FEDERAL COURT OF AUSTRALIA

Hydrocool Pty Limited v Hepburn (No 2) [2010] FCA 285

THE COURT ORDERS THAT:

1.         The applicant is to provide additional security to the first, second and third respondents in the sum of $150,000 by way of a bank guarantee or such other form of security as is acceptable to the District Registrar, such security applying up to and including the trial of the proceedings.

2.         In the event that either:

(a)        $75,000 of the security referred to in order 1 above is not provided by 8 March 2010; or

(b)        the remaining $75,000 of the security referred to in order 1 is not provided by 15 March 2010,

the proceedings are to be stayed.

3.         The first, second and third respondents are not to call upon any bank guarantee provided by the applicant to each of those respondents and filed with the Court pursuant to order 1 except if:

(a)        14 days have elapsed since any of those respondents has obtained an enforceable order for costs;

(b)        the costs order has not been stayed;

(c)        the applicant has failed to pay such an enforceable order for costs; and

(d)        those costs are for costs incurred by those respondents up to and including the trial of the proceedings.

4.         The applicant pay the costs of the first, second and third respondents’ application for security for costs in the notice of motion dated 14 December 2009 in any event.

5.         The proceedings be listed for mediation before a Registrar of the Court at 10:15 am on 5 March 2010.

6.         The proceedings be listed for further directions at 11.00 am on 8 March 2010.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1                          This is an application for security for costs, by the first, second and third respondents pursuant to an amended notice of motion which was originally filed in December 2009.

2                          The amount of the security which is sought pursuant to the amended notice of motion is $223,192.  The affidavit of Mr Reynoldson sworn on 2 March 2010, sets out the basis upon which that amount is sought by way of security for costs.  The amount is comprised of the following items:  $17,000 for expert fees, $69,432 for counsel’s fees based on seven days preparation and 17 days of trial, approximately $58,000 for second counsel’s fees, and $50,000 for solicitors’ fees incurred in preparation for trial and dealing with unresolved interlocutory matters, and $28,900 for solicitors’ fees for appearing at the trial, at the daily rate of $1,700.

3                          This is not the first application for security for costs which has been made by the first to third respondents in this long-running case.  An application by the first to third respondents was first made in 2006, when the matter was still in the New South Wales District Registry.  The application was supported by an affidavit sworn by Ms Ainslie van Onselen, who deposed to the financial state of Hydrocool Pty Limited, the applicant company, at the time.  There was, annexed to that affidavit, Hydrocool’s special purpose financial report for the year ended 30 June 2004.  There was, also, annexed to that affidavit, a cash flow statement which was prepared by Ernst & Young which showed that Hydrocool was close to being insolvent, and only had enough cash to meet its liabilities for another few months.

4                          I note in passing, however, that Mr Stephen Murphy has filed an affidavit which shows that Hydrocool was subsequently able to get the support of its shareholders to continue with this litigation.

5                          In response to the first to third respondents’ application for security for costs, Hydrocool consented to an order, which was made in April 2007, that it provide security for the costs of those respondents.

6                          At around the same time, orders for security for costs were made in favour of each of the sixth respondent, the seventh respondent, and the eighth respondent - all litigants in person.  These orders were made on 27 June 2007.  The orders provided for modest amounts to be given as security.

7                          There was also an order for security for costs in the sum of $24,000 in favour of the ninth respondent, Water Master Limited, and $15,115 in favour of the fifth respondent, made on 27 July 2007.

8                          Thereafter, on two separate occasions, the first to third respondents made a further application for an increase in the amount of the security.  Those applications were opposed by Hydrocool - but only on the question of quantum.  In neither of those two applications was any point taken that the financial position of Hydrocool was any different to that as reflected in the evidence of Ms van Onselen.  That evidence was not challenged by Hydrocool.  The only issue on those occasions was the quantum of the security.  Orders were made “topping up” the security on 30 October 2008 and on 1 July 2009.  The security for costs ordered was in respect of costs leading up to, but not including the trial.

9                          There was a mediation ordered.  That mediation occurred in November 2009, but was unsuccessful.

