FEDERAL COURT OF AUSTRALIA

MHG Plastic Industries Pty Ltd v Quality Assurance Services Pty Limited [2002] FCA 821

PRACTICE & PROCEDURE – Applications for security for costs – whether respondents at risk of costs orders not being met – whether discretion to order security should be exercised in favour of respondents.

Trade Practices Act 1974 (Cth), s 65C(1)(a)

Corporations Act 2001 (Cth), s 1335

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

Corporations Law, s 436A

Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, cited.

Beach Petroleum NL v Johnson (1992) 10 ACLC 525, followed.

Equity Access Ltd v Westpac Banking Ltd [1989] ATPR 40-972, followed.

P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321, cited.

BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857, followed.

Reches v Tadiran (1998) 85 FCR 514, cited.

Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467, cited.

Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68, cited.

MHG PLASTIC INDUSTRIES PTY LTD v QUALITY ASSURANCE SERVICES PTY LIMITED & ANOR

N 390 OF 2001

SACKVILLE J

SYDNEY

28 JUNE 2002

THE COURT ORDERS THAT:

1.                  The applicant provide security for costs to the first respondent, in the form of a bank guarantee from an Australian trading bank in favour of the first respondent, or in such other form as may be approved by a Registrar of the Court, in the sum of $50,000.00.

2.                  The bank guarantee be provided within twenty-eight days.

3.                  If the applicant fails to provide security for costs in accordance with Order 1 within twenty-eight days, the proceedings against the first respondent be stayed.

4.                  Note that Order 1 is intended to provide interim security and that the first respondent is at liberty to apply for additional security, provided that no such application shall be made, except with the leave of the Court, until discovery by the applicant and the first respondent has been completed and inspection has taken place.

5.                  Liberty to apply on 72 hours notice.

6.                  The applicant pay the first respondent’s costs of the motion for security filed on 15 February 2002.

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

THE COURT ORDERS THAT:

1.        The applicant provide security for costs to the second respondent, in the form of a bank guarantee from an Australian trading bank in favour of the second respondent, or in such other form as may be approved by a Registrar of the Court, in the sum of $35,000.00.

2.      The bank guarantee be provided within twenty-eight days.

3.      If the applicant fails to provide security for costs in accordance with Order 1 within twenty-eight days, the proceedings against the second respondent be stayed.

4.      Note that Order 1 is intended to provide interim security and that the second respondent is at liberty to apply for additional security, provided that no such application shall be made, except with the leave of the Court, until discovery by the applicant and the second respondent has been completed and inspection has taken place.

5.      Liberty to apply on 72 hours notice.

6.      The applicant pay the second respondent’s costs of the motion for security filed on 15 February 2002.

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

REASONS FOR JUDGMENT

1                     The first and second respondents (“Quality Assurance” and “RTA”, respectively) have each filed a motion seeking an order that the applicant (“MHG”) provide interim security for costs in the sum of $75,000.

background

The Earlier Proceedings

2                     Some background is necessary.  In early 1999, the Australian Competition and Consumer Commission (“ACCC”) instituted proceedings against MHG seeking declarations that the supply in trade or commerce of certain protective helmets manufactured by MHG would contravene s 65C(1)(a) of the Trade Practices Act 1974 (Cth) (“TP Act”).  The ACCC also sought orders restraining MHG from supplying the helmets.  Section 65C(1)(a) of the TP Act prohibits a corporation, in trade or commerce, supplying goods that are intended to be used by a consumer, if the goods are of a kind in respect of which there is a prescribed consumer product safety standard and the goods do not comply with that standard.

3                     After a three day hearing, the trial Judge delivered a judgment on 15 June 1999 in which he found that three models of motor cycle helmets manufactured by MHG since 1996 – nearly 51,000 helmets in all – did not comply with the relevant Australian standard.  On 13 July 1999, his Honour made declarations to that effect, and also made a declaration that MHG had contravened s 65C(1)(a) of the TP Act.  The trial Judge made consequential orders obliging MHG to give public notice of the Court’s determination and to refund to purchasers of the helmets the price they paid for them and to use its best endeavours to recover all helmets distributed by it.

4                     MHG appealed to the Full Court.  In a judgment delivered on 9 August 2000, the Full Court allowed the appeal and set aside the orders made by the trial Judge.  By orders made on 12 October 2000, the ACCC was ordered to pay MHG’s costs of and incidental to the proceedings at first instance.  Subject to one minor qualification, the ACCC was also ordered to pay to MHG its costs of and incidental to the appeal.

The Present Proceedings

5                     The present proceedings were commenced in this Court on 13 June 2001.  MHG alleges, inter alia, that the RTA, through its commercial business unit known as “Crashlab”, improperly conducted tests on MHG’s helmets for the purpose of determining whether they complied with the relevant Australian standard.  MHG claims that the tests were carried out negligently and that the Court had relied on the test reports by the RTA in making the orders at first instance that were ultimately set aside on appeal.

6                     MHG further alleges that it was unable to sell helmets in Australia that did not bear a StandardsMark under a scheme administered by Quality Assurance (formerly a division of the Standards Association of Australia).  MHG claims that Quality Assurance, on the basis of the RTA’s Crashlab test reports, purported to suspend the licence pursuant to which MHG was permitted to use the StandardsMark.  MHG alleges that the purported suspension of the licence was in breach of various duties owed by the RTA to MHG.

7                     MHG says that it is entitled to damages from each of the RTA and Quality Assurance in respect of its losses, including the following:

• the advertising costs associated with the recall of the helmets ordered by the Court in July 1999;
• the irrecoverable costs of the proceedings instituted by the ACCC, ultimately resolved by MHG’s successful appeal;
• the costs of the administration of MHG which were incurred followed the execution by MHG of a Deed of Company Arrangement on 3 September 1999;
• the loss of business, reputation and goodwill flowing from the orders of the Court made in July 1999; and
• the disposal by MHG of its assets to a related company “in order to avoid insolvency and in an attempt to trade”.

reasoning

the threshold question

8                     The RTA and Quality Assurance rely on s 1335 of the Corporations Act 2001 (Cth) (“Corporations Act”) and s 56 of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”) as the sources of power to make the orders for security for costs.  Section 1335(1) of the Corporations Act provides as follows:

“Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, 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, require sufficient security to be given for those costs and stay all proceedings until the security is given.”

Section 56 of the Federal Court Act is relevantly in the following terms:

“(1)     The Court or a Judge may order an applicant in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him or her.

  (2)     The security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs.”

9                     Section 56(1) of the Federal Court Act and s 1335(1) of the Corporations Act are alternative sources of power for the making of an order for security for costs: Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1, at 3, per curiam.  Unlike s 1335(1) of the Corporations Act, s 56(1) of the Federal Court Act does not expressly require “credible testimony that there is reason to believe that the corporation will be unable to pay the costs of [the respondent] if successful in his defence”.  Nonetheless, both Mr Simpkins SC, who appeared with Mr Manousaridis for the RTA, and Mr Leopold, who appeared for Quality Assurance, were content to proceed on the basis that the respondents to the proceedings had to satisfy the requirement laid down by s 1335(1) before the discretion to order security for costs is enlivened.

10                  Section 1335(1) of the Corporations Act does not require proof that the applicant corporation will be unable to pay the respondent’s costs if the action fails.  The approach to be taken was explained by von Doussa J in Beach Petroleum NL v Johnson (1992) 10 ACLC 525, at 527, as follows:

In my opinion the power of the Court under s 1335 arises if credible evidence establishes that there is reason to believe there is a real chance that in events which can fairly be described as reasonably possible the plaintiff corporation will be unable to pay the costs of the defendant on service of the allocatur, if judgment goes against it.  This will be so even if in other events which can also be fairly described as reasonably possible the plaintiff corporation would be able to pay the costs.  The degree of likelihood of the plaintiff corporation being unable to pay the costs along with all the circumstances, actual and possible, about its financial position, would be then to be taken into account in the exercise of the discretion, and in framing the orders of the Court if the decision is to order security.”

11                  In order to determine whether the respondents have satisfied the threshold requirement imposed by s 1335(1) of the Corporations Act, as considered by von Doussa J in Beach Petroleum v Johnson, some further background is necessary.

12                  On 30 July 1999, MHG assigned its assets at going concern values, amounting to $3.2 million, to a newly incorporated company, MHG Plastic Industries (Vic) Pty Ltd (“MHG (Vic)”).  It appears that the consideration took the form of MHG (Vic) taking over portion of MHG’s indebtedness to the parent company of the group.  According to Mr Haritos, a director of MHG, the transfer of assets was designed to preserve the component manufacturing business conducted by MHG (constituting the bulk of its operations) and to protect the jobs of 87 employees engaged in that business.

13                  On 2 August 1999, the board of MHG resolved, pursuant to s 436A of the Corporations Law as then in force, to appoint an administrator.  In consequence of that resolution, a deed of company arrangement was executed on 3 September 1999.  The deed was terminated on 16 February 2001 “by reason of it having been wholly effectuated”.

14                  It was common ground that MHG is not currently trading.  Indeed, it does not appear to have traded since it assigned its assets to MHG (Vic).  MHG’s financial report for the year ended 30 June 2001, the latest period for which a statement is available, indicates that it had at that time net assets of $894,970.  However, its only asset consisted of the costs orders made by the Full Court on 9 August 2000 awarding costs in favour of MHG against the ACCC.  The financial report valued this asset at $1,264,674.  The conclusion that MHG had a surplus of assets over liabilities as at 30 June 2001 is therefore wholly dependent on the value attributed to the costs orders.

15                  I should interpose that the evidence establishes that the costs incurred by MHG in the current proceedings have not been met by it, but by its parent company, MHG Corporation Pty Ltd (“MHG Corporation”).  The costs paid in this manner total at least $117,000.  There was no direct evidence as to how these payments were treated in the accounts of MHG, but I would infer that they have been, or at least could be, treated as increasing the indebtedness of MHG to the parent company.  If they are so treated, the effect would be to increase the liabilities of MHG as recorded in the 2001 financial report.  Since MHG chose not to adduce up to date evidence of its financial position, I can more readily draw the inference that the indebtedness to the parent company has increased since 30 June 2001 by at least $117,000.

16                  It seems extraordinary that a case which took four hearing days at trial (allowing for argument about the form of orders) and one day on appeal should result in a costs order in favour of one party amounting, on a party and party basis, to $1.26 million (the amount recorded in MHG’s 2001 financial report).  The explanation for this apparently extraordinary state of affairs is that many of the items claimed by MHG as party and party costs recoverable from the ACCC are unlikely to be allowed on a taxation.  The evidence of Ms Vine-Hall, a costs consultant, identified a number of very large items which fall into this category.  It is inappropriate, having regard to the fact that the taxation is yet to take place, to analyse the bill of costs submitted by MHG item by item.  It is enough to say that on the evidence before me, it is unlikely that the amount allowed on taxation will be significantly more than MHG’s current liabilities (that is, the liabilities of $369,704 recorded in MHG’s 2001 financial report and any increase in liabilities since 30 June 2001).

17                  In my opinion, the respondents have shown by credible evidence that there is reason to believe that MHG will be unable to pay the costs of each of them should they be successful in their respective defences.  In reaching this conclusion, I have taken into account evidence indicating that costs orders in favour of the respondents, should they succeed in the proceedings, are likely to be for substantial amounts.  Indeed, on the evidence, taking into account the costs that MHG will itself incur in pursuing the proceedings, I would say it is probable that MHG will be unable to pay the respondents’ costs should they succeed in obtaining costs orders against MHG in the current litigation.

discretionary considerations

18                  There was no dispute that the matters appropriate for consideration in relation to the discretion conferred by s 1335(1) of the Corporations Act and s 56(1) of the Federal Court Act include the six matters identified by Hill J in Equity Access Ltd v Westpac Banking Ltd [1989] ATPR 40-972, at 50,635, as follows:

“·   the chances of success of the applicant; whether the applicant’s claim is bona fide or a sham;

·        the quantum of risk that the applicant cannot satisfy a cost order;

·        whether use of the power would shut out a small company from making a genuine claim against a large company, i.e. is the power being used oppressively;

·        whether the impecuniosity arises out of the [act] in respect to which relief is sought;

·        whether there are aspects of public interest which weigh in the balance against the making of an order;

·        whether there are any particular discretionary matters peculiar to the circumstances of the case.”

It is convenient to consider each of these matters in turn. 

MHG’s Chances of Success

19                  Mr Simpkins and Mr Leopold properly accepted that MHG’s claim was bona fide and that it must be regarded as having an arguable case against each of the respondents.  It is neither feasible nor appropriate for me at this stage of the litigation to attempt to be more precise about MHG’s prospects of success.

The Quantum of Risk

20                  For the reasons I have given, I think that it is unlikely that MHG will be able to satisfy any costs order made against it in the current proceedings, should the respondents ultimately succeed.  There is nothing in the evidence to suggest that its financial position will improve between now and the conclusion of the proceedings.

Whether MHG Will Be Shut Out From Making a Genuine Claim

21                  The onus is on MHG to establish that those who stand behind it and who will benefit from the litigation if it is successful, whether they be shareholders or creditors, lack the means to finance the litigation.  As was said in Bell Wholesale v Gates Export Corporation, at 4:

“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 P S Chellaram & Co Ltd v China Ocean Shipping Co (1991) 102 ALR 321, at 323, per McHugh J.

22                  In this case, MHG Corporation, the parent company of MHG will benefit from the litigation, should MHG succeed, both in its capacity as shareholder and as a creditor of MHG.  MHG has not established that the granting of security will frustrate the litigation.  On the contrary, I would infer from the fact that MHG Corporation has funded the litigation thus far and from the fact that MHG chose not to adduce evidence as to the financial position of MHG Corporation, the parent company, or those standing behind it, will be able to meet orders for security and will continue to fund the litigation.  It follows that I am not satisfied that MHG will be shut out from pursuing the litigation if orders requiring MHG to provide security for costs are made.

Whether MHG’s Impecuniosity Arose out of the Actions of the Respondents

23                  The parties were in dispute on this issue.  The respondents submitted that MHG’s financial position was so parlous immediately before the declaration and orders were made by the trial Judge in June 1999, that its impecuniosity cannot be attributed to the conduct alleged against the respondents.  It was also submitted that the board of MHG voluntarily appointed the administrator and assigned MHG’s assets to MHG (Vic) and that the consequences of these acts could not be laid at the respondents’ door.

24                  Although the evidence is by no means clear, I am inclined to think that the alleged conduct of the respondents (assuming the allegations can be made out) is partly responsible for MHG’s current financial position.  It is true that MHG incurred very large losses in each of its last three trading years (the years ended 30 June 1997, 30 June 1998 and 30 June 1999).  It is possible that the losses would have continued independently of the costs incurred by MHG in complying with the Court orders.  However, a significant portion of these losses was attributable to abnormal items, including relocation expenses and the estimated cost of the helmet recall (an estimate which proved to be very much overstated).  If abnormal expenses for the 1999 year, all of which seem to be attributable to the June 1999 Court orders, are disregarded, MHG seems to have had a surplus of assets over liabilities of some $600,000 at 30 June 1999.  This would suggest that the effect of the Court orders was to eliminate the surplus that otherwise presumably would have been available to fund MHG’s operations.  Contrary to the respondents’ submissions, there is no basis in the evidence for concluding that the appointment of the administrator and the transfer of assets were anything other than reasonable and appropriate steps in the light of the Court orders and the likely commercial consequences of those orders. 

25                  The conclusion that MHG’s impecuniosity was in part the result of the conduct alleged against the respondent does not mean that the applications for security for costs must fail.  In BPM Pty Ltd v HPM Pty Ltd (1996) 14 ACLC 857 (S Ct WA), the Court considered the significance, for the purposes of an application for security for costs, of a finding that the defendant had caused the plight of the plaintiff company.  Anderson J, with whom Kennedy and Ipp JJ agreed, doubted that this factor can be taken in isolation.  He said (at 862) that it

“must be considered together with the assertion that the effect on the plaintiff of an order for security will be to stultify the action.  If that will not be or is not shown to be the effect of the order, that is, if other parties who will benefit from the plaintiff’s success are financially able to provide the security and it is reasonable that they do so, the fact that the defendant has caused the plaintiff’s own impecuniosity will hardly be good reason to decline security.”

A similar approach was taken by Lehane J in Reches v Tadiran (1998) 85 FCR 514, at 523, and Giles J in Rosenfield Nominees Pty Ltd v Bain & Co (1988) 14 ACLR 467, at 472.

26                  In the present case, MHG has not shown that its impecuniosity will prevent it from maintaining the proceedings against the respondent.  In particular, it has not shown that those standing behind the company and who will benefit from the litigation, if successful, are without means.  On the contrary, for the reasons I have given, the likelihood is that the parent company will continue to fund the current proceedings until they are resolved.  Consequently, the fact that the respondents’ alleged actions were partly responsible for MHG’s impecuniosity, in my opinion, is of relatively little significance in determining whether an order for security for costs should be made.

The Public Interest

27                  No party suggested that the public interest has a significant part to play in the exercise of the Court’s discretion.

Other Discretionary Matters

28                  Mr Ryan SC, who appeared with Mr Hemmings for MHG, emphasised that MHG would not be in its current position were it not for the respondents’ conduct.  As I have explained, while that is a factor to be taken into account, it is of relatively little weight, given that, on the evidence before me, MHG will not be shut out from pursuing the litigation.

29                  In exercising the discretion conferred by s 1335(1) of the Corporations Act it is necessary to bear in mind that if MHG succeeds in the proceedings and obtains costs orders in its favour, it will recover its costs, at least on a party-party basis, from the respondents.  In this respect, there has been no suggestion that either the RTA or Quality Assurance would be unable to meet any costs order against it.  On the other hand, if the respondents (or either of them) succeed against MHG, it is unlikely that they will be able to enjoy the fruits of any costs orders in their favour.  In these circumstances, in the absence of any other significant consideration suggesting that orders for security for costs should not be made, it seems to me to be in the interests of justice that MHG be ordered to provide security for the costs of the respondents.

30                  Mr Ryan submitted that account should be taken of the respondents’ delay in filing the motion seeking orders for security for costs.  The proceedings were commenced on 13 June 2001 and the motions were filed on 15 February 2002.  But each respondent gave ample warning of its intentions and indeed a good part of the apparent delay is explained by MHG’s failure to provide in a timely fashion information reasonably requested by the respondents.  Moreover, the proceedings have not yet been set down for a final hearing, so that there is no danger of costs incurred in respect of an anticipated hearing being wasted if orders for security are not complied with: cf Crypta Fuels Pty Ltd v Svelte Corporation Pty Ltd (1995) 19 ACSR 68, at 72, per Lehane J.  I do not think that such delays as there may have been in bringing the motions warrants refusing to make the orders of the kind sought by the respondents.

quantum

31                  The parties devoted relatively little attention to the quantum of any orders.  It would have been sensible and helpful for the respondents to have adduced evidence as to the costs incurred up to the date of the hearing of the motions, although I appreciate that there has been a delay not of their making between the filing of the motions and the hearing.  Evidence of this kind would have enabled an order to be made covering work completed up to the date of the hearing, with a provisional allowance for the next stage of the litigation.  It may be that the respondents assumed that, since they sought interim orders, any adjustment could be made later in the proceedings.  Perhaps for this reason they seem to have plucked the figure of $75,000 out of the air.

32                  The evidence of Mr Sutherland indicated that Quality Assurance had incurred costs of $35,425 up to 31 January 2002.  Since then he said that 295 hours had been spent on the matter, including 226 hours on discovery.  It is not clear what charges have been or will be made in respect of the time devoted to the matter since 31 January 2002.  Ms Vine-Hall, the costs assessor, thought that of the costs of $35,425 incurred by Quality Assurance to 31 January 2002, about $26,000 would be recoverable on a taxation on a party and party basis.  She suggested that for future work an hourly rate of $230 would be recoverable as professional costs.  She did not, however, give detailed consideration to whether the particular work actually done by Quality Assurance’s solicitors between 31 January 2002 and 24 June 2002 justified this figure.  Nor did her affidavit leave me satisfied that the number of hours said to have been spent on discovery thus far was necessarily reasonable and appropriate.

33                  The evidence adduced on behalf of the RTA was even less precise.  Its solicitor contented himself with an estimate that the costs required to complete discovery would be about $45,000, while the likely costs of completing affidavit evidence, including experts’ reports, were said to be about $105,000.  The solicitor’s second affidavit suggested that preparation for a ten day hearing would involve costs of around $75,000.

34                  As I have indicated, I think that the preferable course would have been to require MHG to provide security in an amount approximating the costs (assessed on a party and party basis)

• incurred by the respondents to date; and
• reasonably estimated as likely to be incurred by the respondents in the next stage of the litigation.

The second component of the orders would have been subject to adjustment on any subsequent application seeking additional security or a variation of the original orders.  However, the evidence is not sufficiently precise to enable me to adopt the course I would have preferred.

35                  In the circumstances, I think that interim orders should be made requiring MHG to provide security for costs.  I think that the amounts required at this stage should be relatively modest, having regard to the rather incomplete nature of the evidence as to quantum.  The orders will permit the respondents to seek orders for additional security, but not before discovery is complete and inspection of documents has taken place.  The orders I propose to make in relation to Quality Assurance’s motion are these:

1. MHG provide security for costs, in the form of a bank guarantee from an Australian trading bank in favour of Quality Assurance, or in such other form as may be approved by a Registrar of the Court, in the sum of $50,000.00.
2. The bank guarantee be provided within twenty-eight days.
3. If MHG fails to provide security for costs in accordance with Order 1 within twenty-eight days, the proceedings against Quality Assurance be stayed.
4. Note that Order 1 is intended to provide interim security and that Quality Assurance is at liberty to apply for additional security, provided that no such application shall be made, except with the leave of the Court, until discovery by both MHG and Quality Assurance has been completed and inspection has taken place.
5. Liberty to apply on 72 hours notice.

36                  I propose to make similar orders in relation to the RTA’s motion, save that the sum I propose to insert is $35,000.00.  I have taken this course because evidence as to quantum relied on by the RTA was less specific than that of Quality Assurance and suggests in any event its costs to date have been substantially less than those incurred by Quality Assurance.

37                  These orders contemplate that the respondents will have the opportunity to seek security sufficient to cover the costs that MHG might ultimately be ordered to pay in the proceedings, should the respondents succeed.  I would expect any future application by the respondents for additional security to be accompanied by precise evidence as to costs incurred prior to the date of the application (with a further expectation that the evidence will be brought up to date at the hearing).

costs

38                  The respondents have largely succeeded on their respective motions.  I see no reason why costs should not follow the event.  Accordingly, MHG should pay the costs of each motion.

addendum

39                  After the hearing in this matter was concluded, MHG’s solicitors sent to my chambers a further affidavit sworn by Mr Haritos.  This affidavit annexed certain correspondence from the Federal Court relating to the taxation of costs in the proceedings involving the ACCC.  The affidavit did not form part of the evidence at the hearing and I have not taken it into account.

Associate:

Dated:              28 June 2002