Lampson (Australia) Pty Ltd v HIMET Corporation Pty Ltd
[2006] WASC 236
LAMPSON (AUSTRALIA) PTY LTD -v- HIMET CORPORATION PTY LTD & ORS [2006] WASC 236
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2006] WASC 236 | |
| Case No: | CIV:1758/2005 | 23 AUGUST 2006 | |
| Coram: | MASTER NEWNES | 31/10/06 | |
| 16 | Judgment Part: | 1 of 1 | |
| Result: | Security for costs ordered | ||
| B | |||
| PDF Version |
| Parties: | LAMPSON (AUSTRALIA) PTY LTD HIMET CORPORATION PTY LTD NUCOR AUSTRALIA LLC MC IRON AND STEEL PTY LTD CHINA SHOUGANG INTERNATIONAL TRADE AND ENGINEERING CORPORATION |
Catchwords: | Practice and procedure Application by defendants for security for costs Whether plaintiff capable of meeting order for costs Substantial counterclaim by defendants Whether order for security appropriate Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 1335 |
Case References: | Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 134 ALR 187 Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998 Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Re Western Australian Planning Commission; Ex parte South Fremantle/Hamilton Hill Residents' Association Inc [2005] WASC 50 BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857 Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates Pty Ltd (1986) 13 FCR 46 Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523 Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ASCR 621 Logue v Hansen Technologies Ltd (2003) 125 FCR 590 Neldue Pty Ltd v Moran [2004] WASC 100 Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1 T Sloyan & Sons (Builders) Ltd v Brothers of Christian Instruction [1974] 3 All ER 715 Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186 Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
HIMET CORPORATION PTY LTD
First Defendant
NUCOR AUSTRALIA LLC
Second Defendant
MC IRON AND STEEL PTY LTD
Third Defendant
CHINA SHOUGANG INTERNATIONAL TRADE AND ENGINEERING CORPORATION
Fourth Defendant
Catchwords:
Practice and procedure - Application by defendants for security for costs - Whether plaintiff capable of meeting order for costs - Substantial counterclaim by defendants - Whether order for security appropriate - Turns on own facts
(Page 2)
Legislation:
Corporations Act 2001 (Cth), s 1335
Result:
Security for costs ordered
Category: B
Representation:
Counsel:
Plaintiff : Mr G E Underwood
First Defendant : Mr P D Evans
Second Defendant : Mr P D Evans
Third Defendant : Mr P D Evans
Fourth Defendant : Mr P D Evans
Solicitors:
Plaintiff : Aherns Lawyers
First Defendant : Freehills
Second Defendant : Freehills
Third Defendant : Freehills
Fourth Defendant : Freehills
Case(s) referred to in judgment(s):
Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 134 ALR 187
Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998
Brundza v Robbie & Co (No 2) (1952) 88 CLR 171
Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497
Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994
KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189
(Page 3)
Re Western Australian Planning Commission; Ex parte South Fremantle/Hamilton Hill Residents' Association Inc [2005] WASC 50
Case(s) also cited:
BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857
Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates Pty Ltd (1986) 13 FCR 46
Harpur v Ariadne Australia Ltd (No 2) [1984] 2 Qd R 523
Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ASCR 621
Logue v Hansen Technologies Ltd (2003) 125 FCR 590
Neldue Pty Ltd v Moran [2004] WASC 100
Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1
T Sloyan & Sons (Builders) Ltd v Brothers of Christian Instruction [1974] 3 All ER 715
Weily's Quarries v Devine Shipping Pty Ltd (1994) 14 ACSR 186
Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542
(Page 4)
1 MASTER NEWNES: This is an application by the defendants for security for costs. The defendants seek security in the sum of $200,000, with liberty to apply to increase that amount as the action progresses.
The action
2 The plaintiff is involved in the supply of cranes and crane operators. The defendants are joint venturers in a project involving the construction and operation of a plant for the production of pig iron at Kwinana, south of Perth.
