Flujo Sanguineo Holdings Pty Ltd v Universal Food Products Pty Ltd
[2020] FCCA 251
•11 February 2020
FEDERAL CIRCUIT COURT OF AUSTRALIA
| FLUJO SANGUINEO HOLDINGS PTY LTD & ANOR v UNIVERSAL FOOD PRODUCTS PTY LTD | [2020] FCCA 251 |
| Catchwords: INTELLECTUAL PROPERTY – PRACTICE & PROCEDURE – Costs – Application for security for costs – whether there is reason to believe the applicants will be unable to pay the costs of the respondent if the respondent is successful in their defence – application granted. |
| Legislation: Federal Circuit Court of Australia Act 1976 (Cth), s.80 |
| Cases cited: Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360 |
| First Applicant: | FLUJO SANGUINEO HOLDINGS PTY LTD |
| Second Applicant: | NATVIA PTY LTD |
| Respondent: | UNIVERSAL FOOD PRODUCTS PTY LTD |
| File Number: | MLG 1817 of 2019 |
| Judgment of: | Judge Baird |
| Hearing date: | 26 August 2019 |
| Date of last evidence filed: | 24 December 2019 |
| Delivered at: | Sydney |
| Date of judgment: | 11 February 2020 |
REPRESENTATION
| Counsel for the Applicants: | Mr Justin Castelan |
| Solicitors for the Applicants: | David Franklin IP Lawyer |
| Counsel for the Respondent: | Ms Sue Gatford |
| Solicitors for the Respondent: | Sinisgalli Foster Legal |
THE COURT:
GRANTS LEAVE to the Applicants to file and rely on the affidavit of David Geoffrey Franklin sworn 28 August 2019.
ORDERS THAT the Applicants give security for the Respondent’s costs of and incidental to the proceeding by payment into Court or by way of an irrevocable bank guarantee issued by an Australian authorised deposit taking institution (as defined in section 5 of the Banking Act 1959 (Cth)) in a form acceptable to the Respondent in the amount of $50,000, by way of 2 tranches, as follows:
(i)$30,000 to be paid or acceptable guarantee provided by 21 February 2020; and
(ii)$20,000 to be paid or acceptable guarantee provided by 6 March 2020.
ORDERS THAT this proceeding be stayed pursuant to section 80(5) of the Federal Circuit Court of Australia Act 1999 (Cth) in the event that any security for costs pursuant to paragraph 2 is not provided by the Applicants in the manner or within a time period specified in paragraph 2.
ORDERS THAT the Applicants pay the costs of the Respondent of and incidental to the Respondent’s application in a case dated 15 July 2019.
GRANTS LIBERTY to apply on 3 days’ notice.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
No. MLG 1817 of 2019
| FLUJO SANGUINEO HOLDINGS PTY LTD |
First Applicant
| NATVIA PTY LTD |
Second Applicant
And
| UNIVERSAL FOOD PRODUCTS PTY LTD |
Respondent
REASONS FOR JUDGMENT
Introduction and summary
The applicants, Flujo Sanguineo Holdings Pty Ltd and Natvia Pty Ltd (together the Flujo parties), commenced this proceeding on 11 June 2019 against Universal Food Products Pty Ltd.
The Flujo parties seek rectification of the Register of Trade Marks in accordance with s.88 of the Trade Marks Act 1995 (Cth) by the cancellation of Universal’s Australian trade mark registration no. 1751295 for the word mark “Nuvia” in class 30 for “natural sweeteners” (Nuvia Mark).
Flujo is the owner of Australian registered trade mark no. 1366289 for the word mark “Natvia” (Natvia Mark) with a priority date of 9 June 2010, and Australian registered trade mark no. 1745997 for the word mark “Nuttvia” (Nuttvia Mark) with a priority date of 13 January 2016 (collectively, the Flujo Marks), each of which is registered in respect of, inter alia, natural sweeteners in class 30 of the Register, and has an earlier priority date than that of the Nuvia Mark. The priority date of the Nuvia Mark is 9 February 2016.
The Flujo parties apply for cancellation of the Nuvia Mark on grounds they allege that they could have opposed registration under s.88(2)(b) of the Act - being ss.42(b), 44(a), 58, 60 and 62 of the Act, and under s.88(2)(c) of the Act. They allege, inter alia, that the Nuvia Mark is substantially identical with, or deceptively similar to, either or both the Flujo Marks, that use of the Nuvia Mark will be likely to mislead or deceive in contravention of ss.18 and 29 of the Australian Consumer Law (ACL), that Universal is not the true owner of the Nuvia Mark, that Flujo has acquired a widespread reputation in Australia in the Natvia Mark by virtue of use by Natvia, and/or in the Nuttvia Mark by virtue of use by a third party, Nuttvia Australia Pty Ltd, and because of that reputation Universal’s use of the Nuvia Mark would be likely to deceive or cause confusion. They also seek cancellation on the basis that the application for registration of the Nuvia Mark was made in bad faith.
In its defence, in sum, Universal denies all of the allegations save incorporation of each of the Flujo parties, and that Flujo is the holder of the trade mark registrations for the Flujo Marks. It says paragraphs of the Flujo parties’ pleading are embarrassing. It says that since December 2016 it has marketed a natural sweetener under the Nuvia Mark from the website at Universal specifically denies substantial identity of the competing marks, or that they are deceptively similar, and says that the suffix “VIA” is a commonly used abbreviation of “STEVIA” as part of product descriptions for natural sweeteners and their brand names.
Universal has filed Australian trade mark application no. 1788314 for registration by the Registrar of Trade Marks of the word Nuvia as a trade mark for various goods in class 30, among which goods are “natural sweeteners”, which application has a priority date of 8 August 2016 (314 Application). Flujo has opposed registration of the 314 Application in an opposition to registration proceeding before the Registrar (TM Opposition), which TM Opposition has been on foot since mid‑2017. So far as the Court has been informed, as at the date of delivery of these reasons, the parties are awaiting the decision of a delegate of the Registrar on the TM Opposition.
In its defence filed in this Court (filed before the hearing of the TM Opposition), Universal asserts that Flujo sought to defer the TM Opposition on the ground that it intended to bring proceedings in this Court against Universal for cancellation of the Nuvia Mark on the same or similar grounds to the TM Opposition, which foreshadowed proceeding is the proceeding before me. Universal says that it invited Flujo to withdraw the TM Opposition, and subsequently bring a claim in this proceeding for rectification of the Register in respect of the mark the subject of the 314 Application, but that Flujo has not responded to that invitation.
At the first case management conference in this proceeding Universal’s counsel, Ms Gatford, foreshadowed an application against the Flujo parties for security for costs, and I made directions in the event that Universal made that foreshadowed interlocutory application, including listing it for hearing before me. On 15 July 2019 Universal filed the present interlocutory application seeking security for costs. At hearing its application was supported by two affidavits made by its solicitors, Alan Foster dated 15 July 2019, and John Sinisgalli dated 21 August 2019. Subsequently, with leave, Universal filed and relies on a second affidavit of Alan Foster, sworn 24 December 2019.
Universal seeks security in the sum of $56,750, on the basis of an estimated final hearing of 2 days.
The Flujo parties oppose the giving of security. At the hearing of the interlocutory application before me they relied on two affidavits by accountant, Anthony Guy, the first made 16 August 2019, and the second on 23 August 2019. To the first affidavit Mr Guy attached a bank statement for the month of July 2019 for a Westpac Business One account in Flujo’s name held with Westpac Banking Corporation (Flujo Bank Account) which showed funds of $283,710.65 as at 31 July 2019. I refer to this July bank statement, and further material relating to the Flujo Bank Account, further below.
I heard the interlocutory application on 26 August 2019. Ms Gatford of counsel appeared for Universal, and Mr Castelan of counsel appeared for the Flujo parties. The above mentioned affidavits were read, and a copy of an unsigned intellectual property licence agreement between the Flujo partes stated made on 28 June 2017, and the statement of grounds and particulars made in the TM Opposition were produced and tendered. At the conclusion of the hearing, I reserved. Mr Castelan did not request leave to file any further evidence, or submissions.
On 29 August 2019, the Flujo parties sought leave to file an affidavit of their solicitor, David Geoffrey Franklin made 28 August 2019, attaching the first page of 6 bank statements relating to the Flujo Bank Account for the period 31 December 2018 to 30 June 2019, and made short submissions in support of admission of the material. In response, Universal opposed leave being given, and made short answering submissions. Thereafter, the parties’ legal representatives provided competing forms of draft order, and the Court sought clarification of the parties’ respective positions. The parties maintained their respective positions as at hearing.
