Copeland Electrical Services and Staff Pty Ltd v Ascenzo

[2011] VSC 323

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMERCIAL AND EQUITY DIVISION

CORPORATIONS LIST D

No. S CI 2010 5427

COPELAND ELECTRICAL SERVICES & STAFF PTY LTD	Plaintiff
v
ASCENZO, ANTHONY & ORS	Defendants

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JUDGE:	Gardiner AsJ
WHERE HELD:	Melbourne
DATE OF HEARING:	3 March 2011
DATE OF JUDGMENT:	21 April 2011
CASE MAY BE CITED AS:	Copeland Electrical Services & Staff Pty Ltd v Ascenzo & Ors
MEDIUM NEUTRAL CITATION:	[2011] VSC 323

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SECURITY FOR COSTS ― Section 1335 of Corporations Act 2001(Cth) ― Rule 62 of the Supreme Court (General Civil Procedure) Rules 2005 ― Threshold condition passed ― Contention that plaintiff’s impecuniosity due to unlawful actions of defendants ― Claim that order for security would stultify pursuit of litigation ― Quantum of security sought said to be excessive ― Award of security made to completion of mediation

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr D. Clough	Ferdinand Zito & Associates
For the second to fifth Defendants	Mr S. Warne	Nathan Kuperholz

HIS HONOUR:

1. The second to fifth defendants (“the defendants”) make application for an order that the plaintiff (“Copeland”) provide security for their costs of this proceeding in the sum of $228,475.80. The application is made pursuant to r 62 of the Supreme Court (General Civil Procedure) Rules 2005, s 1335 of the Corporations Act 2001 and the inherent jurisdiction of the Court. The first defendant, Anthony Ascenzo, did not participate in this application.

1. Copeland accepts that the threshold condition for the exercise of the discretionary power to award security, that is, that there is reason to believe that it will be unable to pay the costs of the second to fifth defendants if judgment goes against it, has been made out.

1. Copeland contends that the Court in its discretion ought not to award security by reason that Copeland’s impercuniosity is due to the unlawful actions of the defendants.  Those actions, it is said, have brought about Copeland’s present financial position.  Copeland also says that an order for security against it would stultify the pursuit of its claims against the defendants.  Further, it submits that if an order is made, the quantum awarded should be limited in the interests of justice.

1. There is no doubt that if the case is lost, the defendants, absent an order for security, will be left with a considerable liability for their own legal expenses. 

1. Once the jurisdictional threshold is passed, the discretion in the Court to award security is unfettered.  There is no general bias in favour of making an order for security in such circumstances, however, impercuniosity is itself a significant discretionary factor.  In Ariss v Express Interiors Pty Ltd (in Liq)[1] Phillips JA (with whom Ormiston and Charles JJA agreed) stated:

It is equally correct that the precondition for the exercise of the discretion as laid down by the section is more than merely a precondition. The impecuniosity of the plaintiff company of which there must be credible evidence before the discretion conferred by s 1335 becomes exercisable is not only the occasion for the exercise of the discretion. It is as Ormiston J observed in Interwest, ‘a factor and often a most significant factor, in the exercise of the Court’s discretion’.

[1][1996] 2 VR 507 at [514]

1. Copeland is the provider of electrical services.  Its directors are Frank Ascenzo and his wife Caterina Ascenzo.  Its shareholders are Frank Ascenzo and his brother Tony, who each hold 5,000 shares in Copeland.    Because of illness, from about September 2008, Frank Ascenzo was unable to involve himself in the business and he relied on his brother Tony to manage and conduct it.  Frank Ascenzo entered into negotiations to sell his shares in Copeland to Tony Ascenzo but they were unable to reach agreement as to the value of the business.  On 9 February 2010, Tony Ascenzo resigned as a director of Copeland.

1. Copeland alleges that Tony Ascenzo and Silvio Ascenzo conspired to obtain Copeland’s business for less than its real value.  It is alleged that Silvio Ascenzo made an anonymous offer through Tony Ascenzo’s lawyer to purchase Copeland’s assets without making any allowance for the value of goodwill of the business.  Silvio Ascenzo revealed his identity as the offeror a short time afterwards. 

1. Copeland alleges that its business had an annual turnover of approximately $3 million in the financial year ended 30 June 2009.  It had a stable client base of significant corporate customers, including McDonalds and ALDI.  It had ten employees.  It is alleged that after Tony Ascenzo resigned from Copeland on 9 February 2010 that Copeland’s business deteriorated and its customers and employees were assumed by the third defendant, TSA Electrical Pty Ltd (“TSA”).  Silvio Ascenzo, the second defendant, is the sole director of TSA.

1. For the year ended 30 June 2010, Copeland’s financial position is said to have deteriorated sharply.  It is alleged by Frank Ascenzo that Tony Ascenzo, rather than proceed to minimise the administrative burden of another person taking over the role that Frank Ascenzo had in Copeland, effectively wound it up.  It is said that he cancelled its $200,000 overdraft with the ANZ bank in late-January 2010 and encouraged its customers to take their work to TSA. It is also alleged that Tony Ascenzo encouraged Copeland’s employees to resign from it and begin work with TSA.  Tony Ascenzo himself took up employment with TSA as its technical supervisor when he resigned from Copeland.  It is said that by destroying the value of Copeland’s business (and therefore Tony Ascenzo’s 50 per cent shareholding in it), it is to be inferred that there was a conspiracy between Tony and Silvio Ascenzo, part of which was to make up this loss to Tony Ascenzo by some means. 

1. The defendants say that the existence of this alleged conspiracy has not been demonstrated thus far by any discovered documentation or it seems by any other evidence and  Copeland to a large degree relies on innuendo and inference to establish its case. 

1. The incorporation of TSA took place on 30 November 2009 shortly after the negotiations between Frank and Tony Ascenzo for the sale of the Copeland’s business fell through.  Silvio Ascenzo’s company, Trimont Pty Ltd (“Trimont”) which is the fifth defendant, is the landlord of the premises from which Copeland operated and said to have assisted with this wrongful diversion of Copeland’s business and employees by allowing TSA to run its business at the same location that Copeland had prior to Tony Ascenzo’s resignation.  It is alleged by Copeland that this allowed a seamless transition and transfer of Copeland’s business to TSA, both in terms of customers and employees.

1. In the statement of claim, Copeland characterises the defendants’ conduct in terms of breach of fiduciary duties on the part of Tony Ascenzo as a director of Copeland, misuse of confidential information, improper diversion of Copeland’s customers and employees to TSA, knowing assistance by the defendants in Tony Ascenzo’s conduct, more particularly in his dishonest and fraudulent design to divert Copeland’s business to TSA, and conspiracy. 

1. In submissions, Mr Warne, counsel for the defendants, criticised the strength of Copeland’s claim submitting that it was without substance and was not supported by any contemporaneous documentation.  Mr Warne contended that Copeland’s case is based on circumstantial evidence and that it hopes to strengthen and retrieve the situation through discovery.  Mr Warne says that, his clients, rather seeking before discovery to strike out the statement of claim, have provided discovery and await Copeland’s promised particulars, in default of which they will proceed to make application for summary judgment.  On the other hand, Mr Warne says, Copeland is in default of its obligations to provide discovery and no explanation has been provided as to why.

1. At the hearing of this matter, both counsel sought to traverse the merits of the proceeding and its strengths and weaknesses in some detail.  The authorities considering applications for security for costs indicate that the Court is to conduct only a relatively superficial assessment of the strengths of the plaintiff’s case and take such an assessment as but one of the discretionary factors to be taken into account in considering whether an award for security should be made[2].  In my view, although the strength of Copeland’s case is heavily criticised by Mr Warne, it could not be said that it is not bona fide or without any prospects of success.  Copeland’s case involves serious allegations of fraudulent conduct by one of its former directors and others.  Mr Warne’s criticisms of Copeland’s case may well eventually be made out, but I consider that the claim is, on its face, plausible and gives rise to triable issues.  The element of the merits of the claim is in my view a neutral factor. 

