Plaintiff v First Defendant

Supreme Court of Victoria|2010-10-05|Before: GARDINER AsJ

APPLICATION FOR SECURITY FOR COSTS pursuant to Section 1335(1) of the Corporations Act 2001 (Cth) and Rule 62.02(1) of the Supreme Court (General Civil Procedure) Rules 2005 - Jurisdictional threshold passed - Plaintiff did not adduce evidence in relation to ability to meet an order for costs if made - Relevance of assessment of prospects of success - Consideration of impecuniosity as a discretionary factor.

1 The third defendant, Bank West Australia Limited (Bank West), makes application for security for its costs against the plaintiff (Education Equity) pursuant to s 1335(1) of the Corporations Act 2001 (Cth), r 62.02(1) of Chapter 1 of the Rules of the Supreme Court and the inherent jurisdiction of the Court.

2 Bank West seeks an order that security be provided from the commencement of the proceeding up to the end of the first day of trial in the sum of $127,244.50 or, alternatively $79,242.30 from the commencement of the proceeding up to the conclusion of mediation in a form suitable to the Court within seven days and that the proceeding be stayed until such time as security is given[1].

3 Education Equity commenced the proceeding by a writ filed on 9 June 2010. It claims that by written heads of agreement of 26 February 2010, the parties agreed to terms by which Education Equity would acquire certain units in trusts, shares and securities and thereby assume ownership and control of two independent colleges, Casey College and Melton College. The colleges were owned by the first defendant as trustee of two trusts. Bank West holds certain securities over the assets of the first defendant.

4 The agreement provided that Education Equity would pay Bank West an "initial deposit" of $500,000 and, upon satisfaction of the conditions listed in clause 7 of the agreement, it would pay Bank West the balance of the deposit of $1.6m. Education Equity paid the initial deposit was paid on 4 March 2010.

5 Clause 6.1 of the heads of agreement provided that the initial deposit of $500,000 was "not refundable". Clause 6.2 provided that in the event a condition contained in clause 7 was not satisfied, the initial deposit was to be refunded to the buyer (i.e. Education Equity) without deduction unless the buyer breached a condition of any of the transaction documents identified in clause 4 of the agreement. Clause 7 provided that the completion of the transaction was subject to and conditional upon Education Equity entering into the several agreements described in paragraph 16(c) of the statement of claim. Clause 10.2(c) of the agreement provided for an extension of time for compliance with the condition precedents. A number of such extensions were agreed to whereby the time was extended from 14 March to 7 May 2010.

6 Education Equity says that the condition precedents set out in clause 7 of the heads of agreement were not satisfied by 6 May 2010 or waived by it. It contends that its enquiries have revealed an undisclosed liability, more particularly prospective litigation against a relevant party involving a possible liability of $185,000. In addition, Education Equity alleges that a dispute involving a childcare centre involved in the transaction has not been disclosed.

7 On 16 May 2010, Education Equity gave notice to Bank West pursuant to cl 10.2 of the agreement of the undisclosed matters and indicated that it was terminating the agreement and demanding return of the initial deposit.

8 Bank West refuses to refund the initial deposit and in this proceeding Education Equity claims the return of the $500,000, alternatively damages and the loss of opportunity to use that sum since 7 May 2010.

9 In the application for security for its costs, Bank West relies on the affidavits of Matthew Richard Critchley sworn 16 August 2010, Pennelope Jane van den Berg sworn 27 August 2010 and Sarel Roux Lategan sworn 20 December 2010. In seeking to resist the application, Education Equity relies on the affidavit of Thomas Charles Mould sworn 10 September 2010 and of Melanie Jane Crowe sworn the same date.

10 Bank West contends that the jurisdictional threshold which is required to be passed in order to attract the jurisdiction of the Court to award security has been established.

11 The threshold test, that there is credible testimony that if Bank West is successful Education Equity will be unable to pay Bank West's costs, is a low one. As Bank West contends, a prima facie case is sufficient to meet the test. Bank West says that Education Equity has share capital of only one dollar and holds no real estate in Victoria, Queensland or New South Wales.

12 Mr Möller, counsel for Bank West, says the fact that Education Equity has chosen not to adduce any evidence in relation to its ability to meet costs is most significant.

13 Mr Clarke, counsel for Education Equity, in his submissions contended that there is no credible testimony establishing there is reason to believe that Education Equity would be unable to pay Bank West's costs. In this regard, he says that Education Equity has no judgments against it and no statutory demands have been served upon it. He submitted that there is in excess of $500,000 in an account at Bank West in the name of Education Equity, a reference to the initial deposit held by Bank West. I would not regard that as a relevant factor at all as those funds are the very same funds which are the subject-matter of the current proceeding. In my view, they could not be regarded as an asset of Education Equity in light of the current proceedings and could not be regarded as a source of funds to meet an adverse order for costs against Education Equity, for the simple reason that such an order for costs would only arise if Bank West is successful in resisting Education Equity's claim, in which event it would be entitled to retain those funds.

14 Mr Clarke submitted that the subject transaction, one involving Education Equity's ability to raise or pay the sum of $21,481,000 and to assume liabilities for the securities held by Bank West and that at the time of entry into the heads of agreement, Bank West had no misgivings about Education Equity's ability to perform its obligations under that agreement. He says that Bank West freely entered into the agreement and did not seek any personal guarantees.

15 Bank West submits that Bank West's perceptions at the time of the entry into the heads of agreement are of no relevance to the question of Education Equity's present ability to meet an order for costs and I agree. Whatever the reasons that Bank West had for entering into the heads of agreement, the question I have to consider is whether there is credible testimony before me that if Education Equity loses this case, Bank West will be left wanting for its costs.

16 Bank West, while conceding that it bears the onus of establishing the threshold question points in this case to the fact that Education Equity has chosen not to adduce any evidence in relation to its ability to meet an order for costs.

17 Mr Clarke says that his client is under no obligation to do so and Bank West bears the onus in the application. He referred me to the decision of Goldberg J of the Federal Court of Australia in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd[2]. At paragraph 9, Goldberg J stated:

I will shortly turn to the evidence placed before the Court but before doing so I should turn in anticipation to one submission made on behalf of the respondents which is that the refusal by the applicants to provide the respondents with any further financial information other than that which the respondents have been able to glean from published annual returns should compel me to apply the principles identified in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. It is submitted that the evidence before the Court raises inferences that the applicants are heavily indebted and have no assets or other means with which to satisfy those debts, that the onus is on the applicants to adduce evidence of their ability to pay their debts and that their failure to do so should compel the Court to conclude that the applicants have no such means, relying on Jones v Dunkel (supra). However, I do not consider that there is any onus on the applicants to adduce evidence of their ability to pay their debts or that the issue should be determined on the basis whether or not that onus has been satisfied.

18 Mr Clarke also referred me to the decision of Finn J of the Federal Court of Australia in Olivaylle Pty Ltd v Flottweg GMBH and Co.[3]

19 In response, Mr Möller referred to the decision of the Full Court of the Supreme Court of Western Australia in Ffe Minerals Australia Pty Ltd v Mining Australia Pty Ltd,[4] where Pidgeon and Owen JJ stated at para 11:

Here the applicant is not seeking to prove the state of the company's finances. The applicant is required to do no more than place on the record credible testimony and the exercise of the Court at this stage is in judging the testimony and its quality rather than seeing if a matter has been proved by inference. The company, at this stage, is not being asked to explain or contradict something for the purposes of avoiding an inference being drawn. If there is credible testimony, then the Court has jurisdiction to make the order and a company which called no evidence to show that it could meet a costs order would run the risk of having an order made against it. (emphasis added)

20 In my view, Bank West has demonstrated to the required degree by credible testimony that if it is successful in this proceeding and Education Equity is ordered to pay its costs, Education Equity will be unable to meet such an order. While the authorities indicate that the paid up capital of a company will generally be irrelevant[5] in an assessment of the ability to meet an order for costs in the security for costs context, Education Equity has no real property in Victoria, Queensland or New South Wales. Like the respondent in Ffe Minerals, it has chosen not to confront Bank West's evidence in regard to its asset position. Education Equity was only incorporated earlier this year, apparently as a corporate vehicle to act as the purchaser in the transaction the subject of the proceeding. No accounts are available for it and, aside from what has been put forward by Bank West, there is no information about its financial position. The evidence put forward by Bank West is of a very similar type and quality to that regarded by Pidgeon and Owen JJ in the Ffe Minerals case as constituting "credible testimony". In Ffe Minerals, the evidence was that the company's paid-up capital was $4,001 and that there was no land registered in the company's name. There were no recent accounts available on the public registers and the accounts which were available showed that the company had made operating losses for a number of years. The respondent company to the application for security did not file any answering affidavit.

21 On an application of Ffe Minerals I consider that Bank West has met the required credible testimony test.

22 I now move to consider the discretionary matters. Education Equity says that there is a substantial "unity of issues" in the case between its claim and Bank West's defence and what it describes as Bank West's "de facto counterclaim". Education Equity says that although a counterclaim has not been filed, in reality Bank West claims an entitlement to the $500,000 deposit.

23 In response, Bank West says that it has not filed a counterclaim nor does it seek any relief in this proceeding. I pressed Mr Möller of counsel for Bank West whether it intended to do so and he said that it did not. Mr Möller says that Bank West's case is that it is entitled to retain the initial deposit in accordance with cl 6 of the Heads of Agreement and has no need to bring a counterclaim.

24 I do not consider that this is a situation where in the words of Hedigan J in B.L. O'Shea Pty Ltd v Australian Mutual Provident Society Limited[6], that Education Equity is "compelled to litigate". Nor do I agree with Education Equity's submission that characterises the proceeding as being brought defensively in that it seeks to prevent or halt Bank West from exercising self-help in releasing the deposit of $500,000 from Education Equity's account at Bank West to itself.

25 Bank West, for the reasons explained in the affidavit of Mr Lategan sworn 20 September 2010, regards itself as the beneficial owner of the $500,000 while Education Equity considers that such funds are obliged to be returned to it. I consider that Education Equity is in the relevant sense the moving or aggressor party, seeking the recovery of the moneys. Aside from its commercial desire to do so because it considers the funds are wrongfully retained, it is not compelled to bring this proceeding.

26 Finally, as to the discretionary factor of assessment of prospects of success, it is clear that a court considering these types of applications should not assess Education Equity's case and its strengths in any detail. The case is clearly brought in good faith and has reasonable prospects of success but other than that it is somewhat a neutral factor. Certainly, the defendants have not sought to strike out Education Equity's claim by way of summary application.

27 Mr Möller submits that the establishment of the threshold issue by putting up credible evidence as to the impecuniosity of Education Equity is also a very substantial factor to be taken into account when exercising the discretion to award security. In Ariss v Express Interiors Pty Ltd (in liq)[7], Phillips JA (with whom Ormiston and Charles JJA agreed) said:

... any discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.

28 In Livingspring Pty Ltd v Kliger Partners,[8] Maxwell P and Buchanan JA in reference to the above passage in Ariss, stated at paragraph 19:

The same point may be expressed slightly differently, as follows. The threshold condition for the exercise of the power to order security defines the circumstances in which Parliament contemplated that the power would be exercised. That is, the power was conferred for the purpose of protecting the defendant against the very risk which must be shown to exist before the power can be exercised. In this sense, satisfaction of the threshold condition - demonstrating the existence of the risk - "calls for" the fulfilment of the purpose for which the power was conferred. Whether the power should be exercised in the particular case will, of course, depend on all the circumstances.

29 I consider that the principle extracted above is apposite for application in this instance and points in favour of an award for security.

30 As to other discretionary factors, this proceeding was commenced in June 2010 and the application for security was brought shortly afterwards. As such, there has been no delay. There is no evidence which would suggest that the impecuniosity of Education Equity has been brought about by the actions of Bank West. Similarly, there is no evidence that an award of security would stultify Education Equity's ability to continue with the proceeding. Finally, there is no element of public policy involved. I consider that an award for security should be made.

31 I consider that security should be awarded for the period running from seven days after the filing of the application to the conclusion of mediation.

32 As is usual in these types of applications, the parties have adduced evidence of qualified costs experts. In the case of Bank West, it relies on the affidavit of Penelope Jane van den Berg sworn 16 September 2010. Education Equity relies on the affidavit of Melanie Jane Crow sworn 10 September 2010. Both those affidavits descend into very considerable detail and analysis which I will not rehearse here. In his affidavit, Mr Critchley, the solicitor at Corrs Chambers Westgarth conducting this matter on behalf of Bank West, also deals with the question of the quantum of the security which should be awarded.

33 Ms van den Berg quantifies the costs from 24 August 2010 (i.e. seven days after the filing of the application for security) to the conclusion of mediation as being $75,269.30. Included amongst the items, she says should be the subject of an award for security include non-party discovery and costs associated with witness statements, including reviewing witness statements of Education Equity and other defendants. As I would understand it, there has been no order for witness statements, nor has there been or is there foreshadowed applications in respect of non-party discovery. For this reason, I would deduct the amount which has been provided for those matters, $30,000, from the figure put up by Ms van den Berg.

34 Ms Crow contends that if security is awarded an appropriate figure from 24 August 2010 to the conclusion of mediation is $46,006.90, a figure very close to that to which I have reduced Ms van den Berg's estimate, approximately $45,000 if the $30,000 referred to is deducted from the amount she contended for.

35 In the circumstances, I will order that Education Equity give security for Bank West's costs in the sum of $45,000 in a form acceptable to the Prothonotary. I will hear counsel on the form of the orders required to implement this.

[1] The third defendant filed an amended summons on 20 September 2010 seeking security in such sums for those periods.

[3] SAD 216 at 2006, especially at [12] and [14].

[5] See for example Microcorp Pty Ltd v Terran Computers Pty Ltd & ors (unreported Federal Court of Australia) 19 December 1991 at page 3.

[6] Unreported, Victoria Supreme Court, F4118, 15 February 1994.

Court (General Civil Procedure) Rules 2005

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Judgment (47 paragraphs)

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