New South Wales District Court CITATION: AON Services Aust Pty Ltd v Impact Edge Pty Ltd [2009] NSWDC 76 HEARING DATE(S): 3 April 2009 JUDGMENT DATE: 24 April 2009 JURISDICTION: Civil JUDGMENT OF: Williams DCJ at 1 DECISION: Cross claimant ordered to provide security for costs, to the satisfaction of the Registrar, in the sum of $60,000. Proceedings on cross-claim stayed until then. CATCHWORDS: Security for costs - Cross claim - principles Fiduciary Ltd – v – ­­­­Morningstar Research P/L 2004 NSW SC 664 CASES CITED: Ravi Nominees P/L – v – Phillips Fox BC 9201117 WASC unreported 15/7/92; FPM Construction – v – Blue Mountains City Council 2005 NSWCA 147 AON Services Aust Ltd PARTIES: Plaintiff/cross defendant Impact Edge Pty Ltd T/as Termo Hotel Defendant/ cross claimant FILE NUMBER(S): 3958 of 2007 COUNSEL: Mr J Sleight for AON Mr P King for Impact SOLICITORS: Clinch Long & leatherbarrow Cropper Parkhill Judgement on Notice of Motion for Security for Costs on the Cross Claim 1. In March 2003, Impact Edge P/L (Impact) consulted with AON Services Aust Ltd (AON ) preparatory to the purchase of the Termo Hotel, Albury in regard to various insurances that might be required. The Hotel was purchased for $1.2 million being $597,000 goodwill, $153,000 licence and $448,000 plant and equipment. 2. On 12/1/05, the Hotel burnt down. Apparently, AON assisted Impact in proceedings against CGU Insurance. Those proceedings were settled for $900,000, but exactly when that occurred is not known. 3. On 6/7/07, AON filed a Statement of Claim in the District Court seeking payment of 3 invoices for services to Impact, totalling $60,614.79. A defence was filed in 22/11/07 disputing any amount beyond $10,000 and various other matters. AON knew by January 2008 that Impact was also going to file a Cross-Claim. Despite some initial slowness, this was done on 22/04/08. 4. The cross claim was in excess of $750,000 alleging, essentially, negligent advice in regard to its insurance cover and settlement of its claim. Impact seeks to further amend the Cross-claim by the addition of statutory counts under the Corporations Act and the ASIC Act in regard to alleged misrepresentation. 5. An amended defence was also filed on 28/04/08. On 10/6/08 AON filed a defence to Impact's cross-claim. AON's solicitor on 19/06/08 indicated an intention to seek security for costs regarding the cross-claim. 6. On 25/06/08 Impact's solicitor replied advising that Impact acknowledged "impecuniosity" but said that such was caused by AON's actions and further that such an order would stultify Impact's claim. 7. AON filed an amended Statement of Claim on 14/07/08. There were directions hearings on 20/08/08 and 04/11/08 and other court proceedings, including lists of documents and discovery and inspection. 8. On 1/12/08 the dispute was unsuccessfully mediated before Mr Angyal SC. 9. On 23/12/08 a Notice of Motion was filed seeking security by AON supported by an affidavit of its solicitor, Mr Leary. Affidavits in reply were by Ms Sutton (solicitor) and Mr Philips (director/shareholder) were filed on 3/2/09 and 9/3/09 respectively. 10. On 9/2/09 a form 19 Notice to Produce for inspection was filed by AON and served on 10/2/09. The matter was before a Judge on 13/2/09 when a call was made on the documents but they were not produced. I note that at least 14 days were required before the notice should have been called on. 11. Despite a number of court appearances since then, there has been no further call. 12. That constitutes the available facts and evidence in support. 13. The criteria for considering the ordering of a security for costs are well understood. 14. Essentially they include the following: 1. The application should be brought promptly having regard to considerations of delay and prejudice. 2. The applicant's case ought, at least on a prima facie basis, disclose a cause of action that has reasonable prospects of success. 3. Whether the impecuniosity of the corporation was caused by the conduct of the party seeking the security. 4. Whether the application is oppressive to defeat an otherwise bona fide claim. 5. Whether there are persons behind the company who will benefit from the litigation and are willing to provide security or an undertaking as to costs 6. Whether there are Public Interest issues. 15. The criterion for considering whether or not a corporation ought be ordered to give security for costs is whether it appears on credible testimony that there is reason to believe that the corporation if unsuccessful would be unable to meet an order for costs. I am satisfied this applies to cross-claims as much as it does to a principal cause of action. 16. In the present case, there can be no doubt that the corporation would be unable to pay costs if unsuccessful on the cross-claim. Impact's solicitors' letter of 25/06/08 acknowledged impecuniosity but said that such was caused by AON. Further, in Mr Philip's affidavit, he being a co-director and share holder of Impact with his wife, says at paragraph 14 that the company has no funds, assets or income to continue the proceedings if a security for costs order is imposed and in par 18 that neither the company nor he nor his wife would have incurred the costs of the cross-claim to date had they known that there would be an application for security. I take this to mean that the cross-claim would not even have been commenced in those circumstances. 17. An affidavit from AON's solicitor suggests costs in the order of $150,000 could be incurred in defending the matter. 