Supreme Court New South Wales Medium Neutral Citation: Perricoota Boat Club Investments Pty Ltd v Watson [2011] NSWSC 1103 Hearing dates: 12 August 2011 Decision date: 15 September 2011 Jurisdiction: Equity Division Before: Gzell J Decision: Appeal allowed. Security for costs to be given. Catchwords: PROCEDURE - Security for costs - appeal from dismissal of motion by Associate Justice - caveat over interest in land by chargee under loan agreements - whether inference should be drawn that debt extant - refusal to answer notice to produce Legislation Cited: Uniform Civil Procedure Rules 2005 Cases Cited: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 Patonga Beach Holdings Pty Ltd v Lyons [2009] NSWSC 869 Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1 Jones v Dunkel [1959] HCA 8; (1958-1959) 101 CLR 298 Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 Kuhl v Zurich Financial Services Australia [2011] HCA 11; (2011) 276 ALR 375 KP Cable Investments Pty Limited v Meltglow Pty Limited [1995] FCA 1093; (1995) FCR 189 Category: Principal judgment Parties: Perricoota Boat Club Investments Pty Ltd (Plaintiff) Anthony Rupert Watson (First Defendant) Hillington Valley Pty Ltd (Second Defendant) Representation: Counsel William Alstergren (Plaintiff) Mark Goldblatt (Second Defendant) Solicitors McDermott & Associates (Plaintiff) Dandanis & Associates (Second Defendant) File Number(s): 2009/291115 Judgment 1This is an appeal from Macready AsJ's dismissal of a motion by Hillington Valley Pty Ltd, the Second Defendant, for security for costs from the Plaintiff, Perricoota Boat Club Investments Pty Ltd. 2In an application of this nature there is a threshold issue: it is for Hillington to prove by credible testimony that there is reason to believe that Perricoota will be unable to pay Hillington's costs. As Einstein J said in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [61] the evidence to be relied upon must have some characteristic of cogency. 3If this initial burden of proof is established, the evidentiary onus falls upon Perricoota to satisfy the court that, taking into account all relevant factors, the court's discretion should be exercised by refusing to order security or by ordering it in some lesser amount. 4His Honour concluded that Hillington had not overcome the initial onus. 5Perricoota was incorporated in Victoria but most of its assets are in New South Wales. The sole shareholder and director is Paul Graeme Jarman. The company has a paid up capital of $1. 6Perricoota holds a 37.5% interest in land known as Lot 17 on DP 270076, formerly Lot 16. The land is the subject of a mortgagee sale by Statewide Secured Investments Limited. Mr Jarman said that the likely indebtedness to Statewide on the sale would be approximately $1.4 million. Gary Bares the sole director of Hillington said the indebtedness was likely to be in excess of $1.6 million. 7In October 2009, Perricoota and the other owners of Lot 17, Anthony Rupert Watson, the First Defendant and Hillington sold it to Hillington as trustee for the Bares Family Trust, Backbeach Holding Pty Ltd, Perricoota as trustee for the Watson Investment Trust and Mr Watson for $2 million. That was the best evidence of value that was before his Honour. The sale was not completed because of a dispute about the giving of vacant possession. 8Taking the higher amount of the prospective surplus on sale of Lot 17 of $600,000.00, Perricoota's equity is worth approximately $225,000.00. 9There is, however, a caveat over Lot 17 lodged by Suttonville Pty Ltd declaring an interest as chargee against Perricoota pursuant to two loan agreements in 2006 and 2007 between Suttonville as lender and Perricoota as borrower. 10Suttonville is a company controlled by Mr Jarman who is also the sole director of Perricoota. 11Hillington issued a notice to produce to Perricoota seeking all documents evidencing the charge to Statewide and all documents supporting that charge; the charge in favour of Suttonville referred to in the caveat; the loan agreements made between Perricoota and Suttonville referred to in the caveat and any documents evidencing the amount owed pursuant to the charge to Statewide and the loan agreements with Suttonville. 12Perricoota refused to produce any documents on the basis that the Uniform Civil Procedure Rules 2005, Pt 21 r 21.10(1)(b), requiring an identification of a specific document clearly identified in the notice had not been satisfied. Reference was made to Patonga Beach Holdings Pty Ltd v Lyons [2009] NSWSC 869 at [11]. 13Macready AsJ said that it was surprising that no financial statements of Perricoota or Hillington were put in evidence and it was also surprising that no evidence was given of the liabilities of Perricoota apart from what was owed on the mortgage to Statewide. 14Perricoota claimed to have other assets. Apart from costs orders in its favour to which I will return, his Honour found that they were not an available source for the payment of Hillington's costs. His Honour's determination in this respect was not challenged on appeal. 15The main thrust of the appeal was that the charge to Suttonville and the refusal of Perricoota to answer the notice to produce were sufficiently persuasive to permit a rational belief to be formed that if ordered to do so, Perricoota would be unable to pay Hillington's costs estimated at $35,000.00 to $45,000.00 up to the commencement of the trial ( Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1 at 5). 16His Honour dealt with this question thus: "I would have thought that the applicant/second defendant should have led evidence of the amount of the debt if there was one which was secured by the charge to Suttonville. Subpoenas should have produced material or Mr Jarman could have been cross-examined on the matter. The existence of the charges is not sufficient by itself to infer that there must be some debt. For all the court knows, there may be nothing arising because nothing was advanced or perhaps it has been repaid." 17With respect, I do not agree with his Honour. The information was wholly within the knowledge of Perricoota. The attempt to obtain the information by notice to produce was just as appropriate as issuing a subpoena, or perhaps more so. It would lengthen the hearing of motions for security for costs if cross-examination became the norm. If Suttonville made no advance, the caveat was improper but, in any event, the caveat identifies a charge under two loan agreements. If the loans were repaid the caveat would be lifted. 18In my view the appropriate inference was that Perricoota was indebted to Suttonville. The evidence to support the inference was cogent. The caveat was still in place and would have been lifted if the loans had been discharged. That evidence together with the failure of Perricoota to answer the notice to produce, enhanced by the inference that had it done so the evidence would not have assisted it ( Jones v Dunkel [1959] HCA 8; (1958-1959) 101 CLR 298; Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389; Kuhl v Zurich Financial Services Australia [2011] HCA 11; (2011) 276 ALR 375) engendered a rational belief that if ordered to do so, Perricoota would be unable to pay a costs order in Hillington's favour. 19Perricoota had an order for costs in its favour in proceedings in Victoria quantified at $16,639.04 together with interests accrued of $1,557.41. There is an estimate of the costs ordered on an indemnity basis against Hillington in other proceedings in excess of $16,000.00. 20Those amounts would not discharge the estimated costs for which Hillington seeks security. 21There are two problems about taking the costs orders into account. First, Hillington can but has declined to pay any of the costs orders and unless they are paid the costs orders are not a source of funds to discharge any costs order in Hillington's favour. 22Secondly, Perricoota has incurred the costs the subject of the orders. If payment is made by Hillington, those funds will defray Perricoota's liabilities to its legal advisers and will not be available to discharge any costs order in Hillington's favour. 23In the notice of motion for appeal, Hillington alleged that Macready AsJ erred in reading into evidence an affidavit of Michael Stjaalkjaer sworn on 27 April 2011. That ground was not pressed before me. His Honour did not rely on the contents of that affidavit. 24In my view Hillington overcame its initial burden of proof and his Honour erred in finding to the contrary. 25In KP Cable Investments Pty Limited v Meltglow Pty Limited [1995] FCA 1093; (1995) FCR 189 at [39], Beazley J set out seven matters that ought to be taken into account in exercising the discretion whether or not to order security for costs. 26Macready AsJ had regard to each of those matters and concluded: "Accordingly one can see there will be strong discretionary factors also leading to the dismissal of the motion." 27To the contrary, I would have thought that on balance his Honour's analysis of those matters favoured the exercise of discretion in favour of Hillington. His Honour concluded that delay was not excessive; the claim was bona fide; there was nothing of substance in the ground that Hillington's impecuniosity was caused by Perricoota's conduct; there was no evidence that the application for security was oppressive; there was no one standing behind Perricoota likely to benefit from the litigation who was willing to provide security or any personal undertaking to be liable for the costs; and Perricoota was in substance the Plaintiff. 28I do not disagree with the conclusions reached by Macready AsJ in relation to the matters to be considered in exercise of discretion. My disagreement is with his Honour's final assessment of the effect of these matters. In the exercise of my discretion I adopt his Honour's analysis but conclude that it produces a result suggestive of an exercise of discretion in favour of awarding security for costs which I will do. 29The appeal from Macready AsJ is allowed. I will order security for costs by Perricoota in the amount of $35,000.00. I will hear the parties on the appropriate terms of the court's orders and I will hear the parties on 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: 15 September 2011