ABS Pty Ltd v AJA (WA) Pty Ltd [No 2]
[2021] WADC 54
•4 JUNE 2021
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: ABS PTY LTD -v- AJA (WA) PTY LTD [No 2] [2021] WADC 54
CORAM: GETHING DCJ
HEARD: 12 MAY 2021
DELIVERED : 4 JUNE 2021
FILE NO/S: CIV 929 of 2020
BETWEEN: ABS PTY LTD
Plaintiff
AND
AJA (WA) PTY LTD
Defendant
AJA (WA) PTY LTD
Plaintiff by counterclaim
ABS PTY LTD
Defendant by counterclaim
Catchwords:
Practice and procedure - Costs - Security for costs - Corporations Act 2001 (Cth) s 1335 - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 1335
Result:
Application granted
Representation:
Counsel:
| Plaintiff | : | Mr W Vogt |
| Defendant | : | Mr N Siegwart |
| Plaintiff by counterclaim | : | Mr N Siegwart |
| Defendant by counterclaim | : | Mr W Vogt |
Solicitors:
| Plaintiff | : | Vogt Graham Lawyers |
| Defendant | : | Birman & Ride |
| Plaintiff by counterclaim | : | Birman & Ride |
| Defendant by counterclaim | : | Vogt Graham Lawyers |
Case(s) referred to in decision(s):
57 Moss Rd Pty Ltd v T & M Buckley Pty Ltd t/as Shailer Constructions [2010] QSC 278
ABS Pty Ltd v AJA (WA) Pty Ltd [2021] WADC 19
Appleby v Myers (1867) LR 2 CP 651
Attorney-General of Botswana v Aussie Diamond Products Pty Ltd [2009] WASC 299
Bell Wholesale Co Pty Ltd v Gates Export Corp [1984] FCA 34; (1984) 2 FCR 1
Briggs v Glentham Pty Ltd (1992) 8 WAR 339
Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301
Chong v Super Equity Invests Pty Ltd [2012] NSWSC 27
Dalma Formwork Pty Ltd v Concrete Constructions Group Ltd [1998] NSWSC 472
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241
Gartner v Ernst & Young (No 3) [2003] FCA 1437
Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405
George 218 Pty Ltd v Bank of Queensland Ltd [2016] WASCA 56
Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1992) 11 WAR 40
Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523
Hazart Pty Ltd v Rademaker (1993) 11 WAR 26
Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62
Hunt v Knabe (No 2) (1992) 8 WAR 96
Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744
Kezic v St John of God Health Care Inc [2015] WASCA 220
Liebherr-Australia Pty Ltd v Bloomfield [2006] WASCA 128
Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; (2008) 66 ACSR 455
Marand Holdings Pty Ltd v Cateus International Pty Ltd [2003] WASC 238
Melunu Pty Ltd v Claron Constructions Pty Ltd [2004] NSWSC 1064
Phoenix Eagle Company Pty Ltd v Tom McArthur Pty Ltd [No 2] [2019] WASC 378
Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 2] [2014] WASCA 106
Siah v Wong [2021] WASC 19
Spence Financial Group Pty Ltd v G E Commercial Corporation (Australia) Pty Ltd [2007] WASC 15
Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19
Sunlea Enterprises Pty Ltd as Trustee for Drummond Cove Unit Trust v Pollock [2014] WASC 91
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129
Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161
Vicon Services Pty Ltd v BHP Billiton Worsley Alumina Pty Ltd [2012] WASC 109
W Pope & Co Pty Ltd v Edward Souery & Co Pty Ltd [1983] WAR 117
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57
Westwind Air Charter Pty Ltd v Hawker De Havilland Ltd (1990) 3 WAR 71
YICI Pty Ltd v Sun Wah Marine Products (HK) Co Ltd [No 2] [2010] WASC 27
GETHING DCJ:
Introduction
ABS Pty Ltd (ABS), the plaintiff, carries on business as an industrial supplier, installer and fabricator of steel. AJA (WA) Pty Ltd (AJA), the defendant, carries on business as a builder.
In October 2018, ABS and AJA entered into an agreement for ABS to supply, fabricate and install structural steel for a project being undertaken by AJA in Forrestdale (Agreement). The contractual price was $723,705. It is common ground that ABS commenced the work and that AJA has paid $657,252.86 of the contractual price.
