Federal Court of Australia HC Foods Pty Ltd v Carmichael [2020] FCA 1693 File number: WAD 135 of 2020 Judgment of: COLVIN J Date of judgment: 20 November 2020 Catchwords: PRACTICE AND PROCEDURE - application for security for costs - whether applicant's ability to meet costs order if unsuccessful should be evaluated by reference to ability to meet costs in ordinary course of business - whether risk that applicant will be unable to pay costs order - whether applicant's claim has weak prospects of success - order by way of partial security made Cases cited: All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Limited [2020] FCA 840 Division: General Division Registry: Western Australia National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 17 Date of hearing: 20 November 2020 Counsel for the Applicant: Mr T Lethbridge Solicitor for the Applicant: Croftbridge Counsel for the Respondents: Mr D Tassone Counsel for the Respondents: Williams & Hughes ORDERS WAD 135 of 2020 BETWEEN: HC FOODS PTY LTD (ACN 141 276 753) Applicant AND: KERRY DAMIAN CARMICHAEL First Respondent CARMICHAEL DISTRIBUTORS PTY LTD (ACN 606 256 204) Second Respondent order made by: COLVIN J DATE OF ORDER: 20 NOVEMBER 2020 THE COURT ORDERS THAT: 1. Within 30 days, the applicant provide security for the respondents' costs of the action by paying the amount of $30,000 into Court 2. The action be stayed pending compliance with order 1. 3. There be liberty to apply for the action to be dismissed in the event of a failure to comply with order 1. 4. The applicant pay the respondents' costs of the application for security to be assessed if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT (edited from the transcript) COLVIN J: 1 The respondents apply for an order for security for costs in the amount of $100,000. The application is based upon an uncontested estimate of likely assessed costs for the proceedings of the order of $166,000. The proceedings were commenced in June this year. The application for security was foreshadowed at an early stage. On 25 August 2020, I made orders programming a hearing of the application for an order for security. 2 The principles to be applied are well established and were recently summarised by the Chief Justice in All Class Insurance Brokers Pty Ltd (in liq) v Chubb Insurance Australia Limited [2020] FCA 840 at [40]-[44]. 3 The applicant carries on the business of selling frozen products. It has been in business for many years. In the last financial year, its net profit was $178,807. It also holds assets that are necessary for its business, including holding an inventory of frozen products. Financial statements for the applicant for recent years are in evidence. They show that the applicant would have to reduce its trading inventory over time, or liquidate that inventory by sale otherwise than in the ordinary course of its business, or sell some of its plant or equipment in order to meet any costs liability that may arise in these proceedings from its own resources. Otherwise, it would need to borrow moneys on the basis of its future cash-flow in order to meet such an order. So much is accepted by the applicant. 4 An issue has been raised between the parties as to whether the ability of the applicant to meet the costs order should be evaluated by reference to what might occur in the ordinary course of the business of the applicant, that is to say, whether it would be able to meet its costs out of its activities undertaken in the ordinary course of its business. The applicant says that the question whether it will be able to pay the costs of the respondents if the claim is unsuccessful is not to be judged by reference to whether it would be in a position to meet those costs in the ordinary course of business. I accept that submission. 5 What is required is an assessment of the risk that any costs liability will not be met, in circumstances where the jurisdiction to order the provision of security requires (a) the statutory threshold about inability to meet costs to be met; or (b) the exercise of a general discretion by reference to all of the circumstances of the case including the Court's assessment of any likelihood that a costs order will not be met. 6 As I have said, the business of the applicant is well established and it has been trading successfully for a number of years. There is no evidence to indicate that its business is under particular or abnormal financial stress, and in the ordinary course, on the evidence, it may be expected to continue trading at the levels of profitability it has enjoyed in the past. Nevertheless, the commencement of these proceedings has the potential, depending on the outcome, to expose the applicant to a substantial liability relative to the scale of its business as disclosed by the evidence. It is that aspect that gives rise to a real risk that a costs order may not be met. 7 I am satisfied that the evidence establishes that there is a genuine basis for a concern that the applicant will be unable to meet the full extent of any costs order without taking steps that are likely to disrupt its day-to-day business activities in a manner which may bear upon its ability to meet those costs. Therefore, I am satisfied that the threshold is met, or alternatively, that that factor is a reason why the Court should consider the exercise of its discretion to order security. 8 I would not assess the risk of a costs order not being met as high, but there is reason to believe that the corporation will be unable to pay, at least part of, a costs order in favour of the respondents given the possible extent of that liability relative to the scale of the business of the applicant. Therefore, it is appropriate to consider other matters that should bear upon the exercise of the discretion in this case. 9 The respondents rely upon submissions to the effect that the claim as pleaded has, so it would say, relatively weak prospects of success. It is not suggested that there is a lack of bona fides to the claim brought by the applicant, rather, that there are aspects of the claim which mean that its prospects are, in the language of the respondents, weak. Those submissions focus upon the nature of the claim that is advanced. 10 Speaking broadly, the claim made is that the first respondent, a former employee of the applicant, breached his duties as an employee, or used confidential information, or acted in breach of a restraint of trade obligation, to establish a business through the second respondent that has competed with the applicant's business. 11 As to the breach of good faith duties as an employee, the claim focuses on a period at about the time that the first respondent was made redundant, and it is said that there is no loss and no relief claimed in respect of that conduct, which is articulated as making contact with an important customer of the business. What is put, in effect, is that even if there was a breach there was no loss. The nature of the claim is such that relief may extend to accounting for the benefit gained through breach of fiduciary duty. I would not accept the applicant's narrow characterisation of the nature of the claim. A more detailed evaluation of the facts both as to the nature of the breach, its significance and relief would be needed to form a view as to the merits. 12 The next part of the claim brought by the applicant is a claim for breach in relation to confidential information. The claim raises issues as to the extent to which information about customers is part of the ordinary information that any employee carries around with them or whether the establishment of the new business has involved some use of confidential information about customers. It is a factually dependent claim. 13 The third claim is a restraint of trade claim based upon an alleged implied restraint of trade. That aspect of the case puts it in an unusual category where a restraint of trade is said to apply to an employee that was not expressly agreed. I accept that a claim of that kind would face considerable difficulty at trial. 14 Although the issues raised by the respondents concerning the claim are a credible basis for questioning the merits of the claim, in my view, this is not a case where the legal basis for the claim that has been raised by the applicant would lead to it being described as having relatively weak prospects and I do not reach that conclusion at this stage of the proceedings. As the merits of the first and second claims depend upon an evaluation of the facts, it is not appropriate to undertake such an evaluation for the purposes of an application of the present kind. Nevertheless, there is the very real prospect that there could be a substantial costs order in favour of the respondents as a likely outcome of these proceedings. Put another way this is not a case where the claim of the applicant may be assessed as having such a high degree of likelihood of success that merit should weigh against ordering security for costs despite the weight of other factors. 15 There is no suggestion raised that the costs order that is sought would have the effect of stultifying the proceedings and, on my assessment, there has not been any undue delay in the bringing of the present application. 16 In the end, the Court has a broad discretion which must be exercised judicially, that is to say, fairly, having regard to all of the circumstances. It requires a just balancing of the considerations that bear upon two competing risks of injustice that arise with or without an order for security in the circumstances of the particular case. On the one hand, there is a risk that the order may prejudice the conduct of the proceedings, and may do so in circumstances where the proceedings themselves complain about conduct that affects the financial interests of the applicant. On the other hand, there is a risk that the respondent party will be exposed to the burden of proceedings and will successfully defend those proceedings, only to be left without any recourse as to costs. 17 In my view, to summarise, there are the following matters that bear upon the approach that should be adopted in this case. Firstly, there is a real risk that the proceedings will be unsuccessful and a costs order of about the level of a year's turnover for the applicant will be imposed. That order will have to be met by the applicant in addition to having to fund its own legal costs of these proceeding. Secondly, by reason of the extent of legal costs to be incurred by the applicant advancing its own case and meeting the respondents' costs if unsuccessful in its claim there is a risk that some part of the costs order may not be able to be met by the applicant. In all the circumstances, I consider that an order by way of partial security should be made, and taking all matters into account, I would order that amount to be the amount of $30,000. So there will be an order for security in an amount of $30,000 as sought on the application. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Colvin. Associate: Dated: 23 November 2020