Scentre Management Ltd v Italian Gourmet Kitchen Pty Ltd - [2021] WADC 90

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION:   PERTH
CITATION:   SCENTRE MANAGEMENT LTD -v- ITALIAN GOURMET KITCHEN PTY LTD [2021] WADC 90
CORAM:   PRINCIPAL REGISTRAR MELVILLE
HEARD:   25 AUGUST 2021
DELIVERED          :   22 SEPTEMBER 2021
FILE NO/S:   CIV 2990 of 2019
BETWEEN:   SCENTRE MANAGEMENT LTD
First Plaintiff
RE1 LTD
Second Plaintiff
AND
ITALIAN GOURMET KITCHEN PTY LTD
First Defendant
OZER DERMIRKAN
Second Defendant
ALA'AUDDEN AHMAD AL-KHATIB
Third Defendant
AND
ITALIAN GOURMET KITCHEN PTY LTD
ALA'AUDDEN AHMAD AL-KHATIB
Plaintiff by counterclaim
SCENTRE MANAGEMENT LTD
RE1 LTD
Defendant by counterclaim

Catchwords:

Security for costs - Equitable set-off as a defence

Legislation:

Corporations Act 2001 (Cth), s 1335
Rules of the Supreme Court 1971 (WA), O 25 r 2 and r 6, O 20 r 17

Result:

Application for security for costs refused

Representation:

Counsel:

First Plaintiff	:	Mr C Slater
Second Plaintiff	:	Mr C Slater
First Defendant	:	Mr C Galic
Second Defendant	:	Not applicable
Third Defendant	:	Mr T Galic
Plaintiff by counterclaim	:	Mr T Galic
Defendant by counterclaim	:	Mr C Slater

Solicitors:

First Plaintiff	:	Watts Legal Consultants
Second Plaintiff	:	Watts Legal Consultants
First Defendant	:	TGC Lawyers
Second Defendant	:	Not applicable
Third Defendant	:	TGC Lawyers
Plaintiff by counterclaim	:	TGC Lawyers
Defendant by counterclaim	:	Watts Legal Consultants

Case(s) referred to in decision(s):

Casella v Costin Pty Ltd (Unreported, WASCA, Library No 5416, 22 June 1984)
Clyde Industries Pty Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325
Gathercole v Smith (1881) 7 QBD 626
Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62
Joseph v Joseph [2007] WASCA 27
Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57
Young v National Australia Bank Ltd [2004] WASCA 298

PRINCIPAL REGISTRAR MELVILLE:

By writ of summons endorsed with a statement of claim and dated 8 August 2019 the first and second plaintiffs as lessors of premises at Westfield Carousel Shopping Centre commenced an action against the first defendant (IGK) for monies alleged to be owing by IGK pursuant to the lease of the premises, and for monies owing pursuant to a second agreement between the plaintiffs and IGK whereby the plaintiffs agreed to contribute financially to the fit out of the premises (the Fitout Deed). It is pleaded the plaintiffs terminated the lease with effect on and from 18 October 2018 following the issue of a default notice dated 28 September 2018.
In the same writ the plaintiffs also brought an action against the second defendant and the third defendant (Mr Al-Khatib) as guarantors of IGK's obligations under the said lease and the Fitout Deed.
The action against the second defendant has since been dismissed by way of consent orders.
By way of a joint defence IGK and Mr Al-Khatib have admitted most of the material facts set out in the statement of claim but deny owing the money on the basis of the '… counterclaims and setoffs pleaded herein'.
By way of their set‑off and counterclaim IGK and Mr Al-Khatib allege that in reliance on representations made by the plaintiffs' leasing executive IGK entered into the lease for the premises which were situated in the food court, and the Fitout Deed and expended approximately $213,150 in fitting out the premises.
The representations, which I paraphrase, are alleged to be that there would be a redevelopment of the Westfield Carousel Shopping Centre which would increase business for the food court, increase the sales of IGK such that projected annual turnover would be at least $1,000,000 per annum and that that there were no plans to open up any new dining facilities or food court on the newly expanded top floor that would negatively impact on foot traffic in the existing food court.
It is then alleged that contrary to those representations 22 new restaurants were introduced on the top floor and the redevelopment saw a decline in the number of shoppers frequenting the premises.
The representations are alleged to be misleading or deceptive or likely to mislead or deceive, contrary to s 18 of the Australian Consumer Law (ACL) or were representations made as to future matters for which there was no reasonable grounds and are deemed to be misleading or deceptive contrary to s 4 of the ACL.
As a result of the misrepresentations IGK suffered trading losses and other losses.
The counterclaim goes on to allege the issue of the default notice and the re-taking of possession of the premises was unconscionable conduct in circumstances where IGK was in a vulnerable financial position which had been disclosed to the plaintiffs and which had been caused by losses alleged to be due to the misrepresentations and other failures of the plaintiffs.
IGK and Mr Al-Khatib further allege the plaintiffs were in breach of the provisions of the lease by undertaking a redevelopment which was in excess of those allowed under the lease and which denied IGK the right of quiet possession.
IGK then pleads it is entitled to set off its claim in damages against the amounts claimed by the plaintiffs and seeks by way of further relief a declaration that the lease is void. Mr Al‑Khatib pleads for recission of cl 9.1 of the Fitout Deed and an order setting the guarantee aside. The factual basis relied upon by Mr Al-Khatib for the relief sought is the same factual basis upon which IGK relies for its set‑off and counterclaim.
The plaintiffs now seek an order that IGK as first plaintiff by counterclaim pay the sum of $123,913 into court by way of security for costs. The application is bought pursuant to s 1335 of the Corporations Act 2001 (Cth) or, alternatively pursuant to O 25 r 2 and r 6 of the Rules of the Supreme Court 1971 (WA) (RSC).

The law

Section 1335 of the Corporations Act provides:

(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.

The RSC by O 25 provide relevantly:
1.Factors that are not grounds for ordering security for costs
The Court may order security for costs to be given by a plaintiff, but no order shall be made merely on account of the poverty of the plaintiff or the likely inability of the plaintiff to pay any costs which may be awarded against him.
2.Grounds for ordering security for costs
Without limiting the generality of rule 1 the Court may order security for costs to be furnished where the plaintiff -
(a)is ordinarily resident out of the jurisdiction, notwithstanding that he may be temporarily within the jurisdiction;
(b)is about to depart from the jurisdiction;
(c)enjoys within the jurisdiction some privilege which renders him immune, wholly or partially, from the normal processes of execution;
(d)is an undischarged bankrupt or a person who has suspended, or given notice of suspension of, his debts;
(e)is a company in liquidation or under official management, or a company in respect of which a receiver of its property has been appointed;
(f)is a relator suing for the enforcement or declaration of some public right or to have some public trust carried out or some charitable scheme settled;
(g)is in default in respect of any costs ordered to be paid by him in any proceedings previously brought by him against the same defendant or another defendant for substantially the same cause of action or in relation to substantially the same subject matter;
(h)is a person who has in the past vexatiously brought litigation against the same defendant or against any other defendant;
(i)is suing the sheriff in respect of anything done or omitted to be done by the sheriff or his officers in the execution of any judgment of the Court.
3.Court has discretion
The granting of security shall be in the discretion of the Court, and in determining whether an order should be made the Court shall take into consideration -
(a)the prima facie merits of the claim;
(b)what property within the jurisdiction may be available to satisfy any order for costs against the plaintiff;
(c)whether the normal processes of the Court would be available within the jurisdiction for enforcement of any order for costs made against the plaintiff.
4.Term used: plaintiff
In this Order the term plaintiff shall include a defendant counterclaiming in respect of a claim not arising out of the claim made against him.
…
6.Action may be stayed
Where security is ordered the action or other proceedings shall be stayed until the security is furnished, unless the Court otherwise orders.
The principal point of difference between s 1335 of the Corporations Act and O 25 of the RSC is that in the case of s 1335 of the Corporations Act discretion to order security for costs is enlivened once there is credible evidence to suspect the plaintiff company will not be able to pay costs that might be ordered against it if it is unsuccessful, in other words is in a difficult financial position, whereas under O 25 RSC that in itself is not sufficient to obtain such an order.
It has been held in the case of s 1335 of the Corporations Act the discretion is unlimited and to be exercised having regard to all the circumstances of the case. In Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3]it was said:[1]
Essentially, the section requires a balance to be struck between protecting the defendant from the possible consequences of being sued by an impecunious corporation with limited liability and avoiding injustice to the corporation by unnecessarily prejudicing it in the conduct of litigation: see Buckley v Bennell Design & Construction Pty Ltd (1974) 1 ACLR 301.
[1] Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161.
The court went on to say:
11I approach this matter on the basis that there is not an entitlement to security as of right once the defendant has established that the plaintiff will be unable to pay its costs if the defendant is successful; nor is there a predisposition towards an order for security: see the extensive review of the authorities in Re Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497. In the circumstances of a particular case, however, the fact that the plaintiff is impecunious may be an important factor in determining the application: Spiel v Commodity Brokers Australia Pty Ltd (in liq) (1983) 35 SASR 294, 300; Pearson v Naydler (1977) 1 WLR 899, 906; BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857, 860; Harpur v Ariadne Australia Ltd (1984) 2 ACLC 356, 361.
12Further, the court may give weight to the amount of the defendant's loss if the risk materialises: Sent v Jet Corporation of Australia Pty Ltd [1984] FCA 178; (1984) 2 FCR 201, 217.
13Where those who stand behind the company and would gain from the litigation are financially able to provide adequate security, it is at least a weighty consideration in favour of an order for security: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542, 545; Sent v Jet Corporation (215). A court is not justified in declining to make an order on the basis that the proceedings will be stultified unless the impecunious plaintiff establishes that those who stand behind it are also unable to provide the requisite security for costs: Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1, 3; Idoport Pty Ltd v National Australia Bank Limited [2001] NSWSC 744 [66]; Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120, 123.
14Where, however, those who will benefit are without means, an order for security may stultify the litigation. Where the plaintiff does establish the possibility of stultification, that is a powerful factor to be taken into account in exercising the court's discretion, although it does not automatically lead to refusal of the order: Yandil Holdings Pty Ltd v Insurance Co of North America (545).
15The effect of the authorities is that a company seeking to resist an order for security on the ground that it will frustrate the litigation must 'raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts': Bell Wholesale Co Pty Ltd v Gates Export Corporation. It is incumbent upon a plaintiff who wishes to resist an application for security to put before the court a full and frank statement of the assets and liabilities of the plaintiff, and also of its shareholders and creditors (if relevant), and, if there are trust assets, of the beneficiaries of the trust: Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1, 3; Tirops Safety Technology Pty Ltd v Lazer Safe Pty Ltd [2005] WASC 164. Without that evidence, no conclusion can properly be reached that the effect of an order for security will be to frustrate the plaintiff's claim. In this sense there is an onus on a plaintiff resisting an order for security: see BPM Pty Ltd v HPM Pty Ltd (862); Bell Wholesale Co Pty Ltd v Gates Export Corporation.
16Finally, the ability of the defendant to absorb the costs if successful may be a relevant consideration. The court may have regard to the position of the defendant, and may be 'more sympathetic to an application from a respondent with limited funds than a respondent which is a major corporation': Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344; (2007) 65 ACSR 383 [56]; Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180, 186.
In this regard the considerations to be taken into account are similar to those that are to be taken into account on an application for security for costs pursuant to O 25 of the RSC, mindful of course, of the additional requirements in O 25 set out in r 3 that the court is obliged to consider. All of those considerations have more recently been succinctly summarised by Edelman J in Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd where it was said:[2]
[2] Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57.
6Depending on the circumstances, various factors may have different strength and effect on the exercise of the discretion to award security for costs. The most commonly cited, nonexclusive, factors include the following, most of which I extrapolate from the cases footnoted:
(i)the strength and bona fides of the plaintiff's case;
(ii)the likelihood of the plaintiff being unable to pay the defendant's costs;
(iii)whether the plaintiff's impecuniosity was caused by the defendant's conduct which is the subject of the claim;
(iv)whether the application for security is oppressive;
(v)whether the award of security would deny an impecunious applicant a right to litigate;
(vi)whether there are persons standing behind the plaintiff who were likely to benefit from the litigation;
(vii)whether the persons standing behind the plaintiff have offered any security or personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
(viii)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 halt the defendant's selfhelp procedures;
(ix)whether the application for security had been brought promptly;
(x)whether the applicant has any rights which it can exercise against assets of the plaintiff to satisfy an order for costs in its favour; and
(xi)any factors relating to the public interest.
(footnotes omitted)
The evidence bearing on the above issues is found in the affidavits sworn on behalf of the plaintiffs by Ms R G Jeanes sworn 8 April 2021 and 18 June 2021 together with a copy of an order of the Supreme Court tendered from the bar table and received as exhibit 1, and affidavits sworn by Mr Al‑Khatib sworn 19 July 2021 and 18 June 2021. I should say at the outset I find exhibit 1, which is an order made in other proceedings in another court involving a different plaintiff of which Mr Al-Khatib is a director and in which security for costs was ordered in the sum of $50,000 to be of little help in determining this application.
In the circumstances of this case there is credible testimony IGK cannot pay any award of costs it would be required to meet if unsuccessful in its counterclaim. In this regard the defence and counterclaim is eloquent enough. IGK admits it has failed to make payments pursuant to the lease and the Fitout Deed and pleads in its set‑off and counterclaim as a particular of the unconscionable conduct that the plaintiffs knew it was in a 'vulnerable position financially and was unable to remedy the alleged default' and that it had 'detailed its vulnerable financial position and its financial losses in an email …'.[3]
[3] Defence and Counterclaim pars 10, 13 and 14.
Further there is evidence that IGK has no land in Western Australia.[4] Mr Al-Khatib in his affidavit swears that he believes the plaintiffs by making this application are trying to 'stultify' the proceedings and that he and the other director of IGK are prepared to underwrite the plaintiffs' costs if IGK loses. This indicates IGK cannot pay the costs itself.
[4] Affidavit of R G Jeanes sworn 8 April 2021; Annexure RGJ-2.
At Annexure A to Mr Al-Khatib's affidavit sworn 17 June 2021, are found various emails touching upon the financial circumstances of IGK. In an email of April 2018 it is stated 'we have repeatedly requested Westfield's urgent financial support in order to survive with our business' and in an email of June in which it is said cashflow is extremely tight and that 'we can hardly manage our daily operations expenses'.[5]
[5] Email dated 7 June 2018.
I conclude, it is very likely IGK will be unable to pay the plaintiffs' costs if unsuccessful in its counterclaim, or for that matter, its defence.
I am also satisfied there are people standing behind the company, namely the shareholders, who stand to benefit from IGK's counterclaim. Whilst the company records indicate two shareholders who are the directors of the IGK, those records indicate neither hold the shares as beneficial owners. Who the beneficial owners are is not disclosed in the evidence but on any view there is no credible evidence that the people standing behind the company, whether they be the legal owners of the shares or the beneficial owners of the shares, are unable to fund IGK's litigation and accordingly I cannot find that the prosecution of IGK's counterclaim would be stultified by an order for security for cost.
On affidavit Mr Al‑Khatib has stated that the directors are 'prepared to underwrite the plaintiffs' costs, and whilst the plaintiffs might find limited solace in this offer, it is not worthless, although in the absence of particulars as the directors capacity to meet these costs and comply with such an undertaking I would not give it as much weight as I otherwise would have.[6]
[6] Clyde Industries Pty Ltd v Ryad Engineering Pty Ltd (1993) 11 ACLC 325.
All these considerations point in favour of making an order for security for costs.
On the other hand, if the allegations raised by IGK in its defence and counterclaim are proven to be correct, it could be said with some justification that IGK's impecuniosity has been brought about by the conduct of the plaintiffs which is the subject of the defence and counterclaim.

Further, on the face of the pleadings and the affidavit material it appears to me the counterclaim is bona fide, the complaints made in the counterclaim being consistent with the complaints made in the pre‑existing emails about the impact of the renovations on IGK's business, and is reasonably arguable. It seems that generally a preliminary view is taken as to the merits as it is not appropriate to try the issue as one would at a trial for purpose of determining its prospects of success at trial.[7]
[7] Joseph v Joseph [2007] WASCA 27.
The real difficulty the plaintiffs have with their application is that in my view the interests of justice are not served by ordering IGK to provide security for costs. More particularly IGK pleads in its defence facts which give rise to an equitable set-off which in my view is a defence to the action brought by the plaintiffs. As it happens, and is so often the case, the same facts that establish the defence (the equitable set-off) also give rise to a separate cause of action for the defendant against the plaintiff which manifests itself in a counterclaim.
To stay the prosecution of IGK's counterclaim in my opinion cannot preclude IGK litigating the same issues in its defence to the action. The plaintiff obtains no protection on costs from any order staying the prosecution of IGK's counterclaim. It will still incur the same cost in dealing with the defence. Further, if the defence is proved presumably the defendant should be able to obtain judgement on any counterclaim but will be precluded from doing so because the counterclaim is stayed.
In this regard I understand the plaintiffs to make two submissions. The first is that it is not possible to plead an equitable set-off as a defence without there also being a counterclaim that is being pursued. The practical effect of that submission is that if the prosecution of the counterclaim is stayed then any defence based on an equitable set-off falls away.
The second submission is that in any event the facts pleaded by IGK and Mr Al-Khatib do not give rise to an equitable set-off and IGK's claim is an action unconnected to and separate from the case brought by the plaintiffs against the defendants. As such it can only stand as a separate counterclaim and cannot be used as a defence.
With these propositions I am unable to agree.
Firstly, in my view an equitable set-off, if it arises, is as much a defence as is a set-off. A set-off is a defence and can be pleaded as such. In Gathercole v Smith Lush LJ said:[8]
The set-off is not an independent action. It is still a defence and nothing more. If the plaintiff before the Judicature Acts chose to discontinue his action the defendant could not claim to have his set-off tried. It fell with the action to which it was and still is an adjunct.
[8] Gathercole v Smith (1881) 7 QBD 626, 269.
In the same case Baggallay LJ said:
I do not feel satisfied that a set-off and a counter-claim are the same. I do not think that the Rules of Court intended that they should be so regarded in every instance. I think that in some instances a set-off may fail, whilst a counter-claim may succeed; …'
The distinction between a set off and a counterclaim is maintained by O 20 r 17 of the RSC which provides:
where a claim by a defendant to a sum of money (whether of an ascertained amount or not) is relied on as a defence to the whole or part of a claim made by the plaintiff, it may be included in the defence and set off against the plaintiff's claim, whether or not it is also added as a counterclaim.
Further, the fact that the plaintiff by counterclaim may not have a remedy because the cause of action is statute barred does not preclude that party from raising the set-off as a defence.[9]
[9] Young v National Australia Bank Ltd [2004] WASCA 298 [32].
Hence it can be seen that a set-off may exist where a counterclaim does not, and a counterclaim may exist where a set-off does not.
Secondly, an equitable set-off arises when the defendant brings forward a claim which impeaches that of the plaintiff. This requires more than pleading a countervailing claim arising out of the same contract. The counterclaim must impeach the rights of the other party, or to put it another way, must be essentially bound up with the rights of the other party.[10] In Casella v Costin Pty Ltd[11] the Full Court stated that the law was as set out in Spry, Equitable Remedies (2^nd ed), 170 ‑ 171, being:
What generally must be established is such a relationship between the respective claims of the parties that the claim of the defendant has been brought about by, or has been contributed to by, or is otherwise so bound up with the rights which are relied upon by the plaintiff that it would be unconscionable that he should proceed without allowing a set-off. Thus if conduct of the plaintiff is such as to induce the defendant to incur an obligation in favour of the plaintiff, and that conduct itself is fraudulent, negligent or otherwise wrongful so as to give a cause of action to the defendant, the plaintiff will not ordinarily be permitted to proceed until he is made good the material claims of the defendant.
[10] Hazcor Pty Ltd v Kirwanon Pty Ltd (1995) 12 WAR 62.
[11] Casella v Costin Pty Ltd (Unreported, WASCA, Library No 5416, 22 June 1984).
In my view IGK, in seeking a declaration that the lease is void, and seeking damages on the basis it was induced to enter the lease and the Fitout Deed by the alleged misrepresentations, brings a claim which is essentially bound up with the rights of the plaintiff, or impeaches the plaintiffs' rights which are based on the existence of a valid lease brought into existence in the absence of any misrepresentations.
In any event in my view IGK's counterclaim can be characterized as defensive irrespective of whether it in fact gives rise to an equitable set‑off.
Finally, and in any event, exactly the same issues of fact are going to be canvassed by the court in dealing with the counterclaim of Mr Al‑Khatib. To allow the issues to be litigated by Mr Al-Khatib but to stay the action brought by IGK on the same facts seems to make little sense.
On weighting the factors in favour of an order staying the actions unless security for costs are given, against the factors favouring no order for a stay I am not persuaded I should exercise my discretion to order IGK's counterclaim be stayed pending IGK paying security for the plaintiffs' costs on defending the counterclaim.
So the application is dismissed.

I certify that the preceding paragraph(s) comprise the reasons for decision of the District Court of Western Australia.
MEB
Associate
22 SEPTEMBER 2021