Shaanxi Nutracare Australia Pty Ltd v Viplus Dairy Pty Ltd

Federal Court of Australia|2021-08-26|Before: Mr P, O'Callaghan J

Within 7 days of the date of these orders, the applicant provide the respondent with security for its costs in the proceeding in the sum of $225,000.
The security referred to in order 1 be provided by payment into Court or the provision of an irrevocable bank guarantee from an Australian trading bank.
The proceeding be stayed unless the amount referred to in order 1 above is paid into Court.
Costs reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 This is an application by the respondent (Viplus) pursuant to s 35A of the Federal Court Act 1976 (Cth) for the review of a decision by a registrar of the court refusing its application for security for costs. It follows that the review is by way of a hearing de novo, in which the matter is considered afresh. This is a consequence of the decision of the High Court in Harris v Caladine (1991) 172 CLR 84, a point reiterated recently by the Full Court in Bechara v Bates [2021] FCAFC 34; (2021) 388 ALR 414 at 415-423 [1]-[31]. 2 This proceeding is set down for hearing before me on issues of liability, together with Shaanxi Prospect Co Ltd v Shaanxi Nutracare Australia Pty Ltd (VID 828 of 2020), commencing on 30 September 2021 on an estimate of seven days. 3 Viplus seeks an order pursuant to r 19.01 of the Federal Court Rules 2011 (Cth) that the applicant (Nutracare) provide security for Viplus' costs of the hearing in the amount of $295,000 and that the proceeding be stayed until such time as the security is provided. 4 Because the trial of the two proceedings is scheduled to commence in five weeks' time, it is important that I make a ruling promptly. Accordingly, these reasons are less detailed than they otherwise might be.

The facts 5 Viplus provided a useful chronology of relevant events that have occurred on and from the commencement of this proceeding (originally in the Supreme Court of Victoria). I attach the chronology to these reasons, marked "Annexure A". 6 As I explain below, one of the issues about which the parties took a different view was the extent of any relevant delay in the bringing of the application. The chronology is helpful in understanding that issue. Nutracare says that the relevant period of Viplus' delay should be regarded as starting to run from 17 December 2020, when Viplus' lawyers (K&L Gates) sent a letter to Nutracare's lawyers (Arnold Bloch Leibler) setting out its concerns that Nutracare did not have sufficient assets to meet any adverse costs order. Viplus says that the net of delay should not be cast that wide, because on 8 February 2021, Arnold Bloch Leibler wrote to K&L Gates insisting that Nutracare was not impecunious. Viplus also says that until the proceeding was transferred to this court from the Supreme Court in March 2021, and until it had been determined that the two proceedings would be heard together, it would not have been practicable to fashion an appropriate order for security, because the contours of the proceeding were not then clear. Both parties ultimately accepted that the critical period of delay is from 7 April 2021 (when I ordered that the two cases be heard together) until 4 June 2021 (when Viplus issued its application for security for costs).

Governing principles 7 The principles governing an application of this type are well known and were not in dispute. 8 If it appears by credible testimony that there is reason to believe that a corporation will be unable to pay the costs of a successful defendant, the court's discretion to order security for costs is enlivened. 9 That discretion is a broad one, but it must be exercised judicially. See Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 3. The court aims to achieve a "balance between ensuring that adequate and fair protection is provided to the defendants, and avoiding injustice to an impecunious plaintiff by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings". See Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467 at 470 (Giles J). 10 There are a number of well-established considerations that may (not must) be taken into account in the exercise of the discretion. They include: whether the application for security for costs has been brought promptly or has been unduly delayed; the strength and bona fides of the applicant's case; whether the applicant for security voluntarily assumed the risk of a corporate plaintiff's financial position; whether the applicant's impecuniosity was caused by the respondent's conduct subject of the claim; 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; and 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.

The competing submissions 11 In this case, Nutracare submits that the discretion to order security for costs should not be exercised in Viplus' favour for four principal reasons. 12 First, it says that by far the most important reason is that Viplus delayed in bringing the application, and has not provided any adequate explanation for that delay. It says that the cases make it clear that delay is a critical consideration, because it is capable of causing prejudice or unfairness to the party against whom the order is sought, especially when, because of delay, that party has expended large sums of money and time on the preparation of its case, assuming that no application for security was to be made. See, by way of example only, Axent Holdings Pty Ltd v Compusign Australia Pty Ltd (No 2) [2017] FCA 1102 at [58]-[59]. 13 Secondly, it submits that the fact that it is impecunious is attributable to the wrongful repudiation by Viplus of its contractual obligations, which is the essence of the case that it alleges in this proceeding. 14 Thirdly, it says that Viplus made a careful and deliberate decision to accept the commercial risk of dealing with a corporate entity that, it is alleged, was a special purpose vehicle created solely for the purpose of carrying on the business that Nutracare says was wrongfully brought to an end by Viplus. 15 Fourthly, it says that although it cannot make a submission that the litigation would be "stultified" (because no evidence of the risk of it was adduced), nonetheless the fact that the application for security was brought so late means that it will suffer "serious forensic prejudice" during "the intensive phase of preparation as the trial looms close to commencement", citing among other cases Attorney-General of Botswana v Aussie Diamond Products Pty Ltd [2009] WASC 299 at [21]. 16 Nutracare relied on an affidavit sworn by Mr Dollard dated 23 August 2021. Mr Dollard is a solicitor employed by Arnold Bloch Leibler and has the care and conduct of the proceeding on behalf of Nutracare. He swore that Nutracare's costs of this proceeding are being funded by Nutracare Life Ltd (NLL), which is a 50% shareholder in Nutracare. Mr Dollard said that he was informed by Mr Mark Lipshut and Mr Steven Lipshut, directors of Nutracare and NLL, that: as at 30 June 2021, NLL has a cash balance of only $192,000; neither Mark nor Steven Lipshut have the financial capacity to fund the costs of the upcoming trial or to provide security; the current shareholders of NLL "have not said that they will fund" a security order; and that it might take months for Mark and Steven Lipshut to raise funds to satisfy any security order. 17 Mr Dollard also deposed as follows: 11 … (f) [S]ince 7 April 2021, [Mark and Steven Lipshut] have conducted the litigation on behalf of the Plaintiff in the belief that a security for costs application would not be made by the Defendant; (g) [I]f an application for security for costs had been made earlier (particularly before 7 April 2021 when the proceeding was set down for trial) and the Plaintiff had been ordered to provide security Mark Lipshut and Steven Lipshut would have conducted the litigation on behalf of the Plaintiff in a different manner and sought additional time for various interlocutory steps such as the preparation of evidence, and would have had more time to raise the necessary funds; and 12 I am informed by Mark Lipshut and Steven Lipshut and believe that, in the circumstances, if the Court makes the Proposed Orders or any other order requiring the Plaintiff to provide security for the Defendant's costs, the Plaintiff may be unable to provide the security ordered by the commencement of the trial of this proceeding on 30 September 2021 or at all. The Plaintiff will therefore suffer prejudice as: (a) its preparation for trial will be disrupted; (b) it may lose the upcoming trial date of 30 September 2021; and/or (c) it may be unable to proceed with the trial of this proceeding at all. 18 Viplus accepted that the delay in bringing the application from 7 April 2021 until 4 June 2021 was a consideration that militated against the making of the order that it sought. It accepted that delay is usually an important, even often decisive, factor in deciding whether to order security. On the other hand, it submitted that the passage of time is only one factor to be taken into account in the balancing exercise that is involved, citing Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd (No 5) [2011] FCA 1041 at [18]. Viplus also submitted that "not a great deal happened" in that period, other than the filing of lengthy affidavits by Mark and Steven Lipshut. It was also submitted that a number of the cases which suggest that delay is often a decisive factor were concerned with an application for security for past costs. (Here, Viplus does not seek any order to cover past costs. The application is limited to the costs of the trial.) 19 Viplus also submitted that the affidavit of Mr Dollard to which I referred was unpersuasive. It was submitted that Mr Dollard's evidence that the shareholders of NLL "have not said that they will fund" any order for security is equivocal, and that I should not have regard to it in circumstances where it seems that the shareholders have not refused to do so, or where it seems that they may not even have been asked to do so. It was also submitted that Mr Dollard's evidence that Nutracare "may be unable to provide the security ordered" was also equivocal, and that in circumstances where Mark and Steven Lipshut, or their associates or associated entities, must be assumed to be funding the legal costs of Nutracare in both proceedings, I should give little weight to that evidence, because it is both hearsay and unexplained assertion at that. In that regard, Viplus submitted that the cases make it tolerably clear that a party seeking to resist an application for security on the ground of impecuniosity must produce a full and frank statement of its assets and the assets of those who stand behind it (see eg Dagenham Nominees Pty Ltd v Shanks (2011) 110 SASR 577 at 582) and that I should therefore place no weight on the assertions made in Mr Dollard's affidavit. 20 Viplus also stressed that courts look not just to the impecuniosity of a corporate plaintiff, but also to those standing behind it, or those who stand to benefit from the litigation, citing the following passage from Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4: [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 the 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 security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts. 21 Viplus also submitted that I should not give weight to the notion that it is to be regarded as having voluntarily assumed the risk of dealing with a corporate entity because its case is that there was never any direct relationship between it and Nutracare. 22 Viplus also submitted that I should not give weight to the suggestion that Nutracare's impecuniosity had been brought about by the very conduct the subject of the proceeding because it is impossible, on the hearing of an application such as this, to form even a preliminary view about that question, where the evidence is voluminous and the issues complex.

