Industrial Court of New South Wales CITATION: AN Walker Machine Tools (WT) Pty Limited v Wilson Tool International Inc and ors [2007] NSWIRComm 313 APPLICANT AN Walker Machine Tools (WT) Pty Limited PARTIES: RESPONDENTS Wilson Tool International Inc Wilson Tool International Limited FILE NUMBER(S): 811 of 2003 CORAM: Marks J CATCHWORDS: Unfair contract proceedings - respondents' application for security for costs - impecuniosity of applicant conceded - applicant failed to discharge burden of demonstrating why security should not be given - security fixed at $80,000 LEGISLATION CITED: Corporations Act 2001 s 1335 Industrial Relations Act 1996 s 106 CASES CITED: Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1; 52 ALR 176 Pioneer Park Pty Ltd (in liq) and ors v Australia and New Zealand Banking Group Limited [2007] NSWCA 344. HEARING DATES: 11 December 2007 DATE OF JUDGMENT: 14 December 2007 APPLICANT Ms P Thew of counsel Solicitors John F Morrissey and Company Mr J Morrissey LEGAL REPRESENTATIVES: RESPONDENT Mr M Ashhurst SC Solicitors Kemp Strang Lawyers Ms K Bonisoli JUDGMENT: INDUSTRIAL COURT OF NEW SOUTH WALES CORAM: Marks J Friday 14 December 2007 Matter No IRC 811 of 2003 AN Walker Machine Tools (WT) Pty Limited v Wilson Tool International Inc and ors Application under s 106 of the Industrial Relations Act 1996 INTERLOCUTORY JUDGMENT ON SECURITY FOR COSTS [2007] NSWIRComm 313 1 The substantive proceedings, the subject of this interlocutory judgment, are brought by the applicant, AN Walker Machine Tools (WT) Pty Limited, against the respondents, Wilson Tool International Inc and Wilson Tool International Limited, seeking certain relief under s 106 of the Industrial Relations Act 1996 ("the Act"). An agreement which I will describe in general terms as being an agency sales agreement between the applicant and the respondents and which the applicant claims to be unfair, was terminated by the respondents upon giving one month's notice. The claim for monetary compensation made by the applicant is for an amount well in excess of $1million. 2 The respondents have sought by motion an order for security for costs against the applicant. The applicant has conceded for the purpose of the proceedings that it is impecunious. 3 Affidavit evidence was tendered in the interlocutory proceedings which sought principally to go to the issue of impecuniosity. In addition, oral evidence was given by Mr Adrian Walker, the sole director of the applicant. 4 The application for security for costs was brought under s 1335 of the Corporations Act 2001, which is in the following terms. 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. (1A) Subsection (1) does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation. Note: Similar provision is made in relation to Aboriginal and Torres Strait Islander corporations under section 581-20 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006. (2) The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs. 5 The principles which are to be applied by a court when exercising the discretion to order security for costs under s 1335 have most recently been described by Basten JA in the New South Wales Court of Appeal in Pioneer Park Pty Ltd (in liq) and ors v Australia and New Zealand Banking Group Limited [2007] NSWCA 344. Tobias and McColl JJA agreed in his Honour's judgment (save for one particular only, which is not relevant for the purpose of these proceedings). 6 Although Pioneer Park was concerned with appeal proceedings, I respectfully adopt and apply the general discussion of the principles by Basten JA. At [47] to [58] his Honour said, "47 A number of factors may be derived from the principles set out by Beazley J in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198 and the authorities to which her Honour referred. The first factor is whether the applicant for the order has established, in order to engage the power, that the company is unlikely to be able to pay the costs of the applicant if it is unsuccessful in its claim (impecuniosity). 48 Two further factors arise once impecuniosity is established by the applicant; the company may seek to avoid an order by establishing that: (a) the applicant's conduct was the cause of its impecuniosity, or (b) an order for security for costs would stifle the proceedings. 49 In the case of a small company or one starting up a business, impecuniosity may be unrelated to the matter in dispute: see, eg, Equity Access Ltd v Westpac Banking Corporation (1989) ATPR ¶40-972 at 50,637 (Hill J). In many cases, however, companies assert that current financial problems have arisen as a result of the applicant's conduct which is the subject of the litigation. An assessment of that contention would require some consideration of the merits of the appeal. 50 The third factor derives from the principle that to require security of a plaintiff reduced to poverty by the act of the defendant would involve a denial of justice. This principle is sometimes sourced to Farrer v Lacy, Hartland & Co (1885) 28 Ch D 482. However, the principle was not applied in that case, the Court distinguishing Rourke v White Moss Colliery Company (1876) 1 CPD 566, in which it was applied. Rourke involved a personal injury claim by an individual plaintiff. There was no dispute that the negligence of the defendant had reduced the plaintiff to poverty, the issue being a question of law as to the scope of the doctrine of common employment, the injury having resulted from the negligence of a fellow employee of the defendant. Understandably, the plaintiff was not deprived of his opportunity to argue the point of law. In relation to a corporate plaintiff, the principle has a somewhat different operation. Thus, it has been said that the existence of a genuine dispute cannot "of itself provide cause for disentitling the respondent to security if the circumstances otherwise are appropriate ones for the making of such an order": see Pasdale Pty Ltd v Concrete Constructions [1995] FCA 1471; (1995) 131 ALR 268 at 273 (35) (Finn J). 