Barry v City West Water Ltd

[2000] FCA 553

FEDERAL COURT OF AUSTRALIA

Barry v City West Water Ltd [2000] FCA 553

PRACTICE AND PROCEDURE – security for costs – whether reason to believe a corporate applicant unable to pay costs of successful respondent – corporate and natural applicants – undertaking by natural applicant to pay costs awarded against corporate applicant

Corporations Law, s 1335(1)
Federal Court of Australia Act 1976, s 56

Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507 followed
Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 followed
Stack v Brisbane City Council (1996) 71 FCR 523 distinguished

KEVIN FRANCIS PATRICK BARRY & ANOR v CITY WEST WATER LIMITED (ACN 066 902 467) & ANOR
V 569 of 1999

KENNY J
MELBOURNE
1 MAY 2000

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 569 OF 1999

BETWEEN:

KEVIN FRANCIS PATRICK BARRY
First Applicant

STREAMLINE DRAINS & PIPELINES PTY LIMITED
(ACN 059 665 539)
Second Applicant

AND:

CITY WEST WATER LIMITED (ACN 066 902 467)
First Respondent

BRAMBLES AUSTRALIA LIMITED (ACN 000 164 938)
Second Respondent

JUDGE:

KENNY J

DATE OF ORDER:

1 MAY 2000

WHERE MADE:

MELBOURNE

THE COURT ORDERS THAT:

1.   The motion, notice of which is dated 27 January 2000, be dismissed.

2.   The first respondent pay the second applicant’s costs of and incidental to the motion, including the costs incurred on 28 March 2000.

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

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	V 569 OF 1999

BETWEEN:

KEVIN FRANCIS PATRICK BARRY
First Applicant

STREAMLINE DRAINS & PIPELINES PTY LIMITED
(ACN 059 665 539)
Second Applicant

AND:

CITY WEST WATER LIMITED (ACN 066 902 467)
First Respondent

BRAMBLES AUSTRALIA LIMITED (ACN 000 164 938)
Second Respondent

JUDGE:	KENNY J
DATE:	1 MAY 2000
PLACE:	MELBOURNE

REASONS FOR JUDGMENT

1. This is an application by way of motion by the first respondent, City West Water Limited (“City West Water”), for security for costs to be provided by the second applicant, Streamline Drains & Pipelines Pty Limited (“Streamline Drains”).  A similar application by the second respondent, Brambles Australia Limited (“Brambles”), has been consensually resolved between the parties. 

2. The applicants’ claims are based on allegations of breach of confidence, breach of s 51AAB of the Trade Practices Act 1974 (Cth), and passing-off. The claims relating to breach of confidence concern the alleged disclosure and use of information about a combination vacuum high pressure and low pressure water and air excavation system (“the invention”). City West Water denies the applicants’ claims, asserting, amongst other things, that systems of this kind have been known and used for a considerable period prior to the date upon which the applicants allege that Streamline Drains disclosed the applicants’ system to Brambles. The Trade Practices Act and passing-off claims are based on an allegation that, in a newspaper article appearing in the Maribyrnong Mail on 9 December 1998, City West Water claimed to be the inventor of the applicants’ invention.  This too is denied by Streamline Drains.

3. City West Water relies on two affidavits of Wayne Maurice Condon, sworn 27 January 2000 and 25 February 2000, and an affidavit sworn by Elizabeth Mary Harris on 24 March 2000.

4. In his first affidavit, Mr Condon deposed that searches disclosed that Streamline Drains had given two registered fixed and floating charges over its assets to the Commonwealth Bank of Australia (a reference, so it seems, properly to the Commonwealth Development Bank) and Mr Barry Graham Lumsden.  The company was not shown to have any real estate.  Mr Condon further stated that he had obtained a credit report from the ratings agency, Dun & Bradstreet.  That report, apparently provided on 31 August 1999 to City West Water’s solicitors, is critical to City West Water’s application for security for costs.

5. The Dun & Bradstreet report gave Streamline Drains a “dynamic risk score” of 13.  This was said to compare with an industry average of 58.  The report stated

   A Score of 13 represents a 22.1% chance of Financial Distress in the next 12 months and is a relatively significant risk level.  We recommend that you offer C.O.D.  The Dun & Bradstreet recommendation should be considered in light of your credit & business policies. 

   These scores have been statistically computed from information currently available in the Dun & Bradstreet database.  The historical DRS and Industry Average scores are shown as at the last day of each month. 

   The report continued:

   Below is an explanation of some significant factors which contributed to this Dynamic Risk Score.

   *   Current financial details are unavailable.

   *   A court action has been recorded against the company during the past 5 years.

   *   Subject shows collections activity against it over the past 2 years.  Accounts are sometimes placed for collection even though the existence or amount of the debt is disputed. 

   *   No court actions appear against the director(s) within the past 5 years.

   *   Debentures are shown to be held by associated companies.

   *   Subject’s age suggests a potentially higher risk.

   The report also gave Streamline Drains a “dynamic delinquency score” of 430, indicating, so it said, a “probability of severely delinquent payment” during the next twelve months of 17.3%.  The score was based on factors similar to those set out above.  Under the heading “payments”, the report further stated:

   A search of the Dun & Bradstreet Trade Reference database today did not locate any Trade References relating to the subject.  As this database contains over five million Trade References, this may indicate that the subject does not trade extensively on credit.

   On 20/8/1999 Laurie Evans Project Manager, deferred trade references to fax. 

   This was faxed on 20/8/1999.

   When a response is received, the report will be updated and forwarded accordingly.

6. Ms Harris, a costs consultant since February 1989, deposed that, having examined the files of City West Water’s solicitors, as at 21 March 2000, she assessed the costs incurred by City West Water in respect of the proceeding, on a party/party basis, at $12,605 exclusive of disbursements.  She further deposed that, based on advice received from City West Water’s solicitors, she estimated that the total party/party costs that City West Water would incur in the proceeding would be about $60,768 (based on an estimated five-day hearing). 

7. In opposing the application for security for costs, Streamline Drains relied on an affidavit sworn by Kevin Barry, senior, on 12 April 2000, an affidavit sworn by Enzo John Minuzzo on 12 April 2000 and an affidavit sworn by Maxine Mary Evers on 14 April 2000. 

8. In his capacity as managing director of Streamline Drains, Mr Barry, senior, deposed that the company “is solvent, that is to say it is able to pay its debts as and when they fall due”.  He further deposed that a copy of the company’s balance sheet as at 30 June 1999, which was annexed to his affidavit, represented a true statement of the financial matters stated in it.  That balance sheet showed that, as at 30 June 1999, the company had net assets of $2,185,819 as opposed to a net deficit of $18,607 in June 1998.  Current assets amounted to $198,810.  The non-current assets consisted of motor vehicles valued at $420,750, furniture, fittings and other equipment valued at $50,000, property, plant and equipment valued at $275,200, leasehold improvements valued at $110,000, and a licensing agreement valued at $2,000,000.  I return to this last item below. 

9. Current liabilities included a secured liability for $5,648.  Mr Barry deposed that this related to a loan by the Commonwealth Development Bank which was originally in the sum of $90,000.  He further deposed that the loan had now been fully repaid.  A statement from the Bank confirmed this.  The balance sheet showed an unsecured liability for $143,879.  Mr Barry deposed that this had been reduced to $95,000.  Non-current liabilities included a secured liability of $182,558.  This related to a secured loan given by Mr Lumsden, who, as it turns out, is one of the company’s directors.  There were also unsecured liabilities of $531,856, including a loan amount of $450,491 from the Commonwealth of Australia.  Mr Barry deposed that the first instalment of this loan was not due for repayment until 15 January 2002, with the final instalment falling due on 15 July 2004.  The balance of the unsecured liabilities represented moneys due to the company’s directors and shareholders.  The increase in unsecured, non-current liabilities from $32,489 in 1998 to $531,856 in 1999 constituted a capital injection which presumably permitted the asset acquisition recorded in 1999.

10. Mr Barry produced a more recent report from Dun & Bradstreet that did not paint the company in a light as adverse as that in the earlier report relied upon by City West Water.  The report produced by Mr Barry did, however, refer to a judgment debt of $35,154 owed by Streamline Drains to Brambles.  This was, so it seems, subject to appeal. 

11. Mr Barry further deposed that Streamline Drains would have been in a better financial position but for the matters that were the subject of this proceeding.  The basis for this view was set out in his affidavit and supported by the affidavit of Mr Minuzzo.  In substance, Mr Barry deposed that Streamline Drains lost the benefit of a more favourable arrangement with investors in the United States and had to settle for a less and later arrangement on account of the matters with which this proceeding is concerned.  For present purposes, it suffices to note, however, that, under the current arrangement, Streamline Drains is to acquire forty per cent of the US Streamline company with an injected capital of US$5 million and the first applicant is to receive US$500,000.  The arrangement is recorded in a Memorandum of Understanding that was executed on 24 February 2000.  In his affidavit, Mr Minuzzo deposed that:

    It is my expectation that negotiations for the injection of capital will be formalised by the end of May 2000 as I am expecting my primary investor to arrive in Australia in approximately three weeks time.  Full documentation reflecting the approval of funding has been executed but is confidential as is the existence of the primary investor. 

    The Memorandum of Understanding would permit Streamline Drains to sell its shares in the US company, subject to certain restrictions, including prior offer to the other shareholders and their consent.  (Counsel for Streamline Drains stated that this arrangement supported the item referred to in the balance sheet as the licensing agreement, notwithstanding that the relevant Memorandum of Understanding had not been executed at the date of the balance sheet.)

12. The matters the subject of the proceeding had occasioned Streamline Drains other financial detriment, so Mr Barry deposed.  He also stated that Streamline Drains was expecting to be paid approximately $75,000 from various debtors, including Macquarie Fields College of TAFE and the South Sydney City Council in the immediate future.  He referred to the negotiation of “a large ongoing contract with Shell Oil Refinery in Geelong”.

13. Ms Evers, a costs consultant since December 1993, deposed that she estimated the party/party costs and disbursements to 21 March 2000 to be $5,463.  She further deposed that she estimated that the City West Water’s party/party costs for the proceeding would be $25,219.  Party/party costs up to and including only the first day of the hearing would be $18,307. 

14. The application for security is made pursuant to s 1335(1) of the Corporations Law, alternatively, s 56 of the Federal Court of Australia Act 1976.  Subsection 1335(1) provides that:

    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. 

    City West Water submits that there is reason to believe that Streamline Drains will be unable to pay City West Water’s costs if City West Water is successful.

15. City West Water must establish the pre-condition for the exercise of the discretion conferred by s 1335(1). As Phillips JA said in Ariss v Express Interiors Pty Ltd (in liq) [1996] 2 VR 507 at 513-4:

    The impecuniosity of the plaintiff company of which there must be credible evidence before the discretion conferred by s 1335 becomes exercisable is not only the occasion for the exercise of the discretion; it is, as Orimiston J observed in Interwest [Ltd v Tricontinental Corp Ltd (1991) 5 ACSR 621] ‘a factor, and often a most significant factor, in the exercise of the court’s discretion’.  In saying this, his Honour drew on Pearson v Naydler [1977] 1 WLR 899 at 906, where Megarry VC had said that the inability of the plaintiff company to pay the defendant’s costs was ‘a matter which not only opens the jurisdiction but also provides a substantial factor in the decision whether to exercise it’. This dictum is often referred to with approval: see for example (in addition to Interwest) National Bank of New Zealand [Ltd v Donald Export Trading Ltd [1980] 1 NZLR 97] at 102; Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd (1982) 44 ALR 163 (Smithers J) at 165; Sent v Jet Corporation of Australia Pty Ltd (1984) 8 ACLR 979 (Full Federal Court) (although compare Harpur [v Ariadne Australia Ltd (No 2) (1984) 8 ACLR 835] at 840 per Connolly J and contrast Rhema Ventures [Pty Ltd v Stenders [1993] 2 Qd R 326 at 326] lines 42-6 per Lee J with Hession [v Century 21 South Pacific Ltd (1992) 28 NSWLR 120] at 123D per Meagher JA). The approach of Megarry VC, which acknowledges that the impoverishment of the plaintiff company may be a factor in the exercise of the discretion conferred by the statute, seems to me wholly apt, if I may so with respect; it does no more than recognise that the primary purpose of the section is to provide protection for defendants who are sued by indigent companies and that where such an action is commenced such protection as the section offers may well be appropriate in the proper exercise of discretion.

    Counsel for Streamline Drains submitted that City West Water had not provided the Court with credible evidence as to Streamline Drain’s impecuniosity.  For the reasons given below, I accept this submission. 

16. Assuming that Streamline Drains owns no real property (as it apparently concedes), that fact alone does not permit an inference to be drawn as to its impecuniosity.  On Mr Barry’s evidence, the Bank charge, which figured in Mr Condon’s January affidavit, no longer represents a liability for Streamline Drains.  Whilst the second of the charges referred to by him continues to secure a significant sum of money, its holder has been shown to be one of the company’s directors.  That does not mean that the liability can be disregarded:  it simply means that its provenance has been partly explained. 

17. To a large extent, City West Water’s application depends upon the Dun & Bradstreet report obtained by its solicitors in August 1999.  That report, as its contents make clear, is based on certain statistical comparisons.  The precise nature of those comparisons is not, as we have seen, disclosed.  The nature of the database upon which the report relies is also not revealed in the report or in any other evidence.  The cogency of the factors referred to in the report that depend upon statistical analysis and the database (such as the effect of the company’s age) is, in this circumstance, weak.  The report also treated as significant the paucity of information about Streamline Drains.  Bearing in mind the company’s organisation and business, this consideration is not, I think, a reliable indicator of the company’s impecuniosity.  Moreover, the later report obtained by Streamline Drains makes it plain that no adverse inference can be drawn from the collections activity referred to in the August 1999 report; and there is only one security held by a director, namely, Mr Lumsden.  The court action to which reference was made in the August 1999 report is not, it seems, being pursued; and the only active court action against the company has resulted in a relatively modest judgment debt that is, in any event, subject to appeal.  Accordingly, I do not accept that the Dun & Bradstreet report relied on by City West Water establishes, by credible evidence, the alleged impecuniosity of Streamline Drains.

18. Further, City West Water cannot, in the circumstances of this case, discharge its onus by relying on the deficiencies in the evidence adduced by Streamline Drains.  There are, plainly enough, gaps in the company’s evidence.  The balance sheet produced by Mr Barry apparently forms part of a set of financial statements, the whole of which were not produced.  It is not said that the balance sheet is supported by an auditor’s statement.  The bases of the assets valuation, including of the licensing agreement, are not explained.  As already noted, the current Memorandum of Understanding was not executed until February 2000, although there were apparently prior negotiations relating to the exploitation of the technology owned by Streamline Drains.  It is to be borne in mind, however, that the managing director of Streamline Drains has stated, on oath, that the company is solvent.  He has provided some evidentiary foundation for this view.  The effect of his evidence is that the company has more than enough assets to meet a costs order made against it in favour of City West Water in the proceeding.  Moreover, Mr Barry’s evidence indicates that the financial position of Streamline Drains may well improve.  Entry into the Memorandum of Understanding may reasonably be regarded as indicative of the possibility of better prospects. 

19. Further, even if the assets valuations in the balance sheet are significantly discounted and if it is assumed that Ms Harris’s costs estimate is going to be nearer the mark than that of Ms Evers, there would, it seems, be enough to meet a costs order in favour of City West Water.  Even if the arrangement represented by the current Memorandum of Understanding is worth much less than the $2 million nominated value of the balance sheet licensing agreement, nonetheless, in the absence of contrary evidence, it must be assumed to have some considerable value.  That the arrangement is a genuine one is not disputed. 

20. For these reasons, I am of the view that City West Water has not established the pre-condition for the exercise of the discretion conferred by s 1335(1) of the Corporations Law.

21. Further, I would not make an order for security under s 56 of the Federal Court of Australia Act.  First, for the reasons given, City West Water has not established the impecuniosity of Streamline Drains.  I accept, moreover, that the applicants’ case is brought bona fide.  It cannot be said that it is without prospects of success, notwithstanding that the respondents have put forward an apparently tenable defence.  There are, plainly enough, real issues to be tried.

22. There is also the consideration that, in this proceeding, Streamline Drains is an applicant with Mr Barry, junior, who is a major shareholder in the company.  Further, Mr Barry, junior, has indicated that he is prepared to give an undertaking to pay City West Water’s costs in the event that it is successful against Streamline Drains.  That undertaking may have some practical significance:  Streamline Drains, not Barry, is the claimant in a principal cause of action against City West Water.  As the authorities indicate, these considerations are relevant, though not necessarily decisive, to the exercise of discretion as to a grant of security for costs:  compare Epping Plaza Fresh Fruit and Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at 194-198 and the cases there cited and contrast Stack v Brisbane City Council (1996) 71 FCR 523 at 529.

1. As I have said, I would not, for the reasons stated, grant City West Water’s application for security for costs against Streamline Drains.  Accordingly, I would dismiss the first respondent’s motion, notice of which is dated 27 January 2000.  I would give the parties an opportunity to be heard on the question of the costs of the motion.

I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.

Associate:

Dated:             1 May 2000

Counsel for the First Applicant:	Mr M Goldblatt
Solicitor for the First Applicant:	Peter Cornelius & Partners
Counsel for the Second Applicant:	Mr M Goldblatt
Solicitor for the Second Applicant:	Peter Cornelius & Partners
Counsel for the First Respondent:	Mr A Ryan
Solicitor for the First Respondent:	Freehill Hollingdale & Page
Counsel for the Second Respondent:	Mr G Clarke
Solicitor for the Second Respondent:	Corrs Chambers Westgarth
Date of Hearing:	26 April 2000
Date of Judgment:	1 May 2000