Gerrard v Slamar
[2004] WASC 253
DOMELIA PTY LTD as Trustee for the KEITH BRADFORD FAMILY TRUST, BRADFORD PERSONNEL TRUST and BRADFORD PERSONNEL NO 2 TRUST & ANOR -v- PAIKER [2004] WASC 253
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2004] WASC 253 | |
| Case No: | CIV:2499/2003 | 9 NOVEMBER 2004 | |
| Coram: | MASTER NEWNES | 26/11/04 | |
| 9 | Judgment Part: | 1 of 1 | |
| Result: | Application for security for costs dismissed | ||
| B | |||
| PDF Version |
| Parties: | DOMELIA PTY LTD as Trustee for the KEITH BRADFORD FAMILY TRUST, BRADFORD PERSONNEL TRUST and BRADFORD PERSONNEL NO 2 TRUST KEITH BRADFORD ALAN RAEL PAIKER |
Catchwords: | Practice and procedure Application for security for costs Whether plaintiff likely to be able to meet order for costs Relevance of contingent debts of plaintiff Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 1335 Rules of the Supreme Court 1971, O 25(1) |
Case References: | FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241 Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 11 ACLC 1238 BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857 Dalecoast Pty Ltd v Guardian International Pty Ltd, unreported; SCt of WA; Library No 990168; 7 April 1999 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- First Plaintiff
KEITH BRADFORD
Second Plaintiff
AND
ALAN RAEL PAIKER
Defendant
Catchwords:
Practice and procedure - Application for security for costs - Whether plaintiff likely to be able to meet order for costs - Relevance of contingent debts of plaintiff - Turns on own facts
(Page 2)
Legislation:
Corporations Act 2001 (Cth), s 1335
Rules of the Supreme Court 1971, O 25(1)
Result:
Application for security for costs dismissed
Category: B
Representation:
Counsel:
First Plaintiff : Mr K S W Tan
Second Plaintiff : Mr K S W Tan
Defendant : Mr I R Gillon
Solicitors:
First Plaintiff : Mullins Handcock
Second Plaintiff : Mullins Handcock
Defendant : Lawton Gillon
Case(s) referred to in judgment(s):
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241
Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 11 ACLC 1238
Case(s) also cited:
BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857
Dalecoast Pty Ltd v Guardian International Pty Ltd, unreported; SCt of WA; Library No 990168; 7 April 1999
(Page 3)
1 MASTER NEWNES: This is an application by the defendant for an order for security for costs against the first plaintiff, pursuant to s 1335 of the Corporations Act2001 (Cth) or the Court's inherent jurisdiction. The defendants seek security in the sum of $125,553.50.
2 The proceedings were commenced by the plaintiff on 9 December 2003. The second plaintiff is a solicitor who, at all material times, has practised under the name of Bradford & Co. He is the sole director of the first plaintiff, which is the trustee of, among others, the Bradford Personnel No 2 Trust (the "Trust"). The first plaintiff carries on business, as trustee of the Trust, as the service entity for the legal practice. Under the terms of the trust deed, the first plaintiff is entitled to be indemnified out of the assets of the trust for any liabilities
3 It is alleged in the statement of claim that, by an oral agreement made on about 10 June 2001, the first plaintiff employed the defendant as its manager. It was agreed the defendant would be paid a salary of $60,000 per annum, plus $10,000 travelling allowance and superannuation. The plaintiff had to serve a probationary period of three months and at the end of the probationary period, if the parties did not terminate the agreement, the defendant's salary was to be increased to $70,000 per annum. One of the defendant's responsibilities was to arrange payment of the wages and salaries of the staff of the first plaintiff, including his own salary. The defendant's salary and travelling allowance were to be paid in instalments, two weeks in arrears.
4 The plaintiffs say that the defendant was employed between 19 June 2001 and 19 September 2003. It is alleged by the first plaintiff that, in breach of his employment agreement and his duties to the first plaintiff, the defendant made unauthorised payments to himself by way of salary and travel allowance and unauthorised bonuses in a total sum of $117,923.29 and a further sum of $1754.15 in superannuation payments.
5 The first plaintiff also claims that the defendant made unauthorised payments to himself from the first plaintiff's bank account in the sum of $12,020.56.
6 The second plaintiff says he authorised the defendant to operate the second plaintiff's bank accounts for the purpose of the conduct of the legal practice. The second plaintiff alleges that during his employment the defendant, without the second plaintiff's authority, paid to himself from that account a total amount of $19,782.52. The second plaintiff claims that amount.
(Page 4)
7 There is a further general claim by both plaintiffs that the defendant paid further sums to himself from their respective bank accounts without their authority and in breach of his obligations, full particulars of which are to be supplied after discovery.
8 The defendant denies the plaintiffs' claims and says that any sums that were paid to him were expressly authorised by the second plaintiff. The defendant says he has a counterclaim against the first plaintiff for outstanding employment entitlements.
