Rickard v Testel Australia Pty Ltd - [2017] SASC 144

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
RICKARD & ORS v TESTEL AUSTRALIA PTY LTD
[2017] SASC 144
Judgment of The Honourable Justice Doyle
10 October 2017
APPEAL AND NEW TRIAL - APPEAL - PRACTICE AND PROCEDURE - SOUTH AUSTRALIA - STAY OF PROCEEDINGS
APPEAL AND NEW TRIAL - APPEAL - PRACTICE AND PROCEDURE - SOUTH AUSTRALIA - SECURITY FOR COSTS
PROCEDURE - JUDGMENTS AND ORDERS - ENFORCEMENT OF JUDGMENTS AND ORDERS
The respondent (plaintiff) brought a claim against the applicants (defendants) for, inter alia, breach of a restraint covenant in a franchise deed. The plaintiff obtained judgment against the defendants in the amount of $172,912 (including interest), and costs were awarded against the defendants on an indemnity basis.
The defendants have appealed the decision of the trial judge on the issues of quantum and costs. In relation to quantum, the defendants complain that the trial judge erred in assessing the plaintiff’s lost opportunity. In relation to costs, the defendants challenge the trial judge’s decision to extend the order for indemnity costs to include the costs of their cross-action.
The defendants are seeking a stay of enforcement of the judgment and costs orders pending hearing and determination of the appeal. The plaintiff seeks security for its costs of the appeal.
Held per Doyle J, ordering a stay of enforcement pending the appeal:
1. The appeal has arguable prospects of success, and there is some prospect of prejudice to the defendants (in the form of bankruptcy, liquidation and an inability to pursue the appeal) being avoided should a stay be granted.
2. The stay is to be conditional upon the defendants providing written undertakings restricting the use of their assets and to prosecute their appeal with all reasonable diligence; and upon them providing the plaintiff with security for its costs in the amount of $22,000.00.
Supreme Court Civil Rules 2006 (SA) r 300; Enforcement of Judgments Act 1991 (SA) s 17, referred to.
Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd (No 3) [2014] SASC 148, applied.
Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248; Kalifair Pty Ltd v Digi-tech (Aust) Ltd (2002) 55 NSWLR 737; Landmark Operations Ltd v J Tiver Nominees Pty Ltd [2009] SASC 14; Lesses v Maras (No 2) [2016] SASC 140; Philip Morris (Australia) Ltd v Nixon [1999] FCA 1281; Ryan v Urban Construct (SA) Pty Ltd (No 2) (2012) 114 SASR 410; Technilock (Aust) Pty Ltd v Mondami Pty Ltd [1999] SASC 94; Testel Australia Pty Ltd v Rickard & Ors [2017] SADC 31; Testel Australia Pty Ltd v Rickard & Ors (No 2) [2017] SADC 69; Wu v Li [2014] FCA 297, discussed.

RICKARD & ORS v TESTEL AUSTRALIA PTY LTD
[2017] SASC 144
Civil
DOYLE J:

The plaintiff, Testel Australia Pty Ltd (Testel), was successful in obtaining judgment for $172,912 (inclusive of interest) and costs orders against the defendants, Mr Troy Rickard, Mr Rowan Wilson and Active Safety Services Pty Ltd (Active).[1]
[1] Testel Australia Pty Ltd v Rickard & Ors [2017] SADC 31.
The defendants have appealed the quantum of the judgment and the costs orders. The defendants seek a stay of enforcement pending the hearing and determination of their appeal. The plaintiff seeks an order requiring that the defendants provide security for its costs of the appeal.
These are my reasons for ordering a stay of enforcement pending appeal, and that the defendants provide security for costs in the amount of $22,000.
Background
Testel has an electrical testing business. It operates that business as a franchisor with a number of franchises both in South Australia and throughout Australia, and has done so for a number of years.
In 2004, T&T Rickard Pty Ltd (T&T) entered into a franchise agreement with Testel, contained in a document referred to as the 2004 franchise deed. T&T’s directors were Mr Troy Rickard and Ms Tracey Rickard. Mr Rickard executed a document by which he guaranteed the performance by T&T of its obligations under the 2004 franchise deed. The franchise agreement was renewed through the execution of similar deeds in 2007 and 2010.