3 On 17 April 2003 the defendants, through their agent, HIsmelt (Operations) Pty Ltd, entered into a contract with the plaintiff under which the plaintiff was to supply, among other things, a heavy lift crane with associated equipment and services for work being carried out at the defendants' plant at Kwinana. Pursuant to the contract, the plaintiff provided a banker's undertaking to the defendants in the sum of $58,615. The banker's undertaking was to be returned to the plaintiff upon completion of its obligations under the contract and payment of all moneys payable by the plaintiff to the defendants.
4 The plaintiff says that there have been certain variations to the contract by which additional amounts have become payable to the plaintiff.
5 In the action,the plaintiff alleges that the defendants are indebted to it in the total sum of $503,288.31, being the total amount of the invoices it has rendered to the defendants for work it has carried out under the contract. The plaintiff also seeks the return of the banker's undertaking on the ground that its obligations under the contract have been completed and there is no money owing by the plaintiff to the defendants.
6 In their defence and counterclaim, the defendants allege that, on 1 June 2004, the heavy lift crane, operated by the plaintiff's crane driver, lifted a large vessel known as the Stage One Venturi vessel ("Venturi") and kept it suspended approximately 60 metres above the ground. After being suspended for 15 to 30 minutes, the crane failed to maintain hold of the Venturi which fell approximately four metres on to the structure below, causing substantial damage (the "crane accident").
7 The defendants notified the plaintiff that it would claim against the plaintiff in respect of the damage caused in the crane accident.
(Page 5)
8 The defendants do not admit that the amount claimed by the plaintiff, or any amount, is payable as alleged but say that if the plaintiff is entitled to the amount claimed, on the proper construction of the contract the defendants are entitled to deduct or withhold payment of that amount, and are not required to return the banker's undertaking, pending resolution of their claim in respect of the crane accident.
9 The defendants also counterclaim against the plaintiff, in respect of the crane accident, damages for breach of an alleged duty of care, breach of contract and misleading and deceptive conduct. It is alleged that as a result of the accident, the defendants have suffered loss and damage in the order of $6,000,000 and they claim, among other things, damages. The defendants say in their defence that they are entitled to set off against any amount due to the plaintiff under the contract the amount of those damages.
10 In its reply and defence to counterclaim, the plaintiff denies any liability for the crane accident and says that the crane driver was at all material times under the control and supervision of the defendants and that the suspension of the Venturi was due to the unsafe or incompetent control and supervision of the defendants. It alleges that the crane accident was caused by the failure by the defendants or its agent properly to prepare and implement a safe lifting plan and properly to control and supervise the lifting of the Venturi.
The evidence as to the plaintiff's financial capacity
11 A search of the records of ASIC has revealed that there are two issued shares in the plaintiff, both held beneficially by a resident of the United States, Mr William Lampson, and that the plaintiff has a paid up capital of $4. There are three directors of the plaintiff, two of whom, Mr Lampson and a Mr Cooper, are US residents.
12 The defendants put in evidence a special purpose financial report of the plaintiff for the period ended 30 September 2004, which was lodged by the plaintiff at ASIC.
13 The 2004 financial report shows that in the financial year ended 30 September 2004 the plaintiff had a total shareholders' deficiency of $2,321,249, compared with $2,658,607 for the previous year. It shows that the plaintiff's receivables had increased to $7,247,157, compared with $3,846,549 for the previous year, but its sundry creditors had also increased, from $1,879,642 to $4,616,194. The statement of income and
(Page 6)
- expenditure shows an operating profit of $402,678, compared with an operating profit of $1,115,092 for the 2003 financial year.
14 It is significant that the statement of cash flows from operating activities in the 2004 year shows that payments to suppliers and employees substantially exceeded receipts from customers, with the result that net cash flows from operating activities showed a deficiency of $2,629,438, compared with a deficiency of $313,195 for the previous year. The increase was offset by the increased borrowings of $2,736,552 during the 2004 year. The plaintiff's net cash position as at 30 September 2004 showed a deficit of $717,568, compared with a deficit of $754,961 for the previous year.
15 The plaintiff is shown in the report as having a non-current liability of $5,000,000, being a loan from Neil F Lampson Inc which that company has by deed subordinated to the claims of all other creditors during the (unspecified) term of the deed.
16 The plaintiff has filed in response to the application an affidavit of Mr Wayne Fowler, an accountant who advises the plaintiff on its taxation and accounting affairs. Attached to Mr Fowler's affidavit is the special purpose financial report of the plaintiff for the period ended 30 September 2005 that was lodged with ASIC in March 2006.
17 The schedule of income and expenditure shows an operating loss for the financial year of $744,576. The statement of financial position shows that the plaintiff's total shareholders' deficiency had increased as at 30 September 2005 to $2,895,471, an increase of some $574,000 over the previous year. Mr Fowler says that this does not truly reflect the actual financial position of the plaintiff, as it has continued to trade very strongly in the 2006 financial year. He refers in particular to certain management accounts to which I will return.
18 Mr Fowler notes that the trade debtors of the plaintiff for each of the financial years ended 30 September 2003, 2004 and 2005 have increased from $3,091,549 to $7,247,157 to $9,074,915 respectively. Mr Fowler says that the increase in the level of receivables can be attributed to the increase in sales shown in the cash flow statement.
19 I should interpose at this point that the statement of cash flows in the 2005 report shows that, while there was a substantial increase in sales and trade debtors, the cash flow position of the plaintiff in that year did not greatly improve. Once again, payments to suppliers and employees substantially exceeded receipts from customers, so that for the year ended
(Page 7)
- 30 September 2005 the net cash flow from operating activities resulted in a deficiency of $1,736,828, compared with a deficiency of $2,629,438 for the previous year. The plaintiff's sundry creditors as at 30 September 2005 had increased again, by a further amount of $1,336,293, to a total of $5,952,487. The plaintiff's net cash position showed a deficit as at 30 September 2005 of $1,392,890, an increase of $675,322 over the previous year.
20 Mr Fowler says the total loan due to Neil F Lampson Inc as at 30 September 2005 was $11,810,080, compared with the figure of $9,321,558 as at 30 September 2004. He says, however, that a signed declaration is received from Neil F Lampson Inc each year declaring that the loan is not interest-bearing and will not be required to be repaid prior to 30 September of the following year.
21 Mr Fowler also refers to Megalift Pty Ltd ("Megalift") which is a company wholly owned by the plaintiff. Megalift specialises in heavy haulage and trucking. He annexes statements of financial position for Megalift for each of the financial years ending 30 September 2003, 2004 and 2005. They show a net surplus of assets over liabilities as at 30 September 2003 of $2,267,563, as at 30 September 2004 of $2,345,918 and as at 30 September 2005 of $2,488,658. Mr Fowler says that as the plaintiff is a non-reporting entity, the directors of the plaintiff have elected not to have consolidated accounts, but on a consolidated basis the contribution of Megalift to the net overall asset position of the plaintiff is an amount of $2,438,578 for the year ended 30 September 2005, after taking into account the acquisition cost of the shares in Megalift in the sum of $50,080.
22 I should say that the value of the plaintiff's shares in Megalift is shown in the plaintiff's statement of financial position as a non-current asset at cost, in the sum of $50,800.
23 Mr Fowler says that, being a non-reporting entity, the plaintiff records property, plant and equipment at historical cost, rather than current value. Annexed to Mr Fowler's affidavit are valuations of the properties owned by the plaintiff which show the total market value of those properties at some $4,000,000, substantially in excess of the book value. Mr Fowler says that when the values of Megalift and the land revaluations are taken into account, a (notional) consolidated balance sheet of the plaintiff and Megalift shows net assets as at 30 September 2005 of $890,544. That comprises a deficiency of $1,548,034 for the plaintiff and a surplus of $2,488,658 for Megalift.
