FEDERAL COURT OF AUSTRALIA

Checked-Out Pty Ltd v Eagle Eye Inspections Pty Ltd [2001] FCA 1475

CHECKED-OUT PTY LTD v EAGLE EYE INSPECTIONS PTY LTD

N169 OF 1999

EMMETT J

21 SEPTEMBER 2001

SYDNEY

THE COURT ORDERS THAT:

1.                  The applicants provide security for the costs of the respondents by way of a charge over the land known as 45 Hassan Street, Lake Heights, in an amount of $60,000 appropriated as follows:

·                    $10,000 to the first to fifth respondents,

·                    $25,000 to the sixth to eleventh respondents,

·                    $25,000 to the twelfth respondent.

2.                  The motions filed 12 September 2001 (applicants), 2 August 2001 (1^st to 5^th respondents), 22 August 2001 (6^th to 11^th respondents) and 6 August 2001 (12^th respondent) be otherwise dismissed.

3.                  The applicants pay the costs of the notices of motion listed in Order 2, insofar as they relate to security for costs.

4.                  There be no order as to costs insofar as the motions relate to summary dismissal.

5.                  The proceeding be stayed until the further security is paid.

6.                  The matter be stood over for mention on 2 November 2001 at 9.30am.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     I have before me motions by all parties relating to security for the respondents’ costs of the proceeding.  In the proceeding, the first applicant, Checked-Out Pty Ltd (“Checked-Out”), or alternatively the second applicant, Philip Julian Hardcastle (“Mr Hardcastle”) claims to be the owner of copyright in certain software and documents.  The documents include the format of reports relating to the inspection of buildings. 

2                     The applicants claim that Mr Hardcastle had conceived and developed a method of providing and formatting building inspection reports and related documents that were of use in connection with conveyancing transactions.  The concept seems to be that Checked-Out would provide a report of an inspection of a building that was the subject of a contract for sale.  The applicants assert that the concept used computer programs and applications software written and developed by Mr Hardcastle that facilitated the rapid, efficient and economical production of reports and related documents according to a standard format.  The applicants also assert that the concept utilised a marketing strategy, devised by Mr Hardcastle, which concentrated on promoting Checked-Out’s services to firms of solicitors and conveyancers.

3                     Eagle Eye Inspections Pty Ltd (“Eagle Eye”) was registered on 13 October 1998.  The second to the fifth respondents are principals of Eagle Eye in one form or another.  The applicants assert that, through the second to fifth respondents (“the Eagle Eye principals”), Eagle Eye has infringed the applicants’ copyright, that it has knowingly taken the benefit of confidential information provided to it by the Eagle Eye principals, and that the Eagle Eye principals used their knowledge of Checked-Out’s business to entice Checked-Out’s customers.  The Eagle Eye principals have admitted breach of the fiduciary duty that they owed to Checked-Out as employees of Checked-Out.  It is common ground that certain of them were employees of Checked-Out and that, in that capacity, they engaged in business on behalf of Checked-Out with the sixth to the twelfth respondents (“the solicitor respondents”). 

4                     The solicitor respondents are partners in firms of solicitors who had dealings with Checked-Out, and subsequently with Eagle Eye, in relation to the provision of services consisting of building reports.  The sixth to eleventh respondents are represented by the same legal team. The twelfth respondent is separately represented.  The applicants assert that, following the establishment of Eagle Eye, Eagle Eye provided reports to solicitors, including the solicitor respondents, in a form that bears considerable similarity to the form of reports that had been provided by Checked-Out.  The applicants assert that the solicitor respondents participated in infringements of copyright and breach of duty by the Eagle Eye principals.  They also assert that the solicitor respondents have themselves infringed copyright by reproduction of infringing reports furnished to them.  There are also allegations of contravention of the Trade Practices Act 1974 (Cth) and the Fair Trading Act 1985 (Cth) on the part of Eagle Eye and the Eagle Eye principals. 

5                     The history of the proceeding to date is somewhat unfortunate.  The proceedings were originally commenced by Checked-Out without legal assistance.  The original application and statement of claim, prepared by Mr Hardcastle, were filed on 26 February 1999.  On 28 April 1999 the respondents sought security for costs from Lehane J who had the management of the proceeding at that stage.  They also sought to strike out the application and statement of claim.  On 3 May 1999, Lehane J ordered that the application and statement of claim be struck out but gave leave to re-plead.  On 28 June 1999 an amended application was filed.

