Weston Energy Pty Ltd v National Ceramic Industries Australia Pty Ltd

Supreme Court of NSW|2023-06-28|Before: Garling J

JUDGMENT

On 22 February 2023, the defendant National Ceramic Industries Australia Pty Ltd ("National Ceramic") filed a Notice of Motion by which it sought an order that Weston Energy Pty Ltd ("Weston") provide security for its costs of the proceeding by way of payment into Court in the amount of $200,000 (a sum later updated to $269,000) within 14 days. Consequential relief was sought, including that the proceeding be stayed until such time as the security was provided.
The Motion also included an order that Weston be required to provide a response to National Ceramic's request for further and better particulars contained in correspondence dated 8 December 2022 within 7 days.
This is the third interlocutory Motion which I have heard in these proceedings.
In respect of the other two Motions, I will publish contemporaneously a judgment, Weston Energy Pty Ltd v National Ceramic Industries Australia Pty Ltd [2023] NSWSC 713, in which I describe the nature of the litigation and the subject matter of it. It is unnecessary to repeat all of that material here. This judgment assumes familiarity with that judgment and the proceedings generally.
But, to recap, the following matters are to be noted: 1. Weston claims the sum of a little under $665,000 for gas which it supplied to National Ceramic in accordance with a written agreement and for which it has issued an invoice. 2. Of that invoiced sum, a little under $5,500 represented the sum charged for an item described as "Price Cap Premium". 3. National Ceramic, in its pleading by way of Defence to Weston's claim, disputes the entitlement of Weston to charge this sum. It otherwise does not dispute that the gas recorded on the invoice was supplied, nor that the monies charged on the invoice are in any way mistaken or wrong. It admits that it has not paid the tax invoice. 4. By way of defence, National Ceramic pleads that it is not obliged to pay any monies found to be outstanding on that invoice because it is entitled to an equitable set-off. That set‑off arises, it claims, because of an entitlement which it has to damages arising from either a breach of the Agreement, or alternatively misleading and deceptive conduct contrary to the Australian Consumer Law ("ACL"). As well, it claims to be entitled to restitution of a sum of money which had been billed, and collected by Weston, with respect to "price cap premium" on invoices prior to the invoice sued upon.

Applicable Legal Principles

The claim by National Ceramic for security for costs is based on two separate legislative provisions.
The first is set out in r 42.21 of the Uniform Civil Procedure Rules 2005 ("UCPR"). That rule, relevantly, provides that where it appears to the Court on an application to it, 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, …", the Court has a discretion to order the plaintiff to give such security as the Court thinks fit, in such manner it thinks fit for the defendant's costs.
Rule 42.21(1A) sets out a non-exhaustive list of matters to which the Court may have regard. These include the following: "(a) The prospects of success or merits of the proceedings, … (e) whether the plaintiff is effectively in the position of a defendant, … (k) whether the security sought is proportionate to the importance and complexity of the subject matter in dispute …"
The second basis upon which the defendant seeks security for costs is that contained in s 1335 of the Corporations Act 2001 (Cth) which provides that where a corporation is a plaintiff in any action, a Court 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 …".
Each of r 42.21 and s 1335, give the Court an unlimited discretion in circumstances where a plaintiff is a corporation, as is the case here, and where there is sufficient reason to believe that the plaintiff may not be able to pay the defendant's costs of the proceedings, to order security for costs in such form and in such manner as the Court thinks fit.
Because the power to make an order is discretionary, the mere fact that one or other ground for the order is established, in particular, impecuniosity, does not of itself necessarily justify the making of the order for security. Similarly, the grounds which are referred to in r 42.21(1A) are not exhaustive of the Court's power to order security for costs: see Phillips Electronics Australia Pty Ltd v Matthews (2002) 54 NSWLR 598; [2002] NSWCA 157 at [52].
The first and perhaps threshold question for a Court to consider is whether credible evidence establishes that there is reason to believe that the plaintiff will be unable to pay the defendant's costs if an order is made in the defendant's favour. If the evidence establishes such impecuniosity, then that impecuniosity may well be a relevant factor in determining the exercise of the discretion.
The prospects of success or the overall merits of the proceedings are a relevant factor in circumstances where the Court can form a meaningful view as to the strength or weakness of a plaintiff's case. It will often be sufficient if the Court is persuaded that a plaintiff's case is "… an arguable or triable case …" or that a plaintiff's case is not "… merely frivolous …": see Equity Access Ltd v Westpac Banking Corporation [1989] ATPR 40-972 at 50,636.
The third relevant factor in the hearing of this Motion, is whether the plaintiff is effectively in the position of being a defendant. It will be necessary to examine the parties' submissions in this matter with respect to this contention.
Finally, the issue arises, in the circumstances of this application, whether the costs of the proceedings and the security sought are proportionate to the importance and complexity of the subject matter in dispute.

