Court of Appeal Supreme Court New South Wales Medium Neutral Citation: Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65 Hearing dates: 26 February 2014 Decision date: 17 March 2014 Before: Macfarlan JA at [1]; Ward JA at [55]; Tobias AJA at [60] Decision: The two applications for leave to appeal are dismissed with costs. [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Catchwords: PRACTICE AND PROCEDURE - costs - security for costs - appeal against decision refusing to order security for costs under Uniform Civil Procedure Rules 2005 (NSW) r 42.21(1)(d) or Corporations Act 2001 (Cth) s 1335(1) - whether reason to believe plaintiff company will be unable to meet adverse costs order - not a test of whether risk that that will be the case - burden of proof in applications for security for costs - principles governing appellate review of determination of threshold question of whether power to order security Legislation Cited: Civil Procedure Act 2005 (NSW), s 56 Corporations Act 2001 (Cth), s 1335 Family Provision Act 1982 (NSW) Supreme Court Act 1970 (NSW), s 101 Uniform Civil Procedure Rules 2005 (NSW), r 42.21 Cases Cited: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; 148 CLR 170 Australian Securities and Investments Commission v Hellicar [2012] HCA 17; 247 CLR 345 Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission [2000] HCA 47; 203 CLR 194 Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; 234 CLR 124 Finch v Telstra Super Pty Ltd [2010] HCA 36; 242 CLR 254 Fox v Percy [2003] HCA 22; 214 CLR 118 Ho v Powell [2001] NSWCA 168; 51 NSWLR 572 House v The King [1936] HCA 40; 55 CLR 499 HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 In re the Will of F B Gilbert (1946) 46 SR (NSW) 318 Jones Lang LaSalle (NSW) Pty Ltd v Taouk [2012] NSWCA 342 Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377 Potts v Miller [1940] HCA 43; 64 CLR 282 Prynew Pty Ltd v Nemeth [2010] NSWCA 94; 28 ACLC 10-026 Singer v Berghouse [1994] HCA 40; 181 CLR 201 Strong v Woolworths Ltd [2012] HCA 5; 246 CLR 182 Tarabay v Leite [2008] NSWCA 259 Warren v Coombes [1979] HCA 9; 142 CLR 531 Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245 Category: Principal judgment Parties: CA 2013/323232: Sally-Ann Cornelius (First Applicant) Christopher Quinn (Second Applicant) Andrew Winthorpe (Third Applicant) John O'Brien (Fourth Applicant) The Zuellig Group Incorporated (Fifth Applicant) Zuellig Pharma Asia Pacific Ltd (Sixth Applicant) Zuellig Healthcare Holdings Australia Pty Ltd (Seventh Applicant) John Diener (Eighth Applicant) Global Medical Solutions Australia Pty Ltd (First Respondent) Axiom Molecular Pty Ltd (Second Respondent) Mathew Farag (Third Respondent) CA 2013/322239: Mathew Farag (Applicant) Global Medical Solutions Australia Pty Ltd (Respondents) Representation: Counsel: CA 2013/323232: P Brereton SC/RCA Higgins/ F Roughley (Applicants) P Durack SC/S Keizer (Respondent) CA 2013/322239: ACN Bova (Applicant) P Durack SC/S Keizer (Respondent) Solicitors: CA 2013/323232: Corrs Chambers Westgarth (Applicants) Jones Day (First Respondent) Norton Rose Fulbright (Second Respondent) Webb Henderson (Third Respondent) CA 2013/322239: Webb Henderson (Appellant) Jones Day (Respondent) File Number(s): CA 2013/323232; 2013/322239 Decision under appeal Jurisdiction: 9111 Citation: Global Medical Solutions Australia Pty Ltd v Axiom Molecular Pty Ltd [2013] NSWSC 1433 Date of Decision: 2013-09-27 00:00:00 Before: Stevenson J File Number(s): SC 2012/295084 HEADNOTE [This Headnote is not to be read as part of the judgment] The plaintiff, Global Medical Solutions Australia Pty Ltd ("GMSA"), carries on business in the field of nuclear pharmacy. The second to sixth defendants were senior employees of GMSA until 2011 or 2012 when each resigned their employment with GMSA to commence employment with a start-up venture, Axiom Molecular Pty Ltd ("Axiom"), which is now in liquidation. Following the execution on 24 September 2012 of search orders made by McDougall J, GMSA commenced proceedings in the Commercial List of the Equity Division alleging that those defendants conspired with the seventh to ninth defendants (members of the Zuellig group of companies) and the tenth defendant to divert GMSA's business and misuse its information so as to carry on business in competition with GMSA. Those proceedings are now fixed for a final hearing in the Commercial List commencing on 14 July 2014. In separate applications, the second defendant and the third to tenth defendants sought orders pursuant to r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW), or alternatively s 1335(1) of the Corporations Act 2001 (Cth), that GMSA provide security for their costs already incurred or to be incurred. By judgment of 27 September 2013 the primary judge declined to make those orders. Held by the Court: (1) The threshold test on an application for security for costs is whether there is "reason to believe" that a party "will be" unable to meet any adverse costs order. The words of the statute and rule do not require consideration of whether there is a "risk" of that occurring ([15]-[17]). (2) The legal burden of proof remains on the applicant for security throughout, although the respondent may bear an evidentiary burden to raise particular issues ([18]-[20]). (3) The principles in House v The King (1936) 55 CLR 499 govern appellate review of the determination of the threshold question of whether there exists power to order security for costs ([23]). Though not strictly discretionary, it has features warranting application of those principles ([22]-[23]). (4) The applicants failed to establish a clear case of material error such as to warrant the grant of leave to appeal against the decision not to order security to be provided. Judgment 1MACFARLAN JA: These are applications by defendants in proceedings in the Commercial List of the Equity Division for leave to appeal against a judgment of Stevenson J dated 27 September 2013 declining to make orders that the plaintiff, Global Medical Solutions Australia Pty Ltd ("GMSA"), provide security for their costs ([2013] NSWSC 1433). The applications were heard concurrently with the appeals that would lie if the applications were granted. THE COMMERCIAL LIST PROCEEDINGS 2GMSA carries on business in Australia supplying radiopharmaceutical products and engaging in related activities in the field of nuclear pharmacy. Until 2011 or 2012 the second to sixth defendants were senior employees of GMSA, Mr Farag (the second defendant) being its managing director until 9 November 2011. Following the execution on 24 September 2012 of search orders made by McDougall J, GMSA commenced the present Commercial List proceedings in which they allege that these defendants conspired with the seventh to ninth defendants (described as the "Zuellig Defendants") and the tenth defendant "to divert the plaintiff's business and misuse the plaintiff's information in order to set up a new business to be carried on by the First Defendant in competition with the plaintiff". The first defendant (Axiom Molecular Pty Ltd) is now in liquidation. The defendants are alleged to have unlawfully taken and used GMSA's property, including its confidential information. 3Following many interlocutory applications, the proceedings are now fixed for a final hearing in the Commercial List, to occupy five weeks commencing 14 July 2014. THE JUDGMENT AT FIRST INSTANCE The power to order security 4By separate applications, the second defendant and the third to tenth defendants sought orders pursuant to r 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW), or alternatively s 1335(1) of the Corporations Act 2001 (Cth), that GMSA provide security for their costs incurred or to be incurred after the date of their applications. The Court's power under the former provision arises if "there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so", whilst under the latter it arises 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". The primary judge's view that there is no presently material difference between these provisions was not challenged on appeal. 5Citing Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377 at [21], the primary judge stated that the burden of proof rested upon those seeking security "from first to last" (Judgment [8]). His Honour adopted the view that the provisions under which the applications were made required an assessment of whether there was "a risk that the corporation will be unable to pay" (Judgment [10] citing Livingspring at [15] and the decision of Ward JA sitting as a single judge in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 at [7] said to have approved this view). His Honour considered that the risk in question must be "real" or "sensible", and not "merely fanciful, or theoretically possible" (Judgment [11]). 6His Honour approached the threshold question of whether the power to order security existed, as distinct from that of whether the discretion to order it should be exercised, on the assumption that $2,000,000 was the appropriate amount of security if it were to be ordered. 7He expressed his conclusion that the defendants had not established that the Court had power to order security (and thus had not surmounted the "threshold") as follows: "35 In all of these circumstances, I see no reason to believe that the plaintiff could not meet an adverse costs order, even if it were to be in the order of $2 million (as the defendants contend). Adopting a 'practical, commonsense approach to examination of' the plaintiff's financial position (see [10] above), I do not see that there is a real or sensible risk (see [11] above) that the plaintiff will be unable to meet an adverse costs order." 8The matters to which the primary judge principally had regard in reaching that conclusion were the following: (1)"The plaintiff is an established business. It has some 150 employees and trades in a field, nuclear medicine, which has high barriers to entry. It has been consistently profitable since 2010 with substantial revenues, sizeable trade debtors and significant net assets" (Judgment [14]). (2)GMSA's management accounts for the six months to 30 June 2013 showed gross sales revenue of about $13.8 million with a gross profit of about $4 million and an operating profit of about $243,000. After deduction of non-operating expenditure (including legal fees of about $1 million) the company suffered a loss for the period of just under $1 million. (Although it should be noted that the non-cash item of depreciation of about $436,000 was deducted in arriving at that loss). (3)The balance sheet forming part of those accounts showed that GMSA had net assets in the order of $4.4 million, with an excess of current assets over current liabilities in the order of $1.2 million. (4)His Honour found of "some assistance" GMSA's submission that it had a "very conservative" enterprise value in the order of $14 million. This figure was calculated by multiplying the earnings shown in the company's audited accounts to 31 December 2012 by a multiple of seven. There was some evidence that that multiple was used by the seventh defendant, Zuellig Group Incorporated, when considering acquisition of GMSA's parent company in 2011. (5)GMSA has a low gearing, leaving "ample assets to offer a prospective lender". 9His Honour added: "33 The plaintiff has significant assets (debtors and stock) that the plaintiff is likely to be able to realise in sufficient time to meet any obligation it has to pay costs. Were an adverse costs order to be made, I see no reason to believe that the plaintiff would not be able to realise its assets in time to satisfy that order. 34 It is true that, because of the costs of these proceedings, the plaintiff is trading at a loss. Historically, however, it has been profitable. It has a high turnover and healthy gross profit (albeit a relatively slender operating profit, leaving aside legal costs)." The discretion to order security 10The primary judge concluded that if (contrary to his view) he had power to order security, he would not exercise his discretion to do so. The following three matters led him to this conclusion (Judgment [85]). 11First, his Honour regarded it as a factor weighing against the ordering of security that the second to sixth defendants have the benefit of an indemnity for their costs (and any judgment obtained against them by GMSA) from Axiom Molecular Australia Holdings Pty Ltd, a company associated with The Zuellig Group Incorporated (the seventh defendant). 12Secondly, the primary judge considered that there was substance in GMSA's submission that to the extent that there was concern about its present financial position that concern arose wholly from the existence of the present proceedings, and that that was a factor weighing against the granting of security. 13Thirdly, his Honour took into account the existence of an undertaking by GMSA's parent company, Global Medical Solutions Ltd ("GMSL"), a company incorporated in the British Virgin Islands, to be jointly liable with GMSA in relation to any costs orders made in favour of the second to tenth defendants. The undertaking was only offered on the basis that no order for the provision of security was made. GMSL accepted that the undertaking amounted to a submission to local jurisdiction in relation to its enforcement. It said that it was not prepared to provide any information regarding the present financial position of GMSL because: "Your clients are well aware of the general nature, extent and value of GMSL's business and assets (including its investments in subsidiaries) having spent some 18 months conducting due diligence and ultimately offering US$45 million to acquire same (and, in internal Zuellig documents, recognising that it was worth US$55 million). There is no reason to doubt that GMSL is easily able to meet any costs orders." 