6                     On 13 August 1999 Lehane J ordered that the amended statement of claim be struck out but that the applicant have leave to file and serve an amended application and a further amended statement of claim.  On 24 September 1999 a further amended statement of claim and an amended application were filed and served.  On 4 November 1999 Lehane J ordered that the sum of $65,000 which had been paid into court on 26 August 1999 by the applicant stand as security for the costs of all of the respondents.  His Honour concluded that it was not appropriate to order further security at that stage, but left it open to the respondents to apply at a later stage for further security – see Checked-Out Pty Ltd v Eagle Eye Inspections Pty Ltd [1999] FCA 1565 at [10] – [11].

7                     Disputes continued thereafter concerning discovery and defences.  On 14 July 2000 Lehane J ordered the solicitor respondents to inform the applicant by 21 July 2000 as to the precise grounds of their objections to the further amended statement of claim and directed that their motion to strike out the amended statement of claim be dealt with on 23 August 2000.  On 15 August 2000 his Honour directed that:

(i)                  the applicants serve on the respondents not later than 29 August 2000 a draft second amended statement of claim;

(ii)                the respondents inform the applicants by 12 September 2000 of any alleged deficiencies in the draft second further amended statement of claim. 

On 23 October 2000 a second further amended statement of claim was filed in Court pursuant to leave that his Honour then granted.  There has been no further complaint in respect of the pleading.

8                     The respondents have now applied for further security.  The applicants have applied to the Court for orders either that the existing security be discharged by repayment of the money in Court, or alternatively, for orders that the applicants be permitted to substitute as security a charge over a parcel of land.

9                     The evidence before me indicates that, whereas Mr Hardcastle was an incorporator of Checked-Out, he is no longer a shareholder of that company.  He has transferred his shares in the company by way of gift to Ms Anna Wilczak.  Ms Wilczak, therefore, is the person who stands to benefit from the success of this proceeding.  Ms Wilczak has now proffered an undertaking to the Court to accept personal liability for any order for costs that may be made against Checked-Out in the proceeding.  That undertaking was not proffered, however, until part way through the second day of the hearing of the respondents’ applications.

10                  The evidence before me indicates that if an order for costs were made against Checked-Out, Checked-Out would be unable to meet the order, although the extent of its incapacity is by no means clear.  I have no evidence as to the current financial position of Checked-Out.  The only evidence of its financial position that I have consists of income tax returns filed in respect of the years ended 30 June 1997, 1998 and 1999.  That evidence indicates that Checked-Out has always been impecunious.  As at 30 June 1997, there was a deficiency in its shareholders’ funds of $106,963.  In the period ended on that date it incurred losses of $36,036.  Its net losses carried forward as at that date amounted to $76,622.  As at 30 June 1998 Checked-Out had a deficiency in shareholders’ funds of $99,812, having derived a profit during that period of $12,681, leaving losses carried forward of $63,941.  As at 30 June 1999 Checked-Out’s shareholders’ funds deficiency had been reduced to $94,524.  In the period ended on 30 June 1999 it derived a profit of $5,088, giving it losses carried forward of $58,853.

11                  Checked-Out’s business during those three years generated significant income.  Its gross income for the year ended 30 June 1997 was $249,781.  That increased to $302,613 for the year ended 30 June 1998 but reduced to $216,506 for the year ended 30 June 1999.  The reduction in turnover and profit for the year ended 30 June 1999 is, so it is asserted, attributable to the conduct of the respondents about which complaint is made in the proceeding.

12                  I have no evidence as to the nature of the liabilities of Checked-Out as at the three dates relevant to the income tax returns.  Its current liabilities for the three years were shown in its tax return as $176,000, $188,787 and $136,525 respectively.  Each of those amounts is shown as an estimate.  It is said that substantial parts of those liabilities are advances paid to Checked-Out by Mr Hardcastle.  However, the evidence concerning that is not clear. 

13                  There is evidence that in about July 1989, Mr Hardcastle received a sum of some $270,000 following settlement of proceedings between him and his former wife in the Family Court of Australia.  He said that he offered that sum to Ms Wilczak to allow Checked-Out to retain legal representation to conduct this proceeding since he was aware, so he said, that Checked-Out lacked the financial means to conduct the proceeding.

14                  On 6 August 1999 Ms Wilczak deposited the sum of $270,001 into a bank account of Checked-Out with the Commonwealth Bank of Australia.  Mr Hardcastle says that payment was made to him as an unsecured loan to Checked-Out.  He also says it was his intention that the moneys were to be used to assist Ms Wilczak.  He said that he was aware that she had invested her savings in Checked-Out and had obtained loans to develop the business. 

