Australian Battery Distributors Pty Ltd v Robert Bosch

Federal Court of Australia|2015-10-30|Before: Mr J, Edelman J

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 719 of 2015

BETWEEN: AUSTRALIAN BATTERY DISTRIBUTORS PTY LTD ABN 67 071 122 462

AND: ROBERT BOSCH (AUSTRALIA) PTY LTD ABN 48 004 315 628

The applicant post security for costs in the amount of $60,000 in the form of an unconditional bank guarantee in that sum, or otherwise to the satisfaction of the District Registrar of the Queensland District Registry of the Court.
The proceeding be stayed until provision of the security in (1) or until further order of the Court.
The applicant pay the respondent's costs of this application to be taxed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION QUD 719 of 2015

BETWEEN: AUSTRALIAN BATTERY DISTRIBUTORS PTY LTD ABN 67 071 122 462

AND: ROBERT BOSCH (AUSTRALIA) PTY LTD ABN 48 004 315 628

JUDGE: EDELMAN J DATE: 30 OCTOBER 2015 PLACE: BRISBANE

Introduction 1 This is an application by Robert Bosch (Australia) Pty Ltd (Bosch Australia) for security for costs for the claim against it by Australian Battery Distributors Pty Ltd (ABD). The security is sought under s 1335(1) Corporations Act 2001 (Cth). 2 One of ABD's central reasons for resisting this application is that it is impecunious and that its meritorious claim might be stifled. ABD is a company with paid up capital of $225,000 and a sole shareholder which is a $2 company. The sole shareholder (Battery Australia Group) has the same registered address as ABD's directors (at relevant times), Mr and Mrs Thomas. There is no doubt that there is a risk that ABD may not have sufficient assets to meet an adverse costs order after trial. However, the extent of its assets remains somewhat opaque. Further, Mr and Mrs Thomas, who are the shareholders of Battery Australia Group, stand to benefit from the litigation and are potentially in a position to offer security. But they have offered none, including even personal security. The evidence concerning their assets is, at best, inadequate and there is no evidence of the extent of their interest, or the value, of eight of the entities in the Thomas group of companies. 3 In circumstances in which one of ABD's primary reasons for resisting security is that it says that it is impecunious, its lawyers have spent a remarkable amount of time and effort upon evidence and submissions for this application for security for costs. Security for costs applications are interlocutory processes that should not be complex. The principles are well understood. The authorities emphasise that substantial evidence is not required and that the application is not supposed to be a mini-trial. 4 I consider that security for costs should be ordered. The appropriate quantum for security for costs for the period up to and including a mediation in this case is $60,000. The following written reasons are provided in circumstances in which security for costs is to be posted only for the period up to and including a mediation. This does not necessarily mean that further security will be ordered when the matter is revisited. Whether it is appropriate to order a further tranche after mediation will be a matter to be revisited at that time, in light of these reasons and any further evidence, which should be very limited and proportionate to the issues at stake, in any subsequent application.

The confusion before this application arising from ABD's stance 5 On 27 August 2015, Bosch Australia wrote to ABD explaining its intention to apply for security for costs. Bosch Australia asked if there were any reason why Bosch Australia would not be entitled to security for costs. Bosch Australia pointed out the limited paid up capital of ABD and its sole corporate shareholder; the address of ABD being the same as its directors; the apparent absence of any real property held by ABD; and the failure of ABD to pay Bosch for almost $1 million in respect of automotive batteries that were delivered to ABD by Bosch Australia. 6 On 28 August 2015, ABD responded indicating that financial reports will need to be obtained before further considering the request for security for costs. However, the solicitors for ABD said that they had been given instructions to put $25,000 into their trust account within seven days of an agreement between the parties to be held for Bosch Australia's costs relating to the pleadings in this matter and only to be released from trust by way of an agreement between the parties or an order of the Federal Court. 7 On 31 August 2015, an oral application for security for costs was made by Bosch Australia before Dowsett J. Counsel for ABD said that the application would be opposed. No reasons for the opposition were given. 8 In Dowsett J's absence, the matter was allocated to me for the security for costs hearing. At a directions hearing to make programming orders for that application, counsel for ABD informed the Court that "we're seeking instructions from the client, but one of the issues for us is that there's undoubtedly a capacity in some form of the company to pay, and also there's obviously two directors who may wish to participate in providing some security". 9 When ABD filed its submissions two days ago, the essential ground upon which it resisted the application for security for costs was that neither ABD nor its directors have the capacity or the funds to pay any security for costs orders. ABD says that this impecuniosity was caused or materially contributed to by the wrongful conduct of Bosch Australia. ABD says that it has a meritorious case which it should be entitled to ventilate at trial. It says that an order for security for costs in these proceedings would be oppressive and would effectively stifle ABD's proceeding. And it says that Bosch Australia assumed the risk that eventuated in these proceedings.