   [2] See Ariss v Express Interiors Pty Ltd [1996] 2 V.R.507 at [509]; Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 V.R. 191 at [28].

1. The affidavit of Darren Cain sworn 25 February 2011, after making reference to the shortcomings in Copeland’s case, proceeds to detail the financial position of Franko Ascenzo (as he is otherwise known) and his wife Catarina Ascenzo.  An index search in regard to their property holdings reveals that they are the proprietors of an unencumbered property which is said to be valued in the order of $500,000. 

1. Frank and Catarina Ascenzo have declined to provide any guarantee or undertaking in respect of Copeland’s liability for costs in this proceeding.  In his submissions, Mr Clough of counsel, who appeared on behalf of Copeland, submitted that Frank and Catarina Ascenzo are presently funding Copeland’s own legal costs of the proceeding but that they are entitled to leave their options open in regard to whether or not they continue to do so.  As part of that notion, he says that at some point they may leave Copeland ‘high and dry’ and ‘cut the company loose’.  It was contended that Frank and Catarina Ascenzo were under no obligation to put their life savings at risk to provide security for the defendants’ costs of this proceeding.  He says this is so because it is the defendants’ conduct which has brought about its present inability to provide security and to make an order for security would effectively stultify the litigation. 

1. It is not said that Frank and Catarina Ascenzo have no means to provide security, rather that it is unreasonable and it would be unjust to expect that they should do so.  It is not contended that they are impecunious. 

1. In Livingspring v Kliger[3] the Court observed in respect of the issue of burden in these applications:

   21.…While the satisfaction of the threshold condition in the relevant sense ‘calls for’ the exercise of the power, this does not alter the fact that the burden rests on the defendant, from first to last, to persuade the court that the order for security should be made.

   22.There are, of course, particular discretionary matters of which the plaintiff must necessarily have carriage. If, for example, the plaintiff corporation asserts that an order for security would impose on it such a financial burden as would stultify the litigation, the plaintiff must establish the facts which make good that assertion. We respectfully adopt what the Full Federal Court said in this regard in Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2):

   ‘In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here 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, as in this case, 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 granting of the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts.’

   The same would be true of a contention that the plaintiff’s impecuniosity was caused by the defendant.

   [3](2008) 20 VR 377, [21].

2. As to the submission that it is the defendants’ conduct which has caused Copeland’s impecuniosity I do not consider it is possible, as I have said, to make other than a superficial appraisal of the merits of Copeland’s case or where blame lies.  Aside form considering Copeland’s case to be bona fide and arguable, I am not prepared to go further.  I cannot determine to any relevant degree that the defendants have caused Copeland’s impecuniosity.

1. In these circumstances, Frank and Catarina Ascenzo are quite prepared to fund at least for the present time, the legal expenses of Copeland of the proceeding but are not willing to expose their personal resources to meet an order security for security for the defendants’ costs, despite being in a position to do so.  That is to say, Copeland, through their agency, is prepared to embark on significant and costly litigation in this Court for which they will, at least in part enjoy the fruits of victory, yet if the case is lost, to leave the defendants to bear their costs of the litigation.  I am not attracted by that submission.  

1. In Fiduciary Limited & Ors v Morningstar Research Pty Ltd & Ors[4] Austin J observed:

   72.There is a well-recognised principle that the court will not make an order for the provision of security, even in the case of a corporate plaintiff, if the order would operate to frustrate or stultify the plaintiff’s non-frivolous pursuit of its claims. It is thought to be oppressive to the plaintiff to do so, because the order would stifle a claim that may prove to be genuine  … and unjust, because the effect of the order would be that the defendants would achieve a ‘victory’ without any contest.

