New South Wales Supreme Court CITATION : Linfox v Yates [2003] NSWSC 663 HEARING DATE(S) : 2/6/03, 3/6/03, 4/6/03 JUDGMENT DATE : 4 June 2003 JURISDICTION: Equity Division Commercial List JUDGMENT OF : Brownie AJ at 1 DECISION : Motion dismissed with costs. CATCHWORDS : Application for Security of Costs LEGISLATION CITED : Corporations Act Beach Petroleum NL v Johnson (1992) 7 ACSR 203 CASES CITED : Set Technologies Pty Ltd v Lewis (1993) ACSR 61 Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 PARTIES : Linfox Transport (Australia) Pty Limited (Plaintiff/Cross Defendant) Arthur Yates and Company Limited (Defendant/Cross Claimant) FILE NUMBER(S) : SC 50125/00 COUNSEL : S Wilson QC with Mr Meehan (Linfox) R Smith SC with N. Kidd (Yates) SOLICITORS : Corrs Chambers Westgarth (Linfox) Coudert Brothers (Yates) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BROWNIE AJ Wednesday, 4 June 2003 50125/00 LINFOX TRANSPORT (AUST) PTY LIMITED v ARTHUR YATES & CO LTD JUDGMENT 1 HIS HONOUR: The plaintiff seeks an order that the defendant provided security for costs in respect of the continued prosecution of the cross-claim. Earlier the parties agreed to compromise the plaintiff's claim against the defendant so that all that is now left for determination is the cross-claim. 2 The defendant, respondent to the motion, accepts for present purposes that within the meaning of section 1335 of the Corporations Act it should be described as the plaintiff and the present applicant should be described as the defendant. 3 The respondent is a subsidiary of Yates Limited. The applicant approached the motion as if the financial position of the respondent could be equated with the financial position of Yates Limited and the respondent did not quarrel with that approach. 4 Initially the applicant's case was advanced through the affidavit and annexed report of Mr Wight, an expert witness who had examined and analysed certain documents made available to him concerning the position of Yates Limited. On the basis of those documents and that analysis, Mr Wight offered opinions, qualified in various ways, concerning information which was not available to him when he wrote his report. It later emerged that after he had written his report further information was made available to him but in his evidence-in-chief he did not refer to this. This is unusual if not startling, but in the end it does not seem to matter. 5 To an extent the applicant continues to rely on the opinions of Mr Wight. I consider that these opinions should in substance be put aside for present purposes, for three reasons. First, the opinions were always qualified by reason of his having had access only to limited information. The further information which has been made available and which is in evidence now has not really been considered by Mr Wight and it changes the position, in some respects quite markedly. 6 Secondly, Mr Wight expressed a view about the ability of Yates Limited to pay about $1.5 million for costs on or about 30 June 2003. Assuming the sum mentioned to be appropriate, the date mentioned is clearly inappropriate. The presently announced expectation of the parties is that the hearing of the action will not finish until about the end of October. When the hearing does finish I will have to write reasons for judgment, and the present indications are that that will be a time consuming project. It is easy to foresee that I might not be able to deliver judgment before about the end of the year, or possibly even later. 7 Assuming that a judgment is delivered about the end of this year and an order of costs made in favour of the applicant, the applicant will then not be in a position to recover its costs until they have been assessed. Given the complexities of the case, it seems unlikely that the costs assessment process will finish before the middle of next year and perhaps even as late as the end of next year. In short, to the extent that Mr Wight was asked to and did work on the basis that the costs might be payable about 30 June this year, that assumption was misplaced. A more appropriate date would be a year or more later. 8 Thirdly, the respondent's case when resisting the motion turned in part upon the proposed sales of three different businesses conducted by Yates Limited or its subsidiaries. On the respondent's case the proceeds of these sales constitutes what might be regarded as an independent source of funds, that is, funds independent of those which are for the time being and probably in the near future likely to come to hand if the businesses are conducted profitably. No doubt those funds will be dissipated to some extent if the businesses are conducted at a loss. 9 If the sales that are proposed take place, the proceeds of the sales are likely to constitute, on the case of Yates, an independent source of funds out of which a costs order might be satisfied. 10 This whole topic is barely considered by Mr Wight and to the extent that he was asked about it in cross-examination and in re-examination he, in effect, conceded that if the proposed sales did proceed and the proceeds of sale about which Mr Marginson spoke were received, that would be a sufficient source of funds to satisfy an order for costs. 11 It seems appropriate to remark that if the applicant's case on this point is successful it would really need all three proposed sales to fall to the ground before it would be appropriate to look to the funds available to Yates otherwise than through the proposed sales of the businesses. 12 In the course of the hearing of the motion and the events leading up to that hearing, the applicant, implicitly rather than explicitly, but quite realistically, apparently made the forensic decision to seek to buttress Mr Wight's opinion by two other paths. First, it served subpoenas upon the National Australia Bank Limited, the banker of Yates Limited and its subsidiaries, and upon Mr Bouffler, a senior officer of that bank, being the person who in a practical sense is in charge of the relevant accounts and the person who makes recommendations to the appropriate committee of bank officers concerning any application made by the Yates group for financial facilities. 13 The course of the evidence appears to demonstrate that the applicant had no real knowledge in advance what Mr Bouffler might say, presumably because Mr Bouffler and the bank treated the affairs of the bank's customers, that is the Yates group, as confidential between the bank and the customers. In any event, Mr Bouffler's evidence did not really assist the applicant. 14 The evidence on the motion includes a letter from the bank to Yates Limited dated 14 March 2003, in effect, a contract or a record of a contract between the bank and Yates Limited, as well as a letter from Yates Limited to the bank dated 6 May 2003, and the bank's reply of 23 May. The latter two letters effectively constitute a variation to the contract recorded in the letter of 14 March. That letter records the terms upon which the bank then agreed to advance some millions of dollars to the Yates group. They were described as "stringent" terms. I proceed on the assumption that this categorisation is accurate. 15 Annexure B to the letter required Yates Limited to achieve what were described as milestones, including making certain payments by specified dates. Failure to achieve any of those milestones was to constitute an event of default. If such an event occurred Yates Limited was required to immediately notify the bank, and the bank was entitled to terminate the facility and to demand the repayment of monies then owed. 16 The letter of 6 May constituted notice of the happening of one event of default or, it was said, two such events. In the letter Yates Limited suggested a variation to the existing terms and the bank acceded to that request. The applicant points to this chain of events as demonstrating that Yates Limited is, generally speaking, in financial difficulties and that the bank might terminate the facility. The applicant suggested that if that happened, that is to say the facility was terminated, Yates Limited would then be plainly insolvent. 17 The evidence of Mr Bouffler undermines the submission. It was not just what he said but the way in which he said it that seems significant. Whilst he qualified his opinion with what might be described as the proper caution of a prudent banker, particularly when he was asked about possible future events, his attitude to the suggestion that the bank might view events adversely to the Yates interests seemed to be one of some bemusement. Mr Wight had hypothesised that the bank would not agree to advance $1.5 million to Yates Limited if the applicant succeeded in recovering a judgment on the action and an order for costs. Mr Bouffler's response was that he would recommend the making of such an advance. I see no reason in the evidence for preferring Mr Wight's hypothesis, particularly as it was based on inadequate materials, to the view of Mr Bouffler, who seemed to be quite familiar with the details of the affairs of the Yates group so far as they concerned the bank. 18 Mr Bouffler was shown the report of Mr Wight and, in substance, invited to change his attitude. He responded by saying, in effect, that the report disclosed no information about which he had not previously been aware. It was also made clear that Yates Limited had kept the bank informed of developments, including the proposed sale of the three businesses now under consideration, and that the bank, at least so far as Mr Bouffler could speak for it, regarded the proposed sales with equanimity. If one stands back from the detail of the evidence and the details debated during address, this seems quite explicable. The bank appears to be adequately secured and if the proposed sales proceed to completion it is likely that debts owing to the bank will be repaid in full in the near future. In the meantime the bank continues to earn interest and fees. 19 The applicant pointed to various pieces of evidence and submitted that Yates Limited was under de facto bank administration. The evidence does not justify that view. The applicant also pointed to the fact the bank was considering the position of the Yates accounts on a daily basis. This is so but it hardly seems right to give this circumstance the rather dramatic tones suggested. Mr Bouffler did not seem to think it was significant. 