More Group Pty Ltd v Ronan Czesler (Ruling No 1)
[2017] VSC 638
•18 October 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
INTELLECTUAL PROPERTY LIST
S ECI 2015 000204
| MORE GROUP PTY LTD | Plaintiff |
| v | |
| RONAN CZESLER | First Defendant |
| and | |
| JRZ TECHNOLOGIES PTY LTD (ACN 186 539 420) | Second Defendant |
| and | |
| SAADE SAADE | Third Defendant |
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JUDGE: | VICKERY J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 30 August 2017 |
DATE OF JUDGMENT: | 18 October 2017 |
CASE MAY BE CITED AS: | More Group Pty Ltd v Ronan Czesler & Ors (Ruling No 1) |
MEDIUM NEUTRAL CITATION: | [2017] VSC 638 |
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PRACTICE AND PROCEDURE – Security for costs – Whether threshold test met by Defendants – Exercise of the discretion – Effect of delay in making the application for security – Effect of forewarning of the making of an application - Whether quantum to be assessed from commencement of proceeding or at time of making application for security - Quantum of security.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Rivette | HWL Ebsworth Lawyers |
| For the First and Second Defendants | Mr C D Freeman | Braddon Marx Lawyers |
| For the Third Defendant | Mr P Creighton-Selvay | Navado Lawyers & Solicitors |
HIS HONOUR:
By Summons filed on 18 August 2017, the First and Second Defendants (Ronen Czesler and JRZ Technologies Pty Ltd) seek orders for security for costs against the Plaintiff (More Group Pty Ltd).
By Summons dated 23 August 2017, the Third Defendant (Dr Saade Saade) also seeks orders for security for his costs from the Plaintiff.
The background to these applications can be summarised as follows:
(a) The proceeding was issued in the Intellectual Property List of the Court;
(b) Issues have arisen in relation to intellectual property between the Plaintiff and the Defendants, who are competitors in the market place;
(c) The subject matter of the intellectual property is claimed to be materials associated with presentations and programs designed by the Plaintiff relating to dental implants, prosthetic and grafting products and other oral health products. The Plaintiff claims to be the owner of or entitled to customer lists, product lists, price lists, records and systems, lecture and seminar slides and materials developed for the operation of its business.
Legal Principles
Threshold test of the jurisdiction
Rule 62.02(1) of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (the ‘Rules’) relevantly provides that:
(1) Where—
(b) the Plaintiff is a corporation … and there is reason to believe that the Plaintiff has insufficient assets in Victoria to pay the costs of the defendant if ordered to do so;
…
(f) under any Act the Court may require security for costs—
the Court may, on the application of a defendant, order that the Plaintiff give security for the costs of the defendant of the proceeding and that the proceeding as against that defendant be stayed until the security is given.
Section 1335(1) of the Corporations Act 2001 (Cth) (the ‘Act’) provides that:
(1)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.
As observed by a two-member bench of the Court of Appeal in Livingspring Pty Ltd v Kliger Partners[1](‘Livingspring’) the wording of r 62.02 differs from s 1335. However, the principles established in relation to both the rule and the statutory provision apply equally.[2]
[1]Livingspring v Kliger (2008) 20 VR 377, 381 [10].
[2]Australian Institute (Vic &Tas) Pty Ltd v Australian Institute of Fitness (NSW) Pty Ltd & Ors [No 2] [2016] VSC 625 [5].
In Beach Petroleum NL v Johnson[3] (‘Beach Petroleum’) von Doussa J said:[4]
An application for security of 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 successfulness 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.
…
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.
[3][1992] FCA 110; (1992) 7 ACSR 203.
[4]Ibid 205 [8], [10].
The approach of von Doussa J in Beach Petroleum was followed by Einstein J in Idoport Pty Limited v National Australia Bank Limited [5]. In that case, Einstein J noted that where the Court is considering an application for security for costs under s 1335, the Court is required to form an opinion about what the financial position of the applicant will be at the time of judgment.[6] Of necessity, therefore, is the requirement to make a judgment about future events. As von Doussa J said in Beach Petroleum[7] (at 205):
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.
(citations omitted)
[5][2001] NSWSC 744. See also Strategic Financial Project Services Pty Ltd v Bank of China Ltd [2009] FCA 604 [13], [15] (Moore J).
[6]Ibid [58].
[7]Beach Petroleum 205 [9].
These principles have been adopted and applied in Victoria.
In Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd[8] (‘Epping Plaza’) Winneke P and Phillips JA observed that ‘the justification for the statutory rule is that the defendant, not being a voluntary litigant, deserves to be protected from the consequences of limited liability.’[9] Their Honours said further in this regard:[10]
The evident purpose behind statutory provisions such as s 1335 is to draw a distinction between corporate plaintiffs and individual plaintiffs. Thus, whilst it may be said that "[t]the basic rule that a natural person who sues will not be ordered to give security for costs, however poor he is, is ancient and well established" (Pearson v Naydler[1977] 1 WLR 899 per Megarry VC at 902, it is also true that "the whole concept of the general practice with regard to companies is just the opposite. It is the poverty of the company that attracts the power": Rajski v Computer Manufacture & Design Pty Ltd[1982] 2 NSWLR 443 at 449, per Holland J. Indeed, as Megarry VC said in Pearson, at 904-5:
In the case of a limited company, there is no basic rule conferring immunity from any liability to give security for costs. The basic rule is the opposite: section 447 [the equivalent of s 1335 of the Corporations Law] applies to all limited companies and subjects them all to the liability to give security for costs. The whole concept of the section is contrary to the rule developed by the cases that poverty is not to be made a bar to bringing an action. There is nothing in the statutory language (the substance of which goes back at least as far as the Companies Act 1862, s 69) to indicate that there are any exceptions to what is laid down as a broad and general rule for all limited companies. Nor is it surprising that there should be such a rule. A man may bring into being as many limited companies as he wishes, with the privilege of limited liability; and section 447 provides some protection for the community against litigious abuses by artificial persons manipulated by natural persons. One should be as slow to whittle away this protection as one should be to whittle away a natural person's rights to litigate despite poverty.
[8] [1999] 2 VR 191.
[9]Ibid 195 [14].
[10]Ibid 195 [13].
As to the mechanics, the first question to be addressed is whether the threshold condition for the exercise of the power is satisfied, that is, whether there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful. That jurisdictional condition must be satisfied before the discretionary power to order security for costs is enlivened.[11]
[11]See FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 156 FLR 116, 122 [21] (Pidgeon and Owen JJ), cited in Livingspring Ibid 381 [11].
As further observed by the Court of Appeal in Livingspring:[12]
The language of the statutory test is clear. The court must address the question which the section poses:
Is there reason to believe that the corporation will be unable to pay the defendant’s costs?
[12] Livingspring 381 [14].
The Court added:[13]
The phrase “reason to believe” is the touchstone of the jurisdiction. It requires a rational basis for the belief – and no more.
[13]Ibid 382 [15].
The Court of Appeal said further in Livingspring that:[14]
The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a “real risk”.) A risk assessment is, of necessity, imprecise. The section calls for a practical, common sense approach to the examination of the corporation’s financial affairs.
16 It may be said, with justification, that this is a low threshold. But the test simply reflects the policy of the provision, which is to protect a defendant against the risk of the plaintiff corporation’s impecuniosity. (Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507, 513-4.)
The provision equips the court with the means to require that the defendant be secured against that risk.
…
21 While the satisfaction of the threshold condition in the relevant sense ‘calls for’ the exercise of the power, this does not alter the fact that the burden rests on the defendant, from first to last, to persuade the court that the order for security should be made.
[14]Ibid 382-3 [15]-[16], [21].
As to the standard of proof, the Court of Appeal observed in Livingspring that a prima facie case is sufficient to meet the test.[15] The applicant for security bears the onus, but it is an onus merely to demonstrate, by credible testimony, that if it is successful in the proceeding, and the plaintiff is ordered to pay the costs of the defendant, there is reason to believe that it will be unable to do so.
[15] Education Equity Pty Ltd v Austock Funds Management Pty Ltd [2010] VSC 636 [11].
The matter was also considered by the then Full Court of the Supreme Court of Western Australia in FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd,[16] where, in explaining what a party must do to satisfy the first element of s 1335, Pidgeon and Owen JJ said:[17]
... The applicant is required to do no more than place on the record credible testimony and the exercise of the court at this stage is in judging the testimony and its quality rather than seeing if a matter has been proved by inference. The company, at this stage, is not being asked to explain or contradict something for the purposes of avoiding an inference being drawn. If there is credible testimony, then the court has jurisdiction to make the order and a company which called no evidence to show it could meet a costs order would run the risk of having an order made against it.
