Artmade Architectural v JOSEPH

[2015] FCCA 763

FEDERAL CIRCUIT COURT OF AUSTRALIA

ARTMADE ARCHITECTURAL v JOSEPH & ANOR [2015] FCCA 763

Catchwords:
COSTS – Application for security for costs – whether there is reason to believe the applicant will be unable to pay the costs of the respondents if the respondents are successful in their defence – application dismissed.

Legislation:

Corporations Act 2001 (Cth), s.1335

Federal Circuit Court of Australia Act 1999 (Cth), s.80

Federal Circuit Court Rules 2001 (Cth), r.21.01(1)

Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93
Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union (1993) 12 ACSR 1

Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245

Applicant: ARTMADE ARCHITECTURAL ABN 42 101 567 015

First Respondent: EHAB JOSEPH

Second Respondent: RANDA SELIM

File Number: SYG 2836 of 2014

Judgment of: Judge Manousaridis

Hearing date: 24 March 2015

Date of Last Submission: 24 March 2015

Delivered at: Sydney

Delivered on: 1 April 2015

REPRESENTATION

Counsel for the Applicant: Mr S Milanovic

Solicitors for the Applicant: Cadmus Lawyers

Counsel for the Respondents: Mr B Skinner

Solicitor for the Respondents: Anthony Ziade, Solicitor & Notary Public

ORDERS

1. The respondents’ application for an order that the applicant provide security for costs is dismissed.

2. The respondents’ pay the applicant’s costs of the application.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT SYDNEY

SYG 2836 of 2014

ARTMADE ARCHITECTURAL ABN 42 101 567 015

Applicant

And

EHAB JOSEPH

First Respondent

RANDA SELIM

Second Respondent

REASONS FOR JUDGMENT

Introduction

1. Before the Court is an application by the respondents for an order that the applicant, a corporation, provide security for the respondents’ costs.

2. The Court has two sources of power for the making of an order for security for costs. One is the power conferred by s.80 of the Federal Circuit Court of Australia Act 1999 (Cth) and r.21.01(1) of the Federal Circuit Court Rules 2001 (Cth) which provides that, on application by a respondent, the Court may order the applicant to give security that the Court considers appropriate for the respondent’s costs of the proceedings.

3. A second source of power, being the source on which the respondents rely, is s.1335 of the Corporations Act 2001 (Cth) which 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 the security is given.

Principles

1. The principles the Court should apply in determining the application are not in dispute. They have been helpfully summarised by Beazley JA (as her Honour then was) in Wollongong City Council v Legal Business Centre Pty Limited as follows:[1]

   a)The party seeking an order for security for costs (the respondent) bears the onus of establishing there is reason to believe the other party to the litigation (corporation) will be unable to pay the costs of the litigation if unsuccessful.

   b)When considering whether there is reason to believe the corporation will be unable to pay the respondent’s costs, the court should adopt a practical common sense approach to the examination of the financial affairs of the corporation.

   c)Once the respondent has discharged the onus of establishing there is reason to believe the corporation will be unable to pay the costs of the litigation if unsuccessful, the onus shifts to the corporation to establish a reason why security should not be granted.

   d)Factors that are relevant to whether the court should grant security include the quantum of the risk that a costs order will not be satisfied, whether the making of the order will stifle a reasonably arguable claim, the corporation’s prospects of success and whether there is a person or persons of means who stand to benefit if the corporation succeeds in the litigation.

   e)Whether there are aspects of public interest which weigh in the balance against such an order.

   f)Whether there are any particular discretionary matters peculiar to the circumstances of the case.

   [1] [2012] NSWCA 245, [28] – [34]

2. What is involved in showing there is reason to believe a corporation will be unable to pay the costs it may be ordered to pay has been discussed in a number of cases. In Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union Lee J said:[2]

   The use of the word “credible'” suggests a requirement that evidence to be relied upon has some characteristic of cogency. Qualification of the word “testimony” by the word “credible” suggests that an evidentiary burden is undertaken by the party seeking the order. It amounts to an obligation on an applicant for an order to show that the material before the court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings. To what extent the satisfaction of that standard may fall short of the demonstration of a likelihood that the corporation will be insolvent at the relevant time is unnecessary to decide. It is enough to say that speculation as to insolvency or financial difficulties likely to confront the corporation will be insufficient to ground the exercise of the discretion.

   [2] (1993) 12 ACSR 1 at page 5

3. In Livingspring Pty Ltd v Kliger Partners the Court of Appeal of Victoria said:[3]

   The phrase “reason to believe” is the touchstone of jurisdiction. It requires a rational basis for the belief — and no more. The wording adopted may be contrasted with other familiar formulations such as “if the court is satisfied that…” or “if in the view of the court it is likely that…”. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a “real risk”.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation’s financial affairs.

   [3] [2008] VSCA 93 at [15]

Reason to believe applicant will be unable to pay costs?

1. The evidence the respondents have adduced to show there is reason to believe the applicant will be unable to pay their costs consists largely of correspondence between the respondents’ solicitors and the solicitors for the applicant. Some of the correspondence relates to the issuing of a notice calling for the production by the applicant of income tax returns, financial statements, and bank statements. The correspondence also includes and refers to the applicant’s having an issued capital of $200, and to a charge the applicant granted to secure a chattel mortgage over a motor vehicle.

2. The applicant, on the other hand, has adduced evidence which I find establishes the following matters. The applicant has been providing architectural services for over twelve years. It currently employees six persons, five of whom are architects, and one practice manager. For the financial years ended 30 June 2013 and 2014, the applicant earned gross income of $820,183.21 and $513,552.49 respectively, and profits before tax of $132,188.93 and $58,365.49 respectively. As at 30 June 2013 and 2014 the applicant’s total equity was $199,660.87 and $240,426. From 7 August 2014 to 7 March 2015 there had been deposited into the applicant’s bank account amounts totalling $520,068.58. During that seven-month period, the lowest balance in the applicant’s bank account was a credit $56,547.79 and for five of the seven months the bank balance exceeded $100,000. The amount required to discharge the charge referred to in the correspondence between the parties’ solicitors is $20,734.29.

3. Counsel for the respondents relied on two matters for submitting there was reason to believe the applicant would be unable to pay the costs of the respondents should the applicant not succeed. The first is the nominal paid up capital of the applicant. The second was the absence from the balance sheet of any substantial assets and, in particular, real estate.

4. That a company does not have in its balance sheet any substantial assets does not by itself afford a rational ground for believing the company may be unable to satisfy a costs order. The trading history and the outcome of the trading history of the company must be assessed, and will often be a better indicator of a company’s ability to meet a costs order. In that regard, the evidence satisfies me that the applicant’s trading history and profitability are such as would prevent me from being satisfied there is reason to believe the applicant may be unable to pay an adverse costs, which the respondents estimate will be in the order of $45,000, should the applicant fail in its claims.

5. As I have already found, the applicant has been trading for twelve years; at least during the previous two financial years it has traded profitably; and, for the seven month period before 7 March 2015 the applicant has maintained what I would regard as a healthy cash balance with its bank. These matters alone would prevent me from being satisfied there is reason to believe the applicant may be unable to pay costs the applicant may be required to pay to the respondents.

6. Further, even though the applicant does not own any real estate, I do not accept the applicant does not have any substantial assets. The single largest asset of the applicant, as disclosed in its balance sheet for 30 June 2014, is loans to shareholders totalling $247,437.12. If, for whatever reason, the applicant will be unable to pay costs out of its current profits, the applicant’s loans to its shareholders is an asset the applicant would readily be able to call on to make up any deficiency.

Conclusion and disposition

1. Because I am not satisfied there is reason to believe the applicant will be unable to pay the costs of the respondent should the applicant not succeed, it is unnecessary for me to consider any of the discretionary factors that the parties have advanced in favour of and against my making an order that the applicant provide security for costs. It also follows that I should dismiss the application for security for costs.

2. I propose, therefore, to dismiss the respondents’ application for security for costs, and to order that the respondents pay the applicant’s costs.

I certify that the preceding fourteen (14) paragraphs are a true copy of the reasons for judgment of Judge Manousaridis

Associate: 

Date: 1 April 2015