The Court listed the matter for a further case management hearing on 18 December 2019. Universal’s legal representative informed the Court that Universal wished to file and rely on a further affidavit evidencing further developments in the financial position of a related party to the Flujo parties. Separately, I indicated that I was minded to grant leave to the Flujo parties to read the Franklin affidavit, and to order security for costs.
I allowed both parties time to file and serve further material in the application including as foreshadowed by Universal’s legal representatives.
For the reasons that follow I allow Universal’s application. I will order that the Flujo parties give security for Universal’s costs of and incidental to its defence in this proceeding in the sum of $50,000.
General principles
Universal brings its application pursuant to s.80 of the Federal Circuit Court of Australia Act 1976 (Cth) (FCCA Act), rule 21.01 of the Federal Circuit Court Rules 2001, and s.1335 of the Corporations Act 2001 (Cth). The principles concerning security for costs are not in dispute among the parties. It suffices to refer to the relevant statutory provisions and summarise relevant principles as follows.
Section 80(2) of the FCCA Act provides that the Court may order an applicant in a proceeding in the Court to give security for the payment of costs that may be awarded against the applicant. The security shall be such amount, and given at such time and in such manner and form, as the Court directs: s.80(3). The Court may reduce or increase the amount of security ordered to be given and may vary the time at which, or manner or form in which, the security is to be given: s.80(4). If security is not given in accordance with that ordered, the Court may dismiss or stay the proceeding: s.80(5). Rule 21.01 reflects the terms of s.80 of the FCCA Act. Section 80 is in substantially similar terms to s.56 of the Federal Court of Australia Act 1976 (Cth).
Section 1335 of the Corporations Act provides:
1335 Costs
(1)Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
(1A)Subsection (1) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.
Note:Similar provision is made in relation to Aboriginal and Torres Strait Islander corporations under section 581‑20 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006.
(2)The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.
The Court exercises a broad discretion under these legislative provisions in determining whether it is appropriate to order security, limited only by the fact that its discretion must be exercised judicially. As summarised by O’Bryan J in Flujo Holdings Pty Ltd v Merisant Company & Ors [2019] FCA 594:
7The discretion conferred by s 56 to award security for costs is broad and unfettered, the only limitation being that the discretion must be exercised judicially: Bell Wholesale Limited v Gates Export Corp (No. 2) (1984) 2 FCR 1 at 3. It is a discretion to be exercised according to the merits of each case and without any particular predisposition: Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 511 per French J. The Court’s discretion is to be exercised having regard to whether the interests of justice would be best served by making or refusing the order: Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405 at 411.
8As observed recently by Colvin J in Frigger, in the matter of Computer Accounting & Tax Pty Ltd (in liq) (No. 2) [2018] FCA 612 (at [8]):
In Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93, a decision on which Mr Castelan placed emphasis, the Victorian Supreme Court of Appeal, by reference to s.1335 of the Corporations Act explained the application of the statutory test:
(a)first, the threshold condition to be satisfied is whether there is reason to believe that the corporation will be unable to pay the costs of the [respondent] if unsuccessful: at [11];
(b)the threshold question must be satisfied before the discretionary power to order security is enlivened;
(c)“the phrase ‘reason to believe’ … requires a rational basis for the belief – and no more. … The section calls for a practical, commonsense approach to the examination of the corporation’s financial affairs”: at [15];
(d)it may be said, with justification, that this is a low threshold: at [16];
(e)the power being enlivened, the court must consider whether it should be exercised. Foremost among the discretionary considerations will be any contention on behalf of the [plaintiff – applicant in the substantive proceeding] that an order for security will work an injustice: at [18];
(f)whether the power should be exercised will depend on all of the circumstances: at [19];
(g)the burden rests on the [respondent – moving party on the application for security for costs] from first to last to persuade the court that the order for security should be made;
In Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360, a decision on which Ms Gatford relied, Edelman J, then of the Federal Court of Australia, at [12] also explained that the substantive onus of proof rests throughout upon the party seeking security. His Honour observed, however, once the threshold issue is satisfied, there is an evidentiary burden on the party resisting the order for security for costs (namely, the applicant, in the present case, the Flujo parties) to establish a reason why security should not be granted. That requires only that the entity resisting providing security raise (with some basis to do so) the matters that it wishes to be taken into account in determining whether the order for security for costs should be made. His Honour summarised some of the relevant factors commonly to be considered, to which I have had regard to the extent that they have relevance to the present case.
