District Court New South Wales Medium Neutral Citation: AIMT Holdings Pty Ltd trading as New Era Balustrades v Amalgamated Holdings Ltd [2015] NSWDC 434 Hearing dates: 18 September 2015 Date of orders: 18 September 2015 Decision date: 18 September 2015 Jurisdiction: Civil Before: P Taylor SC DCJ Decision: (1) Pursuant to s 1335 of the Corporations Act 2001 (Cth) and r 42.21 of the Uniform Civil Procedure Rules 2005, order the plaintiff to provide security to the defendant in the sum of $10,000 as security for costs up to but not including the trial of the proceedings (including the steps up to and including the exchange of evidence); and that the defendant not be precluded from making a further application in respect of security for the costs of the trial. (2) The security ordered may be provided by the provision within 14 days by the plaintiff of the sum of $10,000 to its solicitor and notification by the plaintiff's solicitor to the defendant's solicitor that the plaintiff's solicitor holds that sum as security for the defendant's costs until the Court otherwise orders, or such other form of security as the parties agree. (3) In the event that security is not provided within 14 days, the proceedings be stayed. (4) The Court notes the undertaking of Isolde Tornya not to call upon the plaintiff for repayment of the loan recorded in the plaintiff's balance sheet dated 30 June 2015 until the proceedings have concluded and any costs orders in favour of the defendant have been met. (5) Order the plaintiff pay the costs of the notice of motion. Catchwords: COSTS — security for costs — threshold question – reason to believe an inability to meet an adverse costs order – discretionary matters Legislation Cited: Corporations Act 2001 (Cth), s 1335 Uniform Civil Procedure Rules 2005, r 42.21 Cases Cited: Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 5) [2006] FCA 1672 Pearson v Naydler (1977) 1 WLR 899 Category: Procedural and other rulings Parties: AIMT Holdings Pty Ltd trading as New Era Balustrades (ACN 163 234 982) (plaintiff) Amalgamated Holdings Ltd (ACN 000 005 103) (defendant) Representation: Counsel: Ms N Obart (plaintiff) Mr G Johnson (defendant) Solicitors: Richard Bartalesi & Associates (plaintiff) Minter Ellison (defendant) File Number(s): 2015/181818 Publication restriction: None Judgment 1. The plaintiff, AIMT Holdings Pty Ltd trading as New Era Balustrades ("AIMT"), is a family company owned by Andrew Tornya and Isolde Tornya. AIMT carries on the business of supplying metal and glass handrails, balustrades and staircases. Mr Tornya is the General Manager of AIMT and Mrs Tornya is a director. 2. AIMT makes a claim against Amalgamated Holdings Ltd ("Amalgamated") for $212,311, being the amount of gross profit said to arise on a contract by AIMT to supply and install certain glass balustrades at the Rydges Cronulla site. Amalgamated is alleged in the statement of claim to carry on the business of construction and building projects and it appears that Rydges Cronulla Pty Limited, not a party to these proceedings, is the owner of the site where the works are or were to be conducted. 3. The claim is denied and Amalgamated seeks security for costs of the proceedings in the sum of $16,380. 4. The threshold test that must be satisfied in order for security to be awarded under s 1335 of the Corporations Act 2001 (Cth) and r 42.21 of the Uniform Civil Procedure Rules 2005 is that there must be reason to believe that the plaintiff would be unable to pay the costs of the proceedings were it ordered to do so. Amalgamated says that there is reason to hold this belief because the share capital of AIMT is $100. 5. The balance sheet of AIMT as at 30 June 2015 was in evidence. It raises a number of questions. 6. First, the balance sheet specifies accounts receivable, the primary asset, in the amount of $117,515.72. There is no evidence as to the status of these accounts, whether they are recent, old, and whether they are likely to be paid or not. AIMT submitted that as there was no cross-examination, the Court should not doubt whether the accounts receivable would be paid. However, AIMT could have led further evidence about the accounts. In accordance with the principles in Jones v Dunkel (1959) 101 CLR 298, I am not inclined to draw an inference in favour of AIMT on a matter about which it chose not to give evidence. Even if I were to infer that the accounts would be paid, there is no indication as to when that might occur. The date of payment may impact on whether a costs order could be met. 7. A second, and perhaps more substantial, question about the accounts receivable is that there is evidence of a tax invoice issued by AIMT to Amalgamated on 29 July 2014, which has not been paid, in the sum of $115,960.02. There is nothing in the evidence to suggest that that is not part of the accounts receivable. If it is, then almost the entirety of the assets of AIMT appear to depend upon success in the proceedings, as the tax invoice is apparently connected to the subject contract and would not be payable were Amalgamated to succeed. In that event, an inability to pay an adverse costs order seems almost guaranteed. The adverse costs order would likely only be made if AIMT were unsuccessful in the proceedings, when it would have no entitlement to be paid the Amalgamated account and would then have no substantial accounts receivable. 8. AIMT submitted that it was unlikely that that account was part of the accounts receivable. That assertion is not supported by evidence. There is evidence that AIMT has an annual turnover of, approximately, $100,000 but that says little about the profit of AIMT. It suggests only that the business is operating. 9. Further, that extent of the annual turnover suggests that the accounts receivable must extend for something in the order of 14 months' turnover indicating that the accounts receivable are old accounts that might not be paid. Accordingly, there remains a question as to the real value of that particular asset. 10. Another matter of concern arising out of the balance sheet is that there is reference to a loan to Mrs Tornya of $89,463.97. This is the primary liability shown on the balance sheet. AIMT submitted that there was no evidence that Mrs Tornya would call in that loan. There is also no evidence that she would not. 11. At the conclusion of the submissions, an undertaking was given by Mrs Tornya, through counsel for AIMT, not to call on AIMT for repayment of that loan until the proceedings had been concluded and any costs orders in favour of Amalgamated had been met. 12. Amalgamated submits that there remains the question of the value of the undertaking and whether, if called in, that loan would be able to be met by AIMT. In my view, the proffering of the undertaking is a matter in favour of AIMT, but it is limited and does not answer all the questions that arise from the balance sheet. 13. I note that there was no willingness by either Mr or Mrs Tornya to undertake to be responsible for Amalgamated's costs. 14. A third aspect of the balance sheet is that the net assets of AIMT are said to be $24,731.13, a relatively small amount. There is a section headed "EQUITY" which refers to certain matters which one might have expected to have been included in the assets of the company, such as machinery and equipment, stock and even retained earnings. Yet the form of the balance sheet indicates that this is a means of dividing up the net assets. This section of the balance sheet indicates a net income of negative $43,653.72, which I infer represents the most recent profit figure of AIMT. If that is the case, and it is not otherwise explained, then the loss of $43,653.72 in the most recent financial year gives further reason to believe that AIMT would be unable to meet an adverse costs order. 15. For all these reasons, I am persuaded that the threshold requirement is satisfied: that there is reason to believe that AIMT would not be able to meet an adverse costs order notwithstanding the undertaking that has been given by Mrs Tornya. 16. This finding enlivens the discretion. A reason to believe that there is an inability to meet a costs order is a necessary, but insufficient, element to establish an entitlement to security for costs. 17. AIMT relies on one discretionary factor. It is submitted that AIMT has a strong case and that the strength of the case is a reason why I should exercise the discretion not to order security. 18. A central issue in the proceedings is whether there was a contract between AIMT and Amalgamated. 19. On 22 November 2013, AIMT gave Amalgamated a quote for certain works, including the installation of glass balustrades in the sum of $379,636. On 20 December 2013, a written form of contract on Amalgamated letterhead bearing that date was printed. There is evidence that AIMT, by Mr Tornya, signed that contract. However, the contract does not purport to be a contract between Amalgamated and AIMT, but rather between AIMT and Rydges Cronulla Pty Limited, inferentially the owner of the land where the work was to be done. The contract has a place for Rydges Cronulla Pty Limited, described in the contract as the "Principal", to sign. There was no provision in the contract or indication in the contract that it was to be signed by Amalgamated. Apart from the letterhead of the contract, Amalgamated was not named within it. The evidence indicates that neither Amalgamated nor Rydges Cronulla Pty Limited actually signed the document. 20. On that same day, 20 December 2013, at 3.19pm, a representative of Amalgamated, who was also the representative of Rydges Cronulla Pty Limited according to the contractual document, sent to Mr Tornya an email in the following terms: "Hi Andrew, Could you issue the deposit invoice nominating purchase order No.CR14573006. I'll get the order to you in the new year. Regards, John Gregory". 1. There is no evidence before me of the purchase order itself and it apparently was not delivered "in the new year". I draw this inference because the statement of claim alleges that Amalgamated repudiated the agreement on 23 December 2013. Thus, within three days of this quoted email Amalgamated was denying that it was bound by a contract. Furthermore, the tax invoice or "deposit invoice" that was requested by the email on 20 December 2013 was not issued at least until 29 July 2014. 2. Thus, the only contractual document does not name the defendant as a party, it is not signed by anyone other than a representative of the plaintiff, and the parties contemplated the purchase order would be delivered at a time after, as it turned out, the existence of the contract was disputed; and there was no deposit invoice issued until many months later despite having been requested so to do. 3. I am not satisfied on the material before me that this is a strong case. At least the strength of the case is not so great as to suggest that a security order should be refused. 4. I was referred to the decision of Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 5) [2006] FCA 1672. In that decision Collier J referred at [31] to the decision of Megarry VC in Pearson v Naydler (1977) 1 WLR 899 at 904, which said: "In relation to security for costs, there seems to me to be an essential distinction between natural persons and limited companies as plaintiffs. For a natural person, the basic rule is that he will not be ordered to give security for costs, however poor he is…In the case of a limited company, there is no basic rule conferring immunity from any liability to give security for costs. The basic rule is the opposite…" 1. The learned judge goes on to note, at [32], that: "In Australia the substantial weight of authority has rejected any suggestion that a defendant is entitled to an order for security as of right where the impecuniosity of the company has been established: French J in Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 506." And that "the onus of persuading the court that an award of security for costs should be made lies on the party seeking the order" (at [33]). 1. Thus, where the threshold test is satisfied, namely that there is reason to believe that the plaintiff is unable to meet an adverse costs order, although there is no immunity from liability to give security for costs in a case of a limited liability company, nevertheless the onus still remains on the applicant to satisfy the Court that security should be given. 2. Amalgamated submitted that AIMT has not indicated that an order for security could not be met or would otherwise stultify the proceedings. Nor were any of the other factors listed in r 42.21(1A) of the Uniform Civil Procedure Rules 2005 raised as being relevant, or otherwise appeared to be relevant, to the question of security in this case. In the circumstances where there is no discretionary factor mentioned other than the strength of the case, which is a factor that does not weigh in favour of AIMT, and because of the concerns I have both of the prospects of AIMT in the proceedings and also the financial position of AIMT, I think that this is an appropriate case for security to be ordered. 3. The security sought is relatively modest compared to the amount in issue. 4. There are two issues raised in relation to the amount of security, namely, that the security order should not extend to costs already incurred and that the estimates of certain costs are too high. Although no cross‑examination of the solicitor giving these estimates was made, I remain able to make an independent assessment of the costs estimated. The estimate by the Amalgamated solicitor is fairly brief and states: Description Estimated hours Costs Considering and advising on the statement of claim 6 hours $3,000 Motion for security for costs (including hearing) 6 hours $3,300 Preparing a defence 2.5 hours $1,300 Reviewing documents for discovery and preparing a list of documents 10 hours $5,000 Considering the respondent's witness statements and preparation of the applicant's witness statements (1 witness each), including counsel's fees 6 hours $3,000 Attending directions (say, 2) 2 hours $900 Correspondence with the solicitors for other parties 2 hours $900 Advising the applicant on all aspects of the proceedings 2.5 hours $1,300 Sub total $18,700 Other disbursements, including photocopying and ASIC searches $200 Counsel's fees in respect of the motion for security for costs $4,500 TOTAL $23,400 1. These costs are said to be the estimate of the costs up to and including the preparation of the evidence and thus constitute an estimate of the costs up to the commencement of the hearing. Some of the initial costs indicated in this evidence, including considering and advising on the statement of claim and preparing a defence, are costs for time already spent. AIMT criticised an estimate being given for these costs since an actual figure could presumably have been included. 2. A second item was raised by AIMT, that the estimate includes the costs of the security for costs application. It was submitted that those costs should never be the subject of an order for security. But well prior to making the application, Amalgamated wrote to AIMT's solicitor referring to the paid‑up capital of only $100 and stated: "In these circumstances, our client requests that your client provide evidence that if these proceedings proceed to final determination your client has the capacity to meet any potential adverse costs orders made against it. In the alternative, our client would be willing at this point to accept interim security in the form of a $10,000 bank guarantee in AHL's favour. This amount is our estimate of the legal costs our client will incur in investigating the claim and preparing and filing a defence. We request a reply by close of business on Wednesday, 15 July 2015. If satisfactory assurances are not given in respect of your client's ability to meet an adverse costs order, or a bank guarantee for $10,000 is [not] provided by 15 July 2015, we will seek instructions from our client to file an application for security for costs." I am unaware of any rule that the security awarded cannot extend to the costs of making a security for costs application. The circumstances that a letter was sent prior to the application being made which sought to resolve the question of security is a matter in favour of an order for security extending to those costs. To hold otherwise would be to require a defendant to incur substantial, potentially unrecoverable costs even when a security for costs application was made successfully and the defendant had acted reasonably in giving the other party advance warning of the proposed application. 1. One matter in the estimate which causes me concern is the suggestion that discovery requires ten hours of time even though there seems to be very few documents in relation to the issue of the proceedings. The estimate should also be discounted because of the difference between solicitor/client costs and the costs awarded on an assessment. 2. I propose to order that AIMT provide security in the sum of $10,000. It is sufficient if that sum is provided to AIMT's solicitors to be held by them until further order of the Court, and for AIMT to notify Amalgamated that they hold that sum. Until that occurs, the proceedings are to be stayed. It is intended that this order for security include security for costs up to but not including the trial, as sought in this notice of motion. 3. I also note the undertaking of Mrs Tornya given to the Court through counsel for AIMT that she will not call for payment of the debt owed to her by AIMT reflected in the balance sheet of 30 June 2015 until the proceedings are concluded and any costs of Amalgamated have been met. 4. Amalgamated should have its costs of the application. 5. The orders of the Court will be: 1. Pursuant to s 1335 of the Corporations Act 2001 (Cth) and r 42.21 of the Uniform Civil Procedure Rules 2005, order the plaintiff to provide security to the defendant in the sum of $10,000 as security for costs up to but not including the trial of the proceedings (including the steps up to and including the exchange of evidence); and that the defendant not be precluded from making a further application in respect of security for the costs of the trial. 2. The security ordered may be provided by the provision within 14 days by the plaintiff of the sum of $10,000 to its solicitor and notification by the plaintiff's solicitor to the defendant's solicitor that the plaintiff's solicitor holds that sum as security for the defendant's costs until the Court otherwise orders, or such other form of security as the parties agree. 3. In the event that security is not provided within 14 days, the proceedings be stayed. 4. The Court notes the undertaking of Isolde Tornya not to call upon the plaintiff for repayment of the loan recorded in the plaintiff's balance sheet dated 30 June 2015 until the proceedings have concluded and any costs orders in favour of the defendant have been met. 5. Order the plaintiff pay the costs of the notice of motion. ********** 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: 12 July 2018