Australian Institute (Vic and Tas) Pty Ltd v Australian Institute of Fitness (NSW) Pty Limited [No 2]
[2016] VSC 625
•19 October 2016
IN THE SUPREME COURT OF VICTORIA Not Restricted AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2016 001111
AUSTRALIAN INSTITUTE (VIC & TAS) PTY LTD (ACN 092 728 937) Plaintiff v AUSTRALIAN INSTITUTE OF FITNESS (NSW) PTY LIMITED
(ACN 082 557 346)
AND OTHERS (ACCORDING TO THE SCHEDULE)Defendants AND BETWEEN
AUSTRALIAN INSTITUTE OF FITNESS (NSW) PTY LIMITED
(ACN 082 557 346)
AND OTHERS (ACCORDING TO THE SCHEDULE)Plaintiffs by Counterclaim v AUSTRALIAN INSTITUTE (VIC & TAS) PTY LTD (ACN 092 728 937) Defendant by Counterclaim ---
JUDGE:
VICKERY J
WHERE HELD:
Melbourne
DATE OF HEARING:
18 August 2016
DATE OF JUDGMENT:
19 October 2016
CASE MAY BE CITED AS:
Australian Institute (Vic & Tas) Pty Ltd v Australian Institute of Fitness (NSW) Pty Limited & Ors [No 2]
MEDIUM NEUTRAL CITATION:
[2016] VSC 625
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COSTS – Security for costs – Whether threshold test established by Defendants – Exercise of the discretion – Form of security – Quantum of security – Plaintiff proposed security in the form of a deed of indemnity from a supporting Australian company – Principles to be applied – Proposed deed of indemnity inappropriate to provide adequate security in the circumstances.
---
APPEARANCES:
Counsel Solicitors For the Plaintiff Mr J P Tomlinson B2B Lawyers For the First to Fourth Defendants Mr C G Juebner Yeldham Price O’Brien Lusk HIS HONOUR:
1 By summons dated 22 July 2016, the first to fourth defendants (together the ‘Shareholder Defendants’) seek security for costs from the plaintiff up to and including a mediation.
2 The background facts relating to this proceeding are set out in the judgment arising from an earlier injunction application, being Australian Institute (Vic & Tas) Pty Ltd & Ors v Australian Institute of Fitness (NSW) Pty Ltd & Ors (the ‘Injunction Proceeding’).[1]
[1][2016] VSC 362.
Applicable principles
Threshold test of the jurisdiction
3 Rule 62.02(1) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (the ‘Rules’) relevantly provides that:
(1) Where—
(b) the Plaintiff is a corporation … and there is reason to believe that the Plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so;
…
(f) under any Act the Court may require security for costs—
the Court may, on the application of a defendant, order that the Plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given.
4 Section 1335(1) of the Corporations Act 2001 (Cth) (the ‘Act’) provides that:
(1)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 The wording of r 62.02 differs from s 1335. However, the principles established in relation to both the rule and the statutory provision apply equally.[2] As observed by a two-member bench of the Court of Appeal in Livingspring Pty Ltd v Kliger Partners:[3]
The language of the statutory test is clear. The court must address the question which the section poses:
Is there reason to believe that the corporation will be unable to pay the defendant’s costs?
[2]Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377, 381 [14] (Maxwell P and Buchanan JA) (citations omitted).
[3]Ibid.
6 The Court added:[4]
The phrase “reason to believe” is the touchstone of the jurisdiction. It requires a rational basis for the belief – and no more.
[4]Ibid 382 [15].
7 The principle underlying the grant of security for costs is that a defendant is an unwilling party to a proceeding and ought be protected from the consequences of limited liability of corporations.
8 A prima facie case is sufficient to meet the test.[5] The applicant for security bears the onus, but it is an onus merely to demonstrate, by credible testimony, that if it is successful in the proceeding, and the plaintiff is ordered to pay the costs of the defendant, there is reason to believe that it will be unable to do so.
[5]Education Equity Pty Ltd v Austock Funds Management Pty Ltd [2010] VSC 636 [11].
9 In Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd[6]Winneke P and Phillips JA observed that the justification for the statutory rule is that the defendant, not being a voluntary litigant, deserves to be protected from the consequences of limited liability.[7] Their Honours said further:[8]
[6][1999] 2 VR 191 (‘Epping Plaza’).
[7]Ibid 195, [14].
