BUSINESS AND RESEARCH MANAGEMENT v FLUDE

KENNETH JOHN BOWEN (Sixth Defendant) JUDGMENT (Application for security for costs) 1 By Notice of Motion filed on 21 June 2002 the defendants seek security for costs from the plaintiff in the sum of $153,294.54. The application, as I understand it, is founded on SCR Pt 53 r 2(1)(b) namely that there is reason to believe that the plaintiff, being a body corporate, will be unable to pay the costs of the defendants if ordered to do so. In this context I note the candour with which Mr Campbell, for the plaintiff, acknowledged that the situation referred to in the subrule presently applies to his client. 2 The proceedings were commenced on 22 November 2001. The plaintiff seeks damages for defamation arising from the publication, as alleged, by the defendants of a newsletter, so it is said, sent to syndicate members and others in the financial community. Kirby J, on 22 April 2002 found that the pleaded imputations were capable of being carried by the matter complained of and capable of being found to be defamatory: Business and Research Management Limited v Flude [2002] NSWSC 318. 3 The evidence in support of the defendants' application is constituted by two affidavits of Sarah Elizabeth Davies sworn 20 June 2002 and 6 August 2002. Exhibit "SED-1" and following is constituted bundles of documents in relation to the plaintiff and its operations. The affidavit of 20 June 2002 purports to set out the history of the action, requests for security dated 1 March, 1 May and 29 May 2002 which remain hitherto unanswered, the background to the action and the bundle of documents exhibited to the affidavit to which I have referred. From paragraph 18 on, Ms Davies deposes to her relevant experience and to an assessment of costs in the figure which is mentioned in the Notice of Motion. The second affidavit relates to searches conducted in Queensland, New South Wales, Western Australia and Victoria as to the plaintiff being the registered proprietor of real estate each of which disclosed a nil return. It also refers to a telephone conversation she had with a former Managing Director of the plaintiff company, Mr John Knox, on 6 August in which she was informed by him that the plaintiff did not own any real property within Australia. The other matter which, in the scheme of things, is probably inconsequential, is an acknowledgment that she had misstated counsel's fees on a daily basis by reducing those fees by $750.00 resulting in an increase in the estimated costs of $8,250.00. 4 Exhibit A is a bundle of bank statement of the plaintiff company with the St George Bank for the period November 2000 - 31 July 2002 on which latter date the accounts indicate a credit balance of $64.99. There is recorded throughout the bank statements deposits and withdrawals, usually within 24 hours, of what are said to be "loans" from a company described as "BGR" to the plaintiff. Exhibit B is the Notice to Produce calling upon the plaintiff company to produce amongst other things, bank statements from which it is to be inferred, together with exhibit A, that the bank statements produced are the only documents that fall within the Notice. 5 Exhibit C is another Notice to Produce to which is attached a draft of the Annual Financial Report of the plaintiff (BARM) together with a communication with the Deputy Commissioner of Taxation dated 20 November 2001. As I understand it this particular component of the material seeks to detract from any assertion in the material tendered or otherwise relied upon by the plaintiff that purports to show in some way a potential asset approximately in the sum of $7 million by way of a taxation refund. 6 The plaintiff/respondent relies upon the affidavit of Bernard Allan Smith, solicitor for the plaintiff, which does no more than prove that there were communications between the plaintiff's solicitors and KPMG, unsuccessfully as it turns out, to seek to obtain financial information that may be of assistance in the present application. The second affidavit is that of Frederick Theodore Gulson sworn 2 September 2002. The deponent is a director of the plaintiff company and also of a company called Maincamp Holdings Pty Ltd (MCH) said to be a company related to the plaintiff. Mr Gulson purports to undertake to the Court to indemnify the plaintiff against any costs orders which the defendants may obtain against it. It asserts that MCH has net assets in excess of $7 million. Annexed to the affidavit is what is described as a balance sheet as at 30 June 2002 for Maincamp Holdings Pty Ltd. A brief outline of the affairs involving the plaintiff was provided by Mr Blackburn in the course of submissions to the following effect: the second defendant Australian Rural Group Ltd (ARG) is the trustee of nine agricultural investment projects on behalf of investors involving plantations mostly of tea trees and the plaintiff is the manager of all but one of those syndicates. The first and third to sixth defendants are directors of the second defendant. 7 The material exhibited to Ms Davies' first affidavit includes a management agreement (SED4) which in clause 7.8 provides that the manager as agent for the company in respect of the carrying on of the business, undertakes to use its best endeavours to commercialise the intellectual property and to continue to carry on the business and to bring to bear all of its skill and expertise in promoting the business and maximising the profit there from. A Research Agreement is part of SED4. Clause 7.2 provides that "In the event that the research and development produces any research results which are of commercial value, then the manager as agent for the trustee and the manager of the business in the collaborative research will investigate and pursue commercialisation of the research results at its own cost." The trust deed is exhibit SED5 to Ms Davis' affidavit and my attention was drawn to clause 2.1 relating to the appointment of the manager and trustee and clause 25.3 which sets out covenants by the trustee and what are described as "core obligations". 8 I was referred to the material in exhibit A, the bank statements and the loan agreements evidenced therein by the payment in and withdrawal of various amounts and to the fact that as at July the plaintiff has "precious little of its own money". 9 Exhibit C, as Mr Blackburn suggests, offers no further information as to the outcome of KPMG's letter to the Deputy Commissioner of Taxation. The Draft Financial Report seems to point to current assets of approximately $171,000 and non-current assets of a little over $7 million as at 30 June 2001. It is to be noted that the accounts are draft only and there is no evidence that the asserted income tax benefit in fact exists. 10 I am satisfied on the evidence that there is a foundation for the position candidly stated by counsel for the plaintiff, that its present situation makes it fall within the Rule to which I have referred above. I add that the plaintiff is a wholly owned subsidiary of BGR Corporation Pty Ltd. The material produced for the defendant discloses that the issued capital of $115,000 and all the 115,000 shares are beneficially owned by BGR Corporation Pty Ltd. The plaintiff has not been shown to be the owner of any real estate in NSW or in the other States to which I have referred. 11 The real issues appear to be, first, quantification, and second, whether any security should be ordered for the whole trial or for the 7A trial only and whether any such costs ordered to be secured should take account of the orders for costs presently made in favour of the plaintiff in relation to the arguments before Kirby J.

12 In support of the submission that a "large upfront" order should be made is that useless litigation would thereby be avoided. Any order for security up until the end of the 7A trial would, it is submitted, not have the desired effect or achieve justice between the parties because the matter thereafter may be stayed as no further security would be provided and the work will have been done for nothing. In this context, if security is ordered up to the end of the 7A trial and the defendants are successful their costs will be secured. If the plaintiffs are successful then it will be a matter for the plaintiff whether to prosecute the action knowing that an application for further security will be made. All I can venture to suggest is, in that event, that the defendants upon the plaintiff's success at a 7A trial would not in the normal course be entitled to an order for costs, nor indeed would the plaintiff. It has to be acknowledged that a sum state of "limbo" theoretically might be achieved bearing in mind that a profoundly important consideration on an application is to secure justice between the parties, principally by ensuring that unsuccessful proceedings do not occasion injustice to defendants, and taking into account the unknown nature and extent of post-7A litigation, I consider it appropriate to make the 7A hearing the cut-off point. 13 The next problem, of course, is the quantification of the amount to be ordered. I have had the benefit of Mr Campbell's bar table analysis of the figures provided by Ms Davies. Her affidavit is certainly confusing in terms of the isolation of costs incurred in relation to the s12A matters, the 7A hearing and any final hearing. For example, a great deal of the costs referred to in paragraph 20 up to (g) were the subject of an order in favour of the plaintiff. It is not my function to conduct an assessment exercise based upon the statements in Ms Davies' affidavit to isolate which of the amounts claimed would be payable by the defendant to the plaintiff and those which would not. Similarly, there appears to be some confusion in paragraph 21 as to costs attributable to a 7A trial and costs attributable to a post-7A trial (even taking into account the error in relation to counsel's fees to which I have referred above). According to Mr Campbell a rough figure, taking into account the notional credit to the plaintiff for the costs order made in its favour, is in the sum of $10,000. 14 I do not see it my function to make a detailed analysis to determine the correctness of that "rough" calculation. It is apparent from Ms Davies' affidavit that approximately $22,500 of the amounts claimed is referable to the preparation for the 7A trial (see paragraph 21 items (n) to (q)). 15 The items that cover the matters that might be subject to the credit in favour of the plaintiff appear to be set out in paragraph 20 (a) to (g), in rounded figures approximately $16,000. That, on my estimation, brings about a total of approximately $40,000 in respect of work done from the commencement of the proceedings and to be done up until the end of the 7A hearing. Whilst I have not agreed with the submission by Mr Blackburn for the defendants that the "limbo" to which I have referred possibly occurring at the conclusion of the 7A trial (dependent upon its outcome) could operate to the prejudice of the defendant, to order the provision of security beyond that point I am persuaded, notwithstanding the parlous state, at present, of the plaintiff company, would not bring about that balance of justice to which the Rules are directed. 16 The credit for the plaintiff theoretically at the end of an action would be taken into account by the appropriate person upon the assessment of costs upon the making of a final order at the conclusion of proceedings. There the matter should presently rest. 17 Accordingly I am of the view that the plaintiff should provide security in the sum of $40,000. 18 The orders are:

Within 21 days from the date of this order the plaintiff is to provide security for the defendant's costs in these proceedings in the sum of $40,000 in a form acceptable to the Registrar and that the plaintiff's action be stayed until the provision of such security.
The costs in this application are to be costs in the cause.
I stand the matter over to the Registrar's Defamation Directions list on October 11 2002. **********

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Judgment (16 paragraphs)

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