NT Recycling Solutions Pty Ltd v Environbank NT Pty Ltd - [2016] NTSC 44

NT Recycling Solutions Pty Ltd v Environbank NT Pty Ltd & Ors
[2016] NTSC 44
PARTIES:NT RECYCLING SOLUTIONS PTY LTD

v
ENVIRONBANK NT PTY LTD
AND
MARINE STORES PTY LTD
AND
CAN RECYCLING (SA) PTY LTD

TITLE OF COURT:  SUPREME COURT OF THE NORTHERN TERRITORY
JURISDICTION:  SUPREME COURT OF THE TERRITORY EXERCISING TERRITORY JURISDICTION
FILE NO:127 of 2015 (21558190)
DELIVERED:  25 August 2016
HEARING DATES:  9 & 11 August 2016
JUDGMENT OF:  MASTER LUPPINO
CATCHWORDS:

COSTS – Security for costs – Principles applicable to the making of an order – Order is discretionary – Pre-requisites to enliven the discretion – Test to be applied in determining whether the discretion is enlivened.
Anchung Pty Ltd v Northern Territory of Australia [2015] NTSC 76.
Anchung Pty Ltd v Northern Territory of Australia (No 2) [2016] NTSC 34.
Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65.
HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87.
Livingspring v Kliger Partners [2008] VSCA 9.
Pucciamati v Walker Nominees Pty Ltd [2002] NTSC 13.
Beach Petroleum NL v Johnson (1992) 10 ACLC 525 at p 527.
Darwin Joinery and Furniture Manufacturing Pty Ltd (In Liquidation) v Finch, Unreported, Supreme Court NT, Kearney J, 23 July 1991.
Mac-Attack Equipment Hire Pty Ltd v AJ Lucas Operations Pty Ltd [2010] NTSC 27.
Supreme Court Rules, O 62.02
Environment Protection (Beverage Containers and Plastic Bags) Act, s 20
Evidence (National Uniform Legislation) Act, s 131
Corporations Act 2001, s 1335
Uniform Civil Procedure Rules 2005 (NSW), r 42.21(1)
REPRESENTATION:
Counsel:
Plaintiff:Mr Wyvill SC with Mr Baddeley
First Defendant:  Mr Maher
Second Defendant:  Mr Crawley
Third Defendant:  Mr Sanders
Solicitors:
Plaintiff:Ward Keller
First Defendant:  Paul Maher Solicitors
Second Defendant:  De Silva Hebron
Third Defendant:  HWL Ebsworth
Judgment category classification:    B
Judgment ID Number:  Lup1604

Number of pages: 19
IN THE SUPREME COURT
OF THE NORTHERN TERRITORY
OF AUSTRALIA
AT DARWIN
NT Recycling Solutions Pty Ltd v Environbank NT Pty Ltd & Ors
[2016] NTSC 44
No. 127 of 2015 (21558190)

BETWEEN:
NT RECYCLING SOLUTIONS PTY LTD

Plaintiff
AND:
ENVIRONBANK NT PTY LTD

First Defendant
AND:
MARINE STORES PTY LTD
Second Defendant
AND:
CAN RECYCLING (SA) PTY LTD
Third Defendant

CORAM: MASTER LUPPINO
REASONS
(Delivered 25 August 2016)

The substantive proceedings in this matter is a claim by the Plaintiff as an “approved collection depot” under the Environment Protection (Beverage Containers and Plastic Bags) Act (“the Act”) for the amount of “reasonable costs” determined pursuant to section 20(2)(b) of the Act. Each Defendant is a “CDS co-ordinator” as defined in the Act. The Act provides for a scheme to recycle beverage containers which operates by consumers paying a deposit of 10 cents on beverage containers which is refunded when the empty container is returned to an approved collection depot. The collection depot in turn delivers those containers, after sorting and the like, to the CDS co-ordinator and is to be paid a fee namely, the amount of the deposit refunded to the consumer plus a sum representing those “reasonable costs”.
The relevant section of the Act provides as follows:-
20                  Operator of collection depot may be reimbursed for costs
(1)        This section applies if:
(a)a manufacturer supplies a beverage in an approved container; and
(b)a person delivers the empty container to an approved collection depot; and
(c)the operator of the depot pays the refund amount for the container to the person; and
(d)     the operator delivers the container to a CDS coordinator.
(2)The operator of the depot may, by written notice, require the CDS coordinator to pay:
(a)     the refund amount; and
(b)the reasonable costs incurred by the operator relating to sorting, cleaning, storing, packing and processing the container for ensuring the container can be reused, recycled or otherwise disposed of.
The current application is by the Second Defendant seeking orders for security for costs and particular discovery. All parties agree that general discovery will involve a very large number of documents. The Plaintiff says that unrestricted general discovery would result in costs of the order of $100,000 for discovery alone. Taking that at face value for the purposes of argument, in absolute terms that figure is unusually high but it also represents approximately 10% of the quantum of the claim on the Plaintiff’s case and 20% if the Second Defendant’s assessment is correct. It represents a significant proportion of the maximum potential judgment amount and more so in respect of a favourable result for the Defendants. That demonstrates an obvious need to limit discovery so that a level of proportionality consistent with modern case management is achieved.
Following discussions with the parties, an approach tailored towards a limited form of discovery has subsumed the application for particular discovery. That part of the application has been adjourned to further consider that option.
Security for costs is provided for in Rule 62 of the Supreme Court Rules (“SCR”). The relevant parts provide as follows:-
62.02                 When to give security
(1)   Where:
(a)     the Plaintiff is ordinarily resident out of the Territory;
(b)the Plaintiff is a corporation or (not being a Plaintiff who sues in a representative capacity) sues not for his own benefit but for the benefit of another person and there is reason to believe that the Plaintiff has insufficient assets in the Territory to pay the costs of the Defendant if ordered to do so;
(c)a proceeding by the Plaintiff in another court for the same claim is pending;
(d)subject to subrule (2), the address of the Plaintiff is not stated or is not stated correctly in his originating process;
(e)     the Plaintiff has changed his address after the commencement of the proceeding in order to avoid the consequences of the proceeding; or
(f)under an Act or the Corporations Act 2001 the Court may require security for costs,
the Court may, on the application of a Defendant, order that the Plaintiff give security for the costs of the Defendant of the proceeding and that the proceeding as against the Defendant be stayed until the security is given.
Section 1335 of the Corporations Act is also a source of power to order security for costs. That section provides as follows:-
Where a corporation is a 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.
Most recently, in Anchung Pty Ltd v Northern Territory of Australia (No 2)[1] (“Anchung No 2”) and Anchung Pty Ltd v Northern Territory of Australia[2] (“Anchung No 1”), I discussed the principles in respect of applications for security for costs. As I said there, both Rule 62.02 and section 1335 confer a discretionary power on the Court. The process has two stages. First the discretion must be enlivened. That is the threshold question. That is satisfied if any of the factors in Rule 62.02 of the SCR, or section 1335 of the Corporations Act are established. The first stage is not discretionary and depends entirely on whether any of the factors provided for in rule 62.02 or section 1335 are satisfied.[3] Once the threshold has been achieved the decision whether or not to grant security is discretionary.
The amount of security sought is $140,000. This is sought by way of a payment into Court by the Plaintiff. An alternative form of security, which is discussed in more detail below, is also provided for. Pre-estimating costs for security for costs purposes is often a difficult question. I am however satisfied that, assuming an order was to be made, the amount sought would appear appropriate. It appears that the relevant considerations[4] have been taken into account in assessing recoverable costs at $140,000 up to the first day of trial. Although there has not been any allowance made to take into account the prospects of a settlement well before trial, that is a deduction that is usually left to the Court in appropriate cases and it is rare that an allowance is made for that in the estimate of costs made by the party seeking the order. On that basis, and after considering the evidence the Second Defendant relies on for that purpose,[5] I think that all relevant considerations have been properly factored in.
The first task for the Court is to determine whether the discretion is enlivened. Mr Crawley, for the Second Defendant, argues that it has been but Mr Wyvill SC, for the Plaintiff disputes that. Mr Crawley argues that the evidence establishes the factors in Rule 62.02(1)(b) and (f).
Initially the Second Defendant also relied on the factor in rule 62.02(1)(a). However the Second Defendant has now conceded that factor. That was on the basis of evidence that the registered office of the Plaintiff had changed from an address in Adelaide to an address in Darwin in March 2016. Although the point is no longer relevant given the Second Defendant’s concession, I am not satisfied that this factor turns simply on the location of the registered office of a company. A place of residence is an unusual concept in the context of a company. It may be inappropriately restrictive to simply say that a company is “ordinarily resident” in the place where its registered office is located. If there is a significant enough nexus between the operations of the company and the Northern Territory, then that may be more determinative of the residence of the company for the purposes of that sub-paragraph. In that regard the Plaintiff has significant involvement in the recycling industry in Darwin and that is not limited only to beverage container recycling.
Mr Crawley submits that the test to be applied in respect of the threshold question is not a demanding one[6] and that only a prima facie case is required. I discussed a similar submission, and the authorities[7] relied on to support that submission, in Anchung No 1. Mr Wyvill challenged that and submitted that the test requires a rational basis for the belief that the Plaintiff will have insufficient assets in the Northern Territory to pay the Second Defendant’s costs if ordered to do so. He relied on Cornelius v Global Medical Solutions Australia Pty Ltd[8] (“Cornelius”), a decision of the New South Wales Court of Appeal which, Mr Wyvill submitted, rejected the test as put by Mr Crawley.
Cornelius concerned rule 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW) which is the rule corresponding to rule 62.02 of the SCR. The New South Wales rule is worded differently. Although the words “reason to believe” are common to both, the New South Wales rule requires a reason to believe that a corporate Plaintiff “will be unable to pay the costs of the defendant if ordered to do so”. Rule 62.02(1)(c) requires a reason to believe that a corporate Plaintiff “has insufficient assets in the Territory to pay the costs of the defendant if ordered to do so”. I only note that for completeness as I am of the view that the different wording is not a basis to distinguish Cornelius on this aspect.
Cornelius was an appeal from a decision at first instance which interpreted the threshold test as requiring an assessment of the “risk” that a Plaintiff would be unable to satisfy a costs order. On appeal, the New South Wales Court of Appeal said that such an interpretation was “too generous”[9] to the defendant and that “a rational basis for the requisite belief”[10] was required to be held. In HP Mercantile Pty Ltd v Dierickx[11] (“HP Mercantile”) WardJA made reference to assessing risk when discussing the threshold test in his ex tempore reasons. This may have caused confusion as to the proper test. In Cornelius he clarified this and said that his decision in HP Mercantile was not intended to change the test to require a risk evaluation in the assessment.[12]
Mr Crawley’s submissions in respect of the test were not made specifically on the basis of an assessment of risk, merely that only a prima facie case was required. In submitting that only a prima facie case was required, I did not understand Mr Crawley to be suggesting that the test required only a finding that there was a risk that the Plaintiff would be unable to satisfy an adverse cost order. To be entirely clear however, I accept that the test is that the Plaintiff will have insufficient assets in the Northern Territory to satisfy any adverse cost order and not only that there is a risk of that occurring.
As to section 1335 of the Corporations Act, Mr Wyvill submitted that the section does not apply as there is no “credible testimony that there is reason to believe that [the Plaintiff] will be unable to pay the costs of the [Second Defendant] if successful in its defence” as required by that section. The test and principles to be applied are the same, whether applying section 1335 or Rule 62.02.
In respect of Rule 62.02(1)(b) of the SCR, the Second Defendant relies on the evidence it has produced as well as the financial accounts provided by the Plaintiff. The evidence of the Second Defendant demonstrates firstly that the Plaintiff does not own real estate in the Northern Territory. Secondly there is evidence of a media report of a substantial penalty imposed on the Plaintiff in respect of an environmental law prosecution. Thirdly there is evidence of a media report to the effect that certain depots of the Plaintiff in the Northern Territory have closed. Lastly there is documentary evidence consisting of ASIC searches and the like which demonstrates that the Plaintiff has numerous financial charges registered over its assets. The amount of these charges is not able to be determined from the documentary evidence given that the amounts secured are on an “all moneys” basis. The Plaintiff’s evidence gives greater detail of those liabilities.
Dealing first with the penalty, what is not known in respect of that is what ongoing impact that has on the resources of the Plaintiff. An examination of the financial accounts submitted by the Plaintiff suggests that there is no adverse impact. It is not shown as a liability so presumably it has been paid. That therefore appears neutral. Similarly in respect of the closure of some depots, it is not possible to legitimately infer solvency issues for the Plaintiff based on that as there may be pertinent reasons, not inconsistent with solvency, to explain the closure of the depots. Having said that the Plaintiff has opted not to provide any evidence in respect of either of those matters despite being on notice and despite having had the opportunity to do so.
It is generally recognised that a plaintiff defending an application for security for costs should make full and frank disclosure of its financial position, at least to the extent that it is relevant to the application.[13] The failure of the Plaintiff to do so in Anchung No 1 and Anchung No 2 resulted in criticism of the Plaintiff in those applications. However, this requirement is tempered by the wording of the rule in only setting a “reason to believe” as the required standard. A Court will not undertake as thorough an examination of a plaintiff’s finances as it would if the plaintiff’s finances were an issue at trial.[14] A balance needs to be struck as to the extent of the evidence required. Not every aspect of the Plaintiff’s accounts needs to be the subject of evidence provided that overall the evidence is sufficient to enable the Court to determine the primary question. To meet this requirement the Plaintiff has provided some financial statements,[15] being financial accounts prepared by the Plaintiff’s accountants for the years 2014 and 2015 in evidence together with year to date figures which appear to be computer generated and apparently without input from accountants.
Mr Crawley was critical of the sufficiency of the financial accounts as they were described as special purpose accounts. The extent of the criticism was unclear as the admissibility of the accounts was rightly conceded. I consider them sufficient for current purposes, albeit that they are not audited.
With that background, I now consider the threshold question in light of the evidence before me, mostly the Plaintiff’s evidence of its financial position. I set out below a summary of what I consider to be the relevant parts of that evidence including commentary. For discussion purposes, figures are not quoted in full and rounded approximate amounts are used in lieu for convenience. Pertinent features are:-
(a)The total trading income of the Plaintiff in both the 2014 and 2015 financial years was in excess of $10 million. Mr Crawley commented that the trading figures related to the entire enterprise of the Plaintiff and not only the beverage containers. Although apparently correct that does not matter for current purposes as it is the overall financial position of the Plaintiff that is relevant;
(b)The “gross profit” (meaning receipts less direct costs of goods) in each of those years was in excess of $8 million;
(c)The net profit in 2015 was $620,000 which compares to a loss of $167,000 in 2014. The year-to-date figures show a net profit for the 2016 year up to 31 May 2016 at $101,000, which is indicative of a dramatic drop in profitability between 2015 and 2016;
(d)Although there was no after-tax profit in 2014 given the loss the Plaintiff recorded that year, the after-tax profit in 2015 was approximately $450,000;
(e)The “retained profits” of the Plaintiff in 2015 was approximately $320,000. What that term precisely means was not explained and there was no indication in the accounts as to how or why that arises. Also, it is puzzling that there is a higher figure for that item ($560,000) in 2014, when the Plaintiff made a substantial loss in that year;
(f)The Plaintiff’s total assets were $8.75 million in 2015 and the total liabilities for the same period were $5.5 million resulting in net assets of approximately $3.2 million. In 2014 the net assets were $2.8 million. For 2015, this is comprised as to $840,000 by way of “retained profits”, $2.1 million as a “revaluation reserve’ and $308,000 as a “general reserve”. None of those items are explained in detail in the accounts. Ideally, it would be useful to know how realisable those amounts are or how readily the Plaintiff could draw on them;
(g)Goodwill is said to be $2.1 million which corresponds to the amount of the item described as the revaluation reserve. The accounts also describe goodwill as being “at cost” but that contradicts other evidence which suggests that the business was a start up by its current principals. If so, that is inconsistent with the purchase of goodwill. Mr Wyvill attempted to explain this, by reference to the notes to the accounts, by stating there was a purchase of a business, not the Plaintiff’s current business. That alone is unhelpful and leaves important questions unanswered. In any case, if the amount shown as goodwill is at cost, it remains unclear how that ties in with its current profitability or whether that amount is reflective of the current goodwill of the Plaintiff’s businesses. Having said that I accept that there will always be goodwill in a business, such as that of the Plaintiff, which shows a more than adequate level of profit;
(i)Despite the very favourable trading figures, the accounts only show approximately $4,000 as cash on hand. Although current assets are said to be $1.6 million in 2015 and $2.1 million in 2014, this is mainly composed of “receivables”. Also credit cards and director’s loans seem to be utilised to fund the Plaintiff’s operations. Credit card liabilities were $96,000 in 2015 and $51,000 in 2014. In the corresponding years director’s loans were $375,000 and $261,000 respectively. The conclusion is that the available cash position of the Plaintiff is poor. However, the test in the SCR is based on whether the Plaintiff has “insufficient assets” to meet a costs order. It is not income dependant and not limited to any particular type of asset. It is concerned more with what can be realized to meet costs and therefore the amount of immediately available cash alone is not determinative;
(j)The property, plant and equipment are shown at cost less depreciation, namely $4.5 million. The plant and equipment is subject to hire purchase liabilities which are listed as being $3.3 million, resulting in a net value of $1.2 million. A substantial reduction in the hire purchase liability in 2015, of the order of $800,000, is evident compared to the 2014 figures. Although there is no actual and current valuation of the plant and equipment, depreciated value is the generally accepted value for accounting purposes and may be a sufficient for current purposes. Depreciated value however is not necessarily an indicator of actual value, albeit that actual value may exceed depreciated value;
(k)The difference between debtors and creditors of the Plaintiff is in the Plaintiff’s favour by approximately $350,000. Relevantly this does not include any amount likely to be recovered in the current proceedings. This ties in with the alternative form of security previously referred to. The Second Defendant has all but conceded a liability to the Plaintiff of $145,000 in the current action, albeit once certain formalities are met. If the Plaintiff’s evidence as to what are “reasonable costs” is accepted, that will be substantially more;
(l)The Plaintiff’s total liabilities are listed as bank loans of $154,000, the aforesaid hire purchase liabilities of $3.3 million and loans by directors of $375,000. Tax liabilities, including GST were $241,000 in 2015. As to the loans by directors, it is not clear why such significant loans are necessary given the trading figures of the Plaintiff. It is notable that the amount of the loans by directors increased by $110,000 in 2015 alone;

Mr Wyvill addressed my concerns about the apparent anomalies in the evidence as to the value of goodwill by pointing out that even if goodwill was disregarded, the financials demonstrate a healthy net position of assets over liabilities. With that I agree in broad terms. He said the net difference was of the order of $600,000 but I think it would be more than that if the figures for depreciated value of plant and equipment accurately reflect value. If the amount that the Second Defendant has all but conceded it will soon owe to the Plaintiff, (albeit once formalities are satisfied), is factored in then the net asset position increases to almost $750,000. That figure represents more than five times the amount sought by the Second Defendant for security.
In applications for security for costs the standard to be applied to the threshold question means that the evidence of the financial position of the Plaintiff will not necessarily be conclusive. The evidence in the current application is no exception. That does not automatically translate to an order for security as that evidence can still be sufficient to negate the “reason to believe” for the purposes of Rule 62.02 of the SCR and section 1335 of the Corporations Act. What the aforesaid summary shows is that if any discrepancies in the Plaintiff’s accounts were resolved in favour of the Second Defendant, the evidence is sufficient to establish that the Plaintiff is a well-established and profitable company whose assets exceed its liabilities by a significant amount and likely to be at least $600,000.
Moreover that does not have any regard, for current purposes, to the amount which the Second Defendant seems to acknowledge will be due by it to the Plaintiff once valid notices are served. This virtual concession is more apparent when the alternative form of security which the Second Defendant puts forward as acceptable is considered. The alternate form of security is for $140,000 of the amount that is due to the Plaintiff from the Second Defendant be paid into Court by the Second Defendant as the Plaintiff’s security for the costs. That the Second Defendant proposes this as an acceptable alternative largely acknowledges that the Second Defendant will at least be indebted to the Plaintiff in the sum of $145,000, once valid notices are served. Recently the Plaintiff has served further notices on the Defendants although it is not yet known whether the Defendants will pay on those notices. However what the Second Defendant seems to thereby indirectly acknowledge is that the Plaintiff will have at least one asset in the Territory, i.e., that debt, which will be sufficient to satisfy a costs order in favour of the Second Defendant.
That position could only change to the detriment of the Second Defendant if the Plaintiff took some step towards recovery of that amount such as a claim for summary judgment, or if the Second Defendant pays the amount sought in the recently served notices. Until then the Second Defendant can retain that amount. In other words, the Second Defendant has a form of protection against any inability of the Plaintiff to satisfy an order for costs by reason of that debt alone. That strengthens the overall net asset position of the Plaintiff for current purposes.
I therefore am of the view that there is no reason to believe that the Plaintiff will not have sufficient assets in the Territory to satisfy a cost order in favour of the Second Defendant for the estimated amount if ordered to do so. The discretion is not enlivened.
For these reasons I dismiss the Second Defendant’s application for security for costs. I will hear the parties as to any other ancillary orders.

