Francis v CPI Graphics Ltd

The undertaking 4The terms of the undertaking have been set out above. First, the reference to the requirement of a judgment directs attention to the prospective situation at the time when judgment is given, as distinct from the present situation. It is therefore necessary to take into account developments that may take place between now and judgment. 5Secondly, it requires that there be " a significant risk " that Graphics, if required to do so, " may be unable to refund the mortgage proceeds it receives ... with interest ". The concept of a " risk " pertains to a possibility, not a probability, and a low degree of probability may nevertheless involve a significant risk, if it is not so low as to be " insignificant " [ Fallas v Mourias (2006) 65 NSWLR 418; [136] (Aston JA)]. A risk that is not fanciful or trivial or that has a real chance of materialising is a significant one [ Fallas v Mourias, [15]-[18] (Ipp JA), [91] (Tobias JA)]. The use of the phrase " may be unable " - as distinct from " will be unable " [cf (CTH) Corporations Act , s 1335], in my opinion adds little, but certainly does not increase the demands of the test imposed by the undertaking. 6Thirdly, the risk contemplated is one that the first defendant may be unable to refund the mortgage proceeds - not that it will be impossible to recover an equivalent amount from some other party, related or unrelated to Graphics. 7Finally, having regard to the circumstances in which the undertaking was given, and the form of the undertaking - particularly, the use of the words " at any time before judgment " -the plaintiffs do not need to establish any change of circumstances after the undertaking was given on 16 December 2010. It is open to them to establish the relevant risk by material that was available when the undertaking was given, as well as by new material that became available subsequently, or reveals a subsequent change of circumstances. It is open to them to do so by establishing that the relevant risk existed when the undertaking was given and has persisted thereafter, as well as by showing only that it arose more recently. Graphics' financial position 8Graphics' current financial position is depicted by its management accounts. While, according to its balance sheet as at 30 June 2010, Graphics had assets of $7 million and liabilities of $2.2 million, with net assets of $4.8 million, according to the management accounts: as at 31 December 2010, assets were $4.7 million, liabilities $0.8 million and net assets $3.9 million; as at 31 January 2011, assets were $4 million, liabilities $2 million, and net assets $2 million; and as at 28 February 2011, assets were $5 million, liabilities $2 million, and net assets $3 million. 9The profit and loss in the management accounts show net losses for every month from July 2010 to February 2011: $136,000 in July, $130,000 in August, $64,000 in September, $180,000 in October, $199,000 in November, $94,000 in December, $43,000 in January and $35,000 in February. How, in the light of those figures, the net asset position increased between January and February is difficult to comprehend. The Group Annual Report discloses that Graphics' main business had been disposed of and that its current business was at a "start up" status only and would not contribute significantly to group outcomes in the short term. In addition, Graphics is engaged in the present litigation, which will no doubt result in the incurring of costs between now and any judgment. 10Accordingly, Graphics' net assets have fluctuated (as at end January 2011) below $2 million - the amount necessary to fund the repayment, if required, of the mortgage proceeds and interest - and Graphics is making losses, and also incurring legal costs, so that there is a high degree of risk that its position will deteriorate rather than improve. If that were the whole of the picture, there would in my opinion be plainly a significant risk of the type described in the undertaking. 11However, Graphics relies on two matters as removing, or mitigating, any such risk, such that it should not be regarded as a significant risk. The first is the availability of a finance facility with GE held by Group, and the second is a cross-guarantee given by all group companies. The GE facility 12Group has a finance facility with GE. All the companies in the Group are, I am prepared to accept, entitled to draw down funds under that facility. Presently, of the total facility of $60 million, $11,294,631 remains available (the balance having already been drawn). Graphics submits that, if required to do so, it could resort to that facility for the purpose of refunding the mortgage proceeds and interest. 13PagePack has indicated that, if its scheme proceeds, it intends " for the foreseeable future " that Graphics retain financing arrangements with GE " on a similar basis to those which are currently in place between CPI and GE ". However, while that may well be PagePack's intention, the change of control involved in the scheme of arrangement will be a " review event ", entitling GE to terminate the facility or change its terms at its option, under clause 18 of the Facility Agreement. Further, the circumstances that the Quality Group debt of some $2 million plus is irrecoverable (as is conceded, for the purpose of these proceedings only) might well constitute a " material adverse event " and thus an event of default under clause 17.1(m) of the Facility Agreement, entitling GE to terminate it under clause 17.2. And the right to draw-down under the facility is in any event subject to a number of conditions, under clauses 3.6 and 4.1 - including that it will not result in the facility limit being exceeded. 14Consideration of the availability of a facility which funds the whole Group requires consideration of the financial position of the Group as a whole. According to the Group management accounts, as at 31 December 2010 the Group had net assets of in excess of $50 million. However, in connection with the PagePack scheme proposal, an independent expert has analysed the Group's position on a number of different bases. While ultimately selecting a capitalisation of maintainable earnings valuation basis, the analysis included an " orderly realisation of assets " basis. For the purpose of testing ability to pay debts - as distinct from the purpose of evaluating what is a fair price for shares in the entity - an orderly realisation of assets approach is instructive. The independent expert was of the view that on an orderly realisation of assets approach, the net assets (before providing for costs of realisation of $750,000) were in the range of $3.455 million on the low side, to $16.868 million on the high side. The major differences between the management accounts and estimated realisable views on the low and high side, were: (1) in respect of receivables, all debts outstanding in excess of 120 days were fully provided for in the low valuation scenario, and 30% provided for in the high scenario, but not at all in the management accounts; (2) in respect of inventories, in the low and high scenarios (but not the management accounts) those on hand for more than 18 months were written down to scrap values and some provision made in respect of those between 6 and 18 months; and (3) in the low and high scenarios (but not the management accounts), provision was made for redundancy payments. This reveals a risk that Group net assets upon orderly realisation could be as low as $2.705 million - which would be barely sufficient to cover the refund of the mortgage proceeds, and then only if debt in other group companies did not increase. Moreover, the Group management profit and loss accounts report net losses in September ($296,000), October ($172,000) and January ($274,000) off-set by net profits in November ($312,000), December ($162,000) and February ($96,000). Only $11 million now remains available in the GE facility, whereas in December 2010, twice that amount was said to be available. 15Taken together, these matters demonstrate that there is no certainty that, when the substantive proceedings come to judgment, $11 million - or any amount - will then remain available on the GE Facility. There is a risk - and a not insignificant one - that the GE Facility will not remain available, or will be insufficient, to fund reimbursement of the mortgage proceeds. The cross-guarantee 16The other basis on which it was suggested that any risk was reduced to insignificance was the existence of a cross-guarantee by all the Group companies in favour of the others, including Graphics. However, there are at least two significant difficulties with this. 17The first is that, for reasons just explained, the Group financial position leaves open a risk that, upon orderly realisation, there would be insufficient net equity to fund repayment of the mortgage proceeds. 18The second is that the cross-guarantee is enforceable only on the winding up of the debtor company - relevantly, Graphics. Reliance on it thus inherently involves that Graphics would itself be unable to pay the debt, but that another Group company or companies would do so in its place. But that is not what the undertaking requires: it suffices that there be a significant risk that the first defendant may not be able to pay. The availability of a cross-guarantee pursuant to which other Group companies may pay if Graphics is unable to do so does not affect the existence of the relevant risk. Conclusion 19In my view, the plaintiffs have established that, on the proper construction of the undertaking, there is a significant risk that Graphics, if required so to do in a judgment at the end of the proceedings, may be unable to refund the mortgage proceeds received by it on the sale of the Watsons Bay and Lindfield properties together with interest. Accordingly, that having been established, Graphics is bound by its undertaking to pay such amount and interest up to the date of payment into Court. Costs 20The ordinary practice of the court in respect of interlocutory applications is that contained in (NSW) Uniform Civil Procedure Rules 2005, r 42.7, namely, that the costs of the application are to be paid and otherwise dealt with in the same way as the general costs of proceedings and, unless otherwise ordered, do not become payable until the conclusion of the proceedings. 21The plaintiffs have succeeded on the motion, and in my view are entitled to costs of the motion. However, they also seek an "otherwise order", to the effect that the costs the subject of that order be payable forthwith. 22It has been said that factors which have caused the courts to depart from the normal position to order that interlocutory costs be assessed and payable forthwith include: (1) where the interlocutory matter constitutes the determination of a 'separately identifiable matter or may be viewed as the completion of a discrete aspect' (see Fiduciary Ltd v Morningstar Research Pty Ltd (2002) 55 NSWLR 1, [4] (Barrett J); Bagley v Pinebelt Pty Ltd [2000] NSWSC 830); (2) where there has been some unreasonable conduct on the part of the party against whom the costs have been ordered (see Fiduciary Ltd, [5]); and (3) where there is a 'fairly long time' before the proceedings are to be finalised (see Fiduciary Ltd [5]). 23In the case at hand, obviously the present application could be said to be a separately identifiable aspect of the proceedings. However, that can be said of very many interlocutory applications, yet an order for the payment of costs forthwith is not one usually made simply on that ground alone. Secondly, in relation to whether there has been some unreasonable conduct by the party against whom costs have been ordered, while I have found that the defendant has failed on this motion, I have not concluded that there was any unreasonable conduct on its part. Thirdly, in relation to whether there is likely to be a fairly long time before the proceedings are disposed of, in this case there is no reason to expect that such period will be any more than the ordinary time before proceedings are disposed of -and, if the matter is expedited and counsel for the plaintiff did indicate this morning that the plaintiff would seek expedition, it may in fact be less than the ordinary time usually taken. 24Another matter raised was said to be the impecuniosity of the plaintiffs. There is, however, practically no evidence before the court to support a submission that the plaintiffs are impecunious. Moreover, t here will in any event be a substantial sum of money in court, pursuant to the order that has been made. On balance, I do not think that there are sufficient grounds to justify an "otherwise order" in this case. I therefore decline to make a special costs order. 25My orders are: (1)Order that the first defendant by 15 April 2011 pay into Court to the credit of these proceedings the sum of $2,062,353.40 (which includes interest to 15 April); (2)Order that the first defendant pay the plaintiff's costs of the motion.

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