Westpac Banking Corporation v Southern Environmental Services Pty Ltd

By notice of motion filed on 13 April 2017 Gloucester 103 Holdings Pty Ltd (Gloucester) and Klondu Group Pty Ltd (Klondu), the cross defendants, seek security for costs against Southern Environmental Services Pty Ltd (Environmental), the cross claimant. The application is made pursuant to Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 42.21(1)(d) and/or (e); and s 1335(1) of the Corporations Act 2001 (Cth). Environmental resists the application. However, Paul Wenham, one of its directors, who is also the third defendant, has undertaken to the Court to accept liability to pay the cross defendants’ future costs of the proceedings if I were otherwise persuaded to order security for costs.

Mr Robertson, who appeared on behalf of Environmental, accepted that Environmental would be unable to meet an adverse order for the costs of the cross claim. He confirmed that Environmental did not submit that its impecuniosity was caused by the cross defendants. He also accepted that Environmental’s only asset was its cause of action on the cross claim and that it had a substantial liability to Westpac Banking Corporation (Westpac).

The background to the proceedings is relevant to Environmental’s submissions that it has a strong claim and that the cross defendants have delayed the application; and to the cross defendants’ submission that they were not responsible for Environmental’s impecuniosity. I note that the last matter is not in dispute as it has been conceded by Environmental.

I note at the outset that Environmental has served its evidence in support of the cross claim but the cross defendants have not been directed to serve theirs. Accordingly, the background facts set out below are based on the evidence adduced and submissions made on the motion and ought not be taken as ultimate findings of fact. Moreover, although several affidavits were read on the motion, both parties confirmed that, in respect of the exhibits to Environmental’s affidavits (which constituted its evidence in the proceedings), I was only to have regard to the material to which I was specifically taken. Accordingly, I have not had regard to any other material in those affidavits.

In August 2011 Southern Engineering Services Pty Ltd (Engineering) ordered three drum manipulators at a cost of $1.1 million. The drum manipulators were manufactured by C & M Leussink Engineering Pty Ltd. Their acquisition was financed by ANZ Bank. Drum manipulators are used to handle drums which are principally used in the mining industry, including for longwall mining. As the drums are very large and heavy, the manipulators are used to permit them to be serviced by facilitating access to their various parts.

In January 2012 the drums were delivered to premises (the Premises) which Engineering occupied pursuant to a lease from Gloucester (the Lease). It was a term of the Lease that equipment remaining on the premises after termination of the Lease would be taken to have been abandoned. In late 2012 the ANZ Bank asked for the financing of the drums to be taken off the books of Engineering. As a result of this request, Environmental, a company related to Engineering, entered into a hire purchase agreement with Westpac which was guaranteed by Gyressa Pty Ltd (Gyressa), the second defendant, and Mr Wenham, the third defendant. In turn, Environmental leased the drums to Engineering for, in effect, the cost of finance of $34,000 (being the amount payable to Westpac pursuant to the hire purchase agreement) and management fees of $10,000 per month. Notwithstanding this change, the drums remained on the Premises. According to Mr Leussink (the principal of the company which manufactured the drums):

I infer from Mr Leussink’s evidence that the leasing arrangement between Environmental and Engineering was group-specific and was the result of accounting exigencies.

The demand for the drum manipulators was affected by the state of the mining industry as is reflected in the following statement by Ken McCallum, who was employed by Engineering between 28 February 2011 and April 2013:

By 18 August 2014 Engineering had been placed in liquidation. On 2 September 2014 its administrator disclaimed the inter-company lease with Environmental of the drum manipulators. Accordingly, no further lease payments were made by Engineering to Environmental. On 22 September 2014 an order was made for Engineering to be liquidated. Its liquidator tried, unsuccessfully, to sell the drum manipulators. In October 2014 Environmental ceased making payments to Westpac under the hire purchase agreement. On 27 November 2014 Westpac purported to terminate the hire purchase agreement and notified Environmental that it remained liable for $1,854,207.33. On 5 December 2014 Westpac demanded payment of the balance of the account from Environmental and Gyressa and Mr Wenham as guarantors.

By letter dated 15 December 2014 Mr Wenham, on behalf of Environmental, wrote to Westpac and requested that the notice of termination be withdrawn. He wrote, in part:

The liquidator of Engineering terminated the Lease on 19 December 2014. By email sent on 18 December 2014 the liquidator of Engineering wrote to the directors of Environmental, Mr Wenham and his son Andrew, to inform them that Engineering would be vacating the Premises on 19 December 2014. The liquidator continued:

There is no evidence of any further communication between Environmental and Westpac until 26 May 2015 (see below).

In the meantime, Gloucester was trying to re-let the Premises. In December 2014 it engaged Klondu to move the drum manipulators to its premises at Steelhaven, via Gate 9, Five Islands Road, Port Kembla. It is common ground that Klondu has used the drum manipulators in some aspects of its business.

On 25 May 2015 Mr Wenham was contacted by a private investigator appointed by Westpac who was trying to find the drum manipulators. Mr Wenham told him that the last he knew was that they were at the Premises and asked whether he had checked with whoever was leasing the Premises. The investigator told him that he had checked and the drum manipulators were not there, to which Mr Wenham responded:

There was correspondence between Westpac and Environmental about Westpac’s claim under the hire purchase agreement. On 26 October 2015 Westpac commenced these proceedings by filing a statement of claim against Environmental, Gyressa and Mr Wenham. The defendants filed a defence on 4 December 2015 in which they denied that they were liable to Westpac.

On 1 June 2016 Environmental’s solicitors, Cordato Partners, wrote to Gloucester as follows:

On 14 June 2016 Environmental filed the cross claim, which was served on 27 June 2016. In paragraph [10] of the cross claim Environmental alleged:

I understand that the demand alleged in [10] is the passage emphasised in the extract from the letter of 1 June 2016 set out above.

On 13 July 2016 the solicitors for the cross defendants wrote to Gadens, the solicitors for Westpac, and confirmed that Klondu was in possession of the three drum manipulators. They said that, until they were served on 27 June 2016 with the statement of claim, defence, cross claim and evidence, the cross defendants had been operating on the basis that the drums had been abandoned in the Premises. The letter said in part:

By 6 September 2016 the cross defendants had not received a response to their letter of 13 July 2016. On that date they wrote again to Westpac and confirmed that their offer to give Westpac possession of the drum manipulators was not conditional on payment of reimbursement of their costs of removal (from the Premises to Klondu’s premises at Port Kembla). On 14 September 2016 Westpac rejected Klondu’s offer to purchase the drum manipulators but notified the cross defendants that they would be contacted by Westpac’s agent concerning collection. On 21 September 2016 Klondu confirmed that it would not assist in the dismantling of the drum manipulators.

On 5 October 2016 Paddy Slattery, of Slattery Auctions, which had been engaged by Westpac to sell the drum manipulators, reported to Westpac that it was difficult to identify the particular drum manipulators at the site at Port Kembla. On 20 October 2016 representatives from Slattery Auctions attended Klondu’s premises at Port Kembla to inspect them.

Mr Slattery reported again on 9 November 2016 in part as follows:

On 2 December 2016 the cross defendants served a notice to produce on Westpac requiring production of any valuation of the three drum manipulators and any quotations or estimates received by Westpac or its agents, Slattery Auctions, as to the cost of removal. The communications referred to above were produced at the directions hearing on 9 December 2016 in answer to that notice. Following production, the cross defendants’ solicitors wrote to Gadens confirming Klondu’s willingness to facilitate the sale of the drums from its site at Port Kembla. They also attached a draft motion for disposal of the drums under the Uncollected Goods Act 1995 (NSW).

On 7 December 2016, no satisfactory arrangement having been reached between Westpac and Klondu, the cross defendants filed a notice of motion for orders under the Uncollected Goods Act. The notice of motion was amended on 19 December 2016. On 7 March 2017 this motion was resolved on terms that the cross defendants would arrange for the sale of the drum manipulators and that they would be entitled to deduct their reasonable costs of sale from the sale proceeds and that the balance be remitted to Westpac. The Agreement to Sell was formalised in a document dated 27 April 2017. On 4 May 2017 Klondu appointed Slattery Auctions to sell the drum manipulators. The drum manipulators have yet to be sold.

At a directions hearing before Registrar Bradford on 18 November 2016, Westpac foreshadowed a motion for summary judgment and directions were made for its filing and for evidence on the motion. By letter dated 24 November 2016 Environmental’s solicitors wrote to Westpac’s solicitors endeavouring to persuade them not to move for summary judgment. They said, in part:

On 2 December 2016 Westpac filed a notice of motion for summary judgment, which was to be heard on 15 March 2017. On 15 March 2017, while another motion was being heard by Button J, the motion for summary judgment was resolved, which led to the principal proceedings being resolved: Westpac Banking Corporation v Southern Environmental Services [2017] NSWSC 330 at [11]. Judgment was entered in favour of Westpac by consent for an amount in the order of $1.26 million, to be enforceable after 26 April 2017. The consequence of the settlement was that the drum manipulators were to be sold by Westpac, which would be entitled to the proceeds of sale.

On the following Monday, 20 March 2017, the cross defendants’ solicitors wrote to Environmental’s solicitors and sought documents with a view to ascertaining whether Environmental would be able to satisfy any adverse costs order if the cross defendants successfully defended the cross claim. Environmental’s solicitors purported to respond on 31 March 2017. However, I find their response to be argumentative and non-responsive since it did not provide the information and material sought. The cross defendants’ solicitors reiterated their request on that same day but received no response.

When the matter came before Registrar Bradford on 5 April 2017, directions were made for the filing of the motion for security for costs and evidence in support of and in opposition to the motion. On 13 April 2017 the cross defendants filed their notice of motion for security for costs. On 3 May 2017 the motion was listed for hearing on 17 May 2017 and the parties were directed to file outlines of submissions by 12 May 2017. Shortly before 5pm on 12 May 2017, Environmental served its submissions, paragraph [18] of which said:

In the course of the hearing of the motion, Mr Robertson converted the offer into an undertaking to the Court, given on behalf of Mr Wenham, that he would accept liability to pay any adverse costs order against Environmental referable to costs incurred after the hearing of the motion for security for costs, if security is otherwise thought appropriate.

The company search of Environmental shows that its present director is Paul Wenham and its sole shareholder is Cambage Corporation Pty Ltd. The shareholders of Cambage Corporation Pty Ltd are Paul and Andrew Wenham. According to the search extracted from the ASIC database, each holds a single share, which is held beneficially. However, in his affidavit sworn 1 June 2016 Mr Wenham said:

The trust deed of the Cambage Trust is not in evidence. Nor is there any evidence of the identity of the beneficiaries of the trust, beyond the description set out above.

Mr Robertson accepted that Environmental had no assets except its cause of action against the cross defendants. The draft balance sheet as at 31 March 2017, which is annexed to the affidavit of Environmental’s solicitor, shows that Environmental’s current liabilities are $1,601,197 which comprise: $1,356,555, presumably relating to the judgment debt and interest; tax payable of $231,442; and “other accruals” of $13,200. Its non-current liabilities are said to be $78,663, being the “Wenham Loan Account”.

All that is known about the financial position of Paul Wenham is that there is a judgment against him for $1.26 million, as guarantor of the debt owed to Westpac. Mr Robertson did not submit that he would be able to meet an order for the costs of the cross claim, although he gave an undertaking on Mr Wenham’s behalf to accept liability for such costs.

Gyressa can also be said to stand to benefit from the proceedings since it guaranteed the liability of Environmental to Westpac. Its director is Paul Wenham and its shareholders are Paul Wenham and Starshell Pty Ltd. According to the ASIC search, the share held by Mr Wenham is not held beneficially. There is no evidence about the beneficial owner of that share, or the identity or means of those standing behind Starshell Pty Ltd.

Environmental did not dispute that it would be unable to meet an adverse costs order against it on the cross claim. It accepted that the jurisdictional basis for ordering security for costs under UCPR, r 42.21(1)(d) and s 1335(1) of the Corporations Act had been established. Accordingly, the application is to be determined as a matter of discretion.

Ms Roughley submitted that there has been no relevant delay in the making of the application for security. She contended that, on 15 March 2017, there was a fundamental change in the nature of the proceedings and the issues in dispute. Up until that date Environmental had disputed Westpac’s claim and filed evidence in its defence. On that day, it had consented to a judgment in favour of Westpac in the sum of $1.26 million which was to be enforceable after 26 April 2017. She submitted that shortly after the entry of judgment, her solicitors had raised the issue of security and when no sufficient answer had been made, the motion had been filed. Accordingly, Ms Roughley submitted that as soon as Environmental’s financial position was altered by the judgment, the cross defendants acted swiftly to protect their position by applying for security for costs.

Ms Roughley submitted that the difference that the entry of judgment would make to the proceedings was anticipated by Environmental’s solicitors in their letter to Gadens dated 24 November 2016 referred to above. In these circumstances, it could hardly be said that the timing of the application could preclude relief. She submitted further that there was no evidence that Environmental had suffered prejudice as a result of the timing. The evidence Environmental has filed in the proceedings was relied on by Environmental in its defence to Westpac’s claim, which was only resolved on 15 March 2017. The cross defendants’ foreshadowed their application for security for costs shortly thereafter.

Ms Roughley made detailed submissions about the draft balance sheet provided by Environmental. I would be disposed to accept these submissions. However, it is unnecessary to consider them further in light of Mr Robertson’s concession that her analysis was correct and that Environmental will be unable to meet any adverse costs order, having regard to its financial position.

Ms Roughley referred to the evidence of her instructing solicitor that the cross defendants had already spent $45,000 defending the cross claim. No application is made for security with respect to past costs. The cross defendants’ evidence was that their likely future costs would be in the order of $142,000, which comprised $42,000 for the preparation of evidence and $100,000 for the costs of preparing for the trial and the trial itself. The cross defendants’ evidence was that these figures would be likely to give rise to amounts for party/party costs of $94,000, comprising $21,000 for the preparation of evidence and at least $73,000 for the costs of preparing for the trial and the trial itself. The estimate for the length of the hearing was five days. There will be five witnesses for Environmental and five for the cross defendants.

Ms Roughley described the amounts sought as “both appropriate and modest” and referred to the evidence of Environmental’s solicitor that Environmental had spent $70,000 in prosecuting the cross claim.

The cross defendants seek security in two tranches: $21,000 payable 28 days before their evidence is due to be served; and $50,000 payable 28 days before the date on which the proceedings are listed for final hearing.

Ms Roughley submitted that there was a genuine dispute about the cross claim and that, accordingly, the factors identified in UCPR r 42.21(1A)(a) and (b) ought be regarded as neutral. She relied on the concession made by Mr Robertson that Environmental’s impecuniosity is not attributable to the cross defendants’ conduct (UCPR r 42.21 (1A)(c) and (d)). Ms Roughley contended that Environmental was not effectively a defendant (UCPR, r 42.21(1A)(e)) since the cross claim was being pursued after the entry of judgment on the principal claim.

Ms Roughley accepted that the consequences for Environmental of ordering security for costs were that it would be unable to provide security from its own resources. However, she submitted that there was no evidence about the means of Cambage Corporation Pty Ltd or Mr Wenham’s financial circumstances or that of its other shareholder, Andrew Wenham. She also pointed to the lack of evidence of the details of the trust and the identity of the beneficiaries.

Ms Roughley noted the dicta of Basten JA in Jazabas Pty Ltd v Haddad (2007) 65 ACSR 276; [2007] NSWCA 291 and contended that even if it represented the law, it would not avail Environmental. She submitted that Environmental has not discharged the onus it bears to establish that the resources that might be available to it from those who stand to benefit from the litigation would not be sufficient to provide security: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 and Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4 (Sheppard, Morling and Neaves JJ).

Ms Roughley submitted that there was no matter of public importance raised (UCPR r 42.21(1A)(g)).

The cross defendants also submitted that Environmental delayed the commencement of the cross claim since it did not file the cross claim until almost a year after Westpac had filed its statement of claim. The cross defendants submitted that, had Environmental brought its cross claim promptly, the cross defendants would have become aware of Environmental’s claim and the quantum of the cross claim would have been significantly less since the drum manipulators would have been made available at an earlier time.

Ms Roughley submitted that the offer made by Mr Wenham was first made on in Mr Robertson’s written submissions which were filed shortly before 5pm on 12 May 2017. She contended that its form was vague and it was not apparent that it would even be enforceable. She noted that it was not made in the form of an undertaking to the court (although Mr Robertson subsequently reworded it, as referred to above, so as to make it an undertaking of sorts). She submitted that there was no evidence of the value of Mr Wenham’s offer and no evidence of the means of any of the other people who stood behind Environmental. Accordingly, she submitted that Environmental had failed to show that the proceedings would be stymied if security for costs was ordered.

Mr Robertson submitted that the cross defendants’ application ought be refused on the grounds of delay. He contended that the cross defendants’ had not explained why the application was brought so long after the filing of the cross claim. He submitted that if an order for security were made the costs expended by Environmental on the cross claim would be wasted, which constituted substantial prejudice. He also contended that the very nature of Westpac’s claim was such that it ought to have been apparent to the cross defendants from the outset that Environmental might have difficulty in meeting a costs order.

Mr Robertson submitted that the evidence filed by Environmental showed that it had a strong case. He submitted that Environmental was not a party to the Lease and that therefore it could not be taken to have abandoned the drum manipulators. Moreover it was not for Engineering to abandon the drum manipulators since Engineering did not have an interest in the drum manipulators except pursuant to the lease from Environmental.

Environmental submitted that, in circumstances where Environmental has a debt to Westpac in excess of $1.2 million, for which Mr Wenham is jointly liable (as guarantor), he is the only person who stands to benefit from the cross claim. Mr Robertson argued that the offer made by Mr Wenham to be liable for any adverse costs order against Environmental removed the justification for an order for security for costs, which is to prevent those who stand to benefit from litigation taking advantage of the limited liability of the corporate plaintiff (in this case, cross claimant) to avoid exposure to the other party’s costs: Jazabas v Haddad at [12] per Basten JA. He submitted that Mr Wenham’s offer ought weigh heavily against the making of an order for security for costs: Prynew Pty Ltd v Nemeth [2010] NSWCA 94 at [38]-[39].

When it was put to Mr Robertson that there were others who stood behind Environmental, he submitted that the cross claim, even if wholly successful, would not generate a return to shareholders since it would be entirely consumed by Westpac in satisfaction of the judgment debt. He contended that, while for every dollar that reduced the judgment in favour of Westpac, Mr Wenham would be better off, the same could not be said for the shareholders of Environmental since they would not receive anything anyway since the liabilities of Environmental substantially exceeded its assets.

Mr Robertson argued that the amount of security sought was excessive and noted that his solicitor’s estimate of the hearing time was two to three days.

I accept the cross defendants’ submission that the application for security was made in a timely way. Environmental’s consent to judgment in favour of Westpac had an immediate and deleterious effect on its capacity to pay the costs of the cross defendants if they were successful in defeating the cross claim. It also made plain Environmental’s standing as an effective plaintiff.

There is no explanation for the delay in filing the cross claim. If Environmental had wished to regain the drum manipulators it could have commenced proceedings in late 2014. That it did not make any demand of the cross defendants until 1 June 2016 is some indication that it did not regard the matter as pressing and did not have any use for the drum manipulators. That Klondu was able, in the interim period, to use them for its commercial purposes does not establish that Environmental would have been able to earn money from their use, or has suffered damage from their absence. Nor does it mean that the cross defendants have not suffered prejudice as a result of the delay in filing the cross claim. Had Environmental written to Gloucester in late 2014 rather than 1 June 2016 there is nothing to suppose, on the basis of the evidence on the motion, that the cross defendants would not, at that time, have corresponded with Westpac concerning the removal and sale of the drum manipulators.

I am not satisfied that Environmental’s case is particularly strong. All that can be said is that the cross defendants have accepted, for the purposes of the notice of motion, that the cross claim has reasonably arguable prospects of success.

Having regard to the issues in dispute and the number of witnesses, 10 in all, I consider the estimate for the length of the hearing to be reasonable. I accept the evidence adduced by the cross defendants as to the costs likely to be incurred and note the charge-out rates of those involved. I am satisfied that they are reasonable and are likely to be incurred. The extent to which the party/party costs have been estimated appears to be appropriate. I note that Mr Pike, the cross defendants’ solicitor, was not cross-examined on his estimates of costs or of the length of the hearing.

Before turning to the factual relevance and value of the offer made by Mr Wenham I propose to address briefly the distinction drawn between the articulation of principle by the majority (Mason P and McClellan CJ at CL) and the minority (Basten JA) in Jazabas v Haddad.

The majority view (so-called because it was favoured by the majority in Jazabas v Haddad) is that an undertaking by those standing behind a corporate plaintiff is merely a relevant consideration. It may be relevant to the question whether an order for security for costs will stultify the litigation because those standing behind the company are unable to provide security for an eventual costs order. Undertakings by shareholders can be taken into account in favour of the effective plaintiff. In some cases, the undertaking or undertakings, are accepted by the Court as being sufficient and the order for additional security is refused. However, in such cases, the value of the undertaking itself is also relevant: Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191; [1999] VSCA 43 at [23]-[24] per Winnecke P and Phillips JA. An undertaking given by an impecunious person standing behind an impecunious plaintiff can only be enforced, as a practical matter, by contempt proceedings and provides cold comfort to the effective defendant.

The minority view (favoured by Basten JA in Jazabas v Haddad) is that the purpose of requiring a company to provide security for costs is to ensure that those standing behind the company are neither in a better, nor worse, position through having adopted the corporate structure than they would be had they not. On this view, if those standing behind a corporate plaintiff give an undertaking to pay a costs order made against the corporate plaintiff, there is no justification for ordering security for costs. Moreover, the value of the undertaking is not important since an impecunious natural plaintiff would not have to provide security as poverty is no bar to a litigant. I note that the difference was not determinative in Jazabas v Haddad since, in that application, some of the persons standing behind the plaintiff failed to come forward to offer undertakings to be liable for any adverse costs orders made against the plaintiff.

I am bound by the majority view in Jazabas v Haddad.

The value of Mr Wenham’s offer has not been established since his financial position has not been the subject of evidence. Mr Robertson was careful to limit the undertaking given on Mr Wenham’s behalf to an undertaking to accept liability to pay any costs order in favour of the cross defendants made against Environmental rather than to pay such costs.

I do not accept Mr Robertson’s submission that Mr Wenham is the only person who will benefit from the litigation. Those who also stand behind Environmental, and stand to benefit from the cross claim, include Cambage Corporation Pty Ltd, Andrew Wenham and the beneficiaries of the trust referred to in Mr Wenham’s affidavit referred to above. While a company is not in liquidation, a “benefit” is to be measured by an improvement in its net position, even if it is still not breaking even.

However, in any event, there does not seem to be any reason why Gyressa ought be excluded from consideration, even on Mr Robertson’s argument, since it too stands to benefit from the litigation in the same way as Mr Wenham will as they are both jointly liable for the judgment debt which Environmental owes to Westpac. There is no evidence as to who is beneficially interested in the share held by Mr Wenham in Gyressa or who is behind Starshell Pty Ltd. Thus it has failed to show that all of those standing behind the company are also prepared to put their assets on the line: see the (minority) analysis of Basten J in Jazabas v Haddad at [23]-[29].

Environmental has shown that it does not have the means to provide security. It has failed to establish that, if security is ordered, the litigation will be stultified since it has not proved that those who stand behind it are also without means (Bell Wholesale Co Pty Ltd v Gates Export Corporation at 4) or that those standing behind the company are “reasonably unwilling, even though possibly able, to provide the security” (Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [26] per Hodgson JA).

The dicta of Beazley JA in Prynew Pty Ltd v Nemeth is particularly apposite to the present case in light of Mr Wenham’s offer. Her Honour said:

If security is not ordered and the cross defendants successfully defend the cross claim, they will not recover their costs because of Environmental’s financial position. If security is ordered, it is by no means clear that the proceedings will be stultified, since Environmental has not discharged the relevant onus.

Having regard to the matters referred to above I am persuaded that it is appropriate to order security for costs as sought by the cross defendants.

I make the following orders: