In the Matter Of Torrens Constructions Pty Ltd

Supreme Court of South Australia
(Civil)
IN THE MATTER OF TORRENS CONSTRUCTIONS PTY LTD
[2023] SASC 25
Decision of Judge Bochner a Master of the Supreme Court
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS - FACTORS RELEVANT TO EXERCISE OF DISCRETION - STIFLING OF LITIGATION
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS - FACTORS RELEVANT TO EXERCISE OF DISCRETION - JUSTICE OF CASE
PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS - FACTORS RELEVANT TO EXERCISE OF DISCRETION - DELAY
Application for security for costs - pre-action steps not complied with.
Corporations Act 2001 (Cth); Uniform Civil Rules 2020 (SA), referred to.
Reschke v Trevor Reschke Nominees Pty Ltd; Reschke v Australian Executor Trustees Ltd [2020] SASC 60; Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd [2019] SASC 39; ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd) as trustee for the Harrop Family Trust v Beauville Pty Ltd [2014] VSC 298; Beach Petroleum NL v Johnson [1992] FCA 110; Basetec Services Pty Ltd v Leighton Contractors Pty Ltd [2014] FCA 991; Adelaide (SA Pools & Spa) Manufacturing and Installations Pty Ltd & Ors v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60; Southbank Liquor Stores Vic Pty Ltd v Ardila [2021] VSC 404; Letore Pty Ltd v Associated International Finance Pty Ltd Unreported, Supreme Court of Victoria, McDonald J, 28 May 1993, BC9303883; Denward Lane Pre-cast Panels Pty Ltd v Cornerstone Constructions Australia Pty Ltd [2008] VSC 144; Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd [2012] VSC 588; Coca-Cola Amatil (Victoria) Ltd v PAA Enterprises Pty Ltd [2003] VSCA 135, considered.

IN THE MATTER OF TORRENS CONSTRUCTIONS PTY LTD
[2023] SASC 25
CIVIL

The applicant commenced this action in March 2022, alleging that the affairs of the fourth respondent, Torrens Constructions Pty Ltd (“Torrens Constructions”) had been conducted in a manner contrary to the interests of the members as a whole, or otherwise oppressive, or unfairly prejudicial to or unfairly discriminatory against the applicant. It further alleges that the first to third respondents have committed the tort of conspiracy and that Torrens Constructions has breached its contract with it. It seeks declarations, damages and an order that the first and third respondents purchase its shares in Torrens Constructions.
Background
The applicant pleads, in its revised statement of claim, that the applicant was registered by its sole director, Peter Toubia, in May 2012, to carry on the business of a construction company. It engaged principally in the renovation, repair, and maintenance of commercial and residential properties.
It appears, however, that the applicant is, in fact, the trustee of the INYHWHI Trust, which carries on the business of a construction company.
Between about February and June 2019, the applicant was in a contractual relationship with Torrens Constructions, to carry out renovations, maintenance and repair of commercial and residential properties. From 1 July 2019, the applicant operated as consultant to Torrens Constructions.
The first respondent, Chao Dong, was a director of Torrens Constructions from 29 January 2019 to 20 April 2021. The second respondent, Yue Hong Zhao, is the sole director of the third respondent, and since 20 April 2021, she has been the sole director of Torrens Constructions. She is married to Mr Dong.
Torrens Constructions was registered on 29 January 2019. Its registration came about as a result of an agreement reached between Mr Toubia and Mr Dong in late 2018 to go into business together to carry out renovations, maintenance and repairs to and construction of commercial and residential properties. They agreed that a new company (Torrens Constructions) would be formed and Mr Toubia would bring in the existing clients and business of the applicant, while Mr Dong would refer new work to the company, including the introduction of significant projects. At registration, Torrens Constructions had two directors, Mr Dong and Mr Toubia. The applicant held 49% of the fully paid up shares of Torrens Construction and Mr Dong and Ms Zhao jointly held the remaining 51%. At this time, the paid up capital of Torrens Constructions was $2000. Torrens Constructions commenced business in January 2019.
The applicant says that it was agreed that the applicant would work as a contractor to Torrens Constructions and would invoice Torrens Constructions for the work that it carried out. The applicant and Mr Dong would share the profits of the company in accordance with their respective shareholdings.
The business of Torrens Constructions carried on in accordance with this initial arrangement until 30 June 2019. Effective 1 July 2019, it was agreed that the applicant would become a consultant to Torrens Constructions, and in return for providing consulting services, it would receive a fee of $150,000 per year as well as reimbursement of expenses.
It appears that from June 2020, Mr Dong commenced working part time for Torrens Constructions. It was agreed that he would undertake all of its administration and would be paid $50,000 per annum by way of a consultant’s or director’s fee. From about June 2021, Mr Dong’s hours increased to full time and he was paid $150,000 per year.
On 29 April 2020, Mr Dong and Ms Zhao transferred all of their shares in the applicant to the third respondent. On 5 May 2021, the third respondent transferred one share back to Mr Dong. Both of these transfers were done without Mr Toubia’s knowledge.
On 20 April 2021, Torrens Construction Group Pty Ltd (“TCG”) was registered. TCG’s sole director and secretary was and remains Ms Zhao and the sole shareholder of TCG is the third respondent.
At some time prior to April 2021, the relationship between Mr Toubia and Mr Dong broke down. It appears that Torrens Constructions had some liquidity problems, and Mr Toubia and Mr Dong were unable to agree on a way in which they should be resolved. Mr Dong says that he proposed that each of them make a cash contribution to Torrens Constructions; he says that this proposal was rejected by Mr Toubia.
