Plaintiff v First Defendant

2 The application was initially returnable on 15 June 2010 and was adjourned part heard on that date to enable Wenco to file further affidavit material in opposition to the application.

3 The defendants rely on an affidavit of Ian Richard Brooks, sworn 25 May 2010, in support of their application. That affidavit was supplemented by two subsequent affidavits of Mr Brooks, sworn 11 June and 9 July 2010. In addition, the defendants rely on an affidavit of Diana Manova, sworn 20 May 2010.

4 Wenco relies on an affidavit of its solicitor, Gary Goldsmith, sworn 27 May 2010. That affidavit exhibited affidavits of the director of Wenco, Ying He, filed in proceeding number 10550 of 2008, which was a winding up proceeding commenced against Wenco by the defendants based on the failure to comply with a statutory demand. The statutory demand claimed payment of an order for costs made against Wenco in favour of the defendants. On 27 May 2010, Ying He swore a short affidavit confirming the matters sworn to in his earlier affidavits filed in the winding up proceedings and the matters sworn to by Mr Goldsmith in his affidavit of 27 May 2010. Subsequent to the adjournment ordered on 15 June 2010, Ying He also swore an affidavit on 13 July 2010 deposing to his personal financial position.

5 Wenco alleges in this proceeding that it went into partnership with the first defendant WW Industrial Pty Ltd (WW) under the terms of a written partnership agreement. Wenco says that the partnership agreement was signed on behalf of WW by the second-named defendant, Mr Whitehead, who is the Managing Director of WW and who, it is said, managed the Australian operations of the partnership business from the time it commenced operations until the dissolution of the partnership, which Wenco says occurred on 15 April 2004. Wenco says that it decided to commence the proceeding following accusations by Mr Whitehead that there had never been in reality a partnership and that the alleged partnership had been a sham set up in order to assist Ying He and his wife to obtain an Australian resident's visa. Wenco says that the accounts and taxation terms of the partnership, which were prepared by its accountant Mr Maric, were drawn up on the basis that there was a partnership and that it had generated a profit.

6 In the proceeding, Wenco seeks a declaration that the partnership between WW and Wenco existed from January 2000 until 15 April 2004 and that the partnership was dissolved on 15 April 2004. Wenco also seeks orders for the taking of accounts and for an accounting to Wenco of its share of the partnership assets together with profits, damages and other orders. Wenco says that the partnership agreement provided, among other things, that Wenco would contribute $250,000 as working capital for the partnership. It says that it contributed at least $249,180 as capital. Mr Maric and Mr Whitehead claim that the amount had been loaned to WW and that interest would be paid on that loan amount.

7 In its defence dated 14 September 2004, WW says that in October 1999 Wenco agreed to contribute $250,000 capital to the partnership and had paid amounts totalling $249,180. WW contends that, when Ying He's wife applied for a visa which was subsequently refused, WW accepted that the proposed partnership was at an end and offered to repay the $249,180 to Wenco. WW says that Wenco requested WW to retain the money and pay interest at prevailing bank rates and that WW agreed to do that. WW says that the loan would be repaid within 12 months of written request for repayment and that Mr Whitehead guaranteed the repayment of the loan.

8 WW filed an amended defence in June 2006. In that defence, WW admitted that there was a partnership between Wenco and WW from January 2000 to 15 April 2004 and pleaded that since the dissolution of the partnership, WW had continued to use the assets of the partnership. Further, WW admitted that Wenco was entitled to payment of an amount found to be due to Wenco after the taking of accounts. Wenco contends that this was the first time that WW admitted the existence of the partnership.

9 Mr Brooks' affidavit of 25 May 2010 provides a chronology of the proceeding, from its commencement on 4 August 2004 to date. It reveals that the proceeding has become protracted by various interlocutory applications. In August 2006, Teague J appointed a special referee, Mr Gregory Meredith, to determine certain questions of an accounting nature. Mr Meredith delivered a lengthy report in November 2006 pursuant to the reference. Mr Meredith determined that as at 15 April 2004, the partnership owed Wenco $540,178 and made other findings concerning the net profit and loss for the partnership for the years 2000 to 2004. The defendants sought orders that the report of Mr Meredith be adopted but this was opposed by Wenco and became the subject of a substantive application before Smith J in September 2007. Smith J ordered that the report of Mr Meredith be adopted.

10 Wenco sought to appeal the judgment of Smith J out of time and that application was heard in July 2008. The Court of Appeal granted the necessary extension of time to enable Wenco to make the application for leave to appeal and set down the question of leave for hearing at the same time as the substantive appeal.

11 On 27 August 2009, the Court of Appeal refused Wenco's application for leave to appeal with costs.

12 On 30 May 2008, Master Wood ordered Wenco to pay the defendants $7,500 in respect of earlier costs orders made by Master Kings in September 2007. On 30 September 2008, the defendants served a statutory demand on Wenco. Wenco did not comply with that demand and on 24 December 2008 the defendants issued an application that Wenco be wound up in insolvency.

13 When the winding up application came before Efthim AsJ on 13 March 2009, Wenco indicated that the debt claimed in the statutory demand had been paid and made an open offer to the Court to pay WW and Mr Whitehead's costs of the proceeding. The winding up application was dismissed and Wenco was ordered to pay the costs of the application.

14 Section 1335(1) of the Corporations Act 2001 provides as follows:

"Where a corporation is the plaintiff in any action or other legal proceeding, the Court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, requires sufficient security to be given for those costs and stay all proceedings until the security is given."

15 As a threshold or preliminary matter, the defendants must first establish that it appears by credible testimony that there is reason to believe that Wenco will be unable to pay the defendants' costs if the defendants are successful in the proceeding.

16 The defendants submitted that the jurisdictional threshold has been satisfied saying that Wenco has paid up share capital of only $100 and whatever assets it may have are the subject of a fixed and floating charge. In addition, Mr Carew, counsel for the defendants, submitted that Wenco's financial position is revealed by the winding-up proceeding which was based on non compliance with the defendants' statutory demand for what was said to be the modest sum of $7,500, which was not paid until 12 March 2009, some two and a half months after the filing of the winding-up application.

17 Mr Carew made reference to Ying He's evidence filed in the winding-up proceeding, more particularly that Wenco has not traded since 15 April 2004.[1] The costs order made by Smith J on 28 September 2007 in favour of the defendants was apparently paid by a stranger to the proceeding, Harley Industrial Pty Ltd, a company apparently associated with Ying He, who is a director and holder of 50 per cent of the issued shares in that company. Mr Brooks in his affidavit sworn 9 July 2010 says that on 29 June 2010 he received a cheque of $9,128.48 from Goldsmith's lawyers in payment of the costs ordered by Efthim As J to be paid by Wenco in the winding up proceedings. Significantly, that cheque was also drawn on Harley Industrial Pty Ltd's account. Mr Carew invited me to draw the inference that Wenco could not make these two payments from its own financial resources and that if it suffered an adverse order for costs at the conclusion of this proceeding, the defendants would not be able to obtain payment of such costs. The evidence in this regard was not contradicted by Wenco.

18 Wenco has not confronted the defendants' evidence directed to satisfying the jurisdictional threshold and save for the undertaking offered by Ying He to which I shall refer below, Wenco put up no substantial material to meet the defendants' evidence in this regard. I consider that it has been demonstrated to the required degree by credible testimony that if the defendants are successful in this proceeding and Wenco is ordered to pay their costs, Wenco will be unable to meet such an order.

19 Mr Carew made submissions on the relevant discretionary grounds for awarding security. In those submissions, Mr Carew contended that the impecuniosity of Wenco, in addition to establishing the threshold issue, was also a very substantial factor to be taken into account when exercising the discretion to award security. Mr Carew made reference to the decision of Smithers J in Sent v Jet Corporation Australia Pty Limited where he stated:[2]

. . . the discretion is for the protection of the defendant from the unfair and possibly burdensome consequences of an unsuccessful claim against him by an impecunious company... . The statutory purpose is itself is a factor deserving of weight in the exercise of the discretion.

20 Mr Carew also referred to the decision of Shepherdson J in Interchase Corporation Limited v Colliers Jardine (Qld) Pty Ltd[3] where Shepherdson J held that the perceived inability to pay costs "must always be a consideration of great weight and it will frequently be the determining factor".

21 In Ariss v Express Interiors Pty Ltd (in liq)[4], Phillips JA (with whom Ormiston and Charles JJA agreed) said:

... [T]he 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.

22 In Livingspring Pty Ltd v Kliger Partners[5], 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.

23 In the decision of the Full Court of the Supreme Court of Western Australia in Ffe Minerals Australia Pty Ltd v Mining Australia Pty Ltd[6], Pidgeon and Owen JJ stated at para 12:

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 it could meet a costs order would run the risk of having an order made against it.

