Showcorp Pty Ltd v Ashcroft [2002] FCA 1275

FEDERAL COURT OF AUSTRALIA

Showcorp Pty Ltd v Ashcroft [2002] FCA 1275 SHOWCORP PTY LTD v JAMES BARTON ASHCROFT & ANOR N 1334 OF 2001 EMMETT J 9 OCTOBER 2002 SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY N1334 OF 2001

BETWEEN: SHOWCORP PTY LTD

APPLICANT

AND: JAMES BARTON ASHCROFT

FIRST RESPONDENT

AUGMENT COMMUNICATIONS PTY LTD

SECOND RESPONDENT

JUDGE: EMMETT J

DATE OF ORDER: 9 OCTOBER 2002

WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. the applicant furnish in a manner acceptable to the Registrar a further amount of $10 000 by way of security for costs of the first respondent in this matter to be paid by 18 October 2002, and that that amount and the amount previously furnished be invested in an interest bearing account; 2. the notice of motion of the first respondent filed 12 April 2002 be otherwise dismissed; 3. the costs of the notice of motion, that have not been the subject of an order to date, be the parties costs of the proceeding; and 4. leave is granted to issue subpoena in the form of the draft initialled by his Honour, to be returnable before the Registrar on 16 October 2002. 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 N1334 OF 2001

BETWEEN: SHOWCORP PTY LTD

APPLICANT

AND: JAMES BARTON ASHCROFT

FIRST RESPONDENT

AUGMENT COMMUNICATIONS PTY LTD

SECOND RESPONDENT

JUDGE: EMMETT J

DATE: 9 OCTOBER 2002

PLACE: SYDNEY

REASONS FOR JUDGMENT 1 I have before me an application by motion on notice for the provision of security in the event that an order for costs is made against the applicant. The application is brought, in the alternative, under s 1335 of the Corporations Act 1989 (Cth) ("Corporations Act") or s 56 of the Federal Court of Australia Act 1976 (Cth) ("the Act"). 2 The applicant, at all material times, carried on business as a producer of sales exhibitions and promotional events throughout Australia. In that regard it acted as an exhibition and event manager, organised and supplied staging and lighting, supplied equipment and technical services and covered all operational aspects, including design, construction, stand management, set breakdown, transportation and storage. The respondent was an employee of the applicant from February 1996 to April 2001. 3 The applicant alleges that the respondent has been guilty of breaches of the terms of his employment agreement with the applicant and the terms of a confidentiality agreement entered into between the applicant and the respondent. The applicant also alleges that the respondent breached certain fiduciary duties and obligations owed by him to the applicant. 4 I have not considered the evidence intended to be relied on by the parties in relation to the issues that will be raised at a trial of the proceeding. I do, however, have before me these conclusions reached by Katz J on an application for interlocutory relief brought by the applicant. His Honour, in the events that happened, did not find it necessary to form a firm view as to whether or not there was a serious question to be tried. Having regard to delay in the bringing of the application, his Honour, as a matter of discretion, refused interlocutory relief. However, his Honour did say that, on the evidence before him, he considered the claim fell into to "the more doubtful" rather than "the apparently strong" category of case. 5 Section 56(1) of the Act provides that a judge may order an applicant in a proceeding to give security for the payment of costs that may be awarded against that applicant. Order 28 rule 3 of the Federal Court Rules provides that, where in any proceeding it appears to the Court, on the application of the respondent, that an applicant is ordinarily resident outside Australia, that an applicant is suing for the benefit of some other person and there is reason to believe the applicant would not be able to pay the costs if ordered to do so or if the address of the applicant is not as stated in his originating process, or that an applicant has changed his address after the commencement of the proceeding with a view to avoiding the consequence of the proceeding, the Court may order the applicant to give such security as the court thinks fit. Under the Corporations Act, a corporation is a moving party and the court is satisfied that applicant may not be able to meet an order for costs because of its financial position, the court has an additional discretion to order the provision of security. 6 While there is no such requirement expressly stated in s 56 of the Act, it is clear that the discretion conferred by s 56 must be exercised judicially. That requires that there must be some consideration that compels an order for security. A respondent is not entitled to an order for security as of course. 7 The application is based on the financial position of the applicant. Accounts of the applicant for the years ended 30 June 1998 and following up to the year ending 30 June 2002 indicate that the applicant has throughout that period been nominally insolvent. I say nominally insolvent by reference to what is generally accepted as a rule of thumb for determining solvency, namely, that the current liabilities as at a balance date at any given time exceed current assets. That appears to have been the position of the applicant since at latest 30 June 1998. 8 In addition, a balance sheet of the applicant as at 30 June 2001 showed a deficiency in total liabilities over assets of $36,285. The balance sheets of the applicant as at the previous balance dates, however, showed a positive equity, ranging between $80,000 and $100,000, except for the year ended 30 June 1998, which also showed a deficiency of some $27,910. 9 The accounts in evidence have consistently shown plant and equipment at a figure of between $270,000 and $400,000. The evidence before me indicates that up to 30 June 20021 plant and equipment had been brought to account at cost after depreciation. The applicant depreciated its plant and equipment to the maximum extent permissible under the Income Tax Assessment Act 1997 (Cth). 10 There are two versions the accounts as at 30 June 2001. The reconciliation of the two is not for present purposes significant, except insofar as the discrepancy does cast doubt on the reliability of the accounts. While different versions of the balance sheet as at 30 June 2001 showed a deficiency of $36,000 and $132,898, the balance sheet as at 30 June 2002 shows net assets of $942,750. The remarkable difference between the position as 30 June 2001 and 30 June 2002 relates to the adoption of a new policy by the board of directors of the applicant concerning the treatment of plant and equipment. 11 According to the Directors' Report, the directors identified and valued all the applicant's non-current assets as at 30 June 2002. The value that was placed on them was a value that the directors consider would be the current market value if those assets were sold as second-hand items. In the balance sheet as at 30 June 2001 plant and equipment was shown at $435,309. In the balance sheet as at 30 June 2002, however, plant and equipment was shown at a figure of $1,421,500. Those figures include leasehold improvements, as well as plant and equipment. The notes indicate that plant and equipment, other than leased plant and equipment, as at 30 June 2001, was valued by the Directors at the sum $270,636, whereas it was valued as at 30 June 2002 at a figure of $1,296,973. 12 That difference is explained by the difference in approach adopted by the directors in preparing the accounts as at 30 June 2002. The notes to those accounts state that the valuation method was the market price of second-hand assets as at 30 June 2002. No independent valuation was obtained by the directors. The valuation was placed by one of the directors on the basis of his experience in the applicant's business, that I have briefly described, of producing sales exhibitions and promotional events. 13 I accept that, in the course of that business, the applicant has from time to time sold equipment, although I do not consider that I could have a great deal of confidence that the assets of the applicant, if they were sold, would necessarily realise the figures attributed to them by the director, Mr Baldwin. Mr Baldwin prepared a schedule of all of the applicant's plant and equipment, on which he placed a value of $1,404,480. The reconciliation of that figure with the figure in the balance sheet is to be explained by the fact that leased items and items already shown in the balance sheet were removed in a fairly arbitrary fashion from the valuation of $1,404,480. 14 The question, in essence though, is whether or not the valuation is reliable as an indication of the source of funds in the event that a costs order were made against the applicant. One matter that must be considered in that regard is that it is apparent that the valuation of $1,404,480 includes assets that had been written down for tax purposes. If those assets were sold at a price greater than the written down value then there would be a liability to bring the excess to account, as assessable income. I have no way of knowing from material before me just what that would be. The accounts as at 30 June 2002 indicate that applicant already has current tax liabilities of nearly $100,000. It incurred a loss in the year ended 30 June 2001 of some $211,476, although its profit from ordinary activities before tax for the year ended 30 June 2002 was $30,310. 15 As at 30 June 2002, according to the applicant's balance sheet, it has current assets valued at $408,075 as against current liabilities of $638,273. While the difference between current assets and current liabilities is no more than a rule of thumb, it is a commonly accepted method of determining whether or not a company can pay its debts as and when they fall due from its own money, or resources otherwise available to it. 16 The applicant has an overdraft facility with the Commonwealth Bank of Australia in sum of $350,000, which is secured. I do not have any evidence as to the nature of the security. As at the present time, the account of the applicant with the Commonwealth Bank is in deficit in a sum slightly less than $100,000. On that basis, however, there is an amount of approximately $250,000 of credit that may be drawn under the overdraft facility. That is just enough to meet the deficiency of current assets to current liabilities. However, I do not have any information concerning the arrangements with the Commonwealth Bank as to the extent to which the overdraft will continue to be available. 17 The plant and equipment is clearly part of the working capital of the applicant. If it were sold, the inference that I would draw is that the applicant would not be able to continue to generate income. The plant and equipment comprises audio equipment, lighting equipment, stage equipment and audio-visual equipment. There has been some exploration of the extent to which such equipment loses its value. It is by no means clear how the values placed on the items by Mr Baldwin were arrived at, other than what is said to be his experience in conducting the business of the applicant. There is no indication that these items, or items of this nature, have been sold by the applicant. 18 The respondent relies on affidavit evidence by its solicitor concerning the quantum of security that would be appropriate. The most recent affidavit relied on is an affidavit by Mr Michael Bradley, who estimates that the total cost likely to be incurred in the future conduct of proceeding to a final hearing will be in the vicinity of $55,000. He says that, on the basis of his experience in dealing with the taxation of matters, approximately 70 per cent would be recoverable on taxation, making a total of about $39,000. That estimate is explained in his affidavit. It involves substantial time on the part of an employed solicitor, as well as a partner. I am not convinced that the cost that would be recoverable on taxation would be in the vicinity of $39,000. 19 I consider that the financial evidence relating to the affairs of the applicant are such as would justify an order for some security. However, I consider that the amount should be limited, certainly at this stage. I consider that an appropriate figures would about $15,000. $5000 has already been provided by way of security. Accordingly, I consider that an appropriate figure would be a further amount of $10,000. That view is reached without expressing any firm view about the financial position of the application and my conclusion should not be taken as a conclusion in any way detrimental to its financial stability. I can only assess the matter on the basis of the evidence before me. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.