Cosdean Investments Pty Ltd v Football Federation Australia Limited

REASONS FOR JUDGMENT 1 This is an application under s 1335 of the Corporations Act 2001 (Cth) (the Act) for orders that the applicant, Cosdean Investments Pty Ltd (Cosdean) provide security for costs to the respondent Football Federation Australia Limited (FFA) in the sum of $61,640 or such other amount as the Court deems appropriate. Section 1335(1) reads: '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.' 2 The principles upon which such an application must be determined are clear cut. It is first necessary for FFA (the applicant on the motion) to establish that Cosdean will be unable to pay its costs if Cosdean is unsuccessful in the action. There must be a proper and real basis for believing that the applicant will be unable to meet an order for costs against it: Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205. If that threshold test is met, the Court has an unfettered discretion as to whether, in all the circumstances, it should make the order which is sought: see Reinsurance Australia Corporation Limited v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803 at [66]-[67]. 3 In my view the threshold test has been satisfied. Cosdean is a small one‑shareholder company. As at 30 June 2005 it had no net assets and in the financial year to that period, had traded at a loss. Its balance sheet at 30 June 2006 is not presently available. I do not say that by way of criticism as it is only a short period since the end of the financial year. Its draft profit and loss statement and trading statement show that it has a gross trading profit of $153,900 and an operating profit, before tax, of $38,400. 4 Other information before the Court indicates that during the financial year to 30 June 2006, Cosdean received a substantial injection of funds in the order of $288,000 from what is called Sarjem Family Trust. There is no evidence to indicate that Sarjem Family Trust is a trust of one or other of the directors, although that might be suspected. In any event, that sum advanced during the course of the last financial year now represents a significant liability of Cosdean. There is no evidence to suggest that it is other than a current liability and there is no proposal (if in fact it is a liability to a family trust representing the directors or one or other of them) that the directors are prepared to subordinate that liability to the liability, if any, which is incurred by way of costs to FFA in this proceeding. 5 I note also that the trading statement producing a gross profit of $153,900 includes purchases of roughly $212,000, sales of $144,000 and closing stock of some $222,000 which is noted to be closing stock at market value. I infer from other evidence that those trading figures represent trading in the items which are the subject of the present claim, that is, what are called 'the products' in paragraph 11 of the amended statement of claim filed on 27 June 2006. 6 Given the lapse of time since the World Cup, in the absence of evidence it is not necessarily clear that the closing stock, that is World Cup products, will now be realisable at their market value. Otherwise, the position appears to be that the assets of the company, other than its stock in hand, represent cash of some $45,000 to $65,000 (the recent affidavit of Ms Watson, a director of Cosdean, suggests that the money in the bank account has reduced somewhat in the normal course of operations) and a loan account owed by Dean Cosenza of some $56,000. There is no evidence as to its recoverability. 7 The liabilities, including the $288,000 and putting aside the liability to Deumer, are in the order of $380,000. There are no real estate assets or, so far as the evidence before me goes, other assets. In those circumstances, in my view, FFA has satisfied the threshold test imposed by s 1335 of the Corporations Act. As I noted, the discretion of the Court is then unrestricted. 8 A number of matters have been put by counsel for the parties as to why the discretion should be exercised in one way or the other. Although it seems plain that someone sought to inhibit various football clubs from facilitating the marketing of the products by Cosdean in the critical period, it is not so clear that that inhibition emanated from or was engaged in by FFA. Counsel for FFA has also identified, by reference to the defence and the licensing agreements referred to, that there are some potential breaks in the line of authorisation which Cosdean may ultimately have to prove if it is to succeed in the proceedings. 9 I do not presume to form a view as to the prospects of those defences succeeding, but it is plain enough, as I have said, that someone inhibited Cosdean from marketing the products through football clubs within Australia at a critical time. To that extent I think Cosdean has good prospects of succeeding but that does not indicate, in my view, that it necessarily has good prospects of succeeding against this respondent. When referring to the 'good prospects' of Cosdean succeeding, I am assuming in its favour, although it is contentious, that it did have the authorisation to distribute the products which it claims. I have taken those matters into account. 10 I have also taken into account that there is no evidence that an order for security for costs would stultify the action. There is also nothing to indicate that the directors of Cosdean, or those who stand behind Cosdean and who may ultimately benefit from the successful proceedings if it succeeds, are prepared to support the company by providing some security for costs or providing some undertaking to meet the costs of FFA if FFA's defence is successful. 11 I have also taken into account that at present there is no substantive evidence to indicate what the outcome would be for Cosdean if it were to succeed in this action. There is some evidence to indicate that, whoever was responsible for stultifying or impairing its capacity to sell the product at critical times, Cosdean was thereby restricted in a significant way from selling the product. 12 Senior counsel for Cosdean contended that I should infer that but for that conduct not only would the sales anticipated in the trading statement have been realised but there would have been considerable further sales available to the applicant at critical times. That may well be the case. No doubt that is the case which will be advanced at the hearing but it is presently speculative on the material before me to determine that fact. 13 It is, in my view, simply in the realm of general speculation at present to conclude that, but for the conduct of FFA (or the conduct of whoever was responsible for impairing the sale of the products at the relevant time), Cosdean's financial position would have been dramatically better than it presently is. The purchase of further product from Deumer would have incurred further expense and there is at present no information to indicate the availability of further funds to Cosdean to meet that expense, or to indicate clearly that it could have met that expense from its trading income from time to time. 14 Even assuming that its present financial position, as reflected in the material now before me, as at 30 June 2006 is the consequence of the impugned conduct as asserted in the statement of claim, I do not think it is shown with any degree of satisfaction what its position would be but for that impugned conduct so as to satisfy me that its present circumstances are a consequence of that impugned conduct. 15 Although senior counsel for Cosdean also contended that I should have regard to the public interest in the exercise of my discretion, and I do so in a general way, I do not see that there are particular features of the public interest which should influence the exercise of my discretion in any meaningful way in this matter. It is, after all, simply a dispute between commercial entities. In those circumstances, on balance, I have reached the view that it is appropriate to make an order for security for costs. 16 FFA seeks an order for security for costs of $61,640. The break-up of that figure includes significant allowances for perusing affidavits of Cosdean for use at trial and preparing FFA's affidavits; for obtaining an expert's report and perusing experts' reports and preparation for trial including proofing witnesses, advice on evidence, briefing counsel and sundry attendances. At present I do not think all of those items will necessarily be incurred.