Plaintiff v Defendant

2 In support of its application, Polytrade relies on the affidavits of its solicitor, Robert Auricchio, sworn 26 February, 28 February and 12 April 2013.

3 The plaintiff ("Colmax"), in resisting the application relies on the affidavits of its solicitor, Ashley Brygel, sworn 5 April, 9 April and 23 April 2013.

4 The plaintiff carries on the business of recycling glass and on-selling it to commercial consumers of glass fines. Its plants receive recycled glass from companies operating kerbside collections and grind the glass into fines for on-supply.

5 The proceeding was commenced by writ on 20 July 2012. The claim is for breach of an agreement made in July 2009 for Polytrade to supply Colmax with glass for recycling. The relief claimed includes, in addition to damages for breach of contract, interlocutory and permanent injunctions restraining Polytrade from breaching the agreement and a mandatory injunction requiring it to pay a certain amount per tonne of glass per month.

6 On the same day as the Writ was issued, Colmax applied by summons for an interlocutory mandatory injunction that Polytrade supply not less than the contracted tonnage of glass per month, and related relief. Affidavits were filed on each side. The application came before Ferguson J and on 23 July 2012 it was dismissed.

7 On 6 August 2012, Polytrade filed its appearance. On 17 August 2012, Polytrade filed its defence and counterclaim in which it admitted the bulk of the terms of the agreement to supply glass to Colmax, denied any breach, but said that if it had been in breach that was because it had been prevented from performing its part by the breaches of agreement by Colmax. It counterclaimed for breach and claimed damages of over

$1.2 million. The Reply and defence to counterclaim by Colmax is dated 7 December 2012.

8 The proceeding was admitted to the Technology Engineering Construction List of the Court on 14 September 2012, and orders were made by Vickery J for a mediation and other steps, including the filing and service of a Reply and Defence to Counterclaim and other matters.

9 The mediation was apparently held on 23 October 2012 without any successful resolution of the disputes between the parties. Nevertheless, the affidavit material filed by both parties reveals that following the mediation the parties continued to trade pursuant to the agreement, and that the supply of glass by Polytrade to Colmax was continuing at the time of the hearing of the application for security.[1]

10 Polytrade first sought security for its costs by letter from its solicitors dated 13 February 2013. In doing so the letter pointed to the fact that Colmax had been served with 5 applications for winding up (which in the later search are revealed to have been in 2011 and the first 6 months of 2012) with a further application (the 6th) on 23 November 2012, that Polytrade "required" Colmax's financial statements for the past 3 years to determine whether Colmax could meet Polytrade's costs in the event Colmax was unsuccessful and if that material is not provided the solicitor had instructions to apply for security.

11 On 15 February 2013, at a hearing before Vickery J, counsel for Polytrade informed his Honour that it would apply for security for costs.[2]

12 After some intermediate exchange of letters, on 27 February 2013 Colmax's solicitors responded to Polytrade's solicitors' letter of 13 February 2013. Amongst other things, the letter pointed out that the applications for winding up was publicly available information and any application for security ought to have been made more promptly, that the principals of the parties are in communication on a day to day basis in relation to their ongoing business activities, that the proceeding was at an advanced stage, that the provision of security would "stymie" the continuation of the proceeding and cause Colmax serious injustice, that Polytrade had a counterclaim for over $1.2 million and that the requested security of $150,000 (including the trial) was outrageous.

13 The Polytrade summons for security for its costs came on before me on 8 April 2013 and was adjourned to 16 April 2013 to enable the defendant to file and serve an affidavit or affidavits in response. On 16 April 2013, the application was again adjourned (to

30 April 2013), after being part heard, so as to enable Colmax to submit further affidavit material. The hearing of the application was completed on 30 April 2013.

14 Rule 62.02 of the Supreme Court (General Civil Procedure) Rules 2005 provides, so far as relevant:

62.02 When security for costs may be ordered

(1) Where -

...

(b) the plaintiff is a corporation or (not being a plaintiff who sues in a representative capacity) sues, not for the plaintiff's own benefit, but for the benefit of some other person, and there is reason to believe that the plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so;

...

(f) under any Act the Court may require security for costs -

the Court may, on the application of a defendant, order that the plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given.