Testel’s business model involved it charging a fee of 22 per cent of the revenue earned by the franchisees, plus marketing fees and other charges.
In April 2011, Active was incorporated by its sole director, Mr Rowan Wilson. Mr Wilson had until shortly prior to this date been an employee of T&T. He was a close friend of Mr Rickard. From the time of its incorporation, Active began operating an electrical testing business which was essentially the same as T&T’s business. In particular, Active began providing services to a large former client of Testel (through the T&T franchise), the Flinders Medical Centre (FMC).
Meanwhile, by early 2011, the relationship between Testel and T&T had broken down. T&T ceased performing work under the franchise from May 2011, and, by email dated 19 August 2011, Mr Rickard purported to terminate the contractual relationship between T&T and Testel.
In August 2012, Mr Rickard purported to enter a contract of employment with Active. In the same year, T&T was deregistered as a company.
In these proceedings, Testel sued Mr Rickard, as the guarantor of T&T, for various alleged breaches of the franchise deed. The alleged breaches included:
· breach of the duty of confidence owed by T&T to Testel; and
· breach of the clause which restrained Mr Rickard, as the manager of T&T, from engaging in a business which was substantially the same as, or was in competition with, Testel’s business.
In relation to the latter, it was Testel’s case that the contract of employment between Mr Rickard and Active was a sham; that Mr Rickard had been involved as a principal in the business of Active from the start.
Testel also sued Mr Wilson and Active for tortious interference with the contractual relationship between Testel and T&T.
Mr Rickard brought a cross-action against Testel, alleging breach of a collateral agreement allegedly entered into at the time the 2004 franchise deed was signed. Mr Rickard also alleged that Testel engaged in unconscionable conduct, engaged in misleading conduct, breached a contractual obligation of good faith, and breached the Franchising Code of Conduct. He sought remedies that included declarations that the franchise deed, the restraint clause and/or the guarantee were void.
The trial occurred over 27 days during late 2015. Testel was successful on most issues.
By way of summary, the trial judge held that the 2010 franchise deed, including the restraint clause, was valid and enforceable. The restraint operated for a period of 12 months after the expiry of the deed on 30 September 2013. Mr Rickard’s guarantee was also valid and enforceable.
T&T repudiated the 2010 franchise deed by ceasing to perform work in May 2011, and by its purported termination of 19 August 2011. Testel did not accept T&T’s repudiation, with the consequence that the franchise agreement and restraint clause continued in force.
The trial judge held that T&T breached the restraint clause through Mr Rickard’s involvement in the business of Active. Mr Rickard, as guarantor, was therefore liable in damages for this breach. His Honour also upheld Testel’s claim for damages against Mr Wilson and Active for tortious interference with Testel’s contractual relations with T&T.
The trial judge also upheld an aspect of Testel’s claim for breach of confidence, resulting in a grant of injunctive relief.
In relation to Mr Richard’s cross-action, the trial judge accepted that Testel had breached the Franchising Code of Conduct by failing to provide the required documentation to Mrs Rickard. However, his Honour dismissed the claim that the 2010 franchise deed should be declared void for that reason. Mr Rickard’s case based upon a 2004 collateral agreement was also dismissed. As were his allegations of unconscionable conduct, misleading conduct and breach of a contractual obligation of good faith.
In relation to Testel’s entitlement to damages, the trial judge held that the assessment in relation to both T&T’s breach of the restraint clause and Mr Wilson’s and Active’s tortious interference with contractual relations should proceed in the same way, based on the loss of opportunity to obtain a benefit from customers lost as a result of the breach and tort.
The trial judge considered the position of various customers, ultimately concluding that damages should be assessed by reference to possible revenue from three customers (FMC, Newmont and Badge Constructions). His Honour concluded that were it not for the breach and tort, Testel would have earned its 22 per cent fee on the revenue from FMC (giving an amount of $138,594), was 80 per cent likely to have earned its fee on the revenue from Newmont ($5,840), and was 10 per cent likely to have earned its fee on the revenue from Badge Constructions ($378). His Honour thus awarded damages of $144,812, plus interest in the amount of $28,100, giving a total of $172,912.
The trial judge delivered separate reasons in relations to costs.[2] As his Honour noted, Testel conceded that the cross-action was arguable, but nevertheless contended that the defendants should pay its costs of both the action and cross-action on an indemnity basis. In support of this contention, Testel relied upon an allegation that the defendants had engaged in misconduct that caused a loss of time to the Court and the other party.[3]
[2] Testel Australia Pty Ltd v Rickard & Ors (No 2) [2017] SADC 69.
[3] Citing Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 at 256-257.
The trial judge accepted Testel’s contention that the defendants engaged in such misconduct, and in particular made findings that:
·    Mr Rickard and Mr Wilson concocted the story about Mr Rickard’s role in Active;
·    Mr Rickard deleted an electronic folder of relevant documents because he knew of its forensic significance and thereafter failed to disclose it, including when affirming his disclosure on oath;
·    the actions of Mr Rickard and Mr Wilson caused the plaintiff to undertake long and complex investigations, which included seeking and obtaining a search order and assistance from a forensic IT specialist;
·    the failure to make disclosure continued even after the search order was executed, when it became inevitable that the deleted folder would be disclosed; and
·    Mr Rickard and Mr Wilson gave evidence at great length, much of which was proven to be untrue.
In response to this, the defendants sought to rely upon the plaintiff’s rejection of various settlement offers it made, both by way of filed offer (dated 14 August 2015) and various Calderbank letters (the last of which was dated 2 September 2015). The defendants contended that these offers involved them doing everything within their power to settle the matter, and that the plaintiff acted imprudently in its rejection of the defendants’ offers.
The trial judge accepted the plaintiff’s submission that these offers were irrelevant in circumstances where the plaintiff ultimately succeeded in obtaining a judgment sum that exceeded the offers made. The trial judge also accepted that, at the time of the settlement offers relied upon, there were significant developments in the litigation taking place. These developments, which were related to discovery of the misconduct of Mr Rickard in deleting relevant files, made it reasonable for the plaintiff to withdraw from settlement negotiations, and hence represented a further barrier to the defendants’ contention that the plaintiff had imprudently or unreasonably failed to accept the offers made by the defendants.
The trial judge concluded his analysis of costs by observing:[4]
In this case, the conduct of the defendants, in relation to both the claim and the cross-action, was … unreasonable and unmeritorious.
This is not a case where the defendants’ case has simply been rejected on the balance of probabilities. The basis for the rejection of their evidence goes beyond a question of reliability …
The defendants’ case was false, and they knew it was false. Their defence of the action was improper and unreasonable.
[4] Testel Australia Pty Ltd v Rickard & Ors (No 2) [2017] SADC 69 at [45]-[47].
For these reasons, the trial judge ordered that the defendants pay the plaintiff’s costs of the action and cross-action on an indemnity basis.
The appeal
As mentioned, the defendants’ appeal is confined to the issues of quantum and costs.
So far as quantum is concerned, the defendants’ appeal makes various complaints about the approach taken by the trial judge. The defendants complain that the trial judge erred in assessing the lost opportunity by reference to the entire revenue earned by Active from FMC throughout the period through to 30 September 2014. They contend that his Honour’s approach in this regard failed to distinguish between the loss caused by the failure to perform work under the franchise agreement and the loss caused by the breach of the restraint clause and/or the tortious interference with contractual relations; failed to take account of the possibility that someone other than T&T or another Testel franchisee may well have performed that work; and failed to make any reduction to reflect the possibility that the thermal imaging services (that were performed by Active, but had not previously been performed by T&T for FMC) may not have been performed were it not for Active’s involvement. The appeal also makes several other complaints about the trial judge’s assessment, although these are of a lesser monetary significance than the matters I have identified.
While primarily an appeal on issues of fact underpinning the damages assessment, the defendants’ complaints do encompass a challenge to the approach or methodology adopted by the trial judge in assessing damages.
In relation to costs, the only ground of appeal is one which challenges the trial judge’s decision to extend the order for indemnity costs to include the costs of the cross-action. The defendants contend that in circumstances where there was a concession that the cross-action was arguable, and the findings of misconduct and lack of merit related only to the action, it was an error to include the costs of the cross-action within the scope of the indemnity costs order.
Principles governing the stay application
Under r 300 of the Supreme Court Civil Rules 2006 (SA), while an appeal does not operate to stay execution of a judgment pending appeal, the Court may grant a stay “for any proper reason”. An equivalent power exists under s 17 of the Enforcement of Judgments Act 1991 (SA).
The principles governing a grant of stay of execution pending appeal are well known, and are not in dispute. As I summarised in Lesses v Maras (No 2):[5]
In short, the Court has a discretion to grant a stay, and if so, as to the terms of that stay. While it is not necessary to establish special or exceptional circumstances, the party seeking a stay must demonstrate a proper reason, or appropriate case, to warrant the exercise of the discretion to grant a stay in his or her favour. The mere filing of an appeal will not suffice. Rather, the Court generally proceeds from the starting point that the decision below was correct, and hence that the party who has been successful at trial is entitled to the benefit of their judgment. However, from this starting point, the Court exercises a broad discretion which entails consideration of the competing rights of the parties, any prejudice likely to be suffered by either party in the event that a stay is or is not granted, and the overall balance of convenience.[6]
Analysis of the stay application
[5] Lesses v Maras (No 2) [2016] SASC 140 at [6]; see also Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd (No 3) [2014] SASC 148 at [6]-[8] to similar effect.
[6] Philip Morris (Australia) Ltd v Nixon [1999] FCA 1281 at [17]; Technilock (Aust) Pty Ltd v Mondami Pty Ltd [1999] SASC 94; Landmark Operations Ltd v J Tiver Nominees Pty Ltd [2009] SASC 14; Ryan v Urban Construct (SA) Pty Ltd (No 2) (2012) 114 SASR 410 at [17]-[18]; Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd (No 3) [2014] SASC 148 at [6]-[8].
Merits of the appeal
An applicant for a stay will generally need to establish that he or she has an arguable case on appeal, or that the appeal raises serious issues for determination and is not merely an attempt to delay payment of the judgment debt.[7]
[7] Lesses v Maras (No 2) [2016] SASC at 140 at [7]; Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd (No 3) [2014] SASC 148 at [7]-[8].
Some consideration of the merits of the appeal is thus appropriate. However, given the nature and timing of an application for a stay pending appeal, it is neither possible nor appropriate to undertake a detailed assessment of the merits.
The plaintiff’s counsel identified various matters in response to the challenges made by the defendants to the trial judge’s assessment of damages. He also relied upon the largely factual nature of the appeal in relation to damages, and the discretionary nature of the decision in relation to costs.
While the defendants’ appeal will undoubtedly face some obstacles, I cannot say that the appeal is hopeless or not arguable. To the contrary, I am satisfied that the appeal raises matters of arguable merit.
Ordinarily that would be the end of any relevant consideration of the merits on an application for a stay pending an appeal. However, for reasons explained later it will be necessary in the circumstances of this case to return to the issue in considering the defendants’ asserted prejudice.
Prejudice to the defendants
As mentioned, the total of the judgment sum plus interest is $172,912. The plaintiff’s affidavit material suggests that its entitlement to costs under the indemnity costs orders would be in excess of $600,000.
The defendants filed affidavits addressing their financial positions. Those affidavits disclosed that Mr Rickard is essentially impecunious. Other than about $5,000 in various bank accounts, he has no assets available to pay the judgment sum or costs liability. Mr Wilson has only a few thousand dollars in the bank. He is the joint proprietor with his wife of two properties, being their residence in Moana and an investment property in Seaford. His affidavit deposes to council valuations for those properties of $385,000 and $295,000 respectively. However, these properties are mortgaged in respect of loans in the amount of $205,830 and $343,500. Taking these properties and loans together, and bearing in mind Mr Wilson has only a 50 per cent share in the properties, he has equity of about $65,000 in those properties.
The affidavit material includes financial statements for Active through to the financial year ended 30 June 2016. The balance sheet as at 30 June 2016 shows net assets of $192,176. However, in terms of assets that might be available to meet the judgment sum and costs liability, these appear to be minimal. Putting to one side cash held in an account to pay the company’s expected GST obligations ($15,114), there is further cash at bank of $8,257 and trade debtors of $21,853. The affidavit material reveals that as at 30 March 2017, Active’s cash position had improved slightly to $15,213.68 (again putting to one side cash held to meet the company’s expected GST obligations ($35,828.36)).
