Supreme Court New South Wales Medium Neutral Citation: ACN 105 921 962 Pty Ltd & Ors v Dominic Wiggett & Anor [2012] NSWSC 1526 Hearing dates: 13 November 2012 Decision date: 11 December 2012 Jurisdiction: Equity Division - Corporations List Before: Black J Decision: First and Third Plaintiffs to provide security for the Defendants' costs of the proceedings in two tranches. Parties have liberty to send submissions as to costs within 7 days. Catchwords: COSTS - Security for costs - Whether jurisdiction to make an order for security for costs is established - Discretionary considerations - Quantum of security. Legislation Cited: - Corporations Act 2001 (Cth) s 1335 - Fair Trading Act 1987 (NSW) - Trade Practices Act 1974 (Cth) - Uniform Civil Procedure Rules 2005 (NSW) rr 42.21, 42.21(1)(d) Cases Cited: - Beach Petroleum NL v Johnson (1992) 7 ACSR 203 - Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 - Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 1 FCR 311; 8 ACLR 818 - Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176 - Deangrove Pty Ltd v Buckby [2002] FCA 1544 - Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 - KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 - Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150 - Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40,584 - Litmus Australia Pty Ltd (in liq) v Canty [2007] NSWSC 670; (2007) 25 ACLC 1141 - Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 - Polstead Pty Ltd (in liq) v Shah [2009] NSWSC 560 - Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222 - Ryberg Telecommunications Pty Ltd (in liq) v Optus Mobile Pty Ltd [2011] NSWSC 1268 - Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 - Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 - Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806; (2006) 202 FLR 220 Category: Interlocutory applications Parties: ACN 105 921 962 Pty Limited (First Plaintiff) Envirotechnic Pty Limited (Second Plaintiff) Shannongrove Pty Limited (Third Plaintiff) Dominic Wiggett (First Defendant) A-TEK Specialised Industrial Cleaning Services Pty Limited (Second Defendant) Representation: Counsel: S.A. Gregory (Plaintiffs/Respondents) M. Condon SC (Defendants/Applicants) Solicitors: A.R. Warmsley & Co (Plaintiffs/Respondents) A. McMinn (Defendants/Applicants) File Number(s): 10/39897 Judgment 1The First and Third Plaintiffs, ACN 105 921 962 Pty Ltd ("ACN") and Shannongrove Pty Limited ("Shannongrove") bring proceedings in respect of allegations of breach of a joint venture arrangement and claim, inter alia, damages under the Fair Trading Act 1987 (NSW) and the Trade Practices Act 1974 (Cth), compensation at general law and under the Corporations Act 2001 (Cth), an account of profits and equitable compensation. The Second Plaintiff, Envirotechnic Pty Limited was wound up in a creditors' winding up and was deregistered in October 2011 and therefore no longer maintains the proceedings. 2By Notice of Motion filed on 24 September 2012, the Defendants, Mr Wiggett and A-TEK Specialised Industrial Cleaning Services Pty Limited sought an order that ACN and Shannongrove provide security for their costs in the proceedings in the sum of $250,000 or such other amount as the Court considers appropriate and that, until such security is provided, the proceedings be stayed. In the course of oral submissions, Mr Condon SC, who appears for the Defendants, modified that position by indicating that the Defendants do not press their application for security in relation to past costs and seek security in respect of future party/party costs of $135,000, inclusive of GST. Whether jurisdiction to make an order for security for costs is established 3The principles applicable to an application for security for costs under Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") r 42.21 and s 1335 of the Corporations Act are well established. In Polstead Pty Ltd (in liq) v Shah [2009] NSWSC 560 at [6], Brereton J observed that three issues generally arise in a security for costs application. The first is whether the ground referred to in the section or rule is established; the second is whether, if the ground has been established, as a matter of discretion an order should be made; and the third is the quantum of any order to be made and the terms on which it might be made. 4An order for security for costs can be made under s 1335 of the Corporations Act where it appears to the Court by credible testimony that there is reason to believe that a plaintiff will be unable to pay a defendant's costs if it is successful in its defence. That criterion is satisfied where: "[C]redible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs": Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205; Deangrove Pty Ltd v Buckby [2002] FCA 1544 at [4]. UCPR r 42.21(1)(d) in turn 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, a corporation, will be unable to pay the defendants' costs, 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, and that the defendant's costs of the proceedings and the proceedings be stayed until the security is given. The threshold test for a security for costs application is a relatively low one, reflecting the policy of the provision, namely "to protect a defendant against the risk of the plaintiff corporation's impecuniosity": Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [16]. 5The Defendants' application for security for costs is supported by an application of their solicitor, Mr Anthony McMinn, dated 24 September 2012. Mr McMinn assumed the conduct of these proceedings in June 2012 after the death of the Defendants' previous solicitor. Mr McMinn's evidence is that ACN has a paid up capital of $2.00, does not own real property in New South Wales and, on information and belief, it has ceased trading. The jurisdiction to make an order for security for costs against ACN, considered in isolation from Shannongrove, would be established in these circumstances. However, Shannongrove has offered an undertaking that it will be liable for any costs order made against ACN. The position in respect of ACN should therefore be determined having regard to the position in respect of Shannongrove. 6Mr McMinn's evidence is that Shannongrove has a paid up capital of $2.00. There is evidence that it owns a half share as tenant-in-common of a property at Silverdale with Mr and Mrs Gilmartin, who are its directors and shareholders, which is mortgaged to National Australia Bank Limited. Mr McMinn also gives evidence that Shannongrove was recently found liable for a breach of s 143 of the Environmental Protection Act and ordered to pay a fine of $35,000 and the prosecutors' legal and investigation costs estimated at approximately $118,000. 7Shannongrove is the trustee of the Gilmartin Family Trust ("Trust"). The beneficiaries under the trust deed of the Trust include, inter alia, Mr and Mrs Gilmartin, Mr Gilmartin's family members, any company in which he has an interest as shareholder or director and any trust in which he has or may have an interest. Shannongrove has absolute discretion to pay, distribute or allocate the whole or any part of the trust fund and Mr Gilmartin, as appointor, has the right to remove the trustee. 8Shannongrove in its capacity as trustee of the Trust has a half interest, and Mr and Mrs Gilmartin own the other half, of real property at Silverdale and the parties accepted that I could proceed for the purposes of this application on the basis that the market value of the property was approximately $5.255 million. The property is security for drawn loan facilities of approximately $580,000, although that amount would presumably increase as the facility is drawn down in respect of the Plaintiffs' costs of the proceedings, a matter to which I will refer below. Assuming that the property could be realised for that amount, the unencumbered value of the Trust's interest in the property is in excess of $2 million. I should have regard to the risk that that property could not be realised promptly, since ownership of assets will not necessarily displace the need for a security for costs order if payment of an adverse costs order could only made if the party was allowed an extended time to realise those assets: Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [16]; Livingspring v Kliger Partners above at [43]. However, by contrast with those cases, there is here no evidence before the Court that the sale of the relevant property would be likely to take an extended time. 9There is also evidence that the Trust has undrawn bank facilities of $470,000. Mr Bryett, who is the Plaintiffs' solicitor, also gives evidence that Shannongrove and its directors have no intention to use the balance of the facility available to it with National Australia Bank for any purpose other than the payment of legal fees in relation to the relevant proceedings. I do not think that evidence substantially advances Shannongrove's position, first, because it is no more than a statement, by its solicitor, of his instructions; second, because those instructions are formulated by reference to the intention of Shannongrove and its directors, which may change; and, third, because an intention to use a facility to pay legal fees is not the same as an intention to use that facility to pay costs ordered to be paid in favour of the other party to the proceedings. 10In determining whether to make an order for security for costs against Shannongrove, in its capacity as trustee of the Trust, the Court should have regard to the practical difficulties which the Defendants would face in enforcing an order for costs against it where its assets are held on trust: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40,584 at 46,279-46,731; Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150; Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 at [18]; Transocean Capital Pty Ltd v AFSIG Pty Ltd [2006] NSWSC 806; (2006) 202 FLR 270 at [34]ff. However, ACN, Shannongrove and Mr and Mrs Gilmartin offer several undertakings intended to address these difficulties, and rely on Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd above where Smithers J declined to order security when given an undertaking in similar form. His Honour's approach was cited in Lagarna Pty Ltd v Bridge Wholesale above at 154 and in Transocean Capital Pty Ltd v AFSIG Pty Ltd above although security was ordered in those cases in somewhat different circumstances. 11The primary form of undertaking offered by Shannongrove is that: "1. [Shannongrove] undertakes to the Court to consent to an order that [Shannongrove] be liable to the Defendants, respectively, for any orders which [ACN] is ordered, in the proceedings, to pay the Defendants, or either of them. 2. [Shannongrove], and its directors, Neville Pierse and Susan Christine Gilmartin, undertake to the Court that, if it is necessary in order to enable [Shannongrove] to satisfy any order in the proceedings that [Shannongrove] pay the costs of the Defendants, or either of them, [Shannongrove] will do all things as are reasonably necessary to enable [Shannongrove] to enforce its right of indemnity out of the assets for the time being comprising the Gilmartin Family Trust. 3. [Shannongrove], and in their capacity as its directors, Neville Pierse and Susan Christine Gilmartin, undertake to the Court pending further order, not to dispose of, deal with or diminish the value of the interest of [Shannongrove] in the land in Folio Identifiers [omitted], being respectively [omitted] at Silverdale in the Local Government Area of Wollondilly, Parish of Warragamba, and County of Camden, up to an unencumbered value of A$270,000. 12Mr Gregory, who appears for the Plaintiffs, contends that the second undertaking obviates the need for the Defendants, if they obtain an order that Shannongrove pay their costs, to compel Shannongrove to pursue its right to indemnity or make a subrogated claim. The third undertaking contemplates that Shannongrove will not take steps to dispose of or diminish its interest in the land held by it as trustee to the extent of $270,000, being a substantial portion of the past costs and estimated future costs, and in excess of the amount sought to be secured as future costs. 13Mr Gilmartin also offers a further undertaking, intended to address an issue identified by the Defendants as to the possible removal of Shannongrove as trustee of the Trust, that: "Neville Pierse Gilmartin, the Appointor of the Gilmartin Family Trust, undertakes to the Court that, until further order, he will not remove [Shannongrove] as trustee of the Gilmartin Family Trust or appoint a new trustee or appoint another person either in addition to, or in substitution for, him as appointor of the Gilmartin Family Trust." 14However, the Defendants point out that the Plaintiffs have not given any undertaking in respect of distributions from the Trust. In my view, that is a significant omission and is sufficient to undermine the efficacy of the undertakings since it would leave it open to Shannongrove to borrow funds in its capacity as trustee, including from related entities, make further distributions with those borrowed funds, and create competing claims against the assets of the Trust. 15An alternative form of undertaking offered by the Plaintiffs includes an additional undertaking that: "Neville Pierse Gilmartin, the Primary Beneficiary and Susan Christine, being his spouse, a beneficiary, of the Gilmartin Family Trust, undertake to the Court that, if it is necessary in order to enable [Shannongrove] to satisfy an order in the proceedings that [Shannongrove] pay costs of the Defendants, or either of them, they, jointly and severally, will hold themselves personally liable to indemnify [Shannongrove], to the extent of $135,000, in respect of costs which the First Plaintiff is ordered, in the proceedings, to pay the Defendants, or either of them." The Plaintiffs contend that, if the Court is minded to order that security be provided notwithstanding the undertakings offered in respect of the Trust, the Court ought to decline to order the provision of security where that additional personal undertaking is offered by Mr and Mrs Gilmartin, and the persons who stand to benefit from litigation by Shannongrove have thereby exposed themselves to an order for costs, and have an apparently unencumbered interest in the property. However, there are, in my view, three difficulties with that additional undertaking. The first is that, as the Defendants emphasise, no evidence has been led as to the asset position of Mr and Mrs Gilmartin, other than that they have at least their interest in the property to which I have referred above. The second is that that asset position would also be open to manipulation by the creation of liabilities to related entities, absent any undertaking that would not occur. The third is that this undertaking appears to be limited to apply only in respect of an order for costs against ACN. 16I do not consider that the present form of the undertakings offered by Shannongrove, or the additional personal undertaking offered by Mr and Mrs Gilmartin, are sufficient to displace the reason that would otherwise exist to believe that Shannongrove will be unable to pay the Defendants' future costs of the proceedings if ordered to do so, given its limited share capital and the fact that its assets are held as trustee for the Trust. I reach this view notwithstanding the value of the property owned by the Trust. Other factors relevant to the exercise of the Court's discretion 17Where the Court's jurisdiction to order security for costs under s 1335 of the Corporations Act and UCPR r 42.21 is established, the Court has a discretion whether to make such an order. The factors relevant to the exercise of that discretion include delay on the part of the defendants in bringing the application for security; the strength and bona fides of the plaintiffs' case; whether the defendants' conduct has caused the plaintiffs' financial position; whether the defendants' application for security is oppressive, in that it is being used to deny an impecunious plaintiff a right to litigate; and whether there are persons standing behind the company who are likely to benefit from the litigation and are willing to provide the necessary security: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189; Jazabas Pty Ltd v Haddad [2007] NSWCA 291; (2007) 65 ACSR 276 at [73]ff. 18No submission was made before me that I should not treat the Plaintiffs' case as arguable and brought in good faith. In that situation, it will generally be appropriate to consider the other discretionary factors in respect of an application for security for costs without undertaking too detailed a review of the strength and weaknesses of the claim and the prospects of success are treated as a neutral factor on the application: Street v Luna Park Sydney Pty Ltd above at [20]; Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd [2010] FCA 1222; Ryberg Telecommunications Pty Ltd (in liq) v Optus Mobile Pty Ltd [2011] NSWSC 1268. 19ACN and Shannongrove rely on the lateness of the application, which is made after they have served their evidence on liability and are due to serve the balance of their evidence shortly. An application for security for costs should be brought promptly, and that has plainly not occurred in this case: Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 1 FCR 311; 8 ACLR 818 at 820; Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514. Delay in bringing a security for costs application will have particular significance where a plaintiff has spent substantial monies on the conduct of the litigation, which would be wasted if the proceedings were brought to an end because security cannot be provided: Litmus Australia Pty Ltd (in liq) v Canty [2007] NSWSC 670; (2007) 25 ACLC 1141 at [26]. However, the significance of delay is reduced where it is not suggested that the plaintiffs or those standing behind it would be unable to provide the required security from its or their own resources, so there is no likelihood that the proceedings would be stultified by an order for security. I would nonetheless give that delay some weight in the exercise of the court's discretion. 20ACN and Shannongrove also rely on an affidavit of their solicitor, Christopher Bryett, sworn 22 August 2012, which was read subject to relevance. That affidavit demonstrates significant delays in the conduct of the proceedings, in large part attributable to the Defendants, and a degree of non-compliance with the Court's directions by the Defendants. I agree with the view expressed by Newnes JA in Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176 at [26] that a party's non-compliance with previous directions is ultimately not relevant to the purpose for which an order for security for costs is made, namely to protect against the risk that a successful party cannot recover costs which the other party is ordered to pay, and the discretion to order security for costs "is not a means by which a Defendant may be punished for its non-compliance with case management directions". I do not consider that I should decline to order security for costs by reason of those matters, where the case for it is otherwise established. 21The Plaintiffs did not contend that an order for security for costs would stultify the conduct of the proceedings. Quantum of security for costs 22The Defendants' solicitor, Mr McMinn, gives affidavit evidence of his estimate of the steps likely to be required to prepare the matter for trial and his estimate of the costs of those steps as $135,000; calculated on a solicitor-client basis rather than by reference to the costs likely to be recoverable on an assessment. The Plaintiff's solicitor, Mr Bryett, estimates that Mr McMinn's solicitor/client fees would be closer to $115,000 exclusive of GST, and $126,500 inclusive of GST. I would not allow security for costs on a basis inclusive of GST, where there is no evidence as to whether the Defendants will be able to obtain a credit for the amount of GST paid. 23Mr Bryett's evidence was that costs awarded by costs assessors are in his experience around 60% of the bill sought to be assessed. Although that estimate was not supported, as is common and desirable practice, by evidence of a costs assessor, and it may be a conservative estimate, it was not contested by evidence. It follows that the amount of security that would be awarded would not, on the evidence before me, exceed $46,000, and I will order that such security be provided on a staged basis. Orders 24Accordingly, I order that: 1. The First and Third Plaintiffs provide security for the Defendants' costs of the proceedings in such form as may be agreed between the parties, or otherwise in a form to be determined by a Registrar, in two tranches: (a) the amount of $23,000 within 28 days; and (b) the amount of $23,000 no later than 8 weeks prior to the date allocated for the commencement of the final hearing of the proceedings. 2. The proceedings be stayed if security is not provided when due in accordance with Order 1 above. 25In the ordinary course, costs should follow the event, since the Defendants have been successful in the motion and would not have been put to the costs of the hearing had it not been contested by the First and Third Plaintiffs. However, either party may send any submissions as to costs to my Associate within 7 days. I will then make orders as to costs in chambers unless either party requests an oral hearing. ********** 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: 18 December 2012