FEDERAL COURT OF AUSTRALIA G1PC Pty Ltd (Trustee) v PetStock Pty Limited [2015] FCA 1466 Citation: G1PC Pty Ltd (Trustee) v PetStock Pty Limited [2015] FCA 1466 Parties: G1PC PTY LTD AS TRUSTEE FOR THE GOLDEN 1 TRUST (ACN 125 170 309) v PETSTOCK PTY LIMITED (ACN 098 394 588), SHANE BRENDAN YOUNG, JOHN BEDWELL, JULIE YOUNG, DAVID JOHN YOUNG, PETSTOCK GEELONG PTY LTD (ACN 103 220 524), PETSTOCK (HOPPERS CROSSING) PTY LTD (ACN 105 361 868), PETSTOCK (ERINA) PTY LTD (ACN 129 430 208), WANDOO GREAT PTY LTD (ACN 149 200 439), RALPH HEDLEY HUDSON, PAMELA MARY MACLEOD, KARINA JEANETTE LAMONT, PETSTOCK RETAIL PTY LTD (ACN 127 690 466), PETSTOCK (SUNSHINE) PTY LTD (ACN 127 364 087), PETSTOCK PETVET PTY LTD (ACN 128 415 734), PETSTOCK (CRAIGIEBURN) PTY LTD (ACN 166 638 482), PETVET CRAIGIEBURN PTY LTD (ACN 601 406 946), PETVET ALTONA NORTH PTY LTD (600 301 139)), PETSTOCK (ALTONA NORTH) PTY LTD (600 092 171), PETSTOCK (BRIGHTON) PTY LTD (ACN 127 364 087), PETVET BRIGHTON PTY LTD (ACN 168 114 627), JANELLE E CROUCHER TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER, JAMES M PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER, TERESA L PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER, VICKI M PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER, PETSTOCK (ROUSE HILL) PTY LTD (ACN 603 905 586), PETVET ROUSE HILL PTY LTD (ACN 603 905 764), PETSTOCK (WEST GOSFORD) PTY LTD (ACN 604 821 463) and PETVET (WEST GOSFORD) PTY LTD (ACN 604 821 696) File number: NSD 1154 of 2015 Judge: ROBERTSON J Date of judgment: 21 December 2015 Catchwords: COSTS – security for costs – whether reason to believe applicant corporation will be unable to pay the costs of the respondents if successful in their defence – exercise of discretion – quantum Legislation: Corporations Act 2001 (Cth) s 1335(1) Federal Court of Australia Act 1976 (Cth) s 37M Federal Court Rules 2011 (Cth) r 19.01(1) Cases cited: Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497 Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; 98 ACSR 301 Davey v Herbst [No 2] [2012] ACTCA 19 Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377 Meni's Tailoring & Alterations Pty Limited v Jeanswest Corporation Pty Ltd [2003] FCA 1108 Save The Ridge Inc v Commonwealth [2004] FCA 1289 Date of hearing: 16 December 2015 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 19 Counsel for the Applicant: Dr S Bogan Solicitor for the Applicant: Axis Legal Counsel for the Respondents: Mr HPT Bevan Solicitor for the Respondents: Norton Rose Fulbright Australia IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1154 of 2015 BETWEEN: G1PC PTY LTD AS TRUSTEE FOR THE GOLDEN 1 TRUST (ACN 125 170 309) Applicant AND: PETSTOCK PTY LIMITED (ACN 098 394 588) First Respondent SHANE BRENDAN YOUNG Second Respondent JOHN BEDWELL Third Respondent JULIE YOUNG Fourth Respondent DAVID JOHN YOUNG Fifth Respondent PETSTOCK GEELONG PTY LTD (ACN 103 220 524) Sixth Respondent PETSTOCK (HOPPERS CROSSING) PTY LTD (ACN 105 361 868) Seventh Respondent PETSTOCK (ERINA) PTY LTD (ACN 129 430 208) Eighth Respondent WANDOO GREAT PTY LTD (ACN 149 200 439) Ninth Respondent RALPH HEDLEY HUDSON Tenth Respondent PAMELA MARY MACLEOD Eleventh Respondent KARINA JEANETTE LAMONT Twelfth Respondent PETSTOCK RETAIL PTY LTD (ACN 127 690 466) Thirteenth Respondent PETSTOCK (SUNSHINE) PTY LTD (ACN 127 364 087) Fourteenth Respondent PETSTOCK PETVET PTY LTD (ACN 128 415 734) Fifteenth Respondent PETSTOCK (CRAIGIEBURN) PTY LTD (ACN 166 638 482) Sixteenth Respondent PETVET CRAIGIEBURN PTY LTD (ACN 601 406 946) Seventeenth Respondent PETVET ALTONA NORTH PTY LTD (600 301 139)) Eighteenth Respondent PETSTOCK (ALTONA NORTH) PTY LTD (600 092 171) Nineteenth Respondent PETSTOCK (BRIGHTON) PTY LTD (ACN 127 364 087) Twentieth Respondent PETVET BRIGHTON PTY LTD (ACN 168 114 627) Twenty-First Respondent JANELLE E CROUCHER TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Second Respondent PETER S CROUCHER TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Third Respondent JAMES M PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Fourth Respondent TERESA L PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Fifth Respondent VICKI M PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Sixth Respondent PETSTOCK (ROUSE HILL) PTY LTD (ACN 603 905 586) Twenty-Seventh Respondent PETVET ROUSE HILL PTY LTD (ACN 603 905 764) Twenty-Eighth Respondent PETSTOCK (WEST GOSFORD) PTY LTD (ACN 604 821 463) Twenty-Ninth Respondent PETVET (WEST GOSFORD) PTY LTD (ACN 604 821 696) Thirtieth Respondent JUDGE: ROBERTSON J DATE OF ORDER: 21 DECEMBER 2015 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The applicant is to provide security in respect of the respondents' costs of the proceedings in the sum of $100,000 in the form of a bank guarantee from an Australian trading bank (or in such other form as is acceptable to the District Registrar) to be lodged with the District Registrar and a copy of which is to be served on the solicitor for the respondents. 