Eczanes Pharmaceuticals Pty Ltd v Pharmpro Pty Ltd

The application for security for costs was made by notice of motion filed on 6 March 2025. The defendants seek an order that the plaintiff provide security for their costs of the proceedings by paying into court the sum of $450,000 by 5pm this Friday, 28 March 2025, being the last business day prior to the commencement of the hearing. That sum has been calculated as 65 per cent of the defendants’ solicitor and client costs, and 100 per cent of disbursements (including counsel’s fees), from the date of the filing of the notice of motion on 6 March 2025 until the conclusion of the final hearing. In the notice of motion, the defendants sought a further order that the proceedings be stayed in the event that the plaintiff fails to provide that security. It was not until the commencement of the hearing of the application on 24 March 2025 that the defendants conveyed to the plaintiff and to the Court that they only seek a stay of the plaintiff’s claim, and not the whole proceedings. Pharmpro intends to proceed with the hearing of its cross-claim in the event that the plaintiff fails to pay any security that may be ordered.

This is the defendants’ third application for security for costs in these proceedings. Each of the two previous applications was dismissed by consent with an order that the parties’ costs of the applications be costs in the cause. I accept Ms Doherty’s evidence that this occurred after the plaintiff served financial evidence in response to those security for costs applications which the plaintiff had refused to disclose to the defendants prior to the filing of the relevant application. This resulted in the defendants filing two motions for security which would have been avoided if the plaintiff had provided a substantive response to reasonable requests for information about its financial position in the context of the defendants’ concerns about its ability to meet any adverse costs order. As will become apparent below, the defendants rely on this history as part of the explanation for the timing of the present application. The plaintiff does not submit that the two previous applications preclude the defendants from making this third application, but the plaintiff does complain about the timing of this application.

The evidence adduced by the defendants establishes a material inconsistency in the plaintiff’s cash at bank recorded in a balance sheet as at 31 May 2022 provided by the plaintiff to its expert witness in these proceedings on the one hand, and a balance sheet provided by the plaintiff to a third party for the financial year ended 30 June 2022 on the other hand. There is reason to believe that the plaintiff’s cash was overstated by approximately $3.875 million in the balance sheet provided to the third party. The amount of that discrepancy corresponds with the amount of a sum that had been transferred from the plaintiff’s account to Australia on 13 May 2022 to Bioelektra. As the defendants submitted, this evidence suggests that the plaintiff’s financial statements are unreliable, at least insofar as they relate to the 2022 financial year.

The most recent balance sheet of the plaintiff in the possession of the defendants is a balance sheet as at 25 May 2023. That balance sheet records total assets of $5.021 million, of which $4.218 million are described as current assets. Those current assets include accounts receivable of $3.713 million. Exactly the same figure for accounts receivable is recorded in the plaintiff’s balance sheet as at 31 May 2022 which the plaintiff provided to its expert witness in these proceedings. As the defendants submitted, the precise identity between the two figures one year apart suggests that there was no change at all to the accounts receivable over that one year period, which casts very real doubt on whether the accounts receivable are recoverable at all and/or whether they can properly be characterised as current assets of the plaintiff as at 31 May 2023. As the defendants submitted, that suggests that the plaintiff’s financial statements are unreliable insofar as they relate to the 2023 financial year.

The pharmaceutical products purchased and distributed by the plaintiff include “Soodox” branded products. Through searches of the Australian Therapeutic Goods Register conducted in about September 2024, the defendants’ solicitors ascertained that Soodox Co Pty Limited was recorded as the sponsor of five Soodox-branded products which had been registered on the ATGR for some time prior to the incorporation of Soodox Co on 4 June 2024. Ms Kebriti is the sole director of Soodox Co, and the sole director and shareholder of the sole shareholder in Soodox Co. Through those searches, the defendants’ solicitors also identified further products registered on the ATGR after 4 June 2024 in respect of which Soodox Co is recorded as the sponsor. As the defendants submitted, this, together with a re-branding of the plaintiff’s business evidenced by changes to its website, suggests that the plaintiff is transferring its business, or part of its business, to the newly incorporated Soodox Co. The defendants’ solicitor’s Google search of the name “Eczanes” took them to the website at domain name eczanes.com.au, which displayed the Soodox Co branding and the words “site under construction”. The defendants lack sufficient information to quantify the extent of the plaintiff’s business that is affected by these changes, but submitted that the rebranding suggests that the whole of the business is being transferred to Soodox. At best, as the defendants submitted, it is unclear what remaining business the plaintiff will have after the incorporation of Soodox Co, the changes in the sponsorship of the Soodox products, and the changes to the eczanes.com.au website. It is also unclear how or to what extent the plaintiff is presently trading in circumstances where its website is not operating.

Ms Kebriti and Soodox Co are defendants in proceedings commenced in the Supreme Court of Victoria by Mr Brett Greene and his family trust company LJCJ Pty Limited. LCJC and other entities associated or aligned with Mr Greene own approximately 51% of the shares in SK Diagnostics Pty Ltd, which in turn owns all of the shares in Eczanes. Ms Kebriti owns the remaining approximately 49% of shares in SK Diagnostics. In support of their application for security for costs, the defendants in the present proceedings rely on evidence of certain communications between Ms Kebriti and Mr Greene, which Mr Greene has provided to them, as indicating that Ms Kebriti is under considerable financial stress. That correspondence appears to have been generated in the context of a dispute between Ms Kebriti on the one hand, and Mr Greene and the other shareholders of SK Diagnostics on the other hand, that is now the subject of the Victorian proceedings. Those proceedings include allegations that Ms Kebriti breached her duties owed as sole director of Eczanes, but Eczanes is not a party to those proceedings. I regard that correspondence as providing some insight into the financial position of Ms Kebriti personally, but not Eczanes. To the extent that the correspondence refers to anticipated difficulty in paying wages, which is likely to be a liability of a company rather than a personal liability of Ms Kebriti, the correspondence casts no light on whether the relevant company is Eczanes, SK Diagnostics, or some other company in which Ms Kebriti has an interest directly or indirectly. Accordingly, I reject the defendants’ submission that statements made by Ms Kebriti in this correspondence with Mr Greene about having run out of funds and needing to apply for a loan in order to repay a debt owing to Mr Greene are, by themselves, inconsistent with Eczanes’ balance sheet as at 25 May 2023 recording net assets of approximately $4.218 million. However, my rejection of that submission does not detract from the unreliability of that balance sheet given the apparent failure of Eczanes to recover any of its accounts receivable, which are recorded as constituting a very large proportion of its total net assets, over the preceding twelve months.

Contrary to the defendants’ submissions, I do not consider that the Victorian proceedings, to which Eczanes is not a party, are relevant to the question whether there is reason to believe that Eczanes will be unable to pay any costs that it may be ordered to pay in the proceedings in this Court.

In response to the defendants’ evidence and contentions concerning the unreliability of the plaintiff’s historical financial information and the apparent transfer of at least part of the plaintiff’s business to Soodox Co, the plaintiff adduced: (1) evidence of a letter from Bendigo Bank dated 17 March 2025 verifying that the plaintiff’s account with the bank had a balance of $625,497; (2) a document entitled “Inventory Item list – Eczanes Pharmaceuticals Pty Ltd – As at 17**th March 2025” listing items with a total value of approximately $3.398 million, which Mr Lacey deposes he is instructed will realise more than that amount when sold; and (3) four purchase orders issued to the plaintiff by one of its customers on 14 March 2025 for goods totalling approximately $120,818. The plaintiff did not adduce evidence of its financial statements for the 2024 financial year, management accounts for the 2025 financial year to date, or bank statements. Nor did the plaintiff adduce any evidence explaining the change in sponsorship of Soodox products or the rebranding of the plaintiff’s website.

As the defendants submitted, the letter from Bendigo Bank provides only a snapshot of the plaintiff’s cash at bank on one day after the defendants filed their application for security for costs. There is no evidence of the source of the funds in that account on that day, and one is left to speculate about whether the account balance represents, for example, funds accumulated from trading activities over time, or a short-term loan taken out by the plaintiff, or something else. There is no evidence about whether those funds are likely to be dissipated for any reason prior to the determination of these proceedings.

Similarly, the purchase orders do not provide anything more than a snapshot into business dealings of the plaintiff on one particular day shortly after the defendants filed their application for security for costs. Those purchase orders shed no light on the extent to which the unexplained change in sponsorship of Soodox products on the ATGR and the unexplained re-branding of the plaintiff’s website has affected the plaintiff’s business, or will affect the plaintiff’s business by the time these proceedings are determined. As the defendants submitted, the purchase orders include Soodox products in respect of which Soodox Co is now the sponsor. Due to the absence of evidence from the plaintiff about this matter, it is not clear what if any arrangements it has entered into with Soodox Co in relation to the sale of those products.

