The threshold question - power to order security
24The specific points made by the defendants in support of their challenge to the decision on the threshold question were as follows.
25First, the defendants submitted that the primary judge made an error in assuming that the item for current liabilities in GMSA's management accounts to 30 June 2013 included inter-company loans. The loans were in fact part of the "Long-term Liabilities" stated in the accounts but the defendants had submitted that they should have been treated as current liabilities because at least the principal loan was shown by the evidence to have a maturity date of 7 November 2013. GMSA responded to this submission by proffering to the Court an undertaking by the ultimate owner of GMSA, Mr Bagerdjian, to defer payment of inter-company loans until the conclusion of the court proceedings.
26In referring to the inter-company loans as current liabilities the primary judge could have been implicitly accepting the defendants' submission that that was their proper classification. As a result, I do not consider that the defendants have clearly established that the judge erred in this context.
27In any event, the alleged error has not been shown to be material because the primary judge was in my view entitled to have regard to the undertaking given by Mr Bagerdjian. As pointed out earlier, the evaluation that his Honour was required to undertake was necessarily of a preliminary character, based on less than complete evidence. The defendants' submission on appeal that the undertaking should have been regarded as of "little comfort" because Mr Bagerdjian was outside the jurisdiction was, according to GMSA's submission which was made on appeal without contradiction, not put to the primary judge. In these circumstances and in the absence of any demonstration by the defendants that the alleged error played a significant role in his Honour's reasoning process, I do not consider that material error has been established.
28Secondly, the defendants submitted that the primary judge failed to have "proper regard" to the fact that approximately $2.2 million of GMSA's assets recorded in its 30 June 2013 management accounts balance sheet was constituted by goodwill. However, the balance sheet (which was tendered by the defendants) was some evidence of its assets and liabilities, and their value (Potts v Miller [1940] HCA 43; 64 CLR 282 at 303) and there was no obvious inference arising from other evidence that the goodwill must have been of lesser value than stated in the balance sheet. Indeed, the evidence concerning the nature of GMSA's business and the consideration by the Zuellig interests in 2011 of its acquisition (together with the remainder of the Group) for a very substantial amount pointed in the opposite direction.
29Furthermore, if goodwill had been overstated in the accounts it can be inferred that some of the defendants, and particularly the second defendant who until recently had been the managing director of GMSA, would have known and could have given evidence to that effect. He did not do that.
30Accordingly, I reject the second submission.
31Thirdly, the defendants submitted that the primary judge did not properly consider the effect that payment by GMSA of its own legal costs of the proceedings would have on its capacity to meet the defendants' costs.
32There was no estimate in evidence of the amount of the legal costs incurred and likely to be incurred by GMSA after 30 June 2013 in connection with the Commercial List proceedings. However, based on the evidence concerning the defendants' likely recoverable party/party costs, it can be inferred that GMSA's solicitors/client costs will be likely to be $1 million or more beyond the amounts already accounted for. The management accounts for the six months ended 30 June 2013 took account of legal fees in the order of $1 million, as did the audited accounts for the 12 months concluded 31 December 2012.
33There was discussion in the argument on appeal as to whether these figures could be reconciled with estimates given by Mr Philip Hoser, a solicitor, in an affidavit of 9 September 2013 of legal costs incurred by GMSA in the previous 11 months totalling close to $3.5 million. As the issue was not explored in cross-examination of Mr Hoser, I do not consider that an attempt at reconciliation can occur now.
34GMSA responded to this third submission of the defendants by pointing to a number of references in the primary judge's judgment to GMSA's own legal costs (see Judgment [17], [18], [33], [54] - [56]). In particular, GMSA emphasised [33] where the primary judge said:
"The plaintiff has significant assets (debtors and stock) that the plaintiff is likely to be able to realise in sufficient time to meet any obligation it has to pay costs ... "
35This paragraph immediately followed one in which his Honour referred to evidence that GMSA's parent company had paid some $639,686 of GMSA's fees. That paragraph ([32]) concluded with the comment that the parent company had its own interest in the successful prosecution of the proceedings and that it was likely that it was contributing to GMSA's legal fees for this reason. With GMSA's legal fees thus in the forefront of his mind, it is not reasonable to conclude that his Honour overlooked them in expressing views in the immediately following paragraph (and elsewhere in the judgment).
36As a result, I reject the defendants' third submission.
37Fourthly, the defendants submitted that the primary judge "incorrectly ascribed weight" to the asserted "enterprise value" of GMSA's business referred to in (4) in [8] above, when there was no meaningful identification of what that value comprised and no expert evidence to verify its existence.
38In addition to the evidence referred to there, there was in evidence the Confidential Information Memorandum dated August 2011 referred to at [14] above. The Memorandum referred to the Australian business conducted by GMSA as representing 40% of the group business. Further evidence along the same lines was contained in an internal email of the Zuellig interests dated 23 June 2011.
39As the defendants implicitly recognised in their formulation of this fourth submission, to make it good they had to demonstrate to this Court that the primary judge should have taken no account at all of the evidence of "enterprise value". In my opinion they did not do this. The evidence to which I have referred was before his Honour and rationally gave some assistance to him in answering the threshold question concerning GMSA's ability to meet orders for the defendants' costs, as it suggested that GMSA's business was, at least in 2011, of considerable value. Whilst the passage of time and the departure of senior officers from GMSA's employment undoubtedly affected the weight that could be attributed to it, the evidence nevertheless remained of some not insignificant weight, consonant with his Honour's comment that GMSA's submission concerning this evidence was of "some assistance" to him (Judgment [30]).
40The defendants' fifth submission was that the primary judge erred in concluding that GMSA had "ample assets to offer a prospective lender" (Judgment [31]) when there was no lay or expert evidence to support that conclusion or that GMSA would have been able to service any borrowing.
41I do not accept this submission. Bearing in mind particularly the nature of the proceedings before his Honour (as to which see [16] above), I consider that it was open to the primary judge to draw these inferences from the financial accounts that were before him. He was not required to treat those accounts as incomprehensible in the absence of evidence explaining them. A judge sitting in the Commercial List is well able to read and draw conclusions from balance sheets and profit and loss accounts. It was for the defendants to call evidence to dispel any inferences that were reasonably open to the judge to draw from the accounts. They did not do so and have not shown that the inferences drawn by the primary judge were not open to be drawn by him. The fact that confidentiality orders restricted the documents to which the defendants could have access did not preclude them bringing the knowledge that they had to bear in support of their applications for security for costs.
42Sixthly, the defendants submitted that the primary judge should not have taken into account GMSA's submission that it was unlikely that its parent would "cut the plaintiff adrift" if it was ordered to pay the defendants' costs (Judgment [27] and [30]).
43This submission of GMSA was simply a colourful way of putting the effect of its submissions concerning enterprise value that GMSA formed a significant part of a group of companies of substantial value. As I have rejected the defendants' challenge to the primary judge's regard to those submissions (see [37] - [39] above), this submission should be rejected also.
44The defendants' seventh submission was that the primary judge erred in not considering whether the "limited material proffered by the Plaintiff was an appropriate basis on which to reach a reasonable decision" and not having "proper regard" to GMSA's ability to lead further evidence as to its financial position and the location of its assets. The defendants referred in this respect to Ho v Powell [2001] NSWCA 168; 51 NSWLR 572 at [14] - [15] and Australian Securities and Investments Commission v Hellicar [2012] HCA 17; 247 CLR 345 at [165] - [166] and [255].
45I reject this submission. It is not clear whether the primary judge was asked to direct his mind to these questions but, assuming in the defendants' favour that he was, the absence of express mention of them is not significant. Bearing in mind the character of the applications (as to which see [16] above), the core evidence upon which they were determined, that is, GMSA's most recent audited and management accounts, was entirely appropriate and sufficient to form the basis of a reasoned decision. The defendants, who included a recent managing director of GMSA, were in a position to utilise their own knowledge to supplement the evidence in a direct fashion or to guide their solicitors in the making of further inquiries, if they thought that necessary.
46Eighthly, the defendants submitted that the primary judge erred in not considering that if GMSA's parent had "to step in or otherwise not 'cut the plaintiff adrift' in the face of an adverse costs order", it followed that GMSA could not itself pay the defendants' costs. I reject this submission as GMSA's point (which the primary judge found to be of "some assistance") was that GMSA's parent was in a position to, and would be likely to, ensure that GMSA fulfilled any obligation to pay costs. This was an inference that was open on the evidence. If this occurred, GMSA was, contrary to the defendants' proposition, "itself" able to pay the defendants' costs.
47Ninthly, the defendants submitted that the primary judge erred in not considering "the nature of the Plaintiff's stock, the available market, and the costs of realising such stock when determining whether the Plaintiff was 'likely to be able to ... realise' its assets ('debtors and stock') in sufficient time to meet any obligation it has to pay costs" (written submissions dated 25 October 2013 at [20(b)] referring to Judgment [33] quoted in [9] above).
48I reject this submission also. The financial accounts were evidence of the existence of stock and debtors of the value stated in the accounts and, because they were classified as current assets, that they were realisable at least within a 12 month period. Furthermore, the magnitude of the sales revenue suggested that stock and debtors were likely to have been turning over within a reasonably short period and the fact that a deduction was made for outdated stock suggested that attention had been given during the preparation of the accounts to its realisability. Again, the connection to GMSA in the recent past of the employee defendants, particularly Mr Farag, should have enabled them to give evidence or to suggest lines of inquiries to their solicitors if there was a basis for putting that inferences otherwise available from the accounts should not be drawn.
49Tenthly, the defendants submitted that the primary judge failed, at least consistently, to consider the threshold question "on the basis that the Plaintiff unsuccessfully litigates the proceeding to trial, at substantial cost to itself".
50This submission should be rejected as there is no reason to conclude that the primary judge did otherwise than deal with the applications on this basis (see in particular [34] above concerning GMSA's own legal costs).
51In light of the rejection of these submissions, the defendants' challenge to the primary judge's decision on the threshold question should be rejected and the applications for leave to appeal dismissed with costs.
52I add that if the threshold issue had been approached by the trial judge, not on the basis to which he referred of whether there was a real or sensible risk that GMSA will be unable to meet any costs orders in favour of the defendants, but on what I consider to be the correct basis (see [16] above) of whether there was reason to believe at the time of the hearing at first instance that GMSA will be unable to meet those costs orders, the necessity for him to reject the defendants' applications for security for costs would have been all the clearer.
53I add also that the outcome of the applications for leave to appeal would not differ if, contrary to my view expressed in [22] above, the principles applicable to the appeals (assuming leave were granted) were those stated in Warren v Coombes rather than House v The King.