Supreme Court New South Wales Medium Neutral Citation: Rural & General Insurance Broking Pty Ltd v Barrie Goldsmith t/as Goldsmiths Lawyers [2011] NSWSC 175 Hearing dates: 8 March 2011 Decision date: 17 March 2011 Before: R A Hulme J Decision: Defendant's application for security for costs is dismissed. Catchwords: PROCEDURE - costs - security for costs - whether corporate plaintiff impecunious - winding-up application against plaintiff - relevant discretionary factors Legislation Cited: Corporations Act 2001 (Cth) Legal Profession Act 2004 Uniform Civil Procedure Rules 2005 Cases Cited: KDL Building v Mount [2006] NSWSC 474 Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1 Category: Principal judgment Parties: Rural & General Insurance Broking Pty Limited (Plaintiff) Barrie Goldsmith T/as Goldsmiths Lawyers (Defendant) Representation: Counsel: Ms M Castle (Plaintiff) Mr B Goldsmith (in person) Solicitors: DG Thompson (Plaintiff) Goldsmiths Lawyers (Defendant) File Number(s): 2010/390368 JUDGMENT 1HIS HONOUR: The plaintiff was a client of the defendant who provided legal services to it. A dispute arose as to payment of the defendant's costs. The plaintiff sought an assessment of costs. A costs assessor determined that there was no jurisdiction to determine the application for assessment because it was out of time. A review panel came to the same conclusion. On 23 November 2010 the plaintiff commenced proceedings in this Court by way of summons seeking to quash those two decisions. It also sought an order pursuant to s 728 of the Legal Profession Act 2004 that the defendant provide to the plaintiff a bill of costs. The proceedings are next before the Registrar on 21 March 2011 for directions. 2On 19 January 2011 the defendant filed a notice of motion seeking an order pursuant to rule 42.21 of the Uniform Civil Procedure Rules 2005 and section 1335 of the Corporations Act 2001 (Cth) that the plaintiff provide security for costs and that the proceedings be stayed until such security is provided. The plaintiff resists the motion. 3The basis of the defendant's motion is that there is reason to believe that the plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so: UCPR r 42.21(1)(d). The Corporations Act provision is in similar terms. Such differences as there are between s 1335 and UCPR r 42.21(1)(d) are not presently significant. The primary question on this motion is whether the defendant has established that there is reason to believe that the plaintiff will be unable to pay the defendant's costs if the plaintiff were to be unsuccessful in relation to the proceedings it has brought. Three matters are said to give rise to the belief. 4The first matter is that an application was filed on 23 August 2010 in the Federal Court of Australia by the Deputy Commissioner of Taxation seeking an order that the plaintiff be wound up in insolvency and that a liquidator be appointed. The ground for the application is said to be the failure to comply with a statutory demand for the payment of a debt in the sum of $149,202.24. The defendant contends that this gives rise to a belief that the plaintiff is unable to pay its debts as they fall due and thus would be unable to pay the defendant's costs if ordered to do so. 5The plaintiff's response to this is to indicate that an arrangement has been made with the Australian Taxation Office for the payment of the debt by instalments. The plaintiff's evidence indicates that the plaintiff is paying what should be, as of this month, $20,000 per month and that the liability will be fully repaid by 30 June 2011. 6The second matter is that on 25 October 2010 a liquidator was appointed to a company associated with the plaintiff, ACN 000 007 492 Limited, previously called Rural & General Insurance Limited (RGIL). Previously an administrator had been appointed to this company. The defendant contends that these facts indicate that this company has an inability to meet all of its financial obligations. 7The plaintiff's response to this is that the company and the plaintiff, while associated, share no financial link. It is said that ACN 000 007 492 Limited operates the remnants of RGIL's underwriting business, while the plaintiff operates a broking business. It is also said that since 2004 the companies have had no common shareholders. 8The third matter relates to Mr Charles Pratten. Mr Pratten was at times a director and secretary of the plaintiff until he resigned on 11 October 2010. The plaintiff tendered material which indicates that he then briefly resumed his directorship with the plaintiff effective 14 December 2010, resigning again in 2011. 9The defendant annexed to his affidavit of 18 January 2011 a number of newspaper articles concerned with the apparent charging of Mr Pratten with seven counts of what is referred to as tax fraud and one count of threatening to cause harm to a Commonwealth public official, that is, an Australian Federal Police officer. The defendant submits that there is an inevitability that if Mr Pratten is convicted of these charges he will be sentenced to a term of imprisonment which is likely to be lengthy. I note that one of the newspaper articles refers to Mr Pratten being on bail, with conditions requiring security of $500,000, confiscation of his passport and thrice weekly reporting to police, so I take it that the allegations are of some seriousness. 