Australia's Residential Builder Pty Ltd (In Liq.) v. ARB Developments Pty Ltd [2014] VCC 95 (20 February 2014)

Last Updated: 7 October 2015

IN THE COUNTY COURT OF VICTORIA

Revised (Not) Restricted

AT MELBOURNE

COMMERCIAL LIST

GENERAL DIVISION

Case No. CI-13-05707

AUSTRALIA'S RESIDENTIAL BUILDER PTY LTD (IN LIQUIDATION)	Plaintiff
v.
ARB DEVELOPMENTS PTY LTD	Defendant

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JUDGE:	His Honour Judge Anderson
WHERE HELD:	Melbourne
DATE OF HEARING:	13 February 2014
DATE OF JUDGMENT:	20 February 2014
CASE MAY BE CITED AS:	Australia's Residential Builder Pty Ltd (In Liq.) v. ARB Developments Pty Ltd
MEDIUM NEUTRAL CITATION:	[2014] VCC 95

REASONS FOR JUDGMENT

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Catchwords: Practice and procedure – Security for costs – Proceeding brought by liquidators in the name of the company – Proceeding seeking to establish caveatable interest in four properties – Beneficial interest claimed based on resulting trust arising from plaintiff’s contribution to the purchase price – Plaintiff and defendant managed and operated by common director and principal shareholder – Whether the Court should exercise its discretion against making an order – Order made for security for the defendant’s costs.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr E. Moon	Thomas Egan
For the Defendant	Ms K. Knights	Champions Lawyers

HIS HONOUR:

1. The plaintiff is in liquidation. The defendant is a company which had common directors with the plaintiff. Both companies were involved in the sale of land and new home packages. There were constant financial dealings between them.
2. The liquidators of the plaintiff lodged caveats in the Office of Titles in respect of a number of properties owned by the defendant. The caveats claimed a beneficial interest based on a resulting trust arising from the plaintiff’s contributions towards the purchase of the properties. The defendant does not dispute that monies were advanced by the plaintiff but says that the advances were inter-company loans and it was never intended that the plaintiff should acquire an interest in the properties.
3. The defendant sought to have the caveats removed by application to the Registrar of Tittles pursuant to s.89A of the Transfer of Land Act 1958 (Vic) (“the Act”). As a consequence, the plaintiff issued the present proceeding. The defendant by summons seeks the following relief:
   1. the withdrawal of caveats over four properties;
   2. alternatively, the provision of security for the defendant’s costs of the proceeding.

Withdrawal of the caveats

4. The defendant sought an order that the plaintiff be required to withdraw the caveats on the basis that the defendant was entitled to summary judgment, the plaintiff having “no real prospect of success”. Defendant’s counsel Ms Knights informed the Court that the defendant did not make the application pursuant to s.90(3) of the Act.
5. After brief argument, Ms Knights did not pursue this aspect of the application. It is, however, appropriate to record that:
   1. the defendant relied upon an affidavit of Robert Wiederstein sworn 9 December 2013;
   2. Mr Wiederstein had been the sole director and financial controller of the plaintiff from February 2010 until 31 May 2013. Interests associated with Mr Wiederstein owned two-thirds of the issued shares in the plaintiff;
   100. Mr Wiederstein has been the sole director and financial controller of the plaintiff since September 2010 and interests associated with him own 90% of the issued shares in the defendant;
   4. Mr Wiederstein stated in paragraphs 32(d) and (e) of his affidavit that:

“the agreement between the companies which I made in my capacity as a director of both companies on every occasion that money was advanced by the plaintiff for the benefit of the defendant (and vice versa) was that between the companies was advanced by way of loan only (including on the occasions of the purchase of the Currently Owed Properties and the Formerly Owned Properties that are the subject of this proceeding)” and that “there was never any agreement or intention that the defendant would hold its interest in any of the properties...on trust for the plaintiff”;

6. Ms Knights stated that the agreement asserted by Mr Wiederstein was wholly oral and constituted by conversations with Mr Varcoe (a fellow director of each company), at unspecified times. Ms Knights said that the agreement was not partly in writing and did not arise in part by implication from other facts or circumstances. She said that it was difficult to provide independent evidence of the intention of the companies, as effectively Mr Wiederstein was the controlling mind of both. It is not necessary for me to consider these matters further.

Security for costs

7. Mr Moon, counsel for the plaintiff, submitted that the defendant had not satisfied the jurisdictional requirements of Rule 62.02(1)(b) or s.1335(1) of the Corporations Act 2001 (Cth). He submitted that there was not an adequate basis to conclude that the plaintiff had insufficient assets to pay the defendant’s costs if ordered to do so.
8. The plaintiff has a deficiency of liabilities over assets of about $6.4 million. The liquidators have prepared a “summary of estimated returns” of the liquidation updated to 5 February 2014. The “optimistic” estimate would result in $441,295 being available for distribution to ordinary unsecured creditors less deductions, which would apparently involve a 6.07% return. The “pessimistic” estimate would leave $282,710 available to these creditors. After deductions, however, there would be no return to the creditors.
9. The “pessimistic” estimate lists $50,000 as the company’s “liability for costs in County Court proceeding”. This sum apparently is considered by the liquidators as the party/party costs of the defendant if it were successful in this proceeding.
10. I am unpersuaded by Mr Moon that these figures, and the general financial position of the plaintiff, make it likely that the company would have any funds available to meet an order for the defendant’s costs of the proceeding. I am satisfied the Court has jurisdiction to make an order for security in respect of the defendant’s costs.

Discretionary matters

11. Mr Moon submitted that there were a number of matters which made it appropriate for the Court to decline to make an order for security, as follows:
    1. the plaintiff has a strong case with good prospects of success;
    2. the defendant had contributed to the plaintiff’s impercuniosity;
    100. the proceeding was defensive in nature;
    4. The proceeding was for the benefit of creditors of the plaintiff;
    5. if no security were provided, and the defendant succeeded at trial, it could then make application for its costs to be paid personally by the liquidators.

Good prospects of success

12. Mr Moon had been reluctant to have the defendant’s first application on the merits of the claim determined by application of the tests for a summons under s.90(3) of the Act. As Warren CJ set out in Piroshenko v. Gojsman [2010] VSC 240; 27 VR 489 at paragraph 7:

“This two stage approach requires the caveator to establish that there is a serious question to be tried that they have the estate or interest which they claim in the land in question and having done so, to establish that the balance of convenience favours the maintenance of the caveat on the Register of Titles until trial”.

13. In order to “satisfy the first limb of the test”, Warren CJ said at paragraph 18, that what is required is that:

“1. There is a probability on the evidence before the Court that he or she will be found to have the asserted equitable rights or interest; and

2. That probability is sufficient to justify the practical effect which the caveat has on the ability of the registered proprietor to deal with the property in question in accordance with their normal proprietary rights”.

14. It seems that there is sufficient evidence that the plaintiff contributed to the purchase of a number of properties. In relation to the caveats which remain, this involved:
    1. 8 and 10 Peppermint Grove; from the purchase price of $270,000 for each property, the plaintiff contributed $18,750 (5.09% of the purchase price), and, as a consequence, claims a resulting trust in its favour equivalent to that percentage, of the current value of the properties;
    2. 46 Alison Street; purchase price $230,000; plaintiff’s contributions totalled $200,500; claims a resulting trust of 87.17%;
    100. 1 Moonglow Crescent; purchase price $159,900; plaintiff’s contribution $1,000; claims a resulting trust of 0.63%.
15. In relation to the Alison Street property, the defendant claims it repaid $174,000 to the plaintiff on 12 September 2011 and that a handwritten notation on the bank statement (“95 Alison”, referring to the lot number rather than the street number) supports this claim. The liquidator states, however, that the “plaintiff’s general ledger records the receipt of $174,000 with the notation: Comm Land Proceeding”. The liquidator claims that further investigation has shown that the payment related to the settlement of another property – “Lot 368 Victory”. In later written submissions, the defendant asserted that this notation is unsupported and is likely to be an error. This dispute is impossible to resolve without further evidence.
16. What is clear, as Ms Knights submitted, is that in respect of three of the four properties, the plaintiff’s contribution was relatively minor. In respect of the Alison Street property, if the contested payment were not taken into account, the undisputed figure of $26,500 would represent about 11.5% of the purchase price.
17. The defendant asserts that the “repayment” in relation to the Alison Street property was an example of the arrangement in place between the plaintiff and the defendant, for advances “by way of loan” between the companies, rather than the acquisition of an interest in a property purchased, partly by use of the funds advanced.
18. Both parties have referred to entries in the books of accounts of the parties which either support, or fail to provide evidence, of the assertions made. To a degree, the entries relied on by the liquidator may have added credibility, as the financial management of the plaintiff was under the control of Mr Wiederstein. However, it is not possible, at this stage of the proceeding, to conclude that there is “a probability on the evidence [that the plaintiff] will be found to have the asserted equitable rights or interests”.
19. Of more concern is “the practical effect the caveat has on the ability of the [defendant as] registered proprietor to deal with the property in question”. The relevant facts appear to be; as follows:
    1. the defendant wishes to urgently sell each of the properties because of the substantial holding costs and because its business involves the early sale of completed home and land packages in order to remain viable;
    2. the properties are part of the security held by National Australia Bank Limited, as first mortgagee, in respect of total advances of about $1.7 million;
    100. the plaintiff is a guarantor of the defendant’s obligations to the bank;
    4. the Alison Street property was sold for $445,000, but settlement has not occurred because of the plaintiff’s caveat. The Moonglow Crescent property was sold for $400,000. Settlement was delayed by the plaintiff’s caveat although in later written submissions by plaintiff’s counsel, it was indicated that the liquidators would agree to withdraw the caveat;
    5. The Pepperment Grove properties are being marketed with sale prices of $659,000 (no.8) and $529,000 (no.10).
20. Mr Moon submitted that the liquidator’s primary concern in maintaining the caveats was to ensure that sales of the properties were realised for the maximum amounts, The liquidator referred in his affidavit to the recent proposed settlement of the sale of the Alison Street property, where the selling agent was claiming commission equivalent to about 9% of the sale price instead of the usual 2 or 3% and also, the further sum of over $11,000 for “labour and materials”.
21. The documents exhibited to the affidavit, in respect to the sale of the Alison Street property, showed that the agent’s “Exclusive Sale Authority” dated 2 September 2013 was, for a sale “between $440,000 and $455,000”, a “flat fee” of $30,000. A more detailed account for the “labour and materials” referred to “maintenance” and “cleaning” of the Alison Street property and the Moonglow Crescent property. Apparently, for the Moonglow property, the agent’s commission on a sale price of $400,000 was the more modest sum of $10,500.

Defendant’s contribution to the plaintiff’s impecuniosity

22. The liquidator expressed the view that “based on my investigations and the further work performed by my staff [recently] that the defendant is currently indebted to the plaintiff in the sum of at least $1,908,673.20”. He said that, at the time of his appointment, “the plaintiff’s books and records showed...that the defendant is indebted to the plaintiff in the sum of $1,314,572.88”.
23. The liquidator noted that in August 2013, the defendant faxed to him a copy of its general ledger which purported “to show that the plaintiff is indebted to the defendant in the sum of $2,190,569.25”. The liquidator comments in his affidavit on this claim by reference to entries in the plaintiff’s books of account (for which Mr Wiederstein was responsible) and the fact that almost $1 million in invoices were only sent by the defendant to the plaintiff, days before its liquidation.
24. The liquidators have issued statutory demands to the defendant seeking recovery of $1,314,572.88, and on companies associated with the defendant seeking to recover a further $250,000. Applications have been made by the recipients to have the demands set aside. The liquidators, as plaintiffs together with the plaintiff company, have issued proceedings in the Supreme Court of Victoria claiming $616,026 from a company apparently associated with Mr Wiederstein. Further, proceedings are likely to be issued against Mr Wiederstein and the other two directors of the plaintiff for “insolvent trading” in breach of the Corporations Act 2001 (Cth).
25. There are substantial disputes between the parties and those associated with them. There is already litigation commenced, and the potential for further proceedings. Mr Weiderstein had direct control of the plaintiff and the financial transactions between the plaintiff and the defendant. The management of the companies has left the plaintiff in liquidation with a trading deficiency of over $6 million. The defendant in a far healthier position. In these circumstances, it seems apparent that the plaintiff’s present financial position can, to a degree, be directly related to the defendant and the manner in which that company was managed and operated in relation to the plaintiff.
26. However, the present proceeding concerns the basis upon which caveats were lodged by the liquidator. In these circumstances, I consider that the defendant’s contribution to the impecuniosity of the plaintiff would not be a decisive factor in determining whether an order for security should be made.

Whether the proceeding is “defensive” in nature

27. Mr Moon submitted that the proceeding was brought in response to the lodging of the s.89A application. In my view, it is more appropriate to regard the plaintiff’s caveats as an assertion of a claim to be entitled to an interest in each property. The present proceeding has been brought to substantiate those claims.

The proceeding was brought to benefit creditors

28. It is presently unclear what actual benefit would accrue to the creditors of the plaintiff if it were successful in establishing an interest in the properties. Any caveatable interests are subject to the rights of the bank as first mortgagee, to whom the plaintiff owes a separate obligation as the guarantor of the defendant’s indebtedness to the bank.
29. The prospect of the plaintiff providing any return to creditors is tenuous. The present proceedings in this Court, in the Supreme Court, in the proceedings to set aside statutory demands served by the liquidators and in proceedings as foreshadowed against the directors of the plaintiff for “insolvent trading”, are likely to be protracted and expensive.
30. The “Summary of Estimated Returns”, updated by the liquidators on 5 February 2014, estimates the “legal fees incurred in obtaining recoveries” at $200,000 and the “liability for costs in County Court proceeding” at $50,000. As the figure of $200,000 also includes the cost of “recovering moneys owed by trade debtors” and “negotiating to recover...an unfair preference from the Australian Taxation Office”, this would appear to be a significant underestimate.
31. If, as Mr Moon suggests, the main value of maintaining the caveats, is to ensure that the maximum return is obtained from the sale of the four remaining properties to which the caveats relate, it is unlikely that this proceeding will have any tangible benefit for the plaintiff’s creditors. This is particularly so when one considers the percentage interest claimed in respect of three of the properties.

The defendant, if successful, may make application that the liquidators pay the costs of the proceeding

32. Mr Moon submitted that the defendant might, if successful at trial, seek its costs from the liquidators personally. It is noted that in the Supreme Court proceeding, the liquidators are also named as plaintiffs and will be directly liable for costs, presumably with an entitlement to be reimbursed from the company’s assets.
33. It is difficult to understand how this submission might be persuasive as the basis for suggesting that an order for the provision of security would be inappropriate.

Conclusion as to whether security should be provided

34. I consider that an order should be made for the provision of security for the defendant’s costs of the proceeding. In summary, the reasons are as follows:
    1. the caveats were lodged by the liquidators;
    2. the liquidators did not join in as plaintiffs to the proceeding;
    100. the interest claimed in respect of three of the four properties is limited;
    4. the likelihood of the interests claimed realising any significant sum to the company is doubtful;
    5. the present benefit of the caveats, as expressed by counsel, is not related to the primary purpose of the caveats;
    6. the financial position of the plaintiff and the list of potential claims the company may have, make the present proceeding inconsequential as regards recovering further funds to benefit creditors;
    7. the caveats presently inhibit the defendant’s efforts to realise the properties, and to settle sales made;
    8. the likely costs of the proceeding to the defendant are not insubstantial.

Quantum of the security ordered

35. The defendant seeks security in the sum of $55,422 for its costs up to and including the first day of trial. The estimate of costs is made by the principal of the defendant’s solicitors. He has practiced primarily in commercial litigation for more than 25 years and has “been involved in many taxations of costs”. The estimates include substantial lump sum items, including $38,000 for “instructions for brief including brief to counsel to appear”. Other estimates, including $2,336 for “mediation”, seem to underestimate the probable cost, although it is likely that part of the sum nominated as “counsel’s fees” will be applicable to the mediation.
36. The plaintiff has not filed any answering material. The liquidators have, however, included the sum of $50,000 as the estimated “liability for costs in County Court proceeding”. I propose to adopt this figure as the appropriate security for the plaintiff to provide for the defendant’s costs of the proceeding up to and including the first day of trial.
37. Mr Moon submitted that security should be provided in stages, the first up to and including mediation. Mr Moon stated that, in his view, there was an excellent chance that the proceeding might settle at mediation.

Orders

38. Accordingly, I will make the following orders:
    1. By 3 March 2014, the plaintiff must provide security for the defendant’s costs of the proceeding up to and including the completion of mediation fixed in the sum of $15,000.
    2. Unless the parties agree in writing prior to 28 February 2014 as to an alternative method of providing security, the plaintiff must pay the sum of $15,000 to the Registrar of the Court.
    3. By 1 May 2014, the plaintiff must provide further security for the defendant’s costs of the proceeding up to and including the first day of trial fixed in the further sum of $35,000.
    4. Unless the parties agree in writing prior to 29 April 2014 as to an alternative method of providing security, the plaintiff must pay the sum of $35,000 to the Registrar of the Court.
    5. If the plaintiff fails to provide either the security ordered in paragraph 1 or the security ordered in paragraph 3, the plaintiff’s claim in the proceeding will forthwith stand dismissed with an order that the plaintiff pay the defendant’s costs, including any reserved costs, to be assessed by the Costs Court in default of agreement
    6. If the matter proceeds to trial, the trial judge shall determine any application that the plaintiff provide security for the defendant’s costs beyond the first day of the trial.
    7. The time for the defendant to deliver a defence is extended to 17 March 2014.

8. The parties must mediate the dispute by 5 April 2014.

9. If the plaintiff provides security as ordered in paragraph 1, the parties must by 7 March 2014 notify the Directions Group in writing of the further orders required, including a trial date and an interlocutory timetable.
10. The costs of the defendant’s summons filed 5 December 2013, including the costs of the hearings on 13 and 20 February 2014, shall be costs in the cause.
11. Reserve liberty to apply.

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Certificate

I certify that these 10 pages are a true copy of the reasons for decision of His Honour Judge Anderson delivered on 20 February 2014.

Dated: 20 February 2014

Philippa Gilkes

Associate to His Honour Judge Anderson