McMurray v AIG Insurance Australia Ltd [No 2] - [2018] WASC 391

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   MCMURRAY -v- AIG INSURANCE AUSTRALIA LTD [No 2] [2018] WASC 391
CORAM:   SMITH J
HEARD:   4 DECEMBER 2018
DELIVERED          :   14 DECEMBER 2018
FILE NO/S:   CIV 2962 of 2016
BETWEEN:   FREDERICK WILLIAM MCMURRAY
JENNIFER GRACE MCMURRAY
Plaintiffs
AND
AIG INSURANCE AUSTRALIA LTD
First Defendant
RUSSELL BRESLAND
BRESLAND CONSULTANTS PTY LTD
Second Defendants
TOKIO MARINE & NICHIDO FIRE INSURANCE CO LTD
Third Defendant
MOSMAN BAY CONSTRUCTION PTY LTD
First Third Party
TOKIO MARINE & NICHIDO FIRE INSURANCE CO LTD
Second Third Party
HANS BO KRISTIAN HOLGERSSON trading as HOLGERSSONS COMPLETE HOME SERVICE
First Fourth Party

Catchwords:

Practice and procedure - Security for costs - Whether credible testimony that first third party unable to pay costs of first fourth party - Whether fourth party proceedings are defensive - Principles considered - Turns on own facts

Legislation:

Building Services (Registration) Act 2011 (WA)
Corporations Act 2001 (Cth), s 1335, s 1335(1)
Rules of the Supreme Court 1971 (WA), O 19 r 1(3), O 19 r 8, O 19 r 9, O 19 r 9(2), O 25

Result:

Application dismissed

Category: B

Representation:

Counsel:

Plaintiffs	:	No appearance
First Defendant	:	No appearance
Second Defendants	:	No appearance
Third Defendant	:	No appearance
First Third Party	:	Ms F Stanton
Second Third Party	:	No appearance
First Fourth Party	:	Mr M H Zilko SC

Solicitors:

Plaintiffs	:	No appearance
First Defendant	:	No appearance
Second Defendants	:	No appearance
Third Defendant	:	No appearance
First Third Party	:	Taylor Smart
Second Third Party	:	No appearance
First Fourth Party	:	SRB Legal

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

Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 622
Australia and New Zealand Banking Group Ltd v Dzienciol [2001] WASC 305 (S)
Beach Petroleum NL v Johnson (1992) 7 ACSR 203
Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301
Commercial Developments Pty Ltd v Mercantile Mutual Insurance (Workers' Compensation) Ltd (1991) 5 WAR 208
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241
Johnson v Ribbins [1977] 1 WLR 1458; [1977] 1 All ER 806
McMurray v AIG Insurance Australia Pty Ltd [2018] WASC 144
Melunu Pty Ltd v Claron Constructions Pty Ltd [2004] NSWSC 1064
SP Hay Pty Ltd v Allcorp Pty Ltd [2004] WASC 77
Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129
Veneziano Coffee Roasters WA Pty Ltd v Health Nut Café Pty Ltd [2018] WASC 363
Warren Mitchell Pty Ltd v Australian Maritime Officers' Union [1993] FCA 774; (1993) 12 ACSR 1; (1993) 11 ACLC 1238
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57

SMITH J:

Application for payment of preliminary security for costs

Pursuant to s 1335(1) of the Corporations Act 2001 (Cth) and O 25 of the Rules of the Supreme Court 1971 (WA) the first fourth party, Hans Bo Kristian Holgersson, trading as Holgerssons Complete Home Service (Holgersson) applies for an order that the first third party, Mosman Bay Construction Pty Ltd (Mosman Bay), pay security for costs in the sum of $200,000, as a first tranche of security.
The central reason raised by Holgersson for seeking an order for security for costs is Mosman Bay's financial position.
To invoke the jurisdiction to make an order for security for costs, pursuant to s 1335(1) of the Corporations Act, it must appear to the court on the whole of the evidence there is credible testimony that the corporation will be unable to pay the costs of the applicant for security, if the applicant is successful in its defence.
For reasons that follow, I am persuaded that the jurisdictional requirement in s 1335(1) of the Corporations Act has been met. However, I am not satisfied that an order for security for costs should be made.

Background

Mosman Bay is a construction company. It was engaged by the plaintiffs, Mr and Mrs McMurray (McMurrays), to undertake renovations to a house the McMurrays had purchased in Mosman Park. The renovations commenced in May 2015, and were almost complete by 15 January 2016. During this period of time the house was unoccupied. During the night of 15 to 16 January 2016, a fire occurred which resulted in the whole of the house, including the areas under renovation, being extensively damaged.
Estimates of the loss and damage to the house range:[1]
(a)for the renovations between $900,000 to $1.5 million; and
(b)for the existing house, $3 million to $4.5 million.
[1] Affidavit of Byron Andrew Winburn‑Clarke sworn 31 August 2018 [16].
The cause of the fire is in dispute at least in the third and fourth party proceedings. It is alleged by Mosman Bay and the first defendant, AIG Insurance Australia Ltd (AIG), that the fire was caused by the spontaneous combustion of oil soaked rags within a bin in a room on the ground floor of the house.
The rags said to be the cause of the fire are claimed to be rags used by painters subcontracted to Mosman Bay to apply a product known as Loba HS 2K Impact Oil Colour to stain various timber surfaces in the house.
There is an issue in the proceedings as to the identity of the painting subcontractors. Mosman Bay alleges that the interior painting subcontract was formed with Holgersson. Holgersson pleads that the interior subcontract was formed jointly with himself and another painting subcontractor, being either a company operated by Mark Simpson known as Simmos Home Improvements Pty Ltd or by Mark Simpson personally.
AIG alleges that the interior painting subcontractor was Simmos Home Improvements Pty Ltd.
There are in effect three proceedings before the court.

(A) The principal proceedings ‑ the McMurrays' action

Mosman Bay and Holgersson are not parties to the principal proceedings.
The principal proceedings are instituted by the McMurrays (the owners of the house) and are brought against three defendants. The first defendant, AIG is the insurer of the house. AIG denies liability for damage caused by the renovations under the policy of insurance which it says excludes contract works.
The second defendants, Russell Bresland and Bresland Consultants Pty Ltd (Bresland parties), are insurance brokers who arranged the insurance with AIG. The McMurrays allege that if, as AIG contends, the contract works exclusion applies, then the Bresland parties were negligent and engaged in misleading and deceptive conduct in arranging insurance containing such an exclusion.
The third defendant to the principal proceedings is Tokio Marine & Nichido Fire Insurance Co Ltd (Tokio) who is the insurer from whom Mosman Bay procured annual project and legal liability insurance.
The McMurrays claim that the Tokio policy contained an extension by which Tokio provided insurance to all principals of Mosman Bay for contract works carried out by Mosman Bay. Tokio has denied indemnity to the McMurrays, and the McMurrays sue Tokio for breach of contract.

(B) Third party proceedings by AIG against Mosman Bay and Tokio

Holgersson is not a party to the third party proceedings.
The third party proceedings were commenced by AIG against Mosman Bay and Tokio.
AIG claims that if it is liable to the McMurrays, then it is entitled to be subrogated to the McMurrays' right to bring proceedings against Mosman Bay.
AIG pleads that, if the AIG exclusion clause does not operate to exclude AIG's liability to the McMurrays, then:
(a)Mosman Bay entered into a building contract with the McMurrays pursuant to which Mosman Bay agreed to insure any structure on the relevant site before Mosman Bay took possession of the site;
(b)Mosman Bay subcontractor Simmos Home Improvements Pty Ltd was negligent; and
(c)Mosman Bay is liable to indemnify the McMurrays in respect of the damage caused to the house, and AIG is subrogated to the McMurrays' rights against Mosman Bay.
Mosman Bay defends the third party proceedings on the basis that:[2]
(a)it does not admit that AIG can be subrogated to the rights of the McMurrays in respect of the building contract;
(b)it entered into an oral agreement formed as a result of negotiations between Mr David William Walling (sole director and secretary of Mosman Bay) and Mr McMurray pursuant to which it was agreed that Mosman Bay would insure the renovations and the McMurrays would keep the house fully insured;
(c)in mid‑2015, after the renovations had begun and after Mosman Bay had entered into the policy with Tokio, Mr McMurray asked Mr Walling to sign a building contract for land tax purposes, and Mr Walling did so on behalf of Mosman Bay without realising that the contract contained an obligation that he insured the house against damage caused by the renovations; and
(d)in those circumstances:
(i)the building contract was not intended by either party to have any effect contrary to their oral agreement;
(ii)alternatively, the building contract should be rectified; and
(iii)alternatively, the building contract was partly written and partly oral and on its proper construction, did not require Mosman Bay to insure the house.
[2] Prior to the decision given by Chaney J in McMurray v AIG Insurance Australia Pty Ltd [2018] WASC 144 Mosman Bay had indicated that it did not propose to defend the third party proceedings brought against it by AIG. Following the decision being delivered by Chaney J on 10 May 2018, Mosman Bay ceased to be represented by solicitors for Tokio and determined that it should defend the third party proceedings.

(C) Fourth party proceedings by Mosman Bay against Holgersson

The fourth party proceedings were commenced on 26 April 2017, in the name of Mosman Bay. Tokio required Mosman Bay to pursue fourth party proceedings and obtained leave of the court to do so on 6 April 2017, pursuant to its right under the contract of insurance to pursue a claim against the painters.[3]
[3] Affidavit of Rachel Lee‑Anne Lamb affirmed 13 November 2018, Annexure RLL3.
By letter dated 24 April 2017, Tokio informed Mosman Bay that it had granted indemnity (to Mosman Bay) in respect of what Tokio says are the insured losses under s 1 of the Tokio policy, being the cost of the renovations. Tokio refused any cover under s 2 of the Tokio policy. The basis for this refusal is the allegation made by AIG against Mosman Bay, in the third party proceedings, that Mosman Bay entered into a building contract with the McMurrays pursuant to which it agreed to insure the house (in addition to the renovations) from any damage arising from the renovations.
When the fourth party proceedings were instituted, Mosman Bay's solicitors were Hotchkin Hanly as it had its own claim against the painters.[4]
[4] Affidavit of Rachel Lee‑Anne Lamb affirmed 13 November 2018, Annexure RLL3.
On 19 December 2017, Tokio's solicitors, Clyde & Co, came onto the record for Mosman Bay pursuant to condition 5 of its contract of insurance with Mosman Bay. Tokio agreed to indemnify Mosman Bay for its costs of the fourth party proceedings (including those costs incurred by Hotchkin Hanly) except those costs which only relate to the claim by Mosman Bay for its uninsured loss.[5]
[5] Affidavit of Rachel Lee‑Anne Lamb affirmed 13 November 2018, Annexure RLL3.
Following the institution of the fourth party proceedings, Holgersson made an application to have two preliminary issues dealt with. One of those issues was whether the policy issued to Mosman Bay by Tokio provided legal liability insurance cover for property damage under cl 1 of s 2 of the policy to Holgersson. In reasons for decision, delivered by Chaney J on 10 May 2018, Chaney J held that the Tokio policy provides legal liability insurance to Holgersson as a subcontractor for Mosman Bay.[6]
[6] McMurray v AIG Insurance Australia Pty Ltd [2018] WASC 144.
The decision of Chaney J had the effect that Tokio could no longer instruct its solicitors to maintain the first fourth party proceedings against Holgersson, as Holgersson had found to be insured by Tokio.
Mosman Bay subsequently took steps to instruct its own solicitors to maintain the first fourth party proceedings against Holgersson.
Mosman Bay in the fourth party proceedings alleges against Holgersson:
(a)that Holgersson, pursuant to the terms of a contract, was to carry out staining of timber within the house; and
(b)the manner in which Holgersson or his employees, subcontractors or agents disposed of rags used to carry out the staining of the timber was negligent and/or in breach of an implied term of the contract between Mosman Bay and Holgersson to perform the work with all due care, skill and attention.

The jurisdictional threshold question posed by s 1335 of the Corporations Act

The court has an inherent and statutory jurisdiction to make an order requiring a plaintiff to provide security for costs. Section 1335(1) of the Corporations Act provides:
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.
A defendant who is served with third party proceedings pursuant to O 19 r 1(3) of the Rules of the Supreme Court becomes a defendant and as such is in the position of a defendant in relation to third party proceedings, as if he or she had been sued by the defendant in a separate action.[7]
[7] Johnson v Ribbins [1977] 1 WLR 1458; [1977] 1 All ER 806, 809; applied in Commercial Developments Pty Ltd v Mercantile Mutual Insurance (Workers' Compensation) Ltd (1991) 5 WAR 208, 215 (Malcolm CJ, Pidgeon & Rowland JJ agreeing).
Pursuant to O 19 r 9 of the Rules of the Supreme Court where a defendant has served a third party notice and a third party makes a claim or requirement as mentioned in r 1 or r 8, O 19 applies, with modifications mentioned in subrule (2) of r 9 and any other necessary modifications, as if the third party were a defendant.
It follows, therefore, that fourth party proceedings are an 'action or other legal proceeding' within the meaning of s 1335(1) of the Corporations Act.
In ascertaining whether there is credible testimony that there is reason to believe that the corporation will be unable to pay the costs if it is unsuccessful, the court is required to judge the quality of the evidence put before it to see whether the evidence objectively gives rise to a reason to believe that the corporation will be unable to pay the applicant's costs.[8]
[8] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [24] (Pidgeon & Owen JJ).
Section 1335 of the Corporations Act requires a balance to be struck between protecting the applicant from possible consequences of being sued by an impecunious corporation with limited liability and avoiding injustice to the corporation by unnecessarily prejudicing it in the conduct of litigation.[9]
[9] Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19 [31], (Corboy J applying Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301.
There is no evidentiary burden of proof placed on a party seeking the order. In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd,[10] Pidgeon and Owen JJ rejected the suggestion of Lee J in Warren Mitchell Pty Ltd v Australian Maritime Officers' Union[11] that an evidentiary burden was placed on the applicant for security. Pidgeon and Owen JJ said:[12]
It becomes necessary now to determine whether there was before the Master the necessary credible testimony to give him jurisdiction. In view of the history of the section we would, for our part, see no requirement to attempt to define further the expression. The words speak for themselves and in that sense the expression is similar to expressions such as 'beyond reasonable doubt'. For the reasons we have set out we are not in accord with one proposition referred to by Lee J in Warren Mitchell Pty Ltd v Australian Green Offices Union when his Honour said at 1241 'qualification of the word "testimony" by the word "credible" suggest that evidentiary burden is undertaken by the parties seeking the order'. We would not see any burden as nothing is sought to be proved. The legislature that first enacted the words, used them to replace words referring to proof and in our view, were dispensing with a requirement to prove a matter. What is required is an evaluation of the evidence led by the applicant to see whether that leads to a reason to believe that the corporation will be unable to pay the costs of the defendant.
[10] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [24] (Pidgeon and Owen JJ).
[11] Warren Mitchell Pty Ltd v Australian Maritime Officers' Union [1993] FCA 774; (1993) 12 ACSR 1; (1993) 11 ACLC 1238.
[12] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [24] (Pidgeon & Owen JJ) applied in Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [68] ‑ [69] (Kenneth Martin J, Pullin JA agreeing).
In Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd, Corboy J outlined the principles applicable to the determination of the threshold question:[13]
As to the determination of the threshold question:
(a)The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. It is necessary to make an assessment of the risk that the corporation will be unable to pay ‑ an assessment that will be imprecise. A 'reason to believe' is a low threshold test: Livingspring [15] ‑ [16].
(b)However, the need for credible testimony is an obvious safeguard to ensure that the application is not founded purely upon speculation. To that extent, I agree with the observation of Lee J in Warren Mitchell that 'speculation as to insolvency or financial difficulties likely to confront the corporation will be insufficient to ground the exercise of the discretion' (5).
(c)Determining whether a corporation will be unable to pay involves two considerations. First, it is necessary to fix the time at which the plaintiff's inability, or apprehended inability, is to be assessed. That generally requires an opinion to be formed at the time of judgment and immediately following. Second, it is necessary to identify the range of assets to which recourse might be had for the purpose of enforcing an adverse costs order. Generally, the relevant assets will be those that might be immediately realised and those which could be realised in sufficient time to enable the plaintiff to comply with a costs order in the usual terms: Professional Vending Services Pty Ltd v Christou [2010] FCA 580.
(d)Where the only tangible assets of a plaintiff corporation are held in trust and solvency depends on its right as trustee to an indemnity against the trust property, it is necessary for the court to have in mind the difficulties which a successful defendant would face in attempting to execute an order for costs: Laundry Coin‑Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40‑584 (46,729); BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81 [14] ‑ [15]. In Laundry Coin‑Wash, Smithers J observed that 'indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability' (46,729). Similarly, in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150, Tadgell J held that the fact that the plaintiff trustee company owned unencumbered real estate, the value of which exceeded the likely costs of an appeal and over which it had a right of recourse as trustee by way of indemnity, did not justify a conclusion that security ought not to be given. The trustee might be required at any time to transfer its legal interest in the unencumbered property to the beneficiaries of the trust or to encumber it: and see BBC Nominees where the observations of Tadgell J in Lagarna were cited with apparent approval by Beech J.
[13] Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19 [35].

Importantly, the question is not whether the party whom an order for security for costs is sought against will be unable to meet an adverse costs order, but whether there is reason to believe that it will be unable to do so. The threshold is low.
If the threshold is met, the question is then whether the court should exercise its discretion to make an order for security.

The financial position of Mosman Bay

Mosman Bay has 10 shares each of which are owned by its sole director and shareholder, Mr Walling, with a paid‑up capital of $10.[14]
[14] Affidavit of Byron Andrew Winburn‑Clarke sworn 31 August 2018, Annexure BC1.
Mosman Bay has no real estate registered in its name. Mr Walling is a joint tenant in a property located in Mosman Park, which was purchased on or about 20 April 2017 for the sum of $2,700,000 and is subject to a mortgage. Mr Walling also has a half‑share as tenant in common in equal shares of a property in O'Connor which was purchased on 14 October 2016 for the sum of $1,550,000. There is a mortgage over Mr Walling's share to the other tenant in common, Piama Pty Ltd which was originally registered for the sum of $670,000.[15]
[15] Affidavit of Byron Andrew Winburn‑Clarke sworn 9 November 2018 [3].
Mosman Bay has traded successfully for 10 years. Mosman Bay was incorporated and became a registered company on 26 April 2007. Mr Walling is a registered building contractor. He first became a registered builder on 21 February 2007. Mosman Bay is a registered building services contractor pursuant to the Building Services (Registration) Act 2011 (WA).[16]
[16] Affidavit of David William Walling sworn 11 October 2018 [3] ‑ [7].
A search of Australian Securities Investment Commission records 'creditor watch' reveals that Mosman Bay has a high credit worthiness score, having been assessed as a low risk entity.[17]
[17] Affidavit of Byron Andrew Winburn‑Clarke sworn 31 August 2018, Annexure BC1, pages 14 ‑ 17.
Holgersson relies upon the following matters in support of its argument that the material before the court is sufficiently persuasive to objectively give rise to a reason to believe that the Mosman Bay will be unable to pay the costs of the fourth party proceedings in the event that it is unsuccessful:
(a)Mosman Bay owns no real property;
(b)the financial statements relied upon by Mosman Bay show that whereas Mosman Bay had cash of $693,372 as at June 2017, its cash holdings as at 30 June 2018 had been reduced to $541. The financial statements as at 30 June 2018 show that Mosman Bay has almost no cash at all, not even working capital, which, as a builder, it might be expected to need for ongoing work commitments;
(c)Mr Walling has removed working capital from Mosman Bay by paying himself substantial dividends each year;
(d)by the end of the 2018 financial year, whilst the company had property, plant and equipment of $456,964 by the end of the 2018 financial year, Mosman Bay had borrowings of $348,665 and hire purchase commitments of $303,168.[18] It is argued that:
(i)there is a difference between the depreciated taxable value of plant and equipment referred to in financial reports and the actual saleable value of such equipment;
(ii) none of the assets, namely, vehicles, plant and equipment are identified by description and nothing is known about their age and saleability;
(iii)whilst Mr Walling has filed an affidavit in opposition to this application, he has not taken the opportunity in that affidavit to make the full and frank disclosure of the value of these assets, nor has he provided any undertakings regarding disposal of his vehicles, plant or equipment pending resolution of the action;
(e)the only other asset identified in the financial statements are 'work in progress'. This is an asset that depends entirely on third parties paying what is claimed to be owed to Mosman Bay over a period of months. There is no evidence before the court about those debtors or their ability to pay; and
(f)there is evidence that Mosman Bay has in the past expressed an intention through its former solicitors that it would not take any active steps either in the third party or fourth party proceedings because it had no funds and the third party was likely to go into liquidation. In an affidavit of Bryon Andrew Winburn‑Clarke (a partner in the firm who is acting for Holgersson) sworn on 31 August 2018, Mr Winburn‑Clarke deposes that on 8 September 2017 he had a conversation with a solicitor employed by Mosman Bay's former solicitors Hotchkin Hanly regarding the fourth party proceedings. Mr Winburn‑Clarke deposes that during the conversation he was informed that it was the intention of Mosman Bay not to take any active steps either in the third party or fourth party proceedings because it had no funds and was likely to go into liquidation. Subsequently, on 24 October 2017, Hotchkin Hanly sent an email to all parties stating that Mosman Bay did not wish to take an active role in the third party proceedings.[19]
[18] Affidavit of Scott Robert Disley sworn 16 October 2018, Annexure SRD 3, pages 35, 40.
[19] Affidavit of Byron Andrew Winburn‑Clarke sworn 31 August 2018 [25] and Annexure BC5.
In opposition to the application for security for costs, Mosman Bay relies upon the financial reports recording its financial position at the end of each financial year from 2014, prepared by and annexed to an affidavit of Mr Scott Robert Disley, a chartered and certified practising accountant, sworn on 16 October 2018.
Mosman Bay points out that the annual financial reports show that Mosman Bay has consistently traded profitably. It also points out that the financial reports record that:[20]
(a)during the financial year ending 30 June 2015, Mosman Bay made a net profit of $646,458, it paid a dividend of $550,000 and was left with a total equity of $581,314;
(b)during the financial year ending 30 June 2016, Mosman Bay made a net profit of $484,364, paid a dividend of $480,000 and was left with a total equity of $585,668;
(c)during the financial year ending 30 June 2017 Mosman Bay made a profit of $1,049,939, paid a dividend of $900,000 and was left with a total equity of $735,607; and
(d)during the financial year ending 30 June 2018 Mosman Bay made a profit of $426,263, paid a dividend of $696,000 and was left with a total equity of $465,870.
[20] Affidavit of Scott Robert Disley sworn 16 October 2018, pages 4 - 45.
As a result of the submission made by Holgersson that the financial records of Mosman Bay show it has insufficient cash reserves to operate post‑June 2018, Mosman Bay filed a further affidavit affirmed by Mr Disley on 16 November 2018 which annexes confidential sales records and recording payments of cash of Mosman Bay between July 2018 and the end of October 2018. Mosman Bay relies upon the sales records to show that the company has continued trading since the end of the financial year ending 30 June 2018, to demonstrate that it has sufficient working capital from its available cash flow.[21]
[21] Access to the information in the further affidavit of Scott Robert Disley affirmed 16 November 2018 is to be restricted by order of the court.
I do not accept that the sales figures that are annexed to the confidential further affidavit of Mr Disley, affirmed on 16 November 2018, is of assistance to the court. This is because the records do not indicate what outgoings were paid out of the accounts of the business at any time after 30 June 2018.
In my opinion, there is force in the submission put on behalf of Holgersson that there is sufficient evidence before the court to form an objective opinion that there is reason to believe Mosman Bay is unable to meet an adverse costs order.
The court is required to form an opinion about what the financial position of a respondent to an application will be at the time of judgment and immediately thereafter. The financial position of the plaintiff at the time when the application is made will be an important guide, but is not the sole consideration.[22]
[22] Beach Petroleum NL v Johnson (1992) 7 ACSR 203, 204; see also Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19.
The financial reports of 30 June 2016, 30 June 2017 and 30 June 2018 show that as at 30 June 2016 and 30 June 2017 Mosman Bay had a substantial amount of cash in the bank and minimal borrowings.
As at 30 June 2016, Mosman Bay had total non‑current and current borrowings including hire purchase liability of $217,830 and a loan of $1,766, together with $443,729 cash at the bank.[23]
[23] Affidavit of Scott Robert Disley sworn 16 October 2018, page 10.
In the 2016 financial year, Mosman Bay had revenue of $10,217,112 and a net profit of $484,364.[24]
[24] Affidavit of Scott Robert Disley sworn 16 October 2018, Annexure SRD1, page 20.
In the 2017 financial year, it had revenue of $17,143,908 and a net profit of $1,049,939.[25]
[25] Affidavit of Scott Robert Disley sworn 16 October 2018, Annexure SRD1, page 20.
In 2016, Mr Walling drew a dividend of $480,000 and in 2017 a dividend of $900,000.[26]
[26] Affidavit of Scott Robert Disley sworn 16 October 2018, Annexure SRD1, page 22.
As at 30 June 2017, Mosman Bay had current and non‑current borrowings of $357,285 and a loan of $721, with cash at bank of $693,372.[27]
[27] Affidavit of Scott Robert Disley sworn 16 October 2018, Annexure SRD1, pages 24 ‑ 26.
As at 30 June 2018, Mosman Bay had revenue of $14,890,738 and a net profit of $426,264. Mr Walling, however, paid himself a dividend of $696,000.[28]
[28] Affidavit of Scott Robert Disley sworn 16 October 2018, Annexure SRD1, pages 34 ‑ 36.
From the financial statements, the following inferences can be drawn:
(a)By 30 June 2018, the cash reserves in the business had been depleted and borrowings of the business had increased which had resulted in what could be said to be a substantial depletion of the assets of the company.
(b)Mr Walling paid himself dividends in 2017 and in 2018 that were approximately equal to the net profit of the business. Whilst he has a legal entitlement to do so, the drawings he has made had the effect, as at 30 June 2018, of leaving no capital reserves in the business.
Whilst I accept that retention monies and trade debts when paid in a business such as Mosman Bay are funds that it could expect to rely upon, trade debts and retention monies being trade receivables are by their nature contingent amounts. Retention monies only become available when building works are complete and when released from retention and may be depleted by deduction of money owing for goods, services or works.
As to Mr Winburn‑Clarke's evidence about the conversation he had with Mosman Bay's former solicitor, I note that Mr Walling has not responded to that evidence. In particular, no response has been given to the evidence about the instructions, given to Mosman Bay's former solicitors by Mosman Bay in 2017, about the intentions of Mosman Bay in respect of its defence of the third party proceedings or maintaining the fourth party proceedings.
I have had regard to the fact that there is no reliable evidence before the court about the age and saleability of the plant and equipment of Mosman Bay. I have also had regard to the fact there is no real property registered in the name of Mosman Bay.
In light of the fact that the financial statements of Mosman Bay show that as at June 2018 the capital reserves of Mosman Bay have been depleted and that there has been a suggestion or threat of liquidation of Mosman Bay in the face of these proceedings in the past, I am satisfied that there is a reason to believe that Mosman Bay will be unable to meet its costs of the fourth party proceedings if Holgersson is successful. In making this finding I am satisfied that the low threshold for finding a reason to believe Mosman Bay is unable to pay Holgersson's reasonable costs (if Mosman Bay is unsuccessful in the fourth party proceedings) is met.

Should the discretion to order security be exercised?

