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Judgment

1. McCALLUM JA: Valmont Interiors Pty Ltd has appealed from a decision of the District Court (Smith SC DCJ) in proceedings concerning a building dispute arising out of the fit-out of the Giorgio Armani retail store at Sydney International Airport. On 26 April 2021, which was a week before the hearing of the appeal, I ordered Valmont to pay security for Giorgio Armani Australia Pty Ltd's costs of the appeal, reserving my reasons and my decision as to costs. The relevant orders were as follows: 1. Pursuant to s 1335(1) of the Corporations Act 2001 (Cth), the appellant is to provide security for the payment of the respondent's costs of the appeal, to be paid in the form of a bank guarantee from an Australian trading bank, or by payment into Court, in favour of the respondent, for an amount of $50,000.00, such bank guarantee (if security is provided by that means) to have no expiry date. 2. Security is to be provided by Friday, 30 April 2021. 3. If security is not provided, that the appeal be stayed.
2. These are my reasons for making those orders.
3. The circumstances in which the appeal was brought were summarised in the respondent's written submissions. Valmont was retained as the builder for the fit-out of the airport store in January 2016. The parties fell into dispute and Valmont ultimately commenced proceedings in the District Court seeking payment of amounts allegedly due for certain variations requested by Giorgio Armani. Giorgio Armani brought a cross-claim for defective works and both proceedings were heard by Smith SC DCJ. On 27 August 2020, his Honour made separate awards on the claim and the cross-claim. The award to Giorgio Armani exceeded the amount awarded to Valmont. On the application of Giorgio Armani, the primary judge subsequently made the following orders: The following judgments entered on 27 August 2020 be set off against each other with effect from the date of these orders: (1) the judgment in favour of the plaintiff in the sum of $130,973.00 and (2) the judgment in favour of the defendant on the cross-claim in the sum of $235,611.29.
4. The primary judge ordered Valmont to pay Armani's costs of the proceedings on an ordinary basis up to and including 23 April 2020 and on an indemnity basis thereafter.
5. Accordingly, at the time the appeal was commenced, Valmont was indebted to Giorgio Armani in the sum of $104,638.29 together with post-judgment interest and costs estimated by Giorgio Armani in the sum of $385,000. Giorgio Armani contends that that is a conservative estimate of its costs taking into account a likely reduction on assessment. Valmont has made no payments in satisfaction of the judgment or the costs order.
6. The appeal was commenced by summons filed on 26 November 2020. On 4 December 2020, the solicitors acting for Giorgio Armani wrote to Valmont's solicitors seeking financial statements to enable them to assess whether Giorgio Armani should make an application for security for costs. Valmont was slow to respond to that request and sought a number of extensions of deadlines fixed by Giorgio Armani. Five deadlines passed without the production of any financial statements by Valmont, the last being on 25 March 2021, a date nominated by Giorgio Armani as the deadline for "one final opportunity" for Valmont to make proper financial disclosure.
7. Giorgio Armani filed its notice of motion on 9 April 2021. Shortly after filing the notice of motion, Giorgio Armani filed a notice to produce seeking production of the financial statements it had been requesting since 4 December 2020. An affidavit containing limited financial information was finally produced by Valmont on 22 April 2021. It was confirmed at the hearing that the material annexed to the affidavit represented the entire response to the notice to produce.
8. Giorgio Armani's original notice of motion invoked only r 51.50(1) of the Uniform Civil Procedure Rules 2005 (NSW), which would have required it to establish special circumstances warranting an order for security for costs. However, on the morning of the hearing, an amended notice of motion was filed invoking s 1335(1) of the Corporations Act 2001 (Cth), which provides: Where a corporation is the 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.
9. As to the principles to be applied, Giorgio Armani relied on the decision in Treloar v McMillan [2016] NSWCA 302 at [9]-[15] (Beazley ACJ). Her Honour's judgment in that case provides a helpful and comprehensive summary of the relevant principles which, rather than attempting to paraphrase, I will set out in full: "An order for security for costs may be made against a corporation that is, relevantly, an appellant, if it appears by credible testimony that there is a reason to believe that the corporation will be unable to pay the costs of the respondent if the respondent is successful in opposing the appeal. The Court may require sufficient security to be given for those costs and stay all proceedings until security is given: the Corporations Act, s 1335(1); Pioneer Park Pty Ltd v Australia and New Zealand Banking Group [2007] NSWCA 344 at [20]. The principles governing the making of an order for security for costs under s 1335(1) are well established. Unlike the position where an application for security is made under UCPR, r 51.50, it is not necessary, under s 1335 that an applicant for security for costs demonstrate special circumstances for the making of an order: Pioneer Park at [22]. The test to be applied in determining whether an applicant has satisfied the jurisdictional requirements of s 1335 has been described as "undemanding": HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at [17]. In Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93, Maxwell P and Buchanan JA stated, at [15], that the phrase "reason to believe" in s 1335 "is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more". See also HP Mercantile v Dierickx at [6]-[10]; Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 at [29]-[30]; Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [16]. In Livingspring v Kliger Partners their Honours further observed, at [15], that the section required the making of a risk assessment as to whether the corporation would be unable to pay, and that: "The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs." Relevantly, for the purposes of this case, their Honours stated, at [16], that the assessment that must be made under s 1335 is "a low threshold", reflecting the policy of the section, which is to protect a party against the risk of a corporation's impecuniosity. Maxwell P and Buchanan J stated, at [17], that the foremost consideration in determining whether to exercise the discretion conferred by s 1335 was whether "an order for security would work an injustice". Specific factors that have been identified in the authorities as relevant to the exercise of the discretion conferred by s 1335 include whether the applicant's conduct was the cause of the company's impecuniosity; and whether an order for security for costs would stifle the proceedings: KP Cable Investments Pty Ltd v Meltglow [1995] FCA 76; (1995) 56 FCR 189 at 196-197; Pioneer Park at [48]-[51]. The onus in proving that a party will be unable to pay costs ordered against it remains at all times on the party making the application: see Livingspring v Kliger Partners at [20]; HP Mercantile Pty Ltd v Dierickx at [11]. However, as discussed in Wollongong City Council v Legal Business Centre at [30], if a corporation who seeks to resist an order for security for costs, in circumstances where the applicant for security has established that there is reason to believe that the corporation will be unable to pay the costs of litigation if successful, contends that an order should not be made, for example, because it would stifle the litigation, there may be an evidentiary burden on the corporation to demonstrate that this is the case."
