Everest Colonial Pty Ltd v Ice Creameries of Australia Pty Ltd
[1997] FCA 196
•27 MARCH 1997
CATCHWORDS
PRACTICE AND PROCEDURE - SECURITY FOR COSTS - whether credible testimony as to applicant's inability to pay costs - discretion - relevant considerations - exercise where applicant is in effect defendant - whether applicant was in that position - relevance of public interest in proceedings under Trade Practices Act 1974 - relevance of offer of parent company to guarantee costs - relevance of fact that substantial part of counterclaim covered same issues as the claim.
Trade Practices Act 1974 s 52,
Corporations Law s 459E, s 1335
Jones v Dunkel (1959) 101 CLR 298
Warren Mitchell Pty Ltd v Australian Maritime Offices Union
(1993) 11 ACLC 1238; 12 ACSR 1
Sir Lindsay Parkinson & Co v Triplan Ltd [1973] QB 609
Barton v Minister for Foreign Affairs [1984] 2 FCR 463
Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 13 ACLC 1847
Willey v Synan (1935) 54 CLR 175
Maatschappij voor Fondsenbezit v Shell Transport & Trading Co
[1923] 2 KB 166
Re Travelodge Australia Ltd (1978) 21 ACTR 17
Amalgamated Mining Services Pty Ltd v Warman International Ltd
(1988) 19 FCR 324
Interwest Ltd v Tricontinental Corporation Ltd
(1991) 9 ACLC 1218
Sydmar Pty Ltd v Statewise Developments Pty Ltd
(1987) 11 ACLR 616
Cameron's Unit Services Pty Ltd v Kevin R Whelpton &
Associates Pty Ltd (1986) 13 FCR 46
Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd
(1990) 8 ACLC 304
Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd
(1992) 8 ACSR 405
No VG 675 of 1996
EVEREST COLONIAL PTY LIMITED v ICE CREAMERIES OF AUSTRALIA PTY LIMITED
GOLDBERG J
MELBOURNE
27 MARCH 1997
FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION No VG 675 of 1996
B E T W E E N:
EVEREST COLONIAL PTY LIMITED
(ACN 006 683 740)
Applicant
and
ICE CREAMERIES OF AUSTRALIA PTY LIMITED
(ACN 008 590 430)
Respondent
CORAM:GOLDBERG J
PLACE:MELBOURNE
DATE:27 MARCH 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
Within twenty-one days the applicant provide security for the costs of the respondent up to the commencement of the final hearing of the proceeding in the sum of $30,000.00 to the satisfaction of the District Registrar of the Court.
The applicant pay to the respondent its costs of and incidental to the respondent's motion dated 18 November 1996.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION No VG 675 of 1996
B E T W E E N:
EVEREST COLONIAL PTY LIMITED
(ACN 006 683 740)
Applicant
and
ICE CREAMERIES OF AUSTRALIA PTY LIMITED
(ACN 008 590 430)
Respondent
CORAM:GOLDBERG J
PLACE:MELBOURNE
DATE:27 MARCH 1997
JUDGMENT
Application by the respondent that the applicant give security for the costs of the respondent in defending the proceeding.
Background
On 28 July 1995 the applicant entered into an agreement with the respondent whereby the applicant agreed to supply ice cream to shops which had entered into franchise agreements with the respondent. By that agreement the applicant was obliged to pay to the respondent an initial advance of $400,000.00, rebate payments calculated as a percentage of the price of ice cream products sold by the applicant and to make rebate payments in advance. The initial advance of $400,000.00 payable on 1 October 1995 was paid but the payment
of $200,000.00 due on 1 January 1996 was not paid on that date. Of the $200,000.00 due on 1 January 1996, $20,000.00 was paid on 25 January 1996, $100,000.00 on 21 February 1996 but the balance of $80,000.00 has not been paid. The payment of $200,000.00 due on 1 March 1996 was not paid, nor was the amount of $200,000.00 due on 1 August 1996 paid.
On 18 June 1996 the respondent served a statutory demand upon the applicant pursuant to s 459E of the Corporations Law in respect of the sum of $223,102.00 claimed to be due under the agreement for unpaid advance rebates. On 14 July 1996 the applicant commenced a proceeding to set aside the statutory demand. That proceeding was adjourned for the purposes of a mediation being undertaken but the mediation was not successful and the proceeding is still outstanding and awaiting further directions by the Court.
On 4 November 1996 the applicant issued the present proceeding in which it sought the following relief:
(a)declaration that certain representations made in or about mid 1995 by the respondent constituted misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 ("the Act") and claiming damages in respect of that conduct;
(b)a declaration that the sending of letters by the respondent to the applicant's distributors in late October 1996 after the termination of the agreement which contained statements that the applicant was only permitted to continue to sell to the respondent's franchisees such stocks of ice cream as it held on the date of termination of the agreement constituted conduct which was misleading or deceptive in contravention of s 52 of the Act and claiming damages in respect of that conduct;
(c)an injunction restraining the respondent from communicating to third parties words to the effect that the terminated agreement only permitted the applicant to continue to sell to the respondent's franchisees such of the applicant's stocks of ice cream as were held by it as at the date of the termination of the agreement and that it was only entitled to sell to the respondent's franchisees stock with a batch number prior to the date of the termination of the agreement between the applicant and the respondent;
(d)a declaration that the advance rebate scheduled to be paid on 1 January 1996 pursuant to the agreement was not payable by the applicant to the respondent by reason of the level of sales made by the applicant under the agreement as at 1 January 1996 and 1 March 1996;
(e)an account of all rebates payable by the applicant to the respondent pursuant to the terms of the agreement after adjusting all monies owing to the applicant for goods sold and delivered by the applicant pursuant to the terms of the agreement.
