FEDERAL COURT OF AUSTRALIA Allied Environmental Solutions Pty Ltd v North Burnett Regional Council [2016] FCA 713 File number: NSD 185 of 2016 Judge: GLEESON J Date of judgment: 16 June 2016 Catchwords: PRACTICE AND PROCEDURE – application for security for costs – security for costs to be provided Legislation: Competition and Consumer Act 2010 (Cth) Schedule 2 (Australian Consumer Law) Corporations Act 2001 (Cth) Federal Court Act 1976 (Cth) Federal Court Rules 2011 Cases cited: Australian Battery Distributors Pty Ltd v Robert Bosch (Australia) Pty Ltd [2015] FCA 1164 BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664 Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 Southern Equity Pty Ltd v Timevale Pty Ltd [2015] FCA 1364 Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 Date of hearing: 30 May 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 36 Counsel for the Applicant: Mr M Rudge SC with Mr B Le Plastrier Solicitor for the Applicant: Keith Redenbach Legal Counsel for the Respondent: Mr G McNally SC with Mr R Glover Solicitor for the Respondent: King & Company Solicitors ORDERS NSD 185 of 2016 BETWEEN: ALLIED ENVIRONMENTAL SOLUTIONS PTY LTD Applicant AND: NORTH BURNETT REGIONAL COUNCIL Respondent JUDGE: GLEESON J DATE OF ORDER: 16 JUNE 2016 THE COURT ORDERS THAT: 1. The applicant provide security for the respondent's costs in the sum of $105,000 by provision to the respondent of a bank guarantee in favour of the respondent in a form acceptable to a Registrar of this Court on or before Friday, 15 July 2016. 2. The proceedings be stayed in the event of non-compliance with order 1 until such time as the security referred to in order 1 is provided. 3. The applicant pay the respondent's costs of the amended interlocutory application dated 19 May 2016. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT GLEESON J: 1 By amended interlocutory application dated 19 May 2016, the respondent ("Council") sought orders that the applicant ("Allied") provide security for the Council's costs, pursuant to rr 19.01(1)(a), (b) and (c) of the Federal Court Rules 2011 ("Federal Court Rules") or s 1335(1) of the Corporations Act 2001 (Cth) ("Corporations Act"). 2 On 30 May 2016, by consent, I made an order to the effect that two questions, relevant to liability, be determined as separate questions from any other question in the proceeding. Having made that order, the Council's application for security for costs was confined to the costs of the determination of the separate questions. The Council's costs assessor estimated the relevant costs to be $107,194.30. Allied did not dispute the reasonableness of the estimate but submitted that, in the event that the court decided to order security, it should not be in the full estimated amount. Background to application for security for costs 3 Allied is claiming damages for breach of contract and under s 236 of Schedule 2 of the Competition and Consumer Act 2010 (Cth) ("Australian Consumer Law"). The relevant contract is a contract for the provision of waste management services entered into on 18 July 2006. The dispute between the parties primarily concerns the duration of the contract and whether the Council breached its contractual obligations by refusing to obtain services from Allied after about 30 June 2014. 4 In particular, the parties dispute the meaning of a letter from the Council to Allied dated 22 November 2012 ("extension letter"). The two questions which are to be determined separately are: 1. With respect to the allegations made in paragraphs 18 to 27 of the applicant's statement of claim ("the SOC"): (a) did the extension letter constitute an exercise of clause 3.3 of the contract; (b) if the extension letter did constitute an exercise of clause 3.3 of the contract: (i) was the contract thereby extended for the term referred to in paragraph 14 of the SOC; (ii) is the applicant estopped from asserting that the contract was extended for the term referred to in paragraph 14 of the SOC; and (c) if the extension letter did not constitute an exercise of clause 3.3 of the contract, when did the contract expire? 2. With respect to the allegations made in paragraph 29(a), 29(b) and 29(c) of the SOC: (a) did the extension letter contain a representation that the applicant was exclusively engaged to provide the services referred to in paragraph 9 of the SOC for the term referred to in paragraph 14 of the SOC; and (b) if the extension letter did contain a representation to the effect referred to in paragraph 2(a) herein, was that representation misleading or deceptive within the meaning of section 18 of the Australian Consumer Law? 5 The parties submitted to a process of expert determination in relation to their dispute. In January 2016, the expert made a determination in the Council's favour. The current proceeding makes essentially the same claim that was the subject of the expert determination. Evidence 6 The Council relied on the following affidavits: (1) Affidavits of John Butt, solicitor acting for the Council, affirmed 9 March 2016, 29 March 2016 and 25 May 2016; (2) Affidavits of Paul Garrett, costs assessor, affirmed 10 March 2016 and 27 April 2016; and (3) Affidavit of Michael Cerruto, solicitor acting for the Council, affirmed 16 March 2016. 