Token Imports Pty Limited v Tex n Jean Pty Limited; Airbait Pty Limited v Tex n Jean Pty Limited; Airbait Pty Limited v Philip Haron Smouha

Judgment 1HIS HONOUR: These applications are for the review of decisions of the Registrar relating to security for costs. They concern two proceedings in which the plaintiff is Airbait Pty Limited ("Airbait"). The first of those proceedings was brought in the District Court by Airbait against Tex n Jean Pty Limited ("TNJ"). The statement of claim was filed in the District Court on 31 August 2011. That proceeding, together with another case that raises a similar factual substratum, has been transferred to this Court and has been travelling with a claim brought by Airbait against Mr Smouha. The proceeding against Mr Smouha was commenced by statement of claim filed on 6 December 2012. 2In the claim of Airbait against TNJ, Airbait essentially sues for the price of goods allegedly sold and delivered to TNJ. It also sues TNJ essentially for allegedly wrongly receiving the proceeds of goods allegedly sold by Airbait to a third party. The claim is that TNJ intercepted the moneys payable by the third party for the goods and banked it to its own account. 3In the TNJ proceedings, TNJ does not dispute that it received delivery of goods, but it says that there was no transaction of sale and purchase between it and Airbait. It pleads that at all relevant times Airbait held the stock allegedly sold not for itself beneficially, but on a trust that is pleaded in its cross-claim. On the face of it, that allegation does not meet a claim by Airbait for goods sold or delivered if the transaction were one of sale. 4The relevance of pleading the trust emerges from the cross-claim filed with the defence. In the cross-claim TNJ says, as I understand the pleading and as was explained by counsel, that in about February and March 2009 a Mr Dennis Graham acting for Airbait made a proposal to Mr Smouha to the effect that Mr Smouha could use the office space to be arranged by Mr Graham to solicit prospective customers and to secure orders on behalf of a new business to be established; that Mr Graham would arrange for the importation of goods for that business and for the initial funding of the acquisition of stock; that the cost of acquiring stock would be charged to the new business at cost, and that the new business would open a bank account and have a business infrastructure through a company which Mr Graham would nominate. 5It is alleged that Mr Graham represented that neither he nor interests associated with him would ask for anything in return. It is alleged that subsequently a company called Token Imports Pty Ltd ("Token Imports") was nominated, and subsequently Airbait was nominated, as the company through which the new business was to be conducted. It is alleged that Mr Smouha then solicited customers, secured fabric and garment orders on behalf of the newly commenced business; that Token Imports imported goods to fill the orders solicited by Mr Smouha; that Airbait stocked the goods and invoiced customers of Mr Smouha on behalf of the new business, and that Mr Smouha drew a salary. 6It is said that the effect of these arrangements was that stock acquired by Airbait, or Token Imports, was held on the trust for the entity for which Mr Smouha was carrying on business. In essence, as I understand the allegation, it is that through Airbait and Token Imports, Mr Smouha carried on the business and that subject to indemnifying Airbait or Token Imports for their costs in acquiring stock or other goods, Mr Smouha, or more accurately, according to the pleading, a trust called the Philip Smouha Family Trust, beneficially owned the stock and was entitled to the beneficial interest in moneys received from customers from the sale of stock. 7Then, as I understand the defendant's case, it is said that in about February 2010 Mr Smouha moved out of the premises that had been made available by Mr Graham and began trading through TNJ, the defendant, at other premises, and that the stock and certain vehicles were delivered to TNJ at the new premises. The defendant says that the purported invoices that Airbait relies upon as showing sales of goods by Airbait to TNJ were fabricated and that there were no sales. It says, in effect, that the explanation for TNJ's acquiring the stock and vehicles in question was that they were delivered to TNJ by Mr Smouha as he was entitled to do, either as a beneficiary of the trust, being the person to whom trust assets had been distributed, or perhaps as the director of the trustee of the Philip Smouha Family Trust. But the delivery was not by way of sale. 8Similarly, it is contended that the moneys that Airbait alleges were intercepted by TNJ were moneys that were beneficially held for the Philip Smouha Family Trust. As I understand it, it would be said that Mr Smouha, perhaps as director of the trustee of that trust, could properly direct payment to TNJ. 9By the cross-claim, TNJ seeks an order that an account be taken before an associate judge of all dealings since March 2009 in relation to an account into which funds received in payment of invoices were paid. Claims are made both against Airbait and Mr Graham, the latter claims charging Mr Graham with knowing participation in alleged breaches of trust by Airbait. 10Airbait sought security for costs in respect of TNJ's cross-claim. It did so by notice of motion filed as long ago as 23 July 2012. The assistant registrar gave judgment on that application on 27 September 2012. The application was dismissed essentially on the ground that Airbait had not established that there was a reason to believe that TNJ would not be able to pay costs of the cross-claim if the cross-claim were unsuccessful. The reason for that was that TNJ is itself the trustee of another trust called the Smouha Trading Trust. The learned Registrar took the view that TNJ had rights of indemnity out of trust assets, which would be a source of funds to meet an adverse costs order. 11An application for review of the Registrar's decision was filed on 22 October 2012. That application for review of the decision was listed for hearing on 19 April 2013. That hearing had to be vacated due to personal circumstances of one of the counsel involved. On 26 April 2013 the notice of motion was stood over for directions on 28 June 2013. 12A separate application for security for costs had been made by Mr Graham. It also failed for the same reason as Airbait's application. By notice of motion filed 22 October 2012, Mr Graham also sought a review of the Registrar's decision. That application was also stood over for directions on 28 June 2013. 13On 28 June 2013 orders were made by consent for the notices of motion, together with the proceedings generally, to be stood over for directions on 3 September 2013. In the meantime, orders had been made for the service of evidence in reply by Airbait and by Mr Graham. 14On 3 September 2013, orders were made in the proceedings brought by Airbait against Mr Smouha for the effective consolidation of all the proceedings. 15Nothing further appears to have been done in respect of bringing the notice of motion on for hearing until April this year. 16On the hearing of the application, counsel for TNJ accepted that there was now a reason to believe that TNJ would not be able to pay Airbait's costs of the cross-claim if ordered to do so. 17Hence the basis upon which the application had been determined by the Registrar has undoubtedly materially changed, even if there was no error in the original decision. 18TNJ instead defends the application on two discretionary grounds. The first is that it says that the cross-claim is essentially defensive in nature and therefore security should not be ordered. Secondly, it says that security should not be ordered because of the delay between April 2013 and April 2014, during which time extensive preparations have been undertaken. It is said, and I don't understand this to be disputed, that the proceedings between Airbait and TNJ are ready for hearing, or will be as soon as the proceedings between Airbait and Mr Smouha are ready for hearing. 19In contending that the matters raised in the cross-claim were essentially defensive, TNJ refers also to its defence in the third related proceeding brought by Token Imports against it. 20Token Imports' claim is also one essentially for goods sold and delivered. In answer to that claim, TNJ relevantly pleads that there was an agreement between Mr Smouha and Mr Graham that any amount owing by TNJ for sales would be offset by the amount for which Airbait was liable to account in respect of moneys held by or paid in the Airbait account referred to in the cross-claim in the Airbait/TNJ proceedings, that is to say, an account in to which the proceeds of sales, the subject of the invoices to customers who are alleged to be Mr Smouha's customers, were paid. 21The pleaded cross-claim is certainly complex, but no issue is raised on the present application that it could not give rise to an arguable defence to the plaintiff's claim, or that it is not raised bona fide. I therefore proceed on the basis that if established it could provide the explanation as to why goods that seem undoubtedly at one point to have been legally owned by Airbait come to be held and dealt with by TNJ otherwise than pursuant to a contract for sale and purchase. 22I accept that that part of the claim is essentially defensive in nature. Moreover, the claim made by TNJ that it is entitled to the benefit of moneys in what has been called the Airbait account also arises defensively by reason of the alleged agreement between Mr Smouha and Mr Graham. I think it is only in respect of a claim purportedly brought by TNJ for an account that the cross-claim has an offensive aspect. TNJ's right to seek such an account is said to be based on an assignment that it has taken from the trustee of the Phillip Smouha Family Trust, of claims that could be brought by the trustee on behalf of the beneficiaries of that trust for alleged breaches of trust by Airbait. Insofar as the cross-claim advances those claims, then it is of offensive character, but otherwise it is not. 23In Bevwizz Pty Limited v Transport Solutions Pty Limited [2008] NSWSC 1399, Brereton J reviewed some of the authorities that deal with the principle that a defendant might be ordered to provide security for costs of a cross- claim, but such security would not be ordered as a matter of discretion if the cross-claim is, in substance, put forward as a defence to the claim (see particularly at [12]-[18]). His Honour concluded (at [18]) that if the cross-claim extends purely beyond a defence, then the court will have regard to the overall nature of the proceeding and the cross-claim to see whether it can be said that in truth the cross-claimant has become, in substance, a plaintiff. 24In Visco v Minter [1969] P 82 Ormerod J stated in a passage subsequently quoted with approval by Young J in Classic Ceramic Importers Pty Limited v Ceramica Antiga SA (1994) 12 ACLC 334: "The principle seems to be that where a defendant counter-attacks on the same front on which he is being attacked by the plaintiff, it will be regarded as a defensive manoeuvre. But if he opens a counter-attack on a different front, even to relieve pressure on the front attacked by the plaintiff, he is in danger of an order for security for costs depending upon the court's assessment of the position in each case." 25Counsel for Airbait submits that the constructive trust claim made in the cross-claim arises on an entirely new front. Counsel submits that it is not defensive in the way one would understand a usual defence by way of cross-claim to a claim for the price of goods, such as a cross-claim for damages or a defence of set-off for defective goods. Rather, the cross-claim is based on what counsel vividly describes as "a whole truckload or dumpload of new material" that is said to put a different character on the simple facts asserted by the plaintiff. 26However, I think the matters advanced by way of the pleadings are put forward primarily defensively and that is so even though the facts asserted seem to be complicated and, I am told, give rise to voluminous evidence. 27I think the question can be tested by asking what would be the effect of making an order for security for costs of the cross-claim if the security ordered were not provided. 28A consequence would be that the claim for the taking of an account would be stayed. But it seems to me that all of the facts alleged in the cross-claim as to the existence of the alleged trust of both stock, vehicles and the proceeds of sale could still be advanced by TNJ in its defence of the claim. 29Moreover, if that defence succeeded and it were held that moneys in what has been called the Airbait account were held on trust for the beneficiaries of the Phillip Smouha Family Trust, then a stay of the claim that TNJ is entitled by way of assignment of the trustee's chose in action might well not be continued once that position had been reached, at least if it were clear that there was a balance for which Airbait was required to account to the trustee of the trust or its assignee. 30It follows that the further costs which would be expended by Airbait in taking the case to hearing would be costs incurred in its propounding its claim and meeting the defence to that claim, rather than costs which would be incurred in defending the offensive aspects of the cross-claim. 31In my view, that is a sufficient discretionary reason for not ordering security as sought. 32I also am not satisfied that there is a sufficient explanation for the delay in bringing the application for review on for hearing. 33I accept the submission of counsel for TNJ that it was a matter for Airbait to seek to advance that application. It is often said that applications for security for costs should be brought promptly. The reason for that is that a plaintiff, or in the present case a cross-claimant, could be prejudiced if it incurs substantial costs in preparing its claim or cross-claim if there is delay in making the application. 34It is true that in this case there is no evidence that the person standing behind TNJ, which appears to be Mr Smouha, would not be able to provide security if it were sought. To that extent the prejudice might not run. Nonetheless, I think if this application for review were to be brought, steps ought to have been taken promptly after April 2013 for it to have been brought forward. 35However, I am not to be taken as saying that if delay were the only factor I would have refused the application on that ground. Indeed, I think in the absence of any evidence that TNJ could not have provided the security that I would not have refused the application on the ground of delay, if delay were the only ground. 36Nonetheless, for the reasons I have given, I order that the notices of motion brought by Airbait and by Mr Graham on 22 October 2012 be dismissed. 37The other application is by Mr Smouha in the proceeding in which he is a defendant (2012/379734). Mr Smouha says that he was served with the statement of claim, that had been filed in December 2012, in March 2013. Airbait says that the reason for the delay in service was that Mr Smouha was endeavouring to evade service. That is denied and is not a matter upon which I can express a conclusion. 38Mr Smouha brought an application for security for costs by notice of motion filed 18 April 2013. He sought security in the sum of $90,000. In the affidavit of his solicitor, Mr Manca, sworn on 18 April 2013, his solicitor estimated that the costs that Mr Smouha would incur in defending the proceedings would be approximately $120,000. That estimate was expressly based on an assumption that the proceeding brought against Mr Smouha would be heard independently of the proceedings between Airbait and TNJ and between Token Imports and TNJ. 39The claim against Mr Smouha is for moneys allegedly lent to him under a loan agreement or alternatively, on a restitutionary count for moneys paid by Airbait to Mr Smouha or to third parties at his direction and for his benefit, or for money had and received. I do not have particulars of the claim. The statement of claim says that the particulars are provided in an affidavit of Mr Graham of December 2012, but that affidavit is not before me. I was told that the affidavit was served with the statement of claim. 40The application for security for costs was brought before a defence was filed. It was determined by the Registrar on 21 June 2013. By that time a defence had been filed, but the defence consists essentially of bare denials of the material allegations. 41The Registrar ordered security. It seems that opposition to the security sought at that time was based on a contention that Mr Smouha's conduct had been the cause of Airbait's admitted inability to pay costs if it were ordered to pay costs. That claim was rejected on the basis that evidence suggested that Airbait did not trade and was impecunious before Mr Smouha's involvement. 42Security in the sum of $30,000 was awarded. The Registrar said that it was likely in his view that the matter would occupy two days of hearing at most. There was likely to be only one principal witness for the defendant, being Mr Smouha himself. The plaintiff had served its evidence and the Registrar noted that a defence had been prepared. On the materials before the Registrar, the Registrar's assessment that $30,000 would be sufficient security it would appear to me to be unexceptionable. 43Mr Smouha sought and ultimately received the evidence and documents exchanged in the proceedings between Airbait and TNJ, and I assume Token Imports and TNJ. He is the director of TNJ and it is not disputed that he gave instructions to the legal representatives of TNJ in their defence of Airbait's claim against it. He must have been well aware of the claim and the facts that give rise to the contention that Airbait's assets and business were, so he says, held by Airbait for him or his family trust. 44By his amended defence, Mr Smouha says that he operated the trading business through Airbait and did so on behalf of the trustee of the Philip Smouha Family Trust. He says that the moneys claimed by Airbait from him as loans to him, or as moneys paid on his behalf, were moneys that were paid to him as wages, or sums paid to him as a beneficiary of the trust, or, as I understand it, as advances made by Airbait, presumably on behalf of the trustee of the trust, to him as beneficiary of the trust. In essence he will raise in his defence the same factual allegations about the circumstances in which the Airbait business was established and as to how it was conducted, that TNJ raised in its defence and cross-claim. That is to be expected because it is through him that TNJ makes its case. 45I expressed concern as to why it was that Mr Smouha should have separate representations from TNJ and why there should be, in effect, two sets of costs on the defendant's side of the record in the three proceedings. I was told that the reason is because it is apprehended that there is a conflict, or could be a conflict, between TNJ on the one hand and Mr Smouha on the other. I had difficulty for myself perceiving such a conflict on the materials before me, but I was told that as an example of the conflict, it appeared to the defendants' side of the record that moneys allegedly lent to Mr Smouha, or advanced for his benefit which are the subject of a claim for repayment of a loan or are the subject of a restitutionary claim, relate to the same transactions that are said to be transactions by which Airbait claims moneys from TNJ for goods sold and delivered. 46Precisely how that might be so does not appear. But I think that I must proceed on the basis that it is appropriate for Mr Smouha to have separate legal representation. His claim essentially is that circumstances have changed since the Registrar's decision on 21 June 2013 and that the security should be increased by $200,000. He filed a notice of motion seeking additional security for costs on 15 November 2013. The application was supported by an affidavit of his solicitor, Mr Manca, of that date. Mr Manca deposes that the costs and disbursements incurred by Mr Smouha to date in the proceedings, that is to say, as at 15 November 2013, already exceed $45,000. Mr Manca estimated that Mr Smouha's costs would exceed $300,000 on a solicitor/client or indemnity basis and he sought additional security of $200,000. 