Salex NSW Pty Ltd v Congredior Pty Ltd [2021] NSWSC 732 | Case summary

Whether the discretion to order security has been enlivened

The application for security for costs relied on both r 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) and s 1335 of the Corporations Act 2001 (Cth). These include: "42.21 Security for costs (1) If, in any proceedings, it appears to the court on the application of a defendant: … (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or … the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. (1A) In determining whether it is appropriate to make an order that a plaintiff referred to in subrule (1) give security for costs, the court may have regard to the following matters and such other matters as it considers relevant: (a) the prospects of success or merits of the proceedings, (b) the genuineness of the proceedings, (c) the impecuniosity of the plaintiff, (d) whether the plaintiff's impecuniosity is attributable to the defendant's conduct, (e) whether the plaintiff is effectively in the position of a defendant, (f) whether an order for security for costs would stifle the proceedings, (g) whether the proceedings involves a matter of public importance, (h) whether there has been an admission or payment in court, (i) whether delay by the plaintiff in commencing the proceedings has prejudiced the defendant, (j) the costs of the proceedings, (k) whether the security sought is proportionate to the importance and complexity of the subject matter in dispute, (l) the timing of the application for security for costs, (m) whether an order for costs made against the plaintiff would be enforceable within Australia, (n) the ease and convenience or otherwise of enforcing a New South Wales court judgment or order in the country of a non-resident plaintiff. … (2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct. (3) If the plaintiff fails to comply with an order under this rule, the court may order that the proceeding on the plaintiff's claim for relief in the proceedings be dismissed. (4) This rule does not affect the provisions of any Act under which the court may require security for costs to be given." "1335 Costs (1) 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. (1A) Subsection (1) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation. (2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs."
The first contest between the parties was as to the threshold question whether, on the evidence presented by Congredior, the Court could make the finding that there was reason to believe that Salex will be unable to pay the costs of Congredior if Congredior successfully defends the proceedings.
I accept Mr Ogborne's submission that that is the finding which the statutory language of either relevant legislation requires the Court to make so as to enliven the discretion to order security for costs. It is not sufficient for the Court to find that there is a risk of non-satisfaction of costs.
Mr Parish submitted that the Court should make the requisite threshold finding by reference to the following five matters, only the fifth of which was disputed by Salex: 1. Salex had only one ordinary share with a total share capital of one dollar. 2. Salex did not own any real estate. 3. Salex was not trading, it being accepted that Salex was what might be described as a special purpose vehicle brought into existence for the sole purpose of undertaking the development the subject of the Agreement. 4. There had been no response to the January Letter. 5. The Court could conclude that Salex had debts of at least approximately $1,000,000 with no countervailing assets.
I will deal with this last point first. Salex's amended statement of claim alleges that Salex, in the course of performing the Agreement, met costs of approximately $1,000,000 as it was required to do under the Agreement. Contrary to Mr Ogborne's submission that the paucity of evidence meant the Court could not draw any inference on this question, the Court infers from the available material that Salex does have debts of at least that amount and no corresponding assets of capital or real estate. That inference is made on the basis that Salex was a special purpose vehicle and to have met the costs it was required to pay under the Agreement (which was in evidence) it could only do so by equity or debt. If its equity was only $1, then the Court infers that the payment of approximately $1,000,000 was met in the form of debt of some kind. The evidence was that Salex owned no real estate. As for any other assets, Salex had not gone into evidence on its financial position.
In reference to Mr Parish's fourth point, I would add to the failure to respond to the January Letter, as a related or additional factor, the fact that Salex has sought to meet Congredior's application in part by asserting that Congredior should, for the purposes of prosecuting the present application, have issued a notice to produce to elicit the material sought in the January Letter. For reasons I will explain in [22] to [28] below, its failure to respond to the January Letter, when taken together with its present assertion that a notice to produce should have been issued, are highly relevant matters both as to whether or not the threshold question has been satisfied and as to the exercise of the Court's discretion.
The five matters relied upon by Mr Parish, supplemented in the way I have just described, are the basis upon which the Court finds that there is reason to believe that Salex will be unable to pay Congredior's costs if Congredior is successful.
In reaching that conclusion, I have given careful consideration to the strongly argued response by Mr Ogborne which drew to my attention cases such as Owners-Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820 per Bergin J at [32] to [35] (especially at [35] (emphasis added): "Where forensic steps are available to and not taken by an applicant, whose burden it is to prove its case, I am of the view that a Court should be less inclined to draw such an adverse inference"); Walton Construction Pty Ltd v Illawarra Hotel Company Pty Ltd [2008] NSWSC 1248 per McDougall J at [46]; and Shi v Benhamou Designs Pty Ltd [2017] NSWSC 735 per Ward CJ in Eq at [15] to [17]. Those decisions, while not binding on me, are decisions of experienced judges whose views are entitled to great respect, and are reminders that the applicant bears the burden of making out an affirmative answer to the threshold question. An inference in favour of the applicant is unlikely to be drawn in circumstances where only the bare matters of thin capitalisation, lack of real estate and, in particular, failure to respond to a request for information or to then issue a notice to produce are singularly or together features of any given case.
I readily accept that in and of themselves it would not be proper to draw the necessary inference from only thin capitalisation, or only the lack of real estate or other assets, or only the fact that a company is not trading, or only that it has failed to respond to a proper enquiry to explain how it might be able to meet a costs order. However, I do not read any of the dicta relied upon by Mr Ogborne as conclusively precluding the Court in all cases from drawing an inference in favour of an applicant when all of those matters are present. Each such application necessarily turns on its facts and I do not consider it either necessary or useful to engage in a detailed factual comparison between the cases cited by Mr Ogborne and the case at bar.
In any event, the present case has two additional factors which, in my respectful opinion, distinguish this case from the authorities upon which Mr Ogborne relied.
The first of those factors is the inference that Salex must have at least debt of approximately $1,000,000 with no apparent assets on the other side of the ledger (see [15] above).
However, even if I be wrong in drawing that inference, the other matter which takes this case outside the authorities upon which Mr Ogborne relied is the role of s 56 of the Civil Procedure Act 2005 (NSW) in how a party should approach interlocutory matters of this kind. That is not a consideration canvassed in any of those cases.
Mr Parish relied upon my observations in Tugrul v Tarrants Financial Consultants Pty Ltd (No 5) [2014] NSWSC 437 (Tugrul (No 5)) (emphasis added): "68 How do these dicta and the requirements of ss 56 and 59 of the CP Act translate into practice when interlocutory issues arise, including such matters as amendments, strike outs, discovery and security for costs? Assuming compliance by the practitioner with the relevant professional conduct rules, nine points may be made by way of general, practical guidance. Nevertheless, the variety of circumstances confronted in practice means that what follows cannot be exhaustive. 69 First, it must be emphasised that s 56 of the CP Act and its related provisions are not just pious exhortations to be acknowledged and then ignored. They have real consequences for the clients and lawyers in this Court and are to be applied rigorously in the conduct of all litigation, great or small. … 72 Fourth, if one party requires information or an explanation from another, then the request should be reasonable and focused. A clear justification for the request should be given. 73 Fifth, faced with a reasonable request, the recipient should not automatically respond with an unthinking denial of legal entitlement to the information. The obligation to facilitate the overriding purpose will sometimes require information or an explanation to be given to which the party may not be "legally" entitled. Furthermore, if it is information which would be required to be produced in response to a subpoena or notice to produce then it is contrary to the s 56 obligations of a party and that party's lawyers to resist providing it unless and until the Court's process is invoked. If there is concern for the confidence of such material then an undertaking of the kind considered in Hearne v Street [2008] HCA 36; (2008) 235 CLR 125 (which would apply if the information were provided under compulsion) should be sought and given."
I adhere to the views I expressed in that case. The January Letter was a reasonable request for financial information in relation to the question of security for costs. The question of failure to respond to such a request must be viewed in the context of a party's obligations under s 56, as I set out in Tugrul (No 5) at [73]. This includes that information which could properly be the subject of a notice to produce should, in accordance with the parties' obligations under s 56, be produced in response to a reasonable written request without having to invoke the processes of the Court.
Whether or not the correspondence that then ensues between the parties resolves the question of, in this case, security for costs is not to the point. It may, for example, serve another desirable purpose by limiting the issues ultimately presented for determination if an application is filed. In my respectful opinion, a party has an obligation to respond to such a request and its failure to do so is a matter which can ground, together with other factors, an inference that there is reason to believe that it will not be able to meet an order for security for costs, whether or not the applicant has gone on to issue a notice to produce for the same or similar material.
The only authority which the industry of counsel was able to draw to my attention where the impact of s 56 on a security for costs application was considered is the decision of P Taylor SC DCJ in Araz Investments Pty Ltd v Mitry Lawyers Pty Ltd [2019] NSWDC 823. That case bears some factual similarity to this case insofar as there were issues of thin capitalisation and a lack of real estate on the part of the plaintiff, neither of which matters his Honour at [6] concluded was "especially informative of the corporation's financial affairs". As far as that goes, I respectfully agree. In that case, there also appears to have been at least a reply to a request for information, which his Honour said (at [11]) "did provide some evidence of capacity, though it gave no detail and was perhaps less than convincing."
On the question of s 56, the learned judge said this at [17]: "Mitry, in reply submissions, adopted a consideration raised by the Court about whether s 56 of the Civil Procedure Act 2005 had any impact. Mitry argued that s 56 added weight to the failure of the plaintiff to supply financial details when requested, and that a party should not have to use a notice to produce to reveal that information. I was unconvinced. Perhaps the provision of further details in answer to the letter may have dissuaded the defendant from a security application, but perhaps not. It may rather have led to the ventilation of the discretionary factors. Any excursion into the discretionary aspects of the security application would not necessarily be cheaper or quicker than one that relied upon by Araz, it being an unassailable answer to proof of the threshold question."
I have the misfortune to disagree with Taylor DCJ as to his Honour's view of the impact of failure to provide information in the context of s 56 for the reasons set out in Tugrul (No 5) as set out in [23] above.

Whether security for costs should be ordered

Having been satisfied that the Court's discretion to order security for costs has been enlivened, it is then necessary to turn to the discretionary considerations advanced by Mr Ogborne as to why such an order should not be made.
The first of these was the well-known discretionary consideration that the impecuniosity of the respondent has been caused by the conduct of the applicant for security. I accept Mr Parish's submission based on the decision in CBX2 Pty Ltd v National Australia Bank (No 2) [2015] NSWSC 1969 per McDougall J at [6] that in order to make good a submission of that kind a respondent must go into evidence as to its financial position before and after the applicant's conduct to explain why that conclusion is open to the Court. It is not a matter where the fact of the litigation and the nature of the claims made will be sufficient for the Court to infer the conclusion for which the respondent contends. I do not accept Mr Ogborne's reliance on this factor because Salex has not gone into evidence as to its financial circumstances.
The second discretionary matter upon which Mr Ogborne relied was that it would be unfair to order security for costs where "it may be said that a defendant voluntarily assumed the risk of a corporate plaintiff's financial position", citing the decision of Murphy J in the Federal Court in Mecrus Pty Ltd v Industrial Energy Pty Ltd (2015) 327 ALR 523; [2015] FCA 103 (Mecrus) at [68].
The principle had been considered in the case of ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd) as trustee for Harrop Family Trust v Beauville Pty Ltd [2014] VSC 298 (Harrop Engingeering) per Derham AsJ. This was cited by Murphy J in Mecrus at [69] to [70]: "[69] In Harrop Engineering at [12]-[16] Derham AsJ reviewed the authorities and explained: [12] In Letore, McDonald J considered it a relevant consideration that the defendant had engaged in a voluntary contractual relationship with the plaintiff and that it was that contract which gave rise to the proceedings. His Honour considered it reasonable to assume that at the time the defendant entered into the contract it considered it was financially prudent and worthwhile to do business with the plaintiff. This factor weighed against an order for security for costs. [13] In Denward Lane, Hansen J identified this factor in the following terms (although it appears not to have been given much weight in the circumstances of that case): It may be assumed that the defendant considered the plaintiff to be an appropriate company to engage for these purposes, which must have included an assessment of the plaintiff's financial and managerial ability to perform the agreement. Having done so it is relevant that it is under the very agreement thus entered into that this litigation arises. [14] In Industrial Conveying Robson J took this factor into account in refusing to grant security for costs. [15] In Coca-Cola Amatil, the plaintiff (below) had submitted that as Coca-Cola Amatil had chosen to deal with a company, it should be limited to the resources of the company to satisfy any order for costs it might obtain. The judge who heard the application accepted this ground, saying: Now, that falls fairly and squarely within the principle of what Justice McDonald was talking about in the Letore case. It seems to me that the defendant voluntarily entered into a commercial arrangement with a corporation. Well, here even more so. Not only did they enter into this arrangement, they induced this arrangement. But for this arrangement they would have been dealing with a natural person because the exact same services were being provided as I understand it by Mr Andrew through the corporate structure. And if it weren't for that and there had been a similar contractual arrangement for these sorts of services and there had been an alleged breach, it would be Mr Andrew alone who would now be the plaintiff and there wouldn't be an opportunity for the defendant to seek security for costs. [16] The Court of Appeal (Callaway, Buchanan and Eames JJA) concluded that a refusal by the primary judge to order security for the defendant's costs on the basis that included this factor did not disclose any error of principle in the exercise of the judge's discretion. (Citations omitted.) [70] Derham AsJ concluded at [22]: On the other hand, the assumption of risk factor weighs against the ordering of security, and weighs, in my view, heavily. It weighs heavily because when the defendants entered into the Sale and Purchase Agreements they knew of the impecuniosity of the plaintiffs and should be taken to have assumed the risk that if proceedings were commenced by the plaintiffs to enforce the Agreements, the defendants would be sued by impecunious plaintiffs. It is also relevant because it is out of the very Agreements under which the businesses were acquired that the plaintiffs sue the defendants, and do so in circumstances where they, the defendants, have effectively restrained the principal of the plaintiffs from conducting business through the plaintiffs."
There are three reasons why I do not accept this factor applies to the present application.
First, as appears from the passages quoted Mecrus, in Harrop Engineering the defendant was aware of the plaintiff's financial difficulties prior to entering into the relevant contract. There is no suggestion that is the case here.
Second, while it may be said that there was a risk attached to doing business with a special purpose vehicle, more evidence than was before me would be required to make good that this factor would be applicable in any given case. Putting it simply, not all special purpose vehicles will bring with them the same level of commercial risk as contracting parties. It will very much depend upon surrounding commercial circumstances as to whether it could be said that someone has undertaken a particular financial risk in dealing with a particular company, even if the company is strictly a special purpose vehicle.
For example, it may depend upon who stands behind it. A transaction that is given legal effect through a special purpose vehicle incorporated by a large public company will have a very different commercial dynamic to a transaction undertaken through a special purpose vehicle whose shareholders may be individuals embarking upon their first foray into real estate development. Among other things, the former may have considerable reputational reasons to support its special purpose subsidiary, whereas the latter may have no hesitation in relying on the separate corporate personality of their chosen vehicle.
The evidence in this case is insufficient for the Court to conclude whether one could properly say that Congredior simply assumed the risk of Salex's financial position, whatever it might be.
The third reason is, as Murphy J acknowledged in Mercus at [74], the assumption of risk is not necessarily a strong factor, while it does point away from an order for security for costs. In other words, even if it did apply to this case, I would not consider it as outweighing, as a matter of discretion, the Court's view that it is appropriate to order security for costs.
The final discretionary matter to which Mr Ogborne drew attention was what he said was the strength of Salex's case against Congredior. He put for Salex that an examination of the amended statement of claim demonstrated that the contract case was a straightforward one and that, no defence having been filed, Congredior had not attempted, through the submissions made today, to indicate in any detail what its defences would be. While there were some references in Congredior's evidence on information and belief through its solicitor as to certain matters which it said would be disputed, this did not - so it was argued - diminish the strength of the case in contract.
Mr Parish submitted that I should take the view frequently adopted in applications of this kind: where it was accepted, as Congredior did, that the case was brought bona fide and had a reasonable basis, the Court should not enquire further into the plaintiff's prospects of success. They were a neutral factor.
I accept that there may be cases where, on an application of this kind, the Court will be in a position to form a view as to the strength of the plaintiff's case. However, even if I assume in Salex's favour (without deciding) that its contract case is a relatively strong one, I do not regard that as being a sufficient contraindication to the making of an order for security for costs for three reasons.
First, Salex's claim appears to be for at least the approximately $1,000,000 that it expended. Considering the size of its claim, the amount of security which the Court proposes to order at this stage is quite small. The strength of the case may weigh more heavily against an order for security if the amount of security being sought is large. It must also be remembered that a view about the strength of the plaintiff's case formed at an early interlocutory stage does not mean the Court should completely exclude the possibility that the defendant may succeed. The application before the Court is for security by the defendant and not summary judgment by the plaintiff.
Second, Salex has not suggested that the making of an order for security would stultify the litigation. That is a very important consideration when giving weight to what I have been prepared to assume is a strong case in contract on the part of Salex.
Third, as a point of discretion I take into account Salex's refusal to respond to the January Letter, the matters I have set out in [22] to [28] above, and what I can only assume is Salex's forensic decision not to adduce any evidence about its financial position in response to the present application.

Salex NSW Pty Ltd v Congredior Pty Ltd

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