9 On 5 August 2004, the defendant applied for an order that security for costs be provided by the first plaintiff.
10 Section 1335(1) of the Act provides as follows:
"Where a corporation is plaintiff in any action or other legal proceedings, 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."
11 It is clearly established that the Court's jurisdiction to order security for costs under s 1335 is enlivened only if it appears by credible testimony that there is reason to believe the corporation will be unable to pay the defendant's costs if the defendant is successful. If that question is answered in the affirmative, the question then is whether, in the exercise of the Court's discretion, such an order should be made: FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241.
12 The first plaintiff resisted the current application essentially on the ground that it clearly has the capacity to meet any order for costs that may be made against it in the action.
13 In his affidavit in support of the application, the defendant, rather unhelpfully I must say, refers to the plaintiffs jointly as "the practice". The consequence is that in many places in his affidavit, the defendant does not distinguish, and it is impossible on a reading of the affidavit to distinguish, between the position of the first plaintiff and the second plaintiff.
14 Evidence was adduced on both sides as to the financial position of the first plaintiff, and much of the defendant's evidence related to what
(Page 5)
- was said to be the cash flow difficulties of the practice. I do not think it is necessary to canvass that evidence in any detail. The defendant said that he had an intimate knowledge of the financial affairs of the plaintiffs up to September 2003 and at that time the first plaintiff was not in a position to pay its debts as and when they fell due. It had entered into an arrangement with the Australian Taxation Office to pay arrears of PAYG, but was unable to meet its current obligations in respect of PAYG. The defendant says "the practice" had transferred its accounts from the Commonwealth Bank to the ANZ Bank in January 2003 to enable it borrow further funds and in July 2003 "the second plaintiff" commenced banking with Westpac Banking Corporation, having been offered additional facilities.
15 In the end, however, it was common ground that if, on the evidence, it appeared the first plaintiff had a sufficient surplus of assets over liabilities as would, in the events that are reasonably possible, enable it to meet any order for costs that might reasonably be made against it at trial, the defendant's application must fail. The first plaintiff's cash flow position from time to time was not determinative for the purposes of the present application.
16 There was exhibited to the defendant's affidavit a copy of what he described as management accounts of the practice for the financial year to 29 June 2003. The accounts include a profit and loss statement and a balance sheet of the first plaintiff. The accounts had been prepared by the defendant and it was not suggested by the defendant that they were other than an accurate statement of the financial position, as at 29 June 2003, of the entities to which they related. No financial figures for any later date were put in evidence by either party.
17 The profit and loss statement showed the total income of the first plaintiff for that period in the sum of $2,064,176.59 and total expenses of $1,769,680.82. The profit before tax was therefore $294,495.77. The income consisted almost entirely of management fees of $2,063,948.25. Those management fees were paid by the second plaintiff from the income of the legal practice. The management fees constituted almost the entire expenses of the practice, which showed a relatively modest profit compared to the profit of the first plaintiff.
18 The balance sheet of the first plaintiff showed current assets of $2,136,476.41 and current liabilities of $737,791.26. The non-current assets were shown at $1,923,600.74 and the non-current liabilities at $1,001,764.73. The total assets of the first plaintiff were therefore valued
(Page 6)
- at $4,060,077.15 and the total liabilities at $1,739,555.99. Accordingly, the balance sheet showed the first plaintiff, as at 29 June 2003, having a total surplus of assets over liabilities in the sum of $2,320,521.16.
19 The defendant says that the balance sheet does not reflect the true financial position of the first plaintiff. It was submitted on behalf of the defendant that it was plain from the financial statements of the plaintiffs that the first plaintiff was reliant for almost its entire income on the service fees paid by the second plaintiff. In the balance sheet of 29 July 2003, of the current assets of the first plaintiff of $2,136,476.41, the "accounts receivable", which were service fees payable by the legal practice, constituted $2,136,117.06. I should note in passing that, on the figures in the balance sheet, the total omission of the accounts receivable would still leave a balance of assets over liabilities of $217,404.10. The defendant, however, said that the value of one of the assets of the first plaintiff, a property known as 77 Strickland Street, which was shown in the accounts at $976,375, had obviously been overstated since it had since been sold for $775,000. Accordingly, there was, in fact, no such surplus.
20 The defendant contended that it was apparent that the first plaintiff was dependent for its own solvency on the capacity of the second plaintiff to continue to pay management fees of a similar magnitude from the legal practice. The defendant argued that the second plaintiff did not have that capacity; that, in fact, the second plaintiff was insolvent as the Deputy Commissioner of Taxation had issued taxation assessments to him in the total sum of some $3,000,000. The assessments related to the disallowance of deductions in respect of the prepayment of service fees by the second plaintiff in the financial years ended 30 June 1998, 1999 and 2000. The assessments included penalties and interest charges.
21 The second plaintiff says an objection has been lodged in respect of each assessment. According to the second plaintiff, the deductions were claimed after he was advised by his accountants that prepaid expenses were deductible. He says his accountants had received that advice in writing from an officer of the Australian Taxation Office. The assessments were issued in April 2003 after the Australian Taxation Office retrospectively disallowed the deductions.
