Lincoln Constructions (WA) Pty Ltd v Westside Group Pty Ltd - [2001] WADC 19

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: PERTH

CITATION: LINCOLN CONSTRUCTIONS (WA) PTY LTD -v- WESTSIDE GROUP PTY LTD [2001] WADC 19

CORAM: REGISTRAR KINGSLEY

HEARD: 30 NOVEMBER 2000

DELIVERED : 6 FEBRUARY 2001

FILE NO/S: CIV 608 of 2000

BETWEEN: LINCOLN CONSTRUCTIONS (WA) PTY LTD (ACN 054 140 662)
Plaintiff
AND
WESTSIDE GROUP PTY LTD (ACN 009 162 930)
Defendant

Catchwords:

Practice - Application for Security for Costs - Section 1335 Corporations Law - Preliminary question of whether sufficient evidence to give jurisdiction to exercise discretion

Legislation:

Corporations Law

Result:

Evidence sufficient to give jurisdiction

Representation:

Counsel:

Plaintiff: Mr G J Barrow
Defendant: Mr R D Shaw

Solicitors:

Plaintiff: Chalmers & Partners
Defendant: Phillips Fox

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

Beach Petroleum NL & Anor v Johnson & Ors (1992) 10 ACLC 525
FFE Minerals Ltd v Mining Australia Pty Ltd [2000] WASCA 69

Case(s) also cited:

Crozat v Brogden [1984] 2 QB 30
Lincoln Constructions (WA) Pty Ltd v Builders Registration Board of Western Australia [1999] WADC 150
Warren Mitchell Pty Ltd v Australian Maritime Officer's Union (1993) 12 ACSR; 11 ACLC 1238

REGISTRAR KINGSLEY: This is the defendant’s application for security for costs pursuant to s 1335 of the Corporations Law. In considering applications for security for cash there is a threshold question whether the Court has jurisdiction, followed by an examination of the evidence as to whether the Court would exercise its discretion: FFE Minerals Ltd v Mining Australia Pty Ltd [2000] WASCA 69 at 24. The jurisdiction of the Court is enlivened where it appears, by credible testimony, there is reason to believe the corporation would be unable to pay the costs of the defendant if, the defendant is successful in its defence. Thus the applicant must show by credible testimony that the Court has jurisdiction, and then persuade the Court to exercise its discretion in their favour. In FFE Minerals, Justices Pigeon and Owen gave a historical analysis of the current s 1335. The Judges commented that proof that the company would be unable to pay the costs was not required. At 11:
"The applicant is required to do no more than place on record credible testimony and the exercise of the Court at this stage is in the judging of the testimony and its quality rather than seeing if a matter has been proved by inference."
At 21 the Judges comment that the weight of authority supports the proposition there is initially a jurisdictional question as to whether there is reason to believe a corporation will be unable to pay costs. Once the Court has jurisdiction there is an unlimited discretion.
The defendant has filed an affidavit of Christopher John Park sworn 12 July 2000. Park deposes that the plaintiff is not the registered proprietor of land and the plaintiff has a paid up capital of $6. Park makes reference to an existing charge by National Australia Bank in 1992 but, in the affidavit of Nino Ferrinda sworn 28 August 2000 on behalf of the plaintiff, it would appear that the National Australia Bank charge has been discharged. In his affidavit Park deposes to various legal proceedings commenced against the plaintiff in the Local Court and the District Court.
By his affidavit of 28 August 2000 Ferrinda puts before the Court an interim profit and loss statement for the year ended 31 March 2000. A second affidavit sworn 3 November 2000 by Ferrinda discloses a profit and loss account and balance sheet for the year ended 30 June 2000 and an interim profit and loss account and balance sheet for the period ending 30 September 2000. Plaintiff’s counsel comments on the fact that the Ferrinda affidavit of 3 November 2000 now discloses a $1.2 million counterclaim not previously evidenced. Further, in the Ferrinda affidavit dated 28 August 2000, the balance sheet as at 31 March 2000 included receivables totalling $782,736. Part of these receivables were trade debtors subject to litigation totalling $1,016,086 but this figure was subject to a 90 per cent write-off value. In the balance sheet as at 30 June 2000 the receivables are no longer subject to a discount and are shown at their full total of $1,845,077. Thus the plaintiff's counsel says that there is no reliable evidence from the plaintiff before the Court.
The defendant’s counsel says that the company need not do anything to disprove the application. There is no reversal of onus and the onus is still on the defendant to show on balance that the company cannot pay. The defendant’s counsel says that the plaintiff is entitled to dispute litigation and the fact that there is a dispute does not by that fact provide evidence of an inability to pay. The defendant's counsel further submits that the historical analysis is not important: what is important is what the state of the company’s finances are now. Defendant’s counsel acknowledges that a 10 per cent allowance for recovery was a reasonable accounting standard. The plaintiff’s counsel replied that that may well be the case but the 10 per cent recovery was not applied to the counterclaims.
It is clear from the majority decision in the FFE Minerals case that what is required is an evaluation of the evidence to see whether the evidence leads to the conclusion there is reason to believe the plaintiff corporation would be unable to pay the cost of the defendant.
In an application for security the Court is required to form an opinion what the financial position of the plaintiff will be immediately after the time of judgment. Whilst the financial position of the plaintiff at the time the application is made is an important guide, it cannot be the sole consideration where the plaintiff corporation will be carrying on business. The company’s financial position at the end of the anticipated trial will depend not only on the outcome of the trial and the associated costs, but on the success or otherwise of its business and investments in the meantime. Thus the Court is faced with a range of possibilities extending from insolvency at one extreme to more than sufficient immediate cash at the other. Between those extremes a variety of possible, but not necessarily probable, contingencies could render the plaintiff company unable to pay the costs upon service of an allocatur.
A corporation would be unable to pay if it can only do so if given extended time to realise assets which might be difficult to realise, at least a price sufficient to obtain a surplus over liability. The company will also be unable to pay where the payment would amount to a preference of the defendant over other creditors. What the Court is required to do is make a judgment which anticipates future events and the degree of probability that a particular event might occur: Beach Petroleum NL & Anor v Johnson & Ors (1992) 10 ACLC 525 at 527. In the end what the Court has to evaluate is the likely liquidity of a company to determine if there is sufficient moneys to pay costs.
In considering whether I have jurisdiction I have considered the balance sheets of 30 June 2000 and the interim balance sheet of 30 September 2000. I am of the opinion that the interim balance sheet at 31 March 2000 would be subsumed into the balance sheet for the year ending 30 June 2000. In evaluating the evidence, I have not considered trade creditors in litigation and trade debtors in litigation. In my opinion there are many factors which influence the conduct and settlement of proceedings, and consequently the amount of moneys to be recovered or paid. Further, whilst trade creditors and trade debtors are usually regarded as a current liability or current asset, where litigation is involved the liability or asset may not be current as conventionally defined.
I have not taken into account the moneys held by way of retention. In my opinion where the plaintiff is a building company, the moneys being held in a retention account are a cosmetic asset. The moneys are evidence of good faith and of commercial comfort and ought not be included in the evaluative process.
I have excluded inventories on the ground that they are not assets readily convertible to cash and their conversion is dependant on a number of external factors – including sustained demand for the plaintiff's products. The evaluative process is to consider the liquidity of the company in determining whether it would be able to pay the defendant's costs on service of a signed allocatur.
Whilst having doubts about the appropriateness of its inclusion, I have retained the item "Investments; Trust Entitlement – Fremantle Trust" (projected) as an asset.
Bearing these three matters in mind the asset and liability portion for 30 June 2000 and 30 September 2000 are as follows:

30.6.00 30.9.00 30.6.00 30.9.00

Assets
Cash  $ 33,239.00 $    5,948.00
Receivables   502,601.00 308,179.00
Investments   35,000.00     35,000.00
Property      10,374.00      9,890.00
$581,241.00    $359,017.00

Liabilities
Creditors       $615,901.00    $509,449.00
Debtors             55,000.00     55,000.00
$670,901.00    $564,449.00

As can be seen the liabilities exceed assets and in my opinion this is sufficient to enliven my jurisdiction to deal with the application. That is, there is credible evidence that the plaintiff will be unable to pay the costs of the defendant if it is successful.
There still remains the question whether I ought to exercise my discretion. A number of discrete issues have been identified by the authorities as being relevant to the exercise of my discretion. It remains for counsel to be heard on those issues.