MLW Technology Pty Ltd v May [2003] VSC 24

5. The proceeding concerns an agreement in writing dated 6 September 2001 entered into between MLW, IMT, ACT and the defendant, Roger Thomas May, who is a director of IMT and ACT. Pursuant to this agreement, MLW appointed IMT as its exclusive licensee to manufacture, market, distribute, sell and provide technical support throughout the world for a product known as the MIM 1000 mobile display terminal and for its software interface. The consideration for the grant of these licences was the promise that IMT, ACT and Mr May would procure the issue to MLW of 750,000 fully paid ordinary shares in a company incorporated in Florida USA, Advanced Communications Technologies Inc. By cl. 3.3 of this licence agreement, ACT and Mr May jointly and severally guaranteed that on a date twelve months after the date of the licence agreement, these shares in the US company would have an aggregate value of not less that $2.3M.

8. Clause 3.4 of the licence agreement went on to provide, broadly speaking, that if the value of the shares was on the anniversary date less than the guaranteed value, MLW might itself sell the shares on the market and recover the shortfall from the guarantors or it might require the guarantors themselves to purchase the shares for $2.3M.

11. In the period following the making of the licence agreement the following events occurred:

* On 21 December 2001, ACT granted a charge to Global Communications Technologies Pty Ltd ("Global") which charge was registered on 29 January 2002. Global is the principal shareholder in ACT and is controlled by Mr May.

* On 18 July 2002, the directors of ACT appointed Gideon Isaac Rathner to be its administrator pursuant to Part 5.3A of the Corporations Act.

* On 29 July 2002, Global appointed Kenneth Stewart Sellers and David Neil Lockwood receivers and managers of the assets of ACT pursuant to its debenture charge.

* On 27 August 2002, ACT entered into a deed which included an agreement whereby ACT agreed to sell to Asia InfoTech Pte Ltd its interests in the shares or the rights to shares in Australon Enterprises Pty Ltd ("Australon"). According to the recital to the deed, ACT's shareholding included 57.5% of the shares in Australon. The consideration for the sale was $6M. I should add that this sale is subject to the fulfilment of a number of conditions precedent. There is, I am told, litigation on foot in which ACT calls into question the fulfilment of these conditions.

* On 5 September 2002, it is alleged by MLW, the shares the subject of the guarantee were valued at $0.02 each, a total of only $1500.

* On 23 September 2002, pursuant to cl. 3.4.2 of the licence agreement, MLW required each of Mr May and ACT to purchase the shares for their guaranteed value. This requirement has not been complied with.

* On 17 October 2002, ACT entered into a Deed of Company Arrangement in accordance with a resolution of its creditors made on 26 September 2002 pursuant to s. 439A of the Corporations Act.

22. It was accepted that IMT is a $2 company without assets other than its entitlements under the licence agreement. In these circumstances it would be unable to meet an order for costs if it should be unsuccessful in the counterclaim.

25. With respect to ACT, Mr May has produced and verified in general terms a summary statement of its assets and liabilities showing an estimated surplus of assets in the sum of $55M.

28. This statement of assets was the subject of criticism by counsel on behalf of MLW and much of this was, to my mind, well founded. The assets of ACT are subject to a charge in favour of Global which is not mentioned in the statement. Counsel for ACT told me in response to this criticism that they were instructed by Global to undertake that its "security would not be put in priority to any claim for costs in the event of ACT being unsuccessful in this proceeding". Accordingly, this charge may be ignored for present purposes.

31. The principal asset in this statement, for which an original value of $33,105,600 is attributed, is ACT's holding of the Australon shares. If the sale of these shares to Asia InfoTech is unconditional, the asset position must be reduced by about $27M.

34. Criticism was also directed to the asset of $6.9M for accounts receivable for the sale of intellectual property. No details are provided. The administrator describes this item as a sundry debtor. The Receiver and Managers' in their report to ASIC dated 30 September 2002, exclude this item on the basis that it is commercially sensitive. For my present purposes, I shall do likewise.