Is the Plaintiff Unable to pay the Defendant's Costs?

To establish that the plaintiff would, if unsuccessful, be unable to pay the legal costs of the defendant, the defendant relies upon a number of undisputed facts. They are as follows. Weston is part of the Weston Aluminium Group ("WAG"). Its role in WAG is to supply gas to customers with whom it enters into contractual arrangements. National Ceramic points to the fact that Weston has been unable to carry out its business since its registration was suspended because of its failure to meet the margin call, and it points to the fact that Weston was unable to meet the margin call made by AEMO as being indicative of a parlous financial position.
National Ceramic also relies on a note contained in the audited financial statements of WAG including its controlled entities (of which Weston is one) for the financial year ended 30 June 2022, which is in the following terms: "Key judgment - discontinued major line of business Weston Energy's authorisation to trade in the Declared Wholesale Gas Market was revoked on 24 May 2022. To this extent the subsidiary was required to cease trading and is expected to be wound up in an orderly manner in the 2023 financial year. Management has exercised their judgment in determining that Weston Energy is not a discontinued operation as defined as the carrying amount of the group will not be recovered principally through a sale transaction but rather through continuing use. … "
Following upon this statement, a further note at [30] to the audited financial statements of WAG, records that Weston made a net profit after depreciation and amortisation expenses, finance costs and income tax expense, of $5.57 million in the financial year 2021, and $6.87 million in the financial year 2022.
National Ceramic submitted that the fact is that there are no audited accounts from Weston separately from those of WAG, and the only information which it has specifically relating to Weston is a balance sheet and profit and loss account for each of the 2021, 2022 financial years and for the 2023 financial year to 31 May 2023. These accounts are not audited, the source of them is unclear except that they appear to be management-style accounts, and further they have not been verified as to their accuracy by any evidence from any witness on these Motions. They have merely been produced as "business records".
As well, National Ceramic submits that these facts, namely that it took a long time, and only after many requests, for the appropriate financial documents, including audited accounts, to be produced to the Court by WAG; that Weston itself has declined a request to provide security; and that in correspondence only WAG has offered to provide security for costs, as establishing that Weston does not have sufficient financial means or resources to meet any costs order if it is unsuccessful on its claim.
National Ceramic also points to the fact that it has taken all reasonable steps to obtain relevant financial information, that such information as is provided does not adequately establish the position of Weston and, having regard to the fact that Weston does not lead any evidence from any company officer on the motion to establish its financial capacity, that the Court ought draw an inference adverse to Weston on the question of whether it is impecunious: Agricultural and Rural Finance v Atkinson [2004] NSWSC 437 at [15]-[16].
Weston opposes the making of an order for security for costs essentially on three bases. First, it submits that the financial material produced by Weston makes it clear that there is no reason to believe that it could not meet any order for costs if one was made in National Ceramic's favour. Secondly, it submits that as a matter of discretion, even if the Court was satisfied, contrary to its submissions, on the threshold financial question, it would not make an order because properly understood the real dispute in the proceedings are the claims made for millions of dollars by National Ceramic on its Cross-Claim. It submits that the pleading of an entitlement to an equitable set-off by way of the Defence, demonstrates that unless National Ceramic is successful on its Cross-Claim, it has no other defence. Weston accepts that there is an argument about the sum of money included in the last invoice of a little over $5,000 by way of PC Insurance premiums.
Thirdly, Weston submits that even if National Ceramic was otherwise entitled to security, the amount it seeks is excessive in light of the real issues in the whole of the proceedings and that the form proposed, which is a single lump sum payment, would in any event be inappropriate.
Weston does not contest the fact that the suspension of its status as an authorised gas supplier has affected its trading status. However, it submits that it is apparent from the management accounts which it has produced, particularly for the year to 31 May 2023, that it has other sources of income besides its gas trading. Weston draws attention to the fact that, according to its management accounts, in the period up to 31 May 2023, it has a net income after accounting for depreciation and provision for income tax, of slightly over $4 million. As well, it points to the balance sheet for that period as indicating that, in terms of current assets, it has over $2.1 million in cash or cash equivalents. Leaving aside a sum of money being a liability for an inter-company payment, it submits that its current liabilities do not exceed $100,000. Accordingly, it submits that according to that document, it has more than sufficient money to meet any order for payment of costs.
Weston draws attention to the fact that the position was no different for the financial year ended 30 June 2022. There, it submits, the Court would find in the management accounts that it had a net income of $6.27 million after payment of all expenses including depreciation and income tax and that according to its balance sheet for that year, it had $7.3 million in cash or cash equivalents as one of its current assets and that, again leaving aside an inter‑company loan, its current liabilities were in the order of $4 million.
Weston submits that on this basis, the motion brought by National Ceramic ought to be dismissed.
Weston submits that even if it is concluded by the Court that it would be unable to pay any order for costs in favour of National Ceramic, nevertheless there are significant reasons why the Court would not, as a matter of discretion, make an order for security for costs.
These reasons include: 1. If it is unable to satisfy a costs order in an amount of $269,000, the reason for that is the failure of National Ceramic to pay its invoice, at least, in the amount which it accepts is due and owing, being a sum over $650,000. Differently put, it submits that that sum to which it is entitled is itself properly regarded as a sufficient buffer to protect National Ceramic in the same way as an order for security for costs would. It submits that the sum should be so regarded, at least up until the time when a judgment is delivered on National Ceramic's claims for damages as set out in the Cross-Claim, which would thereby give rise to a possible equitable estoppel. Prior to that time, Weston submits that it is not a matter of set-off, but rather that this is a sum of money to which National Ceramic can have access to meet any order for costs. 2. Weston submits that it is effectively in the position of a defendant and not of a plaintiff. It submits that by a plain comparison between the Cross-Claim, being a claim for many millions of dollars, and this claim where the sum in dispute is in the order of $5,000, the Court ought take the view that in substance and reality, notwithstanding that Weston commenced proceedings first, it is in truth the defendant in the proceedings and security for costs ought not be ordered. 3. Weston supports this submission by pointing to the fact that National Ceramic has agreed to, and has, provided security for costs of the Cross‑Claim in an agreed sum of money pending the final determination of that claim. Weston submits that when one views the entirety of the litigation, that fact weighs heavily in support of the conclusion that National Ceramic is in truth the real plaintiff.
Finally, Weston makes submissions about the amount and manner of provision of security for costs.

Discernment

According to audited accounts of WAG, in the years ended 2021 and 2022, the sales of gas by Weston were in the order of $121 million in 2021 and $186 million in 2022. As consequence of the suspension of Weston as an authorised seller of gas, it can be readily inferred, as I do, that this very substantial income stream will no longer be available to Weston whilst ever its suspension remains in place. As well, the statement contained in the notes to the audited accounts set out above at [18], which ought be accepted as accurate, is that it is the intention of the directors of WAG to wind up its wholly owned subsidiary, Weston, in an orderly manner in the 2023 financial year.
The fact that there is ongoing income, at least according to the management accounts being received by Weston, does not, in the absence of any further evidence, provide compelling material upon which to base a conclusion that Weston is continuing to trade with a different source of income and that it could meet an adverse costs order. There are a number of reasons why I have reached that conclusion. First, management accounts are not properly to be regarded as the equivalent of audited accounts. They are prepared by management for various purposes. As they are not audited, their reliability has not been independently verified. Secondly, the derivation of the material upon which the management accounts are based has not been identified, much less has that been proved. It is quite unclear what the management accounts are based upon or who prepared them. Thirdly, there is no description of the "alternate" source of income. I would not be prepared to conclude that such income comes from anything other than delayed payments for past sales of gas prior to the suspension of Weston as an authorised supplier. After all, Weston seems to have been a sole purpose company, i.e., gas seller. If the income was from another activity unrelated or unconnected to the gas sales stream, then I would have expected evidence to be called by Weston to establish that fact. Finally, the absence of any evidence from an officer of Weston or one of its directors, or else an officer or director of WAG enables me to draw the conclusion which is readily available that Weston would not be in a position to meet any order for costs in due course if it was made after a defended hearing.
That conclusion is supported by the fact that the only offer of security for costs was made by WAG, which was not, in its terms, accepted.
Accordingly, I would conclude, based upon credible evidence, that in the event that National Ceramic succeeds in its defence of Weston's claim, Weston would be unable to meet any costs ordered to be paid.

Discretionary Considerations

However, there are other matters of importance to consider and weigh up before I would be prepared to exercise the discretionary power to order Weston to provide security for costs.
The first of these is that when properly examined, including by reference to the differing sums of money in dispute, in substance National Ceramic is the plaintiff in these proceedings. As is apparent from earlier discussion, a sum just over $5,000 is disputed by National Ceramic with respect to Weston's claim for the overdue payments for the supply of gas. There is no suggestion that the gas was not supplied. There is no suggestion that the monies charged (except for the sum of just under $5,500) were sums which accorded with the Agreement and that there is no reason connected with the supply of gas that the invoiced monies are not owed. Rather, properly examined, National Ceramic say they are excused from paying those monies because they have a claim for damages which would entitle them to an equitable set-off against such sum as may be due and owing. Unless and until National Ceramic prove their claim for damages, which is articulated in the Cross-Claim, no equitable set-off accrues. The same consideration applies to the small amounts claimed by way of restitution by National Ceramic for past charges for premiums for PC Insurance.
This leads me to conclude that Weston is effectively in the position of a defendant when the entirety of the proceedings are considered together. In my view it is artificial to regard Weston as being the plaintiff merely because it commenced proceedings first and in circumstances where the bulk of its claim is not the subject of any real dispute, except that National Ceramic says that the monies are not payable due to the damages and restitutional relief to which it says it is entitled on its Cross-Claim.
I would also take into account the fact that but for the existence of the equitable set‑off, Weston would be entitled to a sum at least twice the amount of the costs claimed by National Ceramic with respect to Weston's claim against it. Even if National Ceramic succeeds in defending the claim by reference to the disputed items relating to premiums for PC Insurance, the sum of money due to Weston by it in respect of this claim will exceed, by a significant margin, the monies which National Ceramic claims by way of reasonable estimate for its costs.
I have had regard to these matters and having given them proper weight, I am not prepared to exercise my discretion to make an order for security for costs. I do not overlook the fact that, for the reasons I have described above, Weston is essentially impecunious and that it may be wound up or else deregistered at some stage during the course of these proceedings. In those circumstances, National Ceramic may be able to obtain security for costs from WAG on the basis that it is the party which will benefit from any judgment found in favour of Weston.
However, that is a matter that may arise in the future and is not directly relevant to the exercise of my discretion with respect to security for costs.
Accordingly, I am satisfied that the Motion for security for costs brought by National Ceramic should be dismissed.

Particulars

It is to be recalled that one order of the Notice of Motion sought the provision of particulars by Weston to National Ceramic in the following terms: "5. The plaintiff/cross-defendant is to provide a response to the defendant/cross-claimant's request for further and better particulars contained in correspondence dated 8 December 2022 within 7 days."
The relevant outstanding particular is to be found in paragraph numbered 5 of the letter of 8 December 2022, in the following terms: "Our client is entitled to understand the case it is required to meet in relation to the Defence. There are several paragraphs of the Defence which are unclear and require further particularisation. Please provide the following further and better particulars: (a) …; (b) in relation to paragraphs 6(b), 9(c) and 13(b) of the Defence, your client pleads that 'it was under no obligation to' take out the Price Capping Insurance. We note that clause 1.8 of Schedule 1 to the Agreement expressly states that 'Weston Energy will provide price insurance for the gas commodity price'. Please provide particulars of the facts and matters your client relies upon in asserting it had no obligation to take out Price Capping Insurance."
Weston submits that this is not a proper request for particulars because in substance the request seeks to ascertain the "… legal characterisation which a party places upon the facts and matters already identified": see Sims v Wran [1984] 1 NSWLR 317 at 322.
In its submissions in reply, National Ceramic accepts that the particulars sought raise an issue of contractual interpretation. But it submits that since a commercial agreement may involve a court giving consideration to contextual facts in order to determine the objective intention of the parties, it is entitled to know whether or not, in this case, Weston relies upon any such contextual facts.
I have in the preceding judgment expressed the view that as I understand the pleadings, no contextual facts are relied upon by Weston.
However, National Ceramic is entitled to a clear statement by way of particulars from Weston indicating whether that is so or not.
Accordingly, I would be prepared to order that Weston should answer the request for particulars upon the basis that the request is to be understood as seeking the identification of any contextual facts relied upon, that is to say, whether there are any contextual facts relied upon and, if so, what those facts, matters and circumstances are.

Orders

I make the following orders: 1. Order the cross-defendant to respond, within 14 days, to the request for particulars 5(b) of the letter of 8 December 2022 from the solicitors for the cross-claimant to its solicitors. 2. Otherwise, dismiss the Notice of Motion filed by the cross-claimant dated 22 February 2023. 3. Order the cross-claimant to pay the cross-defendant's costs of the Motion.

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: 07 July 2023

At a glance

Court

Decision date

Before

Source

Judgment (8 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (4)