CIVIL PROCEDURE - security for costs - discretionary considerations - where party resisting order not acting purely defensively in main proceedings - relevance of the strength of a party's claim
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CIVIL PROCEDURE - security for costs - discretionary considerations - where party resisting order not acting purely defensively in main proceedings - relevance of the strength of a party's claim
Judgment (5 paragraphs)
[1]
Judgment
This judgment deals with two interlocutory applications by Hua Chang Pty Ltd ("HC") against TTM Investment Corporation Pty Ltd ("TTM"). The first application is brought by HC in its capacity as one of the defendants in the proceedings; HC seeks security for its costs of the proceedings from TTM, the plaintiff. In the other application HC, as cross-claimant, seeks a freezing order in aid of its claim against TTM as cross-defendant.
The substantive proceedings arise out of a property development at St Ives in Sydney, on land owned by TTM. The development involved the construction of eight units on the land. HC was the builder. It undertook the work pursuant to a written construction contract dated July 2011. The contract price was $3.256 million.
TTM is a New South Wales company which was incorporated in December 2009 for the purpose of the development project. It has one hundred shares on issue, of which sixty-nine are held by Yan Wang, thirty by Shu Ye Lu and one by Yin Wei. At all relevant times up to October 2016 the directors were Mr Wang and Mr Lu.
TTM appears to be controlled by Mr Wang. He lives in Shanghai in China. Mr Yin also lives in Shanghai. Mr Lu lives in Sydney. While he was a director of TTM, Mr Lu was solely responsible for its management and for the custody of its records.
The events which gave rise to the substantive proceedings arise out of three contractual documents between TTM and HC which post-dated the building contract. The three documents were executed by Mr Lu on behalf of TTM. The first was a letter styled "Letter of Commitment" executed in September 2013. The second was an agreement styled "Final Payment Agreement" executed in December 2013. The third was a deed styled "Deed of Indemnity" executed in April 2014. Mr Lu was also a party to the Deed of Indemnity in his own right.
Under the original building contract, HC was not required to have, and did not have, Home Owners' Warranty ("HOW") insurance. If the units were to be sold to purchasers who were retired, it was necessary under Home Building Act 1989 (NSW), s 92(1), for the units to have been built by a builder holding such insurance. In broad terms, the three documents provided for HC to obtain HOW insurance and for TTM to make additional payments to HC in return.
The HOW insurance policy was obtained in June 2014 and this allowed for the completion and certification of the project. TTM reimbursed HC the $28,000 cost. In July 2014 TTM made further payments of $250,000 (under the Letter of Commitment) and $750,000 (under the Final Payment Agreement). HC and Mr Lu also undertook under the Deed of Indemnity to indemnify HC against any claims by purchasers the subject of the HOW policies.
Subsequently purchasers made claims against HC for defective workmanship. In November 2016, HC commenced proceedings in the Local Court against TTM and Mr Lu seeking indemnity against those claims pursuant to the Deed of Indemnity. The amount claimed was approximately $82,000.
In about February 2017 Mr Wang apparently fell out with Mr Lu. Mr Lu was replaced as director and secretary of TTM by Hai Yun Ding who was originally from Shanghai but is now based in Sydney. Mr Lu remains a thirty per cent shareholder in TTM.
The present proceedings were commenced by TTM in late February 2017. In March 2017, the Local Court proceedings were transferred to this Court to be heard together with these proceedings. Subsequently HC filed a cross-claim covering the claims originally made in the Local Court proceedings but including additional claims against additional parties.
In the principal proceedings TTM sues both HC as first defendant and Mr Lu as second defendant.
As against HC, TTM alleges that the three agreements contravened provisions of the Home Building Act and are therefore void. TTM seeks restitution of the payments made pursuant to those agreements totalling approximately $780,000. It also seeks a declaration that it is not liable to indemnify HC against claims by purchasers.
As against Mr Lu, TTM claims compensation for alleged breaches of duty as director. TTM alleges that Mr Lu misappropriated company funds by transferring them to an account in the name of his daughter. TTM also alleges that the entry into the three agreements were breaches of duty on the part of Mr Lu. It is not alleged that HC was on notice of these breaches.
By its cross-claim, HC claims against TTM (as first cross-defendant) and Mr Lu (as second cross-defendant) indemnity under the Deed of Indemnity against defective work claims by purchasers. This covers the same ground as the original Local Court proceedings. The amount claimed is now approximately $208,000. HC also seeks an order rectifying the Deed of Indemnity so that it would specifically require TTM to pay the costs of obtaining the HOW insurance.
