Spinwest Holdings Pty Ltd Trading as GA Zimbulis and Sons v Fresh Frontier Pty Ltd
[2015] WASC 379
•8 OCTOBER 2015
SPINWEST HOLDINGS PTY LTD TRADING AS GA ZIMBULIS & SONS -v- FRESH FRONTIER PTY LTD [2015] WASC 379
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2015] WASC 379 | |
| Case No: | CIV:2016/2015 | 7 OCTOBER 2015 | |
| Coram: | TOTTLE J | 8/10/15 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| B | |||
| PDF Version |
| Parties: | SPINWEST HOLDINGS PTY LTD TRADING AS GA ZIMBULIS & SONS FRESH FRONTIER PTY LTD JASON ROBERT KIND MICHAEL JOHN LEEN LISA MORAN AMANDA MOFFAT MARK FEENAN |
Catchwords: | Practice and procedure Security for costs Turns on own facts |
Legislation: | Corporations Act 2001 (Cth), s 1335 Rules of the Supreme Court 1971 (WA), O 25 r 1, r 2, r 3 |
Case References: | Beach Petroleum NL v Johnson (1992) 7 ACSR 203 Sugarloaf Hill Nominees Pty Ltd (as trustee for the Richard and Anna Trust) v Rewards Projects Pty Ltd [2011] WASC 19 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Plaintiff
AND
FRESH FRONTIER PTY LTD
First Defendant
JASON ROBERT KIND
Second Defendant
MICHAEL JOHN LEEN
Third Defendant
LISA MORAN
Fourth Defendant
AMANDA MOFFAT
Fifth Defendant
MARK FEENAN
Sixth Defendant
Catchwords:
Practice and procedure - Security for costs - Turns on own facts
Legislation:
Corporations Act 2001 (Cth), s 1335
Rules of the Supreme Court 1971 (WA), O 25 r 1, r 2, r 3
Result:
Application dismissed
Category: B
Representation:
Counsel:
Plaintiff : Mr S M Davies QC & Ms K R Lendich
First Defendant : Mr P D Robinson
Second Defendant : No appearance
Third Defendant : Mr P D Robinson
Fourth Defendant : Mr P D Robinson
Fifth Defendant : Mr P D Robinson
Sixth Defendant : Mr P D Robinson
Solicitors:
Plaintiff : Ilberys Lawyers
First Defendant : Williams & Hughes
Second Defendant : Arns & Associates
Third Defendant : Williams & Hughes
Fourth Defendant : Williams & Hughes
Fifth Defendant : Williams & Hughes
Sixth Defendant : Williams & Hughes
Case(s) referred to in judgment(s):
Beach Petroleum NL v Johnson (1992) 7 ACSR 203
Sugarloaf Hill Nominees Pty Ltd (as trustee for the Richard and Anna Trust) v Rewards Projects Pty Ltd [2011] WASC 19
1 TOTTLE J: By a chamber summons issued on 24 August 2015 the first, third, fourth, fifth and sixth defendants, (the defendants), seek an order that the plaintiff provide security for costs.
2 The application for security is brought pursuant to s 1335 of the Corporations Act 2001 (Cth) (the Act) and O 25 of the Rules of the Supreme Court 1971 (WA).
3 Section 1335(1) of the Act reads as follows:
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.
4 RSC O 25 r 1 reads as follows:
The Court may order security for costs to be given by a plaintiff, but no order shall be made merely on account of the poverty of the plaintiff or the likely inability of the plaintiff to pay any costs which may be awarded against him.
5 RSC O 25 r 2 enumerates a number of grounds upon which an order for security may be made. RSC O 25 r 3 provides that the granting of security is at the discretion of the Court and in determining whether to exercise that discretion, the court shall take into account: the prima facie merits of the claim; what property within the jurisdiction may be available to satisfy any order for costs against the plaintiff; and whether the normal processes of the court would be available within the jurisdiction for the enforcement of any order for costs made against the plaintiff.
The plaintiff's claim
6 The plaintiff's writ was issued on 2 July 2015. A statement of claim was endorsed on the writ. In outline, the statement of claim sets out that the plaintiff carries on the business of wholesaling and distributing compound and component salads and fresh and processed fruit and vegetables. It is alleged that each of the defendants had been an employee of the plaintiff and that they have misused the plaintiff's confidential information, in breach of various contractual and equitable obligations. It is alleged that this confidential information has been provided to the first defendant, who is using it to produce and market salads which are substantially the same as the plaintiff's salads. The plaintiff seeks injunctive relief restraining the misuse of its confidential information; delivery up of materials in which that information is stored; an inquiry as to damages or an account of profits; and various forms of ancillary relief. Defences have not been filed and served.
