Primus Telecommunications Pty Limited v Kooee Communications Pty Limited & Anor

Civil Procedure Act 2005 (NSW) LEGISLATION CITED : Evidence Act 1995 (NSW) Supreme Court Act 1970 (NSW)

Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 Illawong Village Pty Ltd v State Bank of New South Wales [2005] NSWSC 524 CASES CITED : Kalifair Pty Ltd v Digi-Tech (Australia) Ltd; McLean Tecnic Pty Ltd v Digi-Tech (Aust) Ltd [2002] NSWCA 383; (2002) 55 NSWLR 737 Middle Harbour Investments Ltd (In Liq) Re; (unreported, Court of Appeal of New South Wales, Moffitt P, Glass and Mahoney JJA, 15 December 1976). New South Wales Bar Association v Stevens [2003] NSWCA 95 Penrith Whitewater Stadium Ltd and Ors v Lesvos Pty Ltd [2007] NSWCA 103

Primus Telecommunications Pty Limited (Plaintiff) PARTIES : Kooee Communications Pty Limited (First Defendant) SP Telemedia Limited (Second Defendant)

COUNSEL : Mr D Priestley (Plaintiff) Mr M Lee (Defendants)

SOLICITORS : Browne & Co (Plaintiff) Sparke Helmore (Defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

Tuesday 22 May 2007 ex tempore Revised 24 May 2007

50004/06 Primus Telecommunications Pty Ltd v Kooee Communications Pty Limited & Anor JUDGMENT The stay application 1 There is before the court an application for a stay of the judgment and orders entered in these proceedings on 24 April 2007 pending determination of an appeal to the Court of Appeal. 2 The reasons for judgment were delivered in the judgments of 16 February 2007 ([2007] NSWSC 91) and 20 April 2007 ([2007] NSWSC 374). The judgment as to costs was delivered on 7 May 2007 ([2007] NSWSC 444). 3 The proceedings were commenced on 25 January 2006. As the costs judgment made clear the proceedings were vigorously contested. Little quarter was given by either party. As the reasons for the costs decision also made clear, standing back from the whole of the litigation it may be seen that the plaintiff was successful in relation to the issues which expended a very considerable segment of time and costs albeit that the defendants did have some successes. 4 The instant application for the stay requires a principled approach to the exercise of the relevant discretion. In that regard the essential commercial character of the proceedings litigated by the parties which presently compete for market share in their industry requires to be borne in mind. Also to be taken into account, albeit only on a general overview basis, is the obvious fact that it would take some time before the Court of Appeal, even if disposed to expedite the hearing of the appeal, could first hear and then deliver a judgment on the appeal. The principles 5 The Court's power to grant the stay arises from section 135(1) of the Civil Procedure Act 2005; Part 51 rule 15 of the Supreme Court Rules; section 23 of the Supreme Court Act 1970 and the inherent jurisdiction of the Court. 6 There is no serious issue as to the relevant principles which inform the proper exercise of the discretion to grant a stay. Most recently those principles have been summarised by McColl JA in Penrith Whitewater Stadium Ltd and Ors v Lesvos Pty Ltd [2007] NSWCA 103 where her Honour observed:

[18] The overriding principle in an application for a stay is to ask what the interests of justice require: New South Wales Bar Association v Stevens [2003] NSWCA 95 at [83] per Spigelman CJ (Meagher JA and Sheller JA agreeing).

[19] The detailed principles concerning the grant of a stay are set out in Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 at 694: a Where there is a risk that an appeal will prove abortive if the appellant succeeds and a stay is not granted, the Court will normally exercise its discretion in favour of granting a stay; b the onus is upon the applicant to demonstrate a proper basis for a stay;

c it is a matter of discretion whether the Court grants a stay and if so as to the terms which would be fair as part of the granting of a stay; d what is important in considering whether or not a stay ought be granted is the balance of convenience and the competing rights of the parties before it; e it is not necessary that special or exceptional circumstances should be made out; it is sufficient for the applicant to demonstrate a reason or an appropriate case to warrant the exercise of discretion in its favour.

