TC Build Pty Ltd v STM123 Pty Ltd

TC Build Pty Ltd v STM123 Pty Ltd - [2023] NSWSC 322 - NSWSC 2023 case summary — Zoe

[5]

TC Co

In January 2020, TC Build Co Pty Ltd (TC Co) was incorporated. Moitly Boss and STM123 each held 50% of the shares.
Mr Cull said that, given the large number of projects expected to commence in 2020, and with more projects in the pipeline, he and Mr Blank agreed to set up a separate entity which would contract with the subcontractors on Mr Blank's projects only. The works carried out on behalf of Mr Blank would not be intertwined with the other half of TC Build's construction work carried out for third parties. Mr Blank's explanation as to why a separate corporate entity was established is slightly different, but the difference does not matter for the purposes of this application. Both agree that the new company would deal with only STM's projects. TC Build continued to render invoices in respect of the O'Brien Street project (with a markup of 8%).
In April 2020, invoices began to be rendered in respect of a new project in Wentworth Avenue, Point Piper. Invoices were rendered by TC Co. The builder's margin applied was 20%. According to Mr Cull, Mr Blank asked that the STM projects which he intended to sell should have a greater margin of 20%, while other projects which he intended to keep should have no markup. A reconciliation would be done later. Mr Blank did not deny this. Consistently with this, in May 2020, TC Build rendered an invoice in respect of the O'Brien Street project, but with no markup.
In May 2020, invoices began to be rendered in respect of a new project in Fletcher Street, Tamarama. The invoices were rendered by TC Co. 355 In evidence is a building contract between STM and TC Co in respect of the Fletcher Street project, ostensibly dated 24 March 2020, which recorded that the builder was entitled to the cost of works but no additional fee. 525 Where the contract bears a copyright stamp of June 2020, fairly obviously, the contract was back-dated. Whilst it was suggested to Mr Blank in cross-examination that he was responsible for this, the contract appears to have been executed by both he and Mr Cull. It is neither necessary nor appropriate on an application such as this to fix responsibility to any particular person.
In May 2020, TC Build began to render invoices for a new project in Old South Head Road, Watsons Bay.
In August 2020, invoices began to be rendered for a new project in Lamrock Avenue, Bondi Beach. The invoices were issued by TC Co. On 16 August 2020, Mr Blank sent an email to the project manager advising, "There is no management fee on Lamrock, please correct this." On 20 August 2020, Mr Blank emailed the project manager again, "Please remove the builder's margin in the budget". Such requests are consistent with the building contract between TC Co and STM in respect of the Lamrock Avenue project, which records that the builder was entitled to the cost of works with no additional fee. The contact is ostensibly dated 22 May 2020 and I repeat what I have said in respect of back-dating at [17].

[10]

Hoz Construction

On 2 May 2022, Hoz Construction was incorporated. The third defendant, Ian Hossack, is Mr Blank's brother-in-law and a director of Hoz Construction. Mr Hossack and Mr Blank each have a 50% interest in Hoz Construction. Mr Hossack had previously been a director of TC Build and, from December 2020, an employee of BB Plant.
On 4 May 2022, Mr Cull sent an email to Mr Blank: I cannot continue incurring costs on your projects one day longer whilst you refuse to pay direct costs, let alone per agreement. You need to arrange an alternative builder and insurers as of COB today. I am left with no other options.
Following this email, Mr Blank suggested to Mr Cull that they reconcile the building costs and 'work something out'. During this time, Mr Cull said that TC Build continued to work on Mr Blank's projects with the hope of reaching an amicable solution and payment of the builder's margin.
On 1 June 2022, TC Build agreed to Mr Blank's reconciliation of the costs as at February 2022 to be some $39.4 million. On 17 June 2022, the plaintiff issued an invoice for the margin on agreed costs, together with 8% of the invoices which had been rendered since February 2022. The total was $3,348,098.06 plus GST
On 5 July 2022, Mr Cull sent the following email to Mr Blank: there are millions of dollars owing from STM … the business' financial position is a direct result of this… You seem to think you have some ticket to paying no margin by having your work in a separate entity which negates your obligations under the shareholders deed … TCBG is a shell company that you use for liability and tax purposes. … You know full well that we have been fighting to stay alive in one of the most difficult periods for the construction industry ever. If you paid your invoices and margin, then there would be plenty in the account to pay all liabilities … Yes, we have lost money on third party projects, but have also made plenty of money on others. None of this gives you any right to not pay margin yourself. … I came to you with a growing business with rapidly declining margins, this was clearly stated … Never did you actually sit down with myself or any of the team and strategise how to do things differently … We otherwise give you notice that TC Build and TCBG is suspending all work on your projects under SOPA due to non-payment of payment claims.
On 7 July 2022, Mr Hossack tendered his resignation. On 12 July 2022, Hoz Construction obtained a builder's licence. Mr Hossack sent an email to Mr Blank in respect of the Fletcher Street project, "On behalf of TCBG I hereby authorise that STM123 pay all trades concerned [on the Fletcher Street project] directly."
On 19 July 2022, Mr Cull made four payment claims on behalf of TC Build. On 25 July 2022, Mr Hossack wrote to Mr Blank, apparently on behalf of TC Build, withdrawing all payment claims until a proper reconciliation had been performed. The following day, on 26 July 2022, Mr Cull emailed Mr Blank and Mr Hossack, advising that the payment claims were "not withdrawn." The plaintiff sent a letter of demand on 1 August 2022. These proceedings were commenced on 4 August 2022.

[13]

Prospects of success or merits of the proceedings

As rule 42.21(1A)(a) of the UCPR states, the Court may have regard to the merits of the claim in respect of which security for costs is sought, which the court may do if it is able to form a meaningful view on merits: Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302 at [97]-[102] (per Bathurst CJ, Leeming JA and Barrett AJA). The rule does not mandate that the Court do so, and in many cases the parties will not agitate the matter but simply proceed on the basis that the claim is bona fide. As much can be seen from how Live Board Holdings has been applied.
In Galati v Deans [2018] NSWSC 1600 (Ward CJ in Eq at [68]) and In the matter of Australian Style Holdings Pty Ltd [2018] NSWSC 1368 (Black J at [33]), their Honours considered that the evidence was insufficient for the prospects of success to be anything other than a neutral factor. In the matter of Australia Wattle Fund Pty Ltd [2017] NSWSC 1664, Black J considered that the matter was too complex and involved issues about which there would be significant factual contest at the hearing and no further assessment of its merits could reasonably be undertaken at such an early stage of the proceedings: at [23].
In Luo v Windy Hills Australian Game Meats Pty Ltd (No 2) [2018] NSWSC 1139, Stevenson J was able to, and did, assess the strength of the plaintiff's claims on a security for costs application. His Honour concluded that the plaintiff had prima facie a very strong case against the defendants and this was a factor that militated against providing security: at [45]. There, the plaintiff's claim was based on fraud but this did not preclude an examination of the merits of that claim: see likewise BCEG International (Australia) Pty Ltd v Xiao [2021] NSWSC 1027 at [29]-[31] (per Williams J).
Here, the plaintiff seeks to rely on the merits of its case, not by reference to the key contractual documents, but by reference to more peripheral matters concerning allegedly disreputable business practices, the adverse credit findings which the trial judge may make and the consequential boost in the plaintiff's prospects of success in its primary contentions. However, it is usually not possible, necessary or appropriate to reach a view on matters such as credibility on the evidence before the Court on a security for costs application: see, for example, Mitrov Homes Pty Ltd v Mustafa [2022] VSC 5012 at [53] (per Connock J); Vintage Marine Art Pty Ltd v Henderson [2015] NSWSC 1439 at [37] (per Harrison AsJ). The position may be different where an appellate court is considering whether security should be provided and has the adverse credit findings of the trial judge to hand: Eastgate Properties Pty Ltd v J Hutchinson Pty Ltd [2006] 2 Qd R 1; [2005] QCA 342 at 2 (per Keane JA, with whom McPherson and Jerrard JJA agreed); Actors Workshop Pty Ltd v Harrison [2014] QCA 092 at [32] (per Morrison JA).
The plaintiff relied on emails suggesting that invoices rendered by subcontractors in respect of the O'Brien Street project were re-issued at Mr Blank's request to refer to another project. The plaintiff submitted that these emails suggested that the Court may be more likely to accept Mr Cull's evidence in any contest with that of Mr Blank. Whilst Mr Blank may be called to explain what these email appear to suggest at trial, I am in no position to say whether his explanation might be accepted, nor whether any findings on that topic would affect the Court's overall conclusion as to whose evidence should be believed on more substantive topics.
The plaintiff also relied on the back-dating of building contracts (see [17], [19] and [22]) and the fact that, according to the Council's portal, Mr Blank continued to add TC Build as the builder notwithstanding that the contracts were with TC Co or TC Group: see [30]. I have endeavoured to address these matters in the course of reviewing the facts.
Each of these matters was, essentially, peripheral to TC Build's central claim of breach of the Shareholder Deed. The precise contractual arrangements between the parties appears to have been complex and changeable, beginning with the Shareholders Deed and apparently varied over time, including by a series of conversations. Even if a trial judge were to make adverse credit findings against the defendants in respect of these matters, I am unable to say whether this would have the consequence that the plaintiff's version of these contractual arrangements would be accepted. I would have been more interested to know why the plaintiff's primary contentions were meritorious, by reference to the contractual documents or other contemporaneous material.
The defendants submitted that the restructure separated out work done for Mr Blank and his companies. As such, the failure of the plaintiff's business thereafter was unrelated to the defendants. Further, the plaintiff's claim for unpaid builder's margin was said to be weak as it was not supported by the contemporaneous documents, in particular, where the building contracts were not with the plaintiff. That this was the purpose of the incorporation of the new companies was said to have been admitted by Mr Cull in his contemporaneous emails. Insofar as Hoz Construction was concerned, the plaintiff sought an order that Hoz Construction be restrained from undertaking construction work in circumstances where it was not a party to the Shareholders Deed and not the subject of any contractual restraints.
I accept the defendants' submission that the contemporaneous documents present some challenges to the proposition that, notwithstanding that the building contracts were between TC Co and STM, TC Build was nonetheless entitled to a builder's margin of 8% under clause 22 of the Shareholders Deed. I also accept the defendants' submission that the plaintiff's ability to enforce a contractual restraint against a non-party to the Shareholders Deed may also encounter difficulty. I do not consider that this factor militates against providing security for costs.

