Great Scott International Pty Ltd v Cosmetic Suppliers Pty Ltd and Another.

Applicant Great Scott International Pty Ltd (ABN 17 093 478 356)

First Respondent PARTIES: Cosmetic Suppliers Pty Ltd (ACN 000 303 391)

Second Respondent Sebastian Australia Pty Ltd (ACN 074 198 495)

Notice of Motion - security for costs sought against corporate applicant - principles to be applied - discretionary factors - evidentiary onus on party bringing application to satisfy the Court that corporate applicant is unable to pay costs - once impecuniosity established evidentiary onus shifts to corporate applicant to satisfy the Court that relief should be refused - insufficient evidence before the Court to enable a proper assessment of the applicant's current financial circumstances - arguable case required to be shown as opposed to strong prospects of success of the proceedings proper - application for security for costs refused - costs reserved CATCHWORDS:

Corporations Act 2001 (Cth) Industrial Relations Act 1996 LEGISLATION CITED: Supreme Court Rules

Crowe v UCS Developments Pty Limited [2003] NSWIRComm 234 Fiduciary Ltd and Others v Morningstar Research Pty Limited and Others 208 ALR 564 Kenoss Contractors Pty Limited v Allied Constructions Pty Limited (No. 2) (2001) 104 IR 218 Knott v Signature Security Group Pty Limited [2001] 104 IR 84 Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 CASES CITED: Melville v Craig Nolan & Associates Pty Ltd and Anor (2001) 54 NSWLR 82 Meribee Pastoral Industries Pty Limited and Others v Australian and New Zealand Banking Group Limited [1998] 193 CLR 502 Nagle v Tilburg & Anor (1993) 51 IR 8 Pearson v Naydler (1977) 1 WLR 899 Williamson v Service Corporation International (Australia) Pty Limited (2003) 130 IR 247

Applicant Mr D. Chin of Counsel Solicitors Henry Davis York Lawyers LEGAL REPRESENTATIVES:

Respondents Mr J. Fernon, Senior Counsel Solicitors Baker & McKenzie

• 4 - INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES IN COURT SESSION

Great Scott International Pty Ltd v Cosmetic Suppliers Pty Ltd and Another.

Application by respondents seeking security for costs.

1 This is an application by way of Notice of Motion filed by Cosmetic Suppliers Pty Ltd ("the first respondent") and Sebastian Australia Pty Ltd ("the second respondent"), on 22 October, 2004. 2 The Notice of Motion seeks orders that Great Scott International Pty Ltd ("the applicant") provide security for costs to the first and second respondents in proceedings in Matter No IRC 4188 of 2004 ("the proceedings"). 3 The proceedings concern an application for leave to appeal and an appeal from an order made by Marks J on 28 June, 2004 in which his Honour dismissed the applicant's application to amend its Summons for Relief ("the Summons"). The application for amendment before Marks J sought two changes: first, the joinder of an additional applicant, Scott Evan Krauss ("Mr Krauss") who is the sole director and shareholder of the applicant; and, secondly, what appears to be a reformulation of the applicant's contract or arrangement with the respondents, without purporting to be, insofar as the applicant is concerned, a new contract or arrangement: draft Amended Summons for Relief at Claims [1]. 4 The Summons was filed on 7 August, 2002. 5 On 13 May, 2004 the applicant filed its Notice of Motion seeking orders to amend the Summons by the joinder of Mr Krauss as an additional applicant. This Notice of Motion was heard by Marks J on 18 May, 2004. On 28 May, 2004 his Honour refused the application on two bases. The first basis was that there was an insufficiency of evidence before the Court which could enable a determination that there was a contract or arrangement to which Mr Krauss was a party. As a consequence of this his Honour said that this was not the "appropriate stage", (adopting the words used in Nagle v Tilburg & Anor (1993) 51 IR 8 at 13) at which to determine whether the impugned contract or arrangement was identical to the contract as defined in the proposed Amended Summons for Relief. 6 The second basis for rejecting the joinder application was his Honour's finding that the proposed Amended Summons for Relief joining Mr Krauss as an additional applicant constituted a fresh application for an order under s106 of the Industrial Relations Act 1996 ("the Act") and a new application for the purposes of s108B of the Act, as opposed to an amendment of the Summons. Because the proposed Amended Summons for Relief was a fresh application, it was caught by the time limitation period of twelve months imposed by s108B of the Act which applies to contracts terminated more than twelve months before the filing of a summons under s106. The Evidence

7 The present Notice of Motion is accompanied by an affidavit sworn by Elizabeth Raper ("Ms Raper") a legal practitioner employed by Baker & McKenzie Solicitors on 22 October, 2004. 8 Ms Raper deposes that the s106 proceedings was unsuccessfully conciliated on 13 June, 2003 and a certificate to that effect was issued by Glynn J. 9 Annexure ER5 to Ms Raper's affidavit is an ASIC company extract which provides some details of the applicant's financial affairs as at 18 February, 2004. According to the extract, the applicant is a corporation of which Mr Krauss is the sole director, secretary, and shareholder, holding one paid up ordinary share to the value of $1.00. 10 Ms Raper also deposes to the fact that significant legal expenses have been incurred in relation to the proceedings. In oral evidence heard on 14 April, 2005, Ms Raper informed the Court that the amount sought was in the vicinity of $60,000.00. This amount consists of an amount of $10,000.00 for costs incurred by the respondents between 17 July, 2004 to 15 October, 2004 in relation to the preparation of the respondent's submissions for the appeal. A further $10,000.00 forms part of the overall amount, according to Ms Raper, which represents costs incurred in the preparation for the hearing of the present Notice of Motion. The balance of $40,000.00 includes an amount of, "about $7,000.00", representing costs incurred in the preparation of related proceedings filed by way of summons in the Registry of the Court of Appeal by BEA Systems Pty Ltd and BEA Systems Inc (the first and second claimants respectively), against the Industrial Relations Commission of New South Wales in Court Session and David Arthur Lowe (the first and second opponents respectively). The remaining $33,000.00, Ms Raper said, represents an estimate of costs which will be incurred at the hearing of the appeal by the Full Bench of this Court which is anticipated to be heard in one day. 11 The respondents also tendered on the application some financial records of the applicant for the period 1 July, 2001 until 30 June, 2003. 12 The applicant relied on the affidavit of Stephen Michael Jauncey ("Mr Jauncey") a legal practitioner employed by Henry Davis York, sworn on 11 April, 2005. In that affidavit Mr Jauncey deposes that the respondents' estimate of costs incurred in relation to the proceedings ($60,000.00) is, "completely unreasonable and unjustified". In oral evidence given on 14 April, 2005, Mr Jauncey referred to a facsimile from the respondents which was received by his office on the afternoon of 13 April ,2005. Mr Jauncey said he was unable to consider the facsimile until 4.20 pm at which time he thought the facsimile sought the applicant's financial records for the year ending 30 June, 2003 which Mr Jauncey was aware had already been provided to the respondents (the facsimile in fact sought 2004 financial records). At about 5.30pm he was informed by a senior associate that the applicant's 2004 financial records could not be located. Mr Jauncey and the senior associate then continued to search until about 6.00pm, but without success. He did not contact the applicant in relation to the request for the financial records, and, he made no further attempts to locate the records. 13 Both parties also invited the Court to consider their respective written submissions prepared for the appeal, in this present application. Parties' submissions

14 Senior Counsel for the respondents, Mr Fernon relied in submissions on the provisions of Part 53 Rule 2 (1) (e) of the Supreme Court Rules, and, s1335 (1) of the Corporations Act 2001 (Cth).

15 Part 53 Rule 2 (1) (e) provides:- "53.2 Cases for security (1) Where, in any proceedings, it appears to the Court on the application of a defendant ..... (e) that there is reason to believe that a plaintiff being a body corporate will be unable to pay the costs of the defendant if ordered to do so, the Court may order that plaintiff to give such security as the Court thinks fit for the costs of the defendant of and incidental to the proceedings and that the proceedings be stayed until the security is given. ..... 16 Section 1335 (1) of the Corporations Act 2001 (Cth) provides:- "Costs (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. ..... 17 Mr Fernon emphasised that an order for security for costs is discretionary. He relied upon capacity to pay on the part of the party against whom an order is sought, and, the merits of the appeal as discretionary factors which this court should take into account. In relation to the merits of the appeal, Mr Fernon contended, in effect, that the applicant had little prospects of success because the proposed Amended Summons for Relief constituted a separate (or fresh) contract or arrangement, (and, therefore, by implication fell within s108B of the Act). 18 Mr Fernon also submitted that the costs sought by way of security for the appeal proceedings (namely $60,000.00) represents a reasonable estimate. This is because the issues on the appeal will involve detailed consideration of various principles and judgments including Nagle v Tilburg & Anor, and the Full Bench decision in Crowe v UCS Developments Pty Limited [2003] NSWIRComm 234. 19 Mr Chin of Counsel, appearing for the applicant, questioned the way the test, he said, was formulated by the respondent, namely, that the applicant must have strong prospects of success in relation to the appeal. Instead, Mr Chin said, the applicant was only required to make out an arguable case. In any event, Mr Chin contended, the applicant's case on appeal had strong prospects of success. 20 In relation to the factor of the financial capacity of the applicant to pay the respondent's appeal costs in the event its appeal is unsuccessful, Mr Chin pointed to the two items of evidence which were tendered by the respondents in order to show that the applicant was without adequate financial means with which to pay the respondents. Mr Chin, in effect, submitted first that, little reliance should be placed on the evidence. The ASIC company extract, for example, was old evidence, dated 18 February, 2004, and the respondents had had ample opportunity to obtain more updated documentation but they had not. The second item, consisted of the applicant's financial records which were current as at until 30 June, 2003. Those records showed that, as at that date, the applicant had substantial net assets in the amount of $60,195.00. 21 Mr Chin also contended that the respondent's application for costs was premature. Mr Chin placed reliance on the observations of Austin J in Fiduciary Ltd and Others v Morningstar Research Pty Limited and Others 208 ALR 564 at [53]. In that decision Austin J looked at the different approaches taken as to security for costs applications where the plaintiff or applicant is either an individual or a corporation. His Honour thought the different approaches may lie in an endeavour to prevent a corporate controller from avoiding liability for costs by hiding behind the corporation. In this regard Mr Chin sought to distinguish the present circumstances on the basis that Mr Krauss was not seeking shelter behind the corporation, but rather, desired to become a party to the proceedings. The mischief adverted to in Fiduciary Ltd (manipulation of artificial persons by natural persons) is therefore not present here. 22 Mr Chin also addressed the question of onus in these types of applications. He emphasised that the applicant's inability to pay the respondent's costs must first be established before attention can be directed to the discretionary factors. Mr Chin pointed to the correspondence annexed to Ms Raper's affidavit which said:- "On our analysis, GSI appears to be a company with no assets that are apparent from the documents and our client has a very real concern that if a costs order were to be made against GSI that it would be difficult to recover any such costs order in circumstances of GSI being unsuccessful in its application." 23 According to Mr Chin, the statement contained in the annexure is evidence of an apprehension only on the part of the respondents that the applicant lacks the relevant means to pay, as opposed to an assertion that it is unable to pay. This would, in turn, have the necessary result that the respondents' application must fail at the threshold level. 24 If the Court conducts an examination of the various discretionary factors found to have relevance on the application, Mr Chin submitted that the delay on the part of the respondents is such a factor that falls for consideration. The application presently before the Court is the second such application, and, it was made three months after the appeal notice was lodged. 25 As a final submission Mr Chin asked the Court, if minded to grant the application, to consider the quantum of costs sought by the respondents, namely an amount in the vicinity of $60,000.00. The amount of $10,000.00 for example which, according to the respondents, represents costs incurred in relation to the present Notice of Motion, the applicant said should be disregarded since those costs have no connection to the proceedings. The applicant is of the view that the total amount sought by the respondents does not represent a reasonable estimate. 26 Mr Fernon, in reply, addressed briefly the applicants' submissions. 27 First, Mr Fernon sought to answer the applicant's submission that its financial records up to 30 June, 2003 showed that it had substantial assets, by pointing out that the submission ignored the fact that the applicant would have to pay its own legal representatives. Nor he said, did the submission address the fact that the documents show that the equity of the corporate applicant is on a downward spiral. 28 Secondly, the onus, (referred to by both parties as the evidentiary onus), will be satisfied if it is demonstrated that there exists a reasonable belief that the corporate applicant will be unable to pay its debts (as to which see s1335 (1) of the Corporations Act 2001). 29 Thirdly, there has been no delay on the respondents' part which would militate against the granting of the application. The respondents' wrote to the applicant in December, 2003 about their concerns in relation to the applicant's financial position. An affidavit filed by the applicant, subsequent to that correspondence, failed to address those concerns. It was only then that the respondents decided that the present application should be considered. This, in the circumstances, was an entirely reasonable course. 30 Fourthly, the respondents press the amount of $60,000.00 as the more reliable estimate of security for costs sought in the present application. 31 Fifthly, Mr Fernon advanced the contention that it was necessary in applications for security for costs to show that the proceedings had strong prospects of success as opposed to a merely arguable case (as contended by the applicant). Consideration

32 The principles to be applied in applications of this kind have been conveniently set out in a judgment of Wright J, President, in Kenoss Contractors Pty Limited v Allied Constructions Pty Limited (No. 2) (2001) 104 IR 218 at 221, 222. In that decision his Honour adopts the judgment of Sir Robert Megarry VC in Pearson v Naydler (1977) 1 WLR 899 at 906-907 where his Lordship identified the issues commonly underlying an application for security of costs as follows:- "It seems plain enough that the inability of the plaintiff company to pay the defendants' costs is a matter which not only opens the jurisdiction but also provides a substantial factor in the decision whether to exercise it. It is inherent in the whole concept of the section that the court is to have power to do what the company is likely to find difficulty in doing, namely, to order the company to provide security for the costs which ex hypothesi it is likely to be unable to pay. At the same time, the court must not allow the section to be used as an instrument of oppression, as by shutting out a small company from making a genuine claim against a large company. For this reason, Mars-Jones J was not prepared in the Parkinson case ( [1973] 2 All ER 273 at 280 , [1973] QB 609 at 617) to make an order for security for costs for more than the £1,500 that the master had ordered. As against that, the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I fully accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section".

33 Various authorities which have dealt with applications for security of costs have described the general approach as one whereby the party bringing the application has an evidentiary onus of establishing that the party against whom the application is brought will be unable to meet the reasonable costs if the other party succeeds in the proceedings proper. If this onus is discharged the Court's discretion as to whether or not to grant the application is triggered, and the evidentiary onus shifts to the party against whom the application is brought to satisfy the Court that its discretion should be exercised to refuse relief: Fiduciary Ltd and Others v Morningstar Research Pty Limited and Others at [35], [36]; Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744. 34 Discretionary factors which may be typically be taken into account in this jurisdiction will include:- (i) whether the proceedings have been brought bona fide and, are arguable or have reasonable prospects of success: Fiduciary Ltd at [37], [38]; (ii) if the proceedings are brought under s106, the fact that there must be a conciliation of the matter under s109 of the Act prior to any contested hearing: Kenoss Contractors Pty Limited at [15], [17]; (iii) delay in seeking an order for security for costs may a be relevant factor: Williamson v Service Corporation International (Australia) Pty Limited (2003) 130 IR 247 at [32]; (iv) whether if an order were to be made, it would shut a party out of relief in circumstances where that party's impecuniousity is itself a matter which the litigation may help to cure: Meribee Pastoral Industries Pty Limited and Others v Australian and New Zealand Banking Group Limited [1998] 193 CLR 502 at [26]

(see also other considerations relevant to the exercise of discretion set out in Meribee Pastoral Industries at [26]); and Knott v Signature Security Group Pty Limited [2001] 104 IR 84 at [28]. 35 Turning now to the question of impecuniosity, or more precisely, the applicant's ability to be able to pay a sum in the vicinity of $60,000.00 should the respondents succeed, I consider that this matter may be disposed of shortly. 36 The court does not have before it current financial records of the applicant which might assist in presenting a reliable or accurate account of the applicant's financial affairs. Instead, the Court has before it two sets of records, one an ASIC company extract which simply asserts that as at 18 February, 2004 the applicant was a corporation with one director, secretary and shareholder, being Mr Krauss, who held, at the date the record was extracted, one ordinary share to the value of $1.00. The second set of records spans a period of 1 July, 2001 until 30 June, 2003 and little reliance can be placed on them as representing the current state of the applicant's financial affairs. (One of the documents forming part of the second set of records, a profit and loss statement for the year ending 30 June, 2003, in any event shows that the applicant at that date had net assets of $60,196.76.) 37 The evidence of Mr Jauncey was that his office received a request for the applicant's 2004 financial records from the respondents, by facsimile, on the afternoon of the day before the hearing of the Notice of Motion for security of costs. Given the short period of time in which to conduct a search, Mr Jauncey and his staff were unable to locate the documents. The respondents, on the evidence, first became concerned about the state of the applicants financial affairs, and its capacity to meet the respondent's costs if such a contingency arises, in December, 2003: see ER6 annexed to the affidavit of Ms Raper. In the circumstances the respondents have had ample opportunity to obtain updated financial records, but have not. 38 In the result, the respondents have failed to discharge the evidentiary onus placed upon them to satisfy the Court of the applicant's inability to meet a costs order. 39 Having come to this conclusion it is unnecessary for me now to consider the other arguments made to the Court which involve the exercise of my discretion. 40 One of the arguments concerned the strength of the applicant's case on the appeal as a factor to be weighed in the exercise of the discretion whether or not to grant the application. The weight of the authorities appears to suggest that the appropriate test is whether a relevant party has an arguable case in the proceedings to which the application for security for costs relates. 41 In Williamson v Service Corporation International (Australia) Pty Limited the Full Bench of this Court (at[49]), observed that if a party's case was "extremely weak" or brought to, "...extremely vex... or as a form of retribution..." that such situations were entirely different from a situation where an applicant's case may be arguable or where there is no issue raised by a party as to the strength of the case. 42 In Melville v Craig Nolan & Associates Pty Ltd and Anor (2001) 54 NSWLR 82, Stein JA, at [27], looked at the significance of the point in time in which an application for security for costs is made, (namely, before the completion of the litigation) when the outcome cannot be known and the strength of a party's case cannot be assessed. Stein JA observed that all that can be known at that stage is that the litigation was or was not regularly commenced and whether it constituted an arguable case. 43 In the same judgment, Heydon JA (at [132]) recited factors against the making of a security order, as including a case which is arguable, regular on its face, bona fide and properly instituted. 44 In Fiduciary Ltd, Austin J assessed the merits of an application on the basis that the claims were bona fide and had reasonable prospects of success. His Honour added, in the context of noting that the claims were extensive, complicated, and, vigorously contested, that, "... it would be highly imprudent at this stage, to attempt to form any view as to the proportionate strength of the cases of the parties, even if the authorities permitted me to do so. In the present case, the merits ... are a neutral factor". 45 The above authorities lend support to the conclusion that an arguable case, as opposed to one that has strong prospects of success of the proceedings, is all that a party is required to establish as a factor in the exercise of the discretion whether to grant an application for security for costs. That this must be so, is reinforced by the fact that such applications are necessarily made before the completion of the litigation and therefore, before the merits of the case can be properly assessed and the facts known and tested. Orders

46 The Court makes the following orders in relation the respondent's application for security of costs:- 1. The application is refused; 2. Costs of the application are reserved. oooo000oooo

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