47Mr Manca made that estimate on the assumption that a hearing that the Registrar had estimated to take two days would in fact take three weeks. This was on the basis that all three claims would be heard together. I cannot accept that three-week estimate. Whatever the volume of the evidence that has been served, I am sure that orders would be made, including, if necessary, orders limiting the times for the taking of evidence, to ensure that the case finishes well short of that. The amounts involved in all three cases together would appear to be not much more than $1.25 million, assuming that there is no overlap between any of the claims. I do not think the court will allow a claim of that magnitude to consume three weeks of hearing time. It is also not at all clear to me that Mr Manca has made due allowance for the fact that Mr Smouha's legal representatives in the TNJ proceedings should be across all of the issues and there should be plenty of scope for him to use the assistance of those lawyers in his defence of the claim brought against him. I refer to the lawyers in the TNJ proceedings as his lawyers because they are the lawyers who would have been instructed by him and it appears that he is the mind behind TNJ. 48The Registrar rejected the application for additional security on 21 February 2014. He referred to the consolidation of the proceedings by the orders of 3 September 2014 and noted that that application had been made by Mr Smouha. The application had also been made by Airbait in the sense that Airbait had sought an order for consolidation in its statement of claim in the proceedings against Mr Smouha. 49The Registrar said: "The application to consolidate the proceedings was made by Mr Smouha; the added cost was something to which he made no reference. Indeed, the commonality between the proceedings was one aspect which was thought would produce 'economies of scale'. I cannot accept that the applicant in this matter can now seek security [for] costs of a very significant amount in these circumstances. There is an obvious issue of proportionality between the costs claimed by this applicant and the quantum of relief claimed by the plaintiff. In these circumstances, I think this part of the application should be refused." 50This reasoning was attacked by counsel for Mr Smouha who submitted that the Registrar appeared to have interpreted Mr Smouha's decision to seek the consolidation of the proceedings as a tactical one and then, based on that interpretation, refused to make the order for security. 51Counsel submitted that the informal consolidation of the proceedings was entirely appropriate and necessary because of the substantial overlap of the issues thrown up by the various proceedings. 52It does appear to me that the consolidation of the proceedings was a material change and it appears to me that there are other material changes from the basis upon which the first security for costs application was dealt with. 53In particular, the Registrar had initially proceeded on the basis that there would be a separate hearing of the claim brought only against Mr Smouha, which would be unlikely to take more than two days and in which there would be only one witness. 54Because of the complicated matters raised by Mr Smouha for TNJ and now by Mr Smouha's amended defence, it is clear that the original amount of the security that was ordered is inadequate. There have also been orders for discovery of documents which it is said has led to the production of 14 volumes of material in support of the claim for the loan account. I accept that the security provided should be increased. However, I am not persuaded that an increase of $200,000 as sought would be appropriate. 55When considering the security provided for all three proceedings, the commonality of the issues raised, the commonality of the interests of TNJ and Mr Smouha, and the amounts in issue, I think a further $200,000 for security would be out of proportion. 56I also think that Mr Smouha should be taking steps to ensure that his own costs are reduced by taking full advantage of the knowledge and expertise of the legal representatives in the TNJ proceedings. 57In my view, there should be a substantial discount of the additional security sought. In my view, further security of $90,000 should be ordered. 58In relation to the notice of motion filed for Mr Smouha, I order that the plaintiff provide additional security for the defendant's costs in the sum of $90,000. 59I will hear the parties as to what consequential orders should be made, including as to whether the proceedings be stayed until the security is provided and I will hear the parties on costs. 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: 17 June 2014