J H Lever & Co Pty Ltd v Maniotis

REASONS FOR JUDGMENT 1 This matter was resolved by order made on 21 March 2005, that the proceedings be dismissed. Issues as to the cost of the proceedings were subsequently addressed, both at first instance: J H Lever & Co Pty Ltd v Maniotis [2005] FCA 252 and on appeal: Maniotis v J H Lever & Co Pty Ltd [2006] FCAFC 7. 2 In the course of the matter proceeding to trial, on 10 November 2004 an order was made restraining the respondents from dealing with certain fragrances or recipes for any fragrances, including in particular the fragrances derived from 32 specified recipes. That injunctive order was granted upon the undertaking of the applicant as to damages in the usual terms, and was supported by a bank guarantee in the sum of $30,000 proffered to the respondents by the applicant. 3 The applicant subsequently went into liquidation. 4 The respondents have now applied by motion for an order that the applicant pay to the respondents $30,000 pursuant to the bank guarantee provided by the Commonwealth Bank of Australia (the bank) No G00209000 dated 3 December 2004, in support of the undertaking as to damages for the injunction which was subsequently discharged. 5 The guarantee given by the bank is proffered to the respondents collectively (called "Favouree" in the guarantee) and is headed Bank Guarantee, Security Deposit Guarantee. It refers to a security deposit by the applicant (called "Customer" in the guarantee). 6 The guarantee then reads: At the request of the abovementioned Customer and in consideration of the abovementioned Favouree (which term shall mean all of the parties named above as Favouree collectively or any one or more of them, as the case may be, in favour of whom an order for payment is made in the Proceedings) dispensing with the lodgement by the Customer of the Security Deposit pursuant to the orders made by Justice Mansfield on 10 and 12 November 2004 ("the Orders") in Federal Court of Australia Action Number S803 of 2003 ("the Proceedings") the Commonwealth Bank of Australia ABN 48 123 123 124 ("Bank") undertakes to pay to the Favouree on written demand any sum which may from time to time be demanded by the Favouree to a maximum aggregate sum of Thirty thousand dollars only ($30,000.00) (Amount of Security Deposit). Any demand made under this guarantee must be accompanied by an original sealed order of the Court made in the Proceedings requiring the Customer to pay the amount demanded to the Favouree. 7 As the applicant is in liquidation, it is necessary for the respondents to be given leave to proceed: s 471B of the Corporations Act 2001 (Cth) (the Act). An oral application for leave to proceed was made. The liquidator of the applicant has elected not to participate in the proceedings, either to oppose the granting of leave to proceed against the applicant, or as to the substantial order which is sought. As the order sought would require payment of the sum of $30,000 by the bank, rather than by the applicant, and the bank has elected to make no submissions, and is of the view that it should honour the guarantee in full and will otherwise comply with its obligations in respect of the amount of the guarantee, it seems to me to be appropriate to grant leave to maintain the present application against the applicant. The funds the applicant has available to its creditors will not be diminished by the bank giving effect to the guarantee. To the extent to which the applicant incurred cost in procuring the guarantee, that cost has already been incurred and would not be recoverable in the liquidation. There is, therefore, no disadvantage to the applicant in granting the leave sought. 8 As is apparent from the guarantee, the payment by the bank to the respondents on the guarantee must be accompanied by a sealed order of the Court in the proceeding requiring the applicant to pay the amount demanded to the respondents (the Favouree). The guarantee provides that it is to continue until one of several things occur, in essence, indicating that the guarantee to support the undertaking for security in respect of the injunction is no longer necessary. I am satisfied that none of those things have occurred so that the guarantee continues to be in force. 9 It is, however, necessary to be satisfied that the applicant should be ordered to pay on the undertaking as to damages a sum of not less than $30,000. The respondents, I assume, are otherwise prepared to undertake not to prove in the winding up of the applicant for that indebtedness even though it is quantifying an indebtedness which occurred as a result of an injunction which was in force between 10 November 2004 and 21 March 2005. 10 The evidence as to the loss of the respondents by reason of the injunction is contained in the report of Ms Hillary Orr, a chartered accountant, dated 22 April 2009. I am reluctant to act on that report without further information. The second respondent has assessed its losses as a result of the injunction at $75,951. Ms Orr has had access to its workings in support of that assessment. She has expressed the view that its estimates are fair and reasonable, and well in excess of $30,000. She says the losses are based on the level of trading of the second respondent at November 2004 "in the preliminary stages of establishing a new business", and that its turnover has increased substantially since then so that the estimates of losses are most likely understated. She has accepted explanations provided to her in relation to the operations of the business and the manner in which the losses arise. The documentary material she has referred to is a schedule prepared by the second respondent summarising its losses. It is a one page document. She has also had access to documents recording sales and gross profit on sales made in respect of fragrances and recipes for fragrances prior to and subsequent to the injunction. The second respondent started a new division manufacturing fragrances and recipes only in 2003. She has also had discussions with Mr Mark Pitcher of the second respondent in relation to the assessment of damages. There is a brief discussion on each of the five heads of loss making up a total of $75,951. They are as follows: Cost of replacement of fragrances $ 9,058 Loss of profits from trading foregone during injunction $ 7,671 Profits foregone $ 9,930 Loss of profits from Mor Cosmetics $17,790 Loss from fragrances no longer sold $31,502 Grand total $75,951 11 The cost of replacement of fragrances ($9,058) relates to six of the 32 fragrances referred to in the injunction because they were "live", that is, had been developed and were being sold. Ms Orr says that sales at the time were not significant as the fragrance division of Taste Master had only just been established and was at the start of the growth period. She said Taste Master had to develop new products to replace the live fragrances already in production. It is implicit that six new fragrances were developed. She has applied an hourly rate based upon its records both in the perfumery hours and for the "GCMS" operations to reach a cost for each of the fragrances. She has taken the number of hours involved in researching a new product to develop a fragrance as a mid-range between 22 and 30 hours, said to be the appropriate hours. She has not seen records indicating that the specified hours were required. There is an additional "consumables" cost which I assume is an estimate as it is a rounded figure. It is not verified. It is not clear why the six new fragrances had to be developed. Nor is it clear why, after the injunction was lifted, the six "live" fragrances could not again be marketed, so the loss would be the loss in them being withheld from the market for a time. 12 The loss of profits from trading foregone during the injunction is quantified at $7,671. It relates to only five fragrances. It is not explained why there are only five fragrances. The fragrances from which sales could not be made do not clearly reconcile to the fragrances which were required to be replaced. Only two of those five fragrances were sold again after the injunction was discharged. It is not explained why. The claims for loss of trading extend well beyond the period of the injunction. It is not explained why. There is no accounting for the sale of the replacement fragrances developed apparently from the time of the injunction, and which presumably were able to be sold, and continued to be sold, after the injunction was discharged. The formula by which the proceeds were calculated as into profits is not apparent. 13 The third item is profits foregone ($9,930). It refers to "potential profits foregone from the fragrances that had not been developed, or may have been developed but for the injunction". It assumes a loss of profits of $1,300 for eight fragrances (out of a total of 26 injuncted), presumably apart from the six which were "live", discounted to represent an 80% success rate. Ms Orr says that, as the estimate only makes provision for eight of the 26 fragrances and the loss per fragrance is consistent with the loss per fragrance of the fragrances developed, the estimate is modest. The claim includes expenses rather than profit foregone. It is not clear that any of those fragrances would have been developed during the period of the injunction, and whether they were subsequently developed. There is no apparent reason why they could not have been subsequently developed. In that event, the injunction may have delayed their introduction to the market. It is not clear that other fragrances were not developed during that time. At most, it would seem that losses of net profit on fragrances not developed, in the period of 130 days during which the injunction ran, would have been incurred. 14 The final two claims are for loss of profits from Mor Cosmetics ($17,790) and loss of profits from fragrances no longer sold ($31,502). The information provided to Ms Orr was that, prior to the injunction, Mor Cosmetics purchased the live fragrances that were subject to the injunction (presumably six). Once the injunction was in place, Mor Cosmetics then sourced those fragrances from other suppliers. After the injunction was lifted, Ms Orr was told that Mor Cosmetics continued to deal with the second respondent on a reduced scale and last did so on 24 October 2005. She has accepted as reasonable the averaging of two ways of assessing loss of profits. One is to estimate the loss as a factor of sales and the other as a factor of gross profit. She has had regard to the sales and gross profits of fragrances used by Mor Cosmetics in the 12 months prior to the injunction. The gross profit over that period was apparently $6,804, and the "average life" three years to produce a total of $20,412. The annual sales to that entity over that same period were $10,113, multiplied by 1.5. The loss is the average of those two figures. I do not regard that as a measure of loss. It may be a means of quantifying value for sale purposes. Gross profit is not a measure of loss. The net profit is not disclosed. Sales are not a measure of loss. Clearly, if Mor Cosmetics transfers its business to another entity by reason of the injunction (there is no evidence from Mor Cosmetics on the topic), the injunction would have led to some losses. It is not clear that that is the case, and at least not significantly so, after the injunction was lifted. It is not clear what trading there was after the injunction was lifted, or why ultimately there was a loss of business of that customer. It is not clear whether some other customer was able to replace the sales to that customer, and the extent to which costs were otherwise wasted or utilised. 15 The final claim is for loss of profits from fragrances no longer sold ($31,502). There is a loss of products, sales and gross profit on sales, during the period 5 November 2003 to 4 November 2004 for fragrances sold to customers, excluding Mor Cosmetics, that were no longer sold after the injunction was granted. Ms Orr says those fragrances are different from those in respect of which there is a loss of profits from trading foregone during the injunction. It is not clear how that can be. In any event, the methodology used is the same as the loss for Mor Cosmetics with the same weakness. 16 Clearly, there has been some loss incurred by the respondents as a result of the injunction which was in force between 10 November 2004 and 21 March 2005. In circumstances where the applicant has elected to make no submissions on the respondents' application, and the bank is willing to honour the guarantee, it seems appropriate to allow the application notwithstanding the concerns I have expressed about the quality of the evidence otherwise adduced on the motion. In effect, the potentially interested parties are either acquiescent in the order sought or do not regard their potential interests as inconsistent with the orders sought. The respondents' application of 20 July 2009 is allowed and the applicant is to pay to the respondents $30,000 to the extent that the guarantee meets that sum. 17 There should be no order for costs of the motion as the applicant is in liquidation, and the leave given does not extend to recover any amount directly from it. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield.