NHA Pty Ltd (In Liquidation) v Alloy Computer Products (Australia) Pty Ltd [2002] FCA 779

FEDERAL COURT OF AUSTRALIA

NHA Pty Ltd (In Liquidation) v Alloy Computer Products (Australia) Pty Ltd [2002] FCA 779

SECURITY FOR COSTS – impecuniosity of applicant – whether impecuniosity due to alleged wrongful acts of respondent – whether applicant's claim bona fides and with merit – whether order for security for costs would be oppressive because effectively renders applicant unable to prosecute claim

Corporations Act 2001 (Cth) s 1335(1) Sir Lindsay Pattinson & Co Ltd v Triplan Ltd [1973] QB 609 at 628 cited Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 512-513 cited NHA PTY LTD (IN LIQUIDATION) v ALLOY COMPUTER PRODUCTS (AUSTRALIA) PTY LTD T38 OF 2001 HEEREY J 21 JUNE 2002 MELBOURNE (HEARD IN HOBART)

IN THE FEDERAL COURT OF AUSTRALIA

TASMANIA DISTRICT REGISTRY T38 OF 2001

BETWEEN: NHA PTY LTD (IN LIQUIDATION)

APPLICANT

AND: ALLOY COMPUTER PRODUCTS (AUSTRALIA) PTY LTD

RESPONDENT JUDGE: HEEREY J

DATE OF ORDER: 21 JUNE 2002

WHERE MADE: MELBOURNE (HEARD IN HOBART)

THE COURT ORDERS THAT: 1. The applicant provide security for the respondent's costs in the amount of $32,000. 2. The proceeding be stayed until such security is provided. 3. The applicant pay the respondent's costs of its motion by notice dated 17 April 2002. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

TASMANIA DISTRICT REGISTRY T38 OF 2001

BETWEEN: NHA PTY LTD (IN LIQUIDATION)

APPLICANT

AND: ALLOY COMPUTER PRODUCTS (AUSTRALIA) PTY LTD

RESPONDENT

JUDGE: HEEREY J

DATE: 21 JUNE 2002

PLACE: MELBOURNE (HEARD IN HOBART)

REASONS FOR JUDGMENT 1 The respondent seeks by motion on notice dated 17 April 2002 an order for security for costs under s 1335(1) of the Corporations Act 2001 (Cth) (the Corporations Act) which provides: "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." 2 The applicant, which is now in liquidation, formerly carried on two businesses, one as a retailer of computer hardware and software and the other as a provider of internet services. 3 As appears from its amended statement of claim, the applicant's case is that in November 1999 it sought information and advice from the respondent about the purchase of equipment for upgrading its analogue internet service to a digital service. It is said that the respondent advised the applicant to purchase ENTIA modem cards. The applicant accordingly purchased such cards from the respondent in February 2000 but they turned out to be unfit for the purpose. The causes of action pleaded are misleading and deceptive conduct contrary to s 52 of the Trade Practices Act 1974 (Cth), a breach of the terms of fitness for purpose and merchantable quality implied by s 19 of the Sale of Goods Act 1896 (Tas) and negligence. 4 The respondent's case is that it explained to the applicant the features of ENTIA cards as well as two other products but did not represent or advise that the ENTIA product should be preferred over the other two. It says in par 10A of its defence that the applicant's internet service business was sold to a company called Hotkey Internet Services Pty Ltd (Hotkey) in or about November 2000 "…in consequence of which any entitlement to damages (which entitlement is denied): (i) is limited in time to the loss and damage alleged to have been sustained up until that date; and (ii) is limited in amount to the difference, if any, to either the value of the business as at that date and the price paid by Hotkey Internet Services Pty Ltd to the applicant. 5 The respondent also says that the applicant was guilty of contributory negligence and failed to mitigate any alleged loss and damage. Particulars are given in this regard to the effect that the respondent asked the applicant to use the cards in a particular way so that the manufacturer could ascertain and rectify the alleged fault but the applicant refused this request and used the cards knowing that the alleged fault had not been rectified. 6 It was not in dispute that the applicant is insolvent. On 30 November 2001 Mr Michael Henry Cooke was appointed administrator and on 14 February 2002 winding-up commenced with Mr Cooke being appointed liquidator. The applicant has an issued and paid up capital of $8 made up of eight ordinary shares of $1 each. The Commonwealth Bank of Australia has a registered fixed and floating charge over the assets of the applicant. A statement of assets and liabilities as at 19 November 2001, prepared by one of the applicant's former directors Mr J R van Peelem, disclosed a net deficiency of $467,977.00. 7 In his capacity as administrator Mr Cooke made a report to creditors dated 13 December 2001. Mr Cooke recorded his preliminary view that the applicant had not maintained adequate books and records in accordance with the requirement of s 286 of the Corporations Act. The latest financial statements prepared were for the financial year ended 30 June 2000. The applicant's directors had not presented to Mr Cooke complete or accurate financial records for any period since that date to allow him to ascertain precise details of either its trading performance or financial position. Mr Cooke noted the presumption of insolvency applicable by virtue of s 588E of the Corporations Act. 8 Mr Cooke also noted that the applicant reported an operating profit after tax for the 2000 financial year of $23,459.00 compared to an operating similar profit for the previous year of $1,346.00. However, the 2000 profit was after receipt of an abnormal item, a legal settlement of $150,000.00. Mr Cooke reported that the directors attributed the current financial position of the applicant to: · failure of the internet business due to problems experienced with service delivery and poor product quality from external suppliers; · failure of the retail business due to: · high level of competition resulting in low trading margins; · declining demand for product as a result of product imitation and alternative supply sources; and · general economic conditions causing reduced consumer demand and spending. 9 Mr Cooke said: "The directors sought unsuccessfully to refinance the company's business. My review and enquiry indicates that the company has been incurring trading losses for at least the last two to three financial years as a consequence of the above factors. These trading losses compounded by the absence of additional equity and high borrowings have resulted in the current financial position of the company." 10 There can be no doubt that the applicant will not be able to pay the costs of the respondent if the latter is successful in its defence. Indeed the applicant cannot fund its own case. The liquidator will not contribute beyond the sum of $1500. Neither the former directors nor any other individual is likely to provide support. The applicant's solicitors are conducting the litigation on a no win no fee basis. 11 Counsel for the applicant argued that its impecuniosity was due to the wrongful acts of the respondent alleged in this proceeding: see Sir Lindsay Pattinson & Co Ltd v Triplan Ltd [1973] QB 609 at 628. 12 I am not satisfied this ground is made out. There was produced as an exhibit to an affidavit from the applicant's solicitor a graph said to have been prepared by a former director from the financial records of the company and from information supplied by Hotkey showing monthly net profit or loss from January 2000 to February 2001. The graph shows increasing losses (but of the internet business only) from March up until October then decreasing losses to January and a slight profit in February. Hotkey aquired the business in November. The solicitor deposes (there was no affidavit from the former directors) that his "instructions from the directors are that the failure of the internet business was the most significant factor in the failure of the applicant's total business and the ensuing insolvency of the applicant." 13 But Mr Cooke's report shows that the applicant had severe financial problems, unrelated to the internet business, which substantially predated the delivery of the products the subject of the present proceeding. 14 I am unable to be satisfied that the insolvency of the applicant is attributable to the conduct of the respondent, as distinct from the other factors mentioned by Mr Cooke. This is so even if it be assumed that the respondent's conduct was wrongful. As will appear hereafter, I am not satisfied that this is the case. 15 The bona fides of the applicant's claim and its merits are relevant in the exercise of the discretion: Bryan E Fencott Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497 at 513. 16 I accept that the applicant's claim is bona fide. The same may be said for the respondent's defence. Beyond that I am unable to say that the applicant has shown any ground for concluding at this stage that it is likely to succeed. The applicant produced emails relating to attempts to rectify problems said to have arisen with the use of the cards in question. This was said to amount to an admission of fault by the respondent and as showing that there would be at least some amount due from the respondent. Also par 10A of the defence already quoted was said to amount to an admission. I do not accept these submissions. One would expect any reputable supplier of expensive technical equipment (which in the present case costs some $80,000) to assist a customer with problems. To hold that this in itself amounted to an admission of legal liability would operate as a disincentive to sensible and honourable business behaviour. 17 Then it was said that an order for security for costs would be oppressive because it would effectively render the applicant unable to prosecute its claim. The authorities on this issue are discussed by French J in Fencott at 512-513. While this has no doubt been treated in the past as a relevant factor, it does have a somewhat paradoxical aspect. It seems strange that the more insolvent a company is, and thus the more likely security cannot be provided, with the result that it is the more likely the action will not proceed, the less the Court should be inclined to make an order for security. I think all I can say is that I do accept that an order for security in the amount I am about to mention will in all probability have the practical effect that the claim will not proceed, but nevertheless I am satisfied such an order should be made. 18 Turning to quantum, the respondent seeks an order for costs incurred up until now and estimated future costs up until the conclusion of a mediation. The former sum is $7,223.00 and the latter $39,187.00. 19 An experienced independent cost consultant, Mr Ariel Weingart, has examined the respondent's files and prepared an assessment. Some criticism was made of particular items in this assessment. For example item 7 for respondent's discovery includes a list of documents of ninety folios (approximately thirty pages) at $1,295 This was said to be excessive in the light of the relatively few documents this case would produce. Counsel for the respondent fairly pointed out that the applicant had been in receipt of the respondent's affidavit, including Mr Weingart's report, since 28 May and had not attempted a detailed response. 20 I do not think I have any grounds for not accepting the quantification of the individual items of Mr Weingart's report. However, it does proceed on the basis that the case will be prepared up to trial. For example it includes preparing witness statements, $9,565, and instructions for brief, $20,515. While obviously proper preparation for any mediation is highly desirable, I think it would be fairer if I made some reduction to take account of the fact that mediation can be adequately conducted without all the preparations that would be necessary for trial. I would reduce the figure of $39,187. to $25,000 which, added to the costs to date of $7,223, produces an amount of $32,223, which I round down to $32,000. I will order security in that amount, and a stay pending provision of that security. 21 There will be an order that the applicant pay the respondent's costs of its motion by notice dated 17 April 2002. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey.