FEDERAL COURT OF AUSTRALIA Trilogy Computer Systems Pty Limited v CTI Communications Limited [2001] FCA 1778 PRACTICE AND PROCEDURE – security for costs – applicants ordinarily resident outside Australia – considerations as to form and amount of security – no question of principle. Federal Court Act 1976 s 56 Federal Court Rules O 28 r 3 Trilogy Computer Systems Pty Limited ACN 006 673 123 and ors v CTI Communications Limited ACN 071 781 363 and ors N1019 of 2001 ALLSOP J SYDNEY 6 DECEMBER 2001 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1019 of 2001 BETWEEN: TRILOGY COMPUTER SYSTEMS PTY LIMITED ACN 006 673 123 FIRST APPLICANT SAMURAI INVESTMENTS LIMITED SECOND APPLICANT SUSSEX INVESTMENTS LIMITED THIRD APPLICANT ERROL STANLEY WILLIAMS FOURTH APPLICANT MUSASHI LIMITED FIFTH APPLICANT AND: CTI COMMUNICATIONS LIMITED ACN 071 781 363 FIRST RESPONDENT PETER FRITZ SECOND RESPONDENT MICHEAL JOHN BARRACLOUGH THIRD RESPONDENT BRYAN FRANCIS CURTIN FOURTH RESPONDENT DAVID PETER BEDDALL FIFTH RESPONDENT JUDGE: ALLSOP J DATE OF ORDER: 6 DECEMBER 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The Second to Fifth Applicants provide security for the costs of the Second to Fifth Respondents by way of bank guarantee in a form that is satisfactory to the Registrar of the Court, in the sum of $300,000.00 to be provided by the First Applicant on or before 8 December 2001. 2. As a condition of the provision of such bank guarantee, the reasonable costs of the First or Second to Fifth Applicants including costs incurred by the First Applicant in providing the bank guarantee for which the second to fifth Applicants may be liable up to a sum of $10,000 per annum be treated as a reasonable disbursement in the proceeding for taxation purposes provided that such sum is actually expended and that in any taxation of costs payable in these proceedings that such sum be so treated. 3. That the Second to Fifth Applicants pay half of the costs of the Second to Fifth Respondents of the motion filed on 13 November 2001. 4. That the other half of the costs of the Second to Fifth Respondents of to such motion be treated as the Second to Fifth Respondents' costs in the cause. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1019 of 2001 BETWEEN: TRILOGY COMPUTER SYSTEMS PTY LIMITED ACN 006 673 123 FIRST APPLICANT SAMURAI INVESTMENTS LIMITED SECOND APPLICANT SUSSEX INVESTMENTS LIMITED THIRD APPLICANT ERROL STANLEY WILLIAMS FOURTH APPLICANT MUSASHI LIMITED FIFTH APPLICANT AND: CTI COMMUNICATIONS LIMITED ACN 071 781 363 FIRST RESPONDENT PETER FRITZ SECOND RESPONDENT MICHEAL JOHN BARRACLOUGH THIRD RESPONDENT BRYAN FRANCIS CURTIN FOURTH RESPONDENT DAVID PETER BEDDALL FIFTH RESPONDENT JUDGE: ALLSOP J DATE: 6 DECEMBER 2001 PLACE: SYDNEY REASONS FOR JUDGMENT 1 There is before the Court a notice of motion brought pursuant to Order 28 Rule 3 and under section 56 of the Federal Court Act for security for costs. The security is sought by the second to fifth respondents in these proceedings against the first to fifth applicants in these proceedings by way of notice of motion dated 13 November 2001. 2 The first respondent is under administration and the proceedings are stayed against it pursuant to section 440D of the Corporations Act. I understand from the parties before me that a scheme of arrangement is likely to be entered into. If that is the case it may well be that the applicants, at least in part, may obtain some satisfaction from any scheme and the acceptances of any proofs that occur. 3 The second, third and fifth applicants are all British Virgin Island companies. Mr Williams, the fourth applicant, is a resident of Hong Kong. Thus the second to fifth applicants fall within the terms of paragraph 3(1)(a) of Order 28 as parties ordinarily resident outside Australia. 4 The first applicant is an Australian company. I will return to it in due course. The motion sought security against it, but for reasons which will become apparent that part of the motion was not pressed before me. Mr Lee, solicitor for the applicants, frankly and perfectly properly, conceded that he has understood from the gist of conversations between himself and Mr Baldry, solicitor for the second to fifth respondents, that the motion is really only being pressed against the second to fifth applicants. 5 There is a significant measure of agreement amongst the parties. Mr Lee and Mr Baldry were able to agree on a number of essential matters; the first is that security was something that should be given by the second to fifth applicants, they being foreign applicants. Secondly, there was a measure of agreement about the amount. Initially, a sum in the order of over $700,000 was claimed. This was reduced to a sum of $300,000 by way, if I may put it this way, of horse trading between the solicitors. It does not relate to any precise resolution of dispute about the likely costs in these proceedings. Mr Lee indicated to me that he agreed to that being a sum for the first to fifth applicants before a realisation that the motion was being pressed only properly against the second to fifth applicants. 