Freedom Foods Pty Ltd v Blue Diamond Growers

1. The application for security for costs be dismissed with costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ALLSOP CJ: 1 In this matter, the respondent to an application for leave to appeal and the appeal, if leave be granted, seeks orders for security for costs to be provided by the four applicants and prospective appellants. The application for leave to appeal and the appeal, if leave be granted, are fixed for hearing on 19 May 2021 at 10:15am, having been expedited. The matter is a commercial matter between sophisticated commercial parties well advised by experienced lawyers and counsel. 2 On 29 September 2020, the four applicants to whom I will refer collectively as Freedom Foods, sought orders in an originating application restraining the respondent, Blue Diamond Growers, from commencing, prosecuting or otherwise taking any other step in an arbitration in the United States. The applicants also sought declarations under the Competition and Consumer Act 2010 (Cth) that the Freedom Foods Group companies had not breached relevant provisions of a license agreement and that Blue Diamond had behaved in a way contrary to the Australian Consumer Law, together with damages. 3 The background to that application, broadly for present purposes, was a body of disputes about a license agreement entered into by the first applicant, Freedom Foods Pty Ltd and Blue Diamond. The relevant agreement between the parties had an arbitration provision should the parties fall into dispute. Blue Diamond is a foreign corporation incorporated in California and is one of the largest suppliers of almonds in the world. Almonds are a raw material for various food and drink products prepared and sold by the various Freedom Foods Group companies. The originating application was supported by a concise statement, the precise terms of which are not relevant for this application. 4 On 20 November 2020, the applicants filed an interlocutory application seeking orders restraining Blue Diamond from taking any step in the arbitration. The applicants also sought an anti-suit injunction against Blue Diamond from prosecuting, continuing with or taking any step in a proceeding commenced by Blue Diamond in the United States District Court for the Eastern District of California, Sacramento Division, and other orders. 5 On 15 December 2020, Blue Diamond filed an interlocutory application seeking, amongst other things, to set aside service and also, most relevantly, an order that the proceeding be stayed, insofar as it was commenced by the first applicant, in accordance with s 7(2) of the International Arbitration Act 1974 (Cth). That provision is one of Australia's responses to the implementation of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards to force parties to go to arbitration which they had agreed to conduct. That application proceeded before a judge of this Court on 4 and 17 February 2021 with further submissions being filed on 19 February 2021. 6 Both sides were represented by senior counsel. The Freedom Foods parties were represented also by junior counsel. Blue Diamond was represented, not only by senior counsel, but two juniors. In a prompt, careful and comprehensive judgment, if I may respectfully say, the learned primary judge, Moshinsky J, stayed the proceedings, otherwise dismissed Blue Diamond's interlocutory application and dismissed the applicants' interlocutory application seeking to restrain both the arbitration and the United States District Court proceeding: Freedom Foods Pty Ltd v Blue Diamond Growers [2021] FCA 172. It is against those orders that leave to appeal is sought, and the appeal prospectively is brought. 7 The parties agreed that the matter was one for expedition. Administratively, the Court agreed with that and granted expedition and set the matter down in May 2021. There was no application for security for costs attending the exercise of original jurisdiction by the Court. 8 The financial history of the Freedom Foods Group is the subject of this application. The four companies that are the four Freedom Foods applicants do not have substantive assets, and the application for security for costs is not resisted by Freedom Foods on the basis that each company, from its own assets, is able to meet any adverse costs order in the application for leave to appeal or the prospective appeal. Rather, the four companies are part of the Freedom Foods Group and that group is led by the parent company, Freedom Foods Group Limited. Freedom Foods Group Limited is listed on the Australian Stock Exchange (ASX). Its trading was suspended from a period in the middle of last year to March this year. Those who are interested in the group have put together a recapitalisation plan for the listed company, which recapitalisation has been the focus of attention in this application. There is a deed of cross-guarantee between Freedom Foods Group Limited and companies in the group including three of the four Freedom Foods applicants in these proceedings. 