Shi v Benhamou Designs Pty Ltd

Supreme Court of NSW|2017-05-30|Before: Ward CJ

Judgment

HER HONOUR: By amended notice of motion dated 4 May 2017, Ms Xiao Bei Shi (the plaintiff/cross-defendant, Ms Shi) sought orders pursuant to s 1335 of the Corporations Act 2001 (Cth) and/or r 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW) for the provision by the cross-claimant (Benhamou Designs Pty Ltd (Benhamou Designs)) of security in the sum of $85,455 for her costs in defending the cross-claim filed on 9 September 2006 by Benhamou Designs. Benhamou Designs opposed the application for security for costs. In that amended notice of motion, Ms Shi also sought orders for the production of documents specified in a notice to produce filed on 22 March 2017 or, in the alternative, discovery of particular categories of documents.
Following the hearing of Ms Shi's application, I dismissed the application for security for costs indicating that I would provide brief written reasons in due course. After a short adjournment for the parties to consider Benhamou Designs' application for production of documents, I made orders by consent in respect of the production of documents in a more limited scope than had originally been sought by it.
My reasons for dismissing the application for security for costs are set out below.

Principles

The principles applicable on an application for security for costs were not in issue. It was accepted that the reference to a "plaintiff" in s 1335 of the Corporations Act (and r 42.21(1)(d) of the UCPR) includes a cross-claimant, such as Benhamou Designs.
The test as to whether there is reason for the requisite belief is not a demanding one (see Beach Petroleum NL v Johnson [1992] 7 ACSR 203; Meni's Tailoring & Alterations v Jeanswest Corporation Pty Ltd [2003] FCA 1108; HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87) and it has been said that there is a low threshold (Living Spring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [15]-[16]).

Submissions

The principal issue on the present application was whether Ms Shi had satisfied the threshold question of establishing that there is reason to believe that Benhamou Designs will be unable to pay the costs of the litigation if unsuccessful (see Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [29]; Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301; [2014] NSWCA 65 at [17]-[20], [56]-[59]).
The basis on which Ms Shi argued for such a conclusion was in essence, that: Benhamou Designs is thinly capitalised with a paid up capital of only $10; there is evidence that it has been the subject of an adverse judgment in the sum of $275,385.99 on an unrelated matter; correspondence between the solicitors for Ms Shi with one of the third party suppliers said to have been engaged by Benhamou Designs to provide goods for the property suggests that there is a dispute as to whether payment has been made by Benhamou Designs for the goods in question; and that Benhamou Designs has not responded to a letter dated 12 December 2016 from Ms Shi's solicitors in which concern was expressed as to the financial viability of Benhamou Designs and evidence was sought as to the solvency of Benhamou Designs and its ability to meet any judgment and order for costs in respect of the statement of claim and cross-claim. The letter also referred to a concern on the part of Ms Shi that Ms Weiss was in the process of "severing ties" with the jurisdiction. Emphasis was placed by Ms Shi on the lack of a response to that letter.
Benhamou Designs relied upon what was said by Bergin J (as her Honour then was) in Owners-Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820 for the proposition that an applicant for security will not discharge the onus it bears merely by pointing to an unfulfilled demand to the other party to provide evidence as to its ability to satisfy an adverse costs order. In that case, her Honour said (at [33]-[35]): It is important to remember that the defendant has the evidentiary burden of proving it is entitled to the order it seeks. The party who asserts must prove in order to succeed: Scott Fell v Lloyd (Official Assignee) (1911) 13 CLR 230 at 241; Bankinvest AG v Seabrook (1988) 14 NSWLR 711 at 717 per Kirby P recently referred to in Idoport Pty Ltd v National Australia Bank & Ors [2001] NSWSC 744 Einstein J at p. 30 [60]. The defendant had the capacity to serve a Notice to Produce on the plaintiff for its accounting records and financial statements it is required to keep (s 103 and s 106). It also had the capacity to serve a Notice to Produce on the plaintiff to produce minutes of its Annual General Meetings and any records relating to the charging of levies and estimates of outgoings. None of this was done. The rule in Jones v Dunkel and the statements of Jordan CJ and Moffitt J above referred to, do not persuade me that where a defendant demands evidence and a plaintiff refuses to provide it and puts a defendant to proof in an application such as this, the Court should simply infer adversely to the plaintiff. The adoption of such an approach by the plaintiff may cause some suspicion but what is required here is evidence which, viewed objectively, provides the relevant "reason". 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.
Ms Shi sought to distinguish Walter Construction Group (see T 5.12) on the basis that in that case the plaintiff, against whom security for costs was sought, had asserted in correspondence that it would be able to meet any adverse costs order whether by drawing on existing reserves or by imposing a special levy, and her Honour had been asked to apply the rule in Jones v Dunkel in order to draw an adverse inference from the failure of the plaintiff to tender documents establishing its capacity to pay.
Benhamou Designs contended that the reasoning in Walter Construction Group was in no way dependent on the fact that the defendant had made the said assertions in its correspondence; rather, the gravamen of the decision was the failure by the applicant (the defendant) to put before the court the appropriate evidence. It was submitted that this principle was equally applicable in the present case (see T 9). Benhamou Designs pointed out that Ms Shi had the capacity to issue a notice to produce to Benhamou Designs for the production of its accounting records and financial statements but had not done so. It was submitted by Benhamou Designs that the suggestion that the threshold test had been satisfied because it had adduced no evidence to combat the concerns raised by Ms Shi on 12 December 2016 impermissibly sought to reverse the onus of proof in a way that was inconsistent with principle and with Walter Construction Group.

