CATCHWORDS
PROCEDURE - COSTS - SECURITY FOR COSTS - financial position of trustee applicant - trading difficulties said to result from respondents' conduct as complained of in claim - whether court should order security for costs where trustee applicant could potentially claim indemnity for costs from trust beneficiaries or assets - beneficiaries possessing substantial assets
LEGISLATION
Trade Practices Act 1974 (Cth) ss 6, 51A, 51AA, 52
Fair Trading Act 1985 (Vic)
CASES
Bell Wholesale v Gates Export Corporation (1984) 2 FCR 1
Sant v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201
Market Facts (Qld) Pty Ltd v Peregrine Capital Australia Pty Ltd (unreported, Cooper J Federal Court of Australia 9 June 1995)
Mensutu Pty Ltd v Lissenden (1983) 8 ACLR 366
Gentry Bros Pty Ltd v Wilson Brown & Associates Pty Ltd (1982) 8 ACSR 405
Tenth Anemot v Colonial Mutual General Insurance [1993] 2 VR 48
Brundza v Robbie & Co [No 2] (1952) 88 CLR 168
CORAM: RYAN J
PLACE: MELBOURNE
DATE: 15 SEPTEMBER 1995
EPIKK INTERNATIONAL PTY LIMITED
v
AUSTRALIAN FOOTBALL LEAGUE & ORS
VG 216 of 1994
IN THE FEDERAL COURT OF AUSTRALIA )
VICTORIA DISTRICT REGISTRY ) No VG 216 of 1994
GENERAL DIVISION )
BETWEEN: EPIKK INTERNATIONAL PTY LIMITED
(ACN 053 746 982)
Applicant
AND: AUSTRALIAN FOOTBALL LEAGUE (ACN (ACN 004 155 211)
First respondent
AND: WILSON DJUKE HOLDINGS PTY LTD
(ACN 059 529 896)
Second respondent
AND: BRIAN WILSON
Third respondent
AND: THE COMMERCIAL NETWORK PTY LTD
(ACN 057 309 672)
Fourth respondent
AND: BARRY BESANKO
Fifth respondent
CORAM: RYAN J
PLACE: MELBOURNE
DATE: 15 SEPTEMBER 1995
MINUTE OF ORDERS
THE COURT ORDERS:
1. That the applicant provide in a form acceptable to the District Registrar security for the costs up to and including the first day of the trial of the application herein:
(a) of the first respondent Australian Football League in the sum of $12,000;
(b) of the second and third respondents Wilson Djuke Holdings Pty Ltd and Brian Wilson in the sum of $12,000; and
(c) of the fourth and fifth respondents The Commercial Network Pty Ltd and Barry Besanko in the sum of $12,000.
2. That the applicant's proceedings be stayed until compliance with the order for security.
3. That liberty be reserved to any party to apply on not less than 72 hours notice in writing to the other parties.
4. That the costs of all parties of the motions on notice dated 19, 22 and 28 September 1994 including the costs of the hearings on 3 and 15 November 1994 be costs in the cause.
NOTE: Entry and settlement of orders is dealt with in O 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA )
VICTORIA DISTRICT REGISTRY ) No VG 216 of 1994
GENERAL DIVISION )
BETWEEN: EPIKK INTERNATIONAL PTY LIMITED
(ACN 053 746 982)
Applicant
AND: AUSTRALIAN FOOTBALL LEAGUE (ACN (ACN 004 155 211)
First respondent
AND: WILSON DJUKE HOLDINGS PTY LTD
(ACN 059 529 896)
Second respondent
AND: BRIAN WILSON
Third respondent
AND: THE COMMERCIAL NETWORK PTY LTD
(ACN 057 309 672)
Fourth respondent
AND: BARRY BESANKO
Fifth respondent
CORAM: RYAN J
PLACE: MELBOURNE
DATE: 15 SEPTEMBER 1995
REASONS FOR JUDGMENT
RYAN J: There are before the court
three motions seeking that the applicant, Epikk International Pty Limited
("Epikk") give security for costs.
By its statement of claim, Epikk has pleaded that on 25 May 1992 it entered
into a licence agreement ("the 1992 licence agreement") with the
first respondent, the Australian Football League ("AFL"), which was
expressed to commence on 1 March 1992 and expire on 15 February 1993. It is then alleged that the AFL represented
and warranted to Epikk that the 1992 licence agreement would
operate for a term of one year only in the event that Epikk did not wish to
continue as a licensee of the AFL but would otherwise be renewed annually,
provided that Epikk did not act unreasonably and paid royalties as stipulated
in the 1992 licence agreement. It is
then pleaded that a second "1993 licence agreement" was concluded
between Epikk and the AFL to enure from 16 February 1993 to 1 March 1994. The statement of claim goes on to plead that
between September and November 1993, the AFL represented that Epikk was
authorised under the 1993 licence agreement to manufacture and distribute a
calendar displaying caricatures of AFL footballers ("the calendar")
for the 1994, and part of the 1995, calendar year. It is further alleged that between November
1993 and January 1994, the AFL represented that the 1993 licence agreement
would be renewed, but it was not, in fact, renewed. As a result it is sought to make the AFL
liable for contraventions of ss 51A, 51AA and 52 of the Trade Practices Act 1974.
Further or in the alternative, it is pleaded that there was a self-contained agreement under which Epikk was licensed to manufacture and distribute the calendar ("the AFL calendar agreement"); or that the 1993 licence agreement was varied to confer such a licence on Epikk. The licence to manufacture and distribute the calendar is alleged to have been withdrawn, as a result of which Epikk suffered damage.
As against the second respondent, Wilson Djuke Holdings Pty Ltd ("Djuke"), and the third respondent, Brian Wilson ("Wilson"), it is alleged that one or other of them represented that neither of them proposed to apply to the AFL for a licence agreement, and that Wilson had obtained indications that two major chains of retailers would make large purchases of two lines of merchandise. Those lines were "Daicos badges" and magnetic autograph books ("MAB's") which had been developed by Epikk. Those representations are alleged to have been false and made in contravention of ss 6, 51A and 52 of the Trade Practices Act or of provisions of the Fair Trading Act 1985 (Vic). It is further alleged that Djuke and Wilson or one or other of them procured a breach by the AFL of the 1993 licence agreement as varied, or of the AFL calendar agreement.
As against the fourth respondent, the Commercial Network Pty Ltd ("Commercial"), and the fifth respondent, Barry Besanko ("Besanko"), it is alleged that they had represented to the applicant that they had orders for 200,000 MAB's, or that Commercial would order 200,000 MAB's from Epikk, and that Commercial had orders for or had agreed to buy 30,000 calendars. Further representations allegedly made in this context were to the effect that Commercial and Besanko or one or other of them would provide Epikk with a letter of credit in respect of 100,000 MAB's and that Commercial had orders from three named customers for a further 240,000 MAB's. The fifth representation allegedly made by or on behalf of Commercial was that it acknowledged Epikk's exclusive right to manufacture and distribute the calendar and would not infringe that right. The various representations alleged to have been made by or on behalf of Commercial are said to have been false, and it is said to have broken the agreements which it allegedly made with Epikk. As a result of the consequential contraventions of the Trade Practices Act and the Fair Trading Act it is sought to make Commercial and Wilson liable in damages to Epikk. It is also alleged that either Commercial or Besanko procured the AFL to break the 1993 licence agreement as varied or the AFL calendar agreement.
The damages as so far particularized which Epikk claims as part of the causes of action summarized above total $3,216,632.85.
The AFL has requested a provision in the sum of $15,000 as security for its costs of the action. Those costs up to and including the first day of the trial of the action have been estimated by an experienced costs consultant at $14,749. Likewise the costs of Djuke and Wilson to the end of a ten day trial with only Junior Counsel retained have been estimated at $68,721. A similar estimate of the costs of Commercial and Besanko to the end of a ten day trial with both Senior and Junior Counsel retained amounts of $116,957.
The annual return of Epikk for the financial year ended 30 June 1992 disclosed total assets of $3,726. By the end of the following year, its assets had grown to $76,839. It is said to have liabilities of $76,799 as trustee of the D & L Krongold Family Trust in respect of the whole of which it asserts a right to be indemnified out of the trust assets. According to Mr Dennis Krongold, a director of Epikk, its principal assets are saleable stock, being licensed commodities as defined in the licence agreement having a value of $124,426 and unvalued items of sample stock.
The balance of the trust as at 30 June 1993 shows that its principal assets comprise trade debtors of $39,255.25 and loans to Leigh Krongold and Dennis Krongold of $21,984.88 and $8,735.26 respectively. Its major liabilities are trade creditors and bank overdraft amounting together to about $30,000 and a loan from Davsa Forty-Nine Pty Ltd of $46,543.91. That creditor is controlled by Dennis Krongold and Leigh Krongold. The trust saving account for year ending 30 June 1993 shows a gross trading profit of $145,245.97 and total trading profit of $50,229.41. The taxable income for the same year was $46,543 which was distributed to Krongold Ford Business Unit Trust.
The trust deed discloses that the primary beneficiaries of the trust are Dennis Krongold, Leigh Krongold and their four children. Three of those children are students, two of whom engage in part-time employment, and one, Damon, is employed overseas. Damon is registered as the proprietor of a flat in Armadale which has no registered encumbrances and was purchased in 1991 for $140,000. Two of the student children own relatively inexpensive motor cars. Mr and Mrs Krongold were divorced on 29 October 1994. Mr Krongold continues to live in a substantial home in St George's Road, Toorak for which the rent of $27,000 per annum is paid by Mr Krongold's father who is said to have supported Mr Krongold since March 1994. Mrs Krongold owns a Ford "Festiva" motor car valued at about $15,000 and Epikk owns a similar car valued at about $19,000. Another company, Zych Nominees Pty Ltd, controlled by Mr Krongold, owns a Nissan Coupe motor vehicle valued at about $80,000.
Mr Krongold has put the combined value of the assets of the shareholders in Epikk and the beneficiaries in D & L Krongold Family Trust at less than $30,000. However, in giving that evidence, Mr Krongold did not include as a beneficiary his own father who, he concedes, is comfortably well-off. Mr Krongold also accepts that Epikk would be unable immediately to comply with an order for payment of the costs of its application. However, he goes on to assert that Epikk's trading difficulties are directly attributable to the conduct of the respondents complained of in the statement of claim. He asserts that Epikk has notionally expended $260,000, being the value of management time in developing and arranging to market goods subject to the 1993 licence agreement. As well, on Mr Krongold's evidence, Epikk has unsold stock on its hands to a value of $124,426 which it is unable to sell because of the termination of the 1993 licence agreement. That is disputed by the AFL which asserts that the stock can be sold provided that its rights of intellectual property are not infringed.
I have assumed for the purpose of these applications for security that the substantive application has been brought in good faith and has an arguable prospect of success. It is clear from the evidence, and indeed, conceded on behalf of the applicant that there is reason to believe that the applicant, if unsuccessful, will be unable to pay the costs of the respondents. The applicant's income for the year ended 30 June 1993 was completely distributed and its remaining assets appear to be balanced by its outstanding liabilities.
Since the applicant is a trustee, it is appropriate to consider the extent to which it can claim an indemnity for the costs of this action out of the trust assets or from the beneficiaries under the trust. As was observed by a Full Court of this court in Bell Wholesale v Gates Export Corporation (1984) 2 FCR 1 at 4:
"His Honour [the trial judge] found that there was no reason why the persons who might benefit from the proceedings could not finance the litigation if necessary. He said:
"There is no reason to conclude that if an order for security is made the proceedings will be stifled, the applicant or those entitled to benefit under the trust will be oppressed or any public interest in the litigation of alleged breaches of the Act will be adversely affected."
The principal matter relied upon by counsel for the appellant in order to persuade us to a different conclusion was that the question of the ability of those behind the company to finance the litigation had not been the subject of evidence or argument before the primary judge. In his submission it was for the respondent to raise that matter in support of its application for security of costs. If it did not, it was not open to the judge to take into account any considerations other than the impecuniosity of the appellant and the question whether, if an order for security were made, the litigation would be stifled. We rejected this submission.
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."
See also Sant v Jet Corporation of Australia Pty Ltd (1984) 2 FCR 201.
The principle which I extract from that authority is that the court can decline to make an order for security for costs in the circumstances of the present case where it is shown that those who stand behind an impecunious corporate applicant are also without means and the general impecuniosity is arguably attributable to the conduct of the respondent.
I am not satisfied that either of those elements has been made out in the present case. Epikk is the trustee of a discretionary trust, but even if consideration be confined to the primary beneficiaries identified in the fourth part of the Schedule to the Trust Deed, it is far from clear that those beneficiaries do not have sufficient assets to provide security for the costs in issue. A company which Mr Dennis Krongold and his ex-wife control has some equity in a relatively expensive motor car and, as well, Mr Krongold seems to be able to call on his father from time to time to support a lifestyle which cannot be described as frugal. However, I do not regard as significant in the exercise of the broad, general discretion which the court has in cases of this kind the fact that Mr Krongold's father is a "general beneficiary" as refined in cl 1.2 of the Trust Deed and so capable of being an "income beneficiary" thereunder.
In the second place, no explanation has been given to the court of the consideration, if any, provided for the distribution to the Krongold Ford Business Unit Trust of the whole of Epikk's net income to the year ended 30 June 1993. If, for example, that distribution were by way of loan, that chose in action may constitute an acceptable source of the security which the respondents seek. Alternatively, the recipient of those funds is apparently itself a trustee, so the possibility cannot be ignored that the beneficiaries for which its funds are held are identical, or substantially identical, with those who stand behind Epikk.
In my view Epikk has not discharged the onus of showing that those who stand behind it have no funds to provide security and have been rendered impecunious by the conduct imputed to the respondents. As already noted, no explanation has been given of what happened to the $46,543 distributed as income of Epikk for the year ended 30 June 1993. Moreover the evidence suggests that one of the primary beneficiaries, Damon Krongold, has an unencumbered interest in a flat which could be used to provide security. Nor has the court received any indication as to how Epikk is financing its own costs of these proceedings. As well, Mr Dennis Krongold has shown in the past an ability to call on significant financial assistance from his father. Finally in this context, the evidence does not disclose, or permit the drawing of any inference as to, the financial circumstances of Mrs Leigh Krongold.
Nor do the pleadings or the present state of the evidence suggest that Epikk's existing financial resources have been depleted by the conduct of the respondents. The case can rather be assimilated to that recently described by Cooper J in Market Facts (Qld) Pty Ltd v Peregrine Capital Australia Pty Ltd (unreported 9 June 1995) where his Honour said, at p 9:
"The material does not disclose that Market Facts' present financial position has been in any significant way affected by the alleged conduct of Peregine. The complaint is that because of Peregrine's conduct, Market Facts has been denied great wealth and profits. It is not a case of conduct destroying existing wealth or profitability. The present financial position of Market Facts as revealed in the calculations of Mr Skelton shows a picture of some financial stringency brought on by circumstances other than the conduct of Peregrine."
In some
cases courts have considered the position of a respondent in litigation of this
kind to be sufficiently protected by the giving by those who stand to benefit
from the success of the action of an undertaking to make their personal assets
available to satisfy any order for costs which may be made against the
applicant; see eg Mensutu Pty Ltd v
Lissenden (1983) 8 ACLR 366. An
offer to give such an undertaking has been made on behalf of Mr Dennis Krongold
but the evidence suggests that he has few, if any, assets with which to support
the undertaking. No similar undertaking
has been offered on behalf of the remaining primary beneficiaries. In that sense the present case is to be
contrasted with Gentry Bros Pty Ltd v
Wilson Brown & Associates Pty Ltd (1992) 8 ACSR 405, where
all the shareholders who stood behind the impecunious applicant were prepared
to give a personal guarantee by way of security for the respondents' costs.
It is also significant that a liquidator of Epikk, in the event of its being wound up, would have no recourse beyond the trust assets to the beneficiaries of the Dennis and Leigh Krongold Family Trust by way of enforcing an indemnity for the costs of the present action if Epikk is unsuccessful. That is the effect of cl 21 of the trust deed which provides:
"The Trustee shall be entitled to an indemnity out of the Trust Fund for any and all liabilities which he may incur or to which he may be subject arising out of the administration of the Trust Fund and may make any contract hereby authorised in such manner that it and any liability under it shall be enforceable only against the Trust Fund and all persons firms institutions organisations or corporations extending credit to, contracting with or having any claims against the Trustee which arise in the course of the Trustee's administration of the Trust Fund shall look only to the Trust Fund for satisfaction of any such contract or claim or for the payment of any debt damages judgement or decree or any money that may otherwise become due and payable from the Trustee arising out of his administration of the Trust Fund and neither the Trustee nor any of the Beneficiaries shall be personally liable under any such contract or for any such claim."
Counsel for Epikk pointed to evidence tending to suggest that the respondents, when they entered into the contractual arrangements with Epikk with which this litigation is concerned, were aware of the structure and financial standing of the company. There is also evidence that Djuke and Wilson on the one hand and Besanko on the other were also aware in different ways of the straitened financial circumstances of Mr Dennis Krongold himself. In this regard reliance is placed on the following observation of McDonald J in Tenth Anemot v Colonial Mutual General Insurance [1993] 2 VR 48 at 55:
"The fact that the applicant on such an application as this has voluntarily entered into a contractual relationship with the respondent proprietary company is a relevant matter for the court to have regard to in determining whether it should in the exercise of its discretion grant an order for security for costs."
However, those remarks were made in a context where the contractual relationship voluntarily entered into was one of insurer and insured and the subject action was brought to enforce a right of indemnity under the policy. In that sense the litigation was a foreseeable consequence of the issue of the policy and the denial of liability thereunder. I do not regard the consideration which there weighed with McDonald J as having the same force where the applicant sues partly for loss of profits for breach of a licence agreement and partly for damages in tort for procuring a breach of an agreement of that kind.
It was
also pressed that an order for security should not be made in the face of the
offer by Epikk not to sell stock said to
be worth $124,426 which Epikk has acquired in reliance on the disputed licence
agreements or the calendar agreement.
However, there is no independent evidence of the value of that stock and
the respondents raise no objection to its immediate sale provided that the
AFL's "intellectual property rights" are not thereby infringed. The evidence does not disclose what effect
observance of that restriction would have on the sale of the stock or how
readily any AFL trademarks can be removed from the goods in question. In the circumstances, the proferred
undertaking has not caused me to exercise my discretion against the ordering of
security. I consider the
better course to be to leave Epikk to seek to sell the stock as it sees
fit. If it finds that the restriction
sought to be imposed by the AFL unduly limits the market or depresses the
prices which can be realized, application can be made for further orders
pursuant to the liberty to apply which I propose to reserve.
In the light of all the circumstances which have been canvassed in evidence and in the course of Counsel's written and oral submissions, I consider that there is a significant balance in favour of making an order for security. As Fullagar J observed of such an order in Brundza v Robbie & Co [No 2] (1952) 88 CLR 168 at 175:
"It is also material that, in ordering security for costs, the Court does not set out to give a complete and certain indemnity to a respondent: see Aberdare & Plymouth Co v Hankey (1888) 32 SJ 644. It is not, of course, to be assumed that the appellant will fail."
An appropriate amount of security for the costs of each of the AFL, Djuke and Wilson and Commercial and Besanko up to and including the first day of the trial is $12,000 making a total requirement for security of $36,000. The costs of all parties of the application for security should be costs in the cause.
I certify that this and the preceding twelve (12) pages are a true copy of the reasons for judgment of his Honour Justice Ryan
Associate:
Date:
Counsel for the applicant: Mr J Gleeson
Solicitors for the applicant: Maddock Lonie & Chisholm
Counsel for the first respondent:Mr R M Garratt
Solicitors for the first
respondent: Browne & Co
Counsel for the second and
third respondents: Mr J W S Peters
Solicitors for the second
and third respondents: Gadens Ridgeway
(succeeded by Sly & Weigall)
Counsel for the fourth and
fifth respondents: Mr J Elliot
Solicitor for the fourth and
fifth respondents: Michael Green
Hearing dates: 3, 15 November 1995
