Wontok Enterprises Pty Ltd v Telstra Corporation Ltd

Supreme Court of NSW|2022-04-22|Before: Stevenson J, Macfarlan JA

Solicitors: Bird & Bird (Plaintiff/Respondent) Gilbert + Tobin (Defendant/Applicant) File Number(s): 2021/259116

Judgment

In 2012 the plaintiff, Wontok Enterprises Pty Ltd, entered into an agreement with the defendant, Telstra Corporation Ltd, to license to Telstra antivirus and cyber-security software so that Telstra could provide that software to its customers for a fee.
Telstra terminated the agreement with effect on 31 March 2021.
Wontok claims that: 1. Telstra continued to let its customers use the software after March 2021; 2. Telstra did not, as it was required to do, advise Wontok that it should not provide ongoing support to those customers; and 3. Wontok, as it was obliged to do, continued to provide such support.
Wontok claims that Telstra owes it some $3 million in relation to that support.
Wontok commenced these proceedings in September 2021 seeking to recover that amount.
The proceedings have reached a stage where Wontok has, very recently, served its evidence in chief, being an affidavit of its director, Mr Bruce Perry.
Now, by Notice of Motion filed on 12 April 2022, Telstra seeks security for its costs of the proceedings in the sum of $595,000. Telstra first foreshadowed an application for security on 2 March 2022.

The threshold question - is there a reason to believe that Wontok will be unable to pay Telstra's costs?

The question is whether there is "reason to believe" that Wontok "will be" unable to meet an adverse costs order in the proceedings.
Telstra must establish: "[T]hat the material before the Court is sufficiently persuasive to permit a rational belief to be formed that, in order to do so, [Wontok] will be unable to pay the costs of [Telstra] upon disposal of the proceedings." [1]
In Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd, [2] Macfarlan JA explained: [3] "[T]he words 'reason to believe' acknowledge that on an application for security for costs, as a matter of practicality, a court will not be able to undertake as thorough an examination of the financial position of a plaintiff as it would if an issue as to that arose at a final hearing. Almost inevitably, the court's assessment will be a preliminary one based on limited materials. Nevertheless, for the power to order security to arise, the outcome of the assessment must be that the court considers that there is 'reason to believe' that the plaintiff 'will be' unable to meet an adverse costs order. A conclusion that there is a risk that that will, or may, be the case is insufficient."
On this application, close attention was paid by counsel to Wontok's financial statements for the six month period to 31 December 2021. It is common ground that those financial statements reflect Wontok's current financial position.

The weight to be attached to the financial statements

Ms Williams, who appeared for Telstra, submitted that "little weight" should be given to Wontok's financial statements.
Ms Williams pointed to a statement which appears in the accounts under the heading "Compilation Report Statement": "The Responsibility of the Directors The directors are solely responsible for the information contained in the special purpose half-year financial statements and have determined that the basis of accounting used is appropriate to meet their needs and for the purpose that the half-year financial statements were prepared. The special-purpose half-year financial statements were compiled exclusively for the benefit of the directors. The directors do not accept responsibility to any other person for the contents of the special purpose half-year financial statements."
However, on the preceding page of the accounts, under the heading "Directors' Declaration", it is stated that: "The directors of the company declare that: 1. the financial statements and notes for the half-year ended 31 December 2021 are in accordance with the Corporations Act 2001 and: a. comply with Australian Accounting Standards as stated in Note 1; and b. give a true and fair view of the company's financial position as of 31 December 2021 and of its performance for the period ended on that date in accordance with the accounting policies described in Note 1 to the half-year financial statements. 2. in the directors' opinion, there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable."
Those statements were made on 8 February 2022, several weeks before Telstra foreshadowed seeking security for costs in the proceedings.
Ms Williams also pointed to the fact that although Mr Perry had signed these statements in the accounts, he had not sworn an affidavit on this application and was thus not available to be cross-examined in relation to the accounts.
These are factors to be taken into account, but they do not persuade me that I should give "little weight" to the statements of the accounts.

The balance sheet

The balance sheet of Wontok as disclosed in those accounts is in the following form:
The balance sheet shows that Wontok had net assets of $7,398,253 as at 31 December 2021.
One of the current assets disclosed in the balance sheet is "trade and other receivables" of $4,636,861 that, the notes to the accounts reveal, is comprised of "trade receivables" of $319,131 and "other receivables" of $4,317,730.
As Ms Williams pointed out, the "other receivables" comprised of 83.5% of Wontok's current assets as at 31 December 2021.
Wontok's solicitor, Ms Jane Owen, has given unchallenged evidence that: "The other receivables accounted for in the December 2021 Statements consist of amounts owed by Wontok's related entities, Wontok International Limited … and Wontok Inc. …, as a result of arrangements between Wontok, Wontok International and Wontok Inc."
Ms Owen also gave evidence that: "I am instructed by Mr Perry and believe that both Wontok International and Wontok Inc are profitable trading companies and that Wontok International and Wontok Inc are in a financial position to continue to pay the amounts owed to Wontok that make up the 'other receivables' item of the balance sheet in the Statements."
Ms Owen's statement, on information and belief from Mr Perry, does not set out upon what basis Mr Perry made these statements. However, the evidence was admitted without objection. [4]
As Ms Williams pointed out, there is no evidence on this application as to the circumstances in which the "other receivables" came to be owing to Wontok by its "related entities" nor as to the terms of the repayment arrangements between Wontok and those related entities.
However, Wontok has included "other receivables" as part of its "current assets" and its directors have declared that the accounts represent a true and fair view of Wontok's financial position. In those circumstances, I would infer that the "other receivables" are amounts which are payable by Wontok's related entities to Wontok on demand; rather than infer, as Ms Williams invited me to, that the "other receivables" had been wrongly characterised in the balance sheet as "current" assets.
Wontok appears to be an established trading company. It provided software to Telstra for 11 years.
Ms Owen has given evidence on information and belief from Mr Perry that: "a. Wontok has continued to operate as a going concern since 15 October 2021, being the date pleaded in the [Amended Commercial List Statement] at which Wontok contends that Telstra constructively advised Wontok in writing that it did not require Wontok to provide any additional services or support to Telstra or its customers; b. Wontok has continued to generate revenue from the supply of software and the provision of services that support the operation of this software since 15 October 2021; and c. Wontok will continue to operate as a going concern and maintain its software business in Australia irrespective of the outcome of this proceeding."
In those circumstances, I see no reason to assume that Wontok's related companies would not meet any demand for payment of amounts owing to Wontok, nor that Wontok could not realise this asset if necessary, were it to be faced with an adverse costs order.
Wontok's balance sheet as at 31 December 2021 also shows as "non-current assets" "property, plant and equipment" of $2,705,438.
The notes to the accounts show that this figure comprises of "IT Infrastructure & Application Development" of $4,650,370 less "Accumulated Depreciation" of $1,944,932.
In relation to this asset, Ms Owen gave this evidence on information and believe from Mr Perry: "I am informed by Mr Perry and believe that the PPE is conservatively valued at the lower of cost or realisable value, with the realisable value being assessed at least annually. I am informed by Mr Perry that the market value of these assets is significantly higher than the lower of cost or realisable value the accounting standard employed by Wontok. I am informed by Mr Perry and believe that the PPE consists of the cyber security software owned by Wontok and the backend infrastructure owned by Wontok that is used to support these applications."
Ms Williams did object to this evidence, which I allowed only as evidence of Mr Perry having expressed to Ms Owen the beliefs recorded.
The "IT Infrastructure & Application Development", referred to as being a component of "Property, Plant and Equipment", is the antivirus and cyber-security software the subject of these proceedings.
Wontok is able to use that software by reason of a "Distribution Agreement" made between it and Wontok International Ltd dated 30 September 2011. One term of that agreement is that Wontok cannot "assign or otherwise transfer any of its rights" under the agreement without the consent of Wontok International Ltd. This suggests that, whatever may be the true value of the software, it is unlikely that Wontok could easily dispose of it in order to raise funds to meet any adverse costs order in these proceedings.
Ms Williams also drew attention to a "Copyright Assignment Agreement" made between Wontok and Wontok International Ltd on 19 November 2021 which purports to assign to Wontok the software in question for consideration of $1; albeit on the condition that Wontok International Ltd has the option to "buy back the Copyright in the Works" for $1. That agreement was entered into after Wontok commenced the proceedings against Telstra. It provides further reason to conclude that Wontok would not be easily able to realise any funds of significance in relation to the software, were it visited with an adverse costs order. Accordingly, for present purposes, I propose to disregard this asset when considering Wontok's balance sheet.
However, the fact remains, assuming that the "non-current asset" is ignored, Wontok's balance sheet shows an excess of assets over liabilities in the order of $4,696,000.
Further, even if the "current assets" of "other receivables" is ignored, Wontok's assets exceeds its liabilities by some $376,000.

Income

Wontok's income statement for the half-year ending 31 December 2021 is in this form:
There is no doubt that Wontok's revenue has dropped dramatically.
The notes to the account reveal that this drop in revenue is primarily by reason of the drop in license fees which, I would infer at this stage, is by reason of Telstra's termination of the license arrangement.
Nonetheless, Wontok achieved a net profit after tax of $222,042 for the six months to 31 December 2021.
I have set out above Ms Owen's evidence, on information and belief from Mr Perry, that Wontok will continue to conduct its software business in Australia, regardless of the outcome of these proceedings.
Ms Owen also gave unchallenged evidence that: "On the basis of the financial results disclosed in the Statements and the ongoing performance of the business, I am informed by Mr Perry and believe that he expects that Wontok will generate revenue in excess of $1,800,000.00, a net profit before tax in excess of $600,000.00 for the 2021-2022 financial year."

Conclusion

In these circumstances, I am not persuaded that there is reason to believe that Wontok will be unable to meet an adverse costs order in these proceedings.

Discretionary factors

Assuming I am wrong in coming to that conclusion, I think that Mr Burnett, who appeared on behalf of Wontok, was correct to submit that the magnitude of risk that an adverse costs order would not be met is low [5] and that this provides a further reason to decline to order security.
I am not persuaded that there are any other discretionary factors which would warrant declining to order security, had I been satisfied that there was reason to believe that Wontok would not be able to meet an adverse costs order.
Wontok does not suggest that an order for security would stifle the proceedings.
There has been some delay by Telstra in bringing the application, but not such delay as would, itself, warrant refusing to order security were a case for security otherwise made out.
Mr Burnett submitted that such financial difficulty under which Wontok may be labouring was caused by the conduct of Telstra of which it complains in these proceedings.
However, Wontok produced no evidence to support that conclusion. The only evidence to which I was directed was Ms Owen's evidence that: "In respect of the revenue and net profit recorded in the December 2021 Statements, I note that this is lower than the revenue and net profit recorded in the June 2021 Statements. I am informed by Mr Perry and believe that Wontok generated the net profit recorded in the December 2021 Statements despite a reduction in revenue for the six month period because there was a significant reduction in Wontok's operating expenses during this period because Wontok was no longer required to maintain Telstra's account with Wontok."
That evidence was not directed to the proposition that conduct complained of by Wontok in these proceedings is the cause of its current financial position.

Quantum

In view of the conclusion to which I have come, it is not necessary for me to express any opinion about the quantum of costs sought by Telstra.
Nonetheless, I shall do so albeit briefly.
Telstra did not adduce evidence from a costs assessor.
Telstra's solicitor, Mr Jason Oliver, estimated that Telstra's total costs of the proceedings would be in the order of $792,000. Mr Oliver applied a discount of between 65% to 75% to reflect the difference between solicitor/client and party/party costs and thus opined that Telstra's likely recoverable costs were some $595,000.
As Mr Burnett submitted, Mr Oliver, in calculating Telstra's likely solicitor/client costs, made very generous estimates of the time that would be taken to prepare Telstra's evidence, organise discovery, participate in settlement negotiations and mediation, prepare for trial and conduct the trial.
For example, Mr Oliver estimated that junior counsel would be engaged for 12 days, a lawyer for 16 days, a paralegal for 8 days, special counsel for 8 days and a partner for 1 day in relation to preparation of Telstra's evidence. Mr Oliver also estimated that, for discovery, a lawyer would be engaged for 33 days, a paralegal for 48 days and special counsel for 6 days.
In relation to preparation for trial, Mr Oliver estimated that junior counsel would be required for 13 days, a lawyer for 18 days, a paralegal for 7 days and special counsel for 13 days.
Accepting that a broad-brush approach is required when assessing the quantum of costs for security for costs, Ms Owen's estimate of between $325,000 and $375,000 appears to me to be a more realistic estimate of Telstra's likely recoverable costs.
Were I inclined to order security for costs, I would have ordered costs within that range.

Conclusion

The defendant's Notice of Motion of 12 April 2022 is dismissed with costs.

Endnotes

Warren Mitchell Pty Ltd v Australian Maritime Officers Union [1993] FCA 774 (Lee J) cited in Idoport Pty Ltd v National Australia Bank Ltd [2001] NSWSC 744 at [60] (Einstein J).
[2014] NSWCA 65.
At [16].
Although other statements made by Ms Owen on information and belief from Mr Perry were objected to and admitted on the limited basis to which I refer below.
KDL Building Pty Ltd v Mount [2006] NSWSC 474 at [14] (Brereton J). 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. Decision last updated: 28 April 2022

At a glance

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Judgment (11 paragraphs)

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Cases Cited (4)