T G Australia Pty Ltd v Oudman - [2011] WADC 58

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CHAMBERS

LOCATION: PERTH

CITATION: T G AUSTRALIA PTY LTD -v- OUDMAN [2011] WADC 58

CORAM: PRINCIPAL REGISTRAR GETHING

HEARD: 1 APRIL 2011

DELIVERED : 1 APRIL 2011

FILE NO/S: CIV 3504 of 2009

BETWEEN: T G AUSTRALIA PTY LTD
Plaintiff
AND
ENNO WIEBO OUDMAN
First named Defendant
JANTINA OUDMAN
Second named Defendant

Catchwords:

Security for costs

Legislation:

Corporations Act 2001 (Cth) s 1335

Result:

Application dismissed

Representation:

Counsel:

Plaintiff:     Mr A M Ahern
First named Defendant     :     Mr D A Lenhoff
Second named Defendant    :     Mr D A Lenhoff

Solicitors:

Plaintiff:     Aherns Lawyers
First named Defendant     :     Holborn Lenhoff Massey
Second named Defendant    :     Holborn Lenhoff Massey

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

BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69
Meni's Tailoring and Alterations Pty Ltd v Jeanswest Corporation [2003] FCA 1108
Western Areas Exploration Pty Ltd v Streeter [2008] WASCA 218

PRINCIPAL REGISTRAR GETHING: [This judgment was delivered extemporaneously on 1 April 2011 and has been edited from the transcript.]

By application dated 17 December 2010, the defendants sought an order that the plaintiff provide security for costs in the amount of $40,000.
In support of the application, the defendants filed an affidavit of the first defendant, Mr Enno Wiebo Oudman, dated 17 December 2010, together with a responding affidavit dated 2 March 2011.
The plaintiff filed an affidavit from its director, Ms Giao Quynh Tran, dated 8 February 2011. At the commencement of his submissions, counsel for the plaintiff handed up a second affidavit of one Claire Teresa Tota, who is an articled clerk in the employ of the solicitors for the plaintiff. That affidavit goes to details of two charges in the company extract for the plaintiff. I propose to take this affidavit into account for the purposes of the present decision.
The application takes as its context the plaintiff's claim against the defendants arising out of the purchase of a business previously owned by the defendants knows as Transwest Coach Service. The sale agreement was dated 10 October 2006. The plaintiff alleges a large number of claims against the defendants relating to the transition of the business from the defendants to the plaintiff. In a schedule of damages filed 16 March 2011, the plaintiff assesses its claim as being in excess of $415,000.
Although the defendants have not yet pleaded to the most recent version of the statement of claim, it appears from their earlier defence that the plaintiff's claim is disputed on all fronts.
The law in relation to a security for costs application against the company commences with the Corporations Act 2001 (Cth) s 1335. So far as is relevant, that section 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.
…
(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 power in s 1335 contains a threshold test (or jurisdictional requirement) as well as a discretion: Western Areas Exploration Pty Ltd v Streeter [2008] WASCA 218 [2], and BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81 [11]. 'The threshold requirement is met if credible testimony establishes that there is reason to believe that there is a real chance, in the events which can fairly be described as reasonably possible', the relevant corporation will be unable to pay the applicant's costs of the application if unsuccessful: Western Areas [3]. The threshold test has been described as a 'fairly modest test': Western Areas [4], Meni's Tailoring and Alterations Pty Ltd v Jeanswest Corporation [2003] FCA 1108 [4].
In ascertaining whether there is credible testimony, the court does no more than judge the quality of the evidence to see if it objectively gives rise to a reason to believe: Western Areas [5]; FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69 [22]. The onus is on the applicant to produce the necessary credible testimony that there is reason to believe the corporation will be unable to pay the costs of an issue: Western Areas [15].
In relation to the evidence as to the plaintiff's financial position, it is appropriate to place this in the context of the correspondence passing between the parties. By fax dated 20 October 2010, the defendants sought details of the financial capacity of the plaintiff to pay an adverse costs order. The defendants specifically sought copies of the financial statements of the plaintiff.
By facsimile dated 21 October 2010, the then-solicitors for the plaintiff responded that they were seeking their client's instructions in relation to the request. By fax dated 26 October 2010, the solicitors for the defendants repeated their request for details as to the plaintiff's financial capacity to satisfy an adverse costs order. A follow-up letter was sent on 16 November 2010.
The plaintiff changed solicitors during November 2010. The new solicitors responded by a fax dated 17 November 2010 requesting further time to respond. That request was allowed.
By letter dated 13 December 2010 the request for provision of the financial information was refused. On 17 December 2010 the present application was commenced.
The affidavit in support sworn by Mr Oudman on 16 December 2010 and filed on 17 December is said to found the application based on two facts. The first fact is based on the annexed company search. The issued and paid‑up capital of the company is $100. The second is that the plaintiff had failed to provide a response to a request for information as to its financial capacity.
In my view, had there been no further evidence in the proceedings, the evidence of Mr Oudman would not have satisfied the threshold test in s 1335, even taking into account the fact that it is, as I have stated, a modest test.
The financial position of the plaintiff is set out in detail in Ms Tran's affidavit. The assets of the company are said to be valued at just over $1.9 million. This includes property valued at $800,000, a fleet of vehicles valued at approximately $840,000, and the goodwill of the business valued at $274,000 as at 30 June 2009.
The liabilities of the business are said to amount to just over $1.1 million. This is firstly comprised as of a loan of approximately $560,000 over the property which I have said was valued at $800,000. The second component of liability is a business loan to the National Australia Bank which, as at 1 February 2011, had a balance of approximately $560,000.
There are two further liabilities which are disclosed in the ASIC Company Extract as being fixed and floating charges. They are the subject of the supplementary affidavit by Ms Tota. That affidavit is to the effect that the two charges, which are in favour of Jaguar Financial Services, are for two motor vehicles; one an Alfa Romeo, and the second a Rexton. In total, those charges amount to $57,000.
The net result of the evidence is that the equity of the company is in the vicinity of $740,000. This figure is taken from Ms Tran's affidavit where she says on the material in that affidavit that the equity is approximately $800,000, less the $57,000 liability for the two motor vehicles to which I have just referred.
In submissions, counsel for the defendants raised five points as why the court should have great concern in putting any weight on the assets and liabilities of the plaintiff.
The first was that the value of the property which is at 255 Ocean Farm Drive is overstated. This is because the value is that of a market appraisal as opposed to a sworn valuation.
The second to fifth points are largely taken from a report of an accountant, Mr Ray Holden, which is annexed to Mr Oudman's second affidavit. The second is that the trucks or the vehicles said to be valued at $840,000‑odd were recorded in the balance sheet at a written-down value of $236,000. They were also recorded in the balance sheet as having an acquisition cost of $420,000.
The third point made is that the receivables are not referred to in the balance sheet. The information as to the receivables, which are suggested to be around $2 million, contain large amounts which are in the '90 days plus' column. This, according to Mr Holden, indicates that there may be uncertainty as to the recoverability of the debts in the 90-plus days or incorrect reporting.
The fourth point is that the goodwill is difficult to realise, because it assumes that the business is ongoing. In other words, if the business were to be realised by way of liquidation or fire sale, it would be difficult to realise the goodwill. Further, as there is no reference to profit, it is difficult to place weight on the value of goodwill.
The fifth point is the fact that the plaintiff has not disclosed the liabilities section of the balance sheet. All that has been disclosed is the asset component of the balance sheet.
The critical question for present purposes is whether or not, on the basis of that information before me, the defendants have satisfied the onus on them to persuade me that it appears, by credible testimony, that there is reason to believe that the plaintiff corporation would be unable to pay the costs of the defendants if successful in their defence. The defendants have not persuaded me that this is so.
On the information in Ms Tran's affidavit there appears at least to be a surplus of assets over liabilities in the vicinity of $740,000. The amount of security claimed based on the bill of costs is $40,000. Even if the effective equity is overstated by a factor of 10, there is still somewhere in the vicinity of $70,000-odd worth of equity.
Significantly, there is no evidence of any unpaid judgment against the plaintiff. There is no evidence of what I might call financial distress. There is no evidence of creditors being unpaid. In that situation, it does not appear to me, by credible testimony, that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if successful in its defence.
On this basis, the question of discretion does not arise, because I have not moved through the initial threshold. The application ought to be dismissed, and I will hear from counsel as to the question of costs.