ANSAI Pty Ltd v Hak Nominees Pty Ltd - [2006] WADC 179

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS

LOCATION: PERTH

CITATION: ANSAI PTY LTD -v- HAK NOMINEES PTY LTD [2006] WADC 179

CORAM: COMMISSIONER LEY

HEARD: 1 NOVEMBER 2006

DELIVERED : Delivered Extemporaneously on 1 NOVEMBER 2006 typed from tape and edited by Trial Commissioner

FILE NO/S: CIV 2726 of 2004

BETWEEN: ANSAI PTY LTD
Plaintiff
AND
HAK NOMINEES PTY LTD
Defendant
(BY ORIGINAL ACTION)
HAK NOMINEES PTY LTD
Plaintiff
AND
ANSAI PTY LTD
First Defendant
RICHARD HARRIS
Second Defendant
(BY COUNTERCLAIM)

Catchwords:

Practice and procedure - Appeal from Registrar - Corporations Law - Application for security for costs - Turns on own facts

Legislation:

Australian Securities and Investments Commission Act 2001 (Cth)
Corporations Act 2001 (Cth), s 1335
Fair Trading Act 1987 (WA)

Trade Practices Act 1974 (Cth)

Result:

Appeal allowed

Security for costs ordered

Representation:

Original Action

Counsel:

Plaintiff: Mr P Redding
Defendant: Ms C H Thompson

Solicitors:

Plaintiff: Redding & Associates
Defendant: Mullins Handcock

Counterclaim

Counsel:

Plaintiff:     Ms C H Thompson
First Defendant             :     Mr P Redding
Second Defendant         :     Mr P Redding

Solicitors:

Plaintiff:     Mullins Handcock
First Defendant             :     Redding & Associataes
Second Defendant         :     Redding & Associataes

Case(s) referred to in judgment(s):

Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA; Library No 980297; 2 June 1998
Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194
Engel Pty Ltd (in liq) v Leeds, unreported; FCt SCt of WA; Library No 940403, 20 July 1994
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241
Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584
Nelson Capital Pty Ltd v Short [2003] WASC 152

Case(s) also cited:

Dalecoast Pty Ltd v Guardian International Pty Ltd, unreported; SCt of WA; Library No 990168; 7 April 1999
Domelia Pty Ltd v Paiker [2004] WASC 253
Russel v Taparis Pty Ltd & Ors [2004] WASC 238
Satcom Business Exchange Pty Ltd v BCCC Pty Ltd [2001] WASC 126
Scott v Scott [1913] AC 417
Silverstone Holdings Pty Ltd v American Home Assurance, unreported; FCt SCt of WA; Library No 970633; 21 November 1997
SP Hay Pty Ltd v Allcorp Pty Ltd [2004] WASC 77
Tipperary Developments Pty Ltd v State of Western Australia, unreported; SCt of WA; Library No 960620; 31 October 1996
Tradestock Pty Ltd v TNT (Management) Pty Ltd (No 1) (1977) 30 FLR 343

COMMISSIONER LEY: This action was commenced on 30 November 2004. At that time, the plaintiffs were the plaintiff and the second defendant by counterclaim ("Mr Harris"), and the defendants were the defendant and one Henry Kusal ("Mr Kusal"). However, on 20 June 2005, it was ordered inter alia that Mr Harris cease to be a plaintiff and that the plaintiff have leave to discontinue the action insofar as it was against Mr Kusal.
On 1 July 2005, the plaintiff filed an application for summary judgment against the defendant. On 16 August 2005, and while the plaintiff's application for summary judgment was still pending, the defendant filed an application for inter alia an order that the plaintiff provide security of $50,000 for the defendant's costs of defending the action. On 29 August 2005, and by consent, the defendant's application for security for costs was adjourned sine die pending the determination of the plaintiff's application for summary judgment. On 24 November 2005, and also by consent, it was ordered that the plaintiff's application for summary judgment be dismissed. On 31 March 2006, the defendant's solicitors wrote to the Listing Coordinator of this Court requesting that its application for security for costs be re‑listed for hearing. The application was re‑listed on 30 May 2006 before a Deputy Registrar of this Court. After hearing argument on that day, the Deputy Registrar dismissed the application. It is from that dismissal that the defendant appeals.

