Australian Lens Laboratories Pty Ltd (Receiver and Manager Appointed) v National Australia Bank Ltd
[2007] WASC 73
•29 MARCH 2007
AUSTRALIAN LENS LABORATORIES PTY LTD (RECEIVER AND MANAGER APPOINTED) -v- NATIONAL AUSTRALIA BANK LTD [2007] WASC 73
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2007] WASC 73 | |
| Case No: | CIV:1596/2006 | 16 FEBRUARY 2007 | |
| Coram: | MASTER NEWNES | 29/03/07 | |
| 15 | Judgment Part: | 1 of 1 | |
| Result: | Security for costs granted | ||
| B | |||
| PDF Version |
| Parties: | AUSTRALIAN LENS LABORATORIES PTY LTD (RECEIVER AND MANAGER APPOINTED) (ACN 094 967 629) NATIONAL AUSTRALIA BANK LTD (ACN 004 044 937) |
Catchwords: | Practice and procedure Application for security for costs Whether action be stifled Whether commercially impracticable for plaintiff to obtain security from those who stand to benefit if action succeeds Whether plaintiff's impecuniosity attributable to defendant Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 1335 |
Case References: | Ariss v Express Interiors Pty Ltd (In Liq) (1995) 13 ACLC 1,585 Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1 Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998 BPM Pty Ltd v HPM Pty Ltd, unreported; FCt SCt of WA; Library No 960206; 17 April 1996 Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 Christianos v Westpac Banking Corporation (1991) 5 WAR 336 Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325 Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1 Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405 McLaughlin v Daily Telegraph Newspaper Co Ltd (1904) 1 CLR 143 Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
NATIONAL AUSTRALIA BANK LTD (ACN 004 044 937)
Defendant
Catchwords:
Practice and procedure - Application for security for costs - Whether action be stifled - Whether commercially impracticable for plaintiff to obtain security from those who stand to benefit if action succeeds - Whether plaintiff's impecuniosity attributable to defendant - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 1335
(Page 2)
Result:
Security for costs granted
Category: B
Representation:
Counsel:
Plaintiff : Mr K G Robson
Defendant : Mr K J Mony de Kerloy
Solicitors:
Plaintiff : Tan & Tan
Defendant : Freehills
Case(s) referred to in judgment(s):
Ariss v Express Interiors Pty Ltd (In Liq) (1995) 13 ACLC 1,585
Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1
Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998
BPM Pty Ltd v HPM Pty Ltd, unreported; FCt SCt of WA; Library No 960206; 17 April 1996
Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497
Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301
Christianos v Westpac Banking Corporation (1991) 5 WAR 336
Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325
Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994
Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1
Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405
McLaughlin v Daily Telegraph Newspaper Co Ltd (1904) 1 CLR 143
Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52
(Page 3)
1 MASTER NEWNES: This is an application by the defendant for an order that the plaintiff provide security for costs. The defendant seeks an order that the plaintiff provide security in the sum of $50,000 within 14 days and a further sum of $50,000 within 14 days of the date the action is entered for trial. The defendant relied principally upon s 1335 of the Corporations Act 2001 (Cth) (the "Act").
2 After the defendant's application was filed, and following the initial hearing of the application, the plaintiff filed and served a re-amended statement of claim. The amendments to the statement of claim are material and it is in the light of the claim as it is now formulated that this application falls to be considered.
The action
3 In the action, the plaintiff pleads that, between 2 November 2000 and 5 May 2002, it carried on business as a manufacturer of optical lenses. During that period the defendant was the plaintiff's banker and the plaintiff operated a cheque account at the defendant.
4 It is pleaded that, on or about 2 November 2000, the directors of the plaintiff had a meeting with representatives of the defendant at which the plaintiff's directors executed a document by which the plaintiff notified the defendant that any two of certain named directors were authorised to sign cheques drawn on the plaintiff's account. It is alleged that the contract between the plaintiff and the defendant therefore incorporated a mandate that the defendant could not pay any cheques drawn on the plaintiff's account unless two of those directors had authorised the payment.
5 It is pleaded, in the alternative, that the defendant owed to the plaintiff a duty of care to ensure that any cheque drawn on the plaintiff's account would not be paid unless two of the authorised signatories had authorised the payment.
6 The plaintiff alleges that, in breach of the mandate or the duty of care, the defendant paid various cheques drawn on the plaintiff's account although they were signed by only one of the directors. It is alleged that cheques totalling $1,162,388.74 were signed by that director alone. Of that sum, cheques in the sum of $643,676.42 were unauthorised in the sense that they were payments made, not for the benefit of the plaintiff, but to creditors of that director or to creditors of a company controlled by that director.
(Page 4)
7 The plaintiff pleads that, as a result of the alleged breaches by the defendant, the plaintiff has suffered loss and damage. It claims first, the sum of $643,676.42; secondly, the amount that was paid to the receiver and manager of the plaintiff from the assets of the plaintiff; and thirdly, for the loss of its business based on its net profit after tax being in an amount of up to $435,000 per annum between the 2001 and 2006 financial years.
8 The factual basis of the plaintiff's claim is amplified to some extent in the affidavit of Mr Sami Akasheh, filed in opposition to the application for security for costs. Mr Akasheh is currently the sole director of the plaintiff and the majority shareholder. Mr Akasheh currently owns 99,990 shares in the plaintiff, his son owns 10 shares and a Mr Barbeau, the director who is alleged to have signed the cheques in question, owns 50 shares.
9 Mr Akasheh says the plaintiff was incorporated on 2 November 2000 with a working capital of $500,000. That was contributed by Mr Akasheh in the sum of $100,000, a Mr Kalis in the sum of $100,000, a Mrs Sebastian in the sum of $50,000 and $250,000 by Mr Barbeau (in fact it seems a company controlled by him) by way of equipment for the business. There were at that stage four shareholders, three of whom were also directors, and there was an independent director. By 14 December 2000, however, two of the directors had resigned, leaving Mr Akasheh and Mr Barbeau as the directors.
10 Mr Akasheh says he resigned as a director on 27 July 2001. I note in passing that there is a letter in evidence from Mr Akasheh to Mr Barbeau of 9 July 2001 in which Mr Akasheh alleges that Mr Barbeau is taking "major decisions" without his knowledge and approval and demands the return of all money paid by the plaintiff to the company associated with Mr Barbeau. Payments to that company are a substantial component of the current claim against the defendant.
11 At that time Mr Akasheh agreed to sell his shareholding in the plaintiff to Mr Barbeau, on the condition that Mr Barbeau obtained Mr Akasheh's release from guarantees to the defendant, indemnified Mr Akasheh for guarantees he had given as a director of the plaintiff, and paid Mr Akasheh the sum of $100,000 for the shares. Mr Akasheh says none of those things has happened.
12 According to Mr Akasheh, on 6 May 2002, Mr Barbeau, then the sole director of the plaintiff, appointed administrators to the plaintiff. On
(Page 5)
- 8 May 2002, the defendant appointed a receiver and manager to the plaintiff. The administrator appointed by Mr Barbeau resigned on 22 May 2002. The receiver and manager appointed by the defendant kept the plaintiff trading from 9 May until 15 May 2002, when the business was closed down. The receiver and manager decided to cease trading following difficulties he experienced in dealing with the business assets. In a letter dated 24 May 2002, the receiver and manager informed creditors that it was unlikely there would be any funds from which to pay debts outstanding at the time of the appointment of the administrator.
13 Mr Akasheh says he began investigating the plaintiff's affairs in 2004 and that his enquiries revealed the matters which are the subject of the allegations in the statement of claim. I should interpose that whether or not the payments referred to in the statement of claim were for the benefit of the plaintiff is a matter in issue in the action.
14 In May 2005, Mr Akasheh took proceedings to rectify the share register of the plaintiff to delete 249,950 shares of the 250,000 shares held by Mr Barbeau, on the basis that Mr Barbeau had not paid for them. That action was successful and, on 10 March 2006, Mr Akasheh removed Mr Barbeau as a director and reinstated himself. Mr Akasheh says he invited the other shareholders to rectify their shareholding records with ASIC, but they have not indicated a wish to do so or to be involved in these proceedings.
15 Mr Akasheh claims that the plaintiff's current impecuniosity was caused by the defendant's conduct in wrongfully paying cheques signed by only one director.
16 Mr Akasheh says that he is using his own funds for the purposes of this action to recoup money for two of the investors that he arranged to participate in the plaintiff, to stop litigation worth over $100,000 by the defendant and AGC against him under personal guarantees he gave as a director, to recoup losses that he personally incurred, and to recoup money for other investors and the plaintiff's creditors.
17 According to Mr Akasheh, he is personally impecunious as a result of the actions of the defendant, although beyond that he gives no details of his financial circumstances. I should also say that, given his alleged impecuniosity, how he is funding the plaintiff's action is not apparent. Mr Akasheh says that if an order is made for security, it will stultify the plaintiff's claim. He is prepared to give a personal undertaking as to the defendant's costs.
(Page 6)
18 The precise financial position of the plaintiff was never clearly established, but according to the last report of the receiver and manager, dated 14 June 2002 and lodged with ASIC under s 421 of the Act, the investigations by the receiver and manager had revealed a deficiency of assets to liabilities of $644,102. The amount is said to include unsecured creditors of approximately $570,000 and contingent liabilities of approximately $210,000.
19 In a letter dated 15 September 2006 to the defendant, the receiver and manager says that, to the best of his knowledge, the vast majority of the creditors' claims have not been satisfied and the plaintiff has little or no assets out of which the amounts could be satisfied. I should add that the receiver and manager retired in about November 2006. It appears the plaintiff is not currently trading and is insolvent.
The defendant's submissions
20 It was submitted on behalf of the defendant that the discretion to order security for costs under s 1335 of the Act had been opened by the admission of the plaintiff that it would not be in a position to meet the defendant's costs of the action if the plaintiff were unsuccessful at trial.
21 Counsel submitted that it was clear on the evidence that the action was being funded by Mr Akasheh, as the principal shareholder, and was brought for the benefit of Mr Akasheh and investors in, and creditors of, the plaintiff. As Mr Akasheh holds 99.9 per cent of the shares in the plaintiff, if the action is successful he will effectively be the sole beneficiary of any moneys recovered, apart from those paid to the investors and third party creditors of the plaintiff.
22 Counsel argued that there was no evidence from which it could be concluded that an order for security for costs would stifle the action. No attempt had been made on behalf of the plaintiff to procure funds from the creditors and investors for whose benefit the action is, at least in part, being brought. There was therefore no evidence that those who stood to benefit from the action (apart from Mr Akasheh) were not in a position to meet an order for security for costs.
23 Counsel also contended that there was no evidence which showed that the payment of the cheques complained of had caused the plaintiff's impecuniosity. Counsel submitted that the evidence upon which the plaintiff relied for that contention was inadmissible or should be given no weight. The plaintiff relied upon the opinion of an accountant, Mr Draper, of Combined Accounting Services (WA), that had the cheques
(Page 7)
- complained of not been paid, then, as of June 2001, the plaintiff, instead of showing a loss of $283,135.72, would have shown a profit of $289,316.10. That opinion, however, was based on unstated facts and assumptions.
24 On the merits of the plaintiff's case, counsel for the defendant pointed out that a large number of the cheques in issue had been drawn and paid at a time when Mr Akasheh was also a director of the plaintiff, and at a time when Mr Akasheh was demanding that funds paid by the plaintiff to the company associated with Mr Barbeau be repaid. Moreover, the plaintiff would have to prove that the cheques were not in fact paid for the benefit of the plaintiff: Christianos v Westpac Banking Corporation (1991) 5 WAR 336. On the material in evidence that was far from clear.
25 Counsel said that the defendant, among other things, did not accept that the payments were not authorised and were not for the benefit of the plaintiff. The payments to the company associated with Mr Barbeau were explicable as payments in respect of the business which that company had transferred to the plaintiff. Counsel said that the defendant would also plead, in the alternative, that the plaintiff was negligent, on the basis that another director, Mr Akasheh, was aware of cheques being drawn for the purposes now said not to be for the plaintiff's benefit and failed to take steps to prevent it.
The plaintiff's submissions
26 It was submitted on behalf of the plaintiff that it had a strong case, the terms of the mandate being clear and the fact that the cheques were signed by only one director also being clear. It was conceded, however, that the plaintiff would need to prove that the cheques were not in fact paid for the benefit of the plaintiff.
27 It was argued that the plaintiff had sufficiently demonstrated that the cause of its impecuniosity was the payment of the cheques in question. Counsel relied upon a letter from Mr Draper of Combined Accounting Services (WA) and the attached reconstructed accounts prepared by Mr Draper. In the letter, Mr Draper said that, based on the reconstructed accounts, had the cheques complained of not been paid, then, as of June 2001 the plaintiff, instead of showing a loss of $283,135.72, would have shown a profit of $289,316.10.
28 The plaintiff's counsel also submitted that there had been undue delay in the bringing of this application. A period of three months had
(Page 8)
- elapsed before it was brought. In any event, the application should not be determined until it was plain that the defendant would incur substantial expense in proving its defence. At this stage no defence has been filed by the defendant and there was no obvious defence to the claim, at least so far as the breach of mandate was concerned.
29 Counsel submitted that, in the present case, the undertaking proffered by Mr Akasheh in respect of his personal assets was sufficient. That was the case even though Mr Akasheh says that he is impecunious. The fact that Mr Akasheh is in business means that he would avoid bankruptcy if possible and the undertaking was therefore indirect security: Clyde Industries Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325.
30 Counsel conceded that there was no evidence that any enquiries had been made of the creditors or investors who would benefit from the action if the plaintiff were successful at trial, as to whether they were prepared to provide any amount by way of security for costs. But it was submitted that it was impracticable for the plaintiff to seek to obtain the amount necessary to provide security for costs from the creditors and investors. The number of creditors and the amounts involved in respect of each of them made that commercially impracticable. An order for security for costs would therefore stultify the action.
The relevant principles
31 It is necessary, in order to enliven the discretion to order security for costs, that it appears by credible testimony that there is reason to believe that the plaintiff will be unable to pay the defendant's costs if the defendant is successful at trial.
32 It is trite law that the discretion to order security for costs is unfettered and depends upon an examination of all of the circumstances of the case. The circumstances in which the discretion should be exercised cannot be stated exhaustively. In Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405, Cooper J said (at 415):
"[i]t is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed."
(Page 9)
33 It is, however, accepted that some of the relevant factors are:
(1) whether the plaintiff's claim is bona fide and has reasonable prospects of success;
(2) whether the defendant has contributed to the plaintiff's likely inability to pay costs;
(3) whether an order for security for costs may have the effect of stultifying the action;
(4) whether it appears the applicant is seeking to stifle a legitimate claim;
(5) whether there are others behind the corporate plaintiff who might reasonably be expected to contribute to the satisfaction of an order for security.
34 See Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 at 4 - 5 and Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998.
35 The fact that the plaintiff will be unable to pay the defendant's costs if the defendant is successful is a factor of great weight in the exercise of the discretion, but it is not necessarily decisive and regard must be had to all of the circumstances of the case.
36 In the exercise of its discretion the Court will be concerned to achieve a balance between ensuring the defendant is adequately and fairly protected, and avoiding injustice to an impecunious plaintiff company by unnecessarily shutting it out or prejudicing it in the conduct of the litigation: Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301 at 304; Tradestock Pty Ltd v TNT (Management) Pty Ltd (1977) 14 ALR 52 at 56.
37 If a plaintiff seeks to resist an order for security on the ground that the action will be stultified, then it must establish the necessary factual basis before the argument can be weighed in the exercise of the discretion.
38 Generally, a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless the plaintiff establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the
(Page 10)
- granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts: Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1.
39 Accordingly, unless a plaintiff establishes that those who stand behind it and who will benefit from the litigation if it is successful are also without means, no conclusion can properly be reached that the effect of an order for security will be to frustrate the plaintiff's claim: BPM Pty Ltd v HPM Pty Ltd, unreported; FCt SCt of WA; Library No 960206; 17 April 1996.
40 Different considerations may, however, arise where the plaintiff does not rely upon the want of means of those who stand to benefit from the litigation but upon "commercial impracticability", meaning the practical difficulty facing the plaintiff in obtaining any financial assistance from such means as may exist in those persons. Where it is commercially impracticable to obtain funds from those who stand to benefit from the litigation there is no reason why that should not be a relevant circumstance when the plaintiff seeks to demonstrate that any order for security cannot be met. The onus is on the plaintiff to establish that fact. See Ariss v Express Interiors Pty Ltd (In Liq) (1995) 13 ACLC 1,585 per Phillips JA at 1,592 - 1,593.
41 An application for security for costs must be made promptly: McLaughlin v Daily Telegraph Newspaper Co Ltd (1904) 1 CLR 143; Foss Export Agency Pty Ltd v Trotman (1949) 67 WN (NSW) 1. The further a plaintiff has proceeded in an action and the greater the costs the plaintiff has been allowed to incur without steps being taken to apply for an order for security for costs, the more difficult it will be for the defendant to persuade the Court that such an order is not, in the circumstances, unfair or oppressive: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 514; Buckley v Bennell Design & Construction Pty Ltd (supra) at 309.
Should security for costs be ordered?
42 It was not in issue on this application that the plaintiff would be unable to meet the defendant's costs if the plaintiff was unsuccessful at trial. The threshold test has therefore been met and the question is one of the exercise of the discretion.
43 On the material before me, I am not satisfied that the plaintiff has shown that an order for security for costs would stifle the action. Apart
(Page 11)
- from Mr Akasheh, a number of others stand to benefit if the action succeeds. In particular, there are third party creditors who are apparently owed a total sum in the order of $500,000 or more, and investors who have apparently also lost significant sums of money.
44 The only information about the third party creditors which is in evidence is contained in the minutes of the first meeting of creditors of the plaintiff of 13 May 2002. That shows total debts in the sum of $418,685.07 - somewhat less, I should mention, than the total figure of $517,000 which appears in the subsequent receiver and manager's report of 14 June 2002 under s 421 of the Act. The latter, however, contains no details of the creditors. The minutes record one creditor being owed the sum of $153,032.67, another being owed $99,121.73 and another being owed $89,363.21. There are a number of other creditors owed smaller amounts, ranging from $20,000 down to $254.
45 There was no evidence that the creditors had been approached to determine whether they would be prepared to contribute to secure the defendant's costs of the action. Indeed the plaintiff's counsel acknowledged that they had not been approached, submitting that it was commercially impracticable to endeavour to raise funds in that way. In my view, the lack of any evidence as to the creditors' unwillingness or inability to contribute cannot be overcome by the contention that it would be commercially impracticable to seek to procure funds in that manner, in the absence of evidence as to that commercial impracticability. There is no such evidence. While there may well be evident force in the argument that it would not be commercially practicable to attempt to seek funds from the parties who stand to benefit from the litigation in a case where, for instance, there were a large number of unrelated creditors, each of whom was owed a small amount, on the material before me this is not such a case.
46 There is, therefore, no basis for the contention that it would be commercially impracticable to seek funds from the creditors who stand to benefit if the action is successful.
47 It was also contended that the plaintiff's impecuniosity was caused by the defendant. On this issue the plaintiff bears an evidentiary onus: BPM Pty Ltd v HPM Pty Ltd (supra). In my view, it falls well short of discharging that onus.
(Page 12)
48 The evidence as to the plaintiff's financial position before the events complained of by the plaintiff is, in my view, quite inadequate to establish the position at that stage.
49 In the first place, the material considered by Mr Draper is not clearly identified and it is not apparent on what basis Mr Draper has reconstructed the plaintiff's 2001 accounts.
50 Mr Draper says he has "examined the information" supplied by Mr Akasheh regarding the plaintiff and has "reviewed the MYOB information for the [plaintiff] and the cheques provided by [the defendant] to date". Mr Draper does not, however, identify the information that he has been provided with.
51 Mr Draper says that, having gone through the cheques provided by Mr Akasheh, he has ascertained that, at least, cheques in an estimated amount of $431,588.39 were "wrongly authorised by [the defendant] or not company related" [emphasis added]. Mr Draper does not, however, say over what period that occurred or what amount is attributable to cheques that were both "wrongly authorised by" the defendant and "not company related". As counsel for the plaintiff acknowledged in the course of argument, the plaintiff's case is not based simply on the cheques having only one signature, but is necessarily based on the cheques both having only one signature and being for purposes unrelated to the plaintiff.
52 Mr Draper goes on to say that "having gone through the documents provided" he estimates that "further non company related cheques to the value of $118,176.13 [were] paid for the period July 2001 to September 2001." (In fact, Mr Draper says later that he has not been able to report on the accounting period July 2001 to June 2002 due to lack of information. Mr Draper says "[t]here were [sic] some information present in the MYOB accounting system you provided, which covered the period July 2001 to Sept [sic] 2002, but that information was not properly entered").
53 Mr Draper opines that "[b]ased on that information, non related [sic] company cheque payments have caused the [plaintiff] to experience cash flow problems which resulted eventually to placing [the plaintiff] under the receiver manager." Mr Draper does not, however, say whether those cheques had only one signature.
54 Secondly, it appears that Mr Draper has reconstructed the financial results of the plaintiff for the period 1 November 2000 to 30 June 2001, based on printouts of a profit and loss report for that period, and a balance
(Page 13)
- sheet described "as of June 2001", prepared by Mr Akasheh. There is no evidence that Mr Akasheh has any relevant qualifications which would enable him to prepare such financial statements nor is it apparent from what materials they were prepared. Why the profit and loss account was prepared for the period 1 November 2000 to 30 June 2001, rather than the full financial year is not apparent.
55 The accounts prepared by Mr Akasheh show that for the period 1 November 2000 to 30 June 2001 the plaintiff suffered a loss of $283,135.72. The reconstructed accounts prepared by Mr Draper show a profit for the same period of $289,316.10.
56 Mr Draper concludes that he is "able to ascertain that based on the information provided at hand [the accounts and the reconstructed accounts] are a fair representation of the financial position of the [plaintiff]."
57 The reconstructed accounts are therefore based on the accounts prepared by Mr Akasheh (who prepared them on the basis of information which has not been disclosed) and on the basis of information in the possession of Mr Draper which has not been identified. In addition, how Mr Draper has gone about reconstructing the accounts and the process of reasoning followed by him in doing so is not explained. In respect of the period covered by the reconstructed accounts, there is also nothing in his letter to indicate the total monetary amount of the cheques drawn for purposes unrelated to the plaintiff that he considered had been paid by the defendant in breach of duty, and therefore the amount he used in the process of reconstructing the accounts.
58 Moreover, Mr Draper's conclusion that "non related company cheque payments [sic]" caused the plaintiff to suffer cash flow problems and ultimately to end up under external management, is not necessarily the same as saying that such cheques paid by the defendant in breach of duty had that effect, particularly having regard to the distinction he earlier draws between cheques "wrongly authorised by [the defendant] or not company related."
59 In the circumstances, I do not consider that any weight can be given to the financial statements or to Mr Draper's reconstruction of the state of the plaintiff's financial position in 2001, so that no conclusion can properly be drawn that the plaintiff's current impecuniosity was a result of, or contributed to in a material degree by, the defendant's alleged breach of duty.
(Page 14)
60 Although the plaintiff's counsel submitted that the plaintiff had a strong case, I do not consider that at this stage I could properly reach that conclusion. In particular, whether or not the cheques in question were for the benefit of the plaintiff seems to me, on the very limited material in evidence, to be reasonably arguable. As is so often the case in these applications, I consider it is not possible to do more than conclude that the plaintiff's claim has reasonable prospects of success.
61 I do not consider that the delay by the defendant in bringing this application is a matter of great weight in the exercise of the discretion. The delay, in the context of this case, is not of great magnitude and there is no suggestion that, as a result of the delay, the plaintiff has incurred costs that it would not otherwise have incurred or has otherwise been prejudiced.
62 I do not consider that in the present case the undertaking as to the defendant's costs proffered by Mr Akasheh is sufficient. On his own admission, Mr Akasheh is impecunious. The undertaking has any value only to the extent that Mr Akasheh would wish to avoid bankruptcy in the event that a claim was made on such an undertaking. In fact, there is nothing to suggest that, however much he might wish to do so, it would be within Mr Akasheh's power to raise any significant sum to avoid that result in such circumstances. Moreover, the action, if successful, will benefit not only Mr Akasheh but the creditors of, and apparently other investors in, the plaintiff. As I have said, none of those who will benefit has been asked to make any provision to secure the defendant's costs and there is no evidence that they are unable or, if asked, that they would be unwilling, to do so.
63 Having regard to all of the circumstances, I consider that the defendant is entitled to an order for security for its costs.
64 On the question of the quantum of the security that should be provided, counsel for the plaintiff submitted that the amount sought was excessive. Counsel for the defendant, on the other hand, submitted that it was a reasonable amount having regard to, among other things, the number of cheques involved and the issues of proof that would be associated with each one, and the complex issues involved in the plaintiff's damages claim. The case also involved detailed facts going back some five years.
65 I do not consider that the sum of $50,000 up to entry for trial is excessive, having regard to the nature of the matter, but I would not fix
(Page 15)
- any sum beyond that point. Rather, I would give the defendant liberty to apply for a further amount when the matter is entered for trial. I would allow both parties liberty to apply to vary the amount up to entry for trial in the event that there is a material change in circumstances.
66 I will hear the parties on the form of the security that is to be provided.
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