(Page 8)
24 The consolidated statement of income and expenditure of the plaintiff and Megalift shows an overall operating loss in the 2005 financial year of $613,763, made up of a net loss of $744,576 by the plaintiff and a net profit of $130,823 by Megalift.
25 Unaudited management accounts of the plaintiff and Megalift have been prepared for the period 1 October 2005 to 30 April 2006. On a consolidated basis, the management accounts show the two companies earning a net profit of $1,977,820 from sales of $32,536,811, and having combined net assets of $2,868,363. I should say that it is not evident who prepared the accounts. They were apparently not prepared by Mr Fowler. Nor is it apparent how the figures have been derived, including for example what appear on the face of it to be a very large increase in trading revenue and some substantial pro-rata cost savings in a number of areas, with the result that the profit for the period is substantially greater than the profit for the 2005 financial year.
The defendants' submissions
26 It was submitted on behalf of the defendants that there was reason to believe that the plaintiff would be unable to meet any order for costs that might be made against it if it were unsuccessful in the action.
27 It was submitted that on the basis of the 2004 financial report the plaintiff plainly would not be able to meet any order for costs. That position was not materially altered by the 2005 year-end results. It appeared from the 2005 report that in that financial year the plaintiff had incurred an operating loss of some $744,000 and its accumulated losses had increased by some $500,000 to $2,895,473. While sales and receivables had increased, the cash position of the plaintiff had continued to deteriorate. That had been met by increased borrowings.
28 The accounts of Megalift to 30 September 2005 showed a small operating profit of $130,000, but the statement of cash flows from operating activities showed that payments exceeded receipts, resulting in a substantial increase in receivables and leading to borrowings of some $850,000 from a related entity.
29 The overall position of both companies appeared to be that they each had substantial revenue but negative cash flows which were being met by increased borrowings. The borrowings appeared to be from associated companies, but the terms of the borrowings were not disclosed.
(Page 9)
30 The revaluations of the real property of the companies at market value were not challenged. But it was submitted that on the basis of the revaluations, the net asset position of the plaintiff was still a deficiency of some $1.5 million, although Megalift had surplus assets of some $2.5 million.
31 The defendants' counsel submitted that as Megalift was a separate legal entity, the defendants could not have recourse to its assets to meet their costs of defending the plaintiff's action, except by a sale of the shares the plaintiff holds in it by enforcement action or on a winding up of the plaintiff. Even in the former event, given its financial position as disclosed in the 2005 accounts, the ultimate result would inevitably be that the defendants would be competing, as unsecured creditors, with other creditors for an uncertain outcome.
32 There was nothing in Mr Fowler's affidavit which dealt with the interests of persons standing behind the plaintiff, nor the terms of their financial dealings with the plaintiff.
33 It was apparent from the documents in evidence that the sole shareholder of the plaintiff, Mr Lampson, is normally resident in the United States. As a shareholder, he stands to benefit from the plaintiff's claim if it is successful and, as a director of the plaintiff, he exercises some control over the litigation. He is insulated by the interposition of the company, and by his residence in the United States, from any exposure to a costs order. He has declined to bring his own assets into play in support of the proceedings.
34 It was submitted that it was also significant that the plaintiff appears to be controlled by a foreign entity or entities. The financial statements filed with ASIC are entitled "Financial Report - Small Proprietary company that is controlled by a Foreign Company". Mr Lampson, the sole shareholder and a director of the plaintiff, is the president of Lampson International LLC and the plaintiff owes a substantial amount of money to Neil F Lampson Ltd, a corporation that appears to be both a related or associated entity and is based overseas. The loan from Neil F Lampson Ltd is stated to be interest free but the terms of the loan are not disclosed. An amount of $5,000,000 owing to Neil F Lampson Inc is shown on the financial statements of the plaintiff as being a subordinated loan but, other than that the loan is subordinated to the claims of other creditors, the terms of subordination are not disclosed. The position, then, seems to be that the plaintiff is owned by a foreign
(Page 10)
- resident and its substantial creditors are foreign affiliates, the terms of whose lending have not been disclosed.
35 Counsel argued that the management accounts to 30 April 2006, which appeared to show a dramatic improvement in trading performance for both the plaintiff and Megalift, should be treated with great scepticism. The accounts were unaudited and it is not apparent who prepared them. There were also a number of apparent discrepancies in the figures when compared with the 2005 year-end accounts. For instance, the $11.5 million loan from Neil F Lampson Inc no longer appeared in the accounts for the plaintiff and no explanation was offered for that. While the accounts showed that both companies had recorded substantial profits in the six-month period, no provision had been made for any tax liability, whether on the basis of carried forward losses or simply omission was not apparent. In addition, the accounts were for part only of the financial year and may not reflect likely year-end results. It was submitted that the management accounts raised more questions than they answered.
The plaintiff's submissions
36 It was submitted on behalf of the plaintiff that the substantial difference between the parties was whether the plaintiff was in fact impecunious. Counsel for the plaintiff argued that consideration had to be given to the current values of the freehold land in Australia and the value of the wholly owned subsidiary, Megalift. When those matters were taken into account it was clear the plaintiff was solvent and able to meet a costs order should it be unsuccessful in the action. The consolidated accounts to 30 September 2005 showed combined net assets of $890,544. The management accounts showed that, on a consolidated basis, for the six months from 1 October 2005 to 30 April 2006 the plaintiff and Megalift had a profit of $1,977,820 and net surplus assets of $2,868,363.
37 In relation to the loan of $11,810,097.77 from Neil F Lampson Inc, the plaintiff put in evidence a letter from that company extending the time within which payment would not be called for to 30 September 2007.
38 Counsel submitted that on the basis of the figures contained in the consolidated management accounts of the plaintiff and Megalift to 30 April 2006, it was plain that the plaintiff would be able to meet a costs order in the sum of $309,000 - the defendants' estimate of its costs of the action - both from its operating profit and the surplus of assets over liabilities.
(Page 11)
39 It was further submitted that it was also the case that on the basis of the consolidated position of the plaintiff and Megalift to 30 September 2005 - which shows total net assets to the value of $890,544 - the plaintiff had the capacity to meet a costs order. It was clear, too, that as the plaintiff owned substantial unencumbered land it would have no difficulty in borrowing the necessary funds to meet a costs order.
40 In respect of the loan from Neil F Lampson Inc, it was submitted that there was an undertaking from that company that the loan would not be called up before 30 September 2007. If the litigation was not concluded prior to 1 October 2007, the defendants could bring a further application for security.
41 It was submitted that as the plaintiff was solvent and profitable there was no need for those standing behind the plaintiff to depose as to their assets.
42 It was also submitted that security will only be ordered against a party who is in substance a plaintiff and an order ought not to be made against a party who is defending itself and thus forced to litigate. In the present case, the plaintiff is suing for an amount of some $503,000. The defendants have counterclaimed in an amount of almost $6,000,000. The plaintiff is therefore now defending a major action and the costs involved in the defendants' counterclaim will far outweigh the costs involved in the plaintiff's claim. It would therefore be oppressive to require the plaintiff to provide security.
The relevant principles
43 Section 1335 of the Corporations Act 2001 (Cth) provides, in effect, that the jurisdiction to order security for costs is enlivened where it appears by credible evidence that there is reason to believe the plaintiff will be unable to meet an order for costs if it is unsuccessful in the action. The Court then has a discretion whether or not to make an order for security for costs.
44 It is trite law that the discretion to order security for costs is unfettered and depends upon an examination of all of the circumstances of the case, but it is also accepted that some of the relevant factors are:
(1) whether the plaintiff's claim is bona fide and has reasonable prospects of success;
(Page 12)
- (2) whether the defendant has contributed to the plaintiff's likely inability to pay costs;
(3) whether an order for security for costs may have the effect of stultifying the action;
(4) whether it appears the applicant is seeking to stifle a legitimate claim;
(5) whether there are others behind the corporate plaintiff who might reasonably be expected to contribute to the satisfaction of an order for security.
