DNA Property Group Pty Ltd v Land Source Australia Pty Ltd
[2010] VSC 642
•19 August 2010
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST B
No. S CI 2010 02357
| DNA PROPERTY GROUP PTY LTD (ACN 101 126 096) | Plaintiff |
| (Defendant by counterclaim) | |
| v | |
| LAND SOURCE AUSTRALIA PTY LTD (ACN 132 726 151) | Defendant |
| (Plaintiff by counterclaim) |
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JUDGE: | GARDINER As J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 10 August 2010 | |
DATE OF JUDGMENT: | 19 August 2010 | |
CASE MAY BE CITED AS: | DNA Property Group Pty Ltd v Land Source Australia Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2010] VSC 642 | |
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PRACTICE AND PROCEDURE - APPLICATION FOR SECURITY FOR COSTS pursuant to Rule 62.02 of the Supreme Court (General Civil Procedure) Rules 2005 and Section 1335(1) of the Corporations Act2001 (Cth) – Whether order for security would stultify proceeding – Whether impecuniosity of plaintiff was caused by defendants – Plaintiff ordered to provide security.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S. J. Loftus | Harris Carlson Lawyers |
| For the Defendant | Ms S. L. Marks | Lander & Rogers |
HIS HONOUR:
The defendant, Land Source Australia Pty Ltd (“Land Source”) makes application pursuant to r 62.02 and s 1355(1) of the Corporations Act2001 (Cth) for orders that the plaintiff (“DNA”) provide $97,690 as security for Land Source’s costs in this proceeding.
DNA admits that it does not have the funds or access to the funds to pay the amount of the security sought, thereby conceding the threshold question in security for costs applications i.e. is there reason to believe that the corporation will be unable to pay the defendant’s costs. The jurisdiction of the Court having been attracted, consideration is then required as to whether the discretion to award security should be exercised. The application has been made promptly, shortly after proceedings were issued. The litigation is a commercial dispute and there is no element of public interest involved.
The written submissions filed by the parties and oral argument concentrated, quite properly in my view, on two issues. The first is whether an order for security for Land Source’s costs would stultify the proceeding by DNA. Secondly, DNA contended that an order for security ought not to be made because, if DNA is impecunious and not able to pay an award of security, this is as a result of the actions of Land Source. I observe in this regard that, as observed by Phillips JA in Ariss v Express Interiors (1995) 13 ACLC 1585 at 1591, “…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’ “.
Land Source relies on an affidavit of Gregory James McKenzie sworn 21 June 2010 in support of its application. DNA relies on affidavits of its two directors, Daryn Trembath and Anna Cycon, both sworn 3 August 2010, of its accountant Nicholas Paul Zoch sworn 2 August 2010 and a legal costs consultant, Justin Campbell Douglas Scott sworn 9 August 2010.
The proceeding
DNA alleges that Land Source entered into a deed on 3 October 2008 by which it agreed to act as trustee for a partnership for the purpose of purchasing and developing land at Melton. DNA says that under the terms of that deed, upon settlement of a contract for the purchase of part of the land by Land Source, Land Source would pay DNA the balance of an acquisition fee of $1.8m (i.e. $1.5m) plus GST. Settlement of the contract for the sale of the land occurred on 3 March 2010 and DNA says that it is entitled to the balance of the fee owing to it.
Land Source says that prior to entering into the deed, DNA represented to Land Source that it had undertaken a detailed costs analysis and prepared estimates which were accurate and realistic for the development of the Melton land and that construction costs for the development would be in the order of $52,000 to $53,000 per lot. There were to be some 4,000 lots and the expected net profit for the development of the land would be approximately $106m. The representations alleged to have been made by DNA were alleged to be both oral and written. The written aspects were contained in a document entitled “Financial Feasibility Model for Rivergum Flat” which related to part of the Melton land.
In June 2008, the proposed partners in the development project executed an agreement by which they agreed to appoint a trustee of the partnership and execute a partnership agreement. Annexed to that agreement was a copy of the financial feasibility document referred to showing the construction cost per block. On the day that that agreement was executed, the first part of the acquisition fee of $300,000 plus GST was paid to DNA. Subsequently, Land Source was appointed as trustee of the partnership and proceeded to enter into the contract for the purchase of the part of the Melton land as described above.
In its defence, Land Source says that the representations in respect of the detailed cost analysis, the construction costs and the expected net profit were false, misleading or deceptive, were likely to mislead and deceive and, as a result, the Melton development will be far less profitable than it would have been if the costs had been accurately represented. Further, Land Source contends that it would not have entered into the October 2008 deed and DNA would not have been entitled to any part of the $1.8m acquisition fee for which it now claims the balance of $1.5m.
Land Source says that it is entitled to have the clause in the October deed providing for payment of the acquisition fee to DNA set aside or declared void and that it has suffered loss and damage by reason of the representations referred to. Land Source also counterclaims for a declaration that DNA is estopped from enforcing the clause in the deed providing for the acquisition fee and seeks an order pursuant to s 87 of the Trade Practices Act that the clause providing for the acquisition fee is void and unenforceable.
In his affidavit, Mr McKenzie contends that DNA’s claim has poor prospects of success. In my view it is neither appropriate nor possible in this type of application to make such an assessment. DNA makes its claim under the provisions of a deed. It is not suggested that the claim is not bona fide or arguable. Nor on the other hand, is it suggested by DNA that Land Source does not have an arguable defence to the claim.
Mr Loftus, counsel for DNA, in my view correctly accepted that DNA bears a burden of making out the facts to establish the stultification and impecuniosity grounds as a basis for resisting an order for security. In Livingspring Pty Ltd v Kliger Partners,[1] the Court of Appeal observed at [21] and following:
[1][2008] VSCA 93.
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 Corp:
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 creditor, or as is in this case, beneficiaries under a trust) are also without means. It is not for a 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.
24.The same would be true of a contention that the plaintiff’s impecuniosity was caused by the defendant.
DNA’s evidence in opposition to the application
In her affidavit, Anna Cycon deposes that she is a director of DNA and controls 50% of the 24 issued shares in that company. After setting out the basis of DNA’s claim, she then contends that DNA’s claim has strong prospects of success. As I have said, the authorities indicate that a court considering these types of applications should not proceed to assess the merits of a claim on other than a superficial basis and I accept that DNA’s claim is bona fide and arguable. Ms Cycon states that as a result of Land Source’s failure to pay the acquisition fee, DNA has been placed under financial pressure. She says that it has traded at a loss for the financial year ended 30 June 2009 and is currently in a net liability position. She is not in a position to personally contribute to payment of any amount of security ordered to be paid by DNA. She says that DNA was relying on payment of the acquisition fee to provide it with sufficient funds to meet its other financial obligations and that both she and DNA devoted much of their income generating efforts in 2008 and 2009 to the development of the land at Melton. During that time, DNA continued to incur overheads and was dependent upon payment of the acquisition fee to meet its financial obligations. She says that by reason of non‑payment of the acquisition fee, she and DNA have been placed under financial pressure to the degree that they are not in a position to pay security for Land Source’s costs.
As to the stultification issue, Ms Cycon states that while she has interests in two properties at Carnegie and Bridgeman Downs, they are heavily mortgaged. The Carnegie property is valued at $850,000 but is subject to a mortgage of $618,000 and has also been pledged as security for a $900,000 loan. The Bridgeman Downs property is said to have a value of approximately $450,000 but is subject to a first mortgage of $377,000. She says that DNA has current borrowings in excess of $1m and she has given personal guarantees for those loans. She says that she has no other assets which could be used to make any payment for security of costs if called upon.
Ms Cycon does state however that she has been able to make arrangements to borrow funds to pay DNA’s legal expenses to prosecute the claim. Those arrangements are not detailed but she says that they do not extend to enable funds to be borrowed to pay any security amount ordered.
In his affidavit, Daryn Trembath, the other director of DNA, deposes as to his personal financial position. He says that he owns two properties but they are both subject to mortgages of 100% of their valuation. He has also given guarantees in respect of DNA’s current borrowings mentioned above. He states that he has made arrangements to borrow funds to pay DNA’s legal expenses in this proceeding but such arrangements have not been detailed. He also asserts that the arrangements would not enable DNA to borrow funds to pay the amount of any security ordered. He asserts, without any factual substantiation, that it is solely as a result of Land Source’s refusal to pay DNA the acquisition fee that DNA has become unable to pay the security now claimed.
In his affidavit, Nicholas Paul Zoch deposes that he has acted as the accountant for DNA and what he describes as the DNA Property Unit Trust since the 2005 financial year. The trustee of the DNA Property Unit Trust is not identified nor are the unit holders in the trust. On the assumption that DNA is the Trustee, it is those unit holders who would ultimately be the beneficiary of any successful claim by DNA. The last accounts for DNA and the DNA unit trust are for the period ending 30 June 2009. Mr Zoch states that the accounts were prepared on the basis of information provided to him by DNA. The accounts are not audited.
Included amongst Mr Zoch’s responsibilities are preparation of financial statements for entities related to DNA and associated with Ms Cycon and Mr Trembath. These entities include Matrix Enterprises Pty Ltd, which is said to be the trustee for the Matrix Unit Trust. When Land Source’s solicitors first broached the matter of provision of security with DNA’s solicitors, it was indicated in a letter of DNA’s solicitors of 9 June 2009 that Matrix may be prepared to enter into an agreement with Land Source whereby it would agree to pay Land Source’s costs up to an agreed amount if DNA was unsuccessful in the proceedings. It stated in paragraph 9 of that letter, which is Exhibit GJM-5 to Mr McKenzie’s affidavit:
However we are instructed that it [Matrix] does have sufficient equity in a property, which would satisfy a costs order up to the amount presently sought by LSA.
The letter then sets out a proposal in respect of documentation of that arrangement. Land Source’s solicitors followed up this proposal in their letter of 11 June 2010 (Exhibit GJM-6 to Mr McKenzie’s affidavit). However, DNA did not respond to that enquiry. DNA does not explain what transpired in respect of that proposal.
Mr Zoch sets out, in a spreadsheet annexed to paragraph 11 of his affidavit, the net asset position of various members of the group with which DNA is associated for the financial year ending 30 June 2009, that is, over a year ago. What is said to be “an entity” described as the DNA Property Unit Trust had a net asset position as at 30 June 2009 of $1,044,268 and during that year it had suffered a $16,216 loss. The Matrix Unit Trust is said to have a $48,428 deficiency as at 30 June 2009 and had derived a profit of $186,372 in that year. Other members of the related group had modest profits. The Trembath Family Trust had net income of $112,830 with a deficiency of $47,653. Mr Zoch says that the profits shown by the Matrix Unit Trust, the Global Family Trust and the Trembath Family Trust were the result of capital gains made on investment property disposals.
In paragraph 13 of his affidavit, Mr Zoch states that DNA has experienced some difficulty “over the past few years” in re‑financing. Significantly, he states that he is aware that DNA has entered into re‑payment arrangements with the Australian Taxation Office to meet its obligations to the Commissioner of Taxation. This clearly points to a situation whereby DNA has not been able to meet debts due to the Commissioner of Taxation when they were due to be paid and Mr Zoch says that this situation has prevailed to the degree whereby a number of re‑payment arrangements have had to be made. This indicates that DNA has been in a parlous situation financially, if not insolvent, for some time and, it seems, prior to the transaction the subject of the present proceeding. In my view, this tends to undermine the submission by DNA that its current impecuniosity has been brought about by the actions of Land Source in not paying the acquisition fee.
Mr Zoch states that “in his opinion it would be very difficult for DNA to obtain the finance required to fund this matter”. Mr Zoch does not say that it would not be possible to do so and I note that DNA has been able to raise funds to pay its own lawyers. Mr Zoch states that Ms Cycon and Mr Trembath “would also find it very difficult to obtain finance to pay the security amount claimed by the defendant”. He states his belief that if the claimed amount had been paid to DNA that it would have been in a position to pay the security amount. This statement of course rather begs the question of whether Land Source relevantly brought about DNA’s impecuniosity.
Mr Zoch exhibits certain accounts as Exhibit MPZ-1 to his affidavit which includes accounts for the DNA Property Unit Trust. The trustee of the DNA Property Unit Trust is not identified in the evidence and nor, significantly, are the unit holders who are those who will benefit by DNA’s proceeding if DNA is in fact the trustee. The accounts which are exhibited do not reveal how the respective entities are associated with or related to DNA. The accounts for the DNA Property Unit Trust reveal that it had a deficiency of assets of $1,082,052 as of 30 June 2008 and this figure had only increased slightly to $1,044,268.18 by 30 June 2009. Under its non‑current liabilities it lists approximately 20 unsecured loans from persons who appear to be investors. The evidence of Mr Zoch reveals that DNA is part of a sophisticated commercial structure of trusts and companies.
I now turn to assess whether the two factors relied on by DNA should weigh against the ordering of security for costs. As I have said, and as has been accepted by DNA, it bears the onus of establishing such factors. As to the impecuniosity issue, i.e. whether the impecuniosity of DNA was caused by conduct of Land Source, there are assertions in this regard by the deponents to DNA’s affidavits in opposition to the application. They say because Land Source has not paid the fee DNA is not able to pay the amount of security offered. Mr Loftus referred me to the decision of Harper J, as he then was, in Sandl Trading Pty Ltd v North American Oil Company and Robert Hicks Pty Ltd,[2] in which this discretionary ground was used in order to avoid the award of security.
[2][1998] VSC 8.
In that case, the plaintiff filed an affidavit in which it was contended that the trading losses suffered by it were “entirely attributable” to the investment which was the subject of the plaintiff’s claim. In the context of that particular case, Harper J considered that such a statement was sufficient to support the contention that the defendant had contributed adversely to the plaintiff’s financial position. In Sandl Trading, the defendants withdrew supply of its product to the plaintiff and Harper J held that the reasonable likelihood must be that if the defendant’s products had a ready market, the sudden and unexpected termination of the plaintiff’s ability to trade in them would have had an adverse effect on its profitability.
