Is there credible testimony that Axent will be unable to pay the costs of Hi-Lux if Hi-Lux is successful?
21 Hi-Lux submitted that the evidence before the Court showed that there is reason to believe that Axent would be unable to pay the costs of Hi-Lux if Hi-Lux were successful in the proceedings. This evidence was, so it submitted, to be found in the affidavits of Mr Rankin.
22 In his first affidavit, Mr Rankin deposes that a search of the records maintained by the Australian Securities and Investments Commission (ASIC) extracted as at 19 January 2017 shows that Axent is a company registered on 30 March 2001 as an Australian proprietary company, with a total paid-up share capital of $1,000. Further, a Victorian real property search performed on 19 January 2017 showed that Axent was not listed as the owner of any real property in Victoria.
23 Hi-Lux also relied on the fact that, as disclosed in Mr Rankin's second affidavit, Axent was a defendant to a claim in the County Court of Victoria that had been set down for a 7-day hearing commencing on 18 October 2017, and that it had not explained. (Hi-Lux did not press a further matter to which reference was made in written submissions filed before the hearing.)
24 Lastly, in the circumstances set out below, Hi-Lux relied on annexure RRR-4 to Mr Rankin's first affidavit.
25 In considering whether Hi-Lux has shown by "credible testimony" that there is reason to believe that Axent will be unable to pay its costs if successful, it is necessary to say something more about Axent.
26 Axent is an electronic engineering company with corporate headquarters in the Melbourne suburb of Clayton. There was no dispute that Axent has been trading for over 17 years and employs a number of full-time and part-time staff. There was also no dispute about its general revenue figures.
27 In support of its opposing submission that Hi-Lux had not demonstrated there is reason to believe that, if Axent were unsuccessful, Axent would be unable to meet a costs order made against it, Axent referred to confidential annexure CL-9 to the affidavit sworn by Mr Leonidas directed to Hi-Lux's application for security for costs.
28 Axent submitted that, in confidential annexure CL-9, Axent had demonstrated a strong financial position. In this affidavit, Mr Leonidas deposed that he had been advised by Geoff Fontaine, who was the sole director of Axent, and believed that the matters set out in that annexure were true and correct. Confidential annexure CL-9 contained three bullet points, including general assertions about Axent's turnover and EBITDA, as well as its total and net assets.
29 I interpolate here that Hi-Lux objected to the admissibility of confidential annexure CL-9, on the basis that Mr Fontaine was not shown to have the appropriate expertise to express an admissible opinion about the valuation of assets under s 76 of the Evidence Act 1995 (Cth) (Evidence Act) and the evidence was vague and did not indicate the basis for the stated conclusions. In any event, so Hi-Lux submitted, Mr Fontaine should have given that evidence directly and be subject to cross-examination.
30 All parties took advantage of the exception to the hearsay rule in interlocutory proceedings set out in s 75 of the Evidence Act, as they were entitled to do. One might reasonably expect the sole director of Axent would have first-hand knowledge of some of the facts asserted in confidential annexure CL-9, although perhaps not all. One might also infer from the nature of some of the asserted facts that they constitute or depend on opinions about the value of assets and other matters, the basis of which is not disclosed. I am inclined to the view therefore that confidential annexure CL-9 is not admissible, as counsel for Hi-Lux submitted. Even if it were admissible I would attach little, if any, weight to it. This is because I accept, as Hi-Lux submitted, that confidential annexure CL-9 contains broadly-stated conclusions, the bases for which are not explained. The inclusion of a statement of this kind by the company's director as an annexure to an affidavit sworn by the company's solicitor (on information and belief) can scarcely be regarded as persuasive, even acknowledging that Hi-Lux bore the substantive onus with respect to its application, including that the threshold issue was satisfied.
31 It was in this context that counsel for Hi-Lux sought to tender annexure RRR-4 to Mr Rankin's first affidavit, the admissibility of which was the subject of initial objection by Ms Gatford, counsel for Axent.
32 The background to the provision of this information can be briefly stated. Hi-Lux's solicitors wrote to the solicitor for Axent on 7 February 2017 raising the concern that Axent would be unlikely to be able to satisfy an adverse costs order. Hi-Lux's solicitors requested the provision of any information that would establish that Axent had sufficient assets to meet an adverse costs order. Axent's solicitor replied on 13 February 2017 advising that Axent did not agree to provide any security for costs, and that it would disclose financial information on a confidential basis. On 27 February 2017 Hi-Lux was provided with a confidential Management Report dated 18 October 2016, for the financial year ended 30 June 2016 (management report). This document was produced in confidential annexure RRR-4 to Mr Rankin's first affidavit initially to explain Axent's response to Hi-Lux's concerns.
33 This much appears in email correspondence in annexure F to the affidavit of Mr Leonidas sworn in response to the Compusign respondents' application). Amongst other things, in an email to Mr Leonidas dated 15 August 2017, the respondents' solicitor relevantly stated:
The second respondent relies upon both affidavits of Mr Rankin.
The first and third respondents also rely upon both affidavits of Mr Rankin - the practical reality being that the material in both affidavits will be before the Court on the second respondent's application. The financial statement is, however, put before the Court solely in order to disclose the response that Axent advanced as to why it should not be liable to provide security for costs. It does not form part of the respondents' positive case.
Should your client notify us either in their answering materials, or at the hearing, or otherwise, that it does not seek to rely upon its 2015/2016 financial statement in answer to the respondents' application, then the respondents would not tender that statement (contained in Confidential Annexure RRR-4). If Axent seeks to rely on that financial statement, then the issue is moot in any event. If it seeks to rely on a financial statement that is inconsistent with the 2015/1016 financial statement, then that is something that it may need to justify during the hearing.
34 At the hearing, Mr Smith in fact sought to rely on the management report in support of the application made by Hi-Lux for security for costs, because, in his submission, Axent had by then sought to rely on general and vague assertions, which were inconsistent with the more detailed information in the management report. Mr Smith submitted that it was "quite unusual" that the applicant would seek not to disclose the full details to the Court.
35 After further argument, Axent withdrew its objection to the admissibility of the management report as regards the Hi-Lux application. The upshot was that, as indicated earlier, the application for security for costs made by the Compusign respondents was adjourned to a date to be fixed; and that the management report, along with confidential annexures RRR-5 and RRR-7 to Mr Rankin's first affidavit in respect of the application made by Hi-Lux for security for costs, were admitted into evidence.
36 A final point to note is that, with respect to the threshold issue, Axent relied on the decision of Vickery J in Amcor Limited v Barnes [2015] VSC 90 (Amcor v Barnes) at [20]-[44]. Hi-Lux, on the other hand, relied on the decision of Beazley ACJ in Treloar Constructions Pty Limited v McMillan [2016] NSWCA 302 (Treloar v McMillan).
37 In Amcor v Barnes Vickery J accepted (at [24]) that Achilla (against whom security for costs was sought) "no longer has any capacity to generate any cash flow from trading". Achilla had no real estate and provided no information as to its financial position. His Honour said (at [26]):
I have no evidence about income which may be derived from any other source, for example investments, and no evidence about its expenses (if any). Apart from some evidence as to not owning any real estate and the claimed asset of a positive costs order in its favour (in both cases as to which, see below), I have no evidence as to what assets Achilla may have (other than not having any real estate) and what are its liabilities.
38 Nonetheless, after referring to some other matters, Vickery J concluded that he was not persuaded that the evidence permitted a rational belief that, if ordered to do so, Achilla would be unable to pay the costs of the Amcor parties, if it were unsuccessful in its counter-claim. His Honour stated (at [56]) that:
The absence of real estate assets, combined with a low share capital, and the fact that it has ceased to trade, are all based upon credible testimony, however, together they do not provide reason to believe that Achilla will be unable to meet an adverse costs order if made against it in its counterclaim proceeding.
This led his Honour to hold that the threshold question was not satisfied.
39 To evaluate the relevance of this decision, however, two further factors should be borne in mind. In this case, his Honour also indicated (at [59]) that even if Amcor was able to make out the threshold question, he would not have exercised the discretion in Amcor's favour, delay being a significant factor against the exercise of discretion: see Amcor v Barnes at [63]. Further, Achilla did not adduce any evidence as to its financial position and his Honour accepted that Achilla was under no obligation to do so (at [44]) and that the rule in Jones v Dunkel (1959) 101 CLR 298 "cannot be used to fill gaps in the evidence or to convert conjecture or suspicion into evidence in the nature of inference": see Amcor v Barnes at [39]. His Honour remarked (at [40]):
[A] failure to provide financial information in the face of a valid Court process, either in answer to a subpoena or a notice to produce, or in response to a reasonable request on the part of a defendant, may assist or fortify a conclusion based on direct evidence or upon inferences to be drawn from the other evidence as to the inability of the plaintiff to pay the defendant's costs should the defendant be successful. But it cannot of itself provide such evidence or give rise to that conclusion.
40 In Treloar v McMillan, on the other hand, Beazley ACJ made an order for security for costs of an appeal against a corporation, accepting that there was sufficient evidence to satisfy the threshold question. Referring to this threshold question, Beazley ACJ stated (at [11]-[12]):
The test to be applied in determining whether an applicant has satisfied the jurisdictional requirements of s 1335 has been described as "undemanding": HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at [17]. In Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93, Maxwell P and Buchanan JA stated, at [15], that the phrase "reason to believe" in s 1335 "is the touchstone of jurisdiction. It requires a rational basis for the belief - and no more". See also HP Mercantile v Dierickx at [6]-[10]; Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [29]-[30]; Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [16].
In Livingspring v Kliger Partners their Honours further observed, at [15], that the section required the making of a risk assessment as to whether the corporation would be unable to pay, and that:
The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs.
41 Her Honour said (at [25]-[27]) that the parties' submissions
focussed the outcome of the application on whether, in this case, in the absence of a notice to produce financial information, Mr McMillan had satisfied the terms of s 1335. In dealing with that question, both parties referred to the decision of the Western Australian Court of Appeal in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 22 WAR 241; [2000] WASCA 69.
In that case, the court examined the difference in the language of s 1335 from its predecessor provisions. In doing so, Pidgeon and Owen JJ observed, at [11], that there had been a lessening of the threshold requirements for the engagement of the court's jurisdiction and that it was no longer necessary to prove that a party would be unable to pay costs if an order was made against it. …
The applicant in FFE Minerals had adduced evidence that the respondent to the application had a limited share capital and no land on the relevant land register. Their Honours observed, at [25], that there was no evidence of an apparent lack of other assets, although the financial returns produced suggested that was the position. Their Honours considered that the absence of land combined with low share capital gave rise to appearance that there was reason to believe that there were no assets to meet the costs. Their Honours noted that the respondent company could have adduced evidence but did not. They concluded that the evidence led, combined with the absence of evidence from the respondent, objectively gave rise to the necessary belief that the company was not in the position to pay costs if an order was made against it.
42 Beazley ACJ concluded (at [29]) that the threshold question was satisfied in the matter before her because the party against whom security was sought was a company with no real estate and a limited share capital.
It is a project management and building services company and as such would not be expected to have any stock. Prior to the bringing of the application, it was asked to provide proof that it could meet an order for costs but chose not to do so. Although Mr McMillan would have been in a stronger forensic position had a notice to produce been issued, I am, as I have said, nonetheless satisfied that Mr McMillan has established by credible evidence that there is reason to believe that Treloar Constructions would be unable to pay an order for costs if unsuccessful on the appeal.
My conclusion in this regard is reinforced by the fact that Treloar Constructions, on its stay application, did not adduce any evidence that it would be in a position to pay the costs it had been ordered to pay in respect of the first instance proceedings should it not be successful on its appeal. I refer to this below.
43 Consideration of these two cases demonstrates that in determining whether the threshold question can be answered affirmatively, the focus must be on the circumstances of the particular case. Decisions in other cases such as these may inform but cannot dictate the result. Both the cases to which the parties referred were helpful but there were significant differences between the circumstances in each of those cases and in this case.
44 Axent provided Hi-Lux with some information about its financial position in February 2017, when the issue of its ability to pay costs if it was unsuccessful was first raised. In the end, the management report was admitted into evidence with its consent, in the circumstances outlined above. In contrast to the company against which security was sought in Treloar v McMillan Axent has apparently some plant and equipment of value.
45 It may be accepted that the threshold issue is "undemanding"; and Hi-Lux need only establish that there is a rational basis for the belief that Axent will be unable to pay its costs if Hi-Lux is successful. A practical approach is called for in deciding whether Hi-Lux has met this threshold. As already stated, Axent is an electronic engineering company that has been trading for some time. I accept that there is credible testimony about Axent's lack of real estate and low paid-up share capital, but these considerations do not of themselves satisfy me that there is a rational basis for belief that, if ordered to do so, Axent will be unable to pay Hi-Lux's costs. I have borne in mind that Axent has not sought to explain the proceedings in the County Court, but as there is no evidence about the proceeding I would not give this circumstance much weight. The management report does not persuade me that there is a rational basis for the requisite belief.
46 Both counsel for Hi-Lux and Axent made submissions about the management report. Hi-Lux did not, however, support its application with any expert evidence that might have cast more knowledgeable light on the management report. To some extent this may be explained by the circumstances concerning this report, to which I earlier referred. The fact remains, however, that the management report is of uncertain significance. Even the purpose for which the management report was produced is not disclosed. Consideration of it might raise reasonable questions but it appears that Hi-Lux has not sought to raise any question or query arising from that report with Axent. The management report is, therefore, of uncertain significance and does not satisfy me that Hi-Lux has established that there is a rational basis for the belief that Axent will be unable to pay its costs if Hi-Lux is successful.
47 I would not therefore make the order for security for costs that Hi-Lux seeks. However, even if Hi-Lux had satisfied the threshold issue, I would not have exercised the discretion in its favour in this case.