15 Management Pty Ltd v Newstar Sports Management Pty Ltd & Ors [2009] NSWSC 1208

New South Wales Supreme Court

CITATION : 15 Management Pty Ltd v Newstar Sports Management Pty Ltd & Ors [2009] NSWSC 1208

HEARING DATE(S) : 06.10.09

JUDGMENT DATE : 13 November 2009

JUDGMENT OF : Nicholas J

DECISION : Par 49

CATCHWORDS : PRACTICE AND PROCEDURE – security for costs – application for order for future costs - whether reason to believe plaintiff corporation will be unable to pay costs of successful defendant – issues of frustration and delay – exercise of discretion – UCPR r 42.21 – s 1335(1) Corporations Act 2001 (Cth)

LEGISLATION CITED : Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005

CATEGORY : Separate question

Beach Petroleum N.L. v Johnson (1992) 7 ACSR 203 CASES CITED : Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189

15 Management Pty Ltd - plaintiff PARTIES : Newstar Sports Management Pty Ltd – first defendant Anthony Piccone – second defendant Teruaki Kita – third defendant

FILE NUMBER(S) : SC 6225/07

COUNSEL : M L Williams SC - plaintiff T Alexis SC - defendants

SOLICITORS : Worthington Williams Lawyers - plaintiff Rockliffs Solicitors & Attorneys - defendants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

Nicholas J

13 November 2009

6225/07 15 Management Pty Ltd v Newstar Sports Management Pty Ltd & Ors JUDGMENT 1 His Honour: This is an application for security for costs against the plaintiff by notice of motion filed 23 July 2009 under the Uniform Civil Procedure Rules 2005 Pt 42, r 42.21(1)(d), alternatively under s 1335(1) Corporations Act 2001 (Cth). 2 The trial date has not been fixed. Its estimated length is between five and eight days. The defendants estimate their costs for a five day trial at about $150,000, and for an eight day trial at about $185,000. It was not disputed that the estimates are reasonable. 3 The plaintiff is a company of which Mr Jason Macarthur is the sole director and shareholder. The first defendant is a company of which the second defendant, Mr Anthony Picone, is the sole director and shareholder. The third defendant Mr Teruaki Kita has been an employee of the first defendant. 4 By its statement of claim filed 8 April 2008 the plaintiff claims various forms of relief and compensation based on alleged breaches of fiduciary and other obligations under a joint venture agreement or partnership. In short, it is alleged that the purpose of the arrangement was the conduct of a sports management business for the period 1 February 2004 to 30 June 2006, which was concerned with representing and placing Australian rugby union players and coaches with overseas clubs and employers, particularly with companies based in Japan. It is alleged that from about July 2005 the plaintiff and the first defendant carried on the business in accordance with their agreement. The events which are claimed to constitute the breaches are alleged to have happened between about May and December 2007. 5 By the defence of the first and second defendants filed 16 May 2008, and of the third defendant filed 7 August 2008, the defendants deny the existence of a joint venture agreement or partnership, the breaches, and any liability to the plaintiff for the relief claimed. 6 There is no issue that the plaintiff has a bona fide and genuine interest in pursuing the claim, and a triable case. I am in no position to express a view about the prospects of success of any party. 7 By letter of 4 September 2009 to the plaintiff's solicitors, the defendants' solicitors proposed that the application for security be dismissed with costs in the cause on the basis that Mr Macarthur undertake to the court and provide each of the defendants with his personal guarantee to pay any costs of the proceedings which the plaintiff is ordered to pay to the defendants or any of them, in the event that the plaintiff is unable to pay those costs. The offer was open until noon 10 September 2009, but was rejected. The plaintiff 8 The plaintiff has a paid up capital of $2. An ASIC historic search of 15 July 2009 shows that its registered office and principal place of business is at the nominated premises at Pyrmont. Its assets are subject to a fixed and floating charge in favour of ANZ Banking Group created on 6 June 2007. Its last annual return was lodged on 9 February 2003. 9 It is common ground that the latest financial statements and income tax returns for the plaintiff were for the 2006 financial year. Income tax returns have not been lodged for the 2007, 2008, 2009 financial years. 10 The 2006 financial statements disclosed income of $357,356, expenses of $344,681, and profit before income tax of $12,675. 11 Mr Macarthur is the registered proprietor of the premises at Pyrmont. At present, they are unoccupied. The plaintiff has guaranteed Mr Macarthur's personal borrowings from the ANZ Bank in the amount of $1,085,000, and monthly payments of principal and interest until 20 December 2022 of $10,688. The principal security for the loan is the Pyrmont property which is valued at $1,400,000. 12 Mr Macarthur gave evidence in support of the proposition that the plaintiff was financially capable of paying the defendants' costs of the proceedings if ordered to do so. He said that the plaintiff receives income in the form of trailing commissions from two contracts, namely a contract between Ricoh Corporation, Japan, and the rugby union player Stephen Larkham, and a contract between Yokogawa Electric Corporation, Japan and the rugby union player Radika Samo. He said that under these contracts the plaintiff will be paid about $120,000 before the end of the 2009 calendar year, and about the same amount before the end of the 2010 calendar year. 13 Mr Macarthur also said that since about January 2008 he has redeveloped the plaintiff's business as a result of which he anticipates that it will receive a minimum of $80,000 in revenue in the current financial year. The nature of the business redevelopment was described in a document entitled "Summary of Action for 15 Management". It listed a number of steps which had been taken or were proposed to be taken. Its contents provided no apparent basis upon which the anticipated revenue of $80,000 was calculated or, on the probabilities, was payable to the plaintiff. No such revenue has yet been received. Apart from an invoice for about $20,000 which has been sent but not yet paid, no invoices have been sent in respect of transactions under this aspect of the plaintiff's business. No specific transactions, parties, or claims for revenue were identified. 14 He described the plaintiff's business expenses as minimal. He identified a hire purchase liability of $1,700 per month. Another item was the amount of about $1,000 per month payable to a consultant in Japan. Mr Macarthur was referred to the plaintiff's bank statements of its business cheque account for the period 14 November 2008 to 14 July 2009. He said the statements indicated the plaintiff's regular expenses incurred, and likely to be incurred, on a monthly basis. These statements disclose an opening balance of $127,204.24, expenditure during the period of a total of $82,511.19, and a closing balance of $44,692.81 on 14 July 2009. They show that no amounts were credited by way of deposits or otherwise during the period. 15 Mr Macarthur was questioned as to the plaintiff's financial records and replied as follows: Q. … based on the material that you have available to you, presumably you would be able to, if asked, prepare a record of the income the company has received over the last three financial years and the expenses the company has incurred over the last three financial years? A. We don't know what income it's actually been entitled to, because we haven't yet got full discovery. Q. But, Mr Macarthur, in relation to the income that 15 Management has received over the last three financial years, and in relation to the expenses that 15 Management has incurred over the last three financial years, presumably you have access to the primary accounting records of the company for the purpose of indicating what those receipts were and what those expenses are? A. We know what income we have received and what expenses we have incurred, yes. Q. And that information was available to you at the time you came to swear your affidavit on 20 August 2009? A. Yes, correct." 16 As to the plaintiff's financial capacity to pay the costs of these proceedings, Mr Macarthur said it was questionable whether the plaintiff would have sufficient revenue to pay its own legal costs, and if it was unable to do so he would personally ensure it could fund the litigation, but if it was unsuccessful he would not assist it to meet an order to pay the defendants' costs. 17 Mr Jeremy Mark Posniak is a chartered accountant. His evidence was that he acted for the plaintiff and Mr Macarthur between about 2002 and 2007, and was retained again in May 2009. Based on information provided to him by Mr Macarthur, he expressed the opinion that the plaintiff is a going concern, and able to pay its debts as and when they fell due, including anticipated legal costs associated with this litigation. He was unaware of the business debts or expenses of the plaintiff. 18 He recently discovered that there had been an understatement of income and expenses in the plaintiff's tax return for the 2004 financial year, which has necessitated the preparation of an amended return, but this has not yet happened. He conceded the possibility that the plaintiff may be liable for the payment of additional tax, and for penalties and interest for the past five years. 19 The question of the plaintiff's entitlements to commission under each player's contract requires further consideration. 20 The documents evidence an agreement between Yokogawa Electric Corporation, Japan and Mr Samo dated 18 May 2007 under which Mr Samo was employed for 10 months commencing 1 June 2007. It was to be renewed for a further 12 months commencing 1 April 2008. Clause 8 provided: "8. The Company shall pay to GSM World Pty Ltd (GSM) agency fees equal to ten (10%) x the Employee's Gross Salary for every year of the Contract for its full duration, including renewals. Such fees shall be payable on an annual basis on or before 1st June each year following receipt of an invoice from GSM." 21 Although Mr Macarthur said he was not aware if there was currently a contract with Mr Samo, he said that the plaintiff had a contractual entitlement to a commission based on "… a deal done in April 2009 that renewed this contract" (T p 23). He said that an invoice for the agency fee for about $35,000 was sent prior to 1 June 2009, but it has not been paid. There was no other evidence of this transaction. 22 Also in evidence was a document as to the arrangement between Ricoh Co, Japan and Mr Larkham. Entitled "Heads of Agreement" it contained terms under which Mr Larkham was to be employed as a full-time professional rugby player for a term of three years commencing 1 April 2008. It was signed by Mr Larkham on 3 January 2008. With respect to the placement fee it provided: "Amount equivalent to 10% x Gross Salary per annum for the life of the contract, payable to 15 Management Pty Ltd on 1 April 2008 and each anniversary. A separate Service Agreement is to be entered into between the Company and 15 Management in relation to ongoing services. For the avoidance of doubt, the Placement Fee is payable separately from, and in addition to, the Net Salary and other benefits under this agreement." 23 The Heads of Agreement included the following term: "Standard contract to be negotiated, settled and entered into no later than 31 December 2007." 24 Mr Macarthur said that a standard contract had been signed, but was not in evidence because it was in Japanese. He said that arrangements involving Mr Larkham as either a player or a coach for 2010 are yet to be finalised. Assuming negotiations are successful the plaintiff expects a commission of about $80,000. There was no other evidence of this transaction or of a service agreement between Ricoh Co and the plaintiff as contemplated in the Heads of Agreement. 25 In his affidavit (20 August 2009) Mr Macarthur referred to a schedule prepared by the second defendant on about 11 September 2007. It was said to show the anticipated income of the business venture during the period July 2007 to July 2008. He deposed: "The Schedule shows all clients of the Business and the anticipated revenue to be generated by those contracts during the 2007/08 financial year. The anticipated revenue for that period was $857,110.00. Furthermore, the Business was entitled to ongoing management commissions and placement fees on an annual basis for the life of the contracts sourced for its clients, during and after the term of the client contracts. Had the Business not dissolved in or about December, 2007, that income would have continued to accrue to 15 Management until the expiry of the commissionable contracts on which the income was earned. These contracts represent the substantial assets of 15 Management at that time." 26 Mr Macarthur did not expand on these matters in oral evidence. I rejected the plaintiff's application made during final submissions to recall Mr Macarthur to explain the schedule on the ground that it was simply too late to do so. The information in the schedule was relied upon as indicative of the revenue the business was capable of generating. However, the defendant did not accept that the items, as shown in the schedule, which totalled $857,110 were amounts which were recoverable. Determination 27 Relevantly, UCPR Pt 42, r 42.21 provides: "42.21 Security for costs