First Lighting Flagstaff Pty Ltd v Vossloh-Schwabe Australia Pty Ltd

REASONS FOR JUDGMENT 1 The first respondent and the second respondent each seek an order pursuant to s 56 of the Federal Court of Australia Act 1976 (Cth) ("the Act") that the applicant provide security for its costs of the proceeding. The first respondent seeks security in the sum of $600,000 to be provided as to $300,000 by 31 August 2000 and $300,000 by a date six weeks prior to the first date of the trial. The second respondent seeks security in the sum of $140,000. 2 The major thrust of the applicant's claims are made against the first respondent rather than the second respondent. The applicant's claim against the respondents is that the first respondent has breached an agreement entered into between the applicant and the first respondent in July 1999 whereby the first respondent agreed to supply low voltage transformers to the applicant. The applicant also claims that in or about August 1999 the second respondent intentionally induced the first respondent to breach the agreement and to supply low voltage transformers to the second respondent rather than to the applicant. The applicant claims that by refusing to supply the transformers to the applicant, and by supplying them to the second respondent, the first respondent has taken advantage of its power in what the applicant calls "the manufacturers' market" for the purpose of eliminating or substantially damaging the applicant as a competitor in the market for the distribution of the transformers and for the purpose of deterring or preventing the applicant from engaging in competitive conduct in that market in contravention of s 46 of the Trade Practices Act 1974 (Cth). There is an associated claim for contravention of s 45 of the Trade Practices Act. 3 The trading relationship between the applicant and the first respondent pre‑dated the events and conduct raised in the statement of claim. Prior to 27 November 1998 the applicant had been purchasing transformers from the first respondent and it had incurred debts to the first respondent amounting to $900,000. On 27 November 1998 the applicant sent a letter to the first respondent offering repayment of the debt by instalments on a monthly basis. On 13 April 1999 the applicant sent a letter to the first respondent in respect of its outstanding indebtedness. In the letter the applicant explained its financial situation and noted that there would be a deficiency if it was then placed in liquidation. The other issues raised in the letter are not relevant for present purposes. The letter predicted that on a liquidation, stock would realise around 40% of its book value, debtors would realise around 80% of their book value and plant and equipment would realise around 30% of their book value. On 11 May 1999 the applicant and the first respondent entered into an agreement that stipulated the terms upon which the applicant would repay its indebtedness, then $2,479,018.00. Those terms were spread over fifteen years. 4 The second respondent's solicitor has estimated that the second respondent's costs, based upon a twenty day trial, will be in excess of $140,000. His assessment is confirmed by an independent costs consultant who has estimated the second respondent's total costs and disbursements to the commencement of the trial at $62,050 and the costs of the trial at $78,750. 5 The first respondent's solicitor has estimated the first respondent's costs in three stages on the basis of a twenty day trial: · Up to setting down for trial $ 80,000 · Pre-trial $220,000 · Trial $340,000 6 As I have noted earlier the first respondent will bear the burden of responding to the majority of the allegations made in the statement of claim. As a result, the first respondent's estimate of its costs is substantially in excess of that made by the second respondent. It is not a useful exercise to analyse each item of costs identified by the first respondent but I note that there are particular matters which explain part of the substantial difference between the respondents' estimates. The first respondent's solicitor has allowed for: · Expert accountants' reports relating to the damages claim $ 25,000 · Expert economic evidence in relation to the Trade Practices Act claims $100,000 · Retainer of senior counsel $150,000 7 The applicant was incorporated on 8 April 1992 and has been trading since that date. It has a paid‑up capital of $200. It carries on the business of importing, assembling and distributing lighting and allied products. It does not carry on business on its own account but rather as trustee of the Slimline Unit Trust. There are seven registered charges over its assets, which it holds as trustee, to secure indebtedness of the order of $1.3 million. 8 The applicant has produced balance sheets as at 31 December 1999 and 31 March 2000 and profit and loss statements for the six months ended 31 December 1999 and for the three months ended 31 March 2000. Although the balance sheets show an excess of assets over liabilities of $179,703 and $242,964 respectively, it is necessary to take into account the fact that a substantial component of the current assets shown is receivables and inventory which do not necessarily realise their book value particularly on a liquidation. Although the applicant's bank has recently approved a further overdraft facility of $150,000 the applicant acquired this facility to enable it to purchase stock. It is also necessary to take into account the fact that the applicant has to fund its prosecution of the proceeding. 9 The following figures are disclosed by the applicant's income tax returns: · Year ended 30 June 1997 Income $ 8,786,478 Net profit $ 244,038 · Year ended 30 June 1998 Income $10,222,755 Net profit $ 363,975 · Year ended 30 June 1999 Income $ 7,593,513 Net profit $ 9,328 10 The Managing Director of the applicant, Mr Steven Peck, said that the weakness of the applicant's financial position has arisen as a result of the conduct of the first respondent and the second respondent set out in the statement of claim. I am not prepared to draw this inference having regard to the evidence which was placed before the Court. Although Mr Peck said that as a result of the first respondent's refusal to deliver consignments of transformers the applicant has lost a profit of the order of $60,000 per container in respect of eight containers, it is apparent that a decline in the applicant's financial position had set in well before the occurrence of the conduct alleged. 11 In a County Court proceeding brought by Osram Australia Pty Ltd against the applicant for the recovery of a debt of $41,389.84 the applicant alleged in the counterclaim it filed that in April 1999 employees of Osram defamed it by saying that it was bankrupt and unable to pay bills. In the counterclaim the applicant alleged that as a consequence, a number of businesses would only supply the applicant with goods on a cash basis as a result of which it had been injured in its credit, reputation and business. 12 The conduct complained of in this proceeding only commenced after the agreement between the applicant and the first respondent was entered into in July 1999, from which date the applicant's turnover had dropped substantially and its net profit had decreased from $363,975 in the year ended 30 June 1998 to $9,328 in the year ended 30 June 1999. Counsel for the first respondent pointed out that the ratio of profit to turnover had declined from 3.11% in the year ended 30 June 1998 to 0.12% in the year ended 30 June 1999. 13 The deterioration in the applicant's financial position before the conduct complained of is demonstrated by the 11 May 1999 agreement in which the applicant and the first respondent agreed on the terms upon which the applicant would pay the debt of $2,479,018.00. That agreement was entered into as a result of issues which had arisen between the parties as to the terms upon which the debt was payable. The applicant wrote to the first respondent on 13 April 1999 contesting that the whole of the debt was payable and suggesting that if the debt were called up it will be forced into voluntary administration or liquidation. The applicant challenged the inferences which the first respondent invited me to draw from this letter, but I am satisfied on the basis of the whole of the evidence before me that prior to July 1999 the applicant's financial position had been deteriorating for some time and had reached the stage where the applicant was encountering financial difficulties. 14 As I noted earlier the applicant is the trustee of the Slimline Unit Trust constituted by deed executed on 21 April 1992. Under cl 23 of the Trust Deed the applicant is entitled to indemnity out of the trust assets in respect of liabilities it incurs acting as trustee but it is not entitled to any indemnity from any unit holder. 15 The respondents base their application for security for costs on s 56 of the Act which provides: "(1) The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him or her. … (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." There are two other provisions by reference to which applications for security for costs may be made. Order 28 r 3 of the Federal Court Rules empowers the Court to order an applicant to give security for the costs of a respondent where, inter alia, an applicant is suing, not for its own benefit but for the benefit of some other person where there is reason to believe that the applicant will be unable to pay the costs of the respondent if ordered to do so. Section 1335(1) of the Corporations Law empowers the Court to require a corporation to give security for the costs of a defendant: "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". No restrictions or preconditions to the exercise of the jurisdiction are found in s 56 and the jurisdiction to be exercised under that section is not limited to the circumstances set out in O 28 r 3 or s 1335(1). In Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 the Full Court of the Federal Court, referring to the Federal Court Rules, said at 3: "But those rules cannot operate so as to limit the wide power conferred by s. 56 itself. The discretion to make orders under s. 56 must be exercised judicially, but that is the only relevant limitation. Moreover, it is plain from the terms from O. 28 itself that r. 3 is not intended to be an exhaustive statement of the cases in which an order for security for costs can be made." In Pegasus Gold Inc v Bateman Project Engineering Pty Ltd [1999] FCA 1734, Mathews J rejected the submission that there was a threshold test to be found in s 56(1) to the effect that it had to be shown that the applicant would be unable to pay a respondent's costs if the respondent was successful in the proceeding before an order for security for costs could be made. 16 The principles which lie behind Bell Wholesale Co Ltd v Gates Export Corporation (supra) and the statements in it have been followed in a number of subsequent cases: DJM Developments Pty Ltd v Northern Territory of Australia (1992) 110 FLR 269 at 271; Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440 at 445‑446; Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507. 17 In considering whether an order for security for costs should be made the authorities have established that there are a number of discretionary considerations which may be considered: see, eg, Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405. In Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40‑972, Hill J listed six matters which the cases indicated were among the matters appropriate for consideration. Those matters were: "·the chances of success of the applicant; whether the applicant's claim is bona fide or a sham; · the quantum of risk that the applicant cannot satisfy a cost order; · whether use of the power would shut out a small company from making a genuine claim against a large company, i.e. is the power being used oppressively; · whether the impecuniosity arises out of the Act [sic] in respect to which relief is sought; · whether there are aspects of public interest which weigh in the balance against the making of an order; · whether there are any particular discretionary matters peculiar to the circumstances of the case." 18 One of the discretionary considerations established by authority which I should take into account is that an order for security for costs should not be made if to do so will frustrate the litigation. However, there is no explicit evidence or statement to that effect from the applicant. The applicant has submitted that the material before the Court does not warrant an order for security for costs but that if the Court takes a contrary view, the applicant should be able to pay the security by instalments to enable it to pay the money out of the cash flow rather than the capital or loan funds. 19 I am not satisfied that an order for security for costs would frustrate the litigation but in any event I have no evidence before me as to the financial position of those entities or persons who are the beneficiaries of the trust. In particular I have no evidence as to the financial position of the corporate unit holders in the trust nor of the individuals or entities who are entitled to the beneficial interest in the units held by the unit holders. 20 In Bell Wholesale Co Ltd v Gates Export Corporation (supra) the Full Court of the Federal Court said at 4: "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for the party seeking security to raise the matter; it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts." This statement of principle was approved and followed by McHugh J in the High Court in PS Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321 at 323. 21 As there is no evidence before me as to the financial position of the entities or persons entitled to the beneficial interest in the trust, I do not take into account any consideration whether any order for security for costs which I might make would frustrate the litigation. 22 Although the applicant put in issue that it should not be ordered to provide any security for the costs of the respondents, I am satisfied on the material before the Court that the evidence as to the applicant's financial position is such that it is appropriate that an order for the security of the costs of the respondents be made. On the present state of the evidence it is apparent that the applicant's financial position has been deteriorating and that the applicant will be unable to satisfy any order that it pay the costs of the respondents if they are successful in the proceeding. 23 The applicant's solicitor challenged the respondents' solicitors' assessment of their costs and challenged their estimate of a twenty day trial; he estimated a ten day trial. He pointed to a number of items he said were either duplicated or excessive. I do not propose to compare the assessments item by item, but I take into account the applicant's solicitor's criticisms of a number of the items of costs identified by the respondents' solicitors. I also consider that in some respects the applicant's solicitor has under‑estimated the extent of work which will be required, by the first respondent in particular, and that the respondents have overstated their estimates of particular items. In particular, the first respondent's solicitor has estimated costs of $640,000 as solicitor/client costs but only allowed $40,000 of that amount as the difference between solicitor/client and party/party costs. The applicant's solicitor considers the first respondent's solicitor's estimate to be excessive and not recoverable on either a party/party or a solicitor/client basis. There is merit in this observation. The first respondent's solicitor's estimate is that around 93.5% of the first respondent's costs would be recoverable as party/party costs. The usual understanding is that the proportion of solicitor/client costs recovered as party/party costs on taxation is substantially less than this proportion. 24 The applicant's solicitor's criticisms of the respondents' solicitors' estimates of costs results in the applicant's solicitor's estimate of the first respondent's costs up to and including mediation being $35,000 and the second respondent's costs up to and including mediation being $25,400. Those amounts would be increased if the costs were estimated up to the commencement of trial. 25 An order for security for costs is no more than that, namely "security". Such an order does not provide an indemnity as to those costs: Brundza v Robbie & Co (No 2) (1952) 88 CLR 171 at 175; Menhaden Pty Ltd v Citibank NA (1984) 1 FCR 542 at 547; Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 515. Security for costs is no more than that, namely "security" and not an indemnity in respect of costs. 26 Having regard to all these considerations I consider that security for costs should only be ordered up to the commencement of the trial. The applicant submitted that if I was disposed to order security for costs I should only order security up to the stage of mediation. The proceeding is at an early stage and, as yet, no defences have been delivered. I do not consider it appropriate to order security for costs only up to the stage of mediation, as substantial amounts of work would have to be carried out before the mediation which would also be available as part of the preparation of the case for trial. In those circumstances I consider it appropriate to order security for costs up to the commencement of trial and to leave any application for the provision of security to cover the costs of the trial to a point of time closer to the hearing. 27 There is a substantial divergence between the costs estimates of the parties. I have taken into account the manner in which they have assessed their costs and the criticisms of the applicant's solicitor to which I have referred. As I propose to order security for costs beyond the stage of mediation and up to the commencement of the trial, it is necessary to take into account the work necessary to prepare for trial. I propose to take a similar approach to that taken by Sundberg J in World Class Alpacas Pty Ltd v Ostrich Farms (Cook Islands) Ltd [1997] FCA 1193. At 5 his Honour said: "As to quantum, Chanesman's solicitor has sworn a detailed affidavit estimating the costs up to and including the first day of the trial at $38,000. I do not regard all the items paid or expected to be paid as likely to be recovered in full on taxation. I have regard to the answering affidavit of the applicant's solicitor, whose estimate is $18,397. Doing the best I can, I think the appropriate sum is $28,000." 28 As the first respondent has the major carriage of the proceeding I consider that I should order a greater security for the first respondent rather than the second respondent. I therefore consider that security for costs in the sum of $70,000 should be provided for the costs of the first respondent up to the commencement of trial and security in the sum of $50,000 be provided for the costs of the second respondent up to the commencement of trial. The applicant should have until 25 September 2000 to provide such security to the satisfaction of the District Registrar and in default of the provision of such security the proceeding should be stayed until further order in respect of such respondent for whose costs security has not been provided. 29 The respondents have succeeded in obtaining orders in accordance with their motions and as they have succeeded on the merits of their applications, the applicant should pay the respondents' costs of the two motions.