Re Set Technologies Pty Ltd v Dennis Leslie Walter Lewis; Sembern Pty Ltd and Psitech Pty Ltd [1993] FCA 49; (1993) 10 ACSR 61 (22 February 1993)

FEDERAL COURT OF AUSTRALIA

Re: SET TECHNOLOGIES PTY LTD
And: DENNIS LESLIE WALTER LEWIS; SEMBERN PTY LTD and PSITECH PTY LTD
No. Q G60 of 1991
FED No. 101
Number of pages - 11
Companies
[1993] FCA 49; (1993) 10 ACSR 61

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Spender J.(1)

CATCHWORDS

Companies - security for costs - whether applicant corporation 'will be unable to pay the costs of the defendant if successful' - evidence of 'running down' of applicant corporation's business activities - exercise of Court's discretion - proceedings stayed until security in form ordered provided.

Corporations Law s. 1335

Beach Petroleum NL v. Johnson [1992] FCA 110; (1992) 10 ACLC 525

HEARING

BRISBANE, 12 February 1993
22:2:1993

Counsel for the applicant: Mr D. Smith
instructed by: Gray and Maloney

Counsel for the respondents: Mr A. B. Crowe

instructed by: Egans

ORDER

THE COURT ORDERS THAT:
1. Within 28 days, the applicant provide security for costs in the sum of $85,000.00 in a form or forms to be approved by the Registrar.

2. Until security in the form ordered is provided, Proceedings No. QG60 of 1991 be stayed.

3. The costs of the motion, including reserved costs, be paid by the applicant.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

SPENDER J. This is a notice of motion by the respondents in the principal proceedings seeking security for costs by the applicant, Set Technologies Pty Ltd. On 21 July 1992, solicitors for the respondents wrote to the solicitors for the applicant raising the question of security for costs and requesting evidence of the applicant's capacity to meet an order for costs. Correspondence then passed between the solicitors on the question of security.

2. The application is based on s. 1335(1) of the Corporations Law, which provides:

" Where a corporation is a plaintiff in any action or other
legal proceeding, the court having jurisdiction in the
matter may, if it appears by credible testimony that there
is reason to believe that the corporation will be unable to
pay the costs of the defendant if successful in his, her or
its defence, require sufficient security to be given for
those costs and stay all proceedings until the security is
given. "

3. The issues on the present motion are first, the ability of the applicant to pay the respondents' costs of the action if their defence is successful, and secondly, the amount of security should that be ordered.

4. Section 1335 has recently been considered by Von Doussa J. in Beach Petroleum NL v. Johnson [1992] FCA 110; (1992) 10 ACLC 525. His Honour said at 526:

" The power of the Court to order security for costs under s.
1335 is conditioned on the Court being satisfied by credible
testimony that there is reason to believe that the applicant
corporations (i.e. Claremont and Beach) will be unable to
pay the costs of the respondents if they are successful in
their defence. Subject to that condition being fulfilled
the section gives the Court an unfettered discretion which
is to be exercised having regard to all the circumstances of
this case: see Sir Lindsay Parkinson and Co. Ltd v. Triplan
Ltd (1973) 2 All ER 273 at 285, Bell Wholesale Co. Ltd v.
Gates Export Corporation [1984] FCA 34; (1984) 2 FCR 1 at 4, and Bryan E
Fencott and Associates Pty Ltd v. Eretta Pty Ltd and Others
(1987) 16 FCR 497 at 511. "

On the right hand column of the same page, his Honour said:

" The section would be satisfied if it appeared by credible
testimony that there is reason to believe that if a
defendant is successful, circumstances may then exist in
which the plaintiff will be unable to pay the costs. "

And later:

" The financial position of the plaintiff at the time when the
application is made will be an important guide, but is not
the sole consideration. "

And later, on the same page:

" Many uncertain factors may influence the corporation's
financial position. In many of these cases the
uncertainties will mean that the Court will be faced with a
range of possibilities, which, depending on whether fortunes
run with or against the plaintiff in the meantime, extend
from insolvency at one extreme and at the other extreme to
more than sufficient immediate cash resources to meet the
costs and other debts as they fall due. "

His Honour said, at the foot of 526:

" A corporation 'will be unable to pay' the costs within the
meaning of the section if it can only do so if given
extended time to realise assets which might be difficult to
realise, at least at a price sufficient to provide a surplus
over other liabilities, sufficient to pay the costs: see
Southern Cross Exploration NL and Others v Fire and All Risks
Insurance Co. Ltd and Others (1985) 1 NSWLR 114 at 121. "

At 527, Von Doussa J. said:

" When the Court is required to make a judgment which
anticipates future events the Court of necessity is required
to judge the degree of probability that a particular event
might occur. The Court can do no more than evaluate the
chances: cf. Malec v J.C. Hutton Pty Ltd [1990] HCA 20; (1990) 92 ALR 545.
In my opinion the power of the Court under s. 1335 arises if
credible evidence establishes that there is reason to
believe there is a real chance that in events which can
fairly be described as reasonably possible the plaintiff
corporation will be unable to pay the costs of the defendant
on service of the allocatur, if judgment goes against it. "

5. In the affidavit of Desmond William Knight, filed on 9 February 1993, an analysis of the financial position of Set Technologies Pty Ltd up to November 1992 was embarked on. Mr Knight relied on the affidavit of Brian Thomas Egan dated 15 October 1992; two affidavits of Russell Alexander Stuart, a company director of the applicant company, dated 14 and 27 November 1992 and the affidavit of John Arthur Duncan of 30 November 1992.

6. As a result of that analysis, which was of the most recent relevant documentation, including a report from Chiverall and Bulley, Mr Knight concluded that if Set Technologies Pty Ltd had had to meet a costs order as at 23 November 1992, its ability or otherwise to do so from immediate or short term realisable assets was limited to an amount of $43,710.00. He sets out the basis for his view and concludes:

" ...it is quite within the realms of possibility that the
company, Set Technologies Pty Ltd, would not be in a
position to meet an adverse Costs Order. "

7. On the motion before me, I canvassed the evidence of Mr Knight with Mr Dale Smith of counsel who appeared for Set Technologies Pty Ltd and said, at page 26 of the transcript:

" ...Mr Knight says that the amount presently realisable to
meet an order for costs is $43,000. "

to which Mr Smith said:

" Yes, your Honour, he does. "

In response to my question:

" ...as I take it, that is not cavilled at? There is no
evidence to contradict that that is the position? "

Mr Smith said:

"No, your Honour."

8. However, reliance is placed by Set Technologies Pty Ltd on a statement of assets and liabilities as at 30 July 1992 which appears as annexure BTE22 to the affidavit of Mr Egan filed on 16 October 1992. That statement of assets and liabilities by a public accountant shows an excess of assets over liabilities of $149,112.99. In addition, there is a bundle of financial documents annexed to the affidavit of Mr Stuart, filed on 11 December 1992. Those documents include a balance sheet as at 30 June 1992, which shows total assets of $519,274.10 and total liabilities of $206,683.18.

9. The discrepancy, serious though it is, in the statement of assets and liabilities in annexure BTE22 and in the annexures to Mr Stuart's affidavit of 11 December 1992 may be explained by the two notes to the accounts numbered 1 and 2 to the financial documents annexed to Mr Stuart's affidavit, which read:

" 1. A software product developed, described as MPRS
Technology was sold in early July 1992 for $150,000.
This product has not been previously recognized in
prior accounts prepared before 30th June, 1992 while
the expenses incurred to produce this technology were
included amongst total expenditure. Under current
accounting standards, this developed asset should be
recognized in the period in which the expenses have
occured (sic), and as the asset developed was sold
shortly after the end of the financial year for
$150,000, we believe it reasonable to recognize this
asset, and the corresponding income, for the amount of
$150,000.
2. As the listed fixed assets were also sold at the same
time for $48,000, it is reasonable to revalue the
written down value of the assets after depreciation,
back to a realistic amount, the amount for which they
were sold, without any further allowance for
depreciation. This adjustment reflects a true and
fair view of the company's accounts as at 30th June,
1992. "

10. It is a curious feature that there is included as intangible assets in the balance sheet annexed to Mr Stuart's affidavit, the MPRS technology at $150,000.00 and a non current asset of $48,000.00 obtained after an amount of $65,331.00, the subject of note 2 to the accounts, has been reduced by provision for depreciation of $17,331.00.

11. It is unusual to find that in the profit and loss statement annexed to Mr Stuart's affidavit there is an element called 'Revaluation of Assets' of $31,385.39 included as income, and also the valuation of MPRS Technology included as income in the sum of $150,000.00. It seems to me that if the value of an asset is taken as an asset in the balance sheet, the amount obtained on its sale cannot, at the same time, be included as income in the profit and loss statement.

12. Be that as it may, having regard to the evidence of Mr Knight, and the fact that it is not challenged, I am prepared to proceed on the basis that at least as at November 1992 there was something only of the order of $43,000.00 from immediately realisable assets available to meet an order for costs.

13. The evidence shows that there has been a substantial running down of Set Technologies Pty Ltd's business activities. The audit by Chiverall and Bulley says that the company has invoiced $89,753.77 since 1 July 1992, that is over a period of approximately five months. This figure is to be compared with total sales for the financial year ended 30 June 1990 of $1,199,199.50; for the year ended 30 June 1991, $1,267,846.67, and for the year ended 30 June 1992, $1,578,647.53.

14. Moreover, Mr Stuart, in his affidavit of 14 November 1992, deposes that the company then had stock of a total value of $30,782.36. This is to be compared with stock as at 30 July 1992 of $68,334.19.

15. Mr Stuart also deposes that the company then owed no moneys under any loan, lease, overdraft, debenture or otherwise. This I take to mean otherwise than to trade creditors. In those circumstances it is a curious feature of the evidence that it appears that on 28 May 1992 a charge was lodged over Set Technologies Pty Ltd, the chargees being all, bar one, directors of that company. The effect of clause 2.2 of that charge would permit directors to create loans which would then be repaid in priority to unsecured creditors, such as a successful respondent in the principal proceedings.

16. It appears from the affidavit of Mr Stuart, sworn 27 November 1992, that the charge was discharged and released with a notice of discharge lodged with the Australian Securities Commission on 25 November 1992. The reasons for the creation and discharge of the charge are not addressed in the evidence and it is for that, and other reasons, a curious feature of the evidence.

17. In sympathy with this evidence of a substantial running down of the applicant's business activities are the following activities revealed by the evidence: a company, Set Barcode Products Pty Ltd, was registered on 16 June 1992, its then principal activity being described as a shelf company. The registered office from 2 July 1992 was shown as 67 Springwood Road, Springwood, which is the same address at which Set Technologies Pty Ltd is now carrying on business. Set Technologies Pty Ltd has vacated its former place of business at Unit 4, Commercial Court, 130 Kingston Road, Kingston. The directors of Set Barcode Products Pty Ltd include a Mr Voermans, a director of the applicant; a Mr Peacock, formerly employed by Set Technologies Pty Ltd as its marketing and sales manager for Barcode products and TOM products; and a Ms Compton, who was formally the secretary/receptionist of the applicant.

18. The managing director of Set Technologies Pty Ltd, Mr Edwards, is retained by RSM Research Pty Ltd, and by an asset sale agreement of 2 July 1992, which is annexure BTE 26 to the affidavit of Mr Egan filed on 16 October 1992, Set Technologies Pty Ltd sold to that company assets of the applicant, being technology, contracts, records, plant and equipment, stock, and rented equipment, for a price of $205,000.00. By clause 6.1 the parties acknowledged that completion was subject to execution by the employees, namely Mr Edwards, Mr Stewart, Mr Trevor, and Mr Neilsen, four directors of the applicant company, on or before the completion date of employment agreements with RSM Research Pty Ltd.

19. Pursuant to clause 7 of that asset sale agreement, Set Technologies Pty Ltd effectively assigned the lease of the premises at Underwood to RSM Research Pty Ltd. The agreement disposed of the major asset of Set Technologies Pty Ltd, and what appears to be the only asset of any significant value.

20. Mr Smith acknowledged what he called the 'down sizing' of the applicant. Those people behind the applicant are entitled to arrange their affairs as they think best, but if the consequence, or consequences, of any such rearrangement is that there is a reason to believe that Set Technologies Pty Ltd will be unable to pay the costs of the respondents if they are successful in their defence, it is clearly appropriate for the Court to require that the applicant provide security for costs. In all the circumstances, I believe, pursuant to s. 1335 of the Corporations Law that security for costs should be provided.

21. The question then is how much. An affidavit by Mr Egan filed on 28 January 1993 assesses the party and party professional costs and outlays from the commencement of the matter to 9 October 1992 at $43,425.69, and assesses the party and party professional costs and outlays to be incurred by the respondents to the conclusion of the trial at $83,500.00. As appears from annexure BTE 1 to that affidavit of Mr Egan, his estimate of the future party and party professional costs and outlays is based on an estimate of a 10 day trial with counsels' fees being $18,000.00, and airfares totalling $9884.00 for witnesses, two of whom are said to come from England, one from Germany, one from New Zealand and one from New South Wales, as well as accommodation for witnesses, estimated on the basis of 5 persons by 12 days by $190.00, totalling $11,400.00.

22. On the other hand in an affidavit by Mr Duncan, filed on 30 November 1992, he estimates the party and party professional costs incurred by the respondent to date at a total of $36,000.00, and estimates that the future party and party costs and outlays of the respondents, to the conclusion of the trial, based on a three day trial, at $47,500.00.

23. There is, of course, room for difference in relation to estimates, particularly where one estimate is based on a three day trial, another on a 10 day trial, and with the elements to which I have referred in some detail. Being realistic about the matter, it seems to me that the costs, both past and future, of party and party professional costs and outlays will be at least $85,000.00. I would hope that they would not be of that order, on Mr Egan's cautious provisioning, but one cannot say that they might not be of that order.

24. Acknowledging that an order for security for costs is not meant to provide an indemnity, on the totality of the evidence I order that the applicant, Set Technologies Pty Ltd, provide security for costs in the sum of $85,000.00 in a form or forms to be approved by the Registrar. It is my intention that the provision of security be approached flexibly, particularly having regard to the fact that there are persons behind the applicant whose interests clearly have to be looked at.

25. I order that such security be provided within 28 days. Until security in the form that I have ordered is provided, I order that the proceedings be stayed.
(Further submissions were made.)

26. I order that the costs of the motion, including reserved costs, be paid by Set Technologies Pty Ltd. I cannot see any reason why the provisions of the Federal Court Rules dealing with taxation of costs on an interlocutory application should not apply.