Statewide Developments Realty Pty Ltd v The Owners Corporation, SP 77457 & Ors

Judgment 1HIS HONOUR: This is an application under Uniform Civil Procedure Rules 2005, r 49.19 for the Court to review the decision and orders made by a Registrar on 17 October 2013 in which the learned Registrar dismissed the defendant's notice of motion for security for costs. 2It seems that the plaintiff carries on a business of providing caretaker services to owners corporations and other owners of buildings in what I can only assume is a substantial development. There are 43 defendants to the statement of claim. The essence of the claim is that the plaintiff entered into an agreement with a building management committee in 2007 to provide facilities management services in relation to shared facilities in the development. 3The plaintiff pleads that the agreement was made orally in February 2007. It also pleads that in August 2007 the plaintiff and the building management committee entered into a further agreement in the same terms as various agreements entered into with the owners corporations of a number of buildings in the development. 4It also pleads that from November 2007 it and members of the building management committee have conducted themselves on the basis of mutually assumed facts with respect to their relationship; those assumed facts being that they were bound by an agreement in the form of what is called the BNC Agreement. I was told that one of the issues in the proceedings is whether the parties by their conduct have entered into a contract on the terms of an unexecuted document. 5On 30 April 2013 the building management committee gave the plaintiff one month's notice that it terminated its services to the building management committee. I was told that the effect of the notice of termination, if effective, would be to reduce the revenue of the plaintiff in respect of the caretaker services it provides in respect of the development by almost $400,000. 6On 9 August 2013 Kunc J ordered that until further order the defendants in their capacity as members of the building management committee pay a sum of $21,839.84 inclusive of GST to the plaintiff each month subject to, amongst other things, the plaintiff complying with its obligations under the alleged caretaker agreement between the defendants and the plaintiff. In an affidavit that I assume was sworn in support of the plaintiff's application for injunctive relief, a Mr Charlie Touma, who I am told is a director of the plaintiff, deposed that if the building management committee ceased to pay for services before the final hearing of the plaintiff's claim, the reduction in revenue would cause the plaintiff to be financially distressed and there was a high probability that the company would become insolvent. 7By notice of motion filed on 2 September 2013 the defendants sought an order that the plaintiff be required to provide security for their costs in the sum of $179,570.08. That application was dismissed by Assistant Registrar Musgrave on 17 October 2013. The Registrar was satisfied that there was credible or cogent testimony that the plaintiff would be unable to pay the defendants' costs if they were successful and said that the plaintiff is in a precarious financial position. The learned Registrar refused to order security for costs because he concluded that the plaintiff's impecuniosity was the result of the defendants' action about which the plaintiff complains. 8The present application for review does not require the defendants to demonstrate that there has been a material error of fact or principle in the Registrar's order, although the defendants contend that there are such errors. In substance, the present application is a hearing de novo and indeed further evidence was read on this application that was not before the Registrar. 9Pursuant to s 1335 of the Corporations Act 2001 (Cth) and r 42.21(1)(d) there is power to order security for costs if it appears by credible testimony that there is reason to believe that the plaintiff will be unable to pay the defendants' costs if they are successful in their defence. 10I am satisfied that that jurisdictional requirement is made out. 11The further evidence tendered by the plaintiff on this application included balance sheets and profit and loss accounts for the years ended 30 June 2008, 30 June 2009, 30 June 2010, 30 June 2011, 30 June 2012 and 30 June 2013. Those documents I am told were only provided to the defendants by the service of the affidavits today, notwithstanding that some months ago the defendants requested the production of the plaintiff's financial statements. Having said that, the financial statements for the year ended 30 June 2013 were only signed by the accountant who prepared the documents today. The balance sheet as at 30 June 2013 indicates that the plaintiff has a surplus of current assets over current liabilities of a little over $100,000. 12However, it is accepted by the plaintiff that the receivable shown in the balance sheet for trade debtors of $358,167.15 includes a sum of $300,000 owed to the plaintiff by a related company that was the developer of the project, namely, Statewide Developments Pty Ltd. That company has been placed into administration and it is unlikely that that debt will be recovered. It follows that on the latest available financial information the plaintiff has a deficiency of current assets to current liabilities of a little under $200,000. 13The balance sheet nonetheless states that the plaintiff has net assets of $793,741.86. Even allowing for this to be reduced by the irrecoverable debt of $300,000 on the face of the balance sheet, there is reason to think that there should be a surplus of assets available to meet an adverse costs order. However, the only substantial assets that appear on the balance sheet that would be available to meet an adverse costs order are amounts described as other receivables that relate to what appear to be director loan accounts of some $1,971,928. The plaintiff adduced no evidence to show the recoverability of those sums. I cannot assume from the fact that they appear in the balance sheet that the debts are recoverable because the same balance sheet records trade debtors as an asset in the full amount of $358,167, notwithstanding that $300,000 of that amount is not likely to be recoverable. 14Given the lateness of the production of the plaintiff's financial statements which has meant that the defendants have had no opportunity to investigate or test their accuracy, given that at least as to the sum of $300,000 the financial statements appear to overstate the plaintiff's financial position, and given the admission made by Mr Touma for the purposes of the application for injunctive relief as to the precarious financial position of the company if the injunctive relief sought were not granted, I am satisfied that there is reason to believe that the plaintiff would be unable to pay the costs if a costs order were made in favour of the defendants. 15In concluding that the plaintiff's impecuniosity was caused by the defendants' conduct, the learned Registrar referred to the decision of Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 at [85]-[88]. In those paragraphs his Honour considered whether in order for this ground of resistance to an application for security for costs to be made good, it was necessary for the plaintiff company to prove its financial position before the commencement of the defendants' conduct which was the subject of the claim in order to prove that it was the defendants' conduct that caused the plaintiff's financial health to worsen. Austin J (at [88]) doubted that that was a requirement in all cases. The learned Registrar said that it was not contested that the action of the defendants in purporting to terminate the BMC caretaker agreement impacted severely on the plaintiff's profitability. He said that that agreement represented over half of the plaintiff's income. This seems to have been the reason and the only reason for his conclusion that the plaintiff's impecuniosity was the result of the defendants' action, and the learned Registrar did not then go any further in concluding that for that reason the discretion to order security for costs should be exercised in the plaintiff's favour. 16Whilst one can accept that the termination of the arrangement which the plaintiff contends to be a binding caretaker agreement impacted severely on the plaintiff's profitability by reducing its revenue, it does not follow that that conduct should be seen as being the cause or even necessarily the predominant cause of the plaintiff's current lack of impecuniosity to meet a costs order. That is so for a number of reasons. The first is that the result of the injunction granted by Kunc J is that to the extent of some $13,000 per month the plaintiff's revenues have been restored. 17Secondly, it is not disputed by the plaintiff that there have been substantial changes to the plaintiff's revenue over the preceding few years as a result of changes to its business. Whereas in prior years the plaintiff derived income arising from sales of real estate in the development and from the rental management of properties, its revenues now are based wholly or substantially from caretaker agreements into which it has entered. Moreover, the fact that Statewide Development Pty Ltd has gone into administration owing a substantial sum of $300,000 must be another contributing cause of the plaintiff's financial impecuniosity. 18In any event, even accepting that the defendants' conduct about which the plaintiff complains, namely the termination of what the plaintiff says is a binding caretaker agreement, has contributed to the plaintiff's financial impecuniosity, I do not think the discretion not to order security for costs can be exercised for that ground alone without consideration of other factors, in particular the apparent strength of the plaintiff's case that the defendants' conduct was wrongful and whether the plaintiff would in any event be stultified in maintaining the litigation if an order for security for costs were made. 19In KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Beazley J (as her Honour then was) set out a number of principles in relation to applications for security for costs (at 196-197). I need not set them out. One of those principles that her Honour stated was that as a general rule where a claim was prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success. That was said in the context of a statement of another principle that amongst the discretionary matters to be taken into account is the strength and bona fides of the applicant's case. 20Where security for costs is resisted on the ground that it is the defendant's conduct that has caused the plaintiff's impecuniosity, I think the court is entitled and bound to consider the apparent strength of the plaintiff's case, insofar as that can be assessed on the summary application. 21There is little, if anything, in the materials before me from which to make such an assessment. The defendants point to what they say is the absence of any contemporaneous record of the agreements contended for by the plaintiff. The plaintiff's response is that subpoenas have not yet been issued and discovery has not yet been given. 22Whilst I am prepared to accept that the plaintiff's claim is bona fide and has some prospects of success, I am not able to assess the strength of those prospects. 23In any event, I doubt that the allegation, and it is no more than that, that the plaintiff's financial position has been caused by wrongful conduct on the part of the defendants should be a reason for refusing the application for security for costs if it is not shown that to order security would be to frustrate the plaintiff's ability to maintain the proceedings. 24Mr Ashhurst SC for the defendants submitted that on such an application there are two areas of potential prejudice that have to be weighed in the discretionary judgment once the jurisdictional requirement is made out. The first is the potential prejudice to the defendants, that if they succeed in the litigation and obtain an order for costs, they will not be able to recover the costs and will thus be out of pocket. The other is the possible prejudice to the plaintiff if the ordering of security for costs may result in the plaintiff's not being able to bring a good cause of action. I think there is substance to that submission. 25In Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; (1984) 52 ALR 176 the Full Court of the Federal Court said (at 4; 179): "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts." 26In this case there was no evidence that those standing behind the plaintiff would be unable or even unwilling to provide the plaintiff with the means to provide the security that might be ordered. 27In my view, for these reasons security for costs should be ordered. 28In the affidavits read in support of the application for security, the defendants' solicitor deposed that in his estimation, the amount of costs that would be recoverable on assessment reduced to 70 per cent would be a sum of $143,251.48. Mr Davies for the plaintiff pointed to a number of items included in the estimate that Mr Ashhurst SC accepted should not be taken into account in assessing the appropriate quantum of security. The assessment was made on the basis that in the solicitor's view the hearing of the case was estimated to take three days. I am not in a position to say that that assessment is clearly wrong, and indeed, I did not understand that assessment to be disputed by Mr Davies for the plaintiff. 29It is not appropriate or necessary to make a line-by-line analysis of the plaintiff's claim for quantum. The hourly rates of charge appear not to be out of kilter with similar rates that appear in applications of this kind from time to time. The ratio of professional costs estimated to be incurred by the defendants' solicitor with the costs estimated to be incurred in counsel's fees does not indicate that the defendants would not be making efficient use of the resources of the junior bar. Accordingly, I accept the estimate of the likely recoverable costs, subject to a discount of $30,000 that was in substance conceded. 30I think the appropriate order is to round down the amount of security to $110,000. 31For these reasons I order that the orders made by Assistant Registrar Musgrave on 17 October 2013 in relation to the first to 42nd defendants' notice of motion for security for costs filed on 2 September 2013 be discharged. In lieu thereof, I order that the plaintiff provide security for the first to 42nd defendants' costs in the sum of $110,000. I order that that security be provided within 28 days either by bank cheque or otherwise in a form satisfactory to the Registrar. I give liberty to the first to 42nd defendants to apply in the event that the security is not provided within the said period of 28 days. I also give liberty to the defendants to apply on seven days' notice for an order increasing the quantum of security if there has been a material change of circumstances from that envisaged in the evidence read on this application. [Parties address on costs.] 32Having regard to the fact that the plaintiff has obtained an order for security in an amount which is about two-thirds of the amount of security originally sought and having regard to the fact that if the plaintiff succeeds in its claim against the defendants, it could be seen in retrospect that the defendants should have consented to judgment and not put the plaintiff to the costs of defending the successful notice of motion for security for costs, I think the appropriate order is that the costs of the first to 42nd defendants' notice of motion filed on 22 October 2013 should be those defendants' costs in the proceedings and the costs of the first to 42nd defendants' notice of motion filed on 2 September 2013 and the hearing before Assistant Registrar Musgrave should be those defendants' costs in the proceedings. 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: 28 November 2013