Kelbor Pty Ltd v Ozzz Lo Pty Ltd
[1995] FCA 791
•6 OCTOBER 1995
CATCHWORDS
PRACTICE AND PROCEDURE - Security for costs - whether credible testimony that applicant would be unable to pay the respondent's costs if respondents were successful - consideration of financial health of applicant company - threshold test not met.
Southern Cross Exploration NL v. Fire and All Risks Fire Insurance Company Ltd [1985] 1 NSWLR 114
Beach Petroleum N/L v. Johnson (1992) 7 ACSR 203
Kelbor Pty Ltd v. Ozzz Lo Pty Ltd, Robert Arthur Bool, Joyce Mary Bool and Jean Bool
No. QG112 of 1995
Cooper J., Brisbane, 6 October 1995
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
No. QG112 of 1995
BETWEEN: KELBOR PTY LTD
Applicant
AND: OZZZ LO PTY LTD
First Respondent
AND: ROBERT ARTHUR BOOL
Second Respondent
AND: JOYCE MARY BOOL
Third Respondent
AND: JEAN BOOL
Fourth Respondent
JUDGE MAKING ORDER: Cooper J.
WHERE MADE: Brisbane
DATE OF ORDER: 6 October 1995
MINUTES OF ORDER
THE COURT ORDERS THAT:
The notice of motion filed 21 September 1995 be dismissed.
The respondents pay the applicant, Kelbor Pty Ltd, costs of and incidental to the notice of motion to be taxed if not agreed.
THE COURT DIRECTS THAT:
The affidavit of Thomas Hope filed 5 October 1995 and the affidavit of Robert Arthur Bool filed 5 October 1995 be sealed up and not opened without the prior order of the court.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
No. QG112 of 1995
BETWEEN: KELBOR PTY LTD
Applicant
AND: OZZZ LO PTY LTD
First Respondent
AND: ROBERT ARTHUR BOOL
Second Respondent
AND: JOYCE MARY BOOL
Third Respondent
AND: JEAN BOOL
Fourth Respondent
CORAM: Cooper J.
PLACE: Brisbane
DATE: 6 October 1995
REASONS FOR JUDGMENT
This is an application by the respondents under s.1335 of the Corporations Law for security for costs in the sum of $24,000.00.
In Southern Cross Exploration NL v. Fire and All Risks Fire Insurance Company Ltd [1985] 1 NSWLR 114, Waddell J said (at 116) :-
"Two questions have to be decided. The first may be described as a threshold question. It is, whether, having regard to the whole of the evidence before the court, there is credible testimony by which it appears that there is reason to believe that the plaintiffs will be unable to pay the costs of the defendants if successful in their defence. If this question is answered, yes, the second question arises which is whether, in the exercise
of the discretion given to the court by the subsection, the relief sought should be granted wholly or in part or should be refused."
The approach to be taken to the threshold question was dealt with by von Doussa J in Beach Petroleum N/L v. Johnson (1992) 7 ACSR 203. His Honour said (at 204-205) :-
"Although s 1335 requires that there be reason to believe that the plaintiff corporation `will be unable to pay the costs of the defendant if successful' - and I emphasise `will be unable to pay' - the section does not, in my opinion, require that the court be satisfied, as a matter of probability, that every eventuality which could lead to eventual payment of the costs be excluded. The section would be satisfied if it appeared by credible testimony that there is reason to believe that if the defendant is successful circumstances may then exist in which the plaintiff will be unable to pay the costs.
An application for security for costs under s 1335 is likely to be made many months, perhaps a year or more, before the trial and judgment is given in the litigation. The court is required to form an opinion about what the financial position of the plaintiff will be at the time of judgment and immediately thereafter. The financial position of the plaintiff at the time when the application is made will be an important guide, but is not the sole consideration. Not infrequently a plaintiff corporation will be carrying on business. Its financial position at the end of the anticipated trial will depend not only on the outcome of the trial, and the costs likely to be associated with it, but on the success or otherwise of its business and investments in the meantime. Many uncertain factors may influence the corporation's financial position. In many of these cases the uncertainties will mean that the court will be faced with a range of possibilities, which, depending on whether fortunes run with or against the plaintiff in the meantime, extend from insolvency at one extreme and at the other extreme to more than sufficient immediate cash resources to meet the costs and other debts as they fall due. Between the extremes a variety of quite possible, but not necessarily probable, contingencies could render the plaintiff company, in the event of the proceedings being lost, unable to pay the costs in full and without delay in the ordinary course of business upon service of an allocatur.
A corporation `will be unable to pay' the costs within the meaning of the section if it can only do so if 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 v Fire & All Risks Insurance Co Ltd (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: cf Malec v J C Hutton Pty Ltd (1990) 92 ALR 545.
In my opinion the power of the court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it. This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs. The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then taken into account on the exercise of discretion, and in framing the orders of the court if the decision is to order security."
The application is opposed on the basis that it has not been shown by credible testimony that there is reason to believe that the applicant in the principal proceedings will be unable to pay the respondents' costs if the respondents are successful in their defence.
The applicant is presently trading profitably and in the 1994-1995 financial year earned a pre-tax profit of $18,768.42 on sales of $535,671.68, (compared to sales of $376,869.12 in the previous year). The gross profit from trading was $365,589.13, up $86,673.40 from the previous year. The cost of sales had increased $73,469.94 from the previous year to $165,721.85. The salary and wages not referrable to trading paid out of the business was in 1993-1994 $91,447.50 and was up $52,493.81 to $143,941.31 in the year 1994-1995 year. The total expenses in 1993-1994 were $269,178.57 and in 1994-1995 were $346,837.82, up $77,659.25.
The total current assets as at 30 June 1995 were $172,595.44, comprising for the most part $68,325.97 in receivables (trade debtors) and $104,224.73 stock on hand (inventory). The total current liabilities were $103,938.10 at that date, down from $113,975.48 in the previous year.
The respondents submit that the balance sheet figure for trade debtors makes no provision for bad or doubtful debts. However, there is no basis to suggest that a significant proportion of these receivables are irrecoverable. The applicant had total bad debts in 1993-1994 of $1,468.65 and spent $1,343.00 on debt collection against total sales of $376,869.12 and in the 1994-1995 year had bad debts of $4,182.87 with nothing spent on debt collection against total sales of $535,671.68. Further, there is no basis to suggest that the stock on hand will not be realised at historical cost or better having regard to the present trading figures being achieved by the applicant.
The figures show that for the 1994-1995 year the business was improving and that profitability is dependent upon what is taken out by way of wages and salaries by the directors. Ignoring the value given for the intellectual property, the figures show that net deficiency of assets over liabilities is being consistently and significantly reduced each year. The important measure of the health of the business is the surplus of total current assets over total current liabilities which is $68,657.34 as at 30 June 1995. This figure compares favourably with the surplus of $20,139.00 as at 30 June 1994.
I have disregarded the plant, equipment and intellectual property as a source of funds because the same would only become available on a winding up of the business which is not in contemplation.
There is nothing to sustain the assertion that the applicant's business is one dependent upon Mr Thomas Hope's personal efforts. Mr Hope deposes that he has invested time and money in the business and the report of Worrell Whitehill records that Mr and Mrs Hope have put many hours of work into the business but that does not mean that the business would fail under the management and marketing of another. Similarly, the financial position of the applicant in 1992 is of little weight when current trading figures and balance sheets are available. In his affidavit filed 5 October 1995, Mr Hope deposes :-
"3. The Applicant is continuing to enjoy improving financial results. Continuing marketing success and acceptance of the Applicant's products is underlining the improvement reflected in the abovementioned accounts which I expect to continue. In the last six months we have arranged for the produce known as `Medi Pak' to be included in the range of products sold by Franklins, Coles and Safeways.
4. When the Second Respondent was employed by the Applicant the Applicant was still in its development stage and was still actively pursuing markets for its products. The Applicant then employed myself, my wife, one full time employee and the Second Respondent on a part time basis.
5. The Applicant now employs eight people on a full time basis and casual or part time workers when required. The Applicant has also consolidated its position in the market and has secured long term orders for its products which will ensure that the sales figures for the last financial year will be improved upon in the current financial year and beyond. Budgeted turnover is 50% higher for this year than in the 1994/95 year and profits should also be higher as a result.
6. The financial statements referred to above reveal the extent of sales in the last two financial years. 85% of the Applicant's sales relate to the brand name (ie trade mark) products of the Applicant. Other sales are
on a contract basis for other suppliers."
The respondents submit that this evidence ought to be given little weight because it is unspecific and unconvincing and does not particularise the basis of the prediction. However the figures quoted and the development of a permanent workforce of eight persons, plus the obtaining of outlets through Franklins, Coles and Safeways which is not disputed, and the financial statements confirm the improved position of the applicant.
Finally, it is submitted that an adverse inference as to the financial strength of the applicant ought to be drawn because the market in which the applicant trades is competitive and there is therefore an attendant risk of failure, because the applicant has not revealed its litigation budget or how it will fund the litigation and because the applicant is operated in such a way that there is considerable scope for its directors to withdraw from the company any benefits of trading. There is no evidence to support the first contention and the evidence of Mr Hope in paragraph 7 above suggests to the contrary. There is no obligation on the applicant to disclose its litigation budget or litigation funding arrangements and non-disclosure does not of itself suggest impecuniosity. Finally, there is nothing to suggest that the directors would impoverish the applicant and allow it to be wound up in order to defeat an order for costs in the vicinity of $24,000.00.
The financial position of the applicant as appears from the current financial documents would suggest that any order for costs could be paid out of the cash flow of
the business or from the realisation of current assets or by borrowings against current assets. Having regard to the trend over the last two years of trading, the present trading figures and the evidence of consolidation and the obtaining of high profile retail outlets, there is as a matter of probability unlikely to be any dramatic adverse change to the applicant's financial position over the next year.
The respondents do not satisfy the threshold test, and the application is therefore dismissed.
THE COURT ORDERS THAT:
The notice of motion filed 21 September 1995 be dismissed.
The respondents pay the applicant, Kelbor Pty Ltd, costs of and incidental to the notice of motion to be taxed if not agreed.
THE COURT DIRECTS THAT:
The affidavit of Thomas Hope filed 5 October 1995 and the affidavit of Robert Arthur Bool filed 5 October 1995 be sealed up and not opened without the prior order of the court.
I certify that this and the preceding six (6) pages are a true copy of the reasons for judgment herein of his Honour Justice Cooper.
Date:6 October 1995
Associate
Counsel for the Applicant: Mr A Collins
Solicitors for the Applicant: Nicol Robinson & Kidd
Counsel for the Respondent: Mr J McKenna
Solicitors for the Respondent: Biggs & Biggs
Date of Hearing: 5 October 1995
Place of Hearing: Brisbane
Date of Judgment: 6 October 1995
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