Valmont Interiors Pty Ltd v Giorgio Armani Australia Pty Ltd [2020] NSWCA 90

by Andrew Hales, Claire Laverick, Naomi Graham

Key takeouts

The requirements for obtaining an order for security for costs against a corporation are less onerous if the application is made under section 1335(1) of the Corporations Act 2001 (Cth) instead of relying on r 51.50 of the Uniform Civil Procedure Rules 2005 (NSW).

If there is reason to believe that a corporation will not be able to pay the costs of the defendant if successful in their defence, special circumstances do not need to be established for an order for security for costs to be made. It is enough to have a rational basis for the belief based on a practical common sense approach to examining a corporation’s financial affairs.

Facts

Giorgio Armani Australia Pty Ltd (Armani) engaged Valmont Interiors Pty Ltd (builder) to fit out its Sydney International Airport store. A building dispute arose and the builder commenced proceedings in the District Court for payment of amounts due for variations requested by Armani. A cross-claim was made by Armani for defective works. Separate judgments were made on the claim and cross-claim and the amounts set off against each other. The builder was ordered to pay Armani’s costs of the proceedings on an ordinary basis up to a date, and on an indemnity basis thereafter.

At the time the builder commenced its appeal, it owed Armani $104,638 together with post-judgment interest and costs, estimated at $385,000. Armani sought financial statements from the builder to assess whether it should make an application for security for costs. The builder failed to provide information despite requesting various extensions. Following a final warning, Armani filed a notice of motion on 9 April 2021 and a notice to produce seeking production of financial statements it had requested since 4 December 2020.

The original notice of motion invoked r 51.50 of the Uniform Civil Procedure Rules 2005 (NSW), which required Armani to establish special circumstances warranting an order for security for costs. This was amended to invoke section 1335(1) of the Corporations Act 2001 (Cth), which removed the requirement to establish special circumstances if it appeared by credible testimony that there was a reason to believe that the builder would be unable to pay Armani’s costs. The builder provided limited financial material, confined to special-purpose financial statements for year end 30 June 2020 and bank statements from 1 July 2020 to 31 March 2021 for one of two bank accounts.

Decision

The court ordered the builder to provide security of $50,000 for Armani’s costs of the appeal.

In reaching this decision, the court considered principles outlined in Treloar v McMillan [2016] NSWCA 302 at [9]-[15], commenting that the test for whether section 1335(1) is satisfied is an undemanding one, which only requires a rational basis for the belief (Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 at [29]-[30]), a practical common sense approach when examining a corporation’s financial affairs (Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377), and a consideration as to whether an order for security would work an injustice.

The builder’s cash position at 30 June 2020 would have been entirely eroded by payment of its debt to Armani. Since then, its position had frequently fluctuated to a level below what would be required to service. The court was therefore satisfied that there was sufficient evidence for there to be reason to believe that the builder would be unable to pay Armani’s costs if not successful in the appeal.

The court also noted the question of delay, as the matter was due to be heard one week after the date on which the security application was listed. However, as this was largely due to the builder’s extensive delay in producing the financial information, in this case, the court still felt able to exercise its discretion to award security (albeit a reduced amount, on the basis that $50,000 was a generous sum for a one day appeal of this kind).