Chan v Brooktide Holdings (as Trustee for the Hay Unit Trust)

[2003] WASC 33

JURISDICTION     :   SUPREME COURT OF WESTERN AUSTRALIA

IN CHAMBERS

CITATION:   CHAN & ANOR -v- BROOKTIDE HOLDINGS (as Trustee for the HAY UNIT TRUST) & ORS [2003] WASC 33

CORAM:   MASTER NEWNES

HEARD:   24 FEBRUARY 2003

DELIVERED          :   7 MARCH 2003

FILE NO/S:   CIV 1409 of 2002

BETWEEN:   MING CHAN

KEN CHAN (as Trustees for the M AND K FAMILY TRUST)
Plaintiffs

AND

BROOKTIDE HOLDINGS (as Trustee for the HAY UNIT TRUST)
First Defendant

JAMES ALBERT HALLIDAY
LORETTA CHARMAINE EVANGELISTI
Second Defendants

Catchwords:

Practice and procedure - Security for costs of counterclaim - Section 1335 of the Corporations Act 2001 - Turns on its own facts

Legislation:

Commercial Tenancy (Retail Shops) Agreements Act 1985, s 15

Corporations Act 2001, s 1335

Town Planning and Development Act 1928, s 20(1)(c)

Result:

Security ordered

Category:    B

Representation:

Counsel:

Plaintiffs:     Mr P Van Der Zanden

First Defendant             :     Mr B W Ashdown

Second Defendants       :     MR B W Ashdown

Solicitors:

Plaintiffs:     Minter Ellison

First Defendant             :     B W Ashdown

Second Defendants       :     B W Ashdown

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

Buckley v Bennell (1974) 1 ACLR 301.

John Arnold’s Surf Shop Pty Ltd (In Liq) v Heller Factors Pty Ltd and Allert [1979] 22 SASR 20.

Mapleson v Masini (1879) 5 QBD 144.

Ramsay Contracting Pty Ltd v Matthew Hall Mechanical and Electrical Engineers Pty Ltd [1993] SASC 4156.

Visco v Minter [1969] 2 All ER 714.

Case(s) also cited:

Blackbird Entertainment Pty Ltd & Anor v IO Research Pty Ltd, unreported; SCt of WA; Library No 980297; 2 June 1998

Chester & Fein Property Developments Pty Ltd v Candam Investments Pty Ltd & Anor (1985) ATPR 40-618

FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241

Idoport v National Australia Bank [2001] NSWSC 744

Jones v Dunkel (1959) 101 CLR 298

Lagarna Pty Ltd & Ors v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150

Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd & Ors (1985) 7 ATPR 40-584

Pearson v National Australia Bank (1977) 3 All ER 531

Prime Holdings Pty Ltd v Kanemaru (1992) 7 WAR 308

Stanley-Hill v Kool [1982] 1 NSWLR 460

T Sloyan & Sons (Builders) Ltd v Brothers of Christian Instruction [1974] 3 All ER 715

1. MASTER NEWNES: This is an application by the plaintiffs for an order that security for costs be given by the first defendant in respect of the first defendant's counterclaim. The application is made under s 1335 of the Corporations Act2001 and the inherent jurisdiction of the court, although as the matter was argued the focus was on s 1335.

2. To put the application in context, it is necessary to say something about the proceedings out of which the application arises, as the proceedings appear from the pleadings. 

3. The plaintiffs are the registered proprietor of certain land in Hay Street, Subiaco.  Part of that land ("the Premises") is leased to the first defendant and the second defendants have provided a guarantee of the first defendant's obligations under the lease.  A dispute has arisen between the plaintiffs and the first defendant as to whether an area of land described as the "alfresco area", forms part of the Premises.  The plaintiffs contend that it does not and in their statement of claim seek by way of relief a declaration to that effect, an order for possession of the alfresco area, an injunction to restrain the first defendant from using or occupying that area, mesne profits and damages.  In the alternative, if the Court finds that the alfresco area is part of the Premises, the plaintiffs seek certain declarations as to the manner in which rent reviews are to be conducted under the lease, having regard to the alfresco area, and for rectification of the lease to vary the description of the Premises from "300 square metres" to "374 square metres", to take account of the additional land said to constitute the alfresco area. 

4. In its defence, the first defendant denies that the alfresco area does not form part of the Premises. It pleads, in the alternative, that if the alfresco area is not part of the Premises, then the lease of the balance of the land is void by virtue of s 20(1)(c) of the Town Planning and Development Act1928. The first defendant further contends, in the alternative, that the plaintiffs and their predecessors in title knew of, and consented to, the first defendant and previous lessees of the Premises occupying and using the alfresco area as part of the Premises and that the plaintiff is now estopped from denying that that area comprises part of the Premises. The first defendant also contends that cl 2(4) of the Lease, relating to rent reviews, is void by virtue of s 15 of the Commercial Tenancy (Retail Shops) Agreements Act 1985

