Australian Solar Mesh Sales Pty Ltd v Anderson, Neville John

[1997] FCA 1432

FEDERAL COURT OF AUSTRALIA

PRACTICE & PROCEDURE - Security for costs - where transfer of shares occurred after the motion for security for costs filed - whether motion should be dealt with on the basis that solvent persons stand behind company with an interest in the litigation.

Cameron’s Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46, refd

AUSTRALIAN SOLAR MESH SALES PTY LTD v NEVILLE JOHN ANDERSON & ORS
NG 768 of 1993

JUDGE:        DAVIES J
DATE:          17 DECEMBER 1997
PLACE:        SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 768  of   1993

BETWEEN:

AUSTRALIAN SOLAR MESH SALES PTY LIMITED
APPLICANT

AND:

NEVILLE JOHN ANDERSON
DANIEL RALPH SHANAHAN
JOHN GORDON HINDE
FRASER PATISON OLD
DAVID CARLYLE GRIFFITH
JOHN DAVID O'CONNOR

SIMON DUDLEY WILLIAMS and
KENNETH JOHN MCINNES

trading as SPRUSON & FERGUSON,

PATENT & TRADE MARKS ATTORNEYS
RESPONDENTS

CORAM:

DAVIES J

DATE OF ORDER:

17 DECEMBER 1997

WHERE MADE:

SYDNEY

MINUTES OF ORDER

THE COURT ORDERS THAT:

1. The applicant provide security for costs in the sum of $30,000 either by way of payment into Court or by bank guarantee in a form approved by the Registrar, such security to be provided on or before 31 January 1998.

1. Liberty be reserved to the parties to apply to vary or terminate Order 1 should the circumstances warrant that course.

1. The respondents have the costs of the motion.

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 768 of 1993

BETWEEN:

AUSTRALIAN SOLAR MESH SALES PTY LIMITED
APPLICANT

AND:

NEVILLE JOHN ANDERSON
DANIEL RALPH SHANAHAN
JOHN GORDON HINDE
FRASER PATISON OLD
DAVID CARLYLE GRIFFITH
JOHN DAVID O'CONNOR

SIMON DUDLEY WILLIAMS and
KENNETH JOHN MCINNES
trading as SPRUSON & FERGUSON,

PATENT & TRADE MARKS ATTORNEYS
RESPONDENTS

CORAM:	DAVIES J
DATE:	17 DECEMBER 1997
PLACE:	SYDNEY

REASONS FOR JUDGMENT

The respondents, who trade as Spruson & Ferguson, Patent & Trade Mark Attorneys, move for an order that the applicant, Australian Solar Mesh Sales Pty Ltd, provide further security in respect of the anticipated costs of these proceedings. 

In the principal proceedings, the applicant claims that Spruson & Ferguson acted as its patent attorney in applying for and obtaining the grant of a petty patent which was granted on 20 October 1987 and given the number 565992. The petty patent claimed an invention in relation to a mesh material for use as a screen, the mesh material comprising vinyl coated glass fibre yarn and having other particulars set out in the claim. The applicant alleges that it intended to sell franchises throughout Australia for the distribution of the mesh and that it intended to market the invention internationally. The applicant contends that, in May 1989, production commenced and the applicant began supplying the mesh to franchisees of the applicant and to the market generally. Subsequently, there were proceedings before this Court which raised the issue of the validity of the petty patent. It is alleged that a judge of the Court held that the claim did not define the inventions required by s 40(1A)(b) of the Patents Act 1952 (Cth) and that his Honour revoked the patent. The applicant claims that Spruson & Ferguson were negligent and that, as a result, it suffered loss and damage in respect of past events and in respect of potential earnings. I have been informed that the applicant will seek damages in the vicinity of $20 - $30m.

The respondents deny negligence.  They deny that the findings of the judge of the Court were correct and they deny that any negligence on their part caused damage to the applicant, it being alleged, inter alia, that the mesh as manufactured and marketed was overpriced due to excessive charges made by the applicant on the franchises.  The respondents also raise grounds on which, they say, the petty patent was invalid.

The applicant company is insolvent.  An order was made by consent on 5 May 1994 that security in the sum of $10,000 be provided.  On 9 May 1996, the Court ordered by consent that further security in the sum of $60,000 be provided. 

The matter is now ready for hearing.  Affidavits have been filed which show that, over and above the legal expenses incurred to date which have exceeded the security already provided, future expenses anticipated by the respondents for the preparation for and the hearing of an anticipated three weeks trial would amount to $149,201.

The motion for security for costs was filed on 27 October 1997.  It came on for directions on 6 November 1997 at which time an order was made that the applicant file any answering material by 12 November 1997.  The matter came on for hearing on 14 November at which time there was filed on behalf of the applicant an affidavit by Mr K C Ivory, the managing director of the applicant, who deposed, inter alia:

"I am prepared to guaranty the liability of Australian Solar Mesh Sales Pty Limited, the applicant herein in the event of a costs order being obtained at the conclusion of the trial."

As nothing was known of Mr Ivory's circumstances, the matter was adjourned to 1 December 1997, on which day Mr Ivory gave evidence by videolink.  In the meantime, Mr Ivory had also filed two other affidavits.  One affidavit annexed a statement of his assets and liabilities as at 24 November 1997 which showed him to have total assets of $6,364 and estimated liabilities of $325,000, a deficiency of $318,636.  Mr Ivory also produced copies of a number of transfers of shares.  The first was from his wife, Mrs K F Ivory to himself of 64,500 shares for the consideration of $1.  The transfer was dated 28 October 1997.  The other transfers were also to Mr Ivory and were dated 21 November 1997 or thereabouts.  The consideration for each  was $1.  The transfers were:

Mr J R Doust   8,450 shares
           Mrs I F Doust   8,450 shares
           Mr J T Tonsbeek   10,000 shares

Solar-Mesh (Australian Distribution) Pty Ltd   25,000 shares

Mrs B M Platt   5,000 shares

Mr T M Platt   5,000 shares

At about the same time, an additional 40,000 shares were issued to Mr Ivory to take the issued capital of the applicant up to the allowable maximum of 350,000 shares.

That left the shareholders as follows:

Keith Albert George Smith   41,350 shares
           Catherine Smith   41,350 shares
           Mr K C Ivory  267,300 shares

Mr Ivory gave evidence that he spoke with Mr & Mrs Smith and requested that they transfer their shares to him or provide him with assistance to counter the motion for security of costs but they declined to attend to either matter.

Mr Ivory deposed that, at about the time that his wife transferred her shares to him, she also resigned as a director and that the current directors were himself and one of his sons who was unemployed. 

Mr Ivory gave evidence to the Court by videolink.  I am not satisfied that the Court was informed of the whole truth of the matters concerning Mr Ivory's affairs, those of the applicant or those of the persons who were connected with the applicant.  A clear illustration of Mr Ivory's non-disclosure of material facts can be seen in the affidavit of 11 November 1997 in which Mr Ivory deposed that he was prepared to guarantee the liability of the applicant in the event of a costs order being made but failed to disclose that, in his view, he was insolvent and had no assets from which recovery could be obtained.  Another example appears in the following passages of his oral evidence:

"Have accounts for the company been prepared for the financial year ending 30 June 1997?---I don't believe they are at this stage.  I can't recall signing any.

Has there been any material change in the financial situation of the company to the best of your knowledge since 30 June 1996?---I have not - I have just recently - my accountant has just recently been away and I have not yet had time to sit down and look at those documents with him.  So I really couldn't comment on that.  I don't have that information at hand.

...

Can you answer this question, please, have any debts of the company been repaid during the course of the last 12 months?---As I said, I don't have those documents at hand.  I am unable to answer that question at this point of time."

Nor did Mr Ivory attempt to explain in his affidavits why the transfers of shares, which I have mentioned, took place.  I think I should infer from the fact that the transfers of shares occurred after the motion for security for costs was filed that the transfers were effected with a view to enabling the applicant company to avoid an order for the provision of security for costs.

The ordinary rule is that, if it appears that an applicant company may be unable to meet an order for costs made against it in the proceedings, then an order for security will be made and, if the applicant company itself does not have the assets from which security can be provided, then the Court will look to see whether those persons who stand behind the company and who are promoting and are likely to benefit from the litigation are in a position to provide security.  It is quite common for the Court to require that the directors and shareholders give a personal indemnity with respect to the costs.  One of the reasons for this is that litigation tends to be unfair and indeed to become unbalanced if there are not persons on both sides of the litigation who stand to lose if litigation which ought to be settled is not settled or if litigation is unnecessarily prolonged or if unreasonable allegations are made.  Litigation should be efficient.  The sanction of costs applying to persons on both sides of the litigation is a useful tool to achieve this.

The position is different if both an applicant company and those who stand behind the company are unable to provide any security.  Property ought not to be a bar to litigation if there is reasonable cause for the litigation: Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates (Australia) Pty Ltd (1986) 13 FCR 46.

In the present case, had the shareholdings remained as they were prior to the execution of the transfers I have mentioned, I would have had no doubt that an order for security should be made.  On the face of the matter, in the absence of evidence to the contrary, one would assume that, when the proceedings commenced, there were solvent persons standing behind the company who had an interest in the litigation.  I think I should deal with this motion for costs on that basis.  The position is that the shareholders existing at the commencement of the proceedings, other than Mr Ivory, either have no interest in the applicant company or this litigation or that what occurred is a mere ploy to bring about the situation whereby it would appear that the applicant and the one shareholder in the company was insolvent, so that the applicant could rely upon the poverty rule.  In the circumstances, I think I should deal with the motion as if the transfers of shares had not occurred and the shareholding was as it stood when the proceedings commenced.  On this basis, it has not been shown that security cannot be provided.  Indeed, even now, it has not been shown that Mr & Mrs Smith, who remain as shareholders, are not in a position to offer security.

I do not propose to order security in the amount requested.  The Court has a discretion with respect to this matter and already substantial security has been ordered.  I think the issues raised by the applicant could be dealt with within two weeks.  The respondents have raised additional issues as to the validity of the petty patent, but I do not consider that they should have security for the case of those I consider that I should raise the security to $100,000 but that it would not promote the interests of justice to require security beyond that amount. An order for security for costs should not operate to frustrate litigation in which there is a genuine issue to be resolved.  It is rare for orders for security for costs made in this Court to exceed $100,000. 

Accordingly, I shall order that the applicant provide security for costs in the sum of $30,000 either by way of payment into Court or by bank guarantee in a form approved by the Registrar, such security to be provided on or before 31 January 1998.  I shall reserve liberty to the parties to apply to vary or terminate this order should the circumstances warrant that course.  The respondents should have the costs of the motion.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies

Associate:

Date:              17 December 1997

Counsel for the Applicant:	P Dutney QC  (1 December 1997) J S Drummond (14 November 1997)
Solicitor for the Applicant:	Baker Johnson
Counsel for the Respondent:	J V Nicholas
Solicitor for the Respondent:	Ebsworth & Ebsworth
Dates of Hearing:	14 November 1997 & 1 December 1997
Date of Judgment:	17 December 1997