Manhattan (Asia) Limited v Dymocks Franchise Systems

1. Pursuant to s 56(4) of the Federal Court of Australia Act 1976 (Cth) and r 19.01(1)(c) of the Federal Court Rules 2011 (Cth) the substantive proceedings are dismissed.
2. Manhattan (Asia) Limited is to pay Dymocks Franchise Systems (China) Limited's costs as agreed or taxed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT 1 On 28 September 2016, the respondent, Dymocks Franchise Systems (China) Limited (DFS) filed an interlocutory application to dismiss these proceedings. The application was made under s 56(4) of the Federal Court of Australia Act 1976 (Cth) and r 19.01(1)(c) of the Federal Court Rules 2011 (Cth). 2 The applicant, Manhattan (Asia) Limited, commenced these proceedings on 19 October 2012, seeking remedies for alleged conduct by DFS in connection with a franchise operated by Manhattan in Hong Kong. On 27 October 2014 I delivered judgment in respect of an application filed by DFS to have the statement of claim struck out and for security for costs: see Manhattan (Asia) Limited v Dymocks Franchise Systems (China) Limited [2014] FCA 1143. 3 On 11 December 2014, I made orders that: (1) Manhattan pay into Court an initial sum of $58,000 as security for costs by 27 January 2015 and that it pay a further amount of $25,000 within 14 days after the date for the service of a reply; and (2) if default was made in making either payment, the proceedings be stayed until the default was rectified. 4 No payments have been made. 5 Directions hearings scheduled for 5 March 2015, 24 September 2015 and 4 March 2016 were vacated by consent on the basis that the proceedings were stayed and Mr Kevin Mann, Manhattan's director, was suffering from a health condition which prevented Manhattan from receiving advice or giving instructions. Orders made on 3 March 2016 set down the next directions hearing for 18 August 2016 and noted that DFS had given Manhattan notice of its intention to file an application to dismiss the proceedings. This was done by way of a letter dated 1 March 2016 sent by email from Mr Gavin Creighton of Colin Biggers & Paisley, DFS' lawyers, to Mr Peter Sanfilippo of The Franchise Lawyer, Manhattan's lawyers. 6 The directions hearing listed for 18 August 2016 was also vacated and consent orders dated 15 August 2016 provided for DFS to file any application to dismiss the proceedings by 14 September 2016. 7 On 21 September 2016, Mr Sanfilippo advised the Court (by email copied to DFS' lawyers) that DFS had agreed to extend the time before which it would file an application to dismiss the proceedings to 28 September 2016 to allow the parties more time "for dealings which may lead to the disposal of the proceedings". Mr Sanfilippo further advised that "due to developments affecting the directors" of Manhattan, he had become "uncertain as to the persons from whom [he] should be taking instructions on behalf of [Manhattan]". 8 On 28 September 2016, Mr Sanfilippo advised the following (as written): 1. Kevin Mann and Hilda Li, the directors of [Manhattan], have had bankruptcy orders made against them in Hong Kong. 2. Their trustee in bankruptcy has informed me that Mr Mann and Ms Li have a duty to resign as directors of [Manhattan] and should not provide any further instructions on behalf of [Manhattan]. Mr Mann and Ms Li have not yet resigned as directors. 3. The trustee has also informed me that it is not in a position to provide instructions, among other things because it has not exercised its right to become a shareholder or director of [Manhattan] and may choose never to do so. I have sought clarification from the trustee about who, if anyone, is now authorised to give instructions on behalf of [Manhattan] but have not received a response. 4. Mr Mann and Ms Li have indicated a willingness to deal with [Manhattan] in a manner that would have disposed of the proceedings (subject to the orders of the Court), but in light of the advice I have received from their trustee, I am not confident that they have the proper authority to give those instructions on behalf of [Manhattan]. 9 That same day, DFS filed the application to dismiss the proceedings. An affidavit of Mr Creighton sworn sometime in July 2016 was filed in support of the application. 10 On 25 October 2016 Mr Sanfilippo further advised (as written): As far as I can ascertain, there is no-one on behalf of [Manhattan] who can presently give instructions for [Manhattan]. The trustee in bankruptcy in Hong Kong of Kevin Mann and Hilda Li, the directors of [Manhattan], has indicated that he does not intend to take control of [Manhattan] and will therefore not be providing instructions. To the best of my understanding and advice, Mr Mann and Ms Li also cannot give instructions for [Manhattan] because they are bankrupt. In those circumstances, I do not believe I can conduct the matter for [Manhattan]. 11 The interlocutory application was listed for hearing on 8 November 2016. At his request, Mr Sanfilippo was excused from appearing. At the commencement of the hearing, there was no appearance by Manhattan. The matter was called outside the courtroom with no appearance. 12 Mr Creighton deposed, that based on enquiries he caused to be made to Mr Mark Buckland, general counsel and company secretary of DFS that: (1) DFS ceased business in Hong Kong in February 2015 and has had no presence there since then. DFS' defence would be largely dependent on the evidence of its former Hong Kong employees which would now be increasingly difficult to obtain. (2) Documentary evidence is difficult and costly to obtain. While some soft copy documents are available, hard copy documents are in storage in Hong Kong and retrieval would involve an employee travelling to Hong Kong to establish which documents may be relevant to the proceedings. Some documents may now be missing. (3) The existence of the proceedings has affected DFS' insurance premiums and the terms on which some insurance is available. It has also meant that the insurer has incurred legal costs and been required to keep the file for the insurance claim open while the proceedings remain on foot. 13 Section 56(4) of the FCA Act provides: If security, or further security, is not given in accordance with an order under this section, the Court or a Judge may order that the proceeding or appeal be dismissed. 14 Rule 19.01 relevantly provides: Application for an order for security for costs (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought. (3) The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. Note: Section 56 of the Act deals with security for costs. 15 Mr Cheshire SC, counsel for DFS, drew the Court's attention to the recent decision in Austcorp Project No. 20 Pty Limited v The Trust Co (PTAL) Limited, in the matter of Bellpac Pty Limited (Receivers and Managers Appointed) (in liq) (No 4) [2015] FCA 850 (Austcorp). At paragraph [21], Gleeson J canvassed relevant authorities in relation to the factors to be taken into account in exercising the discretion to dismiss proceedings where there has been a failure to comply with an order for security for costs. The factors identified, which I respectfully adopt, are: (1) The period that has elapsed since security was ordered; (2) The fact that the plaintiff has been on notice of the application for dismissal; (3) The seeming inability of the plaintiff to further fund the main proceedings; (4) The prejudice to the defendant; and (5) The position of the Court. 16 In this case, almost two years has elapsed since the orders were made in December 2014 for Manhattan to pay security for costs into Court by 27 January 2015. Those orders have not been complied with. Manhattan has been on notice of this application since 1 March 2016. Having regard to Mr Sanfilippo's evidence, it appears that Manhattan is incapable of funding the substantive proceedings. Further, Mr Cheshire tendered a company registry extract produced by GCS Risk in relation to Manhattan. The extract, marked as Exhibit 2, indicates that pursuant to s 744(3) of the Companies Ordinance of Hong Kong, notice was published on 2 September 2016 that, unless cause is shown to the contrary, at the end of three months (2 December 2016) Manhattan will be dissolved and its name will be struck from the Companies Register. Mr Creighton's evidence demonstrates the prejudice to DFS of the proceedings being protracted, namely, increased insurance premiums as well as the difficulties of obtaining evidence due to the effluxion of time and DFS' change of circumstance. 17 Mr Cheshire submitted that, although it is common to provide the applicant in the substantive proceedings with a further opportunity to pay security for costs within a specified period, failing which the proceedings will be dismissed, that is not the appropriate course in this case. Rather, the appropriate order is that the substantive proceedings be dismissed, having regard to the time which has elapsed since the security for costs order was first made (approximately 2 years) and the imminent de-registration of Manhattan. I accepted that submission. 18 I am satisfied that Manhattan has had ample opportunity to prosecute this action and adequate notice of this application. In all of the circumstances, I am satisfied that I should make an order under s 56(4) of the Federal Court of Australia Act and r 19.01(1)(c) of the Federal Court Rules dismissing the substantive proceedings and awarding costs in favour of DFS, as agreed or taxed. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.