The appeal

An appeal from a Registrar of this Court to a Judge is by way of a new hearing or a hearing de novo: District Court Rules 2005, r 15(6). In such a hearing, the matter is heard afresh and a decision is given on the evidence presented at that fresh hearing. The Judge is required to exercise his or her powers whether or not the Registrar fell into error: Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194 at 203.

The application

The defendant's application was brought under s 1335(1) of the Corporations Act 2001 (Cth). That section provides:
"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 security is given."
The Court's jurisdiction to order security for costs under s 1335 is therefore enlivened only if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the defendant's costs if the defendant is successful. If that question is answered in the affirmative, the question then is whether, in the exercise of the Court's discretion, such an order should be made: FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241; Nelson Capital Pty Ltd v Short [2003] WASC 152 at [3].

The action

In the action, the plaintiff claims damages from the defendant for repudiation or, alternatively, for breach of contract. The plaintiff alleges that it and the defendant each owned 50 per cent of the issued share capital of a company called IC Developments Pty Ltd, ("ICD"), a building company, and that, by a written agreement dated 16 April 2004 ("the 16 April agreement"), the plaintiff agreed to sell its shares in ICD to the defendant for $400,000 payable in instalments of:
(a)$60,000, on 15 March 2004 ("the deposit");
(b)$230,000, on 30 April 2004 ("the first instalment");
(c)$35,000, on 1 July 2004 ("the second instalment");
(d)$25,000, on 1 October 2004, ("the third instalment"); and
(e)$50,000, no later than 30 April 2005 ("the final instalment").
The plaintiff says that:
(a)it transferred its shares in ICD to the defendant on 30 April 2004;
(b)the defendant paid it the deposit on 15 March 2004 or thereabouts;
(c)the defendant paid the first instalment on 30 April 2004; but
(d)the defendant failed to pay either the second or the third instalments.
The plaintiff also says that, on 8 October 2004, it treated the defendant's failure to pay the second and third instalments as a repudiation of the 16 April agreement, accepted that repudiation and terminated the 16 April agreement. The plaintiff claims damages of $110,000, being the total of the second and third instalments, and $50,000, the amount of the final instalment, as damages for the loss of the bargain. Alternatively, the plaintiff claims damages of $110,000 for breach of contract.
In its defence and counterclaim, filed on 8 December 2005, the defendant says that the 16 April agreement was not the first agreement between the parties pursuant to which the plaintiff agreed to sell its shares in ICD to the defendant. The defendant says that there was an earlier agreement in that regard made in early March 2004 and that the 16 April agreement was a variation of that earlier agreement. The defendant effectively admits that, pursuant to the 16 April agreement, it agreed to pay the plaintiff the instalments pleaded by the plaintiff, but says that it was an express term of the 16 April agreement that the second, third and final instalments would only be payable if ICD won the contract to do the building work for the redevelopment of the Caves House Resort in Yallingup ("the Caves House Contract"), and that it was a further express term of the 16 April agreement that the final instalment would be payable on or before 30 April 2005, or on completion by ICD of the Caves House Contract, whichever was the earlier. The defendant says that ICD did not win the Caves House Contract and that, therefore, the second, third and final instalments did not become payable.
In addition, the defendant alleges that, prior to it entering into inter alia the 16 April agreement, the plaintiff, through its director, Mr Harris, made certain oral representations concerning the value of the shares in ICD and various building contracts which ICD was seeking to win. The defendant alleges that those representations were false and constitute misleading or deceptive conduct contrary to the provisions of the Australian Securities and Investments Commission Act 2001 ("the ASIC Act") and/or the Trade Practices Act 1974 ("the TPA") and/or the Fair Trading Act 1987 ("the FTA") and counterclaims an order under the ASIC Act or the TPA setting aside the 16 April agreement and, under the ASIC Act or the TPA or the FTA, damages being the amount of $290,000, which the defendant has paid to the plaintiff pursuant to the 16 April agreement.

