Funge Systems Inc v Newcom Tech P/L (No.2) No. Scciv-01-810

[2001] SASC 253

[2001] SASC 253
FUNGE SYSTEMS INCORPORATED AND ANOTHER V NEWCOM TECHNOLOGIES PTY LTD AND OTHERS (NO. 2)

1. LANDER J.          This is an application by the first and second defendants for costs on an interlocutory application brought by the plaintiffs for injunctive relief. The plaintiffs in proceedings issued on 24 May 2001 sought orders in the following terms:

   “1.That the defendants, whether by themselves or by their respective agents or employees, be restrained from selling, transferring, assigning or otherwise disposing of any interest they may have in the intellectual property described in the schedule attached to this application other than with the express written consent of the plaintiff.

   2.That within 7 days the defendants make an affidavit (and in the case of the first and second defendants, an affidavit by their proper officer) stating whether any of the following documents, namely all documents relating to, recording or evidencing any direct or indirect approach, contact, negotiation or discussion with, or provision of information to, or any agreement with any other person or entity concerning the sale, transfer, assignment, licence or other disposition (whether directly or indirectly by sale, merger, recapitalisation or otherwise) of the Intellectual Property, are, or at any time have been, in the defendants’ possession, custody or power and if not then in their possession, custody or power when they parted with them and what has become of them.

   3.That the defendants produce to the plaintiff within 7 days of the making of the affidavits referred to in para.2 of this application such of the documents as are in the defendants’ possession, custody or power other than those documents in respect of which privilege from production is claimed.”

2. The first plaintiff is a subsidiary of the second plaintiff Funge Systems International Ltd, a company incorporated in the Cayman Islands. That company was under the direct control of the second defendant Newcom Holdings Pty Ltd. The plaintiffs thereby were, until about April of this year, under the control of the first and second defendants.

3. The plaintiffs’ claim that, on 22 March of this year, the first plaintiff and the first and second defendants entered into an agreement whereby the first and second defendants would transfer to the first plaintiff, all of its intellectual property in consideration of the first plaintiff transferring to the second plaintiff 4 per cent of its issued capital. The first and second defendants deny that any such agreement was entered into.  They claim that a document which was executed either on 22 or 23 March was executed in pursuance of on-going negotiations between the parties, but in no way evidences an agreement between the first plaintiff and the first and second defendants.

4. The first plaintiff has entered into a Chapter 11 bankruptcy in the State of Virginia in the United States. It is being funded by Funge Merger Incorporated in respect of proceedings which the first plaintiff has brought in the United States, and, I think, funded in respect of the proceedings brought in this state.

5. The funding arrangements between the first plaintiff and Funge Merger Incorporated have been approved by the Bankruptcy Court in the state of Virginia in the United States.

6. The plaintiffs’ application for an interlocutory injunction was dealt with in the normal way. First I heard an ex parte application for an interim injunction, and made orders in the terms of para.1 of the application and ancillary orders in support of that order. The interim injunction was renewed from time to time in order that the first plaintiff and the first and second defendants could submit evidence to the court for the purpose of determining the application for the interlocutory injunction. The matter was also adjourned during the currency of the interim injunctions because an application was brought in the Bankruptcy Court in Virginia for an injunction in like terms to the interim injunction.

7. The plaintiffs sought, at one stage, to adjourn the proceedings for an interlocutory injunction in this State pending disposal of the application for an interlocutory injunction in the same terms in the state of Virginia. That was opposed and I refused that application.

8. That meant that this application was disposed of in this Court before the like application was heard in Virginia. The plaintiffs’ application failed.  It failed essentially for two reasons.  First because I considered that the undertaking which was proffered by the first plaintiff was effectively worthless because the first plaintiff was in Chapter 11 bankruptcy in the United States. It was worthless, I thought, even though on the interim injunction, I had required the first plaintiff to deposit monies with its solicitors to secure the undertaking. Secondly the application failed because I believed that the balance of convenience lay with the defendants. I thought it in the parties’ interests generally that the order sought should not be made because it would paralyse the defendants in dealing with their only assets and therefore likely to lead to a devaluation in the value of those assets.

9. After I refused the application for the interlocutory injunction, I discharged the interim injunction, which left the defendants free to deal with the assets, which were the subject of the application, as they sought fit.

10. The first plaintiff then pursued its application in the state of Virginia. Judge Mitchell sitting in the Bankruptcy Court in that state, after hearing evidence, including viva voce evidence, made an order in the nature of an injunction in different terms to that which was sought. Effectively he refused the application as it was made, but made an order requiring the defendants to give notice if they intended to transfer the assets away from the defendants. That notice would then allow the plaintiffs to renew an application for an injunction in wider terms to restrain the dealing with the assets if the plaintiffs thought fit.

11. After that order was made in the United States, an application was made to this court for an injunction in the same terms as that made by Judge Mitchell. The application was made on two bases: first, that as a court of equity this Court should recognise and assist in the enforcement of orders made in the United States; secondly, that the order in the United States amounted to fresh evidence, which allowed an application for an interlocutory injunction simpliciter to be made to this Court upon the changed circumstances.

12. That application was heard last Friday but was adjourned until today, to enable the parties to give cross-undertakings such that the plaintiffs would give an undertaking as to damages and the defendants would give their undertaking that it would abide by the orders made by Judge Mitchell in the state of Virginia. As it happened, this morning the defendants offered to give their undertaking but the plaintiffs’ instructions were not to proffer an undertaking as to damages. I therefore adjourned that further application until Thursday.

13. It seems to me that the fact that there is a further current application for an interlocutory injunction does not preclude me from determining the question of costs on the application dealt with and dismissed. It seems to me that if I was to make an order in the same terms as Judge Mitchell for either of the reasons advanced, or I was to accept an undertaking given by the first and second defendants, in the terms of the undertaking proffered to the Court this morning, that does not impact upon any order for costs in relation to the failed application.

14. The defendants’ argument is quite simple; they say that they succeeded on the application, the application was refused, and therefore they should be entitled to costs: r 101.02 of the Supreme Court Rules. The plaintiffs on the other hand say that I should refuse the application for costs because to visit costs upon the plaintiffs in the circumstances as they presently stand would be unfair. It would be unfair, it was argued, for two reasons. First, because if the plaintiffs succeed in due course, then it would be anomalous that they have to pay costs in circumstances where they were always entitled to the intellectual property. Secondly, they should not be obliged to pay costs because if these proceedings proceed, some of the work which has been used for the purpose of the interlocutory application will also be used in the conduct of the cause itself. In those circumstances, it was said that it would be unfair to visit costs upon the plaintiffs in respect of the failed application. It was also put that if I should refuse the application for costs I should merely reserve costs for the time being.  In the alternative any order for costs should be the defendants’ costs in the cause. In those circumstances if the defendants succeeded in the action, the defendants would have their costs; if the defendants failed then the plaintiffs would not be obliged to pay those costs.

15. This case has some special features, which are uncommon to applications of this kind. First, the plaintiffs have brought proceedings in both this State and in the State of Virginia. In the Virginian proceedings the plaintiffs are not at risk for costs; there will be no order for costs whatever the result in that jurisdiction. The defendants have been put to the cost of defending themselves both in Virginia and in this state. The plaintiffs explain that by reason of the fact that it could not commence its proceedings in Virginia because it was still waiting on approval of its funding arrangements in that country. Until its funding arrangements were approved, it could not bring proceedings in the United States. It could however, notwithstanding that it was insolvent, bring proceedings in this jurisdiction.

16. In my opinion that argument lacks merit. There is no evidence before this court that any delay in the bringing of the Virginian proceedings would have put the plaintiffs at risk in relation to the intellectual property. Secondly, there is no evidence before this court that the plaintiffs could not, if it were necessary, have hurried the Virginian proceedings to allow it to commence its proceedings in that State. The defendants therefore have been put to greater expense by reason of having to defend themselves in both jurisdictions.

17. There is a more significant aspect of these proceedings to which regard must be had. It is now, I think, common ground at the bar table that these proceedings will not go beyond the interlocutory application for an injunction. The parties envisage that they will have their differences decided in the bankruptcy court in Virginia.

18. Apparently the defendants have submitted to the jurisdiction of that court, and the plaintiffs are eager to prosecute their claim in that court. That means that after the conclusion of whatever interlocutory application for an injunction is to be decided on Thursday this week, the proceedings in this Court will either be stayed or suspended.  It follows if I was to make an order for costs in the cause, it would be in circumstances where the cause will never be decided in this jurisdiction. One cannot be sure of the procedures in the other jurisdiction, and in those circumstances it appears to me to be inappropriate to make orders for costs in the cause. Because these proceedings will effectively terminate at the interlocutory injunction stage, it seems to me that I should decide the question of costs one way or the other.

19. The plaintiffs have also argued that there should be no order for costs at all until such time as the proceedings are completed in Virginia. It has been argued that until the matter has been decided, one cannot determine the correctness or otherwise of the defendants’ attitude in resisting the application for an interlocutory injunction. For the reasons I have already given, in my opinion that argument should be rejected.

20. Lastly, the plaintiffs have argued that it has succeeded in obtaining an interlocutory injunction in Virginia and it has succeeded in obtaining the proffering of an undertaking by the defendants in this jurisdiction.

21. However the injunction which was obtained in the Virginian proceedings is significantly more limited in its terms than the injunction which was sought in this jurisdiction and in Virginia. In my opinion the plaintiffs cannot point to the injunction which was granted by Judge Mitchell as evidence of any forensic or other type of success.

22. In my opinion it would, in the circumstances of this case, be appropriate to make an order that costs follow the event.  I therefore order that the plaintiffs pay the costs of the first and second defendants, of and incidental to the application for the interlocutory injunction, in the case of the second plaintiff from the date of its joinder and not before.