Universal says that the material before the Court provides multiple causes for concern as to the Flujo parties’ ability and willingness to meet a future costs order in the proceeding.
The Flujo parties submit that Universal is unable to satisfy the threshold question, and that the discretion is not enlivened.
The evidence before the Court on the security for costs application
The Flujo parties’ financial positions
The evidence before me establishes that Flujo was incorporated in 2015 and has an issued and paid up capital of $10. It has two shareholders, who are also the company’s directors - Messrs Mark Anthony Hanna, as to 70%, and Samuel Beng Kee Tew, as to 30%. Mr Tew is also the company secretary.
The second applicant, Natvia, was incorporated in 2009 and has an issued and paid up capital of $100. Flujo is the sole shareholder. Mr Tew is the sole director and secretary of Natvia.
Neither Flujo nor Natvia owns any real property in Victoria. Neither Mr Hanna nor Mr Tew made any affidavit read in the interlocutory application. Corporate records maintained by Australian Securities Investment Commission (ASIC) of the Flujo parties disclose that both Messrs Hanna and Tew have stated to ASIC that they are resident in suburbs of Melbourne.
Searches of the Personal Property Securities Register (PPSR) maintained by the Australian Financial Security Authority reveal that all of Flujo’s present and after-acquired property is subject to a current charge in favour of Westpac Banking Corporation, which has been on foot since July 2016. Whilst this charge is stated to be subject to exceptions being personal property of Flujo which is not from time to time subject to a security agreement in favour of Westpac, there is no indication whether any property is in fact excluded from the charge. The PPSR reveals that Natvia is subject to a similar charge in favour of Westpac dating from July 2016, and additional “commercial other goods” and “other goods” charges.
Mr Guy provided two affidavits on behalf of the Flujo parties. He is a chartered accountant, and a partner in Helmsman Accountants and Advisors, which firm acts for the Flujo parties and “other member companies of the Flujo group controlled by Flujo”. He was authorised to give evidence in the proceeding on behalf of the Flujo parties. He attested to the following:
(a)Flujo is an IP holding company, and parent of Natvia. Flujo’s primary role is to manage, control and license intellectual property of “members of the Flujo group”, including exercising financial and quality control;
(b)Flujo licenses Natvia the right to use the Natvia Mark and other trade marks, and “IP related to Natvia”;
(c)Natvia pays Flujo an annual fee of $267,000, in quarterly instalments in advance (which Mr Guy states will increase to $300,000 for the 2019 – 2020 financial year);
(d)that licence fee appears to be Flujo’s sole source of income;
(e)Flujo does not run any operational business aside from its licensing of IP;
(f)according to Mr Guy, “as such it has no liabilities outside of the costs of management of the IP as the parent company, and expenses for the purpose of preserving and maintaining the value of Flujo’s assets”. It is able to use its licence fee income to fund enforcement of its intellectual property.
As I have said above, to his first affidavit, Mr Guy annexed the July 2019 bank statement for the Flujo Bank Account.
