Concrete Logistics Pty Ltd v KBC Pty Ltd - [2015] WASC 284

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: CONCRETE LOGISTICS PTY LTD -v- KBC PTY LTD [2015] WASC 284

CORAM: MARTINO J

HEARD: ON THE PAPERS

DELIVERED : 12 AUGUST 2015

FILE NO/S: CIV 1512 of 2015

BETWEEN: CONCRETE LOGISTICS PTY LTD (ACN 103 913 551)
Plaintiff
AND
KBC PTY LTD (ACN 008 886 806)
Defendant

Catchwords:

Practice and procedure - Security for costs - Turns on own facts

Legislation:

Corporations Act 2001 (Cth)
Rules of the Supreme Court 1971 (WA)

Result:

Security for costs ordered

Category: B

Representation:

Counsel:

Plaintiff: No appearance
Defendant: No appearance

Solicitors:

Plaintiff: Jackson McDonald
Defendant: Mendelawitz Morton

Cases referred to in judgment:

Crosswest Corporation Pty Ltd v Allstrike Enterprises Pty Ltd [2014] WASC 27
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241
Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57

MARTINO J: The defendant applies for an order that the plaintiff provide security for defendant's costs in the sum of $40,000 by payment of that amount into court. The application is made pursuant to s 1335 of the Corporations Act 2001 (Cth), O 25 r 1 of the Rules of the Supreme Court 1971 (WA) and the inherent jurisdiction of the court.
The plaintiff is a company in liquidation. It was placed in liquidation on 1 December 2014. The defendant company owns land in Karratha. The plaintiff carried on business manufacturing and supplying concrete products from that land until a date in 2014 when it vacated possession of the land. The terms upon which the plaintiff occupied the land and the circumstances by which it ceased to do so are not agreed by the parties. It is common ground that no lease was ever executed by the parties. By this action the plaintiff claims the return of a concrete batching plant and other items that it left on the land. The defendant denies that the plaintiff is entitled to possession of the property on its land. It contends that the items of property left on the land are either fixtures which have become the property of the defendant or that the plaintiff can only enter the land to retake possession of the property if it makes good waste it has committed on the land. The major item of value in dispute is the concrete batching plant, which the defendant contends has become part of its land and are now its property.

The principles which apply to security for costs applications

Section 1335(1) of the Corporations Act 2001 provides:
Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
Order 25 r 1 to r 3 of the Rules of the Supreme Court 1971 provides:
1.       Factors that are not grounds for ordering security for costs
The Court may order security for costs to be given by a plaintiff, but no order shall be made merely on account of the poverty of the plaintiff or the likely inability of the plaintiff to pay any costs which may be awarded against him.
2.       Grounds for ordering security for costs
Without limiting the generality of rule 1 the Court may order security for costs to be furnished where the plaintiff -
(a)is ordinarily resident out of the jurisdiction, notwithstanding that he may be temporarily within the jurisdiction;
(b)is about to depart from the jurisdiction;
(c)enjoys within the jurisdiction some privilege which renders him immune, wholly or partially, from the normal processes of execution;
(d)is an undischarged bankrupt or a person who has suspended, or given notice of suspension of, his debts;
(e)is a company in liquidation or under official management, or a company in respect of which a receiver of its property has been appointed;
(f)is a relator suing for the enforcement or declaration of some public right or to have some public trust carried out or some charitable scheme settled;
(g)is in default in respect of any costs ordered to be paid by him in any proceedings previously brought by him against the same defendant or another defendant for substantially the same cause of action or in relation to substantially the same subject matter;
(h)is a person who has in the past vexatiously brought litigation against the same defendant or against any other defendant;
(i)is suing the sheriff in respect of anything done or omitted to be done by the sheriff or his officers in the execution of any judgment of the Court.
3.       Court has discretion
The granting of security shall be in the discretion of the Court, and in determining whether an order should be made the Court shall take into consideration -
(a)the prima facie merits of the claim;
(b)what property within the jurisdiction may be available to satisfy any order for costs against the plaintiff;
(c)whether the normal processes of the Court would be available within the jurisdiction for enforcement of any order for costs made against the plaintiff.
This court's inherent jurisdiction to regulate its own practice and procedure to procure proper and effective administration of justice and to prevent an abuse of its process enables it to order security for costs in circumstances not covered by s 1335 of the Corporations Act or O 25 of the Rules of the Supreme Court.[1] The defendant referred only to s 1335 of the Corporations Act in its submissions. Neither party referred in its submissions to the court's inherent jurisdiction. There is nothing in this case which requires the court to exercise its inherent jurisdiction because the case can adequately be dealt with under the provisions of the Corporations Act and the Rules of the Supreme Court.
[1] Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 [33] ‑ [35].
When considering an application under s 1335 of the Corporations Act the court is required to take two steps. The first is the threshold jurisdictional question as to whether it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the defendant's costs. If that test is satisfied the court has jurisdiction to order security for costs and it has a discretion as to whether or not to make an order.[2]
[2] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241.
Under O 25 r 1 the likely inability of the plaintiff to pay any costs which may be awarded against it is not, on its own, sufficient ground to make an order for security. However if it is established that the plaintiff is likely to be unable to pay costs awarded against it then that inability is among the factors relevant to the exercise of the discretion.[3]
[3] Crosswest Corporation Pty Ltd v Allstrike Enterprises Pty Ltd [2014] WASC 27 [13] (Beech J).
Once the threshold jurisdictional test in s 1335 is satisfied various factors may have different strength and effect on the exercise of the discretion to award security for costs. The most commonly cited, non‑exclusive, factors include the following:[4]
[4] Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [6] (Edelman J).
(i)the strength and bona fides of the plaintiff's case;
(ii)the likelihood of the plaintiff being unable to pay the defendant's costs;
(iii)whether the plaintiff's impecuniosity was caused by the defendant's conduct which is the subject of the claim;
(iv)whether the application for security is oppressive;
(v)whether the award of security would deny an impecunious applicant a right to litigate;
(vi)whether there are persons standing behind the plaintiff who were likely to benefit from the litigation;
(vii)whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
(viii)whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant's self‑help procedures;
(ix)whether the application for security had been brought promptly;
(x)whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and
(xi)any factors relating to the public interest.
In addition to what is said in O 25 r 3, those factors are also relevant to the consideration of an application under O 25.[5]
[5] Crosswest Corporation Pty Ltd v Allstrike Enterprises Pty Ltd [2014] WASC 27 [14].

The materials filed on the application

In support of the application the defendant filed an affidavit of Jonathon Peter Cook, the solicitor with the day to day conduct of the matter on behalf of the defendant, sworn 20 May 2015. Annexed to that affidavit is a copy of an extract of information from the Australian Securities and Investment Commission database, a copy of a circular to creditors of the plaintiff dated 23 October 2014 and a copy of the minutes of a meeting of creditors of the plaintiff held on 12 February 2015.
On 1 December 2014 the creditors of the plaintiff resolved to wind up the plaintiff. George Aubrey Lopez and Evan Robert Verge were appointed as liquidators. On 23 October 2014, when Mr Lopez and Mr Verge were administrators of the plaintiff under a deed of company arrangement, Mr Lopez issued a circular to creditors of the plaintiff recommending that the deed of company arrangement be terminated. In that circular Mr Lopez provided information as to the plaintiff's financial performance and said that if the plaintiff were to be wound up it was highly unlikely that there would be any surplus to creditors after meeting secured creditors' claims and liquidators' remuneration and disbursements.
The purpose of the creditors' meeting held on 12 February 2015 was to obtain the approval of the creditors for a litigation funding agreement. Mr Lopez informed the meeting that there were a number of unresolved matters relating to the lease of the land at Karratha. Any action by the liquidators would involve significant legal costs with uncertain outcome of recovery. The secured creditors Primero Investments Pty Ltd and Alis Nominees Pty Ltd had given their consent to provide financial support and an indemnity, including any adverse costs order, to the liquidator in respect to pursuing such action. The liquidators recommended that creditors resolve that the litigation funding agreement be ratified on the basis that the risks of the action would be with Primero Investments and/or Alis Nominees. Primero Investments and Alis Nominees were priority secured creditors who had advanced funds for wages and other costs. The entitlement to reimbursement for those advances and securities were with those companies and other creditors were no worse off if the action were successful or unsuccessful.
The meeting ratified the litigation funding agreement.
In opposition to the application the plaintiff has filed an affidavit of Ryan Allan McFarlane sworn 9 June 2015, an affidavit of Andrea Joan Jennings sworn 9 June 2015, an affidavit of Evan Robert Verge sworn 10 June 2015, a copy of an undertaking by the liquidators of the plaintiff made 21 May 2015 and an affidavit of Matthew David Reid made 25 June 2015.
Mr McFarlane is a director of the plaintiff, the chief financial officer of the Primero Group Pty Ltd, the secretary of Primero Group, a director and secretary of Primero Investments and a shareholder of Primero Investments.
Primero Investments is the largest shareholder of the plaintiff and a secured creditor of the plaintiff. On or about 15 May 2013 Primero Group lent $700,000 to the shareholders of Primero Investments, the shareholders of Primero Investments lent $700,000 to Primero Investments and Primero Investments lent $700,000 to the plaintiff in exchange for a circulating security interest in the plaintiff.
On or about 12 July 2013 Primero Group agreed to pay Primero Investments $70,000 a month from 12 August 2013 and Primero Investments agreed to pay the plaintiff $70,000 a month from the same date.
Mr McFarlane deposes that Primero Group has net assets after deduction of its liabilities of approximately $3 million, that Primero Group will pay to Primero Investments all amounts payable by it in respect of the plaintiff and that Primero Group has the ability to pay the plaintiff's legal costs of this action and any adverse costs order payable by the plaintiff. A copy of the financial report of Primero Group for the year ended 30 June 2014 and of the balance sheet and profit and loss reports for Primero Group as at 30 April 2015 are annexed to Mr McFarlane's affidavit.
On or about 15 January 2015 Primero Investments, together with Alis Nominees, agreed to fund an action to be instituted by the plaintiff against the defendant. Primero Investments and Alis Nominees entered into a litigation funding deed with the plaintiff and Mr McFarlane personally signed a guarantee in respect of the funding of the action. Extracts of the litigation funding deed are annexed to Mr McFarlane's affidavit. Also annexed to the affidavit are copies of certificates of titles for a property in Karrinyup and a property in Innaloo showing that Mr McFarlane owns those properties as joint tenant with another person and that there are mortgages over those properties.
Mr McFarlane deposes that on 19 May 2015 Primero Investments and Alis Nominees executed a deed poll pursuant to which they agreed to pay to the defendant the final, quantified amount of any adverse costs order. A copy of that deed poll is annexed to Mr McFarlane's affidavit. The copy annexed has not been executed by Alis Nominees. The deed poll provides:
[T]he Funders, for the benefit of the Court and the Defendant:
(a)submit to the jurisdiction of the Court in relation to any order the Court may wish to make directly against the Plaintiff in the Proceedings that the Plaintiff pay any Adverse Cost Order;
(b)agrees to pay to the Defendant the final, quantified amount of any Adverse Cost Order such that the Defendant may enforce the payment of that amount as a debt due and owing by the Funder to the Defendant; and
