Bright Ceiling Systems Pty Ltd v Merhis Contracting Pty Ltd (No 2)

1. [1]

   HER HONOUR: These proceedings arise out of the plaintiff’s claim against the defendant for money allegedly owing or in connection with a contract under which the plaintiff agreed to perform building work on behalf of the defendant at premises at Chapel Road, Bankstown, NSW.

2. [2]

   The plaintiff is Bright Ceiling Systems Pty Ltd. The defendant is Merhis Contracting Pty Ltd. The plaintiff relied upon the affidavit of its solicitor, Hamilton Zhao, dated 8 September 2017. The defendant relied upon the affidavit of its solicitor, Brendan Hoffman, dated 22 June 2017.

3. [3]

   There are two notices of motion before this Court, one of which was finalised by consent just prior to this hearing.

4. [4]

   The defendant has consented to the plaintiff filing a further amended statement of claim (FASC). I grant leave for the plaintiff to file the FASC within seven days. I also make orders that the plaintiff is to pay the defendant’s costs of the application to amend the statement of claim and costs thrown away by reason of the amendment. However, in relation to the plaintiff’s notice of motion filed 23 May 2017, the costs of the motion are costs in the cause.

5. [5]

   That leaves the notice of motion filed 22 June 2017, where the defendant, pursuant to 42.21(1) of the Uniform Civil Procedure Rules 2005 (NSW), s 1335 of the Corporations Act 2001 (Cth) and the inherent jurisdiction of the Court, is seeking orders firstly, that within 28 days, the plaintiff provides additional security for the defendant’s costs in these proceedings in such sum as the Court considers fit; and secondly, that such security be given by payment into Court or in such manner as the Court considers fit; and that until such additional security is provided, these proceedings be stayed.

6. [6]

   On 17 May 2016 in Bright Ceiling Systems Pty Ltd v Merhis Contracting Pty Ltd [2016] NSWSC 631 (“Bright Ceiling”), Button J made an order for the plaintiff to pay into Court the amount of $50,000 as security. This amount was paid into Court. His Honour also stated at [63] that if the litigation continued to advance and the security of $50,000 could be shown by the defendant to be insufficient to protect its interests, then the defendant may approach the court by way of a further notice of motion for an increase in the quantum of security for costs.

7. [7]

   It is appropriate that I refer to the decision of Button J in Bright Ceiling where his Honour set out the background facts and the law, which I gratefully acknowledge. While it is not necessary for me to reproduce the law as it remains the same, I will set out his Honour’s reasoning and what has occurred since his judgment was handed down.

8. [8]

   Button J’s reasoning was set out in Bright Ceiling at [48]-[64]:

9. [9]

   The defendant has now approached this Court for further security for costs as the amount of security ordered by Button J has since been expended in legal costs. ([63]).

10. [10]

    On 21 June 2017, the defendant’s solicitor conducted a company search for the plaintiff. The search disclosed that the plaintiff is a company with a paid up share capital in the amount of $10 and has been subject to three wind up applications since 2010. (Aff, Hoffman, [5] and Annexure A).

11. [11]

    The defendant’s solicitor also conducted a NSW land title owner search for the plaintiff. The land title search disclosed that the plaintiff does not own any real property in New South Wales. (Aff, Hoffman [6]). Mr Shixian Lu is the sole officer of the plaintiff. As I understand it, he owns a property with his wife as tenants in common at Wahroonga. He has one share and his wife owns nine shares. In 2010, he purchased real estate in the Sydney suburb of Wahroonga for $2,200,000 as a tenant in common with his wife, and that he owns 1/100th share of the property and his wife has a 99/100th share. No reasons are given in the affidavit for this state of affairs. It is said that a debt of $1,000,000 is secured by a mortgage over that property. (Aff, Shixian Lu 25 August 2017, [19]). The property is also subject to 6 caveats. (Aff, Shixian Lu 25 August 2017, [21] and Annexure B).

12. [12]

    Also on 21 June 2017, the defendant’s solicitor obtained a credit report for the plaintiff from “Creditor Watch”. (Aff, Hoffman, [7]). This report disclosed that:

13. [13]

    The defendant’s solicitor has been instructed by the legal manager of the defendant, Mr Ben Wilson, that four garnishee orders have been served on the defendant in respect of judgments entered against the plaintiff in separate proceedings in the Supreme Court of New South Wales, District Court and Local Court. (Aff, Hoffman [8]).

14. [14]

    Mr Wilson also informed the defendant’s solicitor that the plaintiff has paid the following amounts claimed in the garnishee orders (Aff, Hoffman, [9]):

15. [15]

    As at 30 June 2017, the plaintiff’s balance and financial statements show that the shareholders’ equity had accumulated losses in the amount of $472,988.60; had total assets of $20,566.16; and a director loan account in the amount of $394,978.29. The current liabilities were $394,978.29. The total liabilities were $493,544.76, the total assets were $20,566.16 and the net assets were -$472,978.60. (Court Book, 264-265).

16. [16]

    The plaintiff submitted its concern that a third party may be paying the defendant’s costs. If that were the case, it is not appropriate to order that the defendant provide further security on the basis that it does not, in fact, have a liability to pay legal fees. On the morning of this hearing, the defendant’s solicitor provided invoices issued by him to the defendant as evidence that the payments have been made by the defendant to the plaintiff. In these circumstances, it is my view that the plaintiff’s submission has not been made out.

17. [17]

    The remaining issue concerns the quantum of security which should be provided up to the time of trial. I agree with the approach taken by Button J in Bright Ceiling. If the litigation continues to advance to trial and the security provided is insufficient to protect the defendant’s interests, the defendant may approach the Court by way of a further notice of motion for an increase in the quantum of security for costs. The defendant’s solicitor anticipates that the defendant will incur further party costs in excess of $160,000 to defend the claim made by the plaintiff in these proceedings.

18. [18]

    The defendant’s solicitor’s schedule of legal fees up to trial is as follows (Aff, Hoffman, Annexure H):

19. [19]

    In determining the appropriate quantum, I am required to strike a balance between ensuring that the plaintiff has an adequate amount for security for the costs it expends, but not so as to stultify the plaintiff’s ability to continue with its litigation. Overall, the plaintiff’s financial position has not improved since it was outlined by Button J.

20. [20]

    The defendant submitted that the amendments in the proposed further amended statement of claim involves a number of wider claims, one being an oral variation to the contract, which requires further investigation. In preparation for trial, the defendant will have to prepare lay witness statements, discovery and interrogatories, expert evidence, attendances at directions hearings, correspondence and general attendances. There are also outstanding costs orders in favour of the defendant.

21. [21]

    The plaintiff submitted that the amounts to be deducted from the defendant’s schedule include costs of the first notice of motion for security for costs, as the order for costs made was that each party pay its own costs. Further, the allowance for experts’ reports is too generous. On this basis, I have deducted $2,087.50 in relation to items for the costs claimed for the earlier notice of motion seeking security for costs and I have deducted $5,000 from $15,000 of the experts’ reports. I note that the plaintiff has indicated that it is obtaining an expert’s report. (T15.36-38). That equates to about $87,000.

22. [22]

    Nevertheless, in striking the balance, I referred earlier in this judgment that an appropriate quantum for security for costs is $70,000. As this matter should not languish in the court list, such security in a form acceptable to the registrar should be paid within 28 days. The proceedings are stayed until such security is lodged.

Costs

1. [23]

   On the last notice of motion for security for costs, the order made was that each party was ordered to pay its own costs. Both before Button J and this Court, the plaintiff submitted that, contrary to the usual rule that costs follow the event, there is a particular rule that applies to applications of this kind. It was said that often, even if a defendant is successful (as here) in obtaining an order for security for costs against the plaintiff, the successful defendant will not have the entirety of its costs on the motion. The plaintiff referred me to Collingnon Developments Pty Ltd v Wurth (1975) 1 ACLR 314 and Mignon Cakes Pty Ltd v Hiltide Pty Ltd [2004] FCA 142, as discussed in latest edition of G E Dal Pont, Law of Costs (3rd ed 2013, Butterworths) at 965-966.

2. [24]

   The plaintiff also referred to a more recent decision of Validus Advisory Group Pty Ltd v Consolidation Tin Mines Ltd [2017] NSWSC 1352, where Lonergan J stated at [24]:

Costs generally

1. [25]

   Section 98 of the Civil Procedure Act 2005 (NSW) relevantly reads:

2. [26]

   Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”), 42.1 and 42.2 read:

3. [27]

   It is my view that the usual costs rule should apply. There is no reason why I should make an “otherwise order” as set out in UCPR 42.2. The plaintiff should pay the defendant’s costs.