[14]

Whether the plaintiff's impecuniosity is attributable to the defendant's conduct

The plaintiff accepted that it bore the onus of establishing the adequacy of its financial position before the dealings with the defendants and that the defendants' conduct either caused, or at least materially contributed to, the plaintiff's inability to meet an order for costs: Fiduciary v Morningstar Research [2004] NSWSC 664; (2004) 208 ALR 564 at [100] (per Austin J); Jazabas Pty Ltd and Ors v Haddad and Ors [2007] NSWCA 291; (2007) 65 ACSR 276 at [94] (per Basten JA). This onus was said to be discharged where the plaintiff's current balance sheet was some $1.4 million in deficit but, when adjusted to record the outstanding amounts said to be owed by STM, would report a credit of some $4 million.
The defendants submitted that the contracts which gave rise to the damages now sought by the plaintiff were largely with TC Co and TC Group and, as such, the defendants could not be the cause of the plaintiff's impecuniosity. More likely, the plaintiff's financial problems were due to a general decline in its business.
This factor is somewhat equivocal. It does appear that, before the plaintiff began to deal with the defendants, it was in a reasonable financial position. The plaintiff's 2018 financial statements, being before entry into the Shareholders Deed, reported a profit of some $1 million and net assets of $3.3 million.
For the 2020 financial year, TC Build's profit had dropped to $470,000. The fact that the builder's margin now differed from the Shareholders Deed and, in some cases, was nil, may not have helped, although this construction work was being invoiced by TC Co. The plaintiff's net assets had increased to $4.9 million.
The fact that construction work continued to be undertaken for STM and charged at mark-ups less than 8% and, in many cases, for no mark-up, presumably did not help. Again, however, these invoices were rendered, generally, by TC Co and TC Group rather than the plaintiff. Whilst the work undertaken by the plaintiff for other clients may have contributed to its financial position, the bigger problem must surely have been non-payment by STM, where STM comprised half of the projects undertaken.
But here lies the problem for the plaintiff in respect of this factor, where there is a serious dispute as to whether STM owed moneys to the plaintiff as opposed to TC Co or TC Group where, by and large, the invoices were rendered by the latter companies in accordance with the building contracts as allegedly orally novated. In this regard, the "prospects of success or merits of the proceedings" consideration has ongoing significance. If it be the case that any moneys owed by STM are payable to TC Co or TC Group, rather than the plaintiff - such that the $4 million unpaid builder's margin is not, in fact owing to the plaintiff - then it is difficult to say that the plaintiff's impecuniosity is attributable to the defendants' conduct. As such, overall, I consider this fact to be equivocal.

[15]

Whether an order for security for costs would stifle the proceedings

The plaintiff submitted that the Court must have a concern to achieve a balance between ensuring that adequate and fair protection is provided to the defendant, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [47] (per Einstein J).
The defendants submitted that stultification had not been established, in particular, where Mr Cull had not expressly said so. Where the assets initially disclosed by Mr Cull were incomplete, there was said to be insufficient evidence to prove that Mr Cull could not fund these proceedings if need be. The defendants submitted that the plaintiff has not established those who stand behind TC Build and would benefit from the litigation if it were successful were also without means: Re Australian Style Holdings Pty Ltd (as trustee of Australian Style Investments Unit Trust) [2018] NSWSC 1368 at [34] (per Black J). In particular, there was no evidence as to who were the beneficiaries of the Moitly Family Trust, or whether they also lacked the means to pursue the proceedings: Nonox Australia v Certain Underwriters at Lloyds Subscribing to Contract No CV0263CGL [2014] NSWSC 221 at [30] (per McDougall J).
I note that the plaintiff has ongoing building projects which, presumably, require funds to continue. Accepting that the plaintiff's finances are limited, the evidence largely focussed on Mr Cull's ability to provide security for costs.
Mr Cull has shares in Alta Vale Pty Ltd. In February 2022, Alta Vale, executed a building contract for construction in Braemar. The contract sum was some $4.9 million. The industrial development being constructed in Braemar is nearing completion and is expected to be completed by the end of April 2023. The balance sheet of Alta Vale shows net assets of $224,198. This may be a source of funds for Alta Vale, and thereby Mr Cull, in the near future.
Mr Cull owns shares in Three Kooks Pty Ltd. The balance sheet for Three Kooks shows negative net assets. The profit and loss statement shows a modest profit for the year to date of $46,497. Mr Cull says his shares in Three Kooks are worthless. I accept this.
Mr Cull owns shares in Thof Pty Ltd. Thof does not have any assets nor trade. On 27 May 2022, the Australian Taxation Office was notified that it was not necessary to file a tax return for this company for the 2021 financial year.
Mr Cull has a one bedroom unit with no equity. Mr Cull said he has had to invest his personal funds into the plaintiff, including the proceeds of sale of his car. He owes his solicitor more than $120,000 in relation to these proceedings. He does not have the ability to fund the company further and pay security for costs. Mr Cull said that he lives hand to mouth. He does not have any other substantial assets. He was not cross-examined.
The shares in TC Build are owned beneficially by the Moitly Family Trust, which does not have any cash assets and has some small holdings in unit trusts that are difficult to sell. The current balance sheet of TC Build shows a deficit of $1.4 million. The trust's main equity is the equity contributed to TC Build.
However, the beneficiaries of the trust are unknown, as are their financial circumstances. As was said in Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) [1984] FCA 34; (1984) 2 FCR 1 at 4: 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.
Assuming that Mr Cull is a beneficiary of the trust, his asset position is known and modest. However, I do not know who the beneficiaries of the trust actually are. It is not for the defendants to interrogate this matter but for the plaintiff to adduce evidence to establish that those who stand to benefit from these proceedings are in no position to provide security for costs. The plaintiff has not discharged this onus where the beneficiaries of the trust, and their financial circumstances are, unknown. As such, this factor does not apply and the plaintiff ought provide security.

[16]

Quantum

The defendants seek security in the amount of $372,790, comprising $95,900 for costs incurred prior to the filing of the notice of motion and $276,890 for costs incurred after the filing of the notice of motion. These figures were 70% of costs incurred and costs which Mr Hoffman estimated would be incurred, based on a 5-day trial of both the claim and cross-claim. Mr Hoffman estimated that 10% of these costs were referable to Hoz Construction and a further 10% to Mr Hossack, while the remaining 80% was referable to SM123.
Mr Hoffman's estimate of costs did not delineate between the costs incurred in defending the plaintiff's claim and those which related to the cross-claim. The defendants submitted that the cross-claim was purely defensive whilst the plaintiff submitted that there was no relationship between the evidence which the plaintiff would adduce at trial on its claim and that adduced on the cross-claim.
The defendants submitted that the Court takes a "broad brush" approach to the quantum of an order for security for costs: Re Colorado Products Pty Limited (in prov liq) [2013] NSWSC 611 at [66] (per Black J). In the absence of evidence from a costs consultant, the Court has been prepared to accept that 70% of solicitor/client costs and all of counsels' fees are likely to be recoverable on assessment: Re Pioneer Energy Holdings Pty Limited [2013] NSWSC 1366 at [25] (per Black J); Morony v Reschke [2015] NSWSC 860 at [36] (per Black J) (referring to acceptance of "two thirds or more of solicitor/client costs" and all of counsel's fees).
The plaintiff did not adduce evidence as to a more appropriate amount of security but submitted that $200,000 was a more reasonable figure, excluding past costs and given that a portion of a five-day trial would be occupied by the cross-claim.
As for costs incurred before the filing of the motion, there was no material delay between the commencement of these proceedings and the issue of security being raised some six weeks later. Of the $95,900 costs incurred before the filing of the motion, I will allow $60,000.
I consider that some allowance should be made for the fact that a portion of the trial will be concerned with the cross-claim. Whilst I accept that the defendants may not have filed a cross-claim if they had not been sued by the plaintiff, nor was it necessary to bring the cross-claim. The evidence in respect of the substantive proceedings and the cross-claim will differ. Of a five-day trial, I have allowed 1.5 days to be occupied by the cross-claim. This reduces the defendants' estimate of trial costs referable to the plaintiff's claim to $193,823.
Adding both components, the result is $253,823, which I will round to $250,000. This security should be provided in tranches. The defendants should also have their costs of the motion, having succeeded over stiff opposition.

At a glance

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Judgment (18 paragraphs)

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Legislation Cited (2)

Cases Cited (21)

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