9 That cross-guarantee is sufficient, by reference to the Australian Security Investments Commission (ASIC) instrument to permit the group to present accounts on a consolidated basis without the preparation of individual accounts of the subsidiaries. The deed of cross-guarantee provides for Freedom Foods Group Limited to be liable for the debts of its subsidiaries when or if those subsidiaries are wound up. In practical terms, the cross-guarantees provide for the parent to be responsible for the debts of the subsidiaries in the event of winding up. 10 The fourth company, Freedom Foods Ingleburn Pty Limited, to which I will refer as Ingleburn, is not subject to that cross-guarantee. The evidence does not reveal precisely why Ingleburn is not subject to the cross-guarantee, although counsel for the applicants indicated today that the company was not wholly owned by Freedom Foods Group Limited at the time at which the deed was entered. The reality is that it is highly unlikely, indeed, extremely unlikely that there could be any costs order in the application for leave or the appeal which would separate out costs of the individual companies in a way that would make a material difference to the responsibility of the parent. A practical commercial protection of the cross-guarantee is that the liability for costs of the Freedom Foods applicant companies will ultimately be the responsibility of the parent. 11 The application made by the Freedom Foods companies for leave to appeal is based on a narrow point of construction of the Franchising Code of Conduct, its supporting legislation and the relevant agreement. 12 Justice Moshinsky in his reasons concluded that there was no mandatory overriding domestic law based on the arrangements between Freedom Foods and Blue Diamond as being a franchise arrangement. That is, his Honour concluded that the license agreement was not a "franchise agreement" under the Code. In those circumstances, his Honour was the view that there was no mandatory Australian law preventing the operation of s 7(2) of the International Arbitration Act. 13 A number of points were raised by Blue Diamond before his Honour which were decided in favour of Freedom Foods. In Blue Diamond's prospective notice of contention, these matters are raised as alternatives to support the order made by the primary judge. An examination of those issues will not make the application for leave and appeal, if heard consecutively or concurrently, last longer than one day, but they materially affect the time for preparation of the application and appeal. 14 The evidence that has been led has been by two of the solicitors charged with responsibility for the handling of the matter. Blue Diamond's application is supported by two affidavits by Mr Cash, who is a partner of Norton Rose Fulbright Australia, and he has the care and conduct of the proceeding. He is an experienced solicitor having been admitted to practice over 30 years ago. In the two affidavits that he affirmed, he seeks to establish the basis security for costs for the one-day application for leave and appeal in the sum of $211,913.50. The sum of $232,974 was originally claimed but Mr Cash's second affidavit corrected some errors, in particular in relation to GST, and the lesser sum was claimed in the application. 15 The interlocutory application, which was filed on 21 April 2021, sought orders that the security be provided within three days, that the proceeding be stayed until it was provided, and if it was not provided by 5 May 2021, the proceeding stand dismissed. 16 The service of that interlocutory application with its supporting material produced a polite but clear response from the solicitors for Freedom Foods who rejected the demand, in short terms, setting out their view that there was no credible basis to suggest that the Freedom Foods applicants cannot meet an order for costs. The response from the solicitors for Freedom Foods referred to the cross-guarantee and the recent payment by the Freedom Foods Group of accounts in the ordinary course of business in substantial sums. The amount of over $200,000 was said to be excessive, and it was said that Blue Diamond owed Freedom Foods some $2.4 million for outstanding invoices. 17 On 19 March 2021, Freedom Foods Group Limited announced to the ASX a recapitalisation of up to $265 million to "continue turnaround". The summary of that document stated that the recapitalisation would allow the Freedom Foods Group to substantially repay its bank debt, providing a flexible capital structure that better facilitated the continued financial and operational turnaround of the company. The total of $265 million was to be way of issue of notes that would be issued to two groups. First, there would be an invitation to wholesale investors to participate in an offer of up to $130 million of notes, and a placement of up to $200 million of notes to a company by the name of Arrovest Pty Ltd, pursuant to the terms of a commitment agreement. Arrovest is controlled by the family which, to a significant degree, stands behind Freedom Foods. The placement of the notes to Arrovest was subject to that commitment being scaled back, depending upon the appetite of eligible wholesale investors for their share of the notes. 