Relative Networks Pty Ltd v Ovviare Pty Ltd
[2023] WADC 87
•10 AUGUST 2023
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: RELATIVE NETWORKS PTY LTD -v- OVVIARE PTY LTD [2023] WADC 87
CORAM: LONSDALE DCJ
HEARD: 22 JUNE 2023
DELIVERED : 10 AUGUST 2023
FILE NO/S: CIV 3422 of 2021
BETWEEN: RELATIVE NETWORKS PTY LTD
Plaintiff
AND
OVVIARE PTY LTD
First Defendant
ROSALBA VICARIO-ADAMS
Second Defendant
Catchwords:
Appeal against decision of registrar - Security for costs
Legislation:
Corporations Act 2001 (Cth), s 1335
Result:
Appeal allowed - Plaintiff ordered to pay security for costs to mediation
Representation:
Counsel:
| Plaintiff | : | Mr A G Norwood |
| First Defendant | : | Mr W Vogt |
| Second Defendant | : | Mr W Vogt |
Solicitors:
| Plaintiff | : | Trinix Lawyers |
| First Defendant | : | Vogt Graham Lawyers |
| Second Defendant | : | Vogt Graham Lawyers |
Case(s) referred to in decision(s):
Gartner v Ernst & Young (No 3) [2003] FCA 1437
Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523
Marand Holdings Pty Ltd v Cateus International Pty Ltd [2003] WASC 238
Pravenkav Group Pty Ltd v Diploma Constructions (WA) Pty Ltd '[No 2] [2014] WASCA 106
Sugarloaf Hill Nominees Pty Ltd As Trustee For The Richard and Anna Trust v Rewards Projects Ltd [2011] WASC 19
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57
LONSDALE DCJ:
Introduction and overview of proceedings
This is an appeal against a decision of Deputy Registrar Harman delivered ex tempore on 14 December 2022 refusing the first defendant's application that the plaintiff pay security for costs pursuant to s 1335(1) of the Corporations Act2001 (Cth) (Corporations Act).
In short, the substantive proceedings concern the issue of whether the plaintiff, Relative Networks Pty Ltd (Relative Networks) made overpayments for professional services rendered by the second defendant Rosalba Vicario-Adams.
Background to the action
At all relevant times Rosalba Vicario-Adams has held a one‑third share in Relative Networks. Her brother Marco Vicario holds a two‑thirds share in Relative Networks and is the sole director. From now on, I intend to refer to the individuals by their first name in order to avoid confusion. In doing so, I mean no disrespect to them.
Relative Networks is a business operating in the area of information, technology and communications services.[1]
[1] Affidavit of Rosalba Vicario-Adams sworn 7 September 2022, par 6.
Prior to March 2013, Rosalba had been employed by Relative Networks to provide human resources management services, payroll services, account management services and business management and development services.[2]
[2] Statement of claim, par 5.
After March 2013, Rosalba ceased working for Relative Networks but she continued to provide professional services to it. She did so until July 2017 either in a personal capacity or as an independent contractor under the auspices of Ovviare Pty Ltd (Ovviare).[3]
[3] Statement of claim, pars 5 - 7.
Rosalba is the sole director and shareholder of Ovviare.
In June 2021 Rosalba commenced proceedings against Relative Networks in the Industrial Magistrates Court claiming the sum of $257,221.90 plus interest for unpaid wages and entitlements and pecuniary penalties for services rendered.
Relative Networks filed the writ in the present proceedings on 9 September 2021. The writ contained a general indorsement claiming various amounts in disputed payments for human resources services provided by Rosalba between September 2015 and August 2018.
The proceedings in both the Industrial Magistrates Court and in this court thus concern the same subject, namely, accounting for the provision of services by Rosalba to Relative Networks.
In a statement of claim subsequently filed, Relative Networks pleaded that any amounts due to it pursuant to the present action, be set off against any amounts it is ordered to pay in the Industrial Magistrates Court proceedings.
At the hearing of the appeal, I was informed by counsel for Relative Networks that, in May 2023, Rosalba's action in the Industrial Magistrates Court was dismissed. Since then, Relative Networks has amended the statement of claim and has abandoned the set-off claim.[4] Therefore, I proceed on the basis that the present proceedings are the only proceedings concerning the issue of payment for services provided by Rosalba to Relative Networks.
[4] Plaintiff’s further re-amended statement of claim pursuant to order of Bowden DCJ 13 June 2022.
It is apparent from the affidavit material filed in these proceedings that Rosalba and Marco are embroiled in complicated legal proceedings concerning Relative Networks, Ovviare and other entities in which they and other family members have proprietary interests.[5] The affidavits and submissions reference events outside the bounds of the present action. It has been difficult to unravel what is a web of complex financial arrangements and associated litigation and consider its relevance to the present application. In the end, I have decided it is unnecessary for me to do so.
[5] Relative Networks Pty Ltd v Evoluzione Pty Ltd (in liq) (Controllers Appointed) - Supreme Court Civil Action ARB 10 of 2021; Evoluzione Pty Ltd (in liq) v Relative Networks Pty Ltd - Supreme Court of Western Australia - ARB 9 of 2021; Vicario-Adams v Relative Networks Pty Ltd - Supreme Court of Western Australia Court Action No. CIV 2056 of 2020.
For the reasons to follow I would allow the appeal and order that the plaintiff pay security for costs up until a mediation conference.
Overview of evidence before me
The hearing of this appeal is a hearing de novo and so I am not required to find that there was an error on the part of Deputy Registrar Harman. I must however determine the matter on the evidence before me.
I have read and considered Ovviare's written submissions dated 2 June 2023, Relative Networks' written submissions dated 19 June 2023 and the following affidavit evidence:
•Affidavit of Willfried Vogt sworn 29 April 2022 annexing various documents concerning the first defendant's likely costs should the matter proceed and evidencing Relative Networks' financial position.
•Affidavits of Alister Gerard Norwood sworn 1 June 2022 and 17 August 2022 annexing various documents concerning Relative Networks' financial position.
•Affidavit of Rosalba Vicario-Adams sworn 7 September 2022.
•Affidavit of Stephen Chad Mintz affirmed 1 June 2023.
•Affidavit of Marco Vicario sworn 19 June 2023.
•Transcript of decision of Deputy Registrar Harman delivered ex tempore on 14 December 2022.
Statutory basis of the application for security for costs and orders sought
The application for security for costs was made pursuant to s 1355 of the CorporationsAct which reads:
(1)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. ….
Ovviare seeks orders that Relative Networks provide security for costs in the sum of $30,000 within seven days and then $35,000 within seven days of the matter being entered for trial.
Counsel for Ovviare estimates that the costs, if the matter proceeds to trial to be $43,460 for pre‑trial costs and $20,880 for trial. The estimate is based on an estimate of a trial lasting two days.[6]
The threshold test: is there reason to believe that Relative Networks will be unable to pay costs if unsuccessful?
[6] Affidavit of Willfried Vogt sworn 29 April 2022, Annexure WV1.
On an application for security for costs pursuant to s 1335(1) of the Corporations Act the court must determine the threshold requirement of whether there is 'reason to believe' that the plaintiff will be unable to pay the defendant's costs if the latter is successful: Sugarloaf Hill Nominees Pty Ltd As Trustee For The Richard and Anna Trust v Rewards Projects Ltd [2011] WASC 19 (Sugarloaf).
The relevant principles concerning the test for the threshold question were conveniently stated by Corboy J in Sugarloaf [35] and can be summarised as follows:
1.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. That assessment will be imprecise but the 'reason to believe' test is a low threshold test.
2.There is a need for credible testimony to safeguard that an application for costs is not founded on pure speculation that the corporation is insolvent or in financial difficulties.
3.It is necessary to fix a time at which the plaintiff's inability (or apprehended inability) to pay is to be assessed. It is necessary to identify the range of assets to which recourse might be had for the purpose of enforcing a costs order. Generally, the relevant assets will be those that might be immediately realised and in sufficient time to enable the plaintiff to comply in the usual terms.
4.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.
Is there reason to believe that Relative Networks would be unable to pay costs if unsuccessful?
I would fix the time for whether Relative Networks has the ability to pay at the time of the hearing before me.
Relative Networks contends that Ovviare has failed to establish that there is reason to believe that it would be unable to meet an order for costs in the event that the action fails. It submits that, although Relative Networks is a proprietary limited company with a paid‑up share capital of only $100, it has current assets in the form of cash at bank in the sum of $153,777.80 and trade debtors in the sum of $153,380.[7]
[7] Affidavit of Marco Vicario dated sworn 19 June 2023, par 7 references Annexure MVO2.