The applicant says that, on 10 May 2021, a meeting of the shareholders of Torrens Constructions was held. It says that it was not given notice, or proper notice, of the meeting and did not attend. At the meeting, Mr Toubia was removed as a director and a resolution was passed authorising the issue of 2000 new ordinary shares at $1 per share to the third respondent. After the meeting, the applicant’s and Mr Toubia’s access to Torrens Constructions’ bank account, accounting program and email account was removed. When the new shares were issued in accordance with the resolution passed at the meeting, the applicant’s shareholding was diluted from 49% to less than 2.5%. Torrens Constructions ceased paying the applicant’s invoices and it commenced proceedings in the Magistrates Court against Mr Toubia in respect of tools that it says he had purchased on behalf of it and continued to retain.
Since these events, the applicant says that Mr Dong and Ms Zhao have refused to provide the applicant with financial statements and have taken steps to wind down the business of Torrens Constructions.
Mr Dong says that the new shares were issued to raise the capital needed to address Torrens Constructions liquidity problems.
The applicant commenced this action, seeking remedies pursuant to the Corporations Act 2001 (Cth) (“the Act”), the Australian Consumer Law, breach of contract and tort.
The respondents’ application for security for costs.
It appears that the respondents largely accept the account of events set out herein, save that they say that the applicant was offered the opportunity to purchase sufficient shares from the new issue to maintain his 49% shareholding. They say that he did not avail himself of this offer. They deny any breaches of directors’ duties or of the Australian Consumer Law, or any other wrongdoing.
The respondents say that they have met the threshold requirements of both Rule 115.1 of the Uniform Civil Rules 2020 and s 1335(1) of the Act for an order for security for costs. In brief, the respondents’ arguments can be summarised as follows:
·The applicant is a trustee company and so is bringing this action for the benefit of another;
·As a trustee company, the applicant owns no property in its own right, and in fact, divested itself of its only substantial asset in September 2022;
·No one standing behind the applicant has come forward to offer security;
·There has been no suggestion that an order for security would stultify this action;
·There is unchallenged evidence that the applicant is unlikely to be able to meet any costs order made against it; and
·The quantum of costs sought by the respondents is unchallenged.
The respondents submit that the applicant is seeking to engage in risk free litigation; it clearly has no ability to meet an adverse costs order, and the persons who will ultimately benefit from the litigation (Mr Toubia and the beneficiaries of the INYHWHI Trust) have not offered any form of security, nor have they provided any evidence of their ability to meet an adverse costs order.
The respondents rely on the decision of Blue J in Reschke v Trevor Reschke Nominees Pty Ltd; Reschke v Australian Executor Trustees Ltd,[1] (“Reschke”) which sets out the principles to be applied when determining whether to make an order for security for costs. They also rely on the decision of Doyle J, in Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd,[2] in which the position of a trustee is considered.
[1] [2020] SASC 60.
[2] [2019] SASC 39.
On the basis of this authority, the respondents submit that by the mere fact that the applicant is a trustee, they have discharged the onus of establishing that the applicant is unable to meet a costs order as it does not hold any assets in its own right.
They further submit that they have satisfied the requirement in s 1335(1) of the Act, that there is credible evidence to believe that the applicant will be unable to meet a costs order. In this regard, it relies on the report of chartered accountant, Michael Fairlie, who has reached the view, after considering the trust’s financial report and taxation return for the year ended 30 June 2021, that the applicant is unable to provide the amount sought by way of security.[3] Further, there is evidence that, on being notified of the application for security, the applicant divested itself of its own asset of value, Mr Toubia’s family home. This clearly gives rise to the conclusion that the applicant is impecunious.
[3] FDN 26.
The respondents submit that the merits of the case are a neutral factor in determining whether security should be ordered. Each party has given a detailed account of their version of events; ultimately, findings of credit will need to be made before one version can be preferred over the other.
The applicant’s position
The applicant opposes the making of an order for security for costs. It bases its opposition on four separate grounds: the fact that the respondents failed to comply with the pre-action steps required by the Rules and have refused to attend mediation; the merits of the case; the respondents’ assumption of risk; and the fact that the first to third respondents have not demonstrated that they are meeting the costs of the litigation.
The first ground is that the respondents have brought the cost of the litigation on themselves, as they failed to comply with pre-action steps set out in the Rules and have refused to attend mediation, thus removing any possibility of avoiding litigation completely, or resolving the litigation at an early stage. The applicant says that the second to fourth respondents did not respond to the pre-action notice at all, and the first respondent provided a response, albeit several months late. The first respondent offered to attend a pre-action meeting, but only after the applicant had provided discovery, further particulars and an expert report. The applicant says that, by doing so, the respondents sought unilaterally to impose on the applicant the usual interlocutory steps required prior to trial, thus negating the underlying purpose of the pre-action steps, to allow the opportunity of resolution before significant legal costs have been incurred. Later, Mr Dong sought to defer a hearing in another action in the Magistrates Court, but did not address the respondents’ failure to complete the pre-action steps in this action. Since the commencement of this action, the respondents have continued to refuse to take part in mediation until all of the interlocutory steps have been completed. They refused to mediate until after the close of pleadings, despite the applicant’s willingness to mediate before the respondents filed their defences. Even after defences were filed, the respondents refused to mediate; they considered that an application by the applicant for further particulars and their application for security, amongst other things, prevented the matter from proceeding usefully to mediation. In addition, and despite the applicant’s response to a settlement offer made by the respondents, the respondents expressed the view that the applicant’s “attitude” to that offer meant that mediation was premature.[4]
[4] FDN 28, MRB-8.
The applicant contends that the respondents’ approach to its claim has been to drive up the costs of the litigation, rather than to seek to resolve the dispute before significant costs were incurred. It says that this approach informs the exercise of the discretion to make an order for security for costs; the respondent should not be protected from costs incurred, when those costs were incurred unnecessarily and at their insistence. Further, the applicant says that its offer to provide security up to the time of mediation was rejected by the respondent; this is another factor that should be taken into account when exercising the discretion.
In respect of its second ground, the applicant says that the Court is in a good position in this matter to assess the merits of the case. The Court has a detailed affidavit from Mr Toubia which sets out the material facts on which the applicant relies. This is supplemented by an additional affidavit from Mr Toubia, and supported by documents exhibited to his affidavits. The pleadings have now closed, and as a result it is clear that the facts relied on by the applicant to underpin the causes of action on which it relies are not in dispute.
The applicant contends that the defence relied on by the first to third respondents is weak. In particular, it says that the respondents’ justification for issuing the extra 2000 shares was to raise operating capital to meet the fourth respondent’s financial needs. This is clearly spurious, because only $2000 was raised, despite continuing payments to the first respondent of $13,750 per month, and monthly business expenses of $75,000 per month. Further, any attempt to raise funds should have been by way of loan. The applicant further notes that it was not offered shares as part of the share issue of which it complains.
As to the allegations of the respondents that the applicant was precluded from participating in sharing earnings because of breaches of the agreement, the applicant submits that any breaches by it were raised for the first time in the respondents’ defence. They were not advanced in any correspondence in the lead up to the commencement of this litigation. The applicant says that the notice of the shareholders’ meeting referred to a breakdown in relationships and the winding up of the company; it resulted in the share issue and there was no discussion of any breach of agreement by the applicant.
The third ground relied on by the applicant is the assumption of risk by the respondents. They say that, at the time that Mr Dong agreed to go into business with the applicant, he knew that the applicant was a trustee company, albeit a profitable one. He cannot now use the applicant’s status as a trustee company as a basis for security for costs. In this regard, the applicant relies on the case of ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd) as trustee for the Harrop Family Trust v Beauville Pty Ltd[5] (“Harrop”).
[5] [2014] VSC 298.
The final ground relied on by the applicant is that the financial documents of Torrens Constructions lead to the inference that costs of the first to third respondents are being met by Torrens Constructions. As a result, they are not exposed to any costs and so are not entitled to an order for security.
In the event that the Court is minded to make an order for security, the applicant submits that the costs incurred by the respondents in the lead up to mediation should not be included, as the respondents chose to incur them prior to bringing this application, and before engaging in any settlement discussions. Further, the expert fees included in the estimate are the costs of Torrens Constructions, which is not a party to the application for security. Further, the costs of their first lawyers should not be included as it would amount to duplication of the costs of their current lawyers.
As to the applicant’s divesting itself of its only asset, Mr Toubia’s family home, it provided a letter from its accountant, Mr Romeo of Ashmans Accounting, wherein Mr Romeo said that it had been his “long-standing recommendation” that the property should be removed from the trust.[6]
[6] FDN 50, PT-75.
Consideration
Rule 115.1(1) of the Rules provides:
115.1—Security for costs
(1)     The Court may order that an applicant in an action provide security for costs if—
(a)     the applicant is bringing the claim or application for someone else’s benefit;
(b)     the applicant is ordinarily resident outside Australia;
(c)     there are reasonable grounds to suspect that the action has been brought for an ulterior purpose;
(d)     the order is authorised by statute; or
(e)     the order is necessary in the interests of justice.
Note—
Section 1335 of the Corporations Act 2001 (Cth), section 19 of the Service and Execution of Process Act 1992 (Cth) and section 15 of the Trans-Tasman Proceedings Act2010 (Cth) empower the Court to order security for costs in defined circumstances.
The respondents rely on r 115.1(a), (d) and (e). The statute relied on pursuant to (d) is the Act.
In Reschke, Blue J summarised the principles to be applied in application for security under the Rules in the following way:
Paragraph (e) of subrule 194(1) is expressed in different terms to the specific paragraphs (a) to (d). Paragraphs (a) to (d) clearly import a two-stage test: first, has the defendant established the prerequisite contained in the relevant paragraph (for example that the plaintiff is ordinarily resident outside Australia in the case of paragraph (a)); secondly, should the Court exercise a discretion to make a security order in all of the relevant circumstances. By contrast, paragraph (e) only applies when the Court is satisfied that a security order is necessary in the interests of justice. Before the Court can so conclude, it must take into account all relevant circumstances. If the Court concludes that a security order is necessary in the interests of justice, there is no room for the exercise of a residual discretion. Accordingly, in the case of paragraph (e), the test involves only a single stage. In this respect, I agree with the following observations by Hinton J in Strazdins v ANZ Banking Group Ltd:
If the Court arrives at the conclusion that an order is necessary in the interests of justice, what discretion is there then to be exercised? All factors relevant to the question of the order being necessary in the interests of justice will have been considered. If the order is necessary, it is necessary. I cannot think of a circumstance where a court, having arrived at a conclusion that an order for security for costs is necessary in the interests of justice, would then decline to make the order. What additional factor not considered as part of determining whether the jurisdictional fact is established would subsequently be considered and, potentially, justify a conclusion that no order be made? Absent any additional factor, the answer arrived at in determining whether the jurisdictional fact was satisfied must be decisive of the exercise of the discretion.