Exercise of discretion
[16](2000) 156 FLR 116; [2000] WASCA 69; (2000) 156 FLR 116.
[17]Ibid 119 [11].
Once the court has jurisdiction there is an unlimited discretion.[18]
[18]Ibid 122 [21].
In this regard, and returning to Epping Plaza, Winneke P and Phillips JA observed:[19]
[19]Epping Plaza 195–6 [16]–[17].
The authorities tend to suggest that the discretion given to the court by s 1335 to make an order for security against an impecunious company is "open ended" and not to be fettered by rigid guidelines or principles ... As Phillips JA pointed out in Ariss & Anor v Express Interiors Pty Ltd [1996] 2 VR 507 at 512 ff, various courts in this country have frowned upon the statement made by Street CJ in Buckley, at 305, that he "prefer[red] to regard the discretion conferred by the section as being one which should be exercised merely with a predisposition in favour of the defendant party" as an impermissible fetter upon the court's open ended discretion. Having analysed these criticisms, Phillips JA expressed the view in Ariss, at 514, that:
Although of course, like any discretion conferred upon a court, it must be exercised judicially, the discretion conferred by s 1335 should be accepted now as altogether unfettered, but upon the footing that the very fact of which there must be credible evidence in order to enliven the jurisdiction in the first place [that is, the existence of credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant] may itself be a factor, even a most significant factor, in the exercise of the discretion.
Consistently with this view, there may be cases where, in the exercise of its discretion, the Court will regard the fact that those who stand behind an impecunious company have bound themselves to assume responsibility for paying the defendant's costs as a relevant factor in favour of the plaintiff; see for example Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 (Clarke, J), especially at 545; Erolen Pty Ltd v Baulkham Hills Shire Council (1993) 10 ASCR 441, especially at 456 per Powell J; KP Cable Investments Pty Ltd v Meltglow Pty Ltd(1995) 56 FCR 189. But that is as far as it goes; the existence of such an offer to assume personal liability for an order for costs if made against the company, or even a formal guarantee to like effect, cannot be determinative in itself of the application for security, or else the discretion, which is otherwise conferred in general terms, will be impermissibly circumscribed. In Intercraft Cabinets Pty Ltd v Sampas Pty Ltd(1997) 18 WAR 306 the Full Court in Western Australia was concerned with an undertaking to accept personal responsibility for costs against an impecunious company, and after reviewing the authorities Malcolm CJ, speaking for the Court, firmly espoused the view (at 316) that "the availability of an undertaking of personal liability by the persons who stand behind the company is no more than a factor, albeit an important factor, to be taken into account in the exercise of discretion". With respect, that is our view too.
Quantum of the security
The statutory rule provides for ‘sufficient security to be given’. This is the limit of the guidance. It has as its apparent purpose the object of fixing the quantum of security for costs so as to arrive at a sum which ought to be sufficient to provide a satisfactory measure of security to the defendant for the costs it will incur in defending the action.
This involves, amongst other things, an assessment, necessarily broadly based on what are the costs likely to be ordered in favour of a successful defendant at the conclusion of the proceeding. Competing estimates may be presented which need to be considered and weighed in the balance to arrive at a determination as to what quantum of security will be ‘sufficient’ to achieve the statutory purpose on the one hand, and not be unrealistic or oppressive on the other.
The quantification of costs in an application for security for costs does not involve the court conducting a taxation. In Allstate Life Insurance Co v ANZ Banking Group Ltd (No 19)[20] Lindgren J explained:[21]
The amount is in the discretion of the Court and should be such sum as the Court thinks just, having regard to all the circumstances of the case. Obviously, a factor of prime importance will be the amount of a respondent's costs which an applicant, if unsuccessful, will be ordered to pay to the respondent if the proceeding continues to a determination by the court. But the estimation of that amount involves many factors, some of them imponderable. Generally speaking, it cannot be assumed that a failure by an applicant will be on any particular basis. Moreover, the course of events down to and during the trial may be relevant to the particular order for costs to be made. The assessment of the work which will be done in the respondent's interests is also difficult.
[20](1995) 134 ALR 187; [1995] FCA 1778.
[21]Ibid 197 [42].
To similar effect are the remarks of Nicholas J in Ashington Capital Pty Ltd v Parissen Capital (Project X) Pty Ltd:[22]
In my opinion it is only possible to take a broad brush approach to the exercise of discretion in this case. I have not attempted the detailed task of a costs assessor in order to explain the assessment of quantum of security which I propose to order. The following observations indicate my impression derived from the evidence as to the approach to be taken in respect of the various categories of costs proposed by the first defendant for consideration.