The fact that the threshold question has been answered in Holgersson's favour does not compel the conclusion that security should be ordered.
In Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd, Edelman J set out factors that may be relevant to the exercise of the discretion to make an order for security as follows :[29]
[29] Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [6].
(i)the strength and bona fides of the plaintiff's case;
(ii)the likelihood of the plaintiff being unable to pay the defendant's costs;
(iii)whether the plaintiff's impecuniosity was caused by the defendant's conduct which is the subject of the claim;
(iv)whether the application for security is oppressive;
(v)whether the award of security would deny an impecunious applicant a right to litigate;
(vi)whether there are persons standing behind the plaintiff who were likely to benefit from the litigation;
(vii)whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
(viii)whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant's self-help procedures;
(ix)whether the application for security had been brought promptly;
(x)whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and
(xi)any factors relating to the public interest.
Of importance is a corporation's unsatisfactory financial position. In Veneziano Coffee Roasters WA Pty Ltd v Healthy Nut Café Pty Ltd, Le Miere J recently observed :[30]
A corporation's impecuniosity is itself a factor favouring the court ordering security. Not only does proof of the unsatisfactory financial position of the corporate plaintiff trigger the court's discretion, but that evidence is also a substantial factor in the exercise of the discretion: Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [56] ‑ [57]; Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 at [36]. Indeed it has been said that once the defendant has shown that the corporate plaintiff will be unable to meet the defendant's reasonable costs, the evidentiary burden shifts to the plaintiff to satisfy the court that, taking into account all relevant factors, the court should exercise its discretion by refusing to order security or by ordering security of a lesser amount than the defendant seeks: Idoport at [60]-[62], Fiduciary at [36].
[30] Veneziano Coffee Roasters WA Pty Ltd v Health Nut Café Pty Ltd [2018] WASC 363 [6].
As to the first factor, identified by Edelman J in Westonia, it is generally not appropriate for the court to attempt to investigate in considerable detail the likelihood of success in the action.[31]
[31] Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [72] ‑ [74] (Kenneth Martin J).
Holgersson disputes that he was negligent or that it was the contractor, or employed any painter, who carried out the interior painting. As these issues raise central matters of fact and law to be determined at a trial of the proceedings, in at least the third and fourth party proceedings, these issues cannot be appropriately determined in an application for security for costs.
Having read the pleadings and the affidavit materials filed on behalf of Mosman Bay, in particular the affidavit of Mr Walling sworn on 11 October 2018 and the affidavit of Ralph Edgar Thomas (a building supervisor employed by Mosman Bay) sworn on 10 October 2018, and having heard the submissions by counsel on behalf of both parties, I am of the opinion that Mosman Bay has a bona fide prima facie case against Holgersson and that Holgersson has a bona fide prima facie defence to the fourth party proceedings. Consequently, this factor is neutral.
In considering the second factor, that is, assessing the likelihood of Mosman Bay being unable to pay Holgersson's costs, I accept that Mosman Bay is a legal entity of substance. It runs a successful building construction business and has shown by its credit rating and its financial returns that it pays its debts. I also accept that Mosman Bay has the capacity not to be impecunious. Whether it could become so appears to be a matter within the control of Mr Walling and may well depend upon the future dividends that he pays himself from the future cash reserves of the company. This is a factor that weighs in favour of an order for security.
In respect of the third factor, a respondent to an application for security for costs must establish a real causal connection between the conduct and the impecuniosity, which, in the exercise of the court's discretion would make it unjust to require security, and it must be established that the applicant has been guilty of some form of misconduct or unacceptable dealings.[32]
[32] Melunu Pty Ltd v Claron Constructions Pty Ltd [2004] NSWSC 1064 [31] (Brownie AJ); applied in Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [45].
However, Mosman Bay's claims against Holgersson go to allegations of negligence or breach of contract (on grounds of breach of an implied term to provide due care) and do not amount to a form of misconduct or unacceptable business dealings.
Mosman Bay claims that the impecuniosity that it faces was caused by Holgersson's conduct. It points out that following the fire, the McMurrays refused to pay Mosman Bay's progress claim 8 in the sum of $228,145.22.[33] It says that if the fire was caused by the failure to properly dispose of oily rags, Holgersson's negligence and/or breach of contract has had a significant adverse effect on Mosman Bay's financial position by causing the non‑payment of progress claim 8. It, however, concedes that that loss has not rendered Mosman Bay impecunious, but says it is a significant loss to Mosman Bay, and more than the sum claimed as security.
[33] Affidavit of Rachel Lee-Anne Lamb affirmed 13 November 2018, Annexure RLL10.
Consequently, this factor cannot be established in favour of Mosman Bay and is neutral.
The fourth and fifth factors are not raised as relevant factors in this matter.
As to the sixth factor, Mr Walling is the person standing behind Mosman Bay who is likely to benefit from the litigation. Mr Walling, however, has not offered any security or personal undertaking to be liable for the costs of the fourth party proceedings. This factor weighs in favour of the making of an order for security. However, counsel for Mosman Bay informed the court at the hearing of the application that Mosman Bay could raise $200,000 if it needed to provide a bank guarantee but it would be an impost on the company. Alternatively, a personal guarantee for the sum could be given.[34]
[34] ts 180.
As to the seventh factor, Mosman Bay argues that it is in substance not a plaintiff in the first fourth party proceedings, as the proceedings are defensive.
Mosman Bay claims that its claim in the fourth party proceedings is defensive because if:
(a)it is ultimately found that the AIG exclusion clause is not valid;
(b)AIG establishes in the third party proceedings that the fire was caused by Simmos Home Improvements Pty Ltd as alleged;
(c)AIG is successful in third party proceedings against Mosman Bay; and
(d)Mosman Bay made no claim against Holgersson to an indemnity for any liability Mosman Bay is found to owe to the McMurrays;
then, subject to the outcome of the McMurrays' action against the Bresland parties, Mosman Bay may be liable for the cost of rebuilding the house to the standard and scale of the entire house (because Tokio has agreed to indemnify Mosman Bay only for the cost of renovations).

Mosman Bay argues it properly took steps to obtain insurance in respect of the renovations for the work performed in the McMurray property. In addition, at the time Hans Holgersson and Mark Simpson were engaged to provide an estimate of the cost of the interior painting work Mr Walling asked for and was provided with a tax invoice which showed that Mr Holgersson and Mr Simpson were the insured for the business of painter and had liability insurance in the sum of $5 million for the period of 9 March 2015 to 15 March 2016.[35]
[35] Affidavit of David William Walling sworn 11 October 2018 [22] ‑ [23] and Annexures DWW14 and DWW15.
In those circumstances, Mosman Bay argues it joined Holgersson to the proceedings as a direct result of Holgersson's insurers CGU's failure to grant indemnity under the CGU policy (for the risk that Mosman Bay faces in the third party proceedings, when regard is had to the likelihood that the fire was caused by the painters failing to properly dispose of the oily rags).
Mosman Bay say that it is not to the point that AIG pleads that the painting contract was Simmos Home Improvements Pty Ltd while Mosman Bay pleads that it was Holgersson. It says that if the fire was caused by Mosman Bay's painting contractor, then Mosman Bay is at risk in the third party proceedings. In order to address that risk, it seeks indemnity from the party that was in fact its painting contractor.
Thus, it is said that Mosman Bay is not a true plaintiff for the purposes of an application for security for costs but rather a party to proceedings with no option but to defend itself in proceedings which are, essentially, a dispute between insurers, including CGU.
Holgersson argues that the fourth party proceedings are not defensive in nature. This is because Mosman Bay's claim against Holgersson alleges different factual and legal issues. Firstly, there is the issue as to the identity of the entity that carried on the painting work. Secondly, it is alleged by Mosman Bay that Holgersson is liable in contract and is vicariously liable for the conduct of his employees and subcontractors in tort. This is different to the claim brought by AIG. Thus, Holgersson argues that the fourth party proceedings are not defensive in nature but rather offensive. In particular, the fourth party proceedings are not a shield, but a sword.
In Australia New Zealand Banking Group Ltd v Dzienciol,[36] McLure J applied the principles in respect of payment of security for costs to an application for personal liability for costs of guardian ad litem. In considering the principles that apply to defensive claims in claims for security for costs her Honour relevantly observed:[37]
The notion of a plaintiff being nominally so but really defending itself against an attack from the defendants is also well recognised in the law relating to the discretion to order security for costs. Security for costs will not generally be ordered where the plaintiff is the party attacked and is really in the position of the defendant: Willey v Synan (1935) 54 CLR 175 at 184-5; Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 662.
In such cases a Court is also guided by the substance and not the form of the matter. There is usually some pre litigation act of the defendant which is the trigger for the commencement of proceedings. Thus, if a defendant serves a statutory demand under the Corporations Act, it will not be entitled to security for costs if the plaintiff debtor applies to set aside the statutory demand: Aquatown (supra).
The principle was also applied by Wilcox J in Amalgamated Mining Services Pty Ltd v Warman International Ltd (1988) 19 FCR 324. In that case Warman's solicitors wrote to a third party (QMS) complaining that QMS had been offering to supply parts made by AMS for Warman pumps thus infringing Warman's copyright in the drawings. The letter concluded by saying that unless QMS desisted, Warman would take proceedings. AMS commenced proceedings against Warman for a declaration that the threats made by Warman were unjustifiable under the Copyright Act 1968. Warman applied for security for costs. The Court rejected the claim on the basis that AMS was in a practical sense forced to take legal action. Wilcox J said (at 328-9):
'If one applies the homely test adopted by Scrutton LJ of asking who, in the litigation, was the attacker and who was the defender, I think it must be said that the first attack came in a letter from [Warman's solicitors]. Although the letter was not written directly to [AMS], it is that company which has an interest in defending and, in a commercial sense, probably has very little alternative other than to take that course.'
[36] Australia and New Zealand Banking Group Ltd v Dzienciol [2001] WASC 305 (S).
[37] Australia and New Zealand Banking Group Ltd v Dzienciol [2001] WASC 305 (S) [22] - [24].
A defendant who counterclaims will be a plaintiff within the meaning of s 1335 of the Corporations Act where the counterclaim is a separate and distinct claim from that of the plaintiff. Whether that will be so will depend upon the connection between the claim and the counterclaim. A defendant who brings a counterclaim will not be a plaintiff (by counterclaim) where the counterclaim is merely defensive, arising out of the same transaction as the claim.[38] However, in this matter, the fourth party proceedings are not brought by way of counterclaim.
[38] SP Hay Pty Ltd v Allcorp Pty Ltd [2004] WASC 77 [23] (Master Newnes).
I accept that Mosman Bay in the fourth party proceedings should be regarded in substance as a plaintiff as the fourth party proceedings are defensive as they have been instituted to resist the third party proceedings brought against Mosman Bay by AIG, in the event that AIG is successful in the third party proceedings.
In my opinion, the fact that the claim made against Holgersson by Mosman Bay is factually and legally different to the claim made by AIG against Mosman Bay in that AIG claims Simmos Home Improvements Pty Ltd were the contractors of Mosman Bay and the claim made against Holgersson by Mosman Bay is a claim in negligence is immaterial. It appears clear that the claims made by Mosman Bay against Holgersson are not separate and distinct from the AIG proceedings, in that Mosman Bay seeks an indemnity from Holgersson.
Mosman Bay is squarely at risk in the third party proceedings if it is found that the fire was caused by Mosman Bay's painting subcontractor. To address that risk, Mosman Bay seeks an indemnity from Holgersson which it says was the party that was in fact the painting subcontractor. Whilst the matters pleaded in the third party proceedings and the fourth party proceedings in form are not defensive, the court is not to be concerned with form but with substance.[39]
[39] Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 18 ACSR 622, 623 (Sundberg J); applied in Australia and New Zealand Banking Group Ltd v Dzienciol [2001] WASC 305 (S) [19] ‑ [22].
It is clear that Mosman Bay had no practical alternative but to commence the fourth party proceedings in defence of the third party proceedings brought against it by AIG. If Mosman Bay succeeds against AIG in the third party proceedings, or if the third party proceedings fall away in their entirety because the McMurrays succeed against the Bresland parties in the principal proceedings, the fourth party proceedings will be estopped, or otherwise fall away. Thus, it is clear that the fourth party proceedings have no independent purpose but to be otherwise than in substance defensive.
In these circumstances, I am of the opinion that this factor heavily outweighs the second and sixth factors. Thus, I am not persuaded an order for security for costs should be made. But for this factor, I would make an order for security for costs.
If I was to make an order for security, I would not make an order in the sum of $200,000. If Tokio is successful in its appeal against the decision of Chaney J, there is some prospect that Tokio may resume its representation of Mosman Bay in the fourth party proceedings, and may indemnify Mosman Bay in respect of its loss and costs at least in respect of its insured loss. I do not accept, however, the contention put by counsel for Mosman Bay that such a decision would be inevitable, if Tokio is successful in the appeal.
If I was to make an order for security for costs, I would only order a sum that would take into account the costs that Holgersson could be exposed to up until the time of disposition of the appeal by Tokio. Senior counsel for Holgersson informed the court that it is estimated that such costs would be approximately $75,000.
Mosman Bay is not a party to the appeal proceedings. Further, there is no evidence before the court that Holgersson has incurred substantial costs since Tokio ceased to indemnify Mosman Bay in respect of the costs of the fourth party proceedings.
In these circumstances, if I was to make an order for security for costs, I would do so in the sum of $50,000. As to the form of the security that I would make, I would be minded to order that either Mosman Bay pay the security into the court, provide a bank guarantee in the sum of $50,000 or that Mr Walling provide a personal guarantee for the sum. I would also make an order staying the fourth party proceedings until the order for security was satisfied.
For these reasons, I would dismiss the application. I am also of the opinion that an order should be made that the affidavit of Scott Robert Disley, affirmed on 16 November 2018, not be inspected, without the leave of the court, by any party to the proceedings other than those referred to in order 10 of the order made by the court on 20 September 2018.
Costs should follow the event. I will hear from the parties in that respect.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

VV
ASSOCIATE TO THE HONOURABLE JUSTICE SMITH

14 DECEMBER 2018

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: MCMURRAY -v- AIG INSURANCE AUSTRALIA LTD [No 2] [2018] WASC 391 (S)
CORAM:   SMITH J
HEARD:   ON THE PAPERS BY WRITTEN SUBMISSIONS FILED 14 MARCH 2019 & 9 APRIL 2019
DELIVERED          :   17 MAY 2019
FILE NO/S:   CIV 2962 of 2016
BETWEEN:   FREDERICK WILLIAM MCMURRAY
JENNIFER GRACE MCMURRAY
Plaintiffs
AND
AIG INSURANCE AUSTRALIA LTD
First Defendant
RUSSELL BRESLAND
BRESLAND CONSULTANTS PTY LTD
Second Defendants
TOKIO MARINE & NICHIDO FIRE INSURANCE CO LTD
Third Defendant
MOSMAN BAY CONSTRUCTION PTY LTD
First Third Party
TOKIO MARINE & NICHIDO FIRE INSURANCE CO LTD
Second Third Party
HANS BO KRISTIAN HOLGERSSON trading as HOLGERSSONS COMPLETE HOME SERVICE
First Fourth Party

Catchwords:

Costs - Whether ordinary rule should apply - Order 66 r 1(3) of the Rules of the Supreme Court 1971 (WA) - Whether successful party failed on a discrete and severable issue - First third party succeeded on security for costs application on grounds fourth party proceedings defensive - Defensive issue raised at an early stage of proceedings - Not satisfied good reasons to depart from ordinary rule

Legislation:

Civil Liability Act 2002 (WA)
Rules of the Supreme Court 1971 (WA), O 66 r 1

Result:

First third party's application for costs granted

Category: B

Representation:

Counsel:

Plaintiffs	:	No appearance
First Defendant	:	No appearance
Second Defendants	:	No appearance
Third Defendant	:	No appearance
First Third Party	:	Ms F Stanton
Second Third Party	:	No appearance
First Fourth Party	:	Mr M H Zilko SC

Solicitors:

Plaintiffs	:	No appearance
First Defendant	:	No appearance
Second Defendants	:	No appearance
Third Defendant	:	No appearance
First Third Party	:	Taylor Smart
Second Third Party	:	No appearance
First Fourth Party	:	SRB Legal

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

Amaca Pty Ltd (formerly James Hardie & Co Pty Ltd) v Hannell [2007] WASCA 158 (S)
Bowen v Alsanto Nominees Pty Ltd [2011] WASCA 39 (S)
Brazendale v Kenna [1961] Tas SR 199
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241
McKay v Commissioner of Main Roads [No 7] [2011] WASC 223 (S)
McKechnie v Connell (Unreported, WASC, Library No 940023, 20 December 1993)
McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391

SMITH J:

The application for costs following failed application for security for costs

(a) Background

The first fourth party, Hans Bo Kristian Holgersson, trading as Holgerssons Complete Home Service (Holgersson) made an application that the first third party, Mosman Bay Construction Pty Ltd (Mosman Bay), pay security for costs in the sum of $200,000, as a first tranche of security.[40]
[40] First fourth party's application for orders for security of costs, filed 13 September 2019.
Holgersson's application was made on the basis that there were reasonable grounds to believe Mosman Bay would be unable to pay Holgersson's costs, if Holgersson is successful in the fourth party proceedings.[41]
[41] The background facts of the pleaded cases in the principal proceedings, the third party proceedings and the fourth party proceedings are set out in McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391 [12] ‑ [29].
On 14 December 2018, I delivered judgment dismissing the first fourth party's application for security of costs.
Orders were subsequently made, on 28 February 2019, requiring Holgersson and Mosman Bay to provide written submissions on the issue of the costs of Holgersson's application for security of costs. On 14 March 2019, Holgersson provided his submissions as to costs and Mosman Bay provided its submissions on 9 April 2019.

(b) Orders as to costs sought by the parties

Mosman Bay seeks orders that it should have both its costs of the application for security, and its costs of its application for costs of the application for security, to be taxed and paid forthwith.
Holgersson claims that there should be no order as to costs, or alternatively, the order should be that the costs of the application be in the cause of the fourth party proceedings.

The grounds relied upon by Holgersson in support of its argument that the court should depart from the usual orders as to costs

Holgersson points out that Mosman Bay opposed Holgersson's application for an order for security of costs and in doing so put in issue all of the following arguable matters going to the question of whether security for costs should be ordered:[42]
(a)Mosman Bay denied that Holgersson had reached the jurisdictional threshold to obtain a security for costs order.
(b)Mosman Bay disputed that its financial position warranted an order being made.
(c)Mosman Bay purported to provide a full and frank statement of its financial position as called for by the authorities but did not do so.
(d)Mosman Bay's sole director and shareholder, David Walling, the one person who stands to gain by any success in the fourth party proceedings, failed to provide a full and frank disclosure of his personal financial position as called for by the authorities.
(e)Mosman Bay submitted that its impecuniosity was caused by or contributed to by Holgersson's conduct.
(f)Mosman Bay submitted that its claim against Holgersson was in substance defensive.
[42] First fourth party’s submissions (costs), filed 14 March 2019 [2] - [7].
Holgersson claims that Mosman Bay was only successful on the last ground, namely that its claim was in substance defensive. He says that Mosman Bay failed on all other matters. It is claimed that the substantial majority of the work leading up to the hearing of the application and almost all of the time spent on the hearing itself was focused on the unsuccessful matters. It is argued on behalf of Holgersson that if one were to consider portioning the work, in percentage terms, that about 90% of the work done, up to the hearing and the hearing itself, dealt with the unsuccessful matters.

Legal principles

The usual rule as to costs is that costs are to follow the event, that is, the successful party to an action (or application) is entitled to recover his or her costs.
Although costs will normally follow the event, this is not necessarily the case in circumstances where a party, although generally successful in the matter has, by the introduction of some issue or issues on which it failed, increased the costs of the proceedings. In that event, pursuant to O 66 r 1(3) of the Rules of the Supreme Court 1971 (WA), the court may order the successful party to pay the costs of the issues on which he or she failed.
An 'issue' in O 66 r 1(3) does not mean a precise issue in the technical pleading sense, but means any disputed question of fact or law.[43]
[43] McKechnie v Connell (Unreported, WASC, Library No 940023, 20 December 1993) (Nicholson J).
Order 66 r 1(3) only applies where the failed issue has increased costs.
Costs in relation to a dispute over an issue of fact should not be awarded unless the evidence on that issue can be distinguished without difficulty from the evidence on other issues.[44]
[44] Brazendale v Kenna [1961] Tas SR 199, 208 (Crisp, Crawford & Cox JJ).
It is to be expected that a generally successful party will fail on some issues.[45] In a case in which the generally successful party has failed on only a minor issue, which did not materially add to the costs of the conduct of the proceedings, it would not ordinarily be appropriate to depart from the general rule, unless the conduct of the generally successful party in relation to that issue had been unreasonable. In the event of unreasonableness, different considerations may apply.[46]
[45] McKay v Commissioner of Main Roads [No 7] [2011] WASC 223 (S) [179] (Beech J).
[46] Amaca Pty Ltd (formerly James Hardie & Co Pty Ltd) v Hannell [2007] WASCA 158 (S) [7] (Martin CJ, Steytler P & McLure JA).
The Court of Appeal has made it clear that orders for costs in respect of certain discrete issues should not be made as a matter of course and that the successful party should satisfy the court that there are good reasons why it should not pay the other party's costs. In Bowen v Alsanto Nominees Pty Ltd, the Court of Appeal said:[47]
It is clear that while the court has a broad discretion as to costs, generally costs will follow the event: Rules of the Supreme Court 1971 (WA), O 66 r 1(1). It is incumbent upon the unsuccessful party to satisfy the court that there are good reasons why it should not pay the other party's costs: Nikolaou v Papasavas, Phillips & Co (No 2) [1989] HCA 11; (1989) 166 CLR 394, 407.
The court may, in the exercise of its discretion, order that a successful party recover only a portion of its costs where that party has been unsuccessful in respect of certain discrete issues. But that should not be done as a matter of course. To embark as a general practice upon an analysis of which party was successful on each issue, or necessarily to deprive a successful party of some portion of its costs if it has lost on a particular issue, would be likely to add further uncertainty and complexity to the outcome of litigation, derogate from the prospect of settlement, and oblige the court to hear lengthy and frequent arguments in relation to costs as an additional burden on its resources and the costs of the parties: see MacKinnon v Petersen (Unreported, NSWSC, 19 April 1989) (Cole J); Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 [67] ‑ [68] (McHugh J). Litigation is time‑consuming, expensive and burdensome enough already.
In addition, while parties should be encouraged to consider carefully what matters they put in issue, justice may not be served if by too ready a resort to deciding questions of costs according to success on particular issues, parties are dissuaded by the risks of costs from canvassing all issues which might be material to the decision in the case: Doric Products Pty Ltd v Lockwood Security Products Pty Ltd [2002] FCA 282; NRMA Ltd v Morgan (No 3) [1999] NSWSC 768 [24].
[47] Bowen v Alsanto Nominees Pty Ltd [2011] WASCA 39 (S) [5] ‑ [7] (McLure P, Newnes & Murphy JJA).