2. The bank guarantee required by order 1 is to be lodged with the District Registrar by 29 January 2016. 3. The proceedings be stayed if the security for costs is not provided in accordance with the orders of the Court. 4. The respondents have liberty to apply, on seven days' notice, to vary the amount of security for costs required to be provided in accordance with the orders of the Court. 5. The costs of the respondents' interlocutory application dated 17 November 2015, including the costs of the respondents' interlocutory application to be excused from compliance with certain paragraphs of the applicant's notice to produce dated 1 December 2015, be costs in the cause. 6. The parties have liberty to apply on two days' notice. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1154 of 2015 BETWEEN: G1PC PTY LTD AS TRUSTEE FOR THE GOLDEN 1 TRUST (ACN 125 170 309) Applicant AND: PETSTOCK PTY LIMITED (ACN 098 394 588) First Respondent SHANE BRENDAN YOUNG Second Respondent JOHN BEDWELL Third Respondent JULIE YOUNG Fourth Respondent DAVID JOHN YOUNG Fifth Respondent PETSTOCK GEELONG PTY LTD (ACN 103 220 524) Sixth Respondent PETSTOCK (HOPPERS CROSSING) PTY LTD (ACN 105 361 868) Seventh Respondent PETSTOCK (ERINA) PTY LTD (ACN 129 430 208) Eighth Respondent WANDOO GREAT PTY LTD (ACN 149 200 439) Ninth Respondent RALPH HEDLEY HUDSON Tenth Respondent PAMELA MARY MACLEOD Eleventh Respondent KARINA JEANETTE LAMONT Twelfth Respondent PETSTOCK RETAIL PTY LTD (ACN 127 690 466) Thirteenth Respondent PETSTOCK (SUNSHINE) PTY LTD (ACN 127 364 087) Fourteenth Respondent PETSTOCK PETVET PTY LTD (ACN 128 415 734) Fifteenth Respondent PETSTOCK (CRAIGIEBURN) PTY LTD (ACN 166 638 482) Sixteenth Respondent PETVET CRAIGIEBURN PTY LTD (ACN 601 406 946) Seventeenth Respondent PETVET ALTONA NORTH PTY LTD (600 301 139)) Eighteenth Respondent PETSTOCK (ALTONA NORTH) PTY LTD (600 092 171) Nineteenth Respondent PETSTOCK (BRIGHTON) PTY LTD (ACN 127 364 087) Twentieth Respondent PETVET BRIGHTON PTY LTD (ACN 168 114 627) Twenty-First Respondent JANELLE E CROUCHER TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Second Respondent PETER S CROUCHER TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Third Respondent JAMES M PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Fourth Respondent TERESA L PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Fifth Respondent VICKI M PRIDDLE TRADING AS PETSTOCK (MOUNT GAMBIER) AND PETVET MOUNT GAMBIER Twenty-Sixth Respondent PETSTOCK (ROUSE HILL) PTY LTD (ACN 603 905 586) Twenty-Seventh Respondent PETVET ROUSE HILL PTY LTD (ACN 603 905 764) Twenty-Eighth Respondent PETSTOCK (WEST GOSFORD) PTY LTD (ACN 604 821 463) Twenty-Ninth Respondent PETVET (WEST GOSFORD) PTY LTD (ACN 604 821 696) Thirtieth Respondent JUDGE: ROBERTSON J DATE: 21 DECEMBER 2015 PLACE: SYDNEY REASONS FOR JUDGMENT 1 In these proceedings, the applicant claims, by way of a fast track application, that the 30 respondents have infringed trademarks owned by the applicant, contravened ss 18 and 29 of the Australian Consumer Law, and engaged in passing off by promoting and supplying veterinary services using the names 'PetVet', 'PetStock' and variations on those names. The applicant owns trademarks with the name 'PetVets' for veterinary services and the wholesaling of pet care and veterinary products. 2 By interlocutory application filed on 17 November 2015, the respondents seek an order that the applicant provide security for costs, either in the amount of $386,766.75 or in an amount to be determined by the Court, and that the proceedings be stayed until security is given. 3 I shall refer briefly to the evidence in this application. 4 Ms Tisdale's affidavit of 17 November 2015 shows that the applicant is not the registered proprietor of any real property in Australia. The same result applied for FFAL Pty Ltd (FFAL). That company is referred to in paragraph 2 of the applicant's pleading as a company to which the applicant and its predecessor have promoted and supplied veterinary services. Ms Tisdale also annexed correspondence between the parties' solicitors. It seems to be uncontroversial that the applicant has a paid up capital of $2.00, as does FFAL. 5 Ms Tisdale's 2 December 2015 affidavit annexes correspondence. One letter, dated 23 November 2015 from the solicitors for the applicant takes issue with the affidavit or report of Ms Harris, to which I shall