FEDERAL COURT OF AUSTRALIA Top Stuff 4 Business Holdings Pty Ltd v Vodafone Pty Ltd [2011] FCA 1495 Citation: Top Stuff 4 Business Holdings Pty Ltd v Vodafone Pty Ltd [2011] FCA 1495 Parties: TOP STUFF 4 BUSINESS HOLDINGS PTY LIMITED (ACN 139 870 312) v VODAFONE PTY LIMITED (ACN 062 945 554) and WIRELESS ANYWHERE BUSINESS PTY LIMITED File number: NSD 1783 of 2011 Judge: RARES J Date of judgment: 2 December 2011 Legislation: Corporations Act 2001 (Cth) s 1335 Federal Court of Australia Act 1976 (Cth) s 37M Federal Court Rules 2011 (Cth) r 19.01 Cases cited: Buckley v Bennell Design & Construction Pty Limited (1974) 1 ACLR 301 applied Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 followed Date of hearing: 2 December 2011 Place: Sydney Division: GENERAL DIVISION Category: No catchwords Number of paragraphs: 22 Counsel for the Applicant: Mr J Sleight Solicitor for the Applicant: Neville & Hourn Legal Counsel for the First Respondent: Mr N J Kidd Solicitor for the First Respondent: Allens Arthur Robinson Counsel for the Second Respondent: Mr D L Cook Solicitor for the Second Respondent: Makinson & d'Apice Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1783 of 2011 BETWEEN: TOP STUFF 4 BUSINESS HOLDINGS PTY LIMITED (ACN 139 870 312) Applicant AND: VODAFONE PTY LIMITED (ACN 062 945 554) First Respondent WIRELESS ANYWHERE BUSINESS PTY LIMITED Second Respondent JUDGE: RARES J DATE OF ORDER: 2 DECEMBER 2011 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The applicant file and serve on the respondents a written personal undertaking from Daniel Davis by 9 December 2011. 2. The applicant provide a response to the first respondent's request for further and better particulars dated 22 November 2011 and the second respondent's request for further and better particulars dated 28 November 2011 on or before 13 January 2012. 3. The respondents file and serve any defence on or before 17 February 2012. 4. The proceedings and the respondents' security for costs applications be listed for further directions on 24 February 2012. Note: Entry of orders is dealt with in 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1783 of 2011 BETWEEN: TOP STUFF 4 BUSINESS HOLDINGS PTY LIMITED (ACN 139 870 312) Applicant AND: VODAFONE PTY LIMITED (ACN 062 945 554) First Respondent WIRELESS ANYWHERE BUSINESS PTY LIMITED Second Respondent JUDGE: RARES J DATE: 2 DECEMBER 2011 PLACE: SYDNEY REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) 1 These are applications by each respondent, Vodafone Pty Ltd and Wireless Anywhere Business Pty Limited, seeking orders for security for costs under s 1335 of the Corporations Act 2001 (Cth) or r 19.01 of the Federal Court Rules 2011 (Cth). The financial position of Top Stuff and the persons interested in its success 2 The applicant, Top Stuff 4 Business Holdings Pty Limited, is the trustee of a trading trust (the trading trust). There is no issue that the applicant and the trading trust have no substantive net worth and are impecunious. The amended statement of claim makes a number of claims that representations were made by Vodafone, the operator of a telephone network, and Wireless Anywhere. Wireless Anywhere had appointed Top Stuff as an exclusive Vodafone dealer pursuant to arrangements that Wireless Anywhere had with Vodafone. Those arrangements had been preceded by a relationship between another trustee of the same trading trust run by persons who still stand to benefit from the outcome of this litigation, namely David Coote, his wife Jade Bull, Daniel Davis and his wife, Nadia Davis. 3 In affidavits filed on this application, Mr Coote and Mrs Davis both said that they did not own any real estate or other assets other than, in Mr Coote's case, a number of shares in listed companies. Mr Coote said those shares had an approximate market value of about $30,000 and that he anticipated selling them in order to enable his wife to pay the next mortgage repayment on their family home and household bills. That family home is held in Ms Bull's sole name and is subject to a mortgage of an unspecified amount to Westpac Banking Corporation. Mr Coote deposed that he had earlier sold two residential investment properties to provide, mostly, working capital from their proceeds for the purposes of supporting the investment in the trading trust business. 4 Each of Mr Davis, Mrs Davis and Mr Coote has offered an undertaking to the Court to pay any costs which might be ordered against Top Stuff in the event it was unable to pay those costs. Significantly, Ms Bull has provided no such undertaking or an explanation of her reticence to do so. However, it is common ground on the available material that she had no relevant part in the business. It appears that Ms Bull was a discretionary beneficiary of the trading trust, either directly or indirectly through her right to receive distributions from it. The nature of Top Stuff's case 5 Mr Coote verified the truth of the allegations made in the amended statement of claim. These involved several alleged representations made to him commencing from about early 2006, in his capacity at that time as a director of the former trustee of the trading trust. The representations related to the potential benefits of doing business with Wireless Anywhere and Vodafone, the level of marketing services and likely profitability of any such business venture. A number of representations were also alleged to have been made subsequently, in early and late 2009, upon which Mr Coote alleged he relied in his respective capacities as a director of the former trustee, and after 16 October 2009, current trustee of the trading trust, being Top Stuff. 6 Importantly, the amended statement of claim alleged that in about November 2009 both Vodafone and Wireless Anywhere represented to Mr Coote, on behalf of the trustee, that Vodafone and/or Wireless Anywhere would resolve network failures about which Top Stuff had received complaints from its customers. The pleading went on to allege that in the months following this representation both Vodafone and Wireless Anywhere represented that millions of dollars were being invested in Vodafone's network to fix the failures and that the network would be substantially improved. Top Stuff claimed that the representations were false and that most of them related to future matters. 7 Top Stuff also claimed that it entered into a written contract with Wireless Anywhere that gave rise to an implied term that Wireless Anywhere would provide proper and reliable access to fully functioning services for the customer, as defined by the contract. The pleading alleged that in breach of that term, Wireless Anywhere failed to provide such access by reason of the unavailability of services in the service area, disconnection of calls, late receipt of SMS and voicemail messages and inadequate customer service. 8 Top Stuff's case was essentially that its business had failed in early 2011 because of those alleged failures and inadequacies. In support of this case, Top Stuff relied on a letter written by the chief executive officer of Vodafone Hutchison Australia Pty Limited, which I infer is a related company of the first respondent, Vodafone. I was informed that the letter had been sent in early 2011. The chief executive wrote that over the past few months: "… we have let down some of our business customers. While you might not have been affected directly, you may well have heard something and wondered what's been going on. Our aim is to provide our customers with an excellent customer experience and the best possible value, but recently our network and customer service performance, particularly in December and January, fell well below the standards we have set for ourselves. Some of you have experienced issues including dropped calls, delayed SMS and voicemails, slow data speeds, inconsistent coverage and long waits when you called us." 9 The letter expressed the author's true sorrow and gave an apology. It then provided an answer that, because of the rapid growth of the company: "… when problems came, we responded too slowly. When more people joined us and some of our customers started using lots more data than they had before, we didn't keep up, and some technical faults added to the issue." 10 The letter referred to network improvement, and plans to substantially expand the network and to invest over a billion dollars in the upgrading of the network over the succeeding 12 months. The respondents' position on this application 11 The experienced solicitors for each of the two respondents have sworn affidavits identifying that very significant costs would be incurred if these proceedings were fully litigated to the extent of a 10 day hearing involving lay and expert evidence. Those affidavits put forward no articulation of even the general nature of either respondents' defence although, as their counsel noted, the application for security for costs was made, quite properly, at the earliest available opportunity. Moreover, Top Stuff indicated that it proposes to amend its current pleading and may need to give further particulars of some of the current and new allegations. In addition, the respondents argued that Top Stuff, and its predecessor trustee, had entered into written contracts with particular terms, none of which have been relied on by Top Stuff to support its claims. They contended that instead, it was significant that Top Stuff relied on oral representations alleged to have been made to Mr Coote over a period of years. The COURT'S discretion to order security for costs 12 For many years, corporations legislation has provided the Court with a discretion to order security for costs in the form now to be found in s 1335 of the Corporations Act. Although there are many cases involving claims for the exercise of that discretion in particular circumstances, the statutory language makes pellucid that the discretion is an unfettered one. Section 1335(1) provides: "1335 Costs (1) 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." 13 In Buckley v Bennell Design & Construction Pty Limited (1974) 1 ACLR 301 at 305 LW Street CJ, said that: "… the discretion could properly be regarded as ordinarily exercisable so as to protect a defendant sued by an impecunious company, but that, if the court in any case takes the view that this protection should not be afforded to the defendant, it has an unlimited and unrestricted discretion to give effect to such view without having to look for special circumstances. I prefer to regard the discretion conferred by the section as being one which should be exercised merely with a predisposition in favour of the defendant party." 