FEDERAL COURT OF AUSTRALIA Yandilla Mustard Oil Enterprise Pty Limited (ACN 003 880 260) v Palos Verdes International Pty Limited (ACN 079 960 704) [2005] FCA 1769 PRACTICE AND PROCEDURE – application for security for costs – security ordered Corporations Act 2001 (Cth), s 1335 Federal Court of Australia Act 1976 (Cth), s 56 YANDILLA MUSTARD OIL ENTERPRISE PTY LIMITED (ACN 003 880 260) v PALOS VERDES INTERNATIONAL PTY LIMITED (ACN 079 960 704), PETER IAN MURDOCH FERGUSON AND BARBARA FRANCES FERGUSON NSD 2 OF 2005 GYLES J 11 NOVEMBER 2005 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NSD 2 OF 2005 BETWEEN: YANDILLA MUSTARD OIL ENTERPRISE PTY LIMITED (ACN 003 880 260) APPLICANT AND: PALOS VERDES INTERNATIONAL PTY LIMITED (ACN 079 960 704) FIRST RESPONDENT PETER IAN MURDOCH FERGUSON SECOND RESPONDENT BARBARA FRANCES FERGUSON THIRD RESPONDENT JUDGE: GYLES J DATE OF ORDER: 11 NOVEMBER 2005 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The applicant in the proceeding provide within 28 days security for the respondents' costs of the proceeding in the sum of $50,000 deposited in an interest bearing account in such manner as is approved by the Registrar. 2. Costs of the application are the 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 NSD 2 OF 2005 BETWEEN: YANDILLA MUSTARD OIL ENTERPRISE PTY LIMITED (ACN 003 880 260) APPLICANT AND: PALOS VERDES INTERNATIONAL PTY LIMITED (ACN 079 960 704) FIRST RESPONDENT PETER IAN MURDOCH FERGUSON SECOND RESPONDENT BARBARA FRANCES FERGUSON THIRD RESPONDENT JUDGE: GYLES J DATE: 11 NOVEMBER 2005 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This is an application for security for costs. The matter has been well argued on both sides with comprehensive written and oral submissions. I do not set out to reproduce all of them. I indicate those factors which have influenced my thinking in the matter. 2 The first question is whether or not there is an appropriate case for security at all, bearing in mind s 1335 of the Corporations Act 2001 (Cth) and the provisions of s 56 of the Federal Court of Australia Act 1976 (Cth). It appears to me that there is jurisdiction to order security for the following reasons. 3 The net assets of the company as appearing from the latest draft balance sheet indicate a surplus which is less than the amount of the inventory. Whilst I do not accept that the Court should necessarily discount the inventory, the fact is that the disposition of the inventory in a business of this sort is always uncertain. The cash excess is even less and it seems to me that the amount of net assets, whether liquid or otherwise, is not sufficient to: (a) pay the company's costs of the liquidation; and (b) pay the costs of the other side in the event of loss. I am not by any means saying that I would conclude as a fact that the company would be unable to pay the costs. However, it seems to me there is reason to believe that it will be unable to pay the costs bearing in mind its own liabilities and on the assumption that the creditors are at liberty to call for repayment of loans and the company is free to repay those loans. Further, I note that the point has been made that the quality of the receivables is unknown. There is no particular reason to doubt these items, however receivables in a company of this kind are always a matter of some question. 4 I do not take the view that delay has been sufficient to rule out the grant of security. The case has not yet been fixed for hearing. Whilst there may be questions as to why something was not done earlier, the explanation given today seems to me to be sufficient. However, there is substance to the submission that security cannot be demanded in relation to costs already incurred. 5 So far as quantum is concerned there is some debate as to the likely length of hearing, there is some debate about aspects of the calculation of the costs and there is always a question as to what proportion of solicitor/client costs will be recovered on assessment or taxation. Taking all of those things into account, and discounting the amounts already spent or incurred, it seems to me that security in the amount of $50,000 is the appropriate order to be made. That, of course, need not be provided necessarily by physical deposit. The Registrar may be satisfied by a bank or other guarantee of some sort which would enable the company to retain its working capital. 6 One matter which has been agitated after I indicated what my view was in principle is the question of subordination of the loans which had been made by an entity associated with the principal shareholder. Subordination of those loans is not the equivalent of security. However, if there had been a clear and legally enforceable subordination of a significant amount it may have affected the Court's assessment of the ability of this company to meet an order for costs. However, in my opinion, I cannot leave the respondents to the commercial vagaries of the business of the applicant, although it may be that a decent amount of subordination may have practical advantages over a smaller amount of secured costs. That is a matter the parties can give some attention to between themselves. I will not alter my order. 7 The appropriate order for costs is that the costs be the respondents' costs in the cause. I take into consideration the facsimile referred to dated 22 April 2002 marked Exhibit 1 on the application. I take into account the fact there was no offer made of a smaller amount than that sought or of any alternative for security. I order that: (1) The applicant in the proceeding provide within 28 days security for the respondents' costs of the proceeding in the sum of $50,000 deposited in an interest bearing account in such manner as is approved by the Registrar. (2) Costs of the application are the respondents' costs in the cause. I certify that the preceding seven (7) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles. Associate: Dated: 7 December 2005 Counsel for the Applicant: JR Clarke Solicitor for the Applicant: Holman Webb Counsel for the Respondents: G McNally Solicitor for the Respondents: Ted McKeown Date of Hearing: 11 November 2005 Date of Judgment: 11 November 2005