15                  Mr Hardcastle says that the money so advanced to Checked-Out, and the $35,000 realised from the sale of part of the Checked-Out business, has been expended.  It seems Checked-Out also obtained a NewStart Allowance between November 2000 and July 2001 of $5400.  Thus there is evidence that from July 1999 to August 2001 Checked-Out received out additional cash funds of some $310,000.  The whole of that sum has, according to Mr Hardcastle’s evidence, been expended as follows:

·        $23,000 in discharging personal debts;

·        $41,000 in legal expenses to the solicitors presently acting for the applicants;

·        $24,000 in discharging of personal debts of Ms Wilczak;

·        $12,000 in discharging the liabilities of Checked-Out;

·        $65,000 paid into the Federal Court by way of security for costs;

·        $65,000 in the acquisition of a parcel of land situated at 45 Hassan Street, Lake Heights;

·        $1000 in a loan to Mr Hardcastle’s sister;

·        $54,000 in living expenses on behalf of Mr Hardcastle and Ms Wilczak;

·        over $26,000 in the pursuit of other apparently thus far unsuccessful business enterprises. 

It is not clear whether those enterprises are enterprises of Mr Hardcastle, Ms Wilczak or of Checked‑Out.

16                  Mr Hardcastle has not been in outside employment since 1996.  He says that is because it has been necessary for him to concentrate on his personal affairs, including a proceeding against “the AMT Group”.  He also says that he has been working on a number of projects and commercial ventures, none of which has yet come to fruition.  I have no evidence as to whether Ms Wilczak has been employed other than by Checked-Out during that period.

17                  It is clear that the respondents have incurred significant costs to date in relation to the conduct of the proceeding.  Some part of those costs has been incurred in relation to the defective pleading that can be laid at the feet of Mr Hardcastle.  The evidence before me, however, does not enable me to determine how much of the costs that have been incurred by the respondents to date would be recoverable from the applicants either pursuant to any orders for costs that have already been made, or pursuant to any orders for costs that might be made in the future.

18                  The inference I would draw is that Checked-Out does not presently have funds that would enable it to conduct the litigation without support from Mr Hardcastle and Ms Wilczak or from some other outside source.  The application on behalf of the respondents for further security is made on the basis that Checked-Out would not be able to meet an order for costs against it if one were made.  The Court is authorised to make an order for security both under the Corporations Law and under the Federal Court Rules.

19                  In administering the policy reflected in the provisions of the Corporations Law and the rules concerning impecunious corporate applicants or plaintiffs, it is necessary for the Court to be concerned to achieve a balance between ensuring that adequate and fair protection is provided to a defendant or respondent on the one hand, and avoiding injustice to impecunious companies by unnecessarily shutting them out or prejudicing them in the conduct of litigation on the other. 

20                  Ordinarily, the discretion conferred on the Court would be exercised so as to protect a defendant sued by an impecunious company.  However, if the Court in any case takes the view that such protection for a defendant or respondent should not be afforded, the Court has an unlimited and unrestricted discretion.  Nevertheless, the discretion would be exercised with a predisposition in favour of defendants and respondents. 

21                  One circumstance where courts have declined to order security is where it is shown that the impecuniosity of a corporate applicant or plaintiff has been caused by the conduct complained of.  The principle is that is would be unjust and unfair to deprive a corporate applicant or plaintiff of the opportunity of redressing a wrong where the inability of the corporate claimant to provide security for costs is the result of the conduct of the respondents or defendants complained of. 

22                  That principle does not appear to me to have any application in the present case.  If Checked-Out and Mr Hardcastle’s claims are established, they could well be entitled to recover substantial damages or an account of profits from Eagle Eye and the Eagle Eye principals.  They may also be able to recover damages and possibly an account of profits from the solicitor respondents.  However, in so far as Checked-Out is impecunious, its impecuniosity has not been caused by the conduct alleged.  From the figures that I have already cited, it is clear that Checked-Out has been impecunious (in the sense of having a substantial deficiency in shareholders funds) since before July 1996.  Its position improved a little in the following three years.  It may well be that it would have even improved further but for the conduct complained of, although that is not entirely clear.

23                  Assuming, however, that an inference can be drawn in favour of Eagle Eye to that effect, one cannot conclude that the present impecuniosity of Eagle Eye has been caused or even exacerbated by the conduct complained of.  The most that can be said is that Checked-Out has been deprived of the opportunity of overcoming its impecuniosity by generating profits that might have made up the deficiency in its shareholders funds. 

