Edom Restaurant Pty Limited (in liquidation) v Spotless Services Australia Limited

JUDGMENT: - 9 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION

MATTER NUMBER IRC 6041 of 2000 EDOM RESTAURANT PTY LTD v SPOTLESS SERVICES AUSTRALIA LIMITED Application under section 106 of the Industrial Relations Act 1996

1 This is an application for security for costs in proceedings brought by Edom Restaurant Pty Limited (in liquidation) ('Edom'), against Spotless Services Australia Ltd ('Spotless'), under s106 of the Industrial Relations Act 1996 ('the Act'). The claim followed the sale of a catering business in July 1997 by another company, the Mode Group Pty Ltd ('Mode'), to Spotless and an agreement in August 1997 between Edom and Spotless for the provision of management services to Spotless in respect of that business. Those services were to be provided by two directors of Mode, Mr McCloskey and Mr Clarke. Edom had entered the agreement as trustee of a unit trust. The agreement between the parties came to an end in November 1998.

2 The proceedings were commenced in December 2000 and in February 2001, Spotless filed a motion seeking the dismissal of the proceedings and in the alternative, an order for security for costs.

3 Peterson J declined to hear the motion prior to the conciliation of the application pursuant to s109 of the Act. The conciliation took place in July 2001, but was unsuccessful. When the motion came on for hearing, it was announced that the issues between the parties had been narrowed. The strike out application, which went to the standing of Edom to pursue the proceedings, a liquidator having been appointed pursuant to a creditor's voluntary winding up in September 1998, was not pressed.

4 The issues which thus fell for decision were whether the circumstances fell within those dealt with in s1335 of the Corporations Act 2001; whether an order for security for costs should be made; the form of the security and the amount. Costs were also in issue.

5 Section 1335 provides: (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. (2) The costs of any proceeding before a court under this Act is to be borne by such party to the proceeding as the court, in its discretion, directs.

6 For reasons outlined below, I am satisfied on the evidence that the circumstances presently before the Court fall within s1335; that an order for security for costs should be made in favour of Spotless in the sum of $80,000 and that an order for costs should also be made.

7 There was no issue that Edom does not itself have the means to meet any order for costs made against it in the proceedings. There are substantial issues lying between the parties to the litigation, each alleging that the other was in breach of the agreement in question and that the termination of the agreement resulted from the other's actions. At this stage no views can be formed as to which party is likely to succeed in the cases to be advanced.

8 The report of Edom's administrator, Mr Ngan, appointed in August 1998, indicated that Edom had developed the Canteen restaurant in September 1997, some months after the sale of the Mode business to Spotless. The restaurant later failed, leading to the appointment of the administrator, who estimated that Edom's deficiency amounted to $191,742 and recommended that Edom should be wound up. Mr Ngan was then appointed liquidator in September 1998 and in September 2000 reported that he had available $14,623.32 to be distributed on the liquidation and that the remuneration then owing to him was $60,566.10.

9 This litigation was funded by an agreement entered between Edom, the liquidator and Insolvency Management Fund Pty Ltd (now called Insolvency Litigation Fund Pty Limited ('ILF') in September 1999. ILF indemnified Edom and the liquidator in relation to costs awarded in favour of Spotless, initially in the sum of $25,000. This was later increased to $50,000. The indemnity was supported by a guarantee from HSBC Australia Bank Limited. It expired on 11 September 2000 and was extended to September 2001. It has not been further renewed.

10 There was correspondence between the parties' solicitors about the security sought by Spotless, in which these arrangements were revealed. Copies of relevant documentation was sought, but declined to be provided, because ILF would not consent to its provision. In June 2001 the motion was listed for hearing in January 2002 and a timetable fixed for the filing of evidence. Edom was to put on its material by September 2001, but it was not until 25 January 2002 that it filed its evidence. For the first time an offer was then made by Edom for a guarantee in relation to costs to be provided in Spotless' favour by Insolvency Management Fund Limited, ('IMF') a recently publicly listed company, of which ILF is a subsidiary.

11 This offer led to discussions between the parties, which failed to resolve the security issue. At the hearing Spotless sought an order for security in the form of cash or a bank bond from an Australian trading bank. While opposing any order for security, in the alternative Edom proposed security in the form of a guarantee by IMF in favour of Spotless.

12 There was no issue at the hearing that Edom itself had no funds with which it could meet any costs order made against it in these proceedings. It had an agreement with ILF in relation to such costs, no longer supported by any bank guarantee and limited to the sum of $50,000. Spotless had no rights under that agreement. The ability of Edom to pay such funds to Spotless, if obtained from ILF, was not a matter canvassed at the hearing. There was no evidence as to the financial circumstances of ILF. A consolidated profit and loss statement and balance sheet for IMF as at 31 December 2001 was in evidence. IMF appeared therefrom to be well funded. However it had no contractual arrangement with Edom, hence the proposed guarantee from it in Spotless' favour.

13 The costs already incurred by Spotless were $120,000, even though its solicitors' earlier estimates of the costs of the whole proceedings were $132,000, while Edom's solicitors had estimated that such costs, when assessed would amount to no more than some $52,000.

14 In those circumstances, Spotless argued that the orders which it sought should be made, they being the usual approach adopted by the courts in circumstances such as these. The guarantee proposed by IMF was only so good as its financial position at any given time and included a right of termination. What was proposed was a contractual arrangement between it and IMF, itself not a party to the litigation and not subject to the Court's supervision. Edom sought to have IMF treated as either a party to the proceedings or a bank. There was no proper basis for such an approach to be adopted.

15 For its part Edom argued that the orders sought by Spotless did not reflect any usual approach adopted by the courts, which exercised their discretion having regard to the particular circumstances of every case. Here the availability of the guarantee from IMF put Edom in a position where it did not fall within the circumstances described in s1335 and even if it did, given the position of IMF, a publicly listed company in a solid financial position, the form of security sought by Spotless was unnecessary. While it seemed unlikely that IMF could not obtain the support of a bank if it wished to do so, that was not necessary, given its financial position and would but unnecessarily incur further costs.

16 For Spotless it was argued that the public listing of any company did not ensure that its financial position was accurately reported or that it would remain able to meet the costs incurred by Spotless, if it was successful in defending the proceedings. The desire of IMF not to have to provide a bank bond, because it would provide an undesirable precedent for it in its litigation funding business, that being Mr Schneider's understanding of why a bank bond was not offered, was not a proper basis for the exercise of the discretion sought by Edom in relation to security. The approach adopted by Young CJ in Equity in Chartspike Pty Ltd (In liq) v Chahoud [2001] NSWSC 585, was relied on. There his Honour was dealing with another insolvent company which had entered a funding agreement with ILF, in return for a share of the verdict. His Honour concluded that this arrangement provided little comfort to the defendant and that in the circumstances, ILF should bear part of the risk, especially having regard to the terms of the funding agreement in question, similar to that here between Edom and ILF, which he described as being 'in a very strange form'. His Honour ordered the plaintiff to provide security in the form of a bank guarantee or other form acceptable to the defendant or a Registrar.

17 For Edom it was argued that the decision was distinguishable. It was here the case that a guarantee directly in Spotless' favour and in different terms to the agreement between Edom and ILF, was offered by IMF, a publicly listed company of sound financial means. IMF, it was submitted, should be treated like any other litigant in such circumstances, against whom no order for security would be sought or granted. Given its public listing, it was required to provide financial statements quarterly to the Stock Exchange and if Spotless chose to monitor such returns and any concerns as to the adequacy of the guarantee later arose, it could approach the Court to have the orders for security altered.

18 Spotless argued that there was no proper basis for treating IMF as if it were a party to the litigation, it having not even offered an undertaking to the Court by which it could be bound. Spotless should not be forced into a contractual relationship with IMF, which it might later have to pursue in other proceedings if it successfully defended the claim, in circumstances where there was not even evidence before the Court as to IMF's business, or its other potential liabilities under other funding agreements which it might have entered.

19 I am satisfied that Edom is in a situation which brings it within the provisions of s1335 and that its funding arrangement with ILF does not remove it from that situation. I am also satisfied that the form of order sought by Spotless is appropriate in the circumstances.

20 The approach to be adopted to the making of an order for security for costs is well settled. (See for example the discussion by Wright J President in Kenoss Contractors Pty Limited v Allied Constructions Pty Limited (No 2) (2001) 104 IR 218 and by Marks J in Hallford Pty Ltd v Caltex Petroleum Pty Ltd [2000] NSWIRComm 81). It involves the exercise of a discretion, appropriate to the circumstances of the particular case, so as to do justice between the parties in the circumstances presented. The claim here concerns a management agreement with a term of 6 years, which came to an end after about 1 year. The money sum pursued is for a total of some $1,450,000 for the fees due in relation to the management services in the years after termination, together with $1,230,658 for bonus payments due in such later years.

21 The circumstances which led to the appointment of the liquidator to Edom, the failure of the Canteen restaurant, were not suggested to have any connection with Spotless. The issues between the parties concern whether or not they each adhered to their obligations under the management agreement and their conduct in relation to the arrangement between them.

22 Edom has entered into a funding arrangement with ILF and offers security in the form of a particular guarantee from IMF in favour of Spotless, unsupported by any bank, even though it had such support in relation to its arrangement with ILF for some time. Why no such bank support was offered was not explained, other than it being thought to be unnecessary, given IMF's financial position and perhaps creating an undesirable precedent for its business.

23 This is not a case where it is alleged that the making of an order for security is likely to frustrate Edom's ability to litigate its claim. Even if it were, before an order for security was declined, those standing behind Edom would need to provide evidence of their financial status to the Court. (See for instance Yandill Holdings Pty Ltd v Insurance Co of North America & Ors (1985) 3 ACLC 543 at 545 per Clarke J). That has not occurred.

24 On any view the litigation has already been costly and will be more so, as the evidence of the costs incurred and the various estimates of further costs demonstrated. The position here is one where the making of an order for security will not frustrate Edom's ability to pursue the litigation. Failure to make the order on the other hand, would put Spotless into a similar position to that considered and rejected by Young CJ in Eq in Chartspike. I take a similar view to that taken by his Honour, that such a result would here not be an appropriate exercise of the discretion, so as to do justice between the parties. It would plainly not be just if all of the risks of this litigation were to fall upon Spotless.

25 I have also not been convinced by Edom that the order it proposed, in the form of a guarantee from IMF, would involve a proper exercise of the discretion as to security. That order would relieve Edom from itself providing any security and would treat IMF as if it were a party to the proceedings. Spotless has never had and does not seek any contractual relationship with IMF. IMF is a stranger to Spotless and these proceedings, except in so far as its subsidiary ILF has entered into a funding agreement with Edom. Edom's insolvency, its subsequent decision to fund this litigation by giving ILF a share of the verdict and IMF's reluctance to obtain bank support for its late offer to Spotless, is in my view not a proper basis upon which to order security in this case.

26 That view is reinforced by the terms of the guarantee proposed, which, amongst other things, gives IMF the right to terminate the guarantee on notice. Such a right is not one which Edom would usually be given, if a security order were made against it. The fact that IMF has not sought to submit itself to the Court's jurisdiction in these proceedings, by the giving of an appropriate undertaking, for example, is but another reason not to treat IMF as if it were a party to the proceedings, in relation to the matter of security.

27 As to the amount of the order, I have concluded that at this stage, it should be in the sum of $80,000. I have reached that conclusion in light of the competing amounts proposed - $70,000 and $100,000; the costs already incurred by Spotless and the various estimates made by the parties' solicitors. I have also been influenced by the fact that this complex litigation is undoubtedly affected, not only by the evidentiary and legal issues which lie between the parties, but also by the way in which the parties conduct themselves. Failure to comply with the Court's directions, the filing of late evidence and the response and discussions which this gives rise to, only adds to the cost of litigation. It already has.

28 As to the costs of the motion, there were in reality, two alternatives. The first, that they should be costs in the cause. The second and more usual, that Spotless should bear the costs thrown away of the strike out point which it did not pursue and that Edom should bear the costs of the balance of the motion. In the circumstances, I have concluded that the usual approach, that costs should follow the event, would be the most appropriate and might encourage these parties to sensibly revisit their respective conduct of this litigation.

29 Spotless is directed to file the formal orders reflecting this judgment. The costs order will be in the usual form, as agreed or assessed. ------------------------

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