New South Wales Supreme Court CITATION : Agricultural and Rural Finance Pty Ltd v John Edward Atkinson & Ors [2004] NSWSC 437 HEARING DATE(S) : 18 May 2004 JUDGMENT DATE : 18 May 2004 JURISDICTION: Equity Division Commercial List JUDGMENT OF : Bergin J DECISION : Security ordered. CATCHWORDS : [Security for Costs] - Application by cross-defendant to cross-claim against him by former employer - holding company of cross-claimant in receivership and financial statements to 2002 show major decline in finances - notice to produce served on respondent for production of up to date financial statements - not produced - Inference available. LEGISLATION CITED : Corporations Act 2001 CASES CITED : Owners Strata Plan 50530 v Walter Construction Group Ltd [2001] NSWSC 820 PARTIES : Stephen Murray Lloyd (Applicant/Second cross-defendant) Oceania Agriculture Pty Ltd (Respondent/Second cross-claimant) FILE NUMBER(S) : SC 50063/03 COUNSEL : S Hughes (Respondent) SOLICITORS : PD White (Applicant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST BERGIN J TUESDAY 18 MAY 2004 50063/03 AGRICULTURAL & RURAL FINANCE PTY LTD & 1 OR v JOHN EDWARD ATKINSON & 215 ORS JUDGMENT 1 This is an application for security for costs brought by the cross-defendant to the second cross-claim, Stephen Murray Lloyd, against the second cross-claimant Oceania Agriculture Limited to which I shall refer as "OAL". The applicant moves, pursuant to part 53 rule 2 of the Rules or, alternatively, pursuant to section 1335 of the Corporations Act 2001, for security in the amount of $50,000 or otherwise as the Court thinks fit. Further orders are sought, being a stay of the second cross-claim until the security is paid and liberty to apply for further security, together with costs. 2 The applicant relies upon two affidavits: the first of which is of Paul William McDonald, a solicitor with the firm of Philip Densham White. Mr McDonald sets out costs incurred to date by way of attaching to his affidavit, rendered bills together with tax invoices and a fee agreement in respect of these proceedings and "related proceedings". The second affidavit is that of Rohan James McAlpine, sworn 12 March 2004, who annexes correspondence and various other relevant documents. 3 There is also exhibit A, which is the Notice to Produce served on OAL and the documents produced in answer to it. The Notice to Produce sought OAL's profit and loss accounts and balance sheets for the financial years ending 30 June 2000 to 30 June 2003. It also sought income tax returns, bank statements and documents relating to any real property and other assets owned by OAL. 4 The evidence relied on by OAL is that of Geoffrey Lazar, solicitor, in three affidavits of 24 March, 7 May and 18 May 2004. Mr Lazar is a very experienced solicitor of this Court and also has experience as a senior taxing officer of this Court for some five years and of the District Court for two years. 5 The second cross-claim is a claim resulting from a claim against OAL by way of first cross-claim by one of approximately 200 defendants being pursued by the plaintiff, Agricultural & Rural Finance Pty Limited. The plaintiff was a financier of persons who invested in a tea-tree plantation. Put shortly, OAL provided funds to the plaintiff who then financed the investors by providing loans. The investors then paid those funds to OAL by way of management fees and the like. It was no doubt hoped that there would be a successful outcome of the plantation and the income would be used to repay the plaintiff. That has not happened. 6 There is a question in these proceedings in respect of the loan agreements and, in particular, the meaning of the indemnity within those loan agreements. The main proceedings were commenced in 2003 and have been the subject of a number of directions resulting more recently on 19 March 2004 in a conditional agreement for there to be a test case. It is understandable that with approximately 200 defendants there is efficacy in trying to reach agreement to such a course being adopted. That agreement is conditional on the defendants for whom Clayton Utz acts providing written undertakings to Clayton Utz that they will be bound by the findings in the test case. I do not know at this stage what is the status of those undertakings, whether all, some, or none have given undertakings. 7 In any event, subject to that condition and pursuant to part 31 Rule 2, the claim by the plaintiff against one of the defendants, Bruce Walter Gardiner, the cross-claim by Mr Gardiner against the plaintiff and OAL, and the cross-claim by OAL against Mr Lloyd, have been severed for the purpose of the test case proceedings. A regime was put in place on 19 March 2004 for the purpose of preparing that test case bringing the parties back for further directions on 18 June 2004, unless there is slippage and liberty is exercised prior to that date to readjust the timetable. There has been some slippage and it will be the case that there will be some delay. 