(d)agrees to notify the Defendant in writing of any termination of the LFA within 7 days of it so terminating.
Ms Jennings is a solicitor employed by the solicitors for the plaintiff. She deposes that she believes that the plaintiff has a good cause of action for delivery up of the property the subject of this action. She annexes to her affidavit copies of correspondence between the solicitors for the parties concerning that property and the claims of the parties.
Mr Verge deposes that Primero Investments and Alis Nominees hold a circulating security interest over or all of the plaintiff's property. Prior to commencing this action Mr Verge and Mr Lopez were 'minded of the risks in issuing an action whilst the plaintiff remained in liquidation' and they wished to safeguard both their position and that of the plaintiff with respect to any potential adverse costs order. A redacted copy of the litigation funding agreement is annexed to Mr Verge's affidavit.
On 21 May 2015 Mr Verge and Mr Lopez gave a personal undertaking to this court and the defendant that they would retain not less than $45,000 in the plaintiff's bank account for the payment of any costs order in favour of the defendant in this action and that they would pay the defendant's costs of the action as assessed by the court to be just having recourse to the retained funds if necessary.
As at 4 June 2015 the plaintiff had cash at bank in the sum of $202,431.56. The plaintiff also asserts that it is the owner of the property the subject of this action. The defendant owes the plaintiff $39,238.65 for the delivery and supply of concrete products. Four of the seven guarantors of the litigation funding agreement own property in the State of Western Australia. Copies of certificates of title are annexed to Mr Verge's affidavit.
Also annexed to Mr Verge's affidavit are copies of a hire purchase agreement in respect of the concrete batching plant which records that those items are owned by Westpac Banking Corporation, and correspondence from Westpac to Mr Verge in which Westpac has informed the liquidators that it has decided that it is not commercially viable to recover its securities and that it no longer claims any interest in the concrete batching plant. Documents which evidence that the plaintiff is the owner of other property left on the plaintiff's land are also annexed to Mr Verge's affidavit.
The copy of the undertaking signed by the liquidators is in the following terms:
1.We, George Aubrey Lopez and Evan Robert Verge, are the joint and several liquidators of Concrete Logistics Pty Ltd (in liquidation), the plaintiff in this action.
2.As at 21 May 2015, the plaintiff has cash at bank in the sum of $197,061.17.
Attached to this undertaking is a true copy of a statement from the plaintiff's bank account (Bank Account) verifying this amount.
3.We undertake to this Honourable Court and to the Defendant that:
(a)for the duration of the action, retain not less than the sum of $45,000 in the Bank Account ("Retained Funds") as security for the payment of any cost order(s) determined by the Court to be payable by the plaintiff to the defendant in this action; and
(b)in the event of the Court making an order that the plaintiff pay the defendant's costs of the action, to pay those costs (as assessed by the Court to be just) having recourse to tile Retained Funds if necessary.
Mr Reid is a solicitor employed by the solicitors for the plaintiff. He deposes that on 21 May 2015 he sent an e-mail to the solicitors for the defendant attaching a copy of the undertaking signed by the liquidators, a document showing that there was $197,061.17 in a bank account on 7 May 2015 and a copy of the deed poll signed by Primero Investments and Alis Nominees. He has annexed to his affidavit a copy of that e-mail and the attachments together with a reply from Mr Cook dated 21 May 2015 in which Mr Cook said that the defendant was pursuing its application for security for costs. The copy of the deed poll annexed to the affidavit has been executed by both Primero Investments and Alis Nominees.
As I have mentioned redacted copies of the litigation funding agreement have been provided with the papers filed by the plaintiff. The original document is a deed. The parties to that deed are the liquidators, Primero Investments, Alis Nominees, the plaintiff and seven individuals who guarantee in favour of the liquidators and the plaintiff the obligations of Primero Investments and Alis Nominees under the deed.
The copies of the litigation funding agreement that have been filed by the plaintiffs have been heavily redacted. It appears that the original document, excluding the title page and the attestation pages, consists of 23 pages. Of those 23 pages only eight pages have been provided. Part of page 1 and part of page 13 have been redacted. Page 13 also appears to have been altered, because it includes part of clause 3.5 at the top of the page and then clause 14.1. Clause 3.5 is the clause by which Primero Investments and Alis Nominees agree to pay the legal fees of the plaintiff and the liquidators and any adverse costs order. Their obligations to do so are expressed to be 'subject to and in accordance with this Deed'. By clause 14.1 the guarantors guarantee in favour of the liquidators and the plaintiff, on an unconditional basis, the payment to the liquidators and the claimant when due of all amounts owed by Primero Investments and Alis Nominees under the deed and the performance of all obligations by Primero Investments and Alis Nominees under the deed.

