Siennamia Investments Pty Ltd v Carrano Investment Holding Pty Ltd & Anor

Procedural background

1. The plaintiff's notice of motion, as amended, was listed for hearing on 26 April 2022. In the course of the hearing it became apparent that the real interlocutory issue in dispute in the proceedings concerned the defendant's notice of motion seeking security for costs from the plaintiff company. That motion was then listed for hearing on 11 May 2022.
2. On 26 April 2022, before the plaintiff's motion had resolved, orders were made vacating the 11 May 2022 hearing of the defendants' motion and adjourning the plaintiff's motion part-heard to 29 July 2022 so that both motions could be more conveniently determined at that time if the proceedings remained on foot after a Court ordered mediation.
3. The order for mediation was made because it was apparent that this litigation would involve great expense to the parties. Accordingly, pursuant to s 26 of the Civil Procedure Act 2005 (NSW) ("CP Act"), the parties were ordered to engage in a mediation to be completed before 30 June 2022 in respect of all issues in dispute between them. That mediation did not resolve the dispute, but it has nevertheless served to narrow the interlocutory issues, and it has possibly provided an opening for further work to be undertaken with a view to resolving the overall issues in dispute.

Issues

1. The remaining issue requiring determination in this interlocutory dispute concerns the threshold question of whether the conceded absence of evidence of the plaintiff's financial circumstances as to its ability to meet an adverse costs order, justifies the Court in proceeding to consider the customary questions that determine if the discretion within the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"), r 42.21 should be exercised for making an order for security for costs as sought by the defendants.
2. This requires a consideration of the merits and prospects of success of the plaintiff's claim, and a consideration of the genuineness of the proceedings where the underlying facts alleged by the plaintiff, have not been conceded by the defendants. The defendants are presently seeking security for costs in the discounted sum of $150,000, which is an estimate. A hearing date is well over 12 months away and there are many preparatory steps that remain to be completed before the proceedings are ready for trial. In these circumstances, anticipatory costs estimates involve many uncertain assumptions.

Parties and actors

1. The plaintiff, Siennamia Investments Pty Limited ("Siennamia"), and the first defendant Carrano Investment Holding Pty Limited ("CIH"), owned and operated a Fuji Xerox dealership in Lismore, in northern New South Wales. That business was operated through the entity Ikon Technology Group Northern Rivers Pty Ltd ("Ikon"). A dealership agreement subsisted between Ikon and Fuji Xerox which enabled Ikon to operate that dealership.
2. In 2018, the entities Siennamia and Ikon sold their dealership to the entity My Colour Investments Pty Ltd ("My Colour"). Subsequent to that sale of shares, in these proceedings the plaintiff, Siennamia claims that Fuji Xerox, by its conduct, "effectively forced" Siennamia to sell its entire holding of 175 shares in Ikon to My Colour, thereby allegedly resulting in Siennamia incurring significant loss and damage. The principal actors involved in the circumstances that have led to the dispute between the parties are as follows: 1. Mr Juan Aguilar is the director of the plaintiff Siennamia; 2. Mr Antonio Carrano is the third defendant in the proceedings. He is also a director of CIH, which is the first defendant in the proceedings; 3. Mr Daniel Abal is the fourth defendant in the proceedings. He is also a director of the second defendant Abal Investment Holdings Pty Limited ("AIH"); 4. Mr Peter Fiori is the initial director of Storata Pty Limited ("Storata"), a company that ended up trading in competition to the plaintiff Siennamia.

