Mannix Electrical Pty Ltd v Belport Pty Ltd - [2019] SASC 159

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

DOYLE J: This is an appeal from the 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.
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].
The term “credible” suggests “a requirement that evidence to be relied upon has some characteristic of cogency,” obliging a defendant “to show that the material before the Court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings.”[3]
[3] Warren Mitchell Pty Ltd v Australian Maritime Officers’ Union (1993) 12 ACSR 1 at 5.
At the same time, the threshold requirement has also been described as an undemanding test, and as imposing a low or fairly modest threshold.[4]
[4] Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360 at [25]; Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [16]; Meni’s Tailoring and Alterations Pty Ltd v Jeanswest Corporation Pty Ltd [2003] FCA 1108 at [4]; Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [11]-[13].
It is also to be recognised that the nature of a security application means that the issue of the plaintiff’s financial position cannot be approached in any overly strict manner. As Macfarlan JA (with whom Ward JA and Tobias AJA agreed) explained in Cornelius v Global Medical Solutions Australia Pty Ltd:[5]
The words "reason to believe" acknowledge that on an application for security for costs, as a matter of practicality, a court will not be able to undertake as thorough an examination of the financial position of a plaintiff as it would if an issue as to that arose at a final hearing. Almost inevitably, the court's assessment will be a preliminary one based on limited materials. Nevertheless, for the power to order security to arise, the outcome of the assessment must be that the court considers that there is "reason to believe" that the plaintiff "will be" unable to meet an adverse costs order. A conclusion that there is a risk that that will, or may, be the case is insufficient.
[5] Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301 at [16].
Despite the last sentence from this passage, there are authorities that have described to the threshold requirement as involving merely an assessment of whether there is a risk that the plaintiff will be unable to pay an adverse costs order.[6] However, in Monto Coal 2 Pty Ltd v Sanrus Pty Ltd,[7] the Queensland Court of Appeal adopted the reasoning of Macfarlan JA in Cornelius v Global Medical Solutions Pty Ltd, and in particular his criticism of this risk assessment approach. In that case, after referring to the High Court’s observations as to the meaning of the expression “reason to believe” in George v Rockett,[8] Gotterson JA (with whom McMurdo JA and Boddice J agreed) said:[9]
I draw from these observations that for a reason to believe that a fact will exist, the objective circumstances must be sufficient to incline the mind towards accepting, rather than rejecting, that the fact will exist. By way of contrast, the requisite belief is not merely that the circumstance may come in to existence, or that there is some risk it may. It is a belief that the fact will come into existence.
[6]    Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [15]; Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [12].
[7]    Monto Coal 2 Pty Ltd v Sanrus Pty Ltd [2018] QCA 309 at [41]-[42].
[8]    George v Rockett (1990) 170 CLR 104 at 116.
[9]    Monto Coal 2 Pty Ltd v Sanrus Pty Ltd [2018] QCA 309 at [43].
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.
Mr Costa deposed that the plaintiff carried on business in its own right, and not as a trustee. He also deposed that the property on which the Kidman Park premises was operated was owned by a separate company, Belport Properties Pty Ltd, as trustee for the Belport Properties Trust. Mr Costa and his wife are the directors of Belport Properties Pty Ltd and appointors of the Belport Properties Trust. The Land Services SA valuation for the property is $770,000. It is subject to a mortgage in respect of loans totalling $481,475.63.
In correspondence, and in his affidavit, Mr Costa also indicated a preparedness to provide an undertaking or guarantee, and to cause his wife and Belport Properties Pty Ltd to do the same. The precise terms of what was being offered varied, and the Master ultimately directed that the undertakings be filed. However, in their filed form, the undertakings were expressed to operate only if security were to be ordered, and even then were confined to an undertaking to meet an adverse costs order up to the amount of the security sought ($44,844), and not to deal with the Kidman Park property.
The Master’s reasons
The Master identified the threshold requirements under both r 194(1)(a) and s 1335. I have already mentioned the threshold requirement under the latter. The former has a cumulative threshold requirement that the plaintiff be a nominal plaintiff and be insolvent or have insufficient resources to meet an order for costs.
His Honour noted that the onus was on the defendant to establish the threshold requirement under one or other of the two bases for security put forward. His Honour added that the question of onus was relevant in this case given the sparsity of the evidence.
His Honour held that the threshold requirement of r 194(1)(a) was not established, essentially because it was not established that the plaintiff was a nominal (in this case, a trustee) plaintiff. While his Honour’s conclusion in this respect is not challenged on appeal, and hence irrelevant for present purposes, I mention it only because his Honour’s reasoning in respect of the threshold requirements of r 194(1)(a) and s 1335 was to some extent intertwined.
Having mentioned that the Kidman Park property from which the plaintiff traded was held by Belport Properties Pty Ltd, his Honour added:
It has been orthodox accounting advice for a long time that, in respect of a trading business, it should use one company to carry on the trading and another company to hold the assets required for the trading. The limited material before the Court suggests that is what has occurred here.
The Master then observed that there was limited evidence before the Court as to the financial position of the plaintiff. His Honour referred to the affidavit of the director, Mr Costa, which he described in the following terms:
Its director has sworn an affidavit asserting that the business has returned to profitability since it ceased its relationship with the defendant and that the profit margins have increased considerably. The evidence is very general and limited weight can be attached to it. There is no other evidence of the financial position of the plaintiff.
The Master next made reference to the complaints of the defendant that it wrote to the plaintiff’s solicitors seeking the details of its financial position, but that the information sought had not been provided. Having reminded himself that there was no onus on the plaintiff, his Honour said that the failure to provide the information sought was not evidence of the plaintiff’s financial position.
In relation to the plaintiff’s limited paid-up capital, the Master referred to a passage from Finn J’s reasons in Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA[10] (see later) to the effect that this is not ordinarily a relevant consideration.
[10] Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA [2007] FCA 56.
His Honour then concluded his reasoning in relation to the threshold requirement of s 1335(1) in the following terms:
The defendant points to a number of matters, including the limited paid-up capital of the plaintiff. There is no evidence before the Court by which it can be satisfied that there is “a reason to believe” that the plaintiff will be unable to meet an adverse costs order. Of course, there is a risk that the plaintiff may not be able to meet an adverse costs order. That is not sufficient.
Having concluded that the defendant failed to establish the threshold requirements under either r 194(1)(a) or s 1335, there was no occasion for the Master to exercise his discretion to order security. However, his Honour indicated that had he been called upon to exercise the discretion, the undertakings that had been provided meant that it may not have been appropriate to order security for costs in any event.
The appeal
The defendant’s appeal challenges the Master’s conclusion that the threshold requirement was not satisfied.
There is no doubt that in circumstances where the threshold requirement under s 1335(1) is made out, the decision whether to grant security involves the exercise of a discretion. As such, any appeal from such a decision would be subject to an application of the principles of appellate restraint in House v The King.[11]
[11] House v The King (1936) 55 CLR 499 at 505; Adelaide (SA Pools & Spa) Manufacturing and Installation Pty Ltd v Westcourt General Insurance Brokers Pty Ltd [2016] SASC 60 at [22].
The court’s anterior conclusion or decision as to whether the threshold requirement has been made out is not discretionary. However, in recognition of the evaluative nature of the issue, and the context and manner in which it is to be determined, it has been held that appellate intervention in respect of this issue is governed by the principles in House v The King. As Macfarlan JA explained in Cornelius v Global Medical Solutions Australia Pty Ltd:[12]
Whilst the decision whether or not to grant security is discretionary, the threshold decision as to whether the power to do so exists is not discretionary in the strict sense of that word as it does not result from the judge making a choice after consideration of a number of factors (see Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; 234 CLR 124 at [37] - [40]; Finch v Telstra Super Pty Ltd [2010] HCA 36; 242 CLR 254 at [29]; Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission [2000] HCA 47; 203 CLR 194 at [19]). Rather, the outcome is determined by the findings of fact that the judge makes. Nevertheless, it has features warranting the application on appeal of the same principles as are applicable to appeals from discretionary decisions. To succeed on appeal against a discretionary decision, an appellant must establish material error in the making of a finding of fact upon which the decision is based, in the taking or not taking into account of material factors or in some other matter of principle. If no specific error can be established, error may be inferred if the decision is "unreasonable or plainly unjust" (House v The King [1936] HCA 40; 55 CLR 499 at 505). These bases of challenge differ from those applicable to an ordinary, all grounds appeal where the appellate court, whilst giving respect and weight to the conclusions of the trial judge, must give effect to its own views (Warren v Coombes [1979] HCA 9; 142 CLR 531 at 551 - 2), subject to limitations applicable where questions of credit are involved (Fox v Percy [2003] HCA 22; 214 CLR 118 at [28] - [29]).
