SUCCESS 618 Pty Ltd v New Zealand Natural Pty Ltd - [2015] SASC 86

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
SUCCESS 618 PTY LTD v NEW ZEALAND NATURAL PTY LTD
[2015] SASC 86
Reasons of Judge Dart a Master of the Supreme Court
10 June 2015
PROCEDURE - COSTS - SECURITY FOR COSTS
Section 1335 of the Corporations Act 2001 - reason to believe corporation unable to pay costs - whether making of an order will stultify the litigation - order for security made.
Corporations Act 2001 (Cth) s 601AD, s 1335, referred to.
Goldedge Holdings Pty Ltd v Liquor and Gambling Commissioner & Anor (No 2) [2015] SASC 81, applied.
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241; Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523; Livingspring Pty Ltd (ACN 078 943 352) v Kliger Partners [2008] 66 ACSR 455; Oshlack v Richmond River Council (1998) 193 CLR 72; Pearson v Naydler [1977] 1 WLR 899; William Koetsier v Aitco Pty Ltd [1993] SASC 4194, considered.

SUCCESS 618 PTY LTD v NEW ZEALAND NATURAL PTY LTD
[2015] SASC 86
JUDGE DART:

The defendant has made an application for security for costs.[1] The plaintiff is a company which previously operated a retail business at Noosa as a franchisee. The defendant was the franchisor.
[1] FDN12.
In my opinion, for the reasons that follow, it is appropriate that an order for security for costs be made.
The legal test
As the plaintiff is a corporation, the provision providing the Court with the power to make an order in respect of security for costs is found in s 1335 of the Corporations Act 2001, which provides as follows:
1335Costs
(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.
(1A)Subsection (1) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.
Note:Similar provision is made in relation to Aboriginal and Torres Strait Islander corporations under section 581‑20 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006.
(2)The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.
The first matter that needs to be addressed is the threshold condition that there is reason to believe the corporation will be unable to pay the costs to the defendant if the defendant is successful in its defence. It is a jurisdictional question.[2]
[2] FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241 at [21].
No issue arises in this matter in respect of the jurisdictional question. At the time the proceedings were commenced the plaintiff company was deregistered. The directors of the company, Mr and Mrs Reachill, were also plaintiffs at that time. They have subsequently been disjoined.
A company that has been deregistered ceases to exist.[3] The directors took steps to have the company re-registered. It now exists again, but has not traded since 2008 and has no assets. It is accepted that it would be unable to meet a costs order should the Court ultimately make such an order. The jurisdictional question has been satisfied and, accordingly, the Court has a broad discretion to make an award of security for costs. The discretion must be exercised judicially.
[3] Section 601AD of the Corporations Act 2001.
In litigation the usual outcome is that the unsuccessful party pays the costs of the party that succeeded in the litigation. In Oshlack v Richmond River Council[4] McHugh J explained the rationale for what might be regarded as the usual order for costs, in the following terms:[5]
The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought, or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation.
[4] (1998) 193 CLR 72.
[5] Oshlack v Richmond River Council (1998) 193 CLR 72 at 97.
The purpose of making an order in respect of security for costs is to ensure that the Court acts, where appropriate, to ensure that a party who is awarded the costs of an action does not have a pyrrhic victory.
Background
The plaintiff entered into a franchise agreement with the defendant in 2004 to operate a store at Noosa in Queensland. At that time the plaintiff was legally represented and was provided with the relevant documents. The business traded successfully for several years.
The dispute between the parties appears to arise from the events surrounding the exercise of an option to renew the lease. The defendant was the lessee of the shop premises. The plaintiff occupied the shop pursuant to a licence on a back to back arrangement. The head lease was for a period of five years, with two further options, each for a further five years. The terms of the lease provided for a market rate review at the end of the first five year term. That term expired in 2007.
The defendant sought to enter into the procedure provided for in the lease to conduct a market rent review when the first term was about to expire in 2007. The landlord resisted that course. In the result, proceedings were issued jointly by the plaintiff and defendant against the landlord in the Supreme Court of Queensland. The plaintiff and defendant were legally represented and, ultimately, a compromise was reached with the landlord in respect to renewing the lease and also the ongoing rent.
The principal complaint of the plaintiff is that the level of rent agreed in the compromise made the business unviable.
In 2008 Mr Reachill had a serious accident. He suffered significant injuries. As a result of the injuries sustained by Mr Reachill, his medical advisors told him he could not continue to operate the business. He caused the plaintiff to put the business on the market. The sale price obtained was significantly less than the plaintiff paid for the business in 2004.
If the business had been able to be sold for a better price, I suspect this litigation would never have eventuated. Mr Reachill, who represents the plaintiff pursuant to permission given by the Court, is clearly disillusioned with the ultimate outcome of the operation and sale of the business. He blames the defendant for the losses that the plaintiff suffered.
Consideration of the issues
There are a number of established principles relevant to the exercise of the discretion. The weight to be given to those factors will vary from case to case.
The starting point is the jurisdictional question which, when satisfied, as in this case, is a significant reason to exercise the power to order security. That proposition was explained by the Court in Livingspring Pty Ltd (ACN 078 943 352) v Kliger Partners[6] where the Court of Appeal in Victoria said:[7]
The threshold condition for the exercise of the power to order security defines the circumstances in which parliament contemplated that the power would be exercised. That is, the power was conferred for the purpose of protecting the defendant against the very risk which must be shown to exist before the power can be exercised. In this sense, satisfaction of the threshold condition – demonstrating the existence of the risk – “calls for” the fulfilment of the purpose for which the power was conferred.
[6] [2008] 66 ACSR 455.
[7] Livingspring Pty Ltd (ACN 078 943 352) v Kliger Partners [2008] 66 ACSR 455 at 460.
Likewise, in Pearson v Naydler it was said:[8]
The inability of a plaintiff company to pay the costs of the defendant not only opens the jurisdiction for the giving of security, but provides a substantial factor in the decision whether to exercise it.
[8] [1977] 1 WLR 899 at 906.
We are dealing here with a corporate plaintiff which has no assets and does not trade. The litigation is being conducted on its behalf by one of its directors, Mr Reachill. Mr Reachill and his wife are the shareholders of the company. It is they who stand to benefit if the plaintiff is successful in the action.
The reason why an application for security for costs against a corporation is treated differently from an application for security for costs against a natural person was explained by the Court in Harpur v Ariadne Australia Ltd in the following terms:[9]
The mischief at which the provision is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play.
We are dealing with such a situation here.
[9] [1984] 2 Qd R 523 at 532.
When exercising the discretion to award security for costs, it is possible to have regard to the strength of the plaintiff’s case.[10]
[10] William Koetsier v Aitco Pty Ltd [1993] SASC 4194.
The current statement of claim is the Third Statement of Claim.[11] Initially Mr and Mrs Reachill each had their own claim for damages. It was the plaintiff company that conducted the business and the gravamen of the complaint arises from the contractual arrangement between the plaintiff company and the defendant. It was not apparent that Mr and Mrs Reachill had personal claims and, for that reason, they dropped out of the litigation. The claim of the plaintiff is for loss and damages. It is pleaded that the losses include loss of profit and loss of value of the business.
[11] FDN51.
In the Second Statement of Claim a schedule of loss and damage was annexed. A great number of matters were alleged to have been losses occasioned by the wrongdoing of the defendant. The loss and damage claimed totalled almost $6 million. A perusal of the various claims revealed that, even should the plaintiff succeed in these proceedings many, if not most, of the claims, fall outside of what a court could award.
The Third Statement of Claim pleads the defendant failed to negotiate a proper market rent. It alleges that the proceedings in the Supreme Court of Queensland were settled against the landlord without the plaintiff’s knowledge. The plaintiff was represented in those proceedings and, apparently, a party to the settlement. As a result of that settlement, the annual rental went from $189,000 per annum to $212,750.
The plaintiff then claims that the defendant failed to provide assistance under the franchise agreement to enable the plaintiff to pay the higher rent. The Third Statement of Claim does not refer to any obligation arising under the franchise agreement on the defendant to do so. The defendant denies there was an obligation to do so. The defendant admits an obligation to assist in marketing generally. The plaintiff also pleads that the defendant engaged in unreasonable and uncooperative conduct.
At best, when one looks at the Third Statement of Claim, it appears that the plaintiff has a modest claim which has modest prospects of success. Perhaps because the Third Statement of Claim has been prepared without legal assistance, the claim does not articulate, clearly, the allegations against the defendant. It is difficult at the moment to be confident that the plaintiff has a genuine claim.
Another issue which needs to be considered is whether the making of an order for security for costs will stultify the litigation. Clearly the plaintiff has no money whatsoever. The proceedings will be stayed upon the making of an order for security. The stay will only be lifted once the security is provided.
It is a paradox that arises in applications of this nature that the same circumstance which gives rise to the Court’s jurisdiction to make an order for security for costs, the plaintiff company’s lack of funds, also gives rise to a reason not to make such an order because to do so will mean that the litigation will be stultified.
In Goldedge Holdings Pty Ltd v Liquor and Gambling Commissioner & Anor (No 2)[12] Lovell J distilled the authorities in respect of stultification to the following principles:[13]
1.the ability of not only the company but also those who stand behind it is to be considered for this purpose;
2.the onus of proof that neither the company nor those who stand behind it are able to provide the security and that an order would stultify the proceeding is upon the company; and
3.as part of discharging the onus of proof, the company is normally expected to put before the court a full and frank statement of the assets and liabilities of the company and of those who stand behind it.
[12] [2015] SASC 81.
[13] Goldedge Holdings Pty Ltd v Liquor and Gambling Commissioner & Anor(No 2) [2015] SASC 81 at [32].
No evidence has been put before the Court as to the financial position of Mr and Mrs Reachill. The submissions from the bar table made by Mr Reachill were that their financial position is poor. That can be accepted. No undertaking has been offered by Mr and Mrs Reachill in respect of making themselves liable for the costs of the litigation should the plaintiff be unsuccessful. Even if they had done so, it would have provided little comfort to the defendant.
The application seeking security for costs was made early in the proceedings.[14] It has taken some time for it to be dealt with because there have been issues about the pleadings to be dealt with. There was also an application to cross-vest these proceedings to the Supreme Court of Queensland. That application was listed for hearing before Justice Sulan. In the result, it was agreed that the trial will be conducted in this Court, but that one or more witnesses will give evidence in Queensland. No issue of delay arises in respect of the bringing of the application for security for costs.
[14] FDN12, filed on 31 July 2014.
In summary, when one considers the financial position of the company, the inability of the directors and shareholders to contribute towards the satisfaction of any costs order should it be made against the plaintiff, and the uncertain nature of the claim, this is an appropriate matter in which to make an order for security for costs. In my opinion, to fail to do so exposes the defendant to a scenario in which it has no prospect of recovering any costs whatsoever in the event that they successfully defend the action.
Quantification of the amount of the security
The usual order for costs is an order made on a party/party basis. An order for security for costs should be calculated on that basis, which involves calculating the costs based on the Court scale. The usual principles are that security is not awarded for past costs and the security is provided for the costs to be incurred up until the first day of the trial of the action. It then becomes a matter for the trial Judge as to whether any further order is made.
The defendant has filed an affidavit setting out the basis of costs incurred to date and seeking an order for security for costs in the sum of $150,000. A number of invoices in respect of solicitors’ fees and counsel fees are exhibited. They disclose that the fees being charged are what might be called retail fees. The costs do not relate to the Court scale. When the matter came on for hearing the amount of security for costs sought by the defendant was in the amount of $110,000 to $120,000.
A significant portion of costs have been incurred since the application was filed. It is appropriate that those costs be included in the calculation for security for costs.
It is clear that the trial will occupy a number of days and will likely involve either the Court going to Queensland to take evidence or evidence being taken on video-link from Queensland. The defendant will most likely need to obtain expert evidence on the question of market rent of the subject premises in 2007. The plaintiff’s complaint is about the new rent which was eventually agreed between the parties. It cannot complain about the rent if it was an appropriate market rate. It knew, from when it entered into the franchise, that there was a market rent review due in 2007.
Adopting a broad brush approach, allowing for the costs incurred since the filing of the application and attempting to calculate those on a party/party basis and further allowing for the preparation of trial, including the obtaining of experts reports, security should be provided in the amount of $65,000.
I order:
1The plaintiff is to provide security for costs in the amount of $65,000, by paying that sum into the Suitors Fund within 21 days, or otherwise providing security in a form agreed with the defendant.
2The action is stayed pending the provision of the security for costs referred to in Order 1