24 As to other discretionary matters, I observe that there is no element of public policy involved here nor is it suggested that an order for security will stultify the proceeding.

25 Mr Goldblatt approached his opposition to the application by reference to a number of discretionary factors. I shall deal with each of those in turn.

26 First, Mr Goldblatt contended that the delay in bringing the present application at this time in the context of a proceeding which was commenced in 2004 is a powerful reason not to award security to the defendants. He made reference to Mr Goldsmith's affidavit where it is said that nearly $400,000 has been spent by Wenco with its former solicitors in the prosecution of those proceedings which is, in my view, an incredible sum for the apparent stakes involved and the stage to which Wencothe has progressed the proceeding to this point. Mr Goldblatt says that the application for security was made without warning and with no explanation for the delay. He stated that the material relied upon by the defendants concerning the winding up application has been known to the defendants for over a year prior to the present application being brought.

27 While an application for security may be made at any time, if it is not made promptly and it results in prejudice to the respondent to the application for security, it will be a detrimental consideration for security. The rationale for this is that delay results in inconvenience, wasted effort and substantial cost and to award security would result in an injustice. In the absence of prejudice, an application for security should not fail by reason merely of delay in making of the application. While delay is one of the factors to be considered in the exercise of the discretion, it is not of itself sufficient.[7] Prejudice must be demonstrated and the author of the major Australian text on this subject, Stephen Colbran, states that the onus is on the plaintiff to show such prejudice.[8]

28 In my view, the delay by the defendants, which is not satisfactorily explained, is the strongest discretionary factor militating against an order for security in these circumstances. Wenco's claim has been on foot for a very considerable time. The chronology set out in Mr Brooks' affidavit of 25 May 2010 reveals that it is proceeding glacially. The reference by Teague J to Mr Meredith, the application before Smith J and the appeal by Wenco account for a substantial segment of this time span and there are periods of extended procedural inactivity by the parties. While very little has taken place procedurally since the time when the defendants were put on notice of Wenco's impecuniosity when there was failure to comply with the statutory demand in late 2008, I infer little in the way of costs or effort has been expended since then. The prejudice which arises from the extraordinary amount which Wenco has paid its lawyers is largely attributable to the costs of its unsuccessful application before Smith J and the equally unsuccessful appeal to the Court of Appeal and such expenditure has not advanced Wenco's position in the litigation by a commensurate degree. Although the delay in bringing the application is unexplained and unsatisfactory, Wenco's chequered and largely unsuccessful conduct of the litigation in my view in large part discharges the notion that an award of security would be unjust by reason of the large amount in costs that have already been incurred by Wenco[9]. In my view, a close analysis of the chronicle thus far results in a conclusion that the six year period is not the powerful factor against awarding security that it otherwise might be. Nonetheless, I still consider that the defendants' delay is a significant factor.

29 In paragraph 12 of Ying He's affidavit of 11 March 2009, a copy of which is Exhibit "GDG-2" to Mr Goldsmith's affidavit, he undertakes to the defendants that he will pay any costs ordered to be paid to the defendants by Wenco. Mr Goldblatt says that, by reason of this undertaking, the application for security is misconceived as it puts the defendants in the same position as if the plaintiff had been an individual residing in the jurisdiction.

30 I am not persuaded by that submission. When this matter first came before me on 15 June 2010, I enquired of Mr Goldblatt as to what evidence was available as to Ying He's personal financial circumstances and his resources to meet such an undertaking. The reason that the matter was adjourned was to enable Wenco to put on further evidence in relation to that issue.

31 Ying He swore a further affidavit on 13 July 2010 seeking to address the position in that regard. In support of the contention that Ying He can meet his undertaking to pay the defendant's costs if Wenco is unsuccessful, he states that he continues to be a director and shareholder of Harley Industrial Pty Ltd. He exhibits the accounts for Harley Industrial Pty Ltd as at 30 June 2009 and MYOB printouts of the profit and loss and balance sheets for that company as at 30 June 2010. Insofar as that documentation is said to establish the ability of Ying He to meet any order for costs, I do not consider it does. Even if the financial information relating to Harley Industrial Pty Ltd was more comprehensive and demonstrated that it was financially strong, while Ying He may be a director and a shareholder of Harley Industrial Pty Ltd and hold 50 per cent of the net equity in that company, as a practical matter this does not satisfactorily establish that Ying He's undertaking is worth 'powder and shot'. Harley Industrial Pty Ltd is not susceptible to an order for costs against it in this proceeding should the case be lost by Wenco and the defendants would have no means of compelling payment of such an order for costs against it. Harley Industrial Pty Ltd is a proprietary company and its shares are not marketable and therefore not readily realisable by Ying he should the undertaking be called upon. The value of the shares in Harley Industrial Pty Ltd to Ying He really comes down to whatever commercial leverage that company has such that Ying He could raise funds from a financier by causing it to give security for an advance to him or, alternatively, whether he could obtain loan advances from Harley Industrial Pty Ltd itself from whatever cash reserves it holds.

32 Ying He states that the ANZ Bank valued the property that he and his wife own at Centennial Park Drive, Craigieburn, at $500,000 in June 2010. He says that that valuation is conservative and the more likely value is $580,000. He does not exhibit a copy of that valuation or develop the position in this regard beyond mere assertion. He says that the current balance of the mortgage to the ANZ Bank is approximately $220,000 but no independent material is provided in that regard.

33 Ying He elaborates on the matters referred to in his March 2009 affidavit in regard to his investments in the Chinese stockmarket which he states are worth in excess of $AUS100,000. He states that he has a house in China valued conservatively at not less than $AUS250,000 and there is no mortgage on that property. No reference was made to that property in his earlier affidavit and he is not able to explain this. Mr Carew observed that while his recent affidavit has been sworn before an interpreter and signed by him using Chinese characters, his previous affidavits were not, giving rise, Mr Carew says, to issues of credibility in regard to his evidence.

34 In my view, the material in regard to the value of the Craigieburn property is unsatisfactory in quality and does not go beyond mere assertion. This is also the case in respect of the statements made by Ying He in regard to his house in China and his investments in the Chinese stock market. The investments and property in China are not easily accessible should the defendants be required to enforce the undertaking proffered.

35 Ying He states that he has $36,655.71 in cash in his joint bank account with his wife at the ANZ bank as at the date of swearing of the affidavit. He says that he has less than $2,000 owing on credit cards and he has no other liabilities. He concludes his affidavit by asserting that if an order for costs was made against Wenco in the amount being sought by the defendants in this application, he would have the resources to pay such costs from his own funds. He states that this would be very inconvenient as he said he would need to sell and realise some of his assets in order to provide the security.

36 I do not consider that the undertaking offered by Ying He is such as to persuade me that security ought not be awarded.

37 Mr Goldblatt submitted that another discretionary factor to be taken into account in deciding not to award security is that Wenco's financial position was caused by the defendants. He contended that Wenco and the first defendant were partners and that partnership has now of relatively recent times been conceded to exist by the defendants. Mr Goldblatt also contended that where a partnership is dissolved by consent, the costs associated with the taking of accounts are commonly paid out of the partnership assets in priority to any other claims of the partners. He submitted in these circumstances that well into the time line of the proceedings the defendants conceded a partnership existed and the character of the proceeding is now one in which the orders for costs which are likely to be made will be made of that nature, ie, not against Wenco but from the partnership assets.

38 I do not consider it is possible to make any meaningful assessment of the issue of where the blame lies for Wenco's financial predicament. There is not enough evidence to form even a superficial view on that question. As to the second point raised, the discretion as to costs, it is similarly not possible to predict how a court will decide the issue of costs and I would not regard it as being a significant factor.

39 Finally, Mr Goldblatt contended that the prospect of Wenco succeeding in this proceeding is a relevant factor on the issue of security for costs. He stated that the evidence is that Wenco contributed $250,000 to the partnership and Mr Meredith, the special referee, found that its share of the partnership assets at the time of his conducting his report which were referable to the period when the partnership was operative, that is, until 16 April 2004, amounted to $540,178. Mr Goldblatt contended that on an application of s.46 of the Partnership Act, the defendants are liable to account to Wenco for the profits made since the dissolution of the partnership. There has not been any accounting taken in respect of the partnership assets and, he says, s.46 applies. In addition, the defendants sought to characterise Wenco's contribution to the partnership earlier in the proceeding as a loan but have not repaid or tendered payment of that loan. He states Wenco's prospects of succeeding are "extremely good".

40 The authorities dealing with applications for security indicate that a court considering such applications should not go beyond considering on a superficial basis the prospects of success in the proceeding. Such an assessment in this case results, in my view, in such a factor being a somewhat neutral one. The claim is clearly arguable and bona fide and no application has been made to strike it out summarily but, beyond this, it is neither possible nor appropriate to predict the ultimate outcome if the matter is to go to trial.

41 In all the circumstances, I consider it is appropriate to award the defendants security for their costs. In doing so, I consider that the impecuniosity of Wenco is a very significant factor. Those associated with Wenco have been prepared to invest very considerable financial resources into meeting Wenco's own legal costs to date and to pay adverse orders for costs which it has suffered. Wenco (or at least those associated with it) are prosecuting significant commercial litigation and have invested thus far several hundred thousand dollars in payment of Wenco's own legal fees and I regard it as appropriate that Wenco secure the defendants' costs if Wenco is unsuccessful. Ying He has deposed that he has funds in his personal account to support the undertaking he has proffered and in my view such funds should be applied towards provision of security.

42 The solicitors for the respective parties have deposed to what the quantum of any order for security should be.[10] Mr Goldblatt submitted, and I agree, that the amount of security sought by the defendants is excessive. He says that if the Court does decide to award security, the amount should be $33,300 on the basis of the matters set out in paragraphs 20 and onwards of Mr Goldsmith's affidavit. In Mr Brooks' affidavit of 25 May 2010, he contends that an appropriate amount of security is $105,500 for the reasons set out in the concluding paragraphs of his affidavit.

43 As commonly occurs with this type of affidavit material, the defendants, as applicants for security, have put up a rather ambitious amount as being appropriate, while Wenco, being exposed to an order for such security, adopts a more conservative view. Mr Brooks seeks security for the costs of the whole trial, which he says will run for ten days and claims a rate of $4,400 per day for counsel. In my view, this is not appropriate and I will only award security up to and including the first day of the trial. A further application can be made if this becomes necessary. In addition, I would reduce the number of days allowed for preparation for which Mr Brooks claims, five days, to three days. I will allow counsels' brief fees at a rate of $4,000 per day.

44 In approaching this exercise of discretion, I have taken into account other discounting factors which should be applied. Although I am somewhat pessimistic in this instance, commercial cases settle without coming to trial. Even if the defendants are successful, if taxed on a party-party basis, significant sums are often taxed off.

45 In his affidavit, Mr Goldsmith has made certain concessions in response to paragraph 57 of Mr Brooks' affidavit which I will take into account. Adopting the paragraph lettering in Mr Brooks' affidavit, I will order security for the following items:

(a) discovery - $2,500;

(b) I agree with Mr Goldsmith's position as regards provision of copies and allow $500 for inspection of documents;

(c) I agree with Mr Goldsmith's estimate and allow three days' of preparation for counsel but at a rate of $4,000 per day, and not $2,750 as he contends, a total of $12,000;

(d) Despite Mr Goldsmith's concession of four days for this item as I am only awarding security up to and including the first day of trial, I will allow $4,000 for this item;

(e) Solicitors' preparation - $6,000 (which is agreed to by Mr Goldsmith);

(f) Solicitors' attendance at trial to end of first day - $1200;

(g) I will allow transcript for the first day of trial and as the costs are borne half by the plaintiff in any event - $600;

(h) As final directions have not been made for setting this matter down for trial and it is not known whether statements will be ordered or not, I decline to award security in respect of their preparation.

46 In the circumstances, I consider that Wenco should provide security in an appropriate form for the defendants' costs up to and including the first day of trial in the sum of $26,800 and I will hear the parties on the appropriate form of order required to implement this including what order should be made in respect of costs.

[1] See paragraph 10 of Ying He's affidavit sworn 11 March 2009 and filed in the winding-up proceeding.

[2] [1984] FCA 178; (1984) 54 ALR 237 at 255.

[5] [2008] VSCA 93; (2008) 20 VR 377.

[6] [2000] WASCA 69; (2000) 156 FLR 116.

[7] The foregoing principles are collected and discussed in Security for Costs, Colbran at paras [14.35] to [14.41]

[8] Colbran at paragraph[14.41] citing Fenn Management Pty Ltd v Secura Nominees Pty Ltd (1987) 5 A.C.L.C 465

[9] See generally Smail v Burton [1975] VicRp 76; (1975) VR 776

[10] Affidavit of Ian Richard Brookes sworn 25 May 2010 at para [57] and affidavit of Gary David Goldsmith sworn 26 May 2010 at para [23].