New South Wales Supreme Court CITATION : Parle Foods v McClunie Birch [2003] NSWSC 180 HEARING DATE(S) : 12/03/03 JUDGMENT DATE : 21 March 2003 JURISDICTION: Equity Division Technology and Construction List JUDGMENT OF : Barrett J DECISION : Security for costs in the sum of $200,000 ordered CATCHWORDS : PROCEDURE - costs - security for costs - no question of principle LEGISLATION CITED : Corporations Act 2001 (Cth), s.1335 Supreme Court Rules, Part 53 rule 2 Bell Wholesale Pty Ltd v Gates Export Corporation (1984) 8 ACLR 588 Collignon Developments Pty Ltd v Wurth (1975) 1 ACLR 314 CASES CITED : FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 33 ACSR 739 Indaba Pty Ltd v McVeigh [2000] WASCA 332 Owners - Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820 Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 5 ACLC 542 Parle Foods Pty Limited - Plaintiff PARTIES : McClunie Birch Limited - First Defendant McClunie Birch Australia Limited - Second Defendant FILE NUMBER(S) : SC 55039/02 COUNSEL : Mr J J Young - Plaintiff Mr A J McInerney - Defendants SOLICITORS : Mackenzie & Vardanega - Plaintiff Ebsworth & Ebsworth - Defendants - 10 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY AND CONSTRUCTION LIST BARRETT J FRIDAY, 21 MARCH 2003 55039/02 – PARLE FOODS PTY LIMITED v McCLUNIE BIRCH LIMITED & ANOR JUDGMENT 1 The defendants seek an order that the plaintiff provide security in the sum of $300,000 for the future costs of these proceedings, or, more particularly, costs from 12 March 2003 up to and including the hearing of the plaintiff's claim. 2 The proceedings were commenced by statement of claim filed in May 2001. An amended statement of claim was filed in February 2002. A defence and cross-claim were filed in May 2002. A defence to the cross-claim was filed in August 2002. The plaintiff's claims relate to alleged shortcomings on the defendants' part in failing to complete on time the construction and commissioning of a food processing plant at Hanwood near Griffith. The cross-claim is for unpaid remuneration for the construction and commissioning work. No evidence has, at this stage, been filed by either the plaintiff or the defendants. 3 The application for security for costs is made pursuant to Part 53 of the Supreme Court Rules, s.1335 of the Corporations Act 2001 (Cth) and the court's inherent jurisdiction to order security for costs. 4 The defendants, as applicants, acknowledge that they must deal successfully with two main issues to make out a case for an order for security for costs: first, that the defendant are in need of protection from being sued by an impecunious company; and, second, the fact that their application is made almost two years after the proceedings began which, on its face, may mean that a disentitlement because of delay will operate against the defendants. 5 To the extent that the application is founded on s.1335 of the Corporations Act, the task of the court, in the first instance, is to determine whether "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 FFE Minerals Australia Pty Ltd v Mining Australia Pty Ltd (2000) 33 ACSR 739 it was pointed out by Pidgeon and Owen JJ that this does not entail any question of proof as such: "What is required is an evaluation of the evidence led by the applicant to see whether that leads to a reason to believe that the corporation will be unable to pay the costs of the defendant." 6 The words "reason to believe" used here by Pidgeon and Owen JJ appear also in Part 53 rule 2 of the Supreme Court Rules which provides that security for costs may be ordered if "there is reason to believe that a plaintiff being a body corporate will be unable to pay the costs of the defendant if ordered to do so". In Owners – Strata Plan No 50530 v Walter Construction Group Ltd [2001] NSWSC 820, Bergin J observed that, under this provision, an applicant "… is required to establish no more than that the quality of the evidence objectively gives rise to a reason to believe that the plaintiff will be unable to pay the defendants' costs if ordered to do so." 7 If the applicant succeeds in showing an affirmative answer to the threshold or jurisdictional question, the inquiry moves to a new stage described by Murray and Miller JJ in Indaba Pty Ltd v McVeigh [2000] WASCA 332: "The second stage in the process … is to exercise a general and unfettered discretion whether or not to make an order and, if so, how much security is to be provided and in what form." 8 A starting point in considering the first issue based on "credible testimony" or "reason to believe" is the evidence as to what the applicant's costs are likely to be. That is dealt with, in this case, by an affidavit of Ms Vine-Hall, a solicitor and costs consultant retained to provide an expert opinion. Her assessment, which was not challenged, is that the defendants' costs from 31 January 2003 up to and including the hearing may be expected to be of the order of $530,000. It is in the context of that expression of opinion that security is sought in the sum of $300,000. 9 I turn then to the question whether, on the evidence, there is reason to believe that the plaintiff will be unable to pay $530,000. That is, of course, a question to which some time frame must be put, given the "will be unable" aspect of the inquiry. No hearing date is yet fixed. Nor, as I have said, has either party filed evidence. I therefore adopt, as a rule of thumb, 31 December 2003 as the approximate date as at which the financial capability of the plaintiff should be assessed. 10 The financial statements of the plaintiff for the years ended 30 June 2001 and 30 June 2002 are in evidence. These do not appear to be audited (there is, in the table of contents, in each case, a reference to an independent audit report on page 32 but for 2002 there is no such page and for 2001 page 32 contains no such report). The plaintiff is not a reporting entity. The financial statements are described as a "special purpose financial report" to which approved accounting standards do not have "mandatory applicability". The accounts for the year to 30 June 2001 also provide information in relation to the preceding year because of the inclusion of comparison columns. 11 The net assets of the plaintiff, according to these accounts, were $6.54 million at 30 June 2000, $7.09 million at 30 June 2001 and $9.01 million at 30 June 2002. Net profit attributable to the members of the plaintiff (it being the holding company) were $1.03 million for the year ended 30 June 2000 and $554,000 for the year ended 30 June 2001, with a loss of $76,000 for the year ended 30 June 2002. Current liabilities at 30 June 2002 stood at $34.53 million (compared with $38.66 million at 30 June 2001 and $16.16 million at 30 June 2000), of which $25.71 million were interest bearing (2001: $23.11 million; 2000: $8.36 million) and $8.70 million were payables (2001: $14.71 million; 2000: $7 million), the payables being very predominantly trade creditors. 12 There is also in evidence a body of correspondence between the plaintiff and AgReserves Australia Limited which appears to be a financier and shareholder or, more accurately, a former financier and perhaps a former shareholder, given the evidence of Mr Parle that the commercial relationship with Heinz and AgReserve has terminated. The correspondence records delinquency on the part of the plaintiff in meeting its financial commitments. A documented headed "Parle Foods October 2002 Monthly Results" produced on subpoena by AgReserves reads in part as follows: " Creditors Although the creditor balance has reduced by $2m. since July 1, there is still considerable pressure being exerted by overdue creditors. The company is trading with a positive cash flow, but the requirement by most suppliers that we now pay cash before delivery of the goods, means that there is limited opportunity to make inroads on the rump of 180 day plus amounts. We are continuing to avoid legal difficulties, through constant negotiation, and small but regular payments to suppliers who are becoming aggressive. Cash There is little cash available for other than vital expenses, so little or no development or maintenance projects are being undertaken." 13 There is evidence of significant financing by way of the issue of convertible notes and increase in borrowings in the year ended 30 June 2002. This is accompanied by a roughly corresponding reduction in creditors. The convertible notes were taken up by Gresham Rabo Management Ltd but there does not appear to be evidence of their terms. Rabo Australia Limited holds fixed charges over certain assets and a floating charge over assets generally to secure all moneys owing. I infer that both Rabo Australia and Gresham Rabo Management are connected with the Dutch bank, Rabobank. 14 Mr Parle points, in his affidavit, to what he describes as the successful conclusion of negotiations in December 2002 for supplying of frozen vegetables to Coles Myer to a value of approximately $15 million annually, but with a formal contract still being negotiated; also to negotiations at an "advanced stage" for sales to Mitsubishi in Japan expected to result in additional annual sales of approximately $3.8 million. This followed termination of the commercial relationship with Heinz to which corn was to have been supplied. The Mitsubishi interest is said to be confirmed by an email of 11 December 2002. On examination, however, that email merely confirms "an interest in establishing a reliable and constant supply of Sweet Corn (Super Sweets) from Australia" and expresses disappointment at non-realisation of "an expectation that this would have occurred through Parle Foods' previous market arrangements", at the same time asking that Mitsubishi be kept advised of "any further developments or opportunities as and when they arise". This email does not contain any positive or encouraging message. 15 An assessment of the evidence leads to reason to believe that the plaintiff will be unable to pay costs in the sum of $530,000 in December 2003. Profitability has fallen significantly. There was a loss in the most recent financial year. The statements in the October 2002 monthly results document show that there was then quite considerable pressure from creditors and difficulty in paying what was due, with "small but regular payments being made to suppliers who are becoming aggressive" and "little cash available for other than vital expenses". The source of continuing and future revenues is, to say the least, unclear, with the relationship with Heinz at an end and nothing tangible having been shown to have taken its place. The arrangement with Coles Myer is said to be still awaiting the negotiation of a formal contract some three months after apparently successful completion of negotiations. The negotiations said to be at an "advanced stage" with Mitsubishi are evidenced by no more than an email from Mitsubishi (some three months old) expressing disappointment at non-realisation of concluded marketing arrangements with the plaintiff. There is really nothing to verify any expectation of significant marketing arrangements with either Coles Myer or Mitsubishi to take the place of Heinz. 16 In short, the evidence about more recent developments provides no ground for thinking that there will have been any lessening of the financial pressures that existed in October 2002 and were of such a quality that creditors could not be paid and the more aggressive were kept at bay with "small but regular payments". Indeed, in the absence of anything satisfactory about replacement revenue sources, it must be assumed that there is more likely to be increased financial pressure rather than less. 17 The threshold or jurisdictional question posed by s.1335 of the Corporations Act and Part 53 rule 2 of the Supreme Court Rules must therefore be answered by saying that the relevant "reason to believe" exists, so that the court must embark upon the discretionary task of deciding whether an order for security for costs should be made. 18 The defendants, as applicants, concede that they must contend with an issue of delay. The proceedings have been on foot for some 22 months, the statement of claim having been filed in May 2001. An amended statement of claim was filed more than 13 months ago, in February 2002. The plaintiff has invested more than $150,000 in its claims by way of costs to date. The defendants point to the fact that the plaintiff put a figure of $28 million to its claim only in October 2002 and have only recently discovered the plaintiff's financial difficulties. Those two factors, it is said, justify what would otherwise seem to be a late application, particularly where it is a claim only as to further costs. 19 I must say that I do not accept that the plaintiff's quantification of its claim at $28 million marks any relevant point of departure for present purposes. The general size and shape of the litigation must have been clear from the outset. In terms of the scope of the plaintiff's claims, it has not changed in the last 13 months. 20 As to the defendants' assertion that they have only recently realised that the plaintiff is experiencing financial difficulties, the plaintiff's response is that the ramifications of the events that gave rise to the litigation must have been obvious, insofar as they had the capacity to cause losses and financial difficulties for the plaintiff. Furthermore, it is said that the defendants could, at a much earlier stage, have resorted to subpoenas and notices to produce to obtain information relevant to an assessment of the plaintiff's financial situation. 21 The significant point here, in my view, is that the most telling evidence contributing to the outcome I have indicated on the "reason to believe" aspect of the present inquiry is evidence in the financial statements for the year ended 30 June 2002 (which presumably came into existence two months or more after year-end) and the October 2002 monthly results. This, coupled with the fact that the defendants seek security only as to future costs, seems to me to be a sufficient answer to the plaintiff's proposition that delay rules out the defendants' claim. Before the events reflected in the 30 June 2002 accounts and the October 2002 monthly results, it may well have been the case that an application for security for costs would have failed at the "reason to believe" threshold. The fact that circumstances relevant to that threshold emerge and become apparent after litigation has been in progress for some time cannot mean that the simple passage of time since commencement of proceedings works to the detriment of the applicant, at least where security for future costs only is sought. With the application for security for costs having been filed on 27 February 2003, I do not consider that any disqualifying delay operates here. 22 The other matter that arises for consideration is the question whether an order for security for costs would operate oppressively to shut the plaintiff out from claims properly maintainable by it or, putting it another way, whether the proceedings would be stultified. The guiding principle was stated by Clarke J in Yandil Holdings Pty Ltd v Insurance Co of North America (1985) 5 ACLC 542: "(t)he fact that the ordering of security will frustrate the plaintiff's rights to litigate its claim because of its financial condition does not automatically lead to the refusal of an order. Nonetheless it will usually operate as a powerful factor in favour of exercising the court's discretion in the plaintiff's favour." 23 This leads on to the question whether there are persons standing behind the plaintiff who are likely to benefit from the litigation and are willing to provide the necessary financial backing. It is pertinent to quote here a passage from the joint judgment of Sheppard, Morling and Neaves JJ in Bell Wholesale Pty Ltd v Gates Export Corporation (1984) 8 ACLR 588: "In our opinion a court is not justified in declining to order security on the ground that to do so will frustrate the litigation unless a company in the position of the appellant here establishes that those who stand behind it and 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 the 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 security will frustrate the litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts." 24 The persons who "stand behind" the plaintiff in this case are the holders of its share capital being, on the search material in evidence (which the plaintiff did not seek to challenge) are A W Parle, Gresham Rabo Management Ltd and AgReserves Australia Ltd (one share each), B S Parle (120,002 shares) and Trimgood Pty Ltd (360,005 shares); also the holder of the convertible notes, Gresham Rabo. The principal amount of the notes is some $4 million but there is no evidence as to the basis on which the notes may be or will be converted into share capital. 25 There is no evidence as to the financial status of the shareholders and the holder of convertible notes although, as I have said, I infer that Gresham Rabo is connected with a Dutch bank. It must follow that the plaintiff, in seeking to resist the order for security for costs, has failed "to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts". In the absence of that proof, any apprehension that the order sought might leave the plaintiff itself, as a company, financially unable to continue the litigation must be left to one side. 26 The discretionary considerations to which I have referred favour the making of an order that the plaintiff provide security for the defendants' costs of the proceedings, being costs after 13 March 2003. 27 It remains to be considered whether the order should extend to the whole of those costs. The case is a complex one expected to occupy four weeks of hearing time. Although the parties have already engaged in unsuccessful mediation, the significant weight of ongoing expense on each side means that the possibility of settlement must be regarded as continuing. That being so, I consider it appropriate to take the course that commended itself to Needham J in Collignon Developments Pty Ltd v Wurth (1975) 1 ACLR 314, that is, to order security to permit the preparation of the case up to hearing with the intention that the matter be looked at again as the hearing approaches so that the defendants may, if they wish, make an application for further security at that stage. 28 Of the total of $530,530 costs of the defendants after 31 January 2003 as estimated by Ms Vine-Hall, the defendants themselves attribute $194,400 to the four week trial. Future costs up to but not including any trial may therefore be taken to be $336,130 (ie, $530,530 minus $194,400). Applying to that figure of $336,130 the ratio suggested by the defendants' application (that is, 300,000 to 530,530, or 1 to 1.7684), the amount for which security should be ordered is $190,075 which may appropriately be rounded to $200,000. 29 The plaintiff is to provide to the defendants security in the sum of $200,000 for the defendants' costs of the proceedings from 13 March 2003 up to but not including the hearing, the security to be in such form as the parties shall agree or, in default of agreement, as shall be fixed by a Master. Each party has liberty to apply on 48 hours notice in relation to any matter in connection with such security. The costs of and incidental to the motion for security for costs should be reserved. ********** Last Modified: 03/21/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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