It is well-established that security for costs ought not ordinarily be ordered against a natural plaintiff if that would stultify the action. Thus, in Pearson v Naydler Megarry V-C said:
The basic rule that a natural person who sues will not be ordered to give security for costs however poor he is, is ancient and well-established. As Bowen LJ said in Cowell v Taylor, both at law and in equity ‘the general rule is that poverty is no bar to a litigant’. The power to require security for costs ought not to be used so as to bar even the poorest man from the courts.
In this respect, the position is different as between a natural person and a corporation. In the case of a corporation, stultification of the action if security is ordered is an important factor against ordering security but it is not decisive. In the case of a natural person (absent special circumstances such as the person being resident out of Australia), stultification of the action will preclude an order for security.
It is well-established that the onus of proving that a security order will stultify an action lies on the plaintiff. On the other hand, the onus of establishing the pre-requisite under paragraphs (a), (b), (c) or (d) of subrule 194(1) lies on the defendant.
In conclusion, if the plaintiff, on being unsuccessful in the action, will not have sufficient resources to meet an order for costs and an order for security will not stultify the action, it may be (depending on all of the relevant circumstances) that it will be necessary in the interests of justice to order that the plaintiff provide security for costs.[7]
(citations omitted)
[7] Supra, [43]-[47].

Section 1553(1) of the Act provides:
(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.
In Beach Petroleum NL v Johnson,[8] von Doussa J examined the operation of s 1553(1). He said:
5. The power of the Court to order security for costs under s.1335 is conditioned on the Court being satisfied by credible testimony that there is reason to believe that the applicant corporations (i.e. Claremont and Beach) will be unable to pay the costs of the respondents if they are successful in their defence. Subject to that condition being fulfilled the section gives the Court an unfettered discretion which is to be exercised having regard to all the circumstances of this case: see Sir Lindsay Parkinson and Co. Ltd v. Triplan Ltd (1973) 2 All ER 273 at 285, Bell Wholesale Co. Ltd v. Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 at 4, and Bryan E Fencott and Associates Pty Ltd v. Eretta Pty Ltd and Others [1987] FCA 102; (1987) 16 FCR 497 at 511.
…
7. Although s.1335 requires that there be reason to believe that the plaintiff corporation "will be unable to pay the costs of the defendant if successful" - and I emphasise "will be unable to pay" - the section does not, in my opinion, require that the Court be satisfied, as a matter of probability, that every eventuality which could lead to eventual payment of the costs be excluded. The section would be satisfied if it appeared by credible testimony that there is reason to believe that if the defendant is successful circumstances may then exist in which the plaintiff will be unable to pay the costs.
8. An application for security of costs under s.1335 is likely to be made many months, perhaps a year or more, before the trial and judgment is given in the litigation. The Court is required to form an opinion about what the financial position of the plaintiff will be at the time of judgment and immediately thereafter. The financial position of the plaintiff at the time when the application is made will be an important guide, but is not the sole consideration. Not infrequently a plaintiff corporation will be carrying on business. Its financial position at the end of the anticipated trial will depend not only on the outcome of the trial, and the costs likely to be associated with it, but on the successfulness or otherwise of its business and investments in the meantime. Many uncertain factors may influence the corporation's financial position. In many of these cases the uncertainties will mean that the Court will be faced with a range of possibilities, which, depending on whether fortunes run with or against the plaintiff in the meantime, extend from insolvency at one extreme and at the other extreme to more than sufficient immediate cash resources to meet the costs and other debts as they fall due. Between the extremes a variety of quite possible, but not necessarily probable, contingencies could render the plaintiff company, in the event of the proceedings being lost, unable to pay the costs in full and without delay in the ordinary course of business upon service of an allocatur.
9. A corporation "will be unable to pay" the costs within the meaning of the section if it can only do so if given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over other liabilities, sufficient to pay the costs: see Southern Cross Exploration NL and Others v. Fire and All Risks Insurance Co. Ltd and Others (1985) 1 NSWLR 114 at 121. The company will also be unable to pay the costs within the meaning of the section if the payment would be one that will amount to a preference of the defendant over other creditors such that the payment would be liable to be set aside either as a preference or as a fraudulent disposition (that is a payment made by the plaintiff corporation with the intention to defeat or delay one or more other creditors) in the event of the plaintiff corporation later going into liquidation. When the Court is required to make a judgment which anticipates future events the Court of necessity is required to judge the degree of probability that a particular event might occur. The Court can do no more than evaluate the chances: cf. Malec v. J.C. Hutton Pty Ltd [1990] HCA 20; (1990) 92 ALR 545.
10. In my opinion the power of the Court under s.1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then to be taken into account in the exercise of the discretion, and in framing the orders of the Court if the decision is to order security.
[8] [1992] FCA 110.