[8]Ibid [13].
The evident purpose behind statutory provisions such as s 1335 is to draw a distinction between corporate plaintiffs and individual plaintiffs. Thus, whilst it may be said that "[t]the basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is ancient and well established" (Pearson v Naydler[1977] 1 WLR 899 per Megarry VC at 902, it is also true that "the whole concept of the general practice with regard to companies is just the opposite. It is the poverty of the company that attracts the power": Rajski v Computer Manufacture & Design Pty Ltd[1982] 2 NSWLR 443 at 449, per Holland J. Indeed, as Megarry VC said in Pearson, at 904-5:
In the case of a limited company, there is no basic rule conferring immunity from any liability to give security for costs. The basic rule is the opposite: section 447 [the equivalent of s 1335 of the Corporations Law] applies to all limited companies and subjects them all to the liability to give security for costs. The whole concept of the section is contrary to the rule developed by the cases that poverty is not to be made a bar to bringing an action. There is nothing in the statutory language (the substance of which goes back at least as far as the Companies Act 1862, s 69) to indicate that there are any exceptions to what is laid down as a broad and general rule for all limited companies. Nor is it surprising that there should be such a rule. A man may bring into being as many limited companies as he wishes, with the privilege of limited liability; and section 447 provides some protection for the community against litigious abuses by artificial persons manipulated by natural persons. One should be as slow to whittle away this protection as one should be to whittle away a natural person's rights to litigate despite poverty.
Exercise of discretion
10 Once the Court is satisfied that there is a rational basis for the belief that the plaintiff corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, the jurisdiction is enlivened to exercise a discretion to require sufficient security to be given for those costs and stay all proceedings until the security is given.
11 In such a case the court is given an unfettered discretion to do what is justly required by the circumstances of each case. Returning to Epping Plaza,[9]Winneke P and Phillips JA further observed in this regard:[10]
[9][1999] 2 VR 191.
[10]Ibid 195–196 [16]–[17].
The authorities tend to suggest that the discretion given to the court by s 1335 to make an order for security against an impecunious company is "open ended" and not to be fettered by rigid guidelines or principles... As Phillips JA pointed out in Ariss & Anor v Express Interiors Pty Ltd [1996] 2 VR 507 at 512 ff, various courts in this country have frowned upon the statement made by Street CJ in Buckley, at 305, that he "prefer[red] to regard the discretion conferred by the section as being one which should be exercised merely with a predisposition in favour of the defendant party" as an impermissible fetter upon the court's open ended discretion. Having analysed these criticisms, Phillips JA expressed the view in Ariss, at 514, that:
Although of course, like any discretion conferred upon a court, it must be exercised judicially, the discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place [that is, the existence of credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant] may itself be a factor, even a most significant factor, in the exercise of the discretion.
Consistently with this view, there may be cases where, in the exercise of its discretion, the Court will regard the fact that those who stand behind an impecunious company have bound themselves to assume responsibility for paying the defendant's costs as a relevant factor in favour of the plaintiff; see for example Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 (Clarke, J), especially at 545; Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 10 ASCR 441, especially at 456 per Powell J; KP Cable Investments Pty Ltd v Meltglow Pty Ltd(1995) 56 FCR 189. But that is as far as it goes; the existence of such an offer to assume personal liability for an order for costs if made against the company, or even a formal guarantee to like effect, cannot be determinative in itself of the application for security, or else the discretion, which is otherwise conferred in general terms, will be impermissibly circumscribed. In Intercraft Cabinets Pty Ltd v Sampas Pty Ltd(1997) 18 WAR 306 the Full Court in Western Australia was concerned with an undertaking to accept personal responsibility for costs against an impecunious company, and after reviewing the authorities Malcolm CJ, speaking for the Court, firmly espoused the view (at 316) that "the availability of an undertaking of personal liability by the persons who stand behind the company is no more than a factor, albeit an important factor, to be taken into account in the exercise of discretion." With respect, that is our view too.
Form of the security
12 In requiring ‘sufficient security to be given’, assuming the other elements have been established, the Court is required to exercise a further discretion, namely as to the form of the security.
