Systems Associates Pty Limited v Engeneic Pty Limited and Others

Systems Associates Pty Limited v Engeneic Pty Limited and Others - [2007] NSWIRComm 179 - NSWIRComm 2007 case summary — Zoe

[14]

It seems plain enough that the inability of the plaintiff company to pay the defendants' costs is a matter which not only opens the jurisdiction but also provides a substantial factor in the decision whether to exercise it. It is inherent in the whole concept of the section that the court is to have power to order the company to do what it is likely to find difficulty in doing, namely, to provide security for costs which ex hypothesi it is likely to be unable to pay. At the same time, the court must not allow the section to be used as an instrument of oppression, as by shutting out a small company from making a genuine claim against a large company. For this reason, Mars-Jones J. was not prepared in the Parkinson case to make an order for security for costs for more than the £1,500 that the master had ordered: see [1973] Q.B. 609, 617. As against that, the court must not show such a reluctance to order security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I fully accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section. 5 As the above passage identifies, some of the significant issues falling for consideration in applications for security for costs will include as a foundational issue the inability of an applicant to pay a respondent's costs. At the same time a Court must take into account whether the granting of the application might impede an applicant from making a genuine claim. Against that consideration a court must weigh the prospect of an impecunious applicant using its inability to pay costs as a means of putting pressure on the moving party where that party may be seriously out of pocket: see also Matiukevitch v AG&S Building Systems Pty Ltd [2007] NSWIRComm 174 at [11]; Sharbine v Harkham and Another [2007] NSWIRComm 177 at [4]. 6 The parties have raised the following factors for consideration on the application:

[20]

8 The respondents represented by Mr Goot SC produced financial records of the applicant in support of their contention that the applicant lacks the capacity to pay a costs order. 9 The contention would appear to be borne out on my analysis of the records. Annexed to an affidavit of John Stanbridge Boyd are the applicant's annual returns for the financial years ending 2004, 2005 and 2006; and, financial statements for the financial years ending 2003, 2004 and 2005. A search was also undertaken by the respondents for properties owned by the applicant within the jurisdiction. The results of that search reveal that as at 6 September 2006 the applicant did not own any property in New South Wales. A historical extract obtained from ASIC records, on 6 September 2006 shows that the applicant's current issued capital comprises two ordinary shares with a fully paid up value of $2 each. 10 The financial statement for the financial year ending 2003 reveals a net profit of $10 after deduction of expenses including salaries in an amount of $74,000, and a total equity of $904. The financial statement for the following financial year shows a net profit of $5,677 after the deduction of expenses including $84,000 for salaries, a payment of interim dividends in an amount of $13,100; accumulated losses of $8,165; and, a total deficit of $8,163. The financial statement for the financial year ending 2005 shows a net profit of $6,454 after deducting salaries in an amount of $110,316, and other expenses; accumulated losses of $3,584; and, a total deficit of $3,582. These figures suggest that the applicant owns no assets and as of the end of the financial year 2005, at least, was operating at a loss. 11 The respondents described the applicant's financial position as that of an independent contractor with work to perform and cash flow but which has never been in a particularly sound financial position. The applicant, on the other hand is described by its director, Mr Peter Wedd, as a solid and successful small business. Mr Wedd produced a number of company records including a bank statement for the period December 2006 to January 2007 showing a credit balance in an amount of $49,023.80. Mr Wedd also produced two other documents which were not formal accounting records but records created by him in relation to outstanding trade debtors ($54,518.43 up to 31 January 2007) and a list of company assets in an amount of $1,228,989.99. This latter total appears to be derived from two sub-totals nominated as tangible assets (in an amount of $131,989.99) and intangible assets in an amount of $1,097,000. In cross-examination Mr Wedd conceded that the figures representing intangible assets were estimates created by him and that no independent estimates of the applicant's intangible assets existed in any formal accounting records. Whether the applicant has an arguable case

[21]

12 The proper approach to the issue concerning the merits of the applicant's case is to assess whether the applicant has an arguable case in the proceedings to which the application for security for costs relates: see Great Scott International Pty Ltd v Cosmetic Suppliers Pty Ltd and Another [2005] NSWIRComm 133 at [40]-[45]; Williamson v Service Corporation International (Australia) Pty Limited (2003) 130 IR 247. In the present proceedings the material in the amended summons suggests that the applicant has at least an arguable case in relation to his application under s 106. 13 According to the amended summons the applicant was engaged by the first respondent in January 2001 to supply and install a local computer network to support the first respondent's biotechnology research. About one month later, in February 2001, the applicant was approached by the respondents to provide ongoing system support for the first respondent but was advised that the rates charged by the applicant were more than the first respondent could afford. A variation of the applicant's "usual" fee was therefore proposed, namely that the applicant, instead of charging its daily rate, enter a retainer to be paid at $26,000 per annum together with a grant of $50,000 worth of share options in the first respondent as consideration for providing its services about 2 days per week. The applicant was informed that the shares were expected to be publicly listed at some future stage with an opening price of US$100. 14 In about May 2001 the applicant was advised that the first respondent's board would only approve 13,200 share options but that the applicant would receive the remainder at a later time. The applicant says it relied on this assertion and believed it would be a term of the contract. 15 The applicant says that it was induced by representations made to it by the respondents to enter into a consultancy agreement sometime in about December 2002 or 2003. The agreement was backdated to commence on 1 February 2001. The agreement made no reference to share options, or to any representations the applicant alleges were made by the respondents. The respondents contend that this is because share options were not offered by the first respondent prior to 6 June 2002 and that any representations relied upon by the applicant were simply not made. Sometime between 7 June 2002 and 1 August 2003 the first respondent granted the applicant share options in two tranches. The first tranche consisted of 13,500 options which vested on 7 June 2005. The second tranche consisted of 3,375 options which vested in August 2006. 16 Under the agreement the applicant provided consultancy services to the first respondent approximately 2 days per week. The agreement expired on 31 December 2004 but the applicant continued to provide services until February 2006. During the working relationship the first respondent did not publicly list any shares. The agreement was terminated on or about 7 February 2006 allegedly following a complaint made by a relative of the third respondent against Mr Wedd. According to the amended summons the complaint alleges that Mr Wedd rebuked the relative for connecting a laptop computer to the first respondent's network. The applicant received $6,250 upon termination. This amount represented one quarter of its yearly retainer payment. 17 The applicant alleges that the agreement was unfair because it allowed the applicant to provide services to the first respondent for about 5 years at a rate very substantially below the market rate. Various tax invoices submitted by the applicant to the first respondent from about 14 February 2001 reveal that the applicant's annual rate was $753 per day. In addition the applicant alleges that the agreement was unfair because it contained terms which in reality were incorrect representations in relation to the financial potential of the first respondent (specifically as to the potential value of shares when publicly listed). These representations induced the applicant to enter into the agreement and to provide services at a significant discount off its usual rate. The applicant also alleges that it received no more than one months notice prior to termination, and that given the length of time during which it had provided services to the applicant, this circumstance also rendered the agreement unfair. 18 Many, if not all of these allegations are in dispute between the parties. No doubt they will be more fully ventilated during the substantive proceedings when at least some of the evidence may fall to be decided on the issue of credibility. I am prepared to find at this stage that the applicant has an arguable case based first upon the representations which it says induced it to enter into the agreement and to provide services at well below its market rate; and, secondly, because of the payment received (one month) upon termination, which it alleges also rendered the agreement unfair on the ground that it was inadequate.

[26]

24 The applicant raises as another factor against the granting of the respondents' application that Mr Wedd, as a director of the applicant, is also a person of financial substance who stands behind the applicant and is willing to lend it financial support. This circumstance, if borne out by the evidence before the Court, may be taken into account by the Court in deciding not to grant the order for security: Fiduciary Ltd and Others v Morningstar Research Pty Ltd and Others (2002) 208 ALR 564 at [52]. According to the ASIC historical extract, the applicant has two current directors, Mr Wedd and his wife. Mr Wedd is also the applicant's current secretary. This evidence suggests that Mr Wedd is one of two controlling minds of the corporation. The evidence also suggests that Mr Wedd is not impecunious. In his affidavit Mr Wedd states that he is willing to provide an undertaking to the Court that he will personally meet a costs order in an amount of $56,000 (representing Mr Boyd's estimate of the respondents' costs) made against the applicant if the applicant is unable to do so. Both directors, he says, have available to them equity of $700,000 in the family home. Mr Wedd is nevertheless firmly of the view that the applicant is capable of meeting a costs order in the sum of $56,000. This view is based on the fact that the applicant's legal costs, as at the date of Mr Wedd's affidavit (12 February 2007) have been funded from its trading operations and forward costs estimates have been budgeted on the same basis. Mr Wedd emphasises that the applicant is a solid and successful business. 25 In Kenoss, Wright J considered whether evidence which established that persons standing behind the corporate applicant, who were of financial substance and therefore likely to be able to provide any security ordered, should be the subject of an order to provide security, at least in the short term, payable on behalf of the corporation. His Honour formed the view on the facts before him that they should not for reasons which included evidence before the Court suggesting that the corporate applicant's financial difficulties may be transitory: Kenoss at [17]. The judgment also referred to a line of authorities for the proposition that where there is no evidence as to the willingness or ability of creditors or shareholders to stand behind the corporation (and provide financial support), then the Court will order security for costs against the corporation: Kenoss at [4]. 26 The evidence adduced in this present application suggests a somewhat similar set of circumstances from that confronting his Honour, Wright J, in Kenoss. Here one of two directors has indicated his willingness and ability (and that of his co-director) to provide financial support to the corporate applicant should it be unable to meet a costs order. Summary of factors

[27]

27 It remains to weigh all of the above discretionary factors relied upon by both parties in the balance in order to decide whether the respondents' application should be granted. In my view the weight of the factors relied upon is against the granting of the application. First, the evidence, although providing some support for the respondents' contention that the applicant would be unable to meet a costs order in an amount of $171,000, equally supports a conclusion, at this preliminary stage, that the applicant is not impecunious. It is an ongoing business with cash flow and money in the bank, in the order of $50,000, as at January 2007. The Court has a wide discretion as to the quantum of costs and is not bound to accept the respondents' estimates. This is particularly so in the present circumstances where the respondents provided two estimates which could be said to be "poles apart"; the first for $56,000, and the second for $171,000. This marked disparity in turn may give rise to a suggestion, which it is not necessary for the Court to take any further on this application, that at least one of the estimates may not be reliably based. Secondly, as I have found the applicant has an arguable case. Thirdly, there is insufficient material upon which the Court can make any useful assessment as to whether the respondents have delayed making their present application. Accordingly I make no findings in relation to the factor of delay insofar as it is relied upon by the applicant as a factor that the Court should consider in the exercise of its discretion. Fourthly, and most persuasively in my view, Mr Wedd, as one of two controlling minds behind the applicant, has indicated the willingness and the ability of both directors to stand behind it and provide financial support, if necessary, in an amount of $56,000 (representing Mr Boyd's estimate). To give effect to this, Mr Wedd is willing to provide an undertaking to the Court to personally make available on behalf of the applicant a sum of $56,000 as payment for any costs order made against it. 28 I propose therefore to require Mr Wedd to provide to the Court within 7 days of the date of this judgment a written undertaking that in the event the applicant is unsuccessful in its s 106 application and costs orders are made against it, Mr Wedd will be personally responsible for a payment of $56,000 awarded against the applicant. The respondents' application is otherwise dismissed. 29 The Court makes the following orders:

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