14His Honour referred in this context to a Confidential Information Memorandum made available to members of the Zuellig Group during that due diligence asserting that the earnings of GMSL before interest tax and depreciation for the six months to 30 June 2011 was $US4.2 million and that its shareholders' equity at that date was in the order of $US22.1 million. It is not clear how the figure of $US22.1 million and that of $US45 million referred to in [13] above relate to each other. RELEVANT LEGAL PRINCIPLES The threshold test 15Although the primary judge was not asked to do otherwise, in my view he applied a test that was too generous to the defendants. His Honour asked, in reliance on the two judge decision in Livingspring (see [5] above), whether there was a risk (which his Honour said had to be "real" or "sensible") that the plaintiff will be unable to meet any costs orders made in favour of the defendants. I do not consider that this test conforms with the statutory and UCPR language. This language does not refer to risk. 16The words "reason to believe" acknowledge that on an application for security for costs, as a matter of practicality, a court will not be able to undertake as thorough an examination of the financial position of a plaintiff as it would if an issue as to that arose at a final hearing. Almost inevitably, the court's assessment will be a preliminary one based on limited materials. Nevertheless, for the power to order security to arise, the outcome of the assessment must be that the court considers that there is "reason to believe" that the plaintiff "will be" unable to meet an adverse costs order. A conclusion that there is a risk that that will, or may, be the case is insufficient. 17The words of the statute and rule are clear and should be applied according to their terms without a gloss being placed upon them. They were so applied in the last Full Bench decision of this Court applying the provisions, Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245. In that case, Beazley JA (as her Honour then was) (with whom Barrett JA agreed) referred to the onus of the applicant for security as being to establish "that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful" ([29] and [30]). The onus of proof 18The defendants contended on appeal that the primary judge erred in stating that the burden of proof rests upon applicants for security "from first to last" (see [5] above). They submitted that this was contrary to the following statement of Beazley JA in Wollongong City Council v Legal Business Centre: "Once the defendant has discharged the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, the onus shifts to the party against whom the order is sought (who I will refer as the plaintiff) to establish a reason why security should not be granted: KP Cable Investments v Meltglow [1995] FCA 76; 56 FCR 189; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Pioneer Park v Australia and New Zealand Banking Corporation [2007] NSWCA 344; Prynew Pty Ltd v Nemeth [2010] NSWCA 94." 19I do not consider that there is an inconsistency, as alleged, as Beazley JA was in my view referring to the evidentiary (or evidential) burden shifting in the circumstances described to the party against whom security is sought. In fact, her Honour made that explicit in her earlier decision in Prynew Pty Ltd v Nemeth [2010] NSWCA 94; 28 ACLC 10-026 at [16] where in the same context she referred expressly to the evidentiary burden shifting. 20The expression "evidential burden" can be used in at least three senses (Strong v Woolworths Ltd [2012] HCA 5; 246 CLR 182 at [46] - [64]). For present purposes, it is sufficient to say that it includes reference to the principle that in certain circumstances a party who does not bear the ultimate burden of proof may have to raise for consideration matters that favour it if it wishes them to be taken into account in the determination of the case. The evidential burden of raising a matter is thus distinct from the legal onus of proving entitlement to an order for security for costs which it is correct to describe as resting throughout on an applicant for such an order. Appellate intervention 21The primary judge's decision concerned a matter of practice and procedure. For good reason, leave to appeal against interlocutory decisions is required (Supreme Court Act 1970, s 101(2)(e)). Appellate courts are reluctant to intervene in relation to decisions made prior to the termination of proceedings at first instance. It is not usually conducive to the "just, quick and cheap resolution of the real issues" in proceedings for that to occur (Civil Procedure Act 2005, s 56(1); In re the Will of F B Gilbert (1946) 46 SR (NSW) 318 at 323; Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc [1981] HCA 39; 148 CLR 170 at 177). As a result, an applicant for leave to appeal in such a matter will normally be required to establish at least a clear case of material error in the decision at first instance in order to obtain leave to appeal. 22Whilst the decision whether or not to grant security is discretionary, the threshold decision as to whether the power to do so exists is not discretionary in the strict sense of that word as it does not result from the judge making a choice after consideration of a number of factors (see Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; 234 CLR 124 at [37] - [40]; Finch v Telstra Super Pty Ltd [2010] HCA 36; 242 CLR 254 at [29]; Coal & Allied Operations Pty Ltd v Australian Industrial Relations Commission [2000] HCA 47; 203 CLR 194 at [19]). Rather, the outcome is determined by the findings of fact that the judge makes. Nevertheless, it has features warranting the application on appeal of the same principles as are applicable to appeals from discretionary decisions. To succeed on appeal against a discretionary decision, an appellant must establish material error in the making of a finding of fact upon which the decision is based, in the taking or not taking into account of material factors or in some other matter of principle. If no specific error can be established, error may be inferred if the decision is "unreasonable or plainly unjust" (House v The King [1936] HCA 40; 55 CLR 499 at 505). These bases of challenge differ from those applicable to an ordinary, all grounds appeal where the appellate court, whilst giving respect and weight to the conclusions of the trial judge, must give effect to its own views (Warren v Coombes [1979] HCA 9; 142 CLR 531 at 551 - 2), subject to limitations applicable where questions of credit are involved (Fox v Percy [2003] HCA 22; 214 CLR 118 at [28] - [29]). 23The decision here on the threshold question involved an evaluation of a significant amount of financial and other information. Bearing in mind particularly that the assessment was necessarily conducted upon a preliminary basis and on limited materials (see [16] above), it was one in relation to which views could reasonably differ. As in the instance of a decision as to whether a member of a superannuation scheme was unlikely ever to engage in "gainful Work", there were "factors to be examined which [were] difficult to weigh, impressions to be formed, and judgments to be made" (Finch v Telstra Super Pty Ltd at [29]). Like the jurisdictional question of whether an applicant for an order under the Family Provision Act 1982 was left without provision for his or her proper maintenance, education and advancement in life (Singer v Berghouse [1994] HCA 40; 181 CLR 201 at 212) and the apportionment of responsibility in employment accidents (Tarabay v Leite [2008] NSWCA 259 at [29] - [31]; Jones Lang LaSalle (NSW) Pty Ltd v Taouk [2012] NSWCA 342 at [84]), the principles in House v The King in my view govern appellate review of the present threshold question. RESOLUTION OF THE APPEAL The threshold question - power to order security 24The specific points made by the defendants in support of their challenge to the decision on the threshold question were as follows. 25First, the defendants submitted that the primary judge made an error in assuming that the item for current liabilities in GMSA's management accounts to 30 June 2013 included inter-company loans. The loans were in fact part of the "Long-term Liabilities" stated in the accounts but the defendants had submitted that they should have been treated as current liabilities because at least the principal loan was shown by the evidence to have a maturity date of 7 November 2013. GMSA responded to this submission by proffering to the Court an undertaking by the ultimate owner of GMSA, Mr Bagerdjian, to defer payment of inter-company loans until the conclusion of the court proceedings. 26In referring to the inter-company loans as current liabilities the primary judge could have been implicitly accepting the defendants' submission that that was their proper classification. As a result, I do not consider that the defendants have clearly established that the judge erred in this context. 27In any event, the alleged error has not been shown to be material because the primary judge was in my view entitled to have regard to the undertaking given by Mr Bagerdjian. As pointed out earlier, the evaluation that his Honour was required to undertake was necessarily of a preliminary character, based on less than complete evidence. The defendants' submission on appeal that the undertaking should have been regarded as of "little comfort" because Mr Bagerdjian was outside the jurisdiction was, according to GMSA's submission which was made on appeal without contradiction, not put to the primary judge. In these circumstances and in the absence of any demonstration by the defendants that the alleged error played a significant role in his Honour's reasoning process, I do not consider that material error has been established. 28Secondly, the defendants submitted that the primary judge failed to have "proper regard" to the fact that approximately $2.2 million of GMSA's assets recorded in its 30 June 2013 management accounts balance sheet was constituted by goodwill. However, the balance sheet (which was tendered by the defendants) was some evidence of its assets and liabilities, and their value (Potts v Miller [1940] HCA 43; 64 CLR 282 at 303) and there was no obvious inference arising from other evidence that the goodwill must have been of lesser value than stated in the balance sheet. Indeed, the evidence concerning the nature of GMSA's business and the consideration by the Zuellig interests in 2011 of its acquisition (together with the remainder of the Group) for a very substantial amount pointed in the opposite direction. 29Furthermore, if goodwill had been overstated in the accounts it can be inferred that some of the defendants, and particularly the second defendant who until recently had been the managing director of GMSA, would have known and could have given evidence to that effect. He did not do that. 30Accordingly, I reject the second submission. 31Thirdly, the defendants submitted that the primary judge did not properly consider the effect that payment by GMSA of its own legal costs of the proceedings would have on its capacity to meet the defendants' costs. 32There was no estimate in evidence of the amount of the legal costs incurred and likely to be incurred by GMSA after 30 June 2013 in connection with the Commercial List proceedings. However, based on the evidence concerning the defendants' likely recoverable party/party costs, it can be inferred that GMSA's solicitors/client costs will be likely to be $1 million or more beyond the amounts already accounted for. The management accounts for the six months ended 30 June 2013 took account of legal fees in the order of $1 million, as did the audited accounts for the 12 months concluded 31 December 2012. 33There was discussion in the argument on appeal as to whether these figures could be reconciled with estimates given by Mr Philip Hoser, a solicitor, in an affidavit of 9 September 2013 of legal costs incurred by GMSA in the previous 11 months totalling close to $3.5 million. As the issue was not explored in cross-examination of Mr Hoser, I do not consider that an attempt at reconciliation can occur now. 34GMSA responded to this third submission of the defendants by pointing to a number of references in the primary judge's judgment to GMSA's own legal costs (see Judgment [17], [18], [33], [54] - [56]). In particular, GMSA emphasised [33] where the primary judge said: "The plaintiff has significant assets (debtors and stock) that the plaintiff is likely to be able to realise in sufficient time to meet any obligation it has to pay costs ... " 35This paragraph immediately followed one in which his Honour referred to evidence that GMSA's parent company had paid some $639,686 of GMSA's fees. That paragraph ([32]) concluded with the comment that the parent company had its own interest in the successful prosecution of the proceedings and that it was likely that it was contributing to GMSA's legal fees for this reason. With GMSA's legal fees thus in the forefront of his mind, it is not reasonable to conclude that his Honour overlooked them in expressing views in the immediately following paragraph (and elsewhere in the judgment). 36As a result, I reject the defendants' third submission. 37Fourthly, the defendants submitted that the primary judge "incorrectly ascribed weight" to the asserted "enterprise value" of GMSA's business referred to in (4) in [8] above, when there was no meaningful identification of what that value comprised and no expert evidence to verify its existence. 38In addition to the evidence referred to there, there was in evidence the Confidential Information Memorandum dated August 2011 referred to at [14] above. The Memorandum referred to the Australian business conducted by GMSA as representing 40% of the group business. Further evidence along the same lines was contained in an internal email of the Zuellig interests dated 23 June 2011. 39As the defendants implicitly recognised in their formulation of this fourth submission, to make it good they had to demonstrate to this Court that the primary judge should have taken no account at all of the evidence of "enterprise value". In my opinion they did not do this. The evidence to which I have referred was before his Honour and rationally gave some assistance to him in answering the threshold question concerning GMSA's ability to meet orders for the defendants' costs, as it suggested that GMSA's business was, at least in 2011, of considerable value. Whilst the passage of time and the departure of senior officers from GMSA's employment undoubtedly affected the weight that could be attributed to it, the evidence nevertheless remained of some not insignificant weight, consonant with his Honour's comment that GMSA's submission concerning this evidence was of "some assistance" to him (Judgment [30]). 40The defendants' fifth submission was that the primary judge erred in concluding that GMSA had "ample assets to offer a prospective lender" (Judgment [31]) when there was no lay or expert evidence to support that conclusion or that GMSA would have been able to service any borrowing. 41I do not accept this submission. Bearing in mind particularly the nature of the proceedings before his Honour (as to which see [16] above), I consider that it was open to the primary judge to draw these inferences from the financial accounts that were before him. He was not required to treat those accounts as incomprehensible in the absence of evidence explaining them. A judge sitting in the Commercial List is well able to read and draw conclusions from balance sheets and profit and loss accounts. It was for the defendants to call evidence to dispel any inferences that were reasonably open to the judge to draw from the accounts. They did not do so and have not shown that the inferences drawn by the primary judge were not open to be drawn by him. The fact that confidentiality orders restricted the documents to which the defendants could have access did not preclude them bringing the knowledge that they had to bear in support of their applications for security for costs. 42Sixthly, the defendants submitted that the primary judge should not have taken into account GMSA's submission that it was unlikely that its parent would "cut the plaintiff adrift" if it was ordered to pay the defendants' costs (Judgment [27] and [30]). 43This submission of GMSA was simply a colourful way of putting the effect of its submissions concerning enterprise value that GMSA formed a significant part of a group of companies of substantial value. As I have rejected the defendants' challenge to the primary judge's regard to those submissions (see [37] - [39] above), this submission should be rejected also. 44The defendants' seventh submission was that the primary judge erred in not considering whether the "limited material proffered by the Plaintiff was an appropriate basis on which to reach a reasonable decision" and not having "proper regard" to GMSA's ability to lead further evidence as to its financial position and the location of its assets. The defendants referred in this respect to Ho v Powell [2001] NSWCA 168; 51 NSWLR 572 at [14] - [15] and Australian Securities and Investments Commission v Hellicar [2012] HCA 17; 247 CLR 345 at [165] - [166] and [255]. 45I reject this submission. It is not clear whether the primary judge was asked to direct his mind to these questions but, assuming in the defendants' favour that he was, the absence of express mention of them is not significant. Bearing in mind the character of the applications (as to which see [16] above), the core evidence upon which they were determined, that is, GMSA's most recent audited and management accounts, was entirely appropriate and sufficient to form the basis of a reasoned decision. The defendants, who included a recent managing director of GMSA, were in a position to utilise their own knowledge to supplement the evidence in a direct fashion or to guide their solicitors in the making of further inquiries, if they thought that necessary. 46Eighthly, the defendants submitted that the primary judge erred in not considering that if GMSA's parent had "to step in or otherwise not 'cut the plaintiff adrift' in the face of an adverse costs order", it followed that GMSA could not itself pay the defendants' costs. I reject this submission as GMSA's point (which the primary judge found to be of "some assistance") was that GMSA's parent was in a position to, and would be likely to, ensure that GMSA fulfilled any obligation to pay costs. This was an inference that was open on the evidence. If this occurred, GMSA was, contrary to the defendants' proposition, "itself" able to pay the defendants' costs. 47Ninthly, the defendants submitted that the primary judge erred in not considering "the nature of the Plaintiff's stock, the available market, and the costs of realising such stock when determining whether the Plaintiff was 'likely to be able to ... realise' its assets ('debtors and stock') in sufficient time to meet any obligation it has to pay costs" (written submissions dated 25 October 2013 at [20(b)] referring to Judgment [33] quoted in [9] above). 48I reject this submission also. The financial accounts were evidence of the existence of stock and debtors of the value stated in the accounts and, because they were classified as current assets, that they were realisable at least within a 12 month period. Furthermore, the magnitude of the sales revenue suggested that stock and debtors were likely to have been turning over within a reasonably short period and the fact that a deduction was made for outdated stock suggested that attention had been given during the preparation of the accounts to its realisability. Again, the connection to GMSA in the recent past of the employee defendants, particularly Mr Farag, should have enabled them to give evidence or to suggest lines of inquiries to their solicitors if there was a basis for putting that inferences otherwise available from the accounts should not be drawn. 49Tenthly, the defendants submitted that the primary judge failed, at least consistently, to consider the threshold question "on the basis that the Plaintiff unsuccessfully litigates the proceeding to trial, at substantial cost to itself". 50This submission should be rejected as there is no reason to conclude that the primary judge did otherwise than deal with the applications on this basis (see in particular [34] above concerning GMSA's own legal costs). 51In light of the rejection of these submissions, the defendants' challenge to the primary judge's decision on the threshold question should be rejected and the applications for leave to appeal dismissed with costs. 52I add that if the threshold issue had been approached by the trial judge, not on the basis to which he referred of whether there was a real or sensible risk that GMSA will be unable to meet any costs orders in favour of the defendants, but on what I consider to be the correct basis (see [16] above) of whether there was reason to believe at the time of the hearing at first instance that GMSA will be unable to meet those costs orders, the necessity for him to reject the defendants' applications for security for costs would have been all the clearer. 53I add also that the outcome of the applications for leave to appeal would not differ if, contrary to my view expressed in [22] above, the principles applicable to the appeals (assuming leave were granted) were those stated in Warren v Coombes rather than House v The King. The issue of discretion 54As the defendants did not establish that the primary judge had power to order GMSA to give security, the question of whether he should, in his discretion, have exercised the asserted power does not arise. In these circumstances, I do not consider it appropriate to deal with the question of discretion, beyond making the remarks in [18] to [20] above concerning onus. ORDERS 55For the reasons above, the two applications for leave to appeal should be dismissed with costs. 56WARD JA: I agree with Macfarlan JA that the respective applications for leave to appeal should be dismissed with costs for the reasons set out in [24]ff of his Honour's judgment. I would add the following observation as to the power under rule 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 (NSW) to order the provision by a plaintiff of security for costs if the plaintiff is a corporation and there is "reason to believe" that it "will be unable" to pay the costs of the defendant if the latter is successful in defending the proceedings. 57As noted by Macfarlan JA, the primary judge referred to Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93; 20 VR 377, to which I had referred in HP Mercantile Pty Ltd v Dierickx [2013] NSWCA 87 when noting that the test to be applied on an application for security for costs under s 1335 of the Corporations Act 2001 (Cth) had been commonly referred to as an undemanding test. 58To the extent that I suggested in Dierickx (at [11]) that what was required was for there to be established a reasonable possibility that the company will be unable to pay a costs order (as opposed to establishing a basis on which there was reason to believe that to be the case), I was not intending to restate the test applicable under s 1335 of the Act (or, by analogy, rule 42.21(1)(d) of the rules). The test remains as stated in Wollongong City Council v Legal Business Centre Pty Ltd [2012] NSWCA 245. 59As I read what was said in Livingspring, the Court was there suggesting that existence of a real risk of inability to pay the defendants' costs could provide a rational basis for belief that the company will be unable to pay those costs and it was in that sense that the Court referred to the making of a judgment or risk assessment that the corporation will be unable to pay the costs and which it considered called for a practical, commonsense approach to the examination of the company's financial affairs (at [15]). Whether or not that was the context in which those comments were made, I accept that the test requires a rational basis for the requisite belief to be held and that the requisite belief is that the corporation will be unable in the future to pay the defendant's costs, assuming the defendant were to succeed. 60TOBIAS AJA: I agree with Macfarlan JA and with the additional comments of Ward JA. ********** 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. Decision last updated: 17 March 2014