refer shortly. It raised the question, amongst others, whether Ms Harris had included the costs of running the respondents' cross-claim in her estimate of costs. (As to this, I am satisfied that Ms Harris's calculations did not include the respondents' cross-claim: see the email dated 16 December 2015 annexed to the affidavit of Andrew Neil McRobert affirmed 16 December 2015). Another letter from the solicitors for the applicant, annexed to the affidavit of Ms Tisdale, stated that the gross revenue for the PetVets business in the 2014/2015 financial year was $1,457,498.86, a figure which I accept, and was expected to increase in the current financial year. The letter also refers to a valuation of $1,103,192 by Mr Lencioni. A further letter, dated 24 November 2015, from the solicitors for the respondents said that this material supported their position that there was reason to believe that the applicant would be unable to pay the respondents' costs of the proceeding if so ordered. 6 The expert report of Ms Elizabeth Harris, filed on behalf of the respondents, goes to the quantum of recoverable legal costs likely to be incurred by the respondents represented by Norton Rose Fulbright up to and including the trial of the proceedings and assuming costs are awarded on the standard basis. Two qualifications were provided, one where Norton Rose Fulbright acted on behalf of only the first to fifth respondents and the second on the basis that Norton Rose Fulbright acted on behalf of the 25 respondents to the proceedings. On these bases, Ms Harris stated her opinion that the recoverable legal costs likely to be incurred by the respondents if Norton Rose Fulbright acted on behalf of only the first to fifth respondents and all claims proceeded, was $362,164.90. If Norton Rose Fulbright acted on behalf of the 25 respondents and all claims proceeded, Ms Harris gave her opinion as to the recoverable legal costs as $506,739.63. The third variable was that Norton Rose Fulbright acted on behalf of only the first to fifth respondents and the Australian Consumer Law and passing off claims did not proceed. On that basis the opinion of Ms Harris was that the recoverable legal costs would be $278,476.40. On that same basis, but if Norton Rose Fulbright acted on behalf of the 25 respondents, Ms Harris' opinion was that the recoverable legal costs would be $386,766.75. These figures are summarised in Ms Harris' report at [35]. As will appear, I propose to discount some of Ms Harris' estimates in arriving at the quantum of security for costs on a staged basis. 7 The applicant relies primarily on an affidavit dated 25 November 2015 by Mr Lencioni, an accountant at a specialist veterinary accounting firm based in Queensland. The business valuation report for the two companies FFAL and G1PC Pty Ltd (G1PC) was $1,103,192. Mr Lencioni gave the opinion that if G1PC was sold as a stand-alone company the goodwill was $1,038,192. This was calculated by subtracting the plant and equipment of FFAL ($65,000) from the total valuation. Mr Lencioni also said that G1PC had a secured loan with the Bank of Queensland in the amount of $270,635.88. There was also a reference to an unsecured loan to G1PC by FFAL in the amount of $349,650. Mr Lencioni said that G1PC did not have any other creditors of any significance. Provided there was a willing buyer at the valuation price, in selling the business GIPC would be left with a net asset position after payment of all liabilities of $417,906.12. 8 Mr Loriente is the Corporate Development Manager of Petstock Pty Limited. His affidavit, dated 12 December 2015, read on behalf of the respondents, replies to the affidavit of Mr Lencioni. Mr Loriente said, amongst other things, that Mr Lencioni's report did not consider the effect on the value of the business if the owner had to sell it within a predetermined and relatively short period of time, such as to satisfy a liability for legal costs in the proceeding. In a distressed sale or firesale scenario businesses were more often than not disposed of at a material discount to the "Fair Market Value". On that basis, the equity value would be between $54,724 and $101,204. If the unsecured debt owed to FFAL was also deducted, it gave a range of minus $294,926,000 and minus $248,446. 9 The respondents submitted that the applicant was a $2 dollar company with a sole director, Mr Kolenc. It owned no real property in Australia. There was no evidence that it had any cash reserves. It had debts of at least $620,285.88, $270,635.88 of which was a secured loan with the Bank of Queensland. Its plant and equipment was said to be worth only $6,000. The only "asset" put forward by the applicant was the estimated value of the goodwill of the veterinary practice at 296 Stanmore Road, Petersham said to be worth $417,906.12 after offsetting debts. The respondents submitted the applicant's prospects in the proceeding were at best neutral. 10 The respondents made submissions as to the three issues they said arose: first, whether there was "reasonable belief" within s 1335 of the Corporations Act 2001 (Cth); second, whether as a matter of discretion an order for security should be made; and third, the appropriate quantum of security. As to the first of these, the respondents submitted that the applicant's reliance on the goodwill of the Petersham Veterinary Hospital ($417,906.12 after offsetting debts) was misplaced. FFAL, the respondents submitted, was not a party to the proceeding. Also, the respondents submitted, FFAL ran the PetVets business and all of the trading names used by the Petersham Veterinary Hospital were registered to FFAL not the applicant. As the proprietor of the Petersham Veterinary Hospital, FFAL not the applicant owned any goodwill. With reference to Davey v Herbst [No 2] [2012] ACTCA 19 at [42], the respondents submitted that it was uncertain whether the goodwill of the Petersham Veterinary Hospital could be realised in sufficient time and amount to comply with an adverse costs order in the usual terms. The value of the goodwill was uncertain because it involved future projections and because, as stated by Mr Lencioni in his affidavit, anticipated events frequently did not occur as expected. As to the Court's discretion, the respondents submitted that there was no suggestion that the provision of security would stultify the proceedings and there was no evidence that those who stood to benefit from the litigation, such as Mr Kolenc, were without means. Mr Kolenc had offered no guarantee or undertaking. The respondents drew attention to the bank statements produced by the applicant in answer to a notice to produce, being bank statements covering the period 12 January 2014 to 11 October 2015. I find the closing balance for each period did not exceed $400. 11 The applicant submitted that it had significant prospects of succeeding in its claim for trademark infringement and that the respondents' defence to that claim had very limited prospects of succeeding. The applicant also submitted that the costs estimated by the respondents did not reflect that most of the issues were narrow in scope and were likely to be established on the basis of a limited number of key documents such as the franchise agreements and Disclosure Statements. Further, the applicant submitted, it did not assert different facts in relation to each respondent. The infringing mark was sold by the first respondent and then used by each of the franchisee respondents in precisely the same way. The applicant submitted that the costs estimate ignored altogether that at present the proceedings were in the Fast Track list. 12 In any event, the applicant submitted, it had sufficient assets to meet a costs order in the amount sought by way of security for costs ($386,766.75). It was submitted that $417,906.12 was the amount that would be available to satisfy a costs order were FFAL a secured creditor, and as FFAL was an unsecured creditor, it would have no priority over the respondents as judgment debtors. The applicant submitted that Mr Loriente's affidavit was of little consequence. The applicant submitted that the bottom line was that when the goodwill of G1PC's veterinary practice was purchased by G1PC in 2007 it was purchased for a significantly higher amount than the amount sought by the respondents by way of security for costs, and according to its current valuation it had increased in value further since then. The valuation was high enough that if there were a variance in the sale amount actually achieved, there would still be sufficient assets to meet a relevant costs order. In any event, the respondents could not necessarily expect a full indemnity of their recoverable costs by way of an order for security for costs. The applicant also submitted that G1PC was entitled to full indemnification against the trust assets for any claim made against it. 13 I am satisfied that this is an appropriate case to order security for costs. I am satisfied, for the purposes of s 1335(1) of the Corporations Act, that there is reason to believe that the applicant will be unable to pay the costs of the respondents if they are successful in their defence. I accept that the best evidence is not required on such an application. I am also of the opinion that the Court should, on such an application, be cautious in its assessment of the prospects of success of either party, partly because the litigation is in its early days, but more importantly because, consistently with s 37M of the Federal Court of Australia Act 1976 (Cth), an interlocutory application should not be permitted to become a dress rehearsal for a trial. This was one of the reasons I excused the respondents from compliance with certain paragraphs of the applicant's notice to produce, those paragraphs requiring the production of documents more relevant to a final hearing and disproportionate to the application for security for costs. The statutory threshold has been described as a low or modest threshold: Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377 at [15]-[16], although I accept that the words of the statute should be applied according to their terms without a gloss being placed upon them: Cornelius v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; 98 ACSR 301 at [16]-[17]. 14 On the basis of Mr Lencioni's report, and having considered Mr Loriente's affidavit, including the criticisms made of it in submissions on behalf of the applicant, I find there is the reason to believe referred to in s 1335(1). In the profit and loss statement for the 12 months ending 30 June 2015, not only is the net profit shown as $146,338.60, but also this is a valuation of both FFAL and G1PC trading as Petersham Veterinary Hospital. Further, I find that it is unlikely that the goodwill of the Petersham Veterinary Hospital could be realised in sufficient time and amount to comply with an adverse costs order in the usual terms. It is also relevant that the effect of the applicant's position is that if it were ordered to pay the respondents' costs it would have to do so by selling its business: it does not say that it could, and I find that it could not, meet the respondents' costs from cash reserves or readily realisable assets: see Davey v Herbst [No 2] at [42] and, generally, Meni's Tailoring & Alterations Pty Limited v Jeanswest Corporation Pty Ltd [2003] FCA 1108 at [4]. I take into account that the applicant's bank statements covering the period 12 January 2014 to 11 October 2015 showed the closing balance for each period as not exceeding $400. 15 I would exercise the discretion to order security having regard to what I have just said as to the applicant's financial position, to the prima facie reasonableness of the parties' claims in the proceedings, and I note that it is not suggested that an order for the provision of security would stultify the proceedings. 16 As to quantum, I will order security in the amount of $100,000, with liberty to the respondents to renew their application. My opinion is that, barring new circumstances, that security would be sufficient up to and including any mediation of the proceedings. While accepting the exercise involves the broad-brush approach referred to by Emmett J in Save The Ridge Inc v Commonwealth [2004] FCA 1289 and the principles referred to by French J in Bryan E Fencott & Associates Pty Ltd v Eretta Pty Ltd [1987] FCA 102; (1987) 16 FCR 497 at 514-5, I have discounted Ms Harris' estimates by reference to my own assessment of the appropriateness in this litigation of some of the steps she identifies, bearing in mind that this is an application for security for costs rather than a taxation. I have therefore discounted the figures for a summary judgment application, a strike out application, an application for change of venue and the costs associated with discovery. 17 As to terms, in my view it is not appropriate in the circumstances of this case that the proceedings be stayed until security is given as that would put the matter on hold until the end of January 2016. The more appropriate order is that the proceedings be stayed if security is not given by the date I propose to specify, 29 January 2016. 18 I have not placed any weight on Exhibit 2, which was general information provided by Mr Kolenc to Mr Lencioni and which was relied on by him for the purposes of his valuation report. Conclusion and orders 19 I will hear the parties on the appropriate form of order in respect of the respondents' application for security for costs. The respondents' costs of its interlocutory application for security filed on 17 November 2015 will be costs in the cause. Those costs are to include the costs of the respondents' interlocutory application, which succeeded, to be excused from compliance with the paragraphs of the applicant's notice to produce dated 1 December 2015 which were called on, being paragraphs 1, 2 and 4, for the purposes of the respondents' security for costs application. The exhibits are to be returned to the parties. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Robertson. Associate: Dated: 21 December 2015