Cruz Industries Pty Ltd v Sunny Girl Pty Ltd

Federal Court of Australia|2017-11-17|Before: Robertson J

The respondent's application for security for costs is dismissed.
The respondent pay the applicant's costs of that application, as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 By interlocutory application filed on 11 October 2017, the respondent, Sunny Girl Pty Ltd (Sunny Girl), applied for an order for security for costs. It sought an order that the applicant, Cruz Industries Pty Ltd (Cruz), provide within 14 days security for Sunny Girl's costs, in the amount the Court deemed fit, by payment into the Court or by way of lodgement of a bank guarantee in a form satisfactory to the Registrar. 2 The proceedings were commenced on 16 March 2017 by originating application accompanied by a statement of claim. In broad terms, and subject to what I say at [23] below about the remaining issue, Cruz claimed under the Copyright Act 1968 (Cth) that it was the holder of the copyright in certain artistic works and that Sunny Girl had infringed that copyright by offering for sale and/or importing for sale items of clothing made of fabrics featuring the artistic works. 3 An amended statement of claim was filed on 10 May 2017 and a defence on 17 May 2017. An unsuccessful mediation occurred on 6 September 2017. 4 On 7 September 2017 Sunny Girl's solicitors first wrote to the solicitors for Cruz putting them on notice that unless certain requested information was received by 15 September 2017 Sunny Girl would seek security for costs without further notice. 5 There was further correspondence to which I do not find it necessary to refer. 6 I note that the substantive application brought by Cruz has been set down for final hearing on 26 March 2018, with an estimate of up to 4 days.

The statutory provisions 7 Section 1335 of the Corporations Act 2001 (Cth) provides: 1335 Costs (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. (1A) Subsection (1) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation. Note: Similar provision is made in relation to Aboriginal and Torres Strait Islander corporations under section 581-20 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006. (2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs. 8 Section 56 of the Federal Court of Australia Act 1976 (Cth) provides: 56 Security (1) The Court or a Judge may order an applicant in a proceeding in the Court, or an appellant in an appeal under Division 2 of Part III, to give security for the payment of costs that may be awarded against him or her. (2) The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs. (3) The Court or a Judge may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given. (4) If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. (5) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security. 9 The Federal Court Rules 2011 (Cth) provide: 19.01 Application for an order for security for costs (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought. (3) The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. Note: Section 56 of the Act deals with security for costs. (4) In this rule: applicant includes a cross-claimant. respondent includes a cross-respondent. The evidence 10 Sunny Girl's application for security for costs was supported, first, by an affidavit sworn by Ms Simone Mitchell, solicitor, dated 10 October 2017. Ms Mitchell had also sworn a second affidavit, in reply, dated 23 October 2017. A third affidavit by Ms Mitchell, sworn 14 November 2017, was also read. Sunny Girl relied as well on an affidavit of its general manager, Mr Jun Li, made on 15 June 2017. 11 Cruz filed an affidavit by Amy Grace McDonnell, manager, affirmed 17 October 2017 and an affidavit by Lance Newman Scott, solicitor, affirmed 17 October 2017. Mr Scott also made a further affidavit dated 15 November 2017. 12 The evidence as to the financial position of Cruz is claimed to be largely confidential. I shall avoid setting out the detail of that material.

The parties' submissions 13 Sunny Girl submitted that Cruz had insufficient assets to meet an adverse costs order and that there were no discretionary reasons why the Court would decline to order security. Sunny Girl submitted that its costs were likely to exceed $400,000 and its recoverable costs were likely to exceed $300,000. It submitted that an order for security of $280,000 would be appropriate. 14 Sunny Girl also submitted that the share capital of Cruz was $10 and that it did not own any real property in Australia. 15 Cruz contended that it could meet an adverse costs order from funds in an identified bank account and from profits the business was likely to make in the meantime. Sunny Girl submitted that the sum stated to be the balance of the bank account was insufficient on its face and there was no certainty the balance in the account would remain at its current level. As for expected profits, there was no evidence as to what the profits might be. There was some evidence of profits for the 13 months to 30 September 2017. Sunny Girl also submitted that Cruz's stock on hand did not represent an asset of sufficient liquidity so as to constitute a realistic fund against which a successful respondent might enforce an order for costs or an asset against which an order for costs might easily be enforced. Sunny Girl submitted that Cruz's net current asset position was insufficient. 16 Cruz submitted that the application should fail because Sunny Girl had not established that there is reason to believe that Cruz will be unable to pay Sunny Girl's costs if so ordered. Sunny Girl's evidence was not sufficient to discharge the onus it bore in bringing an application for security for costs. Cruz pointed to the absence from the affidavits in support of the application of a statement that there is reason to believe that it will be unable to pay Sunny Girl's costs if so ordered: reference was made to r 19.03(3)(a) of the Federal Court Rules. Confidential Exhibit AGM-6 demonstrated that Cruz was trading at a substantial net profit far in excess of Sunny Girl's highest estimate of its costs and any reasonable amount that could be imputed for Cruz's own costs. That showed positively that there was no reason to believe that Cruz will be unable to satisfy an adverse costs order. There was no basis to suggest, Cruz submitted, that its trading performance over the coming year would not be at least as successful as it had been over the previous year, let alone that it would immediately and significantly deteriorate. Further, Cruz submitted, Confidential Exhibit AMG-5 demonstrated that it had a substantial amount of cash on hand. This was a significant asset to be taken into consideration, in combination with the profits already described and the stock on hand. As to this, Cruz submitted it generally had stock on hand in Australia of substantial value and stock in transit to Australia of a similar value at any one time. It referred to the affidavit of Mr McDonnell at [15]. 17 Cruz also submitted that there had been significant delay by Sunny Girl in bringing the security for costs application. The proceeding was commenced in March 2017 and a potential security for costs application was not mentioned until September 2017. Whatever the reason for the delay, Sunny Girl had allowed Cruz to incur significant costs in connection with the proceeding without any indication that Sunny Girl would seek security for costs. 18 Sunny Girl submitted that no issue of delay arose as orders were made in April 2017 for a mediation and that mediation did not occur until September 2017. The question of security was raised the following day. The cost and delay of a contested application for security would have only hindered potential resolution. Reference was made to the affidavit of Mr Li in part for the proposition that, even if Cruz succeeded on liability, any pecuniary relief would be trivial and far outweighed by the costs of the litigation.

Consideration 19 I am not persuaded that there is reason to believe that Cruz will be unable to pay Sunny Girl's costs if so ordered. This is a substantial factor in the exercise of the discretion. 20 I accept, as Kenny J did in Axent Holdings Pty Ltd v Compusign Australia Pty Ltd (No 2) [2017] FCA 1102 at [45], that the threshold issue is "undemanding"; and Sunny Girl need only establish that there is a rational basis for the belief that Cruz will be unable to pay its costs if Sunny Girl is successful. However, having taken into account Cruz's absence of any real property holdings and its very low paid up share capital, I find that Cruz is trading at a substantial net profit, has a substantial amount of cash on hand as at 18 October 2017 and has or will have access to stock on hand of substantial value which is readily disposable. Cruz's garments are sold in over 100 stores across Australia. It receives payment from its customers upon delivery. I have taken into account the criticisms made by counsel for Sunny Girl of the management reports for the 3 months ended 30 September 2017 and as at 30 September 2017, being the profit and loss statement and the balance sheet respectively, but note the substantial net profit figure. I also take into account Sunny Girl's submission that profits and assets are not the same things. In making this assessment I have accepted, for the purposes of this application, that Sunny Girl's recoverable costs will be of the order of $300,000. 21 Although I do not decide the matter on this basis, I note that the affidavits filed on behalf of Sunny Girl did not state in terms that there is reason to believe that Cruz will be unable to pay Sunny Girl's costs if so ordered: in my opinion such a statement should have been included in that evidence in accordance with r 19.01(3)(a) of the Federal Court Rules. 22 Even if I had been persuaded that there is reason to believe that Cruz will be unable to pay Sunny Girl's costs if so ordered, as a matter of discretion I would not have made an order for security since such applications are to be made promptly and before significant expense is incurred by an applicant: Devenish v Jewel Food Stores Pty Ltd [1990] HCA 35; 94 ALR 664 at 666 per Mason CJ. This application was not so made. Similarly, it is necessary at all times to bear in mind the requirements of ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth) so far as concerns the resolution of disputes as quickly, inexpensively and efficiently as possible. 23 It is common ground that the only substantive issue now in dispute in relation to liability is whether Sunny Girl was aware or ought to have been aware that the four alleged infringing works infringed Cruz's copyright. Although delay is not of itself a disentitling factor, in a relatively small case such as the present, and where there has been no cogent explanation for the delay, I consider it to be dispositive. 24 Generally, in my opinion, an applicant party should know whether or not a respondent party will apply for security not only before the applicant party has incurred significant expense but also before it has been exposed to the risk that it may be liable for significant costs incurred by the respondent if the applicant party becomes liable to pay those costs. In the present case Ms Mitchell has deposed that the costs and disbursements, including counsel's fees, billed to Sunny Girl up to and including 4 October 2017 are approximately $165,000, whereas the application for security for costs was first foreshadowed on 7 September 2017. 25 Of the other factors listed by Edelman J in Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360 at [13], Cruz submitted at one point that I should take into account the strength and bona fides of its case, particularly the admissions made by Sunny Girl. However, as I have said at [23] above, the remaining issue is a narrower one and, provisionally, I do not regard Cruz's case on that remaining issue as any stronger than Sunny Girl's. I understand that counsel for Cruz ultimately accepted that this consideration went no further than that in this case. I do not give this factor any weight.

Conclusion and orders 26 Sunny Girl's application for security for costs is dismissed, with costs. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson.

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