Telstra Corp Ltd v First Netcom Pty Ltd

[1997] FCA 1593

IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY )    No.NG 483 of 1997
GENERAL DIVISION                 )   

Between:TELSTRA CORPORATION LIMITED

Applicant

And:FIRST NETCOM PTY LIMITED

Respondent

REASONS FOR JUDGMENT

EINFELD J SYDNEY 25 AUGUST 1997

There are three motions before the Court and although it would have been desirable to prepare a considered reserved judgment on the matter, time has just made it impossible to do so before the hearing in the Full Court tomorrow.  I am not sure what if anything the effect of these motions might be on the appeal, it seems appropriate that having considered the matter and determined what I believe should be done, I should pronounce it before the matter comes before the Full Court.  The parties and the Court will then know what the position is.  I will therefore give brief reasons this afternoon and expand on them if necessary on a later occasion.

The motions before the Court are, in order of filing, first, a motion by First Netcom to set aside a subpoena issued by Telstra on 11 July seeking in brief terms a range of financial records and other documents designed to show the financial position of First Netcom at the present time and for a short period in the past.  Second, Telstra is seeking an order that First Netcom supply security for its undertaking as to damages given at the time when judgment was pronounced on 16 July last ordering an injunction to prevent Telstra from carrying out certain threatened actions at the time.  The subpoena was intended to support this motion.  Third, Telstra seeks an order in the nature of a Mareva injunction restraining First Netcom from dealing with its assets other than in the ordinary course of trade.

It is appropriate that I deal with the motions in that order.  Firstly, as to the subpoena.  There have now been at least two hearings concerning this subpoena in which First Netcom has proffered evidence designed to support a limited disclosure of information.  It will suffice for present purposes to say that in my opinion those efforts to answer the subpoena were wholly inappropriate and inadequate.  I cannot detail the specifics now but the transcript and exhibits amply demonstrate what I am saying.  Not only am I not satisfied that First Netcom has supplied accurate and truthful information concerning its financial affairs, there seems to be reason for believing that it is deliberately attempting to obfuscate the whole issue of its financial viability at the present time.

It is not necessary for me to come to a final conclusion on that matter at this time.  It is sufficient to say merely that the courts have never permitted parties to determine what they shall supply in response to a subpoena.  Although I agree that the subpoena is fairly broadranging, it seems to me that the sins which the subpoena itself might have committed have been entirely swamped by the refusal of First Netcom to make full disclosure and to provide a person in a position to know the facts, clearly on the evidence Mr MacDonald, to explain the company’s financial position and answer the request for all or most of the information sought in the subpoena.  I therefore propose to dismiss the motion to set aside the subpoena and in a moment will fix a fresh date for the production of the documents sought.

Secondly, the motion for security to support the undertaking as to damages.  I said during the course of the hearing on the injunction that this seems to me to be at the crux of the conflict between these two parties.  On the evidence thus far, Telstra was never seriously intending to cut off the telephones of First Netcom’s customers.  Nor, as it seems to me, were they in a position, as their correspondence suggested, to force these customers to transfer to Telstra or any other supplier as a condition of maintaining their telephone lines.  In fact Telstra’s response to the application for an injunction was its defensive reaction to support its claim that it was owed very substantial sums of money by First Netcom, and that the company would supply security neither in respect of the past debt nor in respect of the continuing supply of services.  Whilst this attitude cannot be criticised in isolation, I have the distinct impression that all the facts in this matter, on both sides, are yet to emerge.

In my view, the merits of the application for security for the undertaking as to damages have been substantially advanced by First Netcom’s response on the issue of the subpoena.  If First Netcom had been able to produce material which even arguably established that it was a viable going concern for which expenditure of $650,000 a month was well within its capacity to pay, the issue of security would hardly have arisen.  However, its failure to make proper disclosure and act in a bona fide way in respect of the subpoena throws very considerable doubt upon its capacity to give a genuine undertaking as to damages given as a condition of the injunction.  The authorities on such undertakings make perfectly clear that they are intended to be taken seriously and to possess or be given real substance.

Although there was, I think, no formal motion for the dissolution of the injunction on the ground the undertaking as to damages was valueless, it certainly was raised in the course of argument as an adjunct to the motion for security and to the other matters presently being litigated between the parties.  It seems to me that it would be premature to discharge the injunction on this ground but I do propose to order security for the undertaking as to damages.

The injunction has now been in place for about six weeks.  As it seems to me, the order that I should now make is that the respondent provide security for its undertaking as to damages in the sum of $2 million, such security to be provided by way of bank guarantee, payment into court or other form satisfactory to a Registrar.  I have chosen the figure of $2 million as representing just a little over 3 months of services at $650,000 per month.  That period reflects the 6 weeks from the time of the injunction up to the present and a period into the future before which it will not be feasible to again examine the continuity of the injunction.  This is partly because of my present workload and also because the parties have been apparently engaging in some form of exchange, albeit argumentative and unedifying, sometimes even a little infantile, concerning the possibility that First Netcom will voluntarily cease to be a customer of Telstra at some time in the near future.

My intention therefore is to list the matter for further hearing on Wednesday 1 October and to order that the subpoena be answered before a Registrar on Wednesday 24 September.  The sufficiency of the disclosure would then be able to be argued, and sensible, or more sensible, discussion take place on the issue of further security or a dissolution of the injunction or some other orders.

So far as concerns the application by Telstra for a Mareva-type injunction, my view is that quite insufficient evidence has been brought forward establishing any danger of First Netcom dissipating its assets adverse to the interests of Telstra.  Indeed Telstra’s own argument in this regard is itself lacking in some logic in that on the other motions, it has been at pains to suggest that First Netcom is to all intents and purposes insolvent.  Yet on this motion it is suggesting that the company is filtering its assets out of the jurisdiction or at least out of the reach of Telstra.  If that is the case, there are ample provisions under the law to permit Telstra to take other actions more appropriate than a Mareva injunction.

The consequences of these conclusions are therefore that:

(1)the motion to set aside the subpoena will be dismissed;

(2)the motion seeking security for the undertaking will be granted as earlier declared; and

(3)the motion for the Mareva injunction will also be dismissed.

The security is to be provided by not later than 5 pm on Tuesday, 8 September.

[After discussion]

On the question of costs, I have not yet made an order as to the costs of the application for the interlocutory injunction given on 16 July.  It does not seem to me to be sensible to deal with the costs of these other motions which are all inter-related without dealing with the costs on the injunction.  That question has not yet been argued.  For the present I will note that First Netcom submits that there should be no order as to costs on the basis that the result of the litigation is approximately evenly in favour of and against both parties.  I suppose I should also note that submission as the first recognition in this unpleasant litigation that the Court might have struck a balance between the two parties.  Telstra, on the other hand, seeks its costs, or at least a high proportion of its costs, of the motions on the ground that on the important motions, that is those for security and relating to the subpoena, they were successful.  It says that the motion for the Mareva injunction was more or less an afterthought which arose during the course of the proceedings and did not cause any appreciably additional costs.

As I have said, I think I should deal with costs on a comprehensive basis.  As the injunction is the subject of an appeal right now such that the Full Court might itself have something to say on costs, I will postpone this issue for the time being but deal with it on 1 October or such other date as is convenient, or in accordance with anything that might fall from the Full Court.