7 Allied relied on an affidavit of Andrew Mayes sworn on 24 March 2016. Mr Mayes is a director of Allied and an accountant employed by Allied. Mr Mayes is also the accountant for the group of companies of which Allied is a member, being the RMA Group of companies. Relevant statutory provisions 8 Rule 19.01 of the Federal Court Rules provides: (1) A respondent may apply to the Court for an order: (a) that an applicant give security for costs and for the manner, time and terms for the giving of the security; and (b) that the applicant's proceeding be stayed until security is given; and (c) that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed. (2) An application under subrule (1) must be accompanied by an affidavit stating the facts on which the order for security for costs is sought. (3) The respondent's affidavit should state the following: (a) whether there is reason to believe that the applicant will be unable to pay the respondent's costs if so ordered; (b) whether the applicant is ordinarily resident outside Australia; (c) whether the applicant is suing for someone else's benefit; (d) whether the applicant is impecunious; (e) any other relevant matter. 9 Section 56 of the Federal Court Act 1976 (Cth) confers power on the Court to make orders for security for costs. 10 Additionally, s 1335(1) of the Corporations Act provides: 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. Legal principles 11 The relevant principles are well established. The discretion to order security for costs is unfettered and should be exercised having regard to all the circumstances of the case without any predisposition in favour of the award of security: KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196. In that decision, Beazley J (as her Honour then was) set out the established guidelines which the court typically takes into account in determining an application for security for costs. Relevantly to this case: (a) Where the application is based on a contention establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, once the respondent has discharged the onus of proving reason to believe, the onus shifts to the party against whom the order is sought to establish why security should not be granted; (b) Considerations in deciding whether to order security for costs are: (i) prospects of success; (ii) the quantum of the risk that the applicant could not satisfy an adverse costs order: Southern Equity Pty Ltd v Timevale Pty Ltd [2015] FCA 1364 at [23]; (iii) whether the applicant's impecuniosity was caused by the respondent's conduct the subject of the claim; (iv) whether the application for security is oppressive, in the sense that it is being used to deny an impecunious applicant a right to litigate. 12 Although Allied initially disputed the question of whether there was "credible testimony" of the requisite reason to believe, in the course of argument, Mr Rudge SC did not maintain that contention. 13 Allied's written submissions contended that its case has reasonable prospects of success. That contention was not disputed, although the Council noted that the expert determination went against Allied. 14 Ultimately, the issues between the parties on the question of whether Allied should be ordered to provide security were: (1) Whether Allied could satisfy an adverse costs order; (2) Whether the court should decline to exercise its discretion to make an order on the basis that Allied's impecuniosity was caused by the Council; (3) Whether the court should decline to exercise its discretion to make an order on the basis that it would stultify the proceeding. 15 As to the second matter, in Australian Battery Distributors Pty Ltd v Robert Bosch (Australia) Pty Ltd [2015] FCA 1164 ("Australian Battery Distributors"), Edelman J said at [39] to [42]: 39 Another well-known factor in the assessment of security for costs is whether the impecuniosity of the applicant is caused or contributed to by the conduct of the respondent. However, there is a qualification to this factor. In Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 [33], Beazley JA said that where the applicant's claim is based upon a loss of profit, "the court will take a more cautious approach in its consideration of the cause of impecuniosity than where the claim is based on the infliction of damage". There is a difference between an existing state of impecuniosity caused by a respondent who has deprived an applicant of existing assets and a state of impecuniosity because a respondent has not acted to ensure that the applicant obtained assets. 40 In particular, the difficulty for ABD in this case is that it has not established that its financial position before its relationship with Bosch Australia was one of a company with substantial assets. The losses claimed by ABD, and its complaint of impecuniosity, rely primarily upon a loss of profits of $638,160. This is a complaint that Bosch Australia failed to make ABD's position better. It is not necessarily a complaint that its position was worsened: see Fat-sel Pty Limited v Brambles Holdings Limited [1985] FCA 89; (1985) 3 ACLC 312, 315 (Beaumont J). 41 In Del Bosco v Outtrim [2008] NSWSC 105 [26], Barrett J said this: I turn briefly to the second matter on which the plaintiff relies, namely, the contention that the defendant was responsible for the plaintiff's lack of means. To succeed in making this complaint relevant, the plaintiff would have to show two things: first, that she had previously had financial resources; and, second, that the defendant's actions caused or at least materially contributed to an inability to meet an order for security: Jazabas Pty Ltd v Haddad [2007] NSWCA 291 at [94] per McClellan CJ at CL. 42 It is not necessary to decide whether this factor should be wholly disregarded if an applicant could not show that it previously had any means. I am content to proceed on the basis that it remains relevant that the respondent might have deprived the applicant of means which it would otherwise have subsequently obtained from the respondent. But the force of this factor is significantly reduced where, as counsel for ABD properly conceded, the bulk of its claimed losses are of this nature rather than involving a loss of pre-existing assets. 16 In Fiduciary Ltd v Morningstar Research Pty Ltd [2004] NSWSC 664, at [88], Austin J rejected a submission to the effect that a court cannot conclude that the respondent's wrongdoing caused the applicant's impecuniosity unless there is evidence to establish the applicant's financial health before the wrongdoing occurred. He envisaged a case in which a company had been carrying on business for a long time, only to find itself financially ruined after the respondent's conduct had intervened. In such a case, the court might be able to conclude that the wrongdoing caused the applicant's financial collapse, without the applicant having to prove its previous financial strength in detail. At [100], Austin J agreed with the following observations by Anderson J in BPM Pty Ltd v HPM Pty Ltd (1996) 131 FLR 339 at 346: …I doubt this factor can be taken in isolation. It must be considered together with the assertion that the effect on the plaintiff of an order for security will be to stultify the action. If that will not be nor is not shown to be the effect of the order, that is, if other parties who would benefit from the plaintiff's success are financially able to provide the security and it is reasonable that they do so, the fact that the defendant has caused the plaintiff's own impecuniosity will hardly be good reason to decline security. Quantum 17 In determining an appropriate amount of security, the Court does not sit as a taxing officer but rather seeks to fix such amount as it thinks fit in all the circumstances of the case. The amount will not exceed the estimate of party and party costs but it may be less. It is appropriate to adopt a "broad brush" approach: Austcorp Project Number 20 Pty Ltd v LM Investment Management Ltd (in liq) [2014] FCA 1371 at [83]. 18 In Health Information Pharmacy Franchising Pty Ltd v Khoo [2010] FCA 438 ("Khoo") at [77], Yates J said: In ordering security for costs the Court does not set out to give a complete and certain indemnity to a respondent: Brundza v Robbie & Co [No. 2] [1952] HCA 49; (1952) 88 CLR 171 at 175. The discretion as to the amount of security to be ordered is unfettered… Council's submissions 19 On behalf of the Council, Mr McNally SC referred to the following facts concerning Allied's likely inability to pay an adverse costs order: (a) Allied's paid up share capital of $3; (b) Allied's three shareholders are companies, each with paid up capital of $2 or less; (c) Allied owns no real property; (d) The most recent financial information, being Allied's 2015 income tax return, shows a total profit of only $2,307, a deficit of current liabilities over current assets and a modest excess of total assets over total liabilities of approximately $25,000; (e) Historically, on the basis of Allied's income tax returns, it has never had sufficient net current assets to pay costs in the amount for which security is sought; (f) The Personal Property Securities Register discloses three charges over the property of Allied. 20 As to whether the Council has caused Allied's impecuniosity, Mr McNally SC argued that this case falls squarely within the statement of Beazley JA (as her Honour then was) in Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 at [33], referred to by Edelman J in Australian Battery Distributors set out above. He argued, based on the financial information provided by Mr Mayes, that Allied had a net deficiency of current liabilities over assets when the contract was made. It is now making a modest profit. 21 Mr McNally SC submitted that, on a claim for loss of profits, the cases show that Allied would not succeed in resisting the application unless it shows that damage was inflicted upon it. In other words, unless it shows that its position now as compared to the start of the contract is one which is much more deleterious that it was, and that has been caused by some wrongdoing or some act of the Council. Allied's submissions 22 Initially, Mr Rudge SC, senior counsel for Allied, submitted that tax returns demonstrated its profitability even after the contract with the Council came to an end. He argued that the evidence supports a conclusion that Allied would be able to meet a future costs order from revenue, although he conceded that there would be difficulty meeting an order for costs immediately. Mr Rudge SC noted that, although Allied's 2015 income tax return showed a total profit of only $2,307, it had income of $134,039 and its costs of sales were only $21,626, the majority of its expenses being "[a]ll other expenses" of $108,780. Mr Rudge SC submitted from the Bar table that the amount of $108,780 was referrable to the legal costs of this proceeding which would not be continuing, because Allied now have a $100,000 facility from another company within the RMA Group from which its legal expenses will be paid. 23 After conceding that the "credible testimony" threshold was met, Mr Rudge SC made further submissions in support of Allied's capacity to pay an adverse costs order. In particular, he pointed to the following matters: (a) In the 2015 income year, Allied's costs of sales was modest compared with its revenue (an excess of $134,089 less $21,626 equals $112,463); (b) Mr Mayes' evidence that Allied has a truck from which it can earn revenue, by truck hire to entities in the RMA Group. Mr Mayes said: 19. I have spoken with George Jabbour, a co-director of AES, about AES acquiring another truck. It is likely that AES could [do] this within the next 12-24 months. Once that occurs AES will be able to capture even more of this internal revenue. 20. I estimate that AES' income over the next 12-24 months from the hire of the single truck will be between $120,000 and $200,000. That figure is likely to increase to $250,000 to $300,000 with the possibility of acquiring more trucks. 24 On the basis of this evidence, Mr Rudge SC argued that the figures in the 2015 income tax return coupled with the ongoing viability of the business are sufficient to satisfy the Court that an adverse costs order could be met. 25 Alternatively, any impecuniosity from which it suffers was caused by the Council's conduct the subject of the proceeding. On this second point, Mr Rudge SC submitted that Allied was a company that was deriving money from other sources (in particular, an agreement with Bovic Lend Lease) prior to entry into the contract the subject of the proceeding. Allied then devoted itself entirely to that contract which, it argues, was brought prematurely to an end. Mr Rudge SC argued that the evidence showed a "viable" company prior to entry into the contract and a very significant deterioration in the company's prospects post-termination. 26 Finally, Mr Rudge SC submitted that there is evidence that an order for security for costs would stultify the proceedings, being the evidence that the shareholder companies have nominal paid up capital, leading to an inference that they are unable themselves to put forward any source of funding. Consideration 27 Where the Council's application is founded upon Allied's asserted impecuniosity, there is no practical difference in deciding whether to make an order under either s 56 or s 1335(1): Khoo at [5]. 28 Contrary to the submissions made on behalf of Allied, the evidence does not support a conclusion that such an adverse costs order would be met. The contention is that the order would be met from future profits. However, Mr Mayes' evidence concerning the financial prospects of Allied over the next couple of years is very thin. He does not go so far as to express a belief himself that Allied could meet such an adverse costs order. Nor does he express any view about the likely profits of Allied for the financial year ended 30 June 2016. Mr Mayes' estimate of Allied's income "over the next 12-24 months", without any information about its income during the year to date, or its likely expenses, provides no reason for confidence that Allied could meet an adverse costs order made over that period. 29 Nor does Mr Mayes express a view that the 2015 income tax return figures provide a sound basis for any conclusion about the Allied's ability to meet an adverse costs order. In the absence of any such evidence, I am not prepared to accept that I should simply rely on the income and costs of sales figures in that tax return to conclude that Allied would be able to meet an adverse costs order. 30 While the available evidence does not permit me to form an educated view about the extent of the risk, I conclude that Allied's ability to meet an adverse costs order is uncertain. 31 Acknowledging the distinction identified by Edelman J in Australian Battery Distributors, I accept that it is arguable that Allied's impecuniosity has been caused or contributed to by the Council's alleged wrongdoing, because it appears that Allied was reliant on a single contract to earn profits and, once that contract was terminated, it was required to find an alternate source of income. 32 However, even if Allied's contention on this point is correct, I do not accept that an order for costs would stultify the action. Mr Mayes did not give evidence to this effect: he was plainly in a position to do so. Where Allied is a member of the RMA Group described by Mr Mayes, I do not accept that the nominal paid up capital of the shareholders of Allied provides a sufficient evidentiary basis for a conclusion that an order for security for costs would have a stultifying effect. The shareholders of Allied's shareholders are three individuals, one of whom is Mr Mayes. No evidence was given about their respective financial positions. Moreover, in written submissions, it was asserted that Allied is part of "a large, successful group of companies". 33 Accordingly, I conclude that the Court should exercise its discretion to order security for costs because: (a) There is reason to believe that Allied will be unable to pay the costs of the Council if successful in its defence; (b) There is an absence of factors that would weigh in the balance against the making of orders, apart from the possibility that the Council has caused or contributed to Allied's impecuniosity; (c) I am not satisfied that the application is oppressive in the sense that it would stultify Allied's claim. Quantum 34 The figure of $107,194.30 is an estimate of recoverable party and party costs including: (1) The costs of the application for security for costs, discovery and evidence preparation and trial preparation in an amount of $76,718.55; (2) The costs of a two day hearing on the separate questions in an amount of $26,760.00; and (3) Accommodation, travel and miscellaneous expenses in an amount of $3,715.75. 35 I have read Mr Garrett's evidence. The estimate of a two day hearing is based on instructions from the Council's lawyers who anticipate evidence from four witnesses (two from each party). In the absence of any criticism of his evidence on behalf of Allied, I accept that his estimate is credible and sufficiently justified. 36 Accordingly, I will order Allied to provide security for costs in the round sum of $105,000. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson. Associate: Dated: 16 June 2016