Fazche Pty Ltd v Internal Lynx Pty Ltd - [2021] SADC 117

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil: Interlocutory Application)
FAZCHE PTY LTD v INTERNAL LYNX PTY LTD & ORS
[2021] SADC 117
Ruling of his Honour Judge O'Sullivan
22 October 2021
CORPORATIONS - LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS - EXTERNAL LITIGATION PROCEDURE - COSTS - SECURITY FOR COSTS - DISCRETION OF COURT - GENERAL PRINCIPLES
Application for an increase in the amount payable for security for costs and for security for the costs of the trial.
The proceedings concern contracts for the construction of multiple dwellings and are brought against the owner of the land, as well as Hayssam Hamra, a consultant/employee of Fazche Pty Ltd at the relevant times and Satori Projects Pty Ltd, a company of which Mr Hamra’s wife is the sole director and shareholder.
Fazche Pty Ltd alleges that the contracts for the construction of the dwellings were entered into by Mr Hamra on behalf of the applicant at sums lower than their value, thereby breaching his fiduciary duty. It is also alleged that payment owed to Fazche Pty Ltd under the contracts was diverted to Satori Projects Pty Ltd.
An order for security for costs was made previously. Internal Lynx and Mr Nasser-Eddine now seek an increase in the amount of security and payment of security for costs for the trial, payable on the first day of trial.
Held: application dismissed.
Corporations Act 2001 (Cth) 1335(1), referred to.
Fazche Pty Ltd v Mounzer & Anor, Fazche Pty Ltd v Internal Lynx Pty Ltd [2019] SADC 194; Fazche Pty Ltd v Mounzer & Ors, Fazche Pty Ltd v Interal Lynx & Ors [2020] SADC 99; Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No.2) [2016] FCA 360; Cameron’s Unit Services v Kevin R Whelpton & Associates (Australia) Pty Ltd [1986] 13 FCR 46 at 49,50, considered.

FAZCHE PTY LTD v INTERNAL LYNX PTY LTD & ORS
[2021] SADC 117
Introduction

This is an interlocutory application[1] filed 24 June 2021 by the first respondent (“Internal Lynx”) and the fourth respondent (“Mr Nasser-Eddine”) in which Internal Lynx and Nasser-Eddine seek orders that:
(i)The amount of security for costs to be paid by the applicant ("Fazche") pursuant to the orders of his Honour Judge Chivell DCJ made 18 December 2019[2] be increased from $25,000 to $75,000; and
(ii)Fazche pay the sum of $95,000 into the Suitors Fund by way of security for costs upon commencement of the trial.
[1] FDN79
[2] [2019] SADC 194
Documents relied upon
Internal Lynx and Mr Nasser-Eddine rely on:
(i)The affidavit of David Matthew Elix filed 24 June 2021 (“First Elix Affidavit”);[3]
(ii)The affidavit of David Matthew Elix filed 29 November 2017 (“Second Elix Affidavit”);[4]
(iii)The second affidavit of Nicola Steven Fazzari filed 17 November 2019,[5] and in particular the Deed of Company Arrangement (“DOCA”) exhibited to that affidavit as "NSF3".
[3]    FDN80
[4]    FDN17
[5]    FDN14
The applicant relies on:
(i)The tenth affidavit of Nicola Steven Fazzari sworn 29 June 2021;
(ii)The affidavit of Nicola Steven Fazzari sworn 9 September 2019 (“First Fazzari Affidavit”);
(iii)The second affidavit of Nicola Steven Fazzari sworn 7 November 2019;
(iv)The third affidavit of Nicola Steven Fazzari sworn 13 December 2019;
(v)The sixth affidavit of Nicola Steven Fazzari sworn 28 April 2020;
(vi)The seventh, eighth and nineth affidavits of Nicola Steven Fazzari sworn 28 April 2020, 29 May 2020 and 1 June 2020 respectively.
Both parties rely on their written submissions.
Prior decisions
There have been two prior decisions in this matter relating to security for costs. I have already mentioned the first which is the decision of his Honour Judge Chivell DCJ dated 18 December 2019.[6] The second is a decision I delivered on 20 July 2020.[7]
[6] [2019] SADC 194
[7] [2020] SADC 99
The applicant's claim
I set out below a brief overview of the applicant's claim.
Fazche is a licensed builder whose director is Nicola Steven Fazzari ("Mr Fazzari"). On 16 August 2019, Fazche went into voluntary administration and the DOCA entered into on 4 October 2019.
The second respondent ("Mr Hamra") was an employee or agent of Fazche.
The third respondent ("Satori") is a company carrying a business as a developer. Its sole director is Mr Hamra's wife, Noura El Hamra.
Mr Nasser-Eddine is the sole director of Internal Lynx. He also did work for Fazche as a contractor.
On 19 April 2016, Fazche and Internal Lynx entered into a contract for the construction of premises at Encounter Bay, South Australia in which a 192 square metre house comprising two storeys, three bedrooms, three bathrooms and a double garage was to be built for a contract price of $70,000 including GST. The contract was signed for Fazche by Mr Hamra.
Independent quantity surveyor evidence estimates the reasonable costs of the completed works as being between $297,000 and $345,000.
On or about 19 January 2017, a contract was entered into between Fazche and Internal Lynx for the construction of a house at Hillbank in the sum of $101,500. Again, the contract was signed for Fazche by Mr Hamra.
The house was a single storey, three bedroom, two bathroom, double garage comprising 233 square metres. The actual cost incurred in construction was $178,000 excluding any margin for profit.
Independent quantity surveyors have estimated the cost of construction as between $258,000 and $299,000.
It is alleged that Mr Nasser-Eddine made payments for the construction of both houses to Satori Projects.
Fazche allege that in entering into the two contracts on behalf of Fazche at sums lower than the cost of the works, Mr Hamra breached his fiduciary duty and duty of care to Fazche.
As to Internal Lynx, Fazche plead that it was the knowing recipient of a benefit it obtained in breach of a fiduciary duty (alternatively recklessly indifferent as to whether it was receiving a benefit in breach of a fiduciary duty).
Fazche plead against Mr Nasser-Eddine that he has committed the tort of interference with contractual relations by making payments for the construction work done on both properties to Satori.
Legal principles
Internal Lynx and Mr Nasser-Eddine rely on s1335(1) of the Corporations Act 2001 ("Act") and rule 115.1(d) and (3) of the Uniform Civil Rules (“UCR”).
Section 1335(1) of the Act provides:
Costs
(1)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.
UCR rule 115.1(d) provides:
115.1—Security for costs
(1) The Court may order that an applicant in an action provide security for costs if—
(d) the order is authorised by statute; …
UCR rule 115.1(3) provides:
(3) The Court may vary or revoke an order for security for costs and may order further security.
The legal principles applying to an application for security for costs pursuant to s1335(1) of the Act are well settled.
Threshold question
Under that section there is a two-step process. The first step is what has been described as the threshold question, that is, is there “credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the respondent if successful in his, her or its defence?”. The onus of proof for the threshold question is on the party seeking security.
If the threshold question is satisfied, the onus shifts to the party opposing the order to establish that in the exercise of the court’s discretion security should not be ordered.[8]
[8] Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No.2) [2016] FCA 360
As I have noted, Fazche went into voluntary administration on 16 August 2019. There is therefore no issue that the threshold question has been satisfied.
Discretion
The issue that is now before the Court is the second question, namely whether in the exercise of the Court’s discretion it should make the orders sought.
It is well settled that the discretion as to whether to order security for costs or an increase in the amount of security is unfettered.[9]
[9] Cameron’s Unit Services v Kevin R Whelpton & Associates (Australia) Pty Ltd [1986] 13 FCR 46 at 49,50
In Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No.2),[10] Edelman J listed the factors to be considered by the court in exercising its discretion as to whether to make an order for security for costs. I consider the same factors apply to the Court’s consideration as to whether or not an order for security for costs should be varied or further security provided.
[10] [2016] FCA 360 at [13]
His Honour said:
Some of the common factors to be considered by the Court in the grant of security for costs were recently summarised by Collier J in Hii v Federal Commissioner of Taxation (No 3) [2016] FCA 58 [9] – [10]. Those factors, and others which are often referred to, include:
(1)     the likelihood of the applicant being unable to pay the respondent’s costs;
(2)the characteristics of the applicant including whether it is a corporation or a natural person, the wealth of the applicant, whether the applicant is a foreign resident and, if so, the assets held by the applicant in Australia;
(3)whether any impecuniosity of the applicant was caused by the respondent’s conduct which is the subject of the claim, to the extent to which that can be assessed;
(4)     whether the application for security is oppressive;
(5)whether the award of security would deny an impecunious applicant a right to litigate;
(6)whether there are persons standing behind the applicant who are likely to benefit from the litigation;
(7)whether the persons standing behind the applicant have offered any security or personal undertaking to be liable for the costs, and if so, the form of that security or undertaking;
(8)whether the proceedings are in substance defensive in the sense of directly resisting proceedings already brought or seeking to halt the respondent’s self-help procedures so that the applicant is, in substance, forced to litigate;
(9)     whether the application for security had been brought promptly;
(10)whether the applicant has any rights which it can exercise against assets of the respondent to satisfy an order for costs in its favour;
(11)the strength and bona fides of the applicant’s case, although this will invariably only be determined in a provisional manner and in many cases will only be a broad brush impression of little weight; and
(12)   any factors relating to the public interest.
