Voxson Ltd v McLaughlins Financial Services Ltd & Anor

Brian Bartley & Associates for the plaintiff/respondent

Mallesons Stephen Jaques for the defendants/applicants

HER HONOUR: The defendants apply for an order for security for costs against the plaintiff pursuant to rule 670 of the UCPR or section 1335 of the Corporations Act 2001.

The application is strongly opposed by the plaintiff either on the basis that there is no reason to believe that the plaintiff will be unable to pay the costs of the defendants, if it is unsuccessful in its claim or, alternatively, if that threshold issue is decided in favour of the defendants, on the basis that there are significant discretionary factors against ordering security. The amount of any security is also an issue.

The plaintiff leased property for eight years from 20 December 2001 from Landmark Property Syndicates Limited ("Landmark"). The subject property was transferred by Landmark to the second defendant as custodian for the purpose of a registered managed investment scheme.

The plaintiff alleges that the first defendant became the responsible entity of the scheme in place of Landmark and became the lessor of the property in place of Landmark. This is denied by the first defendant. In the alternative, the plaintiff alleges that the covenants of the lease were enforceable against the second defendant as the assignee of the reversion.

The plaintiff claims that the first and/or second defendants breached the lease and that the defendants repudiated the lease as a result of the specific breach alleged against the defendants of failing to make available car spaces for the exclusive use of the plaintiff and that the plaintiff accepted the repudiation and terminated the lease. The plaintiff then relocated to other premises.

The other breaches of lease alleged by the plaintiff include failing to keep the subject property in good repair in numerous different respects, overcharging the plaintiff the sum of $171,347.80 in various monthly amounts between January 2002 and January 2005 for operating expenses which did not relate to the property and unreasonably withholding consent to the plaintiff to sublet or assign the lease.

The bulk of the plaintiff's claim is for damages for breach of the lease in an amount of about $975,000. The largest part of that is for rent of about $485,000 for alternative premises leased by the plaintiff for the period 21 July 2005 to 20 December 2009.

It is relevant to this application that on any view that part of the claim for rent for alternative premises could not have strong prospects on the basis that the plaintiff had to pay rent for premises that it chose to occupy after vacating the subject property.

A director of the plaintiff, Mr Lucas Longgionou, stated that the plaintiff's proceeding against the first defendant was commenced on 10 August 2005 in response to a threat by the first defendant to issue a statutory demand against the plaintiff for amounts alleged to be owing by the plaintiff under the lease.

The first defendant defends most of the claim on the basis that it was not a proper party to be sued by the plaintiff in respect of the lease.

The defendants deny the breaches of the lease alleged against them by the plaintiff and deny that the plaintiff had a right to terminate the lease.

The defendants allege that the plaintiff's purported termination was a repudiation of the lease by the plaintiff. The second defendant counterclaims on the basis that the plaintiff breached the lease by vacating the property on or about 22 July 2005 and the defendants have been deprived of rent from mid-July 2005 until 20 December 2009 in an amount of about $1.194 million. The second defendant also claims against the plaintiff for an amount of about $199,000 under the lease for rent and other moneys owed up to 22 July 2005.

In the reply and answer the plaintiff claims that the defendants have not suffered damages for loss of rents from 1 April 2006 as from that date the subject property was rented for a higher rental and a longer term than the plaintiff had been obliged to pay under the lease.

On the threshold issue the defendants rely on the recent history of the plaintiff which is a matter of public record as the plaintiff was a listed public company that made losses in the years ended 30 June 2005 and 2006 and in November 2006 underwent privatisation with the support of the Longgionou family as the continuing shareholders who were also the founders and majority shareholders of the plaintiff. The departing shareholders' shares were cancelled for 2 cents per share and the plaintiff reverted to the control of the Longgionou family. The plaintiff was removed as a listed company on 15 December 2006.

Mr Lucas Longgionou deposed to the financial position of the Voxson Group having improved substantially with net profits from trading for the period 1 July 2006 to 31 March 2007 being approximately $1.038 million. A statement of financial position of the Voxson Group as at 31 March 2007 shows net assets of around $760,000. It is estimated that the Voxson

Group also has patents worth about $3 million, but in the course of privatisation it was expressly acknowledged by the plaintiff that those patents were not realisable in the short to medium term. They should therefore be ignored for this exercise in respect of the security for costs application.

Voxson Sales Pty Ltd is a company in the Voxson Group which is the trading company. The majority of the current assets including cash in bank as shown in the statement of financial position of the Voxson Group as at 31 March 2007 are held by Voxson Sales Pty Ltd and not the plaintiff. In the light of the relatively current financial information which led to the privatisation of the plaintiff and that the improved trading and asset position is largely in the name of Voxson Sales Pty Ltd, the defendants have discharged the onus in relation to the threshold issue.

The pleadings have closed. Disclosure has largely been completed. Both the plaintiff and the defendants have changed solicitors from those solicitors who acted for the parties at the time the pleadings were finalised, and it is anticipated that some further disclosure will be required.

The defendants rely on the capital reduction undertaken by the plaintiff as precipitating this application.

In view of the recent financial history of the plaintiff, the relative lateness of the application should not be an impediment to its success.

The most significant discretionary factor relied on by the plaintiff to preclude the making of an order for security for costs is that the costs for which the defendants seek security are said to be costs which will be incurred in any event in connection with the second defendant's counterclaim.

The plaintiff relies on a line of authorities to the effect that an order for security will not be made where the claim and the cross claim arise out of the same factual matrix. See Sydmar Pty Ltd v. Statewise Developments Pty Ltd (1987) 73 ALR 289, 300 and Dalma Formwork Pty Ltd (Administrators Appointed) v. Concrete Constructions Pty Ltd [1998] NSWSC 472. It is logical that security should not be ordered when the same evidence would be adduced in relation to both a claim and counterclaim in the same proceeding.

Analysis of the pleadings in this case shows that, although the lease may be at the heart of both the claim and the counterclaim, the ambit of the evidence and the issues are distinctly different. It is also relevant that there is no counterclaim brought by the first defendant.

The second defendant's claim for rent and future rents either as damages or in reliance on clause 12.3 of the lease is a relatively confined claim. On the other hand, the plaintiff's claim for breach of the lease traverses a number of different obligations under the lease and will require distinct areas of evidence. If the plaintiff were to establish the one breach of the lease which it alleges could be characterised as repudiation of the lease by the defendants and that resulted in the plaintiff lawfully terminating the lease, that may have a bearing on the recoverability by the second defendant of the claim for future rents as damages for loss of future rents. This overlapping does not make the counterclaim the dominant part of the proceedings as far as the ambit of evidence and the extent of the issues is concerned. (Compare the position of the defendant's defence in Sydmar Pty Ltd v. Statewise Developments Pty Ltd that precluded the ordering of security in that case.)

I am therefore satisfied that the discretion should be exercised in favour of ordering security for costs against the plaintiff.

On the issue of the quantum of the security for costs, there are starkly different approaches taken by Mr Pan on behalf of the defendants and Mr Bartley on behalf of the plaintiff. Security for costs is not concerned with indemnifying a party for its costs if it successfully defends a claim. The approach of Mr Bartley to estimating the defendants' costs of defending the proceeding is much closer to the basis on which a successful party's standard costs would be assessed after an order were made in favour of that successful party. Mr Pan's approach results in an excessive estimate. The defendant sought security in the sum of $170,000. The plaintiff suggested that an appropriate estimate of security would be $40,000. I am satisfied that the plaintiff's estimate should be adopted.

The plaintiff sought to further reduce the amount provided by way of security to take into account the overlap between the defence of the plaintiff's claim and the prosecution by the second defendant of its counterclaim. In view of my analysis of the issues on the pleadings and that the dominant part of the proceeding will relate to the plaintiff's claim, it is unnecessary to make any further reduction in this particular case.

During the hearing of the application Mr Clothier of counsel for the plaintiff indicated that he had instructions to offer security from Voxson Sales Pty Ltd. As a fallback position, he also had instructions to offer security from the directors of the plaintiff. I am satisfied that the support of Voxson Sales Pty Ltd is sufficient to make the security I propose to order against the plaintiff of value.

Now, you have seen the orders I propose to make. Do you have any difficulty with the wording of those orders?

1. It is ordered that the plaintiff give security for the defendants' costs of defending the claim to and including the first day of trial in the sum of $40,000.

2. It is directed that this order for security for costs will be deemed to be satisfied upon Voxson Sales Pty Ltd providing a guarantee in favour of the defendants in support of this order for security for costs on such terms as may be agreed between the plaintiff and the defendants, but failing agreement as determined by the Court.

3. Liberty to either party to apply on two days' notice in writing to the other.

4. There be no order as to the costs of the application filed on 21 March 2007.

In relation to costs, although the defendants have been

successful on their application for security for costs, they

were intransigent on the quantum of the security they sought.

The application was therefore destined to proceed in any case.

There has ultimately been mixed success on the application. I

am therefore inclined to reflect that by making the order that

I have indicated that there be no order as to costs.