Precious 1 Pty Ltd v Chamberlain Early Learning Centre Pty Ltd

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

Judgment

HIS HONOUR: This is an application by Chamberlain Early Learning Centre Pty Ltd ("CEL") for security for its costs of an application by Precious 1 Pty Ltd ("Precious 1") for leave to appeal and, if leave is granted, an appeal from judgments of Emmett AJA of 9 March and 5 May 2017 (Chamberlain Early Learning Centre Pty Ltd v Precious 1 Pty Ltd [2017] NSWSC 189 and [2017] NSWSC 520). The application for leave to appeal and the intended appeal are fixed for a concurrent hearing before this Court on 4 December 2017. The application for security has been brought promptly.
CEL is the lessee of premises at Guildford of which Precious 1 is the registered proprietor. Rent payable under the lease is $16,170.23 per month. Over two years of the lease term remains.
Precious 1 became the registered proprietor of the premises as a result of the registration of a transfer of the fee simple in the property. The transfer was dated 4 January 2016, but was not registered until 23 June 2016. Although CEL's lease was on foot at the time the transfer was signed, CEL was not informed of it until it was registered on 23 June 2016.
The purpose and effect of the transfer was to substitute Precious 1 for the then registered proprietor (4 Chamberlain Pty Ltd - the "Assignor") as the registered proprietor of the property, and as trustee of the family trust upon which the Assignor held the property. As a result of litigation between the Assignor and CEL prior to 2016, the Assignor had become liable to pay costs of $93,860.24 to CEL. In 2016 CEL sought to recoup these costs by setting them off against its liability to pay rent under the lease. It did this both before and after Precious 1 became the registered proprietor of the property.
In the judgments under appeal, Emmett AJA held that CEL was entitled to withhold from Precious 1 rent accruing before Precious 1 became the registered proprietor, but not rent accruing after that registration. In reaching this conclusion, his Honour held that an assignee of the reversion of property under the Real Property Act 1900 (NSW) takes its entitlement to rent payable under a registered lease of the property subject to equities enforceable by the lessee against the assignor. His Honour so held notwithstanding that s 117(1) of the Conveyancing Act 1919 (NSW), which effects the assignment of rent entitlements, does not expressly state that the assignment is subject to equities. His Honour further held that CEL had an equity enforceable against the Assignor, entitling CEL to set off its entitlement to costs against its rent obligations, and that Precious 1 took its right to sue for the rent arrears for March to June 2016 subject to this equity. His Honour held however that CEL was not entitled to set off its costs entitlement against its obligation to pay rent accruing after Precious 1 became registered proprietor. The latter finding was made upon the basis that CEL's entitlement to be paid costs by the Assignor was not sufficiently connected with Precious 1's ongoing entitlement to be paid rent by CEL to establish a right to a set off.
On the present application, CEL did not suggest that Precious 1's application for leave to appeal and intended appeal were not fairly arguable.
The sole director and secretary of Precious 1, Ms Angela Michael, gave evidence before me that the subject property is held by Precious 1 upon the terms of a Trust Deed which established the 4 Chamberlain Holdings Family Trust. The Trust Deed, which was in evidence, confers a right on the trustee to be indemnified in respect of actions taken by it in good faith in relation to the execution of its powers, duties, authorities and discretions under the Deed. Ms Michael stated that the only encumbrance on the property is a mortgage in favour of National Australia Bank, presently securing $1,837,500. The evidence indicates that the bank adopted an 18 August 2016 valuation of the property at $2,625,000 for the purpose of this lending. From these facts, it can be inferred that the Trust has substantial equity in the property.
CEL's application for security for costs is based upon s 1335 of the Corporations Act 2001 (Cth). It did not submit that its interests would be advanced by relying upon any provision of the Uniform Civil Procedure Rules 2005 (NSW).
Section 1335(1) of the Corporations Act is in the following terms: "(1) [Where corporation unable to pay costs] Where a corporation is 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, require sufficient security to be given for those costs and stay all proceedings until the security is given."
The power under this section to require security for costs has been said to arise where there is "reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it" (Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205 per von Doussa J). However, it has properly been pointed out that ultimately the words of the statute must govern, not a judicial reformulation of them (see Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [13]).
Satisfaction of the condition stated in s 1335(1) does not automatically entitle an applicant to security for costs. On the contrary, the onus rests on it to establish that the circumstances of the case warrant an order being made.
As a guide to the exercise of the Court's discretion in a case such as the present, Brereton J said in Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [9]: "[Where the plaintiff is a corporate trustee], the applicant for security will be taken to have satisfied the onus of establishing that there is reason to believe that the plaintiff will be unable to pay a costs order if so ordered, unless the plaintiff can establish that it will have recourse to property or assets held by it on trust … As Smithers J explained in Laundry Coin Wash, this is because, where the only tangible assets of the plaintiff are held on trust for another entity, so that the plaintiff's solvency depends on its right of indemnity, the Court must bear in mind the difficulty which a successful defendant may encounter in attempting to execute in respect of an order for costs. These observations of Smithers J were approved by Tadgell J in Lagarna (at 154)" (citations omitted).
In the present case, the following considerations lead me to the conclusion that the precondition stated in s 1335(1) of the Corporations Act has not been satisfied and the Court should not therefore make any order for security for costs.
First, although Precious 1's only asset is a right of indemnity from a trust estate which appears to comprise a single property, the evidence indicates that the estate has substantial equity in the property.
Secondly, if it fails in its application for leave to appeal or in its appeal, the amount of Precious 1's costs liability is likely to be only a small proportion of the trust's equity in that property. CEL seeks $50,000 as security for costs and Precious 1 concedes that an amount of $35,000 would be an appropriate amount if the Court were to make a security order. From these competing contentions it can be inferred that Precious 1's liability would not exceed $50,000. This is to be compared with Precious 1's equity in the property, which appears to be in excess of $700,000.
Thirdly, the amount of any such costs liability would be equivalent to no more than about three months' rent (rent being payable at the rate of $16,170.23 per month). CEL would be entitled, as it has done in the past, to withhold rent sufficient to satisfy any costs liability incurred by Precious 1. Precious 1 conceded that CEL could do this. Furthermore, the probabilities are that CEL could continue to withhold rent even if Precious 1 transferred its reversionary interest in the property to a new registered proprietor. On Emmett AJA's reasoning (which will have been upheld if Precious 1 fails on appeal and incurs a costs liability), a subsequent registered proprietor would take its interest subject to equities. These would include any right that CEL may have to set off the former trustee's liability for costs against CEL's liability for rent. Any liabilities for costs that may arise on the appeal proceedings would have been incurred by Precious 1 in an attempt (albeit unsuccessful) to perform its trustee's duties to "get the trust property in, to protect it, and vindicate the rights attaching to it" (CGU Insurance Ltd v One.Tel Ltd (in liq) (2010) 242 CLR 174; [2010] HCA 26 at [36]), and specifically in relation to the collection of rent due under the lease. Therefore the necessary connection between the counter-liabilities to justify their set off would at least arguably be established, constituting an equity subject to which any new registered proprietor would take its interest (compare [2017] NSWSC 189 at [76)]. Moreover, Precious 1's right of indemnity against the trust assets would in all probability subsist after their transfer to a new trustee (see Lemery Holdings Pty Ltd v Reliance Financial Services Pty Ltd (2008) 74 NSWLR 550; [2008] NSWSC 1344 at [21]).
Whilst, for the reasons identified by Brereton J (see [12] above), the Court needs to be cautious when dealing with an application for security for costs against a corporate trustee, I do not consider that the evidence indicates that Precious 1 will not be able to pay CEL's costs if Precious 1 fails on appeal. In this context the Court is dealing with probabilities, not certainties. For the various reasons I have given, I consider that the probabilities strongly favour the view that CEL's costs would be paid in such circumstances. This is sufficient to require the conclusion that the precondition stated in s 1335(1) has not been satisfied.
For these reasons, I dismiss CEL's notice of motion, with costs.

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