Mignon Cakes Pty Ltd v Hiltide Pty Ltd

REASONS FOR JUDGMENT 1 This is an application brought by notice of motion filed on 17 December 2003 that pursuant to Section 1335 of the Corporations Act 2001 (Cth) and/or Order 28 of the Federal Court Rules, the applicant provide security for the respondents' costs within 14 days of the date of the relevant order and that the application be stayed pending compliance with order 1. Costs of the motion are also sought. 2 I propose to deal with the matter immediately and in fairly short form. I am able to do so confidently by reason of the full and careful preparation of evidence which has been undertaken by both solicitors and by reason of the careful submissions, in particular, if I may say so without disrespect to Mr Lever, that Mr White has given in writing. The principles of the awarding of security for costs are well known. A relevant consideration is the question as to whether the respondents' alleged conduct has caused the impecuniosity of the applicant. This is the assertion in this case and if the applicant's allegations are made out it will be proved. 3 The case concerns the sale of a business of some six shops and a bakery. The allegation that the applicant makes is that its principal, Mr Bottomley, had conversations with the principal of the respondents, that is, the third respondent, Mr Schlederer, in which Mr Schlederer misrepresented the takings of the business. The ultimate question as to whether the conduct of the respondent has caused the impecuniosity of the applicant is at the root of the liability of the case. I should add that I have been referring to respondents and applicant. I have referred to those parties and will continue to refer to those parties by reference to their position in the main suit, not the notice of motion. 4 This is not a case where there is admitted negligence and a causation question is involved or a legal question or the like. Therefore, while the assertion that the respondents' conduct has caused the impecuniosity of the applicant can be given some weight, on the evidence before me on the application I am content to conclude that the question of liability will be a live issue and one of substance. That is not to prejudge the issue. There has been no cross-examination, and Mr Bottomley has not given evidence. 5 By way of illustration of those propositions it is sufficient in these reasons to indicate that there does appear on the evidence to have been some real discussion between the parties as to the confidential nature of the financial figures by reason of payments and receipts in cash, an unwillingness of the respondent to adopt particular projections, and a number of apparent warnings in relation to the need to keep costs at a minimum. As I indicated earlier I have not formed any view, nonetheless, I should add that it would appear that the principals of the applicant, Mr Bottomley and his wife, were not people who had particular baking or retail food experience, which may or may not explain the conduct of the business in their hands. 6 Mr White emphasises that his case does not depend upon analysing the business in the new owners' hands. Rather, he says the third respondent misrepresented the takings and profitability of the business and the business would simply not have been purchased had these misrepresentations not been made. This is the central issue in the case. It is a factor to be considered, but it is a factor to be considered in the light that it is a highly contested and central issue. 7 There is no dispute that the applicant is not able to meet any order for costs that might be made. It is accepted that it is a company without capacity beyond support by those who stand behind it. There is no evidence before me and I cannot conclude that the awarding of an appropriate amount of security would stultify the action. The principals of the applicant, whether corporate or personal, have not indicated in evidence that an order for security as claimed would stultify their rights. Rather, they say in substance that because the respondent caused the impecuniosity of the corporate applicant security should not be given. 8 I should add that the applicant on the evidence before me appears to have been a corporate vehicle set up or purchased for the purpose of purchasing and running the business. 9 Mr Snow, the solicitor for the respondents, has given evidence as to his estimate of taxed or assessed costs to hearing. It was accepted by Mr Freidman, the solicitor for the applicant, that Mr Snow's estimate made on 9 December 2003 of some $86,746 to get this matter to a completed hearing was reasonable. I can only agree. A further $38,478 was estimated by Mr Snow in his affidavit of 13 February based on further discovery. It is contested by the applicant that this further sum is a reasonable estimate because of what is said to be the unnecessary nature of some of the interlocutory work, in particular, on discovery. 10 The total identified by Mr Snow in his evidence and in submissions is in the order of $125,000 to get this matter to a completed hearing on a taxed or assessed basis. Without the slightest disrespect to Mr Freidman, in the context that he has made as to the necessity for discovery, which may well be right, using my own experience, given that this will be probably a bitterly fought contest on credit which will probably last the best part of a week in Court involving the need for preparation of counsel and possibly experts against the background of the running of the business, I think the sum of $125,000 as an assessment for taxed or assessed costs for this case is not unreasonable. 11 That is not to reject Mr Freidman's objection to the necessity for the discovery, but rather I think the reality is that this case will cost $125,000 in taxed or assessed costs to run and complete. That does not mean, however, that that sum should be awarded by way of security. It may be in the fullness of time, having heard all the evidence, that the applicant's position is entirely vindicated. If that be the case, apart from the incurring of the costs of the security by way of any differential interest foregone, there will be no loss to the applicant. 12 There is no evidence before me from which I could conclude that the deprivation of the cost of the security, or of cash if that is what is put up, would seriously impede the party who might put it up. On the other hand, if it be the case that the respondents are entitled to a verdict, on the evidence before me, they will almost certainly be out of pocket with little recourse to the applicant. In one sense, that is in the nature of things in litigation. I have said on other occasions in slightly different contexts in terms that are not meant to be flippant, that litigation is unfortunately a costly, stressful but necessary evil. 13 On the evidence before me, I think there is a real issue posed as to what was said and the proper way to view the context in which it was said. I do not propose to descend into the minutiae of the evidence. I do not propose to order security for the whole amount of what I think is probably a reasonable estimate of the taxed costs. However, I do propose to award somewhat more than was made in open offer by the applicant's counsel, Mr White. Balancing all the issues, including the assertion that the respondents' conduct has caused the impecuniosity of the applicant as well as the issues that would be necessary to ventilate, I think it appropriate to order a sum of $75,000. 14 I do not desire that the parties expend further costs in returning for a further security. That is a matter for them in due course. At the moment, I would need to be persuaded that the matter had altered fairly dramatically in reasonable estimate to vary that order in the sum of $75,000. 15 I should add one further thing. There is an unexplored relationship in the cases between the orders for security and the principles expressed in Knight v FP Assets Ltd (1992) 174 CLR 178 and cases of that kind. Some relationship was drawn between the awarding of costs against those standing behind litigants and the seeking of security by some of the judges in Knight's case. 16 In the usual case it is necessary to seek security and if security has not been sought that will be a powerful reason why an order of the kind made or dealt with in Knight's case will not be made. There may in some circumstances be explanations which would overcome that earlier failure. See Boland v Yates Property Corporation Pty Ltd (1999) 74 ALR 209. Depending upon the nature of the findings in the case, the award of security in an application such as this should not be taken and the exercise of my discretion is such that I am not basing it on a preclusion of the respondents making application in due course by other means to make up any shortfall of costs beyond that which they have access to under the security. 17 It goes without saying, I am not making any judgment whatsoever about the result of the case. I have taken into account the assertion and the careful and responsible submissions by Mr White of the impecuniosity of the applicant caused by the conduct of the respondents, in particular, the third respondent. If indeed, however, an entirely different complexion was to be made of the facts as they finally turn out, the making of and the disposition of an application for security for costs may not preclude a supplementary application of the kind I identified. That, it also goes without saying, is not to prejudge what might be the complex legal issues arising on such an application should the facts be as I have impliedly hypothesised them. 18 In all those circumstances, I think it appropriate to order that the applicant provide security in the sum of $75,000 within 14 days after which date, should the security not be provided, the application will be stayed. 19 The respondents seek costs of the motion. Mr Snow, in a letter dated 18 November 2003, sought security but not in any particular amount. Mr Lever has indicated that no security was offered prior to today. Mr White does not contest that. Questions of security in circumstances such as this are not easy when the applicant is adamant that its impecuniosity is caused by the conduct of the respondents. If it be the case that the applicant had the worth and profitability of this business misrepresented to it I think that the interests of justice would not be served by necessarily requiring them to pay the costs of this contested motion. 20 However, it is clear that the applicant is not in any position whatsoever to pay the costs and no evidence of the inability of those standing behind the applicant has been brought forward, one assumes because it cannot be brought forward to show that the action would be stultified. In those circumstances, I think it would have been reasonable for the applicant to offer some security. In the end, however, I do not think justice would be done at the moment by awarding costs on the motion. I say that in large part because I think on the material before me this case is going to descend to a point of distinction based on who is telling the Court the truth. 21 In those circumstances, the appropriate choice seems to me to be either to reserve the question of costs, or to make the costs costs in the cause. Theoretically the former would be preferable, but I think, in particular lest I not hear the case, although I am the docket judge, I think it appropriate to make an order that costs be costs in the cause, and I so order. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.