Mannix Electrical Pty Ltd v Belport Pty Ltd

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SUPREME COURT OF SOUTH AUSTRALIA

(Appeal from a Master: Civil)

MANNIX ELECTRICAL PTY LTD v BELPORT PTY LTD

[2019] SASC 159

Judgment of The Honourable Justice Doyle

10 September 2019

PROCEDURE - CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS - SECURITY FOR COSTS

The defendant appeals from a decision of a Master dismissing the defendant’s application for security for costs.

On appeal, the defendant contends that the Master erred in concluding that it had not satisfied the threshold requirement for an order for security for costs under s 1335 of the Corporations Act 2001 (Cth), namely that it appears by credible testimony that there is reason to believe that the plaintiff corporation will be unable to pay the costs of the defendant if it is successful in its defence.

Held (per Doyle J):

1.  Consideration of the relevance of the plaintiff corporation's limited share capital, and failure to respond to a request for financial information.

2.  It has not been established that the Master erred in his evaluative assessment of the evidence and conclusion that the threshold requirement was not established.

3.  Appeal dismissed.

Corporations Act 2001 (Cth) s 1335(1); Supreme Court Civil Rules 2006 (SA) r 194(1)(a), referred to.
Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301; Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302; Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1; Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360; Meni's Tailoring and Alterations Pty Ltd v Jeanswest Corporation Pty Ltd [2003] FCA 1108; Monto Coal 2 Pty Ltd v Sanrus Pty Ltd [2018] QCA 309; George v Rockett (1990) 170 CLR 104; Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA [2007] FCA 56; House v The King (1936) 55 CLR 499; Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60; Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194; Dwyer v Calco Timbers Pty Ltd (2008) 234 CLR 124; Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd [2019] SASC 39; FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241; Jownal v Commonwealth Bank of Australia [1999] SASC 72; Amcor v Barnes [2015] VSC 90; Blackbird Entertainment (Unreported, Supreme Court of Western Australia, White J, 2 June 1998); Jones v Dunkel (1959) 101 CLR 298; Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176, considered.

MANNIX ELECTRICAL PTY LTD v BELPORT PTY LTD
[2019] SASC 159

Civil

  1. DOYLE J:             This is an appeal from the decision of a Master dismissing the defendant’s application for security for costs.

  2. On appeal, the defendant contends that the Master erred in concluding that it had not satisfied the threshold requirement for an order…

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Details
Case
[2019] SASC 159
Decision Date

CaseChat Overview and Summary

In the matter of Mannix Electrical Pty Ltd v Belport Pty Ltd, the defendant, Belport Pty Ltd, sought an order for security for costs under s 1335(1) of the Corporations Act. The plaintiff, Mannix Electrical Pty Ltd, contested this application, leading to an appeal to the court. The plaintiff alleged that it had operated as a franchisee of the defendant from 2003 to 2018, engaging in the retail sale, supply, and installation of air conditioning units. It claimed that the defendant charged excessive prices for products and advertising expenses, and failed to direct enquiries to the plaintiff. The defendant denied these allegations and counterclaimed for unpaid invoices.

The court was required to determine whether the defendant had established the threshold requirement for ordering security for costs, as set out in s 1335(1) of the Corporations Act. This provision allows a court to require security for costs if there is reason to believe that the plaintiff corporation will be unable to pay the costs of the defendant if successful in its defence. The defendant bore the onus of adducing credible testimony to establish this threshold.

The defendant's application for security was supported by an affidavit from its solicitor, who highlighted the plaintiff's lack of real property ownership and a paid-up capital of $51. The plaintiff did not provide financial information in response to a request from the defendant's solicitor. The plaintiff's director did file an affidavit, stating that the business had been profitable until six years ago and had since returned to profitability. However, the affidavit did not provide detailed financial information.

The court considered whether the Master had erred in concluding that the defendant had not established the threshold requirement. The defendant argued that the plaintiff's lack of real property ownership and the inference of recent losses were significant. However, the court found that the evidence did not support a further inference about the plaintiff's financial position or suggest that the plaintiff had engaged in transactions designed to defeat creditors. The court concluded that no error had been demonstrated in the Master's treatment of the plaintiff's failure to provide financial information or the inference of past profitability. Therefore, the appeal was dismissed.

Orders

Orders of the court

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Background

Background to the litigation

For the reasons which follow, I am not persuaded that the Master erred in the manner contended. I will thus dismiss the appeal.Background In these proceedings, the plaintiff alleges that it carried on business as a franchisee of the defendant from 2003 to 2018. Initially it traded from a store at Kidman Park, and from late 2006 it also had a store at Marion. It has now reverted to trading only from the store at Kidman Park. The nature of its business is the retail sale, supply and installation of air conditioning units. The plaintiff alleges that the defendant charged it excessive prices for the supply of products, and excessive amounts for advertising expenses. The plaintiff also alleges that the defendant failed to direct relevant enquiries received through the defendant’s website and 1300 number to the plaintiff. The proceedings commenced with the plaintiff seeking an injunction to restrain the defendant from terminating the franchise agreement. That agreement has, on its terms, now ended. The defendant denies most of the allegations. In particular, it denies that the plaintiff was a franchisee. It says that the plaintiff was entitled to use the business name ‘Mannix Air and Solar’ under licence from the defendant. The defendant has a counterclaim for unpaid invoices in respect of advertising and marketing activities.The application for security for costs The defendant applied for security for costs up to the first day of trial in the amount of $44,844. The application was brought on two bases, namely under s 1335(1) of the Corporations Act and r 194(1)(a) of the Supreme Court Civil Rules 2006 (SA). The latter is no longer pressed and so can be ignored for present purposes. Section 1335(1) of the Corporations Act provides:(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given. It can thus be seen that the discretion to order security for costs under s 1335(1) is conditioned upon satisfaction of the threshold requirement that it appears by credible testimony that there is reason to believe that the plaintiff corporation will be unable to pay the costs of the defendant if successful in its defence. The defendant, as the applicant for an order for security, carries the onus of establishing this threshold requirement; that is, the onus of adducing “credible testimony” that the requisite “reason to believe” exists.[1] Indeed, the onus remains on the defendant throughout the application.[2][1] Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [21].[2] Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301 at [20]; Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [15]; Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [20].

Evidence

Evidence Before The Court

In my view, consistently with the reasoning of Macfarlan JA in Cornelius v Global Medical Solutions Pty Ltd, satisfaction of the threshold requirement of s 1335(1) that there is “reason to believe that the [plaintiff] corporation will be unable to pay the costs of the defendant if successful” requires more than satisfaction of a risk that this may be so.The evidence In support of its application for security filed on 12 December 2018, the defendant relied upon an affidavit from its solicitor, Mr Townsend. It is apparent from the searches identified in that affidavit that the plaintiff owns no real property and has paid up capital of $51. Mr Townsend also exhibited a letter dated 4 December 2018 that he wrote to the plaintiff’s solicitor. In that letter, Mr Townsend identified the defendant’s concerns about the ability of the plaintiff to meet an adverse costs order, and requested provision of certain financial information (including the plaintiff’s financial statements for the last three financial years). Mr Townsend also provided an estimate of the defendant’s party and party costs up to the end of the first day of trial (being $44,844), and foreshadowed an application for security in this amount. There was, and has been, no response to this request for financial information. However, the sole director of the plaintiff, Mr Costa, filed an affidavit in which he provided some evidence as to the plaintiff’s financial position or performance. Mr Costa deposed:As deposed to in paragraph 37 of my first affidavit, the businesses operated by the plaintiff from Kidman Park and Marion were profitable until about 6 years ago.The plaintiff now operates from the Kidman Park premises, and as its only business and activity, a business under the name Costa Air that is of a similar nature to that it previously operated under the name “Mannix Air and Solar”, and has done so since 1 December 2018.The plaintiff no longer operates a business from the Marion premises.The plaintiff’s business as now operated from the Kidman Park premises has been restored to a profitable business, in that in particular it is purchasing products including air conditioning units at a substantially lower price than the price at which it was purchasing products from the defendant. This has resulted in the plaintiff’s gross profit margins increasing considerably and the business operated by the plaintiff at Kidman Park being profitable. Mr Costa’s reference to his first affidavit is a reference to an affidavit he filed earlier in the proceedings in support of the injunctive relief that was initially sought. The relevant sections of that affidavit provide some general indication of the scale of the plaintiff’s business. They explain that while the plaintiff had previously operated from two premises and with 13 employees, over the last five years there had been a reduction in both sales and margins, which reductions the plaintiff attributed to the defendant’s (alleged) overcharging. A decision was then taken to operate the business from one premises, and to reduce the number of employees to five. However, the earlier affidavit did not provide any more precise information as to the plaintiff’s financial position or performance.

Decision

Reasons for decision

In my view, no error has been demonstrated in the Master’s treatment of the plaintiff’s failure to respond to the defendant’s request for financial information, or to otherwise adduce evidence of the same.Conclusion as to the threshold requirement It remains to be considered whether, despite the absence of error in his Honour’s approach to the issues of the plaintiff’s paid-up capital and failure to provide financial information, the Master nevertheless erred in his conclusion that the defendant had not established the threshold requirement. In this context, the defendant relies in particular upon two aspects of the evidence of which it contends the Master did not appreciate the significance. The first relates to the evidence that the land upon which the plaintiff conducted its business was owned by another (related) entity. The defendant contends that the significance of this went beyond establishing that the plaintiff did not own any land. Rather, and consistently with the “orthodox accounting advice” to which his Honour referred, the defendant contended that it could be inferred that the plaintiff was a company which had taken steps to insulate its assets from the claims of creditors. I accept that it is of some significance that the plaintiff does not own any real estate, and that the land from which its business is conducted is held by a related entity. And I accept that the decision to structure the business in this way may have been influenced by a desire to protect the land from any liabilities incurred by the plaintiff through its trading activities. However, in the circumstances of this case, I do not think there is any basis for a further or more general inference or concern about the plaintiff’s financial position. In this respect, it is significant that the land in question was purchased in 2006, and so some years after the business commenced operating from the relevant premises. This was not a situation of an asset being removed from the plaintiff trading company (let alone being removed on a non-arm’s length basis, for less than its true value). Rather, the evidence suggests there was simply a decision to make the acquisition of the land through a different entity. Further, there is no evidence to suggest that the plaintiff has otherwise been engaged in any transactions designed to defeat creditors; or to suggest that whatever assets the plaintiff company has generated through it trading over the 16 years it has been in business have been made unavailable to creditors in some way or otherwise dealt with inappropriately. The second aspect of the evidence emphasised by the defendant is the inference of a significant period of losses by the plaintiff which it contends can be drawn from the director’s affidavit. It will be recalled that Mr Costa said that the plaintiff had been profitable until six years ago, and that it had now returned to profitability. I have already addressed the defendant’s contention that these assertions of profitability should be afforded little weight. But the defendant also contends that it can be inferred from the director’s evidence that the plaintiff had recently experienced several years of losses and that this is relevant to the existence of the requisite “reason to believe” that the plaintiff will be unable to pay an adverse costs order.

Ratio Decidendi

Legal Principle Established

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