45 See Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 at 4 - 5 and Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998.
46 It is also relevant whether the applicant for security is in substance the plaintiff or the proceedings are defensive in nature: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 197; Re Western Australian Planning Commission; Ex parte South Fremantle/Hamilton Hill Residents' Association Inc [2005] WASC 50 at [75].
47 The fact that the plaintiff will be unable to pay the defendants' costs if the defendants are successful is a factor of great weight in the exercise of the discretion, but it is not necessarily decisive and regard must be had to all of the circumstances of the case.
Are the defendants entitled to security for costs?
48 As is usually the case on applications of this sort, it is not possible to make any assessment of the plaintiff's claim beyond saying that on the material before me it appears to be reasonably arguable.
49 It was not suggested by the plaintiff that the defendants have caused the plaintiff to become impecunious, the plaintiff's case being that it is not impecunious but, on the contrary, able to meet any order for costs that might be made against it in the action. Similarly, it did not contend that the current application was oppressive or would stifle the claim.
50 The real issues on the application were first, the financial capacity of the plaintiff to meet a costs order and, secondly, whether, in any event, security for costs should be ordered in circumstances where the
(Page 13)
- defendants' counterclaim was likely to involve the parties in far greater cost than the plaintiff's claim.
51 On the first point, a significant issue between the parties was whether, or to what extent, the assets of Megalift could be taken into account in assessing the capacity of the plaintiff to meet any order for costs, and also whether the financial position of the plaintiff and Megalift is to be taken from the accounts as at 30 September 2005 or the management accounts to 30 April 2006.
52 I do not consider that the unaudited management accounts to 30 April 2006 can be given any significant weight. I accept the submission of counsel for the defendants that they raise a number of questions for which no, or no satisfactory, answer has been proffered or is apparent. The questions they raise also include the reason for what appear to be quite dramatic increases in the plaintiff's revenue and profitability. In addition, the author of the accounts has not been identified and no evidence has been adduced in support of, and no-one on behalf of the plaintiff has attested to, their reliability. The plaintiff's external accountant, Mr Fowler, simply says that he has "reviewed" them and then he merely describes the net effect of what they say. Ms Godwin, a chartered accountant employed by the plaintiff and involved with the preparation of its accounts (whose affidavit annexing certain year-end accounts was put in evidence by the plaintiff), does not refer to them at all.
53 In those circumstances, in my view, it is to the 2005 financial year-end accounts that regard must be had in assessing whether there is reason to believe that the plaintiff will be unable to meet an order for costs if it is unsuccessful at trial.
54 The plaintiff made an operating loss of $744,576 in 2005. The total shareholders' deficiency increased by almost $600,000 during the 2005 financial year to a figure of $2,895,473 as at 30 September 2005. The plaintiff's borrowings have increased steadily and substantially over the period 30 September 2003 to 30 September 2005. While its revenue from sales has increased substantially, the plaintiff has recorded substantial annual deficiencies in cash flow from operating activities in each of 2004 and 2005 (and a smaller operating deficiency in 2003).
55 As at 30 September 2005, an amount of $11,810,097.77 was owing to Neil F Lampson Inc, an increase of some $2,500,000 over the 2004
(Page 14)
- financial year. The terms upon which the $5 million loan from Neil F Lampson Inc has been subordinated are not apparent.
56 I accept the defendants' submission that it appears the plaintiff is effectively being kept afloat by increased borrowings, apparently from associated entities in the United States, upon terms that are not adequately disclosed in the evidence. Whether further borrowings would be made available to bridge any future operating deficiencies of the plaintiff is not apparent. Certainly there is no evidence that they would.
57 I turn then to the effect of the financial position of Megalift. Accepting, for present purposes, the notional consolidated accounts of the plaintiff and Megalift at 30 September 2005, the combined net surplus of assets over liabilities as at that date was $890,544. As I have mentioned, that reflects a deficiency of $1,548,034 for the plaintiff and a surplus of $2,488,658 for Megalift. Equally, while Megalift was profitable in that year, the plaintiff was not. The accounts show a combined overall operating loss in the financial year of $613,763, made up of a net loss of $744,576 by the plaintiff and a net profit of $130,823 by Megalift.
58 It is the case that the plaintiff appears to have a significant asset in its shares in its wholly owned subsidiary Megalift but, in addition to the difficulties in the realisation of that asset for the purposes of meeting a costs order, given the financial position and trading history of the plaintiff as appears from the various year-end accounts, there is reason to believe that by the time of trial the overall financial position of the plaintiff will be such that the realisation of that asset would be insufficient to leave a surplus capable of meeting a costs order against the plaintiff.
59 In the circumstances, I consider that there is reason to believe that the plaintiff would be unable to meet an order for costs if it were unsuccessful at trial.
60 I do not consider that the existence of the defendants' much more substantial counterclaim is of itself a reason why an order for security for costs should not be made in respect of their defence of the plaintiff's claim. The fact remains that the defendants are defending a distinct claim brought by the plaintiff in circumstances where it appears the plaintiff will not be able to meet the defendants' costs of doing so in the event that the claim fails. I do not, however, consider that the defendants are entitled to security so far as their costs are not essentially defensive. I understood the defendants' application to be put on the basis that the amount sought was only in respect of such costs; the full costs associated with the
(Page 15)
- counterclaim for damages would go beyond that. That was not sought to be controverted by the plaintiff.
61 Having regard to all of the circumstances, I consider that this is an appropriate case for an order for security for costs to be made.
The amount of the security for costs
62 The defendants have put in evidence a draft bill of costs in a total amount of $308,623, including $20,000 by way of disbursements. That is based on a five day trial in which senior and junior counsel are briefed and a solicitor attends the trial. The costs of discovery alone are estimated at $60,000, the parties together having discovered some 700 to 800 documents occupying 27 lever arch files. As I have mentioned, an amount of $200,000 is sought by way of security for costs. Counsel for the plaintiff did not expressly take issue with the amount of security claimed, but I do not consider that that is decisive as to the amount that the Court should order.
63 It is not clear from the pleadings precisely what will be the scope or magnitude of the trial of the plaintiff's claim. Although the defendants expressly deny that the amounts claimed by the plaintiff are payable, in respect of only three of the six invoices rendered by the plaintiff do the defendants expand upon that denial. In respect of one invoice it is alleged that the plaintiff did not provide the heavy lift crane from the contract commencement date, as it was obliged to do; in respect of another, that the crane was not available from the commencement date and that it broke down, causing delays totalling 31 days; and in respect of another it is alleged that the claimed variation was work within the scope of the contract. In respect of each invoice the defendants also plead that they are entitled to withhold or to set off the amount of their damages claim arising out of the crane accident.
64 It is well established that in ordering security for costs the Court has a discretion to fix such amount as it thinks fit in all the circumstances of the case. The Court does not set out to give a full and certain indemnity: Brundza v Robbie & Co (No 2) (1952) 88 CLR 171, per Fullagar J at 175. It is appropriate to order such sum as is considered just, taking into account the circumstances of the case: see Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (1995) 134 ALR 187, per Lindgren J at 197. As Lindgren J said in that case (at 201), the approach the Court takes to the determination of the amount is to apply a "broad brush". French J observed in Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 515, that the process of
(Page 16)
- estimation embodies, to a considerable extent, reliance upon the "feel" of the case after considering relevant factors.
Conclusion
65 On balance, on the material currently before me it seems to me that the defendants' estimate of their costs of defending the claim exceeds what is likely to be recovered on taxation. In the circumstances, I consider that an appropriate amount by way of security would be the sum of $170,000 and I would order security in that sum. I would give the defendants liberty to apply at a later stage to increase the amount should grounds exist to do so.
66 I will hear the parties on the precise form of the appropriate orders, including the form the security should take and whether it should be provided in stages, and on costs.
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