Trichotech Ltd v Skin and Cancer Foundation

[1994] FCA 375

JUDGMENT No. d 375

COURT OF )

. )

1'	1	No NG 36 of 1993
-	)

BETWEEN: -

Applicant/Cross-Respondent

u!&ax:	HILL J
M:	SYDNEY
PBTEP:	26 MAY 1994

S FOR JUD-

The Skin and Cancer Foundation ("the Foundation"), the respondent/cross-claimant in the proceedings and the applicant in the present motion, applies for the provision, by Trichotech Limited ("Trichotech") the applicant in the proceedings and the respondent on the motion, of security for costs.

The main proceedings concern a product known as T49HR ("the Product"), alleged by Trichotech to be a treatment for early progressive male pattern baldness. It is alleged that a contract was entered into between Trichotech and the Foundation for the Foundation to conduct a trial of the product and report on the outcome. Trichotech claims that the Foundation is in breach of that contract and sues for damages for breach. It also claims that the issue of the report

meaning of 6.52 of the Trade Practices BEf; 1974 (Cth). There	constitutes misleading and deceptive conduct within the
is a further count based upon negligence. The Foundation has cross-claimed claiming payment to it of the sum of $12,000 plus interest.
The proceedings have been listed for hearing in August with an estimate of five days although it is suggested there is a possibility, having regard to whether a particular witness gives evidence, that that period may extend into a sixth day.
Trichotech is, of course, a corporation. Its balance sheet for the year ended 30 June 1992 discloses that it had assets of $9,946,036 and liabilities of $886,368, leaving a total shareholders equity of $9,059,668. The profit and loss account for the same year showed accumulated losses of $1,340,540. When, however, the balance sheet is examined it will be seen that the assets of Trichotech include an intangible asset to which a value of $9,892,240 is ascribed.
That intangible asset is apparently the rights of Trichotech to the product.
The audit report attached to the accounts points out that Trichotech is reliant upon grants from shareholders to meet its debts as and when they fall due and that the receipt of grants from shareholders is uncertain. The auditor concludes that without that support the company might not be able to continue as a going concern. Discussing the
intangible asset, the auditor says that the net value o f the asset i s based on the expected potential revenue from the sale
o f the process relating t o hair treatment. The auditor says:

"The valuation i s dependent on the process being proven i n laboratory testing and

being successfully marketed i n order t o	realise the forecasted net revenue. The
Chairman's report re fers t o continued
increases in hair counts o f s ta t is t ical significance i n the second stage concluded i n December, 1991. A t present there i s a
December 1991 h a i r counts) o f the Skin and dispute between the findings (based on the
Cancer Foundation and Trichotech Limited which a t present has not been resolved and
certain unproven assumptions and The valuation therefore was based on i s currently before the Federal Court.
expectations and accordingly we are unable
asset. t o express an opinion on the value o f t h i s
No evidence was f i led by Trichotech i n reply t o the

a f f i d a v i t evidence o f the Foundation. The parties are agreed

that i f security i s t o be granted and having regard t o d ra f t

b i l l s which are presently before me	that the amount, including
application but the balance o f costs t o f inal hearing, should	not only the work t o date and the costs o f the present
be assessed for present purposes a t $50 ,000 .

Section 1335(1) o f the CorDoratione provides:

action or other legal proceeding, the	"Where a corporation i s p la in t i f f i n any
court having jurisdiction in the matter may, i f it appears by credible testimony that there i s reason t o 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."

The present application is based upon that section
although there is amply authority, even in the absence of such

a provision, that the Court has a discretion to grant security

for costs in an appropriate case: a v Jet

. .

a Ptv (1984) 54 ALR 237; Be11 W h o w a l e CoL

. .

m v - t r C o r m (1984) 2 FCR 1.

The cases make it clear that an order for security for coets is discretionary to be exercised in all the circumstances of the case. There is no one factor that is determinative and a number of matters arise for consideration which the cases indicate include the following:

a	The chances of success of the applicant and whether the
applicant's claim is bona fide or a sham.
*	The quantum of risk that the applicant cannot satisfy a coet order.
*	Whether use of the power would shut out a small company from making a genuine claim against a large company, i.e. whether the power is being used oppressively.
*	Where the impecuniosity of the applicant arises out of the breach in respect of which relief is sought.
*	Whether there are aspects of public interest which may weigh in the balance against the making of an order.
*	Whether there are any particular discretionary matters peculiar to the circumstances of the case.

See tv Access v !&6t~ac B -

- (1989) ATPR 40-972 and - Ptv L U v Brahen

(1982) 42 ALR 563.

On the face of it the present is an application where security would ordinarily be awarded having regard to the financial impecuniosity of Trichotech and the doubt that must exist that, in the event that its claim were unsuccessful, it would be able to meet a claim for costs by the Foundation. In saying this I am unable, on the evidence before me, to form any view of the chances of success in the matter or of the bona fides of the claim. It is not suggested that the claim was made other than bond fide.

Counsel for Trichotech, however, submitted that there were special matters in the present case which should guide me in exercising my discretion against the making of an order.

First, it was submitted that the Foundation had adduced no evidence to suggest any liability of Trichotech had not been met, other than the amount of $12,000 which is being sued for in the cross-claim. With respect to that submission,

I do not find it particularly persuasive. The accounts of the

company and the auditor's report suggest that Trichotech ha8 no claim upon its shareholders to provide funds. The fact that they have done so in the past is no guide to what they may do in the future, particularly if they are unsuccessful in the present proceedings. Indeed, if Trichotech fails in the present proceedings, it may well be that the outcome of the proceedings makes it clear that the intangible asset is of no value at all, in which event it can hardly be expected that the shareholders, without an obligation so to do, would contribute to the liabilities of the corporation. I should say, further, that there was no offer on the part of shareholders to guarantee payment of the costs in the event that the proceedings were unsuccessful.

Second, counsel for Trichotech sought to rely on the

. . (1987) 72

judgment of Sheppard J in v w e Ptv m

ALR 617. In that case (at 621) his Honour emphasised that the applicant, who was a party to a contract in respect of which he was suing for breach, was in the same financial situation at the time of the proceedings as he was at the time he entered into the contract. His Honour suggested that it might

have been wise for the respondent builder entering into that	contract to ascertain that financial position before business
was done.
One may assume from his Honour's comments that this was a matter his Honour took into account. Counsel for Trichotech properly pointed out that that case was one where security for costs was sought against an individual. While, no doubt, in an appropriate case an order for security for costs may be made against an individual litigant, so to do is relatively unusual. The basic reason for this is that it has been generally understood to be a principle of the common law that poverty is no bar to litigation, so that it is a big step indeed for the Court to place a substantial bar in the way of an individual litigant suing. Somewhat different policy considerations underlie a provision such as s.1335 of the
Corwrations because, where a corporation is an applicant,
the corporation has the benefit of limited liability and the policy of impecuniosity does not play quite the same role.

I do not regard his Honour in as expressing

eome general principle that if a party deals with an impecunious contracting party who subsequently becomes an applicant in proceedings that, therefore, security for costs should not be ordered against that applicant. In any event there is no suggestion that the Foundation was aware of the financial situation of Trichotech at the time it entered into

the contract, and I do not regard what his Honour said in that	case as of any assistance in the matter before me.
The third matter raised by counsel for Trichotech was that the proceedings themselves would ultimately establish the value of the intangible asset in the balance sheet and if the applicant succeeds in the proceedings, the relief granted will give value to Trichotech. If, on the other hand, Trichotech was required to give security and for some reason
was unable to do that then, it was submitted, it would be deprived of the ability to give value to the intangible asset and be barred in pursuing its case when the value of that asset was the real subject matter of the dispute.
It is not quite right to say that the subject matter of the dispute is the value of the asset, in that the real question is not whether the asset is or is not a good product but whether the Foundation breached its contract or was negligent in the way in which it went about carrying on reeearch under it. But, be that as it may, the third submission is a two-edged sword because it makes abundantly clear that in the event that the case proceeds and Trichotech were to fail in its application, the Foundation would be left unable to recoup the costs which it had incurred. Ultimately, it is that sort of argument which underlies the statutory provisions, the latest of which is that incorporated in 8.1335, empowering a court to make an order for security.
In all theee circumstances I am of the view that the preeent is an appropriate case to order security to be given. Accordingly:
(1) I order that Trichotech, within 14 days of today, provide security in the sum of $50,000 in cash or such other form as the Foundation agrees to, or failing such agreement as the Court approves.
(2) I direct that the proceedings be stayed until such security is given, save and except for the right of the applicant, in the event such security is not provided, to apply for such orders as it may be advised consequent upon the non-provision of the security.
(3) I further direct that, in the event that any dispute

shall arise as to the form of the security, either party

should be at liberty to apply on 24 hours' notice.

(4) I further order that Trichotech pay the Foundation's

costs of the motion.

I certify that this and the
preceding eight (8) pages
are a true copy of the Reasons
for Judgment herein of his Honour

Mr Juetice Hill.

Associate: @!!G!

Counsel and Solicitors	JGF Harrowell instructed by
for Applicant/Cross-	Hunt & Hunt
Reepondent :
Counsel and Solicitors	M Walton instructed by
for Respondent/Cross	Clayton Utz
Claimant :
Date of Hearing:	26 May 1994
Date Judgment Delivered:	26 May 1994