Pyrmont Raw Materials Pty Limited (In Liquidation) (Receivers Appointed) v Peter Meier & Anor

Jazabas Pty Ltd & Ors v Haddad & Ors [2007] NSWCA 291 Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 CASES CITED : BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 Eddy & Morphett v Mac Audio & Acoustical Consultants Pty Ltd [2000] SASC 145 Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120

Pyrmont Raw Materials Pty Limited (In Liquidation) (Receivers Appointed) (Plaintiff/Respondent) PARTIES : Peter Meier (First Defendant/Applicant) Peter Meier Investments Pty Limited (Second Defendant/Applicant)

COUNSEL : A J Moon (Plaintiff/Respondent) F P Carnovale (Defendants/Applicants)

SOLICITORS : Connolly Suthers (Plaintiff/Respondent) Toomey Pegg Drevikovsky Lawyers (Defendants/Applicants)

• 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

2834/07 PYRMONT RAW MATERIALS PTY LTD (IN LIQUIDATION) (RECEIVERS APPOINTED) v PETER MEIER & ANOR JUDGMENT 1 This is an application brought by the defendants by way of Notice of Motion filed on 19 January 2009 for an order that the plaintiff, Pyrmont Raw Materials Pty Limited (in Liquidation), give security for the defendants' costs of the proceedings in the amount of $181,087.50. The first defendant is a former director and shareholder of the plaintiff. The second defendant is a company controlled by the first defendant and a shareholder of the plaintiff. 2 It was in June 2005 that receivers were appointed to the plaintiff by Mr Anthony Ellis, pursuant to a charge dated 8 April 2004 . This Court made an order that the plaintiff be wound up on 3 June 2005. It was not until 22 May 2007 that the receivers caused the plaintiff to commence these proceedings by filing an Originating Process dated 17 May 2007. On 21 June 2007 an affidavit of the plaintiff's solicitor sworn on 15 June 2007 was filed to which a form of Statement of Claim was annexed. The solicitor explained in that affidavit that the annexure was the supporting Statement of Claim or Points of Claim referred to in the Originating Process dated 17 May 2007. 3 It is apparent that between June 2007 and 3 April 2008 the proceedings were adjourned on numerous occasions. It was not until 3 April 2008 that orders were made for the filing of pleadings. There were similar orders made on 22 May 2008. It was not until 18 June 2008 that the plaintiff filed a Statement of Claim signed by the solicitor on 10 June 2008 with a verification by the plaintiff, signed by Mr Ellis, also on 10 June 2008. 4 The Statement of Claim sets out the detail of contracts entered into by the plaintiff with third parties for the removal and transportation of sandstone spoil from a site and the levelling, filling and compaction of that site with excavated sandstone. The plaintiff claims that the first defendant was responsible for the day to day management of the site and that the plaintiff paid invoices submitted by contractors and hirers using the site which were verified by the first defendant. The plaintiff claims that the first defendant owed it various duties by reason of his position as a director, including: a duty not to have a conflicting interest to the plaintiff; a duty not to have an inconsistent engagement with a third party; a duty not to misappropriate the plaintiff's property for his own benefit or the benefit of a third party; a duty not to misuse his position for his personal advantage or that of a third party; and a duty to exercise reasonable care, skill and diligence in the exercise of his powers. 5 There are various claims made against the first defendant the first one of which relates to what is referred to as the "ES contract". It is alleged that ES was a business owned and operated by the first defendant and that the first defendant represented to the plaintiff that ES was owned by another person named in the pleadings. ES purportedly provided the plaintiff with various items of machinery, including loaders and dozers, and it is alleged it also provided services to the plaintiff for which it rendered invoices in an approximate amount of $800,000. It is alleged an amount in that vicinity was paid to ES. It is also alleged that the first defendant failed to correct the alleged representation or advise the directors of the plaintiffs that he was the owner of ES and also that he failed to advise the directors that he had received payment of the cheque for his own benefit. There is no pleading that the business ES did not provide the services, rather it is a claim that the first defendant obtained a contract for a business of which he was the owner and thereby obtained the benefit himself. Prima facie it appears that the work was, in any event, necessary. 6 There are some relevantly small claims in relation to the hire of plant and equipment, infelicitously pleaded, for example in paragraph 47 and following, amounting to $20,000 for what appears to be a claim that invoices were inappropriately prepared or perhaps falsely prepared, for hiring that was not necessary. It is suggested by counsel for the plaintiff, Mr AJ Moon, that the claim is actually for the provision of invoices which were without foundation because the equipment was owned by the plaintiff. That is not easily discernible from the alternative pleading that the plaintiff "owned or was entitled to use" the equipment. In any event, it is a claim for approximately $20,000. 7 There are other claims relating to a company, PPH, for approximately $400,000. This allegation appears to be that the first defendant caused the plaintiff to enter into a contract with PPH when it could have entered into a cheaper contract with a business known as Mulgoa. There is no basis upon which the reader of the pleading can identify the terms that were offered or could have been secured with Mulgoa by comparison with the arrangement that was reached and performed with PPH. 8 There are also fraud claims which Mr FP Carnovale, counsel for the defendant, points out were not in the original draft claim attached to the plaintiff's solicitor's affidavit. Those appeared for the first time in the pleading that was filed on 18 June 2008. Mr Carnovale submitted that the claims other than the fraud claims were all statute barred and pointed to the fact that the fraud claims would overcome those matters. 9 The defendants filed a Defence on 5 August 2008 containing some admissions but in the main general denials of the plaintiff's claim. Mr Moon emphasised the generality of the defence and submitted that I should take that into account apparently adversely to the defendants on this application. 10 On 29 August 2008 orders were made for the defendants to provide particulars requested by the plaintiff's then solicitors by 12 September 2008. Between 29 August and 31 October 2008 the proceedings were adjourned by consent on a number of occasions. On about 31 October 2008, the receivers, on behalf of the plaintiff, decided not to prosecute the proceedings any further. The liquidator, Mr Offermans, gave the following evidence in that regard:

In or about October/November 2008, the receiver made a decision not to further prosecute the proceedings on behalf of Pyrmont, and as liquidator of Pyrmont, I was then obliged to myself make a decision as to whether or not I further prosecuted the proceedings on behalf of Pyrmont. After some consideration of the matter, and in particular the matters pleaded in the Statement of Claim, I determined that I would, in my capacity as liquidator of Pyrmont further prosecute the proceedings on behalf of Pyrmont.

11 The liquidator claimed that a relevant factor in his decision to proceed was the fact that there was no order for security for costs and that, "having regard to the period of time since commencement of the proceedings any application brought for security for costs after that date would likely fail because of such delay". 12 The proceedings were adjourned between 31 October and 17 December 2008 to allow the liquidator to make his decision. On 17 December 2008 the defendants advised the liquidator's solicitor that if the liquidator decided to continue with the proceedings, the defendants would bring an application for security for costs. It was on 9 January 2009 that the liquidator's solicitors advised the defendants that the company intended to continue the proceedings. The defendants filed their application during the court vacation, on 19 January 2009, and the application has been the subject of directions to prepare this application for hearing. 13 Counsel for the respective parties have provided very helpful detailed submissions and the plaintiff, by its counsel Mr Moon, has taken a very sensible approach to the matter. First of all, the plaintiff has conceded the threshold issue that the plaintiff, if ordered to do so, would not be in a position to pay costs. Secondly, the plaintiff has conceded that there is no issue about quantum. Thirdly, Mr Moon conceded that the plaintiff is unable to point to any evidence of stultification of litigation or the stifling of litigation if an order for security were made. Mr Moon took care not to concede that there would be no stultification but made the point, as I say, that there was no evidence of stultification. 14 There are three major submissions made by Mr Moon in the application for security. The first relates to the defendants' delay in bringing the application. The second is a submission that the defendants contributed significantly to the plaintiff's impecuniosity. The third is the submission that this is a special case with special considerations because the plaintiff is in liquidation and is pursuing a director of the company. 15 As to delay, Mr Moon candidly indicated that there is no specific prejudice to which he can point. However he relied upon the evidence given by Mr Offermans to which I have referred above. The litigious history to which I have referred, demonstrates that whilst the receivers were in control of the litigation, the only thing that was achieved was a Statement of Claim with some of the problems I have already outlined. The presumption made by the liquidator that any application for security would fail was rather robust. It is always necessary to review the whole of the circumstances to see if such a robust opinion is justified. 16 It was not long after the defendants filed their Defences that the receivers decided to abandon the proceedings. When the liquidator made his decision to cause the plaintiff to continue with the litigation, the defendants moved very promptly. Indeed they heralded their application prior to the decision being made by the liquidator. I am not satisfied that the delay in bringing this application was a material delay. 17 The second submission made by Mr Moon was that the defendants contributed significantly to the plaintiff's impecuniosity. There are some difficulties with this submission. The plaintiff has the onus of proving that the defendants materially contributed to its impecuniosity. It is necessary to establish, by admissible evidence, the financial position of the Company at a relevant time prior to the alleged misconduct of the defendants so that an assessment can be made of the financial position prior to and after the alleged conduct. There is no issue that the debt owing to the secured creditors at the date of the last accounts filed by the receivers in December 2008 was $527,372.90, and there is no issue that the Company's unsecured creditors are owed $1,506,100 at the date of the last accounts filed by the liquidator on 2 December 2008. 18 Mr Moon relied on the pleading to submit that the defendants significantly contributed to the impecuniosity of the Company. 19 In Jazabas Pty Ltd & Ors v Haddad & Ors [2007] NSWCA 291 Basten JA observed that courts do not assume that because a successful claim against the defendants would result in an award of damages, it followed that it was the tortious conduct of the defendants which led to the impecuniosity: at [33]. McClellan CJ at CL, with whom Mason P agreed, said that claimants in applications for security carried the onus of establishing "both the adequacy of their financial position before their dealings with the opponents and that the opponents' actions have caused or at least materially contributed to the claimants' inability to meet an order for security for costs": at [94]. 20 McClellan CJ at CL also referred to Austin J's decision in Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564. In that case Austin J referred to BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 a decision of the Full Court of the Supreme Court of Western Australia in which Anderson J (with whom Kennedy and Ipp JJ agreed) said that the plaintiff had the evidentiary onus to prove that the defendant's wrongful actions had brought about its lack of means. His Honour also said that if there is no evidence to show that the defendant was to blame for the plaintiff's lack of means, the application based on this ground should fail: at 345-6. 21 It is not appropriate to rely merely on the pleadings, unless there are relevant admissions in the pleadings obviating the need to call evidence. If there are no such admissions, the plaintiff is required to call evidence to discharge its onus. In this case it did not do so. I am not satisfied that the defendants' conduct significantly or materially contributed to the plaintiff's impecuniosity. 22 The final submission made by Mr Moon was that where a company in liquidation pursues a director with claims of the kind to which I have referred, caution should be exercised before granting security because it would be inappropriate to allow a defendant to profit from his own misconduct as a director and frustrate the litigation by obtaining orders for security for costs. Mr Moon relied upon Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 more for the reference by Hodgson JA to the decision of the Full Court of the South Australian Supreme Court in Eddy & Morphett v Mac Audio & Acoustical Consultants Pty Ltd [2000] SASC 145 than for anything said otherwise by the New South Wales Court of Appeal. Green was a case in which the liquidator brought proceedings against the directors and officers of the company in liquidation and their insurer. The liquidator settled the proceedings against the directors and the insurer brought an application for security for costs. The primary judge ordered security and in dismissing the appeal from the primary judge, Hodgson JA (with whom Basten JA agreed in part but not on the outcome, and with whom Campbell JA agreed) reviewed the authorities dealing with applications for security against liquidators. Hodgson JA said:

42 Another of the cases was Eddy v Mac Audio and Acoustical Consultants Pty Limited [2000] SASC 145 where at [39] Lander J (with whom Doyle CJ and Duggan J agreed) said this: The fact that the proceedings are brought by a liquidator, appointed by the Court, who is performing a public function to recover the corporation's losses for the benefit of the creditors and shareholders will usually be a relevant factor in the exercise of the discretion to make an order of this kind: In re Pavelic Investments Pty Ltd (1983) 8 ACLR 417. Moreover if a liquidator brings a claim bona fide against directors for breach of their duties ordinarily no order for security for costs would be made in favour of the directors where the liquidator alleges that the breaches of duty caused the plaintiff's impecuniosity; Addstead Pty Ltd v Simionato Holdings Pty Ltd (Supreme Court (SA) Duggan J, Judgment No S 5691 5 July 1996, Unreported). But that is not a rule. It is no more than the result of the proper exercise of a discretion. Clearly there will be cases where in such a claim it would be appropriate to exercise the discretion in favour of the defendant. One circumstance which may make such an exercise appropriate is where there are persons with means who are financing the plaintiff's action and who will be the beneficiaries of the plaintiff's success. If any order made will mean that the plaintiff cannot proceed with the litigation that will also be a relevant factor. The proper exercise of the discretion requires the weighing of all relevant facts and circumstances. It cannot be said that as a rule any one matter should be given greater weight than any other matter. The weight given to any matter will depend upon the facts of the case. 23 Mr Moon relied particularly on the extracted statement by Lander J that if a liquidator brings a claim bona fide against directors for breach of their duty, ordinarily a security for costs order will not be made in favour of the director, where the liquidator alleges that the breach of the duty caused the plaintiff's impecuniosity. This is not that case. First of all it is the plaintiff that is the party not the liquidator. In Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120, Meagher JA, with whom Kirby P and Cripps JA agreed, said at 123:

A distinction must be made between cases in which the liquidator personally is the plaintiff, and those when the company (albeit by its agent, the liquidator) is the plaintiff, a distinction which his Honour regarded as pedantic. In the former case - a prototype of which is the misfeasance summons - if the proceeding fails costs will be awarded against the liquidator personally ( Re W Powell & Sons [1896] 1 CH 681), but no order for security for costs will be made against him ( Re Strand Wood ), apparently on the ground that he is exercising a statutory power vested in him personally. Where the company in liquidation is the plaintiff, things are otherwise. In this case, obviously the Court has jurisdiction to order security for costs: that is what s 1335 says. The fact that the company has a deficiency of assets compared to liabilities (a not uncommon feature of companies in liquidation) is evidence of entitlement under the section to an order ( Northampton Coal, Iron and Waggon Co v Midland Waggon Co (1878) 7 Ch D 500 at 503), not (as his Honour seemed to imagine) evidence of immunity from an order. In this regard, it should also be noted that where a company in liquidation sues and fails, there is no jurisdiction in the Court to order the liquidators personally to pay the defendant's costs. 24 Secondly, as I have said above there is no evidence in this application that the first defendant's conduct caused the impecuniosity of the plaintiff. There has been debate as to whether in certain circumstances where liquidators pursue directors, orders for security should be made. However it is important to note that Lander J made clear that the approach he adopted was not a rule. As Hodgson JA said in Green courts considering applications for security for costs against liquidators "should not treat the matter as being entirely at large" at [45]. Each case must be assessed on its own facts. 25 One of the matters raised by Mr Carnovale is that this application should fail at its outset on this point because there is no evidence that an order for security would frustrate the proceedings. Accordingly there is no foundation for the submission that the director would frustrate the litigation by obtaining an order for security. I agree with that submission. 26 I make the orders in short minutes of order initialled by me and dated today. I list the matter before the Registrar on 6 August 2009.

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