Freiberg International Pty Ltd Viken Commercial Interiors Pty Ltd [1995] ACTSC 44 (16 May 1995)

SUPREME COURT OF THE ACT

FREIBERG INTERNATIONAL PTY LTD v.IKEN COMMERCIAL INTERIORS PTY LTD
No. SC209 of 1995
Number of pages - 6
Practice and Procedure

COURT

IN THE SUPREME COURT OF THE AUSTRALIAN CAPITAL TERRITORY
MASTER A HOGAN

CATCHWORDS

Practice and Procedure - Security for Costs - Company plaintiff insolvent - Debt due to plaintiff - Equitable set off claimed by defendant - Onus of proof on defendant - Security not ordered.

Parkinson (Sir Lindsay) and Co Ltd v Triplan Ltd (1973) QB 609
Demag-Lauchhammer Maschinenbau und Stahlbau G.m.b.H. v John Holland (Constructions) Pty Ltd (1966) 2 NSWLR 3
Kohn v Rinson and Stafford (Bros) Ltd (1948) 1 KB 327

Rules O.33B r.3(1)(e)
Corporations Law s.1335

HEARING

CANBERRA, 5 May 1995
16:5:1995

Counsel for the Plaintiff: Mr Constance

Instructing Solicitors: Sneddon Hall and Gallop

Counsel for the Defendant: Mr Erskine

Instructing Solicitors: Clayton Utz

ORDER

THE COURT ORDERS THAT:
1 The defendant's application for security of costs is dismissed.

DECISION

MASTER A HOGAN This is an application by the defendant in an action for an order that the plaintiff company give security for the costs of the action.

2. Details of the claim and of the defence are set out in the reasons for my decision, made on 5 May 1995, refusing to grant the plaintiff leave to enter summary judgment. Briefly, the claim is for the unpaid balance of the contract price for goods sold and delivered. The allegations of sale and delivery and non-payment were not contested by the defendant.

3. A formal defence has not been filed, but the material tendered by the defendant in opposition to the claim for summary judgment gave details of alleged defects in quality and other matters which would, if proved, afford an equitable set off, and found a cross action for an amount exceeding the plaintiff's claim.

4. A receiver and manager of the plaintiff company was appointed on 2 August 1994. The evidence makes it clear, and counsel for the plaintiff properly conceded, that upon completion of a pending sale of the business of the company there will be no funds available for payment to the ordinary creditors of the company, and the plaintiff is therefore insolvent.

5. The basis for the application is to be found both in O.33B of the Rules and s.1335 of the Corporations Law.

6. The particular ground relied upon under the Rules is that in rule 3(1)(e), namely that the interests of justice require the making of the order. The grounds for making an order under the Corporations Law are not stated in s.1335, but if I were asked to encapsulate them in a single phrase I would use the words of the rule, that the interests of justice so require. I am not able to imagine any circumstance, at any rate where a company is concerned, that would not be equally relevant when considering either basis.

7. It may be left for a case in which an order is sought against a natural person to decide whether the circumstances relevant to the exercise of the discretion under this subrule are in any meaningful way different from those used in applications under the Corporations Law. But certainly in this case there is no reason for making any distinction between them.

8. The discretion granted by the rule is unfettered, no matter which subrule is under consideration, but, particularly when subrule (1)(e) is to be applied, all the circumstances must be taken into account. A useful checklist, though not an exhaustive one, is that set out in Parkinson (Sir Lindsay) and Co Ltd v Triplan Ltd (1973) QB 609 at 626.

9. These considerations point up a distinction that is very important when considering a case such as Demag-Lauchhammer Maschinenbau und Stahlbau G.m.b.H v John Holland (Constructions) Pty Ltd (1966) 2 NSWLR 3, which was relied upon by counsel for the defendant. That case was decided in 1966, on the basis of O.XV r.1 (NSW) as it then was, and in relation to the ground that the plaintiff ordinarily resided outside the jurisdiction.

10. As Macfarlane J decided in that case, that rule had the same intent as the old English RSC O.65 r.6, and he cited the summary of that interpretation given by Denning J as he then was in Kohn v Rinson and Stafford (Bros) Ltd (1948) 1 KB 327 at 330. His Lordship said,

"The law on the matter is plain, that it is in the discretion of the
Court to order security for costs, but it does so as a matter of
course when a plaintiff is out of the jurisdiction and there are no
assets of the plaintiff which can be reached within the
jurisdiction, the reason being that if a judgment is thereafter
obtained by the defendant against the plaintiff for costs, such an
order cannot be enforced by the direct process of the English
Court."

11. I doubt that, even where O.33B subrule (3)(1)(a) was in issue, any such inflexible practice would now be recognised in this Court.

12. The actual decision of Macfarlane J in Demag was that the mere fact that a defendant brings a cross action arising out of the same transaction does not debar him from having the advantage of the rule that generally an order for security for costs would be made in the circumstances of that case. His decision is not authority for the proposition that a defendant should be entitled as of course to an order for security against an insolvent plaintiff when the defendant brings a cross action which arises directly out of the same circumstances as the plaintiff's claim.

13. The nature and origin of the defendant's cross action is obviously relevant, and a defendant whose claim arises out of the same circumstances as the plaintiff's claim is obviously in a stronger position than one who seeks to bring a cross action based on some independent transaction or unrelated cause of action.

14. It is the substance of the matter that must be looked at, not the form in which judgment may ultimately be entered up.

15. In this particular case, I think that the following considerations are the most relevant. They are extracted from the evidence tendered by the defendant.

16. The defendant confirmed its order to the plaintiff to supply and deliver the screens by letter dated 16 December 1993. The fixed price was $873,071. Invoices were to be raised with each delivery, and payment to be made within 7 days in respect of each invoice. Any penalties suffered by the defendant for delays in delivery were to be passed on to the plaintiff and deducted from progress claims.

17. On 2 March 1994 the defendant expressed concern about delays. On 11 and 12 April 1994 there were further complaints about departure from specifications and non delivery.

18. On 30 June 1994 the defendant wrote to the executive chairman of the plaintiff, Mr Peter McIntyre, setting out the history of various complaints. Annexed was a purported reconciliation of the contract, from the defendant's point of view, at 30 June 1994, which read as follows:

"Contract value as at 17/2/94 $865,586.00
Less payments made ($671,356.00)
Subtotal $194,230.00
Less account rendered (as attached) ($101,673.60)
Outstanding balance $92,556.40

19. The attached account itemised additional costs claimed by the defendant, totalling $101,673.60, as referred to in that reconciliation.

20. On 18 July 1994 the head contractor certified practical completion of the relevant part of the works on 4 July 1994.

21. On 20 July 1994 the plaintiff's executive chairman responded to the defendant's letter of 30 July 1994 in some detail. In summary, he did not deny all the delays or failures to comply with specifications, but laid the blame on the builder and the installer, and suggested that the defendant seek recompense from them. He denied liability for additional costs, mainly related to project management, totalling $83,878, and sought further details of other complaints. He set out some additional expenses of the plaintiff, and asked for immediate payment of the balance outstanding of $197,702.50.

22. On 4 August 1994 the executive chairman of the plaintiff notified all distributors that the plaintiff's directors had resolved to request the Bank which held security to appoint a receiver and manager. The main reason for the inability of the company to continue to trade was that an overseas controlling shareholder had decided not to contribute further funds, but the delays, claims and counter claims relating to the subject contract also played a part.

23. By letter to him dated 4 August 1994 the defendant dealt point by point with each of the matters raised by Mr McIntyre in his letter of 20 July 1994, supplied copies of documentation, and attached an invoice for the additional costs totalling $101,673.60. It was further claimed that the contract was not yet complete, because of non supply of As Built Construction Drawings and Operational and Maintenance Manuals. It was stated that no further payment would be made until the contract was complete. There was no specific provision in the contract entitling the defendant to withhold payment of $92,556.40 on such a ground.

