FEDERAL COURT OF AUSTRALIA Versatile Homes Pty Ltd v RCMD Pty Ltd [2012] FCA 1109 Citation: Versatile Homes Pty Ltd v RCMD Pty Ltd [2012] FCA 1109 Parties: VERSATILE HOMES PTY LTD v RCMD PTY LTD, VERSATILE PROPERTY INVESTMENT PTY LTD, FRANKO MARINO, EASY CHOICE PROPERTIES PTY LTD and VERSATILE PROPERTY SOLUTIONS PTY LTD File number: NSD 2147 of 2011 Judge: EDMONDS J Date of judgment: 17 October 2012 Catchwords: COSTS – applicants for orders for payment of security for costs abandoning application at last moment – nevertheless seeking costs orders on indemnity basis against applicant in the proceeding payable forthwith – application misconceived and costs for same ordered to be costs in the cause Legislation: Federal Court of Australia Act 1976 (Cth) s 56 Corporations Act 2001 (Cth) s 1335 Cases cited: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93, 20 VR 377 Warren Mitchell Pty Ltd v Australian Maritime Officers' Union & Ors (1993) 12 ACSR 1 Date of hearing: 3 October 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 37 Counsel for the Applicant: Mr P Durack SC with Ms SK Hill Solicitor for the Applicant: CBD Law Counsel for the First Respondent: Mr JJ Hyde Solicitor for the First Respondent: Mills Oakley Counsel for the Second, Third and Fifth Respondents: Mr RJ Cheney SC Solicitor for the Second, Third and Fifth Respondents: John R De Mattia & Co IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2147 of 2011 BETWEEN: VERSATILE HOMES PTY LTD Applicant AND: RCMD PTY LTD First Respondent VERSATILE PROPERTY INVESTMENT PTY LTD Second Respondent FRANKO MARINO Third Respondent EASY CHOICE PROPERTIES PTY LTD Fourth Respondent VERSATILE PROPERTY SOLUTIONS PTY LTD Fifth Respondent JUDGE: EDMONDS J DATE OF ORDER: 17 OCTOBER 2012 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The first respondent's costs of its application for security for costs be costs in the cause. 2. The second, third and fifth respondents' costs of their application for security for costs be costs in the cause. 3. The applicant's costs thrown away by reason of the adjournment of the first respondent's application for security for costs on 27 August 2012 be costs in the cause. 4. The first, second, third and fifth respondents pay the applicant's costs of the hearing on 3 October 2012 as agreed or taxed, forthwith. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2147 of 2011 BETWEEN: VERSATILE HOMES PTY LTD Applicant AND: RCMD PTY LTD First Respondent VERSATILE PROPERTY INVESTMENT PTY LTD Second Respondent FRANKO MARINO Third Respondent EASY CHOICE PROPERTIES PTY LTD Fourth Respondent VERSATILE PROPERTY SOLUTIONS PTY LTD Fifth Respondent JUDGE: EDMONDS J DATE: 17 OCTOBER 2012 PLACE: SYDNEY REASONS FOR JUDGMENT Introduction 1 On 30 August 2012, I fixed the following applications for hearing on 3 October 2012: (1) An application, pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) ("FCA"), by the first respondent ("RCMD") that the applicant ("VH") provide security for costs by payment into Court of an amount in the sum of $80,000 or in another form satisfactory to the Court; and (2) An application by the second, third and fifth respondents ("Mr Marino and affiliates") that VH provide security for costs by payment into Court of an amount in the sum of $143,275 or in another form satisfactory to the Court. 2 On the afternoon of 2 October 2012 the solicitors for RCMD informed my chambers by email that in the light of material served by VH on 27 September 2012 (Ex A) and on that day (Ex B), they would not be pressing their client's application for VH to provide security for costs and that the only matter to be pursued the following day was an order that VH pay RCMD's costs of the application for security. 3 On the morning of the hearing, counsel for RCMD confirmed his client's position indicating that the costs order his client sought was on an indemnity basis, payable forthwith. 4 When I asked counsel for Mr Marino and affiliates whether they were pressing their application for VH to provide security for costs he indicated that he had received instructions that morning not to do so, but that they too sought an order for costs of their application for security commensurate with the costs order sought by RCMD. 5 Not surprisingly, costs orders in these terms were opposed by VH which took the position that costs of the applications for security should be costs in the cause. 