Factual background to the plaintiff's claim

1. In order to determine the application for security for costs it becomes necessary to consider the factual background to the plaintiff's claim and the present procedural dynamics.
2. Pursuant to the Fuji Dealership Agreement that subsisted between Ikon and Fuji Xerox, Ikon sold "Fuji" branded printers, photocopiers and software to businesses in the Northern Rivers region. Ikon also earned some of its income from the supply of consumables for those products.
3. Ikon had paid $2,270,000 for the dealership. This was in the form of an up-front payment of $1,500,000 with the balance of $770,000 paid over the ensuing 12 months.
4. On 14 February 2022, Messrs Aguilar, Carrano and Abal became directors of Ikon. Shortly afterwards, on 2 March 2022, Ikon was granted a licence to operate a Fuji Australia Dealership in the Northern Rivers region of New South Wales.
5. In that set-up, the corporate entities Siennamia, CIH, and AIH were the initial shareholders of Ikon, each holding one-third of the shares, namely 65 shares each.
6. The relationships between the above entities and parties and their directors, the actors identified at paragraph [8] above, became complicated by the concurrent commercial activities of Storata Pty Limited, a company that was trading from the same premises as Ikon. Storata was dealing and trading in products that were in competition to the sale and distribution of Fuji products. Storata, was incorporated 2 years after Ikon had commenced trading. The initial director of Storata was Mr Fiori. The commercial activity of Storata was in competition to the plaintiff's business activity.
7. The plaintiff Siennamia claims that Mr Fiori was operating Storata's business as the representative of undisclosed principals, namely, the defendants, Messrs Carrano and Abal. Subsequently, on 26 October 2018, Mr Carrano became a director of Storata whilst it was trading from the same premises as Ikon.
8. In these proceedings, Siennamia's claim for damages is based on the proposition that those arrangements were in blatant breach of the Fuji Dealership Agreement (Exhibit "C"), as well as being in breach of the fiduciary obligations of the directors who are defendants in these proceedings. Those matters are established, prima facie, the plaintiff has a strong justiciable case. The defendants are yet to file their defences.
9. The defendants' present application for security for costs of $150,000 relates to both past costs claimed to have been already incurred, and likely future costs. The defendants' estimate of their costs as detailed in the affidavit evidence is for past costs of $54,670.20, together with costs of the costs application of $17,605, and future costs in the range $179,019 to $225,974. Those estimates yield the range $251,294.20 to $298,249.20. The defendants estimate that of that range, the estimate of costs that might be recoverable on a party-party basis would be in the stated range $202,005.20 to $246,160.20 before rounding down the figures.
10. The defendants submitted that the above costs estimates did not include the costs of the recent mediation or the costs involved in the past applications to set aside subpoenas and notices to produce. It is not clear as to why those additional sources of costs were not included in those estimates. Be that as it may, the defendants submit that on the required discounted broad-brush approach to identifying the amount that should be ordered as security for costs, the sum of $150,000 would be reasonable. The plaintiff disputes that submission both as to the amount and as to entitlement.

Evidence

1. No oral evidence was called on the interlocutory issues. Helpfully, the parties produced extensive Court Books: Exhibit "A", Vol 1 - 2, pp 1 - 643. In addition, Siennamia relied on the terms of the Fuji Xerox Dealer Agreement to establish the genuineness of its claim: Exhibit "C". The affidavit evidence was as follows: 1. The affidavit of Deegan Fitzharris, solicitor, sworn 21 April 2021, with attached correspondence; 2. The affidavit of Juan Gabriel Aguilar, sworn 17 June 2021, annexing Exhibit "JGA1", pp 1 - 153, and Exhibit "JGA2", pp 1 - 39; 3. The affidavit of Mark Geoffrey Streeter, solicitor, affirmed 16 August 2021, with an annexed request for particulars dated 6 July 2021; 4. The affidavit of Deegan Fitzharris, solicitor, sworn 13 October 2021, with attached exhibits; 5. The affidavit of Deegan Fitzharris, solicitor, sworn 25 March 2022, with attached costs estimates; 6. The affidavit of Deegan Fitzharris, solicitor, sworn 1 April 2022, with annexed correspondence; 7. The affidavit of Mark Geoffrey Streeter, solicitor, sworn 6 April 2022 with Exhibit "MGS-1", pp 1 - 39; 8. The further affidavit of Juan Gabriel Aguilar, sworn 14 April 2022.
2. The 1 April 2022 and 21 April 2022 affidavits of Mr Fitzharris, filed on behalf of the defendants, dealt with the subpoena and notice to produce issues that are no longer in dispute. The 13 October 2021 and 25 March 2022 affidavits of Mr Fitzharris dealt with costs estimates.
3. The 17 June 2021 and 14 April 2022 affidavits of Mr Aguilar filed on behalf of the plaintiff set out some details of historical and factual matters, including an explanation of the circumstances which have limited his access to relevant records and documents, and provide some detail of the factual basis for Siennamia's claim against the defendants.
4. The 16 August 2021 affidavit of Mr Streeter filed on behalf of Siennamia dealt with procedural matters and annexed a letter dated 6 July 2021 supplying the defendants with replies to a request for further and better particulars that were sought in a letter dated 21 May 2021.
5. The 6 April 2022 affidavit of Mr Streeter filed on behalf of Siennamia dealt with matters of procedural history and matters to do with the notices to produce documents which are no longer the subject of dispute.

Legal principles

1. Any decision made on the application for security for costs involves an unfettered discretion that must be exercised in accordance with the dictates of justice in the particular case: s 58(2) of the CP Act. Section 98 of the CP Act confers a wide discretion on the Court concerning the appropriate orders to be made for costs in proceedings before the Court. Any exercise of discretion should be accompanied by appropriate reasons: House v The King (1936) 55 CLR 499; [1936] HCA 40. It is well-settled that a security for costs application should not be turned into a mini trial of merits of the proceedings: Mohareb v Harbour Radio Pty Ltd [2020] NSWCA 231 at [44].
2. UCPR r 42.21 provides as follows: 42.21 Security for costs (1) If, in any proceedings, it appears to the court on the application of a defendant - (a) that a plaintiff is ordinarily resident outside Australia, or (b) that the address of a plaintiff is not stated or is mis-stated in his or her originating process, and there is reason to believe that the failure to state an address or the mis-statement of the address was made with intention to deceive, or (c) that, after the commencement of the proceedings, a plaintiff has changed his or her address, and there is reason to believe that the change was made by the plaintiff with a view to avoiding the consequences of the proceedings, or (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 (e) that a plaintiff is suing, not for his or her own benefit, but for the benefit of some other person and there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so, or (f) that there is reason to believe that the plaintiff has divested assets with the intention of avoiding the consequences of the proceedings, 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. (1B) If the plaintiff is a natural person, an order for security for costs cannot be made merely on account of his or her impecuniosity. (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.
3. The terms of UCPR r 42.21 pick up the well-settled principle that preceded the Uniform Civil Procedure Rules 2005 (NSW) to the effect that the Court is invested with an absolute discretion as to whether a security for costs order should be made and if so, on what terms: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542, at p 545.
4. An important factor to be considered in determining whether a security for costs order should be made is whether the proceedings would likely be stifled or stultified by such an order, as a conclusion to that effect is a powerful reason for not ordering security for costs: Pacific Acceptance Corporation Ltd v Forsyth [1967] 2 NSWR 402; Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302, at [96].
5. In considering whether to make an order for security for costs, amongst the matters of relevance set out in UCPR r 42.21(1A), it is necessary to objectively determine whether the plaintiff's claim has arguable merit. At this interlocutory stage, absent identifiable defences, the bar for determining that question is not high: General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125; [1964] HCA 69.
6. In my view, in addition to considerations concerning the procedural stage of the proceedings, the critical factors to be taken into account in deciding whether to order security for costs against the plaintiff are, the seriousness of the subject matter of the litigation, and questions of whether the proceedings relate to a genuine dispute, where the plaintiff's pleaded claim has arguable merit.

Consideration and determination

1. In my assessment of the affidavit evidence at this interlocutory stage, and without expressing a concluded view, the conduct of the defendants about which the plaintiff complains warrants serious forensic examination.
2. The allegations made in the plaintiff's amended statement of claim in the context of the agreement comprising Exhibit "C", strongly suggests the plaintiff's claim has merit. At this threshold level of analysis the plaintiff's claim appears to be reasonably arguable, with reasonable prospects of success.
3. At this stage, neither of the defendants have filed defences to commit themselves to an identifiable and factually particularised position in the litigation. It is therefore not possible to form a reliable view of the range of likely outcomes on contested matters of fact. In my view, those circumstances, and the stage at which the defendants' security for costs motion has been brought, absent any filed defences, strongly indicate that the defendants are seeking to stifle the plaintiff's claim against them.
4. Siennamia does not contest the initial threshold issue of the plaintiff's financial position that engages the Court's jurisdiction for an order for security of costs. The threshold issue is therefore taken to be satisfactorily established. However, the fact that the threshold issue is taken to be established does not necessarily mean that, without more, security for costs should be ordered.
5. On the subsidiary question, in this case, there is no reasonable room for doubt that the parties are genuinely and legitimately engaged in a substantive commercial dispute that is important to their respective rights, entitlements and interests. Absent any filed and particularised defences, it is not possible to form a reasoned preliminary view of the strength or otherwise of the position of the defendants in the litigation concerning merits. There have been no admissions or payment into Court by the defendants.
6. In considering the dictates of justice raised by the plaintiff's pleaded case, the litigation conduct of the defendants is a relevant matter to take into account, especially with regard to identifying the real matters in dispute: s 56 and s 58(2) of the CP Act. In that regard, the absence of filed defences that define the issues is a material factor that is missing from the materials relevant to the consideration.
7. Another relevant factor to be considered is the estimated quantum of the costs sought by the defendants as security at such an early stage of the proceedings. In my view, absent filed defences, the amount of $150,000 as sought by the defendants at this stage appears unreasonably excessive, and is based upon speculative assumptions that are ill-defined by reference to the issues in dispute as defined by pleadings: Dare v Pulham [1982] HCA 70; 148 CLR 658, at [6].
8. In those circumstances, I am persuaded to conclude that the defendants' motion for security for costs is intimidatory in its nature, and is aimed at stifling the plaintiff's action. As such, on principle, it should not succeed.

Disposition

1. On the foregoing analysis, I consider that the dictates of justice require that the notice of motion filed by the defendants seeking that the plaintiff provides security for costs should be refused and dismissed, with costs.

Costs

1. As the plaintiff has been successful in resisting the defendants' application for an order for security for costs, the defendants should pay the plaintiff's costs of the dismissed notice of motion on the ordinary basis unless a party can show an entitlement to some other costs order, for which there should be liberty to apply.

Orders

1. I make the following orders: 1. The defendants' notice of motion filed on 13 October 2021 seeking an order pursuant to UCPR r 42.21, that the plaintiff provide security for costs, is dismissed; 2. The defendants are to pay the plaintiff's costs of the dismissed motion; 3. The exhibits may be returned; 4. Liberty to apply on 7 days notice if further or other orders are required.

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: 19 August 2022