6 I am not sure that that proposition is one that is accepted by the respondent's representatives. By that I do not mean to indicate that they doubt Mr Lee's word but it may not have been an impression which struck them at the time. In any event, the second to fifth applicants have independent causes of action against the respondents. Significant costs may well be expended in defending these proceedings against the claims made by the foreign applicants. 7 I indicated a moment ago that Mr Baldry and Mr Lee had previously agreed that security could be provided. They disagree on the form of security. The respondents, the applicants on the motion for security, that is the second to fifth respondents, have required cash, or a bank guarantee. The applicants have proffered that the first applicant provide a guarantee for the second to fifth applicants. This is not acceptable to the respondents. 8 It is unnecessary because of the scope of the agreement between the parties and their representatives to resort to any minute analysis of the affairs of the first respondent. It is a company which engages in what is described as the supply of computing solutions in Australia. It provides information technology products, systems integration, development, training and support to small to medium sized businesses, large corporations and government. It has been operating in Australia, it is said, since the mid-1970s. 9 Its financial statements are in evidence before me. They are not audited. However, they appear to have been competently drawn up to the extent one can judge that from their form. The accounts are not governed by any relevant accounting standard other than Accounting Standard AASB1025 dealing with the application of the reporting entity concept and other amendments. The accounts, notwithstanding that, reveal at 30 June 2000 shareholders' equity of almost $2.4 million. The unsigned accounts for the year ending 30 June 2001 reveal shareholders' equity of $4.5 million. The revenue accounts for 2000 reveal an operating profit in 2000 of $1.1 million and in 2001 of approximately $2.1 million. That is after income tax and extraordinary items. 10 For those numerical reasons the respondents do not press security against the first applicant on the basis that on the face of the accounts there appears to be sufficient worth to pay the costs of the proceedings. However, as I indicated earlier the second to fifth applicants bring their own independent claims and may be liable to significant costs in these proceedings. Mindful as I am of the width of the discretion, I am also mindful of the fact that the $300,000 is, I think it is fair to say common ground, a fairly arbitrary figure. It is not clear to me yet, because of the immature state of preparation in this case, how long it will really take. Therefore the real decision I have to make is twofold. One, whether to grant an order for furnishing of a bank guarantee and secondly in respect of how much money. 11 As to the former question I propose to order that a bank guarantee be provided. It was opposed on the basis that it would be a significant interruption to cashflow. That was the matter deposed to by Mr Allison and Mr Cable, in effect, in their affidavits - in particular Mr Allison. On entering the witness box he frankly stated, upon being asked, what the imposition was on his company in providing a guarantee. His bank has required an arrangement which is not documented in any evidence before me, but from his evidence I take it to be as follows: a form of floating charge over the major assets of the company which are customers' receivables – that is the debtors – at a price in the order of three to four per cent of $300,000 per annum. That means that once the guarantee is in place, and the back-up security is in place, the first applicant will have the benefit of the cashflow of repayment by debtors in the ordinary course of business. There may or may not be some form of fixed charge as well as a floating charge. As I understand Mr Allison's evidence the first applicant will have the use of the funds subject to the satisfaction of the bank, from time to time, as to the position from time to time of the first applicant. If the bank from time to time is dissatisfied with the prudential protection its security gives it then that may be a real guide to whether or not the respondents should be satisfied with the guarantee of the first applicant. In those circumstances, the bank may well ask for better security and, if that can not be given, may withdraw the guarantee. In those circumstances, if that did happen – (and neither party posits that it will for obvious reasons - one not being in a position to know and the other being in a position to know and saying that the company is strong) – if that position did obtain at some time in the future the matter would then have to come back for a review of the whole question of security, depending upon what stage the proceedings were at, how much money people had spent and what the prejudice was to either or both sides in making any particular order. 12 The cost to the first applicant, as I said, was three to four per cent. I do not have any precision beyond that from Mr Allison. Three per cent of $300,000 is $9,000 per annum. He also indicated that the company would be required to pay the costs of the bank in overseeing compliance with whatever prudential considerations the bank had in mind. I imagine that that would involve the provision of balance sheets and other financial information, and the cost to the bank whether of their legal department or their security department of satisfying themselves from time to time of the satisfactory state of such information. 13 No precise amount was given for this but what I propose to do is to assume that it would be in the order of some small thousands of dollars - perhaps, $1,000-$2,000 a year. There would no doubt be line fees and other types of bank fees involved. Looking at the revenue account and the balance sheet of the first applicant, an additional cashflow burden of something in the order of $10,000-$12,000 or even $10,000-$15,000 is hardly likely to affect its ultimate health. It is a revenue outgoing and thus a cost, but no-one indicates or submits that it is likely in any way to stifle the litigation. 14 On that basis I think it is appropriate to order a bank guarantee. However, I think it is also appropriate to direct that as a condition of the provision of the bank guarantee the respondents agree that a reasonable cost of the provision of the guarantee up to $10,000 be treated by them as a disbursement of the first applicant in the conduct of these proceedings being not a lump sum but a sum calculated at 3.3 per cent. So it is $10,000 per year or such allocated part for only part of the year assuming that that sum is actually expended. Absent consent I propose to order that in the taxation of this matter that sum be so treated. That being the case then the bank guarantee would need to be in a form satisfactory to the Registrar. 15 It being the case that that is my view about the form of the security one then turns to the question of the amount. In one sense it is neither here nor there whether is $250,000 or $200,000 or $300,000 in terms of the cost burden arising from the bank charges. I think it is better in circumstances where there is not a stultifying cost burden on the provider of the security to order somewhat more than somewhat less. I say that for these reasons. First, from the state of preparation of these proceedings I am not sure how long it will take to resolve and what really is involved. There are obviously going to be some real questions of lay factual matters which will not extend beyond the usual debate about what happened and what was said. The expert evidence about the underlying business may, it seems to me, be quite technical and may require the involvement not only of accountants of some skill and therefore some cost but also people familiar with topics such as telephony and the like. In my experience those persons do not arrive in court cheaply either. 16 Secondly, the difficult with requiring people to come back for more security if it is appropriate is the burden that can often lie upon such parties to explain what money has perfectly properly been spent. There is a risk in those circumstances of parties having to disclose privileged material if they want more security. That is a choice that should not be thrust upon them if the alternative is not going to cause an overwhelming burden to the provider of the security. For those reasons I propose the order the sum of $300,000, but I recognise that there is real force in what Mr Lee said about for the moment $200,000 being adequate. I think it probably would be. Indeed $150,000 to $200,000 would probably be adequate but I want to avoid the sorts of difficulties that I have identified. 17 There is a third difficulty and that is the expenditure of legal costs in a motion such as the present which would seem to me to probably amount to not much less than half the bank fees for the year, by the time affidavits are prepared and proper preparation is done. 18 In those circumstances I propose to order that the second to fifth applicants provide to the second to fifth respondents security for costs in the order of $300,000 by way of a bank guarantee to be provided by the first applicant the reasonable costs of which up to $10,000 per annum to be treated as disbursements of the first applicant, or the second to fifth applicants, depending on their own internal arrangement system of accounting for it in these proceedings. That security is to be provided on or before 18 December. 19 The question of costs has been argued before me. The question is not easy, the primary difficulty appears to be that Mr Allison swore an affidavit which, in paragraph 3, stated the following. He referred to paragraph 17 of Mr Cable's affidavit where Mr Cable had deposed that to have to pay the amount of $300,000 into court now or, alternatively, to provide a bank guarantee now for that amount would require $300,000 in cash out of cashflow to be set aside. He then said that the statement was correct because if one is the subject of a bank guarantee, the bank requires the person or entity which it is guaranteeing to deposit an amount in cash equivalent to the sum guaranteed into a term deposit account with the bank. I initially allowed this on the basis that it appeared to be evidence of this man's knowledge of how the banking system worked in Sydney or Australia, and given that he was going to be cross-examined, I allowed the evidence. 20 On his entering the witness box, I asked him some questions and it became quite apparent from his evidence that both Mr Cable's affidavit and his paragraph 3 were wrong, that the evidence was not directed to banking practice in general, but rather the evidence was directed to his discussions with his own bank. No primary evidence was put on about that in his affidavit. In fact, what his bank is requiring his company to provide as security is the equivalent of a floating charge, there may also be a fixed component over receivables, being the debtors, for a fee in the order of 3 to 4 per cent a year of $300,000, plus costs of monitoring compliance, which it appears on his evidence to be a financial burden of a revenue kind of something in the order of $10,000 to $15,000 per annum, which is not the same as having to deposit the cash in the bank. 21 If that matter had been made clear in the evidence, I doubt whether this motion would have gone ahead. However, no-one explored how this apparent discrepancy arose and I say no more about it than that which I said in argument: that it would appear to have been brought about by haste and/or lack of clarity in instructions or in understanding them. 22 I have made a condition on these orders. 23 I also note that the motion, strictly speaking, did ask for security against the first applicant, although as I noted earlier, I do not think anyone has come to court today expecting that to be argued or pressed. 24 Costs are within my discretion under s 43 of the Federal Court Act. I think, on balance, the costs of today have been brought about by the applicants in the case, the respondents to the motion, propounding a position that has, in large part, fallen away. However, on the basis that the $300,000 was a fairly global sum negotiated, it perhaps was not unreasonable to seek to put a position for a lower sum if a bank guarantee was ordered. However, one comes back to the basis upon which the request for a bank guarantee was being opposed. That basis has been, in most respects, washed away by Mr Allison's evidence. 25 I was prepared to consider reducing the amount of security. I only have not done so for the reasons of convenience and costs that I set out above. I think there is some force in what Mr Lee says about the question of the amount. 26 Given, however, the nature of paragraph 3 of Mr Allison's affidavit and paragraph 17 of Mr Cable's affidavit I certainly do not think all parties' costs should be in the cause. Equally, I think there is some unfairness in not having the respondents in some fashion recompensed for the successful motion. 27 The order I propose to make about costs is that one half of the costs of the second to fifth respondents of the motion be paid by the applicants and the other half of the costs of the second to fifth respondents of the motion be the respondents' costs in the cause. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop . Associate: Dated: 12 December 2001 Solicitor for the Applicants: Mr T Lee of Terence Lockyer Lee & Associates Counsel for the Respondents: Mr S McNally Solicitor for the Respondents: Bradfield and Scott Date of Hearing: 6 December 2001 Date of Judgment on 6 December 2001 Notice of Motion: