Zenith Corporation Australia Pty Ltd v Optus Mobile Pty Limited

Background and claims in the proceedings

1. On or around 4 April 2017, Zenith and Optus entered into an "Optus Small and Medium Channel Partner Agreement" under which Zenith agreed to act as an Optus agent in the marketing and sale of Optus products and services to small business customers (Agreement). The Agreement was for a three year term until 1 April 2020.
2. By letter dated 11 November 2019, Optus gave notice to Zenith that they were terminating the Agreement with immediate effect (Notice of Termination).
3. The Notice of Termination states that Optus had undertaken two investigations and found deceptive and fraudulent conduct engaged in by Zenith and its employees of submitting false expense claims to Optus, inflating or padding out sales by increasing the quantity of devices and services sold to customers, deliberately inflating sales, entering into multiple handset buy-back arrangements and creating unauthorised services for customers. The Notice of Termination asserted that the conduct constituted multiple breaches of the Agreement which were not capable of remedy and entitled Optus to terminate immediately. It also asserted that, as a consequence of termination, Zenith was not entitled to any commission under the Agreement and was restrained, directly or indirectly, from carrying on any business in the telecommunications industry without Optus' consent for a period of 12 months (restraint).
4. By letter dated 18 November 2019, Zenith disputed that Optus' termination of the Agreement was lawful. The letter responds to the allegations of misconduct outlined in the Notice of Termination and says that to the extent conduct engaged in by Zenith was in breach of the Agreement, it had been remedied and was known to Optus. The letter also asserts that Zenith was not bound by the restraint and was entitled to unpaid commissions and damages for wrongful termination.
5. By email sent on 4 December 2019, Optus maintained the termination of the Agreement was lawful and that Zenith and Mr Wang (the sole director and shareholder of Zenith) remained bound by the restraint detailed in the Notice of Termination.
6. On 20 December 2019, Zenith (as first plaintiff) and Mr Wang (as second plaintiff) commenced these proceedings claiming, amongst other things, that Optus' termination of the Agreement was wrongful and the restraint asserted against Zenith and Mr Wang was unenforceable.
7. On 15 January 2020, Optus' solicitors wrote to Zenith's solicitors requesting information about Zenith's financial position to permit Optus to assess whether they needed to take action in respect of the provision of security for their costs. The letter asserted there was reason to believe that Zenith may be unable to pay Optus' costs of defending the proceedings.
8. By letter dated 17 January 2020, Zenith resisted providing security for Optus' costs on the basis that there was a complete overlap between the claims made by Zenith and Mr Wang. Zenith also asserted that any inability on its part to satisfy any costs order was the result of Optus' conduct.
9. In late January and February 2020, the parties exchanged further correspondence in which Optus pressed for, and Zenith maintained opposition to, the provision of financial information and security for costs. By email dated 25 February 2020, Optus' solicitors reserved Optus' position in relation to the question of security of costs, including their right to make an application without further notice to Zenith.
10. On 27 February 2020, Optus filed their commercial list response and advised Mr Wang that he was released from the restraint. The following day, Zenith and Mr Wang were granted leave to amend to remove Mr Wang's claim based on Optus' asserted reliance on the restraint.
11. On 6 March 2020, Zenith filed an amended summons and amended commercial list statement (CLS) removing the restraint claims and Mr Wang as the second plaintiff. In the CLS, Zenith claims that Optus wrongfully terminated the Agreement, that cl 29.1 of the Agreement (which prohibits the recovery of commission payments after termination) is an unfair contract term within the meaning of s 23 of the Australian Consumer Law and that it is entitled to the payment of commission incurred in April, August, October and November 2019 (commissions). Zenith seeks damages for wrongful termination in the amount of $418,149.49, payment of the commissions totalling $372,761.27, interest and costs.
12. On 13 March 2020, Optus filed their amended commercial list response (CLR). In defence of Zenith's claims, Optus relies on the conduct referred to in the Notice of Termination as entitling them to terminate the Agreement. Optus contends that cl 29.1 of the Agreement is not an unfair contract term and denies that Zenith is entitled to the claimed commissions. Optus also contends that any entitlement of Zenith to commissions prior to termination would have been reduced to nil, or alternatively reduced, because Zenith or Mr Wang engaged in the conduct on which Optus relies to support the termination.
13. On 27 March 2020, Zenith served its commercial list reply in which Zenith alleges that Opus knew of the conduct complained of in the Notice of Termination, had consented or otherwise acquiesced to that conduct and cannot now rely on it. The reply otherwise joins issue with Optus' CLR.
14. On 8 May 2020, Zenith served its evidence in chief, which comprises an affidavit of Mr Wang affirmed on 8 May 2020. Mr Wang's affidavit and exhibit is over 800 pages long and refers to statements made and conduct engaged in by around 40 former and current employees of Optus in support of Zenith's claim that Optus knew of or consented to some of Zenith's conduct referred to in support of the termination of the Agreement.
15. On 9 June 2020, Optus' solicitors raised the issue of security for costs again. In a letter sent to Zenith's solicitors, they assert that the issue of security for costs had become more apparent in light of the "broad range of issues" covered in Mr Wang's affidavit, including his comment at paragraph [12] that Zenith had been set up for "the sole purpose of preparing for the possibility of entering into an arrangement with Optus", and the fact that Mr Wang is no longer a party to the proceedings. They advised that they had instructions to file a motion for security for costs without further notice to Zenith if Optus did not receive a satisfactory response to the matters raised earlier and the repeated requests for financial information.
16. On 12 June 2020, Optus filed their notice of motion.
17. As at 24 July 2020, the date of the hearing of Optus' motion, the 'pleadings' had closed, the evidence was not complete and the proceedings had not been allocated a hearing date. Optus was in the process of finalising their evidence, which was due to be served on 31 July 2020.

