Lindens Shoe Salons Pty Ltd v Danalir Computer Services Pty Ltd

[1992] FCA 399

3SQj 9 Z

JUDGMENT NO. .ru..ra.r.. -.-m

IN THE FEDERAL COURT OF AUSTRALIA)

NEW SOUTH WALES DISTRICT REGISTRY)	No NG 10 of 1992
GENERAL DIVISION	1

BETWEEN LINDEN'S SHOE SALONS PTY

LIMITED

Applicant

AND DANALIR COMPUTER SERVICES

PTY LIMITED

First Respondent

GARY FREEMAN

Second Respondent
DEBORAH EISENBERGER
Third Respondent
H001 WAI KEI

Fourth Respondent

EX TEMPORE JUDGMENT

EINFELD J SYDNEY 5 MAY 1992

Application is made to the Court by the respondents Danalir Computer Services Pty Limited, Gary Freeman and Deborah Eisenberger, the active respondents to this action, for an order that Linden's Shoe Salons Pty Limited (the applicant) provide security for those respondents' costs. The case for security is based upon contentions that the applicant company is to all intents and purposes insolvent. Some evidence is brought that the financial records of the applicant company demonstrate that insolvency by establishing a significant excess of liabilities over assets and a failure to record a

profit in its trading activities for some time.

In negotiations prior to the hearing of the motion, the applicant company offered to supply a bank guarantee for $15,000 by way of such security without admission of any liability to supply it. In substance the offer was rejected, although language was used to make it look as if it was in part being accepted. The rejection was on the basis that the applicant would be required to supply further security of $15,000 when the matter was set down for hearing. The respondents also sought the right to apply for further security in the event that the hearing time exceeded five days. That offer was itself said to be without any admission of liability that the recoverable costs of the respondents in the event of success are limited to $30,000.

The case arises from an action brought by the applicant against the respondents in respect of their failure to supply a computerised accounting system for the applicant's business of footwear retailing in the Newcastle district in accordance with representations as to the efficacy and suitability of the

consequence of the complete failure of the system to live up	system for the business. The applicant claims that as a
to what was promised, it has been greatly inconvenienced and in fact has lost a considerable sum of money. Particulars are given of something in the order of $80,000 to $90,000 worth of losses so far, and this is said to be only part of the losses sustained.
The filing of an application and statement of claim on 10 January 1992 means that the action is relatively new and is some distance yet from a hearing. Yet the matter has already had three directions hearings plus today's hearing against a Court rule-of-thumb standard of only four directions hearings prior to a hearing. Little progress has been made in the case so far. In fact, this application for security for costs is part of a notice of motion seeking particulars which I shall deal with at the end of the security matter. There is as yet no sign of any evidence in support or denial of the action itself.
It is therefore not possible for me to estimate the chances of success of the applicant with any degree of reliability, and I shall have to proceed on the assumption that the applicant might lose the case and become liable to pay the respondent's costs. In an affidavit supplied by the solicitor for the respondents, an estimate has been made that the matter would take five hearing days and that the party and party costs of
unsuccessful respondents would be in excess of $40,000.
It has long been established that filed company records must be scrutinised with care, and not merely superficially, to determine the nature and extent of any lack of liquidity on the part of a company or individual. Certainly records which are filed with the Australian Securities Commission supply only the most basic information. No doubt this is because that is all that is required for the purposes of the Commission which is not in business to supply broad-based information to found applications for security of costs in legal proceedings.
By looking at the records in relation to this particular company, it is possible to discern that the company must at least be trading at a line ball situation, perhaps better. If the company was trading at a loss, the losses would have to be made up from funds supplied by shareholders, or from a bank or other lending authority, or from a combination of both. There is no evidence that this is the position at the present time.
For the year to 30 June 1991, the company declared gross sales of almost $2 million and a gross profit of $783,000. Yet, it returned expenses of $914,000, showing a significant net operating loss. Looking at the expenses of the company, it is fairly clear that a significant amount has been incurred in sustaining the livelihoods of one or more of the shareholders and directors. There is nothing remotely improper about that as a matter of principle. It simply indicates that the trading of the company involves supplying jobs to some of the
shareholders. This is relevant because one of the basic grounds upon which the application for security is pressed is that the company owes significant sums to its shareholders and directors. Presumably these are funds which have been borrowed at some time or other to enable the company to remain liquid and in business, although there may also be other bases upon which these loans have been advanced. If these creditors were to put the company into liquidation, those who were also employed would lose their incomes. This seems an unlikely course for them to adopt.
The other major liability apart from directors' loans is a bank overdraft to the State Bank. The Bank is apparently satisfied, at present, to provide the company with a $100,000 floating overdraft facility. As at a couple of weeks ago, significantly less than that $100,000 had been utilised and there is evidence before the Court that the bank would at present honour a cheque of the company of up to $50,000.
The business being operated by the applicant today has been in existence for almost four decades. The applicant took over the business from a partnership some four and a half years ago and the former partners became the shareholders in the business. The business is said to be the largest women's speciality fashion shoe retail business in Newcastle. It operates three outlets in the Newcastle area and one at
Maitland. One of the company directors has given evidence in this application. She was not cross-examined to seek to
establish that there was anything in her affidavit in the matter which was untrue or exaggerated, or that there is any reason for believing that she is otherwise than a reputable businesswoman of integrity. It was not put to the director in the box that she would, if she was on the receiving end of an order for costs in a legal proceeding, prefer the repayment of her own loan to the company in excess of $400,000 before the costs order was honoured.
The jurisdiction being exercised, principally under section 1335 of the Corporations Law, requires a consideration of whether there is established any reason to believe that the applicant could or would not meet an order for costs. I see no reason at all for forming such a belief. A trading company such as the applicant will obviously have highs and lows in a trading year. It would be impossible to determine long before the hearing that at some time in the future the applicant would not be able to meet a bill for $30,000 or $40,000. It is certainly possible that this situation could arise closer to the hearing and in the light of evidence of the company's trading position at that time. It is certainly possible that in the current economic condition of this country, the applicant company, like so many others, might be forced into liquidation by someone other than the respondents in this action.
However, at the present time there seems no reason to conclude that this is on the horizon. The evidence is that the company has from time to time significant trade creditors, but it does have leeway in its overdraft in this connection. Directors
and shareholders have obviously been prepared to advance their own moneys to keep the company in business. There seems no reason to believe that, having apparently survived the recession up to now, they would be likely to give the effort away at a time when we are being told the end of the crisis is in sight.
Even if that were not so and the economic downturn in the country continues for significantly longer, there is no reason to believe at the moment that the position in relation to the applicant company will be likely to worsen in the coming months. It may not get a lot better in the foreseeable future but, on the evidence before me, it should be able to hold its own. In that event there is no reason for concluding at the present time that the company could not meet an order for costs, in particular the costs incurred to date or likely to be incurred in the near future. There is nothing to indicate that the company is likely at present to be forced into liquidation by one of its other creditors.
I regard this application as premature. It is certainly possible that as the case proceeds, security might be required of the applicant. It will be possible to consider the applicant's financial situation at the end of the current financial year in the light of the position of the litigation itself. As the various required steps in the litigation are
met prior to the hearing, it will be possible to assess the likelihood of the applicant having to meet costs, and if so
what those costs might be.
Contrary to the belief of many in the community, including lawyers who really should know better by consulting the various decisions over many years setting the law relating to security, security is not a right of respondents. It is designed to permit an examination of the likelihood of applicants bringing cases before the Court being able to meet an order for costs if required, and thereby to test the bona fides of applicants in this regard. It is obvious that there could be many impecunious parties who, with nothing to lose, start a case before the Court with little or no merit and merely for the purpose of embarrassing or causing expense to another party with whom they have had a confrontation.
The question in a genuine case such as this, and I use the word "genuine" in a sense of apparently genuine claim without any comment about its validity or likelihood of success, is not so much to guard against the possibilities of lack of bona fides. Rather, it is to ensure that the respondents should not be put to the expense of defending themselves when there is a reasonable chance that they might not recover those expenses in the event that they defend themselves successfully.
I am not yet so persuaded by the evidence in this matter. I
therefore decline to make an order for security at this time. I adjourn the application for security part heard to 9.30 am
on 13 August 1992. At that time a better assessment of the case can be made and a more likely set of circumstances may have been established indicating whether the applicant may or
may not be able to meet an order for costs in favour of the --. .- -

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Dated 5 72 A-66 I

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