Power Infrastructure Pty Ltd v Downer EDI Engineering Power Pty Ltd

AND: DOWNER EDI ENGINEERING POWER PTY LIMITED (ACN 000 983 700)

JUDGE: KATZMANN J DATE: 10 NOVEMBER 2010 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 The applicant ("Power Infrastructure") alleges that in March and April 2008, it negotiated for a joint venture with the respondent ("DEE") relating to the development and management of DEE's transmission business and then entered into a memorandum of understanding, preliminary to a formal joint venture agreement. In July 2009 DEE ended its involvement with Power Infrastructure. Despite the fact that a formal joint venture agreement was never entered into, Power Infrastructure's primary allegation appears to be that there was a legally binding joint venture agreement by May 2008 entitling Power Infrastructure to a share in the profits of DEE's business or that it is otherwise entitled to a share of those profits on one or more equitable or statutory grounds. 2 The proceeding was instituted on 11 June 2010. On 28 July 2010 DEE filed a notice of motion seeking an order that Power Infrastructure provide security for its costs in the sum of $260,000 or such other amount as the Court deems fit, a stay of the proceeding until security for costs has been provided and its costs of and incidental to the motion. For the following reasons I am of the opinion that the motion should succeed. 3 In its written submissions DEE invoked the Court's power to order security for costs in s 1335(1) of the Corporations Act 2001 (Cth). 4 Section 1335(1) of the Corporations Act provides that: [w]here a corporation is plaintiff in any action or other legal proceedings, the court having jurisdiction in the matter may, if it appears by credible testimony that there is 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. 5 DEE did not seek to rely on s 56 of the Federal Court of Australia Act 1976 (Cth), which also confers a power to order security on this Court, but one which is not expressly conditioned on the requirement that there be "credible testimony that there is reason to believe that the corporation will be unable to pay the costs" of a successful respondent. But in cases where the foundation for the application is the alleged inability of a corporate applicant to pay the respondent's costs, there appears to be little difference in practice between the two provisions. See Soul Pattinson Telecommunications Pty Ltd v Subex Americas Inc [2009] FCA 651 at [6] per Perram J. 6 The parties were agreed on the general principles but sharply divided on their application. 7 The nature of the threshold (or jurisdictional) requirement was considered by von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205. His Honour said the power in s 1335(1) was triggered where there was reason to believe there was "a real chance that in events which can be fairly described as reasonably possible" the applicant company will be unable to pay the respondent's costs. Whether his Honour's reformulation of the statutory test would lead to any different result, in my view the statutory test is clear and may be readily applied in its own terms. See Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93, 20 VR 377 ("Livingspring") at [14], Smart Co Pty Ltd v Clipsal Australia Pty Ltd [2009] FCA 1253 at [43]. 8 In Livingspring at [15] the Victorian Court of Appeal said that the words "reason to believe" required no more than a rational basis for the belief and the provision requires a risk assessment based on "a practical, commonsense approach" to the company's financial affairs. 9 DEE has an evidentiary onus to satisfy the Court that Power Infrastructure will be unable to meet DEE's reasonable costs if it succeeds in the litigation. Once that is established, the Court's power to order security for costs is triggered. At that point the evidentiary burden shifts to Power Infrastructure to satisfy the Court that, taking into account all relevant considerations, its discretion should be exercised to refuse security. See Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 ("Idoport") at [60]-[62] and Reinsurance Australia Corporation Ltd v HIH Casualty & General Insurance (in liq) [2003] FCA 803 at [25]. As Einstein J explained the position in Idoport: [60] Whilst from one point of view it may seem inappropriate to approach the matter in terms of the strictures of burden of proof whether of a legal or forensic character [cf discussion in Mummery v Irvings (1956) 96 CLR 99 at 118ff], there is certainly substantial authority which is followed in these reasons, to the effect that the defendants, as applicants for security for costs, have an evidentiary burden of leading evidence to establish a prime facie entitlement to such an order and to such an order in relation to a particular amount. Normally, in any court, the party who asserts must prove in order to succeed: Scott Fell v Lloyd (Official Assignee) (1911) 13 CLR 230 at 241; Bankinvest AG v Seabrook (1988) 14 NSWLR 711 at 717 per Kirby P. In Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 the word "credible" in s1335 was said to suggest that an evidentiary burden is undertaken by the party seeking the order who must show: "...that the material before the Court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings." [61] The evidence to be relied on must have some characteristic of cogency. Furthermore, speculation as to the insolvency or financial difficulties experienced by the plaintiff company is insufficient to ground the exercise of the discretion: Warren Mitchell Pty Ltd v Australian Maritime Officers Union. [62] The approach followed in these reasons is that once the defendants have led evidence to establish the above described entitlement, an evidentiary onus falls upon the plaintiffs to satisfy the Court that taking into account all relevant factors, the Court's discretion ought be exercised by either refusing to order security or by ordering security in some lesser amount than was sought by the defendants. 10 Once the Court's discretion is triggered, it is an unfettered one. See Livingspring at [18] and the discussion in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69, 22 WAR 241. There are, however, a number of considerations relevant to the exercise of the discretion. Commonly cited are those to which Beazley J referred in KP Cable Investments v Meltglow Pty Ltd (1985) 56 FCR 189 at 197-8: They are: (1) applications of this kind should be brought promptly; (2) the strength and bona fides of the applicant's case are relevant considerations, but, "as a general rule, where a claim is 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 a reasonable prospect of success"; (3) whether the applicant's impecuniosity was caused by the respondent's conduct the subject of the claim; (4) whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate; (5) whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security; (6) whether persons standing behind the company have offered any personal undertaking to be liable for the costs and if so, the form of such undertaking; and (7) security will only be ordered against a party who is in substance a plaintiff, and an order ought not to be made against parties who are defending themselves and are thus forced to litigate. 11 DEE relies on affidavits from Ashley Black, a partner in Mallesons Stephen Jaques, DEE's solicitors, sworn 28 July 2010 and Valerie Higinbotham, a solicitor and costs consultant, sworn 16 September 2010. Power Infrastructure relies on affidavits from Kerrie-Ann Rosati, a solicitor and costs consultant, sworn 26 August 2010, and John Murray, a chartered accountant, sworn 1 September 2010.