Summary of ABD's claim 10 ABD's claim is not complex. Its amended statement of claim runs to eight pages. Essentially, its claim is as follows. 11 ABD was the distributor of Bosch products, particularly automotive batteries, which were supplied by Bosch Australia. ABD was the exclusive distributor in Queensland and, from June 2012, was the non-exclusive distributor within New South Wales (north of Sydney). 12 Bosch Australia, at relevant times, employed Mr Clarke who earned commission or benefits from Bosch Australia which were calculated by reference to the volume of Bosch products that ABD ordered. 13 ABD pleads that by February 2012, Mr Clarke and Bosch Australia were aware of the following: (a) ABD had rapidly expanded, and continued to grow, its business as a distributor of Bosch products; (b) ABD was being required by Bosch Australia (by Mr Clarke) to constantly increase its stock holding of Bosch products in order to service new accounts; (c) ABD was experiencing erratic lead times for the supply by Bosch Australia of Bosch products which delays had been caused by inconsistent internal processes adopted by Bosch Australia in the supply of those products; (d) Bosch Australia had adopted inconsistent practices in respect of the manner in which it billed ABD for the supply of Bosch products; (e) the expansion and continuing growth of ABD's business, the delays and inconsistent billing practices had placed, and was placing, ABD under significant financial strain to the point where it was experiencing ongoing difficulties paying its accounts with Bosch Australia; (f) ABD's business depended upon credit being provided by Bosch Australia, which credit enabled ABD to purchase the necessary stock from Bosch Australia to fulfil orders placed by its customers; and (g) Mr Clarke had been, on an almost monthly basis, making oral representations to Mr Adam Thomas, ABD's General Manager, in person and over the telephone, saying that Mr Clarke would obtain longer trading terms and higher credit limits for ABD so long as ABD continued to place, and increase, its orders for Bosch products. 14 ABD, relying upon Bosch Australia's requirement to constantly increase its stock holding of Bosch products and Mr Clarke's representation about trading terms and credit limits, continued to order Bosch products and continued to increase its debt to Bosch Australia. By May 2014, its debt had risen to over $2 million. In early 2014 Bosch Australia began to require ABD to reduce its debt. 15 In January 2014, Bosch Australia (Mr Clarke and Mr Wallis) met with ABD (Mr and Mrs Thomas and Mr Adam Thomas) to discuss a warehousing agreement. Mr Clarke said that the warehousing agreement would involve ABD holding at its warehouses more Bosch products than ABD's business required. Mr Clarke said that Bosch Australia would pay a fee to ABD for the sale of those warehoused products to Bosch customers. Mr Clarke said that the warehousing agreement would benefit ABD greatly and help ABD's cash flow. Mr Clarke later also said to the Thomas' that the warehousing agreement (i) would provide a buffer of stock and reduce delays in availability of Bosch products, (ii) would facilitate rapid growth but at the same time significantly reduce the amount of the credit trading account held by ABD, and (iii) would result in increased sales by ABD of Bosch products. 16 In December 2014, Mr Clarke made further representations and exhortations to ABD to induce ABD to order $250,000 worth of Bosch products for December. Mr Clarke said that Bosch Australia would ensure that ABD's trading limits would be increased from 60 days to 90 days. Mr Clarke also represented that ABD's credit limit for the 2015 financial year would be $1,175,000. 17 On 26 February 2015 Mr Clarke rang Mr Thomas. Mr Clarke said that ABD's signature on the warehousing agreement was required on an urgent basis. Mr Clarke insisted that Mr Thomas should not cross anything out of the agreement. Mr Clarke said that "if there was anything bad in it I would tell you". 18 ABD entered the warehousing agreement relying upon Mr Clarke's representations (i) that Bosch Australia would pay a fee to ABD, and (ii) that the warehousing agreement would benefit ABD in the ways that Mr Clarke had represented (described above). ABD also relied upon these matters to increase its insurance to cover Bosch Australia's stock; to create an area for exclusive storage of Bosch Australia's stock; to undertake and implement regular audits and stock takes of Bosch Australia's stocks; to upgrade its warehouse pallet racking to Bosch Australia's requirements; and to continue to order Bosch products at levels required by Bosch Australia which increased ABD's debt to Bosch Australia. 19 Things then began to go badly wrong. ABD says that the warehousing agreement did not benefit ABD greatly or help its cash flow; that it did not improve ABD's cash flow; that it did not increase ABD's turnover; and that it did not cause a reduction in ABD's debt to Bosch Australia. ABD say that problems arose by Bosch Australia's conduct including Bosch Australia's requirement to inform it that a full pallet of batteries was required even when ABD only required a small portion of batteries from a pallet; and instability of flow of stock from month to month. There were supply shortages that were significant, followed by oversupply. 20 In February 2015, Bosch Australia reduced ABD's credit limit from $1.2 million to $750,000. Then in late February or March 2015 Bosch Australia reduced that credit limit to zero. In April 2015, Bosch Australia required ABD to pay invoices immediately upon receipt of Bosch products. Then in May 2015, Bosch Australia removed all of its stock from ABD's warehouses. 21 ABD says that Bosch Australia's conduct meant that ABD was effectively unable to conduct its business and that Bosch Australia's conduct enabled Bosch Australia to facilitate the takeover of ABD's business by Alco Batteries by June 2015. 22 ABD says that Bosch Australia is liable to compensate it for loss and damage for misleading or deceptive conduct, or for unconscionable conduct under ss 18 and 21 of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010) (Cth). It claims loss in the full amount of its debt under the credit trading account with Bosch Australia and for the loss of its business. That loss is quantified in its evidence on this application at around $1 million.