Consideration 23 I trust that I have done no disservice to counsel in my summary of their very helpful written and oral submissions, but, as I say, it is essential that the parties know the position sooner, not later, because the trial is looming. 24 The issues here are finely balanced, and there is much to be said on both sides. 25 It is certainly the case that Viplus did not proffer any, or any adequate, explanation of the delay that occurred in making the application in the period between early April and June 2021. In my view, that is the most relevant period of delay, because when K&L Gates first raised the issue in December last year, Arnold Bloch Leibler insisted that Nutracare was not impecunious. And until early April, as Viplus submitted, it would have been difficult to fashion an application for security, not knowing how the two proceedings were to be tried. 26 Weighing the competing interests of justice in the balance, it seems to me that, in the particular circumstances of this case, it is an appropriate exercise of discretion to make an order for the provision of security, despite the unexplained delay of four months. 27 Ultimately, I am persuaded that the equivocal nature of the evidence proffered on behalf of Mark and Steven Lipshut by Mr Dollard, and the economic reality of the fact that Mark and Steven Lipshut, or their associates, are funding Nutracare's legal costs in both proceedings, means that it would be unjust to leave Viplus in a position where it would be unable to satisfy any order made in its favour for the payment of its costs, if Nutracare's action failed. 28 I do not think any weight should be given to the point about impecuniosity being brought about by the subject matter of the proceeding because, as counsel for Nutracare recognised, that is a question that is impossible to determine now. 29 In reaching this conclusion, I have also not had regard to the issue of whether Viplus voluntarily assumed the risk of Nutracare's corporate being. It was submitted that it is necessary that a defendant engaged in a voluntary contractual relationship with a plaintiff and that it is such a contract that must give rise to the relevant proceeding. This is not the occasion to consider, let alone decide, the factual and legal aspects such a submission raises in this case. See generally Mecrus Pty Ltd v Industrial Energy Pty Ltd [2015] FCA 103; (2015) 327 ALR 523 at [68]-[74]. 30 As to quantum, Viplus seeks security in the sum of $295,254. Nutracare submitted that that amount was too high, because it includes costs in respect of Viplus preparing its own affidavit evidence ($40,000) and the review of Nutracare's evidence ($12,160), which are tasks which have, or should have been, completed by now. It was also submitted that I should not make allowance for reviewing Nutracare's expert report ($10,720) or Viplus instructing and liaising with their own expert ($6,920), because Nutracare has not filed an expert report. Viplus, in reply, did not seek to challenge these submissions, so I will deduct each of those amounts from the sum sought. 31 It was also submitted that I should make some deduction because the schedule of costs relied on provided for three counsel to be involved, but this is a complex case, and there is no basis for me to say that the involvement of three counsel is inappropriate. Accordingly I will order security in the amount of $225,454, which I shall round off to $225,000, and reserve the costs of the application. Because of the proximity of the trial, I will order that the proceeding be stayed unless (rather than until) the security ordered is provided, so as not to bring any preparation for the trial to an immediate halt. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan.

