of its original return date in June 2007.

6 The result of the stay ordered on 29 June 2007 is that the defendant has not filed an affidavit of documents and the parties have not provided experts' reports pursuant to the orders made on 15 June 2007. I note too that the plaintiff has not filed a reply. Whatever the reason for not doing so, there should be a reply pleading positively to the defence.

7 The defendant seeks security of $130,367 for costs to and including the first day of the trial with liberty to apply for security for the balance of the costs of the trial.

8 In the course of argument on the appeal I gave the defendant leave to rely on a further affidavit by its solicitor Nicholas Rodney Moss affirmed on 5 March 2008, and the plaintiff leave to rely on an answering affidavit sworn by its director, Stephen Philip Martin Smith, on 7 April 2008. Leave was granted in the circumstances of the exceptional delay since the decision of the Master and that the affidavits contained highly relevant material the provision of which brought the facts up to date thus facilitating the appropriate disposition of the application. I did, however, refuse the defendant leave to rely on an affidavit of its director, Craig Richard Dostine, affirmed on 6 June 2007 and which by reason of its late service had not been relied on before Master Daly.

9 It is submitted by the defendant that it applied for security without any relevant delay on its part. It was pointed out that the writ was served on 21 December 2006, an appearance was filed on 17 January 2007, and that on 22 January 2007 the defendant's solicitor wrote to the plaintiff's solicitor seeking evidence of the plaintiff's ability either to pay the defendant's costs of the proceeding should it be ordered to do so or to provide security for the defendant's costs. Then, by letter dated 30 March 2007 the plaintiff's solicitor stated that the plaintiff would not provide security. The summons for security was filed on 2 May 2007 supported by three affidavits sworn respectively on 5 and 26 April and 1 May 2007.

10 Notwithstanding this chronology counsel for the plaintiff submitted that the defendant had delayed in seeking security and that as a result of such delay the plaintiff had already expended a substantial amount in costs.[1] Prior to filing the summons for security the defendant had taken the step of requesting particulars of the statement of claim and filed a defence. Then there was the directions hearing on 20 March 2007 at which the plaintiff was represented by counsel and orders were made by consent for the expeditious conduct of pre-trial work. The parties acted under those orders as mentioned above, with the consequent incurring of costs. In the situation, as it appears to be, that from the outset the defendant was concerned with the plaintiff's ability to pay costs and intended to seek security, it should have applied for security earlier and before the plaintiff went on incurring costs as it did. Not only did the defendant not do so but it consented to orders for interlocutory work on a tight time-table under which costs would be expected to be, and were, incurred. In my view, regarding the matter overall, although only several months were allowed to go by, yet in that time the plaintiff incurred further appreciable costs which a speedier application and objection to the making of interlocutory orders would have avoided. I take this into account in determining the application.

11 The plaintiff's claim is for $270,953.56 as being due under an agreement made with the defendant, on or about 12 August 2005, for the supply to the defendant of 5,391 square metres of concrete precast panels for $593,101. The agreement is alleged to be constituted by a letter from the plaintiff dated 17 May 2005 and a purchase order from the defendant dated 12 August 2005. The plaintiff alleges that it was a written term of the agreement contained in its letter of 17 May that any precast panels supplied to the defendant additional to the 5,391 square metres be paid for by the defendant at the rate of $110 per square metre plus GST. In fact, it is alleged, the plaintiff supplied additional panels to the extent of 914.67 square metres in respect of which it allowed the defendant a credit of $57,066.50 plus GST in respect of certain works undertaken by another supplier for the defendant. Overall the defendant became liable to pay the plaintiff $636,648.21 as to which the defendant had paid $353,420.04. Allowing some credits totalling $36,906.75 the defendant remained liable for $246,321.42 which, with the addition of GST, produced the amount claimed of $270,953.56.

12 The defendant admits entry into the agreement although contending that the agreement was partly oral. Otherwise the defence denied the allegations in the statement of claim. The defence admitted that the defendant had not paid the amount claimed but contended that on grounds set out it was not obliged to do so. Those grounds were these. On or about 8 March 2006 the parties varied the agreement whereby the defendant agreed to engage sub-contractors on behalf of the plaintiff to assist the plaintiff in the performance of the works, pay such sub-contractors on behalf of the plaintiff and deduct the amounts so paid from the contract price. In accordance with that variation the defendant engaged alternative sub-contractors and paid them $281,057.30 for their work. The defendant was thus entitled to deduct that amount from $388,762.05, this latter figure being the amount paid to the plaintiff, which meant that the plaintiff had been overpaid $17,408.25. It was further alleged that by reason of breaches of the agreement by the plaintiff, the breaches being constituted by late performance, the supply of defective panels and negligent installation of panels, the defendant had suffered loss and damage totalling $130,136.04 which it set off in reduction of the plaintiff's claim. There is no counterclaim.

13 Affidavits as to the merits of the respective cases were sworn by the director of the plaintiff, Stephen Philip Martin Smith, and the director of the defendant, Craig Richard Dostine.

14 On the pleadings and the affidavits there is an issue whether, on the one hand, it was agreed that the plaintiff was entitled to be paid for the supply of more than 5,391 square metres of precast panels or whether, on the other hand, the agreement limited the plaintiff's entitlement to payment of the agreed price of $593,101. Smith contends the former, asserting that it must have been clear that the plaintiff quoted a rate for panels to be supplied, given the number that appeared on the drawings, and because the quotation stated that any square metres additional to that quoted would be charged at $110 per square metre. Dostine contends the latter, asserting that by the agreement the plaintiff undertook the supply of the number of panels that the plaintiff estimated were required for a fixed price. It is clear on the affidavits that the plaintiff has an arguable case as to this. See AJ Espie Transport Pty Ltd v TNT Australia Pty Ltd.[2]

15 Then, the parties are in conflict in respect of the variation to the agreement alleged in the defence, whereby the plaintiff was to bear the cost of the engagement of other subcontractors. Dostine deposed that it became apparent to him that the plaintiff was having difficulty complying with the installation schedule and that the plaintiff was supplying panels of an inferior and unacceptable finish which required rectification following installation. He referred to a letter dated 9 December 2005 which brought the quality of the panels to the plaintiff's attention. He was informed by Brad Regan, the defendant's site supervisor, that on or about 8 March 2006 Smith proposed to Regan a variation of the agreement by which the plaintiff be permitted to continue to perform some of the contract works with the defendant to engage alternative subcontractors to assist the plaintiff with the performance of the contract works, those alternative subcontractors to be paid by the defendant and such amounts to be deducted from the amount due to be paid to the plaintiff under the contract. Dostine deposed that he accepted the plaintiff's proposal and on 8 March 2006 sent a confirming letter. Dostine deposed that works continued pursuant to the variation agreement and that the defendant paid the alternative subcontractors for their work and deducted the amounts paid from invoices rendered by the plaintiff, the amount paid to the alternative subcontractors being the claimed sum of $281,057.30. Dostine deposed that after adding that amount to the amounts paid to the plaintiff, the defendant had overpaid the plaintiff $17,408.25.

16 Smith deposed to the contrary of these matters. First, he took issue with the allegation of defective works. The letter of 9 December 2005 followed a discussion had with Regan in which Regan showed Smith photos of damage to the edge of one panel and one door frame with "slag" around it, as to which matters rectification works were undertaken immediately. The letter related only to those two "minor" matters. Secondly, the true position concerning the alleged variation agreement was that Smith, to assist the defendant which was falling behind with the project, agreed with Regan that caulking of panels on site should be carried out by another subcontractor and that another supplier should supply a small amount of precast panels on site. The plaintiff gave the defendant credit for the cost of carrying out the work in question in the sum of $57,066.50 plus GST. Smith denied having agreed to the defendant carrying out works to the value of $281,057.30, stating that that sum appeared to be "cobbled together by adding together claims by the defendant for alleged extra works for alleged defects". He denied liability to pay for certain things and stated further that the defendant failed in many cases to supply structural steel supports to which the precast concrete panels could be bolted. Then, the defendant's assertions about panels being of poor quality was at odds with the defendant never having rejected a panel, and having used the panels without complaint until the time when the plaintiff asked for payment for the "extra" panels supplied. Smith described the claim for $281,057.30 as "spurious". He also deposed that Dostine had accepted liability for the extra concrete panels.

17 In these circumstances again it is clear that the plaintiff has an arguable case which, if successful, would deny the defendant's claim of an overpayment and result in the defendant being liable to pay the plaintiff money.

18 Dostine also deposed that on several occasions Smith requested the defendant to make an early payment of invoices to assist the plaintiff with cash flow problems. The defendant relied on this as evidence of impecuniosity. However, in his answering affidavit Smith described the defendant as "a slow and very reluctant payer" and said that requests for payment were in respect of invoices due and payable. Smith further deposed that in the ordinary course of business the plaintiff would have received payment of the amount claimed ($270,953.56) in August 2006. The plaintiff had incurred substantial costs and overheads in supplying the defendant with the extra concrete panels for which the defendant had not paid, even though, presumably, the defendant had been paid for the work under its head contract.

19 While it should be clear from the above, it perhaps should be clarified that the plaintiff puts in issue the defendant's claim of $130,136.04. Again, as to that amount which is raised by set-off, it cannot be said that the plaintiff does not have an arguable case.

20 Further to this, the plaintiff submitted that in relative terms the defendant's case of a variation to the agreement leading to an overpayment and of breach of the agreement founding a set-off will occupy the majority of the hearing time. That would seem correct. Any issue as to the number of panels shown on the drawings or as to the terms of the agreement would not appear of much compass in terms of time. By contrast, the alleged variation and what was done and paid under it relative to the plaintiff's contractual obligation, and the issues as to breach, evidently involve other issues of fact and law which will occupy by far the greater time. Indeed they are issues in the nature of a separate proceeding or claim, even though the defendant has opted not to counterclaim; see Sydmar Pty Ltd v Statewise Developments Pty Ltd.[3] That is a relevant factor in determining whether security should be ordered and, if so, in what amount. For there may be good reason to consider it unjust in such a case to require security for the costs of all of the pre-trial work or all of the trial or at all, when the majority of such costs are to be borne in respect of the defendant's positive case even if that case be only expressed by way of set-off. In respect of this case the defendant may be regarded as the plaintiff, which in my view is a factor to be considered in the exercise of the discretion on security.[4]

21 In addition counsel for the plaintiff referred to what he termed "unsatisfactory elements of the set-off as pleaded". He referred to eight matters. I do not set them all out. They range from vagueness of the alleged variation to a lack of clarity in the pleading of the engagement of "alternative subcontractors", and include the improbability of overpaying the plaintiff, the lack of contemporaneous complaint of defects, the improbability of suffering loss and damage to $130,136.04 but not pursuing that until the plaintiff claimed, and other matters. While not overlooking the submission I cannot determine the merits on this application. I cannot conclude that the claims are not arguable.

22 I turn now to consider the plaintiff's financial position.

23 The plaintiff was incorporated on 18 January 2005. Smith was, and continues to be, the sole director and secretary of the company which has a paid up share capital of $12 constituted by 12 shares registered in Smith's name. Smith deposes, on advice from his accountant, that he holds these shares as trustee for the Smith Family Trust, the principal beneficiaries of which are Smith and his wife and children. On 12 July 2006 the plaintiff granted a fixed and floating charge to the Australia and New Zealand Banking Group Limited.

24 On incorporation the plaintiff commenced business as a supplier and installer of concrete pre cast panels. Smith had previously conducted such a business by a company called Denward Lane Pty Ltd which went into liquidation. I refer to this company below.

25 It was only a few months later, in April 2005, that the defendant invited the plaintiff to tender for the work. Smith deposed that the defendant knew or should have known that the plaintiff had been trading for only about three months. This raises a point which it is convenient to mention now.

26 It has been considered a relevant factor in deciding whether to order security that the defendant had determined it was appropriate to enter into the subject commercial agreement with the plaintiff. See Letore Pty Ltd v Associated International Finance Pty Ltd.[5] The subcontract works were an obviously important part of the defendant's head contract and the price for the works was substantial. Not only did the defendant voluntarily choose to contract with the plaintiff, but it first of all selected the plaintiff as one of the three tenderers for the works. It may be assumed that the defendant considered the plaintiff to be an appropriate company to engage for these purposes, which must have included an assessment of the plaintiff's financial and managerial ability to perform any engagement. Having done so, it is relevant that it is under the very agreement thus entered into that this litigation arises. Counsel for the plaintiff submitted that in choosing to contract with the plaintiff, the defendant took the risk of litigation with an impecunious litigant. Indeed, if the defendant's contentions are correct, the defendant contracted with an impecunious party. This should be taken as a factor against security, the plaintiff submits.

27 As to this it should be noted that (in his affidavit affirmed on 5 April 2007) Dostine deposed that he sought quotations from various subcontractors which the defendant had engaged in the past. Having said that, he deposed that he sought a quotation from the plaintiff. He did not actually say that the defendant had engaged the plaintiff in the past and provided no particulars of any prior engagement or the experience thereunder that could have been relevant to the assessment of the appropriateness of entering into the agreement now sued upon.

28 As to this, I note that in his affidavit affirmed on 5 March 2008 Moss referred (in para 20) to Dostine's affidavit affirmed on 6 June 2007 where Dostine deposed that Smith previously ran a business of supplying and installing concrete panels through Denward Lane Pty Ltd. There are several points to note about this evidence. First, it is hearsay insofar as it sets out evidence of Dostine. Furthermore, Moss does not depose that he believes what is stated. Secondly, the Dostine affidavit is not part of the materials for consideration on the application.

29 Regarding the matter overall, I consider that this factor is of such limited significance as not to tell against security.