For two reasons identified in the defendants’ submissions, I do not consider that the inventory list suggests that the plaintiff is likely to be able to pay any costs that it may be ordered to pay in these proceedings. First, the inventory includes products in respect of which Soodox Co, rather than the plaintiff, is now recorded as the sponsor on the ATGR, and other products that a third party has informed the defendants are owned by the third party and not by the plaintiff. According to the information provided to the defendants, the plaintiff is merely contracted to warehouse and dispatch those products. Second, the value of the items recorded in the 17 March 2025 inventory list (approximately $3.398 million) stands in stark contrast to the negative $102,847 recorded for stock in the plaintiff’s balance sheet as at 25 May 2023 which it provided to the defendants in response to their first security for costs application in these proceedings. In circumstances where the plaintiff has not adduced evidence of any more recent financial statements or management accounts, it is not possible to compare the inventory list with an approximately contemporaneous balance sheet.

As the applicants for security for costs, the defendants bear the onus of establishing a rational basis to believe that the plaintiff will be unable to pay the defendants’ costs of the proceedings if ordered to do so. As the plaintiff submitted, that calls for a practical, commonsense approach to the examination of its financial affairs: Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [10]-[12] (Beazley ACJ) and the authorities there referred to. The evidence adduced by the defendants to which I have referred at [9]-[11] above falls to be weighed according to the proof that it was in their power to produce, and in the power of the plaintiff to have contradicted. In circumstances where the plaintiff has failed to adduce evidence of its financial statements for the 2023 financial year (with the exception of a balance sheet as at 25 May 2023), its financial statements for the 2024 financial year and/or its management accounts for the 2025 financial year to date, has failed to tender any bank statements, and has failed to adduce any evidence explaining the re-branding of its website and the change in sponsorship of pharmaceutical products following the incorporation of Soodox Co, uncertainties about the plaintiff’s financial position are not to be resolved by drawing inferences favourable to the plaintiff. For those reasons, the defendants’ evidence is sufficient to satisfy the undemanding test that there is reason to believe that the plaintiff will be unable to meet an adverse costs order. The Court therefore has jurisdiction to make an order for security for costs.

I now turn to the question whether the Court should exercise its discretion to do so.

The overarching consideration that governs the exercise of the discretion is whether an order for security would work an injustice: Treloar Constructions, supra, at [13]. That directs attention to a number of factors, including those set out in UCPR r 42.21(1A). Although the legal burden of proof remains with the defendants as the applicants for security, the plaintiff bears an evidential onus to raise for consideration those matters that it wishes the Court to take into account in its favour in exercising the discretion: Webuildem Pty Ltd (Receivers and Managers Appointed) v Arab Bank Australia Ltd [2014] NSWSC 1058 at [8] (Stevenson J) and the authorities there cited.

The plaintiff raises the following discretionary matters in the present case: (1) the prospects of success or merits of the proceedings; (2) the genuineness of the proceedings; (3) whether the plaintiff’s impecuniosity is attributable to the defendants’ conduct; (4) whether the plaintiff is effectively in the position of a defendant insofar as the proceedings concern the cross-claim; and (5) the timing of the defendants’ application for security for costs.

In relation to the first and second matters, there is no reason to doubt the genuineness of the plaintiff’s claim in these proceedings. However, as both the plaintiff and the defendants accepted at the hearing of the security for costs application, the complexity of the competing claims and defences in these proceedings is such that it is not possible to form a meaningful view about the strength or weakness of the plaintiff's claim for the purpose of determining the application: Live Board Holdings Ltd v Cody Live Pty Ltd [2017] NSWCA 302 at [97]-[101] (Bathurst CJ, Leeming and Barrett AJA).

In relation to the third matter, the hearing of a security for costs application is not to become a trial within a trial. It is therefore for a plaintiff opposing an order for security to establish with relatively straightforward and unambiguous evidence of a fairly compelling nature that there is a causal connection between conduct of the defendants and the plaintiff’s impecuniosity: SX Projects Pty Ltd (in liq*) v Battaglia* [2016] NSWSC 1385 at [19]-[23] (Black J) and the authorities there referred to. The plaintiff in the present case has failed to do so, presumably because such evidence would have undermined the plaintiff’s primary contention (which I have rejected) that there is no reason to believe that it will be unable to meet any adverse costs order.

