Shade Solutions Australia (Vic) Pty Ltd v Horan (Ruling as to Costs)
[2023] VCC 453
•4 April 2023
| IN THE COUNTY COURT OF VICTORIA AT Melbourne COMMON LAW DIVISION | Revised Not Restricted Suitable for Publication |
| Defamation List |
Case No. CI-22-03105
| SHADE SOLUTIONS AUSTRALIA (VIC) PTY LTD (ACN 651 260 436) | First Plaintiff |
| and | |
| ANDREW VALK | Second Plaintiff |
| v | |
| AMY HORAN | Defendant |
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JUDGE: | HER HONOUR JUDGE CLAYTON | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 3 March 2023 | |
DATE OF RULING: | 4 April 2023 | |
CASE MAY BE CITED AS: | Shade Solutions Australia (Vic) Pty Ltd and Anor v Horan (Ruling as to Costs) | |
MEDIUM NEUTRAL CITATION: | [2023] VCC 453 | |
RULING
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Subject:COSTS – DEFAMATION – INJURIOUS FALSEHOOD – SECURITY FOR COSTS
Catchwords: Application for security for costs – whether there is reason to believe the first plaintiff has insufficient assets to pay the defendant’s costs
Legislation Cited: County Court Civil Procedure Rules 2018 (Vic), r62.02(1)(b), r62.02(1)(f); Corporations Act 2001 (Cth), s286, s1335(1)
Cases Cited:Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744; Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621; Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; Butler Market Gardens Pty Ltd v GG & PM Burrell Pty Ltd [2018] VSC 461; Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale [1999] 2 VR 191; Trailer Trash Franchise Systems Pty Ltd v GM Fascia & Gutter Pty Ltd [2017] VSCA 293
Ruling: Application granted. First plaintiff ordered to pay security for costs in favour of the defendant.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr L Allen (solicitor) | Rostron Carlyle Rojas Lawyers |
| For the Defendant | Mr J Uljans (solicitor) | Hall & Wilcox |
HER HONOUR:
1The first plaintiff, Shade Solutions Australia (Vic) Pty Ltd (“SSAV”), sues the defendant, Ms Amy Horan, for injurious falsehood.
2Ms Horan applies for security for costs to be provided by SSAV for costs of the proceeding, up to and including mediation. She says there is reason to believe SSAV will be unable to meet an order for costs if ordered to do so.
3SSAV opposes the application and says the jurisdiction of the Court is not enlivened, SSAV is entitled to a presumption that it has a good case, and the second plaintiff, Mr Andrew Valk, has offered to provide a personal guarantee for costs.
4The following issues arise:
(a) Is the jurisdiction of the Court enlivened because there is reason to believe SSAV has insufficient assets in Victoria to pay Ms Horan’s costs if ordered to do so?
(b) If so, should the Court exercise its discretion to order security?
(c) If so, in what sum ought security be ordered?
5For the reasons that follow, I am satisfied that the jurisdiction is enlivened because there is reason to believe SSAV has insufficient assets to meet an adverse costs order.
Is the jurisdiction of the Court enlivened?
Legal principles
6Rules 62.02(1)(b) and 62.02(1)(f) of the County Court Civil Procedure Rules 2018 (Vic) (“the Rules”) provide:
“(1)Where—
(a)…
(b)the plaintiff is a corporation or (not being a plaintiff who sues in a representative capacity) sues, not for the plaintiff's own benefit, but for the benefit of some other person, 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;
…
(f)under any Act the Court may require security for costs—
the Court may, on the application of a defendant, order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given.”
7Section 1335(1) of the Corporations Act 2001 (Cth) (“Corporations Act”) states:
“Where a corporation is a 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.”