The evidence on the application

In applications of this type, there is no evidentiary burden as such on an applicant for an order for security for costs. What is required in such an application, in order to enliven the Court's jurisdiction, is an evaluation of the evidence led by the applicant to see whether that gives reason to believe that the corporation will be unable to pay the costs of the defendant if the defendant is successful: FFE Minerals (supra) at 248.
The defendant relies on three affidavits:
(a)the affidavit of Mr Kusal sworn on 4 October 2005,
(b)the affidavit of Graeme Edward Wimbridge sworn on 13 April 2006; and
(c)the affidavit of Mr Wimbridge sworn on 18 May 2006.
Mr Kusal annexes to his affidavit, ("HK3"), an Australian Securities and Investments Commission company extract in relation to the plaintiff as at 26 November 2004. That extract indicates that, at that time, the paid‑up share capital of the plaintiff was $2 comprising two $1 shares, which were both held by Mr Harris. The extract also indicates that the plaintiff had lodged annual returns most years between 1990 and 2003, but none of those was produced. However, that is of no consequence, because counsel for the plaintiff told me that the share structure and shareholding of the plaintiff is the same today as it was on 26 November 2004.
In his affidavit sworn on 13 April 2006, Mr Wimbridge says that, on 23 March 2006, he caused a search to be carried out to ascertain whether there was any real property registered in the name of the plaintiff in any State or Territory of Australia. The results of that search are annexed to Mr Wimbridge's affidavit ("GEW4") and reveal that, at that time, there was there was no real property registered in the plaintiff's name in any State or Territory of Australia. The plaintiff also concedes that that is still the position.
Also annexed to Mr Wimbridge's affidavit sworn on 13 April 2006 ("GEW7"), is a draft bill of costs in which the defendant's solicitors estimate that the defendant's costs of defending the plaintiff's claim will be over $56,000, based upon an estimate of seven days for the trial.
Although the plaintiff did not put forward any affidavit evidence when the application was before the Deputy Registrar, it now relies on an affidavit sworn by Mr Harris on 14 October 2006. There is annexed to Mr Harris's affidavit ("RCH1"), a document which Mr Harris says, in paragraph 4 of his affidavit, is a true copy of the plaintiff's balance sheet as at 8 September 2006. Mr Harris says that that document was prepared by the plaintiff's accountant, Peter Della-Marta, on his instructions, and correctly reflects the plaintiff's financial position as at 8 September 2006.
However, the balance sheet is accompanied by a statement by Mr Della-Marta dated 11 October 2006 in which he says:
"I have prepared the attached balance sheet for (the plaintiff) as at 8 September 2006 from the information provided by the Director (Mr Harris) and the accounting records of the company.
The balance sheet is prepared an on accrual basis from the records of the company. It is based on historical cost and does not take into account changing values or, except where stated, current valuations of the non‑current assets. No audit or review has been performed and accordingly no assurance is expressed.
To the extent permitted by law, I do not accept liability for any loss or damage which any person may suffer arising from any negligence on my part. No person should rely on the balance sheet without having an audit or review conducted.
The balance sheet was prepared for the benefit of the Director of (the plaintiff). I do not accept responsibility to any other person for the contents of the balance sheet."
The defendant says that I should not have any regard for the balance sheet because:
(a)the balance sheet is qualified by the company's accountant in several material respects, being
(i)it is expressed to be based on historical cost and does not take into account changing value;
(ii)it does not take into consideration the current valuation of non‑current assets;
(iii)no audit or review has been performed;
(b)the current assets of the company are clearly insufficient to pay a costs order;
(c)the non‑current assets of the company are neither sufficiently explained nor sufficiently likely to be realisable;
(d)the equity structure of the plaintiff as disclosed in the annexures to Mr Harris's affidavit is different from the shareholding disclosed in the ASIC records (annexure "HK3" to Mr Kusal's affidavit) and paragraph 1 of Mr Harris' affidavit (which both indicate that Mr Harris is the sole shareholder in and the sole director of the plaintiff);
(e)in spite of resisting the inference at first instance that the plaintiff was a trustee company, the plaintiff now asserts that it has a right of indemnity from trust assets, yet fails to provide any evidence of what those assets are, other than as set out in the balance sheet, which discloses settlement funds of $20 and trustee company capital of $2;
