Chiodo Investments Pty Ltd v Rilac Pty Ltd (No 2)
[2023] VSC 66
•21 February 2023
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMON LAW DIVISION
PROPERTY LIST
S ECI 2021 03012
| CHIODO INVESTMENTS PTY LTD (ACN 110 861 857) | Plaintiff |
| v | |
| RILAC PTY LTD (ACN 007 275 407) | Defendant |
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JUDGE: | John Dixon J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 6, 8, 16 February 2023 |
DATE OF JUDGMENT: | 21 February 2023 |
CASE MAY BE CITED AS: | Chiodo Investments Pty Ltd v Rilac Pty Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2023] VSC 66 |
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PRACTICE AND PROCEDURE – Security for Costs – Plaintiff a trustee – Whether undertakings proffered by plaintiff sufficient – No point of principle.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr L Virgona of counsel | Marshalls Dent Wilmoth Lawyers |
| For the Defendant | Mr C R Northrop of counsel | Harwood Andrews |
HIS HONOUR:
Introduction
On 4 October 2022, an associate judge dismissed the defendant’s application for security for costs from the plaintiff. The primary judge was not satisfied that the defendant had met its burden of establishing that there is reason to believe that the plaintiff would be unable to meet an adverse costs order.[1]
[1]Pursuant to s 1335 of the Corporations Act 2001 (Cth).
Since that hearing, the issues in the application have shifted significantly and, consequently, I am satisfied that the primary judge’s decision was affected by factual error. On reconsideration of the evidence before the primary judge, and the fresh evidence before me, I will allow the appeal and order that the plaintiff provide security for the defendant’s costs in the amount determined by the primary judge, which was not disputed on the appeal.
Evidence before the associate judge
The plaintiff has a paid-up capital of $2. There was no evidence that it traded or was presently earning income. However, there was evidence that the plaintiff was the registered proprietor of real estate – two properties in Carlton – and that the net equity in the two properties fell within the range of $415,000 to $2.3 million, depending on whether the market value of the properties was assessed by reference to rates notices or kerb-side valuations provided by real estate agents. The plaintiff identified the current balance owing under loans secured by registered mortgages to calculate that net equity but there was no evidence as to any other aspect of the plaintiff’s financial position.
The question of whether the plaintiff was beneficially entitled to the equity in these properties was not raised between the parties, either in pre-application correspondence between solicitors or in the affidavits on which the application proceeded. The issue was first raised in submissions before the primary judge.
Further evidence on re-hearing
On 8 February 2023, I gave leave to the plaintiff to rely on a further affidavit, sworn 6 February 2023, that in substance stated it did not hold the two Carlton properties on any trust and was beneficially entitled to the equity in those properties.[2] Salvatore Chiodo, on behalf of the plaintiff, swore:
I confirm now that neither of the Chiodo Properties have ever been held on trust for any other party, whether as part of the Chiodo Family Trust or otherwise, and that both properties have always been held by Chiodo Investments in its own right. In the event that Chiodo Investments is required to meet any adverse costs order in this proceeding, Chiodo Investments is able to access the equity in each of the Chiodo Properties for that purpose.
[2]Chiodo Investments Pty Ltd v Rilac Pty Ltd [2023] VSC 32.
I gave the defendant an opportunity to consider its position and its initial response was to call on a Notice to Produce dated 1 February 2023 for production of the unredacted financial accounts. The plaintiff took the call on notice.
Next, the plaintiff served a further affidavit sworn by Mr Chiodo on 13 February 2023, which exhibited the unredacted financial statements and other relevant documents, thus answering the call. But Mr Chiodo went further and swore a further affidavit.
He deposed that what he stated in his 6 February 2023 affidavit was incorrect and that he realised his mistake when reviewing the unredacted financial statements. The Carlton properties are held by the plaintiff in its capacity as trustee for the Chiodo Family Trust. His mistaken belief was, he said, induced by receipt of documents about the properties, such as rates notices and bank statements, that made no mention of the Trust and the fact that in recent years the financial statements identifying the assets of the Trust, which once referred to the properties by the address, referred to the properties as ‘Buildings’. The plaintiff is one of a number of ‘special purpose entities’ forming part of the Chiodo Group whose financial affairs are managed by his accountants. In the circumstances, this explanation is not convincing.
Mr Chiodo confirmed that the Trust does not carry on any trading business and asserted that the fact that the plaintiff is a trustee does not come up in his regular communications with his accountants which was why he had no reason to ‘place into question the capacity in which Chiodo Investments operates’. Yet, the defendant’s notice of appeal put that very issue in contest.
Mr Chiodo deposed that the Trust is a discretionary family trust and produced the trust deed. The named primary beneficiaries are Mr Chiodo and his ex-wife, Rebecca. Extensive classes of eligible beneficiaries are specified as is common in discretionary family trust deeds. Rebecca Chiodo (incidentally the daughter of the directors of the defendant) agreed in respect of the division of matrimonial assets that she be excluded as a beneficiary of the Trust (there was no deed of variation). Counsel submitted this consequence flowed from orders of the Family Court of Australia made 10 May 2019 that were not produced.
The plaintiff submitted that it was entitled to an indemnity out of the assets of the Trust against liabilities incurred as trustee and Mr Chiodo had also realised that the subject matter of the dispute in the proceeding was Trust business as the South Yarra property that is the subject of the dispute is not held by the plaintiff in its own right but is an asset of the Trust. The plaintiff proposes to amend its statement of claim accordingly.
The plaintiff produced a deed poll executed by Mr Chiodo on 13 February 2023 by which he undertakes, in summary:
(a) first, in his capacity as current director of the plaintiff, that in the event of an adverse costs order he will do all things as are necessary for the plaintiff to obtain the funds from the Trust property required to satisfy such costs order, including, if necessary, enforcing its right as trustee to indemnity; and
(b) secondly, to notify the defendant of any alteration in the directorships of the plaintiff.
Mr Chiodo also undertook that if the plaintiff failed to pay any adverse costs order when due, he ‘shall be personally liable for and will pay’ the amount of such costs as if the costs order had been made against him personally.
Counsel for the plaintiff stated that he is instructed to offer a further undertaking to the court on behalf of the plaintiff if not required to post security, that the plaintiff as trustee of the Trust will not dispose of the Carlton properties pending judgment, including any costs judgment, delivered in the proceeding.
The plaintiff, neither by affidavit nor submission, attempted to justify the redactions to the financial statements and on review of the unredacted statements no ground of justification appears open.
It now follows that on the evidence before me the factual basis on which the primary judge considered the application was mistaken. There was no error apparent in her legal or discretionary conclusions on what was placed before the court at that time, but plainly the court was misled, beginning with the statement of claim that did not allege the fact that subject property was held by the plaintiff on behalf of the Trust. These factual misconceptions are sufficient to give me jurisdiction to entertain the appeal and reconsider the application on the evidence that was placed before the primary judge and the further evidence adduced with my leave.[3]
[3]Numerous decisions to this effect following on Oswal v Carson [2013] VSC 355 are collected in para I 77.06.0 of Bailey D and Arthur J, Civil Procedure Victoria (LexisNexis).
Submissions
Turning to ground one of the appeal, the defendant contended that the court erred in finding that it had not established on the evidence that there was reason to believe the plaintiff would not be able to satisfy an adverse costs order for the purposes of s 1335(1) of the Corporations Act 2001 (Cth). Ground five was complementary. The court should have found there was a risk the plaintiff will be unable to pay an adverse costs order.
The defendant will succeed on these grounds. The remaining grounds need not be considered.
There was no dispute between the parties as to the applicable principles, which are well settled. In order to enliven the court’s jurisdiction to order security under s 1335, the party seeking the order (the defendant, who bears the onus of proof[4]) must adduce sufficient evidence to permit the formation of a rational belief that the corporation against whom the order is sought would be unable to pay the costs upon the disposal of the proceeding. Mere speculation as to insolvency or financial difficulties likely to confront the corporation at the relevant time is not sufficient.[5]
[4]Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, 383 [21].
[5]See also Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176; Amcor v Barnes [2015] VSC 90.
Although before the primary judge the issue of whether the defendant had satisfied the threshold question became a matter of inference from the evidence as it then stood, the parties debated whether the plaintiff was obliged to fill any gaps in the defendant’s proofs. This manner of dealing with the issue was a consequence of the way in which the parties conducted the application. I need not dwell on this point but simply note that the defendant did not promptly challenge the redacted discovery, while Mr Chiodo failed to make proper inquiries of his accountant before making statements about the financial circumstances of the plaintiff. I see no error in the reasoning of the primary judge but plainly her Honour was led to a mistaken view of the facts.
The following materially different facts can be noted.
(a) Mr Chiodo’s 13 February affidavit confirmed that the plaintiff’s claim in this proceeding is brought as trustee of the Trust.
(b) The Carlton properties are held on the same Trust, not beneficially by the plaintiff in its own right.
(c) The defendant’s notice to produce placed the draft financial statements of the plaintiff for 2022 and the financial statements for earlier years before this court on the appeal.
(d) Those financial statements reveal that the Trust has made losses in the last two financial years and has had significant deficiencies in its balance sheet since at least 2015. The Trust is an investment entity that is negatively geared. Its income was rent from the properties in the sum of $45,818 and it booked interest as an expenditure in the sum of $85,403. There is no prospect that the plaintiff could pay an adverse costs bill from its recurrent income. The 30 June 2022 balance sheet, which records a deficiency of $282,348, shows that the plaintiff is supported by related entities with its major current asset being described as ‘accounts receivable from related entities’ and its current liabilities comprising, in the main, ‘accounts payable to related entities’, Mr Chiodo’s beneficiaries’ current account, which he reduced in that year to $63,470 by drawings, and loans from family members. Non-current liabilities in part reflect the outstanding mortgage loan debts to which Mr Chiodo had earlier deposed. The Carlton properties are recorded at a value of $1,959,577 and the loan balances at $2.1M. Two further loans totalling $364, 810 are also booked.
The defendant submitted that the principles considered in Laundry Coin-Wash Pty Ltd v Dunlop Olympic Ltd[6] and Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd[7] were thereby invoked. The evidence now before the court satisfies the threshold test for the purposes of s 1335. On the face of the financial statements, the plaintiff’s balance sheet deficiency of $282,348 and the accumulated losses on its investments permit the formation of a rational belief that it would be unable to pay an adverse costs order at the conclusion of the proceeding.
[6](1985) ATPR ¶40-584.
[7][2019] SASC 39, [57]-[75].
The defendant further submitted there was no material as to the source of funds for the earlier payment of security for costs, suggesting that such funds may have come from resources provided by those who stand behind the plaintiff such as the beneficiaries of the Trust on which the plaintiff holds the properties.
The plaintiff’s responses were:
(a) The book value of the properties may be ignored, and the court ought to accept the kerbside opinions of estate agents that the market value of the properties was in the range $4,400,000 to $4,650,000 and that the rateable valuations of $2,415,000 placed a floor on the proper value of the properties (albeit one greater than the value carried in the company’s accounts).
(b) The equity available, at a minimum, was $2,308,804. (I pause to note that this equity was calculated by reference to a sale of the properties. There was no evidence of the terms of the loans or mortgages, eg, whether there was, and to what extent, a redraw facility.)
(c) The security previously provided ($26,660) to mediation was on the basis that it was not an admission of any obligation to provide security and the primary judge correctly assessed the prior payment as a consideration of little significance in those circumstances.
(d) The defendant’s claim was that costs from mediation to judgment were estimated at $126,156.58. The primary judge stated that had she been prepared to order security it would have been in the sum of $63,000 to the end of the first day of trial and thereafter at $9,000 per day. This assessment was not contested on appeal. The plaintiff contended that the available equity substantially exceeded the anticipated costs liability.
