Ultimate Enterprises Pty Ltd v George Gross & Harry Who Design Co Pty Ltd No. DCCIV-02-1782

ULTIMATE ENTERPRISES PTY LTD v GEORGE GROSS & HARRY WHO DESIGN CO PTY LTD
[2003] SADC 121
His Honour Chief Judge Worthington
Civil

This is an appeal from a decision of a Master given on 4 July 2003, dismissing an application by the defendant for the plaintiff to provide security for costs.
The action was commenced on 12 December 2002. The plaintiff is Citiscape Enterprises Pty Ltd, incorrectly described in the pleadings as Ultimate Enterprises Pty Ltd. The company was originally known as Lara Ray Designs Pty Ltd; its name was changed to Ultimate Enterprises Pty Ltd on 31 July 1996 and remained so until 16 August 2002, when it was changed to Citiscape Enterprises Pty Ltd (“Citiscape”). It is relevant to know the history of the plaintiff’s name but nothing turns on the description for present purposes.
The plaintiff claims $50,000 (approx) as monies owed for garments it supplied to the defendant. In short, it is alleged that there was an agreement that the plaintiff would arrange for the manufacture of garments in Vietnam on behalf of the defendant, using fabric and trims supplied by the defendant and according to styles ordered by the defendant. The plaintiff states that two invoices totalling nearly $80,000 were paid by the defendant in March 2002, but claims that the final invoice sent in April 2002 has not been paid.
The defendant disputes a number of the terms of the agreement, but it is unnecessary for present purposes to detail these matters. In substance, the defendant denies liability on the basis that costs and expenses were included in the invoice improperly, that there was late delivery and that garments were defective. The defendant says that numerous retailers would not accept the garments because of their defects. It alleges breach of contract and denies liability. As a consequence, the defendant says that it has suffered loss and incurred expense. By counterclaim the defendant seeks damages for breach of contract and under s82 of the Trade Practices Act.
In its application dated 27 March 2003 the defendant sought orders, inter alia, that the plaintiff provide security for costs in the sum of $86,000 and that the action be stayed pending provision of that security. The Master refused to make those orders.
It became apparent at the hearing of the appeal that there was information about the plaintiff, including its modus operandi and its relationship with two trusts, that was not before the Master. It is common ground that some of that information is relevant to the application. The evidence before the Master was supplemented at the hearing of the appeal by evidence from a director of the plaintiff, Raymond Richard Vella, and by counsel telling me about agreed facts. An additional affidavit of Mr Lazarevich, solicitor for the defendant, dated 16 July 2003 was also received. There is no dispute that, as the Master did not have the benefit of this further information and as this appeal is by way of rehearing, there is no impediment to my considering the matter afresh.
Citiscape is the trustee of two trusts: The Lara Ray Designs Unit Trust: ABN 13 426 321 508 (“the Unit Trust”) and The Ray Vella Family Trust: ABN 53 438 349 982 (“the Family Trust”). The Unit Trust used to be involved in running the garment business and its ABN appears on the invoices rendered by the plaintiff to the defendant. For all practical purposes, the Unit Trust claims to be entitled to the proceeds of those invoices. Citiscape is a property developer and is no longer involved in the garment business, and the only remaining asset of the Unit Trust is the value of the claim against the defendant. The units in that trust are owned as to 1% by Mr Vella and as to 99% by the Family Trust.
In its capacity as trustee of the Family Trust, Citiscape is the registered owner of two blocks of land at Rostrevor but it has no beneficial interest in that land. Citiscape also has an account with the Savings & Loans Credit Union which has a current credit balance of $74,500 (rounded off). Despite requests from Mr Lazarevich in March 2003, the only information supplied by the plaintiff about its financial position is an affidavit of Mr Vella dated 29 May 2003 in which he deposes to the value of the Rostrevor land, which Citiscape holds as trustee of the Family Trust, and oral testimony at the appeal from Mr Vella about the Credit Union account. Further, in answer to a series of questions, Mr Vella agreed to give an undertaking on behalf of Citiscape that it would honour any costs order made against the plaintiff in these proceedings. However, given the way that line of questions developed in evidence and cross-examination, I cannot accept that Mr Vella fully understood what was being asked of him or the extent of the suggested undertaking.
The defendant says that there is a real risk that if the plaintiff fails in its action it will be unable to meet the defendant’s costs. The plaintiff denies this and says that it is in a sound financial position and that it would be able to meet any costs order made against it. Although the Master declined to make the order for security for costs, he assessed the quantum of costs that would be appropriate if such an order were to be made. After considering the information before him he concluded that the appropriate figure, to include preparation and to the end of the first day of trial, was $35,000. In saying that any security for costs beyond the first day would be a matter for the trial judge, the Master said:
“Due to the nature of the matter I do not think it is appropriate to direct costs for the duration of the trial, although I note that the figures claimed are in my experience very reasonable and in all likelihood to be an under-estimate. Ordinarily the costs from the second day onwards would be raised with the trial judge. In the circumstances that would be the appropriate procedure”.
Before the Master and on appeal the defendant relied on District Court Rule 100.01(d) and s1335 of the Corporations Act 2001. DCR 100.01(d) permits the court to order security for costs where that is authorized by any statute, and s1335 provides:
“Where a corporation is plaintiff in any action or other legal proceedings, 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 a 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”.
On appeal Mr Slattery, for the defendant, also relied on DCR100.01(a) which permits the court to order security for costs “where the plaintiff is a mere nominal plaintiff and is in a condition of poverty or insolvency.”
There are three steps involved in considering the operation of DCR 100.01(d) and s1335. The first is a threshold question of whether the court has jurisdiction to entertain the application under s1335, namely whether there is credible evidence to support a belief that the plaintiff will be unable to pay the defendant’s costs. The second is whether, in the exercise of its discretion, the court should order that security for costs be furnished and if so, finally, what that security should be.
Section 1335 does not require proof that a corporation will be unable to pay the costs of its opponent. It requires merely credible evidence establishing reason to believe that there will be inability to do so. A helpful guide to the application of s1335 is to be found in 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] WASCA 69. In their joint judgment, Pidgeon and Owen JJ, when explaining why the rule in Jones v Dunkel was not relevant, said at paragraph [11]:
“Here the applicant is not seeking to prove the state of the company’s finances. The applicant is required to do no more than place on the record credible testimony and the exercise of the court at this stage is in judging the testimony and its quality rather than seeing if a matter has been proved by inference......... If there is credible testimony, then the court has jurisdiction to make the order and a company which called no evidence to show it could meet a costs order would run the risk of having an order made against it.”
Citiscape is seeking to recover a debt owed to the Unit Trust in relation to a business which no longer functions. The only asset of that trust is the claim in these proceedings, and by virtue of the defence that asset must be regarded as being wholly or partly at risk. Apart from the few matters I have mentioned, nothing is known about the Unit Trust, its structures, whether there are any indemnities, etc, as the trust deed is not before the court. The only known asset of the Family Trust is the Rostrevor land, but Citiscape has no entitlement to any proceeds of its sale. To say the least it is puzzling why Mr Vella, in seeking to establish that the plaintiff was in a sound financial position, referred to details of the value of that land in his affidavit of 29 May 2003; and his answers in cross-examination do not shed any more light on it. There is no evidence to suggest that Citiscape has any right of indemnity from the Family Trust for debts incurred as a trustee of the Unit Trust.
When first asked by Mr Lazarevich in March 2003 to provide some hard information about the financial status of Citiscape, its solicitor, Mr Stokes, asked for 21 days to respond. That was on 4 March and despite further correspondence from Mr Lazarevich, nothing was provided before the hearing of this appeal except Mr Vella’s affidavit. At the hearing, apart from referring to the Credit Union account, Mr Vella provided no evidence about the financial status of the company. The defendant submits that the plaintiff is avoiding providing that information. Whatever the reason, the fact of the matter is that even now, after plenty of opportunity for information to be provided, the court knows little about the financial state of Citiscape.
All that is known is that Citiscape is involved in development and that there is a bank account with a credit of approximately $75,000 which seems to have been there for only a comparatively short time; since March this year. Mr Vella said that funds were injected into the account at that time after the sale of some land at Dernancourt, but he did not say how much was put in. Mr Vella described these funds as being available for Citiscape’s general cashflow. It would be unusual for a trading company to have no liabilities at all, but no mention was made of any, even for its legal costs in this action. The company’s accounts are kept by a reputable firm of chartered accountants, but no evidence in customary form - eg, statements of profit/loss and assets/liabilities - was put before the court.
There is no dispute that for the purposes of considering the ability of a party to pay costs, the relevant time under s1335 is at the conclusion of the litigation. The Master is very experienced in the conduct of litigation and its cost, both as a practitioner and as a Master, and he considered that the estimate of the defendant’s costs at $86,000 by the end of the action was not only reasonable but probably an under-estimate. I have no difficulty in accepting that opinion. Even if Citiscape were to have no liabilities and the credit balance of $74,500 was not reduced in the course of trading, the account would be insufficient to cover the defendant’s costs if the plaintiff failed in this action. Thus, even if the undertaking by Mr Vella could be accepted at face value, it does not assist the plaintiff.
