CONSIDERATION
20 For the reasons set out below, I consider that there is credible evidence giving reason to believe that Total will be unable to pay GRD's costs if GRD is successful in these proceedings. In the first place, the fact that the warrant of execution was returned unsatisfied necessarily means that when the warrant was executed, Total did not have sufficient funds available to meet the Local Court judgment. It appears from the affidavit material before me that this was so, because all of Total's assets were the subject of a fixed or floating charge.
21 Mr Stirrup, the sole director of Total, says in his affidavit sworn 22 May 2008, that he has not caused this judgment to be satisfied because he believes it is based on error. Whilst there is considerable force in Mr Robinson SC's criticisms of many aspects of the adjudicator's determination upon which the Local Court judgment and the warrant of execution are both founded, I do not consider that affects Total's obligations to pay this judgment. The authorities are clear that a determination under the Construction Contracts (Security of Payments) Act 2004 (NT) is intended to be a summary and speedy resolution of payment disputes that arise during construction projects, on the basis that the party required to pay a sum pursuant to such a determination, will ultimately be entitled to restitution in that amount if it is successful in the final determination of all the issues in dispute: see Boutique Venues Pty Ltd v JACG Pty Ltd [2007] NTSC 5 at [16] per Southwood J. That is where Total's remedy lies; it does not lie in simply ignoring this judgment.
22 Further, despite the fact that the presumption of insolvency created by s 459C 2(b) of the Corporations Act 2001 (Cth) only arises for a particular purpose, ie an application for winding up, and is rebuttable, the fact remains that Total is currently liable to be wound up on the basis of that presumed insolvency. When one analyses Total's profit and loss statement and balance sheet to April 2008, this presumption would appear to have some foundation in fact.
23 While Mr Robinson SC pointed to the appropriate net asset figure of $415,000 shown in the balance sheet, Ms Kelly correctly pointed to the fact that this figure does not include any provision for the Local Court judgment of approximately $105,000, nor the Local Court appeal costs, estimated to be $25,000, nor does it include any contingency for the claims made by GRD and the Shanghai Metal Company of 1.4 million dollars each, totalling approximately 2.8 million dollars. Furthermore, this figure of $415,000 is largely made up of an excess of non-current assets over non-current liabilities. That sum is not therefore likely to be immediately available to meet Total's debts.
24 This net excess of current assets of 1.764 million dollars over current liabilities of 1.681 million dollars is a much smaller figure of $83,700 (approximately). More significantly, according to the balance sheet, the only cash immediately available to pay debts appears to be the sum of $48,996.94 held in an ANZ cheque account. The item for 'cash at bank' actually shows a negative balance of $5,036.50. Otherwise, the current assets figure shown is made up of some loans that appear to have been made to related parties, the largest being approximately $70,000 to Stirrup Nominees Pty Ltd, plus stock on hand of approximately 1.4 million dollars, and trade debtors of approximately 1.34 million dollars.
25 It appears from the 'receivables' reconciliation, that more than a quarter of this trade debtor's figure has been outstanding for more than 90 days. On the positive side, there is a large debt of $842,783 shown, which if paid, would resolve some of the company's apparent cash flow problems, at least in the short term. The 'payables' reconciliation shows that Total owes trade creditors approximately $134,000, of which more than a third has been outstanding for more than 90 days. Turning to Total's profit and loss statement to April 2008, Mr Robinson SC has pointed to the operating profit of approximately $315,000 to demonstrate that the company is trading profitably.
26 While that figure certainly suggests that the company has traded ahead of the projected net profit figure by about $27,000 for the year to date, there are some other aspects of the company's trading that engender much less confidence about its trading performance. For a start, the gross income has fallen short of the budgeted figure of approximately 5.75 million dollars by more than 2 million dollars for the year to date. By any assessment, this represents a significant trading underperformance in its budget. While this is partly offset by a reduction in the cost of sales against budget, the gross profit figure is more than $400,000 below budget.
27 Further, while there have been some significant savings against budget on items such as motor vehicle expenses and advertising and promotion, there have been some even more significant expenditures over budget on items such as legal expenses and interest payments. While some part of the latter, shown as 161 percent over budget, could probably be explained by an increase in interest rates in recent times, the overall amount of the increase from a budget of $60,000 to an actual expenditure of $157,198, suggests that the company has considerably increased its borrowings during the year. Perhaps more significantly, the legal expenses are shown as being 525 percent over budget. Given that these proceedings have been set down for trial later this year, this expenditure on legal expenses is likely to continue. The legal fees associated with this application and the steps that I have been informed the parties are currently pursuing in the Local Court must be added to that figure. Finally, even on its reduced trading performance, the combined cost of sales and expenses items total approximately 3.36 million dollars for the 10 month period to the end of April 2008. That means the company has had an average monthly total outgoing of approximately $336,000 during that period.
28 In summary, on the face of Total's accounts to April 2008, the company does not appear to have sufficient funds readily available to meet its current debts, let alone the amount due to GRD under the Local Court judgment. In my view, this conclusion provides an additional and more likely explanation for Total's unwillingness to pay the Local Court judgment.
29 Furthermore, Total's trading figures do not provide much confidence that its position will improve significantly in the foreseeable future. While it has significant trade debtors, it also has trade creditors - which do not appear to include GRD's Local Court judgment - for approximately 2.8 million dollars of claims being pursued by GRD and the Shanghai Metal Company. Total also has to meet a significant level of monthly cash payments together with an increasing level of legal expenses as this matter proceeds to trial.
30 For these reasons, I have concluded that there is credible evidence giving reason to believe that Total will be unable to pay GRD's costs if GRD is ultimately successful in these proceedings. This brings me to what I detected to be Mr Robinson SC's primary argument as mentioned above: in a set of proceedings where the claim and counter-claim arise out of the same factual issues, that is a very important consideration for a court in deciding whether to exercise its discretion to order security for costs. As noted I was referred to the Dalma Formwork decisions. Sheppard J, who delivered the reasons in the New South Wales Court of Appeal decision, summarised the position in that case at [23] as follows:
'Dalma has a claim against Concrete for over $1,000,000 and Concrete has a claim against Dalma for at least as much, if not more.'
31 His Honour went on to say at [24]:
'Neither counsel seemed anxious to come to grips with the reality of the true nature of the case. They appeared to be concentrating on what I would regard as a comparatively minor question concerning the meaning and effect of the indemnity. But as Rolfe J said in the paragraphs from his judgment which I have quoted, 'the fact that a claim and a cross-claim arise out of the same or essentially the same factual matrix is a very important consideration'. He added that it would be quite wrong to preclude a party from litigating matters by way of defence to a cross-claim merely because that party was the initial institutor of the proceedings. I entirely agree with what Rolfe J has said. He concluded this part of his judgment by saying that it was 'a somewhat arid exercise to be considering an application for security for costs if the plaintiff could be cast in the role of a defendant and could litigate the very matters the subject of its claim by way of defence'.'
32 Earlier (at [13]) his Honour referred to Rolfe J's decision and to a decision of Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 11 ACLR 616 ('Sydmar'). In Sydmar, Smart J was dealing with a case where the plaintiff had claimed damages for the breach of a consultancy agreement. The plaintiff's damages were estimated to be unlikely to exceed $250,000. The defendant filed a defence and cross-claim alleging that the plaintiff's employees had been negligent in carrying out the consultancy agreement which related to three mining operations in New South Wales. The defendant's cross-claim was for approximately 4.5 million dollars. Smart J identified a number of factors affecting the exercise of his discretion including the following at 627:
'Whether substantially the same facts are likely to be canvassed in determining the action and the cross-action. 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.'
33 His Honour ultimately relied upon this consideration to refuse to order security for costs against the plaintiff. Ms Kelly has submitted that this consideration does not arise here because, unlike in the Dalma Formwork decisions, Total is not under administration and GRD is not seeking a stay. I do not accept either of these bases for distinguishing the Dalma Formwork decision, or the Sydmar decision for that matter. In my view, the finding that there is credible evidence giving rise to a belief that Total will be unable to pay GRD's costs if GRD is successful in these proceedings, has the same practical effect as Total being in administration. It provides the requisite credible evidence to found the exercise of a discretion to order security for costs.
34 Furthermore, while GRD may not be applying for a stay of Total's proceedings, if an order is made for Total to provide security for costs and Total fails to do so, a stay order is the inevitable consequence. Otherwise the Order for security could be ignored with impunity. Indeed, by its terms, s 1335 of the Corporations Act 2001 (Cth) anticipates this sanction. Therefore if security were to be ordered in this case and if that order could not be met, the inevitable consequence would be that Total's proceedings would be stayed.
35 In that event, the same sort of considerations would arise here as identified in the Dalma Formwork decisions. Total would be prevented from pursuing its claims against GRD but GRD would not be prevented from pursuing its claims against Total. However, Total could presumably raise its claims by way of defence as a set-off to GRD's claim and this would give rise to the 'arid exercise' mentioned by Rolfe J in the Dalma Formwork decision.
36 However, to a large extent, this outcome depends upon whether Total will be unable to meet any security order that is made. While I have concluded that Total will be unable to pay GRD's costs if GRD is ultimately successful in these proceedings, I do not believe it necessarily follows that Total is completely incapable of meeting any order for security for costs at the present time.
37 While this may sound contradictory, Total's accounts do reveal that it has assets in the form of loans made to what appear to be related parties. I have already mentioned that one of those loans is in the sum of approximately $70,000 to Stirrup Nominees Pty Ltd. There is also the large debt shown in the 'receivables' reconciliation that I have already mentioned. I do not of course know when, or if, that debt may be collected, but in my view, Total has at its disposal at least some avenues that would likely allow it to meet a modest order for security for costs.
38 The amount sought by way of security is approximately $116,000. This figure has been calculated at 60 percent of the total estimated costs figure of approximately $193,000, on the basis that at taxation Total would be ordered to pay that amount as a minimum amount.
39 However, in my view, this percentage reduction still significantly overstates the legal costs that are conceivably related to GRD's defence of Total's claim. The estimate assumes that Total will be responsible for all the costs of a five day hearing, yet five days is the total period currently set aside for the hearing of both Total's claim and GRD's counter-claims. Another measure of the reasonableness of the amount sought for security is a comparison between the amount of Total's claim of approximately $128,000 and the amount sought by way of security for costs of defending that claim of approximately $116,000. In my view, the two sums are significantly out of proportion.
40 While it is difficult to be precise, based upon the following factors, I would estimate that one day of the five days set aside for the complete hearing in this matter could reasonably be allocated to Total's claim. The factors are:
a. The comparative amounts of the claims: Total's claim is for $128,000 while GRD's counter-claim is estimated to be for 1.4 million dollars.
b. The comparative detail involved in the claims: Total's amended statement of claim exceeds seven pages while GRD's defence and counter-claim, including the schedules attached, extends to more than 60 pages. Recognising that the defence pleads a set-off, 55 pages are still exclusively devoted to the counter-claim and the comparative complexity of the claims - Total's claims are for two sums, $26,628.40 and $51,600, it says were agreed to be paid in an exchange of emails in late 2006, together with a claim for damages of $50,226 for what it refers to as dimension breaches. GRD's claims are for unspecified damages and are far more extensive, involving numerous aspects of the work done under the contract, including tiling, kitchens, light shelves, vanities, feature glass, mirrors and shower screens.
41 Having weighed up all the matters I have mentioned in these reasons, I have concluded that a fair and reasonable exercise of my discretion would require Total to pay security for costs of defending its claims against GRD in the sum of $20,000. In my view, this sum will provide a reasonable amount of security for the payment of GRD's costs directly related to the defence of Total's claim and yet not be so large that Total will not be able to meet it and, therefore, have to suffer a stay of proceedings leading to the 'arid exercise' of reversing the roles of the parties mentioned in the decisions I have referred to in these reasons.
I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice REEVES.