Mr Sinisgalli, solicitor for Universal, in his affidavit sworn 21 August 2019, stated that he undertook a number of internet searches and searches of the ASIC records relating to Mr Guy, Helmsman, and firms referred to in the Flujo July 2019 bank statement as entities to which Flujo had paid sums in that month. The results of those searches and other material referred to in Mr Sinisgalli’s evidence disclose that:
(a)Mr Guy was a founder of Ecosse Capital Partners, a “private investment firm focused on investments in underperforming business and corporate groups at the margins of traditional lending”;
(b)Flujo paid Ecosse $4,167.24 on 11 July 2019;
(c)Helmsman does not appear to have any website presence, nor are there any references to it currently carrying on business;
(d)Helmsman is a registered business name with a current principal place of business in Balaclava, Victoria, which name is owned by two companies - a deregistered company and a company with the same Balaclava address as Helmsman, which company’s sole director and shareholder is a Mr Daniel Weinstock;
(e)on 4 July 2019, Flujo paid $15,000 to Hamilton Murphy, a specialist insolvency and reconstruction accounting practice;
(f)on 15 July 2019, Flujo paid $25,000 with a transaction description “Nuttvia loan”, and in the statement of claim in this proceeding Flujo is stated to be the parent of a company with the name “Nuttvia Australia Pty Ltd” (see above at [4]);
(g)Flujo is a respondent in current proceedings in the Federal Court commenced by Halal Certification Authority Pty Ltd, which is in the evidentiary stage;
(h)Flujo Holdings Pty Ltd, a previous holding company of Natvia, and former owner of the Natvia Mark, was an applicant in Federal Court proceedings commenced in late 2018 against Merisant Company and another, alleging infringement of the Natvia Mark (Federal Court Proceeding), that on 30 April 2019 Flujo Holdings had been ordered to pay $150,000 as security for costs in that proceeding; and that the proceeding was discontinued/ withdrawn on 15 May 2019;
(i)in his reasons for judgment in Flujo Holdings v Merisant, when ordering Flujo Holdings give security in the Federal Court Proceeding (see above at [19]), O’Brien J at [18] referred to an earlier proceeding in the High Court in New Zealand he described as a parallel proceeding, and which was discontinued on the eve of trial due to a dispute with Flujo Holdings’ lawyers over unpaid fees (New Zealand Proceeding);
(i)on 11 July 2017, the Natvia Mark was assigned by Flujo Holdings to Flujo, the first applicant in this proceeding.
Mr Guy in his affidavit in rebuttal affirmed 23 August 2019, stated that any business entity without realty, regardless of profitability, will fall within the category of businesses at the margins of traditional lending, “given mainstream banking’s approach to lending”. He stated that Helmsman has been retained by Flujo to provide “outsourced financial control services; and ongoing financial, structuring and commercial advice”, which engagement was ongoing. He annexed a partially redacted letter of engagement dated 17 June 2019 from Helmsman addressed to Mr Hanna, director of Flujo, in which the client is identified as Flujo, in its own capacity and as head of the “Natvia Group of Companies”. The letter stated in part “We understand that there may be some company restructuring that you wish to explore which we have already commenced discussion with you on.”
Completing the parties’ evidence, as I have outlined at [10] above, were an unsigned trade mark licence agreement between Flujo and Natvia stated made on 28 June 2017, for a 36 month term commencing that day, and licensing (inter alia) the Natvia Mark, and the statement of grounds and particulars of opposition in the TM Opposition.
Outline of parties’ submissions
Universal says that the material before the Court provides multiple causes for concern as to the Flujo parties’ ability and willingness to meet a future costs order in the proceeding. The Flujo parties submit that Universal is unable to satisfy the threshold question, and that the discretion is not enlivened.
Ms Gatford submitted that because the Flujo parties have paid up share capital of $10, and $100 respectively, and don’t own any real property in Victoria, there is reason to believe that they will be unable to pay Universal’s costs if successful, and accordingly, the evidentiary onus shifts to the Flujo parties to establish that they will have sufficient assets. As at the hearing of the interlocutory application, the only evidence of the Flujo parties’ financial capacity was the July 2019 bank statement for the Flujo Bank Account. It revealed funds in the account as at that point in time, no more. That bank statement does not provide a complete picture of Flujo’s financial position, and does not provide any assurance that the amount standing to the credit of the account as at the statement date will in the future remain in the account and be available to meet a costs order in this proceeding.
Ms Gatford emphasised that there was no evidence as to the Flujo parties’ financial position over time, their financial and trading history, liabilities, overall asset and liability position, no financial statements and only the one bank statement. She referred to other Court proceedings involving the Flujo parties or associated parties, and the Natvia Mark referred to in the evidence and in Flujo Holdings v Merisant. In sum, she submitted that the Court should conclude from the want of disclosure of Flujo’s financial and trading position, Flujo’s payments to financial, insolvency and restructuring advisors shown in Mr Sinisgalli’s evidence, and the course of conduct disclosed in those other proceedings, that there was credible evidence that the Flujo parties would not be in a position to meet an order for costs, and that applying the above referred to authorities, the Court should order security.
Mr Castelan for the Flujo parties referred to the funds disclosed in the Flujo bank statement at 31 July 2019, and submitted that there was no reason to believe that the Flujo bank account would not have at least $55,000 in it in 6 months’ time, and that accordingly, the discretion to order security was not enlivened.
He submitted that in any event, a significant aspect of the Flujo parties’ case is that Universal registered the Nuvia Mark in bad faith, in short, because its officers and shareholders were aware of the Flujo Marks, and had supplied Natvia products under licence in another territory. I note, however, that awareness of another party’s trade mark, by itself, is generally insufficient to establish bad faith.
Further evidence
As I have referred to above, shortly after the interlocutory hearing, the Flujo parties sought leave to file and rely on an affidavit sworn on 28 August 2019 by Mr Franklin, solicitor for the Flujo parties, to which were annexed the first page of 6 bank statements relating to the Flujo Bank Account for the period January to June 2019. Mr Franklin accepted that the July 2019 statement relied on at hearing only provided a snapshot of the company’s banking record. He described the purpose of the evidence as no more than to show that the Flujo Bank Account is always in funds, and that the quantum at any given time exceeds Universal’s projected costs.
Whilst there was no formal application to reopen after the hearing, and Mr Franklin did not proffer any explanation why the material was not available before, or not in evidence at, the hearing, being mindful of the object of the Court’s Rules set out in r.103, I consider that were I to reject his affidavit, I would be deciding the application for security for costs in an artificial environment, and without regard to the longer history of the bank account, which was made available to the Court shortly after the hearing, and may be relevant to the application. Accordingly, I will grant leave to the Flujo parties to file and read Mr Franklin’s affidavit. I have received in evidence that material.
As I have said above, I have since given leave to the parties to file and rely on any further material - to be filed and served by 24 December 2019, on behalf of Universal, and by 13 January 2020, on behalf of the Flujo parties. Universal relies on the second affidavit of Mr Foster sworn 24 December 2019. The Flujo parties have not filed any further material.
To his second affidavit Mr Foster exhibits part of the Administrator’s Report dated 1 November 2019 in respect of Flujo Holdings filed with ASIC. Flujo Holdings was placed in voluntary administration on 7 October 2019, and Mr Stephen Dixon of Hamilton Murphy was appointed administrator. Mr Foster also exhibits a copy of the minutes of meeting of creditors of that company held on 12 November 2019.
The evidence discloses that there is a continuity of directorships and shareholdings between Flujo Holdings and Flujo. Messrs Hanna and Tew are former directors of Flujo Holdings, ceasing their appointments in October 2018 and July 2019 respectively, and remain the two shareholders of that company. I observe, however, that common directorships and shareholdings does not make the two companies related companies within the meaning of the Corporations Act. The Report also discloses a search on ASIC’s Banned and Disqualified Register confirms that Mr Tew has been banned from holding a position as an officer of a company from 5 July 2019 until 4 July 2021. It follows that although I have stated (at [24] and [25] above) that according to the evidence before me Mr Tew is a director of Flujo and of Natvia, his continuing appointment as at the hearing of the present application and subsequently appears contrary to the ASIC notification.
In the Report, Mr Dixon sets out a chronology of material events which he understands led to his appointment as administrator. Those events include the New Zealand Proceeding, and the Federal Court Proceeding. The chronology reveals that after costs were ordered against Flujo Holdings in the New Zealand Proceeding, upon its discontinuance/ withdrawal, and after security for costs was ordered to be paid in the Federal Court Proceeding, there were corresponding failures to pay.
On 8 October 2019, the day after Flujo Holdings was placed in voluntary administration, the Federal Court Proceeding was dismissed by reason of the failure to comply with the security for costs order (I note that this chronology differs from that evidenced by Mr Sinisgalli, however little turns in the present application on the difference in dates), and a statutory demand was issued pursuant to the costs order issued against the company in the New Zealand Proceeding.
The minutes of the creditors meeting disclose that Merisant Company and Merisant Australia Pty Ltd, parties to the New Zealand and the Federal Court Proceedings, have filed proofs of debt in the administration of Flujo Holdings totalling $258,595, and including those proofs, the 4 principal creditors claim $716,252 (rounded) in the administration. Those creditors include parties stated to be related to Flujo Holdings, Flujo Pty Ltd, and Stevia Sweetener Pty Ltd, as secured creditors, and the Merisant companies as unsecured creditors. It is anticipated that the creditors may receive 5 cents in the dollar.
