Digital Cinema Network Pty Ltd v Omnilab Media Pty Limited

REASONS FOR JUDGMENT 1 The proceedings were commenced by the Applicant (DCN) on 22 September 2010. The nature of the dispute was described by DCN in its Fast Track Statement as follows: … who is entitled to enter into, and receive the benefits flowing out of, valuable contracts with certain US film studios, which will grant financial subsidies to independent Australian commercial cinema owners to upgrade their analogue projection equipment to digital projection equipment. 2 The financial subsidy offered by US film studios is apparently called a Virtual Print Fee (VPF). DCN's Fast Track Statement contains the following assertions: 1. DCN was formed by Martin Gardiner, James Gardiner and Michael Smith (Smith) to secure VPF agreements for the ultimate benefit of independent Australian commercial cinema owners and Smith's role was to negotiate the VPF agreements with the US film studios for DCN; 2. while DCN was in the process of seeking to satisfy requirements of the US film studios, the Independent Cinemas Association of Australia (ICAA) approached DCN (through Smith) and told Smith that they would recommend to its members that they support DCN's VPF agreement negotiations; 3. over the last couple of years, DCN has sold 85 digital cinema projection systems in Australia. At the same time, DCN (through Smith) has been working to secure formal VPF agreements with the US film studios; 4. from about November 2008 and without the knowledge or consent of the other directors of DCN, Smith appears to have decided that the benefits of the VPF agreement negotiations belonged to him or his company (MGS) and not DCN, including negotiating a secret and large payment from ICAA to MGS in return for granting to ICAA the power to decide who should be allowed to sign the VPF agreements with the US film studios negotiated by Smith (which DCN alleges were negotiations on its behalf); 5. ICAA subsequently nominated the first respondent (Omnilab) to enter into the VPF agreements and instructed Smith to bring about that result; 6. earlier in 2010, Omnilab expressed to Smith an interest in purchasing DCN and, to that end, in March 2010, DCN entered into a Non-Disclosure Agreement with Omnilab so that it could be provided with information to enable it to assess whether to acquire DCN. Those negotiations failed; 7. after the failure of the negotiations, on 22 July 2010, Omnilab established the second respondent (OmniDCN). OmniDCN has made representations to DCN's suppliers that it has purchased DCN or DCN's business; 8. at about the same time and without the knowledge or consent of the other directors of DCN, Smith at the request of ICAA and Omnilab and further or alternatively OmniDCN, physically substituted DCN's name on the VPF contracts with the new and similar name - OmniDCN. 3 It was common ground that OmniDCN has not entered into any VPF agreements with US film studios. DCN submits it has suffered loss and damage on the grounds that each of the respondents, inter alia, aided and abetted, counselled or procured Smith to contravene ss 180 - 184 of the Corporations Act 2001 (Cth) (the Corporations Act), was knowingly concerned or a party to the contravention by Smith of ss 180 - 184 of the Corporations Act and knowingly received property belonging to DCN obtained by Smith in breach of his fiduciary duties to DCN. 4 The respondents deny the allegations. They contend, inter alia, that from in or around January 2009, ICAA sought and obtained member approval to engage MGS to conduct the negotiations with the US film studios on its behalf, that an arrangement was entered into whereby MGS would be paid a commission on the successful negotiation of the VPF agreement between ICAA members and a US film studio and that from January 2009, Smith conducted all VPF negotiations as a representative of MGS and not DCN. 5 On 11 November 2010, directions were made to prepare the substantive hearing for trial (limited to the question of liability) on 7 February 2011. A mediation is to be held on 25 January 2011. The parties estimate that the trial will last approximately 5 days and involve about 5 lay witnesses. 6 DCN is an Australian company. The uncontroverted evidence is that it has paid up capital of $2.00. Its registered office and principal place of business is in Victoria. It owns no real property. A confidential affidavit sworn by a director of DCN deposed to the fact that the company has limited assets but continues to trade by continuing to service clients and market sales of equipment installations and maintenance of that equipment. The affidavit also set out, in summary form, DCN's turnover and profit for the 2009 / 2010 financial year and the first quarter of the 2010 / 2011 financial year, as well as DCN's outstanding debtors and creditors as at 9 November 2010. It is sufficient to note that the turnover, the profit and the outstanding debtors are significant sums. The affidavit did not address whether DCN had any liabilities, did not provide any documentary material to support the assertions and did not provide any indication of the age of the debtors and creditors. Counsel for the respondents did not seek to cross examine the director even though he was present in Court and available for cross examination. 7 By notice of motion filed 8 November 2010, the respondents sought security for their costs of the proceeding up to and including the first day of trial in the amount of $118,742.74 and an order that if security is not provided, the proceeding be stayed. That application is opposed by DCN. 8 The application was made pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) and s 1335(1) of the Corporations Act. The respondents submitted, and I accept, that the requirement in s 1335(1) of the Corporations Act that "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 or her or its defence …", is a "fairly modest threshold": Meni's Tailoring & Alterations Pty Ltd v Jeanswest Corp Pty Ltd [2003] FCA 1108 at [4]. 9 As von Doussa J said in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205: … the power of the Court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff would be able to pay the costs. … A corporation "will be unable to pay" the costs within the meaning of the section if it can only do so if given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over other liabilities, sufficient to pay the costs. 10 There was also common ground that once it is established by credible testimony that there is reason to believe the applicant will be unable to meet any adverse costs order, the Court has an unfettered discretion whether or not to order security: Bell Wholesale Co Pty Ltd v Gates Export Corporation (No 2) (1984) 2 FCR 1 at 4. Although the discretion is unfettered, the respondents' counsel referred the Court to the decision of Hill J in Equity Access Ltd v Westpac Banking Corporation [1989] ATPR 40-972 at 9-10 where His Honour listed a number factors which could be relevant to the exercise of the court's discretion to award security for costs. 11 It is against that factual and legal background that I turn to consider the current application. In my view, DCN should provide security for the respondents' costs up to and including the mediation on 25 January 2011. I accept that the fact that DCN has paid up capital of $2.00 is not conclusive: Soul Pattison Telecommunications Pty Ltd v Subex Americas Inc [2009] FCA 651 at [17]. However, unlike the position in Soul (see [17] and [19]), DCN has not disclosed the existence of other valuable assets which could readily be realised at a sufficient price and, no less importantly, has not disclosed the extent of its liabilities to enable a Court to assess whether assets could be disposed of to generate a surplus over those liabilities, sufficient to pay the costs. As I have already noted, there was no evidence of the age of the creditors or the debtors (again unlike the position in Soul at [18]). Moreover, DCN has not placed before the Court any other financial information (accounts or bank accounts) to enable the Court to properly assess whether DCN would be able to meet any costs orders. 12 In those circumstances, I consider that there is reason to believe that DCN will not be able to pay any adverse costs order made against it in the event that it fails in this litigation. It follows that the jurisdictional pre-requisite to the operation of s 1335 of the Corporations Act has been satisfied. 13 That brings me to the question of the amount of security. Counsel for DCN made a number of criticisms about the content of the report prepared by the costs consultant relied upon by the respondents. It is unnecessary to address each criticism. It is sufficient to note that I have read the report prepared by each of the costs consultants. In my view, DCN should provide security for the respondents' costs up to and including the mediation on 25 January 2011 of $65,000.00. In my view, security in the sum of $65,000.00 is an appropriate figure to be imposed having regard to the issues in dispute and nature of the preparation that needs to be undertaken for the mediation. 14 I will order DCN to pay the respondents' costs of the application for security for costs. I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.