In relation to the fourth matter, the plaintiff did not submit that its own claim in these proceedings is defensive. Rather, the plaintiff submitted that each party is, in substance, a claimant, in these proceedings. I accept that submission. As I have already observed at [6] above, each party’s defence of the other’s claim is inextricably bound up with the prosecution of its own claim. To the extent that the defendants sought to characterise Pharmpro’s cross-claim as defensive because it was filed only after the plaintiff commenced these proceedings, I reject that submission. The timing of the commencement of the competing claims does not change the reality that they are competing cases as to the outcome or range of outcomes that should flow from an accounting process in respect of the profits of the joint venture. The fact that Pharmpro’s claim is not defensive is confirmed by its intention to litigate the cross-claim even if the plaintiff’s claim is stayed by reason of non-payment of any security for costs that the plaintiff may be ordered to pay.

As I have already mentioned, the amount of security sought by the defendants is $450,000. The plaintiff does not dispute that this is a reasonable estimate of the amount that might ultimately be awarded to the defendants on assessment in respect of their costs of the proceedings during the period from the filing of the application for security on 6 March 2025 and the conclusion of the final hearing, if an order were made in these proceedings requiring the plaintiff to pay those costs. However, as I have explained at [6] above, the incurring of those costs is necessary for the prosecution of Pharmpro’s cross-claim just as much as it is necessary for the defence of the plaintiff’s claim. It is common ground between the parties that one cannot sensibly allocate costs between the defence of the plaintiff’s claim and the prosecution of Pharmpro’s cross-claim.

That is relevant to the exercise of the discretion in this case because Pharmpro intends to prosecute that cross-claim even if the plaintiff’s claim is stayed by reason of failure to pay any sum that it is ordered to pay by way of security. As I have noted at [7] above, this was first conveyed to the plaintiff and to the Court at the commencement of the hearing of the application for security for costs on the morning of 24 March 2025. The order sought in the notice of motion was for a stay of the proceedings in the event that the plaintiff failed to pay any security ordered to be paid. Contrary to the defendants’ submissions, I do not consider that this gave rise to any ambiguity about whether the stay was to apply to the whole of the proceedings or only to the plaintiff’s claim. The terms of the order sought clearly conveyed an application for an order staying the whole of the proceedings in the event of failure to pay any security. I accept that this was an error in the framing of that prayer for relief in the defendants’ notice of motion, and that there was no intention on the part of the defendants or their legal representatives to mislead or confuse the plaintiff about the nature of the relief sought.

The effect of an order for security in the terms now sought by the defendants would be that, if the plaintiff fails to pay the security, it will be deprived of its right to litigate its claims at this very late stage of the proceedings when it has already done substantially all of the work to prepare those claims for hearing, but it will still have to defend Pharmpro’s cross-claim. Alternatively, if the plaintiff pays the security, Pharmpro will have the benefit of that security notwithstanding that it will be incurring the same costs in order to prosecute its cross-claim. In my opinion, it would be unjust to deprive the plaintiff of the right to litigate its claims at this very late stage of the proceedings, or to condition its right to do so on payment of $450,000 into court, in circumstances where substantially the same matters will be litigated in Pharmpro’s cross-claim and the defendants will not incur any additional costs if they are defending the plaintiff’s claim in addition to prosecuting Pharmpro’s cross-claim. I acknowledge that this is an injustice of a different kind to that considered by Rolfe J in Dalma Formwork Pty Ltd (administrators appointed) v Concrete Constructions Group Ltd (unreported, Supreme Court of New South Wales, 19 June 1998), but it is an injustice nevertheless. To put it another way, the plaintiff and Pharmpro have incurred substantial costs up to this point in preparing for two sides of the same fight on the basis that the party who prevails in that fight will be entitled to judgment and orders in their favour reflecting that outcome. It would be unjust in my opinion to remove the plaintiff’s chance of achieving a judgment and orders in its favour at this very late stage of the proceedings unless it pays $450,000 into court within the next four business days, in circumstances where the costs for which that sum would serve as security will be incurred by Pharmpro in any event in prosecuting its own claim. Pharmpro is not entitled to security for the costs of its cross-claim which is not defensive in nature as I have explained at [24] above.

The plaintiff did not submit that the order for security, if made, would stultify the prosecution of the plaintiff’s claims. It does not follow that it is just in all the circumstances of this case to impose a $450,000 price on the plaintiff’s right to prosecute its claims for relief that it has been preparing for all the way up to one week before the final hearing, in circumstances where the defendants will incur those costs in any event and have delayed in making this application for security for costs for approximately six months.

