Supreme Court New South Wales

• Medium Neutral Citation: Paul Michael Pty Ltd v J A Westaway & Son [2011] NSWSC 1076
• Hearing dates: 02/09/2011
• Decision date: 02 September 2011
• Jurisdiction: Equity Division - Technology and Construction List
• Before: McDougall J

Decision

Application for security for costs dismissed. Leave given to proceed on cross-claim.

• Catchwords: PRACTICE - security for costs - matters relating to exercise of discretion - where defendant's proposed cross-claim would cause issues in current proceedings to be litigated in any event - motion dismissed - no question of principle.
• Legislation Cited: Building and Construction Industry Security of Payment Act 1999 (NSW); Corporations Act 2001 (Cth); Uniform Civil Procedure Rules 2005 (NSW)
• Cases Cited: Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (administrator appointed) [1999] NSWCA 16
• Category: Procedural and other rulings
• Parties: Paul Michael Pty Ltd (subject to Deed of Company Arrangement) (ACN 000 715 015) (Plaintiff); J.A. Westaway & Son Pty Limited (ACN 095 327 405) (First Defendant); Urban Traders Pty Limited (ACN 065 603 661) (Second Defendant)
• Representation: Counsel: S Goldstein (Plaintiff); T A Alexis SC / D H Mitchell (Defendants); Solicitors: CCS Legal (Plaintiff); Cara Marasco & Company (Defendants)
• File Number(s): 2011/175041

Judgment - (EX TEMPORE)

1 HIS HONOUR: These proceedings relate to a construction contract made between the plaintiff as builder and the defendants as proprietors for the construction of home units at Pittwater Road, Bayview.

2 The plaintiff, which is subject to a deed of company arrangement, sues to recover damages for breach of that contract and repudiation. I am concerned today with the defendants' application for security for costs and for leave to bring a cross-claim.

3 The application for security relies on s 1335 of the Corporations Act 2001 (Cth) or alternatively UCPR r 42.21(1)(d).

4 The threshold question raised by those provisions - that there is credible testimony, or reason to believe, that the plaintiff will be unable to meet a costs order against it - is clearly satisfied. Since there was no argument put to the contrary, it is unnecessary to do more than note that the threshold question can be shown to be satisfied by even the briefest perusal of the administrator's circular to creditors dated 26 May 2009.

5 The plaintiff raised four issues in opposition to the order for security.

6 The first related to the strength and good faith of the plaintiff's case. Mr Goldstein of counsel, for the plaintiff, submitted that the fundamental question was whether the defendants had repudiated the contract. He relied on views expressed by White J in earlier litigation and by me in other earlier litigation. The fundamental point is that the asserted repudiation arose because the defendants purported to take the work out of the plaintiff's hands, pursuant to a contractual right to do so, at a time when on any view the plaintiff had suspended the work under the contract pursuant to the legal right to do so given by s 27(2)(a) of the Building and Construction Industry Security of Payment Act 1999 (NSW). That legal right was given to the plaintiff, at the time when it suspended work, because there was at least one unpaid adjudicator's determination in its favour.

7 Although it is neither necessary nor desirable that I should express a more concluded view, and indeed I do not have nearly enough material to enable me to express even a provisional view, the factors to which I have referred lend support to Mr Goldstein's submission.

8 The second matter raised by Mr Goldstein was that the plaintiff's impecuniosity was caused or contributed to by the defendants' alleged wrongdoing.

9 The administrator's circular to which I have referred included, based on the director's report as to affairs, an estimated deficiency in excess of $5.2 million dollars as at the date to which the circular spoke.

10 It may be noted that even that figure was reached by taking into account, as an asset, the estimated amount of $5.1 million claimed to be recoverable from the defendants, and by ignoring as a liability the amount of almost $7.5 million that is now the subject of the defendants' proof of debt lodged with the administrator.

11 The financial position stated in the director's report as to affairs discloses an amount owed to a secured creditor of $1.4 million and an amount totalling $3.8 million owing to unsecured creditors.

12 The evidence is that the amounts that on any view are owed by the defendants to the plaintiff (subject to any defence set-off, or cross-claim) total, in round figures, $1.9 million. I reach that figure because there have been two payment claims submitted for adjudication under the Security of Payment Act and those claims have been adjudicated, in the plaintiff's favour, for amounts that total the figure that I have now given (which includes some amount for adjudication expenses and the like).

13 It may be thought to be, at least prima facie, surprising that a failure to pay $1.9 million could have caused the catastrophic losses of which I have spoken, but the position is not quite so simple.

14 The unsigned financial statements and tax return for the plaintiff show that it was solvent, and made a small profit, for the year ended 30 June 2008. Those documents (to the extent that they can be relied upon) demonstrate net shareholders' funds of $208,000. In those circumstances, it is hardly surprising that the failure to pay even $1.9 million (and I put aside the remaining $3.2 million of the amount claimed to be owing in the administrator's circular) would tip the plaintiff over the edge into insolvency.

15 In my view, an analysis of the figures, even ignoring the context of a rapid decline from profitable and solvent trading to loss-making and insolvent trading at a time when, on the evidence, the only project was the subject one, shows that the defendants' failure to pay the amounts adjudicated in favour of the plaintiff, and to meet their liabilities under the resultant judgment debts, are indeed likely to have at least contributed to the plaintiff's present impecuniosity.

16 The third point relied upon by Mr Goldstein was that the making of an order for security would stultify the litigation. Under the deed of company arrangement, the fruits of success in any litigation will flow, in the main part, to unsecured creditors. There is no evidence of any acceptable kind that those creditors have refused to stand behind the litigation by offering to put up security. The furthest that the evidence goes is to show that:

(1) the plaintiff's director, Mr Charles Michael, is unable to himself to afford to provide the full amount of security sought; and

(2) another creditor of the plaintiff approached by Mr Michael has said that he does not think he can help the plaintiff by providing security.

17 The evidence falls well short of showing stultification.

18 The fourth matter is that the very same issues will be litigated in the defendants' cross-claim, even if the plaintiff succeeds. In this context, Mr Alexis of Senior Counsel, who appeared with Mr Mitchell of counsel for the defendants, submitted that the proposed cross-claim was purely defensive. I do not think that this is a correct characterisation of what is likely to happen.

19 Under the regime that was put in place following the hearing before White J and his Honour's reasons for judgment given on 29 October 2010 ([2010] NSWSC 1246), the judgments recovered by the plaintiff pursuant to the two determinations in its favour were stayed on condition that the defendants provide, from the proceeds of sale of the units, bank guarantees for the combined total of those judgments. In round figures, that total is the amount of about $1.9 million to which I have referred more than once.

20 Those bank guarantees are to be available for the plaintiff until the defendants' proof of debt is ultimately dealt with either by the administrator (which, as I shall show in a moment, will not happen) or by the court.

21 On the assumption that the defendants have performed their obligation to put up, or start putting up, security, they are in the position that to recover the bank guarantees and the underlying $1.9 million, they will need to press their proposed cross-claim in any event; and if they do not do so by cross-claim in these proceedings, they will need to do so in fresh proceedings.

22 Application was made to the administrator to deal with the defendants' proof of debt. He declined to do so, I suspect on the basis that there was no money to enable him to investigate it, and on the further basis that, since there were in any event proceedings relating to the underlying dispute on foot in this court, the proof of debt could be dealt with by the court. That means that the defendants will need to agitate their proof of debt, either by way of cross-claim or by way of separate claim, to enable them to recover the guarantees to which I have referred.

23 If that happens, the plaintiff will be able to defend the claim, including by bringing its own cross-claim for damages, and all the issues that are presently foreshadowed will be litigated in any event.

24 When one considers the factors to which I have referred overall, one starts from the point, as I have said, that there is a clear case for the provision of security based on the financial position of the plaintiff. One moves from there to the fact that the plaintiff's case does not appear to be entirely lacking in merit, and takes into account the view that I have expressed that to some significant extent at least the plaintiff's impecuniosity has been contributed to by the defendants' failure to pay amounts owing under adjudication determinations and judgments founded on those determinations.

25 One does not take into account the question of stultification, because in my view the evidence does not make it out.

26 Leaving the matter there, the factors might be thought to be relatively finely balanced. However, when one takes into account the fourth factor, it seems to me that it tips the exercise of discretion very much in the plaintiff's favour. As Rolfe J observed in a case that went to the Court of Appeal, in an observation that attracted the agreement of the Court of Appeal, it would be an arid exercise to order security for costs if in due course the plaintiff could be cast in the role of a defendant and could litigate the very matters the subject of its claim by way of defence. See Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd (administrator appointed) [1999] NSWCA 16 at [24] (Sheppard AJA, with whom Mason P and Handley JA agreed).

27 In that case, both Rolfe J and Sheppard AJA took into account the fact that the appellant (defendant below) had been asked to give, but had declined to give, an undertaking not to prosecute its cross-claim. No such undertaking is offered in the present case; nor could it be, for the reasons that I have indicated in relation to the bank guarantees.

28 In those circumstances, it seems to me that the appropriate exercise of the discretion that has been enlivened is to decline to order for security for costs.

29 In case I am wrong in what I have said, I will look briefly at the evidence of the amount claimed. The estimate was given by the defendants' solicitor Mr Bruno Cara. In round figures, he assessed the total costs, excluding GST, at about $366,000. He said that the assessment did not include costs referable to the cross-claim. There was evidence sought to be led from a barrister and costs assessor, Ms Kim Dulhunty. Although her affidavit was admitted and I did not reject the various argumentative and unsupported parts of it, I do not regard it as detracting in any great way from Mr Cara's estimate. For example, in paragraph 28, Ms Dulhunty deposes to her observation that "many building and construction cases only take a couple of days to hear". I wish that were the case with building and construction cases heard in this list, but in my experience (which is not insubstantial) it is not.

30 To the extent that the observation made by Ms Dulhunty was intended to suggest that Mr Cara's estimate of the time likely to be taken was excessive, I do not accept it. Likewise, to the extent that Ms Dulhunty suggests that the costs for which security is sought "would appear to include time for the hearing of the cross-claim", that is inconsistent with Mr Cara's evidence.

31 Nonetheless, I do think that there is some padding in Mr Cara's estimate. I would also have taken into account the truism that a defendant is not entitled as a matter of course to security for the whole of its course, even assessed on the ordinary basis. Had I come to the view that security should have been ordered, and bearing in mind that any estimate of the amount likely to be required requires the application of a very broad brush, I would have concluded that:

(1) security should be ordered in the sum of $340,000; and

(2) that security should be ordered to be given in tranches, roughly coinciding with the timetable of expenditure.

32 But since I have concluded, on the principal discretionary question, that security should not be ordered, I will not say more.

33 I turn to the application for leave to bring the cross-claim. That application invokes s 444E of the Corporations Act . In circumstances where, in substance, the administrator invited the underlying-claim to be agitated in court and declined to deal with its substance himself, it is clearly appropriate that leave should be granted. It may be noted that the cross-claim will not prejudice the plaintiff or its creditors because Mr Michael has undertaken, pursuant to the deed of company arrangement, to indemnify the company in full for all costs relating to the proceedings that it has instituted. That would include the costs of the cross-claim.

34 I do not know whether the application for leave is sought on the usual basis, that any judgment recovered on the cross-claim not be enforced without the leave of the court. It is not necessary to deal with that at this point, because it may be reserved for further consideration. It is sufficient to say that it is a clear case for the granting of leave.

35 In those circumstances I make an order in terms of prayer 4 of the defendants' notice of motion filed on 16 June 2011 (substituting for the reference to s 440D(1)(b) a reference to s 444E(3). I order that the notice of motion be otherwise dismissed. I will hear the parties on costs.

(Counsel addressed.)

36 I order that the costs of the notice of motion be costs in the proceedings.

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Decision last updated: 13 September 2011