24. On 10 August 1994 the Receiver and Manager asserted that the plaintiff's records indicated that the defendant owed $464,754.50 to the plaintiff. That claim for such an amount, I think, could result only from a bookkeeping error. The defendant responded on 19 August 1994 with an assertion that there were no outstanding amounts due to the plaintiff at that date, and referring to all previous correspondence.

25. My understanding of the correspondence to that time was that the last reconciliation by the defendant admitted an outstanding balance due to the plaintiff of $92,556.40, but that payment was being witheld pending completion of the contract.

26. There is no evidence that the defendant had incurred any penalties imposed by the head contractor for delays, such as would, by the terms of the contract, have entitled the defendant to make deductions from progress payments. The critical outstanding issues, which the defendant asserted needed to be attended to before payment could be made, were set out in a letter to the Receiver and Manager dated 23 August 1994. He responded on 5 September 1994, admitting responsibility for some items and denying it for others.

27. The defendant responded on 20 September 1994, reiterating its demands, and attaching a Contract Status Sheet, which claimed a debt due by the plaintiff to the defendant of $38,109. There is an arithmetical error of $27 in the document, and I find it easier to understand if I adopt a different layout, but as I understand it the amount claimed is made up as follows:

Original Contract Price 873,071
Less agreed variations 11,817
Additional costs claimed in
letter 30 June 1994 101,674 113,518
Current contract value 759,553
Less payments 671,356
Balance 88,197
Less proposed deductions in
lieu of outstanding obligations 126,306
Balance due to defendant $ 38,109
======

28. The proposed deductions in lieu of contract obligations were itemised under 6 headings, and were categorised as estimates only.

29. By letter dated 21 September 1994 the Receiver and Manager responded in detail to each of the items in the defendant's claim of 30 June 1994. Out of the claim for $101,674 liability was admitted for $3,563.50. Detailed reasons for rejecting the balance were given. Without attempting to judge the issue, it is apparent that the plaintiff has an arguable case in opposition to the claim for the balance.

30. By letter dated 5 October 1994 the Receiver and Manager dealt with the 6 items referred to in the list of proposed deductions in lieu of contract obligations of 20 September 1994. Liability was denied for most, and an attempt made to meet the defendant's requirements as to others.

31. On 22 November 1994 the Receiver and Manager informed all creditors and suppliers of the company that the business of the company had been sold, and settlement was scheduled for 24 November 1994. His letter concluded:

"The proceeds of the sale of the business will be applied in
accordance with the statutory priorities in respect of employees'
entitlements, the costs of the receivership and in repayment of the
debt to the first registered secured creditor (my appointor). A
small surplus may remain thereafter which will be available to the
company. It is not a sufficient sum on my calculation to enable
repayment of the debt claimed by the second ranking secured
creditors accordingly, assuming that charge is valid, it seems
unlikely that any funds will be available for payment to the
ordinary (ie non priority) creditors of the company.

32. The persons interested in the fruits, if any, of this litigation, so far as the plaintiff is concerned, are the second ranking secured creditors, and then possibly the ordinary creditors of the company.

33. In substance, the greater part of this litigation will deal with issues on which the defendant will bear the onus of proof, and in respect of which the plaintiff clearly has an arguable case.

34. The counterclaim of the defendant, when finally quantified, may possibly fall short of the balance of the contract price which is clearly to be credited to the plaintiff. Without prejudging the matter, I think that there is a substantial chance that the counterclaim will so fall short.

35. It is not possible to foretell what the ultimate order about costs is likely to be. However, in my assessment, it is unlikely that the plaintiff will be ordered to pay all the defendant's costs of the action and of the counterclaim.

36. I am not persuaded that the interests of justice require that the plaintiff provide security for the defendant's costs in the circumstances of this case.

37. The application is dismissed.