22 The second plaintiff says he has been advised that he has good prospects of success on the objections, but that the objections are unlikely to be determined before December 2008 as they are likely to be considered together with the objections of many other professionals who have prepaid service fees and have now been issued with revised
(Page 7)
- assessments. The second plaintiff has annexed to his affidavit a copy of a letter from the Australian Taxation Office of 10 June 2003 to the effect that no steps will be taken to recover from the second plaintiff the amount of the assessments until his objections have been determined, unless "there is considered to be a perceived risk", in which case the second plaintiff would be contacted to discuss his circumstances.
23 It was argued on behalf of the defendant that, irrespective of the arrangement with the Australian Taxation Office, the amount of the assessments remained payable and when that debt was taken into account the second plaintiff was insolvent. As the second defendant was insolvent, there was no realistic prospect that the first plaintiff would be able to recover the service fees payable to it from the legal practice. If it is unable to do so, the first plaintiff, in turn, will be insolvent.
24 It was submitted that, on the bankruptcy of the second defendant most, if not all, of the unpaid service fees from the legal practice would be lost to the first plaintiff and the first plaintiff's source of future income would also be lost. The first plaintiff was, in effect, simply a trustee for interests related to the second plaintiff and it would not be retained in a similar capacity by any person who took over the practice or by any other legal practice. Even if the second plaintiff continued to practise on his own account, his trustee in bankruptcy would not permit the current arrangement to continue by which service fees of such a magnitude were paid to the first plaintiff.
25 It followed that the major asset of the first plaintiff, the amount of service fees payable to it by the second plaintiff, was irrecoverable and there was therefore reason to believe that the first plaintiff would be unable to meet any order for costs made against it in the action.
26 The difficulty, it seems to me, with the defendant's case is that it is substantially built on conjecture. Speculation as to insolvency or financial difficulties that may confront the first plaintiff is an insufficient basis to make good the threshold question under s 1335: Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 11 ACLC 1238 at 1241.
27 On the evidence before me, the position is that at present the second plaintiff continues to conduct the legal practice, which is profitable. The service fees continue to be paid to the first plaintiff, which, on the figures adduced in evidence, is trading at a substantial profit. There is currently no reason to believe that that will change unless the Australian Taxation Office moves to recover the amount of the assessments it has issued to the
(Page 8)
- second plaintiff. As I have said, the Australian Taxation Office has said in a letter to the second plaintiff that, unless there is some perceived risk, it will not do so prior to the determination of the objections. The evidence is that the objections are unlikely to be determined until the latter part of 2008.
28 On the evidence, the financial collapse of the second plaintiff, as postulated by the defendant, is therefore likely to come about only if ultimately the objections are determined adverse to the second plaintiff, unless something should cause the Australian Taxation Office to take recovery action in the meantime.
29 I am not in a position to assess the likely outcome of the objections, but there is no reason to believe that the objections are without some prospect of success. Nor am I able to weigh up the prospect that before the objections are determined the Australian Taxation Office will move to recover the amount of the assessments from the second plaintiff. Suffice it to say that there is no evidence from which it might reasonably be inferred that there is a real chance of that coming about. As matters stand, it appears likely the status quo will continue until some time in 2008. If this action is pursued with any reasonable expedition, it is likely to have been resolved well before then.
30 The defendant has estimated that his costs of the action will be in the sum of $125,553.50 and he has annexed to his affidavit a bill of costs drawn by his solicitors in that sum. The first plaintiff took issue with that estimate. It was submitted that, so far as appeared from the material before the Court, it was a relatively straightforward case that turned on whether or not the defendant had been authorised by the second plaintiff, as a director of the first plaintiff, to make payment of the amounts in question to himself.
31 I accept that, as the matter stands, the costs sought by the defendant are excessive, including, as they do, $2,700 to administer and answer interrogatories, provision for fees for Queen's Counsel and junior counsel for a four-day trial with a solicitor attending trial and some $30,000 for getting up for trial. There is also included an amount of $16,000 for an accountant's report and an accountant attending trial, although on the issues as they appear at present the need for such extensive involvement on the part of an accountant is not clear.
32 In light of the conclusion I have reached as to the substantive merits of the application, it is unnecessary to reach a final view as to an
(Page 9)
- appropriate amount for costs but, to the extent it is relevant to the question of the first plaintiff's capacity to meet any order for costs, I should say that it would seem to me that an appropriate figure would be substantially less than the amount claimed and more likely to be no more than $80,000.
33 On the basis of the financial information before me on this application, I do not consider there is currently credible evidence that the first plaintiff will be unable to meet any order for costs that might be made against it in the action. The threshold requirement under s 1335 has therefore not been made out. Equally, in my view, no basis has been established under the inherent jurisdiction of the Court, or under O 25 of the Rules of the Supreme Court1971 (WA) (which was raised in argument), for an order for security for costs.
34 I would therefore dismiss the application. It would, of course, be open to the defendant to make a further application should circumstances change.
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