5. The first defendant also counterclaims against the plaintiff in the action.  The counterclaim involves in substance two issues.  The first relates to Statutory Outgoings, as defined in the lease.  The first defendant alleges that it has paid to the plaintiff money on account of Statutory Outgoings but it has not been provided with copies of the assessments of those outgoings which were served on the plaintiff nor with particulars of the calculation of the amount payable by the first defendant in respect of the Premises.  The first defendant contends that, by virtue of cl 3(3) of the lease, its obligation to pay Statutory Outgoings does not arise unless, not less than 21 days before the due date for payment, it is provided with copies of those assessments and with particulars of the calculation of the amount payable by it.  It seeks a declaration that the first defendant is not obliged under the lease to make payments of Statutory Outgoings unless and until the plaintiffs have provided copies of that material to it.  It also seeks the taking of an account of the sum of Statutory Outgoings paid by the first defendant, together with an order directing repayment by the plaintiffs to the first defendant of such sums found to be overpaid, together with interest. 

6. The first defendant also counterclaims in respect of Variable Outgoings, as defined in the lease.  It alleges that Variable Outgoings are payable by it under the lease only in the proportion that the Premises comprise part of the Building (as defined in the lease).  The first defendant says that the Premises and the Building are separate and distinct and that the Premises do not comprise any part of the Building.  Accordingly, the first defendant contends that it is not obliged to pay Variable Outgoings.  It says that it has made payment of Variable Outgoings under the mistaken belief that it was obliged to do so.  It seeks a declaration that it was not obliged to make those payments and seeks an account of the amount of Variable Outgoings paid by it, together with an order directing the repayment by the plaintiffs of the sum found to have been paid, together with interest. 

7. The plaintiffs have filed a defence to the counterclaim in which, relevantly, the plaintiff denies the construction of the lease contended for by the defendant but say in the alternative that it was the common continuing intention of the parties that the Building included the Premises and, further in the alternative, that if the Building does not include the Premises then the defendant must pay Variable Outgoings in the proportion that the area of the Premises bears to the total lettable area of the Building from time to time.

8. I should add for completeness that the first defendant also counterclaims for declarations that the alfresco area comprises part of the Premises and that cl 2(4) of the lease is void and unenforceable pursuant to s 15 of the Commercial Tenancy (Retail Shops) Agreements Act 1985.  It also seeks certain declarations in respect of the definition of "Building" in the lease.  Although pleaded as counterclaims, these issues are clearly responsive to the plaintiffs' claim and the plaintiffs did not seek security for costs in relation to these counterclaims.

9. Turning to s 1335, that section provides as follows:

   "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."

10. Although in its terms s 1335 refers to a "plaintiff", I accept the plaintiffs' contention that it includes a counterclaimant where the counterclaimant is in substance a plaintiff: Buckley v Bennell (1974) 1 ACLR 301, John Arnold’s Surf Shop Pty Ltd (In Liq) v Heller Factors Pty Ltd and Allert [1979] 22 SASR 20; Ramsay Contracting Pty Ltd v Matthew Hall Mechanical and Electrical Engineers Pty Ltd [1993] SASC 4156. I did not understand the first defendant to argue to the contrary. The issue between the parties was whether, in respect of the counterclaim, the first defendant was, in substance, a plaintiff so as to render it amenable to an order for security for costs.

11. Where a party counterclaims, the outcome of the question of whether or not the counterclaimant is, in substance, a plaintiff will depend upon the connection between the claim and the counterclaim.  A counterclaimant will not be, in substance, a plaintiff where the counterclaim is merely defensive, arising out of the same transaction as the claim:  Mapleson v Masini (1879) 5 QBD 144. So that where a respondent counter‑attacks on the same front on which it is being attacked by the applicant, it will be regarded as a defensive manoeuvre. But if a respondent opens an attack on a different front, even to relieve pressure on the front attack by the applicant, it is in danger of an order for security for costs: Visco v Minter [1969] 2 All ER 714. Accordingly, where the counterclaim raises separate issues outside those raised by way of defence to the plaintiffs' claim, the cross‑claimant assumes in relation to those issues the position of a plaintiff and s 1335 applies to the cross‑claimant as if it were a plaintiff.

12. Counsel for the first defendant argued that the liability of the first defendant to pay Statutory Outgoings and Variable Outgoings, and the amount (if any) thereby payable by the first defendant, was so interconnected with the plaintiffs' claim that the counterclaim was properly to be regarded as a defensive plea.  Counsel for the plaintiffs, on the other hand, argued that the issues were quite distinct.  He contended that, in substance, the plaintiffs' claim concerned simply whether a specific area of land, namely, the alfresco area, constituted part of the Premises and while that might ultimately have some affect on the amount of rent and outgoings payable by the first defendant, it was a quite different issue to the issues of construction of the lease raised by the first defendant. 

13. In my view, the first defendant, so far as it counterclaims for declarations and other relief relating to Statutory Outgoings and Variable Outgoings, is, in substance, a plaintiff.  The issues raised by that counterclaim are not issues raised in defence of the plaintiffs' claim but separate and distinct claims against the plaintiffs.

14. That leads to the threshold question of whether in this case, on the evidence, the Court's jurisdiction to order security for costs against the first defendant has been enlivened.  In order to enliven that jurisdiction, there must be credible evidence which gives reason to believe that the first defendant will be unable to pay the costs of the plaintiffs if the plaintiffs are successful in their defence of the counterclaim. 

15. The plaintiffs have filed an affidavit of Michael Shaw Ferguson, dated 10 December 2002.  It appears from that affidavit that the first defendant has a paid‑up capital of $8, it owns no land and all of its assets are subject to a fixed and floating charge to the Bank of Western Australia Ltd.  It is common ground on the pleadings that the first defendant is the trustee of the Hay Unit Trust and that it entered into the lease with the plaintiffs in their capacity as trustee of that trust.

16. An affidavit of a director of the first defendant, Loretta Charmaine Evangelisti, dated 20 January 2003, has been filed on behalf of the first defendant.  Annexed to the affidavit is a draft balance sheet and a draft profit and loss statement of the first defendant for the financial year ending 30 June 2002.  Ms Evangelisti says in her affidavit that she prepared those documents on behalf of the first defendant as draft financial statements and that they are currently being reviewed by the first defendant's accountants.  Ms Evangelisti does not depose to a belief that they accurately represent the financial position of the first defendant.  Her affidavit is silent on that point.

17. The draft balance sheet shows total assets of $1,117,074.72 and total liabilities of $1,096,309.49, leaving a net balance of assets of $20,765.23.  The largest component of the assets on the balance sheet is intangible assets of $904,154.40, of which goodwill comprises $850,000.  The draft profit and loss statement records an operating loss for the financial  year ended 30 June 2002 of $120,817.53 and a net loss of $87,327.77.  No historical information has been produced as to the financial affairs of the first defendant and Ms Evangelisti does not refer to its financial performance after 30 June 2002.  The trust deed of the Hay Unit Trust has not been produced.  If it contains any provisions bearing upon the first defendant's right of indemnity from the assets of the Trust those have not been disclosed.

18. On the evidence I am satisfied that the threshold question should be answered in favour of the plaintiffs and that the Court has jurisdiction to order the first defendant to provide security for the costs of the counterclaim.  It is therefore necessary to consider whether, in the exercise of my discretion, I should do so. 

19. The prospects of success of the counterclaim were not addressed by either counsel in argument.  Neither party contended that the other party's case was not reasonably arguable.  Nor was it contended by the first defendant that an order for security for costs was intended or would be likely to have the effect of stifling the counterclaim.  There is moreover nothing before me to suggest that that is the case.

20. The first defendant contended that the evidence was sufficient to establish that it would be able to meet any order for costs which might be made against it on the counterclaim.  I do not accept that.  On the basis of the evidence adduced on this application there is every reason to believe that it will be unable to do so.  If there was other evidence which demonstrated to the contrary the first defendant failed to take the opportunity to adduce it.

21. Counsel for the plaintiff stressed that none of the individuals standing behind the first defendant and who stood to benefit from the counterclaim had proffered any undertaking as to costs. Counsel for the first defendant argued that that was unnecessary in the light of s 197 of the Corporations Act as that provision requires a director of a trustee company to discharge any liability of the company, incurred while they were a director, if the company cannot do so and if it is not entitled to be fully indemnified against the liability out of the trust assets.  I do not propose to canvass that argument in any detail.  Suffice it to say that the first defendant adduced no evidence that any of the directors had the means to meet any liability of the first defendant which would arise if it were ordered to pay the plaintiffs' costs of the counterclaim.  The only evidence on that issue is to be found in the affidavit of Mr Ferguson in which he deposes to a search of the records of the Department of Land Administration which revealed a property in Joondanna registered in the name of Loretta Charmaine Evangelisti, a director of the first defendant.  There is, however, no evidence of the capacity in which Ms Evangelisti holds that property or its value or any encumbrances over it. 

22. It was also submitted by the first defendant that the costs of the counterclaim would not significantly increase the costs  which would necessarily be incurred in the trial of the plaintiffs' claim.  I do not accept that submission.  In my view the counterclaim raises substantive issues which extend beyond those raised in the plaintiffs' claim and which will involve the plaintiffs in significant additional costs.

23. In the circumstances, I exercise my discretion in favour of the plaintiffs and shall order that the first defendant give security for costs of the counterclaim in respect of its liability for Statutory Outgoings and Variable Outgoings. 

24. Whilst I am satisfied that the issues raised by the counterclaim traverse matters outside the ambit of the plaintiffs' claim, the extent of the likely additional costs attributable to the counterclaim is difficult to assess with precision. 

25. The plaintiffs submitted that the trial of its claim would take three days and the trial of the counterclaim would take an additional day.  The first defendant disputed that the trial of the counterclaim would take a full day.  The plaintiffs have provided a draft bill of costs of the counterclaim in the total sum of $23,869.00.  The first defendant has taken issue with a number of items in the bill and contends that if security for costs of the counterclaim is ordered it should not exceed an amount of $5,000.  On the materials before me I consider a reasonable figure lies somewhere near the middle of that range.  In my view, an amount in the sum of $10,000 should be provided initially by way of security for costs, with liberty to apply for additional security in due course if proper grounds exist. 

26. I will hear the parties as to the precise form of orders and as to costs.