Nelson Capital Pty Ltd v Short
[2003] WASC 152
NELSON CAPITAL PTY LTD -v- SHORT & ORS [2003] WASC 152
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2003] WASC 152 | |
| Case No: | CIV:2736/2002 | 29 JULY 2003 | |
| Coram: | MASTER NEWNES | 15/08/03 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Security for costs ordered | ||
| B | |||
| PDF Version |
| Parties: | NELSON CAPITAL PTY LTD (ACN 081 483 730) ANTHONY NELSON SHORT HALLCREST INVESTMENTS PTY LTD (ACN 064 752 361) AMADEUS ENERGY LTD (ACN 058 714 408) |
Catchwords: | Practice and procedure Application for security for costs Section 1335 Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 1335 Rules of the Supreme Court, O 25 |
Case References: | Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998 BPM Pty Ltd v HPM Pty Ltd, unreported; FCt SCt of WA; Library No 960206; 17 April 1996 Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 Beach Petroleum NL v Johnson (1992) 7 ACSR 203 Bell Wholesale Co Pty Ltd v Gates Export Corp (No 2) (1984) 8 ACLR 588 Dallas Development Corporation Pty Ltd v Western Australian Land Authority [2000] WASCA 49 Dalrymple Park Pty Ltd v Tabe & Lees Pty Ltd (1996) 22 ACSR 71 FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241 Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523 MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 Pegasus Gold Australia Pty Ltd v Bateman Project Engineering Pty Ltd [2001] FCA 377 Prime Holdings Pty Ltd v Shigeyuki Kanemaru (1992) 7 WAR 308 Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd & Ors [1985] 1 NSWLR 114 Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241 Zortec Australia Pty Ltd v R & I Bank of WA, unreported; FCt SCt of WA; Library No 920609; 13 August 1992 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
ANTHONY NELSON SHORT
First Defendant
HALLCREST INVESTMENTS PTY LTD (ACN 064 752 361)
Second Defendant
AMADEUS ENERGY LTD (ACN 058 714 408)
Third Defendant
Catchwords:
Practice and procedure - Application for security for costs - Section 1335 - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 1335
Rules of the Supreme Court, O 25
(Page 2)
Result:
Security for costs ordered
Category: B
Representation:
Counsel:
Plaintiff : Mr R W Richardson
First Defendant : Mr M S Van Brakel
Second Defendant : Mr M S Van Brakel
Third Defendant : Mr M C Hotchkin
Solicitors:
Plaintiff : Bennett & Co
First Defendant : Clayton Utz
Second Defendant : Clayton Utz
Third Defendant : Hotchkin Hanly
Case(s) referred to in judgment(s):
Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998
BPM Pty Ltd v HPM Pty Ltd, unreported; FCt SCt of WA; Library No 960206; 17 April 1996
Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994
Case(s) also cited:
Beach Petroleum NL v Johnson (1992) 7 ACSR 203
Bell Wholesale Co Pty Ltd v Gates Export Corp (No 2) (1984) 8 ACLR 588
Dallas Development Corporation Pty Ltd v Western Australian Land Authority [2000] WASCA 49
Dalrymple Park Pty Ltd v Tabe & Lees Pty Ltd (1996) 22 ACSR 71
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241
(Page 3)
Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523
MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97
Pegasus Gold Australia Pty Ltd v Bateman Project Engineering Pty Ltd [2001] FCA 377
Prime Holdings Pty Ltd v Shigeyuki Kanemaru (1992) 7 WAR 308
Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd & Ors [1985] 1 NSWLR 114
Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241
Zortec Australia Pty Ltd v R & I Bank of WA, unreported; FCt SCt of WA; Library No 920609; 13 August 1992
(Page 4)
1 MASTER NEWNES: This is an application by the defendants for security for costs under s 1335 of the Corporations Act2001 (Cth) or, alternatively, O 25 of the Rules of the Supreme Court. The defendants, however, relied principally upon s 1335.
