Lex Fitness Pty Ltd ATF Lex Family Trust v Australian Fitness Management Pty Ltd; Australian Fitness Management Pty Ltd v Lex Fitness Pty Ltd ATF Lex Family Trust

[2017] NSWSC 157

Supreme Court

New South Wales

Medium Neutral Citation:

Lex Fitness Pty Ltd ATF Lex Family Trust v Australian Fitness Management Pty Ltd; Australian Fitness Management Pty Ltd v Lex Fitness Pty Ltd ATF Lex Family Trust [2017] NSWSC 157

Hearing dates:

9 December 2016

Date of orders:

13 March 2017

Decision date:

13 March 2017

Jurisdiction:

Equity

Before:

Slattery J

Decision:

Order for security for costs made. Costs of the motion for security will be the defendants’ costs in the cause.

Catchwords:

SECURITY FOR COSTS – plaintiff company sues franchisor and vendor for damages for alleged misleading and deceptive conduct in its purchase of a franchised gym and fitness business – plaintiff may not have sufficient means to meet a costs order were it unsuccessful in the proceedings – whether an order for security for costs should be made and if so in what amount.

Legislation Cited:

Environmental Planning and Assessment Act 1979
Uniform Civil Procedure Rules 2005, r 42.21(1)

Cases Cited:

APEP Pty Limited v Smalley (1983) 8 ACLR 260
April Fine Macao Commercial Offshore Ltd v Moore
Business Systems Australia Ltd (2009) 75 NSWLR 619 [2009] NSWSC 867
Barton v Minister for Foreign Affairs (1984) 2 FCR 463
Bell Wholesale Co Pty Limited v Gates Export Corporation (No 2) (1984) 2 FCR 1
Brundza v Robbie & Co (No 2) (1952) 88 CLR 171
Bryan E Fencott & Associates Pty Limited v Eretta Pty Limited (1987) 16 FCR 497
Bullabidgee Pty Limited v McCleary [2011] NSWCA 259
CBX2 Pty Limited v National Australia Bank (No 2) [2015] NSWSC 1969
Collignon Developments Pty Ltd v Wurth (1975) 1 ACLR 314
Dae Boong International Co Pty limited v Gray [2009] NSWCA 11
Jazabas Pty Ltd v Haddad [2006] NSWSC 880
Fat-Sel Pty Limited v Brambles Holdings Ltd (1985) ATPR 40 - 545
FFE Minerals Australia Pty Limited v Mining Australia Pty Limited (2000) 156 FLR 116
IceTV Pty Limited v Ross [2007] NSWSC 1232
KDL Building Pty Limited v Mount [2006] NSWSC 474
KP Cable Investments Pty Limited v Meltglow Pty Limited (1995) 56 FCR 189
MHG Plastic Industries Pty Limited v Quality Assurance Services Pty Limited [2002] FCA 821
Mignon Cakes Pty Ltd v Hiltide Pty Ltd [2004] FCA 142
Pacific Acceptance Corp. v Forsyth (No. 2) [1967] 2 NSWLR 402
Plyable Pty Ltd v Go Gecko (Franchise) Pty Ltd & Ors (No. 2) [2016] QSC 256
Potts v Miller (1940) 64 CLR 282
Prynew Pty Limited & Anor v Nemeth & Ors [2010] NSWCA 94
Re Beechworth Land Estates Pty Limited (administrator appointed) and Others (No 3) (2015) 106 ACSR 495
Sharjade v Darwinia Estate Pty Limited [2006] NSWSC 708

Category:

Costs

Parties:

2016/189790
P: Lex Fitness Pty Ltd ATF Lex Family Trust
D1: Australian Fitness Management Pty Ltd
D2: J & N Holdings Pty Ltd
D3: John Gary Fuller
D4: Nigel Martin Miller

2016/191319
P: Australian Fitness Management Pty Ltd
D1: Lex Fitness Pty Ltd ATF Lex Group Trust

Representation:

Counsel:

 

Plaintiff: D. Moujalli (Lex Fitness Pty Ltd ATF Lex Family Trust)
Defendant:: B. DeBuse (Australian Fitness Management Pty Ltd)

  Solicitors:
Plaintiff: Emma George, LegalVision ILP Pty Ltd (Lex Fitness Pty Ltd ATF Lex Family Trust)
Defendant: Grant Patrick Butterfield, Marsdens Law Group (Australian Fitness Management Pty Ltd)

File Number(s):

2016/189790; 2016/191319

Publication restriction:

No

Judgment

1. The franchisor of and the vendor of a fitness centre, the defendants in these proceedings, each seek security for costs against a plaintiff, which alleges it became respectively the franchisee and purchaser of the centre due to the defendants’ misleading conduct. The plaintiff opposes any order for security. This judgment decides that an order for security for costs should be made, and sets the amount of security.