At page 26, item 6.5, of his Report, Mr Dixon records that the “Natvia” intellectual property of Flujo Holdings was transferred to Flujo (the first applicant in this proceeding) pursuant to deed of assignment dated 27 March 2017. Whilst the administrator observes that the deed does not state any consideration paid for the transfer (and I note that in his reasons O’Bryan J stated that the intellectual property was transferred for no consideration), he has been informed that Flujo Pty Ltd settled the purchase of the intellectual property on behalf of Flujo via a reduction of an existing loan payable by Flujo Holdings to Flujo Pty Ltd, by $255,000 as purchase consideration. By reference to a valuation report made in 2015, and applying the discount rate used in that valuation, the administrator states that the value of the intellectual property appears reasonable.
In the Report the administrator also identifies that Flujo owes a sum of $255,000 to Flujo Pty Ltd. He identifies that Flujo Pty Ltd has lodged a claim that it is still owed $92,500. Whilst Mr Dixon did not say what entity is claimed to owe that sum to Flujo Pty Ltd, from the minutes of the creditors meeting, it appears that Flujo Holdings owes that sum to Flujo Pty Ltd.
Consideration of bank statements and Flujo parties’ financial position
Turning to the partial Flujo Bank Account bank statements annexed to Mr Franklin’s affidavit, those statements disclose the opening and closing balances for the months of January to June 2019, and some, but not all of the transactions occurring in that account in that period. From the limited information ascertainable from those opening and closing balances, it is possible to conclude that the average monthly balance in the Flujo Bank Account was $310,248.
Including the July 2019 bank statement, non‑exhaustively, in the 7 month period, the Flujo Bank Account has debits in 2 months of sums of $10,000 each recorded as “Payment Natvia Pty”, and variously “Natvia” and “Sanguineo loan”, there is a withdrawal of $25,000 in July 2019 described as “Nuttvia loan” and 2 days later a deposit of $20,000 with the same transaction description. Other sums of smaller and larger amounts flow in and out of the account. I am not able to discern any regular payments that could evidence Mr Guy’s statement that Natvia pays a licence fee of $267,000 to Flujo quarterly in advance – that is, I do not see in the 7 months of (partial) bank statements any deposit or deposits apparently from Natvia (or any other entity), not described as a loan, and that total $66,750, or thereabouts, in any quarter. I am not able to speculate whether or not the sole deposit of $45,000 in May 2019 described as “Flujo inv”, could relate a licence payment from Natvia.
There is no explanation in any of the affidavits relied on by the Flujo parties of the transactions in the Flujo Bank Account. Mr Guy’s evidence is limited to explaining his firm is structured as a partnership of trusts, and arguing that no conclusion can be drawn about Flujo’s insolvency or financial difficulties from its engagement of, or payment of sums to, Ecosse, Helmsman and Hamilton Murphy.
There is no evidence before me of any assets or liabilities of Natvia. I have no evidence as to its trading operations, or its financial or other history, merely that it is asserted to be the exclusive licensee in Australia of the Natvia mark.
In sum, the evidence discloses that Flujo’s sole income is a licence fee from Natvia, but there is no evidence that it has been or is being paid. From mid‑2019 the Flujo parties have engaged insolvency practitioners - Hamilton Murphy, a lender at the margins of traditional banking - Ecosse, and the accounting and advisory firm Helmsman to provide accounting and unspecified ongoing financial, structuring and commercial advice. As at November 2019 Flujo owes $255,000 to the company Flujo Pty Ltd
Applying a practical, common sense approach to the examination of the Flujo parties’ financial affairs, I consider that Universal has satisfied the threshold question, and that the Court’s discretionary power to order security is enlivened.
None of the directors (or former directors), or any other person have gone on affidavit to explain the financial affairs of the Flujo parties, or provide any explanation about the transactions in the Flujo Bank Account, or any history of payment of licence fees or any trading or other income producing activities.
The partial bank statements, and the July 2019 bank statement for the Flujo Bank Account do not provide a complete picture of the financial position of Flujo. I consider that there can be no assurance from the balances maintained at the beginning and close of the 7 months of January to July 2019, that the funds standing to the credit of the account in Flujo’s name as at the date of the July bank statement are still in the account, or will in the future remain in the account, or that they are not subject to the security held by Westpac, or to any existing claim by Flujo Pty Ltd, or any other third party.
Specifically, I am not persuaded that funds are and will be maintained in the Flujo Bank Account that will be available to meet any costs order made in favour of Universal against the Flujo parties at final hearing.
Additionally, in a practical sense, my doubt as to the ability of the Flujo parties’ to meet an adverse costs order in this proceeding is heightened by the involvement of the two directors, Messrs Hanna and Tew, when directors of Flujo Holdings. These doubts arise from the events leading to Flujo Holdings, a company of which they are the sole shareholders, and were formerly, and until recently, the directors, being placed in voluntary administration, engaging Hamilton Murphy, the same firm as Mr Hanna, on behalf of Flujo has engaged to assist it and the “Natvia Group of Companies”.
Whilst Flujo Holdings is not a related party to the applicants in this proceeding, it was the former owner of the Natvia Mark. I observe that Flujo Holdings was subject to, and failed to comply with, first, a costs order in legal proceedings in the period when Mr Hanna (up until 1 October 2018), and Mr Tew were directors, and secondly, an order to give security for costs in legal proceedings, whilst Mr Tew remained a director (up until 5 July 2019), and that Messrs Hanna and Tew are the current directors of Flujo. As I have noted, although banned from being a director, Mr Tew is on the ASIC records as the sole director of Natvia.
Having regard to the evidence adduced by Universal, I have concluded that there is reason to believe that Flujo does not have available assets from which to meet an adverse costs order in this proceeding. The limited disclosure on behalf of the Flujo parties does not satisfy me that they have or will be likely to have available assets from which to meet an adverse costs order in the future. As I have indicated, I will order Flujo to give security for the payment of costs that may be awarded against it in this proceeding.
Quantum of security
It is well established that in determining the quantum of security, the Court engages in a “broad brush” assessment, having regard to the information before it. It does not undertake anything in the nature of a taxation of costs. The Court is not bound to give the amount of security sought, nor must the amount be determined with mathematical precision.
In the present case, Mr Foster, for Universal, as an experienced litigation solicitor with over 38 years’ litigation practice experience, has provided an estimate of likely and incurred costs, and set out the inputs into his estimate and its basis. He has allowed for counsel, and based his estimate on assumptions that the proceeding will proceed to final hearing with the current estimate of two days, the scope of any discovery will be confined to issues relating to the marks in dispute, the evidence will be partly written and partly oral, a transcript will be required, he will be assisted by a junior solicitor, and that he will instruct counsel and attend with counsel at the final hearing. Including costs already incurred, he gives an estimate on a solicitor and own client basis of $56,750, comprising counsel fees of $35,750, and solicitor costs of $21,000, exclusive of GST, and excluding costs of an assessor and filing fees, which he estimates at $2,500.
As to quantum, Mr Castelan submitted that Mr Foster’s estimate was based on solicitor‑client costs, and included costs for past work (although undertaken after the issue of security was raised. Should the Court order security, contrary to the Flujo parties’ primary submissions, Mr Castelan submitted, it was unnecessary to order security for the entire period to the conclusion of the hearing, and that any security should in the first instance be limited up to a mediation (although no mediation order has been sought), and if ordered, should be ordered to be provided by instalments.
Security may encompass future costs, and also costs already incurred. The application was foreshadowed early in the litigation, and there has not been any relevant delay in bringing the application. I do not accept that security should be ordered up to a notional mediation date. There is nothing before me to support any basis for payment in many instalments, although I consider it reasonable to order payment be made in two instalments close in time.
Whilst Mr Foster has not given any estimate of recoverable party-party costs, I am aware that within recent history, recoverable party-party costs in intellectual property litigation have been least 55% to 70% and higher of actual costs, and 100% of disbursements, such as counsel fees.
The proceeding has been set down for final hearing in the period May – July 2020, with an estimate of 2 days, which hearing day estimate I consider appropriate given the pleaded issues.
I consider the amount sought is conservative, given the legal and factual trade mark issues arising on the pleadings. I consider that it is appropriate to engage counsel.
Conclusion
Applying a broad brush approach, I will order security up to and including final hearing in the sum of $50,000 to be provided in a first tranche of $30,000 by 21 February 2020, and a second tranche of $20,000 by 6 March 2020. I will make consequential orders.
I certify that the preceding sixty-six (66) paragraphs are a true copy of the reasons for judgment of Judge Baird
Associate:
Date: 11 February 2020
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