Eyezon Consolidated Media Limited v Pugh [No 2]
[2011] WADC 119
•4 AUGUST 2011
| JURISDICTION | : | DISTRICT COURT OF WESTERN AUSTRALIA IN CHAMBERS |
| LOCATION | : PERTH | ||
| CITATION |
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| CORAM | : REGISTRAR KINGSLEY | ||
| HEARD |
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| DELIVERED |
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| FILE NO/S |
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| BETWEEN |
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AND
TREVOR EDWARD PUGH
First Defendant
INTERWEST GROUP PTY LTD
(ACN 118 159 845)
Second Defendant
Catchwords:
Practice - Application for security of costs - No new principles
Legislation:
Nil
[2011] WADC 119
Result:
Security ordered
Representation:
Counsel:
| Plaintiff | : | Mr M G Pendlebury |
| First Defendant | : | In person |
| Second Defendant | : | Mr C MacLennan |
Solicitors:
| Plaintiff | : | Middletons |
| First Defendant | : | Not applicable |
| Second Defendant | : | Lavan Legal |
Case(s) referred to in judgment(s):
Boson Pty Ltd (in liq) v Makris (2003) 21 ACLC 666)
FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69
Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377
Professional Vending Services Pty Ltd v Christou [2010] FCA 580
Sugarloaf Hill Nominees Pty Ltd as Trustee for the Richard and Anna Trust v
Rewards Projects Ltd [2011] WASC 19
Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129
[2011] WADC 119
REGISTRAR KINGSLEY
REGISTRAR KINGSLEY: The second defendant (Interwest) had brought an application for security for costs against the plaintiff (Eyezon). Eyezon's claim against the first defendant (Pugh) is that as a director of Eyezon, Pugh acted in breach of his fiduciary duty by paying monies to Interwest to which Interwest was not entitled. The claim against Interwest is that it received those monies in knowledge of the breach of fiduciary duty by Pugh.
Security for costs – legal principles
2 Where a corporation is a plaintiff in a legal proceeding, a court, if it
appears by credible testimony that there is reason to believe the corporation will be unable to pay the costs of the defendant if successful in its defence, may require sufficient security to be given for those costs and stay all proceedings until the security is given: Corporations Act 2001, s 1335(1). Section 1335 carries both a threshold test and a discretionary test. The threshold question, that there is reason to believe the corporation will be unable to pay the costs of the defendant if successful, must be satisfied before the discretionary power to order security for costs is enlivened: FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd [2000] WASCA 69.
3 Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377 is authority for the proposition that s 1335 requires a risk assessment – is there a risk that the corporation will be unable to pay. Section 1335 calls for a practical commonsense approach to examine the corporation's financial affairs and, with justification, it is said the threshold is a low threshold.
4 Once a court finds that there is reason to believe the corporation will
be unable to pay the costs of the defendant if successful then, the court's discretion is enlivened. There are a number of well established factors which a court typically takes into account in exercising its discretion whether to order security for costs or not. Those factors have been conveniently summarised by Corboy J in Sugarloaf Hill Nominees Pty Ltd as Trustee for the Richard and Anna Trust v Rewards Projects Ltd
[2011] WASC 19. These factors include: 1. Whether the application for security have been brought promptly;
2. The strength and bona fides of the plaintiff's claim;
[2011] WADC 119
REGISTRAR KINGSLEY
3. Whether the plaintiff's impecuniosity was caused by the defendant's conduct the subject of the claim;
4. Whether the application for security is oppressive in that it has been used to deny an impecunious plaintiff the right to litigate;
5. Whether there are persons standing behind the plaintiff who are likely to benefit from the litigation and who could provide the necessary security;
6. Whether the person standing behind the plaintiff has offered any personal undertaking to be liable for costs;
7. Whether the applicant was in substance a plaintiff or the proceedings are distinctive in the sense of resisting proceedings already brought or seeking to halt the defendant's self-help procedure; and
8. The plaintiff's ability to pay the defendant's costs.
5 Sugarloaf Hill Nominees is authority for the proposition that even though the threshold condition has been satisfied, there is no pre-disposition to exercise the discretion in favour of the applicant.
