Stella Life Spa Pty Ltd v Elcorp Investments Pty Ltd
[2017] QSC 333
To print this judgment please return to the case and click on the PDF icon
next to the
case name. For court use, a full PDF copy is required or preferred.
Exit Distraction Free Reading Mode
Please Note: You are about to print a copy of the onscreen
version of
this judgment. For court use, a full PDF copy of the judgment is required or preferred. Please
return to
the case for PDF printing options.
- Unreported Judgment
- Stella Life Spa Pty Ltd v Elcorp Investments Pty Ltd[2017] QSC 333
- Add to List
Stella Life Spa Pty Ltd v Elcorp Investments Pty Ltd[2017] QSC 333
Stella Life Spa Pty Ltd v Elcorp Investments Pty Ltd[2017] QSC 333
SUPREME COURT OF QUEENSLAND
CITATION: | Stella Life Spa Pty Ltd v Elcorp Investments Pty Ltd [2017] QSC 333 |
PARTIES: | STELLA LIFE SPA PTY LTD (Applicant) v ELCORP INVESTMENTS PTY LTD (Respondent) |
FILE NO/S: | SC 555 of 2016 |
DIVISION: | Trial |
PROCEEDING: | Application |
ORIGINATING COURT: | Supreme Court at Cairns |
DELIVERED ON: | 14 December 2017 Ex Tempore |
DELIVERED AT: | Cairns |
HEARING DATE: | 13 December 2017 |
JUDGE: | Henry J |
ORDERS: | (1) The plaintiff provide security for the defendant’s costs of the proceeding up to the first day of trial in the sum of $55,000 by way of bank guarantee within 21 days of the date of this order, in a form satisfactory to the registrar. (2) The proceeding is stayed until such security is provided. (3) Costs reserved. (4) Each party has liberty to apply on two clear business days written notice to the other. |
CATCHWORDS: | PRACTICE AND PROCEDURE – SECURITY FOR COSTS – FACTORS RELEVANT TO EXERCISE OF DICRETION – where the plaintiff is a corporation – whether there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them – where the court ordered security for costs Uniform Civil Procedure Rules 1999 (Qld) rr 670, 671 Corporations Act 2001 (Cth) s 1335 (1) Concrete Mining Structures Proprietary Limited v Cellcrete Australia Proprietary Limited (No. 2) [2016] FCA 360[13] Specialised Explosive Blasting and Training P/L v Huddy’s Plant Hire P/L [2010] 2 Qd R 85 |
COUNSEL: | C Ryle for the applicant MA Jonsson QC for the respondent |
SOLICITORS: | Results Legal for the applicant WGC Lawyers for the respondent |
- The applicant defendant seeks security for costs in the amount of $90,000 pursuant to r 670 of the Uniform Civil Procedure Rules 1999 (“UCPR”) or alternatively s 1335 of the Corporations Act 2001. The enlivening of the discretion to award costs is dealt with in rule 671, which, relevantly to present purposes, provides:
“The Court may order a plaintiff to give security for costs only if the Court is satisfied –
(a)the plaintiff is a corporation and there is reason to believe the plaintiff will not be able to pay the defendant’s costs if ordered to pay them…”
- In a similar vein, s 1335(1) of the Corporations Act relevantly provides:
“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…”
- The applicant defendant (referred to hereafter as “the defendant”) alleges that there is reason to believe the respondent plaintiff (referred to hereafter as “the plaintiff”), a corporation, will be unable to pay the defendant’s costs if the defendant, also a corporation, is successful in its defence. The plaintiff submits this threshold requirement for the enlivening of the discretion has not been met.
- The evidence in support of the requisite belief is the content of the plaintiff’s 2017 tax return and annexures forwarded to the defendant by the plaintiff’s solicitors by letter dated 22 August 2017. In particular, it is the financial report of the plaintiff for the year ended 2017 which is the focus of concern. That financial report’s income statement shows the net profit or loss for 2016 was a net profit of $24,849 but for 2017 was a net loss of $59,252.
- The plaintiff points out the depreciation of $17,787 in the 2017 expenditure column – it was around $10,000 less in 2016 – distorts the extent of the loss.
- A similar submission was made as to the expenditure figure for legal fees, which was $72,084 in 2017 and $33,072 in 2016. The plaintiff’s counsel submitted that those legal expenses were “no doubt associated with this action” but there is actually no evidence laid on to that effect by the plaintiff, who, for all the Court knows, may have had substantial legal expenses in respect of other legal costs unconnected with this action. Given the present litigation is substantially past the pleading stage and some expert evidence has been gathered, I think it reasonable to infer that a substantial portion of the 2017 financial year legal fees were attributable to the present case but the plaintiff’s failure to lay on evidence about this leaves me unable to draw a more precise inference about the quantum of that portion or even whether it is a majority portion.
- The financial statements reveal the plaintiff’s plant is fully depreciated and the only other asset of substantial value listed is its “fit-outs”, inferentially the fit-out of its business premises. The defendant submits and I accept that is not an asset easily realised, particularly at a cost which I note appears to have been fixed as stationary from year to year in the financials.
- True it is, as the plaintiff’s counsel highlighted, the statements attribute no figure to the goodwill of a business submitted to have positive underlying cash flow. Again, there is no evidence as to the value of that alleged goodwill.
- Another difficulty confronting the plaintiff in electing not to lay on evidence explaining the financial statements or, indeed, any aspect of its financial position is that there was a material drop in its gross income from $174,236 in 2016 down to $118,840 in 2017. Such a material drop is consistent with the fact of the plaintiff’s net loss in 2017 and is not supportive of the inferences sought by the plaintiff’s counsel that the plaintiff’s underlying financial position is robust.
- The evidence adduced by the defendant, which are the plaintiff’s own financial statements, does not prove the plaintiff will be unable to meet an adverse costs outcome at trial. However, for present purposes, the question is only whether they provide credible evidence that there is a reason to believe the plaintiff will be unable to pay such costs. There is, of course, no onus on the plaintiff to adduce evidence explaining aspects of the financial statements but the absence thereof leaves this Court with little reason to do other than give weight to the apparently credible content of the statements. I am satisfied that content does give reason to believe the plaintiff will not be able to pay the defendant’s costs if the defendant succeeds at trial.
- The discretion to make a security for costs order having been enlivened, I turn to the considerations relevant to the exercise of the discretion. There is, in the context of this case, no material difference in the discretionary considerations relevant by reference to the UCPR (which lists discretionary factors at r 672) as distinct from the Corporations Act (see, for example, the exposition of discretionary factors relevant to s 1335 by Edelman J in Concrete Mining Structures Proprietary Limited v Cellcrete Australia Proprietary Limited (No. 2) [2016] FCA 360[13].
- Each party touched on the issue of the merits of the claim but only really to acknowledge – correctly, I think – that it is a neutral consideration here. More emphasis was placed on the consideration of delay.
- The claim was filed on 9 November 2016 and the defence on 9 December 2016. The defendant’s solicitor wrote to the plaintiff’s solicitor on 29 November 2016, saying, inter alia:
“Pursuant to rule 671(a) of the UCPR, our client has reason to believe that your client will be unable to meet any costs order made against it.
…
We note, inter alia:
(1)The ASIC company extract attached for the plaintiff shows that it was only incorporated in 2011 and has paid-up capital of only $1.
(2)In your client’s economic loss report dated 27 June 2016, the financial performance of the plaintiff is summarised:
(a)The balance sheet as at 30 June 2015 reveals a net asset position of only $7020;
(b)In the only two full years reported, your client made a before-tax profit of $63,791 in FY ‘14 and a loss of $27,850 in FY ‘15. We note that in making those calculations, no allowance appears to have been made for the director’s salary.
(3)The plaintiff has no real property in the jurisdiction.
(4)The material revealed raises concerns as to whether the plaintiff can satisfy section 95A of the Corporations Act.
In the circumstances, we invite your client to put forward a proposal as to how it will satisfy any adverse costs order made against it, including a full and frank statement of assets and liabilities of your client and its shareholders. …”
- The plaintiff’s solicitor responded on 1 December 2016, to the effect that they would oppose a security for costs application and that such an application ought not precede the close of pleadings. The topic of providing tangible information about the financial position of their client did not attract any meaningful attention at that stage, at least on the materials before me.
- The defendant’s solicitor wrote to the plaintiff’s solicitor on 31 January 2017, saying, inter alia:
“We hereby put you on notice that our client still intends to make the security for costs application previously foreshadowed.
There have been delays brought about by the Christmas break, and we are currently liaising with a costs consultant regarding the provision of an estimate of the costs of running this matter through to trial.”
- The issue was not raised again, however, until after the aforementioned disclosure of the financial statements, when, on 19 September 2017, the defendant’s solicitor wrote to the plaintiff’s solicitor, flagging a security for costs application in light of the content of the disclosed financial statements.
- On 25 September 2017, the defendant’s solicitor wrote again, requiring security by bank guarantee for $100,000. The plaintiff’s solicitor responded on 3 October 2017, saying, inter alia:
“Our client considers that any application by the defendant for security for costs is well overdue and, if made at this late stage, will cause prejudice to the plaintiff.
In the interests of expediting this matter, our client’s sole director and shareholder, Ms Suzannah Dacre, is agreeable to providing security for the defendant’s costs in the amount of $90,000, as requested in your original letter.
The form of security is to be by way of personal guarantee, limited to $90,000 for the duration of the matter. In favour of this form of security are the following factors:
(1)The defendant has delayed bringing an application for security for costs;
(2)The loss claimed by the plaintiff is attributable to the defendant;
(3)Ms Dacre is the only person who will benefit from an outcome in favour of the plaintiff;
(4)Ms Dacre has assets in this jurisdiction; and
(5)The plaintiff has obtained two expert reports, which form the basis for the plaintiff’s claim.
Furthermore, we advised the defendant that Ms Dacre was restructuring assets, causing complications with the provisions of a bank guarantee. As a consequence, any alternative form of security might stifle the proceeding. …”
- To this, the defendant’s solicitor responded on 4 October 2017, saying:
“We refer to your letter of 3 October 2017 and your client’s offer to provide a personal guarantee for $90,000 as security for costs. Our client can accept the amount, but not the form of the security.
Our client previously delayed making an application for security for costs until disclosure was completed so that our client could properly evaluate the strength of your client’s claim and financial capacity.
That process has, amongst other things, revealed:
(1)a company that cannot fund this litigation from its own balance sheet;
(2)a company that at no point in the last five years has generated income that could translate into a loss of $700,000 in marginal profits, much less a business worth $1.2 million;
(3)a director who is unable to raise a bank guarantee.
A personal guarantee is of little comfort to our client. The financial information provided reveals that Ms Dacre derives very little income from the business. If she is devoting her time to the business and not making a substantial income, we cannot see how she can fund the most expensive part of this litigation and still meet a costs order. Our client fears that she will simply declare bankruptcy to avoid the consequences of a costs order.
If our client is to seriously consider a personal guarantee, then Ms Dacre will need to provide details of her personal finances to demonstrate that the personal guarantee is of some value, particularly given that her bank is unwilling to assist.
If your client will agree to provide this information, then our client will allow seven days for its provision. …”
- The plaintiff argues the defendant delayed in bringing this application and in the meantime, stood by allowing the plaintiff to do preparatory work, attending to disclosure and obtaining consent directions with respect to expert evidence, thus financially depleting itself. The significance of the delay as a discretionary consideration favouring the plaintiff here is significantly undermined by the fact that the security for costs issue was flagged from the jump by the defendant. This case is different, for example, from a matter in which security for costs arises as a known issue for the first time near the eve of trial. I note for completeness, we are presently far from the eve of trial.
- Further, the period between the topic being raised initially and subsequently, relevantly the period from 31 January to 19 September, was in my view not so long as to compel a conclusion by the plaintiff that the defendant would not bring an application. It needs to be borne in mind the plaintiff knew, from the defendant’s letter of 29 November 2016, that the defendant was very troubled by the plaintiff’s economic loss report dated 27 June 2016. Against that background, the plaintiff, which must be taken to have known of its continuing financial problems, could hardly have thought another lot of bad financials, once disclosed (as inevitably they had to be in the context of the pleaded case) would not trouble the defendant. The plaintiff may have been hopeful the defendant would refrain from pursuing security for costs but the circumstances do not compel an inference the plaintiff believed there would no longer be an application.
- Further diminishing the force of the already unconvincing complaint about delay, I note the security for costs sought is only for costs incurred after the defendant again raised the security for costs issue in September of this year. In the course of argument it appeared the prejudice said to be flowing from the delay was allegedly that the plaintiff incurred substantial legal costs in this matter in the interim, thus diminishing its profitability and arming the defendant with its argument founding the Court’s requisite threshold conclusion. This argument, if correct, could easily have been supported by evidence. As already explained, there is actually no evidence as to what the legal fees alluded to in the financial statements relate to. I note in addition that while there was some evidence of the legal work undertaken, no affidavit evidence at all was laid on of the prejudice foreshadowed in the plaintiff’s solicitor’s letter of 3 October 2017.
- Turning to other considerations, it is not alleged the plaintiff is impecunious by reason of the defendant’s conduct alleged in this proceeding. Further, it is again noteworthy in the balance that the intimation in the plaintiff’s letter of 3 October 2017 that a need to give security for costs, “might stifle proceedings,” has not now manifested itself in the laying on of any evidence in this application that such an order would likely stifle the proceeding.
- It has to be said that the distinction between the inferences that were sought to be drawn in argument by the very competent submissions of the plaintiff’s counsel were rather starkly exposed, on a close inspection of the evidence actually filed, as largely lacking evidentiary foundation. It was a foundation that could readily have been established by affidavit evidence if there was substance to it.
- As to the means of the plaintiff’s sole shareholder, Ms Dacre, the person standing behind the corporate plaintiff, it is similarly noteworthy in the balance of considerations that no evidence has been laid on about her means. Indeed, there was evidently no response to the defendant’s solicitor’s request of 4 October 2017 for such information. This was hardly an unreasonable request in support of knowing whether her offer of the personal guarantee was of any real value. The best the plaintiff can now say on this aspect is that Ms Dacre did, by her offer, come out from behind the corporate veil. In fact, all it amounts to presently is a rejected offer. But even assuming the offer stands and she is willing to give a personal guarantee, the point is not determinative and is but a discretionary consideration in favour of the plaintiff – see Specialised Explosive Blasting and Training P/L v Huddy’s Plant Hire P/L [2010] 2 Qd R 85.
- In the rather lopsided ledger of relevant discretionary considerations in this case, it does not, however, carry such weight as to outweigh the cumulative strength of other considerations, forcing the conclusion, which I now make, that this is an appropriate case in which to exercise the discretion to order security for costs.
- Having so concluded, I turn to the amount of the proposed security. On this issue the defendant’s solicitor’s estimates costs up to day 1 of trial to be $97,000 compared to the plaintiff’s solicitors estimate of $53,000. The defendant seeks security in the amount of $90,000 up to day 1 of trial.
- The defendant appears to have made some allowances, which in my view are far too generous to it, in particular:
- calculating likely actual rather than standard costs,
- allowing for briefing and collation of expert evidence when, absent further order from me varying an earlier order on the topic, it is out of time in even serving an expert report which it purportedly intends to rely upon (that is, it asks me to factor in a cost which is only relevant if a further order, not yet even sought, is made),
- allowing, what is in my view, the remarkably large sum of $10,000 for preparation of a trial bundle, a task I have not ordered and which, if it is to occur, would be a burden in the normal course falling more so upon the plaintiff,
- allowing $8000 for preparation of a chronology in a case where the defence has already been filed and counsel will also be briefed (in my experience as counsel in litigation a lawyer preparing a case of any complexity would, as part of their preparation ordinarily charged for, make a variety of notes, not the least of which would be notes giving rise to a chronology – that is, I do not regard this, in other than exceptional circumstances, as a category of expense which would be regarded as a standalone item distinguishable from the general cost of preparing for trial),
- allowing for settling amended pleadings when there is no evidence suggesting such an amendment would be other than by reason of the defendant’s own default and thus not entail costs recoverable from the plaintiff.
- I conclude the defendant’s estimate was materially too high. A precise assessment of its likely standard costs is not viable. Further, it will remain open for the defendant to return at a later date armed with more accurate information after further legal work has occurred, should it wish to contend for a more substantial order.
- For the moment though, on the information available to me, I conclude that the appropriate amount of security to be ordered is $55,000.
- As to the costs of this application, given the issues with present availability of counsel, I will reserve costs.
- I will give liberty to apply on the giving of two clear business days notice.
Orders
- My orders are:
- The plaintiff provide security for the defendant’s costs of the proceeding up to the first day of trial in the sum of $55,000 by way of bank guarantee within 21 days of the date of this order, in a form satisfactory to the registrar.
- The proceeding is stayed until such security is provided.
- Costs reserved.
- Each party has liberty to apply on two clear business days written notice to the other.