On the same day as the application was filed a notice of motion was filed by the applicant seeking interlocutory injunctive relief in the terms of the injunctions sought in the application. On 8 November 1996, on the return of the notice of motion, the respondent gave undertakings to the Court substantially in the terms of the injunctions sought and the notice of motion was adjourned to 5 December 1996. The undertakings have now been extended and continued on the basis that the communications restrained by the undertakings will not be made without the respondent giving seven days notice of its intention to do so. Accordingly the notice of motion has been adjourned to a date to be fixed. On 9 December 1996 the respondent filed and delivered a defence and cross-claim in which it denied the substantive causes of action raised by the applicant. In its cross-claim the respondent has claimed payment of the balance of the advance rebate payment of $24,476.05 due on 1 January 1996 and the advance rebate payments of $200,000.00 due on 1 March 1996 and 1 August 1996.
On 18 November 1996 the respondent filed and served a notice of motion seeking an order that the applicant give security for the costs of the respondent in defending the proceeding within seven days. In substance the application was made pursuant to s 1335 of the Corporations Law.
Evidence in support of application for security for costs
Affidavits were filed in support of, and in opposition to, the application for security for costs. Prior to the notice of motion being filed the solicitors for the respondent had written to the applicant's solicitors requesting the provision of security for the respondent's costs but this request had been rejected. The respondent, through its solicitors, estimated its costs prior to hearing as being between $45,500.00 and $47,000.00 and it estimated its costs of the hearing to be $32,300.00. At the hearing before me Mr Houghton QC who appeared for the respondent accepted that the figures for the costs prior to hearing should be reduced to between $41,400.00 to $42,900.00, thereby allowing for the excision of certain components in the costs which related to its cross-claim. The legal costs consultant retained by the applicant estimated the likely party - party costs of defending the proceeding for the respondent prior to the hearing including a mediation to be $28,950.00 and the costs of the hearing as being $15,675.00, a total of $44,625.00. As I indicated in the course of argument I do not consider it appropriate at this early stage of the proceeding to be considering the giving of security for the costs of the hearing and I proceed on the basis of considering the issue of security for costs up to, but not including, the hearing.
The principal affidavit relied upon by the respondent was sworn by Gregory Murray Haywood, the finance manager of the respondent. He produced the agreement between the parties dated 28 July 1995 which provided for the supply of bulk scoop ice cream by the applicant to ice cream shops which were already operating under various franchise agreements under which the respondent was franchisor of those businesses. The agreement provided for the applicant to pay to the respondent rebates, in advance of sales, calculated by reference to what was anticipated to be the prospective purchases of ice cream by the franchisees from the applicant. The initial advance rebate required to be paid of $400,000.00 was paid on 15 September 1995 and on the following day Mr Haywood had a telephone conversation with the Chief Executive Officer of the applicant, Mr Richard Barker, in which Mr Barker told Mr Haywood that the applicant was having cash-flow difficulties. He sought an advance on behalf of the applicant and Mr Haywood said he would consider the matter and let him know.
On 19 September 1995 Mr Haywood had a further telephone conversation with Mr Barker in which he confirmed the respondent's offer to pay an advance of $25,000.00 against future ice cream purchases of the Bowral shop and this amount was paid on 20 September 1995. On 22 January 1996 Mr Haywood telephoned Mr Barker and told him that the next $200,000.00 advance rebate had been dragged out further than was expected due to a poor summer and he sought, as a good-faith gesture, a payment in the order of $25,000.00 which had been advanced to the applicant. On 25 January 1996 the applicant paid the respondent $20,000.00. In mid-February Mr Haywood told Mr Barker that by the end of February the full $200,000.00 advance rebate would be due and payable as reflected in the applicant's sales figures and Mr Barker told him that the applicant might not be able to pay the full $180,000.00 but that the applicant would be able to make a significant payment. $100,000.00 was paid by the applicant on 21 February 1996 and at the end of February 1996 Mr Barker told Mr Haywood that the applicant was not in a position to pay the balance of $80,000.00 and Mr Haywood agreed that the amount should be payable before the end of March. On 25 March 1996 a direct transfer to the respondent from the applicant for $25,000.00 was stopped by the applicant's bank and shortly afterwards Mr Haywood telephoned Mr Barker and told him that the bank had requested that the applicant put up a formal application to substantiate the bank's continued support of the applicant. There was then a discussion about the payment of future rebates.
On 25 March 1996 at a meeting between the parties Mr Barker handed over a signed facsimile addressed to the respondent in the following terms:
"We have encountered a problem with the rebate payments.
As you know we obtained a loan from our bank to pay you the first $400,000.00 which was to be progressively reduced then re-used to pay further advances. In granting the loan the Bank of course reserved the right to keep matters under review.
We have been told that their current position is that the performance of the supply arrangement between Everest and I.C.A. has fallen short of the predictions that supported the loan arrangement and
they are reluctant to continue at the current level of support.
This matter only came to light on Friday so I was not aware of their concerns when I met with you earlier in the week. Obviously we need to sort this out at the utmost urgency.
I will call you later to-day to work out a plan."
This sequence of events between September 1995 and March 1996 was relied upon by the respondent in support of its submission that there was credible evidence that the applicant would be unable to pay the costs of the respondent if it was successful in its defence of the claim.
In addition to the statutory demand which it had served the respondent also relied on winding‑up proceedings taken by two creditors. On 18 June 1996 the respondent had served a statutory demand on the applicant in which it was asserted that the total sum of $223,102.00 was due and owing. The general manager of the applicant, Mr David Allison has sworn an affidavit filed on 5 December 1996 in which he says that in the statutory demand proceeding Mr Haywood had sworn an affidavit in which he had said that as at the date of the affidavit the debt due was $21,029.19.
On 2 August 1996 Burra Foods Pty Ltd served a statutory demand on the applicant in respect of a judgment debt of approximately $111,000.00 plus costs, the demand was not satisfied and a winding‑up application was filed on 11 September 1996. Mr Allison, says that the dispute with Burra Foods Pty Ltd has been settled and the statutory demand has been withdrawn.
On 28 October 1996 Ruskin Plastics Pty Ltd served a statutory demand seeking payment of $40,333.48. Mr Allison says that this debt is in dispute but, notwithstanding that dispute, Ruskin Plastics Pty Ltd is still continuing to supply the applicant products for which it is being paid. In the light of Mr Allison's affidavit and the application to set aside the respondent's statutory demand I do not consider that the fact of the claimed debts due to the applicant, Burra Foods Pty Ltd and Ruskin Plastics Pty Ltd are significantly probative on the issue of there being credible evidence that the applicant would not be able to pay the respondent's costs. The present state of the evidence in relation to the three debts is sufficiently equivocal so as to be of little assistance in resolving any issue as to security for costs.
It is common ground between the parties that a third party has taken an assignment of debts due by the applicant of the order of $340,000.00 and that the third party has paid 23 cents in the dollar for these debts. There is an issue as to the identity of the assignee. The applicant has produced two copies of a deed of assignment which identify the assignee as Mr Allison "or his nominee". Mr Allison says that the debts have been acquired by a superannuation fund manager, ABC Fund Managers Limited. I doubt that it matters for the purposes of the present application as to the identity of the assignee because it was not disputed that there had been an assignment of debts due by the applicant. The holding company of the applicant in its annual accounts for the year ended 30 June 1996 noted that there had been a review of the group's entire business and that during the review payments to existing creditors were frozen. The accounts also noted that subsequent to balance date:
"A third party has acquired in the vicinity of $340,000.00 of these creditors and has entered into an agreement to forego any further claim for payment."
The existence of these assignments of debts to the value of $340,000.00 and the fact that payment of the debts has been foregone is evidence, in my opinion, that the applicant has encountered a difficult financial period in which its cash‑flow has become limited and in which it has been unable to pay its debts as and when they fell due. Although the payment of the debts is said to have been foregone (and on that point the evidence was minimal), the point remains that subsequent to 30 June 1996 the applicant has not been able to pay (or at least has experienced difficulty in being able to pay) debts totalling $340,000.00.
The respondent has also produced a Dun & Bradstreet report on the applicant which contends that the applicant has a "high probability of financial distress in the next twelve months". The report also contains information by reference to which the respondent says that the applicant usually pays well outside credit terms to its suppliers and that it has a negative net worth of $145,028.00. The admissibility of this report was objected to by the applicant. I ruled that it was admissible but I regard the above statements in it as of little probative weight especially having regard to other evidence available to the respondent, particularly financial statements of the group of which the applicant is a member.
Evidence in opposition to application for security for costs
The respondent produced a copy of the financial statements for The Australian Food Group Limited (of which the applicant is a subsidiary) which have been filed with the Australian Stock Exchange in respect of the year ended 30 June 1996. These accounts were the subject of considerable debate before me and there are a number of passages in them to which reference should be made. At page 5 under the heading "EVENTS SUBSEQUENT TO BALANCE DATE" there appears the following:
"The Board of Directors instigated a thorough and comprehensive review of the Group's entire business. The review focused upon the operational, financial and management structure of the business and culminated in the implementation of a detailed business plan. The plan encompassed the far reaching restructure and rationalisation of personnel and overheads as well as establishing new directions and strategies for the marketing and sales efforts of the business. With a clear focus upon the growth of profitable sales, the Group has achieved subsequent to year end, a significant turn around, strengthening of the balance sheet and growth in sales.
During the review payments to existing creditors were frozen until the strategic and financial position of the economic entity had been readdressed.
Subsequent to balance date, a third party has acquired in the vacinity (sic) of $340,000.00 of
these creditors and has entered into an agreement to forego any further claim for payments.
•existing creditors to the value of approximately $350,000.00 have been repaid.
•new creditors have been paid as and when the debt falls due."
This statement is substantially repeated on page 34 of the financial statements.
The respondent also produced a copy of the applicant's annual report and audited financial statements for the year ended 30 June 1995 which disclosed:
(a)trading losses of $576,635.00 and accumulated losses of $1,107,030.00 as at 30 June 1995;
(b)a negative cash-flow from operating activities of $113,269.00, a negative cash-flow from investing activities of $29,992.00 and a negative cash-flow from financing activities of $115,037.00 all of which were included in a total negative cash-flow for the year of $322,361.00;
(c)that the directors had stated in the notes to the accounts that the applicant was dependent on on‑going financial support from the holding company which had guaranteed to support the applicant to 30 June 1995 and that the applicant would be able to continue as a going concern only if existing and additional financial support was available from the holding company and the holding company's group was able to generate adequate levels of profit in the future.
Attention was directed by the respondent to the following matters found in the financial statements of the applicant's holding company for 30 June 1996:
(a)the consolidated loss of the Group to 30 June 1996 was $672,119.00 with retained losses of $3,949,610.00;
(b)consolidated cash-flows were negative from operating activities to the extent of $679,686.00 and negative from investing activities to the extent of $15,550.00;
(c)cash-flow from financing activities was positive to the extent of $829,176.00 but this took account of further borrowings of $759,766.00;
(d)total consolidated liabilities were $4,248,933.00. The Group had fully drawn bank facilities of $2,227,761.00, drawn down overdraft facilities of $300,000.00 with only $54,443.00 credit remaining available;
(e)total current liabilities of $2,269,450.00 exceeded the total current assets of $1,337,944.00 by $931,506.00 which the respondent contended indicated cash-flow difficulties;
(f)net consolidated assets were $1,517,018.00 which included amortised good will of $391,545.00, trade marks (at Directors' Valuation 1994) of $801,000.00 and a "supply agreement" with an amortised value of $250,000.00;
(g)the applicant had recorded an operating loss of $549,805.00 which was a significant contributor to the consolidated losses of $650,717.00.
In the course of argument the respondent submitted that the true value of the assets referred to in the financial
statements was likely to be substantially lower than $1,517,018.00 as the good will and trade mark assets could not be readily converted to cash or given as security for borrowings and the supply agreement was the agreement with the respondent which had been terminated.
The audit report on the accounts of the parent company, The Australian Foods Group Limited was unqualified but that report noted that the audit reports on the accounts of five controlled entities including the applicant, were "qualified subject to ongoing financial support from the economic entity".
The applicant disputed some of the material relied upon by the respondent. Mr Allison the general manager of the applicant said that Mr Barker had resigned from the applicant's employment subsequent to being informed that he would be dismissed on the ground, inter alia, of giving mis‑information to the Board of Directors of the parent company. Mr Allison was unable to challenge the conversations between Mr Haywood and Mr Barker although he disputed the veracity of the statements that were attributed to Mr Barker. He said that there was a substantial dispute between the applicant and the respondent particularly in relation to the debts said to be owed and he produced Mr Haywood's affidavit in the statutory demand proceedings in which he said Mr Haywood had sworn that the debt alleged to be due was $21,029.19. He said the dispute with Burra Foods Pty Ltd had been settled and the statutory demand withdrawn and that the debt claimed by Ruskin Plastics Pty Ltd was in dispute but that notwithstanding the dispute Ruskin Plastics Pty Ltd was continuing to supply the applicant with products for which it was being paid. Mr Allison also challenged the veracity of a number of the statements in the Dun & Bradstreet report, particularly those which referred to Magistrates' Court proceedings which he said had been settled.
Mr Allison also said that at the annual general meeting of The Australian Food Group Limited (the parent company of the applicant) on 28 November 1996 the shareholders passed a resolution "that Directors be authorised to place up to 3,000,000 shares at par (50 cents)". He said that since the passing of the resolution the Directors had issued an additional 923,973 ordinary shares with a par value of 50 cents thereby increasing the issued capital of the parent company from $3,700,284.00 to $4,162,271.00 and that it was proposed to issue the shares early in 1997 which he said would obviously further improve the parent company's financial position. However, as Mr Houghton pointed out there was no evidence that the additional ordinary shares had been issued for cash or that cash had been received on their issue. He submitted that, consistently with the principles in Jones v Dunkel (1959) 101 CLR 298, I should infer from the absence of any statement from Mr Allison as to what had occurred on the issue of the shares that the cash resources of the parent company had not increased as a result of that share issue.
Mr Allison produced what he said were the "consolidated accounts of AFG as at 30th November 1996" which he said disclosed a net position of $2,641,314.00 and in respect of which he said the figure of $3,539,435.00 for plant, property and equipment was the Directors' estimates for the same based on external valuations. He said to the best of his knowledge, information and belief the accounts were true and correct. In fact those accounts were headed "Consolidated Preliminary Financial Statements 30 November 1996".
Mr Allison produced what he said were the applicant's accounts for 30 November 1996 which revealed that the applicant had net assets of $678,655.00. The reference in those financial statements to the plant, property and equipment having a value of $1,556,009.00 was based upon an external valuation which was produced. He said to the best of his knowledge, information and belief those financial statements which were headed "Preliminary Financial Statements 30 November 1996" were true and correct. Mr Allison said that the financial statements showed that the applicant had a working capital of $1,052,430.00 on the basis that current assets of $2,421,162.00 exceeded current liabilities of $1,368,728.00. Mr Houghton pointed out that the current assets included receivables of $1,802,553.00 for the applicant whereas the receivables shown on the consolidated statements of 30 November 1996 showed receivables of $1,550,000.00. He submitted that it was not possible for the consolidated or group receivables to be less than the receivables of one of the operating companies and he invited me to proceed on the basis that the receivables component of the applicant's current assets was $1,005,550.00 rather than $1,802,553.00. Taking this position would result in what was said to be the applicant's net assets of $678,655.00 being reduced to a net deficiency of some $118,348.00.
Mr Watts, who appeared for the applicant, submitted that I should not draw any such conclusion and that I should conclude that the difference between the receivables of the applicant and the receivables of the consolidated group should be accounted for by the elimination of inter‑company transactions. In support of this submission he referred to the annual accounts of the parent company for the year ended 30 June 1996 where he noted that on page 9 the consolidated receivables under the heading of "Non-Current Assets" were nil whereas the company's receivables under the same heading were $596,600.00. However, I should point out that the amount of $227,152.00 is specifically shown as an "advance to controlled entities" in note 6 to the account.
The applicant relied on an affidavit filed, by leave, on 17 February 1997, the day of the hearing, in which Mr Allison swore that:
(a)in the six months ended 31 December 1996 the applicant had a turnover of $2,704,171.00 and made an operating profit of $99,991.00;
(b)the applicant incurred extraordinary and abnormal items of $30,046.00 with the result that the applicant's operating profit for the six months ended 31 December 1996 after extraordinary and abnormal items was $69,945.00.
Mr Houghton submitted that I should give this affidavit scant weight having regard to the bald assertions in it. He also relied upon this affidavit in support of his earlier submission that I should infer that no cash had been raised from the shares issued at the end of 1996 because it was within Mr Allison's knowledge as to whether such cash had been received and he had not dealt with the issue in the affidavit (Jones v Dunkel (1959) 101 CLR 298).
The applicant also relied upon an affidavit of Jonathon David Madgwick, an Associate Member of the Institute of Chartered Accountants in Australia who said he had been engaged in or about March 1996 by the directors of the applicant and the parent company to carry out an independent review of the companies' financial affairs. He verified that the preliminary accounts to the end of November 1996 reflected the financial position of the companies.
Mr Roger Smith the Chairman of the applicant's holding company swore that he had sent a letter to the applicant's solicitors stating that the holding company was prepared to guarantee the obligations of the applicant for any costs awarded against the applicant in the proceeding.
Respondent's submissions on security for costs
Mr Houghton submitted, in substance, that there was a real danger that neither the applicant nor its holding company could satisfy an order for costs if the applicant was unsuccessful in the proceeding. He relied in particular upon the preliminary financial statements which were unaudited and submitted that a close examination of those accounts compared to the audited accounts of the holding company as at 30 June 1996 identified discrepancies which cast doubt upon the accuracy of the later accounts. He referred in particular to the discrepancy between the amount of the receivables to which I have already referred which he submitted demonstrated that the applicant had a deficiency of net assets. He also submitted that the accounts did not disclose any improvement in the holding company's cash position between 30 June 1996 and 30 November 1996, the respective cash figures being $51,356.00 and $51,639.00. He submitted that there was no evidence that the allotment of the additional 923,000 shares in November or December 1996 had resulted in any further cash being available to the holding company. He also relied upon the assignment of the applicant's debts and submitted that no details had been given of the forgiveness of the debts referred to in the holding company's annual report. He submitted that the applicant's evidence that it had a working capital of $1,052,431.00, that being the excess of current assets over current liabilities had simply been achieved by rearrangement of current liabilities to non-current liabilities.
Mr Houghton relied in particular on the statement in the 30 June 1996 accounts that the accounts of the applicant had been qualified subject to ongoing financial support from the economic entity, a reference to the applicant's holding company. He identified the credible evidence required by s 1335 of the Corporations Law to establish the jurisdiction to order security for costs as being demonstrated by the financial accounts to which I have referred, the fact that the applicant required support from its parent to continue in business and what he submitted was serious concern about the parent's ability to provide that support. He invited me to place little or no weight on Mr Madgwick's evidence as his affidavit acknowledged that he had last carried out any work for the companies in March 1996. He submitted that the statements in Mr Allison's latest affidavit as to turnover and profit were mere assertions. He submitted that relevant accounts had not been produced and that no explanation had been given for their non‑production whilst at least preliminary unaudited accounts had been produced as at the end of November 1996.
He summarised the credible evidence upon which he relied as being found in:
(a)the conversations between Mr Barker and Mr Haywood in late 1995 and early 1996;
(b)the unwillingness of the Bank to continue to support the applicant;
(c)the judgments obtained by creditors which, if satisfied, demonstrated that the creditors had to proceed to judgment thereby showing the desperate straits the applicant was in;
(d)the discrepancy between the published audited accounts as at 30 June 1996 and the later preliminary accounts as at November 1996;
(e)Mr Allison's failure to exhibit accounts to support his evidence as to turnover and profit;
(f)the qualification by the auditors of the applicant's accounts.
He submitted that there was no case made out that the order for security for costs would stultify the ability of the applicant to pursue the litigation.
Applicant's submission on security for costs
Mr Watts who appeared for the applicant submitted that there were five reasons why the application for security of costs should be dismissed, namely:
(a)the applicant was solvent;
(b)the applicant had been obliged to issue the proceeding to defend the procedure initiated by the respondent of making a statutory demand upon the applicant pursuant to s 459E of the Corporations Law. He submitted that the applicant in effect was a defendant so it should not be obliged, consistently with authority to which I shall refer, to put up security;
(c)a substantial part of the respondent's cross-claim covered the same issues as were in the applicant's claim;
(d)the balance of the applicant's claim was brought pursuant to s 52 of the Trade Practices Act 1974 so that the public interest element of the claim militated against an order for security for costs;
(e)the applicant's parent company was willing to give an undertaking to pay the costs.
Mr Watts submitted that the earlier conversations between Mr Barker and Mr Haywood did not assist in resolving the issue of solvency, that the statutory demand was neutral and that the evidence disclosed that the claims by Burra Foods Pty Ltd and Ruskin Plastics Pty Ltd had reached a position that did not reflect on the issue of insolvency. He submitted that the fact of the assignments of the debts due by the applicant was not evidence that it was unable to pay the costs of the proceeding if it was unsuccessful and that I was not entitled to draw any inference from the fact that the applicant's debts had been assigned for 23 cents in the dollar. He submitted that the assignments and the forgiveness of the debts or moratorium on the debts by the assignee demonstrated that an advantage had been created for the company which did not imperil its growth or its net worth. However, this submission ignores the significance of the reason why the assignments were entered into. Mr Watts submitted that I should apply the same principles and approach as was taken by Lee J in Warren Mitchell Pty Ltd v Australian Maritime Offices Union (1993) 11 ACLC 1238; 12 ACSR 1 where he concluded that the proper conclusion on the evidence was that the applicant was able to carry on trading profitably and meet its commitments within the normal terms of business. In that case a substantial debt to the Deputy Commissioner of Taxation which might have affected the solvency of the applicant if it was required to be paid in full had been met by an arrangement whereby periodical payments had been made to reduce the debts. However there is nothing in that decision which assists the resolution of the matter before me having regard to the different fact situation involved.
Mr Watts submitted that the applicant's debts were being met within normal trading terms and he relied upon Mr Madgwick's affidavit as well as the proposition that there was a substantial number of assets available which were supported by valuations. In response to the submission by the respondent that the applicant's accounts had been qualified he submitted, as was the fact, that the parent company's accounts had been audited and were unqualified. He submitted that if security was to be ordered then the undertaking given by the parent should be accepted as the parent which as solvent, whose accounts are unqualified, was prepared to stand behind its subsidiary.
Mr Watts submitted that the discrepancy between the receivables was such that I should infer that they had been the subject of "netting out" in the group accounts. However, there was no evidence of this in the November accounts although there was a note to that effect so far as the non‑current liabilities were concerned in the 30 June 1996 accounts.
Mr Watts placed substantial significance on Mr Madgwick's evidence and submitted that the assignments of the applicant's debts should be treated by me in the same way as Lee J had treated the arrangement entered into with the Deputy Commissioner of Taxation in Warren Mitchell Pty Ltd v Australian Maritime Offices Union (supra). He submitted that the fact of the arrangement with the Deputy Commissioner of Taxation had not meant that the applicant was unable to pay its debts and I should draw the same conclusion in relation to the assignment of debts. However, the arrangement before me was quite different from the arrangement entered into between Warren Mitchell Pty Ltd and the Deputy Commissioner of Taxation. Before me there was an assignment of debts for 23 cents in the dollar and a forgiveness of all the debts of the applicant by the assignee. Such forgiveness, in my opinion, demonstrates that there had been a difficult financial situation where I would be entitled to draw the inference that prior to the assignments the applicant been experiencing difficulties in maintaining its cash‑flow level. However, the forgiveness of those debts still requires an analysis of the current financial situation of the applicant and the accounts to which I have referred and the submissions made by Mr Houghton, still result, in my opinion, in a concern about the ability of the applicant to meet any costs ordered against it.
Mr Watts submitted that just as Lee J had accepted unaudited accounts from Warren Mitchell Pty Ltd I should accept the preliminary November 1996 accounts identified by Mr Allison and Mr Madgwick. The difficulty with this submission is that Mr Madgwick was somewhat sparse in his verification of the financial position of the applicant. He said that the preliminary financial statements reflected the position of the company as at 5 December 1996 and that the valuations of property, plant and equipment were based on external valuations which he had sighted. However, those valuations were not produced. Although Mr Allison produced a valuation it did not cover all the plant and equipment. He also deposed to the fact that he was able to say from his own knowledge that as a result of reviews carried out by directors following the resignation of Mr Barker debts incurred by the applicant were being paid within their trading terms which were usually 30 days. However, these matters were not verified in any detail.
Mr Madgwick asserted that both the parent company and the applicant were solvent and would be able to meet any award for costs in the sum of $70,000.00 or thereabouts. He justified this statement by reference to his knowledge of the accounts of the applicant. According to Mr Madgwick he was engaged in March 1996 to carry out independent reviews of the companies' finances but it does not appear that his retainer continued through to the end of 1996. As Mr Houghton correctly pointed out the 1996 accounts only showed a large surplus because of the intangibles which were in the accounts in the sum of $1,442,545.00.
It seems to me that on the totality of the evidence, especially the accounts of 30 June 1996 and the December 1996 accounts there was credible testimony that there is reason to believe that the applicant will be unable to pay the respondent's costs if it successful in its defence. Mr Watts submitted that the applicant was solvent but that does not address the issue as to whether the relevant credible testimony exists. It must be remembered that it is not necessary that the evidence establish a likelihood or probability that the applicant either is presently insolvent or will be insolvent at the relevant time. In this respect I adopt the observations of Lee J in Warren Mitchell Pty Ltd v Australian Maritime Officers Union (supra) where he said at 1241:
"The use of the word 'credible' suggests a requirement that evidence to be relied upon has some characteristic of cogency. Qualification of the word 'testimony' by the word 'credible' suggests that an evidentiary burden is undertaken by the party seeking the order. It amounts to an obligation on an applicant for an order to show that the material before the Court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings. To what extent the satisfaction of that standard may fall short of the demonstration of a likelihood that the corporation will be insolvent at the relevant time is unnecessary to decide. It is enough to say that speculation as to insolvency or financial difficulties likely to confront the corporation will be insufficient to ground the exercise of the discretion."
It is apparent that from late 1995 the applicant has been experiencing financial difficulties and cash‑flow problems, so much is demonstrated by the conversations between Mr Barker and Mr Haywood. Although Mr Barker's employment was terminated, the applicant was unable to contradict Mr Haywood's evidence and did not challenge what was set out in the facsimile handed over at the meeting on 25 March 1996. I regard the evidence as to the judgments against the applicant and the statutory demands served on it as being sufficiently equivocal as to be neutral so far as the relevant credible evidence is concerned. However I am influenced in my conclusion that credible evidence does exist by the various accounts and financial statements to the applicant and its parent which have been produced.
The accounts and other evidence demonstrate that the applicant has a cash-flow problem. I place particular significance on the assignment of debts to the value of $340,000.00, the applicant's negative cash‑flow, that the applicant was dependent on its parent for financial support and that that would only occur if the group was able to generate adequate levels of profit in the future and the qualification of the applicant's accounts by the auditors. Although the annual accounts of the holding company stated that the third party assignee of the $340,000.00 debts had entered into an agreement to forego any further claim for payment, such an agreement was not produced and there was no other evidence of the foregoing of the claim to be paid the debts. Mr Allison said that the debts had been acquired by a superannuation fund manager ABC Fund Managers Limited. If that be correct it is somewhat surprising that a superannuation fund manager could or would abandon an asset of a superannuation fund it managed particularly where it had paid 23 cents in the dollar for the acquisition of the debts. In the absence of any explanation, I am unable to accept that the $340,000.00 assigned debts will not be called upon in some manner.
Notwithstanding Mr Watt's submissions in relation to the accounts I consider that real issues arise as to the extent of the applicant's and the group's net assets. The evidence to which I have referred is such that I have real concerns as to the applicant's financial position and its ability to generate funds to cover the respondent's costs if the proceeding is dismissed. Madgwick swore that in his opinion both the applicant and its parent are solvent and could meet an award of $70,000.00 costs and that the 30 November 1996 accounts "reflect the position of the companies as at 5th December 1996". However those accounts are unaudited and are expressed to be "Preliminary". The issue relating to the proper amount to be attributed to "Receivables" in those accounts raises a real doubt as whether the applicant does have an excess of assets over liabilities. I am also influenced by the fact that the accounts are "Preliminary" so that when considered against the background of the 30 June 1996 accounts and the evidence to which I have referred I reach the conclusion that there is credible evidence as required by s 1335.
I am also left in a state of unease as to whether the share placement in November 1996 resulted in the availability of further funds to the group and indirectly to the applicant. For present purposes I do not need to draw in aid Jones v Dunkel (supra) as I was invited to do by Mr Houghton so as to infer that no cash was raised by the placement. I content myself with finding that there is no evidence before me that cash was in fact raised by the placement. I place little weight on Mr Allison's unsupported assertion in his latest affidavit (17 February 1997) that in the six months to 31 December 1996 the applicant had a turnover of $2,704,171.00 and made an operating profit of $99,991.00. In the absence of any accounts to explain or justify those figures I do not consider that Mr Allison's assertions are sufficient to displace the credible evidence to which I have referred.
A finding that the relevant credible evidence exists does not resolve the matter but only satisfies the threshold test. Having found that there is credible testimony the question then arises whether the Court should exercise its discretion in favour of ordering security. Commenting on an earlier English equivalent of section 1335 of the Corporations Law Lawton LJ said in Sir Lindsay Parkinson & Co v Triplan Ltd (1973) QB 609 at 629:
"[The Court's] discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a straitjacket by considerations of burden of proof. It is a discretion which the court will exercise having regard to all the circumstances of the case."
(cf Barton v Minister for Foreign Affairs (1984) 2 FCR 463). Although the Court's discretion is at large and rules have not been formulated as to how the discretion is to be exercised, there have been a number of relevant discretionary considerations identified in the cases. As I noted earlier Mr Watts relied upon the following discretionary considerations (in addition to his submission that the applicant was solvent):
(a)the proceeding was a defence to the statutory demand proceeding;
(b)a substantial part of the counterclaim covered the same issues as the claim;
(c)the s 52 claim had an element of public interest;
(d)the parent company was willing to give an undertaking to pay the costs.
He did not submit that any order for security for costs would have the effect of stultifying the proceeding.
In support of his submission that the applicant is in substance and for practical purposes a defendant as a result of the adoption of the statutory demand procedure by the respondent, Mr Watts relied upon the line of authority identified by Sundberg J in Aquatown Pty Ltd v Holder Stroud Pty Ltd (1995) 13 ACLC 1847 to the effect that security will not be ordered where the applicant is in substance the party attacked and is in substance in the position of a respondent (Willey v Synan (1935) 54 CLR 175; Maatschappij voor Fondsenbezit v Shell Transport & Trading Co [1923] 2 KB 166; Re Travelodge Australia Ltd (1978) 21 ACTR 17; Amalgamated Mining Services Pty Ltd v Warman International Ltd (1988) 19 FCR 324; Interwest Ltd v Tricontinental Corporation Ltd (1991) 9 ACLC 1218).
There is no doubt that the principle upon which Mr Watts relies is applicable in a relevant situation. If the application filed by the applicant had limited itself to the claim that the advance rebates were not payable there would have been substantial merit and force in the submission that the applicant was effectively being forced to defend itself. However, the application and the statement of claim filed by the applicant go beyond meeting the claim which brought about the statutory demand. The statutory demand related to the amounts due under the agreement in respect of the advance rebates. The relief sought in the application and the claims made in the statement of claim raise further claims such as the claims for breaches of s 52 of the Act and the injunctive relief sought in respect of the communications made to franchisees by the respondent. Thus, in respect of a significant part of the application the applicant is not a respondent but is in truth an applicant. Accordingly I am not sufficiently persuaded that I should exercise the discretion committed to me against ordering security for costs on the ground that the applicant, by the proceeding is essentially defending a claim brought by the respondent. I should also point out in this respect, that the applicant's separate proceeding to set aside the statutory demand is still pending before the Court.
Mr Watts then submitted that a substantial part of the respondent's cross-claim covered the same ground as the applicant's claim and that the balance of it was brought under s 52 of the Act thus invoking public interest principles. Mr Watts relied on Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 11 ACLR 616 where Smart J considered as a fact relevant to the exercise of discretion to order security for costs that substantially the same facts were likely to be canvassed in determining the action and the cross-action. Smart J said he would be slow to allow a situation where the action was stayed because of the applicant's inability to provide security for costs but the cross‑action covering substantially the same factual areas proceeded. However he concluded that the cross‑claim raised issues not directly arising in the defence to the claim which issues were so substantial as to make the defendant in substance the plaintiff in the proceedings so that the cross‑claim was the dominant part of the proceedings. He concluded that in the overall picture of hearing time and amount claimed, the cross‑claim was the dominant part of the proceedings. That is not the situation before me. In any event, as I noted earlier the cross-claim deals substantially with the claim for the advance rebates whereas the application covers and includes the issues in relation to misleading and deceptive conduct under s 52 of the Act and the injunctive relief sought in relation to the communications said not to be warranted by the terms of the agreement. Accordingly, I do not, as a matter of exercise of discretion consider the nature and content of the cross‑claim such as to influence me not to exercise my discretion in favour of ordering security for costs.
I have also taken into account the submission that the balance of the applicant's claim is brought under s 52 of the Act which enlivens public interest considerations. However, the s 52 claims relied upon do not relate to members of the public generally being misled and deceived but rather relate to conduct as between the respondent and the applicant in relation to their agreement and commercial relationship. In such circumstances I do not consider that the existence and nature of the s 52 claims are such as to persuade me to exercise my discretion against ordering security for costs.
The offer of the parent to guarantee the costs and be responsible for them is relevant because of the line of authority which provides that if the individuals who lie behind the corporate plaintiff are exposed to personal liability for the costs then the reason for the statutory purpose has gone (Cameron's Unit Services Pty Ltd v Kevin R Whelpton & Associates Pty Ltd (1986) 13 FCR 46, 53; Mantaray Pty Ltd v Brookfield Breeding Co Pty Ltd (1990) 8 ACLC 304 at 306; Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd & Ors (1992) 8 ACSR 405 at 415). However, the evidence in relation to the ability of the parent company to pay the costs is a matter of controversy. In any event, the principle upon which Mr Watts relies and which is to be found in the cases to which he referred is predicated upon an individual person, rather than a corporation, undertaking to be responsible for the costs. The rationale for the principle being that when an individual offers to be responsible for the costs, the respondent is in no more disadvantageous a position than where it is a respondent in proceedings commenced by a litigant in person (Warren Mitchell Pty Ltd v Australian Maritime Officers Union (supra) p1242).
It follows from what I have said that notwithstanding the discretionary considerations submitted by Mr Watts I consider that I should order that the applicant provide security for the costs of the respondent for the period up to the commencement of the hearing of the Application. There is a conflict in the evidence before me as to what are the estimated costs on a party/party basis of the respondent in respect of that period. Mr Karliner, the solicitor for the respondent, after allowing for the costs of the cross‑claim conceded by Mr Houghton as not being appropriate to claim, estimates the costs at between $41,400.00 and $42,900.00 whereas Ms Hauser, the consultant retained by the applicant, estimates the costs to be $28,950.00. Neither party made submissions as to how I should resolve this conflict on the evidence and there is little material before me to enable me to resolve the issue one way or the other. However, I have examined the evidence given by both sides and it is apparent that there is no one item of costs which explains the difference between the two amounts. Rather, Ms Hauser regards a number of Mr Karliner's estimates as excessive although in some cases such as court fees (in respect of which Mr Karliner estimates $3000.00) Ms Hauser allows nothing. In any event, any provision of security of costs is, at best, an estimate and in all the circumstances, having regard to the conflicting evidence, I am of the opinion that an appropriate amount in respect of security should be given is $30,000.00. As I noted earlier, I consider it premature at this stage to make any assessment or order in respect of costs of the hearing.
Accordingly, I will order that within twenty-one days the applicant provide security for the costs of the respondent up to the commencement of the final hearing of the proceeding in the sum of $30,000.00 to the satisfaction of the District Registrar of the Court. I consider that the applicant should pay to the respondent its costs of and incidental to the motion dated 18 November 1996.
Counsel for the applicant: Mr L Watts
Solicitors for the applicant: Mowbray
Counsel for the respondent: Mr W Houghton QC
Solicitors for the respondent: Baker & McKenzie
Date of Hearing: 17 February 1997
Date of Judgment: 27 March 1997
I certify that this and the preceding thirty-five (35) pages are a true copy of the Judgment of His Honour Justice Goldberg:
Associate:
Date:27 March 1997
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