13 In the recent decision of DIF III Global Co-Investment Fund LP & Anor v BBLP LLC & Ors,[11] Hargrave J considered a form of proposed security offered by the plaintiffs by way of a deed of indemnity from a United Kingdom insurer with no presence in Australia. The plaintiffs in that case had no assets in Victoria. The defendants sought security for costs by way of payment into Court or bank guarantee. His Honour held that in the circumstances of the case before him, security provided by the plaintiffs could take the form of an appropriately drafted deed of indemnity. In so concluding, Hargrave J took into account the fact that the party providing the indemnity was a ‘large regulated insurer’ which had significant assets in the United Kingdom and was found to be ‘generally of good financial standing’, was ‘in the business of underwriting legal expense risks’ and that it was unlikely that the proposed indemnifying insurer ‘would default on the deed’.[12]
[11][2016] VSC 401 [83] (‘DIF III Global’).
[12]Ibid [83].
14 In the course of his reasoning, Hargrave J considered the effect of the authorities relating to the exercise of the Court’s discretion as to the form of the security for costs which may be provided by a foreign plaintiff with no assets in the jurisdiction in which the application is being made. His Honour noted that a plaintiff is entitled to put forward security in a form which is ‘least disadvantageous to it’,[13] but that:[14]
[w]here a plaintiff puts forward security in a form other than payment into court or a bank guarantee from an Australian bank, the central inquiry is whether the proposed form of security is adequate to achieve its object as security; namely, to provide a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff.
[13]Ibid [38].
[14]Ibid.
15 Justice Hargrave drew the threads together relating to the exercise of the Court’s broad discretion as to the ‘form’ of security for costs, observing that ‘the Court will usually apply the following principles’:[15]
[15]Ibid [40].
(1)the plaintiff is entitled to propose security in a form least disadvantageous to it;
(2)the plaintiff bears a ‘practical onus’ of establishing that the proposed security is adequate and does not impose an ‘unacceptable disadvantage’ on the defendant;
(3)in order to be adequate, the proposed security must satisfy the protective object of a security for costs order, namely, to provide a fund or asset against which a successful defendant can readily enforce an order for costs against the plaintiff; and
(4)based on these and any other relevant considerations, the Court will determine how justice is best served in the particular circumstances of the case.
Quantum of the security
16 The statutory rule provides for ‘sufficient security to be given’. This is the limit of its guidance. It has as its apparent purpose the object of fixing the quantum of security for costs so as to arrive at a sum which ought to be sufficient to provide a measure of security to the defendant for the costs it will incur in defending the action.
17 This involves, amongst other things, an assessment, necessarily broadly based, on what are the costs likely to be to be ordered in favour of a successful defendant at the conclusion of the proceeding. Competing estimates may be presented, as they were in this case, which need to be considered and weighed in the balance to arrive at a determination as to what quantum of security will be ‘sufficient’ to achieve the statutory purpose on the one hand, and not be unrealistic or oppressive on the other.
18 The quantification of costs in an application for security for costs does not involve the court conducting a taxation. In Allstate Life Insurance Co v ANZ Banking Group Ltd (No 19) Lindgren J explained:[16]
The amount is in the discretion of the court and should be such sum as the court thinks just, having regard to all the circumstances of the case. Obviously, a factor of prime importance will be the amount of a respondent's costs which an applicant, if unsuccessful, will be ordered to pay to the respondent if the proceeding continues to a determination by the court. But the estimation of that amount involves many factors, some of them imponderable. Generally speaking, it cannot be assumed that a failure by an applicant will be on any particular basis. Moreover, the course of events down to and during the trial may be relevant to the particular order for costs to be made. The assessment of the work which will be done in the respondent's interests is also difficult.
[16](1995) 134 ALR 187, 197.
19 To similar effect are the remarks of Nicholas J in Ashington Capital Pty Ltd v Parissen Capital (Project X) Pty Ltd:[17]
In my opinion it is only possible to take a broad brush approach to the exercise of discretion in this case. I have not attempted the detailed task of a costs assessor in order to explain the assessment of quantum of security which I propose to order. The following observations indicate my impression derived from the evidence as to the approach to be taken in respect of the various categories of costs proposed by the first defendant for consideration.
[17][2012] NSWSC 410 [18].
20 In Farmitalia Carlo Erba v Delta West[18] Heerey J listed a number of non-exhaustive factors which may helpfully be considered in the exercise of the discretion. I set out below one factor relevant to the present case:[19]
[18](1994) 28 IPR 336.
[19]Ibid 345–346 (citations omitted).
Finally, even accepting that the party seeking security has provided acceptable evidence of an estimate of costs, there is a likelihood that in fact that amount would be reduced by the taxing officer. To quote again from Griffiths LJ in Procon (GB) Limited v Provincial Building Co Limited, supra, at 379f:
Allowance will have to made for the unquenchable fire of human optimism and the likelihood that the figure of taxed costs put forward would not emerge unscathed after taxation. It is to be observed in the present case that it was this element that led Bingham J to make a substantial discount in the order of 19%.
Bingham J had noted at 372j that:
... in very substantial taxations, such as this one will be, inevitably [the bill] will be taxed down and I have no doubt that the plaintiffs' solicitors would be astounded if their bill survived without any reduction. [It was the plainitffs who were seeking security against the defendants’ counterclaim]
…
I think in the present case it would be proper to make an allowance for this last mentioned factor and I do so by reducing the sum of $255,000 to $230,000. …
Belief that the plaintiff will be unable to pay defendants’ costs
21 In my opinion, the facts of this case provide a rational foundation for concluding that there is reason to believe that the plaintiff corporation will be unable to pay the costs of the applicant Shareholder Defendants if they are successful in their defence of the proceeding. I arrive at this conclusion based on the following findings of fact, which I accept as established.
22 The plaintiff is a company registered in Victoria and ordinarily resident in Australia. It has 18 issued shares, with paid-up capital of $18. It does not trade and has no income. The plaintiff does not own any real estate and its assets are subject to security interests granted to ATFH Pty Ltd on 30 January 2012 and Westpac Banking Corporation on 9 May 2012.
23 Further, the plaintiff was the subject of a judgment debt arising from litigation in the Supreme Court of New South Wales in the total sum of $1,051,108.50, arising from costs orders and orders in relation to interest. Statutory demands were issued to the plaintiff seeking payment of the judgment debt. Subsequently, the plaintiff filed applications to pay the debt by instalments and sought to set aside the statutory demands.[20]
[20]In the Matter of Australian Institute of Fitness (VIC & TAS) [2016] NSWSC 1143.
24 The financial statements relied upon by the plaintiff in seeking an instalment order identified it as having:
·funds of $18;
·no real estate;
·no investments;
·no motor vehicles;
·no tools or equipment;
·the claimed asset of a loan of $590,000 referred to below; and
·liabilities totalling $1,631,109, resulting in a significant net asset deficiency.
25 In an affidavit filed in support of the application, a director of the plaintiff, Robert Hornsey (‘Mr Hornsey’), deposed that the $590,000 loan recorded as an asset in the books of the plaintiff is:
not required to be repaid by AIF National [the fifth defendant] until it determines it should do so. This has not occurred and as such the [Plaintiff] is not presently able to offset the amounts owed to it by AIF National against the judgment debt.
26 On 1 June 2016, the plaintiff’s application was refused by Senior Deputy Registrar Bellach. In so refusing, it was observed:
There appears to be no capacity to meet the proposed instalment plan until the loan is repaid and there is no certainty as to when the loan will be repaid.
27 On 3 June 2016, the plaintiff filed an application objecting to the order refusing its application to pay by instalments. That application was heard and dismissed on 16 August 2016.[21]
[21]Ibid.
28 The plaintiff caused another related company, Australian Institute of Fitness (Vic/Tas) Pty Ltd (‘AIF Vic/Tas’) (now called Nexus Institute Pty Ltd (‘Nexus’)), to pay for the judgment debt owed to the Shareholder Defendants into the Shareholder Defendants’ solicitors’ trust account by way of the following deposits:
(i) $64,611.38 paid and received on 20 June 2016;
(ii) $64,611.38 paid and received on 19 July 2016; and
(iii) $591,462.80 paid and received on 2 August 2016.
29 An inference is to be drawn from this conduct that the plaintiff itself had no capacity to pay these costs from its own resources.
30 The Shareholder Defendants’ costs of the proceedings in New South Wales in connection with the plaintiff’s application for an instalment order, the plaintiff’s application to set aside the statutory demand served by the Shareholder Defendants, and the plaintiff’s application objecting to the order of the registrar refusing the instalment application, have not been paid. The Shareholder Defendants’ costs are at least $48,620.79 not including GST.
31 The plaintiff has still not paid the sum of approximately $343,675 owed to the fifth defendant, Australian Institute of Fitness Pty Ltd. I infer that it does not have the capacity to make that payment from its own assets. The fifth defendant’s costs in connection with the plaintiff’s application for an instalment order, the plaintiff’s application to set aside the statutory demand served by the fifth defendant and the plaintiff’s application objecting to the order of the registrar refusing the instalment application also remain unpaid by the plaintiff.
32 Having no income, the plaintiff is not likely to improve its position on the available evidence, before the conclusion of the trial.
Plaintiff’s contentions on the threshold issue
33 The plaintiff’s principal contention on the threshold issue is that the related trading company, Nexus, stands behind the plaintiff and, for the purposes of the present application, should effectively be treated as the plaintiff in assessing its capacity to meet the costs of the Shareholder Defendants if so ordered.
34 It was submitted that Nexus was likely to support the plaintiff arising from the unique commercial relationship that existed between the plaintiff, Nexus as the plaintiff’s nominee and the fifth defendant (of which the Shareholder Defendants are shareholders, along with the plaintiff). Further, there is evidence of financial support being provided by Nexus for the plaintiff and, it was said, it is to be inferred from this conduct that financial support into the future will also be provided, including meeting any costs order made in favour of the Shareholder Defendants, should they be successful.
35 It was further submitted that Nexus was in a financial position to provide such support. The most recent balance sheet of Nexus as at 31 March 2016 records that Nexus has net assets of $7,331,541. The most recent profit and loss statement for Nexus for the 2015/2016 year as at 31 March 2016 records total income of$6,813,342 and net income after expenses of $730,331.
36 The balance sheet of Nexus includes as assets accounts receivables of $5,109,535, which (apart from the sum of approximately $300,000) comprise student course fees to which Nexus is entitled and receivable as cash.
37 The budget for 2016/2017 for Nexus provides for forecast revenue of almost $4 million and a net profit of $1.3 million. The projected revenue in the budget is based upon revenue from the teach-out of existing students already enrolled in AIF courses, together with projected further enrolments, and revenue, in respect of the business of Nexus.
38 Mr Hornsey’s affidavit deposes that although the plaintiff does not trade and does not earn any income, it:
(a)has enjoyed the support of related entities in respect of significant liabilities imposed on it in the recent past, in particular from Nexus;
(b) is owed $590,000 by the fifth defendant; and
(c)has external liabilities limited to owing a sum of $280,898.26 to the fifth defendant, with the result that it is a net creditor of it.
Indemnity offered by Nexus
39 It is the plaintiff’s position that no security for the Shareholder Defendants' costs should be ordered. However, such an order were made, Nexus offers to enter into a deed of indemnity if required to do so, in order to stand in the plaintiff’s shoes with respect to its potential liability to pay the defendants' costs. A draft deed of indemnity which Nexus is prepared to execute was provided.
Analysis and conclusion on plaintiff’s submission
40 As to the commercial relationships between the parties to the proceeding, it is appropriate to have regard to a number of facts stated in the reasons for my decision in the Injunction Proceeding:[22]
[22]Australian Institute (Vic & Tas) Pty Ltd & Ors v Australian Institute of Fitness (NSW) Pty Ltd & Ors [2016] VSC 362.
(a)Mr Hornsey is a director of both the plaintiff and Nexus, and is a shareholder in both companies;[23]
[23]Ibid [10].
(b)The Shareholder Defendants, along with the plaintiff, are the shareholders of the fifth defendant, with each holding an equal fifth share and each having an appointed director of the company. They hold their interests in the fifth defendant through a shareholders’ agreement which was entered into on 24 July 2001 (the ‘Shareholders’ Agreement’) which was subsequently varied in writing in 2010;[24]
[24]Ibid [3].
(c)The plaintiff, initially by itself from 2001 to late 2010 or early 2011, provided education and fitness training accreditation services to the public under the name ‘Australian Institute of Fitness’ in Victoria and Tasmania;[25]
[25]Ibid [4].
(d)Subsequently, since about late 2010 or early 2011, the plaintiff has provided these services by its nominee, Nexus;[26]
[26]Ibid [5].
(e)The Shareholders’ Agreement was modified by the plaintiff and the Shareholder Defendants by a written variation dated 7 June 2010 (the ‘Varied Shareholders’ Agreement’).[27] The principal effect of the variation was to add a further clause to the Shareholders’ Agreement which enabled a shareholder to appoint a nominee company to undertake the obligations of the shareholder under any licence agreement with the fifth defendant. There were conditions of the appointment of a nominee, namely that it have the same directorship and shareholding as the appointing shareholder and that it execute a licence with the fifth defendant in place of the appointing shareholder;[28]
[27]Ibid [14].
[28]Ibid [15].
(f)On 17 December 2010, in accordance with the Varied Shareholders’ Agreement the plaintiff nominated Nexus as its licensee under a licence with the fifth defendant to provide fitness education and accreditation services in Victoria and Tasmania under the name ‘Australian Institute of Fitness’ (the ‘VicTas RLA Licence’). The nomination was approved by the fifth defendant on or about 10 December 2010 and consented to by the Shareholder Defendants on or about 3 February 2011;[29]
[29]Ibid [24].
(g) The VicTas RLA Licence was expressed to commence on 7 May 2010 and had a termination date of 6 May 2015. Further, pursuant to cl 4.3 a period of ‘run-off’ was provided for, in this case being a period of up to 90 days from the date of termination by which time the licensee was required to cease to provide its services under the licence as a licensee of the fifth defendant, cease to use the intellectual property of the fifth defendant and take other specified steps to effect an orderly cessation of the licence;[30]
[30]Ibid [28].
(h) In late 2015 and early 2016, the fifth defendant and AIF Vic/Tas, in an exchange of letters, agreed that the termination date of the VicTas RLA Licence be extended to 27 January 2016;[31]
(i) By letter dated 27 May 2016 the fifth defendant notified the plaintiff and its nominee of the termination of the VicTas RLA Licence and that as a result, Nexus would ‘thereby cease to be a licensee of the [fifth defendant]’ and ‘it will no longer be entitled to exercise any rights or to provide and services under the RLA’.[32]
[31]Ibid [29].
[32]Ibid [52].
41 In the Injunction Proceeding, I found that the Varied Shareholders’ Agreement introduced an essential condition to the following effect: in the absence of any shareholder or its nominee having a valid and operative written licence in place with the fifth defendant, that shareholder ceased to have any entitlement to provide fitness education and accreditation services in any territory of Australia under the name ‘Australian Institute of Fitness’, save for an arguably implied exception that, in the event of the termination of any operative written licence, the licensee must continue to operate in its relevant territory for the limited purpose of enabling the licensee to fulfil its contractual obligations to existing students who were enrolled in courses offered by it prior to the licence coming to an end, so as to enable those students to complete their courses of study.
42 The substantive relief claimed by the plaintiff in the proceeding is:
A.An order that the Shareholder Defendants specifically perform and carry into execution the Shareholders’ Agreement in so far as it remains unperformed by the Shareholder Defendants.
B.A declaration that the fifth defendant is obliged to grant a license to the plaintiff, or its nominee (in accordance with cl 29 of the Shareholders’ Agreement), for the plaintiff to exclusively provide fitness education and accreditation services using the name ‘Australian Institute of Fitness’ in the States of Victoria and Tasmania on the terms set out in the RLA as varied in October 2013.
C.A declaration that the fifth defendant has unreasonably refused to consent to the nomination of the plaintiff’s nominee.
43 In other words, in effect, the plaintiff seeks to reinstate its nominee, Nexus, to the position of having a valid licence with the fifth defendant to conduct its business.
44 Save for the limited exception in relation to the plaintiff’s nominee having the right to continue to provide ‘teach out’ services to existing students to the completion of their courses, I found in the Injunction Proceeding that there was no serious issue to be tried.[33]
[33]Ibid [71].
45 It was submitted by the plaintiff that, unless the plaintiff was supported financially by Nexus, it was at risk of falling within the default provisions of the Shareholders’ Agreement, in which event the plaintiff’s rights under that agreement would likely be forfeited and, with that, the rights of Nexus to continue in business under its licence with the fifth defendant would also be likely to fail. Accordingly, there was a considerable commercial imperative for Nexus to continue to support the plaintiff and stand behind it and pay any costs of the present proceedings ordered against it in favour of the Shareholder Defendants.
46 This submission ignores, with respect, an element of financial vulnerability of Nexus. As things stand at present, subject to the Plaintiff ultimately succeeding at trial, Nexus, under its VicTas RLA Licence with the fifth defendant, has no rights to derive income from any new enrolments of students. It is presently confined to deriving what income it can by providing ‘teach out’ services to existing students. This has been the case since the termination of the VicTas RLA Licence on 27 May 2016.
