Salex NSW Pty Ltd v Congredior Pty Ltd

This application for security for costs arises in the context of a dispute between the plaintiff, Salex NSW Pty Ltd (Salex) and the first defendant, Congredior Pty Ltd (Congredior). Mr D Parish of Counsel appeared for Congredior and Mr A Ogborne of Counsel appeared for Salex.

On or about 13 October 2018, a Property Development Agreement (the Agreement) was entered into between Congredior (described in the Agreement as the Land Owner) and Salex (described in the Agreement as the Developer). By an amended statement of claim filed on 9 March 2021 (pursuant to orders made on 4 February and 4 March 2021), Salex primarily alleges breach of the Agreement against Congredior, together with additional claims for misleading and deceptive conduct under the Australian Consumer Law.

On 7 January 2021, Congredior’s solicitor wrote this letter to Salex’s solicitor (the January Letter):

There was no reply to the January Letter.

It is necessary to say something about the changes that occurred in the constitution of the litigation after that letter was sent.

By motion filed on 3 February 2021, Congredior sought these orders:

At the time of the January Letter there were a number of defendants joined in the proceedings. Since then, and relevantly at the time of the present application, the proceedings have been discontinued against all the defendants except Congredior. This has necessarily reduced the amount of security now pressed by Congredior, which nevertheless remained a substantial sum.

However, as a result of some preliminary observations which I made, the parties came to a position before me today that the amount of security that the Court could order would be $65,050. This would cover at least to the point at which the proceedings would be ready to be given a hearing date, with liberty reserved to Congredior to apply for further security in respect of any hearing if it was so advised.

That figure of $65,050 was in fact a figure propounded by Salex’s solicitor in his analysis of, and response to, the still substantial amount sought by Congredior. Mr Parish accepted my preliminary indication with the result that if the Court was otherwise persuaded to order security for costs then, for reasons it is not necessary for me to take time to set out here, he was prepared to accept that it was appropriate that the figure arrived at by Salex’s solicitor should be adopted.

Nevertheless, there remained a vigorous contest between the parties as to whether or not the Court’s discretion to order security for costs had been enlivened and, if so, whether it should be exercised.

The application for security for costs relied on both r 42.21 of the Uniform Civil Procedure Rules 2005 (NSW) and s 1335 of the Corporations Act 2001 (Cth). These include:

The first contest between the parties was as to the threshold question whether, on the evidence presented by Congredior, the Court could make the finding that there was reason to believe that Salex will be unable to pay the costs of Congredior if Congredior successfully defends the proceedings.

I accept Mr Ogborne’s submission that that is the finding which the statutory language of either relevant legislation requires the Court to make so as to enliven the discretion to order security for costs. It is not sufficient for the Court to find that there is a risk of non-satisfaction of costs.

Mr Parish submitted that the Court should make the requisite threshold finding by reference to the following five matters, only the fifth of which was disputed by Salex:

I will deal with this last point first. Salex’s amended statement of claim alleges that Salex, in the course of performing the Agreement, met costs of approximately $1,000,000 as it was required to do under the Agreement. Contrary to Mr Ogborne’s submission that the paucity of evidence meant the Court could not draw any inference on this question, the Court infers from the available material that Salex does have debts of at least that amount and no corresponding assets of capital or real estate. That inference is made on the basis that Salex was a special purpose vehicle and to have met the costs it was required to pay under the Agreement (which was in evidence) it could only do so by equity or debt. If its equity was only $1, then the Court infers that the payment of approximately $1,000,000 was met in the form of debt of some kind. The evidence was that Salex owned no real estate. As for any other assets, Salex had not gone into evidence on its financial position.

In reference to Mr Parish’s fourth point, I would add to the failure to respond to the January Letter, as a related or additional factor, the fact that Salex has sought to meet Congredior’s application in part by asserting that Congredior should, for the purposes of prosecuting the present application, have issued a notice to produce to elicit the material sought in the January Letter. For reasons I will explain in [22] to [28] below, its failure to respond to the January Letter, when taken together with its present assertion that a notice to produce should have been issued, are highly relevant matters both as to whether or not the threshold question has been satisfied and as to the exercise of the Court’s discretion.

The five matters relied upon by Mr Parish, supplemented in the way I have just described, are the basis upon which the Court finds that there is reason to believe that Salex will be unable to pay Congredior’s costs if Congredior is successful.

