Green Camel Pty Ltd v Urban Ecological Systems Ltd

Relevant principles

1. There was no dispute between the parties as to the power to order security or as to the principles to be applied on an application for security for costs, whether that be under s 1335 of the Corporations Act or under r 42.21(1)(d) of the UCPR.
2. Section 1335(1) of the Corporations Act 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 all proceedings until the security is given.
3. The word "plaintiff" includes a cross-claimant (see Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 306; Winnote Pty Ltd (in liq) v Page (2005) 64 NSWLR 244; [2005] NSWCA 362 at [18]).
4. Rule 42.21(1)(d) of the UCPR provides, relevantly: (1) If, in any proceedings, it appears to the court on the application of a defendant: … (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, … … the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given.
5. "Plaintiff" in r 42.21(1)(d) includes a person by whom a cross-claim is made (s 3(1) of the Civil Procedure Act 2005 (NSW)).
6. The threshold question to be determined is whether there is reason to believe that, relevantly, UESL will be unable to pay Green Camel's costs of defending the cross-claim if it were to be ordered to do so. That requires the formation of an opinion as to the financial position of UESL as it will be at the time of judgment and immediately thereafter.
7. Green Camel accepts that the onus is on it, as an applicant for security, to establish that there is reason to believe that UESL will be unable to pay the costs of the litigation if unsuccessful (see Cornelius v Global Medical Solutions Australia Pty Ltd; Farrag v Global Medical Solutions Australia Pty Ltd (2014) 98 ACSR 301; [2014] NSWCA 65 at [17], [56]-[59] (Cornelius v Global Medical)).
8. As to whether there is a rational basis for such a belief, or a real risk of inability to pay the opposing party's costs, this has been described as setting a "low threshold" and involving an "undemanding test" (Living Spring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [15]-[16]; Cornelius v Global Medical at [57]-[60]; In the Matter of Felan's Fisheries Pty Limited [2016] NSWSC 1351 at [10]). It has been said that the Court should adopt a "practical commonsense approach" to the examination of the financial affairs of the corporation (Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [28]).
9. Once the threshold question is satisfied, the next issue to be considered is whether, in the exercise of the Court's discretion, security should be granted and in that regard there is an evidentiary onus on the part of the party from whom security is sought to establish a reason why security should not be granted (see Wollongong City Council (at [30]) and Cornelius v Global Medical (at [18]-[20])).
10. A number of discretionary considerations were identified as relevant in this context by Beazley JA (as her Honour then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] 56 FCR 189 (at 196-198)). Those matters are now largely reflected in amendments to r 42.21 of the UCPR which came into effect on 9 August 2013.

Threshold question

1. With the above in mind, I turn to the threshold question.
2. Green Camel points to the most recent audited accounts for UESL for the financial year ended 30 June 2016 in which the independent auditors qualified their opinion as follows: Due to the nature of the investee entity being a start up company, it was not possible to obtain reliable information as to its estimated future cashflows. We were unable to obtain sufficient appropriate audit evidence as to the valuation and accuracy of the investment's carrying value. Consequently, we were unable to determine whether any adjustment to the carrying value was necessary. … … we draw attention to note 1(t) of the financial report which indicates the existence of a material uncertainty that may cast doubt about the company's ability to continue as a going concern and therefore, the company may be unable to realise its assets and discharge its liabilities in the normal course of its business.
3. The note to which reference was there made was as follows: (t) Going concern The financial statements have been prepared on a going concern basis where it is assumed that the company can meet all debts as they become due and payable. As is common for companies involved in research, development and marketing of a new product, the ability to continue as a going concern is dependent upon its ability to raise additional capital funds and successfully market its product. There is inherent uncertainty, in the absence of these factors, that the company will be able to continue as a going concern and it may be required to realise its assets and extinguish its liabilities other than in the normal course of business and at amounts different from those stated in the financial statements.
4. The audited accounts disclose that for the year ended 30 June 2016, UESL made a loss before income tax of $567,688 compared to the previous year's loss of $126,388. Included in its total assets of $1,150,004 were non-current assets of $1,000,002 (representing its minority shareholding in Green Camel shown at cost). In that regard, note 7 to the accounts gives the reason for this investment being shown at cost as that "[t]he company is unable to significantly influence [sic] as the balance of the shares are held by interest associated with the other former joint venturer [SteelCo]". UESL's total liabilities (all being current liabilities) are shown in the accounts at $1,130,530.
5. UESL's accounts record, as an investment that is not recognised for accounting purposes, a 40% holding in a Chinese company known as Shanghai ELAN Agriculture Technology LLC. The investment is not recognised "as it does not meet the criteria under accounting standards for asset recognition" because "it is not probable that any future economic benefit will flow to the company" and "the value cannot be measurable with reliability".
6. As at 30 June 2016 there was therefore a deficit of approximately $980,528 when UESL's current assets are compared with its current liabilities and a minor surplus (of $19,474) if non-current assets are included.
7. As to the period since 30 June 2016, a profit and loss statement for the period from July to December 2016 discloses negative net income of ($1,500). The recent bank account statements for UESL show positive balances of $5,977 and $118,000 respectively, the latter being largely referable to deposits made after the filing of the present application (to which I will refer in due course).
8. Green Camel submits that the non-current assets of UESL should be disregarded for the purposes of the threshold question because the assets are not of sufficient liquidity to enable satisfaction of a costs order within a reasonable period of time (referring in particular to what was said in Felan's Fisheries) and because of the inherent uncertainty as to the value of the investment. It argues that there is a real risk that any sale of UESL's minority shares in Green Camel within the time necessary to satisfy a costs order would be at a price deeply discounted to the theoretical value of the shares.
9. Green Camel also notes that the risk of UESL's inability to pay is compounded by the legal costs UESL will likely incur in prosecuting the cross-claim, referring to Hurworth Nominees Pty Ltd v ANZ Banking Group [2005] NSWSC 1360 (White J, as his Honour then was), and to the reference thereto in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at ([9]).
10. UESL concedes that it is in a position of a "start-up" company and accepts that it is clear that "money is tight" in that the values of its assets and liabilities are similar. However, it submits that it has put itself in a position where it is generating an income stream from operations in China and points to the evidence of its director, Mr Bodlovich, as to his belief that the company will continue to build upon that income stream (see Mr Bodlovich's affidavit at [2]-[23]).
11. Objection was taken by Green Camel to much of the content of Mr Bodlovich's affidavit, variously on the ground that it expressed opinions or that it stated conclusions based on unstated facts or assumptions. Other than parts which I rejected, I have read those parts of Mr Bodlovich's affidavit to which objection was taken as statements of opinion or belief and/or as a submission, subject of course to weight.
12. Mr Bodlovich has deposed to the receipt of payments (noted in UESL's accounts) in sums of $63,290 on 13 July 2016 and $49,492.35 on 9 September 2016. Those payments are said to be from the Chinese joint venture vehicle to which reference is made in the accounts. They are recorded in bank statements annexed to Mr Bodlovich's affidavit (see [8]) though there is no further information as to the nature of the payments or the regularity of any further expected payments of this kind. Mr Bodlovich deposed to his expectation that a further payment of an amount of US$48,000 would be received in payment of an invoice that had been issued and I was informed from the bar table (though there was no evidence of this), that this payment has since been received.
13. At [10] of his affidavit, which again I read as a statement of his belief, Mr Bodlovich deposed that he expected the cash flow from the Chinese joint venture to continue and build. He also deposed to anticipated contracts that he expected UESL to enter into within about the next three months (which counsel for UESL submitted should be read as relating to negotiations that were on foot in relation to those anticipated contracts). Further, he deposed to UESL currently being in the process, with one of its Chinese joint venture partners, of raising US$1,000,000 "for the purposes of protecting its IP and building greater project delivery capability" and to his expectation that UESL would receive a research and development tax incentive rebate from the Federal Government in around November this year in the amount of at least $50,000. He deposed (as what might be charitably described as a statement of the obvious and which I again read subject to relevance and weight), that UESL could also raise funds by selling shares in itself.
14. Assuming, in the absence of an indication as to when the matter might be ready for hearing, that a concluded hearing might lead to judgment within, say, 12-18 months, the question is whether on the evidence referred to, there is reason to believe UESL will be unable to meet an adverse costs order in relation to its cross claim. I have formed the opinion that there is.
15. I am satisfied that, notwithstanding the expectations (or what may be seen as the optimism) of Mr Bodlovich as to the continuation and building up of the income stream from its Chinese operations, weight should be accorded to the qualifications made by the auditors in the preparation of UESL's most recent accounts as to the inherent uncertainty of the ability of the company to continue as a going concern (note (t) set out earlier) and as to the possibility that if it were required to realise its assets this might be other than in the normal course of business.
16. Green Camel has established that there is a rational basis on which to believe that UESL will be unable, or there is a real risk that it will be unable, to pay the costs of Green Camel if the latter is successful in defending the cross-claim. It is therefore necessary to consider the relevant discretionary factors going to whether security should be ordered.

Discretionary factors

1. The parties addressed a number of the non-exhaustive considerations set out in r 42.21(1A) of the UCPR.
2. First, the prospects of success and genuineness of the proceedings (r 42.21(1A)(a)-(b)). UESL notes that the likelihood that the plaintiff (or cross-claimant) would succeed is a matter that can properly be considered in security for costs applications, referring to KP Cable (at [197]) and Bryan v Fencott and Associates Pty Ltd v Eretta Pty Ltd (1978) 16 FCR 497 (at 514) (Fencott). It accepts that, as a general rule, where a claim is prima facie regular on its face and discloses a cause of action then, in the absence of evidence to the contrary, the Court should proceed on the basis that the claim is bona fide and has reasonable prospects of success (KP Cable at [197]).
3. UESL submits, however, that this Court can go further than that. It submits that Green Camel's case on the cross-claim is implausible and maintains that UESL has a strong likelihood of success. It argues that it is implausible that, having knowledge of UESL's licensed Food Production System, Green Camel could have developed "from the ground up" its own functionally equivalent system between July 2014 and September 2015 that did not fall within the expansive definition of Food Production System while also making good its obligation to use best endeavours to make the UESL system operational. UESL also submits that the claim in relation to representations is inconsistent with the purpose of the Licence Agreement including that the Food Production System be commercialised.
4. For its part, Green Camel does not suggest the cross-claim is not bona fide or is a sham (noting that in Street v Luna Park Sydney Pty Ltd [2006] NSWSC 1317 at [20] it was said that this factor does not involve a detailed evaluation of the prospects of success of the claim in question).
5. I do not consider that I am in a position, based on the pleadings or the material to which I was taken on this application, to form a view as to the strength of UESL's claim. I am not, for example, able to make any assessment as to the likelihood of Green Camel being able to have developed its own food production system from scratch in the relevant period; nor as to whether the development of that system would amount to an Enhancement as defined or involves the use of confidential information of UESL. To make such an assessment it would be necessary to have a better understanding of the respective technologies and what their development entailed. I simply proceed on the basis that on its face the cross-claim is bona fide and not a sham. This is therefore a neutral factor on the question whether security should be ordered.
6. The next factor listed in r 42.21 is the impecuniosity of, here, the cross-claimant (r 42.21(1A)(c)). Green Camel notes that this not only enlivens the Court's discretion under s 1335 of the Corporations Act but that it has been recognised as a substantial factor favouring the exercise of the discretion to order security (referring to Idoport Pty Ltd v National Australia Bank Limited [2002] NSWCA 271 at [40] (Mason P); Tyneside Property Management Pty Limited v Hammersmith Management Pty Ltd [2013] NSWCA 404 at [18] (Sackville AJA)).
7. As already noted, UESL itself accepts that, as a start up company, money is tight. It is not suggested that this is attributable to any conduct on the part of Green Camel (see r 4.21(1A)(d)). Therefore, the impecuniosity factor is one that weighs in favour of the grant of security.
8. The next factor is whether UESL, as cross-claimant, is effectively in the position of a defendant (r 42.21(1A)(e)). UESL maintains that it is. It points to what was said by Ormiston J in Interwest Ltd v Tricontinental Corporation Ltd (1991) 5 ACSR 621 (at 627) to the effect that proceedings have been characterised as defensive where they are either directly resisting proceedings already brought or seeking to halt self-help procedures. UESL refers to his Honour's observation (that in those circumstances): It would seem that to require security would be oppressive, or at least would provide serious grounds for refusing to make an order. At the least it is a factor to be considered in the exercise of the discretion. In particular, it is a basis for adducing the amount of security ordered to a sum relating to the cost of those claims which cannot be characterised as defensive.
9. UESL placed much emphasis in oral submissions on the characterisation of its cross-claim as one seeking to halt "self-help" procedures, namely Green Camel's development of its own Green Camel Technology. Reference was made to what was said in Nick v Taylor [1893] 1 QB 560 at 562 (per Lord Escher); 563 (per Lopez LJ); and 563 (per Lindlay LJ). Reference was also made to examples of what may be characterised as defensive proceedings to halt self-help procedures (see KP Cable at [199]-[202]); John Arnold's Surf Shop (in liq) v Heller Factors Pty Ltd [1979] 22 SASR 20; (1979) 4 ACLR 492 and Interwest).
10. UESL submits that it needs to fight its cross-claim directly to resist the proceeding already brought by Green Camel and Green Camel's self-help measures (which it argues Green Camel employed as a consequence of its assertion that the licensed technology is not capable of operating). It submits that there is no clear delineation of issues between the claim and cross-claim, rather that there is a coincidence of both factual and legal issues and says that, as such, many of the same issues will have to be litigated one way or another even if UESL's cross-claim were to be stayed. It submits that an important coincidence of issues is whether Green Camel is using the licenced Food Production System or has created its own new system. It says that this issue must be considered not only in the cross-claim but also in considering its defence. UESL also argues that the distinctions sought to be drawn by Green Camel between its claim and UESL's cross-claim are artificial. It maintains that, by reason of the repudiation claim in Green Camel's defence to UESL's cross-claim, UESL "is still defending itself in the Cross-Claim Reply: it is defending its rights under the IP Licence Agreement against Green Camel invoking the self-help procedure of purporting to terminate the agreement".
11. UESL referred to what was said by Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd [1987] 11 ACLR 616 (at 626-627), namely that the Court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross claim covering substantially the same factual areas proceeds. (Pausing there, there was no submission by UESL that it would be unable to comply with an order for the provision of security such that this would stifle the cross-claim.)
12. Green Camel, on the other hand, has identified various issues that it maintains arise uniquely on the cross-claim (see the affidavit of Mr Jeffrey Siddle, solicitor for Green Camel, sworn 2 December 2016 at [12]). It argues that the proceedings brought by Green Camel raise the issue whether UESL engaged in misleading and deceptive conduct and acted in breach of the collateral contract by licensing a technological system which did not work, whereas the cross-claim raises the separate issue of whether Green Camel has developed a new alternative system which UESL is entitled to exploit under the terms of the Licence Agreement. Mr Siddle further deposes that the issues he has identified as arising uniquely on the cross-claim (see [12] of his affidavit) will contribute significantly to the evidence, time and cost of the proceedings (see [13]-[18] of his affidavit).
13. In oral submissions, Counsel for UESL appeared to accept that parts of the cross-claim raised claims separate from those that will necessarily be raised in Green Camel's claim (i.e., the alleged breaches relating to the making of enhancements in relation to the Food Production System from about 2014 - see T 33.47; T34.38) but argued that the key allegation as to successful use by Green Camel of the Food Production System would require consideration of any Enhancements to that system as part of the matters to be litigated in its defence of Green Camel's claim.
14. In Sydmar (at 302), Smart J considered that the defendant/cross-claimant was, in the words of Legoe J in John Arnolds Surf, "one seeking to go out for the recovery from the opposition by attack". That description is equally apposite in the current case. The cross-claim for damages in respect of the alleged breaches of the obligations under the Licence Agreement is likely to involve an exercise in comparing the respective technologies and assessing the development of the Green Camel Technology (including any incorporation of confidential information therein), as well as the loss claimed by UESL to have been suffered as a result of the latter. I am not persuaded that those matters would necessarily be raised (or would need to be explored to the same extent) in determining Green Camel's claim in isolation of the cross-claim.
15. This is a factor which must be balanced against all the others, but in my opinion it weighs in favour of the grant of security.
16. There was no submission that there had been delay on the part of Green Camel in making its application for security for costs (the factor referred to in r 42 (1A)(i)). Nor was there reliance on the factors in r 42.21(1A)(g)-(h).
17. The next factor is that raised in r 42.21(1A)(j), namely as to the costs of the cross-claim. Mr Siddle has estimated that, having regard to the complexities and additional issues raised by the cross-claim which he believes will require further lay and expert evidence, there will be at least two days added to the final hearing and Green Camel will incur an approximate $231,500 in additional solicitor/client costs by reference to its defence of the cross-claim. UESL did not press its initial suggestion that expert evidence would not be required.
18. The fact that a party is likely to incur significant legal costs in defending the claim, and will be unprotected if no order for security is made, is a consideration for the making of an order for security (referring to Porter v Gordian Runoff Limited [2004] NSWCA 171 at [13]-[32]). In the circumstances there is no reason not to accept Mr Siddle's estimate as to additional time and costs as being a genuine one and on its face it appears not unreasonable. This is a factor that weighs in favour of the grant of security.
19. Balancing all of the above, I am of the view that the discretionary matters referred to above point in favour of security for costs being made in this case.

Quantum

1. Finally, the quantum and manner of provision of security must be considered. It is acknowledged by UESL that where the application for security for costs has been made relevantly promptly security may include both future and past costs (Fencott). In the present case there was no delay in the seeking of security for costs and the amount claimed for costs already incurred is relatively small in the overall scheme of things. Therefore allowance should be made for those past costs.
2. Mr Siddle has deposed to the costs already incurred in relation to the cross-claim and to the estimated future costs of defending the cross-claim and has itemised those by reference to the tasks involved and the hourly rates of the lawyers and counsel who will be involved in those tasks. He has estimated that the quantum of any costs order in Green Camel's favour (working on the assumption that between 65% and 75% of its solicitor client costs would be recoverable on an assessment of costs) as being in the order of $179,000 to $194,000, excluding GST. The midpoint of the range is $186,500 and that is the amount that it is submitted the Court should order for security.
3. UESL has relied upon an affidavit of its solicitor, Mr Adam Atkins, in which Mr Atkins has deposed to his own estimate as to the cost of the cross-claim (expressed in general terms) and has criticised various of the costings referred to in Mr Siddle's affidavit.
4. The criticisms made in relation to Mr Siddle's estimate of costs relate to the following: the fact that the estimate included an amount of $1,825 to prepare and file a notice to produce dated 8 December 2016 (Atkins at [8]); that costs in connection with the preparation and filing of the defence were incurred in the sum of $12,876 when the defence was 8 pages in length and the cross-claim to what it responded was 11 pages in length; and the fact that the estimate includes estimated costs to completion of trial.
5. While I accept that the Court may fix the amount of security based on a general estimate (Allstate Life Insurance v ANZ Banking Group Limited (1995) 134 ALR 187; [1995] FCA 1778), in the present case I am assisted by the detailed estimates and costings provided by Mr Siddle. The criticism of Mr Atkins as to particular components of the costings, even if accepted, does not point to any great discrepancy such as might taint the reliability of the overall estimate. Moreover, I do not accept that one may reliably gauge the amount of time that may reasonably be expended in, say, preparation of a defence to cross-claim merely by reference to the number of pages it comprises (or a notice to produce by reference to the number of paragraphs it contains).
6. I consider that Mr Siddle's estimates are not unreasonable. The estimated range he gives as to the proportion of costs that would be recoverable on a party/party basis (65%-75%) is accepted by UESL. I am of the opinion that fixing the security by reference to the mid-point of the range is fair in the circumstances.
7. UESL submitted that, in the event that it were ordered to provide security, it would be appropriate that security be ordered in tranches and, in particular, that it be limited at this stage to the pre-trial component (having regard to the possibility that the matter might resolve before trial), referring in that regard to Pacific Acceptance Corporation Limited v Forsyth (No 2) (1967) 85 WN Pt 1 (NSW) 715 (Moffitt J)). I accept that submission.
8. I am therefore of the view that security should be awarded both for the past costs of preparing the defence to cross-claim and the notice to produce and for future costs up to the completion of the evidence and commencement of the trial. Based on the schedules prepared by Mr Siddle, the total estimate for costs and disbursements to that point is $166,691. The disbursements (including Counsel's fees) included in that amount are $31,080. Mr Siddle has estimated that up to 100% would be recoverable in respect of disbursements.
9. Therefore, excluding the amount referrable to disbursements, the costs to completion of the evidence and commencement of the trial would be $135,611. 65% of that amount would be $88,147.15; 75% would be $101,708.25; and the midpoint of those two figures is $94,927.70. Adding back the amount for disbursements produces the figure, on my calculations, of $126,007.70.
10. Finally, UESL notes that security may take such form as the Court considers will provide adequate protection to the defendant and argues that if ordered security should be in the form of a bank guarantee (referring to Estates Property Investment Corporate Limited v Pooley [1975] 3 ACLR 256).
11. There was no suggestion by Green Camel that provision of an unconditional bank guarantee would not be appropriate by way of security for its costs and that is what I propose to order. If any difficulty arises in relation to agreement as to the form of bank guarantee proffered the parties will have liberty to relist the matter before me for the order to be varied.
12. Accordingly, I order as follows: 1. Pursuant to rule 42.21(1) of the Uniform Civil Procedure Rules (NSW) and s 1335(1) of the Corporations Act 2001 (Cth), order the cross-claimant, Urban Ecological Systems Ltd, to provide security within 28 days for the cross-defendant's costs of and incidental to the cross-claim up to the completion of its evidence and commencement of the trial in the amount of $126,007.70, such security to be provided by way of an unconditional bank guarantee in a form acceptable to the cross-defendant. 2. In the event that the security ordered in order 1 above is not provided within the time specified, order that the proceedings on the cross-claim be stayed until further order. 3. Grant the cross-defendant liberty to apply on 3 days' notice for further security to be provided for the period from commencement of the hearing or to increase the amount of security ordered in order 1 or in the event that there is disagreement as to the acceptability of the unconditional bank guarantee provided pursuant to order 1. 4. Order the cross-claimant to pay the cross-defendant's costs of and incidental to this notice of motion.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 April 2017