Secondly, it points to the fact that Relative Networks' financials for the years ending June 2018 ‑ 2022 show that it has always returned a profit (on average $85,391 per annum). It has total assets of just under $1.5 million. Relative Networks' financial statements are reproduced in the table below:
FY 2018/19
FY 2019/20
FY 2020/21
FY 2021/2022
4yr Average
SALES
$ 674,823
$ 569,981
$ 916,122
$ 844,874
$ 751,450
GROSS PROFIT
$ 403,932
$ 349,385
$ 493,619
$ 488,472
$ 433,852
NET PROFIT
$ 106,964
$ 56,959
$ 203,884
$ 26,244
$ 85,391
CURRENT ASSETS
NON-CURRENT ASSETS
TOTAL ASSETS
$ 216,707
$ 522
$ 331,409
$ 181,577
$ 300
$ 348,151
$ 278,286
$ 463
$ 346,397
$ 301,561
$ 150,463
$ 395,917
$ 244,533
$ 4,316
$ 1,438,466
CURRENT LIABILITIES
NON-CURRENT LIABILITIES
TOTAL LIABILITIES
$ 330,887
$ 522
$ 311,409
$ 347,851
$ 300
$ 348,151
$ 345,934
$ 463
$ 346,397
$ 245,454
$ 150,463
$ 395,917
$ 317,532
$ 37,937
$ 355,469
NET ASSETS
$ 944.897
$ 1,001,857
$ 1,205,741
$ 1,179,497
$ 1,082,998
Relative Networks submits that it continues to operate with a healthy turnover and substantial assets and has not filed any material acknowledging that it would be unable to meet its obligations if unsuccessful.
Counsel for Ovviare submits that there is reason to believe that Relative Networks is impecunious for the following reasons.
First, in the Personal Properties Security Register (PPSR), there is a registration against Relative Networks by Dicker Data.[8] Relative Networks contends however that Dicker Data is merely a trade creditor of Relative Networks whose monthly account is in the region of $2,000 ‑ $3,000 and is cleared monthly and therefore not likely to impact its ability to pay an adverse costs order.[9] I consider that I have insufficient information to make a factual determination on the significance of the PPSR. In my view, this does not indicate that Relative Networks would not be able to pay.
[8] Affidavit of Willfried Vogt sworn 29 April 2022, par 21.
[9] Affidavit of Alister Gerald Norwood sworn 1 June 2022, par 12.
Secondly, Ovviare submits that Relative Networks' income is 'modest'. The financial statements indicate that over a four‑year period Relative Networks had an average turnover of $751,000 and a gross profit of $433,852 and an increase in net assets to $301,561 and a decrease in liabilities to $245,454. In my view, however, the fact that a net loss was incurred in the last financial year is reason, I think, for the first defendant to be concerned about Relative Networks' ability to pay.
Thirdly, Relative Networks' financial records show that although it has total assets of $1,179,497 as at the year ending 2022, the total asset position may not be as healthy as it appears on paper. That is because, as counsel for the first defendant submits, the assets include a loan to the proprietary limited company, Evoluzione. The first defendant points out that Relative Networks and Evoluzione (a company in which Marco and Rosalba hold proprietary interests) are engaged in litigation over whether Evoluzione owes obligations pursuant to that loan.[10]
[10] Affidavit of Marco Vicario sworn 19 June 2023, pars 22 - 23.
Ovviare submits that Relative Networks' reported cash balance is modest and could easily be dissipated either lawfully or unlawfully; there is no information concerning Relative Networks' trade debtors and whether amounts owing are likely to be realised.
Fourthly, Ovviare points out that Relative Networks is not the registered proprietor of any real property registered in the State of Western Australia.[11] As such, the first defendant submits that any assets it holds could be easily dissipated either lawfully or unlawfully, prior to any order to pay costs. That is a fact not disputed by the plaintiff.
[11] Affidavit of Willfried Vogt sworn 29 April 2022, pars 14 - 16 and Annexure WV-2.
The background to the litigation between Relative Networks and Evoluzione
I turn now to consider the impact of the dispute between Relative Networks and Evoluzione on the issue of Relative Networks' ability to meet a costs order.
It is common ground that Relative Networks had agreed to loan Evoluzione a sum of money for the purchase of several commercial properties in East Perth (the properties). That loan was secured by way of registered mortgages to secure the debt owed by Evoluzione (being in the region of $1,318,682.41).[12] A loan agreement document dated 30 November 2023 sets out the terms of Evoluzione's apparent obligation to repay Relative Networks. (I say 'apparent' because Evoluzione disputes the obligation to pay.)
[12] Affidavit of Marco Vicario sworn 19 June 2023, par 10; Affidavit of Alister Gerard Norwood sworn 1 June 2022, par 14 and Annexure AGN 02, page 18.
At the time that Ovviare filed the application for security for costs in these proceedings, Relative Networks' claims for repayment were still owing.
Evoluzione is now in liquidation and the properties the subject of the loan have now been sold for a combined sum of $803,000. The evidence before me as to how much of the proceeds of the sale will be left to honour the loan to Relative Networks is uncertain.
Relative Networks refers to the existence of a Deed of Arrangement (Deed) with the liquidators of Evoluzione which it submits provides support that it is in a good financial position. In short, the Deed provides for the payment of amounts to other entities including to Evoluzione's liquidator. Relative Networks asserts that cl 6 and cl 7 of that Deed provides that it is to be repaid from the secured claim less any amount that is owed to Evoluzione and that the amounts to be paid to it will be determined, according to cl 7 of the Deed in a 'short and sharp' expert determination.
I was told from the bar table that the expert determination was to happen imminently. However, there was no affidavit to that effect and, when I raised the issue of whether the matter should be adjourned to allow for the expert determination to be finalised, counsel for the first defendant resisted the prospect of any further delay.
On the evidence before me, I am unable to determine whether or not such a loan-rent agreement ever existed. It follows that I am unable to assess whether Relative Networks is likely to receive the amounts it is claiming and the extent to which that might impact its ability to meet a costs order.
It is common ground that property the subject of the mortgage to Relative Networks was recently sold for the sum of $782,000.
Relative Networks points out that this amount is bound to be applied by the liquidators of Evoluzione pursuant to the Deed authorised by the Supreme Court of Western Australia on 22 December 2022 (pursuant to s 477(2B) of the Corporations Act).[13] On the other hand, as the plaintiff contends, if Evoluzione's claim against Relative Networks were to succeed, then Relative Networks may not recover the amounts advanced pursuant to the loan.
[13] Affidavit of Stephen Chad Mintz affirmed 1 June 2023, par 21.
Marco deposes in his affidavit that Ovviare's business continues to trade and generate an income. I find that, although Relative Network's profits are modest (save for the last financial year) the financial statements do not disclose any concerns that the company is insolvent or at risk of being insolvent. However, having regard to the whole of the evidence before me and adopting a practical, commonsense approach to the examination of Relative Networks' present position, I have reason to believe that Relative Networks may not be able to pay its costs if unsuccessful following a trial. My reasons are as follows:
1.Relative Networks holds no real estate or personal property against which the first defendant could enforce a judgment for costs;
2.the only asset against which Ovviare could enforce a judgment for costs is ongoing business of Relative Networks;
3.although Relative Networks has averaged a modest profit, it returned a net loss in the last financial year; and
4.any cash held in Relative Networks' bank accounts could be lawfully dissipated and therefore beyond Ovviare's reach for enforcement purposes.
Because of a combination of Relative Networks' unsettled claims with Evoluzione, its modest cash and trade debtor balance and the fact that in the last financial year it incurred a loss, I have sufficient disquiet about its financial circumstances that the threshold test has been met and my discretion is enlivened.
I turn now to consider the various factors I must consider in the exercise of my discretion.
Legal principles relevant to the exercise of the court's discretion
The various factors informing the exercise of the court's discretion have been repeatedly stated. The factors relevant to the exercise of the discretion (conveniently restated by Corboy J in Sugarloaf [36(b)]) include:
1.whether the application has been brought promptly;
2.the strength and bona fides of Relative Networks case;
3.whether Relative Networks' impecuniosity was caused by the defendant's conduct the subject of the claim;
4.whether the application for security was oppressive in the sense of being used to deny an impecunious applicant a right to litigate;
5.whether there were persons standing behind Relative Networks likely to benefit from the litigation and who were likely to provide the necessary security;
6.whether the persons standing behind Relative Networks have offered any personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
5.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 hold the defendant's self-help procedures;
6.the inability of Relative Networks to pay the defendant's costs; and
7.the discretion is unfettered and unlimited.
How I should exercise the discretion
I turn now to consider the various factors relevant to the exercise of my discretion.
Whether the application has been brought promptly
Although there have been delays, there is nothing before me to suggest that the delays were occasioned by the conduct of Ovviare. The pleadings have not closed, and that Ovviare has not yet filed a defence. This does not require me to decline the application but is nevertheless relevant to the quantum of and timing of orders for the payment of security for costs.
The strengths and bona fides of the claims
There is nothing to suggest to me that Relative Networks' claim is not bona fide. In the beginning, given that it was Rosalba who commenced proceedings in the Industrial Magistrates Court, Relative Networks' proceedings were, for the most part, defensive. However, given that the proceedings in the Industrial Magistrates Court are now no longer on foot, it cannot be said that Relative Networks claim is defensive.
I am otherwise unable to express any view as to the merits of the claim. This is not one of those exceptional cases where the merits are clear. The merits of the claim will need to be resolved at a trial: Gartner v Ernst & Young(No 3) [2003] FCA 1437 [10].
Whether Relative Networks' impecuniosity was caused by the first defendant's conduct
There is no plausible evidence that any impecuniosity on the part of Relative Networks was caused by the actions of the first defendant.
Whether the application is oppressive in the sense of being used to deny Relative Networks right to litigate
There is no evidence that Ovviare's application is oppressive or would stultify the ability of the company to continue with the action. Relative Networks does not contend that it will be denied the right to litigate if an order for security for costs is made against it.
Whether there are persons standing behind the plaintiff who are likely to benefit from the litigation and who were likely to provide the necessary security
The evidence is that Marco is the sole director of Relative Networks and holds a two-thirds share in it. There has been no evidence as to what other personal assets he has. However, plainly, he stands to benefit from the action without any risk to him personally. It is precisely for this reason that the discretion to make an order for security for costs exists: Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523, 532.
There is no evidence before me that Marco would be unable to provide security for costs.
Whether the persons standing behind the litigation have offered any personal undertaking to be liable to the costs and, if so, the form of the undertaking
Neither Relative Networks nor Marco have provided or offered to provide security for costs.
Marco has not offered any security or personal undertaking to be liable for the costs and in what form. This is a factor which weighs in favour of the granting of an order.
Whether the defendant is in substance a plaintiff or whether Relative Networks' action is essentially defensive
An order for security will not generally be made if proceedings are essentially defensive or where there is a counterclaim raising issues that are substantially similar to the issues raised in the claim: Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [49] - [50].
That is because it would be unjust for the claim to be stayed if security is not paid in circumstances where the same issues would need to be litigated in the counterclaim: Marand Holdings Pty Ltdv Cateus International Pty Ltd [2003] WASC 238 [38] - [41] (Newnes M).
The institution of these proceedings by Relative Networks was initially in response to Rosalba's claim in the Industrial Magistrates Court. However, now that those proceedings are no longer on foot, these proceedings can no longer be regarded as defensive. As such, this is a neutral factor in the exercise of my discretion.
The likelihood that Relative Networks would be unable to pay for the first defendant's costs
Relative Networks is not insolvent, nor is it at risk of becoming insolvent. However, I have found that Relative Networks has limited reserves with which to pay Ovviare's costs if unsuccessful and that any assets it holds could be lawfully or unlawfully dissipated. This is a substantial factor in favour of me exercising the discretion to award security for costs: Pravenkav Group Pty Ltd v Diploma Constructions (WA) Pty Ltd '[No 2] [2014] WASCA 106 [18].
How I should exercise the discretion
Having regard to the foregoing, I would exercise my discretion to order that Relative Networks pay security for costs. The most significant factor in the exercise of my discretion is the disquiet I have about the ability of Relative Networks to meet an order for costs if unsuccessful. Whilst Relative Networks is not insolvent, its assets are essentially liquid assets which could be easily dissipated. That fact, coupled with the absence of any undertaking to pay costs if successful is determinative of how I should exercise my discretion.
I would stay the proceedings save for the filing of a defence and counterclaim and any reply thereto.
I am only prepared to make an order until the next stage of the proceeding, namely a mediation conference. There will be liberty to apply for a further order should the parties not be able to settle the matter at mediation.
Orders
There will be orders as follows.
1.Relative Networks pay security for the defendant's costs up unto and including a first mediation conference in the sum of $15,000.
2.The proceedings are stayed up until the date of the first mediation conference.
3.The defendants have liberty to apply for further security on a date after the first mediation conference.
4.That costs of today be in the cause.
I will hear the parties as to what other orders, if any, should be made.
I certify that the preceding paragraph(s) comprise the reasons for decision of the District Court of Western Australia.
JS
Associate to the Judge
10 AUGUST 2023
0
4
1