Rimhart Nominees Pty Ltd v Glenent Pty Ltd & Baulderstone Hornibrook Pty Ltd - [2009] SASC 267

SUPREME COURT OF SOUTH AUSTRALIA
(Appeal from a Master: Civil)
RIMHART NOMINEES PTY LTD v GLENENT PTY LTD & BAULDERSTONE HORNIBROOK PTY LTD
[2009] SASC 267
Judgment of The Honourable Justice Anderson
3 September 2009
CORPORATIONS - LEGAL CAPACITY AND RELATIONS WITH OUTSIDERS - EXTERNAL LITIGATION PROCEDURE - COSTS - SECURITY FOR COSTS - DISCRETION OF COURT
Appeal by the second defendant against decision of a master refusing application for security for costs - whether master erred in relying on the accounts provided by the plaintiff - whether plaintiff's assets should be valued at market or auction value - whether the plaintiff would be able to meet an adverse costs order in the event its claim is unsuccessful - whether order for security for costs should be made against the plaintiff.
Held: Master did not err in relying on accounts provided by plaintiff - plaintiff's assets should be valued at market value - plaintiff would be able to meet an adverse costs order in the event of unsuccessful claim - order for security for costs should not be made against plaintiff - appeal dismissed.
Supreme Court Civil Rules 2006 r 194; Corporations Act 2001 s 1335, referred to.
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241, applied.
Haoma Mining NL v Carpentaria Gold Pty Ltd [2002] QSC 425; Interwest Ltd v Tricontinental Corporation Ltd & Anor (1991) 5 ACSR 621; Fat-Sel Pty Ltd v Brambles Holdings Ltd (1985) 3 ACLC 312; Olivaylle Pty Ltd v Flottweg GMBH & Co [2007] FCA 56, discussed.

RIMHART NOMINEES PTY LTD v GLENENT PTY LTD & BAULDERSTONE HORNIBROOK PTY LTD
[2009] SASC 267
Miscellaneous Appeal
ANDERSON J.
Introduction

This is an appeal from a decision of a master who refused an application by the second defendant Baulderstone Hornibrook Pty Ltd (“Baulderstone”) for an order for security for costs. The amount sought by Baulderstone was $372,000 plus GST.
The master decided the matter on the basis of affidavit material placed before him by both sides. The master concluded that there was no reason to believe that Rimhart Nominees Pty Ltd (“Rimhart”) would not be able to meet a costs order against it in favour of Baulderstone, and as a result the application was refused.
Background
Rimhart, which is the trustee company of the Rimington Family Trust, has made a claim against two defendants, Glenent Pty Ltd (“Glenent”) and Baulderstone. Glenent is a company equally owned by Baulderstone and Urban Construct Pty Ltd (“Urban Construct”).
Rimhart established the entertainment complex now known as the Beachouse on what was the site of the former Magic Mountain entertainment complex. It comprises of various amusements including a merry-go-round, waterslides and the like. A company associated with Rimhart, the Beachouse Australia Pty Ltd (“Beachouse”), commenced the operation of the Beachouse complex. Mr Peter Rimington is the sole director of both Rimhart and Beachouse. Rimhart also operates a Ferris wheel on Colley Reserve adjacent to the Beachouse complex. Rimhart leases this land from the City of Holdfast Bay.
At the time the dispute arose, Rimhart owned the property on which the Beachouse Complex was situated (“the Beachouse property”) and leased it to Beachouse. On 1 October 2008, Rimhart sold the Beachouse property comprising Certificate of Title Volume 5972 Folio 917 and Certificate of Title Volume 5972 Folio 919 to Jetty Road Foreshore Pty Ltd (“Jetty Road Foreshore”) and Colley Terrace Holdings Pty Ltd (“Colley Terrace Holdings”) for $5,000,000. Neither company is associated with either Rimhart or Beachouse. Property including plant and equipment, fixtures and fittings, was also sold to the purchasers for $7,000,000 subject to finance. These items included the main building on the land, three waterslides, and a bumper boat pool. Other items such as the Ferris wheel and the carousel remain the property of Rimhart. The lease Rimhart had in its favour was also assigned to the purchasers. Beachouse now leases the Beachouse property from Jetty Road Foreshore and Colley Terrace Holdings, with a commencing rent of $1,200,000 per year. There had been a valuation by Savills of the freehold and business for $30,000,000 in September 2008.
Application for security
The application for security for costs is made pursuant to r 194 of the Supreme Court Civil Rules 2006 (“the Rules”) and s 1335(1) of the Corporations Act 2001 (“the CA”). Section 1335(1) of the CA states:
1335 Costs
(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.
That section of the CA is relevant under the Rules because of r 194 which states that the court may order a plaintiff to provide security for costs if, amongst other things, “the order is authorised by statute”. The relevant statute in this case is, of course, the CA.
The threshold question
In relation to the test to be applied, both counsel acknowledged that His Honour correctly directed himself when he referred to the decision of the Full Court of the Supreme Court of Western Australia in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241, as setting out the correct test.
At [21] Pidgeon and Owen JJ said:
[21]We consider that the wording of the section [s 1335 of the CA] and the weight of the authorities supports the proposition that there is initially the jurisdictional question as to whether it appears by credible testimony that there is reason to believe that the corporation had been able to pay the costs. Once the Court has jurisdiction there is an unlimited discretion.
His Honour, after correctly directing himself as to the appropriate test, referred to the further remarks made by Pidgeon and Owen JJ at [22]:
[22]… The learned Master was correct in saying that there was the threshold hurdle which was required to be cleared to give the Court jurisdiction. We consider however, with respect, that the learned Master placed the hurdle too high. He said that there must be credible testimony “that the respondent would not be able to meet any costs order made against it”. The applicant is required to establish no more that there is “reason to believe”.
The complaint made by Baulderstone is that His Honour, having correctly stated the test, then wrongly applied it when he said at [33]:
[33]I find against the second defendant on that issue. In my view the plaintiff has produced credible testimony from its accountants that demonstrates on an ordinary accounting basis that the plaintiff would be able to meet the reasonable costs of the second defendant if unsuccessful against it and if an order for costs were to be made. The plaintiff has met its obligation to put evidence before the Court as to its assets and liabilities and income and projected income.
His Honour has in that passage indicated that he has accepted credible testimony, by way of some draft financial accounts prepared by the plaintiff’s accountants, to demonstrate that the plaintiff would be able to meet the reasonable costs of the defendant Baulderstone. He refers to the plaintiff as having met its obligation to put evidence before the court as to the assets, liabilities, income and projected income. The criticism is that His Honour has applied the wrong test. I disagree with that criticism. Although it is strictly not correct to speak of the plaintiff’s obligation, nothing turns on this.
In my view, His Honour, mindful of the correct test, has merely said in another way that, relying on the evidence from the plaintiff, as against the defendants’ evidence, he is not convinced that there is credible testimony showing that there is reason to believe that the plaintiff would be unable to meet the reasonable costs of Baulderstone. In other words, His Honour has simply weighed up the whole of the evidence which was before him and made his conclusion. I therefore reject the argument that the master applied the wrong test.
The use of the financial accounts
It is clear that in the argument before the master, counsel for Baulderstone attacked the reliability of the draft accounts which were annexed to the affidavit of Mr Miles who was a chartered accountant and a director of the firm Hayes Knight. That firm had been responsible for the preparation of the accounts of the plaintiff for approximately four years. Attached to Mr Miles’ affidavit was a copy of the financial accounts for the Rimington family trust and Top Gun International Pty Ltd (another associated company) to the year ended 30 June 2008. Mr Miles then said in his affidavit that further financial statements had been prepared for the period July 2008 to December 2008 and those accounts were also exhibited to the affidavit. I gather that they were prepared for the purpose of the application before the master. They were the accounts relied on by the master. They were draft accounts only.
These draft accounts were attacked in a number of ways. It was suggested that the fact that they were only drafts, that they were not prepared to any accounting standard, and further that they were based solely on information provided to the accountant by the client, meant they carried little weight.
His Honour took those matters into account when he said at[18]:
[18]The second defendant’s counsel made many attacks on this draft account but at the end of the day it was a draft account prepared by an independent accountant, albeit from information supplied by the plaintiff, and must carry considerable weight with the Court.
His Honour clearly has placed considerable weight on those accounts. On the basis of the accounts, His Honour found that there were assets in excess of liabilities of about $1.7 million which he regarded as “a significant surplus”.
The basis of the valuation of the assets
There was an argument before the master and in this appeal as to the correct basis of valuing the assets of the plaintiffs. MGS, a firm of valuers, had prepared a valuation distinguishing between what it described as “market value continued use and/or current going concern value” on the one hand and “auction value” as an alternative. The auction value was suggested by the appellant as the appropriate basis on which to value the assets. MGS defined auction value as “the gross amount realisable at a properly promoted, conducted and attended public auction sale held by this company under forced sale conditions, and under present day economic trends”. There was a large discrepancy in the valuation of assets as between the market value method and the auction value method.
Mr O’Sullivan QC for the appellant argued that the auction value was the correct method that should have been adopted by the master, on the basis that if Baulderstone was pursuing a costs order then it would be in circumstances which amounted to a forced sale by the plaintiff. The master rejected that submission, saying at [30]:
[30]… It seems to me that if the second defendant is in a position to pursue a costs order it would be after litigation and there will be ample time for the plaintiff to realise some of its assets if that be necessary …
In other words, the master did not consider the need for the realisation of the assets to be urgent that it could be regarded as forced sale conditions.
The parties were unable to provide me with any particular assistance as to when the market value method and the auction value method should be used in determining an application for security for costs. Mr O’Sullivan referred to the decision of Haoma Mining NL v Carpentaria Gold Pty Ltd [2002] QSC 435 as an example of when auction values have been used. In that case, Fryberg J stated that as a matter of commonsense, auction values should be used because the plaintiff in that case was close to insolvency, and there was a real risk that the defendant would be unable to execute an order for costs if it were successful. It seems to me that the plaintiff’s financial position in that matter was, on the face of it, much worse than in this case.
Mr O’Sullivan submitted that in exercising the discretion to grant security, the protection of the defendant should be the court’s primary consideration. To support this proposition he referred to the decision of Interwest Ltd v Tricontinental Corporation Ltd and Anor (1991) 5 ACSR 621 in which Ormiston J commented that the protection of the defendant against impecuniosity is the primary purpose of the security for costs legislation.
Mr O’Sullivan argued that in order to protect the defendant in this matter from impecuniosity, a fire sale auction value should be assigned to the assets, because this would value the assets at their greatest liquidity. Should the plaintiffs be unsuccessful in the action and have an adverse costs order made against them, their assets would need to be as liquid, that is, as easily realisable as possible, in order to meet that order in a timely fashion. Mr O’Sullivan referred to the comments by Beaumont J in Fat-Sel Pty Ltd v Brambles Holdings Ltd (1985) 3 ACLC 312, in which His Honour stated that the applicant in that case should not be forced to accept as security for costs an asset that is not liquid or virtually liquid. By analogy, in order to protect the defendant from impecuniosity in this case, the valuation of the plaintiff’s assets should be on the basis that they should be virtually liquid or easily realisable, and therefore auction values should be used.
Mr Dal Cin, counsel for the respondent, conceded that auction values may well be relevant in some cases. He submitted that ordinarily the court would be using a market value approach and therefore would have to be good reason to move away from that approach.
Mr Dal Cin pointed to the fact that the plaintiff in Haoma Mining was on the brink of insolvency and as mentioned above, had significant debts, severe cash flow problems and was relying on loans from a major shareholder to stay afloat. Mr Dal Cin submitted that the plaintiff’s dire financial circumstances in that case were the key reason that Fryberg J used auction values for its assets. Rimhart, he argued, is in a more favourable financial position, so there is no need to use auction value as distinct from market value.
In my view, it has not been shown that the master was in error in using the market value of the assets in his assessment of the need for security for costs in this matter. I agree that it would not be appropriate to value the assets in this matter on the basis of forced sale conditions.
The analysis of the accounts
The only analysis of the accounts has been by way of submissions from both counsel. There is no expert evidence, nor indeed any other evidence, to assist in resolving the accounting methodologies and the determination of the values in the accounts of the plaintiff.
Mr Dal Cin warned about the analysis of the accounts as undertaken by counsel for the appellant. The fact is that the accounts were prepared by experts, albeit without any notification of adherence to accounting standards. The accounts were nevertheless produced by a responsible firm of accountants familiar with the company’s business affairs. The accounts were put forward by the accountants as representing the financial position of the company at the time they were prepared. The accountants were aware of the purpose of the draft accounts. I agree with the master that they do carry considerable weight.
Mr O’Sullivan then criticised some of the specifics of the accounts provided to the master. In the profit and loss statement, apart from a capital gain of $4.71 million, Rimhart’s only other income was $300,000 in rent and approximately $8,000 in the sale of new and used games. The capital gain item related to the sale of the Beachouse property in October 2008, and Mr O’Sullivan submitted that if that gain were removed from the accounts, Rimhart would actually have made a loss of approximately $618,000. Furthermore, in the future, Rimhart would no longer receive the income from the rent of the Beachouse property.
Further criticism was made of the balance sheet. Included in Rimhart’s assets in the accounts, is a “Land and building legal dispute” valued at $85,432.05. Mr O’Sullivan pointed out that this asset is not easily realisable. Mr O’Sullivan also identified apparent inaccuracies between the values given for some assets in the accounts, such as the motor vehicles, and the market valuations given by the valuers, MGS, in September 2008. Indeed, the Ferris wheel was given a value in the accounts of $1,678,557.41, whereas MGS gave it a market value of $800,000 and an auction value of $180,000. Another criticism is that the waterslides were included in the accounts, but these too have been sold. Mr O’Sullivan submitted, that taking the MGS values, and deducting the assets that have already been sold, the value of Rimhart’s assets should be in the order of $2.7 million, instead of the $4.7 million shown in the accounts. After a comparison of assets against the liabilities of $2,169,946, there is only a surplus of $599,825 instead of the approximately $1.6 million that the master found.
Mr Dal Cin made the point that, apart from everything in the financial accounts, it was apparent from Savills’ valuation that the figure of $30 million concerned the land, buildings and the enterprise. The freehold was valued at $16 million and the leasehold at $14 million. It was not a case, Mr Dal Cin argued, where something valued at $16 million by the valuer, that is, the land, was in fact sold for $5 million, as submitted by Mr O’Sullivan. The land was sold for $5 million but additional property was sold for $7 million, including buildings and nominated fixtures. Above all else, Mr Dal Cin submitted that the financial accounts do not carry with them any valuation for the enterprise as a whole and that it is a substantial going concern which is operating and producing income. Savills valued the leasehold at $14 million but that figure did not include the Ferris wheel operation. On that basis, Mr Dal Cin submitted that the financial statements therefore understate the assets by not bringing into account the full value of the business as a going concern.
Mr Dal Cin submitted that even if the assets were to be given their auction value, consideration should be given to the value of the respondent’s enterprise as a going concern. Mr Dal Cin referred to the decision of Quinn J in Olivaylle Pty Ltd v Flottweg GMBH & Co [2007] FCA 56 in which the applicant had refused to provide evidence of its ability to pay an adverse costs order. Quinn J found that there is no onus on the applicant to adduce such evidence and he emphasised that the court has a wide discretion to grant security. Quinn J took into account the fact that the applicant seemed to have a substantial business and that there was no evidence to suggest it would be unable to pay its debts, in deciding not to make an order for security for costs against it.
Furthermore, Quinn J commented that the capital structure of an applicant would ordinarily be irrelevant to its ability to pay a future adverse costs order. The applicant in that case was a $2 company running a seemingly successful olive growing and processing business. Mr Dal Cin therefore submitted that despite Rimhart’s potentially parlous situation if its assets are assigned an auction value, its associated company, the Beachouse, is a functioning enterprise and therefore able to pay the appellant’s costs should it be unsuccessful in these proceedings. Mr Dal Cin referred to the valuation of Savills of September 2008 of the Beachouse as a “going concern” in which the leasehold was valued at $14 million and this carried with it the enterprise as a going concern.

Mr O’Sullivan then addressed the “going concern” issue in his submissions. He argued first, that the profit and loss statement for the Beachouse actually showed a net loss of $725,897.71 for July through December 2008. Therefore, he submitted, the Beachouse would be unable to contribute to any adverse costs order against Rimhart, because it does not have any assets, and it sustained a loss in the second half of 2008. Mr O’Sullivan also submitted that Beachouse’s assets had little relevance, as it is not a party to these proceedings, but conceded that it had been put forward as an entity that would contribute to a costs order in favour of the appellant. In fact, an application has been taken out to join the Beachouse as a plaintiff. In an affidavit of Mr Rimington dated 17 December 2008, he stated that Beachouse would not oppose the making of a costs order in favour of Baulderstone if the claim was unsuccessful, with Beachouse being jointly and severally liable with Rimhart from the date of that affidavit.
In response to Mr O’Sullivan’s submission that Beachouse made a loss for the second half of 2008, Mr Dal Cin submitted that at this time, the business went into receivership and was re-structured. The receiver and mangers’ costs were put at $307,000 and were a one off liability for that period. The deficit would be further reduced if a written-off debt of $670,000 was not taken into account. Mr Dal Cin also pointed out however that there is a projected net profit for the Beachouse enterprise, including the operation of the Ferris wheel, of $2.3 million, while the projected cash flow to June 2009 for the enterprise was $1.6 million.
Mr Dal Cin argued that it was artificial to look at the accounts and ‘cherry pick’ certain items and deduct them to find discrepancies between the accounts and the MGS values. Instead, the accounts should be looked at globally, in which case there is a closer resemblance between the accounts and the valuation by MGS. When coupled with the fact that the accounts did not include a value for the enterprise itself, he submitted that the financial information provided to the master was reliable and that the master was entitled to rely on it as he did.
Discretionary considerations
The master, in his reasons, went on to deal with the question of his discretion and indicated that if he had awarded security he would have ordered it in the sum of $170,000 and not the $372,000 claimed by the applicant. The applicant accepted, on the appeal, that $170,000 was sufficient if an order was to be made.
In my view, none of the discretionary matters argued before the master or before me would alter the position if the threshold test is satisfied, as I find it to be.
Conclusion
I have considered the competing arguments of both sides relating to the master’s use of the accounts provided by Hayes Knight. My earlier summary of the arguments advanced by both sides illustrates how different emphasis can be put on the entries in the accounts. Each of the arguments put by Mr O’Sullivan can be countered as illustrated by Mr Dal Cin’s submissions. The accounts, on their face, do carry weight and the master was entitled to rely on them. It has not been shown that his Honour was wrong in the reliance he placed on those accounts.
For the reasons I have expressed, it is my view that it has not been shown that the master has erred in his approach to this matter, nor in his assessment of whether there was any reason to believe that the plaintiff would not be able to meet the costs order.
On a practical note, it seems to me that if the appellant does come into possession of further information regarding the plaintiff and its ability to meet an order for costs, it is of course entitled to make a further application for security for costs. At that time one would assume that the formal and final financial accounts for the year ending 30 June 2009 would be available. If no accounts were produced by the plaintiff at that time then that would, of course, be a factor influencing the master in deciding the question of whether there was credible evidence in favour of making the order. By the same token, if the accounts were produced by the plaintiff to meet the argument of the plaintiff, they would be in a proper form and signed off. Those accounts would no doubt reveal the true position of the company as at 30 June 2009. Upon that evidence the master could decide whether to make an order.
I would, for the reasons given, dismiss the appeal.