Ramair Packaging v Metal Manufacturers
[2018] VCC 2089
•13 December 2018
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-18-03371
| RAMAIR PACKAGING PTY LTD (ACN 053632803) trading as Australian Visual Solutions | First Plaintiff |
| and | |
| RAW COOPER IMPORTS PTY LTD (ACN 118453268) trading as Australian Visual Hardware | Second Plaintiff |
| v | |
| METAL MANUFACTURERS LTD (ACN 003762641) | Defendant |
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JUDGE: | HER HONOUR JUDGE MARKS | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 30 November 2018 | |
DATE OF RULING: | 13 December 2018 | |
CASE MAY BE CITED AS: | Ramair Packaging v Metal Manufacturers | |
MEDIUM NEUTRAL CITATION: | [2018] VCC 2089 | |
REASONS FOR RULING
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PRACTICE AND PROCEDURE – Security for costs – The only assets the plaintiffs own are the debt the plaintiffs sue for in this proceeding, and stock which the defendant alleges is valueless – Value of stock to be determined in the course of the trial – Whether reason to believe the plaintiffs are impecunious – Whether the plaintiffs’ impecuniosity is caused by the defendant – Security for costs ordered
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APPEARANCES: | Counsel | Solicitors |
| For the plaintiffs | Mr R G Squirrell | Kahns Lawyers |
| For the defendant | Mr D L K Atkinson QC | Kinneally Miley Law |
HER HONOUR:
Introduction
On 6 August 2018 the plaintiffs sued the defendant for $1,071,007. The defence and counterclaim was filed on 1 October 2018.
The dispute in this case relates to whether the defendant owes money to the plaintiffs as a result of a business and asset sale agreement the parties entered into. Under the sale agreement, the defendant purchased the plaintiffs’ business ‘Australian Visual Solutions’.
Clause 11.3 of the sale agreement set out the following process in relation to the payment for stock.
(a) The Buyer must pay 80% of the value of the Stock determined in accordance with clause 11.2 in accordance with clause 3.2(e).
(b)Subject to clause 11.3(c) the parties agree that the remaining 20% of the value of the Stock will be withheld by the Buyer from the Purchase Price payable in accordance with clause 3.2(e) until the Second True-Up Date. The purpose for withholding this amount is for the Buyer to review the Stock received at Completion to determine what Stock it deems, acting reasonably, to be rejected as Aged Stock, Obsolete Stock or otherwise unsaleable.
(c)The Buyer will use its best endeavours to sell the Stock during the period referred to in clause 11.3(b). If any Stock is sold below costs, only with prior agreement of the Seller, the loss associated with the sale will be deducted from the final payment in respect of the Purchase Price on the Second True-Up Date.
(d) Where the Buyer gives notice to the Seller of Stock deemed to be rejected or which is otherwise unsold within the period referred to in clause 11.3(b), such Stock will become the property of the Seller and its value deducted from the final payment in respect of the Purchase Price on the Second True-Up Date.
(e)Any Stock rejected or otherwise unsold within the period referred to in clause 11.3(b) shall be made available for collection by the Seller on the Second True-Up Date. Risk in respect of such Stock will pass to the Seller upon the Buyer giving notice that such Stock is available for collection. The Seller can dispose of such collected Stock without being in breach of any restraint of trade under this Agreement.
At settlement on 3 July 2017 the defendant paid the plaintiffs $5,395,293.47. This included $4,284,028 attributable to 80% of the value of the stock determined in accordance with clause 11.2 of the agreement.
The defendant rejected all the remaining stock under the process in clause 11.3 of the sale agreement. That led to the plaintiffs’ claim in this case.
The defendant defends on the basis that it was entitled to reject the remaining stock: it is said to be worthless as it is aged stock, obsolete or otherwise unsaleable. The defendant counterclaims for $117,298.92 saying that part of the stock it paid for at settlement was also unsaleable.
Security for costs application
The defendant seeks to have the plaintiffs give security for the defendant’s costs of and incidental to defending their claim in this proceeding, and to have the proceeding stayed until such security is given.
It filed a summons seeking this on 7 November 2018. The parties provided written submissions and a hearing of the application took place on 30 November 2018, when further oral submissions were made.
Oral submissions were made by the parties as to whether security for costs should be ordered.
I then raised with Counsel whether this matter should continue in the County Court of Victoria, or whether it should be determined by an independent accountant as a result of clause 11.4 of the sale agreement.
That clause states:
In default of agreement between the parties as to any item of this clause 11 the dispute will be referred to an independent accountant for determination.
This proceeding arises because the parties do not agree as to the construction of and application of clause 11.3.
Counsel advised the Court that they needed to consider their clients’ positions as to whether this matter should be referred to an independent accountant given clause 11.4, or whether the parties agreed to vary the sale agreement such that the dispute between them should continue in the County Court.
The hearing of the summons was adjourned to 18 December 2018 so that instructions could be sought about this.
It was noted in ‘other matters’ in the orders made on 30 November 2018 that submissions have been made in relation to whether security for costs should be ordered and if so in what amount; and that no further submissions or affidavits are to be filed in relation to this issue.
On 6 December 2018 the parties wrote to the Court advising:
The parties have now carefully considered their positions and agree that this proceeding should continue in the County Court. To the extent necessary, the parties agree to vary the Agreement to give effect to this position.
In light of the above, we would be grateful if Her Honour could proceed to deliver judgment on the security for costs application
I will order security for costs for the following reasons.
Jurisdiction is enlivened
Rule 62.02(1)(b) of the County Court Civil Procedure Rules 2018 provides that security for costs may be ordered 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 defendant bears the onus of satisfying me that there is reason to believe the plaintiffs have insufficient assets in Victoria to pay its costs if ordered to do so.
As stated in the Victorian Court of Appeal decision of Livingspring Pty Ltd v Kliger Partners [2008] 20 VR 377 at [14]–[17]:
14 .... The court must address the question which the section poses:
Is there reason to believe that the corporation will be unable to pay the defendant’s costs?
...
15 The phrase ‘reason to believe’ is the touchstone of jurisdiction. It requires a rational basis for the belief – and no more. ... A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation’s financial affairs.
16 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.
17 The power being enlivened, the court must consider whether it should be exercised. ...
[citations omitted]
I am satisfied that there is reason to believe that the plaintiffs have insufficient assets to pay the costs of the defendant if ordered to do so. The plaintiffs are both companies with a share capital of only $12 each. They do not own any land or have any money in the bank.
They are not trading. Their sole business was what they sold to the defendant under the sale agreement.
The plaintiffs say that they do have assets because they have recovered the stock the defendant rejected under the sale agreement. Cameron Sutherland, the sole director of the plaintiffs, has sworn an affidavit that that stock is worth a great deal of money and that the plaintiffs will be able to sell it and therefore will be able to satisfy costs orders in favour of the defendant.
However, the value of that stock is precisely what is in dispute in this case.
The defendant has rejected the stock. Mousa Elsarky’s affidavits of 9 November and 29 November 2018 set out what he says are the defendant’s reasons for that rejection including that much of that stock is old vinyl product, some of it more than 10 years old. He says that the products in issue age quickly and there is a commercial risk in using the stock and selling it. (I reject the submission made for the plaintiffs that Mr Elsarky is not an expert and cannot give that evidence. He is the Executive General Manager of the defendant’s plastic business and has been personally involved in a number of dealings with respect to the acquisition of the plaintiffs’ business and the operation of it since settlement. Expert evidence as to the stock’s value is not necessary for the purposes of this interlocutory application.)
The plaintiffs argue that I should prefer the evidence of Mr Sutherland over that of Mr Elsarky, as he has some expertise in relation to selling stock and Mr Elsarky does not. However, I am not satisfied on the untested assertions of Mr Sutherland of what value that stock has.
Further, no evidence has been given of what costs would be incurred in trying to sell any of the stock, if the plaintiffs are able to sell some of it. And if some money were obtained from the sale of some of the product I am not satisfied that would mean the plaintiffs would be in a position to pay the defendant’s costs when ordered to do so. The nature of cash payments is that they are moveable. The plaintiffs have distributed all the net profits they received from the sale of the business to Mr Sutherland.
I am satisfied that there is a reasonable basis for the belief that the plaintiffs will be unable to satisfy the costs of the defendant if the defendant is successful in defending the claims against it.
Discretionary matters
I turn now to matters relevant to the exercise of my discretion as to whether to order security for costs.
The application has been brought promptly.
I am satisfied there is an arguable case so far as the plaintiffs are concerned and that the defendant’s prospects of success are not disentitling to its application.
The plaintiffs argue that the fact the defendant has not paid the plaintiffs the approximately $1 million in dispute is the cause of the plaintiffs’ impecuniosity.
There needs to be a causal connection between conduct and impecuniosity such that in the exercise of the court’s discretion it would be unjust to require security to be ordered: Dalma Formwork v Concrete Constructions [1998] NSWSC 472.
I am not satisfied of that causal connection. The plaintiffs were paid over $5 million for the business, of which approximately $500,000 remained after they paid off their loans (see Mr Elsarky’s affidavit of 9 November 2018 at [8], [9]). There was no dispute that the plaintiffs distributed that remaining money to their sole director and shareholder, Mr Sutherland. The fact they have no remaining assets (other than the debt in question and the stock whose value is in issue) is not caused by the defendant.
I take into account that the person standing to benefit from the litigation the plaintiffs bring, Mr Sutherland, has not offered to indemnify the defendant for costs of the litigation.
I am not satisfied that if security is ordered it would stultify the bringing of this claim. The plaintiffs bear the burden of satisfying me that it would stultify the litigation if that were the case: Livingspring v Kliger [2008] VSCA 93 at [21]. Counsel for the plaintiffs said in oral submissions that it is ‘common sense’ that ordering security would stultify the bringing of the claim. I do not agree. Mr Sutherland has not sworn an affidavit to say that is the case as could have been done if that were so. There is no evidence that an order for security would stultify the claim.
The defendant chose to contract with plaintiffs who had one asset, and the question arises as to whether it voluntarily assumed the risk those plaintiffs might be without assets in the event of a later dispute arising from the agreement. The concept of someone voluntarily assuming risk in contracting with a company with limited liability was discussed by McDonald J in Letore Pty Ltd v Associated International Finance Pty Ltd (Unreported, Supreme Court of Victoria, 28 May 1993). However, in this case the defendant made a payment of over $5 million for the purchase of the business. Having paid off their debts the plaintiffs still had approximately $500,000 in net proceeds. They chose to distribute that to their sole shareholder. And as mentioned above, there is no evidence that an order for security would stultify the claim. In those circumstances, I give the aspect of voluntary assumption of risk little weight.
I am satisfied that security should be ordered.
Quantum
Paul Linsdell is a costs lawyer and director of Blackstone Legal Costing Australia Pty Ltd. He has sworn affidavits on behalf the defendant estimating the reasonable fees of the defendant up to and including mediation totalling between $156,254.89 to $174,100.32 (depending on what costs orders the Court frames for work done outside Victoria, as the defendant is using Queensland lawyers).
In his report, which is exhibit 1 to his affidavit of 9 November 2018, he has gone into detail in relation to how he arrives at his maximum figure (the lower figure is explained in his later affidavit of 29 November). Amongst other things he has considered the discovery that will be required to consider issues that arise in relation to the saleability of approximately 1600 stock items and what efforts were made to sell them by the defendant. His report details the six witnesses that he is instructed are expected to be called by the defendant. He sets out a brief summary of what each of them will say, analysing who he thinks it is appropriate to be involved with the preparation of the lay witness statements and what will be required for the expert reports. He makes an assessment that the plaintiffs are likely to call up to four witnesses.
The plaintiffs say the quantum assessed by Mr Linsdell is too high. Ms Penelope Van den Berg, a legal practitioner and director of Mahlab Costing Pty Ltd has prepared a responsive report on the quantum of costs. She arrives at a figure of $76,967.21 from 10 October 2018 to the end of the mediation. She says the plaintiffs instruct they will call just two witnesses, and takes issue with other aspects of the Linsdell costings.
In considering the amount to be awarded by way of security for costs I take a broad brush approach. As stated by Associate Justice Derham in Coonwarra Pty Ltd v Cornonero Pty Ltd & Ors [2018] VSC 333 at [76-77]:
In exercising its discretion to award security for a party’s costs, the Court is not required to give the party full protection for its estimated costs. The calculation of a sum to be given as security for a party’s costs is not an occasion for a full assessment of costs. By its nature, the task involves a ‘broad brush’ assessment having regard to the information before the Court. The existence of the discretion means that the Court is neither bound to give the amount of security that the party seeking the security estimates, nor must the amount be determined with mathematical precision.
Without limiting the discretion, Courts generally undertake a reduction in any sum claimed for security for costs to take into account:
(a)the chance of the case collapsing prior to the mediation. It is not possible to anticipate this occurring in this case at this stage. …
(b) the apparent prospects of success, to the extent it is possible to assess those prospects. The weaker the plaintiff’s case appears on the merits, the stronger the case of the defendant for security becomes and the less inclined the Court should be to give any discount. In this case, it is not possible to assess the prospects …
(f) reductions on taxation of the costs to make allowance ‘for the unquenchable fire of human optimism and the likelihood that the figure of taxed costs put forward would not emerge unscathed after taxation’.
[citations omitted]
I therefore will not deal specifically in these reasons with all the items of dispute raised between the parties’ costs consultants. I note that I am satisfied there is a need for the expert reports before mediation – as the defendant contends – and that the costs calculated by Mr Linsdell in relation to this exercise are reasonable given the number of items of stock to be considered by the experts. I consider a further directions hearing likely given that discovery or other disputes may well arise in relation to the scope of discovery. I take into account that some of the work to be done will concern the counterclaim as well as the claim; that the parties have agreed to have a judicial resolution conference conducted by a judicial registrar of the Court, which means that the mediator’s fee will not be incurred; that there will likely be some duplication in items to be discovered as there are common items of stock; that the case may settle before the judicial resolution conference; and that costs sought are likely to be reduced on taxation in any event.
Orders
I will order that the plaintiffs provide $95,000 by way of security for the defendant’s costs of the litigation up to and including the judicial resolution conference. I will order the proceeding be stayed until that security is provided.
I direct the parties to consider the consequential orders that should be made as a result of these reasons, and further interlocutory steps required in the proceeding and provide to me consent orders by 4pm on 17 December 2018. If the parties cannot agree, those matters will be dealt with at the hearing presently listed for 18 December 2018.
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Certificate
I certify that these 9 pages are a true copy of the reasons for ruling of her Honour Judge Marks, delivered on 13 December 2018 and revised on 14 December 2018.
Dated: 14 December 2018
Samantha Marinic
Associate to Her Honour Judge Marks
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