Agricity Pty Ltd v Caffissimo Holdings Pty Ltd

MCKERRACHER J: 1 By an interlocutory application filed on 15 October 2018, the Respondents seek an order for security for costs pursuant to s 1335 of the Corporations Act 2001 (Cth) from the First Applicant, Agricity Pty Ltd, and the Second Applicant, ACI Mining Ventures Pty Ltd.

BACKGROUND 2 The substantive proceedings, commenced on 12 September 2017, concern the sale of a franchise business - a café business - and the sale of a related capsule business. The Applicants seek declarations that the 'Café Franchise Agreement' and 'Capsules Franchise Agreement' are void pursuant to s 243 of the Competition and Consumer Act 2010 (Cth). They seek to recover the purchase price, rent and refurbishment costs and damages. As I presently view them, some parts of the claim are perhaps creative. By a statement of cross-claim, the Respondents claim damages for breach of the Café Franchise Agreement and Capsules Franchise Agreement. 3 The matter was listed for trial on 26-28 September 2018, but those dates were vacated at the parties' request. The matter was relisted for trial on 14-16 November 2018. 4 Given the imminence of the trial dates, the interlocutory application was listed on an expedited basis for hearing. The matter came before the Court on 5 November 2018, with both parties having filed short written submissions in support and in opposition of the relief sought. 5 The November trial dates were vacated. The parties also considered it was appropriate to adjourn the application for security for costs.

MATERIAL BEFORE THE COURT 6 The Respondents rely on the following material in support of their application for security for costs: the 'Respondents' Outline of Submissions In Support of Interlocutory Application to Strike Out Statement of Claim and for Security for Costs', filed on 29 October 2018; the 'Respondent's Additional Outline of Submissions Security for Costs', filed 23 January 2019; the affidavit of the Second Respondent (and director of the First Respondent), Mr Michael Barr, sworn on 12 October 2018 and filed on 25 January 2019 (the Barr Affidavit); 7 The Barr Affidavit annexed the following: searches conducted into the holdings of the Applicants, specifically of Landgate and the Personal Property Securities Register (PPSR); a draft bill of costs prepared by the Respondents' solicitors; correspondence between the parties' solicitors regarding the security for costs sought by the Respondents; the request for further and better particulars by the Respondents and the Applicants' response; discovery documents; the Sale Agreement the subject of dispute in the substantive claim; and a photograph of the Notice of the termination of the lease to Agricity as a result of non-payment of moneys pursuant to the lease. 8 The Respondents' evidence shows that the Applicants have limited assets and that the Respondents could be financially exposed on a costs order should the claim against them fail. 9 Agricity and ACI rely on the paid up share capital of Agricity and the nature of Agricity's current trading and export activities, including the following evidence: Agricity's Business Activity Statement for the month of December 2018; Agricity's bank account statements for December 2018; and a copy of an invoice issued by Agricity. 10 The evidence of Mr Robert Sealey, as to the effect that Agricity expects to have positive cash flow, details: Trading Activity 11. I had thought the Café could be operated by staff and I would be free to continue with Agricity's trading activities, including those presented by Jones. 12. It soon became obvious to me that the Café required full time attention. 13. Since my involvement with the Café ceased in March 2018, I have had the ability to procure opportunities and enter into agreements for substantial trading and export activities. 14. Agricity has entered into a contract to sell significant quantities of timber logs to an overseas company located in Vietnam. The Vietnamese Company is called "An Viet International Cooperation Investment Joint Stock Company (Business Code no 010488375)". 15. The agreement is to supply 40 containers a month at $200 per tonne. Agricity expects to ship 3000 tonnes a month which would generate $60,000 per month for Agricity. 16. In addition to the timber export contract, Agricity and an Indonesian Company are in the final stages of executing an agreement for Agricity to obtain and ship 3000 head of cattle, twice per month. This equates to approximately 1 million kilograms for which Agricity is entitled to a fee of 50 cents per kilogram. 17. Further, Agricity has agreed with a company in Sabah, Malaysia, to provide 1000 fast build homes which are made out of panels imported from China. The purchase price per home is $25,000 and the expected margin for Agricity to retain is $5,000 per home. There is not a definitive time period for when Agricity can expect to commence production. Monthly revenue 18. During the month of December 2018, Agricity had gross revenue of $193,205 for the month. Its monthly expenses were $122,697. ... 19. For the month of December 2018, Agricity has a GST rebate payable of approximately $10,000. It will continue to have a GST rebate payable every month. 20. The payments made to Agricity in December 2018 can be evidenced by its bank account statements. … 21. The next shipment of logs is expected to happen in the coming weeks. Agricity will receive a deposit of $125,000 into its account on delivery of the logs to Fremantle Port, and another deposit of $125,000 into its account on delivery to the customer[.] … 22. There is no reason to suggest Agricity would not be able to meet an adverse costs order if it was unsuccessful in this proceeding. 23. With every month of trading that occurs, Agricity will continue to be in a stronger financial position. Failure to Pay Lease Rent Obligations 24. I do not dispute that Agricity was in a weak financial position immediately prior the termination of the Lease. The Café was running at a loss of approximately $5,000 per month. 25. It is part of Agricity's claim in the current proceeding that the First Respondent ought to be liable to meet Agricity's obligations under the Lease, based on the First Respondent's conduct.

PRINCIPLES CONCERNING SECURITY FOR COSTS 11 The Court's power to make an order for security for costs may be drawn from s 1335 of the Corporations Act, s 56 of the Federal Court of Australia Act 1976 (Cth) and r 19.01 of the Federal Court Rules 2011 (Cth). It is by reference to the Corporations Act provision that this application will be determined as it was the focus of the parties' submissions. Section 1335 of the Corporations Act provides: 1335 Costs (1) 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. 12 The terms of s 1335 of the Corporations Act and the weight of authorities are to the effect that there is an initial jurisdictional question as to whether it appears by credible testimony that there is a reason to believe that the company will be unable to pay the costs of the defendant if successful in its defence. If the Court's jurisdiction is enlivened it then gives rise to an unfettered discretion: FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 156 FLR 116 (at [21]) and A1 for Maintenance Pty Ltd v Lehal Pty Ltd [2018] FCA 1476 per Colvin J (at [23]). 13 As to the jurisdictional question, the power to make the order under s 1335 of the Corporations Act will be enlivened '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'. As Lee J said in Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 (at 5), the word 'credible' suggests a requirement that the evidence relied upon by the applicant for security have some 'characteristic of cogency'. The threshold requirement has otherwise been the subject of varying judicial opinions, which were neatly summarised by Yates J in Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 (at [7]-[11]): 7 The nature of the requirement was described by von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205 as follows: 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 be fairly 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. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account in the exercise of discretion, and in framing the orders of the court if the decision is to order security. 8 This approach has been applied many times but has been criticised. In Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 at [13]-[14] the Court of Appeal in Victoria said that it was wrong to substitute a judicial exposition for the words of the statute itself: see Central Bayside General Practice Association Ltd v Commissioner of State Revenue (2006) 228 CLR 168 at [84]. The Court of Appeal said that the statutory test was clear: Is there reason to believe that the corporation will be unable to pay the costs of the defendant if successful? 9 The Court of Appeal at [15] continued as follows: The phrase 'reason to believe' is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more. The wording adopted may be contrasted with other familiar formulations such as 'if the court is satisfied that' or 'if in the view of the court it is likely that'. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a 'real risk'.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. 10 This approach was favoured in Smart Co Pty Ltd v Clipsal Australia Pty Ltd [2009] FCA 1253 at [43]. 11 It may be a matter of debate whether in Beach Petroleum von Doussa J did place an impermissible gloss of the words of s 1335(1): Reinsurance Australia Corporation Limited v HIH Casualty and General Insurance Ltd (in liquidation) [2003] FCA 803 at [12]-[21]. Be that as it may, I propose to follow the approach in Livingspring and Smart, by focussing on the words of the statutory provision itself. 14 I will follow the same last mentioned approach. 15 On the question of the exercise of the Court's discretion, the principles that apply are well known and do not require excessive recitation. It is well accepted that whether or not an order ought to be made is a matter for the discretion of the Court. The discretion is a broad one and but for the requirement to act judicially, the discretion is effectively unfettered. 16 The various considerations that may bear upon the making of an order have been considered in numerous authorities. Those considerations include: the applicant's prospects of success; the extent of the risk that a costs order against the applicant will not be met if the application is unsuccessful; whether the making of an order for security for costs would be oppressive in that it would stifle a reasonably arguable claim; whether any impecuniosity of the applicant arises out of conduct the subject of the proceeding; whether there was any delay in bringing the application; whether there are other aspects of the public interest that weigh in the balance against the making of an order for security; and whether there are any particular discretionary matters peculiar to the circumstances of the case.

CONSIDERATION 17 There is scant evidence before the Court despite both parties having ample opportunity to do so. I am not satisfied based on the evidence filed that there is credible testimony of there being reason to believe that Agricity and ACI will be unable to pay costs if judgment goes against it. The evidence relied upon to satisfy the threshold question is that which I have summarised. 18 Further, and while I am mindful of not conflating the threshold jurisdictional question with the issue of discretion, I consider, even were the Court's jurisdiction enlivened, that the nature of the evidence would be a discretionary reason for refusing the application for security for costs. I do not consider the absence of any land ownership by Agricity and ACI and registered charges on the PPSR to be sufficient evidence. The failure by Agricity to pay monies due under the lease has been explained and the First Respondent's liability to meet Agricity's obligations under the lease forms part of the claims in the substantive proceeding. 19 The temporal nature of the test set out in s 1335 of the Corporations Act is also relevant. It requires that the evidence be directed to an inability on the part of the plaintiff corporation to pay costs if the defendant is successful in its defence. The test is directed to the date of judgment. The Notice said to evidence Agricity's impecuniosity is dated 15 March 2018. The Applicant's evidence is that 'Agricity was in a weak financial position immediately prior to the termination of the Lease', however the evidence filed by the Applicants (and to which the Respondents have had the opportunity to respond) suggests that is not Agricity and ACI's present financial position. 20 The Applicants' evidence in support of their contention that Agricity's current trading and export activities is such that 'Agricity will continue to be in a stronger financial position' is of course limited. But it is based on appropriate current records. Admittedly, the details of the relevant contents is limited, but it is an interlocutory application and the desire for commercial confidentiality is obvious. It is for the Respondents to put before the Court some cogent contrary material. I am not persuaded they have done so. 21 Finally, even were I satisfied that the jurisdictional threshold was met, I consider that the Respondents' delay in bringing the application is a sound and important discretionary reason alone why the application should be refused. The Respondents' application for security for costs was filed less than one month before the commencement of the trial (as it was then listed) and more than a year after the substantive proceedings were commenced. I consider, in the absence of a satisfactory explanation for the delay, that this delay is productive of unfairness. The Applicants are to be taken to have proceeded on the assumption that such an application would not be made. From the correspondence between the parties' solicitors placed into evidence, it does not appear that the Respondents' intention to seek security for costs was raised until 2 October 2018. The proceedings were allowed to progress, with the Applicants likely incurring significant costs in connection with the proceeding, without any indication that security for costs would be sought. 22 I conclude by noting that this is a matter in which the parties should greatly benefit from a concerted effort to resolve the dispute through mediation. It is a relatively small claim with the costs the Respondents seek for security for costs being equivalent to the purchase price of the Business the subject of the substantive dispute. The dispute is to be mediated by a Registrar of this Court shortly. I would respectfully encourage the parties to seek an expeditious resolution before greater costs are incurred by both sides. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.