Westpac Banking Corporation v Southern Environmental Services Pty Ltd - [2017] NSWSC 626 - NSWSC 2017 case summary — Zoe

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Westpac Banking Corporation v Southern Environmental Services Pty Ltd

[2017] NSWSC 626

Supreme Court of NSW|2017-05-17|Before: Adamson J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2017-05-17

Before

Adamson J

Catchwords

[1999] VSCA 43 Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276

Source

Original judgment source is linked above.

Catchwords

[1999] VSCA 43 Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276

Judgment (30 paragraphs)

[1]

Solicitors: DGB Lawyers (First and Second Cross Defendants/Applicant) Cordato Partners (Cross Claimant/Respondent) File Number(s): 2015/314296

[2]

Introduction

By notice of motion filed on 13 April 2017 Gloucester 103 Holdings Pty Ltd (Gloucester) and Klondu Group Pty Ltd (Klondu), the cross defendants, seek security for costs against Southern Environmental Services Pty Ltd (Environmental), the cross claimant. The application is made pursuant to Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.21(1)(d) and/or (e); and s 1335(1) of the Corporations Act 2001 (Cth). Environmental resists the application. However, Paul Wenham, one of its directors, who is also the third defendant, has undertaken to the Court to accept liability to pay the cross defendants' future costs of the proceedings if I were otherwise persuaded to order security for costs.
Mr Robertson, who appeared on behalf of Environmental, accepted that Environmental would be unable to meet an adverse order for the costs of the cross claim. He confirmed that Environmental did not submit that its impecuniosity was caused by the cross defendants. He also accepted that Environmental's only asset was its cause of action on the cross claim and that it had a substantial liability to Westpac Banking Corporation (Westpac).

[4]

The manufacturing of the drum manipulators and the financing of their acquisition

In August 2011 Southern Engineering Services Pty Ltd (Engineering) ordered three drum manipulators at a cost of $1.1 million. The drum manipulators were manufactured by C & M Leussink Engineering Pty Ltd. Their acquisition was financed by ANZ Bank. Drum manipulators are used to handle drums which are principally used in the mining industry, including for longwall mining. As the drums are very large and heavy, the manipulators are used to permit them to be serviced by facilitating access to their various parts.
In January 2012 the drums were delivered to premises (the Premises) which Engineering occupied pursuant to a lease from Gloucester (the Lease). It was a term of the Lease that equipment remaining on the premises after termination of the Lease would be taken to have been abandoned. In late 2012 the ANZ Bank asked for the financing of the drums to be taken off the books of Engineering. As a result of this request, Environmental, a company related to Engineering, entered into a hire purchase agreement with Westpac which was guaranteed by Gyressa Pty Ltd (Gyressa), the second defendant, and Mr Wenham, the third defendant. In turn, Environmental leased the drums to Engineering for, in effect, the cost of finance of $34,000 (being the amount payable to Westpac pursuant to the hire purchase agreement) and management fees of $10,000 per month. Notwithstanding this change, the drums remained on the Premises. According to Mr Leussink (the principal of the company which manufactured the drums): "Any heavy mining machinery or equipment including the Manipulators tends to be purchased rather than leased. There is not, in Australia, or anywhere in the world as far as I am aware, any market in which equipment of this nature is hired out."
I infer from Mr Leussink's evidence that the leasing arrangement between Environmental and Engineering was group-specific and was the result of accounting exigencies.
The demand for the drum manipulators was affected by the state of the mining industry as is reflected in the following statement by Ken McCallum, who was employed by Engineering between 28 February 2011 and April 2013: "I can say that the sales averaged $1.2 million per month and the profit margin varied between 25% and 45%. These figures were consistent until early 2013 when there was a significant downturn in the mining industry."

[5]

The liquidation of Engineering and the breach of the hire purchase agreement

By 18 August 2014 Engineering had been placed in liquidation. On 2 September 2014 its administrator disclaimed the inter-company lease with Environmental of the drum manipulators. Accordingly, no further lease payments were made by Engineering to Environmental. On 22 September 2014 an order was made for Engineering to be liquidated. Its liquidator tried, unsuccessfully, to sell the drum manipulators. In October 2014 Environmental ceased making payments to Westpac under the hire purchase agreement. On 27 November 2014 Westpac purported to terminate the hire purchase agreement and notified Environmental that it remained liable for $1,854,207.33. On 5 December 2014 Westpac demanded payment of the balance of the account from Environmental and Gyressa and Mr Wenham as guarantors.
By letter dated 15 December 2014 Mr Wenham, on behalf of Environmental, wrote to Westpac and requested that the notice of termination be withdrawn. He wrote, in part: "This Hire Purchase Agreement was effectively entered into by Southern Engineering Services Pty Ltd (in Liquidation) who had a sub lease with regard to the three manipulators and who used them in premises leased by them, paid the Hire Purchase Agreement directly from Southern Engineering Services and all contact with regard to the manipulators has been through Southern Engineering Services Pty Ltd. The manipulators are presently housed at Gloucester Road, Port Kembla together with other assets of Southern Engineering Services Pty Ltd (In Liquidation) to which there is no access other than via the Liquidators McGrath Nicol, Level 31, 60 Margaret Street, Sydney NSW 2000. The manipulators are large and are built into a steel structure extending along one entire wall of the building. At all times the manipulators have been used in production by Southern Engineering Services Pty Ltd (In Liquidation) who have charged their customers for the use thereof and received the income generated and paid Westpac the Hire Purchase amounts as and when they fell due. I understand that the Liquidators are presently trying to sell two other manipulators held in the same premises. Accordingly, Southern Environmental Services Pty Ltd has no effective control over these manipulators due to their location, size and inability to access them at this time and it is suggested that the matter be taken up with McGrath Nicol in the first stance as Southern Engineering Services Pty Ltd (In Liquidation) has had the benefit of using the goods."

[8]

The letter of demand and the filing of the cross claim by Environmental

On 1 June 2016 Environmental's solicitors, Cordato Partners, wrote to Gloucester as follows: "We act for Southern Environmental Pty Ltd, the owner of the 3 Shearer Drum Manipulators serial numbers DM 3, DM 4 and DM 5 (the "Drum Manipulators"). We write to you as the owner of the premises formerly occupied by Southern Engineering Services Pty ltd (in liquidation) at 36-38 Gloucester Boulevard, Port Kembla. We are instructed that the Drum Manipulators were removed from those premises after Southern Engineering Services Pty Ltd (in liquidation) vacated the premises on 19 December 2014 and before 5 January, 2015, without our client's knowledge or consent. We are further instructed that the Drum Manipulators were removed to the premises of Klondu Group Pty Limited at Steelhaven, via Gate 9 Five Islands Road, Port Kembla. There, since January 2015, Klondu Group Pty Limited has used the Drum Manipulators in the course of its business. The Drum Manipulators have been used and continue to be used without our client's consent. … We understand that the Westpac Banking Corporation has made attempts and continues to make attempts to collect the Drum Manipulators from those premises, without success. We encourage you to co-operate with the Westpac Banking Corporation in this regard. The purpose of our letter is to demand compensation for your involvement in the unlawful conversion of the Drum Manipulators and their detention in the period since January 2015. The amount of compensation is calculated as being $44,000 per month incl GST. That amount represents the payments which were being made by Southern Engineering Services Pty Ltd for the use of the Drum Manipulators. Our client has demanded that payment be made by Klondu Group Pty Limited, who we are instructed has the use and possession of the Drum Manipulators. We look to your company to pay compensation to the extent that our clients claim is not satisfied by Klondu Group Pty Limited. We are instructed to serve a Claim issued out of the Supreme Court of NSW, which names Klondu Group Pty Limited as the First Defendant and your company as the Second Defendant accordingly. We will withhold the issue of a Statement of Claim until Friday, 10 June 2016." [Emphasis added.]
On 14 June 2016 Environmental filed the cross claim, which was served on 27 June 2016. In paragraph [10] of the cross claim Environmental alleged: "By demand addressed to the Cross Defendants dated 1 June 2016 the Cross Claimant demanded delivery up of the drum manipulators."
I understand that the demand alleged in [10] is the passage emphasised in the extract from the letter of 1 June 2016 set out above.

[9]

Arrangements between the cross defendants and Westpac for the sale of the drum manipulators

On 13 July 2016 the solicitors for the cross defendants wrote to Gadens, the solicitors for Westpac, and confirmed that Klondu was in possession of the three drum manipulators. They said that, until they were served on 27 June 2016 with the statement of claim, defence, cross claim and evidence, the cross defendants had been operating on the basis that the drums had been abandoned in the Premises. The letter said in part: "In light of your client's apparent ownership of the DM's [drum manipulators], subject to being reimbursed its out of pocket expenses in the sum of $30,000.00 (which were incurred in the dismantling the DM's and removing them from the Premises) KG is prepared to make the DM's available for collection, which can be collected from the KG Premises on being provided with 14 days notice. If your client does not propose to have the DM's collected, our client is prepared to purchase the DM's for the total sum of $60,000.00 (i.e. $20,000.00 for each DM). Please advise your client's intention within seven days of the date of this letter. If a favourable response is not received by this time and the DM's continue to remain at the KG Premises, storage fees will begin to be incurred at commercial rates. Please contact the write should you wish to discuss this matter further."
By 6 September 2016 the cross defendants had not received a response to their letter of 13 July 2016. On that date they wrote again to Westpac and confirmed that their offer to give Westpac possession of the drum manipulators was not conditional on payment of reimbursement of their costs of removal (from the Premises to Klondu's premises at Port Kembla). On 14 September 2016 Westpac rejected Klondu's offer to purchase the drum manipulators but notified the cross defendants that they would be contacted by Westpac's agent concerning collection. On 21 September 2016 Klondu confirmed that it would not assist in the dismantling of the drum manipulators.
On 5 October 2016 Paddy Slattery, of Slattery Auctions, which had been engaged by Westpac to sell the drum manipulators, reported to Westpac that it was difficult to identify the particular drum manipulators at the site at Port Kembla. On 20 October 2016 representatives from Slattery Auctions attended Klondu's premises at Port Kembla to inspect them.
Mr Slattery reported again on 9 November 2016 in part as follows: "The mining downturn has made these machines redundant and the consensus in the industry is they are worth scrap metal prices. The specialised nature of the machines with mining being the only application limits their value. We have received a quote of $43,280 + gst to remove the manipulators from the premises. The cost to remove would outweigh any positive return at auction. The company who quoted on the removal have offered $4,000 + gst each as they may be able to modify them for another application. They would wear the removal costs themselves."
On 2 December 2016 the cross defendants served a notice to produce on Westpac requiring production of any valuation of the three drum manipulators and any quotations or estimates received by Westpac or its agents, Slattery Auctions, as to the cost of removal. The communications referred to above were produced at the directions hearing on 9 December 2016 in answer to that notice. Following production, the cross defendants' solicitors wrote to Gadens confirming Klondu's willingness to facilitate the sale of the drums from its site at Port Kembla. They also attached a draft motion for disposal of the drums under the Uncollected Goods Act 1995 (NSW).
On 7 December 2016, no satisfactory arrangement having been reached between Westpac and Klondu, the cross defendants filed a notice of motion for orders under the Uncollected Goods Act. The notice of motion was amended on 19 December 2016. On 7 March 2017 this motion was resolved on terms that the cross defendants would arrange for the sale of the drum manipulators and that they would be entitled to deduct their reasonable costs of sale from the sale proceeds and that the balance be remitted to Westpac. The Agreement to Sell was formalised in a document dated 27 April 2017. On 4 May 2017 Klondu appointed Slattery Auctions to sell the drum manipulators. The drum manipulators have yet to be sold.

[12]

Evidence of the directors and shareholders of relevant corporations and their means

The company search of Environmental shows that its present director is Paul Wenham and its sole shareholder is Cambage Corporation Pty Ltd. The shareholders of Cambage Corporation Pty Ltd are Paul and Andrew Wenham. According to the search extracted from the ASIC database, each holds a single share, which is held beneficially. However, in his affidavit sworn 1 June 2016 Mr Wenham said: "I am one of the directors and the secretary of the First Defendant. My son Andrew Wenham is the other director. The shareholding in the First Defendant is wholly owned by Cambage Corporation Pty Ltd, which it holds as the trustee for the Cambage Trust. The beneficiaries of the Cambage Trust are members of the Wenham Family."
The trust deed of the Cambage Trust is not in evidence. Nor is there any evidence of the identity of the beneficiaries of the trust, beyond the description set out above.
Mr Robertson accepted that Environmental had no assets except its cause of action against the cross defendants. The draft balance sheet as at 31 March 2017, which is annexed to the affidavit of Environmental's solicitor, shows that Environmental's current liabilities are $1,601,197 which comprise: $1,356,555, presumably relating to the judgment debt and interest; tax payable of $231,442; and "other accruals" of $13,200. Its non-current liabilities are said to be $78,663, being the "Wenham Loan Account".
All that is known about the financial position of Paul Wenham is that there is a judgment against him for $1.26 million, as guarantor of the debt owed to Westpac. Mr Robertson did not submit that he would be able to meet an order for the costs of the cross claim, although he gave an undertaking on Mr Wenham's behalf to accept liability for such costs.
Gyressa can also be said to stand to benefit from the proceedings since it guaranteed the liability of Environmental to Westpac. Its director is Paul Wenham and its shareholders are Paul Wenham and Starshell Pty Ltd. According to the ASIC search, the share held by Mr Wenham is not held beneficially. There is no evidence about the beneficial owner of that share, or the identity or means of those standing behind Starshell Pty Ltd.

[28]

The relevance and value of the offer made by Mr Wenham

Before turning to the factual relevance and value of the offer made by Mr Wenham I propose to address briefly the distinction drawn between the articulation of principle by the majority (Mason P and McClellan CJ at CL) and the minority (Basten JA) in Jazabas v Haddad.
The majority view (so-called because it was favoured by the majority in Jazabas v Haddad) is that an undertaking by those standing behind a corporate plaintiff is merely a relevant consideration. It may be relevant to the question whether an order for security for costs will stultify the litigation because those standing behind the company are unable to provide security for an eventual costs order. Undertakings by shareholders can be taken into account in favour of the effective plaintiff. In some cases, the undertaking or undertakings, are accepted by the Court as being sufficient and the order for additional security is refused. However, in such cases, the value of the undertaking itself is also relevant: Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191; [1999] VSCA 43 at [23]-[24] per Winnecke P and Phillips JA. An undertaking given by an impecunious person standing behind an impecunious plaintiff can only be enforced, as a practical matter, by contempt proceedings and provides cold comfort to the effective defendant.
The minority view (favoured by Basten JA in Jazabas v Haddad) is that the purpose of requiring a company to provide security for costs is to ensure that those standing behind the company are neither in a better, nor worse, position through having adopted the corporate structure than they would be had they not. On this view, if those standing behind a corporate plaintiff give an undertaking to pay a costs order made against the corporate plaintiff, there is no justification for ordering security for costs. Moreover, the value of the undertaking is not important since an impecunious natural plaintiff would not have to provide security as poverty is no bar to a litigant. I note that the difference was not determinative in Jazabas v Haddad since, in that application, some of the persons standing behind the plaintiff failed to come forward to offer undertakings to be liable for any adverse costs orders made against the plaintiff.
I am bound by the majority view in Jazabas v Haddad.
The value of Mr Wenham's offer has not been established since his financial position has not been the subject of evidence. Mr Robertson was careful to limit the undertaking given on Mr Wenham's behalf to an undertaking to accept liability to pay any costs order in favour of the cross defendants made against Environmental rather than to pay such costs.
I do not accept Mr Robertson's submission that Mr Wenham is the only person who will benefit from the litigation. Those who also stand behind Environmental, and stand to benefit from the cross claim, include Cambage Corporation Pty Ltd, Andrew Wenham and the beneficiaries of the trust referred to in Mr Wenham's affidavit referred to above. While a company is not in liquidation, a "benefit" is to be measured by an improvement in its net position, even if it is still not breaking even.
However, in any event, there does not seem to be any reason why Gyressa ought be excluded from consideration, even on Mr Robertson's argument, since it too stands to benefit from the litigation in the same way as Mr Wenham will as they are both jointly liable for the judgment debt which Environmental owes to Westpac. There is no evidence as to who is beneficially interested in the share held by Mr Wenham in Gyressa or who is behind Starshell Pty Ltd. Thus it has failed to show that all of those standing behind the company are also prepared to put their assets on the line: see the (minority) analysis of Basten J in Jazabas v Haddad at [23]-[29].
Environmental has shown that it does not have the means to provide security. It has failed to establish that, if security is ordered, the litigation will be stultified since it has not proved that those who stand behind it are also without means (Bell Wholesale Co Pty Ltd v Gates Export Corporation at 4) or that those standing behind the company are "reasonably unwilling, even though possibly able, to provide the security" (Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [26] per Hodgson JA).
The dicta of Beazley JA in Prynew Pty Ltd v Nemeth is particularly apposite to the present case in light of Mr Wenham's offer. Her Honour said: "[44] For my part, I prefer the approach of the Victorian Court of Appeal in Epping Plaza v Bevendale, endorsed by Mason P and McClellan CJ at CL in Jazabas v Haddad. I consider that approach to be consistent with the underlying rationale of the jurisdiction to award security for costs. As Street CJ observed in Buckley v Bennell Design & Constructions, a party to a contract can take appropriate steps to protect itself from the consequences of the impecuniosity of the other contracting party. It can, for example, require the other party to the contract to secure the performance of the other party's obligations under the contract. [45] A defendant cannot do that. A defendant is a captive audience to a plaintiff's claim. In my opinion, the purpose of the security for costs jurisdiction would be rendered ineffective if a defendant sued by an impecunious company was denied security because, persons themselves impecunious, were prepared to offer to be responsible for the costs of the litigation."
If security is not ordered and the cross defendants successfully defend the cross claim, they will not recover their costs because of Environmental's financial position. If security is ordered, it is by no means clear that the proceedings will be stultified, since Environmental has not discharged the relevant onus.
Having regard to the matters referred to above I am persuaded that it is appropriate to order security for costs as sought by the cross defendants.

Westpac Banking Corporation v Southern Environmental Services Pty Ltd

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Judgment (30 paragraphs)

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