Jornad Pty Ltd v Sapme Pty Ltd
[2018] ACTSC 147
•25 May 2018
SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Jornad Pty Ltd v Sapme Pty Ltd and Ors |
Citation: | [2018] ACTSC 147 |
Hearing Date: | 17 May 2018 |
DecisionDate: | 25 May 2018 |
Before: | Burns J |
Decision: | Application refused, with costs. |
Catchwords: | PROCEDURE – Costs – Application for security for the costs in proceedings – defendants claim that plaintiffs made false and misleading representations to the defendants - whether application was brought promptly – whether plaintiffs’ case against defendants is weak – whether plaintiffs’ impecuniosity was caused by the defendants – whether defendants’ application is oppressive – whether there are persons standing behind the first plaintiff likely to indemnify the plaintiff |
Legislation Cited: | Court Procedure Rules 2006 (ACT) rr 1900, 1901 Corporations Act 2001 (Cth) s 1335 |
Cases Cited: | KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 |
Parties: | Sapme Pty Ltd, Stephen John Dawn, Anne Dawn (Applicants/Defendants) Jornad Pty Ltd (Respondent/Plaintiff) |
Representation: | Counsel Mr P Walker (Applicants/Defendants) Mr S Hausfeld (Respondent/Plaintiff) |
| Solicitors Trinity Law (Applicants/Defendants) Charles Filgate Giles and Associates (Respondent/Plaintiff) | |
File Number: | SC 67 of 2017 |
Burns J:
By an application dated 30 April 2018 the first, second and third defendants (the defendants) seek an order pursuant to rr 1900 and 1901(a) of the Court Procedure Rules 2006 (ACT) (CPR) or, alternatively, pursuant to s 1335(1) of the Corporations Act 2001 (Cth) (Corporations Act) that the first plaintiff provide security for their costs of these proceedings, and that the proceedings be stayed until the security is given. The defendants also seek an order for costs of the application. The application is opposed by the plaintiffs.
These proceedings were commenced 9 March 2017. They relate to the purchase of a business known as “The Uni Pub” conducted on premises at the corner of London Circuit and University Avenue in Canberra. The Statement of Claim filed by the plaintiffs alleges that the business was purchased by Jornad Pty Ltd (the first plaintiff) in about August 2016. It further alleges that the second plaintiff is a director of the first plaintiff and that certain false, misleading and deceptive representations were made to him about the business by the defendants prior to the purchase. The plaintiffs’ claim that they relied upon these representations in purchasing the business, and entering into a sublease of the premises where the business was conducted, and subsequently suffered loss. They claim that if they had known that the representations were false, misleading and deceptive they would not have contracted to buy the business or to sublease the premises.
When the proceedings were commenced there were two additional defendants. The fourth defendant was the owner of the premises on which the business was conducted and the fifth defendant was a director of the fourth defendant. In about October 2017 the fourth and fifth defendants negotiated a settlement of the claims against them and entered into a deed with the plaintiffs embodying the terms of the settlement. The plaintiffs subsequently discontinued the proceedings against the fourth and fifth defendants.
Relevant legislation
The following provisions of the CPR are relevant:
1900 Security for costs—application and order
(1) On application by a defendant, the court may order the plaintiff to give the security it considers appropriate for the defendant’s costs of the proceeding.
Note Pt 6.2 (Applications in proceedings) applies to an application for an order under this rule.
(2) An application must be supported by an affidavit setting out the facts relied on and the grounds on which the order is sought.
1901 Security for costs—when court may make order
The court may order a plaintiff to give security for costs under rule 1900 only if satisfied—
(a) the plaintiff is a corporation and there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them; or
(b) the plaintiff is suing for the benefit of someone else, rather than for the plaintiff’s own benefit, and there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them; or
[…]
1902 Security for costs—discretionary factors
(1) In deciding whether to make an order for security for costs under rule 1900, the court may have regard to any of the following matters:
(a) the means of the people standing behind the proceeding;
(b) the prospects of success or merits of the proceeding;
(c) the genuineness of the proceeding;
(d) for rule 1901 (a)—the corporation’s lack of financial resources;
(e) whether the plaintiff’s lack of financial resources is attributable to the defendant’s conduct;
(f) whether the plaintiff is effectively in the position of a defendant;
(g) whether an order for security for costs would be oppressive;
(h) whether an order for security for costs would stop or limit the progress of the proceeding;
(i) whether the proceeding involves a matter of public importance;
(j) whether there has been an admission or payment into court;
(k) whether delay by the plaintiff in starting the proceeding has unfairly prejudiced the defendant;
(l) whether an order for costs made against the plaintiff would be enforceable within the jurisdiction;
(m) the estimated costs of the proceeding.
(2) This rule does not limit the matters to which the court may have regard.
The following provision of the Corporations Act is also relevant:
1335 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.
[…]
The evidence
The defendants rely upon an affidavit sworn by Maurice Sebastian Falcetta on 30 April 2018 and an affidavit sworn by Teresa Tranzillo on 2 May 2018.
Mr Falcetta is a solicitor acting on behalf of the defendants in these proceedings. He deposed to holding an unrestricted practising certificate in the Australian Capital Territory, and having practised in commercial litigation for over 15 years. He sought to explain the timing of the present application by reason of the defendants only becoming aware of the terms of the settlement of the proceedings between the plaintiffs and the fourth and fifth defendants on 19 March 2018. The deed of settlement dated 28 September 2017 provided that the plaintiffs were to pay the fourth and fifth defendants a sum of $20,000 within seven days of the date of execution of the deed, and a further sum of $40,000 to be paid in 16 equal instalments over 16 months from the date of execution of the deed. Mr Falcetta stated that that information caused him to question the ability of the first plaintiff to meet any adverse costs order.
Mr Falcetta stated that the plaintiffs’ case is founded upon alleged misrepresentations, which he summarised as follows:
(a)the business was financially supporting itself;
(b)the business was able to and paid its bills;
(c)the bills were up to date;
(d)the business had paid its rent up to date;
(e)the equipment and fittings were serviced and working well; and
(f)the takings were as provided in the hand written note at Schedule 1 of the Statement of Claim.
Mr Falcetta then deposed to matters directed towards establishing that the plaintiffs’ case against the defendants was weak. First, he referred to a document titled “Information Memorandum for the Sale of Uni Pub” apparently prepared by Brindabella Business Brokers on behalf of “the vendors”. I understand this to have been a document provided to prospective purchasers and contained information about the business. On page 4 of the document there is a paragraph which reads:
Intending purchasers should satisfy themselves as to the truth or accuracy of all information given by their own inspection, searches, enquiries, advices or as is otherwise necessary. The inquirer acknowledges that no representation or warranty has been made as to the accuracy or completeness of the material. No person in the employment of Business Brokers has any authority to give or make any representations or warranty in relation to any businesses.
Secondly, Mr Falcetta pointed to the fact that the purchase price of the business was $1.00 plus stock as a valued. It was ultimately submitted that this was a clear indication that the business was not doing well.
Thirdly, Mr Falcetta referred to an email from the second plaintiff to the business broker on 27 July 2016, which stated:
The past trading figures of the pub, of which everyone is aware that the trading figures have been in decline over the past few years and as such is not really profitable at this point in time.
It is now 10 years since the pub fit out was completed and as such could no longer be considered “A” grade rental property.
After looking into the commercial market in the area and surrounding areas, all indicators point to a slight decline in the commercial rental market and the associated rates per sqm over the past couple of years…
The pub does require some maintenance and most notably, painting and carpets in some areas, of which I would be responsible for.
The current rent for the Uni Pub based on the building sqm, is $443 sqm, which is at the very high end of the current market and the Uni Pub would no longer be classed as an “A” grade property.
It is believed that it will take 12– 18 months to return the Unipub back into a profitable ongoing business…
Mr Falcetta also deposed to having carried out searches of the first plaintiff, which revealed that it has a paid-up capital of only $1.00. He also notes that the first plaintiff acts in a trustee capacity. He carried out further searches in New South Wales and the Australian Capital Territory which indicated that there was no property owned by the first plaintiff in those jurisdictions. I should note at this point that it was conceded on behalf of the first plaintiff that there is reason to believe that it will not be able to pay the defendants’ costs if ordered to do so, thus satisfying at the requirements of r 1901 (a) of the CPR.
Mr Falcetta estimated the future costs for the defendants in the conduct of these proceedings as $104,000.00. He was not cross-examined on his affidavit.
The affidavit sworn by Ms Tranzillo was to the effect that she had been instructed that the defendants were unaware of the contents of the Deed of Settlement between the plaintiffs and the fourth and fifth defendants until the Deed was produced in March 2018. She was not required for cross examination.
The plaintiffs relied upon the two affidavits sworn by Charles Filgate Giles on 2 May 2018 and 4 May 2018 respectively. They also relied upon an affidavit sworn by the second plaintiff on a 2 May 2018. In his first affidavit Mr Giles deposed to having instructions that “the plaintiff” (by which I understand he means both plaintiffs) had paid in excess of $40,000.00 to previous solicitors for the carriage of these proceedings. He also stated that the plaintiffs had paid him $8509.05. In his second affidavit Mr Giles states that he has instructions that the plaintiffs are not in breach of their obligations under the Deed of Settlement with the fourth and fifth defendants.
Mr Kevin John Barnes, the second plaintiff, deposed that he is the sole director and shareholder of the first plaintiff. The first plaintiff was a shelf facility which was activated by him for the express purpose of the acquisition of the business that comprised The Uni Pub. He stated that all of the first plaintiff’s operational bank accounts were closed down in or about March/April 2017 and it has no assets, but has liabilities resulting from it having conducted The Uni Pub business. These liabilities exceed $400,000.00. The first plaintiff ceased trading in about the first week of March 2017 “because of the actions of the defendants”.
Consideration
While the defendants’ application is based upon the provisions of both the CPR and the Corporations Act, it was accepted that the same principles apply to each of the sources of the power to order security for costs. In KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189, 196, Beazley J observed that while it is not possible or appropriate to list all of the matters relevant to the exercise of the discretion to award security for costs, there are a number of well-established guidelines which a court typically takes into account in determining any such application. These are:
(a)that such application should be brought promptly;
(b)that regard is to be had to the strength and bona fides of the plaintiff’s case, but, as a general rule, “where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success”;
(c)whether the plaintiff’s impecuniosity was caused by the defendant’s conduct the subject of the claim;
(d)whether the defendant’s application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate;
(e)whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security; and
(f)security will only ordinarily be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and thus forced to litigate.
These considerations largely mirror the matters referred to in r 1902.
In the present case there has been a significant delay by the defendants in seeking an order for security against the first plaintiff. These proceedings were commenced in March 2017, but this application was not made until 30 April 2018. The defendants sought to explain this delay in two ways. First, by reference to settlement negotiations which took place in 2017. Secondly, by reference to them only becoming aware of the terms of the Deed of Agreement between the plaintiff and the fourth and fifth defendants in March 2018. These terms apparently caused them concern about the financial position of the first plaintiff because it suggested that the plaintiffs required a period of 12 months to pay off a relatively modest sum to the fourth and fifth defendants. It is clear that the company has no assets and is not trading. These facts could have been ascertained by the defendants in March 2017 or shortly thereafter had they chosen to undertake the appropriate searches. There is unchallenged evidence that the first plaintiff has already expended significant costs in conducting these proceedings to date. This is a matter which weighs heavily against now making an order for security for costs.
The attempt by the defendants in this application to demonstrate that the plaintiffs have a weak case in the proceedings generally is only of limited assistance. It is generally neither possible nor appropriate to effectively determine the issue of liability on an application for security for costs. The evidence adduced by the defendants suggests that the plaintiffs were aware that the business was performing poorly at the time they purchased it, but that is not necessarily the end of the matter. As I understand it, the plaintiffs accept that they were aware that the business was performing poorly when they purchased it. Their case is that they believed the performance of the business could be turned around based upon the information with which they were provided. They allege that the business was in fact performing significantly worse than they had been led to believe, and to the extent that it was not possible for the business to be turned around and made profitable. To a large extent, as I understand it, this is based upon representations that the plaintiffs say were made by the defendants about the payment of rent by the business in the period leading up to the sale. Effectively, the plaintiffs allege that the information provided to them was misleading in that it did not include an important piece of information, being that the landlord had entered into an arrangement with the business to forgo rent. It may well be necessary for the current pleadings to be amended to reflect the precise nature of the claim if I am correct in my understanding. It is sufficient to note, for present purposes, that I am not satisfied that the plaintiffs’ case is inherently weak.
The first plaintiff claims that its impecuniosity is a result of the defendants’ conduct which is the subject of this claim. This is a matter which weighs against the making of an order for security.
There is no suggestion that the defendants’ application is oppressive, in the sense that it is directed towards stifling the current proceedings. It is, in fact, a matter which weighs against the making of an order for security that the proceedings will continue, and costs will be incurred by the defendants, whether an order is made or not as even if the first plaintiff were unable to provide security, the second plaintiff’s case, based upon the same material and allegations, would nevertheless continue.
The inevitable inference arising from the admitted impecuniosity of the first plaintiff is that those who stand behind the company, effectively the second plaintiff, have accepted responsibility for meeting the first plaintiff’s obligations under the Deed of Agreement. No formal offer to indemnify the first plaintiff has been made by the second plaintiff with respect to any costs order made in favour of the defendants in these proceedings, so that it cannot be inferred that the second plaintiff will accept responsibility for any costs order made against the first plaintiff.
The first plaintiff sought to argue, by reference to other proceedings between the parties which it is not necessary to further explore, that it was in substance defending itself in the current proceedings. In my opinion this submission should not be accepted. In these proceedings, the first plaintiff is a moving party seeking significant damages.
There is no suggestion that the proceeding involves a matter of public importance.
I am satisfied that the first plaintiff is impecunious. I am not satisfied that the second plaintiff or any other interested party standing behind the first plaintiff is willing to indemnify the first plaintiff for any costs order which might be made against it in these proceedings. I have nevertheless determined that I should not exercise my discretion to make the order sought by the defendants. The delay by the defendants in seeking security has led the first plaintiff to incur costs of prosecuting these proceedings for over 12 months. In addition to which, even if proceedings against the first plaintiff were stayed for failure to provide security (if such were ordered), the proceedings would still continue with regard to the identical claim made by the second plaintiff. The defendants would have to incur costs, probably of a similar quantum, regardless of whether an order for security is made, or the first plaintiff continues as an active party in the proceedings. In addition, in view of the identical nature of the claims made by the plaintiffs and the clear connection between the plaintiffs it is difficult to see that any order for costs against the plaintiffs were they to be unsuccessful in these proceedings would be other than imposing a joint and several liability upon them for the defendants’ costs.
I am satisfied that the application should be refused, with costs.
| I certify that the preceding twenty-seven [27] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Justice Burns. Associate: Date: 25 May 2018 |
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Amendments
1 June 2018 In the first sentence of paragraph [23], "second defendant" is replaced with the words "second plaintiff".
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