6 I proceeded to hear the parties with respect to the costs orders sought by RCMD and by Mr Marino and affiliates on their respective applications for security for costs, as well as an order sought by VH that RCMD pay VH's costs thrown away by the adjournment on 27 August 2012. Background 7 At the outset, I have to say that this matter has a somewhat protracted interlocutory history and, on reviewing that history in the course of considering and determining the costs orders sought, I have come to the view that my management of the interlocutory issues that have arisen, in particular the applications for security for costs and associated notices to produce documents, may have contributed to that protraction. If that is correct, then no party should be penalised or punished for my deficiencies in case management. 8 RCMD's application that VH provide security for costs filed on 13 July 2012 was preceded by a considerable exchange of correspondence between RCMD's solicitors (Mills Oakley) and VH's solicitors (CBD Law). Much of this correspondence is annexed to the affidavit of Mr Ziv Ben-Arie affirmed 13 July 2012 and filed in support of RCMD's application of the same date. In that correspondence, Mills Oakley repeatedly requested to be provided with documentation to provide RCMD with evidence of VH's capacity to meet an adverse costs order should one be made against it in this proceeding. In some cases the requests were even couched in terms of threats, such as in Mills Oakley's letter of 3 April 2012: Your client is on notice that if it client [sic] fails to provide the documents requested, our client will be forced to presume that your client does not have the financial capacity to meet an adverse costs order if one is made against it, and it will be forced to proceed with its application for security for costs as foreshadowed in our previous correspondence (Application). 9 By letter dated 11 April 2002, certain requested documents were provided by CBD Law in response to these requests/threats, including the financial accounts of VH as at and for the year ended 30 June 2011 which included comparator accounts for the 2010 year. They disclosed that VH had total equity (surplus of assets over liabilities) in excess of $373,000 ($91,000 for the previous year) and a net profit after tax in excess of $20,000 ($50,000 for the previous year). 10 Mills Oakley's response was to write to CBD Law on 25 May 2012 in the following terms: [These] documents are not sufficient for our client to determine your client's capacity to meet an adverse costs order should one be made against [it] in these proceedings and to serve on VH, through CBD Law, a notice to produce some seven classes of financial documents including the financial statements for the 2011 year already provided. 11 By letter dated 4 June 2012, VH, through CBD Law, provided some documents in response to the notice to produce including financial statements as at and for the 11 months ended 31 May 2012 which disclosed total equity (surplus of assets over liabilities) in excess of $450,000; a surplus of current assets over current liabilities in excess of $436,000; and a net profit before tax in excess of $40,000. 12 In response Mills Oakley, by letter dated 15 June 2012 to CBD Law, issued a further threat: Having now considered the documents provided by your client, we are instructed by our client to file and serve an application seeking security for costs for an amount of $80,000. The documents provided do not demonstrate that your client will be in a position to meet an adverse costs order, in the event one is made against it in our client's favour, in these Proceedings. Notwithstanding, in order to avoid the cost and delay in making an application to the Court for security, our client invites your client to deposit into Court, by way of security, an amount of $50,000, being a sum considerably lower than the costs which our client anticipates incurring in defending the claim made by your client and which your client was given notice of under cover of our letter of 10 April 2012. Your client is on notice that in the event our client does not receive a satisfactory response to the above, within 7 days from the date of this letter, that it will proceed with its proposed application for security for costs. 13 This was followed up by a letter dated 11 July 2012 (two days before RCMD filed its application for security for costs) which relevantly read: As previously advised we confirm our client's instructions to prepare and file an application for security for costs given your client's failure to satisfy our client that it has the financial capacity to meet an adverse costs order in the event one is made against it in these proceedings. The letter went on to request from VH, in respect of the foreshadowed application for security for costs, the production of some seven classes of financial documents within seven days. This was later formalised in the filing and service of a second notice to produce on 27 July 2012. 14 On 13 July 2012, RCMD filed its application for security for costs and Mr Ben-Arie's supporting affidavit. 15 On 24 July 2012, I fixed RCMD's application for security for costs for hearing on 27 August 2012. 16 On 2 August 2012, an affidavit of Matthew John Gwynne, chartered accountant, was filed on behalf of RCMD to which there was exhibited a report prepared by Mr Gwynne dated 30 July 2012. In his affidavit, Mr Gwynne affirmed that he had been retained by RCMD in these proceedings to make the affidavit in support of RCMD's application for security for costs. 17 Mr Gwynne summarised his report in section 2 as follows: 2.1 Based on my review of the information provided to me I cannot be satisfied that Versatile has the financial capacity to meet an adverse costs order, if so ordered, from existing financial resources, available funding from bankers and/or directors, or surplus (profits) that may be derived from operating activities for the following reasons: 2.1.1 The financial information provided is not sufficiently detailed to enable: (i) The assets of Versatile to be verified as to existence and recoverability; (ii) The trading liabilities of Versatile to be verified as to completeness and whether they are within trading terms; (iii) An assessment of the ongoing profitability of Versatile; 2.1.2 Versatile has not provided evidence that their income tax PAYG-withholding and GST obligations to the Australian Taxation Office (both lodgement of required returns and payment of liabilities) are up to date; 2.1.3 If Versatile's profitability in the 2011 financial year and the 2012 financial year to 31 May 2012 is indicative of future profitability an adverse costs order would not be able to be met from trading operation and would need to be met from the Versatile's reserves (if any); 2.1.4 Versatile has not provided evidence that they have the ability to obtain funding if required from financial institutions, or further funding from Mr Sardi in addition to the equity contribution of $275,000 made by him in the 2011 financial year. 18 Mr Gwynne's conclusions were encapsulated in the following paragraphs: 7.5.0 While the financial statements disclose that current assets exceed current liabilities, I have been unable to verify the existence and recoverability of the key assets (cash, trade debtors and work in progress) nor have I been able to ascertain the accuracy of the recorded liabilities (trade creditors, ATO obligations, legal fees). 7.5.1 I note that due to the lack of financial information provided I have been unable to assess whether other indicators of insolvency are present, such as overdue taxation obligations, creditors outside trading terms, restricted trading terms from suppliers, and dishonoured cheques. 7.5.2 I am unable to assess Versatile's ongoing profitability from future trading activities however if the operating profits derived by Versatile in 2011 and 2012 financial year to 31 May 2012 are a guide as to future profitability, an adverse costs order in the vicinity of the $80,000 sought is in excess of those profits, and would therefore need to be met from Versatile's reserves (if any). 7.5.3 Accordingly, based on my review of the information provided to me I cannot be satisfied that Versatile has the financial capacity to meet an adverse costs order, if so ordered, from existing financial resources, available funding from bankers and or directors, or surplus (profits) that may be derived from operating activities. 19 Importantly, for present purposes, Mr Gwynne reported: The financial statements of Versatile disclose a surplus of assets over liabilities at 31 May 2012 of $455,997 and that current assets exceed current liabilities by $436,864. On the face of it Versatile appears to have a strong financial position, however in order to be satisfied that this is in fact the case I have sought to verify, where appropriate and possible, the quantum and existence of assets and liabilities that form part of Versatile's core working capital (i.e. current assets less current liabilities). 20 On 21 August 2012, RCMD filed and served a third notice to produce requiring VH to produce an even wider and more diverse range of financial documents, as well as factual information, at the hearing scheduled for 27 August 2012. The notice was inherently bad in a number of important respects, e.g., it required VH to produce factual information not being documents, and was not pressed in its original form as filed and served. It is unnecessary to embark on those deficiencies further. 21 When RCMD's application for security for costs came before me for hearing on 27 August 2012, senior counsel for VH informed me that he was ready to proceed that day on the basis that a second report from Mr Gwynne, which had been seen by VH's legal representatives for the first time that morning, was excluded from consideration. As had been foreshadowed to my chambers that morning, counsel for RCMD sought an adjournment of his client's application for security for costs to enable VH to be responsive to the third notice to produce referred to in [20] above. The matter was further complicated by the indication from counsel for Mr Marino and affiliates that her clients were about to file an application for security for costs and did so on 29 August 2012 together with a supporting affidavit sworn by Mr Peter James De Mattia. In the circumstances, I stood the hearing of RCMD's application for security for costs over to 30 August 2012 to enable the parties to agree the form of the third notice to produce and remove its inherent deficiencies and to allow the application of Mr Marino and affiliates to be formalised by filing and service of process. 22 Between the mornings of 27 and 30 August 2012, an affidavit from Mr Gwynne affirmed 27 August 2012, to which was exhibited a second report of Mr Gwynne dated 24 August 2012, was filed and served; and the application for security for costs of Mr Marino and affiliates and Mr De Mattia's supporting affidavit were filed and served. 23 On 30 August 2012 I fixed the hearing of both applications for security for costs for 3 October 2012; extended the time for compliance by VH with the amended third notice to produce to 19 September 2012; and ordered that VH serve any affidavits in response RCMD's and/or Mr Marino and affiliates' respective applications for security for costs on or before 21 September 2012. 24 Mr Gwynne summarised his second report at Section 2 thereof in the following terms: 2.1 Based on my review of the additional information provided to me I cannot be satisfied that Versatile has the financial capacity to meet an adverse costs order, if so ordered, from existing financial resources, available funding from bankers and or directors, or surplus (profits) that may be derived from operating activities for the following reasons: 2.1.1 The financial information provided is not sufficiently detailed to enable: (i) Current assets (trade debtors, other debtors and work in progress) of Versatile to be verified as to existence and recoverability; (ii) The trading liabilities (trade creditors, customer deposits, income tax provision) of Versatile to be verified as to completeness; and (iii) Other liabilities (legal fees, judgement debt) of Versatile to be verified as to completeness. 2.1.2 Based on the financial information provided Versatile's profitability from known projects may be in the vicinity of $38,000, significantly less than the $80,000 costs order being sought; 2.1.3 Versatile has not provided evidence that they have the ability to obtain funding if required from financial institutions, or further funding from Mr Sardi in addition to the equity contribution of $275,000 made by him in the 2011 financial year. 25 His conclusions were embodied in paras 5.30 to 5.32 as follows: 5.30 While the draft 2012 financial statements disclose that current assets exceed current liabilities, I have been unable to verify the existence and recoverability of the key assets (trade debtors, other debtors and work in progress) nor have I been able to ascertain the accuracy of the recorded liabilities (trade creditors, provision for income tax, legal fees, client deposits and judgement debts). 5.31 In addition I am unable to assess Versatile's ongoing profitability from future trading activities noting that estimated pre-tax profit that may be derived from projects (referred to above) would be approximately $38,000. An adverse costs order in the vicinity of the $80,000 sought is in excess of those profits, and would therefore need to be met from Versatile's reserves (if any). 5.32 Accordingly, based on my review of the additional information provided to me I cannot be satisfied that Versatile has the financial capacity to meet an adverse costs order, if so ordered, from existing financial resources, available funding from bankers and or directors, or surplus (profits) that may be derived from operating activities. 26 The circumstances which led RCMD, so late in the day, not to press its application that VH provide security for costs, are embodied in a letter dated 2 October 2012 sent by Mills Oakley to CBD Law (Ex 1, 55, 56). Relevantly, that letter reads: AFFIDAVITS We confirm that at 8.41pm on Thursday 27 September 2012 you purported to serve an affidavit of Mr Sandro Sardi, containing some 250 pages of exhibit by email. You have now at 1.44pm today, purported to serve 2 further affidavits of Mr John Hamish Giles Finney and Mr Sandro Sardi, which you have indicated you will seek to rely on at tomorrow's hearing. PRODUCTION OF DOCUMENTS We again note that our client's notice to produce dated 21 August 2012, was returnable on 27 August 2012 (Notice to Produce). On 30 August 2012, the date for compliance with the notice to produce was extended until 19 September 2012. Your client failed to provide those documents within that time. On 27 September 2012, we received an email from you attaching a letter purporting to respond to the Notice to Produce. The production of the above documents (parts of which were illegible) was made 8 days after your client was ordered to produce them, and 2 clear days prior to the hearing in which these documents are needed. PERSONAL UNDERTAKING We confirm that you have now indicated that Mr Sandro Sardi as a director and shareholder of Versatile Homes Pty Ltd will provide a personal undertaking to RCMD Pty Ltd to pay any adverse costs order should Versatile Homes Pty Ltd be unsuccessful in these proceedings. Our client accepts that undertaking. APPLICATION FOR SECURITY On the basis of the (late) provision of the various financial documents provided by your client today as well as on 27 September 2012, and the proffered undertaking on 28 September 2012 our client considers it unnecessary to press its application for security for costs, listed for hearing tomorrow. We will advise the Court accordingly this afternoon. However, our client will be pressing for an order for its costs on an indemnity basis, payable forthwith given that had your client provided its material and undertaking in a timely fashion and more particularly when our client first sought financial information from your client, our client would not have been forced to prepare and serve 3 notices to produce, engage in protracted correspondences with you and file its application for security for costs. Accordingly, we will submit that our client is entitled to its costs, on an indemnity basis, because of your client's apparent refusal or failure to provide the financial information requested at the earliest opportunity presented to it. Consideration 27 The foregoing background is but a summary of the events and circumstance relevant to the costs orders now sought, but that summation provides a sufficient factual context in which to consider and determine the costs orders that should be made. 28 My review of this factual context has led me to the conclusion that RCMD's application for security for costs (and, it follows, the similar application of Mr Marino and affiliates) was, from the very outset, totally misconceived and that this is reflected in early correspondence from Mills Oakley in the exchanges with CBD Law prior to RCMD filing its application for security on 13 July 2012. It is also reflected in the supporting affidavit of Mr Ben-Arie; the tasks for which Mr Gwynne was engaged and the conclusions he expressed in his two reports; and the repeated recourse by RCMD to issuing to VH notices to produce seeking documents and, in one case, factual information, which were not relevant to the issue which the Court would have to decide, namely, whether a security for costs order should be made against VH. 29 From the very outset, RCMD has taken the position that it was incumbent on VH to satisfy RCMD that VH could meet an adverse costs order made against it when clearly VH had no such obligation. The authorities make it clear that the threshold or jurisdictional question that must first be answered is whether it appears by credible testimony that there is reason to believe that the applicant corporation will be unable to pay a respondent's costs if the proceeding is successfully defended. This is so, at least on the facts of the present case, whether the application is made pursuant to s 1335 of the Corporations Act 2001 (Cth) or whether it is made, as here, pursuant to s 56 of the FCA. Contrary to the position taken from the outset by RCMD, the section imposes an evidentiary burden on the applicant for the order. 30 The correct position was summed up by Lee J in Warren Mitchell Pty Ltd v Australian Maritime Officers' Union & Ors (1993) 12 ACSR 1 at 4, 5: It is sufficient to dispose of these motions to restrict consideration to s 1335(1) of the Corporations Law. If the respondents are unable to succeed under that provision they will not obtain an order pursuant to any other power the court may have. A helpful review of the authorities on this topic is contained in the article, "Security for Costs Against Corporations – s A335 of the Corporations Law", Colbran, 1993 Companies and Securities Law Journal 273. Subsection 1335(l) reads as follows: Where a corporation is 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. Section 1335 recognises the injustice that may result if a corporation is able to commence litigation against a respondent who has no choice whether to be involved in the litigation and finds at the conclusion of the proceeding that the corporation is worthless and that its shareholders are able to shelter behind a statutory limitation of their liability. To avoid such a consequence courts have been given an unfettered discretion to make such orders as will be appropriate to balance the interests of parties to litigation commenced by an impecunious corporation. However, the court's discretion to order that security for costs be provided by a litigating corporation is exercisable only if the threshold question raised in s 1335 has been satisfied in favour of the applicant for the order, namely that on the whole of the evidence before the court, there is credible testimony providing reason to believe that if the corporation does not succeed in the proceeding it will be unable to pay the costs of a respondent. The use of the word "credible" suggests a requirement that evidence to be relied upon has some characteristic of cogency. Qualification of the word "testimony"' by the word "credible" suggests that an evidentiary burden is undertaken by the party seeking the order. It amounts to an obligation on an applicant for an order to show that the material before the court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings. To what extent the satisfaction of that standard may fall short of the demonstration of a likelihood that the corporation will be insolvent at the relevant time is unnecessary to decide. It is enough to say that speculation as to insolvency or financial difficulties likely to confront the corporation will be insufficient to ground the exercise of the discretion. 31 In the early exchange of correspondence prior to RCMD filing its application for security for costs, nowhere is it put by RCMD, or by Mills Oakley on its behalf, that it had reason to believe that VH would be unable to meet an adverse costs order made against it in the proceeding. That is not surprising because there was no rational basis for such a belief: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93, 20 VR 377 at [15]. There was no more than speculation on RCMD's part which led to inverting the evidentiary onus in the statements made in the correspondence from Mill Oakley to CBD Law. Moreover, once RCMD had been provided with VH's financial statements for the year ended 30 June 2011 and for the eleven months ended 31 May 2012, the situation did not change. Far from the provision of these documents giving RCMD reason to believe that VH would not be able to meet an adverse costs order made against it, they would have fortified a view that it was reasonable to believe that VH would be able to meet such a costs order. Mr Gwynne said as much in his first report (see [19] above). RCMD and Mr Gwynne may not have been satisfied that this was in fact the case, but that is not the test posed by the threshold question. 32 Nowhere in Mr Ben-Arie's supporting affidavit of 13 July 2012 does he depose to a belief that VH would be unable to meet an adverse costs order made against it and that too is not surprising because there is nothing in that affidavit or in the annexures thereto which provides a rational basis for such a belief. 33 Nor is there anything in Mr Gwynne's reports which would provide a rational basis for any such belief. It undoubtedly explains why he does not express any such belief and says what he does in the extract from the first report reproduced in [19] above. 34 Whether RCMD's application for security for costs had come on for hearing in June of this year or earlier this month when it was listed for hearing, it would, in my view, have failed for want of credible testimony that there is reason to believe that VH would be unable to meet an adverse costs order made against it. This whole issue should have been brought to a head long before now; I cannot help but think that the fact that it was not is something for which I am responsible in failing to better manage the interlocutory stages that came before me. Whether that be right or wrong, neither RCMD nor Mr Marino and affiliates should have sought the costs they seek in relation to their respective applications for securities for costs. The costs of both should be costs in the cause. 35 The same order should be made in respect of VH's costs thrown away by the adjournment of the hearing of RCMD's application for security for costs on 27 August 2012. 36 Finally, there is the question of the parties' costs of the hearing before me on 3 October 2012 at which these costs issues were ventilated. In my view, neither RCMD nor Mr Marino and affiliates should have pursued the costs order each sought. VH should have its costs of that day. 37 I will make orders accordingly. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds. Associate: Dated: 17 October 2012