JDP Australasia Pty Ltd v Pneumatic Systems International Pty Ltd - [1999] WASC 79

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: JDP AUSTRALASIA PTY LTD -v- PNEUMATIC SYSTEMS INTERNATIONAL PTY LTD & ORS [1999] WASC 79

CORAM: MASTER SANDERSON

HEARD: 17 JUNE 1999

DELIVERED : 24 JUNE 1999

FILE NO/S: CIV 1433 of 1999

BETWEEN: JDP AUSTRALASIA PTY LTD (ACN 080 673 472)
Plaintiff
AND
PNEUMATIC SYSTEMS INTERNATIONAL PTY LTD (ACN 066 203 834)
First Defendant
DAVID CASELLA
Second Defendant
HENRY SKLARZ
Third Defendant

Catchwords:

Practice and procedure - Application for security for costs - Turns on its own facts

Legislation:

Corporations Law, s 1335

Result:

Plaintiff allowed chance to bring in further evidence

Representation:

Counsel:

Plaintiff:     Mr T Darbyshire
First Defendant             :     Mr D B Shaw
Second Defendant         :     Mr D B Shaw
Third Defendant           :     Mr D B Shaw

Solicitors:

Plaintiff:     Kott Gunning
First Defendant             :     Bennett & Co
Second Defendant         :     Bennett & Co
Third Defendant           :     Bennett & Co

Case(s) referred to in judgment(s):

BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857
Espanol Holdings Pty Ltd v Banning [1999] WASC 49
JDP Australasia Pty Ltd v Pneumatic Systems International Pty Ltd & Ors [1999] WASC 14
Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 11 ACLC 1238

Case(s) also cited:

Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1
Heller Factors Pty Ltd v John Arnold's Surfshop Pty Ltd (In Liq) [1979] 22 SASR 20
Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364
Prime Holdings Pty Ltd v Kanemaru (1992) 7 WAR 308
Sentv Jet Corporation of Australia Pty Ltd (1985) 2 ACLC 397
Sydmar Pty Ltd v Statewise Developments Pty Ltd (1987) 5 ACLC 480

Tipperary Developments Pty Ltd v State of WA, unreported; SCt of WA (Murray J); Library No 960620; 31 October 1996
Yandil Holdings Pty Ltd v The Insurance Company of North America (1985) 3 ACLC 524

MASTER SANDERSON: This is the defendants' application for an order that the plaintiff provide security for costs of this action. The amount sought by way of security is $115,490. A draft bill of costs appears as Annexure "DBS3" to the affidavit of David Brian Shaw ("Shaw"), sworn 17 May 1999. The draft bill shows the defendants anticipate a 10 day trial based on a damages claim of $2,700,000. Although the plaintiff opposed the granting of any order for security, no issue was taken as to the draft bill of costs generally or the time estimated for the trial in particular.
The application is brought under the provisions of s 1335 of the Corporations Law. It was common ground between the parties that applications under this section involve a two stage process. First, it is for the defendants to establish by credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if successful in their defence. Assuming the defendants can satisfy this threshold test, then the court has a discretion as to whether or not to order security for costs. This discretion, although unfettered is to be exercised judicially: see BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857 per Anderson J at 860.
Before dealing with the application itself, I should say something of the nature of the action brought by the plaintiff against the defendants. This is a defamation action. Further and other relief is claimed but, as I understand the position, the prime cause of action is for defamation. The plaintiff is claiming that the defendants have published certain defamatory material which has adversely affected the plaintiff's reputation. On 5 May 1999 the plaintiff applied for and on 12 May 1999 was granted an injunction on certain terms and conditions. Scott J heard the injunction application and delivered reasons for his decision: see JDP Australasia Pty Ltd v Pneumatic Systems International Pty Ltd & Ors [1999] WASC 14. His Honour dealt with the facts in the following way:
"In order to understand the basis of the application, it is necessary firstly to outline some of the factual matters which lie behind the action. There is evidence to suggest that the first defendant Pneumatic Systems International ('PSI') conducted the business of developing, designing and manufacturing certain pneumatic tools largely connected with the cleaning of pipes. PSI deposes that it has applied for, and in some cases obtained, patents and trademarks for systems and products which it has developed. There is a dispute between the parties as to whether PSI will ultimately obtain patents in respect of other products where patents have been applied for. The reason for that, the plaintiff deposes, is that other companies have used similar technology for a considerable time and there is nothing novel about the system developed by PSI. That, however, is another matter for another day.
It is common ground that a director of the plaintiff, John Doubleday ('Doubleday') met a director of PSI, one David Casella ('Casella') while each was in Casuarina prison. Doubleday was at that time serving a term of imprisonment for armed robbery.
Upon Doubleday's release from prison, he and Casella set up a company JDP Australia Pty Ltd ('JDP Australia') which was incorporated for the purposes of selling the first defendant's products. For that right, JDP Australia was to pay to PSI, $750,000. It is common ground that the money was not paid. PSI eventually cancelled JDP Australia's contract and as a consequence, JDP Australia was wound up.
Following the winding up of JDP Australia Pty Ltd, the present plaintiff, JDP Australasia Pty Ltd was incorporated. That company is referred to in these reasons as 'JDP'. JDP then set about developing its own products to perform the same kind of work as the products developed by the first defendant, PSI. The evidence indicates that the business conducted by the plaintiff was successful and at the time of swearing his affidavit of 29 April 1999, Doubleday deposes to the fact that the plaintiff now employs some 30 people in Western Australia and 250 world‑wide.
JDP sought to distribute its products in England and dealt with a company Cable Management Centre Ltd with a view to distributing JDP's products. Doubleday deposes to the fact that in the course of seeking to set up that distributorship, representatives of a company incorporated in the United Kingdom, Pneumatic Systems (UK) Ltd ('PSUK') purported to disrupt the plaintiff's attempts to set up that distributorship. There is evidence to suggest that PSUK was 50% owned by the first defendant. Subject to that consideration however, there is no other evidence to suggest that the first defendant had anything to do with distributors in the United Kingdom.
There is affidavit evidence advanced for the plaintiffs to suggest that the plaintiffs also sought to enter into a distribution agreement in the United States with a company called Cummins Utilities Supplies ('Cummins'). Doubleday deposes to the fact that pursuant to their arrangements with Cummins, orders in excess of $3 million were placed with the plaintiff. Some of those orders have been met and the plaintiff has been paid the sum of $US1.1 million. The remaining order to a total of $2.7 million remains to be completed. There is evidence to suggest that Cummins does not intend to progress those orders, at least until a substantial proportion of the product which it has already purchased is disposed of. In that respect a copy of an e‑mail, being exhibit JD12 to the affidavit of John Doubleday of 29 April 1999, said to have come from Steve Hitt ('Hitt') of Cummins says:
'As regards the open purchase orders you refer to, I communicated with Annette, in early February, that we will not be accepting any more product until at least 60% of the existing $2 million plus inventory has moved. Our distribution agreement with you does not obligate us to take on an unlimited amount of inventory. We have made a substantial investment in JDP products based on sale projections that have not materialised to date. We cannot sit on an investment of this nature, nor add to it, without more movement of the product.'
From that copy e-mail it is plain that the reason why Cummins has not proceeded with the more recent order is because stock that it has already purchased, has not been sold. In that e-mail there is no suggestion that any information provided to Cummins by the defendants, has brought about Cummins' decision with respect to the further order.
The injunction which the plaintiff seeks, as can be seen from the terms referred to earlier, is directed at restraining the defendants from making certain representations to parties with whom the plaintiff is dealing. In that respect, having examined the representations and statements said to have been made by the first defendant to the parties with whom the plaintiff is dealing, the evidence leads towards the following tentative conclusions:
(a)There is no evidence to suggest that the first defendant has anything to do with any action that may have been taken in the United Kingdom by PSUK. Such evidence as there is, suggests only that persons involved with that company, a different corporate entity to the first defendant, may have been involved in communications with the plaintiff's distributor in that country. That being the case there is nothing to suggest that the plaintiff has an arguable case in relation to anything which it is said that the first defendant has done in the United Kingdom.
(b)In relation, however, to the company Cummins Diesel, there are a number of documents purporting to be signed by the second defendant Casella which may come within the categories of conduct challenged by the plaintiff in the statement of claim. In that respect, whilst the letter from Casella to the Chief Executive Officer of Cummins Diesel (being exhibit JD5 to the affidavit of John Doubleday sworn 29 April 1999) is couched in strong terms, the only area in which it is said that a false representation is made is the reference to Doubleday using 'fraudulent means' to gain advantage for his products.
Having perused the affidavits provided by all of the parties in this action, in my opinion there is little or no evidence to suggest that the plaintiff has used 'fraudulent means' to advantage the distribution of its product. In reaching that view, I have considered the evidence provided by the defendants which suggests that they have already made proper legal claim to the intellectual property which the first defendant claims to have developed. In addition I have taken into account the evidence provided by the defendants which suggests that the plaintiff acquired the intellectual property of the first defendant during the period in relation to which JDP Australia was to act as its distributor. Nonetheless, there is nothing beyond that, which in my view can justify the claim that the plaintiff has used any fraudulent means to advance the sale of its products.
The plaintiff, in a schedule, has set out the seven causes of action which it says it has against the defendants and the elements of each of those causes of action. The plaintiff says that it will seek to establish the following causes of action:
1.Defamation (libel);
2.Interference with contractual relations;
3.Unlawful interference with trade or business (including intimidation);
4.Conspiracy;
5.Injurious falsehood (incorporating slander of goods, trader libel, disparagement);
6.Misleading and deceptive conduct (Trade Practices Act ss82 and 52);
7.Groundless threats of legal proceedings contrary to s202 of the Copyright Act 1968.
I have examined each of those alleged causes of action and the elements of each. At this stage it is not possible to make any forecast as to whether any, or all of those causes of actions will be made out. In any event it is inappropriate to comment on the merits of the action at this stage of the proceedings."
Against that background, I turn first to the question of whether there is credible testimony that the plaintiff will be unable to pay the defendants' costs should it be ordered to do so. The defendants rely upon two affidavits of Shaw, one sworn 17 May 1999 and the other sworn 14 June 1999. They also rely upon two affidavits sworn by John Doubleday and filed in support of the application for the interlocutory injunction. These affidavits were sworn respectively 29 April 1999 and 3 May 1999. Shaw's affidavit of 17 May 1999 annexes a copy of a company search of the plaintiff. What that search shows is that a fixed and floating charge in favour of Northjet Nominees Pty Ltd ("Northjet") was registered on 28 October 1998. Consistent with the requirements of the Corporations Law, the search does not disclose any other matter relevant to the financial position of the plaintiff.
Appearing as Annexure "DBS2" to Shaw's affidavit is a letter from the defendants' solicitors to the plaintiff's solicitors seeking security for costs. There appears to have been no response to that letter. To my mind no adverse inferences can be drawn against a plaintiff who fails to respond to a demand for security. The onus is squarely on an applicant - in this case the defendants: see Warren Mitchell Pty Ltd v Australian Maritime Officers' Union (1993) 11 ACLC 1238. That onus cannot be shifted by the defendant challenging the financial position of the plaintiff and calling upon the plaintiff to respond. Credible testimony must be provided by the applicant.
Shaw's second affidavit sworn 14 June 1999 annexes the transcript of the proceedings before Scott J on the application for an injunction. During the course of his submissions, counsel did not refer to any specific passages from this transcript. Nor do the written submissions of the defendants highlight any particular passages in the transcript which support the defendants' position. I assume that I am supposed to draw from this transcript admissions on the part of the plaintiff that they are in a difficult financial position and that they will be unable to meet any costs order. On page 2 of the transcript (page 3 of the affidavit) counsel for the plaintiff had this to say:
"Your Honour, the plaintiff's business has virtually ground to a standstill as a result of the defendants' conduct and what is more, the plaintiff's officers feel on good grounds, in my submission, that any efforts by them now to kick start the plaintiff's business will do more harm than good because any further approaches that they make to potential distributors will only be met with a continuation of this campaign of undermining which is being conducted by the defendants."
Apart from this rather general comment, there seems to me to be nothing in the transcript which amounts to an admission as to the plaintiff's inability to meet a costs order.
In his affidavit of 29 April, and in particular in par 30 and thereafter, Doubleday deals with the consequences allegedly suffered by the plaintiff as a consequence of the first defendant's actions. In summary, he says that an order for $2,700,000 has been cancelled obliging the plaintiff to lay off 20 casual employees and 10 full‑time staff. He says the delay in the Cummins' order is costing the plaintiff $50,000 per fortnight. He denies that the company is about to go into liquidation. While this affidavit indicates that the plaintiff is under considerable financial pressure, it does not in my view discharge the burden on the defendants.
At par 20, and following, of his affidavit of 3 May 1999, Doubleday deals with the damage allegedly suffered by the plaintiff as a consequence of the defendants' action. Paragraph 20 itself is of some importance and I will quote it in full:
"On 24 December 1998 JDP borrowed $700,000 from Richard Browne‑Cooper to finance the manufacturer's sale of the order placed by Cummins Utilities Supplies which is referred to in my earlier affidavit at paragraph 21 and 22. The money was loaned at 10% compound interest per month." [My emphasis.]
This evidence is somewhat startling. As I understand what is being said, the loan from Mr Browne‑Cooper, via Northjet, attracts 10 per cent interest per month compounded. In other words, between 24 December 1998 and 24 January 1999 the plaintiff became liable to pay Northjet $70,000 in interest. If the $70,000 was not paid then on 24 February 1999 the plaintiff was liable to pay Northjet $77,000 interest, being 10 per cent on the compounded amount. My understanding of the position is clearly correct. By par 21 of his affidavit, Doubleday says that as at 3 May 1999 the plaintiff had paid Northjet $380,000 in interest. Still, the debt stood at $805,000 and the company was then liable for $80,500 per month in interest.
By any measure this is a staggering interest burden. It is a well known fact that at present commercial interest rates are as low as they have for many years. What is more it is most unusual for a commercial arrangement with a reputable lending institution to compound principal and interest on a monthly basis. The fact that the plaintiff found it necessary to enter into a lending arrangement on such terms tends to suggest that it is in a difficult financial position. What is more, matched against a much reduced return from its business activities, it tends to call into question the plaintiff's viability. Certainly it would need to have substantial cash reserves to continue to meet the interest it is liable to pay. On the other hand, if it had substantial cash reserve it would not have needed to borrow in the first place. This evidence does tend to suggest the plaintiff may not be able to meet any costs order made against it.
In opposition to the application the plaintiff filed two affidavits of David Michael Tate ("Tate"). The first sworn 3 May 1999 and the second sworn 15 June 1999. The first affidavit claims that the plaintiff has stock in the United States valued at US$1,095,000. It is further claimed the company has stock in Western Australia valued at more than $1,000,000. No evidence is provided to support this contention and no other financial material is provided. Viewed in isolation, this evidence of the plaintiff is of dubious value.
The second affidavit of Tate deals in more detail with the financial position of the plaintiff. As at the date of the swearing of the affidavit (15 June 1999) the debt owing to Northjet had increased to $1,000,000. Tate says that the plaintiff is selling some stock and that at present the company is making enough to cover its outgoings. He also says that the company has cash reserves of approximately $30,000. How that statement relates to the increase in liability for interest is not entirely clear. Paragraph 10 concludes Tate's second affidavit. It reads as follows: "For the above reasons the Plaintiff does not have the capacity to pay $115,000 by way of security for costs".
Appearing as Annexure "DMT1" to Tate's second affidavit are a balance sheet and a profit and loss statement from July 1998 through to May 1999. The balance sheet shows current assets at $3,071,935.28. Of this amount just under $1,700,000 is made up of "Total Accounts Receivable" and the majority of the rest is made up of inventory assets. Fixed assets and other assets lead to a total asset position of $3,457,903.19. Against that, there are current liabilities of just under $1,700,000. The debt to Northjet is described as a long term liability and is put at $700,000. Clearly, that understates the position by $300,000. Why the position is understated is not clear either from the body of the affidavit or from the balance sheet itself. In any event, the total liabilities are put at $2,334,556.24. Thus it is said that the company has an excess of assets over liabilities of something in the region of $1,100,000.
It is very difficult to know what to make of the balance sheet and the accounts generally. Clearly, the asset position of the plaintiff is dependent upon the realisable value of the current assets. Apart from the bald statements made in Tate's first affidavit, there is no real attempt to explain how the asset value is arrived at, nor any attempt to explain what the value of these assets might be if the action was lost. Whether or not on a fire sale there would be any excess of assets over liabilities must be problematical. Of course it is not for the plaintiff to establish that it can meet any costs order made against it. It is for the defendants to establish that the plaintiff cannot meet such an order. I think all that can be said about the evidence provided by the plaintiff is that it does not establish positively that the plaintiff will be able to meet any costs order. But, in failing to establish that, it has not undermined its position. It still remains for the defendants to satisfy the court on the threshold question.

The position is finely balanced. The evidence adduced by the defendants is limited. But in the end the decisive factor is, in my view, the charge to Northjet. The interest rate charged is such that it is difficult to see how, prior to finalisation of this action, the plaintiff will be able to either meet the interest as it accrues or discharge the debt as it exists at present. What is more, the fact that the plaintiff entered into this lending arrangement suggests that no other options were available. While that does not in itself discharge the onus which rests upon the defendant, it is a factor to be taken into account in assessing the financial position of the plaintiff. On balance, I am satisfied that the defendants have established that, if called upon to do so, the plaintiff will not be able to meet any costs order made against it.
It is then a question of discretion as to whether an order for security for costs ought be made. The plaintiff raised two matters which it said favoured my exercising my discretion against granting a costs order. First, it was claimed that the plaintiff had a strong case and, second, it was said that any costs order would frustrate the litigation. Counsel for the plaintiff submitted that these two factors, taken together, were sufficient to refuse an order being made. On behalf of the defendant, it was submitted that this was a case where there were clearly individuals standing behind the plaintiff who had not given any indication that they were prepared to provide security for costs on the part of the company, although they undoubtedly stood to benefit if the action was successful. It was the defendants' position that security should be ordered and it should be ordered by way of an undertaking from Northjet. The defendants were not prepared to accept undertakings from directors of the plaintiff.
In BPM Pty Ltd v HPM Pty Ltd (supra) Anderson J considered how exercise of the discretion was to be approached. He put the position as follows (at 861):
"The question of the likely effect of an order for security on the prosecution of the claim, as to whether it will be stultified by the order sought, raises the question whether there are people standing behind the plaintiff with the means to provide adequate security. ... The mere fact that there are creditors with the means to assist the company to give adequate security will not always be a decisive factor. The wealthy creditors may be few and the debts owed by them relatively small. The question is not simply whether there is a person who will derive some benefit from the action should it be successful and who can put up security. It is also relevant to consider whether it is reasonable that he should do so."
I think that is the position in this case. The plaintiff says that an order for costs will stultify the action. Before I reach that conclusion I would need to be satisfied that the creditors of the corporation will not provide the security and there would need to be some explanation as to why they had reached that decision. In the absence of such evidence, I could not conclude that an order for security would stultify the action.
In any interlocutory application of this nature it is virtually impossible to make any assessment of the merits of the case of either of the parties. What can be said is this. By virtue of the fact that Scott J granted an interlocutory injunction, it is clear that there is a serious question to be tried. Furthermore, the injunction granted restrains the defendants in exercise of their right of free speech. The mere fact of the granting of this type of injunction tends to suggest that the plaintiff has a strong case. But that is all that can be said. The defendants maintain that their defence is rock solid. On the material presently available I could not conclude one way or the other who is likely to succeed in the action. In my view, the merits of the case favour neither one side nor the other and it is not a factor which would influence the exercise of my discretion.
Finally, there is the question of whether or not the plaintiff's financial plight was brought about by the actions of the defendants. Although not mentioned in the plaintiff's outline of submissions, nor referred to in the defendants' submissions, it was a matter which was addressed during the course of submissions. Essentially, the plaintiff says that the present hiatus in its business affairs can be traced directly to the actions of the defendants. The defendants, for their part, say that their actions had nothing to do with the decision of the plaintiff's American client to limit its purchases. With respect, I am not sure either party approached this issue in the correct fashion.
Dealing with this question in the BPM Pty Ltd decision, Anderson J said (at 862):
"In all fairness it must be accepted that the plaintiff's financial condition before and after the transaction is particularly within the plaintiff's own knowledge. If the plaintiff wishes to resist an application for security because the defendant's wrongful actions have brought about its lack of means it must surely be for the plaintiff to establish this ... I do not mean to say that this is anything but an evidentiary onus. It is enough to say for the purposes of this appeal that if there is no evidence to show that the defendant was to blame for the plaintiff's lack of means, the plaintiff cannot say the application should be refused on that ground."
The way in which the respondent can approach this question is illustrated by the decision of Espanol Holdings Pty Ltd v Banning [1999] WASC 49. In that case the plaintiff provided affidavit evidence of its financial position immediately prior to the transaction the subject of the proceedings and contrasted this with its position after the transaction. The only logical conclusion was that the transaction had resulted in the plaintiff's diminished financial position. This was all done by reference to balance sheets. That, I think, is the way this issue ought to be approached.
In fairness to the plaintiff, it would no doubt point to the fact that all its financial woes flow from the cessation of business by its American customer. That is not seriously in dispute. What is in dispute is whether the customer ceased trading as a consequence of the actions of the defendants or not. All the plaintiff can do is put forward evidence on this matter which is credible.
Whatever might be the correct approach in this case, I am not able to conclude that the plaintiff's present financial position is entirely the result of the defendants' actions. I cannot resolve the conflict of evidence between the parties. That being the case, it does not seem to me that this is a factor to be taken into account in the exercise of my discretion.
In all the circumstances, I have reached the tentative conclusion that security for costs ought be ordered. In line with the defendants' position it would be proper to permit the plaintiff to provide this security by way of an undertaking from Northjet. However, it may be that Northjet can provide reasons why it should not provide the security and I am of the view that the plaintiff should be given the opportunity to advance such evidence. I therefore propose to publish these reasons, afford the plaintiff the opportunity to bring in further affidavit material and allow the defendants the chance to respond to that material. I will then determine the question raised by the summons.