This decision was relied on by Besanko J in Basetec Services Pty Ltd v Leighton Contractors Pty Ltd.[9] Besanko J went on to say the following:
The matters relevant to the second element of s 1335(1) of the Corporations Act have been identified in the authorities as including the degree of likelihood of the plaintiff corporation being unable to pay the costs (Beach Petroleum NL v Johnson, at 205), the strength and the bona fides of the applicant’s claim, the cause of the respondent’s impecuniosity, whether an order for security will otherwise stifle a genuine claim, whether there are persons standing behind the company and whether they are prepared to provide an undertaking to meet an adverse costs order, whether there has been delay by the respondent in making the application, and whether there are any public interest considerations (Health Information Pharmacy Franchising v Khoo).[10]
[9] [2014] FCA 991.
[10] Ibid, [46].
I will examine each of the relevant elements.
Is the applicant bringing this action for someone else’s benefit?
It must be concluded that the applicant is bringing the action for someone’s benefit. As a trustee, the applicant can only act in the best interests of the trust; it can be accepted that the action is being brought to benefit the trust and its beneficiaries. This factor tends to support the making of an order for security.
Is there 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?
The respondents rely on the evidence of Mr Fairlie to establish this requirement of the Act. In reaching his opinion, Mr Fairlie relied on only the financial report and tax return of the applicant for one financial year, the year ended 30 June 2021. I accept that the financial report also shows the figures for the financial year ended 30 June 2020. At the time that he was asked to consider the financial capacity of the applicant, the applicant owned Mr Toubia’s family home which had a book value of $699,415. Mr Fairlie noted that, after income by way of rent was accounted for and the property’s expenses paid, a small loss was generated. In addition, a liability of a loan to Westpac, in the sum of $307,368, was recorded. It can be assumed that the loan was secured over the property, as the only significant interest payments recorded in the financial statements and in the applicant’s tax return are in respect of its rental activities.
Mr Fairlie expressed the view that the applicant did not have the financial capacity to provide a security amount of up to $120,000, based on its income and cash flow from trading activities and its ability to raise money from the sale of assets. This, however, is the wrong question. The question he should have addressed is whether there is reason to believe that the applicant will be unable to pay the costs of the respondents, in the event that they are successful in this litigation. These are two very different questions. As a result, I consider that the evidence of Mr Fairlie does not amount to credible evidence that the applicant will be unable to pay the costs of the respondents, in the event that they are successful in this litigation.
In any event, I consider that the evidence of Mr Fairlie does not support the position that the applicant would be unable to pay the respondents’ costs, in the event that they successfully defend this litigation. Exhibited to FDN 50 is a copy of the trust’s financial report for the year ended 30 June 2022. This demonstrates a similar financial position as compared with the previous financial year, without the benefit of any income derived from Torrens Constructions. According to Mr Toubia, Torrens Constructions has not paid an invoice from the applicant since the end of March 2021.[11] It also demonstrates a significantly larger trading profit than the previous year. It is clear that the applicant continues to trade and in its first year of operation without involvement with Torrens Constructions, it has been able to build its income significantly. I consider that the evidence provided by the applicant’s financial statements is inconclusive on the question of whether it would be able to meet an adverse costs order.
[11] FDN 50, [24] – [26].
At the time that the 2022 financial report was prepared, the applicant still owned Mr Toubia’s family home. It can be assumed that, once the property was transferred away from the applicant, the debt to Westpac was similarly transferred. As a result, while the applicant divested itself of its most significant asset, it also divested itself of significant debt. As a result, I consider that this evidence on its own is also inconclusive, in light of the fact that the applicant continues to trade and to generate income.
The respondents place significant weight on the fact that the applicant is a trustee, to support their contention that it will not be able to meet an adverse costs order if required to do so. In Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd,[12] Doyle J had this to say about an application for security against an applicant pursuing legal action as a trustee:
[12] [2019] SASC 39.
There is no doubt that the fact that a plaintiff is pursuing proceedings in its capacity as trustee is a significant consideration, both in terms of determining whether the threshold requirement of s 1335 has been made out, and in the exercise of the discretion to order security more generally. As Smithers J said in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd:
Where the only tangible assets of an applicant company are held in trust for another entity and its solvency depends on its right as trustee to indemnity against that entity it is necessary for the court to have in mind the difficulties which a successful respondent would face in attempting to execute in respect of an order for costs. Indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability.
This passage has been cited with approval on many occasions, with a number of authorities emphasising that it is not generally a sufficient answer to an application for security for costs for a trustee plaintiff to merely point to its right of indemnity out of trust assets.
Consistent with the above passage, the reason ordinarily given for this approach to trustee plaintiffs is that a successful defendant should not be subjected to the potential complexity, and hence expense and uncertainty, associated with having to resort to derivative rights in order to recover any costs to which it might be entitled. This has been held to be so even in situations where there is evidence of significant trust assets against which the right of indemnity might be exercised; the reason being that there is a risk those assets may become unavailable, for example, by reason of them being distributed to beneficiaries prior to the conclusion of the proceedings.
While it is thus significant, in the context of an application for security, that a plaintiff is suing as trustee, it does not follow automatically that it will be appropriate that there be an order for security. The onus remains on the defendant to establish both that the threshold requirement has been made out (in the case of an application under s 1335), and that the interests of justice will be best served by making an order for security.
However, given the significance of a plaintiff’s status as a trustee, it may, for practical purposes, become incumbent upon a trustee plaintiff seeking to resist an order for security to adduce some evidence as to the likely availability and value of its right of indemnity, or to otherwise take steps to alleviate the potential difficulties for the defendant associated with reliance upon the plaintiff’s right of indemnity to recover its costs. Smithers J said as much in the last sentence from the passage from his reasons in Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd extracted above. His Honour later added:
I have concluded that an applicant being a trustee company which desires to resist an order for security for costs should establish that recourse to property held by or for it will be available to the party against whom it has brought its action and be adequate, at the appropriate time, to meet the possible liability for costs.[13]
(citations omitted)
[13] Ibid, [62] – [66].
