Goldace Holdings Pty Ltd v Vodafone Network Pty Ltd
[1999] WASC 184
GOLDACE HOLDINGS PTY LTD -v- VODAFONE NETWORK PTY LTD & ORS [1999] WASC 184
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [1999] WASC 184 | |
| Case No: | CIV:1452/1999 | 13 & 16 SEPTEMBER 1999 | |
| Coram: | MASTER SANDERSON | 24/09/99 | |
| 16 | Judgment Part: | 1 of 1 | |
| Result: | Application refused | ||
| PDF Version |
| Parties: | GOLDACE HOLDINGS PTY LTD (ACN 082 875 134) VODAFONE NETWORK PTY LTD (ACN 056 161 043) CASH CONVERTERS INTERNATIONAL LTD (ACN 069 141 546) CASH CONVERTERS PTY LTD (ACN 009 288 804) |
Catchwords: | Practice and procedure Defendants' application for security for costs Principles to be applied Turns on its own facts |
Legislation: | Corporations Law, s 1335 |
Case References: | Beach Petroleum NL v Johnson (1992) 10 ACLC 525 Jeffree v National Companies and Securities Commission [1989] 15 ACLR 217 Nicholson & Ors v Permakraft (NZ) Ltd (In Liq) (1985) 3 ACLC 453 Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486 Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241 Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 11 ACLC 1238 Avspares Pty Ltd v Skywest Aviation Pty Ltd (1997) 24 ACSR 272 BPM Pty Ltd v HPM Ltd (1996) 131 FLR 339 Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301 Dalrymple Park Pty Ltd v Tabe & Lees Pty Ltd (1996) 22 ACSR 71 Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA; Library No 940403; 20 July 1994 Grove v Flavel (1986) 4 ACLR 654 Harpur v Ariadne Australia [1984] Qd R 523 Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306 Kinsela & Anor v Russell Kinsela Pty Ltd (In Liq) (1986) 10 ACLR 395 Laundry Coin Wash Nominees Pty Ltd v Dunlop Olympic & Ors (1985) ATPR 40-584 MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 Mills v Mills (1938) 60 CLR 150 McNamara v Flavel (1988) 6 ACLR 802 Pearson v Naydlor [1977] 1 WLR 899 Set Technologies v Lewis (1993) 10 ASCR 61 Sir Lindsay Parkinson v Triplan Ltd [1973] 2 All ER 273 Westralian Gold Mines Ltd v Westralian Minerals & Drilling Pty Ltd (1986) 4 ACLC 167 Winkworth v Edward Baron Development Co Ltd & Ors [1987] 1 All ER 114 Zortec Australia Pty Ltd v The Rural & Industries Bank of Western Australia, unreported; FCt SCt of WA; Library No 920609; 13 August 1992 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
VODAFONE NETWORK PTY LTD (ACN 056 161 043)
First Defendant
CASH CONVERTERS INTERNATIONAL LTD (ACN 069 141 546)
CASH CONVERTERS PTY LTD (ACN 009 288 804)
Second Defendants
Catchwords:
Practice and procedure - Defendants' application for security for costs - Principles to be applied - Turns on its own facts
Legislation:
Corporations Law, s 1335
(Page 2)
Result:
Application refused
Representation:
Counsel:
Plaintiff : Mr G E Taylor
First Defendant : Mr P S Fitzpatrick
Second Defendants : Dr J T Schoombee
Solicitors:
Plaintiff : Taylor Smart
First Defendant : Clayton Utz
Second Defendants : Barker Gosling
Case(s) referred to in judgment(s):
Beach Petroleum NL v Johnson (1992) 10 ACLC 525
Jeffree v National Companies and Securities Commission [1989] 15 ACLR 217
Nicholson & Ors v Permakraft (NZ) Ltd (In Liq) (1985) 3 ACLC 453
Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486
Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241
Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 11 ACLC 1238
Case(s) also cited:
Avspares Pty Ltd v Skywest Aviation Pty Ltd (1997) 24 ACSR 272
BPM Pty Ltd v HPM Ltd (1996) 131 FLR 339
Buckley v Bennell Design and Constructions Pty Ltd (1974) 1 ACLR 301
Dalrymple Park Pty Ltd v Tabe & Lees Pty Ltd (1996) 22 ACSR 71
Engel Pty Ltd (In Liq) v Leeds, unreported; FCt SCt of WA; Library No 940403; 20 July 1994
Grove v Flavel (1986) 4 ACLR 654
Harpur v Ariadne Australia [1984] Qd R 523
(Page 3)
Intercraft Cabinets Pty Ltd v Sampas Pty Ltd (1997) 18 WAR 306
Kinsela & Anor v Russell Kinsela Pty Ltd (In Liq) (1986) 10 ACLR 395
Laundry Coin Wash Nominees Pty Ltd v Dunlop Olympic & Ors (1985) ATPR 40-584
MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97
