Plaintiff v Defendants

Supreme Court of Victoria|2010-07-02|Before: MUKHTAR AsJ

Practice and Procedure ─ Costs ─ Security for costs ─ Substantial passage of time since commencement of proceeding ─ Proceeding fixed for trial ─ Plaintiff in receivership ─ Bankruptcy of controlling director ─ Insolvency of plaintiff ─ Lateness of application ─ Evidentiary requirements ─ Effect on discretion

1 The trial of the claim and counterclaim in this proceeding is fixed for 11 November this year on an expected duration of seven days. By summons filed 4 June 2010 (which is over seven years since the writ was filed) the defendant, activated by recent events including the receivership of the plaintiff, seeks security for its prospective costs. It seeks $138,499 on a party/party basis up to and including the seventh day of trial, reducible to $71,000 if only taken to the end of the first day of trial.

2 The plaintiff by its counsel does not concede it is insolvent as such, but concedes it will be unable to pay the defendants' costs if they are successful at trial. There is no evidence from the plaintiff to say that if a security order is made, it will not be able to proceed and therefore be unfairly stultified in bringing its claim before a court. It makes no submissions on the quantum of security sought. There is no evidence from any past or present director or officer of the plaintiff. The receivers and managers are not interested in intervening in the application. Neither party casts aspersions on the strength of the claim or the defence and counterclaim for the purposes of this application.

3 The only evidence for the plaintiff is from its solicitor who in essence states some procedural facts to support a contention that the delay in the application and certain procedural events make it unfair as a matter of discretion to order security for costs.

4 The essential elements of the case are as follows. The plaintiff and the first defendant are in business as commercial property developers. The plaintiff agreed to purchase premises in Little Collins Street with the intention of converting them into self storage units. It seems the plaintiff experienced difficulties in obtaining all the loan funds it needed to complete the purchase. It alleges the first defendant agreed to pay $600,000 to lease 3 levels of the building for 5 years after the plaintiff did certain works to convert those premises into backpacker accommodation. The first defendant says the works were not completed, and the plaintiff "called the deal off", and therefore it was not obliged to make any payment. The plaintiff alleges the first defendant repudiated the lease agreement, and sues for damages. "The proceeding has been very acrimonious" swears the second defendant (sued as a guarantor) in his affidavit in support of the application.

5 The plaintiff's concession about its inability to pay costs means there has been satisfaction of the threshold test under s 1335 of the Corporations Act. Decisions of the Victorian Court of Appeal have dispelled an early view that the satisfaction of that test predisposes the Court to exercise the discretion in favour of ordering security, but endorse the view that the inability of a plaintiff company to pay a defendant's costs is a substantial factor in the decision whether to exercise the discretion: see Ariss v Express Interiors Pty Ltd [1]; Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [2] and Livingspring Pty Ltd v Kliger Partners.[3]

6 Once the jurisdiction is enlivened, the discretion is unfettered. But I think three considerations are important. First, stultification cases aside, the burden rests on the defendants as applicants, from beginning to end, to persuade the Court that an order for security ought be made. Secondly, the Court's discretion is directed to what is justly required by the circumstances of each case. The justification for a security order is that:

... The defendant, not being a voluntary litigant, deserves to be protected from the consequences of limited liability. Those who seek to conduct their businesses through limited liability companies expect to receive the benefits which such liability attracts. It seems...a necessary corollary that they should be prepared to accept the strictures imposed by the section if the company embarks upon litigation.[4]

7 Thirdly, and most pertinently in this case, an application for security should be made promptly and before costs and expenses are incurred by the plaintiff, for as was said by Gillard J in Smail v Burton [5]:

If an appellant has expended sums of money preparing the appeal for hearing and all the matters necessary to be performed have already been performed and the appeal is ready for hearing, it would be patently unjust to permit a respondent who stood by and allowed that work to be done to come to court and ask for security after such expenses had been incurred. ... On the other hand, if there are reasonable causes for the delay, including the conduct of the appellant, then different considerations might well apply.