In the present case, however, DNA has not exhibited accounting material of the quality that one might expect to make this ground out. Indeed, there are no accounts for DNA in evidence, only what might be described as a summary of the position of various trusts and companies which are said to be members of the group. While it is not stated to be the case, if it is presumed that DNA is the trustee of the DNA Property Unit Trust, the position in regard to that trust has not, as I have observed, materially changed in the years ended 30 June 2008, when it already had a deficiency of over $1m, and 2009. The acquisition fee was due to be paid on settlement of the transaction in March 2009. In Gentry Brothers Pty Ltd v Wilson Brown and Associates Pty Ltd and ors,[3] Cooper J assessed this factor as part of his decision in a security for costs application. He stated:[4]
There is no evidence to support a finding that any conduct on the part of the respondents caused or substantially contributed to the applicant’s impecuniosity. The applicant was suffering loss as in its past for business before the conduct complained of. The increase in trading losses had nothing to do with the respondent. … The material before the Court, incomplete as it is, suggests that the applicant’s net financial position after completion was approximately the same and that its worsening financial position since that time flows from exposure to debt which was not caused by the respondent. There is therefore no circumstance under this head which would weigh against the ordering of security for costs.[5]
[3](1992) 10 ACLC 1394.
[4]At 1399.
[5]A 1400.
I believe that such reasoning is appropriate to be applied in this instance.
I do not consider that DNA has established that the proceeding would be stultified. The material in regard to DNA’s financial position is incomplete and is stale. There are no accounts put into evidence for DNA and even if it is assumed that DNA is trustee of the DNA Property Unit Trust, there is no evidence as to the identity of the persons who will ultimately benefit by DNA’s litigation, i.e. the unit holders, or their means to meet an order for security. It cannot be presumed that Mr Trembath and Ms Cycon are the unit holders – there is no evidence on this issue. The accounts for that trust are in any event over a year old.
Another factor which does influence me is that DNA has been able to fund its own legal expenses for the litigation from unspecified sources but is not prepared or able to use such sources to meet an order for security. DNA, part of a group in a sophisticated commercial enterprise, is prepared to litigate a significant piece of commercial litigation in which the fruits of victory are substantial with the defendant bearing the whole risk of the litigation if DNA should lose the case.
In the circumstances, I consider it is appropriate to accede to the application to award security to Land Source for its costs.
In his affidavit, Mr McKenzie, who is an experienced solicitor practising in commercial litigation, details the costs which Land Source will incur to the commencement of trial in the defence of DNA’s claim. He states that figure to be approximately $97,690. DNA has filed an affidavit of Justin Campbell Douglas Scott, a costs consultant. Mr Scott tabulates in the form of a document resembling a bill in taxable form stating his estimate of the probable party-party costs is in the proceeding.
The respective affidavits were prepared on the bases of different assumptions. Mr McKenzie in his affidavit seeks costs on the assumption that the defence and counterclaim and the costs associated with it should not be discounted on the basis that the counterclaim is one in which Land Source is the “aggressor” in the litigation. Mr Scott, on the other hand, discounts the costs on this basis.
When one looks to the counterclaim, it makes a claim for a declaration and for relief under the Trade Practices Act. I accept the contention of Land Source that the counterclaim is really a mechanism for invoking Land Source’s defences[6] and allowance should be made for it.
[6] See generally Neck v Taylor [1893] 1Q.B. 560 at 562-3 per Lord Esher M.R.
I have reviewed the items mentioned on Mr Scott’s table and compared it with the schedule prepared by Mr McKenzie which is Exhibit GJN-6 to his affidavit which details what he contends will be the costs incurred.
One view taken in these types of applications is that security for costs should be calculated up to the first day of trial. Mr Scott’s schedule, while not parsimonious, adopts an economical and conservative approach. The claim is a large one involving significant responsibility for the legal practitioners involved. Mr Scott allows only one day of preparation and conferences at $3,000 per day which I would consider to be low, both by reference to the daily rate, which on a party-party basis would probably be more in the order of $4,000 for an experienced ‘senior junior’ counsel and for the number of days allowed for preparation which I consider would involve at least two days.
A number of other discounting factors should be taken into account. Many commercial cases, such as the one in this instance, settle without coming to trial; while as I have said the respective prospects of success of the parties can only be superficially assessed, DNA’s claim is based on its entitlement to payment under a deed which Land Source will have to successfully impeach. Even if successful, experience teaches that if bills are taxed on a party‑party basis, significant sums are often taxed off.
In the circumstances, I consider that DNA should provide security in an appropriate form for Land Source’s costs up to the first day of trial in the sum of $50,000.
I will hear the parties on the form of order required to implement this.
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