Smack On Time Pty Limited v Chubb Security Australia Pty Limited & Anor [2002] NSWSC 196

New South Wales Supreme Court

CITATION : Smack On Time Pty Limited v Chubb Security Australia Pty Limited & Anor [2002] NSWSC 196 revised - 12/09/2002 CURRENT JURISDICTION: Equity Division Commercial List FILE NUMBER(S) : SC 50064/01 HEARING DATE(S) : 21 & 25 February 2002 JUDGMENT DATE : 26 February 2002

Smack On Time Pty Limited (Plt) PARTIES : Chubb Security Australia Pty Limited (1D) Peripheral Computer Industries Pty Limited (2D) JUDGMENT OF : McClellan J

P R Graham QC (Plt) COUNSEL : W Muddle (1D) B Connell/S Benson (2D) Edward T Davis & Co (Plt) SOLICITORS : Deacons (1D) Snelgrove Partners (2D) CATCHWORDS : CONTRACT - security for costs - ability of plaintiff to meet its obligations in the event of a costs order being made against it - position of plaintiff in the event of a winding up - whether the court has jurisdiction to make order LEGISLATION CITED : Trade Practices Act 1974 (Cth) Corportions Act s 1335(1) DECISION : Para 33

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

McCLELLAN J

TUESDAY 26 FEBRUARY 2002

50064/01 - SMACK ON TIME PTY LIMITED v CHUBB SECURITY AUSTRALIA PTY LIMITED & ANOR JUDGMENT - On notices of motion for security for costs