8The purpose of a security for costs order is to guard against the risk that a costs order obtained by a defendant may turn out to be of no value by reason of the impecuniosity of a plaintiff.[1]
[1] Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744, at paragraph [52] (Einstein J)
9Where there is a sufficient basis for the belief that a company will be unable to meet an adverse costs order, that belief both enlivens the Court’s jurisdiction to make an order for security for costs and is also a significant factor relevant to the exercise of the discretion.[2]
[2] Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 at 624 (Ormiston J)
10As set out in Livingspring Pty Ltd v Kliger Partners,[3] the threshold for establishing the requisite belief is low.[4] It requires a rational basis for the belief and no more. It does not require that the Court be satisfied that the company will be unable to meet an adverse costs order, nor that it be likely that a costs order would go unmet. The section requires the Court to make a judgment as to whether there is a risk that the corporation will be unable to pay. The section calls for a “practical, commonsense approach to the examination of the corporation’s financial affairs”.[5]
[3](2008) 20 VR 377
[4] Ibid at paragraph [16] (Maxwell P and Buchanan JA)
[5] Ibid at paragraph [15] (Maxwell P and Buchanan JA)
SSAV’s financial position
11An Australian Securities and Investments Commission (“ASIC”) company search in relation to SSAV indicates its total value of paid-up shares is $100.[6]
[6]Exhibit JPU-1 to the affidavit of Jacob Uljans dated 1 December 2022 (“Uljans affidavit”), pages 6-16
12An ASIC company search in relation to the sole shareholder of SSAV shows the total value of paid-up shares is $10 and that Mr Valk is the sole shareholder.[7]
[7]Exhibit JPU-1 to the Uljans affidavit, pages 17-25
13A national property ownership search in relation to SSAV indicates that it does not hold an interest in land in any Australian state or territory.[8]
[8]Exhibit JPU-1 to the Uljans affidavit, pages 26-34
14A Personal Properties Securities Register grantor search in relation to SSAV shows that on 9 February 2022, it granted a security interest in various assets to Waverly Forklifts Pty Ltd.[9]
[9]Exhibit JPU-1 to the Uljans affidavit, pages 35-43
15SSAV was incorporated in June 2021.[10] Mr Valk is sole director of SSAV. SSAV was incorporated shortly before the second plaintiff’s previous company, Shade Solutions Australia Pty Ltd (“SSA”), ceased trading in July 2021 and was placed into administration. SSAV trades under the same name as its predecessor, “Shade Solutions Australia”,[11] and previously operated from the same business address.[12]
[10]Exhibit JPU-1 to the Uljans affidavit, page 17
[11] Amended Statement of Claim, paragraph 3
[12] Amended Statement of Claim, paragraph 11
16Mr Valk describes the establishment of SSAV as part of a “restructure to facilitate national expansion, which now includes entities based in both Victoria and New South Wales”.[13] He estimates revenue for the 2023 financial year will be $7,550,000 based on his “inspection of Shade Solutions Vic’s financial records and my forecast based on sales to date this financial year”.[14] SSAV revenue for 2022 was $2,700,000.[15]
[13]Affidavit of Andrew Valk dated 9 January 2023 (“Valk affidavit”), paragraph 7
[14]Valk affidavit, paragraph 15
[15]Valk affidavit, paragraph 17
17SSA was the subject of two winding up actions, however both applications were dismissed.[16] Seven default judgments were recorded against that company,[17] some of which remained unsatisfied when administrators were appointed.[18] SSA’s receivables ledger was materially inflated by erroneous entries totalling $147,500.[19]
[16]Exhibit DFP-1 to the affidavit of Daniel Poole dated 3 March 2023 (“Poole affidavit”), page 20, paragraph 3.7
[17]Exhibit DFP-1 to the Poole affidavit, page 20, paragraph 3.8
[18]Exhibit DFP-1 to the Poole affidavit, page 20, paragraph 3.8
[19] Exhibit DFP-1 to the Poole affidavit, page 22, paragraph 4.2.1
18In the three months from July 2021 when SSA ceased trading until the appointment of the administrator, Mr Valk drew $200,404 from SSA.[20] Mr Valk utilised SSA’s bank accounts to make purchases for his personal use and withdrawal of cash lump sums. These transactions were recorded in the director’s loan account and owner drawings account. The amount Mr Valk paid to himself as owner drawings came to $300,548, in addition to funds he paid to himself as a director’s debit loan account ($137,448).[21]
[20] Exhibit DFP-1 to the Poole affidavit, page 24, paragraph 4.2.9
[21] Exhibit DFP-1 to the Poole affidavit, page 31, paragraph 5.2.5
19The administrator estimated a net asset deficiency in SSA of between $774,292 and $1,350,992.[22] The administrator opined that trading losses and high operating expenses, inadequate cash flow or high cash use, poor strategic management, failure to maintain accurate books and records and a working capital deficiency were all factors contributing to the failure of SSA.[23]
[22] Exhibit DFP-1 to the Poole affidavit, page 29, paragraph 5.1
[23] Exhibit DFP-1 to the Poole affidavit, page 33, paragraph 5.4
20The administrator considered that SSA may have been balance sheet insolvent from at least 1 March 2019, if not earlier.[24] The administrator’s preliminary investigations suggest the availability of a potential insolvent trading claim against Mr Valk totalling approximately $370,000,[25] potential unfair preference payment claims against Mr Valk of approximately $92,000,[26] and unreasonable director-related transaction claims against Mr Valk of approximately $310,000.[27]
[24] Exhibit DFP-1 to the Poole affidavit, page 39, paragraph 6.3.2
[25] Exhibit DFP-1 to the Poole affidavit, page 39, paragraph 6.3.3
[26] Exhibit DFP-1 to the Poole affidavit, page 40, paragraph 6.4
[27] Exhibit DFP-1 to the Poole affidavit, page 40, paragraph 6.6
21The administrator’s investigations reveal Mr Valk transferred the “Shade Solutions Australia” business and its employees from SSA to two new entities (including SSAV) on or around July 2021.[28] The administrator has noted that the transaction between SSA and the new entities, involving a transfer of inventory from SSA to SSAV and another related entity for no consideration, may also constitute a creditor defeating disposition.[29]
[28] Exhibit DFP-1 to the Poole affidavit, page 41, paragraph 6.9
[29] Exhibit DFP-1 to the Poole affidavit, page 41, paragraph 6.9
22The administrator opined that SSA did not comply with its obligations under s286 of the Corporations Act, inter alia, to keep books and records which correctly record and explain the company’s transactions. The books and records do not provide an accurate reflection of the financial position and performance of SSA. [30]
[30] Exhibit DFP-1 to the Poole affidavit, page 41, paragraph 6.10
23SSAV has provided to the Court two balance sheets dated 30 June 2022 and 22 December 2022 respectively.[31] Neither balance sheet is audited. Each discloses that SSAV’s primary assets, as at the date of each balance sheet, were “accounts receivable” and “stock on hand”. The accounts receivable figures in each balance sheet include an unquantified component of “prospective customers who have been invoiced for a deposit of 25%, but have not yet paid”.[32] There is no evidence concerning the “stock on hand” referred to, including as to the nature of that stock.
[31] Exhibit AV-1 to the Valk affidavit
[32] Valk affidavit, paragraphs 13(b) and 15(b)
24The balance sheets disclose no trade creditors. The balance sheets also indicate that “Owner A Funds Introduced” (which is understood to be a loan to SSAV from Mr Valk) was $537,701.60 as at 22 December 2022 – an increase of $170,000 since 30 June 2022.
25The balance sheets purport to show:
(a) as at 30 June 2022, SSAV held $68,755.91 in its bank account, in full and clear funds.[33] By 22 December 2022, SSAV held $80,087.33 in its bank account, in full and clear funds,[34] being a net increase of $11,331.42;
(b) as at 30 June 2022, SSAV was owed $2,149,484.95 on account of accounts receivable (comprised of debtors and orders for fulfilment).[35] SSAV records its accounts receivables as including the deposit for customers who have signed a binding agreement with SSAV, but have not yet arranged payment of the deposit. By 22 December 2022, SSAV was owed $2,426,444.60 on account of accounts receivable;[36]
(c) as at 30 June 2022, SSAV held $445,789 in value of stock.[37] By 22 December 2022, SSAV held $989,442 in value of stock,[38] being a net increase in the value of stock held of $543,653; and
(d) SSAV does not rely upon any debt as a form of finance, and instead reinvests its earnings.[39]
[33] Valk affidavit, paragraph 13(a)
[34] Valk affidavit, paragraph 15(a)
[35] Valk affidavit, paragraph 13(b)
[36] Valk affidavit, paragraph 15(b)
[37] Valk affidavit, paragraph 13(c)
[38] Exhibit AV-1 to the Valk affidavit
[39] Valk affidavit, paragraph 16
26Mr Valk has provided no evidence as to the circumstances in which SSA went into administration.
27SSAV says, on the basis of its balance sheets, the Court could not conclude that there is reason to believe that SSAV would be unable to meet a costs order. The Court ought have no regard to the administrator report in relation to another company, SSA, which has no relevance to this application.
28Ms Horan says there is a rational basis for a belief that SSAV could not meet an adverse costs order:
(a) The only evidence SSAV has provided of its solvency is two unaudited balance sheets. Given the range of evidence a company would have at its disposal to demonstrate its solvency, an adverse inference can be drawn about the dearth of material before the Court;
(b) It is unclear whether the value of accounts receivable represent the full contract amount for customers who have not yet paid a deposit. If those customers have paid a deposit, that figure would be reflected in the cash in bank figure and cannot be counted twice. There has been no explanation for the accounting provided, which leaves the Court uncertain as to the accurate financial picture of the company;
(c) It is unclear whether stock on hand has been allocated to those customers who have already signed contracts. If so, this would represent double counting of the value of that stock, leaving the Court uncertain as to the true state of affairs;
(d) There has been no explanation as to why the second plaintiff, Andrew Valk, is loaning significant sums of his own funds to the company, if the company is profitable and re-investing its own profits;
(e) The Court has no information as to how readily “accounts receivable” would be able to be recovered;
(f) The documents provided are not audited and lack authentication. Limited weight ought be afforded to them;
(g) The administrator’s report adds further weight to concerns the Court ought to have about the reliability of the balance sheets. The administrator has raised serious questions about the reliability of the balance sheets of SSAV’s predecessor company;
(h) The administrator report raises serious questions about the manner in which SSA was run, and considered inadequate cashflow or high cash use, poor strategic management, failure to maintain accurate books and records and a working capital deficiency, were all factors contributing to the failure of SSA;
(i) SSA’s transfer of assets for no consideration to SSAV raises the prospect that SSAV will itself be the subject of a claim by the administrator of SSA.
Is there a reason to believe SSAV will be unable to meet an adverse costs order?
29The bar is low to meet this threshold and enliven the Court’s jurisdiction. I do not have to be satisfied that SSAV is insolvent or impecunious, nor that it would not be able to meet a costs order, but merely that there is a reason to believe that such a costs order would go unmet.
30I am satisfied there is reason to believe SSAV will be unable to meet an adverse costs order because:
(a) SSAV has not explained how the calculations in the balance sheets have been undertaken, leaving the Court in a position where the true financial position of the company is not clear;
(b) The balance sheets have not been audited or authenticated, and I give them less weight as a consequence;
(c) The lack of any other financial information which I would expect a company to have available leads me to draw an inference that such financial information would not have assisted the company in this application;
(d) I am unable to assess the accuracy of the estimate of revenue for 2023 given the dearth of information provided;
(e) Projections of revenue are of little assistance without projections of expenditure. There is no projected profit or loss statement provided;
(f) The administrator report into SSA raises a question as to whether SSAV could be the subject of a claim by the administrator;
(g) The administrator report raises a question as to whether the same problems that beset SSA would be likely to beset SSAV;
(h) The dearth of evidence from Mr Valk in relation to the administrator report and the circumstances of SSA going into administration lead me to draw an inference that that evidence would not have assisted him.
Should the Court order security?
31Once the Court’s jurisdiction is enlivened, I must determine whether an order for security should be made.
32The burden rests with the defendant to persuade me that it is appropriate to exercise the discretion. My finding that there is reason to believe SSAV will not be able to meet an order for costs is a significant factor that weighs in favour of granting security but I must have regard to all of the circumstances.
33I must balance the risk of exposing an innocent defendant to the expense of defending their position, against the risk of shutting out a plaintiff corporation from obtaining relief to which it is entitled.
34Factors to consider in exercising my discretion include:
(a) whether the application for security for costs was brought promptly;
(b) the strengths and bona fides of the corporation’s case;
(c) whether the corporation’s impecuniosity was caused by the defendant’s conduct;
(d) whether the application is, in and of itself, oppressive, in that it is being used to deny a plaintiff his, her or its right to litigate;
(e) whether there are any persons standing behind the corporation who are likely to benefit from the litigation and who are willing to provide security; and
(f) whether a person standing behind the corporation has offered a personal undertaking to be liable for the costs, and, if so, the form of such undertaking.[40]
[40]Butler Market Gardens Pty Ltd v GG & PM Burrell Pty Ltd [2018] VSC 461
35There is no dispute the application was brought promptly.
36The strength and ‘bona fides’ of the claim ought not be given too much weight. At an early stage, it is difficult to properly assess a claim, particularly in this case where the facts appear to be hotly in dispute. All that can be said at this stage, is that SSAV has an arguable case and Ms Horan has an arguable defence.
37Injurious falsehood requires evidence of actual loss occasioned by the false statements. Even if SSAV is able to prove the statements of Ms Horan are false, it will not necessarily follow that there was any loss caused by those statements. Ms Horan notes that, if the sanguine assessment by Mr Valk of SSAV’s projected revenue is to be believed, it would be very unlikely that SSAV could prove any loss caused by the statements.
38However, as I have already found that the balance sheets and Mr Valk’s assessments are not reliable evidence, I give little weight to this argument. The strength or weakness of the case is a neutral factor in exercising my discretion.
39There was no submission that the corporation’s impecuniosity was caused by Ms Horan, or that a grant of security would stultify the litigation.
Mr Valk’s offer to guarantee costs
40On 2 March 2023, Mr Valk offered to provide a personal guarantee to Ms Horan in the form of an undertaking to the Court, to meet Ms Horan’s costs up to the value of $35,000 in the event she was successful (“the personal undertaking”).
41Ms Horan rejected this offer.
42An undertaking to provide security is not determinative of a claim but is one factor to be considered.[41]
[41]Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale [1999] 2 VR 191
43SSAV says this should be afforded considerable weight when I exercise my discretion.
44SSAV also submits that this is not a proceeding in which Mr Valk seeks to hide behind the corporate structure to avoid a potential adverse costs order. He is also a plaintiff in this proceeding and therefore puts his own assets on the line if his claim fails.
45SSAV says the defamation claims brought by Mr Valk are the most significant component of the proceeding against Ms Horan and are likely to attract the bulk of the costs, so the risk that Ms Horan would be unable to recover her costs of the proceeding from SSAV would be low.
46I am satisfied it was reasonable for Ms Horan to reject the offer, and am not satisfied that the offer is a factor against the grant of security for the following reasons:
(a) Mr Valk has not offered to provide security for SSAV in the amount of $35,000 but has offered to guarantee costs to that amount;
(b) There is no evidence before the Court as to Mr Valk’s financial position, other than that he owns no real property; consequently, his capacity to make payment of $35,000 is unknown;
(c) He is associated with a company, SSA, which has substantial debt, and he may be the subject of a claim by the administrator of that company;
(d) His offer is less than the estimate of costs to proceed to mediation;
(e) Given the lack of evidence about Mr Valk’s financial position, the fact that his own assets are “on the line” because he is also a plaintiff, does not provide any re-assurance to Ms Horan or the Court that an adverse costs order against SSAV would be met.
47There are no factors that weigh against making an order for security and a very significant factor weighing in favour of making such an order, which is the risk that SSAV will not be able to meet a costs order against it.
48Accordingly, I order that security for costs be provided.
In what sum should security be ordered?
49In assessing the quantum of security for costs, the following principles apply:[42]
(a) The amount of security should be just and reasonable in all the circumstances of the case, taking into account the steps that need to be undertaken by the party seeking security and the likely costs in undertaking those steps;
(b) the amount of security “should not be so low that it fails to provide any real protection to the [defendant, but should not be] so high that it is oppressive to the [plaintiff]”;[43] and
(c) there must be an evidentiary basis for the quantum of security; a precise mathematical calculation is not required, rather a “broad brush” assessment is appropriate.
[42]Trailer Trash Franchise Systems Pty Ltd v GM Fascia & Gutter Pty Ltd [2017] VSCA 293, paragraphs [63]-[65]
[43]Ibid, at paragraph [65], citing Law of Costs, G E Dal Pont (Lexis Nexis Butterworths Australia, 3rd ed, 2013) [28.33]
50Mr Uljans has set out the costs incurred on Ms Horan’s account as at the date of his affidavit,[44] and his estimate of the recoverability (on the standard basis) of those “current costs” based on his experience in conducting civil litigation.[45] Mr Uljans has also provided his estimate of the costs likely to be incurred from the date of his affidavit up to and including mediation, as well as his estimate of the recoverability (on the standard basis) of those estimated “future costs to mediation”.[46]
[44] Uljans affidavit, paragraphs 19-22
[45] Uljans affidavit, paragraphs 6-9 and 22
[46] Uljans affidavit, paragraphs 23-26
Costs
Before discount
(ie estimated actual costs)After discount
(ie standard basis)Current Costs
$15,632.50
$10,942.75
Future Costs to Mediation
$55,750.00
$45,195.00
TOTAL
$71,382.50
$56,137.75
51Ms Horan seeks security in the amount of $56,137.75.
52SSAV says the amount is excessive and no more than $35,000 ought be awarded.
53This application has, appropriately, been brought early. There has not yet been discovery, interrogatories or mediation. Given that SSAV claim for injurious falsehood, it is likely it will have significant discovery to support its claim, and Ms Horan’s solicitors will have to review and assess those documents, provide advice and potentially obtain opinion from an expert. It is difficult to precisely quantify the costs likely to be incurred in preparing for mediation in the SSAV claim, as compared to the costs Ms Horan will incur preparing for the defamation claim. Inevitably there will be some cross over of costs.
54Taking a broad brush stroke assessment and having considered the affidavit and the other material before me, I consider the sum of $50,000 to be appropriate to order as security for costs.
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