The evidence
7 The defendants read and relied upon an affidavit sworn by Ms Clara Elisabeth Hagan on 24 August 2015. Ms Hagan's affidavit establishes that:
(a) the plaintiff was registered in February 1990;
(b) the plaintiff's paid up share capital is $260,000;
(c) the plaintiff is not the registered proprietor of any real property in Western Australia;
(d) the plaintiff has granted 36 fixed and two floating charges over its property (these changes are registered in the Personal Property Security Register);
(e) the aggregate of the maximum liability under four of the 36 charges registered in the Personal Property Security Register is $371,061.60, (this figure is derived using the information contained in the Personal Property Security Register search certificates for the four charges).
8 Ms Hagan attached to her affidavit correspondence exchanged between the parties' solicitors which preceded the issue of the chamber summons. In that correspondence the defendants' solicitors referred to the results of the searches undertaken by Ms Hagan and sought from the plaintiff financial statements, tax returns and tax assessments for the last three years, as well as business activity statements and copies of bank statements.
9 The plaintiff's solicitors responded to this request by letter dated 27 July 2015 and, amongst other things, stated:
Our client will not provide to your clients, its trade rivals, the confidential financial information requested in your letter. We are instructed that our client has total assets of approximately $14.6 Million and net assets of approximately $6 Million.
It is clear that, in the unlikely event that our client were successful in its claim, it is able to pay any costs order against it. In the circumstances, there is no basis for an application for security for costs.
10 In subsequent correspondence the defendants' solicitors maintained their request for information about the plaintiff's financial position and the plaintiff maintained that the defendants were not entitled to that information.
11 Ms Hagan also attached to her affidavit a draft bill of costs which estimated the defendants' costs up to and including entry for trial in the sum of $84,040.
12 The plaintiff read and relied upon an affidavit sworn by Mr John De Freitas on 7 September 2015. Mr De Freitas is the managing director of the plaintiff and has been a director of the plaintiff since it was first registered. Mr De Freitas deposed that the plaintiff is a party to a number of finance arrangements in relation to equipment used in the plaintiff's business. He deposed that for each of the finance agreements there was an underlying asset. Mr De Freitas did not provide more detailed information about the financed assets, their value or the amounts owing pursuant to the finance agreements.
13 In his affidavit Mr De Freitas deposed in summary form to the plaintiff's trading history and its asset and net asset position. The information to which he deposed was as follows:
Year | Turnover | Profit After Tax and Expenses | Total Assets | Net Assets |
| $38,681,195 | $2,359,793 |
| $4,550,645 |
| $38,252,983 | $1,443,141 | $13,841,307 | $5,525,786 |
| $36,957,886 | $ 488,599 | $14,662,859 | $6,014,385 |
14 Mr De Freitas did not attach to his affidavit any financial statements evidencing the figures to which he deposed. The figures given for the years ended 30 June 2013 and 30 June 2014 were expressed as assertions by Mr De Freitas. The figures given for the year ended 30 June 2015 were given on the basis of information provided by Mr Graham McLaughlan of Anderson Redman, the plaintiff's chartered accountants, which Mr De Freitas believed to be true.
15 Mr De Freitas attached to his affidavit copies of correspondence additional to that attached to Ms Hagan's affidavit concerning the issue of security for costs. This included a letter from the plaintiff's solicitors to the defendants' solicitors dated 21 August 2015 which contained a statement to the effect that an independent auditor had assessed the plaintiff's net assets in 2013 and 2014 at over $4.5 million and over $5.5 million respectively.
16 The defendants' counsel was critical of Mr De Freitas' failure to verify the figures for the turnover, profit, asset and net asset position of the plaintiff. The thrust of the criticism was that the assertions were inadmissible hearsay, alternatively, to the extent to which they might be admissible, they should be accorded no or little weight. In response it was submitted on the plaintiff's behalf: first, there was no requirement for the plaintiff to put its financial statements into evidence because the defendants' evidence did not demonstrate a reason to believe that the plaintiff will be unable to pay the defendants' costs; and, secondly, the financial statements were confidential and the plaintiff was not prepared to disclose them to the defendants, who were, in effect, trade rivals.
17 In my view there is force in the defendants' counsel's criticisms of the approach adopted by the plaintiff in adducing evidence of its financial position. Assertions by a director about a company's financial position unsupported by the production of financial statements are not persuasive. A proper assessment of the position which is asserted cannot be made by the opposing party or by the court unless the financial statements are produced. Such assertions can be accorded very little weight. A party who adopts the approach followed by the plaintiff in this case does so at its peril.
18 Before leaving the evidence I record that although not established by the plaintiff's evidence, it was accepted by the defendants' counsel that each of the natural person defendants had been employed by the plaintiff.
Applicable principles
19 The principles which govern an application for security pursuant to s 1335 of the Act were considered by Corboy J in Sugarloaf Hill Nominees Pty Ltd (as trustee for the Richard and Anna Trust) v Rewards Projects Pty Ltd [2011] WASC 19. After giving consideration to the differences which have arisen in the authorities concerning the burden borne by each party to an application for security, his Honour outlined the principles applicable to the determination of the threshold question at [35] in the following terms:
As to the determination of the threshold question:
(a) The section calls for a practical, commonsense approach to the examination of the corporation's financial affairs. It is necessary to make an assessment of the risk that the corporation will be unable to pay - an assessment that will be imprecise. A 'reason to believe' is a low threshold test: Livingspring [15] - [16].
(b) However, the need for credible testimony is an obvious safeguard to ensure that the application is not founded purely upon speculation. To that extent, I agree with the observation of Lee J in Warren Mitchell that 'speculation as to insolvency or financial difficulties likely to confront the corporation will be insufficient to ground the exercise of the discretion' (5).
(c) Determining whether a corporation will be unable to pay involves two considerations. First, it is necessary to fix the time at which the plaintiff's inability, or apprehended inability, is to be assessed. That generally requires an opinion to be formed at the time of judgment and immediately following. Second, it is necessary to identify the range of assets to which recourse might be had for the purpose of enforcing an adverse costs order. Generally, the relevant assets will be those that might be immediately realised and those which could be realised in sufficient time to enable the plaintiff to comply with a costs order in the usual terms: Professional Vending Services Pty Ltd v Christou [2010] FCA 580.
(d) Where the only tangible assets of a plaintiff corporation are held in trust and solvency depends on its right as trustee to an indemnity against the trust property, it is necessary for the court to have in mind the difficulties which a successful defendant would face in attempting to execute an order for costs: Laundry Coin-Wash Nominees Pty Ltd v Dunlop Olympic Ltd (1985) ATPR 40-584 (46,729); BBC Nominees (WA) Pty Ltd v Yangebup Developments Pty Ltd [2008] WASC 81 [14] - [15]. In Laundry Coin-Wash, Smithers J observed that 'indeed, unless some step is taken to alleviate those difficulties it is reasonable and just to treat the applicant company as if it were without assets to meet such a liability' (46,729). Similarly, in Lagarna Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150, Tadgell J held that the fact that the plaintiff trustee company owned unencumbered real estate, the value of which exceeded the likely costs of an appeal and over which it had a right of recourse as trustee by way of indemnity, did not justify a conclusion that security ought not to be given. The trustee might be required at any time to transfer its legal interest in the unencumbered property to the beneficiaries of the trust or to encumber it: and see BBC Nominees where the observations of Tadgell J in Lagarna were cited with apparent approval by Beech J.
20 At [36] Corboy J set out the principles derived from the authorities as to how the discretion should be exercised in the event that the threshold question is answered in the affirmative in the following terms:
As to the exercise of the discretion conferred by s 1335 of the Corporations Act:
(a) The discretion is unfettered: Westralian Goldmines Ltd v Westralian Minerals & Drilling Pty Ltd (in liq) (1986) 4 ACLC 167; FFE Minerals;Livingspring and BBC Nominees.
(b) The factors that may be relevant to the exercise of the discretion were said by Beech J in BBC Nominees (citing French J in Carey-Hazell v Getz Brothers & Co (Aust) Pty Ltd [2004] FCA 1334) to include:
(i) whether the application for security had been brought promptly;
(ii) the strength and bona fides of the plaintiff's case;
(iii) whether the plaintiff's impecuniosity was caused by the defendant's conduct the subject of the claim;
(iv) whether the application for security was oppressive in the sense that it was being used to deny an impecunious applicant a right to litigate;
(v) whether there were persons standing behind the plaintiff who were likely to benefit from the litigation and who were likely to provide the necessary security;
(vi) whether the persons standing behind the plaintiff have offered any personal undertaking to be liable for the costs, and if so, the form of such an undertaking;
(vii) whether the applicant was in substance a plaintiff or the proceedings were defensive in the sense of directly resisting proceedings already brought or seeking to halt the defendant's self-help procedures.
(c) To that list can be added the inability of the plaintiff to pay the defendant's costs; indeed, in BPM Anderson J observed that the fact that the court had reason to believe that the plaintiff could not pay the defendant's costs was the starting point for the exercise of the discretion (citing Megarry VC in Pearson v Naydlar (1977) 1 WLR 899 and Connolly J in Harpur v Ariadne Australia Ltd [1984] 2 Qd R 523. In Harpur, Connolly J observed that:
… once the legislature has made it legitimate to regard the lack of means of the plaintiff and its likely inability to meet an order for costs, this must always be a consideration of great weight and it will frequently be the determining factor (529).
(d) The public interest may also be added to the list of relevant factors: Swansdale Pty Ltd v Whitcrest Pty Ltd [2010] WASCA 129 [71].
(e) There are obvious and practical limits on the extent to which an assessment can be made of the substantive merits of the plaintiff's claims and the defendant's defence. The court will generally not be required to investigate in considerable detail the likelihood or otherwise of success in the action: Swansdale [72] - [74], citing Gartner v Ernst & Young(No 3) [2003] FCA 1437.
21 I would only add one further observation in relation to the applicable principles. That is that in determining whether to exercise the discretion to make an order for security for costs the degree of likelihood of the plaintiff company being unable to pay the costs, along with all of the circumstances, actual and possible, about its financial position must be taken into account: see von Doussa J's observations in Beach Petroleum NL v Johnson (1992) 7 ACSR 203, 205.
The threshold question
22 Is there reason to believe that the plaintiff would be unable to pay the costs of the defendants if they are successful? It is important to note that the question is not whether the plaintiff will be unable to meet an adverse costs order but whether there is reason to believe that it will be unable to do so. The threshold is low.
23 The plaintiff contended that the threshold question should be answered in the negative. It was submitted that the existence of a paid up share capital of $260,000, the statements in correspondence as to the plaintiff's financial positon and the statements made by Mr De Freitas on oath about the plaintiff's strong financial position meant that there was no basis upon which a rational belief could be formed to the effect that the plaintiff will be unable to meet an adverse costs order.
24 In my view the plaintiff's share capital of $260,000 viewed in the context of the plaintiff's potential liabilities under the finance agreements must be considered limited. This factor taken with the absence of any land registered in the plaintiff's name and the existence of the charges disclosed in Ms Hagan's affidavit combine to provide reason to believe that the plaintiff will be unable to pay the defendants' costs if they are successful.
Should the discretion to order security be exercised?
25 The fact that the threshold question has been answered in the defendants' favour does not compel the conclusion that security should be ordered.
26 Neither party has made submissions in relation to the merits. The action is at such an early stage that it is impossible to make any assessment one way or the other. I approach the exercise of the discretion on the basis that the 'merits of the claim' is a factor which is neutral.
27 Having regard to the whole of the evidence, I am not satisfied that this is a case in which security should be ordered. My reasons are as follows:
1. The plaintiff has traded for over 25 years. There is no evidence that the plaintiff has experienced financial difficulties in the past.
2. The search of the Personal Property Security Register attached to Ms Hagan's affidavit discloses major financial institutions have been prepared to extend financial accommodation to the plaintiff for the purchase of assets for use in the plaintiff's business on a regular basis and as recently as May and June 2015. There is no evidence that the assets which are charged are not adequate security for the amounts due to the plaintiff's financiers.
3. I infer from the facts I have set out in 1 and 2 that the plaintiff has traded profitably in the past and is solvent.
4. There is nothing in the evidence which would lead me to believe that the plaintiff will not continue to trade profitably or that it will become insolvent, or that it will be unable to meet an adverse costs order if and when one is made.
5. Whilst the fact that the defendants have satisfied the threshold question necessarily involves the existence of some risk that the plaintiff will be unable to meet an adverse costs order, in my assessment, the degree of risk is not such as to warrant the making of an order for security for costs.
28 In reaching the conclusions I have set out above, I have placed no weight on Mr De Freitas' assertions as to the profitability and net asset position of the plaintiff in the years ending 30 June 2013 and 30 June 2014.
29 I have, however, given some weight to the statement made by Mr De Freitas on the basis of information and belief about the plaintiff's financial position for the year ending 30 June 2015. I regard this evidence as reinforcing the conclusions that I have come to by reference to the other matters emerging from the evidence as distinct from it being determinative.
30 The parties' submissions focussed on the application of s 1335(1) of the Act. These reasons reflect that focus. I add, however, for the sake of completeness that I would exercise the discretion conferred by RSC O 25(1) in the same way.
31 For the reasons I have given I dismiss the defendants' application for security for costs and will hear the parties as to the costs of the application.
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