JZ Lee Interiors Pty Ltd v Smith
[2015] VSC 693
•8 DECEMBER 2015
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2015 05133
| JZ LEE INTERIORS PTY LTD (ACN 075 815 093) | Plaintiff |
| v | |
| BRENDON ASHLEY SMITH AND ANOTHER | Defendants |
S CI 2015 5139
| JOSIP VRAPCENJAK as trustee for the VRAPCENJAK FAMILY TRUST AND ANOTHER | Plaintiffs |
| v | |
| BRENDON ASHLEY SMITH | Defendant |
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JUDGE: | ELLIOTT J |
WHERE HELD: | MELBOURNE |
DATE OF HEARING: | 3 DECEMBER 2015 |
DATE OF JUDGMENT: | 8 DECEMBER 2015 |
CASE MAY BE CITED AS: | JZ LEE INTERIORS PTY LTD v SMITH |
MEDIUM NEUTRAL CITATION: | [2015] VSC 693 |
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PRACTICE AND PROCEDURE – Pleadings – application for leave to amend statement of claim – Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 36.01(1).
PRACTICE AND PROCEDURE – Security for costs – delay – past costs – future costs – discretion – Corporations Act 2001 (Cth), s 1335(1), Supreme Court Rules, r 62.02(1).
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APPEARANCES: | Counsel | Solicitors | |||
| For the Plaintiff | Mr I Upjohn QC with Mr S Freire | ||||
| For the Defendants | Ms M Loughnan QC with Mr S Dyrenfurth | ||||
HIS HONOUR:
A. Introduction
There are 2 proceedings before the court. The first proceeding (“the Damages Proceeding”) is a claim by the plaintiff, JZ Lee Interiors Pty Ltd (“JZ Lee Interiors”) against the defendants, Brendon Ashley Smith (“Smith”) and a company owned by Smith, Donamis Consultants (Vic) Pty Ltd (“Donamis”) (collectively, “the Defendants”). In the Damages Proceeding, the Defendants have filed a counterclaim against JZ Lee Interiors, seeking declaratory and injunctive relief based on an alleged settlement agreement entered into on 27 July 2013, by which “all mutual ongoing and outstanding commercial and personal interests, benefits and obligations” were “fully and finally” determined. Alternatively, the Defendants seek damages by their counterclaim.
In the second proceeding (“the Contribution and Restitution Proceeding”), JZ Lee Interiors is the second plaintiff. The first plaintiff, Josip Vrapcenjak (“Vrapcenjak”), is the sole director and shareholder of JZ Lee Interiors. Vrapcenjak, as trustee for the Vrapcenjak family trust, has a claim for contribution against Smith and JZ Lee Interiors seeks restitution from Smith. (Vrapcenjak and JZ Lee Interiors will be referred to collectively as “the Plaintiffs”.)
In the Damages Proceeding, JZ Lee Interiors has made 2 applications, by which it seeks:
(1) Leave to amend the statement of claim.
(2)Security for costs against Donamis, as the second plaintiff by counterclaim.
Also in the Damages Proceeding, application is made by the Defendants for security for costs against JZ Lee Interiors.
In the Contribution and Restitution Proceeding, Smith seeks security for costs against JZ Lee Interiors in its capacity as the second plaintiff.
Although there are corporate parties, the disputes are essentially between Vrapcenjak and Smith. For many years, Vrapcenjak and Smith were in business together. Before they had a serious falling out, Smith provided his services through Donamis.
B. Application for leave to amend the statement of claim
There was no real dispute between the parties as to the test to be applied in considering the proposed amendments. On an application such as this, the court does not engage in an examination of the merits, in the sense that it will only refuse leave if the proposed amendment is obviously futile as it would not have any reasonable prospects of success at trial.[1]
[1]Matthews v SPI Electricity Pty Ltd (Ruling No 6) [2012] VSC 70, [33]-[34] (J Forrest J); Atkins v Interprac and Crole (No 2) [2008] VSC 99 [12] (Hargrave J); Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 36.01(1).
In the particular circumstances of this case, with respect to some of the proposed amendments, reference should be made to the Civil Procedure Act 2010 (Vic) and the overarching purpose to facilitate the just, efficient, timely and cost effective resolution of the real issues in dispute.[2] Persons to whom the overarching obligations apply have a paramount duty to the court to further the administration of justice in relation to any civil proceeding, including interlocutory applications.[3]
[2]Section 7.
[3]Section 16.
By a proposed amended statement of claim dated 17 November 2015 (“the Proposed Statement of Claim”) (a number of superseded versions of this proposed pleading have been provided), JZ Lee Interiors seeks to introduce over 150 new paragraphs to the existing statement of claim. The allegations fall into 4 groups.
B.1 Excessive payments claims
One of the groups of proposed claims is entitled “Excessive Payments by JZ Lee [Interiors] to Donamis for Administration Services”. During the course of oral argument, upon the conclusion of JZ Lee Interiors’ submissions on the point, I gave ex tempore reasons as to why leave should be refused in relation to these proposed claims.[4] I will not repeat the reasons given, save to note that the claims were entirely speculative and no loss could be identified by way of the pleading or the evidence relied upon.
[4]The claims appeared in paragraphs 43-57 of the Proposed Statement of Claim.
After I gave my ruling in relation to these allegations, attention was drawn by senior counsel for the Defendants to a document entitled “Vrapcenjak Group Report”. That report recorded matters as at 22 December 2006 and referred to a “new structure” involving Smith and Donamis. It was stated the benefit of this new structure was that Smith, as contractor under the new arrangement, would be provided with opportunities to profit share in the business. The extent of the profit share was not specified. The existence of this document, and the proposal it records, is an additional reason for refusing leave to make these allegations.
B.2 Miscellaneous claims
The Proposed Statement of Claim includes 124 paragraphs under the heading “Miscellaneous Claims in Respect of JZ Lee [Interiors]’s Funds”. Despite the large number of claims, they total only $73,636.50. Five of the claims made are for less than $200 each. In the circumstances, real issues arise as to whether or not the making of such allegations are consistent with the overarching obligations under the Civil Procedure Act.
That said, most, if not all, of the allegations will be raised at trial whether or not they were the subject of leave. It is alleged that Smith was misusing funds of JZ Lee Interiors for his own private purposes. JZ Lee Interiors indicated that evidence of the subject matter of the allegations would be raised at trial to attack Smith’s credit in any event.
The Defendants submitted that seeking leave to include some of these amendments amounted to an abuse of process because it would be a device by which JZ Lee Interiors could circumvent the credibility rule referred to in s 102 of the Evidence Act 2008 (Vic). In short, it was said that, by this means, positive evidence could be led as to Smith’s credibility in support of the proposed amendments, instead of JZ Lee Interiors being confined to the constraints that would otherwise be imposed.[5]
[5]Evidence Act, s 103.
Although there is some substance to the Defendants’ submission as to the possible consequences if leave were granted, in my view these consequences should not, of themselves, be a reason why leave should not be granted. Further, undoubtedly, the court will be very mindful of undue delay, unfair prejudice and interference with the due administration of justice by excessive time being spent on small claims. Nonetheless, the court, as appropriate, may rely upon ss 135 and 136 of the Evidence Act to ensure that the trial is conducted fairly.
However, with respect to some of the claims made in this section of the Proposed Statement of Claim, there are further issues. The events the subject of various claims occurred between 19 December 2006 and 27 March 2009.[6] They are plainly statute barred. There can be no doubt that any cause of action arose at the time the alleged payments were made. So much was accepted by JZ Lee Interiors. However, in response to this, JZ Lee Interiors submitted that it may plead fraud and rely upon s 27 of the Limitation of Actions Act 1958 (Vic), although senior counsel for JZ Lee Interiors was unable to be specific as to which claims would be the subject of any such allegations.
[6]The claims are made in paragraphs 13.1 to 13.29 of the Proposed Statement of Claim.
Notwithstanding the observations in cases such as Wardley Australia Ltd v Western Australia,[7] to the effect that, ordinarily, limitations issues should be a matter for trial, given (1) the small amounts of each of these claims, (2) the dates upon which the causes of action arose are not in dispute, (3) the clear indication from the Defendants that they propose to plead as a defence that the claims are statute barred, and (4) the inability of JZ Lee Interiors to be specific about any fraud allegation it might make, in the exercise of the court’s discretion leave will not be granted in relation to these claims. On the materials before the court, these claims have no reasonable prospects of success.
[7](1992) 175 CLR 514, 533.8 (Mason CJ, Dawson, Gaudron and McHugh JJ).
Further, 3 of the miscellaneous claims relate to tips alleged to have been given by Smith. The first of these allegations relates to a meal had at Rockpool Bar & Grill Restaurant. The bill was for $404. The amount of the tip was $96. The second of these relates to a meal had at Doc Mornington Restaurant. The amount of the bill was $405 and the tip was $95. Finally, in this regard, it is alleged a meal was had at Rockpool Bar & Grill Restaurant on 22 July 2011. The bill was $2,129.60 and the tip was $370.40.