Zenith's application for security

1. Optus seeks security for costs pursuant to r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) or alternatively s 1335(1) of the Corporations Act 2001 (Cth) (Corporations Act) in the amount of $381,500. Optus seeks that security be provided by payment into Court or in the form of an unconditional guarantee from an Australian-owned Bank in two tranches; the first tranche of $192,500 within 21 days of the order and the second tranche of $189,000 no later than 30 days' prior to the date set down for trial.
2. Optus' motion for security is supported by an affidavit of Simon Theodore, Optus' solicitor in the proceedings, sworn 12 June 2020. Mr Theodore's affidavit includes the calculations of Optus' costs and disbursements (including Counsel) to support the orders sought.
3. Zenith opposes the relief sought and relies on an affidavit of Chao Wang, Zenith's sole director and shareholder, affirmed 30 June 2020 and two affidavits of Stephen Klotz, Zenith's solicitor in the proceedings, affirmed on 30 June and 14 July 2020.
4. Mr Wang's affidavit and documents exhibited to Mr Klotz's July affidavit provide evidence relating to Zenith's operations and financial circumstances relevant to this application, a summary of which follows.
5. Zenith operated as an Optus channel sales partner under the Agreement during the period 30 March 2017 to 11 November 2019. Pursuant to the Agreement, Zenith derived income from Optus in the form of commission for the performance of certain services.
6. According to Zenith's annual report for the 2019 financial year: 1. in the 2018 financial year, Zenith earned gross income of $2.77 million and had profits, after payment of expenses and tax, of $453,377.21. It had net assets of $217,052.42, retained profits of $216,952.42 (after payment of a dividend of $289,057.50) and total equity of $217,052.42; and 2. in the 2019 financial year, Zenith earned gross income of $3.07 million and had profits, after payment of expenses and tax, of $469,228.22. It had net assets of $372,739.14, retained profits of $372,639.14 (after payment of a dividend of $334,729.00) and total equity of $372,739.14.
7. On or around 22 January 2020, Zenith commenced operations as a commercial office furniture and fitouts business. Mr Wang's evidence is that it did so as he considered that Optus' reliance on the restraint in the Agreement meant that Zenith could not continue in the mobile telecommunications industry. Zenith made an initial investment in new stock and it took time to build a new customer base.
8. Zenith's unaudited profit and loss statement for the 2020 financial year and balance sheet as at 12 June 2020 reveal that: 1. Zenith operated at a loss from November 2019 to March 2020 (inclusive), and started producing modest profits in April 2020. It incurred net losses of $195,513.37 in November 2019, $9,372.10 in December 2019, $79,595.42 in January 2020, $10,883.49 in February 2020, and $41,982.24 in March 2020. It then made a small net profit of $3,046.72 in April 2020; 2. Zenith earned gross income of $938,084.63, of which $788,598.87 was earned from Optus; 3. after payment of expenses (most of which relate to payroll of $672,905.89), Zenith had an overall net loss of $74,679.83; and 4. Zenith had net assets of $192,549.26, most of which comprised $85,365.19 in bank accounts and $69,900 by way of director's loan and total equity of $192,549.26 after payment of "owner's/shareholders drawings" of $244,100 and dividend declared of $180,000.
9. The budget forecast for the 2021 financial year that was prepared by Mr Wang (and assumes Zenith is not ordered to pay Optus security for costs) forecasts that Zenith will have gross income of $3.219 million, an operating profit after payment of expenses (most of which relates to payroll of 3.5 to 5.5 staff) of around $393,528.15, and overall net profits of $420,528.18.
10. Mr Wang is self-employed and the primary earner supporting his wife and two young children. A statement of his assets and liabilities annexed to his affidavit discloses total net assets valued at $570,803.77. Mr Wang's assets comprise equity in two mortgaged properties valued at $542,829.31 and cash in the bank of just under $30,000.
11. Mr Wang submits that he is not in a financial position to provide a personal guarantee on Zenith's behalf for the security for costs that Optus seeks in circumstances where it would place him and his family under significant financial pressure.

Threshold question

1. The hearing proceeded on the basis that Zenith did not contest the threshold question of whether there was reason to believe that Zenith will be unable to pay Optus' costs if Zenith was unsuccessful. Zenith's written submissions did not assert otherwise and only raised discretionary grounds as to why an order for security for costs should not be granted in this case. At the hearing, Zenith's counsel also accepted that "we [were] beyond the threshold here" (T31:25-6) and did not challenge that the application was to be determined on discretionary grounds. In my view, this was the correct approach to take.
2. The threshold question of whether there is credible evidence to establish that there is reason to believe that Zenith will be unable to pay Optus' costs has been described as an undemanding test, sets a low threshold and requires the Court to adopt a practical commonsense approach to the examination of Zenith's financial affairs: Wollongong Coal Limited v Gujarat NRE Properties Pty Ltd [2019] NSWSC 187 (Wollongong Coal) at [19] and the cases there cited.
3. I am satisfied that the evidence establishes there is reason to believe that Zenith will be unable to pay Optus' costs if they are successful: UCPR r 42.21(1)(d), Corporations Act, s 1335(1). Zenith has paid up capital of $100 and net assets that are insufficient to cover Optus's estimated costs of the proceedings. It incurred an overall net loss of $74,679.83 in the past financial year. While Zenith's budget for the 2021 financial year suggests that it might be in a position to pay Optus's costs by mid-next year, that budget is based on untested assumptions relating to a start-up business in a new industry. Relevantly, no undertaking has been provided to retain any forecast profits to meet Optus's costs. Nor has Mr Wang provided a personal undertaking to do so.

Discretionary factors

1. As the evidence establishes that there is reason to believe that Zenith will be unable to pay the costs of the litigation if it is unsuccessful, the (evidentiary) onus shifts to Zenith to establish why, as a matter of discretion, security should not be granted: Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 (Wollongong City Council) at [30]; Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 at [18]-[19].
2. The factors relevant to the exercise of the Court's discretion were not in dispute at the hearing. They are set out in UCPR r 42.21(1A) and identified in the authorities. Relevantly, they include whether there has been delay in seeking security, Zenith's prospects of success and merits of its case, whether Zenith's impecuniosity was caused by the conduct complained of in the proceedings, whether making the order would stultify the proceedings, the risk that Zenith will be unable to satisfy an adverse costs order, whether there are public interest factors which weigh against a security for costs order, and whether there is anyone standing behind Zenith who is likely to benefit from the litigation and will provide the security sought: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 (KP Cable) at 197; KDL Building Pty Ltd v Mount [2006] NSWSC 474 at [12]-[19]; Wollongong City Council at [31]-[32].
3. Zenith submits that Optus' motion for security should be refused for a range of discretionary reasons which, in essence, are that: 1. Optus has delayed bringing its motion and to now order security would visit hardship on Zenith; 2. Optus has withheld payment to Zenith of the commissions without proper explanation and withholding those amounts and terminating the Agreement led to Zenith's parlous financial position; and 3. ordering security would stultify the proceedings.
4. Zenith also submits that, if security is to be ordered, the amount sought by Optus is excessive.

Delay

1. In assessing whether delay is of the kind that would tell against making an order for security, the Court will have regard to the length of the delay, the reasons for it, and what has taken place in the interim. The further a plaintiff has proceeded in an action and the greater the costs it has incurred without steps being taken to apply for an order for security, the more difficult it will be to persuade the Court than an order is not unfair or oppressive: Li v State of New South Wales [2013] NSWCA 165 (Li v NSW) at [37] and [39] per Ward JA (as her Honour then was).
2. While accepting that delay is not necessarily fatal to an application for security, Zenith submits that it ought to be so in this case given the lack of proper explanation for Optus' delay together with the prejudice Zenith would suffer if prosecution of the proceedings becomes conditional on an order for the payment of security.
3. I accept Zenith's submission that there has been delay on the part of Optus in bringing their application for security for costs. It was brought more than six months after the proceedings were commenced, more than five months after the issue of security was first raised in correspondence and over a month after Zenith served its evidence.
4. The explanation for Optus' delay is set out in the letter dated 9 June 2020 from Optus' solicitors, which is referred to at [16] above.
5. To the extent that Optus seeks to explain the delay because it was reasonable to wait until after Mr Wang was removed as a plaintiff, that happened on 6 March 2020 and does not adequately explain the delay since that time.
6. Optus also submits that it quite sensibly waited to file their motion until after the extent of the costs and the complexity of the issues involved in preparing Optus' evidence became clear, which they say did not incur until after Mr Wang's affidavit was served on 8 May 2020. I am not persuaded by that submission.
7. In my view, it should have been apparent to Optus from an early stage and before Mr Wang's evidence was received, that extensive enquiries and evidence might be required from a range of Optus employees (both past and present) in order to defend these proceedings. Zenith's letter of 18 November 2019 identifies seven Optus representatives whose evidence might have been expected to have been required and the matters raised in the commercial list reply are consistent with the assertions made in that letter. Even accepting that the full extent of the evidence that Optus would be required to adduce in response might not have been clear until after Zenith's evidence was served does not fully explain why no steps were taken by Optus to make their application for security for costs in March 2020, after it released Mr Wang from the restraint.
8. Zenith argues that Optus' delay deprived it of the opportunity to consider, before it incurred the cost of preparing Mr Wang's evidence, whether it was prepared to continue the proceedings in the face of an order for security for costs. The difficulty I have with that submission is that Zenith had been on notice since February, prior to any amended pleadings and its evidence being served, that Optus might bring such an application without further notice to Zenith.
9. There is also force to Optus' submission that delay should not disentitle security being ordered as the proceedings are at a relatively early stage, a proportion of Zenith's costs to date (which total around $66,000) would have been incurred prior to March, and the impact of delay can be dealt with by limiting any security, if it be ordered, to Optus' future costs only and not to those costs which Optus had already expended: Re Colorado Products Pty Limited (in provisional liquidation) [2013] NSWSC 611 (Re Colorado Products) at [69]; Oswal v Australia and New Zealand Banking Group Limited [2016] VSC 52 at [44].
10. Accordingly, while a relevant factor to take into account on this application, I do not accept Zenith's submission that Optus' delay is of such a nature that it leads me to conclude that it would be unfair and oppressive to now condition the continuation of Zenith's claim on the provision of security for Optus's costs and is, by itself, a disentitling factor: Wollongong City Council at [32].

Prospects of success

1. No submission was advanced by Optus that Zenith's claims have little merit and are not reasonably arguable such as to be relevant to the exercise of my discretion. I have, therefore, approached the application on the basis that Zenith's claims have been made bona fide and its prospects of success or failure is a neutral matter in the exercise of the Court's discretion: Jazabas Pty Limited v Haddad [2007] NSWCA 291 (Jazabas) at [83] - [84]. In the absence of evidence going to the merits of the parties respective positions, it is also not possible to form a view on this application as to the strength or otherwise of Zenith's claim and Optus' defence such as to influence my discretion in ordering security: Fiduciary Limited v Morningstar Research Pty Limited (2004) 208 ALR 564; [2004] NSWSC 664 (Fiduciary v Morningstar) at [37] - [39].

Cause of Zenith's inability to provide security

1. To establish that its impecuniosity is attributable to Optus' conduct, Zenith has to demonstrate both the adequacy of its financial position before its dealings with Optus about which it complains in these proceedings, and that Optus' actions have caused or at least materially contributed to Zenith's inability to meet an order for costs: Jazabas at [94] - [96]; Wollongong City Council at [33].
2. There is no dispute that Zenith was incorporated for the purpose of performing the Agreement. The evidence also suggests that, from sometime in 2017, its sole business was the marketing and sale of Optus products. The conduct and events of which Zenith complains occurred in late 2019, when Optus purported to terminate the Agreement and failed to pay the commissions.
3. Zenith submits that the Court should be satisfied from Zenith's financial statements that Optus' conduct was the cause of its declining financial position such that it is now unable to provide the security sought. It submits that it would have been in a markedly different financial position and likely able to provide security if the commissions had been paid.
4. Optus disputes that their conduct had the requisite causal connection with Zenith's inability to provide security. They argue that Zenith's current financial position is a consequence of it depleting, in large part, the income and profits derived from the Agreement by paying dividends and there is no evidence that Zenith would have retained the commissions even if they had been paid. They also argue that Zenith would have lost its income from Optus in early 2020 in any event, as the Agreement would have been terminated for convenience by February 2020 or by operation of its term in March 2020.
5. Optus' written submissions referred to Narradine Pty Ltd v Mascot Steel and Tools Pty Ltd [2012] NSWSC 385 (Narradine), a case in which Black J, at [12], concluded that the defendants' conduct (which was alleged to be misleading and deceptive, in breach of a Partnership Agreement and oppressive) could not have caused the plaintiff company's financial position as the conduct had no connection with the level of the plaintiff's capitalisation. His Honour's conclusion was made in the context where the corporate plaintiff had not adduced any evidence in the form of financial statements, had not traded since incorporation, its only activity was its ownership interest in a partnership, it had paid up share capital of $2, and the defendant's conduct was not asserted by the plaintiff to have caused its impecuniosity: at [7], [8] and [12]. Therefore, the necessarily link between the conduct complained of and the plaintiff's financial position (as evidenced by its capitalisation) could not have been established. The position in this case is, in my view, different.
6. The financial statements in evidence demonstrate that Zenith was trading profitably and in a sound financial position in the 2018 and 2019 financial years, prior to the conduct complained of. They identify that the slump in Zenith's financial position commenced in August 2019, the month in which Zenith claims to have been owed commissions of over $124,000, the receipt of which would have resulted in an overall trading profit for that month. While Zenith's financial position improved in September and October 2019, it declined significantly in November 2019, the month in which the Agreement was terminated and Zenith lost all income from Optus. Relevantly, Zenith claims to have been owed commissions relating to October and November of over $236,000 which, if received in November, would have resulted in an overall profit for that month. They also identify that the adverse impact from the loss of Optus income continued until at least early 2020.
7. I accept that Zenith's current financial position would have been improved if the dividend declared by Zenith in the 2020 financial year of $180,000 had been retained as profit. That said, I am not persuaded that the declaration of the dividend itself, rather than the conduct complained of (being the withholding of the commissions and the early termination of the Agreement), was the cause of Zenith's financial decline and current position. In my view, the financial statements are fairly compelling evidence that show that the decline in Zenith's financial position corresponded and is consistent with the losses Zenith claims to have suffered from Optus unlawfully terminating the Agreement in November 2019 and withholding the commissions.
