New South Wales Supreme Court CITATION : Juelle Pty Ltd v Buildev Properties Pty Ltd & Ors [2006] NSWSC 302 HEARING DATE(S) : 18/04/06 JUDGMENT DATE : 24 April 2006 JURISDICTION : Equity Division JUDGMENT OF : Gzell J DECISION : Registrar's orders that plaintiff provide security for costs set aside with costs. CATCHWORDS : PROCEDURE - Supreme Court Procedure - Registrar reviews - Principles for review - Admissibility of evidence on review - Security for costs - Principles - Whether Registrar correct in concluding that jurisidictional issues of reason to believe plaintiff corporation would be unable to pay defendant's costs if ordered to do so, met - Whether unaudited financial statements should be given little weight Uniform Civil Procedure Rules 2005 LEGISLATION CITED : Trade Practices Act 1974 (Cth) Fair Trading Act 1987 Corporations Act 2001 (Cth) QBE Workers Compensation (NSW) Pty Ltd v Sports Pit Pty Ltd (in liq), NSWSC, unreported, Young J, 12 October 1995 Wentworth v Graham (2002) 55 NSWLR 638 CASES CITED : Portal Software v Bodsworth [2005] NSWSC 1115 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 156 FLR 116 Owners - Strata Plan No. 50530 v Walter Construction Group Ltd [2001] NSWSC 820 PARTIES : Juelle Pty Ltd T/AS Castrian Homes - Plaintiff Graeme Hopkins - 2nd Defendant FILE NUMBER(S) : SC 3582/05 COUNSEL : Mr M Lawson - Plaintiff Mr D G Charles - Second Defendant LOWER COURT DATE OF DECISION : 04/24/2006 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION GZELL J MONDAY 24 APRIL 2006 3582/05 JUELLE PTY LTD v BUILDEV PROPERTIES PTY LTD & ORS JUDGMENT 1 The second defendant, Graeme Hopkins, brought an application that the plaintiff, Juelle Pty Ltd, give security for costs in the amount of $110,000.00. Registrar Walton ordered Juelle to give security in the amount of $55,000.00. Juelle seeks review of that order. The principles for a review 2 The Uniform Civil Procedure Rules 2005, r 45.19 provides, relevantly for present purposes, that if a Registrar makes an order in any proceedings, the court may, on application by any party, review the order and make such order, by way of confirmation, variation, discharge or otherwise, as the court thinks fits. 3 Of this process, Young J said in QBE Workers Compensation (NSW) Pty Ltd v Sports Pit Pty Ltd (in liq), NSWSC, unreported, 12 October 1995 at 2: "In the review process, it seems to me that the same onus applies as applied before the Registrar. The hearing is not quite a hearing de novo in that it is customary for the parties to be restricted to the material before the Registrar, though there is provision in proper cases for extra evidence to be called. But the hearing is like a hearing de novo in that the Court does not have to find any error of law on the part of the Registrar and may make any order that is sought to be just in the circumstances ( Re Sheppard [1972] 2 NSWLR 714)." 4 While a review is not an appeal and, in consequence, it is not subject to the restrictions that apply to appeals, and while it is unnecessary to demonstrate any error of principle in the order under review, when it comes to matters of practice and procedure there should be a natural inhibition against overturning a Registrar's decision. In Wentworth v Graham (2002) 55 NSWLR 638 at 640-641, Santow J said: " Westpac Banking Corporation v Abemond Pty Ltd (Santow J, 3 November 1994, unreported) points out that the consideration that the registrar's decision involves a matter of practice and procedure remains a relevant consideration in the exercise of the power of review. Accordingly, it is proper for the court to exhibit a natural inhibition against the unrestrained substitution of the reviewing court's views in a matter of practice and procedure for those of the original tribunal." 5 In Portal Software v Bodsworth [2005] NSWSC 1115 at [17], Brereton J pointed out that if fresh evidence is produced, it may be received by the court, or the court may refer the matter back to the Registrar for consideration as a fresh application. Admissibility of evidence on review 6 Counsel for Juelle sought leave to read passages from an affidavit of Garry James Hopes that had not been before the Registrar. 7 In its statement of claim, Juelle alleges that Mr Hopkins was employed by one or more of the corporate defendants, Buildev Properties Pty Ltd, Buildev Development Pty Ltd, Buildev Construction Pty Ltd, Buildev Investments Pty Ltd, Buildev Estate Ltd and Buildev Holdings Pty Ltd, and made representations on behalf of one or other of the companies in the Buildev Group. Juelle alleges that it was engaged to quote for construction work to be carried out within the Buildev Group and it entered into contracts with companies in the Buildev Group to carry out building works on a number of different sites. Juelle alleges that in gearing up to perform the works, it incurred expenditure it would not otherwise have done and suffered loss when the Buildev Group repudiated the contracts. The claim against Mr Hopkins is for misleading and deceptive conduct under the Trade Practices Act 1974 (Cth), s 52 or under the Fair Trading Act 1987, s 42. 8 The evidence sought to be adduced from Mr Hopes, a director of Juelle, was that he and his wife refinanced their principal residence, raising a loan of $680,000.00 that was transferred to Juelle to increase working capital for the purposes of loan warranty insurance eligibility and to purchase plant and equipment that would not have been purchased had it not been for the contracts with the Buildev Group. 