Roth Morgan Kolomanski Pty Ltd v Candlebrush Investments Pty Ltd [2018] VSC 288 (1 June 2018)

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ROTH MORGAN KOLOMANSKI PTY LTD (ACN 078 032 032)	Plaintiff

v
CANDLEBRUSH INVESTMENTS PTY LTD (ACN 098 141 854)	Defendant

JUDICIAL REGISTRAR:	Matthews JR
WHERE HELD:	Melbourne
DATE OF HEARING:	7 May 2018
DATE OF RULING:	1 June 2018
CASE MAY BE CITED AS:	Roth Morgan Kolomanski Pty Ltd v Candlebrush Investments Pty Ltd
MEDIUM NEUTRAL CITATION:	[2018] VSC 288

PRACTICE AND PROCEDURE – Security for costs – Whether jurisdiction enlivened – Whether reason to believe company will be unable to pay costs – Onus in establishing threshold jurisdictional question – Held that threshold jurisdiction not enlivened – Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377 – US Realty Investments LLC No.1 & Ors v Need [2013] VSC 590 – Corporations Act 2001 (Cth), s 1335 – Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 62.02(1)(b).

APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr T J North QC Mr N Gallina	Geoff Dillon & Co Lawyers

For the Defendant	Mr J A F Twigg QC	Back Schwartz Vaughan

1 By summons dated 12 February 2018, the defendant, Candlebrush Investments Pty Ltd (‘Candlebrush’), seeks orders requiring the plaintiff, Roth Morgan Kolomanski Pty Ltd (‘RMK’), to provide security for its costs in the amount of $348,165 for the period up to and including the first day of trial (‘Application’).^[1]

3 RMK opposes the Application, submitting that the jurisdiction to award security for costs has not been enlivened. Alternatively, RMK says that if security is to be awarded, it should be for a lesser sum, being the amount of $191,068.50.

5 Since issuing its summons, Candlebrush has revised the amount of security sought, to $398,140 up to and including the first day of trial.^[2] This increase is attributed to more time than anticipated being spent on tasks between the filing of the summons and the date of its hearing. It should be noted that the Sango Affidavit was filed well before Candlebrush revised and increased the amount sought, so is responsive only to the First Harris Affidavit.

6 At the time Kennedy J made orders referring the Application to me, her Honour also made orders that the parties were to provide short written submissions of no more than 5 pages in length. Both parties then did so. Although there was no order made, either by her Honour or by me, for further written submissions, RMK filed a reply submission (11 pages) on 4 May 2018 (the last working day before the hearing), and a written submission (15 pages) in respect of the Second Harris Affidavit was provided to the Court at the hearing. At the commencement of the hearing, Candlebrush provided a further written submission (27 pages). The hearing of the Application took most of the day.

7 I have had regard to all of the submissions, both written and oral, and to the affidavit material. Given the volume of material, I have not attempted to summarise all of it in these reasons. Rather, I have focussed on the elements of that material which are essential to the determination of the Application. I will say here that there were a number of submissions made (including by reference to some of the affidavit material) where the relevance of those submissions to this Application was questionable or not explained.

8 For the reasons which follow, I am not satisfied that the jurisdiction to award security for costs has been enlivened. Accordingly, the Application will be dismissed.

9 In this proceeding, RMK claims that it had an agreement, or series of agreements, with Candlebrush to provide development advisory and related services to Candlebrush in respect of the development of a multi-storey apartment building in Queens Road, Melbourne (‘Project’), between 2007 to April 2014. Candlebrush admits that the first agreement was entered into with RMK in January 2011, but denies that this was replaced with or varied by another agreement in December 2011. The parties are in dispute over the scope of the services to be provided and the basis for how RMK was to be remunerated for services. RMK alleges that it was to be paid on the basis of hourly rates of $250 (plus GST) for services provided until February 2012, after which it was to be paid a success fee at the end of the Project. Alternatively, RMK alleges that it was to be paid for services after February 2012 at the hourly rate of $250 (plus GST), or alternatively based on the fair value of those services, on a quantum meruit basis.

10 The pleadings in this proceeding have undergone several iterations. The current iterations of the pleadings are RMK’s further amended statement of claim dated 11 December 2017 (‘FASOC’), Candlebrush’s defence dated 22 December 2017 to the FASOC and RMK’s reply dated 1 February 2018 to the amended defence. RMK has also produced a schedule setting out the dates on which it says services were provided to Candlebrush and descriptions of the services it says were provided on those dates, with a total number of hours specified for each date upon which services were allegedly provided (‘RMK Schedule’). Pursuant to previous orders of the Court, Candlebrush has produced an annotated version of the RMK Schedule, where it has noted which of the alleged services are admitted or not admitted (‘Annotated Schedule’).

11 Mr Harris deposes that BSV sent a letter dated 28 February 2017 to GDL requesting that RMK provide security for Candlebrush’s costs, up to and including mediation.^[3] In that letter, BSV stated ‘Our client is concerned that [RMK] does not have the ability to meet an order for costs’.^[4] No details or explanation for that stated concern were given in BSV’s letter.

12 On 21 April 2017, Kennedy J made orders by consent that RMK provide $50,000 in security for Candlebrush’s costs of the period up to and including mediation by payment of that amount into Court (‘Previous Security’). RMK paid the Previous Security into Court on 27 April 2017.^[5]

14 Mr Harris states that BSV sent a letter dated 23 November 2017 to GDL setting out Candlebrush’s request for further security for costs.^[7] In that letter, BSV stated that Candlebrush proposed to make an application for further security in the amount of $620,000 and proposed certain timetabling directions for that application, and asked for RMK’s response to the proposed orders.^[8] Mr Harris deposes that he did not receive a reply to this letter.^[9]

15 Mr Harris says that he then sent a further letter dated 4 December 2017 to GDL which enclosed a draft affidavit.^[10] $620,712 was the amount sought as security for the period from mediation to the conclusion of the trial of the proceeding, and included an additional amount for the period up to and including mediation.^[11]

16 Directions hearings in the proceeding were held on 8 December 2017 and 2 February 2018, at which Candlebrush says the issue of security for costs was raised.^[12] However the parties are not in agreement as to aspects of this. I will return to this later.

17 Mr Harris deposes that on 1 February 2018, he received a reply from GDL to BSV’s 4 December 2017 letter.^[13] That letter stated: ‘In our view, your client’s claim for further security of $620,712 is entirely unjustifiable’. It then goes on to give two examples of this, and states that a full response has not been given as Candlebrush should provide a revised proposal for consideration.^[14]

19 The principles concerning an application for security for costs are well established and are referred to in many decisions of this Court, including US Realty Investments LLC No.1 & Ors v Need.^[15] For convenience, I adopt the summary set out in by Derham AsJ in US Realty. Rule 62.02 of the Rules and s 1335 of the Corporations Act 2001 (Cth) apply.

20 In summary, the Court first looks to whether the jurisdiction to grant security for costs has been enlivened. For that to be the case, one of the grounds set out in r 62.02 or in s 1335 of the Corporations Act 2001 (Cth) must apply. Here, the relevant ground is RMK’s financial position: if it appears by credible testimony that there is reason to believe that RMK will be unable to pay Candlebrush’s costs if Candlebrush is successful, then the Court may order that security for those costs be given. Prior to addressing that, however, Candlebrush appeared to submit that RMK had earlier conceded the jurisdiction question or represented that quantum of the security was the only issue. That will also be addressed below.

21 Once the jurisdiction is enlivened, it is then a matter for the Court’s discretion as to whether security ought be awarded. That discretion is unfettered, although it must be exercised judicially. Those discretionary factors have been identified in previous decisions, and are referred to in US Realty as mentioned above.

22 In this case, both parties focussed on whether the jurisdiction had been enlivened. There was little emphasis paid to the discretionary factors in submissions. Apart from the threshold question of jurisdiction, the parties focussed their attention on the quantum of security if an order for security was to be made.

23 Accordingly, it is necessary to first set out, in more detail, the principles applicable to determining whether the jurisdiction to award security for costs has been enlivened.

24 Candlebrush bears the onus of establishing that the Court’s jurisdiction is enlivened.^[16] However, it is important to analyse that which Candlebrush is required to establish in relation to RMK’s financial position. Referring to the provisions of s 1335(1) of the Corporations Act 2001 (Cth), there must be ‘credible testimony’ for ‘reason to believe’ that RMK will be unable to pay Candlebrush’s costs if Candlebrush is successful. Under r 62.02(1)(b), the Court may order security if ‘there is reason to believe that the plaintiff has insufficient assets in Victoria to pay’ Candlebrush’s costs. Although these provisions are not identical, the applicable principles have been developed and applied on the assumption that they apply equally to both.^[17]

26 The policy of the provision is ‘to protect a defendant against the risk of the plaintiff corporation’s impecuniosity’, and the provision ‘equips the court with the means to require that the defendant be secured against that risk.’^[19]

27 Hence, while Candlebrush bears the onus, it is a relatively low threshold to meet.^[20]

28 In FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd,^[21] the Court of Appeal of the Supreme Court of Western Australia considered an appeal from a master where the master had refused to grant security for costs. In that case, the applicants for security had led evidence that demonstrated that the plaintiff corporation had paid up share capital of $4001 and was not the registered proprietor of any land on the Western Australian land register. The applicants for security had also led evidence of historical financial statements (the most recent of which was some 4 years prior to the application having been made).^[22] Those statements which were in evidence showed that up until at least 1995 the company did not have assets which would allow it to meet a costs order. Assessing the evidence, Pidgeon and Owen JJ stated that ‘the absence of land combined with the low share capital does give rise to an appearance that there is reason to believe that there are no assets in this area to meet the costs.’ They viewed it as ‘open to the company’ to negate such a belief, which the company did not do.^[23]

30 FFE Minerals was referred to and applied in Education Equity Pty Ltd v Austock Funds Management Pty Ltd.^[25] In that case, the plaintiff company had paid up share capital of $1 and held no real estate in Victoria, Queensland or New South Wales. Gardiner AsJ noted that ‘like the respondent in FFE Minerals, [the plaintiff company] has chosen not to confront [the defendant’s] evidence in regard to its asset position’. His Honour also noted that the evidence which the defendant had put forward was of a very similar type and quality to what had been regarded by the majority in FFE Minerals as ‘credible testimony’, and held that the defendant had met the required credible testimony test.^[26]

31 Candlebrush itself has provided no evidence to establish that there is reason to believe RMK will not be able to pay an adverse costs order.

32 Rather, Candlebrush appears to have made the Application on an assumption that jurisdiction was either conceded or agreed and that the only issue was quantum.

33 In meeting the Application, RMK has disputed that the jurisdiction has been enlivened and RMK has provided some evidence about its financial position.

34 Candlebrush has then attacked the information provided by RMK, and submitted that the Court cannot be satisfied that RMK will be able to meet an adverse costs order.

35 First, I need to consider Candlebrush’s submission that there was an agreement, concession or representation as to jurisdiction.

36 Candlebrush submits that at the time RMK agreed to provide the Previous Security, it did not dispute that there was a risk that it could not meet an order for costs. RMK submits that it agreed to provide the Previous Security to avoid unnecessary disputation and to have the matter proceed quickly to mediation.

37 However, there is no evidence before the Court as to the content of any agreement between the parties as to the provision of the Previous Security. The only evidence is BSV’s letter dated 28 February 2017 to GDL where a concern as to RMK’s ability to meet an order for costs is expressed.^[27] True it is that there is no evidence of this being disputed, but by the same token there is no evidence of it being accepted either. The only other evidence is the consent order made by Kennedy J on 21 April 2017 for the Previous Security.^[28] That order does not record, in ‘Other Matters’ or in the order itself, the basis for the consent orders being made.

38 Accordingly, there is no evidence before me other than that RMK consented to the order being made that it provide the Previous Security.

39 Candlebrush then submits that at the directions hearings on 8 December 2017 and 2 February 2018, RMK represented to the Court that the only issue with respect to further security for costs was the quantum of that security, such that it represented to the Court that it did not dispute there was a risk it could not meet an order for costs. Candlebrush relies on the Second Harris Affidavit for this proposition.

40 Mr Harris deposes that he was informed by Mr Twigg, Candlebrush’s counsel who attended the 8 December 2017 directions hearing, and believes that the ‘question of further security for costs was addressed. At the time, the parties agreed that the only question with respect to security for costs was the quantum of the security to be provided’.^[29]

41 Neither party produced the transcript for that directions hearing: I was informed by RMK’s counsel that it did not appear to have been obtained. RMK objects to Mr Harris’ evidence about the 8 December 2017 directions hearing, saying that he was not there and cannot give first hand evidence of what was said there. RMK submits that if Mr Twigg is to be called to give such evidence (I interpolate here to note that there was no suggestion that he do so), then he cannot appear as counsel for Candlebrush. It is well accepted that evidence on an interlocutory application can be taken on ‘information and belief’,^[30] and I see no reason to depart from that here. What I make of the evidence, however, is another question.

42 Mr Harris gives similar evidence in relation to the 2 February 2018 directions hearing, based on his information and belief derived from what Mr Twigg is said to have told him. Mr Harris says that he was informed security for costs was again raised, the Court set a hearing date for the application, and the parties ‘agreed that the only issue for the Court’s determination was the amount of the security to be provided. Counsel for the plaintiff sought time to enable the plaintiff to make an offer for an amount of security.’^[31]

43 RMK makes the same objection to this evidence. Further, RMK provided a copy of the transcript for the 8 February 2018 directions hearing to the Court, drawing the Court’s attention to a statement by Mr Twigg (which RMK describes as inconclusive) that ‘a draft affidavit outlining the value that we said the security should be given to, and that seems to be the only dispute on the question of security’.^[32] RMK also referred to a statement by its junior counsel who appeared at that hearing, Mr Gallina, that ‘I think it would be a good idea to allow sufficient time for at least one round of correspondence to be exchanged’.^[33] RMK submits that this does not limit the matters that could be the subject of correspondence between the parties. I have reviewed the transcript and, apart from the passages emphasised by RMK’s counsel in submissions, I cannot find anything that evidences an agreement between the parties that only quantum was in issue. I therefore place little weight on the way in which Mr Harris has characterised what is said to have occurred at both of these directions hearings. Based on the transcript I do have, I do not accept it as evidence of an agreement or as evidence of representations being made to the Court.

44 Candlebrush’s submissions regarding this issue were not entirely clear: at no stage was the submission clear about what the conclusion should be, or what the import of its submissions were. For example, there was no clear submission that the Court did not need to consider the question of jurisdiction because RMK had already conceded it or agreed to it, and ought to be held to that. Perhaps that was not the purpose of these submissions: it may be the case that Candlebrush made these submissions to counter RMK’s submission that because Candlebrush itself had not led evidence to give rise to a reasonable belief that RMK would not be able to meet an adverse costs order, the jurisdiction had not been enlivened. Mainly, it seemed to me that Candlebrush was complaining that RMK had resiled from its previous position (as Candlebrush would have it) without explanation.

45 Nonetheless, it was up to Candlebrush to explain its submission and what conclusions should be drawn from it, which it did not do.

46 Candlebrush has not established that there was an agreement, concession or representation as to jurisdiction which RMK ought be held to. Rather, the evidence relied on regarding this issue^[34] explains how the Application came to be made and why Candlebrush did not adduce any evidence itself to establish that the necessary threshold for enlivening the jurisdiction had been met. While the Second Harris Affidavit deals with RMK’s financial position, it is more in the nature of commenting on or adding to the affidavit material and submissions which RMK relies upon.

47 Accordingly, the question of whether the jurisdiction has been enlivened remains a matter for the Court to determine.

48 Much of the parties’ affidavit material and submissions were directed to this issue, which is crucial in considering whether the jurisdiction to grant security for costs has been enlivened.

The focus is on the evidence before the Court, regardless of which party has adduced it

49 RMK submits that Candlebrush had failed to raise the threshold question, let alone establish it. RMK appeared to submit that because Candlebrush had not itself adduced evidence that there was reason to believe RMK would not be able to satisfy an adverse order for costs, the threshold had not been met. In other words, because the evidence had not emanated from Candlebrush, it had not satisfied the burden it bears. I do not accept this submission.

50 I am to answer the question of whether there is reason to believe that RMK will not be able to satisfy an adverse order for costs.^[35] Regardless of how the evidence came to be adduced as to RMK’s financial position, that is the question before me. While Candlebrush, who bears the burden, has not put on any evidence going to this question, RMK has elected to do so. RMK having done so, Candlebrush now criticises that evidence and submits that it is sufficient to establish the threshold question. The task for me is to determine this question, based on the evidence that is before the Court, evaluating whether Candlebrush has met its burden.

51 The burden does not shift to RMK here just because it has provided information about its financial status despite there being no evidence from Candlebrush. RMK’s evidence being what it is, it is a matter for Candlebrush to establish that there is the requisite reason to believe.^[36]

52 RMK relies on Mr Kolomanski’s two affidavits in relation to its financial position. In summary, RMK submits that not only does the evidence not reveal a reason to believe that it would be unable to meet an adverse costs order, it demonstrates that RMK is in a sound financial position and well able to pay an adverse costs order. I do not need to go that far: the consideration for me, as previously stated, is whether the evidence supports Candlebrush’s submission that there is reason to believe RMK will not be able to meet an adverse costs order.

54 RMK’s principal asset is the land and an office building in Wendouree, Victoria (‘Wendouree Property’) which it owns, and which is currently leased to VicRoads.^[38] That lease has a minimum term of 10 years and expires in January 2022, with two five year extensions exercisable at VicRoads’ option.^[39] The lease payments are approximately $1.2 million per year, and VicRoads has never missed a rental payment.^[40] The Wendouree Property was independently valued by Herron Todd White as at 27 July 2016 (by a valuer appointed by RMK’s bank, Westpac) (‘2016 Property Valuation’) at over $8.5 million.^[41]

55 Mr Kolomanski states that as at 23 February 2018, RMK owed approximately $2.6 million to Westpac.^[42] He states that the loan has a redraw facility and as at 23 February 2018, there was over $205,000 available for redraw. He also says that the redraw facility increases by more than $47,800 each month in accordance with the loan facility agreement, such that by 21 July 2018 the available undrawn funds would be more than $444,800.^[43] As at 24 April 2018, the amount available for redraw is $305,897.04.^[44]

56 Mr Kolomanski also exhibits a copy of RMK’s tax return for the financial year ended 30 June 2016 (‘2016 Tax Return’), which he says was filed and is RMK’s most recent tax return.^[45] The 2016 Tax Return states that RMK’s income for the year ending 30 June 2016 was $1,096,263 and its expenses for that year were $602,669, leaving a total profit (before tax) of $493,594. RMK’s financial statements for the year ended 30 June 2016 (‘2016 Financial Statements’) are annexed to the 2016 Tax Return. I will return to those, as it is more efficient to deal with them in response to Candlebrush’s submissions.

57 Mr Kolomanski states that RMK is not involved in any litigation or disputes other than this proceeding, is not the trustee of any trust, and does not in this proceeding sue for the benefit of another.^[46]

58 RMK says that the threshold test has not been met, pointing to matters such as the rental income of over $1 million per annum with a stable tenant for the Wendouree Property and a valuation that shows a surplus of about $5.5 million after repayment of the mortgage, and there being about $500,000 in cash available. RMK says that all the other matters raised by Candlebrush do not need to be considered, such as the accounting treatment of loans, as the surplus is sufficient.^[47]

59 As noted above, the First Harris Affidavit does not deal with RMK’s financial position at all. Some 42 paragraphs of the Second Harris Affidavit deal with RMK’s financial position. Much of this is a response to Mr Kolomanski’s affidavits and to RMK’s written outline of submissions dated 20 March 2018. RMK objected to most of the Second Harris Affidavit (except to the extent that it puts correspondence before the Court). In respect of financial matters, the objection was made primarily on the basis that Mr Harris allegedly makes assertions based on speculation unsupported by evidence, he makes assertions regarding matters of finance without being qualified to do so, and his submissions or purported opinions are inadmissible as he has no qualifications or expertise in accounting or financial analysis.

60 Generally speaking, I agree with RMK’s objection in this regard. Much of this section of the Second Harris Affidavit is opinion, commentary or interpretation of RMK’s financial material and there is no evidence that Mr Harris has the qualifications necessary to allow him to give evidence of that type. Unless the relevant item in the financial information section of the Second Harris Affidavit can properly be taken as evidence which Mr Harris is able to give, I will treat it as submissions or observations, and not as evidence.

61 Candlebrush submits that given RMK’s consent to the Previous Security, there is a risk that RMK is not being candid with the Court about its financial position when it submits that its financial position is very sound and it would be well able to pay an adverse costs order. I do not accept this submission: there is no basis for reading RMK’s consent to the Previous Security in this way.

62 According to Candlebrush, an indication of this alleged lack of candour is said to be RMK’s failure to produce a number of financial documents that would confirm its actual financial position. It says that discrepancies have been identified, and the Court should be wary of RMK’s alleged failure to fully disclose relevant financial information. Candlebrush acknowledges that it bears the onus of proof in the Application, but says that it should not be hampered in that application by RMK failing or refusing to provide relevant documents and being ‘cagey’ about its financial position.

63 I will return to specific aspects of RMK’s alleged non-disclosure later, but would observe that RMK was not obliged to adduce any evidence about its financial position. While it may then have run a risk of the type identified in paragraph 28 above, had Candlebrush led evidence sufficient to establish there was reason to believe RMK would not be able to meet an adverse costs order since it would then have been open to RMK to lead evidence to negate such belief, that is not the situation that pertains here. Rather, all that can be said is that RMK could have led further evidence to refute Candlebrush’s submissions if it chose to do so. It should be noted that the Second Kolomanski Affidavit is mostly evidence in response to Candlebrush’s written outline of submissions dated 20 March 2018.

64 Importantly, there is no basis in the authorities for the proposition that a plaintiff ought to provide relevant documents about its financial situation so that a defendant is not hampered in a security for costs application. That is inconsistent with the onus being on the defendant to establish the threshold question.

65 Candlebrush complains that RMK has not produced financial statements for the financial year ended on 30 June 2017 or for the current financial year. In my view, that is not fatal to RMK’s position, unless it was the only way in which a concern raised about the evidence which is before the Court could be addressed.

66 As noted above, Candlebrush’s further written outline was lengthy. It dealt in some detail with very specific aspects of RMK’s financial position based on RMK’s evidence. I will deal with each of these in a brief way: I do not consider it necessary to descend to the level of detail which the parties did when providing written and oral submissions. In saying that, I have taken all of those submissions (including those contained in the Second Harris Affidavit) into account.

67 To avoid repetition, it is efficient to deal with the parties’ submissions by taking Candlebrush’s submissions about specific aspects of RMK’s financial position and RMK’s response to that, indicating my view about each aspect along the way where appropriate.

68 RMK submits that much of Candlebrush’s submissions about these specific aspects are based on speculation and are an unjustified attempt to recreate RMK’s accounts based purely on submissions and not on evidence. RMK did not make specific submissions beyond this regarding some of the matters raised below.

69 Candlebrush submits that the profit and loss statement which forms part of the 2016 Financial Statements reveals a net profit for 2016 of approximately $412,000, as a tax liability of approximately $86,000 must be factored in. It also says that retained losses or profits should be taken into account, and that for the 2016 financial year there was a retained loss of approximately $194,000. Candlebrush submits that this results in an actual retained profit for 2016 of $217,940. It should be noted that the 2016 Financial Statements record these exact figures for the net profit and the retained profit. Candlebrush says that the retained profit for 2016 is not sufficient to cover an order for costs in the vicinity of $350,000 up to and including the first day of trial, let alone the costs if the trial proceeds, which might produce a figure closer to $500,000.

70 True it is that there is no evidence of retained profits for the years after 2016, but nor was I taken to any evidence to suggest there had not been net profits or retained profits after 2016.

71 The balance sheet which forms part of the 2016 Financial Statements records the following position as at 30 June 2016:

Description	Amount $
Current assets	613,495
Non-current assets	7,270,960
Total assets	7,884,455
Current liabilities	(211,048)
Non-current liabilities	3,862,000
Total liabilities	3,650,952
Net assets	4,233,502

72 In its further written submissions, Candlebrush submits that current assets are either cash assets or assets that are expected to be converted to cash within one year, and that current liabilities are liabilities that should be repayable within one year.

73 Candlebrush says that the total current assets of $613,495 recorded in the 2016 balance sheet is over-stated, for the following reasons:

74 Candlebrush submits that the current asset position may therefore be much lower than $613,496 and may be closer to $152,000, and that the true cash position of RMK is therefore very poor.

75 In my view, Candlebrush’s submissions as summarised in paragraphs 73(b) and (c) above are purely speculative. I accept RMK’s general submissions in this regard. For the reasons set out in paragraph 105 below, I will not make a finding as to whether the Kolcorp loan is properly treated as a current asset in the 2016 balance sheet. I will say, however, that even if I had accepted Candlebrush’s submission as to the treatment of the Kolcorp loan, I would still not have considered there to be sufficient evidence to give rise to a reason to believe that RMK would not be able to satisfy an adverse costs order.

76 Candlebrush also attacks the non-current assets section of the 2016 balance sheet, but does not provide a figure or estimate of what it says the non-current assets should be.

77 Candlebrush submits that while approximately $175,000 (after depreciation) is recorded in the 2016 balance sheet for the plant and equipment, motor vehicles and office equipment,^[48] the total current value of those assets is likely to be much lower than the 2016 figure, as these items are subject to a high rate of depreciation.

78 For the Kolcorp and Roth Morgan Investments Pty Ltd (‘RMI’) loans, which total approximately $1.5 million, Candlebrush submits that the Court should draw an inference that any financial information RMK has regarding these loans would not assist it to show that the loans are readily repayable, as there is no evidence as to when these loans will be repaid and whether the borrowers have sufficient cashflow to provide prompt payment of them.

79 RMK says that Candlebrush’s submissions in this regard are pure speculation, and I agree with this submission.

80 As noted above, RMK’s principal asset is the Wendouree Property. In the 2016 balance sheet, it is listed as a non-current asset and Candlebrush says that the value given to it in those accounts is approximately $7.2 million.

81 Candlebrush spent a significant amount of time making submissions about the 2016 Property Valuation, which valued the Wendouree Property at $8.57 million. It submitted that there were five key problems with the 2016 Property Valuation and RMK’s reliance on it for the Application:

82 Candlebrush also relies on a comment in the 2016 Property Valuation which states that 31% of the valuation (ie $2,652,287) is attributed to the present value of the fitout rental, which rental diminishes as the initial term of the lease approaches expiry and ceases on 12 January 2022, so that the valuer recommends that this component offers limited ongoing security and any lending decision against the component should be considered on a cash flow basis only.

83 RMK says that the 2016 Property Valuation is an independent valuation conducted for Westpac and that there is no evidentiary basis for contesting it. It also says that the notion that RMK should have obtained a further valuation prepared in accordance with Order 44 of the Rules for the purposes of resisting this Application is wrong.

84 RMK also says that the 2016 Property Valuation demonstrates that it has sufficient assets to meet a costs order.

85 I see no reason to go behind the 2016 Property Valuation. While some of Candlebrush’s submissions may have some merit (I make no findings in this regard), they do no more than raise questions at the margins of what the current value of the Wendouree Property is. That does not give rise to a reason to believe that RMK may not have sufficient assets to meet an adverse costs order, as such a reason needs to have a rational basis,^[49] and these submissions do not provide that basis.

86 Candlebrush acknowledges that a loan of approximately $913,000 to a related company, RMI, which is recorded in the current liabilities section of the balance sheet as a negative value should be treated as an asset rather than a liability. However, it says that it should be treated as a non-current asset rather than a current asset, as it appeared in the 2015 balance sheet which suggests it is not repayable within 12 months. Candlebrush submits this loan should be removed from the current liabilities section and be treated as a non-current asset.

87 The current liabilities section records a loan to Mr Kolomanski in the amount of $616,588 for 2016 and $678,758 for 2015, and provision for income tax for 2016 in the amount of $86,316.

88 Candlebrush submits that if the RMI loan is treated as a non-current asset, then the current liability position is approximately $702,000, leaving a net current position of negative $550,000.

89 The submission that the RMI loan should be treated as an asset rather than a liability can be accepted (leaving aside the question of whether it is current or non-current).

90 However, Candlebrush’s position regarding the treatment of the Kolomanski loan is inconsistent with its position regarding the Kolcorp loan. If the latter is to be treated as a non-current asset rather than a current asset due to its presence in both the 2015 and 2016 balance sheets (as Candlebrush submits), then why shouldn’t the former be treated as a non-current liability rather than a current liability on the same basis? If that is the case, then RMK’s current liability position in the 2016 balance sheet is the $86,316 provision for income tax.

91 Therefore, I reject Candlebrush’s submission that the net current position is negative $550,000 and that this shows that RMK would not be able to service a costs order for approximately $250,000.^[50] Even on Candlebrush’s figure of $152,000 for current assets based on the 2016 balance sheet, there would still be a surplus of approximately $66,000. However, as noted in paragraph 75 above, I regard Candlebrush’s figure here as speculative. If the Kolcorp loan is moved to the non-current asset section (and I make no finding one way or the other in that regard), the net current position for 2016 [51] $274,179.⁵¹

92 The 2016 balance sheet records two Westpac commercial bill loans under non-current assets, one for $2.8 million and the other for $1 million.

93 In the First Kolomanski Affidavit, Mr Kolomanski states that RMK’s loan balance regarding the Wendouree Property was $3,862,000 as at 30 June 2016 and that the loan balance as at 21 February 2018 was $2,596,013.48.^[52]

94 Candlebrush submits that apart from the First Kolomanski Affidavit, there is no up to date evidence concerning the non-current liabilities. It says that the loan account statement exhibited by Mr Kolomanski^[53] appears to be only for the first loan listed in the 2016 balance sheet. That statement shows an opening balance as at 26 October 2016 of $2.6 million. Candlebrush says that there are no documents which show that the $1 million loan has been paid, such that the total Westpac loans are $3.6 million.

95 RMK did not provide further evidence regarding this aspect, and its submissions did not go beyond saying that Candlebrush’s submission was just speculation and RMK did not have to meet it. There was no clear statement made, either by Mr Kolomanski in his second affidavit or in RMK’s submission, that the $1 million Westpac loan had been repaid.

96 In my view, it is possible that the total Westpac loans are higher than the $2,596,013.48 figure given by Mr Kolomanski for the position as at 21 February 2018. It is also possible that it is not higher than that amount. However, there is no information about when the Westpac loan(s) have to be repaid or on what terms. Given this and the surplus of total assets over total liabilities, that possible uncertainty in itself does not present a rational basis for a belief that RMK could not meet an adverse costs order.

97 Candlebrush also submits that it is unclear why RMK lent money to Kolcorp and whether that loan was in RMK’s interests. Further, Candlebrush has identified 14 withdrawals from one of RMK’s bank accounts^[54] (said to total approximately $45,000) which it says appear to be a use of company funds by the director for personal purposes. This is said to suggest a risk that RMK will not be able to pay a costs order because its funds are being misappropriated such that its cash position is further reduced.

98 RMK says that Candlebrush’s submissions are pure speculation and that there is a director’s loan account in the 2016 balance sheet, which it describes as a common practice, especially in single director companies.

99 Candlebrush also submits that one of the bank statements^[55] shows a ‘large withdrawal’ of $797,000 which is recorded on the statement as a payment to ‘OzForex Pt Settlement Angl Mews’. Candlebrush says it appears to be a foreign transaction which does not relate to any asset held by RMK. Candlebrush says it raised this transaction in its initial written submission and RMK provided no response other than to say that it was in the business of property investment and that Candlebrush had no basis for asserting there was no benefit to RMK. Candlebrush says that this does not explain what the transaction is or how it was for RMK’s benefit. It further says that, in light of the matters I have summarised in paragraph 97 above, RMK’s response is inadequate and shows that it is being less than frank with the Court about its true financial position.

100 RMK submits that it is in the business of property investment and that Candlebrush has no basis for asserting that there was no benefit to RMK in this transaction.

101 Candlebrush also raises matters such as whether the Wendouree Property is used as security for the borrowings of any of RMK’s related entities or whether there is cross-collateralisation across entities within the group of which RMK is a member. Again, RMK says that there is no evidence to support such a submission.

102 I do not accept Candlebrush’s submissions summarised in paragraphs 97, 99 and 101 above. Candlebrush has sought to cast aspersions on RMK and its director where they appear to be based on assumptions Candlebrush has made. The allegations about the payments for personal items are an example of this: as RMK’s counsel pointed out, the balance sheet shows a loan account from RMK to its director (hardly a novel structure), and it may well be the case that those transactions have been recorded in the loan account. There is no information about the other transaction, other than the line item in the bank statement, which is hardly enough to credibly argue that the transaction was of no benefit to RMK.

103 Further, raising such matters in this way does not result in this case falling within the class of cases where there is a reason to believe that the company may not have sufficient assets to meet an adverse costs order and it is then up to the company to negate that belief.^[56]

Conclusion regarding RMK’s financial position and whether the jurisdiction has been enlivened

104 It follows from the above discussion that I do not consider that Candlebrush has satisfied the threshold question. In my view, the jurisdiction has not been enlivened.

105 It is not appropriate that I be placed in the position of needing to possess the skills of a forensic accountant or the assistance of an expert of that type in order to resolve the competing submissions about how I should interpret the 2016 Financial Statements. That is not the nature of the exercise. Some of those questions can only really be answered by reference to the relevant accounting standards. An example of this is how a current asset as opposed to a non-current asset is defined and whether the loan to Kolcorp is correctly classified as a current asset. There was no evidence before the Court as to the accounting standards or how they should be interpreted. In the absence of that evidence, I do not consider it appropriate that I attempt to go behind the 2016 Financial Statements which have been prepared by an external accountant and which accompany a tax return which has been lodged. Further, I do not accept Candlebrush’s submission that I should treat the 2016 Financial Statements with caution as they were not audited and the information upon which the statements were prepared was provided by RMK’s director.

106 I am to take a ‘practical, common sense approach to the examination of [RMK’s] financial affairs’,^[57] and I agree with RMK’s submission that Candlebrush has taken an overly technical approach to this question. On the face of the evidence before me, there does not appear to be reason to believe that RMK will not be able to meet an adverse order for costs. At a very simple level, if one takes Candlebrush’s figure for RMK’s actual retained profit for 2016 of $217,940 and the redraw amount available to RMK as at 24 April 2018 of $305,897.04, that gives a figure of approximately $524,000.

107 Further, I accept RMK’s submission that the value of the Wendouree Property is in excess of RMK’s liabilities, and that there is a sufficient surplus so as not to warrant the exercise of the jurisdiction.

108 As I stated above, much of Candlebrush’s submission (and the Second Harris Affidavit, in respect of RMK’s financial position), do not go beyond speculation and conjecture. The questions which have been raised about RMK’s financial position do not constitute the requisite ‘reason to believe’, and therefore RMK is not placed in the position of having to negate that reason to believe by adducing further evidence to answer those questions.

109 As I have found that the jurisdiction is not enlivened, it is unnecessary that I say anything about the discretionary factors. However, given that some of these matters were argued by counsel, I will state my views about them.

110 The main issue which seemed to be raised by RMK as a discretionary issue was its submission that, given the admissions which Candlebrush has made in the Annotated Schedule, the only outcome of the litigation would be an order that Candlebrush pay RMK money, with the only real dispute being how much that monetary award would be. RMK submits that as Candlebrush is going to be ordered to pay it some money, it is inappropriate for a security for costs order to be made.

111 RMK did not refer to any authority in that regard, and nor was this submission specifically linked to any of the discretionary factors identified in previous cases.^[58]

112 RMK’s submission appeared to be based on an assumption that this asserted outcome of the litigation will inevitably result (absent any offers of compromise becoming a factor in the costs question) in a costs order being made against Candlebrush in favour of RMK. However, that does not seem to me to be inevitable. It is trite to say that costs are in the discretion of the Court.

113 RMK’s submission also appeared to be based on an assertion that Candlebrush had admitted that services in the amount of $343,759 had been provided which had to be paid for. This is based on an hourly rate of $250 multiplied by the number of hours (1,375) for those services as listed in the Annotated Schedule. As this amounts to around the same amount as the security sought, RMK says it should not have to provide security.

114 Candlebrush says that this submission is misconceived, as it has not admitted either the hourly rate or the hours attributed to a particular admitted service. I accept Candlebrush’s submission in this regard, as it is clear that RMK has just taken the total hours listed for a day where sometimes only one among many services for that day are admitted and then multiplied those total hours by $250. It cannot be said that Candlebrush has made any admissions as to the value of the specific services which it has admitted in the Annotated Schedule.

115 I do not consider this issue to be something which weighs against security being ordered, if I was otherwise minded to order it.

116 The only other discretionary factors referred to were the strength (or otherwise) of RMK’s case and the way in which Candlebrush has conducted its defence. As to the former, I would treat that as a neutral factor, particularly given the complexity of the case as it currently stands on the pleadings. As for the latter, even if Candlebrush can be said to have been slow to make admissions (as RMK asserts), at most that is something I would take into account on quantum and would not see it as a disentitling factor in this case.

117 Accordingly, if the jurisdiction had been enlivened, these discretionary factors would not have dissuaded me from ordering security.

118 There is no need for me to decide this question, but given that extensive evidence was adduced and submissions made in this regard, I will briefly express my views.

119 I have previously summarised the principles applicable to the amount of security and the approach to be taken by the Court in determining the quantum of security, and I adopt that summary here.^[59]

120 Candlebrush relied on the evidence given by Mr Harris in his affidavits as to the tasks to be performed and the likely costs associated with those costs. Candlebrush initially sought $348,165 by way of security, but in the Second Harris Affidavit it has increased the amount sought to $398,140.^[60] Mr Harris deposes that he was admitted as a barrister of the Supreme Court of Queensland in 1986, and as a solicitor of the Supreme Court of New South Wales and the High Court of Australia in 1993. He was employed in a variety of public service legal positions from 1987 until 2000. Apart from a period of 13 months leave, he has been employed in private practice in Sydney from December 2000 to date, in primarily litigation roles. He deposes that he is employed as a Special Counsel by BSV and has primary carriage of most of the litigation work of BSV’s practice. It is therefore apparent that Mr Harris is an experienced practitioner with a great deal of litigation experience.

121 RMK relied on the Sango Affidavit to refute the First Harris Affidavit and to provide an opinion as to quantum.

122 RMK criticised Candlebrush’s approach on the basis that Mr Harris is not a costs lawyer and is not independent of BSV’s client, being Candlebrush. It submitted that for this reason, the Court should prefer Ms Sango’s evidence as to quantum.

123 It is well established that the evidence relied upon can be an affidavit from an experienced litigation lawyer or an expert report by a costs consultant.^[61] Therefore, I reject RMK’s submission in this regard. The exercise for the Court is to have regard to the evidence adduced by both parties and then to form its own view as to an amount which should be awarded by way of security for costs.^[62]

124 Ms Sango accepted the hourly/daily rates for counsels’ fees used by Mr Harris, as these were within the current rates for counsel as set out in Appendix A – Supreme Court Scale of Costs (Victoria) (‘Scale’).

125 Mr Harris stated that he had sole carriage of the proceeding on behalf of Candlebrush. In terms of the hourly rate for solicitors’ fees, he used his actual rate for this matter of $525 per hour, but then applied a 35% discount to solicitors’ fees. Mr Harris did not explain this discount, but I have assumed it resulted from what is a typical approach of taking the solicitors’ actual fees and then applying a 30-40% discount. Ms Sango used an hourly rate for solicitors of $402 per hour, which is taken from the Scale. I note that 65% of $525 results in a lower rate than $402 per hour.

126 Candlebrush seeks a ‘top-up’ amount of $48,666 as security for its costs up to the mediation, on the basis that the costs it actually incurred were $98,666.13 after the 35% discount referred to above is taken into account, and the Previous Security was for $50,000. RMK says that no top-up security should be ordered.

127 No satisfactory explanation has been given by Candlebrush as to why it would be appropriate for the Court to order further security for a period which had already been agreed and paid. The only thing which Candlebrush appears to rely on is that its costs ended up being more than the amount of the Previous Security. Even then, there is no satisfactory explanation for how things changed from the initial estimate relied on by Candlebrush’s solicitor when seeking and agreeing to the Previous Security.

129 RMK submits that Candlebrush’s claim for the period from mediation to the hearing of the Application is too high and allows for items which Candlebrush ought not have incurred costs. These pertain to lengthy correspondence between the parties as to a privilege claim which it appears Candlebrush has now conceded, and to RMK’s assertions that Candlebrush’s solicitors ought not be continuing to act in the proceeding if one of BSV’s principals is to be a material witness at trial. I must say that the submissions in this regard were confusing and it was only when pressed that RMK’s counsel indicated that these submissions went to wasted costs and not to matters concerning the exercise of the discretion.

130 RMK and Ms Sango take other objections to Mr Harris’ estimates, such as whether certain directions hearings should be attended by senior counsel and travel allowances. By and large, Ms Sango and RMK would allow less time being spent on most tasks than that estimated by Mr Harris, for both solicitors and counsel.

131 Given that I have already found that the jurisdiction has not been enlivened, I do not propose to go through each of the items and express a view about the minutiae of each one.

132 Rather, in the circumstances of this case, I would indicate the following at a general level:

134 Taking such a broad brush approach, if I was otherwise minded to grant security for the period from mediation up to and including the first day of trial, I would adopt a figure of $250,000. I have arrived at this by taking the original amount sought, deducting the top-up claim, adding $10,000, and then splitting the difference between that figure and Ms Sango’s figure, and adding it to Ms Sango’s figure.^[64]

135 For the reasons set out above, orders will be made dismissing the Application. This is because I am not satisfied that Candlebrush has enlivened the Court’s jurisdiction to order for security for costs, as it has not established that there is reason to believe that RMK will not be able to meet an adverse costs order.

136 Although it is not necessary to do so, I have indicated that if I had found the jurisdiction to be enlivened and I was otherwise minded to grant security for costs for the period from mediation up to and including the first day of trial, I would do so in the amount of $250,000.

^[1] By order made on the Court’s own motion, pursuant to r 84.03 of the Supreme Court (General Civil Procedure) Rules 2015 (‘Rules’), the Application has been referred to me for hearing and determination.

^[22] The financial statements which were in evidence were for the financial years 1990–1995 inclusive but not thereafter, as after that time such statements were no longer publicly available: FFE Minerals [2000] WASCA 69; (2000) 33 ACSR 739.

^[50] It was not clear where this figure of $250,000, contained in Candlebrush’s further written submission at [59], came from.

^[51] Derived from deducting the Kolcorp loan of $253,000 and the tax debt of $86,316 from the total current assets of $613,495.

^[54] There is a bank statement for a Westpac Business One Account exhibited to the First Kolomanski Affidavit, exhibit ‘DK-28’.

^[56] As was the case in FFE Minerals and Education Equity, see paragraphs 28 to 30 above.

^[58] See Colmax Glass Pty Ltd v Polytrade Pty Ltd [2013] VSC 311 [20], by way of example.

^[59] Raventhorpe Pty Ltd & Ors v Westpac Banking Corporation [2017] VSC 362 [56]; Citius Property Pty Ltd v Logos Australia Group Pty Ltd [2018] VSC 74 [15], [17].

^[61] Quadrant Constructions Pty Ltd (in liquidation) v Morgan Smith Barney Australia Pty Ltd [2009] VSC 455 [56]; Trailer Trash Franchise Systems Pty Ltd v GM Fascia & Gutter Pty Ltd [2017] VSCA 93 [64] (‘Trailer Trash’).

^[64] In other words, I have taken the original amount of $348,165, subtracted the top-up claim of $48,666, and added $10,000, which results in a figure of $309,499. The difference between that and Ms Sango’s $191,068 is $118,431. Halving that gives $59,215.50. Adding that to $191,068 gives $250,283.50, which I would then round to $250,000.

Supreme Court of Victoria

Roth Morgan Kolomanski Pty Ltd v Candlebrush Investments Pty Ltd [2018] VSC 288 (1 June 2018)