Principles concerning security for costs applications 23 This application is brought under s 1335(1) of the Corporations Act 2001 (Cth). Although there is also power to order security for costs under the Federal Court of Australia Act 1976 (Cth) s 56, nothing in this application turns upon any difference between those provisions. In particular, it is common ground that there is reason to believe that ABD will be unable to pay the costs of Bosch Australia if Bosch Australia is successful in its defence. 24 Section 1335(1) of the Corporations Act provides as follows: (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. 25 The authorities and principles concerning the onus of proof in applications for security for costs are explained by Gleeson J in Austcorp Project No 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 [25]-[28]. The onus of proof in a security for costs application rests, from first until last, upon Bosch Australia to persuade the court that the order for security should be made. However, there is an evidential burden upon ABD to adduce evidence concerning matters which establish reasons why security should not be granted in circumstances where it will be unable to pay the costs of Bosch Australia if Bosch Australia is successful in its defence. 26 It is well established that the discretion to order security for costs is unfettered and that all of the circumstances of the case should be considered. In this case, the factors raised by Bosch Australia, and ABD in the discharge of its evidentiary onus, include the following: (1) ABD's claim has merit and its meritorious claim should not be stifled and an order for security for costs would be oppressive; (2) the cause of ABD's impecuniosity is arguably the conduct of Bosch Australia; (3) Bosch Australia had knowledge of the risk that has eventuated in these proceedings; (4) ABD's proceedings are by their nature defensive and do not seek a positive act to be undertaken by Bosch Australia; (5) if Bosch Australia is successful in its defence at trial there is a reasonable possibility that its costs will not be paid by ABD; and (6) Mr and Mrs Thomas are persons standing behind ABD who are likely to benefit from success in the litigation but do not offer any security. 27 Each of these is a well-recognised matter to consider in the exercise of the discretion to order security for costs: see for instance KP Cable Investments Pty Ltd v Meltglow Pty Ltd & Ors [1995] FCA 76; (1995) 56 FCR 189, 196 (Beazley J); Austcorp Project No 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 [30] (Gleeson J). 28 Factors (1) to (4) are relied upon by ABD and factors (5) and (6) are relied upon by Bosch Australia. I consider each of these in turn below.

(1) ABD's claim has merit and an order for security might stifle the claim 29 As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary the court should proceed on the basis that the claim is bona fide with a reasonable prospect of success: Austcorp Project No 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 [30] (Gleeson J). 30 In this case, a considerable volume of material has been filed by ABD in relation to the merits of its claim. ABD relies on affidavits from both Mr and Mrs Thomas. It relies on parts of an affidavit by the Thomas' accountant. It relies on an affidavit from Mr Adam Thomas, the General Manager of ABD. 31 No defence has yet been filed. Bosch Australia has put on no evidence. Counsel for Bosch Australia made valiant submissions concerning potential gaps between the copious evidence filed by ABD and the issues which it was required to prove, particularly causal issues in its claim. I do not consider that it is possible, or appropriate, for me to descend into the detail of those submissions particularly with their focus on difficult causal questions. The submissions are made even more difficult if, as I apprehend, the claim by ABD is essentially a "no transaction" claim: see Henville v Walker [2001] HCA 52; (2001) 206 CLR 459. Ultimately, and understandably, this submission about the lack of strength to the claim by ABD was not strongly pressed. 32 I am satisfied on the evidence currently before me that I should proceed on the basis that the claim is bona fide with a reasonable prospect of success. I am, of course, conscious, that no defence, and no evidence in response, has been filed by Bosch Australia. This is a classic instance where it is inappropriate to descend into a consideration of the prospects of success. I treat them, instead, as a neutral matter: Australian Equity Investors, an Arizona Limited Partnership v Colliers International (NSW) Pty Limited [2012] FCAFC 57 [15] (Jacobson, Besanko and Perram JJ). 33 In circumstances in which ABD has a meritorious claim, it is an important factor that the order may well mean that the action cannot proceed: Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304, 306 (Byrne J). Nevertheless, in Hession v Century 21 South Pacific Ltd (1992) 28 NSWLR 120, 123, Meagher JA said that: ...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. 34 Although ABD filed evidence which satisfies me that there are doubts about the ability of ABD to pay an order for security for costs and to fund its litigation, there is a real prospect that ABD could meet an order for security for costs from other sources. I address that matter further below in point (6). 35 Further, the highest that I put the point of ABD's impecuniosity and inability to conduct is litigation is that I have "doubts". This is because ABD might indeed be able to pay security for costs as well as funding its litigation. Counsel for Bosch Australia pointed to three matters which might support this conclusion. The first is that in the last year ABD has repaid around $70,000 of debtor finance to the Bank of Queensland. The second is that in the last year ABD has acquired $272,300 worth of motor vehicles. The third is that ABD had approximately $180,000 cash at bank only six weeks before this litigation commenced. 36 The other matter raised by ABD in relation to this factor involving the merit of ABD's claim and it being potentially stifled is a matter which is sometimes treated independently. This is the allegation that an order for security would be oppressive. In Equity Access Ltd v Westpac Banking Corporation [1989] ATPR 40-972, 50,635, Hill J described this factor as involving a circumstance where the "use of the power would shut out a small company from making a genuine claim against a large company, i.e. is the power being used oppressively". 37 The mere seeking of security for costs by a larger corporation from a smaller corporation is not oppressive, particularly where there are strong grounds to believe that the smaller corporation will not be able to meet any costs order. Nor does it become oppressive for a larger corporation to seek security for costs by the mere prospect that an order for security for costs might shut out the smaller company from litigation. Something more must exist. 38 ABD was unable to point to anything more in this case. It is, however, somewhat remarkable that Bosch Australia submits, with evidence from a costs consultant, that the likely costs of defending the claim, only to the point of a mediation, is more than $200,000. It is mindboggling that this could be the cost of defending an eight page statement of claim, only to the point of mediation, where the total of the claim is little more than $1 million. However, as counsel for ABD quite properly pointed out, the assessment of costs made by Bosch Australia was based on an earlier version of the statement of claim which was subsequently streamlined and amended. I also accept the submission by counsel for Bosch Australia that the assessment of costs was based on a somewhat pessimistic view of the future conduct of the litigation, based on experience with this application. I am, perhaps naively, more optimistic, particularly given the professional way in which oral submissions were presented this morning and the appropriate concessions that were made to the Court by both parties. If the parties can continue that conduct amongst themselves then both sides might save vast legal expenses.