Whether it appears by credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if successful in its defence

The plaintiff contends that, notwithstanding the contents of Mr Cook's affidavit and the annexures to that affidavit, the defendant has not satisfied the threshold test under s 1335. It contends that, despite being in liquidation, it is financially able to pay a costs order in favour of the defendant. It points to:
1.the undertaking that the liquidators have signed and filed;
2.the evidence of Mr Verge in his affidavit dated 10 June 2015 that at 4 June 2015 the plaintiff had cash at bank of $202,431.56;
3.the indemnities and guarantees in respect to costs orders from Primero Investments and Alis Nominees and their directors; and
4.the deed poll signed by Primero Investments and Alis Nominees submitting to the jurisdiction of the Court and expressing their intention to be bound by any adverse costs orders made against the plaintiff and to pay the amount of any such costs to the defendant.
I do not accept the plaintiff's submissions that the defendant has not satisfied the threshold test. The conclusion I reach from the affidavit of Mr Cook and the annexures to the affidavit is that the plaintiff is insolvent and that, after payment of the secured creditors' claims and liquidators' remuneration and disbursements, there will be no monies available to distribute to unsecured creditors. While there is cash in the plaintiff's bank account the plaintiff has liabilities which exceed the amount of that cash.
The undertaking provided by the liquidators, the indemnities and guarantees in respect of costs orders and the deed poll do not alter these conclusions. The effect of these documents is to provide that someone other than the plaintiff will pay the costs of the plaintiff in the circumstances described in them. That is a matter that is to be taken into account in the exercise of the discretion as to whether to order that security be provided. It does not detract from the fact that the plaintiff is insolvent and that, after payment of the secured creditors' claims and liquidators' remuneration and disbursements, there will be no monies available to distribute to unsecured creditors. I am satisfied that it appears by credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if successful in its defence.

The exercise of the discretion

The major item of value in dispute is the concrete batching plant. The plaintiff's claim is certainly bona fides, and the defendant did not contend otherwise, but in determining this application for security for costs it is not appropriate for me to attempt to investigate in detail the likelihood of the plaintiff being successful in this action.[6] Neither party made detailed submissions as to the merits of the claim or the defence.
[6] Crosswest Corporation Pty Ltd v Allstrike Enterprises Pty Ltd [2014] WASC 27 [15]; Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [72] - [74].
The plaintiff's impecuniosity does not appear to have been caused by the conduct of the defendant and the plaintiff did not suggest that it was.
The application for security for costs was brought promptly by the defendant. The application is not oppressive nor, if security in the amount applied for were to be ordered, would the plaintiff be denied from pursuing this litigation.
The plaintiff's action is, in a real sense, defensive. It is pursuing this claim because the defendant has prevented it from entering upon the defendant's land to take possession of the property. That is a factor that weighs against ordering security for costs. However in my view it is not a strong factor in this case. That is because the substantive issue in this case is which of the parties owns the concrete batching plant. If the plant were to belong to the defendant then the plaintiff would have no right to go on to the defendant's land to remove the defendant's property.
In my view this application turns on whether the assurances provided in the litigation funding agreement, the deed poll and the liquidator's undertaking adequately deal with the risk that the defendant's costs might not be paid if a costs order were to be made against the plaintiff in favour of the defendant. I have reached the conclusion that those documents do not adequately deal with that risk.
Under the litigation funding agreement the guarantors guarantee the obligations of Primero Investments and Alis Nominees under that agreement. Clause 3.5 of the litigation funding agreement provides that the obligations of Primero Investments and Alis Nominees are subject to and in accordance with the deed. The copy of the deed provided to the court and to the defendant has been so heavily redacted that it is not possible for the defendant or the court to make any assessment of the limitations on the obligations of Primero Investments and Alis Nominees under the deed.
The obligations of Primero Investments and Alis Nominees under the deed poll are expressed with reference to the litigation funding agreement. It is not beyond argument that the obligations of Primero Investments and Alis Nominees under the deed poll are limited to the extent of their obligations under the litigation funding agreement. As I have already mentioned, the litigation funding agreement has been so heavily redacted that it is not possible to make an assessment of those obligations.
The undertaking provided by the liquidators is unclear. The reference in it to retained funds suggests that the undertaking is intended to be limited to the liquidators being able to use those funds to pay those costs. There may be other claims on those funds. If the liquidators were, for whatever reason, to be unable to use those funds to pay costs if a costs order were to be made, then it is possible that the liquidators would wish to argue that the undertaking does not apply or to be relieved of their undertaking. It is not appropriate for that uncertainty to attach to an undertaking to the court.
For these reasons I have decided that it is appropriate to order that the plaintiff provide security for costs in the form of payment into court of $40,000. I will allow the parties a reasonable time to consider these reasons before making an order.