David Clarke Air Conditioning Pty Ltd v Quann [No 2]
[2016] WASC 176
•16 JUNE 2016
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS
CITATION: DAVID CLARKE AIR CONDITIONING PTY LTD -v- QUANN [No 2] [2016] WASC 176
CORAM: LE MIERE J
HEARD: 10 JUNE 2016
DELIVERED : 16 JUNE 2016
FILE NO/S: CIV 1395 of 2013
BETWEEN: DAVID CLARKE AIR CONDITIONING PTY LTD (ACN 114 155 770) as trustee for THE DAVID CLARKE AIR CONDITIONING TRUST
First Plaintiff
D S CLARKE NOMINEES PTY LTD (ACN 131 023 777) as trustee for THE DS CLARKE SUPERANNUATION FUND (ACN 131 023 777) as trustee for THE DS CLARKE SUPERANNUATION FUN)
Second PlaintiffDAVID STUART CLARKE
Third PlaintiffAND
LINDSAY EDWARD QUANN
First DefendantCADAGI HOLDINGS PTY LTD (ACN 009 169 386) as trustee for THE KARRIVIEW UNIT TRUST
Second DefendantKARRIVIEW MANAGEMENT PTY LTD (063 633 572)
Third DefendantADDER HOLDINGS PTY LTD (ACN 009 264 037) as trustee for THE GRV PROPERTY TRUST
Fourth DefendantHARBOUR RETIREMENT HOLDINGS PTY LTD (ACN 009 312 234) as trustee for THE HARBOUR PINES INVESTMENT TRUST
Fifth DefendantLEROY NOMINEES PTY LTD (ACN 008 876 202) as trustee for THE L E QUANN FAMILY TRUST
Sixth Defendant
Catchwords:
Security for costs - Rules of Supreme Court and inherent jurisdiction - Prima facie case - Property within jurisdiction - Undertaking given - Normal process for enforcement of costs - Delay - No adequate reason for delay - Application dismissed - Turns on own facts
Security for costs - Corporations Act - Where corporations will be unable to pay costs - Order not made in court's discretion - Delay - Where other party will be jointly and severally liable - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 1335, s 459P
Property Law Act 1969 (WA), s 89
Rules of the Supreme Court 1971 (WA), O 25 r 1, O 25 r 2, O 25 r 3
Result:
Defendants' applications are dismissed
Category: B
Representation:
Counsel:
First Plaintiff : Mr L A Warnick
Second Plaintiff : Mr L A Warnick
Third Plaintiff : Mr L A Warnick
First Defendant : Ms K J Levy
Second Defendant : Ms K J Levy
Third Defendant : Ms K J Levy
Fourth Defendant : Ms K J Levy
Fifth Defendant : Ms K J Levy
Sixth Defendant : Ms K J Levy
Solicitors:
First Plaintiff : Zafra Legal
Second Plaintiff : Zafra Legal
Third Plaintiff : Zafra Legal
First Defendant : Ludlow Legal
Second Defendant : Ludlow Legal
Third Defendant : Ludlow Legal
Fourth Defendant : Ludlow Legal
Fifth Defendant : Ludlow Legal
Sixth Defendant : Ludlow Legal
Case(s) referred to in judgment(s):
Ammon v Consolidated Minerals Ltd [2004] WASC 201
Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176
Corfu Navigation Co v Mobil Shipping Co Ltd (The Alpha) [1991] 2 Lloyd's Rep 52
David Clarke Air Conditioning Pty Ltd ATF David Clarke Air Conditioning Trust v Quann [2016] WASC 73
De Bry v Fitzgerald [1990] 1 All ER 560
Ebrard v Gassier (1884) 28 Ch D 232
Kevorkian v Burney (No 2) [1937] 4 All ER 468
Kim v Song [2012] NSWSC 103
KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189
Neely v Attorney‑General [1984] 2 NZLR 636
Porzelack KG v Porzelack (UK) Ltd [1987] 1 WLR 420
Shurat Hadin, Israel Law Centre v Lynch (No 2) [2014] FCA 413
LE MIERE J:
Summary
The first and second plaintiffs are companies controlled by Mr Clarke, the third plaintiff. The first defendant, Mr Quann, is an accountant. The other five defendants are companies associated with him. The plaintiffs say that in 2008 Mr Clarke engaged Mr Quann under a contract of engagement as a tax agent and accounting, corporate, financial and business adviser to Mr Clarke and his companies and superannuation fund. The plaintiffs plead various causes of action against Mr Quann, including breach of the code of professional conduct for tax agents, negligence in the discharge of professional obligations, breach of contract, breach of fiduciary duty, misleading and deceptive conduct and false representations. The plaintiffs plead that the second, third, fourth and fifth defendants, with knowledge of breaches of fiduciary duty by Mr Quann, assisted him in those breaches of duty. The second, third and fifth defendants are also alleged to have received payments or other benefits in breach of the fiduciary duty. The plaintiffs say that the second, fourth and fifth defendants entered transactions by which they created a security interest in favour of the sixth defendant, charging all of the property as security for debts to the sixth defendant. They claim relief under s 89 of the Property Law Act 1969 (WA) as well as in equity.
On 27 May 2016, the defendants filed a chamber summons for orders for security for costs and a certificate of urgency that the application is of such an urgent nature that it is required to be listed or heard immediately. The urgency arises because the action is listed for trial over six days commencing on 23 June 2016. The application has been referred to me because the case manager and trial judge is on leave. For the following reasons, I refuse the defendants' application for security for costs. Of particular importance is the defendants' delay in bringing this application. The defendants have given no adequate explanation for their delay. The defendants' delay in applying for security, and permitting the plaintiffs to incur substantial costs in preparing for the trial, will unduly prejudice and oppress the plaintiffs if security is ordered now on the eve of the trial. Furthermore, there is a risk of the trial not being able to proceed at the scheduled time with the consequential waste of judicial resources.
The application
The defendants' application is brought under O 25 r 2 of the Rules of the Supreme Court 1971 (WA) and the court's inherent jurisdiction and, in respect of the corporate plaintiffs, under s 1335 of the Corporations Act 2001 (Cth). In their chamber summons, the defendants say that their application is brought on the basis that:
1)The Second Plaintiff owes the Fourth Defendant some $44,000 from a costs order made by the Federal Court in DS Clarke Nominees Pty Ltd v Adder Holdings Pty Ltd [2015] FCA 277;
2)Approximately eleven weeks after the Federal Court judgement and one week before the costs estimate being sent to the parties, referred to above was delivered, there was an application to ASIC signed by the Third Plaintiff for voluntary de‑registration of the Second Plaintiff;
3)On the same day, the Third Plaintiff also sought to deregister DCFX, which is an entity controlled by the Third Plaintiff that owes money to the Defendants by way of set‑off pleaded in these proceedings;
4)The Defendants have very recently discovered that the First and Second Plaintiffs have no assets;
5)The Third Plaintiff's financial position is unknown; and
6)The Third Plaintiff has indicated an intention to relocate to China at the conclusion of these proceedings.
Claim for security for costs against Mr Clarke
The defendants' claim that Mr Clarke give security for their costs is brought under O 25 of the Rules. Order 25 r 1 provides that 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. Order 25 r 2 provides, without limiting the generality of r 1, that the court may order security for costs to be furnished in any of the circumstances set out in pars (a) ‑ (i). The circumstance in par (b) is that the plaintiff is about to depart the jurisdiction. Mr Clarke intends to move to China to study an intensive Mandarin programme commencing in August 2016. Therefore, the ground for ordering security for costs that the plaintiff is about to depart from the jurisdiction is made out.
Order 25 r 3 provides that the granting of security shall be in the discretion of the court, and in determining whether orders 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; and
(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.
Prima facie merits of plaintiffs' claim
The plaintiffs say that their primary case is that the events outlined in the statement of claim constitute a course of conduct involving recurrent breaches of fiduciary duty by the first defendant, Mr Quann, using the other defendants as the vehicles for his breaches. The result of this course of conduct was that the defendants took the plaintiffs' money and refused to give it back. When confronted with legal proceedings by the plaintiffs for recovery of their money, the first defendant continued and compounded his breaches of fiduciary duty by erecting a wall of secured debt to make it difficult or impossible for the plaintiffs to enforce a judgment against the second, fourth and fifth defendants.
I am not sufficiently familiar with the case to form any opinion as to the merits of the plaintiffs' claims. In KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189, Beazley J said:
As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success (197) [39].
In January of this year, the case manager, Allanson J, dismissed an application to strike out the plaintiffs' statement of claim: David Clarke Air Conditioning Pty Ltd ATF David Clarke Air Conditioning Trust v Quann [2016] WASC 73. The parties have proceeded towards trial. Witness statements have been exchanged. The trial is due to commence in less than four weeks. In those circumstances, it is appropriate to proceed on the basis that the plaintiffs' claim is bona fide with a reasonable prospect of success.
Property within the jurisdiction
A court will not ordinarily require security for costs from a non‑resident plaintiff, or one about to depart the jurisdiction, who has substantial property of a fixed and permanent nature within the jurisdiction that can be made available to meet a costs order: Ebrard v Gassier (1884) 28 Ch D 232, 235 (Bowen LJ); Neely v Attorney‑General [1984] 2 NZLR 636, 645 (McMullin J); Shurat Hadin, Israel Law Centre v Lynch (No 2) [2014] FCA 413 [20] (Robertson J). In such a case, the mischief to which an order for security is directed arguably does not arise: Dal Pont GE, Law of Costs (3rd ed, 2013) [29.79].
Mr Clarke is the sole registered proprietor of the property at 122 Shenton Road, Swanbourne. At the time he acquired full title to the property in 2008, the value was assessed for stamp duty purposes at $880,000. Mr Clarke says that based on sale prices for comparable properties in the area, he conservatively estimates the value of the property to be just over $1,000,000. The property is subject to only one encumbrance - a mortgage to Australia & New Zealand Banking Group Ltd to secure a facility of $500,000. Mr Clarke has drawn down an amount of $400,000 under that facility. Thus, Mr Clarke has real property within the jurisdiction well in excess of the likely amount of any costs awarded to the defendants.
In his affidavit sworn on 7 June 2016, Mr Clarke says that over the past two to three years he developed a desire to move to China to study an intensive Mandarin programme and that he is currently booked to commence such a course in August 2016. He does not know how long he will be resident in China, but he does not intend to sell his house in Swanbourne. He will be leasing the property to meet the mortgage costs and provide him with some income while he is away. On 7 June 2016, he signed an undertaking relating to the property. The undertaking is given to the defendants and to the court. Mr Clarke undertakes that he will not sell or offer for sale the Swanbourne property without providing 28 days written notice to the defendants.
The defendants say that the undertaking is inadequate for two reasons. First, Mr Clarke may have other unsecured creditors. Secondly, it is only an undertaking not to sell or offer the property for sale, but does not preclude Mr Clarke from encumbering the property or otherwise disposing of it or diminishing his interest in the property.
There is no evidence that Mr Clarke has other unsecured creditors. On the other hand, Mr Clarke has not provided any evidence of his assets and liabilities other than the Swanbourne property. In De Bry v Fitzgerald [1990] 1 All ER 560, Staughton LJ said, in reliance upon Kevorkian v Burney (No 2) [1937] 4 All ER 468, that it is for the plaintiff to show that he has an asset within the jurisdiction which will remain here and then for the defendant to show, if he can, that the asset is worthless or not of sufficient worth to cover the costs. A similar approach was taken by Commissioner Zilko SC in Ammon v Consolidated Minerals Ltd [2004] WASC 201 where the learned commissioner said that, also referring to Kevorkian v Burney, that the defendants had led no evidence to show that the assets nominated by the plaintiff will be insufficient to meet the defendants' costs of the action.
Mr Clarke's undertaking does not provide the defendants with security for their costs. The undertaking he has given to the court and to the defendants does not prevent him from disposing of or diminishing the value of his interest in the property, otherwise than by sale. Furthermore, Mr Clarke may have other unsecured creditors who might rank equally with the defendants if Mr Clarke is unable to pay all his debts if and when the defendants obtain an order for costs in this action. However, on the evidence currently before the court, there is property within the jurisdiction that will be available to satisfy any order for costs against Mr Clarke. The purpose of ordering security for costs against a plaintiff ordinarily resident outside the jurisdiction, or about to depart the jurisdiction, is to ensure that a successful defendant will have a fund available within the jurisdiction of the court against which it can force the judgment for costs: Porzelack KG v Porzelack (UK) Ltd [1987] 1 WLR 420, 422 (Sir Nicolas Browne‑Wilkinson VC). The term 'ensure' in this context should not be read as 'guarantee'; it is used to refer to the object of the order rather than its effect: Dal Pont [29.65], citing Corfu Navigation Co v Mobil Shipping Co Ltd (The Alpha) [1991] 2 Lloyd's Rep 52, 54 (Lord Donaldson MR). That Mr Clarke owns the Swanbourne property and has given the undertaking referred to is, although not determinative, a factor in favour of not ordering Mr Clarke to give security for the defendants' costs.
Normal processes for enforcement of costs
The normal processes of the court would be available within the jurisdiction for enforcement of any costs order made against the plaintiffs. The defendants might enforce any order for costs against Mr Clarke's real property.
Delay
An application for security may be made at any stage of the proceedings, but applications should be made promptly. In Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176, Newnes JA, with whom Murphy JA agreed, said:
It is, however, incumbent upon a defendant who wishes to obtain security for its costs to apply promptly for that relief once it is, or ought reasonably be, aware that the plaintiff would be unable to meet an order for costs. Security for costs is not a card that a defendant can keep up its sleeve and play at its convenience. Delay is an important consideration in the determination of an application for security for costs because it is capable of causing prejudice or unfairness to the plaintiff. A plaintiff is entitled to know at the earliest opportunity, before it has committed substantial resources to pursuing the litigation, whether it will be required to provide security. The later an application is made the greater the likelihood that it will cause substantial disruption or distraction in the conduct of the plaintiff's case, and if the plaintiff is unable to provide security, the greater the costs that will have been wasted. The oft‑cited words of Moffitt P in Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 are apposite:
'The right to seek security for costs and to stay proceedings, with the possible result that a claim for damages is frustrated, is a powerful weapon. Therefore, the litigant who seeks to use it against his opponent is at risk of not having it available, unless the application is made and persevered with in circumstances involving the least oppression of his opponent. The primary reason why the application should be brought promptly and pressed to determination promptly is that the company, which by assumption has financial problems, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it is allowed to or commits substantial sums of money toward litigating its claim (309).'
I would add that in an era when the need to ensure the efficient use of judicial resources has become increasingly important, delay may also be significant in that regard. A late application which frustrates the action will mean that the judicial resources already devoted to the case will have been wasted. Where it results in the adjournment of an imminent trial it will often have the result that the trial dates will be wasted … [20] ‑ [21].
The defendants have offered no adequate explanation for their delay in bringing this application. The defendants knew in August 2015 that Mr Clarke was relocating to China and wanted to resolve the matter as soon as possible. The defendants have referred to a number of matters concerning Mr Clarke which they have learned since August 2015. The second plaintiff brought an application in the Federal Court against the fourth defendant for a winding up application on the ground of insolvency under s 459P of the Corporations Act 2001. The application was discontinued on 22 September 2014. Indemnity costs were awarded against the plaintiff on 27 March 2015. On 22 June 2015, the Federal Court advised the parties that costs had been certified in the sum of $44,702 plus interest. No costs have been paid pursuant to this order.
On 17 July 2015, the plaintiffs' solicitors informed the defendants' solicitors that the plaintiffs are prosecuting this action for an amount well in excess of $44,702.75 and the plaintiffs intend to set‑off any amount due and owing against the amount owed to the defendants. The defendants say that Mr Clarke sought to deregister the second plaintiff after the judgment in the Federal Court proceedings but before the certificate of taxed costs were issued while the second plaintiff was a party to these proceedings and that Mr Clarke signed a declaration stating that there were no outstanding issues. The defendants also say that Mr Clarke sought to deregister DCFX Nominees Pty Ltd which is the entity pleaded in the set‑off as owing the defendants money. Further, the defendants say that they discovered during the last week of May 2016 that the second plaintiff (a super fund) is non‑compliant which can result in substantial penalties and fines.
Of all those matters, only the last matter affects, or may affect, Mr Clarke's ability to meet any costs order against him. The defendants have provided no further detail of Mr Clarke's alleged potential liability for penalties. The discovery of those matters neither shows that Mr Clarke's assets will not be sufficient to meet an order for costs against him nor provides an adequate reason why an application for security for costs was not brought earlier.
Mr Quann says in his affidavit sworn on 27 May 2016 that he became aware 'in the past week through our investigations that the super fund is non‑compliant which results in substantial penalties, interest and fines'. In support of that assertion, Mr Quann provides a printout of an ABN lookup extracted 24 May 2016. Mr Quann provides no explanation why he did not access that material earlier. In argument, the defendants' counsel submitted that it was only when the defendants received financial information relating to the second and third defendants in May 2016 that they became aware that the corporate plaintiffs were insolvent and of the necessity to bring this application for security for costs. The defendants have known since June 2015 that the second plaintiff had a debt of over $44,000 which it was not paying. There is no adequate explanation for why the defendants did not investigate the super fund matters earlier.
On 19 August 2015, the defendants' solicitors informed the plaintiffs' solicitors that they were instructed to apply for a security for costs order. The defendants did not do so. The defendants did not inform the plaintiffs that, notwithstanding their inactivity, they intended to pursue an application for security for costs. In the meantime, the parties proceeded to prepare the matter for trial and incur substantial costs. It would unfairly prejudice Mr Clarke to now order him to provide security for the defendants' costs on the eve of the trial when the defendants have stood by while he incurred substantial costs in preparing for it. Furthermore, there is a likelihood that if the court orders security for costs, the trial will not be able to commence on the scheduled date with the resulting waste of judicial resources.
Claim for security against corporate plaintiffs
Section 1335 of the Corporations Act provides that the court 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 their defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. I am satisfied that the threshold requirement has been met, that is, the defendants have shown by credible testimony that there is reason to believe that the second and third plaintiffs will be unable to pay the costs of the defendants if successful in their defence. The court has an unfettered discretion whether to make the order.
In the exercise of my discretion, I decline to make an order for security for costs in favour of the defendants against the corporate plaintiffs for two principal reasons. First, Mr Clarke will be jointly and severally liable with the corporate plaintiffs for any costs ordered in favour of the defendants. As I have declined to order Mr Clarke to give security for costs, it is inappropriate to require the corporate plaintiffs to do so. Secondly, the defendants have unduly delayed in bringing their application.
In Kim v Song [2012] NSWSC 103, the defendants applied for security for costs against three individual plaintiffs and two corporate plaintiffs. The individual plaintiffs were Korean students who had been living and studying in Australia for three years. Black J found there was no jurisdiction to order the individuals to give security for costs and if he had had jurisdiction there would be a real question whether an order should be made. In relation to the claim for an order that the corporate plaintiffs give security for costs, Black J said:
However, the individual plaintiffs are the persons behind those companies and are parties to the proceedings and liable to an order for costs in them, and any costs order made against them is likely to be joint and several, so that the Defendants would not be left to look to the corporate plaintiffs alone for recovery of their costs. This matter strongly tends against an order for security for costs in respect of the corporate plaintiffs: Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564; [2004] NSWSC 664 at [69]. To the extent that the policy of UCPR r 42.21(1)(d) and Corporations Act s 1335 is to require a person who conducts his or her business affairs as a corporation and would otherwise be in a position to expose the other party to the proceedings to costs without risking his own assets, to accept liability for costs, that policy seems to be satisfied where that person is already liable for costs of the proceedings as a party to them: Harpur & Ors v Ariadne Australia Ltd & Ors (No 2) (1984) 2 ACLC 536 at 356; Newtimber (Operations) Pty Ltd v Tarong Energy Corporation Ltd [2011] FCA 123 at [32]. Mr Knackstredt, who appeared for Oliver Brown contended that this principle had no operation where the individual Plaintiffs were themselves persons who should be ordered to give security for costs; however, I do not consider that such an order should be made against them for the reasons I have indicated above [13].
I do not consider that an order should be made against Mr Clarke for the reasons I have set out above. In that circumstance, it is not appropriate to require the corporate plaintiffs to give security for costs.
Further, the defendants have unduly delayed in applying for security for costs. The defendants were aware in June 2015 that the second plaintiff had not paid and did not intend to pay the debt in excess of $44,000 owing to the defendants as a result of the Federal Court costs order. On 19 August 2015, the defendants' solicitors said they were instructed to bring an application for security for costs. They did not do so. On 26 November 2014, the defendants had requested the plaintiffs' solicitors to provide copies of documents in their list and requested copies of a number of documents by way of discovery, including 'copy all ATO returns for the plaintiffs during the relevant period'. The documents were not provided. The defendants did nothing to pursue their request. In any event, the request was for documents relevant to matters in issue in the proceeding and not for the purpose of showing the plaintiff corporations' ability to meet an award of costs. The defendants say, in effect, that when they received, by way of discovery, some financial documents from the plaintiffs in May 2016, that alerted them that the corporate plaintiffs were insolvent and caused them to bring the application for security for costs. The defendants have been on notice since July 2015 that the second plaintiff had not paid the outstanding Federal Court costs order and did not intend to do so. The defendants took no steps to apply for security for costs notwithstanding their statement on 19 August 2015 that they intended to do so. The defendants did nothing about obtaining security for costs or ascertaining the plaintiffs' ability to meet a costs order. The defendants made no enquiries of their own. The defendants did not ask the plaintiffs anything about their ability to meet an order for costs. In the meantime, the plaintiffs have incurred substantial legal costs in preparing for trial. It would be unduly and unfairly prejudicial to the plaintiffs to require them to give security for costs on the eve of the trial.
Conclusion
The defendants' applications for security for costs are dismissed.
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