FEDERAL COURT OF AUSTRALIA

PRACTICE AND PROCEDURE - security for costs - where applicant company has limited assets - shareholders of applicant company are likely to fund the litigation and will be the true beneficiaries of the company’s business and of the litigation - whether a factor in favour of exercising discretion to order security - whether factors weighing against an order for security are relevant to discretion to discount amount of security ordered.

Corporations Law, s1335

Federal Court of Australia Act 1976 (Cth), s 56

Pasdale Pty Ltd v Concrete Constructions (1995) 131 ALR 268

Petite Pty Ltd v Byrd Smith and Associates (Supreme Court of Victoria, Beach J, 23 April 1996, unreported)

Robust Software v Mann Judd Reis Pty Ltd (Federal Court of Australia, Merkel J, 11 February 1997, unreported).

Deltrend Pty Ltd v AST Australia Pty Ltd (1995) 16 ACSR 762

ACOHS PTY LTD V MERCK PTY LTD AND ORS

VG 75 OF 1997

MERKEL J

MELBOURNE

20 JUNE 1997

MINUTES OF ORDER

THE COURT ORDERS THAT:

1.         Within 21 days, the applicant, ACOHS Pty Ltd, give security for costs of the respondents, Merck Pty Ltd; Michael Culver and Rick Biezen in the sum of $50,000 in the form of bank guarantee, cash or such other form of which the Registrar approves.

2.         Liberty to apply is reserved generally but in particular for a variation of these orders in accordance with reasons for judgment delivered on 20 June 1997.

3.         Reserve costs.

EX TEMPORE REASONS FOR JUDGMENT

In this matter the applicant has issued proceedings against the respondents for infringement of copyright, misuse of confidential information and breach of the terms of a licence in relation to certain software programs.  The respondents have denied all liability in respect of the claims.  The first, fourth and fifth respondents have applied for security for costs.  The application for security for costs was made in reliance on s 1335 of the Corporations Law and s 56 of the Federal Court of Australia Act 1976 (Cth), and incidentally on O 28, r 3(1) of the Federal Court Rules.

The parties are in dispute as to whether the threshold required under the Corporations Law and for the exercise of my discretion has been met.  In substance, the threshold requires that there be credible testimony that there is reason to believe that the applicant will be unable to pay the costs of the respondents if the respondents are successful in their defence.  The evidence is not altogether satisfactory on this issue.  The applicant's evidence is that it has a successful, ongoing business which has been, and is fully able, to pay its own way.  The latest figures suggest that the business has an excess of assets over liabilities of some $160,000 without taking into account good-will.  I am satisfied that the good-will has some value, but I am not satisfied that that value would accord with the estimate given in the evidence of some $500,000.

The real problem is that the costs that the applicant is likely to incur in conducting the proceedings will have to be borrowed, thereby increasing its current liabilities.  That will have the probable consequence of placing it in a position where the threshold is met.  In all the circumstances I am satisfied on the totality of the evidence, particularly having regard to the likely costs of the litigation on both sides which will be considerable, that the threshold is met in the present case.  However a contributing, but not necessarily the sole, factor in that threshold being met is that the applicant will incur significant costs in contesting the proceedings which will add considerably to its indebtedness.  I regard that as a factor I am able to take into account in relation to the threshold and, when it comes to the exercise of the discretion, it is also a matter that weighs in the applicant's favour against the ordering of security.  I will return to that matter later.

The discretion I exercise is one that I approach without a predisposition either way.  In exercising the discretion I am required to have regard to all the circumstances of the case.  In the applicant's favour, against the ordering of security, are the following factors:

(a)        its evidence, as yet untested, is that it has a very strong case for relief;

(b)        the risk that a cost order will not be met is not a strong one;

(c)        in large part that risk is attributable to the costs that the applicant will incur in contesting the proceeding;

(d)        if the applicant was required to provide security out of its own finances that might effectively shut it out of the proceeding with the result that the order for security for costs would work in a way that is unduly or unfairly oppressive.

The main contention put forward by the respondents, which I regard as their strongest ground for the ordering of security, is that the shareholders of the applicant are the real beneficiaries of any litigation and of the applicant's business.  Further, the respondents contend that I ought to assume that for that reason those shareholders are likely to have a significant role in funding the litigation, and if they are able to fund the litigation, in the absence of evidence to the contrary, they will be able to meet any order for security for costs.

Consequently it is said that:

(a)        I cannot assume that an order for security for costs will stifle the litigation; and

(b)        those who seek to benefit from the litigation in a commercial sense, if not in a legal          sense, ought not to be free of the burden of the costs of the litigation in the event that           the litigation fails.