10Also annexed to the defendant's affidavit is a printout from the plaintiff's website in which Mr Pratten is described as "a partner of the business". 11It is the defendant's contention that if Mr Pratten were to be incarcerated the business of the plaintiff will be prejudicially affected and this gives rise to further concern about its ability to meet any order for costs that may be made against it. 12The plaintiff asserts in response that, first and foremost, the plaintiff has experienced management that can competently manage the affairs of the business in Mr Pratten's absence. Moreover, it is contended that the charges against Mr Pratten are personal in nature and do not implicate the plaintiff; that they are in their embryonic stages in the sense that Mr Pratten has not had to enter a plea, no particulars of the charges have been provided by the prosecution, and the matter is unlikely to be heard until 2012, well after the conclusion of these proceedings; and that in any event, Mr Pratten intends to vigorously defend the charges. 13As noted above, the law governing motions for security for costs requires me to consider whether, as the parties put it, the "threshold test" has been met. That is, whether there is "reason to believe" that the plaintiff will be unable to pay the costs of the defendant if ordered. If the threshold test is satisfied, it is then necessary to determine whether the Court should exercise its discretion to order security for costs. The "threshold test" 14In determining whether there is reason to believe that the plaintiff will be unable to pay an adverse costs order against it, speculation as to insolvency or financial difficulties likely to confront the corporation is insufficient: Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1 at 5. 15Of the three grounds raised by the defendant as the basis for its belief, the winding up application issued by the Deputy Commissioner of Taxation against the plaintiff is the strongest. However, the plaintiff has to some extent dispelled this concern by providing evidence that it has entered into an arrangement to repay the outstanding tax liability and that the amount will be fully repaid by 30 June 2011. It is said that in the interim, the winding up application has been stood over to allow time for the debt to be repaid, whereupon the application will be withdrawn. There is nothing before me which contradicts this evidence. I accept it. 16The need for the plaintiff to repay an outstanding tax liability by instalments could exist for various reasons. One could be financial hardship on the part of the company. Another could be cash flow. Significantly, however, the ability of the plaintiff to make payments, initially of $10,000 per month, and now $20,000 per month, tends to support the proposition that the plaintiff will be able to pay an adverse costs order against it. It is not apparent, on the evidence before me, whether this arrangement compromises the plaintiff's ability to pay costs if so ordered. Further, it is altogether possible that the arrangement will have finalised by the time these proceedings conclude. 17What is lacking is an assessment of the plaintiff's financials which could substantiate the defendant's suspicion. Without it, the evidence gives rise to mere speculation as to the plaintiff's financial position which does not suffice to meet the threshold test for an order for security for costs. 18The defendant submitted that I should draw an adverse inference against the plaintiff concerning its financial viability by virtue of its failure to produce documents in response to a notice to produce served on 3 March 2011 and called on at the hearing of the motion. While I accept Mr Goldsmith's submission that it may have been possible for the plaintiff to have at least complied, in part, with the notice to produce by the date of the hearing, the defendant could well have served the notice to produce some six weeks earlier than he did. There is no merit in Mr Goldsmith's contention that he had an expectation that the plaintiff would have put on evidence as to its financial position. The plaintiff bore no onus to do so. The submission that the need to serve the notice to produce only emerged when it became apparent that the plaintiff did not intend to provide such evidence is rejected. The defendant bore the onus to establish the threshold test. If he required documents in the plaintiff's possession in order to do this, a notice to produce could have been issued and served at around the time the notice of motion was filed. In these circumstances, I do not propose to draw any adverse inference against the plaintiff for failure to comply with a notice to produce which allowed a mere two clear business days for compliance. 19As for the other two matters raised by the defendant, they do not, either individually or in combination, satisfy me that the threshold test is met. With respect to the appointment of a liquidator to ACN 000 007 492 Limited, there is no evidence before the Court of any financial ties between that company and the plaintiff which would affect the plaintiff's capacity to pay an order for costs against it. Similarly, evidence of criminal charges against a former director of the plaintiff may raise suspicions or concerns regarding the day-to-day management of the plaintiff, however in light of the plaintiff's explanations that matter goes no further. On Mr Pratten's unchallenged evidence, there appears to be an executive team that can manage the plaintiff's affairs in his absence, and in any event his potential absence significantly post-dates any potential order as to costs in these proceedings. Moreover, until the proceedings having been finalised, Mr Pratten is entitled to the presumption of innocence. Discretion to order security for costs 20Were I to find in the alternative that the threshold test was met, I would still be minded not to exercise the Court's discretion to order security for costs. The parties addressed me on some of the general factors that may be relevant in assessing whether to exercise the discretion. Some particular attention was given to the prospects of the parties in the substantive proceedings, including the merits and bona fides of the respective cases. 21In assessing prospects, I am not required to consider in any great detail the merits of the cases once satisfied that each side appears to have a viable case: KDL Building v Mount [2006] NSWSC 474 at [13]. In addition, I accept Mr Goldsmith's submission that it is difficult to make an assessment of the relative prospects of the parties without the defendant's evidence having been prepared, though this is not an uncommon scenario faced by the courts in security for costs applications. 22That said, I have given some consideration to the determinations of the costs assessor and the review panel that are the subject of review in the substantive proceedings. 23Section 350 of the Legal Profession Act, at the time the application for costs assessment was filed, provided that such an application must be made within 12 months of certain specified events. The plaintiff filed an application on 22 December 2008. There was no question about this being within time. However, there was an error in the name of the plaintiff. Although it should have been patently obvious who the applicant was, the defendant took issue. Ultimately the plaintiff rectified the error by filing an amended application, but after the 12 month period had expired. 24The defendant submitted, in effect, that this was an application now out of time. The costs assessor agreed, and held that there was no jurisdiction to deal with the matter. The review panel likewise agreed. 25The plaintiff's contention is that filing of an amended application outside the 12 month period did not deny the assessor jurisdiction when the original application was filed in time. Alternatively it contends that s 350 should be applied as it was in force at the time it entered into the retainer with the defendant. At that time, the period in which to file an application for costs assessment was 60 days, but an assessor had power to deal with an application filed outside that period. 26The latter contention appears to be somewhat dubious but the primary contention to my mind appears to have some merit. These are not concluded views, but looking at the matter broadly, there appears to be nothing about either party's case which would compel a conclusion that it is highly likely to succeed, let alone certain to succeed, or vice versa. The most that can be said on the evidence before me is that both parties appear to have a prospect of success. 27The final prayer for relief in the summons raises a discrete issue as to whether the defendant should be ordered to provide the plaintiff with a bill of costs pursuant to s 728 of the Legal Profession Act . There appears to be arguments available to both parties in respect of this. It is not possible on the evidence presently before the Court to determine what the likely outcome might be. 28A factor of some significance in favour of not exercising the discretion to order security for costs is the rather small magnitude of the risk to the defendant of the plaintiff not complying with an adverse costs order. I accept the plaintiff's submission that the defendant has overestimated the amount of preparation and hearing time. The matter is not as complex as the defendant appears to suggest. Were I minded to order the giving of security, the quantum would be somewhere in the order of between $15,000 and $20,000 and not the $34,900 sought by the defendant. This is a relatively modest sum, proportionate to the relative simplicity of the matter. Orders The defendant's application for security for costs is dismissed. I will hear from the parties on the question of costs. ********** 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. Decision last updated: 17 March 2011