8. I am also unpersuaded by Optus' argument that the conduct complained of did not materially contribute to Zenith's financial position as it would have been adversely impacted in any event in February or March 2020 when Optus terminated the Agreement for convenience or because of the effluxion of time. Optus terminated the Agreement without prior notice and earlier than expected. It also asserted that Zenith was subject to a contractual restraint which prevented it from opening a new business in the same industry. In those circumstances, it seems reasonable to infer that Optus' conduct meant that Zenith lost the opportunity to plan a new business and replace its lost income immediately and that the loss of commissions and income materially contributed to a more rapid decline in Zenith's finances such that it is now not in a position to provide the security in the sum sought.
9. Optus also argues that, even if there is a causal nexus between their conduct and Zenith's impecuniosity, it would not be unjust to require security as there is a bona fide dispute between the parties as to whether Optus was entitled to terminate the Agreement and not pay the commissions. In support of this submission, Optus relies on the comments of Rolfe J in Dalma Formwork Pty Ltd v Concrete Constructions Group Ltd [1998] NSWSC 472 (Dalma) where His Honour states that "the fact that the defendant has not made payment to the plaintiff because there is a bona fide dispute between the parties, cannot, without more, exculpate the plaintiff from providing security for costs if the other requirements are met."
10. In Dalma, the plaintiff asserted that the defendant's failure to pay certain amounts meant that it could not discharge certain indebtedness to its insurer, which indebtedness triggered the appointment of the administrator. Rolfe J was of the opinion that the existence of the dispute between the parties as to the defendant's liability to pay the plaintiff and, assuming there was a liability, the obligation of the plaintiff to set-off against that indebtedness amounts claimed by the defendant, did not give rise to conduct on the defendant's part that disentitled it to security. His Honour's view was that, in light of the bona fide dispute, it had to be established that the defendant had been guilty, in not making payment, of some form of misconduct or unacceptable business dealings qua the plaintiff. Having made those observations, his Honour then considered the detailed evidence from the accountants on the question of whether the defendant's failure to pay the amounts claimed caused or materially contributed to the plaintiff's financial position. Unlike the position in this case, his Honour was not satisfied that the evidence established the causal link.
11. I accept that the existence of a bona fide dispute as to whether Optus is liable to pay Zenith may be a factor to take into account in assessing whether the discretion to order security for costs should be exercised. That said, it does not seem to me to follow that the existence of such a dispute necessarily means that the Court cannot take into account that the conduct of which complaint is made in this case materially contributed to Zenith's current financial position and inability to satisfy a security order, or that Zenith must establish some form of misconduct or unacceptable business dealing on the part of Optus: Suncare Constructions Australia Pty Ltd v Gainspace (MacKay) Pty Ltd [2016] QSC 67 at [25] - [33].
12. As noted by Hodgson JA in Dae Boong International Co Pty Ltd v Gray [2009] NSWCA 11 at [34], where a company or person resisting security for costs relies on the point that the impecuniosity was caused by the other party, it is almost inevitably the case that that is a matter that is in issue in the proceedings. His Honour went on to observe that, in such circumstances, it would not be inappropriate for the Court considering whether to grant security to have some regard to the apparent strength of the case.
13. In this case, the material before the Court does not enable me to form any view as to the strength of Zenith's case and, as noted at [47], no submission was advanced that it did not have any merit or prospects of success. The pleadings and correspondence in evidence leads me to conclude that Zenith's claims are not frivolous but that there are real issues to be tried between the parties.
14. Optus also argues that if they caused Zenith's inability to meet a security order, that factor is only relevant where stultification is established. While accepting that it might be appropriate to consider those matters together (see Fiduciary v Morningstar at [101] referring to BPM Pty Limited v HPM Pty Limited (1996) 131 FLR 339 at 346), I do not accept that the Court can only have regard to Optus having materially contributed to Zenith's adverse financial position where Zenith also establishes stultification: The Owners - Strata Plan 87265 v Saaib [2019] NSWSC 289 at [42], [48] and [55]; Pioneer Park Pty Ltd v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344 (Pioneer Park) at [48]; KP Cable at 197.
15. While accepting there is a genuine dispute between the parties as to Optus' liability to make the payments claimed by Zenith in these proceedings, I am satisfied that Zenith has discharged its onus of establishing that Optus' conduct (of which complaint is made) materially contributed to Zenith's current financial position, such that it is now without means to meet a security for costs order of the quantum sought by Optus and that factor is one to which the Court may have regard on this application.

