V & M Davidovic Pty Limited v Professional Services Group Pty Limited

Background 6On 8 October 2007, Davidovic and Vesuvius entered into a deed of option to lease a property at Doyle Avenue, Unanderra ("Doyle site"). On 7 November 2007, Vesuvius paid a security deposit pursuant to the deed. Davidovic was required to take steps to ready the Doyle site for occupation within 12 months otherwise Vesuvius was entitled to have the security deposit returned. Negotiations subsequently took place for the lease of an alternative site at Sylvester Avenue, Unanderra ("Sylvester site"). That proposal failed to eventuate. The Doyle site was not readied as required and Vesuvius commenced proceedings seeking the return of the security deposit. It was successful against Davidovic in the sum of $616,000 although a cross claim brought by Davidovic against Vesuvius has not yet been determined ("the substantive proceedings"). Davidovic seeks to recover any moneys that it does not recover on the cross claim in the substantive proceedings. 7Davidovic alleges that any amounts it does not recover against Vesuvius pursuant to the cross claim is loss arising as a result of Rosier's negligence. Davidovic also seeks to set aside a judgment against it, arising from an assessment of Rosier's costs, in the sum of just over $68,000.

The law on security for costs 8Rule 42.21 of the UCPR relevantly provides: "42.21 Security for costs (1) If, in any proceedings, it appears to the court on the application of a defendant: ... (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or ... the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. (2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct. ..." 9Also s 1335 of the Corporations Act (Cth) relevantly reads: "Costs (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. ... Note: Similar provision is made in relation to Aboriginal and Torres Strait Islander corporations under section 581-20 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006. (2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs." 10Pursuant to r 42.21(1)(d) of the UCPR and s 1335(1) of the Corporations Act (Cth) the Court must be satisfied that there is reason to believe that Davidovic will be unable to pay Rosier's costs if ordered to do so ("the threshold issue"); and the Court should exercise its discretion to order security for costs having regard to a range of factors, as summarised by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 ("discretionary issues").

The threshold issue 11I acknowledge that I have largely adopted the submissions prepared by counsel for Rosier. Counsel for Rosier submitted that there are reasons to believe that Davidovic will not be able to pay Rosier's costs if ordered to do so for the following reasons. 12First, the ASIC search and an updated search dated 27 April 2012 show that: (a) On 17 November 2011 and 6 March 2012, receiver managers were appointed; (b) On 6 December 2011, Windlock was appointed as controller; (c) Davidovic has paid up capital of $10; (d) There are three registered charges in favour of the NAB and Windlock; (e) Velibor and Miroslav Davidovic are the directors and hold 9 of the 10 shares in Davidovic. 13Secondly, the ASIC charge extracts indicate that there are fixed and floating charges in favour of NAB (all moneys) and Windlock (to a maximum of $3.5 million and $3 million respectively). 14Thirdly, paragraph 7 of the cross claim in the substantive proceedings against Vesuvius suggests that property held by Davidovic is as trustee of a family trust established by Velibor Davidovic. The assertion in Mullane & Lindsay's letter of 31 October 2011, that Davidovic is a trustee company and does not have assets or recourse to assets of the trust, has not been disputed by Davidovic. In the absence of countervailing evidence, paid up capital of $10 and Davidovic's status as trustee must be taken to represent "credible testimony" of its likely inability to pay Rosier's costs: Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806 at [39] per Barrett J. 15Fourthly, LPI searches conducted on 27 April 2012 show Davidovic as the owner of four properties. Those properties appear to be held in trust. However, even if held beneficially by Davidovic three of those properties are mortgaged to Windlock (the controller of the company with charges amounting to up to $6.5 million) and one to NAB (the holder of an all moneys charge). Further, Windlock has sold or is in the process of selling Davidovic's properties. 16Fifthly, Davidovic has not provided financial statements, tax returns and other of the evidence requested in Mullane & Lindsay's letter of 31 October 2011 and again on 2 November 2011 and 12 January 2012 in circumstances where the Court granted and then extended time for it to provide particulars going to the issue of security for costs. In Narradine Pty Ltd & Anor v Mascot Steel and Tools Pty Ltd & Ors [2012] NSWSC 385 Black J referred at [8] to Prynew Pty Ltd v Nemeth [2010] NSWCA 94 when concluding that, in such circumstances, "the Court can more readily infer that such information would not establish that [the plaintiff] would be able to meet an order for costs against it". 17Sixthly, Davidovic's schedule of assets and liabilities falls considerably short of establishing that Davidovic will be able to pay a costs order. 18Seventhly, and of lesser importance there was "substantial delay" by Davidovic is posting security of $80,000 which it agreed to pay following an application for security for costs by Vesuvius in late 2010. 19Eighthly, the liabilities of Davidovic include the payment of approximately $616,000 to Vesuvius (Aff, Cavanagh [9]) and $68,027 to Rosier (Aff, Cavanagh [17]) pursuant to Court judgments and orders. Davidovic is also involved in various ongoing litigation against Rosier, Vesuvius and Windlock. 20Mr Davidovic stated in oral submissions before this Court on this application that security for costs in the sum of $60,000 (an amount posed to him by this Court) could be provided but that "It is a struggle". 21Overall, it is my view that on credible evidence, there is reason to believe that Davidovic will be unable to pay Rosier's costs if Rosier is successful in his defence and costs are awarded in his (Rosier's) favour. 22Turning to the discretionary issues, in KP Cable Investments Pty Ltd v Meltglow Pty Ltd Beazley J at 196F - 198C stated: "The law is now settled that the discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security... Notwithstanding the broad unfettered discretion with which the Court approaches an application for security for costs, there are a number of well established guidelines which the court typically takes into account in determining any such application. They are:

1. That such applications should be brought promptly...
2. That regard is to be had to the strength and bona fides of the applicant's case are relevant considerations...As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success...
3. Whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim...
4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate...
5. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security...
6. An issue related to the last guideline is whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of any such undertaking ...
7. Security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate. ..." 23I shall deal with each guideline in seriatim.

The application should be brought promptly 24On 25 July 2011, the statement of claim was filed. 25Between 31 October 2011 and 12 January 2012, evidence of Davidovic's financial capacity was sought by way of correspondence from Mullane & Lindsay, Rosier's solicitors. The Court also made directions during this period for the provision of the information. 26On 13 January 2012, Rosier received the schedule of assets and liabilities from Good Legal Lawyers, Davidovic's then solicitors. On 30 January 2012, the application for security was filed. I accept that the application for security has been brought promptly.

The strength and bona fides of the plaintiff's case 27The statement of claim was filed just over three weeks after the costs judgment in favour of Rosier was registered on 1 July 2011 and Rosier issued a creditor's statutory demand against Davidovic. Counsel for Rosier submitted that the timing of the commencement of proceedings suggests that the action is motivated by Davidovic's desire to avoid paying the costs judgment.

The pleading in these proceedings 28The allegations of negligence against Rosier in these proceedings are essentially twofold. The first is that it failed to ensure that the security deposit paid by Vesuvius in relation to the lease of the Doyle site was "carried over" to the Sylvester site (S/C [12]). The allegation is denied on a number of grounds. The most fundamental is that the allegation turns on Davidovic establishing that Rosier was retained on 15 July 2008, as alleged, prior to the expiry of the 12 months period in which Davidovic was to prepare the Doyle site, on 8 October 2008. After that date, Vesuvius was entitled to the return of the security deposit. However, correspondence between the parties to the transaction and their lawyers provides strong evidence that Verekers Lawyers were acting for Davidovic at the relevant times and Rosier's retainer did not commence until December 2008, some months after Davidovic became liable to return the security deposit. 29The receiver and manager Mr Nicols, in his email dated 20 May 2012 to Boris Davidovic, adds weight to Rosier's submission on this topic. Mr Nicols doubts Davidovic's contention that Rosier's is the relevant solicitors acting from June 2008 as all correspondence and evidence signed by him does not agree with this contention. 30The second allegation is that counsel wrongfully made an admission during the hearing of a notice of motion filed by Vesuvius seeking an order requiring the return of the security deposit (S/C [18]). Rosier denies the allegation. The "negligent admission" made by counsel was that the only binding agreements between Davidovic and Vesuvius were the Deed of Option for Lease of the Doyle site and the Lease. That was factually correct. Further, the application by Vesuvius was unsuccessful in any event but neither party was awarded costs. Further, even if negligent (which is denied) it falls within an advocate's immunity from suit. 31On 14 February 2012, Black J heard and dismissed Davidovic's application to set aside a statutory demand issued by Rosier flowing from the costs judgment entered in its favour, in V & M Davidovic Pty Limited v Professional Services Group t/as Rosier Partners Lawyers [2012] NSWSC 134. His Honour delivered judgment on 29 February 2012. His Honour considered the allegations in the statement of claim in these proceedings and his Honour's findings are of some (albeit limited having regard to the issues the Court was considering) guidance on the issue of the strength of the claim. His Honour concluded at [16] that the pleading in relation to the outstanding costs was not sufficient to establish a genuine dispute as to the amount of the costs certificate. His Honour identified the date on which Rosier was retained as of relevance but preferred to not comment on that issue having regard to these proceedings, at [20]. However, having considered the statement of claim and evidence, his Honour concluded that there was no offsetting claim in any event because the evidence and the statement of claim did not provide any basis upon which the quantum of damages could be assessed if Davidovic was otherwise successful in these proceedings, at [23]. 32It is my view that Davidovic's case is weak and it is likely that these proceedings were commenced to stave off the company being placed into liquidation.

Whether the plaintiff's impecuniosity was caused by the defendant's conduct 33Counsel for Rosier submitted that Davidovic's case against it is weak and appears to be motivated by an attempt to avoid paying outstanding costs. Rosier submitted that there is no evidence to suggest that Davidovic's impecuniosity was cause by Rosier although I accept that Mr Davidovic may say otherwise.

Whether the application is oppressive; to deny an impecunious plaintiff the right to litigate 34Rosier further submitted that there is no evidence to suggest that either of the above apply to this application. Mr Davidovic did not submit to the contrary.

Whether there are persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security; and whether persons standing behind the company have offered any personal undertaking to be liable for the costs and, if so, the form of such undertaking 35Velibor Davidovic (Miroslav Davidovic's father) and Miroslav Davidovic are the directors of Davidovic and hold 9 and 10 shares in it. Neither has indicated a willingness to provide security or give an undertaking. Nor has Desanka Davidovic (Miroslav's mother) who holds the remaining share.

Whether the party is in substance a plaintiff 36Taking into account the above discretionary issues, it is my view that an order for security for costs should be made.

Quantum 37The costs and disbursements are estimated at $92,525. This does not include an allowance for the cost of considering and responding to any expert evidence served by Davidovic. At this stage, it is unlikely that Davidovic will obtain expert evidence. The amount of quantum is discretionary. In the exercise of my discretion I will order security in the sum of $70,000. 38Costs are discretionary. Costs usually follow the event. The plaintiff is to pay the defendant's costs as agreed or assessed. 39I direct the defendant's solicitor to forward a copy of this judgment to Mr Nicols, the receiver and manager of the plaintiff.

The Court orders that: (1) The plaintiff is to provide security for costs in the sum of $70,000. (2) The security is to be in such form as the registrar determines. (3) The proceedings are stayed until such security is provided. (4) The plaintiff is to pay the defendant's costs as agreed or assessed.

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: 13 June 2012