The decision here on the threshold question involved an evaluation of a significant amount of financial and other information. Bearing in mind particularly that the assessment was necessarily conducted upon a preliminary basis and on limited materials (see [16] above), it was one in relation to which views could reasonably differ. As in the instance of a decision as to whether a member of a superannuation scheme was unlikely ever to engage in "gainful Work", there were "factors to be examined which [were] difficult to weigh, impressions to be formed, and judgments to be made" (Finch v Telstra Super Pty Ltd at [29]). Like the jurisdictional question of whether an applicant for an order under the Family Provision Act 1982 was left without provision for his or her proper maintenance, education and advancement in life (Singer v Berghouse [1994] HCA 40; 181 CLR 201 at 212) and the apportionment of responsibility in employment accidents (Tarabay v Leite [2008] NSWCA 259 at [29] - [31]; Jones Lang LaSalle (NSW) Pty Ltd v Taouk [2012] NSWCA 342 at [84]), the principles in House v The King in my view govern appellate review of the present threshold question.
[12] Cornelius v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301 at [22]-[23].

It is appropriate that I follow this approach. That said, as the decision in relation to the threshold issue is not a discretionary one, I would prefer to describe the appeal as one governed by principles akin to those in House v The King. In other words, where the decision under appeal is one involving an evaluative assessment in relation to which views could reasonably differ, or an area of decisional freedom, then the identification of error in that decision must take account of this. In such circumstances, the identification of error requires more than that the appellate court would have reached a different decision. It requires a conclusion that the judge below’s evaluative assessment miscarried in some way, or that the decision was outside of the area of decisional freedom reposed in that judge.[13]
[13] Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission (2000) 203 CLR 194 at [19]; Dwyer v Calco Timbers Pty Ltd (2008) 234 CLR 124 at [37]-[40].
The threshold requirement
On appeal, the defendant contends that the Master erred in holding that the defendant had not satisfied the threshold requirement of s 1335 in circumstances where the plaintiff:
1.   has only nominal paid-up capital;
2.   does not own any real property;
3.   conducts its business in a business structure arranged by its principal, Mr Costa, in a manner in which there is a separation of ownership of the business from ownership of the land on which the business is conducted, which land is owned by Belport Properties Pty Ltd (also controlled by Mr Costa);
4.   operates a business that has not been profitable for the last six years;
5.   operates a business that has reduced from two retail outlets to one retail outlet; and
6.   has declined to provide the financial information sought by the defendant.
Treating the appeal as subject to the strictures of House v The King, the defendant pitched its argument on appeal in terms of the Master having erred in failing to attach any significance to the plaintiff’s limited paid up capital, and its refusal to provide the financial information sought from it by the defendant. Alternatively, the defendant contended that the Master erred in that his conclusion that the threshold requirement had not been satisfied was unreasonable or plainly unjust in the sense required by House v The King.
Relevance of paid up capital
In discounting the significance of the plaintiff’s nominal paid-up capital, the Master relied upon the following passage from the reasons of Finn J in Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA:[14]
… it now seems reasonably well accepted that the paid up capital of an applicant company is not as of course relevant in proceedings of this variety because the capital structure itself will ordinarily be irrelevant to the ability to pay. As Heerey J observed of a context in which the paid up capital of a company was only $12 in Microcorp Pty Ltd v Terran Computers Pty Ltd …:
“Today companies with very small paid up capital may be solvent and prosperous while others with balance sheets showing impressive sums in this regard may have no more than wistful memories of past glories to show to creditors.”
[14] Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA [2007] FCA 56 at [12].
Applying this approach, I recently accepted the general irrelevance of the paid-up capital of a company to its asset position in Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd,[15] although I expressed the position in the more ambiguous terms that the plaintiff’s limited paid-up capital was “no real indicator” of its asset position.
[15] Mathew (SA) Nominees Pty Ltd v Belconnen Automotive Pty Ltd [2019] SASC 39 at [89].
The defendant contends that it is going too far to say that a plaintiff’s paid-up capital is irrelevant, or even generally or ordinarily irrelevant. It contends that Finn J’s observations should be understood as meaning merely that while the paid-up capital may not of itself have any relevance, the context or surrounding circumstances may give it a relevance.
In this respect, the defendant contrasts the approaches in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd[16] and Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA.[17]
[16] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241.
[17] Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA [2007] FCA 56.
