MH Chambers v General Practice Support Services [2013] NSWSC 275

Supreme Court New South Wales

Medium Neutral Citation: MH Chambers v General Practice Support Services [2013] NSWSC 275 Hearing dates: 22/03/2013 Decision date: 22 March 2013 Jurisdiction: Equity Division - Commercial List Before: McDougall J Decision: 1. Stay on execution of judgment to be lifted unless defendant pays judgment debt plus interest into court within 7 days. 2. Cross-claimant to provide security for cross-defendants'; costs of cross-claim in the sum of $85,000.00. Category: Procedural and other rulings Parties: M H Chambers Pty Limited (ACN 002 215 705) (First Plaintiff/First Cross-Defendant) T M Harpur Pty Ltd (ABN 93 002 200 008) (Second Plaintiff/Second Cross-Defendant) David Sena Pty Ltd (ABN 75 003 304 416) (Third Plaintiff/Third Cross-Defendant) Michael Henry Chambers (Fourth Cross-Defendant) Timothy Martin Harpur (Fifth Cross-Defendant) IPN Medical Centres Pty Ltd (Seventh Cross-Defendant) (ABN 37 008 149 893) General Practice Support Services Pty Limited (ACN 082 708 147) (Defendant/First Cross-Claimant) Representation: Counsel: EAJ Hyde (Plaintiff) S Cirillo (Defendant) Solicitors: Norton Rose Australia (Plaintiffs) MJ Woods & Co Solicitors (Defendant) File Number(s): 2011/413096

