LRSM Enterprises Pty Ltd v Zurich Australia Insurance Ltd
[2013] NSWSC 324
•10 April 2013
Supreme Court
New South Wales
Medium Neutral Citation: LRSM Enterprise Pty Ltd v Zurich Australia Insurance Ltd [2013] NSWSC 324 Hearing dates: 14 March 2013; 9 April 2013 Decision date: 10 April 2013 Before: Adamson J Decision: (1) Order that, within 14 days of the date of this order, 9 April 2013, the plaintiff provide security for costs by payment of the sum of $233,000 to the Registrar of the Supreme Court (Common Law Division) or in such other manner as may be agreed between the parties.
(2) Order that the proceedings be stayed until such security is given.
(3) Order the respondent/ plaintiff to pay the defendant/ applicant's costs of the motion.
Catchwords: PROCEDURE-security for costs-factors relevant to the exercise of discretion- delay-whether claim made in good faith- whether order would stultify proceedings - evidence of capacity of creditors to provide security Legislation Cited: - Corporations Act 2001 (Cth), s 1335
- Uniform Civil Procedure Rules r. 42.21(1)(d)Cases Cited: - Bell Wholesale Co Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1
- Briginshaw v Briginshaw [1938] HCA 34; 60 CLR 336
- Classic Ceramic Importers Pty Limited v Ceramica Antiga SA (1994) 13 ACSR 263
- Equity Access Ltd v Westpac Banking Corporation [1989] ATPR 40-972
- Fiduciary Limited v Morningstar Research Pty Limited [2004] NSWSC 664; 208 ALR 564
- Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; 67 ACSR 105
- Hession v Century 21 South Pacific (in liq) (1992) 28 NSWLR 120
- KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189
- Onassis and Calogeropoulos v Vergottis [1968] 2 Lloyd's Rep 403
- Pioneer Park v Australia and New Zealand Banking Corporation [2007] NSWCA 344; 65 ACSR 383
- Prynew Pty Ltd v Nemeth [2010] NSWCA 94
- Sir Lindsay Parkinson & Co. Ltd v Triplan Limited [1973] 2 All ER 273
- Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114
- Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245
- Woon v The Queen [1964] HCA 23; 109 CLR 529Category: Interlocutory applications Parties: LRSM Enterprise Pty Ltd (Plaintiff/Respondent)
Zurich Australia Insurance Ltd (Defendant/Applicant)Representation: Counsel:
BJ Gross QC and DJ Williams (Plaintiff/Respondent)
DE Grieve QC and RA O'Keefe (Defendant/Applicant)
Solicitors:
Kheir Lawyers (Plaintiff/Respondent)
Vardanega Roberts Solicitors (Defendant/Applicant)
File Number(s): 2008/317328
Judgment
Introduction
I made the following orders on 9 April 2013:
(1) Order that, within 14 days of the date of this order, the plaintiff provide security for costs by payment of the sum of $233,000 to the Registrar of the Supreme Court (Common Law Division) or in such other manner as may be agreed between the parties.
(2) Order that the proceedings be stayed until such security is given.
(3) Order the respondent/ plaintiff to pay the applicant/ defendant's costs of the motion.
My reasons for these orders follow.
The proceedings
By statement of claim filed in the District Court on 11 June 2008 and transferred to this Court 10 December 2010 the plaintiff claims to be entitled to damages against the defendant under a business insurance policy granted by the defendant (the Policy) by reason of a fire which broke out on 30 August 2007 in premises where it operated a gym on Wellington Road, Granville. The plaintiff quantifies its claim by an expert report which calculates its loss as being in the order of $1.8m. It is common ground that the fire was deliberately lit and was the result of arson. The defendant has denied the plaintiff's claim forwarded on 1 November 2007 on the basis that the plaintiff was responsible for the fire.
The application for security for costs
The defendant applies by motion filed on 30 November 2012 for security for costs. The plaintiff resists the application principally on the bases that it has been made too late, to order security would stifle the litigation, that the defendant's conduct has caused the plaintiff's impecuniosity and that the plaintiff, although a corporation, is effectively the alter ego of its principal, Mohamed Naboulsi. The plaintiff submitted that it should be in no worse position than if Mr Naboulsi were the plaintiff merely because Mr Naboulsi has chosen to arrange his affairs through the plaintiff, as corporate vehicle.
Jurisdiction to require security for costs and relevant factors in the exercise of the discretion
The plaintiff does not dispute that it would be unable to meet an order for costs were it unsuccessful in the proceedings. Accordingly there is jurisdiction to make an order, either under s 1335 of the Corporations Act 2001 (Cth) or UCPR r. 42.21(1)(d).
The defendant submitted that in these circumstances the onus shifts to the plaintiff to establish a reason why security should not be granted and relied on Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 (Wollongong City Council) at [30] per Beazley JA, citing KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (KP Cable); Equity Access Ltd v Westpac Banking Corporation [1989] ATPR 40-972 (Equity Access); Pioneer Park v Australia and New Zealand Banking Corporation [2007] NSWCA 344; 65 ACSR 383 (Pioneer Park); Prynew Pty Ltd v Nemeth [2010] NSWCA 94. Thus, the inability of a corporate plaintiff to meet an adverse costs order both triggers the Court's jurisdiction and is a factor in the exercise of its discretion: Fiduciary Limited v Morningstar Research Pty Limited [2004] NSWSC 664; 208 ALR 564 at [35]-[37] per Austin J.
The relevance of the plaintiff's prospects of success
The defendant also submitted that this is not a case in which the Court can simply assume that the plaintiff's claim under the policy is made in good faith and is reasonably arguable. It submitted that the plaintiff's prospects of success are relevant to the discretion and relied on Lord Denning MR's statement in Sir Lindsay Parkinson & Co. Ltd v Triplan Limited [1973] 2 All ER 273, at 285 that the criterion is "whether the plaintiff has a reasonably good prospect of success".
In Equity Access Hill J adverted at 50,536 to the difficulties of embarking on a consideration of the prospects of success when the application is made well in advance of the hearing of the matter. In that case the difficulties arose, not because the application was made at an early stage but rather, because it was made after three days of the substantive hearing. Hill J, who was both the trial judge and the judge responsible for determining the application for security, said:
"It would I think be quite improper for me to embark upon a view of the evidence as it presently stands to determine whether the applicant does or does not have a good case. It suffices to say that the case is one where it must clearly be said that the applicant has an arguable or triable case."
The defendant submitted that the case was ready for hearing and that the joint expert report following a conclave (the Joint Expert Report) was to hand. It submitted that, in these circumstances, it was an appropriate matter in the exercise of my discretion to consider the plaintiff's prospects of success, in the context outlined above, namely that I should not assume that the plaintiff's claim is made in good faith and is reasonably arguable.
The plaintiff accepted that its prospects of success are relevant to the defendant's application.
There is little dispute about many of the primary facts. Further, the application for security was heard when the extent of common ground between the experts was evident from the Joint Expert Report. I shall outline the undisputed facts and summarise the plaintiff's evidence in order to assess, in so far as it is appropriate to do so on such an application, the plaintiff's prospects of success.
Relevant facts: admitted or incontrovertible
The relevant facts, which are either admitted, not in dispute, incontrovertible or established by objective or contemporaneous evidence are summarised below. The figures extracted from the plaintiff's financial statements were verified by Mr Naboulsi in answers to interrogatories. The matters concerning the closed circuit television (CCTV) cameras are principally taken from the disc itself and the Joint Expert Report.
The plaintiff was registered on 29 March 2005. Mr Naboulsi is its sole director. Its paid up capital is $10.
In 2005, Mr and Mrs Urusoglu, the owners of premises at Wellington Street, South Granville, granted to the plaintiff a five-year lease of the entrance of the ground floor and the first and second floors of unit 35 with two five-year options to renew. The first and second floors were accessible from the ground floor by a lift and two sets of fire stairs. The entry to the gym was on the ground floor but the reception to the gym was on the first floor, as was the back office and the server room. The plaintiff was in possession of the leased area from 30 August 2005 until 30 August 2007, when the fire occurred.
For the year ended 30 June 2006, the plaintiff declared in its tax return total income of $208,542 which comprised $53,366 from "other sales of goods and services" and "other gross income" of $155,176. Its total expenses came to $646,351 and included lease expenses of $115,098, repairs and maintenance of $141,475 as well as undifferentiated "all other expenses" of $368,706. The loss and therefore the deficiency in shareholders' funds was, accordingly, $437,809.
The Policy was taken out for the period from 28 September 2006 until 28 September 2007. The Policy insured the plaintiff against loss or damage by reason of fire and business interruption in the following amounts:
Plant machinery and all contents $2,000,000
Stock $10,000
Removal of debris $40,000
Business interruption for period of 12 months
Loss of income $420,000
Additional cover $70,000
By application dated 16 May 2007, Mr Naboulsi, through his agent A & K Engineering Group Pty Limited, applied for a development and construction certificate in respect of a proposed new location for the gym in the same complex as the existing gym. In the Statement of Environmental Effects, also dated 16 May 2007, Mr Naboulsi's intentions, which are relevantly the plaintiff's, are recorded in the following passage:
"As Council would be aware the subject site currently contains a health and fitness centre, and as part of this submission, the tenant of the existing health and fitness centre wishes to relocate to the north-east building."
By letter dated 21 August 2007 the plaintiff received a letter of offer from the owners of lot 20 of the proposed new location. The plaintiff was, prior to the fire, also negotiating with the owners of the other lots that comprised the new location: 21, 23, 23 and 24.
Because the sequence of events on the night of the fire can only be understood against the background of the CCTV system that operated in the gym, it is necessary to summarise how the system worked.
There were 14 CCTV cameras located at various positions throughout the gym. What the cameras "saw" could be viewed on a computer screen which was located in a room designated the "server" room on the first floor which could be accessed via the back office. There was a monitor (the Server Monitor), keyboard, mouse and a Black 16 digital video recorder (DVR) on a wooden stand which was some distance, about 40 cms, from the wall. The cabling to the DVR was completely unsupported and hung loose from where it was plugged into the DVR.