(e) The defendant accordingly failed at the threshold question, as the primary judge ruled.
The plaintiff’s further responses directed to the status of the plaintiff as a trustee were:
(a) Mr Chiodo gave undertakings in the form of deed poll, which I will come to, that the plaintiff contended were sufficient to persuade the court in the exercise of its discretion not to order that the plaintiff put up any security.
(b) In response to the defendant’s submission that the deed poll did not directly address the issue that the assets of the Trust could be dissipated pending the resolution of the dispute, the plaintiff offered to the court, by its counsel, an undertaking that the Carlton properties will not be dealt with in any way, pending resolution and delivery of the judgment, including costs, in this proceeding. The terms of this offer were clarified to be
subject to further order, Chiodo Investments Pty Ltd as Trustee of the Chiodo Family Trust, will not dispose of [the Carlton properties] pending judgment, including any costs judgment being delivered in this proceeding.
The plaintiff declined to undertake not to refinance the properties and gave no reasons for not extending its undertaking to constrain its capacity to redraw or refinance.
By the deed poll, Mr Chiodo, as director of the plaintiff, assumed the following obligations.
(a) If an adverse costs order is made, he will do all things as are necessary for the plaintiff to satisfy such order from the property of the Trust, including, if necessary, enforcing the trustee’s right to indemnity provided by the trust deed.
(b) He will advise the defendant of any alteration in the directorships of the plaintiff.
(c) If the plaintiff failed to pay the costs order when it fell due for payment, he ‘shall be personally liable for and will pay’ to the defendant such costs as if the costs order had been made against him.
There was no direct evidence of the financial circumstances of Mr Chiodo, save that he does not own any real property in Victoria. He deposed that he conducts his financial affairs through ‘special purpose entities’ forming ‘the Chiodo group of companies.’ It was also not apparent how the plaintiff paid its own legal costs, the probable inference being that another entity in the Chiodo group provided financial support.
The defendant submitted that the undertaking contained in clause two of the deed poll was inadequate in numerous respects, including:
(a) the accounts of the Trust show a significant deficiency;
(b) Mr Chiodo could at any time cease to be a director or the sole director;
(c) property held on trust may be further encumbered;
(d) there is no restriction on the Trust disposing of assets by way of distributions or otherwise;
(e) the plaintiff could be replaced as trustee;
(f) the trust deed could be varied at any time.
The undertaking to be personally liable set out in clause three of the deed poll was also problematic:
(a) Mr Chiodo conducts his affairs through ‘special purpose entities,’ presumably partly as an asset protection measure;
(b) there is no information about Mr Chiodo’s capacity to pay costs;
(c) enforcing the undertaking by an application to the court would be costly, time consuming and potentially unproductive.
Analysis
The threshold issue has been satisfied. There is credible testimony that establishes there is reason to believe the plaintiff will be unable to meet any adverse costs order. It is plainly dependent on the support of non-parties. The extent to which the defendant could enforce a costs order against non-parties is not relevant to the threshold issue but a discretionary consideration.
There is force in the defendant’s submissions that the defendant’s undertakings fall short of a guarantee or like commitment and that uncertainty remains as to whether an adverse costs order would be satisfied.
As the Court explained in Laundry Coin-Wash:
The method by which the parties concerned construct the entities by which their interests are pursued has, no doubt, positive benefits for them, and is a matter for decision by them. But the trust structure does involve that persons dealing with a company playing the part of the trustee in the adopted business structure, necessarily deal with an entity, the beneficial ownership of all property in whose hands is in another entity to whom the legal estate therein may be passed at any time. The accountability of such a company for amounts for which it may be legally liable is inherently less stable and reliable than would be the case if it were in business on its own behalf. For reasons mentioned above a creditor with a judgment against the applicant should not normally be restricted to reliance on the applicant’s indemnity under the trust deed. Accordingly, but for the giving of the undertaking referred to I would have ordered that the applicant give security for costs.[8]
[8]Laundry Coin-Wash, 46,730-46,731 (n 6).
