Yorke Financial Management Pty Ltd as Trustee for the Yorke Family Trust v Marijana Ravlich as Trustee for the Marijana Ravlich Family Trust
[2013] WADC 71
•16 MAY 2013
JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL
LOCATION: PERTH
CITATION: YORKE FINANCIAL MANAGEMENT PTY LTD as Trustee for THE YORKE FAMILY TRUST -v- MARIJANA RAVLICH as Trustee for THE MARIJANA RAVLICH FAMILY TRUST [2013] WADC 71
CORAM: PRINCIPAL REGISTRAR GETHING
HEARD: 7 MAY 2013
DELIVERED : 16 MAY 2013
FILE NO/S: CIV 3984 of 2012
BETWEEN: YORKE FINANCIAL MANAGEMENT PTY LTD as Trustee for THE YORKE FAMILY TRUST
Plaintiff
AND
MARIJANA RAVLICH as Trustee for THE MARIJANA RAVLICH FAMILY TRUST
Defendant
Catchwords:
Practice and procedure - Security for costs
Legislation:
Corporations Act 2001 (Cth) s 1335
Result:
Security for costs ordered
Representation:
Counsel:
Plaintiff: Mr D K C Wee
Defendant: Mr D Engelter
Solicitors:
Plaintiff: Chan Galic
Defendant: Williams & Hughes
Case(s) referred to in judgment(s):
Attorney-General of Botswana v Aussie Diamond Products [2009] WASC 299
BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81
Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34
Bryan E v Fencott v Eretta Pty Ltd (1987) 16 FCR 497
Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301
Commonwealth of Australia and Another v Cable Water Skiing (Australia) Ltd (1994) 14 ACSR 760
Darwin Offshore Logistics Base Pty Ltd v Cox [2010] WASC 356
Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevenvale Pty Ltd (1999) 2 VR 191
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241
Fiduciary Limited v Morningstar Research Pty Ltd (2004) 208 ALR 564
Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405
Harpur v Ariadne Australia Limited [1984] 2 Qd R 523
Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744
Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306
Jaddcal Pty Ltd v Minson [No 2] [2011] WASC 138
Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584
Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377
Melunu Pty Ltd v Claron Constructions Pty Ltd [2004] NSWSC 1064
Meni's Tailoring & Alterations Pty Ltd v Jeanswest Corp Pty Ltd [2003] FCA 1108
Moss Rd Pty Ltd v T & M Buckley Pty Ltd t/as Shailer Constructions [2010] QSC 278
Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1
Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122
Smail v Burton; Re Insurance Associates Pty Ltd (in liq) (1975) 1 ACLR 74
Spence Financial Group Pty Ltd v GE Commercial Corporation (Australia) Pty Ltd [2007] WASC 15
Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19
Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161
Vicon Services Pty Ltd v BHP Billiton Worsley Alumina Pty Ltd [2012] WASC 109
Western Areas Exploration Pty Ltd v Streeter [2008] WASCA 218
Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57
YICI Pty Ltd v Sun Wah Marine Products (HK) Co Ltd [No 2] [2010] WASC 27
PRINCIPAL REGISTRAR GETHING: Clifford Yorke and Marijana Ravlich are financial planners. Mr Yorke carried on his business through a company he owned with his wife, Yorke Financial Solutions Pty Ltd (YFS). Ms Ravlich also carried on her business though a company, Life Financial Planners Pty Ltd (Life). In early 2010 Mr Yorke and Ms Ravlich decided to merge their businesses. The merger was effected by the corporate shareholder of YFS, Yorke Financial Management Pty Ltd (YMF), a trustee company controlled by Mr and Mrs Yorke, selling its shares in YFS to Life. In return, YFS received 50% of the shares of Life. Yorke Financial Management Pty Ltd as the trustee of the Yorke Family Trust is the plaintiff in the action.
Within a matter of months, irreconcilable differences had arisen between Mr Yorke and Ms Ravlich. A decision was made to dissolve the merger. As part of the demerger agreement, YMF agreed to sell its shares in Life to Ms Ravlich as trustee for the Marijana Ravlich Family Trust (the defendant).
In the present action, commenced on 21 December 2012, YFM alleges that Ms Ravlich has failed to pay amounts owing pursuant to the demerger agreement. It clams damages for breach of contract just in excess of $200,000.
Ms Ravlich is yet to file a defence. From the material before me, it is evident that she proposes to defend the action on the basis that no money remains owing pursuant to the demerger agreement and that she has counterclaims or set-offs against YFM.
By application dated 19 March 2013 Ms Ravlich sought security for costs against YFM. The amount of security sought is $100,000.
What issues arise for determination?
Yorke Financial Management Pty Ltd seeks orders for security for costs pursuant Corporations Act 2001 (Cth) (CA) s 1335, which relevantly 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 power in CA s 1335 contains a threshold test or jurisdictional requirement, and a discretion: Western Areas Exploration Pty Ltd v Streeter [2008] WASCA 218 [2]; BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81 [11]. The threshold requirement is that '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': CA s 1335. Once enlivened, the discretion is unlimited or unfettered, though it must be exercised by reference to established principles: Westonia Earthmoving Pty Ltd v Cliffs Asia Pacific Iron Ore Pty Ltd [2013] WASC 57 [5]; Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19 [36]; Darwin Offshore Logistics Base Pty Ltd v Cox [2010] WASC 356 [3]; FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69; (2000) 22 WAR 241 [21].
There are five issues which need to be considered in order to determine the present application:
(a)What is the financial position of YFM?
(b)What are Ms Ravlich's likely future costs?
(c)Has Ms Ravlich has satisfied the threshold requirement in CA s 1335?
(d)What is the appropriate exercise of the discretion in CA s 1335?
(e)What are the appropriate final orders?
What is the financial position of YFM?
The relevant time at which to consider the financial position of YFM is following judgment after trial. This is because the inquiry in CA s 1335 is directed to whether YFM will be able to pay Ms Ravlich's costs if she is successful in her defence, which will not be known until judgment is given: Sugarloaf [35]. There then needs to be some time allowed for costs to be taxed. Based on my experience of cases progressing through the court to trial and taxation of costs, I thus need assess YFM's financial position in approximately 12 months' time.
The information before me about YFM's financial position, in summary terms, is as follows:
(a)YFM is a corporate trustee company;
(b)its paid up share capital is $4;
(c)it is not the registered proprietor of any land in Western Australia;
(d)Onepath Life Limited holds a fixed and floating charge over all of YFM's current and future acquired assets;
(e)according to its draft 2011 financial statements, in that financial year it had an operating loss of $39,681 and, at 30 June 2012, had a net asset deficiency of $39,581.58;
(f)according to its draft 2012 financial statements, in that financial year it had an operating loss of $136,248.99;
(g)according to its draft 2012 financial statements, as at 30 June 2012, its total assets were $70,431.90, though it had a net asset deficiency of $175,830.57;
(h)according to its draft 2012 financial statements, as at 30 June 2012 it owed the ATO $71,688.94; and
(i)it only has a small amount of ongoing income.
I note that the copy of the 2011 and 2012 financial reports in evidence before me are unsigned drafts. Mr Yorke deposes that the final versions of these documents are held by YFM's accountant. However, for present purposes, there is no evidence that a director of YFM has signed the director's solvency declaration, that in their 'opinion there are reasonable grounds to believe that the trust will be able to pay its debts as and when they become due and payable'.
Mr Yorke has not given any evidence of any material changes to the financial position of YFM since 30 June 2012. He does give evidence that in light of the non-payments by Ms Ravlich, he has had to arrange for working capital to be transferred to YFM in order to serve major expenses. However, counsel for YFM was not able to show me how this injection of working capital was reflected in the 2011 and 2012 financial statements (though it may well have occurred after 30 June 2012).
Further, YFM is litigating as the trustee of the Yorke Family Trust. Despite a request by Ms Ravlich's lawyers, YFM has not placed into evidence the relevant trust deed. I am thus not aware of the extent to which YFM is entitled to be indemnified out of trust assets. In this situation, it may be 'reasonable and just' to treat YFM as if it were without assets to meet any liability for Ms Ravlich's costs: Laundry Coin‑Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40‑584, 46,729; Sugarloaf [35].
Ms Ravlich has not placed before the court any evidence which would suggest that YFM is in immediate financial distress, for example, writs lodged or statutory demands issued.
What are Ms Ravlich's likely future costs?
Ms Ravlich seeks orders for security for costs in the amount of $100,000.
In his affidavit of 19 March 2013, Mr Engelter, a solicitor employed by Ms Ravlich's lawyers, annexes a letter dated 17 January 2013 to YFM's solicitors in which he sets out an itemised list of scale cost estimates for the future conduct of the action through to trial, totalling $108,369. He confirms this analysis in a further affidavit dated 17 April 2013.
Counsel for YFM conceded that the amount of $100,000 was roughly correct.
In my view, Mr Engelter's estimate is reasonable and ought to be used for the purposes of the application.
Has Ms Ravlich has satisfied the threshold requirement in CA s 1335?
The threshold requirement in CA s 1335 is that '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'. This requires 'an evaluation of the evidence led by the applicant to see whether that leads to a reason to believe that the corporation will be unable to pay the costs of the defendant': FFE Minerals [24]. '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 [22]. The court is to adopt a 'practical, commonsense approach to the examination of the corporation's financial affairs': Sugarloaf [35].
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 in issue: Western Areas [15]. The threshold test is, however, a 'fairly modest' test: Western Areas [4]; Meni's Tailoring & Alterations Pty Ltd v Jeanswest Corp Pty Ltd [2003] FCA 1108 [4].
In FFE Minerals Pigeon and Owen JJ declined to define further the expression of the threshold requirement, being content that the words speak for themselves [24]. In Western Areas, Pullin JA took a different approach, stating that [3] ‑ [4]:
The threshold requirement is met if credible testimony establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the appellate corporation will be unable to pay the respondents' costs of the appeal if the appeal is unsuccessful.
This will be so even if in other events which can also be fairly described as reasonably possible the appellant would be able to pay the costs.
The threshold test was also discussed by Maxwell P and Buchanan JA of the Victorian Court of Appeal in Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; (2008) 66 ACSR 455. Their Honours stated [15] ‑ [16]:
The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'if the court is satisfied that' or 'if in the view of the court it is likely that.' The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a 'real risk'.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs.
It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation's impecuniosity. The provision equips the court with the means to require that the defendant be secured against that risk.
This formulation was adopted by Le Miere J in Vicon Services Pty Ltd v BHP Billiton Worsley Alumina Pty Ltd [2012] WASC 109 [17] and by Corboy J in Sugarloaf Hill Nominees Pty Ltd v Rewards Projects Ltd [2011] WASC 19 [34] ‑ [35].
From the evidence which I have summarised above, I am satisfied that Ms Ravlich has, by credible testimony, established that there is reason to believe that YFM will not be able to pay her costs if she is successful in her defence. Based on the 2012 draft financial statements, as at 30 June 2012 YFM could not have paid an amount of $100,000. There is no evidence that the financial position of YFM will improve over the next 12 months. Even now it requires additional working capital to be injected to meet major expenses. Yorke Financial Management Pty Ltd's ongoing income is small. Over the next 12 months YFM will need to fund the litigation which is likely to require it to expend at least the same $100,000 claimed by Ms Ravlich. The fact that YFM does not hold any real property and has nominal share capital is also significant: FFE Minerals [25]. The assets that it does have are more or less the same as its ATO liability, and are, in any event, subject to a fixed and floating charge. Finally, there is not even any evidence that YFM is entitled to be indemnified out of trust assets.
The discretion in CA s 1335 is thus enlivened.
What is the appropriate exercise of the discretion in CA s 1335?
Discretion – principles and issues
As I have noted, once enlivened, the discretion in CA s 1335 is unlimited or unfettered, though it must be exercised by reference to established principles: Westonia [5]; Sugarloaf [36]; Darwin Offshore Logistics [3]; FFE Minerals [21]. The circumstances in which the discretion should be exercised cannot be stated exhaustively, and all of the circumstances of the case should be examined: Spence Financial Group Pty Ltd v GE Commercial Corporation (Australia) Pty Ltd [2007] WASC 15 [33]; YICI Pty Ltd v Sun Wah Marine Products (HK) Co Ltd [No 2] [2010] WASC 27 [3].
Ms Ravlich bears the persuasive onus to satisfy the court that the discretion should be exercised: Westonia [7]; Sugarloaf [33] ‑ [34]. However, YFM must advance evidence as to any factual matter it wishes to assert in opposition to the application: Sugarloaf [34].
The issues argued before me as being relevant to the application of this discretion were:
(a)YFM's financial position;
(b)the merits of YFM's claim and Ms Ravlich's defence;
(c)the delay by Ms Ravlich in making the application;
(d)whether YFM's current financial issues were caused by Ms Ravlich;
(e)whether the making of an order for security for costs would stultify YFM's ability to continue with the litigation; and
(f)whether an offer by Mr Yorke to be personally liable for Ms Ravlich's cost is sufficient to offset any risk the she may not be paid her costs if she successfully defends the action.
Discretion – the financial position of YFM
The fact which enlivened the jurisdiction in CA s 1335 ‑ namely that there is reason to believe that YFM will be unable to pay Ms Ravlich's costs if successful in her defence - is a 'substantial' or 'most significant' or 'important' factor in favour of its exercise: Westonia [37]; YICI [5]; Sugarloaf [36]; Unified Pty Ltd v The Cancer Council Western Australia Inc [No 3] [2011] WASC 161 [11]; Jaddcal Pty Ltd v Minson [No 2] [2011] WASC 138 [11]. It does not, however, establish an entitlement, or even a predisposition, in favour of ordering security for costs: Unified [11].
In my view, the financial position of YFM set out above ([10] ‑ [14]) is a most significant factor in favour of an award of security for costs.
Discretion – merits
In Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405, Cooper J identified the limited relevance of the merits of a claim in the exercise of the discretion to order security for costs (416):
Ordinarily in my view the likelihood or otherwise of success in the proceedings ought not to be investigated on an application for security for costs ... There may be circumstances where the merits are clear or where the claim cannot succeed in point of law or is not brought bona fide. Should that occur, regard will be had to those circumstances. However, those cases in my view are the exception to the ordinary rule.
Likewise, in Sugarloaf, Corboy J stated that the 'court will generally not be required to investigate in considerable detail the likelihood or otherwise of success in the action' [36]. The absence of pleadings beyond a statement of claim adds to the difficulties of an assessment of the merits: Westonia [27].
YFM's claim is reasonably straight forward: it says that Ms Ravlich was obliged to pay it some $203,940 by way of instalment payments under the de‑merger agreement, but has failed to do so. The de‑merger agreement is annexed to Mr Yorke's affidavit. It appears to have been duly executed. The payment term in the schedule is for 23 consecutive monthly instalments of $15,870, together with six further monthly instalments calculated in accordance with a formula set out in the schedule.
As I have noted, Ms Ravlich is yet to file a defence. This appears to have been deferred pending the determination of this application. Although it is somewhat unclear from the material before me, it appears that Ms Ravlich has paid YFM in excess of $250,000 by way of monthly instalments from September 2010 (16 instalments of $15,870). Ms Ravlich accepts that she has withheld $92,580 of the remaining fixed instalments and has not paid the six further instalments.
In submissions before me, counsel for YFM placed some weight on the fact that the de‑merger agreement did not contain any provision allowing Ms Ravlich to set‑off amounts owing under the formula in the schedule (used to calculate the final six payments) from the 23 fixed monthly payments. However, as counsel for Ms Ravlich observed, at common law, the position is that amounts may be set‑off unless the contract provides to the contrary, which the de‑merger agreement does not: Sandbank Holdings Pty Ltd v Durkan [2010] WASCA 122 [1], [2], [27] ‑ [39]; Lewinson K, The Interpretation of Contracts¸ (2011), 624, 5th ed, Sweet and Maxwell, London.
From the material available to me, it appears that Ms Ravlich's defence is that she does not owe anything more to YFM. This is for three reasons.
The first reason is that, applying the formula set out in the schedule to the de‑merger agreement, she says that:
(a)the six further monthly instalments are not payable; and
(b)there needs to be an adjustment to the 23 fixed instalments of about $65,296.
This accounts for all but $27,554 of the amount withheld.
The second reason is that she alleges that YFM and/or Mr Yorke removed assets that ought to have been included in the calculation of the purchase price in the original merger agreement. She says that the value of this claim is $13,500.
The third reason is that she alleges that YFM, through Mr Yorke, operated as a financial planner in breach of restraint of trade provisions in the de-merger agreement. The de‑merger agreement contains a restraint of trade clause in which Mr Yorke agrees not to 'work in the financial planning industry or as a financial planner'. It contains the usual cascading sequence of time periods and areas. At its widest, the restraint is for three years throughout Western Australia. Mr Yorke separately executed the de‑merger agreement. Ms Ravlich annexes an ASIC extract to the effect that since 1 June 2012 Mr Yorke has been an authorised representative of Elders Financial Planning Pty Ltd. She further annexes a screen shot from the Elders' website stating that Mr Yorke is now 'enjoying pursuing the new challenges of providing professional financial planning advice to regional and rural clients with the backup of the Elders Financial Planning team behind him'. She also gives an example of a client of Life contacted by Mr Yorke with an offer to provide financial services.
Ms Ravlich deposes that at the trial of the action she will 'seek to establish that Mr Yorke solicited clients, breached the restraint of trade, and used confidential information not only causing [her] loss and damage but also making it inequitable for YFM to pursue its claim'.
It is apparent to me that the major issue in dispute is the proper construction and application of the formula contained in the schedule to the de‑merger agreement. This accounts for the vast bulk of the amount in dispute.
Where a claim is regular on its face and discloses a cause of action, then, in the absence of evidence to the contrary, the court will proceed on the basis that the claim is brought in good faith and is arguable: Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306, 316 ‑ 318; Westonia [28]. However, this applies equally to YFM's claim and Ms Ravlich's defence.
On the limited evidence available to me, I am satisfied that both YFM's claim and Ms Ravlich's defence appear to be being pursued in good faith and raise issues which will need to be determined at trial. There is nothing in either YFM's claim or Ms Ravlich's defence that would weigh one way or the other in favour or against the making of an order for security for costs on this ground. The merits of YFM's claim is a neutral factor: Fiduciary Limited v Morningstar Research Pty Ltd (2004) 208 ALR 564 [37] ‑ [39].
Discretion - delay
An application for security for costs must be made promptly: YICI [6]; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 [70]. Delay in making the application is a significant factor against the exercise of the discretion: Attorney‑General of Botswana v Aussie Diamond Products [2009] WASC 299 [21] ‑ [24]. The 'further a plaintiff has proceeded in an action and the greater the costs it has been allowed to incur without steps being taken to apply for an order for costs, the more difficult it will be to persuade the court that such an order is not, in the circumstances, unfair or oppressive': Bryan E v Fencott v Eretta Pty Ltd(1987) 16 FCR 497, 514; Attorney‑General of Botswana [23]. This is for at least two reasons. The first is that a late application, without explanation, offends modern case management principles: Attorney‑General of Botswana [14] ‑ [24]. The second is that it will generally be unjust to permit a defendant who stood by and allowed the plaintiff to work on their case to ask for security after expenses had been incurred: Idoport [70]; Smail v Burton; Re Insurance Associates Pty Ltd (in liq)(1975) 1 ACLR 74, 75.
On the other hand, evidence of delay does not necessarily render the application fatal on its own: Idoport [70]. Rather, the passage of time is merely one factor to be taken into account during the balancing exercise undertaken by the court: Idoport [70]; Commonwealth of Australia and Another v Cable Water Skiing (Australia) Ltd(1994) 14 ACSR 760, 762.
YFM asserts that Ms Ravlich has delayed in making her application for security for costs and that this should count against the exercise of the discretion.
In his affidavit of 10 April 2013, Mr Yorke deposes that in June 2012, YMF commenced an action in the Magistrates Court in respect of amounts which it said were owing pursuant to the de‑merger agreement. There were various attempts to settle the issues in the Magistrates Court. Due to other amounts becoming due, the amount in issue subsequently exceeded the jurisdiction of the Magistrates Court, and the District Court action was commenced. I was advised from the bar table that the Magistrate Court action is in effect dormant.
Mr Yorke's evidence is that during the course of the Magistrates Court proceedings, neither Ms Ravlich or her lawyers indicated to his lawyers that she would be making any application for security for costs. Counsel for YFM submitted that this made it now unjust for YFM to seek security for costs. He submitted that if Ms Ravlich had a genuine concern about YFM's capacity to pay, she would have made an application in the Magistrates Court.
Ms Ravlich agrees that she did not seek security for costs in the Magistrates Court, but says that this was because of the different procedure in that court. She says that if the Magistrates Court action had continued past a pre‑trial conference, she would have sought security for costs. She further says that the present application was brought shortly after she entered an appearance in the action.
In my view, the fact that Ms Ravlich did not seek an order for security for costs in the Magistrates Court action is not relevant to the present application. The amounts in issue, and the scope of the facts in issue, were much more limited in the Magistrates Court. The costs that may be awarded in the Magistrates Court are much less than in the District Court. Any order for security for costs in the Magistrates Court action could have only applied to that action. Ms Ravlich's application was made promptly once District Court proceedings were commenced. In particular, she did not stand by and let YFM undertake work on its case in the District Court before making the application.
In my view, this is not a case in which the delay of the applicant should weigh against the exercise of the discretion to order security for costs.
Discretion - financial impact of Ms Ravlich's conduct
In exercising the discretion in CA s 1335, it is relevant to consider whether the conduct of Ms Ravlich caused or substantially contributed to any of the financial issues being experienced by YFM: Gentry (415 ‑ 416); Spence [35]. To rely on this ground for resisting an application for security for costs, YFM would need to establish 'a real connection between the conduct and the impecuniosity which in the exercise of the court's discretion, would make it unjust to require security, and … that the applicant for security for costs has been guilty of some form of misconduct or unacceptable business dealings qua the respondent': Melunu Pty Ltd v Claron Constructions Pty Ltd [2004] NSWSC 1064 [31]; Westonia [45]. In other words, YMF must show more than the mere fact that it is impecunious because Ms Ravlich owes it money; were this not the case, virtually every plaintiff owed money would be able to resist a claim for security for costs on the ground of impecuniosity thereby defeating the purpose of the section: Melunu [31]; Westonia [45].
Mr Yorke submits that the financial position of YFM was caused by the defaults under the de-merger agreement by Ms Ravlich. He deposes that YFM relied on the monthly instalments due under the de‑merger agreement as well as income from his salary as a licenced financial planner, and a consultant, with Life.
Mr Yorke says in his affidavit that as a result of the non‑payment of money under the demerger agreement, he was 'forced to sell assets under pressure from creditors in an attempt to maintain the financial abilities of' YFM. This included selling investment properties for losses of upwards of $300,000. He further says that he and his wife have had to 'realise non‑current assets and liquidate the same at a loss for the purposes of injecting working capital into' YFM.
Mr Yorke says that, in effect, YFM's claim is for non‑payment of instalments to the value of $203,940 which is a substantial sum of money to which YFM has not had access.
Counsel for Ms Ravlich submitted that YFM has not established that it was the failure by Ms Ravlich to pay amounts under the de‑merger agreement which led to its financial issues. This is because:
(a)it is common ground that the instalments due in the financial year ending 30 June 2011 were paid;
(b)notwithstanding (a), YFM had an operating loss and net asset deficiency in the year;
(c)it is common ground that only $61,110 of the $190,440 of the instalments due in the financial year ending 30 June 2012 was not paid (being the amounts not paid in that financial year as set out at par 17 of the statement of claim); and
(d)notwithstanding (c), YFM had an operating loss of $136,248.99 and a net asset deficiency of $175,830.57 in the financial year ending 30 June 2012.
Thus, even had Ms Ravlich paid what YFM has claimed, it still would have had operating losses and a net asset deficiency in both financial years. Any financial issues arose independently of the present claim, and exceeded it.
I agree with this analysis. I also observe that it was not clear to me how the amounts received by YFM from Ms Ravlich were brought to account in the financial statements of YFM for the 2011 and 2012 financial years. This calls into serious question the reliability of these, admittedly draft, financial statements.
Counsel for Ms Ravlich further submitted that even if YFM could establish the failure to pay the amounts said to be due under the de‑merger agreement, YFM has not established that Ms Ravlich has engaged in any form of misconduct or unacceptable business dealing.
I also agree with this submission.
In my view, there is no evidence before me that some misconduct or unacceptable business dealings by Ms Ravlich caused or substantially contributed to any of the financial issues being experienced by YFM. YFM has not satisfied me that this is a factor weighing against an order for security for costs.
Discretion – impact on YFM's ability to continue the with the litigation
Mr Yorke deposes as to the self‑evident point that if the litigation is stayed it would be of great prejudice to YFM as it is owed a substantial sum of money by Ms Ravlich pursuant to the de‑merger agreement.
In exercising the discretion in CA s 1335, the court may consider whether ordering security for costs would stultify the ability of the plaintiff company to continue with the action: Westonia [39]; Unified [13]; Spence [39]; Bell Wholesale Co Pty Ltd v Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1, 4.
A court will not be justified in declining to make an order on the basis that the proceedings will be stultified unless the impecunious plaintiff company establishes that those who stand behind it are also unable to provide the requisite security for costs: Westonia [39]; Unified [13]; Spence [34]; Bell Wholesale (4). It is incumbent upon a plaintiff who wishes to resist an application for security on this basis to put before the court a full and frank statement of the assets and liabilities of the plaintiff, and also of its shareholders: Westonia [39]; Unified [15]; Spence [39]; Newtrend Pty Ltd v Oceanic Life Ltd [1990] WAR 1, 3. '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': Unified [15]. In this sense it can be said that there is an onus on a plaintiff company resisting an order for security for costs on this basis: Westonia [39]; Unified [15]; Spence [39].
Mr Yorke provides the following information as to his financial position and that of his wife:
(a)the personal assets of himself and his wife are in excess of $460,000, including a residential property, cash in the bank and a share portfolio;
(b)their only substantial liability is a mortgage in the sum of approximately $250,000; and
(c)they are trustees of two other trusts which hold other business assets being a florist shop and a financial planning business.
YFM has not placed the kind of detailed information before the court that would satisfy me that an order for security for costs would stultify the ability of YFM to continue with the action. To the contrary; if Mr Yorke's evidence is accepted there is at least $200,000 differential between the assets and liabilities of Mr and Mrs Yorke which could be used to both provide security for costs and continue to support YFM to continue with the action.
Discretion – Mr Yorke's offer of a guarantee
Mr Yorke states that he is willing to provide a personal undertaking as to costs in the proceedings in the sum of $30,000 if required to do so by the court. He has not yet done so.
The relevance of an undertaking by the shareholder or director of a company, was explained by Connelly J (with whom Campbell CJ and Demack J agreed) in Harpur v Ariadne Australia Limited [1984] 2 Qd R 523, 532:
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. If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied.
An undertaking by a person standing behind a corporate plaintiff to be liable for its legal costs is an important, though not a decisive, factor: Westonia [41] 57; Moss Rd Pty Ltd v T & M Buckley Pty Ltd t/as Shailer Constructions[2010] QSC 278 [31] ‑ [33]; Gentry Bros (415). This is so notwithstanding that the worth of the directors may ultimately prove insufficient to satisfy any judgment in whole or in part: Gentry Bros (415). This is because it places the party seeking security in no worse position than it would have been in had it sued those standing behind the company as litigants in person, without the imposition of the corporate entity between them: Gentry Bros (415). However, the court still needs to consider the value of the undertaking and the means of the person giving it: Westonia [41]. The court should not readily accept an undertaking to pay costs from an individual who is impecunious and who, at least at the time when the undertaking is given, has no chance of making it good: Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevenvale Pty Ltd (1999) 2 VR 191 [24].
Counsel for Ms Ravlich submitted that the court should not accept any undertaking from Mr Yorke given the generalised assertions as to the combined financial position of Mr Yorke and his wife.
Whilst there is some merit in this submission, it does appear from the general information set out by Mr Yorke summarised above [65], that between Mr Yorke and his wife, there is at least a $200,000 differential between their assets and liabilities.
Discretion - application
In exercising its discretion the court will be concerned to achieve a balance between ensuring the defendant is adequately and fairly protected, and avoiding injustice to an impecunious plaintiff company by unnecessarily shutting it out or prejudicing it in the conduct of the litigation: Spence [38]; Westonia [5]; Sugarloaf [31]; Unified [10]; Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301, 304.
Ms Ravlich has made out a case for some form of security for costs to protect her from the risk that YFM will not be able to fully satisfy any award of costs against it following judgment in the action. There is a clear risk that YFM will not be able to pay her costs, reasonably estimated to be $100,000, if she successfully defends the action.
In considering the nature of the security to be provided, the court is not required to order such security as will provide a complete and effective indemnity for costs: Sugarloaf [80]; Gentry (415).
Counsel for YFM submitted that if the court decides to make an order for security for costs or to accept a personal undertaking from Mr Yorke, that security or an undertaking should be limited to $30,000 up to the pre‑trial conference or mediation stage of the action. He submitted that this would be just in all the circumstances of the case as the parties will be in a better position to try and resolve the dispute after pleadings have been filed and discovery and inspection provided. This was the approach considered in Westonia [7].
I agree with this submission. Ms Ravlich should be given liberty to apply if the dispute cannot be resolved at the first mediation conference or pre‑trial conference. There should also be a time limit placed on this occurring so that YFM is encouraged to progress the action in a timely fashion.
If the liberty is invoked, and YFM intends to either oppose the order of further security or seek a form of security less oppressive than an order for payment into court or a bank guarantee:
(a)YFM will need to place before the court signed financial statements, in particular bringing to account the money received by Ms Ravlich pursuant to the de‑merger agreement; and
(b)Mr and Mrs Yorke will need to provide detailed information as to their respective financial positions.
What are appropriate final orders?
My preliminary view is that a suite of orders along the following lines will appropriately give effect to the reasons I have set out above and thereby balance the competing risks of injustice:
1.unless by 22 May 2013 Clifford Yorke executes, files and serves on the defendant an undertaking to the court in the following terms, the plaintiff's claim herein be stayed;
(a)Mr Yorke is to pay the balance of the taxed or agreed costs of the defendant in the action not paid by the plaintiff within three months of the date of the taxing officer signing the certificate of taxation costs (if taxed) or the date of the agreement as to costs (if agreed);
(b)the obligation to pay is to be limited to $30,000; and
(c)the obligation need not be secured.
2.in the event that the plaintiff's claim herein is stayed pursuant to the order in paragraph 1 for a period in excess of three months, the plaintiff's claim herein be dismissed and the plaintiff pay the defendant's costs to be taxed;
3.the defendant's application for security for costs be otherwise adjourned sine die;
4.there be liberty to the defendant to apply for further security for costs, the liberty:
(a)to commence at the end of the first mediation conference or pre‑trial conference in the action or 27 September 2013, whichever is the earlier; and
(b)to be exercised by writing to the court requesting the application dated 19 March 2013 to be relisted for further hearing; and
5.there be liberty to the parties to apply to the Principal Registrar or trial judge in relation to the order in par 1;
The reason for granting liberty to apply in relation to the order in paragraph 1 is in case the orders I ultimately make have an unjust or unintended consequence in the context of the ultimate judgment in the action following trial. Further, Mr Yorke ought to have the ability to seek to be discharged from his obligation in the event of, say, undue delay by Ms Ravlich in exercising her rights. This again can be accommodated in giving liberty to apply.
I will hear from counsel as to the final form of the orders, including the terms of the undertaking, along with costs.
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