Respondent’s submissions
$95,000 for the costs of trial
I deal first with the application for an order that on the first day of trial Fazche pay the sum of $95,000 into the Suitor's Fund as security for costs. Mr Heinrich of counsel for Internal Lynx and Mr Nasser-Eddine clarified that if the Court considers it is not appropriate to make that order before that time, the order should be made on the first day of trial. I say now that I do not consider it appropriate to make such an order now and I decline to do so. It is open to Internal Lynx and Mr Nasser-Eddine to renew their application on the first day of trial, if so advised.
The increase in security from $25,000 to $75,000
Internal Lynx and Mr Nasser-Eddine rely on six grounds.
Increase in trial length
First, this action is now to proceed at the same time as three other related actions.
Internal Lynx and Mr Nasser-Eddine refer to the decision of his Honour Judge Chivell and point to exhibit "DME3" to the Second Elix Affidavit,[11] which is Mr Elix’ assessment of costs of preparation for and running the trial of between $118,000 and $155,000.
[11] FDN17
They submit that when his Honour made the order for security for costs, the trial had not been set and there had been no order made to hear the four actions in the one trial. Further, it was based on a three-day trial.
This action commenced on 9 August 2019. The first application for security for costs was filed on 29 November 2019 with his Honour Judge Chivell delivering his decision in December 2019. Internal Lynx and Mr Nasser-Eddine observe that was early in the proceedings and refer to the orders made in this matter on 25 February 2021 in which four matters were listed for trial for four weeks.
They submit that is different from which they had initially contemplated which was a single trial, and which gives rise to a justifiable basis to seek to have the security for costs order reviewed and a further order made, increasing the amount of security.
It is correct that his Honour's decision was made very early in the proceedings and in this action alone. However, it became apparent subsequently that there were other actions involving similar allegations and common parties. It is for that reason the Court ordered the four actions be listed together.
It seems his Honour was persuaded to make the order at that early stage given the DOCA and the failure by the applicant's director, Mr Fazzari, to provide a personal guarantee.
As I understand the position, that remains the case, however the Court has far more information now than was the case in December 2019. The evidence against Internal Lynx and Mr Nasser-Eddine will still have to be presented. If anything, there is likely to be an overall cost saving. In those circumstances, I do not consider that the fact the trial in this matter is listed with others is a basis for increasing the amount of security.
Creditors
Second, in simple terms, Internal Lynx and Mr Nasser-Eddine submit that the report of the administrators, BRI Ferrier[12] discloses creditors of $1.5 million but that the court should not infer that each of the creditors do not have money to fund the litigation.[13] The point Internal Lynx and Nasser-Eddine make is that the action is for the benefit of the creditors.
[12] Second Elix Affidavit, FDN17, Exhibit DME2
[13] T92.1-14
Internal Lynx and Mr Nasser-Eddine also submit that since the applicant is being legally represented, they would expect to hear that Fazche’s solicitors are acting on a speculative basis and that in the absence of being informed that is the case, the Court should infer that the applicant does not want to reveal the basis on which it is being represented because it will not assist its case. As part of that submission, they also submit there is no information as to those standing behind Fazche.
As to those two points:
I dealt with the provisions of the DOCA in my decision delivered 28 July 2020[14] and I do not repeat them. However, it is clear from the DOCA[15] that the majority of any nett recovery goes to the deed fund for distribution to creditors and that if, within two years of execution of the DOCA, the amount of $180,000 has not been contributed from nett recoveries, Mr Fazzari has to make an additional payment of $180,000. On that basis, I consider the action is for the benefit of the creditors.
As to the second point concerning funding the proceedings, I understand the submission to be that given the way the DOCA works, there must be some other party or parties who is/are funding the action against Internal Lynx and Mr Nasser-Eddine.
That may well be the case, I simply do not know. However, as I have noted above, the DOCA provides that the nett recovery from legal actions (which includes this action), is defined to include the gross proceeds of the resolution of the legal actions less the legal costs and disbursements reasonably incurred in resolving those legal actions. As I also noted in my previous decision,[16] if successful, there will be an element of out of pocket costs and expenses which Fazche, and/or those who may be funding the action, will not recover from other parties. On that basis, even if someone is funding Fazche, there is no suggestion that that funder is to recover anything more than the legal costs and disbursements incurred in resolving the legal actions.
As to those standing behind Fazche, in my previous decision I noted that whereas the court has no information as to the assets of those who stand behind Fazzari Investments Pty Ltd, which is the sole shareholder in Fazche, the DOCA makes it clear that they will not benefit from a recovery other than the 40% of the nett recovery from legal actions. I was prepared in infer on that occasion and I am prepared to continue to infer that would do no more than place Mr Fazzari and related entities in a costs recovery position.
[14] [2020] SADC 99 [72]-[83]
[15] Third Fazzari Affidavit, Exhibit NSF3
[16] [2020] SADC 99 [106]-[108]
Accordingly, I do not accept that the fact the action is being run for the benefit of creditors and in the absence of information concerning who (if anyone) is funding the applicant in these proceedings in these particular circumstances, is such as to warrant the court increasing the amount of security.
Cause of applicant’s impecuniosity
Third, whereas in my decision dated 28 July 2020, one of the main issues is whether the actions of the second and third respondents caused the impecuniosity of the applicant, Internal Lynx and Mr Nasser-Eddine submit they were not a party to that application. They submit that whereas I dealt with the actions of Mr Hamra and Satori in my decision dated 28 July 2020, that is irrelevant for the purposes of exercising my discretion in this application. They invite the Court to conclude that Internal Lynx and Mr Nasser-Eddine were not responsible for the impecuniosity suffered by the applicants.
They point to the Statement of Claim in this matter alleging that the loss on Encounter Bay was in the order of $221,000 whereas the loss suffered by Fazche in the financial year in question was $1.5 million. On that basis, Internal Lynx and Nasser-Eddine challenge their contribution to the loss.
They submit the same result arises in relation to the Hillbank property where the loss is alleged to have been $136,733.
The submission by Internal Lynx and Mr Nasser-Eddine proceeds on the basis that, accepting for the purposes of the argument that loss Internal Lynx and Mr Nasser-Eddine contributed to Fazche's loss, it cannot be said that they contributed to the applicant’s impecuniosity.
I do not accept that submission. Although Mr Hamra and Satori are parties in other actions, the reason these actions are being heard together is because of the commonality of subject matter and parties. In those actions, the allegations, broadly stated, are that Mr Hamra executed a contract on behalf of Fazche which understated the construction costs of various properties with a benefit flowing either to him or to Satori.
It seems to me when the allegations against all the respondents in this action are considered, it may be said that the consequences of the impugned transactions formed part of or contributed to what was the ultimate financial downfall of the applicant.
Delay
Fourth, the respondents submit that any delay in bringing the application is not an issue.
The respondent refers to the First Elix Affidavit[17] in which Mr Elix deposes that he recalls that at the directions hearing on 25 February 2021, he informed the Court that Internal Lynx and Mr Nasser-Eddine had obtained an order for security for costs in the proceedings based on a three day trial and that with the length of the trial being increased it made necessary for the amount of the security to be revised.
[17] FDN80

So it is that Internal Lynx and Mr Nasser-Eddine submit there is no delay in bringing this application.
This matter was listed for trial initially on 27 September 2021, seven months after the order made listing it for trial. Under those circumstances, I consider a delay of four months in bringing the application, which is dated 24 June 2021, to be significant although by itself, not sufficient to justify the dismissal of the application.
Stultify the proceedings
Fifth, Internal Lynx and Mr Nasser-Eddine submit there is no evidence that an order for security or an increase in security will stultify the proceedings. There is also no evidence as to the assets of related entities, although as I have discussed above on the face on the DOCA it appears that those related entities will not benefit from the litigation.
As I noted in my decision dated 28 July 2020, I did not consider the application for security as a tactic to stultify an otherwise genuine claim.[18] I maintain that position.
Those standing to benefit from the litigation
[18] Ibid at [110]
Sixth, Internal Lynx and Mr Nasser-Eddine submit that there are people standing behind the company likely to benefit from the litigation who have the capacity to provide security. The onus is on the applicant to show to the relevant standard that there is not anybody available to provide security.
I have dealt with this issue above when dealing with creditors. Further, it seems to me that in the particular circumstances of this case, the public policy consideration in pursuing alleged debts for the creditors outweighs that concern.
Applicant’s submissions
The applicant submits that the discretion should be exercised against the applications brought by Internal Lynx and Mr Nasser-Eddine on the basis of:
(1)The contribution made by Internal Lynx to the insolvency of the applicant as I have set out above;
(2)The expert evidence concerning the true cost of construction of the Encounter Bay and Hillbank properties;
(3)The fact that the applicant is subject to a DOCA under which the majority of the proceeds of the litigation are for the benefit of the creditors under the DOCA but Mr Fazzari bearing the cost of the exercise.
I accept those submissions on the basis I have set out when dealing with the submissions of Internal Lynx and Mr Nasser-Eddine.
Conclusion
In all of the circumstances, I am not satisfied that the exercise of my discretion is appropriate to increase the amount of security ordered by his Honour Judge Chivell on 18 December 2019.
Similarly, I am not prepared to order that the applicant pay security on the first day of trial at this stage, although as I have noted it is always open to Internal Lynx and Nasser-Eddine to renew their application that day, if so advised.
I will hear the parties as to the question of the costs of and incidental to this application.