While Active thus has little by way of assets available to meet the defendants’ judgment or costs liability, the financial statements do reveal a capacity to generate income. The financial statements reveal sales of $400,121 and an operating profit before tax of $101,372 for the financial year ended 30 June 2016; and sales of $350,704 and an operating profit before tax of $80,289 for the year ended 30 June 2015. In the previous financial year, being the year ended 30 June 2014, the company had generated sales of $251,941 but returned a small operating loss.

There is no dispute that the defendants do not have the financial capacity either individually or jointly to pay the judgment sum and costs liability. This is supported by the evidence to which I have just referred.
There is also no dispute that if no stay is ordered, then steps will likely be taken by the plaintiff to enforce the judgment and costs orders, and that these steps will likely result in the bankruptcy of Mr Rickard and Mr Wilson, and the liquidation of Active.
In that context, the defendants contend that they will suffer irremediable prejudice if no stay is ordered, both by reason of them becoming bankrupt or going into liquidation and by reason of the appeal being unlikely to proceed.
I accept that the intervention of bankruptcy and liquidation may constitute relevant prejudice. There is authority to that effect.[8] However, as the plaintiff contends, this assumes that if a stay were granted there is some prospect that the appeal would not only succeed, but succeed to an extent sufficient to avoid bankruptcy and liquidation. In other words, the prejudice relied upon must be avoidable prejudice, as opposed to prejudice that the plaintiff will incur even in the event of a successful appeal.
[8] Lesses v Maras (No 2) [2016] SASC 140 at [15]-[16]; Essential Beauty Franchising (WA) Pty Ltd v Pilton Holdings Pty Ltd (No 3) [2014] SASC 148 at [13]-[14]; Wu v Li [2014] FCA 297 at [50]-[51]; Kalifair Pty Ltd v Digi-tech (Aust) Ltd (2002) 55 NSWLR 737 at [21]-[26].
It is in this context that it is necessary to return to the nature and merits of the defendants’ appeal. I have mentioned that, as things presently stand, the defendants owe the plaintiff $172,912 by way of judgment sum and in excess of $600,000 by way of costs. The defendants’ combined ability to satisfy their liabilities will fall well short of the total required. Indeed, they are unlikely to be able to pay more than a small proportion of the sum owing.
The plaintiff contends that even if the defendants were to succeed in their appeal in relation to both quantum and costs of the cost-action, the amount still owing would well exceed the combined resources of the defendants. The plaintiff thus contends that bankruptcy and liquidation are likely to occur in any event.
The defendants’ answer to this contention is that it ignores the possible consequential effect upon the costs of the action generally from a reduced judgment sum – assuming the appeal is successful in reducing the judgment sum to a figure below the level of the defendants’ Calderbank offers or filed offer. The defendants accept that even if their appeal succeeds, they will remain liable for a significant sum. Based on the submissions made before me, the defendants appear to accept that even if their complaints about the trial judge’s assessment were all accepted on appeal, they would likely remain liable for a judgment sum in excess of about $60,000, and so liable for a sum of in excess of about $70,000 inclusive of interest.
This reduction in the judgment sum would not of itself reduce the defendants’ overall exposure sufficiently for them to avoid bankruptcy and liquidation, given their liability for the plaintiff’s costs. Indeed, even if their appeal in relation to the indemnity costs order on the cross-action succeeded in reducing that aspect of their costs liability, the defendants would nevertheless be left owing more than they have the capacity to pay.
However, the defendants contend that if the judgment sum were reduced on appeal to a figure below what they offered in their Calderbank or filed offers, then this would require a reconsideration of the costs of the action generally, and might result in a different outcome in relation to those costs. In particular, the defendants contend that they might become entitled to an award of costs in their favour for the period following the Calderbank or filed offers. It is not possible for me to be precise about the numbers, but on something approximating the defendants’ best case scenario, one might assume a reduced judgment sum of $70,000 inclusive of interest. If the costs orders were then adjusted to require that the plaintiff pay the defendants’ costs from some date in September 2015, then this might (based on some high level inferences drawn from costs figures disclosed in the affidavit material) result in the plaintiff’s costs entitlement being reduced to something less than $300,000 (for the period prior to September 2015) and in the defendants becoming entitled to recover about $300,000 on account of its own costs (for the period after September 2015). The net result might be that the defendants are left owing only a modest sum to the plaintiff. The defendants may well be able to meet this sum and avoid bankruptcy and liquidation.
While not challenging the logic of the above analysis and scenario, the plaintiff contends that it involves multiple layers of speculation. It first assumes that the defendants succeed in their appeal, which the plaintiff describes as barely arguable. It secondly assumes that the success is sufficient to bring the judgment sum beneath one of the amounts offered by the defendants. It thirdly assumes that the Court is prepared to make costs orders in the defendants’ favour despite the trial judge’s findings of misconduct. It fourthly makes assumptions about the parties’ costs sufficient to bring the net sum owing to the plaintiff to a modest and manageable amount. It fifthly assumes that the defendants have otherwise paid or reached some accommodation in respect of the approximately $92,000 currently owing to their solicitors, and the approximately $71,000 in legal costs apparently incurred but which the accounts through to 30 June 2016 do not indicate have been paid by Active.
It is true that the defendants’ ability to avoid the prejudice associated with them being forced into bankruptcy and liquidation will require several matters to fall their way. It is also true that none of these matters or assumptions are straight forward.
For the purposes of satisfying me that the second assumption is a realistic prospect, the defendants disclosed their offers to me. It is neither possible nor appropriate for me to express any detailed or precise view as to the likelihood of the defendants achieving sufficient success on the appeal to bring the reduced judgment sum below the figures offered. However, on the basis of the offers disclosed to me, and while there is some complexity in comparing the offers with possible outcomes after the appeal and in determining the reasonableness of the amounts offered on account of costs, I am satisfied that there is at least some prospect of the defendants ‘beating’ at least one of their offers.
The next assumption, namely that the Court would be prepared to reverse the existing costs order in respect of post-September 2015 costs in the event the appeal resulted in the defendants ‘beating’ their offer, is also problematic given the findings of misconduct. However, assuming the appeal is successful, I accept that the issue of costs would need to be reconsidered, and the broad discretion available to the Court means that there is some prospect of a significant alteration in the parties’ costs entitlements.
As for the amounts of $92,000 and $71,000, there is not much I can say about these amounts on the evidence before me. The plaintiff contends that, in the absence of any evidence from the defendants, I should assume that the defendants are liable to pay these amounts such that even if the defendants’ liability to the plaintiff was reduced to a figure that was otherwise manageable, their liability for the amounts of $92,000 and $71,000 (together with additional costs associated with prosecuting the appeal) will leave them insolvent and vulnerable to bankruptcy and liquidation in any event. While it is not entirely satisfactory that the evidence left the position in relation to the $92,000 and $71,000 unclear, I am not persuaded that, in the event that the appeal was otherwise successful in reducing the defendants’ liability to the plaintiff to a manageable sum, the defendants will nevertheless be forced into bankruptcy and liquidation.
It is not clear to me what has happened in relation to the $71,000. While the plaintiff contends that I should infer these fees were paid by a third party with a resulting debt owing to that third party that it might seek to enforce, I regard that as speculative. It may equally be that these costs have been paid by the defendants, perhaps after the close of the 30 June 2016 accounts for Active. Alternatively, it may still be owing to the defendants’ solicitors.
Further, in relation to the $92,000, while this figure is owed to the defendants’ solicitors, I am not prepared to infer that the solicitors (in the event of a successful appeal) would enforce this liability to the point of bankruptcy and liquidation of the defendants. The solicitors have supported the defendants to this point, and it may well be that their best interests will continue to lie in that direction so as to give them, and in particular Active, the opportunity to generate sufficient funds to pay their legal fees.
In summary, I accept that there are several assumptions that underpin the defendants’ submission that if no stay is granted they will suffer prejudice in the form of bankruptcy and liquidation that may well be avoided if a stay is granted. I also accept that each of these assumptions comes with its own difficulties. However, in the ultimate analysis I am satisfied that there is some prospect of this prejudice being avoided. The prospect of this being achieved is more than merely fanciful, and is sufficient for me to be satisfied that the appeal is being prosecuted in a bona fide way with a view to avoiding this prejudice. It is not being prosecuted merely to delay paying of the judgment sum, or to delay an inevitable bankruptcy or liquidation.
Balance of convenience
Even accepting my finding that the defendants will incur prejudice which might otherwise be avoided if a stay were not granted, that is not the end of the analysis.
It is also relevant to consider the prejudice the plaintiff might suffer if a stay were granted, and the balance of convenience more generally.
The plaintiff contends that if it were permitted to enforce its judgment and costs orders now, then it would be entitled to have recourse to Mr Wilson’s equity in the Moana and Seaford properties as well as the modest assets otherwise available to the defendants. The plaintiff contends that if, on the other hand, there is a stay, then even if it successfully defends the appeal, there will be no assets left from which it might make any recovery.
Against this, the defendants contend that their financial position is sufficiently poor that, even if a stay were refused and the plaintiff was permitted to enforce its judgment and costs orders forthwith, there would be no recovery. The defendants would be forced into bankruptcy and liquidation, and the modest assets of the defendants have would soon be exhausted by the costs and fees associated with bankruptcy and liquidation.
In my view, the defendants’ submissions reflect the practical reality of the situation. The unfortunate reality is that even if there were to be no stay, it is unlikely the plaintiff would make any significant recovery. It follows that it is unlikely that the plaintiff will suffer any significant prejudice to its prospects of recovery from a stay being refused.[9]
[9] Similar reasoning was employed in Essential Beauty Franchising (WA) Pty v Pilton Holdings Pty Ltd [2014] SASC 148 at [19]; Wu v Li [2014] FCA 297 at [51]; Kalifair Pty Ltd v Digi-tech (Aust) Ltd (2005) NSWLR 737 at [25].
While the plaintiff’s position will deteriorate to the extent of the costs incurred by it in defending the appeal, this is a form of prejudice that can be addressed by making an order that the defendants provide security for the plaintiff’s costs of the appeal as a condition of any stay.
To the extent there might be any risk of the defendants’ assets otherwise being dissipated during the period taken for the appeal to be heard and determined, this is a form of prejudice that can be addressed by making any stay conditional upon not only the diligent prosecution of the appeal by the defendants, but also upon the defendants undertaking not to deal with their assets other than in the ordinary course of business or for the purposes of funding the appeal.
The plaintiff also contends that when considering the balance of convenience, and in exercising the Court’s discretion in relation to the stay sought, the findings in relation to the defendants’ misconduct in the litigation should weigh against the grant of a stay. The plaintiff contends that it is a relevant consideration that the defendants’ own misconduct has significantly contributed not only to its own impecuniosity, but also the significant costs liability it has incurred to the plaintiff but is unable to pay.
There is no doubt that it is regrettable that the defendants engaged in the misconduct described by the trial judge, and that this contributed to the unfortunate predicament in which both parties now find themselves. While relevant in a general way, I am not persuaded this is a consideration of much weight in determining whether the interest of justice make it appropriate to order a stay of enforcement pending appeal.
I say that for two reasons. First, it is in part because the misconduct has already been addressed through the making of indemnity costs orders against the defendants. The plaintiff may regard this as little comfort given the defendants’ impecuniosity; however, costs orders are the usual mechanism through which such conduct is addressed. Even in that context, the costs orders are generally said to reflect a compensatory approach rather than a punitive approach.
Secondly, it is also in part because the focus on a stay application is forward-looking rather than backward-looking. The focus is upon the party’s proposed appeal, and what might occur, and in particular what prejudice the parties might incur, in two alternative scenarios, namely if a stay were granted and if it were not granted.
In light of those considerations, I do not think it would be appropriate to in effect punish the defendants for their misconduct by denying them a stay of enforcement if they otherwise establish a proper basis for such an order.
In summary, I do not go so far as to say that it is irrelevant to the exercise of the discretion on a stay application that the reason the parties find themselves in the present predicament is in part the misconduct of the defendants. While it would not be appropriate to seek to punish the defendants for their misconduct by depriving them of stay, the fact that their conduct contributed to the parties’ predicament nevertheless informs the interests of justice in a general and background way. However, I regard the assessment of the prejudice that each of the parties might suffer in the event of a stay being granted or refused to be of greater weight.
In this case, if a stay were refused the defendants would likely face bankruptcy and liquidation, and lose the opportunity to pursue an appeal that has arguable prospects of success. Further, if a stay were to be granted, there is some prospect that the defendants will be able to avoid bankruptcy and liquidation. I am satisfied that the defendants are pursuing the appeal in a bona fide attempt to avoid this prejudice, rather than merely to delay the inevitable. The courts do not lightly shut a party out of an appeal that has arguable prospects and is being pursued for bona fide reasons.
It is true that the defendants’ prejudice (or at least their ability to avoid that prejudice) remains rather speculative. But in my view the risk of this prejudice outweighs the considerations that favour the refusal of a stay. In particular, the unfortunate practical reality that the defendants are already impecunious, and that enforcement now would be unlikely to result in any significant recovery for the plaintiff, means that the plaintiff is unlikely to suffer any prejudice from granting a stay and allowing the appeal to proceed that could not be addressed through appropriate conditions that might be attached to the grant of a stay.
For these reasons, I propose to order a stay of enforcement pending the hearing and determination of the defendants’ appeal. I propose to do so on condition that the defendants provide the undertakings proffered in draft form in relation to the restricted use their assets; that they undertake to pursue their appeal with all reasonable diligence; and that they provide security for the plaintiff’s costs of the appeal in the amount determined in the next section of these reasons.
The application for security for costs
The parties are agreed that it is appropriate that the defendants be ordered to provide security for the plaintiff’s costs of the appeal. The only dispute is as to the appropriate amount of that security.
The defendants contend that $15,000 is an appropriate estimate of the plaintiff’s likely party/party costs of the appeal, and is hence an appropriate amount of security. The plaintiff, on the other hand, contends that this significantly understates the work to be done. The plaintiff seeks security in the amount of approximately $37,000.
While accepting that each case turns on its own facts, the parties directed my attention to several decisions of this Court that have ordered security for costs of an appeal in amounts varying between $19,000 and $60,000, but with several being in the amount of $20,000 or $25,000.[10]
[10] See Essential Beauty Franchising (WA) Pty v Pilton Holdings Pty Ltd (No 3) [2014] SASC 148 at [29], and the authorities referred to therein.
In supporting its figure of $15,000, the defendants emphasised the narrow nature of their appeal, being confined as it is to the issues of quantum and costs. While I agree that the narrowing of the issues means that the hearing of the appeal will not occupy more than a day, the factual nature of the matters raised means that there will be a reasonably significant amount of work involved in preparing the appeal. The core of the factual matters relevant to the defendants’ grounds of appeal may well be fairly narrow, but as the general submissions before me in relation to the merits made plain, these factual matters will need to be considered in their broader factual context. In circumstances where the trial involved considerable oral and documentary evidence, and proceeded over 26 hearing days, I consider $15,000 to be an inadequate sum.
On the other hand, I reject the plaintiff’s estimate of its costs of the appeal as unreasonably high. It assumes six days preparation time by counsel, which in my view is excessive. I also reject the submission that the amount to be provided by way of security should include an amount in respect of the present applications. I propose to deal separately with those costs.
In my view, security for costs in the amount of $22,000 is appropriate in the circumstances of this case.
Orders
For the reasons set out above, I propose to order:
1. That there be a stay of orders 1, 4 and 5 made in District Court Action No. 2196 of 2013 on 4 July 2017 pending the hearing and determination of the appeal filed on 21 July 2017, conditional upon:
(a)the filing within 7 days of signed written undertakings by the first appellant and second appellant in the form contained in the Schedules to the Interlocutory Application filed by the appellants on 17 August 2017;
(b)those written undertakings also including an undertaking to the effect that the appellants will prosecute their appeal with all reasonable diligence; and
(c)the payment of the sum of $22,000 into court by 17 October 2017, as security for the respondent’s costs of the appeal.
2. The appellants’ appeal filed on 21 July 2017 is stayed pending the provision of the security for costs in paragraph 1(c) above.