18. As to Impact's ability to meet a costs order, not that much is known. Of the settlement figure of $900,000 mentioned before, Mr Philips says a significant portion of that sum was used to pay legal costs, but does not tell the court what the figure actually was. He also says in paragraph 12 that after the fire, he had to sell his home and surrender an $800,000 term deposit in order to repay the loan by the ANZ in purchasing the Hotel, the loan being secured by a mortgage on his house. He indicates that the total expenses, including legal costs incurred by he and his wife, exceed their joint incomes, which appears to be less than $100,000 on the documents attached to his affidavit. 19. So that $800,000 plus the value of their house plus $900,000 by way of settlement of the action against CGU, are somehow in the equation as to the loss of the $1.2 million hotel business. 20. One of the matters relied on by AON's solicitor establishing on inability to meet a costs order was a floating charge registered by ANZ on the company. However, I am satisfied from the affidavit of Ms Sutton, Impact's solicitor, that this charge has now been removed. 21. As was said by Austen J in Fiduciary Ltd – v – Morningstar Research P/L 2004 NSW SC 664 once the defendant's evidentiary onus of establishing a plaintiff's inability to pay costs is satisfied, the court's discretion is triggered and it is then for a plaintiff to satisfy to the court that the order should not be made. He also referred to the approach to be taken to corporate plaintiffs of no substance behind which individuals shelter to avoid a costs liability, compared to the situation where the plaintiff is a real person. 22. In submissions made after the proceedings were concluded but before judgement, I am informed there has been a late offer (6/4/09) by Mr and Mrs Philips to undertake to be responsible for the further costs of the cross claim incurred by Impact if AON withdraws the application for security. That offer has been rejected (8/4/09). Objection has also been taken to these submissions being made without the consent of the plaintiff and I am asked not to have regard to them for the reasons set out in the somewhat acrimonious correspondence that has occurred between the respective solicitors. Whether or not I should have regard to these submissions, there is nothing in Mr Philips affidavit that provides any reason to think that there is much substance behind such an offer. If such an undertaking was sought to be enforced, I can see no ability on the part of the Philips to be able to meet it. As a matter of practicality, the offer takes the case no further. 23. Impact argues that there has been a delay in bringing this application and I have been referred to a number of practical examples in the reported cases (see Ravi Nominees P/L – v – Phillips Fox BC 9201117 WASC unreported 15/7/92; FPM Construction – v – Blue Mountains City Council 2005 NSWCA 147. However, the examples of delay in those cases are not apposite to the matter before me and seem to all have been at much later and more crucial stage of the respective proceedings. That really can't be said about the present application and in any event, there is no evidence of any particular prejudice suffered by Impact as a result of any delay. 24. AON made a point in regard to a suggested failure by Impact to answer the notice to produce for inspection dates 9/2/09 and called 13/2/09 some four days later. 25. I am not satisfied that issue is of any substance and I note that the call has not been re-agitated since. 26. On Impact's own admissions via its solicitor and a director, not only could it not meet an order for costs but it would not have commenced proceedings if it had been required to provide such security. Whilst I haven't addressed the merits of Impact's cross-action, that stance does little to re-assure the court that its cause of action is a meritorious and viable one. After all, we are not talking about a cross-action of little substance but one that exceeds the jurisdiction of this court, in response to a claim against it of $60,000. If the claim with the proposed amendment is bona fide, it is difficult to understand why action to bring such a claim was only taken after Impact itself had been sued. However, against that, I have the certificate of a legal practitioner that the cross claim has reasonable prospects of success and the cross claim document does not appear to be internally inconsistent or to raise causes of action unknown to the law or which are prima facie un-tenable. 27. However, the lack of detail in Mr Phillips' affidavit does not assist the court in resolving the discretion. It's all very well to say that his statements are unchallenged but if Austen J in Fiduciary is correct, he has the onus of persuading the court not to exercise its discretion. 28. Given this and the disparity between claim and cross-claim and Impact's admitted inability to meet costs if their action is unsuccessful, it is my view that Impact should give security for costs in the sum of $60,000 and I so order. Proceedings in the cross-claim are stayed until that order is satisfied or until the parties agree otherwise. It seems somewhat illogical that in an application like this further costs be awarded against an unsuccessful party. The order I would be inclined to make is that the costs of this application be AON's costs in the principal action. I reserve the issue of costs. 29. This matter was heard on 3 April in Sydney. Judgement has been delayed because I was on circuit until 20 April. J S Williams Judge 24 April 2009 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.