Lesvos Pty Ltd v Penrith Whitewater Stadium Ltd

[2006] NSWSC 823

Reported Decision: 58 ACSR 481

New South Wales

Supreme Court

CITATION:	Lesvos Pty Ltd & 1 ors v Penrith Whitewater Stadium Ltd [2006] NSWSC 823
HEARING DATE(S):	14/7/06
JUDGMENT DATE :	17 August 2006
JUDGMENT OF:	Bell J at 1
DECISION:	1. The plaintiffs give security for the defendants’ costs of the proceedings in a form acceptable to the Registrar within 28 days of today’s date in an amount of $187,500.00; 2. In the event security is not given in accordance with order 1, the proceedings be stayed; 3. The plaintiffs pay the defendants’ costs of the motion.
CATCHWORDS:	Security for costs - delay in bringing application
LEGISLATION CITED:	Corporations Act 2001 (Cth) Supreme Court Rules 1970 Trade Practices Act 1974 (Cth) Uniform Civil Procedure Rules 2005
CASES CITED:	Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd (No. 19) (1995) 134 ALR 187 Beach Petroleum NL v Johnson (1992) 7 ACSR 203 Brundza v Robbie & Co [No.2] (1952) 88 CLR 171 Equity Access Ltd v Westpac Banking Corporation [1989] ATPR 40-972, 50-635 Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (unreported) 7 November 1995 KDL Building v Mount [2006] NSWSC 474 Lesvos v Penrith Whitewater Stadium [2004] NSWSC 441 Southern Cross Exploration NL (Ors) v Fire & All Risks Insurance Co Ltd & Ors (1985) 1 NSWLR 114
PARTIES:	Lesvos Pty Ltd (ACN 078 840 338) (1st Plaintiff) Koffee Pty Limited (ACN 056 318 882) (2nd Plaintiff) Penrith Whitewater Stadium Ltd (ACN 083 662 140) (1st Defendant) Penrith City Council (2nd Defendant)
FILE NUMBER(S):	SC 20147/02
COUNSEL:	D Baran (1st and 2nd Plaintiff) M Jacobs / P.J. Bambagiotti (1st and 2nd Defendant)
SOLICITORS:	Andresakis & Associates (1st and 2nd Plaintiff) Gadens (1st and 2nd Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

BELL J

Thursday 17 August 2006

20147/02 Lesvos Pty Ltd (ACN 078 840 338) & 1 ors v Penrith Whitewater Stadium Ltd (ACN 083 662 140)

JUDGMENT – security for costs

1 BELL J: The first defendant, Penrith Whitewater Stadium Ltd (PWS) and the second defendant, Penrith City Council (the Council) move on notice for orders including that the plaintiffs, Lesvos Pty Ltd (Lesvos) and Koffee Pty Limited (Koffee), provide security for their costs in the sum of $226,357.50.

2 The proceedings have a lengthy history which is set out in my judgment in Lesvos v Penrith Whitewater Stadium [2004] NSWSC 441 at [13] in which I extract a number of paragraphs from an earlier decision of Master Malpass. It is sufficient for present purposes to note that the proceedings were commenced by filing an ordinary statement of claim in the District Court of New South Wales on 8 September 2000. The causes of action that were then pleaded were under s 52 of the Trade Practices Act 1974 (Cth) (the TPA) and in negligence.

3 The proceedings were transferred to this Court on 25 March 2002 on the application of the plaintiffs, it having been determined that their claim was one that may exceed the jurisdictional limit of the District Court. Thereafter the defendants moved for orders under Pt 13 r 5(1) and/or Pt 15 r 26 and/or Part 65 r5 of the Supreme Court Rules 1970 that the proceedings be stayed or dismissed generally. Ultimately they were successful in obtaining an order striking out the original pleading. The plaintiffs repleaded their claim in their amended statement of claim. This pleading was also the subject of challenge. Ultimately, on 23 June 2006, the plaintiffs were granted leave to file their second amended statement of claim. By this pleading they advance causes of action in contract and under the TPA. I understand in the way the matter has been argued that it is not in issue that the economic loss claim that is now sought to be advanced is considerably more substantial than that which was to be advanced at the time the proceedings were commenced.

4 After the transfer of the proceedings to this Court the defendants filed a motion on 20 May 2003 seeking an order for security. The defendants moved promptly following the grant of leave to proceed on the second amended statement of claim to bring their motion for security on for hearing (they moved on an amended motion that was filed on 13 July 2006 and which contained a revised figure for the sum that was sought).

5 The defendants relied on the affidavits of Martin David Hirst, sworn on 30 June 2006, and Tony Samuel sworn on 15 March 2006 together with his supplementary affidavit sworn on 11 July 2006, in support of their application.

6 The plaintiffs relied on the affidavits of their solicitor, Angelo Andresakis, sworn on 22 June 2006 and Maria Mihas which was filed in the proceedings on 8 October 2001.

7 The application is brought under Rule 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (UCPR) and/or s 1335(1) of the Corporations Act 2001 (Cth).

8 Rule 42.21(1)(d) of the UCPR relevantly provides:

42.21 (1) If, in any proceedings, it appears to the court on the application of a defendant:
…
(d) That there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so,
…
the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant’s costs of the proceedings and that the proceedings be stayed until the security is given.
(2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct.
…
(4) This rule does not affect the provisions of any Act under which the court may require security for costs to be given.

9 Section 1335(1) of the Corporations Act provides:

Where a corporation is the 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.

10 Nothing was submitted to turn on any distinction in the scope of the power to make an order for security under the UCPR or the Corporations Act.

11 Von Doussa J considered the principles to be applied in dealing with an application for security under the Corporations Act in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205:

In my opinion the power of the Court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the Court if the decision is to order security.

12 Mr Jacobs QC, who with Mr Bambagiotti appeared on behalf of the defendants, submitted that the defendants had adduced credible evidence to establish the existence of a real chance that, in the event of judgment against them, the plaintiffs will be unable to satisfy an adverse costs order.

13 Lesvos and Koffee are each companies having a single shareholder and a single director. Company searches of each are exhibited to Mr Hirst’s affidavit. These reveal that each has been the subject of action to strike them off the register of companies. The action did not proceed in either case. Mr Jacobs submitted the fact that those responsible for the company’s affairs had allowed each to get into such a state of affairs was material to be taken into account in considering the likelihood of the plaintiffs being able to meet an order for costs. I accept that is so, but it is not a consideration to which I attach significant weight.

14 Maria Alexiou is recorded in the company search as Lesvos’ sole director. I infer that she is one and the same as Maria Mihas (a copy of the plaintiffs’ economic loss report prepared by Chris Katehos of Furzer Crestani Services is exhibited to Mr Hirst’s affidavit (the Katehos report) – Mr Katehos records that he has been asked to assume that Maria Mihas is the sole director and shareholder of Lesvos). The sole director of Koffee is Arthur Alexiou. Koffee and Lesvos each record their current principal place of business as 18 Glenmore Place, Penrith.

15 In his affidavit Mr Hirst states his belief that the plaintiffs will be unable to meet costs orders against them. He bases this in part on the Katehos report, which is dated 22 June 2006. Schedule C to the report contains a summary of the profit and loss statement for Lesvos which shows it to be insolvent. Koffee is recorded in the report as having ceased trading.

16 Lesvos is the registered proprietor of the premises at 16 Glenmore Place, South Penrith, Folio Identifier 158/246594. This property is subject to a registered mortgage in favour of Permanent Custodians Limited. Mr Andresakis states that he has been informed by Arthur Alexiou that the sum of approximately $298,000.00 is outstanding under the mortgage to Permanent Custodians Limited (Wizard Home Loans). There is no evidence of the value of the property.