15 Section 1335 of the Corporations Act 2001 relevantly provides:

(1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is a reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

16 The first question is whether the threshold condition for the exercise of the power is satisfied, that is, whether there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful. That jurisdictional condition must be satisfied before the discretionary power to order security for costs is enlivened: Livingspring Pty Ltd v Kliger Partners.[3]

17 It is well established that the proper approach to the matter is that the Court has an unfettered discretion, but on the footing that the very fact that the jurisdiction has been enlivened in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion.[4]

18 If the Court has jurisdiction to order security, the burden rests on the defendant to persuade the Court that an order for security should be made.[5]

19 In exercising the discretion whether to order a company to give security for costs the court must carry out a balancing exercise. It must weigh the injustice to the plaintiff if it is prevented from pursuing a proper claim by an order for security, against the injustice to the defendant if no security is ordered and at trial the plaintiff's claim fails and the defendant is unable to recover costs from the plaintiff: See the observations of Smithers J in Tradestock Pty Ltd v TNT (Management) Pty Ltd.[6] The Court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, but also it will be concerned not to be so reluctant to order security that an impecunious company can use its inability to pay costs to put unfair pressure on the defendant: Keary Developments Ltd v Tarmac Construction Ltd.[7]

20 The various factors that have been found to be potentially relevant in the exercise of the discretion were summarised many years ago, compendiously, by Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd.[8] So far as relevant to the present application, those factors include:

(a) The plaintiff's prospects of success: Whether the plaintiff's claim is made bona fide and has reasonable prospects of success. In this regard, the authorities make the following points:

(i) As a general rule, where a claim is prima facie regular on its face and discloses a cause of action, in the absence of evidence to the contrary, the court should proceed on the basis that the claim is bona fide with reasonable prospects of success;[9]

(ii) Assessing the plaintiff's prospects of success is not really a practicable test in any case of reasonable complexity: Interwest Ltd v Tricontinental Corp Ltd;[10] Although it will ordinarily not be practicable to reach any clear view about the merits of the plaintiff's claim, that is not to say that the merits are always irrelevant (unless totally lacking) or that the bona fides of the claim may be disregarded: Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd;[11]

(iii) The court is not obliged to consider at length the merits of the claim, and to do so would ordinarily be a waste of resources: Impex Pty Ltd v Crowner Products Ltd (1994) 13 ACSR 440 (QSC);

(b) Plaintiff's impecuniosity caused by defendant: Whether the plaintiff's lack of funds has been caused or contributed to by the conduct of the defendant in relation to the transaction the subject of the claim: Sir Lindsay Parkinson & Co Ltd v Triplan Ltd.[12] In this regard, the authorities make the following points:

(i) The plaintiff carries the burden of persuasion on the question whether the conduct of the defendant was the cause of the plaintiff's financial difficulties: BPM Pty Ltd v HPM Pty Ltd;[13]

(ii) There must be a solid foundation for that conclusion: Right Home Improvements International Pty Ltd v Imperial Alarm Screens (Aust) Pty Ltd,[14] referred to in Sandl Trading Pty Ltd v North American Oil Co;[15] .

(iii) The plaintiff carries the onus of satisfying the court on the basis of admissible evidence, see Ninan v St George Bank Ltd;[16]

(c) Plaintiff's proceeding merely defensive: Whether the plaintiff's proceeding is merely a defence against "self-help" measures taken by the defendant: Heller Factors Pty Ltd v John Arnold's Surf Shop Pty Ltd (in liq);[17] Sydmar Pty Ltd v Statewise Developments Pty Ltd;[18] Interwest Ltd v Tricontinental Corp Ltd.[19] Each case must be looked at to see whether in substance the claim set up is by way of defence such that the plaintiff's claims are properly characterised as defensive;

(d) Security order would stultify pursuit of legitimate claim: Whether the making of the order would unduly stultify the ability of the plaintiff to pursue an arguable case legitimately instituted: See MA Productions Pty Ltd v Austarama Television Pty Ltd;[20] Drumdurno Pty Ltd v Braham;[21] Ariss v Express Interiors Pty Ltd (in liq);[22] Excelsior Run Pty Ltd (in liq) v Nelius Pty Ltd;[23]

(e) Contribution by shareholders or creditors to security ordered: The extent to which it is reasonable to expect shareholders or creditors (or beneficiaries, if the company is a trustee) to make funds available to satisfy any order for security which is made: National Bank of New Zealand Ltd v Donald Export Trading Ltd;[24] Pacific Acceptance Corp Ltd (t/as Flack & Flack) v Forsyth (No 2);[25] Drumdurno Pty Ltd v Braham;[26] Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd;[27]

(f) Delay in applying for security: Delay in applying for security may be ground for refusing to order security. The company, which can be assumed to be in financial difficulties, is entitled to know its position in relation to security at the outset, and before it embarks to any real extent on its litigation, and certainly before it makes a substantial financial commitment toward litigating the claim. See Buckley v Bennell Design & Construction Pty Ltd;[28] Smail v Burton; Re Insurance Assocs Pty Ltd (in liq);[29]

(g) Defendant's cross-claim raising same facts: where the defendant has raised a cross-claim, whether substantially the same facts are likely to be canvassed in determining the claim and cross-claim. The court would ordinarily seek to avoid the situation where the claim is stayed because of the inability of the plaintiff to provide security while the defendant's cross-claim covering the same factual areas proceeds: Sydmar Pty Ltd v Statewise Developments Pty Ltd.[30]

21 In Livingspring Pty Ltd v Kliger Partners the Court of Appeal said:[31]

There are, of course, particular discretionary matters of which the plaintiff must necessarily have carriage. If, for example, the plaintiff corporation asserts that an order for security would impose on it such a financial burden as would stultify the litigation, the plaintiff must establish the facts which make good that assertion. We respectfully adopt what the Full Federal Court said in this regard in Bell v Wholesale Co Pty Ltd v Gates Export Corporation (No 2):

In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means. It is not for a party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

The same would be true of a contention that the plaintiff's impecuniosity was caused by the defendant.

22 In Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd,[32] Winneke P and Phillips JA, made the following observations:[33]

It is thus apparent that the justification for the statutory rule is that the defendant, not being a voluntary litigant, deserves to be protected from the consequences of limited liability. Those who seek to conduct their businesses through limited liability companies expect to receive the benefits which such liability attracts. It seems to us a necessary corollary that they should be prepared to accept the strictures imposed by the section [s 1335] if the company embarks upon litigation: Buckley v Bennell Design and Constructions Pty. Ltd. (1974) 1 ACLR 301 at 304 (NSW Court of Appeal).

It has not been, and could not be, suggested that the section compels the court to order security against an impecunious corporate plaintiff. The court is given an unfettered discretion to do what is justly required by the circumstances of each case. Street CJ made this point in Buckley when he said, at 305:

It seems to me that the discretion could properly be regarded as ordinarily exercisable so as to protect a defendant sued by an impecunious company, but that, if the court in any case takes the view that this protection should not be afforded to the defendant, it has an unlimited and unrestricted discretion to give effect to such view without having to look for special circumstances.

(a) That there is reason to believe that Colmax has insufficient assets in Victoria to pay the costs of Polytrade if ordered to do so. Equally, he submitted, there is by credible testimony reason to believe that Colmax will be unable to pay the costs of Polytrade if Polytrade is successful in its defence. In particular, he pointed to the fact that Colmax has been the subject of five winding up applications filed between 17 November 2011 and 22 November 2012, and had owed seven separate creditors the total sum of $603,283.27. These facts provided reason to believe that Colmax will be unable to pay Polytrade's costs of the proceeding, if ordered to do so. The Court has, therefore, jurisdiction to order security;

(b) That the contentions made by Colmax were, in summary:

(i) its financial position has been caused by Polytrade's conduct (affidavit of Ashley Brygel sworn 5 April 2013 at [5]);

(ii) an order for security will stultify its claim against Polytrade (exhibit "AB-3" to the affidavit of Ashley Brygel sworn 5 April 2013); and

(iii) it has the capacity to pay "any " costs order made against it (affidavit of Ashley Brygel sworn 5 April 2013 at [9]-[10],

and that Colmax's contentions are inherently inconsistent. In particular, Colmax cannot reasonably assert (b) and (c) above;

(c) If Colmax is impecunious, it has not discharged the burden of proving that its impecuniosity was caused by the conduct of Polytrade. There is no "solid foundation" (as per Right Home) for concluding that Polytrade caused Colmax's impecuniosity;

(d) Equally, Colmax has not discharged the burden of proving that an order for security will impose on it such a financial burden that it will stultify a bona fide claim. Firstly, Colmax has not provided any "real evidence" as to its financial position. Secondly, Colmax has not established that those behind the litigation are also without means (as per Livingspring);

(e) Moreover, in the circumstances set out above, the Court ought not be satisfied that Colmax has the capacity to, and/or would, pay any costs order made against it. Even if Colmax does have net assets, comprising plant and equipment, worth $1.8 million, that provides Polytrade with no security or other assurance whatsoever;

(f) That security should be ordered in the sum of $150,000. An experienced solicitor estimates Polytrade's party party costs of the proceeding at between $131,400 and $245,300 (affidavit of Robert Auricchio sworn 26 February 2013 at [7]-[9]; exhibit "TA-1"; affidavit of Robert Auricchio sworn 12 April 2013 at [13]. Colmax instituted this proceeding in the Supreme Court of Victoria and claims permanent injunctions and damages in the sum of $2,161,802 (Further and Better Particulars of Statement of Claim dated 4 February 2013). The trial is estimated to take five days. $150,000 is a reasonable estimate of Polytrade's party party costs of defending the proceeding.

(a) That the claim by Comax was made bone fide. She made detailed submissions in this regard and pointed to deficiencies in the response made by Polytrade and the issues she raised in this regard "cast a shadow of doubt over the defence", to employ the language of Gibbs J (as he then was) in Ritter v North Side Enterprises;[34]

(b) That the application was made oppressively, in the circumstances that Polytrade continues to trade with Colmax, but not in accordance with their agreement, and continues to fail to make timely payments for deliveries as required under the agreement;

(c) That Colmax has net assets of $1.8 million against which any order for costs may be enforced, it is solvent and continues to trade, including trading with Polytrade. Accordingly, notwithstanding that on the material filed by Polytrade, it may appear from creditable testimony that there is a reason to believe that Colmax will be unable to pay the costs of Polytrade if it is successful in its defence, that initial position is answered and rebutted;

(d) That Polytrade's defence and counterclaim put it in the position of an 'actor', in that its counterclaim was not merely defensive. It was submitted that if any security for costs is ordered it should be reduced so as to relate only to those claims of Polytrade that are truly defensive. She referred to a number of authorities relevant in this regard, and in particular to Interwest Ltd v Tricontinental Corporation Ltd,[35] where Ormiston J (as he then was) said:

The authorities on the effect of counterclaims and cross-claims are by no means satisfactory. In my experience counterclaimants are rarely required to provide security and the existence of a counterclaim frequently dissuades defendants from pursuing an application for security, but there is no doubt that the jurisdiction exists to grant security and is "unfettered" in the sense described. Perhaps it may be said that the authorities support the proposition that security will only ordinarily be ordered against a party who is in substance the plaintiff, and that an order ought not to be made against parties who are defending themselves and thus forced to litigate: cf Accidental & Marine Insurance Co v Mercati (1866) 3 Eq 200. That would appear to be an overstatement, but the fact that a plaintiff, or counterclaimant, has instituted essentially defensive proceedings, must be a significant factor in the exercise of the court's discretion. ... In Sydmar's case a number of propositions were stated by Smart J which were referred to in the course of argument, three of which are relevant to the present case (see at 626-7):

3. Whether the plaintiff's proceedings are merely a defence against 'self-help' measures taken by the defendants, Heller Factors, supra,...

7. Further in Heller Factors at 496 Mitchell J said that a consideration of whether the company in question is a true plaintiff or not '... is one matter which may be placed in the scales in making the decision as to which way the discretion should be exercised'.

8. Whether substantially the same facts are likely to be canvassed in determining the action and cross- action. The court would be slow to allow a situation where the action is stayed because of the inability to provide security but the cross-action covering substantially the same factual area proceeds.

(e) That Polytrade has delayed in its application for security and it has not given a reasonable explanation for that delay. It has known of the matters opening the jurisdiction for a claim for security prior to filing its defence and counterclaim. That Colmax has incurred substantial liability for costs in the litigation which would not have been done if the application had been made in a timely way;

(f) That Polytrade's defence and counterclaim will take considerable time at trial and arises from the same substratum of facts as the claim;

(g) That the provision of security 'may' stultify the prosecution of its claim.

25 In addition to the matters included in the background material referred to above, the evidence established the following matters:

(a) The affidavits filed in support of the application by Polytrade's solicitor, Mr Robert Auricchio, showed the following:

(i) Colmax has a paid up capital of $120;[36]

(ii) Colmax owns no real estate in Victoria;[37]

(iii) Colmax has been the subject of five winding up applications filed between 17 November 2011 and 22 November 2012,[38] having owed seven separate creditors the total sum of $603,283.27;[39] and

(iv) despite a number of requests,[40] Colmax had refused to provide any real evidence of its capacity to pay Polytrade's costs until the last affidavit of Mr Brygel sworn on 23 April 2013;

(v) a search of the Personal Properties Securities Register 'indicated' that Colmax's plant and equipment is under charge to the National Australia Bank.

(b) The affidavits of Colmax's solicitor, Mr Ashley Brygel, deposed (largely on information and belief) that:

(i) Colmax's claim for damages according to its further and better particulars was approximately $2.2 million and that the losses were continuing due to Polytrade's ongoing breaches of the agreement;

(ii) Colmax had net equity of at least $1.8 million and that he was "instructed by Mr Harkins that this equity is more than sufficient to meet any costs order against Colmax, but that Colmax objected to providing commercially sensitive financial information to Polytrade because it is a competitor in the industry, as well as a supplier, and may use the information to Colmax's detriment;

(iii) that Polytrade was aware as early as 31 July 2012 of the winding up applications against Colmax and that the most recent application was dismissed on 27 March 2013;

(iv) that Polytrade was indebted to Colmax as at 5 April 2013 for trading under the agreement in the sum of about $185,000;

(v) that the costs claimed by Polytrade were excessive and a reasonable estimate was $20,000, having regard to the fact that most interlocutory steps other than discovery were complete.

26 In his supplementary affidavit of 23 April 2013, Mr Brygel produced what he was informed by Mr Hawkins, a director of Colmax, and believed, was an unaudited balance sheet of Colmax as at March 2013 showing net assets of $1,815,183.33.

(a) current assets made up of cash on hand ($16,896.18), trade debtors ($1,92,477.91), other current assets and inventory, totalling $1,651,653.37;

(b) fixed assets of $9,672,977.38 (comprising plant and equipment);

(c) current liabilities of $3,928,215.18 (comprising some significant amounts, including, accounts payable of $3,036,590.05, ATO liabilities of $736,892.09, and payroll liabilities of $89,987.76); and

(d) long term liabilities of $5,581,232.24 (including inter company loans of $2,853,266.08).

28 The significance of this balance sheet is that apart from showing a positive balance of over $1.8 million, as deposed to by Mr Brygel, the current position was seriously negative, in that current assets over current liabilities shows a deficit of $2,276,561.81, and, moreover, the make up of the current liabilities is concerning because of the large sums due to creditors and the ATO. On the other hand, there was a large amount owing to Colmax by trade debtors.

29 Until the production of the evidence, such as it was, of the unaudited balance sheet of Colmax, there was by credible testimony reason to believe that Colmax will be unable to pay the costs of Polytrade if Polytrade is successful in its defence. That is the prima facie position.

30 The evidence of the unaudited balance sheet is problematic, first, because it is unaudited and in the nature of mid-year management accounts, lacking in detail or notes. Secondly, because on close analysis it shows, in my view, a serious cash flow problem. The result is that the prima facie position is not adequately rebutted. True it is that there are net assets of over $1.8 million, but the make up of those assets is such that the Court could not be satisfied of the ability of Colmax to trade without the support of its bankers or creditors, or both.

31 I therefore turn to the discretionary considerations.

32 It seems to me that Colmax's claim is bone fide and has reasonable prospects of success. As with most applications of this kind, at this stage it is not practicable to reach a clear view about the merits of the claims made by Colmax, nor as to the strength of the counterclaims, so as to conclude that one side has the better claim or not. This matter, notwithstanding the quite extensive submissions made by Counsel for Colmax as to the merits of the claim and counterclaim, is at best neutral.

33 It was pointed out by Counsel for Polytrade that the assertion that Colmax's financial position has been caused by Polytrade's conduct seemed to depend on statements made in the affidavit of Ashley Brygel sworn 5 April 2013 at [5]. However, that evidence did not, in terms, relate to this ground. It concerned the ongoing breaches of the Agreement and the outstanding losses and moneys owed by Polytrade to Colmax. If it is taken as directed to establishing that the impecuniosity of Colmax was caused by Polytrade, on its own I would agree with the submission of Mr Frenkel that it does not provide a 'solid foundation' for so concluding.

34 The unaudited balance sheet, which is an exhibit to the affidavit of Mr Brygel sworn 23 April 2013, was not made available to the Court, or the representatives of Polytrade, until 30 April 2013, when an application for an order that it be kept confidential (and inspection be limited to counsel and the solicitor for Polytrade) was made and refused.[41]

35 It may therefore be that Counsel for Polytrade had insufficient time to undertake a close analysis of that balance sheet. I have done so, however, and note that the amounts apparently owing by Polytrade to Colmax as claimed (about $2.2 million) would, if recovered, substantially eliminate the deficiency of current assets over liabilities. That points to a much firmer foundation for the submission that the parlous financial position of Colmax was caused by Polytrade than existed when Mr Frenkel first made his submission.

36 I conclude that there is some foundation for the submission that Colmax's financial position has been caused by Polytrade's conduct. However, against that there needs to be brought to account the fact of Polytrade's counterclaim, which may significantly reduce the recovery by Colmax, and, what-is-more, demonstrate that Colmax has been the author, at least in part, of its own impecuniosity. Accordingly, I give this factor some, but little, weight, in the balancing exercise I must perform.

37 Despite the submissions in this regard, it seems to me that the proceeding is not merely defensive in nature, although the counterclaim of Polytrade does put Colmax in the position of a defendant in substance. The nature of the claims made by Colmax, and the fact of the interlocutory injunction application, points against the claim being defensive in the sense used in this area. Further, the claim by Colmax - if proven - will overtop the counterclaim presently raised by Polytrade.

Security order would stultify pursuit of legitimate claim

38 There is a limited basis established that an order would stultify the prosecution of the claim. When the matter was first argued, as Mr Frenkel pointed out, the submission that it may stultify the action was inconsistent with the submission that there are sufficient assets to meet any costs order in favour of Polytrade.

39 When the application was further argued after Colmax's solicitor had filed a further affidavit disclosing the unaudited balance sheet of Colmax, the submission was repeated. Having now, however, had time to undertake a closer analysis of the unaudited balance sheet and what its detail reveals, it seems to me that the serious deficiency of current assets over current liabilities reveals what may be a serious cash flow problem. This is a problem borne out, perhaps, by the several winding up applications made over the past 18 months.

40 Those matters cast a different light on the submission by Ms Kinda that an order may stultify the prosecution of the claims by Colmax. The net assets do indeed seem sufficient, but the cash flow shortage, as it appears to me, has the result that there is more force to the submission than at first thought.

41 That is not, however, the end of this matter. As Mr Frenkel pointed out in his submissions, the Court of Appeal in Livingspring Pty Ltd v Kliger Partners[42] referred with approval to Bell v Wholesale Co Pty Ltd v Gates Export Corporation (No 2), and in particular to the proposition that the Court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless Colmax establishes that those who stand behind it and who will benefit from the litigation if it is successful are also without means. It is not for Polytrade to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts.

42 There has been no evidence produced by Colmax as to the ability of those standing behind the company to meet, or not to meet the costs of Polytrade. Accordingly, this matter is given no weight.

43 Although the delay in bringing this application is not as great as some, it does come a significant time after the commencement, and after the close of pleadings. It also comes some 3 months after the unsuccessful mediation on 23 October 2012. However, discovery of documents has yet to be undertaken. Importantly, the essential facts underpinning the application have been known to Polytrade since about the time of the filing of the defence and counterclaim (with the exception of the 6th winding up order).

44 As a rule, an application for security should be made promptly once the defendant has knowledge of the facts that would justify the making of an order. Delay in applying brings with it the inevitable consequence that an order for security might unfairly prejudice Colmax, which has no doubt incurred a considerable liability for costs so far.

45 In the end, this is a factor to be weighed with the other factors in considering whether security should be ordered. It weighs against making an order.

46 I invited submissions on this matter from Counsel for the parties at the first part of the hearing of the application on 16 April 2013. Only Polytrade took up that opportunity directly, whilst Colmax relied on submissions already made (as referred to above). Mr Fenkel pointed to a number of decisions in which the decision of Smart J in Sydmar, in this regard has not been followed or has been distinguished:

(a) In Stratplan Consulting Pty Ltd v Leong,[43] Balmford J discounted the dicta of Smart J because there was no evidence before her from which she could conclude that the plaintiff's case will be stultified by the making of the order;[44]

(b) In Premier Capital (China) Ltd v Sandhurst Trustees Ltd and others,[45] Mukhtar AsJ rejected the plaintiff's submission that the counterclaim means that substantially the same facts (or legal issues) are likely to be canvassed in determining the claim and counterclaim, and that should be a disqualifying or discretionary factor. He noted that the Courts do recognise that it is unfair to stay a claim because of the plaintiff's inability to provide security but to allow the cross action covering the same facts to proceed, referring to Sydmar. He said that can be viewed in the same way by asking: who is the real defendant or real protagonist in the case? He said that the plaintiff was right to say that the counterclaims seek relief by reference to the same agreement which is the subject of the plaintiff's claim. But, in his view, they did so in way consequential or commensurate to the defence they raise to the claim put against them and that it was more a shield than a sword. He concluded that it could not be said the defendants are the real plaintiffs. Accordingly, he rejected this ground of resistance to the application for security;

(c) The next case referred to by Mr Frenkel was the decision of Byrne J in MLW Technology Pty Ltd v May; May v MLW Technology Pty Ltd.[46] In that case his Honour said the counterclaims are not to be characterised as defensive of the claims but were properly to be seen as a "counter offensive" on a different front. Accordingly, he made an order for security;

(d) In Mark Sensing Shanghai Paper Products Co Ltd v Baldock,[47] Mukhtar AsJ concluded that it could not be said that substantially the same facts are likely to be canvassed in determining the claim and counterclaim.

47 Mr Frenkel submitted that the statement by Smart J was obiter and is distinguishable from this case. He submitted that it could not be said that Polytrade is the protagonist in the proceeding, and it was not the contention of Colmax that it was. In my view, it is not just a case of looking to see whether the defendant is the real protagonist. The importance of the observation of Smart J in Sydmar is the identification of a potential injustice where the plaintiffs claim is stayed whilst the defendant's counterclaim proceeds and does so on substantially the same factual area as the claim.

48 Further, it was submitted (paradoxically) that the proceeding should not be stayed because of Colmax's inability to provide security, as it has always maintained that it has net assets of $1.8 million, which is more than sufficient to meet any cost order made against Colmax if it is unsuccessful in the proceeding. In my view, the question of the ability of Colmax to meet an ultimate costs order falls to be considered by reference to its anticipated ability, according to its assets; whereas the question that is relevant at this stage is, according to the dicta of Smart J (and for that matter, Ormiston J in Interwest), whether there is evidence that the proceeding will be stultified if the order for security is made. The ability of Colmax to meet an order for security is likely to be affected by its limited cash flow.

49 Mr Frenkel then submitted that even if Colmax's impecuniosity (at this stage or at the end of the day) has been caused by Polytrade, it has failed to file evidence of the ability of those behind it to meet the costs, as it is bound to do in those circumstances. In this respect that is undoubtedly the case.

50 The solicitor for Polytrade submitted a detailed calculation of the costs incurred and to be incurred from the commencement of the proceeding down to the completion of a 5 day trial. The minimum costs and disbursements were calculated on a party/party basis as $131,400 and the maximum $245,300. They include steps that have occurred, including the pleadings, further particulars and mediation.

51 As I have said, Polytrade has established that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful. The jurisdictional threshold question is, therefore, answered in favour of Polytrade. I have formed this view both on the basis of the material advanced by Polytrade, but also after an analysis of the unaudited balance sheet of Colmax. That company has not, having regard to its apparent cash flow difficulty, satisfactorily rebutted the prima facie position established.

52 In adopting the approach that the Court has an unfettered discretion, but on the footing that the very fact that the jurisdiction has been enlivened in the first place may itself be a factor, even a most significant factor, in the exercise of the discretion, I take into account, in addition, in the exercise of my discretion:

(a) That there is some foundation for the contention that Colmax's impecuniosity has been brought about by Polytrade's conduct, as referred to above at paragraph 36;

(b) That Polytrade has delayed in making its application, although not excessively;

(c) But note that the other factors considered above are either neutral or positive (negative so far as Colmax is concerned);

And conclude that there should be an order for security, but limited by reason of the delay in bringing the application to the costs to be incurred from the date of the application, 15 March 2013.

53 Given that discovery is yet to be undertaken, and that having regard to the claims and counterclaims, this may be an extensive exercise, I estimate that roughly one half of the costs and disbursements to be incurred down to the first day of the trial have been incurred before 15 March 2013. I come to this proportion having regard to the fact that there has been an application for an interlocutory injunction, pleadings, mediation, the matter has been entered into the TEC list, and having regard to the fact that the calculation of the costs by Polytrade's solicitor includes 5 days of trial. The preparation and completion of discovery and inspection of documents, the preparation of evidence and court books, and preparing for trial are now the major costs to be incurred. My staring point is therefore a figure of $75,000.

54 As Mukhtar AsJ observed in Mark Sensing Shanghai Paper Products Co Ltd v Baldock,[48] Courts undertake a "conventional" reduction.[49] Doing the best I can to discount it for some overlap between claim and counterclaim, reductions on taxation, I would discount that figure by a third, so as to require security for costs in the sum of $50,000 for the period down to and including the first day of the trial.

55 I will hear Counsel for the plaintiff on the appropriate form of security.

[1] Affidavit of Ashley Brygel sworn 5 April 2013 at paragraphs 6,7 & 8 and in the exhibits referred to; affidavit of Robert Auricchio sworn 12 April 2013.

[2] Affidavit of Robert Auricchio sworn 12 April 2013 at [7].

[3] [2008] VSCA 93; (2008) 20 VR 377 at 381 [11].

[4] Ariss v Express Interiors Pty Ltd [1996] 2 VR 507, 514.8 (Phillips JA, with whom Ormiston and Charles JJA agreed). See also Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; (2008) 20 VR 377, 382 [18].

[5] Livingspring Pty Ltd v Kliger Partners at 383 [21].

[6] [1977] FCA 1; (1977) 14 ALR 52 at 56.

[7] [1995] 3 All ER 534 at 540; Op Cit Williams Civil Procedure Victoria [62.02.80].

[8] (1987) 73 ALR 289 at 299-300 (NSWSC); see also Williams, Civil Procedure Victoria [62.02.90].

[9] See Bryan E Fencott and Assocs Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497; KP Cable Investments Pty Ltd v Meltglow Pty Ltd [1995] FCA 76; (1995) 56 FCR 189; 13 ACLC 437 at 439;

[10] (1991) 5 ACSR 621; 9 ACLC 1218 (VSC)

[11] [1999] VSCA 43; [1999] 2 VR 191 at 199; [1999] VSCA 43;

[12] [1973] QB 609; [1973] 2 All ER 273, per Lord Denning MR

[13] (1996) 14 ACLC 857 (WASC).

[14] (1986) ATPR 40-641 (FCA).

[15] [1998] VSC 8.

[16] [2012] FCA 905; at [48].

[17] (1979) 22 SASR 20; 4 ACLR 492 (SASC).

[18] (1987) 73 ALR 289 at 302 (FCA).

[19] (1991) 5 ACSR 621, (VSC).

[20] (1982) 7 ACLR 97 (SASC).

[21] [1982] FCA 161; (1982) 42 ALR 563.

[23] [2001] VSC 161.

[24] [1980] 1 NZLR 97.

[25] [1967] 2 NSWR 402 at 407; (1967) 85 WN (Pt 1) (NSW) 715.

[26] [1982] FCA 161; (1982) 42 ALR 563 at 570.

[27] [1982] FCA 182; (1982) 44 ALR 163 at 166 (FCA).

[28] (1974) 1 ACLR 301 at 309 (NSWCA).

[29] [1975] VicRp 76; [1975] VR 776.

[30] (1987) 73 ALR 289 at 300 (NSWSC).

[32] [1999] VSCA 43; [1999] 2 VR 191.

[34] [1975] HCA 18; (1975) 132 CLR 301 at 305.

[35] (1991) 5 ACSR 621 at 626-8

[36] exhibit "RA-4" to the affidavit of Robert Auricchio sworn 26 February 2013.

[37] exhibit "RA-6" to the affidavit of Robert Auricchio sworn 26 February 2013

[38] exhibit "RA-4" to the affidavit of Robert Auricchio sworn 26 February 2013

[39] affidavit of Robert Auricchio sworn 12 April 2013 at [8].

[40] exhibits "RA-3" and "RA-5" to the affidavit of Robert Auricchio sworn 26 February 2013.

[41] The application was refused because there was no material directly showing that the parties were competitors in the trade. There were, I should note, allegations about the matter in the pleadings, but no evidence.

[43] (2004) 51 ACSR 459; [2004] VSC 436.

[45] [2011] VSC 572 at [9]- [10].

[46] [2003] VSC 24

[47] [2010] VSC 124

[49] Farmitalia Carlo Erba SrL v Delta West Pty Ltd (1994) 28 IPR 336 at 344.