10. Valmont expressly disavowed any argument that Giorgio Armani's conduct was the cause of any impecuniosity or that an order for security for costs would stultify its prosecution of the appeal, its position being that the financial statements showed a satisfactory financial position.
11. Accordingly, the principal factual issue raised by the application was whether, based on an analysis of what little financial information Valmont produced, there was reason to believe it would be unable to pay Giorgio Armani's costs if successful in its defence of the appeal.
12. The financial material produced by Valmont was confined to special-purpose financial statements for the year ended 30 June 2020 and bank statements from 1 July 2020 to 31 March 2021 for one of the two bank accounts identified in the financial statements.
13. Giorgio Armani's written submissions analysed the financial statements against the measure of what was contended to be the lowest amount payable to Armani, stated as $520,352.51. The submissions contained an error in that respect, adopting as the judgment amount payable to Giorgio Armani the sum of $130,973. That was the judgment awarded to Valmont. The correct amount payable to Giorgio Armani after the set-off is $104,638.29, taking the total debt including costs to $494,017.80. However, even if it is assumed that the debt is around $490,000, the analysis holds good.
14. Valmont's cash position as at 30 June 2020 was $449,623. That amount would be entirely eroded by payment of the debt to Giorgio Armani of $490,000. Further, Valmont's cash position since then has fluctuated considerably and has frequently fallen to a level below that required to meet its indebtedness to Giorgio Armani.
15. Giorgio Armani relied on a series of additional matters. I have already referred to the fact that Valmont produced bank statements in relation to only one of the two bank accounts identified in its financial statements as at 30 June 2020. The bank statements produced related to Valmont's everyday account. As at 30 June 2020, Valmont also had an "Online Saver" account with a recorded balance of $270,000. No statements or more recent information regarding that account were provided.
16. Curiously, in the financial statements as at 30 June 2020, term deposits in the sum of $294,140 are recorded as non-current assets in the balance sheet but as current assets in a note to the balance sheet. Non-current assets also include over $1.5 million in "related party loans", the recoverability of which is entirely unknown and which, so far as the evidence reveals, appear to be unsecured.
17. Furthermore, Valmont provided no evidence as to its tax position apart from the fact that the financial statements record a debt due and payable to the ATO as at 30 June 2020 of over $180,000 (as noted on behalf of Valmont, the same entries at least indicate that there is no unpaid liability for the previous financial year).
18. Giorgio Armani's written submissions also provided an analysis of the fluctuations in the account which revealed many days since 30 June 2020 on which the balance in the everyday account did not hold sufficient funds to meet Valmont's liability to Armani. The overall picture presented by the accounts is, perhaps, what might be expected of a trading building company, with the cash position fluctuating considerably from day to day.
19. Giorgio Armani's analysis of the financial evidence persuaded me that there was reason to believe that Valmont would be unable to pay Giorgio Armani's costs if not successful in its appeal.
20. The only discretionary factor pointing against ordering that security be provided was the question of delay. As already noted, the matter was due to be heard one week after the date on which the security application was listed. However, that was largely due to the extensive delay on the part of Valmont in producing the financial information requested many times by Giorgio Armani. In circumstances where the risk of stultifying the prosecution of the appeal was expressly disavowed, I considered that I should exercise my discretion to award security.
21. The quantum of security sought was $75,000. Although that sum was not specifically contested by Valmont and was supported by a careful calculation based upon the estimates of an experienced lawyer, I considered that it was a generous sum for a one day appeal of the kind brought. Based on a relatively rough reckoning, I was of the view that the amount payable by way of security should be $50,000.
22. I reserved the question of costs of the motion. I have come to the view that the costs of the motion should be costs in the appeal. Although Giorgio Armani has been successful in this motion, the basis on which it has succeeded was identified very much at the last minute with the amendment of the notice of motion to rely on s 1335(1) of the Corporations Act. That left Valmont effectively no time to consider offering security within the framework of the application as it ultimately proceeded. Had Giorgio Armani been required to establish special circumstances warranting an order for security for costs, there may have been a different result.
23. For those reasons I make the following order as to costs: 1. the costs of the respondent's motion be costs in the appeal.