In my view there is considerable substance in the respondent's arguments on this point.  There is no evidence before me as to the financial circumstances of the two shareholders in question, being Linset Pty Ltd, which owns 99 of the 100 issued shares in the applicant, and Mr Ian Cowie who owns the other share and is a director of the applicant.

I raised my concerns on this issue with counsel for the applicant in the course of argument and he quite properly conceded that there was no evidence upon which I could act which would lead to the conclusion that an order for security for costs would not be met or to the conclusion that such an order would necessarily stifle the litigation.  No application was made for further evidence to be filed to establish that Linset Pty Ltd or Mr Cowie would not be able to meet an order for security for costs, nor was any evidence adduced which suggested that it would be unfair for them to be required to meet such an order.  In those circumstances, at this stage, I am not prepared to form the view that a costs order would stifle litigation or would result in injustice to the applicant.

I should say that there are other instances where this Court and other courts have held that where litigation is being conducted for the benefit, in a commercial sense, of interests behind an applicant, then that is a factor that weighs strongly in favour of exercising the discretion to order security for costs: see Pasdale Pty Ltd v Concrete Constructions (1995) 131 ALR 268; Petite Pty Ltd v Byrd Smith and Associates, (Supreme Court of Victoria, Beach J, 23 April 1996, unreported); Robust Software v Mann Judd Reis Pty Ltd (Federal Court of Australia, Merkel J, 11 February 1997, unreported).  In each of these cases the fact that there were persons behind the applicant company who were likely to benefit from the litigation and who appeared to be in a position to provide the necessary security weighed heavily in favour of the exercise of the discretion to grant security for costs.  No instance has been presented to me where, in similar circumstances, security for costs has been refused. 

Accordingly, for those reasons it is my view that those seeking to benefit from the proceeding ought not to be able to do so without bearing some risk in respect of the costs incurred by the respondents in contesting the proceeding.  However, although I have concluded that I could not be satisfied at this stage that the ordering of security would be likely to stifle litigation, I am satisfied that in having regard to the amount of security that I should order, I should have regard to the factors which otherwise would have weighed against the granting of security by discounting the amount of security that might otherwise be appropriate; see Deltrend Pty Ltd v AST Australia Pty Ltd (1995) 16 ACSR 762, where, at 764 Burchett J considered that factors relevant to the discretion whether security should not be ordered are also relevant to the question of whether the amount should be discounted by reason of those factors.

There is an additional matter which enables me to do justice between the parties in relation to the ordering of security.  I propose to reserve liberty to either party to apply in the future to either release the security which I propose to order, or for the grant of further security in the light of the evidence then to be adduced.

I refer to the possibility of releasing the security if it later appears that the application for security was part of an endeavour to stifle the litigation.  That may arise if the evidence that is sought to be adduced in defence of the proceeding is shown to be without substance, as the applicant has contended before me today.  I use that only as an example and do not say that it is definitive of other instances that might arise.  In other words, I believe that justice can be done by affording the applicant an opportunity to apply for the release of security if events arise hereafter that make it just that that should occur.

I also refer to the possibility of further security being ordered on the basis of evidence that will better enable me to determine what is an appropriate amount for security for costs in the light of the matters that will be tried and the length of the trial, as well as the costs involved.  Suggestions have been made that a number of overseas witnesses will be required, that there will be expert evidence and that the evidence at trial will be both complex and voluminous.  At this stage I am not prepared to make any assumptions about any of those matters.  It seems appropriate that the preferable course is for me to await the outcome of such matters in the light of the evidence to be adduced. 

In those circumstances, it seems to me that I can allow the issue of security to be raised again at a later point of time after the completion of interlocutory directions and after the completion of the filing of evidence. An appropriate time might be when I fix the matter for trial and give directions as to the manner, mode and place of trial.

In all the circumstances I propose to order that there be security in the sum of $50,000 and I propose to reserve the costs of the present application.

I certify that this and the preceding three

(3) pages are a true copy of the Reasons

for Judgment herein of the Honourable

Justice Merkel.

Associate:

Date:

Counsel for the Applicant:                                 Mr P Fox

Solicitor for the Applicant:                                 Mulcahy Mendelson & Round

Counsel for the First, Fourth &

Fifth Respondents:                                            Mr J D Wilson

Solicitor for the First, Fourth &

Fifth Respondents:                                            Mallesons Stephen Jacques

Date of Hearing:                                               20 June 1997