Zamtech Truck Services Pty Limited v Sydney Water Corporation [2017] NSWSC 768

Supreme Court New South Wales

Medium Neutral Citation: Zamtech Truck Services Pty Limited v Sydney Water Corporation [2017] NSWSC 768 Hearing dates: 09/06/2017 Date of orders: 09 June 2017 Decision date: 09 June 2017 Jurisdiction: Equity - Technology and Construction List Before: McDougall J Decision: Plaintiff to give security for defendant's costs. Catchwords: PRACTICE AND PROCEDURE - application for security for costs – where there are discrepancies and errors in the plaintiff's financial statements – where plaintiff's financial position was not brought about by the wrongful acts alleged against the defendant – plaintiff to provide security for costs – no question of principle Category: Procedural and other rulings Parties: Zamtech Truck Service Pty Limited (Plaintiff) Sydney Water Corporation (Defendant) Representation: Counsel:

C Harris SC (Plaintiff) B Michael (Defendant)

Solicitors:

Knight Lawyers (Plaintiff) King Wood & Mallesons (Defendant) File Number(s): 2017/33764

Judgment (EX TEMPORE – REVISED 9 JUNE 2017) 1. HIS HONOUR: The plaintiff contracted to provide servicing maintenance and repair work to the defendant's fleet of motor vehicles and other equipment. The contract was for a period of two years from about November 2013. There was an option for renewal, which on the face of things appears to have lain solely in the defendant's gift. If exercised, there would be a further contract for a further period of 12 months. 2. The defendant says that it became dissatisfied with the services provided by the plaintiff, in particular because of a failure in an item of equipment that the plaintiff had serviced. The defendant investigated the failure and, while it was doing so, did not give further work to the plaintiff. The contract has now been terminated. The plaintiff says that in those circumstances the defendant has repudiated the contract. That is contentious. 3. The plaintiff sues to recover damages. The damages comprise amounts of the order of $100,000 for damages for specific and alleged breaches, and about $1 million for loss of bargain damages. The loss of bargain damages' case appears to be predicated on a number of assumptions. One of those assumptions is that the plaintiff was the defendant's sole contractor for the services in question. Another is that it would receive a certain volume of work from the defendant. A third is that the option would be exercised. 4. I mention those matters because, although the Court does not normally undertake a detailed analysis of the strengths and weaknesses of a claim where the application is, as is the defendant's today, for security of costs, those aspects of the plaintiff's claim seem, on the face of things, to be somewhat difficult. As Mr Michael of Counsel, who appeared for the defendant, pointed out, the alleged agreement for exclusivity is inconsistent with other terms of the contract, and so is the alleged agreement for the provision of a certain volume of work. As I have said already, the option appears to be one that was given to the defendant solely and in its discretion. 5. Be that as it may, there is no submission that the claim is totally unsustainable, or that it has been brought in anything other than good faith. 6. The defendant seeks security in the sum of $95,000. Mr Harris of Senior Counsel, who appeared for the plaintiff, did not suggest that any other figure was appropriate. On the evidence, it does seem to me to present a reasonable and indeed conservative estimate of the defendant's exposure should it win and should the plaintiff be unable to pay costs. Mr Harris did ask that if security were to be ordered, it should be by way of three instalments at two-monthly intervals, starting in 28 days' time. 7. The threshold question, regardless of the source of power that is invoked, is whether there is reason to believe that if the plaintiff is unsuccessful, it will be unable to pay the defendant's costs. Much of the argument focused on the plaintiff's most recent unaudited balance sheet, which appears to have been prepared as some form of management accounting exercise. The plaintiff's principal, Mr Zamattia, prepared it, but since then it has received some degree of approval from the plaintiff's external accountant, Mr Ashton. 8. On the face of things, the balance sheet as at 30 April 2017 shows that the plaintiff has net assets in excess of $528,000. That is an increase of about $145,000 from the figure shown as at 30 June 2016. However, Mr Michael pointed to what he said were discrepancies and errors in the balance sheet. 9. First, it refers to savings of $43,000 held at bank. However, the bank statements appear to show that a somewhat lesser figure, of the order of $10,000, was held as at that date. There is no explanation of the discrepancy. On the face of things there is about $33,000 of overstatement in that figure. Perhaps more significantly, the error does appear to cast some doubt on the extent to which weight can be attributed to the 30 April 2017 balance sheet. 10. The balance sheet shows current assets of $584,000. About $253,000 of those current assets is represented by a payment claim presented by the plaintiff to the defendant. That seems to comprise about $60,000 for work and labour, and about $190,000 for materials and equipment purchased by the plaintiff for the purposes of attending to its contract with the defendant, but said to be of no utility to the plaintiff. Mr Michael submitted, with some justification, that the governing assumption by reference to which the application must be considered is that the defendant succeeds. As he pointed out, if that governing assumption is made good, the $253,000 cannot be taken to account as an asset, at least in the way that it is presented in the balance sheet. 11. Mr Harris countered that if this were so, nonetheless the plaintiff would be left with about $190,000 worth of assets. That may be so; but in circumstances where they appear to be of no utility to the plaintiff's business, I am not sure how much that helps in assessing the financial position of the plaintiff. 12. The next matter to which Mr Michael drew attention was an "asset revaluation reserve". That had not featured in the plaintiff's previous financial statements. It is, in the context of the amounts revealed by the balance sheet, substantial: $176,000. There is no evidence to support the proposition that this does represent a real recording of present value, compared to the written down value which, on orthodox principles, is elsewhere utilised. A note to the accounts says that this figure records "a conservative review of the net realisable value of the assets". As I have noted already, the external accountant, Mr Ashton, appears to be happy with that conclusion. He says he has reviewed the balance sheet and confirms its accuracy, and in doing that has had regard to relevant source documents "where necessary". 13. Among the non-current liabilities, the balance sheet shows an amount of $35,500 owing under leases for motor vehicles. A statement produced by the lessor suggests that the amount owing is about $4,400 more. There is no evidence to explain the apparent discrepancy, although Mr Harris said that there was an explanation which could have been put on affidavit had the need for it been appreciated. 14. The next matter in the financial statements to which Mr Michael drew attention is the amount of $50,000 shown for directors' loans. That amount is netted out, because they are said to be subject to a "non-drawing agreement". A note to the accounts says that the directors have agreed not to call upon their loans "before finalisation of Sydney Water court case". There is otherwise no evidence of that agreement. 15. I accept that the balance sheet shows a company that has a modest surplus of net assets. As I have said, there are some aspects of it - in particular, the significant discretion in relation to savings at bank - that give me some cause to doubt the reliability of the statements. I do not for a minute mean to suggest that they have been produced in a way that is knowingly false or fraudulent. Nonetheless, I conclude that the net assets are likely to be significantly less than $528,000. In the absence of any evidence to support the asset revaluation reserve, and taking into account the difficulty as to savings at bank, I suspect that, on the most optimistic view, the true figure may have been closer to $300,000. 16. As against that, there is evidence that the plaintiff has been a company that has traded successfully and has retained net assets over the last four years. In the financial years 2014 and 2015, those net assets were of the order of $240,000. For the financial year 2016, they were of the order of $380,000. It is open to question whether the significant jump from that figure to the $528,000 shown in the figures as at 30 April 2017 is due substantially to the revaluation of assets. 17. For the three financial years to which I have just referred, the company recorded net profits after tax of $320,000, $154,600 and $139,500. Those figures (and the net asset figures) have some additional significance, because they cover the periods of time before and when the plaintiff was providing services to the defendant and after the defendant stopped giving the plaintiff work to do. Mr Zamattia said that, whilst the contract was on foot, it provided about half the plaintiff's business. His success in keeping the plaintiff going despite the loss of half its business is a credit to him and his staff, but unfortunately has little, if any, significance to the task with which I am confronted. 18. One feature that does emerge from the financial statements that are in evidence is that the plaintiff has little retained cash at the end of any financial year. That tends to suggest that most of its income is used up in paying on-going expenses. That is significant because, if this litigation proceeds, the plaintiff will have to fund its own legal costs. If one were to take the defendant's legal costs as an example, and bearing in mind Mr Harris' acceptance of the reality of the estimate for which security is sought, those costs could be of the order of $90,000 to $100,000. It seems to me to be perfectly clear that if that sort of money were to be drained out of the business over the next 12 to 15 months, the plaintiff's financial position, should it lose the litigation, would be very seriously and adversely affected. And at that point, the recoverable value of the plant and equipment would be seriously open to doubt. It is common experience that a "going concern" valuation may provide no guide to recoverable value. 19. As always, the assessment of the jurisdictional requirement is an impressionistic one. However, it does not require the Court to be satisfied affirmatively that the plaintiff will not be able to pay the costs if called upon to do so. The question is, rather, whether there is evidence (or credible evidence) to indicate that that is likely to be the case. In this case, putting together the various factors I have indicated and taking into account in particular the drain of legal costs on the plaintiff's resources, I am satisfied that the test is made good. 20. I turn to the question of discretion. A number of factors were argued. I have said enough about the apparent strength of the plaintiff's case. Another matter to take into account is whether (as is sometimes argued) the plaintiff's financial position has been brought about by the wrongful acts alleged against the defendant. The evidence does not really make good that suggestion. On the contrary, to the extent that the evidence is relevant, it seems to suggest that between the 2015 and 2016 financial years, the plaintiff's operating profit after tax dropped only by about $15,000, or 10 per cent. That is of significance, not just because of the monetary amount but because the years in question are, respectively, a year in almost all of which the plaintiff provided services to the defendant, and the next year, in which it provided no services. That would appear to suggest that the plaintiff has weathered the storm. Certainly, it provides no basis for any suggestion that to the extent that the plaintiff is impecunious, that can be laid at the feet of the defendant. 21. Mr Michael's submissions traversed other discretionary factors. However, since they were not argued by Mr Harris, I see no point in going over those submissions. 22. In the result, exercising the discretion that I have concluded is enlivened, I think that the defendant has made good its argument that the plaintiff should provide security for costs. I see no reason why that security should not be provided by instalments, nor any reason why those instalments should not be staggered as Mr Harris submitted. In saying that, I take into account that the proceedings will be stayed (subject to any further order of the Court) unless the plaintiff complies with the orders that I am about to make. 23. I order the plaintiff to provide security for the defendant's costs, by such means as it may agree with the defendant or otherwise by payment into court, by the following instalments: 1. $35,000 no later than 7 July 2017; 2. $30,000 no later than 8 September 2017; and 3. $30,000 no later than 10 November 2017. 1. I order that the proceedings be stayed until the first instalment of security is provided, and thereafter they be stayed if the second or third instalments be not provided. 2. I list the matter for directions on 14 July 2017. 3. I will hear the parties on costs.