FEDERAL COURT OF AUSTRALIA

Total Development Supplies Pty Ltd v GRD Building Pty Ltd [2008] FCA 844

Corporations Act 2001 (Cth)

Trade Practices Act 1974 (Cth)

Construction Contracts (Security of Payments) Act  2004 (NT)

Dalma Formwork Pty Ltd v Concrete Constructions Pty Ltd [1998] NSWSC 472

Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd [1999] NSWCA 16

Boutique Venues Pty Ltd v JACG Pty Ltd [2007] NTSC 5

Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 11 ACLR 616

TOTAL DEVELOPMENT SUPPLIES PTY LTD (ACN 108 294 051) v GRD BUILDING PTY LTD (ACN 114 871 082)

NTD 19 OF 2007

REEVES J

6 jUNE 2008

DARWIN

THE COURT ORDERS THAT:

1.                  The applicant will within 14 days of today pay into Court the sum of $20,000 by way of security for the respondent’s costs in these proceedings.

2.                  The security for costs referred to in Order 1 hereof will be the applicant’s security for the cost of this proceeding up to the conclusion of the trial at first instance in this application.

3.                  The security for costs provided under this Order will only be released to the applicant upon the happening of one or more of the following events:

(a)                an order of the Court;

(b)               the agreement of the parties;

(c)                the final determination of these proceedings.

4.                  The parties have liberty to apply generally subject to providing 24 hours notice in writing to the other party or parties.

5.                  The District Registry is to deposit the monies paid into Court into an interest-bearing deposit account entitled ‘The Minister for Finance of the Commonwealth: Official Exempt SPM Account, payable to Total Development Supplies Pty Ltd v GRD Building Pty Ltd: NTD19 of 2007’.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

INTRODUCTION

1                     This is an application for security for costs by GRD Building Pty Ltd (‘GRD’).  GRD is the respondent to the primary proceedings commenced by Total Development Supplies Pty Ltd (‘Total’).  The application is based upon s 1335 of the Corporations Act 2001 (Cth) (‘the Corporations Act’). 

2                     More specifically, GRD says that Total is a corporation, that there is credible evidence that there is reason to believe that Total will be unable to pay its costs if GRD is successful in these proceedings and that in the circumstances I should exercise my discretion to require Total to provide security for GRD’s costs of defending Total’s claim against it. 

FACTUAL BACKGROUND

3                     Before considering the submissions made on the application, I shall briefly set out some of the relevant background.  In early 2006, GRD (as the head contractor) and Total (as the subcontractor) entered into a ‘Standard Minor Works Subcontract’ for the supply and installation of various materials in connection with the construction of an eight level residential apartment building in Darwin, to be known as the ‘Cascade Apartments’. 

4                     During the term of this contract disputes arose between GRD and Total.  Among other things, Total claimed that GRD had made representations to it about the dimensions of various parts of the apartment building and the program of works for the construction of the apartment building, which were misleading or deceptive, in breach of s 52 of the Trade Practices Act 1974 (Cth).  Total also claimed that it was owed monies for works it had done under the contract. 

5                     For its part, GRD claimed that Total failed to perform its obligations under the contract within the time required and as a result GRD had to complete those obligations at its own expense.  GRD also claimed that there were many defects in the work Total undertook.  GRD therefore raised a counter-claim against Total far exceeding any claims Total had against GRD. 

6                     On 26 November 2007, Total commenced proceedings against GRD in this Court claiming approximately $124,000 plus damages.  In May 2008, the original Statement of Claim was amended to claim a further $4,000 (a total of $128,000 including damages).  In the meantime, GRD lodged its defence and the counter-claim to Total’s claim as mentioned above.  Whilst the amount of GRD’s claim is not specified in its defence and counter-claim, I have been informed by Counsel that GRD assesses its counter-claim to be in the vicinity of 1.4 million dollars. 

7                     Prior to proceedings being commenced in this Court, GRD had made an application to have a payment dispute adjudicated under the provisions of s 28 of the Construction Contracts (Security of Payments) Act 2004 (NT)(‘Construction Contracts Act’).  Initially that application was dismissed by the adjudicator because he concluded it was out of time.  However, GRD successfully appealed that decision to the Local Court at Darwin and in March 2008, the matter was remitted to the adjudicator for re-determination. 

