Supreme Court New South Wales Medium Neutral Citation: Two Italian Boys Holdings Pty Ltd v The Winery Pty Ltd [2016] NSWSC 1163 Hearing dates: 27 July 2016 Date of orders: 23 August 2016 Decision date: 23 August 2016 Jurisdiction: Common Law Before: Harrison J Decision: Parties to bring in short minutes of order giving effect to these reasons. Catchwords: COSTS – security for costs – where plaintiffs are arguably impecunious – whether plaintiffs' financial position caused by the defendant – where defendant has filed no defence to the statement of claim – where strength of the plaintiffs' case cannot be judged before a defence has been filed Legislation Cited: Corporations Act 2001 Uniform Civil Procedure Rules 2005 Category: Procedural and other rulings Parties: Two Italian Boys Holdings Pty Ltd (First Plaintiff) 2IB Distributions Pty Ltd (Second Plaintiff) The Winery Pty Ltd (Defendant) Representation: Counsel: A d'Arville (Applicant/Defendant) D Stewart (Respondent/Plaintiffs) Solicitors: Chapman Thackeray Law (Plaintiffs) Henry Davis York (Defendant) File Number(s): 2015/360681 Publication restriction: Nil Judgment 1. HIS HONOUR: By their statement of claim filed on 8 December 2015, the plaintiffs claim in excess of $1.675M alleging various breaches of the terms of a deed of settlement dated 10 June 2015. Although the plaintiffs' case is pleaded in various ways, at the heart of the claim is the allegation that the defendant sold 24,000 bottles of wine to the plaintiffs that were labelled with idiosyncratic barcodes that have effectively rendered them unsalable as the plaintiffs' product. The plaintiffs contend that, by reason of the operation of the Wine Australia Labelling Integrity Program, the wine should have been designated with a GS-1 Global Trade Identification Number unique to the 2IB Branded Wine. The barcode on the wine sold to the plaintiffs contained a GS-1 Global Trade Identification Number that was the identifier of a different wine brand. 2. The defendant maintains that there is either "reason to believe" for the purposes of UCPR 42.21 or "credible testimony" for the purposes of the Corporations Act 2001 that the plaintiffs would be unable to pay the defendant's costs if ordered to do so. The defendant's concerns about the financial position of the plaintiffs have been articulated in a letter dated 19 February 2016 from Henry Davis York to Chapman Thackeray Law in the following relevant terms: "Our client is concerned that your client does not have sufficient funds to meet any order for costs that might arise. Without being exhaustive, that concern arises from: The fact that the total share capital of both plaintiffs is $260; and We are instructed that as at March 2015 (when Domenic and Dorothy Guglielmino ceased to be directors of 2IBH) our clients were aware that the financial position of 2IBH was precarious given its only assets were bottled wine stock and the 'Two Italian Boys' trademark. We hold instructions to apply for orders that your clients provide security for its costs. In the interest of avoiding the need for that application, would you please: 1. provide us with evidence of each plaintiff's ability to satisfy an adverse costs order. This would include a copy of both companies' current financial statements and bank documents confirming the cash held by the companies; or 2. provide your clients' proposal for security." 1. The plaintiffs have now conceded "corporate impecuniosity", but oppose the making of the orders sought on discretionary grounds, namely: 1. The plaintiffs' case is so strong that security is not justified; 2. Their impecuniosity was caused by the defendant; 3. They have offered adequate security already; and 4. The quantum of the security sought by the defendant is disproportionate. 1. The first of these considerations was the subject of correspondence from Henry Davis York earlier this year. They maintained that the plaintiffs' case was "misconceived". Briefly, they contended that the GS-1 Australia Acquisitions, Mergers and Partial Purchase Fact Sheet made it clear that there is a protocol regarding the use of the GS-1 Company Prefix and associated GS-1 Identification Barcodes. That protocol provides for a period of up to one year to put in place arrangements to deal with any changes to the legal status of companies and for an acquiring company to phase out its own barcodes. Henry Davis York's letter of 29 January 2016 indicated that "[y]our client has not requested any assistance from our client in respect of the Barcodes" and that it "is ready to provide reasonable assistance in communicating with the GS-1 regarding this issue." 2. That letter also contained the following: "Claim in debt Prior to receiving the statement of claim there had been no communication between your client and our client regarding payments referred to in paragraphs 29-33 of the statement of claim. Our client requests details of all amounts received by 2IBH customers since 10 June 2015 so that any difference between payments recovered before and after 10 June 2015 by your client and our client respectively, in accordance with the Deed of Settlement, can be resolved. In all the circumstances, including those detailed above, we consider the claim to be misconceived. Please confirm within 7 days that your client will consent to an order for the proceedings to be discontinued. In which case our client would be prepared to agree that each party will pay its own costs. If your client does not consent to a discontinuance on those terms, we expect to receive instructions from our client within 14 days to make an application for your clients' claim to be struck out with indemnity costs." 