ABS says that since July 2019 it has been unable to get access to the project site to complete the works. Ultimately this led to it purporting to terminate the Agreement in December 2019. It commenced an action in the District Court in March 2020 seeking damages as a result of the breaches of the Agreement which led it to terminate the Agreement. Those damages were particularised at $104,427.94, being the balance of the agreed price. It also claims $15,108.50 for an outstanding invoice for variations, as well as seeking the return of certain structural steel which it supplied to AJA, but for which it has not been paid.
AJA filed a defence, set-off and counterclaim on 10 July 2020. It asserts that on a number of occasions between October and December 2019 it requested ABS to return to the project site. ABS did not do so and, as a consequence, it was AJA who terminated the Agreement by accepting ABS's repudiation of it. In general terms, AJA says that it is not liable for any variations and that ABS did not complete the works to a satisfactory standard, for which AJA is entitled to claim damages.
By application filed 30 November 2020 AJA sought an order for security for its costs in the amount of $112,658 (Application). The Application was dismissed by a registrar on 25 March 2021 (Decision), with the registrar publishing written reasons.[1]
[1] ABS Pty Ltd v AJA (WA) Pty Ltd [2021] WADC 19.
AJA has appealed the Decision. For the reasons which follow, ABS should be required to provide security for AJA's costs, though I will hear from counsel as to the form in which that security is provided.
Issues arising for determination
The appeal is by way of a new hearing of the matter that was before the registrar.[2] It involves a complete de novo review.[3] In essence I am to treat the Application as if it were before the court for the first time, with AJA as appellant having the obligation to open the appeal.[4] There is no requirement on AJA, as the party who lodged the appeal, to show that the registrar made an error in the Decision.
[2] District Court Rules 2005 (WA) (DCR) r 15(6).
[3] Briggs v Glentham Pty Ltd(1992) 8 WAR 339, 349 - 350 (Malcolm CJ, with whom Pidgeon & Rowland JJ agreed); Hunt v Knabe (No 2) (1992) 8 WAR 96, 109 - 110 (judgment of the court); Hazart Pty Ltd v Rademaker (1993) 11 WAR 26, 28 (Malcolm CJ) (Hazart); Liebherr-Australia Pty Ltd v Bloomfield [2006] WASCA 128 [8]; Kezic v St John of God Health Care Inc [2015] WASCA 220 [42] (reasons of the court).
[4] Hazart (28).
AJA relies on three affidavits in support of the Application. Each was sworn by Nigel Jerome Siegwart, a solicitor employed by AJA's lawyers. The first was made on 30 November 2020, the second on 12 February 2021 and the third on 11 May 2021.[5]
[5] Which will be referred to as the 'First Siegwart Affidavit', 'Second Siegwart Affidavit' and 'Third Siegwart Affidavit' respectively.
ABS initially filed two affidavits in opposition to the Application. Each was sworn by Robert Abbey, the director of ABS. The first was made on 1 February 2021 and the second on 30 April 2021.[6]
[6] Which will be referred to as the 'First Abbey Affidavit' and the 'Second Abbey Affidavit' respectively.
At the conclusion of the hearing on 12 May 2021, I left open the opportunity for counsel for ABS to put on a further affidavit in response to the matters raised in the Third Siegwart affidavit. Counsel for ABS took advantage of that opportunity and on 20 May 2021 filed a third affidavit of Mr Abbey sworn the previous day,[7] as well as additional submissions. Counsel for AJA filed submissions in response on 27 May 2021.
[7] Which will be referred to as the 'Third Abbey Affidavit'.
The Application is brought pursuant to Corporations Act 2001 (Cth) (CA) s 1335(1) which provides:
(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.
The District Court is a 'court' for the purposes of CA s 1335(1).[8]
[8] CA s 58AA.
The power in CA s 1335 contains a threshold test or jurisdictional requirement and a discretion. The threshold requirement is that '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'. Once enlivened, the discretion is unfettered by the terms of CA s 1335(1), though must be exercised judicially by reference to established principle and considering all the circumstances of the case.[9]
[9] Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [67], [71] (Kenneth Martin J with whom Pullin JA agreed) (Swansdale); FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [21] (Pidgeon & Owen JJ) (FFE); Phoenix Eagle Company Pty Ltd v Tom McArthur Pty Ltd [No 2] [2019] WASC 378 [14] (Allanson J) (Phoenix); Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [5] - [6] (Edelman J) (Westonia).
Consequently, four issues arise for determination:
•What costs would ABS be required to pay if AJA was successful in its defence?
•Is reason to believe that ABS will be unable to pay the costs of AJA if successful in its defence?
•If there is, how should the discretion be exercised?
•What final orders are appropriate?
What costs would ABS be required to pay if AJA was successful in its defence?
Counsel for AJA estimates that the taxed costs of AJA if it was successful in its defence of the action would be $112,658. This is based on a three day trial and the action not progressing in a manner that would entitle AJA to have its costs taxed without reference to the applicable scale limits.[10]
[10] First Siegwart Affidavit, par 9, Annexure NJS5.
Counsel for ABS submitted that this was excessive, and that considering only matters relating to the defence of the action, as opposed to the counterclaim, the costs should be assessed on the basis of a one day trial.
In order to resolve this issue, it is necessary to examine the pleaded case of each party. This is set out in:
(a)ABS's statement of claim, annexed to the writ;
(b)ABS's further and better particulars filed 22 June 2020;
(c)AJA's defence, set-off and counterclaim filed 10 July 2020 (Defence);
(d)AJA's further and better particulars filed 23 September 2020; and
(e)ABS's reply and defence to counterclaim filed 5 November 2020 (Reply).
A review of the pleadings suggests that the following factual issues will need to be addressed at trial:
(a)whether it was AJA who prevented ABS from returning to site or ABS who refused the request of AJA to return to site;
(b)the extent to which the work claimed by ABS as a variation is in fact a variation;
(c)whether ABS agreed not to make a claim for the variations or otherwise waived its right to claim for them;
(d)whether ABS installed certain awnings in breach of instructions given by AJA and, if so, whether this caused AJA to incur additional costs for which it is entitled to claim damages;
(e)the extent to which ABS had not completed the works specified in the Agreement as at the date on which the Agreement was terminated;
(f)whether ABS failed to fasten certain bolts for the steel structure and, if so, whether this was in breach of the terms of the Agreement, and if so, what damages AJA is entitled to;
(g)whether ABS failed to treat certain steel welds and bolts and, if so, whether this was in breach of the terms of the Agreement, and if so, what damages AJA is entitled to; and
(h)whether ABS damaged any of the concrete floor and concrete panels and, if so, whether this was in breach of the terms of the Agreement, and if so, what damages AJA is entitled to.
AJA seeks to set-off against ABS's claim the damages set out in pars (d), (f), (g) and (h). These are in essence unliquidated claims for defective performance under a contract. Claims of this kind will not generally amount to an equitable set-off.[11] This is because an equitable set-off may only be raised where the claim impeaches the claim of the plaintiff or has otherwise been brought about or contributed to or is so bound up with the rights which are relied upon by the plaintiff that it would be unconscionable for the plaintiff to succeed without allowing the set-off.[12] It is only 'available where the party seeking it can show a recognised equitable ground for being, to the relevant extent, protected from his adversary's claim'.[13]
[11] Westwind Air Charter Pty Ltd v Hawker De Havilland Ltd (1990) 3 WAR 71, 85 - 86 (Murray J); W Pope & Co Pty Ltd v Edward Souery & Co Pty Ltd [1983] WAR 117, 120 - 122 (Olney J); though see Siah v Wong [2021] WASC 19 [768] - [779] (Smith J).
[12] Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62, 67 - 68 (Kennedy J, with whom Malcolm CJ & Kennedy J agreed) (Hazcor); Geraldton Building Co Pty Ltd v Christmas Island Resort Pty Ltd (1992) 11 WAR 40, 52 (Ipp J, with whom Franklyn J agreed).
[13] Hazcor (67).
Notwithstanding that, as a matter of pleadings, where 'a claim by a defendant to a sum of money (whether of an ascertained amount or not) is relied on as a defence to the whole or part of a claim made by the plaintiff, it may be included in the defence and set-off against the plaintiff's claim, whether or not it is also added as a counterclaim'.[14] This rule of pleading does not, however, displace the common law and equitable rules substantively governing set-offs.[15] In my view, the significance of AJA being able to plead its counterclaim as a set-off is that, for the purposes of CA s 1335, AJA's 'defence' properly includes its claims for unliquidated damages for defective performance under the Agreement.
[14] Rules of the Supreme Court 1971 (WA) O 20 r 17.
[15] Hazcor (69).
The trial of the action addressing the factual issues identified at [18] is, in my view, likely to take well in excess of three days making due allowance for oral opening and closing submissions. I regard AJA's estimate of costs in the order of $110,000 as being conservative and thus appropriate for use on a security for costs application.
Is reason to believe that ABS will be unable to pay the costs of AJA if successful in defence?
The threshold question posed by CA s 1335(1) is whether it appears by credible testimony that there is reason to believe that ABS will be unable to pay the costs of AJA if successful in its defence.
There is no evidentiary burden to be undertaken or discharged by a party seeking the security order. Rather, what required is an evaluation of the evidence led by the applicant to see whether that leads to a reason to believe that the corporation will be unable to pay the costs of the applicant if successful in its defence.[16]
[16] FFE [24]; Swansdale [69]; Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19 [34] (Corboy J) (Sugarloaf).
The principles by which this question is to be answered are well settled, and may be summarised as follows:[17]
(a)the court will adopt a practical, common sense approach to the examination of the corporation's financial affairs;
(b)it is necessary to make an assessment of the risk that the corporation will be unable to pay, an assessment that will necessarily be imprecise;
(c)a 'reason to believe' is a low threshold test;
(d)the requirement that there be 'credible testimony' is an obvious safeguard to ensure that the application is not founded purely upon speculation;
(e)in ascertaining whether there is 'credible testimony', the court does no more than judge the quality of the evidence to see if it objectively gives rise to 'a reason to believe';
(f)the court will need to fix the time at which the corporation's inability, or apprehended inability, is to be assessed, which will generally require an opinion to be formed as to the date on which judgment is likely to be given;
(g)the court will need to identify the range of assets to which recourse might be had for the purpose of enforcing an adverse costs order; and
(h)generally, the relevant assets will be those that might be immediately realised and those which could be realised in sufficient time to enable the corporation to comply with a costs order in the usual terms.
[17] George 218 Pty Ltd v Bank of Queensland Ltd [2016] WASCA 56 [40] - [48] (Murphy JA); Pravenkav Group Pty Ltd v Diploma Construction (WA) Pty Ltd [No 2] [2014] WASCA 106 [18] (Murphy JA) (Pravenkav); FFE [22] ‑ [24]; Vicon Services Pty Ltd v BHP Billiton Worsley Alumina Pty Ltd [2012] WASC 109 [17] (Le Miere J); Sugarloaf [35]; Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; (2008) 66 ACSR 455 [15] - [16] (Maxwell P & Buchanan JA) (Livingspring).
The time at which ABS's capacity to pay an order for costs is to be assessed is following trial and delivery of a reserved judgment. Based on the court's current listings, I assess this to be about 12 months from now, say, mid‑2022.
I have assessed the costs which ABS would be liable to pay if AJA was successful in its defence as being in the order of $110,000.
As to the assets of ABS to which recourse could be had for the purpose of enforcing an adverse costs order, ABS does not own any real property.
ABS's only non-financial assets appear to be equipment and vehicles, valued at around $70,000 at cost. There is no evidence as to the current market value of these assets. There is, however, evidence that ABS is the grantor of a number of security interests to third parties, registered on the Personal Properties Security Register.[18] In particular, there are a number of securities in the collateral classes 'Motor vehicle'[19] and 'Other goods'.[20] Thus suggests that any value which the equipment and vehicles may have would be encompassed by the existing security interests. It is not apparent to me that the equipment and vehicles referred to in the financial statements of ABS have any unencumbered value to which AJA could have recourse for the purpose of enforcing an adverse costs order.
[18] First Siegwart Affidavit, pars 4 and 5.
[19] First Siegwart Affidavit, page 15.
[20] First Siegwart Affidavit, page 16.
Another asset which ABS put forward as being available to satisfy any adverse costs order is an amount of steel which ABS supplied AJA and for which it says it has not been paid and is entitled to the return of. Mr Abbey suggests that this steel is in the order of 10 tonnes and worth in the vicinity of $50,000.[21]
[21] Second Abbey Affidavit, par 26.
ABS asserts in the action that it is entitled to the return of this steel. It says that there is a retention of title clause in the terms and conditions of trade, which conditions form part of the terms of the Agreement.[22] Whilst there is currently a plea that the ABS's terms and conditions of trade form part of the Agreement,[23] there is no plea in relation to a retention of title clause. There is a general plea that a demand was made for the return of the steel,[24] though this appears to be based on a claim in unjust enrichment.[25] Be that as it may, I will assume that the failure to plead a right to return of the steel pursuant to a retention of title can be cured by amendment.
[22] Plaintiff's submissions filed 20 May 2021, par 11.
[23] Statement of claim, par 9.
[24] Statement of claim, par 45.
[25] Statement of claim, par 47.
There are a number of problems with the assertion that any steel in possession of AJA is an asset to which recourse may be had to enforce a costs order in 12 months' time. The first is that AJA in the Defence denies that ABS is entitled to the return of the steel.[26] The scenario I need to consider for the purposes of CA s 1335 is AJA being successful in its defence. If successful in its defence, it will have avoided an order for the return of the steel. So the steel cannot be considered an asset of ABS against which an order for costs could be enforced if AJA is successful in its defence.
[26] Defence, pars 25 and 26.
The second is that the building in which the steel provided by ABS was to be used has been completed and is currently being marketed to be leased.[27] AJA pleads that once it accepted ABS's repudiation, it engaged another contractor to complete the works[28] implying that the steel has now been used. There is long established authority that the steel bars 'necessarily became the property of the defendant as soon as they were worked into [its] premises and became part of them'.[29] So, any right to the physical return of the steel (as opposed to a claim in damages) must necessarily have lapsed. This legal position reflects common sense. What counsel for ABS proposes is practically impossible. For a start, there is no evidence that the building is in fact owned by AJA, with the statement of claim merely asserting that AJA is a builder. Even if it were, in order to obtain steel which could be sold by the sheriff in executing a property seizure and sale order to enforce an order for costs the steel would have be to be physically removed from the completed building. From the picture of the building in evidence, this looks impossible without some serious demolition. Which also begs the question of which steel it is that ABS has title to, as the remedy is in rem so the particular bars of steel which have not been paid for need to be specifically identified and removed. And then what is left is 10 tonnes of used structural steel, presumably customised for this particular building.
[27] Third Abbey Affidavit, pars 34 ‑ 40.
[28] Defence, par 22.7.
[29] Appleby v Myers (1867) LR 2 CP 651, 659 (judgment of the court).
This leads to the third issue. I do not accept that the valuation placed on the steel by Mr Abbey has any utility for present purposes. It may well be an appropriate estimate for damages purposes, but that is very different to the value at which 10 tonnes of used structural steel could be sold by the sheriff. I am not told what the value of 10 tonnes of used structural steel is.
For these reasons, I do not consider that there is an amount of steel which is an asset of ABS to which AJA could have recourse if it was successful in its defence and became entitled to an order for costs.
As at 29 April 2021, the only other assets of ABS were financial, comprising:
(a)cash at bank of $44,825.38; and
(b)trade debtors of $367,423.80, of which $140,000 or so relates to the present action.
In the First Abbey Affidavit, Mr Abbey deposes that the trade debtors of ABS are placed on payment terms of 30 days from the date of the issue of the invoice. He further deposes that the only trade debtor who has withheld payment of an invoice is AJA and that AJA is the only trade debtor who has recorded a significant sum of money owing.
In the hearing before me, counsel for ABS conceded that (aside from the steel) the only assets from which an order for costs could be paid is from the income generated by the business as a going concern.
The business of ABS does not have a history of significant profits. Its historical financials are as follows:[30]
[30] Defendant's submissions filed 20 April 2021, par 9.
FY ended
Revenue $
Wages (inc super) $
Net profit $
Net assets $
30-Jun-17
1,140,204
728,721
55,350
19,257
30-Jun-18
1,794,062
842,277
-16,240
3,019
30-Jun-19
2,626,343
767,425
26,453
17,000
30-Jun-20
1,547,350
93,776
-1,451
-1,449
Of more significance is the current financial information contained in the Second Abbey Affidavit. In the period from 1 July 2020 to 28 April 2021, ABS had a total income of $1,436,866.76. In the same period, expenses were $1,323,646.65, giving an operating profit of $133,220.11, and, after some other expenses, a net profit of $108,707.45.
ABS will of course have to pay its legal fees over the next 12 months, including those of the trial. I am not told what that amount is likely to be.
Another issue raised by counsel for AJA is that it appears that ABS has a payment plan in place with the Australia Taxation Office (ATO) for payment of its GST liabilities. However, the most recent evidence of this is what appears to be a credit of $4,142.71 in the management accounts. In any event, Mr Abbey tells me that as at 19 May 2021, ABS has fully discharged its obligations to the ATO.[31] There is no other evidence to suggest that ABS is experiencing any financial stress.
[31] Third Abbey Affidavit, par 32.
In the hearing before me, counsel for AJA invited the court to view the management accounts as being unreliable based on divergences between the approach used in these accounts and that evident in the professionally prepared accounts. Counsel also pointed to confusing aspects of the management accounts such as there being a significant negative credit of $53,503 under the current liability item 'PAYG Withholding Payable'. Counsel further expressed concerns about a restructuring by which the welding employment costs of ABS have been moved to another company. However, I do not need to descend to this level of detail to determine the question posed by CA s 1335(1).
This is because on the other evidence I have mentioned it appears to me by credible testimony that there is reason to believe that ABS will be unable to pay the costs of AJA if successful in its defence. In summary, this is because, adopting a practical, common‑sense approach to the examination of the financial affairs of ABS:
(a)ABS has no real estate or personal property against which AJA could enforce a judgment for costs;
(b)the only asset against which AJA could enforce a judgment for costs is the ongoing business of ABS;
(c)executing a judgment against an ongoing business could only be realistically achieved by the appointment of a receiver, which would be uneconomic in the present situation;
(d)ABS does not have a strong history of profitable trading, so there is a real risk that its trading over the next 12 or so months will not generate substantial profits - it may do, but history suggests to the contrary; and
(e)to the extent that ABS generates cash from its business activities, there is no obligation on its director Mr Abbey to keep that cash within the company, and if lawfully removed from the company by way dividend would be beyond the reach of AJA for enforcement purposes.
For these reasons, I consider that there is a real risk that in 12 months' time ABS will not have sufficient assets for AJA to be able to enforce a judgment for costs in the order of $110,000.
The discretion in CA s 1335 is thus enlivened.
How should the court exercise the discretion in CA s 1335?
As I have noted, once enlivened, the discretion is unfettered by the terms of CA s 1335(1), though must be exercised judicially by reference to established principle and considering all the circumstances of the case.[32] The circumstances in which the discretion should be exercised cannot be stated exhaustively, and all of the circumstances of the case should be examined.[33]
[32] Swansdale [67], [71]; FFE [21]; Phoenix [14]; Westonia [5] ‑ [6].
[33] YICI Pty Ltd v Sun Wah Marine Products (HK) Co Ltd [No 2] [2010] WASC 27 [3] (Martin CJ) (YICI).
Once the discretion is enlivened it is for AJA as the applicant to persuade the court that the discretion should be exercised in its favour, although each party will be required to advance evidence on the particular factual matters it wishes to assert as part of its case.[34]
[34] Sugarloaf [34]; Livingspring [20].
The circumstances argued before me as being relevant to the Application were:[35]
•The likelihood of ABS being unable to pay AJA's costs.
•The merits and bona fides of the parties' claims.
•Whether ABS's impecuniosity was caused by the conduct of AJA which is the subject of the claim.
•Whether AJA is in substance a plaintiff or whether ABS's proceedings were defensive.
•Whether the application for security is oppressive, and in particular, whether the award of security would deny ABS a right to litigate, and stultify its claim.
•Whether there are persons standing behind ABS who are likely to benefit from the litigation.
•Whether the persons standing behind ABS have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking.
[35] See generally: Swansdale [71]; Westonia [6].
The fact which enlivened the jurisdiction in CA s 1335, namely that there is reason to believe that ABS will be unable to pay the costs of AJA if successful in its defence, is a substantial factor in favour of its exercise.[36] It does not, however, establish an entitlement, or even a predisposition, in favour of ordering security for costs.[37]
[36] Pravenkav [91]; Swansdale [80].
[37] Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161 [11] (Allanson J) (Unified).
As to the merits and bona fides of the parties' claims, on an application for security for costs, the court will not generally investigate the likelihood or otherwise of either party being successful in the action. There may be exceptional cases where the merits are clear or where the claim cannot succeed in point of law or is not brought bona fide.[38] The present action is not such a case. The issues which I have identified at [18] are issues which should properly be resolved a trial. I do not accept the submission made by counsel for ABS that the proposal by AJA to stay the counterclaim if security for costs is ordered but not provided means that the defence and counterclaim of AJA are not bona fide. ABS's position is a pragmatic and defensible commercial one. This factor neutral to the exercise of the discretion.
[38] Swansdale [72]; Gartner v Ernst & Young (No 3) [2003] FCA 1437 [10] (Mansfield J); Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405, 416 (Cooper J) (Gentry Bros).
As to whether ABS's impecuniosity was caused by the conduct of AJA which is the subject of the claim:[39]
[A] respondent to a motion for security for costs relying upon this as a ground for resistance, must establish a real causal connection between the conduct and impecuniosity which, in the exercise of the Court's discretion, would make it unjust to require security, and it must be established that the applicant for security for costs has been guilty of some form of misconduct or unacceptable business dealings qua the respondent, such as … inappropriately making claims for and receiving monies for variations, which payments caused the respondent's impecuniosity.
ABS has not put forward any evidence to this effect. This factor is again neutral to the exercise of the discretion.
[39] Melunu Pty Ltd v Claron Constructions Pty Ltd [2004] NSWSC 1064 [31] (Brownie AJ); Dalma Formwork Pty Ltd v Concrete Constructions Group Ltd [1998] NSWSC 472; Sunlea Enterprises Pty Ltd as Trustee for Drummond Cove Unit Trust v Pollock [2014] WASC 91 [75] (Allanson J) (Sunlea); Westonia [45].
As to whether AJA is in substance a plaintiff or whether ABS's proceedings are essentially defensive, if this is the case, then this would count against the exercise of the discretion.[40] An order for security will not generally be made where the issues raised in a counterclaim are substantially similar to the issues raised in the claim. This is because it would be unjust for the claim to be stayed if security is not paid in circumstances where the same issues will need to be litigated in the counterclaim.[41] However as in Westonia, AJA has neutralised this factor by offering an undertaking not to proceed with the matters which are the subject of its counterclaim if the proceedings are stayed as a result of a failure to meet any order for security for costs.[42] This factor then becomes neutral to the exercise of the discretion.
[40] See generally: Westonia [47] ‑ [50].
[41] Marand Holdings Pty Ltd v Cateus International Pty Ltd [2003] WASC 238 [38] ‑ [41] (Newnes M); Chong v Super Equity Invests Pty Ltd [2012] NSWSC 27 [31] - [40] (Slattery J).
[42] Westonia [51].
As to whether the Application is oppressive, in exercising the discretion in CA s 1335, the court may consider whether ordering security for costs would stultify the ability of the company to continue with the action.[43] Specifically, a court will not be justified in declining to make an order on the basis that the proceedings will be stultified unless the impecunious plaintiff company establishes that those who stand behind it are also unable to provide the requisite security for costs.[44]
[43] Unified [13]; Spence Financial Group Pty Ltd v G E Commercial Corporation (Australia) Pty Ltd [2007] WASC 15 [39] (Newnes M) (Spence); Bell Wholesale Co Pty Ltd v Gates Export Corp [1984] FCA 34; (1984) 2 FCR 1, 4 (judgment of the court) (Bell Wholesale).
[44] Unified [13]; Spence [34]; Bell Wholesale (4).
However, counsel for ABS does not assert that granting the Application would be oppressive for this particular reason as ABS's position is that it will be able to meet an adverse costs order if made following trial. Rather, counsel argued that granting security for costs in the amount sought immediately would be oppressive for two other reasons. The first is that an amount in the order of $110,000 is a grossly inflated estimate of AJA's costs of defending the action. I have already dealt with that argument. The second is because the security is sought immediately and not in tranches as the action progresses. This is not a reason not to grant security for costs, but is a matter going to the form of the order if made.
As to whether there are persons standing behind ABS who are likely to benefit from the litigation, where there is evidence that those who stand behind the company and who would gain from the litigation are financially able to provide adequate security, this is 'at least a weighty consideration in favour of an order for security'.[45] Counsel for ABS submits that there is little evidence to suggest that the directors and shareholder of ABS are using the company as a shield behind which to carry on litigation without the fear of an adverse costs order being made against them.
[45] Sunlea[84].
The evidence is that there is only one director and shareholder of ABS, Mr Abbey. Axiomatically, his personal assets are not currently at risk of a costs order, yet he stands to benefit from any judgment awarded to ABS. This is the reason why the power to order security for costs exists:[46]
The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play.
There is, however, no evidence of his personal financial position. So this factor again becomes neutral.
[46] Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, 532 (Connelly J with whom Campbell CJ & Demack J agreed) (Harpur).
Another relevant factor is whether the persons standing behind ABS have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking.[47] This is so notwithstanding that the worth of the directors may ultimately prove insufficient to satisfy any judgment in whole or in part.[48] This is because it places the party seeking security in no worse position than it would have been in had it sued those standing behind the company as litigants in person, without the imposition of the corporate entity between them.[49] At this stage, Mr Abbey has not offered any such undertaking. So a potential reason against the exercise of the discretion is not present.
[47]57 Moss Rd Pty Ltd v T & M Buckley Pty Ltd t/as Shailer Constructions [2010] QSC 278 [31] - [33]; Gentry Bros (415); Harpur (532).
[48] Gentry Bros(415).
[49] Gentry Bros(415).
ABS did not assert that AJA unduly delayed bringing the Application. Rather, the position taken by ABS was that the issue of security for costs should be looked at after pleadings had closed, which is what occurred. Accordingly, this is not one of those cases in which delay in the bringing of the application might have encouraged the plaintiff to rely to its detriment upon the defendant's failure to apply.[50] So the timing of filing the Application is neutral to the exercise of the discretion.
[50] See generally: YICI [6]; Attorney-General of Botswana v Aussie Diamond Products Pty Ltd [2009] WASC 299; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 [70] (Einstein J).
I turn then to the exercise of the direction. In doing so:[51]
[T]he section requires a balance to be struck between protecting the defendant from the possible consequences of being sued by an impecunious corporation with limited liability and avoiding injustice to the corporation by unnecessarily prejudicing it in the conduct of litigation.
[51] Sugarloaf [31]; Phoenix [14]; Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301, 304 (Street CJ).
As I have noted, the fact that there is reason to believe that ABS will be unable to pay the costs of the AJA if successful in its defence, is a substantial factor in favour of its exercise.[52] The remaining considerations are neutral. There no factor pointing against the exercise of the direction. In my view, in the circumstances of this case it would be unjust for AJA to be forced to continue to defend the action in circumstances where there is a very real risk that, if successful in its defence, it will not be able to enforce any judgment it obtains for costs against ABS.
[52] Pravenkav [91]; Swansdale [80].
I am satisfied that an order for security for costs should be made.
What final orders should be made?
As I foreshadowed at the hearing of the Application, I will hear from counsel as to the form of the order for security for costs.
If ABS seeks to provide security by way of an undertaking from Mr Abbey, he needs to file and serve an affidavit setting out in detail his assets and liabilities.
I will also hear from counsel on the issue of costs.
I certify that the preceding paragraph(s) comprise the reasons for decision of the District Court of Western Australia.
SVH
Associate
4 JUNE 2021
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