Austpole Industries Limited v Kilpatrick Green Pty Ltd and State Energy Commission of Western Australia [1993] FCA 309 (2 July 1993)

FEDERAL COURT OF AUSTRALIA

AUSTPOLE INDUSTRIES LIMITED v. KILPATRICK GREEN PTY. LTD. and STATE ENERGY
COMMISSION OF WESTERN AUSTRALIA
No. VG338 of 1990
FED No. 442
Number of pages - 5
Companies

COURT

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Jenkinson J(1)

CATCHWORDS

Companies - Actions between companies and strangers - Security for costs - When ordered - Principles applied by court - Public company three quarters of the issued capital of which held by three persons - Finding that company will be unable to pay respondents costs if respondent successful in its defence - No submission that company will be unable to provide security and no evidence of the financial resources of the three principal shareholders - Order made for security.

The Corporations Law - s.1335

HEARING

MELBOURNE, 25 and 28 June 1993
2:7:1993

Counsel for the Applicant : Ms. M. Barker

Counsel for the Respondent : Mr. B. Hess

Solicitors for the Applicant : Freehill Hollingdale and Page

Solicitors for the Respondent : Corrs Chambers Westgarth

ORDER

The Court orders that:
1. The applicant provide security in the sum of $85,000, in a

form to be determined by the Registrar, within 14 days.
2. In the event that the security hereinbefore ordered be not
provided in compliance with the foregoing order the
proceeding on the originating application be stayed until
further order.
3. The respondent have leave to amend the notice of motion
dated 4 June 1993 by adding a paragraph numbered 4 claiming
an order that if the applicant fails to comply with the
order to provide security within the time limited in the
order the proceeding on the originating application be dismissed.
4. The further hearing of the motion of which the amended
notice is dated 4 June 1993 be adjourned to a date to be
fixed by either party on reasonable notice to the other party.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

JENKINSON J Motion for security for the respondent's costs of a proceeding for patent infringement.

2. The patent in suit is for a method of restoring the base of a power transmission pole or telephone pole. The respondent is alleged to have infringed the patent by using the method in performance of a contract, for the restoration of such poles, between the respondent and the State Energy Commission of Western Australia. The proceeding commenced in November 1990. A cross-claim for revocation of the patent was made by the respondent. Notice of a motion for security for its costs was filed by the respondent on 25 November 1991. The motion was dismissed by Gray J on 13 December 1991 after a contested hearing. His Honour was not persuaded that there was reason to believe that the applicant will be unable to pay the respondent's costs if the respondent is successful in its defence. His Honour also said:

"I should say also that, if I were of the other view, I should
nevertheless dismiss the application for security for costs on
the basis of delay. The authorities cited by counsel for the
applicant seem to indicate that a court should lean against
granting orders for security for costs where the application is
made late in the proceeding and an applicant has been caused to
incur considerable legal costs. The present proceeding has gone
to a considerable extent with respect to interlocutory steps and
there is evidence that the applicant has incurred $100,000 worth
of legal costs in its own application.
It is said on behalf of the respondent that the financial position
of the applicant was not known until inspection of discovered
documents took place on 19th August of this year and that then
prompt action was taken by letter dated 5th September, asking for
security for costs. Further prompt action was taken after a reply
refusing security was received, that reply having been dated 13th
September. It must also be said, however, that it was open to the
respondent to some degree to investigate the financial position of
the applicant prior to inspection of documents, if it were at all
concerned about the question of security for costs. Its concern
might well have arisen from a document described as a business
profile, which is in evidence, and which on the evidence was in the
possession of the respondent even prior to the commencementof this
proceeding. I should not therefore regard it as just to grant an
order for security for costs which might have the effect of
rendering the applicant's expenditure of $100,000 on its legal costs
as wasted."

3. The respondent's principal sources of knowledge of the applicant's financial position are the annual accounts filed by the applicant in compliance with the Corporations Law. Gray J had before him the accounts for the year ended 30 June 1990. The accounts for the next year were filed on 21 August 1992. Search did not disclose, nor was it suggested on behalf of the applicant, that application had been made to the Australian Securities Commission for extension of the time for lodging, beyond 31 December 1991, of the accounts for the year ended 30 June 1991. Having obtained a copy of those accounts, the respondent's solicitors asked the applicant's solicitors by letter dated 14 October 1992 to advise how the applicant proposes to pay the respondent's costs if the proceeding should be dismissed. The letter in reply referred to the dismissal of the respondent's motion for security for costs and asserted that the applicant was under no obligation to provide information concerning the applicant's ability to pay the respondent's costs. The respondent's solicitors letter dated 30 October 1993 in reply dealt with allegations of inaccuracy in the directors' report filed with the accounts, a topic raised in the letter dated 14 October 1992 and discussed in the applicant's solicitors' reply. Nothing was written about security for costs. On 21 April 1993 the respondent's solicitors were notified that trial of the proceeding and the cross-claim had been fixed for 2 August 1993. On 4 June 1993 notice of the motion which I heard at the end of June was filed.

4. The motion is for security for costs hereafter to be incurred, not for costs already incurred. Mr. Hess of counsel for the respondent submitted that the evidence before me compels the conclusion that there is reason to believe that the applicant will be unable to pay the costs to be incurred by the respondent, and also justifies a conclusion that the respondent has a good prospect of succeeding in its defence.

5. Gray J had before him accounts which showed a surplus of assets over liabilities of $740,332. From that should be deducted the value of the patent in suit, $100,000, because that will be reduced to nil if the patent is revoked. I was not directed to any evidence that the respondent had a prospect of succeeding in its defence that it had not infringed. The evidence was of anticipation justifying revocation. The accounts before me show a reduction of that surplus to $328,001, which is also to be reduced by $100,000. The case for a conclusion of the applicant's inability to pay the respondent's costs to be incurred, which may be expected to tax, as between parties, at not less than $85,000, is strengthened by doubts about the reliability of the asset values, and by the applicant's abstention from evidence about its financial fortunes since 30 June 1991. Between September 1991 and June 1993 the applicant has incurred costs in the proceeding and the cross-claim of about $142,000. I infer from the evidence of the costs the respondent is estimated to be likely hereafter to incur, about $140,000, that the applicant will incur costs of not less than $75,000. If the applicant now pays what it has not already paid of the $142,000 and $75,000 on account of costs to be incurred, the surplus of $282,999 as at 30 June 1991 will be reduced to about $65,000, there being no evidence to suggest a source of funds other than the assets at 30 June 1991.

6. I am not able, if I were willing, to form on the evidence before me an estimate of the respondent's prospects of success in the proceeding. I have no expert evidence to assist me in evaluating the complete specification of the patent in suit and the documents said to constitute, or to evidence, anticipation. Without expert assistance I could form no useful estimate.

7. I accept Mr. Hess's submission that what Gray J said about delay does not inhibit the exercise now of the discretionary power to order security, which is exercisable whenever it is invoked. But I cannot ignore the consequence of his Honour's decision - that the applicant has decided to incur since that decision was announced costs exceeding $100,000, under the influence, no doubt, of what his Honour said. Nor can I ignore what he said when I consider the failure of the respondent between October 1992 and June 1993 to move for the order now sought. The respondent's advisers knew that delay had been characterised as fatal to the earlier application and Mr. Hess could advance no explanation which I could regard as exculpatory of the delay between October 1992 and June 1993.

8. Mr. Hess submitted that, because the applicant submitted to me, as it had submitted to Gray J, that the evidence did not afford credible testimony that there is reason to believe that it will be unable to pay the respondent's costs, I should not have regard, or should give little weight, to the circumstance that there had been delay and the incurring of substantial costs by the applicant during the period of delay, which costs would be thrown away if the proceeding were stayed upon the applicant's failing by reason of impecuniosity to give the security ordered. I do not accept that submission. The applicant ought not in my opinion to be penalised for choosing one submission rather than another by which to oppose the respondent's application for security, nor, having regard to the onus of proof, penalised for choosing to abstain from adding to the respondent's evidence about its financial position. Of course, that abstention may, and in this case does, encourage the judge to draw inferences which the evidence before him raise.

9. The applicant has failed in compliance with the requirement of the Corporations Law that it file its accounts for the year ended 30 June 1992 by 31 December 1992 and has not explained that failure to me. That may in my opinion be taken into consideration as tending to confirm the conclusion, which the evidence justifies, that there is reason to believe that the applicant will be unable to pay the respondent's costs.

10. According to the applicant's annual return for the year ended 30 June 1991 the applicant's issued capital of 9,241,956 fully paid shares, each of 50 cents, was held in the legal and beneficial ownership of 12 persons, six of them proprietary companies, one a public company, and 5 natural persons. More than seven million of the shares were held by three companies. The public company held 2,635,581 of that seven million. There is no evidence that the shareholding has changed since 30 June 1991. There is no evidence as to the financial resources of any of those three shareholders, who are entitled to more than three quarters of whatever the applicant has and whatever the applicant hereafter gains, notwithstanding that I pointed out to counsel for the applicant during the hearing of the motion that failure to call evidence of that kind might have serious consequences of the kind indicated in Bell Wholesale Co. Pty. Ltd. v. Gates Export Corporation [1984] FCA 34; (1984) 52 ALR 176. Miss Barker of counsel for the applicant submitted that the reasoning in that case is inapplicable to a public company. In my opinion it would be applicable to this public company on the evidence before me, except for one circumstance. In the Bell Wholesale Case the Full Court said (52 ALR at 179-180):

"In our opinion a court is not justified in declining to order
security on the ground that to do so will frustrate the litigation
unless a company in the position of the appellant here establishes
that those who stand behind it and who will benefit from the
litigation if it is successful (whether they be shareholders or
creditors or, as in this case, beneficiaries under a trust) are
also without means. It is not for the party seeking security to
raise the matter; it is an essential part of the case of a company
seeking to resist an order for security on the ground that the
granting of security will frustrate the litigation to raise the
issue of the impecuniosity of those whom the litigation will benefit
and to prove the necessary facts."

The applicant did not seek to resist the order here sought on the ground that the granting of an order for security will frustrate the litigation. I decide the motion, therefore, on the basis that the granting of an order for security will not frustrate the litigation.

11. I consider that, notwithstanding the two episodes of delay, one before and one after the decision of Gray J, I should now make an order for security for the respondent's costs to be hereafter incurred. The policy underlying a provision such as s.1335 of the Corporations Law is that those who will gain by the applicant's success in the litigation should, if they can, bear that part of the loss which should be borne by the applicant if it fails in the litigation, but which the applicant apparently will not be able to pay. Notwithstanding my finding that the applicant will be unable to pay the respondent's costs, I conclude that some other person will provide security if it is ordered. Delay in seeking security should be discouraged. But in this case I think that the policy to which I have referred should be given such weight that it overbears the considerations which the respondent's delays raise.

12. As requested by the parties, I will hear them concerning the terms of the order.