As to sufficiency of an undertaking to alleviate this ‘less stable and reliable’ means of recourse against a trustee, in Laundry Coin-Wash the Court found the following to be a suitable undertaking:
I have concluded that an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs. In this case, I considered the applicant might do this by giving an undertaking such as I have required. It ensures that the applicant will be in actual possession of property and have legal entitlements in respect thereof sufficient in value to provide for the applicant’s liability and thus providing a sufficient measure of practical protection of the interests of the respondents.
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Undertakings have been given to the Court by the applicant and its director that subject to further order the capital assets in the hands of the applicant will not be disposed of by it, there be no order for the provision of security for costs which may be payable to the respondent.[9]
[9]Ibid.
Similarly, in Envol Pty Ltd v Perceptive Systems Pty Ltd,[10] the relevant undertaking was:
Each of Dr Birch and his wife should undertake that, in the event that an order for costs is made against the plaintiff in the present proceedings, he or she, as the case may be, will, as a director of the plaintiff, do all such things as are necessary for the plaintiff to enforce against the trust property the right of indemnity conferred upon the plaintiff by Part 21 of the trust deed dated 18 January 1981 and that they will, subject to further order of the court, take no action whereby to cause the plaintiff to dispose of its shareholding in the first defendant.
[10]Unreported, 15 September 1993, referred to in Livingspring, 391 [56]-[57] (n 4).
However, in Matthew (SA) Nominees, the undertaking went further in order to alleviate risk of challenges in recovery:
As the authorities cited above make plain, the court will not generally assume the availability and value of a right of indemnity, even in cases where there are substantial trust assets. However, in this case, in addition to the evidence establishing that the properties have a substantial value, and that one of them is unencumbered, the plaintiff (through an affidavit of its sole director and shareholder, Mr Loprete) said that it has no intention of selling, dealing with or further encumbering the properties, and that it will not do so without first notifying the Court. The effect of this will be to ensure that the properties will not (without notice) be dealt with in any way that might prejudice the defendant’s recovery of any costs ordered in its favour. The plaintiff will be prevented, for example, from distributing the properties (or proceeds from any sale of them) to a beneficiary or beneficiaries of the trust.[11] (emphasis added)
[11]Matthew (SA) Nominees, 422 [73] (n 7).
Mr Chiodo’s undertaking falls short of this undertaking.
Undertakings are not conclusive and their mere existence does not mean that the court is obliged to refrain from ordering security. They are matters to be taken into account in the exercise of the discretion in a particular case and their import depends on the circumstances of each case.[12] The plaintiff’s activities are funded by other related entities which further increases the likelihood (risk) that the assets may be further encumbered. This militates in favour of the necessity for a more far-reaching Mathew (SA) Nominees form of undertaking, which was not offered.
[12]St Mary’s Hog’s Pty Ltd v HBCA Pty Ltd [2022] FCA 52, [117].
Also relevant in this case, which speaks to the utility of the deed poll, is that there is no evidence before the court about Mr Chiodo’s personal financial position save that he deposes his affairs are arranged through various entities. There is no real property registered in his name in Victoria.[13]
[13]Ibid [118].
There is sufficient evidence before the court that the defendant may have difficulties in attempting to execute an order for costs against the plaintiff as trustee that have not been sufficiently alleviated by the undertakings.[14]
[14]Matthew (SA) Nominees, 420-1 [65]-[66] (n 7); Laundry Coin-Wash (n 6).
The provision of security by payment into court provides an immediately accessible fund, which is what is intended. No discretionary considerations were put in issue, such as stultification, and the sum sought is modest. Security would provide clarity and certainty for all parties.
Conclusion
I will order that:
(a) The appeal is allowed.
(b) The plaintiff pay into court, within 14 days, the sum $63,000 as security for the defendant’s costs to the end of the first day of the trial and the further sum of $9,000 per day for the second and each subsequent day of the trial by 10:00 am on each such day.
My tentative view is that the plaintiff should pay the costs of the summons, but I will hear further submissions from the parties on that issue.
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