I note that the applicant has not adduced any evidence as to the likely availability and value of its right of indemnity. Indeed, it has, by transferring the property to Mr Toubia’s wife, increased any difficulty the respondents might have in recovering their costs. Further, while I consider that the applicant’s financial statements are inconclusive with respect to its financial position, that position is clarified somewhat, when its status as a trustee is taken into consideration. If the applicant were a natural person, or even a trading company, I would not consider that the threshold requirement of s 1335 had been met; as a trustee that has not produced any evidence of its ability to have recourse to the assets that it holds on behalf of the trust, the position is quite different. As a result I consider that this is a significant factor that weighs in favour of an order for security.
On the basis that the applicant is a trustee company which has divested itself of its only asset of value, has not produced evidence of its ability to have recourse to the other assets that it holds on behalf of the trust, and whose financial statements raise some questions in respect of its ability to meet any costs order, I consider that the threshold question raised by s 1335(1) of the Act has been met.
The merits of the applicant’s claim
The applicant urged me to find that its claim was a meritorious one, and that the respondents’ defence was weak. I do not consider that such findings are supported by the evidence. I consider that the applicant’s claim is brought in good faith, but I am unable to find that it is so strong that this should weigh against any order for security being made. Similarly, I am unable to find that the respondents’ defence is so unmeritorious that an order for security should not be made on this basis alone. In Adelaide (SA Pools & Spa) Manufacturing and Installations Pty Ltd & Ors v Westcourt General Insurance Brokers Pty Ltd,[14] Doyle J said:
In my view, particularly bearing in mind the unfettered nature of the discretion, the appropriate approach to the merits of a case will depend upon the nature of the case and the evidence available to the Court. In some cases the issues may be so narrowly defined or clear that it is possible to form a view about the strength or weakness of a particular claim. In those cases, the merits may weigh quite heavily in favour or against an order for security. However, it will often be the case that it is neither practical nor desirable for the Court to go further than satisfying itself that the claim has reasonable prospects of success. That will generally be so where the claim is complicated or turns on disputed questions of fact (particularly where they are likely to involve issues of credit).[15]
[14] [2016] SASC 60.
[15] Ibid, [38].
Similarly, I am of the view that this is not a case where its merits can be determined on the basis of affidavits. Much will turn on the oral evidence of the parties, in respect of the representations made at the time that the parties entered into business together, and in respect of other matters. As a result, I consider that this is a neutral factor.
Is the conduct of the respondents the cause of the applicant’s impecuniosity?
The applicant says that the respondents’ conduct, that is, the issue of the shares and the consequent dilution of its shareholding, is the cause of its impecuniosity. Prior to its involvement with the respondents, the applicant was a thriving building company which operated on its own. On commencement of the operation of Torrens Constructions, the applicant transferred its work to Torrens Constructions. In March 2021, and without any prior warning, Torrens Constructions ceased paying the applicant’s invoices. The applicant says that the respondents then engaged in conduct deliberately designed to dilute its shareholding in Torrens Constructions and remove it from the operation of the business. All of this is denied by the respondents.
I consider that it is impossible to determine on the evidence before me whether the respondents are the cause of the applicant’s impecuniosity.
Would an order for security stultify the applicant’s claim?
The applicant does not claim that an order for security would stultify its claim. This factor does not weigh against the making of an order for security, if the evidence otherwise indicates that such an order should be made.
Has Mr Toubia, as the applicant’s director, indicated that he is prepared to provide an undertaking to meet an adverse costs order?
Mr Toubia has not indicated that he is prepared to provide an undertaking to meet any adverse costs order made against the applicant, nor has any other person on behalf of the applicant. Further, Mr Toubia has not provided any evidence of his financial capacity; he has not deposed that he is able to meet an order for security for costs on behalf of the applicant, nor has he deposed that he is unable to do so.
Has there been delay in the respondents’ bringing this application?
The applicant argues, in effect, that the respondents have delayed in bringing this application, in that they required significant interlocutory steps to be carried out, prior to filing this application, and significantly, prior to the matter proceeding to mediation. It says that the applicant should not have to provide security for costs that the respondents incurred prematurely and in circumstances where it may not be necessary to have incurred them.
There is no doubt that there was significant delay in any of the respondents responding to the applicant’s pre-action notice. The pre-action notice was dated 1 October 2021; Mr Dong’s response was dated 10 January 2022. The other respondents have never responded to the pre-action notice.
In his pre-action response, Mr Dong stated that he “required” the applicant to make discovery of documents at least as extensive as that required by the Rules; he also “required” the applicant to provide further particulars and an expert’s report. Only once these conditions had been complied with, would he attend a pre‑action meeting.[16]
[16] FDN 59, CD-6.

The Rules set out, at r 61.1, the objects of the pre-action steps:
61.1—Objects
The objects of this Part are to—
(a)     encourage parties to resolve a dispute before commencing litigation;
(b)facilitate litigation, if unavoidable, proceeding expeditiously, efficiently, at a proportionate cost and on narrowed issues;
(c)     involve insurers at an early stage;
(d)require parties to take steps before instituting proceedings in accordance with the principle that the time and costs incurred should be proportionate to the amount or value in dispute; and
(e)require substantial compliance without emphasis on technical matters or minor departures from the requirements.
It appears to me that Mr Dong disregarded these objects when he sought to impose conditions on the holding of the pre-action meeting. The unilateral demands that he made did not take into account the proportionate cost of the steps that he required as compared to the value of the claim overall, or the fact that those steps would be wasted if a settlement was reached at the pre-action meeting. He sought to impose all of the formalities of the litigation process on the pre-action steps, ignoring the costs that would be incurred and the fact that any goodwill held by the applicant in seeking to reach a settlement would be eroded.
Rule 61.16 provides:
61.16—Costs of proceeding
When the Court considers orders relating to costs of a proceeding, the Court may take into account—
(a) any failure by a party to comply with Division 3, 4 or 5;
(b)a comparison between the terms of any non-accepted pre-action offer and the result of the proceeding;
(c)whether a party unreasonably failed to accept a pre-action offer or a better pre-action offer; or
(d) the conduct of a party otherwise in respect of pre-action steps.
This rule empowers the Court to take into consideration the conduct of a party in respect of compliance or otherwise with pre-action steps when considering “orders relating to costs of a proceeding”. There is nothing in the wording of the rule to suggest that this consideration must only occur at the conclusion of an action, when the question of costs of the completed trial is being dealt with. There is no reason why the conduct of a party in complying with the pre-action steps cannot be taken into consideration in an application for security for costs. Such an application is, in fact, an order “relating to the costs of a proceeding”.
The pre-action steps strive to encourage parties to behave reasonably in the pre-action stage of a dispute. They have been formulated to give parties the best opportunity of resolving disputes before litigation is commenced. Failure to comply with the steps should result in sanction, particularly where such failure has resulted in the parties losing any opportunity to negotiate prior to the commencement of litigation. I consider that Mr Dong behaved unreasonably when he sought to impose conditions akin to interlocutory processes on the holding of the pre-action meeting. The other respondents behaved unreasonably by not complying with the pre-action steps at all. They should be sanctioned for this.
In addition to the failure to comply appropriately with the pre-action steps, the applicant says that the respondents behaved unreasonably by refusing to engage in mediation after the action was commenced until significant legal costs had been incurred. It says that, despite frequent requests by it that the parties attend mediation, the respondents refused to attend mediation until the pleadings had closed and discovery had been made. This refusal to attend mediation earlier and then bringing this application prior to mediation also amounts to a delay in bringing this application.
I consider that the respondents have again behaved unreasonably in refusing to attend mediation earlier. Significant costs have been incurred in this action to date, and an extraordinarily large number of documents have been filed, given the stage of litigation that this action has reached. The respondents made no attempt to find an alternative, less expensive way to prepare for mediation, such as by the use of position papers and informal discovery. By insisting on all of the formalities of litigation to be concluded prior to agreeing to attend mediation, the respondents have caused significant costs to be incurred.
I consider that these are factors which weigh against an order for security for costs being made.
Did the respondents assume the risk of entering into a contractual arrangement with a trustee company, as a result of which they are not entitled to an order for security for costs?
In making this submission, the applicant relied on the case of Harrop.[17] In this case, Derham AsJ considered a number of authorities dealing with this issue in the following way:
[17] Supra.
The factor which is most significant in this case is the assumption of risk factor, identified by McDonald J in Letore Pty Ltd v Associated International Finance Pty Ltd (Letore), and followed in a number of cases since, including Denward Lane Pre-cast Panels Pty Ltd v Cornerstone Constructions Australia Pty Ltd (Denward Lane), Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd (Industrial Conveying), and Coca-Cola Amatil Victoria Ltd v PAA Enterprises Pty Ltd (Coca-Cola Amatil).
In Letore, McDonald J considered it a relevant consideration that the defendant had engaged in a voluntary contractual relationship with the plaintiff and that it was that contract which gave rise to the proceedings. His Honour considered it reasonable to assume that at the time the defendant entered into the contract it considered it was financially prudent and worthwhile to do business with the plaintiff. This factor weighed against an order for security for costs.
In Denward Lane, Hansen J identified this factor in the following terms (although it appears not to have been given much weight in the circumstances of that case):
It may be assumed that the defendant considered the plaintiff to be an appropriate company to engage for these purposes, which must have included an assessment of the plaintiff’s financial and managerial ability to perform the agreement. Having done so it is relevant that it is under the very agreement thus entered into that this litigation arises.
In Industrial Conveying Robson J took this factor into account in refusing to grant security for costs.
In Coca-Cola Amatil, the plaintiff (below) had submitted that as Coca-Cola Amatil had chosen to deal with a company, it should be limited to the resources of the company to satisfy any order for costs it might obtain. The judge who heard the application accepted this ground, saying:
Now, that falls fairly and squarely within the principle of what Justice McDonald was talking about in the Letore case. It seems to me that the defendant voluntarily entered into a commercial arrangement with a corporation. Well, here even more so. Not only did they enter into this arrangement, they induced this arrangement. But for this arrangement they would have been dealing with a natural person because the exact same services were being provided as I understand it by Mr Andrew through the corporate structure. And if it weren't for that and there had been a similar contractual arrangement for these sorts of services and there had been an alleged breach, it would be Mr Andrew alone who would now be the plaintiff and there wouldn't be an opportunity for the defendant to seek security for costs.
The Court of Appeal (Callaway, Buchanan and Eames JJA) concluded that a refusal by the primary judge to order security for the defendant’s costs on the basis that included this factor did not disclose any error of principle in the exercise of the judge’s discretion.[18]
(footnotes omitted)
[18] Supra, [11] – [16].
In contrast to the authorities referred to by Derham AsJ is the case of Southbank Liquor Stores Vic Pty Ltd v Ardila[19] (“Southbank Liquor Stores”). In this case, the applicant sought relief from the respondent for oppressive conduct. The applicant was incorporated for the sole purpose of entering into the business arrangement with the respondent. Gardiner AsJ distinguished the authorities referred to and relied on by Derham AsJ on the basis of the nature of the transaction entered into by the parties. He said:
In my view, the authorities which were referred to by Derham AsJ in Harrop are set in quite a different context to the circumstances of this case. Those authorities concern proceedings with substantive claims arising from agreements for the supply of goods and services and a hire purchase agreement. The primary claim made by Laguna in this proceeding is that of oppressive conduct; Laguna does not contend that it had a contractual relationship with Mr Ardila of the kind the subject of those authorities. Laguna’s case is that it invested capital in Southbank and Mr Ardila’s contribution was to operate the business. These are not circumstances of the type the subject of consideration, for example, by the Court of Appeal in Coca-Cola Amatil Victoria Ltd v PAA Enterprises Pty Ltd where a significant enterprise, Coca-Cola Amatil, chose to contract with a corporation with little or no assets. Here, there is not such an obvious disparity of financial resources between the parties.[20]
(citations omitted)
[19] [2021] VSC 404.
[20] Ibid, [42].
I consider that cases such as Harrop have no application here. The factual circumstances of Harrop and the cases relied on by Derham AsJ are very different to the factual situation in this matter and, for that matter, in Southbank Liquor Stores. Harrop involved the sale and purchase of a business; Letore Pty Ltd v Associated International Finance Pty Ltd[21] involved the hire purchase of a boat; in Denward Lane Pre-cast Panels Pty Ltd v Cornerstone Constructions Australia Pty Ltd[22] the applicant and respondent entered into a contract for the applicant to supply concrete pre-cast panels to the respondent; in Industrial Conveying (Aust) Pty Ltd v SKM Recycling Pty Ltd[23] the applicant was contracted to manufacture equipment and carry out work for the respondent; and in Coca-Cola Amatil (Victoria) Ltd v PAA Enterprises Pty Ltd[24] the parties entered into a contract for the respondent to fill vending machines for the applicant. Each of these cases involved a contract for the supply of goods or services. The matter before me involves a very different type of contractual relationship, and one which is governed by a range of different considerations, including those imposed by the Act. There is no evidence here of any disparity in financial resources, nor is there any evidence that the respondents turned their mind to the financial capacity of the applicant. Consequently, I do not consider that this is a relevant factor here.
[21] Unreported, Supreme Court of Victoria, McDonald J, 28 May 1993, BC9303883.
[22] [2008] VSC 144.
[23] [2012] VSC 588.
[24] [2003] VSCA 135.
Are the first to third respondents meeting their own legal costs?
Since this question was raised by the applicant, further affidavit material has been filed by Mr Dong, in which he deposes that the first to third respondents are personally meeting their legal costs. I have no basis for doubting the veracity of this deposition.
Conclusion
The respondents’ delay in bringing this application until after significant costs have been incurred by both parties, and their flagrant disregard for the pre‑actions steps required by the Rules lead to the conclusion that an order for security for costs should not be made. On the other hand, the applicant’s status as a trustee company, the conspicuous silence of any person standing behind the applicant coming forward to provide an undertaking to meet an adverse costs order and no evidence of the applicant’s ability to enforce its right of indemnity support the conclusion that an order for security should be made.
I consider that the interests of justice demand that an order for security should be made, albeit one which takes into consideration the conduct of the respondents. I note that, other than in respect of a number of discrete issues, the applicant does not take issue with the assessment of legal costs provided by Mr Ericson. I accept that Mr Ericson is a highly respected and experienced costs specialist.
Mr Ericson has estimated that the costs incurred to the date of his report, 13 September 2022, on a party/party basis are $35,000. He has estimated that the total costs likely to be incurred to the first day of trial is $112,000. This is the amount sought by the respondents. I note that at the time that Mr Ericson was instructed to prepare his report, the parties had not yet made discovery. This has now occurred.
The respondents’ refusal to take part in a pre-action meeting before the applicant complied with their onerous demands, and their subsequent refusal to engage in mediation without incurring very significant costs are matters that deserve sanction. These actions are contrary, not only to the objects of the pre‑action steps, but to the object of the Rules set out in r 1.5 and to the overarching obligations of parties and lawyers, set out in r 3.1. These are matters that I am entitled to take into consideration pursuant to r 61.16. In doing so, I have reached the conclusion that, while the respondents are entitled to an order for security, they are not entitled to an order that would provide security for costs incurred prematurely or unreasonably and as a result of their breaches of Rule 3.1 and the rules relating to pre-action steps, and their disregard for the provisions of r 1.5 and r 61.1. I consider that an appropriate amount for security is half of the amount estimated by Mr Ericson as the costs of the matter to the first day of trial, the amount of $56,000. As the respondents declined to take part in a pre-action meeting without imposing unreasonable demands on the applicant, I also consider that such amount should not be payable until 14 days after the mediation listed for 10 March 2023 has concluded, either by way of a settlement being reached or by way of termination by the mediator.

[2023] SASC 25

24 February 2023