Associate: Dated: 26 August 2021 Annexure A SECURITY FOR COSTS APPLICATION - VIPLUS' CHRONOLOGY Date Event Reference (if any) 24 July 2020 The proceeding was commenced in the Supreme Court of Victoria and Viplus was served with the writ and statement of claim in this proceeding. Dollard Affidavit, [5(a)] 11 September Viplus filed its defence and counterclaim. Dollard Affidavit, [5(b)] 2020 6 October 2020 Nutracare filed its reply and defence to counterclaim. Dollard Affidavit, [5(c)] 22 October 2020 Viplus filed its reply to Nutracare's defence to counterclaim. Dollard Affidavit, [5(d)] 13 November Nutracare and Viplus made discoverable documents available for inspection. Dollard Affidavit, [5(e)] 2020 15 December Nutracare issued three subpoenas for production to the Prothonotary. Dollard Affidavit, [5(f)] 2020 17 December K&L Gates sent a letter to ABL in which they set out concerns that Nutracare did not have sufficient assets to meet any adverse costs order and sought evidence from Nutracare that it would be able to satisfy any such costs order. First Hume Affidavit, [23]; SH-7 (pp. 138-9) 2020 24 December Shaanxi Prospect Co Ltd commenced related proceeding VID 828 of 2020 against Nutracare, Nutracare Life Limited, Mark Lipshut, Steven Lipshut and ASIC. Dollard Affidavit, [7(a)] 2020 5 February 2021 Viplus issued a summons seeking a stay of the proceeding in the Supreme Court of Victoria on the basis that determination of Federal Court proceeding VID 828 of 2020 commenced by Shaanxi Prospect Co Ltd would ultimately dispose of this proceeding. Dollard Affidavit, [7(b)] 8 February 2021 ABL replied to K&L Gates' letter regarding security, saying inter alia: First Hume Affidavit [24]; SH-8 (pp. 141-2) "your client's conduct the subject of this proceeding has caused our client loss and damage in excess of $18 million. That conduct has necessarily impacted our client's financial position. If it were possible to characterise our client as impecunious (which is expressly denied), that impecuniosity would have been caused or contributed to by your client's conduct." [Emphasis added.] The letter also raised the issue of delay. 17 February 2021 Nutracare and Viplus made further discovery. Dollard Affidavit, [7(d)] 19 February 2021 Justice Sloss raised the possibility that the matter might be apt for transfer to this Court to be heard by the same Judge hearing proceeding VID 828 of 2020. The summons was adjourned for directions on two further occasions (to 26 February 2021 and then 5 March 2021). 5 March 2021 Justice Sloss made orders transferring the proceeding to this Court. 12 March 2021 On 12 March 2021, a Registrar heard the Nutracare security for costs application in proceeding VID 828 of 2020. 15 March 2021 K&L Gates received a transcript of the hearing of the application for security by Nutracare, in which its counsel said: First Hume Affidavit [18]; SH-5 (pp. 83-131) • "this company [Nutracare] does not have any value. The shares in [Nutracare] have no value either" [exhibit p. 97]; • "a 50 per cent shareholding in this company [Nutracare] has no value" [exhibit p. 124]; and • "effectively what we have is shares of a company with no known business, except that it is involved in ongoing litigation" [exhibit p. 92]. 18 March 2021 K&L Gates sent a letter to ABL raising the issue of security and foreshadowing that security for costs would be sought in the event that the proceeding was not stayed. First Hume Affidavit, [26], [27]; SH-9 (pp. 144-5) 26 March 2021 Shaanxi Prospect was ordered to provide security for costs. 31 March 2021 This proceeding was listed before O'Callaghan J for a first case management hearing. On 30 March 2021, the first case management hearing was adjourned to 7 April 2021, so that it could be heard concurrently with proceeding VID 828 of 2020. 7 April 2021 At the case management hearing on 7 April 2021: • Nutracare sought orders that the trial for proceedings VID 122 of 2021 and VID 828 of 2020 be heard together; and • Viplus sought orders that proceeding VID 828 of 2020 be listed for trial prior to proceeding VID 122 of 2021. Justice O'Callaghan ultimately made orders at the case management hearing for the parties in both proceedings to file their evidence, and indicated that he would review the evidence and consider the extent of any overlap in issues so that he could make a decision as to the appropriateness of a joint trial. The orders made on 7 April 2021 set down a trial to commence on 30 September 2021, of a scope to be determined on 20 August 2021. 3 May 2021 On 3 May 2021, Nutracare filed as evidence in this proceeding: • a 51-page affidavit of Mark Lipshut which included an exhibit containing 154 tabs; and • a 28-page affidavit of Steven Lipshut which included an exhibit containing 59 tabs. 2 June 2021 K&L Gates sought access to three affidavits sworn by Sam Dollard of ABL (Dollard Affidavits) on behalf of Nutracare in its security application in proceeding VID 828 of 2020. Second Hume Affidavit, [5] 4 June 2021 Viplus issued its application for security for costs. 16 June 2021 K&L Gates obtain access to the Dollard Affidavits. Second Hume Affidavit, [6], [7]; SH-12; SH-13; SH-14 • The Second Dollard Affidavit exhibited the audited financial statements for Nutracare Life Limited as at 30 June 2020 [from exhibit p. 290]. These financial statements indicate that as at 30 June 2020, NLL had attributed a value of zero to its 50% shareholding of Nutracare [exhibit p. 321]. • The Third Dollard Affidavit exhibited the draft financial statements for Nutracare as at 30 June 2020, which set out that Nutracare: o incurred a net loss of $4,969,527 for the financial year ended 30 June 2020 (at page 4 of the affidavit) [exhibit p. 333]; and o had total equity of negative $18,525 as at 30 June 2020 (at page 5 of the affidavit) [exhibit p. 334]. 7 July 2021 Registrar Gitsham heard Viplus' application for security. 3 August 2021 Registrar Gitsham made orders dismissing the application.

Federal Court Act 1976(Cth)s 35A

Federal Court Rules 2001(Cth)r 19.01

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