EWC Payments Pty Ltd v Commonwealth Bank of Australia
[2011] VSC 389
•19 August 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT – LIST D
S CI 2010 00683
| EWC PAYMENTS PTY LTD (ACN 122 161 737) & ORS | Plaintiffs |
| v | |
| COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) | Defendant |
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JUDGE: | GARDINER AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15 April 2011 | |
DATE OF JUDGMENT: | 19 August 2011 | |
CASE MAY BE CITED AS: | EWC Payments Pty Ltd & Ors v Commonwealth Bank of Australia | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 389 | |
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SECURITY FOR COSTS – Section 1335(1) of the Corporations Act 2001 (Cth) – Rule 62.02(b) of the Supreme Court (General Civil Procedure) Rules 2005 - threshold point conceded – plaintiff contends that award of security would stultify the litigation and that its impecuniosity was caused by defendant’s actions – evidence in respect to financial position of plaintiffs inconsistent and unreliable to such a degree that those discretionary matters not available to first and second plaintiffs - plaintiffs contend that substantially the same facts would be canvassed in claim and counterclaim and that their claim is being brought defensively to defendant’s claim – security for costs awarded.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr D Clarke | Holding Redlich |
| For the Defendant | Mr A.G. Bell SC with Mr C Archibald | Gilbert & Tobin |
HIS HONOUR:
The defendant (“CBA”) makes application pursuant to s 1335(1) of the Corporations Act 2001 and Rule 62.02(1)(b) of the Supreme Court (General Civil Procedure) Rules 2005 for security for its costs of this proceeding from the first plaintiff (“EWC”) and second plaintiff (“E‑World”) in the sum of $1,327,516. It seeks that such security be payable in two equal tranches, the first being payable within 7 days of the making of an order under this application and the second, within 7 days of the matter being listed for trial.
CBA’s estimate of its costs includes the costs of the trial. I indicated in the course of the hearing of this application that, in the event that security was awarded, that I only considered it appropriate to order it in respect of the costs incurred by CBA up to the conclusion of mediation. If the matter does not resolve at mediation, an application for further security can then be made.
It is conceded by EWC and E‑World that they have no assets to pay CBA’s costs if it is ultimately successful. Accordingly, the discretion conferred by Rule 62.02(1)(b) and s 1335(1) of the Act is enlivened.
The plaintiffs’ claims, which on their evidence may exceed $42m, are complex and what follows is a succinct summary for the purposes of consideration of this application.
EWC carried on business as an intermediary between merchants and customers involved in internet transactions from October 2006 until February 2009. E-World, a Swiss company, is the holding company of EWC. The third plaintiff, Dr Starr (also referred to as Mr Starr in the evidence) is a former director and secretary of EWC.
The plaintiffs allege in their amended statement of claim of 26 November 2010 that in November 2006 EWC entered into an agreement with CBA by which EWC agreed to channel internet card payment transactions to CBA. The amended statement of claim sets out several pages of detailed particulars of that agreement which was said to be evidenced in writing in the form of emails, by discussions which took place between the parties together with terms which arose by implication. The plaintiffs say that under the agreement, a facility would be established by CBA to enable EWC to be recognised as a merchant selling organisation or payment services provider (as distinct from a merchant, which EWC asserts it never was).
It is alleged that CBA would provide the necessary internet facilities to ensure that each transaction processed through EWC would proceed through various authorisations, that CBA would document the recognition of EWC as a merchant selling organisation or payment services provider, that CBA would provide a unique merchant identity number (or MID as it is called) together with a merchant classification code (or MCC) and that it would provide a 15 to 20 character name known as a merchant descriptor.
The plaintiffs also contend that CBA was required to monitor and maintain the systems that it put in place and ensure that no credit card issuing bank would decline or reject transactions. For its part, EWC states that it agreed to adopt a processing policy whereby any customer who sought a refund would be granted one by a process described as a charge back. This would occur when a card holder disputed liability or did not accept an internet transaction and was granted a refund. Before the refund was regarded as permanent, further steps would take place whereby the merchant bank was afforded the opportunity to produce documents substantiating the transaction under challenge. EWC was required by CBA to maintain separate accounts with CBA for the five currencies in which EWC traded, in which all proceeds of sales received from internet customers of the merchants were placed before either being passed to the merchant when settlement of the relevant transaction occurred or refunded to the customer in the event of a charge back.
EWC was also required to maintain a trading account with CBA into which funds were required to be deposited to meet all of CBA’s ongoing charges. CBA was entitled to charge a 2.305 percent fee and a 15 cent transaction fee for each transaction directed to and processed by it. EWC contends that CBA unilaterally increased the 15 cent transaction fee to either 19 cents or 16.5 cents and charged what is described as a penalty of $35 for each charge back. It is said that those matters were not agreed to or authorised by EWC.
The plaintiffs contend that CBA breached the agreement by failing to provide the necessary internet facilities, failing to implement as quickly as practicable a system whereby EWC could be recognised as a merchant selling organisation or a service provider and, without the knowledge or consent of EWC, in mid-July 2008, changed the MCC assigned to EWC.
It is alleged that CBA failed to monitor and maintain its systems and processes to ensure that the merchant classification codes were not changed so as to cause banks to decline or reject transactions put through EWC. The plaintiffs contend that the number of charge back requests increased exponentially, the number of transactions cancelled also increased in the same way and, on 14 January 2009, CBA wrongfully gave notice of termination of its relationship with EWC.
EWC says that the proceeding requires the Court to undertake an inquiry not merely into the fact of the charge backs but to their cause and also the effects of those charge backs on EWC. EWC makes a claim for damages for the wrongful termination of the agreement which are alleged to total $14,000,000. It also makes a claim for misleading and deceptive conduct and alternatively, unconscionable conduct with the same loss and damage being alleged.
The claim of the second plaintiff, E-World, is pleaded in terms of a breach of duty of care owed to E-World by CBA. E-World claims that the consequential loss said to flow as a result of that conduct is of the order of $27,000,000. The third plaintiff, Dr Starr, also makes a claim for a breach of duty of care owed to him personally.
CBA, in its defence and counterclaim, alleges that it entered into a merchant agreement whereby it agreed to provide a credit card merchant facility to EWC for the purpose of enabling acceptance of payments. The particulars of the merchant agreement are in much more simple terms than the agreement alleged by the plaintiffs. CBA alleges that the merchant agreement provided for a $35 fee per charge back and that EWC was a merchant for the purpose of the merchant agreement as distinct from a merchant services provider, as EWC would have it. It says that it was agreed that EWC would be charged a transaction fee of 15 cents per transaction and that the internet interchange fee of 2.305 percent was indicative only. In succinct terms CBA’s claim is that the merchant agreement provided for payment of charge backs, that there were a certain number of charge backs and they did increase markedly. Its claim is one in debt, consisting of the number of charge backs multiplied by the relevant value.
CBA contends that in order to prove its claim it is not necessary that the cause of the charge backs be determined. When transactions between the parties ceased, CBA held approximately $2.6M in the various foreign currency accounts that it maintained in EWC’s name. CBA says that on 21 May 2009, EWC was indebted for approximately $2.9M for charge backs and that the amount standing to the credit to EWC with CBA was applied against that indebtedness. This left $319,000 in unpaid charge backs. By reason of additional charge backs, together with other associated fees which CBA contends that it is entitled to exact, CBA’s claim is approximately $2.8M.
Evidence in support of the application for security for costs
The principal affidavit in support of CBA’s application for security was sworn by Rani John on 18 February 2011. It is a 42 page affidavit which sets out the history of EWC and E‑World, analyses their financial position by reference to various documents before detailing estimates of CBA’s costs of defending the plaintiffs’ claim.
EWC was registered on 12 October 2006. An ASIC search conducted on 19 February 2010 revealed that its directors were Dr Starr and a Jerome Charles George Cle who resided in Geneva, Switzerland. An ASIC search conducted on 19 August 2010 revealed that, between 19 February 2010 and 19 August 2010, EWC had converted from an unlisted public company to a proprietary company. At the date of that search, Mr Cle and a Georgina Louisa Starr were the directors of the company, Dr Starr having resigned on 30 June 2010. That search reveals that the ten shares in EWC are held by Edelweiss Card SA, (the former name of the second plaintiff E-World). A third search carried out on 8 February 2011 states that the position as to directorship and shareholding in EWC had not changed. EWC owns no land in Victoria and no longer trades.
In its submissions, CBA placed much emphasis on the inconsistencies in the information published by EWC as to its financial position; CBA contended that such material is so dramatically inconsistent that the plaintiffs could not contend that they are entitled to the exercise in their favour of the discretion against the award of security on the bases of impecuniosity or stultification.
In her affidavit, Ms John exhibits a number of documents to support that contention. In a letter signed by Dr Starr (at that time the managing director of EWC) in connection with a takeover announcement of NewSat Ltd, dated 3 September 2009 which was sent to ASIC and the ASX on the letterhead of EWC and signed by Dr Starr and headed “NewSat Takeover Announcement Update at 2.50 pm”, Dr Starr states:
In relation to the NewSat board announcement at 2pm today recommending that shareholders reject the EWC Takeover Offer, and stating that EWC payments only has a paid up capital of $10, it is important to draw the market’s attention to the fact that EWC is a wholly-owned subsidiary of a Swiss multi-national corporation, headquartered in Geneva, and that company has paid up capital of CHF $1,000,000.
