Olivaylle Pty Ltd (ACN 080 670 640) v Flottweg GMBH & Co KGAA

REASONS FOR JUDGMENT 1 This is the second application that has been made by the respondent, Flottweg GMBH & Co KGAA, for security for costs in this matter. In February of this year I dismissed the first application: see Olivaylle Pty Ltd (ACN 080 670 640) v Flottweg GMBH & Co KGAA (ABN 95 101 547 424) [2007] FCA 56. I incorporate by reference those reasons into the present ones. It is unnecessary for present purposes that I reiterate the background facts referred to on the first application as also the statement of applicable principles which are not now in controversy. The only additional matter to which I would make reference is that in addition to relying upon s 1335 of the Corporations Act 2001 (Cth) the respondent also invokes the court's jurisdiction to order security under s 56 of the Federal Court of Australia Act 1976 (Cth). 2 The basis for the renewed application for security is said to lie in what is revealed by Olivaylle's financial statements from 30 June 2000 to 31 December 2006 which it is said provide credible evidence establishing that there is reason to believe there is a real chance that in events the occurrence of which are reasonably possible, Olivaylle will be unable to pay Flottweg's costs. Those statements were provided to Flottweg pursuant to discovery made on 18 April 2007. 3 A summary of the profit and loss statements for Olivaylle have been put in evidence and they show that in each of the financial years from 30 June 2000 through to 30 June 2006 there are losses ranging from $500,000 to just over $1.5 million and in the final six month period from 30 June 2006 to 31 December 2006 there is a loss of $1.8 million. The summary of the balance sheets for the same period disclose that at 2000 there was a deficiency of $42,000 which had increased by 2001 to a deficiency of $1.3 million. By 31 December 2006 there was a net deficiency of $7.5 million. 4 As I indicated in my previous reasons, Flottweg is a company with only 1,000 issued shares. It has unsecured term loans totalling almost $13.5 million. It is to be inferred from this state of affairs that the company which is a start up company developing an olive oil processing business on almost 2,000 acres of land in northern Victoria, is relying upon debt financing rather than equity financing. I emphasise that the loan is unsecured. The clear inference to be drawn is that the continuing capacity of the company both to carry on its business and to meet its obligations depends upon the continuing support of its debt financier(s). 5 The case now put by the respondent is that, if they are unsuccessful in defending this matter, the likely costs order in its favour would be in the order of $500,000 and estimates to that end have been tendered. It is said that there is simply no reason to believe that whoever is propping up the company at the moment will continue to do so if such an order were to be made. 6 For Olivaylle it is said that its financial position as revealed in the discovery documents does not indicate impecuniosity, rather what it demonstrates is a substantial investment in capital asset improvements to freehold real property where it conducts its business. It is apparent on the evidence that the company has spent millions of dollars in the development of the property and that it only commenced producing olive oil in 2005. Olivaylle goes on to say that if there were anything irregular, unusual or approaching financial difficulty in its position, it would be expected that some arrangement may have been made to change the basis of the ownership or indeed to sell off capital asset. This has not occurred. There is no evidence that those supporting the company financially have such concern for their investment as to take steps to limit their exposure by, for example, seeking security over the property. Indeed, it is said the profit and loss accounts demonstrate that the company has so significantly invested in capital improvements and equipment that accounting for depreciation is now amongst its most substantial balance sheets negatives. 7 The Olivaylle position put shortly is simply that nothing has changed since I dismissed the first application for security in February, save that more information has been provided in the discovery process which reveals both an operating company with a substantial capital asset which is unsecured and that there is no proper basis for any reason to believe that it may possibly not continue to meet its liabilities, be it in respect of a costs order or otherwise, if and when they fall due. 8 For my own part, I am not satisfied that the case is an appropriate one in which to make an order for security. There is no reasonable ground for apprehending that, even in the event that Olivaylle is unsuccessful in prosecuting this matter, its financiers might walk away from their unsecured more than $13 million investment and allow the company to go into liquidation. What the financial statements reveal is that the company is emerging from a developmental stage requiring significant investment to be made, and was moving into an anticipated production period in which the subject matter of the proceedings was to play an important part in the generation of an income stream for the company. I do not consider that there is anything in the financial circumstances of the company and particularly in the loan arrangements which does other than demonstrate confidence in that investment and the likelihood of continuing support by the debt financiers for this venture. 9 I am in consequence unprepared to make the order for security that is sought. I would, though, acknowledge that those who stand behind this company do have a real interest in the litigation and are likely to be beneficiaries of it should it be successfully prosecuted. It may well be the case that, if at the end of the day Olivaylle is unsuccessful and a costs order is to be made, a case may be able to be made for a third party costs order. I express no view on the appropriateness or otherwise of such an order. 10 The order of the Court will be that the notice of motion of 14 September 2007 be dismissed with costs. I certify that the preceding ten (10) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finn.