Threshold question
6 Eyezon concedes the threshold question but submits the court should
not exercise its discretion to order security (Eyezon's submissions dated
10 June 2011, par 5).
The discretionary issues
7 The proceedings were brought by Eyezon on 16 June 2009 and
appearances filed in June 2009. Eyezon brought an application for summary judgment pursuant to O 14 Rules of the Supreme Court in July 2009. That application was heard in September 2009 and dismissed.
8 Thereafter the actions lay dormant until the court issued a summons
for directions for hearing in January 2011. By a minute of consent orders, Eyezon was to serve an amended statement of claim by 1 February 2011 and Pugh and Interwest to file a defence on or before 8 March 2011. In March 2011, when the matter came on for a directions hearing, the time for compliance by Eyezon was extended to 18 March 2011, and for Pugh & Interwest extended to 8 April 2011.
[2011] WADC 119
REGISTRAR KINGSLEY
9 Interwest's application for security is dated 30 March 2011 and is,
prima facie, just slightly less than two years after the writ was issued. However the matter has lain dormant and only revived by the court in January 2011. Notwithstanding the effluxion of time, having regard to the circumstances the application was brought promptly after the amended statement of claim was served.
10 Eyezon's amended statement of claim pleads that in May 2007 the
directors of Eyezon executed a notice of authority providing Pugh with authority to draw cheques and authorise periodic payments on any of Eyezon's accounts. Between 29 September 2007 and 23 August 2008, Eyezon pleads Pugh, without authority, caused Interwest to be paid $97,700 from Eyezon's account.
11 Eyezon pleads that Pugh knew or ought to have known that Interwest
was not entitled to receive those payments. Particulars of knowledge arise from the fact that on 8 May 2007 Interwest and Eyezon Pty Ltd (EPL) executed an agreement entitled IPO Management Agreement (the IPO Agreement). Under that agreement, Interwest agreed to provide services in relation to the proposed listing of Eyezon on the ASX. One of the terms of the IPO Agreement was that Interwest would be entitled to be reimbursed for costs and expenses but only if a minimum of $300,000 (the seed capital) was raised from the allotment of ordinary fully paid shares in Eyezon at 6 cents per share. Eyezon pleads that at no stage had the condition of a minimum of $300,000 being raised been satisfied.
12 Interwest argue that, having regard to the failed summary judgment
application on behalf of Eyezon, this demonstrates the weakness of
Eyezon's case.13 Apart from dealing with an earlier version of the statement of claim
for Eyezon to succeed on the summary judgment application it would be necessary to show in effect that the invoices upon which the cheques were paid were a sham. The evidence before Deputy Registrar Hewitt did not establish that fact and did no more than raise a suspicion that might be the case.
14 In its defence, Interwest admits receipt of $95,700 and says it is
entitled to the payment by reason of the notice of authority pleaded in par 5 of the statement of claim and the IPO Agreement entered into between the parties on 8 May 2007. I note that if the IPO Agreement referred to in the defence is the same as the IPO Agreement referred to in
[2011] WADC 119
REGISTRAR KINGSLEY
par 8 of the statement of claim, then that Agreement was not entered into
between the parties.15 In any event, Interwest pleads that Eyezon is estopped from raising
the issue of seed capital as a basis for refusing to pay Interwest because Eyezon represented to Interwest that it would not insist upon performance by Interwest of the obligation to raise seed capital but would still pay for work done in relation to listing. On the basis of that representation, Interwest did not raise the seed capital yet continued to carry out work for Eyezon.
16 As in all matters at an early stage of the proceedings on its face that
the plaintiff's claim has merit and is bona fide. This application is not the vehicle to investigate in detail the likelihood or otherwise of success in the action (see Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129).
17 The 30 June 2010 annual report of Eyezon showed a total equity in
the company at $23,590. Eyezon argues that, but for the disputed payment to Interwest, Eyezon would have had, as at 30 June 2010, some $118,000.
18 In an affidavit sworn 26 May 2011, John William McLeay, the
managing director of Eyezon, says that since 30 June 2010 Eyezon's financial position has improved substantially. McLeay deposes that between July 2010 and January 2011 Eyezon raised $350,000 through the issue of new shares. McLeay attached an unaudited consolidated balance sheet as at 30 April 2011, showing a total equity of $546,837, of which goodwill comprises $345,744.
19 In fact the figures for non-current assets have not been calculated
correctly. The non-current assets total $657,403 and not $425,100 as
stated. This makes the total assets $940,352.20 Of the total assets $657,403 is non-current assets. Generally, the
relevant assets for consideration are those that could be immediately realised to enable a plaintiff to compy with a costs order (Professional Vending Services Pty Ltd v Christou [2010] FCA 580). I will disregard the $657,403 for the purposes of exercising my discretion on the basis the non-current assets are not immediately realisable.
21 Of the current assets trade debtors amount of $98,655, there is no
mention in the June 2010 audited statement of trade debtors. There is an entry of $60,021 for other receivables but this figure represents the subject
[2011] WADC 119
REGISTRAR KINGSLEY
matter of the litigation – see auditor's report, page 36, McLeay affidavit
sworn 26 May 2011.22 Trade creditors have increased from $91,012 as at June 2010 to
$161,212 at April 2011. Assuming that the trade debtor are fully recoverable – an optimistic assumption – and taking out $60,021 from other receivables, the balance is $61,716.
23 Eyezon's business consists of a patented custom-built information
screen that displays a range of pre-printed brochures and leaflets. The info-scan unit contains a widescreen high definition TV screen and each leaflet is security encoded when inserted into the info-scan unit the leaflet triggers the replay of a unique video message. Eyezon is at a very early start up phase of its business and is currently negotiating with a number of shopping centres and other leading organisers to expand their distribution network (see the affidavit of Tegan Louise Stewart sworn 14 June 2011).
24 In the financial statements for the year ended 30 June 2010 it is clear
that, as would be expected with a company just starting up, there is a significant outflow of money with little inflow – though to be fair, the company's revenue appears to have increased from $4,000 in 2009 to $33,000 in 2010. I am not told of the current revenue by Eyezon.
25 There is evidence that Eyezon's income stream will take some time
to develop. McLeay deposes that in March 2011, Eyezon received delivery of its first batch of info-scan units, some of which are in the process of being installed in major shopping centres in Perth. It would be fair to infer that the outflow of monies would be greater than the inflow for at least 12 months.
26 There is no evidence to support the proposition that an order for
security is being brought by Interwest purely to frustrate the plaintiff's
claim.27 There is no evidence that the persons standing behind Eyezon are
likely to provide any security, nor have offered any form of undertaking
as to costs.28 There is no evidence that Interwest in its application for security is in
substance a plaintiff. I note that Interwest has brought a counterclaim against Eyezon. Further there is no evidence that the proceedings are defensive in the sense of seeking to halt the defendant's self-help procedures.
[2011] WADC 119
REGISTRAR KINGSLEY
29 The draft bill of costs attached to the affidavit of Phillipa Alyse
Honey, sworn 30 March 2011 in support of Interwest's application for security is, in my opinion, excessive. The draft bill claims $166,260.60 for a three day trial. The plaintiff's claim is for $95,700 and is centred about the IPO Agreement whereby Interwest agreed to provide services in relation to the proposed listing of Eyezon on the ASX. Interwest says that Eyezon by its director told Interwest in substance that it did not want Interwest to raise seed capital sums but to still provide IPO services for Eyezon.
30 In that case the action is principally one of the evidence of the parties
in making the agreement and any subsequent variation. The scope of the action in that regard is relatively narrow. I could not envisage that Interwest's bill of costs, if it were successful, would tax out at $166,000. The likelihood is that the costs would tax at approximately half that amount.
Conclusion
31 The system of justice under which we operate assumes that the
interests of justice are best served if a successful litigant will receive his litigation costs and that the unsuccessful party will pay them: Boson Pty Ltd (in liq) v Makris (2003) 21 ACLC 666.
32 Having regard to the discussion on the discretionary issues, in my
opinion there is a possibility Eyezon will not be able to pay the costs of the interest. The proper exercise of my discretion requires that security be given.
33 Bearing in mind that the majority of cases in this court settle at a
pre-trial conference, and the fact an order for security for costs is not intended as a complete indemnity, I would order that Eyezon provide security in the sum of $30,000 to the point where the first pre-trial conference is concluded. Recognising that the assessment is somewhat arbitrary and inexact, if the matter progresses beyond that point, it is open for Interwest to renew its application.
To that end I will hear counsel as to the form of security and as to
costs.
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