2 Section 1335(1) provides as follows:
"Where a corporation is plaintiff in any action or other legal proceedings, 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."
3 It is clearly established that the Court's jurisdiction to order security for costs is enlivened only if it appears by credible testimony that there is reason to believe the corporation will be unable to pay the defendant's costs if the defendant is successful. If that question is answered in the affirmative, the question then is whether, in the exercise of the Court's discretion, such an order should be made.
4 It is necessary, before turning to those issues, to say something about the proceedings. In the statement of claim the plaintiff pleads that in about February 1998 it entered into a written partnership agreement with the second defendant for the provision of corporate advisory services and to facilitate investment opportunities for the benefit of the partnership. The partnership's affairs were controlled by Mr Justin Birchmore on behalf of the plaintiff and the first defendant on behalf of the second defendant.
5 The plaintiff alleges that in 1999 the first defendant identified two potential commercial projects for development and commercial exploitation by the partnership. The first, identified in about July 1999, involved a proposal developed on behalf of an engineering firm, Toussaint & Richardson, for the commercial production of diesel fuel from vegetable oils or animal fats to petroleum (the "Bio-Diesel Project"). The other, identified in about October or November 1999, was a "corporate opportunity to assist in the acquisition by purchase or otherwise of Landfill Gas and Power Pty Ltd by Environmental Gas and Power Ltd, whose ultimate beneficiary carried on business in Western Australia as an integrated energy entity with specialist knowledge in the area of
(Page 5)
- waste-to-power electricity generation and the live monitoring and management of deregulated power ('the Control Room Project')".
6 It is alleged that subsequently the plaintiff and the second defendant developed both projects for the benefit of the partnership and that significant time and cost were expended developing, among other things, opportunities and appropriate commercial models for development of each and, in respect of the Control Room Project, its commercial value in creating an alliance with Honeywell Ltd for its development.
7 It is alleged that in about July 2002 the partnership was dissolved and the plaintiff acquired the second defendant's interest in the partnership.
8 The plaintiff claims that subsequently the second defendant procured the third defendant to acquire or develop the projects through two wholly owned subsidiaries of the third defendant, Australian Renewable Fuels Pty Ltd and Virtual Control Systems Ltd, which were incorporated for that purpose. It says that each of the projects was developed by the third defendant into significant commercial ventures, utilising the work previously done by the partnership.
9 The plaintiff says that in so acting the second defendant was in breach of fiduciary duties it owed to the plaintiff and is liable to the plaintiff in damages, and that the first and third defendants respectively are liable to account for the profits and benefits they respectively obtained. It is suggested that the plaintiff's claim is for an amount in the order of $90,000,000.
10 The defendants have each filed defences but, apart from admitting the incorporation of the various corporate parties and pleading the periods for which it is said the first defendant was a director of the second defendant and third defendant respectively, the defendants simply deny each of the allegations made against them in the statement of claim. No positive case is pleaded. In the course of argument, counsel for the first and second defendants and for the third defendants indicated that it was highly probable their respective clients' defences would be substantially amended, but said that that could not be done until an outstanding dispute over the adequacy of further and better particulars of the statement of claim provided by the plaintiff had been resolved. It was the defendants' position that before they can plead more fully to the claim they require much more information about it, which they were seeking to obtain through further and better particulars.
(Page 6)
11 It is against that background I turn to the first question on this application, namely, whether it appears by credible evidence that the plaintiff will be unable to meet the defendants' costs if the defendants are successful at trial.
12 It was not in issue that the plaintiff's issued share capital consists of a single $1 share issued to Mr Birchmore. The plaintiff holds no real property. There is annexed to an affidavit of Mr Birchmore, sworn 30 June 2003, in opposition to the application, a balance sheet of the plaintiff as at 30 May 2003, which Mr Birchmore says was prepared by the plaintiff's accountant. It is not, however, suggested that the plaintiff's accounts have been audited.
13 According to the balance sheet, the plaintiff has total assets of $218,240.02 and total liabilities of $266,583.10. That is, it has an excess of liabilities over assets of $48,343.08. The defendants submitted that, moreover, the balance sheet overstated the plaintiff's assets. In support of that contention counsel referred to three items of significance shown as assets on the balance sheet. The first was an amount of $31,798.90 for shares in Mermaid Marine Ltd "at cost". Counsel pointed out there was nothing to indicate when the shares were acquired or their current value. The next item was an amount of $63,747.87, described as "loans to associates". Counsel observed that there was no indication of the terms of those loans, the repayment provisions or the capacity of the debtors to repay them. The third item concerned an amount of $103,519.38, which was described in the balance sheet as "cash in hand" at National Australia Bank. There was also an amount of $6,678.72 for current receivables. Counsel for the first and second defendants referred to a letter dated 22 April 2003 from the plaintiff's solicitors to the first and second defendants' solicitors in which the plaintiff's solicitors said that the plaintiff had cash at bank of $150,000. It was submitted that the discrepancy between the amounts indicates that the plaintiff spent an amount in the order of $40,000 in the period 22 April 2003 to 30 May 2003. That, it was submitted, is a rate of depletion that, if continued, would eliminate the cash reserves of the plaintiff entirely by September 2003. There was no evidence that the plaintiff was carrying on any business which would generate funds to replace those being spent.
14 In his affidavit, Mr Birchmore says that the most significant liability of the plaintiff is a loan from the Justin Birchmore Trust of $221,886.56. Mr Birchmore says that the Trust, of which he is the trustee, will subordinate $60,000 of that debt in respect of any costs awarded to the defendants in the action. There is annexed to Mr Birchmore's affidavit a
(Page 7)
- letter addressed "To Whom It May Concern" to that effect. The defendants' counsel questioned the effect and enforceability of the letter, but in any event said that the proposed subordination provided little comfort. In the first place, the fact that part of the debt was to be subordinated implied that the debt was secured in a manner that would otherwise give it priority over any claim for costs by the defendants. Accordingly, the balance of the loan, of some $160,000, would still rank in priority to any claim by the defendants. Secondly, given that, on the plaintiff's own figures, the liabilities of the plaintiff exceeded its assets by some $48,000, the subordination was of little consequence, particularly when it was borne in mind that the plaintiff's financial position would be adversely affected by having to meet its own costs during the course of the litigation.
15 The costs of the action were a matter of contention between the parties. The first and second defendants contended that, in light of the nature and extent of the matters in issue, the trial was likely to take 15 hearing days and involve substantial expert evidence from overseas experts. The draft bill of costs prepared by their solicitors estimated an amount of $20,900 for "meetings with experts, inspecting reports and research" and an amount of $40,600 for "examination of witness before trial by counsel or solicitor". The latter item was not explained, but I assume it is a reference to taking the evidence of overseas experts. There was no suggestion that evidence of any other witness would have to be taken before trial. The total amount of the draft bill, including disbursements, was $258,718.
16 The third defendant's solicitors estimated that the trial would take 30 hearing days. They also considered that it would involve expert evidence from overseas experts. The draft bill of costs includes costs to "travel to expert" of $26,720, "meeting with expert and inspecting projects" in an amount of $33,400 and the expenses of junior and senior counsel and a solicitor travelling to Austria and spending five days in conference with an expert in an amount of approximately $30,000. There is also provision for "examination of witness before trial" in an amount of $40,600. Once again, there was no explanation of that and I assume it refers to taking the evidence of an overseas expert. The total amount of the third defendant's bill of costs, including disbursements, was $452,180.
17 The plaintiff, on the other hand, estimates that the trial will take seven hearing days, subject to the proviso that it is impossibly reliably to estimate the length of the trial at this stage. The plaintiff contends that the
(Page 8)
- defendants' estimates are due to their erroneous view of the matters in issue.
18 The plaintiff says it does not allege that it identified and developed Bio-Diesel as a concept or invention or that it developed the Control Room technology. It does not claim any rights to the technology itself. Accordingly, issues relating to the nature of the technology will not arise. As a consequence, it was submitted, the defendants' estimates overstate the nature and extent of the evidence, particularly the expert evidence, which will be relevant at trial. Counsel for the plaintiff also stressed that the defendants do not plead any positive case and the extent of the evidence which, on the present pleadings, they would be permitted to adduce would appear to be very limited.
19 The first and second defendants accepted that the ambit of the necessary evidence is somewhat uncertain at this stage but say that that is principally due to the degree of generality with which the plaintiff's case is pleaded. Counsel for the first and second defendants pointed out that one of the matters in issue is whether the projects being developed by the third defendant are the same as the projects with which the plaintiff says the alleged partnership was concerned. That, it was submitted, will clearly involve expert evidence. The third defendant said that the case will also require investigation into what was done by the alleged partnership in relation to the projects which the plaintiff says the partnership had had in hand, and the value of any interest which the plaintiff could have derived from those projects, involving a detailed, expert analysis of relevant markets and opportunities, and the development, marketing and other costs involved in their exploitation.
20 Whilst initially the defendants argued that their likely costs of the action should be assessed on the basis of the way in which it was likely the action, including the pleadings, would develop, their counsel conceded in the course of argument that, on this application, any assessment of the likely costs would have to be based on the pleadings as they stand, rather than the nature of the pleadings as they may eventually become. The latter, at this stage, was necessarily speculative.
21 I have some sympathy for the plaintiff's argument that it is difficult to estimate the likely costs with any degree of confidence at this stage. I am inclined to think that, as is so often the case, the true position in relation to the length of trial is likely to lie somewhere between the estimates which have been provided by the plaintiff and the third defendant, although, on the basis of the present pleadings, I consider it is
(Page 9)
- likely to be much closer to the plaintiff's end of the range than the third defendant's. Whilst I accept that, even as the case is currently pleaded, significant expert evidence, or consultation with experts for the purpose of cross-examination, will be required, it is difficult to see why there would need to be much, if any, duplication of experts by the first and second defendants on the one hand and the third defendant on the other. Presumably, much of the expert evidence will be common to all the defendants. At this stage, I am also not persuaded that it will be necessary for costly trips to be made to Europe to obtain expert evidence. There is nothing before me which indicates that relevant experts cannot be obtained in Australia or, at least, cannot be obtained more economically than the draft bill of costs of the third defendant contemplates. I also accept the submission by counsel for the plaintiff that, as the matter currently stands, a number of the items in the draft bills of costs are excessive.
22 It is the case, however, that the plaintiff's own estimate of the trial length is seven hearing days and, even on what little is known of the matter at present, I am inclined to think that may be a slight under-estimate. In those circumstances, it is clear that the costs of the action will be substantial, even assuming that matters such as the nature of any projects currently conducted by the third defendant, and the value of the opportunities which the plaintiff claims to have lost, will be largely common to the defendants. I would expect the first and second defendants' costs would be slightly greater than the third defendant's costs, because of the other issues which arise on the pleadings in relation to the alleged partnership, but that may depend on how they deal with matters where they have common interests.
23 I am satisfied, having regard to the evidence as to the financial position of the plaintiff, there is credible evidence that the plaintiff would be unable to meet the defendants' costs if the defendants were successful at trial. It is, therefore, necessary to consider whether, as a matter of discretion, an order for security for costs should be made.
24 It is trite law that the discretion to be exercised on an application of this sort is unfettered, but it is also accepted that some of the factors to be taken into account are:
(1) whether the plaintiff's claim is bona fide and has reasonable prospects of success;
(2) whether the defendants have contributed to the plaintiff's likely inability to pay costs;
(Page 10)
- (3) whether an order for security for costs may have the effect of stultifying the action;
(4) whether it appears the applicants are seeking to stifle a legitimate claim;
(5) whether there are others behind the corporate plaintiff who might reasonably be expected to contribute to the satisfaction of an order for security.
- Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA (Malcolm CJ); Library No 940403; 20 July 1994 at 4 - 5 and Blackbird Entertainment Pty Ltd v IO Research Pty Ltd, unreported; SCt of WA (White J); Library No 980297; 2 June 1998.
25 It is also well accepted that the fact the plaintiff will be unable to pay the defendants' costs if the defendants are successful is a factor of great weight in the exercise of the discretion, but it is not necessarily decisive and regard must be had to all the circumstances of the case.
26 The plaintiff raises two grounds upon which it says that, as a matter of discretion, an order for security should not be made in this case. First, the plaintiff says that the defendants have caused the plaintiff's present inability to meet their costs and, secondly, that the defendants' applications are an attempt to stifle the plaintiff's claim.
27 In relation to the first ground, Mr Birchmore simply says that, by their conduct, the defendants have deprived the plaintiff of assets that would otherwise have materially increased its net worth. He does not elaborate on that assertion. Counsel for the third defendant submitted that the contention is irrelevant because the issue is whether the defendants have diminished the plaintiff's financial capacity, not whether the defendants have prevented the plaintiff from improving it. I do not think it is necessary to deal with that submission. On this ground, the plaintiff bears an evidentiary onus: BPM Pty Ltd v HPM Pty Ltd,unreported; FCt SCt of WA; Library No 960206; 17 April 1996. There is simply no evidence to support the plaintiff's contention. There is, in particular, no evidence that the plaintiff would have exploited the alleged projects within the life of this litigation or, if it had, that such exploitation would materially have improved its capacity to meet the defendants' costs. No attempt has been made to lead such evidence.
28 The plaintiff says the fact that the applications are an attempt to stifle its claim is to be inferred from the extravagant amounts, some $700,000 in total, claimed by the defendants by way of security for costs. I do not
(Page 11)
- think that inference can be drawn. In the course of argument, it appeared that the respective bills of costs had been prepared on the basis of the defendants' expectations as to what would be the matters in issue in the action once the amendments which they contemplate will be made to their defences were made. As I have mentioned, their counsel conceded in the course of argument that, in fact, the current application must be determined on the basis of the pleadings as they stand, rather than on assumptions about how they may finally turn out. The bills of costs do therefore overstate the position, and I also think that, as is often the case, the authors have tended to base them on the greatest costs likely to be incurred rather than the probable costs. I do not, however, think it can be inferred that the amounts claimed are due to the motive that the plaintiff attributes to the defendants. No other basis was suggested for the plaintiff's contention.
29 There was a sustained attack on the merits of the plaintiff's claim, as pleaded, by counsel for the defendants, and an equally spirited attack on the adequacy of the defendants' defences by counsel for the plaintiff.
30 I do not consider that, at this stage, it is possible to reach any firm conclusions about the merits of the plaintiff's claim. Whilst the defendants have pointed to certain problems with the way in which it is currently pleaded, I do not think it can be said that the plaintiff does not have an arguable claim. In those circumstances, I consider I should proceed on the basis that the plaintiff's claim is bona fide and has reasonable prospects of success.
31 It was submitted by the plaintiff that if an order for security for costs were to be made, the security should be provided in stages. I accept that that is an appropriate course in the circumstances of this case. The matter is at an early stage. In matters of this nature, it is often very difficult to reach any confident conclusion as to the ambit of the matters which will be in issue at trial and therefore the nature and scope of the evidence that the parties will seek to adduce. This action is a good example. It is almost inevitable that, after the initial interlocutory skirmishing, the pleadings will evolve substantially and the matters in issue will be more precisely defined. Indeed, that was foreshadowed by the defendants, albeit in the expectation that the matter will become substantially more, rather than less, complicated. Be that as it may, as the matter stands the security to be provided, in my view, should be in a total amount of $150,000. There should be liberty to any party to apply to vary the amount of the security if circumstances materially change.
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32 The appropriate stages at which security should be provided and the amounts for each stage were not canvassed in argument and I will hear counsel on that and on costs.
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