14 Earlier his Honour had said that the courts had been concerned to achieve a balance between ensuring that adequate and fair protection is provided to the other party while avoiding injustice to impecunious companies by unnecessarily shutting them out or prejudicing them in the conduct of litigation (1 ACLR at 304). Those views have been applied many times, including by Winneke P and Phillips JA in Epping Plaza Fresh Fruit & Vegetables Pty Ltd v Bevendale Pty Ltd [1999] 2 VR 191 at 195 [15]. Their Honours went on to say that the authorities tended to suggest that the discretion given to the court by s 1335 to make an order for security against an impecunious company was open-ended and was not to be fettered by rigid guidelines or principles. I agree. Consideration 15 In this matter, there is good reason to consider that the discretion in s 1335 in favour of requiring security to be given has been powerfully enlivened. I need not consider the position under r 19.01. Given the nature of the claims in the application and amended statement of claim, it is likely that if there is any contest about the adequacy of Vodafone's service to its telephone subscriber customers, who were the persons that Top Stuff's business was to solicit, then significant issues could arise. At the moment, it appears that the chief executive's letter, which I have referred to above, suggests that there may be questions of degree about the impact of inadequate service on persons in the position of Top Stuff. But, the letter is potentially supportive of the claim that Top Stuff seeks to make and suggests that it may have some merit. 16 The two respondents have not argued that Top Stuff's claim is anything other than bona fide. However, in litigation of this kind, once the issues have been properly identified and articulated, it is likely that some defences will be asserted, although no detail of these has been identified by either respondent at this time. That makes it quite difficult, at the moment, to fashion a proper order providing for security for costs that can apply from now to the end of the proceedings. The likely costs of preparing a defence for each of the respondents at the present time is in the order of between $10,000 and $15,000 each. 17 The immediate need in this litigation, subject to disposing of the issue of security, is to identify what the real issues will be and to craft orders that will prepare those issues for trial in accordance with the overarching purpose of the Court's civil practice and procedure provisions pursuant to s 37M of the Federal Court of Australia Act 1976 (Cth). 18 In my opinion, the proffer of the three undertakings by Mr Coote, Mr Davis and Mrs Davis provides what I would regard as a sufficient security to take the proceedings to the point where either the pleadings will have closed or the parties will have identified the issues adequately so that the future progress of the matter can be provided for by appropriate directions. 19 It is a matter of concern that Ms Bull has not seen fit to proffer an undertaking to the Court so as to risk whatever assets she may have. On the evidence, she stands to gain from a favourable outcome of this litigation. However, I consider that, once the point has been reached of identifying what the issues are and, therefore, what likely expenses and investments the parties will have to make in pursuing the proceedings to trial, the respondents should not be precluded from revisiting the issue of whether there should be a monetary sum provided by way of security or an undertaking proffered by Ms Bull, as a condition of permitting further progress of the proceedings. 20 I am of opinion that it is appropriate to order that Top Stuff provide security for costs, but the undertakings proffered to date will provide the respondents with a sufficient, real recourse to payment of whatever costs they may be awarded, for the moment, and up to the point that I have indicated. 21 The undertakings proffered by the three individuals represent a serious commitment to risk the consequences of exposing themselves to liability for costs. Those three individuals are persons closely connected with the operations of the trading trust who stand to benefit from the success of this litigation. I am of opinion that those undertakings are sufficient to warrant deferring consideration of the making of an order for any monetary sum in the present circumstances. 22 As I have said, once it is clear what the case will really involve and the real issues have been ascertained, it should be a relatively simple exercise to quantify what, if any, monetary sum should be fixed for security, based on the estimates that have already been put on, but perhaps revised with greater knowledge of the likely consequences of the conduct of the litigation. It should also be relatively easy to ascertain whether it is appropriate to make such an order having regard to any further proffer of undertakings by those, such as Ms Bull, who stand to gain from the conduct of the litigation and the substance which those persons might put behind any such undertakings. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares. Associate: Dated: 21 December 2011