The evidence showing impecuniosity 12 On 15 July 2010 Mr Black wrote to Power Infrastructure's solicitors expressing his client's concern about the prospect of significant costs being incurred in the defence of the proceeding. He noted that a company search of Power Infrastructure had disclosed that it has a paid-up share capital of $1 and has not filed accounts. In order to allow his client to assess Power Infrastructure's ability to satisfy any adverse costs order, he requested details of its current financial position, including (but not limited to) copies of its most recent accounts (audited where available), details of any real property or other fixed assets held within the jurisdiction and details of any current loan facilities or other financial accommodation extended to it. In the event that Power Infrastructure was not willing to provide the information, Mr Black sought confirmation that it would provide a bank guarantee or some other form of security to be agreed upon to protect DEE's costs in an amount not less than $A300, 000. 13 On 23 July 2010 Power Infrastructure's solicitors replied to Mr Black, the substance of which read: Our client was incorporated as a single purpose company for undertaking a joint venture enterprise of the type it undertook with your client. Accordingly, it has no significant assets, given the outcome of that enterprise for our client. Our client is unwilling to provide security for the costs of the proceedings. It is evident that, but for the wrongful conduct of your client, our client would be in a strong financial position. .... The impecuniosity of our client is due entirely to your client's actions. In those circumstances we do not consider that the Court will order that our client give security for the costs of the proceedings. We consider, in any event, your client should articulate a sworn Defence so that it may be seen what the genuine scope of the factual and legal controversy is between the parties before you take any further step in respect of security for costs. Please let us have your client's sworn Defence promptly. 14 Mr Black replied by letter dated 26 July 2010. He stated, amongst other things, that he assumed that Jason Power, whom the company search showed was the sole shareholder, director and secretary of Power Infrastructure, was not willing to put his company in funds to meet an adverse costs order although he stood to benefit from any success it might enjoy in the proceeding. He rejected the assertion that his client's conduct was responsible for Power Infrastructure's impecuniosity. He also indicated, in effect, that it was imprudent for DEE to incur the costs of drafting a defence when it was now plain Power Infrastructure would not meet the costs of DEE doing so if it ultimately failed in the proceeding. 15 All this correspondence, together with the company extract obtained from the Australian Securities and Investment Commission, was annexed to Mr Black's affidavit. 16 Although no defence has been filed, Mr Black set out in his affidavit the scope of the issues he considered were likely to arise in the proceeding.

Power Infrastructure claims it is not impecunious 17 As I said, in the letter of 23 July to DEE's solicitors, Power Infrastructure admitted it was impecunious and had no significant assets, asserting that "the impecuniosity of our client is due entirely to your client's actions". Despite the contents of the letter, Power Infrastructure now seeks to resist the application, not because its impecuniosity was due to DEE's conduct, but because it is not impecunious. This is probably because it appreciated that in circumstances where it is alleged that the respondent caused the applicant's impecuniosity, the applicant bears an evidentiary onus of establishing both the adequacy of its financial position before its dealings with the respondent and that the respondent's actions have caused or at least materially contributed to its inability to give security (Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664, 208 ALR 564 ("Fiduciary") at [100]; Jazabas Pty Ltd v Haddad [2007] NSWCA 291, 65 ACSR 276 ("Jazabas") at [94]) and it offered no evidence of its financial position before its dealings with DEE. Moreover, as Smithers J said in Tradestock Pty Limited v TNT (Management) Pty Limited (1977) 14 ALR 52 at 59: … the court may well look with disfavour upon a defendant seeking security for costs if the acts of that defendant have disabled the plaintiff from complying with an order for such security. But this is not such a case. So far as appears the plaintiff company's impecunious condition has existed since the company came into being, and before it attempted to do business with the defendants or any of them. It may be that the defendants' conduct, wrongful or otherwise, has created a situation in which the plaintiff has had less opportunity than it otherwise might have had to cure its original impecuniosity, but it did not cause it. 18 Power Infrastructure now submits, again notwithstanding what it said in the letter of 23 July, that it has a valuable asset. The asset it claims to have is a chose in action. The chose in action is a claim in either debt or for damages for breach of contract which, it says, is part of the current proceeding and consists of a share in DEE's profits for the financial year ending 30 June 2009. The value of the asset was put in written submissions as at least $1.4 million. There was some movement away from that figure in argument but, on any view, it was said to be sufficient to pay DEE's costs. 19 Although there was a dispute about whether the claim was squarely raised on the pleading, there is no doubt that Power Infrastructure makes it and I propose to proceed on the basis that the claim is caught by the current pleading or, at least, will be pursued in the proceeding. 20 The entitlement to the sum was said to arise from the memorandum of understanding ("MOU") entered into between the parties on 1 May 2008 and extended until 31 July 2008. The MOU recited that the parties had agreed to enter into negotiations with a view to forming an agreement for the ongoing management and development of DEE's transmission business ("the services agreement"). It set out the terms of any agreement contemplated by the MOU. They included engaging Mr Power as manager of the transmission business and DEE and Power Infrastructure sharing the profits generated from the transmission business on a specified basis commencing 1 July 2009. The parties acknowledged that they were yet to finalise an "interim profit distribution arrangement" and would need to discuss it further for the 2009 financial year. It is common ground that the services agreement contemplated by the MOU was never executed. Power Infrastructure relied, however, on emails in which Mr Power claimed that there was an agreement to pay his company a share of DEE's profits for the first year of the agreement. The emails were self-serving. No objective evidence of that agreement was presented and Mr Power did not give evidence on oath. The emails also contradicted the position of DEE reflected in a letter to Mr Power dated 11 June 2009 in which DEE noted, amongst other things, that the draft services agreement was not finalised and executed. The letter also set out a number of matters which DEE stipulated had to be satisfied as "conditions precedent" to the making of any such agreement. Power Infrastructure also relied on notes of a meeting with DEE in July 2009 entitled "meeting with Jason Power re Profit Distribution" from which it argued it could be inferred there was an agreement. Although the meeting notes were apparently prepared by an employee of DEE (they are typed on DEE letterhead), the meaning of the parts relied on is ambiguous. It is abundantly clear from the evidence before me and from the submissions made by DEE that the existence of any such agreement will be a live issue in the proceeding. Of course, nothing that I have said in these reasons should be taken as an indication that I have formed any views about the matter. The evidence presented on this application is undoubtedly incomplete. 21 On 16 July 2009 DEE wrote to Mr Power terminating his services. In that letter DEE explained that it was not satisfied that the conditions precedent to an agreement had been met. It is unnecessary to explore those reasons here. Suffice it to say that they provide a basis for a defence that, as Mr Dick SC, counsel for the respondent, put it, there are factors which, if proved, would disentitle Power Infrastructure to the relief it seeks.

The flaw in Power Infrastructure's position 22 Power Infrastructure seeks, in effect, summary judgment of part of its claim in circumstances where DEE disputes it and has not yet filed a defence. It filed a motion for summary judgment which it sought to have heard either before or at the same time as the motion for security for costs. I refused that application and it awaits a hearing. In the circumstances of the present case, where DEE accepted the bona fides of Power Infrastructure's case, the merits are to be regarded as a neutral matter, and the Court should not embark on a detailed consideration of them. See Fiduciary at [37]-[38]; Jazabas at [84]. Unless the claim is obviously hopeless, the prospects of success or of failure are of little relevance, especially where the issues are complex. See Jazabas at [83]. See also Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 at [52]-[56]. The basis upon which I am obliged to approach the jurisdictional or threshold question of impecuniosity is that the respondent will succeed: Reinsurance Australia Corporation Limited v HIH Casualty and General Insurance Ltd (in liq) [2003] FCA 803 at [17]. Power Infrastructure did not argue that this case was wrongly decided. It is inconsistent with such an approach for the Court to make a determination to the contrary. It is simply illogical to assume that the applicant will lose but at the same time decide it will win.

The report of Mr Murray 23 Power Infrastructure tendered a report from Jason Murray, a chartered accountant, retained by Power Infrastructure. The report purports to detail the company's "entitlement to profits for the year ending 30 June 2009 pursuant to the Memorandum of Understanding". It purports to evaluate the alleged chose in action. It is based on a number of assumptions which DEE argued were not proved. Most of the report was the subject of objection. It is unnecessary to canvass the various objections or to deal with the alternative submission that the bulk of the report should be rejected in the exercise of the Court's discretion under s 135 of the Evidence Act 1995 (Cth) or a limiting order made under s 136. Mr Murray's report is inadmissible because it is irrelevant. As I am to approach the threshold question on the basis that Power Infrastructure will lose its case, the value of any part of its claim is not evidence that, if accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue on the motion.

Conclusion 24 In my view, the evidence DEE adduced through Mr Black provides credible testimony that there is reason to believe that Power Infrastructure will be unable to pay DEE's costs assuming it will be successful, thus discharging its evidentiary burden. To put it another way, the evidence is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings. 25 Power Infrastructure was unable to point to any authority in which an unacknowledged debt or action for breach of contract which was the subject matter (or part of the subject matter) of the proceeding was held to defeat an argument of impecuniosity. Mr Cotman SC, counsel for Power Infrastructure, frankly described the argument as "eccentric" or "unusual". In my view it was a clever, but specious, one. It suffers from a fundamental flaw. Ultimately, Power Infrastructure's position amounts to nothing more than an unsuccessful attempt to overcome the difficulties presented by the case law. As no other basis for resisting the motion was advanced, the application should be granted. There is no reason why I should not exercise my discretion in favour of it. There is no issue (nor could there be) that the application was brought promptly. Neither is there an issue concerning the bona fides of Power Infrastructure's action. For the purpose of this application DEE was content to accept that Power Infrastructure had a reasonably arguable case. Power Infrastructure did not argue that the application was oppressive and would stultify the litigation. Indeed, Mr Cotman expressly disavowed such a position. Despite Mr Power's position as sole officeholder and shareholder, there is no evidence of any agreement to guarantee DEE's costs. 26 The remaining question concerns the amount of the security.

The amount of the security 27 There is a dispute between the parties about the party/party costs DEE was likely to incur. The range (rounded out) is from $168,000 to $222,000. Ms Rosati put them at $168,000 to $176,000 and Ms Higinbotham at $209,000 to $222,000. As might be expected, there is a great deal of guesswork involved. In general, however, I am satisfied that Ms Rosati's assessment is too conservative. It fails to have sufficient regard to the complexity of the proceeding. In the circumstances, the most sensible course, which the parties accepted, was that I should avoid analysing the minutiae of the differences between the costs assessors and settle on a figure of $200,000. Such a sum is sufficient protection for the respondent.

A staged approach? 28 During the course of the hearing Power Infrastructure offered security until the defence is filed. DEE rejected the offer. I am not persuaded to make such an order. I am, however, prepared to make an order that security be provided in stages, the amount comprising the anticipated costs for the first stage, being the period up to and including the date the proceeding is fixed for trial, payable within 28 days from today, and the second, being the period from that time until the completion of the trial (and including the costs of considering and advising on the judgment) to be payable within 28 days of the date fixed for trial. Doing the best I can on the evidence, I order that $100,000 be paid within 28 days and a further $100,000 be paid at the later date. I will, however, grant liberty to apply, both to vary the apportionment, if necessary, and in the event that my costs assessment proves too conservative, to permit the respondent to apply for an additional amount.

Orders 30 I therefore make the following orders: (1) The applicant is to provide security for the respondent's costs of and incidental to defending the proceeding in the sum of $200,000 by payment into Court or by an irrevocable bank guarantee issued by an Australian bank for the same amount. (2) The sum is to be paid in two equal instalments, the first within 28 days of this order, the second at least 28 days before the date the proceeding is fixed for hearing. (3) The proceeding is stayed until the sum is paid in accordance with these orders. (4) The applicant is to pay the respondent's costs of and incidental to the motion. (5) Liberty to apply on three days' notice. I certify that the preceding thirty (30) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Katzmann.