30 In his affidavit sworn on 1 June 2007 Smith disclosed the Financial Statements of the plaintiff for the year ended 30 June 2006 which also set out the figures for the approximate half year of trading to 30 June 2005. The statements record a loss from ordinary activities before income tax of $39,442 for the year to 30 June 2006 and $232,633 for the period to 30 June 2005. The balance sheet shows an excess of liabilities over assets of $272,063 in the year to 30 June 2006 and $232,621 in the period to 30 June 2005. The current assets consist of cash, receivables and inventories, while the non-current assets consist of receivables, plant and equipment of $38,922 and preliminary expenses. The assets do not include real estate.

31 Smith further deposed that the failure of the defendant to pay the sum claimed of $270,953.56 had had a very substantial impact on the financial position of the plaintiff. Indeed, he deposed, it meant that the plaintiff was unable both to fund the proceeding and give security for costs. Thus, an order for security would, or probably would, have the effect of stifling the proceeding. Further, the plaintiff was, or probably was, unable to raise the amount needed from its directors, shareholders or other backers or interested persons, no such person having the financial resources or capacity to provide such security. These assertions raised issues that became the subject of further evidence.

32 Then, it is to be noted that the plaintiff has not provided any financial statements for the period since 30 June 2006. In response to the request of the defendant's solicitor that the plaintiff provide financial statements for the year ended 30 June 2007, Smith deposed (in his affidavit sworn on 7 April 2008) that such statements have not been produced. Not only has the plaintiff not provided accounts for the year ended 30 June 2007, it has not provided accounts in respect of any period at all since 30 June 2006, and whether final, management or of whatever nature. Notwithstanding this absence of financial statements, as mentioned earlier, Smith deposed in his affidavit sworn on 7 June 2007 to a belief that if the defendant had paid the amount claimed of $270,953.56 the plaintiff would have made a profit in the year to 30 June 2007, having regard to the level of the plaintiff's work in progress consisting of jobs at Emanuel College, Point Cook ($450,000 contract), Forest Resort, Ballarat ($1.2M) and Ryrie Street, Geelong ($600,000).

33 This evidence of Smith as to a belief in a profit that would have been achieved was relied on by the plaintiff as a factor weighing against an order for security. It is well recognised that conduct of the defendant which has caused or contributed to a plaintiff's lack of funds, is a matter properly to be taken into account in determining whether to order security. See Sir Lindsay Parkinson and Co Ltd v Triplan Ltd;[6] Spiel v Commodity Brokers Australia Pty Ltd;[7] Imaging Applications Pty Ltd v Sun Alliance Australia Limited.[8] The difficulty confronting the plaintiff establishing this as a factor to be considered is that the fact of a likely profit in the year to 30 June 2007 rests on the asserted belief of Smith in the context of a lack of information that enables the reliability of the belief to be objectively assessed. Yet, it remains the fact that the plaintiff's business was in its relative infancy and it may readily be accepted that not receiving an amount as large as $270,953.56 could well and doubtless did significantly impact on the cashflow and thus profitability of the business. I have regard to that factor accordingly, although without being able to find whether the plaintiff would have or did make a profit in the year ended 30 June 2007. In so considering the matter I have borne in mind all of the criticisms made of Smith and his business and of Smith's credibility by counsel for the defendant.

34 A further matter which came to light in recent months was that on 10 December 2007 the plaintiff applied to set aside a statutory demand served by Jordan Steel (Vic) Pty Ltd. Having searched the file of that proceeding the defendant has placed before me a copy of an affidavit sworn by Smith in support of the application. The affidavit refers to Jordan Steel (Vic) Pty Ltd having contracted to supply steelwork for two jobs, one being at properties at 9 and 10 Simcock Street, Somerville. Smith deposed that he owned these properties and that in May 2007 the plaintiff intended to construct for sale two larger factories at 9 Simcock Street and six smaller factories at 10 Simcock Street. It is evident that Jordan Steel (Vic) Pty Ltd was claiming the cost of steel supplied. Smith disputed the claim in the statutory demand and alleged that the plaintiff had offsetting claims in an amount at least as great as any amount owed to Jordan Steel (Vic) Pty Ltd. The fact of a statutory demand, the amount of which I am not aware of, and the contents of Smith's affidavit, speak for themselves but do not establish the defendant's case of impecuniosity. For all I know, all that Smith deposed to is correct.

35 A deal of the criticism of counsel for the defendant was based on the manner and circumstances of the liquidation of Denward Lane Pty Ltd and the establishment of the plaintiff to conduct an identical business. The plaintiff, it was said by counsel for the defendant, was a phoenix company that arose out of the ashes of Denward Lane Pty Ltd leaving creditors behind and a history of unsatisfactory conduct. To establish its contentions in this respect the defendant relied on information contained in an historical company extract relating to Denward Lane Pty Ltd, a report to creditors dated 3 December 2007 by the liquidator of the company together with minutes of a meeting of creditors on 19 December 2007 and accounts of the liquidator filed with the Australian Securities and Investments Commission. Although I do not set out all that counsel referred to, I have read and have regard to all of the above documents and to all that he submitted.

36 The following appears from the above material. Denward Lane Pty Ltd was incorporated on 30 June 1994. It conducted business producing concrete precast panels for buildings. Smith became a director and the secretary in 1996. Another person, Keith William Smith, became a director in 1995. According to an historical extract dated 22 February 2008 they continue to be the directors. They hold 12 shares each, that being the total number of issued shares the total capital value of which is $24.

37 According to the report of the liquidator the company had been involved in some property development activity, although no particulars were stated.

38 The report stated that the company fell into financial difficulty; the director (presumably Smith) advising the problem was poor cashflow resulting from late paying or irrecoverable debtors. The liquidator stated that the business had ceased trading prior to his appointment and that the director (presumably Smith) had advised that from late in December 2004 the company had not accepted new contracts and was completing existing contracts. I interpolate that Denward Lane Pre Cast Pty Ltd was incorporated on 18 January 2005.

39 On 13 July 2005 the company was ordered to be wound up on the application of the Deputy Commissioner of Taxation and a liquidator was appointed. On 15 July 2005 a receiver and manager was appointed to the assets of the company by the National Australia Bank pursuant to a fixed and floating charge. The receiver and manager realised all assets and retired on 17 May 2006 on the bank's debt being satisfied in full with the majority of the shortfall being met by the director (presumably Smith) of the company.

40 The liquidator's report stated that the company had unsecured debts estimated at $1,126,866.17.

41 The liquidator's report takes the usual form of including a section entitled Investigations and Insolvent Transactions, several passages in which counsel for the defendant relied on. It is to be borne in mind that what was relied on were untested hearsay statements contained in the report of a person (the liquidator) who did not give evidence. The liquidator expressed the view that based on information received to date his examination indicated that the company had been insolvent since approximately 30 June 2003 and "hopelessly" insolvent in the 2005 financial year. As to Insolvent Transactions, the liquidator believed that the company had made a number of preferential payments (including, it seems possible, to the Australian Taxation Office), and that the director could be liable for debts outstanding since at least 30 June 2003 by reason of the company having traded while insolvent. Then, the transfer of the business to Denward Lane Pre Cast Panels appeared to be a phoenix transaction although it was difficult to determine any realisable value for the business and it was likely to have had little if any goodwill. Further, investigations indicated that the director purchased the plant and equipment from the receiver and manager. The liquidator had no documentation to indicate the exact circumstances of the transfer and whether it resulted in a loss to the company. The only other possible recourse against the director might be in respect to transactions which "may" on investigation be shown to be in the category of uncommercial transactions. The liquidator concluded with advice that he would further investigate the matter of preferential claims and uncommercial transactions and inform creditors in due course. Finally, being without funds the liquidator sought an indemnity from creditors to investigate further the collection of debts, preferential payments, insolvent trading and determining whether the transfer of the business asset was an uncommercial transaction. He also proposed that in the absence of an indemnity he be authorised to enter into a litigation funding agreement to enable him to pursue claims in relation to preferential payments. The meeting of creditors duly resolved that the liquidator be so authorised. So far as the evidence goes, there the matter rests.

42 Counsel for the defendant relied on the liquidator's report, and in particular the aspects referred to above, to attack the plaintiff via Smith. It seemed that these matters, which apart from matters of record were to a considerable extent views of the liquidator based on incomplete investigations, were in some way to be taken as establishing facts concerning the plaintiff and Smith, in particular as to the state of its business and unsatisfactory conduct in the conduct of the plaintiff's business. One particular repeatedly asserted by counsel for the defendant was that the plaintiff was a phoenix company. As to that, what appears to have occurred is that the plaintiff purchased the assets of Denward Lane Pty Ltd from the receiver and manager who one would suppose sought to achieve the best price reasonably available. In other words, a valuable consideration would have been received even if it has only gone for the benefit of the secured creditor. But it was not a case of a sideways shift of assets without consideration paid to an independent third party vendor. While the liquidator states that he desires to investigate the matter further I can only go on that which is placed before me.

43 Otherwise the picture is of a company failing with amounts owing to unsecured creditors. As to that the liquidator indicates that with recovery of preferential payments there will be a dividend for creditors. I do not know what progress, if any, the liquidator has made toward entering into a litigation funding agreement and recovery of preferential payments. Nor do I know what if any claim he might make against Smith or any other person to recover amounts incurred or expended while trading while insolvent or as an uncommercial transaction. In short the position as to a dividend for unsecured creditors in the winding up remains to be ascertained.

44 It may be, therefore, that Smith, in addition to making payment to the secured creditor of the balance owing after realisation of assets, will be required to make some recoupment to the company for the benefit of unsecured creditors.

45 In all I do not consider these materials warrant the more extreme view of the plaintiff and Smith urged by counsel for the defendant. No amount of the beating of the drum by reference to the failure of Denward Lane Pty Ltd can in itself establish that the plaintiff is insolvent or could not meet an order for costs or security. The view that I form of the plaintiff's financial circumstances is informed by the evidence pertaining to the plaintiff. One thing that evidence does indicate is that the plaintiff commenced business with little financial backing and only eight months or so before the award of the subject contract. The balance sheet at 30 June 2005 or 30 June 2006 shows little ability to weather a storm such as that caused by a significant debt not being paid.

46 Counsel for the plaintiff submitted that I could act on the evidence of Smith that the plaintiff would have returned a profit in the year ending 30 June 2007 if the defendant had paid the amount claimed. He submitted that I could act on the basis that the plaintiff's fortunes were improving. The difficulty confronting this submission lies in the failure of the plaintiff to produce more current financial information. Moreover Smith has deposed that because the amount claimed has not been paid the plaintiff cannot fund the proceeding and provide security. That evidence reflects that the plaintiff's financial resources are limited and so much would seem apparent on the evidence. One would therefore conclude on this basis that the plaintiff was unable to provide security, as Smith states. These circumstances indicate and I so find that the plaintiff would be unable to pay the costs of the defendant if ordered to do so. The jurisdiction to order security under s 1335(1) or 062.02(1)(b), is thus "enlivened". Further, the inability of the plaintiff to pay the costs of the defendant, if ordered to do so, is a factor in favour of ordering security. Obviously it is such a factor as the purpose of s 1335 is to protect a party to litigation from an impecunious opponent. But the presence of that factor does not mean that the Court is predisposed to exercise its discretion in favour of ordering security. The factor is to be considered along with all other relevant factors - and in that consideration it may be a significant factor - in determining upon the just and equitable exercise of the discretion. See Interwest Ltd v Tricontinental Corporation Ltd;[9] Ariss v Express Interiors Pty Ltd.[10]

47 Then there is the matter of Smith's evidence that neither he nor any other person behind the plaintiff could provide security. Counsel for the defendant submitted that Smith should not be believed, that I should find that he had the capacity to provide security and that he should be ordered to do so as the person behind the company. See Harpur v Ariadne Australia Ltd (No 2).[11]

48 These submissions primarily relied on evidence as to Smith's ownership of four properties. These properties were situated at:

The submission also emphasised the failure of Smith to provide evidence of his financial position and that of his wife and children and the Smith Family Trust. This, together with the evidence of the properties, was relevant to the question whether an order for security would stultify the ability of the plaintiff to pursue the proceeding. Whether an order would have that effect is a factor which may be considered in determining whether to grant security.[12] To acknowledge it as a factor that may properly be considered along with other relevant factors in the circumstances, is not to deny that, the point of s 1335(1) being to protect a party from an impecunious corporate litigant, an order for security may well have the effect of stifling a proceeding. That is, s 1335(1) contemplates that effect. Moffit J referred to this in Pacific Acceptance Corporation Ltd v Forsyth.[13] That does not mean, however, that the possible stifling of the proceeding is not a relevant factor. It is, as the authorities acknowledge. It is a factor that may properly be considered along with the other relevant factors.

49 As to the above properties I accept the following to be the situation.

50 The property at 7 Woodbyne Crescent is Smith's residential address. He has been the registered proprietor of the property since 30 December 1997. The property is subject to two registered mortgages; the first was registered on 11 December 2006 to secure $200,000 and the second was registered on 21 February 2007 to secure $600,000. In his affidavit sworn on 7 June 2007 Smith stated that the property was last valued in October 2006 by Marketline Valuers at $775,000. He produced a copy of the valuation, and deposed that there was no equity in the property which would be available on a sale or to secure further borrowings. No contrary evidence was filed by the defendant and Smith was not cross-examined. I accept Smith's evidence.

51 The next property is 2 Oliphant Way, Seaford. Smith has been registered as the proprietor of this property since 13 September 2006 subject to a mortgage dated 31 August 2005 providing for an advance by instalments of $395,000. It is evident from the mortgage that the loan was to cover the costs of constructing factories on the site. Smith deposed in his affidavit sworn on 7 June 2007 that he sold the property in or about October 2005 and that the sale was settled in October 2006. Accordingly, he deposed, he had no equity or interest in the property and that if the property was still registered in his name it must be because the purchaser had not lodged the transfer of land for registration. That a sale occurred is consistent with the fact that a caveat was lodged in relation to the property on 17 April 2007, the interest of the caveator being stated to be that of a purchaser under a contract of sale dated 17 October 2005. That accords with Smith's evidence referred to above and to his further evidence in his affidavit sworn on 7 April 2008 that he did not know why the purchaser had not lodged the transfer of land. Again, the defendant filed no contrary evidence and did not cross-examine Smith. Nevertheless, counsel for the defendant submitted that as Smith remained the registered proprietor I should consider his evidence of a sale as untrue and find that in fact Smith remained the owner subject to the mortgage. In view of the evidence the submission is entirely speculative and, in its severity as to finding a witness gave false evidence, made without appropriate foundation. I reject the submission. I accept Smith's evidence. To so conclude is not, however, to overlook that Smith did not produce the contract of sale or disclose the amount received on the sale and what has become of it insofar as these matters bear on the ability of the plaintiff or Smith to provide security. But it was always open to the defendant to have called for, or subpoenaed, documents bearing on these matters rather than leave the evidence as it was.