1 HIS HONOUR: The defendants seek security for costs in these proceedings. The amount sought by each defendant is the sum of $135,000. Each defendant has also offered to take the personal guarantee of Mr Hawes, who is the principal of the plaintiff, for one half of the defendant's costs, in the event that an order for costs in favour of the defendants is made in the proceedings. 2 The plaintiff is a company which carries on business as a provider of technical services. It formerly enjoyed a contract with the Australia and New Zealand Banking Group Limited (ANZ Bank) to provide services in relation to the servicing of Eftpos terminals. The contract, as I understand it, was to provide services to the bank jointly with the second defendant. The original contract was for a term of two years, expiring on 30 September 2000, but that contract was extended to 30 September 2002. 3 The ANZ Bank terminated the agreement, as it would seem it was entitled to do, on 12 February 2001. On the same day, the bank apparently appointed the second defendant to provide the same services to it as the plaintiff had previously. The new arrangement providing for the first defendant to be the nominated subcontractor of the second defendant. 4 With respect to the first defendant, the plaintiff says it was induced, in or about June 1999, to provide the first defendant with confidential information which was used to advantage by the first defendant to obtain the benefit of the ANZ arrangements. It is pleaded that the first defendant breached both an agreement with respect to maintaining the confidentiality of the plaintiff's information and the relevant provisions of the Trade Practices Act 1974 (Cth). 5 It is apparent from the evidence that the plaintiff did provide the first defendant with the information about its arrangements with the ANZ Bank. Furthermore, there is no doubt that, within a short time of the information being communicated, the ANZ Bank terminated the arrangement which included the plaintiff and retained the defendants. However, whether the information given by the plaintiff, assuming it could be relevantly described as confidential, played any part in the defendants securing the business of the ANZ Bank, cannot be determined on the evidence tendered in these proceedings. That matter will have to await the trial. All that can be concluded at present is that there is a conjunction of events with respect to the giving of information and the termination and making of contracts, which I have noted. 6 It is obvious that the loss of the ANZ business had a significant effect upon the plaintiff's cashflow. At about the same time, it lost a contract which it had with the Commonwealth Bank, in respect of which there is also litigation. The loss of that contract must also have contributed to a deterioration in the plaintiff's position. However, the impact of the loss of the ANZ Bank business was apparently more significant than the loss of the Commonwealth Bank contract. 7 The plaintiff had an after tax profit for the financial year to the end of June 2000 of $281,519. The ANZ Bank business was lost on 12 February 2001. In the tax year ended 30 June 2001, the plaintiff's after tax profit was reduced to $11,265. The gross revenue from the ANZ Bank's business to the plaintiff was of the order of $224,000 per month, or a total of $2,688,000 per annum. 8 The plaintiff's revenue for the months immediately following the termination of its arrangement with the ANZ Bank was of the order of $200,000 per month, whereas prior to February 2001 it was in excess of $460,000 per month. 9 Ms Birgitta Drew, the financial controller of the plaintiff, gave evidence and stated the impact of the loss of the ANZ Bank's business on the plaintiff. Apparently the plaintiff has responded by restructuring its workforce and has recently been successful in obtaining some further work, with the prospects of even further contracts. The company, although trading at a loss, has been successful in reducing those losses. For the month of July 2001 it suffered an operating loss of $82,497, which by December 2001, had been reduced to $10,561. The loss for that month allows for depreciation of the order of $10,000 and, accordingly, the company appears to have restructured its business so that it can expect to trade profitably in the future. 10 Because of its trading difficulties, the company has experienced problems in meeting all its obligations in a timely fashion. However, it has the benefit of a bank overdraft facility presently fixed at $325,000. The drawings against this facility have fluctuated significantly, although presently an amount in excess of $125,000 is available. Miss Drew has prepared a "To Do List - Payables" as at 15 February 2002, which shows liabilities at $137,083.85. 11 The balance sheet of the plaintiff as at February 2002 was also tendered. It shows a net asset position of $702,755. However, the stated value of at least two of the substantial assets are said by the defendants to be questionable. Firstly, the company owns an aeroplane valued, before depreciation, at $518,324 and, secondly, has lent a total of $614,992 to Mr Hawes, the managing director and effective principal of the plaintiff. 12 The aeroplane was apparently purchased in 1993 for $170,000. It is now insured for $600,000 and it is said that, by reason of the movement in the Australian dollar and the aeroplane's reasonably rare configuration - it is a pressured, twin engine aircraft, which is not turbine powered - it is worth a sum in this vicinity. Similar aeroplanes are recorded to be offered for sale for more than $600,000 in the United States of America. I accept that the aircraft is worth at least $450,000 or approximately the net figure, allowing for depreciation, provided in the balance sheet. 13 The ability of the plaintiff to recover the loan to Mr Hawes is also in issue. Emphasis is placed on the fact that the loan has increased significantly in the last twelve months, with the proceeds apparently being dissipated on Mr Hawes' living expenses. At least, no other explanation for the disposition of the moneys was forthcoming. 14 The ability of the company to recover this loan is obviously dependent upon the financial position of Mr Hawes. In this respect, the defendants tendered a financial statement prepared for Family Court proceedings in the form of an affidavit sworn on 16 February 2001. I am of the view that I could reliably assume that the statement did not overstate Mr Hawes' financial position. His major asset, apart from shares in the plaintiff company, is a half interest in the matrimonial home, said to be worth $437,500 in the affidavit. I accept that this value would be likely to have increased. Mr Hawes' share of the mortgage in relation to this property is stated to be $75,000. Miss Drew has been given to understand by Mr Hawes that the present value of the property is in the order of $1,100,000, and I accept this to be reasonable. Accordingly, the net value of Mr Hawes' interest in the real estate is of the order of $475,000. 15 Mr and Mrs Hawes are apparently estranged and Family Law proceedings are in train, which may lead to orders for the disposition of jointly held property. However, I have no evidence which would suggest that Mr Hawes would not be entitled to a half share in the matrimonial home, and I know little of Mr and Mrs Hawes personal circumstances beyond the fact that there do not appear to be any children of the marriage. 16 Mr Hawes also disclosed in his affidavit that his shares in the company were worth $857,000, there being a further share held in trust by his wife. However, I assume this valuation was made before the termination of the ANZ and Commonwealth Bank arrangements, and I doubt whether Mr Hawes' share in the plaintiff would be worth this amount today. For present purposes, in my opinion, those shares should be assessed as having only a nominal value. 17 An analysis of the matters to which I have referred would lead to the conclusion that Mr Hawes would presently be able to meet only $475,000 of his total liability to the plaintiff of $614,992, leaving a shortfall of approximately $140,000. It follows that the true position of the plaintiff, in the event of a winding up, may not be as disclosed in the balance sheet as of February 2002. I also accept that, in the event of a winding up, plant, office equipment and furnishings may not realise the amounts provided for them in the balance sheet, although a reasonable sum for depreciation has also been allowed for each of these items. I believe it appropriate to allow these items at only half the written down value provided in the balance sheet. 18 Notwithstanding the necessity, in my view, to adjust the value of some of the assets in the balance sheet in the manner I have indicated, having regard to the value of the aeroplane and the circumstances of Mr Hawes, I am satisfied that the plaintiff, if wound up, could presently meet an obligation to pay at least $400,000 by way of an order for costs. 19 I am also satisfied that the plaintiff has been successful in reorganising its business, firstly, to reduce its trading losses and, secondly, can expect to trade profitably in the near future. I see no reason, having regard to the evidence of successful trading before the ANZ Bank business was lost and to the new business it has attracted and which it is presently negotiating, why the plaintiff should not shortly return to a profitable trading position. 20 The defendants each claim a sum of $135,000 by way of security. In his affidavit, the solicitor for the second defendant deposes that $120,000 has already been spent, including a significant sum in presenting this motion ($35,000), and estimates further costs of the proceedings to be in the order of $135,000. The first defendant's solicitor deposes to a total likely cost of the proceedings to the first defendant, including moneys already spent, in the order of $135,000. 21 The defendants must satisfy the Court that there is jurisdiction before an order for security for costs could be made. The test provided by section 1335 (1) of the Corporations Act is: "Where it appears by creditor testimony that there is reason to believe that the corporation will be unable to pay the costs of the successful defendant if successful in his, her or its defence." 22 Miss Drew was asked her opinion in relation to these matters. She expressed some doubt about whether the plaintiff could meets its debts as they presently fall due and said she believed it unlikely that the plaintiff could meet a costs order in the vicinity of $200,000 to $300,000 if such an order was made. However, I understand her to be indicating that the company may not be able to continue trading and meet such an obligation. She was not asked about the situation in the event of a winding up. 23 The evidence to which I have referred does not persuade me that there is presently reason to believe that the plaintiff will be unable to pay the projected amount of the defendants' costs and, accordingly, I am not persuaded that there is the jurisdiction to make the order sought. Although it is apparent that the trading position of the plaintiff has been poor in the last twelve months, the losses have been arrested and I am satisfied that there are reasonable prospects of the plaintiff trading profitably in the future. I am not persuaded that, in the event of a winding up in which Mr Hawes would be required to repay his loan to the plaintiff, there would not be sufficient funds to enable any costs order in favour of the defendants to be met. To the contrary, in my opinion adequate funds would be available. 24 If I had been satisfied that there was jurisdiction, I would have been required to consider whether, in the exercise of my discretion, an order should be made. In this respect the defendants submit that a significant factor to which I should have regard is the failure of Mr Hawes to give evidence, together with his failure to respond to the offer seeking a guarantee as to one half of the defendants' costs. 25 The defendants further submit that I should exercise my discretion in their favour because it is said the plaintiff has little prospects of success in the proceedings. Although it would appear that the present pleadings may have some problems, which were identified previously by Hunter J, I find myself unable to determine the strength of the plaintiff's case. However, it is plain that the contract with the ANZ Bank was lost after information was disclosed to the first defendant, which found its way into the bank's hands. Whether that information was significant, directly or indirectly, in the decision by the ANZ Bank, must be decided at the trial. 26 The plaintiff submits that any response from Mr Hawes was unnecessary because the defendants, it submitted, would be unable to satisfy the Court with respect to jurisdiction. Beyond this it was submitted that because of Mr Hawes' loan obligations to the plaintiff, his personal assets are available should the company have to meet a substantial costs order. In the event that I found that there was jurisdiction, the plaintiff submits that I should exercise my discretion to deny the relief sought. 27 It is submitted that the plaintiff's present financial position has been significantly affected by the loss of the ANZ Bank contract, although it is also accepted that the loss of the Commonwealth Bank business has had an impact. It is further submitted that if it is the case that the plaintiff cannot finance the litigation, this will only be after the assets of Mr Hawes have been exhausted in meeting his liability to the plaintiff. Accordingly, it is submitted that this is not a case where a principal, who stands to benefit from the plaintiff's litigation, would be said to have failed to stand behind the corporation. 28 Because I am satisfied Mr Hawes' assets will be available to the plaintiff should the plaintiff be wound up, I see no reason why the fact that he has not responded to the defendant's offer would entitle the defendants to an order. 29 It is plain that the plaintiff's financial position is largely as a result of the loss of the business of the ANZ Bank. To require security in circumstances where it may not have been forthcoming, may have frustrated the litigation. Accordingly, if I had been required to determine the matter, I would have exercised my discretion by declining to make the orders sought. 30 For these reasons I am satisfied that the motion should be dismissed. 31 The plaintiff seeks an order for costs against both defendants. As far as the second defendant is concerned, the order sought extends to the costs of the hearing before Hunter J, which was not concluded before I was required to take up the matter. The first defendant did not participate in that hearing, and the plaintiff seeks costs against the first defendant confined to the hearing before me. Both the defendants submit that costs should be costs in the cause. 32 I do not accept the defendants' submissions. The motions were contested, the parties tendered significant evidence and made detailed submissions. I am satisfied that the motions fail. In my opinion, the only appropriate order is for each of the defendants to pay the plaintiff's costs of the respective motions. Accordingly, the orders I make, in relation to each motion, are: 33 (1) The motion is dismissed. (2) I order the first defendant to pay the plaintiff's costs of the motion, making plain that those costs are confined to the motion heard before me. (3) I order the second defendant to pay the plaintiff's costs of the motion, including the costs of the hearing before Hunter J. **********