[20] Since a stay will prevent the judgments being enforced while the appeal is pending, the Court should endeavour to preserve the status quo by protecting the judgment creditor from the risk of loss: McLean Tecnic v Digi-Tech; Kalifair v Digi-Tech [2002] NSWCA 383; (2002) 55 NSWLR 737 at [28]…. 7 The defendants presently accept that the starting point is that:

"[p]rima facie, a successful party is entitled to the benefit of the judgment obtained by him and is entitled to commence with the presumption that the judgment is correct": per Mahoney JA (with whom Moffitt P and Glass JA agreed) in Re Middle Harbour Investments Ltd (In Liq) (Court of Appeal, 15 December 1976, unreported). 8 Ultimately the matter inheres in the interests of justice tailored to the circumstances of the particular litigation in which the stay is sought. Returning to the instant litigation Positing the existence of an arguable ground of appeal 9 I am content to proceed upon an assumption that there is a reasonably arguable ground of appeal. This appears to be the principled approach which is appropriate to be taken by a trial judge: cf Illawong Village Pty Ltd v State Bank of New South Wales [2005] NSWSC 524 per Campbell J at [13] - [15]. The balance of convenience 10 In the manner in which the parties have approached their respective submissions it is clear that this factor becomes of particular significance in determining what the interests of justice require. 11 The defendants have essentially contended as follows:

i. during the pendency of the appeal the Court should endeavour to preserve the status quo by protecting the judgment creditor from the risk of loss;

ii. as a condition of the stay the defendants offer to put in place within seven days a bank guarantee from an Australian Trading Bank securing the amount of the unpaid judgement debt;

iii. hence the judgment creditor is seen to be completely protected from the risk of loss and the Court can be satisfied that if the appeal is unsuccessful the defendants will discharge the unpaid amount of the judgment debt;

iv. conversely, in the event that a stay be not granted, the Court could have no comfort that the defendants will not have a risk of loss. 12 Parameter i cannot be gainsaid: so much is apparent from the observations already noted made by McColl JA in Penrith Whitewater Stadium,: see also Digi-Tech at [28]. 13 Parameters ii, iii and iv however require to be carefully tested. In my view the materials relied upon by the defendants in support of these propositions are not shown to be of sufficient substance to make these propositions good. The defendants' case 14 The matters put forward by the defendants in this regard were as follows:

"The evidence discloses that the Primus Telecommunications Group has filed on 30 March 2007 a document entitled " Form 10-K Primus Telecommunications Group Inc - PRTL " for the period up to 31 December 2006. A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission which is required to give a comprehensive summary of a public company's performance. The Report discusses the operations of the Primus Group globally of which Primus Australia is a part. Relevantly the Report reveals the following:

a) the Australian operations represent 30% of the 2006 net revenue for the Primus Group;

b) there are a number of financial risk factors that may impact on the operations of the Primus Group in the future;

c) there has been a material weakness in Primus' internal control over financial reporting, which Primus indicates may adversely affect its ability ' to initiate, authorise, record, process or report external financial data reliably in accordance with accepted accounting principles ';

d) the Primus Group has a level of debt which will impact on the Group's future cash flow and which may adversely affect Primus' financial and operating flexibility and there exist net and operating losses which Primus states ' may hinder our ability to meet our debt service or working capital requirements ';

e) net losses for the Primus Group incurred in US dollars from 2004 to 2006 were as follows: in 2004, $10,600,000; in 2005, $154,400,000; and in 2006, $238,000,000.

f) net revenue for Primus' Australian operations dropped from AUD $451million in 2005 to AUD $406million in 2006 and loss from Primus' operations in Asia Pacific, which includes Primus' Australian operations was USD $69million; a further USD $10million was spent on capital expenditure; and

g) there is litigation on foot by a number of plaintiffs against the Primus Group in the United States District Court for the Southern District of New York, involving allegations of insolvent trading against the Primus Group; the Report states that if the plaintiffs are successful in this legal proceeding, it will jeopardise the Group's ability to make certain payment obligations in a timely manner." 15 The defendants go on to contend that in the light of this material the Court could not be satisfied that the plaintiff will necessarily be in a position to repay the balance of the judgment debt. The defendants also seek to rely upon some additional materials which are referred to below in this judgment. 16 However the defendants then make an important concession which in any event to my mind simply states a finding which requires to be made. The concession and the finding is that there is not a sufficient evidentiary basis to submit responsibly that the plaintiff is in serious financial difficulty. 17 This notwithstanding, the defendants do submit that there is sufficient material on the evidence to generate concern. It is said to be particularly noteworthy that in terms of the materials sought to be relied upon by the defendants Moody's considers the financial outlook of the Primus Group as "negative", and its operation is "under pressure with declining revenues and weak profitability". The defendants observe that Moody's has given the Primus Group a rating of "Caa3", its third-lowest grade, which according to Moody's is described as is deemed to be of "poor standing and subject to very high credit risk". 18 Finally the defendants also submit that on the evidence, market conditions affecting the telecommunications industry in Australia are volatile. The plaintiff's case 19 The evidence put forward by the plaintiff on the application includes the following matters deposed to by Mr Nivert, the current Financial Controller of the plaintiff:

i. The plaintiff in this proceeding, Primus Telecommunications Pty Limited (ACN 071 191 396) ("Primus Australia") is an Australian propriety company limited by shares. Its registered office is Level 3, 538 Collins Street, Melbourne, Victoria, 3000 and its principle place of business is also at Level 3, 538 Collins Street, Melbourne, Victoria, 3000. Annexed herewith and marked " A " is a copy of an ASIC company extract of Primus Australia dated 4 May 2007.

ii. Primus Australia trades under the business name Primus Telecom.

iii. Primus Australia is part of the global Primus Telecommunications Group Inc with operations in Europe, North and South America and the Asia/Pacific region. The parent company, Primus Telecommunications Group Incorporated, is listed on the Over-the-Counter Bulletin Board (OTCBB) as PRTL.OB with world headquarters in Washington DC, USA.

iv. A summary in spreadsheet of the historical and current financial status of Primus Australia reveals that Primus Australia's current cash surplus is $7.6M.

v. The Australian Primus group of companies always maintains a cash balance of at least $6.5M to comply with the requirements of a particular supplying leasing company.

vi. The documents also reveal that Primus Australia's projected Revenue for this financial year is $227.43M. 20 Concerning the content of the affidavit made by Mr Moffatt on 18 May 2007 relied upon by the defendants, Mr Nivert has deposed as follows:

i. Generally speaking, the matters raised in the affidavit have no relevance to Primus Australia [allowed subj/136]. In addition thereto, the affidavit makes no reference to either Defendant's financial position.

ii. On 1 May 2007, the company secretary of the Second Defendant, Judgment Debtor and Guarantor, SP Telemedia Ltd, (the company ), announced that it had entered into an agreement with PBL Media Pty Ltd for the sale of the company's media assets for a total consideration of $250 million.

iii. I am informed by John Edgar and believe that, despite request, no financial information has been provided to Primus Australia about the impact of the sale on the Defendant's ability to pay the Judgment Debt. In the circumstances Primus Australia is concerned to obtain payment of all sums outstanding pursuant to the Judgment Debt including costs forthwith.

iv. The material weakness in internal control over financial reporting referred to in paragraph 11 of Mr Moffatt's affidavit relating to Primus USA, is specifically, as noted in Item 9A on page 63 of the Primus Telecommunications Group, Incorporated Form 10K report for the fiscal year ended 31st December, 2006 (the "2006 10-K"), related to income tax reporting in the US. Primus Australia did not and does not have any financial material weaknesses. In any event, the reference to material weakness in control over financial reporting was relevant to Primus USA income tax, which does not have any effect on revenue, cash or profitability of Primus Australia.

v. Whilst the US Primus Group has a level of debt, none is due until 2009 and there is no significant debt in Primus Australia, (only finance leases; no public debt or other loans).

vi. While Primus Australia is net income negative for US Primus reporting purposes, this is only after accounting for asset depreciation and US inter-company management fee, inter-company royalty fee and inter-company interest charges, all of which are non-cash charges. Primus Australia generated AU$38m in cash last year and is on track to generate AU$35m this year, (our Adjusted EBITDA).

vii. I am informed by Mr John De Podesta, Legal Counsel, Primus USA and verily believe that Primus USA won the litigation against it in the US, referred to in paragraph 16 of Mr Moffatt's affidavit. Some plaintiffs appealed, but the appeal was dismissed. Primus USA has issued a motion to dismiss the last remaining Plaintiff's complaint. In any event, I am informed by Mr De Podesta and verily believe the allegation of insolvent trading arose only out of a US$22m inter-company transfer to pay off public debt that was due, and once the litigation was complete the debt was immediately repaid (refer to Item 3 on page 33 of the 2006 10-K).

viii. Since the US litigation was heard, Primus Group's auditors have issued a "clean opinion", and the former "going concern" qualification from the 2005 10-K has been eradicated.

ix. In respect of Primus Group's credit rating, it was sufficient for another US$100M to be extended to the US Group in February 2007, after the Moody's rating referred to (refer to Note 21 on page F-49 of the 2006 10-K).

x. While Primus Australia's revenue may be affected by the decline of dial-up internet, Primus Australia is replacing that revenue with broadband for both businesses and consumer customers. Additionally, Primus Australia recently received approval to upgrade our DSL network and install additional DSLAMS to lower costs by enabling us to put all traffic on the Primus network and avoid Telstra completely. This will have a significant increase on Primus Australia's margins.

xi. In summary Primus Australia is in a very healthy financial position and will be able to easily absorb any new debt in the order of $1.5M in the medium term. [allowed as 'arising no higher than'] Returning to the defendants 'points of concern' 21 In my view the points of concern raised in the defendant's affidavit material [and in the other material upon which it sought to rely], are seen not to be of substance in terms of discharging the defendants onus to show the necessary risk or likelihood that the moneys will be irrecoverable. 22 In Kalifair v Digi-Tech [at 741] the Court referred to the necessity for an appellant to show that there is 'a real risk' that it will suffer prejudice or damage if the stay is not granted, which will not be redressed by a successful appeal. 23 Some debate has taken place at the Bar table, in particular in the submissions by Mr Lee, as to the following matters:

iii. What is it that must be at risk? 24 Clearly enough the relevant risk being treated with in this context is a risk that an appeal will prove abortive if it succeeds absent a stay being granted. 25 Turning more particularly to Mr Lee's submission in this regard, it is true that the words "a risk" were used in Alexander v Cambridge Credit Corporation, as repeated by McColl JA in Penrith, whereas the words "there is a real risk" are to be found in Kalifair v Digi-Tech. I do not understand there to be any particular problem in terms of an understanding of the material principle. The matter inheres in what the interests of justice require and, as is made plain by the authorities to which I have already referred, the Court is involved in a balancing exercise tailored to the particular circumstances of the particular litigation. The exercise upon which the Court embarks is an exercise of weighing the justice of the situation in the material context.

26 The problems which face the defendants in terms of the materials upon which they have relied or seek to rely include the following:

i. They relate to the financial position of the US parent company;

ii. There is not shown to be here a circumstance suggesting otherwise than that the plaintiff, which is an Australian registered company, is itself financially sound;

iii. Even in so far as the parent is concerned, the matters sought to be raised by the defendants do not raise any real doubt about financial viability. I accept that they comprise merely a selection of negative aspects from a financial report, put into context by Primus' affidavit evidence which has been allowed.

iv. For all of the attempts by Mr Lee to rely upon the materials before the Court [and the materials in respect of which the Court's ruling as to admissibility is to be given below]: attempts to repeatedly suggest that the Court should have a sufficient concern with the prospects of the Group directly and more particularly of what may or may not be portents of future difficulty for the Australian subsidiary, these on examination amount to no more than speculation drawn from a number of quarters. The fact is that on the evidence the plaintiff is on track to generate $A35 million this year on an adjusted EBITDA. The exercise of testing the viability of a Corporation or Corporate Group is plainly a difficult one at the best of times and cannot be carried out by reference to dubious or insubstantial materials. The reserved ruling as to admissibility 27 The defendants sought to tender materials which were marked for identification MFI D1 and a ruling in relation to that tender was reserved to be delivered as part of these reasons. The tender was of a composite bundle of materials comprising an Ibis World company profile report on the Australian holding company of the plaintiff, which is self-explanatory; a report on Primus Telecommunications Australia by Paul Budd Communication Pty Limited, and, finally, an internet extract from The Australian 14 March 2007 edition by Michael Sainsbury. The admissibility of these materials has been objected to by the plaintiff. 28 In my view none of these materials should be admitted into evidence. The probative value of the matters sought to be proven by these materials is in my view outweighed by the danger that the evidence might be both unfairly prejudicial to the plaintiff, misleading or confusing, as well as such as would or might cause or result in an undue waste of time [section 135 Evidence Act 1995]. The materials comprise statements of opinion, statements of alleged fact and a number of matters which could only be described as hearsay. 29 Mr Lee has submitted that the Court should take into account in its rulings as to admissibility, the position that his client would have preferred to have had an opportunity to cross-examine Mr Nivert on his affidavit. Yet at the commencement of the hearing Mr Lee was asked whether or not there was an application to adjourn the hearing and made clear that there was not to be such an application. 30 One has to recall that the onus of establishing an entitlement to the stay rests squarely upon the defendant. For whatever reason a defendant may elect to approach the task of discharging such an onus, that matter is a matter of its own forensic decision. Questions such as the entitlement of a defendant to serve notices to produce or subpoenas going to the financial position of the successful party are not matters for the Court but for the defendant. The approach taken by the defendant in terms of its forensic entitlement presently has been as is transcribed. 31 Having ruled that the materials are not permitted into evidence, it is fair to note that both parties were permitted to address in relation to the whole of MFI D1. Having heard those respective addresses, I am confident that even had all of the material in MFI D1 been before the Court, the decision would have been no different. Nothing in those materials does otherwise than to treat with sundry analyses of many parameters of the respective Australian and overseas related companies. Nothing in the materials removes the basis for the finding [and the concession] earlier referred to, namely that there is not a sufficient evidentiary basis upon which the defendants can responsibly submit that the plaintiff is in serious financial difficulty. Returning to the competitive nature of the parties' respective businesses 32 Mr Nivert has also deposed in the affidavit to which I have referred as follows:

21. I have worked within the Primus Group in various centres around the world since the year 2000. The telecommunications industry. In Australia, a number of players including the 2 defendants are competing hard for market share, against Telstra and each other, as potential revenues, particularly from internet use, grow.

22. In the present environment, the use of a sum of cash over a period of time has the potential, through avenues such as marketing and advertising, and additional DSLAMS, to significantly affect market share and future revenues. The negative effect of that money being in the hands of a direct competitor for that period is obviously multiplied.

23. Primus Australia and the defendants presently compete directly in the areas of voice telephony, broadband, dial-up internet, mobiles and small business telecommunications services, known as "band 2".

24. At present, interest in the money accruing even at 10% does not in my view adequately compensate Primus Australia for being denied the use of the money compared in the Judgment Debt, that money being available to a telecommunications competitor. Primus Australia has already been without the money for 2 years now, during which time Primus Australia and the defendants have been competing for market share. Additional undertaking 33 There has been some discussion of the additional undertaking proffered by the plaintiff and expressly referred to in Mr Nivert's affidavit. That is to say Mr Nivert is also instructed that in any event, Primus Australia will undertake to pay the defendants any sum owing after the conclusion of the appeal as a priority, including a priority over the annual repatriation of funds to the United States parent. In that regard he has deposed that in 2005 to 2006 $A21.07 million was transferred to the US group and that the projected sum to be repatriated for 2006 to 2007 is $A24 million. 34 During the course of address the difficulties of form in terms of the Court and the defendants being able to follow with the necessary precision, the precise terminology of any such undertaking have been raised. My own view is that in the circumstances, the plaintiffs having made clear that some such undertaking is proffered, it is appropriate to require that the plaintiffs come forward with the precise terms of that undertaking, before the undertaking is taken in by the Court. 35 Even had the undertaking not come forward, the decision would have been that the stay application fails. However, in the circumstance that the undertaking has been proffered, it does seem to me reasonable for the Court to carry out its best endeavours to oversee the documenting of such an undertaking. Decision

36 The nature of the proceedings, the fact that the defendants have already had the use of relevant moneys since the middle of 2005, the fact that on the evidence the statutory interest does not fully compensate the plaintiff, and the fact that the points of concern raised by the defendants do not discharge their onus of showing the necessary risk or likelihood that the moneys will be irrecoverable should the defendants succeed in their appeal, all combine to make the principled exercise of the relevant discretion the dismissal of the stay application.

1. Order that the defendants pay the plaintiffs costs of the defendants motion filed on 22 May 2007.

3. Proceedings stood over to 25 May 2007 for the purpose of dealing with outstanding matters.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.