EWC’s revenue in 2008 was more than $474,000,000 in Australia with a gross profit of more than $17,000,000 (the majority of retained earnings paid to its Swiss HQ in management fees). EWC was profitable on its first year of operation.
In a letter to NewSat of the same date and copied to ASIC and the ASX, Dr Starr stated its revenue to be $170m in 2007 and $474m in 2008.
On 29 September 2009, in a document headed “Newsat Limited Takeover – Supplementary Information”, again signed by Dr Starr, he states:
EWC is a subsidiary of Edelweiss card SA a body incorporated in Switzerland (Edelweiss). Edelweiss is an international transaction processing service provider for e-commerce merchants. Edelweiss core service is an Internet Payment gateway, an ATM-EFTPOS transaction processing Switch Solution, similar to those installed in banks, major retailers and oil companies. Through these systems, Edelweiss processes credit card transactions through merchant accounts for its e-commerce merchant customers.
On the page following, under the heading “EWC 2007 and 2008 Revenue Figures” it states:
For calendar 2007, EWC’s gross customer fee income was $158,829,793. Its gross payments to its contracted merchants were $153,038,301. EWC’s gross transactions and services revenue was $5,791,492. EWC’s calendar 2007 profit before income tax was $940,540.
For calendar 2008, EWC’s gross customer fee income was $474,256,885. Its gross payments to its contracted merchants were $456,963,812. EWC’s gross transactions and services revenue was $17,293,072. EWC’s calendar 2008 profit before income tax was $3,386,126.
The letter then goes on to state:
The information in this section 4 updates and replaces the financial information contained in the announcements of 3 September 2009.
On 9 November 2009, in a letter signed by Dr Starr and forming part of a bidder’s statement, Dr Starr (after recommending that the shareholders in NewSat not accept EWC’s bid) states:
EWC has compiled a long list of written admissions by the Commonwealth Bank of the errors and mistakes made by them over a two year period concerning the processing of EWC’s merchant’s transaction, and EWC will be actively seeking recourse in the courts.
At page 12 of that document, under a segment dealing with what is described as an overview of EWC’s activities, it states
EWC has ceased domestic transaction processing and is now working in partnership with a Joint Venture company (bound by non-disclosure at this time) to process debit card transactions from an initial rollout of (1) million USB connected Point of Sale devices throughout the Asia Pacific region over the next 18 months – commencing in the Philippines where 12,500 devices have already been deployed. The enormity of this business opportunity is one of the prime reasons for the takeover offer.
In addition, EWC provides the processing engine for which is one of the services provided by another complementary mobile services company. …
In addition, EWC is expanding the global footprint of its parent company’s joint venture money remittance business – Money Express and EWC is responsible for the development and expansion of the brands throughout the Australia/Pacific region. The Global Money Remittance business is a $370 billion per annum growth business and EWC is intent on carving out a profitable niche of this industry. …
Finally, EWC is currently developing new revenue streams in two areas of strong product demand throughout the world (1) noise reduction technology – via its licensed Quilite product, and (2) in gold and diamond research, infrastructure development, production, and sales in joint-venture with local interests in the Republic of Guinea – Schedule for 2010 ramp up. Revenues from these two services will not commence until 2010.
At pages 15 and 16 of that document, a resume is provided of Dr Starr and Mr Cle. Dr Starr is said to be involved in Cyberspace Corporation and was the founder of EWC and helped to establish and develop Edelweiss Card SA into a global operation. Throughout the 1990s, Dr Starr was responsible for the sale and implementation of most of the multi million dollar ATM/POS transaction processing Switch solutions in operation in Australia, New Zealand and the Pacific, including companies such as Coles, Myer, Target, K-Mart, Liquorland, Shell, Mobil, Bank of Melbourne, Bank SA, Adelaide Bank, Trust Bank, Newcastle Permanent Building Society, Heritage Building Society, National Bank of New Zealand, Countrywide Bank in New Zealand, Mobil NZ, Westpac Fiji, Bank PNG.
Mr Cle is described as a fund and management specialist who has worked in Geneva with major financial institutions and private banks over the past 15 years in the area of arbitrage, derivatives and associated fields. Mr Cle is the president of Edelweiss card SA and was also one of its Founders. Mr Cle is currently resident in Singapore.
On page 26 of the document, under the heading “Financial Information” it states:
In EWC’s takeover announcement on 3 September 2009 it referred to calendar year figures (as stated) as its parent company reports on a calendar year basis and is audited as such.
EWC’s financials were said to have been audited for the 2008 fiscal year. EWC’s revenue received is then stated to be $308,825,091, net gross commissions $12,353,001, and net profit $55,529. It is said to have cash at the end of the financial year of $1,017,452, total current assets of $1,791,182, and total liabilities of $1,771,798, leaving net assets of $19,773.
The target of EWC’s takeover, NewSat, in a document entitled “Target Statement” of 26 November 2009, under the heading “Why you should reject the EWC offer” and under the sub‑heading “Can you believe EWC - the wide variations in respect of the information given by EWC as to its financial position” observed that, in the ASX announcement of 29 September 2009, EWC had made a net profit before tax for the 2007 calendar year of $940,540 and $3,386,126 for the 2008 calendar year. NewSat observes that, on page 26 of the bidder’s statement, as referred to above, that EWC had made a profit before tax for the 2008 financial year of only $55,529. NewSat observes,
While these periods may not correspond, it is highly unlikely that the earlier claims can be correct in light of the “audited” profit disclosed in the Bidder’s Statement.
Later, in the same table, it is noted that, in its 2008 unaudited fiscal year tax return, EWC had reported cash flow from its operations of $308 million but later corrected this. It is to be noted that this figure of $308 million matches the gross dollar volume of transactions processed by EWC but its revenue was only $12.4 million.
Mr Bell placed much emphasis on these inconsistencies to meet a submission by EWC that its impecuniosity was caused by CBA’s conduct; it is said by Mr Bell that there is a danger in relying upon the assertions of those associated with EWC in relation to its financial position in correspondence, even correspondence that is published in stock exchange documentation for the market in connection with the takeover of a public company.
Mr Bell also drew attention to a Notice of Assessment issued by the Australian Taxation Office for EWC for the year ending 30 June 2008, which noted EWC’s taxable income as being $28,233.
The unaudited financial statements of EWC were also referred to. In the financial statements for the year ended 30 June 2009, the position at the end of the 2007 financial year was said to be a loss of $35,766. EWC had commenced operations in October 2006. The financial statements for the years ending 2008/2009 state that modest profits of $19,463 and $76,869 respectively were earned.
On 6 October 2010, Deloitte Private produced a report on behalf of EWC for the purpose of this proceeding in which the author reviewed the estimates of loss and damage which were detailed in the Statement of Claim. The report states on the front page:
The basis for this analysis is the statistics prepared by Mr Matthew Starr which are shown in Appendix A to this report. For the purposes of preparing this report there has been no audit verification other than due diligence of the compilation of this report at this point in time.
On page 7 of that report, there is a summary of the profit and loss statements of EWC. That summary notes a loss of $508,065 for the year ended 30 June 2009 (as compared with the figure of $48,636 in EWC’s accounts which are referred to above).[1] Mr Bell submitted that the best position which could be put, assuming an error in instructions to Deloitte, is that there was a very modest profit in 2009 in the order of $48,000 based on the unaudited financials. The various sums which are filed by EWC as to its revenue and profit for 2007 and 2008 are set out in a schedule to Ms John’s affidavit. The variations are dramatic and there is no explanation for the discrepancy by affidavit from the plaintiffs. Mr Bell stated that this supports a submission that EWC was impecunious from the start of its operations, that it was never going to be in a position to meet an order for security and that EWC cannot contend that CBA caused the company to be impecunious or that an order for security will stultify the plaintiff’s claim in the relevant sense.
[1]Exhibit RSJ-23 at p 24.
Mr Bell then moved on to a consideration of the financial position of E‑World, the second‑named plaintiff. Ms John’s principal affidavit contains extracts of the records obtained from the Canton of Geneva for E‑World which state that the administrative chairman of the company is Mr Cle who, together with a Jean‑Francois Le Roc, a resident of Sarajevo, Bosnia-Herzegovina, is identified as being the directing mind of the company. Like EWC, it owns no land in Victoria and no longer trades.
A report of the records of Dun & Bradstreet for E‑World states that E‑World is managed by Mr Cle and its board of directors consists of Mr Cle and Mr Le Roc. The company was incorporated in 2006 with a capital of 1 million Swiss francs, a turnover of 3.5 million Swiss francs and ten employees. The report reveals that there is no balance sheet available for the company, but that turnover for 2009 was estimated to be €3.5 billion. The report observes, under the heading “Payment References”,
A hundred per cent of the invoices are not settled within the time limit. The percentage is calculated on the basis of 14 different invoices received.
A table in the report notes that such invoices are all for less then 5,000 Swiss Francs and 50% of them were outstanding for more than 91 days.
The statement of claim alleges that E‑World secured commission from EWC in the financial years ended 30 June 2007, 2008 and 2009 totalling $6,974,291.
Ms John states that she is not aware of any convention, treaty or agreement between Australia and Switzerland which would enable recognition and enforcement of foreign judgments.
In correspondence from the solicitors for the plaintiff, in response to enquiries from the solicitors for CBA, it was reported that all the persons involved in E‑World (with the sole exception of one person who is an independent contractor) were residents of the United States or Europe.
In a further affidavit of Ms John of 4 April 2011, there is reference to Mr Cle’s involvement in other commercial activities. Mr Cle is involved in a Singaporean company, SCCP Holdings. This company has, according to a company search conducted of the records of the Singaporean Accounting and Corporate Regulations Authority, a paid up capital of $5 million Singapore dollars. Its officers are said to be Mr Cle and a Tan Pay Luan. Mr Cle has 100 shares in the company, with the balance being held by a company called Thom Payment Services Pte Limited. A search of Thom Payment Services Pte Limited reveals that it has issued capital of $1 and its officers are Mr Cle and Mr Luan. Mr Cle owns the share in Thom Payment Services Pty Ltd and beneficially owns the entire shareholding in SCCP Payment Services.
In another affidavit of Ms John, of 13 April 2011, she exhibits a personal names ASIC search for Dr Starr. That document reveals that Dr Starr owns shares in Cyberspace Corporation, which is referred to above, as well as CA Retail Software and Value‑Added Software Pty Ltd. He is also listed as being a director of Cyberspace Corporation. He is noted as being a director of The Money Senders Pty Ltd and Value‑Added Software Pty Ltd. Also exhibited is an ASIC search of Cyberspace Corporation Pty Ltd, which was incorporated in 1995. Dr Starr is shown as the sole director of that company. It has 10,012 issued shares, four of which are held by a Mr Chamberlain, 5,004 by Dr Starr and 5,005 by Ms Wendy Starr. The Money Senders Pty Ltd was incorporated in December 2007. Dr Starr is the sole director and holds the one issued share in that company. As to Value‑Added Software Pty Ltd, Dr Starr is also the sole director and he holds five of the ten issued shares with the balance being owned by Wendy Starr. Wendy Starr is the sole director of CA Retail Software Pty Ltd. Dr Starr holds five of the ten issued shares with Wendy Starr holding the other five.
In response to CBA’s evidence that Mr Cle effectively beneficially owns SCCP Payment Services Holdings Pte Ltd, a company with paid up capital of Sing $5m, it is not contended by the plaintiffs that the shareholdings referred to are valueless. The same position applies in relation to the shareholdings of Dr Starr that are referred to.
In opposition to the application, the plaintiffs rely on an affidavit of their solicitor, Mr Rapke, dated 25 March 2010. Neither Dr Starr nor Mr Cle have sworn an affidavit in opposition to this application. When I enquired of Mr Clarke as to why Dr Starr, a Victorian resident, had not done so, Mr Clarke responded that there was no explanation, other than that the instructions that have been obtained have been obtained by his instructors with some difficulty. Dr Starr lives in Melbourne and Mr Clarke said that he travels but that he could not take the matter any further. Mr Bell submitted that the obvious point to be made about this was that Dr Starr could not be cross‑examined about the matters which he seeks to raise through his solicitor in opposition to the application for security.
Mr Rapke’s affidavit sets out his instructions from the plaintiffs as to their general financial situation. Amongst that evidence was Dr Starr’s tax assessment for the year ended 30 June 2010, which indicated that he had no taxable income for that financial year. I note that, significantly, there is no material as such to the assets of Dr Starr or those persons and entities directly or indirectly associated with him. Mr Rapke deposes that Dr Starr does not own any real estate and he has not derived any income since early 2009. EWC has not traded since about October 2009 and E‑World has not done since early 2009. He stated that the plaintiffs were endeavouring to obtain litigation funding but that such funding has not yet been obtained. Mr Clarke asserted that while there was some inconsistency as to the financial position of EWC, it was clear that EWC has been dealing with transactions of great value in each year. This assertion was not developed nor were the inconsistencies referred to above in any way satisfactorily explained by submission or by reference to evidentiary material which contradicted the position being put by CBA.
Mr Clarke contended that an order for security will stultify the litigation and that it is the actions of CBA that have brought about the impecuniosity of his clients. Mr Clarke also submitted that the proceeding revolves around the charge‑backs which were exacted as a result of the change by CBA of the merchant code number assigned to EWC and that this issue will require consideration not only in the plaintiffs’ claim against CBA but in the defence to CBA’s claim. As such, Mr Clarke says substantially the same facts are likely to be canvassed in determining the plaintiffs’ claim and the counterclaim and the situation is akin to that considered by Smart J in Sydmar Pty Ltd v Statewise Developments Pty Ltd,[2] whereby CBA is in reality the plaintiff in the proceeding and ought not to get security. When asked what his clients’ most powerful point was against the granting of security, he stated that it was the fact that CBA already has $3 million of the plaintiffs’ funds which were appropriated from the plaintiffs’ accounts with CBA and that amounted to de facto security. I disagree with that submission as such funds are in reality part of the funds sought by the plaintiffs in their claim.
[2](1987) 73 ALR 289 at 302.
Mr Clarke was not able to satisfactorily respond to my enquiries as to why there is such a variation in the evidence pointed to by Mr Bell in regard to the plaintiffs’ financial situation. He asserted that EWC was a very large undertaking and was only able to say that the explanation for the loss which is referred to in the Deloitte report may have been as a result of the $3 million being removed from the bank account by CBA. In his affidavit, Mr Rapke states that he is instructed that some of the inconsistencies referred to in Ms John’s affidavit, as to revenue and profit, appear in part because of different financial year periods applying in Switzerland and Australia.
There is no effective contradiction of CBA’s evidence in respect of EWC’s and E-World’s financial position. I agree with Mr Bell’s observation that much of Mr Rapke’s affidavit consists of conjecture without a premise, in other words that much of it is a mere assertion so that even if it was deposed to by one of the directing minds of EWC or E-World, it would be, for the large part, inadmissible.
Finally, Mr Clarke submitted that the application for security has been brought oppressively.
Mr Bell submitted that, in applications of this character, the impecunious state of a plaintiff is not only relevant to the so‑called threshold issue, it is also a powerful discretionary matter to be taken into account in deciding whether or not to award security. This submission is supported by the authorities. In Ariss v Express Interiors Pty Ltd (in liq)[3] Phillips JA (with whom Ormiston and Charles JJA agreed) said:
… Any 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 may itself be a factor, even a most significant factor, in the exercise of the discretion.
[3][1996] 2 VR 507.
In Livingspring Pty Ltd v Kliger Partners,[4] Maxwell P and Buchanan JA, in reference to the above passage in Ariss stated at paragraph 19:
The same point may be expressed slightly differently, as follows. The threshold condition for the exercise of the power to order security defines the circumstances in which Parliament contemplated that the power would be exercised. That is, the power was conferred for the purpose of protecting the defendant against the very risk which must be shown to exist before the power can be exercised. In this sense, satisfaction of the threshold condition – demonstrating the existence of the risk – ‘calls for’ the fulfilment of the purpose for which the power was conferred. Whether the power should be exercised in the particular case will, of course, depend on all the circumstances.
[4][2008] 20 VR 377 (‘Livingspring’).
Mr Bell accepted that CBA bears the burden of persuading that an award for security ought to be made but, that in regard to the particular discretionary grounds of stultification and impecuniosity, EWC and E‑World bear the evidentiary burden. In Livingspring, the Court of Appeal observed, at 22, that the plaintiff must establish the facts which make good the assertion that an order for security would impose on it such a financial burden as would stultify the litigation and noted that the same would be true of a contention that the plaintiff’s impecuniosity was caused by the defendant. The Court of Appeal also observed:
21.While the satisfaction of the threshold condition in the relevant sense ‘calls for’ the exercise of the power, this does not alter the fact that the burden rests on the defendant, from the first to last to persuade the Court that the order for security should be made.
22.There are, of course, particular discretionary matters of which the plaintiff must necessarily have carriage. If for example the plaintiff corporation asserts that an order for security would impose on it such a financial burden as would stultify the litigation, the plaintiff must establish the facts which make good that assertion. We respectively adopt what the Full Federal Court said in this regard in Bell Wholesale Co Pty Ltd v Gates Export Corp:
In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditor, as in this case, beneficiaries under a trust) are also without means. It is not for a party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts.
24.The same would be true of a contention that the plaintiffs’ impecuniosity was caused by the defendant.
I do not consider that, those standing behind EWC and E‑World have appropriately disclosed their asset position (as they should have), so as to satisfy the test enunciated in Livingspring. The principals behind the EWC and E‑World have not sworn affidavits in opposition to this application and have chosen to put on material by the avenue of instructions to their solicitor.
Mr Bell contended that the financial material put forward by the plaintiffs is so unsatisfactory that it could not form the basis of any contentions based on impecuniosity or stultification - and I agree. In my view, the evidence put forward by Ms John describes serious inconsistencies in the financial position of EWC which are of such a degree to impeach the plausibility of any contention that the discretionary grounds of stultification or impecuniosity are available to EWC or E‑World. The evidence consisting of how EWC had represented itself to the world, more particularly to ASIC and the ASX in the context of share market manoeuvring, contained dramatic inconsistencies which were not contradicted by the plaintiffs other than a feint suggestion that they may have arisen because of the difference between Australian and Swiss financial years. What material there was available, mainly involved the level of alleged income of the corporate plaintiffs, but was scant as to their respective assets. In response to my question as to how the plaintiffs were funding this litigation, Mr Clarke indicated only that a litigation funder was being sought and it was intimated that the plaintiffs’ own lawyers have not even been placed in funds.
