Soul Pattinson Telecommunications Pty Ltd v Subex Americas Inc

Principles 4 Subex applies both under s 1335 of the Corporations Act 2001 (Cth) ('the Act") and s 56 of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act"). Section 1335(1) provides: 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. 5 Section 56(1) of the Federal Court Act contains the Court's general power to order security. It is in these terms: The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the court to give security for the payment of costs that may be awarded against him or her. 6 There may be subtle differences in the operation of these two provisions. Section 1335 of the Act is subject to a condition precedent - the appearance of credible testimony of a particular kind - which does not appear to precondition s 56 of the Federal Court Act. In a case, however, where the only basis asserted for the security relates to an alleged inability of the applicant to meet a future costs order it may, in practice, be difficult to discern a difference in the operation of the two provisions. In Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 Lee J thought (at 4-5), in a context such as the present, that an inability to succeed under one spelt inevitable defeat under the other. There is no present need to resolve that question but I would reserve whether that is necessarily always so. However, in this case, and indeed in most cases, it will often be so. 7 There is a great deal of learning about applications such as the present. However, the present matter may be resolved by noting but one. 8 The testimony suggesting an inability to pay must have some characteristic of cogency or, to put it another way, must be sufficiently persuasive to permit a rational belief to be formed: Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 [at 5]. Often enough, conflicting but nevertheless rational views may be held on some topic in dispute. It is no surprise then that the demonstration that there are grounds for thinking that a corporation may be able to meet a costs order does not mean that there are not rational grounds for thinking the contrary, a consequence noted by Von Doussa J in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 204-205. 9 It is useful then to turn to the ability of Soul to pay any ultimate adverse costs order. Soul is a member of a group of companies the parent of which, SP Telemedia Ltd, is listed on the Australian Stock Exchange. Soul is 100% owned by SP Telemedia. As was already noted, Soul owns fibre network assets and holds a carrier licence issued under the Telecommunications Act 1997 (Cth). It employs 170 staff in Sydney and Newcastle and supplies services to more than one hundred federal, state and local government entities. 10 There are 25 companies in the SP Telemedia group. As is common, there is a class order in place for the entire group issued by the Australian Securities and Investment Commission ("ASIC") pursuant to s 341(1) of the Act. That provision authorises ASIC to dispense corporations from the obligation to file corporate returns under the Act. To obtain the benefit of that order, each member of the group has executed a deed of cross-guarantee. I will not set its terms out. It suffices to observe that it has the effect of causing each member of the group to cross-guarantee the obligations of all other members of the group on, broadly speaking, the occurrence of insolvency. 11 Subex's obligation on the present application was to show that there was some rational basis for thinking that Soul could not meet an adverse costs order. There are, so it seems to me, two ways that rational belief could be established. First, Subex could seek to show that the group as a whole was likely to be wound up so that the cross-guarantee would be activated, rendering Soul liable for all of the debts of each other member of the group. Given that the group was unlikely to permit this to occur unless it was insolvent, it would follow that it was probable that Soul would be insolvent too. Secondly, Subex could show that Soul itself would be unlikely, on a stand alone basis, to be able to meet any future adverse costs order. 12 Subex pursued both of these courses. As for the first, that is the group position, there was in evidence the audited accounts for SP Telemedia Limited and its controlled entities for the half year ended 31 January 2009. Subex drew attention to three matters in that report. First, it pointed to what it said was a working capital deficiency of some $32 million as at 31 January 2009. The consolidated interim balance sheet showed near cash assets totalling about $86 million whereas its current liabilities were shown to be about $118 million. Secondly, although the consolidated interim balance sheet showed net assets of $311 million, that total included within it a $342 millionintangible asset the nature of which did not appear from the report. Thirdly, it pointed to a loss made for the financial year ending 31 July 2008 of $18.9 million. 13 I do not think that this material provides any rational basis for suggesting that SP Telemedia Limited or its group might become insolvent. The audited half yearly accounts also show: (a) a net profit for the six month period ending 31 January 2009 of $5 million as opposed to a $2.5 million profit the preceding year; (b) cashflows from operating activities of $46 million; (c) a declaration by the directors that the company was solvent as at 31 January 2009; and (d) that the group used its excess cashflow to pay down debt to the extent of $21 million in advance so that it now has no repayment obligations under its facilities until July 2010. 14 The material does not suggest that there is any real risk that the group as a whole has solvency issues (above the background risk faced by all corporations). I am unmoved by Soul's failure to explain the $342 million intangible asset because there is no obvious reason why a company should be required to justify particular assets in its audited accounts. Of course, had there been some evidence that the group was in difficulties it might have been relevant, but here that situation was not approached, still less reached. So too, I am unpersuaded by the alleged working capital shortfall because it is wholly inconsistent with the obviously substantial prepayment which has been made on the loan facilities. Finally, the fact that a loss was made in the financial year 2008 does not, without much more, bespeak insolvency. Solvent companies make losses. In any event, the fact is that this group is presently making a profit. 15 In those circumstances, I do not think there is any sensible risk that Soul will be unable to meet any costs order by reason of its membership of the SP Telemedia Group and/or its execution of the deed of cross-guarantee. 16 I turn then to the stand alone position of Soul itself. The evidence shows that Soul: (a) has a paid up capital of $2; and (b) owns fibre network assets and holds a carrier licence under the Telecommunications Act 1997 (Cth). 17 I do not think that (a) shows an unlikelihood of being able to pay any costs order. The fact that a company has a shareholders' capital of $2 tells one nothing about its other forms of capital, still less about whether it can meet its debts as and when they fall due. Of course, in a non-operating company this might mean something. But this company owns network assets, holds a carrier licence, has a staff of 170 employees, and more than 100 governmental clients. As will presently be seen, its bank account regularly has a balance in excess of $1 million. The proposition that its only capital is members' capital appears difficult to sustain. 18 During the hearing two documents were tendered by Subex from Soul's records. The first was an accounts payable register which was said to show that 30% of Soul's debts were 90 days old. It also showed, I think it is worth noting, that 70% were not and that there were no accounts outstanding beyond 90 days. It might be noted that there was no evidence as to the terms upon which any of these invoices were rendered. 19 Secondly, there was a printout of Soul's bank account statements. These showed, in the period 3 November 2008 to 27 April 2009, a balance fluctuating between $6,105.50 credit and $1,705,325.37 credit. Indeed, as might be expected in a working account of a substantial business, it showed significant inflows and outflows of cash. I find it quite impossible to find any support in this document for the notion that Soul would not be able to meet any costs order. 20 Mr Golledge, who appeared for Subex, submitted that the bank account statements also showed substantial deposits by the parent company which, so he argued, should lead to the conclusion that Soul was being "propped up" by SP Telemedia. This, I think, carried the further implication that unpropped it might fall over. With respect, I simply cannot extract that from the bank statements - without knowing what each entry is for the matter is pure speculation - they could, for example, record intercompany loans. 21 It was submitted that Soul had failed to place before the Court any financial information and that adverse inferences should therefrom be drawn. I do not agree. There are no financial statements available for Soul because it is a member of a consolidated group subject to ASIC's class order. In those circumstances, I do not think there is anything untoward in its failure to provide non-existent financial statements. Nor is it correct to say no information was produced. To the contrary, the audited consolidated accounts for the most recent half year were produced. 22 In those circumstances, I do not consider that it is open to think that there is a risk that Soul will not be able to pay any adverse costs order made against it in the event of its failure in this litigation. It follows that the jurisdictional prerequisite to s 1335 of the Act has not been satisfied. Whilst there is no such requirement under s 56 of the Federal Court Act, I cannot think that an order for security would be available in the present circumstances. 23 The motion is dismissed with costs. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram.

Associate: Dated: 18 June 2009 Counsel for the Applicant: D. R. Sulan