(f)the plaintiff asserts in correspondence that, as at 8 September 2006, it had a net income of $39,984.40, yet no indication is given as to the period to which that income relates.
Although Mr Della‑Marta says in his statement dated 11 October 2006 that the balance sheet is based on historical cost and does not take into account changing values, he does say that current valuations of the non‑current assets appear in the balance sheet "where stated." The only item in the balance sheet which seems to fall into that category is:
"Shares in U/L (unlisted) companies at valuation $190,000."
However, neither Mr Della‑Marta nor Mr Harris says who has valued the shares or on what basis they have been valued.
It would certainly seem to be the case that, with that exception, the figures given for the non‑current assets are based on historical cost and not on current valuations. That makes it impossible for me to ascertain their true worth for the purpose of deciding whether the plaintiff's net assets are sufficient to meet any costs order which might ultimately be made in favour of the defendant.
It is the case that, as Mr Della-Marta says in his statement, the balance sheet has not been audited or reviewed. It is for that reason that he gives no assurances about it and in fact says, "No person should rely on it without having an audit or review conducted."
The current assets of the plaintiff, as reflected in the balance sheet, total $16,701. That would clearly be insufficient to meet a costs order exceeding $56,000. However, in written submissions, the plaintiff takes issue with the quantum of the defendant's draft bill of costs and its estimate that the trial could take seven days. However, the action involves issues of breach of contract and misleading or deceptive conduct relating to the financial affairs of an active building company, and the culmination of the breakdown in the relationship between the company's two principals. The case also involves complicated legal questions as to repudiation and breach of contract, unconscionability, the setting aside of an agreement and assessment of damages. In my opinion, the trial could easily take seven days, if not longer, and $56,000 is not an excessive estimate of the costs on one side.
I also agree with the defendant that the non‑current assets in the balance sheet are not sufficiently explained to enable me to assess whether they could be realised to meet a costs order. The loans totalling $226,909 are said to have been made to inter alia Lomwest, Nina Harris, RHM and Efftech. Without information about the ability of Ms Harris and the other entities to repay the loans and the terms on which the loans were made, I cannot make any realistic assessment of them.
The annexures to Mr Harris's affidavit do not give a clear indication of the equity structure of the plaintiff as at 8 September 2006. However, the balance sheet does tend to suggest that the shareholders in the plaintiff were, at that time, Mr Harris and Nina Harris. That is different from the company extract annexed to Mr Kusal's affidavit ("HK3"), which indicates that, as at 26 November 2004, the only shareholder in the plaintiff was Mr Harris. The plaintiff says that is the position now. That makes the references in the balance sheet to Ms Harris's equity difficult to understand.
The balance sheet suggests that the plaintiff is the trustee for a trust. I note in their letter to the defendant's solicitors dated 20 September 2006, (annexure "RCH2" to Mr Harris's affidavit), the plaintiff's solicitors said that the plaintiff had a right of indemnity out of trust assets. However, they did not name the trust, give any indication of the extent of the trust assets or produce any financial statements of the trust. Mr Harris does not annexe to his affidavit a trust deed establishing that the plaintiff has such a right. These things should be done if a trustee company is to establish that it has a right to be indemnified out of trust property and that that property would be adequate to meet a possible liability for the defendant's costs: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) 7 ATPR 40-584 at 46,731.
In all the circumstances, and particularly because of the statement of Mr Della‑Marta dated 11 October 2006, I am not prepared to rely on the balance sheet annexed to Mr Harris's affidavit as providing a true or accurate picture of the financial position of the plaintiff for the purposes of determining whether there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if the defendant is successful in this action.
That means that the only remaining evidence is that in the affidavits of Mr Wimbridge to the effect that the issued paid‑up share capital of the plaintiff is $2, and there is no land registered in the plaintiff's name in any State or Territory of Australia. That evidence is, as I say above, accepted as accurate by the plaintiff.
I consider that that evidence is sufficient for there to be reason to believe that the plaintiff will be unable to pay a costs order in an amount of approximately $56,000 if the defendant is successful. That decides the threshold jurisdictional issue, so I now turn to the question of discretion.

Discretion

Once the jurisdictional question has been answered in the affirmative, the discretion whether or not to order security is unlimited and unrestricted: Buckley v BennellDesign & Construction Pty Ltd (1974) 1 ACLR 301 at 305 per Street CJ; FFE Minerals (supra) at page 248 per Pidgeon and Owen JJ.

Although the list of factors relevant to the exercise of the discretion is not closed, some of the factors are:
(a)whether the plaintiff's claim is bona fide and has reasonable prospects of success;
(b)whether the defendant has contributed to the plaintiff's likely inability to pay the costs;
(c)whether an order for security for costs may have the effect of stifling the action;
(d)whether it appears that the defendant is attempting to stifle a legitimate claim;
(e)whether there are others behind the corporate plaintiff who might reasonably be expected to contribute to the satisfaction of an order for security.
Engel Pty Ltd (in liq) v Leeds, unreported; FCt SCt of WA; Library No 940403, 20 July 1994 at 4 and 5; Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA; White J, Library No 980297; 2 June 1998; Nelson Capital Pty Ltd v Short (supra), at [24].
It is also an accepted principle in the ordering of security for costs that the application should be made promptly: Buckley v Bennell (supra) at 308 per Street CJ. The plaintiff suggests that the defendant has delayed in bringing this application. While it is true that this action was commenced on 30 November 2004 and the defendant did not file its application for security until 16 August 2005, Mr Harris was also a plaintiff in the action until 20 June 2005. The inevitable overlapping between his claim and the plaintiff's claim would have made it very difficult for the defendant to obtain an order for security prior to that time. Therefore, I consider that there was no significant delay in the defendant bringing its application.
The plaintiff says that its claim is bona fide and is not a sham. I accept that, as does the defendant. The plaintiff also says that the defence is shadowy. I do not accept that. Although the defence and, for that matter, the counterclaim, will be based largely on oral evidence, there is no basis upon which to conclude that the defence is not bona fide and does not have some prospects of success.
The plaintiff says in its submissions that the defendant is the party responsible for it not having $110,000 in its bank account. However, that is not the same as saying that it is the conduct of the defendant which has contributed to the plaintiff's likely inability to pay costs. The plaintiff says that it is in a position to meet any costs order made against it in the proceedings: par 5.3 of Mr Harris's affidavit sworn on 14 October 2006. Therefore, whether or not the defendant is responsible for the plaintiff having $110,000 less than it would otherwise have is not relevant to the determination of the application.
Nor do I believe that there is any evidence that the defendant by this application is attempting to stifle a legitimate claim or that an order for security would have the effect of stifling the plaintiff's claim.
In my view, for those reasons, an order for security should be made and I am prepared to exercise my discretion to do so. However, I do not believe that it should be a complete indemnity against the defendant's anticipated costs. I consider that the total security to be provided should be $45,000. The plaintiff submitted that the security should be provided in stages, which I accept. I consider that $25,000 of the security should be provided within 14 days, with the remaining $20,000 to be paid when the action has been listed for trial and trial dates have been obtained.
There should also be liberty to any party to apply to vary the amount of the security if circumstances change in a material respect. Accordingly, I would be prepared to allow the appeal, set aside the decision of the Deputy Registrar and make orders in those terms.