Canterbury Heating and Cooling Pty Limited (In Liquidation) v Denham Constructions Pty Limited
[2010] NSWDC 5
•5 February 2010
CITATION: Canterbury Heating and Cooling Pty Limited (In Liquidation) v Denham Constructions Pty Limited [2010] NSWDC 5 HEARING DATE(S): 29 January 2010
JUDGMENT DATE:
5 February 2010JURISDICTION: Civil JUDGMENT OF: Rolfe DCJ DECISION: See paragraph 38 of Judgment CATCHWORDS: Plaintiff Company in Liquidation - Application by Defendant for order for Security for Costs - Exercise of discretion where granting of order will stultify the prosecution of the Plaintiff's claim - Factors to take into account - Order made in circumstances where Liquidators and legal advisers would be the only persons likely to benefit from the successful prosecution of the Plaintiff's claim LEGISLATION CITED: Corporations Act 2001
Uniform Civil Procedure RulesCASES CITED: Yandil Holdings Pty Limited v The Insurance Co of North America & Ors (1985) 3 ACLC 542
Bell Wholesale Pty Limited v Gates Export Corp and Ors (No. 2) (1984) 8 ACLR 588
Rosenfield Nominees Pty Ltd & Anor v Bain & Co (1988) 14 ACLR 467
J & M Enterprises Pty Ltd v Shell Co Limited (1983) 70 FLR 261
Merrag Pty Limited v Khoury (2008) NSW SC 1286
Dae Boong International Co Pty Limited v Gray (2009) NSWCA 11
Kavcor Pty Ltd (in liq) and Anor v Kavanagh (2005) NSWSC 1163
Litmus Australia Pty Ltd (in liq) v Paul Brian Canty and Ors (2007) NSW SC 670
Duke Holdings Ltd (in liq) v Duke Group Ltd (in liq) (2009) SASC 245PARTIES: Canterbury Heating and Cooling Pty Limited (In Liquidation) (Plaintiff)
Denham Constructions Pty Limited (Defendant)FILE NUMBER(S): 1387/09 COUNSEL: J C Mobellan (Plaintiff)
M K Condon (Defendant)
JUDGMENT
1 The Plaintiff in these proceedings, Canterbury Heating and Cooling Pty Limited (In Liquidation), carried on the business of mechanical engineers. The Defendant, Denim Constructions Pty Ltd, carried on the business of a builder.
2 In February 2004 the Defendant had a head contract with Campbelltown Council to undertake a building project at Campbelltown Bicentennial Art Gallery.
3 In February 2004, the Plaintiff entered into a subcontract with the Defendant (the “contract”) to supply and install air conditioning works for the building project.
4 In February 2005 the Plaintiff terminated the contract with the Defendant on the alleged basis that the Defendant had failed to make payment to the Plaintiff of monies owing by way of a progress claim.
5 In these proceedings, the Plaintiff claims monies owing to it by the Defendant for unpaid work done in accordance with the contract. At this point, the precise amount claimed by the Plaintiff is unclear because it has been put in the alternative; the plaintiff claims either $117,000 or $162,000.
6 The Defendant says that the Plaintiff’s purported termination of the contract was unlawful and that the Defendant thereby accepted that act as a repudiation of the contract. As a complete defence to the Plaintiff’s claim, the Defendant claims damages by way of set off for costs it incurred in having the works which the Plaintiff had agreed to perform completed by other contractors. The Defendant claims additional costs for rectifying work which it says the Plaintiff performed defectively. As things stand, the amount claimed by the Defendant by way of set-off and in a proposed cross-claim are far in excess of the amount of the Plaintiff’s claim.
7 On 27 April 2005 Messrs Pascoe and Singleton were appointed liquidators of the Plaintiff by a resolution of creditors made pursuant to s 446A(1)(a) of the Corporations Act 2001 (the “Act”).
8 On 2 April 2009 these proceedings were commenced. On 11 September 2009, by an amended Notice Of Motion filed in Court, the Defendant seeks an order that the Plaintiff provide security for the Defendant’s costs pursuant to UCPR Pt 42 r21 and/or s1335 of the Act in the amount of $148,000 (round figures). The Defendant also seeks a stay until such time as the Plaintiff provides any security ordered by the Court.
9 As a condition of seeking and obtaining these orders, the Defendant has given the Court the undertaking dated 1 February 2010 which was faxed to my associate on that date. The undertaking was initialled by me and placed with the papers in the Court file.
10 Accepting that the Plaintiff would be unable to pay the Defendant’s costs if the Defendant succeeded in its defence, the Plaintiff’s counsel nevertheless submitted that the Court ought exercise its unfettered discretion in favour of the Plaintiff and dismiss the Defendant’s application. The Plaintiff’s primary submission was that, as any order for security for costs could not be met by the Defendant, it would have the consequence of stultifying the Plaintiff’s claim. For all practical purposes, given the Defendant’s undertaking referred to above, the proceedings would thereby come to an end.
11 As was stated by Clarke, J. in Yandil Holdings Pty Limited v The Insurance Co of North America & Ors (1985) 3 ACLC 542 at 545, simply because an order for security might frustrate a plaintiff’s rights to litigate its claim because of its financial condition, this does not automatically lead to the refusal of an order but it is a powerful factor in favour of the court exercising its discretion in that way.
12 It is also often important to take into account whether or not those who stand to benefit from the Plaintiff’s success in its liquidation, such as shareholders or creditors, are without means and thereby unable to stand behind the company: Bell Wholesale Pty Limited v Gates Export Corp and Ors (No. 2)(1984) 8 ACLR 588; Rosenfield Nominees Pty Ltd & Anor v Bain & Co (1988) 14 ACLR 467.
13 The evidence of Mr Pascoe was that the directors and shareholders were unwilling or unable to stand behind the plaintiff. Clearly, there would be no benefit for the directors in funding the litigation.
14 In the exercise of the Court’s discretion, the prospects of success that a Plaintiff has in the proceedings are important as well. If the Plaintiff has a strong and apparently meritorious case the court ought be reluctant to make an order which would have the effect of shutting the Plaintiff out: J & M Enterprises Pty Ltd v Shell Co Limited (1983) 70 FLR 261 at 264, cited with approval in Merrag Pty Limited v Khoury (2008) NSW SC 1286.
15 Counsel for the Plaintiff submitted that its claim was clearly meritorious and furthermore it would be unfair and unjust to grant the orders sought in circumstances where the Defendant had recovered from Campbelltown Council under its head contract all amounts which the Plaintiff had included in its progress payments schedule served on the Defendant with the exception of an amount of $8,000.
16 As things stand, however, whilst it cannot be said that the Plaintiff’s claim, on the face of it, will not succeed or is hopeless, there is no evidence that the Plaintiff’s claim is any more meritorious than that of the Defendant’s claim by way of set-off.
17 First of all, there is no direct evidence that the Plaintiff served a payment claim on the Defendant in accordance with the provisions of the contract. As I understood the argument, in order to make good its claim, the Plaintiff will be asking the trial judge to infer from other facts that this term of the contract was complied with. For example, the plaintiff will be relying on the fact that work to date claimed by the Plaintiff is shown as $234,000 in the fax dated 16 December 2004 (exhibit 4, Tab 1) from the Defendant to the architect employed on the project works. A previous document, in November 2004, recorded a claim to date of approximately $186,000. Therefore, the difference represents the actual progress claim itself made by the Plaintiff on the Defendant in December 2004. Therefore, so the argument goes, it must have been served.
18 On the other hand, as far as the Defendant is concerned, there is evidence that the Plaintiff did not complete the works it was required to perform by 30 November 2004 and was still working on them on 9 February 2005 when it asserted an entitlement to terminate the contract with the Defendant (Exhibit A tab 3). Further, there is evidence to demonstrate that the Defendant did not profit at all from including amounts in its own claim on Campbelltown Council (which included amounts claimed by the Plaintiff) because it had to employ another contractor, James + Scott Air Pty Limited, to complete work which had not been done by the Plaintiff under its contract with the Defendant. The Defendant says the following costs were incurred:
(a) James + Scott Air Pty Limited: $147,388.30
(b) Cost of sheet metal ductwork flashings etc: $51,096
(c) Ductwork – Polyarie
(d) Ductwork – Sundries & Flex – Bonney Forge EPG $2,626.10
Total $281,650.40(e) Installation of ductwork $80,540
19 It will be seen that these items alone are well in excess of the Plaintiff’s claim. In this respect, the Defendant acknowledges that, so far as any cross-claim is concerned, it will need leave to proceed and probably leave to appeal out of time in respect of the liquidators’ rejection of its proof of debt.
20 In addition, the Defendant claims the cost of rectification work which it says resulted from defective work done by the Plaintiff. The costs claimed are $19,700. There is an additional claim of $20,000 for time spent by the Defendant’s employees in attending to these matters and a claim for liquidated damages of $50,000.
21 This is a building case. Cases of this sort are always a challenge in terms of case management. The costs are often prohibitive. To this end, the uncontested independent expert evidence of the Solicitor, Mr Ramsey-Stuart, is that the defendant client will incur solicitor-client costs of between $112,000 - $145,000 in resisting the plaintiff’s claim up to the date judgment is delivered. The solicitor and client costs of prosecuting a cross-claim would be $56,000 - $109,000. On assessment, the Defendant’s costs taxed on the ordinary basis would be reduced by 15% to 20%. Thus, the ordinary costs of the Defendant in resisting the Plaintiff’s claim, excluding costs of the cross-claim, would likely be in the range of $90,000 - $115,000.
22 From my own experience of cases of this sort it seems to me that the estimates of Mr Ramsey-Stuart are conservative. In addition, there is no reason why I should not conclude, given the evidence before the court, that the Plaintiff will incur costs in around about the same total amount as the Defendant.
23 In the circumstances of this particular case, the dictum of Hodgson JA in Dae Boong International Co Pty Limited v Gray (2009) NSWCA 11 at para 27 is apposite:
“Ultimately it seems to me the question to be determined by the court is whether it is fair that the person being sued by the company should be in the position of having to incur substantial costs, in this case perhaps tens of thousands of dollars of costs, and being at risk of liability for the company’s costs, and yet have no real chance of recovering costs even if the action is unsuccessful, when there are persons who would benefit from the proceedings, who face no risk of liability for costs themselves and are either unwilling or unable to provide security.”
24 Although the evidence establishes that there are unsecured creditors in the liquidation of the Plaintiff owed approximately $2.5 million, in the event that the Plaintiff’s claim proceeds and the Plaintiff is successful, the parties were in agreement that those who will benefit in accordance with the priorities established under the Act will be, first, the liquidator and secondly, former employees of the plaintiff who are owed money for wages, leave entitlements and superannuation.
25 Liquidator’s fees to date are $108,000 of which an amount of $73,000 remains outstanding (all round figures). Further, it can be expected that, if the matter proceeds, the liquidator will have to supervise and give instructions for the conduct of the litigation including informing creditors as to what is happening and so on. There is no reason to assume that the liquidator will not incur substantial fees in this respect and so I would allow a further $40,000 in relation to this item.
26 As at the date of the liquidation, employees were owed $211,000 (exhibit 3 p 14). Of the amount owing to employees, the Australian Government paid to the liquidators the amount of $79,000 pursuant to s 560 of the Act as a proportion of outstanding employee entitlements (exhibit 3 p 15). It was accepted that, under its General Employee Entitlements and Redundancy Scheme (“GEERS”), the Australian Government was entitled to the same right of priority payment as the employees if there was to be a distribution of company assets.
27 Given that the Australian Government through the GEERS Scheme has advanced $79,000 to the Plaintiff and stands in the shoes of former employees in this regard, it might be thought, at first glance, that the liquidators would have directly approached the Australian Government to ascertain whether it was prepared to fund the proceedings against the Plaintiff. There is no evidence of this step having been taken.
28 The liquidators sent a circular to creditors (presumably including the Australian Government) about the matter. But it was only of a general nature. Creditors were informed that proceedings had been commenced against a debtor of the Plaintiff “for a substantial sum”. Creditors were then asked as follows:
“In respect of the recently commenced proceedings I request creditors advise me whether or not they are prepared to provide funding in respect of this action. Such funding is to be limited to any application for security for costs or adverse costs order. Creditors are advised that an application has been made by the Defendant for Security of Costs.”
Creditors were asked to inform the liquidators whether they were prepared to provide funding or not to provide funding. In this respect, there was no positive response. There is evidence of negative response from a number of individual creditors and the Court infers that individual employees would not want to fund a dispute of this sort when they have already lost their entitlements.
29 The circular letter provided by the liquidators to creditors is a hardly convincing document in the sense that it does not provide any basis upon which a considered decision could be made. I have in mind, in particular, the Australian Government.
30 In order to take all of the above matters into account, it is also necessary to put the matter in its financial perspective in the context of an application for security for costs.
31 As things stand, I will assume the maximum amount of the Plaintiff’s recovery will be $162,000. I have not included any amount for interest given that the Plaintiff’s alternative claim is for the lower amount of $117,000.
32 Next, it is necessary to deduct liquidator’s fees to arrive at the net pool of assets available for distribution to the other priority creditors.
33 The Court also needs to deduct the element of solicitor-client costs which the Plaintiff would incur and would be unlikely to recover, assuming the usual order for costs is made in the Plaintiff’s favour if it succeeds. (It is not appropriate to speculate on the success or otherwise of an offer of compromise or Calderbank offer). Based on Mr Ramsey-Stuart’s estimates that I have already referred to, the Plaintiff could expect to incur between $17,000 - $30,000 of solicitor-client costs. As I consider Mr Ramsey-Stuart estimates conservative, I propose to work off the figure of $30,000.
34 Approaching the matter in this way, the amount available for distribution to the Australian Government and employees would only be $19,000 calculated thus:
(a) Successful claim $162,000
(b) Less Liquidator’s fees $113,000
Net $19,000Less Solicitor-client costs $30,000 $143,000
35 Accordingly, the only persons who will really benefit from the litigation if it proceeds will be the liquidators and their legal advisers.
36 There is no evidence of any steps being taken by the liquidators or their legal advisers to obtain litigation funding. In modern courts, this is a relevant consideration: Kavcor Pty Ltd (in liq) and Anor v Kavanagh (2005) NSWSC 1163; Litmus Australia Pty Ltd (in liq) v Paul Brian Canty and Ors [2007] NSW SC 670; Duke Holdings Ltd (in liq) v Duke Group Ltd (in liq) (2009) SASC 245.
37 On the other hand, the Court’s analysis demonstrates that if it dismisses the Defendant’s application, the Defendant will be put in a position of incurring very substantial costs in defending the Plaintiff’s claim with no prospects of recovering costs if it succeeds. At the same time, there will be virtually no funds available for distribution to the former employees of the Plaintiff, assuming it succeeds in its claim. In my opinion, it would be most unjust in such circumstances to dismiss the application for security. This litigation should not be allowed to proceed merely for the benefit of the liquidators and their legal advisers.
38 Accordingly, the Court’s orders are as follows:
1. Order the Plaintiff to provide security for costs of the Defendant pursuant to Part 42, Rule 21 of the Uniform Civil Procedure Rules and section 1335 of the Corporations Act 2001 in the sum of $115,000 on or before 3 March 2009.
3. Subject to paragraph 4, the Court notes the undertaking of the defendant to the Court by its solicitor, that (subject to any further order of the Court) it shall not:2. Subject to Orders 5, 6 & 7, order that the proceedings be stayed until such time as the Plaintiff complies with Order 1.
(a) Lodge any proof of debt in the liquidation of the Plaintiff arising out of the subject matter of proceeding number 1387/09; or
For so long as:(b) Prosecute any appeal against the rejection by the Plaintiff’s liquidators of its proof of debt lodged already in the liquidation of the Plaintiff,
(ii) If these proceedings are dismissed because of the Plaintiff’s failure to provide security – the plaintiff does not commence fresh proceedings against the Defendant or issue a statutory demand against the Defendant.(i) These proceedings are stayed; and
4. The Court notes that the undertaking given in paragraph 3 does not bar the defendant from lodging a proof of debt for the costs arising out of these proceedings.
5. Direct that the exhibits be returned.
7. Stood over for Directions on 5 March 2010 at 9.30am.6. Transfer the proceedings to the Commercial List.
39 Costs of the Motion on the ordinary basis should follow the event but I will entertain submissions if the parties wish to be heard.
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