8                     Total was ordered to pay the costs of that appeal.  In his re-determination the adjudicator made an order that Total should pay GRD approximately $105,000.  That order was registered in the Local Court at Darwin on 28 March 2008 and in early May 2008, a warrant of seizure and sale was issued against Total.  That warrant was returned wholly unsatisfied on 7 May 2008. 

9                     GRD has also made a number of demands of Total for the payment of the costs of the Local Court appeal, albeit that those costs have not yet been taxed.  None of these demands has resulted in payment. 

10                  Mr Stirrup, the sole director of Total, has now instructed his solicitors to apply to set aside the Local Court judgment or, in the alternative, to seek to stay it. 

CONTENTIONS

11                  At the hearing of this application Ms Kelly appeared for GRD and Mr Robinson SC appeared for Total.  Both parties had earlier filed a written outline of submissions.  Ms Kelly submitted that Total’s failure to pay the Local Court judgment and its failure to pay the costs of the Local Court appeal, provided in the terms of s 1335 of the Corporations Act 2001 (Cth): ‘credible testimony that there is reason to believe that (Total) will be unable to pay (GRD’s) costs’, if GRD is successful in these proceedings. 

12                  Ms Kelly submitted that the return of the warrant of execution wholly unsatisfied gave rise to a presumption that Total was insolvent under s 459C(2)(b) of the Corporations Act 2001 (Cth).  However, Ms Kelly conceded that this presumption only applied for the purposes of an application to wind up Total and stated it was not her client’s present intention to make such an application.  Ms Kelly also relied upon proceedings issued by the ‘Shanghai Metal Company’ against Total, claiming approximately 1.4 million dollars for the supply of tiles.  Once the Court accepted this credible evidence, Ms Kelly submitted that the Court had an unfettered discretion to order security; a discretion which she said must be exercised judicially. 

13                  In her written submissions, Ms Kelly set out a range of factors that other Courts had considered relevant to the exercise of this discretion including: the level of risk that a Costs Order will not be met; whether making an Order will be oppressive; whether any impecuniosity of the plaintiff arises out of the conduct of the defendant/respondent; public policy considerations; and any other factors peculiar to the particular case. 

14                  Ms Kelly submitted that the amount of the security should be determined by reference to the claim, rather than the counter-claim and be fixed at an amount that is fair and reasonable.  She accepted that her client was not entitled to any security for the costs of pursuing its counter-claim against Total, but submitted that it would be difficult to isolate those costs, because the counter-claim is, at least in part, pleaded as a defence by way of set-off. 

15                  Mr Robinson SC submitted that Total was justified in not paying the Local Court judgment because there were significant errors in the adjudicator’s decision.  Counsel took me through the adjudicator’s decision to demonstrate these errors. 

16                  I would interpolate that I agree with Mr Robinson SC’s submission that the adjudicator has drawn a number of conclusions that are plainly contrary to law.  I did not detect Ms Kelly to be quibbling with his criticisms of the adjudication. 

17                  Mr Robinson SC submitted that the cost of the Local Court appeal had not yet been ascertained because they had not been taxed and that his client claimed to have a good defence to the proceedings commenced by the Shanghai Metal Company, without identifying what that defence might be.  He submitted that Total’s balance sheet to April 2008, produced to this Court, showed that Total had net assets of approximately $415,000, which he said was more than enough to meet GRD’s costs should GRD be successful in defending Total’s claim. 

18                  He said this was so, even if the amount of its claim against GRD which had been included as an asset in the balance sheet were to be deducted.  Mr Robinson SC submitted the claim and counter-claim in this case arise out of the same factual issues and that factor is a very important consideration for the Court in deciding whether to order security.  He referred to parts of the decisions of Rolfe J, in Dalma Formwork Pty Ltd v Concrete Constructions Pty Ltd [1998] NSWSC 472, and, on appeal, in Concrete Constructions Pty Ltd v Dalma Formwork Pty Ltd, also unreported, [1999] NSWCA 16, at [24], (‘the Dalma Formwork decisions’). 

19                  In reply, Ms Kelly submitted that not only does Total’s balance sheet assume as an asset the full amount of Total’s claim against GRD, it also fails to allow any contingency for GRD’s claim against it (totalling approximately 1.4 million dollars).  Ms Kelly also pointed to the absence of any contingency in relation to other items, including the 1.4 million dollar claim by Shanghai Metal Company, GRD’s Local Court judgment for approximately $105,000 and GRD’s costs of the Local Court appeal, which she claimed were approximately $25,000.  When allowances are made for all these items, Ms Kelly submitted the net assets figure of approximately $415,000 shown in the balance sheet is illusory.  Ms Kelly submitted that the Dalma Formwork decisions dealt with a case where the plaintiff company was in administration, and the defendant was seeking a stay of the plaintiff’s claim, whereas neither of these circumstances applied in this case. 

CONSIDERATION

20                  For the reasons set out below, I consider that there is credible evidence giving reason to believe that Total will be unable to pay GRD’s costs if GRD is successful in these proceedings.  In the first place, the fact that the warrant of execution was returned unsatisfied necessarily means that when the warrant was executed, Total did not have sufficient funds available to meet the Local Court judgment.  It appears from the affidavit material before me that this was so, because all of Total’s assets were the subject of a fixed or floating charge. 

21                  Mr Stirrup, the sole director of Total, says in his affidavit sworn 22 May 2008, that he has not caused this judgment to be satisfied because he believes it is based on error.  Whilst there is considerable force in Mr Robinson SC’s criticisms of many aspects of the adjudicator’s determination upon which the Local Court judgment and the warrant of execution are both founded, I do not consider that affects Total’s obligations to pay this judgment.  The authorities are clear that a determination under the Construction Contracts (Security of Payments) Act 2004 (NT) is intended to be a summary and speedy resolution of payment disputes that arise during construction projects, on the basis that the party required to pay a sum pursuant to such a determination, will ultimately be entitled to restitution in that amount if it is successful in the final determination of all the issues in dispute: see Boutique Venues Pty Ltd v JACG Pty Ltd [2007] NTSC 5 at [16] per Southwood J.  That is where Total’s remedy lies; it does not lie in simply ignoring this judgment. 

22                  Further, despite the fact that the presumption of insolvency created by s 459C 2(b) of the Corporations Act 2001 (Cth) only arises for a particular purpose, ie an application for winding up, and is rebuttable, the fact remains that Total is currently liable to be wound up on the basis of that presumed insolvency.  When one analyses Total’s profit and loss statement and balance sheet to April 2008, this presumption would appear to have some foundation in fact. 

23                  While Mr Robinson SC pointed to the appropriate net asset figure of $415,000 shown in the balance sheet, Ms Kelly correctly pointed to the fact that this figure does not include any provision for the Local Court judgment of approximately $105,000, nor the Local Court appeal costs, estimated to be $25,000, nor does it include any contingency for the claims made by GRD and the Shanghai Metal Company of 1.4 million dollars each, totalling approximately 2.8 million dollars.  Furthermore, this figure of $415,000 is largely made up of an excess of non-current assets over non-current liabilities.  That sum is not therefore likely to be immediately available to meet Total’s debts. 

24                  This net excess of current assets of 1.764 million dollars over current liabilities of 1.681 million dollars is a much smaller figure of $83,700 (approximately).  More significantly, according to the balance sheet, the only cash immediately available to pay debts appears to be the sum of $48,996.94 held in an ANZ cheque account.  The item for ‘cash at bank’ actually shows a negative balance of $5,036.50.  Otherwise, the current assets figure shown is made up of some loans that appear to have been made to related parties, the largest being approximately $70,000 to Stirrup Nominees Pty Ltd, plus stock on hand of approximately 1.4 million dollars, and trade debtors of approximately 1.34 million dollars. 

25                  It appears from the ‘receivables’ reconciliation, that more than a quarter of this trade debtor’s figure has been outstanding for more than 90 days.  On the positive side, there is a large debt of $842,783 shown, which if paid, would resolve some of the company’s apparent cash flow problems, at least in the short term.  The ‘payables’ reconciliation shows that Total owes trade creditors approximately $134,000, of which more than a third has been outstanding for more than 90 days.  Turning to Total’s profit and loss statement to April 2008, Mr Robinson SC has pointed to the operating profit of approximately $315,000 to demonstrate that the company is trading profitably. 

26                  While that figure certainly suggests that the company has traded ahead of the projected net profit figure by about $27,000 for the year to date, there are some other aspects of the company’s trading that engender much less confidence about its trading performance.  For a start, the gross income has fallen short of the budgeted figure of approximately 5.75 million dollars by more than 2 million dollars for the year to date.  By any assessment, this represents a significant trading underperformance in its budget.  While this is partly offset by a reduction in the cost of sales against budget, the gross profit figure is more than $400,000 below budget. 

27                  Further, while there have been some significant savings against budget on items such as motor vehicle expenses and advertising and promotion, there have been some even more significant expenditures over budget on items such as legal expenses and interest payments.  While some part of the latter, shown as 161 percent over budget, could probably be explained by an increase in interest rates in recent times, the overall amount of the increase from a budget of $60,000 to an actual expenditure of $157,198, suggests that the company has considerably increased its borrowings during the year.  Perhaps more significantly, the legal expenses are shown as being 525 percent over budget.  Given that these proceedings have been set down for trial later this year, this expenditure on legal expenses is likely to continue.  The legal fees associated with this application and the steps that I have been informed the parties are currently pursuing in the Local Court must be added to that figure.  Finally, even on its reduced trading performance, the combined cost of sales and expenses items total approximately 3.36 million dollars for the 10 month period to the end of April 2008.  That means the company has had an average monthly total outgoing of approximately $336,000 during that period. 

28                  In summary, on the face of Total’s accounts to April 2008, the company does not appear to have sufficient funds readily available to meet its current debts, let alone the amount due to GRD under the Local Court judgment.  In my view, this conclusion provides an additional and more likely explanation for Total’s unwillingness to pay the Local Court judgment. 

29                  Furthermore, Total’s trading figures do not provide much confidence that its position will improve significantly in the foreseeable future.  While it has significant trade debtors, it also has trade creditors - which do not appear to include GRD’s Local Court judgment - for approximately 2.8 million dollars of claims being pursued by GRD and the Shanghai Metal Company.  Total also has to meet a significant level of monthly cash payments together with an increasing level of legal expenses as this matter proceeds to trial. 

30                  For these reasons, I have concluded that there is credible evidence giving reason to believe that Total will be unable to pay GRD’s costs if GRD is ultimately successful in these proceedings.  This brings me to what I detected to be Mr Robinson SC’s primary argument as mentioned above: in a set of proceedings where the claim and counter-claim arise out of the same factual issues, that is a very important consideration for a court in deciding whether to exercise its discretion to order security for costs.  As noted I was referred to the Dalma Formwork decisions.  Sheppard J, who delivered the reasons in the New South Wales Court of Appeal decision, summarised the position in that case at [23] as follows:

‘Dalma has a claim against Concrete for over $1,000,000 and Concrete has a claim against Dalma for at least as much, if not more.’

31                  His Honour went on to say at [24]:

‘Neither counsel seemed anxious to come to grips with the reality of the true nature of the case.  They appeared to be concentrating on what I would regard as a comparatively minor question concerning the meaning and effect of the indemnity.  But as Rolfe J said in the paragraphs from his judgment which I have quoted, ‘the fact that a claim and a cross-claim arise out of the same or essentially the same factual matrix is a very important consideration’.  He added that it would be quite wrong to preclude a party from litigating matters by way of defence to a cross-claim merely because that party was the initial institutor of the proceedings.  I entirely agree with what Rolfe J has said.  He concluded this part of his judgment by saying that it was ‘a somewhat arid exercise to be considering an application for security for costs if 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’.’

32                  Earlier (at [13]) his Honour referred to Rolfe J’s decision and to a decision of Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 11 ACLR 616 (‘Sydmar’).  In Sydmar, Smart J was dealing with a case where the plaintiff had claimed damages for the breach of a consultancy agreement.  The plaintiff’s damages were estimated to be unlikely to exceed $250,000.  The defendant filed a defence and cross-claim alleging that the plaintiff’s employees had been negligent in carrying out the consultancy agreement which related to three mining operations in New South Wales.  The defendant’s cross-claim was for approximately 4.5 million dollars.  Smart J identified a number of factors affecting the exercise of his discretion including the following at 627:

‘Whether substantially the same facts are likely to be canvassed in determining the action and the cross-action.  The court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-action covering substantially the same factual areas proceeds.’

33                  His Honour ultimately relied upon this consideration to refuse to order security for costs against the plaintiff.  Ms Kelly has submitted that this consideration does not arise here because, unlike in the Dalma Formwork decisions, Total is not under administration and GRD is not seeking a stay.  I do not accept either of these bases for distinguishing the Dalma Formwork decision, or the Sydmar decision for that matter.  In my view, the finding that there is credible evidence giving rise to a belief that Total will be unable to pay GRD’s costs if GRD is successful in these proceedings, has the same practical effect as Total being in administration.  It provides the requisite credible evidence to found the exercise of a discretion to order security for costs. 

34                  Furthermore, while GRD may not be applying for a stay of Total’s proceedings, if an order is made for Total to provide security for costs and Total fails to do so, a stay order is the inevitable consequence.  Otherwise the Order for security could be ignored with impunity.  Indeed, by its terms, s 1335 of the Corporations Act 2001 (Cth) anticipates this sanction.  Therefore if security were to be ordered in this case and if that order could not be met, the inevitable consequence would be that Total’s proceedings would be stayed. 

35                  In that event, the same sort of considerations would arise here as identified in the Dalma Formwork decisions.  Total would be prevented from pursuing its claims against GRD but GRD would not be prevented from pursuing its claims against Total.  However, Total could presumably raise its claims by way of defence as a set-off to GRD’s claim and this would give rise to the ‘arid exercise’ mentioned by Rolfe J in the Dalma Formwork decision. 

36                  However, to a large extent, this outcome depends upon whether Total will be unable to meet any security order that is made.  While I have concluded that Total will be unable to pay GRD’s costs if GRD is ultimately successful in these proceedings, I do not believe it necessarily follows that Total is completely incapable of meeting any order for security for costs at the present time. 

37                  While this may sound contradictory, Total’s accounts do reveal that it has assets in the form of loans made to what appear to be related parties.  I have already mentioned that one of those loans is in the sum of approximately $70,000 to Stirrup Nominees Pty Ltd.  There is also the large debt shown in the ‘receivables’ reconciliation that I have already mentioned.  I do not of course know when, or if, that debt may be collected, but in my view, Total has at its disposal at least some avenues that would likely allow it to meet a modest order for security for costs. 

38                  The amount sought by way of security is approximately $116,000.  This figure has been calculated at 60 percent of the total estimated costs figure of approximately $193,000, on the basis that at taxation Total would be ordered to pay that amount as a minimum amount. 

39                  However, in my view, this percentage reduction still significantly overstates the legal costs that are conceivably related to GRD’s defence of Total’s claim.  The estimate assumes that Total will be responsible for all the costs of a five day hearing, yet five days is the total period currently set aside for the hearing of both Total’s claim and GRD’s counter-claims.  Another measure of the reasonableness of the amount sought for security is a comparison between the amount of Total’s claim of approximately $128,000 and the amount sought by way of security for costs of defending that claim of approximately $116,000.  In my view, the two sums are significantly out of proportion. 

40                  While it is difficult to be precise, based upon the following factors, I would estimate that one day of the five days set aside for the complete hearing in this matter could reasonably be allocated to Total’s claim.  The factors are:

a.       The comparative amounts of the claims: Total’s claim is for $128,000 while GRD’s counter-claim is estimated to be for 1.4 million dollars. 

b.      The comparative detail involved in the claims: Total’s amended statement of claim exceeds seven pages while GRD’s defence and counter-claim, including the schedules attached, extends to more than 60 pages.  Recognising that the defence pleads a set-off, 55 pages are still exclusively devoted to the counter-claim and the comparative complexity of the claims – Total’s claims are for two sums, $26,628.40 and $51,600, it says were agreed to be paid in an exchange of emails in late 2006, together with a claim for damages of $50,226 for what it refers to as dimension breaches.  GRD’s claims are for unspecified damages and are far more extensive, involving numerous aspects of the work done under the contract, including tiling, kitchens, light shelves, vanities, feature glass, mirrors and shower screens. 

41                  Having weighed up all the matters I have mentioned in these reasons, I have concluded that a fair and reasonable exercise of my discretion would require Total to pay security for costs of defending its claims against GRD in the sum of $20,000.  In my view, this sum will provide a reasonable amount of security for the payment of GRD’s costs directly related to the defence of Total’s claim and yet not be so large that Total will not be able to meet it and, therefore, have to suffer a stay of proceedings leading to the ‘arid exercise’ of reversing the roles of the parties mentioned in the decisions I have referred to in these reasons. 

Associate:

Dated:         6 June 2008