15 Management Pty Ltd v Newstar Sports Management Pty Ltd

[2009] NSWSC 1208

CITATION:	15 Management Pty Ltd v Newstar Sports Management Pty Ltd & Ors [2009] NSWSC 1208
HEARING DATE(S):	06.10.09
JUDGMENT DATE :	13 November 2009
JUDGMENT OF:	Nicholas J
DECISION:	Par 49
CATCHWORDS:	PRACTICE AND PROCEDURE – security for costs – application for order for future costs - whether reason to believe plaintiff corporation will be unable to pay costs of successful defendant – issues of frustration and delay – exercise of discretion – UCPR r 42.21 – s 1335(1) Corporations Act 2001 (Cth)
LEGISLATION CITED:	Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005
CATEGORY:	Separate question
CASES CITED:	Beach Petroleum N.L. v Johnson (1992) 7 ACSR 203 Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189
PARTIES:	15 Management Pty Ltd - plaintiff Newstar Sports Management Pty Ltd – first defendant Anthony Piccone – second defendant Teruaki Kita – third defendant
FILE NUMBER(S):	SC 6225/07
COUNSEL:	M L Williams SC - plaintiff T Alexis SC - defendants
SOLICITORS:	Worthington Williams Lawyers - plaintiff Rockliffs Solicitors & Attorneys - defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

Nicholas J

13 November 2009

6225/07 15 Management Pty Ltd v Newstar Sports Management Pty Ltd & Ors

JUDGMENT

1 His Honour: This is an application for security for costs against the plaintiff by notice of motion filed 23 July 2009 under the Uniform Civil Procedure Rules 2005 Pt 42, r 42.21(1)(d), alternatively under s 1335(1) Corporations Act 2001 (Cth).

2 The trial date has not been fixed. Its estimated length is between five and eight days. The defendants estimate their costs for a five day trial at about $150,000, and for an eight day trial at about $185,000. It was not disputed that the estimates are reasonable.

3 The plaintiff is a company of which Mr Jason Macarthur is the sole director and shareholder. The first defendant is a company of which the second defendant, Mr Anthony Picone, is the sole director and shareholder. The third defendant Mr Teruaki Kita has been an employee of the first defendant.

4 By its statement of claim filed 8 April 2008 the plaintiff claims various forms of relief and compensation based on alleged breaches of fiduciary and other obligations under a joint venture agreement or partnership. In short, it is alleged that the purpose of the arrangement was the conduct of a sports management business for the period 1 February 2004 to 30 June 2006, which was concerned with representing and placing Australian rugby union players and coaches with overseas clubs and employers, particularly with companies based in Japan. It is alleged that from about July 2005 the plaintiff and the first defendant carried on the business in accordance with their agreement. The events which are claimed to constitute the breaches are alleged to have happened between about May and December 2007.

5 By the defence of the first and second defendants filed 16 May 2008, and of the third defendant filed 7 August 2008, the defendants deny the existence of a joint venture agreement or partnership, the breaches, and any liability to the plaintiff for the relief claimed.

6 There is no issue that the plaintiff has a bona fide and genuine interest in pursuing the claim, and a triable case. I am in no position to express a view about the prospects of success of any party.

7 By letter of 4 September 2009 to the plaintiff’s solicitors, the defendants’ solicitors proposed that the application for security be dismissed with costs in the cause on the basis that Mr Macarthur undertake to the court and provide each of the defendants with his personal guarantee to pay any costs of the proceedings which the plaintiff is ordered to pay to the defendants or any of them, in the event that the plaintiff is unable to pay those costs. The offer was open until noon 10 September 2009, but was rejected.

The plaintiff

8 The plaintiff has a paid up capital of $2. An ASIC historic search of 15 July 2009 shows that its registered office and principal place of business is at the nominated premises at Pyrmont. Its assets are subject to a fixed and floating charge in favour of ANZ Banking Group created on 6 June 2007. Its last annual return was lodged on 9 February 2003.

9 It is common ground that the latest financial statements and income tax returns for the plaintiff were for the 2006 financial year. Income tax returns have not been lodged for the 2007, 2008, 2009 financial years.

10 The 2006 financial statements disclosed income of $357,356, expenses of $344,681, and profit before income tax of $12,675.

11 Mr Macarthur is the registered proprietor of the premises at Pyrmont. At present, they are unoccupied. The plaintiff has guaranteed Mr Macarthur’s personal borrowings from the ANZ Bank in the amount of $1,085,000, and monthly payments of principal and interest until 20 December 2022 of $10,688. The principal security for the loan is the Pyrmont property which is valued at $1,400,000.

12 Mr Macarthur gave evidence in support of the proposition that the plaintiff was financially capable of paying the defendants’ costs of the proceedings if ordered to do so. He said that the plaintiff receives income in the form of trailing commissions from two contracts, namely a contract between Ricoh Corporation, Japan, and the rugby union player Stephen Larkham, and a contract between Yokogawa Electric Corporation, Japan and the rugby union player Radika Samo. He said that under these contracts the plaintiff will be paid about $120,000 before the end of the 2009 calendar year, and about the same amount before the end of the 2010 calendar year.

13 Mr Macarthur also said that since about January 2008 he has redeveloped the plaintiff’s business as a result of which he anticipates that it will receive a minimum of $80,000 in revenue in the current financial year. The nature of the business redevelopment was described in a document entitled “Summary of Action for 15 Management”. It listed a number of steps which had been taken or were proposed to be taken. Its contents provided no apparent basis upon which the anticipated revenue of $80,000 was calculated or, on the probabilities, was payable to the plaintiff. No such revenue has yet been received. Apart from an invoice for about $20,000 which has been sent but not yet paid, no invoices have been sent in respect of transactions under this aspect of the plaintiff’s business. No specific transactions, parties, or claims for revenue were identified.

14 He described the plaintiff’s business expenses as minimal. He identified a hire purchase liability of $1,700 per month. Another item was the amount of about $1,000 per month payable to a consultant in Japan. Mr Macarthur was referred to the plaintiff’s bank statements of its business cheque account for the period 14 November 2008 to 14 July 2009. He said the statements indicated the plaintiff’s regular expenses incurred, and likely to be incurred, on a monthly basis. These statements disclose an opening balance of $127,204.24, expenditure during the period of a total of $82,511.19, and a closing balance of $44,692.81 on 14 July 2009. They show that no amounts were credited by way of deposits or otherwise during the period.

15 Mr Macarthur was questioned as to the plaintiff’s financial records and replied as follows:

Q. … based on the material that you have available to you, presumably you would be able to, if asked, prepare a record of the income the company has received over the last three financial years and the expenses the company has incurred over the last three financial years?
A. We don't know what income it's actually been entitled to, because we haven't yet got full discovery.

Q. But, Mr Macarthur, in relation to the income that 15 Management has received over the last three financial years, and in relation to the expenses that 15 Management has incurred over the last three financial years, presumably you have access to the primary accounting records of the company for the purpose of indicating what those receipts were and what those expenses are?
A. We know what income we have received and what expenses we have incurred, yes.
Q. And that information was available to you at the time you came to swear your affidavit on 20 August 2009?
A. Yes, correct.”

16 As to the plaintiff’s financial capacity to pay the costs of these proceedings, Mr Macarthur said it was questionable whether the plaintiff would have sufficient revenue to pay its own legal costs, and if it was unable to do so he would personally ensure it could fund the litigation, but if it was unsuccessful he would not assist it to meet an order to pay the defendants’ costs.

17 Mr Jeremy Mark Posniak is a chartered accountant. His evidence was that he acted for the plaintiff and Mr Macarthur between about 2002 and 2007, and was retained again in May 2009. Based on information provided to him by Mr Macarthur, he expressed the opinion that the plaintiff is a going concern, and able to pay its debts as and when they fell due, including anticipated legal costs associated with this litigation. He was unaware of the business debts or expenses of the plaintiff.

18 He recently discovered that there had been an understatement of income and expenses in the plaintiff’s tax return for the 2004 financial year, which has necessitated the preparation of an amended return, but this has not yet happened. He conceded the possibility that the plaintiff may be liable for the payment of additional tax, and for penalties and interest for the past five years.

19 The question of the plaintiff’s entitlements to commission under each player’s contract requires further consideration.

20 The documents evidence an agreement between Yokogawa Electric Corporation, Japan and Mr Samo dated 18 May 2007 under which Mr Samo was employed for 10 months commencing 1 June 2007. It was to be renewed for a further 12 months commencing 1 April 2008. Clause 8 provided:

“8. The Company shall pay to GSM World Pty Ltd (GSM) agency fees equal to ten (10%) x the Employee’s Gross Salary for every year of the Contract for its full duration, including renewals. Such fees shall be payable on an annual basis on or before 1st June each year following receipt of an invoice from GSM.”

21 Although Mr Macarthur said he was not aware if there was currently a contract with Mr Samo, he said that the plaintiff had a contractual entitlement to a commission based on “… a deal done in April 2009 that renewed this contract” (T p 23). He said that an invoice for the agency fee for about $35,000 was sent prior to 1 June 2009, but it has not been paid. There was no other evidence of this transaction.

22 Also in evidence was a document as to the arrangement between Ricoh Co, Japan and Mr Larkham. Entitled “Heads of Agreement” it contained terms under which Mr Larkham was to be employed as a full-time professional rugby player for a term of three years commencing 1 April 2008. It was signed by Mr Larkham on 3 January 2008. With respect to the placement fee it provided:

“Amount equivalent to 10% x Gross Salary per annum for the life of the contract, payable to 15 Management Pty Ltd on 1 April 2008 and each anniversary. A separate Service Agreement is to be entered into between the Company and 15 Management in relation to ongoing services. For the avoidance of doubt, the Placement Fee is payable separately from, and in addition to, the Net Salary and other benefits under this agreement.”

23 The Heads of Agreement included the following term:

“Standard contract to be negotiated, settled and entered into no later than 31 December 2007.”

24 Mr Macarthur said that a standard contract had been signed, but was not in evidence because it was in Japanese. He said that arrangements involving Mr Larkham as either a player or a coach for 2010 are yet to be finalised. Assuming negotiations are successful the plaintiff expects a commission of about $80,000. There was no other evidence of this transaction or of a service agreement between Ricoh Co and the plaintiff as contemplated in the Heads of Agreement.

25 In his affidavit (20 August 2009) Mr Macarthur referred to a schedule prepared by the second defendant on about 11 September 2007. It was said to show the anticipated income of the business venture during the period July 2007 to July 2008. He deposed:

“The Schedule shows all clients of the Business and the anticipated revenue to be generated by those contracts during the 2007/08 financial year. The anticipated revenue for that period was $857,110.00. Furthermore, the Business was entitled to ongoing management commissions and placement fees on an annual basis for the life of the contracts sourced for its clients, during and after the term of the client contracts. Had the Business not dissolved in or about December, 2007, that income would have continued to accrue to 15 Management until the expiry of the commissionable contracts on which the income was earned. These contracts represent the substantial assets of 15 Management at that time.”

26 Mr Macarthur did not expand on these matters in oral evidence. I rejected the plaintiff’s application made during final submissions to recall Mr Macarthur to explain the schedule on the ground that it was simply too late to do so. The information in the schedule was relied upon as indicative of the revenue the business was capable of generating. However, the defendant did not accept that the items, as shown in the schedule, which totalled $857,110 were amounts which were recoverable.

Determination

27 Relevantly, UCPR Pt 42, r 42.21 provides:

“42.21 Security for costs

(1) If, in any proceedings, it appears to the court on the application of a defendant:
…
(d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or
…
the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant’s costs of the proceedings and that the proceedings be stayed until the security is given.

(2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct.”

28 Section 1335(1) Corporations Act 2001 (Cth) states:

“Costs
(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.”

29 Essentially, under each provision the defendant must demonstrate that there is reason to believe that the plaintiff corporation will be unable to pay the costs of the defendant if ordered to do so and, if so, whether the court in the exercise of its discretion should grant the relief sought (Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 par 20).

30 As for the first step, the court is required to form an opinion about what the financial position of the plaintiff will be at the time of judgment and immediately after. An important consideration will be the financial position of the plaintiff at the time of the application, however this is not the sole consideration (Idoport par 58).

31 When considering s 1335(1) in Beach Petroleum N.L. v Johnson (1992) 7 ACSR 203, von Doussa J said

(p 204):

“Although s 1335 requires that there be reason to believe that the plaintiff corporation “will be unable to pay the costs of the defendant if successful” — and I emphasise “will be unable to pay” — the section does not, in my opinion, require that the court be satisfied, as a matter of probability, that every eventuality which could lead to eventual payment of the costs be excluded. The section would be satisfied if it appeared by credible testimony that there is reason to believe that if the defendant is successful circumstances may then exist in which the plaintiff will be unable to pay the costs …”

and (p 205):

“In my opinion the power of the court under s 1335 arises if credible 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. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security.”

The same approach should be taken with an application under UCPR r 42.21(1)(d).

32 The test has been described as an undemanding test (Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360 (par 41) per White J).

33 The paucity of evidence before the Court as to the plaintiff’s financial position may be summarised as follows. There are no financial statements or income tax returns for the 2007, 2008, and 2009 financial years. There was no evidence of the actual receipt of any income by the plaintiff in those years, or of any transaction under which it was probable that any income would be received during those years, or between now and the time of judgment in these proceedings, or that any income was recoverable from any person or persons. The only recent evidence of the plaintiff’s financial position consisted of the bank statements for the period 14 November 2008 to 14 July 2009 which disclose no deposits, but expenditure of $82,511.19.

34 Significantly, there was no evidence of any agreement or arrangement between the plaintiff and Yokogawa Electric Corporation in respect of Mr Samo’s contract, or between the plaintiff and Ricoh Co in respect of Mr Larkham’s contract, under which those organisations became liable to the plaintiff for commission or agency fees.

35 In my opinion, taken overall, Mr Macarthur’s evidence went no further than a bare ipse dixit that the plaintiff has sufficient financial capacity to meet an order to pay the defendants’ costs if it was unsuccessful in these proceedings. His and Mr Posniak’s assertions to the effect that the plaintiff was entitled to some ongoing trail of income were supported only by the evidence that some invoices had been sent on the plaintiff’s behalf.

36 In short, the Court was left with no objective factual evidence of the plaintiff’s financial position for the financial years, 2007, 2008, and 2009 and thereafter to the present time. There was no objective evidence to support the several assertions as to estimated revenue from contracts with any persons, or from the redevelopment of the plaintiff’s business. The evidence provided nothing more than a basis for speculation about the plaintiff’s financial situation since 30 June 2006.

37 No explanation was given for the delay in the preparation of financial statements and taxation returns. As to any suggestion that the plaintiff was impeded in this task because relevant records have been held by the defendants or other persons, there appears to have been no attempt to require their production by the usual court processes of discovery and subpoena.

38 Mr Macarthur stated that he knows what income the plaintiff has received, and what expenses it has incurred. He is the plaintiff’s sole director and shareholder. He is, or has been, a solicitor. There is no evidence of the plaintiff’s present place of business. I infer that, being Mr Macarthur’s alter ego, it carries on business wherever he happens to be. Absent evidence otherwise, I am satisfied that Mr Macarthur is capable of providing information which would disclose the plaintiff’s present financial situation and enable the Court to make a rational evaluation of its likely financial situation at the time of judgment.

39 I am satisfied that the necessary information of the plaintiff’s present financial situation is with Mr Macarthur who stands behind it. The unexplained failure or inability to provide the Court with this information in support of its opposition to an order that it provide security for the defendants’ costs generates sufficient doubt about its financial position to found the belief that there is a real chance that it would be unable to pay the defendants’ costs of the proceedings if ordered to do so. Since, at least, the filing of the notice of motion for security there has been ample opportunity to provide admissible evidence, if it exists, which would demonstrate the plaintiff’s ability, if unsuccessful, to pay the defendants’ costs. I find it astonishing, if such evidence exists, that neither Mr Macarthur nor Mr Posniak provided it for consideration on this application. In these circumstances in which the Court is left with no probative evidence of the plaintiff’s financial position, it is open to conclude that it is reasonably possible the plaintiff will be unable to pay the costs of the defendant if ordered to do so (Beach Petroleum N.L. pp 205, 206).

40 Accordingly, I am satisfied that the ground under each of r 42.21(1)(d) and s 1335(1) is established.

41 I turn now to the question whether, in the circumstances, the Court’s discretion should be exercised to grant the relief sought. I have taken into account the factors identified in KP Cable Investments Pty Ltd v MeltglowPty Ltd (1995) 56 FCR 189 (pp 197, 198) by Beazley J (as she then was).

42 A factor to be taken into account is the plaintiff’s prospects of success, an exercise which does not require any detailed analysis of its case. As earlier stated, it is not disputed that the plaintiff has a bona fide and triable case. As I am unable to express a view as to the ultimate prospects of any party, this factor has no weight one way or the other.

43 Another factor is whether an order for security should be declined on the ground that, if made, it would stultify the plaintiff’s ability to proceed with the litigation. In this case Mr Macarthur has said he is prepared to fund the plaintiff in the prosecution of the proceedings. Accordingly, I am satisfied that an issue that an order would stultify the plaintiff’s conduct of the litigation does not arise.

44 The plaintiff raised as an issue the defendants’ delay in making this application. It relied on the fact that these proceedings were commenced by summons in December 2007, over 18 months before the application was made.

45 In Idoport, Einstein J, in terms with which I respectfully agree, expressed the approach to be taken as follows:

“81 Ultimately it seems to me that in the context of the broad discretion and consistently with the approach referred to in the above authorities, delay is best regarded simply as a factor whose consequences are to be weighed in the balance in determining what is just between the parties. [cf French J in Bryan E Fencott supra at 515] The Court, in approaching delay as a discretionary factor, looks at the length of the delay and the nature of the acts done during the interval. If a company has suffered no real relevant prejudice in the sense of expenditure of its own funds or the incurring of liabilities in relation to the litigation in the period until the application for security for costs, the significance of delay reduces or may substantially disappear.”

46 There was no evidence that the plaintiff was prejudiced in its conduct of the litigation by reason of any delay on the defendants’ part. For example, it was not demonstrated that it incurred costs which might have been avoided had the claim for security been made before costs were incurred. I am unpersuaded that in the circumstances of this case it would work an injustice if an order for security was made. Furthermore, a relevant factor under this issue is that the order sought is for future costs. Bearing this in mind, in my opinion there is no basis for a finding that the period of delay complained of tells against the making of the order sought. The plaintiff’s opposition on this ground fails.

Conclusion

47 In my opinion, the justice of the case requires that an order for security be made.

48 Given the estimated range of the defendants’ costs, the amount for which security is to be ordered is $165,000. On the assumption that the hearing will commence in about 12 months’ time, it is reasonable to order payment be made to the defendants’ solicitors of quarterly instalments each of the sum of $41,250 on or before the 18 December 2009, 22 March 2010, 21 June 2010 and 20 September 2010 and I propose to order accordingly. Should the parties agree on an alternative means for providing security, for example, in the form of a bank guarantee, application may be made to my associate to re-list the matter before me for the purpose of making appropriate orders by consent.

Orders

49 It is ordered that:

(1) The plaintiff provide security for the defendants’ costs of the proceedings in the sum of $165,000, such security to be provided by way of payment made to the defendants’ solicitors of instalments each of the sum of $41,250 on or before the 18 December 2009, 22 March 2010, 21 June 2010 and 20 September 2010, failing which the proceedings be stayed until further order.

(2) The plaintiff to pay the defendants’ costs of the application.

(3) Liberty to apply on 2 days’ notice.

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