52 Finally there are the properties at Lots 9 and 10 Simcock Avenue. These stand in a different position. The matter of these properties was first raised by Moss in an affidavit affirmed on 5 March 2008 and which Smith answered in his affidavit sworn on 7 April 2008. Moss was made aware of the properties by the references thereto in Smith's affidavit in support of the plaintiff's application to set aside the statutory demand of Jordan Steel (Vic) Pty Ltd. In that affidavit Smith deposed that in May 2007 the plaintiff intended to construct factories on the properties (as stated above), and sell the factories on subdivided lots, and that in August 2007 he entered into a loan and mortgage with Southern Finance Ltd in the sum of $1,650,000 to finance the construction of the factory. It is to be noted that Smith did not refer to the plaintiff or himself undertaking this matter in his affidavits filed at the time of the hearing before Master Daly who was thus unaware of any financial capacity in the plaintiff indicated by the material. Counsel for the defendant submitted that Smith's statement in his affidavit sworn on 1 June 2007 that the plaintiff and himself did not have the capacity to provide security was inconsistent with Smith having, as at 1 June 2007, purchased or the intention to purchase the Simcock Avenue properties, and being able to borrow $1,650,000 in August 2007. As to that, however, the date of May 2007, and August 2007, may not be correct in view of the following. That is to say, the following facts indicate dates when events actually occurred as distinct from their occurrence being considered or a possibility.

53 In his answering affidavit sworn on 7 April 2008 Smith deposed that in August 2007 he arranged to borrow $1,650,000 from Southern Finance Ltd to finance the purchase and construction of factories on the property. A term of the loan was that the net proceeds of sale of each factory be applied in reduction of the loan. Then in September 2007 he entered into contracts to purchase Lots 9 and 10. He did not have any interest in the properties before contracting for their purchase. Before then he had a plan to buy the land, to construct factories thereon and sell the subdivided lots.

54 The contract of sale required the payment of a deposit of $52,000. On 20 September 2007 the plaintiff lent Smith this amount, having received a progress payment from a customer. He paid the cheque into a loan account with the Bank of Queensland and paid the deposit from that account. Without the loan he could not have paid the deposit.

55 The title to the properties records that Smith became the registered proprietor on 13 November 2007 subject to a mortgage to Southern Finance Ltd registered on 13 November 2007. The mortgage is dated 2 November 2007 with a commencing date of 26 October 2007. In respect of each lot the consideration stated in the transfer of land was $290,400.

56 Smith further deposed that the lender advanced the balance of the purchase monies and money to fund the construction, the construction component to be advanced on a progress payment basis. Smith deposed that he was not required to put up money from his own resources for the project.

57 Smith deposed that the plaintiff was still in the process of constructing the factories. The plaintiff will be paid for its work out of the proceeds of sale of the factories. In his affidavit in support of the application to set aside the statutory demand, Smith stated that he had entered into three contracts of sale of lots on which factories were to be constructed and he produced copies of the contracts. Difficulties had been experienced in progressing the construction and no factory had yet received a certificate of occupancy. It is not until a certificate of occupancy has issued that a sale of a factory can be settled. Hence (Smith deposed in his affidavit sworn 7 April 2008) no monies had been received for the sale of any of the factories.

58 It is to be noted that counsel for the defendant did not seek to cross-examine Smith on the matter of sales, or any aspect of the factory development, or subpoena documents pertaining to these matters, or seek an adjournment for time in which to investigate them. To have done so might have clarified which factories had been sold and for what amount, and the amounts due to the plaintiff and which may come to be retained by Smith. The defendant did not even call on the plaintiff to produce the contracts of sale referred to in his December affidavit.

59 Counsel for the defendant subjected Smith's evidence on this matter to much criticism. For instance, in his affidavit in support of the application to set aside the statutory demand Smith had said that the borrowing was to finance construction costs. However in his latest affidavit he said that the borrowing was also to finance the balance of the purchase price of the property. Where, it was asked, was the evidence to establish the truth of the matter? Did the money for the purchase price come from the plaintiff or Smith? How could the plaintiff have had $52,000 to lend to Smith to aid him to purchase the properties when the plaintiff said that it could not provide security? Further, counsel asked, was the $52,000 story true, as the price paid for the properties was considerably more? Counsel questioned whether the full story had been told. Furthermore, counsel asked how could the plaintiff have borne the burden of undertaking substantial building work without being paid, unless it had a financial capacity not disclosed?

60 I take into account these and other criticisms and submissions of counsel for the defendant. In the end, however, it is not established on the balance of probabilities that Smith has a presently realisable net equity in the Simcock Street properties.

61 For these reasons I reject the defendant's submission that the four properties or any of them provide Smith with the ability to provide security. And for reasons already stated I am not satisfied that the plaintiff or Smith's wife or children or any other person who may be behind the plaintiff or involved with the family trust has the capacity to provide security. I find that an order for security would have the effect of preventing the proceeding from continuing.

62 In conclusion, regarding the matter overall, and taking into account that the jurisdiction to order security is "enlivened" under s 1335(1) (or, if one likes, also under O 62.02(1)(b)), and taking into account the various factors discussed, I am of the view that the appropriate and just disposition of the application is that security not be ordered. Accordingly the appeal will be dismissed.

63 I should add only this concerning the security sought. The amount sought was founded on the affidavit of a cost consultant, Alan Maxwell Thompson, who assumed a trial of an estimated duration of 10 sitting days, whereas Moss deposed to an estimate of five to 10 days based upon the advice of counsel. That indicates an approach which has the effect of assessing likely future costs at the outer limit. I am of the view, regarding the evidence overall, that that approach has infected Thompson's estimation and resulted in inflated estimates. Overall Thompson estimated that the defendant will incur an amount of approximately $190,433 by way of party/party costs and disbursements in defence of the proceeding. That amount included the costs of the trial. Excluding the estimated trial costs of $66,740 produced $123,683. Taking a pro-rata portion of these costs for the first day of the trial ($6,674) the total up to and including the first day of trial is $130,367 which is the amount sought as security.

64 The foreshadowed expenditure of such amounts relative to the amounts involved in the proceeding indicates a lack of proportionality in the approach to the litigation. Be that as it may, it is to be noted that the estimate purports not to include work to date. It commences with interrogatories and includes discovery which the defendant is yet to provide. Indeed, it allows $4,371 for discovery including inspection at $1,416 (for six hours). As to discovery it is further to be noted that this is one of the items of costs that the plaintiff has already incurred.

65 Then, it is to be noted, the estimate includes $1,457 as the costs of the application for security. In my view that is not a proper amount to be allowed for present purposes. It is an amount incurred prior to the order for security, if made, and is the cost of the application.

66 I do not discuss other items such as $75,000 for solicitors' costs. Having read and considered the affidavits of Thompson and Moss and the rival affidavits of the plaintiff's solicitor Richard John Curtin and of the cost consultant engaged by the plaintiff, Geoffrey Robin Westacott, I am of the view, regarding the matter overall, that the defendant's estimate of costs is inflated.

67 As to this, Westacott estimated the defendant's party/party costs as follows:

(b) of the whole action from the security for costs application to completion of the trial - $50,000, inclusive of counsel's fees allowing one day for preparation and four days for trial, and

68 It may be that Westacott has gone too far the other way in his estimation of costs. But there is about his approach a sense of proportionality and perspective that I regard as lacking in Thompson's estimate.

69 If I had decided to order security I would have allowed a modest sum approaching the matter more along the Westacott lines and in assessing the sum would have taken into account the fact that much of the time in preparation and trial would be concerned with the defendant's positive allegations or claims and not with the plaintiff's case. I would not have considered it appropriate to order security until trial without considering, and limiting, what the security covered. In the event, however, I do not have to settle on a figure and do not do so.

70 The appeal will be dismissed with costs including reserved costs. I will also order that the plaintiff file and serve a reply within 10 days and reinstate the orders made by Master Daly on 15 June 2007 with appropriate dates for their compliance.

[1] See Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301, 309 (Moffit P); Loreva Pty Ltd v CEFA Associated Agencies Pty Ltd (1982) 7 ACLR 164.

[4] Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq) (1979) 4 ACLR 492.

[5] Unreported, Supreme Court of Victoria, McDonald J, 28 May 1993.

[12] See MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97; Drumdurno Pty Ltd v Braham [1982] FCA 161; (1982) 42 ALR 563; Spiel v Commodity Brokers Australia Pty Ltd (1983) 8 ACLR 410; Imaging Applications Pty Ltd v Sun Alliance Australia Limited [1999] VSC 230.

At a glance

Court

Decision date

Before

Source

Judgment (90 paragraphs)

Parties

Cases Cited (2)