Sandl Trading Pty Ltd v North American Oil Company [1998] VSC 8

Supreme Court of Victoria|1998-07-27|Before: HARPER, J.

I have before me an appeal from an order made by Master Wheeler on 8 July 1998. The Master then refused an application made by the first defendant by summons dated 26 June 1998 in which the first defendant sought further security for costs.

The jurisdiction to make orders of this kind is conferred by s.1335 of The Corporations Law. Sub-s.(1) of that section is in the following terms:

"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 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."

The proceeding commenced by writ issued by the plaintiff on 14 February 1997. By the statement of claim endorsed on the writ the plaintiff sought declarations (a) that a distribution agreement between it and the first defendant remained in force despite its (allegedly ineffective) termination by the first defendant and (b) that the plaintiff is the owner of the copyright in certain packaging and advertising material associated with the first defendant's products. The plaintiff also sought injunctions against both defendants, the second defendant being a company which the first defendant claims has replaced the plaintiff as its Australasian distributor.

The original order for security for costs was made by consent by Master Bruce on 12 June 1997. That order required the plaintiff to provide the sum of $20,000 as security for the first defendant's costs from 22 April 1997 to the date upon which the proceeding was set down for hearing. The Master also made the following order:

"Upon the proceeding being set down for trial the first defendant shall be at liberty to make an application for further security for the first defendant's costs of this proceeding from such date as this court may direct".

On 3 March this year Master Kings fixed 24 August 1998 as the trial date. From 3 March 1998 therefore, the first defendant was free to make a second application for security. It did so by the summons issued on 26 June 1998 to which I have already referred.

The appeal has been argued by both sides on the basis that there is a bona fide dispute between the parties. The plaintiff, however, submits that its financial position, while not warranting the making of an order for further security, has been adversely affected by those actions of the first defendant which have given rise to the present litigation. According to an affidavit sworn on 22 May 1997 by Sabastiano Melia, the trading losses, amounting in total to $59,475, which the plaintiff suffered in the financial years 1993 and 1994, "are entirely attributable" to the investment which during that period the plaintiff made in the promotion of the first defendant's products in Australia and New Zealand. Moreover, according to Melia's affidavit, the sum of $130,000 (representing the net profit which the plaintiff would have made in the calendar year 1997 had it been able to sell the first defendant's products during that year) has been lost to the plaintiff. It has also suffered adversely from capital expenditure of more than $195,000 made in the belief that its contractual relations with the first defendant were as the plaintiff claims them to be.

The first defendant submits that this evidence lacks the clarity and force necessary if it is to support the contention that the first defendant contributed adversely to the plaintiff's financial position. I disagree. Whilst the evidence has its limitations, especially in that it lacks that basal detail without which it cannot be thoroughly tested, nevertheless it does in my opinion suffice for present purposes. I say this bearing in mind that Pinkus, J. used the expression "solid foundation" when in his judgment in Right Home Improvements International Pty Ltd v. Imperial Alarm Screens (Aust) Pty Ltd (1986) A.T.P.R. 40-641 he described the strength and credibility of the evidence which the plaintiff should put forward if it seeks to resist an application for security for costs on this basis. It must always be a question of balance; and if the courts themselves are not to be guilty of making litigation unnecessarily expensive and time consuming, then judges must remember the wisdom lying behind the judgment of Dixon, J. in Brigenshaw v. Brigenshaw [1938] HCA 34; (1938) 60 C.L.R. 336. The nature of the issue necessarily affects the process by which the requisite standard of persuasion - in this case satisfaction on the balance of probabilities - is attained. The reasonable likelihood must be that if the first defendant's products have a ready market, the sudden and unexpected termination of the plaintiff's ability to trade in them will have an adverse effect on its profitability. The plaintiff has sworn through Mr Melia that in this case this is so. Evidence has been put forward in support of that contention. It would, in my opinion, result in a misuse of resources were the parties required to attack this issue as if it were itself a mini-trial of overwhelming importance.

I bear in mind too that Mr Melia will doubtless be a critical witness for the plaintiff. If he has sworn an affidavit which is untrue then he runs the risk that this will be revealed at trial, with all the adverse consequences that would have for the plaintiff's case - to say nothing of the possibility of his being charged with perjury.

The plaintiff submits that the application for further security should be dismissed because of the first defendant's "excessive" delay in making it: the delay between 3 March 1998 and 26 June this year. It was this delay which determined the Master's attitude to the application. The Master accepted the plaintiff's submission that it was properly described in the terms used by the plaintiff.

In my opinion, the first defendant has not convincingly explained the delay. Indeed, it has sought to do so only on the basis that the parties went to mediation on 8 April 1998 and that an application before them would have been inappropriate; and that in any event the directions given by Master Kings on 3 March did not require any steps to be taken before 27 July 1998. The first defendant also submits that the plaintiff has not been prejudiced by the delay.

In my opinion the mediation cannot be properly used as a reason for not making the application sooner. The principal reason why the courts insist that applications of this kind be initiated at the earliest reasonable opportunity is that otherwise the party from whom costs are sought might spend its funds on the litigation before an order for security is made, thus placing such security beyond its reach. An order for security for costs pronounced in those circumstances would result in the action being stayed and the expenditure in question being thrown away. At the very least, the party from whom security is sought might, had the application been on foot at an earlier date, have reordered its spending priorities to its advantage.

There is no evidence here that the plaintiff spent funds on the mediation such as to now put beyond it the capacity to give security were security to be ordered. On the contrary, the plaintiff insists that it is in a sound financial position. Nevertheless, it did between 3 March 1998 and 26 June 1998 not only attend the mediation, but also obtain leave to file and serve an amended statement of claim. Its position in relation to both these events may have been different had it then been required to provide security.

I do however observe that in one respect the plaintiff has been advantaged by the lateness of the application. It now has available its interim financial results for the financial year ended 30 June 1998. According to Mr Melia in an affidavit sworn on 22 July this year, these disclose a trading profit of $152,788. Although this figure may require some reworking, Mr Melia deposes to his accountant's expectation that any adjustments to the accounts "are unlikely to result in a deviation in the profit figure ... of more than $20,000".

These results are much more favourable than those of past years and much better than those anticipated last March and April. Indeed, they are much better than anticipated when the matter came before Master Wheeler. At that time Mr Melia, in an affidavit sworn on 7 July 1998, estimated "that Sandl's trading profit for the year ended 30 June 1998 will be in the order of $95,000".

The first defendant is very sceptical about the accuracy of the financial information relied upon by the plaintiff, and even more sceptical of the conclusions with which the plaintiff seeks to draw from that information. The first defendant submits that the plaintiff was and perhaps still is impecunious; that its action in consenting for the order for security made by Master Bruce is a tacit admission that it could not - or at least might not - meet an order for costs made against it; and that the financial information conveyed by the material served on the first defendant as late as midday on 23 July 1998 cannot be trusted: certainly not to the extent that it negates the earlier tacit admission.

Mr Melia has sworn in a number of affidavits filed in this proceeding that "Sandl has been and continues to be able to pay its debts as and when they fall due" (affidavits sworn, respectively, on 22 May 1997 and 7 July 1998). Nevertheless, as the first defendant points out, the plaintiff's balance sheet for the year ended 30 June 1997 showed total current liabilities at $512,146 and total current assets at only $353,156: a difference of $158,990, or about 45 per cent. Included in the current assets were trade debtors of $61,517 (but no apparent provision for bad debts) and a loan to a related company of $158,610. A trading profit of $68,300 is recorded for that year and a trading profit of $35,963 for the year ended 30 June 1996. The three previous years had, according to the first defendant, recorded trading losses, although there is a dispute about whether this was so for 1995: the plaintiff claims a profit of $16,829 for that year, while the first defendant alleges a loss of $815. In any event, the first defendant points to and relies upon a number of occasions in which the plaintiff's accounts have been revised.

The latest figures show current assets ($576,718) exceeding current liabilities ($556,707) by $20,011. When one brings total assets into the equation (there are no non-current liabilities) the difference is $126,486. Moreover, the liabilities include loans to directors of $283,448. If these are excluded the plaintiff had as at 30 June 1998 net assets of $409,993.

The first defendant makes several criticisms of the latest figures. I have taken these into account. Provided, however, that the plaintiff's directors are prepared to give the undertakings to which I am about to refer, it seems to me that I should, in all the circumstances which present themselves in this appeal, exercise my discretion so as to dismiss it.

Once the loans from the directors are excluded from the plaintiff's liabilities, it seems to me that any basis for a belief that the plaintiff will be unable to pay the costs of the first defendant, if the latter party is successful in its defence, is removed. This is a consideration which goes to the heart of the rationale behind orders for security of costs made against corporations.

If a defendant could not seek security for costs against a financially troubled corporate plaintiff, that defendant might be forced into litigation in which it was ultimately successful but unable to recover costs awarded in its favour. Meanwhile the shareholders of a plaintiff who stand to benefit if the action were to result in a judgment in its favour have not been placed at risk in costs should the action fail. Here the shareholders of the plaintiff are also its directors. The means to ensure that they accept the risk or at least alter the incidence of its burden are at hand. They should, I think, be required as a condition of my dismissing the appeal to undertake to assign to the first defendant so much of the monies owed to them by the plaintiff as would equal any order for costs which might ultimately be made against the plaintiff and in favour of the first defendant. Accordingly, if the directors are prepared to give such an undertaking the appeal will be dismissed.

The orders that I have in mind include; under the heading "Other Matters" the following:

The debt referred to below is that recorded in the plaintiff's interim balance sheet for the year ended 30 June 1998 in an amount of $283,448, being monies owing by the plaintiff to Sebastiano Melia and Lucy Melia as set out in Exhibit "SM6" to the affidavit of Sebastiano Melia sworn 22 July 1998 and filed in this proceeding.

Upon Sebastian Melia and Lucy Melia undertaking that they will:

(a) Assign to the first defendant so much of the debt as equals any amount ordered to be paid by the plaintiff to the first defendant for the first defendant's costs of this proceeding; and

(b) not until further order accept any repayment of

The question of the liability for costs of the hearing before Master Wheeler and the appeal before me is as nicely balanced as some of the other considerations which I have had to grapple with during the course of the hearing of this appeal.

It seems to me that Master Wheeler was wrong to refuse the application for security for costs at that time on the material which the Master then had before him. There was delay, there it was unexplained, and it was a delay which lies squarely at the feet of the first defendant. On the other hand, that delay did not adversely affect the plaintiff save perhaps in the ordering of its priorities when deciding how to expend its money over the period between 3 March and 26 June. There was no other prejudice. To the contrary, the delay enabled the plaintiff to bring forward in evidence the results of the trading over the last financial year.

Of course the plaintiff is not to blame for the fact that those figures were not before Master Wheeler, but the fact remains on the material before the Master the plaintiff's financial position was such as it seems to me to warrant an order having been made at that stage. For that reason it seems to me that the cost of the hearing before the Master should be borne by the plaintiff.

The hearing before me has not resulted in an order for security. The court had the benefit on appeal of the fresh information which, if it is accurate, shows a quite dramatic turn in the fortunes of the plaintiff. On the basis of that dramatic alteration the plaintiff's position is now, in my opinion, sufficiently strong financially as to not warrant the making of an order for security once the relevant undertakings have been brought into account. Those undertakings were not proffered until last Friday, although as earlier as May last year the plaintiff indicated to the first defendant that it was prepared to take some action to ensure that the monies borrowed from the plaintiff's directors was not returned to them.

Notice of the evidence upon which the plaintiff particularly relied to demonstrate the change in its financial fortunes was not given to the first defendant until the day before the hearing, and, indeed, until midday on the day before the hearing, very close to the last possible time that notice could have been given.

The broad explanation for the delay in getting this financial material before the first defendant is of course that it took some time after the end of the financial year before the material was available; why the delay extended to midday on Thursday last week has not been explained.

In the circumstances it seems to me that the first defendant should receive some of its costs on the appeal, it properly coming to court on the basis, when the appeal was instituted, that there was a real question about the correctness of the order made by the Master.

Because in my view the first defendant had then good grounds for bringing the appeal, this seems to me to be a case where an adjustment to the rule that costs follow the event should be made. In my opinion a just outcome would be an order that the first defendant's costs of the appeal be taxed and when taxed be paid as to half by the plaintiff.

I have held that the Master was wrong in refusing the application for security simply on the basis of the delay and accordingly to that extent the success on the question of law about which s.13 speaks has been I think made out. Accordingly I will grant a certificate in relation to the costs of the appeal.

At a glance

Court

Decision date

Before

Source

Judgment (35 paragraphs)

Parties