Mills v Mills (1938) 60 CLR 150
McNamara v Flavel (1988) 6 ACLR 802
Pearson v Naydlor [1977] 1 WLR 899
Set Technologies v Lewis (1993) 10 ASCR 61
Sir Lindsay Parkinson v Triplan Ltd [1973] 2 All ER 273
Westralian Gold Mines Ltd v Westralian Minerals & Drilling Pty Ltd (1986) 4 ACLC 167
Winkworth v Edward Baron Development Co Ltd & Ors [1987] 1 All ER 114
Zortec Australia Pty Ltd v The Rural & Industries Bank of Western Australia, unreported; FCt SCt of WA; Library No 920609; 13 August 1992
(Page 4)
1 MASTER SANDERSON: This is an application by the first and second defendants for an order for security for costs. The application is brought under s 1335 of the Corporations Law. That section reads as follows:
"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."
2 The first defendant's application is supported by three affidavits - an affidavit of Steven Daniel Glass ("Glass") sworn 6 July 1999, an affidavit of Peter John Brown ("Brown") sworn 1 September 1999 and an affidavit of Matthew Vincent Donnellan ("Donnellan") sworn 2 September 1999. The second defendants' application is also supported by three affidavits. Two of these affidavits are sworn by Michael Ian Cooke ("Cooke") - the first sworn 15 July 1999 and the second sworn 25 August 1999. There is a further affidavit relied on by the second defendants, that being an affidavit of Russell Harry Morgan ("Morgan") sworn 25 August 1999. In opposition to the application the plaintiff also relies on three affidavits. Two of these are sworn by Peter Karageorge ("Karageorge")- the first sworn 27 July 1999, the second sworn 9 August 1999. The third affidavit relied upon by the plaintiff was sworn by Angelo Petrelis ("Petrelis") on 10 December 1999. During the course of the hearing various objections were raised by counsel for the defendants and counsel for the plaintiff to certain paragraphs in the affidavits. There was no formal objection to any particular paragraphs and no application to strike out parts of the affidavits. I indicated to the parties that I would rule on the various objections if parts of the affidavits in question were of consequence in determining the applications. In the event, I have not found it necessary to rely on any of the material to which objection was taken by the parties.
3 Although a detailed analysis of the plaintiff's claim against the defendants is unnecessary for the purposes of these applications it is appropriate that I say something of the nature of the plaintiff's cause of action. The first defendant is a company which is conveniently described as a "service provider for mobile telephones". The two-named second defendants operate retail outlets which sell, among other things, mobile phones. The plaintiff pleads that on or about 10 January 1998 it entered into an agreement with the three-named defendants, pursuant to which the plaintiff would have the exclusive right to sell the first defendant's mobile
(Page 5)
- phones through the second defendants' stores. The agreement was said to be for five years with two further options for five years each. There were certain refinements to this agreement, largely to do with the fact that the second defendants operate stores through franchisees, which are not presently relevant. It is alleged by the plaintiff that by letter dated 26 March 1999 the first defendant repudiated its agreement with the plaintiff. It is also alleged that the second defendants also repudiated their agreement with the plaintiff on the same date. The statement of claim goes on to allege that there was, in effect, a conspiracy between the defendants which led to the repudiation by both defendants of their respective agreements with the plaintiff. Although it is not specifically pleaded, it would appear that the plaintiff has accepted the repudiation of the agreements by the defendants and it sues for damages for breach of contract and in relation to the alleged conspiracy. The statement of claim is relatively short and straightforward and clearly sets out the nature of the plaintiff's claim.