[22][2012] NSWSC 410 [18].
In Farmitalia Carlo Erba v Delta West[23] Heerey J listed a number of non-exhaustive factors which may helpfully be considered in the exercise of the discretion. I set out below one factor relevant to the present case:[24]
[23](1994) 28 IPR 336.
[24]Ibid 345–346.
Finally, even accepting that the party seeking security has provided acceptable evidence of an estimate of costs, there is a likelihood that in fact that amount would be reduced by the taxing officer. To quote again from Griffiths LJ in Procon (GB) Limited v Provincial Building Co Limited, supra, at 379f:
Allowance will have to [sic] made for the unquenchable fire of human optimism and the likelihood that the figure of taxed costs put forward would not emerge unscathed after taxation. It is to be observed in the present case that it was this element that led Bingham J to make a substantial discount in the order of 19%.
Bingham J had noted at 372j that:
... in very substantial taxations, such as this one will be, inevitably [the bill] will be taxed down and I have no doubt that the plaintiffs' solicitors would be astounded if their bill survived without any reduction. [It was the plaintiffs who were seeking security against the defendants’ counterclaim]
…
I think in the present case it would be proper to make an allowance for this last mentioned factor and I do so by reducing the sum of $255,000 to $230,000. …
(citations omitted)
Delay and Security for Past Costs
In Oswal v Australia and New Zealand Banking Group Ltd[25] (‘Oswal’), Sifris J analysed the issue of delay in the making of the application for security and its companion issue, that of liability for costs already incurred (past costs) at the time of making the application for security.
[25][2016] VSC 52.
His Honour observed in Oswal:[26]
Delay is usually an important factor, and often a decisive factor in deciding whether to order security and in particular security for past costs. The main reason is that by such delay, the defendant has permitted the plaintiff, during the period of the delay, to incur costs, and often substantial costs, that may not have been incurred had the application been made promptly. If a plaintiff proceeds on the assumption that no such application will be made, it may be harsh and unfair to require security for such past costs. There are, of course, or may well be, other considerations which will excuse delay or balance the assumed and presumed prejudice that inevitably arises out of such delay.
[26]Ibid [34].
Relying upon a review of relevant authorities in Oswal,[27] Sifris J distilled the following principles:
(a)Delay in making an application for security for costs, or further security for costs, is a most important and often a critical factor, essentially because it unfairly allows a plaintiff to proceed and incur costs on the assumption that no application is to be made.
(b)Delay is more significant, and often critical, in relation to security for past costs although it may also be a relevant factor in relation to security for future costs.
(c)Prejudice to a plaintiff is assumed and presumed because of the delay. However, each side may adduce evidence in support of, or against, such prejudice.
(d)Despite delay, security may be granted for past costs (in whole or in part) where it is established that there is some conduct that negates the prejudice, harshness, or oppression, that is otherwise apparent when there is a delay and substantial costs have been incurred. The Court retains a broad discretion which requires all relevant facts and circumstances to be taken into account. Each case must be decided in accordance with its own peculiar facts and circumstances.
[27](In each case with citations omitted) Colorado Products Pty Ltd (In Prov Liq) [2013] NSWSC 611; LRSM Enterprises Pty Ltd v Zurich Australia Insurance Ltd [2013] NSWSC 324; Narradine Pty Ltd & Anor v Mascot Steel & Tools Pty Ltd & Ors [2012] NSWSC 385; Chapel Road Pty Ltd v Australian Securities & Investments Commission (No 2) [2012] NSWSC 511; Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd (No 5) [2011] FCA 1041; Idoport Pty Ltd v National Australia Bank & Others; Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176; Karl Suleman Enterprizes Pty Ltd (in Liq) v Pham and Ors [2010] NSWSC 886; Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2009] NSWSC 563; and Crypta Fuels Pty Ltd & Anor v Svelte Corporation Pty Ltd & Ors [1995] 19 ACSR 68.
To these observations, I would respectfully add the following considerations which are particularly relevant to the case at hand:
(i)It is well established that an application for security for costs should be brought promptly and, where that is done, an order for security for costs may extend not only to future costs but also to costs already incurred. See: Colorado Products Pty Ltd (In Prov Liq) [2013] NSWSC 611 (Black J);
(ii)If there is delay in making application for security, this may result in the application for security not being granted. See: Australian Equity Investors, An Arizona Limited Partnership v Colliers International (NSW) Pty Ltd (No 5) [2011] FCA 1041 per Cowdroy J. Or the delay may have a bearing on whether the security ordered may extend only to future costs or in addition include costs already incurred. See: Narradine Pty Ltd & Anor v Mascot Steel & Tools Pty Ltd & Ors [2012] NSWSC 385 at [22] (Black J);
(iii)The longer the delay, and the more costs incurred in the interim, the more difficult it is likely to be to persuade a court that an order for security for the full costs, including the past costs, would not be unjust or oppressive See: Chapel Road Pty Ltd v Australian Securities & Investments Commission (No 2) [2012] NSWSC 511 at [22] (Schmidt J); and Bryan E Fencott and Associates Pty Ltd v Eretta Pty Ltd and Ors 16 FCR 497 at 514 (French J, as he then was);
(iv)However, evidence of delay does not necessarily render an application for security fatal on its own. The passage of time is merely one factor to be taken into account in the balancing exercise undertaken by the Court. See: Idoport Pty Ltd v National Australia Bank & Others [2001] NSWSC 744 at [70] (Einstein J);
(v)In the cases where, despite delay, an order has been made for the provision of security, there have been present at least one and usually two other factors. One is that the hearing or resumed hearing was not immediately imminent. The other is that there has been some forewarning foreshadowing an application for security for costs. See: Crypta Fuels Pty Ltd & Anor v Svelte Corporation Pty Ltd & Ors [1995] 19 ACSR 68 at 71 (Lehane J);
(vi)In this era of the overarching purpose and case management requirements of the Civil Procedure Act 2010 (Vic), where the efficient use of judicial resources has become increasingly important, a late application for security which brings about the end of the proceeding or a stay in the proceeding pending payment of the security, would result in judicial resources already devoted to the case potentially being wasted or a delay in prosecution of the case to trial. See: Christou v Stanton Partners Australasia Pty Ltd [2011] WASCA 176 at [21] (Newnes J); and
(vii)Finally, I would observe that the award an order for any past costs incurred in a proceeding is entirely within the court’s discretion. See Southern Cross Exploration NL v Fire and All Risks Insurance Co Ltd (1985) 1 NSWLR 114 (Waddell J).
Factual Case of the Defendants on Threshold Issue
By way of summary, the Defendants relied upon the following principal facts which they maintained should found a belief that, if the Plaintiff lost at trial, it would be unable to pay their costs:
(a) The Plaintiff has paid capital of $2;
(b)The Plaintiff is not the registered proprietor of any land in New South Wales or Victoria;
(c)There have been three written requests for the Plaintiff to produce evidence of its assets and liabilities on 18 August 2016, 5 July 2017 and 25 July 2017. None of the requests have been complied with. It was submitted that the continuing non-disclosure raises a very strong inference that the Plaintiff is not co-operating because it does not have sufficient assets to meet costs orders. It was contended that it would be otherwise extraordinary if a Plaintiff, knowing that a security for costs application was being brought, held back documents to establish that it can meet any costs orders;
(d)The Plaintiff has no written exclusive distribution agreement for its principal product range (the ‘MIS products’). Ongoing distribution of such products underpins the basis of its claim for significant damages. There is also evidence of predatory activity on the part of a corporation in the relevant market which exposes the Plaintiff to the risk of a takeover. Further, the supplier of the MIS products has already been taken over by this corporation;
(e)On 4 September 2015 the First and Second Defendants made a claim in writing for security in the sum of $275,000;
(f)On 11 September 2015, the Plaintiff offered security in an amount of only $30,000;
(g)On 15 September 2015 the Third Defendant made a claim in writing for security, following which no offer to provide security was forthcoming from the Plaintiff;
(h)The First and Second Defendants foreshadowed their application for security by letter dated 15 September 2015. The Third Defendant also raised the issue of security for costs by a letter dated 15 September 2015;
(i)A great deal of the costs of the proceeding have been expended prior to the making of this application by summons issued 18 August 2017 (by First and Second Defendants) and by summons dated 23 August 2017 (by the Third Defendant).
Factual Case of the Plaintiff on Threshold Issue
The Plaintiff submitted that it was in a sufficiently strong financial position to meet any payment of costs in favour of the Defendants, should it ultimately be ordered to do so.
In confidential exhibits relating to its financial position, which were produced to the Court during the application, the Plaintiff submitted that a strong cash flow was evidenced, this being the Plaintiff’s principal asset.
The Plaintiff submitted that, based on the 2015 and 2016 financial years for the period ending in each case on 30 June, a consistently solid income stream was demonstrated. On the basis of this record, it was contended that the Court should be confident that the income stream would continue to and beyond trial to generate sufficient cash reserves to meet any adverse costs order.
The Plaintiff also pressed delay in the making of the applications for security.
Conclusion on Threshold Issue
However, in my opinion, the facts of this case provide a rational foundation for concluding that there is reason to believe that the plaintiff corporation will be unable to pay the costs of the applicant Shareholder Defendants if they are successful in their defence of the proceeding. I arrive at this conclusion based on the following findings of fact, which I accept as established.
(a)The Plaintiff is a company registered in Victoria. However, it has issued shares with paid-up capital of only $2;
(b) The Plaintiff does not own or have any interest in any real estate;
(c) The parties are competitors in the marketplace in a narrow market;
(d)The principal asset of the Plaintiff is its cash flow. However, this cash flow in turn is dependent upon supply to it of the principal products used in its business, namely the MIS products. Further, there is no written agreement in place in relation to the supply of these products to the Plaintiff which has been produced and there is no evidence of the terms of any supply agreement, whether oral or to be implied;
(e)There is evidence of a party in the marketplace which has engaged in take-over activity of like businesses, and has in fact taken over the Plaintiff’s supplier of the MIS products;
(f)These factors place the Plaintiff in a somewhat vulnerable financial position in respect of its cash flow, which gives rise to a degree of uncertainty as to its financial position when the trial is due to commence, which is a year away sometime in 2018;
(g)The Plaintiff has refused to supply financial information to the Defendants prior to the hearing of the applications for security, and ultimately did so only with the provision of limited confidential financial information during the hearing of the applications. Although there may have been commercial reasons for refusing to provide this financial information to a competitor at an earlier time, given the gravity of the applications and the relative ease with which they could have been disposed of had the Plaintiff had further evidence of the strength of its financial position, and given the requirements of the Civil Procedure Act 2010 (Vic), which, inter alia, imposes on parties the overarching obligation to facilitate the just, efficient, timely and cost‑effective resolution of the real issues in dispute, including by agreement,[28] I am drawn to the conclusion that there is none beyond that which the Plaintiff produced during the hearing of the applications;
(h)As to the confidential financial information provided during the hearing of the applications, this was confined to a Commonwealth Bank statement to 30 June 2017; and balance sheets for the years ending 30 June 2015 and 30 June 2016 which were not signed by any accountant. The result is that only a limited picture of the financial position of the Plaintiff has been presented to the Court. This was not improved by the failure put on any affidavit as to the financial circumstances of the Plaintiff, by any director of the Plaintiff.
(i)Finally, added to these factors, are the mounting costs of this litigation, which are becoming substantial for all parties, including both groups of Defendants.
[28]Civil Procedure Act 2010 (Vic) ss 7(1), (2)(b).
In the present case, the evidence put on by the Defendants seeking security on the question of the likely financial position of the Plaintiff is credible evidence. In my opinion, it establishes reason to believe that events could occur before the conclusion of these proceedings which would render the Plaintiff unable to pay the costs of the Defendants in the manner contemplated by s 1335.
It is also possible that the Plaintiff might then be able to pay the costs. However, as in Beach Petroleum, the Defendants in this case, and subject to the discretionary factors addressed below, are entitled to have protection under the section for the adverse possibility.[29]
[29]See Beach Petroleum 205-6 [10]-[11].
Discretionary Factors
As to delay, no submission was made, and no evidence was advanced by the Plaintiff that it was prejudiced by the delay. For example, there is no evidence of what the Plaintiff has spent on the proceeding which it would not have spent had the applications for security been made earlier.
Written requests for the provision of security for costs were made at a relatively early stage of the proceedings, which were issued on 1 June 2015.
By letter from the solicitors for the First and Second Defendants to the solicitors for the Plaintiff dated 4 September 2015, the Plaintiff was advised:
In the circumstances, we are instructed to request your client provide security for our client’s costs by way of bank guarantee in the sum of $275.000.00.
Please advise by 10 September 2015 whether your client is prepared to do so. If not, then we have instructions to apply to the court for appropriate orders.
This letter included a detailed table which set out how the sum claimed of $275.000.00 was calculated and arrived at.
On 11 September 2015, the Plaintiff offered the First and Second Defendants security in an amount of only $30,000.
By letter to the solicitors for the Plaintiff dated 15 September 2015, the First and Second Defendants advised that the offer of $30,000.00 was rejected and foreshadowed the filing of a Summons seeking appropriate Orders that the Plaintiff provide security for costs.
By letter from the solicitors for the Third Defendant to the solicitors for the Plaintiff dated 15 September 2015, the Plaintiff was advised:
Security for costs: Our client considers that your client, as a corporate plaintiff should provide security doe costs pursuant to rule 62.02 of the Supreme Court (General Civil Procedure) Rules 2005.
These written requests for security were buttressed by requests being made of the Plaintiff to produce evidence of its assets and liabilities on 18 August 2016, 5 July 2017 and 25 July 2017 in the context of the foreshadowed applications for security for costs.
By these means, the Plaintiff was forewarned from a relatively early date after the issue of the proceedings of the likelihood of the Defendants, or one or other of them, making application for security for costs. This likelihood was furthered by the letters sent to the Plaintiff’s solicitors between 18 August 2016 and 25 July 2017. In these circumstances, the fact that the actual making of the applications for security was the subject of some delay in this case does not work to disqualify any of the Defendants from being successful in their applications.
Another factor is that the trial of the proceeding is not immediately imminent. It is in fact some year away in all likelihood. Further costs will be incurred by all parties in preparation for this event.
Further, the Plaintiff in this case did not seek to assume the burden of establishing that an order for security would impose on it such a financial burden as would stultify the litigation, because the Plaintiff company, and those behind it and who stand to gain from the litigation, if successful, would be without means to prosecute the case if an order for security was to be made. Had it done so, it would have been required to establish the facts which make good that assertion before the discretion could have been exercised in its favour.[30]
[30]Livingspring 383 [22].
The threshold jurisdictional question must therefore be answered in favour of the applicant Defendants.
Whether to Assess Quantum from Commencement of Proceeding to Include Past Costs
A question in this application is whether the quantum of the security to be ordered should include costs incurred by the Defendants from the commencement of the proceeding (‘Past Costs’) or should be confined to future incurred costs (‘Future Costs’).
In coming to this determination, I apply the legal principles earlier canvassed.
The proceeding was commenced on 1 June 2015. Reference is made to the findings above as to the Plaintiff being forewarned from a relatively early date after the issue of the proceedings of the likelihood of all Defendants making application for security for costs.
Further, there is no evidence of prejudice which has been advanced by the Plaintiff that it has in any way altered its position by reason of the Defendants making their applications when they did by their summonses filed 18 August 2017 (First and Second Defendants) and by his summons dated 23 August 2017 (Third Defendant).
In the exercise of the Court’s discretion, I am satisfied that the sums claimed for security for costs should be ordered in favour of all Defendants, and without reduction, from the commencement of the proceeding so as to include Past Costs incurred by them.
Quantum of the Security
I now turn to the question of quantification of the security to be provided.
Again, in coming to this determination, I apply the legal principles earlier canvassed.
The Plaintiff did not advance any evidence as to an appropriate sum to be provided for security, save that it was submitted by counsel that $80,000 for each group of Defendants up to trial (a total of $160,000) would not be inappropriate if security was to be ordered and on the basis that past costs were deducted.
Quantum of Security – First and Second Defendants
On 19 July 2017, the First and Second Defendants sent a letter to the Plaintiff’s solicitors requesting security for costs in the revised sum of $346,500.00.[31]
[31]Affidavit of Mark Secivanovic of 18 August 2017.
Description Amount Fees: (a) paid to ClarkeKann Lawyers $210,000.00 Our fees: (b) of these proceedings incurred to date $53,000.00 (c) to attend on disclosure, interrogatories and inspection of documents $10,000.00 (d) to proof witnesses and brief counsel to advise on evidence $20,000.00 (e) of pre-hearing Motions, including security for costs, giving of discovery and answers to interrogatories $10,000.00 (f) to attend pre-hearing conferences with witnesses $10,000.00 (g) to instruct counsel at trial including preparation $30,000.00 Counsel’s fees: (h) to advise on liability, quantum and evidence $10,000.00 (i) to settle and appear on pre-hearing Motions $15,000.00 (j) to settle affidavit evidence $5,000.00 (k) to attend to preparation for trial and pre-hearing conferences with witnesses $20,000.00 (l) to appear at trial $25,000.00 Other fees including: (m) expert fees $25,000.00 (n) witness expenses $10,000.00 (o) transcript fees, filing fees and miscellaneous expenses $15,000.00 Sub Total: $468,000.00 Less approx. 33% on a party/party basis: $315,000.00 GST: $31,500.00 Total $346,500.00
Save for one item, I accept this table as being a correct estimate for present purposes, based on the evidence of Mr Secivanovic in his affidavit of 18 August 2017. It makes provision for past costs, but allows for a deduction of 33% for costs payable on a party/party basis, which I accept.
The one item which I do not accept for present purposes is the amount claimed by the First and Second Defendants for past costs represented as $210,000.00, which I find was calculated on a solicitor client basis, which is said to have been paid to ClarkeKann Lawyers prior to the present solicitors for the First and Second Defendants assuming the role. Even taking into account the basis on which these past costs were calculated, there is a very large disparity between this sum and the amount sought by the Third Defendant in the sum of $60,000 for past costs, which I find includes a 33% deduction for costs claimed on a party/party basis. No witness was called from ClarkeKann Lawyers or any costs consultant to justify the sum of $210,000 claimed by the First and Second Defendants. Further I accept the evidence of Mr Kake in his affidavit of 23 August 2017 sworn on behalf of the Third Defendant, and find that an allowance of $70,000 (being $60,000 plus the sum of $10,000 to allow for there being two Defendants) for past costs on a party/party basis is a more reasonable sum to reflect in the order for security which should be made in favour of the First and Second Defendants.
Further, I am only prepared to make and order for security up to trial. The result is that I will deduct $40,000 in respect of the following items of claimed costs:
(l) to appear at trial $25,000 (Counsel);
(n) witness expenses $10,000 (which I infer are for the trial); and
(o) transcript fees (for the trial), in respect of which I will deduct $5,000.
This calculation yields a total of $468,000 – $210,000 (disallowed past costs) - $40,000 (disallowed trial costs) = $218,000 - 33% (for costs payable on a party/party basis) = $145,334.
To this figure is added $70,000 in respect of the past costs appropriately claimed by the First and Second Defendants on a party/party basis.
This yields a total calculation of $215,000.
An order for security to trial against the Plaintiff in favour of the First and Second Defendants will be made on this basis.
Quantum of Security – Third Defendant
By letter to the Plaintiff’s solicitors dated 5 July 2017, the Third Defendant sought payment of security for costs in the sum of $242.000.00.[32]
[32]Affidavit of Mark Secivanovic of 18 August 2017.
Description Amount Estimated Legal Fees (a) proceedings to date $60,000.00 (b) to attend to issue subpoena, request further discovery and interlocutory application to administer interrogatories $15,000.00 (d) to proof witnesses and brief counsel to advise on evidence $20,000.00 (e) to attend pre-hearing conferences with witnesses $5,000.00 (f) to instruct counsel at trial including preparation $25,000.00 Counsel’s fees: (a) to advise on liability, quantum and evidence $5,000.00 (b) to settle any interlocutory applications $5,000.00 (c) to attend to preparation for trial and pre-hearing conference with witnesses $25,000.00 (d) to appear at the trial $25,000.00 Other fees including: (a) expert reports $10,000.00 (b) witness expenses $10,000.00 (c) transcript fees and miscellaneous expenses $15,000.00 Sub Total $220,000.00 GST $22,000.00 Total $242,000.00
I accept this table as being a correct estimate for present purposes, based on the evidence of Mr Kake in his affidavit of 23 August 2017. It makes provision for past costs, but is estimated on a ‘Standard Basis’ which, as I take it, allows for a deduction of 33% for costs payable on a party/party basis.
However, I am only prepared to make and order for security up to trial. The result is that I will deduct $40,000 in respect of the following items of claimed costs:
Counsel (d) to appear at trial $25,000;
Other fees witness expenses (b) $10,000 (which I infer are for the trial); and
Other fees transcript fees (c) (for the trial), in respect of which I will deduct $5,000.
This calculation yields a total of $220,000 - $40,000 (disallowed trial costs) = $180,000.
An order for security to trial against the Plaintiff in favour of the Third Defendant will be made on this basis.
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