Phoenix International Pty Ltd v Resources Combined No. 2 Pty Ltd and Zayler; Phoenix International Pty Ltd v Jetoglass Pty Ltd and Zayler; and Phoenix International Pty Ltd v Gantley Pty Ltd and Zayler

[2009] VCC 555

IN THE COUNTY COURT OF VICTORIA Revised

Not Restricted

AT MELBOURNE
COMMERCIAL LIST

BUILDING CASES DIVISION

Case No. CI-09-00781

PHOENIX INTERNATIONAL GROUP PTY LTD	Plaintiff
(ACN 109 614 011)
v
RESOURCES COMBINED NO. 2 PTY LTD	First Defendant
(ACN 108 925 999)
and
ZYGMUNT ZAYLER	Second Defendant

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Case No. CI-09-00782

PHOENIX INTERNATIONAL GROUP PTY LTD	Plaintiff
(ACN 109 614 011)
v
JETOGLASS PTY LTD	First Defendant
(ACN 006 256 239)
and
ZYGMUNT ZAYLER	Second Defendant

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Case No. CI-09-00783

PHOENIX INTERNATIONAL GROUP PTY LTD	Plaintiff
(ACN 109 614 011)
v
GANTLEY PTY LTD	First Defendant
(ACN 113 690 574)
and
ZYGMUNT ZAYLER	Second Defendant

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JUDGE:	HIS HONOUR JUDGE SHELTON
WHERE HELD:	Melbourne
DATE OF HEARING:	22 April 2009
DATE OF JUDGMENT:	1 May 2009
CASE MAY BE CITED AS:	Phoenix International Pty Ltd v Resources Combined No. 2 Pty Ltd & Zayler; Phoenix International Pty Ltd v Jetoglass Pty Ltd & Zayler; and Phoenix International Pty Ltd v Gantley Pty Ltd & Zayler
MEDIUM NEUTRAL CITATION:	[2009] VCC 0555

REASONS FOR JUDGMENT

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Catchwords: Security for Costs Application – order for security until completion of mediation – Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93 – FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 33 ACSR 739 – Saint-Gobain RF Pty Ltd v Maax SPA Corporation Pty Ltd [2004] VSC 335 – Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507 – Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr R Andrew	Erhardt & Associates
For the Defendants	Mr J R Gurr	Kliger Partners
HIS HONOUR:

1          This is an application for security for costs in each of the three proceedings brought pursuant to Order 62 of the County Court Rules of Procedure in Civil Proceedings 2005 and/or s.1335 of the Corporations Act 2001 (Cth).

2          The three proceedings have a degree of similarity to each other. The plaintiff is the same in each. The second defendant in each proceeding is Zygmunt Zayler, who is a director of the first defendant in each proceeding.

3          In Phoenix International Group Pty Ltd v Resources Combined No. 2 Pty Ltd & Zygmunt Zayler (“the Resources matter”), the plaintiff alleges a written construction contract made on or about 20 January 2006, pursuant to which it agreed to construct eight two-storey townhouses for the first defendant at 42 Sherrard Street, Ballarat for the sum of $1.428 million. On 23 February 2009, the first defendant served on the plaintiff a notice purporting to terminate the contract. In an affidavit sworn 15 April 2009, the defendants’ solicitor, Darren Frank Cain, deposes that the construction period stated in the contract was 274 days and that when the notice of termination was given on 23 February 2009, 965 days had passed since the commencement date and that the works had not reached practical completion. No extension of time claims were lodged under the contract. The plaintiff alleges that the Notice of Termination was wrongfully given, treated it as a repudiation of the contract, and accepted this repudiation by letter dated 26 February 2009.

4          The plaintiff now seeks from the first defendant the sum of $721,811.51 damages based upon a quantum meruit. It further claims damages against both defendants under the Trade Practices Act (Cth) 1974 in respect of variations requested by the second defendant of the plaintiff. This claim has not yet been quantified.

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5          In Phoenix International Group Pty Ltd v Jetoglass Pty Ltd and Zygmunt Zayler (“the Jetoglass matter”), the plaintiff relies upon a written contract made on or about 6 December 2005, pursuant to which it was to construct two double-storey townhouses for the first defendant at 1/46 Tramway Parade, Beaumaris for the sum of $825,000. There the first defendant gave a Notice of Termination dated 24 February 2009. Cain, in an affidavit sworn 15 April 2009, alleges that 750 days had passed since the commencement date and that the construction period was stated to be 214 days. Again, Cain states that works had not reached practical completion when the notice of termination was given and that no extension of time claims had been lodged under the contract. Again, the plaintiff regarded this Notice of Termination as a repudiation of the contract of 6 December 2005, purported to accept the repudiation and now claims damages of $505,588.38 on a quantum meruit basis. The plaintiff again seeks damages pursuant to the Trade Practices Act from both defendants.

6          In Phoenix International Group Pty Ltd v Gantley Pty Ltd & Zygmunt Zayler (“the Gantley matter”), the plaintiff relies upon a written contract made on or about 2 October 2006, pursuant to which it agreed to construct for the first defendant a 20-unit development at 64-66 Riversdale Road, Hawthorn for the sum of $4.95 million. There a Notice of Termination was given by the first defendant dated 19 February 2009. Cain, in an affidavit sworn 15 April 2009, deposes that at 18 February 2009, 325 days had passed since the amended date for practical completion and the works had not then reached practical completion. Again, no extension of time claims were lodged under the contract. Again, the plaintiff alleges that this Notice of Termination constituted a repudiation of the contract of 2 October 2006 and that it accepted this repudiation, thus bringing the contract to an end. The plaintiff claims

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Phoenix International Pty Ltd v Resources

damages on a quantum meruit basis against the first defendant in the sum of $1,941,412.49. Again, it brings a claim pursuant to the Trade Practices Act for damages in respect of variations against both defendants.

7          Rule 62.02(1)(b) provides that where the plaintiff is a corporation:

“… and there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so … the Court may … order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given.”

8 S.1335(1) of the Corporations Act 2001 (Cth) 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.”

9          In Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93, the Court of Appeal (Maxwell P and Buchanan JA) stated, at paragraph 10, that although the wording of these two provisions is not identical, they are in practice so regarded and the same principles apply to each.

10        The Court stated, at paragraph 11:

“The first question to be addressed is whether the threshold condition for

the exercise of the power is satisfied, that is, whether

there is reason to believe that the corporation will be unable to pay the costs of the
defendant if successful.

That jurisdictional condition must be satisfied before the discretionary power to order security for costs is enlivened.”

11        At paragraph 15, the Court stated:

“The phrase ‘reason to believe’ is the touchstone of jurisdiction. It requires a rational basis for the belief — and no more. … The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a ‘real risk’.) A risk assessment is, of necessity,

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Phoenix International Pty Ltd v Resources

imprecise. The section calls for a practical, commonsense approach to
the examination of the corporation’s financial affairs.”

12        At paragraph 16, the Court said:

“It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation’s impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk.”

13        On the threshold issue, Mr Gurr, who appeared for the defendants, relied on the following matters.

14        Here the plaintiff has a paid up capital of only $100. It owns no real property in Victoria. Its sole shareholder is a trustee company whose assets are subject to a fixed and floating charge. Strangely, the plaintiff principally relies upon the evidence not of its two directors but of Steve Phillips, a former director and undischarged bankrupt and now project manager employed by the plaintiff who swore an affidavit on 21 April 2009. This affidavit does not disclose the existence of any assets owned by the plaintiff. The plaintiff has not had accounts prepared since 30 June 2006. The most that Phillips can say is that the plaintiff’s accountant has been given all the necessary documents to prepare these accounts and that he has had the documents for some months. He does not suggest that the plaintiff’s accounts for the financial year ending 30 June 2006 have been completed. The plaintiff’s two present directors who might be expected to know the plaintiff’s true financial position, have declined to give any evidence. In his affidavit Phillips states that the plaintiff is no longer trading. Thus it has no source of income from which to meet any order for costs.

15        In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 33 ACSR 739, at 745, Pidgeon and Owen JJ, in the Full Court of the Supreme Court of Western Australia, stated:

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“… We consider that the absence of land combined with the low share capital does give rise to an appearance that there is reason to believe that there are no assets in this area to meet the costs. …”

16        Here, in addition to limited share capital and no land on the Register, there are other relevant factors as indicated.

17        In the circumstances, I am satisfied that “there is reason to believe that the corporation will be unable to pay the costs of the defendants if successful”. Thus my discretionary power to order security for costs is enlivened. This discretion “is unfettered and is to be exercised judicially having regard to all of the circumstances of the case” – see Saint-Gobain RF Pty Ltd v Maax SPA Corporation Pty Ltd [2004] VSC 335, per Habersberger J, at paragraph 29.

18        On the basis of the authorities, relevant matters to be considered by me in determining how to exercise my discretion are:

• The very fact that the plaintiff would be unable to pay the defendants’ costs were the defendants successful – see Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507, at 513-514, per Phillips JA (Ormiston and Charles JJA agreeing). His Honour stated that this could be “even a most significant factor”.

• The application certainly has not been made at a late stage of the proceedings with a trial imminent. Notices of Appearance were only filed on 12 March last and the application made on 15 April last. Judgment was entered in default of defence in the three proceedings on 20 April last and set aside by me on 22 April last.

• It is inappropriate to analyse the plaintiff’s and defendants’ cases in too much detail. While I am not prepared to go to the extent of labelling the plaintiff’s claim as not bona fide or as a sham, on its face it does not

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appear particularly strong. As indicated above, there has been an inordinate delay beyond the due date for completion of contract works. No applications were lodged for extensions of time even though Phillips is quite experienced as a builder. It appears that the Beaumaris works have been abandoned by the plaintiff. On its face, it would appear that the plaintiff may have difficulty in establishing that the first defendant in each instance was not entitled to give notice of termination. I agree with the submission of Mr Gurr that the claims under the Trade Practices Act are somewhat vague and generalised. I also note that it was the defendants who took the initiative in terminating the contracts and it was only in response that the plaintiff treated these notices as purportedly repudiatory, accepted the repudiations, purportedly bringing the contracts to an end and then issued proceedings.

• In Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317, Brereton J stated, at paragraph 21, that a relevant consideration is “the magnitude of the risk that the plaintiff will be unable to satisfy a costs order in the event that it fails”. Here, in my view, this risk is considerable given that there is no evidence that the plaintiff has any assets and that it is no longer trading.

• In Street, at paragraph 22, Brereton J stated:

“The third discretionary factor is whether use of the power to order security would be oppressive or would stultify prosecution of a genuine claim. No evidence or submission has been made that these proceedings would be stultified by an order for security. This factor therefore does not tell against making an order for security.”

Here, there is no evidence before me to suggest that an order for security for costs would stultify the litigation, the onus being upon the plaintiff to produce such evidence – see Livingspring at paragraph 22.

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Phoenix International Pty Ltd v Resources

• In Street, Brereton J stated, at paragraph 23, that a relevant consideration is whether the plaintiff’s impecuniosity is caused by the conduct of the defendant. The onus of establishing this rests upon the plaintiff – see Livingspring at paragraph 22. The only possible evidence before me on this issue is paragraphs 30 and 31 of Phillip’s affidavit sworn 21 April 2009, which in my view falls far short of discharging the onus cast upon the plaintiff.

19        In the circumstances, I have come to the conclusion that it is appropriate to order security for costs in the three proceedings.

20        As to the quantum of the security of costs to be provided, the defendants rely upon affidavits sworn in each proceeding on 9 April 2009 by Cyril David Ger, a cost consultant and proprietor of RJD Legal Services. He states that he was provided with an overview of each of the proceedings by the defendants’ solicitor. In the Resources matter, his estimate to date of trial of costs and disbursements is $67,292. He estimated costs of a six-day trial at $29,276. In the Jetoglass matter, he estimates costs and disbursements to the date of trial at $59,954 and the costs of a four-day trial at $20,184. In the Gantley matter, he estimates costs and disbursements to the date of trial at $70,045 and the costs of a ten-day trial at $48,460.

21        As to the pre-trial costs, these include costs associated with interrogatories which are unlikely to be ordered. Also, Mr Gurr conceded that there was likely to be a joint mediation and therefore the sum claimed for the mediation in each proceeding should be reduced accordingly.

22        The plaintiff’s solicitor, Harry Erhardt, in an affidavit sworn 21 April 2009, challenged Mr Ger’s assessments on the basis that they have been prepared on the basis that each proceeding would be tried separately. He refers to the

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commonality of parties and issues. He further indicates that he was proposing to seek an order that the three proceedings be heard and determined together, an order which, subject to materials to be placed before me and the hearing of submissions, I might well be inclined to make.

23        Mr Andrew, who appeared for the plaintiff in each of the proceedings, urged me to order security initially only to the completion of discovery. He relied upon the Saint-Gobain decision, where Habersberger J ordered $35,000 security to the completion of discovery.

24        In my view, it is appropriate in all the circumstances to order that security be given until the completion of mediation which it would seem should be a joint mediation. I therefore order, based generally on Ger’s estimates and taking into account the matters referred to by Mr Erhardt in his affidavit, which I accept, that in each matter the following sums be provided by way of security for costs:

In the Resources matter	-	$12,000
In the Jetaglass matter	-	$10,000
In the Gantley matter	-	$9,000

25        I have arrived that these figures on the basis that a joint mediation would be held after discovery was completed. Mr Ger allows a total sum of $58,000 for expert witnesses’ fees. It would be quite inappropriate, in my view, for such a sum to be paid on experts’ fees prior to mediation.

26        I give leave to the defendants to make application to me at the conclusion of the mediation, should it be unsuccessful, for orders for further sums to be lodged by way of security. By then, an order for the three proceedings to be heard together might well have been made and a much more realistic assessment could be made of the likely future costs of the proceedings.

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