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Federal Court of Australia |
Last Updated: 28 September 2006
FEDERAL COURT OF
AUSTRALIA
ACOHS PTY LTD v UCORP PTY LTD &
ORS [2006] FCA 1279
PRACTICE AND PROCEDURE – security for
costs – review of Registrar’s decision – principles relevant
to the exercise of discretion
to order security for costs.
Corporations Act 2001 (Cth):
s 1335
Acohs Pty Ltd v Merck Pty
Ltd [1997] FCA 57
Ariss v Express Interiors Pty Ltd (in liq)
[1996] 2 VR 507
Beach Petroleum NL v Johnson (1992) 7 ACSR
203
Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR
1
Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR at
497
Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR
301
Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd [2004] FCA 1334
Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR
68
Equity Access Limited v Westpac Banking Corporation [1989] ATPR
40-972
Harpur v Ariadne Australia Ltd (No.2) [1984] 2 Qd R
523
Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744
January Force Pty Ltd v Tricon Restaurants Australia Pty Ltd
[1999] FCA 1746
KP Cable Investments Pty Ltd v Meltglow Pty Ltd
(1995) 56 FCR 189
Lisa Joy Pty Ltd v Brothers Neilsen International Pty
Ltd [2003] FCA 986
Memutu Pty Ltd v Lissenden (1983) 8 ACLR at
364
Meni’s Tailoring and Alterations Pty Ltd v Jeans West Corp Pty
Ltd [2003] FCA 1108
Pacific Acceptance Corporation Ltd v Forsyth
(No.2) [1967] NSWR 402
Pasdale Pty Ltd v Concrete
Constructions (1995) 131 ALR 268
Petite Pty Ltd v Burdon-Smith &
Assoc (Supreme Court of Victoria, Beach J, 23 April 1996)
Porzelack KG
v Porzelack (UK) Ltd [1987] 1 All ER 1074
Re Brindle (1992) 35 FCR
506
Re Kwiatek (1989) 89 ALR 631, 638
Re Smail v Burton:
Insurance Associates Pty Ltd [1975] VR 776
Robust Software v Mann Judd
Reis Pty Ltd (1997) FCA 1595
Sandl Tading Pty Ltd v North American Oil
Company [1998] VSC 8
Sir Lindsay Parkinson and Co Ltd v Triplan
Ltd [1973] QB 609
Southern Cross Expiration NL v Fire & All Risks
Insurance Co Ltd (1985) 1 NSWLR 114
ACOHS PTY LTD v UCORP PTY LTD, BERNARD
BIALKOWER, WESFARMERS LIMITED AND J BLACKWOOD & SON LIMITED
VID873 OF 2004
JESSUP J
27 SEPTEMBER
2006
MELBOURNE
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AND:
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UCORP PTY LTD
First Respondent BERNARD BIALKOWER Second Respondent |
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AND BETWEEN:
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UCORP PTY LTD
First Cross-Claimant BERNARD BIALKOWER Second Cross-Claimant |
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AND:
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THE COURT ORDERS THAT:
1. The orders made by the Registrar on the respondents’ motion by notice dated 9 May 2006 be set aside.
2. The respondents pay the applicant’s costs of the said motion.
3. The respondents pay the applicant’s cost of applicant’s motion by notice dated 24 July 2006.
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BETWEEN:
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ACOHS PTY LTD
Applicant |
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AND:
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UCORP PTY LTD
First Respondent BERNARD BIALKOWER Second Respondent |
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AND BETWEEN:
|
UCORP PTY LTD
First Cross-Claimant BERNARD BIALKOWER Second Cross-Claimant |
|
AND:
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WESFARMERS LIMITED
First Cross-Respondent J BLACKWOOD & SON LIMITED Second Cross-Respondent |
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DATE:
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PLACE:
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REASONS FOR JUDGMENT
INTRODUCTION
1 In its Third Further Amended Statement of Claim filed on 14 December 2005, the applicant alleges that it has for many years conducted the business of authoring, maintaining, managing, distributing and updating material safety data sheets (‘MSDSs’) of chemical and hazardous substances of manufacturers, importers and suppliers, primarily by means of a database and management computer program known as ‘Infosafe’. The applicant claims to be the owner of copyright subsisting in a large and original database of MSDS files known as the ‘Infosafe’ database. The applicant claims to be the proprietor of the Internet domain name ‘msdsonline.com.au’. The applicant alleges that the respondents have ‘stocked’ various Internet web sites with a version of the applicant’s Infosafe database or a substantial reproduction thereof. It also alleges that, by creating a web site containing the Infosafe database which contains some indicators of source referable to the applicant, or words which are associated with the applicant, they have represented that the web site and associated items are those of the applicant or are authorised by the applicant. The applicant alleges breach of copyright, breach of s 52 of the Trade Practices Act 1974 (Cth) and passing off. 2 The proceeding was commenced in July 2004. Amended Statements of Claim were thereafter filed on or about 9 September 2004, 17 December 2004, 14 July 2005 and 14 December 2005. 3 By about the beginning of 2006, the parties had given discovery, but there remains some dispute as to the sufficiency thereof. 4 By letter dated 20 January 2006 to the applicant’s solicitor, the respondents’ solicitors said that they were ‘becoming increasingly concerned as to the veracity of your client’s claim’. They said that it was becoming ‘increasingly clear that your client has divested itself of all intellectual property rights (if any) in its MSDS to a number of its clients’ which was said to have severely weakened the applicant’s cause of action. The respondents said that they were, in the circumstances, concerned about the applicant’s ability to meet any costs order ultimately made against it. They referred to another proceeding, Acohs Pty Ltd v Merck Pty Ltd [1997] FCA 573, in which the applicant was ordered to provide security for costs, and asked to be informed by the applicant whether the ‘material issues’ had changed since then. 5 It seems that the respondents were not satisfied with the response which they received to their solicitors’ letter of 20 January 2006, and on 9 May 2006 they filed a Notice of Motion for an order requiring the applicant to provide security for costs. The motion was argued before a Registrar of the court on 2 June 2006, and the Registrar gave her decision on 7 July 2006. On that day, she ordered the applicant to pay $300,000 as security in a form approved by the Registrar, and that the proceeding be stayed until that security was provided. 6 By Notice of Motion filed on 24 July 2006, the applicant seeks a review, pursuant to s 35A(5) and (6) of the Federal Court of Australia Act 1976 (‘Cth’) and O 46 r 7B of the Rules of Court, of the orders made by the Registrar. On a motion such as the present, the court must conduct a hearing de novo: Re Kwiatek (1989) 89 ALR 631, 638; Re Brindle (1992) 108 ALR 470, 476.
SECTION 1335 OF THE CORPORATIONS ACT
7 The power of a Registrar to deal with a question of security for costs (not being the costs of or in connection with an application to be heard by the Registrar) is confined to the power arising under s 1335(1) of the Corporations Act 2001 (‘Cth’), which provides as follows:
"Where a corporation is 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."
The court itself has power to order security also under s 56 of the Federal Court Act, but the matter was argued before me as one to be resolved under s 1335(1) of the Corporations Act.
8 As the authorities demonstrate, s 1335(1) has three elements, each of which requires a particular approach by the court. Those elements are:
(a) the standard involved in the phrase ‘if it appears by credible testimony that there is reason to believe’;
(b) the concept involved in the phrase ‘the corporation will be unable to pay’; and
(c) the nature of the discretion given by the words ‘the court ... may ... require ...’.
9 The principal authority, upon which both parties in the present matter relied, is the judgment of von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203. As to the matter of ‘reason to believe’, his Honour said (at 205):
"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. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs."
This has been described as setting up a ‘fairly modest threshold’: see Meni’s Tailoring and Alterations Pty Ltd v Jeans West Corp Pty Ltd [2003] FCA 1108, [4].
10 The second element, inability to pay, involves two considerations of its own. The first is the need to fix the time at which the applicant’s inability, or apprehended inability, is notionally to be assessed. Section 1335 uses the future tense, and clearly looks forward to circumstances which are yet to occur. In Beach Petroleum, von Doussa J said that the court was required to form an opinion about the financial position of the applicant ‘at the time of judgment and immediately thereafter’: 7 ASCR at 205. The second consideration is as to the range of assets to which the applicant is likely to have recourse for the purposes of meeting an adverse costs order. It seems that these are the assets which might be immediately realised, together with those which could be realised in sufficient time to enable the applicant to comply with a costs order in the usual terms. The matter was put by von Doussa J in Beach Petroleum as follows (7 ACSR at 205):
"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 v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114 at 121. The company will also be unable to pay the costs within the meaning of the section if the payment would be one that will amount to a preference of the defendant over other creditors such that the payment would be liable to be set aside either as a preference or as a fraudulent disposition (that is a payment made by the plaintiff corporation with the intention to defeat or delay one or more other creditors) in the event of the plaintiff corporation later going into liquidation."
11 If the factual threshold under s 1335 is crossed, the court then has a discretion whether to make an order for security. There was, it seems, at one time a view that the crossing of the threshold should predispose the court to making an order for security. In Sir Lindsay Parkinson and Co Ltd v Triplan Ltd [1973] QB 609 the English of Court of Appeal rejected that view. Lord Denning MR said (at 626):
"Turning now to the words of the statute, the important word is "may". That gives the judge a discretion whether to order security or not. There is no burden one way or the other. It is a discretion to be exercised in all the circumstances of the case."
Agreeing with the Master of
the Rolls, Lawton LJ said (at 629):
"... the court has a discretion, and that discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a straightjacket by considerations of burden of proof. It is a discretion which the court will exercise having regard to all the circumstances of the case."
That the discretion was unfettered was confirmed by the Full Court in Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, 4. Taking this approach, in Gentry Bros Pty Ltd v Wilson Brown and Associates Pty Ltd (1992) 8 ACSR 405, 415, Cooper J said:
"It is not possible or appropriate to list all of the matters relevant to the exercise of the discretion. The factors will vary from case to case. The weight to be given to any circumstance depends upon its own intrinsic persuasiveness and its impact on other circumstances which have to be weighed: PS Chellaram and Co v China Ocean Shipping Co [1991] HCA 36; (1991) 65 ALJR 642 at 643."
The same approach has been taken by the Victorian Court of Appeal: see Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507, 513.
12 Notwithstanding the unfettered nature of the discretion under s 1335, single judges of this court have on occasions set out check-lists, as it were, of factors or guidelines which might, in appropriate cases, be relevant. As I understand them, such guidelines are in no way an attempt to place fetters upon the exercise of the discretion; rather, they amount to reminders, to assist the parties and the court, of things that have been considered to be important on other occasions. In the present case, I have been referred to a check-list set out by Hill J in Equity Access Limited v Westpac Banking Corporation [1989] ATPR 40-972 at 9-10. The factors which could be relevant to the exercise of the discretion, according to his Honour, were the applicant’s chances of success, the question whether an order for security would shut the applicant out from pursuing its claim, if the applicant is impecunious, the question whether the impecuniosity that arises from the conduct of the respondent, the public interest, discretionary matters peculiar to the particular case, and the quantum of the risk that the applicant could not satisfy an order for costs. Clearly these factors, to the extent that they are proper to be taken into account, cannot be an exhaustive itemisation of the matters to be considered. Indeed, some six years later, in KP Cable Investment Pty Ltd v Meltglobe Pty Ltd (1995) 56 FCR 189, Beazley J set out seven guidelines which inform the exercise of the discretion under s 1335, including some that were not on Hill J’s list. The guidelines appear in a lengthy passage in Beazley J’s judgment (56 FCR at 197-198), which does not need to be set out in full here. To the extent that her Honour’s guidelines bear upon the matter which I need to decide here, I shall refer to them presently. I note that they were, however, summarised in point form by French J in Carey-Hazell v Getz Bros & Co (Aust) Pty Ltd [2004] FCA 1334, in which his Honour said at [28]:
"The general principles relevant to the exercise of the discretion to order security for costs were conveniently set out by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189. They are:
1. Whether the application for security has been brought promptly.
2. The strength and bona fides of the applicant’s case.
3. Whether the applicant’s impecuniosity was caused by the respondent’s conduct the subject of the claim.
4. Whether the respondent’s application for security is oppressive in the sense that it is being used merely to deny an impecunious applicant a right to litigate.
5. Whether there are any persons standing behind the applicant who are likely to benefit from the litigation and who are willing to provide the necessary security.
6. Whether the persons standing behind the applicant have offered any personal undertaking to be liable for the costs and, if so, the form of any such undertaking.
7. Whether the applicant is in substance a plaintiff or the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt the respondent’s self-help procedures."
The Registrar in the present case had resort to French J’s check-list to assist her in exercising her discretion under s 1335.
THE APPLICANT’S CAPACITY TO SATISFY A COSTS ORDER
13 The parties are agreed that there are two aspects in which the Registrar’s decision should not be challenged, and may provide a basis for the court’s own consideration of the respondents’ motion. The first is the Registrar’s estimate of the party/party costs which the respondents would be likely to incur between the filing of their Notice of Motion on 5 May 2006 and the judgment in the proceeding. In the hearing before the Registrar, both parties agreed that she might bring her experience in the matter of taxation to bear upon the exercise in which she estimated the respondents’ likely costs. Proceeding in this way, the Registrar took the view that $450,000 would fairly represent the likely party/party costs of the respondents over the relevant period. Both parties have accepted this as a reasonable estimate. The importance of the estimate in the present circumstances is that it represents the figure against which the applicant’s likely capacity to raise funds for the purposes of meeting a costs order must be tested. 14 The second aspect of the Registrar’s decision which both parties accept is the quantification of the amount of security which the applicant should be required to provide, should the respondents’ motion succeed. The Registrar ordered the applicant to pay $300,000 as security, thereby discounting the sum of $450,000 to reflect the possibility that, as things eventuate, that sum may prove excessive. The Registrar fixed upon $300,000 in the exercise of her discretion, and both parties accepted before me that, if I should order the applicant to provide security, the sum of $300,000 would be appropriate. 15 The next matter to consider is when it is likely that judgment will be given in this case. Mr McGowan SC, who appeared with Mr Dalton for the applicant, was inclined to think that the trial would not be complete before the middle of 2007. The Registrar based her consideration of the matter of security upon an anticipated 15-day trial. The stay which she ordered has itself put back the date upon which the parties would otherwise be ready for trial. Although I am concerned that, in a proceeding in which discovery has already been given – albeit that some issues remain – the parties are unable to anticipate an earlier trial than they do, I can but go on what I am told. For the purposes of these reasons, I shall assume that judgment will be given at about the end of the third quarter of 2007. 16 I turn next to consider the applicant’s financial resources. The applicant has a share capital of $100.00. It owns no real property. Of its 100 issued shares, 99 are held by Linset Pty Ltd and the other is held by Mr Ian Cowie, the sole director of the applicant. Mr Cowie and his wife Genevieve are the only directors and shareholders of Linset Pty Ltd. 17 The applicant conducts, in its own right and not merely as trustee, a viable and, it appears, generally successful business based upon the licensing of third parties to use its Infosafe 2000 System. The purpose of that system, and related services, is to assist manufacturers, importers, suppliers and employers to comply with the regularity obligations in relation to the creation and distribution of MSDSs. The Infosafe 2000 System comprises a relational database and powerful manipulative software applications that permit and control the entry and the storage of data into the system, and the retrieval and delivery of that data in unique and consistent Infosafe MSDSs that can be viewed on a computer and, if desired, printed as a hardcopy. The applicant had sales revenues of $2,261,894 in 2003/04 and of $2,444,861 in 2004/05. 18 On 29 May 2006, the applicant’s bank account was overdrawn to the extent of about $110,000. A cash flow projection prepared by Mr Lazar, the applicant’s accountant, showed a closing balance of ($64,246) on 30 April 2006 and of $239,038 on 31 May 2006. There was no explanation for the difference between a negative balance on the applicant’s overdraft account in the sum of $110,000 on 29 May 2006, and a positive balance on cash account of $239,038 two days later. I shall assume, in the applicant’s favour, that the cash balance was in fact $239,038 or thereabouts on 31 May. 19 Mr Lazar’s cash flow projection predicts a closing balance of $855,400 on 30 June 2007. I am not, however, prepared to accept that sum as the cash resources that will most likely be available to the applicant at the time when the respondents’ costs have to be paid. As mentioned above, the best estimate of when that time will be is about the end of the third quarter of 2007. The closing balances on cash account according to Mr Lazar’s projection for the 4 months prior to June 2007, in order from February, were $460,138, $446,847, $498,932 and $826,052. The applicant did not provide any projection extending beyond June 2007. It is not clear to what extent I should infer that the cash position would be influenced by the applicant’s profit and loss results, but, as the respondents pointed out, the latter have not been stable over the last three years: a loss of $59,589 was recorded in 2003/04, a profit of $69,519 was recorded in 2004/05, and a profit of $689,140 was recorded for the period from 1 July 2005 to 29 May 2006. There is no estimate for 2006/07. Any attempt on my part to use these figures to anticipate the applicant’s cash position in the third quarter of 2007 would be speculative. 20 Another aspect of concern in this regard is the submission of the respondents that the applicant appears to have lost some customers in recent times. The applicant’s response to this is that at least one major customer has been lost to the respondents largely as a result of their use of material in which the applicant claims copyright. 21 In these circumstances, I believe I am obliged to take a conservative approach to the question of the probable cash position of the applicant at about the end of the third quarter of 2007. On the evidence, I think it probable that the position will have improved considerably over the figure for 31 May 2006 – $239,038 – but I am not prepared to find it probable that the balance would be of the order of $850,000. Given the pattern of cash flow balances projected for the first half of 2007, I hold it to be probable that, at the end of September 2007, the applicant’s cash position will show a positive balance of between about $450,000 and about $650,000. 22 As he conceded in his affidavit sworn on 1 June 2006, Mr Lazar’s projection took no account of the applicant’s own legal costs in this proceeding. Despite the considerable volume of material before the court, there is no sworn estimate on behalf of the applicant as to its own likely costs in the proceeding. Down to 30 June 2006, the applicant has spent $412,531 on costs. Until September 2005, the applicant’s solicitors were Mulcahy, Mendelson & Round. At about that time, Mr Round took up employment with the applicant and has been the applicant’s solicitor on the record since. I was invited by Mr McGowan to infer that the applicant’s solicitor/client costs would be somewhat less as a result of this change in arrangements. I am prepared to draw that inference, but there is no evidence which would tend to indicate by how much those costs would be less than they would otherwise have been. An analysis of the evidence handed up by the respondents demonstrated that, in the month of June 2006 alone, the applicant incurred legal fees of slightly less than $140,000. There was a deal of interlocutory activity in and around that month, principally the hearing of the present motion before the Registrar and the commenced hearing of a second motion before Finkelstein J, on which his Honour gave a ruling on 7 July 2006. However, I think it would be a mistake to assume that interlocutory activity will henceforth be a matter of little or no expense to the applicant. 23 A 15-day trial will require considerable preparation, including, it seems, the engagement of experts. Mr Anderson SC, who appeared with Mr Wallis for the respondents, pointed out that, if the Registrar estimated the respondents’ likely prospective party/party costs at about $450,000, all things being equal the applicant’s own costs over the same period, on a solicitor/client basis, could be anything from about $600,000 upwards. Mr McGowan stressed that all things were not equal, because of Mr Round’s position as in-house solicitor. Even given Mr Round’s situation, I think it would be unrealistic for the applicant to anticipate conducting the whole of the remainder of the proceeding for less than about a further $400,000 (ie since 29 May 2006) on a solicitor/client basis. 24 Turning to non-cash assets, the applicant’s balance sheet as at 29 May 2006 showed accounts receivable of $822,831. Mr Rathner, the accountant engaged by the respondents, noted that the applicant’s accounts made no provision for doubtful debts, and suggested that a figure of $71,500 should be allowed for that. Mr McGowan stressed that the applicant’s customer list comprised ‘Australian and international listed public companies, many of which [were] household names, government departments and large private companies’. He submitted that there was virtually no risk of bad debts. Mr Lazar said that the cause of the aged debts as they appeared in the balance sheet was the applicant’s own procrastination in following up those debts. He would allow for no more than $10,000 in bad debts. I do not believe it is necessary for me to resolve this issue. In his cash flow projection, Mr Lazar included the applicant’s revenues from trading operations. I infer that the projection is based upon the payment of trading debts as and when they fall due, and that for the applicant to recover more than is shown in the projection would involve seeking to accelerate the receipt of payments from customers outside the limits of its normal trading terms. In the result, having given the applicant the credit of the cash position revealed by Mr Lazar’s projection, I do not believe I should also count the accounts receivable item as an asset likely to be available, in any realistic sense, for the payment of the respondents’ costs. 25 The applicant’s balance sheet also shows three loans which the applicant has made, totalling $355,958. There is some limited evidence about the making of two of these loans, but there is nothing which would indicate whether the applicant has a right to call for the repayment of the capital, and if so on what notice. Neither is there any evidence about the creditworthiness of the borrowers (although I note that one of the borrowers is Mr Cowie himself, whose creditworthiness I assume for present purposes). Of these loans, Mr Rathner said:
"The recoverability of these advances is not known. However ... recoverability of the loans is dependant upon the repayment terms. The directors loan is not repayable before 30 June 2007 and the loan to GWT is not repayable before September 2008. In addition, as loans have been advanced to entities overseas, the recoverability of loans from jurisdictions outside Australia is more problematic should the debtor elect to be difficult on repayment."
Mr Lazar did not respond to these statements. In the circumstances, I think the appropriate course is to treat these loans in the same way as I treated trade debts, namely, to assume that, to the extent that the capital would be available to the applicant if need be, due account has been taken of it in Mr Lazar’s projection.
26 Another significant item in the applicant’s balance sheet is computer hardware and software, the written down value of which is $138,043 and $59,534 respectively. Mr Rathner said that, in his experience, second hand computer equipment and software has little if any value. Mr McGowan submitted that I should infer that the kind of computer hardware that the applicant had was much more sophisticated than that available to the consumer, and may have a quite respectable second hand value. However, Mr Lazar said nothing on the subject, and, if the only way the applicant was able to put together sufficient assets for sale for the purposes of avoiding the threshold in Beach Petroleum is by notionally disposing of the equipment which is vital to its operation as a business, I am inclined to think that such an item should not be taken into account. 27 Finally, Mr Lazar’s own conclusion about the applicant’s capacity to fund an adverse costs order was as follows:
"It is my firm opinion based on my experience as an accountant and my knowledge of the applicant’s business and accounts that it would be able to pay an order for costs of at least $400,000 within a reasonable time without jeopardising its working capital or requiring it to borrow against the value of the intellectual property."
Mr Lazar did not provide a table explaining how the figure of $400,000 was derived. Neither is it apparent at what time Mr Lazar assumed that the applicant would be required to find a sum of this order (ie, whether now, in late 2007, or some time in between). From my own calculations, referred to above, and after paying its own solicitor/client costs, in the third quarter of 2007, the extent of the applicant’s readily realisable assets (which I derive largely from Mr Lazar’s cash projection) would be no more than about $250,000.
28 There are, of course, many imponderables in all this, and I have been considerably disadvantaged by the fact that the accountants who swore affidavits have not been cross examined. However, as appears from the previous paragraph, whether Mr Lazar’s $400,000 or my own maximum of $250,000 is taken, the applicant falls short of the sum of $450,000 which the Registrar took, and the parties accept, as the respondents’ most likely party/party costs down to judgment in the proceeding. At best, the position is very problematic. In the circumstances I am persuaded that there is a real chance that the applicant will be unable to pay the respondents’ costs, if judgment goes against the applicant, and therefore that the respondents have satisfied the factual requirement of s 1335 of the Corporations Act necessary to enliven the discretion to make a security order of the kind contemplated by the section.
THE DISCRETION UNDER s 1335
29 Mr Anderson relied upon the following matters in pressing for an order for security:
(a) the fact of the finding – assuming I should make one – that there is reason to believe that the applicant would be unable to pay the respondents’ costs;
(b) the fact that Mr & Mrs Cowie stand behind the applicant and will benefit if the applicant succeeds but will not be obliged to pay the respondents’ costs if it fails;
(c) the ability of Mr Cowie, who with his wife effectively controlled the applicant, to ‘order his affairs’ in a way that would be to the respondent’s disadvantage; and
(d) the damage done to the applicant’s prospects of success by certain documents recently discovered.
30 Mr McGowan relied upon the following matters in resisting an order for security:
(a) the respondents’ delay in making their application for security;
(b) the fact that the risk of the applicant being unable to pay the respondents’ costs is low;
(c) the strength of the applicant’s case;
(d) the respondents’ breach of undertakings given to the court;
(e) the fact that the applicant is the principal asset of those who stand behind it; and
(f) the fact that an order for security would be a ‘millstone’ for the applicant.
31 I consider first Mr Anderson’s point (a) and Mr McGowan’s point (b). The fact that an applicant will be unlikely to be able to pay the respondent’s costs (ie the factual condition involved and the threshold under the section) may itself be (and probably usually will be) a factor in the exercise of the discretion. In Ariss, Phillips J A said (at 513):
"But if it be correct to adopt that approach, it is equally correct that the precondition for the exercise of the discretion ... is more than merely a precondition. The impecuniosity of the plaintiff company of which there must be credible evidence before the discretion conferred by s 1335 becomes exercisable is not only the occasion for the exercise of the discretion; it is ... ‘a factor, and often a most significant factor, in the exercise of the court’s discretion’."
This, of course, cuts both ways. At one end of the scale, if, at the threshold point, the court was readily satisfied that the applicant would, at the time of judgment, be hopelessly impecunious, that should, in my view, be regarded as a significant discretionary reason why an order should be made. If the factual case is otherwise, however, and the applicant is in a generally sound position, and cannot be described as impecunious (notwithstanding the court’s anticipation that it will probably be unable to meet an order for costs), the court would, in my view, rightly exercise greater restraint before making an order.
32 In the present case, Mr McGowan submitted that the applicant could never be described as impecunious, that it had a healthy business with an established customer base of good repute, and that its major asset (the intellectual property which it seeks to protect in this proceeding) is, in point of substance as well as form, genuinely its own (in the sense that it is not simply being used as a convenient corporate vehicle through which other interests carry on business). He submitted that, if there was a risk that the applicant would be unable to pay the respondents’ costs, that risk should be regarded as low in all the circumstances. I accept these submissions, and I place this consideration on the scales as one which tends to favour restraint in the making of an order. Although I do not lose sight of the fact that I have found it to be a realistic possibility that the applicant will be unable to pay the respondents’ costs, I have not concluded, and I would not conclude on the evidence, that it is more probable than not that the applicant will in fact be unable to pay the respondents’ costs. In the result, I consider that the fact that the respondents have crossed the threshold should be of little weight in the discretionary exercise arising under s 1335. 33 I consider next Mr Anderson’s point (b) and Mr McGowan’s points (e) and (f). The applicant has made it clear that it would be able to comply with an order for security in the amount of $300,000 or thereabouts, and that it will provide the security ordered by the Registrar should I allow her order to stand. It follows that the making of an order for security would not stultify the proceeding. This is a consideration which weighs in favour of the respondents. However, the applicant does submit that an order for security would constitute ‘a millstone’ which it would rather not have. The evidence tends to support that submission. In his affidavit sworn on 18 August 2006, Mr Cowie said:
"I am in the process of developing a business model to assist the Applicant to compete with the Respondents. If the Applicant is ordered to give security for costs, its capacity to invest in the model and its ability to compete with the Respondents will be severely restricted. On 7 July 2006, Deputy Registrar Mussett ordered the Applicant to pay security for costs of $300,000. The Applicant is able to pay this amount and would be able to pay even more; however, to do so will gravely affect its ability to make the investment necessary to compete with the Respondents."
I recognise that such claims in an interlocutory affidavit might be regarded as self-serving and for that reason, as well as for the reason that they have not been tested, should be treated with caution. However, the claims strike me as reasonable and they correspond generally with uncontroversial facts as to the overall circumstances of the applicant.
34 I have grouped Mr McGowan’s point (f) with the other two points mentioned in the previous paragraph because of what I perceived, from the authorities, to be a connection between a submission (not made in the present case) that an order for security would stultify the litigation and the submission embodied in Mr Anderson’s point (b). Mr Anderson submitted that this was a case in which the individual persons (Ian and Genevieve Cowie) who stand behind the applicant will derive considerable benefit if the litigation succeeds, but seek to prosecute it without any of the attendant risks of having to pay the respondents’ costs, in the event that it should fail. 35 Mr McGowan submitted that this was not a case in which the Cowies should be regarded as ‘standing behind’ the applicant, or in which the applicant should be regarded as no more than a convenient corporate device behind which the Cowies could shelter. Mr Cowie himself gave evidence that he had provided guarantees for some of the applicant’s liabilities, including guarantees to a finance company in connection with the leasing of equipment and the like. He said that he and his wife were personal guarantors of the applicant’s $150,000 overdraft facility. He said that there were terms of that facility that had the effect that, if the applicant failed to pay the respondents’ costs, he and his wife would become personally liable under the guarantee. 36 Mr Anderson’s submission gives rise to a need to address what I consider to be an important question as to the exercise of the discretion under s 1335 of the Corporations Act. It is this: absent any question as to the solvency of the company concerned, will the mere fact that the company has shareholders who, qua shareholders, stand to benefit from a successful outcome in the litigation, but who are not exposed to the risk of an adverse costs order against the company, constitute a consideration favouring the making of an order for security? I consider that this question should be answered in the negative, for reasons which I attempt to explain below. 37 Before doing so, however, I shall explain why the question is important in the present case. The fact that the Cowies were ‘standing behind’ the applicant and would derive a benefit from the applicant’s success in this proceeding, but were not exposed to the risk of an adverse costs order, was a most significant factor in the Registrar’s decision to make an order under s 1335. This was so notwithstanding the fact that it was not claimed by the applicant that an order for security would stultify the litigation. Although the present proceeding involves, as I have said, a hearing de novo, it may be noted that this particular consideration stood at the forefront of the respondents’ case before the Registrar, and she was much influenced by it. It was likewise a most important part of the respondents’ case before me. 38 Turning to the cases which touch on the question with which I am dealing, I need go no further back than two Full Court judgments in 1984. The first was Bell Wholesale, in which the Full Court said (at 4):
"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 suggestion here is that a consideration of the position of natural persons who would benefit from the success of litigation, but who would not be exposed to an adverse costs order, becomes relevant because the company in question contends that an order for security would stultify its attempt to secure justice in the proceeding.
39 The second Full Court judgment was Sent v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201. In this matter the trial judge had declined to order security against Jet Corporation, for which company a receiver and manager had been appointed, after taking into account a number of factors, including the fact that it had not been proved that an order for security would mean that Jet Corporation would not proceed with its claim, and the court not being satisfied that Jet Corporation was not suing for its own benefit, but for the benefit of Citicorp, the secured creditor which had appointed the receiver and manager. With the agreement of Sweeney J, Smithers J said (2 FCR at 214-215):
"The situation is that unless security for costs is provided Citicorp has the privilege of suing on its initiative and responsibility, for its benefit, on terms that if it loses it has no responsibility for costs. From the point of view of the justice of the situation this is far removed from a case where a plaintiff or applicant is the party instituting and conducting the litigation.
....
Once it appears, not only that there is a secured creditor in respect of whose claims against an insolvent company the proceedings are of special interest, but that the proceedings have been initiated by, and are controlled by the receiver and manager appointed by that secured creditor whose primary purpose is the recovery of his own debt, and there is a reasonable inference that that secured creditor is supporting the litigation financially, the injustice of that secured creditor pursuing his own interest in an action against the appellant parties with no risk to itself should the appellant parties succeed in their defence assumes a special significance on the question of the justice of granting or refusing an order for security for costs."
The suggestion here is that, the applicant
company being in receivership and being operated for the benefit of the
appointor, an obvious
injustice would arise if the latter were able, in effect,
to conduct the litigation without exposure to the normal risks which an
unsuccessful party takes on the matter of costs.
40 The principle for which Bell Wholesale stands is that a corporate applicant will not be heard to assert that an order for security would frustrate (or, as it has been said elsewhere, stultify) its litigation unless the natural persons associated with it (shareholders, creditors, etc) are also without means, proof of which lies upon the applicant. Although often an applicant to whom this principle applies will in fact be insolvent or nearly so, that circumstance is not definitional: the principle applies to all corporate applicants. The principle for which Jet Corporation stands is that, when a corporate applicant is in receivership, under administration or the like, the circumstances may be such (although, it must be said that it will always be a question of fact) as to warrant the conclusion that, although it may not be possible to say that the proceeding is brought for the benefit of another (such as, for example, to invoke the operation of O 28 r 3(1)(b) of the Rules of Court), the real beneficiary of success in the proceeding would not be the applicant itself, but those who have prompted, and are funding, the applicant to take the proceeding. As was the case in Jet Corporation itself, those who stand to benefit cannot avoid the order for security merely by declining to take the point that such an order would stultify the litigation. Manifestly, the principle in Jet Corporation would not normally apply to a corporate applicant about the solvency of which there was no question, for two reasons: first, there would be no reason to doubt that the real beneficiary of the litigation would be the applicant itself, and secondly, it could not be said that the applicant was not exposing its own assets to the risks of an adverse costs order. 41 I consider next the important judgment of Beazley J in KP Cable. In her Honour’s seven guidelines to which I have referred, the fourth and fifth guidelines were expressed as follows (56 FCR at 197-198):
"4. Whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate: see M A Productions v Austarama Television at 100; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 per Clarke J at 545; Bryan E. Fencott at 513. In Yandil Holdings at 545 Clarke J stated the principle in these terms:
‘[t]he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour.’
This factor is related to the next, namely:
5. Whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security: see Memetu v Lissenden (1983) 8 ACLR 364; Sent v Jet Corporation (1984) 2 FCR 201; Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 2 FCR 1; Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120 at 123; Bryan E. Fencott at 513; Yandil Holdings at 545. The combined effect of these two principles was summarised by Meagher JA in Hession at 123 as follows:
‘...a company in liquidation against whom an order for security for costs is sought cannot successfully resist such an order merely by proving that it cannot fund the litigation from its own resources if an order for security is made; it must prove that it cannot do so even if it relies on the other resources available to it (the company's shareholders or creditors)...Finally, whilst it is both true and important that poverty must be no bar to litigation, what that means is that the courts must be astute to see that no person pursuing a claim which is not frivolous is precluded from doing so by the erection of obstacles which poverty is unable to surmount; it does not mean that proof of insolvency automatically confers an immunity from statutory provisions which deal with insolvent plaintiffs’."
42 If the first sentence of Beazely J’s fifth factor were taken as an absolute proposition and out of the context given by the authorities to which her Honour referred, it might justify the proposition that the mere fact that a corporate applicant has shareholders who could as individuals provide the security, and the mere fact that those persons would indirectly enjoy the benefits of the applicant’s success, should incline the court to make an order for security. I do not believe that her Honour intended the guideline to be so read, for the following reasons. First, her Honour’s words ‘and who are willing to provide the necessary security’ imply a fact situation in which the applicant itself is unable or unwilling to do so. This might be because the applicant is on its knees financially (the Jet Corporation situation) or simply because the applicant is submitting that it cannot or will not provide the security, and that its litigation would be stultified by an order. Secondly, her Honour did not express the fifth guideline as an absolute: twice she connected it with the fourth. She said that the fourth guideline ‘is related to the next’, and she referred to the summary by Meagher JA of ‘the combined effect of these two principles’. It may be noted that, although the plaintiff in Hession v Century 21 South Pacific Ltd was in liquidation, the reasoning of Meagher JA was aligned more with that in Bell Wholesale than with that in Jet Corporation. 43 In none of the judgments to which Beazley J referred under her Honour’s fifth guideline is there to be found any support for the absolute proposition that the mere fact that a corporate applicant has shareholders who would indirectly benefit from success in the proceeding, but who would not be exposed to the risks of an adverse costs order, should incline the court to make an order for security. In Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364 , the relevant passage in the judgment of Rogers J is as follows (at 365-366):
"Notwithstanding this, I would refuse to make an order for security if to do so would mean that the action would be stifled. However, that is not necessarily the case. The unreported decision of Yeldham J in Tulloch v Walker has indicated the route which should be followed by judges faced with the problem presently before me. If there is available some person or persons with assets who would be a person or persons who would benefit from the success of the action, it is an apt exercise of discretion in circumstances such as the present to require that person or persons to provide the security which would normally be required to be provided by the plaintiff."
In Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497, one of the four factors which French J took into account as being relevant to the exercise of his discretion was ‘whether the order will frustrate the plaintiff’s claim’. Having considered the authorities as they stood in 1987, his Honour concluded (16 FCR at 513):
"The effect of the authorities is, in my opinion, that the probability or certainty that an order for security for costs will frustrate the plaintiff’s claim will not automatically lead to such order being withheld. It is however a factor relevant to the granting of an order and will weigh against it where there is no party standing behind the company who is in a position to provide the necessary security."
In Yandil
Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542,
545, Clarke J said:
"The principles which should guide me in resolving the present dispute are not in doubt. The Court is vested with an unfettered discretion as to whether an order is made and, if so, upon what terms. The fact that the ordering of security will frustrate the plaintiff’s rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the Court’s discretion in the plaintiff’s favour.
It must be observed however in this respect that the mere fact that the plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order will stultify the plaintiff’s claim. There is a line of authority, commencing with the unreported decision of Yeldham J. in Tullock v Walker (8 December 1976), standing for the proposition that if the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security then it is, generally speaking, inappropriate to refuse an order."
His Honour then referred to Bell
Wholesale, and considered the impact of the principles set out in that
judgment upon the nature of the discretion which arose. His Honour
concluded on
this aspect:
"Indeed reference to a later portion of the judgment makes it quite clear that the Court does enjoy an unfettered discretion. In the circumstances of the present case it is sufficient for me to say that it is unlikely that a plaintiff could successfully resist a security order on the grounds of its own inability to provide an adequate sum unless it provides evidence of the financial status of those who stand behind it."
I have referred above to
the relevant passages in Jet Corp and Bell Wholesale, and the
position stated by Meagher JA in Hession is sufficiently set out in the
extract quoted in KP Cable.
44 Another judgment which is often referred to is that of Finn J in Pasdale Pty Ltd v Concrete Constructions (1995) 131 ALR 268. His Honour said (at 272):
"The applicant submitted, first, in a global way that an order for security would bring its application to an end. It is perfectly clear on the evidence that the company itself is in no position to provide security. But as I will indicate below, the real fate of the application does not in a practical sense turn upon the company's capacity to provide security. Standing behind the company for present purposes are creditors (a) who, under Part 5.3A of the Corporations Law, are involving themselves in the company's fate; (b) whose capacity to provide security if they are so minded, is unquestionable; and (c) who alone, seemingly, stand to benefit from such success as the application may enjoy. In these circumstances an order for security may have the effect of bringing the application to an end. But whether or not it has that effect will depend, not on the applicant's impecuniosity, but on the judgment made by a creditor or creditors as to whether the furtherance of the application should be supported."
In Pasdale, it was not the risk-free benefit which would be obtained by persons standing behind the applicant, of itself, which his Honour took into account; rather, it was the fact that the judgment of those who stood behind the applicant (in that matter, creditors) as to whether the applicant should be supported would inevitably determine the question whether the making of an order for security would frustrate the litigation. Having considered the facts in the case before him, Finn J concluded (at 274):
"The bare point to be made here, though, is that the creditors have the clear capacity to put the company in a position to continue its application notwithstanding the making of an order for security for costs. For this reason it cannot be said that "if an order for security were made, the litigation would be stifled": Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, at 4; see also PS Chellaram and Co Ltd v China Ocean Shipping Co [1991] HCA 36; (1991) 102 ALR 321; Yandil Holdings Pty Ltd v Insurance Company of North America (1985) 3 ACLC 542 ."
45 Another example of the approach in Bell Wholesale was that taken by Beach J in Petite Pty Ltd v Burdon-Smith & Assoc (unreported, Supreme Court of Victoria, Beach J, 23 April 1996). His Honour said:
"Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. ... However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation (see Flender Werft AG v Aegean Maritime Ltd [1990] 2 Lloyd’s Rep 27). In that case Saville J applied by way of analogy the approach adopted in another context, that of payment into court as a condition of leave to defend. In M V Yorke Motors (a firm) v Edwards [1982] 1 All ER 1024 at 1028, [1982] 1 WLR 444 at 449, 450 Lord Diplock approved the remarks of Brandon LJ in the Court of Appeal: ‘The fact that the man has no capital of his own does not mean that he cannot raise any capital; he may have friends, he may have business associates, he may have relatives, all of whom can hep him in his hour of need.’"
46 I mention next two unreported ex tempore judgments of Merkel J in 1997. The first was Robust Software v Mann Judd Reis Pty Ltd (1997) FCA 1595. In that case, the applicant was under administration at the time when the respondent sought security. There was a litigation fund provided by creditors, including a company associated with the main equity holder in the applicant itself. Merkel J referred to Pasdale and to Petite as authority in support of one of the three matters which, he considered, weighed strongly in favour of an order for security. That matter was that the litigation was being conducted for the benefit not only of the applicant, but of creditors and the interests behind the applicant. His Honour referred next to the substantial award which stood to be achieved by the applicant if its litigation succeeded. He continued:
"In other words, not only is the litigation not likely to be stifled by the order for security of costs, but parties standing to get a very substantial benefit from the proceeding ought not to be able to do so without bearing some risk in respect of the costs involved to the respondent in contesting the proceeding."
As I have said, this was an ex tempore judgment, and it is not entirely clear whether the passage I have just quoted related to both the first and the second matters to which I have referred, or to the second matter only. Whatever may be the case in that respect, however, given that Merkel J indicated that he was following Pasdale and Petite, I am disposed to think that his judgment in Robust Software, should not of itself be regarded as authority for the absolute proposition, separate from any consideration of potential stultification, that the mere fact that shareholders would derive an indirect benefit from a successful outcome, without exposure to the risks of adverse costs orders, should be regarded as favouring the making of an order for security.
47 The other 1997 judgment of Merkel J involved the applicant in the present proceeding: Acohs v Merck [1997] FCA 573. Having considered some factors which weighed against the making of an order for security, his Honour said:
"The main contention put forward by the respondents, which I regard as their strongest ground for the ordering of security, is that the shareholders of the applicant are the real beneficiaries of any litigation and of the applicant's business. Further, the respondents contend that I ought to assume that for that reason those shareholders are likely to have a significant role in funding the litigation, and if they are able to fund the litigation, in the absence of evidence to the contrary, they will be able to meet any order for security for costs.
Consequently it is said that:
(a) I cannot assume that an order for security for costs will stifle the litigation; and
(b) those who seek to benefit from the litigation in a commercial sense, if not in a legal sense, ought not to be free of the burden of the costs of the litigation in the event that the litigation fails.
In my view there is considerable substance in the respondent's arguments on this point. There is no evidence before me as to the financial circumstances of the two shareholders in question, being Linset Pty Ltd, which owns 99 of the 100 issued shares in the applicant, and Mr Ian Cowie who owns the other share and is a director of the applicant. I raised my concerns on this issue with counsel for the applicant in the course of argument and he quite properly conceded that there was no evidence upon which I could act which would lead to the conclusion that an order for security for costs would not be met or to the conclusion that such an order would necessarily stifle the litigation. No application was made for further evidence to be filed to establish that Linset Pty Ltd or Mr Cowie would not be able to meet an order for security for costs, nor was any evidence adduced which suggested that it would be unfair for them to be required to meet such an order. In those circumstances, at this stage, I am not prepared to form the view that a costs order would stifle litigation or would result in injustice to the applicant."
It is evident that Merkel J referred to the absence of evidence as to the financial circumstances of "those who benefit from the litigation in a commercial sense" because it enabled him to dismiss any concern that he otherwise would have had that an order for security would stifle the litigation or (presumably, thereby) result in injustice to the applicant. In other words, his Honour proceeded conventionally in line with the principle to be extracted from Bell Wholesale to which I have referred above. I should add that, in the present case, whatever is the reality, my judgment is not based upon the assumption that the applicant’s shareholders are likely to have a significant role in funding the litigation: my conclusion that the threshold from Beach Petroleum had been crossed was based upon an assumption that the applicant would itself fund the litigation.
48 Having effectively decided the security matter in Acohs v Merck in the passage I have set out above, Merkel J continued (in a passage to which the Registrar referred in the present case):
"I should say that there are other instances where this Court and other courts have held that where litigation is being conducted for the benefit, in a commercial sense, of interests behind an applicant, then that is a factor that weighs strongly in favour of exercising the discretion to order security for costs: see Pasdale Pty Ltd v Concrete Constructions (1995) 131 ALR 268; Petite Pty Ltd v Byrd Smith and Associates, (Supreme Court of Victoria, Beach J, 23 April 1996, unreported); Robust Software v Mann Judd Reis Pty Ltd (Federal Court of Australia, Merkel J, 11 February 1997, unreported). In each of these cases the fact that there were persons behind the applicant company who were likely to benefit from the litigation and who appeared to be in a position to provide the necessary security weighed heavily in favour of the exercise of the discretion to grant security for costs. No instance has been presented to me where, in similar circumstances, security for costs has been refused."
I do not believe that this passage was an
essential part of his Honour’s reasoning in Acohs v Merck. Of the
authorities to which he referred in it, Pasdale and Petite at
least are wholly in line with the principle in Bell Wholesale as I
understand it.
49 The intrinsic connection between what I might call the ‘stultify factor’ and the ‘persons standing behind’ factor (as recognised by Beazley J in KP Cable) is also to be seen in the very comprehensive examination of the authorities undertaken by Einstein J in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744. Having referred to KP Cable, his Honour said (at [50]):
"Clearly as Beazley J recognised, the possibility of stultification is a "powerful" factor to be taken into account by the Court in exercising its discretion as to whether an order is appropriate: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542. However, Clarke J in Yandil observed that the fact that a plaintiff is financially unable to provide security does not lead to the inevitable conclusion that the making of the order will stultify the plaintiff’s claim nor does it lead to the automatic refusal of an order. He went on to cite a line of authorities (see Tulloch v Walker, Yeldham J, 8 December 1976, unreported; Bell Wholesale Co Pty Ltd v Gates Export Corp & Ors (No 2) (1984) 8 ACLR 588) in support of the view that it is generally inappropriate to refuse an order for security where:
"the personnel behind the corporate plaintiff, or other parties who will benefit if the plaintiff succeeds, are financially able to provide adequate security." (at 545)
In other words, without fettering the Court’s discretion, it was said to be unlikely that a plaintiff could successfully resist a security order on the grounds of their own impecuniosity in the absence of evidence of the financial status of those who stand behind it (see Yandil at 545)."
This final sentence from the judgment of Einstein J states the correct approach as I understand it.
50 Finally, I refer to the judgment which perhaps states most categorically a proposition which is contrary to that which I have distilled from the authorities to date. It is that of Spender J in Lisa Joy Pty Ltd v Brothers Neilsen International Pty Ltd [2003] FCA 986. His Honour said (at [6]):
"... the fundamental principle to me is that expressed in Bell Wholesale, that an impecunious company ought not to be permitted to have a "free hit", in the sense that it would be entitled to the benefit of a successful prosecution of its claim, but be at no risk in the event that the claim is unsuccessful."
His Honour set out the passage from Bell Wholesale to which I have referred above, and continued (at [7]):
"Now it should be said that counsel for the applicant in the present principal proceedings does not assert that the litigation will be frustrated if an order for security is made, and therefore, the question of frustration, and the need to prove impecuniosity of those who stand behind the company is not directly relevant, but the consideration that those who stand behind the company will benefit from the litigation if it is successful, and yet will not be exposed to making good the costs that the company is ordered to pay if the company is unsuccessful, is a compelling reason for the exercise of the discretion to order security."
The Registrar relied on this judgment, as did the respondents before me. However, Spender J purported to follow the Full Court in Bell Wholesale and, as I have attempted to explain above, I do not believe that the Full Court was concerned to make the absolute proposition that the mere fact that an applicant company had shareholders or others standing behind it who would derive an indirect benefit from a successful outcome but who would not be exposed to the risk of an adverse costs order should be regarded as a factor favouring an order for security.
51 I recognise, of course, that the very point of s 1335 and its predecessors is to deal with the injustice that may on occasions arise where the statutory artifact of the incorporated entity is used to obtain all the potential benefits of litigation while avoiding the potential risks, or, to use the metaphor of Connolly J, to require an individual standing behind a company ‘if not to come out from behind the skirts of the company, at least to bring his own assets into play’: Harpur v Ariadne Australia Ltd (No.2) [1984] 2 Qd R 523, 532. I agree, with respect, that if the involvement of a corporate applicant is predominantly for the purposes of providing a skirt behind which an individual might participate in litigation without the usual incident of potential exposure to an order for costs, there would be every reason to require that individual to bring his or her assets into play. That is conventional Jet Corporation. But Connolly J’s metaphor does not, I consider, translate directly into the proposition that the mere fact that an applicant is a company with shareholders who would, by reason of that status, stand to derive an indirect benefit from success in the litigation should incline the court the more readily to make an order for security against the applicant. 52 In the present case the applicant has not contended that an order for security would stultify its litigation. That being the case, I do not take such a circumstance into account in favour of the applicant. Neither, however, is the applicant impecunious, of doubtful solvency, or the like. Thus I do not characterise the present proceeding as one in which the respondents are being harassed by other interests who are using the applicant as a vehicle for their litigation from which the respondents might expect nothing by way of costs, should a costs order ultimately be made in their favour. The applicant appears to be a viable trading enterprise with a legitimate business which cannot, on the evidence before the court, be regarded as ‘really’ the concern of the Cowies rather than that of the applicant itself. I would not, from the mere fact that the applicant happens to have two shareholders only, or that the bulk of the shares are owned by a company in which the Cowies hold all the equity, look upon the proceeding as one which is substantially brought for the benefit of those who stand behind the applicant. If the respondents do prevail and secure an order for the payment of their costs, on the facts and assumptions set out in the earlier part of these reasons, I consider there is a real risk that the applicant will fall short in payment thereof. But that does not mean that the applicant will get off scot-free, as it were: on any view, in the circumstances posited, the applicant will most likely find itself paying a considerable sum to the respondents by way of costs. 53 This brings me to Mr McGowan’s submission that an order for security would be a millstone for the applicant. Although this is not the same as saying that such an order would stultify the litigation, it does amount to a proposition that the additional financial commitment required thereby would place hardship upon the applicant. I accept the submission so far as it goes, but I do not believe I should act upon it if it appears that the hardship should not be regarded as a reality because of the ability of those standing behind the applicant to contribute to the security, should such be ordered. Mr Cowie has sworn that the applicant is the most significant asset which he and his wife own. I have referred to the personal guarantees which they have given. I am persuaded, in the circumstances, that the ordering of security would be financially onerous for the applicant to some degree, although the evidence does not permit me to assess the extent of the burden. 54 I consider next Mr Anderson’s point (d) and Mr McGowan’s point (c). In resisting the respondents’ motion, Mr McGowan submitted that the applicant had a case which was self-evidently strong, and likely to succeed. Mr Anderson, by contrast, submitted that documents which came to light during recent discovery have demonstrated that the applicant’s case has real problems. Those documents were said to be commercial agreements pursuant to which various customers of the applicant made use of MSDSs in which the applicant claimed copyright. Mr Anderson submitted that they demonstrated that the applicant did not own (or at least no longer owned) the copyright at all. Mr McGowan rejoined that the most that could be said of these documents was that the applicant had agreed that, under certain circumstances, it would assign the copyright. Unless the evidence is very clear one way or the other (which it is not), contentions at this level of detail lie along a path which, at this interlocutory stage, I should not tread: Porzelack KG v Porzelack (UK) Ltd [1987] 1 All ER 1074, 1077. Mr Anderson accepted that the present application should be dealt with on the basis that the applicant has prima facie case of some apparent substance. I am not prepared to say anything further about the applicant’s case at this stage: indeed, on the limited exposure which I have had to the underlying facts of the controversy, I do not consider that I am competent to make any assessment of the applicant’s prospects of success. To the extent that those prospects should be a factor in the exercise of my discretion, therefore, I hold that they cut neither one way nor the other. 55 I consider next Mr McGowan’s point (d). He submitted that the respondents had been in continued breach of undertakings which they gave to the court on 3 September 2004. Those undertakings related to the use of a reproduction, or substantial reproduction, of the applicant’s HTML files relating to MSDSs, or the applicant’s compilation of such files known as the Infosafe MSDS database. The applicant has not moved the court to deal with the respondents for contempt in this respect and I am reluctant to make findings about breaches of undertakings (save, perhaps, in a very obvious case) in what might be referred to as a collateral context. I regard the applicant’s allegation that the undertaking has been breached as a very serious one, but I do not regard the present occasion as providing the appropriate vehicle for an investigation into whether that allegation is well-founded. Apart from anything else, the matter is not straight forward. The respondents have applied for leave to vary the terms of the undertaking which they made in September 2004, and contended recently before Finkelstein J that the existing undertaking requires to be clarified in certain respects. On 7 July 2006 his Honour made a preliminary ruling the effect of which was that the existing undertaking had the meaning for which the applicant, rather than the respondents, contended. The respondents’ motion to vary their undertaking will come before the court on 16 October 2006. All things considered, I think it would be undesirable for me to embark upon a detailed consideration of the applicant’s allegation that the respondents have been in continued breach of their undertaking. 56 I consider next Mr McGowan’s point (a): the question of delay. As I have indicated, the proceeding was commenced in July 2004. The application for security was made in May 2006, although the applicant was effectively on notice of the respondents’ intentions in January 2006. As a general proposition, a respondent’s delay in making an application such as the present one will be an important consideration against the making of an order: Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301, 308, 309; Smail v Burton [1975] VR 776, 777; PG Gabel Pty Ltd v Katherine Enterprises Pty Ltd (1977) 2 ACLR 400, 402; Staff Development and Training Centre Pty Ltd v The Commonwealth [2005] FCA 1643, [10]. Mr Anderson submitted, however, that delay as such was not disentitling: what mattered were the reasons for, and the circumstances surrounding, the delay, and the question whether the applicant was prejudiced thereby, and if so in what way. 57 Mr Anderson pointed to the following facts and circumstances. First, he submitted that, as a result of recent amendments made by the applicant, the case was now somewhat different from, and larger than, its original formulation. Secondly, he submitted that recent circumstances had provided the respondents with legitimate grounds to make the present application, which grounds were not present, or at least were not apparent to the respondents, when the proceeding commenced. Thirdly, he submitted that the applicant was not prejudiced by the delay, or at least that the kind of prejudice to which it pointed was not such as was recognised in the authorities as a legitimate basis for resisting an order for security on the ground of delay. Fourthly, he pointed out that the respondents sought security for their prospective costs only, and did not seek any security for the costs which they had already incurred. I shall consider each of these matters in turn. 58 As referred to at para 2 above, it is true that there have been a number of amendments to the Statement of Claim. The only amendments which have been made since 2004, however, are not such as would, in my view, justify the conclusion that the applicant has significantly enlarged the boundaries of the proceeding or otherwise given rise to a legitimate justification to seek security for costs, when none previously existed. Perhaps sadly, it is an unusual statement of claim which does not, over the course of the interlocutory period, undergo adjustments in various ways. Such adjustments should not be discouraged; to the contrary, the process of adjustment evidenced by amendments to a party’s pleading will almost always focus the attention of all concerned more sharply on the issues which will in fact be controversial at trial, thereby not only promoting efficiency in the litigation itself but also, hopefully, providing a sounder basis for any mediation or settlement discussions which may occur. I am persuaded in the present case that the amendments by the applicant since 2004 are of this category, rather than seeking to make out a case which is substantially different from the original. 59 Next, Mr Anderson submits that the agreements which were recently discovered, and to which I have referred in par 54 above, made it apparent to the respondents that the applicant’s case was a deal weaker than was originally anticipated. In addition, he referred to the evidence, such as it is, of the applicant’s loss of customers in recent times. He submitted that, more or less about the same time, the respondents had a renewed cause to believe that they would in fact succeed in the litigation, together with a heightened cause to fear that the applicant would not have the resources to satisfy an adverse costs order. I would not hold that a new enthusiasm, on the part of the respondents, for the strength of their own case justifies delay in seeking an order for security. Such an order would be based upon the supposition that the respondents will succeed. The court knows nothing of the assessment by the respondents and their advisers of their chances of success, either originally or at any later time. It would not, in my view, be appropriate for the court to determine the present application by reference to the ebb and flow of changing assessments at this level. I do not, of course, exclude the possibility that, in an appropriate case, a dramatic change of fortunes produced by the revelation of some new piece of evidence might be regarded as sufficient to justify the timing of an application for an order for security. I do not, however, consider this to be such a case: rather, the present appears to be more in the normal run of cases in which, over the course of mutual discovery, each party gets its own particular encouragements. 60 As to the respondents’ suggestion that the applicant has recently lost customers, I note that, in one case referred to in the evidence, the customer was lost to the respondents. Given that the most significant item of commercial value to the applicant is the intellectual property which it seeks to protect in this proceeding, I am inclined, in the exercise of my discretion, to be somewhat sympathetic towards the applicant in this respect. On the assumptions which are inherent in the applicant’s case, the respondents are in competition with it. The conceptual template against which questions of delay should be measured, in my view, is one in which the respondents were aware, from the outset, that they were in competition with the applicant and would, therefore, anticipate that the applicant might well lose customers. That this has, apparently, eventuated to an extent is not something which, in my view, should tend to excuse the respondents’ delay. 61 On the matter of prejudice, it is, of course, accepted in the authorities that it is necessary to look not only at the delay as such, but also at the reasons for it, and at the things which the parties have done in the meantime. In Southern Cross Expiration NL v Fire & All Risks Insurance Co Ltd (1985) 1 NSWLR 114, 125, Waddell J said:
"Although relating to a different context it seems to me that the approach to be made in cases such as the present should reflect what was said in the well-known passage in Lindsay Petroleum Co v Hurd (1874) LR 5 PC 221 at 240:
... two circumstances, always important in such cases (that is where a defendant relies upon the doctrine of laches) are, the length of the delay and the nature of the acts done during the interval, which might affect either party and cause a balance of justice or injustice in taking the one course or the other, so far as relates to the remedy."
Likewise, in Buckley v Bennell, Street CJ said (1 ACLR at 308):
"It is an accepted principle in the ordering of security for costs that such an application should be made promptly. There may, of course, be cases where the impecuniosity of the company may only be discoverable or provable at a later stage of the proceedings. Similarly, there may be cases in which the length of the proceedings was not foreseen when they commenced. Other situations could occur in which a late application could, without procedural prejudice, be brought forward during the currency of the disputed proceedings. But ordinarily, I reiterate, the application ought to be made promptly in order to avoid the very situation which has developed in this case."
62 The applicant relied upon the statement made by Harper J in Sandl Tading Pty Ltd v North American Oil Company [1998] VSC 8, [11]:
"The principal reason why the courts insist that applications of this kind be initiated at the earliest reasonable opportunity is that otherwise the party from whom costs are sought might spend its funds on the litigation before an order for security is made, thus placing such security beyond its reach. An order for security for costs pronounced in those circumstances would result in the action being stayed and the expenditure in question being thrown away. At the very least, the party from whom security is sought might, had the application been on foot at an earlier date, have reordered its spending priorities to its advantage."
Mr McGowan referred me to a number of respects in which the applicant has made commercial decisions and commitments since the commencement of the proceeding which it might not otherwise have made, or which it might have made differently, had it known from the outset that it would be under an obligation to provide security for costs. Mr Anderson pointed out that Harper J’s judgment was not concerned with prejudice in this broader commercial sense, but was confined to prejudice arising from the making of decisions in, and the commitment of funds to, the litigation in question. He submitted that there could be no suggestion that the applicant had made decisions in, or committed funds to, the conduct of the present litigation which might in either case have been done differently if the respondents had sought an order for security at the outset, or nearly so.
63 There is no shortage of instances of security being ordered notwithstanding a respondent’s delay. Mr Anderson referred me to Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68, and to January Force Pty Ltd v Trico Restaurants Australia Pty Ltd [1999] FCA 1746, in each of which case a judge of this court ordered security notwithstanding what appeared, on the face, to be considerable delay. In the latter case, Goldberg J said that ‘delays should be considered by reference to whether the delay has occasioned any prejudice to the applicant’: at [18]. His Honour also said that ‘promptness is relative having regard to all relevant circumstances and is a factor to be weighed with other relevant factors’: at [22]. 64 In considering the matter of delay, courts have looked not only at absolute delay, but also at relative delay, in the sense of considering the timing of the application for security relative to the other steps which have been taken, and which remain to be taken, in the litigation. Thus, it seems, the court will be less inclined to make an order if the application therefor is not made until, say, the first day of the trial than it would be in the case of an application which is made part of the way through a lengthy interlocutory period. In the present case, there remains much to be done. As noted above, I have been told that at least one of the parties remains unsatisfied with the extent of the other’s discovery. There is the matter concerning the respondents’ undertaking which is to come before me on 16 October 2006. As I have said above, Mr McGowan is pessimistic as to the prospects of completing the 15-day trial before about the middle of next year. 65 On the other hand, as I have also indicated above, the applicants have already expended over $400,000 on their own legal costs in this proceeding. They have settled with some of the interests who were originally respondents. They have filed several iterations of their Statement of Claim. They have been involved in giving discovery, and in obtaining discovery from the respondents. In summary, there is much that the applicant has done, and considerable sums which it has spent, without any indication that it might be required to provide security. 66 I also consider it appropriate to take into account what the applicant says about the commercial commitments which it has made since the commencement of this proceeding. It is true, as Mr Anderson submitted, that the cases do not disclose an example of these kinds of commitments being treated as ‘prejudice’ for the purposes of s 1335 of the Corporations Act. However, neither do the cases suggest the contrary. As it happens, the authorities to which my attention has been drawn deal with the matter of prejudice along the litigation axis, as it were. But there is no suggestion that another axis might not also be relevant, in an appropriate case. The discretion under s 1335 is not confined, and if I should be persuaded in the present case that, for any reason, the applicant would suffer prejudice as a result of the respondents’ delay in bringing the present application, I can think of no reason why such a circumstance should not be placed on the scales for its appropriate weight. 67 An examination of the applicant’s accounts has satisfied me that compliance with an order for security would constitute a significant financial commitment for the applicant. In its evidence, the applicant has pointed to a number of investments or commitments which it made at various times since the commencement of this proceeding. None of them was either so large, or so small, as to exclude the realistic prospect that it would not have been made, or given, alongside a requirement to provide security. Although his statements should be recognised as self-serving in this respect, Mr Cowie has sworn that the applicant would not have, or at least might well not have, undertaken one of more of these investments or commitments had it been under an obligation to provide security. The amount of security proposed by the Registrar in the present case is, on my understanding of the applicant’s accounts, about equivalent to what would be a medium-sized, yet significant, investment for the applicant. 68 Mr Anderson pointed out that it was only his client’s prospective costs which were sought to be covered by the order for security which they seek. I do not think that this is a consideration of any particular weight in favour of the respondents. Having come this far in the litigation, the applicant does not have the range of choices which would have been open to it at the outset. Providing the security in addition to having made the other commitments to which I have referred is no less invidious by reason of the fact that it is only the respondents’ prospective costs that are sought to be covered by the security. That circumstance is not, in the overall circumstances of the case, something which alleviates the concern which I otherwise would have about the impact of the respondents’ delay. 69 In the circumstances, I do consider that, if security is ordered, the applicant should be regarded as having suffered real, not merely theoretical, prejudice as a result of the respondents’ delay in making the present application. This is a circumstance which should weigh in favour of the applicant. 70 I consider finally Mr Anderson’s point (c). He pointed to a number of respects in which Mr Cowie had ‘ordered his affairs’. In addition to the evidence of the investments which had been made since the commencement of the proceedings, there was evidence that what would otherwise be a healthy profit position for the applicant was affected by various tax minimisation arrangements. Mr Anderson’s point, as I understand it, was that, since the applicant was a small company with only two individual proprietors, it had the flexibility to order its affairs to the disadvantage of the respondents should its prospects in this proceeding start to look uncertain. And if it had that capacity, according to Mr Anderson, Mr Cowie’s record tends to show that he could use it. He said that, if there was any doubt, the court should act to protect the respondents. As against these considerations, Mr Cowie has sworn that any failure to pay the respondents’ costs would expose him and his wife to liability under the guarantees to which I have referred in par 35 above. Also, although Mr Cowie may have shown a proclivity to order his affairs to his financial advantage, I think it would be a significant step for the court to find it likely that he would order not only his own affairs but also those of the applicant to cause the applicant to be unable to pay an anticipated debt involving the respondents’ costs. On the evidence, I am not prepared to make any such finding. 71 In summary, I should say that I have found this application to be rather finely balanced. Neither the strength nor the weakness of the applicant’s case in the proceeding as a whole is so obvious as to provide any real assistance in deciding the matter. The crossing of the threshold in Beach Petroleum necessarily leads to the conclusion that the respondents may be unjustly deprived of their costs if they succeed. On the other hand, I should also recognise the injustice that would be involved if I were to impose an additional financial burden upon a company with a viable business which may ultimately be found to have been in the right from the outset. Although I have referred to a number of the authorities in these reasons, they tend to provide much more ready guidance for a situation in which the corporate applicant is insolvent or nearly so than they do for a situation such as the present. 72 In my assessment of all the circumstances to which the parties have referred, there are two which are of particular significance. First, I believe that an order for security would constitute a commercial and financial millstone, as Mr McGowan put it, for the applicant. This circumstance is to be viewed in the light of the nature of the applicant’s business and its relationship with the rights which it asserts in this proceeding. In short, I think that, from the applicant’s perspective, a requirement to provide security would make life just that much more difficult when the object of its litigation is to protect intellectual property which appears to be critical to its trading operations. Secondly, I do not consider that the respondents have offered an entirely satisfactory explanation for their delay of about 22 months in making the present application (albeit that effective notice of their concerns was given about 4 months earlier); and I take the view that the applicant would have been prejudiced by that delay, should the Registrar’s order stand. 73 All things considered, I am not persuaded that I should make, or continue, an order for security in favour of the respondents. In the circumstances, the orders made by the Registrar will be set aside.
Associate:
Dated: 27
September 2006
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URL: http://www.austlii.edu.au/au/cases/cth/FCA/2006/1279.html