8 What explains this late application? Some of the material seemed to be directed to attributing blame on the defendants for the prolonged interlocutory journey, ranging from amended pleadings, applications for further discovery, additional witness statements, and the loss of a trial date in September 2009 after another application for further discovery. In a case such as the present, an investigation into which party is more responsible than the other for the interlocutory instability is a conjectural and inconclusive exercise. From what I can see superficially at least, I think it not unfair to proceed on the basis that both parties can be held responsible, in one way or another, for allowing the case to take so long. All that really concerns me is the reason for bringing the application at a late stage.

9 It is not feasible to give a full account of the history of this case. I shall state the essential procedural facts in two segments, and avoid precise dates and descriptions. As the first segment:

(a) The write was filed in October 2002.

(b) At a directions hearing in June 2007, the defendants said they would be applying for security for costs. But they did not do so. There was no evidence explaining that change of intention.

(c) Neither party sought to expose before me what was happening in the years between 2002 and 2007.

(d) From about late 2007 to December 2008 the matter was being prepared for trial. Witness statements were filed, there were amended pleadings, there was further discovery, a notice to admit was served, and additional lay and expert witness statements were prepared by both parties.

(e) By early 2009 the case was ready for trial.

(f) In April 2009, St George Bank Limited applied to wind up the plaintiff in this Court on the grounds of insolvency for non payment of a statutory demand. That proceeding was dismissed on 17 June 2009 presumably because the debt was paid up. There is no evidence to show that the defendants did not know about the winding up application. Nor is there evidence that they did. The material concerning the winding up was put into evidence by the defendants' solicitor who says he obtained that information on a company search when preparing for this application.

(g) Before the winding up proceeding was dismissed, in April 2009 a tentative date for trial was fixed for 1 September 2009. That was subsequently vacated because the defendants applied for further discovery. That application was dismissed in October 2009.

10 Pausing there, by this time, nearly seven years had elapsed since the writ was filed. It is the facts in the following segment that actuated the defendants into making the application:

(a) A directions hearing occurred on 16 December 2009. On that day, the plaintiff showed the defendants a signed deed dated 27 November 2009 in which the plaintiff assigned to Beluga Investments Pty Ltd "all of the Assignor's right title and interest in the cause of action arising from the Sobel proceedings". The stated consideration was $20. Mr Mark Baranov was the sole director of both assignor and assignee and signed the deed as such.

(b) Between those two dates, so the defendants have now discovered, receivers and managers were appointed over the plaintiff. That occurred on 3 December 2009. That fact had not been previously disclosed to the Court or to the defendants.

(c) According to the receivers' report as to affairs, the plaintiff's only asset which is not specifically charged is a $3 million debt which has an unknown realisable value. The debtor is Bar Um Storage Pty Ltd, a company which is in liquidation and previously controlled by Baranov. That company is worthless according to its liquidator, who has made a claim against Baranov for insolvent trading and made a demand for $3 million. The liquidator has filed a confidential report with ASIC, and reported his findings to the Victoria Police.

(d) The report as to affairs does not refer to this proceeding as a prospective asset.

(e) The receivers' report also shows that the plaintiff gave to Perpetual Trustee Company Limited a registered mortgage and first ranking fixed and floating charge of slightly over $10 million. That is shown as being the amount owing.

(f) On 21 December 2009 the plaintiff served a notice of assignment as well as a proposed amended statement of claim by reason of the assignment. There has been no application to amend, and add the assignee as a party.

(g) Baranov remains a director of the plaintiff and its sole shareholder. He was also a director of Beluga Investments but resigned on 19 February 2010. On that date, his mother took appointment as director and secretary. She is 62 years old and lives in New South Wales

(h) Baranov was the beneficial owner of all the issued shares in Beluga Investments. He transferred those shares to another company Cash Purse Pty Ltd, a company previously controlled by Baranov but now under the directorship of his mother. That company is not the beneficial owner of the shares in Beluga Investments. Baranov is the beneficial owner of all shares in Cash Purse Pty Ltd.