10                        On 14 December 2009, the first to third respondents filed this motion for further security for costs.  The notice of motion initially sought security for costs in the sum of $69,432, but, as mentioned, that amount has been amended to a sum in excess of $200,000.

11                        At the first mention of the notice of motion, Mr Cobden SC, who appeared for Hydrocool, foreshadowed that at the hearing of the motion, Hydrocool would put in issue whether the threshold question in s 1335(1) of the Corporations Act 2001 (Cth) had been met.  That is, whether “it appears by credible testimony that there is reason to believe” that Hydrocool will be unable to meet the costs order, if the first to third respondents are successful.  At that hearing, I also made directions for the filing of further affidavits in support of, and opposing, the application for security for costs.  The parties have taken advantage of those directions.

12                        Three main issues have emerged from the argument today.  The first issue is whether the threshold requirement of s 1335(1) of the Corporations Act has been met.  The second issue is, if it has been met, whether I should decline to order security for costs because of the delay that has occurred in the bringing of this application.  The third issue, if that becomes relevant, is the quantum of any security ordered.  There is a subsidiary question in relation to quantum.  That is whether the security for costs that was ordered in favour of the unrepresented litigants and in respect of Water Master, should be released.

SECTION 1335(1) OF THE CORPORATIONS ACT

13                        I will deal first with the question of whether the threshold requirement of s 1335(1) has been met.

14                        Section 1335(1) of the Corporations Act provides as follows:

(1)        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.

15                        In my view, the proper approach in relation to the first question, is to have regard to the evidence which was relied on by the first to third respondents at the time of the initial application for security for costs, and the subsequent conduct of Hydrocool in relation to the applications made for further security for costs since then.  The evidence showed that Hydrocool would not be in a position to meet any order for payment of costs.  As I said, this evidence was not challenged on the two subsequent occasions when the first to third respondents made applications for an increase in the amount of the security.  The last order was as late as July 2009.

16                        In my view, it is in these circumstances, incumbent on Hydrocool to lead evidence to demonstrate that the financial circumstances of Hydrocool have changed since the last occasion, namely, July 2009, when it decided not to contest the evidence which showed that Hydrocool was not in a position to meet a costs order made against it.

17                        To this effect, Hydrocool has relied upon the three affidavits sworn by Mr Murphy, namely, an affidavit of 25 January 2010, an affidavit of 24 February 2010, and an affidavit which was sworn today.  Mr Murphy is the director of Hydrocool, and also an accountant.  At p 76 of his affidavit of 25 January 2010, Mr Murphy summarised the trading position of Hydrocool for the years 2006 to 2009.  This summary shows that in each of those years the company made a trading loss.

18                        Mr Murphy has also annexed to that affidavit, the special purpose accounts for the period ending 31 December 2009.  The income statement for the period ending 31 December 2009, reflects revenue of $1,625,000, which leads to Hydrocool showing a profit of $1.4 million.  Mr Murphy has stated that the accounts were prepared on an accrual basis.

19                        I note in passing, the balance sheet for the period ending 31 December 2009, shows that there are non-current liabilities of $858,000 and loans to related parties of $493,000.  Mr Murphy has said that Hydrocool has been operating, effectively, on the basis of the support of its shareholders.  The non-current liabilities of $858,000 are not explained in the affidavit.  However, in light of the reference to the related party loans, I take it that those loans are not loans to shareholders.

20                        The accounts reflect that the revenue of $1,625,000 is a receivable due from a trade debtor.  In his affidavits, Mr Murphy explained that the receivable, has its source in a heads of agreement, which was signed on 3 December 2009, and which provides for Hydrocool to receive a total of $4.5 million in licence fees over a period of three years.  However, the heads of agreement is not annexed to any of Mr Murphy’s affidavits.  Mr Murphy does, however, go on to say that:

Due to confidentiality restrictions, including an NDA that has been entered into by Hydrocool and the group, I am unable to disclose the name of the group or any other information about them.

21                        I take the reference to “NDA” to be a reference to a non-disclosure agreement.

22                        In my view, that is an unsatisfactory way to discharge a burden to adduce evidence on the question of whether Hydrocool will be able to meet liability for costs in a substantial amount.  There is provision under s 50 of the Federal Court of Australia Act 1976 (Cth), for the making of confidentiality orders by the Court protecting confidential dealings.  However, Hydrocool has chosen not to seek to invoke the benefit of those provisions that are available in the Court.  The weight that I place on the evidence of a witness who resorts to assertion of confidentiality as the basis for not producing a crucial document, in these circumstances, is very limited.  Accordingly, I place little weight on the assertion that Hydrocool has, under the heads of agreement, earned a right to a revenue stream that would permit it to meet an order for substantial costs.  The weight of that evidence does not outweigh the weight of the evidence which is against Hydrocool, arising from its consent to orders for security and its failure to challenge, as late as last July, the evidence of Ms van Onselen, that it would be unable to meet any liability for costs.

23                        So, in that circumstance, I am of the view that the first to third respondents have discharged the overall burden, called for under s 1335(1) of the Corporations Act, of showing that there is credible testimony that Hydrocool will not be able to meet a costs order made against it if it were to lose the application it has made.

DELAY

24                        The next question is whether I should decline to exercise my discretion because of the delay.  It is certainly true that delay is a factor which the Court takes into account in deciding whether to exercise a discretion, once the threshold question has been determined.

25                        However, for the following reasons, delay is not a factor which would preclude me from making an order for security for costs in this particular case.

26                        First, I recognise that an application for a large amount of money by way of security for costs, as this one is, made late in the day, could, in some circumstances, be unfair and burdensome to a party, in the sense that it could result in a claim which has been on foot for a long time, being thwarted.  However, there is no evidence before me that such circumstance would occur if I was to make a security for costs order.

27                        Secondly, this is not a case where a party has not previously made an application for security for costs during the interlocutory process, and then, shortly before the trial, brings the first application for security.  In this case, security for costs applications were made at regular intervals in 2006, 2008, and 2009, so that Hydrocool would have known that security for costs was an important matter for the first to third respondents, particularly, in light of Ms van Onselen’s evidence as to Hydrocool’s financial position.  In this case, Hydrocool was always on notice that security was an issue, and it should have expected that some application for security would be made in respect of trial costs, should mediation fail.

28                        Thirdly, in assessing the delay in making the application, I also note that this application was brought just after a Court ordered mediation had failed.  In this regard, I take into account that the Court seeks to encourage parties to settle claims.  Mediation is an element of case management.  In my view, it was not unreasonable for the first to third respondents to await the outcome of the mediation before bringing an application for security for costs in respect of trial related costs.

QUANTUM

29                        That brings me then to the question of quantum.  There is now a substantial claim for security in the sum of, as I have said, $223,192.  However, this is a complex proceeding albeit that it has, I am informed, been substantially reduced in scope.  The amount which is claimed covers items of work which would have to be undertaken, and expenses which would have to be incurred.  However, notwithstanding that, in my view, the appropriate order in this case would be that security for costs should be given in the sum of $150,000.

30                        The security is not intended to be an indemnity.  In saying so, I am not suggesting that the amounts which comprise the amount of security claimed are based on a full indemnity of the first to third respondents’ costs, but the Court exercises its discretion in a balanced way to try and be fair to all the parties.

DISCHARGE OF ORDERS FOR SECURITY FOR COSTS IN FAVOUR OF OTHER RESPONDENTS

31                        Hydrocool also contended that I should have regard to the means whereby the security be given.  One of the means contended for by Hydrocool, is that the Court should discharge the orders for security for costs made in favour of the unrepresented litigants or, at least, to release some of the monies comprising the security which was ordered to be given in favour of the unrepresented litigants; and also to Water Master.  However, I am not inclined to do so, because that would not be in accordance with natural justice.  If such an application was to have been made, then it should have been made on notice to the other parties who would be affected by the discharge orders.

32                        As to the question of how the security should be provided, I am sympathetic to the fact that the trial in this matter is due to start next week.  I will hear from Mr Cobden, counsel for Hydrocool, as to whether it might be appropriate to stage the security, or whether it may make no difference.  What I have in mind is that $75,000 of the security be provided before trial; and another $75,000 be provided after the first week of the trial.

Associate:

Dated:         24 March 2010