Stultification

1. It is well established that if the effect of making a security for costs order would stultify the proceedings, that is a powerful factor weighing against the making of an order: Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545.
2. It is for Zenith to establish by the evidence that making a security for costs order would unduly stultify its ability to pursue the proceedings: Li v NSW at [45]. In doing so, Zenith must establish that those who stand behind it, in this case Mr Wang, are unable (not unwilling) to provide the requisite security for costs: Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4.
3. It has been said that a plaintiff that seeks to prove stultification must call the necessary evidence to establish the financial position of the persons who stand to benefit from the litigation and be full and frank in its disclosure to the Court: CBX2 Pty Limited v National Australia Bank (No 2) [2015] NSWSC 1969 (CBX2) at [8]; Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744 (Idoport) at [66]; Unified Pty Limited v Cancer Council of Western Australia Inc (No 3) [2011] WASC 161 at [15].
4. Zenith submits that the evidence demonstrates that making an order for security would have the likely result that the proceedings would be stayed, which would be unjustifiably oppressive.
5. Zenith relies on Mr Wang's affidavit in which he gives evidence that he expects Zenith will be required to re-invest a large portion of the net assets available to it ($192,549.26 according to its balance sheet as at 12 June 2020) in the short to medium term in order to grow the business and that Zenith will be unable to continue to grow if it is required to pay its available capital into Court as security for Optus' costs. It also relies on the budget forecast for the 2021 financial year which, as noted at [27], was prepared on the assumption that Zenith is not ordered to pay security. Zenith says that the budget forecast demonstrates that it does not currently have profits available to it to provide security for costs as sought by Optus although, if it trades as projected, it should have profits available to meet a costs order by mid-2021.
6. Zenith also contends that Mr Wang has been frank in providing details of his financial position (as set out at [28]) and the Court should accept that he could not reasonably meet, on Zenith's behalf, an order for security for costs.
7. Optus submits that the evidence does not establish that making an order for security would prevent Zenith from continuing the proceedings. They argue that the evidence does not establish that Zenith cannot afford to pay any security and that Mr Wang's evidence of his own personal circumstances goes to an unwillingness to provide security, rather than an inability to do so.
8. In my view, there is force to Optus' submissions regarding Mr Wang and his evidence. Taken at face value, Mr Wang's evidence indicates that he is not impecunious and has assets from which he could meet an order for costs and provide security, although I accept that he may not be in a position to readily do so by way of cash in the amount sought by Optus.
9. The other difficulty with Mr Wang's evidence is that it is of a general nature, lacks supporting material and also fails to deal with matters which could have been expected needed to be addressed. There are no current valuations of the two properties referred to in Mr Wang's statement of assets and no tax returns have been produced that deal with Mr Wang's income.
10. As noted above, there is evidence that Zenith declared dividends and paid owner/shareholder drawings. As at 12 June 2020, the amounts paid totalled $424,100. Together with the dividends declared in the 2018 and 2019 financial years (of $289,057.50 and $334,729.00), the funds paid out from Zenith of that nature amounted to $1.047 million. It is reasonable to infer that Mr Wang, as Zenith's sole shareholder and director, has received the $1.047 million, yet there is no explanation as to what use has been made of those funds and why some of them are not available for security for Optus' costs.
11. Mr Wang's evidence also does not suggest that he has tried to obtain a bank guarantee against his assets and could not do so. Nor does it indicate that he is unaware of any other means by which Zenith or he may obtain finance or funds to provide security for Optus' costs.
12. As to Zenith, the financial statements demonstrate that it has some cash reserves and assets. Mr Wang's evidence is that Zenith would be unable to continue to grow if it is required to pay the security that Optus seeks, not that it will be unable to continue to operate if it is required to provide any security, such as for a lesser amount. In the absence of any suggestion that Zenith is being represented on a no-win, no-fee basis, it also seems reasonable to infer that Zenith and/or Mr Wang are funding the proceedings, including the $66,000 already incurred.
13. Having regard to the above, I am not persuaded that Zenith has discharged the onus of establishing that it is likely that the proceedings would be stultified if an order for security for costs were made in this case. Without evidence from Mr Wang that the proceedings could not continue if Zenith was ordered to provide security, based on the evidence before the Court, I am not prepared to infer that they would.