9 Over objection as to the relevance of the evidence against Mr Hopkins as distinct from the Buildev Group, I allowed the evidence. It seems to me that it goes to the question whether any inability to pay Mr Hopkin's costs was induced by his actions as well as those of the Buildev Group, to the question of the source of funds available to Juelle, and to the question whether the profitability of Juelle in the year ended 30 June 2005 was adversely affected by the costs of gearing up and was an atypical year. 10 No objection was raised to the tender of Juelle's business account statements with the Commonwealth Bank from 17 August 2001 to 16 September 2005. I allowed the tender. The bank balance was relevant to the question whether Juelle had the capacity to pay costs that might be incurred by Mr Hopkins. 11 Scott Elsley swore two affidavits that were before the Registrar. He is a chartered accountant who gave a report with respect to Juelle for which his firm acted as accountants and tax agents and were responsible for the completion of the company's financial statements for the year ended 30 June 2005. 12 The financial reports that were in evidence were complied on the basis that Juelle was not a reporting entity and Mr Elsley had used his accounting expertise to collect, classify and summarise the financial information that the directors provided into a financial report. Those procedures did not include verification or validation procedures. No audit or review had been performed and, accordingly, no assurance was expressed by Mr Elsley's firm. The special purpose financial report was prepared for the benefit of the directors and members of Juelle. 13 In relation to the issue of security for costs, Mr Elsley expressed the opinion on the financial position of Juelle as detailed in its accounts, stating that they indicated that Juelle had net assets of $1,628,332.87 and that, should an unfavourable legal cost order be made against it for $110,000.00, Juelle, under normal business and trading conditions, including the realisation of assets and discharge of liabilities, should be in a position to meet such costs. 14 Objection was taken to this opinion before Registrar Walton. She rejected the objection. So do I. The financial statements of Juelle, that were before the Registrar, show a net asset position as stated by Mr Elsley. The net asset position of Juelle at 30 June 2005 and its ability to discharge an adverse costs order are material considerations with respect to the application for security for costs and on this review. 15 As I understand the objection, it was that the special purpose financial report being unverified, non-validated, unaudited and non-reviewed by Mr Elsley, it should be ignored with the consequence that Mr Elsley's statement as to net assets should be disregarded, the opinion therefore lacked foundation. 16 The report was signed by Mr Elsley and by the directors. The directors declared that the financial statements and notes presented fairly Juelle's financial position as at 30 June 2005 and its performance for the year ended on that date in accordance with the accounting policies described in note 1 to the financial statements. The directors also declared that in their opinion there were reasonable grounds to believe that Juelle would be able to pay its debts as and when they became due and payable. 17 The financial reports comprised a profit and loss statement, a detailed balance sheet, a detailed profit and loss statement, a trading account, a detailed profit and loss statement for building operations, a trading account for building operations, a detailed profit and loss statement for boat building operations, a trading account for boat building operations and a depreciation schedule. Note 1 to the financial statements is a statement of significant accounting policies. It states that the financial report was prepared in accordance with Australian Accounting Standards with respect to materiality and events occurring after reporting date. It mentions specific accounting policies adopted in the preparation of the financial report including the policy that inventories were measured at the lower of cost and net realisable value. 18 In my view, the lack of verification, validation, audit and review by Mr Elsley does not render the financial report inadmissible. They are the statements by the directors of the financial position of Juelle. The lack of verification, validation, audit and review may bear upon the weight to be given to the evidence but it does not, in my view, exclude the evidence. 19 John Joseph Woodward, the solicitor for Mr Hopkins, swore an affidavit in which he said that in July 2005 he obtained a copy of a fixed and floating charge over the undertaking, property and assets of Juelle, including its uncalled capital, in favour of the Commonwealth Bank. Objection was taken before the Registrar and before me that since the charge had been discharged subsequently, the evidence was no longer relevant and should be struck out as inadmissible. Registrar Walton rejected the submission as do I. As at the time of which Mr Woodward's speaks there was a charge that was relevant to the question to be argued before the Registrar and the material that was before her should be before me. 20 Mr Woodward stated his instructions to be that Mr Hopkins did not enter into any contracts with Juelle and if Juelle contracted with anyone, it was with one or other of the companies in the Buildev Group. It was submitted that that portion of the affidavit was argumentative and ought to be struck out. But the statement is non-contentious in the sense that Mr Hopkins' argument as to the cause of any impecuniosity on Juelle's part, resulted from the activities of the Buildev Group and not from him as an employee. I reject the submission. 21 Objection was taken to a letter from Mr Woodward in which he raised a number of concerns with respect to the figures in the financial statements prepared by Mr Elsley. It was submitted that Mr Woodward had not been constituted an expert. But the letter does not express an accounting opinion. Rather, it raises issues that, it was claimed, required further explanation. 22 No objection was taken to the letter before the Registrar. It may be that with respect to objections to evidence considered by a Registrar taken for the first time before the court on review, at least where the evidence played some part in the Registrar's decision, the appropriate course may be to refer the matter back to the Registrar, for the decision of the court, in those circumstances, may not constitute a review the Registrar's decision, but be a decision of the court replacing that of the Registrar, based on different material. 23 I do not have to decide that issue because I take the view that the letter is not offensive as a non-expert's opinion. 24 An objection, not raised before the Registrar, was made to a further letter of Mr Woodward in which he commented upon the letter from Mr Elsley explaining the change from a profit in Juelle for the year ended 30 June 2004 to a loss for the year ended 30 June 2005. Mr Woodward complained that he had not been provided with the answers to the questions raised in his previous letter and made comment and stated inferences and assumptions that he made. In my view, this letter falls into the same category as the earlier one. It does not purport to be the expression of an expert's opinion and is not rendered inadmissible on that ground. And the question whether the failure to take the objection before the Registrar has consequence, need not be determined. Security for costs legislation 25 Juelle being a corporation, the application for security for costs before Registrar Walton was made under the Corporations Act 2001 (Cth), s 1335(1) which provides that 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 a 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. 26 Alternatively, the application was made under the Uniform Civil Procedure Rules 2005, r 42.21(1)(d) which provides that if in any proceedings it appears to the court on the application of a defendant 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 may order the plaintiff to give such security as the court thinks fit in such manner as the court directs for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. Security for costs principles 27 In KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197-198, Beazley J, having said that a court approaches an application for security for costs under a broad unfettered discretion, summarised a number of factors that are commonly taken into account. Her Honour indicated that applications should be brought promptly, that regard should be had to the strength and bona fides of the plaintiff's case, to whether the plaintiff's impecuniosity was caused by the defendant's conduct, to whether the defendant's application is oppressive in the sense that it is being used merely to deny an impecunious applicant a right to litigate, to whether there are any persons standing behind the plaintiff who are likely to benefit from the litigation and are willing to provide the necessary security, to whether such persons have offered any personal undertakings to be liable for costs, and to whether the party against whom the order is sought is, in substance, the plaintiff. 28 In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 156 FLR 116 at 122 a majority of the Full Court of the Supreme Court of Western Australia said there was, initially, a jurisdictional question in an application for security for costs as to whether it appears by credible testimony that there is reason to believe that the plaintiff corporation will be unable to pay the costs. Once the court has jurisdiction, there is an unlimited discretion. The majority went on to say that the applicant for security is required to establish no more than that there is reason to believe and that required no more than judging the quality of the evidence to see if it objectively gave rise to a reason to believe: "The learned mmaster was correct in saying that there was the threshold hurdle which was required to be cleared to give the court jurisdiction. We consider however, with respect, that the learned Master placed the hurdle too high. He said that there must be credible testimony "that the respondent would not be able to meet any costs order made against it". The applicant is required to establish no more than that there is "reason to believe". The master's final question and answer is a further indication that he was requiring the applicant to prove the fact that the company now would not be able to meet a costs order. The master said: "Does the fact that in 1995 the first plaintiff would not have been able to meet any costs order made against it, mean that it would not be able to meet such a costs order in 1999? To conclude that it does would, in my view, be nothing more than speculation." In order to determine whether he had jurisdiction he was required to do no more than judge the quality of the evidence to see if it objectively gave rise to a "reason to believe"." 29 In Owners - Strata Plan No. 50530 v Walter Construction Group Ltd [2001] NSWSC 820 at [26], Bergin J endorsed the decision in FFE Minerals: "In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 156 FLR 116 the Full Court of the Supreme Court of Western Australia said, at p 122, that the applicant is required to establish no more than that the quality of the evidence objectively gives rise to a reason to believe that the plaintiff will be unable to pay the defendant's costs if ordered to do so." 30 In her reasons for judgment, Registrar Walton cited the observation of Bergin J, although she attributed it to FE Minerals (sic). 31 It is not argued that Registrar Walton applied any incorrect principle in her determination. What is said is that the application of that principle should have led the Registrar to the conclusion that the jurisdictional threshold had not been crossed. 32 The statutory reference to the future requires some timeframe to be supposed at which the question of financial incapacity is to be tested. Registrar Walton chose the first half of 2007 and no objection is raised to her selection of that time frame. 33 Furthermore, no objections is raised with respect to the Registrar's quantification of the security at $55,000.00. Juelle's financial position 34 The detailed balance sheet of Juelle as at 30 June 2005 showed net assets and shareholders' funds of $1,628,332.87. 35 The largest part of current assets was building work in progress but, as Note 1 to the financial statements indicated this, as an item of inventory, was valued at the lower of cost and net realisable value. Current assets stood at $368,144.46 and exceeded current liabilities that stood at $262,983.38. 36 Non-current assets included a loan of $622,484.75 to Castrian Development Co Pty Ltd and $684,228.80 as a loan to the Hopes Family Trust. These two amounts were greatly in excess of non-current liabilities at $530,192.59. 37 The bank statements showed that at all times in the period covered by them, Juelle had a credit balance with its bankers. The basis for the claim for security 38 Mr Woodward's initial concern that Juelle may not be in a position to pay costs estimated at $110,00.00 was based upon circumstances that no longer existed when the matter was before the Registrar. Paid up capital of $60,000.00 had been increased to $710,000.00, as Mr Elsley explained, to meet homeowner warranty insurance requirements and the fixed and floating charge in favour of the Commonwealth Bank had been discharged. Those circumstances could not constitute a quality of evidence objectively giving rise to a reason to believe that Juelle would be unable to pay Mr Hopkins' costs if ordered to do so. 39 The only other bases of concern raised on behalf of Mr Hopkins were set out in Mr Woodward's correspondence. There was no other evidence relied upon by Mr Hopkins. He did not call an accountant to express an opinion on the financial statements or Mr Elsley's reports. 40 Upon receipt of the special purpose financial report, Mr Woodward expressed a number of concerns. 41 There was the concern, since the financial statements were a special purpose financial report, whether reliance could be placed upon the declaration as to solvency signed by the directors. Secondly, concern was raised with respect to the fall from a profit in 2004 to a loss in 2005. Thirdly, concern was expressed that there was no indication as to when the debts due by related parties could be recovered. Then concern was expressed that the financial statements did not make reference to the indebtedness to the Commonwealth Bank the subject of the charge. And, finally, the costs of the current proceedings and the impact upon Juelle were not disclosed in the financial statements as a contingent item. 42 Mr Woodward's concerns were addressed in a letter from Mr Elsley's firm. It said that the primary reason for the 2005 year result was due to a developer cancelling the promised significant building work to Juelle which had committed large resources to the anticipated building work including staff and infrastructure acquisition and staff time. The letter went on to say that the directors of Juelle had established Castrian and it had acquired several large building and development sites, most with development approval and that Juelle would become the builder for Castrian but that no such work for Castrian had begun during the year ended 30 June 2005. The letter concluded that the directors of Juelle believed the company would return to profitable operations in 2006 and future financial years due to guaranteed building work and the non-occurrence of building business start up costs including business infrastructure. 43 The financial statements confirmed these opinions. There was an increase in plant and equipment in the 2005 year of $121,468.36 and the cost of motor vehicles rose from $147,191.68 to $315,618.58. In addition, new hire purchase liabilities totalled $211,310.56. 44 On the profit and loss side, motor vehicle expenses increased by more than three times the amount in the 2004 year and wages increased from $48,353.56 to $266,721.92. 45 The testimony from Mr Hopes identified expenditure on plant and equipment including leases on three motor vehicles that would not have been purchased but for the contracted works at $272,856.23. 46 The fact that Castrian had acquired large building development sites is suggestive of an ability to repay its loan from Juelle and supportive of Mr Elsley's statement in his report that, should an unfavourable legal costs order be made against Juelle, under normal business and trading conditions, including the realisation of assets and discharge of liabilities, Juelle should be in a position to meet a $110,000.00 costs order. 47 The loss in 2005 and the recoverability of the debt owed by Castrian were explained in the affidavits of Mr Hopes and Mr Elsley. In his reports the discharge of indebtedness to the Commonwealth Bank was also explained. That leaves the declaration as to solvency by the directors on unaudited accounts and the lack of a contingent item with respect to the current proceedings. 48 The quality of that evidence, objectively, does not, in my opinion, give rise to reason to believe that Juelle will be unable to pay Mr Hopkins' costs if ordered to do so. 49 The declaration by the directors was upon a set of financial statements that reflected net assets in excess of $1.6 million. The security ordered was $55,000.00. There was more than ample justification for the declaration of the directors. There were reasonable grounds to believe that Juelle would be able to pay its debt as and when they became due and payable. And in light of the disparity between the net assets and the security ordered, the lack of any statement that a contingent liability might exist could not have such an adverse effect upon Juelle's position to give rise to a belief that Juelle would be unable to pay Mr Hopkins' costs if ordered to do so. 50 When Mr Elsley's reports were made available to Mr Woodward, he added a further concern that the directors of Juelle had established a separate holding company to quarantine assets which might otherwise have been available to Juelle to meet its liabilities. 51 That opinion was unfounded. Mr Elsley had explained that Castrian had acquired several large building development sites and, thereafter, Juelle would be protected by carrying out guaranteed building work for Castrian. The Registrar's reasons 52 Registrar Walton gave the financial report little weight. She said: "The second defendant points out that the financial statements of the plaintiff are described as a special purpose financial report and the procedures of the accountant do not include verification or validation of procedures, no audit or review of the accounts has been performed, and accordingly no assurance as to the veracity of the accounts is expressed. I find this quite troublesome. I would have expected in such circumstances that the plaintiff would have provided some evidence to corroborate the veracity of the reports. Without such further evidence, I give the reports very little weight." 53 Juelle was not obligated to produce any evidence. The jurisdictional issue required Mr Hopkins to adduce such evidence, the quality of which, objectively, gives rise to a reason to believe that Juelle will be unable to pay Mr Hopkins' cost if ordered to do so. 54 To expect Juelle to have provided corroborative evidence of the veracity of the financial report tends to reverse the onus of proof contrary to the judicial statements regarding this threshold or jurisdictional issue. 55 The Registrar went on to reject the submission that she look at the 2004 year figures rather than the loss in 2005. Again, Registrar Walton took the view that it was incumbent upon Juelle to produce more up to date financial reports. She said: "Whilst I accept that some of the 2005 losses may have been caused by the conduct of the defendants, as a whole I am not convinced that I should be looking at the 2004 year to assess the plaintiff's ability to meet a costs order. Given that the 2005/2006 financial year is half completed, I would have expected some evidence as to the current position of the plaintiff. Without that I find it difficult to make any assessment of the plaintiffs (sic) ability to pay any adverse costs order. Without this and given my comments above in relation to the reliability of the financial records, I find the second defendant has established the threshold question that the plaintiff would be unable to meet any adverse costs orders." 56 The Registrar went on, then, to consider discretionary factors. Conclusion 57 With respect to the Registrar, I take a contrary view of the jurisdictional issue. It was for Mr Hopkins to adduce sufficient evidence which, viewed objectively, would give rise to a reason to believe that Juelle will be unable to pay Mr Hopkins' costs in the first half of 2007 if ordered to do so. 58 Apart from Mr Woodward's expressed concerns with respect to the financial statements, the only evidence adduced was the assertion that Juelle had limited paid up capital and a fixed and floating charge held over its undertaking by the Commonwealth Bank. Neither of those matters remained in existence at the time Registrar Walton considered the matter. 59 On the other hand, Mr Elsley swore affidavits and gave a further certificate explaining the downturn in profitability in the 2005 year and Juelle's expectations for the future. 60 My task is to review the evidence as a whole and form my own decision based on that material. I do not need to find any error in the decision of the Registrar. 61 In my view, an evaluation of that evidence does not lead to a reason to believe that Juelle will be unable to pay Mr Hopkins' costs if ordered to do so. The evidence that might have established such a reason to believe was spent by the time of the hearing. The criticisms of the financial statements were answered in the evidence adduced by Juelle and those answers, in my view, displaced any basis upon which a reason to believe Juelle will not be able to pay Mr Hopkins' costs if ordered to do so could be founded. 62 In my view, Mr Hopkins has failed to establish the threshold issue. It is unnecessary for me to consider the discretionary issue. 63 I set aside the Registrar's orders of 6 February 2006. I dismiss Mr Hopkins' notice of motion filed on 6 September 2005. I order Mr Hopkins to pay Juelle's costs of that notice of motion and of Juelle's notice of motion for review filed on 16 February 2006. ********** 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.