37. The next asset item is intangible assets for which a value is attributed of $15M. This item is said to represent the transfer of these rights "subject to receipt of royalties as per DA". I do not altogether understand this qualification. Mr Yii in his affidavit sworn on 12 February 2003 points out that 65% of these royalties must, in any event, be paid into the fund established under the Deed of Company Arrangement for payment to creditors. Mr May in his answering affidavit of 14 February 2003 merely says that this valuation represents "the total cost" of the SpectruCell technology less money received from AusIndustry. This item is not given any value in the reports of the Administrator or the Receiver and Manager. I approach the value of this asset with considerable caution.

40. Finally, criticism was directed to the assertion in the statement that there were no liabilities "over and above those covered by the Deed of Company Arrangement". According to the accounts presented to the creditors by the administrator there was $15.5M owing to Global secured by the charge over the assets of ACT and a further $3.4M owing to unsecured creditors. Pursuant to the terms of the Deed of Company Arrangement the unsecured creditors' debts are barred but not extinguished. These creditors do not include Global's secured debt. Notwithstanding this, Mr May in paragraph 8(c) of his affidavit of 14 February 2003 says that Global has agreed to postpone its entitlement to the first $5M of the amounts owed to it and secured by the charge. I recall, too, the undertaking proffered to me on behalf of Global at the hearing.

43. Upon a general view of the position of ACT it appears to me that there is evidence which shows that its financial state depends upon the realisable value of assets whose value is uncertain, even problematical, and whose saleability is unknown. Furthermore, it seems very likely that, if it is unsuccessful in its counterclaim, it will be obliged to pay a further $2.3M to the counterclaimants. I am satisfied that there is reason to believe that ACT will be unable to satisfy a costs order if its counterclaim is unsuccessful.

47. Two points were made on behalf of ACT and IMT. First, that the counterclaim was essentially defensive in character and, further, that there is in this case a natural person who is also a defendant to counterclaim, namely Mr May. There was no evidence before me that Mr May himself would be unable to satisfy an order for costs. In order to assess these submissions it is necessary to analyse the contentions in this litigation.

50. The Claim of MLW is for specific performance by Mr May of the buy-back agreement of the US shares or for damages. By his defence, Mr May says that he is not liable under the guarantee clause of the licence agreement for a number of reasons:

* At the time of the licence agreement MLW did not own the product the subject of the licence agreement so that there was a failure of consideration or a repudiation of the agreement, which repudiation has been accepted so that the agreement has been terminated.

* MLW has repudiated the agreement by its failure to provide to IMT the whole of the source code items which it was obliged to provide and this repudiation has been accepted so that the agreement has been terminated.

* Mr May is discharged by cl. 3.6 of the licence agreement from the obligation to purchase the US shares.

* Mr May also seeks to set off his counterclaims for damages which exceed the amount sought against him.

57. The counterclaim is brought by Mr May and ACT and IMT against MLW and Mr Yii, a director of MLW. The claims made in the counterclaim may be summarised as follows:

* damages for breach of the licence agreement inasmuch as MLW failed to provide the whole of the source codes

* damages for breach of the licence agreement inasmuch as MLW failed to own the product at the time of the agreement

* damages for breach of the exclusivity terms of the licence agreement inasmuch as MLW or an associated company agreed to sell the product or a similar product to the Malaysian Royal Police

* damages for misleading and deceptive conduct inasmuch as MLW and Mr Yii made certain representations as to the market for the product

64. A number of general observations should be made about the defence and counterclaim. ACT and IMT were not sued by MLW. Late in 2002 they were joined as defendants upon the application of Mr May since they are affected by his allegations that the licence agreement has been terminated. No relief is sought against them by MLW.

67. The counterclaim, insofar as it concerns the allegations of breaches relied on in the defence as producing the repudiation, alleges these breaches as a foundation for a damages claim. This is tied into the defence by the set-off allegation made in paragraph 11N of the pleading. It may be inferred that the factual enquiry at trial into these allegations will be substantially the same in the defence as in the counterclaim.

70. Third, although the counterclaim is pleaded on behalf of all counterclaimants, the claims for damages as particularised appear to be brought for the benefit not of Mr May but of IMT which, as the trading vehicle, will have suffered the losses alleged in paragraph 27. Counsel for ACT sought to sweep this aside on the basis that the losses of IMT would affect the value of its shares held by Mr May. But this is not as the case is pleaded. In any event, the ASC report shows that, of the two shares in IMT, one is held by a company, Data Link Technologies Pty Ltd, and the identity of the other shareholder is not disclosed. This is not a case where ACT and IMT are joined as counterclaimants in support of Mr May's counterclaim; rather the converse. Their counterclaim and in particular IMT's counterclaim could properly stand on their own without him[1].

73. There is substantial overlap between the factual matters alleged in the defence and those in the counterclaim except for the claim based on the breach of the exclusivity provision and that based on false representations. In his letter of 15 January 2003, Nathan Kuperholz, the solicitor for MLW, expresses the opinion, which I have no reason to doubt, that the trial of the counterclaim would occupy at least six days. He estimates that the cost of his clients in defence of the counterclaim as being in the region of $134,750. He does not in this estimate attempt to disentangle the time and cost involved in dealing with the overlapping claims compared with those peculiar to the counterclaim. It may well be that this is not possible.

76. In considering these matters I have had the benefit of the discussion of Ormiston J in Interwest Ltd v Tricontinental Corporation Ltd[2]. There, his Honour started from the position that the court should approach the application of discretion with no predisposition one way or the other. The fact of the likely inability of ACT and IMT to satisfy a costs order in favour of AWL and Mr Yii is a significant factor.

79. The significance of the fact that Mr May is also a counterclaimant making much the same claims as ACT and IMT is considerably diminished by the fact that the damages which are sought by them represent compensation for a loss which is not his. One is left with the impression that he has been included as a counterclaimant simply to fortify his defence of the MLW claim.

82. This, then, brings me to the fact that the claim in respect of which security is sought is in truth a counterclaim. I note in passing the experience of Ormiston J which is recorded in the Interwest case that counterclaimants are rarely required to provide security. This is because security will not be ordered against parties who are in fact defending a claim, for they are involuntary litigants.

85. In a given case, it may be difficult to identify the counterclaimant as in truth a defending party. In Visco v Minter[3] Ormrod J put the test this way:

"... where a defendant counter-attacks on the same front on which he is being attacked by the plaintiff, it will be regarded as a defensive manoeuvre. But if he opens a counter-attack on a different front, even to relieve pressure on the front attacked by the plaintiff, he is in danger of an order for security for costs depending on the court's assessment of the position in each case."

T. Sloyan & Sons (Buildings) Ltd v Brothers of Christian Instruction[4] was a case where a counterclaimant was ordered to provide security in substance for those matters which were more than a defence by way of set-off against the plaintiff's claim.

90. In Sydmar Pty Ltd v Statewise Developments Pty Ltd[5], a critical factor was identified as being whether the cross action covered substantially the same factual area as the claim.

93. To my mind, the claims of ACT and IMT in their counterclaim are, in essence, not to be characterised as defensive of the claims made against Mr May. Adopting the imagery of Ormrod J, they are properly to be seen as a counter offensive on a different front. Accordingly, I will make an order for security. I will, however, treat the factual issues common to the claim and the counterclaim as representing about 50% of the time and cost involved in preparing and presenting the cases. Accepting the estimates of Mr Kuperholz, which would have the cost of the defendants to counterclaim up to the end of the first day of the trial at $87,450, I will fix the amount of security to that time in the sum of $44,000.

96. I will therefore order that ACT and IMT provide security for the costs of the defendants to counterclaim in the sum of $44,000. I will hear counsel further as to the form of security and the time for its provision.

I certify that this and the 7 preceding pages are a true copy of the reasons for judgment of Byrne J of the Supreme Court of Victoria delivered on 21 February 2003.

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[1] Compare Harpur v Ariadne Australia Ltd (1984) 8 ACLR 835.

[2] (1991) 5 ACSR 621 at 624-6.

[3] [1969] 2 All ER 714 at 716.

[4] [1974] 3 All ER 715.

[5] (1987) 11 ACLR 616.