1. It is apparent that the defendant did not elect to adopt that course. It is in that context that the defendant now maintains that the proceedings are "misconceived". The defendant has also contended that there are various reasons that the plaintiffs' claims are unlikely to succeed, of which "the primary example" is said to be the fact that the second plaintiff sues on a deed to which it is not a party. That theme is revived in the Henry Davis York letter of 19 February 2016. Clearly that suggestion cannot affect the viability of the claim maintained by the first plaintiff. No significant attack on its claim is evident from the correspondence. 2. The defendant has submitted that to the extent that the merits of the proceedings are relevant, "this is a matter that tends towards granting security." I am unable to agree. In particular, I have no appreciation, despite the terms of the Henry Davis York letters to which I have been referred, and the defendant's contentions about it on this application, what the defence to the claim might look like. I accept that it is appropriate to seek security at the earliest available opportunity, but in the present case I am unarmed with any material with which to assess the defendant's proposition that the plaintiffs will fail. 3. The application is supported by an affidavit of Stephen Mark Gorry sworn on 23 March 2016. Mr Gorry is the solicitor with carriage of the matter for the defendant. He deposes that the cost of preparing a defence to the statement of claim would be $23,080. That is made up as follows: HDY partner 4 hours @ $620 per hour: $2,480 HDY senior associate 15 hours @ $500 per hour: $7,500 HDY solicitor 25 hours @ $300 per hour: $7,500 Junior counsel 2 days @ $2,800: $5,600. 1. It may be that I am hampered by a less than perfect view from where I now sit, but it seems to me that $23,080 or anything like it is a somewhat extraordinary sum in the particular circumstances of this case to expend upon the preparation of what in all probability will be a document of a few pages. To start with, I have some considerable difficulty comprehending why or how junior counsel retained to settle or even draft a defence would need two days in which to complete the task. I am equally mystified at what a senior associate and a solicitor, working together or even alone, would be required to do, again in the particular circumstances of this case, to bring that document into existence for verification as the present defendant's defence. I simply do not comment upon why a supervising partner would then also need to spend four of his or her own hours reviewing the actions of 40 hours of employed solicitors' activity on the same matter. In expressing these views I note that I have had specific regard to the somewhat cryptic details of what is thought to be involved in that task referred to by Mr Gorry at paragraphs 37 and 38 of his affidavit. I acknowledge, of course, that Mr Gorry was not required for cross-examination on this application, so that at one level it seems that the plaintiffs do not apparently contest what he has said. 2. Part of the assessment of the costs anticipated by the defendant for which security is sought is the costs of a summary judgment application. That was foreshadowed in the 29 January 2016 letter. I am unaware of any steps having been taken by the defendant to follow that through. Presumably that reflects the defendant's current view that the plaintiffs' case is not amenable to summary disposal. 3. A fairer understanding of the competing merits of this case cannot in my opinion be made without a proper understanding of the defendant's position. Letters sent by the defendant's solicitor in bellicose terms unfortunately do not make the defendant's position any clearer. 4. It is apparently not in issue that the plaintiffs have insufficient resources to meet an adverse costs order. The plaintiffs maintain that that is the result of the defendant's defaults upon which the proceedings are based. It is probable, although by no means certain, that the strength or otherwise of the plaintiffs' case will emerge when the defendant has formally responded to the statement of claim. Only then will it be possible to begin to assess the plaintiffs' current allegation that its financial position is the direct result of the defendant's conduct. 5. In my opinion the time has not yet arrived when an order for security for costs should be made. The defendant should have been required to file its defence some several months ago. It is regrettable that the plaintiffs did not insist that this be done. 6. Accordingly I propose to adjourn the defendant's application to a date suitable to the parties and to me. I will direct the defendant some time before that date to file and serve its verified defence in response to the statement of claim. I will then invite the parties to make any further or other submissions that they may wish to make before finally dealing with the motion. The costs of the application will be reserved until then. 7. I will therefore do no more than direct the parties to bring in short minutes of order giving effect to these reasons. ********** 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: 23 August 2016