The DVR was relevantly set to "motion" which means that the footage is only sent to the hard disc if motion is detected.
The only input controls for the DVR were the keyboard and mouse located in the server room. There was also a monitor located at the reception desk (the Repeat Monitor) but there was no accompanying keyboard or mouse for the Repeat Monitor. The Repeat Monitor displayed what was shown on the Server Monitor.
There were two DB15HD connectors referable to the CCTV system (the Connectors) which were held securely in place by thumbscrews. There was one thumbscrew on either side of each of the two Connectors. The Connectors which were plugged in to the back of the monitor connected the DVR to the power sources on the wall. It was impossible to unplug either of the Connectors when the thumbscrews were tight. Each Connector had a capacity of 8 cameras. Cameras 1-8 were connected to the top Connector and cameras 9-16 (13 and 14 not in use) were connected to the lower Connector.
A uniform blue screen image at the Server Monitor is generated when it no longer detects a valid signal at the camera input, such as the Connectors. For example, signal interruption from a camera feed will result in blue screen being generated. Signals from any individual camera could potentially be interrupted at various locations between the camera and the DVR. However interruptions to groups of cameras (1-8 or 9-16) can only occur at the Connectors.
The CCTV footage which, with the consent of the parties, I viewed in chambers and the Joint Expert Report, together with incontrovertible or admitted facts establishes the following sequence of events on 30 August 2007, the night of the fire.
Time
Event
11.15 pm
Mr Naboulsi arrived at the gym. At this time the gym was still open; there was a male staff member at the desk, a cleaner, as well as patrons, who were using the equipment. The Repeat Monitor showed 14 cameras in view at this time.
11.17.16 -11.17.43 pm
Mr Naboulsi entered the server room at a time while the Repeat Monitor showed 14 cameras in view. While Mr Naboulsi was alone in the server room, the Repeat Monitor changed to show a full screen image of camera 4, which was in the back office. Camera 4 continued to provide live footage (showing no change). The Repeat Monitor changed to 14 cameras at view and then recording from camera 4 resumed to show Mr Naboulsi leaving the server room and switching off the lights to the back office. The lights in the server room were not altered by Mr Naboulsi and appeared to be off at this time.
The experts agree that it is likely that the changes on the monitors to view the signal feed from camera 4 occurred as a result of Mr Naboulsi's intervention.
11.24 pm
Mr Naboulsi went back into the server room.
11.26 pm
Video images from cameras 1-8 ceased for a period of about 2.8 seconds. Video images from the remaining six cameras continued uninterrupted. Image quality before and after the interruption was consistent and not distorted. At this time Mr Naboulsi was alone in the server room. The signal interruptions at this time probably occurred when connectivity was lost at the upper Connector, which is consistent with the Connector becoming unplugged or almost unplugged and then plugged in again.
11.50 pm
Mr Naboulsi locked the entrance to the gym on the first floor from the inside.
From 11.59 pm
Mr Naboulsi was alone in the gym, the cleaner and the male at reception having left via the fire stairs.
12.02 am
Mr Naboulsi moved to a position near the windows on the eastern side of the first floor of the gym from which he could observe the entrance from Wellington Road, the driveway, the car park and the other units on the western side of the property.
12.03 am
Mr Naboulsi moved to a window on the southern side of the first floor from which he could observe the car park.
12.03 am
Mr Naboulsi left the first floor of the gym.
12.07 am
Mr Naboulsi returned to the first floor of the gym.
12.10 am
Mr Naboulsi moved to a position near the windows on the northern side of the first floor of the gym from which he could observe Wellington Road.
12.11 am
Mr Naboulsi moved to a position near the windows on the southern side of the first floor of the gym
12.15 am
Mr Naboulsi moved to a window on the southern side of the first floor from which he could observe the car park and then left the first floor.
12.22 am
Mr Naboulsi returned to the first floor.
12.30 am
Mr Naboulsi, stood up from the chair at the front desk and went into the server room. While there, he changed the Server Monitor to full screen camera 1 which provided views of the front foyer and into the car park beyond, through the glass front door.
12.31 am
Mr Naboulsi walked to a position near a window on the eastern side of the first floor from which he could observe the driveway to the premises. He then moved to a position near a window on the southern side of the premises from which he could observe the car park.
12.33 am
Mr Naboulsi left the first floor via the fire stairs.
12.44 am
Mr Naboulsi returned through the entrance to the first floor from fire stairs.
Between 12.48 and 12.50 am
Mr Naboulsi walked around the first floor of the gym, switched off all of the lights apart from the refrigerator lights and left via the fire stairs.
12.54 am
A person, apparently male, wearing a white hooded suit and booties, entered the first floor via the fire stairs. He used the concealed latch to open the pedestrian gate without apparent difficulty. The person shielded his face with his left hand and bent forward, which had the effect of obscuring his face from the CCTV camera 5. He then used his right hand to obscure his face from CCTV camera 6. The person moved to the back office without hesitating although the light was poor. The person then went to the server room. He entered the server room within 15 seconds of entering the first floor.
12.54.55- 12.54.56 am
The person unplugged both the upper and lower Connectors which caused signals to be lost from all cameras. The time within which this was achieved indicated that the thumbscrews around each of the two Connectors had already been loosened and that the person was familiar with the CCTV system and the camera connections.
About 1 am
A fire was deliberately lit in the gym. Six 20-litre cans of petrol which had been poured around the gym acted as an accelerant.
1.28 am
The fire was reported.
The telephone at the back office was out of its cradle when the Fire Brigade arrived. The presence of soot indicates that it was out of its cradle prior to the fire. Photographs taken after the fire show the Connectors and the composite connector for the Repeat Monitor were unplugged and were found amongst the bundle of wires on the floor.
On 22 December 2008, Mr Naboulsi was interviewed by police. The interview was recorded. The defendant tendered the Electronically Recorded Interview of a Suspected Person (ERISP) on this application. Mr Naboulsi was specifically asked about his conduct at 11.24 pm. The following exchange occurred:
Q699 Mohamad, at 11:24 pm the CCTV system indicates you were walking into the server room.
A Yeah
Q 700 OK And basically by, by the investigations made it appears that you reach into the control cabinet like, where the security system is and just out of view of camera 4 you disconnect the CCTV video, the feed---
A Right
Q 700 --- which basically brings it down. The video feeds the camera 4 and 5 and 7 are lost momentarily. Camera 1 to 8 are lost completely for two, two point eight seconds. Then you've reinserted the plug serving cameras 1 to 8 second, camera 1 to 8, sorry. I will rephrase that
A Yeah, go on
701 You re-insert the plugs serving camera, cameras 1 a couple of seconds later.
A I don't know.
Q702 You don't know?
A No
Q703 Is there anything you can tell me as to why that would----
A Sorry, I don't remember, it has been that long, yeah. So just recap, say that again. Sort of, I just really got confused.
Q704 Basically you have gone into the server room----
A Right.
Q704 ----and you've disconnected the plug into the video feed----
A Right
Q704 --- and you've disconnected the plug basically, all right, and then you've reinserted that plug.
A No
Q705 No
A No
Q706 Is it something you would do usually?
A Oh, it depends. Like I, like I said, I don't know what the actual, what was wrong, up on that day--
Q707 Yeah
A ----like it could be the, like, testing them, it could be anything really.
Q Ah hmm
A Yeah
Q709 Did you ever have cause to fiddle with any of the plugs?
A Oh, if they've been, yeah, you would fiddle around with them to make sure the connections were right or I don't know that specific night---
Q 710 Mmm
A --- but ah, it could be anything like, it's really hard to say, it has been that long.
Q 711 Mmm
A Yeah, like, why would I have done it? It could be for any reason. I could have gone in there, there was a camera glitch. It could have been, there was something wrong or anything like that.
Q 712 Yeah
A Just testing cables, I don't know.
Q 713 Because basically what it indicates is O. K. I will try and put it in laymen's to you,....
A Yeah, no, that's fine, yeah, yeah.
Q 714 You've walked into the server room---
A Yeah, yep, yep
Q 714 ----and obviously, and then you've got fourteen cameras in the place.
A Yeah, yeah
Q 715 O.K. And cameras 1 to 8 have gone down---
A Yeah
Q715 ----for two point eight seconds and then come back on. Now, our investigations reveal that the only way that could have happened is that the plug----
A Yeah
Q715 ----that operates cameras 1 to 8 was pulled out for two point eight seconds and then put back in. Do you remember doing that or can you offer any reason why you would do that?
A Well, I, no, no, I am sorry, no.
Q716 O.K.
A I cannot remember at all
Q717 All right
A It's like I'm thinking how would, why would it be three cameras for two point eight seconds, is that the---
Q718 No, eight cameras. So basically what it is----
A All eight cameras went down or----
Q719 No, yeah. From my understanding of the CCTV system and our investigations into this matter
A Yeah
Q 720 At the back of that, you know----
A DVR?
Q720 ----your hard drive there feeding the cameras---
A Yeah, the DVR
Q720 ----there's two plugs, all right?
A All right
Q721 One plug----
A Two plugs----
Q722 Yeah, two plugs go in the back?
A Yeah
Q723 One plug controls the cameras 1 to 8----
A Right
Q723 ----and the second plug controls cameras 1 to 16. Now I understand you have only had fourteen cameras. So----
A O. K.
Q723 ----the second one would only control six cameras.
A Right
Q724 So our investigations reveal that whilst you're in that service room, one of those plugs was being removed----
A Right
Q724 ----for two point eight seconds and then put back in
A O.K.
Q725 So whilst that plug's removed the cameras 1 to 8 go down, the screen goes blue.
A Right
Q726 Right. And I will just show you a photograph which is this one here. And that indicates that the monitor at the front thing. O.K. So at 11.00, 11.00, where is it? Year, 11.26 pm O. K.---
A Ah hmm
Q726 --- where that monitor indicates, that first group of cameras goes blue which indicates cameras 1 to 8 had gone down
A Right
Q727 See how the split screen's there, you can see the image is----
A To tell you the truth it just looks blue to me
Q728 Yeah
A Yeah, sorry
Q729 It's a bit better on the one we've got
A O.K. Yeah
Q730 I can indicate to you that those cameras on the top half of that screen----
A Yeah
Q730 ----go down for two point eight seconds---
A All right
Q 730 ----and then come back on. O.K.
A It could be that I've, so what, you have got to physically pull it out?
Q731 You have to physically pull the cord out
A No. Not that I know of.
Q732 You do not remember doing that?
A I could have bumped it. No, no, all I can remember is either I bumped it----
Q733 Yeah
A ----or fixing up cables underneath----
Q734 Yeah
A ----and like you, if they're bent or whatever it is.
Q735 Sorry mate
A Yeah
Q736 That was the wrong photo I showed you earlier obviously but that is just you there in that server room
A O.K. yeah
Q737 That is at 11.24 O.K. and it appears that you are reaching into the cabinet
A. Which cabinet is that? Yeah, that's the-----
Q738 In the server room. So----
A That would be the um, the phone, the computer cabinet? Is that what cabinet you are talking about?
Q739 Well, as Detective Sergeant McDonald indicated the, the actual computer to the video, like, to the actual CCTV
A That's at the back of the, that's, I am at the front of the door, that's in the back.
Q740 O.K.
A The computer that you guys, the, ah, DVR and that is at the back of the, it is like two metres away.
Q741 Yeah. I think this is just a still of you just entering the room.
A O.K.
Q742 O.K. Because you're in there for about two minutes.
Q743 Yeah
A O.K. Yeah , no, 'cause it's just like looking at that photo, I am actually right at the door
Q744 Yeah
A So that's right where the um, the what's it's called, the patch panel is
Q745 Yeah. So what we're suggesting is----
A Because I normally leave it in there
Q746 Yeah
A So if I am opening up keys, getting everyone to grab keys or whatever it is
Q747 I can indicate from the footage that you into the room and you are in there
A Right
Q748 And whilst you're in the room that's when those cameras drop out like I've mentioned before that the plug's taken out
A O.K. O.K.
Q749 O.K. But can you offer any reason why that plug was taken out?
A No, no.
It will be a matter for the trial judge, as the tribunal of fact, to decide whether Mr Naboulsi's answers amount to a consciousness of guilt. It would, in my view, be open to the trial judge to infer from the answers given by Mr Naboulsi on his interrogation, viewed in light of the facts agreed by the experts and what is shown in the CCTV footage, that he had revealed that he was implicated in the arson: Woon v The Queen [1964] HCA 23; 109 CLR 529.
Some considerable time after the fire, the plaintiff caused to be prepared its financial statements for the 2007 financial year. It recorded a net profit after tax of $29,541.71. This figure is inconsistent with the balance sheet and does not tally with the previous year's results.
On 22 January 2009 Mr Naboulsi was arrested and charged. He was subsequently acquitted by direction.
Mr Naboulsi's evidence
Mr Naboulsi made a statement on 22 June 2012, which was annexed to his affidavit of 27 February 2013 relied upon in opposition to Zurich's application for security for costs. In his evidence he deposed as to the following matters:
(1) Neither the plaintiff nor he has the funds to provide security for costs or to meet an adverse costs order.
(2) He is not aware of any litigation funder who would be prepared to fund the proceedings.
(3) He had nothing to do with the fire and is innocent of any wrongdoing relating to the fire.
(4) At the time of the fire neither he nor the plaintiff had cash flow problems.
(5) The only demands for creditors the plaintiff had at the time of the fire were from the lessor for unpaid rent, which was disputed (see below) and electricity bills which were also disputed on the grounds that proper readings had not been done.
(6) At the time of the fire the plaintiff was in dispute with the lessor of the premises about credits to be given against rent obligations for fitting out the premises as a gym and a rent-free period, neither of which matters had been reduced to writing, but he expected that he would be successful in the Supreme Court proceedings which he had commenced in March 2007.
(7) Prior to the fire Mr Naboulsi had spent about $360,000 of his own money and money from others fitting out the gym.
(8) The annual rent payable under the lease for the gym was $22,000, subject to the arrangement referred to above.
(9) He had told the lessor before the fire that he was intending to move out to different premises within the same complex.
(10) The new premises he had identified were smaller and more suitable since they were on the ground floor. The rent for the new premises would be less than half the rent for the original premises.
(11) Mr Urusoglu had a key to the gym.
(12) On 25 August 2007 someone tried to start a fire in the gym coming from a gas leak. This made Mr Naboulsi paranoid and meant that he was very wary when leaving the premises at night.
The plaintiff's prospects of success: whether its claim is made in good faith
As far the defendant's liability is concerned, there is only one issue in the case, namely, whether or not the fire and the resulting loss and damage were caused by the plaintiff or at its instigation. In that respect, the defendant submitted that the plaintiff and its sole director, Mr Naboulsi, may practically be considered to be one and the same.
The plaintiff's financial difficulties and its desire to relocate to new premises in the vicinity are relevant to prospects of success as well as the next factor, to be considered below, whether the plaintiff's impecuniosity was caused by the defendant. They are relevant to prospects of success. As Lord Pearce said in Onassis and Calogeropoulos v Vergottis [1968] 2 Lloyd's Rep 403 at 431, motive is one aspect of probability.
The plaintiff submitted, on the basis of the evidence of Mr Naboulsi, that the gym business was profitable and that, apart from the dispute with the lessor, the plaintiff was able to pay its debts. The plaintiff submitted that the 2006 financial statements could be explained on the basis that the gym was a new business and that the equipment had to be paid off before substantial profits could be made. It also submitted that because the business interruption element of the Policy was limited to $400,000 it would have been economically irrational for the plaintiff to be involved in the deliberate destruction of the gym when its trading losses, as calculated by the expert retained for the purposes of these proceedings, were so much greater than the limit of that cover in the Policy. As Mr Gross QC put in submissions:
"So the idea that you profit by burning down one gym and starting another just doesn't fly because the business interruption, ie loss of income which you receive only for a three-month period, takes out your entire policy."
However, as appears from the report of Ian Barker, loss assessor, dated 16 August 2011 relied on by the plaintiff, its claim against the defendant is substantial and comprises the following elements (derived from Mr Barker's report of which business interruption is only one):
Contents and fit out $1,376,328.52
Removal of Debris $40,000
Stock $5,000
Claims preparation fees $20,000
Business interruption $400,000
Total $1,841,328.52
The defendant submitted that the plaintiff had no reasonable grounds to expect either that it could relinquish the obligations it had undertaken to the lessor of the premises where it conducted the gym without financial penalty or that the dispute with the lessors was likely to be resolved by agreement, particularly having regard to the fact there had already been litigation. Indeed, had the plaintiff moved to finalise arrangements with the owners of the new lots where it proposed to move, there is a risk that it would have been taken to have repudiated its existing lease.
The defendant submitted that the 2006 financial statements show that the business was operating on its shareholders' funds and was unable to pay its debts without recourse to such funds. For what period it could have continued before being able to trade without such funds is not clear.
In my view it would be open to the defendant to make the submission at the hearing of the matter that, had the insurance claim been paid by the defendant, the plaintiff's immediate objectives would have been achieved: it would not only have been released from its obligations under its existing lease because of the destruction of the premises, but it would also have had a substantial cash payment for loss of profit and destruction of equipment with which to commence its new business in the new location. Its prospects of achieving a profit would have been enhanced having regard to the lower rent and greater capitalisation.
In addition to the evidence that tends to establish the plaintiff's motive for arson, there is, in my view, substantial circumstantial evidence which implicates Mr Naboulsi in the arson, whether or not he was personally involved in the physical acts of pouring the petrol and igniting the fire. The disablement of the CCTV cameras by the arsonist so soon after they had been disabled at a time when Mr Naboulsi was the only person in a position to unplug the Connectors incriminates Mr Naboulsi in the sequence of events that led to the arson occurring in circumstances where the CCTV cameras were not operational.
I accept the defendant's submissions that the following circumstances also point to Mr Naboulsi's involvement in the arson:
(1) The CCTV footage records that he looked out of the windows of the premises on numerous occasions in the hour before the fire for a total of about 22 minutes.
(2) He remained in the premises for an hour after closing the gym for no apparent reason, in circumstances where he alleges that he was scared for his safety because of an alleged earlier attempt to ignite the premises.
(3) He went outside the premises on three occasions in the hour before the fire for a total of approximately 22 minutes.
(4) The alarm located on the ground floor fire exit door was not activated when the arsonist entered the building.
(5) The arsonist, upon entering the premises via the fire escape, covered his face with his hands in a way that suggests awareness of the location of the CCTV cameras notwithstanding the low ambient lighting.
As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, then in the absence of evidence to the contrary, the Court should proceed on the basis that the claim is bona fide and has reasonable prospects of success: KP Cable at 197.
I consider that the defendant has, as the summary of evidence, much of which is undisputed, admitted or incontrovertible, shows, adduced considerable "evidence to the contrary". I accept the defendant's submission that, in light of the evidence referred to above, I ought not assume the claim is made in good faith.
In making these observations as to these matters, I do not intend to suggest that these matters do not give rise to issues to be tried.
Whether the plaintiff's inability to meet a costs order was as a result of the defendant's conduct
The plaintiff bears the onus of establishing the adequacy of its financial position before the dealings with the defendant and that the defendant's conduct either caused, or at least materially contributed to, its inability to meet an order for costs: Wollongong City Council at [33] per Beazley JA. The plaintiff has not adduced any material to support such allegation other than Mr Naboulsi's assertion that the plaintiff was able to meet its commitments from cash flow and that the gym was profitable.
For the reasons given above in connection with the plaintiff's motive, I am not satisfied that the plaintiff's impecuniosity is as a result of the defendant's conduct in denying the claim. There is substantial evidence referred to above that its financial difficulties pre-dated the fire.
Whether an order for security would prevent the plaintiff from maintaining the proceedings and whether the plaintiff has demonstrated impecuniosity on the part of those standing to reap the benefit of any judgment ordered in the plaintiff's favour
Mr Naboulsi's unchallenged evidence is that, if an order for security for costs were made, it would prevent the plaintiff from maintaining the proceedings.
In Bell Wholesale Co Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1 (Bell Wholesale) the Full Court of the Federal Court, Sheppard, Morling and Neaves JJ, observed at 4:
"In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) also without means. It is not for the party seeking security to raise the matter; 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 security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts."
That this is a relevant matter has recently been reaffirmed in Pioneer Park per Basten JA (with whom Tobias and McColl JJ A agreed) at 394.
Mr Naboulsi deposed to his impecuniosity, his lack of assets and his lack of employment. He has identified three creditors of the plaintiff who have obtained judgments against it and who, at least until recently, apparently agreed to defer enforcement pending the outcome of these proceedings as follows:
Creditor
Judgment date
Amount
Capital Finance Australia Ltd
24 November 2008
$33,953.76 plus interest from 24.11.08
Australian Product Sourcing PL
13 May 2009
$675,660.39 incl. interest and costs as at 27.2.13
Macquarie Equipment Rentals PL
19 October 2009
$37,500 plus interest and costs up to 27.2.13
There are other creditors identified in the plaintiff's evidence.
In the time allocated for the hearing of this application, the plaintiff made no endeavour to prove that those creditors were without means. Indeed it accepted that, as finance companies, they are likely to have the means to provide security for costs. The plaintiff submitted, by way of explanation for the lack of such evidence:
"It's fanciful to believe that finance companies will be asked to as part of getting back moneys which are presently owed and where repayment is unclear to actually put extra money which is non-refundable into the case in order to meet the defendant's moneys - money demands in relation to security for costs."
The plaintiff also submitted:
"The mere fact there are creditors out there who might gain from getting outstanding debts paid does not change the position in terms of how one approaches this application."
However, after the hearing of the application had concluded, the plaintiff sought leave to re-open its evidence and adduce further evidence. The defendant neither opposed nor consented to this course. Accordingly, the matter came before me on 9 April 2013 at which time I granted leave to the plaintiff to re-open. The plaintiff read affidavits which established that none of its creditors was willing to contribute any amount by way of security for costs. It also relied on an affidavit sworn by Mr Naboulsi's father, Ahmad Naboulsi, sworn 8 April 2013 in which the deponent deposed to his assets, liabilities and financial commitments. The defendant read a further affidavit which established that Ahmad Naboulsi also stood to gain from the litigation if the plaintiff's claim was successful since he had guaranteed various of the plaintiff's debts. The defendant accepted at the resumed hearing on 9 April 2013 that the plaintiff had established, in respect of Ahmad Naboulsi, that he is incapable of providing funds to meet an order for security for costs.
The plaintiff's further evidence established that its creditors are willing to take the benefit of the litigation but not to assume any burden for costs. There is no evidence that they are unable to assume such a burden, merely that they are unwilling to do so. Accordingly, the plaintiff has not only failed to discharge the onus referred to in Bell Wholesale but it has effectively proved the contrary.
That those who stand to benefit from the litigation if the plaintiff is successful are able but not willing to provide security is a relevant matter, particularly in circumstances where the plaintiff submitted that I should refuse to order security on the grounds that such an order would stymie the litigation.
Delay
Delay is a relevant factor in determining whether to order security for costs: KP Cable at 197B. The longer the delay, and the greater the costs the plaintiff has been allowed to incur, the less likely it is that an order will be made: Southern Cross Exploration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 123-124 per Waddell J.
The defendant foreshadowed its application for security by letter dated 23 November 2012. By this time it was over four years since the proceedings were commenced in the District Court. The proceedings are listed for final hearing on 13 May 2013. By affidavit sworn on 30 November 2012 in support of the application, Stephen Vardanega, solicitor for the defendant gave the following explanation for the delay:
"[20] I am instructed and verily believe that an application for security for costs was not considered by the Defendant prior to service by the Plaintiff of all evidence upon which it proposes to rely in June 2012 (save further evidence in reply).
[21] From the time of service of the Plaintiff's evidence it became apparent to the Defendant's lawyers from the expert opinion of Mr Watt [the defendant's expert] and from the Plaintiff's answers to interrogatories that at the time of the first the Plaintiff may not have been a financially viable entity.
[22] From the time of service of MN's [Mr Naboulsi's] statement it became apparent that the Plaintiff may not be able to pay the costs of the Defendant if ordered to do so."
Although the application is made relatively late in that almost all of the costs of preparing the matter for hearing have been spent, I am satisfied by Mr Vardanega's evidence that the passage of time was not the result of any undue delay on the part of the defendant but that rather the defendant did not regard itself as being in a position to assess the strength of any proposed application at an earlier time. Although the defendant could have sought information from the plaintiff as to its ability to pay a costs order at an earlier time, it did not analyse the plaintiff's pre-fire financial position until it had Mr Watt's report.
The plaintiff submitted that it was prejudiced by delay. There was no evidence from Mr Naboulsi that, had he known that an application for security for costs would be made, he would not have caused the plaintiff to commence the proceedings. Nor is there any evidence of what the plaintiff has spent in recent times, which it would not have spent had the application been made earlier.
The lack of such evidence is not sufficient to rebut the inference of prejudice. In Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; 67 ACSR 105, Hodgson JA, with whom Basten and Campbell JJA agreed, said at [57]:
"In my opinion, it is not necessary, in order for a plaintiff to show prejudice from delay, that the plaintiff prove what the plaintiff would have done if the application had been made earlier; although if a plaintiff does prove that it would not have gone ahead with the proceedings if the application had been brought when it should have been, this would be a very powerful consideration against granting security in the case of a delayed application. In my opinion, where substantial costs have been incurred since the time when an application for security should have been brought, it would be unreasonable to deny the existence of prejudice unless the plaintiff can prove exactly what the plaintiff would have done if the application had been brought earlier."
Delay is a relevant factor, but it is not, as cases such as Equity Access illustrate, determinative. The defendant does not seek security for past costs but only for costs to be incurred in the future. In the circumstances referred to above, the presumed prejudice arising from delay is not sufficient to outweigh the other factors in favour of an order for security.
Further submissions made on behalf of the plaintiff
The plaintiff submitted that I ought not order security for costs because to do so would infringe the principle that "poverty is no bar to a litigant". It submitted that it should not be treated differently than Mr Naboulsi would himself have been, had he run the gym in his own name since the plaintiff was, effectively, Mr Naboulsi's alter ego. Mr Gross QC put the argument as follows:
"But shouldn't the law - the reality is whether you're stopping an ordinary citizen conducting a business, self-employed people use corporations all the time as their methods of carrying on business, why should such a litigant be treated differently if in fact he's used a corporate mechanism to conduct his business.
It's obvious that the person who is sustaining the losses and the person who stands to gain is the plaintiff and the plaintiff will be without a remedy if in fact he has unreasonable barriers put in front of him."
I reject this submission. It is at odds with the law. A submission in almost identical terms was rejected by the Court of Appeal in Hession v Century 21 South Pacific (in liq) (1992) 28 NSWLR 120. As Meagher JA, with whom Kirby P and Cripps JA agreed, said at 123D:
"The fact that a company has a deficiency of assets compared to liabilities . . . is evidence of entitlement under the section [1335] to an order . . .not . . . evidence of immunity from an order."
I also understood the plaintiff to submit that because the defendant bears the onus of proving to the Briginshaw standard (after Briginshaw v Briginshaw [1938] HCA 34; 60 CLR 336) that the plaintiff was implicated in the arson, the plaintiff was effectively the defendant and that, accordingly, no order for security for costs ought be made.
Orders for security for costs have been made against defendants in circumstances where a defendant is effectively the "agressor". For example, an order has been made against a defendant who served a statutory demand where a plaintiff has commenced proceedings to set aside a statutory demand: Classic Ceramic Importers Pty Limited v Ceramica Antiga SA (1994) 13 ACSR 263. I do not consider that an insurer who denies a claim on the basis of the alleged involvement of the insured in causing the damage that gives rise to a claim is thereby converted into a plaintiff for the purposes of such an application.
I reject the submission that the evidentiary onus the defendant bears in proving its defence converts the defendant, relevantly, into a plaintiff or that it otherwise provides a reason why an order for security for costs ought not be made against the named plaintiff.
Further matter
As Beazley JA said in Wollongong City Council at [34], in some cases persons who stand behind a plaintiff corporation, or who otherwise stand to benefit from the litigation, may offer to be responsible for costs. Should that occur, it may provide a reason for the court to exercise its discretion not to order security: KP Cable at 198. The plaintiff has identified Mr Naboulsi as a person who stands to benefit from the litigation. He has not offered to be responsible in the event that a costs order is made against the plaintiff. In any event, on the evidence, he would not have the financial capacity to be responsible for the costs.
Amount of security
The original estimate of hearing time required was 15 days. The defendant estimated that its solicitor/ client costs for the remaining work and a hearing of that length will be in the order of $425,000 and its costs recoverable on the ordinary basis would be in the order of $350,000. However the estimate has been revised to 10 days, following the receipt of the Joint Expert Report. Since the preparation for the hearing has largely been completed, the defendant submitted that its solicitor/ client costs would be in the order of two thirds of the original figure, namely $283,000 and that the same ratio between solicitor/ client costs and costs on an ordinary basis should be applied. Accordingly it seeks security for $233,000. There is no dispute about the amount of security that would be appropriate, in the event that an order for security was made.
Conclusion
Having regard to the factors referred to above, I am satisfied that, notwithstanding the defendant's delay in making the application, it is appropriate that I make an order in terms of prayer 1 of the defendant's notice of motion filed on 30 November 2012.
No submissions were made as to the form in which security ought take. I consider it appropriate to provide for payment of the relevant sum to the Registrar unless another form is agreed by the parties.
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Decision last updated: 11 April 2013
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