Stolair Pty Ltd v Friends United International Pty Ltd

[1997] FCA 1540

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 105 of 1996

BETWEEN:

STOLAIR PTY LTD
ACN 008 288 024
FIRST APPLICANT

PHARMALLIANCE PTY LTD
ACN 074 186 548
SECOND APPLICANT

AND:

FRIENDS UNITED INTERNATIONAL PTY LTD
ACN 070 101 156
FIRST RESPONDENT

BETTY JOAN ALLEN
SECOND RESPONDENT

BARRY JONES
THIRD RESPONDENT

JUDGE:	MANSFIELD J
DATE:	16 DECEMBER 1997
PLACE:	ADELAIDE

REASONS FOR DECISION

This matter was commenced by application on 10 December 1996.  Thereafter, there were interlocutory hearings seeking injunctive relief on 10 and 24 December 1996 as a result of which the Court made certain orders on the latter date.  The subsequent conduct of the matter during 1997 has been directed essentially to the matter being prepared for trial.  The respondents to the application have had certain changes of solicitors during that time.  Most recently, in October 1997, the present solicitors for the respondents to the application commenced to act for them.

Promptly upon those solicitors commencing to act for the respondents, they sought information from the applicants directed to ascertaining what assets the applicants had available to meet any order for costs should the application be unsuccessful.  By that time, and in fact on 25 September 1997, I had tentatively listed this matter for hearing for the week commencing 16 February 1998.  There is now before the Court a notice of motion issued on 27 October 1997 by the respondents seeking that the applicants provide security for costs in relation to the proceedings.

That application is brought principally pursuant to s 1335 of the Corporations Law 1991 (“the Law”).  Consequently, my power to make the order sought in the notice of motion exists if it appears by credible testimony that there is reason to believe that the applicant corporations or either of them will be unable to pay the costs of the respondents if successful in their defence.  I may then require sufficient security to be given for those costs, and to stay the proceedings until that security is given.

In the light of the material before me I have not reached the view that it appears by credible testimony that there is reason to believe that the applicants or either of them will be unable to pay the costs of the respondents if successful in their defence.  Consequently at this point I decline to make the order sought on the notice of motion.  I shall briefly explain my reasons for declining so to order.

The material adduced by the respondents, the applicants on the motion, is limited to searches made through the Lands Titles Office to ascertain what real estate is owned by the applicants.  I am satisfied from that material that the second applicant owns no real estate, and that the first applicant owns only the land in Certificate of Title Register Book Volume 5205 Folio 539, a property at Beulah Park, which it purchased in December 1994 for $98,000 and which is mortgaged to the extent of $89,000 or thereabouts.  If they were in fact the only assets of the applicants, and if there was no other evidence as to the trading or balance sheet position of the applicants, I would have the view that it was open to exercise the discretion under s 1335 of the Law.  I was asked so to conclude in accordance with that section on the basis of that material, and (it was contended) in the absence of any material having been provided by the applicants to the respondents in response to the request of solicitors for the respondents for such material.  I do not need to decide whether I would draw that conclusion, at least sufficiently for the purposes of s 1335 of the Law, in the absence of any additional material.  However, it is noteworthy in my view that there is no evidence that either of the applicants is insolvent.  There is no evidence that either of the applicants has been unable to pay its debts as and when they have fallen due.  There is no evidence as to what the applicants have asserted, if anything, in the Annual Returns which they have filed, according to the material before me, with the Australian Securities Commission from time to time.  There is no evidence of other inquiries which might indicate that there were other significant creditors of either of the applicants presently unsatisfied.  Subject to reviewing evidence adduced by the applicants, the picture therefore is a somewhat unsatisfactory one, albeit one upon which the respondents, the applicants on the motion, sought to rely in the absence of further materials having been provided to them.

The material relied upon by the applicants contained in or exhibited to the affidavit of Warwick Deane Raymont (“Mr Raymont”) sworn on 8 December 1997 includes financial information concerning the applicants.  It provides trading statements, profit and loss statements and balance sheets of each of the two applicants, in the case of the first applicant to 30 June 1996 and in the case of the second applicant to 30 June 1997, together with further information which shows that the revenue from trading of the second applicant has progressively increased from early 1997 to a level in excess of $40,000 per month.  The trading, and profit and loss statements, relating to the second applicant for the year ended 30 June 1997 show that for a number of months of that financial year its revenue was very significantly less than that amount.  There is therefore reason to think that its net profit in the current financial year will be significantly better than its net profit for the year ending 30 June 1997.  The profit and loss statement for the second applicant for the year ended 30 June 1997 shows only a net profit of $5,320 but within the expenses is included an item for legal expenses in excess of $20,000, which I am prepared to infer represents abnormal expenditure rather than trading expenditure.  To that extent its net profit potentially in the current year, and subject to resolution of the current proceedings, will be rather better.  Its balance sheet shows a surplus of assets over liabilities as at 30 June 1997 of a little over $70,000, largely if not entirely represented by office equipment.  I do not have information directly showing whether that office equipment is readily realisable, but its description tends to indicate that it would be realisable at some significant amount if not at the amount for which it is contained in the balance sheet.  I am not prepared to conclude that it would realise anything in the order of $70,000 if realised as a matter of urgency, but I find that it would realise a significant amount.  The first respondent's financial information is restricted to the 30 June 1996 financial year.  During that year it had a net trading profit of $19,811 and at the end of that financial year its net assets had increased during that year from an insignificant sum to $12,827.  There are no particular assets listed within that balance sheet which indicate that, upon realisation of those assets, they would not be realised at, or in the case of the real estate possibly more than, the figures contained within the balance sheet.  There is no information to indicate how the financial position of that entity has altered since 30 June 1996.

I make it clear that, in forming the view which I have formed, I am doing so on the basis that the affidavit of Mr Raymont referred to does represent not merely the financial position of each of the applicants, but also that that affidavit would be misleading if it did not fairly present that financial information and, in particular, that it would be misleading the Court if the financial situation of the first applicant had altered to its detriment since 30 June 1996.

On the material I have identified, in my view, both the applicants have demonstrated, quite apart from the absence of evidence suggesting insolvency or inability of either of them to meet debts as and when they fall due, that they are trading profitably.  In the case of the second applicant, that trading is considerably better than its trading during the financial year ended 30 June 1997.  Each has a significant surplus of assets over liabilities likely to be realised, if necessary, at not insignificant value should the action be determined adversely to the applicants.

I have of course had regard to the fact that it is necessary to see what would be the financial position of the applicants when this action generally is completed, rather than simply at the present time.  There is nothing to indicate that the financial position of either of them will have deteriorated in 1998, nor to indicate that any significant new contingent liability or prospective liability will have been incurred which will alter the financial picture presented to me.

The only abnormal potential liability which the applicants face apart from their own costs is, therefore, the likely award of costs against them should they fail in their claim.  I do not have evidence before me quantifying that likely award of costs, but I am prepared to assume that it will be quite substantial.  However, given the material before me, I do not think it appears by credible testimony that there is reason to believe that the applicants will be unable to pay the costs of the respondents if the respondents are successful in their defence in the action.

I have not in those circumstances called upon counsel for the applicants to develop the other matters which he indicated were proposed reasons why, in the Court's discretion, an order for security for costs should not be made, in any event.  That is because I do not think the threshold over which I must pass to address those additional discretionary considerations has been passed.

Accordingly, I reject the application for security for costs on the notice of motion.

Each of the applicants and the respondents has applied for costs of the notice of motion.  I shall not recite the submissions.  When the notice of motion was first called on for hearing, and directions were given with regard to its disposition, solicitors for the applicants in the action also orally applied for an order that the then solicitors for the respondents should be disqualified from continuing to act for the respondents.  Directions were also given with a view to resolving that matter.  That matter first came on today before the notice of motion, but it was not pressed.  I refer to it because it is part of the circumstance to which the applicants refer and which is said to justify the non-disclosure until today of their financial and trading position in the way I have outlined in my reasons.  On the other hand, as my reasons indicate - and as counsel for the respondents said in the course of his submissions on costs - had that material been available earlier, the respondents may not have pursued the application at all.

In my view, the appropriate order for costs on the notice of motion is that the applicants in the action should have their costs of the notice of motion as their costs in the cause.  I do not think it would be an appropriate exercise of discretion for the unsuccessful respondents, the applicants on the motion, to have any order for costs.  The effect of my order is that if the respondents succeed in resisting the principal claims of the applicants, they will not have to pay costs of the notice of motion.  If the applicants succeed in their application generally at the hearing, the costs of the notice of motion will be recoverable as part of the costs of the action.

I certify that this and the preceding five (5) pages are a true copy of the Reasons for Decision herein of the Honourable Justice Mansfield.

Associate:

Dated:            

Counsel for the Applicants:	Mr M Hoile
Solicitors for the Applicants:	Scales & Partners
Counsel for the Respondents:	Mr M Browne
Solicitors for the Respondents:	Robert Brook
Date of Hearing:	16 December 1997
Date of Decision:	16 December 1997