The significant feature of these allegations concerning the tips is that there is no allegation that Smith was not authorised to have the meals that he did (presumably with others) and to charge the cost of those meals to JZ Lee Interiors. The only complaints are in relation to the fact that on each occasion he gave a tip, and the amount of the tips.
There is no allegation that Smith was ever given an instruction that he was not allowed to give any tip at all.[8] Giving a tip for a restaurant meal is a generally accepted practice within much of the community. Accordingly, it must follow that, absent some direction to the contrary, authority to spend the funds of JZ Lee Interiors on a meal must have implied that it also authorised some tip to be given. When this issue was raised with senior counsel, he initially accepted that a tip could be given. With respect to the first of these claims, he said the claim was not for $96, but for “largesse”. He then sought to resile from this position. Further, no attempt was made to specify what amount would accord with customary practice.
[8]See also pars 23-24 below.
In these circumstances, the claim for the full amount of the tip in each case is untenable. During the course of a later exchange, senior counsel for JZ Lee Interiors stated that he believed he was pushing at a “rather closed door” in relation to the claims concerning the tips. Having said that, he then went on to say that he did not want to say anything more about it. If this was a concession, in my view it was correctly made. Whether it was made or not, given the uncertainty of the quantum of each claim,[9] there are no reasonable prospects of success for the amounts claimed. That disposes of the matter. However, and in any event, given the very small amounts involved and the circumstances of the claims, and mindful of the obligations imposed by the Civil Procedure Act, in the exercise of the court’s discretion I would not have granted leave in relation to these 3 claims.[10]
[9]A claim for moneys had and received must be for a definite and ascertained sum: see, for example, Baxendale v The Great Western Railway Company (1863) 14 CBNS 1, 42 [143 ER 343, 359.6]; Harvey v Archbold (1825) 3 B & C 626, 630 [107 ER 865, 866.8]. See also par 24(1) below.
[10]Accordingly, leave will not be granted in relation to paragraphs 13.51-13.53, 13.79-13.81 and 13.99-13.101 of the Proposed Statement of Claim.
Save for the paragraphs not the subject of leave by reason of the matters set out in paragraphs 10 to 21 above, the remainder of the claims in respect of the use of JZ Lee Interiors’ funds will be the subject of leave. Save for 1 matter I will come to, there was no suggestion by the Defendants that the allegations did not disclose a cause of action. Further, for completeness, I note that there was no resistance from the Defendants in relation to the claims concerning the certain property,[11] as that subject matter was already raised in the existing statement of claim.
[11]These claims are in paragraphs 13.64-13.68, 13.74-13.78, 13.94-13.98 and 13.104-13.109 of the Proposed Statement of Claim
The Defendants’ submission that the allegations did not disclose a cause of action was based upon a contention that the claims were for moneys had and received, and that an essential element for pleading that cause of action was missing. In a previous iteration of the Proposed Statement of Claim, dated 13 January 2015,[12] allegations were made that culminated in an allegation that Smith misapplied JZ Lee Interiors’ funds “without the authority of JZ Lee [Interiors]”. No such allegations are now made. The Defendants submitted not only that allegations of want of authority were essential to pleading a valid cause of action, but the fact that these allegations had been withdrawn demonstrated that there was no proper basis upon which they might be made.
[12]There were 2 different iterations of the statement of claim with the same date.
Although the inference is clearly open that specific allegations concerning the absence of authority cannot be maintained, such allegations are not necessary for a valid claim for moneys had and received. Although further matters might be pleaded to support a claim, including absence of authority, the essential elements of such a claim are:
(1)The defendant must have received a definite and ascertained sum of money.
(2)The money received by the defendant must be either the claimant’s own money or money in which it was directly interested.
(3)The money or its equivalent must be clearly proved to have come into the defendant’s hands.
(4)The third party cannot in conscience retain the money as this would result in the third party being unjustly enriched at the expense of the owner of the money.[13]
[13]See, for example, Atkins Encyclopaedia of Court Forms in Civil Proceedings (2008, 2nd ed) 27(2), 262 [207]. See also Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221, 257.1 (Deane J): the defendant must have derived a “benefit … at the expense of a plaintiff”; David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, 379.3 (Mason CJ, Deane, Toohey, Gaudron and McHugh JJ): there must have been a qualifying or vitiating factor “such as mistake, duress or illegality”; and, at 379.7: an order for restitution cannot be made if it would be “unjust”.
No authority was drawn to the court’s attention which stated that an absence of authority is an essential element of a claim for moneys had and received in Australia. It may be that absence of authority could amount to a material fact that goes to an essential element. However, it does not follow that it must be pleaded specifically to properly plead a cause of action.