Other matters

1. Zenith submits that Optus has failed to provide it with information relating to the issues in the proceedings which it claims is a discretionary factor weighing against the grant of security. Zenith points to its requests for, and Optus' failure to provide, information about the non-payment of commissions, the basis on which Optus paid to Zenith the amount of $57,504.96 on 7 February 2020 that was described as "Final Payment after REC" and copies of the two investigation reports referred to in the Notice of Termination. Zenith asserts that the withholding of this information has made it difficult for Zenith to properly assess its prospects of success.
2. I am not persuaded that these matters are significant on this application. Optus' CLR makes clear that they deny any obligation to pay the commissions based on the terms of the Agreement and Zenith's conduct as detailed in the Notice of Termination and the CLR: CLR, C50-C53. It is to be expected that information and documents that relate to those matters will be the subject of Optus' evidence in the usual way. Presumably, that evidence will address how Optus has calculated the basis on which commissions have (and have not) been paid to date and the investigations undertaken in relation to Zenith's conduct. There is no obligation on Optus to provide those details to Zenith before its evidence is complete. For this reason, I do not accept that the withholding of information until Optus' evidence is served should lead the Court to regard Optus' prospects of defending Zenith's claim to payment of the commissions with a degree of scepticism, as Zenith submits.
3. Optus submits that the failure of Mr Wang to proffer an undertaking to pay Optus' costs in the event Zenith fails with its claims is also relevant to the exercise of the Court's discretion.
4. The provision of an undertaking by those who stand behind a plaintiff corporation or otherwise stand to benefit from the litigation to be responsible for costs may provide a reason for the court to exercise its discretion and not order security: KP Cable at 202-20; Wollongong City Council at [34]. Accepting that it may be a burden on Mr Wang (and his family) if he was personally liable to pay Optus' costs, it seems to me to be not unfair to proceed on the basis that he should also bear some of the risks and burdens that the process of litigation entails, and that it was not unreasonable to have expected him to provide an undertaking to be personally liable for costs: Fiduciary v Morningstar at [83].
5. The lack of an undertaking by Mr Wang to be personally liable is, therefore, a factor that I consider should be taken into account on this application. To my mind, it is also relevant that Mr Wang has proffered no undertaking on behalf of Zenith to retain at least some part of Zenith's current assets and/or the profits it makes in the 2021 financial year to meet Optus' costs. The absence of undertakings in those terms increases the risk to Optus that any costs order made in their favour will go unsatisfied, notwithstanding Zenith's budget forecast might suggest otherwise.

Conclusion on whether security for costs should be ordered

1. In exercising the discretion whether to grant security for costs, the Court engages in a balancing process of the various discretionary factors and attempts to do justice between the parties. In doing so it seeks to achieve a balance between ensuring that adequate and fair protection is provided to Optus and avoiding injustice to Zenith by unnecessarily shutting it out or prejudicing it in the conduct of the proceedings: Idoport at [47].
2. This is a case which is finely balanced. There are factors which I have concluded are neutral (the prospects of success), factors which tends against granting security or all of the security sought (Optus' conduct materially contributing to Zenith's declining financial position and delay) and factors which support the making an order (Zenith's financial position, the lack of any undertakings being proffered, Mr Wang's financial position and the failure to establish stultification).
3. Taking into account all of the circumstances, the conclusion I have come to is that the discretionary factors weigh in favour of Optus and that an order for security for costs should be made. This is primarily because I am not satisfied that making a security order would be likely to result in Zenith not being able to pursue its claims. Mr Wang's failure to proffer an undertaking to be liable for costs and/or how Zenith's assets and profits might be dealt with is also significant. If undertakings had been proffered, they would have been powerful factors tending against security being ordered and may have led to a different outcome.
4. I recognise it may be oppressive to make an order where the quantum of the security claimed could be seen to be a relatively insignificant amount for Optus and beyond the capacity of Zenith (and Mr Wang) to pay: Jazabas at [75]; KP Cable at [196] - [198]; Pioneer Park at [56]. But the risk of an order being oppressive to Zenith can be mitigated by making an order in a lesser amount than the quantum sought by Optus and providing for payment to be made by way of tranches, which I deal with below.