2. The proceedings were heard on 9 December 2016. Mr B. DeBuse appeared for the defendants. Mr D. Moujalli appeared for the plaintiff. The Court has decided to order security for costs in the sum of $80,000 in respect of each group of defendants for the reasons stated in this judgment.

The Plaintiff buys a Franchise Business – 2014 to 2015

3. Australian Fitness Pty Limited (“Australian”) franchises fitness centre businesses. On 28 January 2014, it granted a franchise of a fitness centre business, “Plus Fitness 24/7 Darlinghurst”, to Lex Fitness Pty Limited (“Lex”) to be operated at certain premises at Riley Street, Darlinghurst. J & N Fitness Pty Limited (“J & N”) already conducted a fitness business there.

4. On 14 February 2014 Lex took assignment of the lease of the premises and agreed to purchase the business from J & N for $407,617.

5. But an issue with the opening hours of the premises came to a head two years later. The area is controlled by the City of Sydney Council, which administers it pursuant to the Sydney Local Environment Plan and the Sydney Development Control Plan, instruments made under the Environmental Planning and Assessment Act 1979 (“Act”). On 4 February 2016, after the expiry of a trial period of 24 hour operation, the Council determined that the premises could not be used between 10pm and 6am, as that was contrary to the Act and these local environmental plans. This meant that from the date of operation of the Council’s decision, 26 February 2016, Lex was confined to opening the premises only between 6am and 10pm.

6. Lex says this severely impacted its business. It rescinded the franchise and purchase agreements in June 2016 and commenced these proceedings against the defendants.

7. Lex alleges in these proceedings (No 2016/189790) that the franchisor (Australian), the vendor (J & N), and associated persons misrepresented the future opening hours of the premises. Lex alleges that Australian, J & N and Mr John Fuller and Mr Nigel Miller represented to Lex Fitness that the premises had been physically fitted out in such a way that after the expiry of the trial period, the Council would not refuse consent to continued 24 hour operation. But the Council did refuse consent.

8. Lex says these representations were misleading and deceptive. Lex seeks declarations that Australian, J & N, Mr Fuller and Mr Miller all engaged in misleading and deceptive conduct and that both the franchise agreement and the purchase agreement should now be avoided and that Lex is entitled to damages under the Australian Consumer Law. Australian resists these claims for relief.

Procedural History and the Current Motion

9. Lex commenced its proceedings by Statement of Claim on 22 June 2016. The following day Australian commenced another set of proceedings (“the Australian proceedings”) by Summons (No. 2016/191319), seeking a declaration that Lex has wrongfully terminated the franchise agreement, and seeks other consequential relief.

10. In Australian’s proceedings, Rein J made interlocutory orders restraining Lex Fitness from dealing with the subject fitness premises (the premises), any property located at the premises, and any list of members of the fitness business. Rein J extended these orders on 24 June 2016. Rein J extended his original orders again on 30 June 2016 and noted an agreement between the parties that on the payment of the sum of $50,000 by Australian to Lex that Lex would transfer title to the fit out and equipment at the premises to Australian.

11. Finally on 6 July 2016, Stevenson J noted the undertaking of the directors and shareholders of Lex, Ms Amy Brinckley and Mr Wes Brinckley through their counsel that they would refrain from publishing or commenting or using social media statements in relation to Australian’s conduct of the business.

12. The same day Australian filed the current Notice of Motion seeking security for costs. On 31 August 2016 the Registrar in Equity listed the motion before me partly on 9 December 2016. It was fully argued that day.

13. Mr Moujalli conceded that Lex would not be able to meet a costs order if it were ordered to do so. But he submitted that notwithstanding that, having regard to available discretionary factors that there should be no provision for security for costs in this case.

14. Lex based its case on the security motion upon the claimed strength of its proposed case at trial. So these reasons commence with the issues in the main proceedings, as the parties described them.

Lex’s Case and the Defences in the Main Proceedings

15. When Lex purchased the business in February 2014, the Council had given provisional consent to the business operating 24 hours a day, seven days a week, for a trial period. Lex pleads that one or other of the defendants representated to it that the Fitness Centre had been constructed in such a way that there would be no longer-term concerns for neighbours in relation to noise generated from its operation. Lex claimed that although Council’s consent was only provisional, the nature of the representations implied that Lex would have no concern about the centre’s noise generation so it could reasonably be expected that Council would continue approval for the business to operate on a 24/7 basis. There was no issue that Lex paid the consideration of about $400,000 to acquire the business.

16. Lex particularised the loss and damage it has suffered in addition to the payment of the purchase price. This loss and damage included: fees and levies and other amounts payable under the franchise agreement; trading losses in operation of the business; payment of rent and outgoings under the lease; and, the loss of an alternative investment opportunity. But the issue of the plaintiff’s ongoing liabilities pursuant to the lease reduced because Lex vacated the premises and the lease has been terminated. There were two years of trading losses in the business before it was handed back. The final hearing will not be complicated by claims for ongoing losses. So the final damages issues should be for two readily quantifiable amounts: (1) the consideration paid for the business; and (2) trading losses for a limited period between February 2014 and February 2016.

17. Lex claims the reliance measure of damages. It submits that it should be put in a position it would have been had the representations not been made. Lex submitted this would mean the return of the purchase price of $400,000 plus trading losses. But it may be argued by the defendants that Lex should not have rescinded the contracts and that the correct measure of damages may well be the difference between the value of the business that Lex received and the amount paid for that business together with trading losses. It may still be necessary therefore to value the business as at the date of purchase for the purposes of calculating damages.

18. If the parties wish to avoid the cost of valuations in this case it may be possible to hold a separate damages hearing, which need only take place if Lex is successful on liability. But a separate damages hearing may not be possible if the damages hearing involves any issue concerning the credibility of lay witnesses who also give evidence in the liability case.

19. The plaintiffs say that this is not a Potts v Miller (1940) 64 CLR 282 case because Lex no longer has the business: the appropriate measure of damages is to restore the plaintiff to the position that it would have been in, had the representations not been made. Lex’s case is that had the assurance of 24/7 operations not being given it would not have proceeded with the transaction.

20. But general principle in these cases is to order security only on a staged basis. There is sufficient uncertainty about whether expert evidence will be needed, so that at this stage security should not be ordered for the whole of the preparation for hearing, including expert evidence.

21. The plaintiff’s counsel, Mr Moujalli took the Court through a brief chronology of the important events to be litigated at the trial of the main proceedings. The Council gave development approval on 5 July 2013 restricting the hours of operation to between 6am and 10pm Monday to Sunday. But for a trial period of one year (from July 2013) the occupier was permitted to operate between 10pm and 6am the following day. The development approval contained a number of restrictions on use. These restrictions among other things banned gym classes and amplified music within the premises.

22. On 29 October 2013 Mr Fuller, a director of Australian and J & N, sent an email to Ms Brinckley. The email attaches a Statement of Environmental Effects, a planning document used to apply support the application for development approval. Under the heading “Gym Equipment and Flooring” it says of the Regupol style flooring in the premises, “This flooring has a high loaded impact resistance and is a preferred choice for gyms and any other noise sensitive businesses and areas. The flooring absorbs in excess of 95% of the sound made by the dropping of ‘heavy weights equipment’ and comfortably satisfies any noise related concerns”. The email also attaches a management plan.

23. Then on 5 November 2013 Ms Brinckley sent an email to Mr John Fuller copied, to Mr Brinckley, Mr Nigel Miller and Samra Tripodi. The email contains a number of Ms Brinckley’s questions seeking to confirm essential features of the business, including staff numbers, staff roles, arrangements of personal trainers, annual rent, lease commencement date and expiry, parking and membership numbers. Ms Brinckley also asked the question of Mr Fuller “is there any special requirements or restrictions imposed by Council?” Mr Fuller replied in a slightly different coloured script in the same area as the question, “There is a 12 month ‘trial’ period for the opening hours however this is a standard condition with the City of Sydney Council. We have however taken steps to ensure that there is no excess noise from the club by installing shock pad flooring throughout the entire free weights (rubber) areas”.