In reaching that conclusion, I have given careful consideration to the strongly argued response by Mr Ogborne which drew to my attention cases such as Owners-Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820 per Bergin J at [32] to [35] (especially at [35] (emphasis added): “Where forensic steps are available to and not taken by an applicant, whose burden it is to prove its case, I am of the view that a Court should be less inclined to draw such an adverse inference”); Walton Construction Pty Ltd v Illawarra Hotel Company Pty Ltd [2008] NSWSC 1248 per McDougall J at [46]; and Shi v Benhamou Designs Pty Ltd [2017] NSWSC 735 per Ward CJ in Eq at [15] to [17]. Those decisions, while not binding on me, are decisions of experienced judges whose views are entitled to great respect, and are reminders that the applicant bears the burden of making out an affirmative answer to the threshold question. An inference in favour of the applicant is unlikely to be drawn in circumstances where only the bare matters of thin capitalisation, lack of real estate and, in particular, failure to respond to a request for information or to then issue a notice to produce are singularly or together features of any given case.

I readily accept that in and of themselves it would not be proper to draw the necessary inference from only thin capitalisation, or only the lack of real estate or other assets, or only the fact that a company is not trading, or only that it has failed to respond to a proper enquiry to explain how it might be able to meet a costs order. However, I do not read any of the dicta relied upon by Mr Ogborne as conclusively precluding the Court in all cases from drawing an inference in favour of an applicant when all of those matters are present. Each such application necessarily turns on its facts and I do not consider it either necessary or useful to engage in a detailed factual comparison between the cases cited by Mr Ogborne and the case at bar.

In any event, the present case has two additional factors which, in my respectful opinion, distinguish this case from the authorities upon which Mr Ogborne relied.

The first of those factors is the inference that Salex must have at least debt of approximately $1,000,000 with no apparent assets on the other side of the ledger (see [15] above).

However, even if I be wrong in drawing that inference, the other matter which takes this case outside the authorities upon which Mr Ogborne relied is the role of s 56 of the Civil Procedure Act 2005 (NSW) in how a party should approach interlocutory matters of this kind. That is not a consideration canvassed in any of those cases.

Mr Parish relied upon my observations in Tugrul v Tarrants Financial Consultants Pty Ltd (No 5) [2014] NSWSC 437 (Tugrul (No 5)) (emphasis added):

I adhere to the views I expressed in that case. The January Letter was a reasonable request for financial information in relation to the question of security for costs. The question of failure to respond to such a request must be viewed in the context of a party’s obligations under s 56, as I set out in Tugrul (No 5) at [73]. This includes that information which could properly be the subject of a notice to produce should, in accordance with the parties’ obligations under s 56, be produced in response to a reasonable written request without having to invoke the processes of the Court.

Whether or not the correspondence that then ensues between the parties resolves the question of, in this case, security for costs is not to the point. It may, for example, serve another desirable purpose by limiting the issues ultimately presented for determination if an application is filed. In my respectful opinion, a party has an obligation to respond to such a request and its failure to do so is a matter which can ground, together with other factors, an inference that there is reason to believe that it will not be able to meet an order for security for costs, whether or not the applicant has gone on to issue a notice to produce for the same or similar material.

The only authority which the industry of counsel was able to draw to my attention where the impact of s 56 on a security for costs application was considered is the decision of P Taylor SC DCJ in Araz Investments Pty Ltd v Mitry Lawyers Pty Ltd [2019] NSWDC 823. That case bears some factual similarity to this case insofar as there were issues of thin capitalisation and a lack of real estate on the part of the plaintiff, neither of which matters his Honour at [6] concluded was “especially informative of the corporation’s financial affairs”. As far as that goes, I respectfully agree. In that case, there also appears to have been at least a reply to a request for information, which his Honour said (at [11]) “did provide some evidence of capacity, though it gave no detail and was perhaps less than convincing.”

On the question of s 56, the learned judge said this at [17]:

I have the misfortune to disagree with Taylor DCJ as to his Honour’s view of the impact of failure to provide information in the context of s 56 for the reasons set out in Tugrul (No 5) as set out in [23] above.

Having been satisfied that the Court’s discretion to order security for costs has been enlivened, it is then necessary to turn to the discretionary considerations advanced by Mr Ogborne as to why such an order should not be made.

The first of these was the well-known discretionary consideration that the impecuniosity of the respondent has been caused by the conduct of the applicant for security. I accept Mr Parish’s submission based on the decision in CBX2 Pty Ltd v National Australia Bank (No 2) [2015] NSWSC 1969 per McDougall J at [6] that in order to make good a submission of that kind a respondent must go into evidence as to its financial position before and after the applicant’s conduct to explain why that conclusion is open to the Court. It is not a matter where the fact of the litigation and the nature of the claims made will be sufficient for the Court to infer the conclusion for which the respondent contends. I do not accept Mr Ogborne’s reliance on this factor because Salex has not gone into evidence as to its financial circumstances.

The second discretionary matter upon which Mr Ogborne relied was that it would be unfair to order security for costs where “it may be said that a defendant voluntarily assumed the risk of a corporate plaintiff’s financial position”, citing the decision of Murphy J in the Federal Court in Mecrus Pty Ltd v Industrial Energy Pty Ltd (2015) 327 ALR 523; [2015] FCA 103 (Mecrus) at [68].

The principle had been considered in the case of ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd) as trustee for Harrop Family Trust v Beauville Pty Ltd [2014] VSC 298 (Harrop Engingeering) per Derham AsJ. This was cited by Murphy J in Mecrus at [69] to [70]:

There are three reasons why I do not accept this factor applies to the present application.

First, as appears from the passages quoted Mecrus, in Harrop Engineering the defendant was aware of the plaintiff’s financial difficulties prior to entering into the relevant contract. There is no suggestion that is the case here.

Second, while it may be said that there was a risk attached to doing business with a special purpose vehicle, more evidence than was before me would be required to make good that this factor would be applicable in any given case. Putting it simply, not all special purpose vehicles will bring with them the same level of commercial risk as contracting parties. It will very much depend upon surrounding commercial circumstances as to whether it could be said that someone has undertaken a particular financial risk in dealing with a particular company, even if the company is strictly a special purpose vehicle.

For example, it may depend upon who stands behind it. A transaction that is given legal effect through a special purpose vehicle incorporated by a large public company will have a very different commercial dynamic to a transaction undertaken through a special purpose vehicle whose shareholders may be individuals embarking upon their first foray into real estate development. Among other things, the former may have considerable reputational reasons to support its special purpose subsidiary, whereas the latter may have no hesitation in relying on the separate corporate personality of their chosen vehicle.

The evidence in this case is insufficient for the Court to conclude whether one could properly say that Congredior simply assumed the risk of Salex’s financial position, whatever it might be.

The third reason is, as Murphy J acknowledged in Mercus at [74], the assumption of risk is not necessarily a strong factor, while it does point away from an order for security for costs. In other words, even if it did apply to this case, I would not consider it as outweighing, as a matter of discretion, the Court’s view that it is appropriate to order security for costs.

The final discretionary matter to which Mr Ogborne drew attention was what he said was the strength of Salex’s case against Congredior. He put for Salex that an examination of the amended statement of claim demonstrated that the contract case was a straightforward one and that, no defence having been filed, Congredior had not attempted, through the submissions made today, to indicate in any detail what its defences would be. While there were some references in Congredior’s evidence on information and belief through its solicitor as to certain matters which it said would be disputed, this did not — so it was argued — diminish the strength of the case in contract.

Mr Parish submitted that I should take the view frequently adopted in applications of this kind: where it was accepted, as Congredior did, that the case was brought bona fide and had a reasonable basis, the Court should not enquire further into the plaintiff’s prospects of success. They were a neutral factor.

I accept that there may be cases where, on an application of this kind, the Court will be in a position to form a view as to the strength of the plaintiff’s case. However, even if I assume in Salex’s favour (without deciding) that its contract case is a relatively strong one, I do not regard that as being a sufficient contraindication to the making of an order for security for costs for three reasons.

First, Salex’s claim appears to be for at least the approximately $1,000,000 that it expended. Considering the size of its claim, the amount of security which the Court proposes to order at this stage is quite small. The strength of the case may weigh more heavily against an order for security if the amount of security being sought is large. It must also be remembered that a view about the strength of the plaintiff’s case formed at an early interlocutory stage does not mean the Court should completely exclude the possibility that the defendant may succeed. The application before the Court is for security by the defendant and not summary judgment by the plaintiff.

Second, Salex has not suggested that the making of an order for security would stultify the litigation. That is a very important consideration when giving weight to what I have been prepared to assume is a strong case in contract on the part of Salex.

Third, as a point of discretion I take into account Salex’s refusal to respond to the January Letter, the matters I have set out in [22] to [28] above, and what I can only assume is Salex’s forensic decision not to adduce any evidence about its financial position in response to the present application.

For these reasons, the Court will order Salex to provide security in the sum of $65,050, with liberty to Congredior to apply for further security, if so advised, at the point when the matter is otherwise ready to be set down for final hearing.

I will hear the parties as to the appropriate form of orders to give effect to these reasons.