The third cross-defendant to HC's cross-claim is Link Lawyers Pty Ltd ("Link"), a solicitor corporation which acted for HC in connection with the Deed of Indemnity. HC alleges professional negligence against Link in the preparation of the Deed of Indemnity; HC claims damages from Link for the loss which would be suffered by HC if the Deed of Indemnity proves unenforceable.
Seven of the units in the development have been sold. Unit 8 remains unsold. It is said to be worth between $1.1 and $1.2 million. It is mortgaged as security for a loan of approximately $650,000. Accordingly, there is between $450,000 and $550,000 in equity available to TTM. HC lodged a caveat on the property which has prevented its sale but now accepts that it has no caveatable interest. At the hearing on 9 July I made a consent order for the caveat to be withdrawn.
Originally there was a third motion before the Court, an application by Mr Lu for security of his costs of the proceedings. This application was settled, with consent orders being made for TTM to provide security in the sum of $80,000 out of the proceeds of sale of the property and to grant Mr Lu a caveat for that amount over the property in the meantime.
[2]
Application for security for costs
The threshold condition which must be satisfied before the Court may order security is that there is reason to believe that TTM will, if it is unsuccessful in the proceedings, be unable to pay HC's costs. It is common ground that this condition is satisfied; and, moreover, that the satisfaction of this condition not only opens the door to the exercise of the Court's discretion to award security but is a factor in favour of doing so.
The affidavit by TTM's solicitor in response to the application states that the Chinese government prohibits Chinese citizens from transferring funds totalling more than $10,000 overseas in any one year. But the evidence also shows that Mr Wang has funded the conduct of the litigation by TTM so far to the tune of approximately $116,000. The evidence shows that TTM is in a precarious financial position and is heavily indebted to Mr Wang and others. There is no evidence that Mr Wang and the others who stand to benefit from the success of the litigation are without the means to fund it, and it is not suggested that an order for security for costs would stultify the proceedings.
Counsel for TTM resisted the making of an order for security on two grounds. First, counsel argued that the proceedings were defensive in nature. Counsel pointed out that the proceedings in this Court were brought after HC had commenced proceedings on the Deed of Indemnity in the Local Court. Counsel argued that the invalidity of the Deed and the related agreements was a point which could be raised by way of defence to that claim (now part of HC's cross-claim).
All this may be accepted, but the fact remains that TTM is not merely defending itself against a $208,000 claim by HC. It is itself claiming approximately $780,000 back from HC. I do not think that it is accurate to see TTM's proceedings as being purely defensive. The proceedings are not a response to "self-help" remedies. TTM invokes the Court's assistance to try to recover monies which are considerably more than the amount at stake in the cross-claim.
Counsel's second argument was that TTM's claim is a strong one. It was submitted that the conduct of HC represented a clear breach of the Home Building Act. But it is not usual in an application such as this for the Court to go into the merits of the claim in any detail. Counsel for TTM did not suggest that the proceedings were indefensible or that HC was not acting bona fide in defending the proceedings. Given that there is no suggestion that the ordering of security would stultify the proceedings, I think that the strength of the claim (once it is accepted, as it is here, that the defence is viable) is of no real significance.
It follows that I consider that HC has made out an entitlement to an order for security in its favour. The question remains what quantum of security is appropriate.
HC's notice of motion originally sought an order for provision of security in the sum of $80,107.50. In an affidavit filed in support of the application, HC's solicitor estimated that the costs of defending the proceedings would be approximately $80,000. The affidavit in response from TTM's solicitor Mr Shen accepted this as a reasonable estimate. Mr Shen suggested that TTM's costs of the proceedings, which include of course claims against Mr Lu and Link as well as TTM, would be $120,000 to $150,000.
In February 2018 HC agreed to provide Link with $100,000 in security for Link's costs of the cross-claim. HC then amended its notice of motion so as to include the additional $100,000 in the security to be provided by TTM for its costs of HC's defence. But this amendment was abandoned. HC now accepts that it can only legitimately get security for its own costs of defending the proceedings, and cannot tack the security which it has given for its separate claim against Link on to its security entitlement against TTM.
Counsel for HC submitted that $80,000 should be awarded on the basis that TTM's solicitor had accepted the reasonableness of this figure. But I think that all that was really agreed was the reasonableness of the figure as an estimate of HC's costs, not the reasonableness of security being provided in that amount.
The difficulty is that in my view both TTM and HC are in effect plaintiffs. Both stand to gain from the outcome of the proceedings and both have their own independent claims. Neither can be regarded as acting defensively. In principle it is clear enough that if there are any costs which are solely referable to HC's defence of TTM's claims against it, security should be provided for those costs. It is equally clear in principle that HC should not get security for costs which are solely referable to the prosecution of its cross-claim. The practical difficulty is that most, if not all, of the costs are likely to be referable to both TTM's claim and HC's cross-claim.
I was not referred to any authority on how to resolve this problem. As a matter of principle, and in the absence of evidence identifying any costs solely referable either to the claim or cross-claim, I think the appropriate course is to partition the costs equally between the claim and the cross-claim. Accordingly I will fix the amount of security to be provided at $40,000.
HC seeks orders in conventional form for TTM to provide security in a form acceptable to the Court and for the stay of the proceedings until the security is provided.
TTM has already agreed to fund the security provided for Mr Lu's costs from the sale of the remaining unit in the St Ives property, and I assume it will wish to do the same for HC's security. In principle, this seems appropriate provided that appropriate steps are taken to protect HC's interest in the meantime, presumably along the same lines as those taken to protect Mr Lu's interest (i.e a caveat and an undertaking not to deal with the property). Counsel for HC indicated, without making any final commitment, that such an arrangement would likely be acceptable if offered. Accordingly, while I will make an order in the form sought by HC, I will grant liberty to TTM to apply for variation of the order to enable it to fund the security out of the sale of the property in a similar matter, and on similar terms, as for the security to be provided to Mr Lu.
[3]
Freezing order
In Patterson v BTR Engineering (Aust) Limited (1989) 18 NSWLR 319, Gleeson CJ said (at 321-322):
The remedy is discretionary, but it has been held that, in addition to any other considerations that may be relevant in the circumstances of a particular case, as a general rule a plaintiff will need to establish, first, a prima facie cause of action against the defendant, and secondly, a danger that, by reason of the defendant's absconding, or of assets being removed out of the jurisdiction or disposed of within the jurisdiction or otherwise dealt with in some fashion, the plaintiff, if he succeeds, will not be able to have his judgment satisfied.
In the present case it is the second requirement which is in issue. Counsel for HC pointed to the fact that TTM, although a New South Wales company, is apparently controlled from China. Counsel's submission was that if a freezing order is not made there would be nothing to stop Mr Wang organising the sale of the property and remitting the proceedings offshore, thus depriving HC of any assets against which it might enforce any judgment it might obtain. Counsel for TTM, on the other hand, pointed out that there was no evidence of any specific threat to make TTM judgment-proof.
In Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft und Co KG (The Niedersachsen) [1983] 1 WLR 1412 the defendants were a West German limited partnership which sold a ship to the plaintiffs in England. The defendants had no other assets in England apart from the proceeds of sale. Mustill J (as his Lordship then was) made a Mareva order against the defendants on an ex parte basis, but later discharged the order on the defendants' application. The plaintiffs appealed the discharge of the order. The test applied by the Court of Appeal was whether "the refusal of a Mareva injunction would involve a real risk that a judgment or award in favour of the plaintiffs would remain unsatisfied".
Little evidence on this question had been presented to the Court, apart from the bare fact that the defendants had no presence in England and had no assets there apart from the proceeds of sale. The plaintiffs' agent deposed to his belief that the proceeds would rapidly be repatriated if an injunction were not granted, and to his pessimism about the prospects of the defendants honouring any award of judgment unless they were forced to keep assets in England. But there was no evidence of any history of default by the defendants on their debts, no evidence that an entity incorporated in West Germany would be difficult to track down or be unable to provide assets to meet adverse judgments, and no suggestion that English judgments or arbitral awards could not be enforced in West Germany.
The defendants' case in response was similarly bare. It comprised a short affidavit from the defendants' representative who deposed to three matters. Firstly, he denied any intention on behalf of the defendants to evade any aware that might be made against them. Secondly, he stated that the corporate group of which the defendants were part had been founded more than 50 years before and had never failed to honour its financial commitments. Thirdly, he noted the defendants would probably remove the proceeds from England in order to invest them in the ordinary course of its business operations in West Germany.
Mustill J observed that the evidence of difficult market conditions for shipowners did not demonstrate that the defendants were unable to meet any judgment against them. Mustill J said (quoted by the Court of Appeal at 1425):
True, they have suffered losses on ships which (like all trading ships) were heavily mortgaged. Yet the sellers are not bankrupt; mortgages have been redeemed, no doubt with backing from the rest of the group; there is no suggestion that the group as a whole has failed to weather the storm. If the group has absorbed losses of nearly $100m on these two ships, why should the court assume that it will let the company go to the wall for a further loss of less than one-hundredth of this amount?
The Court of Appeal stated (at 1419-1420), in a passage quoted with approval by Gleeson CJ in Patterson (at 323-324):
Bare assertions that the defendants are likely to put any asset beyond the plaintiff's grasp and are unlikely to honour any judgment or award are clearly not enough by themselves. Something more is required. Viewed from this point of view, the plaintiffs' evidence in the present case can certainly be described as exiguous. In that respect it is very much of a borderline case. However, the judge presumably took the view that in all the circumstances there was just enough to justify the limited injunction which he granted, leaving it to the defendants to apply to have it discharged, as happened, and knowing that no real harm would thereby befall them which could not be dealt with by an order as to costs. Accordingly, despite the judge's implied invitation to us to do so, we would not go so far as to say that in the exercise of his discretion, he was wrong to make the order which he made. However, the exiguousness of the plaintiffs' evidence on this aspect must naturally weigh strongly, as it did with the judge in this case, when the court comes to consider the whole of the evidence on the application inter partes to discharge the injunction.
The Court of Appeal affirmed Mustill J's decision to discharge the order.
In this case there is no evidence that Mr Wang in the event of the sale of the property, actually intends to remove the proceeds offshore to put them beyond HC's reach. But I do not think that the Court should ignore that, on the evidence, Mr Wang has no ties to Australia and faces no commercial pressure to leave the remaining proceeds of the property in Australia when it is realised. Rather he would have a positive incentive to remove the proceeds so as to improve TTM bargaining position in the litigation.
If an injunction is refused and the proceeds of the property are removed from the jurisdiction, then if HC obtains a judgment in its favour it will face having to appoint a liquidator who would then be required to mount claims for breach of director's duties or for the recovery of uncommercial payments against Mr Wang in China. It was not suggested that there are any relevant international agreements which would assist the liquidator in this task. Nor is there any reason to think that Mr Wang carries on any business activities in any other jurisdiction where he might be vulnerable to recovery proceedings. And nothing whatever is known of Mr Wang's own financial position or that of any companies or business through which he operates. The situation is different from that in The Niedersachsen, where the defendant was part of a large West German ship-owning group, judgments or awards given in English courts were readily enforceable in the courts of West Germany, and there was no suggestion the group as a whole was not viable.
In the circumstances, I think that some restraint is appropriate. This is not because the Court entertains active suspicion of Mr Wang's conduct or motives, but simply to remove the temptation which would otherwise exist.
Accordingly, I propose to make an order restraining TTM from selling or encumbering the property, which will be discharged if TTM pays the sum of $208,000 into Court. Ordinarily such an order is subject to a carve-out for the reasonable costs of defending the proceedings. In this case, the position is complicated by the fact that TTM is not only defending the cross-claim by HC but is bringing its own independent claim against HC and Mr Lu. On the figures which have been presented to me, the equity in the property may well be sufficient to cover the security ordered in favour of TTM and Mr Lu, and for funding TTM's defence of the proceedings while still leaving sufficient left over to cover the $208,000. But I will grant liberty to TTM to apply for a "carve out" from the $208,000 in the event that the remaining equity appears insufficient.
[4]
Costs of applications
When the applications initially came before me for hearing on 8 June, it appeared following negotiations that the parties might have resolved the applications by TTM giving undertakings in a form acceptable to HC. When the matter returned to Court on 9 July TTM offered an undertaking of its solicitor to receive the proceeds into his bank account and not to pay them out except by way of defence costs and payment of the costs of sale and the security awarded in favour of Mr Lu. But as counsel for HC pointed out, an undertaking of this type would not give HC any security nor would it prevent the "security" amount from being eroded by HC's own costs. When I questioned counsel for TTM about how the undertaking could be reconciled with Mr Shen's obligations to his own client, and how it would work if a liquidator was appointed to TTM, the undertaking was withdrawn and counsel reverted to the position that the applications should be dismissed.
In the result, HC has succeeded on both of its motions and I think a costs order should be made in its favour. But allowance must be made for the costs associated with the amendment to the motion which sought the extra $100,000 on account of the security HC provided to Link, and for the fact that I have decided to award only half the security sought. Rather than complicate the assessment by referring to individual issues in the motions, I think the appropriate course is to order TTM to pay half of HC's costs of the two motions.
I direct that HC bring in short minutes of order giving effect to these reasons within 14 days of today's date.
[5]
Amendments
27 July 2018 - amend references to parties
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Decision last updated: 27 July 2018