The Old Kiama Wharf Company Pty Ltd v Betohuwisa Investments Pty Limited & Anor [2011] NSWSC 214 | Case summary

The Facts 2The plaintiff is in liquidation. The liquidator has received funds from a creditor who is interested in the outcome. The defendants are separately represented but there is evidence that the second defendant (Mr Warwick Colbron) has been indirectly involved in the affairs of the plaintiff and the first defendant. The plaintiff seeks a declaration, among other things, that Mr Warwick Colbron was and is a shadow director of the plaintiff and the first defendant. There is some evidence that other family members and close personal associates of Mr Warwick Colbron are or have been involved in the affairs of both companies. I should make clear that because they are central to the issues for determination at the final hearing, I have not, of course, reached any final conclusions about these matters at this stage. 3The plaintiff's principal object in the proceedings is to impugn a sale transaction entered into on 30 November 2009 between the plaintiff as seller and the first defendant as buyer. The plaintiff invokes Section 37A of the Conveyancing Act, 1919. The subject matter of the sale consisted of registered crown leases on which certain businesses at Kiama were undertaken. It alleges that the first defendant was not a bona fide purchaser for value of the property without notice of a claim by the previous owner, namely Cliffshaw Pty Ltd. 4That claim arises because in 2004, Cliffshaw had entered into a contract to transfer to the plaintiff the crown leases and the businesses undertaken on the land. The plaintiff received the property which was the subject of the agreement but failed to perform its obligations to Cliffshaw. On 8 March 2007 Cliffshaw obtained judgment for $1,270,258 against the plaintiff. On 30 June 2009 Cliffshaw served a statutory demand on the plaintiff in relation to the judgment. 5There then commenced in July 2009 a series of events which directly resulted in the claims in these proceedings. The first defendant was incorporated on 15 July 2009. Then, in the face of the judgment obtained by Cliffshaw against the plaintiff, and notwithstanding the statutory demand which it had issued, the plaintiff gave a fixed and floating charge over its assets to the first defendant. Next, on 30 November 2009 the plaintiff transferred to the first defendant its property consisting of the businesses and the leases on which the businesses were carried out. 6The basis of the allegations that Warwick Colbron was and is a shadow director of the plaintiff and the first defendant derives in part from the fact that when the first defendant was incorporated, its sole director and shareholder was Mr Colbron's daughter, Samantha Hamilton. Conveniently, the sole director and shareholder of the plaintiff was Mr Colbron's de facto partner, Christine Jackman. In more recent times, Mr Colbron's son, Benjamin Colbron has become the sole director of the first defendant. At this interlocutory stage, there is prima facie evidence of Warwick Colbron's indirect association with both the plaintiff and the first defendant sufficient to support the allegation that he was a shadow director of those companies. There is also prima facie evidence to demonstrate at least the reasonable possibility of impropriety by him in connection with the sale transaction on 30 November 2009. 7Because these are serious issues, I have necessarily refrained from reaching any final conclusion. However, for the purpose of the exercise of my discretion, it is sufficient if I observe that the defences of the first and second defendants to these substantive claims for relief are neither obvious nor clear. 8As well as there being prima facie evidence to support the proposition that the sale transaction on 30 November 2009 is voidable, there is also support in the evidence for the proposition that the current financial position of the plaintiff is a consequence of the conduct of its affairs, and the affairs of the first defendant, by persons with a familial or other personal association with Warwick Colbron. 9The plaintiff in fact received very little from the transfer of the leases and businesses to the first defendant on 30 November 2009. The sale price was only $475,000. This is alleged to have been a gross undervalue and the true value is said to have been approximately $1.5 million. I have directed that there be a joint expert report on this issue. More significantly, of the amount of $475,000, the major portion namely $400,000, was the subject of a mortgage back to the plaintiff. The net amount received by the plaintiff therefore was minimal. Although the circumstances will require careful examination, it does not seem altogether surprising that 10 days after the sale transaction, the plaintiff appointed an administrator and that on 27 January 2010, the plaintiff went into liquidation. Whether the sale transaction was an uncommercial transaction and whether there was an intention to defraud creditors of the plaintiff are matters of the utmost seriousness, not least because Warwick Colbron is a solicitor and officer of the court.

Significance of Delay 10Applications for security for costs must be made promptly. Delay is the antithesis, and should usually be the nemesis, of a security for costs application. A plaintiff must be given an early opportunity to decide whether it is prepared to provide security or whether, faced with an order for security, it would prefer for commercial reasons not to continue with the litigation. The opportunity to make that choice should be given to a plaintiff in advance of the expenditure of substantial moneys in the conduct of a litigation and the preparation of evidence. These principles apply with particular significance to companies in liquidation where, of necessity, the liquidator must negotiate and make commercial decisions in conjunction with a third party creditor or creditors interested in the outcome. 11The words of Moffitt P in Buckley v Bennett Design & Constructions Pty Ltd (1974) 1 ACLR 301 (CA) at 309 deserve to be repeated: The right to seek security for costs and to stay proceedings, with the possible result that a claim for damages is frustrated, is a powerful weapon. Therefore, the litigant who seeks to use it against his opponent is at risk of not having it available, unless the application is made and persevered with in circumstances involving the least oppression of his opponent. The primary reason why the application should be brought promptly and pressed to determination promptly is that the company, which by assumption has financial problems, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it is allowed to or commits substantial sums of money toward litigating its claim. 12It is inconsistent with this underlying policy and principle that the defendants' applications for security should be brought more than eight months after the commencement of the proceedings. Substantial time and legal expense has already been spent in contested interlocutory proceedings, as a result of which Ward J gave a judgment on 22 December 2010. Since then, the proceedings have been in the Expedition List on at least three occasions; the plaintiff's evidence has been served; the defendants have agreed to directions for the service of their evidence by 15 April; and a hearing date has been fixed with the consent of all parties. 13For those reasons alone, I am not prepared to make any order for security for costs against the plaintiff. Further however, the absence of any obvious or clearly articulated defence causes me concern. Security for costs applications, like most discretionary interlocutory applications, are not determined in the abstract, without regard to the apparent merits of each parties' position in the proceedings. The courts' objective is to achieve a just outcome in the whole of the circumstances weighing all considerations in the exercise of a broad discretion. The plaintiff's case is clearly bona fide and has reasonable prospects of success. At this stage, the same cannot necessarily be said about the defendants' case. 14Finally, and in any event, the defendants may have some other protection as to costs if they are successful. The creditor of the plaintiff who is interested in the outcome of the proceedings is Cliffshaw Pty Limited. It commenced proceedings in the Federal Court which were transferred to this court. It no longer seeks to proceed with that litigation and is content to abide the outcome of these proceedings. I have ordered that the Cliffshaw proceedings be stayed permanently subject to the resolution of any questions of costs and other residual or ancillary issues. I will order that these proceedings and the remaining issues in the Cliffshaw proceedings, be heard together. The court has sufficient flexibility to make costs orders against Cliffshaw, if necessary, and if I am persuaded that it is appropriate, in the event that the plaintiff fails in these proceedings. That may include the joinder of Cliffshaw as a party to these proceedings. 15Subject to that matter, I reject Mr Warwick Colbron's oral application to vary the stay order that I have previously made in the Cliffshaw proceedings. I dismiss the defendants' applications for security for costs. I order the defendants to pay the plaintiff's costs of the applications.

The Old Kiama Wharf Company Pty Ltd v Betohuwisa Investments Pty Limited & Anor

At a glance

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Decision date

Before

Source

Judgment (4 paragraphs)

Parties

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