FEDERAL COURT OF AUSTRALIA Cosdean Investments Pty Ltd v Football Federation Australia Limited (No 2) [2007] FCA 163 SECURITY FOR COSTS – impecunious applicant – where only one arms length unsecured creditor – whether that creditor's position should be taken into account Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507 cited Attorney-General v Transport Control Systems (NZ) Ltd [1982] 2 NZLR 19 cited Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1 considered BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 discussed Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 cited Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 1 FCR 311 discussed Drumdurno Pty Ltd v Braham (1982) 42 ALR 563 cited John Arnold's Surf Shop Pty Ltd (In liq) v Heller Factors Pty Ltd (1979) 22 SASR 20 cited Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364 cited Microcorp Pty Ltd v Terran Computers Pty Ltd (unreported, 26 June 1992, Northrop J) cited Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd (1982) 44 ALR 163 cited Pacific Acceptance Corp Ltd v Forsyth (No 2) [1967] 2 NSWR 402 cited Pasdale Pty Ltd v Concrete Constructions (1995) 59 FCR 446 cited P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642 cited Ratepayers & Residents Action Association Inc v Auckland City Council [1986] 1 NZLR 746 cited Reches Pty Ltd v Tadiran Pty Ltd (1998) 85 FCR 514 cited Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609 cited Spiel v Commodity Brokers Australia Pty Ltd (In liq) (1983) 35 SASR 294 cited Tullock Ltd v Walker (Unreported, Supreme Court of New South Wales, Yeldham J, 8 December 1976) distinguished Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 distinguished COSDEAN INVESTMENTS PTY LTD v FOOTBALL FEDERATION AUSTRALIA LIMITED AND SOCCER NSW LIMITED SAD 114 OF 2006 MANSFIELD J 20 FEBRUARY 2007 ADELAIDE IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY SAD 114 OF 2006 BETWEEN: COSDEAN INVESTMENTS PTY LTD Applicant AND: FOOTBALL FEDERATION AUSTRALIA LIMITED First Respondent SOCCER NSW LIMITED Second Respondent JUDGE: MANSFIELD J DATE: 20 FEBRUARY 2007 PLACE: ADELAIDE REASONS FOR DECISION INTRODUCTION 1 On 22 August 2006 under s 1335(1) of the Corporations Act 2001 (Cth) I ordered that Cosdean Investments Pty Ltd (Cosdean) provide to Football Federation Australia Limited (FFA) $40,000 by way of security for costs for FFA's costs in the action. The quantification of the security for costs was by reference to the anticipated costs to the first day of the hearing. Subsequently on 17 November 2006 I made a similar order, in the sum of $25,000, in respect of the costs of the Soccer NSW Limited (Soccer NSW), again quantified by reference to the anticipated costs of the first day of hearing. 2 Both FFA and Soccer NSW, at the commencement of the hearing on 29 January 2007, applied for further security for costs. At that time, it was apparent that the hearing was likely to take more than the five days set aside for it, having regard to the number of affidavits filed as proposed evidence on the part of all parties, the clearer identification of issues through pleadings, and the consequential need to test the proposed evidence of Cosdean on that range of issues. The progress of evidence during the first week of hearing confirmed that. A further factor also emerged in the course of the first week of hearing. As a result of the course of evidence thus far, Cosdean has sought and been granted leave to call further witnesses whose evidence was filed in accordance with pre-trial directions and was not opened upon. The further witnesses proposed include the employee of Cosdean, Dean Cosenza, who was most closely involved in the transactions giving rise to the claim. His evidence alone is likely to take some days. In my view, and it is one shared by counsel for the parties, the hearing is likely to take another 10 or more days to complete. 3 The hearing of the fresh applications for security for costs was deferred for a short period as Suzanne Watson, the director of Cosdean, who would have had to give instructions with respect to it, was being cross-examined and it was preferable that her cross-examination be completed before such instructions were sought. Her evidence took much of the first week of the hearing. That process has now been completed. THE ISSUES 4 The principles upon which an application such as the present should be determined are relatively clear cut, with one significant qualification which emerged from the submissions. Those principles are discussed in my earlier judgment: Cosdean Investments Pty Ltd v Football Federation Australia Ltd [2006] FCA 1134 at [2]. 5 There is no dispute that the threshold test is met, that is that Cosdean, if unsuccessful in its claim, will be unable to meet an order for costs against it. So much is common ground. I will not repeat the analysis of the material previously before the Court as to Cosdean's financial status, except as it is now relevant. 6 Consequently, the Court has an unfettered discretion as to whether, in all the circumstances, it should make the orders which are sought. 7 Cosdean opposes the orders for security which are sought for three reasons: (1) That any order for security for costs would shut it out from pursuing its claim. It also says neither of its directors is in a financial position to provide security; it has provided evidence to that effect. It has also established that Dean Cosenza, who is also a former director and shareholder, is an undischarged bankrupt who has no real property nor any assets of any value and no prospect of being able to meet any security for costs order. (2) That it has prospects of success in its claim which can be said to be "genuine and arguable". It is not necessary to refer to the evidence as to the genuineness of Cosdean's claim, as the respondents accept that it is brought bona fide. (3) The conduct of the respondents has produced Cosdean's impecuniosity, and in particular it points out that the affidavit evidence proposed to be adduced by FFA puts in issue the accuracy of the content of a certain conversation between officers of FFA and Soccer NSW which is said to be critical. Would further security stultify the proceedings? 8 As to the first argument, namely that any further order for costs would stultify the proceedings, I am satisfied that neither Cosdean nor its directors or shareholders or Mr Cosenza has the capacity to provide any further security for the costs of the proceeding. I do not need to refer in detail to the evidence about that. The respondents, on these applications for security for costs, did not challenge it. 9 The respondents' contention is that Cosdean's principal creditor stands to benefit very substantially in the event that Cosdean succeeds in its claim, and that the circumstances of its principal creditor should be taken into account before deciding if the proceeding will be stultified, and further that Cosdean has not proved that the principal creditor is unable (or even unwilling) to provide security for their costs. Cosdean contends that the circumstances of its principal creditor are not relevant to the application. It accepts that it has not proved that its principal creditor is unable (or unwilling) to support it in providing any further security for costs. 10 In very rough terms, Cosdean's claim is (as its senior counsel acknowledged) for up to $3 million. The claim arises from a contract between Cosdean and Deumer Asia Ltd (Deumer) whereby Deumer appointed Cosdean as its agent for Australia to sell FIFA endorsed key rings within Australia leading up to and during the World Cup conducted by FIFA in June and July 2006. Cosdean contracted with Deumer to sell 500,000 key rings. It appears to be accepted that, under the contract, Cosdean is liable to pay Deumer the equivalent of the wholesale cost of those key rings even if they were not sold. In the events which happened, 450,000 of the key rings were not imported into Australia and Cosdean apparently acknowledges its liability to Deumer for them. Again using very rough figures, that liability is in the vicinity of $1.8 million. 11 Cosdean has no other significant creditors. Its balance sheet at 30 June 2006 shows net assets of $2851, but that is without allowing at all for its liability to Deumer. It is shown as having no current liabilities, and only non-current liabilities to persons or entities associated with its directors or Mr Cosenza of some $375,000. The reasons why they are called "non-current" liabilities are not given. Its profit and loss statement for the financial year to 30 June 2006 shows sales of only $144,000 (including from sales of FIFA key rings presumably to that date), and an operating profit before tax of about $38,000. The operating profit is on the basis that it has closing stock (again, I infer, the FIFA key rings) worth about $222,000. If that closing stock did not have that value by the passage of time after the World Cup, the accounts would probably show a gross trading loss, and clearly an operating loss and then a negative asset position. 12 As noted, Cosdean's senior counsel accepted in submissions that Cosdean's claim at best, if it succeeded, about $3 million. The defences put both liability and quantum in issue. It is not at all clear that, if Cosdean succeeds in its claim, its damages would be assessed in that amount. It would have to establish that it would have imported and sold almost all of the 500,000 key rings, but for the conduct of FFA or of Soccer NSW or both. There are very significant issues between the parties about that. They will have to be resolved in due course. However, I think it is appropriate to take into account the prospect that Cosdean, if it succeeds in its claim, may not recover damages of the amount it seeks. Cosdean, according to the affidavit of Ms Watson and the pleadings, had ordered and received 50,000 key rings of which about 23,000 were unsold at 30 June 2006. It had ordered a further 300,000 key rings, but they had not been despatched by the time of the conduct complained of, commencing on 25 May 2006. It had still to order another 150,000 key rings, and then have them delivered. It pleads that it sold about 23,000 of the 50,000 key rings it had ordered and received after the World Cup at 40 cents per unit. As the agency agreement with Deumer was made on 23 January 2006, it appears that Cosdean had therefore sold about 27,000 key rings between that date and 30 June 2006. Those raw numbers suggest the possibility that Cosdean may not have been able to receive and sell the 500,000 key rings it had contracted to sell in the period leading up to and during and shortly after the World Cup. Indeed, absent any wrongful conduct on the part of the respondents as alleged, the respondents have put in issue Cosdean's capacity to have sold 500,000 key rings. That of course remains to be decided on the hearing. 13 The defence of FFA pleads that the critical document, an email of 25 May 2006, was sent to a limited number of entities or persons (including an officer of Soccer NSW), and the defence of Soccer NSW pleads that that email or its effect was then also conveyed only to a limited number of clubs. The extent to which the alleged conduct of the respondents impaired the capacity of Cosdean to sell all 500,000 key rings is clearly an important factual issue. 14 Of course, I cannot decide those factual issues on the present application. But I think it is appropriate to take into account, first, the possibility that Cosdean may not have been able to sell 500,000 key rings in any event, and as its pleading shows, it was vulnerable to a very significant loss per unit for unsold key rings. Judging from the cost to Cosdean of 300,000 key rings, the cost per unit was about $4 or a little more and, as noted, the ultimate "salvage" value was only about 40 cents per unit. Second, it is also appropriate to take into account that the conduct of the respondents may only have impaired to a degree the capacity of Cosdean to have sold the key rings as it planned, rather than to have destroyed or dramatically affected Cosdean's ability to have done so. 15 In my view, one potential outcome of these proceedings is that in essence the practical beneficiary of any judgment in favour of Cosdean will be Deumer. In any event, Deumer will be the primary practical beneficiary of any judgment, as Cosdean acknowledges that it is liable to Deumer for in excess of $1.8 million and Cosdean has no other independent creditors of significance. 16 Consequently, if Cosdean succeeds in its claim, Deumer will have access (after any priority liabilities, and there do not appear to be any of significance) to the first $1.8 million or so of any damages awarded, or if the damages are assessed at less than $1.8 million to the whole of the judgment sum. 17 The issue which emerged from the submissions is whether, in addressing the security for costs application, the Court should have regard to the fact that in essence Cosdean has only one large creditor who stands to benefit indirectly but substantially from the proceedings for damages awarded in the action before Cosdean can succeed at all in any practical sense. Cosdean stresses that there is no suggestion that Deumer is other than a disinterested third party creditor which will, in due course, seek to recover its indebtedness from Cosdean. There is nothing to suggest that it has in fact supported Cosdean in bringing the claim or has had any role in Cosdean deciding to bring the claim or in the manner of its conduct. 18 In my judgment, there is no real issue of principle. 19 Once the threshold prescribed by s 1335 is satisfied, the discretion as to whether to order security for costs is an unqualified one: Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1 at 3; Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609; Spiel v Commodity Brokers Australia Pty Ltd (In liq) (1983) 35 SASR 294; Ratepayers & Residents Action Association Inc v Auckland City Council [1986] 1 NZLR 746. 20 A number of factors have been regarded as relevant to the exercise of that discretion in other cases, but of course it is neither appropriate nor possible to indicate what factors should be considered except in the circumstances of the individual case. A list of those factors, or some of them, appears in Colbran S, Security for Costs, (Longman Professional, 1993) at [12.57] pp 222-223. 21 As Cosdean contends, here one relevant factor is whether the making of an order for security for costs may stultify the action: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd (1987) 16 FCR 497. There are numerous cases where this factor has been taken into account. 22 I have found that, absent consideration of the circumstances of Deumer, any further order for costs is likely to stultify the action. Neither Cosdean, nor its directors and shareholders, nor Mr Cosenza are apparently able to provide any further security for costs. That is why the question has arisen as to whether the Court can, and should in these circumstances, have regard to Deumer's position. 23 In my view, it is clear that the Court may do so. There are a number of cases where, in the face of a contention that a security for costs order may stultify an action, the position of unsecured creditors has been taken into account: Pasdale Pty Ltd v Concrete Constructions (1995) 59 FCR 446 per Finn J; P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 65 ALJR 642; Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542; Newtons Travel Services Pty Ltd v Ansett Transport Industries (Operations) Pty Ltd (1982) 44 ALR 163. 24 That is not confined to persons who control the company, but extends to those who will have the benefit of the proceedings if they succeed: Microcorp Pty Ltd v Terran Computers Pty Ltd (unreported, 26 June 1992, Northrop J); Caruso Australia Pty Ltd v Portec (Aust) Pty Ltd (1984) 1 FCR 311. In Caruso, Toohey J at 314 considered that it was reasonable that the two major and arms length creditors be expected to contribute to any security that may be ordered. See also John Arnold's Surf Shop Pty Ltd (In liq) v Heller Factors Pty Ltd (1979) 22 SASR 20; Pacific Acceptance Corp Ltd v Forsyth (No 2) [1967] 2 NSWR 402; Drumdurno Pty Ltd v Braham (1982) 42 ALR 563; Ariss v Express Interiors Pty Ltd (In Liq) [1996] 2 VR 507 at 508; Attorney-General v Transport Control Systems (NZ) Ltd [1982] 2 NZLR 19 at 20; Memutu Pty Ltd v Lissenden (1983) 8 ACLR 364 at 365-366; Reches Pty Ltd v Tadiran Pty Ltd (1998) 85 FCR 514 at 523. 25 Those cases reflect the policy underlying s 1335 that security may be ordered where a company appears to be in no position to provide security from its own resources where, in all the circumstances, it is reasonable that the resources of some other person or entity standing behind the company or of some person or entity for whose practical benefit the proceeding is being conducted should provide the security. The privilege of limited liability should not necessarily exclude those standing to benefit from proceedings by that company from having to provide support to it: Buckley v Bennell Design & Constructions Pty Ltd (1974) 1 ACLR 301 at 303-304. The approach was conveniently expressed in Bell Wholesale 2 FCR 1at 4 where the Full Court (Sheppard, Morling and Neaves JJ) said: "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the applicant here establishes that those who stand behind it and who will benefit from the litigation if it is successful (whether they be shareholders or creditors or, as in this case, beneficiaries under a trust) are also without means." 26 In my view, having regard to the nature of the claim and the status of Deumer in relation to Cosdean and its real interest in the outcome of the proceedings, it is reasonable that the circumstances of Deumer should be taken into account on the applications for further security. In BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 344, Anderson J adopted a similar approach. In other circumstances, the capacity of shareholders or directors of a limited liability company to support proceedings have been taken into account, as has the capacity of trustees of trading trusts, trust beneficiaries, members of associations, debenture holders, guarantors and appointors of receivers: see Colbran at [14.7] pp 237-238 and the cases cited there. The present circumstances provide simply another illustration of what may be taken into account, in appropriate circumstances, in addressing an application for security for costs against an impecunious corporate litigant. 