The Defendants relied upon 3 decisions in order to support their submission concerning the need to plead absence of authority, namely Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd,[14] Commercial Banking Co of Sydney Ltd v Mann[15] and Hudson v Robinson.[16] Put succinctly, none of these cases stand for the proposition contended for by the Defendants.
[14](2014) 253 CLR 56, in particular, 592-596 [65]-[75] (Hayne, Crennan, Kiefel, Bell and Keene JJ).
[15][1961] AC 1, in particular, 8.4‑10.8 (Privy Council).
[16](1816) 4 M & S 475, in particular, 482 [105 ER 910, 912.8].
The passage relied on by the Defendants in Australian Financial Services and Leasing Pty Ltd v Hills Industries Ltd explains the basis for the underlying principle of unconscionability in a claim for moneys had and received.[17] This does not require that the plaintiff plead absence of authority.
[17]At 592-596 [65]-[75] (Hayne, Crennan, Kiefel, Bell and Keane JJ).
In Commercial Banking Co of Sydney Ltd v Mann, the Privy Council was concerned primarily with a claim for conversion, although it was observed that, if the claim for conversion failed, then the alternative count in moneys had and received must also fail.[18] That case is distinguishable on its facts, not least because, rather than being an action against the individual that misappropriated the funds from the partnership, it was an action against the bank into which those funds had been deposited. Further, it does not stand for the proposition contended by the Defendants, namely that one must plead absence of authority in order to make out a claim for moneys had and received. In fact, for reasons peculiar to the circumstances of that case and which are unnecessary to set out here, the respondent’s claims actually failed because it was found that there was absence of authority.[19]
[18][1961] AC 1, 8.2.
[19]At 11.1.
Finally, in Hudson v Robinson, a witness was held to be a competent witness when a question before the court was whether “the money of the plaintiffs has got into the pocket of the defendant … without any consideration”.[20] In that case, “the consideration was the supposed right of the defendant to dispose of the goods as partnership property”.[21] Therefore, the question of whether the defendant was authorised to use the money of the plaintiffs was a central issue. However, it does not follow that an absence of authority must be pleaded in all cases. That this case does not stand for the contended proposition is demonstrated by Lord Ellenborough CJ stating that the law, at the time, was such that “an action for money had and received is maintainable wherever the money of one [person] has, without consideration, gone into the pocket of another”.[22]
[20](1816) 4 M & S 475, 478 [105 ER 910, 911.7] (Lord Ellenborough CJ).
[21]Ibid.
[22]Ibid.
B.3 Improper use of trading accounts claims
The third set of claims alleges breach of various duties by Smith owed to JZ Lee Interiors in allowing JZ Lee Interiors’ trade accounts to be used improperly.[23] These claims are divided into alleged arrangements with 2 separate individuals. With respect to the first individual, it is alleged that an arrangement was entered into between Smith and this individual from or shortly before 2 October 2009 until about 31 August 2010. It was alleged that, as a result of this arrangement, the individual paid $100,000 in cash to Smith, exclusive of GST, by reason that orders were placed on behalf of this individual using JZ Lee Interiors’ trade accounts. The loss claimed is for the $100,000, together with GST on the supply.
[23]Paragraphs 58-65 of the Proposed Statement of Claim.
The Defendants submitted that this raised limitation issues because the alleged conduct preceded the 6 year limitation period. However, the cause of action could not have arisen until the moneys were paid, which is alleged to have occurred in 2 instalments in December 2009 and June 2010. Accordingly, prima facie, the allegations made are within time.[24]
[24]It is possible that the cause of action arising out of the first instalment is statute barred because of an overlap of a number of days, but the position is not clear. In those circumstances, it would be inappropriate to shut out JZ Lee Interiors.
Both with respect to the first individual and the second individual, the latter of which concerns events alleged to have occurred in 2010 and 2011, a cause of action is clearly disclosed. The Defendants did not suggest otherwise. Although the latter of the 2 claims is only $3,536.30, together with GST on the alleged supply, leave will be granted including for the reasons in paragraph 15 above.
B.4 Unauthorised gifting claim
Finally, allegations are made concerning alleged unauthorised gifting of building supplies purchased with JZ Lee Interiors’ funds.[25] The claims total a mere $1,028.61. However, for the reasons above, including those set out in paragraph 15 above, leave will be granted as a cause of action is disclosed in relation to the alleged events in 2012.
C. Security for costs in the Damages Proceeding
[25]Paragraphs 66-72 of the Proposed Statement of Claim.
C.1 General principles
In determining whether or not security for costs should be ordered, a threshold question must be addressed. The court must determine whether there is credible evidence that there is a reason to believe that the corporate plaintiff (or plaintiff by counterclaim) will be unable to pay the defendant’s (or the defendant by counterclaim’s) costs if the defendant (or defendant by counterclaim) is successful in defending the claims made.[26]
[26]Corporations Act 2001 (Cth), s 1335(1); Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 62.02(1).
If that threshold question is answered in the affirmative, the court must then approach the exercise of its discretion on the basis that the court has an “altogether unfettered [discretion], but upon the footing that the very fact [that the jurisdiction has been enlivened] in the first place may itself be a factor, even a most significant factor in the exercise of the discretion”.[27] Put another way, the “satisfaction of the threshold condition … ‘calls for’ the fulfilment of the purpose for which the power was conferred”, subject to a proper exercise of the discretion depending on all the circumstances.[28] Further, although the exercise of the power may be “called for”, that circumstance does not alter the fact that the burden rests on a defendant (or a defendant by counterclaim) to persuade the court that security should be ordered.[29]
[27]Ariss v Express Interiors Pty Ltd (in liquidation) [1996] 2 VR 507, 514.8 (Phillips JA, with whom Ormiston and Charles JJA agreed). See also Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, 382 [18] (Maxwell P and Buchanan JA).
[28]Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, 382-383 [19].
[29]Ibid, 383 [21].
C.2 Application by the Defendants
The principal affidavit in support, affirmed by the Defendants’ solicitor, sets out the large number of interlocutory steps that have been taken since mid 2014, when the Damages Proceeding was commenced in the County Court. I will not go through the detail, save to record that, on 16 July 2015, the Court of Appeal delivered judgment by which it found that the County Court did not have jurisdiction to deal with some of the claims made in the Damages Proceeding.[30] As a result, both the Damages Proceeding and the Contribution and Restitution Proceeding were transferred to this court under the Courts (Case Transfer) Act 1991 (Vic).[31]
[30]Smith v JZ Lee Interiors Pty Ltd [2015] VSCA 203 (Weinberg and Tate JJA).
[31]Referrals under the Court (Case Transfer) Act were served by JZ Lee Interiors’ solicitors before the matter came on for hearing before the Court of Appeal. This was in response to a letter, dated 23 June 2015, from the Defendants’ solicitors suggesting, apparently for the first time, that the County Court had no jurisdiction to grant the relief sought under the Corporations Act.
On 10 August 2015, the County Court ordered that the trial date previously fixed on 21 September 2015 for the Damages Proceeding and the Contribution and Restitution Proceeding be vacated and the proceedings be stayed in the County Court.[32]
[32]Although the County Court had jurisdiction to hear and determine the Contribution and Restitution Proceeding, it was just and efficient for both proceedings to be managed together.
Ten days later, the Defendants indicated that they intended to seek security for costs against JZ Lee Interiors. The letter stated that if JZ Lee Interiors did not provide a reasonable amount by way of security, the Defendants would seek provision of information as to JZ Lee Interiors’ financial position.
On 26 August 2015, JZ Lee Interiors declined to provide any security for costs and refused to provide any of the information sought. In particular, no information was provided as to whether or not JZ Lee Interiors was currently trading or whether it had any assets.
From searches conducted by the Defendants’ advisers, the following information was obtained:
(1)JZ Lee Interiors is a limited proprietary company with paid up capital of $1.
(2) The sole shareholder is J & Z Vrapcenjak Pty Ltd.
(3) JZ Lee Interiors holds no land in Victoria.
(4)Based on a search of the personal property securities register, it appeared that JZ Lee Interiors was no longer trading.
This information, viewed alone, suggested to the Defendants there was “reason to believe” that JZ Lee Interiors would be unable to pay the Defendants’ costs.[33]
[33]See Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, 382 [15] (Maxwell P and Buchanan JA) as to the meaning of “reason to believe” in this context.
Upon the application for security for costs being made, certain financial information was then provided by JZ Lee Interiors. The suggested financial position of JZ Lee Interiors, as set out in the recently provided material, is as follows:[34]
[34]Affidavit of Lyndal Gaye Mews affirmed 26 November 2015, exhibit LGM-19.
Assets $1,470,422.10 Liabilities $136,663.59 Net assets $1,333,758.51
The Defendants had this material reviewed by a chartered and forensic accountant. His report (which was tendered without objection) included the following:
(1)A conclusion that JZ Lee Interiors ceased employing staff as at 30 June 2013, with the staff being employed by another entity that charged the cost to JZ Lee Interiors.
(2)A balance sheet provided as at October 2015 for JZ Lee Interiors did not include a tax liability of approximately $140,000 for 30 June 2015, a tax liability for the period July 2015 to October 2015 of approximately $90,000 and certain hire purchase liabilities.
(3)By reason of the further liabilities, it is expected that the current cash balance of JZ Lee Interiors of approximately $650,000 would be significantly depleted by December 2016.
(4)On the assumption that JZ Lee Interiors had ceased trading, there could be a real issue as to whether or not trade debts of $45,358 are recoverable given their age.
(5)The current assets of JZ Lee Interiors include a loan to the Vrapcenjak Family Trust of $273,074 and to “Dudley Street Developments” of $230,000. However, the income for the previous financial year only included $102 in interest. Therefore it was likely that these loans were to related parties or were non-performing. (There was no evidence as to the capacity of these borrowers to repay the loans.)
(6)In the accountant’s opinion, the ability of JZ Lee Interiors to meet a future award of costs (which he was asked to assume would be $522,914[35]) was contingent on the financial position and actions taken by related parties. In the absence of any evidence as to the financial position or intentions of the related parties, he concluded there was significant uncertainty that JZ Lee Interiors would be in a position to meet the award of costs if such an award was ultimately made.
[35]This amount bore little resemblance to the amount ultimately claimed.
At the hearing of these applications, JZ Lee Interiors did not dispute the existence of the additional liabilities identified by the expert accountant. Taking these liabilities into account, and assuming that JZ Lee Interiors’ financial position was and will continue to be as stated in its October 2015 balance sheet, JZ Lee Interiors’ financial position would be as follows:
Assets $1,470,422.10 Liabilities (as shown in balance sheet) $136,663.59 Hire purchase liabilities $140,000.00[36] Future net tax liability $220,000.00[37] Net assets $973,758.51 [36]Affidavit of Paul Lom affirmed 25 November 2015, exhibit PL-1, par 2.2.7.
[37]Ibid, par 2.2.8.
Even taking into account that JZ Lee Interiors has ceased to trade (save for related-party transactions), and that further legal costs would be incurred in conducting the Damages Proceeding and the Contribution and Restitution Proceeding, if the figures above are accepted, then it would appear there would be ample funds to meet any costs order made in favour of the Defendants.
However, there are a number of serious concerns in relation to the balance sheet proffered by JZ Lee Interiors as at October 2015. The first of these is already apparent. The expert accountant has identified substantial liabilities that were not referred to in the balance sheet. The fact that such significant amounts were not included must raise serious questions about the reliability of the balance sheet generally.
Secondly, the balance sheet as at October 2015 was produced by a letter from JZ Lee Interiors’ solicitors. Curiously, it was not the subject of sworn evidence from anyone on behalf of JZ Lee Interiors.[38]
[38]The balance sheet as at October 2015 was exhibited to an affidavit filed on behalf of the Defendants.
Thirdly, the evidence of previous accounts of JZ Lee Interiors up to 30 June 2015 was sworn to by Kim Vrapcenjak, the daughter of Vrapcenjak. There was no sworn evidence from Vrapcenjak himself as to the accuracy of any of the financial statements of JZ Lee Interiors. Further, Kim Vrapcenjak did not give evidence on information and belief that she had made any inquiries of Vrapcenjak for the purposes of verifying the accounts proffered. Kim Vrapcenjak identified herself as “General Manager and Operational Manager of the JZ Lee Group”. She said, on this basis, she had knowledge and management of JZ Lee Interiors’ records and operations. She also said she had examined the financial statements and believed the contents to be true and correct. The basis of that belief was not stated. Why she did not make any inquiry of Vrapcenjak before swearing her affidavit is not explained. Further, there was no explanation by her as to why substantial liabilities were not included in the accounts.
Fourthly, none of the financial statements tendered are audited.
Fifthly, none of the financial statements are signed by Vrapcenjak. Indeed, in the 30 June 2015 accounts, provision is made for the signature of Vrapcenjak, but no signature appears. Further, no explanation was given as to why Vrapcenjak, or for that matters the auditors, had not signed these accounts.
Sixthly, the accounts show that dividends in excess of $2 million have been paid in the past. There was no evidence put forward on behalf of JZ Lee Interiors, nor any indication given to the court by its counsel, that further dividends would not be paid in the future. Indeed, there was no commitment as to what might become of whatever assets JZ Lee Interiors presently holds. In circumstances where JZ Lee Interiors has ceased to conduct any ongoing arms-length business, there must be real uncertainty as to the intention to maintain any substantial assets in the future.
In all the circumstances, the financial statements proffered by JZ Lee Interiors are of very limited probative value in determining the threshold question.[39]
[39]Cf Strategic Financial and Project Services Pty Ltd v Bank of China Ltd [2009] FCA 604, [34]-[35] (Moore J).
In my view, the probative evidence tendered by the Defendants establishes that there is credible testimony that there is reason to believe that JZ Lee Interiors will be unable to pay the costs of the Defendants if the Defendants are ultimately successful. The evidence of JZ Lee Interiors has not altered this. Further, the Defendants’ position is supported by the evidence of the expert accountant. Accordingly, I turn to the issues relating to the exercise of the court’s discretion.
There has been delay in the making of this application. The Damages Proceeding (together with the Contribution and Restitution Proceeding) was set down for trial in the County Court on 2 prior occasions.[40] Whilst such delay must mean that the Defendants ought not obtain any security with respect to past costs,[41] the delay ought not, of itself, result in the application being unsuccessful.[42]
[40]In addition to the trial dated of 21 September 2015 (see par 37 above), the proceedings were previously set down for trial on 9 February 2015.
[41]The Defendants sought the sum of $158,238 with respect to costs incurred prior to the application.
[42]Cf Rolfe v Investec Bank (Australia) Ltd [2013] VSCA 293, [51]-[55] (Santamaria JA, with whom Osborn JA agreed).
This proceeding has only recently been transferred to the Supreme Court and there are now a large number of new claims being made. In the circumstances, it was appropriate for the Defendants to consider the issue of whether or not to seek security for costs at this time. Further, and in any event, it was not until earlier this year that the Defendants discovered that JZ Lee Interiors had effectively ceased to trade. Although evidence was led in an attempt to rebut this suggestion, that evidence did not establish that Smith had prior knowledge of JZ Lee Interiors’ complete cessation of arms-length dealings.
There is no suggestion that an order for security for costs would stultify JZ Lee Interiors’ claim. Indeed, the financial statements for the period ending October 2015 proffered by JZ Lee Interiors suggests that the legal costs of JZ Lee Interiors are being substantially met from sources other than JZ Lee Interiors’ assets.[43] However, the person standing behind JZ Lee Interiors, Vrapcenjak, has not made any offer in the Damages Proceeding to meet any adverse costs orders.
[43]JZ Lee Interiors’ financial statements for the year ended 30 June 2015 disclosed total legal fees of $57,909, when the legal costs of JZ Lee Interiors were far in excess of this amount: see par 70 below.
Late in argument, JZ Lee Interiors offered an undertaking to the court that it would not dispose of its assets so as to ensure that its net asset position would not fall below $250,000 and that, commencing December 2015, every 2 months thereafter JZ Lee Interiors would provide to the Defendants an up-to-date profit and loss balance sheet within 30 days of the end of the relevant month.[44] The Defendants rejected any suggestion that this undertaking would be appropriate in lieu of an order for security for costs.
[44]Earlier undertakings had been offered, but they were in significantly different terms.
Notwithstanding the initial attraction to the form of undertaking, having considered the financial information provided by JZ Lee Interiors carefully, in my view such an undertaking gives very little comfort to the Defendants. The balance sheet as at October 2015 contains assets in excess of $250,000, the recoverability of which is completely unknown. Accordingly, Vrapcenjak could have his loan repaid, the cash at bank could all be expended and yet the undertaking could still be technically complied with. In short, it was not an appropriate alternative.
In all the circumstances, it is appropriate that an order for security for costs be made with respect to the costs of the Defendants from the time of the issue of the application up to and including the first day of trial.
Attached to this judgment marked “Annexure A” is a table setting out the competing amounts on quantum. JZ Lee Interiors’ evidence is from a costs expert. The Defendants’ evidence is from their solicitor, who has had the carriage of the proceedings from the outset.
The midpoint between the 2 amounts[45] has been taken as both versions deserve some weight. It was not clear on the evidence which was more correct.[46] I note that the Defendants similarly chose a midpoint between the 2 amounts in their written submissions.[47]
[45]I selected the higher range of JZ Lee Interiors’ estimate as, on the evidence, this appeared more appropriate.
[46]Cf Rolfe v Investec Bank (Australia) Ltd [2013] VSCA 293, [52] (Santamaria JA, with whom Osborn JA agreed).
[47]Defendants’ outline of submissions dated 30 November 2015, pars 50 and 51.
The order will be made for security for costs in the sum of $139,445, which is made up of the components referred to in Annexure A, on the basis set out in the preceding paragraph and in the annexure.
C.3 Application by JZ Lee Interiors
There was no issue that Donamis has very limited assets, and would not be able to meet any adverse costs order made against it. The only real issue between the parties on this application was whether or not Donamis was truly a defendant or whether, by reason of the counterclaim, a “counter attack” had been opened on a different front which exposed it to an order for security for costs.[48]
[48]See, for example, Visco v Minter [1969] P 82, 85G (Ormrod J).
As referred to above,[49] the Defendants allege that on 27 July 2013, the Defendants, Vrapcenjak and JZ Lee Interiors agreed to fully and finally determine all outstanding disputes.
[49]See par 1 above.
If the Defendants are successful in establishing the existence of a binding settlement agreement, then the other matters the subject of the counterclaim will be subsumed in that finding. In other words, the claims made in the counterclaim are only made on the basis that the settlement agreement, contended for in the defence of the claims of JZ Lee Interiors, was not entered into. In these circumstances, the Defendants can properly be considered to be truly defensive in the matters pleaded, and it would be inappropriate that Donamis be the subject of any order for security for costs.
Another relevant factor to consider is an undertaking given by the Defendants that if security for costs were awarded against JZ Lee Interiors, those costs were not paid and the Damages Proceeding was subsequently stayed, they would also treat their counterclaim as stayed.[50] This is a further reason why no security should be ordered against Donamis.
[50]Cf Bakers Investment Group (Australia) v Caason Investments Pty Ltd [2014] VSC 154, [46]-[50]; Bufalo Corp Pty Ltd (Receiver and Manager Appointed) (in liquidation) v Lendlease Primelife Ltd (No 3) [2010] VSC 263, [70] (Judd J); Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621, 627.3 (Ormiston J).
D.Application for security for costs in the Contribution and Restitution Proceeding
During the course of argument, senior counsel for the Plaintiffs informed the court that Vrapcenjak was willing to give an undertaking to the court which would continue until the hearing and determination of the Contribution and Restitution Proceeding that, in the event that JZ Lee Interiors were unsuccessful, Vrapcenjak would not resist an application for both of the Plaintiffs to be liable for Smith’s costs. By this, I understood the Plaintiffs would be jointly and severally liable if any such costs order was made.[51]
[51]Later, senior counsel indicated that by reason of this undertaking, Vrapcenjak would be “on the hook for everything”.
In these circumstances, an order for security for costs is unnecessary. There is no suggestion that Vrapcenjak would not be able to meet any costs order made against JZ Lee Interiors.
E. Other matters
The above reasons deal with the applications presently before the court. However, further comments need to be made in relation to the conduct of this case. For the purposes of the applications before the court, a total of 15 affidavits were filed by the parties. A number of these were voluminous. Based on my review of the file, this appears to be typical of the approach of the parties in this proceeding.
As a result of the concern about the level of costs being incurred, I required the parties to inform the court as to the amount of costs incurred to date. Remarkably, the plaintiffs have already incurred $412,500 with respect to claims that are unlikely to exceed $1 million in total. It is difficult to form any conclusion other than, by the time this matter is ready for trial,[52] the costs incurred will be completely disproportionate to the amounts involved.
[52]There are still pleading and discovery issues. The parties have previously agreed the suggested trial duration will be 20 hearing days.
The Defendants have incurred even further costs, totalling $542,000. In other words, the total costs already incurred by the parties to date are likely to have exceeded the total of the amounts claimed.
In the circumstances, it is appropriate to record that no party should assume that the conduct of this case moving forward should be conducted other than strictly in accordance with overarching obligations.[53] Although the allegations made by the Plaintiffs are of a serious nature, this does not diminish the applicability of the overarching obligations.
[53]See par 8 above.
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Annexure A
| Stage/disbursement | Defendants’ position[54] | Plaintiff’s position[55] |
| Appearances at directions hearings | $11,004.40 | $4,000 - $7,000 |
| Preparing for hearing of JZ Lee Interiors’ amendment application and appearance | $23,430 | $17,000 - $19,000 |
| Preparation for further mediation and the further mediation | $23,556.61 | $19,353.11 - $19,995 |
| `Preparation for trial and the trial | $225,412 | $121,000 - $136,000 |
| Excluding trial but up to first day: $98,757 | ||
| General disbursements | $4,292.21 | $2,000 |
| Subpoena conduct money | $450 | $150 |
| Subpoena compliance costs | $7,500 | ‑ |
| Subpoena service fees | ‑ | $300 |
| Transcript costs | $22,000 | $16,000 |
| For first day of trial: $2,000 | ||
| Total (including trial) | $317,645 | $179,803.11 - $200,445 |
| Total (to end of first day of trial) | $170,990 | $96,788 - $107,899.54[56] |
[54]Affidavit of Lyndal Mews affirmed 23 October 2015, pars 56 and 58.
[55]Affidavit of Antonella Terranova sworn 20 November 2015.
[56]This was calculated by applying the percentage differential between the Defendants’ estimated total including trial and total to the end of the first day of trial to the total including trial as estimated by JZ Lee Interiors.
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