In the first of these cases, the anticipated costs of the defendant were $44,000; the plaintiff company’s paid-up capital was $4,001; it had no registered land in its name; from 1990 to 1995 (the last date on which it was required to file financial returns) it suffered operating losses after tax, save in 1995; there was no evidence of any relationship between the parties other than that the litigation concerned a contractual dealing; and the plaintiff did not file any answering affidavit in response to the application for security. Pidgeon and Owen JJ considered that the absence of land combined with the low share capital gave rise to an appearance that there was reason to believe that there were no assets to meet the costs.
The defendant also relies upon Jownal v Commonwealth Bank of Australia[18] and Treloar Constructions Pty Ltd v McMillan[19] as further illustrations of the potential relevance, depending upon the surrounding circumstances, of a plaintiff’s limited share capital.
[18] Jownal v Commonwealth Bank of Australia [1999] SASC 72 at [33]-[34].
[19] Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302.
On the other hand, the defendant contends that the limited paid-up capital of the plaintiff in Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA[20] was ultimately irrelevant only by reason of the context that the plaintiff appeared to have a substantial business that it was conducting upon a significant property, and that the relationship between the parties had not given the defendant any cause for concern about the financial circumstances of the plaintiff.[21] As Finn J explained in that case:[22]
For the reasons given by Heerey J [in Microcorp Pty Ltd v Terran Computers Pty Ltd] to which I earlier referred I do not consider that the capital structure of [the plaintiff] provides reason suggesting it may not have either assets in excess of half a million dollars or else the capability to accommodate liabilities in such a sum. There is no credible testimony before me to suggest that it does not. It has been able to acquire a very expensive machine and it is the owner of what appears to be a significant business. I infer this both from the property holding it has and from the size and pleaded capacity of the machine purchased from [the defendant]. The character and duration of the prior business relationship of the parties and the fact that [the plaintiff] conducts a business on substantial land that it owns places the circumstances of this matter in quite a different field of discourse from those in FFE Minerals Australia Pty Ltd.
[20] Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA [2007] FCA 56.
[21] Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA [2007] FCA 56 at [13].
[22] Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA [2007] FCA 56 at [14].
The Master in this case made reference to the plaintiff’s limited paid-up capital. While his Honour did not say so in express terms, it would appear that he attached little, if any, significance to this matter in the circumstances of the present case. Certainly he did not regard it as sufficient to give rise to the requisite “reason to believe.”
I am not satisfied that the defendant has established any error in the Master’s treatment of the plaintiff’s paid-up capital. Applying the approach of Finn J in Olivaylle Pty Ltd v Flottweg GMBH & Co KGAA, I consider that a company’s limited paid-up capital will ordinarily be of little significance in an application for security for costs. To the extent that it may in some cases take on a greater significance, that will be largely a function of the context or colour that arises from the surrounding circumstances, rather than a function of the limited paid-up capital of itself. In my view, that is what explains the significance of the plaintiff’s limited share capital in the authorities relied upon by the defendant.
I will consider the relevance of the surrounding circumstances in the present case later in these reasons. It is enough for present purposes to conclude, as I do, that the defendant has not demonstrated any error in the Master’s approach to the plaintiff’s limited capital share.
Failure to provide financial information
The defendant relies upon its 4 December 2018 letter in which it set out its concerns in relation to the plaintiff’s financial position and requested that it provide certain financial information. The defendant complains that not only did the plaintiff not respond to this request, but also, only two days before the 18 April 2019 hearing of the application for security, it filed the affidavit of Mr Costa referred to earlier in these reasons, making what the defendant contends was “a general assertion that [the plaintiff] had become ‘profitable’, unsupported by documents and of limited weight.”
The defendant quite rightly points to the limited weight that should be attached to the director’s affidavit assertion of a recent return to profitability given the general terms in which it was expressed and the failure to put before the court any of the financial documentation (such as financial statements or management reports) that one expects would have been available to the director. However, as the defendant acknowledges, the Master accepted the defendant’s submission in this regard, and acknowledged that only “very general and limited weight” could be attached to the director’s assertion of a return to profitability.
As recounted earlier in these reasons, the Master also referred in his reasons to the plaintiff’s failure to respond to the defendant’s request for financial information. Having reminded himself that there was no onus on the plaintiff, his Honour said that the failure to provide the information sought was not evidence of the plaintiff’s financial position.
However, the defendant contends that the Master erred in attaching no weight to the plaintiff’s failure to respond to the defendant’s request for financial information. In support of this contention, the defendant relies upon the following passage from the reasons of Robb J in Re Beechworth Land Estates Pty Ltd:[23]
However, in my view, in cases where the amount of the legal costs that a plaintiff company may be ordered to pay is substantial in relative terms, and there is some evidence that gives rise to concern as to the financial capacity of the company, it is relevant for the Court to have regard to the response of the company to a reasonable request by the defendants that the company provide, on a proper basis, adequate evidence to confirm its financial capacity. I regard the requests made by the defendants' solicitors in this case as being reasonable. Not only did First Debenture decline to provide any positive response at all to these requests, but it failed to produce the documents, that it was required to produce to the Court, by the notice to produce that was served by the Vangory parties. First Debenture did not apply to set aside the notice to produce. It did not give evidence to explain why it did not produce the documents required. It simply did not respond at all. It is not therefore simply a matter of First Debenture not tendering evidence available only to it to displace some appearance of financial incapacity that may be inferred from other evidence available to the Court. First Debenture has denied the defendants the ability to consider and rely upon that evidence by reason of its unexplained and unwarranted failure to comply with the notice to produce. That is a considerably more potent reason for the Court to decide that there is the necessary “reason to believe” than if First Debenture had simply not tendered evidence of its own financial records.
While it is necessary for the defendants to persuade the Court that the evidence justifies a conclusion that there is reason to believe that First Debenture will be unable to pay their costs if ordered to do so, the Court should not permit a plaintiff company to avoid an order for the provision of security for costs by “stonewalling” the defendants, by refusing to comply with a notice to produce returnable at the hearing of an application for an order for security for costs.
It will be the case for a substantial number of corporate plaintiffs that the only source of proof of their financial capacity will be their own financial records, which are solely within the knowledge of the companies. The capacity of defendants to obtain orders for security for costs should not always be dependent upon the happening of events, such as the filing of winding up applications, execution of securities, or non-payment of debts, which may provide objective evidence to defendants of the likely financial incapacity of the companies. There is a point where, in the face of some evidence that casts doubt on the financial capacity of a plaintiff company, a point-blank refusal to provide adequate internal documentary evidence of the financial capacity of the company, will justify a finding that the necessary reason to believe exists.
[23] Re Beechworth Land Estates Pty Ltd (2015) 298 FLR 233 at [113]-[115].
While it may be accepted that Robb J attached some significance to the plaintiff’s failure to respond to the defendants’ reasonable requests for financial information, there are two important points that emerge from the above passage. The first is that Robb J was dealing with circumstances in which there was not only a failure to respond to a request for such information by letter, but also a failure to comply with a notice to produce seeking the same information. There was no equivalent failure to comply with the court processes in this case. Further, Robb J made it clear that the failure to respond to a request for financial information will only be relevant to, and assist in, reaching a conclusion that the threshold requirement is satisfied in a case where there is other evidence that casts doubt upon, or gives rise to a concern about, the financial capacity of the plaintiff.
In respect of this last consideration, other authorities make it plain that because the onus remains on the defendant (as the applicant for security) the courts must be astute not to use a plaintiff’s failure to proffer information or evidence as a make-weight or to fill gaps in the defendant’s evidence. As Vickery J explained in Amcor v Barnes:[24]
[24] Amcor v Barnes [2015] VSC 90 at [39]-[44].
I accept the approach of White J in Blackbird Entertainment,[25] in reasoning that the rule in Jones v Dunkel[26] is limited to assisting the court to draw an inference which is available from circumstantial evidence. The absence of evidence to the contrary may not, however, be directly converted into circumstantial evidence itself tending to prove the fact in issue against the silent party. In other words, the rule cannot be used to fill gaps in the evidence or to convert conjecture or suspicion into evidence in the nature of inference.
Accordingly, a failure to provide financial information in the face of a valid Court process, either in answer to a subpoena or a notice to produce, or in response to a reasonable request on the part of a defendant, may assist or fortify a conclusion based on direct evidence or upon inferences to be drawn from the other evidence as to the inability of the plaintiff to pay the defendant's costs should the defendant be successful.
…
In Christou v Stanton Partners Australasia Pty Ltd[27] Newnes JA, with whom Murphy JA agreed, said:[28]
I also do not accept that the filing by the appellants of an application for security for costs gave rise to some obligation on the second respondent to provide a full account of its financial position. That is to put the cart before the horse. In order to enliven the court's discretion there must be material before it which is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the second respondent would be unable to pay the appellants' costs if the second respondent were to be unsuccessful in the action; mere speculation as to the second respondent's insolvency or financial difficulties is not sufficient: see Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 12 ACSR 1; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 [60]-[61]. In circumstances where the appellants had not troubled themselves to put any material before the court relating to the second respondent's financial position, it was not incumbent upon the second respondent to fill that gap. The second respondent apparently took the view (rightly, in my opinion) that the discretion had not been enlivened and was content to leave the matter at that. It was entitled to do so.
I respectfully adopt this analysis of Newnes JA in Christou.[29]
In the present case, there was no obligation on the part of Achilla to provide a full account of its financial position. I accept that Achilla took the view that the threshold issue could not be answered in favour of the Amcor Parties on the material before the Court, and that the discretion could not be enlivened. It was entitled to take this course and not put on any detailed financial evidence.
[25] (Unreported, Supreme Court of Western Australia, White J, 2 June 1998) at [23].
[26] Jones v Dunkel (1959) 101 CLR 298.
[27] Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176.
[28] Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176 at [34].
[29] Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176.
I acknowledge that there are some authorities that appear to have attached at least some significance to a plaintiff company’s failure to respond to requests for financial information, or to otherwise adduce any evidence of its financial capacity to meet an adverse costs order.[30] However, as with the approach of Robb J in Re Beechworth Land Estates Pty Ltd, the courts have done so only in circumstances where there is other evidence giving rise to concerns or doubts about the plaintiff company’s financial capacity, and being mindful of the fact that the onus remains upon the defendant company to establish the requisite “reason to believe.”
[30] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241 at [11], [25]; Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [26]-[27], [30].
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.
Again, I accept this is a relevant consideration. But in the absence of any information as to the extent of any losses during this period, it does not advance the defendant’s position very far. It may be that the plaintiff’s business was simply marginal or making small losses during the relevant period. In the context of a business of at least a moderate scale, and a 16 year history of trading without any evidence of financial difficulties (either from within the business relationship between the parties or externally), the fact that the business was not profitable during a recent period provides little more than a basis for speculation or conjecture as to the plaintiff’s capacity to meet an adverse costs order.
Finally, I do not attach much significance to the change in the scale of the plaintiff’s business from two premises to one. From the little that is known about why this occurred, it would seem it was a response to the difficult, or at least changed, trading conditions the plaintiff apparently experienced over recent years. While it is consistent with the plaintiff facing difficult or changed trading conditions, it also suggests the plaintiff took steps to address these conditions.
In summary, bearing in mind all of the matters relied upon by the defendant, I accept that the evidence came close to establishing the requisite reason to believe. The present case bears some similarities to the circumstances in cases such as FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd and Treloar Constructions Pty Ltd v McMillan, where the Courts concluded that the threshold requirement had been established. However, mindful that the onus lay on the defendant, and that the evidence suggested a significant trading history on the part of the plaintiff, and even bearing in mind the plaintiff’s limited share capital and refusals to provide the financial information requested by the defendant in the context of the surrounding circumstances as outlined above, there remained an element of speculation and conjecture in the defendant’s submissions as to its concerns that the plaintiff would not be able to meet an adverse costs order. It may be accepted that there is a risk that the plaintiff will not be able to do so, but as the Master correctly observed, the threshold requirement under s 1335(1) requires something more than this.
In all of the circumstances I am not satisfied that the Master erred in his evaluative assessment of the evidence and conclusion that the threshold requirement was not established. Certainly, I do not think it can be said that his conclusion was “unreasonable or plainly unjust” in the House v The King sense.
Exercise of the discretion
Given the conclusion I have reached, it is not necessary for me to consider how the Court’s discretion to order security might have been exercised had the threshold requirement been satisfied.
However, I mention that given the form of the undertakings ultimately filed by Mr Costa, his wife and Belport Properties Pty Ltd, they would not have provided a basis for declining to award security. Not only were the undertakings conditional upon security being ordered (which defeated any suggestion they could be a reason not to order security), but they were also limited in their amount to the estimate of the defendant’s party and party costs to the first day of trial. In order to be an effective answer to an application for security, undertakings offered by a person or persons who stand to benefit from the litigation should ordinarily extend to the amount of any adverse costs order, or at least that person or entity’s available assets.
Beyond this, I observe merely that had the threshold requirement been satisfied, this is generally of itself a significant consideration in favour of an order for security, particularly in circumstances where, as here, there is no suggestion that an order for security would stultify the litigation. On the other hand, as this is not a case where the plaintiff is obviously impecunious, this may not have been decisive.
Conclusion
For the reasons set out, I dismiss the appeal.