24. On 13 November 2013 Rachael Barker sent to Ms Brinckley a number of documents including the submission for the DA to Council, the DA approval, the signed lease and a car insurance policy. That email repeats the representations about the new flooring’s 95% sound absorption.

25. The franchise agreement was in evidence. It contains the usual clauses in which the franchisee indicates that he has conducted his own due diligence and there is an entire agreement clause. These clauses are relevant but not decisive on issues of causation and reliance in an action for misleading and deceptive conduct.

26. The Council wrote to Australian on 4 February 2016. This was in response to an application of 31 July 2015 to modify consent for development approval to continue the 24 hour trading on a trial basis at the premises. The Council declined to continue the 24 hour trading. It gave the following reasons for its decision:

“The use of the gym between 10pm and 6am, specifically the dropping of weights and the audio system, has resulted in ambient and structure borne noise adversely affecting the amenity of residents within the building. Efforts to mitigate these issues have been unsuccessful with complaints continuing to be received. The acoustic report prepared by Acoustic Consulting Engineers dated 27 January 2016 used an inappropriate methodology and has failed to satisfy the Council that the recommended works would mitigate noise from the premise”

27. The letter then indicated the various contraventions of the Act which the Council assessed were occurring. From 8 February 2016 correspondence commenced with the Council. The Council threatened to issue notices requiring compliance with the hours of consent and said if there were no compliance, then the matter would have to go to Court.

28. Australian’s case at trial will be that Lex changed the operation of the fitness centre for example to introduce Olympic-style weightlifting that attracted the local residents’ adverse attention, which in turn led to the Council taking action. The defendants say that if Lex had operated the centre without these changes it would still have no Council restriction on 24 hour operation and that this indeed is what has happened since July 2016 when a new franchise took over. This is a matter for trial.

29. The evidence contains much material that readily establishes that many customers cancelled their membership, because they had only chosen to become gym members, because of the 10pm to 6am operating hours. The letters are very clear. They say how well the gym was run and how clean it was kept. With letters like these and the witnesses who lie behind them, the issue of causation of any loss associated with the reduced opening hours may ultimately not be difficult to establish.

30. Finally on 22 June 2016, the solicitors for Lex served the solicitors for Australian a notice of rescission of the franchise agreement and the purchase agreement on the basis of the misrepresentations alleged. The notice recited the January 2014 franchise agreement, the February 2014 purchase agreement, Council’s February 2016 determination and said:

“Our client was induced to enter into the above agreement by misleading representations made by your clients, namely that the Fitness Centre had been fitted out in such a way that any noise generated by the use of the Fitness Centre would not be of a level or intensity to give rise to complaints about the noise, to cause any concern in relation to compliance within Environmental Planning legislation and that would provide Council with cause to refuse consent for the Fitness Centre to be open and accessible to members 24 hours a day.”

31. Lex rescinded the franchise agreement and the purchase agreement. The Statement of Claim in the main proceedings was served with the correspondence effecting the rescission.

32. The allegation of misleading conduct is said to come out of the words “comfortably satisfies” in the Statement of Environmental Effects”, statements that it said were made without any qualification.

33. The other alleged misleading conduct is contained in a document entitled “Plan of Management”, dealing with the site. The Plan of Management says:

“The size of the premises is relatively small at 427 m² and is not anticipated to generate large volumes of patronage at any one time and the use is considered to be low intensity use that will not attract or result in unruly or noisy patrons nor result in any anti-social behaviour.

Furthermore tenancy is located within a building containing industrial, warehouse, café and childcare facilities and surrounded by similar types of uses. There are no residential premises or any other sensitive land uses in close proximity of the site.”

34. Lex says this is a misleading statement, because there are, said in the plaintiff’s case, to be residential premises in the same building. The presence of residential premises was not in issue on the motion. Whether or not the plaintiff was aware of the presence of these residential premises before committing to the lease will be one of the issues the defendants will contest at the trial.

35. The representations pleaded appear to be about future matters. If the Defence that is proffered at trial to this pleading is that the Plan of Management represents reasonable grounds for the representations, then Lex will say that such a defence will not work because one of the assumptions made in the Plan of Management appears to contain a critical error. Lex says that it is not asserting that it was impossible to foresee the nature of any residential premises nearby. Rather it will submit that the reasoning of the Plan of Management was obviously defective in a critical respect and therefore it will not survive scrutiny as “reasonable grounds” for the representations made.

36. The defendants will contend that they did not engage in any misleading or deceptive conduct and that the written material relied upon in Lex’s case should not be construed the way that Lex contends.

37. All that can be said in my view is that there are many factual and legal issues in contest in the proceedings and it would be an exercise in overconfidence to try and predict the outcome at this stage.

Applicable Legal Principles

38. There are several heads of power enabling the Court to order security for costs on the basis 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: Corporations Act 2001 (Cth) s 1335 and Uniform Civil Procedure Rules 2005 (UCPR) rule 42.21. It was not argued in this case that the choice of one or other of these different sources of jurisdiction would lead to any difference in result. So it is generally convenient to refer in these reasons to the jurisdiction conferred in UCPR r 42.21. The jurisdiction conferred under Corporations Act 2001 (Cth) s 1335 is the same in substance and is also referred to from time to time below.

39. It is not necessary to reproduce UCPR r 42.21 in these reasons. The relevant considerations that the Court may take into account are set out in UCPR r 42.21 (1A). Those relevant considerations are not listed again in these reasons. Some authorities further explaining the relevant considerations that have been debated in this case are set out in this section.

40. Three issues generally arise on applications for security for costs: whether the grounds to make an application are established; whether as a matter of discretion an order should be made; and, the quantum and terms of any order to be made: KDL Building Pty Limited v Mount [2006] NSWSC 474, per Brereton J at [6]. That structure is adopted in these reasons.

41. At the first of the three stages, before the jurisdiction to award security for costs is enlivened, there must be “reason to believe” (UCPR r 42.21(1)(d)), or “credible testimony that there is reason to believe” (Corporations Act s 1335 (1)) that the plaintiff will be unable to pay the costs of the defendant if ordered to do so. Properly explained all this means is that the applicant must establish “no more than that the quality of the evidence objectively gives rise to a reason to believe that the plaintiff will be unable to pay the defendant’s costs if ordered to do so”: FFE Minerals Australia Pty Limited v Mining Australia Pty Limited (2000) 156 FLR 116 (Pidgeon and Owen JJ) at p122.

42. At the second stage, there is no principle that a court should make an order for security merely because the grounds set out in UCPR r 42.21(1) are established: Barton v Minister for Foreign Affairs (1984) 2 FCR 463. The discretion to order security is unfettered, the relevant factors to be considered will vary from case to case, and the relative weight of each depends upon its own intrinsic persuasiveness and its impact on other circumstances that have to be weighed: KP Cable Investments Pty Limited v Meltglow Pty Limited (1995) 56 FCR 189, at 196 – 198 (Meltglow) per Beazley J, as her Honour then was.

43. Some particular considerations relevant to the exercise of the discretion attained greater prominence in the debate between the parties on this application. The law applicable to them is dealt with below.

44. On an application for security for costs, the Court may take into account the merits of the claim and the defence: In the matter of Felan’s Fisheries Pty Limited [2016] NSWSC 1351 at [21] (per Black J). But there are limits to the analysis of the merits. The Court should not usually descend into too fine a balancing of the relative strengths of the respective cases, because it is difficult to do so except in the case of a very strong or a very weak case, and the Court’s assessment at an early stage, without testing of the evidence may be wrong: IceTV Pty Limited v Ross [2007] NSWSC 1232, per Brereton J at [14].

45. Consideration of the cause of plaintiff’s impecuniosity has its own complexities. A plaintiff asserting that its impecuniosity was caused by a defendant faces a higher hurdle in a claim for loss of profit than in a claim arising out of the infliction of damage: Fat-Sel Pty Limited v Brambles Holdings Ltd (1985) ATPR 40 - 545. Where impecuniosity is relied upon as having been caused by the other party, it would usually be an issue in the proceedings and the most that can be said on such an application is that the plaintiff has an arguable cause to that effect, and the consideration of this issue may also attract evaluation of the apparent strength of the case: Dae Boong International Co Pty limited v Gray [2009] NSWCA 11 (Dae Boong) per Hodgson JA at [34].

46. A Court is justified in declining to order security against a plaintiff company on the ground that to do so will stultify the litigation, unless the company establishes that those who stand behind it and who will benefit from the litigation, if it is successful (whether they be shareholders, creditors or beneficiaries under a trust) are also without means; the party seeking security need not raise the matter as it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation: Bell Wholesale Co Pty Limited v Gates Export Corporation (No 2) (1984) 2 FCR 1, at [4]. Even if stultification is not proven, the impecuniosity of the plaintiff and difficulties in providing security are not irrelevant and “if those who stand to benefit from the proceedings are reasonably unwilling, even though possibly able, to provide security, that may be a factor to be taken into account”: Dae Boong, at [26]. The absence of evidence giving an indication either as to the position of the beneficiaries or other creditors is a reason for ordering the provision of security, not against it: CBX2 Pty Limited v National Australia Bank(No 2) [2015] NSWSC 1969 at [8]. Whether an individual of substance is prepared to step out from behind the corporate veil and take responsibility for the corporate plaintiff’s costs is a related relevant factor that the Court can take into account: Prynew Pty Limited & Anor v Nemeth & Ors [2010] NSWCA 94 at [32] – [47].

47. The plaintiff says here that the issues being litigated are a matter of public importance and that there is a public interest to the continuation of this litigation. Public interest or importance is not itself a sufficient reason for denying security. But the public importance of the matters in issue in the proceedings may properly influence the exercise of the Court’s discretion to require security for costs: Meltglow. And this litigation, like all litigation under the Australian Consumer Law, and formerly the Trade Practices Act 1974, is making use of legislation which is “fundamentally remedial and protective” and gives effect to “matters of high public policy”: Bullabidgee Pty Limited v McCleary [2011] NSWCA 259 at [69], (Basten and Young JJA agreeing).

48. At the third stage, the principles governing the assessment of the quantum of security to be awarded and the terms of any award are well established. The Court’s power is to order security “in such manner, at such time and on such terms” as the Court may direct (UCPR r 42.21(2)), or to require “sufficient security” (Corporations Act s 1335 (1)). The exercise of the power should take into account the likely effect of the order on the plaintiff’s ability to continue the litigation: MHG Plastic Industries Pty Limited v Quality Assurance Services Pty Limited [2002] FCA 821. The Court should examine costs estimates for proportionality, for the proper conduct of the proceedings and for reasonableness: April Fine Macao Commercial Offshore Ltdv Moore Business Systems Australia Ltd (2009) 75 NSWLR 619; [2009] NSWSC 867. The Court is not obliged to require security in an amount that will meet all eventualities: Brundza v Robbie & Co (No 2) (1952) 88 CLR 171, at 175. The Court may initially order security to be given only for the cost of preparing the matter for hearing and the resulting order may be according to a staged timetable: APEP Pty Limited v Smalley (1983) 8 ACLR 260 and Sharjade v Darwinia Estate Pty Limited [2006] NSWSC 708. The Court may take a “broad brush” approach to the quantum of an order for security for costs: Re Beechworth Land Estates Pty Limited (administrator appointed) and Others (No 3) (2015) 106 ACSR 495 at [111]. If the application for security is made promptly the order may include both past and future costs: Bryan E Fencott & Associates Pty Limited v Eretta Pty Limited (1987) 16 FCR 497.

(1) Are the grounds for the application established?

49. Lex’s financial position is such that there is reason to believe that it will be unable to pay the costs of the defendants if ordered to do so. Lex’s paid up capital is $12. Lex no longer operates the fitness business the subject of the proceedings and therefore has no goodwill, or equipment associated with that business and does not derive any income from the business.

50. Lex’s financial statements as at 30 June 2015 showed that it has $477,999.98 in total liabilities (with $453,250.65 in non-current liabilities), made an operating loss of $18,958.96 and had equity of $120. That wafer-thin equity was only achieved by balancing its liabilities with the assets of the business; assets which Lex no longer has. And it had only relatively modest cash reserves of $33,242.18.

