Master Engineers Pty Ltd (In Liq) (ACN 601 164 069) v Ulagapipargasm & Ors (Ruling)
[2019] VCC 2261
•20 December 2019
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
GENERAL LIST
Case No. CI-19-02103
| MASTER ENGINEERS PTY LTD (IN LIQUIDATION) (ACN 601 164 069) 164 069) | Plaintiff |
| v | |
| JEYATHEEPAM ULAGAPIPARGASM & ORS (ACCORDING TO SCHEDULE ATTACHED) | Defendants |
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JUDGE: | HIS HONOUR JUDGE SMITH | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 7 November, 10 December 2019 | |
DATE OF RULING: | 20 December 2019 | |
CASE MAY BE CITED AS: | Master Engineers Pty Ltd (In Liq) (ACN 601 164 069) v Ulagapipargasm & Ors (Ruling) | |
MEDIUM NEUTRAL CITATION: | [2019] VCC | |
RULING
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Subject: PRACTICE AND PROCEDURE
Catchwords: Security for costs – plaintiff company in liquidation – Order 62 of Rules of Court – s1335 of the Corporations Act 2001 – exercise of discretion to refuse order sought by defendants – appropriate quantum of security
Legislation Cited: Corporations Act 2001; Evidence Act 2008
Cases Cited:Bell Wholesale Co Pty Ltd v Gates Export Corp (No 2) (1984) 2 FCR 1; Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148; Ryberg Telecommunications Pty Ltd (in liquidation) v Optus Mobile Pty Ltd [2011] NSWSC 1268
Ruling: Summons dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr R Harris | P&B Law |
| For the Defendants | Mr C Twidale | NOH Legal |
HIS HONOUR:
1 In this proceeding, the plaintiff company (in liquidation) claims against the 1st defendants in respect of:
· Loans by the plaintiff to him; and
· Shares issued to him.
There are claims made by the plaintiff against other defendants but these are not the subject of this application.
2 By Summons dated 11 October 2019, the 1st defendant seeks an order for security for costs against the plaintiff. He seeks further orders that until such security is provided, the plaintiff’s claim against him be stayed.
3 In his defence, the 1st defendant denies the plaintiff’s allegation that he is indebted to it in relation to the alleged loans. In particulars to paragraph 3 of his defence, the 1st defendant pleads that he cannot presently verify the veracity and methodology employed by the plaintiff in making its calculations of the debt. This does not amount to a clear denial of the claim and appears merely to put the plaintiff to its proof in respect of that claim.
4 In relation to the alleged debt relating to the issue of shares by the plaintiff to him, the 1st defendant alleges that, since the incorporation of the company, he has paid or advanced in excess of $657,033.20 to the plaintiff, “part of which was in full payment of the share subscription cost of the 2,500 Founder’s Shares and 12,500 Ordinary Shares”. In other words, he pleads that he has paid in full for the shares issued to him.
5 Following submissions by the parties on 7 November 2019, I ordered that:
· By 21 November 2019, the 1st defendant provide further and better particulars of the payment of the sum of $657,033.20 as alleged in paragraph 9 of his defence.
· By 28 November 2019, the 1st defendant make discovery of relevant documents and make such documents available for inspection by the plaintiff.
· By 5 December 2019, there be leave for the plaintiff to file and serve a further affidavit dealing with the preparedness or otherwise of one or more of the plaintiff’s creditors to fund all or part of the security for costs sought by the 1st defendant in this Summons.
· The matter be adjourned part-heard to a date not before 5 December 2019.
6 The matter was refixed for hearing of the Summons on 10 December 2019. On that date I had anticipated that one or both parties would make further submissions in relation to the orders sought based on the documents discovered by the 1st defendant, further particulars provided by the 1st defendant, and any further affidavits filed by the parties.
7 On 10 December 2019, I was informed by the parties that:
· On 21 November 2019, the 1st defendant had filed and served particulars of the allegation of payment of the sum of $657,033.20 as alleged by him.
· On 5 December 2019, the plaintiff filed and served an affidavit sworn by Gideon Rathner (liquidator of the plaintiff) concerning his unsuccessful requests to creditors of the plaintiff to contribute to all or part of the security for costs sought by the 1st defendant.