24                  The conduct of the proceeding has been delayed significantly by the pleading deficiencies of the applicants.  During that time, funds that were available to Checked-Out have been expended in the way that I have described.  Those funds could have been made available for legal expenses or for security.  More significantly, they could have been made available for legal expenses for the conduct of this litigation on behalf of the applicants in the future.  Mr Hardcastle, however, has preferred to pursue his activities as an inventor.  As I have said, I have no evidence as to Ms Wilczak’s employment.

25                  The parcel of land that has been purchased with the funds that have been lent to Checked-Out is apparently owned by Mr Hardcastle and Ms Wilczak jointly.  It has a present value of approximately $75,000.  At one level, the application by Checked-Out and Mr Hardcastle is for return of the sum of $65,000 and interest that has accrued on that sum while in Court, and the substitution of the parcel of land. 

26                  I do not see any reason at all to depart from the view expressed by Lehane J in making the order that it was appropriate for security to be given in the sum of $65,000.  His Honour did not preclude a subsequent application at an appropriate time.  There is no suggestion that the notices of motion before me have been brought prematurely or indeed brought late.  It is likely that a substantial part of the money presently in Court has been consumed by costs incurred by the respondents to date although, as I have said, the evidence is unsatisfactory as to the quantum.  I do not see any reason why the security should be reduced or why the applicants in the circumstances that I have described should be given leave to substitute a charge on the land by way of security.

27                  On the other hand, the proceeding has now reached the stage where substantial further costs are going to be incurred by the respondents in the preparation for trial.  In that regard some consideration is perhaps appropriate to the merits of the respective claims against the Eagle Eye principals on the one hand and the solicitor respondents on the other.  As I have said, there have been admissions by certain of the Eagle Eye principals of breach of duty, although the quantification of any damages or an account of profits in relation to the admitted breaches remains yet to be determined.

28                  One concern is that the position of the solicitor respondents is by no means certain. The claim against them is, in effect, that they were in a position where they should have known that Eagle Eye and the Eagle Eye principals had engaged in contravention of the rights of Checked-Out and Mr Hardcastle. The assertion is that all of the solicitor respondents at much the same time switched allegiance from Checked-Out to Eagle Eye as soon as Eagle Eye was established, knowing that the principals of Eagle Eye were former employees of Checked-Out.  The applicants assert that it would have been apparent to them, had they looked, that the format of building reports being provided by Eagle Eye was substantially similar to the format of reports that had previously been provided by Checked-Out.  Indeed, it is clear that there has been a copying, even to the extent of grammatical errors. 

29                  Whether that constitutes infringement and whether or not there was copyright in the first place in the material is not to the point at this stage.  Assuming, however, that there is a case against Eagle Eye and the Eagle Eye principals, and the material that I have seen certainly suggests that an inference to that effect could be drawn, the claim against the solicitor respondents is much weaker on the material that I have seen than the claim against Eagle Eye and the Eagle Eye principals. 

30                  That is a factor that, it seems to me, I can take into account in determining whether or not security should be ordered against the applicants in circumstances where to do so could conceivably stultify the proceeding.  Because I have no information as to the capacity of Mr Hardcastle or Ms Wilczak to earn income, I am not able to conclude that the ordering of further security of a reasonable sum would necessarily impede the conduct of the proceeding.

31                  In the circumstances, I consider that it would be appropriate to require additional security to be given for the costs of the respondents by way of charge over the land to which I have referred in a form satisfactory to the Registrar.  The amount of that additional security should be for $10,000 in favour of Eagle Eye and Eagle Eye principals and $25,000 in relation to each separately represented solicitor respondent.

32                  The amounts of that additional security are provisional pending any further application by either party on proper evidence to show what is the likely quantum of costs that have been incurred to date that would be the subject of an order for costs against the applicants.  If the respondents wish to put on proper evidence as to those matters then I would consider varying the order.  On the other hand, if the applicants wished to show that there is still substantial security available in the sum of money that is already there, then I would consider a variation the other way.

33                  It is not entirely clear why the twelfth respondent requires separate representation.  I would regard it as open to the applicants to demonstrate that there should be no separate security in respect of the twelfth respondent.  Prima facie, however, each of the respondents is entitled to separate representation.  Unless it is shown that the separate representation is unreasonable, there is no reason why I should interfere with the decision of the twelfth respondent to have separate representation.

Associate:

Dated:              22 October 2001