47 However, for present purposes, on the evidence before me, I accept that Nexus is likely to have the financial capacity to meet any costs order made in favour of the Shareholder Defendants against the Plaintiff up to and including a mediation.
Conclusion on threshold issue
48 The Shareholder Defendants placed some reliance on the findings made in the judgment of Barrett AJA in the appeal against the refusal of a registrar to make an instalment order in respect of the costs ordered to be paid by the New South Wales Supreme Court against the plaintiff.[34] Although, on one view, findings were made which are consistent with the position of the Shareholder Defendants, I accept that the findings were made in a different context. For present purposes, I therefore disregard those findings.
[34]In the Matter of Australian Institute of Fitness (VIC & TAS) [2016] NSWSC 1143.
49 Applying the requirements of s 1335(1) of the Act, I am satisfied that the Shareholder Defendants have established the threshold issue. In other words, I am satisfied, on credible testimony, that there is reason to believe that the plaintiff, being a corporation, will be unable to pay the costs of the Shareholder Defendants if they are successful in their defences.
50 In particular the following findings which I make support this conclusion:
a) the plaintiff does not trade and does not earn any income;
b) the plaintiff has a net asset deficiency in its books of $1,041,091;
c)in so far as the plaintiff is owed money by the fifth defendant, this loan is not presently repayable. Accordingly, it is presently not able to be set off against the costs liability which the plaintiff continues to owe the fifth defendant;
d)further, each shareholder of the fifth defendant (including the plaintiff) was required to provide it with loan finance because the fifth defendant required funds arising from the plaintiff’s failure to pay licence fees, coupled with the legal expenses it incurred in fighting the plaintiff’s claims in the New South Wales proceedings;
e)the plaintiff’s only asset of any ‘value’ appears to be its shareholding in the fifth defendant. However, this shareholding is of indeterminate value and is at risk. If the plaintiff is ultimately found to be in breach of the Shareholders’ Agreement and fails to rectify that breach within 30 days after being given notice of the breach, these shares may be compulsorily acquired at their issue price under the Shareholders Agreement;
f)further, historically the plaintiff has not paid its debts from its own resources and it has borrowed from related entities for this purpose. For example, in so far as the plaintiff advanced funds to the fifth defendant, it did so by borrowing from Nexus. Further, in so far as costs orders made against the plaintiff in the New South Wales proceedings in favour of the Shareholder Defendants have been discharged, they were discharged by a payment received from Nexus; and
g)even though the plaintiff has satisfied some of its costs orders made in the New South Wales proceedings, the amount of $280,898 which has remains outstanding to the fifth defendant.
Discretionary factors
51 The jurisdiction is accordingly enlivened to exercise a discretion to require sufficient security to be given for those costs and stay all proceedings until the security is given.
52 In the present proceeding the plaintiff seeks to secure rights to continue to provide services in Victoria and Tasmania. I do not regard this as a defensive action. It is a proceeding which the plaintiff brings to enable it or its nominee to provide services in Victoria and Tasmania under the Shareholders’ Agreement.
53 In my opinion, justice requires in this case that the plaintiff provide adequate security, and given my findings on the financial position of the plaintiff, the discretion vested in the Court must be exercised in favour of requiring security to be given.
Form of the security
54 Although, it is possible to order that security be provided by way of an appropriately drafted deed of indemnity or similar instrument, as was the outcome in DIF III Global, the facts of the case before me differ from those in DIF III Global in critical respects.
55 In DIF III Global, as earlier observed, the party providing the indemnity was a ‘large regulated insurer’ which had significant assets in the United Kingdom and was found to be ‘generally of good financial standing’, was also ‘in the business of underwriting legal expense risks’ and that it was unlikely that the proposed indemnifying insurer ‘would default on the deed’.
56 Further, the party providing the indemnity was independent of the plaintiff, whereas in the present case the plaintiff and the proposed indemnifying entity, Nexus, are controlled by common shareholders and directors.
57 Significantly in this case, the parties have been locked into protracted litigation in both Victoria and New South Wales. In these circumstances, I am not satisfied that the deed of indemnity proposed for Nexus would be appropriate to achieve its object as security; namely, to provide a fund or asset against which the Shareholder Defendants, if ultimately successful, could readily enforce against the plaintiff. Should the Shareholder Defendants succeed at trial and achieve a costs order in their favour, the fact that they might be compelled to rely on the proposed deed of indemnity as security may well force them to make demands for payment. If those demands were not met, the Shareholder Defendants would then be required to commence separate proceedings for enforcement. Having regard to the history of dealings and litigation between the parties, and the common directorships and shareholdings shared by the plaintiff and the proposed indemnifying entity, there is, in my opinion, an unacceptable risk that Nexus might not pay on demand or may delay payment of the costs of the Shareholder Defendants. This would give rise to further expense being suffered by the Shareholder Defendants through any enforcement process, thereby diminishing the value of the security.
58 In the circumstances, I am satisfied that the better course is to make a conventional order for security for costs by ordering that an appropriate sum be paid into Court. The plaintiff can then, if necessary, look to its related entities, including Nexus, to provide the funds to meet the order. By this means, it is unlikely that the litigation will be stultified and the Shareholder Defendants will be adequately protected.
Quantum of the security
59 As noted above, the Shareholder Defendants seek security for costs up to and including mediation only.
60 The Shareholder Defendants put on evidence to the effect that costs incurred by them to 30 June 2016 amount to $97,551. Although these costs were actually incurred, the Shareholder Defendants accept that on taxation they are only likely to recover some 75 per cent of these costs, resulting in the figure claimed of $73,163 for this item. I accept this figure as realistic.
61 The parties are apart on a figure for this application. The plaintiff claims that $12,222 is adequate, whereas the Shareholder Defendants contend that $25,000 is the appropriate amount. This application was hard fought. Written submissions were prepared, including reply submissions by the Shareholder Defendants. Overall, I am satisfied that the sum estimated by the Shareholder Defendants is closer to the mark, and allowing for a 25 per cent reduction on taxation, I estimate $19,000 for this item.
62 The parties are also apart on a figure for mediation. The plaintiff claims that $19,676 is sufficient, whereas the Shareholder Defendants identify $32,000. The plaintiff makes no allowance for the costs of the mediator. This is a commercial case of some complexity, particularly as to the applicable law. A mediation is likely to incur taxable costs for the Shareholder Defendants in the order of $18,000 (allowing for a 25 per cent reduction on taxation) and I will allow that figure.
63 The parties are also apart on a figure for pleading. The plaintiff claims $17,839, the Shareholder Defendants contend for $37,000. In my view, the figure claimed by the Shareholder Defendants is excessive, particularly given that the case has already been well defined by the Injunction Proceedings. I will allow $20,000 for pleadings (which also takes into account a 25 per cent reduction on taxation).
64 In relation to discovery, the parties are relatively close with their estimates: $13,000 for the Shareholder Defendants compared with $12,000 for the plaintiff. I will allow $9,750 for discovery (which also allows for a 25 per cent reduction on taxation).
65 The total of the above figures is $139,913. When rounded down, the sum which ought to be ordered as security for costs against the plaintiff is therefore $139,900. I consider that this amount is a fair and reasonable amount of security to be provided by the plaintiff up to and including the mediation, and, having regard to the circumstances, just.[35]
[35] Allstate Life Insurance Co v ANZ Banking Group Ltd (No. 19) (1995) 134 ALR 187, 197.
Orders
66 The following orders will be made:
1.The plaintiff is ordered, within 21 days of the date of this order, to provide security for the first to fourth defendants in the sum of $139,900 in a form acceptable to the first to fourth defendants or fixed by the Court for the costs of the first to fourth defendants of, and incidental to, this proceeding up to the conclusion of the mediation.
2. This proceeding be stayed until such security is provided.
3.The plaintiff is ordered to pay the costs of the first to fourth defendants of the application for security for costs, including any reserved costs of the application.
SCHEDULE OF PARTIES
| Australian Institute (Vic & Tas) Pty Ltd (ACN 092 728 937) | Plaintiff |
| And | |
| Australian Institute of Fitness (NSW) Pty Ltd (ACN 082 557 346) | First Defendant |
| Australian Institute of Fitness (WA) Pty Ltd (ACN 009 088 724) | Second Defendant |
| Australian Institute of Fitness (QLD) Pty Ltd (ACN 134 504 822) | Third Defendant |
| Australian Institute of Fitness (SA & NT) Pty Ltd (ACN 125 555 133) | Fourth Defendant |
| Australian Institute of Fitness Pty Limited (ACN 098 156 471) | Fifth Defendant |
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