51 The likelihood that an order for security would stifle or stultify the proceedings, if established, is a factor which will tend against an order for security. However, that factor is not made out merely by reference to the company's impecuniosity, but requires proof, as explained in the passage from Bell Wholesale at [43] above. As noted by Austin J in Fiduciary Ltd v Morningstar Research Pty Ltd (2004) 208 ALR 564 at [74], referring to the judgment of Clarke J in Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 3 ACLC 542 at 545, "the mere fact that the corporate plaintiff is financially unable to provide security does not lead inevitably to the conclusion that the making of an order for security will stultify the plaintiff's claim. It may be that there is someone else who will satisfy the order on the plaintiff's behalf". 52 A fourth factor, providing a reason for not ordering security, may arise where all those who seek to benefit from the litigation are willing to step out from behind the corporate shield and offer undertakings in relation to an adverse costs order in the event of failure. There may be different views as to how such circumstances should affect the exercise of the power to order security, but the need for their resolution does not arise in the present case: see Jazabas Pty Ltd v Haddad [2007] NSWCA 291 at [2]- [3] (Mason P). 53 A fifth factor concerns the presence in the proceedings of an individual litigant. In Winnote Pty Ltd (In liq) v Page [2005] NSWCA 362; (2005) 64 NSWLR 244 Mason P, in declining to order security for costs against the corporate appellant, noted that "[t]he continuing presence of Mr Roach (apparently a man of substantial means) shows that it is not called for, so long as it remains highly likely that costs would be awarded against both appellants if the appeal fails": at [43]. 54 Two further factors are commonly identified as "oppression" and the public interest. 55 The concept of oppression is most likely to operate as a constraint on the making of an order where an order is likely to stifle the appeal. It may also invite some closer attention to the merits of the proceedings than would otherwise be necessary and appropriate. On the other hand, it is not entirely clear what is referred to by oppression. As noted by Beazley J in KP Cable Investments at 197, Needham J referred in MA Productions Pty Ltd v Austarama Television Pty Ltd (1982) 7 ACLR 97 at 100 to the need to consider whether "the defendants' application for security is oppressive in the sense that it is being used merely to deny to an impecunious plaintiff a right to litigate". There may be rare cases in which it can be established that an application for security is brought for improper purposes: such conduct could no doubt be described as "oppressive". On the other hand, from the respondent's point of view the question is not whether an impecunious corporate appellant has a "right to litigate" but rather who should be required to bear the costs of the litigation if the appellant is unsuccessful. 56 It may be that a court will be more sympathetic to an application from a respondent with limited funds than a respondent which is a major corporation: see Remm Construction (SA) Pty Ltd v Allco Newsteel Pty Ltd (1992) 57 SASR 180 at 186 (King CJ) and Irwin Alsop Services v Mercantile Mutual Insurance Co Ltd [1986] VR 61 at 65 (Ormiston J), referred to by McClellan CJ at CL in Jazabas Pty Ltd v Haddad [2007] NSWCA 291 at [76]. Nevertheless, as implied by Brooking J in Prime Forme Cutting Pty Ltd v Baltica General Insurance Co (1989) 8 ACLC 29 at 32-33, large corporate defendants should not be seen as standing "outside the policy of the security for costs provisions". However, to accept that they do not, does not in turn require the Court to ignore the fact that they "stand in no special need of care and protection", as Brooking J expressed the point. Thus, it might be seen as oppressive to allow a large corporate defendant to obtain an order for security for costs which would be likely to stifle the litigation in circumstances where it could be seen that the claim had potential merit and that the quantum of costs would in any event be a relatively insignificant amount for the corporate defendant, though beyond the capacity of the corporate plaintiff to pay. To order security in such circumstances may constitute a form of "oppression". 57 Finally, there is the question of any "public interest" in the proceedings. The question of public interest may have greater weight with a claim which can be seen to have some merit on its face, rather than being merely arguable. Again the question is likely to arise only in circumstances where a prima facie case of stultification has been made out. G.E. Dal Pont, Law of Costs (2003) adopted the cautious view of Young CJ in Kardynal v Dodek [1978] VR 414 at 415-416, as to reliance on public interests, stating that to be "a sensible view because otherwise plaintiffs will seek to characterise their claim as novel or in the public interest confident in the knowledge that this will of itself immunise them from a security order": at [29.113]. Such an approach places little faith in the perspicacity of the court, but there is a more principled basis for caution. Thus in Lucas v Yorke (1984) 58 ALJR 20, a case in which there had been a grant of special leave to appeal, Brennan J, in refusing an order for security stated (at p 21): "I do not stress the importance of the question for determination lest the public interest in the resolution of that question override the interests of the parties (c.f. Kardynal v Dodek [1978] VR 414). However, justice would not be best served in the circumstances of the present case by shutting out the appeal and I decline to make an order for security." 58 The nature of the public interest, the circumstances in which it arises in particular litigation and the basis on which an application for security is made would all be relevant in determining the role of a claim that litigation promotes the public interest: see, eg, Arnold v Queensland (1987) 73 ALR 607 at 613 (Wilcox J). It does not arise squarely in the present case and therefore need not be discussed further." 7 It is important for the purpose of these proceedings to understand and apply what is contained in the introductory words of [48] of the judgment of Basten JA. That is, once impecuniosity is established, by concession or otherwise, it is for the plaintiff/applicant corporation to establish the matters which are referred to in that paragraph. That is, the plaintiff/applicant corporation bears the burden of establishing that it was the defendant's/respondent's conduct that caused its impecuniosity or that an order for security for costs would stifle the proceedings. 8 The respondents, applicants on the motion for security for costs, submitted that the applicant failed to discharge the burden of demonstrating these matters. In terms of impecuniosity, the evidence in the proceedings was that the applicant was impecunious in the 2000, 2001, 2002 and 2003 financial years in that in each of those financial years there was a deficiency in shareholders funds. The financial material, which became evidence in the interlocutory proceedings, indicates that this was so even allowing for unsecured shareholders' loans as current liabilities. The agency sales agreement was terminated on 17 February 2003. 9 The applicant's trading, profit and loss statement for the year ended 30 June 2002 showed a profit before income tax of $117,588.71. However, for the 2001 financial year there was an operating loss of $49,614.93. For the 2000 financial year there was an operating loss of $333,803.20. 10 Although there was tendered into evidence an expert report of Matthew Gwynne, an accountant retained by the applicant, that report does not without explanation allow me to ascertain the extent to which the applicant's impecuniosity was caused by the termination of the agreement with the respondents, particularly having regard to the trading position of the applicant prior to the termination of the agreement. The situation is complicated by the fact that the applicant represented concurrently another organisation in the sale of equipment, although it seems that sales effected on behalf of that other organisation were far less than those effected on behalf of the respondents. Nevertheless, it is arguable as the respondents submitted, that the respondents in fact enhanced the applicant's financial situation by terminating the agreement with the applicant. 11 As to the question of stultifying the proceedings, I refer to the observations made by Basten JA in [51] and [52] of his Honour's reasons for judgment set out above. 12 Again, it is for the applicant to establish the matters that would allow the court to exercise discretion against the making of an order for security for costs. In this regard, the applicant's evidence was of a limited nature and the applicant was less than forthcoming in terms of disclosure of relevant material. 13 A company search tendered by the respondents shows that Mr Adrian Walker is the sole director of the applicant. The shareholders are Mr Walker and his wife, Narelle Joy Walker. Furthermore, Mrs Walker has a registered fixed and floating charge over the assets of the applicant company. 14 It transpired from evidence given by Mr Walker that Mrs Walker is the sole proprietor of a house at Whale Beach which he assessed as being worth about $2million and which was subject to a bank mortgage which secured, in part, an advance to Mrs Walker and, in part, an advance to the applicant company. The evidence available to the Court is that the bank loans, in aggregate, amount to something less than $400,000. Although Mr Walker offered personal security in the sum of $30,000, no such offer was made by the other shareholder who, on the evidence given in the proceedings, has equity in her home exceeding $1.5million. I should add that this information was not proffered by Mr Walker either in the form of an affidavit or in the form of evidence in chief. It was only ascertained during the course of cross-examination by the respondents' counsel. 