51. The litigation is likely to incur substantial costs on both sides. This will increase Lex’s reported liabilities related to its own litigation costs, even before any costs order were to be made against it, were it to be unsuccessful.

52. Lex’s non-current liabilities as at 30 June 2015 appear to be mostly related-party loans associated with several trusts of which it is trustee, The Eat Strong Trust ($79,437.71) and the Brinckley Family Trust ($349,000).

53. Lex had little to say against these financial facts. Its overall position has only deteriorated since 30 June 2015. The grounds to make the application are established. Mr Moujalli’s concession that Lex would not be able to meet a costs order was properly made.

(2) As a matter of discretion should an order be made?

54. Lex has not proved that the persons who stand behind it, Mr and Ms Brinckley, are unable to find the funds to fund Lex’s litigation. Rather, Lex’s case is put on the basis that there is material to show that the plaintiff’s impecuniosity was caused by the defendant’s conduct, that induced the purchase of the business, which in turn generated Lex’s substantial present liabilities. Mr Moujalli also submitted that there was also a public interest consideration, in deterring misleading conduct which weighed against making an order for security.

55. An order for security should be made. This is so for several reasons.

56. The outcome of the proceedings is a very open question. The analysis above shows this. This means it is not possible to draw clear inferences at this stage that the defendants were the cause of the plaintiff’s impecuniosity. Indeed, the defendants point out that Lex was incurring trading losses of some $22,418 per year even during the period that it was under 24 hour operation. Lex rightly says that it incurred substantial liabilities to acquire the business. That does not seem to be in serious contest. But whether Lex’s acquisition of those liabilities was the result of the defendants’ misleading or deceptive conduct is an open issue.

57. Similarly, Lex’s public interest argument is not persuasive. Lex certainly has an arguable case for misleading and deceptive conduct. But that cannot be be decisive at this stage such that the public interest in pursuing the litigation should be weighed as a substantial factor in Lex’s favour.

58. Finally, the Court cannot infer that an order for security for costs will stultify the proceedings. Ms Brinckley and Mr Brinckley have not gone into evidence as to whether or not they would be in a position to provide security were an order to be made. In those circumstances it is difficult to draw the inference that an order for security would stultify the conduct of otherwise meritorious proceedings. Ordinarily as the persons standing behind Lex they would bear the onus of showing this. They have taken the course, which they are perfectly entitled to take, of not adducing evidence about this. But this means that the inference of stultification of the proceedings is a more difficult one for them.

(3) What is the quantum and the terms of any order to be made?

59. The Court has decided that security should be given. On what terms and how much security is appropriate in the circumstances?

60. The defendants rightly conceded that were security to be ordered that they would not necessarily have the benefit of an order for security for all their costs. In accordance with authority, they submitted that the Court could take a broad brush to the question of assessing the quantum of any grant of security.

61. Security can be provided in many forms. By the terms of its order the Court can regulate what form of security would be satisfactory. For example, the security may be paid into Court, may be a charge over property or may be provided by way of personal or bank guarantee.

62. The Court raised with the parties the possibility of making an order for security in the form that Mr and Ms Brinckley give personal guarantees for the plaintiff’s costs obligations. But the Court received two somewhat negative answers to this. Lex said it had a public interest case and authority suggested that security was not appropriate in such a case, so personal guarantees should not be given.

63. The defendants also gave a negative answer, of a different kind. They said that a substantial amount of money had been advanced to the plaintiff by the Brinckley Family Trust, which showed that the Brinckleys’ assets were sheltered against creditors: this was not a case, it was submitted, where someone behind the plaintiff was prepared to put up their own home.

64. Neither of these answers is complete. This case has some elements of the public interest, as has been pointed out. But that is not a decisive consideration and does not mean that an order security for costs will not be made. Deterring misleading and deceptive conduct is one incidental effect of litigation of this type. But it must be remembered that the misleading conduct still has to be proved, not assumed in Lex’s favour. Such an argument does not generally absolve impecunious corporate plaintiffs from having to provide security for costs.

65. But nor does the Brinckleys’ use of trusts to hold some of their assets show that they are impecunious. It merely shows that they have chosen to shelter some of their assets. But the lack of any evidence as to their personal financial position is a factor that weighs in favour of ordering security.

66. The defendants rely upon the affidavit of Mr Aaron Johnson of 6 July 2016 to claim security in the minimum amount of $100,000. Mr Johnson’s affidavit indicates that a combination of partner’s, associates and counsel’s fees for preparation for a three day trial in the Supreme Court in this matter are in the range of $165,000 to $265,000. A good proportion of these figures will be incurred prior to hearing. In Mr Johnson’s affidavit the defendants also estimate their costs of the motion for security for costs of $24,200 to $33,000.

67. The figures are broken down between counsel, partner and associate and again divided between the pleading, preparation for hearing and hearing stages. But beyond that the figures are essentially global. As the Court observed to Mr DeBuse of counsel, the top figure seems to be at the very high end of the range. Of course if the defendants were successful, on assessment only a percentage of these figures would be recoverable.

68. The Court will take into account that the defendants have already paid the plaintiff the sum of $50,000 in respect of equipment and fit-out contained in the gym, in circumstances that will be contested at the hearing in which the defendants say the plaintiff abandoned the gym, increasing the losses claimed - a matter which Lex disputes. The Court will also adopt what is not an uncommon approach in these cases of ordering security in tranches. The Court will not award $100,000 but a somewhat smaller figure in stages, namely $40,000 within 14 days and $40,000 21 days before hearing.

69. The security will have to be in “an acceptable” form which could be way of bank guarantee, payment into Court or other means. Although the Court raised the possibility of personal guarantees, the Court has decided not to order security to be given in that form, but it may nevertheless be acceptable to the defendants, in combination with other forms of security. That will be a matter for the parties.

Costs of the Motion

70. The defendants have succeeded in obtaining an order for security for costs. The parties debated what would be the appropriate costs order in the circumstances. Relying upon Bond J’s decision in Plyable Pty Ltd v Go Gecko (Franchise) Pty Ltd & Ors (No. 2) [2016] QSC 256 (“Go Gecko”), Mr DeBuse submitted on behalf of the defendant that the appropriate order for this result should be that the plaintiff pay the defendants’ costs of the motion.

71. The plaintiff submitted that the appropriate order in these circumstances would be that the costs of the motion be the successful party’s costs in the cause. Mr Moujalli argued that this was the traditional approach to the costs of such applications in this State, based upon long-standing authorities such as Mignon Cakes Pty Ltd v HiltidePty Ltd [2004] FCA 142 at [19] – [21] per Allsop J, Collignon Developments Pty Ltd v Wurth (1975) 1 ACLR 314 per Needham J, and Pacific Acceptance Corp. v Forsyth (No. 2) [1967] 2 NSWLR 402 per Moffitt J at 409.

72. In reply, the defendants say that Go Gecko at [12] shows that there is no “usual” approach to the award of costs where a defendant is successful in a security for costs application. The defendants are correct that there is no presumed approach one way or the other and there are examples of a successful defendant on security for costs applications receiving the benefit of the rule that costs follow the event under UCPR, r 42.1: MHG Plastic Industries Pty Ltd v Quality Assurance Services Pty Ltd [2002] FCA 821 and Jazabas Pty Ltd v Haddad [2006] NSWSC 880.

73. On this application the Court will order that the costs of the motion be the defendants’ costs in the cause. Although the defendants were successful on the motion, they claimed very substantial amounts of costs and were not successful in obtaining an order for security in anything like the amount of costs which they forecast for preparation of the hearing and the hearing. They were not wholly successful. The order the Court proposes represents an appropriate discretionary balance in the circumstances.

Conclusion and Orders

74. For the reasons given the Court will order security for costs by way of acceptable security which may include personal guarantees. The Court makes the following orders and directions:

1. Order that these proceedings be stayed as against all defendants unless before 4.00pm on 18 April 2017 the plaintiff provides acceptable security for the potential costs liability of the plaintiff to the defendants in the amount of $40,000, on account of the costs incurred up to the commencement of the hearing of these proceedings and a further $40,000 14 days before the date listed for the hearing of the proceedings, on account of the costs of the hearing;

2. Order that the costs of the defendants’ motion for security will be the defendants’ costs in the cause;

3. Adjourn the proceedings to the Registrar’s list for further mention on 20 April 2017; and

4. Otherwise grant liberty to apply in respect of the implementation of these orders.

**********