Chaskel's Emporium Pty Ltd v Capercorp Pty Ltd & Anor [2014] QDC 57

DISTRICT COURT OF QUEENSLAND CITATION: Chaskel’s Emporium Pty Ltd v Capercorp Pty Ltd & Another [2014] QDC 57 PARTIES: CHASKEL’S EMPORIUM PTY LTD ACN 101 786 930 (plaintiff/respondent) v CAPERCORP PTY LTD ACN 121 441 414 (defendant/applicant) and WILLIAM JACK KLUSKA (defendant by counter claim/respondent) FILE NO/S: 4583/13 DIVISION: Civil PROCEEDING: Application ORIGINATING COURT: District Court at Brisbane DELIVERED ON: 28 March 2014 DELIVERED AT: Brisbane HEARING DATE: 24 March 2014 JUDGE: Horneman-Wren SC DCJ ORDER: 1. The defendants application for security for costs be adjourned to 23 April 2014 to allow the lodgement with the registrar of the court of an irrevocable guarantee by William Jack Kluska, in a form acceptable to the registrar, in favour of the defendant whereby Mr Kluska guarantees every obligation which the plaintiff may have to pay any costs order made against the plaintiff in this proceeding. 2. The plaintiff cause such guarantee to be lodged with the registrar within 14 days. Upon notification by the registrar to the parties that the guarantee has been lodged and is in a form acceptable to the registrar, the defendant’s application filed 3 March 2014 will stand dismissed. -- 1 of 12 -- 2 3. Each party’s costs will be their costs in the proceeding. CATCHWORDS: PROCEDURE – COSTS – SECURITY OF COSTS – POVERTY – LACK OF MEANS – where plaintiff is impecunious – where sole director and shareholder of the plaintiff is impecunious - where sole director and shareholder of the plaintiff is willing to offer personal guarantee – whether security ought to be ordered Corporations Act 2001 (Cth), s 459G, s 459H(1)(a), s 459H(1)(b) Uniform Civil Procedure Rules 1999 (Qld), r 670, r 671(a), r 672 Aqwell Pty Ltd v BJC Drilling Services Pty Ltd [2008] QSC 266 Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 19 Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd [1999] 2 VR 191 Global Access Ltd v EducationDynamics, LLC [2010] 1 Qd R 525 Specialised Explosives Blasting and Training Pty Ltd v Huddy’s Plant Hire Pty Ltd [2010] 2 Qd R 85 COUNSEL: P L Somers for the plaintiff/respondent M R Bland for the defendant/applicant SOLICITORS: Jason Nott Solicitors for the plaintiff/respondent QBM Lawyers for the defendant/applicant [1] The applicant is the defendant in proceedings brought by the respondent/plaintiff. The defendant by counter claim to those proceedings, Mr Kluska, is the sole director and shareholder of the plaintiff. [2] The defendant has brought an application for security for its costs of the proceeding pursuant to r 670 of the Uniform Civil Procedure Rules 1999 (Qld). It is uncontentious that the plaintiff corporation will not be able to pay the defendant‟s -- 2 of 12 -- 3 costs if ordered to do so. Thus, a prerequisite for the making of an order requiring the plaintiff to give security is satisfied.1 [3] It is common ground between the parties that it is appropriate to proceed on the basis that the plaintiff‟s claim is bona fide and has a reasonable prospect of success. [4] The defendant in its application sought an order for security for costs in the sum of $80,670. This was based upon an estimate of Mr Muller, the defendant‟s solicitor, of the standard costs of the steps remaining to be undertaken in the proceeding, including a three day trial. [5] In seeking to resist the application, the plaintiff raises a number of matters under r 672 relevant to the exercise of the court‟s discretion. Mr Kluska has undertaken to pay the costs [6] The first consideration raised is that Mr Kluska, as the individual standing behind the proceeding who stands to benefit from it, has undertaken to be liable to meet any costs order made against the plaintiff. [7] Mr Bland of counsel who appears for the applicant defendant submits that there is no principle of law that where the shareholders or other persons interested in the outcome of the litigation offer to be personally liable for costs ordered against a plaintiff company an order for security for costs should not be made, or other circumstances need not be considered. This is undoubtedly correct.2 The court‟s 1 Rule 671(a) UCPR. 2 Specialised Explosives Blasting and Training Pty Ltd v Huddy’s Plant Hire Pty Ltd [2010] 2 Qd R 85 per Muier JA at [39]. -- 3 of 12 -- 4 discretion to order security for costs cannot be fettered by determining an application one way or another when certain matters are, or are not, established. All the circumstances of the case must be considered. [8] However, the fact that such an offer has been made by the person who stands behind the company remains a relevant consideration to be placed „in the mix‟3 in considering, together with all the other relevant circumstances, whether security for costs should be ordered in a particular case. [9] In this case, Mr Kluska had offered, on 21 March 2014, to resolve the defendant‟s application on the basis of a consent order which would have adjourned the application for a period of 21 days to permit him to lodge an irrevocable guarantee by him, in a form acceptable to the registrar of the court, guaranteeing every obligation which the plaintiff may have to pay any costs order made against it. Upon lodgement of the guarantee, the defendant‟s application would be dismissed. An order in terms like those proposed was made by Daubney J in Aqwell Pty Ltd v BJC Drilling Services Pty Ltd and by Martin J in Specialised Explosives Blasting & Training Pty Ltd v Huddy’s Plant Hire Pty Ltd.4 The offer to resolve the application by such a consent order had been open for acceptance by the defendant by 4.00pm on 21 March 2014. When asked by me in the course of the hearing, Mr Somers of counsel who appeared for the plaintiff stated that the form of the order previously proposed in resolution of the application was now put forward to the court as an alternative order which might be made in the application. 3 Aqwell Pty Ltd v BJC Drilling Services Pty Ltd [2008] QSC 266 per Daubney J at [16]. 4 [2010] 2 Qd R 85. -- 4 of 12 -- 5 [10] Mr Kluska has deposed to his own personal financial position. It is not complex. He owns a property in Kingscliff with an estimated value of between $560,000 and $600,000. Mr Kluska has recently obtained approval for a loan to be secured against that property in the sum of $385,150. He has been unable to obtain finance to any greater extent because he does not have sufficient income to service it. [11] It is a condition of the approval for that loan that his current home loan of $300,138.25, credit card debts totalling $60,237, and $5,749 in loan and brokerage fees, be paid. After payment of those amounts upon which the loan is conditional, there will be only a further $19,025.75 available. Mr Kluska intends applying that amount to the $24,064.20 which is presently owed to his lawyers for legal fees in this proceeding. He has entered into a speculative fee arrangement with his solicitors in respect of the balance of the outstanding account and ongoing fees. [12] That this is the extent of the funds available to Mr Kluska would seem to be accepted by the defendant. On the basis of those figures it has amended the relief which it seeks on the application to require that security for costs be provided by the payment into court of $20,000 together with a guarantee by Mr Kluska for any liability for costs which the plaintiff may incur to the defendant. [13] Essentially, the defendant seeks that the part of the loan proceeds which would otherwise be paid to Mr Kluska‟s (and the plaintiff company‟s) solicitors, be paid into court. [14] Mr Somers submits that the financial information concerning Mr Kluska establishes that he is unable to provide the security for costs should such an order be made. Notwithstanding that inability, it is submitted that Mr Kluska‟s undertaking is -- 5 of 12 -- 6 valuable and enforceable because the evidence establishes a net asset position of approximately $175,000 based upon the valuation of his property less the mortgage debt. [15] In Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd5 Winneke P and Phillips JA, in disagreeing with the earlier statement of Cooper J in Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd6 that the court‟s discretion to order security for costs should rarely be exercised in circumstances in which those who stand behind an impecunious company are prepared to expose themselves to personal liability for a defendant‟s costs, observed, as a reason for their disagreement, that: „Furthermore, in our view the court should not readily accept an undertaking to pay costs for impecunious individuals who, at least at the time when such an undertaking is given, have no chance of making it good. Such an undertaking could not be an effective alternative security because it could not be enforced (at least for the time being) by proceedings for contempt…‟7 [16] In my view, the evidence establishes that Mr Kluska is presently impecunious in that he is unable, without the sale of his primary asset, to raise funds to meet an order for security for costs made against the plaintiff. For reasons developed below, the balance of the loan funds of $19,075.25 should not be considered as available to be paid into court. [17] I am, however, satisfied that should Mr Kluksa be required to pay the costs of the defendant he would be able to do so by selling that primary asset. He would be able to make good his undertaking or guarantee. 5 [1999] 2 VR 191. 6 (1992) 8 ACSR 405 at 415. 7 Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191at 198. -- 6 of 12 -- 7 Will the Proceeding be stifled? [18] The defendant‟s suggestion that Mr Kluska has the capacity, on behalf of the plaintiff, to provide $20,000 by payment into court as a means for providing security, is premised upon the $19,025.75 presently earmarked for payment of current legal fees being used instead for the provision of that security. This is relevant to another basis upon which the plaintiff seeks to resist an order for security for costs. The plaintiff says that if such an order is made it will stifle the proceeding. [19] The defendant submits that the proceeding will not be stifled if the order for security is limited in the way that it now proposes. Implicit in that submission is a recognition that an order which went beyond the balance of funds available from the recently secured loan, may stifle the proceeding. [20] In Specialised Explosives Blasting & Training Pty Ltd v Huddy’s Plant Hire Pty Ltd8 Muir JA said: „A corporate plaintiff wishing to avoid an order that it give security for costs on the ground that the making of the order will prevent the continuation of the litigation, at least as a general proposition, must establish that those “who stand behind it and who will benefit from the litigation if it is successful are also without means.”‟ [21] In my view, the plaintiff has demonstrated that the making of the security for costs order would prevent the continuation of the litigation. The identification by the defendant of the balance loan funds of $19,025.75 as being available to meet a 8 [2010] 1 Qd R 85 at [45]. -- 7 of 12 -- 8 security for costs order pays insufficient regard to the evidence concerning the payment of that amount in partial discharge of the legal fees presently owing. The evidence establishes more than the existence of a debt for those fees and a choice by Mr Kluska to use the balance of the loan funds in its partial discharge. Mr Kluska deposes to the current arrangement with the solicitors as being that the $19,025.75 will be applied in reduction of the current debt and that the balance outstanding and future fees will be subject of the speculative fee arrangement. [22] It is readily inferred that the failure to apply the $19,025.75 to the present debt will result in the current arrangement not being met. That would mean that the ongoing funding of the litigation through the speculative fee arrangement would not occur. That is, the second part of the current arrangement, the carrying of fees on a speculative basis, is contingent upon the first part of the current arrangement, the payment of the $19,025.75 in a reduction of the current debt. [23] In my view, the plaintiff has established that even the order now proposed by the defendant would stifle the proceedings. Is the Plaintiff’s impecuniosity attributable to the Defendant? [24] The plaintiff also contends that its impecuniosity is attributable to the defendant‟s conduct. I am not satisfied that the plaintiff has demonstrated this. [25] The plaintiff has put on evidence in the form of its financial statements which show a series of losses. However, I am not prepared to conclude for the purposes of this application, that those losses, and the plaintiff‟s impecuniosity, are attributable to the defendants conduct. -- 8 of 12 -- 9 [26] On the pleadings, the plaintiff alleges that certain representations made by or on behalf of the defendant before the plaintiff entered into a franchise agreement were misleading or deceptive, or likely to mislead or deceive. The representations were in respect of certain costs associated with running a Pizza Capers franchise. In the main, the representations related to employment costs, and, to a lesser extent, electricity and costs of goods sold. Those representations were contained in a document called for the purposes of the proceedings “the Financial Model”. It is alleged that the Financial Model, should have recorded that a Pizza Capers franchise was less profitable than recorded in the Financial Model, or was unprofitable.9 It is pleaded that further and better particulars of that allegation will be provided upon obtaining expert evidence. [27] In light of the pleading that the Financial Model should have recorded that a franchise was less profitable, I am unable to reach the conclusion on the basis of the evidence on the application that the full extent of the losses in the financial statements, and thus the impecuniosity of the plaintiff, is attributable to the defendant‟s conduct. Is the Plaintiff in the position of a defendant? [28] The plaintiff also contends that a factor weighing against making an order for security for costs is that it is effectively in the position of a defendant. This contention is based upon the fact that the proceeding was only commenced after the 9 Statement of Claim, para 9(d). -- 9 of 12 -- 10 defendant and a related corporation had served statutory demands upon the plaintiff, both of which were subsequently withdrawn.10 [29] I do not accept that the plaintiff is effectively in the position of a defendant. The service of the statutory demands immediately preceded the commencement of the proceeding, and may have precipitated its commencement. However, it is noted in correspondence from the plaintiff‟s solicitors on 27 November 2013 in response to the statutory demands that the plaintiff had placed the defendant on notice of potential proceedings from as early as 4 July 2013. The action which the plaintiffs then foreshadowed was for the recovery of loss and damage which it said it had sustained as a consequence of its reliance upon the misleading and deceptive conduct of the defendant and certain other individuals. [30] The plaintiff claims a declaration that the franchising agreement is void ab initio. If that was all that was claimed, then it might be said that it was acting defensively so as to avoid liability for claims brought by the defendant under that agreement. It might then bring itself within the principles which apply to plaintiff corporations being seen to act defensively.11 But the plaintiff also claims substantial damages, which well exceed those sought by the defendant in its counterclaim. In its correspondence of 27 November 2013 foreshadowing the commencement of this proceeding that claim for damages was identified as an “offsetting claim” in accordance with s 459H(1)(b) of the Corporations Act 2001 (Cth). That is, a claim which the plaintiff had against the defendant which could be raised in an application under s 459G to set aside the statutory demand. The plaintiff thereby indicated that 10 The statutory demand of the related corporation was conceded as being unsupported by the franchise agreement. The Defendant‟s statutory demand was withdrawn because it was thought that it may have been technically defective. -- 10 of 12 -- 11 any application to set aside the statutory demand would not be limited to asserting, under s 459H(1)(a), that there was a genuine dispute about the existence of the debt to which the demand related. Again, if the plaintiff had indicated that any such action would be so limited, then it might more readily be seen to be defensive in nature. Conclusion [31] Taking all of these issues into consideration, I am of the view that orders of the kind proposed by the plaintiff as were made by Martin J in Specialised Explosives and Daubney J in Aqwell are appropriate. The offer by Mr Kluska to guarantee the defendant‟s costs, together with the fact that the proceedings will be stifled if an order is made even in the limited terms now sought by the defendant persuades me to this view. [32] I order that the defendant‟s application for security for costs be adjourned to 23 April 2014 to allow the lodgement with the registrar of the court of an irrevocable guarantee by William Jack Kluska, in a form acceptable to the registrar, in favour of the defendant whereby Mr Kluska guarantees every obligation which the plaintiff may have to pay any costs order made against the plaintiff in this proceeding. [33] I order that the plaintiff cause such guarantee to be lodged with the registrar within 14 days. Upon notification by the registrar to the parties that the guarantee has been lodged and is in a form acceptable to the registrar, the defendant‟s application filed 3 March 2014 will stand dismissed. 11 See the discussion by Applegarth J in Global Access Ltd v EducationDynamics, LLC [2010] 1 Qd R 525 at 528, [14] - [22]. -- 11 of 12 -- 12 Costs [34] The plaintiff seeks its costs of the application. The defendant says each party‟s costs should be their costs in the proceeding. Neither party has been wholly successful. The defendant‟s proposed order is to be preferred in those circumstances. Each party‟s costs will be their costs in the proceeding. -- 12 of 12 --