If the plaintiffs’ own documentation is accepted, EWC commenced business in October 2006 with paid up capital of only $10. It made a loss of $35,766 for the financial year ended 30 June 2007, a profit of $55,529 in the following financial year and a profit of $48,636 for the year ended 30 June 2009. As such, EWC never made significant profits and it appears that it never would have been in a position to meet CBA’s costs in the event that an adverse order was made against it. The plaintiffs’ evidence is not informative as to the asset and profit position of E-World.
I do not consider that the discretionary grounds of stultification or of impecuniosity, for which EWC and E‑World bear the evidentiary onus, are available to them. Nor do I consider that this application is being brought oppressively as Mr Clarke asserted.
Mr Bell then went on to make submissions to meet the plaintiffs’ position that their claim was a defensive one, that CBA was in reality the plaintiff and should therefore not be given security. He referred to a decision of Dixon J of this Court in Premraj v Thirteenth Corp Pty Ltd,[5] where a submission that a counterclaim should be properly characterised as defensive was not accepted because, inter alia, the claims of the respondent to the application for security were approximately ten times that of the applicant and it appeared that the claim would be pursued against the applicants for security, in any event. Mr Bell submitted that this approach is apposite to the application in this case, as EWC’s claim is approximately 20 times the size of CBA’s. He pointed to the NewSat takeover documentation, referred to above, where Dr Starr had stated that he was then in the final stages of preparing a claim against CBA, which would be brought in either the Federal Court or the Supreme Court. This claim is said to be in the order of $42 million which, if accepted to be bona fide, would always have been brought in any event, whether or not CBA had made a claim. I consider that it is implausible that it would be abandoned but for a counterclaim of $2.8 million. A $42m claim could not in my view be contended to be defensive to a $2.8m claim. CBA makes no claim against E-World, so its claim could not conceivably be characterised as defensive.
[5][2010] VSC 483.
As to the submission by Mr Clarke that the claims are based on substantially the same factual scenario and that there is an overlap in issues between the plaintiffs’ claim and CBA’s counterclaim, Mr Bell contended, and I agree, that the contractual basis of the plaintiffs claims and the counterclaim are quite different. Whereas CBA deals with a singular written merchant agreement, the plaintiffs’ case relies on a complex series of emails, discussions and implications arising from conduct.
The plaintiffs do not contend that the application was not brought promptly nor, in the course of written or oral submissions, was it said that, when exercising the discretion, any issue of public interest was involved.
Mr Bell conceded that the plaintiffs’ claims were made bona fide and the issue of merits was a neutral factor when coming to exercise the discretion as to whether or not to award security.
Based on the foregoing, I consider that it is appropriate to make an order for security for CBA’s costs of defending the plaintiffs’ claims.
In Ms John’s principal affidavit, she goes into considerable detail when estimating the quantum of the costs which she says will be incurred by her client in this proceeding. The estimate provided is very detailed and is, in my view, careful and conservative. The estimates do not include any costs for travel from Sydney to Melbourne for CBA’s Sydney based representatives or matters of that sort. The total costs of the proceeding are estimated by Ms John on a solicitor-client basis at $1.9 million and taking into account the $300,000 which has apparently been spent to date, the total would be $2.2 million. Assuming that party-party costs would be 60% of that figure, an amount of $1.3 million is sought as security.
The estimate of costs for the various stages of the litigation are summarised in a table early in Ms John’s’ affidavit, as a percentage of which each such category bears to the whole of the costs In round terms, the estimate of costs up to conclusion of mediation is of the order of 60% of the total estimate and as I have said I intend only to award security up to and including mediation.
I will not embark here on a close analysis of Ms John’s evidence as to how that figure was arrived at, other than to assess whether it is generally reasonable. Ms John begins her evidence by stating that CBA’s costs[6] in connection with the unsuccessful application to cross-vest these proceedings in the Supreme Court of New South Wales, the costs of the present application, and the costs referrable to the bank’s counterclaim against EWC, have been excluded from her estimate of CBA’s costs of defending the plaintiffs’ claim. These costs total $300,000.
[6]To 31 January 2011.
There then follows a close analysis of the cost of the tasks involved in completion of discovery and other documentary issues such as subpoenas, including subpoenas to third parties. Ms John contends that CBA’s discovery will be extensive given the complex, factually dense and technical nature of the allegations made by EWC and E‑World. It is contended that approximately 220,000 documents will be discovered or produced under discovery or on subpoenas issued at the request of CBA. It is estimated that CBA will incur costs and disbursements associated with discovery and other documentary issues of $332,630.