The failed issues

It is clear that Mosman Bay failed on the threshold issue. The threshold issue was invoked by Holgersson's application (made pursuant to s 1335 of the Corporations Act 2000 (Cth)) requiring the court to evaluate evidence led by the applicant (Holgersson) to see whether that leads to a reason to believe the corporation (Mosman Bay) will be unable to pay the costs of the defendant (Holgersson).[48] It is well established that the threshold for meeting this issue is low.
[48] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [24] (Pidgeon & Owen JJ).
In construing the issue whether the financial position of Mosman Bay warranted an order of security being made, after considering all of the evidence relevant to Mosman Bay's financial position I found:[49]
In considering the second factor, that is, assessing the likelihood of Mosman Bay being unable to pay Holgersson's costs, I accept that Mosman Bay is a legal entity of substance. It runs a successful building construction business and has shown by its credit rating and its financial returns that it pays its debts. I also accept that Mosman Bay has the capacity not to be impecunious. Whether it could become so appears to be a matter within the control of Mr Walling and may well depend upon the future dividends that he pays himself from the future cash reserves of the company. This is a factor that weighs in favour of an order for security.
[49] McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391 [69].
As to the claim by Holgersson, that Mosman Bay itself and Mosman Bay's sole director failed to provide full and frank disclosure of Mosman Bay's and Mr Walling's personal financial position; I did not make a finding that can be properly characterised in this way.
As to Mosman Bay's and Mr Walling's personal financial position, I observed that:
(a)some of the financial information Mosman Bay put before the court was deficient;[50]
(b)Mr Walling had not responded to evidence given by Holgersson's solicitor, Mr Winburn‑Clarke about a conversation Mr Winburn‑Clarke had with a solicitor employed by Mosman Bay's former solicitors on 8 September 2017 that it was the intention of Mosman Bay not to take any active steps either in the third party or fourth party proceedings because it had no funds and was likely to go into liquidation;[51]
(c)as at the end of the financial year in 2018, the capital reserves of Mosman Bay had been depleted (by the payment of substantial dividends to Mr Walling);[52]
(d)that Mr Walling is the person standing behind Mosman Bay who is likely to benefit from the litigation but he had not offered any security or personal undertaking to be liable for the costs of the fourth party proceedings. I did, however, observe that counsel (for Mosman Bay) had informed the court that Mosman Bay could raise $200,000 if it needed to provide a bank guarantee but it would be an impost on the company or, alternatively, a personal guarantee for that sum could be given.[53]
[50] McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391 [48], [61].
[51] McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391 [44(f)].
[52] McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391 [62].
[53] McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391 [75].
As to Mosman Bay's claim that its impecuniosity was caused, or contributed to, by Holgersson's conduct, as Mosman Bay points out this issue was the subject of only brief submissions of evidence and occupied little time at the hearing and cannot be said to be an issue that materially added to the cost of the proceedings.
Mosman Bay was, however, successful in defending the application on the grounds that in substance it was not a plaintiff in the fourth party proceedings as the proceedings are defensive.
This was a factor found to heavily outweigh the financial capacity of Mosman Bay to satisfy an order for costs or a lack of a personal undertaking by Mr Walling to be liable for the costs of the fourth party proceedings.
The finding that Mosman Bay was not in substance a plaintiff was found to be decisive and but for the finding that the proceedings are defensive, I would have made an order for security.[54]
[54] McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391 [89].

Conclusion - Mosman Bay should be awarded its costs

As Mosman Bay points out, the contention that Mosman Bay was in a defensive position was:
(a)raised in writing during the conferral on the issue of security for costs by a letter from the solicitors for Mosman Bay to the solicitors for Holgersson, dated 29 June 2018.[55] By letter dated 18 July 2018, Holgersson's solicitors rejected Mosman Bay's contention that Mosman Bay was in substance in a defensive position and referred to the fact that the first defendant, AIG Insurance Australia Ltd, made allegations against Simmos Home Improvements Pty Ltd rather than the first fourth party and referred to the differences in the causes of action relied upon by AIG Insurance Australia Limited respectively and raised an issue in respect of pt 1F of the Civil Liability Act 2002 (WA).[56] The latter issue was not pursued in the application and the other issues raised by Holgersson's solicitors on this point were found to be immaterial;[57]
(b)required evidence as to:
(i)the events leading to Mosman Bay commencing proceedings against Holgersson including Mr Walling's understanding of insurance arrangements in respect of renovations of the house;
(ii)the events leading to the partial denial of indemnity by the third defendant, Tokio Marine & Nichido Fire Insurance Co Ltd;
(iii)the circumstances giving rise to the painting subcontract;
(iv)the matters relevant to the cause of the fire; and
(v)the fact that Holgersson was himself insured by CGU Insurance pursuant to a policy under which he would be expected that liability would be accepted, and which would give liability for dual insurance with Tokio Marine; and
(c)required submissions as to these issues.
[55] First third party's submissions on the costs of the first fourth party's application for security for costs, filed 9 April 2019 [10]; Affidavit of Byron Andrew Winburn‑Clarke, sworn 31 August 2018, annexure BC6, pages 37 ‑ 40.
[56] First third party's submissions on the costs of the first fourth party's application for security for costs, filed 9 April 2019 [11]; Affidavit of Byron Andrew Winburn‑Clarke, sworn 31 August 2018, annexure BC8, pages 43 ‑ 44.
[57] McMurray v AIG Insurance Australia Ltd [No 2] [2018] WASC 391 [86].
Thus, Holgersson's assertion that 90% of the work, performed leading up to and including the hearing itself, dealt with the financial issues is, as Mosman Bay points out, not correct.
The only issues upon which it can properly be said that Mosman Bay failed is the issue going to Mosman Bay's and its director, Mr Walling's, financial position.
It could be said that Mosman Bay should have conceded the jurisdictional issue, so that the only substantial issue that required consideration by the court in determining whether it should exercise its discretion to make an order for security was whether the proceedings were defensive. This was an issue that was not only ultimately decisive, but an issue that was squarely raised at an early stage by Mosman Bay's solicitors in correspondence during conferral in respect of the application for security.
However, I am not satisfied that Holgersson has shown that there are good reasons why it should not pay Mosman Bay's costs. Had Holgersson accepted that Mosman Bay was in a defensive position, the application for security of costs should not have been made, or pressed. For this reason it is not in the interests of justice to make the orders sought by Holgersson.
I will make the orders sought by Mosman Bay.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

EH
Research Associate/Orderly to the Honourable Justice Smith

17 MAY 2019