Flujo Holdings Pty Ltd v Merisant Company

Introduction 1 The applicant, Flujo Holdings Pty Ltd (Flujo), commenced this proceeding on 1 November 2018. It alleges that the first, second and third respondents (the Merisant respondents) have engaged and are engaging in conduct that contravenes ss 18, 29(g) and 29(h) of the Australian Consumer Law and that constitutes an infringement of trade marks of which Flujo was the owner or authorised user in contravention of s 120 of the Trade Marks Act 1995 (Cth). The fourth respondent, Flujo Sanguineo Pty Ltd (Flujo Sanguineo), is the current owner of the trade marks in issue. 2 On 7 December 2018, the Merisant respondents filed an interlocutory application for security for costs, supported by an affidavit of their solicitor, Kellech Nanette Smith, sworn 7 December 2018. Flujo opposes the application. On 10 and 19 December 2018, the Court made timetabling orders which provided for the application to be heard on 24 April 2019. 3 At the interlocutory hearing on 24 April 2019, the Merisant respondents relied on the first affidavit of Ms Smith and a further affidavit of hers sworn 18 April 2019. Flujo relied on an affidavit of Mark Anthony Hanna, who is a director and shareholder of Flujo, affirmed 20 March 2019. During the hearing, I gave leave to the Merisant respondents to file a further affidavit of Ms Smith to update the calculation of the costs incurred to the date of the hearing by the Merisant respondents and to provide a revised estimate of the costs that would be incurred by the Merisant respondents in reviewing evidence to be filed on behalf of Flujo and preparing for and attending mediation. That further affidavit was filed and served on 26 April 2019. 4 For the reasons that follow, I will order security for costs for the period until the completion of mediation. I will also make orders for the filing of evidence by Flujo and the referral of the proceeding to mediation before a Registrar of the Court.

General principles 5 Section 56(1) of the Federal Court of Australia Act 1976 (Cth) provides that the Court may order an applicant in a proceeding in the Court to give security for the payment of costs that may be awarded against the applicant. The security shall be such amount, and given at such time and in such manner and form, as the Court directs: s 56(2). The Court 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: s 56(3). If security is not given in accordance with an order made under s 56, the Court may order that the proceeding be dismissed: s 56(4). 6 As observed by Kenny and Edelman JJ in Commissioner of Taxation v Vasiliades (2016) 344 ALR 558; [2016] FCAFC 170 (at [72] and [86]), the parties against whom proceedings are brought are not respondents by choice but because someone else has chosen to sue them. The purpose of an order for security for costs is to ensure that a successful respondent to a claim will have a fund available within the jurisdiction of the Court against which the successful respondent can enforce a judgment for costs in the respondent's favour. The policy of the law in this regard is related to the accepted understanding in Australian courts that normally costs follow the event. 7 The discretion conferred by s 56 to award security for costs is broad and unfettered, the only limitation being that the discretion must be exercised judicially: Bell Wholesale Limited v Gates Export Corp (No. 2) (1984) 2 FCR 1 at 3. It is a discretion to be exercised according to the merits of each case and without any particular predisposition: Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 511 per French J. The Court's discretion is to be exercised having regard to whether the interests of justice would be best served by making or refusing the order: Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 411. 8 As observed recently by Colvin J in Frigger, in the matter of Computer Accounting & Tax Pty Ltd (in liq) (No. 2) [2018] FCA 612 (at [8]): An applicant may have access to funds from outside the jurisdiction or from a third party to enable the prosecution of a claim in Court. However, the problems that a successful respondent may face in enforcing a costs order obtained against the applicant due to difficulties or an inability to resort to that same source of funds has long been recognised as a significant factor that supports the making of an order for security for costs. 9 The Merisant respondents also rely on s 1335 of the Corporations Act 2001 (Cth) which provides: 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 proceedings until security is given.

Should security be ordered? 10 The proceeding is a commercial dispute between corporations. Flujo alleges that it owned trade marks and intellectual property material to this proceeding from 2009 until March 2017 and, during this period, authorised Natvia Pty Ltd to use the trade marks and intellectual property. It is alleged that Natvia Pty Ltd has been carrying on a business of manufacturing, marketing, distributing and selling a natural stevia-based range of sweetener products under and by reference to the NATVIA name, trade mark and getup in Australia. 11 Although not pleaded, evidence before the Court establishes that Natvia Pty Ltd is a subsidiary of the fourth respondent, Flujo Sanguineo. Flujo and Flujo Sanguineo have common shareholders and directors, being Mark Anthony Hanna and Samuel Ben Kee Tew. As such, Flujo and Flujo Sanguineo are not related companies within the meaning of the Corporations Act 2001 (Cth) (companies are related if they have the same holding company, not if they have common individual shareholders). 12 In broad terms, Flujo alleges that the Merisant respondents carry on the business of manufacturing, marketing and selling sweetener products in Australia using brands and packaging that is deceptively similar to the brands and packaging used by Natvia Pty Ltd in the sale of its products. As noted earlier, Flujo alleges contraventions of the Australian Consumer Law and the Trade Marks Act 1995 (Cth) and seeks various forms of relief, including injunctions and damages or an account of profits. It is too early to make any assessment of the prospects of success of the claims. 13 The evidence adduced by the Merisant respondents concerning the financial position of Flujo establishes that Flujo is an Australian incorporated company with issued share capital of $2. It does not own any real property in Australia. There is no evidence that Flujo has any money in any bank account. Flujo owns two trade marks (not the trade marks in issue) and no other intellectual property. There is no evidence as to the financial value, if any, of the two trade marks owned by Flujo. Although Flujo previously owned the trade marks in issue in the proceeding, they were assigned to Flujo Sanguineo in March 2017 for no consideration. Flujo's assets are subject to the following security interests in favour of other entities: (a) since 27 January 2012, Oxford Funding Pty Ltd has had a fixed and floating charge over "[a]ll present and future property and assets held by the corporation and the whole of the corporation's undertaking", with a maximum prospective liability of $10 million; and (b) on 27 November 2017, Flujo granted a security interest in "[a]ll present and after-acquired property - no exceptions" to each of two other entities: Flujo Pty Ltd and Natvia Pty Ltd. 14 Flujo owns all of the shares in Natural Sweetener Co Pty Ltd and Norbu Sweetener Pty Ltd and 75% of the shares in Vitarium Holdings Pty Ltd. There is no evidence establishing the value of any of those shareholdings, and the evidence suggests that Natural Sweetener Pty Ltd and Norbu Sweetener Pty Ltd have no value. Natural Sweetener Co Pty Ltd has been under external administration following an action brought by the Commissioner of Taxation, and a liquidator was appointed in August 2016. The company has admitted debts in excess of $630,000 (including approximately $100,000 owed to Flujo). Norbu Sweetener Pty Ltd has also been under external administration following an action brought by the Commissioner of Taxation, and a liquidator was appointed in October 2016. The company has admitted debts in excess of $320,000. Vitarium Holdings Pty Ltd was under administration between June and December 2017 and there is no other evidence as to the value of its shares. 15 Mr Hanna's affidavit states that he and his business partner, Mr Tew, are ultimately responsible for the conduct of the various businesses owned by what he calls the Flujo Group (comprising Flujo, Flujo Sanguineo and their subsidiaries). As noted above, Flujo and Flujo Sanguineo are not related companies within the meaning of the Corporations Act 2001 (Cth), and the use of the description "Flujo Group" is apt to mislead. Mr Hanna states that the "Flujo Group" is an Australian SME (which I take to mean small to medium enterprise) with a successful range of sweetener and related products. However, Mr Hanna provided no information as to which companies conduct that business or the financial position of any such companies. No financial statements of any company are exhibited to his affidavit. 16 Mr Hanna further states that "Flujo and its related entities, including Flujo Sanguineo, are able to meet any costs ordered against it in this proceeding, collectively or individually". Again, I observe that Mr Hanna is in error in referring to Flujo Sanguineo as a related entity to Flujo. The only evidence adduced by Mr Hanna in support of that statement is a copy of a recent bank statement of Flujo Sanguineo. The bank statement is said to be confidential but I consider that there is no basis for a confidentiality order to be made. No submissions were made as to the reasons for the Court to make any confidentiality order in respect of the exhibit and I decline to do so. The bank statement is in respect of the period 31 January to 28 February 2019. It shows an opening balance as at 31 January 2019 of approximately $320,000 and then four transactions: a debit for the monthly plan fee, a debit which is designated "PYMT Natvia Pty Sanguineo Loan", a credit for interest paid and a debit which is designated "Payment by authority to Principal Finance". The closing balance is approximately $310,000. The affidavit does not explain those transactions or provide any evidence as to the purpose of the bank account. In my view, the bank statement of Flujo Sanguineo provides no evidence that Flujo would be able to meet an adverse costs order. As already noted, while Flujo and Flujo Sanguineo have common shareholders (Messrs Hanna and Tew), they are not related companies and, as far as the evidence discloses, Flujo Sanguineo has no obligation to meet debts incurred by Flujo. 17 Mr Hanna's affidavit also states that Flujo Sanguineo is willing to provide an undertaking to the Court to pay the costs of the Merisant respondents in this proceeding in the event they succeed. Apart from the bank statement referred to in the preceding paragraph, there is no evidence as to the ability of Flujo Sanguineo to satisfy such an undertaking. The bank statement does not provide a complete picture of the financial position of Flujo Sanguineo and there can be no assurance that the funds standing to the credit of the account as at the date of the bank statement are still in the account or will in the future remain in the account. 18 Doubt as to the ability of Flujo to meet an adverse costs order in the proceeding is heightened by the failure of Flujo to meet an adverse costs order that was made in parallel proceedings that were brought in the New Zealand High Court. Ms Smith gave evidence that Flujo initiated proceedings against the Merisant respondents and another company in the New Zealand High Court on 17 May 2016. Flujo sought but failed to obtain an interlocutory injunction in that proceeding. The allegations made by Flujo in the New Zealand proceeding were similar in nature to those made in this proceeding. The trial in the New Zealand proceeding was due to commence on 1 May 2017. However, on the last working day before the trial was due to commence, Flujo discontinued the New Zealand proceeding. The discontinuance appears to have been caused by Flujo's solicitors and counsel withdrawing from the case due to a disagreement over unpaid counsel's fees. On 18 July 2017, the New Zealand High Court made costs orders against Flujo in respect of the discontinued New Zealand proceeding. An appeal against those orders by Flujo was subsequently dismissed. In an affidavit dated 6 September 2017 filed in the New Zealand proceeding, Mr Hanna stated that Flujo intended to pay the costs award made against it due to discontinuance of the proceeding once the costs issue was resolved and the award of costs sealed. On 23 August 2018, the New Zealand High Court issued a Certificate of Judgment ordering that Flujo pay the Merisant respondents and another party the sum of $NZ103,978.25. On 26 October 2018, the Merisant respondents obtained from the Supreme Court of Victoria registration of the New Zealand costs order under the Trans-Tasman Proceedings Act 2010 (Cth) in the amount of NZ$103,978.25 plus interest of NZ$5,312.86 and costs of A$1,028. The Merisant respondents have sought payment of that amount from Flujo, but no payment has been made. 19 Ms Smith also gave evidence that, following the discontinuance of the New Zealand proceeding, on 9 June 2017 Flujo Sanguineo filed proceedings in the New Zealand High Court of against two of the Merisant respondents and two other companies. The allegations made in that proceeding are similar to those made in the discontinued proceeding in New Zealand. 20 Mr Hanna, as a director and shareholder of Flujo (and Flujo Sanguineo), was in a position to adduce evidence demonstrating that one or both of those companies had available assets to meet an adverse costs order in the proceeding. He failed to adduce such evidence. Mr Hanna was also in a position to explain the failure of Flujo to pay the New Zealand costs order, but his affidavit did not refer to that outstanding costs order. 21 Having regard to the evidence adduced by the Merisant respondents, in my view there is reason to believe that Flujo does not have available assets from which to meet an adverse costs order in this proceeding. An undertaking from Flujo Sanguineo to meet an adverse costs order does not provide adequate security for the Merisant respondents in circumstances where there is no evidence that Flujo Sanguineo is likely to have available assets from which to meet an adverse costs order in the future. I will therefore order Flujo to give security for the payment of costs that may be awarded against it.

Quantum of security 22 It is well established that, in determining the quantum of security, the Court does not undertake anything in the nature of a taxation of costs, but engages in a "broad brush" assessment having regard to the information before the Court: Allstate Life Insurance Co v Australia and New Zealand Banking Group Limited (1995) 134 ALR 187 at 201 per Lindgren J; Premier Building and Consulting v Spotless Group Limited (No. 7) [2005] VSC 275 at [5] and [6]. The Court is not bound to give the amount of security that the party seeking the security estimates to be the amount of its costs, nor must the amount be determined with mathematical precision: Idoport Pty Ltd v National Australia Bank Limited [2007] NSWSC 23 at [82]. 23 As observed by Gordon J in Norcast S.ár.L v Bradken Limited [2012] FCA 765 (at [17] and [18]), the traditional approach to quantifying security is for the respondent to engage a costs consultant to prepare an affidavit setting out the steps likely to occur up to and including the first day of trial with an estimate of the party-party costs of each step which would be recoverable by the respondent were it to succeed and obtain an order for its costs. However, an alternative approach is for the respondents' own solicitor to give evidence as to the likely steps and the costs to be incurred in completing each step. Such evidence usually relies upon a calculation of actual costs incurred discounted by some factor reflecting the likely recovery of party-party costs. 24 Security may extend not only to future costs but also to costs already incurred: Bryan E Fencott Pty Ltd v Eretta (1987) 16 FCR 497 at 515 per French J. That conclusion is supported by the language of s 56 which states that the Court may order security to be given for costs that may be awarded; a future award of costs may include costs already incurred. While delay in making an application for security can be a factor against making an order (Gartner v Ernst and Young (No 3) [2003] FCA 1437), there has been no relevant delay in this proceeding. 25 In her first affidavit, Ms Smith gave evidence of the actual costs incurred by the Merisant respondents to the date of the affidavit (7 December 2018) and the estimated future costs and disbursements until the conclusion of the trial in the proceeding. The total estimate of legal costs and disbursements was $517,270. Ms Smith also gave evidence that, on the basis of her experience with the assessment of recoverable party-party legal costs, she estimated that recoverable party-party costs (should the Merisant respondents be successful) would be in the range of 55% to 70% of the actual costs incurred. On that basis, Ms Smith estimated that the minimum costs liability of Flujo to the Merisant respondents (if the Merisant respondents were to be successful) would be in the range of $284,498 to $362,089. 26 Flujo did not challenge that evidence. However, it submitted that it is unnecessary to order security for the entire period to the end of trial, as no trial may occur. It proposed that security covering the period up to mediation would best serve the interests of justice in this case. I accept that submission. If the proceeding is not resolved at mediation, the Merisant respondents can seek further security at that time. 27 During the hearing of this application, the parties made submissions concerning the necessary procedural steps in order to make mediation productive. The parties agreed that mediation would be assisted if Flujo were to file and serve its evidence prior to the mediation, to enable the Merisant respondents to gain a better understanding of how Flujo puts its case. Accordingly, I propose to order that Flujo file and serve its evidence and for mediation to occur after that. I also propose to order security for the costs of the Merisant respondents up to and including mediation. 28 In her further affidavit sworn 26 April 2019, Ms Smith gives the following evidence: (a) from the date of the service of the statement of claim to 26 April 2019, the costs incurred by the Merisant respondents in the proceeding, including for the costs of the application for security for costs, amount to approximately $174,032.46 (excluding GST); and (b) the estimated costs of reviewing the evidence filed by Flujo and preparing for and attending mediation are $79,560 (excluding GST). 29 Accordingly, the total incurred and estimated costs to the completion of the mediation are estimated to be $253,500. As noted above, Ms Smith has estimated that the recoverable party-party costs will be in the range of 55% to 70% of their actual legal costs, based on her experience. Ms Smith's affidavit demonstrates that she has considerable experience in litigation in this field. Applying a broad brush approach, I will order security for the period until the completion of mediation in the sum of $150,000.

New Zealand proceeding 30 By their interlocutory application, the Merisant respondents also sought an order that, out of the amount ordered for security for costs, a sum of $100,000 be designated as security for costs that Flujo has been ordered to pay to the Merisant respondents (and another company) in the New Zealand proceeding referred to earlier (plus interest on that amount and the costs incurred in registering that order under the Trans-Tasman Proceedings Act 2010 (Cth)). 31 The Merisant respondents submitted that the Court has power to order security in this proceeding for payment of the costs ordered to be paid by Flujo in the discontinued New Zealand proceeding. The Merisant respondents further submitted that, in circumstances where similar issues have been agitated in this proceeding and in the discontinued New Zealand proceeding, it is just to extend the order for security in this proceeding to the costs of the discontinued New Zealand proceeding. 32 I have considerable doubt as to whether the Court has power to make the order sought by the Merisant respondents. The Federal Court has such powers as are expressly conferred by statute, impliedly conferred by statute or incidental and necessary to the exercise of the jurisdiction or power so conferred: Parsons v Martin (1984) 5 FCR 235 at 241; 58 ALR 395; Jackson v Sterling Industries Limited (1987) 162 CLR 612 at 630; 71 ALR 457. A specific power to make orders for security for costs is conferred on the Court by s 56. In Thunderdome Racetiming & Scoring Pty Ltd v Dorian Industries Pty Ltd (1992) 36 FCR 297, Olney J observed (at 308): Given the purpose and function of the Federal Court of Australia Act, namely, to create a new superior court, it would seem that the very specific provisions of s 56 were intended to provide a comprehensive statement of the court's powers to order security for costs. Had the intention been to merely preserve those powers which such a court in our legal system has traditionally enjoyed, there would have been no purpose enacting s 56, at least so far as proceedings at first instance are concerned. But Parliament has adopted the course of particularising the court's power in a way that leaves no scope for any inherent power in this field. 33 Section 56(1) provides (omitting unnecessary words) that the Court may order an applicant in a proceeding in the Court to give security for the payment of costs that may be awarded against him or her. In my view, the phrase "costs that may be awarded against him or her" is implicitly a reference to costs that may be awarded in the proceeding in which the order for security is made. That view is supported by the apparent purpose of the section: to ensure that a successful respondent to a claim will have a fund available within the jurisdiction of the Court against which the successful respondent can enforce a judgment for costs made in the respondent's favour: Commissioner of Taxation v Vasiliades (2016) 344 ALR 558 at [72] per Kenny and Edelman JJ; [2016] FCAFC 170. The order sought by the Merisant respondents would result in an exercise of power under s 56 in this proceeding serving as a means of enforcing payment of the New Zealand costs order. In my view, such an exercise of power lies outside the purpose and scope of s 56. 34 Counsel for the Merisant respondents did not refer me to any decision in which this Court has made an order of the kind they seek. Quite properly, counsel for Flujo drew my attention to the decision of the NSW Supreme Court in Byrnes v John Fairfax Publications Pty Ltd [2006] NSWSC 251 in which the NSW Supreme Court ordered that proceedings in the court be stayed until such time as the plaintiff paid to the defendant costs that had been ordered to be paid in parallel proceedings in the ACT Supreme Court. Justice Simpson concluded that the court had power to make such an order under s 67 of the Civil Procedure Act 2005 (NSW) which gave the Court power to order that proceedings be stayed. In my view, the decision does not assist on the question whether this Court has power under the Federal Court of Australia Act 1976 (Cth) to order security for the payment of costs that have been awarded in another court in another jurisdiction. 35 Ultimately, it is unnecessary for me to determine whether the Court has power to make the order sought by the Merisant respondents because I do not consider that it is appropriate for such an order to be made. While the issues raised in this proceeding and the discontinued New Zealand proceeding may be similar, the proceedings concern different facts and different legal rights. The proceedings in this Court concern the question whether sales of products by the respondents in Australia infringed (and will in the future infringe) Flujo's legal rights under Australian law, while the proceedings in New Zealand concerned the question whether sales of products by the respondents in New Zealand infringed Flujo's legal rights under New Zealand law. In my view, any question of security for costs in relation to the discontinued New Zealand proceeding was and is properly the subject of judicial supervision in New Zealand. Further, the costs have been incurred and an order for payment of costs has been made. I do not consider it to be a proper application of the Court's power under s 56, or any other possible source of power, to use the processes of the Court in this proceeding as a mechanism to enforce payment of the New Zealand costs order. For those reasons, I will not make any order in relation to the costs of the discontinued New Zealand proceeding. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Bryan.

SCHEDULE OF PARTIES VID 1418 of 2018 Respondents Fourth Respondent: FLUJO SANGUINEO PTY LIMITED