   73.The ‘stultification principle’ goes to the exercise of the court’s discretion, and does not automatically lead to refusal of the application for security.  It nonetheless ‘usually operates as a powerful factor in favour of exercising the court’s discretion in the plaintiff’s favour’ …

   74.I take these cases to mean, in the case of a corporate plaintiff, that although the court has a discretion to order security and may be influenced to do so by proof of the plaintiff’s insolvency, it may be persuaded not to do so if the impecunious plaintiff proves that there is no real prospect of obtaining funds to meet the order from someone else. … As Clarke J explained in Yandil Holdings Pty Ltd v Insurance Co of North America at 545, the mere fact that the corporate plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order for security will stultify the plaintiff’s claim.  It may be that there is someone else who will satisfy the order on the plaintiff’s behalf.

   [4](2004) 208 ALR 564.

2. At paragraph 83 Austin J observed:

   It would be unrealistic for the court to decline to order security on the ground that to do so would stultify the litigation, if it took into account only the financial ability of the plaintiff, and disregarded the financial ability of those who would benefit from the plaintiff’s success and who would therefore have an economic incentive to bear the burden of a security order.  More broadly, it is fair for the courts to proceed on a basis which reflects the proposition that those who seek to benefit from litigation should bear the risks and burdens that the process entails. (emphasis added)

3. In my view, the ground of stultification is not made out.  There is no “commercial impracticability”, as some of the cases describe it, in Frank and Catarina Ascenzo drawing upon their resources to meet an order for security, rather an unwillingness to do so.[5]

   [5]See Ariss & Anor v Express Interiors Pty Ltd (1995) 13 ACLC 1585.

1. In my view, an award of security is warranted and to do so would not visit an injustice on Copeland.  The application has been made quite promptly after the commencement of the proceeding.  The proceeding involves no issue of public policy.

1. I consider it appropriate to make an award of security but only for the period running from seven days after the demand for such security was made on Copeland up to completion of the mediation of the proceeding. 

1. The demand for provision of security was by letter on 11 January 2011 to Copeland’s solicitors.  The request for security was declined one week later. 

1. In the affidavit of Cyril Ger sworn 25 February 2011 and filed on behalf of the defendants, he deposes that he has operated a legal costing practice since December 1998.  Mr Ger contends that from 25 February to the completion of mediation the second to fifth defendants are likely to incur $148,519.90 in fees which consists of $31,750 by way of disbursements and $116,761.90 by way of professional fees. 

1. Copeland’s solicitor, Ferdinand Zito, in his affidavit in opposition to the application sworn 2 March 2011, contends that a reasonable and practical estimate likely to be incurred by the applicant/defendants ‘is about $60,000’.  Aside from making some superficial criticisms of Mr Ger’s evidence, he does not embark on a detailed critique on Mr Ger’s projected bill of costs. 

1. On my review of that draft bill, it is appropriate to make some reduction of the amounts claimed.  There is provision for scanning Copeland’s documents which are estimated to be 9,000 folios, yet discovery is yet to be made and its volume is unknown.  An amount of $22,500 is claimed for that.  Disbursements of $20,000 for an expert is claimed but it is not clear how such estimate is arrived at. An amount of $107,500 is claimed for professional costs but that is in the nature of an ambit figure. 

1. An order for security for costs is not intended to be a complete indemnity[6] and although it seems somewhat unlikely, I have to make some allowance for the possibility that the matter may settle at mediation. Further, experience teaches that even if the defendants are successful, when bills are taxed on a party-party basis, significant sums are often taxed off.

   [6]Brundza v Robbie & Co (No2) (1952) 88 CLR 171 at 175

1. I consider an appropriate amount for security up to the completion of the mediation is $80,000.  I will order that Copeland is to give security for the costs of the second to fifth-named defendants in a form acceptable to the Prothonotary in the sum of $80,000 within 21 days of today’s date.  I will also order that if Copeland does not provide security for the costs of the second to fifth defendant within that period, the proceeding be stayed as against the second to fifth defendants until further order of the Court. I will hear the parties on the questions of costs.

1. The second to fifth defendants have liberty to apply for provision of further security if the matter does not resolve at mediation.