[1] [2016] NTSC 34.

[2] [2015] NTSC 76.

[3] Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65.

[4]Mac-Attack Equipment Hire Pty Ltd v AJ Lucas Operations Pty Ltd [2010] NTSC 27 at paras 8 and 10.

[5] Affidavit Andrew Graham John Robertson made 9 June 2016.

[6]It has been described as undemanding in a number of cases, see for example HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 and Livingspring v Kliger Partners [2008] VSCA 9.

[7]HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87; Livingspring v Kliger Partners [2008] VSCA 9; Pucciamati v Walker Nominees Pty Ltd [2002] NTSC 13; Beach Petroleum NL v Johnson (1992) 10 ACLC 525 at p 527.

[8] [2014] NSWCA 65.

[9] [2014] NSWCA 65, per Macfarlan JA at para 15.

[10] [2014] NSWCA 65, per Ward JA at para 59.

[11] [2013] NSWCA 87.

[12] [2014] NSWCA 65, per Ward JA at para 58.

[13]Anchung Pty Ltd v Northern Territory of Australia [2015] NTSC 76; Anchung Pty Ltd v Northern Territory of Australia (No 2) [2016] NTSC 34; Darwin Joinery and Furniture Manufacturing Pty Ltd (In Liquidation) v Finch, Unreported, Supreme Court of the Northern Territory, Kearney J, 23 July 1991.

[14] Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at para 16.

[15] Annexures LS8 and LS9 to the affidavit of Leon Schulz made 1 July 2016.