4 Perhaps, surprisingly, the first defendant, in the affidavit material upon which they have relied, does not give any indication of the basis upon which they intend to defend the claim. In his affidavit of 25 August 1999 Mr Cooke deals with the grounds upon which the second defendants terminated their agreement with the plaintiff: see par 10 through to par 22 of Mr Cooke's affidavit. From evidence led by the second defendants it is possible to obtain some indication of what the first defendant's position might be, but it must be said that the situation is by no means clear.
5 Dealing with an application for security for costs is a two-stage process. The first stage involves what might be called the jurisdiction question. The applicant must establish by credible testimony that there is reason to believe that, if called upon to do so, the respondent will not be in a position to meet any costs order made against it. Once that test is satisfied and jurisdiction is established, then the court's discretion is enlivened. That discretion is wide and unfettered but must be exercised judicially. A large number of cases have established what matters should properly be taken into consideration in the exercise of the discretion.
6 There are three points to be made in relation to the jurisdiction question. First, what is required to establish there is "credible testimony" that the respondent will be unable to meet a costs order? In Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 11 ACLC 1238 Lee J dealt with this question as follows (at 1241):
(Page 6)
- "The use of the word 'credible' suggests a requirement that the evidence to be relied upon has some characteristic of cogency. Qualification of the word 'testimony' by the word 'credible' suggested that an evidentiary burden is undertaken by the party seeking the order. It amounts to an obligation on an application for an order to show that the material before the court is sufficiently persuasive to permit a rational belief to be formed that, if ordered to do so, the corporation would be unable to pay the costs of that party upon disposal of the proceedings. To what extent the satisfaction of that standard may fall short of the demonstration of a likelihood that the corporation will be insolvent at the relevant time is unnecessary to decide. It is enough to say that speculation as to insolvency or financial difficulties likely to confront the corporation will be insufficient to ground the exercise of discretion."
7 His Honour's views were cited with approval by Murray J in Tipperary Developments Pty Ltd v State of Western Australia (1996) 22 ACSR 241 and most recently by Goldberg J in Second Lenbourne Pty Ltd v Beagle Management Pty Ltd [1999] FCA 486. It follows from what his Honour said that, when an application for security for costs is made, it is not incumbent on the respondent to produce any evidence in answer to the application. The evidentiary onus rests with the applicant. What is more, if the respondent fails to provide any evidence in answer to the application, no adverse inferences can be drawn from this omission so as to support the applicant's case. This principle emerges clearly from the Tipperary case where Murray J said (at 244):
"For the defendant it is argued that I may have regard to the failure of the plaintiff to provide complete information about its financial position and prospects by applying what is generally referred to as the rule in Jones v Dunkell, but the unexplained failure of a party to give evidence may, in appropriate circumstances, lead to an inference that the uncalled evidence would have assisted that party's case, so entitling the court the more readily to draw an inference against the party which might otherwise fairly be drawn from the evidence which was adduced. That is, of course, an important limitation upon the operation of the rule. It is limited to assisting the court to draw an inference which is available from circumstantial evidence. The absence of evidence to the contrary may not, however, be directly converted into circumstantial evidence itself tending to prove the fact in issue against the silent party, as was made clear
(Page 7)
- in Jones v Dunkell itself. The rule cannot be used to fill gaps in the evidence or to convert conjecture or suspicion into a matter of inference … Therein lies the impediment to the application of the rule in this case."
8 In the Second Lenbourne Pty Ltd case (supra) Goldberg J reached the same conclusion (see par 9). However, the position is different once some evidence is put forward by the respondent. To quote again from Murray J in the Tipperary case (at 243):
"However, where a matter is raised by the plaintiff resisting the making of an order was particularly within its knowledge, then, as would ordinarily be the case, the onus would rest upon the plaintiff to establish such matters."
9 The second point to be made about the jurisdiction question is a temporal one. It is necessary for the applicant to establish that the respondent will not be able to meet a costs order when called upon to do so. In this case, for instance, a statement of claim has been filed and as yet there has been no defence. The vigour with which this application for security for costs has been fought would indicate that the plaintiff's claim will be strenuously resisted by the defendants. That will lead inevitably to a raft of interlocutory applications. Experience has shown that to be the case. Furthermore, discovery is likely to be a lengthy process. The plaintiff is claiming damages which, in correspondence attached to the various affidavits, it has quantified in the region of $10 million. The plaintiff will need to produce evidence to support such a claim. Such evidence will no doubt involve extensive financial documentation. Expert evidence will be required. In short, the matter is unlikely to be ready for trial before the end of next year. The question then is, will the plaintiff be able to meet any costs orders which might be made against it in 15 to 18 months time? (See Beach Petroleum NL v Johnson (1992) 10 ACLC 525 per von Doussa J at 526.)
10 The further question is what is meant by the use of the phrase "will be unable to pay". A substantial part of the argument in this application was directed to the question of the net worth of the plaintiff, either on the basis that its business was disposed of as a going concern or on the basis that it disposed of all its assets, either voluntarily or under some form of administration. To an extent such considerations miss the point. In the Beach Petroleum decision von Doussa J put the position as follows:
(Page 8)
- "A corporation 'will be unable to pay' the costs within the meaning of the section if it can only do so given extended time to realise assets which might be difficult to realise, at least at a price sufficient to provide a surplus over other liabilities, sufficient to pay the costs: see Southern Cross Exploration NL & Ors v Fire and All Risks Insurance Co Ltd & Ors (1985) 1 NSWLR 114 at 121. The company will also be unable to pay the costs within the meaning of the section if the payment would be one that will amount to a preference of the defendant over other creditors such that the payment would be liable to be set aside either as a preference or as a fraudulent disposition (that is a payment made by the plaintiff corporation with the intention to defeat or delay one or more other creditors) in the event of the plaintiff corporation later going into liquidation. When the court is required to make a judgment which anticipates future events the court of necessity is required to judge the degree of probability that a particular event might occur. The court can do no more than evaluate the chances."
11 Turning then to the financial position of the plaintiff, the company was acquired as a shelf company on or about 23 June 1998. According to the affidavit of Karageorge sworn 27 July 1999 (par 3) the company was acquired for the specific purpose of carrying on business with the defendants. The company has on issue 10 ordinary shares of $1 fully paid and 750,000 redeemable preference shares of $1 each, also fully paid. These redeemable preference shares were the subject of extensive argument during the course of this application. Appearing as part of Annexure "PK6" to Mr Karageorge's affidavit of 9 August 1999 there are minutes of a meeting of directors held on 15 December 1998. These minutes set out the rights and privileges attaching to the preference shares. Because of the importance the defendants attached to the capital structure of the plaintiff, it is appropriate that I quote precisely what was resolved by the company:
"2. These preference shares shall have the following rights and privileges:
(a) The holders of the preference shares shall be entitled to receive out of the profits of the company, a cumulative preferential dividend at the rate of 4 percent per annum calculated from 10 July 1998 on the capital paid up on such preference shares.
(Page 9)
- (b) If the profits of the company in respect of any year are more than sufficient to pay the preferential dividend to the close of such year (and any preferential dividend or part thereof which may be unpaid in respect of any previous year), then the holders of the preference shares shall not participate further in any dividends which may be declared in that year (which dividends will therefore be distributed to the other shareholders).
(c) The capital paid up on the preference shares shall not be liable to cancellation or reduction in respect of loss or depreciation.
(d) In the event of winding up of the company the holders of the preference shares shall be entitled to have the surplus assets applied, first, in paying off the capital paid up on the preference shares held by them respectively, secondly, in paying off the arrears (if any) of the preferential dividend aforesaid calculated to the date of commencement of the winding up, but thereafter shall not participate further in the profits or assets of the company.
(e) Other than in a class meeting of the holders of the preference shares, the preference shares shall be non-voting at any shareholders meeting and shall not entitle the holders to move or second any resolution.
(f) The preference shares may be redeemed by either the company or by the holders upon three months' written notice at any time after 30 June 2000, or at any time by agreement between the company and the holders, and in the event that no such agreement shall have been reached and no such notice of redemption shall have been given, then the preference shares will in any event be redeemed on 30 June 2003.
(Page 10)
- (g) Upon redemption the holders of the preference shares shall be entitled to receive in cash the repayment of the capital paid up on the preference shares, and also the preferential dividend (and any arrears of dividend) calculated to the date of redemption, but thereafter shall not participate further in the profits or assets of the company."
12 It was the defendants' submission that, in effect, the capital subscribed by way of these redeemable preference shares was no more than a loan to the company which could be recovered at will by the shareholders. It is to be noted that the 750,000 redeemable preference shares were issued in two equal tranches - one to George Karageorge and one to Nicholas Karageorge. Both of these individuals are directors of the plaintiff. So is Peter Karageorge. It was submitted by the defendants that at any time it was possible for the company to agree with the holders of the shares that the shares would be redeemed. This would require nothing more than the Karageorges agreeing among themselves that the shares should be redeemed. It was submitted on behalf of the defendants that this made the capital structure of the plaintiff inherently unstable and suggested that if a liability for costs was incurred by the plaintiff the preference shares may be redeemed, leaving the company unable to pay any costs order. Further, it was suggested that, even without a costs order being made, there was a prospect at any time the shares might be redeemed leaving the company a shell. The defendants submitted they should be protected against that possibility.
13 Counsel for the plaintiff took strong exception to this submission by the defendants. He submitted that to redeem the preference shares in circumstances outlined by the plaintiffs would amount to a breach by the directors of their duties under the Corporations Law. He pointed to the duty on the directors to maintain the capital and assets of the company so that creditors could be paid: see Nicholson & Ors v Permakraft (NZ) Ltd (In Liq) (1985) 3 ACLC 453; Jeffree v National Companies and Securities Commission [1989] 15 ACLR 217. Furthermore, counsel pointed out, correctly, that there was not a scrap of evidence to suggest that the directors of the plaintiff would breach the Corporations Law and act in a way suggested by the defendants. Counsel made the point that the plaintiff's business was trading profitably and there was no reason to expect that it would not continue to do so. In these circumstances it was submitted that the nature of the capital structure of the plaintiff was not a factor in favour of concluding that the plaintiff would be unable to pay a costs order if it was required to do so.
(Page 11)
14 I accept the plaintiff's submissions on this question. There are two factors to be taken into consideration in considering what input the preference share structure might have on the financial position of the respondent. The first is the entitlement of the preference shareholders to an annual dividend at the rate of 4 per cent of the $750,000 invested - $30,000 per annum. It is not inconceivable, given the way the plaintiff is presently trading, that this dividend would be paid. Even if it were not paid, the liability would continue to accrue and must be reflected in the plaintiff's accounts. But for reasons which I will detail when I deal more fully below with the plaintiff's present trading position, the payment of the dividend or the accrued liability is not a matter which is, in my view, likely to lead to the plaintiff not being able to meet a costs order. The second issue is the prospect of the redemption of the preference shares. To conclude that it was likely that the directors would arrange between themselves for the redemption of these shares would be to conclude that the directors were likely, in certain circumstances, to breach the Corporations Law. To reach that conclusion would require some compelling evidence to support such a proposition. In the absence of such evidence, and in this case there was none, I could not conclude that there was a real prospect of the preference shares being redeemed. In other words I am not satisfied there is credible testimony that, as at the date the plaintiff might be called upon to meet any costs order, the present capital structure will not be in place.
15 In addition to the $750,010 subscribed for shares in the plaintiff, the plaintiff also received a payment of $430,000 from the first defendant. How this payment should be characterised is not entirely clear from the evidence and was the subject of much debate during the course of submissions. The agreement between the plaintiff and the first defendant in relation to this payment appears to be embodied in a letter from the plaintiff to the first defendant dated 10 July 1998 and appearing as Annexure "AP1" to the affidavit of Petrelis sworn 10 September 1999. It was common ground between the parties that the payment was not a subscription for shares. The first defendant does not now and has never held any shares in the plaintiff. The plaintiff, in its accounts, characterises the payment as "retained profits". It says that the payment was made by the first defendant to the plaintiff as part of the overall contractual arrangement between the parties. The plaintiff says that the payment was in the nature of an inducement to allow the plaintiff to get its business up and running and to market the first defendant's product. The defendants criticise the plaintiff's description of the $430,000 as retained profits and says it cannot properly be so characterised: see affidavit of Morgan,
(Page 12)
- par 8. Brown, in his affidavit, suggests that the $430,000 was a contribution towards the cost of fitting out the second defendants' stores to allow for marketing of the mobile phones. Brown says that, as a consequence of the payment, he believes it is "likely" that the first defendant owns the fit out.
16 It is very difficult to know what to make of the evidence of Brown. There is nothing in the documentation which suggests that his view of the payment of $430,000 is correct. There is certainly nothing in the letter of 10 July 1998 which supports his contention. What is more, he is somewhat equivocal in his evidence. On balance, I am satisfied that the $430,000 should be regarded as a payment made by the first defendant to the plaintiff which the plaintiff is under no obligation to repay. It may well be that the description of this payment as retained profits is inaccurate, although quite how it should be described is not clear. But there is no doubting the effect of the payment or the way it is to be treated. In my view it is properly regarded as a cash injection into the plaintiff and it is a matter to be taken into account in assessing the overall financial position of the plaintiff.
17 It was the plaintiff's contention that as a starting point in assessing its financial position it was proper to accept that as at July 1998 the plaintiff's total asset base was $1,180,010. This, of course, is made up of the $750,010 from share subscriptions and $430,000 from the first defendant. In my view, that submission accurately reflects the position of the plaintiff as at July 1998 and it is appropriate this be regarded as the starting point.
18 Appearing as Annexure "PK4" to the affidavit of Karageorge sworn 9 August 1999 there is a balance sheet for the year ended 30 June 1999 and a trading profit and loss statement for the same period. Karageorge makes the point that the full year financial accounts have not been completed and what is provided is "a fair and accurate statement of the financial position of the company": see par 5 of Karageorge's affidavit. It is also to be noted that the question is not whether, based upon these accounts, the plaintiff could meet any costs order likely to be made against it. The accounts are relevant insofar as they give an indication of whether or not any costs order could be met in the future. That being the case, a detailed analysis of the accounts is of limited value. Perhaps the best use that can be made of them is as an indicator of the way in which the plaintiff is trading. By that I mean, if the accounts indicate that the plaintiff is trading at a loss and there is nothing to indicate any turn around in business then that would suggest a bleak future and a likelihood that a costs order could not be met. Of course, the reverse is true - a
(Page 13)
- steadily improving balance sheet would suggest a costs order might be met. But the consideration of the balance sheet is only one factor to be taken into account in assessing what lies in the future.
19 The accounts received detailed consideration from all counsel. A number of features emerge. First, it is clear that for the year ending 30 June 1999 the plaintiff suffered a trading loss of $536,521.16. In the accounts the $430,000 payment from the first defendant to the plaintiff is offset against this loss so that the profit and loss statement shows an accumulated loss of $106,521.16. But, as was freely acknowledged by counsel for the plaintiff, the real position is that for the period up to 30 June 1999 a loss of over $500,000 was incurred.
20 The plaintiff makes a number of points about this trading loss. First, it says that it was incurred during a period when the plaintiff was attempting to establish the mobile phone business in the second defendant's stores. The plaintiff says that it incurred all the start-up costs associated with establishing a new business and a loss was to be anticipated. After all, that was why capital of more than $1 million was required before the business was commenced. The plaintiff also points to the fact that the contractual arrangement it had with the first and second defendants was terminated by those parties. The effect of this, so it was submitted, was that although the start-up costs associated with the new business had been incurred the business had not been given time to produce returns. The loss should be seen against that background. In addition, the plaintiff points to the fact that presently it is operating a business out of a store in Murray Street, Perth, which is profitable and which "is improving all the time": see Karageorge's affidavit of 27 July 1999, par 12. The plaintiff says that as at 10 September 1999 it has $102,458.28 cash at bank. It also says that it has stock-on-hand "at normal levels": see affidavit of Petrelis at par 46. This would appear to be a reference to the entry for stock-on-hand in the balance sheet for 30 June 1999. The figure appearing in the accounts is $67,504. The accounts do not disclose that there is any liability with respect to this stock. In other words, the accounts show that it is an unencumbered asset in the hands of the plaintiff. In turn, that suggests that the net liquid assets of the plaintiff are something over $160,000. Of course, as counsel for the second defendant pointed out, cash at bank may fluctuate on a daily basis. But the evidence suggests that the cash held by the plaintiff has been on the rise. It has gone from $87,292 in August 1999 (see Karageorge's affidavit of 9 August 1999, par 7) to the present figure of just over $100,000. While I accept that such figures, offered in isolation,
(Page 14)
- need to be treated with some caution it does suggest the plaintiff is trading profitably.
21 The second matter which received detailed attention from counsel was the valuation by the plaintiff of its business at $280,000. In the balance sheet this is referred to as "Asset Revaluation Reserve". It is added to the share capital of the company to produce what the defendants say is an inflated figure. The defendants also question whether the treatment of the value of the business in this way accords with proper accounting practice: see Morgan's affidavit par 10 to par 13. Certainly it would appear that the figure of $280,000 is an arbitrary assessment by the directors of the plaintiff of the value of the business. Appearing as Annexure "AP2" to the affidavit of Petrelis there is a "Market Appraisal" by a business agent of the value of the plaintiff's business. The defendants' counsel took strong exception to that valuation and, in my view, their objections are well-founded. The valuation is so imprecise as to be of no assistance whatever.
22 It is worth at this point considering what, if any, significance attaches to the present value of the plaintiff's business. Two things are to be borne in mind. First, it is not the value of the business now, but at the date the costs are to be paid which is of relevance. Secondly, applying the test used by von Doussa J, the question is whether the plaintiff is able to pay any costs order without the need to liquidate its major asset or undertaking. Looked at in that way, the relevance of the goodwill might arise if it is anticipated that the plaintiff would need to borrow to pay any costs. It may be possible to borrow against the goodwill. Of course, borrowing against goodwill is notoriously difficult no matter what valuation might properly be put on a business. To that extent it seems to me that attempting to put a value on the plaintiff's business now is of limited value and is not a matter to which great weight should be attached.
23 Having said that, it emerged on the evidence that there was some consensus between the parties as to how the plaintiff's business should properly be valued. In his affidavit, Brown sets out a methodology for valuation of businesses which retail mobile phones: see par 9, par 10 and par 11. Using this methodology, he concludes the plaintiff "would be lucky to realise the business for more than approximately $60,000". In reaching this conclusion Brown makes a series of assumptions about the way that the plaintiff is trading: see par 10. In his affidavit, Petrelis picks up this methodology and applies it to the plaintiff's Murray Street store: see par 29 through to par 36. This produces a value for the plaintiff's business of $371,124. Brown, after reaching a valuation of the business,
(Page 15)
- discounts that valuation by just over 50 per cent. Petrelis has not applied the same discount, but if he were to do so that would give a value for the plaintiff's business of something around $180,000. Insofar as the present value of the business is relevant, that figure would seem to me to be a reasonable assessment of the worth of the business.
24 The third area of dispute had to do with the value to be attached to plant and equipment which is included as an asset with a value of $464,239 in the plaintiff's balance sheet. I have already dealt with the question of whether or not this fit-out is owned by the first defendant. In my view, on the evidence presently available, the better view is that the fit-out is owned by the plaintiff. At present the fit-out is in the possession of the first and/or second defendants who refuse to deliver it to the plaintiff. The fit-out itself comprises of booths decked out in the livery of, and prominently displaying the name of, the first defendant. It is the defendants' submission that even if this plant and equipment is owned by the plaintiff it is of little value and certainly would not be worth anything like $464,239 if it was sold. For its part, the plaintiff says that it has as an asset the plant and equipment and the defendants will have to account for their use of that asset. On that basis, they say that the prime cost of the plant and equipment is the proper figure to be included in the accounts. Alternatively, they say that if they were to recover the plant and equipment from the defendants, the defendants would be in the position of requiring such plant and equipment to allow them to market mobile phones in the second defendants' stores. Given this ready market for the plant and equipment, the plaintiff says that it should be able to realise very close to the amount which is included in the accounts.
25 Once again, I have doubts as to the relevance of the value of the plant and equipment to the matters under consideration. The same reasoning as applies to the value of the business applies to the value of the plant and equipment. What is more, it is not possible for me to resolve the conflict of evidence on the affidavits. I would accept that it is unlikely that if the plant and equipment were to be sold it would yield anything like what it cost. But what it might yield I cannot assess. The best that can be said is that a significant discount on the value of the plant and equipment ought be applied when considering the accounts.
26 The final matter which arose between the parties has to do with the plaintiff's lease on the Murray Street store. In his affidavit, Donnellan calls into question whether or not the plaintiff has a lease or whether or not it operates under a licence which can be terminated at short notice. This question is addressed in the affidavit of Petrelis. Appearing as
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- Annexure "AP3" is a series of correspondence passing between Vodafone Pty Ltd (a company separate and distinct from the first defendant), the plaintiff and the landlord's agent. Based upon this correspondence, it seems to me that there is no doubt that the plaintiff will obtain an assignment of lease of the Murray Street premises which will provide it with security of tenure. I see no basis upon which doubts about the lease can call into question the plaintiff's valuation of its business.
27 In the end, it is a matter of weighing all the factors together to make an assessment of the plaintiff's likely capacity to pay at some stage in the future. On balance, I am not satisfied that there is credible testimony to the effect that the plaintiff will not be able to meet any costs order. There are a number of factors which I regard as relevant. First and foremost is the plaintiff's present trading position. The evidence suggests that the plaintiff is trading profitably and that its business is improving. It is very difficult to anticipate what the future holds for telecommunications generally and the marketing of mobile phones in particular. But there is nothing in the evidence which suggests that the plaintiff's business is likely to experience a downturn or that its profitability is likely to fall away. Indeed, there is every reason to believe that in 18 months time the plaintiff will be in a sound position and able to meet any costs order made against it.
28 Secondary to this conclusion there are a number of other factors which, when weighed in the balance, seem to me to favour the plaintiff and run counter to the making of any order for security for costs. I am not satisfied that the share structure is unsound and is likely to be undermined by any action of the plaintiff's directors. I am satisfied that the plaintiff's business has significant value so as to allow a balance sheet to cope with an order for costs, even allowing for the prospect that damages would have to be paid at the same time. I am satisfied that, in relation to the plant and equipment, there is an underlying asset not presently being used by the plaintiff which might be realised to allow any costs order to be met. Indeed, on the evidence as it stands, the plaintiff may be entitled to recover from the defendants for their use of its plant and equipment. This chose in action I would see as an asset in the hands of the plaintiff.
29 On balance then, I am not satisfied that there is credible testimony that the plaintiff would not be able to meet any costs order made against it. I would dismiss the application by the first and second defendants. I will hear the parties as to costs.
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