Determination

The fact that Benhamou Designs has not responded to Ms Shi's expressed concern as to its ability to meet an adverse costs order, and has put Ms Shi to proof on her application for security for costs, does not enable the inference to be drawn that Benhamou Designs is unlikely to be in a position to meet an adverse costs order.
The fact that the company is "thinly capitalised" says nothing about its assets and liabilities nor does the fact that it has been the subject of a judgment debt in other proceedings enable me to form a view as to its overall financial position. Similarly, the fact that there may be disputes with third party suppliers overseas does not provide me with a sufficient basis to form the requisite view.
Therefore, even having regard to the undemanding nature of the test, I was not persuaded on the evidence that the test had been met and in those circumstances, the threshold for the making of an order for security for costs was not satisfied.

Discretionary matters

Submissions were made as to the matters to which the Court should have regard in exercising its discretion were I to have reached the alternative view (see UCPR r 42.21(1)(1A), which sets out a non-exhaustive list of matters to which the Court may have regard corresponding in large part to the discretionary considerations identified by Beazley JA (as her Honour then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198; [1995] FCA 76).
In that regard, Ms Shi argued (but this was disputed by Benhamou Designs) that she had not delayed unreasonably in applying for security for costs; noted that there had been no assertion by Benhamou Designs that an order for security for costs would stultify its claims (and that there was no evidence as to the financial position of the second defendant as its sole director and controlling mind); and that there was no suggestion that the impecuniousness of Benhamou Designs arose from matters the subject of the cross-claim (rather, Ms Shi contends, the available evidence suggests that Benhamou Designs' impecuniousness stems from the choice of its incorporator to "thinly capitalise it"). It was said that the complaint made by Benhamou Designs as to the jurisdiction in which the proceedings had been commenced (the Equity Division rather than the District Court) was not correct in that particulars in respect of additional damages (relating to goods delivered that were said not to have been of merchantable quality) were likely to take the total beyond the $500,000 threshold referred to in r 42.34 of the UCPR.
There was criticism by Benhamou Designs as to the manner in which Ms Shi provided its estimate as to the quantum of costs likely to be incurred. Benhamou Designs argued that the reasoning of Ms Shi's solicitor as to the basis for the estimated costs is not made clear in Mr Pozniak's affidavits and there was no distinction between past costs that had already been incurred (including, relevantly, costs incurred prior to the issue of the cross-claim) and costs likely to be incurred in the future.
Had I been satisfied that the threshold question was satisfied, I would have been disinclined to order security for costs in circumstances where Benhamou Designs is in my opinion essentially in the position of a defendant (see UCPR r 42.21(1A)(e)). It was conceded by Counsel for Ms Shi that the factual matrix of her claim and that of Benhamou Designs' cross-claim was largely the same. Benhamou Designs submits that its cross-claim is essentially defensive in nature in the sense that it impeaches Ms Shi's claim and arises out of the same or essentially the same factual matrix (referring to Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd [1999] NSWCA 16 at [15]; Bevwizz Group Pty Ltd v Transport Solutions Pty Ltd [2008] NSWSC 1399 at [21]). While I accept that that is but one of a number of factors to take into account, in the present case it seems to me that it would have been determinative against making an order for security for costs.
The position is similar to that considered in Sydmar Pty Ltd v Statewise Developments Pty Ltd [1987] 11 ACLR 616 (at 626-627), namely that the Court would be slow to allow a situation where an action is potentially stayed (here, Benhamou Designs' cross-claim) if there is in fact an inability to provide security where another claim covering substantially the same factual area (here, Ms Shi's principal claim) would be able to proceed. The cross-claim in the present case does not on its face satisfy the description given (at 302) by Legoe J in John Arnold's Surf Shop (in liq) v Heller Factors Pty Ltd [1979] 22 SASR 20 as one in which the cross-claimant is "seeking to go out for the recovery from the opposition by attack".
In any event, the issue of discretion did not arise as I was not satisfied as to the threshold question.
For those reasons, I dismissed the application for security for costs and ordered that the costs referrable to the bringing of that application be paid by Ms Shi.

Amendments 16 June 2017 - Coversheet - amendment to representation Par [7] - dates of Mr Pozniak's affidavits DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 16 June 2017

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