Judgment (ex tempore - revised 22 March 2013) 1HIS HONOUR: The plaintiffs, an incorporated medical practice and its practitioner directors, sued the defendant for amounts due under a practice support agreement. The defendant cross-claimed, against the plaintiffs and others, seeking substantially greater damages. The proceedings were fixed for hearing for 25 February 2013 with an estimate of three days. On 4 February 2013 Dr Tufiq Shah, the director of the defendant, notified the defendant's intention to seek a vacation of the hearing date. That application was dealt with on 8 February 2013. The date was vacated. 2It seems that, at the hearing on 8 February 2013, it became apparent that the real dispute between the parties was not as to the plaintiffs' claim against the defendant, but, rather, as to the defendant's cross-claim. Accordingly, among the orders made on 8 February 2013, there was an order that there be judgment for the plaintiffs on their claim against the defendant for the sum of $201,075.41, together with interest of $27,408.93; but that the judgment be stayed until the cross-claim was decided or until the further order of the court. 3There had been correspondence between the parties or their legal representatives as to the ability of the defendant to pay costs if ordered to do so. That appears to have started back in February 2012. The result reached was that, upon undertakings as to confidentiality, the defendant provided its financial statements for the year to 30 June 2011 and what were presumably some form of management accounts for the six months to 31 December 2011. 4The former document disclosed, amongst other things, the proposition that as at 30 June 2011 the defendant had total assets of $7.1 million and net assets of $2.685 million. A similar, although not so substantial, healthy position was shown for the proceeding financial year. 5No doubt encouraged by that, the plaintiffs agreed not press their application for security for costs, on the basis that the defendant's director Dr Shah would give an undertaking to notify the plaintiffs' solicitors within fourteen business days of his "knowledge of any material adverse change to the information contained in the financial documents of [the defendant] provided...on 15 March 2012". That undertaking was given; the "financial documents" to which it referred were those from which I have extracted the net asset positions set out earlier. 6As a result of the events of February 2013, the plaintiffs became concerned as to the financial position of the defendant. Accordingly, the defendant was asked to provide further information as to its financial position. It did not do so. 7Against that background, the plaintiffs submit that there has been a material adverse financial change to the defendant's position. They submit, further, that there has been shown good reason to believe that, if the defendant is ordered to pay their costs, it would not be able to do so. Thus, the plaintiffs seek a lifting of the stay of execution on the judgment they have recovered, and security for the costs of the cross-claim. 8The defendant's website shows that it derived income from fees earned by the management of medical practices. Some eight practices were listed on the website, although I think in fact there may have been more than eight in all. The financial statements that have been provided (and I include in this both the financial statements and management accounts referred to earlier, and a further set of what appear to be management accounts for the year to 30 June 2012) confirm that practice management fees and the like were indeed the source of the great bulk of the defendant's income. 9It is clear, from an affidavit affirmed by Dr Shah on 20 March 2013, that the various practices have been sold or let go. In some cases, they were sold in order to enable their debts to be paid. In some cases, the practices were simply closed down (for example, because the landlord evicted the practice from the leased premises). Thus, following the completion of those events, the defendant no longer had available the practices listed on its website which were, according to the website and its financial statements, the sources of the great bulk of its income. 10Of the various sales, some occurred after 30 June 2012 (and thus the impact of the sales would not be reflected in the management accounts to that date). Four of the sales occurred prior to 30 June 2012, but in April or March of that year. Thus, to the extent that the practices were indeed providing income to the defendant, the bulk of that income would have been received by the time the practices were sold or closed down. 11The defendant opposes the relief sought by the plaintiffs. It says that it wants to continue with the preparation of its cross-claim, so that the cross-claim can be heard on the date presently fixed: 22 April 2013 (with an estimate of three days). In support of that, the defendant submitted that the proceedings (being its cross-claim) would be stultified if it were now ordered to pay the amount of the judgment and the sum of approximately $100,000 requested by the plaintiffs as security for their costs. Ms Cirillo of counsel, who appeared for the defendant, clarified that proposition. She said that the defendant's position was that ultimately it could afford to pay the amounts sought, but that being required to pay them now would stultify its cross-claim. 12It is a remarkable proposition that a company said to have net assets of a little under $2.7 million as at 30 June 2011, in respect of which it is said (and continues to be said) that there has been no material adverse change, cannot afford to provide approximately $330,000. 13As to the application for security for costs, Ms Cirillo submitted, further, that the defendant needed time both to consider the amount of costs sought and to advance its case of stultification. It is apparent, the hearing being approximately four weeks away, and the Easter break intervening, that any grant of time, and further consideration of the notice of motion, would mean that the decision might have an adverse impact on the ability of the parties to prepare for hearing and on the hearing date itself. 14Before I move to the various points, I should note that Dr Shah's affidavit indicates that he and his wife are in the process of selling their home. Such evidence as there is on the topic suggests that the sale price would be about $1 million. Dr Shah has not confirmed that. He has said that he and his wife "Intend to invest a substantial portion of the net proceeds of sale in" the defendant. He has not sought to quantify the amount of that proposed investment. The title search that he has annexed shows that there are two mortgages to the Commonwealth Bank of Australia and that a third corporation, which by its name would appear to be a lender, has lodged a caveat against the title. Dr Shah has not indicated what is the amount secured by those encumbrances. Thus, the court is entirely unable to ascertain whether the sale would produce anything significant in the way of net proceeds. 15That is of some significance, because it is uncontested that the defendant itself has no assets by way of real estate. Further, to the extent that its financial statements (as at 30 June 2011) suggested that it did hold some assets, it is abundantly clear that the position has changed markedly since then. 16I start with the question of material adverse change. In my view, it is clear that there has been such a change. The position painted in the financial statements, that were the subject of the undertaking, was one of a flourishing business with very substantial net assets. Since that position was portrayed, the income earning assets of the business have been sold; in many cases, it would appear, because they were unprofitable or loss-making. That of itself suggests to me that there has been a material adverse change. 17In addition, there is the conundrum, to which I have referred, as to why it is that a business enjoying the substantial net assets referred to in the financial statements as at 30 June 2011 cannot now provide a small fraction of that without risk of stultifying its cross-claim. Further, one might think, there is some reason to believe, from the very fact that Dr Shah and his wife are selling their home and intend to invest a substantial portion of the net proceeds in the defendant, that the defendant's financial position is way different, and adversely so, from what was portrayed as at 30 June 2011. 18I am satisfied that there has been a material adverse change, in the financial position of the defendant, from that referred to in the documents furnished to the plaintiffs' solicitors on 15 March 2012. 19That of itself does not mean that the stay should be dissolved. But it does undermine in a very significant way the undoubted factual basis on which the plaintiffs, and in my view the court, approached the matter on 8 February 2013. The plaintiffs were satisfied, no doubt, to have the judgment but have it stayed (to await determination of the cross-claim) on the basis that there was ample money in kitty to satisfy the judgment should that become relevant. Likewise, I think one can readily infer that the plaintiffs did not press the question of security on the same basis. For the reasons I have given, I think there has been a fundamental change. 20In those circumstances, it seems to me to be appropriate to make some change to the orders of 8 February 2013. The primary relief sought is that the stay be dissolved. Alternatively the plaintiffs seek payment into court of the requisite sum of money (including a small amount of further interest) within seven days, and a vacation of the stay if that be not done. To my mind, the latter course is the appropriate one. 21I turn to the question of security for costs. Security is sought in the amount of $100,000 (in round figures). The affidavit evidence of Ms Taylor sets out in detail how that figure has been reached. It includes a substantial discount to allow for the likely reduction of fees properly charged on a solicitor and client basis to fees recoverable, on assessment, on the ordinary basis. Although it was the defendant's position that it wished to lead evidence from a costs expert as to the amount for which security was sought, it seems to me that the expense and delay involved in doing so would be out of all proportion to the amount of security sought. However, bearing in mind that the defendant has not had the opportunity to deal in a considered way with the evidence, I think that it is appropriate to make some further adjustment to the amount for which security is sought. That would protect the defendant both against the possible injustice of fixing a figure on which it has not had an adequate opportunity to be heard. It would accept and apply the principle that an applicant for security for costs is not always entitled to have security for the full amount in question. 22It is, of course, necessary that, before security can be ordered, it be shown that there is reason to think that the party in question would be unable to pay costs if ordered to do so. Essentially for the reasons that I have given already in canvassing the financial position of the defendant, I am comfortably satisfied that this position has been demonstrated. 23Accordingly I make orders in accordance with prayers 2, 3, 4 and 5 of the cross-defendant's notice of motion filed on 11 March 2013, substituting for the figure of $100,400.43, in order 4, the figure of $85,000. 24I acknowledge that it is impossible to give any reasoned justification of the quantification of this alternative figure but that, it seems to me, is a necessary consequence of the defendant's desire to contest the figure, which would require some adjournment, and the plaintiffs' desire to have the issues sorted out now. 25I order the respondent pay the applicants' costs of the notice of motion. I order that the costs be assessed forthwith. And I order that the exhibits be handed out.