Judgment Suppressed - [2005] WASC 10

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: POWDER INDUSTRIES PTY LTD -v- PASDONNAY PTY LTD [2005] WASC 10

CORAM: BLAXELL J

HEARD: 11 FEBRUARY 2005

DELIVERED : 11 FEBRUARY 2005

FILE NO/S: CIV 1186 of 2002

BETWEEN: POWDER INDUSTRIES PTY LTD
Plaintiff
AND
PASDONNAY PTY LTD
Defendant

Catchwords:

Practice and procedure - Security for costs of counterclaim - Application for security made on eve of trial - Turns on own facts

Legislation:

Corporations Act 2001 (Cth), s 1335

Result:

Order for security of costs

Category: B

Representation:

Counsel:

Plaintiff: Mr J R Birman
Defendant: Mr B H Taylor

Solicitors:

Plaintiff: Birman & Ride
Defendant: Talbot & Olivier

Case(s) referred to in judgment(s):

Engel Pty Ltd (In Liq) v Leeds, unreported; SCt of WA; Library No 940403; 20 July 1994

Case(s) also cited:

Nil

BLAXELL J: These are applications for security of costs and for a Mareva injunction made by the plaintiff in the action who is the defendant to the counterclaim by the defendant. I state at the outset, that no grounds have been established for the grant of a Mareva injunction and the issue accordingly boils down to whether or not there should be an order for security. The applications have come very late and on the eve of a five‑day trial which is listed for hearing next week.
The application for security of costs is made pursuant to s 133(5) of the Corporations Act and O 25 of the Rules of the Supreme Court. It will be convenient if I focus on s 1335 of the Corporations Act which provides:
"1335(1) [Security given by corporation] 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 threshold question is whether there is credible testimony that there is reason to believe that the defendant, Pasdonnay Pty Ltd, will be unable to pay the costs on the counterclaim if the plaintiff is successful in its defence of the same. If that threshold question is answered affirmatively, there is then the question of the exercise of my discretion to order security for costs.
As to the threshold question, I have affidavits of Neale Damien Paterson in support of the application and I have heard the viva voce evidence of Kimberley David Parker, the accountant for the defendant. I consider Mr Parker to be a credible witness and I accept what he has had to say about the finances of the defendant.
What that evidence shows is that the defendant conducts a business of selling downhole drilling equipment but has recently sold the whole of that business to SDS Corporation Ltd under an agreement for sale which is still to be completed. There has been litigation in connection with the agreement for sale which was recently concluded following an adverse judgment against the defendant on appeal. Mr Parker's evidence is to the effect that he expects that the agreement for sale will be completed by about May 2005 but that is obviously to some degree speculative and he cannot be altogether certain that everything will be resolved by that time.
The evidence also shows that the defendant corporation is presently subject to a floating and fixed charge over all of its assets to a limit of $5 million in favour of its banker, the Hongkong and Shanghai Banking Corporation Ltd. However, once the agreement for sale is completed, the defendant will have very substantial net liquid assets.
I have been provided with current balance sheets, profit and loss accounts, and also budgeted financial projections by Mr Parker. In broad terms what these show is that for some time Pasdonnay Pty Ltd has not had sufficient cash flow from within its own resources to continue trading. Consequently its managing director and major shareholder, Mr Rear, has been contributing funds (at this stage totalling an amount approaching $600,000) which funds have enabled the company to continue trading pending the resolution of its litigation with SDS Corporation Ltd. The defendant has also been able to defer payment of payroll and group tax liabilities, and its trade creditors have been reasonably generous in not insisting upon immediate payment. Some of these debts to trade creditors are approaching an age of five or six months.
Based on that evidence, I consider that the threshold question under s 1335 should be answered in the affirmative. Although the evidence indicates that the defendant would ultimately have the assets to meet an adverse costs order, it certainly would not be in a position from its own resources to make immediate payment if that order was to be made next week or within a short time thereafter.
In my view s 133(5) of the Corporations Act should be construed on the basis that it is referring to the ability of a corporation to pay the costs of an adverse order as and when that order is made and not at some time in the future. Accordingly I consider that in the circumstances of the present case I have the discretion to order security.
The factors relevant to the exercise of my discretion are fairly numerous. They have been referred to in a number of authorities including the decision of the Full Court in Engel Pty Ltd (In Liq) v Leeds, unreported; SCt of WA; Library No 940403; 20 July 1994. I will now deal with the factors referred to in that decision as well as with some others, and I make the following comments: Firstly as to the strength of the defendant's counterclaim that is a matter that I am unable to judge. In any event as I am to be the trial Judge next week it is inappropriate that I make any comments in that regard. As to the question of whether the claim and the counterclaim include substantially the same issues, it is clear that they do not. As to whether the plaintiff has contributed to the defendant's likely inability to pay costs, the position is that it has not. As to the question of whether an order for security may have the effect of stultifying the action the subject of the counterclaim, I consider on the evidence that that is most unlikely.
As to whether it appears that the plaintiff is seeking to stifle a legitimate claim, I do not consider that it is and I consider that the defence mounted to the counterclaim is a genuine one. Whether or not it is a valid one remains to be seen but nevertheless the plaintiff does not appear to have any ulterior motives in resisting the counterclaim. As to the question of whether there are others behind the corporate defendant who might reasonably be expected to contribute to the satisfaction of the order for security, as I have already noted there is evidence that the managing director Mr Rear (who evidently is a substantial shareholder of the defendant corporation) has been contributing substantial funds to enable the company to continue trading. Clearly on that evidence it might reasonably be expected that Mr Rear could make a contribution towards satisfying any order for security.
As to the question of whether the plaintiff has been guilty of any delay which impinges upon the defendant's financial capacity, it has not. There is then finally the very relevant factor of the plaintiff's delay in bringing the present application. I have affidavit evidence before me as to the reasons for that delay and in essence the plaintiff has taken the view that until the conclusion of the recent appeal in the proceedings between the defendant and SDS Corporation Ltd, the injunction that was ordered in those proceedings provided adequate security in all of the circumstances.
Although there have been submissions to the contrary on behalf of the defendant, I take the view that the plaintiff has shown good reason for its delay in bringing this present application. In any event the law is quite clear that the application may be brought at any stage of the proceedings.
Having regard to all of these matters I have come to the conclusion that the balance of those factors favours the grant of an order. Accordingly I propose to make an order for security of costs and in my view the amount suggested of $30,000 would appear to be appropriate. For these reasons there will be an order in terms of the application granting security for costs.