8 Mr PD White, solicitor, who appears for the applicant, Mr Lloyd, has taken the Court through the financial material to demonstrate what he submits is the basis upon which this Court would form the view on credible testimony that the cross-claimant would be unable to pay a costs order if ordered to do so. It is clear from the financial statements that the project commenced in about 1997, but for one reason or another, did not proceed successfully. In the financial report for the year ended 2001, the following was stated: Proceeds from oil sales were insufficient to pay management fees to the company. The company met with and informed the trustee in April 2001 that funds to continue operations would not be available. In June 2001, a letter was sent to all farmers informing them that operations would cease due to lack of funds. In July 2001, ASIC was notified of the company's inability to meet its licence conditions regarding funding. The company has ceased operations and is selling assets to meet liabilities. 9 In the same report it was recorded that the company had commenced discussions with the trustee and its advisers in regard to winding up the tea-tree projects, retiring as manager or otherwise ceasing operations. In the financial report for the year ending 2002, that material in respect of the cessation of the project, was repeated and, in addition, the state of affairs was recorded as follows: The company continued operations at the urging of farmers in order to give time to explore alternative proposals to save the projects. No proposals to save the projects were found. In November 2001, the trustee called a meeting of farmers, which was held on 18 December 2001, to consider a recommendation that the projects be wound up. The farmers voted against the winding-up of the projects. 10 In the same report it was recorded that the likely developments included the likely cessation by OAL of its principal activities and the recovery over time of the deposits it made with the plaintiff to meet liabilities and to make a distribution to its shareholders after tax. 11 The history revealed in the financial statements and balance sheets of OAL shows a reduction in total shareholders equity over the three-year period 2000 to 2002, indeed, from 1999, in which year the shareholders equity was 1.3 million; the following year it was 1.1 million. In 2001, it had reduced to $369,997 and in 2002 it had reduced to $261,484. The cash at the end of the financial year in 2002 was $4,713. 12 Importantly, Mr White emphasised the notes to the financial statements for the year ended 30 June 2001 and highlighted the listing of receivables. In the year 2000, the amount receivable from the plaintiff was listed at $1.025 million. The following year it was nil. Mr White submitted that receivable had been written off. When one reviews the way in which these proceedings are structured, Mr White submitted that the writing off of that mount is an important aspect of what this company is doing in respect of its financial position. 13 In particular, it was noted that in the year 2000, the other receivables were noted to be $510,244. In the year 2001, they had increased to 2.669 million. The point is made that those receivables have nothing to do with the plaintiff. It must be the case that those receivables are from elsewhere, they being listed as "other" in a paragraph where the plaintiff is specifically referred to at nil. In the following year, 2002, the "other" receivables of 2.6 million appear to have been written off. Looking at that history, up to 30 June 2002, it would seem to me that the company is on a downward spiral writing off over $3 million in receivables. 14 Mr Hughes of counsel, for OAL, the respondent, submitted that the applicant has failed to discharge its onus in this application. In support of that submission, Mr Hughes relied upon The Owners Strata Plan No. 50530 v Walter Construction Group [2001] NSWSC 820, in particular the following paragraphs of that judgment: [33] It is important to remember that the defendant has the evidentiary burden of proving it is entitled to the order it seeks. The party who asserts must prove in order to succeed: Scott Fell v Lloyd (Official Assignee) (1911) 13 CLR 230 at 241; Bankinvest AG v Seabrook (1988) 14 NSWLR 711 at 717 per Kirby P recently referred to in Idoport Pty Ltd v National Australia Bank & Ors [2001] NSWSC 744 Einstein J at p30 [60]. [34] The defendant had the capacity to serve a Notice to Produce on the plaintiff for its accounting records and financial statements it is required to keep (s103 and s106). It also had the capacity to serve a Notice to Produce on the plaintiff to produce minutes of its Annual General Meetings and any records relating to the charging of levies and estimates of outgoings. None of this was done. [35] The rule in Jones v Dunkel and the statements of Jordan CJ and Moffitt J above referred to do not persuade me that where a defendant demands evidence and a plaintiff refuses to provide it and puts a defendant to proof in an application such as this, the Court should simply infer adversely to the plaintiff. The adoption of such an approach by the plaintiff may cause some suspicion but what is required here is evidence which, viewed objectively, provides relevant "reason". Where forensic steps are available to and not taken by an applicant, whose burden it is to prove its case, I am of the view that a Court should be less inclined to draw such an adverse inference. 15 In that case, the applicant on the Motion for Security failed because it had failed to take forensic steps available to it in circumstances where the financial material was unavailable and it had failed to take steps to establish factors that were relevant to whether there was a possibility of the raising of levies. It seems to me that the applicant in this case has not failed in that regard. He did take the forensic steps that were available to him. Firstly, he served a Notice to Produce for all the documents to which I have made reference, such notice being part of exhibit A and, secondly, he notified the respondent's solicitors that, notwithstanding he would not press further compliance with the Notice, he still sought the production of the tax returns and financial reports of OAL for the year ended 30 June 2003. Having taken those forensic steps, OAL was put on notice that, if it did not produce the material, the applicant would seek to have the Court draw an adverse inference. The inference is available in this case. 16 Mr Lazar gave evidence in the affidavit of 7 May 2004 that he had been informed that the financial statements had been prepared in draft, but had not been finalised and that he expected them to be finalised within two weeks. His 18 May 2004 affidavit recorded that as far as he was aware the income tax return had still not been finalised. There was no reference to the other material sought. 17 OAL has not called evidence independent from the evidence relied upon by the applicant. It has sought to characterise the financial material differently and, in particular, refers to page 74 of exhibit A in which there is reference to the total equity and the total assets; there being in 2002 total assets of $443,084 and total equity of $261,484. I am afraid that does not assist OAL in the light of all the evidence called by the applicant. 18 There is also evidence that the holding company of OAL is in receivership and the landholder of the land on which the plantation of tea-trees is situated is also in receivership. I am satisfied to the requisite degree that there is credible testimony upon which I am satisfied that the applicant would not be in a position to pay a costs order if ordered to do so. 19 The next argument raised by OAL is that, on the evidence called by the applicant, the Court would not order security because the quantum cannot be assessed with any precision or accuracy. 20 It is clear that this litigation is complex. It is also clear that the respondent has chosen to bring a cross-claim against Mr Lloyd claiming that, notwithstanding his position with the respondent, he made representations that were not authorised by the respondent. The nature of the claim that is made against Mr Lloyd will require Mr Lloyd to be present during the trial or at least have a presence so that his interests are attended to throughout the trial. It will be necessary for him to understand the evidence that is given by Mr Gardiner and other defendants, if they be called, in respect of representations that were made and to gather any nuances from any evidence that may be given to suggest, either directly or indirectly, that Mr Lloyd made representations beyond his statutory authority as an officer of OAL. 21 That is a heavy burden and one, no doubt, that will be very costly, but the applicant on the motion, Mr Lloyd, has taken a conservative approach at this stage. He has established that somewhere in the realm of about $40,000 has already been expended on this litigation. A conservative estimate is half that amount, $20,000, and it is appropriate to have regard to the fact that there have been seven directions hearings and such amount does not take into account the presence of a senior practitioner here today arguing a Notice of Motion on his behalf. 22 There is then the further preparation of reviewing the evidence to be filed, of preparing the evidence to respond to the application brought by OAL against him and, indeed, trying to decipher whether that evidence is to be called in his capacity as a party, or in his capacity as a witness in any of the other cases that are part of the test case. All in all it seems to me that the applicant's claim for $50,000 is conservative in the circumstances of this complex litigation. That is understandable, however, by reason of the reference in the fee agreement to "related proceedings". Mr Lazar made the point in his evidence that he does not know what the related proceedings are or were, neither does the Court. That, however, is irrelevant, having regard to the fact that I have assumed that any reasonable practitioner attending to the litigation before this Court would have incurred at least $20,000 in respect of the costs of this litigation. 23 Mr Hughes also raised the status of OAL's cross-claim and submitted that this is really a responsive claim. This submission is a popular one in security for costs applications and needs to be looked at quite closely. It is a matter for a cross-claimant to demonstrate that the cross-claim is really a defensive claim. That cannot be done in this matter. The claim made against Mr Lloyd is very broad indeed. It includes allegations of breach of statutory duties, damages claims at Common Law, claims for misleading and deceptive conduct and breaches of the Corporations Act. I am not satisfied it is responsive. 24 In my view, the applicant has established that quantum is able to be assessed and it should be said that where it is difficult to assess quantum, the Court is not precluded from awarding security. It must do its best on the evidence before it. I am satisfied that to do justice between the parties the orders sought by the applicant should be made. I make the orders in the short minute of order dated today and signed by the solicitor for the applicant and counsel for the respondent. ****** Last Modified: 05/25/2004 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.