The defendants’ evidence reveals that their solicitors first wrote to the plaintiff’s solicitors foreshadowing the present application on 2 August 2024, referring only to matters raised in an affidavit affirmed by Ms Doherty on 6 November 2023 and to the $3.875 million payment to Bioelektra which had been made in May 2022 as I have referred to at [9] above. The defendants became aware of the change in sponsorship of Soodox-branded products referred to at [11] above by 20 September 2024, but it was not until 3 December 2024 that their solicitors wrote to the plaintiff’s solicitors raising this as a matter casting doubt on the plaintiff’s ability to meet any costs order. It is not clear when the defendants first became aware of the changes to the plaintiff’s website which indicated a re-branding of its business and a transfer of all or some part of its business to Soodox Co, but it was at some time before 3 December 2024. The plaintiff’s solicitors responded to the defendants’ solicitors 3 December 2024 letter on 10 December 2024, but it was not until 10 February 2025 that the defendants’ solicitors wrote to the plaintiff’s solicitors again. The only new matter raised by the defendants’ solicitors on 10 February 2025 was the correspondence between Ms Kebriti and Mr Greene, which lacks the significance attributed to it by the defendants for the reasons I have explained at [12]-[13] above.

It is true that the plaintiff’s solicitors declined to provide any of the financial information requested in the defendants’ solicitors’ letters on 2 August 2024, 3 December 2024 and 10 February 2025. Given the history to which I have referred at [8] above, it is understandable that the defendants hoped to avoid the costs of filing a third application for security for costs only for the plaintiff to then provide the information requested, which might result in the defendants wishing to discontinue the application. However, in circumstances where the hearing date was fast approaching and all parties were embarking on the final stages of their preparation for hearing at significant cost, it was incumbent on the defendants to raise with the plaintiff expeditiously the matters discovered on about 20 September 2024 and to make a forensic decision whether or not to proceed with the application promptly thereafter, rather than casting around for further information which has proved to be of no relevance and which was unlikely in any event to cause the plaintiff to change its attitude and voluntarily provide financial information to the defendants.

The injustice arises not from the mere fact that the plaintiff has incurred substantial costs during the six-month period since September 2024, as Mr Lacey deposed, but from the fact that the practical effect of the security order sought by the defendants would be to provide them with security for their costs of defending the plaintiff’s claim and also for the costs of prosecuting Pharmpro’s claim, together with the prejudicial effect of the defendants’ delay in making the application. By reason of that delay, the application itself and the risk of the plaintiff needing to raise $450,000 to be paid into court within a matter of days must necessarily have distracted the plaintiff from the core tasks of the very final stages of its preparation for hearing – conferring with lay and expert witnesses, finalising objections to evidence, and preparing submissions. I consider that this kind of prejudice is obvious from the nature of commercial litigation, albeit inherently difficult to quantify, and may be inferred without evidence of the specific effects of the defendants’ delay: PPK Willoughby Pty Ltd v Baird [2019] NSWCA 48 at [11]-[16] (Bell P and Simpson AJA).

The defendants submitted that, having satisfied the jurisdictional threshold for an order for security for costs, they should not be deprived of security that would otherwise be ordered in their favour merely because they have filed a cross-claim in these proceedings. That submission misses the point, with respect. The fact that the defendants are both defending and prosecuting claims in these proceedings does not entitle them to an exercise of discretionary power in their favour requiring the plaintiff to pay security in respect of the defence costs in circumstances where that would effectively deliver security for the cross-claim costs and alter the playing field immediately prior to the commencement of the final hearing in the manner described at [27]-[28] above to the disadvantage of the plaintiff and the advantage of the defendants.

For completeness, I acknowledge the defendants’ submission that, if the plaintiff failed to pay any security that might be ordered, it would not necessarily follow that the plaintiff would be prejudiced. The defendants submitted that, if Pharmpro’s cross-claim failed in that scenario, and if it followed from the Court’s findings that monies were owing to the plaintiff, then it would be open to the plaintiff to apply to the Court at that time to lift the stay of the plaintiff’s claim and for judgment to be entered and orders to be made in favour of the plaintiff notwithstanding the plaintiff’s non-payment of the security. I do not consider that the plaintiff’s ability to make such an application for a favourable exercise of the Court’s discretion in that scenario would be a substitute for the plaintiff’s right to litigate its claims, including its right to appeal from any adverse determination of those claims by the primary judge.

For all of those reasons, I do not consider that it is appropriate for the Court to exercise the discretion to order the plaintiff to pay security for the defendants’ costs of these proceedings. The order of the Court is that the defendants’ notice of motion filed on 6 March 2025 is dismissed with costs.