18 The capital raising was not underwritten, but Arrovest has entered into a binding commitment to subscribe for the $200 million of notes, subject to the scale back, and the balance of the $65 million is being raised on a best efforts basis. The board and management consider that the minimum amount of $200 million to be raised will provide sufficient funding to achieve the company's recapitalisation objectives of reducing its senior debt and facilitating the company's turnaround. 19 The recapitalisation was necessary because of issues that had arisen with the financial state of the group. The illustrative matters were set out in Blue Diamond's submissions for security. Freedom Foods Group Limited had failed to comply with lending covenants, and had obtained a waiver from its financiers and entered into a standstill agreement with its lenders which had been extended until 28 May 2021. For the six months to December 2020, Freedom Foods Group Limited had net current liabilities of $277.8 million, net cash outflows from operating activities of $21.5 million and had made a loss of $23.9 million. The directors of the parent disclosed that, as at February 2021, if a number of matters did not occur, "material uncertainty would exist which would cast significant doubt on the Group's ability to continue as a going concern and therefore whether it would be able to realise its assets and discharge its liabilities in the normal course of business." There are two class actions also against the group, an investigation by ASIC, and a potential liability in relation to withholding tax. 20 There are aspects of the capital structure which concern Blue Diamond. The first is that the terms of the notes are said to place the noteholders in a position of superiority over general creditors; secondly, that there is a negative covenant about settling any dispute with Blue Diamond; and, thirdly, it is said that to the extent that the supporting documents for the capitalisation, to which I will come in a moment, identify growth in sales of MilkLAB products, it is those products which are at the heart of the arbitration in California, in which arbitration Blue Diamond says Freedom Foods is prohibited from selling those products under the license agreement. Some emphasis is also placed on what was apparently said by the chair of Freedom Foods Groups Limited in a March 2021 interview with the Australian Financial Review. 21 The evidence of Mr Vaatstra, a solicitor for Freedom Foods, put in evidence a document provided to the ASX entitled Freedom Foods Groups Limited Recapitalisation Presentation. The presentation provides an overview of the recapitalisation process and also provides information summarising the parent's financial results for the first half of the financial year 2021. That is, July 2020 to January 2021. Those matters included the following: an increase in total revenue on the previous corresponding period of 15 per cent to $291.4 million; the group returned to positive operating earnings with an adjusted earnings before interest, tax and depreciation of almost $22 million compared to a restated loss of $26.5 million; positive cash flow from operations before financing costs and non-recurring adjustments, being $30.5 million higher than the previous corresponding period; and various other, apparently encouraging signs of a financial turnaround. 22 The Freedom Foods recapitalisation presentation was placed into evidence. Both sides relied on aspects of it. On the basis of only $200 million being subscribed by Arrovest, $183 million would go towards repayment of debt and $10 million would go to transaction costs of the recapitalisation, leaving a $7 million contribution to working capital. On the other hand, if the wholesale investors had an appetite for the recapitalisation, there would be a higher repayment of debt, up to $233 million, and there would be $22 million in working capital. If $215 million was the recapitalisation sum, repayment of debt would remain at $183 million. There would still be $22 million in working capital. There was no evidence given as to take-up, as presently existing, by wholesale investors. No one gave evidence on behalf of the Freedom Foods Group directly other than through the presentation of material through the affidavits of Mr Vaatstra. I do not say that critically of either the preparation of the case or Freedom Foods. The recapitalisation was sufficient to allow relisting on the ASX. 23 The Freedom Foods applicants say it would be unprecedented for any security to be ordered in the light of the recapitalisation and in the light of this being a publicly listed company accepted to be trading as a going concern by its directors, auditors and the stock exchange. There is some force in that. However, the position can be expressed somewhat more helpfully, I think, by standing back and looking at the evidence that has been led about the broad recent history of the company. 24 The first question is whether Blue Diamond as the respondent to the substantive proceeding and applicant to the interlocutory application, has demonstrated on the evidence that there is credible testimony that there is reason to believe that the companies will be unable to pay the costs of Blue Diamond, as required by s 1335 of the Corporations Act 2001 (Cth). In the light of the practical effect of the cross-guarantee and the attempt to maintain a valuable business on the stock exchange by Freedom Foods Group Limited, I do not think it can be concluded that there is reason to believe that the applicants will be unable to pay the costs of the respondent. 25 If one were to look at their assets strictly, one finds that there may be few assets or few unencumbered assets to pay any order for costs, and it is true that the cross-guarantee, strictly speaking, only is engaged at the time of winding up of the companies, but the practical reality of the matter is that those costs are likely to be paid by the parent. That said, if one takes an individual approach to these companies and looks at the precise legal entitlements of Blue Diamond against Freedom Foods Group Limited, the proposition might be put that it is simple, then, for those that stand behind these four companies to simply put up security. That said, in my view, the preferable way to look at s 1335 is whether it has been shown that there is reason to believe that the corporations will be unable to pay any order for costs, and I am not prepared to draw that conclusion as a conclusion in the real world. 26 Section 56 of the Federal Court of Australia Act 1976 (Cth) is also a basis of the application for security for costs. It is often said that the basis for security in the context of prospective lack of financial means is similar or the same as that under s 1335. It is unnecessary to traverse the authorities about that. I think the financial position of Freedom Foods can, helpfully for the purposes of this application, be described as follows: it is evident that the parent, and thus the group including the four applicants, were vulnerable to the failure by the parent to comply with its lending covenants and without a successful recapitalisation, there is significant doubt about the capacity of the group and the parent to continue as a going concern. 27 The recapitalisation is designed to overcome those financial difficulties. The binding commitment of Arrovest, being the corporate vehicle of the family standing behind the group, can be seen to place the company in a substantially recapitalised position with a modest - indeed, small - addition to working capital to assist with the financial turnaround of the group. 28 There is no evidence before me as to the prospect of the full $265 million recapitalisation, but there is evidence that there will be a $200 million recapitalisation. In these circumstances, the following can be said: there exists some uncertainty about the future of the recapitalisation, and some commercial uncertainty as to the future viability of the group as a going concern, but as presently propounded, the recapitalisation of the group appears to be the reasonable basis for the conduct of the group and its listing on the stock exchange as a going concern, and there is evidence that in that context the group is and has been paying considerable sums of money in the ordinary course of business in its trading operations. 29 The success of the recapitalisation will, however, need to be known by the end of May, being the time in which the standstill agreement with the senior lenders comes to an end. The likelihood is that cost orders might well be made, if they are made, against an unsuccessful application somewhere after the end of May, if the Full Court reserves its judgment. Therefore, there is some doubt and some uncertainty as to the long-term position of the group. 30 The question is whether, notwithstanding my view that from a practical point of view it has not been shown that the corporation will be unable to pay its debts, there is some uncertainty as to the future of the recapitalisation being fully successful, and whether that should be the basis for an order of security. 31 The answer to that question, in part, needs to be answered by reference to the quantum that was demanded, and what is now propounded, and the context in which the demand was made. A significant body of costs have already been incurred. The submissions in the proceedings have been filed, save for the applicants' reply submissions. The application for leave to appeal was filed on 19 March 2021 and the notice of contention in April 2021. The interlocutory application was filed on 21 April 2021 after those costs had been expended. 32 The demand for security was made on 13 April 2021, in the first of the letters of Norton Rose Fulbright in relation to security. I do not think anything is to be taken from the time from 19 March 2021 to 13 April 2021. More relevantly is the amount of costs that were demanded by way of security. The letter required Freedom Foods to provide security, at that point, of $208,000. In response, Arnold Bloch Leibler indicated that Freedom Foods would set aside a sum of $50,000. More correspondence took place between the parties thereafter. 33 This matter came on before me on 28 April 2021 and I indicated in, I thought, tolerably clear terms that I was of the opinion that a sum of $232,000, reduced in the later affidavit to $211,000, was unlikely to find favour, given its size. The calculation of these sums were deposed to by Mr Cash by reference to partner hours, associate hours, graduate hours and total fees. The costs of the application for leave to date were said to be $16,353. The estimated costs of the application for leave, by which I take it to mean the argument of the appeal as well, were $184,963, and the costs of this application for security for costs were said to be $31,658. The costs all added up to $232,974. 34 With the utmost respect to Mr Cash, these fees are ones that are such that the response of Arnold Block Leibler, namely that the costs were excessive, was justifiable. That is not a criticism of Mr Cash. But the proposition that this Court will order, in a commercial matter of an interlocutory hearing in the character of what is before the Court, for one day, the sum of $200,000 is not supportable. It does not accord with the levels of security granted in cases of one day appeals that a perusal of the last few years' judgments in this Court would produce. I will not order this sum to be paid as security, even if there were a ground to consider that there should be security for costs. 35 By the time the security was requested, the prospective argument had been expanded by the issues on the notice of contention propounded by Blue Diamond. The issues propounded by Freedom Foods involved a tolerably narrow question of construction, referable to a very clear and comprehensive judgment, involving examination of the Code and the commercial agreements. The appeal books were the responsibility of Freedom Foods to prepare. Blue Diamond had responsibility to prepare a set of submissions, including submissions to propound their own points under the notice of contention. 36 Looking at this as a practical matter, and recognising that the proper assessment of reasonable costs is not intended to be a full indemnity, it would be reasonable to approach the assessment of the quantum in the way that I have put the matter to counsel this morning. If s 1335 had been made out and an order for security was thought to be appropriate, the following simple approach to the matter could be taken. 37 This is an appeal. The issues are clear. The client is aware of the nature of the matter and does not need detailed advice from the solicitors. The clients have been fully apprised of the issues. The clients and the lawyers have, as I have said, a clear and comprehensive set of reasons. The battle lines are drawn. The matter is important, sufficient for retention of senior counsel, together with one junior counsel. This is not an application which required detailed work by the partner, an associate and a graduate lawyer. A simple rule of thumb could be taken that the senior counsel, the junior counsel and a solicitor would have one day in court. The argument would also proceed over issues that are brought at the instance of Blue Diamond. Nevertheless, the appearance in court for one day by those three can be understood. 38 The amount of preparation involved, including preparation of written submissions, would be, for the issues raised on the notice of appeal, no more than one day by counsel familiar with the issues and who argued the matter below. Being somewhat more generous and taking two days, one has three days of senior counsel's time and three days of junior counsel's time. Given the issues, I do not see the need for participation of the solicitor for a full day in preparation, but even if one allowed that, one would then have two days for the solicitor. That generosity of time would be ample for the preparation of the written submissions and any associated costs in preparing the appeal. The rates that I would think may be appropriate for taxation, and being tolerantly generous, are $12,000 including GST per day for senior counsel, $7,500 dollars per day for junior counsel and $7,500 per day for the solicitor. This comes to a bill of $36,000 for the silk, $22,500 for the junior, and $15,000 for the solicitor. That is some $73,500. 39 That would be, on my reading of a number of cases in this Court, and given the generous assumptions as to time that I have made, one of the highest amounts of security for costs for a one day appeal that has been granted. The cases to which I refer are Pleash (liquidator) v Tucker [2018] FCA 168; Kemppi v Adani Mining Pty Ltd [2018] FCA 2012; Mathews v All Options Pty Ltd [2019] FCA 1972; Dimitriou v Pineview Property Holdings Pty Ltd [2019] FCA 2123; Langbein v Mottershead Investments Pty Ltd (No 2) [2020] FCA 188; and Stallion (NSW) Pty Ltd v Commissioner of Taxation [2020] FCA 554. I do not place a huge amount of weight upon those kinds of comparisons, but in my view, $75,000 would be a generous order for security for costs. In my view, the $50,000 response by Arnold Bloch Leibler was not out of the ballpark, if I may use that colloquialism. 40 What was demanded by Blue Diamond in its application was that the applicants provide security for Blue Diamond's costs of and incidental to the application for leave to appeal and any consequent appeal in the amount of $232,974 within three days of the order. That was then amended to $211,913.50. The security was to be provided in the form and on the condition that the Court considers appropriate. There was no order sought that security would be provided in such amount as the Court thought appropriate, although there was a prayer for such further or other order as the Court sees fit. 41 I think in the circumstances of the bringing of this application on after the expedition of the matter, I do not consider that it is appropriate to order that security be provided within three days. I do not consider that the evidence is sufficient to amount to a conclusion that s 1335 of the Corporations Act is engaged. 42 There is, however, a question as to the certainty of the success of the recapitalisation. There is sufficient evidence to allow me to conclude that the recapitalisation will take place with at least $200 million injection of capital by way of notes. There is sufficient evidence to allow me to conclude that, to this point, there is some degree of optimism that is reasonable to conclude about the turnaround of the company, though it is not without qualification. 43 In these circumstances, the question is whether it would be appropriate and just in all the circumstances to order some amount of security pursuant to s 56. As I have said, that question, in the way that I am approaching it, is not strictly called for by the interlocutory application. 44 Consequent upon my views expressed on 28 April 2021, Blue Diamond in effect made an open offer that it would take $125,000 as security, provided that the applicants agreed to pay its costs of this application. In the light of the way the application for security for costs has been framed, that is, over $200,000 or $125,000 plus the costs of the security for costs application, said to be $31,000, I am not prepared to order that security. I do not consider that, in that context, there is sufficient basis for me to order security for costs under either s 1335 or s 56, either in the sums claimed or in the sum of the amount that I indicated might be appropriate, indeed, might be generous, if the basis under s 1335 were made out. 45 That said, I am left with the lingering concern for the foreign party that the recapitalisation of the group may not be successful other than to the $200 million capitalisation by Arrovest. It is the ultimate commercial success of the turnaround of the company about which the evidence does not permit me to be certain. In the light, however, of the evidence of the payment of invoices in the ordinary course of business, the evidence of the turnaround to the extent that it has happened, it would be, in my view, if I were to order any security inappropriate to order anything other than that which the applicants to the substantive matter were prepared to put forward to deal with the matter. 46 In those circumstances, the only order that I would be prepared to make in favour of Blue Diamond is that pursuant to s 56, and based upon the residual uncertainty of the ultimate turnaround of the company, an order might be made for the provision of security in the sum of $50,000. If that were to be made, it would be an order not demanded by the applicant to the interlocutory application. If it were to be made, it would only be made justly, in my view, on the basis that Blue Diamond pay Freedom Foods' costs of the security for costs application. In my view, the claim for over $200,000 was unjustified for an application of this kind, and that should have been, with respect, evident. 47 That order, however, in a sense, gives little protection to Blue Diamond. Thus, in the light of my views as to the non-engagement of s 1335, only a residual concern about the success of the ultimate turnaround through the recapitalisation, and the manner in which the claim for security has been structured, I think the appropriate order is simply to dismiss the interlocutory application for security. 48 The orders of the Court will be that the application for security for costs be dismissed with costs. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Chief Justice Allsop.