In the circumstances, there is reason to believe that the defendant will be unable to meet the costs of the defendant if it is successful in its defence. I turn then to the question of whether I should exercise the discretion to order security.
The unit holders in the Unit Trust stand to receive the benefit of a successful claim against the defendant and it is on their behalf that the plaintiff is litigating. The usual order is that costs follow the event (DCR 101.02) but if the plaintiff should fail in its claim against the defendant, the unit holders are not exposed to an order for costs and, on the face of it, it would be unfair not to order some security (Normanville Constructions Pty Ltd v Callan, 1995 Supreme Court of SA: B.C. 9503164 at 8).
The only argument put against the exercise of the discretion was that the defendant has made a counter claim which, if successful, is likely to exceed the claim. In short, it was submitted by Mr Stevens, for the plaintiff, that if Citiscape were called upon to provide security for costs, it would be tantamount to asking it to fund the defendant’s action against the plaintiff. On that basis, he submits, the court should exercise its discretion against making the order.
A number of authorities were canvassed in the course of argument but there is little that touches directly on the point in issue here. However, the question of whether a defendant who raises a counter claim should be ordered to furnish security for costs has been considered, and the principles relevant to that are helpful in looking at how the discretion should be exercised in a case such as this, i.e., where a defendant who has a counter claim seeks security from a plaintiff.
In Visco v Minter [1969] P 82, Ormrod J said at 85:
“ ...... if the defendant wishes to raise a counterclaim by way of defence, he is allowed to do so without incurring the liability of having to provide security for the costs of the counterclaim. But this rule is subject to certain limits, because otherwise it would enable a defendant, sued in this court, to bring a cross-action about something quite different. Where the counterclaim or cross-action raises matters quite outside the plaintiff’s claim, the defendant will be treated as a plaintiff so far as the cross-action is concerned and may be ordered to find security for costs ............. The principle seems to be that where a defendant counter-attacks on the same front on which he is being attacked by the plaintiff, it will be regarded as a defensive manoeuvre. But if he opens a counter-attack on a different front, even to relieve pressure on the front attacked by the plaintiff, he is in danger of an order for security for costs depending upon the court’s assessment of the position in each case.”
I have already summarised the substance of the Defence which is set out in seven paragraphs, some of which contain subsidiary allegations. As was acknowledged in argument by Mr Stevens, that there is nothing in the Defence that is not designed to defeat, or at least damage, the plaintiff’s case. The counter claim raises no new allegations and simply relies on the matters pleaded by way of defence as giving rise to a claim for damages. It is fair to say that the defendant can be expected to call evidence to quantify those damages, but apart from that, the counter claim does not require ventilation of issues beyond those properly to be regarded as matters of defence. The defendant alleges that the very breaches of contract that defeat the plaintiff’s claim have caused the defendant substantial loss. That this loss is alleged to be more than the plaintiff’s claim is beside the point. Moreover, given that the Master’s foreshadowed order only went as far as the first day of trial, the fact that the trial may take longer because of the defendant’s need to prove quantum does not come into the equation at this time. That would be a matter for the trial judge if there was an application with regard to security for costs beyond the first day.
During the hearing of the appeal Mr Slattery advised the court that the defendant will stay the counter claim as if it were a set-off, if the plaintiff does not provide security as ordered. Given the view I have formed about the nature of the defence and the counter claim, while I note that information, it plays no part in my consideration of whether the discretion should be exercised.
In my opinion the defendant’s counter claim does not have any bearing on the exercise of the discretion in this matter. I am satisfied that the defendant has made out an entitlement to an order for security for costs pursuant to DCR100.01(d) and s1335 of the Corporations Act. In those circumstances it is unnecessary for me to deal with the argument based on DCR100.01(a).
The defendant is content with the Master’s foreshadowed approach to the quantum of security, but Mr Stevens submits that I should be cautious and fix a lesser amount. He does not say what that figure should be. The Master had before him an estimate of likely costs for the defendant to the end of trial at $86,000 based on particulars contained in a document prepared by Mr Lazarevich which is an exhibit to his affidavit of 27 March 2003. I have already referred to the Master’s experience in litigation and his comments about the reasonableness of that costing. It is clear from the Master’s decision that he was satisfied that it was reasonable to both parties to fix the defendant’s costs to the end of the first day of trial at $35,000. I have considered the material supplied by Mr Lazarevich and in my opinion there is no ground to interfere with that assessment.
For these reasons I allow the appeal and order (1) that the plaintiff furnish security for costs in the sum of $35,000 and (2) that until that is done the action will be stayed.

[2003] SADC 121

21 August 2003