17 Koffee does not hold any interest in real estate.

18 Mr Jacobs drew attention to a number of unsatisfactory features of the evidence concerning the financial position of Lesvos. The balance sheet as at June 2005 and the profit and loss statement for the period 1 July 2004 to 30 June 2005, both of which were provided to Mr Andresakis under cover of a letter from an accountant, Jim Moutsos, are annexed to his affidavit. The balance sheet records as a liability “Wizard Home Loan – Sth Penrith - $89,711.87”. It records as a current asset “Glenmore Pl – cost - $122,000.00. Capital works relating to Glenmore Pl (which I take to be a reference to Glenmore Place) are stated as $15,780.48. The financial accounts for the year ending 30 June 2004 are also in evidence. I note that these were signed by the accountant on 4 April 2006. They record a loan from a bank in the amount of $92,401.39 as a non-current liability. There is no explanation for the difference between the figures in the financial statements for the year ending June 2004 and the June 2005 balance sheet and the size of the liability recorded in Mr Andresakis’ affidavit. As Mr Jacobs observed, if the extent of the sum owing under the mortgage is as recorded in Mr Andresakis’ affidavit at [28] it would appear that Lesvos is hopelessly insolvent.

19 Maria Mihas reported a taxable income of $4,223 for the financial year ending 30 June 2004. She is recorded as the registered proprietor of two properties at Emu Plains. One appears to be unencumbered. The second is subject to a mortgage to the St George Bank Limited. She is a registered proprietor of a property at Ingleburn, which is jointly owned with Jim Mihas (as joint tenants) and is the subject of a mortgage to the Westpac Banking Corporation that as at November 2001 was expressed to secure the sum of $185,000.

20 Arthur Alexiou reported a taxable income of $7,350 for the financial year ending 30 June 2004. Arthur Alexiou is a registered proprietor of 11 properties. Nine are jointly owned and the majority are subject to registered mortgages. Nonetheless Mr Hirst’s inquiries point to Mr Alexiou as a person who is not without assets of some worth.

21 Gadens, who act for the defendants wrote to Mr Andresakis on 13 July 2006 seeking confirmation by 4:00 pm that day (being the day before the motion was listed for hearing) that Maria Mihas and Arthur Alexiou were prepared jointly and severally to pay the costs of the defendants (or either of them) in the event they (or it) were successful in their defence to the action. Mr Baran, who appeared on behalf of the plaintiffs, informed the Court that he had not obtained instructions in this respect.

22 The defendants’ application is for an order for security with respect to the future estimated costs of the proceedings. Mr Hirst estimates the defendants’ likely costs from 30 June 2006 to the final hearing of the claim will be $301,810, of which 75 percent ($226,357.50) will be recoverable. The basis of Mr Hirst’s estimate is set out in a schedule that is exhibited to his affidavit. He assumes that the hearing will occupy 11 days and that senior and junior counsel will be retained.

23 I am satisfied that there is reason to believe that the plaintiffs will be unable to pay the costs of the defendant should there be judgment against them. The defendants have established the ground for an order under r 42.21(1)(d) of the UCPR and/or s 1335(1) of the Corporations Act. I turn to a consideration of whether in the exercise of discretion an order with respect to the estimated future costs should be made in this case.

24 In Mr Baran’s submission I would decline to make an order having regard to the delay in bringing the application. The delay that he relied upon was that between the commencement of proceedings on 8 September 2000 and the filing of the motion claiming security for costs on 20 May 2003. Delay is not relied upon in the period following the transfer of the proceedings to this Court.

25 Mr Jacobs submitted that the claim in the District Court had been viewed as involving a smaller sum and that the failure to move for an order for security was to be assessed in that context. When it became clear that the plaintiffs were advancing a claim for substantial damages the defendants had moved in a timely fashion to file the present application. In Mr Jacobs’ submission, while the delay was a factor to be taken into account, it should not be viewed as necessarily defeating the application. By confining the application to the future costs of the proceedings the defendants had taken into account the observations of Waddell J in Southern Cross Exploration NL (Ors) v Fire & All Risks Insurance Co Ltd & Ors (1985) 1 NSWLR 114 at 125.

26 Mr Jacobs also relied on the judgment of Hunter J in Hughes Bros Pty Ltd v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (unreported) 7 November 1995:

I think the correct approach to this case is acceptance of the proposition that, while an application for security for costs should be made in a timely way, it may be made at any time. Mere delay in making such an application, in itself, is not bar to an order for security for costs. Nevertheless such delay resulting in prejudice to the party to whom such an order is sought, may be fatal to the application. While the onus to show prejudice must rest on the respondent to such an application, that onus may be readily discharged, for example, when it is apparent that substantial costs have been incurred by the respondent that would otherwise not have been incurred but for the dilatory nature of the application for security for costs.

27 I accept Mr Jacobs’ submissions and do not approach the defendants’ application on the basis that the delay in the period when the proceedings were before the District Court is to be viewed as necessarily determinative of it.

28 Brereton J discussed the discretionary considerations that bear on an application for security in KDL Building v Mount [2006] NSWSC 474 at [12]-[19] citing the judgment of Hill J in Equity Access Ltd v Westpac Banking Corporation [1989] ATPR 40-972, 50, 635. I have regard to those considerations. The first addresses the plaintiffs’ prospects of success.

29 Mr Samuel in his report of 15 March 2006 (the first report) commented on the documents produced in answer to subpoena in support of the plaintiffs’ claim for damages for lost profits, revenue and good will, as set out in their second amended statement (exhibit CJR30 to the affidavit of Carolyn Jane Rasaiah). Mr Samuel noted that the documents did not include any financial statements, documents of prime entry, tax returns or any systematic record of the financial transactions of Lesvos or Koffee. He also noted the absence of source documentation (such as sales invoices or purchase invoices) or working papers that would enable a reconstruction of actual sales, gross profits or costs saved. In his opinion there was insufficient documentation available to determine the actual profits made by the business either prior to the period of the alleged lost profit or during the period of the alleged lost profit and no documentation that could be relied upon to estimate the profit that would have been made absent the alleged breach of contract (at [31]). Mr Samuel also noted that the plaintiffs had not provided any supporting documentation to enable a calculation of any loss due to alleged loss of goodwill.

30 Following service of Mr Samuel’s first report the plaintiffs served the Katehos report which quantifies their economic loss on one assumption in the amount of $1, 231,956. In a further report that is dated 11 July 2006 (the second report) Mr Samuel comments on the Katehos report. Appendix D to the second report identifies the documents referred to in the Katehos report which Mr Samuel had not previously seen. These include a copy of the Whitewater Café Penrith profit and loss statement for the 10 months ended 20 June 2000 and a copy of the Whitewater Café General Journal 1/07/99 to 1/08/2001. Mr Samuel states in the second report at [12]:

In my opinion, the existence of a profit and loss statement and General Journal indicates that other financial records should be available but have not been provided to me, including:
(a) Source documents supporting the income earned and expenses incurred, such as till receipts, purchase invoices and cheque stubs;
(b) other relevant third party documents, such as bank statements;
(c) accounting records which provide detail as to the transactions incurred, such as a cash book, general ledger and detailed general journal; and
(d) a statement as to the financial position of the Whitewater Café (i.e. a balance sheet).
[13] The only accounting documents relating to the operations of the Whitewater Café that I have seen prior to receipt of the Katehos Report were those included in the Annexure marked “MM2” to the affidavit of Maria Mihas sworn 8 October 2001. Those documents comprised:
(a) Copies of invoices to the Whitewater Café from Penrith Whitewater Stadium Ltd for the lease of the café at $833.33 per month and monthly garbage collection charges. The monthly rental expense is equivalent to an annual figure of $10,000. I note that the summary of income and expenses shows a monthly rental cost of approximately $500 and the profit and loss statement shows total rent for ten months of $5,000. I am unable to say why these figures are inconsistent with the invoices from Penrith Whitewater Stadium Ltd. Also, I have been unable to identify the garbage collection costs in either the profit and loss statement or the summary of income and expenses; and
(b) A schedule totalling $149,486.75 entitled “Whitewater Café Fit-out Costs”, together with the documents purporting to support that schedule.

31 In the defendants’ submission, either there are no documents to support the case that the plaintiffs seek to make or they have deliberately failed to produce them despite the efforts made by them to obtain them on subpoena. Mr Jacobs submitted that the inference was open that the plaintiffs’ claim for damages was not brought bona fide.

32 Mr Baran submitted that the Court should not be drawn into a consideration of whether there was a basis for the assumptions made in the Katehos Report, since this was a matter for trial. In his submission, in addition to the delay in bringing the application, the content of Maria Mihas’ affidavit, which sets out the history of the dealings between the plaintiffs and the defendants tells against making an order for security in that the conduct of the defendants was said to have brought about the situation in which they were arguably without the funds to pay any order for costs against them. In the course of developing the first submission Mr Baran acknowledged, “We accept there is a very live issue about damages and about the cause of action generally, there is no doubt about it” (T 14/07/06 at 15.32-34). I do not consider that I should approach the application upon a view that the plaintiffs’ impecuniosity has been brought about by the defendants’ conduct.

33 I do not conclude that the plaintiffs’ claim for damages is not brought bona fide. However Mr Baran’s concession was realistic and the defendants’ prospects of successfully defending the claim are not without significance in considering the exercise of the discretion. In this respect I note the observations of Brereton J in KDL Building v Mount Brereton J at [13].

34 I am of the opinion that there is a very substantial risk that the plaintiffs would be unable to meet an adverse costs order in the event they fail.

35 It is necessary to consider whether an order for security would stultify the plaintiffs’ claim by preventing it from being prosecuted. In this respect it is relevant to take into account whether those who beneficially stand to behind the plaintiff companies (and who stand to benefit should their claim succeed) are prepared to make their own assets available to satisfy an adverse costs order. The plaintiffs led no evidence concerning the financial position of Maria Mihas or Arthur Alexiou. Neither responded to Gadens’ inquiry as to their willingness to furnish suitable undertakings with respect to the costs of the proceedings. The request was made late in the piece nonetheless there was no evidence that there was any obstacle to instructions being obtained in this respect. Taking this into account and such evidence as there is before me concerning the assets of Ms Mihas and Mr Alexiou I do not find that an order for security would be oppressive.

36 I have concluded that the proper exercise of discretion favours the making of an order for security.

37 Mr Baran submitted that the figure of $300,000 (Mr Hirst’s estimate in round figures of the solicitor/client costs of the proceedings) was excessive in the context of this claim. Mr Hirst was not required for cross-examination. The plaintiffs led no evidence on this issue.

38 Mr Hirst’s figure for the total costs of the proceedings necessarily involves prediction including of the length of the hearing. The Court in determining an order for security is not concerned to give a complete indemnity to an applicant: Brundza v Robbie & Co [No.2] (1952) 88 CLR 171 per Fullagar J at 175. It is appropriate to order a sum as is considered just, taking into account the circumstances of the case: Allstate Life Insurance Co v Australia & New Zealand Banking Group Ltd & Ors (No. 19) (1995) 134 ALR 187 per Lindgren J. The estimate of 11 days in a case in which it appears that one expert witness will be qualified by each party may be somewhat pessimistic. I have determined to direct security in an amount that is based upon Mr Hirst’s estimate but which assumes that the hearing is completed in seven days. This reduces the total costs by an amount of just over $50,000. 75 percent of this sum produces a figure of $187,500.

39 For these reasons I make the following orders.

ORDERS

1. The plaintiffs give security for the defendants’ costs of the proceedings in a form acceptable to the Registrar within 28 days of today’s date in an amount of $187,500.00.

2. In the event security is not given in accordance with order 1, the proceedings be stayed.

3. The plaintiffs pay the defendants’ costs of the motion.

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