· At approximately 7.30pm on 9 December 2019 (the previous evening), the 1st defendant served an affidavit of documents upon the plaintiff’s solicitors. These were some 51 documents consisting of some 300 pages. No documents had, by that time, been made available for inspection. The plaintiff’s solicitors had had no opportunity of inspecting such documents by the commencement of the adjourned hearing on 10 December. I accept that the plaintiff had not had the opportunity to inspect and fully assess the relevance of any of them.
8 The plaintiff is in liquidation and it is conceded that it is unlikely ever to be able to fully meet any costs order against it should it be unsuccessful in the proceeding.
9 Section 1335(1) of the Corporations Act 2001 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.” [My Emphasis]
10 A similar power is given to this Court by Order 62 of the Court Rules.
11 Counsel for the parties appear to be in agreement that the application involves a three stage process:
(a) Firstly, the applicant must establish the ground referred to in Order 62 of the Rules or s1335 of the Act – that is, is there reason to believe that the corporate plaintiff will be unable to pay the costs of the defendant if the defendant is successful in his, her or its defence? I am satisfied here that such ground has been established.
(b) Secondly, if the ground has been established, whether as a matter of discretion, an order should be made. [I shall return to this aspect below].
(c) Thirdly, what is the appropriate quantum of any such order for security?
12 Matters of relevance in relation to this application include:
(a) That the plaintiff in the proceeding is the company in liquidation rather than the liquidators personally;
(b)The plaintiff’s concession that it is unlikely that it will be able to fully satisfy any order for costs made against it;
(c)That, in my view, the plaintiff’s case against the 1st defendant appears to be strong. It does not appear that it is bringing the case merely to harass the 1st defendant;
(d)There appears to be no creditor or person who, in effect, stands behind the company, and who stands to benefit from the litigation if it is successful, and prepared to fund security for the 1st defendant’s costs; and
(e)It is likely, in my opinion, that the order sought by the 1st defendant would frustrate the plaintiff’s litigation.
13 I accept that it is not for the party seeking security to establish that shareholders or creditors who stand behind the company and who are likely to benefit from the litigation, if it is successful, are also without means.
14 I accept that normally, in the case of a company in liquidation resisting an order for security on the ground that the granting of security will frustrate the litigation, it is for the company to raise the issue of the impecuniosity of those whom the litigation will benefit and prove the necessary facts.[1]
[1]Bell Wholesale Co Pty Ltd v Gates Export Corp (No 2)(1984) 52 ALR 176 at 179-180
15 I acknowledge that where the plaintiff is a company in liquidation and not the liquidator, then security for costs will more readily be ordered unless the company proves that those who stand behind the company and would benefit from the litigation are unable to provide security.[2] However, I do not consider that this is some mandatory course to be taken by the Court. Rather, the Court is required to examine all of the circumstances of the case to establish how its unfettered discretion should be exercised.
[2]Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 (‘Green’) at [45]
16 Counsel for the plaintiff submits and I accept, that it is relevant to the exercise of my discretion that the impecuniosity of the plaintiff company is largely caused by the 1st defendant’s conduct. The 1st defendant’s failure to pay for the shares in question or to repay the loan is effectively a cause of its impecuniosity.
17 The 1st defendant pleads that he has paid the sum in excess of $657,000 to the company, which sum included the payment for the shares issued to him. However, on the material put before me, he has provided no proper particulars of such payment nor evidence of it.
18 The particulars provided in response to my direction of 7 November 2019 are, in my view, inadequate. They consist, in the main, of a list of some 62 items setting out dollar amounts totalling $657,033.20 that are mostly unidentified, save for what appear to be numbers of cheques drawn on two Bank of Queensland Bank accounts which I accept are accounts in the name of the 1st defendant. It appears that the 1st defendant’s case is that he personally paid amounts owed by the company to various persons presumably by way of loan. I consider that it would have been a relatively simple matter to identify the recipient of each cheque and particularize what the payment was for. No cheque butts have been provided. In only a small percentage of cases are the recipients named. There are no details as to what the payments concerned. Insofar as these payments related to invoices from persons in relation to work or services performed for the company, no invoices have been discovered. I conclude that there are no adequate particulars of payment of those sums.
19 Plaintiff’s Counsel further submits that it is relevant here that the plaintiff’s claims are made against a current director and not against some third party unconnected with the plaintiff’s affairs. He submits that the claims relate to matters of public interest, as directors of companies owe duties to the company to act in the best interests of the company and not themselves.
20 Further, it is submitted (and I accept) that the litigation is not for the benefit of those who stand behind the company. It is submitted, and I accept that, those persons are the 1st and 2nd defendants. The 1st defendant is a director of the company and they are both shareholders of the company. Rather, the proceeding is for the benefit of sundry creditors of the plaintiff. Liquidators are officers of the court and they have a duty to take reasonable steps to recover what they can for the benefit of creditors and, indeed, shareholders of the plaintiff.
21 Further, it is submitted that the only persons who could conceivably fund this litigation are the director (that is, the 1st defendant) and the shareholders of the company (that includes the 1st defendant and the 2nd defendant).
22 I am satisfied that payment of security for costs will stultify the plaintiff’s claim. It has no funds and it appears that no creditor is prepared to fund the litigation.
23 My discretion is unfettered. Having taken all of the circumstances into account, I have come to the conclusion here that I should exercise that discretion in the plaintiff’s favour.
24 I take into account that it was the 1st defendant who placed the plaintiff company into liquidation, thus bringing about its current status.
25 Further I take into account that:
(a) The application is brought at a time that there have been no proper particulars provided regarding the payment by the 1st defendant for shares issued to him by the company. The liquidator has been unable to locate evidence of any payment in respect of issued shares.
(b) In the claim against the 2nd defendant, it appears that he has conceded that he has not paid for the relevant shares issued to him. He has pleaded in his defence that the 1st defendant had told him that no such sum was payable by him in relation to the same number of shares issued to him by the company as were issued to the 1st defendant. This increases the doubt in my mind that the 1st defendant would have paid for the shares issued to him.
(e) The application was brought by the 1st defendant prior to the completion of discovery by him and prior to the provision of proper particulars of payment of the amount of $657,033.20 as alleged by him.
(f) The evidence shows that there has been no claim made to date by the 1st defendant to the liquidator in respect of any monies claimed to be owing by the company to him. The loan accounts of the company’s shareholders do not confirm the 1st defendant’s allegation that he is owed any substantial sum by the company.
(g) In an email dated 9 May 2018 from the plaintiff’s former accountant to the 1st defendant (Exhibit HFD-3 to the affidavit sworn by Hugh Fletcher Denton on 1 November 2019), there was no reference to any monies owed to the 1st defendant by the company. The 1st defendant has not claimed to the contrary.
(h) Exhibit HFD-4 to Mr Denton’s affidavit sworn on 1 November 2019 is a memorandum from the legal firm, Gadens, to the 1st defendant dated 27 June 2018. The 1st defendant claims that this document is subject to solicitor/client privilege and objects to it being tendered. A reading of the memorandum and the Gadens invoice for costs relating to it makes it clear that it is a memorandum to the plaintiff, and addressed to the 1st defendant in his capacity as a director of the plaintiff. It is clear from the terms of that memorandum that the client for whom Gadens prepared the memorandum is the plaintiff and not the 1st defendant in person. In any event, the memorandum was plainly prepared for the purpose of advising the company on matters of how the company’s affairs should be handled.
(h) In those circumstances, any privilege in that memorandum is that of the plaintiff and not the 1st defendant. In the circumstances, I will permit that memorandum to be tendered.
(i) Further, I note that the memorandum has previously been discovered by the plaintiff company in this proceeding. Plainly, it has been in the company’s possession for some time. The inference I am able to draw is that, even if the memorandum was prepared for the 1st defendant personally, it was provided by him to the company at some earlier time. Any privilege that the 1st defendant may have had in relation to the memorandum has, I find, been waived.
(j) The significance of the memorandum is set out in paragraph 12 of it, where the author advised the company to determine what further capital the 1st defendant could inject into the company to pay out creditors, including “by way of paying to the company the subscription price for the 2,600 founder shares and 12,500 ordinary shares that have been issued to [the 1st defendant’s] shareholding entity (being $150k)”. I consider that this memorandum is inconsistent with any suggestion that the shares in question had been paid for previously.
(k) Further, I note that in paragraph 7 of the defence of the 2nd defendant, he admits that he also was issued with 2,500 founder class shares at $10 per share (as was the 1st defendant). He alleges that at the time of the issuance of the founder shares, the 1st defendant represented to him that his total paid up capital for the founder shares was $10. That is, not $10 per share, but $10 in total. That, to my mind, would make it unlikely that the 1st defendant would have paid for his issued shares at any greater price.
26 On the basis of the above material, I conclude that the plaintiff’s claim against the 1st defendant in this proceeding is a strong one.
27 I take into account the comments of Black J in Ryberg Telecommunications Pty Ltd (in liquidation) v Optus Mobile Pty Ltd,[3] that the strength of the plaintiff’s claim should normally be treated as a neutral factor, particularly in a complex case where the assumption should be made in a security for costs application that the defendant will ultimately succeed in the proceeding so that costs will be payable.[4] Here I am not convinced that the plaintiff’s claim is properly described as a complex case.
[3][2011] NSWSC 1268
[4]Ibid [11].
28 Nevertheless, I consider that the strength or weakness of the plaintiff’s case is, in all of the circumstances, a relevant matter to take into account, although by no means a decisive one.
29 Further, I consider the circumstances surrounding this dispute between the parties are unusual. It was the 1st defendant himself who placed the plaintiff company in liquidation.
30 I accept that there are no creditors of the company who would be likely to take over the funding of this litigation. I am able to conclude that none of the debts owed to creditors are of a size that might tempt such a creditor to fund the litigation when the cost of that litigation would likely be well in excess of the amount of their debt.
31 It might normally be the case that shareholders in a company in liquidation would be likely to benefit by proceedings brought by such a company seeking to recover monies owed to it by other persons. Here, those other persons (the defendants) are the sole shareholders in the company and are hardly likely to fund any legal proceeding against themselves.
32 Counsel for the 1st defendant has submitted that the test regarding availability of alternative funding of security for costs is that the company must prove that those who stand behind it are unable to provide security.[5] He submits that Mr Rathner’s affidavit sworn 5 December 2019 merely shows that no creditor, to date, has indicated a willingness to provide security as opposed to an inability to do so.
[5]Green at [45]
33 I do not consider that such authority assists the 1st first defendant here. Here, those that stand behind the company are, in my view, the 1st and 2nd defendants. I am able to infer that they will not fund any aspect of the proceeding against them. The very issuing of this Summons confirms this.
34 Secondly, I consider that the use of the phrase “unable to provide security” (my emphasis) must depend upon the facts of the particular case. I accept the submission of Counsel for the plaintiff that, if it were otherwise, any application for security for costs where an entity such as the Australian Taxation Office was a creditor of a company in liquidation must succeed - unless the company proved that the ATO was financially unable to provide security for costs sought. It is unlikely that the Courts in Green and in Bell Wholesale Co Pty Ltd v Gates Export Corporation[6] intended that this would be so.
[6](1984) 52 ALR 176.
35 In all the circumstances, I consider that, in this unusual proceeding, it is a just exercise of my unfettered discretion not to order the plaintiff company to provide security for costs.
36 In any event, if I am later found to have erred in law in the exercise of that discretion I consider the amount of security sought of $65,000, in relation to the period up to but not including the trial, is excessive. I consider that a sum in the region of $30,000-$35,000 to be adequate. In any event, I would require the assistance of a person with appropriate expertise in the costing of litigation matters on a standard basis to have confidence in any proposed figure.
37 I consider that it follows that I should order:
· The 1st defendant’s Summons dated 11 October 2019 is dismissed; and
· The 1st defendant pay the costs of the plaintiff of and incidental to the Summons, to be assessed, in default of agreement, by the Costs Court on the standard basis.
SCHEDULE OF PARTIES
BETWEEN
| MASTER ENGINEERS PTY LTD (IN LIQUIDATION) | Plaintiff |
| v | |
| JEYATHEEPAM ULAGAPIPARGASM | First Defendants |
| THAMBIPILLAI URUTHTHIRAN | Second Defendant |
| SRISANTHINE URUTHTHIRAN | Third Defendant |
| REGISTRAR OF TITLES | Fourth Defendant |
| CITIGROUP PTY LTD (ACN 004325080) | Fifth Defendant |
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