Supreme Court New South Wales Medium Neutral Citation: Bright Ceiling Systems Pty Ltd v Merhis Contracting Pty Ltd (No 2) [2017] NSWSC 1580 Hearing dates: 10 November 2017 Date of orders: 23 November 2017 Decision date: 23 November 2017 Jurisdiction: Common Law Before: Harrison AsJ Decision: The Court orders that: (1) Leave is granted to the plaintiff to file a further amended statement of claim within seven days. (2) The plaintiff is to pay the defendant's costs of the application to amend and costs thrown away by reason of the amendment to the statement of claim, but for the plaintiff's notice of motion filed 23 May 2017, the costs of this motion are costs in the cause. (3) The plaintiff is to provide further security for costs of the defendant in these proceedings in the sum of $70,000 in a form acceptable to the registrar. (4) The security is to be provided within 28 days. (5) Until such security is provided, these proceedings are stayed. (6) The plaintiff is to pay the defendant's costs of the defendant's notice of motion filed 22 June 2017. Catchwords: COSTS – Security for costs – Procedure and discretion – Whether additional security for costs be ordered – Quantum – Whether plaintiff's financial position has changed – Whether defendant is entitled to the entirety of costs on the motion – No point in principle Legislation Cited: Civil Procedure Act 2005 (NSW), s 98 Corporations Act 2001 (Cth), s 1335 Uniform Civil Procedure Rules 2005 (NSW), 42.1 and 42.2 Cases Cited: Bright Ceiling Systems Pty Ltd v Merhis Contracting Pty Ltd [2016] NSWSC 631 Collingnon Developments Pty Ltd v Wurth (1975) 1 ACLR 314 Mignon Cakes Pty Ltd v Hiltide Pty Ltd [2004] FCA 142 Validus Advisory Group Pty Ltd v Consolidation Tin Mines Ltd [2017] NSWSC 1352 Texts Cited: G E Dal Pont, Law of Costs (3rd ed 2013, Butterworths) Category: Procedural and other rulings Parties: Bright Ceiling Systems Pty Ltd (Plaintiff) Merhis Contracting Pty Ltd (Defendant) Representation: Counsel: B Zipser (Plaintiff) D S Weinberger (Defendant) Solicitors: Juris Cor Legal (Plaintiff) Bradbury legal (Defendant) File Number(s): 2015/66705 Publication restriction: Nil Judgment 1. HER HONOUR: These proceedings arise out of the plaintiff's claim against the defendant for money allegedly owing or in connection with a contract under which the plaintiff agreed to perform building work on behalf of the defendant at premises at Chapel Road, Bankstown, NSW. 2. The plaintiff is Bright Ceiling Systems Pty Ltd. The defendant is Merhis Contracting Pty Ltd. The plaintiff relied upon the affidavit of its solicitor, Hamilton Zhao, dated 8 September 2017. The defendant relied upon the affidavit of its solicitor, Brendan Hoffman, dated 22 June 2017. 3. There are two notices of motion before this Court, one of which was finalised by consent just prior to this hearing. 4. The defendant has consented to the plaintiff filing a further amended statement of claim (FASC). I grant leave for the plaintiff to file the FASC within seven days. I also make orders that the plaintiff is to pay the defendant's costs of the application to amend the statement of claim and costs thrown away by reason of the amendment. However, in relation to the plaintiff's notice of motion filed 23 May 2017, the costs of the motion are costs in the cause. 5. That leaves the notice of motion filed 22 June 2017, where the defendant, pursuant to 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW), s 1335 of the Corporations Act 2001 (Cth) and the inherent jurisdiction of the Court, is seeking orders firstly, that within 28 days, the plaintiff provides additional security for the defendant's costs in these proceedings in such sum as the Court considers fit; and secondly, that such security be given by payment into Court or in such manner as the Court considers fit; and that until such additional security is provided, these proceedings be stayed. 6. On 17 May 2016 in Bright Ceiling Systems Pty Ltd v Merhis Contracting Pty Ltd [2016] NSWSC 631 ("Bright Ceiling"), Button J made an order for the plaintiff to pay into Court the amount of $50,000 as security. This amount was paid into Court. His Honour also stated at [63] that if the litigation continued to advance and the security of $50,000 could be shown by the defendant to be insufficient to protect its interests, then the defendant may approach the court by way of a further notice of motion for an increase in the quantum of security for costs. 7. It is appropriate that I refer to the decision of Button J in Bright Ceiling where his Honour set out the background facts and the law, which I gratefully acknowledge. While it is not necessary for me to reproduce the law as it remains the same, I will set out his Honour's reasoning and what has occurred since his judgment was handed down. 8. Button J's reasoning was set out in Bright Ceiling at [48]-[64]: "48 As I remarked to both counsel during the hearing of the motions, arguably some of those factors are "two-edged swords", which argue for and against the making of an order. For example, on the one hand, impecuniosity could indicate that the plaintiff is not able to pay costs if the defendant is successful in the substantive dispute. On the other hand, impecuniosity on the part of the plaintiff raises the concern that an order for security for costs against the plaintiff may stultify a valid claim. 49 To my mind, on the evidence placed before me, there is an undoubted concern about the ability of the plaintiff to comply with a costs order in favour of the defendant if, at the end of this litigation, the plaintiff is unsuccessful. The evidence establishes to my satisfaction that the plaintiff is engaged in a "war on many fronts" with regard to a number of creditors. Not least of the battles is the fact that a garnishee order has issued with regard to an outstanding judgment debt of the plaintiff of over $1 million. 50 In short, I am well satisfied of the basal test with regard to an order for security for costs. 51 I now turn to consider the factors for my consideration in more detail, and shall deal with them in the order in which they are discussed in KP Cable Investments Pty Ltd v Meltglow Pty Ltd. 52 First, as I have said, a statement of claim was filed on 4 March 2015, the defence on 10 April 2015, the amended statement of claim on 24 September 2015, and the relevant notice of motion on 8 September 2015. I consider that the application has been brought promptly. 53 Secondly, there is nothing to suggest that the claim of the plaintiff is a sham or brought without good faith. Indeed, the documents that found it, including the two payment schedules attached to the affidavit of Mr Lu, and the fact that, in the past, the defendant has implicitly accepted that it was indebted to the plaintiff in substantial amounts, suggest that the claim is not weak. 54 Thirdly, it is possible that the conduct of the defendant has contributed to the impecuniosity of the plaintiff. On the evidence before me, however, there are many other bases for that impecuniosity. 55 Fourthly, stultification of a potentially valid claim is always a concern in a matter such as this, because the impecuniosity of the plaintiff that founds the application can itself found the countervailing consideration. Although I do not come to the affirmative opinion that the application by the defendant is oppressive, I have borne the question of stultification firmly in mind. 56 To be weighed against that concern is the fact the affidavit of Mr Lu is a solemn document of recent provenance containing his sworn evidence relied upon by the plaintiff before me. It shows that the plaintiff company has a substantial monthly net income. I do not believe that that sworn evidence can be discounted, or subsumed by the evidence that the plaintiff may soon be placed into liquidation. To my mind, the defendant is entitled to call in aid that evidence in support of the proposition that an order of appropriate quantum would not run the risk of stultification. 57 Focussing upon the fifth and sixth factors discussed in the seminal decision, this is not a case where those associated with the plaintiff company have not come forward by way of an offer to provide personal security for costs. As I have said, Mr Lu has offered to provide a personal undertaking in that regard. It is true, as counsel for the plaintiff submitted, that, in accordance with what was said in KP Cable Investments Pty Ltd v Meltglow Pty Ltd at 198, that has some value. But in light of the financial position of Mr Lu, his undertaking must be assessed as having negligible practical value, in terms of actually protecting the defendant from a substantial liability for costs, with regard to which it may have no effective recourse against the plaintiff. 58 Seventhly, to my mind, Bright Ceilings is indeed a plaintiff in the true sense, and not a de facto defendant. 59 Eighthly, there are no other factors playing upon my discretion, either pointed to by one or both parties, or taken into account by me. 60 Seeking to balance all of the countervailing factors arising from the evidence placed before me, I propose to order security for costs, but for a sum substantially less than primarily sought by the defendant. That is so for the following reasons. 61 First, it is impossible to predict the forensic progress of the matter, especially in light of the pending possibility of the plaintiff being placed into liquidation. 62 Secondly, a reduction in the quantum will reduce the risk of stultification of a potentially valid claim. 63 Thirdly, in light of the lack of clarity of the future progress of the matter, I do not propose to order that security be provided in tranches. If the litigation continues to advance, and the sum that I order can be shown by the defendant to be insufficient to protect its interests, then this Court may be approached again, by way of a further motion. 64 In short, I determine that it is appropriate in this case to make an order for security for costs in the sum of $50,000, to be paid into Court by the plaintiff before any further forensic step is taken." 1. The defendant has now approached this Court for further security for costs as the amount of security ordered by Button J has since been expended in legal costs. ([63]). 2. On 21 June 2017, the defendant's solicitor conducted a company search for the plaintiff. The search disclosed that the plaintiff is a company with a paid up share capital in the amount of $10 and has been subject to three wind up applications since 2010. (Aff, Hoffman, [5] and Annexure A). 3. The defendant's solicitor also conducted a NSW land title owner search for the plaintiff. The land title search disclosed that the plaintiff does not own any real property in New South Wales. (Aff, Hoffman [6]). Mr Shixian Lu is the sole officer of the plaintiff. As I understand it, he owns a property with his wife as tenants in common at Wahroonga. He has one share and his wife owns nine shares. In 2010, he purchased real estate in the Sydney suburb of Wahroonga for $2,200,000 as a tenant in common with his wife, and that he owns 1/100th share of the property and his wife has a 99/100th share. No reasons are given in the affidavit for this state of affairs. It is said that a debt of $1,000,000 is secured by a mortgage over that property. (Aff, Shixian Lu 25 August 2017, [19]). The property is also subject to 6 caveats. (Aff, Shixian Lu 25 August 2017, [21] and Annexure B). 4. Also on 21 June 2017, the defendant's solicitor obtained a credit report for the plaintiff from "Creditor Watch". (Aff, Hoffman, [7]). This report disclosed that: 1. On 27 September 2012, default judgment was entered against the plaintiff in favour of Hire One Group Pty Ltd in the amount of $15,644; 2. On 8 July 2014, default judgment was entered against the plaintiff in favour of United Super Pty Ltd in the amount of $1,414; 3. On 29 September 2014, default judgment was entered against the plaintiff in favour of Dragon Plasterboard Supplies Pty Ltd in the amount of $57,518; 4. On 18 May 2015, default judgment was entered against the plaintiff in favour of Buzzell Glazing Pty Ltd in the amount of $4,042; and 5. On 6 October 2016, default judgment was entered against the plaintiff in favour of Australian Boom & Scissor Lift Pty Ltd in the amount of $47,966. 1. The defendant's solicitor has been instructed by the legal manager of the defendant, Mr Ben Wilson, that four garnishee orders have been served on the defendant in respect of judgments entered against the plaintiff in separate proceedings in the Supreme Court of New South Wales, District Court and Local Court. (Aff, Hoffman [8]). 2. Mr Wilson also informed the defendant's solicitor that the plaintiff has paid the following amounts claimed in the garnishee orders (Aff, Hoffman, [9]): 1. The whole of the garnishee order issued by BCT Distributors Pty Ltd in the amount of $39,520.10; 2. The whole of the garnishee order issued by Dragon Plasterboard Supplies Pty Ltd in the amount of $57,517.55; and 3. The whole of the amount of the garnishee order issued by Peer Industries Pty Ltd in the amount of $239,703.20. 1. As at 30 June 2017, the plaintiff's balance and financial statements show that the shareholders' equity had accumulated losses in the amount of $472,988.60; had total assets of $20,566.16; and a director loan account in the amount of $394,978.29. The current liabilities were $394,978.29. The total liabilities were $493,544.76, the total assets were $20,566.16 and the net assets were -$472,978.60. (Court Book, 264-265). 2. The plaintiff submitted its concern that a third party may be paying the defendant's costs. If that were the case, it is not appropriate to order that the defendant provide further security on the basis that it does not, in fact, have a liability to pay legal fees. On the morning of this hearing, the defendant's solicitor provided invoices issued by him to the defendant as evidence that the payments have been made by the defendant to the plaintiff. In these circumstances, it is my view that the plaintiff's submission has not been made out. 3. The remaining issue concerns the quantum of security which should be provided up to the time of trial. I agree with the approach taken by Button J in Bright Ceiling. If the litigation continues to advance to trial and the security provided is insufficient to protect the defendant's interests, the defendant may approach the Court by way of a further notice of motion for an increase in the quantum of security for costs. The defendant's solicitor anticipates that the defendant will incur further party costs in excess of $160,000 to defend the claim made by the plaintiff in these proceedings. 4. The defendant's solicitor's schedule of legal fees up to trial is as follows (Aff, Hoffman, Annexure H): Task Lawyer Duration Estimated costs Settling of application for security for costs Barrister 1 hour $500 Filing fee for notice of motion for security for costs $904 Solicitor 3 Hours $975 Review of plaintiff's evidence in respect of application for security for costs and plaintiff's application to file a further amended statement of claim Partner 0.5 hours $162 Barrister 0.5 hours $250 Review of the plaintiff's evidence in respect of application for security for costs and plaintiff's application to file a further amended statement of claim Solicitor 3 hours $650 Barrister 0.5 hours $250 Solicitor 3 hours $975 Preparation in reply in respect of application for security for costs and plaintiff's application to file a further amended statement of claim Partner 0.5 hours $162 Barrister 0.5 hours $250 Preparation of outline of submissions for hearing of application Barrister 2 hours $1,000 Preparation for and appearance at hearing of application for security for costs and plaintiff's application to file a further amended statement of claim Solicitor 10 hours $3,250 Barrister 1.5 days $6,750 Solicitor 2 hours $650 Preparation of defence to further amended statement of claim Partner 0.5 hours $162 Barrister 0.5 hours $250 Solicitor 25 hours $8,125 Reviewing plaintiff's evidence Partner 6 hours $1,950 Barrister 1 day $4,500 Expert fees $5,000 Solicitor $14,625 Preparation of defendant's evidence Partner 13 hours $4,225 Barrister 2 days $9,000 Expert fees $10,000 Discovery and subpoenas Solicitor 8 hours $2,600 Partner 2 hours $650 Attendance at directions hearings Solicitor 15 hours $4,875 Correspondence and general attendances Solicitor 25 hours $8,125 Partner 5 hours $1,625 TOTAL $92,440 1. In determining the appropriate quantum, I am required to strike a balance between ensuring that the plaintiff has an adequate amount for security for the costs it expends, but not so as to stultify the plaintiff's ability to continue with its litigation. Overall, the plaintiff's financial position has not improved since it was outlined by Button J. 2. The defendant submitted that the amendments in the proposed further amended statement of claim involves a number of wider claims, one being an oral variation to the contract, which requires further investigation. In preparation for trial, the defendant will have to prepare lay witness statements, discovery and interrogatories, expert evidence, attendances at directions hearings, correspondence and general attendances. There are also outstanding costs orders in favour of the defendant. 3. The plaintiff submitted that the amounts to be deducted from the defendant's schedule include costs of the first notice of motion for security for costs, as the order for costs made was that each party pay its own costs. Further, the allowance for experts' reports is too generous. On this basis, I have deducted $2,087.50 in relation to items for the costs claimed for the earlier notice of motion seeking security for costs and I have deducted $5,000 from $15,000 of the experts' reports. I note that the plaintiff has indicated that it is obtaining an expert's report. (T15.36-38). That equates to about $87,000. 4. Nevertheless, in striking the balance, I referred earlier in this judgment that an appropriate quantum for security for costs is $70,000. As this matter should not languish in the court list, such security in a form acceptable to the registrar should be paid within 28 days. The proceedings are stayed until such security is lodged. Costs 1. On the last notice of motion for security for costs, the order made was that each party was ordered to pay its own costs. Both before Button J and this Court, the plaintiff submitted that, contrary to the usual rule that costs follow the event, there is a particular rule that applies to applications of this kind. It was said that often, even if a defendant is successful (as here) in obtaining an order for security for costs against the plaintiff, the successful defendant will not have the entirety of its costs on the motion. The plaintiff referred me to Collingnon Developments Pty Ltd v Wurth (1975) 1 ACLR 314 and Mignon Cakes Pty Ltd v Hiltide Pty Ltd [2004] FCA 142, as discussed in latest edition of G E Dal Pont, Law of Costs (3rd ed 2013, Butterworths) at 965-966. 2. The plaintiff also referred to a more recent decision of Validus Advisory Group Pty Ltd v Consolidation Tin Mines Ltd [2017] NSWSC 1352, where Lonergan J stated at [24]: "24 Having considered the nature and history of the proceedings and negotiations relevant to this application, the appropriate costs orders are as follows: (1) The plaintiff is to pay the defendant's costs of and associated with the application for security for costs up to and including Thursday, 20 July 2017. (2) Each party is to bear its own costs of the application for security for costs on and from Friday, 21 July 2017 including the costs of the hearing on 24 July 2017, the appearance on 9 August 2017 and the costs associated with the preparation of written and oral submissions on the question of costs of the application." Costs generally 1. Section 98 of the Civil Procedure Act 2005 (NSW) relevantly reads: "98 Courts powers as to costs (1) Subject to rules of court and to this or any other Act: (a) costs are in the discretion of the court, and (b) the court has full power to determine by whom, to whom and to what extent costs are to be paid, and …" 1. Uniform Civil Procedure Rules 2005 (NSW) ("UCPR"), 42.1 and 42.2 read: "42.1 General rule that costs follow the event Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs. 42.2 General rule as to assessment of costs Unless the court orders otherwise or these rules otherwise provide, costs payable to a person under an order of the court or these rules are to be assessed on the ordinary basis." 1. It is my view that the usual costs rule should apply. There is no reason why I should make an "otherwise order" as set out in UCPR 42.2. The plaintiff should pay the defendant's costs. The Court orders that: (1) Leave is granted to the plaintiff to file a further amended statement of claim within seven days. (2) The plaintiff is to pay the defendant's costs of the application to amend and costs thrown away by reason of the amendment to the statement of claim, but for the plaintiff's notice of motion filed 23 May 2017, the costs of this motion are costs in the cause. (3) The plaintiff is to provide further security for costs of the defendant in these proceedings in the sum of $70,000 in a form acceptable to the registrar. (4) The security is to be provided within 28 days. (5) Until such security is provided, these proceedings are stayed. (6) The plaintiff is to pay the defendant's costs of the defendant's notice of motion filed 22 June 2017. ********** 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: 23 November 2017