(i) The plaintiff's solicitors ceased acting in March 2010 but then recommenced acting when they appeared at a directions hearing on 27 April 2010.

(j) On 11 May 2010 a Mr Moshe Yaniv Vaknin was appointed a director of the plaintiff. At a directions hearing that day, a trial date of 11 November 2010 was fixed.

(k) Baranov was made a bankrupt on 13 May 2010.

11 The defendants fasten on that second segment of facts to say that despite the passage of time, there are now new, recent and clear facts to show that the plaintiff is insolvent; its controlling mind Baranov is bankrupt and has been engaging in a "stripping" of the company including an assignment of its chose in action of the case for $20 to a related company; and if the assignment is not dubious, this litigation is now for the benefit of a non party. Added to that is the submission that there have been instances where the plaintiff by its solicitors have failed to properly reveal to the Court various significant facts concerning the status or affairs of the plaintiff.

12 It is recognised that a supervening event, such as insolvency or a departure from the jurisdiction, may be a catalyst for, and justify a late application for security for future costs: Tim Barr Pty Ltd v Nauri Gold Coast Pty Ltd [6]. In those situations, it is not so much a case of "delay", in the sense of delay despite knowledge of relevant facts, but a late application because of a supervening fact coming lately. And even then, such applications would normally be confined to future costs and not past costs, as is this application.

13 In ordinary circumstances, it is clear an order for security would be made in this case. This plaintiff is in a hopeless financial position. Its controlling mind is now bankrupt. It has assigned its cause of action for $20. But Mr Noonan submits that as a matter of discretion I ought decline to order security on the ground of delay because the evidence of events that triggered the application is insufficient. What is essential, he submitted, is evidence from the defendants of the reasons why they had not acted before then. That is, the defendants did not go on oath to say that they were not previously aware of the plaintiff's financial position. He submitted the Court should not infer what the defendants would not swear to. In that regard, he relied upon Pooley's Trustee v Whetham.[7]

14 In the Pooley's Trustee Case, an application for security for costs of an appeal was sought after the appellant had taken all steps and incurred all costs for the appeal and shortly before the appeal was actually called on for hearing. The applicant explained its delay by saying that it had recently issued a warrant of execution against the appellant for unpaid costs which was returned nulla bona, with an admission that there were no assets to pay those costs. So, the applicant submitted, it did not have any sufficient evidence until those events that the appellant was insolvent.

15 The Court of Appeal refused the application for security. The Court decided that the absence of any evidence from the applicant that, before then, it did not have any evidence of the appellant's insolvency was fatal. The affidavit evidence should have gone further. As there is no evidence in the present case from the defendants to the same effect, the plaintiff submits the application here is likewise defective.

16 The Court in the Pooley's Trustee Case expressly said it was not laying down a fixed or general rule because each case depends on its own circumstances. I think that case is an instance, 124 years ago, of a Court applying the elementary rule that security must be sought promptly to avoid the injustice of a plaintiff incurring costs in the meantime which may be wasted if a security order is subsequently made which puts the case at an end. And if an applicant explains its delay because it was ignorant of the respondent's insolvency any earlier, it should give sworn evidence of that fact.

17 But here we have an application concerning future costs, not past costs, in the light of recent facts. I think such cases have to be approached a little differently. Once the "new" facts are known, then of course it is necessary for the application to be made promptly, as it has here. But to then require the defendants to state on oath whether before then they had reason to think that the plaintiff was insolvent opens up to my mind matters of conjecture or unclear facts or uncertain knowledge about the plaintiff. In the context of a security application, it may also be a matter of judgment for a defendant. Protracted debate may then arise about what enquiries or investigations the defendants made, and whether they were sufficient and how facts should have been interpreted. The defendants may well have sensed the plaintiff's financial weakness or instability but legal judgments then have to be made about the strength of the "credible testimony" as required under s 1335, and evaluations of the prospects of success for an application which is to be decided on a Court's discretion.

18 In my view, the requirement in Smail v Burton[8] to explain the lateness of the application is met primarily at an evidential level by the applicant exposing the recentness of the facts on which it has acted. A Court's apprehension that the applicant might have known about those facts depends on the nature of the facts. The receivership and the assignment and other matters truly were, by nature, recent.

19 I do not say that it does not matter that in a given case a defendant can be exposed as having known earlier about the insolvency of a plaintiff to a degree where a Court can say that the information is not truly something "new" and therefore it would be unfair to order security. But for the reasons I have given, I am not willing to conclude that the discretion is not to be exercised in the defendants' favour here because they have not sworn they did not know, before the receivership, that the plaintiff was insolvent or unable to pay costs. I think if the defendants' prior knowledge is an issue, it is for the plaintiff to show there were overt and objective facts, or admissions, which before then made it objectively plain that the plaintiff was insolvent and that was unreasonable for the defendants not to have acted beforehand. It will be rare case where a plaintiff makes it obvious to an adversary that it is insolvent.

20 To that end, Mr Noonan directed the Court to two matters. First, there is a witness statement of the second defendant, Jerome Borazio, filed in this case on December 2008. In it he states that in his discussions with Baranov concerning the agreement to lease, Baranov told him that he was trying to borrow 100% of the purchase price of the premises to complete the purchase with the vendor "but that he owed too much money elsewhere and he had no further securities which he could offer to the lenders." In my view this is not capable of showing the defendants knew or should have known the plaintiff was insolvent, for present purposes. It shows Baranov was a risk taker and using the lease agreement to obtain the shortfall in funds needed to complete the purchase.

21 Secondly, reference was made to the ASIC company search to show that any examiner would see that there were fixed and floating charges at all times over the plaintiff's assets since 12 April 2002. But the search also shows discharges and releases over time. In any case, I do not regard that fact as sufficient to demonstrate that that the defendants should have been moved much earlier to form a view about the plaintiff's insolvency and apply for security for costs.

22 Security for costs orders are a tool of justice. The law empowers a court to protect a defendant from the consequences of the plaintiff's limited liability. This case is now being conducted by a hollow company, so it seems to me. There being no other basis put forward by the plaintiff to resist the application except delay, I conclude it would not be unjust to order security for costs in the light of recent, or supervening events.

23 As for the question of quantum, although no submissions were advanced by the plaintiff, the Court is bound to consider the matter for itself. I see no reason to depart from the usual view that security for costs should be calculated up to the first day of trial, at which time it may be renewed or "topped up" on application to the trial judge. Experience has it that commercial proceedings may settle early in the trial, thereby rendering such an application unnecessary.

24 The question is whether I should discount the figure of $71,000. In Farmitalia Carlo Erba v Delta West Pty Lt ,[9] Heerey J of the Federal Court concluded that the conventional reduction of two - thirds of an amount established as a reasonable estimate of party and party costs has no justification in law or logic. But, a number of discounting factors must apply such as: the chance of a case collapsing without coming to trial with the consequence that the security ordered turns out to be an over provision; the apparent prospects of success in so far as they are discernible; the fact that an order for security should not effectively deny the applicant a right to pursue the claim; the extent to which the costs of the defendants will relate to a case that is not essentially defensive; and the real prospect that the amount sought would be reduced by a taxing officer.

25 Looking at the affidavit of Mr de La Rue, the defendants' cost consultant, nothing strikes me as egregiously extravagant, although there is always a question about photocopying charges and the fees for general preparation. But the witness statements are done, as is the Court Book and I would think given the history that preparation is already highly advanced. That reduces the laborious requirements of this case from now on.

26 Doing the best I can, and excluding the costs incurred for this application, I would discount the amount of $71,000 to $55,000.

27 Subject to hearing from counsel, I propose to order that

1. The plaintiff pay security for the defendants' costs as from this date and up to and including the first day of trial, in the sum of $55,000

2. The sum of $55,000 to be paid as moneys into Court, or in a form otherwise acceptable to the Prothonotary, by 4 pm on 30 July 2010 failing which this proceeding is stayed..

3. The plaintiff pay the defendants' costs of this application.

[4] See Epping Plaza, above, at 195 [14].

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