Ms John’s affidavit then moves on to consideration of the costs of reviewing and preparing witness statements and experts’ reports. This of course presumes that witness statements will be ordered. She states that there are at least 24 potential lay witnesses for EWC and E‑World, based on the persons that have been identified in the amended statement of claim and other documentation. It is then contended that there are approximately 30 persons identified as potential lay witnesses to be called on behalf of CBA and the costs associated with interviewing and proofing those witnesses is deposed to. That analysis descends to consideration of the varying significance of those witnesses into key witnesses, witnesses of medium significance and witnesses of less significance. In addition, it is said that there will be two expert witnesses called on behalf of CBA and details are provided as to the costs which will be incurred by their involvement in the proceedings. Ms John estimates that the fees payable to the expert forensic accountant who will be retained to respond to expert accounting evidence called on behalf of EWC and E‑World will be of the order of $150,000. She basis this estimate on her previous experience with forensic accountants in matters of a similar magnitude and complexity and her knowledge of the hourly rates commonly charged by such experts.
Ms John estimates the costs, including experts fees, that will be spent on dealing with the bank’s lay witnesses and expert evidence to total $593,610. She estimates the costs associated with EWC and E‑World’s lay witness statements and expert evidence as being $85,810.
Ms John’s’ analysis then moves on to a consideration of an estimate of costs of preparing for and attending directions hearings, case management conferences and any mediation of the proceeding. She indicates that CBA’s Sydney based solicitors, while retaining Sydney based senior and junior counsel, have also retained additional Melbourne based junior counsel to appear on its behalf at directions and other administrative hearings in this State and the estimates do not include any allowance for the costs associated with travel to and from Melbourne or any accommodation costs for the bank’s Sydney based legal representatives.
Consideration is then given to the costs leading up to trial and of the trial itself but I will not award any security for such costs at this time.
In respect of some of the categories mentioned above, Ms John exhibits schedules providing further breakdowns of the calculation of the amounts sought. These are provided in respect of costs for discovery and documents produced on subpoenas, costs of attending directions hearings, case management conferences and mediation and the trial itself.
Mr Rapke, in his affidavit material in opposition to the application does not provide, as one might expect, a detailed critique of Ms John’s evidence about quantum. Mr Rapke makes critical assertions as to the estimates made by Ms John but does not descend to any degree of detail as to why. He cavils at the assumption of there being 200,000 documents but meets it with no estimate as to what he would consider to be a realistic estimate in that regard.
Mr Clarke indicated that his instructors had not been able to obtain instructions from the plaintiffs to secure the services of a costs consultant to put up material in contradiction to the evidence of CBA concerning quantum.
He made the general criticism that Ms John’s material reveals that it was contemplated that several lawyers and two counsel would be working on the matter and asserted that this was not justified. I do not agree with that submission. The plaintiffs’ claims total $42m. CBA is entitled to treat the matter very seriously and to engage high level legal representation.
I note that in respect of the several categories of tasks to be performed by the lawyers in the litigation, estimates are made by Ms John in her affidavit as to the involvement of the hierarchy of CBA’s legal representatives in such tasks. Ms John deposes that a partner, senior lawyer, lawyer and paralegal will be engaged from time to time. Mr Clarke contended that a partner and senior lawyer would be more than enough, but again I disagree with that submission. CBA could be equally criticised for having a senior lawyer performing a paralegal’s tasks. I regard the level of detail provided by Ms John in her affidavit as being quite impressive and it was not contradicted by the plaintiffs, other than by a generic assertion as to unreasonableness. Mr Clarke queried the need for experts to be engaged but I did not consider that he satisfactorily met a submission by Mr Bell that, because there were extensive claims for consequential economic loss by the plaintiffs, that a forensic accountant’s evidence would be necessary.
I do not consider that Ms John’s estimates were effectively contradicted or impeached as being unreasonable and I will adopt them as guidance as the amount which should be fixed as security.
In deciding an amount which is appropriate to award as security, I am mindful that such an amount should not be a complete indemnity for CBA’s costs. I also take into account other considerations. Commercial cases, particularly large claims, frequently settle. Experience teaches that in party‑party taxations, significant sums are often taxed off successful parties’ bills. As I have said, I regard it as appropriate to only award security for the costs of CBA until the conclusion of mediation of the proceeding and Ms John’s affidavit indicates that 40% of the estimated costs are for preparation prior to trial and the trial itself and a deduction of that order from the amount sought must be made.
I consider that CBA’s position is appropriately secured by an award of security of $750,000. In argument, Mr Clarke accepted that if an award for security was made it was appropriate that it was made in two tranches.
I order that the first and second plaintiffs pay the defendant’s costs of this application. I will hear the parties on the form of orders required to implement these reasons.
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