Stratplan Consulting Pty Ltd v Leong [2004] VSC 436

Supreme Court of Victoria|2004-11-03|Before: Balmford J

Practice and Procedures - Application for security for costs - Discretionary factors - Impecunious corporate plaintiff - Effect of s.1335(1) of Corporations Act 2001 (Cth) - Order 62.02 of the Supreme Court Rules.

For the Plaintiff and First Defendant by Counterclaim

For the First Defendant and Plaintiff by Counterclaim

In this proceeding, commenced by summons issued on 16 September 2004, the first defendant and plaintiff by counterclaim ("Mr Leong") seeks the following orders:

1. An order pursuant to Rule 62.02 of the Supreme Court (General Civil Procedure Rules) 1996 ("the Rules"), and also pursuant to section 1335 of the Corporations Act 2001 (Cth) ("the Corporations Act") that the plaintiff give security for the costs of the first defendant of the proceeding and that the proceeding as against the first defendant be stayed until the security is given.

2. An interlocutory injunction restraining the plaintiff, by its director, officers, servants or agents, or any of them, until the conclusion and determination of this proceeding, or until further order, from removing, disposing of, or in any way dealing with, any sums of money standing to the credit of, or held on behalf of, the plaintiff in its account(s) maintained with the Westpac Bank Victoria [sic].

3. That the plaintiff pay the first defendant's costs of this application.

Rule 62.02 of the Rules reads, so far as relevant:

(1) Where --

. . .

(b) the plaintiff is a corporation . . . and there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so;

. . .

the Court may, on the application of a defendant, order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given.

(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.

The substantive proceeding was commenced by writ on 6 June 2003 and is essentially a claim for breach of fiduciary duty. The proceeding has not yet been served on the second defendant.

Mr Leong is a quantity surveyor and the second defendant by counterclaim ("Ms Harris") is an architect. It appears that, having done some work together in the past, they decided early in 2002 to establish a joint venture company undertaking project management, feasibility studies and the like within the health care sector. This arrangement would use their different but complementary skills. In February 2002, in pursuance of that decision, they each acquired one of the two fully paid one dollar shares in the plaintiff, which they still retain, and became the two directors of the plaintiff, which shortly afterwards changed its name to that which it presently bears. It is not necessary for me to make any further finding as to the arrangements which they entered into, and I do not do so.

A dispute arose between Mr Leong and Ms Harris, in the context of a particular contract involving work to be done for the second defendant. Mr Leong resigned as a director on 15 April 2003 and Ms Harris has since then been the sole director. That dispute culminated in the issue of the writ on 6 June 2003. The counterclaim was filed on 17 July 2003.

Ms Harris deposed in her affidavit sworn on 12 October 2004 that since February 2002 the plaintiff had received approximately $85,000 and expended approximately the same amount and that the amount in the plaintiff's bank account at that date (presumably the Westpac account referred to in the summons) was approximately $65. The balance sheet of the plaintiff as at 30 June 2003 shows its principal asset as trade debtors of $39,160, and the only non-current assets as plant and equipment of $6,552. Mr Byrne, the solicitor for Mr Leong, deposes in his affidavit of 27 September 2004 that searches disclose that the plaintiff owns no real estate in Victoria. On 8 October 2004 the solicitors acting for the plaintiff advised Mr Byrne that the plaintiff was currently not undertaking any business.

Mr Byrne deposes in his affidavit of 27 September 2004 as to his experience in litigation in this Court. He estimates his client's costs and disbursements on a party-party basis from 17 September 2003 up to and including the first day of trial, at $27,410. Mr Marantelli indicated that in his client's view that estimate was fair and reasonable. It appears that 17 September 2003 was the date on which Mr Byrne initially informed the solicitors for the plaintiff that he was taking instructions as to an application for security for costs.

I find that there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of Mr Leong if ordered to do so, and thus the precondition for the exercise of the Court's discretion to make an order for security for costs, whether under the Rules or under the Corporations Act, is met.

The discretion of the court to make such an order is unfettered, [1] although there are a number of matters normally taken into account in the consideration of whether to exercise that discretion.

The Court of Appeal held in Ariss v Express Interiors Pty Ltd [2] that, while the court should approach an application for security for costs without any predisposition either in favour of the application or against it, nevertheless the impecuniosity of the plaintiff company is not only the occasion for the exercise of the Court's discretion, but a factor, and often a most significant factor, in the exercise of that discretion.

On the material before me it would be premature to form any view as to the merits of the plaintiff's claim. Mr Pirrie, for Mr Leong, sought to persuade me that the claim should not succeed. Mr Marantelli, for the plaintiff, relied on the following passage from the judgment of French J in Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd [3]:

Where there is a claim prima facie regular and disclosing a cause of action, I see no reason why the court would, in the absence of evidence, proceed on the basis that the claim was other than bona fide with a reasonable prospect of success.

There is affidavit evidence before me from Mr Leong disputing aspects of the plaintiff's claim. However, this is not a matter to be tried on affidavit evidence alone, and I do not consider it appropriate to endeavour to form any view as to the merits.

Nor am I able, that being so, to either accept or reject the submission of Mr Marantelli that the conduct of Mr Leong contributed to the financial position of the plaintiff.

As to whether the granting of the application would have the effect of stultifying the claim of the plaintiff, the inability of the plaintiff itself to meet the costs must be considered in the light of the position of the shareholders. In the present circumstances, although there are two shareholders, it is the position of Ms Harris which must be considered.

Mr Pirrie referred to the passage in the judgment of the New Zealand Court of Appeal (Cooke, McMullin and Somers JJ) in Attorney-General v Transport Control Systems [4], cited by Habersberger J in St-Gobain RF Pty Ltd v Maax Spa Corporation Pty Ltd [5], to the effect that in the absence of evidence from the shareholders as to financial hardship, it was appropriate to infer that an order for reasonable security for costs would be met. He pointed out that Ms Harris in her affidavit makes no claim of financial hardship and does not suggest that the granting of the application would stultify her claim.

Mr Marantelli drew my attention to evidence in the affidavit of Mr Leong that over the last four or five years Ms Harris had principally undertaken part-time and casual work, having taken maternity leave for the birth of her children and the care of those children. In his submission, the Court could infer that a person in that situation, and being a director of a two-dollar company which was not carrying on business, would be unable to provide security for a costs order on the scale envisaged.

It does not appear to me that I can draw that inference; there are many possible sources from which a person in the situation of Ms Harris might be able to draw funds, and it is not necessary to particularise them. In any case, the onus lies on the plaintiff to show that stultification of the proceeding would result from the granting of the application,[6] and that onus cannot be discharged by the drawing of inferences. I am not in a position to find that the granting of this application would stultify the plaintiff's claim.

Mr Marantelli submitted that effectively this was a dispute between two individuals, not between an individual and a company, and security for costs could not (except in certain specified cases not here relevant) be ordered against an individual. He submitted that the real plaintiff here was Ms Harris, and accordingly it was not appropriate to make an order for security for costs against the plaintiff. However, the plaintiff has the benefit of corporate structure, and must bear its burdens, one of which is vulnerability to the making of such an order. [7]

Mr Marantelli submitted that the delay which had occurred between the initial raising of the subject of security for costs and the issue of the summons justified the refusal of the application. It was on 17 September 2003 that Mr Byrne initially informed the solicitors acting for the plaintiff that he was taking instructions as to an application for security for costs, and asking whether the plaintiff was itself prepared to post security without requiring a court order. He wrote again on this matter on 28 September 2003 and on 11 February 2004, when he referred to a discussion between solicitors on that subject having taken place on 25 November 2003. He received no reply to any of these letters as to the intention of the plaintiff, and the summons was finally issued on 16 September 2004, twelve months after the initial letter.

Mr Marantelli pointed out that since the last letter on 11 February 2004 there had been three sets of interlocutory orders, on 19 February 2004, 10 June 2004 and 5 August 2004 (although the plaintiff had been represented on only one of those occasions) and some interlocutory steps had been completed. Mr Leong had raised the spectre of an application for security for costs, but had allowed the plaintiff to incur further costs without initiating such an application. It was immaterial that he had heard nothing from the plaintiff about its intentions; he should not have let twelve months go past without taking any steps in the matter. The plaintiff, he submitted, was entitled to know its position in regard to security for costs before embarking on the expenditure involved in those interlocutory proceedings and activities.

However, while the delay of twelve months was inappropriate, the plaintiff had been on notice since receiving the letter of 17 September 2003 of Mr Leong's intention to seek security for costs, and any expenditure by it after that date was undertaken in the light of that knowledge. [8] The interlocutory steps taken by it were the filing on 9 March 2004 of a request for further and better particulars of the defence and counterclaim and the filing on 5 August 2004 of further and better particulars of the statement of claim and further and better particulars of the reply and defence to counterclaim.

The final consideration which appears to me to be relevant in all the circumstances of this case is the existence of the counterclaim, in the hearing of which substantially the same facts are to be considered as in determining the plaintiff's claim. I note that Smart J of the Supreme Court of New South Wales said in Sydmar Pty Ltd v Statewise Developments Pty Ltd [9] that "The court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-action covering substantially the same factual areas proceeds." However, as I have said, there is no evidence before me from which I could find that the plaintiff's case will be stultified by the making of the order, and accordingly I do not regard this consideration as significant in all the circumstances.

Taking into account the matters to which I have referred, I consider, on balance, that I should exercise my discretion to make an order in the terms sought by Mr Leong in paragraph 1 of the summons.

Mr Pirrie indicated that despite the small amount deposed by Ms Harris to be currently standing in the Westpac bank account of the plaintiff, [10] he wished to proceed with the claim for an interlocutory injunction restraining the plaintiff from dealing with money in that account. In any case, the solicitors for the plaintiff had indicated in a letter of 6 October 2004 that their client was prepared to consent to that order, and Mr Marantelli did not resile from that position. Accordingly an order will be made in the terms sought in paragraph 2 of the summons.

For the reasons given, there will be orders in terms of paragraphs 1 and 2 of the summons. I invite submissions as to the form of the orders and as to costs.

[1] Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] VSCA 43; [1999] 2 VR 191 at 195 per Winneke P and Phillips JA

[6] Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440 at 446

[7] See Epping Plaza Fresh Fruit and Vegetables Pty Ltd (supra) at 195 per Winneke P and JD Phillips JA and at 202 per Callaway JA

[8] See the judgment of Hodges J in Ballance v Smith (1895) 1 ALR 144

At a glance

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Judgment (44 paragraphs)

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Cases Cited (3)