20 The third way in which the applicant sought to make out its case turned upon the cross-examination of Mr Marginson, the managing director of Yates Limited and of the respondent since 1 July 2002. In describing the approach of the applicant in this way, I do not intend to suggest that there were three separate and more or less independent approaches. Rather, the three strands to the applicant's case were presented cumulatively, but it seems convenient and easier to analyse the three strands separately. 21 Mr Marginson described the plans to sell three separate businesses, described for brevity and the ease of reference as the forestry business, the vegetable seeds business and the core business. The first two proposals have been in the public domain since March of this year, at least, and I do not think that very much needs to be said about them. Various potential buyers have submitted non-binding proposals. There have been various due diligence inquiries conducted and some draft contracts have been exchanged. Mr Marginson deposed to the expectation that the two businesses would be the subject of binding agreements for sale in the near future, followed by prompt settlement. 22 The third proposed sale, that relating to the core business, has not yet been publicly disclosed. It was this circumstance which led to my making an order earlier that the present motion be heard in closed court. Yates Limited is a company, the shares in which are traded on the Australian Stock Exchange. It seems that neither the exchange, nor the general body of shareholders, nor the staff of the companies in the Yates group have been told about the proposal as yet. News of the sale, if and when a concluded agreement is reached, might well affect the price at which the shares in Yates Limited are bought or sold. 23 According to Mr Marginson, this sale is likely, although there is as yet no binding offer made by the proposed purchaser. He described in some detail the state of the negotiations. It seems obvious that no-one can say that the sale is certain. Like any future event, one can hazard an opinion as to what might or might not happen. It is difficult, if not quite impossible, to go much further than to express opinions expressed in terms of probabilities or possibilities. 24 Amongst the contingencies that need to be considered are the attitudes of regulatory authorities and the decision which might be made at a meeting of the shareholders of Yates Limited. Mr Marginson dealt with these matters when explaining the view he took as to what was likely to happen. 25 The applicant challenged his credit. I do not think that that challenge succeeded, or even went close to succeeding. It was suggested that he had been party to Yates Limited being guilty of some malpractice in not disclosing the fact of the proposed sale to the Stock Exchange or to its shareholders, as well as not disclosing it in the first affidavit which he swore in these proceedings. 26 The former suggestion was buttressed by the suggestion that what the directors of Yates Limited had disclosed to the company's shareholders and to the Stock Exchange in March 2003 when publishing details of the financial affairs of the group as at 31 December 2002 had changed and, as I understood it, that the continued silence thereby constituted something in the nature of a misrepresentation or what in another context is described as misleading or deceptive conduct. 27 The respondent suggested a number of answers. One, in my view sufficient by itself, is that Yates Limited acted upon legal advice; that is to say, it acted upon legal advice in not telling the Stock Exchange, or its shareholders for that matter, of the change or possible change in the intention of the company through its directors. 28 The applicant disputed the accuracy of the advice. The question is one about the credit of Mr Marginson, so that it really does not matter much whether the advice was correct or incorrect. If, as I accept to be the fact, he acted upon the advice that he or the company was given, that is a sufficient answer. In any event, at least at first impression, the advice given was arguably correct, or to put it another way, the advice was quite reasonably given. 29 Other attacks were made upon Mr Marginson's credit. For example, it was said that he had not disclosed certain matters in his first affidavit, and, in particular, that he had not disclosed information that he had conveyed to the bank. The details of these submissions are recorded in the transcript and I do not think it is profitable at this stage to go into all the detail. 30 One matter which was accented was the suggestion that Yates Limited, together perhaps with one or more of its subsidiaries, was to the knowledge of Mr Marginson, and contrary to the opinion that he expressed in his affidavits, insolvent, or effectively insolvent, or close to insolvent. A strand in this argument was the proposition that Yates Limited committed one or more events of default and notified the bank about that in the letter of 6 May. It is, of course, perfectly true that Yates Limited did give that notice to the bank but if one reads the letter Yates Limited attributed that circumstance to the default of another person, a stranger to the litigation. The bank seems to have accepted the explanation without demur and to have acceded to the request of Yates Limited to vary the existing contract without any real hesitation. 31 There does not seem to be any basis at all for thinking that the bank might in the near future, for that reason or for some similar reason, act so as to terminate the existing facility. 32 For what it is worth, I regard Mr Marginson as a truthful and reliable witness. No doubt his views about future events must be approached with some degree of caution, as must the views of any witness about possible future events, but his views seem to be a much safer foundation than the views of Mr Wight so far as those two men express views about the future affairs of Yates Limited and its subsidiaries. 33 The parties differed as to the correct approach to be adopted to the construction of section 1335. The applicant contended for the views expressed in Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 204-5, followed in Set Technologies Pty Ltd v Lewis (1993) ACSR 61, whilst the respondent contended for the views expressed in Warren Mitchell Pty Ltd v Australian Maritime Officers Union (1993) 12 ACSR 1 at 5. If I had choose between these two approaches, I would respectfully prefer the construction adopted in the last mentioned case because it seems to give greater, and in my respectful view, appropriate weight to the expression "will be" within the words of the section. However, it is not necessary to decide that question. 34 Approaching the case on the basis contended for by the applicant, I consider that the evidence demonstrates a likelihood that the three proposed sales will proceed. It might very well be the case that there will be some delay, but there is really no basis in the evidence for anything more than speculation that the sales will not proceed at all, or that some condition in one or more of the contemplated contracts for sale will not be able to be satisfied. It was suggested that the regulatory authorities might not approve of the transaction, or at least the transaction concerning the core business. Certainly this is possible but the evidence does not suggest a basis for such a refusal. That is, the evidence does not point to a reason why one or other of the authorities will not approve of the proposed transaction or transactions. 35 The various conditions in the contemplated contracts were described as hurdles. I take this term to be correct in some senses, but on the evidence it seems to be something of an overstatement. If one looks at the evidence as a whole it does not seem at all likely that the authorities will regard the transactions, or any of them, as apt for non-approval. The other conditions seem to be little more than more or less routine conditions likely to be found in transactions of the type contemplated. Mr Marginson spoke of completion as being likely to be effected in respect of all three transactions by the end of July, although at one time he also said that it might be that the sale of the core business might not be concluded until about mid-August. 36 If all three transactions proceed, then by about mid-August, and probably earlier, something approaching a year before any order for costs which might be made is likely to be able to be enforced, Yates Limited and its subsidiaries will have paid off their debts to the bank and will have some tens of millions of dollars in readily available funds. There does not seem to be any basis for thinking that that money will not be available some time next year. 37 If in the event two of the sales proceed but not three, the position will be different. If the sale of the core business does not proceed there will be a considerably lesser sum available. But assuming the sales of the forestry business and the vegetables seeds business proceed, those two sales by themselves, in whatever final form they should be, would seem to provide an ample reason for dismissing the present motion. 38 I dismiss the motion. 39 SMITH: I apply for costs. 40 WILSON: We would make two submissions in relation to costs. First, the full circumstances of the matters concerning the sale of the businesses, which were obviously important in your Honour's view and in the judgment your Honour has announced, were not made clear until the second of the two Marginson affidavits, and therefore, in our respectful submission, if a costs order were to be made it ought not to be made for the full amount of the costs, but rather only in the normal event some proportion of the costs. 41 Secondly, in our respectful submission, the position, as your Honour has said, is one where these sales will take place in one sense in the immediate future, and the true position of Yates' financial position ought to be known fairly soon; that is, at least as between these parties if nothing else. In those circumstances we would have thought that the appropriate course is to reserve costs until the sales have taken place and we know what the true position is. Other than that, I have nothing that I can add in relation to the question of costs. 42 HIS HONOUR: Thank you. Well, as to the first of those matters the applicant plainly reviewed its position after receipt of the second affidavit of Mr Marginson and chose to proceed. As to the second matter, the order for costs will not be enforceable until final judgment in any event. It does not seem appropriate to make any particular order. I will therefore substitute what I said earlier with the motion is dismissed with costs. ooOOoo Last Modified: 07/23/2003 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.