Quantum of security

1. Optus claims security for costs in the amount of $381,500 or such other amount as the Court thinks fit. The amount of $381,500 is based on Mr Theodore's evidence as to the costs Optus has incurred to date and what he estimates Optus will incur up to the end of a five day contested hearing.
2. Mr Theodore's estimate of Optus' solicitor/client costs is made by reference to six categories of work: work to date including counsel's fees ($150,000); finalising lay evidence in relation to six witnesses ($100,000); preparing for and attending a one day mediation and equally split mediator fees ($25,000); work preparing submissions for final hearing ($35,000); preparing for and attending a five day final hearing ($200,000); and general ongoing ancillary correspondence and related advice ($35,000). The total of those costs comes to $545,000. Mr Theodore applies a 70% discount (based on a party-party recovery) to come to the claimed security amount of $381,500.
3. Mr Theodore's estimate assumes there will be no discovery in the proceedings, is based on hourly rates (all exclusive of GST) currently charged for a partner (himself), an associate, a lawyer and two paralegals and an hourly rate for Junior Counsel, and assumes Senior Counsel will be briefed for the hearing at $10,000 per day.
4. As I have concluded that Optus delayed making this application (at [39]), the order for security will be in relation to Optus' future costs only and not those costs which have already been incurred: Chocron v Onkoud [2018] NSWSC 1205 at [10]; Re Colorado Products at [69]. Accordingly, I will not take into account the amount of $150,000 for "work to date" in setting the sum to be provided by way of security.
5. As to the estimate for future costs, Zenith submits that what is claimed by Optus is excessive. It relies on Mr Klotz's evidence which, in summary, is that: 1. Optus' costs incurred to date of $150,000 and $100,000 to complete its evidence are in excess, and up to two to three times, of what he considers to be reasonable for the size and complexity of the matter and when compared to Zenith's costs to date of $66,421.85; 2. Optus' estimate of $25,000 for a mediation are double what he considers to be reasonable, assuming a partner attends the mediation with junior counsel and a mediator charges $5,000 to each party. He is also of the view that court-annexed mediation would be appropriate given the quantum and complexity of the case; 3. the estimate of $235,000 to be incurred up to and including a hearing is in excess of and probably double what he considers to be reasonable for a five day hearing and five days of preparation, including because senior counsel would not ordinarily be briefed for a matter of this size and complexity; and 4. assuming Optus were to incur those costs and have the benefit of a costs order, it would be likely to recover around 50% on a party/party basis.
6. In my view, some of the criticisms made by Mr Klotz have merit, as does Zenith's general challenge that Optus' costs are seemingly disproportionate to the amount in issue and the quantum of Zenith's costs incurred to date as compared to Optus' costs. I accept that Optus' costs are likely to be greater than Zenith's. Optus' defence is positive in nature and will likely require evidence from a number of witnesses. That said, Optus' estimated total costs of $545,000 represents around 68% of the amount claimed by Zenith as pleaded, of approximately $800,000. Given the amount in issue, Optus' estimate for the mediation seems high, as does an allowance for senior counsel at $10,000 per day.
7. The Court is entitled to take a "broad brush" approach and there is no principle that entitles Optus to be given security for the whole of its recoverable costs: CBX2 at [54] and [55]; Wollongong Coal at [68]. It has also been said that in exercising its discretion to order security for costs the Court will stand back from the amounts claimed and the precise assessment of costs to consider the case on its particular facts and will make an order as is just and reasonable in the circumstances: Wollongong City Council v FPM Constructions Pty Ltd [2004] NSWSC 523 at [50].
8. Applying those principles in the circumstances of this case and taking into account the evidence of estimated costs, I have come to the view that it is appropriate to order security in the sum of $190,000. That amount excludes any allowance for Optus' past costs, discounts Mr Theodore's estimated costs for the mediation and hearing, and assumes a 60% recovery rate. It also takes into account that security need not be a complete protection against Optus' costs but needs to provide some measure that is not illusory and yet not be oppressive to Zenith having regard to the value of its and Mr Wang's available cash, their net assets and Zenith's forecast profits.
9. I also propose to order that the security be provided by way of four tranches; the first in the amount of $30,000 within 21 days of this order (11 September 2020); the second in the amount of $30,000 five weeks later (16 October 2020); the third in the amount of $30,000 after a further five weeks (20 November 2020); and the last tranche of $100,000 not less than 21 days before the commencement of the final hearing of the matter. Doing so should assist in mitigating any impact to the ongoing operation of Zenith's business and reflects that the next steps will likely be the preparation of Zenith's evidence in reply. It also assumes that the final hearing of the matter will occur some time in 2021.

Costs and orders

1. As Optus has succeeded in obtaining an order for security for costs and that order was contested by Zenith, I see no reason why costs should not follow the event and will make an order accordingly.
2. For these reasons, I make the following orders: 1. Pursuant to r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW) and/or s 1335(1) of the Corporations Act 2001 (Cth), the plaintiff to provide security for the defendants' costs to final hearing in the amount of $190,000 (excluding GST) to be provided by way of tranches as follows: 1. the first tranche of $30,000 by no later than 11 September 2020; 2. the second tranche of $30,000 by no later than 16 October 2020; 3. the third tranche of $30,000 by no later than 20 November 2020; and 4. the fourth tranche of $100,000 by no later than 21 days before the commencement of the final hearing of this matter. 1. The security required by Order 1 is to be provided by way of: 1. payment of funds into Court; or 2. the provision of an unconditional guarantee from an Australian-owned Bank (as recognised by the Australian Prudential Regulation Authority) in favour of the Principal Registrar of the Supreme Court of New South Wales, which security is to be held by the Principal Registrar of the Supreme Court of New South Wales. 1. The proceedings be stayed if security is not provided in accordance with Orders 1 and 2 above. 2. The plaintiff to pay the defendant's costs of the defendants' notice of motion for security for costs filed on 12 June 2020.

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: 21 August 2020