15 Again, the corporate applicant bears the onus of demonstrating that the stultification argument applies in endeavouring to resist an order for security for costs. If authority were required for such a basic proposition, it is to be found in the judgment of the Full Federal Court of Australia in Bell Wholesale Co Ltd v Gates Export Corp (1984) 2 FCR 1; 52 ALR 176. The relevant passage is at FCR 4 and ALR 179 - 180. The Court said, "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate any litigation unless a company in the position of the appellant here establishes that those 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. It is not for a party seeking security to raise the matter, it is an essential part of the case of a company seeking to resist an order for security on the ground that the granting of the security will frustrate the litigation to raise the issue of impecuniosity of those whom the litigation will benefit and to prove the necessary facts." 16 The applicant has failed to discharge the burden of demonstrating the necessary matters to allow the Court to consider in the exercise of its discretion the question of stultification. 17 In all the circumstances, no evidentiary material has been advanced which would justify the Court in declining to order security for costs given the acknowledged impecuniosity of the applicant. 18 This leaves for consideration the quantification of the security that should be given. The respondents gave evidence through their solicitor that costs and disbursements incurred to date exceeded $185,000. The quantum of costs was justified by reference to a printout of solicitors' charges no doubt fixed on the usual time charged basis. 19 These charges relate to the preparation of the proceedings to date. The proceedings are at a stage where the applicant has filed its affidavit evidence but the respondents have not yet done so. The evidence given in these proceedings is that the costs of preparation of the respondents' affidavit evidence from five witnesses together with the costs of retaining an expert accountant and preparation for hearing will involve a further $120,000 inclusive of GST. 20 I cannot begin to comprehend how the respondents could have incurred $185,000 in legal fees to date given my limited knowledge of the proceedings gained to date through the case management process. The applicant's costs to date are of the order of $80,000, which includes the costs of preparation of extensive affidavit material. This would appear to me to be a more appropriate amount to be assessed by reference to costs. 21 Basten JA made some reference to the process of quantification of costs in Pioneer Park. His Honour's assessment of what was a reasonable amount was not shared by Tobias and McColl JJA. 22 I do not propose to enter into any enquiry as to the appropriate level of security that should be provided by the applicant because to do so may involve the parties in incurring further costs. In my opinion, it is appropriate at this stage to assess a level of security in an amount that reflects the applicant's costs to date, namely $80,000. The respondents may approach the Court for the provision of further security if it is thought appropriate to do so. 23 Accordingly, I propose to order the applicant to provide security for costs in favour of the respondents in an amount of $80,000. I shall stand the proceedings over to allow the applicant to consider the appropriate form of security that might be made available and to enable the applicant's solicitors and the respondents' solicitors to hopefully reach agreement with respect to the form of security. Any consent position may be reflected in consent orders, which I will sign in Chambers. 24 The question of costs has not been argued. Prima facie, the respondents will be entitled to their costs of the motion. In any event, I will reserve costs and grant liberty to apply in addition to the liberty to apply which I hereby grant with respect to any controversy concerning the final form of orders for the security for costs. 25 Finally, I wish to make an observation that will hopefully assist the parties and their legal practitioners in reviewing this litigation. Costs on both sides to date exceed $260,000. If the matter is litigated it would seem on the information before the Court to date that costs on both sides will exceed $500,000. Whatever the merits of the applicant's claim, about which I make no comment whatsoever, it is inescapable that the quantum of any entitlement which might be found to exist will be affected firstly by the applicant's trading history and the profitability of its representation of the respondents' products and secondly by the fact that whether termination of the agency sales agreement might be effected by reference to a particular period of notice or by reasonable notice, there will nevertheless be found to exist a right of termination. There is no suggestion made by the applicant in the proceedings that the agency sales agreement is subject to any other regime which would affect the right of termination. It is arguable, therefore, that the costs expended to date and the costs which it might reasonably be anticipated will be incurred will exceed, perhaps to a great extent, any value of the applicant's claim. Wise legal practitioners and commercially astute litigants should be driven by a consideration of these matters towards a speedy and appropriate settlement. I trust that these observations will assist the parties. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.