27 Given the extent to which Deumer stands to gain from the proceedings if they are successful, and that the cause of action is apparently the only asset of Cosdean which may enable it to be paid, or to be substantially paid, under its agency agreement with Cosdean, and that in essence it has no real competing external creditors who might participate in any award of damages, I think it is reasonable that Deumer support Cosdean in the prosecution of the claim, or at least that it have the opportunity to do so. It may wish to make its own assessment of Cosdean's prospects of success in the proceedings or of the likely award of any damages, and balance those things against the amount of the further security for costs I have ordered. That is a matter for Cosdean and Deumer. The circumstances are different from those where there are a number of creditors, including small creditors: cf Yandil 3 ACLC 542 at 545; Tullock Ltd v Walker (Unreported, Supreme Court of New South Wales, Yeldham J, 8 December 1976). There is no other evidence of commercial impracticability in Deumer supporting Cosdean in the claim; see Ariss (1996) 2 VR 507 at 515 per Phillips JA. 28 Cosdean accepts that, where the opposition to an application for security for costs is based upon the assertion that the effect of an order for security for costs will stultify a bona fide claim, the onus is upon the party asserting that effect to prove it: see Idoport Pty Ltd v National Australia Bank [2001] NSWSC 744 at [51]-[52] and [66] per Einstein J; Bell Wholesale 2 FCR 1 at 4; Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 583. The last-mentioned case concerned a litigation funder, whose resources were considered to be relevant. Cosdean also accepts that there is no evidence that it has made any approach to Deumer to fund or support the proceedings, or to support any order for security for costs. There is no evidence to demonstrate that Deumer is either unable or unwilling to support Cosdean's action or of any other financial hardship or commercial impracticability in it doing so. 29 Consequently, as I consider for the reasons given that the circumstances of Deumer are properly to be taken into account in considering the applications, it follows that Cosdean has not demonstrated that further orders for security for costs would stultify the proceedings. It may be that Deumer is unable to support the proceedings but that is purely speculation. If it were not prepared to, but had the capacity to do so, in circumstances where it had in effect the first call upon the proceeds of the action to the extent of some $1.8 million, that in itself would be a relevant consideration as to whether to make further orders for security for costs. THE PROSPECTS OF SUCCESS 30 As noted above, the respondents accept that Cosdean's claim is brought in good faith. 31 I also assume in Cosdean's favour that it has an "arguable" claim (to adopt the word used by its senior counsel). I have also assumed that it has a reasonable prospect of success in the action, but until all the evidence is heard it is not possible to go beyond that: Hughes v Canon Australia Pty Ltd (1990) 8 ACLC 209 at 213. 32 I have referred above to the serious issues confronting Cosdean in establishing an entitlement to damages in the full amount of its claim. I do not need to take those observations further because, having regard to its liability to Deumer and that Deumer is in essence its sole trading or arms length creditor, it is clear that even in the event that the claim succeeds and that the damages awarded are substantial, Deumer will in effect have first call on any damages up to about $1.8 million. I was not asked by Cosdean to conclude that its prospects of successfully recovering more than that sum are more than arguable. DID THE RESPONDENTS CAUSE COSDEAN'S IMPECUNIOSITY? 33 It is clear enough that Soccer NSW was joined as a respondent to this proceeding because FFA, by its pleading, put in issue the accuracy of a pleaded communication between officers of FFA and Soccer NSW. However, although that potentially exposes Cosdean to two sets of costs, rather than one, if its action is unsuccessful, that does not support the contention that its impecuniosity is due to the improper conduct of the respondents or of either of them. Indeed, although the above point was made in written submissions, senior counsel for Cosdean understandably did not make much of it in oral submissions. 34 More significant was the contention that it was the conduct of the respondents or of one or other of them in late May and early June 2006 which has put Cosdean into its present impecunious state. 35 I do not accept that is the case. I have referred briefly to Cosdean's financial position as at 30 June 2005 and at 30 June 2006. At 30 June 2005 its net assets were $35,311. At 30 June 2006, its net assets were $2851, but as noted that included $222,104 stock on hand (I infer subsequently sold at 40 cents per unit). In each year its assets included a loan to Mr Cosenza, unsecured, of about $60,000 and which, as he is bankrupt, must be of dubious value. Putting that aside, the surplus of assets over liabilities at 30 June 2006 appears to result from the stock on hand, funded by an increase in borrowings from the Surjem Family Trust. The trading statement to 30 June 2005 showed an operating loss of $35,321 and to 30 June 2006 an operating profit of $38,162. It was based on gross profit from trading of $153,901. In turn, that was dependent on the closing stock being valued at $222,104. The sales (apparently of key rings) to 30 June 2006 or thereabouts totalled $143,735. 36 In my view, the picture is that Cosdean was in a financially parlous state at all times. On its case as the material on this application shows, it had to pay about $1.2 million in late May 2006 for the 300,000 key rings it had ordered, and then had to sell them at a profit and quite quickly to become significantly profitable. That is, of course, what the case is about: whether it could have done so but for the respondents' alleged wrongful conduct, and how (if at all) the respondents' alleged wrongful conduct in fact impeded its prospects of doing so. But the picture is of Cosdean in a financially parlous state before its arrangement with Deumer, and in much the same position at 30 June 2006 and since. The respondents' alleged wrongful conduct has not resulted in any outflow of Cosdean's funds. The claim is that their alleged wrongful conduct has deprived Cosdean of the opportunity to be relieved of its pre-existing and continuing financially modest position. 37 In my judgment, Cosdean's lack of funds pre-existed the alleged wrongful conduct. The outcome of the present proceedings is, of course, presently contentious. I am unable to conclude at present one way or the other that the respondents' alleged wrongful conduct significantly impaired Cosdean's prospects, as it alleges, although I have assumed Cosdean has reasonable prospects of succeeding to some extent in its claim. I am not persuaded at present that the financial position of Cosdean is, however, attributable to the conduct of the respondents. OTHER CONSIDERATIONS 38 Counsel for Cosdean and for FFA and Soccer NSW did not identify other matters of any significance which I was asked to take into account in the exercise of my discretion. 39 Having regard to the factors I have discussed, in my view the balance comes down quite firmly in favour of the making of further orders for security for costs. QUANTIFICATION 40 I have indicated that, in my view, the further hearing of this matter will extend for a further 10 or more days. In addition, the respondents will have to address the further evidence of Cosdean, in particular that or Mr Cosenza. It may also have to respond to the further evidence, including perhaps by further witness statements in response. 41 FFA seeks a further sum of $70,000 by way of additional security for costs, which together with the earlier security provided would cover about two-thirds of its anticipated costs. I do not regard those figures as unrealistic, and they were not directly criticised by Cosdean. However, to err on the side of caution, I ordered that Cosdean provide to FFA the further sum of $60,000 by way of additional security for costs. 42 Similar considerations apply to Soccer NSW. I accept that its costs to date greatly exceed the sum presently secured for its costs, and its likely additional costs will be in the order of $50,000 or perhaps more. Those figures also were not directly criticised by Cosdean. Again, to err on the side of caution, I ordered that Cosdean provide to Soccer NSW the further sum of $40,000 by way of additional security for costs. 43 The parties are given an opportunity to address the manner in which the further security for costs should be paid, and the consequences of its non-payment. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield. Associate: Dated: 20 February 2007 Counsel for the Applicant: S Walsh QC and G King Solicitor for the Applicant: Griffin Hilditch Counsel for the First Respondent: P Slattery QC and M Burnett Solicitor for the First Respondent: Tindall Gask Bentley Counsel for the Second Respondent M Douglas Solicitor for the Second Respondent Minter Ellison Date of Hearing: 14 February 2007 Date of Orders: 14 February 2007 Date of Reasons: 20 February 2007