(2) The cause of ABD's impecuniosity is arguably the conduct of Bosch Australia 39 Another well-known factor in the assessment of security for costs is whether the impecuniosity of the applicant is caused or contributed to by the conduct of the respondent. However, there is a qualification to this factor. In Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 [33], Beazley JA said that where the applicant's claim is based upon a loss of profit, "the court will take a more cautious approach in its consideration of the cause of impecuniosity than where the claim is based on the infliction of damage". There is a difference between an existing state of impecuniosity caused by a respondent who has deprived an applicant of existing assets and a state of impecuniosity because a respondent has not acted to ensure that the applicant obtained assets. 40 In particular, the difficulty for ABD in this case is that it has not established that its financial position before its relationship with Bosch Australia was one of a company with substantial assets. The losses claimed by ABD, and its complaint of impecuniosity, rely primarily upon a loss of profits of $638,160. This is a complaint that Bosch Australia failed to make ABD's position better. It is not necessarily a complaint that its position was worsened: see Fat-sel Pty Limited v Brambles Holdings Limited [1985] FCA 89; (1985) 3 ACLC 312, 315 (Beaumont J). 41 In Del Bosco v Outtrim [2008] NSWSC 105 [26], Barrett J said this: I turn briefly to the second matter on which the plaintiff relies, namely, the contention that the defendant was responsible for the plaintiff's lack of means. To succeed in making this complaint relevant, the plaintiff would have to show two things: first, that she had previously had financial resources; and, second, that the defendant's actions caused or at least materially contributed to an inability to meet an order for security: Jazabas Pty Ltd v Haddad [2007] NSWCA 291 at [94] per McClellan CJ at CL. 42 It is not necessary to decide whether this factor should be wholly disregarded if an applicant could not show that it previously had any means. I am content to proceed on the basis that it remains relevant that the respondent might have deprived the applicant of means which it would otherwise have subsequently obtained from the respondent. But the force of this factor is significantly reduced where, as counsel for ABD properly conceded, the bulk of its claimed losses are of this nature rather than involving a loss of pre-existing assets.

(3) Bosch Australia had knowledge of the risk that has eventuated in these proceedings 43 In ACN 006 577 162 Pty Ltd (formerly Harrop Engineering Australia Pty Ltd) v Beauville Pty Ltd [2014] VSC 298 [22], Derham J said: the assumption of risk factor weighs against the ordering of security, and weighs, in my view, heavily. It weighs heavily because when the defendants entered into the Sale and Purchase Agreements they knew of the impecuniosity of the plaintiffs and should be taken to have assumed the risk that if proceedings were commenced by the plaintiffs to enforce the Agreements, the defendants would be sued by impecunious plaintiffs. It is also relevant because it is out of the very Agreements under which the businesses were acquired that the plaintiffs sue the defendants, and do so in circumstances where they, the defendants, have effectively restrained the principal of the plaintiffs from conducting business through the plaintiffs. 44 ABD submits that in mid-2014 Bosch Australia knew of the risk relating to ABD's impecuniosity and made a voluntary commercial decision to continue doing business with ABD. ABD points to Bosch Australia's evidence of regular failures by ABD to make payments on time and the knowledge of Bosch Australia of ABD's losses and net liability position following a meeting on 12 August 2014. 45 Although I place some weight on this factor, it must be assessed in the context of three matters which substantially reduce the force of it. The first is that the parties were already in a trading relationship when further credit was extended to ABD. The second is that the evidence of Bosch Australia on this point was concerned only to establish the impecuniosity of ABD; it did not address the reasons for any decision to continue trading with ABD which is a matter upon which there may very well be dispute about at trial. Thirdly, a substantial part of ABD's case involves allegations of pre-contractual representations and conduct rather than a focus only upon whether it was creditworthy at the time of the warehousing agreement.

(4) ABD's proceedings are by their nature defensive and do not seek a positive act to be undertaken by Bosch Australia 46 ABD says that a factor weighing against security for costs is that ABD's proceedings are, by their nature, defensive. ABD points to the classic statement of this principle by Dixon J in Willey v Synan [1935] HCA 76; (1935) 54 CLR 175, 186. In that case the plaintiff had claimed silver coins that he said that he found on a ship of which he was a crew member. The Collector of Customs issued a notice under the Customs Act 1901-1930 (Cth) requiring the plaintiff to bring an action to recover the coins, or otherwise to forfeit them. In the course of refusing security for costs, Dixon J said that when the plaintiff "does issue a writ he does so to protect his supposed ownership. In substance he is not the attacker, actor or person seeking redress". 47 ABD submits that the reason why these proceedings are defensive is because it responds to a proceeding commenced by Bosch Australia. After pre-litigation mediation, Bosch Australia commenced proceedings against ABD in the Supreme Court of Victoria for around $384,000 as a debt said to be owing. ABD says that it anticipates that Bosch Australia will increase that claim to around $884,000 (the $500,000 difference was reported to the police as a theft rather than including it in the civil proceedings). 48 ABD says that these proceedings are defensive because they will be "ultimately seen in the form of a set off or counterclaim in the Victorian Supreme Court proceedings". I do not accept this submission. 49 One reason why I do not accept it is because if ABD had wished to bring defensive proceedings then it might have done so by waiting for a claim to be brought and filing a defence and counterclaim in the Victorian Supreme Court proceedings. There is no evidence before me which explains why one proceeding was commenced in Victoria on the same day that another was commenced in Queensland. At the very least, one would hope that the parties, acting properly and commercially and consistent with the overriding objective of all litigation, discuss a sensible means by which essentially the same dispute is not litigated in two fora. 50 Another reason why I do not accept this submission is that these proceedings stand independently of the debt alleged by Bosch Australia in other litigation. These proceedings are for amounts which exceed that debt and which are based upon positive allegations of unconscionable conduct and misleading or deceptive conduct. 51 The proceedings by ABD in this Court are not defensive.

(5) If Bosch Australia is successful in its defence at trial its costs might not be paid by ABD 52 In Jodast Pty Ltd v A & J Blattner Pty Ltd (1991) 104 ALR 248, 255, Hill J said that "the question of the financial standing of the applicant is one obviously which requires considerable consideration, and it is clearly a significant matter to take into account". 53 It is now common ground that ABD might not have the resources to meet an order for costs if its claim is unsuccessful. However, as I have explained, the precise financial circumstances of ABD remain somewhat opaque.

(6) Mr and Mrs Thomas are persons standing behind ABD who are likely to benefit from success in the litigation but do not offer any security 54 In Forest Pty Ltd (receivers and managers appointed) v Keen Bay Pty Ltd (1991) 4 ACSR 107, 123, Dowsett J explained that [i]t would be contrary to the public interest and public confidence in the litigation process to allow third parties to finance a plaintiff's action in the certain knowledge that in the event of the action being unsuccessful, the defendant will not be able to recover his costs. 55 ABD did not dispute that Mr and Mrs Thomas stand behind ABD and stand to benefit from success in the litigation. In Bell Wholesale Co Pty Ltd v Gates Export Corporation (1984) 52 ALR 176, 179 the Full Court of the Federal Court said that "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 … are also without means". 56 Mr and Mrs Thomas have offered no guarantee or personal undertaking to be liable for any costs incurred by Bosch Australia. Indeed, they specifically declined to make such an offer. The evidence as to their means is, at best for ABD, inadequate to show that they are without ability to offer a meaningful undertaking or other security. At worst for ABD the evidence establishes that they have real means to meet a security for costs order. 57 Evidence was filed this morning by Mr Thomas, and by the accountant for Mr and Mrs Thomas. There are at least three important points to observe from that evidence which suggest a real ability by Mr and Mrs Thomas to meet an order for security for costs. 58 First, the accountant's evidence is that Mr and Mrs Thomas have just accepted a conditional offer to purchase one of their investment properties which would yield equity of around $100,000 to obtain proceeds for the litigation costs and any security for costs. If the sale becomes unconditional, the proceeds should be available in about a month. Mr Thomas says that he and Mrs Thomas would be prepared to make the $100,000, or some of it, available for security for costs, but that such a course would place them under significant financial pressure and would make it extremely difficult for them to conduct the litigation from their own financial resources. He does not say whether there are other financial resources available to ABD for its conduct of the litigation. 59 Secondly, the accountant refers to the "Thomas group" of companies which consists of nine entities. Counsel for ABD properly accepted that there is no evidence about the means of at least eight of the entities in the Thomas group. The Thomas' accountant says that until all inter-entity transactions are finalised it is not possible to finalise transactions for the entire group. There is no evidence of the extent to which the Thomas group has funded, or is in a position to fund, the litigation of ABD. 60 Thirdly, Mr and Mrs Thomas have a number of assets which are not necessary for their daily living needs and which could be charged for the purposes of security but which they do not offer to charge. One example is the asset described as "boat" and valued at $80,000. Another example is an asset described as "Porsche" and valued at $100,000: see KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189, 204 (Beazley J). 61 There are also aspects of the statement of Mr and Mrs Thomas' liabilities which appear to be overstated. One example is the contingent liability to guarantee bank facilities for ABD to the Bank of Queensland. That is listed as $1.3 million. But in the balance sheet of ABD the Bank of Queensland Debtor Finance is listed at $627,176.

Assessment of whether security for costs should be ordered 62 In the course of balancing all of the factors I have discussed, I consider that security for costs should be ordered. I am not satisfied that an appropriate amount of security for costs would be unable to be paid by ABD or those who stand behind it. I consider that it is unlikely that an order for security for costs would stifle the proceedings by ABD. I have reached this conclusion independently of any consideration of whether ABD might nevertheless be able, or have been able, to litigate the same claim in the Supreme Court of Victoria.

Quantum of security to be posted 63 Several principles, as follows are well established in relation to the assessment of the quantum of security for costs: see, for instance, Sagacious Procurement Pty Ltd v Symbion Health Ltd [2007] NSWCA 205 [50]-[52] (Mason P); Manhattan (Asia) Limited v Dymocks Franchise Systems (China) Limited [2014] FCA 1143 [127] (Farrell J); Levy v Bablis [2011] NSWCA 411 (Giles JA); TSDack Pty Ltd v Australian Water Holdings Pty Ltd [2015] FCA 931 [76] (Katzmann J): (1) the assessment of the quantum of security is not akin to a taxation of costs; it involves the exercise of an unfettered discretion to award the amount considered to be fit in all the circumstances; (2) the Court does not seek to provide a complete and certain indemnity for the respondent; although the security to be posted will not exceed the assessment of likely party and party costs after trial and it will usually be less; (3) the Court will take into account the possibility of the case settling or being discontinued prior to trial and the discount may be greater at early stages in the proceeding where the prospect of the matter continuing to the end of trial may be remote; (4) the order for security need not be once and for all; it could involve a first tranche of security with the issue to be revisited at a later point particularly where an order in tranches would have the least impact upon the applicant (such as by removing the size of the immediate burden) and the least likelihood of stifling its capacity to prosecute its claims; (5) however, if the ordering of security in tranches would merely generate the unnecessary expense of one or more additional applications then an order for costs in tranches would not conform to the overarching purpose of the civil procedure provisions of the Federal Court of Australia Act and Rules; and (6) the quantum can cover costs that have already been incurred but the Court will often be reticent to incorporate these costs into an assessment of the quantum where they were incurred prior to the making of a security for costs application and the potential impecuniosity of the applicant was not reasonably ascertainable by the respondent. 64 In this case both parties proposed that security be ordered in tranches with the first tranche for the period up to and including a mediation of the matter. I consider that this is an appropriate course. It would have been very useful if the parties had adopted the same co-operative and pragmatic approach to the other issues in this application. 65 I have reviewed the evidence from the costs consultants which is adduced by both Bosch Australia and ABD. As I have explained, the evidence from Bosch Australia suggesting that taxed costs of defending an eight page statement of claim, only to the point of mediation, would be $200,000 is astonishing even if all the costs incurred from the start of this litigation were included. Even the evidence from ABD of costs in the region of $90,000 is surprising. The surprise is that this amount would be incurred in the context of (i) a claim for around $1 million where the fact and issues are unlikely to be complex, (ii) where (unfortunately) much of the likely evidence for ABD has been filed in support of this security for costs application, and (iii) where the parties should be doing all that they can to move the matter to mediation as soon as possible and without incurring significant legal expenses which might entrench their positions and make mediation difficult.

Conclusion 66 Security for costs should be ordered for the period up to and including a mediation of this matter in the amount of $60,000. The applicant should post security for costs in that amount in the form of an unconditional bank guarantee, or otherwise to the satisfaction of the District Registrar of the Queensland District Registry of the Court. 67 The proceeding will be stayed until provision of that security or until further order of the Court. 68 I would have awarded less, perhaps considerably less, than this amount if the parties had not already conducted a mediation before this action was commenced. I accept the submission of counsel for Bosch Australia that the pleadings should close and the parties should also complete discovery and inspection before a mediation. Although counsel for Bosch Australia also foreshadowed a strike out application, I have doubts whether such an application will be brought. I refer to my observations in Sherrin Hire Pty Ltd v Sherrin Rentals Pty Ltd [2015] FCA 1107 [44]. I also doubt that discovery should be as extensive as had been assumed by the evidence from the costs consultant for Bosch Australia. Twenty lever arch files of discovery is excessive for a claim of this nature, even accepting that there might be interesting issues of causation involved. Co-operation between the parties, consistent with their duties and an acceptance of the overriding objective of litigation in this Court, should be able to reduce the scope of that discovery. 69 The remaining matter is the costs of this application. Although Bosch Australia has been successful in this application for security for costs, the quantum of security is vastly less than it sought. This is a matter that militates against the extent of a costs order in its favour. On the other hand, ABD's conduct in this proceeding as described above at [5]-[9] was the cause of considerable confusion and wasted expense in preparation for this hearing. ABD was also still filing revised submissions and further affidavits just over an hour before this hearing began. Further, ABD had indicated its intention to oppose this application on the basis of quantum even before it knew what the quantum claimed by Bosch Australia would be. That quantum was only clear when the costs affidavit was filed on 28 September 2015. Finally, Bosch Australia had indicated a willingness for this matter to be determined on the papers, without the expense of an oral hearing, if the only matter in contest was quantum. 70 On balance, I consider that ABD should pay Bosch Australia's costs of this application, to be taxed if not agreed. Although, as I have explained, I consider that both parties have spent far more time in preparation for this application than is reasonable in light of the nature of this litigation that matter will ultimately be for a taxing officer to assess. I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman.

Corporations Act 2001(Cth)s 1335(1)

Federal Court of Australia Act 1976(Cth)s 56, s 56, nothing

At a glance

Court

Decision date

Before

Source

Judgment (22 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (22)

Cited By (5)