Poche Engineering Australia Pty Ltd v Hitachi Construction Machinery (Australia) Pty Ltd & Anor (No.3) - [2010] FMCA 666

FEDERAL MAGISTRATES COURT OF AUSTRALIA

POCHE ENGINEERING AUSTRALIA PTY LTD v HITACHI CONSTRUCTION MACHINERY (AUSTRALIA) PTY LTD & ANOR (No.3)

[2010] FMCA 666

PRACTICE AND PROCEDURE – Security for costs.

Corporations Act 2001 (Cth), s.1335
Trade Practices Act1974 (Cth), ss.46, 51AC

Merribee Pastoral Industries Pty Ltd v ANZ Banking Group Limited (1998) 193 CLR 502
KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189
Trade Stock v TNT (Management) (No 2) (1977) 30 FLR 343
Dictating Machine Centre v Coomb (1981) 26 SASR 316

Applicant:

POCHE ENGINEERING AUSTRALIA PTY LTD

First Respondent:

HITACHI CONSTRUCTION MACHINERY (AUSTRALIA) PTY LTD

Second Respondent:

HITACHI CONSTRUCTION MACHINERY CO LTD

File Number:

SYG 3077 of 2009

Judgment of:

Raphael FM

Hearing date:

24 August 2010

Date of Last Submission:

24 August 2010

Delivered at:

Sydney

Delivered on:

24 August 2010

REPRESENTATION

Counsel for the Applicant:

Mr J de Meyrick

Solicitors for the Applicant:

Patrick Lim & Associates

Counsel for the Respondents:

Mr J Hennessy

Solicitors for the Respondent:

DibbsBarker

ORDERS

Security for costs be provided by the Applicant in the sum of $35,000.00.
Proceedings stayed pending provision of the security.
Applicant to pay the Respondent’s costs assessed in the sum of $7,500.00 within 28 days.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 3077 of 2009

POCHE ENGINEERING AUSTRALIA PTY LTD

Applicant

and

HITACHI CONSTRUCTION MACHINERY (AUSTRALIA)
PTY LTD

First Respondent

HITACHI CONSTRUCTION MACHINERY CO LTD

Second Respondent

REASONS FOR JUDGMENT

There comes before me today an application for security for costs filed on behalf of the respondents. It is an application made pursuant to s.1335 of the Corporations Act 2001 (Cth), which states:
“(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.
(1A) Subsection (1) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.
Note: Similar provision is made in relation to Aboriginal and Torres Strait Islander corporations under section 581‑20 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006.”
(2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.”
In support of the contention that the respondent to the application, the applicant in the substantive case may be unable to pay the costs of the substantive respondents, there has been produced an affidavit of Scott Robert Sloan sworn 23 April 2010, to which is annexed a number of documents and also a helpful tender bundle.
I have also been assisted by Mr Hennessy’s helpful written submissions in which he has provided the Court with both background and substantive submissions by reference to the decided cases. In those submissions, Mr Henderson refers specifically to the views expressed by Kirby J in Merribee Pastoral Industries Pty Ltd v ANZ Banking Group Limited (1998) 193 CLR 502 at [513] to [515].
Three years earlier, Beazley J, as she then was, sitting in the Federal Court, also set out some considerations that would guide a Court in considering whether or not to exercise its broad unfettered discretion to order security for costs, in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189. In the head note of that case, seven principles are set out, which the parties before me were content to rely upon as those that I should take into consideration. They are:
“(i) whether the application for security for costs has been brought promptly;
(ii) the strength and bona fides of the applicant's case;
(iii) whether the applicant's impecuniosity was caused by the respondent's conduct the subject of the claim;
(iv) whether the respondent's application for security is oppressive, in the sense that it is being used merely to deny an impecunious applicant a right to litigate;
(v) whether there are any persons standing behind the company who are likely to benefit from the litigation and who are willing to provide the necessary security;
(vi) whether persons standing behind the company have offered any personal undertaking to be liable for the costs and, if so, the form of any such undertaking;
(vii)whether the applicant is in substance a plaintiff or the proceedings are defensive in the sense of directly resisting proceedings already brought or seeking to halt the respondent's self-help procedures. (197A-198C)”

The evidence which Hitachi, the substantive respondent, has produced has been obtained by it following the issuance of notices to produce. In short, it is some financial records of the applicant company. It should be stated that the applicant company was, in fact, only formed in 2008 and that it has a sole director and shareholder, a Mr Adam Poche.
The financial statements for the year July 2009 to 31 March 2010 show that the company received its income from what are described as management fees. They totalled $750,420.00. It had expenses of some $863,270.00, of which wages appeared to be $743,224.00, and superannuation $64,673.00. The company made a loss of $112,850.00. In the previous year, it made a loss of $2,627.00. There is a retained deficit at the end of the financial year of $115,477.00. The balance sheet of the company reveals it has no cash at bank and has no current assets. It has net liabilities of the same $115,477.00. There is a negative equity of that amount. I have also been provided with a copy of the company’s tax return for 2009, which indicates a loss of $2,627.00 for tax purposes.
The applicant company has produced no admissible evidence to counter the clear argument that the Court has reason to believe it would be unable to pay the costs of the defendant if it is successful. In an earlier decision, I explained why I refused to admit the only evidence that was tendered. Mr Hennessy points out in his written submissions that:
“This application is made on the basis that, in the light of the foregoing facts (and the maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced, and the power of the other to have contradicted: see Black v Archer [1774] 1 COWP 66, 98 ER 969, Vetter v Lake Macquarie City Council [2001] 202 CLR 439 454 and Placer (Granny Smith) Pty Limited v Thiess Contractors Pty Limited [2003] 196 ALR 257 278) there is a real possibility that the applicant, as a corporation whose financial position is not secure, may not be able to pay Hitachi’s costs in the event that it obtains such an order against the applicant.”
These authorities make it clear that a Court would expect a party in

the position of the respondent to the application to have produced

some admissible evidence of its structure and financial situation.

Mr de Meyrick, who appears for Poche, indicated that it was part of a group. He accepted that his client was not a trading entity, but was some form of service company within this engineering group, but that is all we know about it other than the fact that it also has a fixed and floating charge over its assets from the Westpac Banking Corporation that is stamped up to an amount in excess of $2 million. In my view, the evidence indicates there is a prima facie case for the Court to exercise its discretion to order security.
Looking at the matters referred to by Beazley J, I would indicate that I am satisfied that the application was brought promptly. I note that

Mr de Meyrick argues that there was a considerable time delay between the issuance of the proceedings and the issuance of the application, but in fact the amended application and statement of claim were only filed on 31 March and the application for security was made on 23 April.
In regard to the strength or bona fides of Poche’s case, I do have some concerns. The company which is the applicant was not the company that was manufacturing the parts for Hitachi from reversed engineered plans that it had created. That was another company which is not a party to these proceedings. The applicant company has only been in existence for two years and it is not at all clear to me that it was itself injured by the alleged actions of Hitachi through its Australian subsidiary or through the Japanese holding company. The respondents have made an application to strike out this claim, and whilst that has not yet been heard, the submissions made would certainly indicate that there may well be difficulties confronting the current applicant.
Considerations 3 and 4 relate to a company’s impecuniosity. This company does not wish to hide behind impecuniosity, according to

Mr de Meyrick but, on the other hand, it does not provide the Court with any indication that it is substantial and can afford to pay the costs. What it does say is that it should not be forced or required to put up security where it believes that there is an imbalance between the risks of exposing an innocent defendant to an unsatisfied order for costs and preventing a bona fide applicant from litigating its claim. It argues that the balance lies in this case altogether with the applicant. I regret that on the basis of the evidence that I have seen I cannot support this view.
If the corporate structure of the Poche Engineeering business had been explained to me, I might have understood how this particular applicant fits in and how it is said to have been affected by the actions of the Hitachi companies. At the present time, my reading of the application and statement of claim is that the Poche group is suffering because the Hitachi companies have ceased to use them to manufacture their parts. There is no suggestion of any long term contract that has been breached, merely an indication that Hitachi are using unfair business practices in breach of ss.46 and 51AC of the Trade Practices Act1974 (Cth).
Hitachi, on the other hand, have said to Poche that it would resist Poche from utilising information which it obtained whilst it was undertaking work for Hitachi that it considers to be confidential. That has not yet occurred because, as I understand it, Poche has not utilised such information in order to produce parts, but to some extent the situation is at a stand-off.
Whilst the Court may be obliged to hear the substantive claims, I do not think that the application for security has been brought merely to deny Poche the right to litigate. It seems to me from my reading of the affidavit of Mr Sloan, who was not cross-examined, that there is a considerable amount of work to be done in order to meet the claims under ss.46 and 51AC and that it would be entitled to ask a company whose financial affairs indicate that it is making a substantial loss and has no assets to provide some security.
Considerations five and six relate to the possibility that someone behind the company is prepared to provide the necessary security for it. In this particular case, Mr Adam Poche, who is the director of the company, has offered an undertaking or guarantee up to a limit of $50,000.00. Unfortunately, he did not provide Hitachi with any details as to his own financial standing. They have made their own inquires and it appears that he and his wife jointly own a house, which is mortgaged to the Westpac Banking Corporation. We do not know how valuable the house is or the size of the mortgage and frankly, it is not for Hitachi to establish these facts, it is for Mr Poche.
Hitachi also say that the offer of an undertaking or guarantee is in itself not adequate because it will require them, if they are successful in the substantive proceedings, to commence additional proceedings in order to enforce the costs undertaking and I think that is a matter. That it is legitimate to take into account. Hitachi also say the limit of $50,000.00 is not substantial enough in any event, because Mr Sloan’s affidavit indicates that his clients could be looking at a costs bill of anything from a low range of $146,550.00 to a higher range of $247,350.00.
Now, this Court was set up by the Commonwealth Government in 1999 to commence hearing proceedings in 2000 with the idea of it being, as the Attorney General of the time said, “cheaper, quicker and simpler”. The idea that a costs order in its jurisdiction would come to $246,000.00 would have caused the learned attorney to suffer something quite short of apoplexy. I have little doubt that that figure for taxed costs may well be in excess of what might eventually be ordered. But even if the amount of tax costs likely to be incurred was reduced to $100,000.00 it would still be a very substantial amount and one for which I believe the respondents should have some protection.
Consideration seven is not, to my mind, relevant in this particular case.
It does concern me that Poche have not provided the Court with any evidentiary assistance in this application. It has not sought to argue with the quantification of costs made by Mr Sloan. It has not provided the Court with any understanding of its financial situation, nor has Mr Poche himself provided the Court with any details of his own assets and liabilities. The evidence that I do have satisfies me that there is reason to believe that the applicant company would be unable to pay its costs if the respondent is successful and I do believe that security should be given.
Mr de Meyrick has kindly referred the Court to a number of cases, such as Trade Stock v TNT (Management) (No 2) (1977) 30 FLR 343 and Dictating Machine Centre v Coomb (1981) 26 SASR 316 at 320. The principles expounded in those cases are still relevant today, but it might have been more helpful had he provided the Court with some more up to date information about the manner in which these applications are dealt with and the types of orders that are made.
The general view today is that security for costs orders should not impose upon a payer a huge up‑front responsibility, but should reflect the costs as they are going along. In that way, it cannot be said that they are being used to squeeze the life out of a litigant, but only to make him responsible for the burden he is placing upon a respondent at any particular time. In this case, there has already been quite an amount of money spent, but much of it was spent wrongly, to my mind, by the respondents themselves in seeking to prevent the service of the process upon the Japanese Hitachi company.
That has now been dealt with, but other costs were involved in relation to the initial statement of claim and then the amended statement of claim. And I foresee it being very possible that a further amended statement of claim will be attempted to be filed. Much of the respondent’s submissions as to the amount of costs relates to the work that would have to be done in order to deal with the ss.51AC and 46 claims. Those have not been pleaded to any great degree of particularity. They may be, or they may not.
The view that I have come to is that security should be provided by the applicant by way of a payment into the trust account of the applicant’s solicitor of the sum of $35,000.00, but that this amount should not be regarded as a final order, and that the respondents will have leave to reapply for further security if the matter proceeds along the lines that are indicated in the amended statement of claim.
In accordance with the usual practice in these matters, the application will be stayed pending the provision of the security. And the applicant company should pay the respondent’s costs of the application, such sum I assess as $7,500.00 payable within 28 days of today.

I certify that the preceding twenty-four (24) paragraphs are a true copy of the reasons for judgment of Raphael FM

Date: 1 September 2010