Vintage Marine Art Pty Ltd v Henderson

The plaintiff

1. The plaintiff, as is obvious from the title of the proceedings, is a corporate entity of which there are two Directors. One of those Directors is Gina Edwards, who swore an Affidavit dated 22 September 2018.
2. The plaintiff has served its lay evidence in chief for the substantive proceedings and the defendants have served some affidavit evidence. One of the allegations of the defendant, for which expert evidence is said to be required, is that a crucial email has been concocted and/or forged, by including two sentences about assignment that, according to the defendants, were not in the original email.
3. At the time that the proceedings came before the Court in November 2018, save for the expert evidence relating to the aforementioned allegation of forgery, the matter was ready to take a hearing date. The estimate for the hearing was four days. Mediation has already occurred and was unsuccessful.
4. In the Affidavit of Robert John McLaughlin, Solicitor for the defendants, the defendants have provided estimates of the professional costs already incurred; and the disbursements to be incurred from November 2018, until the conclusion of the substantive hearing, including the professional fees incurred at trial. That estimate is for $62,371.50, in which there is an allowance of 70% on assessment for professional fees and 100% for disbursements. The foregoing assessment is the basis for the claim for $60,000 further security.
5. The plaintiff is impecunious. Each of the parties agrees on that issue. The defendants were persons involved in the formation of the plaintiff. As a consequence, the Court is satisfied that pursuant to the terms of the Uniform Civil Procedure Rules 2005 (NSW) (hereinafter "UCPR"), r 42.21(d), the plaintiff, being a corporation, "will be unable to pay the costs of the defendants if ordered" so to do.
6. As a consequence, the Court has the power to order security and, whether or not it exercises that power, is a matter within the discretion of the Court.

Exercise of discretion

1. While the defendants bear the onus of establishing the threshold jurisdictional basis for an order securing costs, it is for the plaintiff, to the extent that it is relying upon an argument that the ordering of security would stifle the proceedings, to show a basis for that proposition. Security for costs is not a punishment; it is intended to ensure that a party that conducts itself in such a way as to require another party to incur costs will, if an order for costs is made, be able to meet such costs.
2. Impecuniosity, in relation to a natural person, is not a basis upon which the Court would, ordinarily, order security for costs. In the case of a corporation, the issues are different.
3. Since it is relatively simple to arrange the finances of a corporation in such a way that it cannot meet its debts associated with the costs of the proceedings, together with the proposition that the corporation must act through natural persons, the impecuniosity of a corporation is a jurisdictional basis upon which the Court may order security. It is then for the persons behind the corporation to show that such an order would stymie or stifle the proceedings.
4. For that purpose, as earlier stated, Ms Edwards swore the Affidavit of 22 September 2018. That Affidavit attests to the proposition that she is also impecunious and is unable to find sufficient funds to meet a further order for security of costs. At [18] of her Affidavit, Ms Edwards attests to the fact that her employment contract will terminate shortly after which she will be receiving no income. The assumption in that proposition is that Ms Edwards will be unable otherwise to obtain work.
5. Further, the plaintiff relies on an Affidavit of Ms Edwards of 19 July 2018. In that Affidavit, the deponent (at [7]) attests to the fact that over $250,000 has been paid by her in legal fees "as the plaintiff ceased trading in 2012" and "the responsibility has been assumed by me as a director and shareholder of the plaintiff". On the information provided in the Affidavit of 19 July 2018, there is little doubt that Ms Edwards has significant debt and is, on account of that debt, together with the burden of her own legal costs, unable to afford the security for costs.
6. At the hearing, Ms Edwards, who appeared for the plaintiff, made it clear that she was, shortly, to be admitted to practise law in New South Wales. She has current employment, but is not earning sufficient income that would warrant an inference that she could afford the security of costs which are being sought.
7. There are two Directors of the plaintiff. Ms Edwards is one of those Directors. The other Director is Danielle Demarest, who deposes in an Affidavit, sworn 20 July 2018, that she is the co-owner of assets with her husband, for which it is necessary to obtain his consent, were it sought to levy those assets. There is no suggestion that his consent would not be forthcoming.
8. Apparently, at the time of swearing the Affidavit on 20 July 2018, Ms Demarest was unemployed and was caring for three children. It seems, on the material before the Court, that she is a legal practitioner, but has student loans from law school totalling approximately US$20,000.
9. Further, the Affidavit of Ms Demarest attests to the fact that she has "federal income tax debt" exceeding US$50,000. Given that the rate of income tax in the United States, levied federally, is lower than that which is levied in Australia on income, I infer that the federal income tax debt would be payable in respect to an income of over US$150,000. There is no suggestion that the income to which the income tax debt related involved more than one year's annual income.
10. The statement by the Director, Ms Demarest, to the effect that she is "unable to financially support the Plaintiff in respect of security costs sought by the Defendants", must be understood in the context of an inability, in the absence of her husband's consent. Her reference to credit card debt of $6,000 and student loans of $20,000 (each in US dollars) provides little or no context.
11. It is not clear, from the Affidavit, and it is not attested by Ms Demarest, as to what the monthly credit card debt is and whether the credit card debt of $6,000 is more or less than the debt that accrues each month. Nor does Ms Demarest attest to the scheme by which the student loans are required to be repaid and the effect that repayment, if made, has on recurrent income and payments.
12. Ultimately, I am not satisfied on the material arising from the two Affidavits that, with the support that is ordinarily available to either or both of the Directors but, particularly, Ms Demarest, and in the context of their ordinary payments, an order for further security of costs would stifle the proceedings.
13. The plaintiff, as earlier mentioned, is no longer trading. It is therefore necessary to determine whether it is appropriate to exercise the discretion reposed in the Court to order further security for costs.
14. I have already dealt with the jurisdictional threshold associated with the UCPR. I should also note the provisions of s 1335 of the Corporations Act 2001 (Cth). It is obvious that there is credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if successful in its defence.
15. No discretion is ever "unfettered": Re Coldham; Ex Parte Brideson (1989) 166 CLR 338 at 347; [1989] HCA 2. As was made clear by the High Court in Brideson, a discretion that is exercisable without stated or express criteria is, nevertheless, a discretion that must be exercised having regard to the scope and purpose of the legislative provision. Further, this discretion must be exercised judicially.
16. Other than the plaintiff's impecuniosity, which is a jurisdictional precondition to the making of an order of this kind, and the condition for which the plaintiff argues that the further order for security for costs would stifle the proceedings, other factors are relevant in the determination of this aspect of the motion. Without being exclusive, those factors include: the genuineness of the commencement of the proceeding and its continuation; whether the proceedings involve a matter of public importance; whether there has been an admission; whether delay by the plaintiff is such as to warrant overcoming some prejudice to the defendants; the costs of the proceeding; that the security sought is proportionate to the subject matter; the timing of the application; the enforceability of the security order; and whether the proceedings have been taken for genuine purpose: Beach Petroleum NL v Johnson (1992) 7 ACSR 203; [1992] FCA 136.
17. I have no doubt that the proceedings have been taken genuinely for the purpose of obtaining the legal remedy claimed. The Court has dealt already with the impecuniosity of the plaintiff and the circumstances of those that are behind the plaintiff. The Court has also dealt with whether the order for further security for costs would stifle the proceedings.
18. The factors, of, firstly, whether the prospects of success on the merits of the proceedings; and, secondly, whether there has been an admission, are factors that, in this case, are related. In the substantive proceedings, the Affidavit filed on behalf of the plaintiff of Ms Edwards of 19 July 2018 contains a statement in or to the effect that Ms Edwards does not "disagree that there has been a change to the original email, however, I deny that I altered this email in anyway at any time." The foregoing deals with the issue of the allegedly "forged" email that refers to the capacity to assign the rights under the Licence Agreement.
19. The last mentioned statement does not suggest that the merits of the case of the plaintiff are lacking. Nevertheless, the substantive proceedings will need to determine what, if any, other material corroborates or expresses the view that the parties agreed to a capacity to assign and, if words have been added to the email in the attachment, by whom they were added. This means that the proceedings will be a little more complicated than might otherwise be the case and, possibly, involve expert evidence beyond that which has been estimated by the defendants.
20. For the foregoing reasons, the Court considered that it was appropriate to order further security. The difficulty was the amount of that security. The Court fixed an amount of $40,000 as the security to be provided, but in so doing the Court did not intend that any inference or implication should be drawn or made to the effect that the estimates of the costs into the future are unreasonable.
21. Ultimately, the Court must balance the interests of each of the parties. While I am not satisfied that the ordering of any security would stifle the proceedings, I am mindful that the resources available to the two Directors (and/or the partner of one of the Directors) are not substantial and an order for security for costs that is for an amount that might stifle the proceedings, should be avoided. For that reason, I determined that an appropriate level of security was approximately two thirds of the estimated future costs and fixed the sum at the amount ordered.
22. For the foregoing reasons the orders of 18 November 2018 were issued.

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